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Manufacturers and Traders Trust Company v. Brick House Spring Water Distributors, LLC

United States District Court, D. Maryland

October 22, 2018

MANUFACTURERS AND TRADERS TRUST COMPANY. Plaintiff,
v.
BRICK HOUSE SPRING WATER DISTRIBUTORS, LLC, el al. Defendants.

          MEMORANDUM OPINION

          A. DAVID COPPERHITE, UNITED STATES MAGISTRATE JUDGE

         The Court will address three pending motions in this Memorandum Opinion. First, Defendant Edward Young filed a Motion to Alter or Amend Judgment ("Defendant's Motion") (ECF No. 44) seeking to reduce the summary judgment award of $189, 991.18 entered against the Defendants by $150, 873.64 on the basis that Plaintiff, Manufacturers and Traders Trust Company ("Plaintiff"), failed to prove damages in its breach of contract claim. ECF No. 44 at 1, 4-6. Second. Plaintiff filed a Motion to Specify Pre-Judgment and Post-Judgment Interest ("Plaintiffs Motion") (ECF No. 45), requesting that the Court specify and award pre- and post-judgment interest. ECF No. 45 at 3. Third, Defendants/Cross-Plaintiffs. Brick House Spring Water Distributors, LLC ("Brick House") and John Taro (collectively with Brick House. "Cross-Plaintiffs"), then filed a "Motion for Joinder" ("Cross-Plaintiffs' Motion") (ECF No. 47) to "join in the Motion to Amend/Alter Judgment filed by the defendant and cross-defendant, Edward Young." ECF No. 47 at 1. After considering each of the motions and responses thereto, the Court finds that no hearing is necessary. See Loc.R. 105.6 (D.Md. 2016). For the reasons set forth herein, the Court will DENY Defendant's Motion (ECF No. 44), GRANT Plaintiffs Motion (ECF No. 45), and DENY Cross-Plaintiffs' Motion (ECF No. 47).

         Factual Background

         Brick House is a limited liability company formed by Messrs. Taro and Young in October 2016 for the distribution of bottled water. ECF No. 7 at 2-3; ECF No. 9 at 1-2. Mr. Taro is the President and 51% owner of Brick House, while Mr. Young is the Chief Executive Officer ("CEO") and 49% owner. ECF No. 7 at 2; ECF No. 9 at 1.

         On January 19, 2017, Mr. Young, as CEO of Brick House, executed a Merchant Services Agreement (the "Agreement") with Plaintiff. ECF No. 29-3 at 2. The Agreement consisted of several documents, including the Merchant Services Application executed by Messrs. Taro and Young on January 19, 2017; the Pricing Terms, Card, Network and Product Flection Form; the Merchant Services Terms & Conditions and Processing Terms & Conditions; and Personal Guaranties of Messrs. Taro and Young. See generally ECF Nos. 29-3, 29-4, 29-5. 29-6. The Rules of the Card Associations, such as Visa and MasterCard, are also part of and incorporated by reference into the Agreement. ECF Nos. 29-3 to 29-6. Under the Agreement, Plaintiff agreed to provide "Merchant Services" to Brick House, which included, among other things. Visa and MasterCard "merchant card processing services" for the use of credit and debit cards in payment for goods and services. ECF No. 29-3 at 2; ECF No. 29-6 at 5.

         The Agreement required Brick House to maintain a Merchant Deposit Account with Plaintiff with sufficient funds to prevent the occurrence of a negative balance. ECF No. 29-6 at 7. In addition, the Agreement required Plaintiff to provide monthly account statements to Brick House. Id. In the case that Brick House believed that an account statement contained an error, the Agreement stated that Brick House could request that Plaintiff initiate an inquiry by providing written notice within sixty days and that failing to do so would "preclude [Brick House] from disputing the activity shown on the subject statement." Id.

         Furthermore, the Agreement specified that Brick House had an obligation to pay all applicable transaction fees, including fees charged by Card Associations, such as Visa or MasterCard. Id. at 9. The Agreement also required Brick House to "immediately reimburse [Plaintiff] the amount of negative balance in the Merchant Deposit Account that occurs as a result of deductions for charge-backs, charges, fees or otherwise" and stated that excessive charge-backs could result in termination of the Agreement. Id. at 8. Brick House agreed that "having excessive charge-backs may result in assessments, tines, fees, and penalties by the Card Associations" and "agree[d] to reimburse [Plaintiff] immediately for any such assessments, fines. fees, and penalties imposed on [Plaintiff] and any related loss, cost, or expense incurred by [Plaintiff]." Id.

         The Agreement also set forth that "Merchant Obligations[1] are immediately due and owing in full, without demand or notice to" Brick House and "Merchant Obligations that are not paid when due will bear interest at the rate of 1.5% per month or the maximum rate of interest allowed by Law, whichever is more." Id. at 6-7. In addition, the Agreement specifies that Brick House "will resolve disputes related to Card Transactions that arise with a Cardholder, exclusively between itself and Cardholder." Id. at 7. The Agreement further delineates that "[u]pon termination of this Agreement, [Brick House] must: [c]ontinue to be responsible for all Chargebacks, fees, fines, assessments, credits, and adjustments resulting from Transactions processed pursuant to this Agreement before termination; and [b]e responsible for all amounts then due or which thereafter may become due to [Plaintiff] under this Agreement." Id. at 13.

         Pursuant to the Agreement, Plaintiff supplied Brick House with two card payment devices, which were assigned two merchant account numbers. ECF No. 29-22 at 2. The account number ending in 8842 was primarily used for card transactions in March 2017. while the account number ending in 9451 was primarily used for card transactions in April 2017. Id. A separate merchant deposit account, in the form of an advanced business checking account, was set up to receive the merchant processing settlement funds in connection with all card transactions conducted by Brick House. Id.

         On or around March 30, 2017, Visa posted a bulletin for its member banks explaining that it had detected an increase in fraud from merchants submitting unauthorized force-posted transactions into the payments system. ECF No. 30. The bulletin explained that a force-posted transaction allows merchants to manually enter a previously obtained authorization code in order to bypass the authorization process. Id. Such unauthorized transactions can result in excessive chargeback losses. Id. According to Visa, a force-posted transaction may entail a small initial sale in order to obtain a valid authorization code for repeated subsequent use. Id.

         When a merchant force-posts a transaction, the merchant submits a payment request to the card issuing bank using a manually entered authorization code, rather than swiping the card. ECF No. 29-22 at 3. Once the payment request is submitted to the issuing bank. Plaintiff credits the merchant deposit account in the amount of the transaction with the expectation that the issuing bank will fund the transaction that same day. Id. It can take several days-or longer for international transactions-for Plaintiff to receive notification that the card issuing bank denied a transaction and initiated a chargeback. Id.

         Between February 13, 2017 and April 10, 2017, Brick House conducted dozens of card transactions. ECF No. 29-8. When Visa and MasterCard determined that fifty-two of the transactions in the amount of $4, 325, 977.37 were unauthorized, they notified Plaintiff that they would not fund the transactions and initiated chargebacks totaling $4, 332, 145.75 through chargeback journal entries. ECF Nos. 29-8, 29-12, 29-15, 29-16. On April 11, 2017. Visa further notified Plaintiff that several of Brick House's transactions were "highly suspicious transactions with no authorizations" and requested that Plaintiff investigate the challenged transactions. ECF No. 29-17 at 1. Despite knowing none of the details of the transactions and failing to produce any sales records pertaining to the challenged transactions, Defendants do not dispute that they conducted the transactions deemed unauthorized by the card issuing banks. ECF No. 29-19 at 2. 5-6.

         According to the monthly account statements for Brick House's Merchant Deposit Account, which detail the debits and credits from the initial deposit of the amount of the challenged transactions, withdrawals by Mr. Young, and subsequent account and chargeback fees, in September 2017, Brick House's Merchant Deposit Account had a negative balance of $189, 991.18. ECF No. 29-10 at 20. Defendants have refused to reimburse Plaintiff for the fees assessed for the card transactions which were deemed unauthorized, including the chargeback fees. On April 11, 2017, Plaintiff informed Messrs. Taro and Young that it would be terminating the Agreement to provide merchant services to Brick House because the Agreement was violated. ECF No. 29-18.

         Procedural Background

         On October 11, 2017, Plaintiff filed suit in this Court against Defendants alleging that Defendants breached their contractual obligation under the Agreement by failing to maintain sufficient funds and to pay amounts owed as a result of a negative balance in their account. ECF No. 1. On November 9, 2017, Brick House and Mr. Taro filed a joint answer and crossclaim against Mr. Young, denying Plaintiffs allegations and alleging that Mr. Young was solely responsible for any damages Plaintiff suffered to the extent that any of Plaintiff's allegations were true. ECF No. 7. Mr. Young filed an answer to the Complaint on November 15, 2017. denying liability.[2] ECF No. 9.

         After discovery closed on April 2, 2018, ECF No. 10-1 at 2, Cross-Plaintiffs filed a motion requesting that the Clerk of the Court enter an Order of Default against Mr. Young on Cross-Plaintiffs' crossclaim for failing to answer or otherwise respond to the crossclaim, ECF No. 25. On April 27, 2018, Mr. Young filed a Motion to Modify Scheduling Order and Briefing Schedule, ECF No. 27, and on April 30, 2018. Plaintiff filed its Motion for Summary Judgment, ECF No. 29. Upon reviewing the motions, the responses thereto (ECF Nos. 32, 34, 35, 37), and Plaintiffs reply (ECF No. 38), the Court denied Cross-Plaintiffs' Motion for Clerk's Entry of Default, denied Mr. Young's Motion ...


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