Free Motion for Judgment - District Court of Arizona - Arizona

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Christopher R. Kaup, Esq. State Bar No. 014820
Third Floor Camelback Esplanade II 2525 East Camelback Road PHOENIX, ARIZONA 85016B4237 TELEPHONE: (602) 255-6000 FACSIMILE: (602) 255-0103

Counsel for Biltmore Associates, Trustee of the Visitalk.com Creditors' Trust

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA CIV 02-2405-PHX-HRH BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, PLAINTIFF'S MOTION FOR DETERMINATION OF AMOUNT OF DAMAGES AND FOR ENTRY OF JUDGMENT AGAINST PETER THIMMESCH (Assigned to the Honorable H. Russel Holland)

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vs. PETER THIMMESCH and CYNTHIA THIMMESCH, husband and wife; MICHAEL O'DONNELL and MARSHA O'DONNELL, husband and wife; et al., Defendants.

BILTMORE ASSOCIATES, AS TRUSTEE FOR THE VISITALK CREDITORS'
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TRUST, Plaintiff in the above-captioned case requests that the Court determine the
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amount of damages to be awarded against Defendant Peter Thimmesch (hereinafter
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"Thimmesch") and enter a final judgment against him in that amount. This Motion is
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supported by the Declaration of Renee Jenkins (the "Jenkins Declaration") attached
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hereto as Exhibit "1', the facts set forth in the Separate Statement of Facts ("SOF") filed
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in connection with Plaintiff's prior Motion for Summary Judgment, the other materials
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attached hereto and he entire record in this case
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RESPECTFULLY SUBMITTED this 5th day of May, 2008.
TIFFANY & BOSCO, P.A.

By: /s/ CRK #014820 Christopher R. Kaup, Esq. Jeffrey A. Sandell, Esq. Attorneys for the Plaintiff

MEMORANDUM OF POINTS AND AUTHORITIES The Court granted summary judgment in favor of Plaintiff against Thimmesch on Counts I, II, V, VII, XI, XII, XIV, and XXI of the Second Amended Complaint on October 15, 2007. However, the Court declined to enter judgment in a specific dollar amount at that time because Plaintiff had not submitted sufficient evidence of damages in connection with its Motion for Summary Judgment. See Order, at Docket No 407, dated October 15, 2007. After reaching a settlement with Defendant Snell & Wilmer, L.L.P., during the trial, Plaintiff was ready to present evidence in the form of expert testimony regarding the amount of damages suffered by Visitalk due to the actions of Thimmesch. However, Thimmesch appeared only briefly at the beginning of the trial in the case and the Court directed Plaintiff to fill appropriate materials to establish the amount of damages to be awarded against Thimmesch. As a result, the Court has conclusively resolved all facts and legal issues as to liability for breaches of fiduciary duty and fraudulent transfers against Thimmesch. All that remains is for the Court to determine the amount of damages to be awarded against him. This Motion and the Jenkins Declaration establish that the amount of damages to be awarded against Thimmesch is $33,724,515.00 or 42,643,765.00 depending on the

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methodology for calculating deepening insolvency damages the Court decides to be most appropriate1. I. MATERIAL UNDISPUTED FACTS AS TO DAMAGES. Visitalk was incorporated in the State of Arizona on September 3, 1998, but had become insolvent by November of 1998. (Plaintiff's Separate Statement of Facts (SOF at ¶3). Thimmesch was one off the initial shareholders of Visitalk and the Chief Executive Officer and a Director of Visitalk. (SOF, at ¶4). In September, 1998, Visitalk raised money through the sale and issuance of "Series A Preferred Stock" to individual investors (the "Series A Offering"). Visitalk sold Series B preferred stock to investors in October and November, 1998 (the "Series B Offering") and Series C preferred stock to investors 1999 (the "Series C Offering"). (SOF, at ¶5). Visitalk was insolvent from November of 1998 through the date of its bankruptcy according to the expert witness reports and testimony of Renee Jenkins, an accounting expert and certified fraud examiner retained by Plaintiff. (Jenkins Declaration, Exhibit "1" hereto, at ¶¶6, 8 & 17). The aggregate amount of damages to Visitalk caused by the actions of Thimmesch, utilizing a method based on the increase in the amount of indebtedness of the company, during the period from November, 1998 through June 30, 1999 is $4,749,379 and during the period from July 1, 1999 through October 1, 2000 is $18,922,136. Declaration, Exhibit "1" hereto, at ¶¶22 & 23). The aggregate amount of damages to Visitalk caused by the actions of Thimmesch, utilizing a method based on the dissipation of assets or diminution in the value of assets of the company during the period from November, 1998 through October 1, 2000 is $41,253,765. (Jenkins Declaration, Exhibit "1" hereto, at ¶25). (Jenkins

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Plaintiff believes that both methods, discussed at length below, are well established by the decisional authorities

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II.

THE DAMAGES CAUSED BY THIMMESCH'S BREACHES OF FIDUCIARY DUTY AND FRAUDULENT TRANSFERS. Having been found by the Court to have knowingly participated or acquiesced in

the corporate torts identified in the Motion for Summary Judgment, Thimesch is liable for the resulting damages. See Hall Fam. Prop. v. Gosnell Dev. Corp., 185 Ariz. at 387; D.W. Jaquays Mining and Equip. Contractors Co., 145 Ariz. at 210-11. First, by granting summary judgment in favor of Plaintiff, the Court found Thimmesch engaged in self dealing, in violation of his duty of loyalty, by causing the preparation of an Action by Unanimous Consent regarding the Founders Warrants in November of 1998 and then back dating that document. The Court also determined that Thimmesch violated the duty of due care by failing to cause the company to comply with securities laws, a violation of the duty of due care, in its Series A, Series B and Series C stock offerings. The Court also necessarily found that Thimmesch violated the duty of due care by failing to inform himself about the legal problems associated with the Founders Warrrants and other potentially serious securities law problems faced by Visitalk and by failing to adequately supervise disclosures made to creditors and investors regarding such matters, Visitalk's insolvency and the fact Visitalk did not have a commercially viable product. All of those investors held claims against Visitalk as a result of those actions and omissions which are properly includable in the calculation of insolvency and damages. Indeed, the Bankruptcy Court, Visitalk as the debtor in its Chapter 11 Bankruptcy Case and the investors themselves agreed these persons held claims against Visitalk relating to the purchase of securities. The aggregate amount of claims held by those persons; that is,

cited in this motion and were employed by Ms. Jenkins as set forth in her Declaration.
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the amount of damages caused to Visitalk by those actions and omissions was $22,385,900. (Jenkins Declaration, Exhibit "1" hereto, at ¶¶10 - 16). Second, by granting summary judgment in favor of Plaintiff, the Court found that Thimmesch, in violation of his duty of due care, failed to investigate and competitively bid billing and accounting software and systems and consulting services regarding such software and systems and inform himself that Visitalk had no need for the Portal billing software and system, the Oracle software and system and the services of Ernst & Young to provide consulting services regarding those products. See McQueen v. First Nat'l Bank, 36 Ariz. at 87; Rossi v. Hammons, 34 Ariz. at 104; 6 Ariz.Practice §7.94 (2005). The aggregate amount of damages caused to Visitalk by those actions and omissions was $3,750,000. (Jenkins Declaration, Exhibit "1" hereto, at ¶18 & SOF at ¶¶25 & 26 and Declaration of Vernon Schweigert attached thereto). Third, by granting summary judgment in favor of Plaintiff, the Court found Thimmesch breached his fiduciary duties by causing or permitting Visitalk to make fraudulent transfers violative of A.R.S. §§44-1004(a)(2) & 1005 to MP3 for the purpose of creating a false impression that Visitalk was solvent and had received a substantial amount of income. See Hall Fam. Prop. v. Gosnell Dev. Corp., 185 Ariz. at 387; D.W. Jaquays Mining and Equip. Contractors Co., 145 Ariz. at 210-11. The aggregate amount of damages caused to Visitalk by those actions and omissions was $5,303,000. (Jenkins Declaration, Exhibit "1" hereto, at ¶19 & SOF at ¶27). Fourth, by granting summary judgment in favor of Plaintiff, the Court found that Thimmesch, in violation of the duty of due care and loyalty, caused or permitted Visitalk to transfer the corporate opportunity to sell $1.2 million of Visitalk stock to an insider/director, Mark Cardwell, at a time Visitalk was insolvent. The Court necessarily also determined Thimmesch breached the duty of due care because it was a fraudulent transfer under A.R.S. §§44-1004(a)(2) & 1005. See Hall Fam. Prop. v. Gosnell Dev.
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Corp., 185 Ariz. at 387; D.W. Jaquays Mining and Equip. Contractors Co., 145 Ariz. at 210-11. The aggregate amount of damages caused to Visitalk by those actions and

omissions was $1,000,000. (SOF at ¶¶28 & the exhibits attached thereto). Finally, by granting summary judgment in favor of Plaintiff, the Court found that Thimmesch, in violation of the duty of due care and the duty of loyalty, took actions, including causing or permitting Visitalk to continue to sell securities, and failed to take other actions, such as making misleading disclosures in a release document sent to Series A investors and causing Visitalk to file for bankruptcy, which artificially prolonged Visitalk's corporate life and deepened its insolvency. See Hall Fam. Prop. v. Gosnell

Dev. Corp., 185 Ariz. at 387; D.W. Jaquays Mining and Equip. Contractors Co., 145 Ariz. at 210-11. There are two methods used by Courts for awarding damages against officers and directors for negligence and breaches of fiduciary duty which, as happened in this case, cause the deepened insolvency of their company. It is appropriate to award damages against Thimmesch based upon a calculation of the increased debt incurred by Visitalk or the dissipation of its assets. See Florida Dep't of Ins., v. Chase Bank of Texas, 274 F.3d 924, 935 (5th Cir. 2001)(Observing that "[d]amages are measured by the dissipation of assets or the increased debt" occurring after the act giving rise to the claim); In re Flagship Healthcare, Inc., 269 B.R. 721, 728 (Bankr. S.D.Fla. 2001)(Stating that "the additional debt incurred thereafter, and allegedly as a result of defendant's negligence, may provide a measure of damages recoverable by the Trustee."); In re Latin Inv. Corp. , 168 B.R. 1, 3 - 5 (Bankr. D.Col. 1993)(Finding that the defendants and the debtor's principals "work[ed] together to perpetuate the existence of the debtor" which caused the debtor to incur substantial additional obligations" and "suffer depletion of funds amounting to over $6,461,266.91"); Hanover Corp., v. Beckner, 211 B.R. 849, 854 (D. M.D.La. 1997)(noting that the "aggravation of
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insolvency . . . has been considered to constitute injury to the corporation" and the "corporation's alleged damages include the amount of indebtedness incurred."). Plaintiff's expert witness, Renee Jenkins, has calculated the deepening insolvency damages using both methodologies. The aggregate amount of damages to Visitalk due to the deepened insolvency caused by those actions and omissions is $23,671,515 (applying the method of measuring such damages by the increase of debt owed by the company) or $41,253,765 (applying the method of measuring such damages by the value the company's assets which were dissipated). (Jenkins Declaration, Exhibit "1" hereto, at ¶¶22 - 25). The damages properly awardable against Thimmesch are summarized as follows: (1) Damages in the amount of $22,385,900 for breaches of fiduciary duty

giving rise to claims held by the Series A, B, and C investors against Visitalk;
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Damages in the amount of $3,750,000 for breaches of fiduciary duty as to

the expenditure of funds on the Portal billing software and Oracle accounting system; (3) Damages in the amount of $5,303,000 for breaches of fiduciary duty by

causing or permitting fraudulent transfers to MP3; (4) Damages in the amount of $1,000,000 for breaches of fiduciary duty by

causing or permitting the transfers to Mark Cardwell of the opportunity to sell common stock; (5) Damages for breaches of fiduciary duty by causing or permitting the

deepening insolvency of Visitalk (a) in the amount of $23,671,515 (in the event the Court adopts the damages methodology based on increased indebtedness2); or (b) in the

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If the Court elects to use this method for calculating damages, the aggregate amount of the damage award will not include the dollar amount of damages set forth in Paragraph (1) above because that amount already is included in the calculation of the aggregate amount of indebtedness comprising deepening insolvency damages in this Paragraph (5)(a).

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amount of $41,253,765 (in the event the Court adopts the damages methodology based on dissipating of corporate assets3) III. CONCLUSION. Thimmesch caused substantial damages to Visitalk by breaching his fiduciary duties as an officer and director. If this Court applies the method of calculating

deepening insolvency damages based on increased debt the aggregate amount of damages properly awarded against Thimmesch is $33,724,515 (the sum of the amounts in Paragraphs (2), (3), (4) and (5)(a)). If this Court applies the method of calculating deepening insolvency damages based on increased debt the aggregate amount of damages properly awarded against Thimmesch is $42,643,765 (the sum of the amount in Paragraph (5)(b) and the claims held by the Series A and B investors4).
RESPECTFULLY SUBMITTED this5th day of May, 2008. TIFFANY & BOSCO, P.A.

By: /s/ CRK #014820 Christopher R. Kaup, Esq. Jeffrey A. Sandell, Esq. Attorneys for the Plaintiff

ORIGINAL of this pleading filed Electronically with the U.S. District Court for the District of Arizona on this 5th of May, 2008.

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If the Court elects to use this method for calculating damages, the aggregate amount of the damage award will not include the dollar amount of damages relating to the claims of the Series C investors set forth in Paragraphs (1) and the dollar amounts set forth in Paragraphs (2), (3) and (4) above because those amounts already are included in the calculation of the aggregate value of assets which were dissipated comprising the deepening insolvency damages in this Paragraph (5)(b). 4 The amount of the investment by the Series C investors is already included in the amount set forth in (5)(b).

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COPIES of the foregoing were mailed this same date to: Honorable H. Russel Holland United States District Court 222 West 7th Avenue - No. 54 Anchorage, AK 99513 Peter Thimmesch 11329 Stonehouse Place Potomac Falls, VA 20165 Peter Thimmesch 11337 Stonehouse Place Potomac Falls, VA 20165

/s/ Lauri Andrisani

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