Cachet Fin. Servs. v. C&J Assocs., Inc.

Citation: 373 F. Supp. 3d 1303Docket: Case No. 5:16-cv-06862-EJD

Court: District Court, N.D. California; March 29, 2019; Federal District Court

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Cachet Financial Services has initiated a statutory interpleader action to resolve conflicting claims to $1,886,546.73, which it deposited with the Court. Cachet seeks either summary judgment or partial summary judgment to recoup $835,748.83 of the interpleaded funds. The motion is opposed by Pacific Diversified Insurance Services, Inc. and Robert Talbott, Inc., along with other parties, including Pinnacle Manufacturing Corporation, Gavin De Becker & Associates LP, and San Juan Oaks, LLC. The Court has decided to rule on the motion without oral argument and will deny Cachet's request.

Cachet, an electronic Automated Clearing House (ACH) service provider, received the funds due to its contractual relationship with Pinnacle Workforce Solutions, which provides payroll processing services. The remaining eighty-one defendants are Pinnacle's employer clients who have claims to these funds. Cachet and Pinnacle entered a "Remarketer Agreement" in March 2007, allowing Cachet to process ACH transactions for Pinnacle. Under this agreement, Cachet was responsible for debiting employer accounts to aggregate funds for payroll payments and was required to deposit client funds into Pinnacle's accounts within 48 hours.

The agreement also stipulated that Pinnacle would ensure the necessary reserves were maintained for processing transactions and that it would cover any overdrafts until fully resolved. On September 27, 2016, Pinnacle's account with Cachet was overdrawn by $1,395,748.83, leading Cachet to suspend services until the overdraft was addressed. Pinnacle committed to resolving the issue through a wire transfer, contingent upon settling the ACH collections in Cachet's clearing account.

Cachet informed Pinnacle that it would release collected funds for direct deposit payments once Pinnacle resolved its account overdraft. Pinnacle agreed but failed to rectify the overdraft, wiring only $560,000 instead of the required $1,395,748.83, leaving an overdraft of $835,748.83. After Cachet contacted Pinnacle, staff indicated that Mr. McEwan had the necessary funds but was incapacitated; they assured Cachet the balance would be settled by September 28, 2016. On that date, Cachet processed Pinnacle's collections, resulting in a balance of $2,149,099.37 in its clearing account after transferring $459,127.04 to Pinnacle’s tax clearing account. Following no further wire transfers from Pinnacle, Cachet re-suspended Pinnacle's account. On or before October 18, 2016, banks executed ACH returns totaling $262,552.64, leaving $1,886,546.73 in the account. Cachet offset the account to recover the prior overdraft and initiated an interpleader action in November 2016, depositing the remaining funds with the court. Cachet described the setoff as routine accounting. The court later denied Cachet's motion for discharge and ordered the deposit of the $835,748.83, which Cachet complied with. Three defendants—Pacific, Talbott, and Pinnacle Manufacturing Corp.—filed counterclaims against Cachet, alleging it debited their accounts without the intention of crediting employees’ accounts. The litigation of these counterclaims is currently stayed pending the Special Master's claim determination process. 

In terms of legal standards for summary judgment, a motion should be granted if there are no genuine disputes of material fact, with the moving party bearing the initial burden to demonstrate this. If successful, the burden shifts to the non-moving party to provide evidence of genuine disputes. Merely suggesting that facts are in controversy or providing speculative testimony is insufficient to defeat the motion.

The non-moving party must provide admissible evidence to meet the burden of proof; failure to do so results in the moving party winning the summary judgment motion. Conversely, if sufficient evidence is presented by the non-moving party to establish a genuine issue of material fact, the motion is defeated. Cachet claims entitlement to recover $835,748.83 from the Interpleaded Funds as a setoff for Pinnacle's overdraft balance, arguing that California law allows depository institutions to recoup overdraft balances from NSF transactions. Cachet cites several cases, including Miller v. Bank of America (Miller I and II) and DeBartolo v. Bank of America, to support its position. However, these cases do not substantiate Cachet's claim under the specific circumstances. 

In Miller I, the California Supreme Court ruled that a bank's practice of recouping overdrafts from public benefit funds did not violate previous legal standards, emphasizing that banks cannot set off against funds from unemployment and disability benefits. Notably, Cachet, as an electronic ACH, is not a bank and its "Remarketer Agreement" clarifies that it is not a bank, having only received permission to process EFT transactions. California Financial Code section 864, which governs banks and was repealed in 2011, does not apply to ACHs. Cachet has not presented sufficient legal authority to justify its right to set off akin to a bank. The cases cited, including Miller II and DeBartolo, likewise pertain to bank practices and fail to support Cachet's position. The only somewhat relevant case is Lonely Maiden Productions, LLC v. GoldenTree Asset Management, LP, which involved payroll processing agreements but does not directly relate to Cachet's claim.

Axium defaulted on a loan, leading the lender, with a perfected security interest in Axium's general deposit accounts, to foreclose on those accounts. Film clients sued the lender to reclaim funds paid to Axium, arguing that the lender compelled Axium to invoice and collect from them under the premise that the funds were to be used solely for wages and withholdings. The trial court dismissed the film clients' tort claims and granted summary judgment for the lender, a decision upheld by the appellate court. 

In contrast, Cachet claimed a right of setoff regarding $835,748.83 in a clearing account, arguing that it had a security interest due to an overdraft, citing California Commercial Code section 9312(b)(3). However, Cachet admitted it had no security interest in the withdrawn funds, and the court found its arguments unconvincing. Cachet also referenced a principle from the Lonely Maiden case regarding debtor-creditor relationships, asserting that it acted within the scope of its authorization to debit accounts for payroll. The court found that Cachet failed to demonstrate entitlement to use the funds as its own based on the available evidence and the terms of the Remarketer Agreement, which limited its use of funds to payroll and tax obligations.

Cachet's motion for summary judgment was denied due to insufficient evidence of a right to a setoff. Additionally, Cachet's claims regarding the mootness of counterclaims and lack of standing were deemed inappropriate since the counterclaims were stayed. The court granted Cachet's request for judicial notice of certain documents and facts related to the case, including a guilty plea by Mr. McEwan for wire fraud. Ultimately, Cachet did not fulfill its burden of proof necessary for summary judgment, as outlined by Rule 56.