Rekor Systems, Inc. v. Loughlin

Background

Rekor purchased Firestorm Solutions, LLC and Firestorm Franchising, LLC on January 25, 2017. Rekor alleged that, before the purchase, the defendants failed to disclose side letters that waived certain franchise fees and minimum royalties, and that they represented that Firestorm was about to complete a valuable transaction that never occurred. Rekor also alleged that the defendants destroyed or removed emails from company accounts after resigning. The defendants and CrisisRisk Strategies, LLC asserted counterclaims concerning Rekor’s failure to honor stock warrants and promissory notes and its failure to pay invoices for services.

The defendants and CrisisRisk moved for partial summary judgment under Rule 56, which permits judgment without a trial when no genuine dispute exists about a fact that could affect the result. They sought judgment on Rekor’s fraudulent-omission claim, its fiduciary-duty claim against Loughlin, its Computer Fraud and Abuse Act claim, its conversion claim, and its trespass-to-chattels claim. They also sought judgment on counterclaims involving warrants, promissory notes, and unpaid invoices.

Fraudulent-Omission Claim

The court denied summary judgment on Rekor’s first cause of action for fraudulent omission. It held that factual disputes remained about whether Rekor reasonably relied on the defendants’ statements or omissions, whether Loughlin and Rhulen knew about the side letters, and whether rescission—the undoing of the transaction—was available. Rekor’s sophistication, legal representation, due-diligence efforts, financial documents, and budget information did not resolve those issues as a matter of law. The court also concluded that Rekor had not had enough discovery to test Loughlin’s and Rhulen’s statements about their knowledge.

Email-Related Claims

The court dismissed Rekor’s third, fourth, and fifth causes of action against Satterfield because Rekor stated that it was prepared to dismiss those claims against him. The three claims alleged violations of the Computer Fraud and Abuse Act, conversion, and trespass to chattels based on the alleged destruction or removal of emails.

The court granted summary judgment to Loughlin and Rhulen on the Computer Fraud and Abuse Act claim. Rekor’s theory was that they accessed their email accounts while still employees and deleted or destroyed company documents. The court ruled that this theory, even if supported by evidence, would not show that they accessed information from areas of a computer that were off limits to them, as required by that statute.

The court denied summary judgment on the conversion claim against Loughlin and Rhulen. It found factual disputes about whether emails were deleted or merely moved to laptops, whether the emails belonged to Rekor, and whether the defendants disposed of the emails before Rekor could demand their return. The court likewise denied summary judgment on the trespass-to-chattels claim against Loughlin and Rhulen because the same factual disputes remained. The court also denied Loughlin’s request for summary judgment on Rekor’s second cause of action for breach of fiduciary duty, finding factual disputes about the timing and scope of her duties and whether her conduct breached them.

Warrant and Promissory-Note Counterclaims

The court denied summary judgment on the defendants’ second, third, and fifth counterclaims concerning Rekor’s alleged breaches or anticipatory breaches of stock warrants and promissory notes. Because those counterclaims depended in part on the outcome of Rekor’s fraud claim and the possible remedy of rescission, the court concluded that judgment on them was premature.

Invoice Counterclaims

The court granted CrisisRisk summary judgment on its nineteenth counterclaim for breach of contract in the undisputed amount of $25,500.60. The claim concerned unpaid invoices for services performed by CrisisRisk, Loughlin, and Satterfield. The court ruled that recoupment, a deduction based on claims arising from the same transaction, did not apply because the invoices arose from separate arrangements after the Firestorm acquisition. Setoff, which applies mutual debts owed by the same parties, also did not bar CrisisRisk’s recovery because CrisisRisk was not a party to the Firestorm purchase agreement and did not exist when that agreement was made.

The court denied summary judgment on Satterfield’s twentieth counterclaim for an unpaid invoice. It found a factual dispute about whether amounts Satterfield might owe Rekor under Rekor’s fraud theory could be set off against what Rekor owed Satterfield.

Disposition

Judge Lewis J. Liman concluded that the motion for partial summary judgment was granted in part and denied in part. The third, fourth, and fifth causes of action were dismissed as to Satterfield. Loughlin and Rhulen received summary judgment on the third cause of action under the Computer Fraud and Abuse Act, and CrisisRisk received summary judgment on the nineteenth counterclaim. Summary judgment was denied on the first cause of action, the second cause of action as to Loughlin, the fourth and fifth causes of action, the second, third, and fifth counterclaims, and the twentieth counterclaim as to Satterfield.