Receiver's Reply to Zi Corporation's Memorandum in Opposition to Receiver's Motion for Contempt and for Sanction S

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION NIGHT BOX FILE D SECURITIES AND EXCHANGE COMMISSION , K' - 6 2006 Plaintiff, ;. t 4 MADDAX ~' . U~ACISDpldlMIA V. MICHAEL LAUER, LANCER MANAGEMENT GROUP, LLC, and LANCER MANAGEMENT GROUP II, LLC, Case No. 03-80612 CIV-MARRA Defendants, Jointly Administere d and LANCER OFFSHORE, INC ., LANCER PARTNERS, LP, OMNIFUND, LTD., LSPV, INC ., and LSPV, LLC , Relief Defendants . / In re : Chapter 11 Cas e LANCER PARTNERS L .P., Case No. : 04-8021 1 -CIV-MARRA Debtor. RECEIVER'S REPLY TO ZI CORPORATION'S MEMORANDUM IN OPPOSITION TO RECEIVER'S MOTION FOR CONTEMPT AND FOR SANCTION S Marty Steinberg, Esq ., the court-appointed receiver (the "Receiver") for the Lancer Entities' submits this Reply to Zi Corporation's Memorandum in Opposition to Receiver's Motion for Contempt and for Sanctions (the "Response Brief') . 'Lancer Management Group LLC ("Lancer Management"), Lancer Management Group II LLC ("Lancer Management II"), Lancer Offshore Inc . ("Offshore"), Omnifund Ltd . ("Omnifund"), LSPV Inc . ("Offshore LSPV"), LSPV LLC ("Partners LSPV"), Alpha Omega Group, Inc . ("AOG"), G .H. Associates LLC, and CLR Associates, LLC (the "Receivership Entities" ), and Lancer Pa rtners, L.P. ("Partners") . CASE NO. 03-80612 -CIV-MARRA /VITUNAC Case No.: 04-80211 -ClV-MARRA - Jointly Administere d 1. INTRODUCTION In a feeble attempt to hopefully avoid the inherent problems created for Zi Corp . ("Zi") by the Voting Rights Agreement ("VRA") it executed on July 15, 2004, coupled with this Court's Receivership Order and Case Management Order ("CMO"), Zi asserts futile and/or inapplicable legal doctrines and principles in its Response Brief as purported justification for the Court's denial of the Receiver's Motion for Contempt and for Sanctions (the "Contempt Motion"). Specifically, Zi contends : 1) the Receiver never served Zi with process of the contempt proceeding thereby depriving the Court of jurisdiction ; 2) Zi is not otherwise amenable to the jurisdiction of this Court ; 3) Zi has not, as a matter of law or fact, violated any of this Court's Orders or the automatic stay in bankruptcy and therefore is in compliance with the statutory exception articulated in 28 U.S.C. § 959 (a); and 4) Florida is an improper forum based upon the doctrine offorum non conveniens. For these reasons, Zi contends the Court should deny the Contempt Motion and award it fees and costs for responding to the Motion . Through this Reply, the Receiver argues that Zi was properly served with the Contempt Motion and further that Zi is estopped from challenging this Court's jurisdiction as well as venue based upon forum non conveniens. The Receiver believes Zi has intentionally violated Orders of this Court and only this Court has jurisdiction to enforce its duly entered Orders . Moreover, Zi has intentionally breached the VRA, which provides for jurisdiction and venue before this Court. Because the arguments articulated in Zi's Response Brief are merely designed to obfuscate the underlying issues attendant to the Contempt Motion, the Receiver requests that both Zi and Michael Lobsinger ("Lobsinger") should be sanctioned and held in contempt . II. BACKGROUND Interestingly, from 1996 to 2005, neither Zi nor Lobsinger contested or challenged the right of the Lancer Entities to vote their respective shares of Zi . Specifically, from 1996 to the summer of 2003 when the Lancer Entities, under the operation and management of Michael Lauer ("Lauer") acquired their respective positions in Zi, both Zi and Lobsinger knowingly sold significant blocks of Zi shares to the Lancer Entities through a series of private security transactions . Thereafter. from July 2003 to August 2005, after the Receiver disclosed that the Lancer Entities owned approximately 49% of Zi's outstanding and issued shares, Zi never contested or challenged the Receiver's right to vote those shares of Zi . In fact, Zi never questioned the Receiver in 2004 when he filed certain reports in Canada and the United State s 2 CASE NO. 03-80612 -CIV-MARRA/VITUNAC Case No.: 04-8021 1-CIV -MARRA - Jointly Administered disclosing the Lancer Entities' ownership interests in Zi . Instead, Zi requested the Receiver to refrain from selling any of its shares for 150 days in order to facilitate a $10 million private placement for Zi . Also, in July 2004, through the VRA, Zi authorized the Receiver to not only appoint a member to its board of directors, but it further agreed not to contest the Receiver's right to vote any of the Zi shares . Indeed, the VRA confirms Zi's acknowledgment of the Lancer Entities' ownership of its shares as well as the rights that came with those shares as it states in paragraph 3 that the parties : " . .acknowledge that the Lancer Entities are not now restricted fro m voting or causing to be voted any shares of the Company beneficially held by any or all of them, and further agree not to take any action or to solicit or encourage any other party to take any action that would restrict any of the Funds from voting or causing to be voted any share of Zi beneficially held by any or all of them ." Moreover, at the time Zi executed the VRA, it was on notice of the injunctive and jurisdictional provisions contained in both, the Receivership Order and the CMO, which bestowed broad authority upon the Receiver to marshal and safeguard all of the estate assets, to manage the business affairs, funds, chooses in action and other property of the Lancer Entities. It is this understanding of the Orders that presumably explains why Zi consented to the exclusive jurisdiction provision contained in paragraph 5 of the VRA which states , in pertinent part: 1 . "Any disputes relating to or arising under this Agreement shall be considered proceedings ancillary to the Lancer Entities ' action styled Securities and Exchange Commission v. Lauer et al., Case No. 03-80612- CIV-ZLOCH ;" 2 . The District Court " shall have original and exclusive jurisdiction over any such disputes;" 3 . The parties "irrevocably submit in any suit, action or proceeding arising out of or relating to this Agreement to the exclusive jurisdiction of the District Court and waives any and all objections to such jurisdiction or venue that it may have under the laws of any state or country, including, without limitation, any argument that jurisdiction, situs and/or venue are inconvenient or otherwise improper ;" and 4. "Process may be served upon it in any manner authorized under the laws of the United States or Florida, and waives any objections that it otherwise have [sic] to such process." 3 CASE NO . 03-80612-CIV-MARRA/VITUNAC Case No .: 04-8021 1-CIV-MARRA - Jointly Administere d During the summer of 2005, upon learning of the resignation of Zi's President, Michael Donnell, an event which Zi itself acknowledged could have a materially adverse impact on its business, the Receiver, pursuant to the VRA, requisitioned a special meeting of Zi's shareholders to seek nominations for additional members to Zi's board of directors . Zi responded by commencing an ex parse proceeding before the Queens Bench in Calgary seeking an injunction precluding the Receiver from conducting the shareholder's meeting. On the grounds that the ex parte order entered by the Calgary Court on August 10, 2005 violated the VRA as well as the Receivership Order and the CMO, the Receiver asked the Canadian Court to dismiss that action . The Receiver concurrently filed the Contempt Motion before this Court . III. DISCUSSIO N A. Zi's Argument That It Has Not Been Properly Served With Process Is Inaccurate . First and foremost, the Contempt Motion, which was filed November 7, 2005 was served on Joseph Galda, Esq . of the Hodgson Russ firm in Buffalo, New York. Mr. Galda has represented himself to Hunton & Williams LLP as counsel for Zi in connection with receivership related matters as far back as 2003 . Neither Hunton & Williams LLP nor the Receiver received any notice or indication that neither Mr. Galda nor his former firm no longer represents Zi in connection with the receivership . In addition, Zi's Canadian litigation counsel has not filed an appearance in the receivership proceedings. In order to avoid all doubt, on December 23, 2005, the Receiver forwarded the Contempt Motion by registered mail, return receipt requested to Zi Corporation in Calgary, and by First Class mail to Zi's Miami counsel . A true and correct copy of the Receiver's Certificate of Service dated December 23, 2005 is attached hereto as Exhibit "A." Hence, service of the Contempt Motion on Zi complies with the Federal Rules of Civil Procedure, the Local Rules of Civil Procedure for the Southern District of Florida as well as the service of process provisions contained in the VRA . Second, Zi's argument that this Court lacks jurisdiction because of improper service is fallacious for two additional reasons . First, the Receivership Order and the CMO do not only govern parties to litigation. They apply to any person "with notice" of the Orders . Zi admits having notice of both Orders . Zi in fact attached the Receivership Order to its Canadian pleadings in August . Furthermore, the VRA states that any dispute shall be considered "proceedings ancillary" to this very case . Hence, Zi had actual notice of the receivership proceedings . 4 CASE NO. 03-80612 -CIV-MARRA/VITUNAC Case No. : 04-8021 1-CIV-MARRA - Jointly Administered Second, in the context of a motion for contempt, the contemnor "waive[s] any objection to the manner of service [when] it does not claim lack of actual notice." First City, Texas Houston, N.A. v. Rafidain Bank, 281 F.3d 48, 55 (2d Cir 2002) ; see also Titra California, Inc .

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