Absolute Resolutions Investments, LLC v. Citibank, N.A.

Background

Absolute Resolutions Investments, LLC sued Citibank, N.A. after purchasing several forward flows of delinquent credit-card accounts. Under the parties’ Master Purchase and Sale Agreements, Citibank promised not to use account-selection criteria materially adverse to Absolute. An addendum also stated that the data files delivered during the October 2019 sales flow would be substantially similar to the sample file used for Absolute’s bid.

Absolute alleged that Citibank’s control process disproportionately withheld high-value accounts from the portfolios sold to Absolute. It also alleged that Citibank suspended an April 2020 sale, failed to explain discrepancies in the portfolios, and eventually terminated the parties’ relationship after Absolute suspended payment. Absolute signed a May 2020 release covering certain claims, including claims concerning the selection of accounts and the April 2020 suspension.

The amended complaint asserted two claims: breach of contract and breach of the implied covenant of good faith and fair dealing. Citibank moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim.

Breach of Contract

The court applied South Dakota law, as required by the agreements. Citibank argued that Absolute’s contract claim was barred because Absolute had not followed Section 3.4’s notice-and-cure procedure. That provision described notice as the sole remedy for breaches of the representations listed in Article 3 and required account-specific information and documentation.

The court held that Section 3.4 did not apply to Absolute’s alleged breach of Section 3.5. Section 3.3.2 stated that Citibank made no representations or warranties about the accounts other than those specifically listed in Section 3.3. Because Section 3.5 was not a representation or warranty under that language, the court treated it as a separate contractual duty rather than a warranty subject to Section 3.4’s notice requirements. Absolute therefore did not lose its Section 3.5 claim by failing to use that procedure.

The court also considered the May 2020 release. It rejected Absolute’s argument that the release was invalid because of economic pressure, finding that the amended complaint did not plausibly allege involuntary acceptance, the absence of a reasonable alternative, or wrongful coercion. The court nevertheless found the release ambiguous as to its scope. The release referred to a nonexistent “Section 3.5 of the Addendum,” and the parties offered different reasonable interpretations of whether it covered only the March 2020 sale or a broader group of sales. Because the release’s meaning presented a factual question requiring evidence about the parties’ intent, the court allowed discovery on that issue.

Implied Covenant of Good Faith and Fair Dealing

The court rejected Citibank’s argument that the agreements waived the implied covenant of good faith and fair dealing. It interpreted the agreements’ disclaimer and integration provisions as addressing prior representations and understandings, not as permitting either party to perform its contractual duties in bad faith. The court also stated that South Dakota law recognizes an implied duty of good-faith performance in every contract.

Absolute presented three theories. First, it alleged that Citibank removed accounts from the portfolios in a nonrandom way. The court found that theory was governed directly by Section 3.5 and therefore had to be pursued as a contract claim, not as a separate implied-covenant claim. Second, Absolute alleged that Citibank acted in bad faith by suspending the April 2020 sale. The court held that the release plainly covered that conduct, so that theory could not proceed.

Third, Absolute alleged that Citibank failed to provide information after Absolute questioned discrepancies between the sample portfolios and the delivered portfolios. The court held that this theory adequately stated a claim. Given Section 3.5’s prohibition on materially adverse selection criteria and its reference to disclosure in the final electronic file, Absolute could reasonably expect an explanation about how Citibank administered the control process.

Disposition

The court denied Citibank’s motion to dismiss the amended complaint. The contract claim and the surviving theory of breach of the implied covenant could proceed, while the court rejected the two described alternative theories supporting the implied-covenant claim. Citibank was ordered to file an answer within 21 days of the decision.