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Cachet Financial Services v. C&J Associates, Inc.

United States District Court, N.D. California, San Jose Division

November 15, 2017

C&J ASSOCIATES, INC., et al., Defendants.


          EDWARD J. DAVILA United States District Judge

         I. Introduction

         This is a statutory interpleader action initiated by Cachet Financial Services (“Cachet”) against eighty-two defendants to resolve conflicting claims to $1, 050, 761.90 (the “Interpleaded Funds”), which Cachet deposited with this Court. Cachet moves for an order (1) discharging Cachet from any further responsibility and any liability with respect to the Interpleaded Funds and (2) imposing a permanent injunction from the filing or prosecution of any action or the assertion of claims against Cachet as to those Interpleaded Funds. Cachet also moves for recovery of $78, 075.50 in attorneys' fees and $10, 628.52 in costs. Defendants Pacific Diversified Insurance Services, Inc. (“Pacific”) and Robert Talbott, Inc. (“Talbott”) (collectively “Defendants”) oppose the motions. The Court finds it appropriate to take the motions under submission for decision without oral argument pursuant to Civil Local Rule 7-1(b). Based upon all pleadings filed to date, Cachet's motions are denied.


         Cachet is an electronic Automated Clearing House (“ACH”) third party service provider that processes a variety of electronic funds transfers (“EFT”) in the form of payroll ACH transfers. The transfers commonly take the form of direct deposit payroll and electronic payment processing. The interpleaded funds came into Cachet's possession as a result of its contractual relationship with defendant Pinnacle Workforce Solutions (“Pinnacle”), a company that provides payroll processing services to employers. The remaining eighty-one Defendants are employers who used Pinnacle's payroll services and have claims to the Interpleaded Funds.

         Pursuant to a “Remarketer Agreement, ” Cachet provided ACH transaction services for Pinnacle. Pinnacle provided weekly instructions directing Cachet to debit specific accounts from Pinnacle's employer clients, to aggregate their funds within Cachet's general clearing account, and to credit specific accounts for the purpose of making ACH payroll payments to the employees of Pinnacle's employer clients.

         On or about September 21, 2016, Pinnacle allegedly submitted a written instruction file to Cachet that specified the ACH debits and credits Cachet was to execute. Upon transferring the funds as directed by Pinnacle, however, Cachet determined that Pinnacle allegedly had insufficient funds in the general clearing account to credit the employee accounts of Pinnacle's employer clients. Cachet alleges that in accordance with the ACH rules promulgated by the National Automated Clearing House Association and its agreement with Cachet's bank, Cachet provided its own funds to cover the shortfall and credited the employees' accounts using other funds in the clearing account. Cachet alleges that Pinnacle was required to, but failed to fully repay Cachet for the shortfall, which totaled $835, 748.83.

         On or about September 27, 2016, Pinnacle submitted another ACH instruction file and the employers' accounts were debited. Cachet, however, refused to issue the requested credits to various employees' accounts unless Pinnacle cleared the alleged shortfall from the previous week. Pinnacle allegedly refused Cachet's demand to cure the shortfall and ceased communication with Cachet. Cachet alleges that it therefore froze Pinnacle's funds and alerted the authorities, including the Federal Bureau of Investigation. According to Cachet's investigation, Pinnacle had been engaging in fraud and is now defunct.

         Cachet alleges that Pinnacle's refusal to cure the shortfall constituted a breach of the Remarketer Agreement. Accordingly, Cachet invoked its alleged contractual and common law rights of offset[1], retaining the recently debited funds to recover the $835, 748.83 Cachet had credited to employees the week before. After the offset, there remained $1, 050, 761.90 in the clearing account.

         Cachet filed the instant interpleader action on November 29, 2016. Cachet sought to secure waivers of service, signed acknowledgments of service or personal service for each of the defendants. Numerous defendants informed Cachet's counsel that they did not want to be involved in this suit and those defendants have been dismissed from the action. Cachet brought a motion for an order allowing it to deposit the Interpleaded Funds with the Court, which was granted. Cachet also brought a motion for an order appointing a Special Master under Federal Rule of Civil Procedure 53 to oversee a reasonable claims and distribution process, which was granted. The Special Master is currently overseeing the claims process.

         Three Defendants, Pacific, Talbott and Pinnacle Manufacturing Corp. have filed counterclaims against Cachet seeking to recover the amounts Cachet debited from their respective accounts that were used by Cachet to offset Pinnacle's obligation to Cachet. These three Defendants allege that at the time Cachet debited their accounts Cachet had no intention of crediting their employees' accounts with Defendants' funds. Litigation of the counterclaims is stayed pending completion of the Special Master's claim determination process and submission of the Special Master's final report on distribution of the Interpleaded Funds.


         A. Discharge of Liability

         Title 28 United States Code Section 2361 governs interpleader actions. The statute provides in pertinent part that “a district court may issue its process for all claimants and enter its order restraining them from instituting or prosecuting any proceeding in any State or United States court affecting the property . . . involved in the interpleader action until further order of the court.” Further, Section 2361 provides that the court “shall hear and determine the case, and may discharge the plaintiff from further liability, make the injunction permanent, and make all appropriate orders to enforce its judgment.” 28 U.S.C. §2361. An interpleader action usually involves two stages. First, the court decides whether the requirements for a statutory interpleader action have been met by determining if there is a single fund at issue and whether there are adverse claimants to that fund. Lee v. West Coast Life ...

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