Free Consent Judgment - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Pursuant to stipulation by and between the Plaintiff and Defendants Michael and Marcia O'Donnell, and for good cause showing, the Court hereby finds as follows: I. 1. FINDINGS OF FACT Plaintiff, Biltmore Associates, L.L.C., is the Court appointed Trustee for the IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA BILTMORE ASSOCIATES, L.L.C., as Trustee for the Visitalk Creditors' Trust, Case No. 02-2405-PHX (HRH) Plaintiff, vs. PETER THIMMESCH and CYNTHIA THIMMESCH, husband and wife; MICHAEL O'DONNELL and MARSHA O'DONNEL, husband and wife; MICHAEL CARDWELL and MARGARET MAHONEY, husband and wife; RAY GASTON and JANE DOE GASTON, husband and wife; STEPHEN BEST and JANE DOE BEST; husband and wife; STEPHEN A. BEST, P.C.; JEFFREY HIRSCHBERG and JANE DOE HIRSCHBERG, husband and wife; ALAN KAPLAN and JANE DOE KAPLAN, husband and wife; MICHAEL COONEY and JANE DOE COONEY, husband and wife; ROBERT CORRY and JANE DOE CORRY, husband and wife; GILES SOMERVILLE and JANE DOE SOMERVILLE, husband and wife; ERNST & YOUNG, LLP, a limited liability partnership; SNELL & WILMER, LLP, a limited liability partnership; MP3.COM, INC., ("MP3"), is a foreign corporation; BLACK CORPORATIONS 1-10; and JOHN DOES 1-20, Defendant. JUDGMENT

Visitalk Creditors' Trust and the successor in interest to the claims and causes of action set forth in the Amended Complaint filed by Visitalk.Com, Inc. ("Visitalk"). Document 299 Filed 03/21/2006 Page 1 of 11

Case 2:02-cv-02405-HRH

1 2 3 4 5 6

2.

Defendants Michael and Marcia O'Donnell at all material times were residents of

the State of Arizona. At all times material hereto, Michael and Marcia O'Donnell were acting on behalf of the marital community. 3. Mr. O'Donnell is a former officer and director of Visitalk. At all material times

hereto, he was Visitalk's President. 4. Visitalk was incorporated in the State of Arizona on September 3, 1998. The aggregate amount of Visitalk's debts, inclusive of claims held by investors,

7 8 9 10 11 12 13 14 15 16 17 18 19
reflect that Mr. Thimmesch was issued 2,600,000 shares of Visitalk's common stock.on 5. exceeded the value of Visitalk's assets on all dates material to each of these Findings of Fact. 6. A document titled "Unanimous Consent of the Board of Directors in Lieu of

Organizational Meeting," dated September 4, 1998, states that Mr. Thimmesch was elected Chief Executive Officer and Secretary, Cynthia Thimmesch was elected Corporate Treasurer, Mr. O'Donnell was elected President and Mr. Cardwell was elected Vice President. 7. The document titled "Unanimous Consent of the Board of Directors in Lieu of

Organizational Meeting," dated September 4, 1998 also states that Mr. Thimmesch was issued 2,600,000 shares, Mr. O'Donnell was issued 2,500,000 shares and Mr. Caldwell was issued 1,000,000 shares of Visitalk's common stock. 8. The stock transfer records of Visitalk, as well as actual stock certificate stubs,

20 21 22 23 24 25 26
September 4, 1998, Mr. O'Donnell was issued 2,500,000 shares of Visitalk's common stock on September 4, 1998, and Mr. Cardwell was issued 1,000,000 shares of Visitalk's common stock on September 4, 1998. 9. 10. Mr. Cardwell was elected to Visitalk's Board of Directors on September 18, 1998. A document titled "Unanimous Consent" of the Board of Directors in Lieu of

Special Meeting," dated September 12, 1998 provides that the Board of Directors authorized the Document 299

Case 2:02-cv-02405-HRH

-2-

Filed 03/21/2006

Page 2 of 11

1 2 3 4 5 6

issuance of 3,825,000 warrants to purchase Visitalk's common stock at a price of $0.1375 per share to both Mr. Thimmesch and Mr. O'Donnell (the "Founders Warrants") on September 12, 1998. 11. According to a document prepared by Visitalk's former legal counsel, Snell &

Wilmer, L.L.P., the issuance of the Founders Warrants actually occurred in early November, 1998, after the closing of the Series "A" Offering of preferred stock by Visitalk.

7 8 9 10 11 12 13 14 15 16 17 18 19
15. The copy of the document titled "Minutes of a Special Meeting of Board of 12. The document titled "Unanimous Consent of the Board of Directors in Lieu of Special Meeting," dated September 12, 1998 was not created until November of 1998 or signed by any member of the Board of Directors until November of 1998, after Mr. Cardwell became a director, and was never signed by Mr. Cardwell. 13. A document titled "Minutes of a Special Meeting of the Board of Directors of

Visitalk.com, Inc.," dated September 12, 1998, provides that Visitalk's Board of Directors, consisting only of Mr. Thimmesch and Mr. O'Donnell, convened a meeting on September 12, 1998, in which they agreed to issue the Founders Warrants to themselves. 14. The document titled "Minutes of a Special Meeting of the Board of Directors"

was not actually prepared on or about September 12, 1998. In reality, that document was prepared at a later date by the law firm of Bryan Cave.

20 21 22 23 24 25 26
Directors of Visitalk.com, Inc.," dated September 12, 1998, in Visitalk's possession is not signed by either Mr. Thimmesch or Mr. O'Donnell or any other officer of Visitalk. 16. In September, October and November 1998, Visitalk raised money through the

Series A Offering and the "Series B Offering. In connection with the Series A Offering, no disclosure was made regarding the Founders' Warrants claimed to have been issued to Mr. O'Donnell and Mr. Thimmesch in September, 1998. No disclosure was made to the investors Document 299

Case 2:02-cv-02405-HRH

-3-

Filed 03/21/2006

Page 3 of 11

1 2 3 4 5 6

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 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 a significant number of persons who purchased stock in the Series A Offering were "non-accredited" investors. No disclosure was made to persons who purchased

7 8 9 10 11 12 13 14 15 16 17 18 19
Snell & Wilmer, L.L.P., had concluded that the Founders Warrants had not been authorized and 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 Snell & Wilmer, L.L.P., had advised or concluded that Visitalk's securities offerings were not in compliance with "Regulation D" of the securities laws, those offerings may have been "integrated" and not exempt from registration under the securities laws, a significant number of persons who purchased stock in the Series A Offering were "non-accredited" investors, and Visitalk failed to comply with the requirements of Rule 10b-9 of the securities laws as to extensions of the Series C Offering. 17. A letter regarding the Founders Warrants and a release agreement sent to Series A

investors in November of 1999, did not disclose, among other things, that Visitalk's lawyers,

20 21 22 23 24 25 26
issued until November of 1998, after the closing of the Series A Offering, or that no documents prepared before the Series A Offering existed to support the claim those warrants had been issued prior to the Series A Offering. 18. Mr. O'Donnell should have known the relevant facts relating to the Founders

Warrants at the time of the Series A Offering and the Series B Offering. Mr. O'Donnell, as President of Visitalk, had sufficient power within Visitalk to require a more complete disclosure Document 299

Case 2:02-cv-02405-HRH

-4-

Filed 03/21/2006

Page 4 of 11

1 2 3 4 5 6

of the relevant facts relating to the Founders Warrants to the Series A investors and in the Series B Offering. Mr. O'Donnell also should have known about and had sufficient power within Visitalk to require complete and accurate disclosure of the claims held by the Series A investors to all subsequent investors and disclosure of the securities law problems, identified in Paragraph 16 above, relating to Visitalk's sales of securities to all investors. 19. Mark Cardwell was terminated by Visitalk for cause. At the time of Mr.

7 8 9 10 11 12 13 14 15 16 17 18 19
prevent improper or excessive expenditure of corporate funds by employees. Cardwell's termination, Visitalk had investors interested in purchasing additional shares of Visitalk stock. The settlement agreement between Visitalk and Cardwell required Visitalk to attempt to find purchasers for Mr. Cardwell's Visitalk stock, Visitalk located such investors, the money received from such investors for the purchase of Cardwell's stock was deposited into a bank account for which two officers of Visitalk were the only signatories, Visitalk's legal counsel, Snell & Wilmer, issued stock certificates and sent executed stock purchase agreements to the investors and the sum of $1,210,000.00 was paid to Mr. Cardwell for his Visitalk shares. 20. Visitalk was deprived of not less than $1,210,000.00 by transferring to Mr.

Cardwell the opportunity to sell Visitalk stock. 21. Prior to the Spring of 2000, Mr. O'Donnell and the other officers and directors of

Visitalk failed to implement adequate internal accounting and operating controls for Visitalk to

20 21 22 23 24 25 26
22. 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 which no or inadequate documentation or justification was provided, were excessive or which, in reality, were personal expenses. 23. Upon learning of Mr. Thimmesch's expenditures of Visitalk funds for which no

or inadequate documentation or justification was provided, excessive expenditures and his use of Document 299

Case 2:02-cv-02405-HRH

-5-

Filed 03/21/2006

Page 5 of 11

1 2 3 4 5 6

corporate funds on personal matters, the disinterested members of Visitalk's board of directors, including Mr. O'Donnell, directed Mr. Thimmesch to execute a promissory note to Visitalk in the approximate sum of $235,000. However, Mr. O'Donnell and the other Visitalk officers and directors did not require Mr. Thimmesch to provide any collateral, such as his rights in trademarks and other intellectual property, to secure his agreement to reimburse this amount to Visitalk. Mr. Thimmesch failed to repay Visitalk the sum of $235,000 and Mr. O'Donnell took

7 8 9 10 11 12 13 14 15 16 17 18 19
billing software from Portal nor did he require Visitalk to obtain independent, disinterested no action to cause Visitalk to bring legal action against Mr. Thimmesch to recover the amount Mr. Thimmesch had agreed to pay to Visitalk. 24. While Mr. O'Donnell was Visitalk's President, Visitalk entered into a three-year

license of billing software from Portal Software, Inc. ("Portal") in May 1999. The cost of the license was approximately $1 million. In addition, Mr. O'Donnell, among others, caused Visitalk to retain the accounting firm of Ernst & Young to customize the billing software for the additional sum of approximately $1 million, even though, at the time of this agreement, Ernst &Young also served as Visitalk's auditors. 25. At the time it entered into the software license, Visitalk did not have, nor did it

ever have, a need for software as sophisticated or expensive as the Portal software. 26. Mr. O'Donnell did not individually analyze the need for Visitalk to license the

20 21 22 23 24 25 26
professional advice regarding Visitalk's need for such software. Mr. O'Donnell and the Board of Directors of Visitalk did not direct Ernst & Young to consider less costly alternatives to the Portal software and did not, as a board, consider less costly alternatives to the Portal software. 27. Visitalk purchased an accounting package from Oracle Corporation ("Oracle") at

a cost of $750,000.00. In addition, Visitalk incurred additional consulting fees relating to the Oracle accounting package. Mr. O'Donnell and the other Visitalk officers and directors failed to Document 299

Case 2:02-cv-02405-HRH

-6-

Filed 03/21/2006

Page 6 of 11

1 2 3 4 5 6

secure competitive bids for the Oracle accounting package and the related consulting services. 28. At the time it purchased the Oracle software, Visitalk had no need for the Oracle

software, nor did it ever have a need for such software. 29. Mr. O'Donnell did not individually analyze the need for Visitalk to license the

accounting package from Oracle nor did he require Visitalk to obtain independent, disinterested professional advice regarding Visitalk's need for such software. The Board of Directors of

7 8 9 10 11 12 13 14 15 16 17 18 19
viability of Visitalk's product, the Founders' Warrants, the fact that Visitalk's lawyers had Visitalk, including Mr. O'Donnell, did not direct Ernst & Young to consider less costly alternatives to the Oracle software and the related consulting services and did not, as a board, consider less costly alternatives to the Oracle accounting package. 30. From the date of its incorporation to the date it filed for bankruptcy protection,

Visitalk generated less than $100,000.00 in revenue from business operations. 31. Mr. O'Donnell should have known the relevant facts relating to the Founders

Warrants and the other matters set forth above in Paragraph 16 at the time of the Series C Offering. Mr. O'Donnell, as President of Visitalk, had sufficient power within Visitalk to require a more complete disclosure of the relevant facts relating to the Founders Warrants and the other matters set forth above in Paragraph 16 in the Series C Offering. 32. Mr. O'Donnell should have known the relevant facts relating to the commercial

20 21 22 23 24 25 26
concluded the Founders' Warrants had been authorized and issued after the closing of the Series A Offering and the other matters set forth in Paragraph 16 above. Mr. O'Donnell, as President of Visitalk, had sufficient power within Visitalk to require a more complete disclosure of such facts in Visitalk's subsequent offerings of securities and in the "Updated Series C Confidential Information Statement" sent to to Series "C" investors in December of 1999. 33. On December 31, 1999, Visitalk and MP3.com, Inc. ("MP3") entered into a Document 299

Case 2:02-cv-02405-HRH

-7-

Filed 03/21/2006

Page 7 of 11

1 2 3 4 5 6

Marketing and Promotional Agreement. 34. On January 6, 2000, Visitalk and MP3 also entered into a Series E Preferred

Stock Purchase Agreement pursuant to which MP3 agreed to purchase 1,875,000 shares of Series E Preferred Stock in exchange for the payment of $15,000,000.00. 35. One reason why Visitalk wanted to enter into the Stock Purchase Agreement was

to show substantial equity investment income to Visitalk from a large, well known internet

7 8 9 10 11 12 13 14 15 16 17 18 19
totaled over Two Million Dollars ($2,000,000.00). company, such as MP3, and another purpose was to fund Visitalk's obligations to MP3 under the Marketing and Promotional Agreement. 36. Visitalk paid $5,000,000.00 to MP3 immediately after the closing of the issuance

of the Series E Stock Transaction and an additional $303,000.00 within months thereafter. 37. The transactions with MP3 increased Visitalk's debt burden which it had no

ability to pay, and thus artificially prolonged Visitalk's corporate life and deepened its insolvency 38. Marcia O'Donnell had certain responsibilities for controlling and directing the

expenditures of Visitalk corporate funds for tenant improvements, furniture, fixtures and equipment in a building that Visitalk first occupied in or about April 2000. 39. The expenditures for such tenant improvements, furniture, fixtures and equipment

20 21 22 23 24 25 26
40. The aggregate amount of Visitalk's debts, inclusive of claims held by investors, exceeded the value of Visitalk's assets at the time Visitalk incurred the expenditures referenced above and Visitalk had no meaningful operating revenue at this time. 41. The Board failed to exercise appropriate oversight and analysis regarding Ms.

O'Donnell, the contracting process for the improvements, the items purchased, and the expenditure of funds. Document 299

Case 2:02-cv-02405-HRH

-8-

Filed 03/21/2006

Page 8 of 11

1 2 3 4 5 6
1334.

II.

CONCLUSIONS OF LAW

Based on the above stipulated facts, and for good cause showing, the Court hereby concludes as follows: 1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

2.

Venue is proper in the District of Arizona pursuant to 28 U.S.C. §§ 1408 and

7 8 9 10 11 12 13 14 15 16 17 18 19
by negligently failing to investigate and analyze the need for or value of purchasing accounting 1409. 3. Mr. O'Donnell breached his duties as President and a board member of Visitalk

by negligently failing to investigate and to supervise the need for and implementation of accounting and operating controls for the expenditure of funds by employees and the recovery of funds expended by Mr. Peter Thimmesch, a former officer and director of Visitalk; 4. Mr. O'Donnell breached his duties as President and a board member of Visitalk

by negligently failing to investigate and analyze the need for or 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; 5. Mr. O'Donnell breached his duties as President and a board member of Visitalk

20 21 22 23 24 25 26
software from Oracle Corporation for $750,000.00, and the substantial and highly priced consulting services proposed to be rendered by and the 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; 6. Mr. O'Donnell breached his duties as President and a board member of Visitalk

by negligently failing to investigate the capital structure of Visitalk, including the claimed Document 299

Case 2:02-cv-02405-HRH

-9-

Filed 03/21/2006

Page 9 of 11

1 2 3 4 5 6

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 "Regulation D" of the securities laws, (c) those offerings may have been "integrated" and not exempt from registration

7 8 9 10 11 12 13 14 15 16 17 18 19
indebtedness for tenant inprovements, furniture, fixtures and equipment and to supervise under the securities laws, (d) persons who purchased stock in the Series A offering were "non-accredited" investors, and (e) Visitalk failed to comply with the requirements of Rule 10b-9 of the securities laws as to extensions of the Series C offering, Visitalk's lack of a commercially viable product and Visitalk's deepening insolvency. 7. Mr. O'Donnell's breach of his fiduciary duties in connection with the Founders'

Warrants contributed to the insolvency of Visitalk. 8. Mr. O'Donnell breached his fiduciary duties by failing to prevent Visitalk from

entering into the settlement transaction with Mr. Cardwell and permitting Visitalk to transfer to Mr. Cardwell the opportunity to sell his stock to investors located by Visitalk. 9. Mr. O'Donnell breached his duties as President and a board member of Visitalk

by negligently failing to investigate the expenditure of corporate funds and incurrence of

20 21 22 23 24 25 26
employees regarding such matters and deciding to incur over Two Million Dollars ($2,000,000.00) of tenant improvements, furniture, fixtures and equipment at a time when Visitalk was insolvent. 10. Visitalk suffered actual damages in an amount of not less than FIFTY-FOUR

MILLION, EIGHT HUNDRED SEVENTY THOUSAND, SIX HUNDRED FORTY-SIX AND NO/100 DOLLARS ($54,870,646.00) as a direct, proximate and foreseeable result of Mr. Document 299

Case 2:02-cv-02405-HRH

-10-

Filed 03/21/2006

Page 10 of 11

1 2 3 4 5 6

O'Donnell's breaches of his duties as President and a board member of Visitalk. 11. Plaintiff has properly been assigned by Visitalk all rights and claims Visitalk has

against Mr. and Mrs. O'Donnell. III. JUDGMENT

Based on the above findings of facts and conclusions of law, and for good cause showing,

IT IS HEREBY ORDERED entering judgment in favor of Plaintiff and against 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Case 2:02-cv-02405-HRH Document 299

Mr. and Mrs. O'Donnell in the amount of FIFTY-FOUR MILLION, EIGHT HUNDRED SEVENTY THOUSAND, SIX HUNDRED FORTY-SIX AND NO/100 DOLLARS ($54,870,646.00). DATED at Anchorage, Alaska, this 20th day of March, 2006.

/s/ H. Russel Holland United States District Judge

-11-

Filed 03/21/2006

Page 11 of 11