Loughlin v. Goord

Background

Suzanne Loughlin, Harry Rhulen, and James Satterfield sued Glenn Goord, a director of Rekor Systems, Inc., for breach of fiduciary duty and libel. The plaintiffs alleged that Goord participated in a retaliation campaign led by Rekor’s executive chairman, chief executive officer, and controlling shareholder, Robert Berman. They narrowed their fiduciary-duty claim during oral argument to Goord’s alleged support for Rekor’s decision not to honor the plaintiffs’ warrants.

The libel claim concerned an August 14, 2019 Form 10-Q filed with the Securities and Exchange Commission. The filing stated that Rekor believed the plaintiffs had fraudulently induced the agreement under which Rekor acquired Firestorm and that the agreement and related warrants were subject to cancellation. The plaintiffs alleged that Goord reviewed and approved the filing, that the statement was false, and that it was made as part of the alleged retaliation campaign.

Personal Jurisdiction

Goord moved to dismiss under Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction and under Rule 12(b)(6) for failure to state a claim. The court held that personal service on Goord while he was physically present in New York established general personal jurisdiction. It rejected Goord’s argument that later Supreme Court authority concerning general jurisdiction over corporations limited jurisdiction based on serving an individual in the state. Because the court found jurisdiction based on Goord’s physical presence, it did not reach the plaintiffs’ alternative argument for specific jurisdiction.

Breach of Fiduciary Duty

The court held that the plaintiffs failed to state a breach-of-fiduciary-duty claim. To the extent their injury came from Rekor’s refusal to convert their warrants into shares, the injury was suffered in their capacity as warrant holders. Under the law applied by the court, warrant holders are owed contractual duties, not fiduciary duties. The court said the plaintiffs’ remedy for that alleged harm was contractual and noted that they were asserting contract-related counterclaims in the separate related action brought by Rekor.

The court also rejected the plaintiffs’ alternative theory based on their status as shareholders. The plaintiffs did not allege injury suffered as shareholders. In addition, any shareholder injury affecting shareholders equally would be derivative rather than a direct claim by the individual plaintiffs. The court further stated that the business judgment rule would protect Goord’s conduct because the plaintiffs had not alleged facts creating reasonable doubt that the directors were disinterested and independent or that the decision was outside a valid exercise of business judgment.

Libel

The court held that the statement accusing the plaintiffs of fraudulently inducing the purchase agreement was capable of being proven true or false and therefore was not protected opinion at the pleading stage. The statement was specific, appeared in a securities filing, and implied that Rekor had facts supporting the accusation. The court also held that the statement was not protected by an absolute litigation privilege, a fair-report privilege, or the privilege for statements made by attorneys before litigation.

The court nevertheless held that the statement was subject to a qualified privilege. Rekor, its board, and its investors shared an interest in information about the warrants and the number of shares that might be issued. The court reasoned that Rekor had to disclose both its position concerning the warrants and the basis for that position to provide investors with material information.

The plaintiffs alleged that the statement was made with actual malice and as part of a retaliation campaign. The court found those allegations insufficient. A motive to defame is different from knowing that a statement is false or recklessly disregarding its truth. The court also held that any personal ill will was not the only reason for the filing because the filing also addressed information Rekor had a duty to report to investors. The qualified privilege therefore defeated the libel claim at the pleading stage.

Disposition

The court granted Goord’s motion to dismiss. It dismissed the amended complaint under Rule 12(b)(6) for failure to state a claim and specified that dismissal with prejudice was appropriate because the plaintiffs had already amended once and identified no facts that could cure the pleading defects. The court directed the clerk to close the motions and the case.