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Bankruptcy software contract lawsuit continues as court caps damages

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REUTERS/Andrew Kelly

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(Reuters) - A New York appeals court has kept alive MUFG Union Bank’s claim that Axos Bank wrongfully interfered with its agreement with a bankruptcy software company but capped its potential payout well below the $100 million it says it lost in profits.

A four-judge panel of the New York Appellate Division, First Department ruled on Thursday that a lower court judge correctly denied Axos’s motion to dismiss MUFG’s claim for tortious interference with a contract, rejecting Axos’s argument that such a claim is barred because the contract was terminable at will.

The ruling stems from MUFG’s 2019 lawsuit accusing bankruptcy software provider Epiq Systems of breaching a joint services agreement when it sold its Chapter 7 trustee software business to Axos in 2018.

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MUFG attorney David Keyko of Pillsbury Winthrop Shaw Pittman, Epiq attorney Zack Tripp of Weil Gotshal & Manges and Axos attorney Jeremy Deutsch of Cozen O'Connor did not immediately respond to requests for comment.

MUFG and Epiq had previously been parties to an agreement by which they would “jointly promote their products and services to bankruptcy and insolvency professionals," according to court papers. While Epiq provided the software for Chapter 7 bankruptcy trustees, the bank provided banking and deposit services.

MUFG alleged that Epiq and Axos devised a scheme to transfer the services agreement as part of the sale without its consent and in violation of the contract. The bank says the sale left it "without any Chapter 7 trustee banking business at all" as Axos, which also provided depository services, later terminated the agreement and lured over MUFG's clients. MUFG said it had $500 million in deposits before the sale.

In September 2020, Justice Barry Ostrager of the Supreme Court of the State of New York rejected most of Epiq and Axos’s motions to dismiss the breach of contract claims. He also rejected Epiq’s request that potential damages be capped at $20 million, saying the joint services agreement only caps damages at that figure if a jury finds a limited number of non-willful breaches under certain clauses of the contract.

But the appeals panel held on Thursday that damages must be capped at $5 million or $10 million, depending on the nature of the alleged breach, because MUFG did not show that Epiq’s alleged breach was “caused willfully” or by “gross negligence” as described in the contract.

“On this record, there is no evidence that Epiq breached the [agreement] intending to willfully inflict harm on MUFG; rather, the proof is that Epiq sold its bankruptcy software business to Axos in order to advance its own economic self-interest,” the panel wrote.

The panel was unpersuaded by Axos’s argument that the joint services agreement was terminable at will and therefore could not be the basis for a tortious interference claim, finding that MUFG’s allegations don’t relate to termination, but to its alleged encouragement of Epiq to breach the contract.

Justices Dianne Renwick, Barbara Kapnick, Anil Singh and Tanya Kennedy were on the panel.

The case is MUFG Union Bank NA v Axos Bank et al., New York Supreme Court Appellate Division—First Department, No. 2020-03991.

For MUFG Union Bank: David Keyko of Pillsbury Winthrop Shaw Pittman

For Epiq: Zack Tripp of Weil Gotshal

For Axos: Jeremy Deutsch of Cozen O'Connor

Read more:

Bankruptcy software company Epiq must face trial over Chapter 7 business sale

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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