MODESTO, Calif. -- The Scott Peterson defense team has suffered a major setback -- an elderly neighbor who claimed to have seen Laci Peterson walking her dog on the day she disappeared from her Modesto home, countering the police theory of the crime -- has died.

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Video On Demand: Potential Key Peterson Defense Witness Dies

Family members said late Wednesday night that Vivian Mitchell had passed away of natural causes. Mitchell's report was among those discounted by the Modesto Police during their investigation of Laci's disappearance and death.

Vivian and her husband, Bill, told reporters and the police that they saw Laci Peterson at about 10 a.m. or 10:15 a.m. on Dec. 24, wearing white and black clothes and walking with a golden retriever.

The Mitchell home is about 10 blocks from the Covena Avenue home where Laci Peterson, nearly eight months pregnant, disappeared during the day.

"I had seen Laci walk by the house several times before," said Vivian Mitchell at the time. "When she walked by on Christmas Eve, I hollered to Bill, 'Oh look, it's the lady with the golden retriever."'

Bill Mitchell, who served three terms on the Modesto City Council, said he saw Laci go around the corner as he went to the window.

"It looked like the dog wanted to go one way, and she was going another," he told The Modesto Bee.

Vivian Mitchell said she reported the sighting to Modesto Police about a week after Laci Peterson disappeared, but never heard back.

It was not known if Mitchell was to be called as a defense witness at the upcoming trial, but her testimony would certainly have been key to countering the prosecutors theory of the murder that Scott Peterson killed his wife and dumped her body in the San Francisco Bay.

Meanwhile, a Southern California judge expressed concern Wednesday that Peterson's attorney Mark Geragos will be too busy to handle a lesser-known client in a 5-year-old embezzlement case.

"This court is going to be way out of line on your priority list as far as in-custody cases, which is what my long-range concern is," Judge Frank F. Fasel told Geragos in Orange County Superior Court.

The Los Angeles lawyer will have a busy schedule this year after being hired to handle the child molestation case against Michael Jackson in Santa Barbara County and the double-murder case against Peterson, which was filed in Stanislaus County and will be tried in San Mateo County.

The Peterson prosecution is a potential death-penalty case, which Fasel acknowledged takes precedence under law.

In Orange County, Geragos represents Jeffrey Hambarian, a longtime trash hauler accused of embezzling $4 million from the city of Orange. Hambarian was arrested in 1999 and is free on bail.

Prosecutors believe Hambarian was the mastermind behind an elaborate series of fraud and embezzlement schemes that inflated city garbage rates.

The case has been delayed several times over the past year at the request of defense attorneys. Geragos reassured the judge that he will have time to handle the embezzlement case following the Peterson trial, which he believes could take up to four months.

"I in no way want to diminish the importance of this case," said Geragos, who added he wanted to keep the embezzlement case on a "short leash."

"Most attorneys have more than one case," Geragos said outside of court. "You go ask any lawyer in California if they got more than one case."

Deputy District Attorney Ronald Cafferty was frustrated with the length of the case and said he would be "shocked if Peterson starts (on time)." Cafferty previously said he will oppose any more postponements in the trial.

Fasel ordered Geragos and his client to return to court Feb. 17 for a hearing.