Free Motion for Leave to File - District Court of Arizona - Arizona

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Christopher R. Kaup State Bar No. 014820 Jeffrey A. Sandell, Esq. State Bar No. 020658
Third Floor Camelback Esplanade II 2525 East Camelback Road PHOENIX, ARIZONA 85016B4237 TELEPHONE: (602) 255-6000 FACSIMILE: (602) 255-0103

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

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA
BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, vs. CIV 02-2405-PHX-HRH

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PETER THIMMESCH and CYNTHIA THIMMESCH, husband and wife; MICHAEL O'DONNELL and MARSHA O'DONNELL, husband and wife; SNELL & WILMER, LLP, a limited liability partnership, et al.,

MOTION FOR LEAVE TO FILE SECOND AMENDED COMPLAINT (Assigned to the Honorable H. Russel Holland)

Defendants.

BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, the Plaintiff in the above-captioned action, hereby moves this Court for leave to amend its Complaint, pursuant to Rule 15(a), Fed.R.Civ.P., in the form attached hereto as Exhibit "1". This Motion is supported by the following Memorandum of Points and Authorities, which is incorporated herein by reference. /// ///

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Mr. Best is a former defendant in this action and was a witness clearly hostile to Plaintiff's position in this case. Visitalk sold approximately $40 million worth of securities to numerous investors over two years before filing for bankruptcy on November 29, 2000. Mr. Thimmesch and Mr. O'Donnell owned 5.1 million shares of Visitalk's common stock.
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RESPECTFULLY SUBMITTED this 24th day of October, 2005.

TIFFANY & BOSCO, P.A. /s/ C.R.K. #014820 By: _________________________________ Christopher R. Kaup, Esq. Jeffrey A. Sandell, Esq. Counsel for Plaintiff MEMORANDUM OF POINTS AND AUTHORITIES I. Factual Background. Visitalk.com, Inc. ("Visitalk") filed its Amended Complaint alleging that, among other things, the law firm of Snell & Wilmer ("S&W") received certain payments, which constitute avoidable preferential transfers, within ninety days of the filing of Visitalk's petition for relief under Chapter 11 of the Bankruptcy Code. See Amended Complaint at ¶¶ 319-339. S&W is the former legal counsel for Visitalk. All claims against S&W were transferred to the Visitalk Creditors Trust by operation of the Order confirming Visitalk's Chapter 11 Plan of Reorganization. Since the filing of the First Amended Complaint, Plaintiff has continued to diligently conduct discovery in this matter. Through those efforts, Plaintiff's counsel has learned -- only recently -- that the relationship between S&W and Visitalk was sufficiently close that S&W may be properly treated as an "insider" for purposes of 11 U.S.C. §547. On September 9, 2005, Stephen A. Best1, Plaintiff's former in-house counsel, was deposed by Plaintiff. Mr. Best testified about the very close relationship between S&W and the two principal shareholders2 and officers3 of Visitalk, Peter Thimmesch ("Thimmesch") and

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Michael O'Donnell ("O'Donnell"). According to 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. Mr. Mallery also provided business advice to Visitalk. See Transcript of Deposition of Stephen Best, September 9, 2005 (hereinafter referenced as "Best Tr."), at p.20, ln. 1 ­ p. 21, ln. 19, attached hereto as Exhibit "2." Mr. Best's testimony regarding the exceedingly close relationship between Visitalk and S&W was recently corroborated by Raymond Gaston4, Visitalk's former Vice President of Finance and Controller of Visitalk. Mr. Gaston testified during his deposition on October 6, 2005, that he agreed Mr. Mallery was a father figure for Thimmesch and O'Donnell and understood that Mr. Mallery provided business advice to Visitalk. See Transcript of Deposition of Raymond Gaston, October 6, 2005 (hereinafter referenced as "Gaston 10/6/05 Tr."), at p.483, ln. 3 ­ p. 484, ln. 1, attached hereto as Exhibit "3." Mr. Gaston also testified, at the same deposition, that Mr. Mallery and Michael Donahey, the lawyer at S&W who provided the majority of legal services to Visitalk, knew, in early 2000, about Visitalk's grave financial condition and that the company would go out of business unless it raised additional capital through selling securities to new investors. See Gaston 10/6/05 Tr., at p. 490, ln. 23 ­ p. 492, ln. 3, attached hereto as Exhibit "3." Mr. Gaston had testified previously that Mr. Mallery and Mr. Donahey pressured him, as Visitalk's Controller, to make large payments to S&W at the end of May and during the Summer of 2000, even though Visitalk was having cash flow problems and paying certain S&W bills, in response to Mr. Mallery's phone call, would have violated a Visitalk internal policy. According to Mr. Gaston, S&W's legal services in connection with preparing offerings of securities to new investors was critical to Visitalk's continued existence in May of 2000. Mr. Gaston believes the lawyers at S&W knew

Peter Thimmesch was the Chief Executive Officer and the Chairman of the Board of Directors for the majority of the time that S&W represented Visitalk. Michael O'Donnell was the President and a member of the Board of Directors of Visitalk during the representation of the company by S&W. 4 Mr. Gaston was a defendant in this action against whom a judgment has been entered by the Court upon stipulation between him and Plaintiff.
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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. See Transcript of Deposition of Raymond Gaston, July 14, 2005 (hereinafter referenced as "Gaston 7/14/05 Depo."), at p. 139, ln. 11 ­ p. 141, ln. 25; p. 145, ln. 14 - p. 148, ln. 23, attached hereto as Exhibit "4." Based on this newly discovered information, there is a strong factual basis to allege and for this Court to conclude that S&W was an "insider" of the Debtor for purposes 11 U.S.C. §547 and, as a result, the one year preference period provided by Section 547(b)(4)(B) is applicable to S&W. Visitalk paid S&W $720,859.92 within the one year prior to its bankruptcy which is recoverable as a preference, pursuant to 11 U.S.C.547(b), assuming S&W is determined to have been an "insider" of Visitalk. Count XXVII of the Amended Complaint alleged voidable preferential transfers made to S&W during the 90 days prior to Visitalk's bankruptcy filing. Prior to recently deposing Mr. Best and Mr. Gaston, Plaintiff did not have an adequate factual basis to allege that S&W was an insider of Visitalk. Therefore, Plaintiff now seeks to amend its Amended Complaint only to include the allegations that S&W was an insider and the dates and amounts of transfers to S&W during one year prior to bankruptcy. See Proposed Second Amended Complaint, attached hereto as Exhibit "1." Granting leave to make this one amendment will not expand or prolong this litigation because S&W already possesses any documents and all facts relevant to its alleged status as an "insider" and participated fully in the depositions of Mr. Best and Mr. Gaston by conducting examinations of them. The factual and legal grounds for S&W's defenses are the same whether the 90 day preference period in Section 547(b)(4)(A) or the one year period applies to S&W. II. Legal Argument. The authority to amend a pleading is provided by Rule 15(a), Fed.R.Civ.P., which states, in pertinent part; A party may amend his pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is
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one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, he may so amend it at any time within 20 days after it is served. Otherwise a party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. In the Ninth Circuit, courts are advised that Rule 15(a) must "be applied with extreme liberality." Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003)(quoting from Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708,712 (9th Cir. 2001)). In fact, there is a presumption under Rule 15(a) in favor of granting leave to amend unless a party opposing the amendment demonstrates prejudice or a strong showing of one of the factors listed by the Supreme Court in Foman v. Davis, 317 U.S. 178, 192 (1962). In Foman, the Supreme Court offered the following factors a district court should consider in deciding whether to grant leave to amend: In the absence of any apparent or declared reason ­ such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. ­ the leave sought should, as the rules require, "freely given." Id at 182. See also Allen v. City of Beverly Hills, 911 F.2d 367, 373 (9th Cir. 1990); Hurn v. Ret. Fund Trust of the Plumbing, Heating & Piping Indus. of S. Cal., 648 F.2d 1252, 1254 (9th Cir.

None of the Foman factors are present in this case. Here, Plaintiff is not seeking to 20 amend its Complaint based upon any "dilatory motive" or in an effort to cause "undue delay"; 21 rather, Plaintiff seeks to amend its Complaint for the valid and permissible purpose of 22 supplementing only its claim for avoidance of preferential transfers based upon newly discovered 23 evidence. There is certainly no bad faith by Plaintiff and will be no prejudice to S&W. 24 As demonstrated above, Plaintiff discovered only recently information evidencing that 25 S&W shared a much closer relationship with Visitalk and its principal officers and major 26 shareholders than previously known or could have been suspected and alleged. One of the most
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senior attorneys at S&W was a "father figure" for Messrs. Thimmesch and O'Donnell and provided business advice to Visitalk. Having knowledge about Visitalk's severe financial

problems and that their services were necessary to the survival of the company, Mr. Mallery and Mr. Donahey used this extraordinarily close relationship to pressure Mr. Gaston to make very large payments to S&W. After speaking with Mr. Mallery at the end of May, 2000, Mr. Gaston thought that Mr. Mallery, Mr. Thimmesch's "father figure," would call and "press" Mr. Thimmesch to have a check written to S&W. See Gaston Tr. 7/14/05, at p. 147, ln. 18 ­ p. 148, ln. 8, attached hereto as Exhibit "4." The testimony of Mr. Best and Mr. Gaston establishes conclusively that S&W and the Visitalk did not maintain an ordinary attorney ­ client relationship. In fact, S&W and Visitalk shared a sufficiently close relationship, such that their prepetition dealings were not at arm's length. This testimony supports the conclusion that S&W was an "insider" for the purposes of 11 U.S.C. 547(b)(4)(B). See In re Schuman, 81 B.R. 583, 586 (9th Cir. BAP 1987)(quoting the legislative history, the Court observed that "an insider is `one who has a sufficiently close relationship with a debtor that his conduct is made subject to closer scrutiny than those dealing at arms length with the debtor.'"); Standard Stores, Inc. v. Riddle, 124 B.R. 318, 324 (Bankr. C.D. Cal. 1991)(holding that the appropriate test to determine "insider" status is whether the creditor had a "close" relationship with the debtor that resulted in a transaction that was not conducted at arm's length, and further holding that a "close" relationship existed when debtor's president was considered creditor to be family); Winnick v. Daddy's Money of Clearwater, Inc., 187 B.R. 750, 755 (Bankr. M.D. Fla. 1995)(finding that attorney did not deal at arm's length with a debtor when the attorney held sufficient control over the debtor to compel payment of his debt); Koch v. Rogers III, 203 B.R. 385, 391 (Bankr. D.Md. 1996)(finding insider status when creditor-attorney had a "long-term complex relationship" with the debtor). The Ninth Circuit Bankruptcy Appellate Panel has recognized that, "insider status may be based on a professional or business relationship with the debtor, in addition to the Code's per se
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classifications, where such relationship 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 Enterprise Acquisition Partners, Inc., 319 B.R. 626, 631 (9th BAP 2004)[emphasis supplied]. The testimony of Mr. Best and Mr. Gaston demonstrate that S&W had just that type of "insider" relationship with Visitalk. As to a plaintiff's right to amend in a bankruptcy preference action, the Court in In re Atkinson, recognized that, "[s]ince the function of Rule 15(a) is to enable a party to assert matters that were overlooked or unknown to him at the time he filed his original complaint, leave to amend should be freely granted in the absence of any undue delay, bad faith or dilatory motive." 78 B.R. 449, 450 (Bankr. D.S.C. 1987)(citing Spell v. McDaniel, 591 F.Supp. 1090, 1097 (E.D.N.C. 1984)). In Atkinson, the Chapter 7 Trustee initiated an adversary proceeding in an effort to recover certain payments as preferential transfers. Subsequent to the filing of the original complaint, the Chapter 7 Trustee sought to amend his complaint in order to allege that the payment recipient was an "insider", thereby expanding the time period in which payments could be avoided. Although the defendant in Atkinson objected to the amendment request, the

Bankruptcy Court was not persuaded and specifically noted that allowing the amendment and expanding the preference period would not result in any prejudice to the defendant. In re

21 Atkinson, 78 B.R. at 451. That is also the case here. 22 23 24 recently discovered during depositions of Mr. Best in September and Mr. Gaston in October, 25 2005. Allowing Plaintiff to amend its Complaint could not possibly cause undue prejudice to 26 any party, including S&W; rather, amending the Complaint will ensure justice, as this matter will
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III. Conclusion. The evidence providing the basis for Plaintiff to make the proposed amendment was only

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be decided on its merits. Plaintiff is not seeking to amend its Complaint for purposes of undue delay, bad faith or a dilatory motive. Plaintiff has not previously failed to cure any alleged deficiencies in the Complaint through amendments that were previously permitted. And,

amendment of the Complaint clearly will not be futile and will not expand or delay this litigation. The Foman factors simply are not present here. Thus, the "extreme liberality" with which courts in the Ninth Circuit must apply Rule 15(a) requires this Court to grant the Plaintiff leave to amend its Complaint. WHEREFORE, the Plaintiff respectfully requests that this Court grant leave to the Plaintiff to file an Amended Complaint. RESPECTFULLY SUBMITTED this 24th day of October, 2005.

TIFFANY & BOSCO, P.A. /s/ C.R.K. #014820 By: _________________________________ Christopher R. Kaup, Esq. Jeffrey A. Sandell, Esq. Counsel for Plaintiff ORIGINAL of this pleading electronically filed with the Court on this 24th of October, 2005. and copies electronically mailed this 24th day of October, 2005, to: Douglas F. Behm Brian N. Spector Jennings, Strouss & Salmon 201 E. Washington, 11th Floor Phoenix, AZ 85004 Attorneys for Defendant MP3.com, Inc. Gary L. Birnbaum Timothy J. Thomason Mariscal, Weeks, McIntyre & Friedlander, P.A. 2901 N. Central Avenue, Suite 200 Phoenix, AZ 85012 Attorneys for Defendant Snell & Wilmer, LLP
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David B. Rosenbaum, Esq. Maureen Beyers, Esq. Osborn Maledon, PA 2929 North Central, Ste. 2100 Phoenix, AZ 85012 Attorneys for Cardwell/Mahoney Joseph E Mais Perkins Coie Brown Bain P.A. PO Box 400 Phoenix, AZ 85001-0400 Attorneys for Defendant Michael and Marcia O'Donnell Filed 10/24/2005 Page 8 of 9

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and copies mailed via U.S. First Class Mail this 24th day of October, 2005, to: Peter Thimmesch 11337 Stonehouse Place Potomac Falls, VA 20165-5123 Pro Per Ray Gaston Betty B. Gaston 5313 E. Pinchot Ave. Phoenix, AZ 85018 Pro Per Cynthia Thimmesch 6530 N Central Avenue Phoenix AZ 85012 Pro Per Vern Schweigert Biltmore Associates 1121 E. Missouri Avenue #100 Phoenix, AZ 85014 Trustee of Creditors' Trust

Dean M. Dinner, Esq. JENNINGS, HAUG & CUNNINGHAM, LLP 2800 North Central Avenue, Suite 1800 Phoenix, Arizona 85004-1049

Mark J. Giunta 845 North Third Avenue Phoenix, Arizona 85003-1408

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