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Sterling National Bank v. Block

United States District Court, N.D. Illinois, Eastern Division

June 14, 2019

STERLING NATIONAL BANK, Plaintiff and Counterclaim Defendant,
v.
BERNARD N. BLOCK, TRUSTEE, et al., Defendant and Counterclaim Plaintiff.

          MEMORANDUM OPINION AND ORDER

          HARRY D. LEINENWEBER, JUDGE.

         This case arises out of an alleged breach of a stock purchase agreement. The parties to that agreement, Defendants Bernard N. Block, Trustee, et al., (collectively, the “Sellers”) and Plaintiff Sterling National Bank (“Sterling”), have cross-moved for summary judgment. For the reasons stated herein, Plaintiff's Motion for Partial Summary Judgment (Dkt. No. 134) is denied, and Defendant's Motion for Summary Judgment (Dkt. No. 128) is granted in part and denied in part.

         I. BACKGROUND

         A. The Parties

         The Court will begin with a brief overview of the parties and the nature of the business at issue, before diving into the details of this contract dispute. There are three corporate entities involved in this case. The first two are the parties to this litigation: Sterling and the Sellers. The third, Damian, is a company that the Sellers sold to Sterling in 2015.

         Before it was acquired by Sterling, Damian was a privately-held corporation that provided short-term payroll funding to temporary staffing agencies (the “Clients”). (Answer ¶ 10, Dkt. No. 20.) Damian's Clients provide temporary employees to other businesses (the “End Users”). (Defs.' Resp. to Pl.'s Stmt. of Facts (“PSOF”) ¶ 7, Dkt. No. 142.) Damian offered its Clients two levels of service: “full service” and “money only.” (PSOF ¶ 8.) Full-service Clients submitted their workers' hours and hourly wage to Damian at various intervals, and Damian would then pay the temporary employees, withhold the proper payroll taxes, transmit those taxes to the proper jurisdictions, and invoice the End Users, among other services. (PSOF ¶ 9; Pl.'s Resp. to Defs.' Stmt. of Facts (“DSOF”) ¶ 15, Dkt. No. 147.) After receiving the invoices, the End Users would transfer the amount they owed to Damian's bank facility, from which Damian would remit payments to its Clients. (PSOF ¶ 10.) For money-only Clients, Damian would pay the temporary workers based on the Clients' invoices, which Damian then transmitted to the End Users. (PSOF ¶ 21.) Damian did not create invoices for its money-only Clients (hence the use of the term “money only”). (PSOF ¶ 11.)

         Damian, of course, charged for its services. Though the parties vigorously dispute the details of Damian's billing practices, its business model was essentially as follows: The End Users repaid the amount Damian paid to the temporary workers. Damian charged its Clients a base fee for its services (expressed as a percentage of total billing) and offered a variety of discounts and late fees based on how quickly the Client paid the base fee. (See PSOF ¶¶ 13, 17-18.) If the End User paid its invoice within a specified period of time, measured from the invoice date, the Client would only owe Damian the base fee. (PSOF ¶ 18.) If the End User paid its invoices within a shorter period of time, the Client would receive a fast pay discount. (PSOF ¶ 19.) If the End User paid after the specified time period, the Client would owe Damian late fees. (PSOF ¶ 20.)

         The contract Damian used with both full-service and money-only Clients is called an “Accounts Funding and Administration Agreement” (“Client Contract”). (PSOF ¶ 12.) The Client Contract was based on a standardized form, but Clients could negotiate conditions such as fees, discounts, and term lengths. (PSOF ¶¶ 12-13.) Full-service Client Contracts included a Schedule of Fees, which identified the base fee and the periods of time that would trigger the fast pay discounts and late fees. (PSOF ¶¶ 17-20.) For full-service Clients, the invoice date started the clock for the various discounts and fees that might apply. (PSOF ¶ 28.) Money-only Client Contracts contained a “Money Only Addendum, ” which identified the base fee, any late fees, and the time period applicable to each. (PSOF ¶ 22.) Some money-only Client Contracts started the fee clock not by reference to the invoice date (as Damian did not generate invoices for money-only Clients) but rather by Damian's receipt of labor invoices. (PSOF ¶ 23.)

         B. The Contract at Issue

         On February 27, 2015, Sterling acquired Damian from the Sellers pursuant to a stock purchase agreement (“SPA”). (PSOF ¶ 42; see also SPA, Ex. A to Answer, Dkt. No. 20-1.) The following SPA terms are most relevant to this litigation: the Sellers represented to Sterling that it was providing a full and accurate picture of Damian's finances, liabilities, and obligations; the Sellers agreed to indemnify Sterling for losses incurred in the case of a breach of those representations and warranties; Sterling agreed to pay $25 million to purchase Damian, $2 million of which Sterling would place into an escrow account for future claims asserted against the Sellers; and both parties agreed to a set of procedures by which they would handle indemnification claims. (See generally SPA.)

         On July 20, 2015, Sterling learned that a former Damian employee was calling Clients and informing them that Damian had improperly backdated its Client invoices to shorten the window of time in which the End Users could make early or on-time payments. (DSOF ¶ 30.) Sterling investigated this allegation and learned that in June of 2009, Alvin Block, the founder of Damian, directed that Damian change its invoicing practices. (PSOF ¶ 30.) Specifically, Damian began to date invoices on Sunday, the final day of a given work week. (Answer ¶ 17.) Previously, Damian dated most Client invoices on the first Friday after a work week (five days from Sunday, the end of the work week). (PSOF ¶ 30.) After Damian changed the date on its invoices to the Sunday at the end of the pay period, it did not begin transmitting or delivering its invoices to the End Users earlier than it had before changing the invoice dates. (Defs.' Resp. to Pl.'s Stmt. of Add. Facts (“PSOAF”) ¶ 72, Dkt. No. 153.)

         Sterling calls this practice improper “backdating”; Sellers call it “conform[ing] the invoice date to the contract date.” (Answer ¶ 17.) The Court will refer to it as the “2009 change.” As a result of the 2009 change, Clients had a shorter window in which they could obtain early pay discounts or avoid late fees. (PSOF ¶ 33.) Sterling asserts that it was not informed of the 2009 change in Damian's invoice dating practice prior to the closing of the Damian acquisition, and that this lack of information constituted a breach of the SPA. (PSOF ¶ 50.)

         C. Sterling's Investigation and Indemnification Claim

         After learning of the former Damian employee's allegations, Sterling hired the law firm of Wachtell, Lipton, Rosen & Katz (“WLRK”) to conduct an investigation. (DSOF ¶ 32.) On approximately August 3, 2015, Sterling sent letters to Damian's remaining Clients (which at this point were Sterling's Clients) that stated, “an issue has come to our attention that may result in a credit to your account, ” and, “Sterling is in the process of reviewing the data and [is] committed to working through all of the information as soon as practical.” (DSOF ¶ 46.) By early August, Sterling had drafted a script that its employees could use to call the Damian Clients and notify them that they may be entitled to refunds. (DSOF ¶ 47.) By August 7, 2015, Sterling decided that if its investigation determined that overcharges took place, it would discharge any liabilities it owed. (DSOF ¶ 48.) On August 10, 2015, a Sterling in-house lawyer circulated a draft “Document Hold Notice, ” intended to preserve documents for use in the internal investigation. (DSOF ¶ 49.) On that same day, Sterling discussed contacting the U.S. Attorney's Office (“USAO”) about the 2009 change. (DSOF ¶ 51.)

         On August 11, 2015, WLRK drafted a memorandum for a meeting with the USAO that summarized the facts it had learned so far, including an estimate that the 2009 change had created a $1.2 to 1.5 million “aggregate financial impact” on the Damian Clients. (DSOF ¶¶ 52-57.) The memorandum stated that Sterling intended to calculate and refund the amount of overcharges to the Clients. (DSOF ¶ 54.) It further stated, “[w]e are alerting you because there is a possibility of fraudulent conduct here.” (DSOF ...


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