United States District Court, S.D. New York
Decided October 16, 2014
For Hindsight Solutions, LLC, Plaintiff: Derek S. Sells, Stephanie Rose Correa, Tracey Lyn Brown, The Cochran Firm, New York, NY.
For Citigroup, Inc., Citimortgage, Inc., Defendants: Marshall Howard Fishman, LEAD ATTORNEY, Samuel Joseph Rubin, Timothy P. Harkness, Freshfields Bruckhaus Deringer LLP, New York, NY.
OPINION AND ORDER
John G. Koeltl, United States District Judge.
This lawsuit arises from a contract between the plaintiff, Hindsight Solutions, LLC, (" Hindsight" ) and the defendant CitiMortgage, Inc. (" CitiMortgage" ). Hindsight agreed to provide CitiMortgage with
a proposal to reduce the overall maintenance costs that CitiMortage paid annually to IBM for the use of IBM's FileNet software. CitiMortgage agreed to pay Hindsight 30% of the actual savings that CitiMortgage recognized over a two-year period compared to the annual maintenance costs that were currently billed by IBM. Hindsight claims that CitiMortgage failed to pay amounts that were owed under the contract. Hindsight also claims that CitiMortgage failed to pay amounts that Hindsight was owed for its work in connection with an audit by KPMG. Hindsight argues that, to the extent any amounts were not owed under the contract, Hindsight is entitled to payment under various quasi-contractual theories. Hindsight also contends that CitiMortgage defrauded it by misrepresenting that there was a " software deployment freeze" that caused Hindsight to withdraw its efforts to obtain compensation based on alleged software savings under the contract. CitiMortgage denies that there were any misrepresentations and contends that Hindsight was paid exactly what it was owed under the contract.
Various claims and defendants were dismissed over the course of the litigation. Hindsight's remaining claims are for breach of contract, fraudulent misrepresentation, fraudulent inducement, and quasi-contractual claims for unjust enrichment, quantum meruit, and promissory estoppel. Hindsight has sued CitiMortgage and Citigroup, as well as individual defendants, Gil Scheibelhut and Harold Hatter.
The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332 based on complete diversity of citizenship.
The Court conducted a non-jury trial in this case from September 8, 2014 through September 16, 2014. Having considered all of the evidence and assessed the credibility of the witnesses, the Court makes the following findings of fact and reaches the following conclusions of law pursuant to Federal Rule of Civil Procedure 52.
1. Hindsight is a Delaware limited liability company that was formed in January 2007. Pl. Trial Ex. (" PTX" ) 1. Its three members are citizens of South Carolina, Kansas, and California. Am. Comp. ¶ 1. Michael Hinds is Hindsight's chief executive officer, founder, and sole employee. Tr. 64, 293. Hinds, a certified engineer, began working at FileNet in 2000 as a technical engineering consultant. Tr. 61. He worked in compliance to curb software piracy and developed a program to track compliance with software licenses. Tr. 61-62. Hinds continued to work at FileNet after it was acquired by IBM in 2006, until he left to start Hindsight in 2007. Tr. 63, 87.
2. Defendant Citigroup is a Delaware corporation with its principal place of business in New York. Am. Comp. ¶ ¶ 3-4. Defendant CitiMortgage is a New York corporation with its principal place of business in Missouri. Am. Comp. ¶ 6. (Defendants Citigroup and CitiMortgage are referred to collectively as " Citi" ).
3. Defendants Scheibelhut and Hatter are employees of Citigroup with offices in Texas and Florida respectively. Schiebelhut and Hatter are citizens of those respective states. See Am. Compl. ¶ ¶ 3-8, 11-12; Answer ¶ ¶ 3-8, 11-12. Scheibelhut is a Director of Production Software Support for Citigroup. Tr. 535. He is responsible for keeping the applications that support Citi's mortgage business up and running. Tr. 541. Hatter is a Director of Supplier Governance in Citigroup's Global Technology Resource Strategy group. Tr. 912. Hatter's role is to facilitate the contracting process by assisting internal
clients at Citi such as Scheibelhut with the vendor procurement process. Tr. 913-15.
II. THE BEGINNING OF THE RELATIONSHIP BETWEEN HINDSIGHT AND CITI
4. CitiMortgage uses FileNet software to manage images stored in a computerized document repository under licenses purchased from IBM. Tr. 669. In 2008, FileNet was one of three different platforms CitiMortgage used to store document images. Tr. 527. CitiMortgage's FileNet licenses are perpetual; once purchased CitiMortgage continues to own the license in perpetuity. Tr. 76; PTX 6, at 95974. In addition to the one-time license purchase, IBM charges CitiMortgage ongoing annual " maintenance" fees. Tr. 670-71, 843. The annual maintenance fees are the only ongoing fees charged after a license is purchased. Tr. 844.
5. Maintenance is the annual fee paid to IBM for continued use of existing licenses and technical support once the customer owns the license. Tr. 670. Once purchased, a customer cannot recoup the cost of a license but it can deactivate ongoing maintenance. Tr. 300-01, 778. If a user deactivates ongoing maintenance, the user may reactivate it later. Tr. 778.
6. CitiMortgage's FileNet licenses are governed by a contract (the " IBM-FileNet Contract" ) dated August 5, 2003. PTX 6. The IBM-FileNet Contract states that it permits CitiMortgage affiliates to use CitiMortgage's FileNet system. PTX 6, at 95961, 95975. The IBM-FileNet Contract was the governing contract that Hindsight eventually reviewed for purposes of its work. Def. Ex. (" DX" ) 136; DX 150.
7. In December 2007, before Hindsight approached CitiMortgage, CitiMortgage owned FileNet licenses that permitted over 49,000 internal users and two million external users to use its FileNet system. Tr. 784-85.
8. Prior to the contract between CitiMortgage and Hindsight, CitiMortgage paid IBM $1,557,493.98 annually for maintenance on FileNet licenses. DX 160. In December 2007, Hinds contacted Citi's James Ford to propose that Hindsight could assist in reducing Citi's ongoing FileNet costs. Tr. 65-66.
9. On January 29, 2008, Hinds again approached Ford with a " specific goal" of reducing Citi's " annual IBM-FileNet ECM maintenance." PTX 2; Tr. 841. On March 16, 2008, Hindsight contacted Ford and provided a summary of its " no cost" proposed engagement to enable CitiMortgage to save on its annual maintenance. DX 3; Tr. 842.
10. Hindsight offered to perform an initial analysis at no cost or obligation to CitiMortgage. DX 3; Tr. 295, 842. Hindsight agreed that at the conclusion of that analysis, it would present Citi with a summary of projected maintenance savings at which point CitiMortgage could elect to retain Hindsight or not. Tr. 68-70, 674-75, 842; DX 3.
11. To enable Hindsight to perform its no cost analysis, CitiMortgage provided Hindsight with reports generated directly from the FileNet system. DX 25. The reports CitiMortgage provided to Hindsight showed the users who accessed the FileNet system. Tr. 770-75. Hindsight used these reports to determine the number of users accessing FileNet so it could recommend reductions in CitiMortgage's FileNet maintenance costs without any negative impact on CitiMortgage's usage of the FileNet system. DX 17; DX 25; DX 27; Tr. 843.
12. On May 22, 2008, Hindsight advised CitiMortgage that the reports CitiMortgage provided to Hindsight to analyze
the system were " perfect" and " exactly what [Hindsight] needed." DX 25.
13. On May 8, 2008, after its initial no cost analysis, Hindsight presented Ford with an " approximate 24-month savings projections" with respect to annual maintenance for CitiMortgage and CitiMortgage's affiliate CBNA. DX 17. CBNA used the CitiMortgage FileNet system before Hindsight was retained. DX 17; Tr. 846.
14. The " approximate savings projections" were based on reducing Citi's " overall software maintenance." DX 17. The " approximate 24-month minimum savings projections" were $1,116,774 (reflecting a 30% reduction in Citi's " current 24-Month software maintenance calculation" ). DX 17, at 86735. The proposed compensation to Hindsight was based on " 30% of CitiGroup's actual 24-month savings projections (Though, actual customer savings should continue well beyond 24-months)." DX 17, at 86735; Tr. 844-46.
15. On May 13, 2008, Hindsight sent Ford its Standard Terms and Conditions. DX 19. The Hindsight Standard Terms and Conditions provided compensation based on savings of annual software maintenance. Hindsight's Standard Terms and Conditions provide:
None of the Services referenced under this MSA guarantee Hindsight will be successful in reducing Customers annual software maintenance. However, if using Hindsight's restructuring recommendations, Hindsight and/or Customer are unable to successfully negotiate at least a 20 percent cost reduction off the current annual software maintenance (as referenced in the 'Scope of Services Delivery Document'), Customer will not be required to compensate Hindsight for the Service Fees outlined in the Agreement.
DX 19, at 87796. Hindsight's Standard Terms and Conditions did not provide for compensation based on new users or software deployments. DX 19; Tr. 331, 846-48.
16. Hindsight's Standard Terms and Conditions contained a merger clause providing that " [t]his Agreement constitutes the entire agreement between the parties regarding the subject matter hereof and supersedes all prior or contemporaneous agreements, negotiations, representations, and proposals (whether oral or written) between Hindsight Solutions and Customer." DX 19, at 87797. Hinds considered it good business practice to include a merger clause in Hindsight's Standard Terms and Conditions and not to rely upon oral discussions. Tr. 412-13.
17. On May 28, 2008, Hindsight sent Citi its proposed work order outlining the scope of Hindsight's engagement. DX 32. Hindsight's May 28 proposed work order stated that its analysis was an " effort to immediately reduce Citi's ongoing FileNet-IBM [Enterprise Content Management (" ECM" )] maintenance." DX 32, at 87833. The next day, Hinds also sent Ford an e-mail summarizing the steps Hinds would undertake if Hindsight was engaged. DX 30. There were four steps, all of which pertained to deactivating maintenance and none of which referred to " software license savings." DX 30; Tr. 848-49.
18. The proposed work order stated that " Hindsight's compensation is based on 30% of Citi's actual 24-month savings, even though Citi should continue to recognize benefits beyond 24 months." DX 32, at 87833; Tr. 852-53. The proposed work order contained a " 24 month savings example" that was based on proposed reductions in " maintenance." DX 32, at 87834. The proposed work order did not provide
for compensation based on software savings or FileNet users. DX 32.
19. On June 16, 2008, Citi provided Hindsight with a new draft agreement and work order providing that Hindsight would analyze " current software licensing structure, annual maintenance, systems deployments and contracts for FileNet across CitiMortgage and CitiBank North America businesses." DX 38, at 105708. The June 16 draft stated that Hindsight would " provide a new licensing structure that will reduce the overall maintenance costs incurred by Client. The structure will also provide Client with a consistent licensing structure for all U.S. entities and allow Client to utilize any licenses across all Client business entities." DX 38, at 105708. The June 16 draft stated that Hindsight's project fee would be " a fixed rate of 30% of the actual savings off current billed maintenance recognized by Client for a two year period." DX 38, at 105709; Tr. 856-58.
20. On June 17, 2008, Hindsight agreed to the June 16 draft agreement and work order subject to edits it supplied. DX 40. Hindsight's June 17 edits did not change the " services and deliverables" section's requirement that Hindsight would provide a strategy to " reduce the overall maintenance costs." DX 40. The edited work order made clear that the new structure would allow affiliates to use any unused active licenses across the business enterprise provided that their total usage would not exceed the authorized usage and that they would adhere to the Guidelines in the IBM-FileNet license. DX 40, at 105739. Hindsight's June 17 edits did not change the " project fee" section's provision that Hindsight's compensation would be based on a " fixed rate of 30% of the actual savings off current billed maintenance recognized by Client for a two year period." DX 40.
III. IN JUNE AND JULY 2008, IBM PROPOSED A FILENET UPGRADE THAT CITI ULTIMATELY DID NOT ACCEPT
21. In June and July 2008, during the course of Hindsight's no cost or obligation analysis, Citi was evaluating a proposal received directly from IBM that would provide software and hardware upgrades to a new version of FileNet called " P8" (the " IBM Proposal" ). PTX 7.
22. The IBM Proposal anticipated a roll-out of a new FileNet platform, and additional expenditures associated with the purchase of new licenses and hardware. If executed, the IBM Proposal would also provide a reduction in ongoing annual maintenance. PTX 7; Tr. 517-18. Citi was interested in the IBM Proposal because it offered a new, more stable, document platform. Tr. 540-41, 551-52, 680-81.
23. Scheibelhut, in particular, was in favor of proceeding with the IBM Proposal because it would have provided a more stable platform and it was the product in which IBM intended to invest more in the future. Tr. 680-81. However, ultimately, Citi decided not to implement the upgrade to FileNet P8 outlined in the IBM Proposal because Citi did not want to incur the required approximately $2 million capital expense. Tr. 562, 690-91, 776.
IV. HINDSIGHT'S EFFORTS TO OBTAIN AN AGREEMENT WITH CITI IN SUMMER 2008
24. By July 2008, Hindsight had used the data Citi had provided to do its no cost, no obligation analysis. On July 9, 2008, Ford circulated internally at Citi a summary of the maintenance savings achievable through Hindsight's proposal (the " July 9 Summary" ). PTX 7. In his July 9 Summary, Ford projected that
Hindsight could save Citi over $600,000 per year on maintenance. PTX 7. Based on that maintenance savings, Ford's July 9 Summary stated that Hindsight's compensation would be a percentage of that maintenance savings in the amount of approximately $270,801.36. PTX 7.
25. As part of the July 9 Summary, Ford prepared a spreadsheet that analyzed the IBM Proposal and compared the costs and benefits of the IBM Proposal to retaining Hindsight. PTX 7. Ford's spreadsheet, consistent with his discussions with Hinds and with Hindsight's proposal, provided for compensation to Hindsight based only on maintenance savings. The July 9 Summary did not provide for any compensation to Hindsight in the event that Citi did not accept the IBM Proposal. PTX 7; Tr. 863-64.
26. By late July, although Ford was plainly in favor of the Hindsight proposal, he could not get the necessary Citi approval to enter into a contract with Hindsight and did not have authority to do so. Tr. 851-52, 858. On July 21, 2008, Ford informed Hindsight that he considered the Hindsight " deal to be dead." Tr. 858-59; DX 50.
27. Hindsight asked if the engagement could be processed through a different vendor that had already been approved. DX 50. Ford rejected that suggestion saying that " changing the players to get the same deal through would only antagonize" those who needed to approve Hindsight's retention. DX 50; Tr. 351.
28. After Ford advised Hindsight that the deal was " dead", Hinds's then-fiancé, Eden Williams, contacted Raymond McGuire, Citi's co-head of global investment banking. DX 52. Williams, a personal friend of McGuire, asked McGuire to help get senior level individuals at Citi to review Hindsight's proposal. Tr. 352-53; DX 52. McGuire passed on Williams' inquiry to a colleague who, in turn, sent the inquiry to Mark Torkos, a Citi managing director and chief information officer for consumer operations and technology. DX 60.
29. Meanwhile, on July 24, 2008, unbeknownst to Ford, Hinds altered the July 9 Summary, which Ford had provided to Hinds, to include a payment to Hindsight for money that Citi would save if Citi determined not to proceed with the IBM Proposal. PTX 8; Tr. 86-88, 364. The July 9 Summary that Ford had provided to Torkos related only to payment to Hindsight based on projected maintenance savings and did not contain any compensation related to not proceeding with the IBM proposal. PTX 7. Ford's July 9 Summary and spreadsheet were consistent with all his discussions with Hinds. Tr. 857-58. Hinds sent a new spreadsheet to Torkos. In the e-mail, Hinds claimed that " everyone within Citi who has reviewed Hindsight's proposal believes moving forward is in Citi's best interest. . . . Jim Ford forwarded to your attention on July 9, 2008 for your approval." PTX 8. It was plainly not true that everyone within Citi who had reviewed Hindsight's proposal was in favor of it. Moreover, the attached proposal had been altered from the July 9 proposal that Ford had sent to Torkos because the new proposal included a payment to Hindsight for not proceeding with the IBM proposal. Finally, Hinds's July 24 e-mail to Torkos included an inaccurate description of Hindsight. It described Hindsight as a company made up of former " Filenet compliance executives," when in fact Hinds was Hindsight's only employee. PTX 8. This was similar to a false statement that Hinds had made in his original new vendor questionnaire that he completed for Citi in May 2008, and provided to Ford in July 2008, in which Hinds represented that Hindsight had five employees. Tr. 312-13. The representation
was false because Hindsight had only one employee -- Hinds. Tr. 312-13.
30. The changes Hinds made to Ford's spreadsheet which Hinds sent to Torkos were material. Hinds added payments of over $300,000 by Citi to Hindsight if Citi were to decide not to pursue the IBM proposal. PTX 8; Tr. 89. There is no evidence that Hinds shared the spreadsheet he sent to Torkos with Ford or any other Citi employee. Tr. 369, 864.
31. Hinds's trial testimony that he only " tweaked" the numbers in Ford's spreadsheet was inaccurate because he added a payment for Hindsight for alleged savings if Citi did not proceed with the IBM proposal. Tr. 87-88, 360-64, 369, 374-75.
32. Ford testified that all discussions with Hinds were about maintenance savings and there was never a discussion about compensation based on users, deployments, or software savings. Tr. 852-53, 863. Ford further testified that he never agreed to, and never discussed, compensation to Hindsight based on Citi's not proceeding with the IBM Proposal. Tr. 864.
33. Hindsight was never hired to do any consulting work with regard to the IBM Proposal and Hindsight's work was separate and unrelated to the IBM Proposal. Tr. 604, 861. In fact, Hinds never explained to Citi that he was seeking to be paid for Citi's foregoing the IBM proposal. Tr. 691. And, Citi never discussed paying Hindsight for the IBM proposal that was not accepted. Tr. 864. Citi's decision not to upgrade FileNet as outlined in the IBM Proposal pre-dated by many months the execution of the agreement between Hindsight and Citi and was unrelated to any work Hindsight did. Tr. 604, 690-91.
V. THE FALL 2008 NEGOTIATIONS
34. In July 2008, Citi informed Hindsight that Harold Hatter and Gil Scheibelhut would be handling future discussions with Hindsight. PTX 9; Tr. 90.
35. In August 2008, Scheibelhut was of the view that Hindsight was not CitiMortgage's best available option. Tr. 540. Scheibelhut believed that the P8 platform being proposed by IBM would be more stable than the current FileNet platform. Tr. 540-41. Scheibelhut informed Hinds that Citi was " not interested in doing business with him." DX 75. Scheibelhut wanted to pursue the IBM proposal and was uncomfortable with bringing a third party into a partnership Citi had with IBM. Tr. 688. In September 2008, Citi attempted to come up with the same savings claimed by Hindsight, but was unable to do so. PTX 61; PTX 67.
36. Due to financial constraints, Citi decided not to proceed with the IBM Proposal. Tr. 690. Meanwhile, Hinds went directly to Mark Torkos and argued that his proposal had merit and that Scheibelhut and Hatter were not " familiar with (or have [not] even reviewed) the facts" of his recommendations. DX 75. Citi decided to allow Hindsight to make its proposal for maintenance savings, which would create no obligation on Citi's part to proceed with a proposal. Tr. 691. In October 2008, negotiations between Hindsight and CitiMortgage resumed. Tr. 91; PTX 10; DX 99.
37. On October 17, 2008, Citi provided Hindsight a draft master professional services agreement and work order. PTX 10. The October 17 draft followed the June 16-17, 2008 drafts that Hindsight had accepted with minor changes. DX 38; DX 40. The October 17 draft provided that Hindsight would analyze the current information and data provided by Citi for software licensing and maintenance arrangements
with FileNet. PTX 10. Upon completion of the review, Hindsight would provide
a proposal to [CitiMortgage] outlining the strategy for reducing the overall annual FileNet maintenance costs. Such a proposal must provide for the savings set forth herein without any reduction or negative impact, in any way, on the maintenance services currently being obtained by [CitiMortgage]. Without limiting the foregoing, any proposal will also allow [CitiMortgage] to authorize business affiliate[s] the right to use any unused active licenses across [CitiMortgage's] business enterprise, so long as the actual usage does not exceed the authorized usage and the affiliates adhere to the guidelines.
PTX 10, at 98880. The October 17 draft based all compensation to Hindsight, if any, solely on " maintenance" savings. PTX 10, at 98881; Tr. 101. Compensation was to be based on 30% of the actual savings recognized by CitiMortgage on the annual maintenance costs for a two year period compared with IBM/FileNet's most recent annual maintenance quotes, namely annual maintenance quotes of $1,579,374.05 for CitiMortgage and $155,735 for Citibank. PTX 10, at 98881.
38. Hinds edited the October 17 draft in an October 20, 2008 draft he e-mailed to Citi. PTX 11. Hindsight revised the " project fee" section to provide that payment would be " 30% of the actual software license savings and off current billed maintenance anticipated by Client for a two-year period." PTX 11, at 99675; Tr. 99-101, 103-04, 394-95, 580. Hinds took out the previous maintenance quotes that were in the prior draft. Hinds testified that the " software license savings" he inserted related to the IBM Proposal. Tr. 395. Hinds testified that he had not added the software license savings language in previous drafts because Citi had not " provided . . . the IBM proposal [to Hindsight] . . . until June 18." Tr. 336-37, 339-40.
39. On October 22, 2008, Michele Askins, a Citi employee involved with vendor procurement, Tr. 567, e-mailed Hinds stating that Hindsight's October 20 edits did " not reflect earlier discussions on certain items, including but not limited to the acceptance and payment terms." DX 103.
40. A call took place on October 24, 2008 between Hinds, Scheibelhut, Hatter, and Askins. At trial, Hinds testified in detail about the call; he testified that Scheibelhut told him to include the $2 million IBM proposal as a baseline from which to determine software savings. Tr. 105-06. However, when asked at his deposition about " what was discussed on [the October 24, 2008] call," Hinds testified: " I don't recall at this time." Tr. 283-84. Scheibelhut testified that although he could not recall specific calls, he recalled always rejecting Hindsight's proposed " software savings" language. Tr. 593-96, 599, 695. Hinds's testimony that he now recalls Scheibelhut telling him to put in savings based on the IBM proposal is not credible. Scheibelhut had opposed the Hindsight proposal and went forward with it on the basis of no-risk maintenance savings from currently-billed maintenance from IBM. It is not credible that Scheibelhut would have offered to compensate Hindsight for an IBM proposal that Citi had rejected because Citi was not prepared to pay the cost of the IBM proposal.
41. There are no notes or correspondence reflecting the October 24 call with the exception of a contemporaneous e-mail from Hatter to Scheibelhut in which Hatter asks: " Do you want to mention the reduced license scenario." PTX 95. No one testified to knowing what this e-mail referred to, and ...