Free Reply - District Court of Arizona - Arizona

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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

John J. Bouma (#001358) James R. Condo (#005867) Patricia Lee Refo (#017032) Joseph G. Adams (#018210) SNELL & WILMER L.L.P. One Arizona Center 400 E. Van Buren Phoenix, AZ 85004-2202 Telephone: (602) 382-6000 E-Mail: [email protected] Attorneys for Defendant Kirkland & Ellis IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Diane Mann, as Trustee for the Estate of LeapSource, Inc., et al., Plaintiffs, v. GTCR Golder Rauner, L.L.C.; a Delaware limited liability company, et al., Defendants. (Oral Argument Requested) No. CIV 02-2099 PHX RCB KIRKLAND & ELLIS' REPLY IN SUPPORT OF SUPPLEMENT TO KIRKLAND & ELLIS' MOTION FOR SUMMARY JUDGMENT REGARDING VICARIOUS LIABILITY (Assigned to Hon. Robert C. Broomfield)

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Plaintiffs wrote into their settlement agreement with AEG a choice of law provision designed to maximize K&E's potential exposure to plaintiffs for the alleged conduct of David Eaton. By settling their claims against AEG and Eaton on terms that will pay litigation costs with no direct recovery to the LeapSource estate (see Notice of Mot. of Trustee and Pls. To Approve Settlement With David Eaton and AEG Partners, L.L.C., at 2:8-11) and inserting the most favorable choice of law provision, plaintiffs hope to shift to K&E all remaining liability for Eaton's alleged conduct. The question on this motion is whether K&E--and the Court--are bound by the contract between plaintiffs and AEG. As set forth below, they are not.

Case 2:02-cv-02099-RCB

Document 412

Filed 05/24/2006

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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

I.

K&E MADE CLEAR FROM THE OUTSET THAT IT OBJECTED TO THE TERMS OF THE SETTLEMENT. Plaintiffs' assertion that K&E "chose to lie in the weeds" and somehow hid its

position concerning this settlement is, simply, fiction. That K&E objects to the manner in which the Settlement Agreement purports to affect its rights and liabilities comes as no surprise to anyone, especially plaintiffs. On February 2, 2006, and in response to plaintiffs' Motion to Approve Settlement with David Eaton and AEG Partners, L.L.C., K&E filed its Notice of Reservation of Rights with the Bankruptcy Court ("Reservation of Rights"). In that Reservation of Rights, K&E specifically indicated that this Court "is vested with jurisdiction over the matters and issues relating to the District Court Case" and, as a result, that K&E would ask this Court to resolve disputed issues regarding the effect of the Settlement Agreement: K&E believes that the terms of the Settlement Agreement may materially affect its rights and liabilities as a defendant in the District Court Case. By motion in the District Court Case, K&E intends to ask the District Court to resolve all such disputed issues. While K&E does not object to the approval of the proposed settlement in this Court [Bankruptcy Court], it specifically reserves all of its rights, claims, defenses, and/or other interests regarding the interpretation of that Settlement Agreement by the District Court. Thus, K&E unambiguously advised plaintiffs, and the Bankruptcy Court, (1) that K&E understood this Court to be the appropriate forum for resolving disputed issues concerning the impact of the Settlement Agreement on this case; and (2) that it intended to ask this Court to determine those issues. Neither the plaintiffs, nor the Bankruptcy Court, quarreled with either of those propositions at the time. Plaintiffs' claim that K&E's opposition is untimely is without any basis in law or fact. II. PLAINTIFFS' CHOICE OF LAW PROVISION DOES NOT BIND K&E OR THIS COURT. Plaintiffs and AEG do not have the contractual right to determine what impact their settlement agreement will have on plaintiffs' claims against K&E, who was not, of course, a party to their settlement. Indeed, a choice-of-law clause in a contract has no
Document 412- 2 - Filed 05/24/2006

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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

relevance to a tort claim asserted against a stranger to the contract. Such provisions are simply not binding on third parties. See, e.g., Carlson v. Tandy Computer Leasing, 803 F.2d 391, 393-94 (8th Cir. 1986) (applying Missouri law to questions that implicate the rights of third parties even though a contract contained a choice of law provision incorporating Texas law); Hong Kong & Shanghai Banking Corp. v. H.F.H. USA Corp., 805 F. Supp. 133, 139-40 (W.D.N.Y. 1992) (contracting parties stipulation to choice of law will be disregarded where it operates to the detriment of strangers to the agreement); In re Automated Bookbinding Services, Inc., 336 F. Supp. 1128, 1132 (D. Md. 1972) (parties to contract could not agree to bind rights of third parties); see also In re Eagle Enterprises, Inc., 223 B.R. 290, 294 (Bank. E.D. Pa. 1998). Plaintiffs cite no case to the contrary. Because K&E is not bound by the choice of law provision plaintiffs and AEG wrote into their contract, the choice of law analysis set forth in K&E's motion governs. Plaintiffs also suggest that David Eaton's intent, and his signature on the settlement agreement, is somehow relevant to whether K&E is bound by the choice of law provision. (Pls.' Resp. to Kirkland & Ellis' Supplement to Mot. for Summ. J. Regarding Vicarious Liability ("Pls.' Resp.") at 5:1-7.) But plaintiffs admit that Eaton was acting "in his capacity as an individual defendant" when he signed the settlement agreement. (Id. at 5:2.) He was not acting or purporting to act on behalf of K&E, nor was he acting with actual or apparent authority from K&E. He was simply acting as an individual with the ability to bind only himself. It is a fundamental principle of

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partnership law that "ordinarily a partnership is not liable on contracts or transactions entered into by a partner in his individual capacity or for his private benefit . . . ." 68 C.J.S. Partnership § 137 (2005); see, e.g., McDonnell v. American Leduc Petroleums, Ltd., 456 F.2d 1170, 1187 (2d Cir. 1972) (partnership not liable for partner's acts that were not performed in the usual course of partnership business); Rodgers v. Saunders, 396 P.2d 817, 819 (Mont. 1964) (partnership not liable for purchases made outside scope of business as ordinarily conducted unless authorized, adopted, or ratified by partnership); Moseley v. Smith, 49 P.2d 775, 779-80 (Okla. 1935). Therefore, Eaton's
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

signature in his individual capacity cannot bind K&E to the Settlement Agreement, or to any of its terms. III. THIS IS NOT A COLLATERAL ATTACK ON THE BANKRUPTCY COURT'S ORDER. First, contrary to plaintiffs' claim, the Bankruptcy Court's order does not purport to determine the impact of the terms of the settlement on the case pending in this Court--nor could it. Instead, the order simply recites what the Settlement Agreement terms are. ("By the express terms of the Settlement Agreement, the Trustee and Plaintiffs do not release and expressly reserve . . . . " Order dated April 6, 2006 at 2:67.) Nothing in the order determines the effect of those terms on the claims asserted against K&E. & David Eaton.) Because the Bankruptcy Order does not determine the impact of the settlement on the claims before this Court, the collateral attack case law cited by plaintiffs is inapplicable. In Celotex, the respondents were "bonded judgment creditors" who had been expressly enjoined by the bankruptcy court from action that "would have a direct and substantial adverse effect on Celotex' ability to undergo a successful reorganization." See Celotex Corp. v. Edwards, 514 U.S. 300, 309 (1995). The Court held that the creditors should have challenged the injunction against them in the bankruptcy court. There is no similar order here, and K&E is not a party to the Plaintiffs acknowledge as much in asking this Court to enter their disputed proposed order. (See Pls.' Proposed Order Re Dismissal of AEG Partners LLC

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LeapSource bankruptcy proceeding. Plaintiffs' reliance on the Rein case is similarly misplaced. In that case, the court specifically held that the "collateral attack doctrine does not apply to [plaintiff] because his claims were never addressed by a prior order or judgment." See Rein v. Providian Fin. Corp., 270 F.3d 895, 902 (9th Cir. 2001). The Trustee sought approval of the Bankruptcy Court for her settlement with AEG and Eaton pursuant to the Bankruptcy Rules. Fed. R Bank. Pro. 9019 ("on motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement . . . ."). Plaintiffs cite nothing in the Bankruptcy Code giving the Bankruptcy Court jurisdiction over tort and contract claims by former employees of LeapSource
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

against any of the defendants in this case. Those claims were not--and likely could not have been--brought in the LeapSource bankruptcy proceeding. See 28 U.S.C. § 157. Rather, the claims were brought in Arizona state court, and were removed only after the Trustee joined as a plaintiff. The individual plaintiffs never explain how the Bankruptcy Court--which never had jurisdiction over their claims or K&E--had authority to conclusively determine the effect of a settlement agreement on claims to which the Trustee is not a party, that were never before the Bankruptcy Court and likely could not have been brought there, and that are, in fact, pending in this Court. Because this is not a collateral attack on an order of the Bankruptcy Court, this Court may determine the impact of the Settlement Agreement on the claims pending here against K&E. Beyond asserting that the choice of law provision controls, plaintiffs do not dispute that the effect of the release of Eaton on the claims against K&E should be governed by Illinois law.1

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IV.

CONCLUSION. For the foregoing reasons, Kirkland & Ellis' Motion for Summary Judgment on

Vicarious Liability should be granted. DATED this 24th day of May 2006. SNELL & WILMER L.L.P.

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1

By s/ Patricia Lee Refo John J. Bouma James R. Condo Patricia Lee Refo Joseph G. Adams Attorneys for Kirkland & Ellis

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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

CERTIFICATE OF SERVICE I hereby certify that on May 24, 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: Leo R. Beus Richard R. Thomas Scot C. Stirling Beus Gilbert, PLLC 4800 North Scottsdale Road Scottsdale, AZ 85251 Attorneys for Plaintiffs Don P. Martin Edward A. Salanga Quarles & Brady Streich Lang, LLP Two North Central Phoenix, AZ 85004-2391 Attorneys for GTCR Defendants and Defendants Nolan, Rauner, Yih, Donnini and Canfield David S. Foster Latham & Watkins, LLP Sears Tower, Suite 5800 233 South Wacker Drive Chicago, IL 60606 Attorneys for GTCR Defendants and Defendants Nolan, Rauner, Yih, Donnini and Canfield Merrick B. Firestone Ronan & Firestone, P.L.C. 649 North Second Avenue Phoenix, AZ 85003 Attorneys for Michael Makings Foster Robberson Richard A. Halloran Lewis and Roca LLP 40 N. Central Avenue Phoenix, AZ 85004-4429 Attorneys for David L. Eaton and AEG Partners LLC Steven J. Brown Steve Brown & Associates, L.L.C. 1440 E. Missouri, Suite 185 Phoenix, AZ 85014-2412 Attorneys for Plaintiff Diane Mann, as Trustee for the Estate of LeapSource, Inc. By: s/ Kimberley K. Mosaidis

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1838324.1

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Case 2:02-cv-02099-RCB

Document 412- 6 - Filed 05/24/2006

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