Bankdirect Capital Finance v. Texas Capital Bank National

Citation: Not availableDocket: 18-1054

Court: Court of Appeals for the Seventh Circuit; January 8, 2019; Federal Appellate Court

Original Court Document: View Document

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BankDirect Capital Finance and Capital Premium Financing are involved in a legal dispute over a loan purchase and servicing agreement initiated in December 2010. Capital Premium sought operating capital from BankDirect after exhausting its previous line of credit. In exchange for financing, BankDirect secured a five-year option to purchase Capital Premium's business. The agreement stipulated a deadline for exercising this option near its fifth anniversary, with a drop-dead date of June 1, 2018, after which neither party had obligations.

BankDirect exercised the purchase option in November 2015, but Capital Premium refused to comply, prompting BankDirect to file a lawsuit for enforcement. Capital Premium counterclaimed for an injunction requiring BankDirect to continue purchasing loans and servicing them. Although BankDirect continued operations until May 1, 2017, it later stopped purchasing loans and seized accounts, leading to Capital Premium renewing its request for an injunction.

The district court, presided over by Judge Gottschall, granted a preliminary injunction mandating BankDirect to maintain its prior business relationship with Capital Premium. However, the court failed to address the implications of the June 2018 terminal date and did not clarify what would occur if the litigation extended beyond that date, leaving several disputes unresolved.

Capital Premium's motion for a preliminary injunction was granted, preventing BankDirect from terminating Capital Premium as the servicer of its originated loans, interfering with its control over deposit accounts, accessing its Participation Interest, retaining $1,000,000 seized from its account, and seizing any additional funds, including the demanded $5,000,000. The appeal highlights issues such as the lack of clarity regarding the contract's terminal date, ambiguous terms like "interfering," and the absence of a formal injunction document, which violates Fed. R. Civ. P. 65(d)(1)(C). The district court also failed to require a bond from Capital Premium, contrary to Rule 65(c), which necessitates security to cover potential costs to a party wrongfully enjoined. BankDirect argued that the injunction could cost it $500,000 monthly and sought a substantial bond, which led to Judge Lee acknowledging a need for a $7.5 million bond while permitting continued adherence to Judge Gottschall’s opinion. Capital Premium's claims of inadequate funds to secure the bond should have delayed the injunction, yet Judge Lee extended the bond posting deadline multiple times. Ultimately, Capital Premium posted the bond in November 2018, but concerns remained about the ongoing financial impact of the injunction and the lack of clarity regarding its duration, which Judge Lee did not resolve, attempting instead to interpret Judge Gottschall’s intent.

Judge Lee denied BankDirect’s request to set a terminal date for the injunction, interpreting Judge Gottschall's intent as wanting it to remain in effect for the duration of the lawsuit. Judge Lee believed the injunction aimed to require BankDirect to continue purchasing loans from Capital Premium, despite the lack of explicit language in the opinion to that effect. A key issue raised is the appellate jurisdiction, where Gunn's findings indicate that an opinion's statements are not considered a formal injunction. This absence of a valid injunction under Rule 65(d) could bar direct appeals to the Supreme Court under 28 U.S.C. §1253, and potentially affect BankDirect’s appeal under §1292(a)(1). Supplemental memoranda were requested on this topic.

Gunn noted that appeals from district courts to the Supreme Court are rare, and dismissals under §1253 allow further appeals to lower courts. If a district court fails to issue a written order, it lacks efficacy, resulting in no party being adversely affected, which precludes appeal. However, since Judge Gottschall issued a written order that she expected BankDirect to comply with, Judge Lee aligned with this perspective despite noting the bond requirement under Rule 65(c) for the injunction's enforcement.

It would be unjust to inform BankDirect that it was unprotected by a bond for a year and unable to seek appellate review of what is viewed as a long-term injunction. Although the injunction should have specified a terminal date—June 1, 2018—which has since passed, the court decided to vacate the injunction and remand the case for the district court to determine if any party breached their obligations and assess any damages.

Judge Gottschall’s opinion suggested that the initial end date of January 31, 2016, was relevant only if BankDirect did not exercise its purchase option. She noted BankDirect had exercised this option, implying the absence of a renewal notice before the deadline did not terminate the obligations. This reasoning might also apply to the June 1, 2018 date, but it holds no weight since BankDirect did not complete the acquisition of Capital Premium, which refused to finalize the transaction. The district court must now evaluate whether Capital Premium’s refusal was justified or wrongful, as the parties remain in a standard business relationship where the specified dates are relevant.

June 1, 2018, is established as the critical termination date for the contract in question. If the terminal date extends beyond January 31, 2016, the new maturity date must not exceed June 1, 2018. BankDirect's failed attempt to acquire Capital Premium's business could be interpreted as an extension of the initial agreement's date, but the contract limits such extensions. Capital Premium argues that BankDirect cannot exit the agreement due to its refusal to sell, implying an indefinite and potentially disadvantageous commitment for BankDirect. The contract's language clearly indicates that BankDirect sought to avoid being locked into a prolonged, untrustworthy relationship. The court vacates the injunction and remands for the award of damages to BankDirect for the period beyond June 1, 2018, and to assess potential damages for breach of contract by either party. The mandate for this ruling will be issued immediately, terminating the injunction.