Free Response 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 KIRKLAND & ELLIS' SUPPLEMENT TO MOTION FOR SUMMARY JUDGMENT REGARDING VICARIOUS LIABILITY (Assigned to the 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 Kirkland & Ellis's (K&E's) Supplement to Motion For Summary Judgment Regarding Vicarious Liability. This Response is supported by the response to K&E's Statement of Facts ("SOF") in support of its motion, and the Statement of Additional Facts ("SOAF") precluding summary judgment submitted contemporaneously with this response. INTRODUCTION In its Motion K&E urges this Court to apply Illinois law with regard to the effect of the settlement between David Eaton and AEG Partners, L.L.C. (hereinafter referred to collectively as "AEG") and Plaintiffs because (1) the original agreement between AEG and LeapSource stated it was "to be governed by and construed in accordance with the laws of the State of Illinois" and, (2) conflict of laws principles require the application of Illinois law. These arguments are, however, misguided and misleading. Arizona law should apply to interpret the effect of the AEG settlement with Plaintiffs on the vicarious liability claim against K&E. The analysis leading to this conclusion is simple. In their Settlement Agreement with Plaintiffs, AEG and Plaintiffs agreed to the following:

18 19 20 21 22 23 24 25 "14. Governing Law. This agreement shall be governed, construed and enforced according to the laws of the State of Arizona without regard to conflicts of laws principles." Settlement Agreement, attached as Exhibit 3 to K&E SOF. (Emphasis added) Although K&E attached and referenced the Settlement Agreement to its Supplement, it deliberately failed to inform the Court of its most important provision vis-à-vis the effect of the settlement on their vicarious liability claim. Notwithstanding any choice of law provision that was originally included in the letter agreement between AEG and LeapSource,
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the effect of said provision ended when the parties chose to resolve their differences by settlement and memorialize that settlement in a new legal document, i.e., the Settlement Agreement. More importantly, the letter agreement between AEG and LeapSource governed a relationship wherein AEG agreed to provide: Financial Advisory Support It is our understanding that the company is primarily seeking advice in a) developing and assessing restructuring alternatives that address the Company's current liquidity crisis; and b) assisting the Company, as requested in its negotiations with potential financing sources, creditors or other financial stakeholders to build consensus for a restructuring that meets the Company's financing needs. Financial Advisory Engagement letter dated March 2, 2001, attached as Exhibit 1 to K&E SOF.

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The agreement between AEG and LeapSource did not provide that David Eaton would be providing legal services to LeapSource. Any legal advice that David Eaton provided to LeapSource was in his capacity as a lawyer for K&E, and not pursuant to the AEG agreement with Plaintiffs and would not be subject to the terms of said letter agreement. Since Arizona law governs the legal malpractice claims against K&E, logic dictates that Arizona law would also govern any malpractice that is imputed to them by virtue of the conduct of their agent, David Eaton.

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II.

ARGUMENT A. AEG And Plaintiffs Agreed That Their Settlement Agreement Shall Be Governed By Arizona Law

In K&E's claim that Illinois law should apply to the effect of the AEG/Plaintiffs 4 5 6 7 8 9 10 11 12 13 14 aware, some of Plaintiffs' claims against AEG may have been subject to the choice of law 15 16 17 18 19 20 21 22 23 24 25 that the resolution of their claims would be governed by the Settlement Agreement and, more 4 Filed 05/18/2006 Page 4 of 12 Case 2:02-cv-02099-RCB Document 404
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settlement, nowhere do they mention (not even once) the intent of the parties to that settlement. As a matter of fact, K&E deliberately failed to inform this Court that despite their claim that Illinois law should apply to a settlement of which they were not even a party, the parties to the settlement themselves had agreed otherwise. In their Settlement Agreement with Plaintiffs, AEG and Plaintiffs agreed to the following: "14. Governing Law. This agreement shall be governed, construed and enforced according to the laws of the State of Arizona without regard to conflicts of laws principles." Settlement Agreement, attached as Exhibit 3 to K&E SOF. (SOAF ¶ 16) As this Court is

and arbitration provisions of the letter agreement, and some were not. The settlement between AEG and Plaintiffs intended to extinguish all such claims and causes of action. The Settlement Agreement further provided that: WHEREAS, on the terms and subject to the conditions contained herein, the Trustee and the Plaintiffs, on the one hand, and AEG on the other, desire to compromise and settle all of the claims and causes of action that may exist or be alleged to exist between them in the Litigation. Id. at 2. Regardless of whether a claim was subject to Illinois law and binding arbitration, or Arizona law as applied in this District Court action, the parties (AEG and Plaintiffs) agreed

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importantly, Arizona law. David Eaton, who is an attorney and a share partner with K&E, signed this Settlement Agreement in his capacity as an individual defendant. David Eaton knew that Plaintiffs intended to preserve their rights in this action against his principal, K&E, as well as the other defendants. David Eaton signed the Settlement Agreement knowing that Arizona law would govern the effect of his settlement on the Plaintiffs' vicarious liability claims against his employer, K&E.

7 8 9 10 11 12 of Trustee and Plaintiffs to Approve Settlement with David Eaton and AEG Partners, L.L.C. 13 14 15 16 17 18 19 20 21 22 or more of the Other Defendants, on the other hand, are or may be alleged to be principals, 23 24 25 agents, or joint tortfeasors as to one or more of the Trustee's reserved alleged claims." See SOF ¶ 6. 5 Filed 05/18/2006 (SOAF ¶ 12) This Notice specified a bar date of 20 days from the date of service for any creditor or party in interest to file an objection to the settlement. K&E did not object to the settlement, even though they were aware that the Settlement Agreement (1) specified the application of Arizona law, and (2) that the "Trustee and Plaintiffs do not release and expressly reserve any Claims that she (in her capacity as Trustee) and Plaintiffs might have or claim to have against any person or entity other than AEG, including, without limitation, the various personal and entities named as defendants or adverse parties in the Litigation . . .regardless of whether AEG, on the one hand, and any one B. K&E Did Not Object To The Proposed Language Of The Settlement Agreement

On January 13, 2006 K&E was electronically served with a copy of the Motion of Trustee and Plaintiffs to Approve Settlement With David Eaton and AEG Partners, L.L.C. (SOAF ¶ 11) On that same date K&E was also electronically served with a Notice of Motion

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Rather than object to the settlement, K&E filed a document entitled "Notice of Reservation of Rights" with the bankruptcy court on February 2, 2006. (SOAF ¶ 13) In that document K&E stated it "does not object to the approval of the proposed settlement in this Court," instead claiming it was reserving its rights to have the interpretation of that agreement left to the District Court. Inasmuch as K&E is now seeking the application of Illinois law to the AEG settlement with Plaintiffs, K&E is, in fact, objecting to a term of that

7 8 9 10 11 12 13 14 15 16 17 On April 6, 2006 United States Bankruptcy Court Judge James M. Marlar signed an 18 19 20 21 22 23 24 25 Order Granting Motion of Trustee and Plaintiffs to Approve Settlement Agreement With David Eaton and AEG Partners, L.L.C. (SOAF ¶ 14) Judge Marlar's Order reads as follows: IT IS HEREBY ORDERED that said Motion is hereby granted. The terms and conditions of the Settlement Agreement entered into by and between the parties are hereby approved and deemed to be in the best interests of the Debtor. By the express terms of the Settlement Agreement, the Trustee and Plaintiffs do not release and expressly reserve any Claims that she (in her capacity as Trustee) and Plaintiffs might have or claim to have against any
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settlement. However, K&E's time to object to the settlement expired on February 2nd, the date they chose to inform the Bankruptcy Court that they did not object. Once again K&E chose to lie in the weeds and "object" to one of the terms of the AEG settlement at this time and in this forum. K&E should not now be rewarded for their feigned consent to the AEG settlement, sans objection, when they truly objected to the "Governing Law" section of the Settlement Agreement at the time the Bankruptcy Court was considering the approval of said settlement. The time to object was then, not now. C. Bankruptcy Judge James M. Marlar Approved The Settlement Agreement And Incorporated The Reservation Of Claims Language In The Signed Order Of April 6, 2006

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person or entity other than AEG and Eaton, including, without limitation, the various persons and entities named as defendants or adverse parties in the Litigation or in any adversary proceeding in which the Trustee is or has been the plaintiff or other party asserting a Claim, that currently is pending in the U.S. District Court or the Bankruptcy Court, and that arises from or relates to the Litigation or the Debtor, including, without limitation, the Other Defendants, regardless of whether AEG and/or Eaton, on the one hand, and any one or more of the Other Defendants, on the other hand, are or may be alleged to be principals, agents, or joint tortfeasors as to one or more of the Trustee's reserved alleged Claims. Order Granting Motion of Trustee and Plaintiffs to Approve Settlement Agreement With David Eaton and AEG Partners, L.L.C. signed by Judge James M. Marlar on April 6, 2006, attached as Exhibit 1 to Plaintiffs SOAF. (SOAF ¶ 15) As the parties to the Settlement Agreement had agreed, Judge Marlar's Order provided that Plaintiffs had expressly reserved their rights under the Settlement Agreement

13 14 15 16 17 18 Eaton only and allowed Plaintiffs to expressly reserve their rights against all others. 19 20 21 22 23 24 25 Kirkland & Ellis is requesting this Court to follow the law of the State of Illinois and dismiss the "vicarious liability" claims against them. This is an impermissible "collateral attack" on the Bankruptcy Court's Order of April 6, 2006. "The collateral attack doctrine precludes litigants from collaterally attacking the judgments of other courts. Rein v. Providian Financial Corporation, 270 F.3d 895 (9th Cir. 2001). (Emphasis added)
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to proceed with their case in the U.S. District Court against K&E for, inter alia, the acts of their agent, David Eaton. D. K&E's Supplemental Request Is An Illegal "Collateral Attack" On Bankruptcy Judge Marlar's April 6, 2006 Order

In his Order of April 6, 2006 Judge James M. Marlar released only AEG and

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In Celotex v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, Chief Justice Rehnquist said: We have made clear that "`[I]t is for the court of first instance to determine the question of the validity of the law, and until its decision is reversed for error by orderly review, either by itself or by a higher court, its orders based on its decision are to be respected.'" Walker v. Birmingham, 388 U.S. 307, 314, 87 S.Ct. 1824, 1828, 18 L.Ed.2d 1210 (1967) (quoting Howat v. Kansas, 258 U.S. 181, 189-190, 42 S.Ct. 277, 281, 66 L.Ed. 550 (1922)). If respondents believed the Section 105 Injunction was improper, they should have challenged it in the Bankruptcy Court, like other similarly situated bonded judgment creditors have done. See Celotex II, 140 B.R., at 912. If dissatisfied with the Bankruptcy Court's ultimate decision, respondents can appeal "to the district court for the judicial district in which the bankruptcy judge is serving," see 28 U.S.C § 158(a), and then to the Court of Appeals for the Eleventh Circuit, see § 158(d). Respondents chose not to pursue this course of action, but instead to collaterally attack the Bankruptcy Court's Section 105 Injunction in the federal courts in Texas. This they cannot be permitted to do without seriously undercutting the orderly process of the law. Celotex, 514 U.S. at 313. (Emphasis added) Like the judgment creditor in Celotex, K&E is asking this District Court to challenge United States Bankruptcy Judge James M. Marlar's April 6, 2006 Order. K&E did not challenge the propriety of Judge Marlar's Order in the Bankruptcy Court. To the contrary, K&E expressly stated it "does not object to the approval of the proposed settlement in this Court." See SOAF ¶ 13. Similarly, K&E did not appeal the Order Granting Motion of Trustee and Plaintiffs to Approve Settlement Agreement With David Eaton and AEG Partners, L.L.C. Instead, they chose to lie in the weeds and attack the Order collaterally in this Court.

23 24 25 K&E should not be permitted to use this forum to collaterally attack Judge Marlar's Order. Their request should be denied. 8 Filed 05/18/2006

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E.

Arizona Law Will Not Relieve K&E Of Vicarious Responsibility For The Acts Of David Eaton

There is no case in Arizona that holds the release of an agent, which expressly 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reserves rights against the principal, relieves the principal of responsibility for the same act(s). There is some guidance, however, from Arizona case law dealing with "covenants not to sue." In the covenant not to sue context Arizona courts have generally held that such covenants only release those parties who were specifically named in the agreement. In the most recent pronouncement of this rule, the Court in Blocher v. Thompson, 169 Ariz. 182, 818 P.2d 167 (1991) stated the following in this regard: While those cases involved instruments which contained express reservations of the covenanter's right to proceed against the covenantee's principal, we believe that the reasoning supporting those decisions equally applies to the situation where rights against the principal have not been so expressly reserved. Furthermore, "[c]ovenants not to sue should be construed in harmony with the intent of the parties." Fagerberg v. Phoenix Flour Mills Co., 50 Ariz. 227, 71 P.2d 1022 (1937). In the Settlement Agreement between AEG and Plaintiffs there was clearly an intent to reserve a right of action against K&E. This was the mutual intent of both AEG (specifically including David Eaton in his individual capacity), and Plaintiffs. F. Even Under Illinois Law Claims Not "Purely Vicarious" Cannot Be Dismissed

This Court should be mindful that K&E's liability is not "purely vicarious" in this case. Even under the law of Illinois cited by K&E, K&E's liability for "aiding and abetting" David Eaton's misconduct (or for any of its own conduct or misconduct) is not "purely vicarious." For example, K&E recommended David Eaton to Plaintiffs, K&E lawyers
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worked with David Eaton, and K&E did not enforce their own rules (with regard to their rule prohibiting their "of counsel" lawyers from working for a client who has a "conflict" with a current K&E client, absent a waiver). III. CONCLUSION. K&E's Supplement to its Motion for Summary Judgment Regarding Vicarious Liability must be denied. Dated this 18th day of May 2006. BEUS GILBERT PLLC

By

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

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

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CERTIFICATE OF SERVICE I hereby certify that on May 18, 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/ Steven E. Weinberger___________________ 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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