Bankdirect Capital Finance, LLC v. Capital Premium Financing, Inc.

Filing 260

MEMORANDUM Opinion and Order Signed by the Honorable John Z. Lee on 7/11/18.Mailed notice(ca, )

IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
BANKDIRECT CAPITAL FINANCE, LLC,
Plaintiff,
v.
CAPITAL PREMIUM FINANCING, INC.,
Defendant,
v.
BANKDIRECT CAPITAL FINANCE and
TEXAS CAPITAL BANK NATIONAL
ASSOCIATION,
CounterDefendants.

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Case No. 15 C 10340
Judge John Z. Lee

MEMORANDUM OPINION AND ORDER
Plaintiff BankDirect Capital Finance, LLC (“BankDirect”), Defendant Capital
Premium Financing, Inc. (“CPFI”), and Counter-Defendant Texas Capital Bank
National Association (“TCB”) have brought a number of claims against one another
which arise out of a failed business relationship. BankDirect and TCB have moved
to dismiss Counts VII and VIII of CPFI’s second amended counterclaims. For the
reasons given below, BankDirect and TCB’s motion is denied.

Background1
BankDirect and CPFI originate and service loans for the financing of insurance
premiums. CPFI’s 2d Am. Countercl. (“Countercl.”) ¶ 2, ECF No. 172. TCB controls
BankDirect and directs its conduct. Id. ¶¶ 104, 105, 128. BankDirect’s primary
customer segment is large insurance agencies, while CPFI focuses on small to midsized insurance agencies. Id. ¶¶ 4, 5.
In 2010, CPFI and BankDirect entered into a set of agreements under a Master
Transaction Agreement (“Master Agreement”) designed to substantially intertwine
the two companies’ sales, marketing, and financing. Id. ¶¶ 1, 9, 10. The Master
Agreement also gave BankDirect an option to purchase certain CPFI assets and
liabilities upon the Master Agreement’s expiration. Id. ¶ 10.
When the Master Agreement expired in 2016, BankDirect attempted to
exercise the purchase option, and CPFI refused to sell. Id. ¶ 136; 3d Am. Compl. ¶¶
123–40, ECF No. 160. As a result, BankDirect has brought a number of claims,
including breach of contract (Counts III, IV and V) and breach of the implied duty of
good faith (Count VI). BankDirect also seeks a declaration that the agreements
between the parties are enforceable and that it satisfactorily performed its
obligations under the agreements (Count II).2

The following facts are taken from CPFI’s Second Amended Counterclaims and are
accepted as true on review of BankDirect and TCB’s motion to dismiss. See Tamayo v.
Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
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BankDirect has voluntarily withdrawn Count I.

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For its part, CPFI’s counterclaims contend that BankDirect and TCB breached
the parties’ agreements (Count II and III) and the covenant of good faith and fair
dealing (Count IV). CPFI also alleges that BankDirect and TCB fraudulently induced
CPFI to enter into the agreements (Count VI); that the agreements, including the
purchase option, are void (Count I); and that BankDirect and TCB have been unjustly
enriched (Count V).

In addition, CPFI claims that BankDirect and TCB

misappropriated proprietary information in violation of the Illinois Trade Secrets Act
(“ITSA”), 765 Ill. Comp. Stat. 1065/1 et seq. (Count VII). Lastly, CPFI brings a
conversion claim (Count VIII) alleging that, after the parties’ dispute arose,
BankDirect and TCB unilaterally seized $1,000,000 from CPFI’s deposit account
without having a contractual right to do so.
Before the Court is BankDirect and TCB’s motion to dismiss CPFI’s
counterclaims for trade-secret misappropriation and conversion (Counts VII and VIII,
respectively).
Legal Standard
A motion under Rule 12(b)(6) challenges the sufficiency of claims under Rule
8. See Christensen v. Cty. of Boone, 483 F.3d 454, 457 (7th Cir. 2007). The federal
notice pleading standard requires claims to “contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2009)). Claims need provide only “enough detail to give [defendants] fair notice of
what the claim is and the grounds upon which it rests, and, through his allegations,
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show that it is plausible, rather than merely speculative, that he is entitled to relief.”
Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir. 2008). In evaluating a Rule
12(b)(6) motion, all well-pleaded allegations are accepted as true, and courts must
draw all reasonable inferences in the claimant’s favor. See Cole v. Milwaukee Area
Tech. Coll. Dist., 634 F.3d 901, 903 (7th Cir. 2011); Justice v. Town of Cicero, 577 F.3d
768, 771 (7th Cir. 2009).
Analysis
I.

ITSA Claim (Count VII)
BankDirect and TCB move to dismiss CPFI’s trade-secret misappropriation

claim under the ITSA, 765 Ill. Comp. Stat. 1065/1 et seq. “To state a claim for trade
secret misappropriation, a plaintiff must allege: (1) that the information at issue was
a trade secret; (2) that it was misappropriated; and (3) that it was used in the
defendants’ business.” Fire ‘Em Up, Inc. v. Technocarb Equip. (2004) Ltd., 799 F.
Supp. 2d 846, 849–50 (N.D. Ill. 2011) (citing Learning Curve Toys, Inc. v. PlayWood
Toys, Inc., 342 F.3d 714, 721 (7th Cir. 2003)).
“A trade secret is information that ‘(1) is sufficiently secret to derive economic
value, actual or potential, from not being generally known to other persons who can
obtain economic value from its disclosure or use; and (2) is the subject of efforts that
are reasonable under the circumstances to maintain its secrecy or confidentiality.’”
Id. (quoting 765 Ill. Comp. Stat. 1065/2(d)). “While it is true that specificity of
concrete trade secrets is required to support a finding of misappropriation, . . . the
alleged trade secrets need not be disclosed in detail in a complaint to survive a motion
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to dismiss.” Id. at 850 (citing AutoMed Techs., Inc. v. Eller, 160 F. Supp. 2d 915, 920–
21 (N.D. Ill. 2001) (internal citation omitted); see Motorola, Inc. v. Lemko Corp., 609
F. Supp. 2d 760, 771 (N.D. Ill. 2009) (“ITSA plaintiffs are not required to plead highly
specific facts on improper trade secret use, because such facts often will not be
available before discovery.”) (citing Sentry Pool v. Wave Tec Pools, Inc., No. 07–4082,
2008 WL 3200837, at *3 (C.D. Ill. Aug. 6, 2008)); see also Covenant Aviation Sec., LLC
v. Berry, 15 F. Supp. 3d 813, 818–19 (N.D. Ill. 2014) (collecting cases for the
proposition that “courts have found [trade-secret] allegations to be adequate in
instances where the information and the efforts to maintain its confidentiality are
described in general terms”).
Moreover, under Illinois law, customer lists, pricing data, and similar
information “can constitute trade secrets depending on the facts of each case.” Id.
(collecting cases).
BankDirect and TCB make a number of arguments for why CPFI fails to state
a legally cognizable trade-secret misappropriation claim. First, they contend that
CPFI’s claim is improperly based on an implied duty of confidentiality, rather than
the explicit duty set forth in the Master Agreement. Counterdefs.’ Mem. Supp. at 7–
10, ECF No. 150. As an initial matter, the Court observes that BankDirect and TCB
cite only to summary-judgment opinions to support their argument, rather than cases
based upon pleading standards. Id. (citing Nilssen v. Motorola, Inc., 963 F. Supp.
664, 679–80 (N.D. Ill. 1997); Maxtech Consumer Prods., Ltd. v. Robert Bosch Tool
Corp., 15 C 5951, 2017 WL 2573033, at *22 (N.D. Ill. May 18, 2017); Fast Food
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Gourmet, Inc. v. Little Lady Foods, Inc., 542 F. Supp. 2d 849, 865 (N.D. Ill. 2008)). In
any event, CPFI concedes that its ITSA claim is limited to whatever obligations the
confidentiality provision in the MTA imposed upon BankDirect and TCB and that the
information at issue comprises the information that CPFI identified as confidential
pursuant to the Master Agreement.3 Countercl. ¶¶ 97, 98. This is enough specificity
for pleading purposes.
In addition, BankDirect and TCB argue that CPFI fails to sufficiently allege
that customer lists, pricing information, and other specific customer and agencyrelated information were trade secrets because BankDirect, not CPFI, owns this
information. In support, BankDirect and TCB quote contract language stating that
BankDirect was to be the exclusive purchaser of certain insurance loans originated
by CPFI. See Counterdefs.’ Mem. Supp. at 11. BankDirect and TCB also cite to
several other provisions of the parties’ agreements that they contend granted
BankDirect and TCB ownership of the information at issue. See id. In response,
CPFI contends that these provisions evidence ownership of the loan documents, but
not the customer, agency, and pricing information at issue.
To CPFI’s point, none of the contractual provisions that BankDirect and TCB
invoke in their opening brief explicitly addresses the ownership of the information at

It is true enough that CPFI also states that “[a]dditionally, the confidential
information that CPFI provided to BankDirect was provided under circumstances that
created a reasonable expectation [of confidentiality] that gave to a duty [of confidentiality].”
Countercl. ¶ 99. However, in its response, CPFI disavows that its claim is rooted in anything
other than the terms of the Master Agreement. Def.’s Resp. at 4, ECF No. 169.
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issue. See Counterdefs.’ Mem. Supp., Ex. A, ECF No. 150-1. Instead, they indicate,
in one fashion or another, that CPFI will maintain “Loan Files” on BankDirect’s
behalf and that BankDirect is entitled to access them. But BankDirect and TCB do
not provide the complete definitions of this and other relevant terms in the opening
brief. Instead, it is only in the reply brief that BankDirect and TCB develop the
argument that the assets purchased from CPFI include the information in question.
See Counterdefs.’ Reply at 4–8. But this is too late. After all, by waiting until the
reply brief, they have effectively prevented CPFI from responding to these
arguments, and thus the arguments are deemed waived. See M.G. Skinner Assocs.
Ins. Agency, Inc. v. Norman–Spencer Agency, Inc., 845 F.3d 313, 321 (7th Cir. 2017).
’
Lastly, BankDirect and TCB contend that CPFI fails to allege that it took
“efforts . . . to maintain [the] secrecy or confidentiality” of the information at issue.
Counterdefs.’ Mem. Supp. at 12 (quoting 765 Ill. Comp. Stat. 1056/2(d)). But, to the
contrary, CPFI alleges that it took “reasonable measures”—including its
confidentiality provision with BankDirect—to protect the information from being
generally known to the public or competitors. Countercl. ¶ 215.
In sum, CPFI plausibly alleges that BankDirect and TCB improperly used its
confidential customer and pricing information to their benefit and to the detriment
of CPFI. Id. ¶¶ 94–103. This is sufficient to state an ITSA claim for pleading
purposes. See Fire ‘Em Up, Inc., 799 F. Supp. 2d at 849–50.

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II.

Conversion Claim (Count VIII)
BankDirect and TCB also move to dismiss CPFI’s conversion claim. Under

New York law,4 “[t]he tort of conversion is the [intentional] ‘exercise of unauthorized
dominion over the property of another in interference with a plaintiff’s legal title or
superior right of possession.’” Briarpatch Ltd. L.P. v. Geisler Roberdeau, Inc., 148 F.
Supp. 2d 321, 328–29 (S.D.N.Y. 2001) (quoting Lopresti v. Terwilliger, 126 F.3d 34,
41 (2d Cir. 1997)).
Moreover, a contracting-counterparty “defendant may be liable in tort [only]
when,” for a negligence claim, “it has breached a duty of reasonable care distinct from
its contractual obligations,” or when, for other torts, the defendant “has engaged in
tortious conduct separate and apart from its failure to fulfill its contractual
obligations.” N.Y. Univ. v. Cont’l Ins. Co., 662 N.E.2d 763, 767 (N.Y. 1995). Thus,
“[f]or a conversion claim to succeed in the context of a dispute regarding a contract,
the breach of contract must result in some ‘wrong’ that is separately actionable.”
Briarpatch, 148 F. Supp. 2d at 39; see, e.g., BNP Paribas Mortg. Corp. v. Bank of Am.,
N.A., 949 F. Supp. 2d 486, 505 (S.D.N.Y. 2013) (“New York law makes clear that the
allegedly tortuous [sic] conduct must be such that there would be liability even if no
contract existed.” (internal quotation marks omitted)).

BankDirect and TCB contend that New York law governs CPFI’s conversion claim. In
response, CPFI suggests that its claim may instead be governed by Illinois law, but states
that the differences between New York and Illinois law are immaterial, and it proceeds to
engage with New York case law. See Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir.
2001) (stating that courts do not concern themselves with which state’s law applies unless
the parties bring substantive differences to a court’s attention). The Court will do the same.
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In assessing whether a conversion claim fits this mold, “the primary
consideration . . . is whether the contract itself speaks to the issue.” TN Metro
Holdings I, LLC v. Commonwealth Ins. Co., 51 F. Supp. 3d 405, 411–13 (S.D.N.Y.
2014).

Moreover, a conversion claim must seek damages that are not merely

duplicative of those sought for a breach-of-contract claim in the same action. See
DER Travel Servs., Inc. v. Dream Tours & Adventures, Inc., No. 99 CIV. 2231 (HBP),
2005 WL 2848939, at *16–17 (S.D.N.Y. Oct. 28, 2005); Briarpatch, 148 F. Supp. 2d at
329; Citadel Mgmt., Inc. v. Telesis Tr., Inc., 123 F. Supp. 2d 133, 148–50 (S.D.N.Y.
2000).
Here, CPFI argues that, while BankDirect and TCB may eventually be entitled
to the funds held in its deposit account (assuming, of course, that they prevail on the
breach of contract claim), they had no contractual right to unilaterally seize the funds
from the account before the claim is adjudicated. Countercl. ¶ 222. In response,
BankDirect and TCB contend in passing that they are allowed to unilaterally seize
the funds in the event of a breach pursuant to their rights as a secured creditor under
the Security Agreement. Counterdefs.’ Mem. Supp. at 5 (citing 2d Am. Compl., Ex. F
§ 3.08, ECF No. 40-6). But, again, BankDirect and TCB fail to adequately explain
why this is so. And so the argument is deemed waived.
Next, BankDirect contends that the damages CPFI seeks for its conversion
claim is duplicative of the damages it seeks for its breach-of-contract claims. But, in
addition to recovery of the $1,000,000 in seized funds, CPFI seeks punitive damages
for its conversion claim. See Countercl. ¶ 226. As such, CPFI “may be entitled to
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damages beyond those available for the breach of contract claim[s].”

Pillard v.

Sotheby’s, Inc., No. 95 CIV. 7775(JFK), 1997 WL 381795, at *7 (S.D.N.Y. July 10,
1997) (finding that tort and breach-of-contract claims were not duplicative because
punitive damages “can be awarded for conversion claims, but not breach of contract
claims”).
Lastly, BankDirect and TCB assert for the first time in their reply that courts
must also assess whether it is in the “public interest” for a contract-counterparty
plaintiff to be able to bring a tort claim independent of a breach-of-contract claim.
Counterdefs.’ Reply at 10, ECF No. 192 (citing N.Y. Univ., 662 N.E.2d at 763; Mindset
Ltd. v. Quality Controlled Biochemicals, Inc., No. 99 Civ. 6070(AGS), 2000 WL 28167,
at *3 (S.D.N.Y. Jan. 14, 2000)).

But because this argument is not raised in the

opening brief, it too is waived. See Tellabs Operations, Inc. v. Fujitsu Ltd., 283 F.R.D.
374, 379 (N.D. Ill. 2012) (“Arguments . . . that could have been raised in the opening
brief but are first raised in a reply brief are waived.”).
In any event, the cases to which BankDirect and TCB cite do not support their
position. In New York University, 662 N.E.2d at 767–68, the New York Court of
Appeals instructed that, when a party seeks to bring a negligence claim arising out
of a purported contract breach, a court must determine if it would be in the public
interest for a defendant to have a duty of reasonable care in the performance of its
contractual obligations.5 But, for other torts, courts are to consider whether the

The duty of reasonable care is an element of negligence claims, not of intentional torts
like conversion. See, e.g., Marketplace LaGuardia Ltd. P'ship v. Harkey Enters., Inc., No. 07CV-1003 (CBA), 2008 WL 905188, at *6 (E.D.N.Y. Mar. 31, 2008) (“[I]ntentional torts . . . [do
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defendant “has engaged in tortious conduct separate and apart from its failure to
fulfill its contractual obligations.” N.Y. Univ., 662 N.E.2d at 767.
As such, BankDirect and TCB’s citation to Mindset, 2000 WL 28167, at *3,
which addressed a negligence claim, is inapposite. And the other cited case, Brown
v. Kristal Auto Mall Corp., 149 A.D.3d 1025 (N.Y. App. Div. 2017), is similarly
unhelpful to BankDirect and TCB’s position. There, the New York Appellate Division
considered whether a conversion claim should be dismissed, and it did so on the basis
that the plaintiff had failed to allege “tortious conduct separate and apart from . . .
[the defendant’s] contractual obligations.” Id. at 1025 (citing N.Y. Univ. 662 N.E.2d
at 767–68). CPFI does so here.
Conclusion
For the reasons stated herein, BankDirect and TCB’s motion [149] to dismiss
Counts VII and VIII of CPFI’s second amended counterclaims is denied.
SO ORDERED.

ENTERED: 7/11/18
______________________________________
JOHN Z. LEE
United States District Judge

not] require proof of any applicable duty of care.”); see also De Long Corp. v. MorrisonKnudsen Co., 200 N.E.2d 557, 558–59 (N.Y. 1964) (stating that conversion is an intentional
tort under New York law).

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