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' MOTION FOR SUMMARY JUDGMENT ON CONTRACT CLAIMS, BREACH OF FIDUCIARY DUTY CLAIMS, AND ALL OTHER REMAINING CLAIMS AGAINST DEFENDANT MAKINGS (Honorable Robert C. Broomfield) (Oral Argument Requested)

MICHAEL MAKINGS, Counterclaimant, vs.

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LEAPSOURCE, INC., et al., Counterdefendants.

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Plaintiffs submit the following response to Makings' Motion For Summary Judgment Regarding Remaining Claims (Docket No. 340). This Response is supported by the

plaintiffs' Response to Makings' Statement of Facts and the Statement of Additional Facts Precluding summary judgment submitted contemporaneously with this Response. Makings' Motion should be denied for the reasons explained in the following pages of this Memorandum, for the reasons already argued in the Trustee's Motion for Summary

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 fraudulent transfer that left LeapSource with fewer assets to satisfy the claims of creditors 23 24 25 and, with everything else that happened to make this transaction possible, unable to survive as a going concern. These are issues for the jury to decide: 2 Filed 06/06/2006 Judgment against Makings under Count III (Docket No. 312), and because Makings' Motion is based upon a highly selective, self-serving, and misleading recital of alleged facts that are disputed, and upon inferences and conclusions to be drawn from the facts, including conclusions about the intent or belief or understanding of interested parties, which are particularly unsuitable for summary judgment. Summary judgment must be denied in part because so much of the evidence consists of deposition testimony from witnesses with obvious biases. Even when the facts are not disputed, the inferences to be drawn therefrom vary quite widely. First American Corp. v. Al-Nahyan, 17 F.Supp.2d 10, 27 fn. 19 (D.D.C. 1998). There is substantial circumstantial evidence to show that Makings saw an opportunity, with the failure of LeapSource, to reclaim his former business (the "ICG Assets") from LeapSource for a fraction of its value, and joined in the factionalism stirred up by GTCR in order to help bring that about. In fact, he ultimately succeeded in striking a deal with GTCR, while he was still an officer and employee of LeapSource, to acquire the ICG Assets in a

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As noted above, all inferences from such circumstantial evidence, including Carpenter and Byers's personal relationship, their other acts of misconduct, and the evidence in the audit's fraudulent expense packets, should have been made in favor of Mohave. Orme School, 166 Ariz. at 310, 802 P.2d at 1009; Pritchard, 163 Ariz. at 433, 788 P.2d at 1184. Here, if all such evidence had been submitted to a jury, as demanded, the jury could have found a conspiracy extending to Carpenter's other acts. Instead, the trial court erroneously dismissed claims against Byers as to such other misdeeds on summary judgment. The existence of a conspiracy may be inferred from the nature of the acts, the relationship of the parties, "the interests of the conspirators, or other circumstances," and "express agreement or tacit concert will, if proven, suffice to create liability." In re American Continental Corp./ Lincoln Savings and Loan Secs. Litigation, 794 F.Supp. 1424, 1437 (D.C. Ariz.1992). We therefore reverse the trial court's order granting Byers partial summary judgment because a litigant can proffer circumstantial or inferential evidence to prove that parties were acting in concert. There was at least a fact issue that Byers and Carpenter were acting as each other's agents, or were intentionally acting pursuant to a common course of conduct to wrongfully use Mohave funds for personal gain. A.R.S. §§ 12-2506(D) and (F)(1) (Supp.1995). In so doing, we also hold that the trial court erroneously ruled that evidence of a conspiracy as to one aspect of fraudulent conduct (the expense packets developed in the MMI audit) could not be used to show an agreement as to other kinds of fraud, i.e., the insurance policy, reimbursement of expenses to Carpenter for attending professional organization meetings, and the use of company employees and fuel for personal profit. Mohave Electric Coop v. Byers, 189 Ariz. 292, 942 P.2d 451, 465 (App. 1997). Here, the evidence is disputed, the inferences and conclusions to be drawn from the evidence are disputed, and summary judgment is inappropriate.

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I.

MAKINGS' STATEMENT OF FACTS Makings claims that the sale of the ICG Assets was negotiated with counsel for

LeapSource after he had resigned. But Makings has offered no evidence that LeapSource counsel were charged with negotiating the terms of the sale, and his argument directly contradicts David Eaton's and Dan Yih's testimony: Q. And after that time did you handle the negotiations for the ICG deal with Mr. Makings? A. I was definitely in -- I was actively involved in those negotiations. Eaton Deposition, 160:14-17.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 corporation for the sole purpose of acquiring these assets on 16 March also suggests that he 24 25 had reason to believe that the ICG assets could be acquired by him, which he could not have 4 Filed 06/06/2006 Q. Okay. How was the -- what -- what is your understanding of how the price for the sale of the ICG assets to Mike Makings was determined? A. My understanding, there was a negotiation of the price, and David Eaton negotiated the ultimate transaction. Q. So your -- your understanding is that the price was negotiated between David Eaton and Mike Makings? A. Yes.

Yih Deposition 484:4-13. Makings' argument also contradicts the minutes of the 20 March 2001 board meeting, attended by Eaton and Makings, who was still CEO and director of LeapSource, when Eaton disclosed that he had already discussed the terms of the deal with Makings. Eaton could not possibly have suggested that everybody could get "comfortable" with the deal if the terms of the deal had not already been discussed. Moreover, the fact that Makings formed a new

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known without discussing the terms for the acquisition. Those are questions of fact for a jury to decide. A. Tortious Interference With Contract Claims

Makings says that there are no allegations that he was acting in any capacity other than as an officer or director of LeapSource. Motion at 2:5-7.1 Yet Makings has also argued, both here and in opposition to the Trustee's Motion for Summary Judgment re Count II, that he was not an officer or director of LeapSource when he purchased the ICG Assets

8 9 10 11 12 13 14 15 16 17 LeapSource"); FAC ¶ 311 ("When Makings realized that LeapSource was headed for 18 19 20 21 22 23 24 25 Makings has phrased many of his arguments as if he were making a Rule 12(b)(6) motion to dismiss for failure to state a claim. In fact, Makings did make a motion to dismiss and it was denied with respect to the claims against him in the Fourth Amended Complaint.
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from LeapSource, because he negotiated for the purchase of the ICG Assets only after he resigned as CEO and director of LeapSource. He cannot have it both ways. His own papers demonstrate the existence of disputed facts, because he has contradicted himself with respect to the factual premise of his own argument. In any case, yes there are allegations and there is evidence that Makings was acting purely for his personal benefit and not as an officer or director of LeapSource. FAC ¶ 269 ("During this time, Makings also secretly agreed with GTCR, through Nolan and Yih, to have the ICG assets returned to him without fair and adequate consideration to

bankruptcy, he negotiated a deal with Nolan and Yih to benefit himself at the expense of LeapSource and its creditors, by purchasing the ICG assets from LeapSource for less than

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their fair value"). In any case, the argument is based upon a false premise concerning the law in Arizona with respect to this issue.2 The law does not require a breach of the Purchase Agreement; it is enough if the Agreement was terminated, even without a breach (e.g., if GTCR ceased funding pursuant to the Purchase Agreement) as a result of Makings' interference. Termination of an at will contract as a result of interference is actionable. See, e.g., Sterner v. Marathon Oil Co., 767

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "Aetna has argued that Fischer was a supervisor acting within the scope of his authority as an agent of Aetna, and that, therefore, Bernstein cannot claim interference because Aetna cannot be guilty of inducing a breach of its own alleged contract. This argument is meritless. It was specifically rejected in Wagenseller. 147 Ariz. at 386-87, 710 P.2d at 1041-42. The issue that the Wagenseller court emphasized is whether the interfering party's action was "improper." Bernstein v. Aetna Life & Cas., 843 F.2d 359, 367 (9th Cir. 1988) (also involving an at-will employee). Moreover, we have been through this same issue before at the Motion to Dismiss stage, when the Court rejected Makings' motion to dismiss this claim. Makings is re-arguing the same legal issue.
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S.W.2d 686, 689 (Tex. 1989) (at-will employee could maintain action for tortious interference against a third party who interfered with the employment relationship); Cronk v. Intermountain Rural Electric Ass'n, 765 P.2d 619 (Colo. App. 1988) (tortious interference claim allowed against supervisor who induced employer to exercise its at-will termination power by presenting corrupt reason). To establish a prima facie case of intentional interference with contractual relations, a plaintiff must prove the existence of a valid contractual relationship or business expectancy; the interferer's knowledge of the relationship or expectancy; intentional interference inducing or causing a breach or termination of the relationship or expectancy; and resultant damage to the party whose relationship or expectancy has been disrupted. Wallace v. Casa Grande Union High School Dist. No. 82 Bd. of Governors, 184 Ariz. 419, 909 P.2d 486 (App.1995). Furthermore, the interference must be "improper as to motive or

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means" before liability will attach. Wagenseller v. Scottsdale Mem'l Hosp., 147 Ariz. 370, 388, 710 P.2d 1025, 1043 (1985). Whether a particular action is improper is determined by a consideration of seven factors found in the Restatement (Second) of Torts § 767 (1979): (a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference and (g) the relations between the parties. Wagenseller, 147 Ariz. at 387, 710 P.2d at 1042. Hill v. Peterson, 201 Ariz. 363, 35 P.3d 417, 420 (App. 2001) (emphasis added). Although it directly concerns the defendants' state of mind to support a claim for punitive damages, FAC ¶ 323 alleges that the defendants in Count I (including Makings), "[b]y interfering with the performance of the Purchase Agreement as described herein, Defendants, and each of them, acted with oppression, fraud and malice, in conscious derogation of LeapSource's rights" (emphasis added), which of course requires knowledge of those rights. Makings' knowledge of the contract rights he interfered with is sufficiently

21 22 23 24 25 alleged in the FAC. It is also substantiated by the facts described in the Interrogatory Answer quoted at pages 7-8 of Makings' Memorandum. Although Makings' Motion does not even address the evidence with respect to this point, the evidence at trial will show that Makings was in fact aware of the Purchase
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Agreement. He knew that GTCR was funding the Company, and as Chief Operating Officer of LeapSource it is preposterous to suggest that he didn't understand that funding was pursuant to an agreement. He met directly with Mr. Nolan at GTCR to discuss GTCR's relationship with LeapSource before ICG was acquired in early 2000, and he became COO and later CEO and a director of LeapSource. It isn't necessary that the plaintiffs prove that Makings knew the specific terms of the Purchase Agreement in order to prove his liability

7 8 9 10 11 12 13 14 15 16 Makings' knowledge of impropriety does not require that he have specific knowledge 17 18 19 20 21 22 23 24 25 We notice that, while both Makings and GTCR have claimed that he "resigned" from LeapSource in December, Makings' Motion at 8:9 states that he was COO and CEO of LeapSource "from approximately the fall of 2000 through March 2001." (Emphasis added.)
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for tortious interference with that contract relationship, and Makings has cited no authority to suggest that is the plaintiffs' burden.3 Makings' argument that he could not be liable for tortious interference while he was an officer of a corporation unless his actions "exceeded the scope of his agency relationship" is unavailing. Motion at 8:10-15. Self-dealing and fraudulent transfers to an officer and director of a corporation clearly are not within "the scope of his agency relationship." Makings has not cited any authority for his suggestion that he was properly authorized to engage in self-dealing in LeapSource assets.

of particular acts of wrongdoing. Instead, that "may be demonstrated by proof that the aiderabettor `had general awareness that his role was part of an overall activity that is improper,'" and "such knowledge could come through circumstantial evidence." FDIC v. First Interstate Bank of Des Moines, 885, F.2d 423, 431 (8th Cir. 1989). See also Brock v. Hendershott, 840

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F.2d 339, 342 (6th Cir. 1988) ("knowledge of the breach can be inferred from surrounding circumstances raising a reasonable inference of knowledge. ... The facts here bear out that Platel knew or clearly should have known Hendershott had a duty not to profit personally..."). Although in certain circumstances "doing nothing would be of great assistance to the principal actors in the tortious conduct," York v. Intrust Bank, N.A., 265 Kan. 271, 962 P.2d

7 8 9 10 11 12 13 14 15 16 17 his principals or client depends upon whether the agent's interference was "improper" in 18 19 20 21 22 23 24 25
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405, 425 (1998), in this case Makings actively and directly participated in the conduct that has been alleged as breaches of fiduciary and other duties by other defendants. Arizona courts analyze seven factors to determine whether there is improper interference. Wagenseller v. Scottsdale Mem'l Hosp., 147 Ariz. 370, 386, 710 P.2d 1025, 1042 (1985) (citing Restatement (Second) of Torts § 767). These are: (1) the nature of the actor's conduct, (2) the actor's motive, (3) the interests of the other with which the actor's conduct interferes, (4) the interests sought to be advanced by the actor, (5) the social interest in protecting the freedom of action of the actor and the contractual interests of the other, (6) the proximity or remoteness of the actor's conduct to the interference, and (7) the relations between the parties. Id. In Arizona, whether an agent may be held liable for interfering with the contracts of

light of all of the factors listed in Restatement § 767. The answer to that question requires a factual determination that cannot be made in the context of this motion for summary judgment, but there is more than enough evidence to support a jury verdict that, for example, the sale of the ICG assets was harmful to the interests of the creditors of LeapSource, and prevented LeapSource from performing its contract obligations to creditors, including to Individual Plaintiffs who were owed substantial severance payments by LeapSource.

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Moreover, the evidence is overwhelming that such interference with the performance of contract obligations was certain to be the result of conveying those assets ­ purchased for $10 million just one year earlier ­ in exchange for forgiveness of a $2.5 million promissory note that LeapSource could not pay and that had no prospect of being paid ahead of the claims of other creditors if LeapSource were put into bankruptcy for liquidation. A claim of tortious interference does not require proof that the defendant actually

7 8 9 10 11 12 13 14 15 16 action.'" Id. at 212. In any event, summary judgment is inappropriate when the interfering 17 18 19 20 21 22 23 24 25
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desired to interfere with the plaintiff's contract. "The tort is intentional in the sense that [the Defendants] must have intended to interfere with the [Plaintiff's] contract or have known that this result was substantially certain to be produced by its conduct." Snow v. Western Savings & Loan Assn., 152 Ariz. 27, 33, 730 P.2d 204, 211 (1986) (citing Restatement of Torts § 8(A) and § 766 comment j) (emphasis added). Thus, it is not necessary that the defendant actually desire to cause a breach of a contract; "even if [the Defendant] did not desire to interfere, liability attaches to interferences that are `incidental to the actor's independent purpose and desire but known to him to be a necessary consequence of his

actor's intent is an issue. Snow v. Western Savings & Loan Assn., 152 Ariz. 27, 33-34, 730 P.2d 204, 211-212 (1986) ("the question of intent ordinarily is for the finder of fact"), citing Antwerp Diamond Exchange v. Better Business Bureau, 130 Ariz. 523, 530, 637 P.2d 733, 740 (1981). Makings apparently misapprehends the nature of the claims for interference with the Individual Plaintiffs' Senior Management Agreements and Employment Agreements.

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Nobody questions that the Individual Plaintiffs were employed at-will, and none of them has made a "wrongful termination" claim against any of the defendants. The Individual Plaintiffs were employed at-will with employment agreements that entitled them to the payment of severance, and in some cases other amounts of money, by LeapSource when their employment was terminated. Those payments were a part of their employment contract rights, and Makings knew about them because he was personally

7 8 9 10 11 12 13 14 15 16 contributed to LeapSource's inability to pay wage claims and severance claims of former 17 18 19 20 21 22 23 24 25
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involved in attempts to negotiate reductions in those obligations. Makings' campaign to obtain the return of the ICG Assets, which culminated in a fraudulent transfer that he negotiated for his personal benefit while he was CEO and a director of LeapSource, resulted in looting the company of valuable assets that could have been used to pay the claims of terminated employees, including the Individual Plaintiffs. Instead, those millions of dollars of assets were wrongfully diverted to Makings through breaches of fiduciary duty ­ his own and those of others, including "Chief Restructuring Officer" David Eaton and the GTCR members of the LeapSource board ­ that

employees, including Individual Plaintiffs. The breaches of fiduciary duties that prevent or hinder the company's ability to perform its contract obligations are actionable both as tortious interference with those contracts, and as breaches of fiduciary duties owed by the officers and directors to the creditors of an insolvent corporation. Makings attempts to explain away the consequences of his own conduct, and his conduct in concert with the GTCR defendants, by saying that "unfortunately, the severance payments could not be paid as there were no funds to expend." Motion at 9:25. But one of

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the reasons there were no funds, or insufficient funds, to expend is that Makings made off with millions of dollars in LeapSource assets without paying for them, and the LeapSource money that was available was used to pay severance claims for those who were willing to give releases to GTCR.4 Q. Can you tell me about every conversation you had with Mr. Makings on this issue? A. Well, in early January, the first week of January, Mike Makings asked to see me and me only for breakfast. We made a breakfast meeting. It was the first few days of January that I recall. And in that breakfast meeting, Mike Makings suggested that there was significant pressure that LeapSource was feeling from GTCR. He felt that there would be some major changes, and all he wanted was ICG back. He proceeded to tell me have I ever considered ICG, what would I do personally if these changes occurred at LeapSource, and could I take his cell phone if I wanted to discuss this in the future. *** Q. Did Mr. Makings -- you said it was your impression that Mr. Makings was trying to -- I am just paraphrasing what you said here, so tell me if I am being inaccurate, but it was your impression that Mr. Makings was trying to tell you that the company was going under? Is that what you were saying? A. Either that or he was trying to walk away with ICG. And I was trying to figure out how you would do that. ICG was a component of LeapSource. And it was confusing at best. Q. Did Mr. Makings ever specifically say anything about the company, quote, unquote, going under?

GTCR has argued that the release of the GTCR VI entities was pursuant to the Employment and Senior Management Agreements. In fact, the agreements did not provide for the release of GTCR.
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A. He said there were significant changes going on at LeapSource because of the increased pressure from GTCR. Q. Did he say anything else on that issue?

3 A. All he wanted to do was walk away with ICG. 4 Q. Did he specifically say that? 5 A. He specifically said that. 6 Patti Walker deposition at 39:11-41:8 (emphasis added). 7 8 9 10 11 12 13 14 15 16 17
corporation becomes insolvent or is in the vicinity of insolvency, its directors and officers owe

That was no "mystery

conversation," and it is consistent with what Makings actually accomplished for himself and at the expense of LeapSource creditors by cooperating with GTCR in dismantling LeapSource. Breaches of fiduciary duty, self-dealing by directors and officers, and fraudulent transfers are "wrongful" for the purpose of a claim for tortious interference with contract. B. Breach of Fiduciary Duty Claims

Makings owed fiduciary duties to the company and to the creditors of LeapSource because it was either insolvent or in the zone of insolvency. According to the law of Delaware, where LeapSource was incorporated, once a

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fiduciary duties to the corporation, and its assets must be preserved and protected. Geyer v.

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Ingersoll Publ'n Co., 621 A.2d 784, 791 (Del. Ch. 1992) (officers and directors have a fiduciary

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duty to the corporation to preserve its assets once the corporation is in the vicinity of insolvency);

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Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch.

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1991) at *34 (same); In re NCS Healthcare, Inc. Shareholders Litigation, 825 A.2d 240, 256-57, &

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397 (Del. Supr. 2002) (same). Accord Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, n.25 (3d Cir. 1990). In addition, the directors and officers of a corporation that is insolvent or in the zone of insolvency owe fiduciary duties to the corporation's creditors. Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 1991) (Delaware law); AYR Composition, Inc. v. Rosenberg, 261 N.J.Super. 495, 619 A.2d 592 (N.J.Super.A.D. 1993) (New Jersey law). In fact, since Credit Lyonnais, it has become "universally agreed that when a

corporation approaches insolvency or actually becomes insolvent, directors' fiduciary duties expand to include general creditors." In re Kingston Square Assocs., 214 B.R. 713, 735 (Bankr. S.D.N.Y. 1997) (emphasis added).

In violation of those duties, Makings engaged in self-dealing, and assisted in breaches of fiduciary duties by others, helping to shut down the Company and dispose of its assets in order to facilitate his own ability to walk away with the ICG Assets. As a matter of law, the same conduct that has been described in the Trustee's Motion for Summary Judgment Re

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Count III (fraudulent transfer and preferential transfer of the assets of an insolvent company) constitutes a breach of fiduciary duty to LeapSource and to the creditors of LeapSource, including Individual Plaintiffs who were not paid severance or other amounts owing to them. See Trustee's MSJ Re Count III (Docket No. 312) and Trustee's Reply Memorandum in Support of MSJ Re Count III (Docket No. 374): Makings in essence is arguing that the CEO of a company, armed with inside information that the company is failing and on its way to bankruptcy, can negotiate for payment of his own debt, then resign, then days later receive the transfer, and thereby avoid insider status. Such a position turns the policies of §547(b)(4)(B) on their head, and has been rejected many times. (See, generally, Determining Insider Status Under Bankruptcy 14 Filed 06/06/2006

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Code Section 547(B)(4)(B): When "I Resign" May Not Be Enough To Terminate Insider Status, 41 UCLA L. REV. (Aug. 1994) ("If the instigation of the transaction at issue resulted from opportunities available because of insider status, a simple resignation from the insider position cannot insulate that party from future attack." At p. 1576). In In re EECO, Inc., 138 B.R. 260 (Bankr. C.D. Cal. 1992), the bankruptcy court looked at analogous 9th Circuit law and aptly stated the logic belying Mr. Makings' argument: For example, if an insider put together a transfer for himself, formally resigned, and then a minute later received the monetary benefits from the deal he had made while an insider, it would be clear that the transfer would be avoidable, even without a showing of fraud or intent to delay or hinder required by 11 U.S.C. § 548. The insider's formal resignation did not change the nature of the transfer in any way. Further, to hold that one could gain non-insider status in such a manner would thwart § 547's goal of recovering assets from insiders. [FN2] FN2. Congress established the one-year reach-back provision in order to "ameliorate the insider's potential leverage in dealing with the debtor shortly before bankruptcy." Jahn v. Economy Car Leasing (In re Henderson ) 96 B.R. 820, 825 (Bankr.E.D.Pa.1989) citing Nimmer, Security Interests in Bankruptcy: An Overview of Section 547 of the Code, 17 House L.Rev. 289, 293 n. 10 (1980). 138 B.R. at 264 (emphasis added). Accord, In re Imperial Corp. of America, 1992 WL 427752 at p. 13, (S. D. Cal. 1992) ("[I]f the transferee is an insider on the date the transfer is arranged, the one-year reachback period applies); In re F&S Cent. Mfg. Corp., 53 B.R. 842, 849 (Bankr. N.Y. 1985) ("Section 547(b)(4) was not intended to allow those who are insiders to escape the insider provisions by delaying instead the date the debtor transfers its property. A creditor who is an insider at the time the transfer of the debtor's property is arranged is an insider at the time of the transfer. In re Vaniman International, Inc., 22 B.R. at 189; Hostellerie d'Argentevil, Inc., 42 B.R. 292, 293 (S.D.Fla.1984).")

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The "business judgment rule" doesn't protect such self-dealing, because under Delaware law there is no place for divided loyalties among directors. "The substantive protection of the business judgment rule can be claimed only by disinterested directors whose conduct otherwise meets the test of the rule's procedural requirements." McMullin v. Beran, 765 A.2d 910, 923 (Del. 2000). There is no refuge in the Business Judgment Rule for directors who have divided interests.5 Weinberger v. UOP, Inc., 457 A.2d 701, 710-711 (Del. 1983) (no "safe harbor" in Delaware law for directors with divided loyalties; in that case, directors designated by parent corporation to sit on the board of a subsidiary): This is merely stating in another way the long-existing principle of Delaware law that these Signal [parent corporation] designated directors on UOP's [subsidiary] board still owed UOP and its shareholders an uncompromising duty of loyalty. (Emphasis added.) See also Guth v. Loft, 5 A.2d 503, 510 (Del. 1939).

13 14 15 16 17 18 19 20 21 22 23 24 25 The business judgment rule is based on "[t]he presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interest." Black's Law Dictionary 192 (7th ed. 1999) (emphasis added).
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A conflicted director cannot defend himself by simply claiming that he acted fairly, as "the question of independence flows from an analysis of the [facts] pertaining to the influences upon the directors' performance of their duties generally and, more specifically, in respect to the challenged transaction." Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984) (emphasis added). Instead, when such divided loyalties are present, the burden is on the Defendants to prove the entire fairness of their actions and decisions on behalf of the company. Rabkin at 1106; Weinberger at 710. Conflicted directors have no "safe harbor"

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for their divided loyalty, and their professions of loyalty or disinterestedness can never serve to shift the burden of proving entire fairness to the Plaintiffs. It is not clear why Makings thinks it is relevant that officers, directors, and employees are entitled to "make preparations to compete with a company they are employed with while still employed there." Makings Motion at 22:14-21. None of the cases cited by Makings in that paragraph says that an officer or director can prepare to compete by self-dealing in the

7 8 9 10 11 12 13 14 15 16 the ICG Assets acquisition with David Eaton and with other members of the board while he 17 18 19 20 21 22 23 24 25
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company's assets, or arrange for the fraudulent transfer of the company's assets to them, for the purpose of setting up a competing business. Makings concludes by describing his discussions about acquiring the ICG Assets as "mere preparations" prior to his resignation as CEO. That is a hotly disputed issue that is entirely inappropriate for summary judgment. Makings' early January conversation with Patti Walker, and the notes of the conversation that occurred on March 20 at the board meeting that Makings attended while he was still an officer and director of LeapSource, show that Makings had gone beyond "mere preparations" and was discussing the terms of

was still an officer and director of the Company. It simply makes no sense for David Eaton to say on March 20 that he thought the board could "get comfortable" [sic!] with the terms of what turned out to be a fraudulent transfer, unless the terms had been discussed. Makings' claim that the transaction was negotiated only after he resigned is disputed, and is flatly contradicted by the notes of the board meeting on March 20, 2001.

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There is no evidence that Ms. Matiski had the foundation ­ including knowledge of Makings' prior discussions with Eaton or others ­ to express the opinions that she gave (over objection made for that reason) at her deposition. See Makings Memorandum at 23. The fact that an outside attorney testified that she "did not observe" breaches of fiduciary duty is not an answer to specific evidence that Makings did begin to negotiate for the fraudulent transfer of LeapSource assets to himself while he was still an officer and director of the

7 8 9 10 11 12 13 14 15 16 Company in return. 17 18 19 20 21 22 23 24 25
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company. It is also no answer to specific testimony (as from Patti Walker) that Makings was planning to recover the ICG Assets for himself long before he resigned from LeapSource. Even if Makings were to prevail on his claim that he was no longer a fiduciary when he negotiated the fraudulent transfer of the ICG Assets to himself, his own lack of fiduciary status would only open him up to liability for aiding and abetting the breaches of fiduciary duties of others, including Chief Restructuring Officer David Eaton and the GTCR members of the LeapSource board, who breached their duties to LeapSource and to LeapSource creditors by disposing of the ICG Assets without receiving fair consideration for the

It is not necessary to show that Makings exercised "control" over the GTCR defendants to prove his liability for aiding and abetting their breaches of fiduciary duty. Aiding and abetting causation under Restatement (Second) Torts § 876(b) does not require "control" of the breaching party, but merely "assistance" to the breaching party.

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C.

The Remaining Claims 1. Aiding and Abetting Fraudulent Transfer

The Trustee has standing under 11 U.S.C. § 541(a)(1) to bring pre-petition claims belonging to LeapSource. Here, the Trustee has standing because she brings these claims on behalf of the estate of LeapSource and not any specific creditor. Galleries of America, 862 F.3d 896, 900-901 (1st Cir. 1988). The causes of action in LeapSource's bankruptcy estate include claims arising from Defendants' breaches of their duties to the Company. See, e.g., Pepper v. Litton, 308 U.S. See In re Rare Coin

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 This is the same authority cited by GTCR in its Motion for Summary Judgment On Fiduciary Duty and Other Remaining Claims, at 10:9-15, for the same proposition for which it is cited here by the plaintiffs.
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295, 307 (1939).6 As the Supreme Court in Pepper v. Litton explained, a bankruptcy trustee (or liquidating trustee) is the proper party to bring claims against its fiduciaries for breaches of their duties: While normally [a] fiduciary obligation is enforceable directly by the corporation, or through a stockholder's derivative action, it is, in the event of a bankruptcy of the corporation, enforceable by the trustee. For that standard of fiduciary obligation is designed for the protection of the entire community of interests in the corporation ­ creditors as well as stockholders. See also 11 U.S.C. § 541; Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132 (4th Cir. 1988) (bankruptcy trustee, not creditor, had standing to bring alter ego action against debtor's principals); In re Rare Coin Galleries of America, Inc., 862 F.2d 896, 901 (1st Cir. 1988) (debtor's causes of action against accountants sounding in negligence and breach of contract are property of the estate); ANR Ltd., Inc. v. Chattin, 89 B.R. 898, 903 (D.

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Utah 1988); (§ 541 "should be construed broadly in an effort to further the fundamental bankruptcy policy of equitable distribution to all creditors."). See also In re Folks, 211 B.R. 378, 387 (B.A.P. 9th Cir. 1997) (bankruptcy trustee does not have standing to bring claim of any particular creditor, but does have standing to bring general claims ­ claims which belong to no particular creditor but "could be brought by any creditors of the debtor.").
Arizona's version of the UFTA includes the same provisions relied upon by the New Jersey

7
Supreme Court in Banco Popular North America v. Gandi, 184 N.J. 161, 876 A.2d 253, 263

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
The UFTA was designed as a vehicle by which creditors may recover from debtors and others who hinder their collection efforts. Yet, in enacting the UFTA, the Legislature specifically opted not to preclude related causes of action. N.J.S.A. 25:2-32 states, "Unless displaced by the provisions of this article, the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its Case 2:02-cv-02099-RCBClaims\Response to Makings MSJ.doc Document 418 H:\10272\LeapSource\Pleadings\Makings MSJ re Other

(2005), where that court held that ""Following the Morgan definition, a creditor in New Jersey
may bring a claim against one who assists another in executing a fraudulent transfer." Banco Popular North America v. Gandi, 184 N.J. 161, 876 A.2d 253, 263 (2005) (emphasis added). In that case, the court held that an attorney could be liable for his participation in a conspiracy to commit a fraudulent transfer. We hold that there is no cause of action for creditor fraud in this jurisdiction but that the attorney may be liable for conspiracy to violate the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, for his participation in the transfer. Id. at 255. A fortiori, if there is liability for conspiring to assist a fraudulent transfer, there may also be liability for aiding and abetting a fraudulent transfer. The liability exists, not because the fraudulent transfer statute expressly provides for these causes of action, but because the statute expressly provides that it is not abrogating other common law causes of action or bases of liability ­ such as liability for conspiracy and aiding and abetting.

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provisions." Thus, to the extent that the facts undergirding a UFTA claim also establish other recognized causes of action, for example, breach of contract, negligence, or common-law fraud, a creditor may pursue that claim as well. Banco Popular, 876 A.2d at 262-63 (emphasis added). See also In re B.S. Livingston & Co., 186

4
B.R. 841, 866 (D. N.J. 1995) ("Clearly, summary judgment was inappropriate on Counts 1 and 2

5
(and, by extension, Count 3 (aiding and abetting a fraudulent transfer), and the bankruptcy court

6
was correct in so finding") (applying New Jersey law).

7 Makings hangs his argument that there was no fraudulent transfer in part upon the 8 9 10 11 12 13 14 15 16 17 around that issue and to avoid confronting the question of the promissory note's actual value 18 19 20 21 22 23 A. I'd say that's a correct statement. 24 25
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opinion of Ed McDonough, who gave a report attempting to characterize the "purchase price" paid for the ICG Assets as $4 million "plus." The opinion was remarkably superficial and unfounded, and is not entitled to any weight at all. It is certainly not sufficient to support Makings' Motion for Summary Judgment. In a nutshell, Mr. McDonough's opinion was based in part upon his assertion that the worthless promissory note that Makings surrendered in exchange for the ICG Assets was actually worth $2.5 million, without regard to its collectibility. That opinion is simply laughable, and is not entitled to any weight or consideration at all. After trying to dance

for as long as he could, Mr. McDonough at his deposition finally admitted that he had "no opinion" about the value of the promissory note. Q. So then when this report says at page 28 that "Table 13 reflects the value of the Promissory Note, including accrued interest," it is not reflecting the fair market value of the promissory note; is that right?

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Q. And you made no effort to determine the fair market value of the promissory note as of that date; is that right? A. That's correct.

3 4 5 6 7 8 9 10 "obligations" that were not in fact obligations of ICG are also contrary to law, as is apparent 11 12 13 14 15 16 17 18 19 20 transaction. 21 22 23 24 25 Makings and the GTCR defendants knew that LeapSource had paid $10 million for the ICG assets only one year earlier, because Makings negotiated and GTCR approved the acquisition of ICG at that price. Sean Cunningham's notes show that GTCR believed the ICG part of the business was still worth several millions of dollars in January 2001, much
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Q. And you have no opinion about the fair market value of that promissory note as of that date; is that correct? A. That's correct. McDonough Dep. at 194:9-21. Why Makings continues to cite the opinions of Mr.

McDonough after Mr. McDonough himself has abandoned them is not clear. Makings Motion at 27:14-16. Mr. McDonough's other attempts to ascribe value to the lease payments and payroll

from the Trustee's Motion for Summary Judgment Re Count III (Docket No. 312), and as was demonstrated in the Trustee's Reply Memorandum in support of that motion (Docket No. 374). The Trustee has also demonstrated in those papers and their supporting exhibits why the transaction was not for reasonable value. The evidence of LeapSource's insolvency and inability to pay the $2.5 million promissory note also demonstrates that the value of the assets received by Makings in the transaction was not matched by reasonable compensation to LeapSource. At best for Makings there are genuine issues of material fact for trial about the amount of the damage actually sustained by LeapSource as a result of this fraudulent

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more than the $2.5 million owed to Makings for the promissory note. Plaintiffs' Statement of Facts ¶ 155. The defendants also knew that the promissory note to Makings was

essentially worthless, after GTCR had refused to put up the money to pay the interest on the note when it became due. Q. Were you aware, at the time of this board meeting, March 30, 2001, that LeapSource had purchased this business, ICG, for $10 million only the previous year? A. Acutely --

8 MR. FOSTER: Object to the form. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 shown to have the relevant information or experience with respect to the relevant business 23 24 25 and valuation issues required to give opinions, cannot satisfy his burden of justifying a selfdealing transaction with a company in which he was an officer and director.
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A. (Continuing.) Acutely aware that it had been purchased for $10 million. I don't remember exactly when. BY MR. STIRLING: Q. Other than what you heard from Mr. Eaton, did the board of directors seek an appraisal or valuation of the ICG assets that were going to be sold to Mr. Makings? A. I don't believe that we did.

Q. Do you know whether Mr. Eaton sought an appraisal or valuation of the assets? A. I don't believe he did.

Q. Do you remember asking whether an appraisal had been done? A. I don't recall.

Plaintiffs' Statement of Facts ¶ 159 (Dep. testimony of Daniel Yih). Makings' self-serving claim that he relied upon the opinions of counsel, who were not

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2.

Trust Fund Claims

Makings has attempted in the opening paragraph of the argument beginning at page 28 of his Motion to "re-define" the scope of the trust fund doctrine. Neither the Realty Exchange Corp. nor A.R. Teeters case purports to limit liability under this theory to the particular facts of the claims involved in those cases. See Teeters & Assoc., Inc. v. Eastman Kodak Co., 172 Ariz. 324, 836 P.2d 1034, 1041 (App. 1992); In re Jacks, 266 B.R. 728 (9th Cir. BAP 2001) (holding that California's corporation statutes, while modifying remedies, do

8 9 10 11 12 13 14 15 16 17 On the other hand, the Trustee has already demonstrated, in connection with the 18 19 20 21 22 23 24 25 Trustee's Motion for Summary Judgment re Count III, that Makings has in fact received more than he would have received as a creditor in the Bankruptcy Proceedings. Trustee's Motion for Summary Judgment Re Count III (Docket No. 312) at pages 9-10: In a Chapter 7 liquidation, the Estate would have a maximum of $9,634,123 million to distribute ($134,123 in current assets (PSOF ¶ 13) plus $9.5 million, the maximum future recovery in GTCR litigation). However, there would be $12,189,088 in claims ($9,440,562 in filed claims plus $2,748,526 on the Note (PSOF ¶ 8)) and hundreds of thousands of dollars in 24 Filed 06/06/2006 See not eliminate the trust fund doctrine); Kallmeyer Flegel v. Burt & Associates, P.C., 242 B.R. 492 (9th Cir. BAP 1999) (holding debt to creditor nondischargeable in bankruptcy as a result of violation of Trust Fund Doctrine); In Re Linderman, 20 B.R. 826 (W.D. Wa. 1982) (applying Washington trust fund doctrine). Makings argues that this claim requires proof that Makings has received more than other creditors of his class would have received, yet Makings has made no effort to sustain his burden as the moving party to show that there is no genuine issue of material fact with respect to this issue.

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administrative expenses. Thus, the unsecured creditors would receive a maximum of 79 cents on the dollar. Makings would therefore receive a maximum of $2,171,336, far less than the $2,510,000 his expert says he received through the ICG transfer (PSOF ¶ 9). He would most likely receive far less ­ these computations reflect his maximum recovery, assuming full victory in the GTCR litigation and no administrative expenses. Because the Trustee's demonstration was based upon the defendants' (including Makings) own expert witness valuation testimony, the Trustee has already demonstrated that she is entitled to summary judgment against Makings for the preferential transfer. Because

8 9 10 11 12 13 14 15 16 17 and control over the transferred assets" or where "it benefits in some way from the 18 19 20 21 22 23 24 25
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the actual damage to LeapSource and to its creditors was greater than the amount suggested by the defendants' expert, Makings may also be liable for damages in a greater amount than the amount suggested by the defendants' expert. However, in no way is Makings entitled to summary judgment. Makings has dropped a footnote at page 29 of his Motion, implying without argument that he may not be liable because the transfer of the ICG Assets was to a company that Makings formed for that purpose, and not to Makings personally. A non-transferee may be held liable for a fraudulent transfer where it has "dominion

conveyance." Lippe v. Bairnco Corp., 218 B.R. 294, 303 (S.D.N.Y. 1998). Here, the plaintiffs have alleged and have evidence to demonstrate that Makings benefited from the transfer of the ICG Assets to a company that he owns and formed for the purpose of receiving those assets. Accordingly, he may be held liable for the plaintiffs' claims. See also R.T.C. Mortgage Trust, 1995 ­ S/N1 v. Sopher, 171 F. Supp. 2d 192, 201­02 (S.D.N.Y.

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2001) (holding that an individual shareholder who "benefited" from the fraudulent transfer may be liable even through he was not a direct transferee). II. THE RELEASE A mutual release given in a transaction that constitutes a fraudulent transfer or preference (an issue already addressed in detail in the Trustee's Motion for Summary Judgment Re Count III) does not protect a "released party" from liability for engaging in the fraudulent transfer or preference, because the release is voidable along with the rest of the

8 9 10 11 12 13 14 15 16 17 the conveyance of the hard ICG Assets, and may not be invoked to shield a party who has 18 19 20 21 22 23 24 25
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transaction. If the law were otherwise, no bankruptcy trustee could recover from disloyal officers and directors who loot a corporation on the way to bankruptcy, provided they have the foresight to "release" themselves and each other from liability for their own misconduct. None of the authorities cited by Makings upheld a release against a Bankruptcy Trustee for damages done to the Bankruptcy Estate. None of the authorities cited by Makings upheld a release to provide protection against lawsuits by third parties who were injured by the "released" party's breaches of fiduciary duty or other unlawful conduct. The Release cited by Makings is itself as much a part of the fraudulent transaction as

participated in looting an insolvent company from liability to the Bankruptcy Trustee. Of course, the release is also not binding on strangers to the Release (the Individual Plaintiffs), either. Makings' hopeful reference to the "Mutual Release" as the "Plaintiffs Mutual

Release" [sic!] at Motion page 31:24-26, does not change the fact that none of the plaintiffs was a party to the "Mutual Release" and the Trustee is not bound by a "Mutual Release" that

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is itself part of a fraudulent conveyance, and that purports to give up valuable claims belonging to the estate of the bankrupt Company without fair consideration. Makings' argument that "courts do not ordinarily inquire into the consideration for contracts," Motion at 32:20-21, obviously has nothing to do with a Mutual Release that was given in a transaction that had the effect of looting an insolvent and bankrupt company. None of the cases cited by Makings in this part of his Motion supports his argument that

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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"consideration doesn't matter" when a transaction has been challenged as a fraudulent transfer or preference or breach of fiduciary duty. The "release" argument fails for the same reason that the Trustee is entitled to the summary judgment previously moved for under Count III. CONCLUSION. The Makings Motion for Summary Judgment should be denied. Dated this 6th day of June, 2006. BEUS GILBERT PLLC

By

s/ 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

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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 6 June, 2006, 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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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 __s/ Scot C. Stirling_____________________ 17 18 19 20 21 22 23 24 25
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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]

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