Cachet Fin. Servs. v. MyPayrollHR

CACHET FINANCIAL SERVICES, Plaintiff, v. MYPAYROLLHR, formerly known as Cloud Payroll LLC; MICHAEL MANN; VALUEWISE CORPORATION;ROSS PERSONNEL CONSULTANTS, INC., doing business as Ross Consultants;SOUTHWESTERN PAYROLL SERVICES INC., doing business as Southwestern Payroll;ESSQUE, INC., doing business as Heutmaker Business Advisors; and DOES 1-10, Defendants.

1:19-CV-1181 (FJS/CFH)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

September 2, 2020

APPERANCES

OF COUNSEL

LOEB & LOEB LLP

10100 Santa Monica Boulevard

Suite 2200

Los Angeles, California 90067

Attorneys for Plaintiff

DONALD A. MILLER, ESQ.

EVAN K. FARBER, ESQ.

MATTHEW ANDERSON I, ESQ.

MYPAYROLLHR formerly

Known as Cloud Payroll LLC

Defendant

NO APPEARANCE

MICHAEL MANN

Defendant

NO APPEARANCE

VALUEWISE CORPORATION

Defendant

NO APPEARANCE

ROSS PERSONNEL CONSULTANTS

INC., doing business as Ross

Consultants

Defendant

NO APPEARANCE

SCULLIN, Senior Judge

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION

Pending before the Court is Plaintiff's motion for entry of a default judgment against Defendants MyPayrollHR, LLC, Michael Mann, Valuewise Corporation, and Ross Personnel Consultants, Inc. (collectively "Defaulting Defendants" or "Mann Defendants"). See Dkt. No. 77.¹

II. BACKGROUND

Plaintiff filed this action against the Defaulting Defendants and others to recover damages it suffered as a result of the Defaulting Defendants' actions. The Defaulting Defendants failed to answer or otherwise defend this action within the required time frame; and, therefore, Plaintiff requested entry of a Clerk's default, see Dkt. No. 68, which the Clerk of the Court entered on January 23, 2020, see Dkt. No. 70. Plaintiff now moves for entry of a default judgment against the Defaulting Defendants in the amount of $108,985,455.04, which is comprised of the following: (1) general damages in the amount of $26,418,517.04; (2) consequential damages in the amount of $27,575,000.00; (3) punitive damages in the amount of $52,837,034.08; and (4) prejudgment interest in the amount of $2,154,903.92 through February24, 2020. See Dkt. No. 77-1 at 24.² In addition, Plaintiff seeks post-judgment interest at a per diem rate of 1.47%. See id.

Plaintiff is a national financial services company that focuses on processing automated clearing house ("ACH") transactions and providing related services for the payroll industry. See Dkt. No. 77-1 at 5 (citation omitted). Plaintiff's ACH system, when used correctly, provides the electronic mechanism through which funds from employers' bank accounts are withdrawn and then ultimately deposited into the bank accounts of the employers' employees. See id. (citation omitted). Payroll processors, i.e., the remarketers, contract with Plaintiff to process tens-of-billions of dollars annually in ACH transactions for tens-of-thousands of employers and millions of employees. See id. (citation omitted).

According to Plaintiff, its patented ACH transaction process works as follows: A payroll processor, such as Defendant MyPayrollHR, sends a digital specification batch file to Plaintiff's automated system, which file includes, among other things, (1) bank and account information of each of the payroll processor's employer-clients; (2) the amount of deposits to be made by each of the payroll processor's employer-clients into Plaintiff's settlement account at Plaintiff's bank; and (3) the amounts to be directly deposited from Plaintiff's settlement account to each of the payroll processor's employer-clients' employees. See id. at 6 (citation omitted). This batch file also includes the bank information for Plaintiff's settlement account, albeit through the use of a fictitious account number to protect Plaintiff, so that funds from the payroll processor's employer-clients transfer directly from their accounts to Plaintiff's settlement account. See id. (citation omitted).

Once Plaintiff's system receives the batch file from the payroll processor and the file is "balanced," i.e., the amounts to be withdrawn from the employer-clients equals the amounts to be deposited into the employees' accounts, Plaintiff's system automatically initiates the transfer of funds from the employer-clients' accounts to Plaintiff's settlement account as delineated in the specifications batch file on the "settlement date" indicated in the file. See id. (citation omitted). Banks have up to two banking days to reject ACH transactions. See id. citation omitted).

Plaintiff contends that it had an 11-year contractual relationship with Defendant MyPayrollHR. See Dkt. No. 77-1 at 6. Defendant MyPayrollHR is an employer-outsource payroll processing company that contracts with employers to manage the employers' payroll. See id. (citation omitted). Defendant MyPayrollHR is one of Plaintiff's clients, i.e., a remarketer. See id. (citation omitted). The business relationship between Plaintiff and Defendant MyPayrollHR is governed by two written agreements: (1) the Rules, Regulations, and Binding Policies (the "Rules") and (2) the Cachet Terms and Conditions (the "Terms"), collectively the "Agreement." See id. at 6-7. Defendant MyPayrollHR executed the most recent versions of these documents on May 1, 2019. See id. (citation omitted).

According to Plaintiff, pursuant to the Agreement, Defendant MyPayrollHR agreed, among other things, to the following:

(1) To use Plaintiff's ACH settlement and processing services only for payroll-related transactions and not to use Plaintiff's services for non-payroll-related transactions, such as company-to-company transfers (Ex. B (Terms) at Introduction Para., §§ 1B, 2B, 7F);

(2) Not to use Plaintiff's ACH settlement and processing services in a way that violates the laws of the United States (Ex. A (Rules) § 1D;

(3) Not to allow unauthorized access to Plaintiff's ACH settlement and processing services (id. § 5B; Ex. B (Terms) § 1A);(4) To provide accurate information in Plaintiff's specifications batch files (Ex. A (Rules) § 4E); and

(5) To pay Plaintiff for all credit entries directed by MyPayrollHR that were made by Plaintiff on MyPayrollHR's behalf (id. § 8A) (collectively, the Security Provisions).

See Dkt. No. 77-1 at 7.

The Agreement also provides as follows: "'4.F. Offset and Security Interest. To secure the payment and performance of [MyPayrollHR]'s obligations set forth herein, [MyPayrollHR] grants CACHET a security interest in the funds collected by [MyPayrollHR] into the Settlement Account, as collateral for the obligations contained in this Remarketer Agreement, and any other agreement Remarketer has signed with CACHET.'" See id. (quoting [Ex. A (Rules)] § 4F).

According to Plaintiff, in or about late August or early September 2019, unbeknownst to Plaintiff at the time, Defendants MyPayrollHR and Mann manipulated Plaintiff's specifications batch files to cause in excess of $26 million to be routed to MyPayrollHR, the Mann Entities, and other entities (such as non-parties Millennium and P2Bi) to which Defendant Mann or Defendant MyPayrollHR apparently owed an obligation. See id. at 8 (citation omitted). This occurred by way of two separate sets of transactions and two different means of theft - one for more than $19 million (the "$19 Million") and another for more than $7 million (the "$7 Million") for a total of $26 million (the "$26 Million"). See id. (citation and footnote omitted).

Specifically, with regard to the $19 Million, Plaintiff alleges that Defendants Mann and MyPayrollHR used Plaintiff's settlement account for non-payroll purposes to steal the $19 Million directly from Plaintiff using classic kiting techniques. See Dkt. No. 77-1 at 8 (citation omitted). According to Plaintiff, Defendants Mann and MyPayrollHR did this by manipulating Plaintiff's specifications to make it appear as if the $19 Million was being transferred from various entities that Defendant Mann controlled to Plaintiff's settlement account and that thesame amount was then being transferred from Plaintiff's settlement account to various other entities, i.e., some of the Mann Entities. See id. (citation omitted). Plaintiff contends that, in reality, no funds were transferred to Plaintiff's settlement account because the accounts from which the funds were supposed to be transferred, i.e., some of the Mann Entities' accounts, were frozen; and the $19 Million, which was Plaintiff's money, was transferred from Plaintiff's settlement account to various accounts that the Defaulting Defendants controlled, which accounts purportedly were also then frozen by the "receiving" banks. See id. (citation omitted).

Furthermore, Plaintiff claims that Defendant MyPayrollHR's specifications appeared to show that the entire $19 Million that was to be credited to Plaintiff's settlement account was to come from various accounts at Pioneer Bank, i.e., routing number 021000322, called "Primacy-Pioneer," "Optix-Pioneer," "Apogee-Pioneer," "Ross Consultants," and "OptumInsight" (collectively the "Mann Originating Accounts"). See id. (citation omitted).

Plaintiff's ACH system automatically executed the instructions indicated in the specifications that Defendant MyPayrollHR and Mann provided. See id. Specifically, on Friday, August 30, 2019, the various accounts at Pioneer Bank making up the $19 Million, i.e., the Mann Originating Accounts, were debited, and the $19 Million was credited to Plaintiff's settlement account (the "Collection Transactions"). See id. (citation omitted). Then, according to Plaintiff, on Friday, August 30, 2019, and Tuesday, September 3, 2019, as instructed in the specifications that Defendants MyPayrollHR and Mann prepared, Plaintiff's settlement account was automatically debited and the various accounts indicated in the specifications were automatically credited. See id. Significantly, Monday, September 2, 2019, was Labor Day, a bank holiday, which did not count toward the two banking days that Pioneer Bank had to reject the Collection Transactions. See id. (citation omitted).

According to Plaintif...