Free Response to Motion - District Court of Arizona - Arizona

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Christopher R. Kaup, Esq. State Bar No. 014820
Third Floor Camelback Esplanade II 2525 East Camelback Road PHOENIX, ARIZONA 85016B4237 TELEPHONE: (602) 255-6000 FACSIMILE: (602) 255-0103

Counsel for Biltmore Associates, Trustee Of the Visitalk.com Creditors' Trust THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA BILTMORE ASSOCIATES, as Trustee for the Visitalk Creditors' Trust, Plaintiff, vs. PETER THIMMESCH, et al., Defendants. Plaintiff, Biltmore Associates, LLC ("Biltmore" or the "Plaintiff"), pursuant to the provisions of the Rule 56, Fed.R.Civ.P., hereby responds to the Motion for Summary Judgment (the "Motion") filed by Defendant Snell & Wilmer, L.L.P. ("S&W"). This Response is more fully supported by the attached Memorandum of Points and Authorities, its separate Controverting Statement of Facts (the "CSOF"),its separate CASE NO. CV 02-2405 PHX HRH

PLAINTIFF'S RESPONSE TO DEFENDANT SNELL & WILMER, LLP'S MOTION FOR SUMMARY JUDGMENT

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Additional Material Facts (the "AMF") and the declarations and other documents attached thereto. S&W is not entitled to summary judgment because there are numerous material issues of fact in dispute and S&W is not entitled to judgment as a matter of law.

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I.

INTRODUCTION. S&W assisted two corporate officers and directors of Visitalk.com, Inc., Peter

Thimmesch and Michael O'Donnell, with the "restatement of corporate history" - a cover up of earlier backdating of an alleged authorization and issuance to themselves of cheap

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warrants to purchase stock. S&W knew the truth: the warrants had been authorized and issued after the sale of stock to other investors and those investors held claims against the company. S&W put the truth into writing. However, S&W did not tell the truth to the disinterested members of Visitalk's Board of Directors. S&W also did not tell the truth to the affected investors in a letter and a release document it prepared. S&W also did not tell the truth about the warrants and other securities law problems in other securities offering documents drafted by them. S&W can not shift blame to Visitalk's prior counsel, Bryan Cave. Plaintiff's claims do not arise from the backdating of the warrants. Rather, they are based on S&W's own actions after they began representing the company at the end of June, 1999. S&W also can not take cover in Visitalk's business model or the "dot.com bust." The evidence is overwhelming that Thimmesch and O'Donnell breached their fiduciary duties to Visitalk. S&W aided and abetted those breaches of duty. Their actions fell far below

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the standard of care for lawyers. S&W also assisted Thimmesch and O'Donnell with artificially prolonging Visitalk's corporate life, after the date lawyers at the firm knew about its precarious financial condition, through additional offerings of securities, the proceeds of which were used, in part, to pay enrich S&W through payment of large legal

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fees. Those actions prevented the effective release of claims and caused the incurrence of additional claims and indebtedness which deepened Visitalk's insolvency. The damages caused to Visitalk by S&W, as measured by the amount of additional indebtedness which saddled the company as of the date of its bankruptcy, exceed $25,000,000.00.

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S&W's Motion indicates it has still not accepted the truth relating to its representation of Visitalk. There are a vast number of material facts in dispute as to all of Biltmore's claims against S&W. Summary Judgment must be denied.
II. RELEVANT FACTUAL BACKGROUND.

Visitalk was formed on September 3, 1998.

(CSOF ¶1).

According to the

testimony of Thimmesch, there were three "founders" of Visitalk: O'Donnell, Mark Cardwell and himself. (Id.) Each of them were officers and were issued shares of stock,

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in differing amounts, on September 4, 1998, based on Visitalk's original corporate records and an audit report prepared by Ernst & Young, L.L.P. (Id.) In September,

1998, Visitalk raised money through the sale and issuance of "Series A Preferred Stock" to individual investors (the "Series A Offering"). Visitalk sold Series B preferred stock to investors in October and November, 1998 (the "Series B Offering") and sold Series C preferred stock to investors 1999 (the "Series C Offering"). (AMF ¶3).

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Visitalk never had a commercially viable product or technology prior to the date of its bankruptcy filing on November 29, 2000. (AMF ¶10). Visitalk was insolvent

from November, 1998 through the date it filed for bankruptcy. (AMF ¶7). Visitalk's financial problems were caused by the lack of income from business operations, grossly excessive and wasteful spending, incompetent management by Messrs. Thimmesch and

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O'Donnell, breach of fiduciary duties by certain officers and lawyers at S&W, lack of financial and operational controls and the failure to address and obtain the release of claims against the company. (CSOF ¶3) Documents prepared by S&W in July and October 1999 and in March of 2000 establish that, in early November, 1999, Messrs' Thimmesch and O'Donnell purported to authorize and issue to themselves 7,650,000 warrants to purchase Visitalk's common stock at an exercise price of $0.1375 per share (the "Founders' Warrants") through an Action by Unanimous Consent of the Board In Lieu of a Meeting. (CSOF ¶14). In addition, S&W observed in an internal Office memorandum in October 1999, that,

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"[t]here is no known documentary evidence to support Michael's and Peter's assertions that, on September 12, 1998, acting in their respective capacities as the sole directors of Visitalk, they resolved to issue the Founder's warrants to themselves. . . . The Action by Unanimous Consent [relating to the Founders' Warrants identified in ¶14 of the SOF] is ineffective even today." (Id.) Mr. O'Donnell testified he did not disagree with "the fact from a paperwork standpoint" that the Founders' Warrants "were issued in early November." (Id.) S&W concluded that persons who purchased Series A preferred stock held claims arising from

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the attempted issuance of the Founders Warrants. (Id.) No disclosure was made by Thimmesch, O'Donnell and Visitalk to the investors who purchased preferred stock through the Series B Offering regarding the exercise price of the Founders Warrants, the claims held by investors who had purchased stock in the Series A Offering, whether Visitalk's securities offerings were in compliance with "Regulation D" of the securities laws, whether those offerings were "integrated" and exempt from registration under the securities laws, and the fact that a significant number

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of persons who purchased stock in the Series A Offering were "non-accredited" investors. (AMF ¶5). No disclosure was made by Thimmesch, O'Donnell and Visitalk to persons who purchased stock through Visitalk's Series C Offering and then by

Thimmesch, O'Donnell and S&W in subsequent private offerings of securities by
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Visitalk regarding the claims held by investors who had purchased stock in the Series A Offering, the claims held by investors in the Series B Offering, lawyers at S&W had advised or concluded that Visitalk's securities offerings may not have been in compliance with "Regulation D" of the securities laws, those offerings may have been "integrated" and not exempt from registration under the securities laws, and a significant number of persons who purchased stock in the Series A Offering were "non-accredited" investors.

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(AMF ¶6). As a result, all of the persons who purchased stock through the Series A Offering, the Series B Offering and the Series C Offering held claims (collectively the "Investor Creditors") against Visitalk. (CSOF ¶6). The terms of Visitallk's confirmed Chapter 11 Plan, the Disclosure Statement filed in support of the Plan, an Order Clarifying Article XII of the Confirmed Plan (the "Clarification Order"), entered by the Bankruptcy Court on December 15, 2004 and agreements executed by the Investor Creditors and the

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Reorganized Debtor after confirmation of the Plan recognize the fact that each of the Investor Creditors held actual claims against Visitalk and its Bankruptcy Estate. (Id.) S&W failed to inform the entire Board regarding the actual chronology and truth regarding the claimed issuance of the Founders' Warrants and provided the Board with false information about actions Messrs. Thimmesch and O'Donnell would take if the

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Board refused to recognize the validity of the Founders' Warrants. (CSOF ¶16).

Mr.

Donahey deleted the words from draft Minutes of a Board Meeting, dated November 24, 1999, describing a false explanation given to the Board ("a technical error") regarding the background of the Founders' Warrants. (CSOF ¶17). S&W prepared a letter and Release

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of Claims document for the purpose of soliciting the release of claims held by Series A investors relating to the Founders' Warrants. (CSOF ¶18). Those documents contained false and misleading information regarding the claimed authorization and issuance of the Founders' Warrants. (Id.) & (CSOF ¶23). S&W aided and abetted breaches of fiduciary duty by Messrs. Thimmesch and O'Donnell by the acts described above, failing to provide necessary information and

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advice regarding claims of past investors and securities law problems about which they had knowledge for inclusion in documents offering the sale of securities and the other matters described in detail in CSOF¶19, and which are, hereby, incorporated herein by this reference. (CSOF ¶19). S&W aided and abetted the Cardwell stock sale transaction and Visitalk suffered serious harm as a result of the diversion of the corporate opportunity to sell over $1,000,000 of Visitalk stock was transferred to Mr. Cardwell. (CSOF ¶31) S&W was at

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the center of the sale of Mr. Cardwell's stock through this transaction which a S&W lawyer warned exposed Visitalk to civil and criminal liability. (CSOF ¶34). The

agreement with Mr. Cardwell resulted in the transfer of a corporate opportunity to sell Visitalk stock, deprived Visitalk of over $1,000,000 and caused Visitalk's insolvency to be deepened. (CSOF ¶36).

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S&W had highly unusual power and control over the continued operations and existence of Visitalk. (CSOF ¶40 & 41). Mr. Mallery was a father figure to Messrs. Thimmesch and O'Donnell and gave business advice on how to run Visitalk to Thimmesch. Mr. Mallery addressed a group of Visitalk shareholders in December,

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1999, promoted opportunities for the company's business and stock value appreciation and downplayed a securities issue about which he had knowledge. shareholders they "were all about to be millionaires." (CSOF ¶40). He told the S&W had

knowledge about Visitalk's precarious financial condition and Visitalk would been required to cease operations if S&W stopped providing legal services to Visitalk relating to the offerings of securities. The bills of S&W were paid as a result of those securities

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offerings and Visitalk's corporate life was artificially prolonged and its insolvency was deepened. (CSOF¶41). The actions and inactions by S&W set forth above resulted in the failure to obtain the effective releases of claims held by the Investor Creditors, caused claims to arise against and debt to be incurred by Visitalk and artificially prolonged Visitalk's life and deepened its insolvency. (AMF ¶17). Visitalk suffered actual damages in an amount of not less than $25,146,000 as a direct, proximate and foreseeable result of actions and

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inaction of S&W set forth above. (AMF ¶18).
III. SUMMARY JUDGMENT STANDARD.

A motion for summary judgment should be granted only when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Rule 56(c), Fed.R.Civ.P.; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

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Jessinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Summary judgment will not lie if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id; Jessinger, 24 F.3d at 1130; Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). Summary judgment should be used with care and restraint.

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Hutchinson v. United States, 677 F.2d 1322, 1325 (9th Cir. 1982). The evidence should be reviewed in the light most favorable to the non-moving party. Hifai v. Shell Oil, 704 F.2d 1425, 1428 (9th Cir. 1983). Procedurally, the proponent of a summary judgment motion bears a "heavy burden to show that there are no disputed facts warranting disposition of the case without trial." In re Aquaslide `N' Dive Corporation, 85 B.R. 545, 547 (BAP 9th Cir. 1987). "When a defendant moves for summary judgment, the trial court must determine from the record whether `a fair-minded jury could return a verdict for the plaintiff on the evidence presented.' " United Steel Workers of America v. Phelps Dodge Corp., 865 F.2d 1539,1541-42 (9th Cir. 1989) (quoting from Liberty Lobby, 477 U.S. at 252)). If reasonable minds could differ as to the import of the evidence, a motion for summary judgment should not be granted. Liberty Lobby, 477 U.S. at 250-51. IV. SNELL & WILMER IS NOT ENTITLED TO SUMMARY JUDMENT ON ANY OF PLAINTIFF'S CLAIMS.
A. Plaintiff Can and Will Demonstrate that Snell & Wilmer Violated the Professional Standard of Care. 1. Plaintiff's Expert Witness on the Standard of Care is Qualified and his Testimony is Admissible.

Plaintiff's expert witness on the standard of care, Mr. Boyd Lemon, is eminently qualified to testify in this proceeding. He is the co-founder of the executive committee of

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the Lawyers Professional Responsibility Bar Association, a member of the American Bar

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Association Center for Professional Responsibility, a former lecturer on legal malpractice and ethics at the University of California at Riverside and is widely published on legal malpractice. Further, he has testified in several legal malpractice cases in Arizona. To assert that he is "not close to being qualified to provide the standard of care opinions that

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he proffers" is absurd. Every case involving a standard-of-care issue involves different facts and circumstances. Mr. Lemon is an expert in the standard of care issues that govern the malpractice claims in this case. He is not being offered as an expert in securities law. Moreover, it is for the fact finder to decide the weight to give his testimony. Plaintiff hereby adopts and incorporates additional legal argument on the

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admissibility of expert testimony contained in Plaintiff's Response to Defendant Snell & Wilmer's Motion in Limine to Exclude Testimony of Boyd Lemon or for Daubert Hearing and Plaintiff's Response to Defendant Snell & Wilmer's Motion in Limine to Exclude Testimony of Renee Jenkins or for Daubert Hearing. 2. Expert Witnesses are Not Required to Establish a Breach of the Standard of Care Where Negligence is Grossly Apparent to Even a Lay Person. Furthermore, "although expert testimony is generally required to establish the

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standard of care in a professional malpractice action, it is not necessary where the negligence is so grossly apparent that a lay person would have no difficulty recognizing it." Asphalt Engineers, Inc. v. Galusha, 160 Ariz., 134, 135-136, 770 P.2d 1180, 11811182 (App. 1989) (Emphasis added). In this case, for example, there is evidence that Snell & Wilmer defendants aided and abetted the directors and officers in their breach of

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fiduciary duty by participating in the creation of a fictitious business history, which helped cause the company to take on liabilities and deepened its already insolvent condition. Such gross negligence can be ascertained by a lay person and does not require expert testimony on the standard of care.

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The evidence concerning S&W's negligence in aiding and abetting the breaches of fiduciary duty by Thimmesch and O'Donnell relating to the Founders' Warrants issues is so readily apparent that a lay person would have no difficulty recognizing it as a negligent breach of a professional duty and expert testimony is unnecessary. For example, (1) Mr. Gaston, Visitalk's former controller and a

nonpracticing lawyer testified that, based on his time and experience working at the
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company, he believes Mr. Donahey and Mr. Mallery assisted Messrs Thimmesch and O'Donnell in breaching their fiduciary duties to Visitalk; (2) S&W failed to inform the entire Board regarding the actual chronology and truth regarding the claimed authorization and issuance of the Founders' Warrants and provided the Board with false information about actions Messrs. Thimmesch and O'Donnell would take if the Board refused to recognize the validity of the Founders' Warrants; (3) Mr. Donahey deleted language from a draft of the Minutes from the November 24, 1999 Board Meeting which

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would have disclosed to a reader that the explanation of the problems given to the Board ("a technical error") was false; (4) the letter and release sent to the Series A investors was prepared by S&W and contained false and misleading information regarding the claimed authorization and issuance of the Founders' Warrants. Mr. Kaplan testified he relied on the lawyers at S&W to prepare this letter and release; (5) S&W failed to provide

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necessary information and advice regarding the claims of past investors and securities law problems about which they had knowledge for inclusion in documents offering the sale of securities. Mr. Gaston relied on S&W to provide him with advice and information regarding the existence of claims held by earlier investors and past securities law

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problems in order to permit him to make proper disclosure of such matters to potential investors; (6) As a former director, Mr. Kaplan believes that S&W failed to adequately represent Visitalk because it did not include disclosure regarding the securities law problems identified by Mr. Donahey in a letter dated July 15, 1999, and the problems regarding the Founders' Warrants set forth in Mr. Donahey's July 28, 1999 letter in Updated Series C Confidential Information Statement; (7) Mr. Kaplan, as a former

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Visitalk director, believes that S&W failed to adequately perform their duties if they did not call Joe Richardson or other lawyers at Bryan Cave to verify the story of Messrs' Thimmesch and O'Donnell regarding the claimed issuance of the Founders' Warrants; (8) Eighth, according to Mr. Gaston, he does not recall S&W ever advising him, as Visitalk's Controller, regarding his fiduciary duties to creditors when Visitalk becam insolvent. To the best of Mr. Gaston's knowledge, S&W did not advise any of Visitalk's other officers about their fiduciary duties to creditors upon Visitalk's insolvency; (9)

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Messrs. Thimmesch and O'Donnell only made de minimus capital contributions into Visitalk and were spending other people's (the investors') money by causing Visitalk to spend money. Mr. Thimmesch breached his fiduciary duties through excessive and improper expenditure of corporate funds. No one at S&W recommended to him the need

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for policies and procedures to prevent breaches of fiduciary duties by excessive expenditures. (CSOF ¶19). These acts constitue such gross negligence that a lay person may readily determine that they fall below the applicable standard of care. As such, all the evidence of the

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breach of the standard of care should be submitted to the trier of fact.
B. Plaintiff's Claims are Not Barred by the In Pari Delicto Doctrine or the Wagoner Rule. 1. This court should refuse to reopen this already decided issue under the Law of the Case Doctrine. This Court already decided this issue over almost four years ago through its Order entered on August 12, 2003. That decision is law of the case as to the application of the "Wagoner" rule and the doctrine of in pari delicto. It is well established under the Law of the Case Doctrine in Arizona that "a court acts within its discretion in `refusing to reopen questions previously decided in the same case by the same court or a higher appellate court' unless `an error in the first decision renders it manifestly erroneous or unjust or when a substantial change occurs in essential facts or issues, in evidence,

P.3d 572 (App. 2004) (citing State v. Wilson, 207 Ariz. 12, ¶ 9, 82 P.3d 797, 800 (App.2004),
(quoting from Powell-Cerkoney v. TCR-Montana Ranch Joint Venture, II, 176 Ariz. 275, 278-79, 860 P.2d 1328, 1331-32 (App.1993)). See also Martinez v. Indus. Comm'n, 192 Ariz. 176, ¶ 14, 962 P.2d 903, 906 (1998). In U.S. v. Schaff, 948 F.2d 501, (9th Cir. 1991), the Ninth Circuit Court of Appeals held that the Law of the Case Doctrine applied to preclude one defendant from challenging on appeal a jury instruction previously upheld in an appeal by a codefendant. The same concept was

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applied by the Tenth Circuit in a Chapter 11 bankruptcy case, In re Integra Realty Resources, Inc., 354 F.3d 1246 (10th Cir. 2004). This was a case brought by a trustee of an unsecured

creditors' trust, seeking to set aside, as fraudulent transfers or unlawful dividends, the corporate debtor's spinoff of its stock to thousands of defendant shareholders. Certain defendants sought to challenge a settlement of the case. The Tenth Circuit held that its prior
decisions regarding two major issues of law with respect to other defendants on appeal ­ whether

Fidelity Capital Appreciation Fund and its counsel provided adequate representation for the class members, and whether notice afforded to the appellants was adequate to satisfy the dictates of the Due Process Clause ­ were dispositive under the Law of the Case Doctrine
of the appeal later brought by the codefendants.

[W]hen a rule of law has been decided adversely to one or more codefendants, law of the case doctrine precludes all other codefendants from relitigating the legal issue. The same applies to the claims of fellow class members ... We have emphasized that exceptions to this rule are rare. We will depart from the law of the case doctrine in three exceptionally narrow circumstances: (1) when the evidence in a subsequent trial is substantially different; (2) when controlling authority has subsequently made a contrary decision of the law applicable to such issues; or (3) when the decision was clearly erroneous and would work a manifest injustice." 354 F.3d at 1259 (Citations omitted). This court decided in this case, in an August 12, 2003 order denying motions to dismiss against Defendants Best, Hirschberg and Kaplan, that: 1) the Wagoner Rule is an

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application of the doctrine of in pari delicto to litigation instituted by bankruptcy trustees; 2) the ruling in Shearson Lehman Hutton, Inc v. Wagoner, 944 F.2d 114 (2d Cir. 1991) and the holding in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340 (3d Cir. 2001) are "at odds" with the Ninth Circuit's decision in FDIC
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v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995); 3) where there is a conflict between the circuits, this court is bound by the rulings of its circuit; and therefore 4) "the Wagoner rule is not applicable to the instant dispute." denied. As a result,the motions to dismiss were

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No controlling authority has since made a contrary decision of law applicable to this issue; no substantially different evidence has been developed; and this court's decision was not clearly erroneous. S&W makes the same arguments and relies upon the same cases that their codefendants made and raised four years ago. The court should apply the Law of the Case Doctrine and rule that this court's previous order on this issue applies to these defendants as well.

12 13 14 15 16 17 18 19 20 2. O'Melveny Was Correctly Decided And Applied

This court's decision four years ago noted that the Ninth Circuit in O'Melveny stated: "While a party may itself be denied a right or defense on account of its misdeeds, there is little reason to impose the same punishment on a trustee, receiver or similar innocent entity that steps into the party's shoes pursuant to court order or operation of law." O'Melveny, 61 F.3d at 19. The court in O'Melveny further explained, "A receiver, like a bankruptcy trustee and unlike a normal successor in interest, does not voluntarily step into the shoes of the bank; it is thrust into those shoes." Id. (quoting

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FDIC v. O'Melveny & Myers, 969 F.2d 744 (9th Cir. 1992)). This court's order of 2003 rightly termed the dicta in O'Melveny regarding bankruptcy trustees "unambiguous as to what the Ninth Circuit would hold in this matter." O'Melveny remains the law of the circuit which is dispositive of this issue.

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3. In Pari Delicto Does Not Apply if Parties are not Equally Guilty. The in pari delicto defense is narrow and limited under Arizona law. It does not apply when the parties are not equally guilty in their action. "This [in pari delicto] principle is founded upon the equitable doctrine of he who comes into court must come with `clean hands.' However, this rule applies only where the parties to the wrongful act

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are equally at fault. It need not apply where one party's wrong is slight in comparison with the other." Brand v. Elledge, 89 Ariz. 200, 204 360 P.2d 213, 216 (1961). See also Graham v. Shooke, 107 Ariz. 79, 80, 482 P.2d 446, 447 (1971) ("[W]here one party is only slightly guilty or has acted in good faith, the parties are not in pari delicto.") Arizona courts determine if the party seeking legal aid is in pari delicto with the other wrongdoer by looking to statutes. If the statute imposes a penalty on one party but

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not the other, the party not penalized will not be viewed as in pari delicto

with the

wrongdoer. United Bank & Trust Co. v. Joyner, 40 Ariz. 229, 236, 11 P.2d 829, 832 (1932). The Arizona Supreme Court adopted the general rule from 13 C.J. 499 § 443, quoting: [T]he complaining party is especially protected by the law where the agreement is not illegal per se but is merely prohibited, and the prohibition was intended for his protection, and in such case, not being in pari delicto, he is entitled to relief. The fact that the penalty is imposed on one of the parties alone shows clearly that the law does not consider them in pari delicto. Joyner, 40 Ariz. at 236, 11 P.2d at 832. In the case at bar, the Arizona statutes have codified the fiduciary duties of officers and directors, at A.R.S. §§10-830 and 10-842. Accordingly, based on Union Bank & Trust, Visitalk and the Plaintiff, as the Trustee of its successor (the Visitalk

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Creditors Trust), may not be found in pari delicto with its officers and directors upon whom the Arizona Corporate Code imposed statutory duties for the protection of the Plaintiff. Here, Visitalk, an inanimate creature of statute, and its Court created successor

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(the Trust) harmed by the actions of its officers and S&W, is the least guilty party in the situation. As such, the Plaintiff is not equally guilty, and the principle of in pari delicto does not apply. As a matter of law, therefore, the doctrine of in pari delicto, as applied in Arizona, is not a defense to the Plaintiff's claims. 4. The Adverse Interest Exception Bars These Defenses. Even if in pari delicto principles are, as a general matter, applicable to Visitalk and the Plaintiff, the adverse interest exception to that doctrine and the Wagoner rule

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provide that the agents' misconduct will not be imputed to the corporation where the agents "acted solely to advance their own interests, and not the interests of the debtor." In re Hampton Hotel Investors, L.P., 289 B.R. 563, 567 (Bkrtcy. S.D.N.Y. 2003). Where the exception may apply, a cause of action "cannot be dismissed on [a] motion." Id. at 568. The theory is that "where an agent, though ostensibly acting in the business of the principal, is really committing a fraud for his own benefit, he is acting outside of the scope of his agency." Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000).

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In Wight, the Second Circuit held that, where a complaint alleged the debtor was "dominated" by corrupt management who acted in their own interests and not in the interests of the debtor, the New York district court was correct in holding "that the complaint pled facts sufficient to trigger the adverse interest exception." Id. The same

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holds true in the case of Visitalk, where corrupt directors and officers dominated the company and drove it deeper into insolvency, with the help of Snell & Wilmer, directly contrary to the company's best interest. In In re Adelphia Communications Corp., 330 B.R. 364 (S.D.N.Y. 2005), the

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adverse interest exception allowed a creditors' committee to go forward with "claims against lenders that, in order to obtain lucrative fees, had allegedly aided and abetted fiduciary breaches by debtors' principals." The committee alleged that the agent banks made loans "that violated fundamental lending practices ... in order to obtain lucrative fees" and then "underwrote securities offerings for Adelphia and certain of its subsidiaries ­ without disclosing the fraud they knew suffused Adelphia's financial

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statements ­ to raise from public investors the money that the Debtors could have used to pay back the amounts ... borrowed from the agent banks." Adelphia, 330 B.R. at 371. The defendants asked the court to conclude that by reason of the Wagoner rule and in pari delicto doctrine, the committee's claims were barred. But the court concluded the committee's argument that the adverse interest exception applied because "the agents were acting in their own interests, and not those of the debtor" required factual inquiry. Id. at 379.

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Similarly, in the case of Visitalk, S&W obtained lucrative fees in connection with assisting Visitalk in remaining afloat through ongoing securities offerings. (CSOF 41). It did so despite knowing of Visitalk's precarious financial condition. (Id.). S&W's

interests, like those of the banks in Adelphia, were in collecting its own lucrative fees. Failure to tell the truth to the Board of Directors and the investors regarding the Founder'

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Warrants benefited only the insiders and S&W and did not benefit Visitalk. (CSOF 17 & 19). S&W has failed to show any benefit to Visitalk from those actions. Imputation is, therefore, improper. See Smith ex rel Boston Chicken v. Arthur Anderson, 175 F.Supp.2d 1180, 1198 ­ 99 (imputation of knowledge improper where no actual benefit to the

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corporation). Likewise, the interests Messrs. Thimmesch and O'Donnell in this case were adverse to those of Visitalk. S&W has provided no evidence of benefit to the corporation from their breaches of fiduciary duty and, as a result, their actions should not be imputed to the corporation. At a minimum, there are questions of fact as to whether the agents in this case were acting solely in their own interests, which were adverse to the interests of the corporation and the existence of any benefit to Visitalk therefrom.

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Accordingly, this issue is not appropriate for summary judgment.
C. Plaintiff's Claim for Damages Under the Theory of Deepening Insolvency is Firmly Rooted in Ninth Circuit Case Law. 1. The Investor Creditors Held claims Against Visitalk And The Bankruptcy Estate And Visitalk Was Insolvent.

S&W argues there was no insolvency and, as a result, the deepening insolvency claim must fail. That argument, based on the flawed premise that the Investor Creditors did not hold claims, is meritless. The Investor Creditors held claims recognized as valid by the Bankruptcy Court, Visitalk as the debtor in its Bankruptcy Case, Visitalk Capital

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Corporation (the postconfirmation "Reorganized Debtor") and the individual Investor Creditors themselves. (CSOF ¶6). Plaintiff's expert witness Renee Jenkins has exhaustively analyzed this issue in her Reports, attached to her Declaration, and is eminitely qualified to testify on the matter.

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Biltmore adopts and incorporates all of the authorities and arguments set forth in its Response to S&W's Motion In Limine To Exclude Testimony Of Renee Jenkins, Or For Daubert Hearing. Ms. Jenkins has concluded that the claims of the Investor Creditors

must be included in the calculations of insolvency in this proceeding. (CSOF ¶6).
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In addition, Allan Kaplan, a former director of Visitalk and a Series A and B investor, testified he has claims against Visitalk arising from the actions of Thimmesch and O'Donnell. A Series C investor, Steve DelBianco also testified he holds claims against Visitalk due to the failure to disclose claims relating to the Founders Warrants and other securities law problems. Mr. Gaston, Visitalk's former controller, testified that he understood the Investor Creditors held claims.

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Visitalk treated the Investor Creditors as holding claims in its confirmed Chapter 11 Plan of Reorganization and its related Disclosure Statement. The Bankruptcy Court acknowledged the existence of these claims in its Clarification Order. The vast majority of the Investor Creditors signed agreements in which they explicitly agreed they held claims against Visitalk and its Bankruptcy Estate which were treated in the confirmed Chapter 11 Plan. (CSOF ¶6). Even if the Court believes these claims were or are "contingent," it is clear they

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must be included in a calculation of total indebtedness and insolvency utilized in this proceeding1. See In re Sierra Steel, Inc., 96 B.R. 275, 279 (9th Cir. BAP 1989); In re Jacks, 266 B.R. 728, 739 (9th Cir. BAP 2001). Accordingly, there is absolutely no merit

The Bankruptcy Appellate Panel also observed that such claims may need to be discounted to their present or expected amount. Id., at 279.
1

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in S&W's assertions that the Investor Creditors have no claims and there is no proof of insolvency.
2. Fraudulent Conduct is Not Required in the Ninth Circuit to Make Out a Claim for Deepening Insolvency as a Measure of Damages.

S&W's argument that proof of fraudulent conduct is necessary for Plaintiff to prevail under the deepening insolvency theory is wrong. The Ninth Circuit Court of Appeals in Smith v. Arthur Andersen, 421 F.3d 989 (9th Cir. 2005) held that a complaint states a "cognizable harm "when it alleges defendants `prolonged' the firm's existence, causing it to expend corporate assets that would not have been spent `if the corporation [had been] dissolved in a timely manner, rather than kept afloat with spurious debt.' " Boston Chicken, 421 F.3d at 1004 (quoting from Official Committee of Unsecured Creditors v. R.F. Lafferty & Co. Inc., 267 F.3d 340, 350 (3d Cir. 2001). The Ninth Circuit agreed with the Third Circuit's decision in Lafferty that "prolonging an insolvent corporation's life through bad debt may dissipate corporate assets and thereby harm the value of the corporate property." However, it did not hold that fraudulent conduct was

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necessary for such a determination. Id. An Arizona bankruptcy court in In re Southwest Supermarkets, LLC, 325 B.R. 417 (Bankr.D. Ariz. 2005), applying Arizona law, held that deepening insolvency may provide a measure of damages in a case brought by a bankruptcy trustee, based on breach of fiduciary duty, negligence and assisting a breach of fiduciary duty. As in Southwest Supermarkets, Plaintiff in this case is asserting the theory of

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deepening insolvency as a measure of damages with respect to defendants who breached fiduciary duties and assisted in the breach of fiduciary duties. As in Boston Chicken,
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Plaintiff asserts that the actions of the defendants helped to artificially prolong the life of the insolvent Visitalk, thereby, harming the value of the corporate property. evidence overwhelmingly supports those claims. (CSOF ¶34 & 41 and AMF¶17). The case law requiring fraudulent conduct for a claim of deepening insolvency The

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comes from Pennsylvania law and the Third Circuit and springs from the "definition" of deepening insolvency in Lafferty as the "fraudulent expansion of corporate debt and prolongation of corporate life." Lafferty, 267 F.3d 340. However, outside the Third Circuit, other courts, in addition to the bankruptcy court in Arizona, have applied deepening insolvency theory to claims for negligence. In In re Flagship Healthcare Inc., 269 B.R. 721 (S.D.Fla. 2001), where a

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bankruptcy trustee bought a claim against a financial advisor alleging negligence, the trustee's complaint was sufficient to state a claim for damage to the debtor on a "deepening insolvency" theory. In In re LTV Steel Co. Inc., 333 B.R. 397, 421 (N.D. Ohio 2005). The court held that a defendant may be liable for "deepening insolvency" where defendant's conduct, "either fraudulently or even negligently, prolongs the life of the corporation, thereby increasing the corporation's debt and exposure to creditors." And in In re Greater Southeast Community Hospital Corp., 353 B.R. 324, 337 (Bankr.

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D.D.C. 2006), the bankruptcy court in the District of Columbia held that deepening insolvency injuries can occur as a result of management's negligence, just as easily as they can due to management's fraud. The court noted that "if deepening insolvency were treated as a separate cause of action rather than as a theory of harm, it would make sense to require a higher scienter than mere negligence ..." Id. But since the court treated

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deepening insolvency as a measure of damages, as the courts do in Arizona, negligence would suffice. 3. Defendants' Conduct Nevertheless Was Fraudulent Even if the Court believes "fraudulent conduct" is required in the Ninth Circuit for a claim of deepening insolvency, Plaintiff's have provided substantial evidence of

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fraudulent conduct on the part of S&W, although fraud is not the underlying tort. (CSOF ¶19, 40 & 41). S&W aided and abetted the Messrs. Thimmesch and O'Donnell with the "restatement of corporate history" to cover-up the backdating of the Founders Warrants. They prepared documents sent to the Investor Creditors and Visitalk's Board of Directors furthering the lies about that matter. One of their lawyers, despite having knowledge of Visitalk's profound securities law problems, even stood up at a shareholders' meeting

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and told them they were all about to be millionaires. (CSOF¶19 & 40). Black's Law Dictionary defines a fraudulent act as "conduct involving bad faith, dishonesty, a lack of integrity or moral turpitude." According to the Restatement

(Second) of Torts on fraudulent representations: "One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation."

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Rest. 2d Torts § 525 (1977). In Arizona criminal law, a "fraudulent representation" is one made "with reckless indifference as to its truth or falsity and made or caused to be made with the intent to deceive." A.R.S. § 13-2310. In U.S. v. McCollum, 802 F.2d 344, 347 (9th Cir. 1986), the

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district court told the jury that in order to find that the criminal defendant participated in a "fraudulent scheme," they must find that he "willfully and knowingly devised or participated in a scheme to defraud." The court defined a "fraudulent statement" as one "known to be untrue, or made with reckless indifference as to its truth or falsity, and

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made ... with the intent to deceive," and defined acting with intent to defraud as acting "willfully, and with the specific intent to deceive or cheat." The court said a defendant acted "knowingly" if he realized what he was doing and did not act through ignorance, mistake or accident. The jury instructions were upheld by the Ninth Circuit as valid and accurate. Courts in other states have specifically defined "fraudulent conduct." The

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Tennessee Supreme Court in Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 901 (Tenn.1992), defined fraudulent conduct as "that involving intentional misrepresentation of an existing, material fact" or which "produces a false impression, in order to mislead another or to obtain an undue advantage," and by which "another is injured because of reasonable reliance upon that representation." Likewise, in Pennsylvania, the jurisdiction from which the Lafferty definition of deepening insolvency springs, "fraudulent conduct" is defined as a "misrepresentation fraudulently uttered with the intent to induce the action

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undertaken in reliance upon it to the damage of the victim." Moser v. DeSetta, 527 Pa. 157, 163, 589 A.2d 679, 682 (1991). A person asserting fraud in Pennsylvania, therefore, must establish: (1) a misrepresentation, (2) scienter on the part of its maker, (3) an intention by the maker that the recipient will be induced to act, (4) justifiable reliance by the recipient upon the misrepresentation; and (5) damage to the recipient. Banks v.

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Jerome Taylor & Associates, 700 A.2d 1329, 1333 (Pa.Super. 1997). The appeals court in Texas defined "fraudulent conduct by an attorney" as "an act, omission or concealment done, made or affected as an attorney with a purpose, design or intent to carry out fraud or wrong." Rowland v. State, 55 S.W.2d 133, 137 (Tex.Civ.App. 1932).

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Plaintiff alleges and has provided substantial evidence attached to the CSOF establishing that S&W, Thimmesch and O'Donnell knowingly misled Visitalk's Board of Directos and the Investor Creditors about the Founders' Warrants and other securities law problems and S&W assisted Messrs. Thimmesch and O'Donnell with breaching their fiduciary duties and these fraudulent misrepresentations caused harm to Visitalk by way of its deepening insolvency. (CSOF ¶3, 14, 16 ­ 20, 22, 23, 25, 27, 31, 33 ­ 35, 40 & 41;

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and AMF 4 ­ 10, 12, 15, 17 & 18). In addition, Plaintiff's expert Renee Jenkins has opined that Visitalk actually was a "Ponzi scheme, a conclusion with which Mr. Schweigert, Plaintiff's managing member, agrees. (CSOF ¶15). These allegations

support a finding of "fraudulent conduct," regardless of the choice of torts pleaded by Plaintiff. Certainly, there are disputed issues of material fact as to these matters which preclude the granting of summary judgment as to such claims. 3. Stoll Does Not Bar These Claims Plaintiff is not asserting the claims of Visitalk's creditors as S&W appears to imply in their reliance on Stoll v. Gottlieb, 305 U.S. 165, 170-71, (1938). Rather, Visitalk asserted in the original Complaint and, postconfirmation of the Plan and transfer of the claims to the Trust, Plaintiff has asserted claims for damage done to Visitalk. As a result, Stoll is inapplicabl;e and that argument must fail.

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Moreover, in the nearly 70 years since Stoll, several courts interpreting it in various jurisdictions have declined to extend its holding to impose such a binding effect on all orders confirming reorganization plans. Stoll involved a collateral enforcement action brought in state court after entry of a bankruptcy court's confirmation order. It

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concerned the doctrine of res judicata and dealt with the question of whether a court's ruling can still be binding even if the court lacked jurisdiction. One court explained that Stoll stands for the proposition that a court's decision can be binding even though it lacked jurisdiction, not as authority for the binding effect of an order confirming a plan. See In re Reef Petroleum Corp., 99 B.R. 355, 359 (Bkrtcy. W.D.Mich. 1989); see also Hampton v. Bank of Lafayette, 578 S.E.2d 486 (Ga.App. 2003) (Confirmation order in

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promissory-note maker's Chapter 13 bankruptcy case did not bar holder of notes from bringing action to collect against guarantor, although holder did not file notice of claim in bankruptcy case, and although confirmed bankruptcy plan would have enabled holder to have obtained full payment, since the plan did not address the issue of the guarantor's liability on notes.); Eubanks v. CBSK Financial Group, Inc., 385 F.3d 894 (6th Cir. 2004) (Borrowers' inadvertent failure to include a potential lender liability claim in their previous bankruptcy adjudication did not preclude them from pursuing claim.).

20 21 22 23 4. There Is Substantial Evidence Of Proximate Cause In The Record And Proximate Cause Is an Issue For The Trier Of Fact.

Plaintiff has provided substantial evidence of proximate causation. Summary judgment may not be granted on that ground. (CSOF¶3, 6, 19, 31, & 41; AMF ¶17 &

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18). Indeed, Mr. Gaston testified that Visitalk would have been forced to shut-down and

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liquidate had S&W not continued to prepare new offerings of securities which deepened Visitalk's insolvency. (CSOF41). AMF¶17 & 18) "[P]roximate cause is a jury question unless reasonable persons could not differ on that issue." Desilva v. Baker, 208 Ariz. 597, 600, 96 P.3d 1084, 1087 (App. 2004)

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(citing Tennen v. Lane, 149 Ariz. 94, 97, 716 P.2d 1031, 1034 (App. 1985); Markowitz v. Ariz. Parks Bd., 146 Ariz. 352, 358, 706 P.2d 364, 370 (1985). See also Brand v. J.H. Rose Trucking Co., 102 Ariz. 201, 427 P.2d 519 (1967) (When there is any evidence of negligent conduct which reasonable people might infer was one of the proximate causes of injury, the cause must be submitted to the jury.). In Tennen, the Arizona Court of Appeals reversed a directed verdict in a legal

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malpractice action because the plaintiff's evidence created a genuine question of material fact on whether the attorney's negligence proximately caused her damages. The court stated that it was not necessary for the plaintiff to prove what would have happened but for the negligence, but only to present evidence sufficient to create a question of fact for the jury on causation. Here, there is substantial evidence that S&W aided and abetted breaches of fiduciary by Messrs. Thimmesch and O'Donnell, at a time Visitalk was already insolvent,

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which allowed Visitalk to continue to operate and caused the incurrence of substantial additional indebtedness. (See e.g. CSOF19 & 41 and AMF 17 & 18). Not surprisingly, the work done by S&W on securities offerings enabled Visitalk to continue in existence long enough to pay hundreds of thousands of dollars of legal fees to S&W, but, in the end harming the by deepening its insolvency and decreasing its value. (See e.g. CSOF19 &

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41 and AMF 17 & 18). Clearly, there is sufficient evidence demonstrating the existence of a disputed regarding whether the actions of the S&W were a proximate cause of harm to Visitalk.
D. In the Ninth Circuit, Malpractice Claims are Transferable to a Bankruptcy Trustee Under Federal Law, and the Trustee Has Standing to Bring Them. 1. The Claims are Assignable Under Federal Law.

The Ninth Circuit Court of Appeals has determined that "regardless of whether a personal injury claim is transferable or assignable under state law, such claims become part of the bankruptcy estate" under federal law, specifically 11 U.S.C. § 541(a)(1) (1982). Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 709 (9th Cir. 1986). That federal law, the court noted, "defines property of the bankruptcy estate to include `all legal or equitable interests of the debtor in property as of the commencement of the case.' The scope of Section 541 is broad, and includes causes of action." Id.
In re Ellwanger, 140 B.R. 891 (Bkrtcy. W.D.Wash. 1992), a case which applied Sierra Switchboard's holding to a case involving legal malpractice claims, is most instructive. In Ellwanger, the bankruptcy court held that a trustee was not estopped from bringing a legal malpractice claim despite California's public policy under state law against the assignment of legal malpractice claims. [F]ederal bankruptcy law, rather than assignability or public policy

under state law determines whether malpractice claims are property of the estate, and California's nonassignability public policy appeared to be the sort of nonbankruptcy restriction on transfer which Congress invalidated with the statute ... Congress, in § 541(c), unambiguously invalidated restrictions such as California's nonassignability of legal malpractice claims.
Id. at 900-01.

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In Thurston v. Continental Cas. Co., 567 A.2d 922, 923 (Me. 1989), a legal malpractice

claim against lawyers who had defended a products liability suit was assigned to the products-liability plaintiff, after judgment was obtained in excess of the original defendant's insurance policy limits. The court held that the assignment was proper.

5 6 7 8 9 10 11 12 13 14 15 16 Plaintiff has standing under federal law to pursue these claims. 17 18 19 20 21 22 23 24 25 26 2. The Trustee has Standing to Bring a Legal Malpractice Claim Where the Malpractice Deepened the Corporation's Insolvency, Such that Injury to the Corporation Resulted. The Ninth Circuit in Loyd v. Paine Webber, 208 F.3d 755 (9th Cir. 2000), applying the rule from Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992), held that a bankruptcy trustee had standing to bring a legal malpractice claims where the law firm was alleged to have engaged in conduct that deepened the company's insolvency.

We hold first that there is no reason to prohibit the assignment of a legal malpractice claim in a situation such as this. We are not here confronted with the establishment of a general market for such claims; this assignee has an intimate connection with the underlying lawsuit. ... The argument that legal services are personal and involve
confidential attorney-client relationships does not justify preventing a client ... from realizing the value of its malpractice claim in what may be the most efficient way possible, namely, its assignment to someone else with a clear interest in the claim who also has the time, energy and resources to bring the suit. The Arizona bankruptcy court on August 27, 2004, confirmed the Visitalk Plan of Reorganization, which properly assigned to the Creditor's Trust all remaining causes of action, including the pending action against Snell & Wilmer. Plainntiff is the court appointed trustee of the Trust. There was nothing improper under federal law with respect to this assignment, and

Three elements must be satisfied to meet the minimum constitutional requirements for standing ... : injury in fact, causation and redressability. ... The complaint alleges that the law firm failed to
discover the fraudulent scheme and take action to prevent the insolvent

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company from continuing to sell insurance in California. This harmed the company by allowing it to incur further liability which it would not otherwise have had. Although this liability exists largely because of the fraudulent conduct of the insiders, the complaint alleges that the period of insolvency was extended, and the company's liability thereby increased, because the law firm helped the company continue to operate. The injury was thus caused, in part, by the allegedly negligent conduct of the law firm. `At the pleading stage, general factual allegations of injury resulting from the defendant's conduct may suffice' to establish causation for the purpose of standing. 208 F.3d at 758 (quoting from and citing Lujan, 504 U.S. at 561) (Emphasis supplied.).

The Ninth Circuit in Boston Chicken cited to the Loyd case in holding that the trustee in Boston Chicken had standing because the claim alleged harm to the corporation -- dissipation of assets -- caused by defendants' conduct. 421 F.3d at 1006. In Metropolitan Creditors' Trust v. Pricewaterhouse Coopers, LLP, 463 F.Supp.2d 1193 (E.D.Wash 2006), this Ninth Circuit holding was applied to a Creditors'

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Trustee. In Metropolitan, the Trustee for a Creditors' Trust, formed as a result of a Plan of Reorganization to administer post-confirmation responsibilities for the benefit of creditors, had standing to bring a claim against the debtors' former auditors for professional negligence, relying on the Ninth Circuit holding in Boston Chicken. In determining whether the trustee has standing to bring a particular claim, courts should focus on `whether the Trustee is seeking to redress injuries to the debtor itself caused by the defendants' alleged conduct.' In Smith v. Arthur Andersen, the bankruptcy trustee for Boston Chicken brought a professional malpractice suit against the debtor's former auditors ... The Ninth Circuit held that misuse of a company's assets `qualifies as an injury to the firm which is sufficient to confer standing upon the trustee.' 463 F.Supp. at 1200 (quoting from Boston Chicken, 421 F.3d at 1002-03).

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In Visitalk's Bankruptcy case, its Plan provided as follows:
The Plan explicitly provides as follows:

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Effective on the Effective Date, the Creditor's Trustee will be the representative of the Estate as that term is used in Bankruptcy Code §1123(b)(3)(B) and will have the rights and powers provided for in a Bankruptcy Code in addition to any rights and powers granted herein to pursue the Causes of Action. In his or her capacity as the representative of the Estate, the Creditor's Trustee will be the successor in interest to the Debtor with respect to the Causes of Action. *** (k) Transfer of Trust Property to the Creditor's Trust. Except as otherwise provided in the Plan, title to the Trust Property, including the Causes of Action and the $50,000 from the Causes of Action Proceeds, will pass to the Creditor Trust on the Effective Date free and clear of all claims and equity interest in accordance with Bankruptcy Code §1141.

(CSOF ¶6). Thus, the Plan explicitly provides that which Congress contemplated would occur under 11 U.S.C.§1123(b). Contrary to S&W's assertion, the assignment of the claims to the Trust was for the sole and exclusive benefit of the creditors of the Visitalk Bankruptcy Estate, the professionals representing the Trust to recover on the claims and the fees and costs of Biltmore, as the Trustee of the Trust. .

13 14 15 16 17 18 19 20 21 22 23 24 E. S&W Met the "General Awareness" Element Required to Bring a Claim for Aiding and Abetting, and their Actions, Taken Collectively, Present a Question For The Trier Of Fact Whether They Provided "Substantial Assistance".

All of the claims and causes of action held by the Bankruptcy Estate were actually assigned to the Trust and addressed by the Bankruptcy Court, pursuant to the Confirmation Order, the Appointment Order, and the Clarification Order. The causes of action of Visitalk, as outlined above, were properly assigned to the Trust. Biltmore, as the Trustee of the Trust, has standing to bring it.

Claims of aiding and abetting torts require three elements: 1) the primary tortfeasor must commit a tort that injures plaintiff, 2) the defendant has knowledge the primary tortfeasor's conduct constitutes a breach of duty and 3) the defendant must

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substantially assist or encourage the primary tortfeasor in the achievement of the breach.

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Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 488, 38 P.3d 12, 24 (Ariz. 2002) (Emphasis added.). S&W, in their Motion, do not dispute that the first element is met. As to the second element, the court in Wells Fargo elaborated that: "A showing of actual and

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complete knowledge of the tort is not uniformly necessary to hold a secondary tortfeasor liable under an aiding and abetting theory." 201 Ariz. at 488, 38 P.3d at 26 (citing FDIC v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423 (8th Cir. 1989) [emphasis supplied]. " `The knowledge requirement' can be met, `even though the [defendant] may not have known of all the details of the primary fraud -- the misrepresentations, omissions, and other fraudulent practices.' " Id. (quoting Aetna Cas. and Sur. Co. v.

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Leahey Const. Co., Inc., 219 F.3d 519, 536 (6th Cir. 2000) (citing Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1012 (11th Cir. 1985). In First Interstate, the court held that a defendant may be held liable for aiding and abetting a fraud if that defendant has a "general awareness" of the fraudulent scheme. The court further held that "general awareness" of the fraudulent scheme can be established though circumstantial evidence. 885 F.2d 423. The First Interstate court also held that the facts (evidence indicated that defendants suspected bank accounts were

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being misused and its customer might be "a crook") raised inferences sufficient to take the issue to the jury under the applicable preponderance of the evidence standard." Here, there is evidence that S&W had more than a "general awareness" of the breaches of fiduciary duty by the D&O defendants and the fraudulent scheme in which they were engaged. Documents and deposition testimony establish that lawyers at S&W knew the truth about the Founders Warrants but failed to tell the Board of Directors and
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Investor Creditors that truth, failed to include disclosure of securities law problems about which they had knowledge in securities offerings drafted by the firm, knew about Visitalk's precarious financial situation, yet continued to assist the company with additional sales of securities which artificially prolonged Visitalk's life and deepened its insolvency. At a minimum, the evidence demonstrates the existence of numerous

disputed issues of material fact and raises inferences sufficient to take the issue to the trier of fact. In determining whether defendants' conduct met the third element of aiding and abetting, substantial assistance or encouragement of the breach, the Arizona Supreme Court in Wells Fargo quoted from the Eighth Circuit's decision in Metge v. Baehler, 762 F.2d 621, 630 (8th Cir. 1985): "Although the facts ... are unremarkable taken in isolation, we find that taken together, they present what should have been a jury issue on the question of aiding-and-abetting liability." 201 Ariz. at 488, 38 P.3d at 26. Metge involved a suit by investors against a lender for aiding and abetting an issuer of securities who ultimately filed for bankruptcy. The investors alleged that the lender engaged in a series of banking strategies to keep a failing securities issuer in business. In evaluating the record, the court sought to determine whether the lender knew that the thrift certificates being issued were worthless and that because of the lender's involvement, the financial life of the issuer was prolonged in the lender's own interest and at the expense of the certificate holders. The court noted that, viewed separately, most of the banking transactions were unremarkable events, but viewed in conjunction with other evidence, they suggest an unusual pattern of extraordinary attempts to prolong the issuer's financial viability to the detriment of the investors. Id. As in Metge, Plaintiff alleges that S&W took actions that prolonged the life of the insolvent Visitalk, to provide itself with financial gains (payment of substantial legal fees)at the expense of the corporation. The evidence of the actions of Snell & Wilmer

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with respect to Visitalk, taken collectively, suggests a pattern of behavior designed to do just that. F. There is Substantial Evidence that S&W Was An Insider Under Federal
Law and The One-Year Preference Period Is Applicable In This Case.

11 U.S.C. § 547(b)(4)(B) permits a bankruptcy trustee or a debtor in possession to avoid any pre-petition transfer by the debtor that occurs "between ninety days and one year before the date of filing of the Petition, if such creditor at the time of such transfer was an insider." 11 U.S.C. § 101(31)(B) states that an "insider" includes ­ if the Debtor is a corporation ­a "person in control" of the Debtor. Additionally, the Ninth Circuit Bankruptcy Appellate Panel has recognized that, There are two distinct types of insiders, those entities specifically mentioned in the statute, ... [and] those not listed in the statutory definition, but who have a "... sufficiently close relationship with the debtor that ... conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor." ... [I]nsider status may be based on a professional or business relationship with the debtor, in addition to the Code's per se classifications, where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties. In re Enterprise Acquisition Partners, Inc., 319 B.R. 626, 631 (9th BAP 2004) (quoting Wilson v. Huffman, 712 F.2d 206, 210