Rekor Sys. v. Loughlin
| Decision Date | 14 March 2022 |
| Docket Number | 19-cv-7767 (LJL) |
| Parties | REKOR SYSTEMS, INC., Plaintiff, v. SUZANNE LOUGHLIN, et al, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Defendants Suzanne Loughlin (“Loughlin”), Harry Rhulen (“Rhulen”), and James Satterfield (“Satterfield” and, with Loughlin and Rhulen “Defendants”) and additional counterclaim plaintiff CrisisRisk Strategies, LLC (“CrisisRisk”) move, pursuant to Federal Rule of Civil Procedure 56, for an order granting them partial summary judgment against plaintiff Rekor Systems, Inc. (“Plaintiff” or “Rekor”): (1) dismissing Plaintiff's first cause of action against all Defendants (or, in the alternative, dismissing it against Loughlin and Rhulen or to the extent it seeks rescission) (2) dismissing Plaintiff's third, fourth, and fifth causes of action (or, in the alternative, dismissing those causes of action against Satterfield and Loughlin, as well as dismissing the second cause of action against Loughlin); (3) granting summary judgment for Defendants on their second third, and fifth counterclaims; (4) granting summary judgment for CrisisRisk on the nineteenth counterclaim; and (5) granting summary judgment for Satterfield on the twentieth counterclaim.[1] Dkt. No. 111.
For the following reasons, the motion for partial summary judgment is granted in part and denied in part.
The following facts are undisputed for purposes of this motion except where otherwise indicated.
This case arises out of the sale of a business owned by Loughlin Rhulen, and Satterfield to Rekor on January 25, 2017. Dkt No. 118 ¶ 34; Dkt. No. 137 ¶ 34. Loughlin, Rhulen, and Satterfield were each 25% owners of Firestorm Solutions, LLC (“FSLLC”).[2] Dkt. No. 118 ¶ 1; Dkt. No. 137 ¶ 1. FSLLC also owned 49% of Firestorm Franchising, LLC (“FFLLC” and, together with FSLLC, “Firestorm”), and Satterfield owned the remaining 51% of FFLLC. Dkt. No. 118 ¶ 3; Dkt. No. 137 ¶ 3. Prior to the sale of Firestorm, each of the Defendants was an officer of FSLLC. Dkt. No. 118 ¶ 46; Dkt. No. 137 ¶ 46. Satterfield was also the Chief Executive Officer (“CEO”) and President of FFLLC. Dkt. No. 118 ¶ 47; Dkt. No. 137 ¶ 47. The parties dispute the number of employees Firestorm had. Defendants state that Firestorm had nine employees; Plaintiff contends that Firestorm had five employees. Dkt. No. 118 ¶ 50; Dkt. No. 137 ¶ 50.
FSLLC was in the business of providing business continuity planning and crisis response services to its customers, and FFLLC operated a group of franchises that marketed and serviced crisis planning services to customers. Dkt. No. 112 (“Satterfield Decl.”) ¶¶ 5-7; Dkt. No. 137 at 32 (“Additional Material Facts”) ¶ 25.[3] In the course of its business, FFLLC entered into franchise agreements. FSLLC used FFLLC's franchise system as its sales force; frequently, FSLLC provided crisis planning services to customers engaged by franchises of FFLLC. Satterfield Decl. ¶¶ 5-7; Additional Material Facts ¶ 25.
Rekor is a multifaceted business that is publicly traded on the Nasdaq Stock Exchange and provides technology products and professional services for clients in the areas of government contracting, aerospace, public safety, security, transportation, financial services, and logistics. Dkt. No. 64 ¶ 1. At all relevant times, Rekor's CEO was Robert Berman (“Berman”). Dkt. No. 118 ¶ 5; Dkt. No. 137 ¶ 5. Plaintiff submits that Berman has known Loughlin and Rhulen since childhood. Additional Material Facts ¶ 1.
On January 25, 2017, Rekor purchased Firestorm pursuant to the Purchase Agreement, and FSLLC and FFLLC became sub-subsidiaries of Rekor. Dkt. No. 118 ¶ 36; Dkt. No. 137 ¶ 36. In exchange, Loughlin, Rhulen, and Satterfield received cash, shares in Rekor common stock, warrants to purchase Rekor common stock (“Warrants”), and promissory notes (“Promissory Notes”). Dkt. No. 118 ¶ 43; Dkt. No. 137 ¶ 43. In addition, pursuant to the Purchase Agreement, Loughlin and Rhulen resigned all positions at FSLLC and became officers of Rekor. Dkt. No. 118 ¶¶ 37-39; Dkt. No. 137 ¶¶ 37-39. Rhulen became the President of Rekor, and Loughlin became the General Counsel and Chief Administrative Officer of Rekor. Dkt. No. 118 ¶¶ 38-39; Dkt. No. 137 ¶¶ 38-39. Satterfield, by contrast, maintained his positions at Firestorm and continued as the President and CEO of FSLLC and FFLLC. Dkt. No. 118 ¶¶ 40-41; Dkt. No. 137 ¶¶ 40-41.
The parties dispute the circumstances and due diligence surrounding Rekor's acquisition of Firestorm and the representations made regarding the franchising agreements that FFLLC had entered into with various entities. According to Defendants, in September 2016, Berman proposed to Loughlin that the predecessor entity to Rekor acquire Firestorm. Dkt. No. 118 ¶ 9.
Plaintiff, on the other hand, submits that Berman and Defendants Rhulen and Loughlin mutually arrived at the acquisition decision. Dkt. No. 137 ¶ 9; see also Additional Material Facts ¶¶ 1116. According to Plaintiff, Berman spoke to Loughlin in early 2016 because he was interested in exploring the possibility of launching a franchise business, knew that Loughlin and Rhulen were equity members of a franchise business, and sought to learn the risks and opportunities in the industry generally. Additional Material Facts ¶ 7. Plaintiff submits that Loughlin encouraged Berman to speak to Rhulen, who was knowledgeable about the business, and Rhulen indicated to Berman that, given the transactional costs associated with launching a franchise business, Plaintiff might be better served by acquiring an existing franchise business. Id. ¶¶ 8, 11. From Plaintiff's perspective, Rhulen advised Berman that he believed there were meaningful synergies that could be achieved between Rekor and Firestorm, and, over the next several months, Berman, Rhulen, and Loughlin met and discussed possible opportunities for the two companies to collaborate in some manner, including the possibility of a business combination. Id. ¶¶ 12-16. Defendants offer evidence that Rhulen emailed Berman in October 2016 and stated that the purchase price of Firestorm could not be based on a financial measure. Dkt. No. 118 ¶ 10; Dkt. No. 114 (“Rhulen Decl.”) ¶ 9.
Regarding the franchising agreements, FFLLC began entering into franchise agreements beginning in 2009. Dkt. No. 118 ¶ 65; Dkt. No. 137 ¶ 65. According to the FFLLC Franchise Agreement, the franchisee was required to pay to FFLLC an initial franchise fee of $55, 000 and a continuing monthly royalty fee of an amount equal to the greater of $1, 000 or 8% of the gross revenues. Dkt. No. 111-6 § 5. The parties also agree that, prior to the acquisition and continuing afterward, Satterfield granted waivers through side letters (“Side Letters”) to certain franchisees with respect to the franchise fee and the minimum continuing royalty that would have been due to FFLLC under the franchising agreements. Dkt. No. 118 ¶¶ 69-71, 74; Dkt. No. 137 ¶¶ 69-71, 74. Defendants submit that neither Rhulen nor Loughlin ever participated in the decision to grant any such waiver, Dkt. No. 118 ¶ 72; Plaintiff states that it is unable to determine the veracity of this statement without further discovery, Dkt. No. 137 ¶ 72. See also Dkt. No. 118 ¶ 49; Dkt. No. 137 ¶ 49 ().
Plaintiff submits that Defendants neither expressly nor implicitly stated or suggested that there were any waivers from the franchise fee and royalty requirements and that, while the franchise agreements, which contained the initial franchise fee and monthly royalty fee requirements, were provided to it before the acquisition, the Side Letters, which waived certain of those fees, were not. Additional Material Facts ¶¶ 19-21, 28, 46-50, 55-57, 67-68; see also id. ¶¶ 90-96. Plaintiff also submits that the existence of the waivers was material and would have influenced the decision to acquire Firestorm. Id. ¶¶ 22-24. According to Plaintiff, after the acquisition, Defendants continued to represent or fail to correct their representation that the franchisees were obligated to pay an initial franchise fee and a continuing minimum monthly royalty. Id. ¶¶ 51-52. Regarding the franchise agreements, Defendants point to evidence that FFLLC publicly filed Franchise Disclosure Documents (“FDDs”) with various state governments and that the FDDs contained the standard form franchise agreement used by FFLLC. Dkt. No. 118 ¶¶ 66-68. The then-current FDD, which was filed in March 2016, disclosed that, during the last fiscal year, the initial franchise fee ranged from $0 to $55, 000. Satterfield Decl. ¶¶ 8, 11; id., Ex. 1 at 5. In response, Plaintiff notes that the FDDs did not identify the specific franchisees that received waivers. Additional Material Facts ¶¶ 77-78. Defendants further discuss evidence showing that, at a December 2016 board meeting, Plaintiff's predecessor approved the 2017 budget for Firestorm, including FFLLC, which showed revenues less than the aggregate of the minimum monthly fee times the number of franchises. Dkt. No. 118 ¶ 32; Satterfield Decl. ¶¶ 34-36. Plaintiff responds that the Firestorm budget did not state that Firestorm had waived any initial franchise fees or minimum monthly royalties and that the board approved the consolidated budget and did not separately approve Firestorm's individual subsidiary budget. Dkt. No. 137 ¶ 32; Additional Material Facts ¶¶ 81-82. Plaintiff avers that, in 2019, Rekor finally learned that the Side Letters existed. Additional Material Facts ¶ 97.
Plaintiff also submits that, at the meetings to discuss the possible acquisition, Rhulen and Loughlin informed Berman that Firestorm was on the cusp of...
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