Paychex Advance LLC v. Deploy HR, Inc.

Background

PEI Staffing, LLC provided staffing services to Deploy HR, Inc. beginning in May or June 2017. PEI and Deploy later signed a Subcontractor Supplier Agreement and a related Management Services Agreement on August 24, 2017, dating them effective July 1, 2017. The agreements required PEI to maintain specified insurance and to indemnify, defend, and hold Deploy harmless from certain third-party claims and expenses.

After a worker supplied by PEI died, the worker’s estate filed a wrongful-death action in Pennsylvania state court. PEI’s insurer later brought a Maryland action seeking a declaration that it had no duty to defend or indemnify Deploy. The Maryland court granted the insurer summary judgment because the written agreements were not signed before the worker’s death and the policy required a prior written contract for additional-insured coverage. Deploy was a named defendant in the wrongful-death action and paid for its own representation.

Paychex relied on a 2011 Factoring and Services Agreement between PEI and Paychex’s predecessor, Advance Payroll Funding. That agreement gave Advance a continuing first-priority security interest in payments owed to PEI for staffing services. Paychex stated that it acquired Advance’s assets, including the agreement, in 2015. Deploy did not fully pay seven PEI invoices, and the balance Paychex identified as owed was $769,689.

Claims and arguments

Paychex’s operative complaint asserted claims for open account, services rendered, account stated, and breach of contract. Deploy opposed Paychex’s request for full or partial summary judgment. It argued that Paychex had not provided admissible evidence establishing that it acquired the relevant rights or that it was a secured creditor, and that Paychex had not provided the required notice of assignment.

Deploy also argued that it could offset, or reduce, amounts otherwise payable because PEI allegedly failed to provide insurance, failed to defend or indemnify Deploy, and sent misleading certificates of insurance. Deploy asserted related cross-claims against PEI and PEI’s principals for breach of contract, contractual indemnity, intentional misrepresentation and deceit, civil racketeering, and conspiracy to violate the racketeering statute.

Court’s analysis

The court held that Paychex presented sufficient admissible evidence that it acquired the Factoring and Services Agreement through an Asset Purchase Agreement with Advance. Deploy did not identify evidence showing that the purchase did not cover the agreement or the payments owed under the staffing agreement. The court therefore found that Paychex was a secured creditor with respect to money owed to PEI under the staffing agreement.

The court rejected Deploy’s notice argument. It explained that the California Commercial Code provision concerning notice addresses when a debtor must pay an assignee instead of the original creditor. Paychex was seeking money still held by Deploy, not payments that Deploy had already sent to PEI. The court also noted evidence that Deploy had paid some invoices directly to Advance or Paychex and concluded that Deploy had not shown why the notice provided through the parties’ dealings or this litigation was insufficient.

The court partly accepted Paychex’s argument concerning Deploy’s indemnity defense. PEI could not recover under a breach theory based on failure to secure insurance or indemnify Deploy for the wrongful-death action or the portion of Deploy’s defense connected to that action. But Paychex did not show that Deploy was barred as a matter of law from withholding money for costs incurred in the Maryland insurance-coverage action or some litigation and defense costs in the federal actions.

The court also rejected Paychex’s collateral-estoppel argument. Collateral estoppel is a rule that can prevent a party from relitigating an issue already decided. The Maryland court had decided only that the insurance policy did not cover Deploy as an additional insured because there was no signed agreement before the worker’s death. It had not decided whether an oral agreement existed or whether the staffing agreement separately required PEI to indemnify Deploy.

Finally, the court found factual disputes concerning Deploy’s misrepresentation, deceit, and racketeering-based cross-claims. Deploy claimed that PEI’s representations about insurance caused it to continue operating under an oral agreement and that it would have protected itself or stopped performing had it known there was no coverage. Whether Deploy reasonably relied on those representations and whether it would have acted differently were factual questions that could not be resolved on summary judgment.

Ruling

The court granted Paychex’s motion for summary judgment in limited part and otherwise denied it. It found that Paychex had the rights of a secured creditor to assert claims concerning PEI’s rights under the staffing agreement. It denied summary judgment on Paychex’s affirmative claims for open account, services rendered, account stated, and breach of contract because factual disputes remained about what amounts, if any, Deploy was entitled to withhold under its related litigation and cross-claims. Judge William H. Orrick signed the order.