Free Trial Brief - District Court of Arizona - Arizona

Gary L. Birnbaum (#004386) [email protected] Charles S. Price (#006197) [email protected] Timothy J. Thomason (#009869) [email protected] Scot L. Claus (#14999) [email protected] MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. 2901 North Central Avenue, Suite 200 Phoenix, Arizona 85012-2705 Phone: (602) 285-5000 Fax: (602) 285-5100 Attorneys for Defendant Snell & Wilmer, LLP IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, v. PETER THIMMESCH, et al., Defendants. CASE NO. CIV 02 2405 PHX HRH

DEFENDANT SNELL & WILMER'S TRIAL BRIEF
(FINAL PRETRIAL CONFERENCE: FEBRUARY 8, 2008) (TRIAL TO THE COURT: MARCH 3, 2008)

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I.

INTRODUCTION Plaintiff has four extant claims remaining against Snell & Wilmer: A. B. C. D. Professional negligence; Aiding and abetting breach of fiduciary duty; Negligent misrepresentation; and Preferential payments.

The Court has granted summary judgment in Snell & Wilmer`s favor and against Plaintiff on all claims related to Visitalk`s transaction with MP3.com, Inc., and on all claims related to Peter Thimmesch`s alleged improper expenditures. Accordingly, plaintiff`s remaining claims for legal malpractice, aiding and abetting, and negligent misrepresentation claims are relegated to issues related to the Founders Warrants, the Cardwell Settlement, and Snell & Wilmer`s representation of Visitalk in connection with the private offering of securities from July 1999 through August 2000. II. SNELL & WILMER'S STATEMENT OF AUTHORITIES AND POSITION REGARDING THE REMAINING CLAIMS A. Professional Negligence 1. Elements The elements of a legal malpractice claim are: (1) The existence of an attorney/client relationship imposing a duty on the attorney to exercise the degree of skill, care and knowledge commonly exercised by members of the profession; A breach of that duty; That such negligence was a proximate cause of resulting injury; and The fact and extent of injury.

(2) (3) (4)

Phillips vs. Clancy, 152 Ariz. 415, 418 (Ct. App. 1986). The plaintiff bears the burden of 24 25 26 proof on each element of its claim. Id. Indeed, the law presumes that the attorney has discharged his or her duty. Moelever v. Roush, 152 Ariz. 367, 371 (Ct. App. 1986). In order

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to establish a breach of the standard of care, expert testimony is typically required. Baird vs. Pace, 752 P.2d 507, 509 (App. 1987). 2. Plaintiff Will Not Meet its Burden of Proof on Liability. a. Overview

Though Snell & Wilmer does not dispute that it acted as one of several outside law firms to Visitalk from July 1999 until November 2000, plaintiff will be unable to meet its burden of proof with respect to any other essential element of its professional negligence claim. For example, plaintiff must prove that Snell & Wilmer fell below the standard of care applicable to Arizona lawyers. In other words, plaintiff must prove that Snell & Wilmer did not exercise the competence and diligence normally exercised by lawyers in similar circumstances. Restatement (Third) of the Law Governing Lawyers, § 52(1) (2000). Furthermore: [t]he duty of competence does not require a lawyer, in a situation involving the exercise of professional judgment, to employ the same means or select the same options as would other competent lawyers in the any situations in which competent lawyers exercise professional judgment in different ways. Restatement (Second) of Torts, § 299A. In any event, a lawyer`s exercise of professional judgment cannot be evaluated in a vacuum. Rather, the Court must take into account a variety of factors, including the scope of the representation, the client`s instructions (and ratification of the lawyer`s actions), the importance of the matter to the client, the cost of the effort, customary practices, and the amount of time available for the performance of the work. Restatement (Third) of the Law Governing Lawyers, § 52(1) (2000). When the Court evaluates all of those factors here, it must conclude that Snell & Wilmer did not breach any duties owed to Visitalk. b. Founders Warrants

Plaintiff claims that, prior to Snell & Wilmer`s representation of Visitalk, Founders Warrants were improperly and invalidly authorized for issuance to Peter Thimmesch and Michael O`Donnell. Plaintiff then asserts that when Snell & Wilmer determined that the authorization of the Founders Warrants may not have been properly documented, Snell & Wilmer breached the
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applicable standard of care by assisting Visitalk in: a) obtaining releases from Series A investors for any claims they may have had; and b) documenting that the Founders Warrants were authorized for issuance in September 1998. The Court`s analysis should begin with a determination as to whether the Founders` Warrants were properly authorized. The authorization of the Founders Warrants was initially documented by its then-counsel, Bryan Cave, via a Unanimous Written Consent in Lieu of a Meeting of the Board of Directors. A.R.S. § 10-821 permits actions taken by the board of directors to be memorialized by a written consent. Section 10-821(B) states that any board action taken pursuant to a consent is effective when the last director signs the consent, unless the consent specifies a different effective date. Here, the Unanimous Consent drafted by Bryan Cave specifically indicated that the action memorialized by such consent was effective as of September 12, 1998. However, by November 1998, the time the consent appears to have been drafted by Bryan Cave, Mark Cardwell had become a director. Therefore, absent a meeting, the consent may not have been effective. Id. When a meeting of the Board of Directors does occur, Arizona law does not require minutes of such a meeting to be contemporaneously prepared; nor does Arizona law require meeting minutes to be signed. See A.R.S. §10-1601. As part of its investigation, Snell & Wilmer learned from those involved that a meeting regarding the Founders Warrants had occurred on September 12, 1998. In fact, the occurrence of the meeting has been confirmed by all attendees at the meeting. Not only was the meeting confirmed, but Mr. Cardwell confirmed he was not a director or shareholder at the time of such meeting. Because a meeting actually occurred wherein the Founders` Warrants were authorized by all of the then-existing members of Visitalk`s Board, Snell & Wilmer`s assistance in the preparation of minutes to memorialize that meeting was entirely appropriate1. Id.
Moreover, because the Founders` Warrants were authorized at a meeting, they were properly authorized in the first instance. Therefore, whether any shareholder held a claim related to those warrants becomes moot.
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Moreover, when the Board of Directors determined to eliminate all doubt regarding the Founders` Warrants and any potential risk to the corporation and to future securities offerings by seeking releases from all Series A investors (to whom the existence of the Founders Warrants had not been disclosed), Snell & Wilmer did not breach any duty by deferring to the sound business judgment of the Board of Directors. Snell & Wilmer certainly did not fall below the applicable standard of care by assisting the Board in drafting the release of claims ultimately executed by every Series A shareholder. c. The "Cardwell Settlement"

On May 10, 2000, Mark Cardwell and Visitalk entered into a Settlement Separation and Release Agreement (referred to herein as the Cardwell Settlement). Plaintiff asserts that Snell & Wilmer`s actions fell below the applicable standard of care in connection with the Cardwell Settlement. At the time of the settlement, Mr. Cardwell owned one million shares of common stock in Visitalk. The Cardwell Settlement involved the sale by Mr. Cardwell of 500,000 of those shares to third-party investors. From the sale of such shares, Mr. Cardwell received $2.42 per share, and Visitalk received the balance, which ultimately resulted in the generation of approximately one million dollars in capital for Visitalk. In addition, Mr. Cardwell released any and all claims he may have had against Visitalk, including age discrimination claims. In other words, the Cardwell Settlement--which was approved by Visitalk`s Board of Directors--resulted in substantial economic benefit to the corporation and eliminated potential exposure to loss. Plaintiff claims that the sale of shares by Mr. Cardwell pursuant to the settlement was a corporate opportunity that was usurped, ostensibly with the assistance of Snell & Wilmer. Plaintiff is wrong as a matter of fact, logic, and law. The "corporate opportunity doctrine" prohibits a fiduciary`s usurpation of a corporate opportunity. It requires a fiduciary who learns of a corporate opportunity to disclose it to the corporation before appropriating the opportunity for himself. Amerco v. Shoen, 907 P.2d 536, 544 (Ct. App. 1995). Therefore, plaintiff must prove,

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among other things, that the alleged opportunity to sell stock to investors was something that Mr. Cardwell did not disclose to Visitalk. Id. Plaintiff can make no such showing. d. The Representation of Visitalk In Connection with Securities Offerings

Plaintiff has asserted that Snell & Wilmer fell below the applicable standard of care in connection with its representation of Visitalk in connection with certain securities offerings. It is, 6 again, unclear how any conduct of Snell & Wilmer that assisted Visitalk in raising money could 7 8 simply be unable to demonstrate that Snell & Wilmer fell below the standard of care in 9 connection with any offering of securities. 10 3. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 The Alleged "Shareholder Claims" Cannot Constitute Compensable Damages to Visitalk. a. Overview give rise to a compensable damage claim on the part of Visitalk. That being said, plaintiff will

Plaintiff asserts that shareholders of Visitalk possessed certain claims against Visitalk (though no such claims were ever asserted), and that those claims constituted debt for the purpose of measuring Visitalk`s solvency and to ostensibly support its theory of deepening insolvency. However, even if such claims existed, this Court has recognized in its previous rulings that plaintiff cannot pursue claims allegedly held, nor recover damages allegedly suffered, by investors in Visitalk. (10/15/07 Order at 22-23). Similarly, plaintiff cannot pursue claims allegedly held, nor recover damages allegedly suffered, by creditors of the corporate entity. (Id.) Rather, the extent of permissible claims is limited to those claims held by Visitalk, and the permissible damages are limited to damages suffered by Visitalk. On this point, the controlling authority is clear and categorical. In Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005), the Ninth Circuit stated: [I]t is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself." [citing Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991) ]; see also Steinberg v. Buczynski, 40 F.3d 890,

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893 (7th Cir. 1994) ("The trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor"). This principle derives from the Supreme Court's decision in Caplin, "in which the Court concluded that a reorganization trustee under Chapter X had no standing under the old Bankruptcy Act to assert, on behalf of the holders of the debtor's debentures, claims of misconduct against a third party 421 F.2d at 1001. In fact, a bankruptcy trustee lacks standing to assert claims on behalf of the debtor's creditors, even if the creditors have expressly assigned their claims to the trustee. Metro. Creditors' Trust v. PricewaterhouseCoopers, LLP, 463 F. Supp. 2d 1193, 1200 (E.D. Wa. 2006 (citing Caplin, 406 U.S. at 434; Williams v. Cal. 1st Bank, 859 F.2d 664, 667 (9th Cir. 1988)). Accordingly, plaintiff must prove that Visitalk suffered damages as a result of Snell & Wilmer`s conduct, and then identify and quantify those damages. The Plaintiff in this case cannot do so. b. Plaintiff Will Offer No Evidence that any Shareholder Could Successfully Litigate a "Shareholder Claim.

Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. § 78j, imposes certain duties upon the issuers of securities and confers certain rights upon shareholders. Plaintiff tacitly suggests that Visitalk shareholders had claims, pursuant to Section 10(b) (and SEC Rules promulgated pursuant to Rule 10(b)) as the result of securities offerings made by Visitalk. However, to establish liability under Section 10(b), the following elements must be proven: (1) a material misrepresentation . . . ; (2) scienter, i.e., [the defendant's] wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to . . . as 'transactional causation'; (5) economic loss2; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss. 3 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005) (emphasis in original). Moreover, [w]hen a party executes a release agreement, he or she abandons a claim or right to the person against whom the claim exists or the right is to be enforced or exercised.`
To have viable claims, Visitalk shareholders would have been required to prove they bought shares at inflated prices because of the alleged material misrepresentation. Dura, 544 U.S. at 343 ("the higher purchase price [is] a necessary condition of [establishing an economic] loss"). 3 To establish that shareholders held viable claims, plaintiff would also have the burden of proving that the alleged misrepresentations to each shareholder "caused the loss for which that shareholder could recover. Dura, 544 U.S. at 345. Case 2:02-cv-02405-HRH Document 443
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[citations omitted]. The claim, once abandoned, is extinguished. Cunningham v. Goettl Air Conditioning, 194 Ariz. 236, 240 (1999). Because every Series A shareholder released any and all claims, including known and unknown claims and contingent claims, those alleged claims were extinguished and cannot form the basis of any debt or contingent liability of Visitalk. Id. c. Any Claims Are Barred under the Doctrine of Res Judicata

The confirmation of a plan operates as a final judgment. 5 Collier on Bankruptcy, § 1141.02[4]; Stoll v. Gottlieb, 305 U.S. 165, 170-71 (1938). Any claim not made part of the debtor`s schedules and not asserted prior to the bar date is forever disallowed and cannot be subsequently asserted. Fed. R. Bankr. P. 3003(c)(1); see also In re Analytical Systems, Inc., 933 F.2d 939, 942 n.5 (11th Cir. 1991). That final bar of claims applies equally to contingent claims. Siegel v. Federal Mtg Hm Loan Corp., 143 F.3d 525, 532 (9th Cir. 1998) (all pre-petition claims, including contingent claims, are forever barred under the doctrine of res judicata upon entry of the bankruptcy court`s discharge order). No Visitalk shareholder ever filed a proof of claim in the Visitalk Bankruptcy for any monies paid for securities. Indeed, the Schedules of Assets and Liabilities, filed under oath by Visitalk in the Visitalk Bankruptcy, never identified any shareholder as possessing a claim against Visitalk. The confirmation of Visitalk`s Second Plan of Reorganization bars the assertion by the current plaintiff of those non-existent claims. Stoll, 305 U.S. at 170-71. d. In Any Event, "Shareholder Claims" Were Time-Barred Long Ago.

Even if a shareholder had a claim against Visitalk based on the offering of securities, any such claim would now be time-barred. Litigation instituted pursuant to § 10(b) and Rule 10b5... must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991). The one-year prong of the statute of limitations on § 10(b) and Rule 10b-5 claims begins to run when the plaintiffs have either actual or constructive notice
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of the alleged fraud. Dodds v. Cigna Secs., Inc., 12 F.3d 346, 350 (2d Cir. 1993). Obviously, the one year limitation period expired long ago. Thus, any possible shareholder claims are timebarred as well, and cannot form the basis of any claimed debt of Visitalk. Id. 4. Plaintiff's Reliance on a "Deepening Insolvency" Theory is Groundless. a. No Viable Deepening Insolvency Claim Exists.

Because plaintiff cannot prove that Visitalk suffered actual damages, it attempts to equate money invested by Visitalk shareholders to damages suffered by Visitalk by invoking the mantra of deepening insolvency. Plaintiff`s reliance on this theory is misplaced. As one court recently recognized: The incantation of the word insolvency, or even more amorphously, the words zone of insolvency should not declare open season on corporate fiduciaries. Directors are expected to seek profit for stockholders, even at risk of failure. With the prospect of profit often comes the potential for defeat. Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168,174 (Del. Ch. 2007). The Trenwick court`s analysis is particularly instructive here. Like the plaintiff in this case, the Trenwick plaintiff was a litigation trust created pursuant to a plan of reorganization. 906 A.2d at 172. Moreover, just like the plaintiff here, the Trenwick plaintiff asserted that a corporate holding company pursued an imprudent business strategy that caused the holding company to take on debt that eventually rendered it insolvent. Id. at 17273. The Trenwick plaintiff then concluded that the fact that the holding company's strategy ultimately failed must mean that the process that led to its adoption was the product of culpably sloppy efforts. Id. The litigation trust in Trenwick sued not only the directors and officers of the holding company (just as in this case), but also the professional advisors of the holding company, including its independent auditors (Ernst & Young) and outside counsel (Baker & MacKenzie). Id. at 213-14. In allegations generally paralleling those in this case, the Trenwick plaintiff claimed that the professional advisors "`knowingly participated' in breaches of duty by the Trenwick and Trenwick America directors by `helping to conceal the true
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financial condition of the Trenwick Companies, manipulating the valuation and reserves of various of these companies, and/or signing off on the legitimacy of these transactions.' Id. The Trenwick court summarily rejected the plaintiff`s claims. In doing so, it recognized the patent sophistry underlying claims of deepening insolvency in cases such as the present one. The court stated: The concept of deepening insolvency has been discussed at length in federal jurisprudence, perhaps because the term has the kind of stentorious academic ring that tends to dull the mind to the concept's ultimate emptiness. Delaware law imposes no absolute obligation on the board of a company that is unable to pay its bills to cease operations and to liquidate. Even when the company is insolvent, the board may pursue, in good faith, strategies to maximize the value of the firm. As a thoughtful federal decision recognizes, Chapter 11 of the Bankruptcy Code expresses a societal recognition that an insolvent corporation's creditors (and society as a whole) may benefit if the corporation continues to conduct operations in the hope of turning things around. If the board of an insolvent corporation, acting with due diligence and good faith, pursues a business strategy that it believes will increase the corporation's value, but that also involves the incurrence of additional debt, it does not become a guarantor of that strategy's success. That the strategy results in continued insolvency and an even more insolvent entity does not in itself give rise to a cause of action. Rather, in such a scenario the directors are protected by the business judgment rule. Id. at 204-05. Of course, the business judgment rule is not a principle unique to Delaware. Rather, in Arizona, the business judgment rule creates a powerful presumption that a corporation`s business decisions are properly motivated, which can only be "rebutted in those rare cases where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith. Mann v. GTCR Golder Rauner, 483 F. Supp. 2d 884, 902 (D. Ariz. 2006) (quoting Parnes v. Bally Entertainment, 722 A.2d 1243, 1246 (Del. 1999) (emphasis in original). Stated differently, the business judgment rule presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.`" United Dairymen of Ariz. v. Schugg, 212 Ariz. 133, 140 (Ct. App. 2006) (quoting Blumenthal v. Teets, 155 Ariz. 123, 128 (App. 1987))
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Even assuming a state of insolvency, its mere existence does not create the paradigm shift in the duties and/or conduct of directors suggested by plaintiff. The directors of an insolvent corporation still have the ability and duty to attempt to make decisions for the benefit of the corporation and to attempt to operate the corporation successfully. As the Arizona Court of Appeals recently recognized: When a firm has reached the point of insolvency, it is settled that . . . the firm's directors are said to owe fiduciary duties to the company's creditors. This is an uncontroversial proposition and does not completely turn on its head the equitable obligations of the directors to the firm itself. The directors continue to have the task of attempting to maximize the economic value of the firm. That much of their job does not change. But the fact of insolvency does necessarily affect the constituency on whose behalf the directors are pursuing that end. By definition, the fact of insolvency places the creditors in the shoes normally occupied by the shareholders -- that of residual risk-bearers. Where the assets of the company are insufficient to pay its debts, and the remaining equity is underwater, whatever remains of the company's assets will be used to pay creditors, usually either by seniority of debt or on a pro rata basis among debtors of equal priority. Dawson v. Withycombe, 163 P.3d 1034, 1057 (Ct. App. 2007). Visitalk`s directors exercised their best business judgment; there will be no evidence to the contrary. The fact that their collective judgment did not result in success does not mean that the exercise of that judgment gives rise to a cognizable claim against one of the law firms that represented the corporation. Id.; Trenwick, 906 A.2d at 204-10. b. Plaintiff Must Establish When Visitalk Became Insolvent.

If the Court permits plaintiff to pursue its deepening insolvency claims, then the Court must still make a critical determination: when did Visitalk become insolvent? A.R.S. § 44-1002 sets forth the following definition of insolvency: A. A debtor is insolvent if the debtor`s debt is greater than all of the debtor`s assets at a fair valuation; [or] B. A debtor who is generally not paying his debts as they become due is presumed to be insolvent. Plaintiff is attempting to characterize the alleged unasserted contingent claims of Visitalk`s shareholders as debt of Visitalk that caused Visitalk to be insolvent. However, it
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is axiomatic that a contingent liability . . . must be reduced to its present, or expected, value before a determination can be made whether the firm's assets exceed its liabilities. In re Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988). The plaintiff in Xonics asserted that a corporation was insolvent because it signed loan guarantees that created contingent liabilities: The Xonics court rejected this notion out of hand: The proposition is absurd; it would mean that every individual or firm that had contingent liabilities greater than his or its net assets was insolvent -- something no one believes. Every firm that is being sued or that may be sued, every individual who has signed an accommodation note, every bank that has issued a letter of credit, has a contingent liability. Id. (emphasis added). Therefore, the Xonics court concluded that, the existence of remote contingencies, which do not seriously endanger the firm's ability to pay its debts, [cannot] be deemed to make an otherwise solvent firm bankrupt. Id. The same analysis should be applied here. Plaintiff must present competent evidence demonstrating that the alleged claims were likely to be asserted at the date that Visitalk`s solvency is being measured. Id. Absent such proof, the Court cannot determine, as a matter of law, that any claims of any Visitalk shareholder--even if such claims existed--caused Visitalk to be insolvent.4 Id. 5. Plaintiff Cannot Establish That any Act or Omission of Snell & Wilmer Was the Proximate Cause of its Alleged "Damages.

Relying on amorphous theories of damages (such as deepening insolvency) does not relieve the plaintiff of its burden of proving that Snell & Wilmer`s acts were the proximate cause of any cognizable damages. In other words, plaintiff must not only prove that but for Snell & Wilmer`s conduct, Visitalk would not have suffered (as of yet, unidentifiable) injuries; plaintiff must also prove that Snell & Wilmer`s conduct was a "a substantial factor in bringing about the harm." Thompson v. Better-Bilt Aluminum Prods. Co, 832 P.2d 203, 207 (Ariz.

4

That no shareholder claim was ever asserted by a shareholder, identified in Visitalk`s bankruptcy filings, or perfected through a proof of claim, demonstrates both the non-existence of such claims and that there was no substantial likelihood that such claim would be asserted. Case 2:02-cv-02405-HRH Document 443 Filed 02/01/2008
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1992) (citing Restatement (Second) of Torts, §§ 431, 433). The Thompson court adopted the factors outlined in Restatement § 433 for use in determining whether conduct can be considered a substantial factor in bringing about an injury: (a) the number of other factors which contribute in producing the harm and the extent of the effect which they have in producing it; (b) whether the actor's conduct has created a force or series of forces which are in continuous and active operation up to the time of the harm, or has created a situation harmless unless acted upon by other forces for which the actor is not responsible; (c) lapse of time. Id. Applying this standard, even if plaintiff identified actual injuries that it sustained, the Court cannot find that Snell & Wilmer was the proximate cause of those injuries. Id. The causal link between a lawyer`s conduct and the injury must be based on more than speculation. Legal Malpractice, § 8.5. Here, in its Disclosure Statement submitted in the bankruptcy proceeding, Visitalk itself recognized (under oath) that the dot.com collapse beginning in mid-2000 was a precipitating factor in Visitalk`s ultimate failure. Tellingly, the Disclosure Statement did not even mention Snell & Wilmer. B. AIDING AND ABETTING A BREACH OF FIDUCIARY DUTY. A claim of aiding and abetting tortious conduct requires proof of three elements: 1. 2. The primary tortfeasor must commit a tort that causes injury to plaintiff. The defendant must show that the primary tortfeasor`s conduct constitutes a breach of duty; and 3. The defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach. Wells Fargo v. Arizona Laborers, 201 Ariz. 474, 38 P.3d 12, 24 (2002). The burden of proof on each element of the aiding and abetting claim lies with plaintiff. Id. Though plaintiff suggests in its separate statement of legal issues (set forth in the Joint Pretrial Statement) that Snell & Wilmer may be held liable for aiding and abetting a breach of

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fiduciary duty even if it did not have actual knowledge of the alleged underlying torts, the law is to the contrary. As the Arizona Court of Appeals recently recognized: For a person to be liable for a tort for aiding and abetting it must be shown that the person knew the primary tortfeasor's conduct constituted a tort, and that the person substantially assisted or encouraged the primary tortfeasor in accomplishing the tort. As this theory of liability depends upon proof of scienter, it must be shown that the defendants knew the conduct they allegedly aided and abetted was a tort. Dawson, 163 P.3d at 1063 (citing Wells Fargo, 38 P.3d at 33) (emphasis added). On this point little more need be said. Plaintiff cannot, in any event, establish this essential element of an aiding and abetting claim. C. NEGLIGENT MISREPRESENTATION. To prove negligent misrepresentation, plaintiff must establish that (1) Snell & Wilmer, in the course of business, gave materially false information for the guidance of Visitalk in its business transactions; (2) Snell & Wilmer intended, or could reasonably foresee, that Visitalk would rely on that information; (3) Snell & Wilmer failed to exercise reasonable care in obtaining or communicating that information; (4) Visitalk justifiably relied on that materially

16 17 18 19 20 21 22 23 24 25 26 The professional's liability is limited to that which could have been imposed on a contractual basis.). Snell & Wilmer represented Visitalk. Thus, plaintiff is limited in its claim for negligent misrepresentation to information supplied to, and relied on by, Visitalk. Id. In fact, false information; and (5) Visitalk`s justifiable reliance was the proximate cause of Visitalk`s damages. Taeger v. Catholic Fam. & Comm. Svcs, 995 P.2d 721, 730 (Ct. App. 1999). As a matter of Arizona law, a professional can only be liable for negligent misrepresentation to those to whom the professional owes a duty. Hoffman v. Greenberg, 767 P.2d 725, 728 (Ct. App. 1988) (the professional has been held liable for damage to the client.

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plaintiff will not be able to demonstrate that Snell & Wilmer made false statements or supplied false information to anyone. D. PREFERENCE.

11 U.S.C. § 547(b)(4)(B) permits a bankruptcy trustee or a debtor-in-possession to avoid any pre-petition transfer by the debtor that occurs between 90-days and 1-year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider. 11U.S.C. § 101 provides the statutory definition of an insider of a corporation.

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Badger Freightways v. Continental Illinois National Bank, 106 B.R. 971, 980 (Bankr. N.D. Ill. 23 24 25 26 1989). While the courts recognize that the relationship necessary to find insider status neither requires consanguinity nor marital relations, the relationship must be sufficiently close such Section 101(31)(b) states: The term insider` includes...if the debtor is a corporation ­ (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of the general partner, director, officer or person in control of the debtor. 11 U.S.C. § 101(31)(b). In In re Friedman, the Ninth Circuit recognized that a finding of non-statutory insider status can only be justified when the relationship between the alleged insider and the debtor compels the conclusion that the individual or entity has a relationship with the debtor . . . close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties. 126 B.R.63, 70 (9th Cir. 1991). As one court explained: When describing the requisite level of influence the [purported insider] must have to be an insider, courts have used terminology such as having a stranglehold over the debtor, having a complete domination of the debtor, rendering the debtor a mere instrumentality or alter ego of the [purported insider] or powerless to act independently.

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that decisions are predicated on affinity rather than being commercially motivated. See, e.g., In re Fourthstage Technologies, Inc., 355 B.R. 155, 160 (Bankr. D. Ariz. 2006). The mere fact that an attorney engages in passing social relations with a client certainly does not create insider status. Courts have recognized that the attorney/client relationship requires a certain degree of inter-personal relationship as well as a business relationship. See, e.g., JER WHTR Services, Inc. v. Lavin, 213 B.R. 791 (D. Mass. 1997). The Lavin court determined that, despite the long relationship between the debtor and counsel, the attorney could not be considered an insider because the attorney did not have control or decision making powers regarding the corporation. Id. To demonstrate insider status in this case, plaintiff must prove that Snell & Wilmer had such a close personal relationship with the officers and directors of Visitalk that Snell & Wilmer was able to control the internal business affairs of Visitalk. Id. Absent such showing, the Court cannot determine that Snell & Wilmer was an insider.5 E. UCATA The Uniform Contribution Among Tortfeasors Act (UCATA), A.R.S. § 12-2506, provides that [e]ach defendant is liable only for the amount of damages allocated to that defendant in direct proportion to that defendant's percentage of fault. UCATA applies in this case to all of plaintiff`s claims sounding in tort. Id. If Visitalk is found to have sustained any compensable damages, then the Court must apportion fault among all parties and nonparties that caused or contributed to such damages. Id.

In any event, any payment to Snell & Wilmer that represented new value or contemporaneous value cannot constitute a preference. 11 U.S.C. §547(c).
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RESPECTFULLY SUBMITTED this 1st day of February, 2008. MARISCAL, WEEKS, McINTYRE & FRIEDLANDER, P.A. By: s/Scot Claus________ Gary L. Birnbaum Timothy J. Thomason Charles S. Price Scot L. Claus 2901 N. Central Avenue, Suite 200 Phoenix, Arizona 85012-2705 Attorneys for Snell & Wilmer, LLP

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CERTIFICATE OF SERVICE Biltmore Associates v. Peter Thimmesch, et al. (Case No. CV-02-2405-PHX-HRH) I hereby certify that on February 1, 2008, I electronically transmitted the attached document(s) to the Clerk`s Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Christopher R. Kaup [email protected] Tiffany & Bosco, P.A. Third Floor Camelback Esplanade II 2525 East Camelback Road Phoenix, Arizona 85016-4237 Special Counsel for the Plaintiff I hereby certify that on February 1, 2008, I caused the attached document to be served by federal express on: HON. H. RUSSELL HOLLAND UNITED STATES DISTRICT COURT 222 West 7th Avenue ­ No. 54 Anchorage Alaska 99513 (Ph: 907) 677-6252 I hereby certify that on February 1, 2008, I caused the attached document to be served by first class mail on the following, who are not registered participants of the CM/ECF System: Peter Thimmesch 11337 Stonehouse Place Potomac Falls, Virginia 20165-5123 Defendant Pro Se MARISCAL, WEEKS, McINTYRE & FRIEDLANDER, P.A. By: /s/ Scot L. Claus

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