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 GTCR MOTION FOR SUMMARY JUDGMENT RE FIDUCIARY DUTY AND REMAINING CLAIMS (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 the GTCR Motion For Summary Judgment Regarding Fiduciary Duty and Remaining Claims (Docket No. 343). This Response is supported by the plaintiffs' Response to GTCR's Statement of Facts, and by the plaintiffs' Statement of Additional Facts Precluding Summary Judgment, submitted contemporaneously with this Response. GTCR's Motion should be denied because it is based upon a highly selective and

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Notably, the GTCR defendants have argued that it is "irrational" to suppose that they 24 25 would act contrary to their own financial interests, but that is not sufficient to carry their 2 Filed 06/06/2006 misleading recital of alleged facts, many of them disputed, and upon inferences and conclusions to be drawn from the facts, including conclusions about the intent or motivations 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). Here, the evidence is disputed, the inferences and conclusions to be drawn from the evidence are disputed, and summary judgment is inappropriate. I. GTCR'S STATEMENT OF FACTS The GTCR defendants have done an excellent job of picking isolated facts out of context ­ and sometimes changing their context, even shifting from later dates to earlier dates to create the impression that the earlier facts were the result of, or in response to, the later facts ­ in order to tell those parts of the story that favor their view of the case. However, that is not sufficient to meet their burden on a motion for summary judgment.

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burden on a motion for summary judgment. Of course it was irrational for GTCR to do what it did ­ first encouraging the development of a company that was designed to go after large clients, and promising as recently as January 2001 that it would fund the Cargill transaction if LeapSource would implement a reduction in force (RIF) to reduce its expenses, and then suddenly pulling the plug on the negotiations with Cargill and destroying the company. It was irrational of the GTCR members of the board to totally abdicate their responsibility to

7 8 9 10 11 12 13 14 15 16 Plan" as if the document prepared before LeapSource was formed incorporated the entire and 17 18 19 20 21 22 23 24 25 It probably wasn't "rational" for Exxon to allow a man who had previously lost his drivers' license because of alcohol-related traffic violations to captain an oil tanker in Prince William Sound, but the fact that it was irrational didn't keep the ship off the rocks, or save Exxon from liability for the damage that resulted from its "irrational" behavior.
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the Company in 2000, and then to react to a memorandum from another member of the board (Tom Gilman), who properly chastised them for their irrational and destructive behavior, by firing the CEO and removing Tom Gilman from the board. It was irrational to deliberately ignore the opportunity (and obligation) to obtain an appraisal of the ICG Assets and to negotiate a sale of the entire business or its parts for a fair value. But ultimately the GTCR defendants were not sued because so many of the things they did were irrational, but because almost everything they did was damaging to LeapSource and finally to its creditors.1 GTCR begins by misrepresenting the document described in the FAC as the "Business

final business strategy for the company, and as if the plan was static from the time it was prepared in 1999 until LeapSource ended in bankruptcy in 2001. The business plan does include confidential information, including the integration of information into a platform that would allow the client to have immediate access to the client

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company's financial information.

However, the evidence shows that the strategy for

implementing that plan was evolving even as LeapSource was being formed, and continued to evolve during the start-up period. (The Court is reminded that, because of their

agreements with Arthur Andersen, the Individual Defendants who were former Andersen partners were prohibited from selling LeapSource services for a period of three months. During that period ­ beginning after LeapSource was formed and after the "Business Plan"

7 8 9 10 11 12 13 14 15 16 the later history of LeapSource's efforts to recruit larger "big fish" clients. 17 18 19 20 21 22 23 24 25
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document had been created ­ there were substantial changes in the strategy for implementing the business plan, reflected in the marketing campaign that began at the conclusion of that period.) Therefore, it is extremely disingenuous for GTCR to simply compare projections in the written document prepared before LeapSource was formed, or from a LeapPak created during the first month of the Company's existence and as the plaintiffs (and GTCR) were developing their program and strategy for marketing the Company's services ­ and based on the assumption that LeapSource would be going after larger numbers of smaller clients ­ to

GTCR's highly selective summary of the facts ignores the fact that LeapSource prepared monthly reports including information about the clients and the types of clients that it was pursuing, and including comparisons of financial performance to budget. Those reports ("LeapPaks") were provided to GTCR and to the GTCR members of the board of directors on a regular basis. For example, for the year 2000, except for a non-cash one-time special charge to reflect additional shares of stock issued to GTCR to prevent dilution of its

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ownership position, LeapSource's actual financial performance compared positively to the budget by approximately $175,000. When GTCR began interfering with LeapSource's efforts to recruit Cargill ­ the largest privately-owned company in the world ­ without the action concurrence of the LeapSource board, LeapSource was very close to successfully concluding that contract negotiation. Whether because of their obvious animosity toward Chris Kirk, or because of a

7 8 9 10 11 12 13 14 15 16 II. 17 The Trustee has asserted claims for breach of fiduciary duty and for aiding and 18 19 20 21 22 23 24 25
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desire to conceal their own abdication of responsibilities as directors and as professional advisors under the Professional Services Agreement, the GTCR defendants sabotaged LeapSource efforts to conclude transactions that would have made the company a more desirable acquisition target and that would have preserved the value of the LeapSource business for the benefit of its creditors. The actual history of the development of LeapSource demonstrates the GTCR defendants' complete failure to honor their obligations as fiduciaries to the Company and to its creditors, whose interests are represented here by the Trustee. THE PLAINTIFFS' FIDUCIARY DUTY CLAIMS

abetting breaches of fiduciary duty against the GTCR defendants, who acted in various capacities and with respect to different transactions as majority shareholders of LeapSource, as financial advisor to LeapSource, and as directors of LeapSource. The conduct of the defendants was obviously concerted with respect to some of the subjects of the plaintiffs' complaint, and the GTCR defendants are accused both of breaches of fiduciary duty and of aiding and abetting the breaches of fiduciary duty by others.

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LeapSource is a Delaware corporation, and we believe the parties are in agreement that the existence and scope of the defendants' fiduciary duties is determined by the law of Delaware. The directors of Delaware corporations have a triad of primary fiduciary duties: due care, loyalty, and good faith. Those fiduciary responsibilities do not operate intermittently. Accordingly, the shareholders of a Delaware corporation are entitled to rely upon their board of directors to discharge each of their three primary fiduciary duties at all times. Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001) (emphasis added). The parties also seem to be in agreement that LeapSource was insolvent or in the zone of insolvency in early 2001. Again, according to the law of Delaware, when a corporation
becomes insolvent or is in the vicinity of insolvency, its directors and officers owe fiduciary duties to the corporation, and its assets must be preserved and protected. Geyer v. Ingersoll Publ'n Co., 621 A.2d 784, 791 (Del. Ch. 1992) (officers and directors have a fiduciary duty to the corporation to preserve its assets once the corporation is in the vicinity of insolvency); Credit Lyonnais Bank

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Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 1991) at *34 (same);

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In re NCS Healthcare, Inc. Shareholders Litigation, 825 A.2d 240, 256-57, & n. 32 (Del Ch. 2002)

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rev'd on other grounds; Omni Care, Inc. v. NCS HealthCare, Inc., 822 A.2d 397 (Del. Supr. 2002)

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(same). Accord Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, n.25 (3d

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Cir. 1990).

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The directors and officers of a corporation that is insolvent or in the zone of insolvency owe fiduciary duties both to the corporation and to the corporation's creditors, as the duty to preserve the assets of an insolvent corporation also runs to the creditors of the
corporation. Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991

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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).

7 8 9 10 11 12 13 14 15 16 17 shareholders is the same damage suffered by all shareholders equally, and that claims for 18 19 20 21 22 23 24 25
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A.

Individual Plaintiffs' Standing

The Trustee has standing to bring an action asserting claims to recover for the benefit of creditors. However, the Individual Plaintiffs include creditors of LeapSource who also have standing to complain of the breaches of fiduciary duties owed to the creditors of LeapSource when it was insolvent or in the zone of insolvency. The GTCR defendants acknowledge that the plaintiffs have claimed that the GTCR defendants' actions were "extremely disadvantageous to LeapSource and its creditors," GTCR Motion at 9:5-6. However, they deny the standing of the Individual Plaintiffs because they claim that the damages suffered by the Individual Plaintiffs in their capacity as

such damages belong only to the corporation (or to a trustee who stands in the shoes of the corporation). However, the Individual Plaintiffs have also suffered and claim individualized damages, apart from the losses sustained as shareholders, including claims for unpaid bonuses and severance payments. At page 9 footnote 8 of their Motion, the GTCR

defendants acknowledge those claims, but attempt to deny the significance of the fact that

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Individual Plaintiffs were denied their severance payments, by arguing that no fiduciary duties are owed to employees (at least not in their capacity as employees, as the single Maryland case they have cited actually says). But that is not the point, and it is also simply not true of employees who are also creditors. Both the Individual Plaintiffs and the Trustee have standing to bring fiduciary duty claims against the defendants. See, e.g., Prod. Res. Group, LLC v. NCT Group, Inc., 863

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A.2d 772, 792 (Del. Ch. 2004) ("PRG has standing to raise fiduciary duty claims, however, because it has pled that NCT is insolvent," and was entitled to assert claim that directors "breached their fiduciary duties by improperly harming the economic value of the firm, to the detriment of the creditors who had legitimate claims on its assets"). See also Smith v. Arthur Andersen LLP, 421 F.3d 989, 1004 (9th Cir. 2005), where the Court recognized that both the Trustee and creditors may assert such claims: The firm's insolvency simply makes the creditors the principal constituency injured by any fiduciary breaches that diminish the firm's value and logically gives them standing to pursue these claims to rectify that injury. Put simply, when a director of an insolvent corporation, through a breach of fiduciary duty, injures the firm itself, the claim against the director is still one belonging to the corporation. Id. at 1006 (emphasis added) (quoting Prod. Res. Group, LLC v. NCT Group, Inc., 863 A.2d 772, 792 (Del. Ch. 2004)). See also Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987); In Matter of Integrity Ins. Co., 573 A.2d 928, 935 (N.J. Super. A.D. 1990); In re Western World Funding, Inc., 52 B.R. 743 (Bankr. D. Nev. 1985).

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B.

Duty of Care Claims

The GTCR defendants invoke the "business judgment rule" at pages 10-11 of their Motion, but after reciting legal standards for the application of the rule, they don't make any argument at all for the application of the business judgment rule to preclude liability for these claims on the facts of this case. GTCR Motion at 10:21-11:19. With respect to the claims against GTCR defendants for aiding and abetting the breaches of fiduciary duty by Makings (e.g., Counts 6 and 20), whose breaches of fiduciary

8 9 10 11 12 13 14 15 16 17 divided loyalties; in that case, directors designated by parent corporation to sit on the board 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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duty involve self-dealing in the ICG Assets, the business judgment rule certainly has no application at all to Makings' conduct, and is also no part of any defense to a claim for aiding and abetting Makings' breaches of fiduciary duty. "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.2 Weinberger v. UOP, Inc., 457 A.2d 701, 710-711 (Del. 1983) (no "safe harbor" in Delaware law for directors with

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.

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(Emphasis added.) See also Guth v. Loft, 5 A.2d 503, 510 (Del. 1939). A conflicted director cannot defend himself by 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

7 8 9 10 11 12 13 14 15 16 The GTCR defendants' arguments against the liability of a controlling shareholder for 17 18 19 20 21 22 23 24 25
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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" 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. Even where the business judgment rule might otherwise be applicable, the record in this case raises fact questions to preclude summary judgment with respect to claims against the GTCR defendants who were directors of LeapSource. Those issues are discussed in the following pages of this Response.

breaches of fiduciary duty are not supported by the authorities they have cited at Motion pages 12-13. The court in Official Comm. Of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., 137 F.Supp.2d 502 (S.D.N.Y. 2001), did not hold that majority shareholders could not be sued for their own breaches of duty, but merely said that the shareholders could not be sued for the acts of their nominee director on the theory that the director was the majority shareholders' agent. It was that "agency" claim that the court rejected an attempt at an end-run around the protections of §102(b)(7), and that distinguishes Color Tile from this

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case. In that case, the plaintiff did not even claim that the shareholders had done anything themselves ­ it simply argued that the shareholders were liable as the principals of a director who was appointed to be their "agent" on the board: Moreover, plaintiff does not contend that the shareholder defendants individually took any specific actions to breach a duty of care, rather plaintiff argues that the shareholder defendants are vicariously liable for breach of their duty of care by Soldatos as their agent. Official Committee of Unsecured Creditors of Color Tile, Inc. v. Investcorp, S.A., 137

8 9 10 11 12 13 14 15 16 17 and then reneging on that promise, damaging the value of LeapSource as a going concern 18 19 20 21 22
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F.Supp.2d 502, 515 (S.D.N.Y. 2001). That decision has no application at all to a case where the majority shareholder is sued for its own misconduct ­ for example, there is nothing in the Color Tile decision to protect GTCR VI entities from liability for the acts of Dan Yih when he was not even a member of the LeapSource board of directors.3 Nor does it protect GTCR from liability for its own acts that were not taken through the board of directors ­ such as, for example, using the threat of its control over funding to require a reduction in force to be implemented by LeapSource, while at the same time promising to fund the Cargill acquisition if the RIF was implemented,

and as a potential acquisition, while LeapSource management was attempting to market the company or to attract additional investors, with predictably harmful consequences.

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It is not true that the only decision or acts by the GTCR shareholders was their decision to cease purchasing preferred shares of LeapSource. Motion at 13:11-12. GTCR defendants have themselves suggested in this Motion that at least some of the complained of acts of Dan Yih during his so-called "investigation" were taken on behalf of the GTCR defendants as shareholders. See for example Motion at 20:12-14. 11
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The court in Color Tile at 137 F.Supp.2d at 515 did not dispose of duty of care claims as blithely as the GTCR defendants claim that it did. What the court actually said was this: Controlling shareholders have a fiduciary duty to minority shareholders. See, e.g., Kahn v. Lynch Communication Sys., Inc., 669 A.2d 79, 84 (Del.1995); Paramount Communications, 637 A.2d at 47; Singer v. Magnavox Co., 380 A.2d 969, 976 (Del.1977). However, while there are cases in which Delaware courts have referred to a duty of care for controlling shareholders, each of those cases involved controlling shareholders who breached their duty of loyalty by acting to benefit themselves to the detriment of the minority shareholders. See, e.g., Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 406 (Del.1988) (finding that majority shareholder of airline breached fiduciary duty to minority shareholders by failing to place earlier orders for jets and forcing airline to enter into leases for aircraft, but stating "[majority shareholder] acted for its sole benefit at the expense of its fiduciary duties to TWA's minority shareholders"); Cinerama, Inc. v. Technicolor, Inc., 1991 WL 111134, at *19-20 (Del.Ch. June 24, 1991) (noting that a majority shareholder in a cash-out merger assumes the duties of care and loyalty when he exercises power directing actions of corporation in cashing out the minority shareholders); Harris v. Carter, 582 A.2d 222, 235-36 (Del.Ch.1990) (finding that a duty of care may be imposed on majority shareholders in the context of a "sale of corporate control" by the majority shareholders). Plaintiff argues that "there is no conceivable reason why Delaware would pick and choose applying a duty of care to a fiduciary in some cases but not others." However, plaintiffs cannot point to a single instance in which a shareholder's duty of care was recognized in the absence of a breach of the duty of loyalty. The purpose of treating controlling shareholders as fiduciaries ­ to ensure that the controlling shareholder does not abuse its position of control to obtain some benefit to the detriment or exclusion of the minority shareholders ­ argues against the imposition of a separate duty of care in circumstances in which the interests of all the shareholders are aligned. (Emphasis added.)

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The plaintiffs certainly do not agree that GTCR "went to great lengths to inform itself" before it began taking radical action to interfere in the management of LeapSource, particularly in early 2001. In fact, while the GTCR defendants who were directors of LeapSource neglected their responsibilities to the Company ­ the board did not authorize the actions taken by GTCR beginning in late December 2000 ­ Dan Yih began to demand action from LeapSource management and admitted that his conduct was "very disruptive" and

7 8 9 10 11 12 13 14 15 16 company. The GTCR defendants' belated decision to try to paint Mr. Yih's activities as 17 18 19 20 21 22 23 24 25
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effectively "cut off the arms and legs" of Chris Kirk as the CEO, at the same time that she was trying to market the company. It is not true that the plaintiffs complained about "the extent of the two-month investigation that preceded the [GTCR VI entities'] decision" to stop funding LeapSource pursuant to the Purchase Agreement. GTCR Motion at 13:14-16. What the plaintiffs complained about, in fact, is the acts of GTCR, largely (but not exclusively) through Dan Yih, who was not a member of the board of directors, and who had not been authorized by the LeapSource board of directors to do anything with respect to the management of the

merely an "investigation" is precisely the kind of post hoc spin and rationalization that the Court should not adopt in deciding motions for summary judgment. GTCR concludes this part of its argument by dismissing any suggestion that it was "grossly negligent" in its decision-making process. GTCR Motion at 13:15-16. In fact, it was worse than grossly negligent; in the end, it was malicious, because when GTCR and the GTCR directors were properly chastised by director Tom Gilman for their destructive interference in the management of the company, and for the directors' total abdication of

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their responsibility to the Company, they reacted by firing the CEO, cutting funding to the Company by fax sent to Ms. Kirk at the offices of a company that had expressed interest in acquiring LeapSource, removing Mr. Gilman from the board, and disposing of the pieces of the business without making any serious effort to preserve the value of the business for the benefit of creditors. C. Breach of Duty of Loyalty

7 Under Delaware law, a director's intentional dereliction of duty is not merely a breach 8 9 10 11 12 13 14 15 16 17 of whether they might fall under the loyalty or care aspects of good faith) are in any event 18 19 20 21 22 23 24 25 "Specifically, the court must determine whether the director had a personal interest in the transaction, or failed to act independently or consider objectively whether the transaction
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of a duty of care, but is also a breach of the duties of good faith and loyalty: "[T]he concept of intentional dereliction of duty, a conscious disregard for one's responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith. Deliberate indifference and inaction in the face of a duty to act is . . . conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct." See In re Walt Disney Co. Derivative Litig., 2005 WL 2056651 (Del. Aug. 9, 2005) (emphasis added). "[S]o long as the role of good faith is understood, it makes no difference whether the words `fiduciary duty' are placed in front of `good faith,' because acts not in good faith (regardless

non-exculpable because they are disloyal to the corporation." Bad faith conduct always is disloyal. The GTCR defendants quote from page 45 of the Court's September 30, 2003 Order,4 GTCR Motion at 14:1-3, and immediately begin to argue that the plaintiffs' loyalty claims

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against GTCR "must be analyzed" under a much narrower standard. GTCR Motion at 14:14-17. To support the attempt to constrict the scope of the duty of loyalty, GTCR cites to Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 946 (Del. 2003), without noting that page 946 of that decision is six pages into the dissenting opinion. Moreover, GTCR glides right over the assumption that the directors' interests "remain aligned with the corporation's shareholders." Id. at 14:4-5. The facts of this case show that

7 8 9 10 11 12 13 14 15 16 insolvency. See, e.g., Emerald Partners v. Berlin, 787 A.2d 85 (Del. Ch. 2001) ("Although 17 18 19 20 21 22 23 24 25 was in the corporation's best interest (and by extension, its shareholders') best interests." (Emphasis added.) To that we would only add, in light of the defendants' admission that LeapSource was insolvent, whether the transaction was in the creditors' best interests.
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GTCR's interests were not aligned with those of the other shareholders. Instead, GTCR alone perceived its interests to lie in shutting down the company and disposing of its assets so that there would be no occasion to review GTCR's conduct toward the company and its creditors, including the failure of the GTCR directors to attend to their responsibilities to the Company. The GTCR defendants' failure to act in good faith raises genuine issues of material fact to require a trial on the GTCR defendants' breaches of their duty of loyalty to LeapSource and to its creditors while the company was insolvent or in the zone of

corporate directors are unquestionably obligated to act in good faith, doctrinally that obligation does not exist separate and apart from the fiduciary duty of loyalty. Rather, it is a subset or 'subsidiary requirement' that is subsumed within the duty of loyalty, as distinguished from being a compartmentally distinct fiduciary duty of equal dignity with the

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two bedrock fiduciary duties of loyalty and due care."). See also Emerald Partners v. Berlin, 840 A.26 641 (Del. 2003). Since Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993), "good faith" has joined the standard formulation of director duties by many Delaware courts, including the Supreme Court, which in several decisions has repeated its enumeration of good faith as a fiduciary duty separate and independent of those of care and loyalty, but never offered a

7 8 9 10 11 12 13 14 15 16 Inc., 208 B.R. 288, 300-301 (Bankr. D. Mass. 1997). The facts of this case, particularly with 17 18 19 20 21 22 23 24 25
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definition of good faith nor based a decision addressing director conduct on the concept. See, e.g., McMullin v. Beran, 765 A.2d 910 (Del. 2000); Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999). It is a breach of the duty of loyalty and good faith to waste the assets of an insolvent corporation. Permitting fraudulent transfers of corporate assets is a breach of fiduciary duty to the corporation, and (in the case of an insolvent company) to the corporation's creditors. See, e.g., Geyer v. Ingersoll Publications Co., 621 A.2d 784 (Del.Ch. 1992); Wieboldt Stores, Inc. v. Schottenstein, 94 B.R. 488, 507-508 (N.D. Ill.1988); In re Healthco Intern.,

respect to the ICG Assets transaction, will also support a claim for wasting corporate assets, which against supports a claim for breach of the fiduciary duties of good faith and loyalty. A claim for waste describes, in simple terms, "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993).

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"Nondisclosures Regarding Funding Cutoff" That is GTCR's characterization at page 15 of its Motion of allegations concerning a history of bad faith conduct by GTCR toward the plaintiffs and toward LeapSource. It is followed by GTCR's benign description of its own conduct, based upon a series of statements from its Statement of Facts that are both disputed and highly misleading because of their selectivity and incompleteness. GTCR Motion at 16-17.

7 8 9 10 11 12 13 14 15 16 wouldn't make sense for it to do anything harmful to a company in which it had made a 17 18 19 20 21 22 23 24 25
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The facts described by GTCR in its Motion are not the facts perceived by Tom Gilman at the time of the events that led him to send a memorandum dated February 24 2001 to the LeapSource board. See Plaintiffs' Response to GTCR's Statement of Facts at ¶¶ 142149 (discussing the "Gilman Memorandum"). And the GTCR defendants' reaction to the Gilman Memorandum in February 2001 belies the moderate tone adopted in the GTCR Motion. GTCR reacted angrily and destructively to the Gilman Memorandum, and in less than a month LeapSource was destroyed. At the end of this argument, GTCR Motion at 19, GTCR falls back on the claim that it

substantial investment. However, the fact that GTCR's conduct was damaging and counterproductive is not evidence that it did not occur. In fact, the GTCR members of the

LeapSource board completely abdicated their responsibility to act through the board (until ironically at the very end they sought counsel to paper over the substance of what they were doing with a thin veneer of attention to legal niceties). In the end, they "failed to ... consider objectively" whether the transactions they pursued were in the best interests of the corporation, its shareholders, or its creditors.

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Interference with Management Ironically, in light of their complete failure to attend to their duties as directors of LeapSource when it mattered most, the GTCR defendants dismiss complaints about their interference with the management of LeapSource by invoking the authority of the board of directors over the management of a corporation. GTCR Motion at 20:15-28. And yet the GTCR Motion does not cite a single act or resolution of the board of directors to explain the

7 8 9 10 11 12 13 14 15 16 in fact the board of directors did not authorize them and individual directors have no such 17 18 19 20 21 22 23 24 25 The rights granted to the GTCR VI entities in the Stockholders' Agreement and Purchase Agreement, cited by GTCR at 21:17-23, Exhibits 21 and 22, do not even come close to authorizing the type of conduct that GTCR actually engaged in with respect to LeapSource. The GTCR defendants also have not attached the entire Stockholders' Agreement to their
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conduct described in the preceding paragraph ­ lines 2-14 ­ because in fact the GTCR board of directors did not authorize any of it. And none of the authorities cited by GTCR support the proposition that a shareholder has the right to interfere in the management of a corporation. Thus, GTCR has absolutely no factual or legal support for its sweeping claim that, "[a]cting as directors and/or majority shareholders, the GTCR defendants were authorized to take these acts, which are unassailable from the standpoint of fiduciary duties." GTCR Motion at 20:12-14. The GTCR defendants were not "authorized to take these acts" as directors, because

authority on their own. And the GTCR defendants have cited absolutely no authority for the proposition that they were "authorized to take these acts" in their capacity as shareholders, because in fact neither the board of directors nor any rule of law or corporate governance gave them that authority.5 It is doubly ironic that GTCR invokes the authority of the board

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of directors, GTCR Motion at 20:15-28 and 21:8-16, when the GTCR defendants so determinedly avoided discharging their duties as directors, or acting through the board of directors in 2000 and 2001. While the GTCR defendants cite one provision after another invoking the authority of "the board," GTCR Motion at 21:8-16, and point to other provisions concerning GTCR's rights or authority as majority shareholder, id. at 21:17-23, those provisions are no answer to

7 8 9 10 11 12 13 14 15 16 the entire history of GTCR's conduct toward LeapSource, its role in disrupting efforts to sell 17 18 19 20 21 22 23 24 25 Statement of Facts, but the Stockholders' Agreement (which was attached as Exhibit 7 to GTCR's Statement of Facts in support of its Motion for Summary Judgment re Joint Venture Claims [Docket No. 240]), doesn't support GTCR's claim.
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the breach of fiduciary duty claims against the GTCR defendants because they do not authorize the conduct that the plaintiffs have complained of as improper interference with the management of LeapSource. Interference with the sale of the company GTCR's selective cherry-picking of the record is on display throughout this section of the argument, as GTCR suggests that it simply reacted to an unfortunate set of events that somehow developed without even a hint of responsibility on the part of GTCR. Although GTCR's responsibility for creating the circumstances that it describes requires a review of

the company and to preserve its value for the benefit of the shareholders and LeapSource creditors is suggested by the handful of paragraphs numbered 251-255 in the plaintiffs' Statement of Additional Facts Precluding Summary Judgment.

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Although GTCR claims that Exult failed to produce a "more concrete offer" in response to Joe Nolan's solicitation, GTCR Motion at 24:6-9, Kevin Campbell of Exult testified very differently: A. And I do remember us expressing some interest in the people, some of the people, and then, you know, I think the trail goes cold at that point. I'm pretty sure I learned that from either Jim or Duncan. Q. That they were going to close down the company? A. Yeah, and that they weren't interested in continuing discussions, which we found odd but we obviously only had one piece of the equation. Q. Why did you find that odd? A. Because, you know, we thought we had some interest in the company and we would have thought that they would have pursued those discussions. So again, pure -- it was pure speculation on our part, but what we were wondering was why wouldn't they have considered our alternative to closing down the company. Deposition of Kevin Campbell, at p. 37:11-38:3. Disposition of Company Assets GTCR tries to argue that the disposition of company assets could not have been managed differently than it was in the circumstances. Because GTCR abruptly terminated financing while attempts to sell the business were under way, GTCR suggests that it was then somehow "forced" to react to circumstances, as if it had no hand in creating them, by disposing of the assets of the company and putting it into bankruptcy.

22 23 24 25 The truth is that the GTCR directors were not discharging their duty by providing direction to LeapSource about their own company's intentions ­ which they alone knew ­ and misled LeapSource about their intention to continue funding the Company through the
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Cargill transaction in order to implement a reduction in force that caused the loss of CHC as a client and made a sale of the company more difficult. When, instead of funding the Cargill transaction, GTCR stopped funding LeapSource on February 27, it communicated its decision to Chris Kirk by a facsimile addressed to her at the offices of EDS, where she was in the midst of negotiations for the potential sale of the company. At every opportunity, GTCR reacted angrily toward Kirk and Gilman, and recklessly toward the company and its

7 8 9 10 11 12 13 14 15 16 simply false. The proposal was in fact discussed at a board meeting on 20 March 2001, 17 18 19 20 21 22 23 24 25
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creditors, until ultimately it destroyed the negotiations for the sale of the company to other companies who were seriously interested in getting involved in business process outsourcing. ICG Assets Sale It is revealing that the GTCR Motion takes up the sale of the ICG Assets at 30 March 2001 ­ ignoring everything that went before it ­ and pretends that the LeapSource board, now consisting entirely of GTCR representatives, was presented with this decision for the first time at the end of March. GTCR's statement that Makings took no part in the consideration of the proposal is

while Makings was still a member of the board, and in Makings' presence. Makings had already formed a new corporation (on 16 March) for the purpose of acquiring the ICG Assets. At the board meeting on 20 March, Eaton made it clear that the terms of the transaction had already been discussed, and that he was in favor of the sale. Eaton's self-serving characterization of the purported reasons for the ICG Assets sale to Makings are not undisputed facts, but the retroactive justifications for a transaction that was made because GTCR wanted it done, to hasten the disposition of the pieces of

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LeapSource and to put the company into bankruptcy ­ after waiting ninety days for preference periods to expire on the payment of severance to only those employees who agreed to release GTCR from any claims. The notion that ICG revenues depended on Makings' presence is nonsense, and was known to be nonsense at the time. At the same time the GTCR defendants claim that Makings was essential to the continuing revenue stream of ICG, GTCR Motion at 27:8-14,

7 8 9 10 11 12 13 14 15 16 Makings was on the board and was present at the first meeting when the transaction was 17 18 19 20 21 22 23 24 25
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they have also argued that Makings had "resigned" from LeapSource in December 2000 and was gone in January 2001 ­ after which GTCR's own analysis indicated that GTCR still valued the ICG part of the business at several millions of dollars. See Plaintiffs' Statement of Additional Facts ¶ 219, citing Sean Cunningham's calculations showing the ICG division to be worth an estimated $4 to $6.4 million in early 2001. It is simply disgraceful for the GTCR defendants to argue that Makings was not at the directors' meeting on 30 March 2001 when the contract was formally approved, GTCR Motion at 27:27-28, when the deal was first negotiated and proposed to the board while

proposed and favorably discussed by the board on 20 March. Moreover, the statements made by Eaton to the board on 20 March show that the transaction had obviously been discussed before 20 March ­ and in terms sufficiently encouraging to cause Makings to form a new corporation for the purpose of acquiring those assets on 16 March 2001. The other transactions for the disposal of LeapSource assets included the sale of LeapSource's intellectual property to Comsys ­ a portfolio company of GTCR ­ with the apparent expectation that Comsys would operate a shared service center and begin

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competing in the business process outsourcing industry using LeapSource's resources. Ultimately, it appears that Comsys did not pursue that line of business as anticipated, and the result is that the LeapSource intellectual property, including the CxO Desktop interface, was wasted.6 The negotiation of employee severance payments and releases for the benefit of GTCR cannot be justified as the defendants have attempted at page 31 lines 17-20 of their

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The value of the Individual Plaintiffs' trade secrets and the intellectual property developed by LeapSource is included in the business valuation and is therefore included in the plaintiffs' damages claims. However, the plaintiffs will not oppose the Motion with respect to Count 13 (misappropriation of trade secrets). The defendants' lame attempt to pretend that the release was intended for the benefit of all shareholders is obvious nonsense. Eaton was not interested in obtaining a release for the other shareholders when he left this message for Chris Kirk's lawyer: GTCR has now indicated that they are not interested in entering into any mutual release unless Tom Gilman is also involved in his own release with the company and them. I just think, frankly, Tom is acting like a jerk as well. I think everybody believes that Tom and Chris are very close and that, whether she denies it or not, Chris is somehow involved in this or has some influence over Tom. So as of right now, the deal is off unless
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Motion, because the statement that the release of GTCR as the majority shareholder in LeapSource was "in accordance with an explicit `condition precedent' to severance that is set out in all LeapSource SMAs and Employment Agreements is not accurate. The agreements did not require the release that GTCR demanded. In the end, the result was that money otherwise available for the payment of former employee's wage or severance claims on an equitable basis went only to those former employees who would agree to release GTCR from any potential claim of liability.7

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D.

Aiding and Abetting Breaches of Fiduciary Duties

After denying that it owed fiduciary duties to the plaintiffs, GTCR argues that it cannot be liable for aiding and abetting breaches of fiduciary duty if it is itself a fiduciary. Motion at 33:8-20. We do not quarrel with the proposition that a person who himself owes a fiduciary duty with respect to a transaction or course of conduct cannot be liable for aiding and abetting a breach of that same fiduciary duty by another, because the same facts that would

8 9 10 11 12 13 14 15 16 17 Company and was not "rehired" when GTCR made him President and a member of the 18 19 20 21 22 23 24 25
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otherwise constitute aiding and abetting would constitute a "primary" breach of fiduciary duty. If every one of the defendants were to admit that they were fiduciaries and were at all times acting in a role that imposed upon them fiduciary duties toward the plaintiffs, this argument might have some traction in a motion for summary judgment. But (for example) Daniel Yih was not a member of the board of directors when he first appeared at LeapSource and began interfering with the operation of the Company in December 2000 and January 2001. Michael Makings and GTCR have claimed that Makings "resigned" from LeapSource ­ although he continued to receive a paycheck from the

board of directors at the end of February 2001. The plaintiffs expect that the evidence will show that some of the defendants were fiduciaries at all or most of the relevant times (e.g., Rauner and Nolan as directors of LeapSource), and that some others (e.g., Yih) were

you can deliver Tom Gilman's release, and if we are not able to get that in the next couple of days then we'll issue the for cause letter and just proceed down that path. 24

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fiduciaries only during particular periods of time.

As previously noted, the GTCR

defendants have suggested that some of their conduct was taken in their capacity as majority shareholder, and other conduct taken as directors. Wrongful conduct during periods when they were not fiduciaries, or while acting in a capacity in which they claim not to be fiduciaries8 may constitute aiding and abetting the breaches of duties by those who were fiduciaries during those same periods, and their

7 8 9 10 11 12 13 14 15 16 instructed concerning the elements of an aiding and abetting breach of fiduciary duty claim. 17 18 19 20 21 22 23 24 25 For example, the GTCR defendants have denied that they were acting as fiduciaries when providing services under the Professional Services Agreement.
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wrongful conduct during periods when they were themselves fiduciaries may give rise to liability for breaches of fiduciary duties, but not for aiding and abetting. GTCR's argument that the aiding and abetting claims fail simply because the plaintiffs have alleged that the defendants were fiduciaries is nonsensical, because the defendants have in some cases denied it. The defendants' own denial of the fact that they were acting as fiduciaries ­ although they have not attempted to demonstrate that they were not by pointing to the evidence in the record ­ creates a genuine issue of material fact for trial. The issue raised by this argument is one for the jury to decide, after being properly

The GTCR defendants' second argument against aiding and abetting liability for breaches of fiduciary duty by other GTCR defendants rests upon the argument that no GTCR defendant breached any fiduciary duty to any of the plaintiffs, Motion at 34:1-6, which has already been addressed above.

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Their third argument against aiding and abetting liability is based upon the claim that there is "no evidence" that the GTCR defendants "knowingly participated" in any breach of fiduciary duty by the non-GTCR defendants. That is simply not true. The GTCR defendants caused LeapSource to use K&E as its counsel and subsequently caused Eaton to be retained by LeapSource as a "crisis manager," and then made him Chief Restructuring Officer, knowing of these conflicts of interest. The GTCR

7 8 9 10 11 12 13 14 15 16 relationship with K&E. 17 18 19 20 21 22 23 24 25 For example, terminating Kirk's employment "for cause" long after she had been terminated, and using the threat of that action to attempt to negotiate a release of liability for the GTCR defendants; using the same threat to attempt to coerce a release from Tom Gilman. See for example Plaintiffs' Statement of Additional Facts ¶ 228.
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defendants then either directed or gave Eaton authority to do things in the name of LeapSource that were aimed at driving the plaintiffs away and avoiding any accounting for the GTCR defendants' breaches of duty to the Company.9 The GTCR defendants allowed the sale of the ICG Assets to Eaton. They attempt to exculpate themselves from liability for that obviously fraudulent transaction by arguing that they relied upon Eaton's recommendation ­ but that is a question of fact for the jury to believe or not to believe, and in any case it was the GTCR defendants who put Eaton in a position to make that recommendation knowing that he was conflicted because of his

Whether it was reasonable to rely upon Eaton's suggestion that they could "get comfortable" with the terms of that transaction is also a fact question for the jury. The GTCR defendants knew that LeapSource had paid $10 million for those assets only one year earlier, because they had approved the acquisition of ICG at that price. Sean Cunningham's

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notes show that they believed the ICG part of the business was still worth several millions of dollars in January 2001, much more than the $2.5 million owed to Makings for the promissory note. They also knew that the promissory note to Makings was essentially worthless, after they had refused to put up the money to pay the interest on the note when it became due. To argue, in the face of those facts, that the GTCR defendants did not

"knowingly participate" in breaches of fiduciary duties by others is patent nonsense. 7 8 9 10 11 12 13 14 15 16 actually direct ­ the breaches of fiduciary duties. 17 18 19 20 21 22 23 24 25
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In Malpiede v. Townson, 780 A.2d 1075, 1096-1098 (Del. 2001), the court summarized the law of aiding and abetting and the elements of an aiding and abetting claim. In that case, there was "no indication in the amended complaint that Knightsbridge [the defendant] participated in the board's decisions, conspired with board, or otherwise caused the board to make the decisions at issue." Id. at 1098. In this case, the evidence shows

specific acts by the GTCR defendants that demonstrate their awareness of the misconduct complained of with respect to fiduciaries, including Eaton and Makings, their indifference to warnings and complaints by the plaintiffs, and their knowing participation in ­ if they did not

III.

OTHER CLAIMS A. Trustee Claims 1. Aiding and Abetting Fraudulent Transfers

Arizona recognizes a cause of action for aiding and abetting breach of duty by another under Restatement (Second) Torts § 876(b), for a person who "knows that the other's conduct
constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself," is also liable for aiding and abetting the breach of duty.

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This liability is not dependent on the nature or source of the underlying breach of duty, and it is misleading to suggest that the Court is asked to "create" a new cause of action when the cause of action (for knowing participation in the breach of duty by another person) and source of the underling duty (the Uniform Fraudulent Transfer Act) are well-established in Arizona. Arizona's version of the UFTA includes the same provisions relied upon by the New Jersey Supreme Court in Banco Popular North America v. Gandi, 184 N.J. 161, 876 A.2d 253, 263

(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.". In that case, the court held that an attorney could be liable for his participation in a conspiracy to commit a fraudulent transfer.

11 12 13 14 15 16 because the fraudulent transfer statute expressly provides for these causes of action, but 17 18 19 20 21 22 23 24 25 because the statute expressly provides that it is not abrogating other well-established common law causes of action or bases of liability ­ such as liability for conspiracy and aiding and abetting. 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
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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

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validating or invalidating cause, supplement its 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 B.R. 841, 866 (D. N.J. 1995) ("Clearly, summary judgment was inappropriate on Counts 1 and 2 (and, by extension, Count 3 (aiding and abetting a fraudulent transfer), and the bankruptcy court was correct in so finding") (applying New Jersey law).

8 9 10 11 12 13 14 15 16 17 with respect to the fraudulent transfer claim is fatally flawed because he has admitted that he 18 19 20 21 22 23 24 25
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There is more than sufficient evidence of the value of the ICG Assets, including the GTCR defendants' own admissions, to support the claim for the fraudulent transfer (against Makings) and for aiding and abetting fraudulent transfer against other defendants, even without the testimony of Tom Gilman.10 However, the idea that "the only competent ICG valuation in the case is that of Ed McDonough," GTCR Motion at 38:3-6, is patently false. There are admissions from GTCR and evidence from the purchase of the ICG business in 2000 and other evidence in the record to support the underlying claim for a fraudulent transfer. In fact, Mr. McDonough's opinion

has "no opinion" about the actual fair market value of the promissory note given up by Makings in exhange for the ICG Assets.

Because the GTCR defendants have deferred the discussion of Tom Gilman's ability to testify to their so-called Daubert motion, the plaintiffs will similarly address those issues in response to that motion. The GTCR defendants have made no argument to support their claim that Gilman is not competent to testify. Gilman's summary of damage opinions is included as an exhibit to the Plaintiffs' Statement of Additional Facts, as is other evidence of

10

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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 around that issue and to avoid confronting the question of the promissory note's actual value for as long as he could, Mr. McDonough at his deposition finally admitted that he had "no

7 8 9 10 11 12 13 14 15 16 A. That's correct. 17 McDonough Dep. at 194:9-21. 18 19 20 21 22 23 24 25 the value of the ICG assets, including the purchase of those assets for $10 million in early 2000.
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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? A. I'd say that's a correct statement. 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. Q. And you have no opinion about the fair market value of that promissory note as of that date; is that correct?

Mr. McDonough's other attempts to ascribe value to the lease payments and payroll "obligations" that were not in fact obligations of ICG are also contrary to law, as is apparent 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

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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. The GTCR board members cannot claim that they were "well-informed" about the

7 8 9 10 11 12 13 14 15 16 of the board on March 20, with Eaton and Makings in attendance. Only after the proposal 17 18 19 20 21 22 23 24 25
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sale of the ICG Assets to Makings when they knew the facts that proved that Makings was not giving reasonable value in exchange for the ICG Assets. The transfer of the ICG Assets to Makings was initiated while Makings was CEO and a director of the Company. (The organizational documents provided that the CEO would also be an ex officio member of the board, and the GTCR defendants at least no longer seem to be denying that Makings was a member of the board, GTCR SOF ¶ 18, although Makings himself has denied it). The transfer of the ICG Assets to Makings was proposed and discussed at a meeting

was favorably discussed with other members of the board on March 20 did Makings resign and consummate the transaction within a period of several days. When that transaction was proposed, the GTCR members of the board owed fiduciary duties to the creditors of LeapSource to preserve its assets. They had previously expressed the view that the ICG part of the business was worth millions of dollars, and they knew that the promissory note payable to Makings was essentially worthless in light of GTCR's plans to shut down the rest of the business. They understood the need to obtain an appraisal of the

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ICG part of the business, and made a deliberate decision not to do it. Instead, they agreed to give that part of the business to Makings in exchange for forgiveness of a worthless promissory note and very little other consideration. The Trustee has previously explained that such self-dealing ­ which is a blatant breach of the directors' fiduciary obligations to preserve the company's assets for the benefit of LeapSource creditors ­ cannot be papered over by striking a deal and then having

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Makings resign from the board just days before the deal is consummated. See the Trustee's Reply Memorandum in support of Trustee's Motion for Summary Judgment 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 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 transfe