Free Judgment - District Court of Arizona - Arizona

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Biltmore Associates, as Trustee for the Visitalk Creditors' Trust,

) ) ) Plaintiff, ) ) vs. ) ) Peter Thimmesch and Cynthia Thimmesch, ) husband and wife; Michael O'Donnell and ) Marsha O'Donnell, husband and wife; ) et al., ) Defendants. ) _______________________________________)

No. CV-02-2405-PHX (HRH)

JUDGMENT Pursuant to stipulation by and between the Plaintiff and Defendants Ray and Betty B. Gaston, and for good cause showing, the Court hereby finds as follows: I. FINDING OF FACTS 1. Plaintiff Biltmore Associates, L.L.C., is the Court appointed Trustee for the

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")s. 2. Defendants Ray and Betty B. Gaston at all material times were residents of the

State of Arizona. At all times material hereto, Ray Gaston was acting on behalf of the marital community.
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3.

Mr. Gaston is a former officer of Visitalk. At all material times hereto, he was

Visitalk's Chief Financial Officer and/or Controller. 4. Peter Thimmesch, Cynthia Thimmesch, Michael O'Donnell, and Mark

Cardwell, are referred to collectively herein as the "Founders." 5. 6. 7. Visitalk was incorporated in the State of Arizona on September 3, 1998. Visitalk was insolvent on all dates material to each of these Findings of Facts. A Unanimous Consent of the Board of Directors in Lieu of Organizational

Meeting, dated September 4, 1998, reflects 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. 8. The September 4, 1998 Unanimous Consent also reflects 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. 9. The stock transfer records of the Visitalk, as well as actual stock certificates,

reflect that those shares of stock were issued to Mr. O'Donnell, Mr. Thimmesch and Mr. Cardwell on September 4, 1998. 10. 1998. 11. A document titled "Action by Unanimous Consent" of Visitalk's Board of Mr. Cardwell was elected to Visitalk's Board of Directors on September 8,

Directors purports that the Board of Directors authorized the issuance of 7,650,000 warrants to purchase the Plaintiff's common stock at a price of $0.135 per share to Mr. Thimmesch and Mr. O'Donnell (the "Founders Warrants") on September 12, 1998.

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12.

That Action by Unanimous Consent was not created until November of 1998,

not executed by any members of the Board of Directors until November of 1998, after Mr. Cardwell became a director, never signed by Mr. Cardwell and never legally effective. 13. A document titled "Minutes of a Special Meeting of the Board of Directors,

dated September 12, 1998," purports that Visitalk's Board of Directors, consisting only of Mr. Thimmesch and Mr. O'Donnell, allegedly convened a meeting on September 12, 1998, in which they agreed to issue the Founders Warrants to themselves. 14. Those "Minutes of a Special Meeting of the Board of Directors" were not,

actually, prepared on or about September 12, 1998. In reality, they were prepared by S&W in November or December of 1999. 15. The copy of alleged "Minutes of Special Meeting of Board of Directors, dated

September 12, 1998," in Visitalk's possession is not signed by either Mr. Thimmesch or Mr. O'Donnell or any other officer or director of Visitalk. 16. In October and November 1998, Visitalk raised money through the sale of an

issuance of "Series A Preferred Stock" and an issuance of "Series B Preferred Stock." In connection with the Series A Stock issuance, no disclosure was made regarding the Founders' Warrants allegedly issued to Mr. O'Donnell and Mr. Thimmesch. As to the Series B Stock issuance and four subsequent privatge stock offerings by Visitalk, inadequate disclosure was made regarding the Founders' Warrants. 17. Mr. Gaston should have or could have had sufficient knowledge about the

Founders' Warrants to correct the situation and had sufficient power within Visitalk to require a more complete disclosure about the Founders' Warrants during stock offerings or issuances by Visitalk.

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18.

The situation with the Founders' Warrants resulted in a settlement with Mark

Cardwell after he was terminated by Visitalk for cause. Mr. Cardwell demanded and was paid $1,200,000.00 even though he had initially offered to settle for the same severance payment made to other Visitalk senior executives under the employment agreements. The usual severance payment amount was $200,000.00. Thus, Visitalk paid Mr. Cardwell $1,000,000.00 in excess of the usual severance payment due to his knowledge regarding the infirmities of the Founders' Warrants. The settlement required Visitalk to find purchasers for Mr. Cardwell's Visitalk stock, which was to be purchased for the $1,200,000.00 owed to Mr. Cardwell under his settlement with Visitalk. 19. Visitalk paid the settlement with Mr. Cardwell by procuring purchasers for his

Visitalk stock at the price of $1,210,000.00. 20. These procured purchasers purchased Visitalk stock directly from Mr.

Cardwell, paying him directly for the stock, and depriving Visitalk of the funds it should have received from investors seeking to purchase of Visitalk stock. 21. Mr. Peter Thimmesch caused the Plaintiff to reimburse him for at least

$235,000 of business expenses that were not appropriately considered business expenses or for which no or inadequate documentation or justification was provided. 22. Despite his role as CFO and/or Controller, and even though he was aware of

Mr. Thimmesch's improper expenditures of Visitalk funds, Mr. Gaston did not require that Mr. Thimmesch repay the at least $235,000.00 sum back to Plaintiff. 23. While Mr. Gaston was Visitalk's Chief Financial Officer, Visitalk entered into

a three-year license of billing software from Portal Software, Inc. ("Portal") in May 1999. The cost of the license was $1 million. In addition, Mr. Gaston, among others, caused

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Visitalk to retain the accounting firm of Ernst & Young to customize the billing software for an additional $1 million even though Ernst &Young was Visitalk's auditors. 24. 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. 25. Mr. Gaston neither analyzed nor sought professional advice regarding the need

for the Oracle software, nor did he ever consider any alternatives to to the Oracle software. 26. Visitalk purchased an accounting package from Oracle Corporation ("Oracle")

at a cost of $750,000.00, plus large additional consulting fees. 27. 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. 28. Mr. Gaston neither analyzed nor sought professional advice regarding the need

for the Oracle software, nor did he ever consider any alternatives to the Oracle software. 29. During the summer and fall of 2000, Visitalk desperately needed operating

capital and was having substantial difficulty in raising new money from investors. During the summer and fall of 2000, Mr. O'Donnell sold large portions of the Founders' Warrants, even though the warrants had infirmities. 30. The sale of the Founders' Warrants by Mr. O'Donnell deprived Visitalk of

funds it could have raised through the sale of stock. 31. Mr. Gaston did nothing in advance of such sales by Mr. O'Donnell to prevent

the sale of Founders' Warrants, especially when it deprived Visitalk of funds from investors, nor did Mr. Gaston take any actions to recover from Mr. O'Donnell funds raised from the sales of the Founders' Warrants or to terminate Mr. O'Donnell's position with Visitalk. 32. During its entire corporate life, Visitalk never had a viable product to sell,

selling just $60,000 worth of product while incurring nearly $55,000,000 in debt.
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32.

Despite the lack of any viable product and other issues relating to certain

offerings of securities, Mr. Gaston, among others, permitted Visitalk to sell preferred stock through the "C" through "F" offerings. These actions and inactions by Mr. Gaston deepened Visitalk's insolvency. 33. On December 31, 1999, Visitalk and a company called MP3.com, Inc. ("MP3")

entered into a Marketing and Promotional Agreement, obligating Visitalk to pay MP3 not less than $60,000,000.00 to MP3 for marketing services. 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. 35. The purpose of the Marketing and Promotional Agreement and Stock Purchase

Agreement was to convey the appearance of substantial equity investment income to Visitalk from a large, well known internet company, such as MP3, as well as a substantial sale for MP3. 36. Visitalk actually 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 within months thereafter. 37. The transactions with MP3 did not provide any benefit to Visitalk; rather, it

increased Visitalk's debt burden which it has no ability to pay, and thus artificially prolonged Visitalk's corporate life and deepened its insolvency. 38. In addition, Visitalk did not receive reasonably equivalent value in exchange

for the transfer to MP3 of $5,300,000.00.

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II.

CONCLUSIONS OF LAW

Based on the above stipulated facts, and for good cause showing, the Court hereby concludes as follows: 1. 1334. 2. 1409. 3. Mr. Gaston breached his duties as an officer of Visitalk by negligently failing Venue is proper in the District of Arizona pursuant to 28 U.S.C. §§ 1408 and This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

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. Gaston breached his duties as an officer 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. Gaston breached his duties as an officer of Visitalk by negligently failing

to investigate and analyze the need for or value of purchasing accounting software from Oracle Corporation for $750,000, 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 the Oracle accounting software and to obtain competitive bids for such software and consulting services; 6. Mr. Gaston breached his duties as an officer of Visitalk by negligently failing

to investigate the actual capital structure of Visitalk, including the claimed issuance of
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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, including disclosures regarding Visitalk's capital structure, lack of a commercially viable product and deepening insolvency. 7. The actions by Mr. Gaston in connection with the Founders' Warrants comprise

a breach of his fiduciary duties and loyalties to Visitalk and contributed to the insolvency of Visitalk and the ability of Visitalk to subsequently raise funds and operate successfully. 8. Mr. Gaston's breach of fiduciary duties and loyalties to Visitalk by failing to

stop the Cardwell settlement damaged Visitalk. 9. Visitalk suffered actual damages in an amount of not less than $49,804,240.00

as a direct, proximate and foreseeable result of Mr. Gaston's breaches of loyalty and fiduciary duties as an officer of Visitalk, as well as his negligent failure to investigate and supervise others. 10. Plaintiff is the owner and was properly been assigned by Visitalk all rights and

claims Visitalk has against the Defendants. 11. Plaintiff and Mr. Gaston have entered into a stipulation providing for the entry

of a judgment against Mr. Gaston in the amount of $42,000,000.00. 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 Mr. Gaston and his marital community in the amount of forty-two million dollars ($42,000,000.00);

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IT IS HEREBY FURTHER ORDERED granting dismissal of the Amended Complaint as against Betty Gaston and her sole and separate property. DATED at Anchorage, Alaska, this 7th day of September, 2005.

/s/ H. Russel Holland United States District Judge

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