United States District Court, W.D. Texas, Austin Division
MEMORANDUM OPINION AND ORDER
W. AUSTIN, UNITED STATES MAGISTRATE JUDGE
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.
FINDINGS OF FACT
Breach of contract claims
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.
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.
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:
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
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.
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. 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. 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.
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
Failure to provide additional services
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. 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
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.
Interference with Newtek contract
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.
CONCLUSIONS OF LAW
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. 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.
Pathway's Breach of Contract Claim
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
MidCap's Alleged Failure to Perform
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
Minimum Performance Standards
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.
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
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
P-5 at 4.
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.
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). 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).
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.
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
Q. Okay. And we've used the term “media campaign,
” I believe, during the trial. What is a media
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
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.
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 ...