Free Reply in Support of Motion - District Court of Arizona - Arizona

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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

10 FOR THE DISTRICT OF ARIZONA 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 v. PETER THIMMESCH, et al., Defendants. (Assigned to the Honorable H. Russell Holland) (Oral Argument Requested) BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, CASE NO. CIV 02 2405 PHX HRH REPLY MEMORANDUM IN SUPPORT OF MOTION IN LIMINE TO EXCLUDE TESTIMONY OF RENEE JENKINS, OR FOR DAUBERT HEARING

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I.

INTRODUCTION. The damage theory of plaintiff's accounting expert Renee Jenkins, as set forth in her

original report, rests on this syllogism:

1) "All evidence shows" that "certain defendants" 2)

breached their fiduciary duties to Visitalk, which "gave rise to the investor claims";

Visitalk became insolvent early on as a result of such "claims"; and 3) Visitalk incurred damages of $25.4 million "during the life of the Snell & Wilmer relationship" (later adjusted to $25.15 million). The main problem with that syllogism is that there were, and are, no such claims. Where the key underpinnings of an expert's opinion are supported merely by the assertions of the expert, the opinion will be struck under Daubert. Nebraska Plastics, Inc. v.

Holland Colors Americas, Inc., 408 F.3d 410 (8th Cir. 2005); Eckelkamp v. Beste, 315 F.3d 863 (8th Cir. 2002). Plaintiff likewise fails to link the challenged expert opinions to the issues that will be tried. Plaintiff itself, in the materials submitted with the Response, cites numerous reasons for the failure of Visitalk that had nothing to do with Snell & Wilmer, 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." [Plaintiff's Separate Controverting Statement of Facts in Support of Response to Snell & Wilmer's Motion for Partial Summary Judgment ("PCSOF"), para. 3.] An expert opinion that attempts to blame Snell & Wilmer for Visitalk's demise without even mentioning such factors that were admittedly at work (not to mention the biggest problem, the "dot com" bubble burst, also unaddressed by Jenkins) lacks "fit" with the facts of the case and must be struck. Microstrategy Inc. v. Business Objects, S.A., 429 F.3d 1344 (Fed. Cir. 2005); Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2nd Cir. 2002). Plaintiff's attempts to distinguish those cases amounts to nothing more than restating their holdings and then asserting, incorrectly, that they do not apply here.

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The Response also confirms that Jenkins lacks the "superior" knowledge of the relevant subject matter that is necessary for admission of an expert opinion, Jones v. Lincoln Elec. Co., 188 F.3d 709, 723 (7th Cir. 1999). In her "Rebuttal And Supplemental Report" dated June 4, 2007, PCSOF Exhibit 16 ("Jenkins Supplemental Report"), Jenkins dismisses the critical issue of the absence of investor claims as "irrelevant." She likewise, in her deposition, dismissed the central issue of whether Visitalk would have survived even without alleged securities problems as a "silly hypothetical question" on which she had no opinion [Jenkins Depo. at 76:17-21], a cavalier approach to a core question that the Response does not even attempt to defend. Such result-oriented opining is inconsistent with an expert's role and is a further

ground for rejection under Daubert. Kumho Tire Co. v. Carmichael, 119 S. Ct. 1167 (1999). Plaintiff's approach in the Response was not to address such problems head on, but to present Snell & Wilmer with a constantly moving target in the hope that some version of the Jenkins report would survive. Two new versions of her opinions, and several hundred pages of new supporting documents, have been provided since her deposition in January. Such materials were required to be, but were not, produced with the initial expert report. The Jenkins Supplemental Report, filed almost six months after her deposition, was not authorized by the Court's Scheduling Order. It was served, without warning, on defense counsel the very day we filed the Motion in Limine (in fact, just an hour before we filed that Motion). Plaintiff and its expert now take the position (after pausing, predictably, to say that defense counsel are at fault for not filing an additional brief responding to the unauthorized Supplemental Report) that the Court should overlook any shortcomings of the original report and deposition and focus instead on the "corrections," "adjustments," and "recalculations" of the Jenkins Supplemental Report. [Jenkins Declaration dated July 17, 2007, PCSOF Exh. 16 ("Jenkins Declaration") at ¶ 8.] The new materials, while blatantly improper, so clearly confirm the flaws in Jenkins' approach that the appropriate relief continues to be simply striking the Jenkins report 2
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(including the unauthorized and untimely Jenkins Supplemental Report and the Jenkins Declaration) as unfounded, unsupported and improper under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 593, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), Kumho Tire Co. v. Carmichael, 119 S.Ct. 1167 (1999) and their progeny. The Court should so rule. II. ARGUMENT. A. The Undisputed Facts Establish That There Were, And Are, No Shareholder Claims Relating To The Founders' Warrants Issue, And Therefore There Was No "Insolvency" Of Visitalk Owing To Such Supposed Claims. "Ms. Jenkins contends that the

Plaintiff's Response Brief states [at 9:25-10:2]:

Company was insolvent directly because of the Shareholder claims . . . The Shareholder claims arise from the bad actions Snell facilitated." Thus, if there were no shareholder claims, there

was no insolvency, and there is no "deepening insolvency" damage claim. Snell & Wilmer has inquired consistently as to the basis of the contention that there were shareholder claims. Visitalk went through a complete bankruptcy proceeding, with an approved Plan of Reorganization. One searches that record in vain for any hint of any "investor claims" related to Founders' Warrants or securities fraud. ever asserted, nor could they be in the future. Under the Second Joint Plan of Reorganization of Visitalk dated June 22, 2004 ("Second Joint Plan"), attached as Exhibit A to Declaration of Michael Williams dated July 16, 2007, PCSOF Exh. 6 ("Williams Declaration")­indeed under the very provision that plaintiff relies on ­ if a creditor did not make a proper claim in the bankruptcy, he or she had no right to participate in the Plan as a creditor at all. Section 5.9, on which plaintiff relies, provides that "Class 8 Equity Interest Holders" may obtain warrant units in the reorganized Visitalk in exchange for a formal release of any claims as a creditor. The Second Joint Plan, however, defines Class 8 as consisting only of the "Allowed Interests of all of the holders of the Debtor's Old Preferred Stock." [Second Joint Plan at ¶ 3.9.] "Allowed Interests," in turn, 3
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No such claims were

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are defined as claims or interests that were listed in the company's Chapter 11 Schedules and not identified as "disputed" "contingent" or "unliquidated," or that were the subject of a proper proof of claim filed by the creditor. [Second Joint Plan, Appendix A (Definitions) ¶ 6(a).] There were no creditors' claims arising out of the Founders' Warrants that met that definition. Therefore, Class 8 did not include any such creditor claims at any time before the final approval of the Visitalk bankruptcy Plan. See Declaration of Michael Tucker dated August 6, 2007, attached as Exhibit "A" ("Tucker Declaration") at paras.5-10. Pursuant to Rule 3003 of the Federal Rules of Bankruptcy Procedure, a claimant must file a proof of claim in a timely fashion. F.R. Bankr. P. 3003(c)(2). "[A]ny creditor who fails to do so shall not be treated as a creditor . . . ." Id. A creditor is excused from the proof of claim requirement only when the liability is listed on the debtor's "schedule of liabilities and list of equity security holders." F.R. Bankr. P. 3003(b). The schedule of liabilities is "prima facie evidence of the validity and amount of the claims of creditors, unless they are scheduled as disputed, contingent or unliquidated." Id. The Bankruptcy Claims Bar Date in the Visitalk bankruptcy was August 27, 2001. Tucker Declaration at para. 6. No proofs of claim were submitted by any "investors" relating to the Founders' Warrants or any other alleged securities issues prior to that date. Id. at para. 9. Visitalk did not schedule any such investor claims, let alone schedule them as undisputed, fixed or liquidated. Id. at para. 7. As stated in the Tucker Declaration [para. 10], "Based on my review of the Visitalk Chapter 11 Schedules and the proofs of claims filed, no Series A, B or C preferred stockholders had "Allowed Claims" as defined by the Plan." Plaintiff makes

no contention to the contrary. As such, no "investor claims" were ever made to Visitalk. No such claims can be submitted in the future, as they are long since barred. Plaintiff argues that the bankruptcy court "confirmed the existence of the claims in Paragraph 5.9 of the Second Joint Plan of Reorganization," and that "each Shareholder signed an acknowledgement of these claims." [Plaintiff's Response at 5:5-8.] This is not correct. 4
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Under the Second Joint Plan, as noted above, Class 8 creditors are defined to include only those who filed a proof of claim, or whose non-contingent, undisputed claims were acknowledged by Visitalk on its Chapter 11 schedules. Plaintiff ignores that definition, and creates a new category of "Investor Creditors," unilaterally defined by plaintiff to mean all "persons who purchased Visitalk preferred stock through Visitalk's Series A, Series B, Series C and Series E stock offerings" ­ even though they never filed such a claim before or during the bankruptcy. [See Williams Declaration submitted in support of plaintiff's Response, PCSOF Exh. 6, at para. 8] This definition is not accurate. It has no support in the Plan of Reorganization or the Bankruptcy Code. It has been "made up" by plaintiff. Plaintiff implies that bankruptcy Judge Baum went along with plaintiff's redefinition of "non-claimants" as "claimants" in his December 15, 2004 "Order clarifying Article XII of the Confirmed Plan." Not so. Article XII of the Second Joint Plan provides that the Creditors Trust will pursue claims for the benefit of, and pay proceeds to, Class 7 creditors (consisting of general unsecured creditors). Judge Baum's December 15, 2004 order simply made clear that, if there are funds left over after paying Class 7 (as well as the claims of professionals performing services in the bankruptcy), those funds may be paid to Class 8 ­ i.e., to those holding "Allowed Interests" as a result of having filed a proper proof of claim or being listed on the company's Chapter 11 schedules. Judge Baum was not asked to, and he did not, redefine Class 8 to include creditors who had not filed a proper proof of claim and were not listed on the schedules. There simply is no basis in the record for a conclusion (or "assumption") that even a single shareholder made a proper, timely claim against Visitalk related to the Founders' Warrant issue. Of course, no such claim can be made now. Daubert and Kumho Tire Co require an expert's opinion to have "a reliable basis in the
knowledge and experience of [the relevant] discipline." Daubert, 509 U.S. at 592; Kumho, 526 U.S. at 149. Asked to identify any objective support for her reclassification of shareholder equity as

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unrecorded liabilities, Jenkins could point to nothing more than "an assumption there, that those claims are held to be valid," plus "some knowledge from other bankruptcy cases." [Jenkins Depo. at 84:14-86:4, attached to Motion in Limine to Exclude Testimony of Renee Jenkins (etc.)]. That is woefully insufficient. In fact, one of plaintiff's cases, In re: Sierra Steel, Inc., 96 B.R. 275 (9th Cir. BAP 1989), makes clear that, where subsequent events show what happened with a purported contingent claim, a Court may properly exercise hindsight and determine the fair value of the claim to have been zero. The Court stated that, "A contingent liability must be reduced . . . to its present or expected amount before a determination on insolvency can be made." 96 B.R. at 279. Where it was conceded that the debtor "never had to and will never have to pay anything on the $300,000 claim," then, "reducing the claim to its present value of zero," the Court affirmed the lower court's finding that the claim was not a "debt." Id. The Court further

stated that subsequent events help inform the decision of what a claim was worth at an earlier time: "[T]here is no policy reason why bankruptcy judges should not be allowed to consider subsequent events in valuing assets or determining liabilities. For example, judges regularly consider the actual collection rates in valuing receivables." Id. Since the claims Jenkins

relied on were never asserted and never will be paid, they cannot be considered "debts." This causes the entire "deepening insolvency" analysis to fail, based on plaintiff's own authority. Recognizing that there were no investor claims asserted, Jenkins states that, "whether or not the individual investors ever asserted their claims is irrelevant." [Jenkins Supplemental Report at 4.] The fact that those claims were never asserted at any point before or during the bankruptcy, and cannot now be asserted, is not only "relevant," but dispositive. Jenkins' attempt to ignore that central issue is alone grounds for rejection of her opinion. Nebraska Plastics, Inc. v. Holland Colors Americas, Inc., 408 F. 3d 410 (8th Cir.2005) (affirming

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rejection of expert opinion for failure to take into account critical, undisputed facts); Eckelkamp v. Beste, 315 F.3d 863 (8th Cir. 2002) (same).1 Finally, plaintiff relies on Mr. Kaplan, one of Visitalk's directors and a Series A and B investor, who testified that he "believes" that he and other unnamed "Investor Creditors" "held claims against Visitalk." [PCSOF at para. 6.] Plaintiff cites no legal or accounting authority for the proposition that an individual can render a corporation insolvent merely by holding the belief that others may have claims against the company that they have not bothered to assert. Plaintiff supports its damage claim almost exclusively on investor claims against Visitalk that were never asserted. Plaintiff is akin to an accident victim claiming damages for a broken arm that was never injured. should be struck. B. Contrary to Jenkins' Initial Assumption, Shareholder Claims Will Not Be Litigated, and Their Amount Will Not Be Determined, In The Upcoming Trial. In her deposition, Jenkins adamantly insisted that shareholders' claims would be adjudicated at trial, so that her damages number was in essence an elaborate placeholder, with the true number to be plugged in at trial.2 Snell & Wilmer pointed out in its initial brief on this Motion that such shareholder claims would not, in fact, be litigated at the trial, because such claims were never properly asserted in the bankruptcy court or in the adversary proceeding. The damage claim here has no basis in reality and

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Jenkins hardly enhances her creditability when she explains the complete lack of investor claims by noting the "harsh penalties for the filing of claims for which there is not [sic] factual basis." [Jenkins Supplemental Report at 8.] 2 Jenkins Depo. at 87:24-88:4, attached as Exh. B ("My understanding would be that as the case became litigated, there would come a time where a judge or jury would make a decision about the amount of any claim for that Series A, Series B, or Series C investors. And at that point, the reorganized debtor would record on that balance sheet the liabilities, whatever those claims turned out to be").

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Jenkins now concedes this point. She states at page 6 of her Supplemental Report, "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." [Jenkins Supplemental Report at 4.] Jenkins now has it right. The shareholder claims will not be litigated at the trial. That means, however, that an indispensable underpinning of her report is simply incorrect, and her opinions resting on such an assumption must be struck. If plaintiff and its expert were allowed to proceed with their damage approach, the upshot of that approach in economic terms would be that Snell & Wilmer would be ordered to hand over $25 million to Visitalk and its former shareholders, thus compensating those shareholders 100 cents on the dollar for their investments in Visitalk, even though 1) Snell &Wilmer was never in privity with the shareholders; 2) no investor ever made or pursued a securities fraud claim against Snell & Wilmer or Visitalk; and 3) the trial will not involve adjudication of any such shareholder claims. There are simply no legal or accounting

principles that would support such a ridiculous outcome. Jenkins fails to explain how her damage theory could remain viable, absent the assertion of the shareholder claims and their adjudication at trial. This is another reason why her opinions must be excluded. C. Jenkins Fails To Establish That Visitalk Was a Ponzi Scheme, But More Importantly, Plaintiff Fails to Establish That That Debate Is Even Relevant.

As noted in Snell & Wilmer's opening brief, none of the classic indicia of a Ponzi scheme are present here. The President and Chairman of Visitalk Capital Corporation, the successor to Visitalk's assets, admits that the current Visitalk entity is offering products and services today that are "quite similar from an end-user perspective as they were in 2000." A refined "technology infrastructure" now makes the products and services more profitable than they were then. (Williams Declaration, PCSOF Exh. 6, at ¶ 24.) That is what the founders of Visitalk were trying to accomplish when they were forced to shut the company down. This is hardly the sort of "doomed to failure" scenario associated with fraudulent "Ponzi schemes." 8
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Plaintiff now acknowledges that "Ponzi scheme" is essentially a label intended to prejudice a jury. [Plaintiff's Response at 10:6-8 ("An analysis of the nature of the business, explaining that it was a Ponzi scheme, describes for the jury Visitalk's unlawful practices which the Founders' advanced and Snell facilitated")]. Such pejorative labeling is less of a concern in this bench trial than it would be in a jury trial, but Jenkins' unsupported "Ponzi scheme" smear still has no basis. Jenkins placed heavy emphasis on the supposed existence, in Visitalk's case, of "external and internal signs" of a Ponzi scheme. Snell & Wilmer was suspicious of Jenkins' formulation, because she was describing a list where many of the so-called "signs" (e.g., "charismatic leader") could easily apply to legitimate companies as well. In addition, the list was so general, and the criteria for applying it so loose, that Ms. Jenkins' assertion that Visitalk was a Ponzi scheme seemed essentially untestable, in direct violation of Daubert and Kumho. In her Supplemental Report, for example, she states [at 14]: I am not saying that observable characteristics, if present, means that there is a ponzi or other scheme in motion. I am saying that several characteristics always exist when a scheme is in motion and, when observed, indicate additional research (due diligence) is necessary to determine whether the business entity is legitimate or not. Pressed on the "observable characteristics" point in her deposition, Ms. Jenkins acknowledged that she could not think of a single authoritative source outlining such characteristics or explaining their application, other than, "Myself." [See Memorandum in Support of Jenkins Motion in Limine at 8] Even her Supplemental Report does not cure this deficiency. The "Ponzi scheme" label is unhelpful to ­ and is in fact merely intended to prejudice ­ the factfinder. Jenkins' opinion in that regard again does not "fit" with the substantive facts of the case. It should therefore be struck. Claar v. Burlington Northern R.R., 29 F.3d 499, 506 (9th Cir. 1994); see also Nebraska Plastics, Inc., supra.

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D.

When Stripped of Improper and Unsupported Conclusions, Jenkins' Opinions Consist of Simple Mathematical Calculations not Requiring Expert Testimony.

With regard to Snell &Wilmer's argument that Jenkins is merely performing simple addition, not requiring expert testimony, there are only two possibilities. Perhaps Ms. Jenkins really intends to offer all the opinions and conclusions in her report as her own, including her opinion that there were breaches of fiduciary duty; that certain releases were ineffective; etc. She is clearly, in fact admittedly, unqualified to render such opinions. (We noted, at pp. 6-8 of the opening Memorandum in Support, Ms. Jenkins' admission of her lack of qualifications in those areas. The Response does not attempt to controvert that point.) Alternatively, she may be planning merely to summarize in mathematical format the degree of Visitalk's insolvency if certain assumptions are made. In that case, she is not providing expert opinion testimony about the amount or cause of Visitalk's damages, but is merely performing a mathematical function requiring no expertise. Astrazeneca v. Tap

Pharmaceutical Products, Inc. 2006 U.S. Dist. Lexis 40620 (2006) (excluding expert who "based his opinion on a simple mathematical calculation" and ignored numerous relevant factors); De Jager Const. Co. v. Schleininger, 938 F.Supp. 446, 449 (W.D. Mich. 1996).

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Conclusion For the foregoing reasons, Snell & Wilmer's Motion in Limine to Exclude Testimony of Renee Jenkins, or For Daubert Hearing, should be granted. Respectfully submitted this 6th day of August, 2007. MARISCAL, WEEKS, McINTYRE & FRIEDLANDER, P.A. By: s/ Charles S. Price Gary L. Birnbaum Timothy J. Thomason Charles S. Price Scot L. Claus 2901 N. Central Avenue Suite 200 Phoenix, Arizona 85012-2705 Attorneys for Defendant 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 August 6, 2007, a copy of the foregoing will be sent via FedEx Judge H. Russel Holland UNITED STATES DISTRICT COURT 222 West 7th Avenue No. 54 Anchorage, AK 99513 907-677-6251 I hereby certify that on August 6, 2007, 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] Robert Royal [email protected] Gregory W. Seibt [email protected] Tracy C. Morehouse [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 August 6, 2007, 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: Cynthia Thimmesch 5512 N 6th Street Phoenix, AZ 85012 Defendant Pro Se Peter Thimmesch 11329 Stonehouse Place Potomac Falls, Virginia 20165-5123 Defendant Pro Se

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Raymond F. Gaston Betty B. Gaston 5313 E. Pinchot Ave. Phoenix, AZ 85018-8039 Defendants Pro Se Mark J. Giunta 845 North Third Avenue Phoenix, Arizona 85003-1408 Defendant Pro Se By: s/ Cheryl LoStracco

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