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Cole v. Daoud

United States District Court, E.D. Virginia. Norfolk Division.

July 6, 2016

RICHARD T. COLE, Plaintiff in 2:15cv419, Defendant in 2:15cv479,
v.
WADID DAOUD, and DAOUD INVESTMENT HOLDINGS, INC., Defendants in 2:15cv419, Plaintiffs in 2:15cv479

          Richard T. Cole, Plaintiff, represented by Mark Randolf Baumgartner, Pender & Coward PC & Kristen Rodrigue Jurjevich, Pender & Coward PC.

          Wadid Daoud, Defendant, represented by Barry Dorans, Wolcott Rivers Gates P. C. & Jerry Tamayo, May, Meacham & Davell, PC, pro hac vice.

          Daoud Investment Holdings, Inc., Defendant, represented by Barry Dorans, Wolcott Rivers Gates P. C. & Jerry Tamayo, May, Meacham & Davell, PC, pro hac vice.

          Richard T. Cole, Consolidated Defendant, represented by Mark Randolf Baumgartner, Pender & Coward PC & Kristen Rodrigue Jurjevich, Pender & Coward PC.

          Daoud Investment Holdings, Inc., Consolidated Plaintiff, represented by Barry Dorans, Wolcott Rivers Gates P. C., Gerardo Jerry D. Tamayo, May Meacham & Davell P.A. & William Chris Davell, May Meacham & Davell.

          Wadid Daoud, Consolidated Plaintiff, represented by Barry Dorans, Wolcott Rivers Gates P. C., Gerardo Jerry D. Tamayo, May Meacham & Davell P.A. & William Chris Davell, May Meacham & Davell.

          Richard T. Cole, Consolidated Counter Claimant, represented by Mark Randolf Baumgartner, Pender & Coward PC & Kristen Rodrigue Jurjevich, Pender & Coward PC.

          Wadid Daoud, Consol Counter Defendant, represented by Barry Dorans, Wolcott Rivers Gates P. C., Gerardo Jerry D. Tamayo, May Meacham & Davell P.A. & William Chris Davell, May Meacham & Davell.

          Daoud Investment Holdings, Inc., Consol Counter Defendant, represented by Barry Dorans, Wolcott Rivers Gates P. C., Gerardo Jerry D. Tamayo, May Meacham & Davell P.A. & William Chris Davell, May Meacham & Davell.

          MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION

          DOUGLAS E. MILLER, Magistrate Judge.

         This business dispute is before the court for a second review under Rule 12(b)(6).[1] Richard Cole ("Cole"), following dismissal of his original Complaint and Counterclaim, filed an Amended Complaint and Amended Counterclaim against his former business partner and investor, Wadid Daoud ("Daoud") and Daoud Investment Holdings, Inc., ("DIH"). Daoud and DIH move to strike some of the facts supporting Cole's allegations and move dismiss most of the claims in their entirety. The pending motions were referred to the undersigned United States Magistrate Judge pursuant to 28 U.S.C. § 636 (b)(1)(B) and (C), Rule 72 of the Federal Rules of Civil Procedure, and the Local Rules of this court. For the reasons outlined below, the undersigned RECOMMENDS that in case number 2:15cv419, the court DENY Daoud and DIH's Motion to Strike (ECF No. 44), and GRANT IN PART and DENY IN PART Daoud and DIH's Motion to Dismiss the Amended Complaint (ECF No. 46). In case number 2:15cv479, the undersigned RECOMMENDS that the court GRANT Daoud and DIH's Motion to Dismiss the Amended Counterclaim (ECF No. 38).

         I. PROCEDURAL HISTORY

         Cole originally filed suit in this court on September 21, 2015, against Daoud, DIH, and Kent George ("George"), and the case was docketed as case number 2:15cv419 ("419").[2] Compl., No. 2:15cv419 (ECF No. 1). Following extensive briefing and oral argument, the court dismissed George and several counts alleged against Daoud and DIH. The court also granted Cole ten days to file an Amended Complaint in the 419 case and an Amended Counterclaim in case number 2:15cv479 ("479").

         Cole timely filed his Amended Complaint and Amended Counterclaim, omitting George as a Defendant and asserting entirely new claims against Daoud and DIH. Am. Compl., No. 2:15cv419 (ECF No. 41); Am. Countercl., No. 2:15cv479 (ECF No. 37). Daoud and DIH again move to dismiss Cole's Amended Complaint and Amended Counterclaim for failure to state a claim, No. 2:15cv419 (ECF No. 46); No. 2:15cv479 (ECF No. 38), and they also move to strike portions of the Amended Complaint, No. 2:15cv419 (ECF No. 44). On May 20, 2016, the court consolidated the two cases pursuant to Rule 42 (a) of the Federal Rules of Civil Procedure, No. 2:15cv419 (ECF No. 55); No. 2:15cv479 (ECF No. 44), and referred the matter to the undersigned for a report and recommendation, No. 2:15cv419 (ECF No. 56).

         II. STATEMENT OF FACTS

         In 2013, Cole and two other individuals[3] formed Waypoint Partners, LLC ("Waypoint"), a Virginia limited liability company.[4] Compl. ¶¶ 1, 7, No. 2:15cv419 (ECF No. 41, at 1-2). Waypoint's primary asset was a 51 percent ownership interest in Viridia, LLC ("Viridia"), a Virginia limited liability company formed concurrently with Waypoint, and Waypoint was "designated as the Manager of Viridia." Id . ¶¶ 1, 8. Viridia was "formed to develop and sell certain products to the public through a multi-level or network marketing structure." Id . ¶¶ 8 (ECF No. 41, at 2). Cole was chief executive officer ("CEO") of Viridia, and worked with George to establish a business plan and budget. Id . ¶¶ 10-11. Viridia's business plan involved developing a "new proprietary line of cosmetics in order to be able to market and sell a unique product with a sufficient profit margin to support the multi-level marketing commission structure." Id . ¶ 11. The business plan called for capital requirements of $2, 800, 000.00, and "contemplated that Viridia would outsource all development, product design, formulation, production, marketing and sales management." Id . ¶ 12 (ECF No. 41, at 3). The primary vendor for the outsourced work was to be Innovasource, "a company in which - as was known to George -Cole had an indirect financial and management interest." Id . Cole alleges that Viridia had "completed the development and production of a line of proprietary cosmetic products, had established an initial sales force, and launched the product." Id . ¶ 14. To cover Viridia's operating expenses, Cole contributed personal funds, and he performed work for Viridia without pay. Id . ¶¶ 15-16.

         On April 4, 2014, Cole and Daoud, an investor in Viridia, discussed Viridia's financial problems, and Daoud later "formed DIH for the sole purpose of providing funding for Viridia." Id . ¶¶ 19-20. Daoud told Cole and others that he would "provide sufficient funding for Viridia to become profitable, " and the parties estimated that the funding needed was between $1, 500, 000.00 and $2, 000, 000.00. Id . ¶ 20. As part of this investment, Daoud assured Cole that he had the funds to support Viridia and that he would pay Cole's salary, as currently owed, and in the future, if he continued to work for the company. Id . ¶¶ 21-22 (ECF No. 41, at 4). After Cole told George about Daoud's interest in investing in Viridia, George and Daoud negotiated the terms of Daoud's investment. Id . ¶¶ 23-24.

         On May 29, 2014, Daoud and George reached an agreement in which Daoud would assume control of Waypoint and become manager of Viridia. Id . ¶ 25. Both George and Daoud represented to Cole that Daoud would commit to fund at least $1, 425, 000.00, and "if after that funding was completed the prospect of Viridia was good, Daoud would continue additional funding as reasonably necessary." Id . When making the determination as to Viridia's viability, the parties - Cole, George, and Daoud - agreed to look at Viridia's performance at the end of 2014. Id . Cole alleges that "[a]s a condition precedent to Daoud's obligation to fund, ... Daoud and George told Cole that he had to transfer his 25% membership interest in Waypoint to DIH." Id . ¶ 26. He also alleges that Daoud and George conspired to defraud him and agreed privately that Daoud would not have any obligation to provide additional funding to Viridia. Id . ¶ 27. George then prepared a series of related written agreements, which the parties agreed would constitute "a single transaction" to implement their prior negotiations. Id . ¶ 28. The single transaction consisted of the following agreements: Investment Agreement; Warrant; First Amended and Restated Operating Agreement of Waypoint Partners, LLC; First Amended and Restated Operating Agreement of Viridia, LLC; and Assignments of Waypoint Membership Interests. Id.

         On July 24, 2015, the parties closed the transaction and circulated electronic signature pages, which purported to include all of the necessary signatures. Id . ¶ 31 (ECF No. 41, at 5). After the transaction closed, Cole assigned his "25 Class B shares in Waypoint" to DIH, and the shares had an agreed value of $726, 750.00. Id . ¶ 32. As part of the transaction, and as set forth in the Investment Agreement, DIH would invest $1, 425, 000.00 in Viridia. Id . ¶ 33. The agreements also included forum selection clauses that established "exclusive jurisdiction in the state and/or federal courts in the Commonwealth of Virginia." Id . ¶ 34. On July 25, 2015, Daoud represented to Cole and others that the transaction was closed. Id . ¶¶ 35-37. Although all parties acted as though the transaction was closed, Cole alleges that Daoud and George "had no intention of effecting the Transaction, ... had no intention of creating an enforceable obligation to provide funding[, ] [and] conspired to take Cole's interest in Waypoint, while inducing him to work for free and advancing funds to Viridia." Id . ¶ 38 (ECF No. 41, at 6).

         Daoud also asked Cole to prepare a private placement memorandum for DIH in order to raise equity capital, and DIH was then supposed to use the capital raised to fund Viridia. Id . ¶ 39. Because of Cole's work drafting the private placement memorandum for DIH, and in consideration of Cole's assignment of his Waypoint interest, Cole alleges that Daoud agreed to grant Cole an ownership interest in DIH. Id . ¶ 40. This agreement was confirmed in writing. Id . By unanimous consent of the Board of Directors of DIH, Cole was then appointed vice president of DIH. Id . ¶ 41. As set forth in the private placement memorandum, Daoud, as president of DIH, accepted subscriptions on behalf of DIH. Id . ¶ 45. When the funds were deposited in DIH's account, Daoud would transfer the funds to Viridia as a loan. Id . ¶ 46.

         Cole alleges that "[i]n September, Daoud instructed [him] that upon receipt of a future investment, Daoud wanted the proceeds used to repay him for the payment of Viridia's attorneys' fees in connection with the Transaction."[5] Id . ¶ 47. In November 2014, Deborah Cox Wood ("Wood") offered to purchase shares in DIH, and when Cole told Daoud about Wood's offer, Daoud voiced no objection. Id . ¶¶ 49-50 (ECF No. 41, at 6-7). On March 4, 2015, Cole e-mailed Daoud to explain the particulars of Wood's subscription. Id . ¶ 52 (ECF No. 41, at 7). Cole attached a signature page to the e-mail for Daoud to execute, "just as Daoud had done for the numerous other subscriptions that Cole had solicited." Id . During late February and early March 2015, Daoud was out of the country and not in communication with Cole. Id . ¶ 51. On March 10, 2015, Daoud responded to Cole's March 4, 2015, e-mail, and he also copied Wood on the e-mail. Id . ¶ 53. Cole alleges that the e-mail contained "several disparaging and defamatory statements pertaining to [him]." Id . ¶ 55. In this e-mail, Daoud stated that "he owns 100% of Daoud Investment Holdings, Inc.' and that Cole was not authorized to take any action with respect to the shares of Daoud Investment Holdings, Inc.'" Id . ¶ 56. Daoud also stated that "Cole had no right to sell a subscription or receive any money on behalf of Daoud Investment Holdings, Inc.'" Id . ¶ 57.

         Daoud then removed Cole as CEO of Viridia, and at the time of his removal, Cole alleges he was owed $400, 000.00 in past wages and loans to the company. Id . ¶ 61. Shortly thereafter, Viridia filed for bankruptcy. According to the Amended Complaint, this was "due to the failure of DIH to provide funding to Viridia, as agreed by the parties." Id . ¶ 61 & n.1.

         Cole's Amended Complaint alleges four claims against Daoud and DIH arising from a dispute over the related agreements, as well as the actions of Daoud before and after the transaction: (I) defamation; (II) breach of contract and/or unjust enrichment; (III) declaratory judgment for indemnity; and (IV) declaratory judgment regarding the transaction and related agreements.

         Because Daoud and DIH did not move to dismiss Count I of the original Complaint, Count I of the Amended Complaint is identical to Count I of the original Complaint. In Count I, Cole alleges that Daoud defamed him, and that DIH is liable for the acts of its agent, Daoud, who made the statements within the scope of his duties for DIH.[6] Id . ¶¶ 76-86 (ECF No. 41, at 9).

         Count II alleges that Daoud and DIH breached their agency agreement with Cole by failing to reimburse Cole for the costs and expenses he advanced, as well as the liabilities he incurred, while acting in his capacity as vice president of DIH. Id . ¶¶ 88-91 (ECF No. 41, at 10). Cole states that "DIH's refusal to reimburse Cole constitutes a breach of the Bylaws of DIH, " and Daoud's and DIH's "refusal to reimburse Cole constitutes a breach of their agency agreement and/or results in unjust enrichment to Defendants." Id . ¶¶ 92-93. He asserts that he is entitled to reimbursement from Daoud and DIH for all costs and expenses that he incurred while acting as an agent for DIH in his capacity as vice president. Id . ¶ 94.

         In Count III, Cole seeks a declaratory judgment for indemnity, asserting that "[a] declaration of the respective rights of the parties is necessary to prevent the risk of undirected action jeopardizing the parties' respective interests, rights, and obligations." Id . ¶ 114 (ECF No. 41, at 12). Specifically, Cole alleges that "[p]ursuant to the PPM [private placement memorandum], Daoud personally signed and accepted numerous subscriptions on behalf of DIH, as its President, " and in one specific instance, "Cole, as Vice President and/or agent for Defendants, informed Daoud of a potential $250, 000 investment from Ms. Wood in exchange for shares in DIH." Id . ¶¶ 97, 100 (ECF No. 41, at 10-11). Cole states that "Defendants have... claimed that DIH is entitled to 'repayment' from Cole in the amount of the investments solicited on behalf of DIH." Id . ¶ 109 (ECF No. 41, at 11). Cole claims that his "rights are affected by Defendants' assertion that he is liable to repay investment funds that DIH received from investors for shares of DIH, " and his "rights may be affected to the extent that investors seek repayment from Cole for investment funds paid to or for the benefit of DIH while Cole served in the capacity as Vice President and/or agent for Defendants." Id . ¶ 112-13 (ECF No. 41, at 11-12).

         In Count IV, Cole seeks a declaratory judgment regarding the transaction and related agreements. He asserts that the transaction included several related agreements, and that the parties executed the agreements and proceeded as if the transaction was closed. Id . ¶¶ 116-19 (ECF No. 41, at 12). One of the agreements, the Investment Agreement, "included the adoption of an Amended and Restated Operating Agreement for Viridia, LLC, " and stated that "each party will take such action as any other Party reasonably may request to carry out the purposes of the Investment Agreement... and that each party is entitled to specific performance of the Investment Agreement." Id . ¶¶ 120-21. Cole alleges that Daoud now asserts that "Viridia's members never adopted the Amended and Restated Operating Agreement, " and notes that Daoud filed a sworn affidavit in the 479 case stating that he did not intentionally sign the Investment Agreement. Id . ¶¶ 122-24 (ECF No. 41, at 12-13). Because of this ambiguity regarding the related agreements, Cole states that "[a] declaration of the respective rights of the parties is necessary to prevent the risk of undirected action jeopardizing the parties' respective interests, rights, and obligations." Id . ¶ 130 (ECF No. 41, at ...


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