United States District Court, E.D. New York
GARY R. BROWN, Magistrate Judge.
Before the Court is a motion by plaintiff Pivotal Payments, Inc. ("Pivotal") seeking a preliminary injunction enjoining Defendant U.S. Alliance Group, Inc. ("USAG") from paying to Defendant CardFlex, Inc. ("CardFlex") credit card residual payments and ordering USAG to deposit those funds into the Court. For the reasons set forth herein, that motion is DENIED.
On August 18, 2014, plaintiff filed this action, seeking damages arising from alleged "fraudulent inducements to enter certain asset purchase agreements and/or breach of those agreements and USAG's conversion of funds due to Pivotal." Complaint, DE , ¶ 1. Plaintiff further seeks "to rescind and/or reform those agreements on the basis of fraud and mutual or unilateral mistake and for preliminary relief." Id. On September 9, 2014, Pivotal moved for a temporary restraining order and/or a preliminary injunction directing USAG to deposit credit card residual payments with the Court, and moved for expedited discovery. DE , . Those motions, made before the Honorable Joanna Seybert, were referred to the undersigned for report and recommendation. DE . On September 18, 2014, the parties consented to the jurisdiction of the undersigned for all purposes. DE .
After a hearing, full briefing by the parties and provision for some expedited discovery, the Court denied the motion for a temporary restraining order in the following electronic Order:
While plaintiff has demonstrated certain financial concerns relating to Cardflex, one of the defendants here, that showing does not meet the exacting standard required for a TRO retraining assets to await a potential judgment. Under the federal framework, a TRO is an extraordinary remedy never awarded as of right. Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982). In the context of a preliminary injunction, the Second Circuit has held that such relief is appropriate only upon showing "that the defendant intended to frustrate any judgment on the merits by transferring its assets out of the jurisdiction." Feit & Drexler, Inc. v. Green, 760 F.2d 406, 416 (2d Cir. 1985); Gelfand v. Stone, 727 F.Supp. 98, 100 (S.D.N.Y. 1989) ("A preliminary injunction may issue to preserve assets as security for a potential monetary judgment where the evidence shows that a party intends to frustrate any judgment on the merits by making it uncollectible"). Plaintiff has not made such a showing at this phase.
Electronic Order dated 9/19/2014. The parties subsequently completed briefing and submissions in connection with the motion for a preliminary injunction. This opinion follows.
According to the Complaint, Pivotal, CardFlex and USAG are all "independent sales organizations" ("ISOs") involved in processing credit and debit card transactions for merchants who pay fees, some of which are payable to the ISOs. Complaint, ¶¶ 12-13. These fees are sometimes known as "residuals." Id. at ¶ 13. In 2008, CardFlex acquired rights to use a Bank Identification Number ("BIN") assigned by Visa and MasterCard, which facilitates the ISO's handling of transactions. Id. at ¶ 15. In 2010, First Data Merchant Services Corporation ("FDMS"), the payment card processor for the BIN, informed CardFlex that Wells Fargo Bank, N.A. ("WFB"), the financial institution sponsoring the BIN, would not continue sponsoring CardFlex for certain policy violations. Id. at ¶ 16. USAG acquired Cardflex's rights to the BIN in 2011, and began processing the transactions. Id. at ¶ 18. Pursuant to a side agreement, however, USAG agreed to pay the residuals from the BIN to Cardflex, and Cardflex retained the right to reassign the rights to the BIN. Id. at ¶ 19.
In 2013, Cardflex and Pivotal entered a Letter of Intent by which Pivotal offered to purchase the rights to the BIN. Id. at ¶ 21. Following due diligence, Pivotal and Cardflex entered into an Asset Purchase Agreement ("APA"), through which Pivotal acquired the rights to the BIN and the payment of residuals from USAG in exchange for a payment of approximately $3.1 million. Id. at ¶¶ 25-26. The APA provided for a "Stage Two" closing, which did not occur, which left Pivotal the right to continue to receive residual payments until it had received $3.1 million in "net residual payments." Id. at ¶¶ 26, 47.
The Complaint further alleges that Cardflex failed to disclose in due diligence "certain fees that USAG charged." Id. at ¶ 30. The parties also entered a second agreement, called the Assignment of BIN Transfer Agreement (the "ABTA"), which provided that USAG would not change its fees or charges or impose additional fees upon the merchant accounts associated with the BIN. Id. at ¶ 34. It is alleged that the ABTA further provided that if no "Stage Two" closing occurred under the APA "then USAG was to continue paying residuals to Pivotal until Pivotal has received Residuals in the aggregate amount of $3, 100, 000....'" Id. at ¶ 36. The Complaint concludes that "As of August 18, 2014, Pivotal has received $1, 249, 793.00 in net residual payments. Pivotal is owed $1, 836, 152 in net residual payments." Id. at ¶ 48.
The Complaint sets forth several causes of action, including breach of contract, mutual mistake, unilateral mistake, ...