Free Transcript - District Court of Arizona - Arizona

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA _________________ ) ) ) ) Plaintiff, ) ) vs. ) ) PETER THIMMESCH, et al., ) ) Defendants. ) ) ______________________________) BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, BEFORE:

CIV 02-2405-PHX-HRH Phoenix, Arizona March 11, 2008 8:31 a.m.

THE HONORABLE H. RUSSEL HOLLAND, JUDGE

REPORTER'S TRANSCRIPT OF PROCEEDINGS BENCH TRIAL VOLUME VII A.M. Pages 1256 to 1371

Official Court Reporter: Linda Schroeder, RDR, CRR Sandra Day O'Connor U.S. Courthouse, Suite 312 401 West Washington Street, Spc. 32 Phoenix, Arizona 85003-2151 (602) 322-7249 Proceedings Reported by Stenographic Court Reporter Transcript Prepared by Computer-Aided Transcription

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 1 of 116

1257

1 2 3 4 5 6 For the Defendants: 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 For the Plaintiff:

A P P E A R A N C E S

Tiffany & Bosco By: Christopher Reed Kaup, Esq. 2525 East Camelback Road, 3rd Floor Phoenix, AZ 85016

Mariscal Weeks McIntyre & Friedlander By: Gary L. Birnbaum, Esq. Timothy J. Thomason, Esq. Scot L. Claus, Esq. 2901 North Central Avenue, Suite 200 Phoenix, AZ 85012

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 2 of 116

1258

1 2 3 SCHERF, Steve 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 EXHIBIT NO.: 47 322 395 WITNESSES FOR THE PLAINTIFF:

INDEX OF WITNESSES Direct 1259 1270 1274 Voir Dire 1265 1273 1285 1356 Cross Redirect

INDEX OF EXHIBITS

DESCRIPTION:

ID'D RECEIVED: 1331 1259 1363

E-mail from Ray Gaston re Payment of Snell Bills Rebuttal Report by S. Scherf Scherf Illustrative Diagram

1363

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 3 of 116

1259

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. eight.

THE COURT:

Good morning, ladies and gentlemen.

This

is the continuation of trial in Biltmore versus Thimmesch and others. We have your first expert, I think, this morning? MR. KAUP: Yes, Your Honor. We're going to take

Mr. Scherf, Steve Scherf, out of order. STEVE SCHERF, PLAINTIFF'S WITNESS, SWORN DIRECT EXAMINATION BY MR. KAUP: Q. Good morning, Mr. Scherf. Thanks for coming all the way

from Philadelphia. A. Q. Good morning. Mr. Scherf, we've put in front of you -- There are two file Would you

folders in front of you with Exhibits 321 and 322. look at 321 first. A. Q. A. Yes. I have it.

Do you recognize that document? Yes. This is a copy of my report dated January 8th, 2007. MR. KAUP: And, Your Honor, these are in exhibit book

THE COURT: (BY MR. KAUP) Yes.

Thank you. Do you recognize Exhibit 322?

Exhibit 322 is my expert report dated May 21st, 2007.

Were you engaged as an expert by the plaintiff in this

case? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 4 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Yes, I was. Can you tell the Court about your education. Yes.

1260

I have an undergraduate degree in accounting from I have a master's of science degree in And I have an advanced

Temple University.

finance from Drexel University.

professional certificate in taxation again from Drexel University. An advanced professional certificate is the

equivalent of a second master's degree. Q. Do you have any professional licenses, certifications, and

designations? A. Yes, I do. I'm a certified public accountant in I am a certified insolvency

Pennsylvania and Delaware. restructuring advisor.

I am a certified forensic accountant, And I also hold two credentials in

certified fraud examiner. business valuation. Q.

Have you written any publications germane to the matters on

which you were engaged as an expert in this case? A. No. I've written numerous publications but I don't believe

any specifically on preferences. Q. Have you participated in any speaking engagements on

matters relating to preferences? A. I believe that I have spoken on preferences on fraudulent I also speak nationally on certain other

transfer matters.

matters as well as locally on forensic accounting and other issues. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 5 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1261

Do you -- Could you tell the Court about your experience in

preference analysis. A. Yes. I've been retained by numerous Chapter 7 and Chapter In those cases I've I've also

11 trustees to analyze preferences.

analyzed well in excess of a thousand preferences.

been retained by defendants in preference matters to analyze the defenses for ordinary course as well as the new value defense in numerous preference actions. Q. And have you testified -- Have you testified in connection

with proceedings in which you performed that type of analysis? A. Yes, I have, although typically preference matters do The law seems to be relatively clear or at least

settle.

parties believe that it is in such a manner that most of the time they settle. So out of those in excess of a thousand

times, I believe I've only testified twice in a preference matter. Q. A. Testified in trial or in depositions? I've testified in an arbitration. In some cases the And then in

preferences are put in an arbitration proceeding.

addition to that, I've testified probably several times in depositions. MR. KAUP: Your Honor, we'd proffer -- submit

Mr. Scherf as an expert on the matters of preferences. MR. BIRNBAUM: Your Honor, the proffer of an expert

witness is no longer required under the federal rules, and I UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 6 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1262

don't know what they're going to offer this witness to testify about. So I would prefer to reserve my objection as to his I admit he

opinions when they're offered if they're offered. has the credentials that he just said he had. all I can say at this point.

I think that's

I object to the Court making any

preliminary determination that he is an expert on any particular matter until we find out what the matter is he's going to be asking him about. THE COURT: I'll receive his testimony and reserve

judgment on qualifications to offer expert opinions. MR. KAUP: (BY MR. KAUP) Thank you, Your Honor. Mr. Scherf, just for purposes of background,

can you explain what a preference is and how that bore on your analysis in this case. A. Yes. A preference is a payment that's made by a debtor Preferences really fall into two

prior to a bankruptcy. categories.

They're the traditional preference, which is a

90-day payment within the -- prior to the bankruptcy, and that is for every and all creditor. And then there's another time

period, which is a one-year time period, which is applicable to insiders. And so effectively any payment on an antecedent debt during that 90-day period in the case of a regular creditor or the one-year period in the case of an insider is deemed to be a preference under the Code. And there are certain defenses to

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 7 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 those preferences. Q.

1263

As part of the reports that you prepared in connection with

this case, did you perform an analysis regarding preferential payments to the Snell & Wilmer law firm? A. Q. Yes, I did. Did you perform an analysis regarding certain -- the

applicability of certain defenses and data relating to those defenses? A. Q. Yes, I did. Did you do anything else in connection with the preparation

of the opinions in your report? A. Yes. In analyzing the information, it's my understanding

that the plaintiffs will be putting forth evidence with respect to the fact that Snell & Wilmer was an insider under the Code. I analyzed certain transactions and drew certain conclusions with respect to whether those transactions were in the ordinary course of business or whether they were at arm's length. And

then I applied a one-year preference period in analyzing the preferences based upon the fact that it is my understanding there will be evidence that Snell & Wilmer is an insider. Q. What type of data did you look at as part of -- as the

basis for your opinions? A. As the basis for my opinions, I looked at the information

that's listed in my reports that are marked as Exhibit 321 and 322. There's a schedule in there, Exhibit B, which lists the UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 8 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documents that I considered in performing the analysis. you'd like, I'll give you some examples of those.

1264

And if

They would

be copies of the cancelled checks, copies of various e-mails and correspondence between the parties, schedules of invoices and payments. I, subsequent to the issuance of my report, I

received actual ledger statements from Snell & Wilmer where I was able to actually see what payments were applied to which invoices. And I also looked and did certain industry research from Integra and Altman Weil, which gave me some information on the ordinary course of business for law firms. Q. Could you explain a little bit more the information from

Altman Weil and how that bears on the ordinary course analysis. A. Yes. The defenses for ordinary course really fall into a And the easiest way to look at it is you

set of categories.

need to make a determination whether the payments were in the ordinary course. And we initially made a determination that And I can break that

they were not in the ordinary course. down in a minute.

But in addition to that, there's a test in the Code with respect to ordinary course that says that the payments need to be in the ordinary course between the parties and according to the terms as well as the ordinary course in the industry. In the case of Snell & Wilmer, the relationship UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 9 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. BIRNBAUM: Q. Honor.

1265

existed primarily during the entire preference period or a little bit before the preference period, so there wasn't a pre-preference history between the parties. So the biggest

thing that one needed to look at is the ordinary course of the industry. It's a two-part test. You have to meet both. So we

looked at that. And the Altman Weil survey or information enabled us to determine what payments were within the industry. Altman

Weil is a large consulting firm that provides information to law firms on how to manage the law firms. And what we did was we looked at comparable law firms. We looked at those in the West South Central firms, firms with over 150 lawyers, multi-office firms, and then all firms to look and see what the payment patterns were to establish an ordinary course of business for a firm such as Snell & Wilmer. Q. As part of your background, the prior work that you've done

in this area, Mr. Scherf, do you have any experience that informed your analysis regarding the insider issue? A. Yes. MR. BIRNBAUM: Wait, wait, wait. Objection, Your

Your Honor, may I ask one question on voir dire? THE COURT: Yes. VOIR DIRE EXAMINATION

Mr. Scherf, you did not form an opinion in this case as to UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 10 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1266

whether or not Snell & Wilmer was an insider; is that correct, sir? A. I did not form an opinion as to whether Snell & Wilmer was

an insider, but -Q. A. Thank you. But I did -MR. BIRNBAUM: Thank you, Mr. Scherf.

Your Honor, any comments about insider status or why he feels what he feels are irrelevant and incompetent in this case. The witness has not formed that opinion and has not Thank you. Your question again was? Could you just read back the question?

disclosed it.

THE COURT: MR. KAUP:

(Requested portion of the record was read by reporter.) THE COURT: insider issue. That presupposes that you did analyze the

Did you? I did analyze certain aspects of it, but

THE WITNESS:

I wasn't asked to form a complete opinion as to whether Snell & Wilmer was an insider. It was my understanding that I did

there is other testimony that's going to provide that. make certain observations which are consistent with my

experience as to, you know, for example, my understanding is an insider is defined as, you know, the following people, and then I think it says officers, directors, certain people are definitely insiders. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 11 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point? If nothing else, it's a disclosure issue. THE COURT: THE WITNESS: Statutory ones. The statutory ones.

1267

And then there's

discretion by the Court that determines whether someone's an insider or not. And that relationship is someone who has a

close relationship to the debtor such that the transactions aren't at arm's length. And I do offer an opinion in my report with respect to the transactions and whether those transactions are at arm's length, given, you know, other, you know, to the typical transactions of a creditor. report. THE COURT: out later. MR. BIRNBAUM: Your Honor, may I be heard on this I'll take the testimony, and we'll sort it And I do have that opinion in my

The witness

was asked in his deposition, as he was asked today, whether or not he formed any opinion on insider status of Snell & Wilmer. He said no. So there has not been preparation or discovery or

rebuttal experts -THE COURT: What you're telling me is that you believe

this testimony would go beyond his report that you saw? MR. BIRNBAUM: his report. I absolutely believe this goes beyond

He has testified his report did not reach a

conclusion on insider status, and he's confirmed that again UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 12 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 today, Your Honor.

1268

I heard -- I've heard this doublespeak about arm's length something, which is not a test for insider status. we don't even have to reach that question. The witness was But

asked in his deposition and in court whether he is giving an opinion on insider status to Snell & Wilmer. times. There has been no disclosure. He said no both

There has been no

supplemental report. status.

He is not listed as an expert on insider

And I recognize this is a trial to the Court, Your This is not an

Honor, but to say the least, this is an ambush. insider witness.

In fact, Your Honor, he wrote a rebuttal report to our expert on insider status in which he said I'm being unfairly criticized because I did not give an insider status opinion and do not intend to. So it's unfair to criticize me for the

deficiencies in my report in that area. I don't know what else to say, Judge. testimony. testimony. THE COURT: Well, what I say at this point is, We have the report. We have

We have the rebuttal

Mr. Kaup, you're restricted to the report, but -MR. KAUP: Right. And, Your Honor, as Mr. Scherf did

point out, he does address in the report and one of his opinions is the nature of the relationship was not arm's length. We're not saying that he reaches the ultimate legal UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 13 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 conclusion of insider or not insider. Rather, a factual

1269

predicate, Your Honor, which is in his report, is the lack of an arm's length relationship, and that is a part of his report. And he was deposed on that issue, Your Honor. He was asked

questions about, you know, his background and even case law that would support his conclusions on that issue. And he even

sent cases that -- after his deposition addressing this issue. So, Your Honor this is by no means a surprise, and it's a fair area within the bounds of his report, and we can go forward on it. MR. BIRNBAUM: Your Honor, that is untrue. What the

gentleman said during his deposition was that certain payments did not appear arm's length because of alleged pressure that was put on Snell & Wilmer. He then said that has nothing -He said that has I don't

I'm not testifying about insider status.

something to do with my opinion on ordinary course. have any problem with ordinary course. issuing an opinion on insider status. did not disclose one.

He said he was not He did not form one. And He

Those are the facts in this case.

if the Court needs to see his deposition testimony or to read his report in order to rule on this objection, we hope that you'll do so, Your Honor, because he's not an insider -THE COURT: that extent. Mr. Kaup, you're limited to what's in his report. UNITED STATES DISTRICT COURT I'm We're not going to hold this trial up to

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 14 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. KAUP: Q. A. Can you answer the last question, sir? I'm sorry. Could you repeat it? going to count on you to stay there.

1270

And if you don't, as a

result of cross-examination and decision making, any testimony that's beyond the report will be excluded in the end. MR. KAUP: THE COURT: I understand. Go ahead.

DIRECT EXAMINATION CONTINUED

Could you give me another

question or -Q. Let me ask it this way, sir: MR. BIRNBAUM: Do you --

Mr. Kaup, allow me -- I'm sorry, Your

Honor, but before we get to the next question, may I just supplement, since we were able to find the deposition? On Page 16, Line 11, without reading the whole question and answer, let me just quote part of the answer. Quote, but I was not engaged and have not offered an opinion as to insider status, so I made an assumption that Snell & Wilmer was an insider, closed quote. I don't know how you can be any clearer than that, Your Honor. Q. Thank you. Mr. Scherf, as part of your report, did you

(BY MR. KAUP)

review materials which bore on the issue of an arm's length or a lack of arm's length relationship between Snell & Wilmer and Visitalk? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 15 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. report -Q. A. (BY MR. KAUP) This is your first report? A. Yes, I did. MR. BIRNBAUM: THE WITNESS: Same objection. And if you look at Page 5 of my

1271

This is my first report, Exhibit 321. MR. BIRNBAUM: Excuse me, Mr. Scherf. Your Honor, I The

have the same objections, and the report is hearsay. witness is in the court.

If he is prepared to testify, fine.

He's not here to read a hearsay report, which is not independently admissible in evidence. That's -- Now he's trying to do that. objections on this insider status question. MR. KAUP: (BY MR. KAUP) The question didn't go to insider status. Can you answer my last question, Mr. Scherf? Same objection, Your Honor. But I renew my

MR. BIRNBAUM: THE COURT: testimony here.

Mr. Birnbaum, we're going to take some

I understand you've got an objection to it.

You can object to the whole thing if you want to. Mr. Kaup, go ahead. THE WITNESS: Okay. And I'm going to answer the

question that -- to, you know, show that I did disclose this in my initial report, Your Honor and also in my supplemental report that based upon e-mails, correspondence, and the documents that we analyzed, we've determined that the UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 16 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 relationship was less than arm's length.

1272

Now, if I can -- Do you want me to provide examples of how that would be? MR. KAUP: Yes. We noticed that in each case -- well,

THE WITNESS: not in every case.

There were $720,830 of checks that were Of those checks, all

issued during the one-year time period.

but two were picked up and hand delivered or picked up at the office, because the date of the check was the same date that they were negotiated at the bank. With the exception of the

March 2000 payment and the September 2000 payment, every one cleared the bank on the same date. That's evidence that that's

not a transaction in the ordinary course of business, because typically in the ordinary course of business, companies write checks out to their vendors and put them in the mail, and they come, and they clear three or five or six days later, depending on the process. So it's -- What that showed was that those transactions were not the typical transactions that would be at arm's length. We also noted that there were various e-mail correspondence that showed pressure that was being applied to Visitalk to pay the bills. And we noted that those e-mails and

correspondence that are attached to my supplemental report, they start in May of 2000. There are additional e-mails back

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 17 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. BIRNBAUM: Q.

1273

in February and in November, December that also talk about the fact that now's a good time to seek payment, et cetera. But the ones that there's more of, "I need a check, and I need it now. Can I pick it up?" -- and those e-mails

indicate that those checks were being picked up -- those e-mails start in May of 2000. So it was my conclusion based upon that that the transactions themselves were not arm's length and that there was essentially undue pressure or a transaction outside of the ordinary course of business between the parties. Q. Sir, based upon the data and the other materials you've

reviewed, did you form an opinion as to the total amount of preferences to Snell & Wilmer? MR. BIRNBAUM: Objection, Your Honor. May I ask one

question again on foundation? VOIR DIRE EXAMINATION

Mr. Scherf, preferences, as you've used the term, apply

only to transfers by an insolvent party; is that correct, sir? A. Q. That is correct. Now, Mr. Scherf, you did not determine whether Visitalk was

insolvent at any time, did you, sir? A. That is an assumption. My understanding is there

is another -Q. Thank you. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 18 of 116

SCHERF - VOIR DIRE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. KAUP: Q. A. Do you remember the last question, sir? Yes. A. -- expert that's going to deal with that issue. MR. BIRNBAUM: Thank you, Mr. Scherf.

1274

Your Honor, we object on foundational grounds to opinions regarding the amount of any preferences as the necessary statutory predicate has not been established. THE COURT: I'll take the testimony conditionally. DIRECT EXAMINATION

The total preferences were $720,830, rounding to the

nearest dollar. Q. Can you explain why that is the amount of total preferences

that you've determined based upon your analysis of the data? MR. BIRNBAUM: Your Honor, may I just have a

continuing objection on foundation grounds? THE COURT: THE WITNESS: Yes, you've got it. Yes. If you look at Exhibit C to my

first report, Exhibit -- which is Exhibit 321 in this matter, there's a listing of the various checks that were paid during the one-year time period. Q. (BY MR. KAUP) Those total $720,829.92.

Based upon the data and other materials that

you reviewed and about which you've testified, did you formulate an opinion as to the applicability of the ordinary course defense? A. Yes, I did. And I prepared two calculations. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 19 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A.

1275

Your Honor, my understanding of the ordinary course defense is that if there is, you know, undue, you know, influence or, you know, a behavior pattern where there is pressure for the checks, the ordinary course defense doesn't apply. So I actually calculated that. And then I also calculated what I would refer to as the traditional ordinary course defense, which is payments that fall within the ordinary course for the industry or the parties. In this case, based upon the Altman Weil data, the

industry data, I determined that payments -MR. BIRNBAUM: Wait, wait, wait. Before you give the

opinion, please allow the next question to be asked so I may object. You haven't been asked to give an opinion yet. THE WITNESS: MR. BIRNBAUM: for a yes or no answer. Can I finish? Your Honor, the last question called Now if he's asked for the opinion, I

would like to interpose an objection. THE COURT: You may have an objection to everything

this witness says at this point, just so we can get it out. Okay? MR. BIRNBAUM: THE WITNESS: (BY MR. KAUP) Yes. Yes, sir. Okay.

Could you finish your answer please.

So when I looked at the industry data, I determined

that payments between 46 and 79 days were in the ordinary UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 20 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 course of business.

1276

And as a result of that, any payment that

fell within 46 or the 79 days from the date of the invoice would be determined to be an ordinary course payment. Those

payments that fell outside that range or scope would be outside the ordinary course of business and would be deemed to be a preference, subject to a new value defense. Q. You mentioned two different points in your analysis The first part

regarding the new value defense, Mr. Scherf.

you mentioned related to situations where there was, as you put it, undue influence relating to the relationship between the parties and the payments. Could you tell the Court what your

opinion is as to the amount of preferences to -- from Visitalk to Snell & Wilmer under that element of your opinion? A. Yes. Under that element, the entire amount of the

payments, the $720,830, would be a preference subject to a new value defense, which we would deduct later. about that yet. I haven't talked

So at this point in time it would be $720,830

before the application of the new value defense. MR. KAUP: Your Honor, at this point I think it may

help the Court if Mr. Scherf is permitted to put on the white board the different numbers and show the calculations as he made them. Is that okay with you, Your Honor? How are we going to preserve that? It's just for your purpose and for

THE COURT: MR. KAUP:

illustrative purposes for you, Your Honor, to show the UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 21 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 $720,830. This is -- Okay. So the total preferences for Honor? THE WITNESS: In both cases we start out with calculations. The information will be of course in the

1277

transcript and could be reproduced through the simple calculation after looking at the information that's in the transcript. THE COURT: THE WITNESS: Go ahead. Either that or I could use the other

board, and we can rip it off, the sheet. THE COURT: I didn't realize we had the other. That

will solve my problem. THE WITNESS: everyone can see. MR. KAUP: Can you see that from that angle, Your Let's put it this way, I guess, so

payments when there's pressure as well as under the traditional ordinary course defense is $720,830. When there's pressure that's applied, then the ordinary course defense is not applicable, so the preferences net of ordinary course is still the $720,830. to continue? MR. KAUP: Yes, please. Your Honor, before the witness Do you want me

MR. BIRNBAUM:

continues, may I just lodge an objection to the legal testimony UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 22 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1278

and the legal opinions that the witness has just offered which we believe are incorrect as a matter of law? THE COURT: Yes, you may. Thank you. I'm testifying. I know I'm not a You've got it.

MR. BIRNBAUM: THE WITNESS: lawyer, Your Honor. THE COURT: THE WITNESS:

I'm just testifying from my experience. You don't need to explain. Then what happens is we have, under the

traditional ordinary course, I excluded payments that were 46 to 79 days, and those payments -Q. (BY MR. KAUP) Mr. Scherf, just go back. Why did you

exclude those payments? A. Those -- I excluded those payments because those were

deemed to be in the ordinary course of business of the industry. Q. A. Okay?

Is that based upon that Altman Weil study? That's based upon the Altman Weil study. And I determined And that's

that 46 to 79 days fell into that category. $299,393.

So at that point in time you take -- So it would be

the preference is net of the ordinary course defense here would be $421,437, if I did that right. Okay? That's the -- That's only the ordinary course -- ordinary

course defense analysis? A. Right. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 23 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. You mentioned new value. What is that?

1279

New value is essentially after payments are made, they are

payments -- they are services that are rendered to which there haven't been payments. Effectively in this case under this

analysis, it would be the services that were rendered at the end of -- basically the October services that were ultimately written off by Snell & Wilmer. Q. Did you perform analysis as part of your -- the work you

did to formulate your opinion about the amount of payments that would be new value? A. Yes. Based upon Snell & Wilmer's ledgers, I determined

that $65,882 was net new value. MR. BIRNBAUM: Your Honor, I don't know what analysis

the witness did, but that's not the analysis that was provided to us. That's not in the report. THE WITNESS: It is provided. It was provided in my We

deposition testimony subsequent to my second report. discussed it in my deposition.

I can point you to it in the And subsequently I provided

deposition where it was discussed.

that analysis, because I did not receive the Snell & Wilmer account ledgers until May 23rd or May 24th. issued on May 21st. My report was It was

It was discussed in my deposition. And we've subsequently

later in May, I think May 28th. followed up.

It was requested at the deposition to provide

that information, and it was provided. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 24 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 numbers. MR. BIRNBAUM:

1280

Your Honor, I have no report and no

supplemental report that does this analysis or reaches any of these numbers. THE COURT: MR. KAUP: Is it in the deposition, Mr. Kaup? That is my recollection, Your Honor. Well, Your Honor, I'll look for these I recall a

MR. BIRNBAUM:

I do not recall this analysis being done.

reference by the witness to the fact that he didn't have certain documents. THE COURT: But there is no -Again, I'm going to take it conditionally.

If someone shows me it's not disclosed anywhere, deposition or whatever, we'll exclude it. this included. THE WITNESS: I know that this number here is If I could I would rather think you'd want

$337,555, which means this number has to be wrong. check my notes, Your Honor, I could -THE COURT: THE WITNESS: THE COURT: Go ahead. Sorry, Your Honor.

Unfortunately our record is going to be

not so good at this point. Q. (BY MR. KAUP) Mr. Scherf, could you explain the difference

between the number you originally had and the number that you've now written in under the $720,830 under the traditional. A. Yes. I had actually not -- The payments that weren't in

the ordinary course were -- that weren't in the ordinary course UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 25 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were $317,000 -- that were in the ordinary course were $317,393.

1281

I had in my head thought it was $299,393, leaving

the $403,437 less the new value, leaving a number of $337,555 after new value. Q. So just to be clear, Mr. Scherf, what is your opinion about

the total amount of preferences to Snell & Wilmer, applying the traditional ordinary course analysis and all new value payments? A. Q. That would be $337,555. And, Mr. Scherf, what is your opinion as to the total

amount of preferences to Snell & Wilmer applying the analysis regarding the lack of applicability of the ordinary course defense due to pressure and undue influence and applying the credits for the new value services rendered by Snell & Wilmer? A. Q. That would be $654,948. You mentioned the individual checks and checks having been

deposited on the same day of the -- that the check was written. A. Q. Correct. Are you able to inform the Court as to which of those

checks fall within -- which of the checks to Snell & Wilmer within the one-year period fall within that scope of -- within that type of check? A. Q. A. The total amount? No. Okay. The individual checks. Check 10630 on December 30th, 1999, in the amount of UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 26 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1282

$311,942.61 was deposited on the same date of December 30th. Check No. 11125, check date 3-30-2000, in the amount of $77,237.27 was deposited on the same date. Check No. 11546 dated 6-7-2000 in the amount of $46,000 was actually deposited on the 8th. And I don't know,

you know, but it wasn't sent through the mail because it was too close. Check No. 11803 dated June 13th, 2000, in the amount of $52,189.98 was deposited on the 14th. Check No. 11844 dated July 21st, 2000, in the amount of $77,345.21 was deposited on the 21st. And Check No. 12306 dated 10-26-2000 in the amount of $22,410.06 was deposited on the 26th. The check that was dated 9-15, Check 12148, in the amount of $32,391.49 was actually deposited on the 18th, indicating that -- or the 19th -- I'm sorry -- indicating that it was probably sent through the mail. And then Check 10973 dated 3-3-00 in the amount of $101,313.30 was deposited on the 8th of March, indicating that that was in the mail. So with the exception of the two checks that I mentioned last, the March 3rd check and the September 15th check, all the other checks appeared to be hand delivered or sent overnight or somehow or another got there on the same day or right at the time of the check was -- when it was cut. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 27 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1283

So just the record's clear, why were those facts important

in your preference analysis? A. Well, those show that those payments weren't in the Based on my experience, you know,

ordinary course of business.

the check has to be delivered in the ordinary course of -between the parties as well as the industry. And that didn't

occur in this case because that's not how those types of checks are delivered in the industry. Q. Was, in your review of the materials, was there anything

else that you reviewed and relied on that provided indicia of, as you put it, undue influence and control, placing or removing the applicability of the ordinary course defense? A. Yes. There were certain e-mails that some are attached to

my report, Exhibit 322, copies of e-mails that start in March of 2000, where there's requests for the checks and actually requests to pick them up or drop it off, et cetera. e-mails speak for themselves. report. Q. If -- Did you form an opinion about the amount of The

But they're attached to the

preferences if the insider status is not applicable to Snell & Wilmer? A. Yes. I reviewed the report of Mr. Tucker in this matter,

and he came to the conclusion that Snell & Wilmer was not an insider. He looked specifically at the Code and said that they

weren't an officer or director and didn't look at the UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 28 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 definition completely.

1284

But he came to the conclusion -- and

it's a conclusion that I concur with -- that if in fact, Your Honor, you decide that Snell & Wilmer is not an insider and in fact that they should only be treated as a normal preference defendant, that the net preference amount rounded to the nearest dollar is $4,575. that. Q. You did review the other conclusions in Mr. Tucker's And Mr. Tucker and I do agree on

report? A. Q. Yes, I did. Did you formulate an opinion as to the other conclusions

contained in Mr. Tucker's report? A. Yes. Mr. Tucker criticized my report on a couple grounds. And as counsel for Snell & Wilmer has My report is

He looked at insolvency.

pointed out, I'm not an expert on insolvency. assuming that there's insolvency.

So if there's not

insolvency, then there's no preferences during the time -relevant time period because there has to be insolvency. In addition to that, Mr. Tucker does an analysis or purports to do an analysis with respect to insider status, and he actually just looks at the statutory definition and doesn't do the proper analysis. So his analysis or his determination as to insider status is flawed because he doesn't look at the true characteristics of what the relationship is. UNITED STATES DISTRICT COURT And I know that

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 29 of 116

SCHERF - DIRECT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. BIRNBAUM: Q. A. Q. A. Q. Good morning, Mr. Scherf. Good morning.

1285

that's for Your Honor to decide, so you'll decide that at the appropriate point in time. And -THE COURT: THE WITNESS: You've assumed that. Yes, I've assumed that, you know. The

only thing I noticed was one item, which is arm's length issues that -- on the transactions. But I have not offered an opinion

on insider, and I'm not offering an expert opinion on insider today. And then Mr. Tucker essentially just went through the analysis, which I believe we walked through this way just to isolate out the differences in our calculations. MR. KAUP: questions. THE COURT: You may cross-examine. Thank you, Your Honor. CROSS-EXAMINATION Thank you, Mr. Tucker. I have no further

MR. BIRNBAUM:

I've already complimented you on your selection of ties. And I, as well, yours, so -We didn't look to see if they were from exactly the same

store, but ours are identical. THE COURT: Oh, they are.

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 30 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 order. Q. (BY MR. BIRNBAUM) We didn't compare notes before we

1286

dressed this morning. Mr. Scherf, let me begin in what I hope is a logical

In doing a preference analysis, the first thing that you have to examine is whether or not the party that you're looking at, the creditor in this case, was dealing with an insolvent debtor. a threshold? A. Well, yes, except that in the 90 days, it's presumed to be It's a rebuttable presumption in the first 90 days. And in fact in the first -- the 90 days preceding In That's the first step, right? Insolvency is

insolvent. Q. Right.

bankruptcy, there's a rebuttable presumption of insolvency. the period between 90 days and 365 days, the burden of establishing insolvency is on the debtor, is it not? A. Q. That's correct. Okay. Now, in this case, as to whether Visitalk was ever

insolvent at any time, you reached no conclusion, correct? A. That's right. My understanding is there's another expert

that is doing that. Q. I don't want you to tell us about your understandings, and You are

I don't want you to tell us about other people.

offering no conclusion, no opinion in this case as to whether Visitalk was ever insolvent, correct? A. That's correct. It's an assumption on my part.

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 31 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1287

Now, the second step in the analysis is to determine the You then have

preference period that you're going to examine.

to look at whether or not the creditor is an insider of the debtor; is that correct? A. Q. That's correct. And let's see if we can avoid a lengthy discussion. You

agree, sir, that in this case, you are offering no opinion as to whether or not Snell & Wilmer was an insider of Visitalk at any time; is that correct, sir? A. Q. A. Q. A. Q. I was asked to assume that. Okay. That's correct.

So you are offering no opinion on that point?

That's correct. Now, that saves us a lot of time. Okay. Now, you then, once you determine what period you're going

to look at -- And you decided at least initially here to look at one year; is that correct? A. Q. That's correct. And that's because you assumed Snell & Wilmer was an

insider? A. Q. Correct. Do you agree if Snell & Wilmer was not an insider, the only

relevant period is 90 days before bankruptcy? A. Q. That's correct. Now, looking at this issue of insider status -- I'm sorry. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 32 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1288

Looking at this one-year period, you then determine the total amount of payments made during that year; is that correct? A. Q. A. Q. That's correct. And that was about $720,000, right? That's correct. And that was simply a matter of adding up the checks

written by Visitalk to Snell & Wilmer during that one-year period? A. Q. That's right. Now, having added that up, you then recognized that there Even if all of your assumptions

are defenses or deductions.

about insolvency and insider status and one-year period, even if all of those are correct, you then have to examine whether the $720,000 needs to be reduced, true? A. Q. That's true. And the first thing you looked at was ordinary course of

business, because payments made in the ordinary course of business are not preferential transfers, right? A. Q. That's correct. And ordinary course of business, as you understand it, One is the ordinary course of

involves two distinct analyses.

business between the creditor and the debtor, Snell & Wilmer and Visitalk. And then the second is the ordinary course of

business within the industry in which the creditor operates, true? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 33 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. That's correct.

1289

And during this time period on the Code,

you have to meet both of those. Q. Right. Right. You have to meet both. So now let's take

the first of those two tests, the ordinary course of business between Visitalk and Snell & Wilmer. Now, do I understand, Mr. Scherf, that you believe that there was no course of business between Snell & Wilmer and Visitalk preceding the one-year preference period you were assuming? A. Essentially there were two checks that I have an

understanding that existed prior to the one-year time period. The first check was a check for a $10,000 retainer, and then there was another check. And it's discussed in my first report

that there was another check that fell outside of the preference period, and that was a payment within 62 days from the date of the invoice. Q. So what's the ordinary course of dealing between How

Snell & Wilmer and Visitalk prior to November of 1999? quickly did bills get paid? A. Q. In that case, they were paid, you know, 62 days. Well, that was the check you'd found.

What about the other Were

invoices during the period preceding November of 1999? they paid? A. My understanding is there's only two checks.

I don't know

if there are other checks.

My understanding is that there

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 34 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was -Q. I'm not asking you about the checks, sir.

1290

I'm asking you

about the bills.

What bills were sent by Snell & Wilmer to

Visitalk prior to November of 1999, and what was the payment history on those bills? Let me help you, sir. report, does it? A. Well, wait a minute. I think it does. That appears nowhere in your

I've got the wrong report. Okay. On Page -- Yes, it is in my report. There are

two checks, as I said before.

The first check was a $10,000

retainer, and then there was another check that was in the amount of $6,145.50 made on August 18th, 1999, for an invoice dated in June. It was 49 days. Q. A. All right. Perhaps -And that was 49 days. I'm sorry. I said 62.

And that's the only check, so there's really no pre -- What

I testified to is there was really no pre-preference period course of dealing between the parties other than to say that that first check was within the scope of my determination of ordinary course between 46 and 79 days. Q. I want you to listen carefully to me, Mr. Scherf. Did

Snell & Wilmer send a bill in, let's say, April, 1999? A. Q. Not that I'm aware of. Well, you didn't look, did you? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 35 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. A. Q.

1291

I have no record of any other bills prior to the retainer. So you don't -- No, no, not prior to the retainer. Let me start again. Snell & Wilmer's engaged in what month, do you recall? Well, my understanding is that it's June 30th, 1999. Did Snell & Wilmer send a bill in July? Yes, they did. And when was the July bill paid? According to this, it may have been paid on August 23rd, I'm

sorry.

1999. Q. Well, no. You just told us that was paying the June bill.

When was the July bill paid, if you know, Mr. Scherf? A. Q. A. Q. I don't know. Was it paid in December? It may have been. I don't know.

Let's see if we can agree on some facts. Snell & Wilmer sent a bill in July, right? Correct. And a bill in August, correct? Correct. And a bill in September, correct? Correct. And a bill in October, correct? Correct. And a bill in November, correct? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 36 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Correct.

1292

Now, can we agree that -- These are all pre the one year

preference period, right? A. Q. The bill was, right. Can we agree that the July bill was not paid in at least

150 days? A. Q. I'm not sure we can agree to that. Well, you know there was a July bill, and you know there

was no payment until at least December? Would it help if I used the August bill? that that was not paid for at least 120 days? A. No, I can't agree with that based upon the analysis I'm Can we agree

looking at. Q. Well, was there a payment of the August bill in September,

October, November, or December of 1999? A. Q. There was -There were no payments during that period, right,

Mr. Scherf? A. There was a payment, as I -- Let me just look at this. That's right. So the course of dealing that actually existed between

Visitalk and Snell & Wilmer prior to the preference period of a year that you're utilizing is that one bill was at least 150 days before payment, one was at least 120, one was at least 90, one was at least 60? That was the course of dealing between

UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 37 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the parties, was it not? A. My analysis here shows that there was a payment in

1293

October -- in October. Q. Oh, but you told us there were only two checks you So there was an October payment?

considered. A.

There's an October payment, and that was because I didn't

have the Snell & Wilmer records when I was going through the initial analysis. So there is, according to my analysis here,

there was also a payment on 8-23-99 and October -Q. Well, did you analyze that payment? That appears nowhere That's something

in your reports or your deposition, correct? you're springing on us today? A.

That information is analyzed and was -- It was analyzed in

the ordinary course of business analysis that I came up with here. Q. A. Okay. And what bill did the October payment pay?

Well, it paid, according to this, some August and September

time. Q. Okay. So if it paid August time, it was at least 60 days If it paid September time, it was 30 to 60

behind the bill. days. A. Q. A. Q.

It was 48 and 22. What about that July bill? When did that get paid?

The July bill got paid in August. Oh, there's an August check too you're now telling us UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 38 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 about? A. Q. Yes.

1294

That's also not in your report or your supplemental -- your

rebuttal report; is that right? A. That's right, because I didn't receive the Snell & Wilmer

entire analysis until May, after my May report. Q. Now, it's true, is it not, sir, that the pattern that

existed between Snell & Wilmer and Visitalk is Visitalk paid bills when it had capital funds available that allowed it to pay the bills? Sometimes it was on a pattern of 30 days. But you'll agree it

Sometimes it was on a pattern of 90 days. varied all over the map. A. Isn't that true?

Most of the payments were on the shorter end of earlier

than 46 days. Q. Well, your own analysis shows that there were payments all

over the map ranging from 20 or 30 days to over 100 days, isn't that true, even during the preference period? A. Q. A. Q. No, that's not true. That's not true? No, that's not true. So, for example -- Well, if I look just for example at

Table 2 in your original report, don't you show that the payments to Snell & Wilmer were a minimum of 21 days and a maximum of 104 days? A. And that was based on an assumption that oldest invoices UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 39 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were applied first.

1295

The actual data which came subsequent to

the issuance of my May report indicates that the range was somewhere between a minimum of one day and a maximum of 86 days. Q. Well, did you redo Table 2 to your report, sir? I have a

report in front of me I just referred to. redone? A. Q.

Has that ever been

Yes, and it was discussed in my deposition. Well, can I see the revised Table 2? Because we've never

received such a thing. A. Q. A. Q. A revised Table 2? Yes, sir.

Is there a revised table?

Not in that form, no. Is there a revision to any of the tables and data that you

provided to us in your report and your rebuttal report? A. Q. There's a calculation which was provided to you. I know. You've given us your $337,555. I want to see the Has any of

underlying data on which your opinion is based. that ever been provided to us, sir? A. Q. A. Yes, it has, and here's a copy.

Has it been provided to us before you hand it to me now? Yes, it was. It was provided -- It was requested and

provided from my deposition. Q. I see. Is there an updated report? Let's just get that

behind us, Mr. Scherf. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 40 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. From that? No, there's not.

1296

Now, whatever the course of dealing -- By the way, on this

course of dealing, you say sometimes payments were made in one day. A. Do you know which check that was? Yes. The invoice that was dated July 20th, 2000, was paid

on the 21st. Q. A. Q. Do you know why? I know it was paid. I don't know why.

Did you make any inquiry about who wanted to make that

payment or why? A. Other than the e-mail correspondence requesting payments

for those time periods, no. Q. You're aware that there were checks that were hand

delivered between Visitalk and Snell & Wilmer; is that correct? A. Q. A. Q. That's what it appears to be, yes. Do you know who made those deliveries? No, I don't. Do you know whether the general counsel, Stephen Best, ever

delivered the checks because he was coming to Snell & Wilmer, and he elected to do that? A. Q. I don't know that. Well, do you have any information regarding these hand

deliveries that you thought were outside the ordinary course of business? A. Other than what's described in the e-mails, no. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 41 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay.

1297

You make reference to a late December of 1999 check Do you know why they were paid at

or checks that were paid. the end of December? A.

I don't know specifically why, no, other than, you know,

the $311,000 check was hand delivered. Q. A. Q. A. Hand delivered by who? I don't know that. It's not clear from the documents.

Do you know if it was the general counsel of the company? It may have been, but that doesn't change whether it's in

the ordinary course or not. Q. Do you know whether the general counsel of the company hand

delivered a check because he wanted it paid by the company before the end of the year? A. Q. I don't know. Do you know whether Snell & Wilmer ever requested such a

payment? A. There's not an e-mail that indicates that. I have no idea

whether someone called and requested that payment or not. Q. A. There's no e-mails in that time frame at all, are there? There's a November e-mail that one of the Snell & Wilmer

partners is copied on that indicates that -- the cash issues that are affecting Visitalk. But there are no e-mails that,

you know, demand payment at that point in time that I saw. Q. By the way, these e-mails that you're referencing, you

didn't cull them from some undifferentiated mass of paper, did UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 42 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you? A. Q. They were sent to you by Mr. Kaup? That's right. You didn't ask for anything more?

1298

You just took what he

sent you, and that's what you're relying on? A. Q. Correct. Now, let's go back to our analysis. So once you've assumed the preference period, assumed insider status, assumed insolvency -- all right -- you then looked at the course of dealing between Visitalk and Snell & Wilmer, right? A. Q. Right. And at the time you wrote your report, you had no

information about the pre-petition course of dealing, correct? A. Q. Correct. But you reached the conclusion at that point that

absolutely no payment was subject to an ordinary course defense even though you had no information regarding the relationship between Snell and Visitalk prior to the preference period? A. I did have some information. One is that it wasn't a long

period, and number two is that you need to meet both tests. And given the fact that it's not a long time period, then the industry test is going to control, because you have to meet both tests. So the fact of the matter is that you can just

specifically look at the industry analysis at that point to draw a conclusion. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 43 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1299

In your report you concluded that there was no ordinary

course defense available, period, on these preference payments; isn't that correct? A. Q. In the initial report, that's correct. And that was based on whatever information you had at that

time? A. Q. Correct. And then you did a rebuttal report some number of months

later; is that correct? A. That's correct. And then I was provided with some

information subsequent to that, which I've incorporated in my testimony. Q. And in the rebuttal report, you emphasized that at that

point you had concluded that there was no ordinary course deduction available, correct? A. Q. I believe that's correct. Then at your deposition, which was taken by one of my

partners, you, for the first time, told him that you had reached different numerical conclusions, correct? A. That's correct, because I finally at that point in time --

And in my reports prior to that I said I didn't have the accounting records to do that, and they were produced -those -- from Mr. Tucker's file from FTI. Q. And Mr. Price said to you, the gentleman who was taking the Are there any

deposition, he said, "Well, that's surprising. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 44 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 other new opinions you have to give us today?" correct? A. Q. Right. Is that

1300

Now, did you then, after the deposition -- Oh, by the way,

you even gave Mr. Price other new conclusions at the deposition, didn't you, say, yeah, I have some more things I want to tell you? A. I don't know. The deposition speaks for itself, but my

recollection is that what we talked about was the information from the -- as a result of the Snell & Wilmer client ledgers. Q. Mr. Scherf, you knew at the time you prepared your report

and your rebuttal report that there was a court-imposed deadline for the disclosure of all opinions; is that correct? A. Q. I wasn't aware of that, but I assumed there would be. Mr. Price told you at your deposition that you were giving

him untimely opinions that you were disclosing for the first time at the deposition. A. Q. Do you recall that?

I don't, but the deposition speaks for itself. It certainly does, sir. And then after the deposition was

done and the untimely opinions were stated, did you then supplement your prior reports by providing your data in the same table form or the same analytic form? anything else again? A. Q. No, but I provided -Thank you, Mr. Scherf. UNITED STATES DISTRICT COURT Did you ever write

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 45 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. -- the underlying data. I appreciate that.

1301

So there is no report other than the timely first report and the timely rebuttal report? you've written in this case? A. With text around them, but the analysis was provided as I turned it My My Those are the documents

soon as that information was provided to me. around.

I received it on March 23rd or March 24th.

deposition was, I believe -- I mean, May 23rd or May 24th. deposition was, I believe, May 28th. point in time.

It was disclosed at that

As soon as I got the information, I did those

calculations and told your partner that those calculations were there. In my original first two reports -- and I can quote from the report -- it says that there is accounting information that one would expect to have that was not available. found that it was in Mr. Tucker's files. information in Mr. Tucker's file. analysis accordingly. Q. A. Q. But no supplemental report? No, because you had the analysis. You answered me, sir. All right. Now, let's go back, because now I'm going And we

We requested that

And then we prepared the

to have to roam around a little bit, because I'm sure you're going to tell me you changed some of this analysis. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 46 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1302

You then looked at -- Initially you had no information on the course of dealing between Snell & Wilmer and Visitalk, but you did look at industry-wide course of dealing data; is that right? A. Q. That's correct. And you looked at two sources. One is an information

source called Integra, and the other one is a data compilation by a company called Altman Weil? A. Q. Correct. Now, on Integra, without getting into great detail, you

looked at the data, and you completely discarded it, right, did not use it at all in your analysis? A. That's correct, because it mixed cash and accrual

information on receivables. Q. So rather than adjust the information or attempt to find

out whether Integra had other data, you just discarded that data source? A. Integra doesn't have other data. That's the data they

have. Q. Well, we appreciate your hearsay statement, but you So you're down to one now,

discarded the Integra source. right? A. Q. A. Correct.

Now, that one source is the Altman Weil study, right? That's correct. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 47 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. And which year did you use the Altman Weil study for? I believe it was data for 2000. Okay.

1303

And it covers data submitted for law firms for the

period ending when? A. Q. A. I'd have to pull the study out to do that. It didn't cover your preference period, did it? It covers -- It provides data for numerous years, but I'd I don't have it in front of me.

have to look at the study. Q.

Well, the Altman Weil report actually provides data for one

year, doesn't it? A. It also provides comparative data for more than one year in

certain categories. Q. A. Q. A. What year's report did you use? I believe it was the 2000 report. And what period does that cover? I don't have it in front of me, but it would have been the

information that would have been available at the time of the preparation of the preference analysis, which would be an appropriate period for 2000. Q. Do you agree with me, Mr. Scherf, it does not cover your

preference period; it covers another period? A. Q. I don't know. Okay. I don't have the study in front of me.

Now, in your original report, you then referenced

this Altman Weil data, right? A. Correct. UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 48 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.

1304

And just so we're clear, the Altman Weil -- Snell & Wilmer,

do you know how many lawyers there are at Snell & Wilmer? A. Q. I believe in excess of 400 lawyers. So one category that Altman Weil surveys is firms over 150

lawyers; is that right? A. Q. That's correct. And nationwide they had 17 firms that responded in that That's it, right, 17 firms?

category? A. Q.

That's correct. Now, Altman Weil also defines an area called the West South

Central Region, correct? A. Q. A. Correct. And how many states does that include? I don't know. Several states, probably -- I don't have the Probably five or six states or whatever.

study in front of me. Q.

And in that entire region, there were 30 -- 27 -- 27

responding firms; is that correct? A. Q. Correct. And that's 27 responding firms, regardless of size. In the

entire region, 27 firms responded to the survey? A. Q. Correct. Do you have any idea how many firms there are, for example,

just in Phoenix, Arizona? A. Q. I'm quite sure there's more than 27. Thousands? UNITED STATES DISTRICT COURT

Case 2:02-cv-02405-HRH

Document 473

Filed 03/13/2008

Page 49 of 116

SCHERF - CROSS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. I don't know the answer to that.

1305

Do you know how many firms there are anywhere, any state,

any region? A. Q. It's not something I keep track of, no. Okay. Then nationwide the total number of firms responding

to the Altman Weil survey of any size from one lawyer up to a thousand or more is 308; is that correct? A. Q. Correct. Now, that's the data that you used from Altman Weil, the

data I just summarized; is that right? A. That's right. And there's consistency among that data on

the dif