Free Response in Opposition to Motion - District Court of Arizona - Arizona

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BEUS GILBERT PLLC
ATTORNEYS AT LAW

4800 NORTH SCOTTSDALE ROAD SUITE 6000 SCOTTSDALE, ARIZONA 85251 TELEPHONE (480) 429-3000

Leo R. Beus/002687 ­ [email protected] Scot C. Stirling/005757 ­ [email protected] Steven E. Weinberger/015349 ­ [email protected] Attorneys for Individual Plaintiffs and Trustee

STEVE BROWN & ASSOCIATES, LLC
1414 E. INDIAN SCHOOL ROAD, SUITE 200 PHOENIX, ARIZONA 85014-2412 TELEPHONE (602) 264-9224

Steven J. Brown/010792 ­ [email protected] Co-Counsel for Trustee UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA DIANE MANN, as Trustee for the Estate of LeapSource, Inc., CHRISTINE V. KIRK, et al., Plaintiffs, vs. GTCR GOLDER RAUNER, L.L.C.; et al., Defendants.

Case No.: CIV-02-2099-PHX-RCB

PLAINTIFFS' RESPONSE TO MAKINGS' RENEWED MOTION FOR SUMMARY JUDGMENT ON COUNT 23 AND JOINDER IN GTCR RENEWED MOTION FOR SUMMARY JUDGMENT ON COUNT 5 (Honorable Robert C. Broomfield) (Oral Argument Requested)

MICHAEL MAKINGS, Counterclaimant,

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vs. LEAPSOURCE, INC., et al., Counterdefendants.

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TABLE OF CONTENTS I. II. III. INTRODUCTION AND OBJECTIONS....................................................................... 1 ARGUMENT................................................................................................................. 4 CONCLUSION............................................................................................................ 13

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MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION AND OBJECTIONS Plaintiffs submit this response in opposition to Makings' Renewed Motion For Summary Judgment On Count 23 and Joinder in GTCR's Renewed Motion for Summary Judgment on Count 5 (Docket 480) (hereafter the "Motion"). In his supporting "Statement of Facts" (Docket 481), Makings has simply incorporated by reference GTCR's Statement of Facts (Docket 476), and Makings' own prior

8 9 10 11 12 13 14 15 16 17 Judgment (Docket 483), and by the plaintiffs' Response to GTCR's Statement of 18 19 20 21 22 23 24 25
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Statements of Facts and exhibits filed on February 26, 2006 (sic - Plaintiffs assume that should be February 22, 2006, Docket 324)1 and March 20, 2006 (sic ­ Plaintiffs assume that should be March 10, 2006, Docket 341). The prior Statement of Facts in Docket 324 also included a "joinder" in other defendants' Motions and Statements of Facts, which were addressed in the Plaintiffs' responses to the other defendants' Motions and Statements of Facts.2 This Response is therefore necessarily supported by: (1) Plaintiffs' Response to in opposition to GTCR's renewed Motion for Summary

That was a Statement of Facts filed in support of a Motion for Summary Judgment on the Joint Venture related claims; it is not clear why that document would be cited in support of Makings' "renewed" motion or "joinder" in GTCR's motion. However, we find no document in the record filed by Makings on February 26, 2006. This is one of the reasons that Plaintiffs object to Makings' renewed Motion and joinder in GTCR's motion; Makings is incorporating by reference other documents that in turn incorporated other documents by reference, and the Plaintiffs' responses to those earlier Motions and Statements of Facts therefore comprise a number of other documents, filed over a period of approximately eighteen months. 1
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Uncontested ICG-Related Facts and Statement of Additional Facts Precluding Summary Judgment, submitted with the plaintiffs' Response to the GTCR Motion (Docket 484); (2) Plaintiffs' Response (Docket 418) and Plaintiffs' related Statements of Facts

(Docket 419) filed in opposition to Makings' Motion for Summary Judgment on Contract Claims, Breach of Fiduciary Duty Claims and All Other Claims Against Defendant Makings (Docket 340) and its supporting Statement of Facts (Docket 341).

7 8 9 10 11 12 13 14 15 16 ago. However, because Makings in Dockets 323 and 324 joined in the motion and statement 17 18 19 20 21 22 23 24 25 Plaintiffs believe this admittedly confusing and unhelpful reference to and incorporation of documents previously filed is necessary because of Makings' wholesale incorporation of earlier statements of fact.
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(3)

Plaintiffs' Response (Docket 364) to Makings' Motion for Summary Judgment

on Joint Venture Related Claims (Docket 323) and supporting Statement of Facts (Docket 324) pointed out that the Court had already granted other defendants' Motions for Summary Judgment on the Joint Venture claims, finding that there was no joint venture as a matter of law, and that Makings' Motion was therefore moot. Therefore, Plaintiffs did not file a responsive statement of facts to the Motion, and Plaintiffs object to Makings' attempt in his "renewed" Motion to use unspecified facts from a Statement of Facts that was not even correctly identified, and that was not answered when it was filed approximately 18 months

of facts filed by GTCR, Plaintiffs' response to this "renewed" Motion is also based upon the Plaintiffs' responsive Statements of Facts, filed under seal on September 26, 2005 in opposition to the GTCR Statement of Facts.3 But see footnote 1 (we don't even know why Makings has cited the papers on that motion).

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Plaintiffs object to Makings' "renewed" Motion for Summary Judgment on Count 23, which was filed several months after the Court denied the original motion, without providing any new facts (the "renewed" Motion incorporates Makings' previous Statements of Facts from the original Motion and from a prior motion), and without pointing to any new authority or to any prior authority that the Court may have overlooked in its prior ruling. The "renewed" Motion for Summary Judgment is simply an untimely motion for

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Unlike Makings, the GTCR defendants were expressly given permission by the Court to renew their motion to address the duty of loyalty / good faith issues. In fact, one of the GTCR directors' arguments was that they were not conflicted in the same way that Makings was, because they were not "on both sides" and did not personally benefit from the ICG transaction. Docket 475 at p. 8 lines 1-3. As the purchaser of the ICG assets, Makings clearly was on both sides of the transaction that he began to pursue no later than January 2001, when he was still an officer and director of LeapSource, and also personally benefited from the transaction. Compare, for example, Order dated 30 March 2007 (Docket No. 472) at 22-24, pointing out and ultimately rejecting Makings' selective references to and interpretation of the testimony of Michele Matiski, with Makings' repetition of the same misleading characterization of Ms. Matiski's and her law firm's purported "approval" of the transaction. (Motion at page 7 line 25 to page 8 line 1.) The Plaintiffs' Response (Docket No. 484) to GTCR's Statement of Facts in support of its renewed Motion cited, in response to paragraph 33, Ms. Matiski's testimony that she did not have an opinion whether the transaction was in the company's
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reconsideration. Plaintiffs also object to Makings' "joinder" in GTCR's renewed Motion for Summary Judgment on Count 5,4 which did not even purport to defend or excuse Makings' conduct.5 Makings' joinder is also not supported by any new facts or authority relevant to his own situation, and again simply incorporates and refers to a prior statement of facts, repeating Makings' selective citation and "interpretation" of facts that the Court expressly considered and expressly rejected in its Order dated 30 March 2007.6

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II.

ARGUMENT The only case cited in Makings' "renewed" motion and joinder (at page 3) is Ong

Hing v. Arizona Harness Raceway, Inc., 10 Ariz. App. 380, 459 P.2d 107 (1973), an Arizona case apparently cited for a point about Makings' liabilities as an officer and director of a Delaware corporation. The Court commented on this same point in its Order dated 30 March 2007 (Docket 472) at pages 20-21: Defendant Makings correctly acknowledges that Delaware law applies to this fiduciary duty claim. See Mot. (doc. 340) at 18. Despite that, he then incongruously relies upon Arizona law to argue that he did not owe any fiduciary duties when the ICG assets sale occurred. See id. at 19 (citing Master Records, Inc. v. Backman, 133 Ariz. 494, 652 P.2d 1017 (1982)). Master Records applies Arizona law, and thus is not controlling on the issue of whether under Delaware law defendant Makings owed a fiduciary duty to LeapSource at the time of the ICG asset sale. Makings' Motion should be denied because the record demonstrates the existence of genuinely disputed material facts concerning his breaches of the duty of loyalty and good faith, which constitute improper conduct supporting the claim for interference with the Individual Plaintiffs' interests under the Stockholders' Agreement. Makings has not cited any new facts or law in support of his "renewed" motion or his "joinder" in GTCR's Motion. Both his "renewed" motion and his "joinder" in GTCR's Motion amount to nothing more

19 20 21 22 23 24 25 interest ­ and that it wasn't her job to say so ­ and that her firm did not provide an opinion that the transaction would stand up in bankruptcy. There is no new evidence cited in Makings' joinder to suggest that the Court should reconsider its prior ruling denying Makings' motion for summary judgment on this claim.
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than motions for reconsideration, which should not be considered in the absence of new facts or authority.

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The GTCR Motion that Makings has joined did not even purport to excuse or defend Makings' conduct, and the authorities cited in that Motion are not relevant to his situation as a person who unquestionably commenced his efforts to acquire assets of LeapSource while he was a conflicted officer and director of the corporation, and who succeeded in acquiring those assets for essentially no consideration, approximately one year after those assets were purchased by LeapSource for $10 million.

7 8 9 10 11 12 refers to Makings' vague claim that he did nothing beyond "preparations" for the ICG asset 13 14 15 16 17 18 19 20 21 22 goes on to say that officers, directors, and employees are entitled to make preparations to 23 24 25
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On March 30, 2007, the Court ruled that Makings has not met his burden in terms of showing that as a matter of law, he did not breach any fiduciary duties when he engaged in "preparations" for the ICG assets sale prior to resigning from LeapSource. Order Docket 472 at page 22, lines 13-16. (The word "preparations" in quotation marks

sale before he resigned from LeapSource, previously noted by the Court in the quote at pages 6-7, below.) Makings has said absolutely nothing new in his "joinder" to address that issue ­ except that he has said that, although "there may have been discussions by Makings and anyone associated with LeapSource prior to his actual resignation [on March 20, 2001] in regard to new business opportunities, it was within his legal rights to do so." Motion at page 7, lines 16-18 (emphasis added). No authority is cited for that point. The "new business opportunities" referred to in the language just quoted is selfdealing in the assets of a corporation of which he was still an officer and director. Makings

compete with a company by which they are still employed. Motion at page 7, lines 18-20.

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First, that has nothing to do with preparations to compete using the assets of the company, or the acquisition of the assets of the company in a self-dealing transaction. Makings has not cited any authority for the statement made at lines 18-20, much less cited any authority for the proposition that permitted "preparations to compete" can ever include self-dealing in assets to be used for that purpose. Second, Makings was not preparing to "compete" with LeapSource ­ he was pursuing a transaction in which LeapSource would

7 8 9 10 11 12 13 14 15 16 as reasons for rejecting the same argument the last time around: 17 18 19 20 21 22 23 24 25 The Purchase Agreement was attached as Exhibit 16 to the GTCR Statement of Facts (Docket 476) in support of the Motion that Makings purports to join.
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cease to do the kind of work performed by ICG (it was obviously not contemplated that LeapSource would remain in that line of work after selling all of the ICG assets to Makings),7 and in circumstances where he knew that the GTCR defendants' plan was to liquidate LeapSource. In any case, Makings has simply made these assertions without pointing to any authority to support them, and without pointing to any facts to support his characterization of his conduct. He has repeated an argument that the Court has already rejected, without adding any additional facts or authority to address the points specifically cited by the Court

Shifting to the time frame prior to the ICG assets sale, Makings readily concedes that he was a LeapSource employee and director while at least some of the negotiations for that sale took place. Nonetheless, Makings contends that, as a matter of law, he cannot be held liable for breach of fiduciary duties during that time because he was entitled to engage in what he terms "mere preparations" to compete with LeapSource. See Mot. (doc. 3402) at 22. Makings believes that he was entitled to engage in those

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"preparations" (which he does not identify or explain) even though he was still an employee and director of LeapSource. Defendant Makings provides no legal argument to support his position. Order dated March 30 (Docket 472) at page 21, lines 8-19 (emphasis added). Absolutely nothing has changed with respect to the two points emphasized in the preceding quote. Makings has still identified no facts to identify or explain exactly what "preparations" Makings made and believes that he was entitled to engage in while he was still an officer and employee of LeapSource ­ GTCR's Motion did not purport to describe or

9 10 11 12 13 14 15 16 17 18 support of the Motion that Makings purports to join, there are references to some of 19 20 21 22 23 24 25
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explain what Makings was doing, and Makings has merely incorporated by reference his earlier Statements of Facts. Makings has still not cited any authority to support his position, and he has not pointed to any authority cited in GTCR's Motion that would purport to address Makings' situation as an officer and director of the company making "preparations" to self-deal in assets of the company.8 Makings has not carried his burden as the moving party to demonstrate that there are no disputed issues of material fact, and that he is entitled to summary judgment on this claim. In Plaintiffs' Response (Docket 484) to the GTCR Statement of Facts (Docket 476) in

Because of his personal interest in the transaction that he was "preparing" while still an officer and director of LeapSource, the business judgment rule (invoked by Makings in his original Motion) does not apply, and the burden is on Makings to prove the "entire fairness" of any transaction with the company. "[G]ood faith and the absence of self-dealing are threshold requirements for invoking the [business judgment] rule," and the rule does not apply to a transaction if a director "expect[s] to derive any personal financial benefit from it in the sense of self-dealing"; instead, "the burden shifts to the director defendants to prove to

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Makings' actions during that period of time.9 These facts are sufficient to demonstrate that the burden is on Makings to demonstrate that his conduct was scrupulously consistent with his fiduciary obligations to LeapSource, and that the transaction he was pursuing as early as January 2001 (while he was still an officer and director of LeapSource) was "entirely fair" to the Company. He has not even attempted to meet that burden. Makings told Patti Walker in early January 2001 that "[h]e felt that there would be

7 8 9 10 11 12 13 14 15 16 Makings formed a new corporation for the purpose of acquiring the ICG business, and even 17 18 19 20 21 22 23 24 25
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some major changes, and all he wanted was ICG back"; and that "[a]ll he wanted to do was walk away with ICG. ... He specifically said that." Docket 484, ¶ 42. In February, Makings was negotiating directly with GTCR (not with LeapSource and not with the LeapSource board)10 about his $2.5 million note, which was already in default. Docket 484, ¶ 51. The note was uncollectible because of LeapSource's insolvency. Docket 484, ¶ 60. On Monday, March 12, 2001, Makings was in Chicago to meet with Bruce Rauner of GTCR and David Eaton. Docket 484, ¶ 59. Almost immediately upon his return to Phoenix,

the trier of fact that the challenged transaction was `entirely fair' ..." Order dated March 30, 2007, Docket 474 at 27, 28, 30. The Plaintiffs want to emphasize that the GTCR Motion did not purport to explain or defend Makings' conduct, and did not address many issues relating to Makings' conduct. In their Response to the GTCR Motion, the Plaintiffs responded only to the facts cited by GTCR and the issues raised by GTCR ­ they were not responding to this Motion, and Makings has not added any new facts in support of this Motion. The note was an obligation of LeapSource, so no later than February 2001 Makings was negotiating with somebody other than the obligor on the note and other than the owner of the ICG assets, after telling Patti Walker in January that he wanted to "walk away with
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used the name ICG for his new corporation, although ICG belonged to LeapSource and he was still an officer and director of LeapSource at the time. ICG Group, Inc. was

incorporated on Friday, March 16, 2001. Docket 484, ¶ 61. Makings was still an officer and director of LeapSource when he had the meeting that led to his decision to form a new "ICG" corporation, and when it was incorporated on March 16. Q. But on March 16th, you were incorporating ICG Group, Inc., correct? A. Yes. Q. Whose sole purpose of incorporating was to either start another company or to take back ICG division? A. Yes. Docket 484, ¶ 61. 11 When Makings announced his intention to acquire the ICG assets at the board meeting on the following Tuesday, March 20, 2001, his attorney was already working on the asset purchase agreement. Docket 484, ¶ 62. Although Makings says that the negotiations for the ICG assets were made at arms' length, during this period of time when Makings was engaged in his "preparations" to

ICG," and after suggesting to Sean Cunningham of GTCR on January 31 that "he's willing to negotiate ­ ownership of ICG?" Docket 484, ¶¶ 42, 48. The use of the name "ICG" by Makings belies any suggestion that he was making preparations to "compete" with LeapSource, which owned the name. It was one of the assets acquired by LeapSource in 2000 for $10 million (see Section 1.1.2 of the Purchase Agreement attached as Exhibit 1 to the GTCR Statement of Facts, Docket 476) and sold back to Makings (see the Purchase Agreement attached as Exhibit 16 to the GTCR Statement of Facts, Docket 476), after Makings had already formed and named his new corporation.
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acquire the ICG assets, David Eaton testified that he considered Makings, who had replaced Christine Kirk as CEO, as his "client." Docket 419, ¶ 135.12 Although Makings says (again) that the transaction was "approved" by Osborn Maledon, there is no evidence that Osborn Maledon was even provided with the relevant information required to evaluate the fairness of the transaction, and in fact Osborn Maledon did not assess whether Makings had complied with his fiduciary duties to LeapSource. This

7 8 9 10 11 12 13 14 15 16 value of the ICG assets. The only time entry clearly related to this transaction is dated March 17 18 19 20 21 22 23
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issue was considered by the Court in its ruling on Makings' original Motion, and was also treated in the Plaintiffs' Response to the renewed GTCR Motion that Makings has joined. The Osborn Maledon invoices do not reflect any time spent by Osborn Maledon reviewing information about the transaction before Makings announced that he was preparing to purchase the assets at the board meeting on March 20 ­ nor does the record indicate that Osborn Maledon was ever provided with all the relevant information about the proposed transaction required to determine whether the transaction was a fraudulent transfer or preference, or in the best interests of the company, such as GTCR's opinions about the

30, when Ms. Matiski was apparently reviewing "final" documents for the transaction, which Mr. Makings has testified were prepared by his attorney, Mr. Ronan. Docket 484, ¶ 33. There is no evidence in the record that Makings disclosed, for example, that before LeapSource purchased ICG in January of 2000, Makings had also been negotiating with

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Docket 419 is underlined here to call attention to the fact that Plaintiffs are here referring to their Statement of Facts in response to Makings' Statement of Facts to his original motion, which he has incorporated by reference in this Motion.
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Unisys and with Deluxe Corporation about their interest in purchasing ICG. Docket 484, ¶ 26. That was only one year before Makings said that he wanted to "walk away with ICG" himself. Docket 484, ¶ 42. LeapSource paid $10 million for the ICG assets in 2000. Docket 484, ¶ 3. As recently as March 2001, GTCR representatives had written about the ICG part of the LeapSource business that "a conservative estimate of the value is approximately $4-6 M

7 8 9 10 11 12 13 14 15 16 17 Docket 474 at 24. Makings did that when he began "preparations" for and did everything 18 19 20 21 22 23 24 25
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[million]." Docket 484, ¶ 3. The value of the assets is disputed. The transaction was not fair to LeapSource, which was insolvent when the ICG assets were given to Makings in exchange for a promissory note that was already known to be worthless,13 after GTCR had refused to put up the money to pay the interest on the note when it became due, which caused the note to be in default. The Court has previously recognized that Delaware law does not permit "[c]orporate officers and directors . . . to use their position of trust and confidence to further their private interests." In re Greater Southeast Community Hospital Corp., 353 B.R. 324, 344 (Bankr. D.C.C. 2006) (internal quotation marks and citation omitted) (applying Delaware law).

short of executing the transaction for the acquisition of the ICG assets while he was still an officer and director of LeapSource. Makings announced his intent to acquire the ICG assets at a board meeting on the following Tuesday, March 20, with David Eaton's apparent approval, and an agreement was

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made to transfer the ICG assets to Makings' new company effective March 23.

It is

inconceivable that Eaton could have said anything to indicate his approval of the transaction ­ as the minutes say he did ­ unless the terms of the transaction had already been discussed and at least substantially resolved with Makings who was still CEO and on the board of directors of LeapSource when those statements were made. After that meeting, Makings barely had time to resign from the board on March 22 before the effective date of the

7 8 9 10 11 12 13 14 15 16 Rather than repeat the other points made in the Plaintiffs' Response to the renewed 17 18 19 20 21 22 23 24 25 The fact that the note was worthless was discussed in detail in the Plaintiffs' Response (Docket 418) to Makings' original Motion for Summary Judgment on this claim, at pages 20-21.
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transaction. Makings has not offered any new facts to demonstrate, or even to suggest, that his conduct was consistent with his duties as an officer and director of LeapSource, or that the transaction that he concluded was "entirely fair" to LeapSource. The Plaintiffs' Response (Docket 479) to the renewed GTCR Motion, and the Plaintiffs' Statement of Facts (484) in opposition to that Motion, in addition to the record previously made on Makings' original Motion for Summary Judgment on this claim, show that there is no reason for the Court to reconsider its earlier decision to deny summary judgment on this claim against Makings.

GTCR Motion that Makings purports to join ­ allthough that Motion did not even address the issues that led the Court to deny Makings' original motion for summary judgment on Count 5 ­ the Plaintiffs refer the Court to the Plaintiffs' Response to the GTCR Motion.

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III.

CONCLUSION Makings' "renewed" Motion and "joinder" in GTCR's renewed Motion for Summary

Judgment should be denied. The Court has already ruled against Makings on both of the claims addressed in this Motion, and Makings has offered no additional facts, nor any new authority, relevant to the claims against him to justify reconsideration of the Court's prior rulings. Dated this 7th day of September, 2007. BEUS GILBERT PLLC

By

Scot C. Stirling Leo R. Beus Scot C. Stirling Steven E. Weinberger 4800 North Scottsdale Road Suite 6000 Scottsdale, AZ 85251 Attorneys for Individual Plaintiffs and Trustee

STEVE BROWN & ASSOCIATES, LLC Steven J. Brown 1414 E. Indian School Road, Suite 200 Phoenix, AZ 85014 Co-Counsel for Trustee

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CERTIFICATE OF SERVICE I hereby certify that on 7 September, 2007, I electronically transmitted the attached document 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: Kevin A. Russell David S. Foster Nicholas B. Gorga LATHAM & WATKINS LLP [email protected] [email protected] [email protected] Attorneys for Defendants GTCR Golder Rauner, LLC, GTCR Fund VI, LP, GTCR VI Executive Fund, LP, GTCR Associates VI, Joseph P. Nolan, Bruce V. Rauner, Daniel Yih, David A. Donnini and Philip A. Canfield Don P. Martin Edward A. Salanga QUARLES & BRADY STREICH LANG, LLP [email protected] [email protected] Attorneys for Defendants GTCR Golder Rauner, LLC, GTCR Fund VI, LP, GTCR VI Executive Fund, LP, GTCR Associates VI, Joseph P. Nolan, Bruce V. Rauner, Daniel Yih, David A. Donnini and Philip A. Canfield Merrick B. Firestone Veronica L. Manolio RONAN & FIRESTONE, PLC [email protected] [email protected] Attorney for Defendant Michael Makings

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Richard A. Halloran Jon Weiss LEWIS & ROCA, L.L.P. [email protected] [email protected] Attorneys for Defendants David Eaton and AEG Partners LLC John Bouma James R. Condo Patricia Lee Refo SNELL & WILMER LLP [email protected] [email protected] [email protected] Attorneys for Kirkland & Ellis Steven J. Brown STEVE BROWN & ASSOCIATES, LLC Co-Counsel for Trustee [email protected]

_Scot C. Stirling____

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