Free Statement - District Court of Arizona - Arizona

BILTMORE ASSOCIATES, AS TRUSTEE FOR THE VISITALK CREDITORS' TRUST
V.

PETER THIMMESCH AND CYTHIA THIMMESCH, ET AL.

Rebuttal Report By Stephen J. Scherf

May 21, 2007

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2 Penn Center Plaza · Suite 1730 · Philadelphia, PA 19102 · 215-568-5788 · FAX: 215-568-5769 · www.ESBA.com

PRIVILEGED CONFIDENTIAL ATTORNEY WORK PRODUCT

BILTMORE ASSOCIATES, AS TRUSTEE FOR THE VISITALK CREDITORS' TRUST
V.

PETER THIMMESCH AND CYTHIA THIMMESCH, ET AL.

May 21, 2007

At your request, we have analyzed the March 6, 2007 report of Michael A. Tucker ("Tucker") of FTI Consulting Inc. Tucker was engaged to review and critique our January 8, 2007 Preference Report ("Original Report") concerning the alleged preferential transfers (the "Transfers") made by Visitalk, Inc. ("Visitalk" or "Plaintiff") and/or related entities to Snell & Wilmer, LLP ("S&W" or "Defendant") within the one year Preference Period (the "Preference Period"). In addition, Tucker was engaged to provide his opinion on the amount of the S&W preference based upon the available information. The purpose of this report is to provide our observations and opinions with respect to Tucker's report.

The results of our analysis are presented in the following paragraphs. This report is structured as follows:

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I. II. III. IV.

Background Basis for Analysis Analysis Conclusion Exhibit

I.

BACKGROUND

On November 28, 2000 (the "Petition Date"), Visitalk filed a voluntary petition for relief under Chapter 11 of the United States Code in the District of Arizona. Biltmore

Associates, as Trustee for the Visitalk Creditors' Trust filed a civil proceeding ("Second Amended Complaint") related to a case arising under Chapter 11 of Title 11 of the United States Code. Count XXVII of the Second Amended Complaint alleges that Visitalk made certain preferential transfers to S&W totaling $720,829.92 during the one year prior to the filing date of the bankruptcy petition.1 Visitalk has alleged that Transfers totaling $720,829.92 constitutes avoidable Transfers during the Preference Period beginning November 29, 19992 and concluding on the aforementioned Petition Date.

II.

BASIS FOR ANALYSIS

The analysis and opinions in this report are based primarily upon the documentation available to date and my experience in performing similar financial analyses. I have been qualified and presented testimony on numerous occasions, including the presentation of financial analysis in courts throughout the United States. I am a Certified Public

Accountant, Certified Insolvency and Restructuring Advisor and have a Master of Science with a concentration in Finance. I have been employed as financial advisor to various Chapter 7 and Chapter 11 trustees. In my role as financial advisor to the trustee, I have performed numerous preferences analyses, which included analyzing defenses that would be asserted by the recipients of the alleged preferential payments. In addition, I

Count XXVII of the Second Amended Complaint alleges the necessary elements to have a preference period of one year rather than 90 days. 2 The first transfer during the one year period did not occur until December 30, 1999. Visitalk v. S&W

1

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have been employed by various recipients of alleged preferential payments in analyzing defenses with respect to those payments.

I am a Managing Director at Executive Sounding Board Associates Inc. ("ESBA"). Attached, as Exhibit A, is my current curriculum vitae and information concerning my testimony history, publications and speaking engagements.

I, and others under my direct supervision, have performed this analysis with the documentation available to date. Accordingly, we reserve the right to amend our analysis and this report should additional or updated information become available.

Our analysis was based primarily on the documentation and information listed in our Original Report and a copy of the Tucker report. The documents and information utilized are the types of documents and information experts in my field typically rely upon in performing such an analysis.

Our firm is being compensated at rates of $120 to $425 per hour. Our compensation is not contingent upon the outcome of this litigation.

III.

ANALYSIS

For purpose of our analysis, we have organized this report into the following sections: · · · · ·

Insolvency and Insider Status Flawed Methodology Ordinary Course Misleading Conclusion FTI Alternative Calculation

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A.

INSOLVENCY AND INSIDER STATUS

Visitalk has alleged that certain payments made to S&W during the Preference Period existing from November 29, 1999, through November 28, 2000, are preferential as defined under the United States Bankruptcy Code. Included in this allegation is the assertion that S&W was an insider and that Visitalk was insolvent during the period from November 29, 1999 through November 28, 2000. In our Original Report, we did not express an opinion on whether S&W was an insider and whether Visitalk was insolvent during the relevant period. We understand that with respect to insolvency and insider status, the Trustee will be putting forth other evidence establishing those elements of a preference. For purposes of our analysis, we had assumed that Visitalk was insolvent and S&W was an insider. Therefore the criticisms concerning these issues in the Tucker report was unwarranted.

The Tucker report seems to form an opinion with respect to the insider status of S&W. If Tucker's analysis is the sole basis for a determination of insider status, the analysis is deficient. It is our understanding that section 101(31) of the Bankruptcy Code is not an exhaustive list for the determination of insider status and therefore courts are left to determine whether a party is an insider on a case by case basis. Furthermore, we understand the legislative history of the bankruptcy code to define an insider as "one who has a sufficiently close relationship to the debtor that his conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor." Clearly, Tucker's analysis does not evaluate this standard.

B.

FLAWED METHODOLOGY

Tucker criticizes our report as not taking into account the overlapping ordinary course and new value defenses to the preference. As we noted in our report dated January 8, 2007, the ordinary course of business defense must be asserted and proven by the Defendant. In other words, the burden of proof that the payments were within the
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ordinary course of business rests with the Defendant.

Furthermore, the new value

defense must also be asserted and proven by the Defendant. As was noted in the Original Report, there were various issues concerning the quality of data received from the Defendant as shown below:

"We have been provided with data showing invoices and payments, but it is not clear which payments are paying which invoices. Generally, accounting department[s] apply payments to specific invoices rather than as general payments on account. This payment activity leads one to the conclusion that none of the payments were in the ordinary course of business and are therefore all recoverable as preferences."

Contrary to the assertions of Tucker, we did consider the overlapping nature of the ordinary course and new value defenses and came to the conclusion that based upon the data provided, there was no basis to assume that any of the payments were in the ordinary course leaving us to the conclusion that there was no overlapping defense applicable.

We anticipated that the Defendant would have produced additional documents to meet their defense burden. In addition, we anticipated that Tucker report would have provided an analysis of these issues or would have considered additional documents to shed light on the issues raised in our Original Report. Tucker's report contains no such analysis and does not list the types of documents that one would need to consider to perform such an analysis. Therefore, the Defendant through its expert Tucker has not established any basis to make a determination that the payments were in the ordinary course of business. Given the lack of data produced by the Defendant, we can only conclude that the criticism by Tucker is baseless.

C.

ORDINARY COURSE

Tucker contends that our Original Report does not provide sufficient basis for the determination of undue influence on Visitalk for payment. We respectfully disagree. Below is an excerpt from our Original Report that discusses this issue.

Based upon emails, correspondence and the documents that we analyzed, we have determined that the relationship was less than arms-length. For example, the emails and Visitalk v. S&W

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correspondence that was produced in discovery indicates that significant pressure was being applied to Visitalk to pay its legal bills, despite that some of these bills were only 30 days3 from the date of invoice at the time the pressure was being applied. Application of this type of pressure is not consistent with obtaining a payment within the ordinary course of business. Furthermore, most companies pay their invoices in the ordinary course of business by sending a check through the mail. Our analysis of the cancelled checks provided to S&W show that the majority of the checks that were delivered cleared the bank the same date as the date of the check. This can only occur in a situation when the check is handdelivered, picked up or post-dated and mailed to the customer for deposit on a specific day. In each of these instances, a payment of this type would not be one that would be in the ordinary course of business. Based upon the emails, it appears that S&W sent someone to physically pick up the checks. Based upon our analysis above, we have determined that none of the payments were in the ordinary course and therefore should all be deemed recoverable preferences.

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In an effort to clarify the basis for our conclusion, Attached as Exhibit B to this report are copies of some of the documents that we considered in forming the basis of our conclusion that Defendant provided significant pressure on Visitalk for payment.

D.

MISLEADING CONCLUSION

We respectfully disagree with Tucker's assertion that the conclusion is misleading. As shown in our Original Report, we noted that none of the payments were made in the ordinary course. Therefore all of the payments that total $720,829.92 constitute

avoidable Transfers during the Preference Period. As shown in Exhibit E of our Original Report, these preferences are offset by new value4 of $396,685.82 leaving a net preference of $324,144.10. The alternative calculation is nothing more than just that. This alternative calculation of ordinary course does not alter our opinion that based upon the documents that we considered; it is our opinion that the net preference recovery from S&W is $324,144.10.

As will be seen later in this report, an invoice at 30 days was well within the ordinary course for the industry. 4 It should be noted that our analysis of the "new value" defense has not attempted to make a determination of the value of the services billed on the invoices. To the extent that the quantification of the services as provided in the invoices were less than the "new value" provided our analysis would need to be adjusted accordingly. Visitalk v. S&W

3

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D. FTI ALTERNATIVE CALCULATION

We have analyzed the alternative calculation as provided by Tucker. Tucker assumes that S&W will be deemed not to be an insider. If Tucker is correct that S&W is not an insider, then we agree that the net preference due from S&W for the 90 day preference period is $4,574.61.

IV.

CONCLUSION

Based upon the foregoing, the opinion that we expressed in our Original Report remains unchanged. If in the alternative, if S&W is deemed not to be an insider, we concur with Tucker's conclusion that the net preference due for the 90 day preference period is $4,574.61.

Stephen J. Scherf, CPA, CFE, CrFA

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EXHIBIT A

ESBA
Management & Financial Consultants

STEPHEN J. SCHERF, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
EDUCATION: Mr. Scherf has a B.B.A. in Accounting from Temple University (1980) and a Master of Science in Finance (1986) and an Advanced Professional Certificate in Taxation (1987) from Drexel University. His education has been supplemented by various continuing education courses offered by a variety of professional organizations. He has spoken before professional and educational groups on various aspects of business valuation, litigation consulting, fraud investigations and economic damages. Licenses: Certified Public Accountant in Pennsylvania and Delaware

EMPLOYMENT/EXPERIENCE: Mr. Scherf has provided a wide array of accounting and consulting services to clients with an emphasis on business valuations, fraud investigations, bankruptcy, and litigation matters. Mr. Scherf has testified on numerous occasions in arbitrations, depositions and Federal Court. Mr. Scherf has taught for the American Institute of Certified Public Accountants, The National Association of Certified Valuation Analysts and other professional organizations. Mr. Scherf's employment experience includes "Big Four" regional and a "boutique" accounting firm. In the private sector, Mr. Scherf held officer positions at a $2.5 billion financial institution, a major real estate developer and an investment firm. ASSOCIATIONS: American Arbitration Association National Roster of Commercial Panel of Neutrals American Institute of Certified Public Accountants Delaware Society of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants (PICPA) PICPA Forensic/Litigation Services Committee PICPA Business Valuation Committee PICPA Committee on Cooperation with the Bars National Association of Certified Valuation Analysts (NACVA) NACVA Training Development Team NACVA Standards Committee American Bankruptcy Institute American College Board of Forensic Examiners Association of Certified Fraud Examiners Association of Insolvency and Restructuring Advisors Diplomate of the American Board of Forensic Accounting International Association of Consultants, Valuers and Analysts Institute of Business Appraisers Institute for Internal Controls Turnaround Management Association Case 2:02-cv-02405-HRH Document 384-41 Filed 07/24/2007 Page 9 of 49

Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure - Testimony
Date 2007 Jurisdiction United States Bankruptcy Court Eastern District of Pennsylvania United States District Court District of New Jersey Court of Common Pleas Philadelphia County United States Bankruptcy Court Eastern District of Pennsylvania United States District Court Eastern District of Pennsylvania Court of Chancery of the State of Delaware New Castle County Court of Common Pleas Philadelphia County, Pennsylvania United States Bankruptcy Middle District of Florida United States Bankruptcy Middle District of Florida Court of Common Pleas Allegheny County, Pennsylvania United States Bankruptcy Court District of Delaware Type Hearing Matter Elan Strominger v. Richard Giquinto

2007

Deposition

Balmoral Financial Corporation v. Prestige Capital Corporation Wood v. Grosso

2007

Trial

2006

Hearing

Frascella Enterprises, Inc.

2006

Deposition

AmerisourceBergen Drug Company v. American Associated Druggists d/b/a United Drugs Escalon Medical Corp. and Escalon Holdings, Inc. v. IntraLase

2006

Deposition

2006

Trial

Nathan R. Kurland v. Monika Turtle, Monika Turtle Studio and Monika Turtle Studio, Ltd. Maxxim Medical, Inc. v. Professional Hospital Supply, Inc. and Karen McCauley Maxxim Medical, Inc. v. Professional Hospital Supply, Inc. and Karen McCauley Aidan J. McKenna v. OpenWebs Corporation, CarParts Technologies, Inc., Mark Woodward and Paul Campbell Winstar Communications, Inc., et al. v. Lucent Technologies Inc.

2005

Trial

2005

Deposition

2005

Trial

2005

Trial

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure - Testimony
Date 2005 Jurisdiction American Arbitration Association Philadelphia, PA United States District Court Easter District of Pennsylvania United States District Court Eastern District of Pennsylvania United States Bankruptcy Court District of Delaware United States District Court Eastern District of Pennsylvania Court of Common Pleas, State of South Carolina, County of Richland Office of State Bank Commissioner State of Delaware Court of Common Pleas Bucks County, Pennsylvania Court of Common Pleas Luzerne County, Pennsylvania Court of Common Pleas, State of South Carolina, County of Richland United States Bankruptcy Court Eastern District of Pennsylvania Type Trial Matter Bachmann Industries, Inc. v. BDO Seidman, LLP

2005

Trial

United States of America v. Barry Budilov

2005

Deposition

Koken v. Viad Corp.

2004

Deposition

Neilson v. SMED International

2004

Trial

Out-A-Sight Pet Containment, Inc. v. Radio Systems Corporation, et al. Heritage Propane Partners, L.P. and Heritage Operating L.P. v. SCANA Corporation, et al. In the matter of Lehman Brothers Bank, FSB

2004

Trial

2004

Trial

2004

Trial

Andrew C. Monaghan, et al. v. Renu Labs, Inc. et al.

2004

Trial

Joseph LaRock, Cinda LaRock Danna, and Mary Louise LaRock Burke v. Board of Supervisors of Sugarloaf Township Heritage Propane Partners, L.P. and Heritage Operating L.P. v. SCANA Corporation, et al. ATS Products Corp. v. Willow Grove Bank

2004

Deposition

2004

Deposition

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure - Testimony
Date 2004 Jurisdiction American Arbitration Association Philadelphia, PA American Arbitration Association Philadelphia, PA United States District Court Eastern District of Pennsylvania American Arbitration Association Philadelphia, PA United States Bankruptcy Court District of Delaware United States District Court Eastern District of Pennsylvania American Arbitration Association Philadelphia, Pennsylvania Court of Common Pleas Carbon County, Pennsylvania Court of Common Pleas Susquehanna County, Pennsylvania United States District Court Southern District of New York Family Court of the State of Delaware New Castle County Type Trial Matter Horizon Stevedoring, Inc. v. Int'l Longshoremen's Association, et al.

2004

Trial

Valu Engineering, Inc. and Solus Industrial Innovations, LLC v. Nolu Plastics Inc., et al. Out-A-Sight Pet Containment, Inc. v. Radio Systems Corporation, et al. Valu Engineering, Inc. and Solus Industrial Innovations, LLC v. Nolu Plastics Inc., et al. Winstar Communications, Inc., et al. v. Lucent Technologies Inc.

2004

Hearing

2004

Deposition

2004

Deposition

2004

Deposition

Out-A-Sight Pet Containment, Inc. v. Radio Systems Corporation, et al. American Homestead Mortgage Corp. v. Wilmington Savings Fund Society, FSB Mahoning Valley Cinemas, Inc. v. Carriage Associates Limited Partnership, et al. Norman E. Turner v. The Turner Family Partners, L.P., et al.

2003

Trial

2003

Trial

2003

Trial

2003

Trial

Shared Communications Services, Inc. v. Goldenberg Rosenthal, LLP and David Gruber Carmen J. Facciolo, Jr. v. Pamela Joan Facciolo

2003

Trial

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure - Testimony
Date 2003 Jurisdiction Court of Common Pleas Philadelphia County Court of Common Pleas Philadelphia County American Arbitration Association Philadelphia, Pennsylvania Court of Common Pleas, State of South Carolina, County of Richland United States District Court Eastern District of Pennsylvania United States District Court Middle District of Pennsylvania United States Bankruptcy Court Western District of New York United States Bankruptcy Court Eastern District of Pennsylvania Type Trial Matter Aaron Wesley Wyatt v. Richard G. Phillips

2003

Trial

Pennsylvania Orthopedic Society v. Independence Blue Cross, et al.

2003

Trial

National Business Adjusters, Inc., and Gary Morgan v. Global Energy Resources, et al. Heritage Propane Partners, L.P. and Heritage Operating L.P. v. SCANA Corporation, et al. Out-A-Site Pet Containment, Inc. v. Radio Systems Corporation, et al. Jama Corporation v. Giriwarlal Gupta, et al.

2003

Deposition

2003

Deposition

2003

Trial

2002

Deposition

Corson Manufacturing Company

2002

Hearing

R&A Business Associates, Inc.

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure - Publications
Date 2002 2002 2002 2001 2000 2000 1999 Publication Parente Randolph Newsletter Parente Randolph Newsletter Parente Randolph Newsletter Pennsylvania Bar Institute ­ Business Divorce Small Business Journal Small Business Journal PICPA Mock Trial Program and PBI Litigating in Bankruptcy Court Programs National Association of Certified Valuation Analysts Pennsylvania CPA Journal Title Fraud on the Rise Shareholder Disputes Employee Fraud Business Divorce Valuing Your Business Crisis Management to Improve Profitability How to be an "Expert" Expert Witness

1999

Determining the Appropriate Valuation Method Self Study Course

1997

Discount and Capitalization Rates for Business Valuations: The Income Method

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure ­ Speaking Engagements
Date 2006 Description Discounting of Damages, Selecting Appropriate Discount Rate - Forensic & Litigation Services Conference Pennsylvania Institute of Certified Public Accountants Business Valuation: How to Make or Break Your Case Montgomery County Bar Association Pennsylvania Institute of Certified Public Accountants National Business Institute Financial Statement Analysis for the Non-Financial Advisor in Pennsylvania National Association of Certified Valuation Analysts Advanced Valuation and Case Study Workshop National Association of Certified Valuation Analysts Advanced Valuation and Case Study Workshop National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria National Association of Certified Valuation Analysts Advanced Valuation and Case Study Workshop Association of Government Accountants Philadelphia Chapter Business Valuation Fundamentals and Techniques Location King of Prussia, PA

2006

Norristown, PA

2006

Philadelphia, PA

2006

San Antonio, TX

2006

Chicago, IL

2005

Ft. Lauderdale, FL

2005

Jersey City, NJ

2005

Philadelphia, PA

2005

Lester, PA

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure ­ Speaking Engagements
Date 2005 Description Association of Government Accountants Philadelphia Chapter Ownership and Acquisition Disputes and the Role of the Forensic Accountant National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria AICPA Conferences on Fraud and Litigation Services Case Management Pennsylvania Institute of Certified Public Accountants Business Valuation Methods and Current Hot HV Topics National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria National Association of Certified Valuation Analysts Valuation Methods: Alternatives and Decision Criteria AICPA National Conference on Advance Litigation Services Purchase Price & Acquisition Disputes ­ Practical Application and Hot Issues Pennsylvania Institute of Certified Public Accountants Fraud and Internal Controls Location Lester, PA

2004

Las Vegas, NV

2004

Chicago, IL

2004

Phoenix, AZ

2003

Bethlehem, PA

2003

San Diego, CA

2003

New Orleans, LA

2003

Miami Beach, FL

2003

Hershey, PA

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure ­ Speaking Engagements
Date 2003 Description Institute of Internal Auditors Forensic Accounting National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method Pennsylvania Institute of Certified Public Accountants Not-For-Profit Fraud Schemes PA Department of Banking Fraud Red Flags Association of Government Accountants Forensic Accounting National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method Pennsylvania Bar Institute Business Divorce Pennsylvania Institute of Certified Public Accountants Accounting for Troubled Businesses - Practical Tips Location Pittston, PA

2002

Atlanta, GA

2002

Phoenix, AZ

2002

Toronto, Canada

2002

Hershey, PA

2002

Harrisburg, PA

2002

Philadelphia, PA

2001

Las Vegas, NV

2001

Orlando, FL

2001

Mechanicsburg, PA

2001

Valley Forge, PA

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Stephen J. Scherf, CPA/ABV, CFE, CICA, CIRA, CrFA, CVA
Rule 26 Disclosure ­ Speaking Engagements
Date 2001 Description Pennsylvania Institute of Certified Public Accountants Fraud, Testing and Internal Controls National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method Pennsylvania Institute of Certified Public Accountants Valuing Stock Options and Warrants National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method Pennsylvania Bar Institute ­ Finding Hidden Assets Seventh Annual Conference of Certified Valuation Analysts Valuation Methods ­ Pros & Cons National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method National Association of Certified Valuation Analysts Determining the Appropriate Valuation Method Pennsylvania Institute of Certified Public Accountants Pennsylvania Bar Education Center Mock Trial - Battling the IRS in District Court Location Hershey, PA

2000

Las Vegas, NV

2000

Valley Forge, PA

2000

Chicago, IL

2000 2000

Philadelphia, PA Dallas, TX

1999

New Orleans, LA

1999

San Raphael, CA

1999

Hyannis, MA

1999

Philadelphia, PA

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EXHIBIT B

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