WESTERN SURETY COMPANY v. FUTURENET GROUP, INC. et al

Filing 59

ORDER denying 35 Futurenet defendants' Motion to modify Preliminary Injunction 48 Signed by District Judge George Caram Steeh. (MBea)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

WESTERN SURETY COMPANY,
a South Dakota surety company,
Plaintiff,

CASE NO. 16-CV-11055
HONORABLE GEORGE CARAM STEEH

v.
FUTURENET GROUP, INC., a Michigan
corporation, MOTOR CITY DEVELOPER,
LLC f/k/a FUTURENET DEVELOPER, LLC,
a limited liability company, FUTURENET
SECURITY SOLUTIONS, LLC, a limited
liability company, PARIMAL MEHTA,
individually, DIPIKA MEHTA, individually,
JIGNESH MEHTA, individually, and CAPITAL
FUNDING SOLUTIONS, INC,
Defendants.
/
ORDER DENYING FUTURENET DEFENDANTS’ MOTION (DOC. 35)
TO MODIFY PRELIMINARY INJUNCTION (DOC. 48)
Plaintiff Western Surety (“Western”) filed the instant action against defendants
FutureNet Group, Motor City Developer, FutureNet Security Solutions, Parimal Mehta,
Dipika Mehta, and Jignesh Mehta (collectively, the “FutureNet Defendants”),1 alleging
that the FutureNet Defendants have defaulted on an indemnity agreement. Pursuant to
a motion by Western, the Court issued a preliminary injunction on June 8, 2016. (Doc.
48). The preliminary injunction fully incorporated by reference the terms of a Standstill
1

In addition to the FutureNet Defendants, there is one additional defendant,
Capital Funding Solutions. The preliminary injunction now in effect does not restrain
Capital, and therefore the Court’s resolution of the instant motion will not directly affect
Capital. Capital has not filed a brief concerning the instant motion.
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and Negative Pledge Agreement (“Standstill Agreement”) that Western and the
FutureNet Defendants previously signed. (Doc. 35-2). In short, the preliminary
injunction, through its incorporation of the Standstill Agreement, prohibited the
FutureNet Defendants from transferring, encumbering, or otherwise disposing of their
assets except in limited circumstances.
Now before the Court is the FutureNet Defendants’ motion to modify the
preliminary injunction. (Doc. 35).2 The Court ordered supplemental briefing on the
motion to modify. (See Docs. 49, 50, 52). A hearing was held on July 14, 2016, and
the Court took the matter under advisement pending the parties’ settlement conference.
In their motion, the FutureNet Defendants request that the Court modify the preliminary
injunction to allow them to enter into a factoring arrangement (the “Factoring
Arrangement”) with a company called Money Works Direct (“MWD”). The FutureNet
Defendants contend that the Factoring Arrangement would not adversely affect Western
in any way, but Western disagrees and opposes the requested modification. For the
reasons explained below, the Court will deny the FutureNet Defendants’ motion.
I. Background
As noted above, the FutureNet Defendants wish to enter into a Factoring
Arrangement with MWD, a factoring company. Under the Factoring Arrangement, MWD
would pay a $750,000 lump sum to FutureNet Group in exchange for $997,500 of
2

At the time the FutureNet Defendants filed their motion, the Court had not yet
issued the preliminary injunction, but the Standstill Agreement was in effect. Thus, their
motion to modify was titled “FutureNet Defendants’ Motion to Modify Standstill and
Negative Pledge Agreement.” Given that the Court incorporated the Standstill
Agreement into the preliminary injunction, the Court has construed the FutureNet
Defendants’ motion as a motion to modify the preliminary injunction.
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FutureNet Group’s receivables. (See Money Works Direct Revenue Based Factoring
Agreement, Doc. 35-3). The $997,500 in receivables would be transferred to MWD at a
rate of $19,182 per week for 52 weeks. (See id.). Western has provided a declaration
from Charlie Groves, a construction-finance consultant. (Decl. Charlie Groves, Doc. 511). He calculates that the Factoring Arrangement would effectively be a loan at a 24.9%
interest rate, or “the ‘loss’ of almost $250,000.00 in revenue.” (Id. ¶ 6).
When the FutureNet Defendants filed their motion to modify on May 2, 2016,3
they claimed that they needed the financing provided by the Factoring Arrangement in
order to meet their payroll obligations. (See Mot. Modify, Doc. 35, at 3). As Western
points out, the FutureNet Defendants have not provided any specific evidence about
FutureNet Group’s payroll obligations and ability to satisfy those obligations. (Pl.’s
Resp., Doc. 50, at 10). The FutureNet Defendants’ sole evidence on this point is the
conclusory testimony of defendant Parimal Mehta, at the preliminary-injunction hearing
on May 3, that FutureNet Group was having trouble paying its employees and needed
the Factoring Arrangement in order to do so. Moreover, as Western points out, the
FutureNet Defendants have apparently managed to pay their employees in the several
months that have passed since they filed their motion to modify. (Id. at 4-5).
In their reply brief, the FutureNet Defendants acknowledge that they have been
able to pay their employees without the Factoring Arrangement, explaining that “FNG
has been able to maintain business operations through continued receivable funding
with Capital Funding Solution, an unsecured loan in the amount of $250,000 . . . and

3

The motion to modify preceded the Court’s issuance of the preliminary
injunction. See supra note 2.
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also by deferring payments to certain IT service vendors.” (Defs.’ Reply, Doc. 52, at 4).
But they claim in their reply that the Factoring Arrangement “would provide bridge
financing to secure long term viable financing and to ultimately provide the ability to fund
a settlement with Western which would in most likelihood provide for some down
payment and some series of payments over time.” (Id.). At the July 14 hearing on this
motion, the FutureNet Defendants’ counsel explained that the Factoring Arrangement
would give the FutureNet Defendants a “little more flexibility” and a “little more
bargaining room” with their other factoring company, defendant Capital Funding
Solutions. Counsel also stated that notwithstanding their ability to make payroll, the
FutureNet Defendants have had considerable financial difficulties, including being
unable to pay one of their major software vendors.
A provision of the Standstill Agreement, incorporated into the preliminary
injunction, apparently blocks the FutureNet Defendants from entering into the Factoring
Arrangement. This provision prohibits the FutureNet Defendants from “sell[ing],
convey[ing], transfer[ring], leas[ing] or dispos[ing] of any of the Collateral outside the
ordinary course of business [or] creat[ing], incur[ring], assum[ing] or suffer[ing] to exist
any mortgage, pledge, encumbrance, security interest, lien or charge of any kind upon
the Collateral other than Permitted Liens.” (Standstill Agreement ¶1). “Collateral” is
defined in a separate indemnity agreement between the parties. (Doc. 1-2). It includes
“all property, rights, and assets of the [FutureNet Defendants], including, but not limited
to, all inventory, equipment, instruments, investments, contract rights and proceeds,
insurance, accounts, and deposits.” (Id. ¶ 10). The Standstill Agreement defines
“Permitted Liens” as “[l]iens or encumbrances in favor of . . . any . . . factor as to any
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receivables which are not generated as a result of a construction contract bonded by
Western, which liens and encumbrances arise out of the financing of accounts
receivable in the ordinary course of business.” (Standstill Agreement ¶ 1(a)). Western
has offered evidence that suggests that the Factoring Arrangement would not fall within
the Permitted Liens exception. Specifically, Mr. Groves, Western’s expert, states in his
declaration that “[u]nder no circumstance can the loss of receivables at a cost of almost
25% be considered a transaction in the ordinary course of business in any type of
business.” (Decl. Charlie Groves ¶ 10).
The FutureNet Defendants argue that the Court should allow a modification of
the preliminary injunction, on the ground that the Factoring Arrangement would not
impair Western’s interests at all. The FutureNet Defendants claim that MWD has
agreed to sign an addendum. (Doc. 35-3 at 11). The addendum states, among other
things, that MWD “acknowledges that the Assets being purchased pursuant to the
[Factoring Arrangement] expressly exclude any Receipt . . . generated as a result of
construction contracts bonded by Western Surety Company.” (Id.). Moreover, MWD
will agree that “its security interest in the [FutureNet Defendants’] Assets is junior and
subordinate to all existing the [sic] security interests including without limitation, those of
. . . Western Surety Company and its affiliates.” (Id.).
Based on these provisions in the addendum, the FutureNet Defendants argue
that they are simply requesting “permission to grant a lien to the new lender which
would be subordinate to the liens of existing secured creditors, including the lien of
Western Surety Company . . . , on any assets that might remain after all prior secured
creditors, including Western, are paid in full.” (Defs.’ Reply at 2). They contend that this
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would not affect Western at all because, as things currently stand, if FutureNet Group
were to go out of business and be liquidated, Western would receive nothing over and
above the receivables from the contracts bonded by Western. (Id. at 4 (citing Conway
MacKenzie Liquidation Analysis, Ex. 513 from the preliminary-injunction hearing)).
Western has a super-priority interest in the receivables from the Western-bonded
contracts, but Western’s security interest in all of the other assets is subordinate to the
security interests of several other secured creditors. (Id.). Because of the addendum,
the Factoring Arrangement with MWD would only apply to this latter category of assets.
II. Legal Standard
The purpose of a preliminary injunction is “to preserve the relative positions of
the parties until a trial on the merits can be held.” Findlay Truck Line, Inc. v. Cent.
States, Se. & Sw. Areas Pension Fund, 726 F.3d 738, 746 n.4 (6th Cir. 2013) (quoting
Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981)) (internal quotation marks
omitted). This Court considered four factors in deciding whether to grant the preliminary
injunction currently in effect:
(1) whether the movant [i.e., Western, the plaintiff] has a strong likelihood
of success on the merits; (2) whether the movant would suffer irreparable
injury without the injunction; (3) whether issuance of the injunction would
cause substantial harm to others; and (4) whether the public interest
would be served by issuance of the injunction.
Mich. Catholic Conference & Catholic Family Servs. v. Burwell, 807 F.3d 738, 746 (6th
Cir. 2015) (quoting Jolivette v. Husted, 694 F.3d 760, 765 (6th Cir. 2012)) (internal
quotation marks omitted).
“When modifying a preliminary injunction, a court is charged with the exercise of
the same discretion it exercised in granting or denying injunctive relief in the first place.”
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Welch v. Brown, No. 12-13808, 2014 WL 2931389, at *2 (E.D. Mich. June 30, 2014)
(unpublished) (quoting Sierra Club v. U.S. Army Corps of Eng’rs, 732 F.2d 253, 256 (2d
Cir. 1984)) (internal quotation marks omitted); accord Toledo Area AFL-CIO Council v.
Pizza, 907 F. Supp. 263, 265 (N.D. Ohio 1995). The essential question to be answered
is whether “changed circumstances require modification so as to effectuate the
purposes underlying the initial grant of relief.” The RightThing, LLC v. Brown, No. 3:09
CV 135, 2009 WL 1954632, at *2 (N.D. Ohio July 6, 2009) (unpublished) (quoting Pro
Edge L.P. v. Gue, 411 F. Supp. 2d 1080, 1086-87 (N.D. Iowa 2006)) (internal quotation
marks omitted). A court may modify a previously granted preliminary injunction “[w]here
‘significant changes in the law or circumstances’ threaten to convert a previously proper
injunction ‘into an “instrument of wrong.”’” Gooch v. Life Inv’rs Ins. Co. of Am., 672 F.3d
402, 414 (6th Cir. 2012) (quoting Salazar v. Buono, 559 U.S. 700 (2010) (plurality
opinion), quoting 11A Charles A. Wright et al., Federal Practice and Procedure § 2961
(2d ed. 1996)); see also LFP IP, LLC v. Hustler Cincinnati, Inc., 810 F.3d 424, 426 (6th
Cir. 2016) (“Courts . . . may exercise their ‘sound judicial discretion’ to modify an
injunction ‘if the circumstances, whether of law or fact, obtaining at the time of its
issuance have changed, or new ones have since arisen.’” (quoting Sys. Fed’n No. 91,
Ry. Employees’ Dep’t v. Wright, 364 U.S. 642, 647 (1961))).
III. Discussion
As a preliminary matter, the Court finds that the proposed Factoring Arrangement
in this case is not “in the ordinary course of business,” and that the Factoring
Arrangement therefore does not fall within the terms of the Permitted Lien provision in
the Standstill Agreement. This is obvious from the high effective interest rate of the

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proposed Factoring Arrangement, and confirmed by the credible declaration by Mr.
Groves, Western’s expert. Even the FutureNet Defendants’ counsel admitted during the
hearing that factoring is a financing source “of last resort.” Thus, for the FutureNet
Defendants to enter into the Factoring Arrangement, the Court would need to order a
modification of the preliminary injunction.
The Court will not order a modification. The FutureNet Defendants have not
shown that circumstances have changed significantly since the Court entered the
preliminary injunction in this case or since the parties entered into the Standstill
Agreement.4 FutureNet Group has been able to pay its employees, and the FutureNet
Defendants no longer claim that collapse is imminent. Moreover, the FutureNet
Defendants have adduced no evidence, other than the conclusory testimony of Parimal
Mehta, that their financial circumstances have changed or that they need the proposed
Factoring Arrangement. The FutureNet Parties’ desire for more financial “flexibility” is
an insufficient change in circumstance.
Furthermore, the FutureNet Defendants have not shown that the preliminary
injunction is “an instrument of wrong” or that a modification would be required to
effectuate the purposes of the preliminary injunction. Whatever financial hardship the
FutureNet Defendants will suffer due to the Court’s refusal to modify the preliminary
injunction is not significant enough to affect the Court’s previous analysis under the

4

It is not entirely clear whether the Court should consider the changed
circumstances from the date of the signing of the Standstill Agreement or from the date
of the entry of the preliminary injunction. At any rate, the outcome is the same either
way.
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harm-to-others and public-interest factors of the preliminary-injunction test. (See Op. &
Order Granting in Part & Denying in Part Pl’s Mot. Prelim. Inj., Doc. 48, at 19-23).
On the contrary, the requested modification would harm Western. When the
Court ruled on Western’s preliminary-injunction motion, the Court carefully balanced the
four preliminary-injunction factors and ultimately granted Western a very limited form of
injunctive relief: a stay on the transferring or encumbering of assets except in the
ordinary course of business. The Court did so even though the evidence in the record
makes very clear that Western has a high likelihood of success on the merits and will
likely lose millions of dollars no matter what the Court does. To now allow the
FutureNet Defendants’ requested modification would undermine the very limited relief
that the Court has afforded Western. The requested modification would reduce
the—admittedly low—probability that Western will recover anything beyond the
receivables from the Western-bonded contracts.
IV. Conclusion
Therefore, the Court finds that it would be inappropriate to modify the preliminary
injunction. The FutureNet Defendants’ motion to modify (Doc. 35) is DENIED. IT IS
ORDERED that the FutureNet Defendants’ SHALL NOT enter the proposed Factoring
Arrangement with MWD.
IT IS SO ORDERED.
Dated: January 19, 2017
s/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE

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CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
January 19, 2017, by electronic and/or ordinary mail.
s/Marcia Beauchemin
Deputy Clerk

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