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Merrick Bank Corp. v. Valley National Bank

United States District Court, D. New Jersey

November 30, 2017

MERRICK BANK CORPORATION, Plaintiff,
v.
VALLEY NATIONAL BANK, Defendant. AMERICAN EXPRESS TRAVEL RELATED SERVICES, INC. and JETPAY MERCHANT SERVICES, LLC, Plaintiffs,
v.
VALLEY NATIONAL BANK, Defendant.

          OPINION

          HON. MADELINE COX ARLEO UNITED STATES DISTRICT JUDGE.

         THIS MATTER comes before the Court on Plaintiff Merrick Bank Corporation's (“Merrick”) and Defendant Valley National Bank's (“VNB”) cross-motions for summary judgment in the matter Merrick Bank Corp. v. Valley National Bank, No. 13-7756 (D.N.J.) (the “Merrick” action), and Plaintiffs American Express Travel Related Services, Inc. (“American Express”) and JetPay Merchant Services, LLC (“JetPay”) and Defendant VNB's cross-motions for summary judgment in the matter American Express Travel Related Services, Inc. and JetPay Merchant Services, LLC v. Valley National Bank, No. 14-7827 (D.N.J.) (the “JetPay” action).[1]Merrick ECF Nos. 207, 208; JetPay ECF Nos. 113, 116-118. The parties oppose the respective motions. Merrick ECF Nos. 211, 212; JetPay ECF Nos. 124-27. For the reasons stated below, Plaintiffs' motions for summary judgment are DENIED, and VNB's motions for summary judgment are GRANTED in part and DENIED in part.

         I. Background

         This matter arises from the fraudulent operation and eventual collapse of Southern Sky Air Tours (d/b/a Direct Air) (“Direct Air”), a public charter operator. Plaintiffs Merrick, JetPay, and American Express are banks and credit card processing companies that ultimately reimbursed Direct Air consumers who had paid for incomplete flights due to the company's demise. Plaintiffs seek payment from Defendant VNB, the manager of Direct Air's escrow account, which was formed with the purpose to ensure that sufficient funds were available to refund Direct Air customers in the event that their flights were not completed.

         A. Direct Air Relationship with Plaintiffs

         A credit card purchase typically involves four parties: (1) the cardholder; (2) the cardholder's bank (the “issuing bank”); (3) the merchant's acquiring bank; and (4) the merchant. Amex Stmt. ¶ 42. Following an introduction by JetPay, Merrick served as Direct Air's acquiring bank from its inception in 2006 to its eventual closure in 2012.[2] VNB Corrected R.56.1 Statement of Undisputed Facts (“VNB Stmt.”) ¶¶ 55-64, Merrick ECF No. 209-1.[3] JetPay, an Independent Sales Organization, enters into contractual arrangements with association member banks such as Merrick to provide credit card processing services to its merchant customers, such as Direct Air. JetPay R.56.1 Statement of Undisputed Facts (“JetPay Stmt.”) ¶ 1, JetPay ECF No. 116-2.

         In its capacity as an acquiring bank, Merrick cleared and settled certain credit and debit card transactions for Direct Air. VNB Stmt. Id. ¶ 63. When a cardholder purchased a flight with a credit or debit card, Merrick received a payment from the credit or debit card “issuing bank” through the applicable Card Association rules and regulations by which it is bound as a member bank. Id. ¶ 23. Merrick then made a payment to Direct Air. Id. ¶ 24. If the cardholder later disputed a card charge, the cardholder could demand the money back from its issuing bank, which credited the cardholder. Id. ¶ 25. The issuing bank then initiated a “chargeback.” Id. ¶ 26. Pursuant to the Card Association regulations, Merrick is required to reimburse the card issuing bank the amount of the chargeback. Id. Once those funds are properly charged-back, Merrick would then attempt to collect the funds from Direct Air pursuant to a Merchant Agreement under which Direct Air was responsible for paying Merrick and JetPay for any chargebacks. Id. ¶ 67. Through additional agreements, JetPay also agreed to indemnify Merrick for any chargebacks it could not collect from Direct Air. Id. ¶ 68. In addition, as a credit card process, JetPay was bound through card association agreements to refund Direct Air customers directly. JetPay Stmt. ¶ 79. Direct Air was a covered merchant under Merrick's uncollectable chargeback insurance policy at all relevant times. VNB Stmt. Id. ¶¶ 59-61.

         Plaintiff American Express can serve as both an acquiring bank and the issuing bank or solely as an acquiring bank. American Express R.56.1 Statement of Undisputed Facts (“Amex Stmt.”) ¶ 42, JetPay ECF No. 113-2. As the acquiring bank associated with American Express credit card transactions, when a merchant processes a cardholder's American Express credit card transaction, American Express issues payment to the merchant who accepted the credit card. Id. ¶ 43. If a cardholder disputes a credit card charge, then he/she can seek a reversal or reimbursement for the charge from American Express by initiating a “dispute.” Id. ¶ 44. As an acquiring bank, American Express is required to honor valid disputes and issue a reimbursement to the cardholder. Id. ¶ 45. American Express can then seek to charge back the merchant. Id. ¶ 46.

         In 2006, American Express entered in a Credit Card Acceptance Agreement with Direct Air, pursuant to which Direct Air accepted American Express credit cards as payment. Id. ¶ 17. As such, it served as the acquiring bank for Direct Air purchases with an American Express card. When American Express cardholders used their credit cards to purchase tickets for Direct Air flights, American Express deposited the entire purchase amount into Direct Air's escrow account with VNB. Id. ¶ 18. American Express was obligated to refund payments for cancelled Direct Air flights to customers who submitted claims in accordance with American Express's dispute procedures. Id. ¶ 47.

         B. The Direct Air Escrow with VNB

         Direct Air was subject to regulations promulgated by the Department of Transportation (the “DOT Regulations”), which required it to maintain an escrow account in which payments made by Direct Air customers were held. VNB Stmt. Id. ¶ 36. On October 20, 2006, VNB and Direct Air entered into a Public Charter Depository Agreement pursuant to DOT Regulations. Id. VNB subsequently opened the Direct Air depository account on or around October 26, 2006. Id. ¶ 52. Direct Air made its first deposit into the account in January 2007, and began to accept bookings from consumers. Id. ¶¶ 53, 93. In its role as a depository bank, VNB also entered into a number of tripartite Depository Agreements that each involved VNB, Direct Air, and either a Direct Air carrier or another charter operator. Id. ¶ 16.

         VNB was to maintain an accounting of the funds it received from Direct Air pursuant to the DOT Regulations. Merrick R.56.1 Statement of Undisputed Facts (“Merrick Stmt.”) ¶ 12, Merrick ECF No. 207-2; JetPay Stmt. ¶ 12; Amex Stmt. ¶ 12. The DOT Regulations provide that funds paid by passengers for services covered by the DOT Regulations are held until the air carrier certifies that the flight to which the charter operator has allocated funds has been completed. Merrick Stmt. ¶ 18; JetPay Stmt. ¶ 18; Amex Stmt. ¶ 16. At that point, the escrow bank must release the funds to the charter operator. Id. VNB filed a Form 4534 with the DOT certifying that it, along with Direct Air and an air carrier, “will completely fulfill [its] obligations” under the Depository Agreement and the DOT Regulations. Merrick Stmt. ¶ 18; JetPay Stmt. ¶ 18.

         During the course of Direct Air's operations, VNB released funds from the escrow account in response to written requests submitted by Direct Air, as well as chargebacks from Merrick and JetPay. VNB Stmt. ¶ 138. The parties dispute whether, during the course of Direct Air's operations, VNB knew if the escrow account was operating normally. Merrick Response to VNB Stmt. ¶ 135, Merrick ECF No. 211-21. Specifically, they dispute if VNB was required to do a flight-by-flight accounting for Direct Air and whether VNB was to ensure that the charter operator had sufficient funds in its account at any particular time to make refunds to all passengers on cancelled flights. Id. Plaintiffs further allege that VNB mismanaged the Direct Air account by: (1) failing to maintain a “flight by flight” accounting of passenger funds; (2) failing to verify information that Direct Air provided about the completion of flights; (3) and disbursing undifferentiated and unsegregated funds to Direct Air for Direct Air's “Family Ties” program in violation of DOT regulations. Merrick Stmt. ¶¶ 40-71; JetPay Stmt. ¶¶ 40-71.

         C. Direct Air Closure and Subsequent Litigation

         Direct Air operated until March 12, 2012 when it suspended its operations. VNB Stmt. ¶ 116. On March 15, 2012, it filed for bankruptcy. Id. ¶ 117. Deposits into the Direct Air escrow account ceased, and the account was frozen. Id. ¶ 118. Direct Air had approximately $1.017 million in its escrow account when it ceased operations. Id. ¶ 119. Merrick alleges that this number reflects a shortfall of nearly 30 million that should have been in the account had VNB taken the proper steps to ensure that the escrow account complied with DOT Regulations.

         In accordance with DOT advice, customers who had paid for future flights with Direct Air initiated chargebacks through their credit cards to recoup the price of the flights. Id. ¶ 122. Merrick ultimately incurred chargebacks totaling $26.2 million. Id. ¶ 125. JetPay incurred $1.4 million in chargeback damages. JetPay Stmt. ¶ 80. American Express ultimately paid out $3.7 million in reimbursements to its cardholders for cancelled Direct Air flights. Amex Stmt. ¶ 50. Plaintiffs were barred by the bankruptcy automatic stay from seeking reimbursement of the chargebacks from Direct Air. VNB Stmt. Id. ¶ 126; Amex Stmt. ¶ 51.

         The CFO of Direct Air later pled guilty to bank fraud and wire fraud. VNB Stmt. ¶ 126. He admitted to sending false financial statements to creditors, as well as submitting false release requests to VNB containing inflated passenger figures. Id. ¶¶ 131-32. In addition to the CFO, two other original owners of Direct Air have also been indicted for wire and bank fraud. Id. ¶ 133.

         Merrick filed a lawsuit against JetPay in the United States District Court in the District of Utah seeking indemnification. Id. ¶ 150. In June 2016, Merrick and JetPay reached a settlement in which JetPay paid Merrick $13.24 million. Id. ¶ 151. Merrick also filed a claim pursuant to its UCB policy with its insurer, Chartis. Id. ¶ 152. After Chartis denied Merrick's claim, Merrick filed a lawsuit against Chartis in the United States District Court for the Southern District of New York. Id. In December 2016, Merrick obtained a verdict on liability against Chartis. Id. ¶ 153. Pending motions for Judgment as a Matter of Law and for a new trial are still pending in the Chartis litigation. Id. ¶ 153.

         D. Procedural History

         1. Merrick Action

         Merrick first filed suit in this District against VNB in December 2013. ECF No. 1. In its Second Amended Complaint (“SAC”), Merrick alleged the following ten causes of action: (1) breach of contract on behalf of Direct Air customers as intended third-party beneficiaries of the depository agreements; (2) negligence/gross negligence; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) aiding and abetting fraud; (6) conversion/aiding and abetting conversion; (7) violation of DOT Regulations, 14 C.F.R. § 380; (8) consumer fraud on Merrick and Direct Air customers; (9) breach of contract on behalf of Direct Air as assignee of the bankruptcy trustee's claims against Valley; and (10) consumer fraud on Direct Air. SAC ¶¶ 82-141, Merrick ECF No. 64. In an Opinion dated March 31, 2015, the Court dismissed Merrick's claims for violations of DOT Regulations with prejudice, finding they do not afford a private right of action. Merrick Bank Corp. v. Valley National Bank, No. 13-7756, 2015 WL 1472497, at *5-6 (D.N.J. Mar. 31, 2015) (“Merrick I”). Merrick filed a Third Amended Complaint (“Merrick TAC”). See Merrick TAC, ECF No. 64. In an Order dated January 29, 2016, the Court dismissed Merrick's breach of contract claim on behalf of Direct Air customers and consumer fraud claims with prejudice. Id.

         Six counts remain at issue in Merrick: (2) negligence/gross negligence; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) aiding and abetting fraud; (6) conversion/aiding and abetting conversion; (9) and breach of contract on behalf of Direct Air as assignee of the bankruptcy trustee's claims against Valley. VNB moves for summary judgment against Merrick on all counts. Merrick moves for summary judgment on counts two, three, and four.

         2. JetPay Action

         JetPay and Amex jointly filed a complaint against VNB on December 16, 2014. JetPay ECF No.1. In March 2016, JetPay and Amex filed an Amended Complaint against VNB (“JetPay Am. Compl.”), alleging the following eleven causes of action:: (1) breach of contract; (2) negligence/gross negligence; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) aiding and abetting fraud as to consumers; (6) aiding and abetting fraud as to JetPay and Amex; (7) conversion/aiding and abetting conversion; (8) violation of DOT Regulations, 14 C.F.R. § 380; (9) consumer fraud on charter customers; (10) consumer fraud on Direct Air; and (11) indemnification. JetPay Am. Compl. ¶¶ 74-190, JetPay ECF No. 49. In an Order dated October 28, 2016, the Court dismissed counts One, Eight, Nine, Ten, and Eleven of JetPay and Amex's Amended Complaint. JetPay ECF No. 98.

         Six counts remain at issue in JetPay: (2) negligence/gross negligence; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) aiding and abetting fraud as to consumers; (6) aiding and abetting fraud as to JetPay and Amex; and (7) conversion/aiding and abetting conversion. VNB moves for summary judgment on all counts. JetPay and Amex seek partial summary judgment on their claims for negligence and breach of fiduciary duty. Amex Br. at 1, JetPay ECF No. 113-1; JetPay Br. at 1, JetPay ECF No. 116-1.

         I. Legal Standard

         Pursuant to Fed.R.Civ.P. 56(c), a motion for summary judgment will be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with available affidavits, show that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “[S]ummary judgment may be granted only if there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party.” Miller v. Ind. Hosp., 843 F.2d 139, 143 (3d Cir. 1988). All facts and inferences must be construed in the light most favorable to the non-moving party. Peters v. Del. River Port Auth., 16 F.3d 1346, 1349 (3d Cir. 1994).

         II. Analysis

         A. Claim Preclusion

         In Merrick I, the Court dismissed Merrick's claims for violations of 14 C.F.R. § 380 because there is no private right of action under the DOT Regulations. 2015 WL 1472497, at *5-6. VNB argues that Plaintiffs' negligence, breach of fiduciary duty, and conversion claims are merely “back door” attempts to enforce the DOT Regulations, and must therefore be dismissed. See VNB Br. as to Merrick at 16-18, Merrick ECF No. 208-22; VNB Br. as to JetPay at 17-19, JetPay ECF No. 117- 2; VNB Br. as to Amex at 16-18, JetPay ECF No. 118-4. The Court disagrees.

         The absence of a private right of action may preclude common-law tort claims where the common law claim is based on a violation of the statute. See Astra USA, Inc. v. Santa Clara Cty., 563 U.S. 110, 117-19 (2011) (holding that a contract claim based on the violation of a policy that merely incorporated statutory language was “in essence a suit to enforce the statute itself, ” and therefore unenforceable in a private action); Umland v. PLANCO Fin Servs., 542 F.3d 59, 66 (3d Cir. 2008) (holding that plaintiff could not bring common-law contract claim where the alleged implied contractual term reflected the provisions of the Federal Insurance Contributions Act, which did not provide a private right of action); Mankodi v. Trump Marina Assocs. LLC, 525 Fed. App'x 161, 166 (3d Cir. 2013) (holding that plaintiff's causes of action for breach of contract and conversion were really violations of the Casino Control Act where the complaint alleged, “when defendant's personnel breached the regulations of the New Jersey Gaming Control Commission . . . it breached the gaming agreement . . . that it had with plaintiff.”). In other words, a plaintiff cannot assert a common law claim by simply stating that a defendant has violated a statute that does not in itself afford a private right of action.

         But that is not the case here. Plaintiffs' common law claims are not directly premised on violations of the DOT Regulations. In contrast to the cases cited by VNB, Plaintiffs here have asserted an independent basis for their common law claims. They allege that VNB was negligent in its failure to supervise Direct Air's depository account; that VNB owed Plaintiffs a fiduciary duty when it became an escrow agent to the depositors; and that VNB interfered with the possessory rights of passengers and Plaintiffs to the money in the account. See Merrick TAC ¶¶ 98-109, 123-29; JetPay Am. Comp. ¶¶ 90-114, 152-160. Therefore, Plaintiffs claims are not- contrary to VNB's argument-based solely on a “standard of conduct . . . established by a regulation under which no private right of action exists.” VNB Reply to Merrick at 5, Merrick ECF No. 216. Rather, Plaintiffs allegations are based on standards provided by common law tort, and are not predicated on violations of the DOT Regulations.

         B. Breach of Fiduciary Duty

         Plaintiffs assert a breach of fiduciary duty claim on their own behalf and as subrogees of the Direct Air passengers. JetPay Am. Compl. ¶¶ 104-114; Merrick Reply at n.3, Merrick ECF No. 215. VNB contends that it must be granted summary judgment as VNB did not owe a fiduciary ...


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