Klein v. Campbell

1

MICHAEL J. KLEIN, Personal Representative of the Estate of Richard A. Kay; EF INVESTMENTS, LLC; EAGLE FORCE HOLDINGS, LLC, Plaintiffs - Appellees, v. STANLEY V. CAMPBELL; EAGLEFORCE ASSOCIATES, INC., Defendants - Appellants.

MICHAEL J. KLEIN, Personal Representative of the Estate of Richard A. Kay; EF INVESTMENTS, LLC; EAGLE FORCE HOLDINGS, LLC, Plaintiffs - Appellants, v. STANLEY V. CAMPBELL; EAGLEFORCE ASSOCIATES, INC., Defendants - Appellees.

Nos. 22-1497, 22-1524

United States Court of Appeals, Fourth Circuit

June 6, 2023

UNPUBLISHED

Argued: March 7, 2023

Appeals from the United States District Court for the Eastern District of Virginia, at Alexandria. Leonie M. Brinkema District Judge. (1:20-cv-01122-LMB-JFA) James Bennett Kinsel, PROTORAE LAW PLLC, Tysons, Virginia, for Appellants/Cross-Appellees.

Harold Mark Walter, OFFIT KURMAN, PA, Columbia, Maryland, for Appellees/Cross-Appellants.

Before AGEE, HARRIS, and QUATTLEBAUM, Circuit Judges.

Affirmed in part, vacated in part, and remanded by unpublished opinion. Judge Agee wrote the opinion, in which Judge Harris and Judge Quattlebaum joined.

Unpublished opinions are not binding precedent in this circuit.

AGEE CIRCUIT JUDGE

This appeal arises out of an unsuccessful attempt to form a partnership. Richard Kay, a businessman, sought to acquire a partnership interest in Stanley Campbell's established business, EagleForce Associates, Inc. ("Associates"). As the two men negotiated a potential partnership agreement, Kay started transferring funds to Associates with the expectation that those funds would constitute a capital investment establishing his equity interest in the partnership. To protect Kay in case negotiations soured, Campbell executed a promissory note on behalf of Associates indebting Associates to Kay in the amount of $700,000, roughly the balance lent to Associates at the time of the note's execution. After Kay advanced additional funds to Associates-approximately $1.2 million-without executing an additional promissory note, negotiations ceased without a final partnership agreement.

Nonetheless, Kay sought to establish the partnership by judicial decree in Delaware state court. In that proceeding, Kay denied the existence of a loan to Associates and argued that the money he had transferred represented his equity interest in the business. For his part, Campbell denied the existence of a partnership but repeatedly acknowledged the transferred funds were a loan. After the Delaware court ruled in favor of Campbell and found there was no enforceable partnership, Kay sought to enforce the note by demanding repayment. When Campbell refused to pay, Kay and his affiliated companies, Eagle Force Investments, LLC ("Investments") and EF Holdings, LLC ("Holdings") (collectively "Plaintiffs"), brought this action in the Eastern District of Virginia against Campbell and Associates (collectively "Defendants") to recover the total amount transferred, approximately $1.9 million. Contrary to the position taken in the Delaware litigation, Defendants now deny both the validity of any loan and their liability to repay any monies. After discovery, the district court granted summary judgment to Plaintiffs, holding that Defendants were jointly and severally liable to them for the principal amount of roughly $1.9 million. Given that holding, the only remaining issue to be decided was when interest on that principal amount began to accrue. Following a bench trial, the district court determined that interest commenced five days after Plaintiffs demanded repayment and awarded Plaintiffs $2,101,003.88 in total damages. Both parties appealed.

For the following reasons, we affirm in part, vacate in part, and remand for further proceedings.

I. Partnership Negotiations & Legal Proceedings

A. Underlying Facts

Richard Kay was the sole member of Investments, which in turn is the sole member of Holdings.^[1] Stanley Campbell is the sole owner, president, and chief executive officer of Associates, a healthcare technology development and consulting firm.

In January 2014, Kay and Campbell began discussing the possibility of becoming business partners in Associates-Kay planned to invest the capital and Campbell intended to contribute his intellectual property. Despite not having a binding partnership agreement yet in place, Kay immediately began funding Associates.^[2] By July 7, 2014, Kay had provided Associates $644,000.

Although the men expected for their partnership agreement to go as planned- meaning that the money Kay transferred would be considered his equity capital in the entity-they also recognized the need for a repayment contingency in case negotiations failed. To accomplish this backup plan, Kay's attorney drafted a promissory note ("the Note"), which was signed on July 7, 2014. The men agreed that the Note would "become null and void once" Kay and Campbell finalized their partnership agreement. J.A. 2417.

Relevant here, the Note stated that Associates, as "the Borrower," promised to pay Kay, "the Lender," "upon demand, the principal sum of Seven Hundred Thousand Dollars ($,700,000) [sic]" with interest. J.A. 63 (internal quotation marks omitted). It did not reference Campbell personally, Holdings, or Investments. Additionally, the Note provided that the principal would not begin accruing interest until Associates was in default, which would occur if Associates failed to repay the loan within five days of its due date. Although the Note stated that it was due "upon demand," it also included a provision stating that the loan was due three months after the Note was executed, which would make payment due on October 7, 2014. J.A. 63. Campbell signed the Note on behalf of Associates.

On August 28, 2014, Campbell and Kay signed two additional documents (the "Transaction Documents") that set out certain terms of Campbell and Kay's desired partnership. The Transaction Documents did not reference the Note.

As negotiations dragged on, Kay continued to contribute money to Associates and by February 2015, he had contributed roughly $1.9 million total-the original $700,000 represented by the Note and approximately $1.2 million after executing the Note.^[3] The parties did not execute a second promissory note covering the additional money loaned or provide any specific written documentation evidencing a modification of the Note to cover the additional funds.

The partnership negotiations eventually failed. Campbell informed Kay via email that they "ha[d] reached an impasse that we are unable to resolve" and that partnership negotiations would cease. J.A. 1966. Campbell also noted that "[w]e have booked the funding as a loan." J.A. 1966. Kay replied, "Your email is totally untrue, misleading and the [Associates] investment money has never been a loan[.] You know that as does everyone. I am 50 percent owner [of Associates] and will continue to operate in that role." J.A. 1966.

B. The Delaware Litigation

In March 2015, Plaintiffs filed a lawsuit in the Delaware Court of Chancery^[4] seeking a judicial decree establishing a binding partnership agreement that recognized Kay as fifty-percent owner of Associates based on the Transaction Documents.^[5] Plaintiffs did not reference the Note or any obligation of repayment of the funds Kay had advanced. Campbell, the sole defendant, responded that the Transaction Documents were not a final partnership agreement and that he had never agreed to be bound by them. Throughout the litigation, Kay denied the existence of the loan while Campbell repeatedly affirmed that he had received the money from Kay only as a loan, referenced the Note to support his position, and pledged his personal liability for at least some of the funds. The Delaware court ultimately concluded that Plaintiffs did not show that the partnership existed and entered judgment for Campbell.

Certain parts of the testimony and evidence produced in the Delaware litigation are relevant to the current appeal. First, Kay testified that the $1.9 million he invested in Associates "was never a loan." J.A. 1963. Second, Kay's attorney who had drafted the Note stated that Note "does not" bind Campbell personally. J.A. 2538. Finally, for his part, Campbell stated at trial that he "agreed to be personally liable on [the Note] for at least part of the money that was coming in from [Kay]." J.A. 300. He explained that the Note was in place so that "there was always a mechanism to make [Kay] whole that I was [a] signatory on, all the way up to even now." J.A. 300.

Two of Campbell's responses to Kay's requests for admissions and interrogatories in the Delaware litigation also bear on the current case. He denied Kay's request that he "[a]dmit that [he] never entered into an agreement to borrow money from Richard Kay." J.A. 71. Campbell elaborated that "he has entered into an agreement to borrow money from Richard Kay and/or his affiliates. [Campbell] further states that the [Note] was drafted by Richard Kay's attorneys, reviewed by [Campbell's] attorney and executed with the anticipation that any additional monetary contributions from Kay would be subject to the same terms and conditions as the original loan." J.A. 71.

There were also numerous documents disclosed in the Delaware litigation that consistently acknowledged that Defendants owed money to Kay and Investments. Specifically, in accordance with a Delaware court order, Defendants provided Plaintiffs with more than one hundred documents listing Defendants' accounts payable, balance sheets containing Associates' current liabilities, general ledgers, and tax returns reflecting obligations to Kay and Investments. For example, on August 19, 2015, Defendants provided Plaintiffs with their accounts payable reflecting: (1) a loan...