Mann v. Gtcr Golder Rauner, L.L.C.

• Decision Date: 28 March 2006
• Docket Number: No. CIV. 02-2099-PHX RCB.,CIV. 02-2099-PHX RCB.
• Citation: 425 F.Supp.2d 1015
• Parties: Diane MANN, as Trustee for the Estate of LeapSource, Inc., et al. Plaintiffs, v. GTCR GOLDER RAUNER, L.L.C., a Delaware limited liability company., et al., Defendants.
• Court: U.S. District Court — District of Arizona

425 F.Supp.2d 1015

Diane MANN, as Trustee for the Estate of LeapSource, Inc., et al. Plaintiffs, v. GTCR GOLDER RAUNER, L.L.C., a Delaware limited liability company., et al., Defendants.

No. CIV. 02-2099-PHX RCB.

United States District Court, D. Arizona.

March 28, 2006.

COPYRIGHT MATERIAL OMITTED

Leo R. Beus, Scot Stirling (argued), Steven Weinberger, Beus Gilbert PLLC, Scottsdale, AZ, for Plaintiffs.

Kevin A. Russell, David S. Foster, Michael J. Faris (argued), Nicholas B. Gorga, Latham & Watkins LLP, Chicago, IL, Don P. Martin, Quarles & Brady Streich Lang LLP, Phoenix, AZ, for Defendants GTCR Golder Rauner, LLC, et al.

James R. Condo, Patricia Lee Refo, Joseph G. Adams, Snell & Wilmer LLP, Phoenix, AZ, for Defendant Kirkland & Ellis.

ORDER

BROOMFIELD, Senior District Judge.

On October 21, 2002, Defendants GTCR Golder Rauner, L.L.C., et al., filed their notice of removal in this action, attaching Plaintiffs' (Diane Mann, as Trustee for the Estate of LeapSource, Inc., et al.) First Amended Complaint. Notice (doc. 2). On November 20, 2002, Plaintiffs filed a motion to remand (doc. 8) this action to the Superior Court of Arizona in Maricopa County. On February 7, 2003, that motion was denied. Order (doc. 51). Thereafter, on June 11, 2004, Plaintiffs filed their Fourth Amended Complaint ("FAC"). (doe. 121).

On August 22, 2005, Defendants GTCR Golder Rauner, L.L.C., GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI, Joseph P. Nolan, Bruce V. Rauner, Daniel Yih, David A. Donnini and Philip A. Canfield ("GTCR") filed a motion for summary judgment on all joint venture-related claims (Counts 11, 12, 14, 15, 16, and 22). Motion (doc. 239). On August 23, 2005, Defendant Kirkland & Ellis ("K & E") joined GTCR's motion and filed their own motion for summary judgment on Counts 12 and 14 of Plaintiffs' Fourth Amended Complaint. K & E Joinder and Motion (doc. 242). GTCR's motion was fully briefed and argued orally, however, Plaintiffs did not respond to K & E's motion. For this reason, on October 18, 2005, K & E moved for entry of judgment in their favor on Counts 12 and 14. Mot. Entry of Judg. (doc. 269). Having carefully considered the arguments presented by the parties, the court now rules.

I. Background Facts

As noted above, this action was originally filed in the Superior Court of Arizona in Maricopa County, alleging numerous state law based claims arising out of the financial demise of LeapSource, Inc. ("Leap-Source"). LeapSource was a Phoenixbased "business process outsourcing" ("BPO") company, formed to provide accounting and employee benefit services to mid-sized businesses. The defendants in this action include a number of individuals and companies who were involved in various transactions related to the start-up and operation of LeapSource. GTCR Golder Rauner, LLC, is a Chicago-based venture capital firm. Beginning in September 1999, three partnerships (GTCR Fund VI, L.P., GTCR VI Executive Fund, L.P., GTCR Associates VI) in which GTCR was a general partner made a series of investments by purchasing stock in Leap-Source.

Individual Plaintiff Christine Kirk was recruited by Defendants from her prior position as a partner with Arthur Andersen. She then recruited fellow Andersen employees to work for LeapSource, including fellow partners, some of whom were also given the opportunity to acquire shares of LeapSource.

On August 18, 1999, GTCR sent Kirk a draft Summary of Understanding ("SOU") that stated some of the terms on which GTCR would be willing to provide funding to a corporation to be formed with Kirk and her management team. After considering another venture capital proposal from Bank of America, it is alleged that on August 30, 1999, the GTCR entities and Plaintiffs engaged in a joint venture to make preparations for LeapSource to commence operations (the Kirk-GTCR Joint Venture). Plaintiffs assert that the alleged terms of the Kirk-GTCR Joint Venture were:

(1) that GTCR would provide the financing required to successfully establish the new venture, with the understanding that the amounts required would be in the range of $50-100 million;

(2) that GTCR's commitment was a long-term commitment to the success of the new venture, and that the new venture would be supported through a start up period that was expected to take two years, until it was successfully established as a leading provider of BFO services, and ready to go public or to be acquired when it would be advantageous to the new venture;

(3) that the new venture would be expected to lose substantial amounts of money during its start up period (operating with negative EBITDA), that GTCR understood the magnitude of the financial commitment required to support the new venture during its start up period (because GTCR actually had similar loss experiences with other start-up companies), was "well equipped" to handle such losses, and was willing to finance the new venture through the start up period;

(4) that GTCR's funding commitment was not conditioned upon the new venture's losses reaching or exceeding any particular amount over the first two years;

(5) that GTCR would not financially abandon the new venture, but would stick by the new venture even during bad times, in a way that other venture capital firms would not in one meeting expressed by Rauner that, if Kirk would agree to leave Andersen and join GTCR in this new BPO joint venture, GTCR would be her "partner for life," and in another conversation with Nolan, when the possibility of obtaining financing from another firm was mentioned, that "They won't stick by you in bad times like we will.";

(6) that the purpose of the new venture would be to create and develop a new BPO firm, to pursue related opportunities, and to grow the business of the new BPO firm through acquisitions, alliances, and operations, as contemplated in the business plan prepared by Chris Kirk and others, and provided to GTCR;

(7) that Chris Kirk would be permitted to assemble a management team to implement the business plan and to manage the new venture, with the understanding that a qualified team of professionals and others would have to be brought into the management teams to provide and to sell the outsourcing services;

(8) that the new venture would need to hire and train scores of employees even before outsourcing contracts were signed (with Joe Nolan suggesting that the appropriate number of people to bring on board at the outset would be 100);

(9) that the new venture would have to be equipped to provide the same level and depth of outsourcing services that Andersen provided to its clients (10) that the management team put together by Chris Kirk would be permitted to manage the new venture (also expressed in other words that GTCR did not get involved in management and would adopt a "hands off" policy toward the management of the new venture);

(11) that the members of the management team would have an ownership interest in the new venture, with common stock in a new entity to be formed pursuant to the new venture divided equally between GTCR and the management team, and with GTCR receiving preferred stock in return for its financial investment;

(12) that the members of the management team would be assured of compensation at levels comparable to the compensation that they had been receiving at Andersen (and Chris Kirk, Kim Hartmann, and Julie McCollum specifically discussed their individual compensation as described below);

(13) that GTCR would indemnify the management team against the costs of any action that might be taken by Andersen as a result of the management team's departure from Andersen;

(14) that, because of the non-competitive provisions in the management team's agreements with Andersen, the new venture would not be permitted to start selling outsourcing services for a period of months after their departure from Andersen, which would further extend the start up period discussed previously (when the new venture would be losing money and requiring continuing financial support from GTCR);

(15) that a new company would be formed to provide outsourcing services, and would be a "standard GTCR play," intended to replicate the AnswerThink experience, which meant to start the business with a substantial number of experienced employees from Andersen so that the new venture could stake out a leading position in the BPO services industry;

(16) that Kirk's $400,000 annual salary had been accepted by the GTCR's Board of Directors, that GTCR would make Kirk whole for any bonus distribution withheld by Andersen, and would pay her a one-year's severance package if she was terminated without cause;

(17) that GTCR would make Hartmann whole with respect to any compensation that she expected to receive from Andersen but did not receive because she left before October 1999, up to $1 million, and that GTCR would pay Hartmann a one-year severance package equal to her annual salary of $300,000; and

(18) that McCollum would be made whole on any earned but unpaid bonus she would have received had she stayed at Andersen (with the understanding that McCollum expected to receive a bonus from Andersen in the amount of $80,000), and that GTCR would provide McCollum with a one-year severance package equal to her salary of $360,000.

Resp. (doc. 253) at 11-13.

Between August 30, 1999 and September 14, 1999, Kirk negotiated with GTCR over the terms of the SOU. After exchanging numerous drafts and making a number of changes, the parties executed the final version dated September 14, 1999. Thereafter, on September 16, 1999, LeapSource was incorporated—then named "KirkCo, Inc." At this time, LeapSource had no employees, and its only shareholder other than the above-mentioned GTCR entities was Christine V. Kirk ("Kirk"), Leap-Source's start-up CEO. This group (which is composed primarily of the individual Plaintiffs in this action) worked to gradually grow the LeapSource business; however,...