Free Response to Motion - 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

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

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA In re: BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff v. PETER THIMMESCH and CYNTHIA THIMMESCH, husband and wife; MICHAEL O'DONNELL and MARSHA O'DONNELL, husband and wife, et al, Defendant(s) CIV 02-2405-PHX-HRH DEFENDANT SNELL & WILMER, LLP'S RESPONSE TO MOTION FOR LEAVE TO FILE SECOND AMENDED COMPLAINT

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 1 of 12 Document 281 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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 · ·

INTRODUCTION In its recently filed Motion For Leave to File a Second Amended Complaint, Plaintiff identifies a low procedural bar, and then fails to surmount it. While leave to amend should be "freely given when justice so requires," Fed. R. Civ. P. 15(a), leave should be denied where there is undue delay or undue prejudice to the opposing party, or where amendment would be futile. All those factors are present here: · The premise of the motion is that plaintiff has supposedly learned a new "fact"--that two witnesses referred to a senior Snell and Wilmer partner as a "father figure" to two Visitalk executives. This is not a new fact, but merely a new figure of speech. It does not warrant the procedural turmoil that would be caused by granting the Amendment. One of the "father figure" witnesses was extensively interviewed by plaintiff a year ago, and any such information could have been solicited from him then. More than ten months ago Plaintiff's Rule 30(b)(6) witness Vern Schweigert complained of Snell & Wilmer's acting as Thimmesch and O'Donnell's personal lawyer. [January 3, 2005 Deposition at 38:24-4 (attached as Exhibit A)] He also alleged that "someone as close to the company as Snell & Wilmer was" should have been actively involved in due diligence on the business. [67:9-15 (id.)]. Snell & Wilmer strongly denies any impropriety; indeed plaintiff cannot seem to make up its mind whether Snell & Wilmer was too involved in the business, or not enough. The point, however, is that the underlying facts
Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 2 of 12 Document 281 1 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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 · ·

regarding Snell & Wilmer's representation were known to all, including plaintiff, a long time ago. The proposed amendment would be futile because, although the memorandum supporting the pending motion mentions the "father figure" testimony and the supposed fact that "S & W and the Visitalk [sic] did not maintain an ordinary attorney-client relationship" [Memorandum of Points and Authorities at 6], no such allegations are contained in the proposed amended pleading itself. Thus, the proposed Second Amended Complaint fails to state a claim upon which relief can be granted with respect to the new "insider" allegations [Fed. R. Civ. P. 12(b)(6)], such that amendment would be futile. Amendment would further be futile because, even assuming that the "father figure" averment was contained in the proposed Second Amended Complaint, such a conclusory allegation-- even if true--would fall far short of the factual showing that would be necessary to prove that Snell and Wilmer was an "insider" for the purposes of 11 U.S.C. § 47(b)(4)(B). Indeed plaintiff's contrived "insider" theory is not merely unsupported, but self-defeating. In plaintiff's own description, Snell &

Wilmer attorney Michael Donahey had to "threaten[] to terminate the Firm's representation of the Company unless S & W was paid." [Memorandum at 4] Such conduct is the polar opposite of what must be shown to establish "insider" status-- that the alleged "insider" has "sufficient control over the Debtor to compel payment of his debt" [Id. at 6, citing Winick v.

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 3 of 12 Document 281 2 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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 ·

Daddy's Money of Clearwater, Inc., 187 Br. 750, 755 (Bankr. Md. Florida, 1995)]. Finally, Snell and Wilmer will be prejudiced if the amendment is granted, since the depositions of the only two former Visitalk executives whose testimony is cited to support the dramatically expanded new claims have already been taken. ARGUMENT Good lawyers often provide ­ and should provide ­ advice with a business perspective as well as a legal perspective. The fact that a senior Snell & Wilmer lawyer may have done this is not surprising, and hardly renders Snell & Wilmer an "insider" for purposes of this bankruptcy proceeding. There is an irony to plaintiff's current argument that the rendering of legal advice with a business component went so far beyond the rendering of traditional legal services as to render Snell & Wilmer an "insider." The thrust of plaintiff's claim from the beginning has been that Snell & Wilmer failed to offer a vast array of purely business-oriented services and advice, from performing financial due diligence to confirming the viability of the company's product. Now, plaintiff wishes to argue that Snell & Wilmer did offer so much business advice that it was, in effect, an "insider." Both arguments lack merit, because Snell capably and professionally discharged its obligations as Visitalk's lawyers, but did nothing that brought it even close to "insider" status. The latter argument is not only inconsistent with plaintiffs' claims to date, it is so unsupported by the facts in this case and by relevant authority that amendment would be futile. The proposed Second Amended Complaint contains no factual averments (nor even conclusory statements) about Snell & Wilmer being an insider, so the pleading is deficient on its face with regard to plaintiff's new "insider" theory. Let us assume, however, that the

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 4 of 12 Document 281 3 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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

following allegations found their way from plaintiff's supporting memorandum to its proposed pleading: · There was a "very close relationship between S & W and the two principal shareholders and officers of Visitalk, Peter Thimmesch and Michael O'Donnell" [Memorandum at 2-3]; · "According to [former Visitalk General Counsel] Mr. Best, Richard Mallery, a senior partner of S & W and one of the lawyers at S & W who represented Visitalk, was a `father figure" to Mr. Thimmesch and Mr. O'Donnell" [Id. at 3]; · · "Mr. Mallery also provided business advice to Visitalk" [Id.]; "Mr. Gaston believes the lawyers at S& W knew their services were critical to Visitalk's existence when Mr. Donahey threatened to terminate the firm's representation of the company unless S & W was paid." [Id. at 3-4]. Such allegations do not come close to supporting a claim that Snell & Wilmer should be treated as an insider for purposes of 11 U.S.C. §547. 11 U.S.C. §101 (31) states that "insider" includes ­ "B. if the Debtor is a corporation ­ (i) (ii) (iii) (iv) (v) (vi) director of the Debtor; officer of the Debtor; person in control of the Debtor partnership in which the Debtor is a general partner; general partner of the Debtor; relative of a general partner, director, officer, or person in control of the Debtor...."

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 5 of 12 Document 281 4 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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 Snell & Wilmer obviously does not meet any of those enumerated tests. Because of the statute's use of the word "includes," some courts have found insider status where none of the tests were expressly met, but where there was a strong showing that the putative insider exercised control over the debtor's business affairs. Apart from the "father figure" label, the only fact referenced by plaintiff in the motion to amend is that Snell & Wilmer was able to prevail on Visitalk eventually to pay Snell & Wilmer's overdue legal bill. Lemansky v. Schmalbach, 56 B.R. 981, 1986 Bankr. LEXIS 6754 (W.D. Wis. 1986) notes that successful attempts by attorneys to be paid fall short of the necessary showing of control for purposes of 547 (b)(4)(B) preference avoidance: Attorneys are not automatically considered to be insiders under the Code ... At the time of the assignment the debtors had requested Whipple to undertake substantial additional legal work on their behalf. Whipple prevailed upon the debtors to grant it security for a large past due balance. No control over the debtors was demonstrated in that pair of straightforward business transactions. 56 B.R. at 983. The fact that Snell & Wilmer allegedly had to threaten to withdraw in order to be paid shows, not undue control over the debtor, but the lack thereof. In In re Schuman, 81 B.R. 583 (9th Cir. BAP 1987) is a case cited by plaintiff in its motion in which the court rejected an "insider" allegation as a matter of law. As in this case, there were negotiations between the debtor and the alleged insider that were "adversarial in nature." Thus, the court concluded, "it is clear that the debtor was not volunteering payment on his child support obligation. These factors suggest that the transaction was, indeed, `arms-length.'" Id. at 587. Similarly, an attorney's familiarity, even close familiarity, with a debtor's business affairs ­ which one would expect in the case of a competent attorney working with a corporation for any length of time--does not confer insider status. See Oliver v. Kollody, 142 B.R. 486, 490, 1992 Bankr. LEXIS 1186 (M.D. Fla. 1992): To accept the proposition urged by the debtor, one might contend that any attorney who represented a debtor pre-petition for several years, and became
Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 6 of 12 Document 281 5 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

1 2 3 4 5

intimately involved with and privy to the debtor's affairs, would be vulnerable to a preference attack when bankruptcy intervenes by a Trustee who would, no doubt, seek to recover all payments made to the attorney during the preceding year under the insider provision of the Bankruptcy Code. To carry the interpretation of the term `insider' to its logical extreme, as urged by the debtor, would be clearly absurd and illogical, and lacks any support either in the Code in the legislative history of the Section by case law. The authority relied on by the debtor is off the mark and does not furnish any support. The cases cited by plaintiff actually show how far Snell & Wilmer was from being an

6 insider. In Winick v. Daddy's Money of Clearwater, Inc., 187 B.R. 750, 1995 U.S. Dist. 7 LEXIS 15259, (M.D. Fla. 1995), for example, the Bankruptcy Court found that the insider, 8 Winick, had "sufficient control of [a certain] trust account to deem him an insider," since 9 "the account was `totally and exclusively under the control of Winick ... and was done at the 10 direction of Winick"; in addition, "the debtor had no control over the account, i.e. the ability 11 to disburse the funds or control how much went into the account." Id. No such allegation 12 has been, or could be, made against Snell & Wilmer. 13 Standard Stores v. Riddle, 124 B.R. 318, 324 (Bankr. C.D. Cal. 1991) involved, not 14 an attorney, but an insider who "had been debtor's general manager for years." Id. at 325. 15 In addition: 16 17 18 19 20 21 22 23 24 25 26 Id. Snell & Wilmer's role, as described in the complaint and even the supporting memorandum, was totally different. Similarly, the court's description of the "long term complex relationship" in Koch v. Rogers, 203 B.R. 385 (Bankr. D. Md. 1996) (rev'd in part on other grounds, Riddle [the insider] considered Freeman, the President of Debtor, to be `family' although Freeman was no longer related by affinity [he was Riddle's former brother-in-law]; Riddle had made an unsecured loan of $25,000 relying strictly upon Freeman's word, and Riddle was in the midst of arranging the purchase of a significant portion of Debtor's operations, with the services of Debtor's attorney and several high-ranking employees. Riddle even borrowed Debtor's DBA, `All Automotive Products,' in naming the New Corporation. When all these facts are considered, I am impelled to find that Riddle had the kind of close relationship with Debtor contemplated by Congress."

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 7 of 12 Document 281 6 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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

1998 U.S. App. LEXIS 3070 (4th Cir. 1998)), also cited by Plaintiff, reveals the inaccuracy of plaintiff's implication that Snell & Wilmer had such a relationship with Visitalk: The parties' relationship has been variously that of creditor and debtor, principal and agent, joint venturers, attorney and client, and landlord and tenant. Broumas and Rogers made numerous loans to each other not evidenced by written promises to pay; Rogers permitted Broumas to make withdrawals from his bank account as if it were his own; the two were involved in investment deals without written agreement; Rogers agreed to represent Broumas in litigation without a written fee agreement; and the two made numerous purchases of bank stock in furtherance of a questionable `wash trade' scheme that was the subject of the SEC enforcement action." Id. at 391. In short, relevant authority ­ including the cases cited by Plaintiff in its motion ­ establishes the futility of the proposed amendment, in light of the meager showing made by Plaintiff in its motion papers (even assuming that such averments at some point find their way into the proposed pleading). Finally, the discovery in this case shows that if plaintiff wished to pursue an "insider" theory, it could have done so long before now (in time for Snell & Wilmer to have a chance to confront the witnesses now being proferred in support of that theory). One of the two witnesses cited in plaintiff's motion, Mr. Gaston, was interviewed by plaintiff in December 2004 for at least two hours. [January 3, 2005 Deposition at 19:8-20:15 (attached as Exhibit A] Plaintiff's 30(b)(6) deponent, Mr. Schweigert, at first said Snell & Wilmer was discussed in that interview [id. at 21:17-22], then later said it was not. [id. at 76:4-12] In any event, any questions regarding Snell & Wilmer's alleged insider status clearly could and should have been asked of Mr. Gaston at that time. More than ten months ago, Mr. Schweigert further testified regarding Snell & Wilmer's allegedly close relationship with Visitalk, showing that the recent "father figure" testimony was not any sort of revelation. Schweigert:

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 8 of 12 Document 281 7 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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

·

Believed that "Snell & Wilmer played a part in all facets of the MP3 transaction, although in the marketing side of it, they did not play the lead role" [30:18-20];

·

Noted that Snell & Wilmer represented Visitalk executives Thimmesch and O'Donnell "personally, in their personal estate planning ... as their personal counsel" as well as acting as Visitalk's corporate counsel [38:24-4];

·

Believed that "someone as close to the company as Snell & Wilmer was ... would at least question whether or not you needed a ten million dollar accounting system, just as being a business person." [67:9-15]. "

Again, Snell & Wilmer believes its representation of Visitalk was not only proper but exemplary. The Schweigert testimony, however, makes clear that if plaintiff wished to try to make something out of Snell & Wilmer's allegedly "close" relationship with Visitalk, or Snell & Wilmer's familiarity with some of Visitalk's business issues, it could and should have done so long ago. The attempted amendment of the complaint has been unduly delayed, to Snell & Wilmer's prejudice. In any event, the amendment would be futile in view of the inability of Plaintiff's allegations to support a showing of "insider" status. /// /// /// /// /// /// ///

Case 2:02-cv-02405-HRH v. Visitalk 13801-1\Current Draft Response to Motion to amend.doc 9 of 12 Document 281 8 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL

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

CONCLUSION Plaintiff's Motion For Leave to File Second Amendment Complaint should be denied. DATED: November 10, 2005. MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A.

s/Charles S. Price Gary L. Birnbaum Charles S. Price Timothy J. Thomason Scot L. Claus 2901 North Central Avenue, Suite 200 Phoenix, Arizona 85012-2705 Attorneys for Defendant Snell & Wilmer, LLP

By:

9Filed 11/10/2005 Page Case 2:02-cv-02405-HRH Document 281 Draft Response to Motion to amend.doc 10 of 12 F:\USERS\CSP\Current Cases and OG\SNELL v. Visitalk 13801-1\Current

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

CERTIFICATE OF SERVICE I hereby certify that on November 10, 2005, I electronically transmitted DEFENDANT SNELL & WILMER, LLP'S RESPONSE TO MOTION FOR LEAVE TO FILE SECOND AMENDED COMPLAINT to the Clerk's Office using the CM/ECF system for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants:

Christopher R. Kaup, Esq. Robert Royal, Esq. Gregory W. Seibt Tracy C. Morehouse, Esq. Tiffany & Bosco, P.A. Third Floor Camelback Esplanade II 2525 East Camelback Road Phoenix, Arizona 85016-4237 Special Counsel for the Plaintiff Joseph E. Mais Perkins Coie Brown & Bain, P.A. 2901 North Central Avenue P.O. Box 400 Phoenix, AZ 85001-0400 Attorneys for Defendants Michael and Marcia O'Donnell David Rosenbaum Maureen Beyers Warren John Stapleton Osborn Maledon 2929 N. Central Avenue, Suite 2100 Phoenix, Arizona 85012-2794 Attorneys for Defendants Michael Cardwell and Margaret Mahoney David P. Brooks Brooks & Affiliates, PLC 123 North Centennial Way, Suite 207 Mesa, Arizona 85201 Attorneys for Defendants Robert and Carla Corry

Case 2:02-cv-02405-HRH Document 281 10 Response to Motion to amend.doc 11 of 12 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL v. Visitalk 13801-1\Current Draft

1 2 3 4

Brian N. Spector

Douglas F. Behm Jennings Strouss & Salmon, PLC 201 East Washington, Suite 1100 Phoenix, Arizona 85004 Attorneys for Defendant MP3.com, Inc.
A copy of the RESPONSE was also served on November 10, 2005, via U.S. mail,

5 postage prepaid, to the following, who are not registered participants in the CM/ECF System: 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 By: s/Charles S. Price Charles S. Price 2901 N. Central Avenue Suite 200 Phoenix, Arizona 85012-2705 [email protected] MARISCAL, WEEKS, McINTYRE & FRIELDANDER, P.A.

Cynthia Thimmesch 6530 North Central Avenue Phoenix, Arizona 85012 Defendant Pro Se Peter Thimmesch 11329 Stonehouse Place Potomac Falls, Virginia 20165-5123 Defendant Pro Se
Raymond F. Gaston Betty B. Gaston 5825 East Orange Blossom Lane Phoenix, Arizona 85018

Defendants Pro Se Mark J. Giunta 845 North Third Avenue Phoenix, Arizona 85003-1408 Defendant Pro Se
DATED November 10, 2005.

Case 2:02-cv-02405-HRH Document 281 11 Response to Motion to amend.doc 12 of 12 Filed 11/10/2005 Page F:\USERS\CSP\Current Cases and OG\SNELL v. Visitalk 13801-1\Current Draft