Burtch v. Milberg Factors, Inc.

• Decision Date: 24 October 2011
• Docket Number: No. 10–2818.,10–2818.
• Citation: 2011 Trade Cases P 77660,662 F.3d 212
• Parties: Jeoffrey L. BURTCH, Chapter 7 Trustee, Factory 2–U stores, Inc., et al., Appellant v. MILBERG FACTORS, INC.; Capital Factors, Inc.; the CIT Group/Commercial Services, Inc.; GMAC Commercial Finance, LLC; HSBC Business Credit (USA), Inc.; Rosenthal & Rosenthal, Inc.; Sterling Factors Corporation; Wells Fargo Century, Inc.
• Court: U.S. Court of Appeals — Third Circuit

2011-2 Trade Cases P 77,660

662 F.3d 212

Jeoffrey L. BURTCH, Chapter 7 Trustee, Factory 2–U stores, Inc., et al., Appellant

v.MILBERG FACTORS, INC.; Capital Factors, Inc.; the CIT Group/Commercial Services, Inc.; GMAC Commercial Finance, LLC; HSBC Business Credit (USA), Inc.; Rosenthal & Rosenthal, Inc.; Sterling Factors Corporation; Wells Fargo Century, Inc.

No. 10–2818.

United States Court of Appeals, Third Circuit.

Argued on April 28, 2011.Filed: Oct. 24, 2011.

Joseph D. Mancano (argued), J. Peter Shindel Jr., Pietragallo Gordon Alfano Bosick & Raspanti, LLP, Philadelphia, PA, for Appellant.

Celia Goldwag Barenholtz (argued), Cooley LLP, New York, NY, Ashley B. Stitzer, Stephen B. Brauerman, Bayard, P.A., Wilmington, DE, for Appellee HSBC Business Credit (USA), Inc.

Ashley B. Stitzer, Stephen B. Brauerman, Bayard, P.A., Wilmington, DE, for Appellee HSBC Business Credit (USA), Inc.Bernard Beitel (argued), Daniel Wallen, Lloyd M. Green, Otterbourg, Steindler, Houston & Rosen, P.C., New York, NY, Denise Seastone Kraft, K. Tyler O' Connell, Edwards Angell Palmer & Dodge LLP, Wilmington, DE, for Appellee Wells Fargo Century, Inc.C. Barr Flinn, Elena C. Norman, Karen E. Keller, Monté T. Squire, Young Conaway, Stargatt & Taylor, LLP, Wilmington, DE, for Appellee Rosenthal & Rosenthal, Inc.Gregory A. Inskip, David J. Baldwin, Porter Anderson & Corron LLP, Wilmington, DE, for Appellee Capital Factors, Inc.Before: SLOVITER, GREENAWAY, JR., and ROTH, Circuit Judges.

OPINION

GREENAWAY, JR., Circuit Judge.

Jeoffrey L. Burtch (“Burtch” or “Appellant”), Chapter 7 Trustee of Factory 2–U Stores, Inc. (“Factory 2–U”), appeals the District Court's May 31, 2009 Order granting Defendants' Motion to Dismiss as well as the District Court's June 4, 2010 Order denying leave to amend Burtch's Complaint. Capital Factors, Inc. (“Capital”), HSBC Business Credit (“HSBC”), Rosenthal & Rosenthal, Inc. (“Rosenthal”), and Wells Fargo Century, Inc. (“Wells Fargo”), collectively (“Appellees,” “Defendants,” or “Factors”) ¹ are “factors” who play a role in financing purchase and sale transactions between garment retailers, such as Factory 2–U, and garment manufacturers. According to Appellant, the Factors (1) shared credit information among themselves regarding Factory 2–U, (2) unlawfully agreed to the terms upon which they would do business with Factory 2–U, and (3) at approximately the same time, worsened the terms on which the Factors would provide financing services to Factory 2–U.

Based on these assertions, Appellant sued the Factors under Section 1 of the Sherman Act for illegal price fixing and illegal group boycott and sought leave to amend his Complaint. The District Court ruled that Appellant did not adequately plead his Section 1 claims and that Appellant's motion seeking leave to amend should be denied. The question on appeal is whether Appellant adequately pled claims under Section 1 of the Sherman Act and whether the District Court abused its discretion in denying Appellant leave to amend. We will affirm.

I. BACKGROUND

The garment industry is comprised of three categories of participants—garment manufacturers,² garment retailers, and factors. Garment retailers purchase inventory from garment manufacturers to sell to their customers. Factors play a role in the garment industry by assuming the garment manufacturers' risk of liability with respect to the amount owed by the garment retailers. Factors assume risk by purchasing garment manufacturers' accounts receivable for those garment retailers that the factor approves.

If a factor declines to assume the risk of collecting the accounts receivable from a particular garment manufacturer based on the factor's determination of the garment retailer's “creditworthiness,” the risk of any sale by the garment manufacturer to this garment retailer remains with the garment manufacturer. Garment manufacturers are typically unable to make sales to garment retailers for which the factor declines to assume the risk. Consequently, the factor's credit check decision effectively determines whether or not sales between the garment manufacturer and the garment retailer are made. As a result, garment manufacturers are unable to sell materials to garment retailers due to an inability to quickly convert accounts receivable into cash and the garment retailer is left with insufficient inventory to sell to its retail customers. Additionally, factors determine the terms and conditions, including the discount rate at which factors will purchase receivables from manufacturers who are owed by retailers, payment terms required of retailers, and whether purchases by particular retailers will be financed.

Factory 2–U, a garment retailer, was a major discount clothing retailer that operated more than 200 stores in ten states. Factors competed with one another to provide credit to Factory 2–U, through the purchase of garment manufacturers' accounts receivable, so that Factory 2–U could, in turn, purchase inventory from various garment manufacturers to sell to its customers. In fiscal 2001 and 2002, Factory 2–U had sub-par operating performance and declining sales volume. Between 2002 and 2003, Factors declined to extend credit to Factory 2–U. At that time, Factory 2–U's access to credit was more costly and was, at times, cut off all together. Without credit, Factory 2–U's ability to purchase inventory from garment manufacturers decreased. The company's costs increased, its profitability and sales decreased, and ultimately, Factory 2–U filed for bankruptcy on January 13, 2004.

Here, the parties dispute whether the Factors' decision to decline to extend credit to Factory 2–U was a result of a conspiracy among the Defendants. At the time of the Complaint, approximately 80% of all garment manufacturers relied on factors for their credit needs. In fact, the original Defendants acted as factors to 305 of Factory 2–U's garment manufacturers.

The crux of the Complaint is that the Factors here engaged in “cartel-like behavior.” (Compl. ¶ 34.) According to the Complaint, they unlawfully exchanged information and entered into illegal agreements with one another at highly-secretive weekly meetings and through telephone conversations. Between February 27, 2002 and September 17, 2003, the Factors exchanged credit information about Factory 2–U through at least 27 telephone conversations. Through these telephone conversations, the Factors exchanged information about the Factors' existing credit limits with Factory 2–U, individual Factors' decisions to decline credit or withhold orders to Factory 2–U, and decisions to maintain, approve, or increase Factory 2–U's credit limit.

As a result of their allegedly “unlawful discussions and communications, the Defendants.... declined and limited credit to Factory 2–U at approximately the same time.... [and] based their future course of action on their previously unlawful communications and discussions.” ( Id. ¶ 37.) Resulting from these telephone conversations were “agreements” on: “whether credit would be extended by Defendants to Factory 2–U for its purchases from garment manufacturers;” “the amount of credit that would be extended by Defendants to Factory 2–U;” “the terms on which credit would be extended;” and “whether surcharges would be imposed by Defendants on garment manufacturers as a condition of financing Factory 2–U's purchases from those manufacturers.” ( Id. ¶ 38.)

The Factors ostensibly used these “unlawful means” to “(1) minimize their risks and cost of doing business with garment manufacturers and their customers; (2) maintain and stabilize pricing structures for factoring services; and (3) stabilize their respective market shares....” ( Id. ¶ 33.) As a result of the Factors' agreement to decline or refuse to extend credit to Factory 2–U, competition between garment retailers decreased. After the Factors declined credit to Factory 2–U, its credit costs increased and it did not have sufficient inventory to conduct business. Factory 2–U suffered a loss in profits.

On January 13, 2004, Factory 2–U filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. On January 27, 2005, the bankruptcy case was converted to a Chapter 7 case and Burtch was appointed as interim trustee, pursuant to Section 701 of the Bankruptcy Code, and is serving as Trustee of the estate pursuant to Section 702(d) of the Bankruptcy Code.

On September 17, 2007, Burtch filed a complaint against the original Defendants, pleading violations of Section 1 of the Sherman Act, 15 U.S.C. § 1 (“Section 1”) and unlawful restraint of trade under the New York State Donnelly Act, N.Y. Gen. Bus. Law §§ 340–47. Burtch alleges three Section 1 claims: (1) per se unlawful price-fixing; (2) per se unlawful group boycott; and (3) an anticompetitive agreement violating the rule of reason.

On December 14, 2007, CIT moved to dismiss the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim under Section 1 of the Sherman Act and the New York Donnelly Act. On December 17, 2007, GMAC, Sterling, and Century jointly moved to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6) and on the basis that the Complaint was time-barred. Within three days, Rosenthal, Milberg, HSBC, and Capital each separately moved to dismiss. Magistrate Judge Leonard P. Stark held a hearing on all the pending motions on October 20, 2008.

On March 30, 2009, the Magistrate Judge issued a Report and Recommendation (“R & R”) recommending that Defendants' Motions to Dismiss be granted. The Magistrate Judge based his conclusion on Appellant's failure to allege its Section 1 claims under the following principles established in Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007): (1) a Section 1 claim may not be predicated solely on allegations of parallel conduct by the...