Ally Financial, Inc. v. WELLS FARGO BANK, N.A.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC, et al.,
Debtors.
FOR PUBLICATION
Chapter 11
Case No. 12-12020 (MG)
ALLY FINANCIAL INC.,
Plaintiff,
v.
WELLS FARGO BANK, N.A.,
Defendants.
Adv. Proc. No. 14-02435 (MG)
MEMORANDUM OPINION AND ORDER GRANTING
DEFENDANT’S MOTION TO DISMISS
A P P E A R A N C E S:
BAKER & McKENZIE LLP
Attorneys for Defendant
452 Fifth Avenue
New York, New York 10018
By: 	James Donnell, Esq.
Jacob M. Kaplan, Esq.
KORNSTEIN VEISZ WEXLER & POLLARD, LLP
Attorneys for Plaintiff
757 Third Avenue
New York, New York 10017
By: 	William B. Pollard, III, Esq.
Amy C. Gross, Esq.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 1 of 42

2
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Before the Court is Defendant Wells Fargo Bank, N.A.’s (“Wells Fargo”) motion (the
“Motion,” ECF Doc. # 9) to dismiss the complaint (the “Complaint,” ECF Doc. # 1) in the
above-captioned adversary proceeding (the “Adversary Proceeding”) filed by Plaintiff Ally
Financial Inc. (“AFI”), the non-debtor parent company of the former debtor Residential Capital,
LLC (“ResCap”). AFI filed an opposition (the “Opposition,” ECF Doc. # 16) and Wells Fargo
filed a reply (the “Reply,” ECF Doc. # 17).
This Adversary Proceeding arises out of deposit accounts opened by AFI and certain of
its debtor and non-debtor affiliates and subsidiaries with Wells Fargo. The parties entered into
the contract to open the accounts in January 2012. Two months later, apparently in anticipation
of the bankruptcy filings by ResCap, Wells Fargo used the “change of terms” provision in the
account agreement and unilaterally amended the agreement with AFI. The amendment expanded
the indemnification provision in the agreement, making AFI liable as a guarantor for any debts to
Wells Fargo of ResCap and its debtor affiliates (collectively, the “Debtors”). The notice of the
unilateral amendment gave AFI 37 days to close the accounts or the amendment was deemed
accepted. (The account agreement required that Wells Fargo give AFI 30 days’ notice of any
change of terms.) AFI’s Complaint alleges that it was unable to close all of the accounts by the
deadline (because of the extensive use of the accounts and the number of checks outstanding)
and the amendment became effective before the Debtors filed their bankruptcy petitions
approximately three weeks later. Wells Fargo thereafter debited funds from AFI’s accounts to
satisfy amounts Wells Fargo claimed were owed by the Debtors, allegedly incurred before and
during the Debtors’ bankruptcies. These amounts (approximately $500,000) primarily related to
attorneys’ fees that Wells Fargo incurred in monitoring the Debtors’ bankruptcy cases.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 2 of 42

3
AFI alleges that Wells Fargo’s unilateral amendment of the account agreement and
debiting of AFI’s account were improper, giving rise to damages claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, and conversion. AFI also requests
declaratory relief. Wells Fargo’s Motion to dismiss argues that the plain language of the contract
permitted the amendment and, therefore, as a matter of law, AFI’s claims must be dismissed.
AFI and Wells Fargo were both obviously sophisticated parties. The change of terms
contract language is clear and unambiguous and is enforceable under applicable New York law. 1
While the Court believes that Wells Fargo engaged in what can only be described as “sharp
practices,” Wells Fargo acted in accordance with the terms of the parties’ contract. AFI cannot
rewrite the terms of the contract with the benefit of hindsight.
Therefore, as set forth below, Wells Fargo’s Motion is GRANTED and AFI’s Complaint
is DISMISSED with prejudice as to the breach of contract, conversion, and part of the breach
of the implied covenant of good faith and fair dealing claims. AFI’s remaining theory of breach
of the implied covenant—that Wells Fargo acted uncooperatively in carrying out its own
requisite procedures for closing accounts—is DISMISSED without prejudice and AFI is
GRANTED leave to amend to better allege this claim.
1 	The relevant contract includes the following applicable law clause:
Our relationship with you is governed primarily by the agreement. However, it
is also governed by the laws of The United States of America; applicable state
law, the rules and regulations of the Board of Governors of the Federal Reserve
System and various Federal Reserve Banks; and the rules and regulations of
other bank supervisory authorities and other governmental agencies having
jurisdiction over us. To the extent that State law applies to our relationship with
you, the applicable law is the law of the State in which your account was opened
as identified in our records.
(Compl. Ex. A § 18.) Due to the number of the accounts that were opened pursuant to the agreement, which may or
may not have been opened in different states, this provision did not provide a clear answer as to which states’ laws
apply to this Adversary Proceeding. After the Motion was filed, but before the Opposition was filed, the parties
stipulated that New York law would apply to the adjudication of this case. (See ECF Doc. # 13.) As such, this
Opinion applies New York law to resolve the Motion.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 3 of 42

4
I. 	BACKGROUND
A. 	The Parties’ Original Contractual Relationship
AFI, directly or through its subsidiaries, is one of the largest providers of automotive
financing and leasing products and services in the United States. (Compl. ¶ 14.) The Debtors
were separate and independent legal entities that were direct or indirect subsidiaries of AFI and
were engaged in the mortgage loan origination, securitization, and servicing businesses. (Id.
¶ 16.)
On January 3, 2012, AFI and certain of its affiliates and subsidiaries, including the
Debtors, executed a commercial deposit agreement (the “CDA,” Compl. Ex. A) with Wachovia
Bank and Wachovia Bank of Delaware. (Compl. ¶ 17.) Both Wachovia entities were succeeded
by Wells Fargo. (Id.) The CDA sets forth terms and conditions relating to commercial deposit
accounts that AFI, the Debtors, and the other signatories maintained with Wachovia, and later
Wells Fargo. (Id. ¶¶ 15, 17(citing CDA).) Approximately 30 of these accounts were checking
accounts relating to AFI’s auto financing and services business (the “Ally Auto Services
Accounts”). (Id.) One of the accounts (the “AFI Funding Account”) was a main funding
account that was used to transfer funds to cover checks issued from the Ally Auto Services
Accounts. (Id.) The Debtors’ accounts were not used in AFI’s auto services business. (Id.)
In its original form, the CDA contained the following relevant provisions:
Throughout this deposit agreement, Wachovia Bank and Wachovia
Bank of Delaware, each a division of Wells Fargo Bank, N.A., as
applicable, are referred to as “we” or “us,” the commercial deposit
accounts we offer are referred to as the “accounts,” the treasury
management services that we offer are referred to as the “treasury
services,” 	this 	deposit 	agreement 	and 	the 	other 	documents
described below are together referred to as the “agreement;” and:
1) each entity maintaining an account or using any of the services
listed on Exhibit A hereto; and 2) each such entity is individual
referred to herein as “you.”
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 4 of 42

5
(the “Defining Terms Provision,” CDA at 1);
When you open an account and accept service from us, you agree
to be bound by the terms and conditions of the agreement.
(id.);
We may amend this agreement and any documentation referred to
herein and the rules related to your account at any time. 	We will
provide 	you 	30 	days 	prior 	notice 	of 	any 	such 	changes 	or
amendments if they are not in your favor. 	If you continue to use
such services after such notice you will be deemed to have
accepted such changes. 	Notwithstanding the forgoing, we may
make such changes immediately where required to do so including
amendments required by changes in law, regulation, applicable
clearinghouse rule or in any other circumstance that prohibits the
giving of such prior notice.
(the “Amendment Provision,” id.);
In the event that any provision of the agreement is held to be
invalid, illegal or unenforceable for any reason, the remaining
provisions of the agreement will remain in full force and effect.
(id. § 16);
Except as may be limited by applicable law and except to the
extent losses, claims, and expenses are finally determined by a
court or arbitrator having proper jurisdiction have been caused by
our negligence or our willful misconduct or by our breach of our
obligations under the agreement, you agree to indemnify and hold
us . . . harmless from (or at our election and where appropriate to
reimburse us for) any and all losses, costs and expenses (including
attorneys’ reasonable fees and costs) resulting from:
(a) claims brought against us by any person or entity arising in
connection 	with 	any 	of 	the 	services 	or 	treasury 	services
provided under the agreement . . . ;
. . .
(d) obligations, losses or expenses we incurred in connection with
any legal process, dispute or third-party claim related to you or
your accounts;
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 5 of 42

6
. . .
These indemnification obligations will survive the termination of
any treasury services in whole or in part or the termination of the
agreement.
(the “Indemnification Provision,” id. § 21);
If you ever owe us money as a customer, borrower, guarantor or
otherwise 	including 	any 	obligation 	owed 	to 	us 	for 	services
provided 	pursuant 	to 	this 	agreement 	or 	owed 	to 	a 	financial
institution that we acquire, then you agree that, in addition to any
other remedies we may have, we have the right to deduct and set
off amounts you owe us from any accounts you hold with us or our
affiliates.
By accepting services, you also grant us a consensual security
interest in your accounts and to the funds held in them as collateral
to secure your present and future obligations to us.
With the exception of charging an account for items that may be
returned against it, we will not set-off against – and you do not
grant us a security interest in – any account for money owed us
where the account name indicates, and you actually do, hold the
funds in such account in a representative capacity.
(the “Setoff Provision,” id. at 17);
The CDA contains three signature pages, with authorized signatures for AFI and each of
AFI’s subsidiaries and/or affiliates that opened accounts. (See id. at 23–25.) For each of the
entities, the same individual or individuals signed on behalf of the entity, executing and
accepting the terms of the CDA. (See id.) The CDA attaches a list as Exhibit A of each of the
AFI entities to which the CDA applies: AFI, Ally Servicing LLC, Motors Insurance Corp.,
ResCap, Debtor Residential Funding Co., LLC, Debtor Passive Asset Transactions LLC, Debtor
RFC Asset Holding II, LLC, Debtor Residential Mortgage Real Estate Holdings, LLC, Debtor
Residential Funding Real Estate Holdings, Debtor Homecoming Financial Real Estate Holding,
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 6 of 42

7
Debtor GMACM Mortgage, LLC, Debtor Ditech, LLC, and Debtor Residential Consumer
Services, LLC (together, the “Depositors”). (See id. Ex. A.)
B. 	Wells Fargo’s Amendment to the CDA
Wells Fargo sent the Depositors, including the Debtors and AFI, a letter dated March 19,
2012, stating that it was amending the CDA (the “Amendment”). (See generally Compl. Ex. B.)
The Amendment included amended and/or new provisions, including a guarantee provision,
which states in pertinent part:
a. 	GUARANTY; DEFINITIONS. 	In consideration of [Wells
Fargo’s] continued provision of treasury management services
to 	the 	Ally/ResCap 	Entities 	under 	this 	agreement,
notwithstanding 	the 	right 	of 	[Wells 	Fargo] 	to 	cease 	the
provision 	of 	such 	services, 	and 	for 	other 	valuable
consideration, 	ALLY 	FINANCIAL, 	INC. 	(“Guarantor”),
jointly and severally unconditionally guarantee and promise to
pay [Wells Fargo], or order, on demand in lawful money of the
United States of America and in immediately available funds,
any and all Indebtedness of any Subsidiary [“Subsidiaries
being defined as a variety of the Debtor entities] to [Wells
Fargo] arising out of or relating in any way to any deposit
account maintained by Subsidiary with [Wells Fargo], or
any treasury management service offered by [Wells Fargo]
which is purchased or otherwise utilized by Subsidiary . . .
The 	term 	“Indebtedness” 	is 	used 	herein 	in 	its 	most
comprehensive sense and includes any and all advances, debts,
obligations and liabilities of Subsidiary, or any of them . . . .
. . .
f. 	[Wells 	Fargo’s] 	RIGHTS 	WITH 	RESPECT 	TO
GUARANTOR’S 	PROPERTY 	IN 	[Wells 	Fargo’s]
POSSESSION. In addition to all liens upon and rights of setoff
against the monies, securities or other property of Guarantor
given to [Wells Fargo] by law, [Wells Fargo] shall have a lien
upon and a right of setoff against all monies, securities and
other property of Guarantor now or hereafter in the possession
of or on deposit with [Wells Fargo], whether held in a general
or special account or deposit or for safekeeping or otherwise,
and every such lien and right of setoff may be exercised
without demand upon or notice to Guarantor. No lien or right
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 7 of 42

8
of setoff shall be deemed to have been waived by any act or
conduct on the part of [Wells Fargo], or by any neglect to
exercise such right of setoff and lien shall continue in full force
and effect until such right of setoff or lien is specifically
waived or released by [Wells Fargo] in writing.
(Id. at 4 (emphasis in original).) The Amendment also indicated that continued use by the
Depositors of the accounts covered by the CDA after April 25, 2012 (37 days after the letter was
dated) would be deemed consent to the amendments. (Compl. ¶ 25; id. Ex. B at 2.) The
Amendment changed other provisions of the CDA, such as the subordination of AFI’s claims
against the Debtors to any claims of Wells Fargo against the Debtors and a modification of the
indemnity obligations with AFI agreeing to indemnify Wells Fargo for any losses incurred in
connection with accounts that were the source or recipient of funds transferred to or from AFI.
(Motion at 5 n.2 (citing Compl. Ex. B).)
C. 	AFI’s Closure of Its Accounts with Wells Fargo
After receiving the March 19, 2012 letter, AFI sought to reject the Amendment and
initiated the process of closing its accounts with Wells Fargo. (Compl. ¶ 29.) The Complaint
alleges that AFI made diligent efforts to close all of its accounts with Wells Fargo as soon as
commercially reasonable. (Id.) The Complaint alleges that AFI informed Wells Fargo that
closing the Ally Auto Services Accounts within the allotted 30 day time period posed a serious
business risk to AFI because AFI had issued thousands of checks drawn on those accounts that
remained unpaid at the time the Amendment was sent and AFI could only close each account
after the checks drawn had been paid, escheated, or reissued; AFI did not want to risk those
checks being returned unpaid or otherwise unable to clear due to the closing of the accounts.
(Id.) The Complaint further alleges that AFI had to establish accounts at a new bank for its auto
services business, a process that would take more than 37 days to accomplish given the
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 8 of 42

9
complexity of the accounts, a fact Wells Fargo allegedly knew. (Id. ¶ 30.) The Complaint also
alleges that closing the Wells Fargo accounts required Wells Fargo’s approval in accordance
with its internal administrative process. (Id. ¶ 31.) AFI alleges that Wells Fargo therefore
controlled the timing of the closing of any account upon AFI’s request for account closure. (Id.)
The Complaint alleges that Wells Fargo was fully aware of the processes required to close such
accounts and open new ones and the time needed to do so. (Id.) AFI alleges that it sought to
work amicably with Wells Fargo to transition the accounts from Wells Fargo to a new bank, but
Wells Fargo was uncooperative and unresponsive. (Id. ¶ 32.) Despite AFI’s efforts, AFI was
unable to close the more than 30 accounts by the April 25, 2012 deadline. (Id. ¶ 33.)
D. 	The Debtors’ Bankruptcy
The Debtors filed chapter 11 bankruptcy petitions beginning on May 14, 2012. (Id. ¶ 34.)
Wells Fargo’s attorneys from Winston & Strawn LLP (“W&S”) appeared at several hearings
before this Court. (Id. ¶ 35.) Throughout the bankruptcy proceedings, Wells Fargo’s counsel
argued that counsel needed to protect Wells Fargo’s interest during the Debtors’ bankruptcy
proceeding, but when pressed by the Court, its counsel was unable to articulate exactly what that
interest was and in fact admitted that Wells Fargo was not “aware of any claims [it had against
the Debtors] as of [June 18, 2012].” (Id. ¶¶ 35–36 (citing id. Ex. D) (quoting June 18, 2012 Hrg.
Tr. at 56:8, 57:12–13, ECF Doc. # 472; Nov. 19, 2013 Hrg. Tr. 245:18–21, ECF Doc. # 5971).)
Wells Fargo’s counsel filed multiple proofs of claim, asserting unliquidated claims with no
articulated basis, but attaching the CDA, the Amendment, and other related account documents
and service descriptions. (Id. ¶ 37 (citing id. Ex. E).)
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 9 of 42

10
W&S charged Wells Fargo legal fees in connection with the Debtors’ bankruptcy cases
even though all of the Debtors’ Wells Fargo accounts were officially closed on or before June
12, 2012. (Id. ¶ 38 (citing ECF Doc. # 6019-1).)
E. 	Wells Fargo Debits Funds from the AFI Funding Account
In a letter dated May 4, 2012, Wells Fargo requested payment from AFI of $88,159.39 in
legal fees for services rendered by W&S from December 27, 2011 through February 29, 2012.
(Id. ¶ 40.) The services were allegedly rendered “in connection with the implementation and
administration of this agreement, including amendment” and before the Amendment became
effective. (Id.)
On November 29, 2012, Wells Fargo requested payment by AFI in the amount of
$384,486.01 for the reimbursement of fees charged for services allegedly related to Wells
Fargo’s participation in the Debtors’ bankruptcy involving the Debtors’ accounts. (Id. ¶ 41.)
After AFI contested the requests for payment of legal fees, Wells Fargo provided AFI
with redacted invoices of the legal expenses. (Id. ¶ 42.) The Complaint alleges that the redacted
invoices contained no description of the alleged work for which Wells Fargo sought to hold AFI
responsible beyond stating that the work was for “Res/Cap.” (Id.)
On December 18, 2012, after reviewing the redacted invoices, AFI’s counsel wrote to
Wells Fargo’s counsel questioning the reasonableness and propriety of the fees and counsel’s
billing practices. (Id.) Wells Fargo responded by letter dated December 21, 2012 (received by
AFI on December 24, 2012), stating that Wells Fargo planned to debit AFI’s accounts to pay the
Debtors’ alleged obligations for Wells Fargo’s legal fees. (Id. ¶ 43.) The letter asserted that
Wells Fargo had the right to debit the account pursuant to the Amendment to the CDA. (Id.) On
December 26, 2012, one business day after AFI received the letter, Wells Fargo took
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 10 of 42

11
$472,619.57 from the AFI Funding Account in satisfaction of the Debtors’ alleged obligation to
pay Wells Fargo’s legal fees. (Id. ¶ 44.)
AFI requested that Wells Fargo return the funds and desist from further conversion of
AFI’s money. (Id. ¶ 45.) On December 10, 2013, Wells Fargo agreed to return $100,000 to AFI
subject to a release agreement (the “December 10, 2013 Release Agreement”). (Id. ¶ 46; see
Motion Ex. 1).) In accepting this payment, AFI specifically reserved its claim to the remaining
$372,619.57 taken from AFI’s account. (Compl. ¶ 46.) The December 10, 2013 Release
Agreement also provides the following release of:
any and all known or unknown, asserted or unasserted, derivative
or direct, foreseen or unforeseen, existing or hereinafter arising
claims and Causes of Action arising from or related to the Deposit
Agreement or the Purported Amendment, including Winston’s fees
and expenses incurred in representing [Wells Fargo] regarding the
Debtors and Ally.
(Motion Ex. 1 ¶ 2.) On December 12, 2013, Wells Fargo returned the agreed upon $100,000 to
AFI. (Id.)
AFI has since demanded that Wells Fargo return the remaining funds debited from the
AFI Funding Account, but Wells Fargo has refused to do so. (Id. ¶ 47.)
F. 	Causes of Action
The Complaint asserts three causes of action and a request for a declaratory judgment.
The first cause of action sounds in breach of contract. (Id. ¶¶ 48–57.) According to AFI, the
CDA did not provide Wells Fargo with the right to (1) unilaterally amend the agreement to make
AFI guarantor of any of the Debtors’ liabilities with respect to the Debtors’ accounts with Wells
Fargo, (2) take funds from AFI’s accounts to satisfy the Debtors’ alleged debts to Wells Fargo,
or (3) impose liens on AFI’s property. (Id. ¶ 49.) The Complaint asserts that the Amendment (1)
was commercially unreasonable and unconscionable, (2) was purportedly made with no
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 11 of 42

12
consideration provided in exchange, (3) purports to create, without AFI’s consent, a new
obligation on AFI’s part that was not contemplated by the parties or the original CDA, and (4)
did not provide AFI with enough time to close the accounts if it sought to reject the amendments.
(Id. ¶¶ 50–53.) The Complaint alleges that Wells Fargo breached the CDA when it sought to
impose the third party guarantor obligation on AFI and when it debited money from the AFI
Funding Account without AFI’s consent, for purposes not permitted by the CDA. (Id. ¶ 55.)
The Complaint further alleges that Wells Fargo breached the CDA when it debited funds from
the AFI Funding Account to pay Wells Fargo’s legal fees purportedly relating to the Debtors
because the fees were unnecessary and unreasonably incurred. (Id. ¶ 56.) For this cause of
action, AFI seeks $372,619.57 in damages—the amount withdrawn from the account less the
$100,000 returned—plus interest. (Id. ¶ 57.)
Second, AFI asserts a claim for breach of the implied covenant of good faith and fair
dealing. (Id. ¶¶ 58–63.) The Complaint asserts that the CDA contains an implied promise that
Wells Fargo would act in good faith and deal fairly with AFI and that Wells Fargo’s conduct in
attempting to unilaterally amend the CDA lacked good faith, constituted unfair dealing, and was
arbitrary and irrational. (Id. ¶¶ 59–60.) The Complaint alleges that this claim is separate from
the breach of contract claim, but is also asserted in the alternative. (Id. ¶ 61.) AFI asserts that it
was injured when Wells Fargo wrongfully took funds from the AFI Funding Account under the
purported Amendment and is therefore entitled to damages in the amount of $372,619.57 plus
interest. (Id. ¶¶ 62–63.)
Third, the Complaint pleads a conversion claim. (Id. ¶¶ 64–67.) The Complaint asserts
that the money in the AFI Funding Account belonged to AFI, Wells Fargo took funds from the
account without AFI’s consent and without contractual authority to do so, and Wells Fargo
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 12 of 42

13
thereby exercised dominion over and interference with AFI’s funds in derogation of AFI’s rights.
(Id. ¶¶ 65–66.) AFI asserts that it is entitled to damages in the amount of $372,619.57, plus
interest. (Id. ¶ 67.)
The Complaint further seeks a declaratory judgment that Wells Fargo’s attempted
Amendment to the CDA is illegal and invalid. (Id. ¶¶ 68–71.)
G. 	The Motion
Wells Fargo’s Motion seeks to dismiss the Complaint in its entirety. According to Wells
Fargo, the breach of contract, conversion, and declaratory judgment claims must be dismissed
because the CDA expressly permitted Wells Fargo to take the actions it took. (Motion ¶¶ 13–
25.) Wells Fargo argues that each of these claims requires a finding that Wells Fargo was not
entitled to amend the CDA; Wells Fargo submits that the CDA expressly gave Wells Fargo the
right to amend the agreement and provided that AFI was deemed to have accepted the
Amendment since AFI continued to use the Wells Fargo account services after 30 days’ notice of
the Amendment. (Id. ¶ 14.) Wells Fargo compares the Amendment Provision of the CDA to a
termination provision. (Id. ¶¶ 15–17.) According to Wells Fargo, courts uphold termination
provisions in contracts that include the same 30 day notice provision, regardless whether the
exercise of the provision makes the contract onerous or whether the power is exercised in good
faith. (Id. ¶ 16 (citing Bushwick-Decatur Motors, Inc. v. Ford Motor Co., 116 F.2d 675, 677 (2d
Cir. 1940) (applying Michigan law); Joseph Victory Wines, Inc. v. Vina Santa Carolina S.A., 933
F. Supp. 347, 353 (S.D.N.Y. 1996); Alco Standard Corp. v. Schmid Bros., Inc., 647 F. Supp. 4, 7
(S.D.N.Y. 1986)).) Wells Fargo advocates for a similar treatment of the Amendment Provision
and also contends that AFI’s position is hollowed by the fact that the parties are sophisticated
and specifically agreed to completely terminate the agreement on thirty days’ notice or amend
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 13 of 42

14
the agreement upon the same notice subject to the Depositor’s right to discontinue service. (Id.
¶¶ 17–20, 24.) Wells Fargo also asserts that at least one other court has upheld a similar
amendment provision. (Id. ¶ 24.) Wells Fargo further argues that this issue of contract
interpretation is appropriately resolved as a matter of law on a motion to dismiss where, as here,
the contract is clear and unambiguous—Wells Fargo acted within its right under the CDA to
amend the contract. (Id. ¶¶ 21–22.) As a result, Wells Fargo argues that the contract,
conversion, and declaratory judgment claims cannot survive the Motion to dismiss. (Id. ¶ 25.)
Wells Fargo additionally argues that AFI cannot use the implied covenant of good faith
and fair dealing to override the express terms of the CDA. (Id. ¶¶ 26–30.) Wells Fargo asserts
that courts interpret and enforce the plain meaning of contracts and the fact that literal
enforcement of a contract term may lead to a mismatch between the parties’ expectations or an
“unreasonable” exercise of the contracted for powers does not allow the courts to rewrite the
plain terms of a contract under the guise of the implied covenant. (Id. ¶¶ 27–29 (citing Kham &
Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990); MJ
Partners Rest. Ltd. P’ship v. Zadikoff, 995 F. Supp. 929, 933 (N.D. Ill. 1998); Gen. Aviation Inc.
v. Cessna Aircraft Co., 703 F. Supp. 637, 644 (W.D. Mich. 1988), aff’d 915 F.2d 1038 (6th Cir.
1990)).) Wells Fargo argues that the CDA clearly sets forth Wells Fargo’s ability to amend the
agreement on 30 days’ notice; Wells Fargo’s actions therefore cannot constitute a breach of the
implied covenant of good faith and faith dealing. (Id. ¶ 30.)
Wells Fargo concludes by asserting that the December 10, 2013 Release Agreement bars
AFI from challenging the reasonableness of the actions taken by Wells Fargo pursuant to the
Amendment. (Id. ¶¶ 31–37.) According to Wells Fargo, the December 10, 2013 Release
Agreement provided for a partial settlement under which Wells Fargo was released from all
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 14 of 42

15
claims that AFI might assert against Wells Fargo, except for a claim that the amendment to the
CDA was invalid. (Id. ¶ 33 (citing id. Ex. 1).) Wells Fargo argues that the reasonableness of the
W&S fees is beyond argument and cannot be litigated before the Court. (Id. ¶ 35.) Wells Fargo
contends that the December 10, 2013 Release Agreement is unambiguous and must be enforced
according to its terms. (Id. ¶ 36.) Wells Fargo therefore asserts that any claim AFI asserts that
the attorney’s fees were unreasonable and should not have been deducted even if the Amendment
were valid, must be dismissed. (Id. ¶ 37.)
H. 	The Opposition
AFI first argues that the Amendment is void under New York law because it violates the
Statute of Frauds codified in New York General Obligations Law (“NYGOL”) section 5-701(a).
(Opp. at 7–10.) AFI asserts that the Amendment is a special promise to answer for a debt of
another and is not capable of being performed within a year; although the Amendment is in
writing in the letter, AFI never executed the letter, and the Amendment is therefore
unenforceable. (Id.) AFI similarly asserts that the Amendment violates NYGOL section 5-1103,
which governs the modification of a security interest provision and requires that the party against
whom it is sought to be enforced sign the written modification. (Id. at 10–11.) Since AFI did
not sign the letter contemplating the Amendment, AFI contends that the Amendment is invalid
under this New York statute. (Id.)
AFI further asserts that, contrary to Wells Fargo’s assertions, the Amendment constitutes
a breach of the implied covenant of good faith and fair dealing. (Id. at 11–15.) AFI argues that
the Amendment Provision in the CDA is a discretionary provision that should be read to
encompass the implied covenant of good faith and fair dealing and should also be interpreted
narrowly, such that only terms that already existed in the agreement can be amended and new
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 15 of 42

16
terms on extraneous subject matter cannot be added. (Id. at 11–12.) AFI contends that to find
otherwise would allow Wells Fargo to use the amendment process arbitrarily and to impose
terms that were never contemplated by the consent that the depositor gave upon signing the
CDA. (Id. at 12.) Moreover, AFI argues that such a broad reading of the Amendment Provision
would place AFI “at the mercy of” Wells Fargo’s whims to impose whatever terms Wells Fargo
wants, which would be “against the general policy of the law.” (Id. at 12–13 (quoting Fair
Pavilions, Inc. v. First Nat’l City Bank, 19 N.Y.2d 512, 518 (1967)).)
The fact that AFI never affirmatively agreed to the Amendment should alone defeat its
validity and effect. (Id. at 13 (citing Discover Bank v. Shea, 827 A.2d 358, 364–65 (N.J. Super.
2001); Badie v. Bank of Am., 79 Cal Rptr. 2d 273, 290 (Ct. App. 1998)).) According to AFI,
Wells Fargo’s argument that AFI’s failure to close all of its accounts during the 37 day period
constitutes consent is without merit because such closure in such a short amount of time was not
a viable option for AFI. (Id. at 13–14.) AFI argues that the 37 day period was grossly
inadequate, demonstrating that (1) the extreme nature of Wells Fargo’s alleged Amendment was
not mutually contemplated by the parties as being within the Amendment Provision when the
parties signed the CDA approximately two months before receiving the Amendment, and (2)
Wells Fargo did not act in good faith or deal fairly with AFI with respect to the Amendment.
(Id. at 14.)
AFI further argues that the Amendment is commercially unreasonable, renders the CDA
illusory, and is unconscionable. (Id. at 15–24.) First, AFI argues that the Amendment is
commercially unreasonable and unenforceable because the Amendment sets forth entirely new
obligations not contemplated originally by the parties, unilaterally gives Wells Fargo a security
interest in all AFI property in breach of covenants AFI owes to others, and was clearly outside
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 16 of 42

17
the scope of the Amendment Provision. (Id.) Second, AFI argues that if the Amendment
Provision permits Wells Fargo to make such unfettered changes to the CDA, courts have held
that such provisions for unilateral amendment renders a contract illusory. (Id. at 19 (citing Sears
Roebuck & Co. v. Avery, 593 S.E.2d 424, 432 (N.C. 2004); Badie, 79 Cal. Rptr. 2d at 284–85).)
Third, AFI asserts that a contractual notice period must be reasonable to be effective; the notice
provision in the Amendment Provision was misused by Wells Fargo and unreasonable, and as
such does not effectively provide AFI’s consent to the Amendment. (Id. at 20–1.) Fourth, AFI
contends that the Amendment is unconscionable. (Id. at 21–24.) AFI argues that Wells Fargo
anticipated the Debtors’ bankruptcy and immediately attempted to shift the burden for any
expense Wells Fargo might incur as a result upon AFI. (Id. at 21.) Substantively, AFI argues
that the Amendment is unconscionable because the terms of the Amendment are unreasonably
favorable to Wells Fargo. (Id. at 22–23.) Moreover, AFI asserts that the Amendment is
procedurally unconscionable because AFI did not have “any ability to bargain for the terms,” or
an “opportunity to engage in that process.” (Id. at 24.)
AFI acknowledges that the December 10, 2013 Release Agreement prevents AFI from
taking discovery concerning the reasonableness of W&S’s fees without the Court’s permission.
However, AFI states if the Complaint survives it will seek discovery on Wells Fargo’s
motivation for making the Amendment in connection with the breach of the covenant of good
faith and fair dealing and the unreasonable nature of the Amendment, as well as whether the
CDA was breached because some part of the charged fees had no connection with the Debtors’
accounts. (Id. at 21–22 n*.)
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 17 of 42

18
I. 	The Reply
Wells Fargo argues that AFI’s failure to plead the Statute of Frauds and other NYGOL
defenses in the Complaint precludes their assertion in the Opposition. (Id. ¶¶ 5–6 (citing Ryan v.
Kellogg Partners Inst. Servs., Index No. 601909/05, 2010 N.Y. Slip. Op. 33771 [U], at *8–10
(N.Y. Sup. Ct. Jan. 8, 2010); 23/23 Commc’ns Corp. v. GMC, 257 A.D.2d 367, 367 (N.Y. App.
Div. 1999)).) In any event, Wells Fargo argues that the Statue of Frauds and other NYGOL
defenses have no application in this case because the parties entered into a signed agreement that
expressly provides for the way in which amendments to that agreement will be evidenced. (Id.
¶¶ 7–5.) Further, the Statute of Frauds may be satisfied through a combination of writings, only
one of which need be signed while others need not be signed. (Id. ¶ 12.) Wells Fargo also
asserts that AFI’s defense that the Amendment was made without consideration is unpersuasive
because where the original contract allows one party to change the terms pursuant to
ascertainable standards, an amendment does not require additional consideration. (Id. ¶ 13.)
Wells Fargo asserts that AFI fails to point to a single case on point that involves a contract with
an express change of terms provision. (Id. ¶ 14.)
Wells Fargo also reiterates its argument that AFI cannot use the implied covenant of good
faith and fair dealing to override the express terms of the CDA. (Id. ¶¶ 15–22.) Wells Fargo
relies on Valle v. ATM National, LLC, No. 14-cv-7993 (KBF), 2015 WL 413449, at *5
(S.D.N.Y. Jan. 30. 2015), which holds that a customer accepts the revised terms of its account
agreement, whether the terms were originally contemplated or not, by continuing to use such
accounts after receiving notice of the revised terms. (Id. ¶¶ 15–17.) According to Wells Fargo,
AFI’s continued use of the accounts past the notice period constituted more than mere passive
use and therefore manifested acceptance of the Amendment. (Id.) Wells Fargo further asserts
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 18 of 42

19
that this acceptance makes it irrelevant whether the Amendment was within the reasonable
contemplation of the parties. (Id. ¶ 18.) Wells Fargo also asserts that even if the question of
reasonable expectations were relevant, the CDA did contemplate reimbursement and
indemnification. (Id. ¶ 20 (citing CDA at 8 § 21; id. at 17; id. Ex. B at 3–8).) Wells Fargo
contends that the expansion of the indemnification and reimbursement obligations to encompass
the obligations of AFI’s co-signatories was also within reasonable expectations because AFI and
all of the AFI affiliates had the same signatory to the CDA, which contained a broad
indemnification and reimbursement obligation for losses related to the accounts. (Id. ¶ 21.)
Wells Fargo further argues that the Amendment was neither procedurally nor
substantively unconscionable. (Id. ¶¶ 23–27.) First, the Amendment was not procedurally
unconscionable because AFI received notice of the Amendment (and received seven extra days).
(Id. ¶¶ 24–25.) According to Wells Fargo, AFI’s attempt to argue that the 30 day notice period
was insufficient is a belated attempt to re-negotiate the change of terms provision in the contract.
(Id. ¶ 25.) Wells Fargo submits that this should end the inquiry; in order to prove
unconscionability without procedural unconscionability, the plaintiff must show that the contract
provision at issue is so outrageous that it falls within the very limited number of “exceptional
cases” that warrant holding the provision unenforceable solely on the ground of substantive
unconscionability, which AFI cannot prove here. (Id. ¶ 26.) Wells Fargo argues that AFI cannot
argue the Amendment was substantively unconscionable because parent companies routinely
indemnify and guarantee their subsidiaries’ obligations and subordinate their claims. (Id. ¶ 27.)
Wells Fargo concludes by asserting that AFI has not refuted the fact that the December
10, 2013 Release Agreement precludes its claims challenging the reasonableness of the
attorneys’ fees and requires dismissal of such claims. (Id. ¶ 28.)
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 19 of 42

20
II. 	DISCUSSION
A. 	Standard on a Motion to Dismiss
To survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure (“FRCP”), made applicable here by Rule 7012 of the Federal Rules of Bankruptcy
Procedure, a complaint need only allege “enough facts to state a claim for relief that is plausible
on its face.” Vaughn v. Air Line Pilots Ass’n, Int’l, 604 F.3d 703, 709 (2d Cir. 2010) (citing
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Where a complaint pleads facts that are merely
consistent with a defendant’s liability, it stops short of the line between possibility and
plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678 (citation and internal quotation
marks omitted). Plausibility “is not akin to a probability requirement,” but rather requires “more
than a sheer possibility that a defendant has acted unlawfully.” Id. (citation and internal
quotation marks omitted).
Courts use a two-prong approach when considering a motion to dismiss. Pension Benefit
Guar. Corp. v. Morgan Stanley Inv. Mgmt., 712 F.3d 705, 717 (2d Cir. 2013) (stating that motion
to dismiss standard “creates a ‘two-pronged approach’ . . . based on ‘[t]wo working principles’”
(quoting Iqbal, 556 U.S. at 678–79)); McHale v. Citibank, N.A. (In re The 1031 Tax Grp., LLC),
420 B.R. 178, 189–90 (Bankr. S.D.N.Y. 2009). First, the court must accept all factual
allegations in the complaint as true, discounting legal conclusions clothed in factual garb. See,
e.g., Iqbal, 556 U.S. at 677–78; Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir.
2010) (stating that a court must “assum[e] all well-pleaded, nonconclusory factual allegations in
the complaint to be true” (citing Iqbal, 556 U.S. at 678)). Second, the court must determine if
these well-pleaded factual allegations state a “plausible claim for relief.” Iqbal, 556 U.S. at 679
(citation omitted).
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 20 of 42

21
Courts do not make plausibility determinations in a vacuum; it is a “context-specific task
that requires the reviewing court to draw on its judicial experience and common sense.” Id.
(citation omitted). A claim is plausible when the factual allegations permit “the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation
omitted). A complaint that pleads only facts that are “merely consistent with a defendant’s
liability” does not meet the plausibility requirement. Id. at 678 (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 557 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’” Id. (quoting Twombly,
550 U.S. at 555) (internal quotation marks omitted). “Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Id. (citation omitted).
“The pleadings must create the possibility of a right to relief that is more than speculative.”
Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 183 (2d Cir. 2008) (citation omitted).
On a motion to dismiss, in addition to the complaint, a court may consider written
instruments, such as a contract, that is either attached to the complaint or incorporated by
reference. See, e.g., FED. R. CIV. P. 10(c) (“A copy of a written instrument that is an exhibit to a
pleading is a part of the pleading for all purposes.”); In re Lois/USA, Inc., 264 B.R. 69, 89
(Bankr. S.D.N.Y. 2001) (“In addition to the complaint itself, a court may consider, on a motion
to dismiss, the contents of any documents attached to the complaint or incorporated by reference
. . . .”). Courts may also take judicial notice of settlement agreements in order to determine
whether claims are barred by a previous settlement. See, e.g., Rolon v. Henneman, 389 F. Supp.
2d 517, 519 (S.D.N.Y. 2005); see also Johns v. Town of E. Hampton, 942 F. Supp. 99, 104
(E.D.N.Y. 1996) (“[W]hen a [party] fails to introduce a pertinent document as part of his
pleading, [the other party] may introduce the exhibit as part of his motion attacking the
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 21 of 42

22
pleading.” (quoting CHARLES A. WRIGHT & ARTHUR R. M ILLER, FEDERAL PRACTICE AND
PROCEDURE : CIVIL 2D § 1327, at 762–63 (2d ed. 1990)) (internal quotation marks omitted)).
B. 	Breach of Contract, Conversion, and AFI’s Request for Declaratory Relief
The dismissal of AFI’s breach of contract and conversion claims and its request for
declaratory relief turns on whether the Complaint sufficiently alleges that Wells Fargo breached
and/or acted beyond the express terms of the CDA. The Complaint alleges two breaches: (1)
Wells Fargo breached the CDA by enacting the Amendment; and (2) Wells Fargo breached the
CDA by debiting funds from the AFI Funding Account. The first theory of breach relies on the
invalidity of the Amendment Provision of the CDA, rendering unenforceable Wells Fargo’s act
of unilaterally amending the CDA upon 37 days’ notice. Alternatively, if the Amendment
Provision is valid and enforceable, the first theory relies on the allegation that Wells Fargo acted
beyond the terms of the Amendment Provision in enacting the Amendment because terms were
added that were not contemplated in the parties’ original CDA. The second theory relies on the
purported unconscionability of the Amendment, resulting in the original CDA being the only
enforceable agreement governing the parties’ contractual relationship; Wells Fargo’s actions
debiting the funds in the account to pay legal fees would then be in breach of that agreement.
The Court addresses each of AFI’s theories of breach in turn below and concludes that
AFI fails to sufficiently allege that Wells Fargo breached the CDA under either of its two
theories. As such, the Motion is GRANTED to the extent it seeks dismissal of the breach of
contract and conversion claims and AFI’s request for declaratory relief.
1. 	Wells Fargo Did Not Breach the CDA by Enacting the Amendment
“Under New York law, which governs this contract, ‘the initial interpretation of a
contract is a matter of law for the court to decide.’” Compania Financiera Ecuatoriana de
Desarollo, S.A. v. Chase Manhattan Bank, No. 97 Civ. 5724 (JGK), 1998 WL 74299, at *3
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 22 of 42

23
(S.D.N.Y. Feb. 19, 1998) (quoting K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632,
637 (2d Cir. 1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir.
1996)) (citing Curry Road Ltd. v. K Mart Corp., 893 F.2d 509, 511 (2d Cir. 1990); Metro. Life
Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884, 889 (2d Cir. 1990)). On a motion to dismiss where
the terms of the contract are brought into question, the court is “‘not constrained to accept the
allegations of the complaint in respect of the construction of the [a]greement,’ although all
contractual ambiguities must be resolved in the plaintiff’s favor.” Id. at *1 (quoting Int’l
Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995)). A contract must
be “construed in accordance with the parties’ intent as evidenced by [its] written terms.” Filho v.
Safra Nat’l Bank of N.Y., 797 F. Supp. 2d 289 (S.D.N.Y. 2011), rev’d in part, 489 F. App’x 483
(2d Cir. 2012) (finding that a disputed issue of fact regarding whether the defendant followed the
notice provision in the change of terms provision of the relevant contract precluded dismissal of
breach of contract claim). If the terms of the contract are “‘complete, clear and unambiguous on
[their] face, [they] must be enforced according to the plain meaning of [their] terms,’ and a
breach of contract claim may be dismissed on a [FRCP] 12(b)(6) motion.” Wurtsbaugh v. Banc
of Am. Secs. LLC, No. 05 CIV. 6220(DLC), 2006 WL 1683416, at *5 (S.D.N.Y. 2006). Such a
contract “‘has “a definite and precise meaning, unattended by danger of misconception in the
purport of the [contract] itself, and concerning which there is no reasonable basis for a difference
of opinion.””’ Compania Financiera de Desarollo, 1998 WL 74299, at *3 (quoting Sayers v.
Rochester Tel. Corp. Supplemental Mgmt. Plan, 7 F.3d 1091, 1095 (2d Cir. 1993) (quoting
Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 355 (1978)) (citing United Nat’l Inc. Co. v.
Waterfront N.Y. Realty Corp., 994 F.2d 105, 109 (2d Cir. 1993); Metro. Life Ins. Co., 906 F.2d at
889).
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 23 of 42

24
By contrast, when a provision of a contract is “material to the breach of contract claim”
and is ambiguous, a FRCP 12(b)(6) motion will fail. Wurtsbaugh, 2006 WL 1683416 at *5
(citing Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 187
(2d Cir. 2004)). “‘Ambiguity exists where a contract term could suggest more than one meaning
when viewed objectively by a reasonably intelligent person who has examined the context of the
entire integrated agreement and who is cognizant of the customs, practices, usages and
terminology as generally understood in the particular trade or business.” Id. (quoting Eternity
Global Master Fund Ltd., 375 F.3d at 178 (citation omitted)); see also Buena Vista Home
Entm’t, Inc. v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 374 B.R. 113, 120
(Bankr. S.D.N.Y. 2007). To determine whether a contract provision is ambiguous, the court
must “‘consider the entire contract to “safeguard against adopting an interpretation that would
render any individual provision superfluous.”’” In re Musicland, 374 B.R. at 120 (quoting RJE
Corp. v. Northville Indus. Corp., 329 F.3d 310, 314 (2d Cir. 2003) (quoting Sayers, 7 F.3d at
1095)) (citing Galli v. Metz, 973 F.2d 145, 149 (2d Cir. 1992 ) (quoting Garza v. Marine Transp.
Lines, Inc., 861 F.2d 23, 27 (2d Cir. 1988); Bailey v. Fish & Neave, 837 N.Y.S.2d 600, 603
(2007))). Only where the contract provision is ambiguous may the court consider extrinsic
evidence of the parties’ intent, if available. See id.; see also Compania Financiera de Desarollo,
1998 WL 74299, at *3.
Here, AFI attempts to suggest that there is an ambiguity in the Amendment Provision
such that Wells Fargo’s arguments rely on an interpretation that the Amendment Provision gives
Wells Fargo an unfettered unilateral right to amend the contract, while AFI reads the provision to
mean that Wells Fargo may only amend the CDA by changing or adding terms that were
contemplated in the original agreement. Wells Fargo’s arguments, however, do not entirely rely
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 24 of 42

25
on the broader interpretation that AFI suggests.2 Moreover, the Amendment Provision does not,
by its terms, lend itself to the broader interpretation. First, the Amendment Provision includes
express limitations to Wells Fargo’s unilateral right to amend; that is, Wells Fargo may only
amend the CDA if it provides at least 30 days’ notice to AFI and the opportunity to close its
accounts within the notice period should AFI seek to reject the amendment.3 (See CDA at 1.)
Second, the Amendment Provision should also be read, as other similarly broad change of terms
provisions, to include the implied limitation that Wells Fargo may only exercise its unilateral
right to amend the terms of the agreement to the extent that the amended terms were
contemplated in or germane to the original agreement. See Filho, 797 F. Supp. 2d at 296 (“The
[contract] includes a broadly worded ‘change of terms’ clause in which Defendant reserves the
right ‘to change these Terms and Conditions.’ By its own terms, the contract’s ‘change of terms’
clause only allows Defendant to impose changes to these Terms and Conditions, meaning those
pre-existing provisions in the [contract].”); In re Musicland, 374 B.R. at 121 (“Thus, the
provisions of the [contract] were sufficiently broad on their face to encompass the incorporation
of the [loan with a different term lender], and to allow the parties to amend or supplement the
existing definitions and other terms of the Revolving Credit Agreement to accomplish that
end.”); see also Sears Roebuck & Co., 593 S.E.2d at 434 (“We hold that the parties did not
intend that the ‘Change of Terms’ provision in the original agreement would allow Sears to
2 	Wells Fargo’s argument with respect to the validity of the Amendment Provision is two-fold. First, Wells
Fargo asserts that under New York law, a change of terms provision that provides an unfettered right to amend is
valid and enforceable so long as the amending party provided the requisite notice of the amendment and provided
the other party the opportunity to opt-out. Second, Wells Fargo argues that even if the Amendment Provision must
be read as AFI suggests, the Amendment Provision is clear and unambiguous and Wells Fargo acted in accordance
with such terms by enacting an Amendment relating directly to pre-existing terms of the CDA and giving AFI the
requisite notice and opportunity to close its accounts to opt-out.
3 	While these express limitations may be sufficient to validate the Amendment Provision under Valle, 2015
WL 413449, at *5, as Wells Fargo suggests, the Court need not reach this specific issue at this time.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 25 of 42

26
unilaterally add completely new terms that were outside the universe of the subjects addressed in
the original cardholder agreement.”). The Court therefore concludes that the Amendment
Provision is clear and unambiguous.
The Court also concludes that the Amendment Provision is valid and enforceable,
contrary to AFI’s assertions. First, AFI fails to demonstrate that the Amendment Provision is
illusory due to its breadth. While the power to unilaterally amend contractual provisions without
limitations could give rise to an illusory contract, see Sears Roebuck & Co., 593 S.E.2d at 432,
courts will “examine the reasonableness of a defendant’s behavior before holding a contract to be
illusory,” see Valle, 2015 WL 413449, at *5, or read the provision to include an implied
limitation, see Bassett v. Elec. Arts, Inc., No. 13-CV-4208 (MKB), ---F. Supp. 3d ---, 2015 WL
1298632, at *8 (E.D.N.Y. Mar. 23, 2015) (“The Court agrees with Judge Gold’s conclusion that
the arbitration provision was not invalid as illusory simply because [the defendant] had the
unilateral right to modify the agreement. Under New York and California law, the fact that one
party to an arbitration agreement has the unilateral right to modify that agreement does not
automatically render the agreement illusory, as ‘the discretionary power to modify or terminate
an agreement carries with it the duty to exercise that power in good faith and fairly.’” (quoting
John v. Hanlees Davis, Inc., No. 12-CV-2529, 2013 WL 3458183, at *6 (E.D. Cal. July 9, 2013
(applying 24 Hour Fitness, Inc. v. Super. Ct., 78 Cal. Rptr. 2d 533, 541–42 (Ct. App. 1998)))
(citing Lebowitz v. Dow Jones & Co., 508 F. App’x 83, 84–85 (2d Cir. 2013); Fishoff v. Coty
Inc., 634 F.3d 647, 653 (2d Cir. 2011) (quoting Dalton, 87 N.Y.2d at 389); Serpa v. Cal. Sur.
Investigations, Inc., 155 Cal. Rptr. 3d 506, 514 (Ct. App. 2013)). As indicated above, the
Amendment Provision is clear and unambiguous and includes both express and implied
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 26 of 42

27
limitations upon Wells Fargo’s unilateral right to amend the CDA. Accordingly, the
Amendment Provision is not illusory.
Second, AFI fails to show that the 30 day notice period in the Amendment Provision is
unconscionable, commercially unreasonable, and/or impracticable. In terms of
unconscionability, AFI fails to rebut the presumption of conscionability in the CDA because both
Wells Fargo and AFI are sophisticated business entities that had equal bargaining power at the
time the CDA was negotiated, agreed upon, and executed. See Am. Dredging Co. v. Plaza
Petroleum Inc., 799 F. Supp. 1335, 1339 (E.D.N.Y. 1992) (“When the contract is between two
commercial entities, unconscionability must be viewed ‘in light of the general commercial
background and the commercial needs of the particular trade or case,’ and there is a presumption
of conscionability when the contract is between business in a commercial setting. Courts have
rarely found a clause to be unconscionable in a commercial contract.”). Moreover, the cases
upon which AFI relies are inapposite because: (1) they involve adhesion contracts, which
inherently involve unequal bargaining power, (2) notice and time to opt-out was not properly
afforded to the plaintiff(s),4 (3) other states’ law was applied, and (3) each involved the addition
of an arbitration provision waiving the constitutional right to a jury trial to a contract that did not
discuss dispute resolution. See, e.g., Badie, 79 Cal Rptr. 2d at 280–81 (Ct. App. 1998) (applying
California law); Follman v. World Fin. Network Nat’l Bank, 721 F. Supp. 2d 158, 161–66
(E.D.N.Y. 2010) (applying Ohio law); Stone v. Golden Wexler & Sarnese, P.C., 341 F. Supp. 2d
189, 196–98 (E.D.N.Y. 2004) (applying Virginia law); Shea, 827 A.2d at 362–65 (applying New
Jersey and California law); Sears Roebuck & Co., 593 S.E.2d at 426–34 (applying Arizona law).
4 	At least one court, applying New York law to a case involving a unilaterally amended contract in which
new terms were added that were not germane to the original contract, has held that the same cases AFI cites in its
Opposition were inapplicable because the amending party provided the other party notice and an opportunity to opt-
out—procedural terms that are expressly provided in the Amendment Provision and were followed by Wells Fargo.
See Valle, 2015 WL 41344, at *4–6.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 27 of 42

28
As to AFI’s argument that the 30 day notice period is commercially unreasonable and
impracticable because AFI could not have closed all of its accounts within that time period, the
Court is unpersuaded. AFI cannot now renegotiate the terms of the contract for which it
bargained simply because things did not turn out favorably for it. See Indus. Representatives,
Inc. v. CP Clare Corp., 74 F.3d 128, 130 (7th Cir. 1996) (“The terms on which the parties would
part ways were handled expressly in this contract, and IRI got what it bargained for. Contracts
allocate risks and opportunities. If things turn out well, the party to whom the contract allocates
the upper trail of outcomes is entitled to reap the benefits.”). Nor can AFI convince the Court “to
rewrite the contract to fulfill [its] unspoken expectation” that Wells Fargo would give AFI more
time to close its accounts or would not amend the CDA in the way that it did. In re Musicland,
374 B.R. at 121. If AFI wanted more time to close its accounts in order to timely reject a future
amendment of the CDA, AFI should have negotiated for more time before it executed the CDA.
Having found that the Amendment Provision is clear, unambiguous, valid, and
enforceable, the Court must now examine whether Wells Fargo acted in accordance with the
terms of the Amendment Provision when it enacted the Amendment. Procedurally, Wells Fargo
clearly acted within the terms of the Amendment Provision. Wells Fargo provided 37 days’
notice (even though it was only required to provide 30 days’ notice) to AFI of the Amendment
before it went into effect and advised AFI that it had 37 days to close its accounts if it sought to
reject the amended terms. AFI thereafter failed to close all of its accounts within the 37 days and
was deemed to have accepted the changes to the CDA. Substantively, Wells Fargo also acted
within the terms of the Amendment Provision by only adding or changing terms that were
germane to the original CDA. AFI points to the indemnity, guarantee, and security interest
provisions of the Amendment, arguing that the parties never contemplated AFI’s guarantee of
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 28 of 42

29
any of the other Depositor’s obligations to Wells Fargo.5 The Court disagrees. The CDA
includes the Indemnification Provision and Setoff Provision discussing the parties’ obligations to
one another, including the Depositor’s obligation to indemnify Wells Fargo, Wells Fargo’s
ability to set off such obligations by drawing from the accounts, Wells Fargo’s ability to obtain a
security interest in the funds in the accounts, and the Depositor’s potential liability as a
guarantor. (See CDA § 16; id. at 17.) The Amendment then expressly refers back to these
provisions in adding the very language AFI argues was never contemplated. (See generally
Amendment.)
AFI unpersuasively emphasizes the fact that AFI is held liable as the guarantor for the
other Depositors’ obligations under the Amendment. In doing so, AFI highlights the Defining
Terms Provision, which refers to each Depositor as “you,” in connection with the references to
“you” in the Indemnification and Setoff Provisions (and elsewhere in the CDA). According to
AFI, as a result of these singular or individual Depositor references, it is completely outside the
parties’ expectations to group the Depositors together in some way under the CDA’s terms; or
more specifically, to hold one Depositor accountable for the liabilities of another Depositor.
This interpretation, however, conflicts with the nature of the CDA and the conduct of AFI and
the other Depositors in negotiating and executing the CDA. “You,” in this context, can just as
easily refer to the plural as well as the singular. Each of the Depositors signed the same CDA
5 	In the Opposition, AFI asserts that the Amendment grants Wells Fargo a security interest in AFI’s assets
held worldwide. At the Hearing on the Motion, however, AFI was not able to point to any provision in the
Amendment that provided for such a security interest; nor does the Court read the Amendment to provide such a
broad security interest. Instead, the security interest provision of the Amendment appears to be almost exactly the
same as that granted in the CDA—the collateral is limited to the funds in the Depositors’ accounts with Wells Fargo.
Compare CDA at 17 (“By accepting services, you also grant us a consensual security interest in your accounts and
to the funds held in them as collateral to secure your present and future obligations.”), with Compl. Ex. B (“Your
obligations and our right to set off expressly include any obligation sowed to us for services provided pursuant to
this agreement, whether provided to you or any direct or indirect subsidiary of yours; you further agree that we have
the right to deduct setoff amounts that any of your subsidiaries owe us from any accounts that you hold with us, and
you also grant us a consensual security interest I your accounts and to the funds held in them as collateral to secure
your present and future obligations to us, and your subsidiaries’ present and future obligations to us under this
agreement.” (emphasis added)).
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 29 of 42

30
agreement on three signature pages; each of the entities has the same exact signatory that signed
the CDA; each of the entities to which the CDA applies is listed in Exhibit A to the CDA; 6 each
of the Depositors received the benefits of Wells Fargo’s services pursuant to the CDA in opening
one or more accounts with Wells Fargo; and each of the Depositors are bound by the obligations
of a Depositor defined as “you” in the CDA. (See CDA at 23-25; id. Ex. A.) That the CDA
governed all of the entities by the same terms by referring to each individually does not
necessarily preclude Wells Fargo from amending the agreement to have one of those entities
(here the parent) held liable for the obligations of another. Indeed, the Setoff Provision of the
CDA expressly contemplates the possibility that a Depositor may be a guarantor: “If you ever
owe us money as a customer, borrower, guarantor or otherwise including any obligation owed to
us for services provided pursuant to this agreement . . . .” (Id. at 17 (emphasis added).) AFI’s
argument is therefore a non-starter—a Depositor in these circumstances cannot be a guarantor of
its own account.
In sum, the Court finds and concludes that the Amendment Provision is clear,
unambiguous, valid, and enforceable. The Court further finds that Wells Fargo, by enacting the
Amendment, acted within the terms of the Amendment Provision. As a matter of law, the Court
concludes that AFI fails to establish that AFI breached or acted outside the terms of the CDA.
Consequently, AFI’s breach of contract and conversion claims and its request for declaratory
relief, each of which inherently relies on Wells Fargo’s breach or conduct beyond the express
terms of the CDA, are insufficiently pled under this theory of breach. Wells Fargo’s Motion in
this regard is GRANTED and AFI’s breach of contract and conversion claims, in addition to its
6 	The Defining Terms provision also provides that all of the documents (i.e. including Exhibit A to the CDA)
constitute the “agreement.” (See CDA at 1.)
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 30 of 42

31
request for declaratory relief, are DISMISSED to the extent they are based on this theory of
breach.
2. 	Wells Fargo’s Actions Pursuant to the Amendment Did Not Constitute a
Breach of the CDA Because the Amendment Is Valid and Enforceable
In support of AFI’s second theory of breach, AFI asserts that the Amendment itself is
invalid because it violates the Statute of Frauds and other provisions of the NYGOL and is
unconscionable. AFI further asserts that since the Amendment is invalid, by withdrawing funds
from AFI’s account pursuant to the terms of the Amendment, Wells Fargo breached the CDA,
which did not provide such a right to Wells Fargo. By contrast, Wells Fargo argues that the
Amendment is valid and enforceable because it falls outside the Statute of Frauds and the
asserted NYGOL provisions and AFI fails to rebut the presumption of conscionability in the
Amendment.
As set forth below, the Motion to dismiss is GRANTED to the extent it seeks dismissal
of the breach of contract and conversion claims and the request for declaratory relief based on
this theory of breach.7 The Statute of Frauds and NYGOL are inapplicable in this instance and
AFI fails to sufficiently allege unconscionability.
7 	As indicated above, AFI’s conversion claim alleges that Wells Fargo acted beyond the express terms of the
CDA when it debited funds from the AFI Funding Account. Under New York law, “[a] conversion takes place
when someone, intentionally and without authority, assumes or exercises control over personal property belonging
to someone else, interfering with that person’s right of possession.” Colavito v. N.Y. Organ Donor Network, Inc., 8
N.Y.3d 43, 49–50 (2006) (citing New York v. Seventh Regiment Fund, 98 N.Y.2d 249 (2002)) (emphasis added).
The Complaint rests the conversion claim on the allegation that Wells Fargo lacked authority to debit the funds from
the AFI Funding Account pursuant to the terms of the CDA; in other words, AFI’s conversion claim depends upon a
finding that Wells Fargo breached the CDA. In addition to the Complaint’s failure to sufficiently allege that Wells
Fargo breached the CDA under either of the two theories of breach, the conversion claim is DISMISSED because it
is “predicated on a mere breach of contract.” See Hui Qun Zhao v. Yu Qi Wang, 558 F. App’x 41, 43 (2d Cir. 2014)
(“Because [the conversion] claim turn entirely on the issue of breach, it sounds in contract, not conversion.” (citing
MBL Life Assurance Corp. v. 555 Realty Co., 240 A.D.2d 375, 376–77 (N.Y. App. Div. 1997) (“It is settled,
however, that a claim of conversion cannot be predicated on a mere breach of contract. Because the plaintiff failed
to submit evidence demonstrating a wrong independent from the contract claim, the defendants are entitled to
dismissal of the third cause of action to recover damages for conversion.” (citations omitted)))); see also
Karmilowicz v. Hartford Fin. Servs. Grp., Inc., 494 F. App’x 153, 158 (2d Cir. 2012) (“[A] claim to recover
damages for conversion cannot be predicated on a mere breach of contract. Since the appellant’s conversion claim
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 31 of 42

32
a) 	The Statute of Frauds and Other Asserted Provisions of the
NYGOL Are Inapplicable
AFI’s first attempt at establishing the invalidity of the Amendment relies on the New
York Statute of Frauds and certain other provisions of the NYGOL. According to AFI, the
Amendment contemplates a guarantee obligation and is unable to be performed within one year.
In order to avoid violation of the Statute of Frauds codified in NYGOL sections 5-701(a)(1) and
(a)(2), such an agreement must be in writing and signed by the party against whom enforcement
is sought (here AFI). AFI similarly argues that the Amendment violates NY GOL section
5-1103, which requires that modifications to a contract relating to security interests be in writing
and contemplate separate consideration in support of the modification. See N.Y. GEN. OBLIG.
LAW § 5-1103. According to AFI, no additional consideration was provided in exchange for the
amended terms.
Putting aside the fact that not one of these statutory arguments was raised in AFI’s
Complaint, these arguments are misguided. AFI ignores that the parties had a written agreement
to begin with that included the Amendment Provision, expressly providing Wells Fargo with the
right to amend its terms. See Alken Indus., Inc. v. Toxey Leonard & Assocs., Inc., Index No.
17304-11, 2013 NY Slip Op. 31864(U) (N.Y. Sup. Ct. Aug. 2, 2013) (“The defendant’s
arguments in support of General Obligations Law section 5-701(a)(1) ignore the fact that the
parties had a written agreement. The written agreement continued to govern the parties’
relationship even after the purported modification. In fact, when Alken terminated the
agreement in 2009, it gave Leonard 30 days’ written notice in accordance with the written
agreement. Accordingly, General Obligations Law section 5-701(a)(1) does not apply.”); Filho,
797 F. Supp. 2d at 297 (“First, he argues that the 2005 change was a contract modification
does not stem from a wrong which is independent of the alleged breach of [contract], it was properly dismissed.”
(quoting Wolf v. Nat’l Council of Young Israel, 264 A.D.2d 416, 417 (N.Y. App. Div. 1999) (citations omitted))).
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 32 of 42

33
requiring separate consideration under New York law. [citing N.Y. GEN. OBLIG. LAW § 5-1103.]
This argument completely ignores the ‘change of terms’ clause in the IBTC. Indeed, as the
Court has found that the contractual change was properly implemented through an agreed-upon
‘change of terms’ provision, it is not a contract modification as contemplated by New York’s
General Obligations Law at all.”). Moreover, the Statute of Frauds may be satisfied through a
combination of writings, only one of which need be signed by the party against whom
enforcement of the contractual relationship is sought. See 23/23 Commc’ns Corp., 257 A.D.2d at
367 (“[T]he various writings [only one of which was executed by the party against whom
enforcement is sought] can be pieced together to establish a single contractual relationship.”);
Anatares Mgmt. LLC v. Galt Global Capital, Inc., No. 12-CV-6075(TPG), 2013 WL 1209799, at
*10 (S.D.N.Y. Mar. 22, 2013) (“A sufficient writing under the statute of frauds may be
established by a combination of signed and unsigned documents, letters or other writings
provided at least one writing, the one establishing a contractual relationship between the parties,
must bear the signature of the party to be charged (or his authorized agent), while the unsigned
document must on its face refer to the same transaction as that set forth in the one that was
signed.” (citation and internal quotation marks omitted)); see also Elias v. Serota, 103 A.D.2d
410, 415 (N.Y. App. Div. 1984) (“While the Statute of Frauds requires that certain types of
contracts be evidenced by a writing [citing N.Y. GEN. OBLIG. LAW § 5-703] it does not require
that each stage of the future performance provided in a contract be supported by additional
signed writings that memorialize the performance.”).
Here, the CDA was executed by AFI and the other Depositors, the CDA provided Wells
Fargo with the unilateral right to amend the CDA, the Amendment was an exercise of that right,
and the Amendment is therefore not void under the Statute of Frauds or NY GOL section 5-1103
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 33 of 42

34
for want of consideration. To the extent AFI’s allegation that the Amendment is invalid and
unenforceable relies on these statutory provisions, the Motion to dismiss is GRANTED.
b) 	The Amendment Is Not Unconscionable
AFI further argues that the Amendment is invalid and unenforceable because it is
commercially unreasonable and unconscionable. Under New York law, an unconscionable
contract “is so grossly unreasonable or unconscionable in the light of the mores and business
practices of the time and place as to be unenforceable according to its literal terms.” Gillman v.
Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10 (1988) (citation and internal quotation marks
omitted). A finding of unconscionability as to a term or provision of a contract may not
necessarily render the entire contract void; rather, a court may hold that only that unconscionable
term or provision is void and unenforceable. See RESTATEMENT (SECOND ) OF CONTRACTS § 208
(1981) (“If a contract or term thereof is unconscionable at the time the contract is made a court
may refuse to enforce the contract, or may enforce the remainder of the contract without the
unconscionable term, or may so limit the application of any unconscionable term as to avoid any
unconscionable result.”).
To prove that a contract is unconscionable, a party must meet two prongs: procedural
and substantive. Gillman, 73 N.Y.2d at 10. “The procedural element of unconscionability
requires an examination of the contract formation process and the alleged lack of meaningful
choice.” Id. at 11. Courts examining this element focus on, for example, “the size and
commercial setting of the transaction, whether deceptive or high-pressured tactics were
employed, the use of fine print in the contract, the experience and education of the party claiming
unconscionability, and whether there was a disparity in bargaining power.” Id. The substantive
element requires the court to conduct “an analysis of the substance of the bargain to determine
whether the terms were unreasonably favorable to the party against whom unconscionability is
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 34 of 42

35
urged.” Id. at 12. Findings of unconscionability are usually based upon the satisfaction of both
of these elements; however, in “exceptional cases” courts have found that “a provision of the
contract is so outrageous as to warrant holding it unenforceable on the ground of substantive
unconscionability alone.” Id.
For contracts entered into by two businesses in a commercial setting, there is a
presumption of conscionability “‘in light of the general commercial background and the
commercial needs of the particular trade or case’” and unconscionability is rarely found. Am.
Dredging Co., 799 F. Supp. at 1339 (quoting Rubin v. Telemet, 698 F. Supp. 447 (S.D.N.Y.
1988)) (citing Cayuga Harvester, Inc. v. Allis Chalmers Corp., 95 A.D.2d 5 (N.Y. App. Div.
1983)). However, “each case must be decided on its own facts” and “if it appears from the
record before the court that unconscionability may exist, and the issue is not free from doubt,
then the court must hold a hearing where the parties may present evidence with regard to the
circumstances of the signing of the contract and the disputed terms’ setting, purpose and effect.”
New York v. Wolowitz, 96 A.D.2d 47, 68 (N.Y. App. Div. 1983).
AFI argues that the Amendment is both procedurally and substantively unconscionable.
First, AFI argues that the Amendment is procedurally unconscionable because Wells Fargo
purported to unilaterally amend the CDA such that AFI did not have the ability to bargain for the
terms and had no opportunity to engage in the negotiation process. (Opp. at 24.) Second, AFI
asserts that the Amendment is substantively unconscionable because the terms, which impose
without consent or further consideration guarantee and indemnification obligations and a security
interest in AFI’s property (purportedly unlimited in scope) to secure the debts of third parties, are
unreasonably favorable to Wells Fargo and potentially cause AFI to breach covenants made to
others. (Id. at 22–23.)
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 35 of 42

36
In terms of the procedural element, AFI fails to sufficiently allege that it did not have a
“meaningful choice” with respect to the Amendment. While AFI alleges that it was not afforded
an opportunity to engage in the negotiation of the terms of the Amendment, AFI cannot allege
that it did not engage in the contract formation process before executing the CDA, which
includes the Amendment Provision granting Wells Fargo its unilateral right to make the
Amendment. Indeed, the Court indicated above that the Amendment Provision was not
unconscionable; a finding that an Amendment made pursuant to the procedures prescribed by the
Amendment Provision is procedurally unconscionable would be inconsistent. AFI also fails to
allege that there were “high-pressured” or “deceptive” practices or any “use of fine print.” Wells
Fargo followed the procedures for unilaterally amending the CDA that AFI bargained for and
bolded and emphasized certain new terms in the Amendment, highlighting the changes made, not
hiding them. Lastly, AFI fails to allege that there was a disparity in bargaining power amongst
itself and Wells Fargo. Both AFI and Wells Fargo are sophisticated business entities of equal
bargaining power. To be sure, contracts between such entities are presumed to be conscionable
for that very reason. See Am. Dredging Co., 799 F. Supp. at 1339. AFI’s arguments with respect
to the procedural aspects of the Amendment’s unconscionability hardly rebut this presumption.
In any event, AFI falls even farther short in its argument that the Amendment is
substantively unconscionable. Each of the provisions of the Amendment that AFI challenges
relate to provisions that were germane to the CDA. 8 AFI cannot use the doctrine of
unconscionability as a means to circumvent the effect of the Amendment Provision it bargained
for in the CDA. Moreover, even though AFI correctly points out that the Amendment’s waiver
of AFI’s benefit from statutes of limitations is unconscionable and void under New York law,
8 	As indicated above, AFI’s allegation that the Amendment grants Wells Fargo a security interest in AFI’s
assets held worldwide is incorrect and unsubstantiated by the terms of the Amendment.
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 36 of 42

37
see Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d 777, 779 (1992) (discussing
N.Y. GEN. O BLIG. LAW § 17-103(1)), the invalidity of this one provision in the Amendment does
not render the entire Amendment void, see RESTATEMENT (SECOND) ON CONTRACTS § 208. The
fact that the statutes of limitations remain intact should not affect the other provisions addressing
indemnity, guarantees, and security interests.
Thus, the Court concludes that AFI fails to sufficiently allege that the Amendment is
invalid, unenforceable, or unconscionable. The Motion to dismiss on this basis is therefore
GRANTED.
C. 	Breach of the Implied Covenant of Good Faith and Fair Dealing
AFI’s only remaining claim asserted in the Complaint is for Wells Fargo’s alleged breach
of the implied covenant of good faith and fair dealing in the CDA. All contracts governed by
New York law are read to include the implied covenant of good faith and fair dealing in the
course of performance. 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153
(2002) (citation omitted); Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995); see also
RESTATEMENT (SECOND ) ON CONTRACTS § 205 (1981) (“Every contract imposes upon each party
a duty of good faith and fair dealing in its performance and its enforcement”).
This covenant embraces a pledge that neither party shall do
anything which will have the effect of destroying or injuring the
right of the other party to receive the fruits of the contract. While
the duties of good faith and fair dealing do not imply obligations
inconsistent with other terms of the contractual relationship, they
do encompass any promises which a reasonable person in the
position of the promise would be justified in understanding were
included.
511 W. 232nd Owners Corp., 98 N.Y.2d at 153 (citations and internal quotation marks omitted);
see also Dalton, 87 N.Y.2d at 389 (citations omitted). A breach of the implied duty of good faith
and fair dealing primarily arises when the contract at issue provides an exercise of discretion;
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 37 of 42

38
such a discretionary act must not be exercised “arbitrarily or irrationally.” Dalton, 87 N.Y.2d at
389; Citibank, N.A. v. United Subcontractors, Inc., 581 F. Supp. 2d 640, 645-46 (S.D.N.Y.
2008). But “[t]he parties’ contractual rights and liabilities may not be varied, nor their terms
eviscerated, by a claim that one party has exercised a contractual right but has failed to do so in
good faith.” Nat’l Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 680 (S.D.N.Y. 1991)
(citation omitted).
“Having failed to state a viable claim for breach of the [express terms of the CDA], [AFI]
may not manufacture a breach through invoking the duty of good faith and fair dealing.”
Wurtsbaugh, 2006 WL 1683416, at *6. The Complaint alleges in pertinent part:
29. 	Immediately after receiving the Purported Amendment,
AFI rejected the amendment and initiated the process of closing its
accounts. AFI made diligent efforts to close all of its accounts with
Wells Fargo as soon as commercially possible. However, as Wells
Fargo knew, AFI's accounts were not simple checking accounts
where funds could be moved promptly to another institution.
Rather, the Ally Auto Servicing Accounts had issued thousands of
checks drawn on those accounts that remained unpaid at the time
of Wells Fargo's Purported Amendment (as an illustration of the
magnitude of checks, in 2011, approximately 63,000 checks per
month were drawn on those accounts and issued). AFI could close
each account after the checks drawn on it had been paid, escheated,
or reissued. Moreover, as AFI informed Wells Fargo, immediately
closing those accounts with so many checks outstanding posed a
serious business risk to AFI in the event those checks were
returned unpaid or otherwise did not clear because the account had
been closed.
30. 	In addition, AFI had to establish accounts at a new bank to
service its auto servicing business, and that, too, Wells Fargo
knew, would take more than 37 days to accomplish, given the
complexity of the accounts.
31. 	Finally, the closing of any AFI account required Wells
Fargo to approve such closure in accordance with its internal
administrative processes. As such, Wells Fargo controlled the
timing of the closing of any account upon a request for account
closure. Wells Fargo was fully aware of the processes required to
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 38 of 42

39
close such accounts and open new ones and the time that this
would require.
32. 	AFI 	sought 	to 	work 	with 	Wells 	Fargo 	in 	closing 	its
accounts and transitioning its banking relationship to another bank,
but 	Wells 	Fargo 	repeatedly 	was 	uncooperative 	with 	and
unresponsive to AFI's efforts to accomplish this.
33. 	Thus, despite AFI's efforts, it was impossible to close the
more than 30 accounts AFI held with Wells Fargo by Wells
Fargo's unreasonable, unilateral deadline.
(Compl. ¶¶ 29–33.) The crux of AFI’s breach of the implied covenant claim is paragraph 32,
stating that Wells Fargo was “uncooperative” in and “unresponsive” to AFI’s efforts to close its
accounts and transition to a new bank. (Id. ¶ 32.) The problem with this allegation is that AFI
fails to specifically allege how Wells Fargo was “uncooperative” and “unresponsive.” (See id.)
To the extent AFI seeks to link the allegation in paragraph 32 to the allegations in
paragraphs 29 and 30—that Wells Fargo had knowledge and/or was put on notice that AFI’s
accounts were complex and that several checks were drawn on the accounts—the breach of the
implied covenant of good faith and fair dealing claim fails and is DISMISSED with prejudice.
AFI presumably had knowledge at the time it entered into the CDA with Wells Fargo that the
commercial deposit accounts it sought to open would be complex and that AFI would draw
several checks on those accounts. Since AFI had knowledge of such facts, AFI also had
knowledge, as it alleges Wells Fargo should have had after AFI notified it, that AFI would likely
require more than 30 days to close such accounts when it executed the CDA. To hold Wells
Fargo liable for the breach of the implied covenant on the basis of these allegations, would be to
hold that Wells Fargo had an obligation that it did not otherwise have under the express terms of
the CDA (i.e. to take into account AFI’s ability to abide by the 30 day opt-out term of the CDA
when making its business determination to amend the agreement within its rights). See id. (“In
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 39 of 42

40
order to find that the defendant has breached its duty it would be necessary to read into the
Agreement an obligation that the defendant make business choices with the growth of the
[plaintiff] in mind. Implying such an obligation under the Agreement would be inconsistent with
the limiting language of the [relevant provision of the original contract] and is thus beyond the
scope of the duty of good faith and fair dealing.”). AFI did not bargain for that obligation to be
imposed upon Wells Fargo in exercising its rights under the Amendment Provision and cannot
use the implied covenant to read that obligation into the provision. Rather, AFI should have
bargained for more than 30 days to close its accounts under the change of terms provision prior
to executing the CDA. AFI cannot use this theory of breach of the implied covenant of good
faith and fair dealing to circumvent the terms it contracted for.
To the extent, however, AFI’s breach of the implied covenant claim seeks to link
paragraph 32 with the allegation in paragraph 31, AFI’s claim may be viable. Paragraph 31
alleges that Wells Fargo had certain procedures in place that had to be followed in order for AFI,
or any Depositor, to close an account with Wells Fargo; such procedures included Wells Fargo’s
prior approval of the closure and the timing of which were (allegedly) subject to Wells Fargo’s
control. (Compl. ¶ 31.) Once AFI notified Wells Fargo, as alleged in the Complaint, that it
sought to reject the Amendment and close its accounts, Wells Fargo was under an obligation to
act in good faith and deal fairly. If Wells Fargo was “uncooperative” and “unresponsive” with
respect to carrying out its required procedures for closing the accounts, AFI may be able to prove
that Wells Fargo breached its implied duty. As currently alleged, however, the Complaint does
not adequately plead this theory of breach. The Court therefore GRANTS the Motion and
DISMISSES without prejudice the breach of the implied covenant of good faith and fair
dealing claim to the extent it is based on Wells Fargo’s conduct in carrying out its account
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 40 of 42

41
closure procedures. 	The Court further GRANTS AFI leave to amend its Complaint to more
sufficiently allege this claim.
D. 	The December 10, 2013 Release Agreement Issue Is Moot
In its Motion, Wells Fargo asserts that to the extent any of AFI’s claims rely upon the
allegation that the attorneys’ fees incurred by Wells Fargo were unreasonable, such claims are
precluded by the December 10, 2013 Release Agreement. AFI does not dispute this preclusion
in its Opposition. As such, the issue is moot and need not be resolved by the Court.
III. 	CONCLUSION
For the foregoing reasons, Wells Fargo’s Motion is GRANTED and the Complaint is
DISMISSED in its entirety. AFI’s request for declaratory relief, and claims for breach of
contract, conversion, and breach of the implied covenant of good faith and fair dealing claim, to
the extent it is based on Wells Fargo’s “uncooperative” or “unresponsive” behavior after having
been notified of the complexity of and amount of checks drawn on the accounts, are
DISMISSED with prejudice. AFI’s breach of the implied covenant of good faith and fair
dealing claim, to the extent it is based on Wells Fargo’s conduct in carrying out its account
closure procedures, is DISMISSED without prejudice and the Court GRANTS AFI leave to
amend. AFI may amend its Complaint, subject to the holding of this Opinion, within thirty days
from the date of this Order. Wells Fargo shall file a response to any further amended complaint
within thirty days after an amended complaint is filed.9
9 	At this stage in the Adversary Proceeding, the parties have not consented to this Court entering a final order
or judgment, raising a potential issue under Stern v. Marshall, 564 U.S. ---, 131 S.Ct. 2594 (2011). Because this
Opinion provides AFI with leave to amend one of its claims and does not dismiss the Complaint with prejudice in its
entirety, this Opinion is an interlocutory order, not a final judgment on the merits and the Court need not address the
Stern v. Marshall issue at this time. See O’Toole v. McTaggart (In re Trinsium Grp., Inc.), 467 B.R. 734, 740–41
(Bankr. S.D.N.Y. 2012) (“After Stern v. Marshall, the ability of bankruptcy judges to enter interlocutory orders in
non-core proceedings, or in core proceedings as to which the bankruptcy court may not enter final orders or
judgments consistent with Article III absent consent, has been reaffirmed by the courts that have had occasion to
address the issue.” (citations omitted)).
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 41 of 42

42
IT IS SO ORDERED.
Dated: May 12, 2015
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
14-02435-mg Doc 22 Filed 05/12/15 Entered 05/12/15 08:39:19 Main Document
Pg 42 of 42