Richland State Bank v. Household Credit Services
| Decision Date | 30 September 2004 |
| Docket Number | No. CIV. 02-4180.,CIV. 02-4180. |
| Citation | 340 F.Supp.2d 1051 |
| Parties | RICHLAND STATE BANK, a South Dakota Chartered Bank; and Ronald L. Jensen, Plaintiffs, v. HOUSEHOLD CREDIT SERVICES, INC., a Delaware corporation, Defendant. |
| Court | U.S. District Court — District of South Dakota |
Roberto A. Lange, Davenport, Evans, Hurwitz & Smith, Sioux Falls, SD, for Plaintiffs.
Michael A. Henderson, Steven W. Sanford, Cadwell, Sanford, Deibert & Garry, Sioux Falls, SD, for Defendant.
SUMMARY JUDGMENT MEMORANDUM OPINION AND ORDER
Plaintiffs' second amended complaint alleged causes of action for breach of contract, negligence and tortious interference with business, as well as requested declaratory judgment relief regarding a contractual provision. Doc. 47. On October 15, 2003. Defendant moved for summary judgment on all counts of Plaintiffs' second amended complaint. Doc. 61. At a pretrial conference hearing on January 5, 2004, the Court heard argument on the motion for summary judgment. Plaintiffs subsequently filed a third amended complaint, in which they have added a cause of action for fraud and deceit. Doc. 88. Defendant then submitted a second motion for summary judgment requesting summary judgment in its favor on the fraud and deceit cause of action. Doc. 93.
Since this matter is before the Court on motions for summary judgment, this Court will view the facts in the light most favorable to the nonmoving party. Plaintiff Richland State Bank is a South Dakota Bank with its principal place of business in Bruce, South Dakota. Since 1995, Plaintiff Ronald Jensen has been its sole shareholder. Richland State Bank issued MasterCard credit cards on new accounts in the sub-prime credit card market (the Richland Portfolio) from November of 1997 until June of 1999. The Richland Portfolio was a cross-sell portfolio offered only to the best cardholders in a sub-prime portfolio called the AFCA portfolio. The AFCA portfolio was owned by a separate business called UCNB, which also owned the ACE Portfolio. The Richland Portfolio performed better than the AFCA portfolio.
Richland State Bank was a credit card issuing bank, but was not a servicer. Until Defendant assumed the servicing contract, a business called Specialized Card Services, Inc. (SCS) performed account servicing under the Richland/SCS Service Agreement. SCS also serviced the AFCA portfolio. In 2000, the owner of the AFCA portfolio had problems with the Office of Comptroller of Currency (OCC), and the Richland Portfolio had problems with the FDIC. The FDIC issued a cease and desist order in February of 2000, and lifted the same in the fall of 2000. UCNB agreed with the OCC to sell its credit card business, including the AFCA and ACE portfolios.
Defendant Household Credit Services, Inc. (HCS) is in the business of owning both prime and sub-prime credit card portfolios. Defendant bought the AFCA portfolio at 72.5% of par, and wanted to buy the Richland Portfolio. Defendant had discussed offering 77% to 80% of par for the Richland portfolio in the summer of 2000. On August 4, 2000, HCS entered into a contract with UICI, a publicly traded company, to purchase the assets of SCS. As part of that agreement, Defendant agreed to service the Richland State Bank accounts for a period of one year following the closing. Although Defendant did not really want to service the Richland Portfolio, according to the project manager of Defendant HCS, it committed to servicing the Richland Portfolio as an avenue to purchase the portfolio.
On September 20, 2000, Ronald Jensen entered into a contract to sell the Richland State Bank for book value to Bryan Mitchell. The purchase price included the payment of book value for the Richland Portfolio. The closing was to occur at the end of 2000. Plaintiffs contend that the asset value of the Richland Portfolio was around 87% of par at that time. The project manager of Defendant HCS called a person affiliated with Bryan Mitchell to seek to keep the Richland Portfolio off the market, so that Defendant HCS could have an opportunity to acquire the portfolio.
Both SCS and then Defendant were required to comply with the Fair Debt Collection Practices Act in servicing the Richland Portfolio. Neither were properly licensed to comply with the Fair Debt Collection Practices Act. On September 25, 2000, the President of the Richland State Bank was advised that Defendant wanted the Richland cards out by the end of the month. When the President of Richland contacted Defendant HCS, he was advised that HCS had a solution — it would outsource collections to LTD. LTD was not a subcontractor of Richland State Bank. Rather, Defendant HCS was the client of LTD on the performance of collections on the Richland Portfolio.
Plaintiffs have submitted evidence that no information was provided to LTD concerning the historical performance of the Richland Portfolio, and that LTD received no initial criteria or performance expectations. In addition, the collectors were all paid the same monthly salary without additional incentives. Plaintiffs have presented evidence that the collectors assigned to the Richland Portfolio were of inferior quality whose positions were terminated because of job abandonment, incarceration, lack of production, and insubordination. Plaintiffs contend that few, if any collection calls were made, and operational problems were not remedied. The Richland Portfolio turned unprofitable in the fall of 2000, Plaintiffs contend, as a result of substandard collections. Although the Richland Portfolio had historically outperformed the AFCA Portfolio, the Richland Portfolio's performance fell well below the AFCA Portfolio.
On December 19, 2000, Defendant HCS faxed an offer for the Richland portfolio at 48% of par. Bryan Mitchell received a fax of the Defendant's offer, and immediately backed out of the Stock Purchase Agreement for the Richland State Bank. The termination letter explained, "As a result of the Household offer and the deteriorating performance of the Richland portfolio since we signed the Agreement, we will not acquire the Bank with the credit card portfolio in it at any price." Richland State Bank them made a demand on Ronald Jensen to buy the sub-prime credit card portfolio receivables at 72.5% of par. Jensen arranged such a purchase by Winn Investors, L.L.C.. After the performance continued to deteriorate, Jensen arranged for Specialized Investments Risks. Ltd., an entity owned by Jensen, to purchase the Richland Portfolio.
The Richland /SCS Service Agreement contained the following clause:
16. Limitation on Damages. In the event that SCS is found liable for any material errors in processing or servicing Institutions's accounts, SCS will only be liable for the amount of the transactions and for the timely correction of any errors or breach of service. In the event of such processing or servicing errors SCS shall not be liable for any penalties or damages including but not limited to anticipated and unanticipated damages, attorney's fees, and costs of collection, and under no circumstances shall SCS be liable for lost profits or for special, consequential, punitive or exemplary damages.
In a second amendment to the Richland/SCS Service Agreement, HCS was substituted for SCS. Other changes were made to the Service Agreement, but paragraph 16 remained the same.
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment shall be entered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In ruling on a motion for summary judgment, the Court is required to view the facts in the light most favorable to the non-moving party and must give that party the benefit of all reasonable inferences to be drawn from the underlying facts. AgriStor Leasing v. Farrow, 826 F.2d 732, 734 (8th Cir.1987). The moving party bears the burden of showing both the absence of a genuine issue of material fact and its entitlement to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Once the moving party has met its burden, the non-moving party may not rest on the allegations of its pleadings but must set forth specific facts, by affidavit or other evidence, showing that a genuine issue of material fact exists. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 257, 106 S.Ct. 2505; City of Mt. Pleasant v. Associated Elec. Coop., Inc., 838 F.2d 268, 273-74 (8th Cir.1988). Rule 56(c) "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
Defendant contends that since the Plaintiffs knew months before HCS took over the SCS contract that SCS was violating the law by engaging in third party collections without appropriate state license, the contract with HCS, who also is not licensed to engage in third party collections, was void as a contract that requires a party to violate a law. In support of its position, Defendant cites to S.D.C.L. § 53-9-1, which provides that a "contract provision contrary to an express provision of law or to the policy of express law ... is unlawful." Defendant also relies on S.D.C.L. § 20-2-2 which provides that the a "condition in a contract, the fulfillment of which is impossible or unlawful, ... is void."
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