Appendix — Children's Fund v. Springfield Holding Co.

Supreme Court, U.S.

FILED

oe No. 09__99=-506 OCT 7 - 2009

OFFICE OF THE CLERK

In The

Supreme Court of the Anited States

The Childrens Fund et al.,

Petitioners,

Vv.

Springfield Holding Co. Ltd. LLC et al,

Respondents.

On Petition for a Writ of Certiorari to the United

States Court of Appeals for the Tenth Circutt

APPENDICES

ROBERT L. STONE

Counsel of Record

CHICAGO UNIVERSITY SCHOOL

5635 S. UNIVERSITY AVE.

CHICAGO, IL 60637

(773) 684-9231

ROBERT REDA

JENNIFER MAJEWSKI

REDA & ASSOCS.

8 SOUTH MICHIGAN AVE.

CHICAGO, ILLINOIS 60603

September 17, 2009 Attorneys for Petitioner

C.

TABLE OF CONTENTS

The opinion and judgment sought to be

reviewed: the “unpublished” “ORDER

AND JUDGMENT” of 6/8/09 by the

Court OF RGRGGIE i.e sc ns os eee 1

The District Court’s “FINDINGS OF

FACT AND CONCLUSIONS OF LAW”

Oe ce ev cc be eee ee ee 31

The District Court’s “JUDGMENT,”

SORE. See 17

The “ORDER’ of 7/15/09, denying

peeereme 2... 2k. «se ss peer eae 81

The Petitioners’ “JOINT OPENING

BRIEF” of 11/26/08, showing that the

UPA questions raised in this Petition

were properly raised below ............ 83

The Petitioner's PETITION FOR

REHEARING EN BANC of 7/9/09,

showing that the Constitutional

questions raised in this Petition

were properly raised below ...... oenne 180

Case: 08-6210 Document: 01018079018 Date Filed: 06/08/2009

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT —

SPRINGFIELD HOLDING

COMPANY LTD LLC, Plaintiff —

Appellee, and MARK W. REINITZ;

ROGER L. KINNARD; DAVID H.

KINNARD, Plaintiffs-Counter-

Defendants-Appellees,

No. 08-6210

(D.C. No. 07-CV-00250-R)

(W.D. Okla.)

Vv.

ROBERT STONE, M.D.; THE

CHILDREN’S FUND, an Illinois

limited liability company; ROBERT L.

STONE, a/k/a Robert L. Stone the IT;

CYNTHIA A. STONE, Defendants-

Counter-Claimants -Appellants.

ORDER AND JUDGMENT’

Before KELLY, LUCERO, and HARTZ, Circuit

Judges.

‘This order and judgment is not binding precedent.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 it s persuasive

value consistent with Fed.R.App.P. 32.1 and 10 Cir. R. 32.1.

Defendants-Counter-Claimants-Appellants—

Robert L. Stone, Cea, A. Stone, Robert Stone.,,.

M.D., ana The Children’s Fund (referred to collec-

tively as the Stones)—appeal the district court’s

judgment in favor of the _ Plaintiffs-Counter-

Defendants-Appellecs, David Kinnard, Roger Kin-

nard, Mark Reinitz, and Plaintiff-Appellee Spring-

field Holding Co. (referred 66 cobleetively as the

Kinnards, given that the principal actors are David

and ieee Kinnard). The primary issue on appeal is

whether the district court erred in concluding that

the Stones no longer maintain an ownership interest

in a set of business entities in which they had

previously held a minority interest. We exercise

jurisdiction pursuant to 28 U.S.C. § 1291, and affirm

the district court’s judgment.

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 oanieias 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

“aggregator,” the Oklahoma Investment Group

(“OIG”). This “aggregator,” which had veils no

assets, was used to run the day-to-day operations of

the various entities and receive and disburse money

for each entity. OIG utilized a single bank account

for the entities, although separate books and records

were kept for each one. David Kinnard was the most

active member of the investors, and he acted as the

managing partner of OIG. Robert L. Stone was not

an active participant in OJQG’s internal affairs, as he

eventually moved to Chicago.

The problems that led to this litigation find

their root in the agreement between David Kinnard

and Robert L. Stone that the Stones would receive a

monthly allowance or distribution of $17,000. These

monthly payments continued from 1996 through

2005, though they apparently ceased for a period

during 1999 for reasons that are disputed by the

parties. The Stones contend that the payments were

withheld as leverage in a dispute between the Stones

and Kinnards over the distribution of proceeds from

a lawsuit (which the parties refer to as the “Beatrice

litigation”) against a third party not involved in this

litigation. The Stones further claim that the

Kinnards still owe them the arrearage that arose in

1999. On the other hand, the Kinnards maintain

that the payments were merely advances on the

Stones’ distributive share of income from the various

entities.!

The problems between the parties

subsequently deepened when Robert L. Stone began

to seek loans from the Kinnards. Mr. Stone sought a

loan from the Kinnards in 2003, and David Kinnard

agreed to grant him the requested money in

exchange for an “assignment” of Stone’s interest in

one of the entities owned by the investors, Cinnamon

‘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). Apit. App. 774-75,

1048-49.

Creek L.L.C. The nature of this exchange is also

disputed; the Stones contend that it was a loan,

while the Kinnards argue that it was a transfer of

the Stones’ ownership share with an accompanying

right to repurchase. This was a critical transaction,

because it set the precedent for the subsequent

financial dealings between the Stones and the

Kinnards. In any event, the Stones eventually

reestablished their ownership interest in Cinnamon

Creek by paying David Kinnard $130,000.

The transactions between the Stones and

Kinnards then began to multiply. In 2004, Stone

once ae used his Cinnamon Creek interest to

secure money from David Kinnard. Later in that

year, in separate transactions, the Stones assigned

to the Kinnards their interest in other entities,

including Peppertree Partners, Inc., Peppertree

Partners, Ltd., Windrock Associates, Summer

Pointe, and the Springfield Entities in exchange for

cash. The Stones also apparently executed two

promissory notes in relation to other disputed debts,

and David Kinnard assumed those obhgations as

part of the transactions between the Stones and

Kinnards. The Kinnards then evidently informed the

Stones that no further money would be forthcoming,

as they had concluded that the Stones had

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 inter-

ests 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 court's judgment, raising

several alleged errors on the part of the district

court.

Discussion

We rewiew the district court's 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

(10 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 firm conviction that a mistake has

been committed.” Anderson vy. City of Bessemer City,

470 U.S. 564, 573 (1985) (citation omitted). If the

district court’s findings are plausible, we will not

reverse. Id. at 573-74. Our review of questions of

law, on the other. hand, is de novo. La Resolana

Architects, 555 F.3d at 1177. We review mixed

questions of law and fact under either the clearly

erroneous standard or the de novo. standard,

depending on whether the inquiry is_ primarily

factual or legal. Hollern v. Wachovia Secs., Inc., 458

k.3d 1169, 1175 n.4 (10th Cir. 2006).

10

I. Sale of the Stones’ Interests in the

Business Entities

The Stones’ first argument is that the district

court erred by concluding that there was a valid con-

tract for the sale of their ownership interest because,

they con-tend, 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 (Oth Cir. 2000). Here, we cannot

conclude that the district court clearly erred, given

the factual record before us. The parties presented

Both parties agree that Oklahoma law governs in this case

11

conflicting evidence, which the district court resolved

in favor of the Kinnards.

The most important piece of evidence sup-

porting the district court’s conclusion is the hand-

ling 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. ApleeSupp.

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

12

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 lability company (the

“Company”), and all rights appurtenant thereto,

including but not hmited 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 pre-paring an

agreement ‘choad he could “repurchase his

membership interest.” Aplee.Supp.App. 5. Further,

the evidence suggests that Mr. Stone was aware of

the difference between the two documents when he

inquired why the transaction was described “as a

sale-redemption and not as a loan.” Apll.Supp.App.

ia

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.”

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_e sale and_ buy-back

agreement—and 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.1

>There is further evidence of the Stones’ knowledge of

the nature of the transaction into which they had entered.

When Cynthia Stone assigned her interest in Summer Pointe

using an identical unconditional transfer document, an OIG

employee informed her that the assignment documented a sale,

not security for a loan.

* The parties agree that identical documents were used

for all the relevant transactions. Hlowever, they disagree as to

whether the first transaction was a loan or a4 sale. Given our

standard of review. we have no basis to reverse the district

courts eminently reasonable conclusion that it was a sale.

=)

ce

In lhght of the documentary evidence and

testimony, stinie’ evidence supports the district

court’s 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. For instance, the Stones testi-

fied 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-

Accordingly, we cannot rely on this first transaction to show

that the remainder were loans, as the Stones would have us do.

i

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

40004145, at *2-3.

“But pointing to conflicting evidence inconsis-

tent with the district court’s 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 evi-

dence, [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

16

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 court's 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.

Il. Adequacy of the Consideration Provided

The Stones next challenge the adequacy of the

consideration they received for the sale of their

ownership interests. In particular, they argue that

L?

the district court erred by finding that David

Kinnard paid valid consideration for the Stones’

interests. ‘(According to the Stones, neither the

ecivauees of the promissory notes executed by

Robert L. Stone nor the funds borrowed by David

Kinnard from the Spring-field Entities can serve as

consideration. The Stones’ challenge raises a mixed

question of law and fact.

A. The Promissory Notes

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

memoriahized 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

18

apparently stemmed from the dispute between the

Stones and Kinnards over the proceeds from the

Beatrice 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 detri-

ment to David Kinnard, because they were executed

after the final assignment of the Stones’ interests,

and because they were of un-certain 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 hable 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 court’s conclusion on this point. Further,

there 1s no evidence that the Kinnard brothers

19

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 Kinnard’s 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, consider-

ation. Finally, it is of little consequence here that.

the notes were executed subsequent to the final

assignment of the Stones’ interest; this fact does not

render their value sufficiently uncertain such that

20

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.°

‘In any event, we note that the undisputed testimony of

the Plaintiffs expert witness was that the consideration for the

purchases would have been reasonable even without including

the discharge of the Stones obligation under the promissory

notes. Aplt. App. 1136-40.

aa

B. Use of Funds Borrowed from the

Springfield Entities

The Stones make two primary arguments

relating to the payments that David Kinnard made

to Robert L. Stone. First, they argue that the pay-

ments 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.

The first argument is plainly without merit. It

is a factual question whether the Kinnards’ periodic

failure to pay the $17,000 monthly distribution cre-

ated a “pnior obligation” such that later payments

would essentially constitute a satisfaction of the pre-

existing debt. The district court concluded that the

monthly payments were not guaranteed payments,

but rather were advances on the Stones’ distributive

share. Kinnard, 2008 WL 4000445, at *6. This con-

clusion was not clearly erroneous, given that it is

amply supported by testimony from David Kinnard,

the accountant for the entities involved, the

Kinnards’ expert witness, and the Stones’ tax

returns. The district court had the discretion to

credit this testimony over that. of the Stones, and we

have no basis for finding clear error. See Penncro

Assocs., 499 F.3d at 1161.

The second argument proffered by the Stones

also fails. The Stones contend that David Kinnard

took the funds from Springfield in violation of the

Springfield operating agreement, and that, ergo, the

payments were void and of no effect. Hlowever, this

argument depends on the related issue of whether

— a je > “RY v PS Be @y By

23

the Stones had waived their right to enforce the

pertinent provision in the Springfield operating

agreement. The district court concluded that the

Stones had waived their rights by previously

borrowing from Springfield without the written

consent of the Kinnard brothers. Kinnard, 2008 WL

4000445, at *7.

Under Oklahoma law, in order to waive a

right, “there must be an actual intention to

relinquish a known right, either expressly, or by

such conduct as warrants an inference of such

relinquishment.” Atlas Life Ins. Co. v. Schrimsher,

66 P.2d 945, 948 (Okla. 1937); see Whitmire v. Zolbe,

403 P.2d 445, 448-49 (Okla. 1965). The district court

correctly concluded that this standard had been

satisfied, given that the Stones had taken a loan

from Springfield without the other owners’ written

consent on prior occasions. Moreover, the

24

arrangement whereby the Stones consistently took

advances of their distributive share of income from

Springfield—thereby creating an account receivable

or debt in favor of OIG and Springfield—also

supports the district court’s finding of waiver. Thus,

the Stones intentionally bypassed the written

consent provision by taking the loan in contra-

vention of the provision. Accordingly, their waiver

was knowing and demonstrated by explicit conduct,

as is required by Oklahoma law. Atlas Life Ins. Co.,

66 P.2d at 948. The Stones cannot now use the

provision that they bypassed against their erst-while

partners. The Stones’ arguments before this court

that they did not waive the provision in the

operating agreement miss the key point raised by

the district court.6 The Stones waived their rights

“We do not need to reach the Stones’ argument that the

Kinnards breached their fiduciary duties, as it was not properly

under the operating agreement not because David

Kinnard had taken a loan from Springfield without

written consent (which is how the Stones frame the

argument); rather, they waived their rights’ by

taking a loan from Springfield themselves without

written consent. Accordingly, the issue is_ not

whether the Stones’ failure to object to another

party's breach constitutes waiver; instead, the issue

is whether the Stones’ own violation of the

agreement operates as a waiver. As noted above, we

conclude that it does. Furthermore, we recognize

that the Stones argue to this court that they “took

that loan from the Kinnard Brothers individually,

not from Springfield,” Aplt. Br. 39, but there 1s

sufficient factual support for the district court’s

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

26

conclusion that they did take the loan from

Springfield that we cannot say this factual finding

was clear error. As noted above, the most significant

evidence supporting the district court’s conclusion is

that Mr. Stone —— testified that he had taken a

loan from Springfield without written consent, and

had signed a promissory note payable to Springfield.

Accordingly, we find no error.

Having concluded that the Stones waived

their right to enforce the pertinent provision in the

Springfield operating agreement, we must also

conclude that the funds David Kinnard provided to

the Stones constituted valid consideration. The

district court's conclusion that the Stones “received

reasonable consideration for their interests in the

subject entities,” Kinnard, 2008 WL 4000445, at *8,

is) not clearly erroncous’ given the underlying

evidence which supports It.

27

II. 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

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

un-conscionable 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

28

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 duty—a claim not

properly presented below. Further, the Stones

overstate the district court’s finding regarding

unclean hands. While the district court found that

both parties had unclean hands regarding the

Springfield operating agreement’s 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

29

impossible 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,

30

2008 WL 4000445, at *6 n.17. We find no clear

error.

The district court’s judgment is AFFIRMED.

The motion to supplement the record is DENIED.

Entered for the Court

[s} Paul J. Kelly, Jr.

Paul J. Kelly, Jr.

Circuit Judge

31

Case 5:07-cv-00250-R Document 114 Filed 08/25/208

IN THE UNITED STATES DISTRICT COURT FOR

THE WESTERN DISTRICT OF OKLAHOMA

DAVID H. KINNARD et al.,

)

. )

Plaintiffs, )

Vv. ) CIV-07-250-R

)

ROBERT L. STONE; )

CYNTHIA A. STONE; and )

ROBERT L. STONE, M.D., )

)

)

Defendants.

FINDINGS OF FACT

AND CONCLUSIONS OF LAW

The Court conducted a non-jury trial of this

matter from June 17, 2008 until June 20, 2008.

Following the conclusion of the trial, the parties

submitted pro-posed findings of fact and conclusions

of law. Having considered the evidence presented,

the Court makes the following findings and

conclusions.

The Court notes at the outset the general lack

of credibility of all the parties to this action. The

facts as found by the Court represent the Court’s

interpretation of the likely facts as separated from

the obvious fiction presented by many of the

witnesses. Additionally, the record keeping of both

Plaintiffs and Defendants was severely deficient and

renders it a near impossibility for even the experts to

discern the actual history of transactions between

the parties. The fault, however, lies with all parties.

Any party who concludes that the Court clearly

favored the opposing side would be incorrect. This is

a tale of apparently intelligent people who have little

business sense or common sense.

The parties dealings began many years ago,

when Plaintiff Roger Kinnard and Defendant Robert

L. Stone became friends while attending the Univer-

sity of Chicago. Robert L. Stone and Cynthia Stone

33

are now husband and wife; however, Cynthia Stone

was formerly married to Roger Kinnard. During the

1980's, Roger Kinnard, his brother, David Kinnard,

and Robert L. Stone, initiated a number of business

ventures for purposes of buying and running apart-

ment buildings in Oklahoma. The ventures were

known collectively, and managed loosely, as the

Oklahoma Investment Group. The Oklahoma

Investment Group functioned as a common man-

agement structure, or aggregator, for a number of

entities, including: Cinnamon Creek, LLC, incor-

porated in 1999;3 Peppertree Partners, Ltd.,4 formed

in 1992; Windrock Associates, an Oklahoma general

* Robert L. Stone, David Kinnard and Roger Kinnard

each owned one-third of Cinnamon Creek, LLC.

‘David Kinnard. Roger Kinnard, Robert L. Stone, and a

fourth person each owned 24.75% of the partnership. The re-

maining one percent was owned by the general partner,

Pepper-tree Partners. Inc, a corporation with four

shareholders, the limited partners

34

partnership formed in 1989,5 Summer Pointe

Partners, Ltd., founded in 1991;6 and Springfield Vil-

lage Apartments, Ltd., an Oklahoma limited liability

company, incorporated in 1990.7 These entities did

not maintain separate bank accounts. Rather, a

single account in the name of Oklahoma Investment

Group, which had virtually no assets, was used for

both receiving monies and making payments. Within

this single account, separate balance sheets were

maintained for each entity. Fach entity filed its own

-°David Kinnard, Roger Kinnard, and Robert L. Stone

were equal partners, each owning one-third of the Windrock

Associates.

"Summer Pointe Partners’ general partner was Sum-

mer Pointe Partners, Inc., owned by Cynthia Stone, Roger Kin-

nard, Margaret McLaughlin and Samuel Brown. The limited

partners were David Kinnard, Roger Kinnard, Sam Brown,

Margaret McLaughlin, and Cynthia Stone.

‘David Kinnard. Roger Kinnard, and Robert L. Stone.

were equal members of Springfield Holding Company, LLC,

which owns ninety-nine percent of Springfield Village Apart-

ments, Ltd.. The remaining one percent 1s owned by Springfield

Apartments, Incorporated, which had three shareholders,

Roger Kinnard, David Kinnard and Robert L. Stone

tax returns. Mark Reinitz served as manager of

Oklahoma Investment Group, which was run by

David Kinnard. During the relevant time period

Roger Kinnard was living in Boston and Robert L.

Stone and Cynthia Stone were living in Chicago.

Mark Reinitz and David Kinnard were living in

Oklahoma, although David Kinnard spent consi-

derable time out of the country.

Problems began with regard to the entities

when Robert L. Stone and Cynthia Stone relocated

to Chicago in 1996. David Kinnard agreed that for a

period of five years, Robert L. Stone would receive

monthly “allowance payments.”8 These payments

* Actually the payments were to be made by Oklahoma Invest-

ment Group, which had no assets, but was the only entity with

a bank account. Apparently the draws were debited against

Stone's distributive share of the various entities. and any

excess created an account receivable in favor of Springfield

Village. Cunously there was no testimony regarding the

accounting methodology employed with regard to the

payments. Additionally, it is unclear what the Stone's believed

was their obligation vis-a-vis the Internal Revenue Service with

regard to the payments, although it was made clear to Mr.

36

were designed to assist the relocation of Robert L.

Stone and his family from Oklahoma to Chicago.

The payments were not treated as “guaranteed

payments” for tax purposes, but rather as advances

on distributive share, and thus did not appear on the

various Schedule K-1s produced by the entities.

From 1996 through 1998, and again from March

2000 through early 2005, monthly payments were

made by Oklahoma Investment Group on behalf of

the partnership entities to the Stones. No payments

were made during 1999, and apparently Robert L.

Stone did not object to the absence of payments. The

rationale for the failure to make payments in 1999 is

of course hotly contested. David Kinnard testified

that no payments were made because Robert L.

Stone was not requesting money, apparently having

Stone by the Oklahoma Investment Group accountant that the

payments were not being deducted as cxpenses by the entuitic:

39

made a considerable amount of money in a “side

deal,” that be-comes a part of the tangled web

presented in this action. According to Robert L.

Stone, the failure to make payments was an effort to

extract a settlement with regard to this “side deal,” a

situation that the parties referred to as “the Beatrice

Dispute.”

Upon relocating to Chicago in 1996, Robert L.

Stone sought to acquire a refrigerated warehouse

located downtown from Beatrice Associates, a

Florida general partnership Springfield Village

loaned Robert L. Stone and Cynthia’ Stone

$305,000.00, which they in turn used to purchase the

warehouse. Robert L. Stone thereafter instituted

htigation against the tenant, Americold Corporation,

for dam-age to the leasehold The underlying

litigation was settled in 1998 for 3.6 million dollars

Robert L. Stone repaid the Springfield loan.

38

including interest. For reasons still unclear, Robert

L. Stone had agreed to “a kicker” that is, that once

the Beatrice litigation was settled, he would pay

Roger Kinnard and David Kinnard ten percent of the

net settlement proceeds. A dispute arose regarding

the definition of net settlement proceeds, specifically

how the litigation costs were to be measured.

Defendant contends the monthly allowance funds

were withheld in 1999 and early 2000 an effort to

extort a settlement of this Beatrice dispute.®

From March 2000 until 2003, the monthly

payments continued via Oklahoma Investment

Group. In early 2003, Robert L. Stone took control of

Redux Office Furniture Company in Chicago, which

refurbished office furniture. Robert L. Stone sought

funding for Redux from Roger Kinnard Roger

°No resolution of this issue was achieved prior to the

assignments that form the basis of the instant dispute

Kinnard asked David Kinnard about the possibility

of investing. David Kinnard refused to invest in the

company, but offered to accept an assignment of

Robert L. Stone’s interest in Cinnamon Creek, LLC

in exchange for giving Robert L. Stone $100,000.

The assignment as executed by Robert L. Stone

stated that he “hereby sclls, assigns, transfers and

conveys to Assignee all of his membership and other

ownership interest of any kind in Cinnamon Creek

L.L.C., an Oklahoma hmited liability company (the

“Company’), and all mghts appurtenant thereto,

including but not lmuited to the right to receive

distributions, profits or income of any_ kind.”

Although not commemorated in writing, the loan

included a buy-back provision, permitting Robert L

Stone to repurchase his interest in Cinnamon Creek

LLC within six months, with an interest rate

of 36%. The funds transferred by David Kinnard

40

were borrowed from Springfield Village, and the

amount was reflected by an increase in David Kin-

nard’s account a account.!® Robert L. Stone

tendered $130,000.00 to David Kinnard, and Robert

L. Stone’s ownership interest in Cinnamon Creek,

LLC was restored on October 1, 2009. No further

problems arose during 2003 between the partners.

In late February 2004, Robert L. Stone ap-

proached David Kinnard, seeking to borrow addi-

tional money. On March 3, 2004, Robert L. Stone

executed an Assignment of Membership Interest

identical to that executed in 2003, assigning his

membership interest in Cinnamon Creek to David

Kinnard. Although not stated in the assignment, the

OTe parties utilized the term “account receivable” to

indicate both money owed to a partner or member or money

owed to an entity by a partner or member. Although tradi-

tionally money owed would be considered an account payable,

as to the debtor, the entities’ accounting reflected any debt

owed by a partner or member as a negative account receivable,

not an account payable of the partner or member.

41

amount agreed upon was $45,000.00. The $45,000

was wired to the bank account of the Children’s

Fund, at the direction of Robert L. Stone, on March

5, 2004. This value was determined by calculating

the capitalized value of Robert L. Stone’s interest in

Cinnamon Creek, LLC.!! Although not stated in the

assignment, Robert L. Stone had the right to restore

his interest by tendering payment to David eee

of the $45, 000, plus interest, the amount of which

escalated depending on when the principal was

repaid. The buy-back option terminated six months

after the assignment, and it was noted in a March 2,

2004 e-mail to Robert L. Stone that “fajf more than

1 The capitalized value of Robert L. Stone’s interest

was calculated by dividing Cinnamon Creck. LLC’s net

operating income by a capitalization rate of 10.5%. The cost of

debt servicing, i.e. the mortgage, was deducted from this value

to determine the net capitalized value of Cinnamon Creek,

LLC. The value of Robert L. Stone’s interest in Cinnamon

Creek, LLC was his pro rata share of the net capitalized value

of the entire property.

42

six months have passed without complete payment,

David shall retain permanently the Cinnamon share

herein discussed.” To finance the purchase David

Kinnard utilized funds borrowed from Springfield

Village, which increased his accounts receivable. !2

Robert L. Stone did not repay the $45,000.00 to

David Kinnard. Robert L. Stone apparently conceded

in early 2005 that he no longer owned an interest in

Cinnamon Creek, LLC, as reflected in the financial

statement prepared by Sergey Galant, the Oklahoma

Investment Group accountant. Robert L. Stone

made suggestions regarding entries on the

'?This same structure was utilized for all of the assign-

ments at issue herein. According to Sergey Galant, the

borrowing is reported as debt of partners to the company. As a

result David Kimnard’s accounts’ receivable increased.

Plaintiffs expert testified that in valuing Robert L. Stone’s

interest in the entities that he included David Kinnard’s debt

as an asset of the entitics, to which Robert L. Stone was

entitled to his proportional share. David Payne also testified

that the capital accounts of the partners were in balance.

43

statement, but did not question the absence of any

ownership interest in Cinnamon Creek, LLC.

In June 2004, Robert L. Stone requested addi-

tional funds. Via e-mail from Mark Reinitz, it was

noted that in exchange for the assignment of his _

interest in Peppertree Partners, Ltd. and Peppertree

Partners, Inc., David Kinnard would pay Robert L.

Stone $10,200.00. Combined with other payments

previously sent to Robert L. Stone and mortgage

payments not received from him for certain

Oklahoma Investment Group properties, the total

amount of compensation was $43,000.00.'3 On June

10, 2004, Robert L. Stone executed an assignment of

his interest in the Peppertree entities. Again,

although not contained in the assignment, the

131n a June 9. 2004 e-mail, from Mark Reinitz to Robert

L. Stone and others, Mark Reinitz noted “[wJe will wire $10.2K

to Rob, which with other payments sent to Rob and not received

from him comes to a total of $43hK paid for Rob’s whole Pepper-

Otree ownership share.

44

transaction permitted Robert L. Stone to repurchase

his shares within six months, with incremental

increases in the amount due.!4 Robert L. Stone did

not repay any money to David Kinnard. As with the

Cinnamon Creek, LLC purchase, the money used by

David Kinnard to purchase Robert L. Stone’s shares

was borrowed from Springfield Village and resulted

in an increase in David Knnard’s -accounts

receivable.

In August 2004, Robert L. Stone requested

additional money for purposes of funding his Chicago

venture. On August 13, 2004, Robert L. Stone exe-

cuted an assignment of his interest in Windrock

Associates to David Kinnard. In exchange for his

assignment, Robert L. Stone received $145,000.00,

The June 9. 2004. e-mail indicated that “fijf more

than six months have passed without complete payment by

Rob, David Kinnard shal] retain permanently the Peppertree

share here-in discussed.”

45

the capitalized value of his ownership interest,

spread over a period of months. Again, although not

part of the documentation, Robert L. Stone had the

opportunity to repay the sais within six months

and to reclaim his ownership interest. Robert L.

Stone did not exercise his rights. In December 2004,

Robert L. Stone again requested money from Roger

Kinnard. Roger Kinnard contacted his brother, via

Mark Reinitz, and David Kinnard agreed to “loan”

Robert L. Stone $45,000.00.'!5 “Rob says that for this

$5K and some previous wire advances, he will assign

his share of Summer Pointe to Dave, with the usual

6 month buy-back option.” Plaintiffs Ex. 71.

Oklahoma Investment Group transferred $5,000.00

to Robert L. Stone on January 25, 2004. Combined

with transfers on December 2, 10, and 30, 2004, the

"In actuality the transaction called for David Kinnard

to loan Robert L. Stone $5,000, and for David Kinnard to cover

$40,000 of Robert L. Stone’s prior advances.

46

total consideration was $45,000.00. The assignment

was made by Robert L. Stone effective March 1,

2005. Robert L. Stone did not repay the amount. to

David Kinnard. Additionally, on March 1, 2005,

Robert L. Stone executed an assignment of his

membership and stock ownership in the Springfield

Entities, Springfield Holding Company and ices,

field Apartments, Inc., to David Kinnard. The same

assignment form was utilized and again there was

an unwritten six month buy-back provision. In

exchange for the assignment, Robert L. Stone

received $81,000 in cash, and David Kinnard agreed

to cover $360,689.37 of accounts receivable owed by

Robert L. Stone to Springfield, and the forgiveness of

two promissory notes. One promissory note, related

to the Beatrice dispute, was allegedly executed in an

attempt to finally resolve the issue of the ten percent

due and owing to David and Roger Kinnard. This

47

note required that it be fully paid by September 15,

2005, six months after its execution, in order for

Sakert L. Stone to regain his shares in the

Springfield entities. The second note was designed

to address a debt by Robert L. Stone to Bernice

Kinnard, Roger and David’s mother. !6 According to

David Kinnard, in exchange for Robert L. Stone’s

interest in the Springfield entities, no one would

attempt to collect this debt. Additionally, according

to Mark Reinitz, David Kinnard was assuming the

debt, making him hable for payment to his mother.

16phe earliest evidence of this transaction is an e-mail from

December 2004. whereby Robert L. Stone indicated that he would

agree that whatever amount he owed Mrs. Kinnard, together with a

loan for $20,000 that he was requesting, would be secured by his

interest in Springfeld Village. Defendants’ Ex. 153. Thereafter, on

December 30, 2004, Robert L. Stone submitted a proposed agreement

to utilize his interest in Springfield Village as secunty for subsequent

money borrowed from Oklahoma Investment Group, money owed to

Bernice Kinnard and any award from the arbitration of the Beatrice

Dispute. Defendants’ Ex. 154. In January it was noted in an e-mail to

Robert L. Stone from Mark Reinitz that “[oJther previous wire

advances plus the Beatmce money owed (about $250K) and

approximately 500K still owed to Mrs. Kinnard will all go against

Rob’s share of Springfield. as he has indicated in earlier emails.”

Plaintuffs Ex. 71.

48

The cash portion of the transaction was wired to the

account of The Children’s Fund, at Robert L. Stone’s

request. Robert L. Stone did not repay any of the

amount to David Kinnard.

In April 2005, Cynthia Stone owned a 5.5%

interest in the Summer Pointe entities. Robert L.

Stone spoke with Mark Reinitz about the possibility

of Cynthia Stone assigning her interests to David

Kin-nard. On April 7, 2005, Ted Teske advised

Cynthia Stone and Robert L. Stone via telephone

that the assignment she was being asked to execute

was not a loan or security for a loan; it was a sale

and an assignment of Cynthia Stone’s entire interest

in the Summer Pointe Entities. The call from Ted

Teske was in response to a request by Robert L.

Stone that he explain to Cynthia that the assign-

ment was in fact merely security for a loan. Robert

L. Stone seemed _ surprised by Mr. Teske’s

49

interpretation of the assignment. Mr. Teske further

explained that Robert L. Stone has _ previously

assigned his entire interest in the entities, and that

the buyback period had expired for certain of those

properties. Thereafter, Ted Teske sent an email to

Cynthia Stone with an attached assignment. Per the

e-mail, the purchase price was to be $42,000.00.

On April 8, 2005, Cynthia Stone insdieea and

delivered an Assignment of Membership Interest of

all of her membership and stock ownership in Sum-

mer Pointe Partners, an Oklahoma limited partner-

ship, and Summer Pointe Partners, Inc. to David

Kinnard. On April 8, 2005, Oklahoma Investment

Group wired $7,000.00 to the account of Robert

Stone at Lakeshore Bank. On April 11, 2005, the

balance of $35,000.00 was wire transferred to the

same account. The wire transfer notation indicated it

was the final payment for the assignment of interest

in Summer Pointe from Cynthia Stone to David

Kinnard. Neither Cynthia Stone nor Robert L. Stone

ever paid any money to David Kinnard to redeem

their ownership interest.

In May 2005, Roger Kinnard informed the

Defendants that no additional money would be

forthcoming from the Oklahoma Investment Group

account, because Defendants no longer maintained

an ownership interest.

As noted above, at some point in time Robert

LL. Stone borrowed money from Bernice Kinnard.

This debt was apparently never repaid, the amount

owed 1s disputed, and Mark Reinitz testified that as

part of the compensation paid to Robert L. Stone for

his interest in Springfield Village, David Kinnard

assumed the debt. As with many of the transactions

involved in this action, the original debt apparently

was not commemorated in writing. Although Robert

5]

L. Stone disputes the existence of the debt, there is a

promissory note signed by Robert L. Stone indicating

a debt to Bernice Kinnard totaling $500,000.00. De-

fendants’ Ex. 400. In February 2004, Robert L.

Stone sent an e-mail to Roger Kinnard acknowledg-

ing a debt, but noting the disputed amount. Defen-

dants’ Ex. 123. On December 10, 2004, Robert L.

Stone acknowledged the debt as well. Defendants’

Ex. 153. On January 25, 2005, Mark Reinitz

estimated to Robert L. Stone that he owed

approximately $500,000 to Mrs. Kinnard. Defen-

dants’ Ex. 165. Robert L. Stone acknowledged, and

did not dispute this estimate, in an e-mail to David

Kinnard, Roger Kinnard and Mark Reinitz.

Plaintiffs Ex. 70. This debt was transferred to

David Kinnard by virtue of the March 2005

transaction regarding Springfield Village.

As a result of the parties’ inability to agree on

whether the Stones own anv iterest in any of the

entities, Plaintiffs filed this action. David Kinnard

seeks a declaratory judgment that the assignments

set forth above were valid and legally binding such

that none of the defendants have any right, title or

interest in any of the entities. Plaintiff David

Kinnard requests an order restraining Defendants

from ever claiming, for any purpose, an ownership

interest or financial interest in any of the entities.

Defendants filed counter-claims seeking a _ full

accounting for each of the entities and a declaratory

judgment that they have ownership rights in the

entities.

Because the assignments are the foundation of

the action, the Court will first consider the legality

and effect of the Stone’s various assignments.

Robert L. Stone contends that certain of the

assignments were prohibited by the terms of the

partnership agreements or the operating agreements

of the particular entity.

According to the Cinnamon Creek, LLC oper

ating agreement, any assignment of a membcr's

interest required the consent of cach member, via

written and dated instrument. Additionally, it re

quired that each member file the necessary docu-

ments for a transferee to become a substitute mem-

ber and that the company receive an opinion of

counsel that the transfer would not materially

adversely affect the company's classification for tax

purposes. The Court notes that in 2003, without

considering any of these issues, Robert L. Stone

assigned his interest in Cinnamon Creek, LLC to

David Kinnard. Additionally, when the money was

repaid in late 2003, Robert L. Stone’s interest was

restored, an assignment in and of itself. When

54

Robert L. Stone assigned his interest a second time

in 2004, again without concern for the provisions of

the Cinnamon Creek, ILLC operating agreement, the

Court concludes that he waived the requirements.

Additionally, Robert L. Stone clearly agreed to the

assignment of his interest by virtue of his signature

on the assignment. Additionally, the e-mail mes-

sages between Mark Reinitz, David Kinnard and

Roger Kinnard are sufficient to fulfill the written

consent requirement. Obviously David Kinnard

consented, and Roger Kinnard’s consent is found

within these e-mails. Furthermore, because David

Kinnard was already a member, there was no issue

regarding substitution of a member, and Mark

Lovelace of Phillips McFall had previously con-

sulted with Plaintiffs on the 2003 sale of Cinnamon

Creek, LLC. Accordingly, the Court concludes that

provision in the Cinnamon Creek, I.LC operating

he

agreement were waived by Robert L. Stone, and

alternatively, that the conditions were fulfilled.!7

The partnership agreement for Peppertree

Partner, Ltd., permits the transfer of a partner's

interest with the approval of the general partner.

The hmited partner seeking to transfer his interest

must request permission in writing and pay a non-

refund-able fee of four hundred dollars, and counsel

must be consulted regarding the effect of such

transfer on the partnership.!® Clearly the condition

‘’The Cinnamon Creek, LLC Operating Agreement

provides, in part: No failure by any party to insist upon the

strict performance of any covenant, duty, agreement or

condition of this Agreement or to exercise any right or remedy

consequent upon a breach thereof shall constitute waiver of any

such breach or any other covenant, duty, agreement or

condition. Defendant Robert L. Stone cannot rely on this

provision when his actions were the actions taken in violation

of the terms of the Operating Agreement related to transfer of

interest.

‘The partnership agreement provides: The lhmited

part-ner seeking to transfer his interest must first apply in

writing to both the general partners at their addresses on the

books of the Partnership and pay a non-refundable fee of four

hundred dollars ($40000) to the resident agent of this

Partnership in this state at the address listed above. to cover

56

of consent was met, because David Kinnard, on

behalf of the corporate general partner, gave his

consent. Additionally, Mark Lovelace was consulted

regarding the proposed transfer, and apparently

concluded that the transfer to David Kinnard would

not impact Peppertree’s status. Accordingly, Defen-

dants’ contention that Plaintiffs failed to comply

with these requirements is without merit.

the costs and expenses of preparing, executing, and filing a

certificate of Amendment with the office of the Secretary of

state of Oklahoma; (b) Upon receiving such notice, the general

partners shall present copies of said notice to counsel for the

Partnership; (c) If in the opinion of such counsel, the proposed

transfer of such partnership interest may be effected without

registration thereof under the Act, as then in force, or any

similar statute then in force. and applicable state securities

law, the general partners shall promptly there after so notify

the holder of such partnership interest. Then the general

partners shall decide in writing whether. in their sole

discretion, they will permit said transfer. A unanimous vote is

required to approve the transfer and to admit the transferee to

the Partnership as a new lmited partner. Approval must also

be in accordance with the terms of the notice delivered by the

transferor to the general partners, in accordance with this

certificate, and upon such further terms and conditions as shall

be required by counsel for the Partnership in order to assure

comphance with the Act. and applicable securties laws.’

Defendants Ex. 302.

=

With regard to Summer Pointe Partners, a

lhmited partnership, Defendants allege that its

bylaws provide that a transfer of shares to any

present share-holder is valid only upon unanimous

approval of all other living shareholders. The

bylaws, however, were not introduced into evidence

‘at trial, and the certificate of limited partnership

contains no such requirement. Furthermore, Mark

Reinitz testified that with regard to the transfer of

Robert L. Stone’s interest in Summer Pointe, that he

questioned the other partners, Roger Kinnard, David

Kinnard, Samuel Brown, and Margaret McLaughlin,

and none had any objection to the _ transfer.

Accordingly, this provision if it exists did not

preclude the transfer of Defendants’ interests in

Summer Pointe.

Defendants alternatively seek to avoid the

effect of the assignments by arguing, with regard to

58

each particular assignment, that they received no

odaaaion for the transfer of their interests.

Additionally, vides argue that because the

fund transfers came from the Oklahoma Investment

Group account, that they did not receive consider-

ation from David Kinnard, the purported purchaser

of their interests. Additionally, Defendants contend

that as a result of the guaranteed monthly

allowance, and Oklahoma Investment Group’s

failure to consistently send the requisite payments,

that Oklahoma Investment was indebted to the

Stones, and that any alleged advances, should have

been set off by the debt owed to them. The Court

disagrees.

Robert L. Stone contends that the promise of a

monthly allowance created an account payable, in

his favor, for any month the promised amount was

not received. Plaintiff's expert, one of the few

59

credible witnesses in the case, testified that he had

completed a full accounting of the entities, utilizing

accepted methods of forensic accounting. 19» He

testified that payments made to partners.or to

members of a lhmited lability corporation can take

one of three forms: (1) guaranteed payments,

generally a salary to a partner for work expended,

which are deducted by the entity as an expense; (2)

distributions of operating income, that is a partner's

pro rata share of net operating income less the debt

service; and (3) loans. Loans are essentially any

moneys paid to a partner or member in excess of his

'’Defendants contend that no “full accounting” was

completed. because Mr. Payne did not have access to the

general ledgers from the inception of the entities. Mr. Payne

testified that it is not unusual that business entities do not

retain al] of their general ledgers. He testified that by virtue of

the tax re-turns for the entities that he was able to determine

historically what distributions had been made to the members

and the partners. There is no evidence that the entities tax

returns did not accurately state the payments made to the

partners as distributions.

60

or her distributive share. At no time were the

monthly payments to Robert L. Stone treated as

guaranteed payments, deducted as an expense by

the entities and reported to the Internal Revenue

Service as guaranteed payments made to him. The

Court concludes that the “monthly allowance” had

the potential to create debt from Robert L. Stone to

the Oklahoma Investment Group member entities, to

the extent the amounts exceeded his distributive

share. However, the failure to make one or more

payments did not create debt in favor of Robert L.

Stone against Oklahoma Investment Group or any

entity or individual. Any money paid monthly, or

otherwise, to Robert L. Stone was either a

distribution or a loan. Distributions in excess of his

distributive share created a liability in favor of the

entities.29

©The Court is unable to accept the testimony of Defen-

61

Mr. Payne testified that the capital accounts

of each partner were essentially in balance, that is,

that the distributions of capital to David Kinnard,

Roger Kinnard, and Robert L. Stone, were

proportionate to their ownership interests. The

partners loan accounts, however, were not in ba-

lance. Roger Kinnard had the largest accounts

dants’ expert. because it is based on a faulty premise: that the

monthly allowance was a guaranteed payment and that the

failure by Oklahoma Investment Group to make a monthly

payment resulted in a liability on its part and an asset on the

part of Robert L. Stone. Such was not the case. As indicated in

an e-mail dated March 22, 2002, from Jeremy White, then-

Oklahoma Investment Group accountant, to Robert L. Stone,

the payments to Robert L. Stone were distributions "instead of

compensation" because "the payments to you are your share of

net income from the partnerships you own. It is_ not

compensation that we are paying to you since the partnerships

do not get to count it as an expense.” Defendants’ Ex. 16. The

accountant refused to consider the payments as guaranteed

payments and the K-Is issued by the entities rarely reported

distributions to their partners or Members. As a result, Robert

L. Stone should have realized that the hundreds of thousands

of dollars that he was receiving annually would have to be

balanced against his distributive share. Indeed, in early 2005,

when preparing his financial statement in conjunction with

Sergey Gallant, Robert L. Stone did not question the fact that

his account receivable, that is his debt to Oklahoma Investment.

Group. was nearly one million dollars. Defendants Ex. 174,

lo dad

177.

62

receivable, followed by Robert L. Stone and then

David Kinnard. As noted above, David Kinnard’s

accounts receivable grew substantially in 2004 and

2005, as he leveraged his interest in order to acquire

Robert L. Stone’s share. Defendants contend that

this was improper for a multitude of reasons,

including the fact that the money was all on the

books of Springfield Village, and its operating

agreement prohibited loans to the members.?!

The Springfield Village Operating Agreement

provides in Article 4, Section 4.3, that “[t]he Com-

pany shall not make any loans to any member or any

affiliate of any member without the written consent

of all members holding as least three fourths (3/4) of

“1The accounting methodology for the entities involved

transferring all accounts receivable to the books of Springfield

Village. Plaintiff's expert testified that Springfield Village is by

far the most profitable of the entities, and that it was in the

best financial position to advance moneys, and thus the

transfer of the debt was not impermissible or unusual.

63

the outstanding Units of the Company.” Defendants’

Ex.329. Defendants contend that Plaintiffs did not

have the required written consent. The Court con-

cludes that by his consent Robert L. Stone waived

this requirement.

In Atlas Life Ins. Co. v. Schrimsher, 179 Okl.

643, 66 P.2d 945 (948) (1937), the Oklahoma

Supreme Court said:

Although the definitions of waiver are

myriad and conflicting, it may be said

with certainty that in order to con-

stitute a waiver, there must be an actual

intention vo relinquish a known right,

either expressly, or by such conduct as

warrants an inference of such relinquish-

ment ... The most rudimentary essential

of a waiver is that the waiving party shall

in some manner publish his intention to

relinquish his rights, either by words or

conduct. As stated in 67Corpus Juris, 294,

‘waiver' ‘is a doctrine, resting upon an

equitable principle, which courts of law

will recognize, that a person with full

knowledge of the facts shall not be per-

mitted to act in a manner inconsistent

with his former position or conduct to

the injury of another.’

64

In 1997, Robert L. Stone and Cynthia Stone

borrowed $305,000.00 from Springfield Village

Apartments, Ltd, an Oklahoma limited liability

company, to procure the Beatrice Warehouse. Plain-

tiffs Ex. 361. There is no evidence of written con-

sent by David Kinnard and Roger Kinnard to the

loan for that transaction. Additionally, On June 3,

2004, and June 14, 2004, Defendant Robert L. Stone

requested advances on his partnership distributions,

which would likely include money from the Spring-

field Village apartment. The Court finds that Robert .

L. Stone, David Kinnard and Roger Kinnard acted

with equally unclean hands, thereby waiving the

written permission requirement with regard to loans

from Springfield Village. As such, Robert L. Stone

cannot complain at this juncture that the borrowing

of money from Springfield Village Apartments, Ltd.

65

by any of the partners was improper under the terms

of the operating agreement.

Defendants further contend that they received

no consideration and additionally that even if they

received consideration, it did not come from David

Kinnard, and thus their interests were not trans-

ferred to him. The Court need not reiterate the

litany of payments made to Robert L. Stone during

2004 and 2005. With regard to each of the entities,

there is evidence of adequate consideration having

been exchanged. David Payne testified that Robert

L. Stone and Cynthia Stone received reasonable

consideration for their interests in the subject

entities. The funds sent to Robert L. Stone from the

Oklahoma Investment Group account for the

transfer of his interest in each entity created a debt

to Springfield Village payable by David Kainnard

The Court accepts Mr. Payne's testimony.

66

If Mr. Kinnard paid Mr. Stone direct,

Mr. Kinnard, being a controlling member,

would have the ability after he paid Mr.

Stone direct to advance money back to

himself or withdraw money from the

partnership and be in the same economic

position that he is as if he could pay direct

and then withdraw or he could just with-

draw the funds out of the partnership

through Oklahoma Investment Group

and pay it and then burden his interest

and both Mr. Stone and Mr. Kinnard

would be in the same economic positions

regardless of the form of the transaction.

Tr.Vol. II, p. 474.

Mr. Payne further testified that Robert L. Stone re-

ceived cash from the entities in excess of his

distributive share and, with regard to the sale of his

interest in Springfield Village, that David Kinnard

assumed responsibility for Robert L. Stone's

accounts receivable. Additionally, Robert L. Stone

received consideration by David Kinnard’s assump-

tion of the obligation on the Beatrice Kinnard note.

Additionally, Robert L. Stone does not dispute the

existence of a “kicker” on the Beatrice deal, nor does

67

he dispute that he did not fulfill his obligation, and

that his obligation to David Kinneard and Roger Kin-

nard has been extinguished by virtue of the

Springfield Village assignment. The Court concludes

that considered both singly and collectively, Robert

L. Stone and Cynthia Stone received reasonable

consideration for their interests, and thus are not

entitled to rescission or other remedy on this basis.

Finally, the issue remains whether the assign-

ments were sales or loans. Although the Plaintiffs at

various times used both terms to describe the ar-

rangements, and although Robert L. Stone testified

that he believes he merely utilized his interests as

collateral for loans with unlimited time for repay-

ment, the Court concludes that the assignments

were sales with the right to redeem, which right was

not exercised within the time prescribed nor in fact,

ever. The 2003 Cinnamon Creek, LLC assignment is

68

instructive in this case, and should have been a har-

binger to Robert: L. Stone of how subsequent trans-

actions would be treated.

Robert L. Stone knew as early as March of

20038, that David Kinnard and Roger Kinnard were

hesitant to loan him money. Defendants’ Ex. 4. Mark

Lovelace, counsel for Oklahoma Investment Group,

sent an e-mail on March 26, 2003, to Mark Reinitz

outlining the possibility of a sale versus a loan. That

e-mail was forwarded by Mark Reinitz to Robert L.

Stone on March 27, 2003, at 10:27 a.m. At 2:10 p.m.

on that same day, Robert L. Stone, in apparent

recognition that his desire for a loan would not come

to fruition, sent a form for the unconditional transfer

of partnership interest to Mark Reinitz. That same

date, an e-mail from Mark Lovelace to all of the

major players indicated that Robert L. Stone should

sign and have the agreement notarized, so that

69

“funding of the agreed $100,000 sale price can occur

tomorrow.” Defendants’ Ex. 48. Mark Lovelace

noted, “I understand that we are also preparing an

Option Agreement for Robert to be able to repur-

chase his membership interest.” Defendants’ Ex. 48.

Later, Robert L. Stone asked Mark Reinitz

why it was important to describe the transaction as

a “sale-redemption” and not as'a loan. Defendants’

Ex. 84. Thus, Robert L. Stone was aware that the

Plain-tiffs believed he had sold his interest, not

merely utilized his interest as security. David

Kinnard further informed Robert L. Stone that

“[t]here is no loan. There is only an opportunity to

buy back shares. Please read these docs carefully.”

Defendants’ Ex. 86. Despite this clear and unequi-

vocal statement, Robert L. Stone later inquired of

Jeremy White, “[w]hat is the amount necessary to

pay off my non-loan from Oklahoma Investment

710

Group, and when is it due?’ Defendants’ Ex. 87.

Robert L. Stone later referenced his “loan-like ar-

rangement.” Defendants’ Ex. 89. Despite this his-

tory and Plaintiffs obvious intentions, Robert L.

Stone subsequently utilized the same unconditional

transfer on Cinnamon Creek, LLC, Windrock

Associates, Peppertree, Summer Pointe, and

Springfield Village. Robert L. Stone did not dispute

the absence of Cinnamon Creek, LLC and Pepper-

tree Partners as assets in his personal financial

statement prepared by Sergey Galant in early

2005.22, With regard to the each of entities Robert L.

-?The Court finds it curious that Windrock Associates

remained on the list of assets owned by Robert L. Stone in De-

cember 2004, despite its earlier transfer. However, it appears

that the lender on the property, for whom the financial state-

ment was being prepared, had not yet okayed the transaction.

Thus it appears that Robert L. Stone’s: interest, although pre-

viously transferred, was not excluded from his list of assets

perhaps in an effort to avoid violating terms of the mortgage

established by the lender. Defendants’ Ex. 172.

71

Stone was unable or failed to exercise his option to

re-purchase his shares. Additionally, Cynthia Stone

was fully aware that the assignment was a sale and

not security for a loan. Despite this knowledge, she

executed the assignment and accepted a transfer of

funds. Accordingly, the Court concludes that upon

the expiration of the six-month option to repurchase,

David Kinnard became the owner of the Defendant

Robert L. Stone’s and Cynthia Stone’s interest in the

subject entities. Defendants are not entitled to claim

any interest 1n the properties.

Dr. Stone’s Loan

Additionally, there is an issue’ between

Springfield Holding Company and Dr. Robert L.

Stone, Sr. The parties are unable to agree on the

amount of the loan or whether it was repaid. As a

result, Plaintiff Springfield Holding Company seeks

a declaratory judgment against Dr. Stone that it

ie’:

owes nothing on a loan he made to the company in

the early 1990's, having repaid in full all principal

and accrued interest and an injunction barring Dr.

Stone from claiming any amount due from Spring-

field, David Kinnard or Roger L. Kinnard. Dr. Robert

L. Stone seeks to recover on a theory of breach of

contract, asserting that David Kinnard and Roger

Kinnard are indebted to him on the $450,000.00,

loan of which only $160,000.00 has been repaid. In

1992, the notes payable ledger of Springfield Village

Apartments, the predecessor in _ interest’ of

Springfield Holding Company, Ltd., indicated a debt

to Dr. Stone totaling $164,269. 80. In June 1993, Dr.

Stone received a $10,000.00 payment toward the

re | From 2000-2004, Robert L. Stone’s

distribution account was credited with $771.35 per

month in interest. On September 19, 2005, Robert

L. Stone was informed that the outstanding debt to

i

Dr. Stone would be repaid before December 2005. In

fact, $163,526.20 was paid to Dr. Stone's bank

account during that time. Despite Defendants’

testimony, there is no other evidence of a

$450,000.00 debt from any Springfield entity to Dr.

Stone. The memorandum of agreement presented as

Defendants’ Exhibit 1 does not support the proposi-

tion that a $450,000.00 promissory note was ever

made. Accordingly, no money is due and owing to

Dr. Stone by any Plaintiff in this action or by any of

the Oklahoma Investment Group entities by virtue

of this agreement.2* Accordingly, Dr. Stone is not

entitled to judgment against the Plaintiffs in this

action.

°3The Court finds that Mr. Reda had the authority of

the trustee from the bankruptcy court in the Northern District

of Illinois to represent Dr. Stone in this action.

74

CONCLUSION

In accordance with the above findings, the

Court concludes as follows:

(1) As of March 5, 2004, Robert L. Stone

owned no interest in Cinnamon Creek;

(2) As of June 10, 2004, Robert L. Stone owned

no interest in Peppertree Partners:

(3) As of November 16, 2004, Robert L. Stone

owned no interest in Windrock Associates;

(4) As of April 7, 2005, Robert L. Stone owned

no interest in Springfield Village Apartments;

(5) As of March 1, 2005 Robert L. Stone owned

no interest in Summer Pointe;

(6) As of April 11, 2005, Cynthia Stone owned

no interest in Summer Pointe;

(7) The Stones received reasonable considera-

tion for their interests in the above-listed entities, as

agreed upon by the parties;

(8) David Kinnard, the purchaser, provided

reasonable consideration for the Stones’ various

interests;

(9) All of the parties ignored the requirement

of Springfield Village that written consent of a

majority of the members be obtained before loans

sould be made, thus this requirement was waived;

(10) Robert L. Stone, during his time as an

owner of the various Oklahoma Investment Group

entities, received money in excess of his distributive

share of the income of the entities;

(11) Although David Kinnard promised to pay

Robert L. Stone a minimum amount monthly, the

failure to pay amounts in 1999 and 2000 did not

create a debt from Oklahoma Investment Group or

any of its entities; these amounts, to the extent they

exceeded the Stone’s distributive shares, were

advances, creating accounts receivable in favor of the

76

entities, as consolidated in favor of Springfield

Village;

(12) David Payne performed a full accounting

of the entities, utilizing accepted principles of

forensic accounting, his results are not undermined

by the absence of general ledgers for the period prior

to 2000, and thus Defendants are not entitled to a

further accounting;

(13) Any debt by David Kinnard, Roger Kin-

nard or Springfield Holding to Dr. Robert L. Stone

has been fully repaid. For the reasons set forth

herein, judgment shall be entered in favor of the

Plaintiffs and against Defendants.

IT IS SO ORDERED this 25m day of

August 2008.

{s] DavidL. Russell

DAVID L. RUSSELL

UNITED STATES

DISTRICT JUDGE

4

Case 5:07-cv-00250-R Document 115 Filed 08/25/208

IN THE UNITED STATES DISTRICT COURT FOR

THE WESTERN DISTRICT OF OKLAHOMA

DAVID H. KINNARD et al.,

Plaintiffs,

Vv.

CIV-07-250-R

ROBERT L. STONE;

CYNTHIA A. STONE; and

)

)

)

)

)

)

)

ROBERT L. STONE, M.D., )

)

)

Defendants.

JUDGMENT

In accordance with the Court’s findings of

Fact and Conclusions of Law, entered this same

date, the Court hereby enters the following judgment

in favor of the Plaintiffs and against Defendants.

(1) As of March 5. 2004, Robert L. Stone

owned no interest in Cinnamon Creek;

(2) As of June 10, 2004, Robert L. Stone owned

no interest in Peppertree Partners;

78

(3) As of November 16, 2004, Robert L. Stone

owned no interest in Windrock Associates;

(4) As of April 7, 2005, Robert L. Stone owned

no interest in Springfield Village Apartments;

(5) As of March 1, 2005 Robert L. Stone owned

no interest in Summer Pointe Partners;

(6) As of April 11, 2005, Cynthia Stone owned

no interest in Summer Pointe Partners.:

(7) The Stones received reasonable considera-

tion for their interests in the above-listed entities, as

agreed upon by the parties;

(8) David Kinnard, the purchaser, provided

reasonable consideration for the Stones’ various

interests:

(9) All of the parties ignored the requirement

of Springfield Village that written consent of a

majority of the members be obtained before loans

could be made, thus this requirement was waived;

79

(10) Robert L. Stone, during his time as an

owner of the various Oklahoma Investment Group

entities, received money in excess of his distributive

share of the income of the entities;

(11) Although David Kinnard promised to pay

Robert L. Stone . minimum amount monthly, the

failure to pay amounts in 1999 and 2000 did not

create a debt from Oklahoma Investment Group or

any of its entities; these amounts, to the extent they

exceeded the Stone’s distributive shares, were ad-

vances, creating accounts receivable in favor of the

entities, as consolidated in favor of Springfield

Village;

(12) David Payne performed a full accounting

of the entities, utilhzing accepted principles of

forensic accounting, his results are not undermined

by the absence of general ledgers for the period prior

$3 ()

to 2000, and thus Defendants are not entitled to a

full accounting;

(13) Any debt by David Kinnard, Roger Kin-

nard or Springfield Holding to Dr. Robert L. Stone

has been fully repaid.

SNTERED this 25th day of August 2008.

[s] David L. Russell

DAVID L. RUSSELL

UNITED STATES

DISTRICT COURT

81

Case: 08-6210 Document: 01018100618 Date Filed: 07/15/2009

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

SPRINGFIELD HOLDING

COMPANY LTD LLC,

Plaintiff - Appellee, and

MARK W. REINITZ, et al.,

Plaintiff-Counter-Defendants -

Appellees,

Vv. No. 08-6210

ROBERT STONE, M.D., et al.,

Defendant-Counter-Claimants -

Appellants.

ORDER

Before KELLY, LUCERO, and HARTZ, Circuit

Judges.

Appellants Robert L. Stone and Cynthia A.

Stone’s petition for rehearing is denied.

The petition for rehearing en banc was

transmitted to all of the judges of the court who are

in regular active service. As no member of the panel

and no judge in regular active service on the court

requested that the court be polled, that petition is

also denied.

Entered for the Court,

[s] Elhzabeth A. Shumaker

ELISABETH A. SHUMAKER, Clerk

83

Case: 08-6210 Document: 09615437 Date Filed: 11/26/2008

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT.

Robert L. Stone et al.,

Appellants,

Case No. 08-6210

Vv.

David H. Kinnard et al.,

Appellees.

ee _ 4 ae fe Ae _ Aa fe ee

On Appeal from: United States District

Court for the Western District of Oklahoma

The Honorable Judge Russell

CIV-07-250-R

APPELLANTS’ JOINT OPENING BRIEF

Respectfully submitted,

Andrew E. Lester, OBA #5388

R. Scott Thompson, OBA #17712

LESTER, LOVING & DAVIES,

1701 South Kelly Avenue

84

Edmond, Oklahoma 73013-3623

(405) 844-9900

Robert S. Reda

Jennifer Majewski

REDA & DES JARDINS, LTD.

8 South Michigan Avenue

Chicago, Illinois 60603

(312) 236-9318

Oral Argument is requested.

Scanned PDF attachments are included with digital]

submission via e-mail.

November 26, 2008

85

TABLE OF CONTENTS

ME PARAL TIQOPOCICS .. 1 eee 89

Prior or Related Appeals..................... 91

Statement of Jurisdiction .................... 91

Statement ofthe Issues..................... 92

Statement ofthe Case.................... . .. 93

Statement ofthe Facts ..................... 100

A. Origin of the Dispute .............. 100

B. The Dispute .......... oo, 111

C. Testimony at Trial ................ 119

Summary of the Argument................. 123

Arguments and Authorities ................. 130

1. The District Court Erred, As a Mixed

Question of Law and of Fact, in Con-

cluding that the Assignments Drafted

by David Kinnard Could have been

Part of a Valid Agreement, because

there was no Meeting of the Minds ... 130

A. The Standard of Review of the

District Court’s Findings of Fact

is “Clearly Erroneous.” ...... 130

86

B. The Assignments Cannot be Part

of Valid Agreements of Any Kind,

because there Could have been No

Meeting of the Minds. ......... 131

2. The District Court Erred, as Matter of

Law, in Concluding that David Kinnard

Paid Valid Consideration for the Stones’

Pee GS se eb a aas toete eee 145

A. The Standard of Review of the

District Court’s Conclusions of

Law is “De Novo” Review. .... 145

B. Forgiveness of neither Mrs.

Kinnard’s Note nor the

Beatrice Note can Serve as

Consideration.............. 146

C. Funds Borrowed by David

Kinnard from Springfield, in

Violation of its Operating

Agreement Cannot Serve as

Valid Consideration. ........ 149

3. The District Court Erred, as a Matter

of Law, in Concluding that Minority

Members or Partners may Uninten-

tionally Waive their Rights under

their Operating Agreements or under

the Oklahoma Uniform Partnership

| A amma a anor er se tera ae 164

A. The Standard of Review of the

District Court’s Conclusions

87

of Law is “De Novo” Review. ... 154

B. Under an Operating Agreement,

Waiver Must be Explicit. ...... 155

C. Under the Uniform Partnership

Act, Waiver of the Managing

Partner’s Fiduciary Duty is Not

a ye ee ae 160

4. The District Court Erred, as a Matter

of Law, in Granting an Equitable

Remedy to a Party that it Found

to have Come to Court with

oP 169

A. The Standard of Review of the

District Court's Conclusions

of Law is “De Novo” Review. ... 169

B. The Kinnard Brothers are Not

Entitled to Any Rehef, be-

cause they Come to Court with

LJmcieem TIANGS. .. 1... 2 wees 169

5. The District Court Erred, as a Matter

Of Law, in Holding that Minority

Partners do Not Have a Right to an

POCO. i ec tw we ee ees 172

A. The Standard of Review of the

District Court’s Conclusions

of Law is “De Novo” Review. ... 172

88

B. The Stones are Entitled to a

Formal Accounting. .......... 173

ERI oe oe a De eae eae ee eee 176

Statement of Counsel as to Oral Arcvnsinas ae 177

Certificate of Compliance .................. 177

Certificate of Digital Submission ............ 178

Certificate of Service

89

TABLE OF AUTHORITIES

CASES

Atlas Life Inc. Co. v. Schrimsher, 1937 OK

117, 179 Okla. 643, 66 P.2d 944

Nel ee ary ad 2a ao ace a 6 «9 159

Barton v. Audietis, 25 Conn.App.92, 592 A.2d

I Stott ere ee aa ae cgay ace ae a . 173

Beaver v. Clingman, 363 F.3d 1048, 1053

(10 Cir. 2004)...... 130, 146, 155, 169, 172

Beck v. Reynolds, 903 P.2d 317, 319 (Okla.

ee re ay ig wa eae aKa 132

City of Tulsa v. Tyson Foods, Inc., 258 F.Supp.2d

3263, 1311 (N.D.Okia. 2008)..........- 171

Helitzer v. Helitzer, 761 F.2d 582, 589

Ce an oe ees es sw 140

Jennison v. Brerer, 601 F.Supp. 1167

a i ESR aS a 167

Kinwood Capital Group LLC v. Northlake Dev.

LLC (In Re Northlake Dev. LLC), 2007

Bankr. Lexis 4403 (Bankr. S.D. Miss.

ois ) ae area ere ee 151-52

Konover Development Corp. vu. Zeller, 228

Conn. 206, 635 A.2d 798 (1994)

Lurch v. U.S., 719 F.2d 333 (10th Cir. 1983)... . 144

90

Meinhard v. Salmon, 249 N.Y. 458, 464,

BG Dect, OU cg ec ks vc te eee wa we 166

Naimie v. Cytozyme Laboratories, Inc., 174

F.3d 1104 (10th Cir. 1999)............. 131

Navair, Inc., v. LFR Americas, Inc., 519 F.2d

1131, 1139 (10th Cir. 2008) ........... 143

NCAS Realty Management Corp. v. The Nat'l

Corp. for Housing Partnerships, 143

Pate oe COG GRE. BE) ce ec cc tcc ee 164-66

O’Neal v. Harper, 75 P.2d 879, 882 (Okla.

eg ce a eR ed 131

Overhoff v. Scarp, Inc., 12 Misc.3d 350, 362,

812 N.W.S.2d 809 (N.Y. Sup. 2005) .. 151-52

Peskin v. Deutsch, 134 Ill.App.3d 48, 479

mR i ee 163

Summum v. Duchesne City, 482 F.3d 1263,

pee 2h: 2 ae 1 7 5 148

Updike v. Wolf & Co., 175 Tll.App.3d 408,

529 N.E. 2d 993 (1988)

Williams v. Tritt, 262 Ga. 173, 415 S.E.2d

a a a ee ee 167

91

STATUTES AND RULES

28 U.S.C. §§ 1291, 1332, 13867, and 2107........ 92

BO AEs RD 6 ov neo ree bee eee 132

Pea. 5. Am. GERM Ee) s s5.s + ¥ oe 2 oe eee 92

Oklahoma Uniform Partnership Act, 54 Okl.St.

De Bk OE MOG. AIOE 6s sc cee ae ease ee 160

Oklahoma Revised Uniform Partnership Act,

§54-1-101 et seq. (2007) ............... 160

REFERENCES

Black’s Law Dictionary, 5th Ed. ............. 139

PRIOR OR RELATED APPEALS

None.

STATEMENT OF JURISDICTION

The United States District Court for the Wes-

tern District of Oklahoma had jurisdiction over thie

matter pursuant to 28 U.S.C. §§ 1332 and 1367. The

District Court conducted a non-jury trial. After the

trial, the District Court entered a final judgment in

favor of David Kinnard, Roger Kinnard, et al. (here-

92

after “the Kinnard Brothers”), the Plaintiffs/Coun-

ter-Defendants below, which addressed all claims by

and against all parties. (Attachment 1)

The Stones timely filed their Notice of Appeal,

in accordance with 28 U.S:C. § 2107 and Fed.R.App.

4(a)(1)(A), on September 23, 2008. (Aplt.App. at

1485-1488) The appellate court’s jurisdiction in the

case at bar davies from 28 U.S.C. § 1291.

STATEMENT OF THE ISSUES

1. THE DISTRICT COURT ERRED, AS A

MIXED QUESTION OF LAW AND OF FACT, IN

CONCLUDING THAT THE ASSIGNMENTS

DRAFTED BY DAVID KINNARD COULD HAVE

BEEN PART OF A VALID AGREEMENT,

BECAUSE THERE WAS NO MEETING OF THE

MINDS.

2. THE DISTRICT COURT ERRED, AS A

MATTER OF LAW, IN CONCLUDING THAT

DAVID KINNARD PAID VALID CONSIDERATION

FOR THE STONES’ PROPERTY.

3. THE DISTRICT COURT ERRED, AS A

MATTER OF LAW, IN CONCLUDING THAT

MINORITY MEMBERS OR PARTNERS MAY

UNINTENTIONALLY WAIVE THEIR RIGHTS

93

UNDER THEIR OPERATING AGREEMENTS AND

UNDER THE OKLAHOMA UNIFORM PARTNER-

SHIP ACT.

4. THE DISTRICT COURT ERRED, AS A

MATTER OF LAW, IN GRANTING AN

EQUITABLE REMEDY TO A PARTY THAT IT

FOUND TO HAVE COME TO COURT WITH

UNCLEAN HANDS.

5. THE DISTRICT COURT ERRED, AS A

MATTER OF LAW, IN HOLDING THAT

MINORITY PARTNERS DO NOT HAVE A RIGHT

TO AN ACCOUNTING.

STATEMENT OF THE CASE

On March 31, 2006, the Stones sued David

Kinnard and Roger Kinnard (hereafter, “the Kinnard

Brothers”), who are multi-millionaire investors with

interests in Chicago, New York, and Russia, in

Bankruptcy Court in Chicago, in Adversary

Proceeding 06 A 00897, The Children’s Fund v. Da.

vid Kinnard et al. (N. D. Iil.), alleging breach of

contract and asking for an accounting. ‘Therein the

Stones alleged that the Kinnard Brothers are 2/3

G4

majority partners, and the Stones are 1/3 minority

partners, in Oklahoma Investment Group (hereafter

“OIG”"), a real-estate partnership which controls

about 550 rental units in Norman and Oklahoma

City, in which the Stone family invested the life

savings of three generations. The Stones alleged

that in 2004 the Kinnard Brothers promised a

$200,000 loan to the Stones if the Stones would

guaranty the loan by assigning to David Kinnard a

security interest in the Stone’s shares in_ the

properties controlled by the OIG partnership, that

the Kinnard Brothers alone drafted the loan docu-

ments, that the Stones came to the “closing” with the

documents signed at the request of the Kinnard

Brothers, that the Kinnard Brothers promised to

come with a $200,000 check, and that at the closing

the Kinnard Brothers took the signed documents

and disbursed only a small part of the loan. Then

95

they declared that the loan documents were “sales.”

The Kinnard Brothers then changed the title to the

Stones’ property without their written consent. The

Stones in their complaint alleged fraud. The

Kinnard Brothers answered by denying all of the

Stones’ allegations. On January 10, 2007, Case 06 A

00897 was dismissed for want of subject-matter

jurisdiction in Chicago because real estate is a “local”

matter under 28 U.S.C.S. § 1332, and most of the

real estate controlled by OIG is in Oklahoma.

On February 28, 2007, the Kinnard Brothers,

together with Springfield Apartments, one of the

subsidianes of the OIG partnership, and Mark

Reinitz, one of the employees of the OIG

partnership, filed the underlying case CIV-07-250-R

in the United States Distmect Court for the Western

District of Oklahoma, asking for a_ declaratory

judgment that the Stones have no interest in their

96

property. ( Aplt. App. at 323-334) On April 2, 2007,

the Stones Counterclaimed, asking for an accounting

and for a Declaratory Judgment determining owner-

ship rights over their property. (Aplt.App. at 335-

344)

Before trial, on December 4, 2007, the Stones

filed a Motion to Compel, alleging that David Kin-

nard, the only Managing Partner (ApIt.App. at 462),

was not producing many of the partnership docu-

ments (which only he controls). (Aplt.App. at 177-

319) On January 30, 2008, the District Court denied

the Stones’ motion as to “all appraisals of the Stones’

property, any corporate or partnership authori-

zations or resolutions for any notes or mortgages for

the Partnership, all general ledgers, all journals of

original entry, all check registers and bank

statements, all general journal entries’ and

adjustments for the Partnership, and all tax returns

97

filed by the Kinnard Brothers.” (Aplt.App. at 345-

353) On February 1, 2008, (four and ’% months

before the trial) the Stones filed a timely motion to

Amend their Counterclaim, alleging new evidence of

large-scale embezzlement by the Kinnard Brothers

that came to hght during discovery. (Aplt.App. at

354-371) On February 25, 2008, the District Court

denied that motion also. (Aplt.App. at 372-374) Then

on April 18, 2008, the Stones for the second time

filed a motion to compel discovery: a Motion to

Compel Access to Books and Records (Aplt.App. at

375-387), attaching an affidavit from their expert

witness saying that he did not have sufficient

information to testify adequately at trial and that he

belheved that the Defendants were withholding

evidence. (Apit. App. at 383-385) On April 24, 2008,

the District Court denied that motion also.

(Aplt.App. at 388-389)

98

At trial, June 17 through 20, 2008, each side

offered into evidence the corporate documents,

spreadsheets showing the history of payments from

OIG to the Stones (Aplt.App. at 415-416), the

Monthly Distribution Agreement between the

parties (Aplt. App. at 91), transmission verifications

from OIG’s bank (Aplt.App. at 92-93, 135-37, 140,

143-46, 148-51, 155; 157, 170, and 172), contested

assignments (Aplt. App. at 131, 142, 147, 153, 161-

62, and 171), and voluminous e-mail and paper

correspondence between the parties and among the

Kinnard Brothers.

Each side in addition presented the testimony

of an accountant as an expert witness. Both experts

shared information with one another. There was

substantial agreement between the expert witnesses

on the fact that OIG sent monthly payments to the

Stones from 2000 until after the loan documents

39

were signed in April, 2005 (Aplt.App. at 415).

However, both experts lacked adequate information

to testify as to what payments were made before

2000, because the District Court had denied the

Stones’ motions to compel discovery. (Aplt.App. at

345-53, 388-89) Therefore, there was no way they

could determine what the total payments were and

therefore whether they met OIG’s total obligation

under the Monthly Distribution Agreement, much

less consideration paid on top of that.

On August 25, 2008, the District Court

entered final judgment in favor of the Plaintiffs on

both counts of the oe and against the -

Defendants on all counts of the Counterclaim.

Attachment 1.

.100

STATEMENT OF THE FACTS

A. Origin of the Dispute

This case has its origins in a friendship and

partnership between Roger Kinnard and Robert L.

Stone, beginning when they were university

students eaten: about 1975. (Apit.App. at 551,

1216-1218) From 1980 to 2004, they formed several

successful joint business ventures and developed a

high level of mutual trust. (Aplt.App. at 1217, 1223-

24, and 1387) One of those successful joint business

ventures was Oklahoma Investment Group (“OIG”),

which they formed in 1989, by both oral and written

agreement, to purchase, manage, and sell apartment

complexes and office buildings in Norman and Okla-

homa City. (Aplt.App. at 1217-1220) OIG was

founded as a 50-50 equal general partnership using

Roger Kinnard’s contacts and about $50,000

101

provided by Roger Kinnard, together with about

$750,000 in funds provided by the Stone family.

(ApIt.App. at 1218) The Stones put their hfe savings

into OIG. (Aplt. App. at 1285) The apartment

complexes included Summer Pointe Apartments,

Peppertree Condominiums, Springfield Apartments,

Cinnamon Creek Apartments, and Windrock

Apartments in Norman (hereafter, “the OIG Pro-

perties”), which together include about 550 rental

units. Each complex is owned by the OIG partners

through a_ separate subsidiary partnership or

corporation, each of which has its own partnership

agreement or operating agreement. (Summer Pointe,

Aplt.App. 17-50; Peppertree, Aplt. App. at 51-68;

Springfield, Aplt.App. at 69-89; Cinnamon Creek,

Aplt.App. at 102-123; Windrock, Aplt.App. at 124-

129) The two friends worked as managers of OIG

and later hired Roger Kinnard’s brother, David

102

Kinnard, as a full-time manager. (ApIt.App. at 1217,

1222) Since OIG began as a startup that could not

afford to pay a manager's salary, and because of

Stone’s trust of Roger Kinnard, the shares were

changed so that David Kinnard was paid with a one-

third share of the partnership, giving the Roger

Kinnard 1/3 and the Stone family 1/3 of the OIG

partnership and its subsidiaries. (Aplt.App. at 1222)

In November of 1989, the partners entered into an

agreement entitled “Articles of Agreement for the

Purchase, Management, and Sale of Real Estate.”

(Aplt.App. at 1290) The three general partners share

equally in the ownership cf, and distributions from,

the various OIG Properties. (Aplit.App. at 1219,

~~

1218-20)

In late 1995, the Stones and the Kinnard

Brothers orally agreed to amend their respective

duties and obligations in the OIG partnership to

103

allow the Stones to move to the City of Chicago to

pursuc the acquisition of Beatrice Associates,

another joint venture with the Kinnard Brothers.

(Aplt.App. at 1222, 1225-31) The essence of the

amended agreement was the Stones, on the one

hand, agreed to become non-managing partners, to

iiow David Kinnard to become the sole managing

and operating partner of the OIG partnership and its

subsidiaries (Aplt. App. at 462, 685), and to allow

the Kinnard Brothers to purchase Stone’s interest in

the Physicians and Surgeons Building, another

property controlled and owned by the OIG partners,

for a below-market price. (Aplt.App. at 1226-1228)

The Kinnard Brothers, on the other hand, agreed,

beginning on January 1, 1996, to cause the OIG

partnership to pay to the Stones a guarantied

monthly distribution, starting at $17,000.00 dollars

and increasing by 3% each year thereafter, instead of

104

the prior 1/3 of profits, “for at least five years.”

(ApIlt.App. at 554, 1202, 1226-27) On May 16, 1997,

David Kinnard restated that agreement in writing

(hereafter, the “Monthly Distribution Agreement,”

Aplt.App. at 91). (Aplt.App. at 567,619, 670, and

680-81) The Monthly Distribution Agreement

provided for renegotiation at five-year intervals upon

the agreement of both parties, provided that capital

accounts will be maintained as normal, and did not

allow the two Kinnard Brothers to refinance any of

the OIG Properties without the Stones’ consent nor

to diminish the Stones’ 1/3 equity therein. (Aplt.App.

at 1161, 1193-95, 1202, 1225-26, 1288, 1303, 1349-

50, 1357, and 1362) The OIG partnership then made

monthly payments to the Stones at the rate specified

in the Monthly Distribution Agreement most months

through April of 2005, though they failed to make

105

the required payments in 1999 and at other times.

(Aplt.App. at 1233)

In 1996, the Stones moved to Chicago. That

same year, David Kinnard moved to Russia, where

he spends most of each year on business ventures,

managing the OIG partnership by telephone and e-

mail with occasional visits to Oklahoma (Aplt.App.

at 1225, 1248), while keeping the books and records

of the OIG partnership, including the subsidiaries

and the related properties, including receipts and

disbursements. (Aplt.App. at 966) Since that time, at

the request of Roger Kinnard, the Stones have

communicated with the OIG partnership almost

exclusively through Roger Kinnard. (Aplt.App. at

855-56, 956, 1233-34, and 1334) Also in 1996, the

Stones borrowed from the Kinnard_ Brothers

individually $305,000 for use in the joint venture in

Chicago, (Aplt.App. at 633-34, 1115) In 1998, the

106

Stones repaid that loan in full to the Kinnard

Brothers individually, plus interest, for a total of

$366,956.32. (Aplt.App. at 633-34, 1115)

In 1999, the Kinnard Brothers caused the OIG

partnership to fall behind in its’ monthly

distributions to Stone by approximately $200,000.

(Apit.App. at 638). As a result, Stone demanded

both an accounting and that the OIG partnership

pay him the arrears. (Aplt.App. at 1201-02)

Although the Kinnard Brothers resumed payments

in 2000, this OIG arrearage persisted and has not

been resolved.

By December 31, 2002, the OIG partnership

was still making payments under the Monthly

Distribution Agreemeni but had fallen behind in the

amount of $408,684. (Aplt.App. at 415) In spite of

repeated requests by the Stones to Roger Kinnard,

the Kinnard Brothers did not provide even a partial

107

accounting until compelled to do so during the

discovery phase of the underlying case. (Aplt.App. at

1237) Roger Kinnard always told the Stones that

David Kinnard was too busy in Russia and Mark

Reinitz (an employee of OIG) was not able to do

accounting, but they were sien on it. (Aplt.App.

at 1237). To date they still have provided no

accounting of the time period before the year 2000

(Aplt.App. at 1066, 1133, and 1165) which represents

ap-proximatecly 2/3 of the period of the OIG

partnership and includes much of the amount in ar-

rears under the Monthly Distribution Agreement.

(Aplt.App. at 91, 415).

Around the beginning of 2003, Robert Stone

requested of Roger Kinnard that the OIG

partnership come current in its arrearage, but Roger

Kinnard told Stone that OIG could not yet do so.

(ApIit. App. at 1240) In fact, the OIG partnership at

108

that time had ample resources to pay its arrearage.

David Kinnard testified at trial that the two

Kinnard Brothers had borrowed approximately $2

million dollars from Springfield. (Aplt.App. at 967,

977, 986, and 1240)

Because the Kinnard Brothers refused to

cause the OIG partnership to come current on its

payments, the Stones, in February of 2003, sought to

borrow $100,000 from David Kinnard individually

for another business venture and to secure that loan

on the Stones equity share in the OIG Properties.

(ApIt.App. at 1239) David Kinnard agreed to the

loan and required that the Stones guaranty the loan

by transferring to David Kinnard a security interest

in Cinnamon Creek, one of the properties owned

jointly by the three partners. (Aplt.App. at 131)

David Kinnard, through Roger Kinnard, promised

that, if the Stones signed, the Kinnard Brothers

109

would provide another document stating the terms of

the loan, including the interest rate and the term of

repayment, and would make the loan. (ApIt.App. at

1242-44, 1366) On March 27, 2003, the Stones

assigned to David Kinnard a security interest in

Cinnamon Creek. (Aplt.App. at 1119, 1241-42) In

return, the Kinnard Brothers never provided the

second document stating the terms, but on March

28, 2003, they did provide the $100,000 loan as

consideration, and the Stones repaid the loan with

$30,000 interest (Aplt.App. at 623, 1244) on Septem-

ber 26, 2003. (Aplt.App. at 622, 1119, and 1339)

Documentation was casual and “seat of the pants.”

(Aplt.App. at 1030) This was a constant problem and

frustration for the Stones dealing with the Kinnard

Brothers. The Stones requested better paperwork,

but the Kinnard Brothers controlled the OIG

partnership's income, accounts, and paperwork and

L10O

refused to provide the requested paperwork. (ApIlt.

App. at 1277-79, 1284, 13038, 1359, and 1367-68)

Because the 2003 loan was a loan and not a sale

(Apit.App. at 1211) plus re-conveyance, there was no

re-conveyance. (Ap]t.App. at 623)

During the discovery phase of the case at bar,

Defendants learned for the first time that the

$100,000 for the 2003 loan to the Stones came not

from David Kinnard but from the Springfield

subsidiary (Aplt.App. at 532-538, 856, 1084, 1108,

1112, 1114, 1119, 1239, and 1244), which, contrary

to what Roger Kinnard told the Stones at the time,

actually had aé_=surplus. (Koger Kuinnard had.

“borrowed” $1.8 million from OI1G/Springfield.

Aplt.App. at 1079, 1391) Springfield 1s owned 1/3 by

the Stones. (ApIt.App. at 89, 601) So David Kinnard

took for himself the $30,000 interest on the loan to

the Stones for doing nothing more than Jending the

iS

Stones money that was 1/3 theirs already and that

was already owed to them. And, by his own

admissions, he did so without the consent of 15% of

the partners in Springfield as required by the

Springfield Operating Agreement. (Aplt.App. at 75,

485-86, 725-26, and 976)

B. The Dispute

As of January 1, 2004, the Kinnard Brothers

had caused OIG to fall into arrears and become

indebted to the Stones, pursuant to the Monthly

Distribution Agreement, in the amount of

$468,320.00. (ApIt.App. at 415) In February of 2004,

the Stones, instead of suing a friend, sought to:

borrow $200,000 from David Kinnard indivalaalis to

make up some of the deficit and to expand the new

business venture in Chicago. (Aplt.App. at 1193,

1365) In return for the Stones’ refraining from suing,

David Kinnard, through Roger Kinnard, agreed to

Lie

the loan, and to come current on the monthly

distributions--- if the Stones again would guaranty

the loan with assignments of the Stones’ shares in

the OIG Properties, using the same _loan-

securitization document which the Kinnard Brothers

had used for the 2003 loan (ApIit.App. at 1247-48,

1261) The form was provided by the QIG’s

eae, outside counsel, Phillips McFall

McCaffrey McVay & Murrah P.C., to their clients for

use with loans with interest rates in excess of that

permitted by the Oklahoma Usury Statute. (Aplt.

App. at 597, 623, 1284, and 1302) The Stones

agreed.

On March 1, 2004, the Kinnard Brothers sent

the first of the new assignments for the Stones’

shares in Cinnamon Creek (the same property used

for the 2003 loan). (Aplt.App. at 131, 142) On March

3, 2004, the Stones executed this guaranty and sent

fe

it back to the Kinnard Brothers. As in 2003, the

Kinnard Brothers said that they would send the

terms of the loan (including interest, repayment

schedule, and provisions in case of default) later, and

that was not a problem because everything was

understood among friends. (Aplt.App. at 1240-41)

On March 5, 2004, the Kinnard Brothers sent a

$45,000 advance on the promised $200,000 loan. (Tr.

Aplt.App. at 1248, 1257-59, and 1266) The Kinnard

Brothers then said that they would pay out the

balance of the promised loan and reduce the amount

they were in arrears under the Monthly Distribution

Agreement, and provide the documents with the

missing terms---as soon as they were able to do so

and after the Stones signed the remaining four

assignments. (ApIit.App. at 1274, 1284) The Stones

signed the remaining assignments promptly as they

were prepared and sent to the them by the Kinnard

114

Brothers, from June 10, 2004, through April 8, 2005.

Meanwhile, the OIG partnership was making the

monthly payments under the Monthly Distribution

Agreement and even reducing its arrearage, to

$274,000 by March of 2004, by paying slightly more

each month than was due under the Monthly Distri-

bution Agreement. (Aplt.App. at 415)

Finally, on March 1, 2005, David Kinnard sent

to Robert Stone the last and most important of his

assignment documents (including Springfield; the

largest of the OIG Properties) for him to sign, with

the following cover letter:

From: David Kinnard

To: Robert Stone

Date: March 1, 2005

“Rob, Just talked to mark and ted. we’ll

send you 20K today if you sign the 4

docs they mentioned to me. we'll send

the remaining next week pending

review of guaranties etc in the loan

docs by lovelace. Dave.” [sic]

[emphasis added] (ApIt.App. at 159)

115

Robert Stone signed and returned all of his

remaining “guaranties” and “loan docs” the same

day, but the Kinnard Brothers still did not send the

loan proceeds. On March 10, 2005, Roger Kinnard

told the Stones that David Kinnard would fund the

loan if Robert Stone would sign the “Promissory

Note” (Aplt.App. at 163-64) to Bernice Kinnard, the

Kinnard Brothers’ mother (hereafter “Mrs. Kin-

nard”), which provided that Robert Stone would

arbitrate an alleged debt to Mrs. Kinnard and then

pay the amount determined by the arbitrators. On

March 11, 2005, Robert Stone signed and returned

the proposed Note. The Kinnard Brothers still did

not make the promised loan. (ApIt.App. at 415,1207,

1262, and 1288) On or about March 15, Roger

Kinnard told the Stones that Mrs. Kinnard had

rejected the proposed Note and had demanded

immediate payment instead, which the Stones

116

refused (Aplt.App. at 164, 460), because they

believed that they owed nothing to Mrs. Kinnard and

that this would come out in arbitration.

On or about March 16, 2005, Roger Kinnard

sent to the Stones another proposed Note (“the

Beatrice Note,” Aplt.App. at 168-69), this one in

favor of Roger Kinnard and David Kinnard, agreeing

to arbitrate a dispute about Beatrice Associates,

another ieleuiauiins between the Stones and the

Kinnard Brothers in Chicago, and to pay the amount

decided by the arbitrator. Again, Robert Stone

signed and returned the proposed Beatrice Note the

same day. On or about March 30, Roger Kinnard

informed the Stones that David Kinnard had refused

to sign the “Beatrice Note,” at demanding immediate

payment instead, which the Stones again refused.

(Aplt.App. at 169, 460) On April 11, 2005, Roger

Kinnard caused the OIG partnership to send the

117

Stones $35,000 of the promised $200,000 loan.

(Aplt.App. at 170) The Kinnard Brothers sent no

more payments.

The Kinnard Brothers never provided most of

the promised $200,000 loan (Aplt.App. at 415, 1207,

1262, and 1288) and never came current in the

monthly distribution payments due under the Mon-

thly Distribution Agreement. Instead, on April 11,

2005, the Kinnard Brothers claimed that the

“guaranties” and “loan docs” that they had induced

the Stones to sign were actually “sales.” (Aplt.App.

at 1288) They then cut off permanently the monthly

distributions to the Stones from the OIG

partnership, unilaterally changed the title of all of

the OIG properties to remove the Stones’ name

without the Stones’ consent, and gave the Stones’ 1/3

share of the OIG partnership and the OIG properties

to David Kinnard. (Aplt.App. at 1197, 1280) The

118

Stones then in a timely manner protested strongly to

Roger Kinnard and demanded reinstatement of their

stolen shares. (See, for example, Letter from Cynthia

A. Stone to Roger Kinnard, ApIlt.App. at 173-176.)

Throughout this time period, there were

numerous communications to the Stones from Roger

Kinnard and his employees discussing the loan and

agreeing that it was a loan. (Aplt.App. at 658-59,

665-66, 671-72, 679, 701, 1193-94, 1242-47, 1255,

1257-58, 1262-1266, 1273, 1280-84, 1286, and 1321)

Roger Kinnard agreed that amounts paid by OIG to

the Stones that year were to be considered distri-

butions if OIG turned out to be in arrears after the

promised accounting ine provided, and loans if the

promised accounting showed that OIG was not in

arrears. (Ap]t.App. at 166) They never provided an

accounting. There was never any discussion by

Roger Kinnard or David Kinnard with the Stones of

i193

a sale until after the last of the loan documénts was

signed and the trap was sprung. (Aplt. App. at 1211,

1285)

C. Testimony at Trial

At trial, David Kinnard testified that he had

paid $1,500,000, in cash and forgiveness of debts,

over a period of 4 years, from May 17, 2001, through

April 11, 2005, (Aplt.App. at 472) to the Stones to

purchase their shares, and that the Stones had sold

their shares to him by signing the six assignments,

although he did not deny the authenticity of his e-

mail cover letter at the time describing them as

“guaranties’ and “loan docs.” (Aplt.App. at 159)

David Kinnard testified further that he had never

spoken with the Stones directly about the purchase

of their shares but had negotiated the entire

transaction exclusively through his employees, Mark

Reinitz and Ted Teske. (Aplt.App. at 494) One of the

120

employees admitted under cross examination that

the employees worked together to deccive the Stones

on Apri! 8, 2005, while negotiating the assignments.

(ApIlt.App. at 759-762)

The employees testified that the Stones had

signed the assignments; that the assignments do not

contain a price term; that the price term was filled in

later by David Kinnard because the Stones’ agree-

ment to sell their shares was oral; and that there is

no written record of it; and that they told the Stones

the assignments were for sales. Furthermore, the

employees testified that they had caused the OIG

partnership to send regular monthly payments to

the Stones from 1996 to 2005; and one employee

actually testified that David Kinnard, after the

assignments were signed, retroactively “reclassified”

payments in the OIG books to appear as purchase

payments. (Aplt.App. at 777)

L2]

Mr. and Mrs. Stone, on the other hand,

testified that they had made no agreement to sell;

that their shares were never for sale; that the

promised loan was negotiated exclusively between

the Stones and their friend, Roger Kinnard, who had

asked the Stones to deal with him alone (Aplt.App.

at 667, 1235-36, 1246, and 1316); that Roger

Kinnard had induced the Stones to sign the

assignments that were sent to them by David

Kinnard by telling them that they were “guaranties”

and “loan docs” for the promised $200,000 loan

(Aplt.App. at 1239) that was never fully funded

(ApIit.App. at 141); that David Kinnard had

confirmed in writing in his e-mail “cover letter” for

the assignments that they were “guaranties” and

“loan docs” ( Aplt.App. at 159); that the monthly

payments mentioned by the employees as payments

for sales were for something entirely different

122

(distributions of the Stones’ share of profit from OIG

under the Monthly Distribution Agreement,

Aplt.App. at 91); that David Kinnard, the only

beneficiary of the assignments, had paid nothing to

any of the Stones for anything; and that, from 2001

through 2005, the Stones had been paid nothing

more than the monthly distributions of profit that

they were due anyway under the OIG partnership

agreement, under the organizational documents of

the subsidiaries, and under the Monthly Distribution

Agreement, and in fact had been paid less.

(Aplt.App. at 91) The Stones admitted that the

employees on two occasions (out of dozens in which

they used the word “loan”’) had used the word “sale”

in e-mail messages to the Stones. When they did

that, Robert Stone immediately called Roger

Kinnard and questioned him. Roger Kinnard told

Robert Stone that those employees were “crazy” and

pio} h

123

did not know what they were talking about, so

please ignore them. (Aplt.App. at 1235-386) The

Stones did so, as they negotiated the loan solely with

Roger, with his employees acting as his secretaries.

Throughout, the Stones testified that the only

transaction they negotiated was the proposed loan

and that they negotiated it exclusively through

Roger Kinnard, David's older brother and their

friend of 30 years. (ApIt.App. at 494, 1248, and 1348)

The Stones never agreed to a sale of any kind.

In rebuttal, Roger Kinnard refrained entirely

from testifying---although he was present in the

courtroom throughout the trial.

SUMMARY OF THE ARGUMENT

1. The District Court erred in holding that

Assignments were part of valid agreements because

there was no meeting of the minds. The parties did

not even agree as to the nature of the transaction;

124

the Stones believed the assignments were securi-

tization of loans while David Kinnard testified that

he believed they were an outright conveyance

pursuant to a sale. Even if the parties had agreed to

the “same thing,” a loan or a sale, there still was no

meeting of the minds as to the remainder of the

essential terms. The party secking to enforce a

contract has the burden of showing a meeting of the

minds as to all essential terms of the contract.

Assuming arguendo, the assignments were part of a

sale, there still must be a price term; but there was

not. Without an agreement of the parties as to the

essential nature of the transaction and the essential

terms thereto, any potential agreement fails.

2. The District Court erred in holding that

David Kinnard paid valid consideration for the

assignments. David Kinnard claims as consideration

both the forgiveness of two notes and funds borrowed

ee

from Springfield. Neither note may serve as

consideration for the assignments. One note 1s a

debt to a third-party (that was rejected by that third

party), and the other is a debt to David and Roger

Kinnard jointly (that was not accepted by them).

David Kinnard cannot forgive debts which are not

owed to him. Moreover, adequate consideration

requires the receipt of a present benefit, but the

notes were not even drafted until after the “loan

docs” were executed. Additionally, at the time of

the assignments, the notes’ values were uncertain as

they were to be ascertained months later through

arbitration and therefore could not serve as

conbidiovation.

Additionally, the cash payments purportedly

made to the Stones also cannot serve as

consideration because David Kinnard testified that

he acquired the funds by taking a loan from the

126

Springfield subsidiary in violation of its Operating

Agreement. To obtain a loan from Springfield he

would have needed unanimous written consent from

the other members (including Robert Stone), which

he admits he did not have. As a matter of law;

actions taken by an LLC member in contravention of

the LLC Operating Agreement are null, void and of

no effect, and all subsequent transactions must be

unwound.

3. The District Court erred in concluding that

the Stones waived their rights under Springfield's

Operating Agreement and under the Oklahoma

Uniform Partnership Act when they purportedly

failed to object to David Kinnard’s making a

personal loan to himself in violation of an express

provision of that Operating Agreement. The District

Court held that the Stones previously in 1998 failed

to object when David Kinnard similarly violated

127

Springfield’s Operating Agreement. Aside from the

fact that Mr. Stone didn’t know about David

Kinnard’s violations, any purported failure to object

is irrelevant, because under the Springfield’s

‘Cdernting Agreement, “[nJo failure by any party to

insist upon the strict performance of any covenant,

duty, agreement or condition of this Agreement or to

exercise any right or remedy consequent upon a

breach thereof shall constitute waiver of any such

breach or any other covenant, duty, agreement or

condition.” See Section 13.4 of Springfield’s Opera-

ting Agreement. (Ap]t.App. at 88).

Likewise, the Oklahoma Uniform Partnership

Act imposes a fiduciary duty on all partners, and

this duty may not be waived under’ any

circumstance. This duty includes: (1) the right to an

accounting, including “full and frank” disclosure, (2)

the right to be treated as the beneficiary of a

128

fiduciary trust, with the managing partner as the

trustee, (3) the right, in case of a dispute between a

managing partner and a non-managing partner, to

enjoy the advantage that the managing partner has

the burden of proof.

4. The District Court erred in granting an

equitable remedy to a party whom it has found to

have come to court with unclean hands. David

Kinnard refused to provide an accounting, took

secret “loans” to himself and his brother, defrauded

his non-managing partners, violated his fiduciary

obligations, and failed to show that he acted

reasonably. In the face of these violations, David

Kinnard came to a court of equity with unclean

hands, asking that it give him the spoils of his

misconduct by way of a declaratory judgment. The

District Court erred in doing so.

129

5. Under the Uniform Partnership Act, and

under the operating agreements, all (especially non-

managing) partners and members’ have. an

unqualified right to an accounting at any time; the

District Court erred in denying the Stones’ request

for an independent accounting, which would have

further illuminated the extent of David Kinnard’s

misconduct.

130

ARGUMENTS AND AUTHORITIES

1. THE DISTRICT COURT ERRED, AS A

MIXED QUESTION OF LAW AND OF FACT, IN

CONCLUDING THAT THE ASSIGNMENTS

DRAFTED BY DAVID KINNARD COULD HAVE

BEEN PART OF A VALID AGREEMENT,

BECAUSE THERE WAS NO MEETING OF THE

MINDS.

A. The Standard of

Review is “clearly

erroneous.”

A district court’s conclusions of law are re-

viewed by a court of appeals “de novo.” In “de novo’

review, “no form of appellate deference is

acceptable.” Beaver v. Clingman, 363 F.3d 1048,

1053 (10th Cir. 2004). On the other hand, “Findings

of fact . . . must not be set aside unless clearly

erroneous, and the reviewing court must give due

regard to the trial court’s opportunity to judge the

witnesses’ credibility.” Fed.R.Civ. P. 52(a)(6). Mixed

questions of law and fact may be reviewed under

either the “de novo” or the “clearly erroneous”

131

standard. The choice between these two standards

will be determined by “whether the mixed question

involves primarily a factual inquiry of the

consideration of legal principles.” Naimie v.

Cytozyme Laboratories, Inc., 174 F.3d 1104 (10thCir.’

1999) (existence of contract). As a matter of law,

there must be a meeting of the minds for there to be

a contract of any kind. O'Neal v. Harper, 75 P.2d

879, 882 (Okla. 1937). But whether there was a

meeting of minds is a question of fact. Since this

inquiry is primarily factual, the standard of review

is “clearly erroneous.”

B. The Assignments Cannot

be Part of Valid Agree-

ments of Any Kind

because there Could have

been No Meeting of the

Minds.

The Plaintiffs argued that the bare fact that

the assignments contain the words “assignment” and

132

“sale” and were signed means that the Kinnards and

the Stones had a “meeting of the minds” and that a

“sale” was consummated. But this is far from the

truth. There was no meeting of minds. The parties

did not even agree as to the essential nature of the

transaction. “In order to have a valid contract there

must be mutual consent, or a meeting of the minds .

.., [t]he consent of the parties must be mutual, and

consent is not mutual unless the parties all agree

upon the same thing in the same [sense]. Because

the parties did not agree upon the same thing in the

same sense, there was no mutual consent, and thus

no contract.” Beck v. Reynolds, 903 P.2d 317, 319

(Okla. 1995). (Internal citations omitted). See also,

15 Okl. St. § 66 (“Consent is not mutual unless the

parties all agree upon the same thing in the same

sense’).

£32

The “sale” was a complete shock to the Stones,

perpetrated by fraud on the part of the Kinnards.

When the Kinnard Brothers announced a unilateral

“sale,” the Stones in a timely manner protested

strongly to Roger Kinnard and demanded rein-

statement of their shares. (For example, see Letter

from Cynthia A. Stone to Roger Kinnard, Aplt.App.

at 173-76.) Only at the trial, three years after the

taking, did the Stones learn how much David

Kinnard claimed he supposedly had paid them for

their shares. At his deposition before the trial, he

himself had no idea how much he supposedly had

paid. During the trial, David Kinnard produced, for

the first time, the number $1,500,000. However to

this day it is not at all clear how that number was

calculated.

What is the contemporary evidence that the

Stones were surprised”? First, both Roger Kinnard

134

(Aplt.App. at 658, 667, and 701) and then David

Kinnard (Aplt.App. at 159) said, dozens of times,

both orally and in writing, that the assignments

were the first half of loan-guaranty documents, and

that the second halves would follow soon. (Aplt.App.

at159, 1366-68) Neither Roger Kinnard nor David

Kannard ever referred to “sale’ documents in any

correspondence with the Stones---until after the

assignments were signed and the trap was sprung.

The following message is from David Kinnard

himself, the Managing Partner (Aplt.App. at 162

and so-called “purchaser” of the assignments, in his

“cover letter” to the most important assignments.

(Note: the “20K” refers to monthly distributions

which OIG was making during and after the signing

process.)

From: David Kinnard

To: Robert Stone

Date: March 1, 2005

135

“Rob, Just talked to mark and ted. we'll

send you 20K today if you sign the 4

docs they mentioned to me. we'll send

the remaining next week pending

review of guaranties etc in the loan

docs by lovelace. Dave.” [sic]

(Aplt.App. at 159) (emphasis added)

The Kinnard Brothers do not deny that they never

produced the “remaining” second halves. Then, here

is Roger Kinnard, the one who negotiated the fraud

with the Stones:

Date: September 14, 2004

From: Roger Kinnard

To: Mark Reinitz, Robert Stone, and David

Kinnard

“Mark, Rob would like a loan. Dave has

agreed to lend Rob $21,000 and this

needs to be sent tout suite.” (emphasis

added) (ApIt.App. at 154, 702-03)

Date: July 14, 2004

From: Roger Kinnard

To: David Kinnard, Mark Reinitz, Ted Teske

“Now, if the $45,000 that was

borrowed four months ago is secured

by SP, then I recommend that we allow

Rob to buy back SP and do a new

agreement for the 45,000 plus interest

and that be added to the 5,000 plus

interest on the 35,000 — 8.9 and rolled

136

into a new loan.” (emphasis added)

(ApIt.App. at 664-66)

In fact, contemporary communications between

Roger Kinnard and his employees shows in writing

that Roger Kinnard was attempting to deceive the

Stones:

Date: April 16, 2003

From: Mark Reinitz

To: Roger and Dave Kinnard

“By calling it a loan in our email to

Rob, you have given Rob a weapon to

use against us in at least 2 ways: (1) ifa

loan, we would have to return the CC

“security” to Rob upon his payment of

your ... specified amount, so that the

Lovelace partnership transfer

agreement would be voided, another

bad precedent. (2) As a loan, it would

be in probable violation of Oklahoma

usury laws....We have not drafted an

option agreement for Rob to buy back

the CC share ..., and so such an

agreement has not been signed

Why didn’t you call us first? You let

him off too easy. CC is/was a lever.”

(emphasis added)

(ApIt.App. at 132, 971)

137

Both Robert Stone and Cynthia Stone always

referred to “loan” documents in their correspondence

with the Kinnard Brothers. (Aplt.App. at 624, 711,

714) Here is Robert Stone:

Date: August 12, 2004

From: Robert Stone,

To: Dave Kinnard

“I propose you send me $25,000 as part

of the loan we have already agreed

upon in principal. Total amount when

available: $100,000, 36 percent from

dates of disbursement.” (emphasis

added)

(ApIlt.App. at 700-01)

Date: October 21, 2004

From : Robert Stone

To: David Kinnard, Mark Reinitz, Roger

Kinnard

“This is a request pursuant to my loan

agreement with Oklahoma Investment

Group. OIG sent to me $20,000 on

October 4, 2004. Please account for

that $20,000 as an advance pursuant to

our loan agreement.”

(emphasis added) (ApIt.App. at 133)

Date: December 30, 2004

Krom: Robert Stone.

To: David Kinnard, Roger Kinnard, Mark

Reinitz

138

“I, Robert L. Stone, hereby agree to

convey my full interest in Springfield

to David H. Kinnard as security for ..

whatever I borrow from OIG from

this date forward .... (emphasis

added) (Aplt.App. at 138-39)

Date: January 18, 2005

From: Robert Stone

To: David Kinnard, Mark Reinitz, Roger Kinnard

“It seems that David Kinnard and I are

near a final agreement on the loan

documents ... .” (emphasis added)

(Aplt.App. at 156)

The Kinnard Brothers even admitted at trial that

the Stones always referred to the assignments as

“loans.”

“Robert Stone always called these

things ‘loans.’ (emphasis added)

--(Aplt.App. at 624)

Robert L. Stone testified that Roger Kinnard told

him dozens of times during the loan negotiations

that the loan documents were loan documents, and

Stone’s testimony about what Roger told him was

confirmed at trial. (Aplt.App. at 658-67, 971) It is

Loe

very significant that the Kinnard Brothers did not

even attempt to refute Robert Stone’s testimony that

Roger Kinnard negotiated the promised loan (Aplt.

App. at 1235, 1348) and that Roger Kinnard told the

Stones dozens of times that the assignments were to

securitize a $200,000 loan. (Aplt.App. at 1207) On

the contrary, Roger Kinnard conspicuously refrained

from testifying at trial.

The second reason why the Stones were

surprised by the alleged “sale” and believed that the

assignments were “guaranties” and loan docs” is

because their wording is consistent with loan

documents. An “assignment” is aé_e transfer of

property. There are ties kinds of transfers of

property: (a) sales, (b) transfers to secure a debt, and

(c) gifts. All three may contain the word “sale.” It is

the context that determines which kind of transfer

one has in any given case. For example, Black's Law

140

Dictionary, 5th Ed., defines “assigned account” as

“Pledge of account receivable to bank or factor as

security for loan.” Another example of an assignment

that is a loan securitization is a mortgage.

Mortgages, lke assigned accounts, also recite the

word “sale.” Also, there is a very old and basic policy

in the law to interpret any ambiguity in a document

against the party who drafted it. “If we had any

thoughts that the words of the contract should be

stretched to cover these unanticipated contingencies,

they are dispelled by our cognizance of the rule that

ambiguities are resolved against the party who

drafted the agreement.” Helitzer v. Helitzer, 761 F.2d

582, 589 (10th Cir. 1985). David Kinnard alone

drafted all of the assignments.

The third reason why the _ Stones were

surprised by the alleged “sale” and beheved that the

assignments were “guaranties” and “loan docs,” so

141

there could have been no meeting of the minds, is

that the assignments are identical to the standard

OIG loan form that the Kinnard Brothers had used

to make a similar loan to the Stones in 2003.

(Aplt.App. at 131) There, the Stones borrowed

$100,000, signed the identical loan form securing the

loan on Cinnamon Creek, and repaid the principal

plus $30,000 interest. (Apit.App. at 554-55) In 2004,

another assignment of the same property, Cinnamon

Creek, was one of the fraudulent assignments.

(Apit.App. at 142) The Stones say the 2003

transaction was a loan, and if it was, then the later

transactions have to be loans, because the

paperwork is identical. And the Kinnard Brothers’

lawyer ot the time said it was a loan. (Aplt. App. at

1365-68) The Kinnard Brothers, on the other hand,

say that the 2003 transaction was a sale with a re-

conveyance. The test of who is telling the truth in

142

2)

this case 1s whether there was a re-conveyancc. At

trial, the Stones proved that there was not, and the

Kinnard Brothers admitted that there was _ not.

(Aplt.App. at 623)

The fourth reason why the Stones were

surprised by the alleged “sale” and believed that the

assignments were “guaranties” and “loan docs” is

that, if the assignments had been sales, the monthly

distributions under the Monthly Distribution Agree-

ment would have decreased and then stopped as the

assignments were signed. Instead, the payments

continued undiminished during and after the time

when the all the assignments were signed. That fact

alone is conclusive of whether the assignments were

sales or loan guaranties.

The fifth reason why the Stones’ were

surprised by the alleged “sale” and believed that the

assignments were “guaranties” and “loan docs,” so

143

there could have been no meeting of the minds, is

that there was no agreement as to a price term.

Even if the parties had agreed to the “same thing,” a

loan or a sale, there still was no meeting of the

minds as to the remainder of the essential terms.

The party seeking to enforce a contract has the

burden of showing a meeting of the minds as to all

essential terms of the contract. peas Inc. v. IFR

Americas, Inc., 519 F.3d 1131, 1139 (10th Cir. 2008).

To be a sale, there must be a price term. However,

there is zero evidence that the parties had ever

. discussed a sale price, let alone agreed to a sale

price. To the contrary, the Kinnard Brothers’ own

witnesses testified that David Kinnard decided

retroactively to “reclassify” prior regular. dis-

tributions to Stone as “payments” for the alleged

sales. (Aplt.App. at 777)

144

The omission of a price term in each and every

assignment was not inadvertent. It goes to the entire

structure and sequence of the transaction. If one

sells something, one negotiates a price with the

buyer, then that is put into the contract, and then

one is paid. In all the voluminous evidence, there 1s

zero evidence that the parties had ever discussed a

sale price before the assignments were signed (or

after), let alone agreed to a sale price. It is settled

law in the 10th Circuit that “... the contract could

not be valid and enforceable if the price term were

missing.” Lurch v. U.S., 719 F.2d 333 (10th Cir.

1983) As this Court will see below, the Kinnard

Brothers claim that they filled in the missing price

term later. The Kinnard Brothers’ own employees

testifed at trial that David Kinnard decided

retroactively to claim prior regular distributions to

Stone as “payments” for the alleged sales. (Tr. 234)

145

It is not permissible for David Kinnard to fill in the

missing, essential price term after the fact.

2. THE DISTRICT COURT ERRED, AS A MAT-

TER OF LAW, IN CONCLUDING THAT DAVID

KINNARD PAID VALID CONSIDERATION

FOR THE STONES’ PROPERTIES.

A. The Standard of Review of a District

Court’s Conclusion of Law is “De Novo”

Review.

The second issue before this Court is whether

David Kinnard paid valid consideration for the

Stones’ interest in the OIG entities. The District

Court concluded that forgiveness of two (rejected

third-party) notes and funds taken from a

partnership by its managing partner in violation of

the operating agreement may serve as consideration

‘for that partner’s purchase of a minority partner’s

shares. Whether rejected, third-party notes and

funds taken in violation of an operating agreement

may serve as valid consideration are pure questions

146

of law, thus the standard of review is “de novo.”

Beaver v. Clingman, 363 F.3d at 1053.

B. Forgiveness of neither Mrs.

Kinnard’s Note nor the

Beatrice Note can Serve as

Consideration.

The Plaintiffs claim the bulk of the considera-

tion for Springfield came from the forgiveness of two

aie: the Mrs. Kinnard Note (Aplt.App. at 163-64)

and the Beatrice Note. (Aplt.App. at 168-69) How-

ever, neither can serve as consideration for the

Springfield assignment.

First, the Mrs. Kinnard Note is not valid be-

cause Mrs. Kinnard did not accept it and sign it. But,

even if it were valid, it would be a debt to Bernice

Kinnard. Bernice Kinnard is a third-party. David

Kinnard had no right to forgive a note that was not

his. There has been and is no evidence that the note

147

was ever assigned to David Kinnard or that he made

any attempt to “forgive” the Mrs. Kinnard Note.

Therefore, there was no detriment to David Kinnard

and therefore no consideration.

Likewise, the Beatrice Note, even if it were valid

and had been accepted and signed by the Kinnard

Brothers (and it was not), would be a debt to both

David and Roger Kinnard. David Kinnard had no

right to forgive the note on behalf of Roger Kinnard.

There has been and is no evidence that the Beatrice

Note was ever assigned to David Kinnard or that he

made any attempt to “forgive” it. (If Mrs. Kinnard

were to sign it and accept it at some time in the

future, it would be resurrected.) Therefore, there was

no detriment to David Kinnard and therefore no

consideration.

Moreover,

148

[A]dequate consideration requires

the reccipt of a present benefit

that reflects the fair market value

of the property.”

--Summum ov, Duchesne City,

82 F.3d 1263, 1272 (10th

Cir. 2007). (internal citation

omitted, emphasis added).

The Springfield assignment was executed March l,

2005. The Mrs. Kinnard Note was not executed until

March 10, 2005, and the Beatrice Note was not

executed until March 16, 2005. The alleged

forgiveness of purported debts that. didn’t even exist

on March 1, 2005, could not have served as

consideration.

Additionally, “a benefit that is of uncertain

value” cannot serve as consideration. 7d. Even when

the notes were executed several days later, they still

did not have a certain value. The stated amounts in

the notes were only to be the actual value of the

notes if Mr. Stone did not proceed with arbitration,

which he did. When the notes were executed there

was still a lengthy process of arbitration that was to

occur to determine the actual amount of the alleged

debt, if any. The value of the notes would not have

been determined for several months after their

execution and therefore were of uncertain value at

the time the Plaintiffs claim they served as

consideration.

C. Funds Borrowed by David

Kinnard from Springfield,

in Violation of its Operating

Agreement Cannot Serve as

Valid Consideration.

The Kinnard Brothers claim that the monthly

payments that OIG sent to the Stones can retroact-

tively serve as consideration. This is not the case, be-

cause all funds sent by OIG to the Stones were sent

pursuant to the Monthly Distribution Agreement,

and it 1s axiomatic that payments under a prior

obligation may not serve as consideration for a

150

second deal. This argument alone refutes the Kin-

nard Brothers’ case. However, there ‘s an even more

important reason why any funds sent by OIG cannot

count as consideration for David Kinnard, the only

beneficiary of the assignments. David Kinnard

claims that the funds that OIG sent to the Stones

over the years were first (secretly) “borrowed” by

him from Springfield (ApIit.App. at 532-38, 1480, 44

17 and 18.) The Kinnard Brothers admit that the

Operating Agreement for Springficld (Aplt.App. at

69-89) prohibits in Section 4.3 all loans from the

Partnership without written consent of the other

partners. (Aplt.App. at 74-75, 725, and 1294). An

employee of David Kinnard, who helped David

Kinnard with the assignments, testified that David

Kinnard was aware of these provisions. (Aplt.App. at

725-26, 1294). David Kinnard openly admitted

during trial that the funds that he claimed he used

151

to pay Stone for the purported sales came from

“loans” from Springfield in violation of the Operating

Agreement. (ApIt.App. at 976) (Throughout the trial,

it became evident that David Kinnard treated OIG

and its subsidiaries as if they were his private

piggybank.)

As a matter of law, actions taken by an LLC

member in contravention of the LLC Operating

Agreement are null, void and of no effect.” Kinwood

Capital Group. LLC v. Northlake Dev., LLC (In Re

Northlake Dev., LLC), 2007 Bankr. LEXIS 4403

(Bankr. S.D. Miss. 2007). See also, Overhoff v. Scarp,

Inc., 12 Mise. 3d 350, 362, 812 N.Y.S.2d 809 (N.Y.

Sup. 2005). In Overhoff, the Plaintiff was founder,

president, and general manager of a limited-hability

company. Two defendants executed a_ written

consent of a majority of the membership of the

hmited-hability company purporting to take certain

actions, including terminating the lmited-labuility

company's lease, terminating the employment of all

of its employees, including that of plaintiff, and

agreeing to acceptance of an alleged notice of default

on a promissory note from the lmited-lhabuility

company to defendant corporation owned by one of

the member defendants. The operating agreement

required approval of all members to transfer any

interest in any property, to confess judgment on

behalf of the hmited-liability company, and to do any

act that made it impossible to carry on the ordinary

business of the hmited-liability company. The court

held that the actions taken aad the operating

agreement and therefore were void. Overhoff v.

Scarp, Inc., 12 Misc. 3d 350, 362, 812 N.Y.S.2d 809

(N.Y. Sup. 2005).

Likewise, in Kinwood, a minority member of

an LLC created a new entity and transferred real

bt Be

property of the LLC to the new entity without the

knowledge or approval of the principal in violation of

the LLC operating agreement. The member then

executed a deed of trust in favor of the new entity in

which he pledged the new entity’s interest in the

property as collateral for a loan. The court declared

the transfer of the property to the new entity null

and void and in turn declared the deed of trust to the

third-party null and void. The court held that the

deed of trust did not create a valid security interest

in the property in favor of the third-party because

the new entity had no interest in the property to

convey to the third-party because the original

transfer was in violation of the operating agreement

and therefore void ab tnitio. Kinwood Capital Group.

LLC vu. Northlake Dev., LLC (Un Re Northlake Dev.,

LLC), 2007 Bankr. LEXIS 4403 (Bankr. S.D. Miss.

2007).

154

Here, the loans which David Kinnard used

allegedly to buy the Stone's interests were in clear

violation of the operating agreement, as even he

admits. As such, they were void ab initio and he had

no right to those funds. Therefore, the loans and

subsequent “purchases” of the Stones’ interests were

void and of no effect. In the face of this clear

precedent, the District Court erred in concluding

David Kinnard’s admitted violation had no effect on

the transaction.

3. THE DISTRICT COURT ERRED, AS A MAT-

TER OF LAW, IN CONCLUDING THAT MINO-

RITY MEMBERS OR PARTNERS MAY UNIN-

TENTIONALLY WAIVE THEIR RIGHTS

UNDER THEIR OPERATING AGREEMENTS

OR UNDER THE UNIFORM PARTNERSHIP

ACT.

A. The Standard of

Review of a_ District

Court’s Conclusions of

Law is “De Novo”

Review.

Awe

The third issue before this Court is whether

failing to object to a managing partner’s or member's

taking secret personal loans for himself, in violation

of an express provision of the Springfield Operating

Agreement and of the Oklahoma Uniform Partner-

ship Act, could unintentionally waive a_non-

managing member's or partner’s right to protection

from such behavior by a managing member or

partner. That is a pure question of law, thus the

standard of review is “de novo.” Beaver v. Clingman,

363 F.3d at 1053.

B. Under the Operating

Agreement, Waiver

Must be Explicit.

The District Court held, even though David

Kinnard admitted to violating Springfield’s Opera-

ting Agreement, that 1t would not unwind the

transaction because the Stones waived their right to

156

enforce the Operating Agreement because they did

not previously complain about’ the vices

(Aplit.App. at 1481, 419; Attachment 2, p. 16)

However, it would have been impossible for the

Stones to complain about David Kinnards’ takings of

“loans” from Springfield, because the Stones did not

know about them until discovery in the case at bar,

during David Kinnard’s deposition. (Aplt.App. at

532-38, 1244) Moreover, any purported failure to

object is irrelevant, because under the Springfield’s

Operating Agreement, “[n]lo failure by any party to

insist upon the strict performance of any covenant,

duty, agreement or condition of this Agreement or to

exercise any right or remedy consequent upon a

breach thereof shall constitute waiver of any such

breach or any other covenant, duty, agreement or

condition.” See Section 13.4 of Springfield’s

operating agreement. (Aplt.App. at 88) In other

tof

words, waivers of rights have to be done explicitly---

not silently, unintentionally, and by constructive

implication.

Also, under the operating agreement, any fail-

ure to complain of a prior violation does not waive

their rights as to a future violation. See Section 13.4

of Springfield’s operating- agreement. (AplIt.App. at

88) The District Court held that the Stones failed to

com-plain about prior violations; but it made no

finding that the Stones affirmatively waived David

Kinnard’s violation as to the loans he took from

Springfield related to the assignments. Because the

Stones’ purported failure to complain about any

prior violations is irrelevant, the District Court erred

in concluding the Stones waived their rights under

the Operating Agreement.

Moreover, the District Court, in support of its

conclusion that the Stones waived all of their rights,

158

found that the Stones came to court with “unclean

hands” because they themselves supposedly took a

loan from Springfield in 1998 without getting

explicit permission from the Kinnard Brothers.

(Attachment 2, p. 16) There are two major problems

with this argument. First, the facts are wrong. The

Stones took that loan from the Kinnard Brothers

individually, not from Springfield, and repaid it to

the Kinnard Brothers individually, at the insistence

of the Kinnard Brothers. (See “Agreement Between

Beatrice Associates and Roger and David Kinnard,”

dated March 27, 1998, and “Collateral Note—Install-

ment,” dated January 1, 1997, Aplt.App. at 94-101.)

The second major problem with the District

Court’s opinion is that it relhes upon a mistake of

law. The District Court, in support of its conclusion

of law that the Stones waived their rights, refers this

Court to the only precedent cited in its opinion: Atlas

e)

Life Ins. Co. v. Schrimsher, 1937 OK 117, 179 Okla.

643, 66 P.2d 944 (Okla. 1937). Here the District

Court indicates that the Stones waived their rights

because, like the defendant in Atlas Life, they failed

to complain while accepting payment from the

plaintiff. (Attachment 2, p. 16) However, in Atlas

Life the court held that the defendant’s failure to

complain when accepting a payment is not waiver.

Furthermore, just as in the case at bar, there was

“no meeting of the minds,” so what appeared to be a

written and signed “contract” was void. “An

individual cannot waive his rights by words spoken

to himself, which no third person hears, or by con-

duct which is never seen.” /d., 179 Okla. at 645, 66

P.2d at 948. At common law, waiver must be

explicit. (In the case at bar, non-managing partners

have the added protections of the Oklahoma Uniform

Partnership Act and of OIG’s operating agrcements.)

160

C. Under the Uniform Partnership

Act, Waiver of the Managing

Partner’s Fiduciary Duty is Not

Possible.

Oklahoma’s law of partnerships since Novem-

ber 1, 1997, includes the Oklahoma Revised Uniform

Partnership Act, §§54-1-101 et seq. (2007). ORUPA

provides that “An association formed under a... .

predecessor statute ... is not a partnership under

this act.” §54-1-202(b) (2007). Since the original

written contract between the Stones and_ the

Kinnard Brothers was executed on October 19, 1989,

and was modified in 1996, and the modification was

restated on May 16, 1997, OIG and its subsidiaries

fall under the predecessor statute, the Oklahoma

Uniform Partnership Act (“Oklahoma UPA”), 54

OkI.St. § 201 et seq. (1989).

The Oklahoma UPA provides that, “This act

shall be so interpreted and construed as to effect its

161

general purpose to make uniform the law of those

states which enact it.” 54 Okl.St. § 204(4) (1989). In

other words, the applicable law of Oklahoma

includes the common law of any jurisdiction that has

enacted the UPA. Furthermore, “In any case not

provided for in this act the rules of law and equity,

including the law merchant, shall govern.” 54 Ok1.St.

§ 205 (1989). In other words, the Oklahoma UPA is,

by its own terms, not intended to be complete in

itself as written but.rather incorporates into itself all

partnership rules from all common-law jurisdictions,

whether or not they have the UPA---as long as those

rules are not specifically contradicted by the UPA.

The above principle of interpretation of the law of

Oklahoma continues under ORUPA after November

1, 1997. §54-1-104 (2007).

The rights of a non-managing partner under

the UPA include: (1) the right to an accounting,

162

including “full and frank” disclosure, (2) the right to

be treated as the beneficiary of a fiduciary trust,

with the managing partner as the trustee, (3) the

right, in case of a dispute between a managing

partner and a non-managing partner, to enjoy the

advantage that the majority partner has the burden

of proof.

Firstly, the UPA is strong and clear on the

right of minority partners to access the partnership

records: “Partners shall render on demand true and

full information of all things’ affecting’ the

partnership to any partner... .” 54 OkLSt. § 220

(1989). And, “Any partner shall have the right to a

omens account as to partnership affairs: .. . (b) If

the right exists under the terms of any agreement

land] (d) Whenever other circumstances render it

just and reasonable.” 54 OKILSt. § 222 (1989). In the

case at bar, the right to an accounting exists in the

163

organizational documents of each subsidiary. In

Barton v. Audietis, 25 Conn.App. 92, 592 A.2d 974

(1991), the trial court denied a non-managing

partner’s motion for an accounting because an oral

partnership was not specific on audits. The court of

appeals reversed, finding that the right to an

accounting is provided by the UPA without any

reference to the partnership agreement, whenever

“circumstances render it just and reasonable.” In

Peskin v. Deutsch, 134 UllLApp.3d 48, 479 N.E.2d

1034 (1985), the trial court, as in the case at bar,

denied a non-managing partner’s motion for a formal

accounting because of contested payments. The court

of appeals reversed, holding that, to defeat a motion

by a non-managing partner for a formal accounting

under the UPA, the managing partner must prove by

clear and convincing evidence that he made a “full

164

and frank” disclosure of all contested payments and

that the non-managing partner had ratified them.

Secondly, all general partners are trustees.

The UPA provides:

——— ee

Every partner must account to the

partnership for any benefit, and hold

as trustee for it any profits derived

by him without the consent of the

other partners from any transaction

connected with the formation, conduct,

or liquidation of the partnership or from

any use by him of its property. [empha-

sis added]

--54 OK1St. § 221(1) (1989).

In NCAS Realty Management Corp. v. The

Nat'l Corp. for Housing Partnerships, 143 F.3d 38

(2nd Cir. 1998), which interprets managing partners’

fiduciary duty to non-managing partners under the

fiduciary provisions of the UPA, plaintiff, as in the

case at bar, was local managing partner, and

defendant was an out-of-state partner. Defendant

counterclaimed for an accounting and to remove

165

plaintiff as local managing partner, based on

allegations of sclf dealing. Defendant filed an order

to show cause seeking a TRO and a preliminary

injunction that would allow its chosen auditor to

review the books and records. The District Court

granted defendant’s motion and issued an injunction

granting defendant's permanent access to the

partnership books and _ records. Quoting Chief

Justice Cardozo,

A partner, as a fiduciary, is held to higher

standards than those of the marketplace.

"Many forms of conduct permissible in a

workday world for those acting at arm's

length, are forbidden to those bound by

fiduciary ties. A trustee is held to some-

thing stricter than the morals of the mar-

ket place. Not honesty alone, but the punc-

tilio of an honor the most sensitive, is then

the standard of behavior.

As to this there has developed a tradition

that is unbending and inveterate. Uncom-

promising rigidity has been the attitude

of courts of equity when petitioned to un-

dermine the rule of undivided loyalty by

the ‘disintegrating erosion’ of particular

exceptions. Only thus has the level of con-

166

duct for fiduciaries been kept at a level

higher than that trodden by the crowd.”

Meinhard v. Salmon, 249 N.Y. 458, 464,

164 N.E. 545 (1928) (Cardozo, C.J.)

--143 F.3d 38, at 39

In other words, the UPA has zero tolerance for man-

aging partners who violate their fiduciary duty. Also,

in NCAS Realty Management Corp. v. The Nati

Corp. for Housing Partnerships, 143 F.3d 38 (2nd

Cir. 1998), a magistrate judge denied defendant’s

motion to remove the plaintiff as managing partner,

because the plaintiff had made payments to supphies

for non-existent goods or services. The magistrate

judge held that such wrongdoing does not rise to the

level of a breach of fiduciary duty, so the plaintiff

should not be punished. The Court of Appeals

reversed, holding that all self-dealing by a managing

general partner at the expense of a non-managing

partner is a breach of fiduciary duty. A partnership

is not a marketplace. Concealment alone is a breach

167

of fiduciary duty. Jennison v. Bierer, 601 F.Supp.

1167 (D.Vt. 1984). So too, is depositing a check from

a client into the managing partner’s own account

and concealing it. Updike v. Wolf & Co., 175

Ill. App.3d 408, 529 N.E. 2d 993 (1988). So too, is

excluding a non-managing partner from the business

so that he did not know what was going on and had

no evidence of financial wrongdoing by the managing

partners. Williams v. Tritt, 262 Ga. 173, 415 S.E.2d

285 (1992).

Thirdly, the burden of proof is on_ the

managing partners. In Konover Development Corp.

v. Zeller, 228 Conn. 206, 635 A.2d 798 (1994), the

managing partner sued a non-managing partner,

alleging breach of contract. The trial court approved

a jury instruction that the managing partner had to

prove that he had acted reasonably. The non-

managing partner appealed, and the supreme court

168

reversed, holding that, under the UPA, a managing

partner is a fiduciary, so when it sues a_ non-

managing partner, it must first prove that it acted in

a fiduciary manner by “clear and_ convincing

evidence.” In the case at bar, the District Court

failed to find that the Kinnard Brothers had proved

by clear and convincing evidence that they had acted

in a fiduciary manner (nor could it have).

It is obvious that David Kinnard’s

concealment, denial of eee to books and records,

fraud, unequal “loans,” violations of the

organizational documents, and general predatory,

unequal treatment of the Stones are breaches of

fiduciary duty. And there is absolutely no precedent.

of a court of law in the Tenth Circuit, or in any other

circuit, ratifying breaches of fiduciary duty in

violation of the UPA.

169

4. THE DISTRICT COURT ERRED, AS A

MATTER OF LAW, IN GRANTING AN

EQUITABLE REMEDY TO A PARTY THAT IT

FOUND TO HAVE COME TO COURT WITH

UNCLEAN HANDS.

A. The Standard of Review

of a District Court’s

Conclusions of Law is

“De Novo” Review.

The fourth issue before this Court is whether

a court of the Unitec States may grant an equitable

remedy toa party that it has found to have come to

court with “unclean hands.” That is a pure question

of law, thus the standard of review is “de novo.”

Beaver v. Clingman, 363 F.3d at 1053.

B. The Kinnard Brothers

Are Not Entitled to Any

Relief, because they

Come to Court with

Unclean Hands.

In the case at bar, David Kinnard concealed

partnership documents and very large financial

transactions (secret “loans” to himself) from the non-

170

managing partners, denied those partners’ access to

books and records, conspired to defraud those

partners, gave himself and his brother unequal

“loans,” violated the organizational documents, and

generally showed a predatory, unequal treatment of

the Stones. In short, he turned OIG and its

subsidiaries into his own private piggybank. Each of

these acts constitutes a breach of fiduciary duty. In

light of the aforementioned violations, the District

Court found that David Kinnard and Roger Kinnard

acted with unclean hands. (Attachments 2, p. 16)

The District Court then gave the Kinnard Brothers

everything they requested. In so doing, the District

Court placed itself in opposition to Tenth Circuit

law.

David Kinnard has admitted that he violated

the various operating agreements and took loans

that benefited himself and his brother while refusing

ava

to allow Stone to take a similar loan. (Aplt.App. at

495-96, 553, 976, and 979-83) Additionally, he

improperly made unequal distributions (Aplt.App. at

495-96), used partnership funds for a_ personal

purpose, and breached his fiduciary duties as

managing partner. (Aplt.App. at 976) Now he asks

the Court not only to ignore his unjust and

unconscionable behavior, but to give this Court’s

judicial stamp of approval to his actions and to allow

him the benefit of his wrongdoing.

Tenth Circuit law on this question 1s clear. “A

declaratory judgment claim that seeks construction

of a contract and no rehef akin to damages is an

equit-able claim.” Manning v. United States, 146

‘F.3d 808, 813 (10th Cir. 1998). And, “[e]quity will

not intervene on behalf of a plaintiff whose conduct

in connection with the same matter has been uncon-

scientious or unjust.” City of Tulsa v. Tyson Foods,

172

Inc., 258 F.Supp.2d 1263, 1311 (N.D. Okla. 2008).

[E]quity will not in any manner aid a party whose

conduct in relation to the litigation matter has been

unlawful, unconscionable, or inequitable.” Jd., at

1311.

5. THE DISTRICT COURT ERRED, AS A MAT-

TER OF LAW, IN HOLDING THAT MINORITY

PARTNERS DO NOT HAVE A RIGHT TO AN

ACCOUNTING.

A. The Standard of Review of a

District Court’s Conclusions

of Law is “De Novo” Review.

The fifth issue before this Court is whether

non-managing partners have a right to a formal, in-

dependent accounting under the UPA. That is a

pure question of law. A district court’s conclusions of

law are reviewed by a court of appeals “de novo.” In

“de novo” review, “no form of appellate deference is

acceptable.” Beaver v. Clingman, 363 F.3d 1048,

1053 (10th Cir. 2004).

ae

B. The Stones are Entitled toa

Formal Accounting.

The Stones showed above in their discussion

of the UPA that the Stones have a statutory right to

a formal, certified accounting when there are

disputed payments. The Stones repeatedly have

requested full access to the partnership books for

OIG and for the various subsidiaries and have

continuously been denied access. (Aplt.App. at 175,

1201, 1235, and 1277) The Stones repeatedly moved

the District Court to grant them access during

discovery, alleging that the managing partner was

doling out some records and withholding others.

(Aplit.App. at 177-321, 375-389) The Stones’ expert

witness testified that he did not have sufficient

documents and that the Kinnard Brothers were

withholding documents. (Aplt.App. at 383-85) The

Stones’ motions to compe] access were denied by the

174

District Court. (Aplt.App. at 345-46, 390-91) The

UPA does not permit the managing partner to dole

out selectively some records and withhold others.

Also, a fair trial was not possible without the

missing accounting. At trial, each side presented the

testimony of an accountant as an expert witness.

Both experts shared information with one another,

so there was substantial agreement between the

expert wit-nesses on the fact that OIG sent monthly

payments to the Stones from 2000 until after the

loan documents were signed in April, 2005 (Aplt.

App. at 415). However, both experts lacked adequate

information to testify as to what payments were

made before 2000, because the District Court had

denied the Stones’ motions to compel discovery.

(Aplt.App. at 345-53, 388-89) Therefore, there was

no way they could determine what the total

payments were and therefore whether they met

175

OIG’s total obligation under the Monthly

Distribution Agreement, much less . consideration

paid on top of that.

In addition, the Kinnard Brothers allege that

the Stones sold to David Kinnard the Stones’ shares

in certain subsidiaries. But even the Kinnard

Brothers do not contest that Robert L. Stone is still a

partner of OIG, so it is incontestable that the Stones

have a right to a certified accounting of OIG.

However, the District Court denied the Stones’

motions to compel discovery, which should have been

granted routinely given their statutory right of

access to acs books and records. Then, in its final

judgment, the District Court denied the Stones’ right

to an accounting even for OIG and (for the

subsidiaries even during the time that the District

Court found that the Stones were partners in OIG

and in its subsidianies. The District Court never had

176

many crucial facts before it, such as the Kinnard

Brothers’ embezzlement and the appraisal of the

properties to show the absurdity of the Kinnard

Brothers’ price term they filled in later. It is

impossible to reconcile the District Court’s final

judgment with the Oklahoma UPA and thereby with

Tenth Circuit law that uses the law of the States as

the rules of decision in diversity cases.

CONCLUSION

The District Court’s Findings of Fact and Con-

clusions of Law are inconsistent with Tenth Circuit

law, the partnership agreements, and the Uniform

Partnership Act. The only way to uphold the law is

to reverse the judgment of the District Court, to hold

that all transactions after David Kinnard’s violations

of the UPA and various organizational documents

are void ab initio, to unwind all subsequent trans-

actions, to order an independent certified

177

accounting, to order all parties to return any and all

loan funds improperly advanced in contravention of

the Operating Agreement, and to order both sides to

equalize the partnership accounts. (Aplt.App. at

1389-91)

STATEMENT OF COUNSEL AS TO ORAL

A MENT

Because of the importance of this case,

because the holding of the District Court

contravenes Tenth Circuit law in five different ways,

and because the standard of review on most of the

issues presented in this appeal is de novo, oral

argument will be helpful to the Court.

Respectfully submitted,

ALL OF THE DEFENDANTS

s/JenniferMajewski

Robert S. Reda

Jennifer Majewski

Reda & Des Jardins, Ltd.

8 South Michigan Ave. 34th Floor

Chicago, IL 60603

1/78

Telephone: 312-236-9318

Facsimile: 312-236-6376

Email: Robert@RDLawyers.com

Email: Jennifer®RDLawyers.com

ATTORNEYS FOR DEFENDANTS

and

Andrew W. Lester, OBA #5388

R. Scott Thompson, OBA # 17712

Lester, Loving & Davies, P.C.

1701 South Kelly Avenue

Edmond, Oklahoma 73013

Telephone: 405-844-9900

Facsimile: 405-844-9958

Email: alester@lldlaw.com

Email: sthompson@lldlaw.com

CERTIFICATE OF COMPLIANCE

As required by Fed. R. App. P. 32(a)(7)(c), I

certify that this brief is proportionally spaced and

contains 12,285 words. I relicd on my word processor

to obtain the court, and it is Microsoft Word 2003. |

certify that the information in this certificate is true

and correct to the best of my knowledge and belief

formed after a reasonable inquiry.

179

By: s/Jennifer Majewski

Jennifer Majewski

Attorney for Appellants

CERTIFICATE OF DIGITAL SUBMISSION

I hereby certify that a copy of the foregoing

Appellants’ Opening Brief, as submitted in Digital

Form, is an exact copy of the written document filed

with the Clerk of this Court and has been scanned

for viruses with the Symantec Endpoint Protection

ver-sion 11.0.3001.2224, Virus Definition File Dated:

11/25/2008 rev. 4, and, according to the program, is

free of viruses.

By: s/Jennifer

Majewski

Jennifer Majewski

Attorney for Appellants

CERTIFICATE

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