Free Reply to Response to Motion - 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 KIRKLAND & ELLIS' REPLY IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT RE AIDING AND ABETTING AND TORTIOUS INTERFERENCE CLAIMS (Assigned to Hon. Robert C. Broomfield) Defendants. (Oral Argument Requested) K&E brought this motion for summary judgment on all of plaintiffs' claims of aiding and abetting and tortious interference with contracts because there is simply no evidence to support these claims. As set forth in the motion, K&E's involvement in LeapSource was limited to its representation of GTCR, the company's principal shareholder, and there is no evidence that K&E aided and abetted any breach of fiduciary duty or tortiously interfered with any contract or business expectancy. Plaintiffs provide no contrary evidence in their opposition brief.1 They do not identify any specific action by K&E to interfere improperly with any contract or prospective economic advantage. Nor do they specify any "substantial assistance" K&E gave to any other party to aid and abet a breach of any fiduciary duty. Essentially conceding that no such evidence exists, plaintiffs do nothing but point to the actions of For the Court's convenience, K&E has attached to this reply a table setting forth K&E's statements of fact, plaintiffs' responses, and K&E's reply to the statements of fact that plaintiffs contend are in dispute.
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David Eaton, the "of counsel" attorney whose independent company AEG Partners, LLC was retained by LeapSource in 2001 to provide financial advisory services. Plaintiffs do not mention any conduct by K&E -- as opposed to Eaton -- other than K&E's initial recommendation of Eaton to GTCR. No reasonably jury could find that the act of recommending AEG constitutes aiding and abetting a breach of fiduciary duty or tortious interference with contract. The motion for summary judgment should be granted. 1. Plaintiffs Have Not Identified Any Conduct By K&E Other Than Providing an Initial Recommendation of David Eaton.

Plaintiffs' Fourth Amended Complaint is completely silent on the specific conduct by K&E that Plaintiffs claim gives rise to liability for aiding and abetting breaches of 11 fiduciary duty and intentional interference with contract. In their brief, plaintiffs explain
LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

12 that these claims depend on two sets of conduct: (a) K&E's conduct in "recommending 13 and working with" Eaton as a "crisis manager" for LeapSource, and (b) the acts of Eaton 14 himself. (Pls.' Resp. at 2:15-23.) This clarifies the nature of plaintiffs' claims against 15 K&E, but also makes it clear that these claims cannot survive summary judgment. 16 Plaintiffs devote the majority of their brief to the conduct of Eaton, whom plaintiffs 17 accuse of breaching various duties while working at LeapSource in connection with 18 AEG's engagement and as the company's Chief Restructuring Officer. There is no 19 evidence, however, that Eaton was acting as an agent of K&E while he was working for 20 AEG at LeapSource. In fact, the undisputed evidence establishes that he was not an agent 21 of K&E and that K&E is not vicariously liable for Eaton's conduct. For this reason, K&E 22 has filed a separate motion for summary judgment setting forth the relevant facts and legal 23 authority. Rather than repeat these arguments, K&E respectfully refers the Court to the 24 substantial briefing on this issue. See K&E's Motion for Summary judgment Regarding 25 Vicarious Liability filed on September 8, 2005, Docket # 250; Plaintiffs' Response to 26 Motion for Summary Judgment filed on October 12, 2005, Docket #260; K&E's Reply in 27 Support of Motion for Summary Judgment filed on November 7, 2005, Docket #285. 28
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Plaintiffs' insistence on repeating their arguments regarding the actions of Eaton highlights that plaintiffs' tortious interference and aiding and abetting claims against K&E derive almost entirely from alleged actions of Eaton. If the Court grants K&E's vicarious liability motion, Eaton's conduct is irrelevant and plaintiffs must focus on K&E's own conduct in proving their claims against K&E. As clarified in plaintiffs' brief, this consists only of K&E's role in recommending Eaton as a possible crisis manager. As a matter of law, that is insufficient to support plaintiffs' claims. 2. There Is No Evidence That K&E Recommended AEG for Any Improper Reason.

All parties agree that Kevin Evanich, a partner at K&E, suggested to K&E's client GTCR that it consider David Eaton as a "crisis manager" for LeapSource. In February 11 2001, Evanich called Eaton at his AEG office and told him that "GTCR had a portfolio
LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

12 company that was in financial trouble and that [Eaton] may get a call from someone at 13 14 manager and financial advisor," not a K&E "of counsel" lawyer. (Id.) Evanich referred 15 Eaton to GTCR because "he was an expert in the financial restructuring advisory 16 business." (VLSOF ¶ 19.) As Eaton understood things, the company "needed financial 17 advisory services and crisis management services, meaning working very closely with 18 existing management, as opposed to providing legal advice to the company." (VLSOF ¶ 19 20.) Eaton later met with GTCR at GTCR's offices in Chicago regarding LeapSource. 20 (VLSOF ¶ 21.) GTCR also interviewed and considered several potential crisis managers 21 before recommending AEG to LeapSource. (VLSOF ¶ 22.) 22 On February 27, 2001, the LeapSource board of directors voted to retain AEG to 23 offer financial advisory services to LeapSource. (Feb. 27, 2001 Minutes of Board of 24 Directors Meeting, attached as Exhibit 21 to Plaintiffs' Statement of Additional Facts.) 25 26 27 28 K&E previously filed statements of fact concerning Eaton's conduct in connection with K&E's motion regarding vicarious liability. Rather than re-file these statements of fact, K&E refers the Court to the statements of fact filed on September 8, 2005 (Doc. #251) in support of the motion for summary judgment on the issue of vicarious liability ("VLSOF"), the response of plaintiffs lodged on October 12, 2005, and K&E's reply, which was attached as an exhibit to its reply brief filed on November 7, 2005 (Doc. #285).
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GTCR." (VLSOF ¶ 18.2) Evanich called Eaton "as an AEG partner" and "a crisis

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

According to the board minutes, the directors voting in favor of retaining AEG were Bruce Rauner, Dan Yih and Joe Nolan, all GTCR principals, and plaintiff Chris Kirk, LeapSource's outgoing CEO. (Id.) Plaintiff Tom Gilman was also present at the meeting but abstained from the vote. (Id.) LeapSource formally retained AEG through a letter agreement dated March 2, 2001 executed on behalf of LeapSource by Michael Makings, its Chief Executive Officer. (AEG Financial Advisory Engagement Letter, attached as Exhibit 20 to Plaintiffs' Statement of Additional Facts.) Plaintiffs argue that K&E suggested that GTCR consider Eaton "knowing and intending that Mr. Eaton would not be free to take any position adverse to GTCR," and that Eaton would act "at all times to protect the interests of GTCR." (Pls.' Resp. at 2-3.) But plaintiffs have not provided any evidence that supports this argument. Although plaintiffs have filed a voluminous statement of facts, they do not support these claims with a single citation to record evidence. Indeed, plaintiffs' opposition brief consists almost entirely of conclusory accusations with a few scant citations to the factual record. Plaintiffs' unsupported assertions and conspiracy theories do not create an issue of material fact. See Karam v. City of Burbank, 352 F.3d 1188, 1194 (9th Cir. 2003) (speculation as to improper motive "does not rise to the level of evidence sufficient to survive summary judgment"). In fact, Evanich testified that he referred Eaton because of AEG's expertise in financial and restructuring matters, not for any other reason, and Eaton concurred. GTCR's principals also testified that they hired Eaton because of his financial experience. (VLSOF ¶¶ 33, 34.) There is no admissible evidence -- not a single document or witness testifying from personal knowledge -- that K&E acted from improper motivation. All that is left is plaintiffs' speculation and innuendo that K&E acted improperly in recommending Eaton 3. K&E's Recommendation of AEG Does Not Constitute Intentional Interference with Contract or Business Expectancies.

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To prove tortious interference with contract, plaintiffs must establish that K&E acted intentionally and improperly. Wells Fargo Bank v. Ariz. Laborers, Teamsters & 28
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

Cement Masons Local No. 395 Pension Trust, 201 Ariz. 474, 493, 38 P.3d 12, 31 (Ariz. 2002). To withstand summary judgment, plaintiffs must produce evidence showing that the interfering party's conduct was "illegal and inequitable." Bar J Bar Cattle Co. v. Pace, 763 P.2d 545, 548 (Ariz. Ct. App. 1988) (approving summary judgment where plaintiff failed to provide evidence of improper interference). Plaintiffs have not even come close to showing that K&E intentionally interfered with any contract or business expectancy.3 The only specific conduct of K&E -- as opposed to Eaton -- cited by plaintiffs is K&E's recommendation of Eaton to GTCR. Plaintiffs have provided no evidence that K&E was involved with LeapSource's decision to retain AEG other than this initial suggestion made to K&E's client, GTCR. Plaintiffs cannot demonstrate that this referral constitutes intentional interference with any contract or expectancy. Plaintiffs repeat their claim that K&E recommended Eaton "knowing Eaton would not be free to take any position adverse to the interests of GTCR while he was purportedly going to be representing the interests of LeapSource." (Pls.' Resp. at 13.) But, as noted above, there is no evidence to support this argument; it is simply speculation and conjecture. Further, the general accusation that Eaton could not take "any position adverse to the interests of GTCR" has no obvious relation to the claim of interference with contracts.4 Plaintiffs have not shown that K&E's referral of Eaton meant that K&E intended to interfere with any contracts, or that K&E should have known that interference with contracts was substantially certain to occur. See Snow v. Western S. & L. Ass'n, 152 Ariz. 27, 730 P.2d 204 (1986). Even if plaintiffs could somehow show that K&E's conduct in referring Eaton to GTCR constituted interference with contract, there is no evidence that it was improper. 3 Plaintiffs have alleged that K&E interfered with the purchase agreement (Counts One and Twenty-Three), the senior management agreements and other employment agreements (Count Twenty-One), the stockholders agreement (Count Twenty-Three), and a joint venture between GTCR and the individual plaintiffs (Count Fourteen). The accusation also assumes too much. If, as the evidence shows, Eaton was acting as a financial advisor rather than as a lawyer, the ethics rules governing lawyers would not apply to his conduct. See Arizona Rules of Professional Conduct, E.R. 5.7 (detailing circumstances in "the lawyer shall not be subject to the Rules of Professional Conduct" if the lawyer is not providing legal services).
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

Without such evidence, plaintiffs' claim of tortious interference cannot succeed. Arizona courts have recognized that even "[l]awyers' advice to their own clients to breach a contract already lies outside the general scope of this tort." Safeway Insurance Co. v. Guerrero, 106 P.3d 1020, 1025 n.7 (Ariz. 2005) (citing Restatement (Third) of Law Governing Lawyers § 57(3)) (emphasis in original). Here, K&E's suggestion to its client GTCR that it consider Eaton is far more remote and does not even suggest that any contract be breached. Plaintiffs' speculation notwithstanding, there is no evidence that K&E recommended Eaton for any reason other than Eaton's expertise in financial services, or that the recommendation had any relation to contracts that plaintiffs had with GTCR. Plaintiffs devote a large amount of their opposition brief to their contention that K&E had a conflict of interest affecting its representation of GTCR and that Eaton was equally conflicted. (Pls.' Resp. at 5-7, 10-13.) Plaintiffs never explain, however, how this alleged conflict constitutes intentional and improper interference with contracts. To withstand summary judgment, plaintiffs must produce evidence showing that K&E intentionally and improperly interfered with contracts and business expectancies. Asserting that K&E had a conflict of interest does not relieve plaintiffs of this burden.5 Finally, plaintiffs' reliance on K&E's initial referral of Eaton as the foundation of its tortious interference claims raises significant causation issues. Plaintiffs have not presented any evidence that this referral was the proximate cause of any interference with any of their contracts. The recent case of Toy v. International Business Machines Corp., No. CIV 03-0860, 2005 U.S. Dist. LEXIS 21939 (D. Ariz. Sept. 26, 2005), is instructive. In Toy, the court granted summary judgment disposing of a tortious interference claim brought by an IBM employee against an IBM retiree who sparked an internal investigation of the plaintiff's outside business activities. Id. at *1-2. After independent investigation and deliberation, IBM terminated the plaintiff for violating company guidelines. Id. at *4. The court found that the initial tip may have sparked the 5 Accordingly, for purposes of this motion, this Court need not resolve plaintiffs' claim that K&E somehow represented LeapSource. (Pls.' Resp. at 10-13.)
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investigation, but it was not the proximate cause of the plaintiff's ultimate termination. Under Arizona law, merely demonstrating that a party was "a cause" is insufficient because proximate cause "must be the natural continuous sequence of events, unbroken by an intervening cause." Id.; see Saucedo v. Salvation Army, 24 P.3d 1274, 1278 (Ariz. Ct. App. 2001). Similarly, plaintiffs cannot show that K&E's initial recommendation of Eaton, whose company was later hired by LeapSource pursuant to a vote of the company's board of directors, was the proximate cause of any harm that they suffered. 4. K&E's Recommendation of Eaton Does Not Constitute Aiding and Abetting a Breach of Fiduciary Duty.

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Similarly, K&E's suggestion to GTCR that it consider hiring Eaton does not constitute aiding and abetting any breach of fiduciary duty.6 Under Arizona law, a claim for aiding and abetting breach of fiduciary duty requires proof of three elements: (1) the primary tortfeasor must commit a tort that causes injury to plaintiff; (2) the defendant must know that the primary tortfeasor's conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach. Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 485, 38 P.3d 12, 23 (Ariz. 2002) (quoting Gomez v. Hensley, 145 Ariz. 176, 178, 700 P.2d 874, 876 (Ct. App. 1984) (citing Restatement (Second) of Torts § 876(b)). Plaintiffs most obviously fail to show that K&E substantially assisted or encouraged any breach of fiduciary duty owed to plaintiffs or LeapSource. K&E did nothing more than recommend the services of David Eaton and AEG to GTCR. GTCR also interviewed Eaton and other candidates, and the LeapSource board of directors then voted to retain AEG. But plaintiffs do not, and cannot, cite any authority showing that K&E's recommendation of Eaton to GTCR could constitute "substantial assistance" in the breach of any fiduciary duty owed to LeapSource or plaintiffs. Plaintiffs allege that K&E aided and abetted two breaches of fiduciary duty by GTCR: (a) the duty owned by GTCR to the individual plaintiffs arising out of a joint venture (Count Twelve), and (b) the duty owed by GTCR in its role as majority shareholder of LeapSource (Count Eighteen).
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

As the Supreme Court of Arizona has noted, the legal elements of aiding and abetting liability have been most comprehensively explored by federal courts in the context of aiding and abetting securities fraud. Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 26 (Ariz. 2002). In these cases, "substantial assistance" means more than "a little aid," and "requires a showing that the defendant's assistance was a substantial factor in causing the plaintiff's harm." In re American Continental Corp./Lincoln S. & L. Sec. Litig., 794 F. Supp. 1424, 1434-35 (D. Ariz. 1992), cited in Wells Fargo Bank, 38 P.2d at 26 (emphasis added). In other words, courts require a showing of a "substantial causal connection between the culpable conduct of the alleged aider and abetter and the harm to the plaintiff." Metge v. Baehler, 762 F.2d 621, 624 (8th Cir. 1985), cited in Wells Fargo Bank, 38 P.2d at 26. This means that "a plaintiff must prove that a defendant rendered `substantial assistance" to the primary securities law violation, not merely to the person committing the violation." Schatz v. Rosenberg, 943 F.2d 485, 497 (4th Cir. 1991) (attorneys not liable for aiding and abetting securities fraud). There is not a shred of evidence showing that K&E's recommendation of Eaton was a substantial factor in any subsequent breach of fiduciary duty. At best, K&E's involvement is tangential and, as a matter of law, does not rise to the level of substantial assistance. See United States v. Lard, 734 F.2d 1290, 1298 (8th Cir. 1984) (defendant's mere suggested use of a particular weapon is insufficient to constitute aiding and abetting ultimate crime); Kilgus v. Kilgus, 495 So. 2d 1230, 1231 (Fla. Ct. App. 1986) (mere suggestion by father "does not constitute the giving of `substantial assistance' . . . nor does it make the father liable as an `aider and abettor'"). Plaintiffs have not identified a single witness who could testify from personal knowledge that K&E substantially assisted or encouraged anyone to commit a tort, nor is there any document or other evidence that would support such a finding. Plaintiffs do not meet their evidentiary burden by citing to a Kansas case involving a bank's role in a real estate transaction. See York v. Intrust Bank, N.A., 962 P.2d 405
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LAW OFFICES One Arizona Center, 400 E. Van Buren Phoenix, Arizona 85004-2202 (602) 382-6000

(Kan. 1998). In York, the court concluded that the bank actively participated by the alleged fraud "by permitting a misstatement it was aware of to be included in the purchase contract it signed." Id. at 425. Plaintiffs have identified no such evidence of wrongdoing by K&E in this case. Plaintiffs also cite to cases from the Sixth and Eighth Circuits for the proposition that K&E need have "specific knowledge" of particular misconduct. See FDIC v. First Interstate Bank of Des Moines, 885 F.2d 423 (8th Cir. 1989); Brock v. Hendershott, 840 F.2d 339 (6th Cir. 1988). These cases, however, are irrelevant to whether K&E offered substantial assistance to anyone breaching a fiduciary duty owed to plaintiffs or LeapSource. 5. Conclusion.

Plaintiffs have not produced any evidence to support their claims that K&E improperly interfered with any business relationship or aided and abetted any breach of fiduciary duty. Plaintiffs' focus on David Eaton and K&E's initial recommendation of Eaton is unavailing. As set forth in K&E's separate motion for summary judgment on the issue of vicarious liability, there is no evidence to support the imposition of vicarious liability on K&E for Eaton's conduct. All that remains is K&E's initial referral of Eaton. As a matter of law, this initial suggestion does not constitute tortious inference or aiding and abetting a breach of a fiduciary duty. K&E respectfully requests that the Court grant its motion for summary judgment. DATED this 12th day of December 2005. SNELL & WILMER L.L.P.

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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 December 12, 2005, 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. s/ Joseph G. Adams

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