Free Response to Motion - District Court of Arizona - Arizona

1 2 3 4 5 6

BEUS GILBERT PLLC
ATTORNEYS AT LAW

4800 NORTH SCOTTSDALE ROAD SUITE 6000 SCOTTSDALE, ARIZONA 85251 TELEPHONE (480) 429-3000

Leo R. Beus / 002687 ­ [email protected] Scot C. Stirling / 005757 ­ [email protected] Steven E. Weinberger / 015349 ­ [email protected] Attorneys for Individual Plaintiffs and Trustee

7 8 9 10 11

STEVE BROWN & ASSOCIATES, LLC
1414 E. INDIAN SCHOOL ROAD, SUITE 200 PHOENIX, ARIZONA 85014-2412 TELEPHONE (602) 264-9224

Steven J. Brown/010792 ­ [email protected] Co-Counsel for Trustee UNITED STATES DISTRICT COURT

12 DISTRICT OF ARIZONA 13 14 15 16 17 18 19 20 21 22 23 24 25
Case 2:02-cv-02099-RCB Document 469 Filed 03/08/2007 Page 1 of 8

DIANE MANN, as Trustee for the Estate of LeapSource, Inc., CHRISTINE V. KIRK, et al., Plaintiffs, vs. GTCR GOLDER RAUNER, L.L.C.; et al., Defendants.

Case No.: CIV-02-2099-PHX-RCB

PLAINTIFFS' SUR-REPLY MEMORANDUM IN OPPOSITION TO GTCR MOTION FOR SUMMARY JUDGMENT ON FIDUCIARY DUTY AND OTHER REMAINING CLAIMS (DOCKET 347) PER COURT ORDER DATED 26 FEBRUARY 2007 (Assigned to Hon. Robert C. Broomfield)

MICHAEL MAKINGS, Counterclaimant, vs. LEAPSOURCE, INC., et al., Counterdefendants.

1 2 3 4 5 6

Pursuant to the Court's Order dated 26 February 2007, Plaintiffs submit the following Sur-Reply Memorandum in opposition to the GTCR Motion for Summary Judgment On Fiduciary Duty and Other Remaining Claims (Docket No. 347). As instructed by the Court's Order, this Memorandum will focus on the standing issue discussed in Part I.A of the GTCR Motion, and the applicability, if any, of the decision in Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 2006 WL 846121 (Del.Ch. Mar. 28, 2006) to that issue.

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 There is in the record, at page 4 of the Plaintiffs' Response (Docket No. 237) to the Defendants' "Motion to Bar Plaintiffs From Asserting Undisclosed Damages Claims" (Docket No. 233), one example of the Individual Plaintiff's damage claims (in addition to their individual severance claims); other individual damage claims were itemized in answers to interrogatories attached as Exhibits to that Motion (Docket No. 233). Those severance and bonus claims, or other claims for payment of promised compensation (as in the case of Mr. Gilman), are simply not the company's claims or damages. They belong to the Individual Plaintiffs under the Court's formulation in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) (who suffered the alleged harm ­ the corporation or the suing stockholder individually ­ and who would receive the benefit of the recovery or other remedy?), cited by the court in Big Lots, 2006 WL 846121 at *6* n. 38.
Case 2:02-cv-02099-RCB Document 469 2 Filed 03/08/2007 Page 2 of 8
1

At the outset, the Plaintiffs remind the Court that, in their Response (Docket No. 417) to the GTCR Motion, at pages 7-8, the Plaintiffs explained that their fiduciary duty claims were not based solely on their status as minority shareholders, but were also based upon their status as creditors of LeapSource, which was insolvent or operating in the zone of insolvency. The analysis of the Individual Plaintiffs' standing to assert direct claims against the Defendants' must take account of the fact that the Individual Plaintiffs have standing to assert claims for breaches of fiduciary duties owed to them as creditors of LeapSource, and for individualized damages.1

1 2 3 4 5 6

In their Reply Memorandum (Docket No. 449) at 9, the Defendants cited Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 2006 WL 846121 (Del. Ch. Mar. 28, 2006), without noting that the opinion was unpublished.2 Nothing in the court's unpublished

opinion in Big Lots suggests any change in the law announced by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004), nor any intention to amend or overrule Production Resources Group v. NCT Group, 863 A.2d

7 8 9 10 11 12 13 14 15 16 228-230, and other facts indicating personal animosity toward Ms. Kirk in particular (e.g., 17 18 19 20 21 22 23 24 25 Delaware Supreme Court Rule 17 has been amended to permit orders of the Delaware Supreme Court to be cited as precedent. See New Castle County v. Goodman, 461 A.2d 1012, 1013 (Del. Supr. 1983) (citing rule change). Big Lots was decided by the Court of Chancery. The 1984 Commentary to Rule 17 states: "The purpose of this rule change is to make clear that orders of this Court may be cited as precedent in unrelated cases in this Court and in any other Delaware Court, which was the intent of the amendment of Rule 17(a), effective April 15, 1983." (Emphasis added.)
Case 2:02-cv-02099-RCB Document 469 3 Filed 03/08/2007 Page 3 of 8
2

772 (Del. Ch. 2004). The analysis by the Court in Big Lots ultimately turned upon the conclusion that, "[i]n summary, Big Lots has pleaded facts that could support a finding of injury to the corporation alone." Id. at *8* (emphasis added). The pleadings in this case allege facts that would support a jury's conclusion that GTCR's reaction to the "Gilman Memorandum," for example ­ discussed in detail in the Plaintiffs' Statement of Facts in opposition to the GTCR Motion, Docket No. 417 beginning at ¶¶ 142-155, including retaliating against Individual Plaintiffs ¶¶ 156-163, and attempting to coerce releases from Mr. Gilman and Ms. Kirk ¶¶

Fourth Amended Complaint ¶ 297 threat to make Kirk "radioactive" in the finance and

1 2 3 4 5 6

accounting communities, and to prevent her from ever getting a job again in those fields).3 See also Plaintiffs' Memorandum in Support of Motion for Reconsideration (Docket No. 466) at p. 10 ("The evidence supports an inference that K&E was involved with GTCR's attempts to intimidate or coerce Christine Kirk and Tim Gilman into releasing claims against GTCR. An April 26, 2001 file memorandum transcribing a voice mail message to Stephen M. Savage of Fennemore Craig from David Eaton ­ purportedly on behalf of LeapSource,

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In their Response to the GTCR Motion (Docket No. 417) at p. 17, the Plaintiffs referred to this evidence and noted that "[T]he GTCR defendants' reaction to the Gilman Memorandum in February 2001 belies the moderate tone adopted in the GTCR Motion. GTCR reacted angrily and destructively to the Gilman Memorandum, and in less than a month LeapSource was destroyed." (Emphasis added.)
Case 2:02-cv-02099-RCB Document 469 4 Filed 03/08/2007 Page 4 of 8
3

but demanding a release for GTCR ­ made a threat that was subsequently acted upon with a letter that attempted to retroactively characterize Ms. Kirk's termination by LeapSource as "for cause."). The opinion in Big Lots acknowledges that evidence of such animus toward a particular creditor (or creditors) is a factor bearing upon the right to assert direct claims for breaches of fiduciary duty: The Production Resources court rejected any bright line test for determining whether claims are derivative or direct when brought by the creditor of an insolvent corporation. Although the court recognized that most such claims are likely to be derivative claims, under the standard in Tooley, the court acknowledged there might nonetheless be some circumstances in which "directors display such a marked degree of animus towards a particular creditor with a proven entitlement to payment that they expose themselves to a direct fiduciary duty claim by that creditor." 863 A.2d 772, 798 (Del. Ch. 2004) (emphasis added).

1 2 3 4 5 6

We do not believe that the unpublished decision in Big Lots in any way modifies the prior law as stated in Tooley or Production Resources. Moreover, the damage claims asserted by the Individual Plaintiffs in this case fall within the class of cases, contemplated by the court in Production Resources and acknowledged by the court in Big Lots, where the claims of particular creditor plaintiffs are based at least in part upon conduct aimed specifically at those plaintiffs, and motivated by animus that is not common to all creditors

7 8 9 10 11 12 13 14 15 16 Big Lots acknowledged that there is no "bright line" to distinguish between direct and 17 18 19 20 21 22 23 24 25
Case 2:02-cv-02099-RCB Document 469 5 Filed 03/08/2007 Page 5 of 8

(or to all shareholders). The evidence in the record will support a conclusion that the GTCR Defendants were motivated by malice and animus toward the Individual Plaintiffs ­ particularly toward Ms. Kirk and Mr. Gilman as the author of the Gilman Memorandum which confronted the GTCR Defendants with evidence of their breaches of fiduciary duties, and also toward the other Individual Plaintiffs because of their identification with Ms. Kirk ­ and the Plaintiffs believe that those facts should be determined by a jury. To the extent that the standing issue discussed by the court in Big Lots is perceived to be unsettled or uncertain (and the court in

derivative claims, but that the distinction turns upon the particular facts of each case), the issue in this case should be decided on a complete record made at trial.

[SIGNATURE ON FOLLOWING PAGE]

1 2

Respectfully submitted this 8th day of March, 2007. BEUS GILBERT PLLC

3 By 4 5 6 7 8 STEVE BROWN & ASSOCIATES, LLC 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Case 2:02-cv-02099-RCB Document 469 6 Filed 03/08/2007 Page 6 of 8

s/ Scot C. Stirling Leo R. Beus Scot C. Stirling Steven E. Weinberger 4800 North Scottsdale Road Suite 6000 Scottsdale, AZ 85251 Attorneys for Individual Plaintiffs and Trustee

Steven J. Brown 1414 E. Indian School Road, Suite 200 Phoenix, AZ 85014 Co-Counsel for Trustee

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Case 2:02-cv-02099-RCB

CERTIFICATE OF SERVICE I hereby certify that on 8 March 2007, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Kevin A. Russell David S. Foster Nicholas B. Gorga LATHAM & WATKINS LLP [email protected] [email protected] [email protected] Attorneys for Defendants GTCR Golder Rauner, LLC, GTCR Fund VI, LP, GTCR VI Executive Fund, LP, GTCR Associates VI, Joseph P. Nolan, Bruce V. Rauner, Daniel Yih, David A. Donnini and Philip A. Canfield Don P. Martin Edward A. Salanga QUARLES & BRADY STREICH LANG, LLP [email protected] [email protected] Attorneys for Defendants GTCR Golder Rauner, LLC, GTCR Fund VI, LP, GTCR VI Executive Fund, LP, GTCR Associates VI, Joseph P. Nolan, Bruce V. Rauner, Daniel Yih, David A. Donnini and Philip A. Canfield Merrick B. Firestone Veronica L. Manolio RONAN & FIRESTONE, PLC [email protected] [email protected] Attorney for Defendant Michael Makings

Document 469 7

Filed 03/08/2007

Page 7 of 8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Case 2:02-cv-02099-RCB Document 469 8 Filed 03/08/2007 Page 8 of 8

Richard A. Halloran Jon Weiss LEWIS & ROCA, L.L.P. [email protected] [email protected] Attorneys for Defendants David Eaton and AEG Partners LLC John Bouma James R. Condo Patricia Lee Refo SNELL & WILMER LLP [email protected] [email protected] [email protected] Attorneys for Kirkland & Ellis Steven J. Brown STEVE BROWN & ASSOCIATES, LLC Co-Counsel for Trustee [email protected]

__s/ Scot C. Stirling___