CDS Bus. Servs. v. H.M.C., Inc.

• Decision Date: 18 May 2021
• Docket Number: 19-CV-5759 (SJF)(SIL)
• Parties: CDS BUSINESS SERVICES, INC., doing business as NEWTEK BUSINESS CREDIT, Plaintiff, v. H.M.C., INC, and KARA DiPIETRO, Defendants.
• Court: U.S. District Court — Eastern District of New York

CDS BUSINESS SERVICES, INC., doing business as NEWTEK BUSINESS CREDIT, Plaintiff,
v.
H.M.C., INC, and KARA DiPIETRO, Defendants.

No. 19-CV-5759 (SJF)(SIL)

United States District Court, E.D. New York

May 18, 2021

REPORT AND RECOMMENDATION

STEVEN I. LOCKE, United States Magistrate Judge

Presently before the Court in this diversity-breach of contract action, on referral from the Honorable Sandra J. Feuerstein for report and recommendation, is Plaintiff CDS Business Services, Inc.'s (“Plaintiff” or “CDS”) Motion for Summary Judgment (“Plaintiff's Motion” or “Pl. Mot.”), DE [29], pursuant to Rule 56 of the Federal Rules of Civil Procedure (“Fed. R. Civ. P.”). By way of Complaint dated October 11, 2019, Plaintiff commenced this action against Defendants H.M.C., Inc. (“HMC”) and Kara DiPietro (“DiPietro”) (collectively, “Defendants”), alleging that Defendants breached the parties' contract and tortiously interfered with contractual relations between CDS and Defendants' customers. See Complaint (“Compl.”), Docket Entry (“DE”) [1]. For the reasons set forth herein, the Court respectfully recommends that Plaintiff's Motion be granted.^[1]

1

I. BACKGROUND

The following facts are taken from the parties' pleadings, declarations, exhibits and respective Local Rule 56.1 statements. Except where indicated, these facts are not in dispute.

Plaintiff CDS is a Delaware corporation with its principal place of business in Lake Success, New York, and “has provided receivables financing, inventory financing, health care receivables financing, and management services to small- to medium-size businesses for over 10 years.” Compl. ¶¶ 2, 9. Defendant DiPietro is the citizen of Maryland, and the President of Defendant HMC, a Maryland corporation with its principal place of business in Columbia, Maryland. Id. at ¶¶ 3-4, 12. HMC is a “custom architectural millwork company, serving primarily the foodservice industry, that ha[s] been in business since 1989.” Id. at ¶ 10; Defendants' Answer to Complaint (“Ans.”), DE [8], ¶ 10. In the three years preceding the events detailed herein, “HMC's annual total sales…averaged over $10 million per year.” Id.

A. Initial Relationship Between HMC, CDS, and DiPietro

According to Defendants, in March 2018, “HMC was approached by a broker, Commercial Finance Partners (“CFP”), about obtaining a small business loan through CDS to improve [HMC's] cash flow and on March 15, 2018, HMC applied for the loan.” See Defendants' Response to Plaintiff's Statement of Material Facts In Support of Motion for Summary Judgment and Counterstatement/Statement of Additional Facts (“Def. 56.1”), DE [30-1], ¶ 85. CFP was allegedly “a referral partner for CDS and, in addition to fees paid directly by HMC, CFP [allegedly] received a commission for each

2

transaction that it referred to CDS.” Id. at ¶ 86. A few weeks after first contact, “CFP approached HMC about obtaining a line of credit through CDS.” ¶ 87. Between March and June 2018, HMC “responded to virtually daily questions [from] CFP and CDS's underwriters concerning [HMC's] clients, sales, prior financing arrangements, inventory and other assets, and requests for documents including receivable reports, proof of insurance and valuations.” Id. at ¶ 89. On or about June 4, 2018, “HMC received a letter (the “Approval Letter”) from CDS advising that HMC been approved for a “$1, 000, 000 Accounts Receivable Line of Credit” pursuant to which Plaintiff agreed to “advance funds up to 80% of the face value of eligible commercial accounts receivable associated with eligible customers of [HMC] not to exceed [$1, 000, 000] in the aggregate.” Id. at ¶ 90; see also December 23, 2020 Deposition of Kara DiPietro (attached as Exhibit 3 to the Declaration of Kara DiPietro (“DiPietro Decl.”), DE [30-3]).

B. The Parties Enter Into the Agreement and Guaranty

On or about June 28, 2018, HMC and CDS entered into an Accounts Receivable Agreement (the “Agreement”), whereby Plaintiff agreed to provide HMC with up to $1, 000, 000 in financing secured by HMC's accounts receivable. See Plaintiff's Statement of Uncontroverted Material Facts In Support of Motion for Summary Judgment (“Pl. 56.1”), DE [29-1], ¶ 1; Def. 56.1 ¶ 1; Compl. Ex. 1 (copy of the Agreement, signed by DiPietro as HMC's President, and CDS's President). That same day, DiPietro executed a personal guaranty (the “Guaranty”) in favor of CDS,

3

wherein she guaranteed to Plaintiff all of HMC's obligations under the Agreement. Pl. 56.1 ¶ 2; Compl. Ex. 2 (copy of the Guaranty, signed by DiPietro).

C. Material Terms of the Agreement

The Agreement sets forth the terms and conditions, pursuant to which Plaintiff agreed to provide HMC with a revolving line of credit of up to $1, 000, 000, secured by a subset of HMC's accounts receivable. Pl. 56.1 ¶ 6; Agreement §§ 1.1, 2.1. Under the Agreement, HMC “agreed to assign to CDS the accounts receivable - i.e., open invoices owed to HMC by HMC's customers - that [Plaintiff], in its sole discretion, determined to be ‘Approved Accounts Receivable.'” Pl. 56.1 ¶ 7; Agreement §§ 1.1, 2.1. “HMC could then request, and CDS is its sole discretion could make, advance payments to HMC of up to 80% of the aggregate outstanding amount of the open invoices that HMC had assigned to [Plaintiff].” Id. In order to secure HMC's obligations under the Agreement, HMC “granted CDS a continuing first-priority lien and security interest in all of HMC's current and future accounts receivable and certain other assets.” Pl. 56.1 ¶ 8; Agreement § 4.1. Plaintiff perfected its security interest in HMC's accounts receivable and other assets by filing a UCC-1 Financing Statement with the Maryland Department of Assessments & Taxation. Pl. 56.1 ¶ 9.

i. HMC Assigns its Accounts Receivable to CDS

Pursuant to the Agreement, HMC was required to notify the customers whose accounts receivable had been purchased by, and assigned to, Plaintiff that those customers were to “pay their invoices directly - and only - to CDS.” Pl. 56.1 ¶ 10.

4

For example, the Agreement required that HMC's invoices to its customers include the following language:

THIS ACCOUNT RECEIVABLE IS SOLD AND ASSIGNED TO, IS OWNED BY AND IS PAYABLE ONLY TO CDS BUSINESS SERVICES, INC d/b/a NEWTEK BUSINESS CREDIT P.O. BOX 3611, NEW HYDE PARK, NY 11040, TO WHOM PROMPT NOTICE MUST BE GIVE[N] FOR ANY OBJECTIONS TO PAYMENT OF THIS INVOICE AS RENDERED. GOODS RETURNABLE FOR ANY REASON SHALL BE RETURNABLE ONLY UPON NOTICE TO NEWTEK BUSINESS CREDIT.

See id; see also Agreement §§ 2.1, 2.4 (emphasis in original). In accordance with the Agreement, Plaintiff and HMC provided an “Assignment Notice” to each HMC customer whose receivables were deemed by CDS to be “Approved Accounts Receivable, ” that each such customer “w[as] to remit payment only to CDS.” Pl. 56.1 ¶ 11; Agreement § 2.1. The Assignment Notices were executed by Plaintiff and HMC on HMC's letterhead, sent to designated HMC customers during the July-September 2018 time period, and instructed each recipient “to pay the full amount of all existing and future invoices from HMC” to CDS, because HMC had “sold and assigned these invoices to [CDS] and, and as such they are now owned by [CDS].” Pl. 56.1 ¶¶ 12-13, 15. Each Assignment Notice contained the following language:

This assignment and the payment instructions are effective as of [the date of this letter] and cannot be modified or revoked except in writing, executed by [CDS] and delivered to you. For proper credit to your account with HMC, payments on all HMC invoices should not be made to any other party other than [CDS] without the prior written consent of [CDS].

5

Id. at ¶ 14. If, notwithstanding an Assignment Notice's payment instructions, a recipient-customer paid an invoice directly to HMC, HMC was required under the Agreement to deliver the payment to Plaintiff in the “original form as received” within three business days and that the failure to do so was an Event of Default under the Agreement. Id. at ¶ 16; Agreement § 2.4.

ii. HMC Charged Interest of Prime Rate Plus 5%

Under the Agreement, HMC agreed to pay CDS: (a) interest; (b) a monthly collateral monitoring fee; and (c) an administrative processing fee. See generally Agreement. According to the text of the Agreement, the interest rate on HMC's outstanding balance was to accrue at a per annum rate of 5% above the prime rate^[2]on a daily basis until all of HMC's obligations were paid in full. See Pl. 56.1 ¶ 18; Agreement §§ 1.1, 2.3(A). Plaintiff charged HMC interest once per month, “on the first day of the month for the previous calendar month.” Id. at ¶ 20. If HMC were to default on the Agreement, “default interest [would] accrue at the per annum rate of 10% above [the prime rate].” Id. at ¶ 18; Agreement §§ 1.1, 2.3(A). On the date the parties entered into the Agreement, the prime rate was 5%. See Pl. 56.1 ¶ 19. The prime rate rose to 5.25% on September 27, 2018, to 5.5% on December 20, 2018, and, as of November 2020, had decreased to approximately 3.25%. See id.

6

iii. The Collateral Monitoring Fee

Through the Agreement, CDS “required HMC to pay a monthly collateral monitoring fee equal to 0.7% of [HMC's] average outstanding balance for the prior thirty days (the “Collateral Monitoring Fee”).” Id. at ¶ 21. According to Plaintiff, this fee was intended to reimburse CDS for “internal and external costs borne by [Plaintiff] such as processing and verifying accounts receivable invoices, determining the creditworthiness of HMC's customers, reviewing and processing HMC's assignment agreements with its customers, monitoring and tracking assigned invoices, sending notifications to HMC that invoices were approaching the maximum age to qualify for borrowing eligibility, and processing and applying payments to verify that payments were applied correctly to outstanding customer invoices and the outstanding balances.” Id....