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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
OTO ANALYTICS, LLC,
Plaintiff,
v.
BENWORTH CAPITAL PARTNERS PR,
LLC; BENWORTH CAPITAL PARTNERS,
LLC; BERNARDO NAVARRO and
CLAUDIA NAVARRO,
Defendants.
FEDERAL RESERVE BANK OF SAN
FRANCISCO,
Plaintiff-Intervenor,
v.
OTO ANALYTICS, LLC; BENWORTH
CAPITAL PARTNERS PR, LLC;
BENWORTH CAPITAL PARTNERS, LLC;
BERNARDO NAVARRO and CLAUDIA
NAVARRO,
Defendants in Intervention.
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Civil No. 23-01034 (GMM) cons. Civil
No. 24-01313 (GMM)
PLAINTIFF OTO ANALYTICS, LLC’S MOTION TO STRIKE DEFENDANTS’
AFFIRMATIVE DEFENSES OF UNCLEAN HANDS, SET OFF, AND PUBLIC POLICY
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 1 of 23
Alexander L. Cheney (admitted pro hac vice)
333 Bush St
San Francisco, CA 94104
(415) 858-7400
acheney@willkie.com
Stuart R. Lombardi (admitted pro hac vice)
Willkie Farr & Gallagher LLP
787 7th Avenue
New York, NY 10019
(212) 728-8000
slombardi@willkie.com
Joshua S. Levy (admitted pro hac vice)
1875 K Street, N.W.
Washington, D.C. 20006
(202) 303-1000
jlevy@willkie.com
Dated: September 9, 2024
Alejandro J. Cepeda Diaz
USDC-PR 222110
McConnell Valdés LLC
270 Muñoz Rivera Ave.
Hato Rey PR 00918
Tel: (787) 250-5637
Email: ajc@mcvpr.com
Attorneys for Plaintiff and Defendant in
Intervention Oto Analytics, LLC
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 2 of 23
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TABLE OF CONTENTS
PRELIMINARY STATEMENT .....................................................................................................1
BACKGROUND .............................................................................................................................3
A.
The Agreements .......................................................................................................3
B.
The Arbitration.........................................................................................................4
C.
Defendants’ Affirmative Defenses ..........................................................................7
LEGAL STANDARD ......................................................................................................................8
ARGUMENT ...................................................................................................................................9
I.
Benworth FL And Mr. Navarro Are Barred And Precluded From Asserting The
Affirmative Defenses. ..........................................................................................................9
A.
Benworth FL And Mr. Navarro’s Affirmative Defenses Are Barred Because
They Are Subject To A Binding Arbitration Agreement.........................................9
B.
Benworth FL And Mr. Navarro Are Estopped From Asserting The
Affirmative Defenses. ............................................................................................11
II.
Benworth PR and Mrs. Navarro Lack Standing To Assert The Affirmative Defenses. ....13
III.
Defendants’ Affirmative Defenses Fail As A Matter Of Law. ..........................................15
CONCLUSION ..............................................................................................................................16
CERTIFICATE OF SERVICE ......................................................................................................18
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 3 of 23
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TABLE OF AUTHORITIES
Page(s)
Cases
ACEMLA de P.R., Inc. v. Banco Popular de P.R., Inc.,
2015 WL 10037151 (D.P.R. Oct. 30, 2015) ............................................................................13
Álvarez-Maurás v. Banco Popular of P.R.,
919 F.3d 617 (1st Cir. 2019) ..................................................................................................2, 9
Arthur Andersen LLP v. Carlisle,
556 U.S. 624 (2009) ................................................................................................................14
Barnstable Cnty. v. 3M Co.,
2017 WL 6452245 (D. Mass. Dec. 18, 2017) ............................................................................4
Bleavins v. Demarest,
196 Cal. App. 4th 1533 (2011) ..........................................................................................13, 14
Bryan Corp. v. Chemwerth, Inc.,
2013 WL 6489785 (D. Mass. Dec. 9, 2013) ..................................................................8, 15, 16
Citizens Bank v. Strumpf,
516 U.S. 16 (1995) ...................................................................................................................16
Grand Wireless, Inc. v. Verizon Wireless, Inc.,
748 F.3d 1 (1st Cir. 2014) ............................................................................................10, 11, 14
Kalkey v. Euromodas, Inc.,
706 F. Supp. 3d 305 (D.P.R. 2023) ..........................................................................................13
Manganella v. Evanston Ins. Co.,
700 F.3d 585 (1st Cir. 2012) ..............................................................................................11, 13
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614 (1985) ..................................................................................................................9
Merigan v. Liberty Life Assur. Co. of Boston,
839 F. Supp. 2d 445 (D. Mass. 2012) ......................................................................................16
Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co.,
324 U.S. 806 (1945) .................................................................................................................15
Ray v. Austin Indus., Inc.,
2018 WL 4701375 (D.S.C. Sept. 29, 2018) .............................................................................10
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 4 of 23
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Rodríguez-García v. Miranda-Marín,
610 F.3d 756 (1st Cir. 2010) ................................................................................................2, 13
Safeguard Props. Mgmt., LLC v. MidFirst Bank,
2017 WL 4541592 (N.D. Ohio Oct. 11, 2017) ........................................................................10
Sourcing Unlimited, Inc. v. Asimco Int’l, Inc.,
526 F.3d 38 (1st Cir. 2008) ......................................................................................................10
Taylor v. Sturgell,
553 U.S. 880 (2008) .................................................................................................................15
Rule
Fed. R. Civ. P. 12(f) .................................................................................................................1, 4, 8
Other Authority
5C Charles A. Wright, Arthur R. Miller, et al., Federal Practice and Procedure
§ 1381 (3d ed. 2024) ..................................................................................................................8
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 5 of 23
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Pursuant to Federal Rule of Civil Procedure 12(f), Plaintiff Oto Analytics, LLC (f/k/a Oto
Analytics, Inc. d/b/a Womply) (“Womply”), by and through its undersigned counsel, respectfully
requests that this Court strike Defendants Benworth Capital Partners PR, LLC (“Benworth PR”),
Benworth Capital Partners, LLC (“Benworth FL”), Bernardo Navarro (“Mr. Navarro”), and
Claudia Navarro’s (“Mrs. Navarro”; collectively “Defendants”) affirmative defenses of unclean
hands, set off, and public policy (collectively, the “Affirmative Defenses”).
PRELIMINARY STATEMENT
This case is about Defendants’ fraudulent transfer of more than $171 million from
Benworth FL to Benworth PR (and likely into the pockets of Mr. and Mrs. Navarro) to keep those
funds from Benworth FL’s creditors. Benworth FL owes Womply approximately $118 million
under a final arbitration award (the “Final Award”) and owes the Federal Reserve Bank of
San Francisco (“Federal Reserve”) approximately $67 million under its Paycheck Protection
Program (“PPP”) lending facility. Womply and the Federal Reserve are seeking to recover those
funds and bring claims for actual fraudulent transfer, constructive fraudulent transfer, and
additional declaratory and equitable relief, which turn on Benworth FL’s fraudulent intent,
Benworth FL’s solvency, and whether Benworth FL received reasonably equivalent value.
In response to Womply’s claims, and to distract from their own fraudulent conduct,
Defendants assert Affirmative Defenses of unclean hands, set off, and public policy that are
completely irrelevant to Womply’s claims. Defendants’ unclean hands/set off defense alleges that
Womply did not sufficiently screen out fraudulent loan applications it referred to Benworth FL
and has not provided unspecified “loan files” to Benworth FL. Defendants’ second set off defense
speculates that the U.S. Small Business Administration (“SBA”) could find in the future that
Womply’s fees to Benworth FL violated SBA regulations. And Defendants’ public policy defense
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asserts that Womply’s fees to Benworth FL violate SBA regulations. These purported Affirmative
Defenses are irrelevant to the issues in this case: whether Benworth FL fraudulently transferred
funds to Benworth PR to avoid creditors, whether Benworth PR is the alter ego of Benworth FL,
and whether Mr. and Mrs. Navarro should be held responsible for Benworth FL’s and Benworth
PR’s debts. Worse, the issues raised by the Affirmative Defenses are subject to a binding
arbitration agreement. Indeed, many of them were already rejected by the arbitrator in the
arbitration between Womply and Benworth FL (the “Arbitration”) that led to this action.
This Court should strike the Affirmative Defenses for at least three reasons.
First, Benworth FL and Mr. Navarro are barred and precluded from asserting the
Affirmative Defenses in this action because they agreed to arbitrate those issues. All of the
Affirmative Defenses are based on agreements between Womply and Benworth FL, which contain
a broad arbitration provision covering “any dispute between parties to the subject matter” of the
agreements. Because the Affirmative Defenses “fall within the expansive ambit of this arbitration
provision,” they cannot “be pursued outside the arbitration framework” and must be stricken.
Álvarez-Maurás v. Banco Popular of P.R., 919 F.3d 617, 624 (1st Cir. 2019). In fact, Benworth
FL and Mr. Navarro already “litigated and lost” on many of the same issues they now raise in their
Affirmative Defenses, so they are precluded from “relitigating [these] issues that have been
previously adjudicated.” Rodríguez-García v. Miranda-Marín, 610 F.3d 756, 770–71 (1st Cir.
2010) (cleaned up; collecting cases).
Second, Benworth PR and Mrs. Navarro lack standing to assert the Affirmative Defenses.
The Affirmative Defenses are based on agreements between Womply and Benworth FL, a
nonparty to an agreement lacks standing to assert claims based on those agreements, and Benworth
PR and Mrs. Navarro admit that each “was not a party to” these agreements. To the extent
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Benworth PR and Mrs. Navarro try to obtain the benefits of these agreements in their Affirmative
Defenses, this helps proves Womply’s alter ego, successor liability, and piercing the corporate veil
claims that Benworth FL and Benworth PR are not separate entities.
Finally, should this Court reach the merits of the Affirmative Defenses, they all fail as a
matter of law. Accordingly, the Affirmative Defenses should be stricken.
BACKGROUND
A.
The Agreements
On April 14, 2021, Benworth FL and Womply entered into an Amended and Restated PPP
Loan Referral Agreement (the “Referral Agreement”) and a Womply Developer Order Form (the
“Order Form”; together with the Referral Agreement, the “Agreements”). (Amended Complaint
(“Am. Compl.”; ECF No. 125) ¶ 92 & Exs. 2–3; Benworth FL’s Answer ¶ 92, ECF No. 150;
Mr. Navarro’s Answer ¶ 92, ECF No. 152.) Mr. Navarro, Benworth FL’s sole member, founder,
President, and CEO, signed the Agreements. (Id.; Am. Compl. ¶ 24; Benworth FL’s Answer ¶ 24;
Mr. Navarro’s Answer ¶ 24; Referral Agreement at 4; Order Form at 1.)
Under the Agreements, Womply agreed to provide certain referral and technology services
to Benworth FL in connection with PPP loans and loan applications, and Benworth FL agreed to
pay Womply certain fees for these services. (Am. Compl. ¶¶ 95–119; Benworth FL’s Answer
¶¶ 96, 98–99, 106, 109, 111–12, 119; Mr. Navarro’s Answer ¶¶ 96, 98–99, 106, 109, 111–12, 119;
Referral Agreement §§ 2.1–2.3; Order Form §§ 2.1–2.3.) The Agreements provide that “Womply
shall return any portion of the [] Fees paid that the SBA or other governmental agency determines
were not in compliance with applicable SBA and/or PPP Loan Program Requirements.” (Referral
Agreement § 2.3; Order Form § 2.3.) After termination of the Agreements, Benworth FL “may
request from Womply, and Womply shall reasonably provide to [Benworth FL], a plan for
transmitting to [Benworth FL] electronic copies of loan files in its possession that related to the
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Referred Loans, to the extent not otherwise in the possession of [Benworth FL].” (Referral
Agreement § 4.3.)
The Agreements contain a broad arbitration provision (the “Arbitration Provision”),
which provides that:
Without limiting a party’s right to seek injunctive or other equitable
relief in court, any dispute between the parties related to the subject
matter of this Agreement will be resolved by binding arbitration in
the English language in San Francisco County, California under the
rules of JAMS; the decision of the arbitrator will be enforceable in
any court. The prevailing party in any action to enforce this
Agreement shall be entitled to costs and attorneys’ fees.
(Am. Compl. ¶ 27 (emphasis added); Benworth FL’s Answer ¶ 27; Mr. Navarro’s Answer ¶ 27;
Referral Agreement § 10; Order Form § 4.) The Agreements also contain a choice-of-law
provision, which states that they “shall be governed by and construed in accordance with the laws
of the State of California.” (Referral Agreement § 9; Order Form § 4.)
B.
The Arbitration
On August 25, 2021, Womply commenced JAMS arbitration proceedings against
Benworth FL alleging that Benworth FL breached the Agreements by failing to pay Womply its
fees. (Am. Compl. ¶¶ 2, 157–58; Benworth FL’s Answer ¶¶ 2, 157–58; Mr. Navarro’s Answer
¶¶ 2, 157–58; Declaration of Joshua S. Levy (“Levy Decl.”) ¶ 3 Ex. A (“Final Award”) at 4–5, 29–
30.)1 In response, Benworth FL asserted “two affirmative defenses (illegality and set off) and four
counterclaims (declaratory relief, breach of contract, severance and enforcement, and money had
and received), all alleging that Womply’s fees under the Agreements are ‘unlawful,’ ‘illegal,’ and
1 On a motion to strike, like on a Rule 12(b)(6) motion to dismiss, this Court “may take judicial
notice of proceedings in other courts,” including “an arbitration award,” to “establish the existence
of the related litigation, what claims were asserted, and what issues were argued and decided.”
Barnstable Cnty. v. 3M Co., 2017 WL 6452245, at *4 (D. Mass. Dec. 18, 2017) (cleaned up;
collecting cases).
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‘not in compliance with SBA Regulations’ because they exceed the limits established by the SBA
Administrator in the Interim Final Rule” (the “Fee Cap Argument”). (Final Award at 33 (quoting
Benworth’s Arbitration Answer at 6–11).) Benworth FL also argued that “the parties’ Agreements
are not valid under SBA regulations because Womply was a Lender Service Provider and failed to
submit the Agreements to the SBA” (the “Lender Service Provider Argument”). (Id. at 41.)
After a “seven-day in-person evidentiary hearing” (the “Hearing”) with six live witnesses, more
than 350 documents “introduced and admitted into evidence,” and extensive pre- and post-Hearing
briefing, the Arbitrator rejected all of Benworth FL’s affirmative defenses and counterclaims and
awarded Womply approximately $118 million. (Id. at 7–8, 72–73.)2
Benworth FL also asserted a counterclaim “for declaratory relief” under “Section 4.3 of
the Referral Agreement” seeking “a declaration that Womply is obligated to promptly reinstate
Benworth’s access to Womply technology platform or in the alternative to transmit electronic
copies of borrowers’ loan files” (the “Loan File Claim”). (Id. at 6 & n.4, 52, 58.) Benworth FL
“abandoned” its “request for declaratory relief concerning its delivery of borrower files” during
“the Hearing” and “previous proceedings.” (Id. at 58.) Benworth FL then “sought
reconsideration” of this claim, arguing that “because of missing loan files, the SBA has denied the
guaranteed purchase of thousands of Womply-referred loans,” and, “if the SBA ultimately does
not buyback these loans, Benworth will have to refund the principal loan amounts that the Federal
Reserve advanced to Benworth for funding PPP loans,” and “Womply’s recovery should therefore
2 (See also Final Award at 41 (“[T]he Technology Services provided by Womply to Benworth
were not subject to the SBA’s 1% Agent Fee Cap . . . . The Technology Fees are not illegal and
therefore, they need not be severed from the Order Form.”); id. at 44–45 (“Womply was not an
LSP”); id. at 47 (“Benworth has failed to prove that, even if Womply was an LSP, the parties’
failure to submit the Agreements to the SBA would have rendered the Agreements invalid or
void.”); id. at 53 & n.15 (“[T]he Technology Fee provision in the Order Form and the parties’
Agreements as a whole are not void, illegal, or unenforceable”).)
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be offset by the amount that Benworth is ultimately required to repay, if anything.” (Id.; Levy
Decl. ¶ 4 Ex. B (“Feb. 20, 2024 Arbitration Order”) at 3–4 & n.1.) “Womply consent[ed] to
declaratory judgment being entered,” the Arbitrator ordered Womply to “transmit copies of
borrowers’ loan files to Benworth,” and Womply promptly did so. (Feb. 20, 2024 Arbitration
Order at 4.)
Benworth FL initially asserted an affirmative defense of “Promissory Fraud: arguing that
Womply is barred, in whole or in part, from recovering outstanding Referral Fees because Womply
promised Benworth that it would materially improve its technology platform to reduce the risk of
loss” from fraudulent PPP loan applications “but did not, in fact, intend to honor that promise when
it was made” (the “Fraudulent Loan Argument”) (Final Award at 5.) However, Benworth FL
refused to comply with the Arbitrator’s discovery order to produce “its list of fraudulent loans to
Womply,” and Benworth FL instead “voluntarily dismissed its Promissory Fraud affirmative
defense.” (Id.)
On July 1, 2024, Womply filed a Petition To Confirm Arbitration Award And For Entry
Of Judgment in federal courts in the Northern District of California. Oto Analytics, LLC v.
Benworth Capital Partners LLC, No. 3:24-cv-03975 (N.D. Cal. July 1, 2024), ECF No. 1. In
response, Benworth FL filed a separate Petition to Vacate Final Arbitration, which argued, among
other things, that “the Final Award is unenforceable because it compels Benworth to violate public
policy,” because “SBA Regulations and interpretations of those regulations [] require agents,
lender service providers, and lenders to submit compensation agreements for review by the SBA.”
(Levy Decl. ¶ 5 Ex. C at 62–63 (capitalization omitted).) On September 6, 2024, Benworth FL
filed an opposition to Womply’s Petition raising the same arguments. (Id. ¶ 6 Ex. D at 24.)
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C.
Defendants’ Affirmative Defenses
On August 19, 2024, each Defendant filed an Answer raising the same sixteen affirmative
defenses. (ECF Nos. 149–52.) As relevant to this Motion, Defendants assert defenses of “unclean
hands” (Second Affirmative Defense), “set off” (Fourteenth and Fifteenth Affirmative Defenses),
and “public policy” (Sixteenth Affirmative Defense) that seek to re-litigate the same Fee Cap
Argument, Lender Service Provider Argument, Loan File Claim, and Fraudulent Loan Argument
that that were the subject of the Arbitration. (Id.) For their unclean hands and set off defenses,
Defendants allege that:
The fees Womply seeks from Benworth FL include fees gained
through missing loan files and fraudulent applications for PPP loans
that Womply referred. The SBA has denied the guaranteed purchase
of thousands of Womply-referred loans totaling more than
$51 million, and it may deny an additional $68 million more. Thus,
if the SBA ultimately does not buyback these loans, Benworth FL
will have to refund the principal loan amounts that the Federal
Reserve advanced to Benworth FL for funding these Womply-
referred fraudulent PPP loans.
(Benworth FL’s Answer at 37, 39–40; Mr. Navarro’s Answer at 35–36, 38–39; Benworth PR’s
Answer at 40–41, 44, ECF No. 149; Mrs. Navarro’s Answer at 42, 45–46, ECF No. 151.) For their
second set off defense, Defendants allege that:
Section 2.3 of the Referral Agreement and Section 2.3 of the Order
Form provide that Womply shall return any fees paid by Benworth
FL that the SBA or other governmental agency determines were not
in compliance with applicable SBA and/or PPP Loan Program
Requirements. Benworth FL has paid Womply approximately
$465 million in fees and those fees are currently the subject of an
investigation by the SBA and/or other governmental agencies. If the
SBA and/or another governmental agency determines that the fees
Benworth FL paid Womply, in whole or in part, were not in
compliance with applicable SBA and/or PPP Loan Program
Requirements, Womply must return those fees to Benworth FL and
any damages awarded to Womply here should therefore be set off
by the amount of fees that Womply is required to return to
Benworth FL
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(Benworth FL’s Answer at 40; Mr. Navarro’s Answer at 39; Benworth PR’s Answer at 44; Mrs.
Navarro’s Answer at 46.) And for their public policy defense, Defendants allege that:
[C]ompelling Benworth FL to pay Womply fees would require
Benworth FL to violate public policy. The SBA has an explicit,
well-defined policy that specifically militates against the relief
Womply seeks here. That public policy expressly provides that
agents, including lender service providers, like Womply, are only
entitled to fees from lenders in connection with SBA loans that are
owed under agreements that were submitted to and approved by the
SBA. See 13 C.F.R. §§ 103.5(a), (c); Small Business
Administration, Office of Capital Access, SOP 50 10 6: Lender and
Development Company Loan Programs at p. 185 (Oct. 1, 2020).
Womply acted as an agent and lender service provider under the
Parties’ Agreements. The relief Womply seeks here is the payment
of fees under agreements that indisputably were never submitted to
or approved by the SBA. Ordering Benworth FL to pay Womply
those fees as damages here would thus require Benworth FL to
violate the SBA’s explicit, well-defined policy. Accordingly,
Womply is barred from recovering damages in this action from
Benworth FL.
(Benworth FL’s Answer at 40–41; Mr. Navarro’s Answer at 39–40; Benworth PR’s Answer at 45;
Mrs. Navarro’s Answer at 46–47.) These defenses should be stricken.
LEGAL STANDARD
Under Rule 12(f), this “[C]ourt may strike from a pleading an insufficient defense.” “A
motion to strike offers the primary opportunity for a plaintiff to object to affirmative defenses and
is governed by the same standards as a motion to dismiss filed pursuant to Fed. R. Civ. P. 12(b)(6).”
Bryan Corp. v. Chemwerth, Inc., 2013 WL 6489785, at *1, *7 (D. Mass. Dec. 9, 2013) (cleaned
up; collecting cases) (striking “affirmative defense of unclean hands”). Courts permit “the
successful use of motion to strike in connection with insufficient affirmative defenses” in “a wide
range of different factual and substantive contexts.” 5C Charles A. Wright, Arthur R. Miller, et
al., Federal Practice and Procedure § 1381 (3d ed. 2024) (collecting cases).
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ARGUMENT
I.
Benworth FL And Mr. Navarro Are Barred And Precluded From Asserting The
Affirmative Defenses.
A. Benworth FL And Mr. Navarro’s Affirmative Defenses Are Barred Because They
Are Subject To A Binding Arbitration Agreement.
The Federal Arbitration Act (“FAA”) reflects “a strong federal policy favoring arbitration,”
such that “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of
arbitration.’” Álvarez-Maurás, 919 F.3d at 624 n.9 (quoting Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985)). Benworth FL admits that it agreed that “any
dispute between the parties related to the subject matter of this Agreement will be resolved by
binding arbitration.” (See supra at 4 (emphasis added).) Benworth FL’s Affirmative Defenses
“fall within the expansive ambit of this arbitration provision,” and therefore cannot “be pursued
outside the arbitration framework.” Álvarez-Maurás., 919 F.3d at 624 (citing Mitsubishi, 473 U.S.
at 628).
There can be no serious dispute that the Affirmative Defenses are related to the subject
matter of the Agreements. Benworth FL’s unclean hands/set off defense (Second and Fourteenth
Affirmative Defenses) is based on purportedly “missing loan files and fraudulent applications for
PPP loans that Womply referred” to Benworth FL. (Benworth FL’s Answer at 37, 39–40.) This
defense is therefore based on Section 1.1 of the Referral Agreement pursuant to which Womply
referred PPP loan applications to Benworth FL; Section 4.3 of the Referral Agreement under which
Womply is obligated to provide Benworth FL with borrowers’ loan files; and the “API Package”
in the Order Form, including “Business Fraud Analytics” and “Account Verification.” (Referral
Agreement §§ 1.1, 4.3; Order Form at 1.) It also implicates Section 1.2 of the Referral Agreement
and Section 1.1 of the Order Form in which Womply disclaimed the “accuracy, lawfulness, or
completeness of any information accompanying a referral.” (Referral Agreement § 1.2
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(capitalization omitted); Order Form § 1.1 (same); see also id. § 1.2 (disclaiming “responsibility
for the action, errors, or omissions of the third party providers”) (capitalization omitted).)
Benworth’s FL’s second set off defense (Fifteenth Affirmative Defense) is explicitly based
on “Section 2.3 of the Referral Agreement and Section 2.3 of the Order Form.” (Benworth FL’s
Answer at 40.) Thus, even if the SBA were to make some determination regarding Womply’s
fees, the extent to which Benworth FL would have any cause of action against Womply would
have to be resolved in arbitration. And Benworth FL’s public policy defense (Sixteenth
Affirmative Defense) challenges the legality of “the payment of fees under [the] [A]greements.”
(Id. at 40–41.) Because all of Benworth FL’s Affirmative Defenses are “related to the subject
matter of th[e] Agreement[s],” they are subject to the Arbitration Provision and Benworth FL
cannot pursue them in court. See Grand Wireless, Inc. v. Verizon Wireless, Inc., 748 F.3d 1, 4, 8–
9 (1st Cir. 2014) (compelling arbitration based on “broadly worded” arbitration provision
governing “any controversy or claim arising out of or relating to this agreement”) (cleaned up;
collecting cases); see also Ray v. Austin Indus., Inc., 2018 WL 4701375, at *4 (D.S.C. Sept. 29,
2018) (holding that “unclean hands” defense must “be decided by the arbitrator rather than the
court”); Safeguard Props. Mgmt., LLC v. MidFirst Bank, 2017 WL 4541592, at *1–2 (N.D. Ohio
Oct. 11, 2017) (dismissing claims where defendants raised “affirmative defenses” regarding “a
right of setoff” that “are subject to mandatory arbitration”).
Mr. Navarro is likewise bound by the Arbitration Provision, which bars his Affirmative
Defenses. Mr. Navarro admits that he signed the Agreements and that he is Benworth FL’s sole
member. (See supra at 3.) Federal courts routinely “estop a signatory from avoiding arbitration”
where, as here, “the subject matter of the suit is intertwined with the subject matter within the
scope of the arbitration clause.” Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38, 47
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 15 of 23
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(1st Cir. 2008) (cleaned up; collecting cases). At a minimum, Mr. Navarro signed the Agreements
in his capacity as President and/or CEO of Benworth FL. (See supra at 3.) Because a company
can “operate only through the actions of its employees,” it is settled law “founded on general state
law principles of agency,” that “when a principal is bound under the terms of a valid arbitration
clause, its agents, employees, and representatives are also covered under the terms of such
agreements.” Grand Wireless, 748 F.3d at 11 (cleaned up; collecting cases).
B. Benworth FL And Mr. Navarro Are Estopped From Asserting The Affirmative
Defenses.
“Issue preclusion (also called collateral estoppel) prevents a party from relitigating issues
that have been previously adjudicated.” Manganella v. Evanston Ins. Co., 700 F.3d 585, 591 (1st
Cir. 2012) (cleaned up; collecting cases). The doctrine “bar[s] relitigation of an issue decided in
an earlier action where: (1) the issues raised in the two actions are the same; (2) the issue was
actually litigated in the earlier action; (3) the issue was determined by a valid and binding final
judgment; and (4) the determination of the issue was necessary to that judgment.” Id. (collecting
cases). It applies “where the subsequent proceeding involves a cause of action different from the
first” so long as the “issues presented in the two actions are in substance the same.” Id. (cleaned
up; collecting cases). “[F]inal arbitral awards are afforded the same preclusive effects as are prior
court judgments.” Id. (collecting cases). “Under modern preclusion doctrine, the central question
is whether a party has had a full and fair opportunity for judicial resolution of the same issue.” Id.
(cleaned up; collecting cases). All of these requirements are satisfied for each of Benworth FL’s
Affirmative Defenses, which are therefore precluded.
Benworth FL’s unclean hands/set off defense asserts that “the fees Womply seeks from
Benworth FL include fees gained through missing loan files and fraudulent applications for PPP
loans that Womply referred,” for which the SBA may “not buyback these loans,” and “Benworth
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FL will have to refund the principal loan amounts that the Federal Reserve advanced to Benworth
FL.” (Benworth FL’s Answer at 37, 39–40.) Benworth FL made the same Loan File Claim and
Fraudulent Loan Argument in the Arbitration. There, Benworth FL sought a declaratory judgment
requiring Womply to produce borrowers’ loan files, arguing that “if the SBA ultimately does not
buyback these loans, Benworth will have to refund the principal loan amounts that the Federal
Reserve advanced to Benworth for funding PPP loans.” (See supra at 5.) Womply consented to
the declaratory judgment, the Arbitrator ordered Womply to produce such loan files, and Womply
did so. (Id.) Benworth FL also alleged in the Arbitration that Womply referred to Benworth FL
fraudulent applications for PPP loans and this claim was dismissed. (Id.)
Benworth FL’s public policy defense asserts that SBA regulations “provide[] that agents,
including lender service providers, like Womply, are only entitled to fees from lenders in
connection with SBA loans that are owed under agreements that were submitted to and approved
by the SBA,” “Womply acted as an agent and lender service provider under the Parties’
Agreements,” and “[t]he relief Womply seeks here is the payment of fees under agreements that
indisputably were never submitted to or approved by the SBA.” (Benworth FL’s Answer at 40–
41.) Benworth FL made the same Lender Service Provider Argument in the Arbitration. There,
Benworth FL likewise argued that “the parties’ Agreements are not valid under SBA regulations
because Womply was a Lender Service Provider and failed to submit the Agreements to the SBA.”
(Final Award at 41.) The Arbitrator rejected this argument, holding that “Womply was not an
LSP,” and “Benworth has failed to prove that, even if Womply was an LSP, the parties’ failure to
submit the Agreements to the SBA would have rendered the Agreements invalid or void.” (Id. at
44–45, 47.)
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Mr. Navarro is also precluded from asserting the Affirmative Defenses. As discussed
above (see supra Section I.A), Mr. Navarro is the sole member, President, and CEO of Benworth
FL. He is therefore “bound by a judgment in a previous case,” because he is Benworth FL’s
“privy” or agent. Rodríguez García, 610 F.3d at 770–71 (cleaned up; collecting cases). In fact,
Mr. Navarro attended every day of the Hearing and was a key witness. (See Final Award at 24,
29, 37, 39, 48, 50–51 (citing Mr. Navarro’s testimony).) In any event, “[t]here is no longer a strict
mutuality requirement for collateral estoppel,” which precludes Mr. Navarro from relitigating the
same issues that Benworth FL “litigated and lost” in the Arbitration. ACEMLA de P.R., Inc. v.
Banco Popular de P.R., Inc., 2015 WL 10037151, at *4 (D.P.R. Oct. 30, 2015) (citing Rodríguez
García, 610 F.3d at 771).
In sum, “the arbitration presented” Benworth FL and Mr. Navarro with “the full and fair
opportunity for adjudication of the issue[s] at hand,” and “allowing [them] to contest these
questions now would contravene the twin goals of issue preclusion: protecting litigants from the
burden of relitigating settled issues and promoting judicial economy by preventing needless
litigation.” Manganella, 700 F.3d at 594–95 (cleaned up; collecting cases).
II.
Benworth PR and Mrs. Navarro Lack Standing To Assert The Affirmative Defenses.
Under California law, which governs the Agreements, “[s]omeone who is not a party to a
contract has no standing” to “assert any claim concerning the contractual relationship.” Bleavins
v. Demarest, 196 Cal. App. 4th 1533, 1542 (2011) (cleaned up; collecting cases); see also Kalkey
v. Euromodas, Inc., 706 F. Supp. 3d 305, 321 (D.P.R. 2023) (“In general, ex contractu actions can
only be brought by one contracting party against the other. A stranger to the contractual
relationship . . . may demand the fulfillment of a contract successfully only if the contract contains
a stipulation in his favor.”) (cleaned up; collecting cases). Benworth PR and Mrs. Navarro assert
repeatedly that each “was not a party to the Referral Agreement or Order Form” and “was not a
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 18 of 23
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party to the arbitration.” (See, e.g., Benworth PR’s Answer ¶¶ 14–15, 19, 29, 92, 94–123; Mrs.
Navarro’s Answer ¶¶ 14–15, 19, 29, 92, 94–123.) Accordingly, they “have no standing to
challenge the performance” or legality of the Agreements in their Affirmative Defenses. Bleavins,
196 Cal. App. 4th at 1542–43 (cleaned up; collecting cases).
Benworth PR and Mrs. Navarro are trying to have it both ways. They insist that they are
separate from Benworth FL and are not parties to the Agreements (see Benworth PR’s Answer
¶¶ 11, 185–99, 241–55; Mrs. Navarro’s Answer ¶¶ 11, 185–99, 241–55), but also want the benefits
of the Agreements, including “loan files” from Womply pursuant to Section 4.3 of the Referral
Agreement and fee reductions under “Section 2.3 of the Referral Agreement and Section 2.3 of the
Order Form” (Benworth PR’s Answer at 44; Mrs. Navarro’s Answer at 45–46). By seeking to
obtain the benefits of the Agreements, Benworth PR and Mrs. Navarro effectively admit that “[t]he
separation of Benworth FL and Benworth PR as distinct corporate entities is an illusion—they are
effectively the same company,” and Benworth PR and Mrs. Navarro can be held liable under alter
ego, successor liability, and piercing the corporate veil principles. (Am. Compl. ¶¶ 11, 185–99,
241–55.) Thus, even if Benworth PR and Mrs. Navarro have standing to assert the Affirmative
Defenses, those defenses are barred by the Arbitration Provision, which can be “enforced by or
against nonparties to the contracts through assumption, piercing the corporate veil, alter ego,
incorporation by reference, third-party beneficiary theories, waiver and estoppel.” Grand
Wireless, 748 F.3d at 12 (quoting Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009)).
For the same reasons, Benworth PR and Mrs. Navarro’s Affirmative Defenses are also precluded
by the Arbitration. See Taylor v. Sturgell, 553 U.S. 880, 894 (2008) (holding that “nonparty
preclusion may be justified on a variety of pre-existing substantive legal relationships between the
person to be bound and a party to the judgment”) (cleaned up; collecting authority).
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III.
Defendants’ Affirmative Defenses Fail As A Matter Of Law.
Should this Court reach the merits of the Affirmative Defenses (which it should not) they
all fail as a matter of law because they are not valid defenses or they are inadequately pleaded.
First, “the doctrine of unclean hands” is “an equitable remedy that allows a court to refuse
to aid ‘one tainted with inequitableness or bad faith relative to the matter in which he seeks relief.’”
Bryan, 2013 WL 6489785, at *2 (quoting Precision Instrument Mfg. Co. v. Auto. Maint. Mach.
Co., 324 U.S. 806, 814 (1945)). “In order to deny relief to a party because of inequitable conduct,
the conduct at issue must directly affect the claim being brought.” Id. (cleaned up; collecting
cases). Defendants fail to allege that Womply engaged in any “inequitable conduct,” let alone
conduct directly relevant to this action. Rather, Defendants allege that borrowers submitted
“fraudulent applications for PPP loans that Womply referred.” (See supra at 7.) Defendants also
allege that Womply is “missing loan files,” which is at most a breach-of-contract claim under the
Agreements, not “inequitable conduct.”
Moreover, none of Defendants’ allegations “relate[] to the conduct at issue in this
litigation.” Bryan, 2013 WL 6489785, at *3. Womply alleges that Benworth FL fraudulently
transferred funds to Benworth PR to render Benworth FL judgment-proof so Womply could not
collect the Final Award from Benworth FL. (See Am. Compl. ¶¶ 165–204.) The fact that the SBA
may “not buyback” certain Womply-referred loans and Benworth FL may “have to refund the
principal loan amounts that the Federal Reserve advanced to Benworth FL” (see supra at 5) is
“unrelated to the events raised in this case,” so “the unclean hands defense sh[ould] be stricken.”
Bryan, 2013 WL 6489785, at *3.
Second, Defendants cannot repackage the same flawed unclean hands defense as a set off
defense. “The right of setoff (also called ‘offset’) allows parties that owe each other money to
apply their mutual debts against each other thereby avoiding the absurdity of making A pay B
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when B owes A.” Merigan v. Liberty Life Assur. Co. of Boston, 839 F. Supp. 2d 445, 448 (D.
Mass. 2012) (quoting Citizens Bank v. Strumpf, 516 U.S. 16, 18 (1995)). This defense is
inapplicable here because Womply does not owe Defendants any debts. Defendants seek to reduce
the debts Benworth FL owes to Womply based on the additional debts Benworth FL owes to the
Federal Reserve. (See supra at 7.) This is not a valid set off defense; it is a refusal to pay debts.
Third, Defendants’ second set off defense similarly fails because there are no offsetting
debts. Defendants speculate that “[i]f the SBA and/or another governmental agency determines
that the fees Benworth FL paid Womply, in whole or in part, were not in compliance with
applicable SBA and/or PPP Loan Program Requirements, Womply must return those fees to
Benworth FL and any damages awarded to Womply here should therefore be set off by the amount
of fees that Womply is required to return to Benworth FL.” (Id. (emphasis added).) Thus,
Defendants implicitly admit that the SBA has not made any such determination, Womply currently
has no obligation to return any fees to Benworth FL, and therefore there are no offsetting debts.
Finally, Defendants vaguely allege “public policy” (see supra at 8), which is not a valid
defense to any of Womply’s claims. Defendants have simply relabeled Benworth FL’s “illegality”
contract defense from the Arbitration as “public policy,” and copied Benworth FL’s “public
policy” arguments for vacating the Final Award into theirs Answers. (See Final Award at 5, 32–
33, 46; Levy Decl. Ex. C at 62–63; id. Ex. D at 24.) None of this is relevant to whether Benworth
FL fraudulently transferred funds to Benworth PR.
CONCLUSION
For the foregoing reasons, Womply respectfully requests that this Court strike Defendants’
affirmative defenses of unclean hands, set off, and public policy.
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 21 of 23
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Dated: September 9, 2024
Of Counsel
Willkie Farr & Gallagher LLP
By: /s/ Alexander L. Cheney
Alexander L. Cheney (admitted pro hac vice)
333 Bush St
San Francisco, CA 94104
(415) 858-7400
acheney@willkie.com
Stuart R. Lombardi (admitted pro hac vice)
Willkie Farr & Gallagher LLP
787 7th Avenue
New York, NY 10019
(212) 728-8000
slombardi@willkie.com
Joshua S. Levy (admitted pro hac vice)
1875 K Street, N.W.
Washington, D.C. 20006
(202) 303-1000
jlevy@willkie.com
Respectfully submitted,
By: /s/ Alejandro J. Cepeda Diaz
Alejandro J. Cepeda Diaz
USDC-PR 222110
McConnell Valdés LLC
270 Muñoz Rivera Ave.
Hato Rey PR 00918
Tel: (787) 250-5637
Email: ajc@mcvpr.com
Attorneys for Plaintiff and Defendant in
Intervention Oto Analytics, LLC
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 22 of 23
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CERTIFICATE OF SERVICE
The undersigned certifies that on September 9, 2024 the foregoing document was filed with
the Clerk of the Court using CM/ECF, which sent notices to all parties receiving notifications
through the CM/ECF system.
Dated: September 9, 2024
By: /s/ Alejandro J. Cepeda Diaz
Attorney for Plaintiff Oto Analytics, LLC
Case 3:23-cv-01034-GMM Document 162 Filed 09/09/24 Page 23 of 23