Free Statement - District Court of Arizona - Arizona

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Christopher R. Kaup State Bar No. 014820
Third Floor Camelback Esplanade II 2525 East Camelback Road PHOENIX, ARIZONA 85016B4237 TELEPHONE: (602) 255-6000 FACSIMILE: (602) 255-0103

Counsel for Biltmore Associates, Trustee of the Visitalk Creditors' Trust

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA

BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, vs. PETER THIMMESCH and CYNTHIA THIMMESCH, husband and wife; MICHAEL O'DONNELL and MARSHA O'DONNELL, husband and wife; et al., Defendants.

Case No. 02-2405-PHX-HRH

STATEMENT OF FACTS IN SUPPORT OF MOTION FOR

SUMMARY JUDGMENT ON PLAINTIFF'S CLAIMS AGAINST PETER THIMMESCH
(Assigned to the Honorable H. Russel Holland)

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Biltmore Associates, LLC ("Biltmore"), the Plaintiff in the above action, pursuant
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to the provisions of the Rule 56, Federal Rules of Civil Procedure, hereby submits its Separate Statement of Facts in Support of its Motion for Summary Judgment on its claims against Peter Thimmesch. 1. Biltmore was appointed by the Bankruptcy Court in the bankruptcy case of

Visitalk.com, Inc. Bankruptcy Case No. 00-13035-PHX-RTB to serve as a Trustee for the Visitalk Creditors' Trust (the "Trust") created as part of Visitalk's confirmed Chapter 11

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Plan of Reorganization and then substituted as the Plaintiff in this action by Order of this
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Court dated January 31, 2005.

Affidavit of Vernon Schweigert (the "Schweigert

Affidavit") at ¶3, attached hereto as Exhibit "1"; 2. On March 18, 2005 Plaintiff served on Thimmisch its "First Requests For

Admission Of Documents (sic) On Defendant Peter Thimmesch." (hereinafter "Requests
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for Admission"). Thimmesch failed to respond at any time with answers to the Requests for Admission in accordance with the rule. Declaration of Christopher R. Kaup, Esq., (the "Kaup Declaration") at ¶__, attached hereto as Exhibit "2"; 3. Visitalk was incorporated in the State of Arizona on September 3, 1998, but

had become insolvent by November of 1998. Schweigert Affidavit, ¶5, Exhibit "1"; 4. The initial shareholders of Visitalk, based on its corporate records, were

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Peter Thimmesch ("Thimmesch"), Michael O'Donnell and Mark Cardwell. Thimmesch was the Chief Executive Officer and a Director of Visitalk and Mr. O'Donnell was its President and another member of the board of directors. Exhibit "1"; 5. In September, 1998, Visitalk raised money through the sale and issuance of Schweigert Affidavit, ¶6,

"Series A Preferred Stock" to individual investors (the "Series A Offering"). Visitalk sold Series B preferred stock to investors in October and November, 1998 (the "Series B

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Offering") and sold Series C preferred stock to investors 1999 (the "Series C Offering"). Schweigert Affidavit, ¶7, Exhibit "1"; 6. The original versions of the corporate records and documents of Visitalk

bearing dates in September of 1998 were not prepared until after September of 1998. Thimmesch decided in late October or early November of 1998 that he needed protection against the dilution that his ownership interest in Visitalk would bear through the

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conversion of the Series A and Series B Preferred Stock into common stock and future offerings of stock. Requests for Admission, Nos. 6 & 8, at p. 4, attached as Exhibit "H" to the Kaup Declaration, at ¶2, attached hereto as Exhibit "2"; 7. The Board of Directors of Visitalk did not have a meeting in September of

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1998 at which the directors authorized the issuance of 7,650,000 warrants to purchase Visitalk's common stock at a price of $0.135 per share to Thimmesch and Mr. O'Donnell (the "Founders Warrants"). The Founders' Warrants were never validly or legally

authorized or issued to Thimmesch and Mr. O'Donnell. Requests for Admission, Nos. 9 & 11, at pp. 4 - 5, attached as Exhibit "H" to the Kaup Declaration, at ¶2, attached hereto as Exhibit "2";

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8.

While Thimmesch was an employee of Visitalk, the technology products

and services of Visitalk had limited scalability and could not support a sufficient number of concurrent users to make those products and services commercially viable. Visitalk did not have did not have a commercially viable product capable of generating income from operations sufficient to pay its obligations and debts as they came due during 1999 and did not have a reasonable prospect of doing so within the next twenty-four months. Requests for Admission, Nos. 34, 35 & 36, at pp. 8 - 9, attached as Exhibit "H" to the

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Kaup Declaration, at ¶2, attached hereto as Exhibit "2"; 9. A document entitled "Action by Unanimous Consent" of the Plaintiff's

Board of Directors purports that the Visitalk Board of Directors authorized the issuance of the Founders Warrants "as of" September 12, 1998. However, the Action by

Unanimous Consent was not created until November of 1998. Requests for Admission, Nos. 7, at p. 4, attached as Exhibit "H" to the Kaup Declaration, at ¶2, attached hereto as

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Exhibit "2"; Letter from Michael Donahey at Snell & Wilmer to Steve Best at Visitalk, dated July 28, 1999, attached as Exhibit "B" to the Kaup Declaration, at ¶3, attached hereto as Exhibit "2"; 10. Defendant Snell & Wilmer, LLP ("S&W"), was retained to represent

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Visitalk in late June of 1999. S&W prepared a document in July, 1999, stating that the issuance of the Founders Warrants to Thimmesch and O'Donnell constituted a breach of fiduciary duty and the agreements with the Series A investors and those investors held claims against the company, Thimmesch and O'Donnell. S&W also prepared a

document in July, 1999, advising of potential violations of federal and state securities laws by Visitalk in its Series A and Series B stock offerings and a subsequent "Series C"

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offering of preferred stock. Letter from Michael Donahey at Snell & Wilmer to Steve Best at Visitalk, dated July 28, 1999, attached as Exhibit "B" to the Kaup Declaration, at ¶3, Exhibit "2"; Letter from Michael Donahey at Snell & Wilmer to Steve Best at Visitalk, dated July 15, 1999, attached as Exhibit "C" to the Kaup Declaration, at ¶4, Exhibit "2"; 11. In connection with the Series A Offering, no disclosure was made by

Thimmesch and Visitalk regarding the alleged existence of warrants to purchase
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Visitalk's common stock at an exercise price of $0.1375 per share (the "Founders' Warrants") claimed to have been issued to Mr. O'Donnell and Thimmesch in September, 1998. Schweigert Affidavit, ¶8, Exhibit "1" 12. No disclosure was made by Thimmesch and Visitalk to the investors who

purchased preferred stock through the Series B Offering regarding the exercise price of the Founders Warrants, the claims held by investors who had purchased stock in the

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Series A Offering, whether Visitalk's securities offerings were in compliance with "Regulation D" of the securities laws, whether those offerings were "integrated" and exempt from registration under the securities laws, and the fact that a significant number of persons who purchased stock in the Series A Offering were "non-accredited"

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investors. Schweigert Affidavit, ¶9, Exhibit "1"; 13. No disclosure was made by Thimmesch and Visitalk to persons who

purchased stock through Visitalk's Series C Offering and subsequent private offerings of securities by Visitalk regarding the claims held by investors who had purchased stock in the Series A Offering, the claims held by investors in the Series B Offering, lawyers at S&W had advised or concluded that Visitalk's securities offerings may not have been in

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compliance with "Regulation D" of the securities laws, those offerings may have been "integrated" and not exempt from registration under the securities laws, and a significant number of persons who purchased stock in the Series A Offering were "non-accredited" investors. Schweigert Affidavit, ¶10, Exhibit "1"; 14. Visitalk was insolvent from November of 1998 through the date of its Schweigert Affidavit, ¶11, Exhibit "1; Expert

bankruptcy on November 29, 2000.

Witness Report of Renee Jenkins, attached as Exhibit "D" to the Kaup Declaration, at ¶5,
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Exhibit "2"; 15. S&W concluded that Mr. Thimmesch and other officers of Visitalk

breached their fiduciary duties to Visitalk and agreements with the Series "A" investors. Schweigert Affidavit, ¶12, Exhibit "1; Letter from Michael Donahey at Snell & Wilmer to Steve Best at Visitalk, dated July 28, 1999, attached as Exhibit "B" to the Kaup Declaration, at ¶3, Exhibit "2";

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16.

The claimed issuance and then back dating of the Founders Warrants and

failure to disclose this information was material to the investors. Transcript of Deposition of Investor Steve DelBianco, at p. 13, ln. 13 ­ p. 14, ln. 8, p. 23, ln. 15 ­ p. 25, ln. 6, p. 44, ln. 10 ­ p. 48, ln. 1, p. 51, ln. 5 ­ p. 52, ln. 10, attached as Exhibit "E" to the Kaup

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Declaration, at ¶6, Exhibit "2"; 17. Vernon Schweigert, as the managing member of Biltmore, the Trustee of

the Trust, has determined that the conclusion of S&W that Mr. Thimmesch breached his fiduciary duties to Visitalk was correct and further determined that persons who purchased stock from Visitalk in its Series A, B and C offerings held claims against the company as a consequence of those breaches of fiduciary duty. Schweigert Affidavit,

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¶13, Exhibit "1; 18. The Bankruptcy Court in the Visitalk bankruptcy case has acknowledged

that all persons who purchased stock from Visitalk in its Series A, B, and C offerings hold claims against the company, subordinated for purposes of distributions to certain other holders of claims, and Biltmore, as the Trustee of the Trust, is authorized to make distributions to the holders of claims based upon their purchase of securities of Visitalk. Schweigert Affidavit, ¶15, Exhibit "1; Order Clarifying Article XII of the Confirmed

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Plan, dated December 15, 2004, attached as Exhibit "F" to the Kaup Declaration, at ¶7, Exhibit "2"; 19. A letter and a Release agreement sent by Visitalk to Series A investors

failed to include complete and truthful information regarding the claimed existence of the Founders Warrants and falsely implied the warrants had been issued and existed prior to the sale of the Series A stock to those investors. Schweigert Affidavit, ¶15, Exhibit "1;

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20.

Visitalk and Thimmesch failed to obtain effective releases of the claims

held by the Series A investors and failed to make a rescission offering to the Series A, B and C investors. Schweigert Affidavit, at ¶16, Exhibit "1"; 21. Ray Gaston, Visitalk's former controller, also a lawyer and accountant,

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testified in a deposition that Mr. Thimmesch breached his fiduciary duties to Visitalk. Mr. Gaston also testified that he understood the Series A, B and C investors held claims against Visitalk due to the actions relating to the Founders Warrants and the other securities law problems of the company. According to Mr. Gaston, the fable of The Emperor Has No Clothes is an appropriate analogy to what Visitalk really was during 1999 and 2000. Transcript of Deposition of Ray Gaston, at p. 72, ln. 25 ­ 73, ln. 4, p.

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128, ln 17 ­ 23, p. 225, ln. 22 ­ p. 226, ln. 5, p. 273, ln. 25 ­ 274, ln 13, attached as Exhibit "G" to the Kaup Declaration, at ¶8, Exhibit "2";
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Visitalk never had a commercially viable product or technology prior to its

bankruptcy according to the testimony of Mr. Gaston, James Fallon, the former head engineer at Visitalk, and Debra Kuhns, Visitalk's former Vice President of Marketing. Transcript of Deposition of Ray Gaston, at p. 272, ln. 21 - 25, attached as Exhibit "G" to the Kaup Declaration, at ¶8; Transcript of Deposition of James Fallon, at p. 10, ln. 2 ­ p.

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11, ln. 8, p. 20, ln. 5 ­ p. 22, ln. 22, p. 27, lns. 5 ­ 9, p. 32, ln. 10 ­ p. 33, ln.8, p. 35, ln.5 ­ p. 41, ln. 4, p. 44, lns. 9 ­ 15, p. 46, lns. 11 ­ 13, p. 47, lns. 12 ­ 19, p. 57, ln. 7 ­ p. 58, ln. 2, p. 61, lns. 2 ­ 14, attached as Exhibit "H" to the Kaup Declaration, at ¶9; Transcript of Deposition of Debra Kuhns, at p. 27, lns. 10 - 15, p. 34, ln. 18 ­ p. 35, ln. 8, attached as Exhibit "I" to the Kaup Declaration, at ¶10, Exhibit "2"; Schweigert Affidavit, at ¶17, Exhibit "1";

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23.

Visitalk spent over $2,000,000.00 in corporate funds for tenant

improvements, furniture, fixtures and equipment in a building that Visitalk first occupied in or about April 2000 just months before its bankruptcy. These expenditures were not needed and grossly excessive. Schweigert Affidavit, at ¶18, Exhibit "1"

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Visitalk did not have formal written policies and procedures to govern

business expense reimbursement and corporate conduct from January of 1999 through June of 2000. In one quarter, Visitalk spent in excess of $1,153,000 on travel and entertainment and received revenue of less than $60,000 as a result of those expenditures. It is my understanding that, due to the lack of internal controls, Peter Thimmesch was able to cause Visitalk to incur and reimburse him for at least $235,000 of expenses for

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which no or inadequate documentation or justification was provided, were excessive or which, in reality, were personal expenses. Schweigert Affidavit, at ¶19, Exhibit "1"; 25. Visitalk paid over $1,000,000 to acquire a billing system from a company

named Portal Software, Inc., even though Visitalk had no customers to bill. Visitalk also paid approximately $750,000 to Oracle for an accounting system, even though it had no revenue and no need for a sophisticated accounting system. In addition, Visitalk paid approximately $2,000,000 for consulting services related to the Portal billing system and

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Oracle accounting system. Schweigert Affidavit, at ¶20, Exhibit "1" 26. Visitalk had no need for the Portal billing software and system at the time it

agreed to purchase that product and hire Ernst & Young to provide consulting services regarding that product. Visitalk also had no need for the Oracle software and system at the time it agreed to purchase that product and hire Ernst & Young to provide consulting services regarding that product. Visitalk' Board of Directors did not investigate, analyze

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and competitively bid billing and accounting software and systems and consulting services regarding such software and systems and was not adequately informed about the need or lack thereof for the Portal billing software and the Oracle accounting software. Schweigert Affidavit, at ¶21, Exhibit "1"; Requests for Admission, Nos. 19, 20, 26 & 27,

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at pp. 6 - 7, attached as Exhibit "A" to the Kaup Declaration, at ¶2, attached hereto as Exhibit "2"; 27. Visitalk entered into a transaction with MP3.com, Inc. ("MP3"), in early

2000 in order to create the false impression of substantial income to Visitalk and MP3 and that Visitalk was solvent. Visitalk transferred $5,303,000.00 to MP3 in 2000 and did not receive reasonably equivalent consideration in exchange for those transfers.

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Requests for Admission, Nos. 29 & 30, at p. 8, attached as Exhibit "A" to the Kaup Declaration, at ¶2, attached hereto as Exhibit "2"; 28. Visitalk terminated Mark Cardwell as an employee for cause at the end of

1999 but entered into a Settlement, Separation and Release Agreement (the "Cardwell Agreement") because Thimmesch was concerned that the original corporate documents and records of Visitalk would become known to shareholders of Visitalk and/or the general public as a result of or through litigation with Mr. Cardwell.. Requests for

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Admission, Nos. 13, 15 & 16, at p. 5, attached as Exhibit "A" to the Kaup Declaration, at ¶2, attached hereto as Exhibit "2". As part of the Cardwell Agreement, Visitalk diverted the corporate opportunity to receive $1.2 million in proceeds from the sale of common stock to Mr. Cardwell in May, 2000, and, as a result, Visitalk's assets were diminished by approximately $1,000,000.00. Transcript of Deposition of Ray Gaston, at p. 259, ln. 6 ­ p. 261, ln. 10, attached as Exhibit "E" to the Kaup Declaration, Exhibit "2";

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29. Exhibit "1"; 30.

Visitalk actually was a "Ponzi scheme." Schweigert Affidavit, at ¶22,

Thimmesch negligently failed to investigate and to supervise the need for

and implementation of accounting and operating controls for the expenditure of funds by
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employees, including himself, and the recovery of funds expended by him. Schweigert Affidavit, at ¶23, Exhibit "1"; Transcript of Deposition of Debra Kuhns, at p. 7, lns. 3 ­ 15 ­ p. 8, ln. 5, p. 12, ln. 24 ­ p. 13, ln. 5, p. 15, lns. 2 ­ 7, p. 40, ln. 13 ­ p. 41, ln. 5, p. 65, ln. 24 ­ p. 66, ln. 13, p. 67, lns. 8 ­ 17, p. 68, ln. 23 ­ p. 71, ln. 12, attached as Exhibit "G" to the Kaup Declaration Exhibit "2"; 31. Thimmesch negligently failed to investigate and analyze the need for or

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value of a $1 million dollar license to use the Portal billing software and the substantial and highly priced consulting services proposed to be rendered by and the large consulting fees proposed to be paid to Ernst &Young in connection with and to customize such software for Visitalk's use. Schweigert Affidavit, at ¶24, Exhibit "1"; 32. Thimmesch negligently failed to investigate and analyze the need for or

value of purchasing accounting software from Oracle Corporation for $750,000.00, and the substantial and highly priced consulting services proposed to be rendered by and the

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large consulting fees proposed to be paid in connection with the Oracle accounting software and to obtain competitive bids for such software and consulting services. Schweigert Affidavit, at ¶25, Exhibit "1"; 33. Thimmesch negligently failed to investigate the capital structure of

Visitalk, including the claimed issuance of securities to insiders, the commercial viability of Visitalk's product, he and Visitalk were, in reality, operating a Ponzi

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scheme, and Visitalk's deepening insolvency and/or failing to adequately supervise disclosures made to creditors and investors regarding such matters and the information received from and/or conclusions by Visitalk's lawyers regarding: (a) the date of the authorization and issuance of the Founders Warrants, (b) Visitalk's securities offerings

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were not in compliance with "Regulation D" of the securities laws, (c) those offerings may have been "integrated" and not exempt from registration under the securities laws, and (d) persons who purchased stock in the Series A offering were "non-accredited" investors. Schweigert Affidavit, at ¶26, Exhibit "1"; 34. This Court has already found and determined by stipulated judgment that

Mr. O'Donnell, the president of Visitalk and another board member with Mr.
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Thimmesch, breached his fiduciary duties to the company by negligently failing to investigate the capital structure of Visitalk, including the claimed issuance of securities to insiders, the commercial viability of Visitalk's product and its deepening insolvency and/or failing to adequately supervise disclosures made to creditors and investors regarding Visitalk's capital structure, the information received from and/or conclusions by Visitalk's lawyers regarding: (a) the date of the authorization and issuance of the Founders Warrants, (b) Visitalk's securities offerings were not in compliance with

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"Regulation D" of the securities laws, (c) those offerings may have been "integrated" and not exempt from registration under the securities laws, (d) persons who purchased stock in the Series A offering were "non-accredited" investors, and (e) Visitalk's lack of a commercially viable product and Visitalk's deepening insolvency. See Judgment, at Docket No. 299;

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35.

This Court has also found and determined by stipulated judgment that the

actions Cynthia Thimmesch, Thimmesch's former wife and a former officer of Visitalk, in connection with the Founders' Warrants comprised a breach of her fiduciary duties and loyalties to Visitalk and contributed to the insolvency of Visitalk by causing liability

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to investors who purchased Visitalk securities. See Judgment, at Docket No. 279; 36. The actions and inactions by Mr. Thimmesch as an officer and director of

Visitalk caused claims to arise against and debt to be incurred by Visitalk and artificially prolonged Visitalk's life and deepened its insolvency. Schweigert Affidavit, at ¶27, Exhibit "1"; 37. Visitalk suffered actual damages in an amount not less than $54,870,646.00

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as a direct, proximate and foreseeable result of the breaches by Mr. Thimmesch of his duties as Chief Executive Officer and a board member of Visitalk. Schweigert Affidavit, at ¶28, Exhibit "1";
RESPECTFULLY SUBMITTED this 7th day of June, 2007. TIFFANY & BOSCO, P.A.

By: ____/s/ CRK #014820__________ Christopher R. Kaup, Esq. Jeffrey A. Sandell, Esq. Attorneys for Plaintiff

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