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

Robert M. Frisbee #018779 FRISBEE & BOSTOCK, PLC 2 1747 East Morten Avenue, Suite 108 Phoenix, Arizona 85020 3 Phone: (602) 354-3689 Fax: (602) 266-7744 4 [email protected] Attorneys for Greg and Linda Hancock
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Meritage Homes Corporation, a Maryland Corporation, formerly d/b/a Meritage Corporation; Hancock-MTH Builders, Inc., an Arizona corporation; Hancock-MTH Communities, Inc., an Arizona corporation d/b/a/ Meritage Homes Construction, Inc.; and Meritage Homes of Arizona, Inc., an Arizona Corporation, Plaintiffs, vs. ) ) ) ) ) ) ) ) ) ) ) Ricky Lee Hancock and Brenda ) Hancock, husband and wife; Gregory ) S. Hancock and Linda Hancock, ) husband and wife; Rick Hancock Homes ) LLC, an Arizona limited liability ) company; RLH Development, LLC, an ) Arizona limited liability company; and ) J2H2, LLC, an Arizona limited ) liability company, ) Defendants, ) and ) ) Greg Hancock, an individual, ) ) Defendant, Counter) Claimant and Third) Party Plaintiff, ) vs. ) ) Steven J. Hilton, an individual; John R. ) Landon, in individual; Larry W. Seay, ) an individual; and Snell & Wilmer, LLP, ) an Arizona professional ) corporation, ) Third-Party Defendants. ) )
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Case No. CV-04-0384-PHX-ROS

GREG HANCOCK'S REPLY TO RESPONSES OF MERITAGE AND SNELL & WILMER TO MOTION FOR STAY AND REQUEST FOR RELIEF

Case 2:04-cv-00384-ROS

Filed 05/22/2006

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I.

THE FACTS AS THEY EXISTED AT THE TIME MERITAGE FIRST FILED THIS LAWSUIT DO NOT ESTABLISH FEDERAL JURISDICTION. On May 1 the Court told counsel for Meritage to look to the facts at the time its case

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was filed. It also said1 to counsel for Greg Hancock that "if you are going to assert to this Court that the undisputed facts establish no jurisdiction, that there was no jurisdiction at the

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time this cause of action was filed, then the Court will consider whether or not I should
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dismiss the matter because of no subject matter jurisdiction." Greg Hancock asserts precisely
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that, as he has on prior occasions. Because of what the facts extant at the time of filing,
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Meritage has assiduously avoided telling the Court what they were.
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When Meritage filed this case on 2/24/04, as shown by the attached Declaration of
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Rick Hancock (Exhibit A), the documents and exhibits previously filed in this case, and the
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other exhibits attached hereto, the facts demonstrate beyond doubt that there was no federal
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jurisdiction when this case was filed.
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A.
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Meritage Breached the License Agreement As A Matter of Law. 1. Hilton's "go dark" Email of 9/8/003 evinced Meritage's intent2 and plan to

breach the License Agreement by diminishing the Hancock name, and Meritage then
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consummated its intent by embarking immediately on that plan with its advertising agency
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and internal staff, even announcing that Hancock would become Meritage at the Christmas
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party of 12/03 (current Motion and its exhibits, pp. 3,4).
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2. Meritage spends more than two pages of discourse on the word"derogate"
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(Opp. 9-11), an irrelevant discourse because it ignores the rest of the words in the License
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Agreement's covenant - or detract from the Licensed Mark's repute, value, marketability,
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degree of public recognition or popularity. Meritage does not claim, because it cannot, that
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See Mobil Oil Corp. v. Kelley, 493 F.2d 784 (5th Cir. 1973), cert. denied 419 U.S. 1022, 95 S.Ct. 498 (jurisdiction determined at time of filing). Meritage lamely contends that the Email is "misstated" and "twisted." (Opp. 7) It speaks for itself, as does Meritage's subsequent conduct in carrying out its intent.
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it did not violate those words. Steven Hilton, Meritage CEO, understood the plain meaning of the words, even if Meritage's attorneys do not: "Q. When you changed the eight or more communities from Hancock Communities to Meritage Homes, what did that do to the visibility of Hancock Communities?" "A. Made it less visible." (Hancock Statement of Facts In Support of Motion for Summary Judgment, Exh. 2, p.70). Also see attached Exhibit B for what Meritage intended - Hancock becomes Meritage. 3. Counsel does not yet have the deposition transcript, but avows that Missy Vallirie, Meritage's head of marketing, testified that she could see no valid marketing reason to retain the name "Hancock Communities" at only two out of the many Meritage housing developments. (Dep. 79, l.1-13; 89-90) Meritage was "trying to keep the [Hancock] name out there for as long as we could" because of the pending lawsuit. (Dep. 67, l.12-19) The purpose of the advertising campaign was to "slowly minimize the awareness" of the Hancock name, "and just make it smaller and smaller `til, by the end of the year, we no longer note [the name]. (Dep. 104, l.1-16) And when Ron French, Hancock's current president, learned at his deposition that the "Hancock" name was no longer present even at Rancho Bella Vista, because Missy thought it logical to remove it and did so, he chewed her out and told her to put it back in the newspaper ads. (Dep. 122-124) "Q. So it was your inference from everything going on around you and knowing the people you work with that the whole purpose of everything that you saw going on was to prevent the Hancocks from using their own name; is that what I understand?" "Yes." (Dep. 155) One cannot "warehouse" a name simply to prevent a competitor from using it. See, e.g., IntraWest Financial Corp. v. Western National Bank of Denver, 610 F.Supp. 950 (D.Colo. 1995). 4. Greg Hancock did not know of either the "go dark" Email or Meritage's other pre-suit activities diminishing his name in the marketplace because he had departed Meritage in March, 2003. For other justifiable reasons, including failure to pay his earn-out,
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he canceled the License Agreement by letter to Meritage's attorneys on 2/13/04. In pertinent part, the letter said: Further, in view of your client's repeated breaches of the Master Transaction Agreement, pursuant to Section 7.3 of the License Agreement * * * your client's license to use the "Licensed Marks," "Hancock Homes" and "Hancock Communities" is hereby terminated immediately. Demand is further made, pursuant to Section 8.1 of the License Agreement, that your client transfer and assign to my client any right, title and interest to the Licensed Marks which your client may have acquired as a result of its activities under the License Agreement. Meritage now desperately bootstraps that language into an assertion that the letter somehow automatically invokes the Federal Declaratory Judgment Act (Opp. 5,6), an assertion not made any place in its pleadings or prior arguments. Meritage has never sought a declaratory judgment. Moreover, it was Meritage that started the hostilities with Pidgeon's threatening letter of February 23, 2004, which said in part: It amazes me the positions you are willing to posit on behalf of your client. And it's unfortunate. You used to be a find and balanced counselor. * * * Meritage views this as a clear attempt to interfere with its business, as an anticipatory breach of critical agreements, and as an attempt, quite frankly, at extortion, by your clients and you personally. Your clients have until the end of today, Monday at 5:00 p.m., to withdraw their threats, drop the use of the Hancock name * * * and agree that they will adhere to their agreements. This needs to be in writing, signed by them, not you, and faxed to Larry Seay at Meritage. They are not going to like the alternative. Neither are you. When the Hancocks failed to render proper obeisance, this lawsuit was filed by Meritage the

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next day.
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Letters aside, reasonable minds can conclude nothing other but that Meritage
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irrevocably breached the License Agreement by the Email and its immediate subsequent
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conduct. Meritage cannot contend in good faith that changing "Hancock" to "Meritage" and
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causing "Hancock" to disappear almost entirely does not "detract from the Licensed Mark's
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repute, value, marketability, degree of public recognition or popularity."
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Finally, the License Agreement dispute is a solely state jurisdictional matter. Rare
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Earth, Inc. v. Hoorelbeke, 401 F.Supp. 26, 37 n.20 (S.D.N.Y. 1975; In Re Houbigant, 914
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F.Supp. 964, 990 (S.D.N.Y. 1995); Wortham v. K. Kahn, Inc., 932 F.Supp. 1176 (E.D.Mo. 1996). B. Interstate Commerce Is Not Implicated In This Case.

The original complaint does not mention "interstate commerce." Rick Hancock has never engaged in interstate commerce. (Exhibit A) Neither has Greg Hancock. (Declaration In Support of Motion to Dismiss) Wholly intrastate business concerns are not subject to federal trademark infringement claims. Horlick's Malted Milk Corp. v. Horluck's, Inc., 49 F.2d 13 (9th Cir. 1932). The Lanham Act was intended to make actionable the deceptive and misleading use of marks used in interstate commerce. Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 123 S.Ct. 2041, 2045 (2003); CCM Investors, Inc. v. Everest Development, Ltd., 840 F.Supp. 1304 (D.Minn. 1994). There is not a word of testimony or a single document produced thus far in this litigation the implicates interstate commerce. When the case was filed such commerce simply could not have been involved since Rick Hancock was not yet in business. This case is remarkably like Hertz Corp. v. Knickerbocker, 206 F. Supp. 305 (D.C.N.Y. 1962), where defendants formed a corporation named `Association of Hertz Licensees, Inc." Before defendants had commenced business, big Hertz sued, alleging Lanham Act violation and unfair competition. The court dismissed the case pursuant to Rule 12(b)(1) and (6) motions, saying:

" * * * I assume what plaintiffs wish to do here is nip in the bud any contemplated activities by the defendants, but the [Lanham] Act does not afford this type of 21 relief. * * * Since the first cause of action, based on trademark infringement, has been dismissed, the second cause of action for unfair competition must be dismissed. The ground 22 for finding pendent jurisdiction no longer exists."
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C.

Rick Hancock Was Not In Business When This Case Was Filed and Therefore Meritage Cannot Have Suffered Any Damages . As of 2/24/04 Rick Hancock owned no property at Sundance and had not yet

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pounded a nail. Earnest money on Parcel 7 was not placed until 9/04, close of escrow did not
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occur until 12/04, and there was no financing for the project until 3/05. (Exhibit A) Reasonable minds can conclude only that Meritage could not have suffered damages by reason of acts which did not occur until many months after filing. A plaintiff cannot recover future claimed lost profits based on speculation or conjecture, Rancho Pescado, Inc. v. Northwestern Mut. Life Ins. Co., 140 Ariz. 174, 186, 680 P.2d 1235, 1247 (App. 1984). Moreover, every witness who was asked the question testified that nothing the Hancocks had done or failed to do has caused Meritage to lose a single sale, and Roger Zetah, CFO of the Hancock division, who is responsible for accounting for sales at Sundance, testified as follows (Dep. 55,56): Q. Will you agree with me generally that Meritage has sold every house it has built as quickly as it could build them in the Sundance subdivision? A. I would agree with that.

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Q. Would you also agree with me that there isn't a single thing - - a single thing that you know about that either Rick Hancock or Greg Hancock has done to deter those sales or prevent those sales? A. Not that I'm aware of.

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There were no Meritage damages when this case was filed and there are none now.
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The so-called damages that Meritage now claims (Opp. 8,9) are the fanciful concoction of
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Meritage's counsel and a so-called "expert," to be discussed below.
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Finally, Meritage's statement that the Ninth Circuit "necessarily" decided that this
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Court has jurisdiction (Opp. 3) is as disingenuous as everything else about its case. At the
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time the Petition For Writ of Mandamus was brought, which concerned the state court
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dismissal issue, this Court had not yet specifically ruled on the jurisdictional issue, and the
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issue was not ripe for the Ninth Circuit. Moreover, the most likely reasons for the Ninth
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Circuit's one sentence ruling was counsel's failure to point out the Anti-Injunction Act and
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the Court's amendment changing the word "with" to "without" prejudice.
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II.
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MERITAGE'S BIG LIE - OLYMPIC/WESTWIND/RIATA.

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This topic permeates the entire case, from the dismissal issue to discovery, and the Court has been horribly misled by Meritage about it. Like "Baghdad Bob" of Iraqi Invasion infamy, and numerous politicians, Meritage's counsel believes that if a fraudulent assertion is made often enough it will become credible. In asking for belief of the fraud, he necessarily expects the Court to ignore documents that nobody else disputes, and to assume that the witness who knows the topic best, David Cornwall, would perjure himself twice in separate depositions in separate cases. Therefore, the Court needs to see the entire story of Olympic in black and white. Greg Hancock's employment agreement with Meritage contained two restrictive covenants. The first precluded him for five years (expiring at the end of this month) from engaging in any homebuilding business with 100 miles of Meritage. Meritage has adduced no evidence that he violated this covenant. The second precluded him for three years (expiring June, 2004) from home sales, land banking, or land development within 100 miles, with an exception that "Employee may be a passive investor, owning up to 25%, of any land banking or land development project." It is the second covenant that counsel falsely claims was violated. Meritage's fraudulent premise is that Greg Hancock was obligated to bring any type of land deal to it first - if so, why the exception to the second covenant, which allows him to do precisely the opposite? Olympic Properties, LLC, formed with Cornwall owning 75% and Hancock owning 25%,was filed on 6/29/01. Its stated purpose was "to invest in and hold real estate for investment." (Exhibit C) Because Hancock had more money than Cornwall, and footed more of the expenses than did Cornwall, he also got an option for $3,500 to increase his ownership to 60%. The Option Agreement, carefully drafted to comply with his restrictive covenant, stated that Hancock could exercise the option after 6/2/04 - the expiration date of the covenant - but that "Prior to June 2, 2004, Hancock shall have no right to acquire any additional Units of Olympic, or any other rights whatsoever with respect to Olympic, by
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virtue of this Option Agreement."(Exhibit D) Over the summer of `01 Cornwall, not Hancock, negotiated options for Olympic on land which eventually became Westwind and Riata West. Olympic sought development financing with Devon Properties, but because of 9-11the financing fell through.(Exhibit E) Cornwall testified both here and in Hancock's divorce that, shortly after the 11/16/0 letter to Devon, Hancock was "out of Olympic and everything that had to do with it." (Exhibit F) Hancock's withdrawal was formalized in an Olympic manager's meeting and by letter of 6/26/02 to Hancock whereby Cornwall returned Hancock's investment money and said:

"As a result of the loss of our primary financial partner, Devon Properties, we were unable to proceed as planned with Olympic Properties. No property or assets of any 10 kind were even purchased. * * * I will be filing a final tax return for Olympic for the year 2001, and dissolving the LLC. As you know, Olympic has no debt, or assets of any 11 kind." (Exhibit G, emphasis added.)
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Cornwall, without Hancock, kept plugging. He formed Cavalier, LLC, assigned the Westwind and Riata options from Olympic to Cavalier at the same option price, and went hunting for financing. He found it from Taro Properties, run primarily by Larry Cox (Taro was Meritage/Hancock Communities' land banker for years). Cornwall and Cox then formed Riata West, LLC, and Westwind Properties, LLC, to take advantage of the options. Then, because of Greg Hancock's referral of Cornwall to Steve Hilton, Meritage formed MTH-Cavalier, LLC, for the purpose of partnering with Cornwall and Cox in Westwind and Riata. Exhibit H shows MTH-Cavalier's corporate formation on 12/19/02, three months before Greg Hancock left Meritage. Monterey Homes is Steve Hilton's division of

Meritage, and the Agent, C. Timothy White, is Meritage's former board member, now General Counsel. Exhibit I shows MTH-Cavalier being added as a member to both Riata West and Westwind on 12/30/02. The LETTER OF UNDERSTANDING of the same date from Cornwall to Cox and Meritage's Hilton and Landon fleshes out the undertaking and demonstrates Meritage's involvement in the projects three months before Hancock left
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Meritage. Exhibit J is the first balance sheet for Westwind, showing Meritage's investment of capital of $2,108,433.51, and a Land Purchase cost of 9,945,390.15. There are 807 acres, yielding a cost per acre of about $12,300. The price to the Meritage/Cornwall/Cox partnership is virtually identical with Olympic's original option price per acre. Exhibit K is a Meritage "Acquisition Summary" describing "big" Meritage's purchase of Westwind from the Meritage/Cornall/Cox partnership for $35,100 per acre, i.e. the Meritage/Cornwall/Cox partnership sold it to "big" Meritage for a profit of about $23,000 per acre. Astonishingly, "big" Meritage tried to put its "expert," Greg Curry, up to saying that the difference in price per acre amounts to damages to "big" Meritage rather than profit to the Meritage/Cornwall/Cox partnership. Curry did not know the truth about the transaction until he read Hancocks' expert's report. (Exhibit L) He promised to amend his report on the subject, but no such amendment has been received to date. Meritage's diatribe at p.9 of its Opposition, where it likens Hancock's walking away from millions of Oympic dollars to a bank robber burning the cash - similar to counsel's blathering about "money laundering"at the last hearing - is no more credible than Baghdad Bob's statement, after the troops pulled down Saddam's statue, "The Americans are not there. They're not in Baghdad. There are no troops there. Never. They're not at all." Meritage's counsel wants the Court to believe that because Greg Hancock did not exercise his Olympic option, carefully drafted to comply with his obligations to Meritage, and instead resigned from Olympic instead of risking violation of those obligations, he made a secret deal with Cornwall to profit later. Counsel wants the Court to believe that Cornwall perjured himself in two depositions. He wants the Court to believe that Cornwall filed false tax returns for Oympic. He wants the Court to believe that even though experienced divorce lawyers and now the Meritage lawyers have pawed through every financial document related to Greg Hancock, some "smoking gun"about Olympic must be hidden somewhere. And he wants the Court to believe that even though the pivotal events in Olympic, Westwind and
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Riata took place before Greg Hancock left Meritage's employ, Hancock was somehow able to hide his early involvement in Olympic from Meritage. The "big lie" is just that. Baghdad Bob can make such statements for political and propaganda purposes, but a litigant and a lawyer have an obligation to the Court that prohibits such fabrication. Despite an eighteen month witch hunt for Olympic documents, there is not a single shred of evidence which substantiates Meritage's absurd claims about Olympic. The only conclusion that can be drawn is that they are sanctionable. III. MERITAGE'S SECOND AMENDED COMPLAINT STARTED THE CASE ANEW. Meritage asserts that because Greg Hancock's counterclaims were not substantially

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different from those asserted earlier, the cases declaring that plaintiff's amendments start a
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case anew and render preceding events a nullity (Hancock Mem. 7,8) are inapplicable.
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Notably, it does not cite a case which so holds, and ignores the fact that the critical element
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of the cited cases is the plaintiff's activity in amending, not how the defendant responds.
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Two things can be said with absolute certainty - if there was a case supporting Meritage's
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contention it would be cited, and had Greg Hancock not responded to its amendments
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Meritage would have claimed "Default!"
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Moreover, if it is true that there is no jurisdiction because of the facts existing at the
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time of filing, a dismissal or discontinuance of an action operates to annul orders, rulings or
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judgments previously made in the case, and prior rulings have no preclusive effect. 24 Am.
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Jur. 2d, Dismissal, § 91; Winchester Homes, Inc. v. Osmose Wood Preserving, Inc., 37
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F.3d 1053 (4th Cir. 1994; Doe v. Duke University, 118 N.C. App. 406, 455 S.E.2d 470 (1995).

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Rule 41(b) specifically exempts dismissals for lack of jurisdiction from the
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presumption that the dismissal is with prejudice, so a Rule 12(b)(1) dismissal is without
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prejudice. Such a dismissal leaves matters as if no action were ever filed, Noland v. Flohr
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Metal Fabricators, Inc., 104 F.R.D. 83,85 (D.Ark. 1984); In re Piper Aircraft Distrib. Sys. Antitrust Litig., 551 F.2d 213, 219 (8th Cir. 1977)( "[t]he effect of a dismissal without prejudice is to render the proceedings a nullity and leave the parties as if the action had never been brought"). More specifically, orders issued during the pendency of an action dismissed without prejudice are rendered void - the dismissal "carries down with it previous proceedings and orders in the action, and all pleadings, both of plaintiff and defendant, and all issues, with respect to plaintiff's claim." Id., at 219. IV. SUPPLEMENTAL JURISDICTION. Meritage claims that whatever the state of the License Agreement, the Court still has jurisdiction because of its "unfair competition" claims. That is simply not true. Since Meritage breached the License Agreement, it can have no claim to the Hancock name - Greg Hancock trademarked and used it long before Meritage purchased Hancock Communities and is the senior user. And as pointed out above, the facts provide Meritage no other nexus to federal jurisdiction. Where there is no Federal subject matter jurisdiction, the court has no discretion to retain supplemental or pendent state claims for adjudication because there never was a valid claim to which the state claims may be supplemental; the district court has no discretion to extend its Article III power, and must dismiss the state law claims without prejudice. Moore's Federal Practice 3d, § 106.66[1], 106-88; Textile Prods., Inc. v. Mead Corp., 134 F.3d 1481, 1485-86 (Fed.Cir. 1998) (where patent licensee's claim did not invoke Federal subject matter jurisdiction, court lacked jurisdiction to adjudicate state patent or contract claims). See, also, Herman Family Revocable Trust v. Teddy Bear, 254. F.2d 802,806(9th Cir. 2001)(a dismissal on the merits of federal claims gives the court discretion to retain supplemental jurisdiction, but a dismissal for lack of subject matter jurisdiction requires dismissal of all claims).

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RESPECTFULLY SUBMITTED this 22nd day of May, 2006. FRISBEE & BOSTOCK, PLC

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/s/ Robert M. Frisbee ROBERT M. FRISBEE Attorneys for Gregory Hancock The foregoing Reply to Responses was electronically filed and served this 22nd day of May, 2006, and copy thereof mailed to the Honorable Judge Silver. /s/ Robert M. Frisbee

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