IN THE SUPERIOR COURT OF THE STATE OF WASHINGTON IN AND FOR KING COUNTY I. RELIEF REQUESTED

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1 FILED OCT AM : 1 KING COUNTY SUPERIOR COURT CLERK E-FILED CASE NUMBER: --0- SEA 1 MARK PHILLIPS, v. IN THE SUPERIOR COURT OF THE STATE OF WASHINGTON IN AND FOR KING COUNTY Plaintiff, CHAD HAROLD RUDKIN AND ELIZABETH RUDKIN, STEPHEN JAMES SCHWEICKERT, and JANE DOES 1 through, Defendants. MARK E. PHILLIPS, v. Plaintiff, STEPHEN JAMES SCHWEICKERT, HUNTS POINT VENTURES, INC. AND HUNTS POINT VENTURES GROUP, LLC, Defendants I. RELIEF REQUESTED The Honorable Mary Yu No SEA DEFENDANTS RESPONSE IN OPPOSITION TO PLAINTIFF S MOTION FOR APPOINTMENT OF A RECEIVER AND FOR INJUNCTIVE RELIEF ORAL ARGUMENT REQUESTED Defendants request that the Court deny the Plaintiff s Motion in its entirety. Defendants Chad and Elizabeth Rudkin (the Rudkins ), Hunts Point Ventures, Inc. ( HPV ), and Hunts Point Venture Group, LLC ( HPVG ) (collectively Defendants ) oppose Plaintiff s Motion for Appointment of Receiver and for Injunctive Relief. For the reasons stated RECEIVER - 1 PHONE () 00 FAX () 00.1

2 1 below, the extraordinary and drastic remedy of usurping corporate control by appointing a receiver is not warranted under the circumstances of this case and would be premature at this stage in the proceedings. Moreover, Plaintiff s request for injunctive relief merely duplicates its request for a receiver and should be treated as such. The Motion should be denied. II. STATEMENT OF FACTS Defendants presume the Court is familiar with the procedural history of this matter. III. STATEMENT OF ISSUES Whether the appointment of a receiver is proper under RCW.0.0? IV. EVIDENCE RELIED UPON 1. Declaration of Joel B. Ard In Opposition To Plaintiff s Motion For Appointment Of A Receiver And For Injunctive Relief, and exhibits thereto; and. The pleadings and filings filed herein. V. AUTHORITY AND ARGUMENT This Court may appoint a receiver only if the court additionally determines that the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate. RCW.0.0(1). (This relevant statute is not identified by Plaintiff, which bases its Motion entirely on statutes which were repealed nearly a decade ago. Defendants address the Motion under the correct statute and standard below.) [A] receiver should be appointed only when necessity calls for such remedy. State ex rel. Panos v. Court for King County, Wash.,, P.d (). The power to appoint a receiver is a delicate one, and should always be exercised with caution. Bergman Clay Mfg. Co. v. Bergman, Wash., -, 1 P. (). Indeed, appointment of a receiver is extreme and should be utilized only in cases where there is fraud, spoliation, or imminent danger of the loss of property.... Horejs v. Am. Plumbing & Steam Supply Co., 1 RECEIVER - PHONE () 00 FAX () 00.1

3 1 Wash., 0, P., 1 (1). [S]uch facts must be clearly proved. Id. Here, none of the conditions appropriate for consideration of receivership apply. In light of such a high standard, the Court must decline to appoint a receiver in this case because Plaintiff has failed to meet its burden of showing that the appointment of a receiver is necessary. Specifically, Plaintiff lacks an ownership interest sufficient to sustain his Motion, Defendant entities are properly managed, their assets are not at risk of substantial devaluation, and neither entity is insolvent or currently at risk of insolvency. Should the Court grant Plaintiff s Motion, Defendants request that the receiver post a bond sufficient to protect Defendants interests, in the amount of $00, A. Plaintiff s Motion Cites To And Relies On A Repealed Statute Plaintiff s Motion relies upon statutes that have been repealed for nearly a decade. 1 Moreover, the applicable language in those statutes is vastly different than Washington s modern receivership statute, RCW.0.0. Not once does Plaintiff cite to the correct statutory provision that applies to this analysis. As it is impossible to determine what Plaintiff s arguments might be under the proper statute, a decision in reliance on the repealed statutes would be prejudicial to Defendants. Plaintiff s Motion should be denied on this basis alone. B. Under The Proper Receivership Statute, RCW.0.0, Plaintiff Has Failed To Meet Its Burden To Showing A Receiver Is Permissible Even considered under the correct receivership statute, RCW.0.0, Plaintiff s Motion should be denied because Plaintiff has failed to meet its burden to demonstrate entitlement to this extraordinary relief. While nowhere identified by Plaintiff, Defendants presume that the Court would evaluate the Motion under RCW.0.0(1)(a) and.0.0(1)(i), which suggest that a Court might consider appointing a receiver in the following instances: 1 RCW.0.0 and 0 were both repealed June, 0. RECEIVER - PHONE () 00 FAX () 00.1

4 1 (a) [W]hen the party is determined to have a probable right to or interest in property that is a subject of the action and in the possession of an adverse party, or when the property or its revenue-producing potential is in danger of being lost or materially injured or impaired; (i) In an action against any person who is not an individual... if that person is insolvent or is not generally paying the person s debts as those debts become due unless they are the subject of bona fide dispute, or if that person is in imminent danger of insolvency; RCW.0.0(1)(a) and (i). Furthermore, a receiver shall be appointed only if the court additionally determines that the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate. RCW.0.0(1). Plaintiff has failed to meet any of the standards listed above. 1. Plaintiff Has Failed To Demonstrate A Probable Interest In Assets Of Either HPV Or HPVG In its discretion, the Court may appoint a receiver when the [moving] party is determined to have a probable right to or interest in property that is a subject of the action.... RCW.0.0(1)(a) (emphasis added). Here, whether Plaintiff has any ownership interest at all in HPV, HPVG, or any corporate assets is a contested issue on which Plaintiff makes no showing of a probable right. Plaintiff claims a 0-percent economic interest in Hunts Point Intellectual Properties, LLC an entity that does not exist. He also claims to have had, at some point, a.1-percent ownership interest in HPV based on an alleged Stock Subscription Agreement signed by Steven Schweickert. The implications and validity of that agreement aside, even Plaintiff admits [t]here can be no question that... he is no longer a shareholder in HPV. Motion at 1. Even crediting Plaintiff s belief that the Rudkins ratified all actions of Mr. Schweickert, Plaintiff presents no credible evidence that he actually fulfilled his obligation to See Exhibit D to Declaration of Mark Philips in Support of Plaintiff s Motion for Appointment of a Receiver ( Phillips Decl. ). See Phillips Decl. at ; see also Exhibit F to Phillips Decl. Phillips Decl. at. RECEIVER - PHONE () 00 FAX () 00.1

5 1 purchase the shares under that agreement. With no evidence that he ever fulfilled any contractual obligation to pay for shares pursuant to the subscription agreement, Plaintiff presents no evidence of any past or present ownership interest, minority or otherwise. As proof of his purchase, Plaintiff points to an excel spreadsheet drawn from his own records that (1) was not produced by HPV in this litigation, () is not in any way selfauthenticating, and () provides HPV with no reason to assume its authenticity. Furthermore, even assuming everything in the document is true, it contains no reference to any supposed $,0.00 payment to the corporation from Plaintiff for HPV stock. What it does appear to represent is a series of transfers of significant amounts of money to and from Plaintiff just months before his conviction on federal wire fraud and money laundering charges. No transfer is in the amount of $,0.00, and it appears that significantly more money left the corporation to line Phillips pockets than any amount he transferred in. Nevertheless, even assuming that Plaintiff does have a minority stake in HPV which he admits he does not, see Motion at 1 such a minority interest in HPV does not support this Motion. Quite the contrary. When considering whether to appoint a receiver, A court will not interfere merely to settle disputes between stockholders, or to substitute its judgment for that of the majority of the trustees. Men differ in their judgment, and the law is that a majority of the stockholders, or in the interim between stockholders' meetings the trustees, shall manage and control the affairs of the corporation. Some controlling equity must intervene to warrant the interposition of the court. Bergman Clay Mfg. Co. v. Bergman, Wash., (). Here, even if Plaintiff is a minority shareholder, he asks this Court to appoint a receiver for the very reason the Washington Supreme Court has held is improper to allow a minority shareholder to See Exhibit H to the Phillips Decl. Id. Id.; see also United States v. Phillips, 0 F. d (th Cir. 1) cert. denied, S. Ct. (). The ledger appears to show Phillips-related withdrawals of close to $0, while only showing Phillips-related deposits of approximately $0, RECEIVER - PHONE () 00 FAX () 00.1

6 1 resolve in his favor a dispute regarding management of corporate assets. Appointment of a receiver under these circumstances would be legal error. Plaintiff s purported shareholder interest, if true, is a proper basis for denying this Motion.. Defendants Assets Are Properly Managed And Not At Risk Of Substantial Devaluation The modern receivership statute also allows appointment of a receiver when the property or its revenue-producing potential is in danger of being lost or materially injured or impaired. RCW.0.0(1)(a). In his Motion, Plaintiff alleges this to be the case with regard to Defendants patents. Specifically, Plaintiff asserts that Defendants IP has not been used for any legitimate purpose of the corporation. Motion at. This is not true. Any legal act is a legitimate purpose of the corporation, see, e.g., RCW B.0.0, and HPV has sued to enforce the patents on four separate occasions. Plaintiff s further contention that Defendants lack the technical experience... to protect the remaining assets of HPV, Motion at, is also a meritless attempt to substitute his own judgment for that of the corporate management. Defendants have hired competent patent counsel who is tending to the IP in accordance with standard industry practices. The Motion simply asks the Court to intervene in what is at best a shareholder dispute and appoint a receiver to displace the sound business judgment of the corporate officers and controlling shareholders in favor of Plaintiff, who, even crediting fully his allegations of ownership, is nothing more than a disgruntled minority shareholder. Granting the Motion would be legal error. See Nursing Home Bldg. Corp. v. DeHart, Wn. App.,, P. d, () ( Courts are reluctant to interfere with the internal management of corporations and generally refuse to substitute their judgment for that of the directors. ). On this basis, the Motion must be denied. See Ard Decl. Exs. A to D. See Ard Decl. Exs. E to H. RECEIVER - PHONE () 00 FAX () 00.1

7 1. Neither Defendant Is Insolvent Or At Risk Of Insolvency. As a final apparent basis for the Motion, the Washington receivership statute permits superior courts to appoint a receiver when a company is insolvent or is not generally paying [its] debts as those debts become due unless they are the subject of bona fide dispute, or if [it] is in imminent danger of insolvency. RCW.0.0(i). Plaintiff asserts that a receiver is appropriate here because HPV is currently unable to pay its obligations to either Ms. Schweickert or Mrs. Hoover, meaning HPV is insolvent. Plaintiff disregards the plain statutory mandate that precludes a receiver when purportedly unpaid debts are the subject of a bona fide dispute. RCW.0.0(i). The supposed debt to Schweickert is the subject of a dispute pending in the United States District Court for the Western District of Washington filed by Plaintiff s counsel, as evidenced by Exhibit A to the Declaration of Jennifer Schweickert filed in support of this Motion. The debt to Hoover is not due, and therefore not yet an obligation of the corporation to pay. 1 Thus, neither debt identified by Plaintiff is a proper basis for receivership under the statute, and the Motion cannot be granted on this basis. C. Should The Court Appoint A Receiver, Such Receiver Should Post A Bond Sufficient To Protect Defendants Interests RCW.0.0() permits a court to condition the appointment of a receiver upon the giving of security by the person seeking the receiver s appointment, in such amount as the court may specify, for the payment of costs and damages incurred or suffered by any person should it later be determined that the appointment of the receiver was wrongfully obtained. Plaintiff s own valuation of Defendants IP is $00,000, Plaintiff acknowledges the substantial income potential to the corporation when Defendants continue to monetize the IP. The potential damage to the Defendants is significant, and therefore, should the Court determine that the appointment of a receiver is necessary, Defendants request a bond in the amount of $00, See Motion at. 1 See Ard Decl. Ex. I (Secured Promissory Note with December 1, maturity). See Phillips Decl. RECEIVER - PHONE () 00 FAX () 00.1

8 to cover Defendants potential costs and damages if such an appointment later proves to be wrongfully obtained. D. The Motion For Injunction Is Properly Denied Plaintiff s Motion concludes with a request for an injunction that merely reiterates the same arguments for receivership, and concludes with a renewed request for appointment of a receiver. For the foregoing reasons, this relief should also be denied. VI. CONCLUSION For the foregoing reasons, Plaintiff s Motion to Appoint a Receiver and for Injunctive Relief should be denied. 1 DATED this rd day of October,. s/s Joel B. Ard Joel B. Ard, WSBA #0 Rylan L.S. Weythman, WSBA # Third Avenue, Suite 00 Seattle, Washington 1- Telephone: () -00 Facsimile: () ArdJB@Foster.com Attorneys for Defendants RECEIVER - PHONE () 00 FAX () 00.1

9 1 DECLARATION OF SERVICE I, Joel B. Ard, state that I am a citizen of the United States of America and a resident of the State of Washington, I am over the age of twenty one years, I am not a party to this action, and I am competent to be a witness herein. I filed the foregoing using the Court s ECF system and served an original by legal messenger upon counsel for plaintiff: Reed Yurchak LAW OFFICE OF REED YURCHAK 0 Lake Bellevue Drive #0 Bellevue, WA 00 Stephen J. Schweickert nd Avenue, NE PMB 0 Kirkland, WA 0 There are no other parties who have appeared in this action as of today s date that need to be served manually. I DECLARE under penalty of perjury under the laws of the State of Washington that the foregoing is true and correct. DATED October,. /s/ Joel B. Ard Joel B. Ard RECEIVER - PHONE () 00 FAX () 00.1