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

1 2 3 4 5 6 7 8

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

9 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 Defendant Snell & Wilmer, LLP ("Snell & Wilmer"), by and through undersigned counsel, hereby Replies in Support of its Motion for Partial Summary Judgment. This Reply is supported by the accompanying Memorandum of Points and Authorities. v. PETER THIMMESCH, et al., Defendants. (Oral Argument Requested) (Assigned to the Honorable H. Russell Holland) BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, CASE NO. CIV 02 2405 PHX HRH REPLY IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT

Case 2:02-cv-02405-HRH Document 394 re Filed 08/06/2007 ofPage MSJ 2 (filed 8-6-07).doc 1 of 22 U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply MSJ\Snell Reply In Support Partial

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
1

MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION. Despite plaintiff`s rhetoric, there is no evidentiary support for plaintiff`s contention that Snell & Wilmer assisted Visitalk`s officers and directors in perpetrating a fraud. More

importantly, plaintiff`s Response to Snell & Wilmer`s Motion for Summary Judgment falls far short of providing a legal basis upon which the case can proceed to trial. In reality, plaintiff presents no facts controverting the fundamental premise that Snell & Wilmer did nothing more than try to resolve a host of securities issues caused by Visitalk and its prior counsel, including the problems with the Founders` Warrants, which Snell & Wilmer actually discovered. Visitalk`s general counsel, and every other knowledgeable fact witness in the case, praised Snell & Wilmer for its efforts. recreating corporate history. There remains no admissible testimony that Snell & Wilmer violated the standard of care. Indeed, recognizing that its expert`s opinions are not admissible, plaintiff now Plaintiff is the only one

desperately contends that no expert testimony is necessary at all.1 It clearly is. But even if the expert testimony is admitted, plaintiff`s claims lack any evidentiary basis upon which to proceed to trial. Plaintiff also has no admissible evidence on damages. Indeed, plaintiff`s non-sensical damage theory continues to rest on so called claims (that arose before Snell & Wilmer was ever counsel to Visitalk) that were never asserted and cannot now be asserted. There is no evidence that Visitalk, a victim of the .com bust, failed because of Snell & Wilmer. It remains undisputed that, to the extent there was any wrongdoing, it was done by Visitalk`s officers and directors. That wrongdoing is attributed to the corporation. The Board

The fact that a lawyer, who admittedly has no knowledge of securities laws, is the expert on the standard of care for a securities lawyer speaks volumes about plaintiff`s case, or the lack thereof. 1
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 2 of 22

1 2 3 4 5 6 7 8 9 10 11

of Directors unanimously approved the solution to the Founders` Warrants problems. Despite plaintiff`s rhetoric, there is no evidence that Snell & Wilmer lied to the Board. Plaintiff`s claims are barred by the in pari delicto doctrine.2 Plaintiff also presents no cogent reason why it has standing to bring the claims asserted here. Plaintiff is not a bankruptcy trustee. Indeed, it is no different than any third party who chose to purchase various assets for a price. Visitalk`s claims were not assignable to plaintiff. There is also no evidence that Snell &Wilmer aided and abetted a fraud. Finally, there is no probative evidence establishing that Snell & Wilmer was an insider for purposes of preferential payment analysis. II. SNELL & WILMER IS ENTITLED TO SUMMARY JUDGMENT IN EACH OF PLAINTIFF'S CLAIMS AS A MATTER OF LAW. A. Plaintiff Has Not Met Its Burden Of Showing That Snell & Wilmer Violated The Standard Of Care.

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

As set forth in Snell & Wilmer`s Motion in Limine regarding Boyd Lemon, the testimony of a lawyer who knows nothing about securities laws on the standard of care of a securities lawyer is inadmissible. As such, plaintiff now desperately argues that an expert is necessary. Plaintiff is wrong. Of course, expert testimony is generally required to prove a legal malpractice case. Baird v. Pace, 156 Ariz. 418, 752 P.2d 507 (App. 1987). A narrow exception exists when the negligence is so grossly apparent that a lay person would have no difficulty recognizing it. Asphalt Engineers, Inc. v. Galusha, 160 Ariz. 134, 770 P.2d 1180 (App. 1989).3 No such case exists here. Indeed, this matter addresses complex questions about the standard of care required of a securities lawyer when introduced to a client that has a myriad of pre-existing securities problems. An in-depth knowledge of the securities laws, the rules of Plaintiff`s contention that this defense is barred by the Court`s prior Order is incorrect for the reasons set forth below. 3 In Asphalt Engineers, the attorney admitted he violated the standard of care, after never meeting with his clients, allowing a non lawyer to provide legal advice, failing to file lien foreclosures and failing to answer a complaint. Such a situation is hardly presented here. 2
2

Case 2:02-cv-02405-HRH

U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 3 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

corporate governance and Visitalk`s securities transactions is essential in order to even begin to address these questions. Indeed, even plaintiff and its expert Lemon admit that knowledge of the securities laws is necessary to assess this case. Since he had no such knowledge himself, however, Mr. Lemon had to rely on another expert to gain an understanding of the securities laws. A case where knowledge and understanding of complex securities laws is necessary in hardly one that is so straightforward that expert testimony is not necessary. The adequacy of Snell & Wilmer`s response to the numerous complex problems it faced is certainly not a question that can be assessed by a layperson. Similarly, whether the Cardwell settlement was in any way improper or whether Snell & Wilmer`s minor role in that deal violated the standard of care is hardly apparent.4 Snell & Wilmer worked tirelessly in addressing Visitalk`s securities problems, none of which were of Snell & Wilmer`s making. Visitalk`s general counsel felt Snell & Wilmer did precisely what it should have done. There was no negligence at all; it certainly was not apparent. . Indeed, plaintiff`s reference to the (inadmissible) opinions of Ray Gaston, a former Visitalk controller, to support its position that negligence occurred actually demonstrates that plaintiff understands it needs an opinion from someone to survive this Motion. Mr. Gaston`s view, however, based on an erroneous misunderstanding of the facts, no more establishes a violation of the standard of care than Mr. Lemon`s unreliable opinion. The case clearly calls for a learned securities practitioner. The failure of plaintiff to proffer one is fatal to its claim.

4

Plaintiff apparently concedes that there is no evidence that Snell & Wilmer did anything wrong in connection with the Thimmesch expenses. 3
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 4 of 22

1 2 3 4 5 6 7 8 9 10

Even if Lemon`s opinions are admitted, there is still no adequate factual basis upon which the case can proceed to trial. With respect to the Founders` Warrants, the following facts remain undisputed: 1. 2. Snell & Wilmer discovered problems. (SOF, ¶ 15); the Founders` Warrants

According to Visitalk`s general counsel and every other knowledgeable witness, Snell & Wilmer properly and appropriately advised Visitalk about its options (SOF, ¶ 19); All five members of the Board reached an agreement on how to resolve the Founders` Warrants problems after an executive session where Visitalk was counseled by lawyers other than Snell & Wilmer (SOF, ¶ 17);

3.

With respect to the Cardwell settlement, the following remains undisputed: 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 3. 1. 2. Snell & Wilmer played no role in negotiating the settlement (SOF, ¶ 32); Snell & Wilmer played a small role in documenting the settlement (SOF, ¶ 33); and All members of the Board of Directors and Visitalk`s general counsel approved the settlement, believing it was a win-win situation (SOF, ¶ 32-36).

There simply is no factual basis for plaintiff`s claims that Snell & Wilmer assisted in perpetrating a fraud. Empty rhetoric and unsupported conclusions are not a sufficient basis for this case to proceed to trial. B. Plaintiff's Claims Are Barred By The In Pari Delicto Doctrine. 1. The Court`s 2003 Order is Not Controlling Here.

On August 12, 2003 the Court entered its Order (the 2003 Order) on a Motion to Dismiss initially brought by defendants Best, Hirschberg and Kaplan. Snell & Wilmer was not involved in this Motion. This Court found that under O`Melveny & Meyers, the Wagoner rule was not applicable. (Order at 9). FDIC vs. O`Melveny & Meyers, 61 F.3d 17 (9th Cir. 1995). In 4
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 5 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

O`Melveny & Meyers, the Ninth Circuit refused to apply the in pari delicto doctrine to the FDIC, serving as a receiver. In that context, the Ninth circuit stated: A receiver, like a bankruptcy trustee and unlike a normal successor in interest, does not voluntarily step into the shoes of the bank; it is thrust into those shoes. It was neither a party to the original inequitable conduct nor is it in a position to take action prior to assuming the bank`s assets to cure any associated defects or force the bank to pay for incurable defects. This places the receiver in stark contrast to the normal successor in interest who voluntarily purchases a bank or its assets and can adjust the purchase price for the diminished value of the bank`s assets due to their associated equitable defenses. In such cases, the bank receives less consideration for its assets because of its inequitable conduct, thus bearing the cost of its own wrong. O`Melveny, 61 F.3d at 19. Based on O`Melveny`s reference, in dicta, to a bankruptcy trustee, this Court concluded in its 2003 Order: The trustee has standing to proceed with Visitalk`s corporate claims, that is, for injuries to the corporation and not to its creditors. (Order at 9). The Court`s 2003 Order is not controlling here. That Order resulted from a Motion to Dismiss in which the Court took the allegations in the Complaint as true. The Complaint alleged that there were innocent Board members that did not know the operative facts. Discovery has demonstrated that that allegation is false. (SOF, ¶ ¶ 27-29). When faced with the standards applicable for a summary judgment motion, it is evident that plaintiff`s claims cannot survive. The Court`s Order was also based upon the premise that this case was or would be pursued by a bankruptcy trustee. This case has never, however, been prosecuted by a

5
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 6 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

bankruptcy trustee. Rather, this case was being prosecuted by Visitalk.com, Inc., the debtor, at the time of the 2003 Order.5 The O`Melveny rule simply had no application to this case. This lawsuit was not being prosecuted by a receiver or a bankruptcy trustee. Rather, it was initially prosecuted by the very actor involved in the original inequitable conduct6. Perhaps more importantly, there has been a change in the plaintiff since the 2003 Order. Even if in pari delicto could not be asserted against the debtor in possession, there is no reason why it cannot be asserted against the current plaintiff.7 This action is not being currently prosecuted by a bankruptcy trustee or any other entity that was involuntarily thrust into the shoes of the wrongdoer. Rather, the plaintiff is now Biltmore Associates, in its capacity as trustee for the Visitalk`s Creditor`s Trust. Biltmore Associates is not a bankruptcy trustee or anything like a bankruptcy trustee. Rather, Biltmore Associates is a normal successor in interest that chose to bid for and acquire certain assets of Visitalk. There is no plausible reason why in pari delicto should not apply here. As such, O`Melveny does not apply. 2. O`Melveny does Not Apply in the Bankruptcy Context in any Event.

O`Melveny should not apply in the bankruptcy context, in any event. O`Melveny dealt with the FDIC as receiver, not a bankruptcy trustee. The comments in O`Melveny about a bankruptcy trustee were pure dicta. Every circuit which has analyzed the issue has determined
5

While a debtor in possession generally holds the powers of a trustee, 11 U.S.C. § 1107(a), there is no support in the Bankruptcy Code for the notion that a trustee and debtor in possession are the same or should be treated the same. There is certainly no legal support for the notion that certain defenses cannot be asserted against a debtor in possession that could be asserted against the debtor pre-bankruptcy, such as in pari delicto. No case that we are aware of has held that in pari delicto cannot be asserted against a debtor in possession. A debtor in possession is hardly like a receiver who is involuntarily thrust into the shoes of the wrongdoer. 6 Law of the case, therefore, is inapplicable because the court`s decision was based on a factual error and was therefore erroneous. Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 98 P3.d 572 (App. 2004). 7 A substantial change in facts also renders the law of the case doctrine inapplicable. Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 98 P.3d 572 (App. 2004). 6
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 7 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

that imputation of wrongdoing by corporate officers can be used against a bankruptcy trustee. See Schneilling v. Thomas (In re: Agribitoech Inc.), 2005 U.S. Dist. LEXIS 6466, 53 Collier Bank. Cas.2d (MB)11717 (D.Nev. 2005). For example, the Tenth Circuit distinguished

O`Melveny on the grounds that the case involved a receiver. A bankruptcy trustee, however, derives its powers from the bankruptcy code. In re Hedged ­ Investments Assocs., Inc., 84 F.3d 1281 (10th Cir. 1996). The Third Circuit has cited legislative history to note

congressional intent that the trustee stands in the debtor`s shoes and take no greater rights than the debtor himself had. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co. Inc., 267 F.3d 340, 356 (3rd Cir. 2001) (citing H.R. Rep. 95-595, 95th Cong., 1st Sess. 367-68 (1977)). In Agribiotech the District of Nevada analyzed this issue thoroughly and determined that there was no basis for not imputing wrongdoing to bankruptcy trustee and that O`Melveny was not to the contrary. OMelveny was actually remanded by the United States Supreme Court after a finding that the Ninth Circuit improperly applied a federal rule of decision. 512 U.S. 79 (1994). A bankruptcy trustee succeeds only to the assets and claims as they existed under applicable non-bankruptcy law. 11 U.S.C. § 541(a). It is not the prerogative of the court to change those rights in the interest of improving the lot of creditors. Hill v. Gibson, Dunn & Cautcher LLP, 338 B.R. 883 (Bktcy. D.C. 2006). If state law recognizes a defense such as in pari delicto, then the bankruptcy trustee is burdened with that defense. Id. There is certainly no dispute that in pari delicto is a recognized defense under Arizona law. Brand v. Elledge, 89 Ariz. 200, 204, 360 P.2d 213, 216 (1961). 3. In Pari Delicto Applies Here.

If the Court determines that in pari delicto can be asserted here, then the outcome is axiomatic. The fundamental principles of in pari delicto are set forth in Smith Ex Rel Boston

7
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 8 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Chicken vs. Arthur Andersen, LLP, 175 F.Supp.2d 1180, 1198-2000 (D. Ariz. 2001). Boston Chicken was affirmed by the Ninth Circuit. 421 F3.d 989 (9th Cir. 2005). Plaintiff does not dispute that it has not made, and cannot make, any showing that there was an innocent member . . . of management who would have been able to prevent the fraud had he known about it. Boston Chicken, 175 F.Supp. at 1199. Rather, it remains undisputed that the five member Board of Directors unanimously approved the solution to the Founders` Warrants. Plaintiff`s contention that Snell & Wilmer provided the Board with false

information about the history of the Founders` Warrants is itself completely false and supported by no admissible evidence.8 Discovery in this case has not revealed an innocent member of management, unaware of the facts, who could have changed the outcome.9

8

In an attempt to establish the alleged false information, plaintiff compares various letters and memoranda from Snell & Wilmer that addressed Founders` Warrants issues with a memorandum (Exhibit 23) provided to Visitalk`s general counsel discussing various options with respect to the Founders` Warrants (Exhibit 23). Of course, Exhibit 23 does not contain every fact and legal issue set forth in every internal Snell & Wilmer memorandum or letter. That hardly supports the notion that Snell & Wilmer in any way misrepresented any facts to the Board of Directors. Plaintiff`s citation of the deposition testimony of Messrs. Kaplan, Thimmesch and O`Donnell to support the notion that false information was provided by Snell to the Board is equally unavailing. None of these individuals in any way suggested that any information provided was in any way inaccurate. Despite the fact that plaintiff seems to believe that his testimony supports their position, the solution that the Board adopted was actually one crafted by board member Allan Kaplan. (SOF, ¶ 23.) Mr. Kaplan, who was asked a series of leading questions by plaintiff`s counsel that utterly lacked foundation, stated only that there was various information that he would have liked to have seen. He never said that anything was false. Mr. Kaplan fully understood that there were legal problems with the Founders` Warrant. (Kaplan Deposition at 218:1-6, Exh. A hereto.) After the issue was fully discussed, the Board decided on a fair and reasonable solution. (Id. at 226:18-227:5.) Plaintiff makes much of the fact that an initial draft of Board minutes refers to a technical error regarding the Founders` Warranty. We are not sure of the point plaintiff is making. No witness has testified that the problems with the Founders` Warrants was described as a technical error, but such a characterization would not be inaccurate. It is undisputed that Bryan Cave did not properly timely document the Board`s initial authorization of the Founders` Warrants. (SOF, ¶¶ 21-25.) 9 While plaintiff cites the testimony of Ray Gaston, not even plaintiff contends that Mr. Gaston, a controller, was in a position to change the outcome. It should also be noted that Mr. Gaston`s alleged views, which were completely lacking in foundation, were based on a serious misunderstanding of the operative facts. Indeed, Mr. Gaston was not involved with Snell & Wilmer at all. 8
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 9 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

4.

There are No Applicable Exceptions to In Pari Delicto.

Plaintiff`s attempts to avoid the in pari delicto doctrine fail. For example, the adverse interest exception does not apply. The fundamental premise of the in pari delicto doctrine is that wrongdoing by corporate officers is normally imputed to the corporation. Boston Chicken, 175 F.Supp. at 1198-99. The adverse interest exception applies only if the corporate officer is acting solely for his personal benefit and there is no benefit to the corporation. Id. When the individual is acting both for his own benefit and the corporation`s benefit, the adverse interest exception does not apply. Id. Even if Messrs. Thimmesch and O`Donnell were acting for their own interests here, the record in this case clearly establishes that they were also acting on behalf of Visitalk. Providing warrants or options to management is hardly an unusual event. There is no dispute that Messrs. Thimmesch and O`Donnell were actively engaged in Visitalk`s business and secured the warrants as an additional incentive to make the company successful.10 They were not working solely for their own benefit, based on the undisputed record. Plaintiff disingenuously attempts to avoid the in pari delicto doctrine by arguing that the wrongdoing of the corporation and its officers was only slight, compared to the purported wrongdoing of Snell & Wilmer. Graham v. Shooke, 107 Ariz. 79, 482 P.2d 446, 447 (1991). Of course, this argument completely disregards the operative facts and plaintiff`s own position. Plaintiff itself contends that Messrs. Thimmesch and O`Donnell embarked on a plan to enrich themselves, even before Snell & Wilmer was Visitalk`s counsel. As such, plaintiff`s
10

In Wight v. Bank of America Corp., 219 F.3d 79 (2nd Cir. 2000), cited by plaintiff, the court held only the adverse interest exception had been adequately pled. The court also noted that the adverse interest exception applies only when the agent has totally abandoned the principal. 219 F.3d at 87. No such contention can be made here. The reference in In re Hampton Hotel Investors, L.P., 289 B.R. 563, 567 (Bkrtcy. S.D.N.Y. 2003) to not deciding the adverse interest issue on a motion dealt with a motion to dismiss, not a motion for summary judgment. 9
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 10 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

contention that Visitalk`s wrongdoing was only slightly compared to Snell & Wilmer is exactly backwards. Even if one were to believe that Snell & Wilmer did anything wrong, any wrongdoing by Snell & Wilmer would itself be slight, compared to the wrongdoing of Mr. Thimmesch and Mr. O`Donnell.11 This is precisely the type of case that the in pari delicto doctrine was intended to apply to. As such, this defense alone is fatal to plaintiff`s position. C. Plaintiff's Claims that Snell & Wilmer Participated in Visitalk's "Deepening Insolvency" Must be Rejected as a Matter of Law and its Damage Claim must Therefore Fail. 1. There are no Creditor Claims.

The argument that Visitalk suffered damage on account of so-called contingent claims that were never asserted or threatened is treated extensively in the Reply Brief in Support of Motion in Limine to Exclude Testimony of Renee Jenkins (Jenkins Reply Brief). Simply put, there were no such claims, and there will be no such claims in the future. The idea that Investor Creditors (a term concocted by plaintiff) held claims that they properly asserted in the bankruptcy is revisionist history with no documentary support in the record. If, as conclusively established in the Jenkins Reply Brief, there were no claims on account of the Founders` Warrants, there can have been no deepening insolvency on account of such claims. Thus, the whole damage theory crumbles. 2. Plaintiff is Improperly Suing for Damage to Shareholders.

In any event, plaintiff`s deepening insolvency theory is an improper attempt to force Snell & Wilmer to compensate Visitalk`s shareholders for their losses, rather than Visitalk for
11

Plaintiff`s contention that Visitalk is not in pari delicto to Snell & Wilmer because Visitalk`s officers violated statutory duties is nonsensical. The question is not whether Visitalk and the plaintiff are in pari delicto with the officers and directors, as plaintiff claims. (Response at 16-17.) The question is whether Visitalk (and its officers) and Snell & Wilmer are in pari delicto. The fact that Visitalk`s officers may have violated statutes and rules of law actually establishes that Visitalk is in pari delicto because the wrongdoing of the officers is imputed to Visitalk. 10
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 11 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

its losses. Where shareholders invest in a company and lose their money, the damage is done to them, not to the company. The $25 million damage claim asserted by plaintiff against Snell & Wilmer represents amounts invested by Series A, B, and C investors, not out of pocket losses by Visitalk. [June 16, 2006 deposition of Vern Schweigert at 116:13-117:2, Exh. B hereto.] As plaintiff`s Response brief notes, The Ninth Circuit Court of Appeals in Smith v. Arthur Andersen, 421 F.3d 989 (9th Cir. 2005) held that a complaint states a cognizable harm when it alleges defendants prolonged` the firm`s existence, causing it to expend corporate assets that would not have been spent if the corporation [had been] dissolved in a timely manner rather than kept afloat with spurious debt.` [Response Brief at 20:6-11 (emphasis added)] Plaintiff`s damages claim is based, not on such unnecessarily expended corporate assets, but on shareholder losses. Plaintiff, however, has no standing to assert such losses. Indeed, plaintiff concedes this! In responding to Snell & Wilmer`s argument, based on Stoll v. Gottlieb, 305 U.S. 165 (1938), that Visitalk shareholders had not submitted claims for breach of fiduciary duty in the bankruptcy, plaintiff responded [Response at 24:20-25]: Plaintiff is not asserting the claims of Visitalk`s creditors as S & W appears to imply in their reliance on Stoll v. Gottlieb, 305 U.S. 165 (1938). Rather, Visitalk asserted in the original Complaint and, post confirmation of the Plan and transfer of the claims to the Trust, Plaintiff has asserted claims for damage done to Visitalk. As a result, Stoll is inapplicable and that argument must fail. (Emphasis added) Shareholder losses do not constitute expended corporate assets of

Visitalk. This is yet another reason for dismissing plaintiff`s damage claim. 3. There is no Evidence of Fraudulent Expansion of Corporate Debt.

Smith v. Arthur Andersen is also noteworthy for its statement that deepening insolvency, as exemplified by Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 350 (3d Cir. 2001), refers to an injury to the Debtors' corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life`. 421 F.3d 11
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 12 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

at 1003. While plaintiff tries to preserve the argument that Visitalk`s management acted fraudulently, and Snell & Wilmer helped them [See Response at 22], that is impossible in light of the testimony of Mr. Schweigert: Q. A. Can you identify any conduct by Visitalk`s management that went beyond negligence to intentional misconduct? Intentional? Intentional, no. I don't think there was any fraud on the part of anyone particularly.

[June 16, 2006 deposition of Vern Schweigert at 116:6-12, Exh. B hereto.] This is yet another reason why deepening insolvency simply does not apply here. 4. Plaintiff`s Proximate Cause Argument Fails. Plaintiff, for example,

Plaintiff`s proximate cause argument is also unavailing.

defends the failure of its expert Jenkins to consider the .com bubble burst by arguing that [i]t has nothing to do with her damages calculations. [Response to Jenkins Motion in Limine at 13:24-26] That, in fact, is our point. Even assuming that shareholder losses could be laid at the feet of Snell & Wilmer, plaintiff would have to show that the securities problems allegedly mishandled by Snell & Wilmer were responsible for the demise of the company. Incredibly, Jenkins dismissed that key issue as a silly hypothetical question on which she had no opinion. [Deposition of Renee Jenkins at 76:17-21, Exh. C hereto.] Jenkins likewise failed to account for numerous other problems that plaintiff admits Visitalk suffered, including 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 SOF ¶ 3.] The total failure to account for such factors demonstrates that plaintiff cannot establish that damage was proximately caused to Visitalk by Snell & Wilmer.

12
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 13 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

D.

The Claims that Plaintiff Purports to Assert were not Properly Assignable and Cannot be Asserted by Plaintiff. 1. Introduction.

The assignment of Visitalk`s legal malpractice claims was untenable, unsupportable, and void under state law. Schroeder v. Hudgins, 142 Ariz. 395, 399, 690 P.2d 114, 118 (Ct. App. 1984), citing Arnold v. Phillips, 117 F.2d 497, 500 (5th Cir. 1041), (the determination of whether the ownership of a cause of action is transferable and rests in the trustee in bankruptcy must be made in accordance with state law.). In its Response, plaintiff does nothing to alter this conclusion. Rather, plaintiff simply tries to imbue itself with authority it has never possessed, while also misrepresenting its status in this case. 2. Plaintiff is Not a Bankruptcy Trustee. that claims held by a debtor become part of the This is a proposition with which

Plaintiff first states the obvious:

bankruptcy estate upon filing of a Chapter 11 petition.

defendant Snell & Wilmer agrees. Plaintiff ignores, however, that United States Bankruptcy code vests exclusive power in the Bankruptcy Trustee to initiate post-petition litigation. 11 U.S.C. §§ 11-323(b), 1107(a); see, e.g., Husvar v. Rapoport, 430 F.3d 777, 780 (6th Cir. 2005); In re Eisen, 31 F.3d 1447, 1451 n. 2 (9th Cir. 1995). Plaintiff cites Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 709 (9th Cir 1986) and In re Ellwanger, 140 B.R. 891 (Bankr. W.D. Wash. 1992) in an attempt to support the propriety of its litigation of Visitalk`s malpractice claims. Those cases, however, dealt exclusively with the issue of whether certain property of the debtor became part of the bankruptcy estate upon the filing of a petition. Sierra, 789 F.2d at 709; Ellwanger, 140 B.R. at 900. Neither of those cases stand for the proposition that any entity other than a bankruptcy trustee may litigate the claims which become part of the estate. Plaintiff is not a bankruptcy trustee. Rather, Plaintiff is an entity to which legal malpractice causes of action were assigned pursuant to the Second Plan of Reorganization. And though federal law controls the property that devolves to the estate, state law controls the 13
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 14 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

propriety of any attempted assignment of such property. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914 (1979). This principle applies to any purported assignment of a cause of action. See Schroeder, 690 P.2d at 118 (the determination of whether the ownership of a cause of action is transferable and rests in the trustee in bankruptcy must be made in accordance with state law.) (citing Arnold v. Phillips, 117 F.2d 497, 500 (5th Cir. 1941)) (emphasis added); see also In re Spanish Language Television, 456 F.2d 159, 162 (9th Cir. 1972) (there must be clear evidence that any Congressional purpose requires overriding state law.). In Arizona, the assignment of legal malpractice claims is void as against public policy. Congress has articulated no reason why such policy can be overridden in this case. The Response is tellingly bereft of even a mention of Butner. Nor does the Response mention the Arizona authority that is directly on point: Schroeder. Instead, the Response cites Loyd v. Paine Webber, 208 F.3d 755 (9th Cir. 2000) for the proposition that a bankruptcy trustee has standing to bring a legal malpractice claim. (Response at 28). Again, Snell & Wilmer does not disagree. However, plaintiff is not a bankruptcy trustee. Plaintiff then cites Smith v. Arthur Andersen, 421 F.3d 989, 1006 (9th Cir. 2005) for the proposition that a bankruptcy trustee had standing to bring a professional malpractice claim. (Response at 28). Again, Snell & Wilmer does not disagree. Once again, plaintiff is not a bankruptcy trustee. 3. Plaintiff is Not Merely an Appointee. Plaintiff cites Metropolitan Creditors` Trust v. Pricewaterhouse Coopers, LLP, 463 F.Supp2d 1193 (E.D. 2006), but completely misconstrues that court`s analysis. First, the Metropolitan court did not even consider a state anti-assignment provision. Rather, the court focused on whether the prosecution of a post-petition cause of action by a creditor`s trust breached a contractual nonassignment clause. 463 F.Supp2d at 1198. The court further determined that no assignment had taken place because, pursuant to the plan, the debtors had

14
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 15 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

maintained their claims against the professional, and that the creditors trust was merely appointed to litigate those claims. 463 F.Supp2d at 1199. Precisely the opposite determination must be made here. According to Visitalk`s Plan, Visitalk retained no interest in the Causes of Action. Nor is the plaintiff merely an appointee. Id. Instead, according to the very language of the Plan, the Plaintiff is the successor in interest to the Debtor (emphasis added). Indeed, the Plan establishes categorically that the plaintiff was not merely appointed to pursue claims that the Debtor maintained. Id. Rather, the Causes of Action were wholly transfer[red] to the plaintiff free and clear of all claims . . . (See Declaration of Vernon Schweigert at ¶ 4). Finally, the recently filed Declaration of Mr.

Schweigert confirms that plaintiff was not merely appointed to pursue claims, but instead, that the debtor assigned all its Visitalk Claims to the Creditor`s Trust. (Schweigert Declaration at ¶ 17). There simply can be no question that an assignment of Visitalk`s legal malpractice claims occurred in this case. Indeed, plaintiff admits that an assignment took place. Therefore, Metropolitan is inapposite. 463 F.Supp.2d at 1199. Schroeder, on the other hand, is controlling. 690 P.2d at 118. Pursuant to Schroeder, the assignment of the Causes of Action from Visitalk to the plaintiff are absolutely void as a matter of state law. Id; see also Botma, 39 P.3d at 542 (2002); Premium Cigars, 96 P.3d at 363. E. Plaintiff has no Viable Claim for Aiding and Abetting a Breach of Fiduciary Duty. 1. There is No Evidence that the Alleged Torts Caused Visitalk Harm.

Plaintiff has not adequately responded to critical points on the aiding and abetting of breach of fiduciary duty claim. First, there is, in fact, no evidence that the alleged torts, purportedly committed by Messrs. Thimmesch and O`Donnell, caused injury to the plaintiff. Wells Fargo Bank v. Arizona Laborers, 201 Ariz. 474, 486, 38 P3.d 12, 23 (2002).

15
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 16 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Indeed, it remains undisputed that the Founders` Warrants were never exercised and have now expired. As such, there is simply no admissible evidence that the purported torts caused injury to the plaintiff. 2. There is no Evidence that Snell & Wilmer Knew a Fraud was Being Perpetrated.

Plaintiff has also presented no evidence that Snell & Wilmer knew that Visitalk`s officers were committing a fraud. Id. [A]iding and abetting liability is based on proof of scienter . . . the defendants must know that the conduct they are aiding and abetting is a tort. Id., quoting Witzman v. Lehrman & Floss, 601 N.W.2d 179, 186 (Minn. 1999). In Wells Fargo, the Court of Appeals concluded that there was sufficient evidence that the defendant bank knew that Fife Symington was making misrepresentations to the union pension funds. 201 Ariz. at 488, 38 P.3d at 26. There is no evidence in this record, however, even suggesting that Snell & Wilmer knew that Messrs. Thimmesch and O`Donnell were in any way perpetrating a fraud. On the contrary, both Messrs. Thimmesch and O`Donnell maintained that the Founders` Warrants were validly approved by the Board in September of 1998. Mr. Cardwell agreed that he was not a Board member at the time and agreed to the Board`s solution to the Founders` Warrants problems. There is no evidence that Snell & Wilmer knew that all of these men were lying. There is also no evidence that Snell & Wilmer knew there was anything improper about the Cardwell settlement, which was praised by all knowledgeable participants, including Visitalk`s General Counsel, as a win-win deal. 3. Snell & Wilmer did not Assist or Encourage Any Breach.

Plaintiff has fallen woefully short of establishing that Snell & Wilmer substantially assisted or encouraged the alleged breaches. This third requirement means more than a little aid. Wells Fargo, 201 Ariz. at 488, 38 P.3d at 26, quoting In re American Continental Corp./Lincoln Savings and Loan Sec. Litig., 794 F.Supp. 1424, 1435 (D.Ariz. 1992). 16
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 17 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Messrs. Thimmesch and O`Donnell purported to secure the Founders` Warrants well before Snell & Wilmer was even Visitalk`s counsel. Obviously, Snell & Wilmer did not assist or encourage Thimmesch and O`Donnell at that time. It remains undisputed Snell & Wilmer stepped in to the middle of numerous securities problems ­ including the Founders` Warrants. Snell & Wilmer did nothing more than analyze the legal issues arising from the problems with the Warrants and explored various options with Visitalk`s general counsel and the Board. While plaintiff contends over and over again that Snell and Wilmer did not tell the Board of Directors the truth, there is no admissible evidence proferred by the plaintiff that in any way supports this ridiculous allegation. The Board of Directors, including two outside Board members and Mr. Cardwell, with the assistance of counsel other than Snell & Wilmer, determined the solution that was the best for Visitalk. The Board`s decision to confirm the Warrants, after securing releases for all Series A Shareholders, was hardly a breach of fiduciary duty. To the extent that a breach of fiduciary duty occurred, however, there is no probative evidence that Snell & Wilmer substantially encourage or assisted any such breach. On the contrary, the Board could have selected any option it wanted to. There is not even a hint of a suggestion in this record that Snell & Wilmer even encouraged the Board to adopt any particular solution. There is also no evidence that Snell & Wilmer substantially assisted or encouraged the Cardwell settlement. Indeed, Snell & Wilmer played almost no role in that deal, which was negotiated between Mr. Cardwell and his counsel and Visitalk`s general counsel and was ultimately approved by the Board. There was no endorsement by or encouragement from Snell & Wilmer. F. Plaintiff is not Entitled to a One Year Preference Period.

Plaintiff`s suggestion that Snell & Wilmer ­ one of many law firms retained by Visitalk ­ controlled Visitalk is nothing short of ludicrous. (Response at 33). The Response points to 17
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 18 of 22

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

absolutely no admissible evidence that Snell & Wilmer exerted ­ or had the ability to exert ­ any control over the business operations of Visitalk. In re Friedman, 126 B.R.63, 70 (9th Cir. 1991); see also In re Fourthstage Technologies, Inc., 355 B.R. 155, 160 (Bankr. D. Ariz. 2006)12. Plaintiff`s characterization of Richard Mallery as a father figure to Peter Thimmesch is meaningless. Plaintiff provides no evidence that Mr. Mallery or any other lawyer at Snell & Wilmer gain[ed] an advantage attributable simply to affinity rather than to the course of business dealings between the parties. 126 B.R. at 70. Instead, Plaintiff engages in rhetorical hand-wringing; culminating in its claim that S&W held the power of life and death over Visitalk. (Response at 34). Aside from being cringingly overwrought, such claim simply ignores the unrefuted (and unrefutable) testimony of the person who hired Snell & Wilmer ­ Steven Best. Mr. Best established categorically that the relationship between Visitalk and Snell & Wilmer was a purely business relationship and not based on personal affinity. Mr. Best testified that he made the decision to hire Snell & Wilmer and that such decision was based purely on a business perspective. (SOF, ¶ 40.).13 Moreover, far from holding the life or death of Visitalk in its hands, Mr. Best testified that if Snell refused to do Visitalk`s work, he simply would have found another securities counsel. (Best Depo at 129:79). For these reasons, plaintiff`s reliance on In re Schuman, 81 B.R. 583 (9th Cir. 1987), Winnick v. Daddy`s Money of Clearwater, 187 B.R. 750 (Bankr. M.D. Fla. 1995), and Koch v. Rogers, 203 B.R. 385 (Bankr. Md. 1996) is completely misplaced. For instance, in Winnick, the debtor`s attorney unilaterally sold property of the debtor and deposited the payment for such property directly into his trust account. 187 B.R. at 755. The evidence further established that the lawyer issued checks from the corporation directly to himself on numerous occasions. Id. at 752.
12

25 26

Characteristically, Plaintiff does not cite nor address Friedman, Fourthstage, or any of the other legal authority cited by Snell & Wilmer. 13 Plaintiff`s preference expert testified that repeated requests for payment (which Snell & Wilmer made) demonstrated a creditor`s lack of control. (SOF, ¶ 41.) 18
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 19 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Based on this evidence, the district court concluded the debtor was totally and exclusively under the control of of the debtor`s counsel, and for this reason alone was the attorney properly imbued with insider status. Id. No such evidence exists in this case. No attorney at Snell & Wilmer had access to Visitalk`s property or bank accounts. No attorney at Snell & Wilmer exerted any control--let alone exclusive control--over Visitalk at any time. Thus, there is simply no evidentiary basis from which this Court could conclude that Snell & Wilmer was an insider for the purposes 11 U.S.C. § 547(b)(4)(B). For this reason, summary judgment must be entered on Plaintiff`s one year preference claim. 11 U.S.C. § 547(b)(4)(B). III. CONCLUSION. For the foregoing reasons, Snell & Wilmer is entitled to summary judgment on the issues raised herein. RESPECTFULLY SUBMITTED this 6th day of August, 2007. MARISCAL, WEEKS, McINTYRE & FRIEDLANDER, P.A.

By:

s/Timothy J. Thomason_ 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

19
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 20 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 to:

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

20
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 21 of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

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

21
Case 2:02-cv-02405-HRH
U:\ATTORNEYS\TJT\Snell & Wilmer adv. Visitalk\Snell Reply re MSJ\Snell Reply In Support of Partial MSJ 2 (filed 8-6-07).doc

Document 394

Filed 08/06/2007

Page 22 of 22