Free Motion for Partial Summary Judgment - District Court of Arizona - Arizona

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Gary L. Birnbaum (#004386) [email protected] Charles S. Price (#006197) [email protected] Timothy J. Thomason (#009869) [email protected] Scot L. Claus (#14999) [email protected] MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. 2901 North Central Avenue, Suite 200 Phoenix, Arizona 85012-2705 Phone: (602) 285-5000 Fax: (602) 285-5100 Attorneys for Defendant Snell & Wilmer, LLP IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, CASE NO. CIV 02 2405 PHX HRH MOTION FOR PARTIAL SUMMARY JUDGMENT And MEMORANDUM IN SUPPORT (Assigned to the Honorable H. Russell Holland) (Oral Argument Requested) Pursuant to Rule 56 of the Federal Rules of Civil Procedure, Defendant Snell & Wilmer, LLP ("Snell & Wilmer") moves the Court for summary judgment on plaintiff's claims for professional malpractice, negligent misrepresentation, and aiding and abetting breach of fiduciary duty, as well as its bankruptcy preference claims based upon a one year look back period. As explained in the accompanying Memorandum of Points and Authorities, Snell & Wilmer is entitled to judgment as a matter of law for the following reasons: A. There is no admissible evidence that Snell & Wilmer violated the requisite

14 v. 15 PETER THIMMESCH, et al., 16 Defendants. 17 18 19 20 21 22 23 24 25 26

standard of care; B. Plaintiff's claims are barred by the in pari delicto doctrine;

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C.

Plaintiff's "deepening insolvency" claim fails because the potential claims that

are alleged to have created the supposed insolvency were never asserted, do not now exist, and/or are barred and precluded as a matter of law; D. There is no admissible evidence that Snell & Wilmer proximately caused

plaintiff to incur any damages; E. The professional negligence claims were not assignable to the plaintiff as a

matter of law. Therefore, plaintiff lacks standing to assert those claims; F. Plaintiff has no viable claim for aiding and abetting a breach of fiduciary duty;

G.

Plaintiff is not entitled to pursue a preference claim based upon a "one-year"

preference period. In addition to the following Memorandum of Points and Authorities, this Motion is supported by the accompanying Statement of Undisputed Facts.

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MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION. A. Summary of Position Though cloaked in the guise of a legal malpractice claim against Snell & Wilmer, this case is, in fact, an attempt by an unrelated third party that had nothing to do with Visitalk, Snell & Wilmer, or the attorney-client relationship to exploit the misfortune of a dot com enterprise that suffered the same fate as hundreds of other such entities. Plaintiff`s claim that Snell & Wilmer committed malpractice, and thus participated in the deepening insolvency of Visitalk.com, Inc. (Visitalk), suffers from a host of fatal substantive shortcomings. Plaintiff`s malpractice claim amounts to this: When Snell & Wilmer was hired by Visitalk in June 1999, they learned of potential securities problems that had arisen in 1998, while Visitalk was represented by Bryan Cave (which was not joined in this action, for reasons still unexplained). One of the issues identified by Snell & Wilmer involved the authorization of the issuance of Founders` Warrants to the two founders of Visitalk, Peter Thimmesch and Michael O`Donnell. It bears repeating: Snell & Wilmer did not represent Visitalk when the Founders of the corporation claimed to have authorized the issuance of the Founders Warrants, nor did Snell & Wilmer represent Visitalk when the Board executed a Unanimous Consent authorizing the issuance of Founders Warrants to Peter Thimmesch and Michael O`Donnell. Snell & Wilmer did not represent Visitalk when Visitalk offered private securities to Series A investors, Serves B Investors, or Series C investors1. It is undisputed that the term sheets disseminated to Series A investors did not disclose the existence of the Founders Warrants. Thus, Series A investors did not initially know that

After being retained by Visitalk, Snell & Wilmer advised Visitalk to distribute an Updated Confidential Information Statement to Series C investors.
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their ownership interest in Visitalk was less than the ownership interest indicated by the Series A term sheet. When Snell & Wilmer was retained in June 1999 to replace Bryan Cave as outside securities counsel, Snell & Wilmer promptly discovered that Series A shareholders had not been properly disclosed the existence of the Founders Warrants. Therefore, Snell & Wilmer provided legal advice to Visitalk`s in-house general counsel, Steven Best, and Board of Directors regarding possible ways in which to solve the Founders warrants problem. Snell & Wilmer gave legal advice regarding the Founders` Warrants and related securities issues. Snell & Wilmer believes, and Visitalk management believed, that the

problem was completely resolved by a combination of written releases by, and disclosures to, Visitalk`s various rounds of investors. Plaintiff disagrees. Plaintiff contends that the releases and disclosures were ineffective, and that all of Visitalk`s investors continued to have potential claims against the company. Plaintiff`s entire malpractice case is predicated on the following misguided syllogism: 1) the alleged potential claims held by Series A shareholders constituted debt of the Visitalk; 2) such debt caused Visitalk to be insolvent from the time Visitalk issued its first share of stock; 3) the claims and insolvency were not disclosed to future shareholders; 4) thus, every subsequent shareholder also had potential claims (which, according to Plaintiff`s tortured logic also constituted debt that caused Visitalk to be insolvent); 5) therefore, Visitalk`s insolvency was deepened each and every time a share of Visitalk stock was sold. Irrespective of the patent fallacies that undermine the logic of Plaintiff`s argument, Plaintiff`s position is also factually flawed. Indeed, Plaintiff`s argument requires the Court to ignore that no investor ever brought a claim against Visitalk arising out of the Founder's Warrants. No investor ever threatened such a claim; no such claim was asserted in the bankruptcy; Visitalk never mentioned the possibility of such claims on its bankruptcy: (i)

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Schedule of Assets and Liabilities filed under oath; (ii) monthly bankruptcy operating reports; and (iii) Chapter 11 Disclosure Statements, all submitted to the bankruptcy court; any such claims are now absolutely precluded by the confirmation of the bankruptcy plan; and no member of Visitalk`s former management thinks the Founders` Warrants had anything to do with the company`s demise. B. Bases for Dismissal of Plaintiff's Claims as a Matter of Law:

Again, Plaintiff`s claim of deepening insolvency rests on potential claims by Visitalk shareholders that were never made, threatened or mentioned before or even during the company`s bankruptcy proceedings. Such phantom claims are irrelevant to a company`s true financial picture. Plaintiff Biltmore Associates is the assignee only of Visitalk`s claims, not of any third parties, such as shareholders, and thus has no standing to assert such claims nor to obtain damages based thereon. Plaintiff`s malpractice and damages experts are each so unqualified to provide the opinions they express in this case, and their opinions are so flawed, that there is a total failure of admissible evidence on key elements of plaintiff`s case. Any claims by Visitalk itself would have been barred--and are thus barred as to Visitalk`s assignee--by the doctrine of in pari delicto. Visitalk was a close, willing and knowledgeable participant in all the decisions and actions here challenged. Plaintiff`s claim for aiding and abetting a breach of fiduciary duty cannot stand, since there is no evidence that Snell & Wilmer did anything to assist any such breach; no evidence of the requisite state of mind on the part of Snell & Wilmer, and no evidence of any damages flowing from the alleged conduct. Other peripheral claims, such as those involving Snell & Wilmer`s work in connection with a settlement with former Visitalk Director Mark Cardwell and in connection with expenses incurred by Visitalk`s CEO, as well as plaintiff's attempt to assert a one-year

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preference period and thus to recover some of the attorney`s fees paid to Snell & Wilmer, lack factual or legal support and must be rejected. Each of these fatal flaws in plaintiff`s case is discussed in further detail below, after we put them in their proper factual context. II. A. FACTUAL BACKGROUND AND ALLEGATIONS OF THE COMPLAINT. Visitalk's Business Model/Snell & Wilmer's Role/Plaintiff's Claims in General.

From June 1999 until November 2000, Snell & Wilmer (along with several other law firms) provided legal services to Visitalk. Visitalk was formed in 1998 by Peter Thimmesch 9 and Michael O'Donnell to provide a static Internet directory. (Statement of Undisputed Facts 10 11 long-distance telephone and videoconference calls using the Internet. 12 subscribers would also have a permanent identification number that would serve as their 13 14 they were connected to the Internet. Visitalk provides those same products and services today 15 16 17 The law firm of Bryan Cave initially acted as primary outside counsel for Visitalk. 18 (SOF, ¶ 12.) In particular, Bryan Cave represented Visitalk in connection with its offering of 19 20 Cave's performance, Visitalk retained Snell & Wilmer in June 1999. (SOF, ¶ 13.) As part of 21 its initial work, Snell & Wilmer identified several serious legal issues regarding Visitalk's 22 securities, including potential problems with warrants Visitalk had ostensibly authorized to be 23 24 Like hundreds of other aspiring "dot com" entities that were dependent on investor 25 26 funding in their early stages, Visitalk had financial problems when the dot com "bubble burst issued to Messrs. Thimmesch and O'Donnell (the Founders' Warrants"). (SOF, ¶ 15.) privately placed securities in 1998 and 1999. (Id.) Due to Visitalk`s unhappiness with Bryan (a fact which, by itself, refutes the underlying premise of plaintiff`s claim that the Visitalk business model was a Ponzi scheme that could not possibly succeed). (SOF, ¶ 2.) phone number, allowing them to place and receive calls anywhere in the world, so long as (Id.) Visitalk (SOF), ¶ 1.) Among other things, such a directory would allow computer users to place

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in April 2000. On November 29, 2000, Visitalk filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Arizona, Case No. 00-13035-PHX-RTB. (SOF at ¶ 3) (the Visitalk Bankruptcy). Biltmore Associates, as Trustee for the Visitalk Creditor's Trust, has now asserted claims against Snell & Wilmer and others as the assignee of Visitalk's claims against third parties. B. Plaintiff's Specific Claims; Summary of Snell & Wilmer Position a. The Legal Claims Plaintiff asserts four (4) causes of action against Snell & Wilmer; the Twenty-Fourth, Twenty-Fifth, Twenty-Sixth and Twenty-Eighth Claim for Relief in the Second Amended Complaint. The Twenty-Fourth Claim for Relief in the Second Amended Complaint is a claim for professional malpractice. The Complaint alleges that Snell & Wilmer breached its duties in connection with: a. b. c. d. The Founder`s Warrants; The Thimmesch expense; The Cardwell settlement; and A transaction involving MP3.2

The Twenty-Fifth Claim for relief alleges that Snell & Wilmer made negligent misrepresentations to Visitalk`s Board of Directors and Series A Shareholders. (Complaint; ¶ 39.) Although deemed a claim for negligent misrepresentation, the claim is really nothing more than a restated claim for professional negligence.3 The Twenty-Sixth Claim for relief is a claim for aiding and abetting breach of fiduciary duties. Once again, the alleged breach pertained to the same topics that were the subject of the professional malpractice claim.
2

No expert opinions are proffered in connection with MP3. In light of that failure of proof, Snell & Wilmer is entitled to summary judgment on such claims.
3

Plaintiff has no standing to assert claims on behalf of Series A Shareholders, which are barred and precluded in any event.
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Finally, the Twenty-Eighth Claim for relief seeks recovery of certain alleged preferential payments made to Snell & Wilmer. Plaintiff seeks a one year look back period. b. Founders' Warrants Months before Snell & Wilmer was retained, Bryan Cave helped create a document entitled "Action by Unanimous Consent." (SOF, ¶ 14.) That document reflects that as of September 12, 1998, Visitalk's Board of Directors authorized the issuance to Messrs. Thimmesch and O'Donnell of 7,650,000.00 warrants to purchase Visitalk common stock (the "Founders' Warrants"). (Id.) Plaintiff alleges that the Action by Unanimous Consent was not created until November 1998 and was not executed by any member of the board of directors until after Mr. Mark Cardwell became a director. As such, says the plaintiff, the Action by Unanimous Consent was never signed by Mr. Cardwell and therefore is legally ineffective. Plaintiff also argues that the Board action supposed to have taken place on September 12, 1998 meeting did not actually take place.4 Plaintiff hinges most of its claims on these supposed flaws in the issuance of the Founders` Warrants. Plaintiff argues that Visitalk shareholders were not properly apprised of those flaws and thus had potential claims against Visitalk. Plaintiff further argues that such potential claims constituted debt of the company, and that such debt in turn, allegedly rendered the company insolvent essentially at its inception. Critically, Plaintiff`s theory ignores that not one such claim was asserted or even threatened before or during the bankruptcy proceeding; such claims were all expressly released in writing, and they are all now time barred. Plaintiff seems determined to make the Founders` Warrants issue as complex as possible. The heart of the matter, as it relates to this motion, is simple:
4

Plaintiff makes such claims despite the fact that four people testified that they personally attended the September 12 meeting and that the Founder`s Warrants action was taken, and no one testified otherwise; and despite the fact that every eyewitness including Mr. Cardwell insisted that he was not a director at that time and therefore did not have to be part of the decision. (SOF, ¶ 20).
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The Founders` Warrants issue arose before Snell & Wilmer was retained; Snell & Wilmer proposed several possible solutions to the Founders` Warrants issue; The resolution of the Founders` Warrants that was adopted by Visitalk was not even proposed by Snell & Wilmer, and in fact a different law firm was consulted regarding the chosen solution; No claim was ever made against Visitalk as a result of the Founders` Warrants issue; Visitalk`s financial woes were entirely unrelated to that issue. c. Cardwell Settlement

8 In January 2000, a shareholder/director and early employee, Mark Cardwell, was 9 terminated by the Company for "cause." 10 threatened legal action. (SOF, ¶ 30.) His dispute was settled as a result of a lengthy back and 11 forth between the parties, with experienced counsel on both sides. (Id.) The "Settlement 12 Separation and Release Agreement" between Mr. Cardwell and Visitalk that was signed by the 13 parties on May 10, 2000, provided that Visitalk would find purchasers for 500,000.00 shares 14 of Mr. Cardwell's stock at the price of $2.42 per share. (Id.) Visitalk management thought this 15 was a good way to work out the differences with Mr. Cardwell, since it created a win-win 16 situation. (Id.) Indeed Visitalk recovered significant funds when the stock was sold since the 17 18 19 constituted malpractice. 20 d. Thimmesch Expenses 21 In the Spring and Summer 2000, Visitalk discovered that Mr. Thimmesch had incurred 22 a large amount of personal expenses, which had been charged to Visitalk. (Complaint, ¶ 84; 23 SOF, ¶ 37.) Mr. Thimmesch agreed in writing that there were at least $235,000.00 in expenses 24 for which there were inadequate business record support or which were for personal matters 25 that had not been authorized. (Complaint, ¶ 86; SOF, ¶ 37.) Plaintiff alleges that Snell & 26 market value of Visitalk`s stock was far higher than $2.42 per share at the time. (Id.). Plaintiff claims, however, that Snell & Wilmer`s advice to Visitalk regarding the settlement (Complaint, ¶ 72; SOF, ¶ 30.) Mr. Cardwell

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Wilmer failed to recommend that Mr. Thimmesch sign a security agreement or deed of trust to provide collateral for his obligation to repay Visitalk the $235,000.00. (Complaint, ¶ 93.) The undisputed facts show that Snell & Wilmer did so recommend, and the company declined to follow that advice. (SOF, ¶ 38). III. SUMMARY JUDGMENT STANDARDS. Summary judgment is appropriate when there is no genuine issue of material fact requiring determination at trial, and the moving party is entitled to judgment is a matter of law. Fed.R.Civ.P.56(c); California Architectural Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987). A factual dispute is genuine only if the evidence is such that a reasonable fact finder could resolve the dispute in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is

appropriate against a party who fails to make a showing sufficient to establish the existence of an element essential to that party`s case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A party opposing a motion for summary judgment cannot rest upon mere allegations or denials in the pleadings or papers, but instead must set forth specific facts demonstrating a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). IV. SNELL & WILMER IS ENTITLED TO SUMMARY JUDGMENT ON EACH OF PLAINTIFF'S CLAIMS AS A MATTER OF LAW. A. On the Undisputed Facts, Plaintiff Cannot Meet Its Burden of Showing that Snell & Wilmer Violated the Standard of Care.

The elements of a claim for professional negligence are: (1) the existence of an attorney/client relationship imposing a duty on the attorney to exercise the degree of skill, care and knowledge commonly exercised by members of the profession; a breach of that duty; that such negligence was a proximate cause of resulting injury; and the fact and extent of injury.

(2) (3) (4)

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Phillips vs. Clancey, 152 Ariz. 415, 418, 733 P.2d 300, 303 (Ct. App. 1986). In order to establish a breach of the standard of care, expert testimony is typically required. See Baird vs. Pace, 156 Ariz. 418, 420, 752 P.2d 507, 509 (App. 1987). Plaintiff has no admissible expert testimony to support its claims. The Motion in Limine to Exclude Testimony of Boyd Lemon or for Daubert Hearing, filed contemporaneously, explains in detail why Mr. Lemon`s opinions are not admissible. Mr. Lemon is simply not close to being qualified to provide the standard of care opinions that he proffers, nor are such opinions reliable. Thus, his testimony is inadmissible.5 Similarly, the

Motion in Limine to Exclude Testimony of Renee Jenkins, or for Daubert Hearing explains that the report of plaintiff`s damage expert lacks the appropriate foundation and fit with the case and should be excluded. In the absence of admissible expert testimony, plaintiff's claims must be dismissed. Apart from the lack of expert testimony, discovery has shown that the factual underpinnings of plaintiff`s claims simply lack an evidentiary basis. Founder's Warrants: The evidence shows that Snell & Wilmer spotted the Founder`s Warrants problem in the first place, but did not actually propose the solution that was adopted and therefore cannot be faulted if that solution was flawed (although we believe it was not). Former Visitalk General Counsel Steve Best testified that, after Snell & Wilmer was retained in mid-1999, he asked the firm to look at several securities issues. (SOF, ¶ 15.) Snell & Wilmer discovered numerous problems with Visitalk's securities that arose while Bryan Cave was Visitalk's counsel. (Id.) It was Snell & Wilmer that pointed out the potential problems with the Founders' Warrants. (Id.) Mr. Best explained that as of November 1999, Visitalk`s Board of Directors consisted of Peter Thimmesch, Michael O'Donnell, Mark Cardwell, Allen Kaplan and Jeffrey Hirschberg. (SOF, ¶ 16.) All five members of the Board

5

Mr. Lemon proffered no opinion on the MP3 transactions referenced above. Absent expert testimony, those claims must be dismissed. See Baird, 752 P.2d at 509.
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of Directors of Visitalk agreed on the resolutions of the potential problems with the Founders' Warrants at a board meeting on November 24, 1999 during an Executive Session. (Id.). No Snell & Wilmer lawyer attended the Executive Session during which the resolution regarding the Founders` Warrants was reached. (SOF, ¶ 17.) Instead, two other law firms--Gibson Dunn & Crutcher and Lynn Stodghill--were added via conference call to the Executive Session. (Id.) A thorough discussion of the resolution of the Founders' Warrants occurred during the Executive Session. (Id.) Mr. Best testified that as a result of the decisions made during the November 24, 1999 Executive Session, Visitalk decided to send out a notice to Series A Shareholders, advising them of the previously undisclosed Founders' Warrant and requesting a release of claims as a result of the non-disclosure of the Warrants. (SOF, ¶ 18.) It was not Snell & Wilmer that proposed this solution to Visitalk. (Id.) Rather, the minutes of the Executive Session reflect that Mr. Griffiths [of Gibson Dunn & Crutcher] explained further the process of waivers, adding that waivers by the shareholders must be obtained by everyone. (Id.) Thus even if any damages were caused to Visitalk by the resolution of the Founders` Warrants issue, which they were not, such damages were not attributable to Snell & Wilmer. According to Mr. Best, Snell & Wilmer did not, in any way, assist Peter Thimmesch and Michael O'Donnell in creating, developing or presenting an incomplete, misleading or false picture about the Founders' Warrants, as plaintiff claims. (SOF, ¶ 19.) Snell & Wilmer did not, as alleged, fail to fully and properly advise Visitalk and the members of the Board of Directors of the Founders' Warrants. (Id.) Similarly, former Visitalk President and CEO Peter Thimmesch testified that Messrs. O'Donnell and Mr. Thimmesch, who were then the sole members of the Board of Directors of Visitalk, did approve the issuance of the Founders' Warrants on September 12, 1998. (SOF, ¶20.) Mr. Cardwell was not a member of the Board of Directors and was not a shareholder on September 12, 1998. (Id.) This testimony is inconsistent with the Founder`s Warrants

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chronology as put forward by plaintiff. Plaintiff`s chronology has found no support from any witness testifying from personal knowledge. Mr. Thimmesch did acknowledge, however, that Visitalk did not properly document the Board's authorization of the Warrants. (SOF, ¶ 21.) Joe Richardson of Bryan Cave was responsible for that failure. (Id.) Snell & Wilmer was retained in 1999 and helped to resolve the "tangled mess" that existed with respect to the Founders' Warrants. (Id.) Mr. Thimmesch confirmed that all of the Board Members agreed on the solution to the Founders' Warrants issue. (SOF, ¶ 22.) In addition to Snell & Wilmer, the Board received legal advice on this issue from Steve Best, general counsel, and two additional lawyers, Steven Stodghill of Lynn Stodghill, and Sean Griffiths of Gibson, Dunn & Crutcher. (Id.) Mr. Griffiths was the lawyer that the Board relied upon the most because he is a preeminent attorney in his field. (Id.) Mr. Thimmesch testified that Mr. Griffiths was the lawyer that the Board relied upon "in the end for the final solution we crafted." (SOF, ¶ 23.) The solution that the Board adopted was actually crafted by Board Member Allan Kaplan. (Id.) Michael O'Donnell, the President of Visitalk, testified that Bryan Cave documented the approval of the Founders' Warrants as a "Unanimous Consent of the Board of Directors in Lieu of Special Meetings". (SOF, ¶ 24.) Mr. O'Donnell also testified that when the Founders' Warrants were approved, Mark Cardwell was not a member of the Board and was not a principal in Visitalk. (Id.) According to Mr. O'Donnell, if Bryan Cave had done its job correctly, none of the ensuing issues would have arisen. (SOF, ¶ 25.) Snell & Wilmer was attempting to do nothing other than rectify the situation and document what actually happened. (Id.) Mr. O`Donnell noted that Mr. Cardwell acknowledged in writing that he was, in fact, not a shareholder or Board member at the time the Founders' Warrants were authorized. (SOF, ¶ 26.) Mr. Cardwell agreed, as part of the resolution of the Founders' Warrants

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problems, that Mr. Thimmesch and Mr. O'Donnell held a meeting on September 12, 1998 and validly authorized the issuance of the Founders' Warrants. (Id.) Mr. Cardwell did not

become an employee or shareholder of the company until September 15, 1998. (Id.) He was not a board member on September 12, 1998. (Id.) Mr. Hirschberg testified that, as a board member, he obtained an accurate and complete understanding of the "problem" with the Founders' Warrants. (SOF, ¶ 27.) The issue was fully discussed by the Board of Directors. (Id.) The full Board made a decision that was in the best interest of the company. (Id.) Former director Mark Cardwell further confirmed the lack of factual support for plaintiff`s version of the Founder`s Warrants chronology. (SOF, ¶ 28.) He testified that he was not a shareholder, director, or employee before September 15, 1998. (Id.) As part of the resolution of the Founder's Warrants issue, Mr. Cardwell confirmed in writing that he was not an employee or shareholder of the company until at least September 15, 1998 and he did not become a director of the company until September 18, 1998. (Id.) Thus all witnesses who testified as to the Founder`s Warrants issue confirmed the absence of any ground for complaint about Snell & Wilmer`s advice regarding that issue. Plaintiff has failed to come forward with specific facts to the contrary. Cardwell settlement: All witnesses with personal knowledge testified that the

settlement with its former director Mr. Cardwell was in the best interests of Visitalk. Thus advising Visitalk regarding it could not have been malpractice. Mr. Best confirmed that Mr. Cardwell`s claims against Visitalk arising out of his termination (essentially age discrimination claims) were potentially serious. (SOF, ¶ 32.) The settlement with Mr. Cardwell was negotiated by Mr. Best and Allan Kaplan, an officer of Visitalk and a member of the Board of Directors, with Mr. Cardwell and his attorney. (Id.) Snell & Wilmer did not negotiate the settlement. (Id.)

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Snell & Wilmer played a role, albeit a small one, in documenting the settlement. (SOF, ¶ 33.) Part of the agreement with Mr. Cardwell was that the company was to procure purchasers for 500,000.00 shares of Mr. Cardwell's stock at $2.42 per share. (Id.) Mr. Best viewed this as a provision that was in the best interest of Visitalk. The transaction was approved by all of the Board members. (Id.) According to Mr. O'Donnell, the settlement with Mr. Cardwell after his termination was a "terrific idea" for Visitalk. (SOF, ¶ 34.) Mr. O'Donnell believed that Mr. Cardwell's dispute needed to be resolved. (Id.) He believed that the terms of the settlement were in the best interest of the company and was fair to Visitalk. (Id.) He did not believe that a corporate opportunity was being usurped. (Id.) Mr. Kaplan stated that he played a major role in negotiating the settlement of Mr. Cardwell`s claims. (SOF, ¶ 35.) He further testified that Visitalk relied mostly on its general counsel, Steve Best, in putting together the Cardwell settlement (id.); that the Board of Directors felt that it was important to resolve Cardwell`s dispute (id.); that the settlement was in the best interests of the Company (id.); that the settlement was fair to Visitalk (id.); and that there was no usurpation of any corporate opportunity. (Id.) Mr. Cardwell himself testified that the claims he had asserted against Visitalk as a result of his termination, including a possible age discrimination claim, were serious claims. (SOF, ¶ 36.) The settlement that Visitalk reached with Cardwell included a release of those claims. (Id.) Thus Visitalk received two significant benefits in the settlement, i.e. the margin on the resale of Mr. Cardwell's shares, (id.) and the release of Mr. Cardwell`s claims. (Id.) Thimmesch expenses: Mr. Best explained that Visitalk demanded that Mr.

Thimmesch repay approximately $285,000.00 in funds that were improperly utilized by Mr. Thimmesch. (SOF, ¶ 38.) Mr. Thimmesch never executed a promissory note, memorializing his obligation to repay the Company, (id.) despite Snell & Wilmer`s admonition to Visitalk to require Mr. and Mrs. Thimmesch to execute a security agreement and collateralize their debt.

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(Id.). The Board of Directors, with Mr. Best's advice, ultimately decided not to pursue Mr. Thimmesch at all. Snell & Wilmer played no role in that decision. (Id.) B. Plaintiff's Claims are Barred by the In Pari Delicto Doctrine.

The in pari delicto doctrine was discussed in this Court's Boston Chicken decision. See Smith ex rel Boston Chicken vs. Arthur Anderson, LLP, 175 F.Supp.2d 1180, 1198-2000 (D. Ariz. 2001). The Boston Chicken court explained that the in pari delicto doctrine dictates that when a participant in illegal, fraudulent or inequitable conduct seeks to recover from another participant in that conduct, parties are deemed "in pari delicto" and the law will aid neither, but rather, will leave them where it finds them. Id. at 1198. The law of in pari delicto was further explained: Although a corporation is generally not chargeable with the knowledge of its officer or director concerning a transaction which the officer or director is acting in his own behalf, the corporation will be charged with the agent's knowledge if any action taken by the agent would benefit both the agent of the corporation, the interest of the individual officer or director being clearly aligned with those of the corporation. Moreover, the exception to the general rule of imputed notice to a corporation that arises where an officer, director, agent or employee is acting fraudulently or adversely to the corporation is not triggered where the individual is also acting for the principal's benefit even though the agent's primary interest inimical to that of the principal. [K]nowledge will not be imputed to the corporation on the basis of an assertion that its agents, though motivated by personal interests, did benefit the corporation, where, under the facts there is no actual benefit to the corporation. Id. at 1198-99 (quoting 18B Am. Jur.2d Corporations § 1681 (1995)). The related "Wagoner" rule holds that a bankrupt corporation's trustee lacks standing to bring a claim against a third party for defrauding or misleading the corporation with the cooperation of the corporation's management. Shearson Lehman Hutton vs. Wagoner, 944 F.2d 114, 120 (2nd 1991). Wagoner involved a sole shareholder who orchestrated the fraud and whose conduct was clearly attributable to the corporation. Certain cases have recognized that the Wagoner rule is applicable if "all relevant shareholders and/or decision makers" were involved in the wrongful conduct, or if there is otherwise sufficient "unity" between the

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corporation and defendant to implicate the corporation itself rather than just its agents. See Smith vs. Arthur Andersen, 175 F.Supp. at 1199, quoting In Re Midiators, 105 F.3d 822, 827 (2nd Cir. 1997). In the Boston Chicken decision, the court found that the Wagoner and in pari delicto doctrines did not apply. The court there stated that in cases involving more than one corporate actor, the plaintiff may avoid dismissal for lack of standing by showing the existence of "an innocent member . . . of management who would have been able to prevent the fraud had he known about it." 175 F.Supp. at 1199, quoting Wechsler vs. Squadron, Ellenoff, Pleasant & Sheinfeld, 212 B.R. 34, 44-45 (S.D.N.Y. 1977). As such, the Wagoner rule can be avoided when the plaintiff has established that there were innocent members on the board or were in management who were unaware of the wrongdoing and could have prevented it. Id. In order to try to defeat the in pari delicto claim, the Complaint alleges that the "outside" board members ­ Mr. Hirschberg and Mr. Kaplan ­ were not adequately informed about the issues regarding the Founders' Warrants and other related matters. (Complaint, ¶ 311). Discovery in this case, however, has revealed that these gentlemen were fully

informed of the issues and concurred fully in the Company`s decision. (SOF, ¶¶ 27-29). Plaintiff has no evidence supporting the notion that there were innocent Board Members who could have prevented the wrongdoing. Therefore, the in pari delicto doctrine and Wagoner rules apply here. To the extent that there was wrongdoing, it was engaged in by the corporation, its management and its Board of Directors. C. Plaintiff's Claim That Snell & Wilmer Participated in Visitalk's "Deepening Insolvency" Must Be Rejected as a Matter of Law, and Its Damage Claim Must Therefore Fail.

As noted in the Motion in Limine to Exclude Testimony of Renee Jenkins (the Jenkins Motion), filed concurrently herewith, the damages claim propounded by plaintiff`s expert is based on the assertion that there was a deepening insolvency of Visitalk, allegedly

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caused by Snell & Wilmer. That deepening insolvency theory is fatally flawed. Unlike the classic cases out of which the doctrine arose, in which insiders turn a blind eye to a company`s obvious and growing insolvency, the insolvency here is wholly fictitious. Plaintiff claims, through its expert Jenkins, that Visitalk was insolvent on the basis of so-called unrecorded contingent liabilities. They were, indeed, unrecorded because they did not exist. As explained in more detail in the Jenkin`s Motion, plaintiff`s theory is based on the idea that there was no disclosure, or insufficient disclosure, of material information to Visitalk`s shareholders regarding the Founder`s Warrants. Plaintiff also says that written releases by Visitalk`s shareholders were ineffective because they were not based on complete information. Crucially for purposes of this Motion, no Visitalk shareholder ever brought or threatened such a claim, and they are now barred. It is well settled that confirmation of a plan operates as a final judgment. 5 Collier on Bankruptcy, § 1141.02[4]; Stoll v. Gottlieb, 305 U.S. 165, 170-71, 59 S.Ct. 134 (1938). Any claim not made part of the debtor`s schedules and not asserted prior to the bar date is forever disallowed and cannot be subsequently asserted. Fed. R. Bankr. P. 3003(c)(1); see also In re Analytical Systems, Inc., 933 F.2d 939, 942 n.5 (11th Cir. 1991). No Visitalk shareholder ever filed a proof of claim in the Visitalk Bankruptcy for any monies paid for securities. Moreover, the Schedules of Assets and Liabilities, filed under oath by Visitalk in the Visitalk Bankruptcy, never identified any shareholder as possessing a claim against Visitalk.6 The confirmation of Visitalk`s Second Plan of Reorganization bars the assertion by the current plaintiff of those non-existent claims. Stoll, 305 U.S. at 170-71. Absent the claims of Visitalk`s shareholders that provide the sole basis for plaintiff`s claim of deepening insolvency, there simply is no cognizable damage claim in this case
6

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In fact, the patent fallacy of plaintiff`s position is demonstrated by the fact that not one of Visitalk`s post-petition operation reports in bankruptcy--which were signed by Visitalk`s CEO in bankruptcy--identified any shareholder contingent claim as constituting a prepetition liability of Visitalk. (SOF, ¶ 6.)
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(since the claims related to the Cardwell settlement, the Thimmesch expenses and the preference claim, while not subject to the infirmities of the deepening insolvency claim, all fail for other reasons). This is yet another reason for summary judgment. Not only is plaintiff`s deepening insolvency damage claim wholly unsupported based on the undisputed material facts, it is also insufficient as a matter of law. Deepening insolvency cases involve the "fraudulent expansion of corporate debt and prolongation of corporate life," Official Committee of Unsecured Creditors v. R.F. Lafferty & Co. 267 F.3d 340 (3d Cir. 2001). Plaintiff claims only that Snell & Wilmer`s actions were negligent, not fraudulent; indeed plaintiff does not even claim that Visitalk`s management acted fraudulently. In addition, the $25.4 million referenced in the Jenkins Report, represents alleged losses of Visitalk`s shareholders, not of Visitalk. Every penny of that damage claim reflects lost shareholder investment, for which those shareholders chose not to seek compensation by way of claims against Visitalk or third parties such as Snell & Wilmer. Even a bankruptcy trustee has no right to pursue claims of a corporation`s creditors as distinct from the corporation`s own claims; still less may a non-bankruptcy trustee, such as the plaintiff here, pursue such claims. As noted in Gerald K. Smith v. Arthur Andersen LLP, 421 F.3d 989, 1001 (9th Cir. 2005): [I]t is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself." [citing Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991) ]; see also Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994) ("The trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor"). This principle derives from the Supreme Court's decision in Caplin, "in which the Court concluded that a reorganization trustee under Chapter X had no [**26] standing under the old Bankruptcy Act to assert, on behalf of the holders of the debtor's debentures, claims of misconduct against a third party." Williams, 859 F.2d at 666; see also Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523, 527 (9th Cir. 1976) (stating that Caplin held that "a reorganization trustee has no standing to

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maintain [an] action on the part of any person or entity other than his debtor corporation"). As we explained in Williams, the holding of Caplin remains valid under the current version of the Bankruptcy Code, and is equally applicable to both reorganization and liquidation trustees. See 859 F.2d at 666-67. Plaintiff`s damage claim suffers from one final problem that would be fatal by itself, namely a complete failure to establish proximate causation. Plaintiff says that various third parties might have had claims against Visitalk, which they might have decided to bring, which might have succeeded, and which might have been big enough in the aggregate to cause the company to fail. There is, however, no evidence of that. Visitalk failed for a host of reasons wholly unrelated to those hypothetical claims. Plaintiff does not even articulate a theory as to how claims that were never asserted and that are now time-barred could have been responsible for the company`s demise. Gregory v. Hawkins, 251 Va. 471 (1996) (reversing malpractice verdict against attorney Gregory since the evidence failed as a matter of law to establish that Gregory's conduct was a proximate cause of the loss sustained by Hawkins). This is yet another reason for summary judgment. D. The Claims That Plaintiff Purports To Assert Were Not Properly Assignable In These Circumstances, and Cannot Be Asserted by Plaintiff. 1. Factual Background.

A Trustee was never appointed in the Visitalk Bankruptcy. (SOF, ¶ 4.) Rather, the debtor, Visitalk, remained a debtor-in-possession during the pendency of the Visitalk Bankruptcy. In November 2002, Visitalk initiated the present proceeding against Snell & Wilmer, among others. (SOF, ¶ 5.) While Visitalk initiated the proceeding, it did not remain the Plaintiff. On June 22, 2004, Visitalk submitted a Second Joint Plan of Reorganization (the Plan) in the Visitalk Bankruptcy. (SOF, ¶ 7.) The Plan purported to select a Creditor`s Trust, to which all Causes of Action held by the Debtor would be transferred to as of the effective date of the Plan. (Id.) Plan. (Id.)
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On August 27, 2004, the Bankruptcy Court confirmed the

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The Plan states: In his or her capacity as the representative of the estate, the creditor`s Trustee will be the successor-in-interest to the Debtor with respect to the Causes of Action. The Creditor`s Trustee will hold all right, title and interest in and to the Causes of Action on behalf of all beneficiaries of the Creditor`s Trust and will pay from the Creditor`s Trust all ordinary and necessary costs of protecting, preserving, investigating and pursuing the Causes of Action. (SOF, ¶ 8.) The Plan further defines the Causes of Action as meaning: All claims and causes of action that are property of the Estate or belong to the Debtor, including but not limited to . . . the pending District Court litigation against former Directors and Officers, former counsel for Debtor (Snell & Wilmer), former accountants, and the pending adversary proceedings in this case. (SOF, ¶ 9.) The Trustee of the Creditor`s Trust created by the Plan is the present plaintiff--Biltmore Associates. Biltmore Associates is and always has been wholly unrelated to Visitalk. (SOF, ¶ 10.) Neither the Creditor`s Trust nor the Trustee, Biltmore Associates, ever had any attorney/client or other relationship with Snell & Wilmer during its representation of Visitalk. (SOF, ¶ 11.) Rather, the Creditor`s Trust`s sole role in the Visitalk Bankruptcy was to act as a third-party assignee of all Causes of Action held by Visitalk, including the present action. Biltmore Associates` principal, Vern Schweigert, recently confirmed during his deposition that Biltmore Associates claims to be both the nominal plaintiff and the real party in interest in this litigation as a result of the purported assignment by Visitalk of the Causes of Action. (Id.) In the circumstances presented here, assignment of any cause of action pertaining to Snell & Wilmer`s representation of Visitalk is void as a matter of Arizona law. Absent a valid assignment of claims against Snell & Wilmer, the plaintiff possesses no claim against or controversy with Snell & Wilmer.

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2.

The Ability to Initiate A Cause of Action is Controlled by Federal Statute, but the Ability to Assign Claims is Governed by State Law.

The United States Supreme Court has recognized that although a duly appointed Bankruptcy Trustee or debtor-in-possession may attempt to sell or assign certain assets of the bankruptcy estate, including causes of action, the propriety of any such assignment is governed by applicable state law:

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 [P]roperty interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves . . . to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy. 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 v. Hudgins, 142 Ariz. 395, 399, 690 P.2d 114, 118 (Ct. App. 1984) (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. Botma v. Huser, 202 Ariz. 14, 18, 39 P.3d 538, 542 (2002); Kiley v. Jennings, Strouss & Salmon, 187 Ariz. 136, 140, 927 P.2d 796, 800 (Ct. App. 1996); Schroeder, 690 P.2d at 118; Premium Cigars Int`l, Ltd. v. Farmer-Butler-Leavitt Ins. Agency, 208 Ariz. 557, 565, 96 P.3d 355, 363 (Ct. App. 2004). Congress has articulated no reason why this policy should be overridden. Spanish Language Television, 456 F.2d at 162. Plaintiff will likely attempt to argue that, because the cause of action was transferred to it in connection with the confirmed Plan, Arizona`s bar on the assignment of legal malpractice claims is somehow preempted. Any such argument is erroneous.

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7

The United States Bankruptcy Code vests power in the Bankruptcy Trustee or debtor-inpossession to initiate post-petition litigation. 11 U.S.C. §§ 323(b), 1107(a); see, e.g., Husvar v. Rapoport, 430 F.3d 777, 780 (6th Cir. 2005) (in the absence of abandonment, only the debtor-inpossession . . . can prosecute a claim); In re Eisen, 31 F.3d 1447, 1451 n. 2 (9th Cir. 1995). Congress has authorized a trustee or debtor-in-possession to appoint a third-party to settle or assert a cause of action on behalf of the debtor. 11 U.S.C § 1123(b). Section 1123(b) states: [A] plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any [claim or interest of the debtor or the estate]. Though an appointment of a third party is permitted to pursue a claim on behalf of the debtor or the estate, Congress has not permitted an assignment to a third-party to prosecute claims when the prosecution of such claims will not benefit the debtor or the debtor`s estate whatsoever, and when the assignment of a cause of action would be in derogation of state law. Here, it is obvious that the legal malpractice claim against Snell & Wilmer is not being pursued for (nor does it devolve any benefit to) the reorganized debtor. Indeed, according to the Plan, not one penny of proceeds derived from this cause of action benefits the reorganized debtor. Rather, the Plan dictates that a select group of creditors, a group of lawyers and other professionals, and plaintiff itself, are the beneficiaries of the assigned causes of action and an proceeds derived therefrom.7 Thus, this litigation constitutes nothing more than a fungible commodity that Visitalk sold to the highest bidder, and which Biltmore Associates hopes to exploit for its own economic gain. Such an assignment is in stark derogation of Arizona law, which cannot be ignored simply because the purported assignment took place during Visitalk`s Bankruptcy.

The Plan provide that Biltmore will be paid directly from any proceeds derived from the Causes of Action, but if any of the select creditors do not claim their share of the proceeds, then Biltmore receives those proceeds as well.
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3.

Public Policy Prohibits the Assignment of Legal Malpractice Claims.

Arizona cases uniformly hold that assignment of legal malpractice claims is not permitted. See, e.g., Botma, 39 P.3d at 542; Kiley, 927 P.2d at 800; Schroeder, 690 P.2d at 3 4 P.3d 355, 363 (Ct. App. 2004). As the Premium Cigars Court explained: 5 6 7 8 9 10 Id. 11 The present case is the paradigm for the application of the Premium Cigars rule. Here, 12 Biltmore Associates had no relationship with either Visitalk or Snell & Wilmer prior to the 13 filing of the Visitalk Bankruptcy. 14 15 16 17 against Snell & Wilmer was transferred upon the effective date of the Plan. (SOF at ¶ 11). In 18 19 20 class of creditors are the limited beneficiaries of the attempted assignment of the legal 21 malpractice action. In other words, the effectuation of the Plan--and purported assignment of 22 legal malpractice claims--attempts to do that which Arizona law and 11 U.S.C. § 1123 (b) 23 expressly forbid. 96 P.3d at 363. 24 Though not Ninth Circuit authority, Schroeder v. Hudgins is nonetheless instructive. 25 142 Ariz. at 399, 690 P.2d at 118. The plaintiffs in Schroeder purported to pursue malpractice 26 fact, the Plan makes clear that Biltmore is not pursuing the Causes of Action for the benefit of the debtor ­ Visitalk. Instead the Plan establishes that Biltmore and a select and segregated Instead, as demonstrated above, the Plan explicitly converted any alleged claims arising out of the uniquely personal relationship between Snell & Wilmer and Visitalk into a commodity that could be sold to an economic bidder. Id. Biltmore Associates is nothing more than that bidder to which the cause of action Public policy dictates the reasons a claim of legal malpractice is not assignable. First, the gravamen of an action for legal malpractice is the negligent failure to utilize such skill, prudence and diligence as lawyers of ordinary skill and knowledge commonly possess. [citations omitted]. Second, the relationship between an attorney and client is of a uniquely personal nature and attorney-malpractice claims should not be relegated to the market place and converted to a commodity to be exploited and transferred to economic bidders. [citation omitted]. 118; Premium Cigars Int`l, Ltd. v. Farmer-Butler-Leavitt Ins. Agency, 208 Ariz. 557, 565, 96

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claims as assignees of those claims after a purchase of such claims from the trustee in bankruptcy. Id., 690 P.2d at 117. The trial court entered summary judgment against the plaintiffs, and determined that they could not bring their cause of action for legal malpractice as purported assignees. Id. The Arizona Court of Appeals affirmed, recognizing that Arizona law prohibited the attempted assignment of a legal malpractice claim owned by the bankrupt estate, and concluded that the purported assignee lacked standing to bring a legal malpractice claim belonging to the debtor. Therefore, the Court affirmed the trial court`s grant of summary judgment. Id. Precisely the same analysis applies here. Any attempted assignment of malpractice claims embodied by the Plan is void pursuant to Arizona law. Id. Thus, Plaintiff lacks standing to bring this action. 4. Biltmore Associates Lacks Standing to Pursue Legal Malpractice Claims Against Snell & Wilmer.

The United States Supreme Court has recognized that [t]he federal courts are under an independent obligation to examine their own jurisdiction, and standing is perhaps the most important of [the jurisdictional] doctrines.`" FW/PBS v. Dallas, 493 U.S. 215, 231 (1990) (quoting Allen v. Wright, 468 U.S. 737, 750 (1984)), overruled, in part, on other grounds, City of Littlejohn v. Z.J. Gifts D-4, LLC., 541 U.S. 774 (2004). Because standing is an integral component of a court`s subject matter jurisdiction, it is a non-waivable defense that can be raised at any time. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S. Ct. 1673, 128 L. Ed. 2d 391 (1994); Rule 12(h)(3), Fed.R.Civ.Proc. The federal courts have consistently recognized that [s]tanding is an essential component of the case or controversy requirement of Article III, section 2 of the United States Constitution. Carroll v. Nakatani, 342 F.3d 934, 940 (9th Cir. 2003). In turn, the requirements for demonstrating standing to sue are well-established.

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As an "irreducible minimum," Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472 (1982), parties who seek to establish standing must show (1) a concrete and imminent "injury in fact, (2) a causal connection between the defendants and the alleged injury, and (3) a likelihood that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 56061(1992); Bernhardt v. County of Los Angeles, 279 F.3d 862, 868 (9th Cir. 2002). Here, plaintiff cannot establish the irreducible elements of standing. Lujan, 454 U.S. at 472. As shown above, Biltmore Associates and Snell & Wilmer had no relationship that led to an injury in fact to Biltmore. Rather, Biltmore Associates sought to stand in the shoes of Visitalk by virtue of the assignment of the present cause of action. That assignment, however, is void as a matter of law. Botma, 39 P.3d at 542; Kiley, 927 P.2d at 800; Schroeder, 690 P.2d at 118. Therefore, there is no connection between the defendants and Biltmore or the alleged injury. Id. Thus, the Court lacks subject matter jurisdiction to adjudicate the legal malpractice claims being prosecuted against Snell & Wilmer by Biltmore Associates. Id. E. Plaintiff Has No Viable Claim for Aiding and Abetting a Breach of Fiduciary Duty.

Aiding and abetting claims are typically brought against lawyers by non-clients who allege that the lawyer assisted his client is committing a tort. Here, Visitalk (from whom plaintiff derives whatever claims it has) was Snell & Wilmer`s client. The evidence is undisputed that Snell & Wilmer did nothing more than provide legal advice to its client. The aiding and abetting claim is nothing more than a renaming of the malpractice claim in an attempt to avoid the infirmities of the latter. To the extent Visitalk is contending that Snell & Wilmer somehow aided and abetted Messrs. Thimmesch and O`Donnell in breaching their fiduciary duties in connection with the Founders` Warrants, there is no basis for such a claim. Snell & Wilmer did not provide advice to Thimmesch and O`Donnell personally about the solution to the Founders` Warrants.
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There is no evidence that Snell & Wilmer did anything to assist Messrs. Thimmesch and O`Donnell in breaching duties they owed to Visitalk.8 Claims of aiding and abetting tortious conduct require proof of three elements: (1) the primary tortfeasor must commit a tort that causes injury to the plaintiff; (2) the defendant must show that the primary tortfeasor`s conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach. Wells Fargo v. Arizona Laborers, 201 Ariz. 474, 38 P.3d 12, 24 (2002) (citing Gomez v. Hensley, 145 Ariz. 176, 178, 700 P.2d 874, 876 (App. 1984) (citing Restatement (Second) of Torts § 876(b))). Here, plaintiff alleges that Snell & Wilmer aided and abetted Messers. Thimmesch and O`Donnell to breach their fiduciary duties. However, plaintiff can point to no admissible evidence that Messrs. Thimmesch or O`Donnell`s alleged breach caused injury to the plaintiff. As demonstrated above, the current plaintiff, a Creditor`s Trustee, cannot establish any damages. Moreover, to the extent that breach of fiduciary duty surrounded the Founders Warrants, it is undisputed that the Founders Warrants were never exercised, and have now expired. Thus, plaintiff cannot present admissible evidence satisfying the first required

element. Wells Fargo, 38 P.3d at 24.
8

Plaintiff has suggested that Snell & Wilmer had a conflict of interest because it represented Messrs. Thimmesch and O`Donnell in estate planning matters. Of course, an ethical violation is not a standard of care breach. Nonetheless, there was no conflict. Snell & Wilmer represented Messrs. Thimmesch and O`Donnell on estate planning matters in 1990, after the Founders` Warrant issue was resolved. (SOF, ¶ 39.) There was no conflict of interest at all. Indeed, representation of corporate executives in estate planning matters by corporate counsel is common. Visitalk`s general counsel consented to that representation. (Id.) In any event, Plaintiff has failed to establish a causal link between the alleged conflict and any damage to Plaintiff. Brosie v. Stockton, 428 P.2 933, 936 (Ct. App. 1970). For this reason, any alleged conflict of interest cannot support the professional negligence claim. Id.
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Nor can plaintiff establish scienter on the part of Snell & Wilmer. Id. To the contrary, the undisputed evidence reveals that the entire Board of Directors--without the assistance of other lawyers--voted to confirm ownership of the Founders Warrants in Messers. Thimmesch and O`Donnell. It is nonsensical to assert that Snell & Wilmer had knowledge that an action by the Board, approved by other counsel, constituted a breach of duty on behalf of Messrs. Thimmesch and O`Donnell. Indeed, there is no evidence here that Snell & Wilmer ever did anything other than provide its client reasonable advice in the utmost good faith. Finally, even if the Court concludes that Messers. Thimmesch and O`Donnell breached their fiduciary duties by claiming a right to the Founders Warrants and then confirming that right, plaintiff cannot establish that Snell & Wilmer substantially assist[ed] or encourage[d] such breach.38 P.3d at 24. Again, the Board voted to confirm the right to the Founders Warrants by Messers. Thimmesch and O`Donnell in the absence of Snell & Wilmer, with the assistance of different counsel! The undisputed facts here demonstrate that the Board made its own independent decision after considering all its options and conferring with other counsel. Snell & Wilmer did not assist or encourage any breach. Id. Stated simply, plaintiff cannot establish the existence of any of the required elements of aiding and abetting breach of fiduciary duty. 38 P.3d at 24. Therefore, Snell & Wilmer is entitled to judgment on this claim as a matter of law. In any event, the imposition of liability upon an attorney in the circumstances presented is contrary to the strong public policy against undermining the attorney-client relationship. Attorneys must be able to advise their clients without fear that they thereby become guarantors of the propriety of the client's conduct. In Alpert v. Crane Caton, & James, P.C., 178 S.W.3d 398 (Tex. App. 2005), the Texas Court of Appeals considered plaintiff's contention that an attorney could be held liable to nonclients under a theory of aiding and abetting a client's breach of fiduciary duty. In upholding

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a dismissal of that claim, the court noted that the plaintiff did not allege that the attorneys had committed any acts or misrepresentations independent of the representation of the client: Absent any allegation that [the attorneys] committed an independent tortuous act or misrepresentation, we decline [plaintiff's] invitation to expand Texas law to allow a non-client to bring a cause of action for "aiding and abetting" a breach of fiduciary duty, based upon the rendition of legal advice to an alleged tortfeasor client. The trial court thus did not error in dismissing this claim. Id., at 407 (2005). There is no evidence here that Snell & Wilmer did anything other than provide legal

8 advice to its client, i.e. Visitalk. There is no basis for liability for aiding and abetting a breach 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
9

of fiduciary duty by Visitalk`s officers. G. Plaintiff Is Not Entitled to a One Year Preference Period.

11 U.S.C. § 547(b)(4)(B) permits a bankruptcy trustee or a debtor in possession to avoid any pre-petition transfer by the debtor that occurs between ninety days and one year before the date of filing of the Petition, if such creditor at the time of such transfer was an insider.9 11 U.S.C. § 101 provides a statutory definition of what constitutes an insider of a corporation. Section 101(31)(B) states that: The term insider` includes . . . if the debtor is a corporation - - (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor. 11 U.S.C. § 101(31)(B). Plaintiff`s Second Amended Complaint is bereft of a single factual allegation which would allow the Court (or the trier of fact) to deduce the basis upon which Plaintiff claims that Snell & Wilmer constituted an insider under the Bankruptcy Code. For this reason alone, summary judgment is appropriate. Moreover, there is no evidence in the record that Snell &

26

The preference period of a non-insider transfer is limited to ninety days prior to the petition date. 11 U.S.C. § 547(b)(4)(A).
Case 2:02-cv-02405-HRH Document 358 -29Filed 06/04/2007 Page 29 of 34

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Wilmer constituted a director, officer, person in control, partner, general partner, or relative of a general partner, director, officer, or person in control of the debtor. In In re Friedman, the United States Bankruptcy Appellate Panel of the Ninth Circuit recognized that a finding of insider status not falling within a statutory definition can only be justified when the relationship between the alleged insider and the debtor compels the conclusion that the individual or entity has a relationship with the debtor . . . close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties. In re Friedman, 126 B.R.63, 70 (9th Cir. 1991). Or, as one court explained: When describing the requisite level of influence the [purported insider] must have to be an insider, courts have used terminology such as having a stranglehold over the debtor, having a complete domination of the debtor, rendering the debtor a mere instrumentality or alter ego of the [purported insider] or powerless to act