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Kinnard v. Stone, 10th Cir. (2009)
Kinnard v. Stone, 10th Cir. (2009)
June 8, 2009
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
TENTH CIRCUIT
Clerk of Court
SPRINGFIELD HOLDING
COMPANY LTD LLC,
Plaintiff - Appellee,
and
No. 08-6210
(D.C. No. 07-CV-00250-R)
(W.D. Okla.)
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
Background
The present case arises from a complicated series of business transactions
between the Stones and the Kinnard brothers, David and Roger, that turned sour.
Because the district court set forth the confused tangle of transactions with as
much clarity as is practicable, see Kinnard v. Stone, No. CIV-07-250-R, 2008 WL
4000445, at *1-5 (W.D. Okla. Aug. 25, 2008), we will not exhaustively recount
the facts of the case here. A relatively cursory overview of the facts will suffice.
Together, Robert L. Stone and the Kinnard brothers had formed a number of
limited liability companies, partnerships, and other entities to manage their joint
business ventures in rental real estate. These entities functioned under an
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At the end of the year, to the extent that advances exceeded distributive
net income, the excess was treated as an account receivable (a loan to the
recipient). Aplt. App. 774-75, 1048-49.
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transferred all of their ownership interests in the various entities to the Kinnards.
The Kinnards initiated this litigation by bringing an action for declaratory
judgment, seeking a declaration that the Stones no longer maintained an interest
in any of the entities. The Stones counterclaimed, seeking a full accounting for
each of the entities and a declaratory judgment that they did in fact still have an
ownership interest in each of the entities. Accordingly, the central question posed
by these competing claims was whether the aforementioned transactions were
loans or whether they were actually transfers of the Stones ownership interest.
Additional issues were also implicated, in that the Stones challenged the adequacy
of the consideration the Kinnards paid for the Stones ownership interest and
contended that they were due a full accounting. Ultimately, the district court
concluded that the Stones had sold all of their interests to David Kinnard for
adequate consideration, and that they had received an adequate accounting.
Kinnard, 2008 WL 4000445 at *7-10. The Stones now appeal the district courts
judgment, raising several alleged errors on the part of the district court.
Discussion
We review the district courts findings of fact for clear error. Fed. R. Civ.
P. 52(a)(6); La Resolana Architects, PA v. Reno, Inc., 555 F.3d 1171, 1177 (10th
Cir. 2009). [A] finding is clearly erroneous when although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and
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there was a valid contract for the sale of their ownership interest because, they
contend, there was no meeting of the minds. The Stones correctly point out that
as a matter of law there must be a meeting of the minds in order to form a
contract. 2 Beck v. Reynolds, 903 P.2d 317, 319 (Okla. 1995). However, we
review the question of whether there was actually a meeting of the minds for clear
error, as it is a factual inquiry. See Homestead Golf Club, Inc. v. Pride Stables,
224 F.3d 1195, 1200 n.5 (10th Cir. 2000). Here, we cannot conclude that the
district court clearly erred, given the factual record before us. The parties
presented conflicting evidence, which the district court resolved in favor of the
Kinnards.
The most important piece of evidence supporting the district courts
conclusion is the handling of the initial transaction relating to Cinnamon Creek.
In 2003, Robert L. Stone sought a loan from David Kinnard, and in so doing
proposed a document entitled Assignment of Partnership Interest as Collateral
for Note offering his interest in Cinnamon Creek as collateral for a loan. Aplee.
Supp. App. 3. However, David Kinnard rejected this offer and the proposed
document because he wanted outright ownership rather than a collateral interest.
Having had his proposed loan arrangement rejected, Mr. Stone ultimately signed a
document that he referred to as an unconditional transfer of [his] partnership
interest in Cinnamon Creek. Aplee. Supp. App. 4.
The instrument provided that Robert L. Stone:
hereby sells, assigns, transfers and conveys . . . all of his membership
interests and other ownership interest of any kind in Cinnamon
Creek, L.L.C., an Oklahoma limited liability company (the
Company), and all rights appurtenant thereto, including but not
limited to the right to receive distributions, profits or income of any
kind from the Company.
Aplt. Supp. App. 6. The attorney who drafted the document called it an
Assignment of Membership Interest in an e-mail to the principal parties, referred
to the $100,000 sale price, and informed Mr. Stone that they were preparing an
agreement whereby he could repurchase his membership interest. Aplee. Supp.
App. 5. Further, the evidence suggests that Mr. Stone was aware of the difference
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between these two documents when he inquired why the transaction was
described as a sale-redemption and not as a loan. Aplee. Supp. App. 7. When
Mr. Stone eventually repurchased his interest, David Kinnard advised him in
writing that [t]here is no loan. There is only an opportunity to buy back shares.
Please read these docs carefully. 3 Aplee. Supp. App. 8. This sequence of events
strongly suggests that the Stones attempted to secure a loan, but failed to do so;
rather, they ultimately entered into a sale and buy-back agreementand they
apparently did so knowingly. This is of significance, given that the parties then
proceeded to use the same unconditional transfer document in all the subsequent
transactions. 4
In light of the documentary evidence and testimony, ample evidence
supports the district courts finding/conclusion that the Stones knew they were
selling their interests rather than merely utilizing their interests as security. To be
sure, the Stones point to evidence which, if credited, might support their position.
The parties agree that identical documents were used for all the relevant
transactions. However, they disagree as to whether the first transaction was a
loan or a sale. Given our standard of review, we have no basis to reverse the
district courts eminently reasonable conclusion that it was a sale. Accordingly,
we cannot rely on this first transaction to show that the remainder were loans, as
the Stones would have us do.
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For instance, the Stones testified that they had no idea they were selling their
interests, produced e-mails wherein the transactions were referred to as loans, and
elicited testimony from the Kinnards that the Stones frequently referred to the
transactions as loans in their communications. Further, they point to testimony
to the effect that payments were reclassified as purchases after the fact. This
testimony, they suggest, shows that there was no sale for an agreed-upon purchase
price, even though the district court concluded there was a sale and found the
amount of each purchase price based on testimony and exhibits entered into
evidence. See Kinnard, 2008 WL 4000445, at *2-3.
But pointing to conflicting evidence inconsistent with the district courts
finding is insufficient, standing alone, to establish clear error . . . . Penncro
Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1161 (10th Cir. 2007).
This is necessarily so, given that every trial is replete with conflicting evidence,
and in a bench trial, it is the district court[] which enjoys the benefit of live
testimony[,] . . . has the opportunity firsthand to weigh credibility and evidence,
[and] has the task of sorting through and making sense of the parties competing
narratives. Watson v. United States, 485 F.3d 1100, 1108 (10th Cir. 2007). The
district court has the discretion to credit some individuals testimony above that
of others and weigh the competing evidence, as long as its conclusion is plausible.
Anderson, 470 U.S. at 573-74. That is the very nature of the function of the
district court in a bench trial, and we may not second-guess the district courts
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determinations absent clear error. Here, the district court had strong
corroborating evidence suggesting that the hundreds of thousands of dollars
received by the Stones were advances on distributions, rather than guaranteed
payments, and that the Stones knowingly sold their interests to obtain cash. We
find no clear error.
II.
for the sale of their ownership interests. In particular, they argue that the district
court erred by finding that David Kinnard paid valid consideration for the Stones
interests. According to the Stones, neither the forgiveness of the promissory
notes executed by Robert L. Stone nor the funds borrowed by David Kinnard from
the Springfield Entities can serve as consideration. The Stones challenge raises a
mixed question of law and fact.
A.
There are two promissory notes at issue. The first was a $500,000 note
executed on March 11, 2005, by Robert L. Stone to Bernice Kinnard, the mother
of the Kinnard brothers. The record shows that the Stones had borrowed money
from Mrs. Kinnard in the 1990s, and this promissory note memorialized the debt.
The second promissory note was executed on March 16, 2005, by Robert L. Stone
to Roger and David Kinnard for $250,000. This note apparently stemmed from
the dispute between the Stones and Kinnards over the proceeds from the Beatrice
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litigation. The Stones contend that the district court erred as a matter of law in
finding these notes to be valid consideration because they were not accepted,
because they were not a detriment to David Kinnard, because they were executed
after the final assignment of the Stones interests, and because they were of
uncertain value. None of these contentions, which actually involve a primarily
factual inquiry, have merit.
First, the district court found as a matter of fact that David Kinnard was
assuming the debt, making him liable for payment to his mother on the first
promissory note, Kinnard, 2008 WL 4000445, at *3, and there is testimony
sufficient to uphold the district courts conclusion on this point. Further, there is
no evidence that the Kinnard brothers somehow rejected the second promissory
note relating to the Beatrice litigation. Accordingly, the Stones argument that
the promissory notes were not accepted misses the mark. Second, the first
promissory note was a detriment to David Kinnard, because he was assuming the
debt that Robert L. Stone admitted he owed to David Kinnards mother.
Accordingly, the Stones argument is misguided insofar as they argue that David
Kinnard merely attempted to forgive a note that was not his. Furthermore, the
evidence supports the finding that the Kinnards forgave the second promissory
note and can no longer enforce it against the Stones. This also constitutes a
detriment and, hence, consideration.
Finally, it is of little consequence here that the notes were executed
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subsequent to the final assignment of the Stones interest; this fact does not
render their value sufficiently uncertain such that there was no detriment to the
Kinnards or benefit to Robert L. Stone. Rather, while the notes were technically
executed after the final assignment of the Stones interest, it appears that these
notes simply memorialized pre-existing debts which the Kinnards forgave or
assumed as part of the assignments. This is sufficient under Oklahoma law. See
Okla. Stat. tit. 15 106. See generally Taylor v. Taylor, 389 P.2d 622, 627-28
(Okla. 1964) (stating that a disputed claim is good consideration, even if that
claim later is demonstrated to be unfounded). Accordingly, the district court
properly treated the promissory notes as good consideration. 5
B.
The Stones make two primary arguments relating to the payments that
David Kinnard made to Robert L. Stone. First, they argue that the payments
cannot serve as consideration because they were merely payments under a prior
obligation (namely, the alleged arrearage in payments on the $17,000 monthly
distribution). Second, they argue that the payments are null and void because
they actually came from Springfield in violation of the requirement that a partner
only borrow from the entity with the written consent of the other partners.
We do not need to reach the Stones argument that the Kinnards breached
their fiduciary duties, as it was not properly raised in the district court. The
Stones attempted to amend their counterclaim to add an additional claim for
breach of fiduciary duty, but the district court rejected their motion as untimely.
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Unclean Hands
The Stones also contend that the district court erred by granting an
equitable remedy to a party who it found to have unclean hands. The unclean
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hands doctrine means, in general, that equity will not aid a party whose conduct
has been unlawful, unconscionable, or inequitable. Houston Oilers, Inc. v.
Neely, 361 F.2d 36, 42 (10th Cir. 1966). However, the doctrine
. . . should
[not] be applied in every case where the conduct of a party may be considered
unconscionable or inequitable. Id. Here, we have no reason to conclude that the
district court abused its discretion by not applying this doctrine. Id. (The maxim
admits of the free exercise of judicial discretion in the furtherance of justice.);
see Haynes Trane Serv. Agency, Inc. v. Am. Standard, Inc., 562 F.3d 1047, 1058
(10th Cir. 2009) (reviewing application of unclean hands doctrine for abuse of
discretion). In particular, we note that this argument was apparently not raised
before the district court. It is based primarily on the Stones argument that the
Kinnards breached their fiduciary dutya claim not properly presented below.
Further, the Stones overstate the district courts finding regarding unclean hands.
While the district court found that both parties had unclean hands regarding the
Springfield operating agreements prohibition on loans without written consent,
Kinnard, 2008 WL 4000445, at *7, it did not so find regarding the broader
fiduciary claims now advanced by the Stones. Accordingly, we find that the
district court did not abuse its discretion.
IV.
Right to an Accounting
Finally, the Stones argue that the district court erred by denying them the
right to a full accounting. According to the Stones, a fair trial was impossible
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with an incomplete accounting, and this inadequacy demonstrates that the district
court erred by failing to grant them their requested relief. However, this
misconstrues the issue. The district court actually held that the Stones had as a
factual matter received a full accounting of the entities, utilizing accepted
principles of forensic accounting, not that they were not entitled to such an
accounting. Kinnard, 2008 WL 4000445, at *10. We cannot say that this factual
finding was clearly erroneous. An expert accountant testified that he was able to
perform an accounting for all the entities involved given the tax returns and other
information available to him, and that expert provided a full report with
documentation. This evidence gave the district court a sufficient basis to
conclude that an adequate accounting had been provided. Kinnard, 2008 WL
4000445, at *6 n.17. We find no clear error.
The district courts judgment is AFFIRMED. The motion to supplement
the record is DENIED.
Entered for the Court
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