Chase Bank USA, N.A. v. Unifund Portfolio A L.L.C., No. 1:2009cv09795 - Document 31 (S.D.N.Y. 2010)

Court Description: OPINION: Based on the conclusions set forth above, the motion to dismiss the AC for breach of contract is denied, and the motion to dismiss the claim for damages is granted. The amended complaint is dismissed. Unifund is also granted reasonable attorneys' fees and costs under Section 28. (Signed by Judge Robert W. Sweet on 9/10/2010) (jpo)

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Chase Bank USA, N.A. v. Unifund Portfolio A L.L.C. Doc. 31 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK --x CHASE BANK USAf N.A'f 09 Civ. 9795 Plaintiff, OPINION -against UNIFUND PORTFOLIO A LLC, Defendant. --x A P PEA RAN C E S: At for Plaintiff STAGG, TERENZI, CONFUSIONE & WABNIK, LLP 401 Franklin Avenue, Suite 300 Garden City, New York 11530 By: Thomas E. Stagg, Esq. At for Defendant ZUKERMAN GORE BRANDEIS & CROSSMAN, LLP 875 Third Avenue New York, NY 10022 By: John K. Crossman, Esq. Edward L. Powers, Esq. USDCSDNY DOCUMENT ELECfRONICALLY FILED DOC#: DATE F'-Y Dockets.Justia.com Sweet, D.J. The defendant Unifund Portfolio A LLC (IlUnifund ll or the "Defendant ll ) has moved pursuant to Rule 12(b)6 1 Fed. R. Civ. P. to dismiss the amended complaint of the plaintiff Chase Bank USA I N.A. (IlChase l1 or the "Plaintiff"). Based on the conclusions set forth below the motion is denied in part and granted in part l and the amended aint is dismissed. This action arises a 28-page Credit Card Account Purchase Agreement between ies dated as of January 11 2008 (the "Agreement") and accounts offered by Chase in July 2008. se that batch of accounts. unifund chose not to response l Chase cancelled careful and able counsell Agreement. In Despite the work of se sophisticated parties now disagree as to the meaning and effect of the Agreement, one of a series negotiated over a period of six years. recover $11 million l Chase Unifund seeks costs and counsel resulting from its Prior Proceedings 1 to s On November 25, 2009, Chase filed its original complaint in this action. Unifund timely moved to dismiss pursuant to Rule 12(b) (6). served and filed Rather than oppose the motion, Chase s Amended Complaint ("AC million in damages. II ), seeking $11 The instant motion was heard and marked fully submitted on June 9, 2010. The Amended Complain t ( II AC II ) Chase was and is a national banking association, federally chartered and existing under the laws of the United States, with its main 1). fice in the State of Delaware. (AC Unifund was and is a limited liability company organized under the laws of Ohio, with a principal place of business at 10625 Techwood Circle, Cincinnati, Ohio. (AC 2) . Chase operates MasterCard and Visa credit card programs, which may include revolving credit products other than credit cards, pursuant to which accounts are established or maintained for cardholders. When a customer is delinquent on a credit card account, Chase attempts to collect on the debt, first internally, and then after charge-off, through outside agencies. Typically, if collection is unsuccessful by third2 party collectors, Chase will sell it to a debt purchaser, such as Unifund. (AC 5). Most sales of charged-off debt occur in large pools. Some of these pools are sold pursuant to long-term contracts, called "forward flow" contracts. Forward-flow contracts are attractive to buyers because they provide a reliable supply of a company's debt pool and are attractive to sellers because they provide a reliable way to remove debt from their books. 6). (AC The pool of charged-off debt sold in a forward-flow contract sells at a steep discount to its face value, usual for cents on the dollar because the accounts are charged-off. The accounts that are collected usually require some expenditure of costs. (AC 7) . Prior to purchasing charged-off accounts, a buyer such as Unifund must ascertain whether the price of the debt will low it to make a profit! taking into consideration factors such as who the issuer is, the geographic distribution of the accounts! the laws of the states where the accounts are located, the terms and conditions of the particular debtor accounts! how old the accounts are! and how recently payments were made and how many payments were made on an account. 3 (AC 8). Over the past six years, Chase and Unifund have negotiated and entered into various contracts for the sale of charged-off credit card accounts to Unifund. The contracts were customarily twelve months in duration, at a set price, with igible charged-off accounts pre monthly basis. (AC by Chase to Unifund on a 9). Pursuant to these contracts, an account was defined as lIineligible" if the: (i) cardholder filed or became subject to bankruptcy proceedingsi (ii) cardholder asserted the account or any transaction on the account was fraudulently originated; (iii) statute of limitat apsed; (AC (v) ion or class actioni or (vi) account was subject to lit account was settled. (iv) cardholder diedi 10). The AC also contained allegations with respect to prior contracts of similar accounts. (AC 12 47). On or about January I, 2008, Chase and Unifund entered into the Agreement through a contract entitled IITerti Forward Flow" for sale by Chase of eligible 4 1 charged-off accounts to Unifund (AC the laws of Delaware (AC 48) which was governed by 49) . Section 2(b) of the Agreement sell, assign and transfer to IIS e ll er will des: and Purchaser shall purchase all of Seller's rights, title and interest in and to eligible Charged-off Accounts (which Accounts shall be listed either on diskette or a spreadsheet to be provided to Purchaser) at a Purchase Price determined by multiplying the total Unpaid Balances of the Charged-off Accounts as of the File Creation Date being sold by f hundredths percent (5.90%) ... and For any Enhanced Digitized Media Accounts, the Purchase Price Media Accounts shall be increased by for such Enhance Digiti 20 hundredths percent and, as such, shall be determined by multiplying the tot Unpaid Balances of the charged-off Enhance Digitized Media Accounts being sold by six and ten hundredths percent (6.10%).11 under the terms it purchased (AC 50). Unifund's Purchase Price was 6.1% Agreement because at all relevant t Digitized Media Accounts. (AC 51). Paragraph 2(c) of the Agreement provides that "Bel in s e judgment and subject to the provisions 5 shall determine which Charge-off Accounts shall be to Purchaser hereunder. (AC IT igible for sale 52). Paragraph 4(f) of the Agreement provides that "Purchaser is a sophisticated Purchaser that is in the business buying or collecting Accounts type being purchased or otherwise deals in the col consumer debt in the ordinary course of Purchaser's business. It Agreement contains a survival Paragraph 20 of clause that expressly provi that 2 of the contract, entitled Sale of Accounts, survives termination of the contract, along with paragraphs 3 through 10, 12 through 17, 19, 20, 23, and 25 through 29. (AC 54). The Agreement was expected to generate approximately $108,000,000 in revenue for Chase. {AC 55) . In or about March 2008, pricing in the post secondary market for charged from the fourth f accounts declined by as much as 30 50% (AC of 2007. 56) . In or about March 2008, significant supply of chargedoff accounts flooded the market in response to tightened credit 6 and large banking institutions being pressured by shareholders to unload bad debt. Virtually overnight, an industry that historically favored issuers of charged-off debt suddenly became a buyer's market. (AC 57). Realizing the market turmoil, Unifund sought to exploit the destabilized environment by attempting to renegotiate the terms of the Agreement. (AC 58) . In or about March 2008, Unifund asked that Chase reduce the purchase price set forth in section 2(b) of the 2008 Contract. Unifund submitted two separate proposals for Chase's consideration[ each a departure from Unifund's contractual obligations under the Agreement. (AC 59). From March through July the parties discussed altering the terms of the Agreement. (AC 59) . By email dated July 25[ 2008, Unifund informed Chase it was not purchasing any charged-off accounts for the July 2008 billing cycle. (AC 79). By letter dated July 29[ 2008, Chase declared unifund in breach of the Agreement. (AC 7 80). By letter dated August 4, 2008, Chase cancell which provides: the Agreement pursuant to section 21, "Seller may cancel this Contract upon five days prior written notice to Purchaser if (i) Purchaser (5) Is or refuses to purchase any Charged-off Accounts offered for sale hereunder to Purchaser by Seller . any other term or condition herein and with[in] breach.!! five or (v) Purchaser breaches Is to cure such breach (5) days of receipt of Chase's notice such In the letter, Chase reserved its right to seek damages due to Unifund's failure to purchase the charged-off accounts. (AC , 81). In an fort to mitigate its damages following Unifund's unilateral failure to honor its contractual obligations, Chase entered into contracts with two other companies to sell the charged-off accounts. However, Chase was unable to sell the charged off accounts at the purchase price set forth in the Agreement, which resulted in Chase selling the charged-off accounts for less than what it would have sold them to Unifund under the terms of the Agreement. (AC , 82). As a result of the foregoing, Chase incurred damaged of no less than $11,024,872.37. (AC , 83). 8 The AC alleged three causes of action (1) a breach of contract (AC 85 89), good (2) a breach of implied covenant faith and false dealing (AC 90 96) 1 th (AC (3) bad 97 101) . The 12(b) Standard On a motion to dismiss pursuant to Rule 12, all factual allegations are accepted as true, and drawn in favor of the pleader. 1 inferences are Mills v. Polar Molecular 12 F.3d 1170, 1174 (2d Cir.1993). The issue "is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. H Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir.1995) (quoting Scheuer v. Rhodes, 416 U.S. 232, 235-36 (1974)). Though the pleading standard set forth in Rule 8 Fed.R.Civ.P. is a liberal one, it is not without its demands: [T]he pleading standard Rule 8 announces ... demands more than an unadorned, the fendant unlawfully harmed-me accusation. A pleading that offers labels and conclusion or a formulaic recitation of the elements of a cause of action will not do. Nor does a 9 ., complaint suffice if it tenders naked assertions devoid of further factual enhancement. Ashcroft v. Iqbal, --- u.s. ----, 129 S.Ct. 1937, 1949 (2009) (internal cites and quotes omitted). Thus, a complaint must allege sufficient factual matter to "state a claim to relief that is plausible on its face." Twombly, 550 U. S. 544, 570 Id. (quoting Bell Atl. Corp. v. (2007)). In meeting this "plausibility standard," the plaintiff must demonstrate more than a "sheer possibility" of unlawful action; pleading facts that are "'merely consistent with' a defendant's liability ... 'stops short of the line between possibility and plausibility of entitlement to relief.'" Id. (quoting Twombly, 550 U.S. at 557); see also Reddington v. Staten Island Univ. Hosp., 511 F.3d 126, 131 (2d Cir.2007) ("Although the pleading standard is a liberal one, bald assertions and conclusions of law will not suffice. To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level." and cites omitted)); Gavish v. Revlon, 2004 WL 2210269 at *10 (internal quotes Inc., No. 00-CV-7291, (S.D.N.Y. Sept. 30, 2004) ("[B]ald contentions, unsupported characterizations, and legal 10 conclusions are not well-pleaded allegations and will not defeat a motion to dismiss.") . The Court is not limited to the four corners of the complaint, but may consider outside documents which are integral to it regardless of whether attached to the complaint, so long as the pleader has notice of them or refers to them. See Schnall v. Marine Midland Bank, 225 F.3d 263, 266 (2d Cir. 2000) . \\[WJhile courts generally do not consider matters outside the pleadings, they may consider documents attached to the eadings, documents referenced in the pleadings, or documents that are integral to the eadings order to determine if a complaint should survive a 12(b) (6) motion." Garcia v. Lewis, 2005 WL 1423253 at *10 (S.D.N.Y. June 16, 2005) . The Motion To Dismiss The Breach Of Contract Claim Is Denied The parties each assert the clarity of the Agreement, but reach oppos conclusions. According to Chase, Unifund was required to purchase the eligible charged-off accounts offered by Chase. (Memo in Opp. p. 9-11). 11 According to Unifund, was ent led under the Agreement to reject the accounts. (Memo ln Support, p. 6 9). Chase relies on the mandatory language of Section 2(b) ("Purchaser shall purchase") . fund relies on Section 2(f) and 2(e) which provide that account information shall be used for no other purpose "other than for determining whether Purchaser shall purchase the Accounts" and that information provided for "Accounts not purchased by Purchaser II shall be destroyed. Unifund also notes Section 21(a) which permits Chase to cancel if Unifund refuses to purchase. Under Delaware law, if the terms a contract are reasonably susceptible to different interpretations or may have two or more different meanings, the contract is ambiguous. Seidensticker v. .... lla Inn Inc., Civ. No. 2555-CC, 2007 WL 1930428 at *3 (Del. Ch. June 19, 2007) i Concord Mall LLC v. Best Buy Stores, L.P., No. Civ.A. 02C-09 267 PLA, 2004 WL 1588248 at *3 (Del. Super. Ct. July 12, 2004). If a contract is deemed ambiguous, it is Ilimproper to grant a motion for judgment on the pleadings because to do so would resolve the ambiguity on an incomplete record not shaped by discovery." f 12 s Assocs. No. Civ. A. 1607- N, 2007 WL 148754 at *3 (Del. Ch. Jan. 17, 2007). Moreover, on a motion to dismiss for failure to state a claim, a court may not choose between two differing reasonable interpretations of an ambiguous contract unless only one reasonable construction exists as a matter of law. Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managel:'s, Inc., 691 A.2d 609, 613 (Del. 1996) (citing __ __________ 1987 WL 17047 (Del. Ch. Sept. 9,1987). The differing interpretations of the Agreement are ially reasonable, thereby creating an ambiguity. When a court is faced with a contractual ambiguity, the court may consider evidence "including the overt statements and acts of the parties, the business context, the parties! prior dealings, and industry custom. It Jul ­ ­ ­ ­ v. Julian, Civ. No. 1892­VCP, 2010 WL 1068192 at *5 (Del. Ch. Mar. 22, 2010) (quoting Wilm. Firef Ass'n Local 1590 v. Ci of Wilm., No. Civ.A. 19035, 2002 WL 418032 at *10 11 (Del. Ch. Mar. 12, 2002}). Here, the case is the early stages of I Unifund!s motion to dismiss is denied to extent that issues of fact exist as to the meaning of the Agreement. 13 igation and The Motion To Dismiss The Implied Covenant And Bad Faith Claims Is Granted Under Delaware law, an implied covenant of good fai claim is flbest understood as a way of implying terms in the agreement, whether employed to analyze unanticipated developments or to fill gaps in the contract's provisions." , No. Civ.A. 2351 VCP, 2007 WL Twin 2744609 at *16 (Del. Ch. Sept. 14, 2007) (quoting Dunl v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005)). AC, however, does not allege any "unanticipated development" nor any "gaps" in the Agreement's provisions. Chancery Court purpose, the impl observed: As the Delaware "Consistent with its narrow covenant [of good faith] is only rarely invoked successfully. Il Kuroda v. , 971 A.2d 872, 888 (Del. Ch. 2009) i see also Superior Vision Servs., Inc. v. Relia­Star Life Ins. Co., No. Civ.A. 1668­N, 2006 WL 2421426 Ch. Aug. 25, 2006) (" [I]mposing an obligation on a at *6 ( contracting party through the covenant of good faith and fair dealing is a cautious enterprise and instances should be rare. ") . Il sting contract terms control . . . such that implied good faith cannot be used to circumvent the parties' 14 duty . bargain, or to create a free float the underlying legal document." Dunl . unattached to ,878 A.2d at 441 (internal quotation marks and citations omitted) . IT Thus , one generally cannot base a claim for breach of the implied covenant on conduct authorized by the terms of the agreement." (citing In re Prudential Ins. Co. 975 F.Supp. 584, 616 (D.N.J. 1996)). Id. Am. Sales Practices Lit • I' Here, the issue of any implied covenant will be controlled by any resolution of the meaning of the Agreement. Delaware does not appear to recognize a claim alleging "bad faith" (other than in the insurance coverage area) as anything good fferent from the breach of the implied covenant of ith inherent in every contract: "[T]here is no meaningful difference between 'a lack of good faith' and 'bad faith.' Accordingly, to prove a breach of the implied covenant plaintiff must demonstrate that defendants acted in 'bad th. '" Amirsaleh v. Bd. of Trade of the Ci of New York Inc., Civ. No. 2322­CC, 2009 WL 3756700 at *5 (Del. Ch. Nov. 9, 2009) . Even assuming "bad faith" existed as an independent claim for relief in Delaware, the AC makes no allegations to 15 support a separate claim. Chase repeats and realleges its prior allegations, avers that Chase performed the Agreement (AC 99), and asserts that Unifund acted in bad faith by " 90, ling to make reasonable efforts to meets its obligations under (AC [Agreement] . " 100). words, Chase's so called In bad faith claim is wholly dependent upon Chase's breach of contract claim. Delaware decisions cited by Chase ss conduct that was not expressly covered by the parties' agreements (unlike ). In BAE v. Lockheed Martin Elec. Inc. ., Civ.A. No. 3099­VCN, 2009 WL 264088 at *6 (Del. Ch. Feb. 3, 2009), court found that where the parties expressly agreed to give plaintiff a "right to bid" on certain business opportunit the s, implicit (but not addressed) in agreement was de 's obligation to provide notice to plaintiff of such opportunit dismis In Dunlap, court , without prejudice, the implied covenant claim in an action involving the scope of an insurer's duty to process and pay 878 A.2d at 437. The two decisions Chase cites do not support its so call "bad faith" claim In Int'l 16 Ins. v. Delmarva ., No. 99C­lO­065 WCC, 2001 WL 541469 ( Super. Ct. May 9, 2001), the Delaware Superior Court permitted the assertion of a bad faith claim the context of a surety agreement, which the court found to be sufficiently similar to an insurance agreement to permit the bad faith claim to go forward. Id. at *10. And, in Ariba Inc. v. Elec. Data Corp., No. Civ.A. 02C­06­083JRJ/ 2003 WL 943249 {Del. Sup. Ct. Mar. 7, 2003), the Delaware Superior Court decl bad faith cl to dismiss a at the pleading stage because it was unclear whether the claim was being as in contract or in tort. Id. at *7 8. Here, Chase concedes that its claim is "rooted ln its breach contract" claim. (Opp. Mem. at 28.) Therefore, the motion to dismiss the claims for breach of the implied covenant of good faith and for bad faith is granted. The Motion To Dismiss The Claim For Damages Is Granted Section 29 of the Agreement, entitled "Limitation of Liability/" states in relevant part: for e a c h ' s obligations under Section 8 (Indemnification) and Purchaser's obligations with 17 respect to Seller's confidential information, no event shall either party hereto. . be liable for any indirect, incidental, spec ,punit consequential damages, or any damages data, business interruption, lost its, lost revenue or lost business sing out of or in connection with this Agreement, ss of whether such damages could have been seen or prevented by either party hereto or whether such has been advised of the possibility of such damages. Agreement, § 29. Chase has alleged $11 million in damages for breach of the Agreement representing difference between the revenue Chase would have the Agreement, presumably for the remainder of its term (July December 2008), and the revenue Chase actually received by selling its charged­off accounts to third ies. (AC 82.) This is thereby a claim for lost revenues or lost profits for the remaining term of the Agreement. See Crowell v. Himont USA Inc., Civ.A. No. 86C 11 125, 1994 WL 762663 at *3 (Del. Super. Dec. 8, 1994) (defining on, *3 t profits" as "those profits which might have been to the performance of the particular contract sued made (c II period for which the contract was to run") No. 79C­JA­5, 1981 WL 191389 at . July 23, 1981). 18 Chase exercised s right to cancel the Agreement in August 2008 after Unifund notified Chase that, pursuant to the Agreement, Unifund had determined not to purchase the chargedoff accounts offered for sale by Chase in the "current [July] billing cycle." Chase was not obligated to cancel the Agreement, but once it exercised its remedy, the Agreement was at an end. Unifund was no longer obligated to perform under the terminated Agreement. As discussed above, any damages claimed by Chase for the period after it cancelled the Agreement would be, by definition, Chase's lost profits or lost revenues, the very damages the parties barred by their Agreement. Crowell f supra; Tanner f 1981 WL 191389 at *3 See f (damages for breach based upon profits that might have been made during the contractual period are lost profits) (citing . v. Quimby, 144 A.2d 123 (Del. 1958)). Chase has sought to avoid the limitation of liability provision, Section 29, claiming that it "fails its essential purpose." (Opp. Mem. at 23.) Under Delaware law, liability limitation clauses that preclude various types of damages, including lost profits, are proper and enforceable. See Delmarva Power & Light Co. v. ABB 19 Power T&D, No. Civ.A. 00C­02­175 WCC, 2002 WL 840564 at *8 (Del. Super. Ct. Apr. 30, 2002) (holding contract had a valid and enforceable limited remedy provision that precluded plaintiff from seeking consequential damages) i Eisenmann Motors . v. General ., No. Civ.A. 99C­07­260 WTQ, 2000 WL 140781 at *22 -----------'"--- (Del. Super. Ct. Jan. 28, 2000) (barring recovery lost opportunity costs where contract contained express provision barring consequential damages and/or lost profits) i Yellow Book USA v. Sullivan, No. Civ.A. 1999 02 046, 2003 WL 1848650 at *7 (Del. Comm. Pl. 20, 2003) (barring evidence of lost profits due to a limitation of liability clause and finding clause enforceable "it is within the part s' contractual intent") . primary case v. cites, J.A. Jones Constr. Co. of Dover, 372 A.2d 540 (Del. Super. Ct. 1977), involved, among other things, the interpretation of warrant/limitation of liability clauses in contracts for the sale generation equipment. involved Id. at 547­554. electric As the contracts sale of goods, they were subject to Article 2 of the Delaware Uniform Commercial Code and law's specific restraints on contractual limitations of Ii lity. 20 Id. at 549. One party to a contract cannot by its unreasonable conduct defeat the other party's remedy expressly set forth in the contract, and then seek to avoid responsibility under a limitation of liability clause. Thus, in Jones, the seller of defective goods could not defeat the warranty remedy in a sales contract (under which agreed to repair or replace a defective product) by delaying the repair or replacement to the point of injuring the buyer, and then invoke the contract's limitation of liability provision. Id. at 551­2. Assuming arguendo that the failure to sell or purchase constituted a breach, Section 21 of the Agreement provides the cancellation remedy that Chase utilized. Section 29 of the Agreement does not defeat this remedy; it merely limits recoverable damages. Under Section 29's preclusion of lost revenues and lost profits, the motion to dismiss the AC is granted. 21 Based on the conclusions set forth above, the motion to dismiss the AC for breach of contract is denied, and the motion to dismiss the claim for damages is granted. complaint is dismissed. Unifund is also granted reasonable attorneys' fees and costs under Section 28. It is so ordered. New York, NY September hc7 The amended 2010 r­\ ROBERTW. SWEET U.S.D.J. 22

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