Free Reply to Response to Motion - District Court of Arizona - Arizona

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Ira M. Schwartz (I.D. No. 010448) Michael A. Cordier (I.D. No. 014378) DeCONCINI McDONALD YETWIN & LACY, P.C. 7310 N. 16th St., Suite 330 Phoenix, Arizona 85020 Telephone (602) 282-0500 (602) 282-0520 (Facsimile)
Attorneys for Plaintiff

IN THE UNITED STATES DISTRICT COURT IN AND FOR THE DISTRICT OF ARIZONA

DECONCINI MCDONALD YETWIN & LACY, P.C.

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Suite 330 Phoenix, Arizona 85020

Erchonia Medical Inc., et al Plaintiff, v. Miki Smith, et al Defendants.

Case No.:CIV 02-2036-PHX-MHM Consolidated with CIV 02-2048-PHX-MHM and CIV 02-2353-PHX-MHM ERCHONIA MEDICAL INC.'S REPLY IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT AGAINST MIKI SMITH ON PROMISSORY NOTE

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7310 N. 16th Street,

Erchonia Medical Inc., et al Plaintiff, v. Miki Smith, et al Defendants. Robert E. Moroney, LLC Plaintiff, v. Erchonia Medical, Inc., et al Defendants.

Case 2:02-cv-02036-MHM

Document 308

Filed 09/09/2005

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Plaintiff Erchonia Medical, Inc. ("Erchonia") submits this Reply in support of its Motion for Summary Judgment against Miki Smith ("Smith") on Count 8 of the Complaint for breach of contract. Summary judgment is appropriate due to Mr. Smith's failure to pay a promissory note he executed in favor of Plaintiff Erchonia. Introduction A review of the facts as recited in both Erchonia's Motion for Summary Judgment and Smith's Response is notable for the facts that are not in dispute. Among the background facts which are not disputed is that Miki Smith took money from Erchonia, which was not salary and which was not otherwise earned by him, and that when confronted with this fact, he signed a promissory note to repay these sums. Although Erchonia disputes that Smith was ever authorized to take this money, even under the facts alleged by Miki Smith, he acknowledges that he was obligated to repay the money. See Miki Smith's Statement of Facts in Support of Response to Motion for Summary Judgment ( hereinafter "Smith SOF") at ¶18. Despite acknowledging he was obligated to repay the money he took from Erchonia, Smith alleges three affirmative defenses to the breach of contract claim: (1) duress, (2) undue influence, and (3) performance was excused or waived based upon the statements of Charles Shanks. See Fed.R.Civ.P. 8(c). It should be noted that the burden of proof for an affirmative defense is on the party asserting the defense. See e.g. Benigni v. City of Hemet, 879 F.2d 473, 479 (9th Cir. 1988); Double AA Builders, Ltd. v. Grand State Const. LLC, 210 Ariz. 503, 114 P.3d 835, 842 (2005).

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None of these affirmative defenses can be sustained. As explained below, Smith does not assert facts sufficient to support the affirmative defenses of duress or undue influence. As to the claim of excuse, the only facts asserted in support of this contention are inadmissible hearsay. See Fed.R.Evid. 801. In the absence of admissible evidence, this claim must also fail. Thorton v. City of St. Helens, ---, F.3d ---, 2005 WL 2127890 (9th Cir. 2005) A. Duress The parties do not materially disagree as to the legal standard required to support the claim of duress. Duress is an affirmative defense which requires the party asserting the defense to carry the burden of proof. See. Benigni, 879 F.2d 473, 479; Double AA Builders, Ltd., 210 Ariz. 503, 114 P.3d 835, 842. The defense of duress requires a showing of either a wrongful act or wrongful threat of one person that compels another person to manifest assent to a contract. Inter-tel Inc. v. Bank of America, Arizona, 195 Ariz. 111, ¶36 (App. 1999). The wrongful act or threat must be the type that precludes an exercise of free will and which it intended or is reasonably expected to operate as an inducement. See Johnson v. American National Insurance Company, 126 Ariz. 219 , ¶11 (App. 1980). Despite reiterating this standard, Mr. Smith glosses over this in his response and states only that there was a meeting where he was asked to sign the note followed by the conclusory allegation that, "Smith did not believe he could leave the meeting at Charles Shanks' house without signing the note." Smith SOF at ¶25. He then adds additional conclusory allegations that he was pressured to sign the note and he does not believe he signed the note of his own free will. Smith SOF at ¶27, 29. Nowhere does he allege that 3
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anyone threatened him, or that anyone took any wrongful act against him causing him to sign the note. In the absence of facts showing some type of threat or wrongful act, there can be no duress. Inter-tel Inc., 195 Ariz. 111, ¶36. Mere self-serving conclusory allegations by a party are insufficient to defeat a motion for summary judgment. Angel v. Seattle-First Nat. Bank, 653 F.3d 1293, 1299 (9th Cir. 1981); Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 922 (9th Cir. 2001); Wingate v. Gin, 148 Ariz. 289, 292, 714 P.2d 459, 462 (App. 1985); Cullison v. City of Peoria, 120 Ariz. 165, 169, 584 P.2d 1156, 1160 (1978). Even assuming the facts as alleged by Smith are true (which Erhonia denies), a review of these few facts shows that there was no duress. Smith characterizes the circumstances under which he signed the note as being purposefully orchestrated to get him to sign the note. He says he was invited to a meeting without being told its purpose. There is no allegation that he asked what the purpose was or that this was an unusual occurrence. There is nothing wrongful or improper in inviting someone to a meeting without telling them the purpose of the meeting. Further, there are no allegations that Smith was in any way forced to attend the meeting. Smith goes on to say that when he arrived at the meeting he was confronted by Shanks family members and they demanded he sign the note. There is nothing wrongful in having a meeting with Smith and demanding that he sign a promissory note to repay funds, when even under the facts alleged by Smith, he admits he owed to Erchonia. See Smith SOF at ¶18.

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Smith argues that he had never previously been asked to sign the note and he had no time for reflection. However, there are no facts asserted that he asked for time to review the note. Again, such actions are not wrongful in any legal sense. Smith states that he was compelled to sign the note surrounded by many members of the Shanks family. From this the Court is asked to presume that the number of people alone is somehow wrongful. However, there is no indication that any member of the Shanks family made any threat or took any action to force him to sign the note. In addition, these are all people with whom he was well acquainted, some of which at the time he considered his friends and many of whom he worked with. See Smith SOF at ¶1. In short, there are not facts to support that the Shanks family did anything wrong in asking Mr. Smith to sign the note. In the absence of a wrongful act or threat, there can be no duress. B. Undue Influence. In addition to claiming the promissory note executed by Smith was signed under duress, Smith further claims that Erchonia exerted "undue influence" in obtaining Smith's signature on the note. Erchonia concedes that the legal test for undue influence set forth by Smith is appropriate, but again, Smith has no facts to support this affirmative defense. Undue influence requires a showing of domination of the party exercising the persuasion or the existence of a confidential or other relationship between the parties from which a party can justifiably assume that the other party will not act in a manner inconsistent with the first party's welfare. See e.g. Eagerton v. Fleming, 145 Ariz. 289, 292 700 P.2d 1389 (App. 5
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7310 North 16th Street, Suite 330 Phoenix, Arizona 85020

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1985); Matter of Estate of Kerr 137 Ariz. 25, 29, 667 P.2d 1351, 1355. (App. 1983). Many of the cases discussing undue influence arise in the situation where there is a question involving the preparation of a will and a gift is bestowed on a party in a close relationship with the testator. See Matter of Estate of Kerr 137 Ariz. 25, 29, 667 P.2d 1351, 1355. Miki Smith does not identify what confidential relationship gave rise to his claim or how Erchonia came to exercise such domination over him. A review of his assertion indicates that it is based upon either his employee-employer relationship with Erchonia or some relationship with the Grace Baptist Church. An examination of either of these relationships demonstrates that Smith's claim of undue influence cannot stand. First, an employee-employer relationship is not the type of relationship in which one party can exercise domination over the other. Nor is it the type of special relationship of trust that the law can find would override a party's free will. Eagerton v. Fleming, 145 Ariz. 289, 292. With regard to Smith's claims that there was an integration of church and work such that it should be inferred that the church compelled Smith to sign the note, this contention is both legally and factually defective. The only facts which Smith has to support this claim are his own conclusory allegations. A review of even the allegations by Smith shows that they are lacking. Most important is the factual allegations that one would expect to find in support of this type of claim which are notably absent from Smith's Statement of facts. These include the following: · Nowhere does Smith allege he was a member of the Grace Baptist Church.

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· Nowhere does Smith describe or identify the type of personal or spiritual relationship he had with Charles Shanks, the pastor of this church. · Nowhere does Smith indicate what amount, if any, he personally tithed or contributed to the Church. Something he indicates as being required of church members. · Nowhere does Smith indicate how his relationship in the church would have been adversely affected if he did not sign the note as the church supposedly compelled him to do. · Nowhere does he indicate what type of harm he suffered when he left the church and returned to his "right" mind. (Of course, this assumes that he was at some point a member in the church.) All of these factors are necessary for a trier of fact to find that the church held a special relationship with Miki Smith and that it used this special relationship improperly to cause him to sign the promissory note. In the absence of these facts, there can be no finding of undue influence. Equally important, a motion for summary judgment must be supported by admissible facts. Thorton v. City of St. Helens, ---, F.3d ---, 2005 WL 2127890 (9th Cir. 2005). Here the meager facts offered by Smith to support his claim of undue influence are all inadmissible. Specifically, Smith relies heavily on the statements made to him by Charles Shanks to show undue influence. However, these statements are classic hearsay and inadmissible into evidence. Fed.R.Evid. 803. Additionally, there is substantial evidence disputing that these statements were made by Charles Shanks and due to the fact 7
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that Mr. Charles Shanks is now deceased, these statements can never be the subject of cross-examination. See Fed.R.Evid. 804. Accordingly, these statements are inadmissible hearsay and cannot be used to support a defense to summary judgment motion. Further, the limited other statements offered by Smith to support this claim of undue influence are unsupported and inadmissible. Most of these statements are mere "beliefs" by Smith without any factual support. A review of Smith's Statement of Facts shows this clearly. For example, Paragraphs 25-29 of Smith's Statement of Facts recite, "25. Smith did not believe that he could leave the meeting at Charles Shanks' house without signing the note. 26. Smith did not believe that the could review the note with a third party before signing the note. 27. Smith was pressured by the Shanks family to sign the promissory note at the meeting in Charles Shanks's home. 28. Smith believes that at the time he signed the note he was not in his right mind and that he was brainwashed by the Shanks and the Church. 29. Smith does not believe that he signed the note of his own free will."(Emphasis added; Deposition citations Omitted.) Smith SOF, ¶¶25-29. As noted above, all of these statements are merely beliefs by Miki Smith. He does not provide us with any facts to show why he adopted those beliefs. There are no allegations of threats of harm to him or allegations of any other wrongful acts. Even the allegations of paragraph 27, that Smith was pressured to sign the note does not give any facts as to circumstances or the type of pressure he felt, or what actions caused him to feel pressured. (Additionally, while perhaps an oversight, Erchonia notes that the Declaration of Miki Smith which is offered to support his Statement of Facts is unsigned. Of course,

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this declaration can carry no weight at all until a signed copy is submitted.) In the absence of facts to support this defense, summary judgment for Erchonia must be granted. C. Allegations that Performance Was Excused by Charles Shanks. In his final argument, Smith contends that Charles Shanks was Erchonia's agent when he excused Smith from paying the promissory note. Smith then goes on to argue about the legal standards for proving agency. There is no evidence that Charles Shanks was an agent or an apparent agent of Erchonia. First, it is clear that Charles Shanks was never an employee, officer or director of Erchonia. See Erchonia's Comprehensive Separate Statement of Facts In Support of Erchonia Medical, Inc.'s Motion for Summary Judgment on its Claims Against Miki Smith, Motion for Summary Judgment Concerning REM's Claims for Violation of Arizona Consumer Fraud Act, Conversion, and Partial Motion for Summary Judgment Concerning REM's Claim for False Advertising (hereinafter "Erchonia's SOF") at ¶17. Second, there is no reasonable way that Charles Shanks can be held to be the apparent agent of Erchonia, at least as far as Miki Smith was concerned. There is no evidence that Charles Shanks ever held himself out as being an officer, director, or agent for Erchonia. More importantly, Miki Smith was the as Vice-President of Sales and Marketing of Erchonia and was employed for many years with Erchonia. Smith SOF at ¶ 15. In his position with Erchonia, Miki Smith had actual knowledge of who the authorized officers of Erchonia were and he also knew from his experience and position that Charles Shanks was not an authorized officer, director or shareholder of Erchonia. Therefore, his

DECONCINI MCDONALD YETWIN & LACY, P.C.

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7310 North 16th Street, Suite 330 Phoenix, Arizona 85020

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argument that Charles Shanks was an apparent agent is a red herring. Nothing about the circumstances of when he signed the promissory note can change his actual knowledge. More importantly, the only evidence we have that Charles Shanks supposedly told Miki Smith that he did not have to pay the note is Miki Smith's own testimony. However, this statement by Miki Smith is clearly inadmissible hearsay and as such is legally insufficient to support this defense. Fed.R.Evid.803; Thorton v. City of St. Helens, ---, F.3d ---, 2005 WL 2127890 (9th Cir. 2005); Martin v. Schroeder, 209 Ariz. 531, 105 P.3d 577 (Ariz. App. 2005). (Only admissible evidence can be considered in ruling on a motion for summary judgment). See also Metabolife Intern., Inc. v. Wornick, 264 F.3d 832 (9th Cir. 2001). (Erchonia notes that it strongly disputes that Mr. Charles Shanks ever made such a statement, however, for purposes of this motion, this factual dispute is irrelevant, as such testimony by Miki Smith is inadmissible.) The law on summary judgment is clear. In order to defeat a motion for summary judgment, Miki Smith must come forward with some admissible evidence of material facts to support his affirmative defense. Thorton v. City of St. Helens, ---, F.3d ---, 2005 WL 2127890. In the absence of such evidence, summary judgment must be granted to Erchonia. Since Miki Smith has no admissible evidence of Charles Shanks or anyone else at Erchonia excusing the payment of the note, this defense fails. Conclusion Miki Smith has no valid defenses to the promissory note he signed. Summary judgment must be granted to Erchonia on this claim. 10
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DECONCINI MCDONALD YETWIN & LACY, P.C.

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DATED: September 9, 2005. DeCONCINI McDONALD YETWIN & LACY, P.C.

DECONCINI MCDONALD YETWIN & LACY, P.C.

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By /s/Ira M. Schwartz Ira M. Schwartz Michael A. Cordier 7310 North 16rd Street, Suite 330 Phoenix, Arizona 85020 Attorneys for Plaintiff

7310 North 16th Street, Suite 330 Phoenix, Arizona 85020

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Certificate of Service I certify that on September 9, 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 those attorneys registered with CM/ECF: Michael Warzynski, Esq. JARDINE BAKER HICKMAN & HOUSTON PLLC 3300 N. Central Ave., Suite 2600 Phoenix, AZ 85012 Co-Counsel for Erchonia Medical Inc. Benjamin B. Lieb, Esq. Robert Brunelli, Esq. SHERIDAN ROSS PC 1560 Broadway, Suite 1200 Denver, CO 80202 Attorneys for Robert E. Moroney, LLC, Robert E. Moroney, and A Major Difference Inc. David Bray, Esq. MARISCAL WEEKS MCINTYRE & FRIEDLANDER PA 2901 N. Central Ave., Suite 200 Phoenix, AZ 85012 Attorneys for Robert E. Moroney, LLC, Robert E. Moroney, and A Major Difference Inc. Gregory L. Miles, Esq. Lori A. Curtis, Esq. DAVIS MILES PLLC 1550 E. McKellips Road, Suite 101 Mesa, AZ 85203 Attorneys for John and Claudette Brimhall Dominic L. Verstagen, Esq. KUNZ PLITT HYLAND DEMLONG & KLEIFIELD 3838 N. Central Ave. Suite 1500 Phoenix, AZ 85012 Attorneys for John and Claudette Brimhall Scott A. Salmon, Esq. THE CAVANAGH LAW FIRM 1850 N. Central Avenue, Suite 2400 Phoenix, AZ 85004 Attorneys for George Gonzalez and Lorena Guzman Gordon S. Bueler, Esq. BUELER JONES, LLP 1300 N. McClintock Drive, Suite B-4 Chandler, AZ 85226 Attorneys for Miki Smith and KMS Marketing, Inc. /s/ Ira M. Schwartz 12
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DECONCINI MCDONALD YETWIN & LACY, P.C.

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7310 North 16th Street, Suite 330 Phoenix, Arizona 85020