Free Order on Motion for Partial Summary Judgment - District Court of Arizona - Arizona

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

BILTMORE ASSOCIATES, L.L.C., as Trustee for the Visitalk Creditors' Trust,

) ) ) ) Plaintiff, ) ) vs. ) ) PETER THIMMESCH, et al., ) ) Defendants. ) ___________________________________) O R D E R

No. 2:02-cv-2405-HRH

Snell & Wilmer's Motion for Summary Judgment Defendant Snell & Wilmer moves for summary judgment.1 This motion is opposed.2 heard. Facts Plaintiff is Biltmore Associates, as Trustee for the Visitalk Creditors' Trust. The remaining defendants in this action are Peter Thimmesch and Snell & Wilmer, LLP. Visitalk.com, Inc. was formed on September 3, 1998. The Oral argument was requested and has been

Articles of Incorporation indicate that Visitalk's business was

1

Docket No. 358. Docket No. 383. -1-

2

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"internet

commerce"

and

that

its

initial

Board

of

Directors

consisted of Peter Thimmesch (Thimmesch) and Michael O'Donnell (O'Donnell).3 Thimmesch and O'Donnell signed an Unanimous Consent

of the Board of Directors in Lieu of Organizational Meeting, which is dated September 4, 1998, in which the officers of the company were listed as Peter Thimmesch, Chief Executive Officer; Michael O'Donnell, President; Mark Cardwell, Vice President; Peter

Thimmesch, Secretary; and Cynthia Thimmesch, Treasurer.4 A stock transfer ledger and stock certificate stubs, which are dated September 4, 1998, indicate that Thimmesch, O'Donnell, and Cardwell were all issued shares of common stock in Visitalk.5 Thimmesch was issued 2,600,000 shares of common stock; O'Donnell was issued 2,500,000 shares; and Cardwell was issued 1,000,000.6 Thimmesch and O'Donnell signed a document, which is "[d]ated as of September 12, 1998," entitled "Unanimous Consent of the Board of Directors in Lieu of Special Meeting."7 The September

12, 1998 Unanimous Consent "granted warrants" to Thimmesch and

Exhibit 1 at 1-2, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. Exhibit 3 at 2, Plaintiff's Statement of Facts, Docket No. 384. See Exhibit 4, Plaintiff's Statement of Facts, Docket No. 384.
6 5 4

3

Separate Separate

Controverting Controverting

Id.

Exhibit L, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359. -2-

7

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O'Donnell, as the "founders of the Corporation", to each purchase 3,825,000 shares of stock and authorized the Board of Directors to "execute and deliver" the Founders Warrants.8 It is undisputed that this "Unanimous Consent" was

prepared by Bryan Cave, P.C., the law firm that was originally Visitalk's primary outside counsel. It is also undisputed that it It is, however, disputed

was prepared after September 12, 1998.

whether the Founders Warrants were actually authorized on September 12, 1998. It is also disputed as to whether Cardwell was a member

of the Board of Directors at the time the Founders Warrants were authorized. In September 1998, Visitalk raised money through the sale and issuance of Series A Preferred Stock to individual investors. Visitalk raised additional money by selling Series B Preferred Stock in October and November 1998 and Series C Preferred Stock in 1999. Defendant Snell & Wilmer was retained by Visitalk in June of 1999. Visitalk asked Snell & Wilmer "to determine the possible

legal implications of the issuance ... of founder's warrants to Peter Thimmesch and Michael O'Donnell...."9 Snell & Wilmer

identified two potential problems with the Founders

Warrants: 1)

the existence of the Warrants was not disclosed to the Series A

8

Id. at 1.

July 28, 1999 letter from Michael M. Donahey, Snell & Wilmer, to Stephen Best at 1, Exhibit 17, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. -3-

9

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investors (although the existence of the Warrants had been disclosed to the Series B and C investors) and 2) Cardwell, whom Snell & Wilmer believed had been elected to the Board of Directors on September 18, 1998, did not execute the resolution approving the issuance of the Founders Warrants, a decision that Snell & Wilmer indicated was made in early November.10 Snell & Wilmer concluded

that "there is significant legal risk associated with the way in which the Founder's Warrants were issued."11 Snell & Wilmer

suggested that if Visitalk "wishes to grant founder's warrants to Messrs[.] Thimmesch and O'Donnell it can do so in a manner that will withstand judicial scrutiny by obtaining the approval of the disinterested directors or shareholders ... and by issuing warrants that comply with the terms of the purchase agreements for the preferred stock."12 In the alternative, Snell & Wilmer advised that the existing Founder's Warrants could be restructured to withstand judicial scrutiny (assuming of course that the issuance does not amount to corporate waste) if the warrants are amended to comply with the vesting requirements of the purchase agreement, if the requisite Board or shareholder ratification ... is obtained, and if the warrants are dated the date they were originally approved by Messrs. Thimmesch and O'Donnell.[13]

10

Id. at 1-2. Id. at 5. Id. at 6. Id. -4-

11

12

13

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As a final alternative, Snell & Wilmer suggested that "in lieu of Founder's Warrants, the Board of Directors may want to consider issuing Messrs. Thimmesch and O'Donnell stock options pursuant to the Company's 1998 Stock Option Plan."14 On November 24, 1999, the Board of Directors of Visitalk, which at that point consisted of Thimmesch, O'Donnell, Allan Kaplan, Cardwell, and Jeffrey Hirschberg, held a meeting at the offices of Snell & Wilmer. The minutes of the meeting indicate that one of the issues discussed was the Founders Warrants,15 that "[t]he background on the Founder's Warrants was explained to the Board," and "[t]he Board went into executive session where the alternatives were reviewed."16 The Board

decided [to] ask all Series A Shareholders to sign a waiver and release of claims regarding the failure of the company to disclose the Founder's Warrants to them at the time of the Series A offering. Once the waivers are all signed and returned, the Founders will keep their warrants. The existence of the Founder's Warrants was disclosed to the Series B and Series C Shareholders. The Board decided to follow a dual track on the issue and have research done on executive compensation plans. If they do not receive unanimous consent from the Series A Shareholders by December 10th, it was decided that Mr. Thimmesch and Mr. O'Donnell would waive their rights to the

14

Id.

Exhibit M at 4, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359.
16

15

Id. -5-

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Founder's Warrants and receive stock options pursuant to their employment agreements. Mr. Griffiths and Mr. Stoghill were added to the conference call. Mr. Griffiths explained further the process of the waivers, adding that the waivers by the shareholders must be obtained from everyone.[17] The minutes of the Board Meeting indicate that Richard Mallery and Michael Donahey, Snell & Wilmer attorneys, attended the Board Meeting,18 but Snell & Wilmer contends that they did not attend the Executive Session during which the Board discussed the Founders Warrants. Following the November 24, 1999 Board meeting, Kaplan, "[a]s a fellow Series A Stockholder" and "as the member of the Company's Board of Directors elected as the representative of the Series A Stockholders," sent a letter to the other Series A stockholders.19 In the letter, Kaplan advised that the "Term Sheet" that had been sent to Series A stockholders "contained an error" because it failed to "disclose the existence of Founder's Warrants issued to Peter Thimmesch ... and to Michael O'Donnell ... to purchase an aggregate of 7,650,000 shares of the Company's Common

17

Id. at 5. Id. at 1.

18

See Kaplan letter to Susan Cole (dated November 29, 1999) at 1, Exhibit 27, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. -6-

19

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Stock at an exercise price of $0.1375 per share."20 Attached to the letter was a "Release of Claims Agreement", which Kaplan asked the Series A stockholders to sign.21 The release provided for a general release of any claims associated with the failure to disclose the existence of the Founders Warrants to the Series A stockholders.22 It is not clear from the evidence that is currently before the court whether all the Series A stockholders signed releases but there are no assertions from the parties to the contrary. In December of 1999, Mallery attended a Visitalk

shareholders' meeting. testified that Mallery

A shareholder who was at that meeting

stood up and told the entire group that Visitalk was doing fabulously. That we were going to be public in the next few months. That we had a principal of Goldman Sachs there present. And that we were all about to be millionaires.[23] In late 1999 and early 2000, Visitalk entered into certain transactions with MP3.com, Inc. totaling $5,303,000. Visitalk made payments to MP3

20

Id. Id.

21

Release of Claims at 2, ¶ 1, attached to Kaplan Letter, Exhibit 27, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. Excerpt of Deposition of Richard John Rothwell at 94, lns. 10-14, Exhibit 39, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. -723

22

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In January of 2000, Cardwell was terminated for "cause." Cardwell threatened legal action, and Visitalk eventually reached a settlement with Cardwell. In exchange for Cardwell releasing his claims against Visitalk, Visitalk agreed to find purchasers for 500,000 shares of Cardwell's stock at the price of $2.42 per share. The parties dispute the extent of Snell & Wilmer's role in the Cardwell settlement. Plaintiff contends that Snell & Wilmer played a substantial role; Snell & Wilmer contends that it played a small role, a role limited to documenting the settlement. On January 6, 2000, Snell & Wilmer began representing Michael and Marsha O'Donnell in their individual capacities and on March 16, 2000, Snell & Wilmer began representing Peter and Cynthia Thimmesch in their individual capacities. In the spring and summer of 2000, Visitalk discovered that Thimmesch had charged $235,000 in personal expenses to Visitalk. Snell & Wilmer advised Visitalk to have Thimmesch execute a

promissory note,24 but no promissory note was ever signed. On November 29, 2000, Visitalk filed a petition for bankruptcy protection, although plaintiff contends that Visitalk was insolvent by November 1998. Visitalk remained a debtor in

possession during the pendency of the bankruptcy case.

Plaintiff

was appointed as the Trustee of the Visitalk Creditor's Trust on

See Email exchange between Todd Weiss and Stephen Best, Exhibit P, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359. -8-

24

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October 19, 2004.25

"The purpose of the Creditor's Trust is to

marshal, maintain, administer, pursue, collect, settle, dispose of and disburse the Trust Property for the benefit of the holders of the Active Professionals Claims included in Class 1(a) and the Allowed Unsecured Claims under Class 7."26 included the "Causes of Action."27 defined as: all claims and causes of action that are property of the Estate or belong to the Debtor, including but not limited to: Avoidance Actions, arising from or related to breach of fiduciary duty, fraud, negligence, misrepresentation, conversion, breach of contract, fraudulent transfer, patent infringement, copyright violations, Lanham Act violations[,] computer fraud and abuse, securities laws violations, derivative claims, misappropriation of trade secrets, unfair business practices, deceptive trade practices, unjust enrichment, indemnification and contribution, arising from or related to directors and officers' liability; and fraudulent transfer claims; claims against D&O Insurance; potential claims and/or existing litigation involving MP3.com, i2v2.com, Inc., GN Netcom, Inc.; and all claims against defendants set forth in any pending litigation brought by Debtor including the pending District Court litigation against former directors and officers, former counsel for Debtor (Snell The Trust Property

The "Causes of Action" are

See Exhibit 12, Plaintiff's Statement of Facts, Docket No. 384.
26

25

Separate

Controverting

Second Joint Plan of Reorganization (dated June 22, 2004) at 34, ¶ 12.1, Exhibit F, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359.
27

Id. at 39, ¶ 12.4(k). -9-

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& Wilmer), former accountants, and the pending adversary proceedings in this case.[28] The Second Joint Reorganization Plan provides that the Causes of Action "shall be conveyed to the Creditors' Trust."29 The Plan also provides that the Creditor's Trustee will be the representative of the Estate as that term is used in Bankruptcy Code § 1123(b)(3)(B) and will have the rights and powers provided for in [the] Bankruptcy Code in addition to any rights and powers granted herein to pursue the Causes of Action. In his or her capacity as the representative of the Estate, the Creditor's Trustee will be the successor in interest to the Debtor with respect to the Causes of Action.[30] The Plan also provided that the Trust Property, including the Causes of Action, were to "pass to the Creditor Trust on the Effective Date free and clear of all claims and equity interest...."31 In its second amended complaint, plaintiff alleges four claims against Snell & Wilmer: 1) a professional malpractice claim (Count XXIV); 2) a negligent misrepresentation claim (Count XXV); 3) an aiding and abetting claim (Count XXVI); and 4) a preferential transfer claim (Count XXVII). In Count XXIV, plaintiff alleges that

Appendix A to the First Amended Plan of Reorganization, ¶ 24, Exhibit F, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359 (emphasis added). Second Joint Plan of Reorganization at 33, ¶ 11.2, Exhibit F, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359.
30 29

28

Id. at 36, ¶ 12.4(f). Id. at 39, ¶ 12.4(k). -10-

31

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Snell

&

Wilmer in

breached connection

the

standard 1) its

of

care

for

the

legal the

profession

with

representation

of

Thimmeschs and O'Donnells in their individual capacities, 2) the Founders Warrants, 3) the Cardwell settlement, 4) the MP3 transactions, and 5) the Thimmesch expense.32 In Count XXV, plaintiff

alleges that Snell & Wilmer made negligent misrepresentations in connection with the Founders Warrants.33 In Count XXVI, plaintiff

alleges that Snell & Wilmer aided and abetted the directors and officers of Visitalk in violating their fiduciary duties in

connection with the Founders Warrants, the Cardwell settlement, the MP3 transactions, and the Thimmesch expense.34 In Count XXVII,

plaintiff alleges that Visitalk made prepetition payments in 2000 to Snell & Wilmer totaling at least $720,829.92.35 Because these

transfers were made within a year of Visitalk filing its bankruptcy petition and because plaintiff alleges that Snell & Wilmer was an insider, plaintiff alleges that these transfers can be avoided.36

32

Second Amended Complaint at 47-48, Docket No. 289.

Id. at 48-49. The parties treat plaintiff's negligent misrepresentation claim as part of the legal malpractice claims as opposed to a separate cause of action, and the court has done the same.
34

33

Id. at 50-51. Id. at 51-52. Id. at 52, ¶ 327. -11-

35

36

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Snell & Wilmer now moves for summary judgment on all of the claims that plaintiff has asserted against it. Discussion Summary Judgment Standard Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The initial burden is

on the moving party to show that there is an absence of genuine issues of material fact. 325 (1986). Celotex Corp. v. Catrett, 477 U.S. 317,

If the moving party meets its initial burden, then the

non-moving party must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 247-48 (1986). In deciding a motion for summary judgment, the court views the evidence of the non-movant in the light most favorable to that party, and all justifiable inferences are also to be drawn in its favor. Id. at 255. "[T]he court's ultimate inquiry is to determine whether the 'specific facts' set forth by the nonmoving party, coupled with undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence." T.W. Elec. Service,

Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987).

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Assignability of Legal Malpractice Claims Snell & Wilmer argue that the legal malpractice claims that plaintiff is asserting were not assignable and thus, as a matter of law, plaintiff lacks standing to bring these claims. Snell & Wilmer contends that the propriety of an assignment of claims by a debtor in possession is governed by state law. To

support this contention, Snell & Wilmer cites to Butner v. United States, 440 U.S. 48 (1979). There, the Supreme Court observed:

Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves ... to prevent a party from receiving "a windfall merely by reason of the happenstance of bankruptcy." Id. at 55 (quoting Lewis v. Mfrs. Nat'l Bank, 364 U.S. 603, 609 (1961)). Snell & Wilmer argues that this principle applies to any

purported assignment of a cause of action and cites to Schroeder v. Hudgins, 690 P.2d 114 (Ariz. Ct. App. 1984), for support. the court observed that "[t]he determination of There, the

whether

ownership of a cause of action is transferable and rests in the trustee in bankruptcy must be made in accordance with state law." Id. at 118. In Arizona, the assignment of legal malpractice claims is void as against public policy. See Premium Cigars Int'l, Ltd.

v. Farmer-Butler-Leavitt Ins. Agency, 96 P.3d 555, 563 (Ariz. Ct.

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App. 2004); Botma v. Huser, 39 P.3d 538, 542 (Ariz. Ct. App. 2002); Kiley v. Jennings, Strouss & Salmon, 927 P.2d 796, 800 (Ariz. Ct. App. 1996). The primary reason why legal malpractice claims are not assignable is that "'the relationship between attorney and client is of a uniquely personal nature,' and attorney-malpractice claims should 'not be relegated to the market place and converted to a commodity to be exploited and transferred to economic bidders.'" Premium Cigars, 96 P.3d at 563 (quoting Schroeder, 690 P.2d at 118). In the Ninth Circuit, "regardless of whether a personal injury claim is transferable or assignable under state law, such claims become part of the bankruptcy estate under section 541" of the Bankruptcy Code. Sierra Switchboard Co. v. Westinghouse Elec. While the court

Corp., 789 F.2d 705, 709 (9th Cir. 1986).

recognized that there may be instances in which such claims are "so personal to the debtor that it would be undesirable, on public policy grounds, to transfer the property interest to the bankruptcy trustee," id. at n.3, there is no persuasive public policy rationale to preclude plaintiff from pursuing Visitalk's legal malpractice claims. "'Under the Bankruptcy Code the trustee stands in the shoes of the bankrupt corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy.'" See Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th Cir. 2005) (quoting Shearson Lehman Hutton, Inc.

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v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991)).

Snell & Wilmer

emphasizes that plaintiff is not a bankruptcy trustee, but rather the trustee of a creditors' trust. But, this is a distinction The Reorganization Plan

without a difference in this instance.

provides that the Causes of Action will be conveyed to the Creditors Trust.37 There is nothing in the Plan that indicates that the Causes of Action are being "sold" to Creditors Trust.38 The Plan also

provides that the Creditors' Trustee "will be the representative of the Estate as that term is used in Bankruptcy Code § 1123(b)(3)(B) and will have the rights and powers provided for in [the] Bankruptcy Code in addition to any rights and powers granted herein to pursue the Causes of Action."39 In the Ninth Circuit, "'court appointed

officers who represent the estate are the functional equivalent of a trustee....'" In re Crown Vantage, Inc., 421 F.3d 963, 973 (9th

Cir. 2005) (quoting In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993)). Thus, Visitalk's legal malpractice claims have

not been relegated to the marketplace and sold to the highest

Second Joint Plan of Reorganization at 33, ¶ 11.2, Exhibit F, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359. The Creditors Trust received $50,000 which was referred to as "proceeds" of the Causes of Action along with the Causes of Action. See id. at 39, ¶ 12.4(k). In other words, the Trust received $50,000 from the debtor; it did not pay the debtor $50,000. Snell & Wilmer's suggestion/argument that the Trust had "bought" the legal malpractice claims is baseless.
39 38

37

Id. at 36, ¶ 12.4(f). -15-

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bidder.

Rather, Visitalk's legal malpractice claims are being

pursued by the functional equivalent of a bankruptcy trustee. Allowing the functional equivalent of a bankruptcy trustee to pursue legal malpractice claims that were originally held by the debtor does not offend Arizona public policy. In Pari Delicto Doctrine/Wagoner Rule Snell & Wilmer argues that plaintiff's legal malpractice and aiding and abetting claims are barred by the in pari delicto doctrine and the Wagoner rule, and thus as a matter of law, it is entitled to summary judgment on these claims. "The doctrine of in

pari delicto dictates that when a participant in illegal, fraudulent, or inequitable conduct seeks to recover from another

participant in that conduct, the parties are deemed in pari delicto, and the law will aid neither, but rather, will leave them where it finds them." Smith ex rel. Estates of Boston Chicken, Inc. v.

Arthur Andersen, L.L.P, 175 F. Supp. 2d 1180, 1198 (D. Ariz. 2001). The Wagoner rule "holds that a bankrupt corporation's trustee lacks standing to bring a claim against a third party for defrauding or misleading the corporation with the cooperation of the corporation's management." Id. at 1199. Snell & Wilmer argues that the in pari

delicto doctrine and the Wagoner rule apply here because to the extent that there was wrongdoing, it was engaged in by the

corporation, its management, and the Board of Directors.

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The court has previously considered whether the in pari delicto doctrine and the Wagoner rule should apply in this case. In August 2003, the court entered an order on a motion to dismiss brought by defendants Best, Kaplan, and Hirschberg.40 The defendants moved to dismiss Visitalk's claims against them, and relying on the Wagoner rule and the in pari delicto doctrine, argued that the trustee did not have standing to bring claims on Visitalk's behalf. The court concluded that "the Wagoner Rule is an application of the doctrine of in pari delicto to litigation instituted by bankruptcy trustees."41 The court held that under FDIC v. O'Melveny & Myers,

61 F.3d 17 (9th Cir. 1995), "the Wagoner Rule is not applicable to the instant dispute."42 In dicta in O'Melveny, the Ninth Circuit

stated that a bankruptcy trustee, like a receiver of a bank, is treated differently because the trustee is "thrust" into the shoes of the debtor. Id. at 19.

"'Under the [law of the case] doctrine, a court is generally precluded from reconsidering an issue previously decided by the same court, or a higher court in the identical case.'" United States v. Thrasher, 483 F.3d 977, 981 (9th Cir. 2007) (quoting Herrington v. County of Sonoma, 12 F.3d 901, 904 (9th Cir. 1993)). "'"[W]hen a rule of law has been decided adversely to one

40

Docket No. 132. Id. at 7. Id. at 9. -17-

41

42

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or more codefendants, the law of the case doctrine precludes all other codefendants from relitigating the legal issue."'" In re

Integra Realty Resources, Inc., 354 F.3d 1246, 1259 (10th Cir. 2004) (quoting United States v. LaHue, 261 F.3d 993, 1010 (10th Cir. 2001)(quoting United States v. Aramony, 166 F.3d 655, 661 (4th Cir. 1999)). See also, United States v. Schaff, 948 F.2d 501, 506 (9th

Cir. 1991) (relying on law of the case doctrine to preclude defendant from challenging jury instruction on appeal, which had been previously upheld in an appeal by a codefendant). Because the court has already decided that the Wagoner rule and the in pari delicto doctrine do not apply here, the law of the case doctrine precludes Snell & Wilmer's argument to the contrary, unless one of the exceptions to the law of the case doctrine applies. "[T]he law of the case doctrine is subject to three exceptions that may arise when '(1) the decision is clearly

erroneous and its enforcement would work a manifest injustice, (2) intervening controlling authority makes reconsideration appropriate, or (3) substantially different evidence was adduced at a subsequent trial.'" Minidoka Irrigation Dist. v. Dep't of Interior, 406 F.3d

567, 573 (9th Cir. 2005) (quoting Old Person v. Brown, 312 F.3d 1036, 1039 (9th Cir. 2002)). Snell & Wilmer argues that exceptions (1) and (3) apply here. Snell & Wilmer contends that the evidence before the court now is substantially different from what was before the court when

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it decided the motion to dismiss in 2003. The motion to dismiss was decided before discovery was complete and the court was required to take the allegations in the complaint as true. The complaint that

existed at that time asserted that some of the Board members did not know about the alleged breaches of fiduciary duty and would have taken action to prevent the wrongdoing of the other Board members, had they known about it.43 Snell & Wilmer argues that discovery has shown, however, that none of the Board members were "innocent." Case law suggests that the application of the Wagoner rule can be avoided if the plaintiff has established that there were innocent board members who were unaware of the wrongdoing and could have prevented it. See, e.g., Wechsler v. Squadron, Ellenoff, Plesent

& Sheinfeld, L.L.P., 212 B.R. 34, 43-44 (S.D.N.Y. 1997). The court did not rely on the "innocent board member" exception to the Wagoner rule in deciding the motion to dismiss. Rather, the court relied on the O'Melveny case because it was Ninth Circuit authority. The fact that discovery has shown there were no innocent board members is irrelevant to the court's previous decision that the Wagoner rule and the in pari delicto doctrine do not apply in this case. Snell & Wilmer also seems to be suggesting that the court's order on the motion to dismiss was clearly erroneous because

43

See, e.g., Amended Complaint at 13-14, ¶¶ 100-101, Docket -19-

No. 98.

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the court assumed that this case was being pursued by a bankruptcy trustee. At the time of the motion to dismiss, Snell & Wilmer

contends that the case was being pursued by Visitalk, the debtor in possession, the very actor involved in the original inequitable conduct. But more important, according to Snell & Wilmer, is the

fact that the case is now being pursued by Biltmore Associates. Snell & Wilmer contends that Biltmore Associates has not been thrust into the shoes of the debtor but rather is a "normal successor in interest" that chose to bid for and acquire certain assets of Visitalk and there is no reason it should not stand in the shoes of Visitalk. O'Melveny emphasized that a receiver and a bankruptcy trustee should not be treated the same as a "normal successor in interest" because they were thrust in the shoes of the bank or the debtor, while a normal successor in interest is acting voluntarily. O'Melveny, 61 F.3d at 19. Plaintiff is not a bankruptcy trustee,

but as discussed more fully above, plaintiff is a court-appointed representative of the bankruptcy estate and thus is considered the functional equivalent of a bankruptcy trustee. Thus, the court's

reliance on O'Melveny was not clearly erroneous because plaintiff is the functional equivalent of a bankruptcy trustee. Snell & Wilmer has failed to show that any of the exceptions to the law of the case doctrine apply. Snell & Wilmer

is precluded from arguing that plaintiff's legal malpractice and

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aiding and abetting claims are barred by the Wagoner rule and the in pari delicto doctrine. Damages Damages are an essential element of a legal malpractice claim and an aiding and abetting claim. See, Glaze v. Larsen, 83

P.3d 26, 29 (Ariz. 2006); AMERCO v. Shoen, 907 P.2d 536, 542 (Ariz. Ct. App. 1995). Snell & Wilmer argues that it is entitled, as a

matter of law, to summary judgment on plaintiff's legal malpractice and aiding and abetting claims because plaintiff will not be able to prove damages. Plaintiff's damages theory is based on the

assertion that there was a "deepening insolvency" of Visitalk and that the "deepening insolvency" was caused, in large part, by claims that Visitalk shareholders had against Visitalk as a result of the Founders Warrants disclosure problems. Snell & Wilmer first argues that plaintiff's damages theory fails as a matter of law because the shareholder claims on which it is based never existed. Snell & Wilmer contends that no

shareholder claims were ever asserted as part of the Visitalk bankruptcy and thus there is no evidence that these claims ever existed. Plaintiff, not surprisingly, contends that the shareholder claims did exist. There are genuine issues of material fact as to whether the shareholder claims ever existed. Although the court has serious reservations about whether plaintiff will be able to prove the

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existence of the shareholder claims, it cannot conclude, on motion for summary judgment, that those claims did not exist. Next, Snell & Wilmer argues that plaintiff will not be able to prove damages because it has no evidence of fraudulent conduct. Snell & Wilmer contends that deepening insolvency cases

requiring a showing of "fraudulent expansion of corporate debt and prolongation of corporate life." Official Committee of Unsecured

Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 347 (3d Cir. 2001) (emphasis added). Snell & Wilmer contends that plaintiff only

alleges that Snell & Wilmer's actions were negligent and that plaintiff has never alleged that Snell & Wilmer's actions were fraudulent. Snell & Wilmer has not cited, nor is the court aware of, any Ninth Circuit case that stands for the proposition that

fraudulent conduct is a necessary element in a deepening insolvency damages theory. The fact that plaintiff has only alleged that Snell & Wilmer's actions were negligent is not fatal to plaintiff's damages theory. Snell & Wilmer also argues that plaintiff's damage theory fails as a matter of law because the $25.4 million in damages calculated by Renee Jenkins, plaintiff's damages expert, represents alleged losses of Visitalk shareholders, not alleged losses of Visitalk. "'[A] bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only

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assert claims held by the bankrupt corporation itself.'" Smith, 421 F.3d at 1002 (quoting Shearson, Lehman, Hutton, 944 F.2d at 118). Snell & Wilmer insists that plaintiff, even though it is not even a bankruptcy trustee, is attempting to assert the claims of the shareholders, and not those of the bankrupt corporation, Visitalk. Because plaintiff has no standing to pursue the claims of the shareholders, Snell & Wilmer argues that plaintiff's damages theory fails as a matter of law. Plaintiff is not asserting the shareholders claims per se but rather it is asserting that the existence of the shareholders claims deepened Visitalk's insolvency, thereby causing financial injury to Visitalk. While the court has grave reservations that

plaintiff will be able to prove this damages theory at trial, the court cannot conclude that as a matter of law plaintiff may not at least attempt to do so. Finally, Snell & Wilmer argues that plaintiff's damages theory is based solely on speculation. According to Snell & Wilmer, plaintiff contends that the shareholders had claims against Visitalk that they might have brought, these claims might have succeeded, and these claims might have been "big enough" in the aggregate to cause the company to fail. But, Snell & Wilmer insists that there is no

evidence to support any of these contentions. Again, the court has serious reservations that plaintiff will be able to prove the existence of the shareholder claims. And,

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even if plaintiff can prove that the shareholder claims exist, the court is not convinced that plaintiff will be able to prove that the shareholder claims were the sole cause of Visitalk's deepening insolvency. But, because there are disputed questions of fact as

to the existence of the shareholder claims, the court cannot, on motion for summary judgment, conclude that plaintiff, as a matter of law, will be unable to prove that Snell & Wilmer's actions caused the harm to Visitalk that plaintiff is claiming. Breach of Duty Snell & Wilmer argues that it is entitled to summary judgment on plaintiff's legal malpractice claims because there are no genuine issues of material fact that Snell & Wilmer breached its duty of care. Under Arizona law, "a plaintiff asserting legal

malpractice must prove the existence of a duty, breach of duty, that the defendant's negligence was the actual and proximate cause of injury, and the 'nature and extent' of damages." Glaze, 83 P.3d at

29 (quoting Phillips v. Clancy, 733 P.2d 300, 303 (Ariz. Ct. App. 1986)). Snell & Wilmer first argues that plaintiff has no

admissible evidence that Snell & Wilmer breached its duty of care. In Arizona, "[e]xpert testimony is generally used to establish the standard of care by which the professional actions of an attorney are measured and to determine whether the attorney deviated from the proper standard." Baird v. Pace, 752 P.2d 507, 509 (Ariz. Ct. App.

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1987).

Snell & Wilmer's argument here is

premised on the court

granting Snell & Wilmer's motion to exclude the testimony of Boyd S. Lemon, plaintiff's "standard of care" expert. As explained more fully in the court's order on the motions in limine, which is being filed concurrently with this order, Lemon will be allowed to offer his opinions as to whether Snell & Wilmer breached its duty of care. Snell & Wilmer's argument that plaintiff has no admissible evidence on this element of its legal malpractice claims thus fails. Snell & Wilmer is entitled to summary judgment on the portion of plaintiff's legal malpractice claims involving the MP3 transactions. There is no evidence that Snell & Wilmer played any Snell & Wilmer is also entitled to

role in the MP3 transactions.

summary judgment on the portion of plaintiff's legal malpractice claims involving the Thimmesch expense. Plaintiff alleges that

Snell & Wilmer breached its duty of care by failing to advise the Visitalk officers and directors as to "the appropriate actions to be taken by [Visitalk] with respect to Mr. Thimmesch after the discovery of his misappropriation and misuse of corporate funds."44 It is undisputed that Snell & Wilmer advised Visitalk to have Mr. and Mrs. Thimmesch execute a security agreement and collateralize their debt45 and that it was the Board of Directors' decision to not

44

Second Amended Complaint at 48, ¶ 301(b)(xii), Docket No. See Exhibit P, Snell & Wilmer's Statement of Undisputed (continued...) -25-

289.
45

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pursue Thimmesch and that the Board did so on the advice of their in-house counsel.46 Snell & Wilmer is not entitled to summary judgment on the portion of plaintiff's legal malpractice claims involving the conflict of interest issue, the Cardwell settlement, and the Founders Warrants. As to the conflict of interest issue, it is

disputed as to whether Snell & Wilmer should have obtained a written waiver. As to the Cardwell settlement, plaintiff has come forward

with some evidence to support its contention that this settlement usurped a corporate opportunity. As to the Founders Warrants, there are numerous material facts in dispute. For example, it is disputed whether any Snell & Wilmer lawyers were present at the executive session in which the Board decided how it would handle the Founders Warrants problem, it is disputed whether the release that Snell & Wilmer drafted was effective, and it is disputed as to when the Founders Warrants were actually authorized. Aiding and Abetting Claim In its complaint, plaintiff alleges that Snell & Wilmer assisted the officers and directors of Visitalk in breaching their fiduciary duties in connection with the Founders Warrants, the

(...continued) Facts, Docket No. 359. Excerpt of Videotaped Deposition of Steven Andrew Best (Jan. 21, 2005) at 55, lns. 13-25, Exhibit I, Snell & Wilmer's Statement of Undisputed Facts, Docket No. 359. -2646

45

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Cardwell

settlement,

the

MP3

transactions,

and

the

Thimmesch

expense. Snell & Wilmer argues that plaintiff has no viable aiding and abetting claim. In Arizona,

[c]laims of aiding and abetting tortious conduct require proof of three elements: (1) the primary tortfeasor must commit a tort that causes injury to the plaintiff; (2) the defendant must know 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 Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 23 (Ariz. 2002). Snell & Wilmer is entitled to summary judgment on the portion of plaintiff's aiding and abetting claim involving the MP3 transactions because there is no evidence that Snell & Wilmer had any involvement in these transaction. Snell & Wilmer is also

entitled to summary judgment on the portion of plaintiff's aiding and abetting claim involving the Thimmesch expense since there is no evidence that Snell & Wilmer assisted or encouraged Thimmesch in the achievement of this breach. As to the Cardwell settlement and

Founders Warrants portions of the aiding and abetting claim, the same factual disputes that preclude Snell & Wilmer from being entitled to summary judgment on the legal malpractice claims

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involving these issues preclude summary judgment on these portions of the aiding and abetting claims. The Preference Claim In Count XXVII, plaintiff alleges that plaintiff made prepetition payments in 2000 to Snell & Wilmer totaling at least $720,829.92, and plaintiff seeks to avoid these transfers. 11

U.S.C. § 547(b)(4)(B) permits a bankruptcy trustee or debtor in possession to avoid any pre-petition transfer by the debtor that occurs "between ninety days and one year before the date of filing of the Petition, if such creditor at the time of such transfer was an insider." If the debtor is a corporation, an "insider" includes: (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 a general partner, director, officer, or person in control of the debtor[.] 11 U.S.C. § 101(31)(B). This statutory list is not an all inclusive list, and Snell & Wilmer could be an insider even if it does not fall within one of these definitions. [I]nsider status may be based on a professional or business relationship with the debtor, in addition to the Code's per se classifications, where such relationship 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.

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See In re Friedman, 126 B.R. 63, 70 (9th Cir. BAP 1991). There is evidence that Mallery, one of Snell & Wilmer attorneys, had a close personal relationship with Thimmesch and O'Donnell.47 This evidence is sufficient to create a genuine issue

of material fact as to whether Snell & Wilmer had a relationship with Visitalk that was "close enough to gain an advantage attributable simply to affinity...." Id. Snell & Wilmer is not entitled

to summary judgment on Count XXVII. Conclusion Based on the foregoing, Snell & Wilmer's motion for summary judgment48 is granted in part and denied in part. Wilmer's motion is granted as to the portions of Snell & legal

the

malpractice and aiding and abetting claims involving the MP3 transactions and the Thimmesch expense. Snell & Wilmer's motion is denied as to all other claims against it. DATED at Anchorage, Alaska, this 2007. 15th day of October,

/s/ H. Russel Holland United States District Judge

See Best Deposition (Sept. 9, 2005) at 20, ln. 4 - 21, ln. 14, Exhibit 30, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384.
48

47

Docket No. 358. -29-

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