Bank Consulting Firm Loses Claim for Compensation
 
July 11, 2007
 
Michael Weissman - Chicago

In John M. Floyd & Associates Incorporated v. Star Financial Bank, ___ F.3d ___ (No. 06-2428 7th Cir. June 7, 2007), Floyd, a bank consulting firm, entered into a contract with Star in early 2000. The contract had four distinct phases.

In the first phase, Floyd was to analyze the bank’s current operations, develop recommendations for change and a plan of implementation. Next, Floyd was to meet with the bank to decide which recommendations would be acted upon. Third, there was the installation phase in which Floyd would coordinate and assist in the installation of those changes the bank had approved and install monitoring processes. And finally, in a so-called follow-up phase, Floyd would meet with the bank to review results and make any fine-tuning that was necessary.

The contract stipulated that Floyd’s compensation would be based solely on savings achieved from Floyd’s recommendations. The contract also provided that Star had final approval as to the implementation of Floyd’s recommendations and that only implemented recommendations would be used to calculate the savings on which Floyd’s compensation would be based.

As fate would have it, Floyd recommended an overdraft privilege program but the bank retained another vendor, Stratis Technologies, to install the overdraft protection program. Stratis installed the same type of program that Floyd had offered to install at one-fifth the price that Floyd proposed to charge.

In addition, Floyd had recommended that Star sell its portfolio of credit card accounts to a national credit card issuer. Once again, this recommendation was effectuated but through another company called Kessler Financial Services, Inc.

Both Stratis and Kessler previously had contact with Star apart from Floyd on the projects they implemented for Star.

When Star put in place the programs Floyd had recommended using other vendors, Floyd filed suit claiming the compensation it would have earned had it been given the task of implementing the changes. Based upon its reading of the terms of the agreement between Floyd and Star, the court rejected Floyd’s claim.

Applying Indiana law, the court said it would not imply terms that did not appear in the text of the contract. It noted that the contract did not contemplate that Star would pay for ideas, but rather for implementation. It further observed that Star’s obligation to pay only arose when a change was installed.

The drafting error that Floyd made, said the court, was the failure to provide for payment even if one or more of its recommendations were installed by another vendor.

In conclusion, the court said the contract was not ambiguous. It permitted Star to select those recommendations it wished to implement and to do so using other vendors whose fees were more competitive than Floyd’s.

 

What’s the Point?

Financial institutions that negotiate contracts with consultants are well advised to work with counsel because the presence or absence of particular clauses can either generate or avoid, as the case may be, a claim for damages.

For more information, e-mail Michael L. Weissmann at michael.weissmann@hklaw.com  or call toll-free,1-888-688-8500.