Third Circuit Addresses When a Creditor Qualifies as an Insider to Avoid a Preference Payment Under the U.S. Bankruptcy Code
In In re: Winstar Communications, Inc., 554 F.3d 382 (3d Cir. 2009) (opinion by J. Sloviter), the Third Circuit affirmed the bankruptcy court’s finding of an avoidable preference payment and breach of contract but modified the judgment with respect to equitable subordination. Winstar Communications, Inc. (“Winstar”) and its wholly-owned subsidiary Winstar Wireless, Inc. (“Wireless”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. The cases were eventually converted to Chapter 7 and a Trustee was appointed. The bankruptcy court reviewed a considerable amount of facts in its determination and it analyzed the breach of contract claim under New York law. Accordingly, an abbreviated version of the facts is presented below and the breach of contract analysis has been omitted.
Prior to its bankruptcy proceedings, Winstar constructed global broadband telecommunications networks and Wireless designed the construction of the network. Winstar often purchased goods from Lucent Technologies, Inc. (“Lucent”) as part of Lucent’s vendor-creditor relationship with Winstar. Eventually, Lucent and Winstar entered into a secured credit agreement where Lucent provided a $2 billion line of credit to be used for the purchase of products and services in exchange for a lien on substantially all of Winstar’s assets. Lucent and Winstar also entered into a Supply Agreement where Winstar agreed to purchase sixty-five to seventy percent of its equipment and services from Lucent. If Winstar did not meet these requirements, it would incur escalating surcharges of up to $3 million per year.
Winstar subsequently obtained a revolving credit and term loan from a consortium of bank lenders (the “Bank Facility”), secured by Winstar’s assets. Winstar paid off its loan with Lucent, which, in exchange, released its lien on Winstar’s assets. Lucent, however, desired to continue its relationship with Winstar. The parties entered into a second credit agreement where Lucent lent Winstar a $2 billion line of credit with the ability to borrow up to $1 billion at any one time. Lucent received security interests in the assets of two of Winstar’s subsidiaries, which Winstar established to borrow the money. The second credit agreement also contained certain financial covenants. It limited Winstar’s total annual capital cash expenditures to $1.3 billion and entitled Lucent to serve a “refinance notice” on Winstar if the outstanding loans exceeded $500 million. Eventually the strategic relationship between Winstar and Lucent degenerated. In its review of the facts before it, the bankruptcy court found that Lucent bullied Winstar into actions that benefited Lucent. For example, Lucent used Winstar to inflate Lucent’s revenues, it forced Winstar to purchase equipment that it did not need, it controlled Winstar’s decisions building its network and it required Winstar to repay Lucent with any increases in the Bank Facility loan.
In November, 2000, Siemens, a manufacturer of telecommunications equipment joined the Bank Facility and lent $200 million to Winstar. The loan documents stated that the loan was to be used for “general corporate purposes.” However, the second credit agreement obligated Winstar to pay an increase in the Bank Facility to Lucent or result in a default. On December 7, 2000, Winstar not only closed on a $200 million increase in its Bank Facility loan, but it also paid $188.2 million towards its loan with Lucent.
Winstar filed for bankruptcy in 2002 and initiated an adversary proceeding against Lucent alleging that Lucent breached their contract causing Winstar to file bankruptcy. Lucent filed several proofs of claims for secured and unsecured claims under their agreement. Based upon the facts presented above, the bankruptcy court found that Winstar’s payment to Lucent in the amount of $188.2 million on December 7, 2000 was an avoidable preference payment that the Trustee was able to recover.
Upon review, the Third Circuit agreed that the payment at issue was an avoidable preference payment. Under the Bankruptcy Code, a trustee can recover property transferred to or for the benefit of the creditor for any antecedent debt owed prior to the transfer which was made while the debtor was insolvent and within 90 days before filing of the petition (or within 1 year if the creditor was an insider at the time of the transfer). As the Siemens transaction occurred outside of the 90 days prior to the petition, the issue turned upon whether Lucent was an insider.
A creditor can qualify as an insider by satisfying one of the categories enumerated by Congress under Section 101 of the Bankruptcy Code, or by qualifying as a “non-statutory insider” if it falls within the definition of an insider but outside of the enumerated categories. The court reviewed whether the bankruptcy court correctly identified Lucent as a “person in control” under Section 101 and as a non-statutory insider. The court found that “actual control” is necessary for an entity to constitute an insider under the “person in control” language; however, “actual control” is not necessary to support a non-statutory insider. Instead, the determination of a non-statutory insider is dependent upon a close relationship between the creditor and debtor and transactions that were not conducted at arm’s length. The court held that notwithstanding whether or not Lucent demonstrated actual control to constitute a “person in control,” sufficient facts existed to support the bankruptcy court’s decision that Lucent was a non-statutory insider. The facts revealed that Winstar and Lucent had a close relationship and that the transactions were not conducted at arm’s length.
Lucent asserted two defenses to the preference action, both of which the court rejected. Lucent first argued that Winstar’s payment to Lucent was earmarked and was therefore not a transfer of Winstar’s property. Under the court-made “earmarking doctrine,” payments are not considered a voidable preference when: (1) an agreement exists between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt; (2) the parties perform according to the agreement’s terms; and (3) the transaction does not diminish debtor’s estate. The court found that Lucent failed to demonstrate to the bankruptcy court that there was an agreement between Siemens and Winstar that satisfied the “earmark doctrine.” Instead, the court found the facts supported just the opposite. The Siemens’ representative testified that Winstar could use its loan for any corporate purposes and Winstar’s memorandum to the Bank Facility lenders did not indicate that it intended to use the loan specifically to repay Lucent. Further, the evidence did not reveal that Siemens conditioned its loan upon Winstar’s payment to Lucent. Therefore, Lucent’s defense of earmarking failed.
Similarly, Lucent’s defense of new value also failed. A trustee may not avoid a transfer to a creditor if after such transfer the creditor gave new value to the debtor which was not secured. The Third Circuit has imposed three requirements on new value defenses: “(1) the creditor must have received a transfer that is otherwise voidable as a preference; (2) after receiving the preferential transfer, the preferred creditor must advance ‘new value’ to the debtor on an unsecured basis; and (3) the debtor must not have fully compensated the creditor for the ‘new value’ as of the date of the bankruptcy petition.” Even though the court agreed that Lucent was involved in two transactions with Winstar after the date of the preference payment, it found that neither transaction constituted new value. The evidence before the bankruptcy court, such as the bankruptcy proceedings, security agreements, proofs of claims and parties’ stipulations revealed that the transactions were secured and therefore, did not satisfy the second element of the new value defense.
The court also addressed the bankruptcy court’s decision to grant the Trustee’s request to equitably subordinate Lucent’s claims. The Bankruptcy Code provides that a court may subordinate all or part of an allowed claim to another allowed claim or all or part of an allowed interest to another interest. Courts have held that in order to equitably subordinate a claim, the claimant must have engaged in inequitable conduct, which resulted in an injury to the bankrupt’s creditors and the equitable subordination must not be inconsistent with the Bankruptcy Code.
The court found that the facts presented to the bankruptcy court supported its finding that Lucent’s conduct was “egregious.” Lucent used threats of non-payment under the subcontract to force Winstar to purchase unneeded equipment from Lucent which triggered Lucent’s ability to issue the refinancing notice because Winstar was over the borrowing limit. Lucent also deliberately delayed issuing the refinancing notice to prevent public disclosure of Winstar’s poor credit and to induce other creditors to provide funds to Winstar. Further, Lucent’s actions harmed Winstar and its other creditors. The unneeded equipment eventually sold for pennies on the dollar and Lucent’s intentional withholding of the refinancing notice induced the Siemens loan and additional private equity financing.
Even though the court found that Lucent’s actions satisfied the first two prongs of equitable subordination, it found that the bankruptcy court’s holding was inconsistent with the Code because the Code does not permit the subordination of debt to equity. A proof of interest which may be filed by an equity security holder is distinguishable from a proof of claim which is filed by a creditor. Therefore, the court modified the bankruptcy court’s equitable subordination so that Lucent’s claims were only subordinated to claims of other creditors as opposed to equity interests.
12(b)(6) Motion Prompts the Court to Analyze the Sufficiency of a Dragonetti Claim
In A.G. Cullen Construction, Inc. v. Travelers Cas. & Sur. Co., Civil Action No. 08-1238, 2009 U.S. Dist. LEXIS 11683 (W.D. Pa. Feb. 13, 2009) (opinion by J. Fischer), the court denied without prejudice Defendants’ motion to dismiss Plaintiffs’ claims under 42 Pa. C.S.A. § 8351 for malicious use of civil proceedings allowing Plaintiffs to proceed through discovery. Plaintiffs claimed that Defendants wrongfully and maliciously filed an Emergency Motion for Temporary Restraining Order and Motion for Preliminary Injunction (the “Underlying Motion”) in the related case of Travelers Cas. & Sur. Co. v. A.G. Cullen Construction, Civ. A. No. 07-765, 2007 U.S. Dist. LEXIS 55997 (W.D. Pa. 2007) (the “Underlying Action”).
The Underlying Action arose after Travelers and Plaintiffs entered into a General Agreement of Indemnity (“GAI”) wherein Travelers was the surety on performance and payment bonds issued to Plaintiffs in connection with general construction contracts between Plaintiffs and Butler County. Pursuant to the GAI, Arlene and Paul Cullen were the individual indemnitors under the terms of the bonds and A.G. Cullen Construction stood as Travelers’ principal. On January 25, 2006, Plaintiffs were awarded a construction contract with Butler County. A dispute between Plaintiffs and Butler County eventually arose as a result of Butler County refusing to grant Plaintiffs an extension of time to complete the project, and as a result of the dispute, Butler County filed a claim against the performance bond with Travelers.
On June 6, 2007, Travelers commenced the Underlying Action against Plaintiffs claiming, inter alia, that Plaintiffs’ refusal to deposit funds into a trust account was in violation of the GAI. Travelers then filed the Underlying Motion and sought to have the court order Plaintiffs, inter alia, (1) to deposit funds collected or received in connection with the project into a trust fund account, and (2) to provide Travelers with access to Plaintiffs’ books, papers, records, documents, contracts, reports, financial information, and accounts. Following an evidentiary hearing, the court denied the Underlying Motion, without prejudice, and ordered the parties to proceed to mediation. Subsequently, as a result of the mediation, the parties then reached an agreement regarding the day-to-day operation and procedures of the trust fund account.
In evaluating Plaintiffs’ claim that Travelers and its attorneys violated 42 Pa. C.S.A. § 8351 by filing the Underlying Motion, the court set forth the elements for a Dragonetti Claim: (1) the defendant has initiated, procured or continued a civil proceeding against the plaintiff; (2) the proceeding was terminated in plaintiff’s favor; (3) there was an absence of probable cause to bring the proceeding; (4) the proceeding was brought for an improper purpose; and (5) plaintiff has suffered damages as a result. First, the court analyzed the term “proceeding” to determine whether the Underlying Motion fell within the definition of the term under the Dragonetti Act. The court took into consideration case law interpreting the meaning of “proceedings” and ultimately concluded that a motion for a preliminary injunction is a proceeding for purposes of the Dragonetti Act and may serve as a basis for a malicious use of civil proceedings claim.
Next, the court determined whether the Underlying Motion could be classified as a termination of a civil proceeding in Plaintiffs’ favor. Defendants’ first argument on this issue was that Plaintiffs’ claims were premature because the Underlying Action remained pending when the Underlying Motion was denied. The court determined that the order denying the Underlying Motion adjudicated the merits of the motion as to the remaining issues not resolved by the mediation, and thus, considered the order a final order for purposes of Plaintiffs’ claims. Also, Defendants raised the argument that the motion was not terminated in Plaintiffs’ favor because Travelers obtained relief with respect to two of its three claims as a result of the mediation. Here, the court concluded that the issues were not clear whether the proceeding was completely terminated in Plaintiffs’ favor. The Underlying Motion was partly terminated in Plaintiffs’ favor because at least one request for relief was denied, but the issues surrounding the operation and management of the trust fund account were not terminated in Plaintiffs’ favor.
With respect to the third element above, the court analyzed whether Defendants lacked probable cause or were grossly negligent in their investigation of the motion and publication of alleged rumors to the court. Plaintiffs contended that Defendants lacked probable cause because the Underlying Motion was based on unfounded accusations. Because this issue was a mixed question of law and fact, and to determine whether probable cause existed or if Defendants acted with gross negligence, the court reviewed the surrounding circumstances relating to the Underlying Motion and analyzed those circumstances under the substantive law pertaining to emergency injunctive relief and the standard for awarding such relief. The court considered Travelers’ knowledge at the time the Underlying Motion was filed and also the court’s decision to decline awarding the relief sought by Travelers and ultimately determined that it was unable to conclude whether probable cause existed or whether Travelers and its attorneys were not grossly negligent. For this element of the claim, the court held that Plaintiffs included sufficient allegations in the Amended Complaint for the claim to proceed through discovery.
Next, the court analyzed the fourth element above to determine whether Defendants acted primarily for an improper purpose. Defendants contended that their primary purpose for bringing the emergency motion was to have Plaintiffs abide by the terms of the GAI, and Plaintiffs argued that Defendants lacked any evidence to support their position that Plaintiffs would not fulfill their payments to the subcontractors. Again, the court allowed the claim to proceed through discovery. Finally, the court reviewed the allegations set forth in the Amended Complaint in accordance with the Dragonetti Act and concluded that potentially recoverable damages were sufficiently pled.
— Contributed by Houston Harbaugh, Pittsburgh;
Dueling Experts Render Motion for Summary Judgment Inappropriate in Patent Infringement
In Arlington Industries, Inc. v. Bridgeport Fittings, Inc., Civil Action No. 3:01-CV-0485 (consolidated), 2009 U.S. Dist. LEXIS 7911 (M.D. Pa. February 4, 2009) (opinion by J. Conner), Bridgeport Fittings, Incorporated (“Bridgeport”) and Arlington Industries, Incorporated (“Arlington”) were involved in a patent dispute regarding U.S. Patent Number 5,266,050 (the “‘050 patent”) held by Arlington. The ‘050 patent was a continuation patent of U.S. Patent Number 5,171,164 (the “‘164 patent”) and involved an electrical conduit fitting developed by Arlington in 1992 that allowed a user to quickly connect the device to a junction box using one hand instead of two. In 1999, Bridgeport created its own version of a quick-connect fitting which used nearly identical design features to those used in Arlington’s products. Arlington filed suit against Bridgeport in 2001 alleging patent infringement, and the parties later entered into a settlement agreement in which Bridgeport agreed to discontinue making its allegedly infringing products, as well as “any colorable imitation, thereof.”
In September 2005, Bridgeport created a new design for a quick-connect electrical fitting that was similar to the design described in the ‘050 patent. However, Bridgeport’s new design incorporated a feature involving four tensioning tangs and two anchoring tabs which it contended distinguished it from the ‘050 patent. After Arlington informed Bridgeport that its products utilizing the new design infringed claim 8 of the ‘050 patent, Bridgeport filed a complaint seeking a declaration that the products do not infringe the ‘050 patent, either literally or under the doctrine of equivalents. Arlington filed a counterclaim claiming that the fifteen products that incorporated the new design literally infringe claim 8 of the ‘050 patent and that the manufacture, use and sale of the new products constituted a breach of the settlement agreement previously entered between the parties.
Claim 8 required that the quick connect fitting contain “at least two outwardly sprung members” attached to its metal adaptor. The court had previously construed “outwardly sprung members” to mean “members bent outward at an angle relative to the normal plane of the adaptor.” Whether the new design infringed upon this claim required a determination of whether the tensioning tangs constituted members “bent outward at an angle relative to the normal plane of the adaptor.”
The parties filed cross-motions for summary judgment. Arlington’s motion sought a judgment that the products literally infringed claim 8 of the ‘050 patent. Bridgeport’s motion sought summary judgment that the products did not infringe, either literally or according to the doctrine of equivalents. Bridgeport’s motion also sought summary judgment that the manufacture and sale of the products did not constitute a breach of the settlement agreement and that Bridgeport was not liable for willful infringement of claim 8 nor any infringement damages prior to December 6, 2005.
Both parties’ motions with respect to literal infringement relied upon highly technical arguments regarding the angle of the tensioning tangs to the plane of the adaptor, with each party’s expert witness construing the evidence to be in favor of his client. The court denied both motions with respect to literal infringement, citing a factual dispute and insufficient evidence to render summary judgment on behalf of either.
Bridgeport asserted the presumption of prosecution history estoppel set forth in Honeywell Int’l v. Hamilton Sundstrand Corp., 370 F.3d 1131, 1134 (Fed. Cir. 2004), in support of its request for summary judgment on the doctrine of equivalents. Under this presumption, a party who rewrites a dependent claim into independent form and at the same time cancels an independent claim cannot invoke the doctrine of equivalents on those claims. Bridgeport argued that Arlington was subject to this presumption because independent claim 1 and dependent claim 2 of the ‘164 patent were combined in response to a patent agent’s rejection of claim 1 based upon prior art, and claim 8 of ‘050 at issue was later formed on this combination. However, the court disagreed, stating that Arlington did not rewrite dependent claim 2 in independent form nor combine dependent claim 2 with independent claim 1. Rather, Arlington merely amended claim 1 in order to distinguish it from the prior art, rather than substituting claim 2 for claim 1 as required by Honeywell.
Bridgeport conceded that the products at issue did perform substantially the same function but argued that they did not do so in substantially the same way to obtain substantially the same result and therefore could not infringe by the equivalents. Once again, the court noted that the parties’ experts reached opposite conclusions regarding the substantiality of the differences between the manner that the products maintained electrical continuity. Accordingly, the court ruled that the factual dispute was properly suited for the trier of fact and denied summary judgment on infringement by the doctrine of equivalents. The court also found that material facts were in dispute regarding Bridgeport’s request for summary judgment on the breach of the settlement agreement and willful infringement, and denied the motion on those issues as well.
The court did grant Bridgeport’s motion for summary judgment regarding the limitation of the period for which Arlington could claim damages. In order to claim damages for infringement, Arlington must have provided either actual notice of infringement to Bridgeport or constructive notice of infringement by marking its products with a “patented” mark. Because Arlington did not mark its products, it was forced to rely upon actual notice. Arlington argued that the settlement agreement put Bridgeport on continuing notice of its duty to refrain from infringing the ‘050 patent. The court rejected this argument, however, and held that Bridgeport did not receive actual notice of infringement until the December 6, 2005 meeting of the parties. Therefore, the court granted Bridgeport’s motion and precluded Arlington from collecting patent infringement damages prior to December 6, 2005.
Plaintiffs Adequately Pled Claim for Copyright Infringement and Claim for Breach of Contract but Failed to Set Forth Claim for Misappropriation of Trade Secrets
In Mainardis v. Prudential Ins. Co. of America, Civil Action No. 08-3605, 2009 U.S. Dist. LEXIS 6935 (E.D. Pa. Jan. 30, 2009) (opinion by J. Pratter), Plaintiffs alleged, inter alia, that Prudential Insurance Company violated their copyrights, breached their software license agreements, misappropriated trade secrets and engaged in unfair competition. Prudential, on the other hand, moved to dismiss all claims pursuant to F. R. Civ. P. 12(b)(6).
In 1995, the Mainardis formed Lighthouse Strategic Projects Group, and after a period of time, they developed the following products: (1) “business Killers”–designed to educate and motivate customers via audiovisual vignettes; (2) “business Killers Extended Market”–designed and targeted specifically at women; and (3) “Family Matters”–designed as an interactive CD-ROM with written materials for marketing insurance and financial services products to closely-held business owners. Eventually, the Mainardis copyrighted all three products in accordance with the federal copyright law as either text and audiovisual material or audiovisual material. From June 2005 through 2006, the Mainardis marketed the business Killers package, which was the software for business Killers and Family Matters, to Prudential employees and officers of Prudential’s affiliates. The software package contained license agreements that each user had to accept upon installation, and Prudential further agreed to keep confidential all information received from the Mainardis during their explanation and instruction sessions.
By February 2006, Prudential expressed an interest in entering into a license agreement for the distribution of the business Killers package, and after lengthy negotiations, a draft of the distribution license agreement was reduced to writing for review by the parties. Eventually, after communicating to Lighthouse that minor problems existed with the agreement, Prudential presented a revised contract to Lighthouse in June 2006 that did not include Plaintiffs’ requested changes. As a result of Prudential’s failure to incorporate the requested changes, a final agreement was never reached between the parties, yet copies of the business Killers package remained with Prudential and were never returned to Plaintiffs. Subsequently, in June 2007, Prudential released a substantially similar copy of the business Killers package entitled “Prudential’s Tipping Points.”
In this case, Plaintiffs’ first claim asserted against Prudential was for copyright infringement. The court set forth the elements necessary to prove copyright infringement: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original. Pursuant to 17 U.S.C. § 102(a), the Copyright Act protects original works of authorship fixed in any tangible medium or expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. In relying on the court’s position that a copyright does not protect ideas, but only expression of ideas, Prudential argued that Plaintiffs sought protection for marketing approaches that are not entitled to protection. The court determined that there was a substantial similarity between Plaintiffs’ verbiage used to describe the program and the dialogue contained in the business Killers package with the verbiage and dialogue contained in Prudential’s Tipping Points vignettes. Thus, the court concluded that Plaintiffs stated a claim for copyright infringement. Also, Prudential argued that Plaintiffs merely recited the elements of the cause of action. The court held, however, that the complaint provided a basis for their assertion of an entitlement to relief.
Plaintiffs also asserted a claim against Prudential for breach of contract based on the software license agreements contained in the business Killers package. Prudential first challenged the claim by arguing that the state law claim was preempted by federal law. In relying on decisions from district courts within the circuit, wherein the courts agreed that an extra element exists in a breach of contract claim, i.e. a promise by the defendant, which is not present in a claim for copyright infringement, the court in the present case concluded that Plaintiffs’ breach of contract claim was not automatically preempted. Prudential also challenged the breach of contract claim by arguing that the complaint did not allege acceptance of the license agreements by Prudential and supported its argument with the technicality that the Mainardis, and not Prudential’s employees or agents, opened the computer programs and accepted the terms during the demonstration of the package. However, the court concluded that the existence of a valid contract was sufficiently pled by Plaintiffs.
The third cause of action asserted by Plaintiffs against Prudential was for misappropriation of trade secrets, which according to the court, requires: (1) the existence of a trade secret; (2) communication of the trade secret pursuant to a confidential relationship; (3) use of the trade secret, in violation of that confidence; and (4) harm to the plaintiff. Because the courts have held that a product cannot constitute a trade secret when it provides its creator with economic value only when disseminated, the court in the present case concluded that the package did not constitute a trade secret because Plaintiffs sought economic benefit through the sale of the business Killers package and failed to assert that they derived any independent economic value from the package.
The last argument raised by Prudential in its motion to dismiss was that Plaintiffs’ claim for unfair competition was preempted by federal law. Prudential argued that Plaintiffs’ claim was premised solely on the fact that Prudential copied their work and passed it off as its own. Plaintiffs, in turn, conceded that they based their claim solely on Prudential’s intent to deceive them, and not the public, but argued that Prudential’s intent to gain access to and copy the business Killers package presented additional elements of proof excluding the claim from federal preemption. After analyzing the common law definition of unfair competition found in the Restatement (Third) of Unfair Competition and its application by other judges of the Eastern District, the court denied the motion without prejudice with the hope that more guidance would be provided by the Pennsylvania courts, which have not yet applied the Restatement (Third) to the common law tort, in the near future on this issue.
— Contributed by Houston Harbaugh, Pittsburgh;
Consumers Adequately Pled Statutory Violations Arising from Purchase of Vehicle
In Molley v. Five Town Chrysler, Inc., Civil Action No. 07-cv-5415, 2009 U.S. Dist. LEXIS 13765 (E.D. Pa. Feb. 20, 2009) (opinion by J. Joyner), the court denied Defendant Wells Fargo Bank’s motion to dismiss the Plaintiffs’ claims for Unfair Trade Practices and Consumer Protection Law (“UTPCPL”), Truth-in-Lending Act (“TILA”) and Equal Credit Opportunity Act (“ECOA”). The relevant facts revealed that Plaintiff Norfeh Molley contacted a Chrysler and Mitsubishi dealer to inquire about purchasing a 2006 Nissan Murano advertised on the Internet. In response to Norfeh’s submittal of her credit application, a representative from the dealer informed her that she was approved for financing and that the purchase price of the vehicle was $15,495.00 excluding all taxes, fees and tags. Norfeh subsequently traveled to New York to purchase the vehicle; however, when she arrived, a second representative from the dealer informed her that the total cost of the vehicle was actually $21,500.00 because the lender, J.P. Morgan Chase (“Chase”) required a separate $2,000.00 deposit and a warranty in the amount of $2,500.00 as a result of Norfeh’s “light” credit history. The dealer determined that Norfeh would qualify for a better rate if she had a co-signer, so a third representative from the dealer drove to Philadelphia and presented Norfeh’s sister, Martha Molley, with blank loan documents for her signature as co-signer. Martha signed the blank documents based upon the third representative’s statements that the final documents would reflect the cost discussed (apparently $19,000 as provided later in the court’s decision) and would be immediately forwarded to her. One month later, Martha received the documents, which incorrectly disregarded the total cash deposit and prior price quotes and indicated that a total of $23,816.15 was financed. The documents also incorrectly named Martha Molley as the holder of the car’s title as opposed to Norfeh.
Plaintiffs filed an action against Chrysler, Mitsubishi and Chase. Plaintiffs subsequently amended their complaint to reflect acquisitions of certain Defendants that occurred either prior to or during the litigation. Ultimately, Plaintiffs filed a second amended complaint adding Wells Fargo as a Defendant after learning that Wells Fargo was responsible for the original financing. Plaintiffs also agreed to dismiss Chase. Wells Fargo filed the motion to dismiss, and Plaintiffs eventually withdrew all claims against Wells Fargo except their claims for UTPCPL, TILA and ECOA.
First, the court found that in construing all of the factual allegations in Plaintiffs’ favor, Plaintiffs had plead sufficient facts to support their claim for UTPCPL. Wells Fargo argued that to support a claim for UTPCPL, a plaintiff must allege the elements of common law fraud. On the contrary, Plaintiffs argued that a claim for UTPCPL can be established by demonstrating “conduct having a tendency to confuse.” The court cited several Pennsylvania federal court decisions and found that since the 1996 amendments to the statute, these courts have been divided as to whether the elements of common law fraud are necessary to plead a claim for UTPCPL. However, the court relied upon a Pennsylvania Superior Court decision from 2000 finding that a plaintiff must still plead the elements of common law fraud despite the 1996 amendments. This court also found that Plaintiffs alleged sufficient facts to support such a claim.
The elements for common law fraud include: (i) a material misrepresentation of an existing fact; (ii) scienter; (iii) justifiable reliance on the misrepresentation; and (iv) damages. “Scienter” can be plead by alleging facts “establishing a motive and an opportunity to commit fraud” or by alleging facts that “constitute circumstantial evidence of either reckless or conscious behavior.” According to Plaintiffs’ allegations, Martha acted in reliance on the misrepresentation that the vehicle would require $19,000.00 in financing and that the loan and vehicle would be in Norfah’s name; the financing amount increased without their consent; the car and loan were only in Martha’s name; and damages included financial injury, loss of credit-worthiness and emotional distress. Therefore, the court denied Wells Fargo’s motion to dismiss the UTPCPL claim.
Next, the court denied Wells Fargo’s motion to dismiss Plaintiffs’ TILA claim. TILA was created to ensure a disclosure of credit terms, so that the consumer is able to compare all credit terms available and avoid inaccurate and unfair credit billing and credit card practices. Pursuant to the statute, the creditor is required to make disclosures in writing and provide a copy for the consumer to maintain for his records. To support a TILA claim, a plaintiff must allege that the defendant was the creditor, that it did not make the required disclosures and that the plaintiff incurred damages. The court found that Plaintiffs alleged sufficient facts to support a claim for TILA because as stated in relevant statutes, Wells Fargo was a creditor even though it was an assignee of the loan and Plaintiffs claimed that Martha signed blank documents at the direction of Wells Fargo’s agents. The court held that blank documents presented to a consumer lacked the requisite TILA disclosure.
Finally, the court denied Wells Fargo’s motion to dismiss Plaintiffs’ ECOA claim. A creditor can trigger a notice requirement to the potential borrower by an approval, a counteroffer or an adverse action. The court held that Plaintiffs sufficiently plead the ECOA claim because they alleged that the original financing offer had increased from $19,000 to $23,816.15 without any notice and that the misrepresentations were made by intermediaries from Chrysler and Mitsubishi at Wells Fargo’s direction.
Posting Copyrighted Material on Internet Sufficient to Establish Access of Alleged Infringer
In R. Bradley Maule v. Philadelphia Media Holdings, LLC, Civil Action No. 08-3357, 2009 U.S. Dist. LEXIS 6795 (E.D. Pa. Jan. 30, 2009) (opinion by J. Kelly), R. Bradley Maule (“Maule”), a photographer in Philadelphia, Pennsylvania, filed a copyright infringement action against Gyro Advertising, Inc. (“Gyro”); Steven Grasse (“Grasse”), the CEO and sole shareholder of Gyro; and Philadelphia Media Holdings, LLC (“PMH”), the publisher of two major newspapers in the Philadelphia area.
In May 2005, Maule allegedly photographed the Philadelphia skyline from the eighteenth floor of a hotel located in West Philadelphia. Maule also alleged that he modified the photograph by inserting artistic renderings of the Comcast Center and Mandeville Place in the locations where they were to be constructed. Maule had also modified one of the billboards in the photo to contain the text “Visit Philly Skyline Dot Com.” He then posted the resulting picture on his website to show how the Philadelphia skyline would appear in 2008 (the “Projected Skyline Photograph”). Maule registered this picture with the U.S. Copyright Office on May 13, 2008.
In 2007, PMH used a picture in an advertising campaign distributed in its newspapers which Maule contended were copies of the Projected Skyline Photograph. The picture depicted a pig flying across the Philadelphia skyline (the “pig glossy”). Maule contended that the pig glossy was a cropped copy of the Projected Skyline Photograph with the text “Visit Philly Skyline Dot Com” digitally removed from the pig glossy prior to print in PMH’s newspapers.
Maule filed suit against PMH, Gyro and Grasse asserting ten causes of action related to the use of the pig glossy and another picture allegedly copied from his website. The defendants filed a motion to dismiss several counts pursuant to Fed. R. Civ. P. 12(b)(6). Maule conceded some of the counts, and the remaining issues decided by the court were whether to dismiss Counts I – III. Count I asserted a claim for copyright infringement against all of the defendants for use of the pig glossy. Count II requested injunctive relief pursuant to 17 U.S.C. § 502. Count III sought declaratory relief against all of the defendants asking the court to invalidate the defendants’ copyright in the pig glossy.
Regarding the motion to dismiss Maule’s copyright infringement claims, the court stated that Maule would be required to establish that (1) he had ownership of a valid copyright in the Projected Skyline Photograph and (2) that the defendants copied, displayed or distributed protected elements of the copyrighted work. The court found that the first element was satisfied because Maule had obtained a valid copyright certificate within five years of the first publication of the photograph. The court held that the second element could be proven by showing defendant’s access to the work and substantial similarity between the Projected Skyline Photograph and the pig glossy. Citing to Maule’s allegations that the Projected Skyline Photograph had been posted on his website for almost two years before the alleged infringing use, as well as the parties’ relative proximity to Philadelphia and other allegations of infringement, the court found that Maule had sufficiently established access. The court also found that Maule’s allegations regarding the common features of the photographs were sufficient to establish the last remaining requirement of substantial similarity. Therefore, the court denied the defendants’ motion to dismiss.
The defendants also asserted that the claims against Grasse in his individual capacity should be dismissed because Maule was not entitled to pierce the corporate veil of Gyro. However, the court noted that Maule had alleged that Gyro was the alter ego of Grasse and was merely a sham for his personal operations. Furthermore, the court noted that Grasse could also possibly be found liable as a contributory infringer due to his alleged level of control over the corporation and its employees. Accordingly, the court denied this request for dismissal as well.
Court Recognizes Cause of Action for Breach of Duty to Negotiate in Good Faith
In W.P. 851 Associates, L.P. v. Wachovia Bank, Civil Action No. 07-2374, 2009 U.S. Dist. LEXIS 1395 (E.D. Pa. Jan. 8, 2009) (opinion by Judge C. Darnell Jones II), the court was asked to decide whether to reinstate a count for breach of a duty to negotiate in good faith. The question of whether such a claim exists has not been decided by the Pennsylvania Supreme Court. However, the court explained that the Third Circuit has predicted that the Pennsylvania Supreme Court would find that an agreement to negotiate in good faith is enforceable if it meets the requisite elements of a contract. Nevertheless, the court refused to reinstate the count for breach of duty to negotiate in good faith.
Applying Third Circuit precedent, the court looked to whether: 1) both parties manifested an intention to be bound by the agreement; 2) the terms of the agreement were sufficiently definite to be enforced; and 3) there was consideration. Additionally, the court explained that the Third Circuit requires the parties to manifest a specific intent to negotiate in good faith before a court can enforce an agreement to negotiate in good faith.
The court found no evidence of an agreement to negotiate in good faith. Plaintiff’s entire motion for reinstatement was based upon one fact witness’s opinion elicited during a deposition: “Q: Did you believe the bank had an obligation to negotiate the terms of the written lease in good faith? A: Yes.” According to the court, this evidence alone did not support an unequivocal agreement to negotiate in good faith. Missing from the record was any unequivocal promise, any person who made a promise or any person to whom a promise was made. It followed then that plaintiff failed to satisfy the requirement that the agreed-upon terms be sufficiently definite. Plaintiff also failed to identify the extent of defendant’s alleged duty. Finally, the court found that the plaintiff failed to meet the consideration element. Accordingly, the court found no basis for reinstating plaintiff’s count for breach of duty to negotiate in good faith.