Rekor Systems, Inc. v. Loughlin

Background

The dispute arose from Rekor Systems, Inc.’s January 2017 purchase of Firestorm Solutions, LLC and Firestorm Franchising, LLC from Suzanne Loughlin, Harry Rhulen, and James Satterfield. Rekor alleged that the defendants made materially false or misleading statements and omissions about Firestorm’s franchisees, franchise fees, royalty payments, and a potential business relationship with Beazley Insurance Company. Rekor sought rescission of the purchase agreement or damages. The defendants disputed those allegations and asserted counterclaims concerning Rekor’s failure to honor warrants and pay principal and interest on promissory notes. Rhulen also alleged that Rekor breached his employment agreement.

Both sides filed motions in limine, which are requests to decide before trial whether particular evidence may be introduced. The court explained that such evidence should generally be excluded only when it is clearly inadmissible on every potentially relevant ground. Because the case was headed toward a bench trial for the matters discussed in several sections, the court also emphasized that it could admit evidence and later decide what weight, if any, to give it.

Rekor’s Motions

Rekor moved to exclude the rebuttal report and testimony of defendants’ damages expert Lawrence Chodor. The court denied that motion. It held that Chodor could criticize Donald M. May’s damages analysis, could testify based on assumed facts, and would not be offering factual testimony, legal conclusions, or an independent damages calculation. The court also noted that, in a bench trial, it could evaluate the reliability and weight of the expert testimony after hearing cross-examination.

Rekor also sought to exclude evidence concerning its chief executive officer Robert Berman’s prior tax judgment, prior lawsuits, and alleged bullying or abusive conduct. The court excluded the certification of tax warrant concerning Berman’s unpaid taxes. The defendants could ask Berman whether he had made a false statement on a tax return if they had a good-faith basis for the question, but they could not use outside evidence to challenge his answer if he denied making such a statement.

The court also excluded evidence about Berman’s prior lawsuits. It found those proceedings unrelated to the transactions and allegations in this case and concluded that presenting them would be irrelevant, unfairly prejudicial, time-consuming, and confusing. But the court denied Rekor’s request to exclude evidence about Berman’s alleged bullying or abusive conduct. It found that information Rhulen received before making complaints to Rekor’s board was closely connected to the case and could be relevant to whether Rhulen acted in good faith, as well as to whether the defendants’ alleged misrepresentations were material or whether Rekor’s fraud allegations were later contrived.

Rekor separately sought to exclude evidence concerning matters it characterized as previously adjudicated, including post-resignation work performed by the defendants, the handling of Firestorm documents, and statements in Rekor’s August 14, 2019 Form 10-Q. The court denied that motion. It found that limited evidence about the defendants’ post-resignation work could bear on whether they acted knowingly or with intent to conceal information before the transaction and could also relate to damages. The court also permitted the Form 10-Q for purposes other than proving the allegedly libelous statement, including its statement that discontinuing Firestorm Franchising’s operations did not constitute a significant strategic shift materially affecting Rekor’s ongoing operations and financial results.

The Defendants’ Motions

The defendants moved to exclude evidence about their conflicts with Berman and their job performance. The court denied the motion. It found that the conflict evidence was closely connected to the fraud allegations and to the defendants’ position that the fraud claims arose only after Rhulen complained about Berman. The court also ruled that if the defendants offered evidence that Rekor acquired valuable managerial talent, Rekor could present evidence that the defendants’ performance had little or no positive value or had negative value.

The defendants sought to exclude evidence concerning their alleged deletion or misuse of digital materials, including emails. The court denied the motion but limited the evidence it would allow. Although the evidence appeared to have marginal value, the court could not say categorically that it was irrelevant. If the defendants had exploited intellectual property transferred in the transaction, that evidence might bear on whether rescission would be an available remedy if Rekor proved fraud.

The defendants also moved to exclude evidence of Firestorm’s post-acquisition performance. The court denied that motion. It held that later performance could be relevant to whether the defendants’ statements about Firestorm before the acquisition were false or material. The defendants could argue that later performance resulted from Rekor’s management, but that argument went to cross-examination and the defense of the case rather than to excluding the evidence.

Finally, the defendants moved to exclude evidence about their statements before closing concerning a prospective relationship with Beazley. The court denied the motion. It found that the request improperly sought a decision about whether Rekor had enough evidence to prove fraud, which is ordinarily a matter for summary judgment or the trial rather than an evidence-exclusion motion. The court also stated that a present-day statement predicting a future event can support a fraud claim if the speaker knew the statement was false or made it while expecting that the event would not occur. The disputed allegations therefore presented a factual question for trial.

Disposition

The court ordered that Rekor’s motions in limine were granted in part and denied in part. The defendants’ motions in limine were denied. The clerk was directed to close the docket entries for the two motions. Judge Lewis J. Liman did not resolve the underlying fraud, contract, or other claims in this opinion; the order governed the evidence to be presented at trial.