Butler v. Augustine ( 2020 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
JASON BUTLER, et al.,
Plaintiffs,
v. Civil Action No. 1:19-cv-01074 (CJN)
ENTERPRISE INTEGRATION
CORPORATION, et al.,
Defendants.
MEMORANDUM OPINION
Plaintiffs Jason Butler and Thomas Price assert that they are the rightful owners of
Defendant Enterprise Integration Corporation (“EIC”). See generally 3d Am. Compl., ECF No.
28. Defendant Walter Augustine claims the company for himself. See generally Defs.’ Mem. in
Support of Mot. to Dismiss for Failure to State Claims (“Mot.”), ECF No. 29-1. Butler and Price
filed this lawsuit, alleging a breach of contract, several quasi-contract alternative claims, and
other torts arising out of their falling-out with Augustine. See generally 3d Am. Compl. Before
the Court are Defendants’ Motion to Dismiss, ECF No. 29, and Plaintiffs’ Motion to Disqualify
Defendants’ Counsel, ECF No. 39. The Court dismisses some counts in the Complaint, leaves
others in place, and declines to disqualify defense counsel at this stage of the litigation.
I. Background
In 2011, Walter Augustine was the sole owner of EIC, a small government contracting
firm incorporated in Louisiana and headquartered in the District of Columbia. 3d Am. Compl.
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¶¶ 4, 7–9. 1 According to the operative Complaint, Butler reached out to Augustine that year to
convey Butler’s interest in purchasing the company. Id. ¶ 10. The two worked out a tentative
deal: if Butler would use his high-level security clearance to obtain new business for EIC,
Augustine would credit revenue from the new contracts toward an ownership stake in the
company for Butler. Id. ¶¶ 1, 13. Butler was to join as a minority partner and to create a new
division of EIC, entitled the “Business Unit.” Id. ¶ 14. As the Business Unit generated profits,
Butler’s share of equity in the company would progressively increase. Id. Once that figure
surpassed $600,000 (Augustine’s rough valuation of the entire company), Butler would own the
company outright, though the two envisioned Augustine remaining on as a senior consultant
following completion of the sale. Id. ¶¶ 10–11, 14, 18. Augustine provided Butler with a
spreadsheet laying out potential scenarios and timelines in which to accomplish the ownership
transfer. Id. ¶ 15.
The following year, Butler brought Jason Price onboard, and in 2014, Butler and
Augustine agreed to include Price as a partner. Id. ¶ 16. Butler and Price agreed to cap Price’s
equity, such that they would eventually achieve an 80/20 split between them, respectively. Id.
¶¶ 16, 17. That same year, Butler and Price left their other ventures and began to work for EIC
full-time. Id. ¶ 20. Using their security clearances, Butler and Price obtained a “Top Secret
Facilities” designation for EIC, enabling the company to bid on a class of government contracts
previously unavailable to it because Augustine had no clearance of his own. Id. ¶¶ 21, 24.
The Business Unit obtained several profitable contracts—at a time when EIC had no
other business. Id. ¶¶ 25–26. While Butler and Price handled the company’s performance of
1
On a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must, of
course, accept well pleaded facts in the Complaint as true. Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007).
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those contracts, Augustine managed the books. Id. ¶ 27. As part of the company’s bids on
government contracts, EIC had to submit forms listing the company’s ownership, such as Key
Management Position Lists (“KMPL”). Id. ¶ 32. Augustine prepared and signed the documents;
the ones he submitted in 2015 listed three partners and their respective stakes: Augustine (60%),
Butler (20%), and Price (20%). Id. ¶ 33.
But whenever Butler and Price requested to inspect the company’s financial records,
either to assess the company’s health or to measure their accrual of equity, Augustine provided
only incomplete records and otherwise avoided or deflected their inquiries. Id. ¶ 28. Neither
Butler nor Price was compensated for his efforts from 2014–2016; all revenues from their
contracts went to EIC—and thereby into Augustine’s pocket as Butler and Price slowly bought
him out. Id. ¶ 30. In 2017 they received limited compensation to cover living expenses, but they
did not receive the full value of the Business Unit’s revenue that year. Id.
Things began to fall apart in 2017. Id. ¶¶ 36–41. After disputes arose between Augustine
and Butler about the terms of the buyout, Butler contacted EIC’s outside counsel, William
Cusmano. Id. ¶ 36. Butler had first engaged Cusmano on EIC’s behalf in 2014, and Cusmano
continued to represent EIC on various legal matters over the ensuing years. See Butler Decl.
¶¶ 2–4, ECF No. 39-3. Cusmano was the only attorney Butler knew, so Butler approached
Cusmano for advice about how to deal with Augustine. Id. ¶ 9. Cusmano heard Butler out and
recommended that, if Augustine denied Butler’s partial ownership, Butler should consider
retaining counsel and pursuing legal remedies. Id. ¶ 11.
Cusmano pulled Augustine, Butler, and Price into a discussion about how to complete
Augustine’s sale of the company to Butler and Price. See Cusmano’s Email of Sep. 6, 2017,
ECF No. 39-4 at 2–3. The four traded emails back and forth over the next ten days, with
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Cusmano offering to structure various purchase agreements that would satisfy all Parties. See
generally Email Correspondence, ECF Nos. 39-4, 39-5. Those negotiations collapsed, and
Augustine terminated Butler’s and Price’s employment on September 15, 2017. See Butler’s
Email of Sep. 13, 2017, ECF No. 39-5 at 1 (“I’m out.”); 3d Am. Compl. ¶ 38. Augustine denied
both the existence of any purchase agreement and that either Butler or Price had accrued any
ownership stake in EIC. Id. ¶ 39.
Augustine then shut down Butler and Price’s access to their documents, contact lists, and
email accounts stored on EIC’s computer systems. Id. ¶¶ 50–51. Augustine continued to access
Butler’s email account and, on at least one occasion, read an email from one of Butler’s business
contacts (intended for Butler) and responded to it (from Butler’s account) without disclosing that
Butler no longer worked at the company. Id. ¶¶ 52–59.
Finally, the Complaint alleges that Augustine was responsible for preparing and filing
EIC’s tax returns. Id. ¶ 42. For tax years 2014–2016, however, Augustine failed to file any
corporate returns on EIC’s behalf whatsoever. Id. For tax year 2017, Augustine filed IRS Form
1099s characterizing Butler and Price as independent contractors rather than partial owners. Id.
¶ 45.
Butler and Price originally filed suit in the United States District Court for the Eastern
District of Louisiana. See generally Compl., ECF No. 1. Plaintiffs amended their Complaint
twice before that court transferred the case to this district. See generally 1st Am. Compl., ECF
No. 14; 2d Am. Compl., ECF No. 17; Transfer Order, ECF No. 18. Upon transfer, both Parties
obtained new counsel local to the Washington area. Defendants EIC and Augustine retained
William Cusmano—the same attorney who had previously represented EIC in other legal matters
and who was at the heart of the failed negotiations among Butler, Price, and Augustine to settle
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the matter without resorting to litigation. See, e.g., Def. Augustine’s Answer to Pls.’ 2d Am.
Compl., ECF No. 21 (filed by William Cusmano).
Defendants answered the Second Amended Complaint. Id. Plaintiffs then obtained leave
to file a Third Amended Complaint, which Defendants then moved to dismiss in its entirety for
failure to state a claim and as barred by the applicable statute of limitations. See generally Mot. 2
The operative Complaint contains nine counts, which fall into three broad categories of claims.
First, Plaintiffs bring four common-law counts alleging a breach of the contract and related fraud
or, in the alternative, some form of quasi-contractual claim: (I) breach of contract, 3d Am.
Compl. ¶¶ 60–66; (II) fraudulent inducement, id. ¶¶ 67–73; (VI) promissory estoppel, id. ¶¶ 97–
102; and (VII) quantum meruit (unjust enrichment), id. ¶¶ 103–11. Second, they lodge three
counts alleging related torts: (III) defamation (invasion of privacy), id. ¶¶ 74–81; (IV) a
violation of the Stored Wire and Electronic Communications Act, 18 U.S.C. § 2707, 3d Am.
2
Ordinarily, “[t]he filing of an amended complaint will not revive the right to present by motion
defenses that were available but were not asserted in timely fashion prior to the amendment of
the pleading,” but “a . . . defense that becomes available because of new matter in the amended
complaint may be asserted by motion.” 5C Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1388 (3d ed. 2020); see also Keefe v. Derounian, 6 F.R.D. 11 (N.D.
Ill. 1946) (denying motion to dismiss amended complaint, which contained no new factual
allegations or legal argument but which merely corrected jurisdictional information, because the
court had already denied defendant’s motion to dismiss original complaint on the same grounds).
That rule might serve to bar Defendants’ current Motion to Dismiss, as they already answered
the Second Amended Complaint—at the very least, it would constrain the pending Motion to
challenging only new material in the Third Amended Complaint. But Defendants’ answers to
the Second Amended Complaint were unusually styled as “Responsive Pleadings to Plaintiffs’
Second Amended Complaint” and contained both short answers to the Complaint and brief,
partially formed arguments to dismiss the Complaint for failure to state a claim. See, e.g., Def.
Augustine’s Responsive Pleadings to Pls.’ 2nd Am. Compl., ECF No. 21. Perhaps because
neither the Complaint nor Defendants’ responses were adequately pleaded, Judge Moss seems to
have granted both Parties an opportunity to amend and refile their pleadings. See Minute Entry
of Jun. 6, 2019 (orally granting Plaintiffs leave to file 3d Am. Compl.). And because Plaintiffs
do not now argue that Defendants waived their opportunity to move to dismiss the Third
Amended Complaint in its entirety by answering the Second Amended Complaint, the Court
takes both operative filings at face value.
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Compl. ¶¶ 82–87; and (V) fraudulent filing of tax returns, 26 U.S.C. § 7434, 3d Am. Compl.
¶¶ 88–96. Finally, they assert two standalone counts seeking specific types of relief: (VIII)
declaratory relief under the Declaratory Judgment Act, 28 U.S.C. § 2201, 3d Am. Compl.
¶¶ 112–13; and (IX) an accounting of EIC’s assets, id. ¶¶ 114–16. Subject-matter jurisdiction is
premised on diversity, though the Complaint raises at least two federal questions on its face. Id.
¶ 5.
While the Motion to Dismiss was pending, Plaintiffs filed a Motion to Disqualify
Defense Counsel William Cusmano. See generally Pls.’ Mot. to Disqualify Defs.’ Counsel, ECF
No. 39. The Motion argues that Cusmano cannot now represent Defendants EIC and Augustine
because (1) Cusmano represented Butler individually against Augustine earlier in this same
dispute; (2) Cusmano previously represented all three alleged owners together in their capacities
as EIC shareholders, so he cannot now represent one of them (and the company) against the
other two; and (3) Cusmano is a necessary witness and therefore cannot represent any party in
this litigation. See generally Pls.’ Mem. in Support of Pls.’ Mot. to Disqualify Defs.’ Counsel
(“DQ Mot.”), ECF No. 39-1.
II. Legal Standard
A. Motion to Dismiss
“A pleading that states a claim for relief must contain . . . a short and plain statement of
the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “When
evaluating a motion to dismiss [under Federal Rule of Civil Procedure 12(b)(6)], the Court must
treat the complaint’s factual allegations as true and afford the plaintiff the benefit of all
inferences that can be derived from the facts alleged.” Atlas Brew Works, LLC v. Barr, 391 F.
Supp. 3d 6, 11 (D.D.C. 2019) (internal quotations and citations omitted). Although the Court
accepts all well pleaded facts in the Complaint as true, “[f]actual allegations must be enough to
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raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007). “While a complaint . . . does not need detailed factual allegations, a plaintiff’s obligation
to provide the grounds of his entitlement to relief requires more than labels and conclusions, and
a formulaic recitation of the elements of a cause of action will not do.” Id. at 554–55 (internal
quotations and citations omitted). The claim to relief must be “plausible on its face,” enough to
“nudge[ the] claims across the line from conceivable to plausible.” Id. at 570.
The Court evaluates Counts II and V under a different standard because both include
allegations of fraud, see 3d Am. Compl. ¶¶ 67–73, 88–96, and fraud claims are subject to more
stringent review on a motion to dismiss. “In alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.” Fed. R. Civ P. 9(b). “[T]he
‘circumstances’ that must be pleaded with specificity are matters such as the ‘time, place, and
contents of the false representations,’ such representations being the element of fraud about
which the rule is chiefly concerned.’” U.S. ex rel Totten v. Bombadier Corp., 286 F.3d 542, 552
(D.C. Cir. 2002) (emphasis omitted) (quoting 5 Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure § 1297 (2d ed. 1990)).
B. Motion to Disqualify
“The district court has wide discretion in the exercise of its duty to supervise members of
the bar appearing before it.” Koller ex rel Koller v. Richardson-Merrell Inc., 737 F.2d 1038,
1054 (D.C. Cir. 1984), vacated on other grounds, 472 U.S. 424 (1985). But “[d]isqualification
of an attorney is a serious step.” Derrickson v. Derrickson, 541 A.2d 149, 152 n.6 (D.C. 1988).
Lawyers practicing in this Court are subject to the District of Columbia Rules of Professional
Conduct. LCvR 83.15(a). The primary situations warranting disqualification are “(1) where an
attorney’s conflict of interests . . . undermines the court’s confidence in the vigor of the
attorney’s representation of his client, or . . . (2) where an attorney is at least potentially in a
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position to use privileged information concerning the other side through prior representation, . . .
thus giving his present client an unfair advantage.” Koller, 737 F.2d at 1055 (quoting Bd. of
Educ. of N.Y. City v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979)). “Unless an attorney’s
conduct tends to taint the underlying trial” as in one of those two categories, “courts should be
quite hesitant to disqualify an attorney.” Id. (quoting Nyquist, 590 F.2d at 1246). “Except in
cases of truly egregious misconduct likely to infect future proceedings, other means less
prejudicial to the client’s interest than disqualifying the counsel of [the Party’s] choice are
ordinarily available to deal with ethical improprieties by counsel.” Id. at 1056 (citations
omitted).
III. Analysis
A. Motion to Dismiss
The Complaint’s various counts fall into three general categories of allegations. Counts
I, II, VI, and VII are all common-law claims dealing with the alleged formation and breach of a
contract, or, in the alternative, a quasi-contract subject to some equitable remedy. Counts III, IV,
and V are separate torts, whether grounded in the common law or federal statutory causes of
action. Counts VIII and IX request specific remedies apart from the legal or equitable remedies
sought in the other counts. The Court takes them in that order.
1. Contract, Fraud, and Quasi-Contract Claims
a. Breach of Contract
The Complaint alleges that Butler, Price, and Augustine formed an oral contract
sometime between 2011 and 2014, in which Butler and Price agreed to secure government
contracts for EIC and then perform those contracts on EIC’s behalf without being paid. 3d Am.
Compl. ¶¶ 10–20. The profits from those contracts went to Augustine. Id. ¶ 26. In turn,
Augustine progressively sold his ownership stake in the company to Butler and Price, who would
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eventually become co-owners after contributing roughly $600,000 in profits. Id. ¶ 18. The
Parties agree that there was no written contract, see Mot. at 4; Pls.’ Opp’n to Defs.’ Mot. to
Dismiss (“Opp’n”) at 9–11, so if any contract existed, it must have been oral.
“To prevail on a claim of breach of contract, a party must establish (1) a valid contract
between the parties; (2) an obligation or duty arising out of the contract; (3) a breach of that duty;
and (4) damages caused by the breach.” Tsintolas Realty Co. v. Mendez, 984 A.2d 181, 187
(D.C. 2009). Augustine and EIC argue that the Complaint fails on the first and third points,
contending that it does not adequately allege either the existence of a contract or a breach
thereof. See Mot. at 4.
“For a contract to be enforceable, there must be (1) an agreement to all material terms,
and (2) intention of the parties to be bound. In addition, mutuality of obligation must exist.”
Eastbanc, Inc. v. Georgetown Park Assocs. II, L.P., 940 A.2d 996, 1002 (D.C. 2008) (internal
quotations and citations omitted). “A contract must be sufficiently definite as to its material
terms (which include, e.g., subject matter, price, payment terms, quantity, quality, and duration)
that the promises and performance to be rendered by each party are reasonably certain.” Id.
(quoting Rosenthal v. Nat’l Produce Co., Inc., 573 A.2d 365, 370 (D.C. 1990)). “All agreements
have some degree of indefiniteness and some degree of uncertainty,” but “[a] contract is
enforceable if it is sufficiently definite so that the parties can be reasonably certain as to how
they are to perform” and its terms are “clear enough for the court to determine whether a breach
has occurred and identify an appropriate remedy.” Id. (internal quotations and citations omitted).
An oral contract’s elements are identical to those of a written contract. See Ashrafi v. Fernandez,
193 A.3d 129, 131 (D.C. 2018) (“[T]he elements of an oral contract are (1) an agreement to all
material terms and (2) intent of the parties to be bound.”)
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Defendants throw every possible argument against the wall to see if any stick. First, they
contend that the agreement lacks consideration because Augustine stood to gain nothing. See
Mot. at 5. According to Defendants, “the plaintiffs would be producing value that they would
exchange for equivalent value,” such that “all of the benefit from the plaintiffs’ generation of
revenues, as alleged by the plaintiffs, apparently was to flow to the plaintiffs.” Id. But the
Complaint says no such thing. Butler and Price allege that they worked without full
compensation for their labor, instead permitting revenues from their contracts and labor to go to
Augustine. 3d Am. Compl. ¶ 14. In return, they obtained partial ownership of EIC, with their
share of the company increasing progressively as they slowly bought Augustine out of his stake
in the business. Id. ¶¶ 17–18.
Second, Defendants argue that the agreement lacks mutuality of obligation because “the
plaintiffs seemingly could have walked away from this arrangement at any time without penalty
and demand[ed] their ‘equity.’” But the law of Louisiana (the state of EIC’s incorporation)
envisions just such an occurrence. See La. Stat. Ann. § 12:1-1435(A) (“If a corporation engages
in oppression of a shareholder, the shareholder may withdraw from the corporation and require
the corporation to buy all of the shareholder’s shares at full value.”). Defendants provide no
legal authority to support their contention that no contract exists among business partners if it is
theoretically possible for one or more partners to abandon the partnership at a future date. It may
be the case that a partner who walks away may lose the benefit of the contract or may not be
entitled to compensation, but that’s not what the Complaint alleges. Instead, it claims that
Augustine affirmatively terminated Butler and Price, thereby depriving them of the benefits of
partial ownership of EIC. See 3d Am. Compl. ¶¶ 38–39.
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Third, Defendants suggest that the agreement lacks essential elements and material terms
because Augustine never promised to return Plaintiffs’ money in the event of a falling out. See
Mot. at 6. In Defendants’ words, “[t]here is no way for the court to fill in this missing term of
the alleged contract,” because “[a]ssuming stock actually had changed hands—which is not
alleged[—]the plaintiffs would have no right to be paid for that stock upon termination of their
services unless they had specifically agreed.” Id. Relying on REO Acquisition Group v. Federal
National Mortgage Association, 104 F. Supp. 3d 22, 27 (D.D.C. 2015), Defendants argue that
“[w]ithout such a material term, the contract fails, and the complaint for breach of contract
should be dismissed.” Mot. at 6. But REO involved a dispute over how a buyer was going to
finance its purchase of a collection of foreclosed houses from the seller. 104 F. Supp. 3d at 28.
Fannie Mae believed that the contract’s terms required REO to pay cash up front, while REO
believed the contract permitted it to finance the purchase with secured transactions. Id. The
Court held that the question of how REO would pay for the properties was a material term of the
contract on which the parties had never agreed, and therefore there was no enforceable contract.
Id. That’s not the case here, where the Complaint alleges that the Parties agreed on payment
terms and that Plaintiffs subsequently paid Defendants hundreds of thousands of dollars in
contract revenues that otherwise would have gone into their own pockets. 3d Am. Compl. ¶ 39.
The disconnect, instead, is on the question of remedies for a breach. The Complaint
seeks, first and foremost, “the value of the equity shares of Defendant EIC to which Plaintiffs are
entitled.” Id. at 18. It may be the case that Plaintiffs cannot recover “the value of their equity,”
but a Contract need not specify a remedy for breach at the outset. “If the terms of the contract
are clear enough for the court to determine whether a breach has occurred and to identify an
appropriate remedy, it is enforceable.” Affordable Elegance Travel, Inc. v. Worldspan, L.P., 774
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A.2d 320, 327 (D.C. 2001). From the face of the Complaint, the Court can conceive of at least
two potential remedies: either money damages in the amount that Butler and Price allegedly
gave to Augustine to purchase equity, or specific performance of the contract through a transfer
of ownership rights to EIC. Plaintiffs expressed their preference for the latter option at a hearing
on the Motion. The Court takes no position at this stage of the litigation on whether these or
other remedies are appropriate, but does conclude that the Complaint adequately alleges the
contract’s essential terms.
Finally, Defendants contend that no shares ever changed hands, so Plaintiffs cannot prove
that a contract ever existed. See Mot. at 5–6. It may be true that the alleged contract’s
performance did not comply with Louisiana law; the Complaint contains little information about
the mechanics of executing the contract. But “[t]o state a claim, a complaint need not assert that
the alleged contract is legal in all respects; rather illegality is an affirmative defense,” and an
“affirmative defense such as illegality can be the basis for granting a Rule 12(b)(6) motion to
dismiss ‘only when the [defense] is established on the face of the complaint.’” Francis v.
Rehman, 110 A.3d 615, 621 (D.C. 2015) (quoting Hafley v. Lohman, 90 F.3d 264, 266 (8th Cir.
1996)). Plaintiffs may have difficulty proving that money or shares ever changed hands, thereby
enabling them to claim some stake in EIC—but that’s a question for summary judgment, not for
a motion to dismiss. The Court does note, however, that the Complaint alleges that Augustine
prepared, signed, and filed with the federal government documents representing that Butler and
Price each owned 20% of EIC in 2015. 3d Am. Compl. ¶ 32. It’s possible that such documents
may be enough to substitute for shares of stock.
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b. The Statute of Limitations
Having established that the Complaint adequately alleges a contract and a breach, the
Court turns to Defendants’ alternative argument that any claim for breach is barred by the
applicable statute of limitations. See Mot. at 8. In the District of Columbia, Plaintiffs must bring
a claim for breach of contract within three years of the breach. See D.C. Code § 12-301(7);
Eastbanc, 940 A.2d at 1004 (“A cause of action for breach of contract accrues, and the statute of
limitations begins to run, at the time of the breach.” (internal quotation omitted)). In Defendants’
view, any enforceable contract must have existed by 2011, and any potential breach must have
occurred immediately, as Plaintiffs never received any of the “trappings of ownership” and so
never received any benefit of the contract. See Mot. at 8. If that’s the case, then the statute
would have run in 2014—long before Plaintiffs filed their original Complaint on August 30,
2018. Id. The same arguments apply to Counts II, VI, and VII. See Halldorson v. Sandi Grp.,
934 F. Supp. 2d 147, 154–55 (D.D.C. 2013) (“Under District of Columbia law, claims for
fraud/fraudulent inducement . . . are governed by a three-year statute of limitations.” (citing D.C.
Code § 12-301(8) (prescribing a three-year limitations period for any claim “for which a
limitation is not otherwise specifically prescribed”))).
But that argument assumes the Complaint alleges an immediate breach. “Where an
injury is not readily determined, ‘[a]t the latest . . . a cause of action accrues for limitations when
the plaintiff knows or by the exercise of reasonable diligence should know (1) of the injury, (2)
its cause in fact, and (3) some evidence of wrongdoing.’” Slate v. Pub. Def. Serv. for D.C., 31 F.
Supp. 3d 277, 313 (D.D.C. 2014) (quoting Beard v. Edmondson & Gallagher, 790 A.2d 541, 546
(D.C. 2002)); see also News World Comm’cns, Inc. v. Thompsen, 878 A.2d 1218, 1223 (D.C.
2005) (“A claim for unjust enrichment only accrues . . . when the enrichment becomes unjust;
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the statute of limitations starts to run upon the occurrence of the wrongful act giving rise to a
duty of restitution[, in this case, refusal to pay for services already rendered].” (internal quotation
omitted)).
According to the Complaint, Butler’s corporate title at EIC was “President and Managing
Partner of the Business Unit.” 3d Am. Compl. ¶ 23. Price was also described as “Managing
Partner of the Business Unit.” Id. From 2014–2016, the two received no salary or payment as
independent contractors, an indication either that they were either working pro bono or that they
were co-owners of the business and were applying their share of the profits to the purchase of a
larger stake in the company. Id. ¶¶ 29–30. Moreover, Augustine allegedly made representations
to the federal government that Butler and Price each owned 20% of the company. 3d Am.
Compl. ¶ 32. All those allegations would be consistent with Plaintiffs’ understanding that
Augustine was continuing to hold up his end of the bargain. As the Complaint alleges, it was
only in 2017 that Augustine breached the contract by purporting to terminate Butler and Price
from the company. 3d Am. Compl. ¶ 38. If that’s the case, then Plaintiffs timely filed suit.
“This Circuit has ‘repeatedly held that courts should hesitate to dismiss a complaint on
statute of limitations grounds based solely on the face of the complaint.’” Slate, 31 F. Supp. 3d
at 312–13 (quoting Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996)). “[D]ismissal is
appropriate only if the complaint on its face is conclusively time-barred.” Id. at 313 (internal
quotation omitted). Further evidence about the timeliness of the claims may arise at summary
judgment, but at this point, the Court cannot conclusively determine that any count is time-
barred.
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Because the Complaint adequately alleges a contract and breach, and because Plaintiffs
seem to have filed their suit within the applicable limitations period, the Court denies the Motion
to Dismiss as to Count I.
c. Fraudulent Inducement
Having successfully alleged the existence of a contract, the Complaint alleges in Count II
that Augustine committed fraud both at the outset (to induce Butler and Price into entering into
the contract) and throughout the ensuing years (to induce them to continue to perform their end
of the bargain), even though Augustine never intended to make good on his obligations. 3d Am.
Compl. ¶¶ 67–73.
Defendants begin by repeating their arguments about the lack of a contract in the first
place, arguing that they cannot be liable for inducing Butler and Price to bind themselves by a
contract that never materialized. See Mot. at 8; see also In re U.S. Office Prods. Co. Sec. Litig.,
251 F. Supp. 2d 77, 101 (D.D.C. 2003) (“[If there is no] contract, no claims requiring
inducement to enter [a] contract can exist.”). 3 Defendants also argue that the claim is barred by
the statute of limitations for the same reasons as Count I. See Mot. at 9. Those arguments both
fail for the reasons stated above.
Defendants next contend that Plaintiffs cannot allege both a breach of contract and
fraudulent inducement because the latter claim necessarily requires rescission of the contract.
See id. They argue that “the plaintiffs must elect either to void the contract or to sue for contract
damages and cannot have it both ways. Since they do not ask for the contract . . . to be voided,
3
Contrary to Plaintiffs’ argument in opposition to this point, see Opp’n at 11, fraudulent
inducement is not an alternative to a breach-of-contract claim and cannot succeed absent the
existence of an enforceable contract. But that error is not fatal to the claim given that the
Complaint states a claim for breach of contract.
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and since they claim precisely the same relief in both counts, their claim is duplicative of their
contract claim.” Id. (citing Carter v. Urban Serv. Sys. Corp., 324 F. Supp. 3d 19, 22 (D.D.C.
2018)). But this argument confuses the legal theory underlying the allegations. “Traditionally, a
person who was induced to enter into a contract by a misrepresentation has several common law
causes of action, including fraud in the inducement sounding in tort and rescission sounding in
contract. The distinction between these two may be important because each action requires a
different level of proof and allows for different remedies.” In re Estate of McKenney, 953 A.2d
336, 341 (D.C. 2008).
Although the Complaint does not explicitly state that Count II sounds in tort, the damages
Plaintiffs claimed to have suffered as a result of the alleged inducement, including “loss of
revenue and profits, diminution of business value, [and] loss of business opportunity,” can be
remedied only through money damages, not by rescission of the contract. 3d Am. Compl. ¶ 73.
It would make little sense for Plaintiffs to seek rescission at this point, as they have already
performed their part of the alleged bargain and are seeking to force Defendants to perform on
their end. See Steiner v. Am. Friends of Lubavitch (Chabad), 177 A.3d 1246, 1255 (D.C. 2018)
(outlining standard for when a party may seek rescission) (quoting Restatement (Second) of
Contracts § 164 (Am. Law Inst. 1981)). Rescission is usually employed by defendants who are
being sued to force them to perform on a contract they allege they were deceived into entering in
the first place. See, e.g., Hercules & Co., Ltd. v. Shama Restaurant Corp., 613 A.2d 916 (D.C.
1992) (dismissing fraudulent inducement claim and enforcing arbitration award). Instead,
Plaintiffs seem to be seeking to “recover monetary damages in tort,” which they may only do if
they “establish[] all of the elements of common law fraudulent misrepresentation . . . by clear
16
and convincing evidence.” In re Estate of McKenney, 953 A.2d at 341–42 (citing Restatement
(Second) of Torts § 525 (Am. Law Inst. 1977) (internal quotation omitted)).
But the relationship between Plaintiffs’ claim for breach of contract and their allegation
of fraudulent inducement presents other problems beyond the question of rescission. To state a
claim for fraudulent inducement, the Complaint must allege that “(1) the defendant[s] made a
false representation, (2) the representation was in reference to a material fact, (3) the
defendant[s] had knowledge of its falsity, (4) the defendant[s] intended to deceive, (5) the
plaintiffs acted in reliance on the misrepresentation, and (6) the reliance was reasonable.” In re
U.S. Office Prods., 251 F. Supp. 2d at 100 (citing R&A, Inc. v. Kozy Korner, Inc., 672 A.2d
1062, 1066 (D.C. 1996); Hercules, 613 A.2d at 923). “Fraudulent inducement to enter a contract
requires [that the] misrepresentation or omission . . . pertain[] to an essential term of a contract
and the intent to convince a plaintiff to enter the contract.” Id. (citing Haynes v. Kuder, 591
A.2d 1286, 1290 n.5 (D.C. 1991)). To comply with Rule 9(b), “the pleader [must] provide the
‘who, what, when, where, and how’ with respect to the circumstances of the fraud.” Anderson v.
USAA Cas. Ins. Co., 221 F.R.D. 250, 253 (D.D.C. 2004) (quoting DiLeo v. Ernst & Young, 901
F.2d 624, 627 (7th Cir. 1990)).
Courts tend not to allow plaintiffs to allege fraudulent inducement alongside claims for
breach because “[t]here is a risk of turning every breach of contract suit into a fraud suit, of
circumventing the limitation that the doctrine of consideration is supposed . . . to place on
making all promises legally enforceable, and of thwarting the rule that denies the award of
punitive damages for breach of contract.” Desnick v. Am. Broad. Cos., Inc., 44 F.3d 1345, 1354
(7th Cir. 1995) (Posner, J.). In the District of Columbia, the claims may stand side-by-side in
one of three instances: (1) when the tort “exist[s] in its own right independent of the contract,
17
and any duty upon which the tort is based . . . flow[s] from considerations other than the
contractual relationship,” Choharis v. State Farm Fire & Cas. Co., 961 A.2d 1080, 1089 (D.C.
2008); (2) when the defendant makes some statement “prior to” and “independent of the
contract” that deceives the plaintiff into agreeing to be bound by the contract, Ludwig &
Robinson, PLLC v. Biotechpharma, LLC, 186 A.3d 105, 111 (D.C. 2018) (quoting Marvin
Lumber & Cedar Co. v. PPG Indus., 223 F.3d 873, 885 (8th Cir. 2000)); and (3) when the
promise to perform on the contract is itself fraudulent, “if at the time of its making, the promisor
had no present intention of carrying it out,” Va. Acad. of Clinical Psychologists v. Grp.
Hospitalization and Med. Servs., Inc., 878 A.2d 1226, 1234 (D.C. 2005). Plaintiffs have not
provided any clarity about which of those categories they believe best fits their claim.
The Complaint alleges that in 2011 Augustine said he would sell equity in the company
to Plaintiffs without the intention of doing so, 3d Am. Compl. ¶ 68; that Plaintiffs agreed to the
deal because of that statement, id. ¶ 71; that Plaintiffs worked for several years in reliance on that
promise, id.; that they received subsequent reassurances of progressively accrued equity, id. ¶ 72;
and that Augustine eventually went back on his word and denied them what they had paid for
with money they otherwise would have kept for themselves, id. ¶¶ 38–39. Plaintiffs thus identify
two potential misrepresentations: (1) that Augustine agreed to the contract in 2011 but even then
did not intend to perform his obligations under the contract and (2) that Augustine lied about
Plaintiffs’ accrual of equity during the course of performance to keep them performing their
obligations under the contract.
Neither of those allegations falls under the category articulated in Ludwig. Plaintiffs do
not allege that Augustine misrepresented anything about the nature of EIC that might have made
the deal appear better than it really was. For instance, Augustine never claimed that EIC was
18
more valuable than he secretly believed it to be; that EIC had lucrative government contracts that
later turned out not to exist; or that he offered to sell the company when, in truth, someone else
owned shares that he had no legal right to convey to Butler or Price. Such statements would
constitute “fraud and misrepresentation in matters leading up to procurement of the contract”
rather than being subsumed within the contract itself and would thereby state a claim. Ludwig,
186 A.3d at 111 (quoting Choharis, 961 A.2 at 1088 n.11) (emphasis added); see also id. at 111–
12 (“[Plaintiff] made no claim that, prior to [Plaintiff’s] taking out the policy, the insurance
company made misrepresentations about (for example) the scope of the offered coverage or the
financial strength of the company and its ability to meet its obligations under issued policies.”
(citing Choharis, 961 A.2d at 1088 n.11)). But there is no such allegation in the Complaint.
The allegation that Augustine was lying when he entered the contract does fit squarely
within the rule of Virginia Academy. There, the D.C. Court of Appeals confirmed that the party
who breaches a contract may be held liable for fraudulent misrepresentation, in addition to
breach, “where the evidence shows that a promise was made without the intent to perform, or
that the promisor had knowledge that the events would not occur.” 878 A.2d at 1234 (quoting
Bennett v. Kiggins, 377 A.2d 57, 60–61 (D.C. 1977)). But it emphasized the difficulty of
holding the promisor liable when the only evidence of the promisor’s intent is the breach itself.
Id.
When a promise is made in good faith, with the expectation of
carrying it out, the fact that it subsequently is broken gives rise to no
cause of action . . . . Otherwise any breach of contract would call
for such a remedy. The mere breach of a promise is never enough
in itself to establish the fraudulent intent. It may, however, be
inferred from the circumstances, such as the defendant’s insolvency
or other reason to know that he cannot pay, or his repudiation soon
after it is made, with no intervening change in the situation, or his
failure to attempt any performance, or his continued assurances after
it is clear that he will not do so.
19
Id. at 1234–35 (quoting W. Page Keeton et al., Prosser and Keaton on the Law of Torts § 109
(5th ed. 1984)) (emphasis added).
The Complaint’s allegations, however, fit Prosser’s definition exactly. Plaintiffs claim
that “Defendants had no intention at the time they made the representations to Plaintiffs or any
time thereafter to tender to Plaintiffs an equity interest in Defendant EIC, therefore the
Defendants knew that their representations regarding Plaintiffs’ ability to earn equity in EIC
were false when they were made.” 3d Am. Compl. ¶ 69. The Complaint alleges no
circumstances that might tend to show that Augustine was lying when he agreed to the contract,
no indications that he knew performance would be impossible, and no allegation that Augustine
repudiated the contract immediately after making it. In fact, Plaintiffs allege that Augustine gave
every indication that he was performing on the contract until 2017, such as his signed
representations to both Plaintiffs and the federal government that Plaintiffs each owned 20% of
the company in 2014 and 2015. Id. ¶¶ 33–35. The first sign of Augustine’s intent to breach
came in 2017—six years after contract formation. Id. ¶¶ 36–41. “The mere breach of a promise
is never enough in itself to establish the fraudulent intent.” Va. Acad., 878 A.2d at 1234 (quoting
Prosser & Keaton § 109). 4
The Complaint’s allegations that Augustine continued to deceive Plaintiffs by giving
assurances throughout the years bear some resemblance to the facts of Ludwig. There, a
pharmaceutical company retained a law firm to handle intellectual property matters. 186 A.3d at
106. The representation agreement included an hourly fee structure and permitted the firm to
4
Defendants briefly raise this argument. See Mot. at 8–9 (citing Va. Acad., 878 A.2d at 1235).
In turn, Plaintiffs make no attempt to engage with the case law and merely restate the
Complaint’s allegations corresponding with the elements of fraud. See Opp’n at 11–12. On this
point (and others), the Parties’ briefing was largely unhelpful in applying D.C. law.
20
withdraw from the representation if the company failed to pay. Id. Of course, the company
never paid its bills, so the law firm threatened to withdraw. Id. at 107. The company assured the
firm of its ability to pay, representing that it could rely on an existing line of credit and revenue
from investments in its subsidiary company. Id. The parties agreed to modify the fee structure,
deferring some hourly fees in exchange for an additional sum to paid on contingency. Id.
Payment never came, so the Parties negotiated a second amendment containing an even larger
contingency payment. Id. The law firm eventually had to take the company to arbitration, where
it prevailed on its breach-of-contract claim and received a sizable award. Id. The firm then
pursued separate claims for fraud and conspiracy (which were unavailable in arbitration) in a
lawsuit. Id. at 107–08. The Superior Court dismissed the claims, holding, among other
conclusions, that the fraud claims were duplicative of the contract damages and therefore could
not stand as separate claims. Id. It relied on Choharis, which held that a tort allegation of fraud
“must exist in its own right independent of the contract, and any duty upon which the tort is
based must flow from considerations other than the contractual relationship. The tort must stand
as a tort even if the contractual relationship did not exist.” 961 A.2d at 1089. The Superior
Court found that the continued misrepresentations merely concealed the company’s breach of the
contract and caused no independent harm that had not already been redressed by contract
damages. 186 A.3d at 110.
The Court of Appeals reversed. Id. at 109–16. Because the company and the law firm
had an “open-ended engagement” and because the law firm had a contractual right to withdraw,
each representation that the company was about to pay up and had access to funds available for
that purpose constituted a separate “inducement” to keep the law firm at the table. Id. at 110–11.
The company knew that there was no existing line of credit and that it could not pay its bills, but
21
it continued to negotiate amendments to the fee agreement under false pretenses to prolong the
scheme. Id. Thus, while an action for breach of contract may have sufficed to give the law firm
the benefit of the original bargain, the firm needed a separate claim to account for the
independent harms caused by the misrepresentation: the additional work it did after threatening
to withdraw (twice) and the legal actions required to enforce the various amendments to the
contract. Id.
Here, Plaintiffs do not allege that the misrepresentations in 2015 and 2016 induced them
to enter into a new bargain with Augustine or caused some new injury that would have arisen
“even if the contractual relationship did not exist.” Choharis, 961 A.2d at 1089. “[C]onduct
occurring during the course of a contract dispute may be the subject of a fraudulent . . .
misrepresentation claim when there are facts separable from the terms of the contract upon
which the tort may independently rest and when there is a duty independent of that arising out of
the contract itself, so that an action for breach of contract would reach none of the damages
suffered by the tort.” Id. (emphasis added). “Even a willful, wanton or malicious breach of a
contract . . . cannot support a claim for fraud.” Id. (internal quotation omitted). Augustine’s
alleged misrepresentations merely deceived Plaintiffs into thinking that they were getting the
benefit of the bargain; there was no separate harm. Misleading statements about a promisor’s
willingness or ability to perform (made during the course of performance) are not separately
actionable fraud, even when those statements prevent the promisee from discovering a breach.
Ludwig, 186 A.3d at 112–13 (citing EDCare Mgmt., Inc. v. DeLisi, 50 A.3d 448, 450–52 (D.C.
2012)). Any harm resulting from Augustine’s alleged statements is “wholly dependent” on the
contract and can be fully redressed through contract damages on the breach. Id. at 113.
22
Count II does not state an actionable claim for fraudulent inducement, whether under the
general pleading standards of Federal Rule of Civil Procedure 8(a) or the more exacting
standards for pleading fraud under Rule 9(b). At bottom, Plaintiffs’ allegations are the sort of
conclusory fraud claims that courts regularly reject as nothing more than an attempt to pile
punitive tort damages onto contract disputes. See, e.g., Shandong Yinguang Chem. Indus. Joint
Stock Co., Ltd. v. Potter, 607 F.3d 1029, 10334 (5th Cir. 2010) (“However, ‘failure to preform,
standing alone, is no evidence of the promissor’s intent not to perform when the promise was
made.’” (quoting Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986))). The
Court will dismiss the count.
d. Promissory Estoppel
Count VI argues that Augustine promised to bring Butler and Price on as business
partners, that they worked for EIC for several years in reliance on that promise, and that
Defendants are now estopped from retracting the promise. 3d Am. Compl. ¶¶ 97–102.
“Promissory estoppel provides a party with a remedy to enforce a promise where the formal
requirements of a contract have not been satisfied, often serving as a substitute for one of these
formal requirements, usually consideration.” Vila v. Inter-Am. Inv. Corp., 570 F.3d 274, 279
(D.C. Cir. 2009) (citing Bender v. Design Store Corp., 404 A.2d 194, 196 (D.C. 1979)).
“Therefore, when a contract fails for lack of consideration, courts will, in some circumstances,
enforce the promise where the promisee has detrimentally relied.” Id. Promissory estoppel and
unjust enrichment (Count VII) are variations on actions in quasi-contract, which function as
substitutes for contractual remedies “even though no intention of the parties to bind themselves
contractually can be discerned.” Bloomgarden v. Coyer, 479 F.2d 201, 210 (D.C. Cir. 1979).
23
Defendants seize on this point to argue that a Complaint cannot allege both breach of
contract and quasi-contract claims. See Mot. at 13. Defendants are correct that “courts tend not
to allow [such] action[s] to proceed in the presence of an actual contract between the parties.”
Id. (quoting Vila, 570 F.3d at 280). They argue that the claims duplicate Count I and should
therefore be dismissed as cumulative. Id.
“There is, of course, no need to resort to [quasi-contract] when the evidence sustains the
existence of a true contract, either express or implied in fact.” Bloomgarden, 479 F.2d at 210.
“One who has entered into a valid contract cannot be heard to complain that the contract is
unjust, or that it unjustly enriches the party with whom he or she has reached agreement.”
Jorden Keys & Jessamy, LLP v. St. Paul Fire and Marine Ins. Co., 870 A.2d 58, 64 (D.C. 2005).
But in every case Defendants cite for that proposition, the existence of the contract was never in
dispute. See, e.g., He Depu v. Yahoo! Inc., 306 F. Supp. 3d 181, 193–94 (D.D.C. 2018)
(collecting cases), rev’d on other grounds 950 F.3d 897 (D.C. Cir. 2020). Here, there is no
written contract, and Defendants have themselves contested that the Parties ever formed an
enforceable oral agreement. See Mot. at 4 (“The plaintiffs have successfully alleged neither a
breach of contract nor a contract in the first instance.”). By pleading quasi-contractual counts for
promissory estoppel and unjust enrichment, Plaintiffs acknowledge that they may be unable to
prove the existence of an enforceable contract and would thereby lose their claim for breach of
contract in Count I. See Opp’n at 11 (“While Plaintiffs cannot prevail on both contract and
quasi-contract claims, they may plead all of these counts in the alternative under the federal
rules.”). If it’s the case that Plaintiffs cannot prove the existence of a valid “contract in the first
instance,” id., then they may rely on quasi-contractual theories of liability to seek restitution of
the benefits they allegedly conferred on Defendants in reliance on Defendants’ alleged
24
assurances. But if they’re able to prove that the Parties validly contracted, then Counts VI and
VII will drop out of the case.
Defendants also challenge the sufficiency of Count VI’s allegations. “In order to find a
party liable on a theory of promissory estoppel, there must be evidence of a promise, the promise
must reasonably induce reliance upon it, and the promise must be relied upon to the detriment of
the promisee.” Simard v. Resolution Tr. Corp., 639 A.2d 540, 552 (D.C. 1994). Defendants
claim that the Complaint never alleges that Augustine promised “to tender the value of the
plaintiffs’ equity upon the termination of the plaintiffs’ services.” Mot. at 13 (internal quotation
and alterations omitted). But that’s not the promise alleged here. Instead, the Complaint alleges
that Augustine “represented to Plaintiffs that if Plaintiffs worked on behalf of Defendants and
generated revenue for the Business Unit, then Defendants would tender to Plaintiffs equity in
Defendant EIC commensurate with the revenue the Business Unit generated, less direct costs and
certain indirect costs.” 3d Am. Compl. ¶ 98. Tendering the value of that equity at termination
would have been a remedy for failure to transfer ownership, not the subject of the original
promise. Instead, the Complaint alleges that Augustine promised to sell a share of the company
to Plaintiffs, id. ¶ 98, that Plaintiffs worked without compensation for several years in reliance on
that promise, id. ¶ 99, and that they got nothing to show for their work in the end, id. ¶ 102. The
Complaint adequately states a claim for promissory estoppel.
e. Unjust Enrichment 5
Count VII, another quasi-contract count, alleges that Butler and Price reasonably
conferred a benefit on Augustine and EIC, that it would be unjust for Defendants to retain that
5
The Complaint labels Count VII as a claim for both unjust enrichment and quantum meruit.
See 3d Am. Compl. ¶ 103. “Quantum meruit may refer to either an implied contractual or a
quasi-contractual duty requiring compensation for services rendered.” New Econ. Capital, LLC
25
benefit, and that equitable principles demand that Defendants return the benefit to Plaintiffs. Id.
¶¶ 103–11. Beyond the same arguments Defendants raise above as to the statute of limitations
and duplication of the contract claim, see Mot. at 16, they contend that the Complaint fails to
state a claim for unjust enrichment because either (1) Plaintiffs received a benefit rather than
conferring one on Defendants, or (2) Plaintiffs were aware the arrangement carried some risk for
them, that they accepted the risk, that they ended up with the short end of the stick, and that it
would not be unjust to permit Defendants to retain the benefits of the agreement, see id. at 14–
15.
“Like promissory estoppel, unjust enrichment provides a party with a remedy to unwind
entanglements that may have arisen from a failed agreement, for instance, . . . where the
agreement is too indefinite to be enforced.” Vila, 570 F.3d at 280 (internal quotations omitted).
“For [Plaintiffs] to recover . . . , [they] must show that [Defendants were] unjustly enriched at
[their] expense and that the circumstances were such that in good conscience [Defendants]
should make restitution.” Thompsen, 878 A.2d at 1222 (quoting Vereen v. Clayborne, 623 A.2d
1190, 1194 (D.C. 1993)). In other words, “[u]njust enrichment occurs when: (1) the plaintiff
conferred a benefit on the defendant; (2) the defendant retains the benefit; and (3) under the
circumstances, the defendant's retention of the benefit is unjust.” Id.
v. New Mkts. Capital Grp., 881 A.2d 1087, 1095 (D.C. 2005) (internal quotation omitted). The
latter theory “is more commonly known as a theory of unjust enrichment.” Vereen v. Clayborne,
623 A.2d 1190, 1194 (D.C. 1993). Although courts have articulated slightly different tests for
stating a quasi-contractual quantum meruit claim, see Mot. at 14–15 (comparing cases), the two
labels mean the same thing in this context. If anything, quantum meruit is a method for
calculating the appropriate remedy for unjust enrichment. That clarification resolves arguments
Defendants raise in their Reply brief discussing the lack of allegation of an implied-in-fact
contract. See Defs.’ Reply to Opp’n to Mot. to Dismiss for Failure to State Claims at 11, ECF
No. 32.
26
Defendants argue that the Complaint mischaracterizes the nature of Plaintiffs’
relationship to EIC. Rather than working to generate revenue and thereby purchase equity in the
company, Defendants claim that the Plaintiffs merely worked for an “opportunity” to buy the
company, “and it didn’t work out.” Mot. at 15. “Although [Plaintiffs] assert that they expected
to buy the company, the relationship ended before that happened.” Id. at 14. Of course, the
Complaint does not assert that Butler and Price “expected to buy the company” at some time
after they began working at EIC; it alleges that they were buying the company by foregoing
salaries and directing revenue from their contracts to Augustine. 3d Am. Compl. ¶ 106.
Although Defendants characterize the affair as a “scheme meant to benefit . . . the plaintiffs, not
the defendants,” Mot. at 14, that argument neglects the significant, uncompensated work that
Butler and Price allegedly rendered for Defendants’ benefit, 3d Am. Compl. ¶ 106. Moreover,
Defendants claim that “[h]ad [Plaintiffs] wished to protect their ‘equity,’ they could have [done
so] with a specific agreement. They did not.” Mot. at 14. That’s a textbook reason for quasi-
contract theories of equity jurisprudence.
Even assuming that there was no contract, Butler and Price allege that they worked for
EIC for free for several years with the understanding that they were being paid in the form of
equity. 3d Am. Compl. ¶¶ 105–06. Defendants allegedly accepted the benefit of Plaintiffs’ work
and even led them to believe that they were accruing equity by filing forms with the federal
government listing Butler and Price as equity partners. Id. ¶¶ 107–09. If Plaintiffs cannot
recover under a breach-of-contract theory, they still may be eligible for restitution of the value of
their work under a theory of unjust enrichment. Id. ¶ 111. Count VII properly states a claim for
unjust enrichment.
27
2. Remaining Tort Claims
Moving on from the Complaint’s contract and quasi-contract counts, the Court turns to
Plaintiffs’ other tort claims: invasion of privacy (Count III), a Stored Wire and Electronic
Communications Act violation (Count IV), and fraudulent filing of tax returns (Count V).
a. Invasion of Privacy
Count III alleges that after Augustine purported to terminate Plaintiffs, he (or his agent)
accessed Butler’s and Price’s corporate e-mail accounts and corresponded with Butler’s business
contacts without revealing to the recipients that he wasn’t Butler (or that Butler no longer
worked at EIC). Id. ¶¶ 74–81. Count III claims that Augustine “thus appropriated Butler’s name
for [his] own benefit, capitalizing on the reputation Butler had earned through his hard work for
[his] own benefit and without permission.” Id. ¶ 78.
Defendants’ primary argument on this front is that the Complaint lacks any allegation
that Augustine published Plaintiffs’ private information or otherwise defamed Plaintiffs. See
Mot. at 9–10. This line of reasoning confuses invasion of privacy with defamation. Defendants
can be forgiven for the confusion, as the Complaint labels Count III “Defamation (Invasion of
Privacy).” 3d Am. Compl. ¶ 74. The label is a misnomer.
The concept of a common-law right to privacy grew to some extent out of protections
against defamation beginning in the late nineteenth century. See William L. Prosser, Privacy, 48
Calif. L. Rev. 383, 383–384 (1960) (citing Samuel D. Warren and Louis D. Brandeis, The Right
to Privacy, 4 Harv. L. Rev. 193 (1890)). Although the distinctions between the two causes of
action were “well known” by the mid-twentieth century, “there have been overlappings from the
beginning.” John W. Wade, Defamation and the Right of Privacy, 15 Vand. L. Rev. 1093, 1094
(1961). It was Prosser who developed and classified the various causes of action courts
eventually recognized to vindicate privacy rights: intrusion upon seclusion, public disclosure,
28
false light, and commercial appropriation. See Kenneth S. Abraham and G. Edward White, The
Puzzle of Dignitary Torts, 104 Cornell L. Rev. 317, 338–40 (2018); compare Restatement
(Second) of Torts ch. 28 (classifying causes of action for defamation) with id. ch. 28A
(classifying causes of action for invasion of privacy); see also Haynes v. Alfred A. Knopf, Inc., 8
F.3d 1222, 1229 (7th Cir. 1993) (Posner, J.) (collecting cases).
Defendants’ arguments that the Complaint does not state a claim for defamation, while
understandable in light of the Complaint’s imprecise labeling, are therefore unavailing. See Mot.
at 9 (“The defendants are at a loss as to what the plaintiffs plausibly suggest could be
defamatory.”). Although Plaintiffs used the term, they clearly do not allege defamation.
Defendants’ arguments against a claim for invasion of privacy fare no better. Under D.C.
common law, “[o]ne who appropriates to his own use or benefit the name or likeness of another
is subject to liability to the other for invasion of his privacy.” Tripp v. United States, 257 F.
Supp. 2d 37, 40–41 (D.D.C. 2003) (quoting Restatement (Second) of Torts § 652C) (citing
Vassiliades v. Garfinckel’s, 492 A.2d 580, 587 (D.C. 1985)). “[T]he interest protected by this
proposition is in the nature of an individual property right in the exclusive use of one's own
identity in so far as the use of one's name or likeness may be of benefit to him . . . or others.” Id.
(emphasis removed) (quoting Restatement (Second) of Torts § 652C, cmt. a). “The common
form of invasion of privacy under [this rule] is the appropriation and use of the plaintiff's name
or likeness to advertise the defendant's business or product, or for some similar commercial
purpose.” Id. (quoting Restatement (Second) of Torts § 652C, cmt. b). “Incidental use . . . for a
purpose other than taking advantage of a person's reputation or the value associated with his
name will not result in actionable appropriation.” Vassiliades, 492 A.2d at 592.
29
As Judge Sullivan noted in his extensive treatment of the difference between various
forms of invasion of privacy in Tripp, the D.C. Court of Appeals has recognized a cause of
action for misappropriation of likeness, but “[n]either D.C. case law . . . nor federal case law
interpreting it provide much guidance” on the subject. 257 F. Supp. 2d at 42. Not much has
changed since Judge Sullivan made that observation. See, e.g., Teltschik v. Williams & Jensen,
PLLC, 683 F. Supp. 2d 33, 55 (D.D.C. 2010) (dismissing count for failure to state a claim).
The cases do establish, however, that Defendants’ sole argument against Count III is
misdirected. Defendants contend that Count III fails to state a claim because it does not allege
that Augustine ever published Butler’s private information to third parties. See Mot. at 10 (“The
plaintiffs claim no revelation of a private fact. There is alleged no publication of fact,
defamatory or private.”). Defendants rely on Smith v. Clinton, 253 F. Supp. 3d 222, 242–43
(D.D.C. 2017), but Smith dealt with the torts of defamation and placing a person in a false light.
False light, although also falling under the category of invasion of privacy, is distinct from
misappropriation of likeness and therefore has different elements. Compare Restatement
(Second) of Torts § 652C (misappropriation of likeness) with id. § 652E (false light). The same
goes for the Defendants’ other citations, which all involved either other forms of invasion of
privacy or defamation. See Defs.’ Reply to Opp’n to Mot. to Dismiss for Failure to State Claims
(“Reply”) at 5, ECF No. 32 (citing Armstrong v. Thompson, 80 A.3d 177, 188–89 (D.C. 2013)
(false light and publication of private facts (citing Restatement (Second) of Torts § 652E));
Randolph v. ING Life Ins. & Annuity Co., 973 A.2d 702, 710–12 (D.C. 2009) (public disclosure
of private facts and intrusion upon seclusion (citing Restatement (Second) of Torts §§ 652B,
652D)); Steinbuch v. Cutler, 463 F. Supp. 2d 1, 3 (D.D.C. 2006) (defamation); Conejo v. Am.
Fed’n of Gov’t Emps. AFL-CIO, 377 F. Supp. 3d 16, 32–33 (D.D.C. 2019) (false light (citing
30
Armstrong, 80 A.3d at 188–89))). None of those cases considered actions for misappropriation
of likeness or had reason to consider the elements or illustrations set out in § 652C of the
Restatement or the corresponding section of the D.C. Court of Appeals’ opinion in Vassiliades.
See 492 A.2d at 592–93.
To be sure, language in Armstrong (taken from comments in Randolph) unequivocally
states that “the ‘publicity’ requirement for a publication of private facts claim is the same for all
invasion of privacy torts.” 80 A.3d at 189. But neither of those opinions had any occasion to
consider misappropriation of name or likeness, and such generic language does not alter the
elements of the tort as laid out in the Restatement and adopted in Vassiliades.
Misappropriation of likeness does not require publication of private information; it
requires only that the tortfeasor “appropriate[] to his own use or benefit the name or likeness of
another.” Restatement (Second) of Torts § 652C. To be sure, the typical case involves “[u]sing
a celebrity’s . . . name or picture in advertising without his consent,” Haynes, 8 F.3d at 1229, but
publication is not an absolute requirement so long as the Complaint alleges that Defendants’ use
of Butler’s name was to Defendants’ “benefit,” Restatement (Second) of Torts § 652C. The
Restatement’s illustrations bear this out:
A, a private detective, seeking to obtain information as to the
relations of B's wife with C, impersonates B, and so induces others
to disclose to him confidential information that they would not
otherwise have disclosed. A has invaded B's privacy.
Id., cmt. b., illus. 3. In this scenario, it is enough that A use B’s name to obtain information of
commercial value to him. There is no publication requirement.
“[W]here the D.C. Court of Appeals has denied plaintiffs relief on a misappropriation of
name or likeness theory, it has relied heavily on the lack of ‘value’ associated with mention or
use of the plaintiff’s name or likeness.” Tripp, 257 F. Supp. 2d at 42. The Complaint clearly
31
alleges that Butler’s name, while it may not have had any value to the general public, had
commercial value to Defendants because it was Butler who had developed the particular business
contact with whom Augustine allegedly corresponded. 3d Am. Compl. ¶ 78. To the extent that
Defendants were attempting to bolster’s EIC’s business by trading on Butler’s reputation in the
relevant business community, without Butler’s knowledge or permission, they would be liable
for misappropriation of name or likeness.
One of Defendants’ arguments here, however, does have merit. In addition to alleging
that Augustine accessed Butler’s email and corresponded with at least one of his business
contacts, the Complaint also claims that “Defendants may have also actively impersonated Price
since Price’s departure from EIC, thus appropriating Price’s name for their benefit as well.” Id.
¶ 79. This allegation seems to be mere conjecture and does not “raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555. The Court therefore grants the Motion to Dismiss
as to the allegation that Augustine misappropriated Price’s likeness and dismisses that portion of
the Complaint without prejudice. The rest of Count III remains in place.
b. Stored Wire and Electronic Communications Act Violation
Count IV alleges a single violation of the Stored Wire and Electronic Communications
Act, 18 U.S.C. §§ 2701–13. 3d Am. Compl. ¶¶ 82–87. The Act criminalizes “intentionally
access[ing] without authorization a facility through which an electronic communication service
is provided” or “intentionally exceed[ing] an authorization to access that facility” and “thereby
obtain[ing], alter[ing], or prevent[ing] authorized access to a wire or electronic communication
while it is in electronic storage in such system.” 18 U.S.C. § 2701(a). The Act also creates a
civil cause of action permitting victims to sue offenders for equitable relief, damages, and
attorney fees. Id. § 2707.
32
The Complaint alleges that Augustine “intentionally accessed Butler’s former EIC email
account without authorization” (“or exceeded any authorization Augustine may have had”) about
a year after Butler left the company. 3d Am. Compl. ¶ 84. But it does not allege the existence of
any agreement between Butler and the company that Butler’s email account was his alone, that
the company would have no access to data stored on its own servers, or that EIC was some sort
of partnership that dissolved upon his termination and that caused Butler to retain a property
right in his email account. The very fact that the Complaint names EIC as a Defendant in this
action renders the allegation a non sequitur. “For [Plaintiffs’] claim to stand, it would require the
Court to assume that, paradoxically, [EIC] is the [electronic communications] facility at issue,
yet that facility has limited access to itself.” State Wide Photocopy, Corp. v. Tokai Fin. Servs.,
Inc., 909 F. Supp. 137, 145 (S.D.N.Y. 1995).
Plaintiffs cite no cases supporting the proposition that a company cannot access its own
email servers. The cases they do cite merely establish that e-mail servers are protected
communications facilities under the Act and that hackers may not access them without
authorization. See Opp’n at 15–16 (citing, e.g., Hately v. Watts, 917 F.3d 770, 794 (4th Cir.
2019); In re Google Inc. Cookie Placement Consumer Privacy Litig., 806 F.3d 125, 147–48 (3d
Cir. 2015)). It cannot be the case that federal law prohibited EIC from accessing its own email
servers absent some contract that protected those accounts individually. See Walker v. Coffey,
No. 19-1067, 2020 WL 1886301, at *8 (3d Cir. Apr. 16, 2020) (holding that an employee’s
“work emails . . . fall outside of the scope of the [Stored Communication Act’s] protection”
when voluntarily disclosed by employer). The Court therefore dismisses Count IV without
prejudice.
33
c. Fraudulent Filing of Tax Returns.
Count V alleges two separate predicate facts to support its allegation that Defendants
violated 26 U.S.C. § 7434, which punishes the fraudulent filing of tax returns. First, the
Complaint alleges that Augustine willfully failed to file returns on EIC’s behalf for tax years
2014, 2015, and 2016, thereby misrepresenting Butler and Price’s status as EIC’s partial owners
and subjecting them to IRS audit or penalty (and potentially affecting their security clearances).
3d Am. Compl. ¶¶ 93–95. Second, it claims that Augustine willfully mischaracterized Butler
and Price as independent contractors rather than owners for tax year 2017, reporting their limited
income from that year on a Form 1099 and thereby omitting any mention of the company’s gains
and losses, which were supposed to have been passed through to them as owners of an S
Corporation under the Tax Code. 3d Am. Compl. ¶¶ 89–92.
The statute creates a civil cause of action against “any person [who] willfully files a
fraudulent information return with respect to payments purported to be made to any other
person.” 26 U.S.C. § 7434(a). Courts in this Circuit have had little occasion to interpret the
statute, so the Court looks to opinions from other Circuits as persuasive authority.
As to Defendants’ first argument, the Second Circuit has held that the text of the statute
“plainly does not encompass an alleged failure to file a required information return.” Katzman v.
Essex Waterfront Owners LLC, 660 F.3d 565, 568 (2d Cir. 2011) (per curiam). Congress’s use
of the term “willfully files” plainly excludes liability for one who files nothing. Id. The Second
Circuit also pointed out that there are other provisions of the Internal Revenue Code that punish a
failure to file a required return, but those sections do not create a private right of action. Id. at
569. Tellingly, Plaintiffs cite to no contrary cases to support their argument. See Opp’n at 17.
The Court agrees with the Second Circuit’s analysis.
34
As to the second argument, courts are split on whether intentionally filing the wrong form
that includes the right amount can constitute a violation of the statute. Compare Liverett v.
Torres Advanced Enter. Sols. LLC, 192 F. Supp. 3d 648, 653 (E.D. Va. 2016) (Ellis, J.) (holding
that both the text and structure of the statute preclude liability for misclassification) with Leon v.
Tapas & Tintos, Inc., 51 F. Supp. 3d 1290, 1298 (S.D. Fla. 2014) (finding, without explanation,
that willful misclassification violates the statute). Judge Ellis’s exhaustive textual analysis of the
ambiguities in the statute has become the dominant view since he issued his ruling in Liverett;
indeed, the Court cannot find a single post-Liverett decision that went the other way on a similar
set of facts. See Evans v. United Parcel Service, Inc., No. 19 CV 4818, 2020 WL 777253, at *3
(N.D. Ill. Feb. 18, 2020) (collecting cases); cf. Greenwald v. Regency Mgmt. Servs., LLC, 372 F.
Supp. 3d 266, 270–71 (D. Md. 2019) (distinguishing Liverett on the facts of the case). The Court
agrees with Judge Ellis’s authoritative opinion: Plaintiffs cannot state a claim against
Defendants under § 7434 merely for mischaracterizing them as independent contractors rather
than employees or owners and thereby filing the wrong tax form.
But the Complaint goes farther, alleging that “the Form 1099s did not accurately report
all income or losses related to Plaintiffs’ ownership interests in EIC.” 3d Am. Compl. ¶ 91. This
allegation may be enough to distinguish Liverett. In Greenwald, Judge Russell declined to
follow Liverett because the Plaintiffs “d[id] not allege that Defendants misclassified them as
independent contractors” but rather claimed, among other allegations, “that Defendants willfully
underreported the amounts [they were actually paid] on their W-2s, 1099s, or both in an effort
[to] defraud tax authorities by reducing their tax obligations.” 372 F. Supp. 3d at 270–71. Judge
Russell concluded that such conduct fell within the statute’s ambit. Id. See also Czerw v.
Lafayette Storage & Moving Corp., No. 16-CV-6701-FPG, 2018 WL 5859525, at *3 & n.2
35
(W.D.N.Y. Nov. 9, 2018) (“[B]ecause Plaintiff alleges that the Form 1099-MISC incorrectly
states the amount paid to him, . . . the Court need not address whether the alleged
misclassification supports a claim under § 7434.); Chin Hui Hood v. JeJe Enters., Inc., 207 F.
Supp. 3d 1363, 1379 (N.D. Ga. 2016) (“[The distinction] matters not in this action, because
Plaintiff provides evidence of both [misclassification and underreporting].”).
Those situations, however, do not quite match the allegations here. Plaintiffs do not deny
that the 2017 Form 1099s accurately reflect the cash payments EIC made to them during that tax
year. Instead, they claim that those cash payments do not reflect a complete accounting for their
income and losses as owners. This case seems to pose a slightly different question than those
listed above, which courts do not seem to have faced before: does § 7434 govern a situation in
which a company allegedly mischaracterizes a plaintiff as an independent contractor and files a
Form 1099 that accurately reports cash payments made to the plaintiff when the plaintiff alleges
that he is neither a contractor nor an employee but rather an owner, entitled to claim the
company’s own gains and losses as his own for the purposes of documenting his income?
That seems to be a question of first impression among the courts that have addressed the
statute’s application. “Congress’s goal in enacting § 7434 was to give redress to taxpayers
aggrieved by the filing of information returns that fraudulently misrepresent the amount paid to
the taxpayer.” Liverett, 192 F. Supp. 3d at 655. Although this case involves a 1099 that
correctly stated the amount of cash EIC distributed to Plaintiffs, Plaintiffs allege that EIC was
required to file other forms documenting both cash distributed and the corporation’s gains and
losses, which, because EIC is an S Corporation under the Tax Code, pass through the corporation
and affect shareholders’ tax liabilities. See 3d Am. Compl. ¶¶ 8, 45; see also 26 U.S.C. § 1366.
That is, EIC allegedly properly reported the amounts it distributed to Butler and Price, but it
36
willfully neglected to report the amount of corporate gains and losses that should have passed
through the corporation to Butler and Price as shareholders, pro-rated according to their interests
in the firm. Those allegations come within the terms of the statute, which creates liability for
anyone who “willfully files a fraudulent information return with respect to payments purported to
be made to” Plaintiffs. 26 U.S.C. § 7434(a) (emphasis added).
Such an allegation makes this situation closer to the circumstances of Greenwald and
distinguishes it from the rule in Liverett. In Greenwald, “Plaintiffs . . . allege[d] that the amounts
Defendants reported were incorrect—and that this misreporting was willful.” 372 F. Supp. 3d at
271. From the face of the Complaint, it’s unclear exactly what benefits Defendants stood to gain
from the alleged misreporting or what damages Plaintiffs could have possibly suffered—those
questions and others may pose stumbling blocks to Plaintiffs. It is also not clear that Plaintiffs
will be able to prove that EIC acted willfully rather than negligently. But Plaintiffs have at least
“nudged their claims across the line from conceivable to plausible.” Twombly, 550 U.S. at 570.
Finally, Defendants briefly argue that the Complaint fails to meet the heightened pleading
standard of Federal Rule of Civil Procedure 9(b). See Reply at 8–9. As mentioned above, “Rule
9(b) requires that the pleader provide the ‘who, what, when, where, and how’ with respect to the
circumstances of the fraud.” Anderson, 221 F.R.D. at 253 (quoting DiLeo, 901 F.2d at 627).
The Complaint meets that threshold. It alleges that Augustine and EIC willfully classified Butler
and Price as independent contractors rather than shareholders when they filed EIC’s 2017 tax
returns with the IRS by filing Form 1099s instead of a Form 1120 Schedule K or other document
that was required to record Butler’s and Price’s shares of the corporation’s gains and losses for
that tax year. See 3d Am. Compl. ¶¶ 42–49, 88–96. These allegations suffice under Rule 9(b).
37
The Court therefore partially dismisses Count V as it applies to Defendants’ alleged
failure to file tax returns in 2014, 2015, and 2016. It leaves the rest of Count V in place.
3. Specific Remedy Counts
Beyond the seven counts alleging substantive legal claims, the Complaint contains two
counts requesting that the Court grant specific remedies to assist Plaintiffs in their quest to gain
ownership of EIC. Count VIII seeks “an order declaring that Butler and Price are shareholders
of EIC, in accordance with the oral transfer of company ownership made to Butler and Price by
Augustine, as well as the amount and value of those shares” under the Declaratory Judgment
Act, 28 U.S.C. § 2201, and Federal Rule of Civil Procedure 57. 3d Am. Compl. ¶¶ 112–13.
Count IX in turn seeks a Court-ordered accounting of EIC’s financial records so that Plaintiffs
can determine how much of EIC they own and what their stakes are worth. Id. ¶¶ 114–16.
a. Declaratory Relief
Defendants argue that a separate count seeking declaratory relief is duplicative of the
other counts because it would declare relief already “subsumed in [the] other claims.” Rodriguez
v. Lab. Corp. of Am. Holdings, 13 F. Supp. 3d 121, 128 (D.D.C. 2014). Under the Declaratory
Judgment Act, the Court may resolve “a case of actual controversy within its jurisdiction” by
“declar[ing] the rights and other legal relations of any interested party seeking [a] declaration,
whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a). After ensuring that the
claim states an actual case or controversy, MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118,
127 (2007), the Court “must still consider whether it is appropriate to exercise its discretion to
grant declaratory relief.” Gibson v. Liberty Mut. Grp., Inc., 778 F. Supp. 2d 75, 78 (D.D.C.
2011).
“In the D.C. Circuit, two criteria are ordinarily relied upon: 1) whether the judgment will
serve a useful purpose in clarifying the legal relations at issue, or 2) whether the judgment will
38
terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the
proceeding.” Glenn v. Fay, 222 F. Supp. 3d 31, 36 (D.D.C. 2016) (citing President v. Vance,
627 F.2d 353, 364 n.76 (D.C. Cir. 1980)). “Ultimately, the purpose of the Declaratory Judgment
Act is to ‘allow the uncertain party to gain relief from the insecurity caused by a potential suit
waiting in the wings.’” Id. (quoting The Hipage Co., Inc. v. Access2Go, Inc., 589 F. Supp. 2d
602, 615 (E.D. Va. 2008) (quoting United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 494 (4th
Cir. 1998))).
Regardless of whether the case satisfies the first criterion, it certainly does not satisfy the
second one. Unlike in Gibson, Count VIII does not pose distinct legal or factual questions but
merely incorporates the questions already raised in Count I. In Gibson, there was “no dispute
over the existence of [an insurance] policy or the nature of the parties’ legal relationships;” the
only questions were “purely factual ones regarding proper compliance with the policy.” 778 F.
Supp. 2d at 79. Those were not legal questions appropriate for a declaratory judgment but rather
“purely factual ones . . . best reserved for the finder of fact.” Id. Here, in contrast, the Parties
dispute the existence of the contract and the legal nature of their relationship. See supra Section
III.A.1.
It’s conceivable that a declaration, on its own, would serve to clarify the nature of the
relationship and the resulting duties of the Parties. But judgment on the substantive counts
would defeat the need for a declaration. As in Gibson, “[i]f Plaintiffs succeed in proving that
Defendants [breached the contract], then Plaintiffs will prevail under [the separate breach-of-
contract count].” 778 F. Supp. 2d at 80. The counts for declaratory relief, therefore, would “add
nothing to [Plaintiffs’] suit.” Id. The Court dismissed those counts and permitted the breach-of-
contract count to move forward. Id. This case is no different. Judgment on Count I (breach of
39
contract) will clarify the nature of the Parties’ relationship and permit them (and the Court) to
determine who owns what percentage of EIC. Declaratory relief would serve no additional
purpose, so the Court dismisses Count VIII.
b. Accounting
The Complaint’s final count requests that the Court order an accounting “of corporate
assets and financial records” to permit “Plaintiffs, as owners of EIC, to know the percentage of
their ownership interest and the value thereof.” 3d Am. Compl. ¶¶ 114–16. Defendants argue
that equitable requests for an accounting cannot be stand-alone claims; if anything, accounting is
merely one available form of relief at the end of litigation once the Court has determined liability
on the contract claims. See Mot. at 17.
“An accounting is ‘a detailed statement of the debits and credits between parties arising
out of a contract or fiduciary relation.’” Bates v. Nw. Human Servs., Inc., 466 F. Supp. 2d 69,
103 (D.D.C. 2006) (quoting Union Nat’l Life Ins. Co. v. Crosby, 870 So. 2d 1175, 1178 n.2
(Miss. 2004)). A request for an accounting is “not, strictly speaking, . . . a stand-alone claim at
all.” Haynes v. Navy Fed. Credit Union, 52 F. Supp. 3d 1, 10 (D.D.C. 2014) (internal quotation
omitted). But it is not unusual to leave such counts in place at the Motion-to-Dismiss stage and
then to resolve them only at summary judgment or later, depending on whether Plaintiffs can
establish both liability on the breach of contract and insufficiency of legal damages. See Bates,
466 F. Supp. 2d at 104 (denying motion to dismiss accounting count); Armenian Assembly of
Am., Inc. v. Cafesjian, 692 F. Supp. 2d 20, 48 (D.D.C. 2010) (denying summary judgment on
accounting claim after denying judgment on contract claim); Haynes, 52 F. Supp. 3d at 10
(granting summary judgment for Defendant on accounting claim, along with judgment on
40
breach-of-contract claim, because accounting “is a remedy premised on a breach of fiduciary
duty or contract that Plaintiff does not establish”).
At this time, it is unclear whether an accounting might be necessary to determine who
owns what percentages of EIC. It may be the case that Plaintiffs will not be able to establish
liability, obviating the need for an accounting. But if Plaintiffs are successful on their other
claims, a court-ordered accounting may be the only way to determine the company’s ownership.
That is especially appropriate because Plaintiffs have alleged that Augustine hid the company’s
books from them to keep them in the dark about both general financial status and their own
equity. 3d Am. Compl. ¶¶ 9, 27–28; see also Cafesjian, 692 F. Supp. 2d at 48 (involving dispute
over access to corporate records); Bates, 466 F. Supp. 2d at 103 (citing P.V. Props., Inc. v. Rock
Creek Vill. Assocs., 549 A.2d 403, 409 (Md. Ct. Spec. App. 1988) (“An accounting may be had
where one party is under an obligation to pay money to another based upon facts and records
which are known and kept exclusively by the party to whom the obligation is owed.”)).
B. Motion to Disqualify Defense Counsel
Some months after Defendants moved to dismiss the operative Complaint, Plaintiffs
responded with a Motion to Disqualify Defendants’ Counsel, William Cusmano. See generally
DQ Mot. They argue that Cusmano’s continued representation in this matter violates D.C. Rules
of Professional Conduct 1.7, 1.9, 1.13, 1.18, and 3.7. Id. at 1–2. Plaintiffs contend that those
alleged violations, taken together, establish three reasons for disqualifying Cusmano: (1)
Cusmano represented Butler in his individual capacity in the early stages of this ownership
dispute, so that he cannot now represent Augustine on the other side of the same controversy, see
id. at 13–17; (2) Cusmano allegedly represented the three purported owners together as a group
(in his capacity as EIC’s outside counsel) and therefore is barred from representing the company
against two of its alleged shareholders, see id. at 11–13; and (3) Plaintiffs intend to subject
41
Cusmano himself to discovery, including a deposition, and they contemplate calling him as a fact
witness at trial, so he cannot represent a party in the same litigation. See id. at 17–20.
1. Plaintiffs Have Not Demonstrated that Cusmano was Butler’s Attorney
According to Plaintiffs, EIC had three owners in 2017: Augustine, Butler, and Price. See
Butler Decl. ¶ 7. 6 It is undisputed that Butler was the first of the three to reach out to Cusmano
regarding the brewing dispute over Butler and Price’s role within the company. Id. ¶¶ 7–9;
William Cusmano Decl. ¶¶ 6, 8–9, ECF No. 40-2. Butler states that before Cusmano brought in
Price and Augustine for further discussions, Butler and Cusmano had private conversations in
which Butler laid out his position on the matter and sought Cusmano’s legal advice. Butler Decl.
¶¶ 10–15. According to Butler, Cusmano heard him out and expressed surprise that there was
any uncertainty regarding Butler and Price’s partial ownership of EIC. Id. ¶ 10. Cusmano
recommended that Butler raise the matter with Augustine and, in the event the Parties could not
reach a solution, that Butler and Price pursue legal remedies. Id. ¶ 11. Butler insists that he
shared confidential information about his position with Cusmano. Id. ¶ 15. 7
For his part, Cusmano admits to speaking individually with Butler generally but denies
that he ever received confidential information or gave legal advice to Butler as an individual.
6
The Parties attached several exhibits to their briefs on the Motion to Disqualify, including
declarations and records of correspondence between Cusmano and the Parties dating to 2017.
The Court did not consider those materials in its decision on the Motion to Dismiss so as to avoid
converting the Motion into a Motion for Summary Judgment. See Fed. R. Civ. P. 12(d).
7
At the hearing on the Motion, Plaintiffs indicated that the confidential information included
discussions on the possibility of merging EIC with other companies Butler and Price controlled.
The Parties have relied on emails between and among the Parties discussing those companies and
their interactions with EIC, so it is unclear to the Court whether that information (or any other
information from those allegedly privileged conversations) ever was or would still be subject to
attorney-client privilege if Cusmano and Butler had indeed created an attorney-client
relationship.
42
Cusmano Decl. ¶¶ 4–5. In Cusmano’s view, he was consulting with an employee of a company
that regularly engaged his services, and he believed that he was acting as EIC’s counsel, not as
Butler’s personal attorney. Id.
Shortly thereafter, Cusmano began to facilitate discussions among the three purported
partners to find a solution. Butler Decl. ¶¶ 17–18. The four traded a series of emails in which
Cusmano attempted to find vehicles for structuring a transfer of shares from Augustine to Butler
and Price in exchange for cash payments, but the Parties failed to reach an agreement and
negotiations broke down. See generally Email Correspondence, ECF Nos. 39-4, 39-5. Cusmano
then dropped out of the matter for two years, reappearing after the District Court in Louisiana
transferred the matter to this Court, when EIC and Augustine engaged Cusmano to represent
them in litigation. See, e.g., Def. EIC Corp.’s Answer to Pls.’ 3d Am. Compl., ECF No. 22 (filed
by William Cusmano).
Lawyers who practice before this Court must comply with the District of Columbia Rules
of Professional Conduct. See LCvR 83.15(a). Rule 1.9 provides that
A lawyer who has formerly represented a client in a matter shall not
thereafter represent another person in the same or a substantially
related matter in which that person's interests are materially adverse
to the interests of the former client unless the former client gives
informed consent.
In Plaintiffs’ eyes, Cusmano formerly represented Butler in his individual capacity in preparation
for negotiations with Augustine over EIC’s ownership—the same question underlying this suit—
and Cusmano is now in a position to take advantage of confidential information Butler conveyed
to him for Defendants’ benefit. See DQ Mot. at 13–14. Defendants (and Cusmano) argue that
Cusmano was EIC’s counsel throughout the events in question and that he made that fact clear to
everyone involved in the matter, so he cannot now be precluded from continuing his
43
representation of EIC in the same matter. See Defs.’ Mem. in Opp’n to Pls.’ Mot. to Disqualify
Counsel (“DQ Opp’n”) at 10–20, ECF No. 40-1.
Plaintiffs bear the burden of establishing the existence of a prior attorney-client
relationship and that “the current litigation is substantially related to the prior representation.”
Derrickson, 541 A.2d at 151–52; see also D.C. R. Prof’l Conduct 1.9, cmt. 2 (incorporating
“substantial relationship” test expressed in Brown v. D.C. Bd. of Zoning Adjustment, 486 A.2d 37
(D.C. 1984) (en banc)). In particular, Plaintiffs must demonstrate that Butler and Cusmano,
“explicitly or by their conduct, manifest[ed] an intention to create the attorney[-]client
relationship.” In re Ryan, 670 A.2d 375, 379 (D.C. 1996) (quoting Nolan v. Foreman, 665 F.2d
738, 739 n.3 (5th Cir. 1982)). Courts consider various factors in evaluating this question,
including “whether the client perceived that an attorney-client relationship existed, whether the
client sought professional advice or assistance from the attorney, whether the attorney took
action on behalf of the client, and whether the attorney represented the client in proceedings or
otherwise held h[im]self out as the client's attorney.” Teltschik, 683 F. Supp. 2d at 45.
“[N]either a formal agreement nor the payment of fees is necessary to create a[] . . .
relationship,” but the presence of either factor is indicative. Derrickson, 541 A.2d at 153.
Here, Butler avers that he sought professional advice from Cusmano, who brought his
concerns to Augustine and advocated on his behalf. See Butler Decl. ¶¶ 12–14. It is undisputed
that Butler did not pay Cusmano and that there was no formal representation agreement. Id.
¶ 17; DQ Opp’n at 20. It is conceivable that Butler may have subjectively understood himself to
be engaging Cusmano as his personal attorney for some short period of time, though even he
acknowledges that only a few days later Cusmano “transitioned to representing EIC” when
Cusmano began brokering a deal between all Parties. Butler Decl. ¶ 17.
44
But “the attorney-client relationship does not rest on the client’s view of the matter;
rather, [the Court] consider[s] the totality of the circumstances to determine whether an attorney-
client relationship exist[ed].” In re Fay, 111 A.3d 1025, 1030 (D.C. 2015) (citing In re Lieber,
442 A.2d 153, 156 (D.C. 1982)). Cusmano’s conduct upon being engaged by Butler (as Butler
himself describes it), while somewhat consistent with the existence of an individual attorney-
client relationship, is equally consistent with Cusmano’s role as EIC’s counsel. Butler admits
that it was he who first hired Cusmano as EIC’s outside counsel in 2014 and who directed the
course of Cusmano’s corporate representation. Butler Decl. ¶¶ 2–5. Augustine, in turn, was
responsible for handling payments. Id. ¶ 6. The same course of events occurred two other times
following Cusmano’s 2014 representation and before Butler contacted Cusmano (for the fourth
time) in 2017 about this matter. Id. ¶¶ 4.
Contemporaneous documentary evidence confirms Defendants’ version of the events.
Butler avers that he initiated discussions on the issue with Cusmano in September 2017, just as
he had in earlier instances when EIC retained Cusmano’s legal services. Id. ¶ 7. The first
document related to this event is an email dated September 6, 2017, in which Cusmano related
that he had had private conversations with both Butler and Augustine to feel out their respective
positions and proposed “various scenarios for [Butler] buying out [Augustine’s] ownership
interest in EIC.” William Cusmano’s Email of Sep. 6, 2017, ECF No. 39-4 at 2. Tellingly, in
concluding that short message, Cusmano indicated that “[Augustine] just called and said that he
wanted to talk more to [Butler] before these plans proceed, and he instructed me to stand down
for now.” Id. (emphasis added). This phrasing indicates that it was Augustine, not Butler, who
was directing Cusmano’s activities—behavior that is entirely inconsistent with the notion of
Cusmano acting as Butler’s attorney.
45
This correspondence continued for another several days until negotiations broke off on
September 15. See generally Email Correspondence, ECF No. 39-5. There is no indication in
any of these documents that Cusmano represented Butler against Augustine; his position at the
time appears to have been that of a neutral broker trying to arrange a transaction that would
benefit all involved players. Id. And when Cusmano wrote up a short summary of the Parties’
positions and scenarios that might accomplish the Parties’ goals, attaching the document to an
email sent on September 11, 2017, he included the following disclosure at the outset:
As an introductory reminder, Cusmano is the lawyer for the
company. Assuming that one goal of the transaction is to leave EIC
intact, Cusmano likely can represent the company and paper the
deal. The individual principals should consider their own counsel
and particularly [Augustine], since his status will change more than
anyone’s. Separate counsel for [Butler] or [Price] probably is less
of an issue, since they will be principals of the surviving entity, but
no one involved is discouraged from obtaining his own counsel.
William Cusmano’s Ltr. of Sep. 13, 2019 at 4–5, ECF No. 40-3 (emphasis added) (providing
original attachment to Plaintiffs’ counsel); see also William Cusmano’s Email of Sep. 11, 2017,
ECF No. 39-5 at 7 (attaching talking points and describing attachment). This information, given
to Butler no more than ten days after he purported to establish an attorney-client relationship
with Cusmano, should have removed any confusion over Cusmano’s role.
While Butler insists that Cusmano represented both Butler as an individual and the
company at different points in time, he has provided no evidence of such a relationship beyond
his own subjective impression, which is insufficient to establish the relationship’s existence—at
least not enough to support the extraordinary remedy of disqualification. See Headfirst Baseball,
LLC v. Elwood, 999 F. Supp. 2d 199, 210 (D.D.C. 2013) (“[The Parties’] declarations and their
content that support the existence of the relationship provide far less than what other courts have
accepted as evidence establishing an attorney-client relationship.”).
46
Finally, Plaintiffs briefly argue that even if Butler and Cusmano did not form a privileged
relationship, Rule 1.18 covers situations in which “a lawyer . . . has had discussions with a
prospective client” and has “received a confidence or secret from the prospective client.” D.C.
R. Prof’l Conduct 1.18(b), (c). The Rule forbids the lawyer from “represent[ing] a client with
interests materially adverse to those of [the] prospective client in the same or a substantially
related matter.” Id. 1.18(c). Plaintiffs liken Butler and Cusmano’s initial discussions to those of
a prospective client seeking out an attorney, even if the relationship did not later arise. See DQ
Mot. at 15–16. But that argument assumes that Butler was a potential client rather than an
existing client in his capacity as an EIC employee (or owner). The totality of the circumstances,
as discussed above, indicates that Cusmano was the corporation’s lawyer, and that his
interactions with Butler occurred in the course of that representation. Rule 1.18 therefore does
not apply to the situation.
It is sometimes true that “in the absence of warning from the lawyer, a constituent of an
organizational client may reasonably rely on the lawyer’s apparent willingness to provide legal
services for the constituent in addition to the entity, thus creating an implied client-lawyer
relationship.” Restatement (Third) of the Law Governing Lawyers § 14, cmt. f (Am. Law. Inst.
2000). But the overwhelming evidence in the record shows that Cusmano repeatedly gave such
warnings and that, within a few days of initial discussions, Cusmano and Butler included Price
and Augustine on the conversation and shared with them the same information that they had
previously discussed between themselves. See Cusmano Decl. ¶ 12; Cusmano’s Email of Sep. 6,
2019. There is no indication that Cusmano learned any private information that remained private
for more than a few days and that would be useful to Defendants in this litigation.
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The totality of the circumstances, based on the evidence the Parties submitted, does not
demonstrate the existence of an attorney-client relationship between Butler and Cusmano at any
time leading up to the genesis of this dispute, or any type of relationship approximating an
attorney-client relationship. The Court therefore cannot disqualify Cusmano on those grounds.
Because it finds that no relationship existed, there is no need to reach the questions of whether
the matters are substantially related or whether the Parties’ positions are materially adverse.
2. The Court Cannot Determine Whether Cusmano Currently Represents
Adverse Parties
Plaintiffs next argue that Cusmano cannot now represent EIC against Butler and Price
because Butler and Price were and still are themselves partial owners of EIC. See DQ Mot. at
11–13. In other words, having advised all of EIC’s owners at an earlier period in this dispute,
Cusmano “may not pick sides” now and represent the corporation and one of its owners against
the other two. Id at 12–13 (citing Griva v. Davidson, 637 A.2d 830, 844 (D.C. 1994)).
Rule 1.7 provides that
(a) A lawyer shall not advance two or more adverse positions in the
same matter.
(b) Except as permitted by paragraph (c) below, a lawyer shall not
represent a client with respect to a matter if:
(1) That matter involves a specific party or parties and a position
to be taken by that client in that matter is adverse to a position taken
or to be taken by another client in the same matter . . . ;
...
(c) A lawyer may represent a client with respect to a matter in the
circumstances described in paragraph (b) above if
(1) Each potentially affected client provides informed consent to
such representation after full disclosure of the existence and nature
of the possible conflict and the possible adverse consequences of
such representation; and
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(2) The lawyer reasonably believes that the lawyer will be able to
provide competent and diligent representation to each affected
client.
D.C. R. Prof’l Conduct 1.7. There is no question that Plaintiffs do not consent to any dual
representation, so the Court must determine whether Cusmano is currently engaged in
representing one set of his clients against another set. Rule 1.13 lays out further guidance in the
context of organizational relationships:
A lawyer representing an organization may also represent any of its
directors, officers, employees, members, shareholders, or other
constituents, subject to the provisions of Rule 1.7. If the
organization's consent to the dual representation is required by Rule
1.7, the consent shall be given by an appropriate official of the
organization other than the individual who is to be represented, or
by the shareholders.
Id. 1.13(d). Together with Rule 1.7, Rule 1.13 “mandates an absolute prohibition of dual or
multiple representation when the lawyer would represent [shareholders] with adverse positions
[to the organization] in the same matter.” Griva, 637 A.2d at 843 (internal quotations omitted).
This issue has arisen with some frequency in the case law. In Griva, the court had to
determine, “when a law firm that represents a three-member partnership also represents two of
the individual partners in matters that pertain to the partnership, [whether] the third partner [may]
obtain . . . disqualification of the law firm from representing the partnership?” Id. at 832. A law
firm assisted three siblings in forming a family partnership to manage their father’s interest in an
apartment building. Id. at 833. The same firm also assisted the three in guardianship and estate
planning services for the elderly father. Id. After forming the partnership, the firm represented
the new entity in its business dealings and expressly represented two of the three siblings in their
interests in the partnership, as well as in unrelated personal matters. Id. The third sibling
obtained separate counsel to represent her own interests in the partnership. Id. at 833–34.
Management disputes arose, and Griva (the third sibling) determined that the partnership’s
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counsel was stacking the deck against her in partnership affairs, withholding documents, and
planning to dissolve the partnership to permit the other siblings to control the business. Id. at
834. She sued both her siblings, their lawyers, and the partnership, trying to disqualify the firm
from representing the partnership and trying to get access to the firm’s documents so that she
could see what the partnership was doing. Id. at 834–35.
The Court of Appeals found that it could not determine whether the Partnership’s
attorneys had violated any rules of professional conduct because of genuine issues of material
fact. Id. at 844. The case involved a partnership agreement that included a “unanimous consent”
clause, such that the partnership could not consent to dual representation of both the partnership
and the two siblings without the third sibling’s affirmative vote. Id. at 840. There were fact
issues about whether and to what arrangement she had consented, so the Court of Appeals could
not answer the question without a trial. Id. at 845–46.
Headfirst Baseball, a dispute involving two officials of a limited liability company that
ran youth baseball camps, bears an even stronger resemblance to this case. 999 F. Supp. 2d at
203. When the officials founded the company, they relied on one founder’s father, a lawyer at
Williams & Connolly, and other attorneys from the firm to handle the formation. Id. at 204. The
firm’s attorneys then acted as the company’s outside counsel, allegedly providing both corporate
and personal legal advice to both founders. Id. But when a dispute later arose between the
founders, Williams & Connolly represented both the company and its partner’s son in that suit
against the other founder, Elwood (though the father and another attorney involved in the
company’s formation did not participate personally). Id. at 204. Elwood moved to disqualify the
firm, arguing in part that it had once advised both partners along with the company, so it could
not then represent the company and one partner against the other. Id.
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Factual uncertainties precluded a concrete finding that warranted disqualification. Id. at
208. First, because there was no documentary evidence showing that Elwood was a member of
the party LLC, he claimed (without evidence) that he was instead a partner in the “Headfirst
Partnership,” an unincorporated but related entity that the other official denied existed. Id. at
207. Second, there was no correspondence in the record showing any communications between
Williams & Connolly lawyers and Elwood until after the purported representation—the first
relevant documents were declarations by the Parties prepared for litigation. Id. at 210. For those
two reasons, the Court concluded that Elwood could not prove the existence of an attorney-client
relationship between Williams & Connolly and him, so the Court could not disqualify the
attorneys for violating it. Id. at 208. The Court denied the motion without prejudice, allowing
for the fact that the record at summary judgment might change the analysis. Id.
Taken together, Griva and Headfirst suggest that, in order for the Court to determine
whether Cusmano is violating Rules 1.7 and 1.13 by representing EIC and Augustine in this
litigation, the Court would first need to determine whether Butler and Price were or still are
owners and officers of EIC. But to do that, the Court would need to decide the fundamental
issues in the case: whether there was a contract, whether Augustine breached the contract, and
whether Butler and Price are entitled to some share of EIC. Of course, that’s impossible at the
Motion-to-Dismiss stage. By the time the Court knows the answers to those questions, the case
will be over and it will be irrelevant whether Cusmano may be permitted to represent
Defendants.
“The scant nature of the existing factual record does not square with the high burden
[Plaintiffs] must satisfy to disqualify [Defendants’] counsel of choice. While discovery and
further development of the facts in this case might ultimately support a finding of a Rule
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1.7 violation, [Plaintiffs] may not rely on that Rule as a basis for disqualifying [Cusmano] as
[Defendants'] counsel in this case at this time. The Court must therefore deny [Plaintiffs’] Rule
1.7 challenge without prejudice. If evidence later comes to light that would counsel in favor of
disqualification, [Plaintiffs] may re-file their motion.” Headfirst, 999 F. Supp. 2d. at 208.
3. The Court Cannot Determine Whether Cusmano Will Be a Necessary Trial
Witness
Finally, Plaintiffs contend that Cusmano cannot serve as litigation counsel because he is a
witness to events at the heart of the dispute and will undoubtably be called to testify about what
he saw and heard. See DQ Mot. at 17–20. Rule 3.7 provides:
(a) A lawyer shall not act as advocate at a trial in which the lawyer
is likely to be a necessary witness except where:
(1) The testimony relates to an uncontested issue;
(2) The testimony relates to the nature and value of legal services
rendered in the case; or
(3) Disqualification of the lawyer would work substantial hardship
on the client.
D.C. R. Prof’l Conduct 3.7(a). At this point in the case, two portions of the rule counsel against
disqualification on this basis. First, the rule precludes an attorney from “advocat[ing] at a trial.”
Id. This case is nowhere near trial; on its face, the rule does not prohibit Cusmano from
representing Defendants in the pre-trial stages of litigation. Second, the rule bars attorneys
whose testimony at trial is “necessary.” Id. At this early stage, no one knows whether
Cusmano’s testimony will be “necessary” to the conduct of a trial (or whether a trial will ever
occur). Plaintiffs raise several valid reasons for why they intend to call Cusmano as a trial
witness, but the Court cannot know how those rationales may shift between now and then.
Finally, the rule provides an exception where “[d]isqualification of the lawyer would
work substantial hardship on the client.” Id. Given that the rule does not require disqualification
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at this time, the Court concludes that disqualification would do just that to Defendants. At a
hearing, the Court informed Augustine himself that Cusmano’s potential necessity at trial is
foreseeable and that he should be prepared to find another trial lawyer if that scenario comes to
pass. Moreover, the Court will likely permit Plaintiffs to depose Cusmano in the normal course
of discovery. But the Court will not disqualify Cusmano—yet.
IV. Conclusion
The Third Amended Complaint timely and adequately alleges that a contract existed and
that Defendants breached it, or in the alternative, that Augustine made some promise and that
Plaintiffs relied on it to their detriment. An accounting may be necessary to figure out who owns
what. The Complaint also adequately alleges invasion of privacy for appropriation of likeness
and fraudulent filing of tax returns, at least in part. But it does not state a claim for fraudulent
inducement or a violation of the Stored Wire and Communications Act, and there is no need for a
declaratory judgment. Finally, the established facts do not warrant defense counsel’s
disqualification at this stage. Accordingly, it is
ORDERED that Defendants’ Motion to Dismiss the Third Amended Complaint is
GRANTED IN PART and DENIED IN PART. It is further
ORDERED that Plaintiffs’ Motion to Disqualify Defendants’ Counsel is DENIED
without prejudice.
An Order will be entered contemporaneously with this Memorandum Opinion.
DATE: May 6, 2020
CARL J. NICHOLS
United States District Judge
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