Free Response to Motion - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Merrick B. Firestone #012138 Veronica L. Manolio #020230
RONAN & FIRESTONE, PLC
ATTORNEYS AT LAW 9300 E. RAINTREE DRIVE SUITE 120 SCOTTSDALE, AZ 85260 TELEPHONE (480) 222-9100

Attorneys for Defendants ICG Group, Inc. and Michael Makings and Marcia Makings Michael R. King #005903 Gregory J. Gnepper #024085
GAMMAGE & BURNHAM
A PROFESSIONAL LIMITED LIABILITY COMPANY ATTORNEYS AT LAW TWO NORTH CENTRAL AVENUE 18TH FLOOR PHOENIX, AZ 85004 TELEPHONE (602) 256-0566

Co-Counsel for Defendants ICG Group, Inc. and Michael Makings and Marcia Makings UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Diane Mann, Trustee; et al., Plaintiffs, vs. GTCR Golder Rauner, L.L.C., a Delaware limited liability company; et al, No. CIV-02-2099-PHX-RCB consolidated with No. CIV-02-2325PHX-RCB BK-01-9020-PHX-JMM Adv. No. 02-1202

Defendants. ______________________________________ RESPONSE TO MOTION FOR 23 In re: PARTIAL SUMMARY JUDGMENT (RE: COUNT III) 24 Leapsource, Inc., 25 26 Debtor. (Assigned to the Honorable Judge Robert C. Broomfield)

315627v3

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 1 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 [1] There is a pending motion to dismiss Marcia Makings from this case, which the defendants expect to be granted. To the extent she remains in the case, Marcia Makings is also a party to this Response. vs. ICG Group, Inc., an Arizona corporation; Michael Makings and Marcia Makings, husband and wife, Defendants. Defendants ICG Group, Inc. ( ICG Group ), Marcia Makings,[1] and Michael Makings ( Makings ) Respond to the Motion for Partial Summary Judgment (Re: Count III) of plaintiff/trustee Diane Mann in the above-captioned Chapter 7 bankruptcy of Leapsource, Inc. ( Leapsource ). This Response is supported by the attached Controverting Statement of Facts ( CSOF ), and its attached Affidavit of Michael Makings and Exhibit A, Asset Purchase Agreement. Summary judgment is only appropriate when there is no genuine issue as to any material fact. Rule 56(c), Fed.R.Civ.P. In determining whether there are contested material facts, the Court must resolve all reasonable inferences in favor of the nonmoving party. T.W. Elec. Serv., Inc. v. Pac. Elec. Co., 809 F.2d 626, 631 (9th Cir. 1987). The plaintiff cannot meet this standard as to her burden of proof on these fact issues. The plaintiff essentially describes ICG Group s acquisition of the ICG assets from Leapsource as robbing the debtor of its most valuable division in exchange for virtually nothing. This description mischaracterizes both sides of the transaction. Neither Leapsource nor the ICG assets were a going concern at the time the assets were transferred to ICG. In the hands of the Debtor, the ICG assets were worth little or Diane Mann, Trustee, Plaintiff, (oral argument requested)

315627v3

2

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 2 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

nothing. The plaintiff vastly overstates the value of the ICG assets, and therefore overstates the amount of the preference claim. The plaintiff has the burden of establishing that the transfer enabled Makings to receive more than he would have in a Chapter 7 liquidation, but using the proper valuation of the ICG assets shows that he actually received less than the estimated 79% distribution to unsecured creditors meaning there was no preference. The plaintiff fails to account for all of the consideration that Leapsource received through the transaction. In addition to the promissory note that Makings or ICG Group released, ICG Group assumed and paid millions of dollars in liabilities that Leapsource owed to third party creditors. Payments to third party creditors of the debtor constitute new value, and the granting of new value defeats a preference claim. Finally, the transaction at issue occurred outside of the 90-day preference period for non-insiders, and Makings completely severed his relationship with Leapsource before the transfer occurred. Plaintiff cannot satisfy her burden of proving that defendants were insiders of Leapsource. For these and other reasons set forth more fully below, the plaintiff is not entitled to summary judgment as to count III, preferential transfer. Facts The plaintiff s statement of facts does not tell the whole story. This summary does not retell the entire sequence, but provides relevant details where the plaintiff's facts are lacking or incorrect. Particular attention is paid to the extent of control Makings had over Leapsource, the total consideration Leapsource received in the transaction, and the proper valuation of Leapsource and the ICG assets in a liquidation context. I. Makings was not an insider and had no control or influence over

Leapsource at the time of the transfer.

315627v3

3

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 3 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

As a result of selling the ICG business to Leapsource in January of 2000, Makings received a $2.5 million promissory note payable by Leapsource in installments. Makings also accepted Leapsource s offer of employment to assist with the ICG business, and worked there until his resignation on December 15, 2001. At that time, the Leapsource board of directors instructed him to stay away, and he ceased having control or influence over Leapsource s affairs. CSOF ¶ 3-4. On February 27, 2001, after Leapsource s primary lender, GTCR Golder Rauner, L.L.C. ( GTCR ), withdrew its funding, Leapsource fired its former chief executive officer and offered the position to Makings. Makings accepted the offer. During his brief tenure as CEO, he focused his efforts on trying to convince GTCR to fund the company and looking for other sources of financing. CSOF ¶ 4. Makings resigned from Leapsource permanently on March 20, 2001, after it became apparent that GTCR controlled Leapsource and Makings realized he could not procure additional financing on behalf of Leapsource. Leapsource s board of directors formally accepted this resignation on March 22, 2001, effective as of March 20, 2001. After resigning, Makings ceased to have any control or influence over Leapsource s operations.[2] CSOF ¶¶ 6-7. On March 30, 2001 ICG Group agreed to purchase the ICG assets from Leapsource. The document had a typewritten date of March 23, 2001, but was signed on March 30, 2001. Pursuant to the Asset Purchase Agreement, the ICG assets were transferred to ICG Group on March 30, 2001. Leapsource's decision to consummate this [2] Indeed, Makings never had actual, effective control of Leapsource. Leapsource s primary financier, GTCR, had been actually running the company for some time, as is the subject of other claims in this litigation. See, e.g., Defendant s Statement of Facts in Support of Motion for Summary Judgment on (1) Contract Claims, (2) Breach of Fiduciary Duty Claims and All Other Claims Against Defendant Makings ¶¶ 68-69

315627v3

4

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 4 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

transaction was made after Makings resigned from Leapsource and no longer had any influence on Leapsource's decisions. David Eaton, the Chief Restructuring Officer, concluded that the transaction was beneficial to the company and signed the Asset Purchase Agreement on its behalf. The Asset Purchase Agreement was drafted by Leapsource s attorneys, Osborn Maledon, the very same firm representing it in the bankruptcy case. Additionally, the expert report of Edward McDonough concluded that it was fair, as the total consideration received by Leapsource exceeded the fair market value of the ICG assets. Eaton and the Leapsource board of directors believed the sale was fair as well, and approved the transaction on Leapsource s behalf. CSOF ¶¶ 7-8; Exhibit A, Asset Purchase Agreement at 9; Expert Report of Edward M. McDonough ( McDonough Report ) at 27-29. II. Defendants gave new value at the time of the transfer. Plaintiff s stated facts fail to describe the total consideration Leapsource received from ICG Group in the transaction. In exchange for the ICG assets, the plaintiff admits that Leapsource received a forgiveness of the promissory note. The plaintiff selectively omits, however, that ICG Group also assumed liabilities owed by Leapsource to third parties. Pursuant to the Asset Purchase Agreement, ICG Group assumed $46,148 in various accounts payable, $634,262 in building lease payments, $37,970 in telephone lease payments, $13,572 in copier lease payments, $55,000 in payroll expenses accrued prior to the transaction, and future payroll expenses estimated at $503,000. Therefore, out of the $4,039,000 of total consideration received by Leapsource, the plaintiff omits $1,290,474 that ICG Group assumed and paid to third party creditors. CSOF ¶¶ 8; Exhibit A, Asset Purchase Agreement at 1.3; McDonough Report at 27-29.

(citing Exhibit 8 thereto, Deposition of Christine Kirk, Volume IV at 809-20). (The other Statements of Facts of defendants in this litigation are incorporated by this reference.)

315627v3

5

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 5 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

III.

The ICG assets were only worth $250,000 in a liquidation context at the time

of the transfer, and the business would have been liquidated but for the ICG Group purchase. The plaintiff claims that ICG Group received a preferential transfer of $2.51 million, the value placed on the ICG assets by McDonough. However, this value is taken out of context because it is based on the assumption that the ICG business was a going concern. McDonough s report notes that under the Asset Accumulation Method, or Liquidation Method, the fair market value of the ICG assets was only $250,000. His final conclusion differed because this liquidation value was out of line with the various indications of value using the other going-concern methods. CSOF ¶¶ 8, 10; McDonough Report at 31-40. As a matter of law, this liquidation value is the appropriate figure to use to evaluate the amount of the allegedly preferential transfer. In March 2001, Leapsource was in dire financial straits. The company had been functionally insolvent for months. Former management had been looking for someone to purchase Leapsource for at least six months. In that time, only one letter of intent was received. Not only was that offer made contingent on numerous requirements, it excluded the ICG business. After Makings resigned, the company decided to have the Chief Restructuring Officer wind up its affairs. If ICG Group had not purchased the ICG assets, it would have been liquidated along with the rest of Leapsource. McDonough also noted that if the Company s performance does not change for the better in the short-term future, the Company would have to consider liquidation. CSOF ¶¶ 6-8, 10; McDonough Report at 35-36. The assets that ICG Group acquired were some tangible office supplies of inconsequential value and various forms of intellectual property. ICG Group never used the intellectual property, and has no need for it. The ICG business operated today is the same in name only as the business destroyed by Leapsource. Affidavit at ¶ 9. Not only

315627v3

6

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 6 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

is the amount of the allegedly preferential transfer much lower than claimed by the plaintiff, the defendants are willing to return the assets received, to the extent they exist.[3] This would constitute a return of the entire transfer, except for the ICG name, which was worthless in March 2001. The Court has discretion to order a return of the actual property, and should where the value of the property is contested, not readily determinable, or not diminished by conversion or depreciation. In re Centennial Textiles, Inc., 220 B.R. 165, 176-77 (Bankr. S.D.N.Y. 1998). All of those factors are present with the property at issue here. Discussion There are at least three reasons why the plaintiff is not entitled to summary judgment. The new value exception applies to ICG Group s payment of third party debts. The plaintiff cannot meet her burden of proving that Makings would have received more in a liquidation of Leapsource, due to her overstatement of the amount of the transfer. And, the plaintiff cannot meet her burden of proving that Makings was an insider of Leapsource at the time of the transaction. I. claim. In exchange for the ICG assets, the plaintiff acknowledges that Leapsource received a forgiveness of the promissory note. Under the Asset Purchase Agreement, however, ICG Group also agreed to assume several third party liabilities owed by Leapsource, including telephone lease payments, building lease payments, copier lease payments, various accounts payable, and past and future payroll and tax expenses. The total consideration received by Leapsource was $4,039,000, of which $1,290,474 was for ICG Group provided Leapsource with new value, which defeats a preference

[3] Much of the physical office equipment is gone. Most of the value from the assets, though, came from the intellectual property which ICG Group has not used and is willing to return.

315627v3

7

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 7 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

third party liabilities. ICG Group has paid these obligations on behalf of Leapsource. CSOF ¶ 8. The trustee cannot avoid a transaction as preferential to the extent the creditor made a contemporaneous or subsequent transfer of new value to the debtor. 11 U.S.C. §§ 547(c)(1), 547(c)(4). The definition of new value includes not only money but new credit, 11 U.S.C. § 547(a)(2) (emphasis added), and case law confirms that payments to third party creditors of the debtor constitute new value. In In re Bellanca Aircraft Corp., 850 F.2d 1275, 1279 (8th Cir. 1988), the bankruptcy court had held that certain payments [creditor] made to [debtor] s creditors, employees, and suppliers constituted subsequent advances of new value. The Eighth Circuit confirmed, noting that [w]hat [creditor] contributed for [debtor s] benefit was money, albeit paid to creditors rather than directly to debtor. [Creditor] s contribution therefore falls squarely within the definition of new value . Id. at 1280-81; accord In re EDC, Inc., 930 F.2d 1275, 1282 (7th Cir. 1991);

In re Moltech Power Sys., Inc., 326 B.R. 179, 184 n.1 (Bankr.N.D.Fla. 2005) ( [P]ayments need not be made directly to the debtor to be considered new value as long as they are made for the benefit of the debtor. ); In re Amarex, Inc., 88 B.R. 362 (W.D.Okla. 1988); In re Strom, 46 B.R. 144 (Bankr.E.D.N.C. 1985). The primary purpose of the new value exception is to encourage creditors to do business with a troubled debtor without fear of having their transactions avoided. In re Lee, 108 F.3d 239, 241 (9th Cir. 1997). Here, quite obviously, Leapsource was a financially troubled entity. But for ICG Group s willingness to acquire the ICG assets, Leapsource would have liquidated that division as well. A liquidation would have fetched a much lower return than the $4,039,000 (including $1,290,474 of new value for debt paid by ICG to third party creditors) that Leapsource received from ICG Group. CSOF ¶¶ 6-8, 10.

315627v3

8

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 8 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Another justification for the new value exception is that creditors are not adversely affected when someone is trying to add value to the debtor s estate. In re Jones Truck Lines, Inc., 130 F.3d 323, 327-28 (8th Cir. 1997). That policy is also served by ICG Group s assumption of the third party liabilities. Moreover, ICG's assumption of these liabilities benefited Leapsource s bankruptcy estate. The bulk of these debts were for payroll and taxes, which would have been administrative expense claims. 11 U.S.C. § 503(b)(1). Leapsource s direct payment of many of these operating expenses, if it had chosen to maintain the ICG business, also would have constituted ordinary business payments, another exception to a preference action. 11 U.S.C. § 547(c)(2). The plaintiff neglects to mention the payments by ICG Group to third party creditors pursuant to the asset purchase/note transaction. Because payments to third party creditors constitute new value, the plaintiff is not entitled to summary judgment to the extent of this new value. As explained below, the new value given by ICG exceeds the entire amount the plaintiff could properly argue was preferential. II. The plaintiff s valuation of the ICG assets is based upon invalid assumptions;

Makings would have possibly received more in a Chapter 7 liquidation, but not less. The plaintiff argues that the defendants received a preferential transfer of $2.51 million, the value placed on the ICG business by McDonough. However, as the report explains, this estimation was based on the ICG business as a going concern. Looking closer at the McDonough report reveals that a small portion of this valuation was based on the liquidation value of the ICG assets, $250,000. CSOF ¶ 10; McDonough Report at 35-36. Because Leapsource would have liquidated the ICG business if defendants had not acquired them, a liquidated figure is more appropriate to measure the value at the time of the allegedly preferential transfer. In valuing a business for preference purposes, courts have an option of using the going concern or liquidation value. In re DAK Indus., Inc., 170 F.3d 1197, 1199 (9th Cir.

315627v3

9

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 9 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

199); In re Taxman Clothing Co., 905 F.2d 166, 169-70 (7th Cir. 1990). [A]lthough the business does not have to be thriving to receive going concern valuation, such valuation is not appropriate if the debtor is on its death bed or is only nominally in existence. Thus, going concern valuation is not appropriate where the debtor is in a very unstable financial condition with a dubious future at the time of the transfers .... 9B Am.Jur.2d Bankruptcy § 1909 (2005); see In re Mama D Angelo, Inc., 55 F.3d 552, 555 (10th Cir. 1995) (describing rule as well-settled ); In re Art Shirt Ltd., 93 B.R. 333, 341 (E.D.Penn. 1988); In re Randall Constr., Inc., 20 B.R. 179, 198 (N.D.Ohio 1981); In re Utility Stationery Stores, Inc., 12 B.R. 170 (Bankr.N.D.Ill. 1981). Here, it is undeniable that Leapsource was in a dire financial situation. Makings left the company after it became apparent Leapsource could not acquire sufficient financing to continue operations. After Makings resigned, the Chief Restructuring Officer began winding up the company s affairs. This included the sale of the ICG assets to Makings. The expert report also states that if the Company s performance does not change for the better in the short-term future, the Company would have to consider liquidation. CSOF ¶ 4, 6, 8-9. McDonough Report at 35-36. To treat such a company as a going concern would be misleading and would, in fact, fictionalize the company s true financial condition. In re Schwinn Bicycle Co., 192 B.R. 477, 486 (Bankr.N.D.Ill. 1996) (quoting Art Shirt, cited supra). The determination of whether to treat a company as a going concern or as being on its deathbed is a factual question. In re DAK Indus., Inc., 170 F.3d at 1199-1200. Taking all reasonable inferences in the defendant s favor then, the Court must employ the liquidation value of ICG. The correct value of the ICG assets, on a liquidation basis, can be found in the expert report relied on by the plaintiff. The plaintiff jumps to the expert report s conclusion without considering what went into that analysis. As the report explains,

315627v3

10

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 10 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

using the Asset Accumulation Method, or Liquidation Method, the ICG assets were only worth $250,000. As the report explains, the final value cited by the plaintiff differs because this liquidation value was out of line with the various indications of value using the other going-concern methods. CSOF ¶ 10; McDonough Report at 35-36 (emphasis added). There are two reasons why the erroneously high valuation of the ICG assets defeats the plaintiff s summary judgment claim. First, the plaintiff has the burden of proving that the transfer enabled Makings to receive more than he would have in a Chapter 7 liquidation. 11 U.S.C. § 547(b)(5). The plaintiff acknowledges that Makings could recover in excess of two million dollars in a Chapter 7 liquidation, based on receiving 79% of the amount of the note as a general unsecured creditor. See Plaintiff s Motion at 9-10. However, ICG Group only received property worth $250,000 in the transfer, much less than the expected distribution to unsecured creditors.. The plaintiff has not met her burden for this element. Second, this $250,000 figure, the proper valuation of Leapsource for preference purposes, is significantly lower than the $1,290,474 of new value that ICG Group infused into Leapsource, as described in above in Part I of this Discussion. Therefore, in resolving all inferences in favor of Leapsource, ICG Group only received a transfer of $250,000. There was no preferential transfer. III. Whether Makings was an insider of the debtor at the time of this transfer is

a factual issue not appropriate for summary judgment. The debtor filed bankruptcy on July 11, 2001. The allegedly preferential transfer took place, according to the express terms of the Asset Purchase Agreement, on March 30, 2001. See 11 U.S.C. § 547(e)(2)(A) (relevant time for preference analysis is when the

315627v3

11

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 11 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

transfer takes effect [4]). Because the transfer took place between ninety days and one year before the debtor s bankruptcy petition, the transfer was only preferential if the plaintiff meets her burden of proving that it was made to an insider of the debtor. 11 U.S.C. § 547(b)(4)(B). The plaintiff s theory is that the transfer of the ICG assets to ICG Group was actually to Makings, and that Makings is a Leapsource insider as a former manager. At the very least, there are factual questions as to whether the plaintiff can sufficiently show these steps in her logic. Makings resigned from Leapsource on March 20, 2001. The Leapsource board of directors officially recognized the resignation on March 22, 2001, but the resignation was effective March 20, 2001. CSOF ¶ 7; see Del. Code Ann. tit. 8, §§ 141(b) ( Any director may resign at any time upon notice. ), 142(b) ( Any officer may resign at any time upon written notice to the corporation. ) (Leapsource was a Delaware corporation.). Either way, though, the plaintiff admits that the transfer occurred after Makings resigned from Leapsource. The statutory definition of insider, where the debtor is a corporation such as Leapsource, includes the debtor s: directors, officers, persons in control, partnerships in [4] The plaintiff cites two cases for the proposition that the relevant time is when the Asset Purchase Agreement was dated. In re Bullion Res., 836 F.2d 1214 (9th Cir. 1988); In re Southmark Corp., 88 F.3d 311 (5th Cir. 1996). These cases conclude that courts should look to the date of the agreement to determine whether a transfer is "on account of an antecedent debt." The defendants do not dispute this element of the plaintiff's claim. In determining whether a transfer occurred within the preference period, however, sources confirm that the relevant moment is when the transfer "takes effect." 11 U.S.C. § 547(e)(2)(A); In re Southeast Comm. Media, Inc., 27 B.R. 834, 841 (Bankr.E.D.Tenn. 1983) (transfer occurred at the time of closing). This is not a major issue, as the plaintiff admits that the transaction occurred outside of the 90-day preference period anyway, and the defendants admit that the transaction occurred within one year of the bankruptcy

315627v3

12

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 12 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

which the debtors is a general partner, general partners, and their relatives. 11 U.S.C. § 101(31)(B); see also 11 U.S.C. § 101(45) (defining relative as individuals related by affinity or consanguinity within the third degree). Although the plaintiff argues that this list is not exclusive, it is worth noting that the statutory list of insiders does not include former directors or officers. See United States v. Cabaccang, 332 F.3d 622, 630 (9th Cir. 2003) ( Under the interpretive maxim of expression unius est exclusio alterius, we read the enumeration of one case to exclude another. ). The definition of insider is necessarily non-exclusive because of the array of potential positions that can afford an individual control or influence over an entity. However, Congress could have simply used current or former, or even current or recent, to modify these endless possible titles, but did not. The plaintiff argues that an insider is an entity that commands preferential treatment by the debtor. Citing In re Friedman, 126 B.R. 63, 69-70 (9th Cir. BAP 1991). The plaintiff never explains how this applies to Makings, though. When the agreement was executed, it is indisputable that Makings no longer had control over Leapsource. In fact, the new management was under a fiduciary duty of loyalty to Leapsource, which prevented them from treating ICG Group and Makings preferentially. In his review of the transaction, McDonough indeed concludes that it was fair, and the document was drafted by Leapsource s attorneys. CSOF ¶¶ 6-7; McDonough Report at 27-29. Just because Makings had knowledge of the ICG business based on his former employment does not render him an insider. The linchpin of an insider analysis is influence, not knowledge. Makings could not and did not coerce the debtor into this transaction. Indeed, in the Friedman decision cited by the plaintiff, the court warned that

petition. Moreover, even though the document was dated March 23, 2001, it was actually signed on March 30, 2001. CSOF ¶ 8.

315627v3

13

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 13 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

a long term and extensive relationship between the parties does not compel a conclusion of insider status and ultimately ruled that those creditors were not insiders. Id. Once Makings resigned, he no longer had control and therefore was not an insider of Leapsource. See In re Coors of N. Miss., Inc., 66 B.R. 845, 863-64 (Bankr.N.D.Miss. 1986) ( Therefore, this court is of the opinion that [creditor] was not an insider of [debtor] at any time subsequent to April 26, 1982, the date he conveyed his stock to the purchasers and resigned as an officer and director of the corporation. (emphasis added)). Finally, Makings' influence on Leapsource, despite his title, was minimal. GTCR effectively controlled Leapsource during all times that Makings held any position of purported authority. Taking the required inferences in favor of defendants, then, Makings was not an insider of Leapsource at the time of the transfer, which defeats summary judgment based on this issue alone. Conclusion The plaintiff is not entitled to summary judgment for several reasons. A preference claim is comprised of several elements, and the plaintiff has the burden of proving them all. 11 U.S.C. § 547(g). There are factual disputes as to several of these elements. Taking all inferences in favor of the defendants, there is at least a factual question as to whether Makings was an insider at the time of this transaction. 11 U.S.C. § 547(b)(4)(B). Nor can the plaintiff meet her burden of showing that the transaction entitled Makings to receive more than he would have in a Chapter 7 liquidation. 11 U.S.C. § 547(b)(5). Finally, the new value exception also defeats the preference claim, as ICG Group provided new value to Leapsource in the form of assumed liabilities of and payments to third party creditors. Therefore, defendants ICG Group, Inc. and Michael

315627v3

14

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 14 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

and Marcia Makings respectfully request the Court deny the plaintiff s Motion for Partial Summary Judgment (Re: Count III).

RESPECTFULLY SUBMITTED this 22nd day of March, 2006. RONAN & FIRESTONE P.L.C.

By

Merrick B. Firestone #012138 Merrick B. Firestone Daniel P. Jensen 9300 East Raintree Drive, Suite 120 Scottsdale, Arizona 85260 Attorneys for Defendants ICG Group, Inc. and Michael Makings and Marcia Makings

GAMMAGE & BURNHAM P.L.C.

By

Gregory J. Gnepper #024085 Michael R. King Gregory J. Gnepper Two North Central Avenue, 18th Floor Phoenix, Arizona 85004 Co-counsel for Defendants ICG Group, Inc. and Michael Makings and Marcia Makings

315627v3

15

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 15 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

ORIGINAL filed and COPY delivered this 22nd day of March, 2006, to:

Via Hand Delivery Honorable Judge Robert C. Broomfield U.S. District Court, District of Arizona 401 West Washington Phoenix, Arizona 85003

Via U.S. Mail Steven J. Brown Steven D. Nemecek STEVE BROWN & ASSOCIATES, LLC 1414 East Indian School Road, Suite 200 Phoenix, Arizona 85014 Via U.S. Mail Kevin A. Russell David S. Foster Patrick E. Gibbs LATHAM & WATKINS, LLP Sears Tower, Suite 5800 Chicago, Illinois 60606 Attorneys GCTG Golder Rauner, L.L.C., et al Via Hand Delivery Don P. Martin Edward A. Salanga QUARLES & BRADY STREICH LANG, LLP One Renaissance Square Two North Central Phoenix, Arizona 85004-2391 Attorneys GCTG Golder Rauner, L.L.C., et al

315627v3

16

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 16 of 17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Via U.S. Mail Richard A. Halloran Jon Weiss LEWIS & ROCA LLP 40 North Central Phoenix, Arizona 85004-4429 Attorneys for Defendants David Eaton and AEG Partners LLC Via U.S. Mail John Bouma James R. Condo Patricia Lee Refo SNELL & WILMER LLP One Arizona Center 400 East Van Buren Phoenix, Arizona 85004 Attorneys for Defendant Kirkland & Ellis Via U.S. Mail Leo L. Beus Scot C. Stirling Steven E. Weinberger Kevin Berger BEUS GILBERT PLLC 4800 North Scottsdale Road, Suite 6000 Scottsdale, AZ 85251 Attorneys for Individual Plaintiffs and Trustee

/s Jackie Benton

315627v3

17

3/24/2006

Case 2:02-cv-02099-RCB

Document 354-2

Filed 03/24/2006

Page 17 of 17