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Starbrands Capital, LLC v. Original MW Inc.

United States District Court, D. Massachusetts

February 27, 2017

STARBRANDS CAPITAL LLC, d/b/a NORCAL HEALTH CARE SERVICES, Plaintiff,
v.
ORIGINAL MW INC., Defendant.

          REPORT AND RECOMMENDATION ON THE PARTIES’ CROSS MOTIONS FOR SUMMARY JUDGMENT [DKT. NOS. 98, 102]

          JENNIFER C. BOAL, United States Magistrate Judge

         Plaintiff Starbrands Capital LLC d/b/a Norcal Health Care Services (“Starbrands”) brings this action against defendant Original MW Inc. (“MW”) for breach of contract. Specifically, Starbrands alleges MW breached its contract with Starbrands when it failed to indemnify Starbrands for losses suffered as a result of MW’s gross negligence. Both parties have moved for summary judgment. Dkt. Nos. 98, 102. For the reasons set forth below, the Court recommends that the District Judge assigned to this case deny Starbrands’ motion and grant MW’s motion.[1]

         I. PROCEDURAL HISTORY

         Starbrands filed the instant action on May 23, 2014. Dkt. No. 1. In its Amended Complaint, Starbrands alleged a violation of Article 4A of the Massachusetts Uniform Commercial Code (“UCC”), breach of contract, and negligence. Dkt. No. 20 (“Amended Complaint” or “Am. Compl.”). On September 11, 2015, Judge Burroughs adopted this Court’s recommendation and dismissed Starbrands’ UCC and negligence claims. Dkt. No. 49. On October 9, 2015, MW filed a second motion to dismiss. Dkt. No. 54. On March 9, 2016, Judge Burroughs adopted this Court’s recommendation that the motion be denied. Dkt. No. 90.

         The parties filed cross motions for summary judgment on May 9, 2016. Dkt. Nos. 98, 102. Starbrands and MW filed their respective oppositions on June 9, 2016 and reply briefs on June 23, 2016. Dkt. Nos. 106, 109, 112, 113. The Court heard oral argument on October 26, 2016.

         II. FACTS[2]

         A. Relevant Parties

         At all times relevant to this action, MW was an independent sales organization for First Data Merchant Services Corporation (“First Data”).[3] As an independent sales organization, MW acquired and entered into contracts whereby First Data would provide credit card payment processing services.[4] MW’s role, in relevant part, was to obtain merchants, have them fill out paperwork, and send the information to First Data for ultimate approval.[5]

         Starbrands Capital LLC and Starbrands Norcal MSO, LLC are limited liability companies that are owned by Omar Salah, and share a business address with Salah’s personal residence in Los Angeles, California.[6] Starbrands registered “Norcal Healthcare Services”[7] with the Alameda County recorder’s office and was doing business under that name between December 22, 2009 and December 22, 2014.[8]

         Norcal Health Care, Inc. (“NHCI”) operates medical clinics throughout the state of California.[9] Dr. Michael Caplan began working at the NHCI clinics in or around November-December 2009, and assumed ownership of NHCI from its former owner, Dr. Philip A. Denney, in or around April-June 2010.[10]

         The Library, Inc. is an accounting firm that serviced the clinics, Starbrands, and Salah, individually.[11] Library employee Ariadne Shaffer served as Salah’s financial manager and Alexis Garcia served as Shaffer’s assistant.[12] Starbrands’ counsel described Shaffer as a “c-level executive of Starbrands” who “managed its financial affairs and oversaw execution of its payment systems” and was “directly involved in every facet of its financial affairs.”[13]

         B. Starbrands And NHCI: The ARMSA

         On December 1, 2010 (effective May 1, 2010), NHCI and Starbrands Norcal MSO entered into an Amended and Restated Management Services Agreement (“ARMSA”).[14] See Dkt. No. 100-12. Salah signed the ARMSA.[15] The ARMSA contains the following provisions:

• [NHCI] retains [Starbrands] to provide all of the management and related services identified or referenced in Article 3 and as otherwise required by [NHCI], subject to the requirements of the applicable provisions of California law relating to the practice of medicine; and [Starbrands] accepts such retention and will provide the Management Services. (ARMSA § 1.1).
• [Starbrands] and [NHCI] intend to act and perform as independent contractors, and this Agreement is not intended to create any partnership, joint venture, or employment relationship between the parties. (ARMSA § 1.3).
• All monies collected for [NHCI] by [Starbrands], and all other funds which may be received by [NHCI] in exchange for the provision of professional services, shall be deposited into a bank account that is in [NHCI’s] name and is controlled exclusively by [NHCI]. . . . [NHCI] shall arrange for the Bank to sweep the [NHCI Account] on a daily basis of all funds in the account, and deposit such funds into another bank account that is in [NHCI’s] name and on which both [NHCI] and [Starbrands] are signatories. (ARMSA § 3.4(e)).
• All collections for services rendered to patients by the Practice shall be made under [NHCI’s] name, and [Starbrands] shall act as [NHCI’s] agent in the collection of such amounts. (ARMSA § 3.5).
• [Starbrands] shall receive as compensation for the performance of all of its obligations and duties contained in the Agreement a Management Fee in an amount equal to [$50,000] per month. . . . [NHCI and Starbrands acknowledge that the Management Fee may be adjusted by the parties from time to time in the event [NHCI] experiences a change in revenues or expenses. . . . (ARMSA § 5.1(a)).
• This Agreement, together with all exhibits and schedules hereto, and all documents referred to herein, constitutes the entire agreement between the parties with respect to the subject matter hereof, supersedes all other and prior agreements on the same subject, whether written or oral, and contains all of the covenants and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by the other party(ies), or by anyone acting on behalf of any party, that are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding. (ARMSA § 13.2).

See Dkt. No. 100-12. The ARMSA also provided that NHCI could pay Starbrands a bonus in addition to the management fee.[16]

         On December 1, 2010 (effective May 1, 2010), NHCI and Starbrands Norcal MSO entered into a modification to the ARMSA, which reduced the management fee to $20,000 per month.[17] See Dkt. No. 100-14 (“ARMSA Modification”). Salah also signed the ARMSA Modification.[18] Starbrands received $265,000 in management fees and approximately $95,710 in bonuses between December 2010 and October 2012.[19]

         C. Starbrands And MW: The Merchant Account

         On or about January 11, 2010, MW received a Merchant Processing Application and Agreement on behalf of “NorCal Health Care Services.”[20] See Dkt. No. 100-16 (“Merchant Application”). The Merchant Application lists Salah as the contact name and owner, and his name also appears on the signature block.[21] In addition, the application contains the contact email address “Christina@Star-Brands.com,” which belongs to Christina Preda, Salah’s “number two” employee.[22] Finally, the Merchant Application lists Starbrands’ unique tax identification number ending in 2092 and designates a Chase Bank account ending in 0987 (“Chase Account”) as the settlement bank account.[23]

         Preda prepared and signed the Merchant Application on behalf of Salah, who testified that he did not review, prepare, or sign it.[24] Salah also testified that it was within Preda’s purview to set up the account and that he instructed Preda to “take care of all th[e] business” associated with the account.[25]

         The Merchant Application incorporates a Merchant Services Program Guide.[26] See Dkt. No. 100-17 (“Program Guide”). The Program Guide contains an indemnification clause wherein MW agreed to indemnify Starbrands for certain losses. Specifically, the indemnification clause states:

We agree to indemnify and hold you harmless from and against all losses, liabilities, damages and expenses resulting from any breach of any warranty, covenant or agreement or any misrepresentation by us under this Agreement or arising out of our or our employees’ gross negligence or willful misconduct in connection with this Agreement. (Program Guide § 26.2).

Dkt. No. 100-17 at 19.[27] The Program Guide also provides, in relevant part:

If you believe any adjustments should be made with respect to your Settlement Account, you must notify us in writing within 45 days after any debit or credit is or should have been effected. If you notify us after such time period, we may, in our discretion, assist you, at your expense, in investigating whether any adjustments are appropriate and whether any amounts are due to or from other parties, but we shall not have any obligation to investigate or effect any such adjustments. Any voluntary efforts by us to assist you in investigating such matters shall not create any obligation to continue such investigation or any future investigation. (Program Guide § 18.10).

Dkt. No. 100-17 at 16.

         After receiving the Merchant Application, MW opened a merchant account and assigned it an ID number of 535353120140686 (“Merchant Account”).[28]

         D. Merchant Account Change Requests

         1. The March 15, 2010 Change Request

         On February 18, 2010, Shaffer, Preda, and Salah exchanged emails in which Shaffer stated that “[a]ll income is supposed to go into the Dr. Denney Account and then be transferred into the Norcal Healthcare account on a regular basis. . . . we need to start the process of moving all the credit card terminals over to the Dr. Denney account as well.”[29] In or around March 13, 2010, Dr. Denney set up the Bank of the West Account.[30] Upon doing so, Dr. Denney emailed Salah on March 13, 2010 and informed him about the account, which had been opened under NHCI, and of his intention to “transfer the funds from Chase and close the account when appropriate.”[31] See Dkt. No. 100-20 at 4.

         On or about March 15, 2010, Preda submitted a FACS FDMS ABA/DDA Change Request to MW.[32] See Dkt. No. 100-19 (“March 15 Change Request”). The March 15 Change Request was signed by Preda, who is identified as “Chief of Staff” of Norcal Healthcare Services, and designates a Bank of the West account ending in 6826 (“Bank of the West Account”) as the settlement bank account.[33] The March 15 Change Request includes a voided check for the Bank of the West Account and identifies NHCI as the account holder at the bank.[34]MW processed the March 15 Change Request and confirmed that the bank change was set on March 18, 2010.[35]

         2. The June 3, 2010 Change Request

         On or around June 3, 2010, MW received a second change request signed by Dr. Caplan and listing NHCI as the merchant name.[36] See Dkt. No. 100-22 (“June 3 Change Request”). The June 3 Change Request designated the settlement bank account as a Morgan Stanley account ending in 0979 (“Morgan Stanley Account”) that belonged to NHCI.[37] An attached letter listed Shaffer, Salah’s financial manager, as the client contact.[38] MW asserts that the June 3 Change Request was never effectuated.[39]

         3. The June 22, 2010 Change Request

         On or around June 22, 2010, MW received a third change request in connection with the Merchant Account.[40] See Dkt. No. 100-24 (“June 22 Change Request”). The June 22 Change Request lists the merchant as NHCI and Dr. Caplan as the “owner.”[41] The Bank of the West Account (previously identified in the March 15 Change Request) was listed as the settlement account.[42] The June 22 Change Request also included a voided check for the Bank of the West account, which identified the account holder as NHCI.[43] None of the following appear on the June 22 Change Request: Salah’s name and/or signature, Starbrands’ tax identification number, or Norcal Healthcare Services.[44]

         On June 24, 2010, MW employee Lilit Zakaryan emailed Salah’s accounting firm to confirm that she received the June 22, 2010 bank change form.[45] On June 29, 2010, Shaffer’s assistant inquired as to the status of the switch and Zakaryan confirmed that “the bank change ha[d] been completed.”[46] On July 1, 2010, Zakaryan informed Salah’s accounting firm that the funds would be deposited into the Bank of the West Account by July 2.[47] On July 1, 2010, Garcia responded that they had received the “Amex Deposits.”[48] Salah testified that he knew as of July 2010 that no credit card revenue from the clinics was being deposited into the Chase Account.[49]

         From on or about March 18, 2010 through October 2012 (when the Merchant Account was closed), all patient revenue generated from credit card payments at the clinics serviced by MW was deposited into the Bank of the West Account.[50] The Bank of the West Account served as the general account for the clinics and was used to pay clinic expenses, payroll, and management fees under the ARMSA.[51]

         On November 23, 2010, Salah’s accountants informed him that payroll was being paid out of the Chase Account and that funds were sent to the account from the Bank of the West Account when they were authorized by Dr. Caplan.[52] On November 21, 2011, Salah’s accountants informed him that the Chase account was an “old account” that was no longer in use and Saleh responded that he would close the bank account himself.[53]

         Salah did not contact MW about any discrepancy in the Chase Account until on or about August 6, 2012.[54] Throughout August and September 2012, Salah sought a full reversal of funds he claimed were not deposited into his Chase Account.[55] MW explained to Salah that no reversals would be issued because the funds were deposited into the Bank of the West Account and that Salah would have to seek the missing funds directly from the holder of that account.[56]MW also stated that there would be no reversals because of an earlier bank change submitted by Preda.[57] Finally, MW alleges that it investigated Salah’s concerns about the Merchant Account, and that as part of that investigation, it contacted Chase Bank and Dr. Caplan and reviewed NHCI accounts at MW as well as the timeline regarding when the change request forms were received.[58]

         E. The California Action

         In April 2012, Dr. Caplan and NHCI sued Starbrands Norcal MSO, Salah, and others, in an action captioned Norcal Health Care, Inc. et al. v. Starbrands Norcal, MSO, LLC, et al., No. RG-12623651 (Super. Ct. Cal., Alameda County).[59] See Dkt. No. 100-30 (“California Action”). In that action, Dr. Caplan and NHCI alleged that Starbrands Norcal MSO and Salah breached the ARMSA by interfering in both the business activities and the provision of medical care by NHCI.[60] The plaintiffs in the California Action sought a declaratory judgment that NHCI properly terminated the ARMSA, for cause, in February 2012.[61] In response, Starbrands Norcal MSO filed a cross-complaint alleging, inter alia, that Dr. Caplan unlawfully excluded Starbrands from the clinics and breached the ARMSA and the ARMSA Modification by changing the account holder’s name from Starbrands to NHCI and by diverting funds from Starbrands for two years.[62]

         After the court in the California Action entered a default judgment against the defendants, it held a prove-up hearing in which Dr. Caplan and NHCI appeared, presented evidence, and rested.[63] On March 26, 2015, the California court entered a judgment in favor of NHCI and against Starbrands Norcal MSO on the breach of contract claim and issued a declaration that the ARMSA was properly terminated by NHCI for cause.[64] Effective August 7, 2012, the California court issued a temporary restraining order which prohibited Starbrands or Salah from, inter alia, (1) entering onto the premises of any of the clinics; (2) asserting any interest in, ownership of, or control over any clinic operated by NHCI; and (3) interfering, or seeking to interfere with the normal business operations of NHCI, including communicating with its patients, employees, contractors, or vendors.[65]

         III. STANDARD OF REVIEW

         Summary judgment is appropriate when the movant shows that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “A ‘genuine’ issue is one that could be resolved in favor of either party, and a ‘material fact’ is one that has the potential of affecting the outcome of the case.” Dennis v. Osram Sylvania, Inc., 549 F.3d 851, 855 (1st Cir. 2008) (quoting Calero-Cerezo v. United States Dep’t. of Justice, 355 F.3d 6, 19 (1st Cir. 2004)).

         The Court “must scrutinize the evidence in the light most agreeable to the nonmovants, who are entitled to the benefit of all reasonable inferences therefrom.” Ahern v. Shinseki, 629 F.3d 49, 53-54 (1st Cir. 2010) (citing Cox v. Hainey, 391 F.3d 25, 29 (1st Cir. 2004)). “A properly supported summary judgment motion cannot be defeated by relying upon conclusory ...


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