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MidCap Media Finance, LLC v. Pathway Data, Inc.

United States District Court, W.D. Texas, Austin Division

June 28, 2018

MIDCAP MEDIA FINANCE, LLC
v.
PATHWAY DATA, INC., et al.

          MEMORANDUM OPINION AND ORDER

          ANDREW W. AUSTIN, UNITED STATES MAGISTRATE JUDGE

         In January 2015, MidCap Media Financing, LLC filed this lawsuit. The Court has held a bench trial, at which it heard testimony from Robert Hanington and David Coulter. Additionally, testimony from Mee Chau, Vannak Kho, and Clay Myers was provided via deposition designations, and each side submitted a number of exhibits. The parties thereafter submitted post-trial briefing. Having considered the evidence and testimony at trial and the post-trial briefing, the Court enters the following Memorandum Opinion and Order.

         I. FINDINGS OF FACT[1]

         A. Breach of contract claims

         In July 2013, MidCap Media Finance, LLC and Pathway Data, Inc. entered into a Media Financing, Security, and Assignment Agreement (the “Agreement”) that provided Pathway up to $1, 500, 000.00 in financing for online media campaigns. P-5. MidCap is a “media-funding business, ” that provides credit lines to fund media campaigns to companies that do direct-response online selling. Vol. 1 Tr. 21; P-5 at 1. Pathway is an online company that provides credit services to consumers. Id. at 168. Pathway's primary product at the relevant time was a credit monitoring software called SmartCredit.com, which was sold directly to customers through online media campaigns. Id. at 168-69. Attached as Appendices to the Agreement were a Limited Power of Attorney to MidCap, and Pathway CEO David Coulter's Guaranty of Repayment, both of which were executed at the same time as the Agreement. Id. at 24, 25.

         The Agreement contemplated that Pathway would obtain “Bookings” from various Media Buyers-defined in the Agreement as “agent[s] hired by [Pathway] to negotiate and purchase on behalf of [Pathway] all advertising for the Funding Project.” Pathway would then forward the Media Buyers' invoices to MidCap for payment. P-5 at 2, 4; Vol. 1 Tr. 30. MidCap was to pay the Media Buyers directly on a weekly basis. Vol. 1 Tr. 31, 54. To have media invoices paid, Pathway would first review and approve the invoice, P-5 at 4; Vol. 1 Tr. 30-3, and then forward it to MidCap for payment. MidCap only refused to finance invoices on two occasions: first, when the invoices had not been provided timely, and second, after March 2014 when Pathway completely stopped making payments on the loan. P-25 (“These Swapalease invoices will not be financed by us as they are far too old.”); Vol. 1Tr. 31, 83. MidCap never refused to fund any invoices for any other reason. Vol. 1 Tr. 83.

         The Agreement contemplated that a “primary bank account” would be established, into which all funds derived from the media campaign financed by MidCap and processed by Pathway's credit card processor would be deposited. P-5 at 5, 31. Those funds would then be split as set out in a schedule to the Agreement, which provided:

         (TABLE OMITTED)

         P-5 at 31. Though this was the parties' plan, they were unable to find a merchant processor that had the ability to make this 65/35 split. See, e.g., P-28A; Vol. 1 Tr. 83-85; Chau Dep. 87:11-14; Kho Dep. 40:15-18. As a result, the contemplated bank account was never created, and all of the funds processed by the merchant processor were sent to Pathway; and Pathway was required to transmit payments on the loan to MidCap weekly. Vol. 1 Tr. 55; Chau Dep. 87:25-88:3. The repayment period for each loan amount MidCap extended-each paid invoice-was 32 weeks. P-5 at 3; Vol. 1 Tr. 5, 172. The interest and repayment schedule in the Agreement was complex:

         (TABLE OMITTED)

         P-5 at 31.

         The Agreement required that MidCap invoice Pathway weekly, setting forth the amount due that week on monies MidCap had advanced. P-5 at 5. In one of the many instances in which the parties appear to have deviated from the Agreement, the evidence demonstrated that MidCap in fact never sent Pathway a document titled “invoice.” Vol. 1 Tr. 102 (“Q: Did you - when you first advance[d] funds on behalf of Pathway, did you send Pathway a weekly invoice? A: No. We used the master spreadsheet as our invoice.”); Chau Dep. 129:1-9. Early in the relationship, Pathway's Operations Manager, Mee Chau, developed a spreadsheet keeping track of the amounts MidCap had funded on Pathway's behalf, as well as the interest due on those payments. Vol.1 Tr. 40-41; Chau Dep. 51:20-2; P-7A. The spreadsheet included information on each media invoice MidCap had paid, the interest accrued on it, and the payments made by Pathway. See, e.g., P-7B, P-28B, & P-29B. Chau and Vannak Kho, Pathway's Controller, updated the spreadsheets weekly, and provided them to Hanington on a regular basis. Vol. 1 Tr. 41-42, 103; Chau Dep. 51:17-22. From then on, the parties relied on the spreadsheet to know what Pathway owed MidCap. Chau Dep. 49-50; 75:20-76:11; Kho Dep. 28:8-11, 93:21-24. Until this litigation began, both parties regularly used the spreadsheets, and neither party ever claimed the spreadsheets were inaccurate. See, e.g., Chau Dep. 52:12-16, 78:3-8, 153:25-154:7; Kho Dep. 21:19-25.

         Importantly, the evidence at trial demonstrates that Pathway never complained that it was not receiving a weekly “invoice” from MidCap. Other than Coulter's testimony-which the Court does not find credible-Pathway was unable to present any evidence that it objected to the use of the spreadsheets or the lack of an invoice.[2] Vol. 1 Tr. 195-96 (testifying that Pathway produced no documents in which it requested invoices). Coulter claimed at trial that he called Hanington on multiple occasions to complain about the spreadsheets, yet Pathway did not submit a single email memorializing any such discussion. Id. 187, 195; Vol. 2 Tr. 41 (“Q: Why is it that there's been no document produced in this case where you sent a request to Mr. Hanington asking for this accounting if it was so important to you? A: I was on the phone with him all the time. That was my primary means of communication with him.”). Further, Hanington directly denied the claim that Coulter had complained about the spreadsheets repeatedly.[3] Moreover, Pathway's primary day-to-day managers, Kho and Chau, both testified that they never objected to the use of the spreadsheets. Chau Dep. 79:24-80:4; Kho Dep. 33:7-13, 33:23-34:1; cf. Vol. Tr. 1187-89 (Coulter testifying about an email from Chau that provided an updated spreadsheet). Nor did Chau or Kho recall Coulter ever objecting to the lack of invoices prior to the start of the litigation. Chau Dep. 30:10-19, 47:13-17, 82:1-12. Based upon all of this testimony, the Court concludes that the parties adopted the practice of using the master spreadsheet in place of weekly invoices.

         Only a few months after the Agreement was executed Pathway began to have trouble making payments on the loan. Vol. 1 Tr. 39. After negotiations related to some of the claims ultimately brought in this lawsuit, MidCap agreed to allow Pathway to make interest only payments for a short period. Id.; P-28A. Just months later, however, even these payments fell behind. Vol. 1 Tr. 56. Thus, in July 2014-only one year after the Agreement was signed-MidCap sent Pathway a Notice to Cure letter stating that Pathway was in default, and accelerating the entire outstanding amount due. P-15 at 2. It then sent a formal notice of default two weeks later. P-16. Pathway has, as of this date, failed to pay the amount outstanding under the Agreement.

         B. Failure to provide additional services

         Coulter testified at trial that MidCap had committed in the Agreement to provide more than simple financing; he claimed the parties also intended MidCap to provide consulting services related to the media campaigns themselves. Vol. 1 Tr. 249. For example, Coulter testified that Midcap-through its manager Robert Hanington and managing partner Jeff Black-made representations “that they had this software to handle the sophistication of the contract.” Vol. 2 Tr. 31. According to Coulter, MidCap was supposed to provide “sophisticated financial software” and “systems analysis and media expertise” in addition to the media funding. Vol. 1 Tr. 250 (referring to these alleged requirements by the acronyms “BFS” and “SAME”). Moreover, Coulter testified, MidCap was supposed to “look at marketing partner data and invoices in order to ensure that the fraudulent campaigns were kept out of customer traffic.” Vol. 2 Tr. 32. Pathway allegedly chose MidCap for financing based on its expertise in these areas, as Pathway “didn't have the capability” to assess the profitability of its campaigns. Id. 37; Vol. 1 Tr. 249-50.[4] From Coulter's standpoint, the Agreement was to be more than a credit line to fund media campaigns; MidCap was allegedly obligated to provide anti-fraud services, and profitability analyses on these campaigns as well. Vol. 1 Tr. 253; Vol. 2 Tr. 4.

         The Court finds that this testimony by Coulter was not credible. As elaborated on at length in the Conclusions of Law, Coulter's claim of what MidCap was obligated to do is inconsistent with the contract between Pathway and MidCap, and was not supported even by Pathway's COO and Controller, nor by the actions the parties actually took during the time the contract was in place. Hanington, a MidCap manager, credibly testified that the Agreement was only ever a contract to provide financing for media bookings. Vol. 1 Tr. 28-29. He stated that MidCap never had a role in selecting or approving media partners, determining whether acquired customers were acceptable, or providing consulting in anything other than the financing it provided. Id. Nor did Pathway ever present any evidence, aside from Coulter's unreliable testimony, that MidCap was required to provide these additional services.[5]

         C. Interference with Newtek contract

         Shortly after MidCap declared the loan in default and demanded payment, an attorney for MidCap sent a letter to Pathway's merchant processor at the time, Newtek Merchant Solutions. D-10. The attorney's letter requested that Newtek “hold-and not disburse to [Pathway] or any other person or entity-any and all funds received by [Newtek] in connection with any account(s) of [Pathway].” Id. The letter cited the Agreement, stating that MidCap “ha[d] the right to notify and collect directly from various sources, including credit card processors, any revenues of [Pathway]” as a result of Pathway's default. Id. Over the next month, MidCap, primarily through Hanington, had a number of discussions with Newtek, but none led to Newtek sending any funds MidCap's way. Nothing further occurred until new counsel for MidCap sent an additional demand in December 2014 that Newtek retain funds otherwise due to Pathway. D-12. This led to an attorney for the “DB7C-2002 Trust”-a trust of which Coulter is the sole trustee and a beneficiary (Vol. 1 Tr. 211)-sending a letter to Newtek demanding that the funds not be retained, and that they be sent to the Trust, purportedly based on a note and security interest held by the Trust, payable by Pathway, which was allegedly in default. P-3. Coulter also sent a letter at the same time, on behalf of Pathway, “authorizing” the transfer to the Trust. P-2. The same attorney representing the Trust also sent a letter to MidCap demanding that MidCap withdraw its request that Newtek hold funds due to Pathway. P-33. Refusing to be stuck in the middle of Pathway and MidCap's dispute, Newtek threatened to terminate its relationship with Pathway unless all parties withdrew their requests. D-14 at 3. Ultimately, Newtek did not cease its credit card processing relationship with Pathway, that relationship continued, and all of the funds that had been retained were transmitted to Pathway. Vol. 1 Tr. 209-10, 219.

         II. CONCLUSIONS OF LAW

         MidCap alleges that Pathway failed to pay the amounts due under the Agreement, and seeks judgment for the amount of the debt owed plus interest. It also sues Coulter individually under his guaranty. Pathway does not deny that it failed to pay MidCap. Instead, it claims that it was excused from paying because MidCap failed to perform its own obligations under the Agreement. Pathway also filed a counterclaim in which it makes an affirmative breach of contract claim (based on the same arguments), and a tortious interference with contract claim, based on the episode with Pathway's credit card processor, Newtek.[6] Because Pathway does not contest the failure to pay, the Court will start by discussing Pathway's claim that MidCap failed to perform obligations under the Agreement.

         A. Pathway's Breach of Contract Claim

         Pathway bears the burden of proof on this claim. A party claiming breach of contract must prove “(1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach.” Smith Int'l, Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007). Here, neither party disputes the existence of the contract, which was admitted as P-5.

         1. MidCap's Alleged Failure to Perform

         Pathway makes the claim that MidCap breached the agreement both as a defense to MidCap's breach of contract claim, and as a separate affirmative claim. Pathway argues that MidCap failed to perform two requirements of the contract: (1) “confirm all Minimum Performance Standards prior to the payment of any Cost of Bookings;” and (2) provide invoices on a weekly basis to Pathway. These failures, Pathway argues, excused Pathway's obligation to pay back the amounts that MidCap paid for Pathway's advertising purchases.[7]

         a. Minimum Performance Standards

         Pathway contends that the contract required MidCap to confirm that each invoice it paid conformed with certain minimum performance standards set forth in the Agreement. Dkt. No. 91 at 9. Pathway further argues that if an invoice failed to meet these standards, MidCap was contractually required not to pay the invoice. Id. Pathway claims that MidCap's funding such invoices was a breach of the Agreement and excuses Pathway's duty to repay MidCap those amounts. Id. at 15-16; Vol 2 Tr. 45. In support of its argument, Pathway identified at trial a number of invoices it claimed did not meet the minimum performance standards. See D-30. MidCap, on the other hand, argues that its “only role in the funding process was to pay invoices, ” and even if there was a duty to confirm the minimum performance standards prior to funding, the evidence fails to prove the invoices did not meet those standards. Dkt. No. 89 at 10.

         The Agreement provides that Pathway was to send MidCap invoices for “Cost of Bookings” that it received from its “Media Buyers.” P-5 at 4-5. MidCap-as Pathway's lender-would then pay the Media Buyers directly, and Pathway was required to repay those amounts plus interest over a 32 week period. Id.; Vol. 1 Tr. 31. The portion of the Agreement at issue provides as follows:

2. MCM's Responsibilities. Subject to the terms and conditions of this Agreement, MCM shall, on behalf of Client, pay to the Media Buyer the Cost of Bookings for advertising which must be approved by Client in writing (e-mail approval to be considered an acceptable writing) and upon meeting all the minimum performance standards listed in Exhibit B; be accepted by MCM, and shall Invoice Client for any amounts paid to the Media Buyer for such Media Time (or other third parties as MCM and Client may agree to in writing from time to time) or for any other amounts due to MCM by the Client under this Agreement including but not limited to the Cost of Bookings and Services Fee up to the Maximum Credit Limit. The payment by MCM of such amounts shall, in addition to any and all other terms contained herein, be subject to the following terms and conditions:
a.) MCM shall confirm all Minimum Performance Standards prior to the payment of any Cost of Bookings. MCM shall have the right not to fund any Cost of Bookings if in its sole reasonable determination the Funding Project has not met or is not meeting the Minimum Performance Standards, as set forth herein.

P-5 at 4.

         The parties construe this language differently. Pathway argues that the Agreement only permitted MidCap to pay an invoice if it met “all the minimum performance standards” set forth in Exhibit B. That is, Pathway contends that this provision not only required MidCap to confirm that minimum performance standards were met, but also obligated MidCap to refuse to fund any invoices that did not meet the standards. For its part, MidCap contends that the contract language makes it clear that though it had the right to refuse to pay an invoice it considered to be below the performance levels, it was not required to do so, and Pathway was obligated to repay all amounts MidCap fronted for advertising services, full stop. The Court agrees.

         The Agreement clearly states that MidCap shall accept any invoices that Pathway has approved, subject to Midcap's “right not to fund” an invoice not meeting the standards. That is, paragraph two of the Agreement gives MidCap the right to refuse to fund any invoices below the minimum performance standards, but not the duty to do so. This is made even more clear by the fact that the decision regarding whether a media purchase met the minimum conditions and should be paid, was MidCap's to make “in its sole reasonable determination.” P-5 at 4. Thus, it was MidCap and MidCap alone, that had the discretion to determine whether the standards were met, and it was MidCap's right-not its obligation-not to fund an invoice. Id.; see also Vol. 1 Tr. 86 (describing situations when MidCap might choose to fund invoices that do not meet minimum performance standards).[8] Further, though the Agreement gave MidCap the right to approve both media buyers and media time, it created no correlative obligations on MidCap. P-5 at § 4(a)(vii). Most importantly, nowhere does the Agreement state that MidCap was to oversee, interact with, or otherwise supervise any of the media buyers. And as for data on media campaigns, rather than suggesting that MidCap would be keeping and analyzing such data, the Agreement obligated Pathway to provide such data to MidCap. Id. at § 4(a)(viii) (“[Pathway] and Media Buyer shall provide to MCM a detailed summary of the orders [Pathway] generated through all marketing channels against the media billed for the same period on a weekly basis, ” as well as “a weekly reconciliation of the orders placed, processed and fulfilled by” Pathway).

         Even if Pathway's construction were accepted, Pathway would still be in debt, just to the advertiser, not MidCap. It was Pathway that selected and contracted with media purchasers. Either Pathway directly, or agents acting for Pathway, purchased the online advertising. The invoices for the ads were sent to Pathway, and Pathway would forward them on to MidCap for payment. Thus, if Pathway's position on this contract language is adopted, when MidCap received an invoice that fell below the performance standards, MidCap was obligated to refuse payment on the invoice. But since the media purchase was already complete, and had been made by Pathway, Pathway was still on the hook for that invoice. The only difference would be that Pathway's creditor in that instance would be the advertiser, not MidCap. Coulter conceded all of this at trial. Vol. 1 Tr. 174, 177-81. His only qualification on these admissions was his claim that he expected MidCap to step in and “fix” things if the advertising went awry:

So my expectations were that if there was an invoice that violated [the performance standards], that [MidCap] would step up to the plate and they would say, wait a minute, let's as a group go back to this marketing partner and let's beat them up. Let's get some concessions and let's make sure they don't do that again. And not one time did they do it.

Vol. 1 Tr. 253.

         This theme-that monitoring the advertising was MidCap's, not Pathway's, responsibility-was a common thread running throughout Coulter's trial testimony. He claimed that Pathway transferred all control over, and bore no responsibility for, the marketing that Pathway was purchasing; rather, the advertisers and MidCap were in charge of that:

Q. Okay. And we've used the term “media campaign, ” I believe, during the trial. What is a media campaign?
A. A media campaign is where you hire third-party marketing groups or marketing agencies and they do whatever they do to drive in consumers to enroll in your services, your online services.

Vol. 2 Tr. 19 (emphasis added).

Q. Okay. Is there any input that you had - when I say you, I mean Pathway - on where Affiliate would advertise? What web pages or the content of the advertising? Is there any control that was kept by Pathway on that?
A. It couldn't include things like porn. It couldn't include things where consumers had opted in. Some of the normal and usual things were controlled, yes.
Q. But other than that, it was their discretion to decide.
A. Correct.

Id. at 85-86. Coulter also claimed that MidCap was supposed to coordinate media purchases with the advertisers directly, leaving Pathway out of the process entirely:

Q. I had some questions about your relationship with the buyers, the media buyers and decisions on things. Looking at this contract, it appears that if you'll put-it's Plaintiff's 43, the first page, the asterisked items on the terms and ...

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