Free Order on Motion in Limine - District Court of Arizona - Arizona

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

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

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

No. 2:02-cv-2405-HRH

Snell & Wilmer's Motions in Limine Defendant Snell & Wilmer moves to exclude the testimony of two of plaintiff's experts, Boyd S. Lemon1 and Renee Jenkins.2 These motions are opposed.3 been heard. Background Plaintiff is Biltmore Associates, as Trustee for the Visitalk Creditors' Trust. Defendant is Snell & Wilmer, LLP. Oral argument was requested and has

Plaintiff has alleged a variety of claims against Snell & Wilmer, including legal malpractice claims and a claim that Snell

1

Docket No. 355. Docket No. 357. Docket Nos. 376 and 377. -1-

2

3

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& Wilmer aided and abetted breaches of fiduciary duty committed by Visitalk officers and directors. a deepening insolvency and other theory, alleged Plaintiff's damages are based on i.e., that Snell caused & Wilmer's

malpractice

wrongdoing

Visitalk's The

insolvency to be greater than it would otherwise have been.

underlying facts that give rise to plaintiff's claims against Snell & Wilmer are set forth in detail in the order on Snell & Wilmer's motion for summary judgment, which is being filed concurrently with this order. These facts are incorporated herein by reference.

Pursuant to Rule 702, Federal Rules of Evidence, Snell & Wilmer now moves to exclude the testimony of Boyd S. Lemon, plaintiff's "standard of care" expert, and Renee Jenkins, plaintiff's damages expert. Lemon renders opinions on what the standard of care is for plaintiff's legal malpractice claims and whether Snell & Wilmer breached that standard of care. Lemon also renders

an opinion that relates to plaintiff's aiding and abetting claim. Jenkins was asked by plaintiff to 1) "calculate the solvency (insolvency) of Visitalk.com, Inc. at various times during its prebankruptcy existence" and 2) render an "expert opinion on whether Visitalk.com, Inc. should be characterized as a 'ponzi' scheme, as the term i[s] commonly used, during its existence prior to the bankruptcy filing."4

4

Limine

to

Expert Report of Renee Jenkins at 1, Exhibit 1, Motion in Exclude Testimony of Renee Jenkins or for Daubert (continued...) -2-

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Discussion Rule 702 provides: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case. Fed. R. Evid. 702. Thus, in deciding whether to admit expert

testimony, the court must determine 1) whether the witness is qualified as an expert, 2) whether the witness's testimony is reliable, and 3) whether the witness's testimony will be helpful to the trier of fact. In deciding whether a witness's testimony is

reliable, the court considers the three factors set forth in Rule 702: 1) is the testimony based upon sufficient facts or data, 2) is the testimony the product of reliable principles and methods, and 3) has the witness applied those principles and methods reliably to the facts of the case. the burden of proving "It is the proponent of the expert who has admissibility." Lust v. Merrell Dow

Pharmaceuticals, Inc., 89 F.3d 594, 598 (9th Cir. 1996). "District courts have a general 'gatekeeping' duty to ensure that proffered expert testimony 'both rests on a reliable
4

(...continued) Hearing, Docket No. 357. -3-

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foundation and is relevant to the task at hand.'"

United States v.

Jawara, 474 F.3d 565, 582 (9th Cir. 2007) (quoting Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993)). "[T]he court's gatekeeping role is necessarily different" if the case is tried by the court as opposed to a jury. F.3d 767, 777 (7th Cir. 2006). In re Salem, 465

"Where the gatekeeper and the

factfinder are one and the same--that is, the judge--the need to make such decisions prior to hearing the testimony is lessened." Id. "[W]here the factfinder and the gatekeeper are the same, the

court does not err in admitting the evidence subject to the ability later to exclude it or disregard it if it turns out not to meet the standard of reliability established by Rule 702." Boyd S. Lemon Plaintiff's "standard of care" expert is Boyd S. Lemon. Lemon "is currently a sole practitioner practicing in ... California...."5 Lemon had been practicing law since 1966 and in that time his practice "has emphasized business and real estate litigation" and he has "represented clients in a variety of business and real estate transactional matters."6 "Currently in his practice he Id.

emphasizes legal malpractice, attorney fee disputes, ethics and

Resume! of Boyd S. Lemon at 1, Exhibit A to Expert Report of Boyd S. Lemon, which is attached as Exhibit A to Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355.
6

5

Id. at 1-2. -4-

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malicious prosecution cases as an attorney and as an expert witness, involving all types of underlying cases, including business, real estate, personal injury, bankruptcy, probate and family law

matters."7

Lemon is the co-founder and a member of the Executive

Committee of the Lawyers Professional Liability Bar Association and has lectured, spoke, and published on legal malpractice and ethics.8 Lemon has previously testified as an expert witness in legal malpractice cases in Arizona,9 as well as in many other cases in other jurisdictions. In his report, Lemon states that the "requisite standard of care for attorneys in Arizona and throughout the United States is to possess and exercise that degree of skill, care and knowledge commonly possessed and exercised by attorneys in similar circumstances."10 Lemon states that "Snell & Wilmer held itself out to

be experts in the field of securities and corporate law, and,

7

Id. Id. at 2-4.

8

See Exhibit B, Lemon Expert Report, which is attached as Exhibit A to Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355 (Arizona cases are MRT Construction, Inc. v. Bryan Cave, Maricopa County Superior Court, Case No. CV 2000-018859; Kent v. Evans, Maricopa County Superior Court, Case No. CV 99-21942; and Tenorio v. Leasco, United States Bankruptcy Court for the District of Arizona, Case No. BK 21422JMM). Lemon Expert Report at 2, ¶ 6, Exhibit A, Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355. -510

9

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therefore,

the

standard

of

care

required

them

to

perform

in

accordance with the skill, care and knowledge of experts in the securities and corporate field."11 Lemon opines that Snell &

Wilmer's representation of Visitalk fell below this standard in sixteen different respects. Snell & Wilmer challenges all sixteen

of Lemon's opinions and has organized his opinions into four groups: 1) the securities opinions 2) the viability opinions 3) the conflict opinion and 4) the aiding and abetting opinion. The Securities Opinions The securities opinions are lettered A, B, C, D, E, F, K, L, M, O, and P in Lemon's report. Snell & Wilmer contends that the

securities opinions are all premised on Lemon's conclusion that Snell & Wilmer was assisting Visitalk to violate securities law or was permitting Visitalk to violate securities law. Snell & Wilmer

argues that Lemon is not qualified to offer the securities opinions because he has admitted that he is not a securities lawyer12 and that he relied on the opinions of Fred Schaffer, an Arizona attorney, regarding the securities law issues.13 Snell & Wilmer also argues

that Lemon's securities opinions are not reliable because they are based on Mr. Schaffer's opinions that Visitalk was violating
11

Id.

See Excerpt of Deposition of Boyd S. Lemon at 16, lns. 911, Exhibit B, Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355.
13

12

Id. at 95-98, 127-28, 200-01. -6-

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securities laws and Lemon did not test the reliability of Mr. Schaffer's opinions. As the court indicated at oral argument, because this matter will be tried to the court, the prudent course will be to allow Lemon to testify and the court will then re-evaluate his testimony. But, that does not mean that the court will allow Lemon Lemon is not

to testify about violations of securities law per se.

qualified to opine on whether securities laws were violated, although he may be qualified to opine generally on what advice a reasonable securities lawyer should have given a client who had violated securities law. The Viability Opinions The viability opinions are lettered G, H, and I in Lemon's report. In Opinion G, Lemon opines that Visitalk was insolvent by

either November 1999 or July 2000 and that Snell & Wilmer's representation fell below the standard of care because it failed to advise the Board of Directors of their fiduciary duty to their creditors.14 In Opinion H, Lemon opines that Snell & Wilmer knew

or should have known that Visitalk was insolvent by November 1999 or July 2000 at the latest and that it should have advised the

Lemon Expert Report at 8, ¶ G, Exhibit A, Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355. -7-

14

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company to stop doing business.15

In Opinion I,

Lemon opines that

Snell & Wilmer's representation fell below the standard of care because it failed to advise the Board of Directors to conduct an independent investigation into the commercial viability of

Visitalk's product.16 Snell & Wilmer argues that Lemon is not qualified to offer Opinion I because he testified at his deposition that he was not aware of any cases that "stand for the proposition that any attorney representing a development-stage company must tell its client to have an independent third person investigate the commercial

viability of the client's product[.]"17

In response, plaintiff

offers a declaration from Lemon, in which he explains the basis for his Opinion I. Lemon states that he had three bases for his

opinion: "(1) my interpretation of ABA Model Rule 2.1 (which has been adopted by Arizona), (2) my experience in 41 years of law practice and (3) my 41 years experience observing what other lawyers have done in similar circumstances."18

15

Id. at ¶ H. Id. at ¶ I.

16

Lemon Deposition at 92, ln. 21 -93, ln. 2, Exhibit B, Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355. Declaration of Boyd S. Lemon at 1, ¶ 2, Exhibit D, Plaintiff's Response to Defendant Snell & Wilmer, LLP's Motion in Limine to Exclude Testimony of Boyd S. Lemon, Docket No. 376. -818

17

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Lemon's declaration cannot serve as the basis for his Opinion I. Rule 26(a)(2)(B), Federal Rules of Civil Procedure,

requires that an expert's written report contain "a complete statement of all opinions to be expressed and the bases and reasons therefore[.]" If Lemon were relying on Model Rule 2.1, he was

required to provide that information in his original expert report. That said, Snell & Wilmer's argument here goes to the reliability of Opinion I, not Lemon's qualifications. Lemon is qualified to

offer Opinion I; the question is whether that opinion is reliable. The fact that there are no malpractice cases involving an independent study does not necessarily mean that Lemon's opinion is not reliable. Snell & Wilmer's other reliability arguments are also unpersuasive. The court is not convinced, at this point, that

Lemon's viability opinions are so unreliable that Lemon should not be allowed to offer them at trial. But, the court reserves its

right to exclude Lemon's viability opinions after it has heard Lemon's testimony at trial. The Conflict Opinion Lemon opines that Snell & Wilmer's representation fell below the standard of care because it did not obtain conflict waivers from the Board of Directors when it began to represent the Thimmeschs and the O'Donnells personally.19 Snell & Wilmer argues

19

Lemon Expert Report at 9, ¶ J, Exhibit A, Motion in (continued...) -9-

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that Lemon is not qualified to offer the conflict opinion because it is based on Arizona ethical rules and Lemon is not an Arizona lawyer and has never been licensed to practice law in Arizona. Snell & Wilmer also argues that Lemon's conflict opinion is

unreliable because Visitalk's in-house counsel consented to Snell & Wilmer's representation of the Thimmeschs and the O'Donnells. Lemon filed a rebuttal and supplemental report on June 4, 2007. There, Lemon "point[s] out that Arizona has adopted the

American Bar Association Model Rules, with which I am familiar and concerning which I have opined on numerous occasions, particularly on Rule 1.7 (in Arizona cited as ER 1.7), which deals with conflicts of interest."20 Assuming for the purposes of this motion that

Lemon's supplemental report is admissible, it establishes that he is qualified to opine on an Arizona ethical rule. To the extent

that Snell & Wilmer argues that Lemon's conflict opinion is not reliable because there was no conflict, that is a disputed fact. The court will take Lemon's testimony and other eivdence on this point before ruling.

(...continued) Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355. Lemon Supplemental Report at 6, Exhibit 32, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. -1020

19

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The Aiding and Abetting Opinion Lemon opines that Snell & Wilmer aided and abetted Thimmesch and O'Donnell to breach their fiduciary duties by

continuing to help Visitalk offer securities in violation of securities law and by contributing to the deepening insolvency of Visitalk.21 Snell & Wilmer argues that this opinion by Lemon should be excluded because, as discussed in its summary judgment motion, there is no evidence that Snell & Wilmer aided any breach of fiduciary duty. Thus, Snell & Wilmer argues that this opinion is Snell & Wilmer also argues

not relevant to any issue in the case.

that there is no causal link between the alleged "aiding and abetting" and any harm caused to Visitalk. believe that Lemon is contending that Snell & Wilmer seems to Snell & Wilmer helped But,

Thimmesch and O'Donnell retain their Founders Warrants.

because the Founders Warrants were never exercised, Snell & Wilmer argues that Visitalk never suffered any harm in connection with the retention of the Founders Warrants. Snell & Wilmer's arguments here are more summary judgment arguments than Rule 702 arguments. In the order on Snell & Wilmer's motion for summary judgment that is being filed concurrently with this order, the court holds that there were disputed questions of

Lemon Expert Report at 10, ¶ N, Exhibit A, Motion in Limine to Exclude Testimony of Boyd S. Lemon or for Daubert Hearing, Docket No. 355. -11-

21

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fact as to the aiding and abetting claim. That makes Lemon's aiding and abetting opinion relevant. Although relevant, the court is not convinced that Lemon's aiding and abetting opinion will be helpful. The fact finder, which is the court in this instance, probably does not need an expert to opine on whether Snell & Wilmer aided and abetted any breaches of fiduciary duty by the officers and directors of Visitalk. However, as with all of Lemon's testimony, the court

will not exclude his aiding and abetting opinion prior to trial. Renee Jenkins Plaintiff's damages expert is Renee Jenkins. Jenkins is In

a Certified Public Accountant and a Certified Fraud Examiner.

her report, Jenkins purports to calculate the solvency (insolvency) of Visitalk at five points in time: 1) September 3, 1998; 2) November 30, 1998; 3) June 30, 1999; 4) December 31, 1999; and 5) November 30, 2000. She concludes that on September 3, 1998, She found that on November 30, 1998,

Visitalk was solvent.22

Visitalk was "an insolvent company ... ($91,000) because a breach of fiduciary duty and breach of stock purchase agreements gave rise to the claims of the Series A and Series B investors."23 By June

30, 1999, Jenkins opines that the insolvency of Visitalk had reached

Jenkins Expert Report at 6, Exhibit 1, Motion in Limine to Exclude Testimony of Renee Jenkins or for Daubert Hearing, Docket No. 357.
23

22

Id. -12-

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($2,951,000).24 Jenkins opines that by December 31, 1999, Visitalk's insolvency was ($8,409,000) and was "tied in part to the failure to provide complete and accurate material information and disclosure to investors and obtain effective releases of claims held by investors."25 day after Finally, she opines that by November 30, 2000, one filed its bankruptcy petition, Visitalk's

Visitalk

insolvency "had reached a level in excess of ($28,390,000)."26 Jenkins then calculated the "damages incurred during the life of the Snell & Wilmer relationship with Visitalk.com, Inc. [as] the sum of the difference between the insolvency calculations on November 30, 2000 and December 31, 1999 and the difference between December 31, 1999 and June 30, 1999."27 Jenkins calculated the difference between the insolvency on November 30, 2000 ($28,390,000) and that on December 31, 1999 ($8,409,000) to be $19,981,000 and the difference between December 31, 1999 ($8,409,000) and that on June 30, 1999 ($2,951,000) to be $5,458,000 for total damages due to deepening insolvency of $25,439,000.28 Jenkins also opines that Visitalk

"should be characterized as the unconsummated first round of a Ponzi scheme that would have come to fruition only after the planned

24

Id. Id. Id. Id. at 7. Id. -13-

25

26

27

28

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Initial Public Offering (IPO) had taken place."29 In the conclusion section of her report, Jenkins lists four conclusions: [(1)] A substantial and material breach in fiduciary duty and breach of stock purchase agreements occurred at the time of the creation and backdating of the "founders' warrants" by Peter Thimmesch and Michael O'Donnell. This act gave rise to the claims of Series A investors, and later, Series B and C investors. Effective releases were never obtained and full, complete, and accurate information and disclosure of these claims and Visitalk.com, Inc.'s serious securities law problems was never made to any investors in July of 1999, December of 1999, or any subsequent date.... [(2)] The claims should be reflected as unrecorded liabilities for purposes of calculating the solvency (insolvency) of Visitalk.com, Inc. during its existence. [(3)] Visitalk.com, Inc. became insolvent no later than November 30, 1998. The insolvency never reversed and only deepened as Series B and Series C shares were sold to investors and Visitalk.com, Inc. continued to incur other indebtedness from operations. Visitalk.com, Inc. continued to offer and sell securities either in the form of preferred stock or convertible debt until shortly before November 29, 2000, the date of the filing of the Chapter 11 Bankruptcy petition for Visitalk.com, Inc., and the company continued to incur substantial indebtedness which it had no ability to repay. [(4)] Damages are calculated as $25,439,000, the amount by which Visitalk.com, Inc.'s insolvency deepened from June 30, 1999 to December 31, 1999 ($5,458,000) and December 31,1999 to November 30, 2000 ($19,981,000)[.30]

29

Id. at 8. Id. at 9. -14-

30

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On the same day that Snell & Wilmer filed the instant motion in limine, Jenkins filed a Rebuttal and Supplemental Report.31 The stated purpose of the Rebuttal and Supplemental Report was "to address the expert report of David B. Weekly dated March 5, 2007 and the testimony given by Mr. Weekly at his deposition on May 25, 2007."32 Weekly is Snell & Wilmer's damages expert. Jenkins'

conclusions "remain[] unchanged" in her Rebuttal and Supplemental Report, except for Conclusion 4.33 Weekly took issue with how

Jenkins had dealt with the MP3 transactions when calculating Visitalk's insolvency. As a result, in her Rebuttal and Supplemental Report, Jenkins reduces her total damage figure to $25,146,000.34 Snell & Wilmer contends that Jenkins' Rebuttal and

Supplemental Report was not authorized by the court's scheduling order. The Scheduling and Planning Order35 simply provides that

discovery should be conducted in accordance with Rules 26-37.36 Expert discovery closed on the same day that the Rebuttal and

Exhibit C, Plaintiff's Response to Defendant Snell & Wilmer, LLP's Motion in Limine to Exclude Testimony of Renee Jenkins, Docket No. 377.
32

31

Id. at 1. Id. at 29. Id. Docket No. 186. Id. at 2. -15-

33

34

35

36

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Supplemental Report was filed.37

Rule 26(a)(2)(C) provides that a

rebuttal report shall be filed "within 30 days after the disclosure" of the evidence that the expert is assigned to rebut. Rule

26(a)(2)(C) also contemplates that an expert shall supplement her report if she "learns that in some material respect the information disclosed is incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing." Fed. R. Civ. P. 26(e)(1)(a). Jenkins' Rebuttal and Supplemental Report was contemplated by the rules and was authorized under the court's Scheduling Order. Because it was filed within 30 days of Weekly's See Fed. R. Civ. P. 26(a)(2)(C).

deposition, it is also timely. Conclusion 1

Snell & Wilmer challenges Jenkins' first "conclusion" which includes the statements that there were breaches of fiduciary duty and the stock purchase agreements that gave rise to the claims of the Series A and B investors and that effective releases of these claims were never obtained. Snell & Wilmer contends that Jenkins To the extent that she

is not qualified to render such opinions.

may be offering opinions on whether there were breaches of fiduciary duty and the stock agreements and whether the releases were

effective, any such opinions are excluded. Jenkins is not qualified

37

See Order re Extensions of Deadlines at 2, Docket No. -16-

338.

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to opine on whether Visitalk officers and/or directors breached their fiduciary duties or breached stock agreements nor is she qualified to opine on whether the releases signed by the Series A shareholders were valid. Snell & Wilmer also criticizes the reliability of

Jenkins's first "conclusion" because it contends that Jenkins "assumed" that the investor claims existed. In her report, she

states that "I understand that approximately 530 investors and other creditors currently hold claims against Visitalk.com, Inc. and its bankruptcy estate."38 As indicated in the order on Snell & Wilmer's motion for summary judgment, which is filed concurrently with this order, the existence of the shareholder claims is a disputed fact. Although Jenkins is not qualified to offer an opinion as to whether the shareholder claims ever existed, she is permitted to assume that they existed and base her damages calculation on that assumption. Conclusion 2 Snell & Wilmer argues that Jenkins's conclusion that the shareholders' equity should be converted, in its entirety, to unrecorded liabilities is unreliable because it was based on an assumption, rather than any reliable method or principle. deposition, Jenkins was asked: At her

Jenkins Expert Report at 1, Exhibit 1, Motion in Limine to Exclude Testimony of Renee Jenkins, or for Daubert Hearing, Docket No. 357. -17-

38

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So your understanding of the assignment was that you were asked to assume that the amount, the total amount of shareholders equity was, in fact, an unrecorded liability and to do a damage calculation based on that assumption, isn't that right?[39] She answered: I assumed that the information I saw about the claims of Series A, B, and C investors, there's an assumption there, that those claims are held to be valid, and the amount I chose was the investment itself as the only logical estimate I could use.[40] When asked if she did any further analysis or investigation, she answered: "I used some knowledge from other bankruptcy cases."41 Snell & Wilmer appears to be arguing that an expert's opinion which is based on an "assumption" cannot possibly be reliable. Jenkins' analysis based on Visitalk's contingent

liabilities is appropriate under the Bankruptcy Code and Ninth Circuit precedent. Title 11 of the Bankruptcy Code defines

"insolvency" generally as a "financial condition such that the sum of [the] entity's debts is greater than all of such entity's property...." 11 U.S.C. § 101(32). A "debt" is defined as a

"liability on a claim" and a "claim" is defined as a "right to

Excerpt of Deposition of Renee Jenkins at 85, lns. 12-16, Exhibit 2, Motion in Limine to Exclude Testimony of Renee Jenkins, or for Daubert Hearing, Docket No. 357.
40

39

Id. at lns. 18-22. Id. at 85, ln. 23 - 86, ln. 2. -18-

41

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payment,

whether

or

not

such

right

is

reduced

to

judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured[.]" Id. §§ 101(5) and (12). Thus, contingent liabilities are properly See

included in a solvency analysis under the Bankruptcy Code.

also, In re Sierra Steel, Inc., 96 B.R. 275, 279 (9th Cir. BAP 1989) ("contingent liabilities must be included in determining total indebtedness for purposes of determining insolvency," but a

"contingent liability must be reduced ... to its present or expected amount before a determination on insolvency can be made"). Jenkins has averred that in her opinion no discount would have been appropriate in this instance.42 Snell & Wilmer contends that Statement 5 of the Financial Accounting Standards Board (FASB 5) is the only accounting rule that permits classification of potential claims as liabilities and yet Jenkins admitted that she did no analysis to confirm the applicability of FASB 5 in this case. during Jenkins' deposition: Q: You haven't done any analysis that would support the conclusion that during the life of Visitalk any claim was probable to be asserted by any of these shareholders, isn't that right? The following exchange took place

Declaration of Renee M. Jenkins at 4, ¶ 16, Exhibit 16, Plaintiff's Separate Controverting Statement of Facts, Docket No. 384. -19-

42

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The WITNESS: That's correct. I did not -- I don't think it's required to do the damages calculation. Q: Okay. Your damage calculation does not rely on a determination that any of these shareholder claims were probable and measurable within the meaning of FASB5, correct? A: Correct.[43] In her Rebuttal and Supplemental report, Jenkins explains that FASB 5 is "the standard that identifies the conditions under which contingent liabilities should be reflected in (audited) financial statements."44 She concluded that FASB 5 did not apply

in this case "because I am not assessing the fairness of a written assertion of others (e.g. auditing)."45 Snell & Wilmer's expert,

Weekly, testified that he thought "that while FASB-5 ... doesn't apply in a sense of financial statement preparation, it has to be considered as one basis, particularly when there is no other basis that has been provided for why that calculation was made in that fashion."46

Jenkins Deposition at 84, lns. 2-13, Exhibit 2, Motion in Limine to Exclude Testimony of Renee Jenkins or for Daubert Hearing, Docket No. 357. Jenkins Rebuttal and Supplemental Report at 2, Exhibit C, Plaintiff's Response to Defendant Snell & Wilmer, LLP's Motion in Limine to Exclude Testimony of Renee Jenkins, Docket No. 377.
45 44

43

Id. at 3.

Excerpt of Deposition of David B. Weekly, Sr. at 45, lns. 18-23, Exhibit F, Plaintiff's Response to Defendant Snell & Wilmer, LLP's Motion in Limine to Exclude Testimony of Renee Jenkins, Docket No. 377. -20-

46

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This discussion about whether FASB 5 applies here does not illustrate that Jenkins' opinion concerning how the shareholder claims should be valued is unreliable. It illustrates that there

is some difference of opinion between Jenkins and Weekly as to whether FASB 5 should be considered. The fact that experts disagree does not render their opinions unreliable. Conclusion 3 Snell & Wilmer challenges Jenkins' solvency opinions on numerous grounds. First, Snell & Wilmer argues that Jenkins'

insolvency opinions are unreliable because she has ignored the following facts: 1) the Series A shareholders all signed releases in December 1999; 2) the Series B offering disclosed the Founders Warrants and some of the Series B investors were Series A investors; 3) the Series C offering disclosed the Founders Warrants and the Series C investors were given the opportunity to have their money refunded in December 1999; 4) no investors had asserted claims related to the Founders Warrants or the Series A releases prior to Visitalk's filing its bankruptcy petition; and 5) in both the first proposed plan and approved second plan in Visitalk's bankruptcy proceedings, the entire equity interest of all Series A, B, and C investors was cancelled. Snell & Wilmer also argues that Jenkins'

insolvency opinions are unreliable because she does not mention or analyze the effect of the burst in the "dot com" bubble. Wilmer further argues that Jenkins' -21insolvency Snell & are

opinions

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unreliable because she has invaded the province of the fact finder and made credibility judgments about fact witnesses. The court is not entirely convinced that Jenkins has relied on sufficient facts and data in reaching her insolvency opinions. shareholder Jenkins' entire theory hangs on the existence of the claims, and she ignores other admitted financial

problems that were plaguing Visitalk.

"While an expert need not

consider every possible factor to render a 'reliable' opinion, the expert still must consider enough factors to make his or her opinion sufficiently reliable in the eyes of the court." MicroStrategy Inc. v. Business Objects, S.A., 429 F.3d 1344, 1355 (Fed. Cir. 2005). As the court indicated at oral argument, it will allow Jenkins to testify because this matter is being tried to the court and not a jury, but the court's perception at present is that there are some serious reliability problems with Jenkins' insolvency opinions. Conclusion 4 Snell & Wilmer challenges the reliability of Jenkins' damage calculation on various grounds as well. First, Snell &

Wilmer contends that Jenkins' causation analysis is speculative. Snell & Wilmer contends that Jenkins' chain of causation is based on the following unsupported assumptions: 1) that Visitalk shares should be converted to liabilities, 2) that the amount of such liabilities will be litigated and determined at trial, and 3) that the amount of such liabilities will be determined to be exactly -22-

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equal to the entire amount of the investment of all Visitalk shareholders combined. Snell & Wilmer also contends that Jenkins

dismissed the key causation issue, whether Visitalk would have failed even if there had not been securities violations as a "silly hypothetical question."47 Jenkins testified that she did not want

to give an opinion on whether Visitalk would have failed had there not been securities violations because "[i]t's too far off the assignment."48 Yet, plaintiff has admitted that, in addition to the problems with the Founders Warrants and the breaches of fiduciary duty, "the company's financial problems were caused by other factors such as almost no income from business operations, grossly excessive and wasteful spending, incompetent management by Messrs. Thimmesch and O'Donnell [and] lack of financial and operational controls...."49 Snell & Wilmer also argues that Jenkins' damage calculation is unreliable because it is based on the assumption that the issue of whether Series A, B, and C investors hold "claims" against Visitalk will be presented at trial. At her deposition, Jenkins testified:

This is a damages calculation that requires some outside determination of the exact correct amounts. If a judge or a jury said these shareholders have subordinated claim[s] to the

Jenkins Deposition at 76, lns. 17-21, Exhibit 2, Motion in Limine to Exclude Testimony of Renee Jenkins, or for Daubert Hearing, Docket No. 357.
48

47

Id. at lns. 22-25.

Plaintiff's Separate Controverting Statement of Facts at 3, ¶ 3, Docket No. 384. -23-

49

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proceeds of this bankruptcy in a certain amount, for example, if the judge or jury said, well, we think the investor[s] should only have 50 percent of this amount, well then the insolvency would be reduced by 50 percent of this calculation.[50] Jenkins was then asked: "So your damage report insolvency analysis says here is one scenario of what the fact finder could determine and here's what the math would look like?"51 "Exactly."52 Jenkins answered,

The problem with this, according to Snell & Wilmer,

is that the shareholder claims will never be adjudicated and their amount will never be determined at trial. Snell & Wilmer contends

that in her Rebuttal and Supplemental Report Jenkins concedes this point. Jenkins states that "I did not intend to testify that the

judge would rule on the existence and amount of each and every investor claim. That is not the issue here. I intended to mean

only that my insolvency (damages) calculation was based on the actual investment of the Series A, B and C investors as the only logical measure of the amount of damages."53 Snell & Wilmer argues

that the fact that the shareholder claims will never be litigated Jenkins Deposition at 99, lns. 14-23, Exhibit 2, Motion in Limine to Exclude Testimony of Renee Jenkins, or for Daubert Hearing, Docket No. 357.
51 50

Id. at lns. 21-23. Id. at ln. 24.

52

Jenkins Rebuttal and Supplemental Report at 4, Exhibit C, Plaintiff's Response to Defendant Snell & Wilmer, LLP's Motion in Limine to Exclude the Testimony of Renee Jenkins, Docket No. 377. -24-

53

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at trial means that Jenkins' insolvency calculation is based on a fallacy. Jenkins' damages calculations are based on assumptions, and while they are the kind of assumptions that a damages expert may make, the court questions the aptness of Jenkins' assumptions. As

the court has indicated, its perception at this point is that plaintiff's damages theory, which is based almost entirely on the existence of the shareholder claims, suffers from some fundamental flaws. But, Jenkins will be allowed to offer her insolvency

opinions, and the court will re-evaluate her testimony after it has been presented at trial. The Ponzi Scheme conclusion Jenkins opined that Visitalk could be characterized as the first round of an unconsummated ponzi scheme. allowed to offer this opinion at trial. Jenkins will not be

It is irrelevant because

it has nothing to do with the claims that are being asserted against Snell & Wilmer. Conclusion Snell & Wilmer's motion in limine to exclude the testimony of Boyd S. Lemon54 is denied. Snell & Wilmer's motion in limine to

54

Docket No. 355. -25-

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exclude the testimony of Renee Jenkins55 is granted in part and denied in part. Jenkins will be permitted to offer her opinions as

to Visitalk's insolvency, although she may not opine as to whether there were breaches of fiduciary duty or stock purchase agreements or whether the Series A shareholder releases were effective. Jenkins' Ponzi scheme opinions are excluded. requests for Daubert hearings are denied. DATED at Anchorage, Alaska, this 2007. 15th day of October, Snell & Wilmer's

/s/ H. Russel Holland United States District Judge

55

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