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Capitol Payment Systems, Inc. v. Di Donato

United States District Court, D. Maryland

May 23, 2017

SALVATORE DI DONATO, et al., Defendants.



         This Opinion resolves the defendants' motion to transfer this case to the District of New Jersey.

         On February 1, 2016, Capitol Payment Systems, Inc. (“Capitol” or “CPS”), plaintiff, filed a “Complaint For Injunctive Relief” in the Circuit Court for Anne Arundel County against defendants Pinnacle Processing Services, LLC (“Pinnacle”) and Salvatore Di Donato, the owner and president of Pinnacle. ECF 4. Capitol asserts a claim for breach of contract (Count I) (id. ¶¶ 33-40) and a claim for tortious interference with contractual relations (Count II). Id. ¶¶ 41-51.[1]Pinnacle removed the case to this Court on March 23, 2016, asserting diversity jurisdiction. See 28 U.S.C. §§ 1332, 1441, and 1446. ECF 3 at 1.

         Pursuant to a joint motion (ECF 24), this case was stayed by Order of May 20, 2016 (ECF 26), pending mediation in a related case initiated by Pinnacle and Di Donato on February 25, 2016, in the District of New Jersey. See, e.g., ECF 26; ECF 40; see also Pinnacle Processing Services, LLC et al. v. Capitol Payment Systems, Inc., et al., Case No. 3:16-CV-01084-FLW-DEA (D. N.J.). The mediation was unsuccessful. See ECF 39.

         Defendants have moved to transfer the case to the United States District Court for the District of New Jersey, pursuant to 28 U.S.C. § 1404. ECF 43. The motion is supported by a memorandum of law (ECF 43-1) (collectively, “Motion”) and several exhibits. ECF 43-2 through ECF 43-6. Capitol responded in opposition (ECF 44, “Opposition), with exhibits. ECF 44-1 through ECF 44-10. Defendants have replied. ECF 45 (“Reply”).

         The Motion has been fully briefed and no hearing is necessary to resolve it. See Local Rule 105.6. For the reasons that follow, I shall grant the Motion.

         I. Factual Background[2]

         Capitol is a Maryland corporation with its principal place of business in Anne Arundel County. ECF 4, ¶ 3. It is a “merchant services company” that provides payment transaction processing services “to a wide array of merchants including small business, regional and national chains, associations, agent banks, fuel merchants and government agencies along with many others.” Id. ¶ 6. Capitol's business includes “processing point of sale credit, debit, [and] gift card transactions for retail merchants and banks.” Id. ¶ 7. Robert Schoenbauer is the president of Capitol. ECF 44-5 (Schoenbauer Affidavit), ¶ 2. He is not a party to this case.

         Pinnacle is a single member limited liability company formed under the laws of New Jersey, with its principal place of business in Red Bank, New Jersey. ECF 4, ¶ 5; ECF 43-5, ¶¶ 3-5 (Di Donato Declaration of 3/31/2016), ¶¶ 3-5.[3] Di Donato is the president, owner, and operator of Pinnacle. ECF 4, ¶ 4; ECF 43-4 (Di Donato Declaration of 3/7/2016), ¶ 3. Formed in 2008, Pinnacle operates as “an agent in the electronic payment processing industry . . . [that] works on behalf of Independent Sales Organizations . . . .” ECF 43-3, ¶ 4.

         I pause to review briefly aspects of the credit card payment processing industry that frame this case. According to defendants, “[w]hen merchants offer debit and credit card payment services to consumers, they generally do so with the assistance of entities that act as intermediaries between merchants and electronic payment processors.[]” ECF 43-1 at 5. Payment processors “often contract with entities known in the payments industry as Independent Sales Organizations (“ISOs”) . . ., [which] acquire merchant relationships on behalf of the processors” and provide various other services. Id.

         “ISOs, in turn, commonly associate themselves with merchant-level agents: entities or individuals that seek out new merchant relationships on behalf of the ISOs and otherwise facilitate the relationships between merchants and ISOs.” Id. Agents are typically compensated through ongoing monthly payments known as “residuals.” Id.

         On or about July 17, 2008, Di Donato entered into an “Independent Marketing Agreement” (“Agreement”) with Capitol. ECF 4, ¶¶ 4, 9; ECF 44-1 at 17-26 (Agreement).[4] Di Donato states that he signed the Agreement in New Jersey and e-mailed the signed copy to Schoenbauer. ECF 43-5, ¶ 10. In its Opposition, Capitol states: “Pinnacle signed the Agreement in Florida and returned the signed Agreement to Capitol in Maryland.” ECF 44 at 10. Nevertheless, the disagreement as to where Pinnacle signed the Agreement is of no consequence, as the parties seem to agree that Pinnacle did not sign the Agreement in Maryland.

         According to CPS, under the Agreement, defendants “agreed to act as an agent of CPS and solicit prospective merchants to apply to CPS for merchant agreements and otherwise provide various merchant account and processing services to the ‘merchants.'” ECF 4, ¶ 10.

         Paragraph 4(c) of the Agreement provides, ECF 44-1 at 19-20:

(c) Non-Interference So long as any Merchant Agreement of any merchant solicited by Agent remains in effect, and for a period not to exceed five years after such date, Agent shall not interfere in any manner whatsoever with the contractual rights and interests of CPS under any such Merchant Agreement, either directly or indirectly (including without limitation, through any partnership, joint venture as an employee or other entity or arrangement[)] to engage in bank card transaction processing through any person or entity other than CPS. Agent may not contact bank or processor directly in an effort to buy pass [sic] CPS or attempt to go direct in any way. Agent may not develop a direct relationship with bank or processor in any way regardless of initiation directly or indirectly. If Agent violates the provisions of this Subparagraph 4(c), by its own acts, or in collusion with any other person or entity, then all payments due to Agent hereunder shall immediately cease and CPS shall have no further obligation to make any such payments and shall be entitled to all other remedies it may have under this Agreement or applicable law. The covenants of Agent and all other provisions of this Subparagraph 4(c) shall survive termination of this Agreement.

         Paragraph 5 of the Agreement is titled “COMPENSATION OF AGENT.” ECF 44-1 at 20. Paragraph 5(a), titled “Processing Fees”, provides, inter alia, id.: “Agent shall be entitled to a fee which is derived from discount fees on gross sales and which is paid to CPS for each merchant solicited by Agent and approved by CPS. Agent shall be entitled to receive compensation . . . for so long as CPS is receiving corresponding compensation for such approved merchant . . . .” (Internal quotations omitted).

         Paragraph 13 of the Agreement pertains to the use of proprietary information. Id. at 23-24. It defines “proprietary information” as “all printed and written material, application forms, contracts and other information furnished by CPS to Agent.” Id. at 23. With respect to proprietary information, the Agreement provides, in pertinent part, id.: “Agent shall not use or disclose any of CPS proprietary information to any other person or entity during the term of this Agreement and for three (3) years thereafter.”

         Notably, paragraph 17 is titled “GOVERNING LAW”. Id. at 24. It provides, id.: “This Agreement and all the documents referred to herein, shall in all respects, be interpreted, enforced and governed by and under the laws of the State of Maryland.”

         In or around June 2012, the parties became involved in a dispute concerning defendants' residual commission percentage. ECF 4, ¶ 13. At the time, defendants threatened to move to another provider the accounts that had been brought to Capitol. Id. To retain Pinnacle as an independent contractor, Capitol agreed to increase defendants' commission for new business. Id.; see ECF 44-1 at 27 (Addendum to Agreement). Nevertheless, defendants began “selling” for a competitor, Priority Payments Local (“Priority”), and other merchant services providers. ECF 4, ¶ 13.

         In or around the fall of 2015, defendants allegedly “began soliciting various CPS customers and encouraging those customers to terminate their merchant agreements with CPS.” Id. ¶ 15. Defendants also directed some of CPS's customers to Priority. Id. According to Capitol, defendants “developed a scheme by which [they] solicit an existing CPS account, move[] that account to Priority, and then approximately one month later request[] that the account be closed with CPS.” Id. ¶ 16. Capitol alleges, on information and belief, that defendants “tell these account holders that CPS is considering selling its portfolio of accounts, thereby implying that CPS is no longer stable or viable.” Id. ¶ 17. Further, Capitol alleges, on information and belief, that defendants tell the account holders that Capitol “is running a fraudulent operation and is getting sued.” Id. ¶ 18.

         Capitol points to a variety of businesses that had an account with Capitol but have since moved to Priority. See Id. ¶¶ 22, 23, 25, 27, 29, 30. It also points to several other businesses that have either left or considered leaving Capitol. See Id. ¶¶ 24, 26, 28, 31, 32.

         Di Donato avers that on January 19, 2016, he received a letter from Capitol's counsel “purporting to terminate the Agreement based on alleged (and unspecified) breaches by Pinnacle.” ECF 43-4, ¶ 16; id. at 24-26. The letter, dated January 19, 2016, stated, id. at 24 (emphasis in original):

Please be advised that it appears as though Pinnacle has violated, and continues to violate, the Agreement in a variety of respects which include, but upon information and belief are not limited to, material breaches of paragraph 4(c) of the Agreement which explicitly prohibits interference “in any manner whatsoever with the contractual rights and interests of CPS under any such Merchant Agreement...”
Indeed, my client has reason to believe that Pinnacle is and has been soliciting various CPS customers to cease doing business with CPS and otherwise terminate their Merchant Agreements. Some of these customers have already confirmed as much.
* * *
Given all of the foregoing, please be advised that, as a result of Pinnacle's substantial and material breach of the Agreement, the Agreement is hereby TERMINATED. Furthermore, pursuant to paragraph 4(c) and all other applicable provisions in the Agreement, all payments due to Pinnacle under the Agreement shall immediately cease.
* **
CPS reserves all rights at law, in equity and in contract including, but not limited to, the right to immediately institute legal proceedings against Pinnacle which action(s) may include emergency injunctive relief prohibiting Pinnacle's continuing violations of the Agreement and other improper activities adverse to CPS. CPS will seek reimbursement of it's [sic] reasonable attorney's fees as part of any such action.

         Counsel for Pinnacle responded to Capitol by letter dated January 22, 2016. ECF 43-4, ¶ 18; id. at 28-29. The letter of January 22, 2016 stated, in pertinent part, id. at 28-29 (emphasis in original):

The thrust of your letter appears to be a claim that Pinnacle breached Section 4(c) of the Agreement. The relevant language in that Section is that “Agent shall not interfere in any manner whatsoever with the contractual rights and interests of CPS under any such Merchant Agreement… (emphasis added).” In fact, Pinnacle has in no way interfered with any CPS merchant or Merchant Agreement. And your letter is devoid of specific allegations to the contrary. Conclusory and vague assertions that merchants have switched processors - which could happen for any number of reasons - or that there were “other improper activities” cannot satisfy any legally or commercially reasonable definition of interference.
* * *
The failure to timely pay Pinnacle would result in irreparable harm to its business. Section 6 of the Agreement provides for such payment by the 30th day of each month. Based upon the lengthy course of dealing between the parties, CPS typically makes such payments by the 25th day of each month. Pinnacle will not sit idly by while CPS improperly withholds compensation payable to Pinnacle pursuant to the Agreement.
To be clear, if Pinnacle does not receive payment in full by January 29, 2016, we will commence litigation on behalf of Pinnacle in an appropriate jurisdiction and venue. Pinnacle's claims would potentially include, among others, breach of contract, fraud, breach of the duty of good faith, unjust enrichment, tortious interference, a demand for accounting and equitable relief.

         Di Donato maintains that Pinnacle never received a response to the letter of January 22, 2016. ECF 43-4, ¶ 18. But, according to Di Donato, at some point after Pinnacle's letter of January 22, 2016, Pinnacle lost access to an online system called “E-Merchant View”, which allows it to track the status of merchant accounts that it brought to Capitol. Id. ¶ 19.

         Di Donato then directed counsel to send a second letter to counsel for Capitol. Id. ¶ 20; id. at 31-32. That letter, dated January 27, 2016, provided, in pertinent part, id. at 31 (emphasis in original):

CPS's actions constitute a material breach of the Agreement. This correspondence shall serve as written notice of CPS's material breach in accordance with Section 10(a) of the Agreement. As such, CPS's failure to cure this breach within five (5) days of the date hereof shall constitute grounds for immediate termination of the Agreement. To be clear, the Agreement will terminate as of February 2, 2016 if Pinnacle's access to E-Merchant View is not fully restored by February l.
* * *
We reiterate our demand that CPS immediately pay Pinnacle its monthly compensation in full. CPS must also immediately restore Pinnacle's access to E-Merchant View to ensure that all merchants receive proper and timely customer service. If CPS does not alter its present course, not only will it face costly ...

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