Free Statement - District Court of Arizona - Arizona

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40 North Central Avenue Phoenix, Arizona 85004-4429 Facsimile No.: (602) 262-5747 Telephone: (602) 262-5311 Richard A. Halloran, State Bar No. 013858 [email protected] Jon Weiss, State Bar No. 015350 [email protected] Candida M. Ruesga, State Bar No. 021305 [email protected] Attorneys for Defendants AEG Partners LLC and David Eaton

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Diane Mann, et al., Plaintiffs, vs. GTCR Golder Rauner, L.L.C., et al., Defendants. ) ) ) ) ) ) ) ) ) )

No. CIV 02-02099 PHX RCB STATEMENT OF FACTS IN SUPPORT OF AEG PARTNERS, L.L.C. AND DAVID EATON'S MOTION FOR SUMMARY JUDGMENT

Pursuant to Rule 56.1(a), Local Rules for the District of Arizona, Defendants AEG Partners LLC and David L. Eaton (collectively "AEG") submit the following specific facts in support of their motion for summary judgment. 1. LeapSource was formed in September 1999 for the purpose of providing

business process outsourcing services to other companies. Fourth Amended Complaint ("FAC") ¶ 170-71. 2. FAC ¶ 34. 3. Christine Kirk, Thomas Gilman, Indu Gupta, Kimberly Hartmann, Julie Plaintiff Diane Mann is the Trustee for LeapSource's Bankruptcy estate.

McCollum, Kelly Powers-Weekes, Bobby Scott, and Patrice Walker (collectively "Individual Plaintiffs") are shareholders and former officers, directors and senior employees of LeapSource. FAC ¶ 35-42, 191, 443.

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4.

AEG Partners is a company that provides financial advisory and

management services to companies experiencing severe financial and operational problems. Eaton Decl., Ex. 1, ¶ 1. 5. David Eaton was a founder and Managing Director of AEG Partners.

Eaton Decl., Ex. 1, ¶ 2. 6. GTCR was LeapSource's majority stockholder and the source of

LeapSource's funding. FAC ¶ 195. 7. On or about September 27, 1999, GTCR entered into a Purchase

Agreement with LeapSource pursuant to which it stated its intent to provide LeapSource total discretionary funding of "up to $65 million," with "up to an aggregate of $15 million" of that total to be used for working capital and related start up expenses. Purchase Agreement, dated September 27, 1999, Ex. 2, at § 1B(b). 8. As early as October 2000, GTCR began expressing reservations to

LeapSource about providing further funding to LeapSource. Kirk Dep., Ex. 3, at 428:711; see also FAC ¶ 261. AEG had nothing to do with GTCR's concerns about funding LeapSource. Kirk Dep., Ex. 3, at 428:12-15. 9. By the end of 2000, LeapSource was experiencing losses of almost $3

million a month, and had run up cumulative losses for 2000 of more than $34 million. Kirk Dep., Ex. 3, at 453:6-9; LeapSource December 2000 LeapPak, Ex. 4, at LS-CK40596. 10. By February 2001, LeapSource had already exceeded the $15 million in

working capital provided for in the Purchase Agreement. Response to AEG and Eaton's First Set of Requests for Admissions to Plaintiffs ("Admis."), Ex. 5, no. 13. 11. On February 2, 2001, LeapSource laid off approximately 70 employees in

its first reduction of force. FAC ¶ 284. 12. On February 20, 2001, the LeapSource Board of Directors discussed

GTCR's concerns about further funding. Minutes of LeapSource Board of Directors

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Meeting on February 20, 2001, Ex. 7, at LS-95-0001.664; see also Kirk Dep., Ex. 3, at 448:25-449:6. 13. On February 27, 2001, GTCR faxed a letter to LeapSource's CEO, plaintiff

Christine Kirk, notifying her that GTCR would no longer provide funding to LeapSource. Letter to Christine Kirk from GTCR, dated February 27, 2001, Ex. 8, at GTCR002283. 14. On February 27, 2001, after GTCR had notified Ms. Kirk of its decision to

withdraw funding, the Board of Directors of LeapSource held a meeting at which time GTCR confirmed that it would discontinue funding LeapSource. Minutes of LeapSource Board of Directors Meeting on February 27, 2001 ("2/27/01 Board Minutes"), Ex. 9, at LS-91-0289; see also Kirk Dep., Ex. 3, at 428:16-429:9. 15. Thomas Gilman resigned from his position as interim CFO during the

February 27, 2001 Board meeting before AEG was hired. 2/27/01 Board Minutes, Ex. 9, at LS-91-0290. AEG had nothing to do with Mr. Gilman's resignation. Gilman Dep., Ex. 10, at 187:8-14. 16. Mr. Gilman had been interim CFO of LeapSource pursuant to

LeapSource's contractual relationship with the company which employed Mr. Gilman. Gilman Dep., Ex. 10, at 187:15-188:7. Mr. Gilman was never an employee of LeapSource. Gilman Dep., Ex. 10, at 187:24-188:2. 17. On February 27, 2001 LeapSource's Board of Directors voted to terminate

Christine Kirk as CEO of LeapSource. No decision was made at that time concerning whether Ms. Kirk's termination was with or without cause. 2/27/01 Board Minutes, Ex. 9, at LS-91-0290. 18. After GTCR announced its decision to stop funding LeapSource, and after

LeapSource's Board of Directors voted to terminate Ms. Kirk as CEO, LeapSource's Board of Directors (including plaintiff Kirk) voted on February 27, 2001, to retain AEG Partners as a crisis manager. Admis., Ex. 5, nos. 1, 2, 4 and 5. 19. AEG did not advise, cause, or induce GTCR to discontinue funding

LeapSource. Eaton Decl., Ex. 1, ¶ 4.
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20.

AEG did not advise, cause, or induce LeapSource's Board of Directors to

terminate the employment of Christine Kirk on February 27, 2001. Eaton Decl., Ex. 1, ¶ 5. 21. LeapSource's engagement of AEG Partners was memorialized in a written

Financial Advisory Agreement, dated March 2, 2001, which provided that AEG Partners was retained for the purpose of developing and assessing restructuring alternatives to address LeapSource's financial crisis. Financial Advisory Agreement, dated March 2, 2001 ("FAA"), Ex. 11. Eaton was the primary AEG representative assigned to work on the LeapSource engagement. FAA, Ex. 11, at AEG000041; see also Eaton Decl., Ex. 1, ¶ 3. 22. As of February 27, 2001, the date AEG was hired, LeapSource's primary

outside legal counsel, Michelle Matiski of Osborn Maledon, described LeapSource's condition as follows: "[I]t did not have sufficient revenues to make payroll. It didn't have a source of funding. Its client relationships were deteriorating. A lawsuit had been or was about to be filed against it by a client. The CEO has just been terminated. It was in disarray." Matiski Dep., Ex. 12, at 93:14-18. 23. At no time in LeapSource's existence did it have revenues sufficient to

meet its payroll obligations. Kirk Dep., Ex. 3, at 400:3-6. 24. As of February 27, 2001, the date AEG was hired, LeapSource was

insolvent. Admis., Ex. 5, no. 3; FAC ¶ 298. 25. As a result of the market decline that began in March 2000, LeapSource

was unable to pursue an initial public offering. Pearlman Dep., Ex. 13, at 68:9-21; see also Kirk Dep., Ex. 3, at 458:17-20. 26. LeapSource retained Solomon Smith Barney for the purpose of raising

additional capital or locating a buyer for LeapSource. Pearlman Dep., Ex. 13, at 59:2-9. Despite months of effort, by February 2001, LeapSource had been unable to secure any firm offers. Pearlman Dep., Ex. 13, at 46:8-14; see also Gilman Dep., Ex. 10, at 209:1622, 267:23-268:17, 285:1-16.
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27.

Individual Plaintiffs Gupta, Hartmann, McCollum, Powers, Scott, and

Walker were terminated as a part of LeapSource's second reduction in force. Makings Dep., Ex. 14, at 311:25-313:6. 28. The decision to include Individual Plaintiffs Gupta, Hartmann, McCollum,

Powers, Scott, and Walker in the second reduction in force was made by Michael Makings, LeapSource's CEO at that time. Makings Dep., Ex. 14, at 287:16-288:21, 311:25-313:6. 29. AEG did not advise LeapSource to implement the second reduction in

force, and had no input into the decision concerning which employees were included in the March 2, 2001 reduction in force. Eaton Dep., Ex. 15, at 135:6-136:6; see also Rhodes Dep., Ex. 16, at 42:1-4. 30. Eaton believed his duty as crisis manager was to maximize the value of

LeapSource and its assets and reduce its liabilities. Eaton Dep., Ex. 15, at 85:4-9. 31. After the Board voted to retain AEG, Eaton traveled to Tempe to learn

about LeapSource's operations and finances and began working with LeapSource management to develop restructuring alternatives that would allow LeapSource to remain a going concern. Eaton Dep., Ex. 15, at 134:5-135:5. 32. Eaton and LeapSource management presented several alternatives to GTCR

during the first week of March 2001. The restructuring alternatives proposed by AEG required additional funding for LeapSource if they were to be successful. Eaton Dep., Ex. 15, at 18:4-9, 80:18-81:5. 33. A few weeks after Eaton and LeapSource presented the restructuring

alternatives to GTCR, GTCR reaffirmed its prior decision to cut off all funding. Eaton Dep., Ex. 15, at 127:12-24, 158:15-21, 159:11-21. 34. As a result of GTCR's decision to withdraw funding, LeapSource directed

AEG in late March 2001 to switch focus from trying to restructure the company to winding down the company's business. Eaton Dep., Ex. 15, at 127:7-128:4; see also Rhodes Dep., Ex. 16, at 132:7-25.
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35.

LeapSource, with AEG's assistance, entered into asset purchase and

settlement agreements with its clients to insure orderly transitions and avoid potential liability. Eaton Dep., Ex. 15, at 121:11-13, 173:5-17. 36. LeapSource, with AEG's assistance, negotiated the sale of various assets to

third parties. Eaton Dep., Ex. 15, at 187:1-16. 37. At the request of LeapSource management, AEG assisted in contacting laid

off employees, including Individual Plaintiffs, and attempting to negotiate releases and reductions in total severance in exchange for a lump sum severance payment. Eaton Dep., Ex. 15, at 130:19-131:9, 133:10-17. The proposed releases were drafted by the law firm Osborn Maledon. Rhodes Dep., Ex. 16, at 236:3-237:5. 38. LeapSource did not have the financial resources to pay Individual Plaintiffs

the severance amounts stated in their Employment and Senior Management Agreements. Eaton Dep., Ex. 15, at 30:5-9. 39. On or about September 27, 1999, Kirk entered into a Senior Management

Agreement with LeapSource. Kirk SMA, Ex. 17. 40. On or about October 5, 1999, Hartmann entered into a Senior Management

Agreement with LeapSource. Hartmann SMA, Ex. 18. 41. On or about October 5, 1999, McCollum entered into a Senior Management

Agreement with LeapSource. McCollum SMA, Ex. 19. 42. On or about October 5, 1999, Gupta, Powers-Weekes, Scott and Walker

each entered into an Employment Agreement with LeapSource. Employment Agreements, Ex. 20. 43. Pursuant to the Senior Management Agreements and the Employment

Agreements, Individual Plaintiffs were entitled to severance payments if LeapSource terminated their employment without cause. Kirk SMA, Ex. 17, at § 6(d); Hartmann SMA, Ex. 18, § 6(d); McCollum SMA, Ex. 19, § 6(d); Employment Agreements, Ex. 20, § 6(e)(iii). LeapSource's severance obligations varied from 6 to 12 months of pay, to be

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paid in equal installments on LeapSource's regular paydays during that 6 to 12 month period. Id. 44. The Employment Agreements provided that a condition of the employee's

receipt of any severance was the employee's execution and delivery of "a legal release in a form and substance acceptable to [LeapSource], in which Employee releases [LeapSource] and its directors, officers, employees, and agents from any and all claims, including those claims relating to the Employee's employment with [LeapSource] and the termination thereof." Employment Agreements, Ex. 20, at § 6(e)(iv). 45. None of the Individual Plaintiffs accepted LeapSource's proposal for lump

sum severance payments. Eaton Dep., Ex. 15, at 263:18-264:4. 46. On May 10, 2001, LeapSource's Board of Directors voted that Ms. Kirk's

termination from LeapSource on February 27, 2001 should be considered for "cause." Minutes of LeapSource Board of Directors Meeting on May 10, 2001 ("5/10/01 Board Minutes"), Ex. 21, at LS-13-1370. 47. From October 15, 1999 through August 23, 2000, Ms. Kirk borrowed more

than $600,000 from LeapSource. Kirk Promissory Notes, Ex. 22. 48. Ms. Kirk was required to repay the loans "dollar for dollar" as she received

capital and other distributions from Arthur Andersen. Kirk SMA, Ex. 17, at §§ 1(d)-(f). 49. In October 2000, Ms. Kirk received payments totaling $600,000 from

Arthur Anderson, but failed to repay the balance of the loans as required by the Senior Management Agreement. Kirk Dep., Ex. 3, at 541:16-542:12. 50. Ms. Kirk's obligation to repay these loans was never excused by the

LeapSource Board of Directors. Kirk Dep., Ex. 3, at 542:9-23. 51. Ms. Kirk also approved loans to Kim Hartmann and Julie McCollum,

which Ms. Kirk late forgave. Kirk Dep., Ex. 3, at 543:23-544:5. 52. Ms. Kirk was required to obtain Board approval concerning decisions

related to hiring, compensation, and equity arrangements of LeapSource senior management. Kirk SMA, Ex. 17, at § 6(b)(i).
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53.

When Eaton looked into the loans to Ms. Hartmann and Ms. McCollum, he

was advised that LeapSource's Board of Directors never authorized any loans to Ms. Hartmann or Ms. McCollum. Nor did the Board authorize Ms. Kirk's later forgiveness of the loans to Ms. Hartmann and Ms. McCollum. Eaton Dep., Ex. 15, at 229:12-231:15; see also Kirk Dep., Ex. 3, at 543:23-544:19. 54. In March 2001, LeapSource provided its counsel at Jennings, Strouss and

Salmon, John Egbert, with information concerning Ms. Kirk's failure to repay the personal loans she took from LeapSource, as well as her authorization and later forgiveness of personal loans to Ms. Hartmann and Ms. McCollum. Rhodes Dep., Ex. 16, at 269:20-270:11. Mr. Egbert advised LeapSource that Ms. Kirk's conduct was more than sufficient to constitute "cause" for the termination of her employment. Rhodes Dep., Ex. 16, at 270:12-271:2. 55. After receiving advice from counsel concerning LeapSource's grounds for

terminating Ms. Kirk for cause, Eaton presented all the information along with counsel's advice to LeapSource's Board of Directors, who then voted to deem its termination of Ms. Kirk to have been for cause. 5/10/01 Board Minutes, Ex. 21, at LS-13-1370. 56. LeapSource's counsel at Jennings, Strouss and Salmon drafted the letter

that was sent to Ms. Kirk notifying her that her termination was for cause. Rhodes Dep., Ex. 16, at 246:2-4. 57. LeapSource's Board of Directors voted to file a voluntary petition for

Chapter 7 bankruptcy on May 10, 2001. 5/10/01 Board Minutes, Ex. 21, at LS-13-1371; see also FAC ¶ 317. 58. 59. LeapSource filed the bankruptcy petition on July 11, 2001. FAC ¶ 317. After LeapSource filed for bankruptcy, the Trustee entered into a settlement

agreement with Ms. Kirk in which Ms. Kirk was required to pay the Estate the money Kirk had borrowed and wrongfully failed to repay to LeapSource. Settlement and Release Agreement ("Kirk Settlement"), dated January 25, 2002, Ex. 23. In exchange, the Trustee revoked the Board's for cause determination, and Ms. Kirk received full
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credit for her severance. Kirk Settlement, Ex. 23, § 4; see also E-mail from Steven Brown, dated December 26, 2001, Ex. 24 ("The Trustee is giving Ms. Kirk full credit for the severance as if she already won the litigation, which is by no means a certainty.") (emphasis in original); Kirk Dep., Ex. 3, at 529:2-4, 529:19-25. 60. Ms. Kirk has never had to disclose to any third party that she was

terminated for cause. Kirk Dep., Ex. 3, at 529:10-18. 61. Since her termination from LeapSource, Ms. Kirk has not been turned

down for any job as a result of her termination from LeapSource. Kirk Dep., Ex. 3, at 504:18-20. 62. AEG had no knowledge of the alleged joint venture between GTCR and

any of the Individual Plaintiffs. Eaton Dep., Ex. 15, at 275:23-276:14. 63. Ms. Kirk testified during her deposition that she had no reason to believe

Eaton knew about the alleged joint venture: Q. A. Do you have any basis to believe that Mr. Eaton knew about the joint venture? I am not aware of any. Has anyone ever told you that Mr. Eaton knew about the joint venture? I don't believe so. Do you have any reason to believe that any other representative of AEG Partners knew about the joint venture? I am not aware of any.

16 Q. 17 18 19 20 A. 21 22 23 24 25 26 27 28 Kirk Dep., Ex. 3, at 360:15-361:21. 64. Individual Plaintiffs Scott, Walker, Powers-Weekes and Gupta never spoke A. Q.

with Eaton concerning the joint venture or any other matter. Scott Dep., Ex. 25, at 204:714, 205:2-206:11; Walker Dep., Ex. 26, at 150:22-151:12; Weekes Dep., Ex. 27, at 184:12-186:12, 191:21-192:19; Gupta Dep., Ex. 28, at 173:19-174:16. 65. Although Individual Plaintiffs McCollum and Hartmann each spoke with

Eaton, neither McCollum or Hartmann ever told Eaton about the alleged joint venture
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agreement between Individual Plaintiffs and GTCR. McCollum Dep., Ex. 29, at 257:13259:2; Hartmann Dep., Ex. 30, at 405:15-407:12. 66. The Individual Plaintiffs contend that AEG's conduct diminished the value

of the Individual Plaintiffs' LeapSource stock, and diminished the assets of LeapSource, thereby resulting in LeapSource's inability to pay them severance. E.g., Hartmann Dep., Ex. 30, at 407:19-409:16. 67. From the inception of AEG's retention on February 27, 2001, through the

filing of LeapSource's bankruptcy, LeapSource was represented by at least two law firms: Osborn Maledon, which advised LeapSource on a range of matters including corporate issues, employment issues, and bankruptcy issues; and Jennings Strouss & Salmon, which advised LeapSource regarding the termination of Ms. Kirk. Eaton Dep., Ex. 15, at 99:2-12, 100:20-24. 68. Individual Plaintiffs Gilman, Hartman, Gupta, Powers-Weekes, Walker,

and Scott filed claims in the Bankruptcy Court through which they seek severance/wages owed by LeapSource. Creditor Claims, Ex. 6. DATED this 30th day of August, 2005. LEWIS AND ROCA LLP

By

s/Richard A. Halloran Richard A. Halloran Jon Weiss Candida M. Ruesga Attorneys for Defendants AEG Partners LLC and David Eaton

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CERTIFICATE OF SERVICE I hereby certify that on August 30, 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 Scot C. Stirling BEUS GILBERT PLLC 4800 North Scottsdale Road Scottsdale, Arizona 85251 Steven J. Brown STEVE BROWN & ASSOCIATES 1440 East Missouri, Ste. 185 Phoenix, Arizona 85014-2412 Don P. Martin Edward A. Salanga QUARLES & BRADY STREICH LANG, LLP Renaissance One Two North Central Avenue Phoenix, Arizona 85004-2391 Kevin A. Russell David S. Foster Michael J. Faris Nicholas B. Gorga LATHAM & WATKINS Sears Tower, Suite 5800 Chicago, Illinois 60606 Attorneys for GTCR Golder Rauner, L.L.C., GTCR Fund VI LP, GTCR VI Executive Fund, L.P., GTCR Associates VI, Joseph Nolan, Bruce V. Rauner, Daniel Yih, Philip A. Canfield, and David Donnini

Merrick B. Firestone Virginia L. Manolio RONANnd FIRESTONE PLC & 649 N. 2 Avenue Phoenix, Arizona 85003 Attorneys for Michael Makings James R. Condo Patricia Lee Refo Joseph Adams SNELL & WILMER LLP One Arizona Center 400 E. Van Buren Phoenix, Arizona 85004-00001 Attorneys for Kirkland & Ellis

s/Sheri McAlister

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