Loyal Bank Ltd. v. Mastercard Int'l

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
PartiesLOYAL BANK LIMITED, et al., Plaintiffs, v. MASTERCARD INTERNATIONAL INCORPORATED, Defendant.
Docket Number20-CV-2208 (KMK)
Decision Date13 August 2021

Michael Tremonte, Esq.

Yu Han, Esq.

Sher Tremonte LLP

Counsel for Plaintiffs

Rena Andoh, Esq.

Caitlin Ross, Esq.

Kelly McCullough, Esq.

Sheppard, Mullin, Richter & Hampton LLP

Counsel for Defendant

OPINION & ORDER

KENNETH M. KARAS, United States District Judge.

Plaintiffs Loyal Bank Limited (Loyal Bank), and Ikins Clarke (“Clarke”) and Rikhi Rampersad (“Rampersad”), as joint liquidators of Loyal Bank Limited (collectively, Plaintiffs), bring this Action against Mastercard International Incorporated (Defendant or “Mastercard”), alleging that Defendant breached its contracts with Loyal Bank and assessed Loyal Bank an illegal termination fee. (Am. Compl. (“AC”) (Dkt. No. 18).) Before the Court is Defendant's Motion To Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) (the “Motion”). (See Not. of Mot. To Dismiss Pursuant to Fed.R.Civ.P. 12(b)(6) (“Not. of Mot.”) (Dkt. No. 30).) For the reasons that follow, the Motion is granted in part and denied in part.

I. Background
A. Factual Background

The following facts are taken from Plaintiffs' Amended Complaint, (AC), and documents of which the Court may take judicial notice. They are assumed true for purposes of deciding the Motion.

On September 28, 2007, Loyal Bank and Mastercard entered into a Mastercard License Agreement (the “License Agreement”). (AC ¶ 23; Decl. of Rena Andoh in Supp. of Mastercard Int'l Inc.'s Mot. to Dismiss (Andoh Decl.) Ex. A (“License Agreement”) (Dkt. No. 32-1).)[1]The License Agreement authorized Loyal Bank to issue debit cards using the “MasterCard” mark. (AC ¶ 23; License Agreement ¶ 2.) In turn, Loyal Bank, among other things, agreed to “never take any action . . . to injure, harm[, ] or dilute the . . . goodwill in and to any of the Marks.” (License Agreement ¶ 7.) Loyal Bank also agreed to “observe all Rules adopted in connection with Authorized Marks.” (Id. ¶ 6; see also id. ¶ 18 (noting that the Rules are incorporated into the License Agreement).) The License Agreement provided that, if a “condition occurs that, under a Rule . . . permits the termination of th[e] License Agreement . . . then MasterCard may terminate th[e] License Agreement as provided in such Rule.” (Id. ¶ 11(f).) The Mastercard Rules (“Rules”) allowed Mastercard “at its sole discretion” to terminate the License Agreement “effective immediately and without prior notice” if, among other things, Loyal Bank “directly or indirectly engage[d] in or facilitate[d] any action or activity that is illegal, or that, in the good faith opinion of Mastercard . . . has damaged or threatens to damage the goodwill or reputation of Mastercard or any of its Marks.” (AC ¶ 26 (brackets omitted); see also Andoh Decl. Ex. B (“Rules”) ¶ 1.13.2(9) (Dkt. No. 32-2).) The Rules also contained Standards, including [u]phold[ing] the value of the Mastercard brands, ” [a]ct[ing] with financial integrity and in compliance with the Standards and the law, ” and [e]ngag[ing] in rigorous fraud management practices.” (Rules 8.) Under the Rules, Mastercard “reserve[d] the right to limit, suspend, or terminate [the License Agreement] . . . if [Loyal Bank] [did] not comply with any Standards.” (Rules ¶ 2.1.2; see also AC ¶ 26.)

The License Agreement and Rules also established obligations for Loyal Bank in the event that the License Agreement was terminated. According to the License Agreement, Loyal Bank was to “remain liable on all amounts due . . . pursuant to the Rules and for [Loyal Bank's] appropriate share of the expenses properly incurred prior to the termination date” and to “otherwise remain liable for all amounts which became due pursuant to the Rules . . . on account of such termination.” (License Agreement ¶ 14(c)-(d).) The Rules contained similar requirements. (See Rules ¶ 1.13.4(2) (“A terminated Customer . . . must promptly pay to [Mastercard] (a) any and all applicable dues, fees, assessments, or other charges as provided in the Standards and (b) all other charges, debts, liabilities, and other amounts arising or owed ....”).) In addition, the Rules required Loyal Bank to “timely pay . . . all fees, charges, assessments and the like . . ., including those set forth in the applicable regional Mastercard Consolidated Billing System manual (the “Manual”). (Id. ¶ 3.8 (italics omitted).) The Manual contained a clause (the “Termination Fee Clause”) requiring a termination fee equal to the greater of $500 or the sum of, in relevant part,

The highest total amount [Loyal Bank] was billed and/or paid . . . as assessments and as fees and charges for services provided directly or indirectly by Mastercard . . ., in a single year during the four calendar years preceding the year in which the termination is effective . . . and . . . [a]ny federal, state, local, or other government taxes or charges that are attributable to the above amounts ....

(Andoh Decl. Ex. D (“Manual”) 2MC1901 (Dkt. No. 32-4).)

Pursuant to the License Agreement and Rules, Mastercard and Loyal Bank also entered into a Deposit Account Security Agreement (the “Security Agreement”). (AC ¶ 27; Andoh Decl. Ex. C (“Security Agreement”) (Dkt. No. 32-3).) The Security Agreement required that Loyal Bank open a deposit account containing collateral to secure the performance of its payment obligations to Mastercard. (AC ¶ 27; Security Agreement ¶ 2.) Loyal Bank opened such an account (the “Account”). (AC ¶ 28; see also Security Agreement Ex. A.) The Security Agreement defined an Event of Default to include when “any proceeding shall be instituted by or against [Loyal Bank] . . . seeking liquidation.” (Security Agreement ¶ 5.) The Security Agreement provided that, should an Event of Default occur, Mastercard “without notice or demand may apply the funds in the Account to any unpaid Obligations (including, without limitation, any Obligations that become due as a result of the occurrence of an Event of Default).” (Id. ¶ 6.)

On March 2, 2018, Loyal Bank and two of its officers were indicted. (AC ¶¶ 31, 34.) The indictment alleged a money laundering conspiracy concerning financial transactions made between two of Loyal Bank's then-officers and an undercover FBI agent. (Id. ¶¶ 33-34.) Loyal Bank entered a plea of “not guilty, ” and the case is still pending. (Id. ¶¶ 36-37.)

On March 16, 2018, Mastercard notified Loyal Bank that it was exercising its right under the Rules as incorporated into the License Agreement to suspend the License Agreement. (Id. ¶ 38.) Loyal Bank's counsel had multiple phone conversations with Mastercard representatives, including counsel, regarding Loyal Bank's efforts to resolve the indictment. (Id. ¶ 41.) In one of these conversations on March 29, 2020, Mastercard's counsel made three representations. (Id. ¶ 42.) First, counsel represented that Mastercard's decision to suspend rather than terminate Loyal Bank was designed to allow Loyal Bank an opportunity to work towards reinstatement. (Id.) Second, counsel represented that Mastercard would not terminate Loyal Bank prior to a decision by the DOJ regarding how to resolve the indictment, so long as Loyal Bank retained its international banking license. (Id.) And, third, counsel represented that Mastercard's decision regarding whether to terminate Loyal Bank would hinge on whether Loyal Bank would be permitted to move forward with lawful business operations notwithstanding the indictment. (Id.)

Contrary to these representations, Mastercard by letter dated May 22, 2018 purported to exercise its option under Rule 2.1.2 to terminate the License Agreement. (Id. ¶ 43.) Loyal Bank protested that Mastercard did not have a right to terminate the License Agreement. (Id. ¶ 44.) In response, Mastercard's outside counsel stated that, in addition to Rule 2.1.2, Mastercard had the right to terminate the License Agreement under Rule 1.13.2. (Id.) Specifically, Mastercard's counsel stated that “Mastercard has determined, in its sole discretion and in good faith, that, at minimum, Loyal [Bank] has damaged or threatens to damage the reputation of Mastercard, and is therefore subject to termination, without advanced notice, under Rules 1.13.2 and 2.1.2.” (Id.)

Also on May 22, 2018, Mastercard announced that it had assessed a termination fee of $2, 151, 426 pursuant to Rule 1.13.4(2). (Id. ¶ 45.) Mastercard calculated this sum under Section 2MC1901 of the Manual. (Id. ¶ 47.) It consisted of $1, 674, 455 in annual fees payment, and $476, 971 in tax reimbursement payment. (Id. ¶ 50.)

On August 24, 2018, “as a proximate result of the wrongful termination of the License Agreement by Mastercard, ” Loyal Bank was placed in liquidation. (Id. ¶ 51.) On August 30, 2018, Mastercard, supposedly relying on Rule 1.4, emptied the Account by transferring the entire balance of $1, 517, 411.37 to partially cover the termination fee. (Id. ¶ 53.)

The Amended Complaint makes three claims. First, it claims that Mastercard breached the License Agreement by terminating the License Agreement. (Id. ¶¶ 55-69.) Loyal Bank alleges that Mastercard did not make a good faith decision regarding the effect of Loyal Bank's license on its reputation. (Id. ¶¶ 62-67.) Second, it seeks a declaratory judgment that Mastercard's imposition of the termination fee was an unenforceable penalty. (Id. ¶¶ 70-82.) Third, it claims that Mastercard breached the Security Agreement by transferring the funds in the Account to Mastercard. (Id. ¶¶ 83-91.) Plaintiffs seek compensatory damages of at least $1, 517, 411.37, a declaratory judgment regarding the allegedly unenforceable penalty, statutory interests costs, and attorney fees. (Id...

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