Free Supplement - District Court of Arizona - Arizona

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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, No. CIV 02-2099 PHX RCB SUPPLEMENT TO KIRKLAND & ELLIS' MOTION FOR SUMMARY JUDGMENT REGARDING VICARIOUS LIABILITY (Assigned to Hon. Robert C. Broomfield) (Oral Argument Requested) Defendants.

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

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 GTCR Golder Rauner, L.L.C.; a Delaware limited liability company, et al.,

Snell & Wilmer L.L.P.

In a filing with the Bankruptcy Court, plaintiffs have given notice that they entered into a settlement agreement with defendants David Eaton and his company, AEG Partners, L.L.C. ("AEG"). In exchange for a release of all claims, AEG and Eaton have agreed to assign approximately $200,000 remaining on their insurance policy to plaintiffs and to cooperate with plaintiffs' counsel in the prosecution of this case. Notably, the settlement agreement purports to reserve plaintiffs' claims against Kirkland & Ellis ("K&E") and other defendants for the conduct of Eaton and AEG, who are being released. Now that the Bankruptcy Court has approved the settlement, K&E supplements its pending Motion for Summary Judgment Regarding Vicarious Liability (filed September 8, 2005, doc. #250). As set forth in its original motion, K&E is entitled to summary judgment on the issue of vicarious liability because there is no evidence that Eaton and AEG were acting as agents for K&E with respect to LeapSource. If, however, the Court finds that an issue

Case 2:02-cv-02099-RCB

Document 368

Filed 04/17/2006

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

of fact remains on the issue of agency, K&E moves, in the alternative, for summary judgment based on the effect of the plaintiffs' settlement agreement with Eaton and AEG. Under applicable Illinois law, releasing an agent from liability also releases, as a matter of law, the vicarious liability of the alleged principal. Accordingly, summary judgment is warranted because plaintiffs' release of Eaton and AEG has extinguished any vicarious liability of K&E. This Supplement is based on K&E's Motion for Summary Judgment Regarding Vicarious Liability, K&E's Statement of Facts in Support of Its Vicarious Liability Motion ("SOF") (filed September 8, 2005, doc. #251), its Supplemental Statement of Facts filed on this date ("SSOF"), and the following Memorandum of Points and Authorities. MEMORANDUM OF POINTS AND AUTHORITIES I. FACTUAL BACKGROUND. In June 1999, Eaton entered into an "of counsel" relationship with K&E, pursuant to the terms of a letter agreement. (SOF ¶ 6.) Eaton was (and remains) a resident of Illinois. K&E is a law firm with its principal office located in Illinois. In January 2000, Eaton and two other businessmen formed AEG Partners, L.L.C. to provide "financial advisory and crisis management for financially distressed companies." (SOF ¶ 14.) AEG was an Illinois limited liability company with its offices in Highland Park, Illinois, where Eaton maintained a regular office. (SOF ¶ 16.) Eaton first learned about LeapSource in February 2001 when Kevin Evanich, a partner at K&E, called Eaton at his AEG office. (SOF ¶ 17.) Evanich told him that "GTCR had a portfolio company that was in financial trouble and that [Eaton] may get a call from someone at GTCR." (SOF ¶ 18.) Within a week of this phone call, Eaton met with representatives of GTCR at GTCR's offices in Chicago regarding LeapSource. (SOF ¶ 21.) LeapSource formally retained AEG through a letter agreement, dated March 2, 2001. (SOF ¶ 35.) In that agreement, LeapSource specifically agreed that its relationship with AEG would be governed by Illinois law:
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

This letter agreement is governed by and construed in accordance with the laws of the State of Illinois with respect to contracts made and to be performed entirely therein and without regard to choice of law or principles thereof. (SSOF ¶ 1.) Pursuant to that agreement, Eaton went to work for LeapSource, traveling back and forth between Illinois and Arizona, and working in both states. (SSOF ¶ 2.) Eventually, LeapSource filed for bankruptcy pursuant to Chapter 7. This action was filed on February 26, 2002. On July 31, 2002, plaintiffs filed an amended complaint that named K&E, Eaton, and AEG as defendants. On October 7, 2005, plaintiffs filed a notice with this Court that they had entered into a settlement agreement with Eaton and AEG. On January 13, 2006, plaintiffs filed a Motion to Approve Settlement with David Eaton and AEG Partners, L.L.C. in the Bankruptcy Court. With that motion, plaintiffs submitted an executed copy of the settlement agreement and asked the Court to approve the settlement. K&E filed a Notice of Reservation of Rights with the Bankruptcy Court on February 2, 2006 indicating that it would ask this Court to resolve any disputed issues related to the interpretation of the agreement. The Bankruptcy Court subsequently approved the settlement agreement. Under that agreement, plaintiffs released Eaton and AEG from any and all liability and agreed to dismiss them from the case. (SSOF ¶ 3.) For its part, AEG agreed to assign roughly $200,000 in insurance proceeds to plaintiffs. (SSOF ¶ 4.) AEG and Eaton also agreed to cooperate with plaintiffs in the continued prosecution of plaintiffs' case, including allowing plaintiffs' counsel to interview Eaton, who is presently a partner of K&E. (SSOF ¶ 5.) Significantly for K&E, plaintiffs also purported to reserve their rights to assert all claims against the non-settling defendants, including those that arose solely from the conduct of Eaton and AEG. The settlement agreement provided, in relevant part: . . . provided, however, that the Trustee and Plaintiffs do not release and expressly reserve any Claims that she (in her capacity as Trustee) and
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

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Snell & Wilmer L.L.P.

Plaintiffs might have or claim to have against any person or entity other than AEG, 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, 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. This release does not constitute a full satisfaction or acceptance of full compensation for Claims for injuries and damages that the Trustee and Plaintiffs have alleged or may allege has been incurred as a consequence of any act or omission to act by any other person or entity, regardless of whether AEG is, or may be alleged to be, a joint tortfeasor as to such Claims. This Agreement constitutes and is intended to be a full and complete release of AEG only and is not a full satisfaction or release of Claims for injuries caused by other persons or entities. (SSOF ¶ 6.) (emphases added). II. UNDER ILLINOIS LAW, PLAINTIFFS' RELEASE OF EATON AND AEG, THE PURPORTED AGENTS, RELEASES K&E, THE PURPORTED PRINCIPAL. Plaintiffs have taken the position that the release of Eaton and AEG has no effect on claims brought against any other defendants, even those that arise solely from the conduct of Eaton and AEG. However, under well-settled principles of Illinois law, a release of an agent constitutes a release of a principal. As a result, plaintiffs' claims against K&E that arise solely from the alleged principal-agent relationship between K&E and Eaton and AEG must be dismissed. Under Illinois law, the release of an agent automatically extinguishes the principal's vicarious liability arising from the agent's conduct. See Gilbert v. Sycamore Municipal Hospital, 622 N.E.2d 788 (Ill. 1993). In Gilbert, for instance, plaintiff brought a wrongful death action against a hospital and one of its doctors. Id. at 792. Plaintiff's subsequent settlement with the doctor extinguished, as a matter of law, the hospital's vicarious liability. Id. at 796. The court held that "any settlement between the agent and the plaintiff must also extinguish the principal's vicarious liability," even if plaintiff
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

expressly reserved her rights against the hospital in the covenant not to sue. Id. at 797. In arriving at its holding, the court explained that a rule to the contrary would deny the agent the benefit of its settlement with plaintiff "because [the agent] would remain liable to the [principal] for indemnification." Id. In another case, the Illinois Supreme Court confirmed that the release of an agent automatically extinguishes the principal's vicarious liability. See Holcomb v. Flavin, 216 N.E.2d 811, 815 (Ill. 1966). In that case, the plaintiff suffered an injury resulting from an automobile accident. Id. at 811. He filed suit against the driver, but eventually accepted $16,000 in settlement and dismissed the suit. Id. Plaintiff then filed suit against the driver's employers. In that case, the plaintiff alleged no active negligence on the part of the employers, but contended that they remained liable because the driver was their employee and agent. The defendants argued that plaintiff's covenant not to sue the driver automatically discharged them as principals. Id. at 812. The court agreed and explained that: if the defendants would have to respond in damages, they could sue their alleged employee, the covenantee, for the amount they had to pay. The employee would then have to respond to the very damages which the covenant was supposed to guard against. The contrary result reached by the" appellate court herein would certainly involve an undesirable circuity and multiplicity of actions. Id. at 815. As the court further explained, "since the liability of the master or principal is merely derivative and secondary, the exoneration of the servant or agent prevents the imputing of negligence to the master or principal." Id.; see also Casey v. Forest Health System, Inc., 683 N.E.2d 936, 938 (Ct. App. Ill. 1997) (liability on the part of the hospital was extinguished when plaintiff settled with the medical director); Jane Doe v. City of Chicago, 360 F.3d 667, 673 (7th Cir. 2004) ("Under Illinois law, a settlement with the agent extinguishes the principal's liability"). These principles apply with full force to this case, where plaintiffs assert that both Eaton and AEG served as agents for K&E. While plaintiffs have also asserted claims that K&E is independently liable for certain conduct, those claims that arise solely from the
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

conduct of Eaton and AEG must be dismissed. III. ILLINOIS LAW GOVERNS THE EFFECT OF THE SETTLEMENT AGREEMENT ON K&E'S VICARIOUS LIABILITY. The settlement between Eaton, AEG, and plaintiffs directly implicates relationships based in Illinois rather than Arizona. Under well-established conflict of laws principles, therefore, Illinois law governs the effect of the settlement agreement among these parties. A federal court that sits in diversity jurisdiction must look to the forum state's choice of law of law rules to determine the controlling substantive law. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Arizona looks to the Restatement (Second) of Conflict of Laws ("Restatement") to determine the applicable substantive law. See Schwartz v. Schwartz, 447 P.2d 254, 257 (Ariz. Ct. App. 1968). In this case, Sections 170 and 174 of the Restatement are the most relevant to the interpretation of the settlement agreement. Section 170 addresses the law that "determines the effect of a release or covenant not to sue given to one joint tortfeasor upon the liability of the others." Similarly, Section 174 addresses the law that "determines whether one person is liable for the tort of another." Both sections of the Restatement examine the same four factors: (a) the place where the injury occurred; (b) the place where the conduct causing the injury occurred; (c) the domicile, residence, nationality, place of incorporation and place of business of the parties; and (d) the place where the relationship, if any, between the parties is centered. Restatement § 145(2). Section 145 provides that these factors "are to be evaluated according to their relative importance with respect to the particular issue." Analysis under these factors "is primarily qualitative, not quantitative." Wendleken v. Superior Court, 671 P.2d 896, 899 (Ariz. 1983). These factors overwhelmingly favor the application of Illinois law to determine the impact of the settlement agreement on K&E. Most significantly, all of the relationships among the relevant parties are centered in Illinois. Under its express terms, the key agreement between LeapSource and AEG, under which Eaton worked for LeapSource, is governed by Illinois law. (SSOF ¶ 1.) Further, the relationship between Eaton (an Illinois
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

resident) and K&E (a law firm with its principal office in Illinois) is likewise governed by Illinois law. The settlement agreement addresses all of these Illinois relationships: it was entered into by parties to an Illinois contract (LeapSource and AEG) and its attempts to impute liability to K&E based on another Illinois relationship (the "of counsel" agreement between Illinois actors).1 Under the circumstances, Illinois law provides the substantive law. The remaining factors do not counterbalance this strong Illinois interest. There is no one place where the conduct of Eaton or AEG giving rise to LeapSource's alleged injury occurred. While working on the LeapSource transaction, Eaton worked out of both AEG's Chicago office and LeapSource's Arizona headquarters. (SSOF ¶ 2.) Likewise, the various actors had varying domiciles, residences, place of incorporation, and place of business: AEG was organized and headquartered in Illinois (SSOF ¶ 7); Eaton resided in Illinois and maintained an office at AEG in Illinois (SSOF ¶ 8); LeapSource was incorporated in Delaware, and had offices in Arizona, California, and Washington, D.C. (SSOF ¶ 9); and the individual plaintiffs are residents of Arizona, Michigan, and Illinois (SSOF ¶ 10). Only a single factor -- the place where LeapSource and the other plaintiffs were allegedly injured -- favors Arizona. However, in light of the substantial Illinois relationships affected by the terms of the settlement, Illinois law should determine its impact. See 389 Orange Street Partners v. Arnold, 179 F.3d 656, 662 (9th Cir. 1999) (applying Connecticut law instead of Oregon law when the "only factor favoring Oregon substantive law is [an employee's] residence in Oregon."). Both qualitatively and quantitatively, these factors favor Illinois law as to this particular issue. By contrast, the question of agency raised in K&E's vicarious liability motion was focused on the common law of agency and whether K&E's conduct led LeapSource to conclude that Eaton and AEG were agents of K&E. Because this inquiry focused on K&E's direct representations to LeapSource, as opposed to AEG's contract with LeapSource or Eaton's agreement with K&E, the motion analyzed Arizona law. As Arizona courts have long noted, "one state may have a legitimate concern with one facet or issue of the case, but not with another...." Schwartz v. Schwartz, 447 P.2d 254, 258 (Ariz. 1968) (quoting Wilcox v. Wilcox, 133 N.W.2d 408, 415 (Wisc. 1965)).
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

IV.

CONCLUSION. As set forth in K&E's motion regarding vicarious liability, plaintiffs have not

produced any evidence that would allow a reasonable jury to conclude that Eaton or AEG was acting as an agent for K&E while working for LeapSource. Accordingly, summary judgment is appropriate on all claims against K&E that depend on vicarious liability. If, however, the Court finds a genuine issue of material fact that Eaton and AEG were acting as agents for K&E while working for LeapSource, K&E is entitled to summary judgment based on the effect of the settlement agreement that plaintiffs have reached with Eaton and AEG. Under the governing law, a release of an agent extinguishes the principal's vicarious liability. DATED this 17th day of April, 2006. SNELL & WILMER L.L.P.

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Case 2:02-cv-02099-RCB

Snell & Wilmer L.L.P.

By s/ Joseph G. Adams 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 this 17th day of April, 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 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:
1778237

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Snell & Wilmer L.L.P.

s/ Kimberley K. Mosaidis