Jillson v. Elrod

• Decision Date: 14 December 2022
• Docket Number: 21-cv-11878
• Parties: KENNETH JILSON, Plaintiff, v. JEREMY ELROD, et al., Defendants.
• Court: U.S. District Court — Eastern District of Michigan

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KENNETH JILSON, Plaintiff, v. JEREMY ELROD, et al., Defendants.

No. 21-cv-11878

United States District Court, E.D. Michigan, Southern Division

December 14, 2022

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS COUNTS THREE, FOUR FIVE, SIX, AND SEVEN UNDER RULE 12(B)(6) (ECF NO. 21) AND DENYING DEFENDANTS' MOTION TO DISMISS COUNTS THREE, FOUR FIVE, SIX, AND SEVEN UNDER RULE 12(C) (ECF NO. 19) AS MOOT

Gershwin A. Drain, U.S. District Court Judge.

I. Introduction

On August 13, 2021, Plaintiff Kenneth Jilson initiated this action against Jeremy Elrod, SWORD International, Inc. (“SWORD”), SWORD Manufacturing, and Assured Outcomes Group, Inc. (“AOG”) (collectively “Defendants”). ECF No. 1. Jilson filed an Amended Complaint on June 3, 2022. ECF No. 20. He brings claims for breach of contract (Count One), unjust enrichment (Count Two), promissory estoppel (Count Three), fraudulent inducement (Count Four), breach of fiduciary duty (Count Five), minority oppression (Count Six), and, in the alternative to Counts Five and Six, securities fraud pursuant to MCL § 451.2101, et seq. (Count Seven). Id. He also requests declaratory judgment (Count Eight). Id.

Presently before the Court is Defendants' Motion to Dismiss Counts Three, Four, Five, Six, and Seven Under Rule 12(b)(6).^[1] ECF No. 21. The matter is fully briefed. Upon review of the parties' submissions, the Court concludes that oral argument will not aid in the disposition of this matter. Therefore, the Court will resolve the instant motion on the briefs. See E.D. Mich. LR 7.1(f)(2). For the following reasons the Court GRANTS IN PART AND DENIES IN PART Defendants' Motion to Dismiss Counts Three, Four, Five, Six, and Seven Under Rule 12(b)(6) (ECF No. 21). The Court will also DENY Defendants' Motion to Dismiss Counts Three, Four, Five, Six, and Seven Under Rule 12(c) (ECF No. 19) AS MOOT.

II. Background

A. Factual Background

The “Facts Common to All Counts” in Plaintiff's Complaint (ECF No. 1) and Amended Complaint (ECF No.20) are the same, so the Court incorporates its recitation of the facts from its Opinion and Order Denying Defendants' Motion to Dismiss Under Rule 12(b)(1) (ECF No. 14).

Defendant Elrod is a Nevada resident. Compl., ECF No. 1 PageID.2. He has three companies, all registered and with their principal places of business in Nevada. Id. Defendant SWORD International, is a manufacturer and developer of products used by the United States military, law enforcement, and hunters. Id. Defendant SWORD Manufacturing is the manufacturing arm of SWORD. Defendant AOG is an asset recovery company formed to support SpaceX. Id.

Jilson and Elrod met in or about 2014 and developed a friendship while Jilson was living in California. Elrod Decl., ECF No. 8-2, PageID.137; Compl., ECF No. 1, PageID.3. As part of their friendship, Jilson routinely provided business advice to Elrod. Id. Jilson also provided Elrod with a “seed working capital loan” in 2015, after SWORD received a military contract. Id. at PageID.4. Elrod repaid this loan in full, with interest, in 2016, id., and it is not [at issue in] this lawsuit.

During the Fall of 2017, Jilson and Elrod discussed Jilson becoming more involved in SWORD and Elrod's other businesses. Id. Thus, on September 13, 2017, Elrod and Jilson executed a promissory note (the “First Note”) on a $58,000 loan [that] Jilson provided Elrod, as the obligor, for a two-year term at ¶ 15% interest rate (the “First Loan). Id. (citing First Note, ECF No. 1-2). Jilson provided the funds on September 26, 2017. Id. Although Elrod signed as the obligor, the funds from the First Loan were to be used by SWORD. Jilson Decl., ECF No. 9-2, PageID.180.

Despite providing the First Loan, Jilson was concerned about SWORD's viability. Compl., ECF No. 1, PageID.4. To allay his concerns, Elrod offered to bring Jilson onboard to help grow and develop SWORD and Elrod's other companies. Id. Jilson agreed and left his then employer in January 2018. Id. In consideration for the unpaid work Jilson would be doing, Elrod promised Jilson equity in SWORD. Id. at PageID.5 (“Per our previous conversations I wanted to send you this email to confirm my intent to issue you equity shares in SWORD International. I believe that you could be a critical part of our team and while I know we have a number of items to tie down I listed below some of the objectives and support I would like to request for 2018.”) (quoting Equity Conf., ECF No. 1-3). Jilson began performing in accordance with their agreement, and Elrod promised he would prepare the necessary paperwork to document Jilson's equity in SWORD. Id.

Given his promised ownership interest in SWORD, Jilson provided Elrod, as obligor, a second bridge loan of $30,000, with a one-year term at ¶ 10% interest rate, on April 23, 2018 (the “Second Loan”). Id. at PageID.5-6. Around this time, Jilson also pushed Elrod to provide the documents memorializing Jilson's equity interest in SWORD. Id. at PageID.6 (“This email is to confirm my intention to bring you on as an equity partner at SWORD International....I am open to the 30% stake we discussed and want only to flesh out details to ensure we are tracking on everything.”) (quoting Second Equity Conf., ECF No. 1-4). As with the First Loan, despite Elrod signing as the obligor, the funds for the Second Loan were also to be used by SWORD and SWORD Manufacturing. Jilson Decl., ECF No. 9-2, PageID.180.

Throughout the following months, Jilson worked with Elrod on all of SWORD, SWORD Manufacturing, and AOG's day-to-day business operations. Compl., ECF No. 1, PageID.6. This included “overseeing the company finances, setting product prices, managing the inventory, improving general operating strategies, creating project budgets, reviewing contracts, [and] initiating strategic partnerships among other tasks.” Jilson Decl., ECF No. 9-2, PageID.180-81. In addition to the operational work he was doing for the SWORD entities, Plaintiff's work for AOG included setting up employee payroll, managing 1099's, and invoicing SpaceX for all costs. Id. at PageID.181.

Notably, in July 2018, Plaintiff moved from California to Michigan. Id. at PageID.179. Nevertheless, he still communicated daily with Elrod and other employees of SWORD, SWORD Manufacturing, and AOG to conduct the business of the entities. Id. at PageID.181. In doing so, Jilson “received thousands of emails, phone calls, and text messages to [his] Michigan based devices.” Id.

In September 2018, Jilson and Elrod agreed Jilson would be compensated $5,000 per month for his work with AOG. Compl., ECF No. 1, PageID.7; Jilson Decl., ECF No. 9-2, PageID.181. Jilson sent invoices for September, October, and November of 2018, but Elrod only paid the fee for September. Id. at PageID.182. At that time, Elrod was using AOG's profits to support SWORD, comingling funds between the two entities. Compl., ECF No. 1, PageID.7. Given the financial situation, Elrod and Jilson agreed to stop paying themselves from AOG's profits and instead use all the capital to support SWORD. Id. Nevertheless, Jilson did not waive the $10,000 that remained outstanding from his AOG invoices. See Jilson Decl., ECF No. 9-2, PageID.182.

On November 25, 2018, Jilson provided a third bridge loan of $75,000, with a two-year term at ¶ 10% interest rate, to SWORD as obligor (the “Third Loan”). Compl., ECF No. 1, PageID.7. Jilson and Elrod verbally agreed to the terms of the loan. Id. Jilson prepared a promissory note memorializing the terms of the agreement, which he then sent to Elrod, but Elrod never returned the executed note. Id.; see also Unexecuted Third Note, ECF No. 1-6. Nonetheless, Jilson initiated the wire transfer of the funds from Michigan. Jilson Decl., ECF No. 9-2, PageID.182; see also Compl., ECF No. 1, PageID.7 (“When you get a moment can you prepare an outbound wire from my saving account for $75,000?”) (quoting Wire Transfer Req., ECF No. 1-5, PageID.47).

Jilson asked about the status of repayment for the First Loan on January 15, 2019. Id. at PageID.8. The First Loan was supposed to enter repayment in September 2018 and was fully due in September 2020. First Note, ECF No. 1-2, PageID.39. While Elrod acknowledged that he still needed to repay the First Loan, he took little to no action for several months. Compl., ECF No. 1, PageID.9. Then, in June 2019, Elrod assured Jilson that SWORD would soon be in position to repay the outstanding loans. Id. ([discussing] a $250,000 loan to complete several projects “total[ing] almost a million dollars in sales” in return for finishing the paperwork documenting Jilson's equity in SWORD, giving Jilson “complete financial controls and approval,” beginning to pay back Jilson's personal loans “ASAP,” continuing to reroute AOG funds as available, and prioritizing repaying the note “over anything else”) (quoting June 19, 2019 Email, ECF No. 1-7, PageID.53).

Thus, on June 27, 2019, Jilson agreed to provide another bridge loan of $50,000, with a one-month term at ¶ 1.5% interest rate, to SWORD as obligor (the “Fourth Loan”). Id. at PageID.9 (quoting Fourth Loan Conf., ECF No. 1-8, PageID.55). In his email discussing terms of the loan, Jilson also requested Elrod agree to complete the equity paperwork by August 1, 2019. Id. Elrod acknowledged the terms listed in the email were as they had discussed and “acceptable;” he thus asked that his email response serve as his agreement. Id. The next day, Elrod emailed Jilson saying that he had attached the signed promissory note, but the email did not contain any attachments. Id. (quoting June 28, 2019 Email, ECF No. 1-9, PageID.57) (citing Unexecuted Fourth Note, ECF No. 1-10). Again, Jilson nonetheless initiated the wire transfer of the loan from Michigan. Jilson

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