The emoluments clauses litigation, part 5 -- problems with the complaints in CREW v. Trump

Days after President Trump's inauguration in January 2017, Citizens for Responsibility and Ethics in Washington (CREW) brought suit against the president under the foreign emoluments clause. One of us criticized CREW's initial theory of standing - premised on the organization's diversion of resources to investigate Trump's business transactions - as a self-inflicted injury. If CREW had standing, then so did the respondents in Clapper v. Amnesty International USA. To remedy this defect, in April, CREW filed its first amended complaint. The amended complaint added two parties: Restaurant Opportunities Centers United (ROC), an organization with members who are restaurant employees, and Jill Phaneuf, who "seeks to book embassy functions" and other events involving foreign governments in the District of Columbia. Both new plaintiffs claimed an injury based on a competitor theory of standing. In May - without any noted objection by the government - CREW filed a second amended complaint, adding yet another party: Eric Goode. Beyond standing and justiciability problems, the complaints do not demonstrate that either ROC or Goode are authorized to bring this litigation.

Eric Goode: Is he the "owner" of hotels and restaurants?

According to the second amended complaint:

Plaintiff Eric Goode resides in New York, New York. Mr. Goode is the owner of several celebrated hotels, restaurants, bars, and event spaces in New York. These include the Maritime Hotel located in Chelsea; the Bowery Hotel and Ludlow Hotel, both in the Lower East Side; and the Jane Hotel in the Meatpacking District. Among the restaurants that Mr. Goode owns - several of which are located in hotels - are the Park, Waverly Inn, and Gemma, the last of which is located in the Bowery Hotel. Mr. Goode's hotels and restaurants have attracted multiple foreign government clients and events, and have also hosted U.S. government officials and state officials traveling on official business and thus paying with government funds …

Plaintiff Eric Goode is an individual resident of New York, New York. Mr. Goode is the owner of several celebrated hotels, restaurants, bars, and event spaces in New York. These include the Maritime Hotel located in Chelsea; the Bowery Hotel and Ludlow Hotel, both in the Lower East Side; and the Jane Hotel in the Meatpacking District. Among the restaurants that Mr. Goode owns are the Park, Waverly Inn, and Gemma, the last of which is located in the Bowery Hotel.

We have emphasized "the owner" and "owns," because these statements are true only in the colloquial sense of the terms. For example, if you own a minority of shares of a publicly traded company, you can describe yourself as "an owner" of that entity, but you are not "the owner," nor do you "own" the company. The distinction of whether Goode is "an owner" or "the owner," as opposed to a part-owner, is not semantic. Under well-established case law, individual members of commercial entities, such as a limited liability company, generally cannot bring suit on behalf of the organization, unless they are duly authorized to do so.

The U.S. Court of Appeals for the 7th Circuit recently explained this doctrine:

Here, the district court granted Texor's motion for summary judgment because Rawoof ran afoul of a particular subset of third-party standing doctrine known as the shareholder-standing rule. This rule holds that a shareholder generally cannot sue for indirect harm he suffers as a result of an injury to the corporation… The rule does not apply if the corporation's management has refused to pursue the action for reasons unrelated to good-faith business judgment…. Another exception to the prohibition on shareholder suits allows a shareholder to pursue an action originating from an injury to the corporation if he has suffered a direct, personal injury independent of the derivative injury common to all shareholders…. Finally, a shareholder may sue to vindicate an injury even where the corporation may bring the action if "a special contractual duty exists between the wrongdoer and the shareholder." Rawoof acknowledges the rule against shareholder standing but argues he is nonetheless entitled to bring this suit in his own name. He makes no effort, however, to bring himself within any of the recognized exceptions we have just listed. Instead, he invokes the agency doctrine applicable to liability issues when an agent acts for an undisclosed principal.

Based on publicly available records, it appears Goode is only a part-owner of the various hospitality establishments described in the second amended complaint. For example, the Observer reported that Sean MacPherson partnered with Goode to open the Ludlow Hotel as well as the Park restaurant. The New York Times noted that MacPherson and Goode are "behind the revamped Waverly Inn," as well as the Bowery Hotel. Likewise, New York magazine observed that Goode and MacPherson are behind the Jane hotel, the Maritime Hotel and the Lafayette House. Eater magazine boasted that the Gemma restaurant is "run by Eric Goode and Sean MacPherson of, among others …" Based on these reports, it would appear that all of the hotels and restaurants mentioned in the second amended complaint are not owned solely by Goode but are joint enterprises with his business partner, MacPherson.

Further, in Campos v. Goode, a class of workers at the Gemma restaurant brought a laborp suit in the Southern District of New York against Goode, MacPherson and a series of LLCs. The second amended class-action complaint in Campos v. Goode - drafted and redrafted after extensive research into the corporate structure - explains that "Defendants Eric Goode, Sean MacPherson, Garden Café Associates LLC, Sulcata Corp, Bowery F&B LLC, Bowery Hotel LLC, and BD Stanhope, LLC operate as part of a single integrated enterprise" (paragraph 30). In her opinion, Magistrate Judge Debra Freeman observed that Gemma and other "restaurants are owned and operated by Defendants Eric Goode, Sean MacPherson, and several corporate entities, including Defendants Garden Café Associates LLC, Sulcata Corp., Bowery F & B LLC, Bowery Hotel LLC, and BD Stanhope LLC." Campos v. Goode, No. 10 CIV. 0224 DF, 2011 WL 9530385, at *1 (S.D.N.Y. Mar. 4, 2011). Campos v. Goode is recent authority within the Southern District of New York that the plaintiffs have to account for.

These facts were not difficult to find. Indeed, the Post story that announced the second amended complaint, in three places referred to Goode as "part-owner" of New York hotels and restaurants. Pulitzer Prize winner David A. Fahrenthold was careful enough not to state that Goode was the sole "owner" of these hotels. The second amended complaint, however, does not make this critical distinction.

If Goode were the sole owner of any of these entities, he could direct the entities to bring these suits, albeit in the name of the entities. But according to readily available records, it appears that he is only a part-owner of the entities that actually own these establishments. There is absolutely nothing in the second amended complaint indicating that he was authorized to bring suit on behalf of these commercial entities or that the claim is a derivative one rather than a direct one. It is not enough that Goode (purportedly) suffers an injury from reduced profits and distributions from the commercial entity involved because of alleged competitive injury with Trump businesses. The suits, if they can be brought at all (and they can't), must be filed by the commercial entity actually suffering the alleged competitive harm.

ROC: Is it the owner of the Colors restaurant?

There are additional problems with CREW's pleading. ROC asserts an injury on behalf of "'COLORS' restaurant," which, according to the second amended complaint, "competes with restaurants owned by Defendant." Here, too, it isn't clear that ROC is the real party in interest. A search of the New York State Liquor Authority's database for "Colors Restaurant" lists seven principals: Fekkah Mamdouh, Sarumathi Jayaraman, Sarita Gupta, Jennifer Herman, Morgan Simon, Imar Hutchins and finally, Restaurant Opp Cntr United. The New York Department of State also lists an entry for Colors NY Restaurant LLC. The second amended complaint in CREW v. Trump simply states that "ROC United also owns and operates the restaurant COLORS in New York City." The second amended complaint does not specify the ownership stakes of any other reported principals or entities, nor does it explain the relationship between the (purported) injury suffered by Colors restaurant and ROC United.

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The Justice Department failed to raise these arguments under Rule 17. No matter. One court, equating the shareholder-standing doctrine to a "nonconstitutional lack of standing," concluded that a judge "can notice an error and reverse on the basis of it even though no party has noticed." During oral arguments on Oct. 18, the district court should inquire about alleged injuries to ROC United and Goode.