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Colonial Funding Network, Inc. v. Genuine Builders, Inc.

United States District Court, D. South Dakota, Southern Division

May 30, 2018





         This matter is before the court on the complaint of plaintiff Colonial Funding Network, Inc. (“Colonial”), invoking this court's diversity jurisdiction. See Docket No. 1. On March 15, 2018, Colonial served four subpoenas duces tecum on third-party banks at which various defendants have accounts. See Docket No. 42-1 through 42-4. The banks on which the subpoenas were served have not objected to producing the documents requested, but defendants themselves have filed a motion to modify the subpoenas. See Docket No. 40. The district judge, the Honorable Lawrence L. Piersol, referred defendants' motion to this magistrate judge for resolution. See Docket No. 44.


         For purposes of providing some context for the instant motion, the court sets forth some basic facts gleaned from Colonial's complaint and its pending partial summary judgment motion so as to sketch out the claims asserted herein. See Docket Nos. 1 & 32. By doing so, the court does not endorse the verity of those facts or claims.

         Colonial is a servicing provider for Strategic Funding Source, Inc. and Direct Merchants Funding, LLC, doing business as Flash Advance. Because neither Strategic Funding nor Direct Merchants Funding are parties to this lawsuit, the court refers to them collectively as “Colonial, ” even though the court realizes Colonial itself did not provide funding. From June 23, 2016, to January 12, 2017, Colonial entered into six separate funding transactions whereby $1.760 million dollars were provided to defendants.

         Prior to making these loans, [1] Colonial conducted a physical site visit to ensure the defendants were actual legitimate businesses with a physical presence and employees. Defendants assert that Colonial never met face-to-face with James Bunker, however. Colonial also conducted a background check on James Bunker, the owner or predominate owner of the defendant entities. Colonial also alleges that prior to each of these loans, it conducted a recorded “funding call” with James Bunker to verify the material terms of each of the loans prior to any funds being disbursed-an allegation defendants deny. Recordings of these phone calls are on file with the court in connection with Colonial's partial summary judgment motion. See Docket Nos. 37-36, -48, -54, -80, -115, and -127. Although a male voice is heard answering on behalf of James Bunker in these recordings, the court is not aware whether the male is in fact defendant Bunker. After the recorded phone calls were made, Colonial then disbursed the funds into defendants' bank accounts.

         The terms of the contracts required defendants to repay the funds through periodic electronic funds transfers out of their various bank accounts. Through these transfers, defendants paid Colonial $1, 161, 567. In late January, 2017, however, defendants instructed their banks not to honor the electronic transfers with the result that no further payments were made to Colonial on the loans. At this time, defendants still owed Colonial approximately $1, 158, 932 in unpaid balances plus approximately $46, 810 in fees.

         Defendants notified Colonial they disputed the validity of the six transactions. Defendants asserted that defendants' employee, James Bunker's sister, Sandra Tawzer, forged Mr. Bunker's name to the contracts. Ms. Tawzer held the position of controller within Mr. Bunker's companies. Colonial asserts Ms. Tawzer had a prior felony conviction for embezzlement before defendants hired her.

         Colonial asserts claims against defendants of breach of contract, promissory estoppel, unjust enrichment, quantum meruit, and money had and received. Defendants deny that they entered into the contracts in question and assert a litany of affirmative defenses, including equitable defenses of unclean hands and estoppel. See Docket No. 17 at pp. 20-21.

         On March 15, 2018, Colonial served subpoenas duces tecum on Richland State Bank of Bruce, South Dakota (see Docket No. 42-1); Frontier Bank of Rock Rapids, Iowa (see Docket No. 42-2); Citizens State Bank of Arlington, South Dakota (see Docket No. 42-3); and Fishback Financial Corporation, First Bank & Trust of Sioux Falls, South Dakota (see Docket No. 42-4). Each of the subpoenas requested all documents relative to any bank account for any defendant for the period from January 1, 2016, to the date of compliance with the subpoena, which was April 2, 2018. See, e.g. Docket No. 42-1 at p. 4. Four days later, Colonial filed a motion for partial summary judgment against defendants [Docket No. 32], which motion is currently still pending.

         Criminal charges against Sandra Tawzer have been filed in South Dakota state court, but those charges are not based on the transactions between defendants and Colonial which are at issue in this case. The chief investigating agent in the Sandra Tawzer case testified one year ago (May 31, 2017), before a state grand jury that Ms. Tawzer was using two men to represent themselves to be James Bunker and to approve of the loans over the phone with the loan companies. See Docket No. 36-14 at pp. 21, 24. The telephonic loans were with out-of-state entities. Id. The court assumes this testimony refers at least in part to Colonial's loans to defendants.

         The one loan discussed at length before the grand jury, and apparently the sole basis for the state criminal charges against Ms. Tawzer, was a loan made by a South Dakota bank, Citizens State Bank of Arlington, South Dakota, on which Ms. Tawzer forged Mr. Bunker's signature. Id. at p. 3-5. That loan was entirely paid back to the bank out of defendants' bank accounts. Id. at pp. 5-6. As to the telephonic loans, the investigating agent did not ask for a grand jury indictment as to those funds because “[t]he loans were made out to the business and cashed in the business's name, but there was so much going on within passing checks and moving checks around that at this point I have not determined where the money's final destination was.” Id. at pp. 24-25. A grand juror asked specifically if the agent could say whether the money went to defendants or to Ms. Tawzer. Id. at p. 25. The agent testified, “I can't show that the money went into [Ms. Tawzer's] pocket at this point.” Id.

         Nevertheless, defendants have represented in this lawsuit that all of the money from Colonial was purloined by Sandra. Defendants have produced no documents in discovery, according to Colonial, not even their required Rule 26 initial disclosures. Hence, Colonial has no documents that show where the funds they gave to defendants went.

         Following the events of January, 2017, defendant James Bunker sought certificates of dissolution from the South Dakota Secretary of State as to defendants Midwest Poured Foundations, Inc. and Waters Edge Concrete, LLC.

         Defendants now move to modify the four bank subpoenas. See Docket No. 40. They allege the time frame for the subpoenas are too broad. Because the first funding transaction was consummated June 23, 2016, and the last such transaction was consummated January 12, 2017, defendants want the court to limit the banks' production of documents to that approximately six-month time period. They point out that the subpoenas cover time periods after Colonial filed its complaint in this matter (on August 28, 2017), and they argue that providing financial information about defendants during the pendency of this lawsuit places them at a strategic and negotiating disadvantage.

         Defendants also assert a claim that the subpoenas are unduly burdensome, but none of the banks have asserted that claim. In fact, Frontier Bank has already compiled the documents and made them available to Colonial. Colonial has declined to receive those documents until the instant motion is resolved.

         Colonial points out that, in conducting its due diligence prior to sending funds to defendants pursuant to the contracts, Colonial requested and received, inter alia, financial documents, tax returns, bank statements, balance sheets, and profit and loss statements for various defendants spanning the time period from 2013 up through 2016. Thus, the bank records subpoenaed partially cover the due diligence period. Finally, Colonial points out that the district court entered a protective order ...

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