Opinion
8:03CV137.
September 28, 2004
MEMORANDUM AND ORDER
This matter is before the court after a bench trial on March 15, 2004. Pursuant to Fed.R.Civ.P. 52, the following are the court's findings of fact and conclusions of law. This is an action for breach of a service agreement between plaintiff First Data Resources, Inc. ("FDR"), and defendant International Gateway Exchange, LLC ("IGE").
FINDINGS OF FACT
The parties have agreed that the following may be accepted as established facts for the purposes of this trial only. FDR is a Delaware corporation that does business in Omaha, Douglas County, Nebraska. IGE is a Delaware limited liability company, and its members are all citizens of a state other than Delaware or Nebraska. On or about November 1, 2001, FDR and IGE's predecessor in interest entered into a service greement. The service agreement provided that FDR would provide IGE various automatic teller machines ("ATM") and debit card processing services as set forth in Schedule "A" of the service agreement. See Trial Exhibit ("T. Ex.") 1. Pursuant to the service agreement, IGE promised to pay FDR a start-up fee, processing fees, and special fees, and permitted FDR to withdraw such fees and payments from a bank account established by IGE for the purpose of paying FDR. On December 23, 2003, FDR sent IGE a written demand letter stating its intention to terminate the service agreement if all amounts owed under the service agreement were not paid by December 31, 2002. On January 6, 2003, FDR sent IGE written notice terminating the service agreement.
The evidence adduced at trial establishes that Philip Colasuonno is the Chief Financial Officer and acting Chief Executive Officer ("CEO") of IGE, and Roger Bryant is IGE's former CEO. Filing No. 66, Transcript of Trial Proceedings, March 15, 2004 ("T. Tr.") at 73-75. IGE's purpose was to distribute and market stored-value cards ("CashCards") to customers who did not have bank accounts. Id. at 75-76. In order to obtain financing for the venture, IGE created a Business Plan. Id. at 76-77; Trial Exhibit ("T. Ex.") 111. FDR was provided with a copy of the Business Plan before or shortly after it entered into a contract with IGE. Id. at 77. The Business Plan included IGE's stated goal to become the market leader in the stored-value card industry. Id. IGE's only products were the CashCards, which were products comprised of both hardware and software. See T. Ex. 111. The Business Plan also set forth the process for authorizing and posting transactions for the CashCards. Id. at 34.
The anticipated process contemplated the purchase of a CashCard by a customer, after which the customer would "load," i.e., fund or put money onto, the card at a Western Union location. Id. at 82. The CashCards had no value or usefulness until they were "loaded. Id. According to the business plan, Western Union would notify IGE, and consequently FDR, of the loading and would transfer the money to First Banks of St. Louis, after which customers could utilize the CashCards at various ATMs or specified merchant locations. See T. Exs. 105 111 at 34. Western Union would charge the customer $6.00 for loading each CashCard. T. Tr. at 86; T. Ex. 105. IGE's fee was dependent on the number of CashCard loading transactions. T. Ex. 105, Schedule A, ¶ 3.
FDR and IGE entered into the processing agreement on November 1, 2001. T. Ex. 1 at 1. Before the agreement was executed, representatives of IGE had been invited to a golf outing sponsored by FDR and First Data Corporation at which IGE was urged to use FDR's processing services. T. Tr. at 87-88. Representatives of Western Union were also present. Id. at 87. Western Union and FDR are both subsidiaries of First Data Corporation. Id. at 31. IGE had conducted earlier discussions with MoneyGram and with Western Union regarding CashCard loading. Id. at 79-83. Although IGE had reached a verbal agreement with MoneyGram, Western Union ultimately served as the sole loading source of the CashCards. Id.; Exhibit 105, § 14.1.
Colasuonno testified that he was assured that "it would be in [IGE's] best interest to use FDR since [IGE] already had an agreement with Western Union and everything would be under one roof, under one umbrella." T. Tr. at 87-88. For that reason, Colasuonno was persuaded to use FDR, in spite of better pricing from another processor. Id. at 88-89. Gary LePatourel, a Client Business Executive at FDR, testified that FDR was aware that the CashCards were to be loaded at Western Union locations. Id. at 14-15, 41. IGE contracted with FDR for the purpose of processing the Western Union/IGE/First Banks of St. Louis transactions. Id. at 89, 133. There is no dispute that FDR drafted the agreement at issue. Id. at 90, 134.
The original duration of the FDR service agreement was five processing years, which could have been extended. T. Ex. 1, § 8.1. Pursuant to section 2.4, the original processing year began on the first day of the first calendar month following completion of the start-up. Id., § 8.1. In the service agreement, FDR agreed to provide various automatic teller machine and debit card processing transaction services and IGE agreed to pay FDR a start-up fee in the amount of $150,000 together with processing fees and special fees for FDR's processing services. Id. The service agreement also provides for certain liquidated damages in the event of breach. Id., § 9.4(c). The agreement further provided that certain occurrences would excuse performance. Id., § 14.9.
Section 2.4 of the service agreement defined the duties and responsibilities of the parties for startup. Id., § 2.4. Section 2.4(h) required IGE to pay a start-up fee of $150,000. It further provided that "[t]he parties agree that the Start-Up Fee is earned on FDR's completion of the Start-Up Process in accordance with the Start-Up Project Plan." Id., § 2.4(h). Start-up continued through at least December of 2001 and possibly into January of 2002. T. Tr. at 134:9-18. The invoice for December 2001 contains the billing for the start-up fee and demonstrates that start-up was completed. T. Ex. 3.
Section 14.9 of the service agreement, titled "Force Majeure and Restricted Performance," provides:
If performance by either party of any service or obligation under this Agreement, including Conversion or Deconversion, is prevented, restricted, delayed or interfered with by reason of labor disputes, strikes, acts of God, floods, lightning, severe weather, shortages of materials, rationing, utility or communication failures, failure of a Network, failure or delay in receiving electronic data, earthquakes, war, acts of terrorist, revolution, civil commotion, acts of public enemies, blockade, embargo, or any law, order, proclamation, regulation, ordinance, demand or requirement having legal effect of any government or any judicial authority or representative of any such government, or any other act, omission or cause whatsoever, whether similar or dissimilar to those referred to in this clause, which are beyond the reasonable control of said party, then said party shall be excused from the performance to the extent of the prevention, restriction, delay or interference.Id., § 14.9 (emphasis added). Section 14.9 does not require notice to FDR of any force majeure event. Similar language is contained within section 13.2, relating to FDR's performance guidelines. Specifically, that section provides that "FDR's failure to meet a performance guideline due to any cause beyond its control shall not be considered to be a failure for which FDR shall be responsible under this Agreement." Id., § 13.2. Both sections are standard provisions contained in FDR service agreements. T. Tr. at 34-36. Article 9 of the FDR service agreement relates to termination. IGE's ability to terminate is set forth in section 9.2. Colasuonno testified that under the circumstances and language of that section, IGE had no basis for terminating the FDR agreement. Id. at 105, 154-55. The service agreement provided that if IGE were to terminate, it would still have been responsible for over $2 million in fees and damages. T. Ex. 1, § 9.3(a).
IGE entered into an agreement with Western Union on August 16, 2001. T. Tr. at 83-85; T. Ex. 105. The stated purpose of the Western Union Agreement was to permit IGE customers to load their CashCards at Western Union Agent locations utilizing the Western Union SwiftPay Service. T. Ex. 105, § E. The Western Union Agreement set forth the duties and responsibilities of the parties. Id.; T. Tr. at 85. By contract, Western Union was the exclusive loading source for the CashCards. T. Ex. 105, § 14.1; T. Tr. at 87. Under the contract, Western Union agreed to accept payments from CashCard holders, provide IGE with a copy of the SwiftPay Card Agreement and Privacy Policy, approve IGE's CashCards, advertising and promotional material, promptly notify IGE of any defects or malfunctions in the Western Union system, assist IGE in developing advertising and marketing programs, provide thirty days to remedy any claimed breach (specifying breach, default or applicable law before termination). T. Ex. 105. IGE then entered into agreements with Union Telecard Alliance ("UTA") and later IBEX Card Services, LLC ("IBEX") for distribution of its CashCards to retail locations. T. Ex. 113; T. Tr. at 79, 95, 116, 120-21.
The record shows IGE's initial capitalization was approximately $4.5 million. T. Tr. at 108; T. Ex. 111. IGE's plan was to derive revenue from: (1) its distributorship agreements with UTA and later IBEX, which provided for payments to IGE in the amounts of $1.4 and $1.5 milllion, respectively, and (2) receiving fees from each Western Union loading transaction. T. Tr. at 86, 116, 122-23; T. Exs. 105 at Schedule A, 113, 114. IGE's expenses included its start-up costs, the development of the CashCard program, salary and office expenses, printing the CashCards and other materials, and contract and legal fees. T. Tr. at 116, 127. IGE had contractual payment obligations to both Western Union and FDR. T. Exs. 1, 105. It was obligated to pay Western Union for fifty thousand transactions a month. T. Tr. at 86-87; T. Ex. 105, Schedule A, ¶ 3. IGE made two payments of approximately $275,000 each to Western Union. T. Tr. at 95, 102, 111. A third payment was not made when due because of problems IGE was experiencing with Western Union's processing of its cards. Id. at 112, 127.
Almost immediately after it entered into the contracts, IGE began to experience problems with Western Union. Id. at 95, 128. Both Colasuonno and Bryant testified that they had personal knowledge of Western Union's failure to fulfill its duties. T. Tr. at 94, 98, 113, 12-29, 123, 141, 144-47. Colasuonno owned check-cashing stores that were Western Union agent locations. Id. at 113. He learned that UTA's agents attempted to load the CashCards and were not successful. Id. He also testified that IBEX had problems with Western Union loading the CashCards. Id. at 94-95. There is also credible evidence that Western Union failed to provide adequate training to its agents concerning the CashCards and its own SwiftPay program and that Western Union failed to inform its agents about the CashCard program. Id. at 94.
There is no dispute that IGE customers had difficulty loading their CashCards and that UTA terminated its contract with IGE to distribute CashCards because UTA learned that Western Union agents were not loading the cards. Id. at 94-95. Roger Bryant testified that IGE's cash flow problems began when UTA terminated its agreement with IGE because of the inability to load the CashCard at Western Union. Id. at 136. There is also evidence that Western Union delayed approval of a simple graphics change on the CashCards for about six weeks. Id. at 146-47, 149. This delay in approval of marketing prevented IGE from printing CashCards and shipping them to IBEX. Id. Bryant further testified that CashCards were sitting in distributors' shelves and the distributors were complaining that customers could not get their cards loaded. Id. at 150-53. Bryant testified that he personally called the Western Union SwiftPay "help desk" in May of 2002, asked about CashCards, and was told that the help desk had no knowledge of them. Id. at 144-45. IGE made 3,500 calls to Western Union locations asking if they understood how the CashCard program worked and, if not, if they could give information about the program; the locations were unaware of the program. Id. at 144-152.
Accordingly, IGE did not achieve its income projections. Id. at 146-47, 149, 162. As IGE's cash flow problems worsened, Bryant testified that IGE made the decision to pay Western Union over FDR because Western Union was its "life line. They controlled our life line. If we lost the ability to load the card, we lost total capability of operating." Id. at 157. Although the payments were late, Colasuonno testified that there were discussions with Western Union about whether IGE had to make payments notwithstanding that Western Union was not providing any services. Id. at 98-99, 127.
On or about April 4, 2002, IGE entered into a contract with IBEX to replace UTA as its exclusive distributor of CashCards. T. Ex. 113; T. Tr. at 92, 121-22. The agreement specified that IBEX had to place certain minimum orders for CashCards. T. Ex. 113, § 4. IBEX agreed to pay $5.75 per CashCard and promised to place orders totaling at least $1,725,000 in the first two months of the agreement. Id., § 4.
In July 2002, Colasuonno and a representative for IBEX agreed to renegotiate the contract. They entered into a Proposed Distributorship and Investment Agreement. T. Ex. 114. The proposed agreement provided for the distribution of additional CashCards and a renegotiation of the original agreement and fee schedule. Id.; T. Tr. at 93, 121-22. This proposed agreement was dependent on the issuance of certain letters by Western Union, and on a showing, to IBEX's satisfaction, that Western Union was performing its obligations under Western Union Agreement. Id. at 123. Under the proposed agreement, IBEX was to pay IGE $442,875.81 as follows: one-half would be paid on IBEX's receipt of the signed Western Union letter to IBEX; and one-half would be paid on mailing of a Western Union SwiftPay letter to SwiftPay Agents. Id. at 123; T. Ex. 114, § c. In addition, after the expiration of two months from the execution of a Master License and Wholesale Distribution Agreement, separate payments of $500,000 would be made. Id. Finally, IBEX would purchase twenty percent of IGE for $5 million. Id., § 1.2(a); T. Tr. at 140. The record shows that the proposed agreement was never executed because Western Union did not issue the requisite letters. Id.
At some point, Western Union began to assert to that IGE had to be a licensed money transmitter in order to conduct the CashCard business. T. Tr. at 94, 163. Colasuonno, who is a certified public accountant, and Bryant, both contended that IGE was not required to be a licensed money transmitter. T. Tr. at 103, 118-19, 168. Bryant testified that he repeatedly asked Western Union for examples of any noncompliance with banking regulatory laws and was not given any. Id. at 168-69, 176. Additionally, Bryant made other inquiries and was told by Ezra Levine, a leading expert in the field, that IGE did not have to be licensed. Id. at 169-70, 173-75.
The record shows that IGE made numerous efforts to enable Western Union to comply with the agreement, including conducting telephone and in-person meetings with Western Union where it was explained that its agents would not load the CashCards; sending mailings to agents; calling agents and providing them with information regarding the CashCard program; sending sample CashCards to agents so they would become familiar with the cards; and making two payments despite the loading and other problems. Id. at 98, 102, 151-52.
Sometime after February of 2002, IGE was so low on funds that management stopped receiving a salary; Colasuonno himself never received any salary. Id. at 127-28. Gary LePatourel testified that his job at FDR was to make sure accounts were current as well as working with customers on any processing problems. Id. at 24. When IGE failed to make payments on FDR's invoices, LePatourel called various IGE principals to determine why payments were not being made. Id. These calls were made on at least a monthly basis. Id. at 25. LePatourel also contacted Western Union regarding IGE's account. Id. at 26. LePatourel admitted that he had contact with both Bryant and Western Union and was aware of the problems IGE was having, including those involving Western Union. Id. at 38-39. He also knew that Western Union was considering terminating the Western Union agreement. Id. at 40.
On June 18, 2002, representatives and lawyers of both Western Union and IGE met in Denver, Colorado, in an effort to resolve their differences. Id. at 98-99, 101. Colasuonno testified that at the meeting Western Union specifically agreed to issue a letter to IBEX giving assurances about Western Union's commitment to and support of the Western Union Agreement. Id. at 99-102. No such letter was executed, resulting in an end to renegotiation between IBEX and IGE for distribution of the card.
On July 16, 2002, Western Union terminated its agreement with IGE. By that time, IGE had no ability to pay its outstanding obligations including those to FDR. Id. at 104, 117, 163, and 168. Because all of its initial capitalization had been expended, mostly to Western Union, IGE could not contract with another loading source for its CashCards. Id. at 157. Roger Bryant testified that even if funds had been available, it would have taken at least six months to set up another loading source assuming a contract had already been negotiated. Id. at 157. Furthermore, Bryant had expected the Western Union agreement to continue past July 2002, so IGE had not pursued other options. Id. at 158.
IGE sued Western Union for the breach in United States District Court for the Southern District of New York. Both parties sought a stay pending resolution of the action. The action has now been decided adversely to IGE. See International Gateway Exch, LLC. v. Western Union Financial Servs., Inc., No. 02 CIV. 6125 (CM), ___ F. Supp. ___, 2004 WL 1555240 (S.D.N.Y. June 25, 2004). The resolution of the case is of no consequence to the court's analysis herein, for the reason that the issue addressed in that case, whether Western Union breached "its contract with IGE by terminating the parties' agreement without cause" id. at *9, is a separate inquiry than that entertained by this court, which is whether acts by Western Union excused IGE's performance under the contract by making it impossible or impracticable to perform.
Bryant and Colasuonno both testified that the IGE system was turned off in September or October of 2002 because IGE could no longer even afford to pay the electric bill. Id. at 104, 154. This effectively ended the CashCard system in its entirety and prevented any further CashCard transactions. Id. at 104-05, 154.
FDR terminated the service agreement on December 31, 2002. Id. at 62; T. Ex. 17; T. Tr. at 62. Over the course of the contract, IGE paid FDR a total of $74,824 on the invoices and generated $3,599 in processing fees. Id. at 61-62. Through July 2002, the unpaid invoices total $123,509.42.
CONCLUSIONS OF LAW
This court has jurisdiction based on diversity of citizenship under 28 U.S.C. § 1332. This is an action for damages for breach of a service contract. Under Nebraska law, a party seeking recovery for breach of contract must prove: the existence of a promise, its breach, damage, and compliance with any conditions precedent that activate the opposing party's duty. See Henriksen v. Jim's Body Shop, 643 N.W.2d 652, 658 (Neb. 2002). The party must further prove its damages were proximately caused by the breach. Union Ins. Co. v. Land and Sky, Inc., 568 N.W.2d 908, 911 (Neb. 1997).
Construction of a contract is generally a question of law. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 506, 412 N.W.2d 453, 456 (Neb. 1987). A contract written in clear and unambiguous language is not subject to interpretation or construction and must be enforced according to its terms. Boutilier v. Lincoln Benefit Life Ins. Co., 681 N.W.2d 746, 750 (Neb. 2004). In construing a contract, words are given their plain and ordinary meaning as a reasonable person would understand them. See Kreikemeier v. McIntosh, 391 N.W.2d 563, 566 (Neb. 1986). A contract will be construed most strongly against the party preparing it when there is a question as to its meaning. Id.
Business necessity, or frustration of purpose, impossibility or extreme impracticability, is a defense to breach of contract that will excuse nonperformance. See Young v. Tate, 442 N.W.2d 865, 868 (Neb. 1989); Cleasby v. Daly, 376 N.W.2d 312, 318 (Neb. 1985); see also Restatement (Second) of Contracts, §§ 261 262. A supervening act may render the business necessity defense applicable. Cleasby, 376 N.W.2d at 318. "Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary." Restatement (Second) of Contracts, § 261. Further, "[w]here, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary." Id., § 265. The burden to prove the business necessity defense is on the party asserting the defense. Cleasby, 376 N.W.2d at 318.
A "force majeure" clause is generally a provision in a contract that allocates the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled. Blue Creek Farm, Inc. v. Aurora Coop. Elevator Co., 614 N.W.2d 310, 312 (Neb. 2000). A "force majeure" is not necessarily limited to the equivalent of an act of God; "the test is whether under the particular circumstances there was such an insuperable interference occurring without the parties' intervention as could not have been prevented by prudence, diligence and care." Horsemen's Benevolent Protective Ass'n v. Valley Racing Ass'n, 6 Cal. Rptr. 2d 698, 713 (Cal.App. 1992).
Contracting parties have a duty to mitigate damages for breach of contract. Harmon Cable Communications v. Scope Cable Television, 468 N.W.2d 350, 363 (1991). A liquidated damages clause contemplates an inability to identify and mitigate damages. See Browning Ferris Indus. of Nebraska, Inc. v. Eating Establishment — 90th Fort, Inc., 575 N.W.2d 885, 890 (Neb.App. 1998). A contracting party cannot negate its general duty to mitigate damages by merely inserting a liquidated damages provision into a contract. Id.
A stipulated sum for liquidated damages will be considered by the court to be an unenforceable penalty clause unless (1) the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty; and (2) the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach. Kozlik v. Emelco, Inc., 483 N.W.2d 114, 121 (1992). Generally, the question of whether a sum mentioned in a contract is to be considered as liquidated damages or as a penalty is a question of law, dependent on the construction of the contract by the court. Browning Ferris, 575 N.W.2d at 890. If the circumstances of a contract and its breach lend themselves to mitigation of damages, it is difficult to sustain a liquidated damage clause. Id.
FDR has established the existence of a contract and its breach. IGE does not dispute that it failed to pay FDR on a majority of the invoices sent by FDR to IGE. It also admits it did not generate $1 million in processing fees as set forth by section 4.4 of the service agreement. Furthermore, it acknowledges that FDR had the right to terminate the FDR service agreement as early as February of 2002. IGE acknowledges the breach and concedes it is liable for payments due under the contract up to June 16, 2001. At that time IGE argues that its performance under the contract was excused by reason of the application of either section 14.9 of the service agreement (the force majeure clause) or by the doctrine of business necessity or frustration of purpose.
The evidence shows that FDR drafted the service agreement in an arm's length transaction involving sophisticated business people. At the time it entered into the contract to provide services to IGE, FDR was familiar with IGE's business plan and business model, and was aware that IGE's business depended on Western Union's performance under the agreement it had with IGE to "load" the CashCards. The fact that FDR and Western Union are part of the same parent corporation gave FDR a competitive edge in securing the contract with IGE. The contract includes a very broad "force majeure" clause. The terms of that clause are clear and unambiguous. Section 14.9 excuses performance for reasons that are either "similar or dissimilar to" acts of God and the like. The contract contains a correspondingly broad clause that would excuse FDR's nonperformance.
IGE has established that its performance should be excused under either section 14.9 or the business necessity defense. IGE has shown that the conduct of Western Union in handling the CashCards frustrated the essential purpose of IGE's business and, consequently, of the service agreement. IGE has shown that Western Union's actions were beyond the contemplation or control of IGE. To the extent that FDR argues that IGE was in effect responsible for Western Union's breach by reason of the "licensed money transmitter" issue, the court finds that is not the case. The evidence shows that there was no way for IGE to counteract or to remedy Western Union's insistence that IGE was somehow in violation of the law. The state of the law with respect to the issue was, and is, uncertain at best.
Moreover, the situation fits squarely within the contemplation of the "force majeure" clause. The broad language of the clause as well as the circumstances of the case show that IGE did not assume the allocation of any risk, via the force majeure clause, that would constrain or negate the applicability of the business necessity defense. Cf. United States v. Winstar Corp., 518 U.S. 839, 909 (1996).
Moreover, even if IGE's performance under the contract were not excused, the court finds that FDR was aware of IGE's difficulties and should have acted to mitigate its damages by terminating the contract when it learned that Western Union had terminated the agreement to "load" the cards. Conversely, the court finds the liquidated damages clause amounts to an unenforceable penalty. It is apparent that FDR had no incentive to terminate the contract because the contractual damage provision gives FDR a far better deal: several months' worth of billings, without having to provide any service. See, e.g., Browning-Ferris, 575 N.W.2d at 889. Therefore, pursuant to section 14.9, FDR should not be entitled to any damages under sections 4.4 or 9.4(a) of the service agreement.
Accordingly,
IT IS ORDERED that, pursuant to this Memorandum and Order, FDR is hereby awarded damages for breach of contract in the amount of $123,509.42, as reflected in its unpaid invoices, up to July 2001. See T. Exs. 2-8. A separate order of judgment will be entered this date.