Howard v. Goodman ( 2021 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
NGA THI HOWARD,
Plaintiff,
v. No. 20-cv-2187 (DLF)
PETER J. GOODMAN, et al.,
Defendants.
MEMORANDUM OPINION & ORDER
Nga Thi Howard brings this direct and derivative action on behalf of herself and Kazoo
LLC, respectively, against Peter J. Goodman, Helen H. Ruan, and CA Solutions. See generally
Am. Compl., Dkt. 18. Goodman has filed a single count counterclaim against Howard. See Am.
Counterclaim, Dkt. 26. Before the Court are the defendants’ Motions to Dismiss, or in the
alternative, Motions for Summary Judgment, Dkts. 23, 24, as well as Howard’s Motion to
Dismiss, or in the alternative, Motion for Summary Judgment on Goodman’s first amended
counterclaim, Dkt. 32. For the reasons that follow, the Court will grant Howard’s motion to
dismiss the amended counterclaim, dismiss Howard’s amended complaint for failure to join a
necessary party, see Fed. R. Civ. P. 19, and deny without prejudice the defendants’ motions.
I. BACKGROUND
Howard and Goodman are members and co-founders of Kazoo LLC, a “technology
company” organized in the District of Columbia and dedicated to “developing a cutting-edge
application . . . that provides on-scene live video streaming to allow emergency contacts and first
responders to locate people in need.” See Am. Compl. ¶ 1. On May 9, 2019, they signed an
Operating Agreement and created Kazoo LLC, establishing Kazoo’s membership, shares, and
other modes of operation. Id. ¶ 33. This business venture forms the basis of this suit.
In broad terms, Howard alleges that Goodman has impeded the development of Kazoo’s
technology, unlawfully shared its trade secrets, and blocked Howard’s access to company
information. See id. ¶¶ 1–9. According to Howard, Goodman allegedly gained access to the
source code and shared it without permission with Ruan, the sole owner of CA Solutions. Id.
¶¶ 43–47. The two parties organized a consulting agreement, allegedly without Howard’s
knowledge or consent. Id. ¶ 47. Goodman then funneled money raised as part of Kazoo’s
crowdfunding initiatives into his, Ruan’s, and unnamed third-party accounts. Id. ¶¶ 52–64.
Allegedly to conceal his activities, Goodman then removed Howard as manager of Kazoo and
blocked her access to her company email account and to company records. Id. ¶¶ 65–97.
Howard brings a total of ten claims against the defendants. Am. Compl. ¶¶ 103–70.
Seven are derivative actions brought on behalf of Kazoo, including Breach of Fiduciary Duties
against Goodman (Count I), id. ¶¶ 103–07; Conversion against all defendants (Count II), id.
¶¶ 108–15; violation of the District of Columbia Uniform Trade Secrets Act, D.C. Code §§ 36-
401, et seq., against all defendants (Count III), id. ¶¶ 116–24; violation of the Defend Trade
Secrets Act, 18 U.S.C. § 1836, against all defendants (Count IV), id. ¶¶ 125–35; Civil
Conspiracy to Convert Funds and Misappropriate Trade Secrets against all defendants (Count
V), id. ¶¶ 136–46; Breach of Amended Operating Agreement § 10.6 against Goodman (Count
VI), id. ¶¶ 147–51; and Unjust Enrichment against all defendants (Count VII), id. ¶¶ 152–55.
The remaining three are direct claims, which include Breach of Covenant of Good Faith and Fair
Dealing against Goodman (Count VIII), id. ¶¶ 156–61; Breach of Amended Operating
Agreement § 8.3 against Goodman (Count IX), id. ¶¶ 162–65; and Breach of Amended
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Operating Agreement § 10.5(a) in violation of D.C. Code § 29-804.10 against Goodman, id.¶¶ 166–70.
Goodman filed a single-count counterclaim of defamation against Howard, alleging that
she intentionally, recklessly, and with willful disregard published false and defamatory
statements to third parties, including other voting members of Kazoo, “in order to injure [him] in
his employment with Kazoo” and “impugn his character and reputation so that [those members]
would vote to remove [him] as CEO of the company.” Am. Counterclaim ¶¶ 27–28, Dkt. 26. He
alleges that Howard “surreptitiously sent written communications to some of the voting members
of Kazoo in which she baselessly asserted that [he] had engaged in various illegal activities.” Id.
¶ 12; see id. ¶¶ 13, 15 (Howard’s messages to Brian Hartline and Brian Eisenberg); id. ¶ 18(noting that Howard also sent a message to Steven Path, who holds an interest in Kazoo-member
Pathmazing, Inc.). Goodman claims that the statements about potential criminal and civil
violations, as well as a drug addiction problem, are false and were sent by Howard “to convince
the other members of Kazoo to vote with her to replace [him] as CEO.” Id. ¶ 20; see id. ¶¶ 12–
19.
The defendants have moved to dismiss under Federal Rules of Civil Procedure 12(b)(1)
and 12(b)(6), or in the alternative, moved for summary judgment concerning all counts in
Howard’s complaint. Howard has also moved to dismiss under Rule 12(b)(6), or in the
alternative, for summary judgment.
II. LEGAL STANDARD
A. Motion to Dismiss
Rule 12(b)(1) of the Federal Rules of Civil Procedure allows a defendant to move to
dismiss an action for lack of subject-matter jurisdiction. Fed. R. Civ. P. 12(b)(1). Federal law
empowers federal district courts to hear only certain kinds of cases, and it is “presumed that a
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cause lies outside this limited jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S.
375, 377 (1994). When deciding a Rule 12(b)(1) motion, the court must “assume the truth of all
material factual allegations in the complaint and construe the complaint liberally, granting
plaintiff the benefit of all inferences that can be derived from the facts alleged, and upon such
facts determine [the] jurisdictional questions.” Am. Nat. Ins. Co. v. FDIC, 642 F.3d 1137, 1139
(D.C. Cir. 2011) (internal quotation marks omitted). But the court “may undertake an
independent investigation” that examines “facts developed in the record beyond the complaint”
in order to “assure itself of its own subject matter jurisdiction.” Settles v. U.S. Parole Comm’n,
429 F.3d 1098, 1107 (D.C. Cir. 2005) (internal quotation marks omitted). A court that lacks
jurisdiction must dismiss the action. Fed. R. Civ. P. 12(b)(1), 12(h)(3).
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows a defendant to move to
dismiss the complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ.
P. 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must contain factual matter
sufficient to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007). A facially plausible claim is one that “allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). This standard does not amount to a specific probability requirement,
but it does require “more than a sheer possibility that a defendant has acted unlawfully.” Id.; see
also Twombly, 550 U.S. at 555 (“Factual allegations must be enough to raise a right to relief
above the speculative level.”). A complaint need not contain “detailed factual allegations,” but
alleging facts that are “merely consistent with a defendant’s liability . . . stops short of the line
between possibility and plausibility.” Iqbal, 556 U.S. at 678 (internal quotation marks omitted).
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Well-pleaded factual allegations are “entitled to [an] assumption of truth,” id. at 679, and
the court construes the complaint “in favor of the plaintiff, who must be granted the benefit of all
inferences that can be derived from the facts alleged,” Hettinga v. United States, 677 F.3d 471,
476 (D.C. Cir. 2012) (internal quotation marks omitted). The assumption of truth does not apply,
however, to a “legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678 (internal
quotation marks omitted). An “unadorned, the defendant-unlawfully-harmed-me accusation” is
not credited; likewise, “[t]hreadbare recitals of the elements of a cause of action, supported by
mere conclusory statements, do not suffice.” Id. Ultimately, “[d]etermining whether a
complaint states a plausible claim for relief [is] a context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.” Id. at 679.
When deciding a Rule 12(b)(6) motion, the court may consider only the complaint itself,
documents attached to the complaint, documents incorporated by reference in the complaint, and
judicially noticeable materials. EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624
(D.C. Cir. 1997). A Rule 12(b)(6) dismissal “is a resolution on the merits and is ordinarily
prejudicial.” Okusami v. Psychiatric Inst. of Wash., Inc., 959 F.2d 1062, 1066 (D.C. Cir. 1992).
B. Motion for Summary Judgment
A court grants summary judgment if the moving party “shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986). A
“material” fact is one with potential to change the substantive outcome of the litigation. See
Liberty Lobby, 477 U.S. at 248; Holcomb v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). A
dispute is “genuine” if a reasonable jury could determine that the evidence warrants a verdict for
the nonmoving party. See Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895. “If there
are no genuine issues of material fact, the moving party is entitled to judgment as a matter of law
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if the nonmoving party ‘fails to make a showing sufficient to establish the existence of an
element essential to that party's case, and on which that party will bear the burden of proof at
trial.’” Holcomb, 433 F.3d at 895 (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)).
III. ANALYSIS
A. Defamation Counterclaim
In the District of Columbia, defamation requires “(1) that the defendant made a false and
defamatory statement concerning the plaintiff; (2) that the defendant published the statement
without privilege to a third party; (3) that the defendant’s fault in publishing the statement
amounted to at least negligence; and (4) either that the statement was actionable as a matter of
law irrespective of special harm or that its publication caused the plaintiff special harm.”
Blodgett v. Univ. Club, 930 A.2d 210, 222 (D.C. 2007).
One recognized privilege that would negate the second element is the judicial
proceedings privilege. This is “an absolute privilege for statements made preliminary to, or in
the course of, a judicial proceeding, so long as the statements bear some relationship to the
proceeding.” Oparaugo v. Watts, 884 A.2d 63, 79 (D.C. 2005) (internal quotation marks
omitted). The statements need not be made to parties to the current or contemplated litigation—
they can be made to third parties such as potential plaintiffs, shareholders in derivative actions,
or persons who have the ability to settle or resolve a dispute. See, e.g., Messina v. Krakower,
439 F.3d 755, 760–62 (D.C. Cir. 2006) (applying privilege to statements made to third party for
purposes of settlement discussions); Finkelstein, Thompson & Loughran v. Hemispherx
Biopharma, Inc., 774 A.2d 332, 342 (D.C. 2001), overruled in part on other grounds by McNair
Builders, Inc. v. Taylor, 3 A.3d 1132 (D.C. 2010) (applying privilege to statement made to
shareholder about potential shareholder derivative lawsuit).
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The privilege determination is a question of law for the Court to decide. Forras v. Rauf,
39 F. Supp. 3d 45, 55 (D.D.C. 2014). The Court assumes all facts as alleged in the Counterclaim
are true, as required when considering a motion to dismiss. Wharf, Inc. v. District of Columbia,
232 F. Supp. 3d 9, 15–16 (D.D.C. 2017).
Howard’s statements were preliminary to the case at bar because she was informing
voting members of the LLC of the grounds of this case against the LLC’s managing member,
Goodman. The parties, however, dispute whether the statements were sufficiently “related” to
the case to be covered by the privilege. First, Howard’s statements regarding Goodman’s alleged
criminal and civil violations, including illegal narcotics use, are related to this litigation because
some of those allegations form the basis of plaintiff’s complaint. Further, they all could shape
either the LLC’s or the LLC’s members’ response to the litigation or settlement thereof.
Second, the recipients of Howard’s emails were persons with an interest in the potential
litigation. According to the operating agreement for Kazoo (Operating Agreement) supplied by
Goodman, Howard, Eisenberg, Hartline Enterprises LLC, and Pathmazing LLC are voting
members of Kazoo. See Goodman Second Mot. to Dismiss Ex. 6, at 3, Dkt. 23 (schedule of
voting unitholders); Goodman Second Mot. to Dismiss Ex. 7, at 1 (showing Brian Hartline as
managing member for Hartline Enterprises, LLC); Goodman Second Mot. to Dismiss Ex. 9, at 1
(showing Steven Path as authorized signatory for Pathmazing). The Operating Agreement
provides that voting members of Kazoo can vote on certain enumerated actions, which include
the commencement or settlement of litigation. Goodman First Motion to Dismiss Ex. 3, §§ 8.3,
8.5(a)(v), Dkt. 8. This agreement provides them with “the requisite interest in or connection to
the litigation,” Messina, 439 F.3d at 762, required under the judicial proceedings privilege
because they could be in the position of voting on how the LLC was to respond to the action.
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The fact that these members alone have insufficient voting power to take such an action
does not, as Goodman suggests, see Def.’s Opp’n at 12–13, Dkt. 33, deprive them of any interest
in or connection to the litigation whatsoever because they can vote their shares and potentially
determine the outcome. In fact, the defendant’s position would inevitably mean that no member
with under fifty percent of the voting shares would have an interest or connection with the
litigation. In an LLC such as this one where every member has under fifty percent voting power,
every member could cast a vote and ultimately resolve litigation in which no member has an
interest. This is sufficient to establish the immunity as a matter of law at the motion to dismiss
stage.
B. Failure to Join Necessary Party
Federal Rule of Civil Procedure 19 provides that a person subject to service of process
and whose joinder will not deprive the court of subject-matter jurisdiction “must be joined as a
party if . . . in that person’s absence, the court cannot accord complete relief among the existing
parties; or that person claims an interest relating to the subject of the action and is so situated that
disposing of the action in that person’s absence may, as a practical matter impair or impede the
person’s ability to protect the interest; or leave an existing party subject to a substantial risk of
incurring double, multiple, or otherwise inconsistent obligations because of the interest.” Fed. R.
Civ. P. 19(a)(1).
If such a person “has not been joined as required, the court must order that person be
made a party.” Fed. R. Civ. P. 19(a)(2); see Wach v. Byrne, Goldenberg & Hamilton, PLLC, 910
F. Supp. 2d 162, 165 (D.D.C. 2012). If a necessary party cannot be joined, the court must
examine the factors in Rule 19(b) to “determine whether in equity and good conscience, the
action should proceed among the parties before it, or should be dismissed, the absent person
being regarded as indispensable.” Cherokee Nation of Okla. v. Babbitt, 117 F.3d 1489, 1496
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(D.C. Cir. 1997) (quoting Fed. R. Civ. P. 19(b)). A party may move to dismiss an action for
failure to join a necessary and indispensable party, see Fed. R. Civ. P. 12(b)(7), but even if the
parties have not raised it, the Court has an “independent duty to raise a Rule 19(a) issue sua
sponte.”1 See Eco Tour Adventures, Inc. v. Zinke, 249 F. Supp. 3d 360, 390 (D.D.C. 2017)
(quoting Cook v. FDA, 733 F.3d 1, 6 (D.C. Cir. 2013)).
For at least seventy years, it has been the law that “the corporation in a shareholder
derivative action is an indispensable party.” Knop v. Mackall, 640 F. Supp. 2d 58, 62 (D.D.C.
2009) (citing Koster v. (Am.) Lumbermens Mut. Cas. Co., 330 U.S. 518, 523 n.2 (1947))
(reversed in part on other grounds). This is because “the cause of action in a stockholder
derivative suit is not [the named plaintiff’s] but the corporation’s.” Id. (internal quotation marks
omitted). As a result, “the corporation is the real party in interest, and the plaintiff is merely
acting on its behalf.” Id.Courts across the country have determined that the same reasoning applies when a
plaintiff brings a derivative action on behalf of a limited liability company, or LLC, such as
Kazoo. See Poultry Borderless Co. v. Froemming, No. 20-cv-1054, 2021 WL 354087, at *4 (D.
Minn. Feb. 2, 2021) (“A business entity, such as an LLC, is an indispensable party when a
derivative claim is brought on behalf of the business entity.”); Atanasio v. O’Neill, 235 F. Supp.
1Here, Goodman and Ruan bring motions under Rule 12(b)(1) for lack of subject matter
jurisdiction and Rule 12(b)(6) for failure to state a claim, and thus, neither defendant has
explicitly moved for dismissal on the basis of failure to join a required party. See generally
Goodman Mot. to Dismiss, Dkt. 23; Ruan Mot. to Dismiss, Dkt. 24. But the defendants argue
that Kazoo LLC must be joined to the action because of the derivative claims brought by
Howard. See Goodman Mot. to Dismiss at 32; Ruan Mot. to Dismiss at 23. And Howard
responds that, because Kazoo LLC would destroy diversity jurisdiction, it should not “in good
conscience” be joined to the action. Pl.’s Opp’n to Mot. to Dismiss, Dkt. 27 at 8. The issue is
thus squarely before the Court for resolution. Cf. Wach, 910 F. Supp. 2d at 163 (stating that
where the “asserted failure of Plaintiff to join necessary parties … [had] been fully briefed” the
issue was “therefore ripe for adjudication”).
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3d 422, 425 (E.D.N.Y. 2017) (“In a derivative action commenced on behalf of a limited liability
company . . . , the LLC itself is a necessary party under Rule 19 of the Federal Rules of Civil
Procedure.”); Cook v. Toidze, 950 F. Supp. 2d 386, 390, 393 (D. Conn. 2013) (holding that an
LLC “is an indispensable party” and noting that “courts appear unanimous in concluding that the
party on whose behalf a derivative claim is brought is indispensable”); Bartfield v. Murphy, 578
F. Supp. 2d 638, 650 (S.D.N.Y. 2008) (concluding that an LLC had an interest in “derivative
claims raised on its behalf” and thus was a necessary party); Kroupa v. Garbus, 583 F. Supp. 2d
949, 953 (N.D. Ill. 2008) (requiring an LLC to be named as a party in a derivative action);
Trident-Allied Assocs., LLC v. Cypress Creek Assocs., LLC, 317 F. Supp. 2d 752, 754 (E.D.
Mich. 2004) (citing Weber v. King, 110 F. Supp. 2d 124 (E.D.N.Y. 2000)) (“[W]here members
of an LLC bring claims derivatively on behalf of the company, the company is an indispensable
party.”).
As in a shareholder derivative suit brought on behalf of a corporation, the LLC is the real
party in interest in a derivative action, not the LLC member. Martin v. Santorini Capital, LLC,
236 A.3d 386, 392–96 (D.C. 2020) (holding that a member of an LLC “is not a real party in
interest that can prosecute a claim on behalf of a . . . LLC”). The cause of action belongs to the
LLC. See Knop, 640 F. Supp. 2d at 62. Further, any benefits from litigation on the derivative
claims will flow directly to the LLC, not to the member, and as a result, the LLC’s interests are
separate from those of the individual member. See Poultry Borderless Co., 2021 WL 354087, *4
(“An entity is distinct from its stockholders and holds the separate right to sue in its own
name.”); see also Knop, 640 F. Supp. 2d at 62 (explaining that because “any finding of liability
would redound to [the corporation’s] benefit,” the corporation “claims an interest relating to the
subject of the action”) (internal quotation marks omitted); cf. Headfirst Baseball LLC v. Elwood,
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No. 13-cv-536, 2014 WL 12784203, at *4 (D.D.C. Mar. 27, 2014) (holding that an LLC was not
an indispensable party where “the relief sought . . . would benefit the plaintiffs, and not [the]
Professional LLC”). Thus, Kazoo LLC is a necessary party because Howard alleges derivative
claims on behalf of Kazoo, and the requested relief would flow to Kazoo.2 See Rose v. Horan,
No. 17-cv-6408, 2018 WL 4344954, at *3 (E.D.N.Y. Sept. 11, 2018).
Accordingly, it is
ORDERED that Kazoo LLC be joined to the action pursuant to Rule 19 of the Federal
Rules of Civil Procedure. It is further
ORDERED that the plaintiff shall file a second amended complaint including Kazoo
LLC on or before September 28, 2021, and shall promptly thereafter effectuate service on Kazoo
LLC. It is further
ORDERED that the defendants’ Motions to Dismiss or, in the Alternative, for Summary
Judgment, Dkts. 23, 24, are DENIED WITHOUT PREJUDICE. It is further
ORDERED that the plaintiff’s Motion to Dismiss the First Amended Counterclaim or, in
the Alternative, for Summary Judgment, Dkt. 32, is GRANTED.
SO ORDERED.
2
At this juncture, the parties’ arguments concerning diversity jurisdiction and the equitable
factors set forth in Rule 19(b) are immaterial. See Goodman Second Mot. to Dismiss at 32; Ruan
Mot. to Dismiss at 23; Pl.’s Opp’n at 8. The Court has subject matter jurisdiction under 28
U.S.C. § 1331 because Count IV of the amended complaint presents a claim under the Federal
Defend Trade Secrets Act, regardless of whether that claim will survive any future motion to
dismiss for failure to state a claim. See Am. Compl. ¶¶ 125–35. As a result, Kazoo’s joinder
will not defeat the Court’s jurisdiction, and the Court need not analyze the factors set forth in
Rule 19(b). See Cherokee Nation, 117 F.3d at 1496 (explaining that a court need only examine
the factors in Rule 19(b) when “a necessary party cannot be joined”).
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________________________
DABNEY L. FRIEDRICH
United States District Judge
September 7, 2021
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