Opinion
Index No. 525411/2023 Motion Seq. Nos. 1 2
01-16-2024
BMF ADVANCE LLC, Plaintiff, v. NICO COMMODITIES LLC / CR&P MERCHANT CORPORATION / UNICO RETAIL LLC / UNICO TRADING LLC / UNITED FUEL SUPPLY CARIBBEAN LLC / THE BLOMFIELD MX RANCH LLC / RCV PETROLEUM LLC and RICCARDO CURCIO VALENTINI, Defendants,
Unpublished Opinion
PRESENT: HON. LEON RUCHELSMAN, Judge.
DECISION AND ORDER
Hon. Leon Ruchelsman J.S.C.
The plaintiff has moved seeking summary judgement pursuant to. CPLR §3212 arguing there are no questions of fact the defendants owe the money sought. The plaintiff has also moved seeking to dismiss defendant's counterclaims. The defendants have opposed the motions. Papers were submitted by the parties and after reviewing all the arguments this court now makes the following determination.
On August 5, 2022, the plaintiff a merchant .cash advance funding provider entered into a contract with defendants who reside in Texas. Pursuant to the agreement the plaintiff purchased 53,476,250 of defendant's future receivable for $2,575,000. The defendants guaranteed the agreement. The plaintiff asserts the defendants stopped remittances in February 2023 and now owe.. $2,237, 949. Further, the plaintiff asserts the defendant breached the agreement by failing to notify plaintiff there would be insufficient funds to satisfy remittances: sought by plaintiff. This action was commenced and now the plaintiff seeks summary judgement arguing there can be no questions of fact the defendants owe: the amount outstanding and judgement should be granted in their favor. The defendants oppose: the motion arguing there are questions of fact which preclude a summary determination at this time.
Conclusions of Law
Where the material facts at issue in a case are in dispute summary judgment cannot be granted (Zuckerman v, City of New York, 49 N.Y.S.2d 557, 427 N.Y.S.2d 595 [1980]). Generally, it is for the jury, the trier of fact to determine the legal cause of any injury, however, where only one conclusion may be drawn from the facts then the question of legal cause may be decided by the trial court as a matter of law (Marino v. Jamison, 189 A.D.3d 1021, 136 N.Y.S.3d 324 [2d Dept., 2021).
The defendants argue the agreement in this case was a usurious loan and thus is unenforceable. In this case, there are no questions of fact the agreement was a cash advance agreement and not a usurious and unenforceable loan. The agreement contained a reconciliation provision which conclusively establish the agreement was not usurious (see, 92 Palm Foods LLC v. Fundamental Capital LLG, 80 Misc.3d 1211(A), 195 N.Y.S.2d 636 [Supreme Court Suffolk County 2023]). The defendants argue the reconciliation provision in the contract was merely illusory and thus not a true reconciliation provision, hence the contract was a loan and was usurious.
It is well settled that if the party that provided the funds is absolutely entitled to repayment in all circumstances then a loan exists, however, if the provider is not absolutely entitled to. repayment then the transaction is not a loan The court must examine whether the plaintiff is absolutely entitled to repayment under all circumstances. Unless a principal sum advanced is repayable absolutely, the transaction is not a loan (LG Funding LLC, v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664, 122 N.Y.S.3d 309 [2d Dept., 2020]). The courts have developed three criteria evaluating whether a particular arrangement is a loan or a merchant case advance. First, whether there is a reconciliation provision, whether the agreement has an indefinite term and lastly, whether the funder has recourse if the merchant declares bankruptcy (Principls Capital LLC, v. I Do Inc., 201 A.D.3d 752, 160 N.Y.S.3d 325 [2d Dept,, 2022]). Thus, a reconciliation provision demonstrates, without any evidence to the contrary that the funder is not "absolutely entitled to repayment under all circumstances" (NY Capital Asset Corp,, v. F & B Fuel Oil Co., Inc., 58 Misc.3d 1229(A), 98 N.Y.S.3d 501 [Westchester County 2018]). As the court there noted "when payment or enforcement rests on a contingency, therefore, the agreement is valid though it provides for a return in excess of the legal rate of interest" (id). In this case the reconciliation provision is mandatory, supporting the simple conclusion the agreement is not a loan (see, Tender Lovinc Care Homes Inc., v. Reliable Fast Cash LLC, 76 Misc.3d 314, 172 N.Y.S.3d 335 [Supreme Court Richmond County 2022]). Specifically, the reconciliation provision in this case states that if no default has occurred then every two weeks "merchant may give notice to BMF to request a decrease in Remittence. The amount shall be decreased if: the amount received by BMF was more than the Purchased Percentage of all revenue of Merchant since the date of this Revenue Purchase Agreement. The Remittence shall be modified to more Closely reflect the Merchant's actual receipts..." (see, Secured Purchase Agreement, ¶1.4 [NYSCEF Doc. No. 2]) .
The defendants argue that reconciliation provision is a sham for three reasons. First, they argue that reconciliation.. is not retroactive, thus, the plaintiff could have recovered far more than they would be entitled without returning any of the excess funds they secured. Second, they argue the original remittance amount was merely a good faith estimate of a percentage of the defendant's receivables and was not based upon any of the defendant's financial information. Lastly, the defendants assert the reconciliation provision is wholly discretionary on the part of the plaintiff rendering it invalid.
In K9 bytes, Inc., v. Arch Capital Funding LLC, 56 Misc.3d 807, 57 N.Y.S.2d 625 [Supreme Court Westchester County 2017] the court explained that a reconciliation provision is designed to permit the merchant to seek an adjustment of the amounts remitted each day. Thus, "if a merchant is doing poorly, the merchant will pay less, and will receive a refund of anything taken by the company exceeding the specified percentage (which often can also be adjusted downward) . If .-the merchant is doing well, it will pay more than the daily amount to reach the specified percentage" (id). Therefore, the possibility of a refund is expressly contemplated within any valid reconciliation provision. Whether a refund was requested and denied in this case does not mean the reconciliation provision was a sham. Indeed, Riccardo Valentini submitted an affidavit and conceded that he requested two reconciliations and that both times the plaintiff acquiesced to the requests. Mr. Valentini's affidavit does not indicate a refund was ever requested. Thus, the actual reduction of daily remittances that were twice approved by the plaintiff surely demonstrates the reconciliation provision was not a sham at all.
Next, there is only one appellate case that held a merchant .agreement was really a loan, based in part, on the fact the daily payment rare did not represent a good faith estimate of receivables (see, Davis v. Richmond Capital Group LLC, 194 A.D.3d 516, 150 N.Y.S.3d 2 [1st Dept., 2021]). In Davis, the court explained a merchant agreement was really a loan for five distinct reasons. First, the reconciliation provision was discretionary, second, the funder refused to permit reconciliation, third, "the selection of daily payment rates that did no.t appear to represent a good, faith estimate, of receivables" (id), fourth, the agreement made rejection of .automated debits on two or three occasions an improper event of default, and lastly, the agreement authorized collection on a personal guaranty in the event of bankruptcy. Thus, based upon that decision the defendants argue the reconciliation provision in this case is a sham because there is no good faith basis the amount taken each day is a good faith estimate of receivables. In truth, there is no way of knowing whether such daily amount represents a good faith estimate of receivables and for that very reason the merchant may reconcile if the .amount taken is too high.. To be sure, such estimate must be based upon the merchant's representations of daily revenue. Any changes in revenue can surely trigger the reconciliation as noted. Moreover, it is unlikely the court in Davis (supra) sought to create a new basis to challenge the reasonableness of a merchant cash agreement, standing alone, on the grounds the amount taken is not correlative to revenue. As noted, that was one reason among five, rendering the agreement problematic in totality (see, Haymount Urgent Care P.C., v. GoFund Advance LLC, 2022 WL 2297768 [S.D.N.Y. 2022]), Thus, this contention, in isolation, is really another way of arguing the funder did not permit, or the: agreement did not allow, reconciliation. However, that claim si. refuted by the facts, as noted, that reconciliation was requested and in fact the daily remittance was reconciled.
Lastly, there is no. basis, to assert the reconciliation provision in this case was discretionary. It is true that discretionary language has been held insufficient to permit reconciliation and consequently those agreements were really loans (see, McNider Marine LLC v. Yellowstone Capital, 2019 N.Y. Misc. LEXIS 6165 [Supreme Court Erie County 2019]). As noted, the language in the agreement in this case states that when the merchant provides notice of a need to adjust the daily remittance "the amount shall be decreased..." (see, Secured Purchase Agreement, ¶1.4 [NYSCEF Doe. No. 2]). That does not demonstrate a discretionary or illusory reconciliation provision.
The agreement states that, if the merchant defaults then the funder may engage in certain protections including the fact that any amount owed will become "due and payable in full immediately" (see, Secured Purchase Agreement, ¶1.12, Protection 1 [NYSCEF Doc. No. 2]). The defendants argue this demonstrates the agreement is really, a loan because it contains a finite term. However, an event of default, which, necessarily implicates, the defendants failure to maintain its: end of the bargain is not dispositive whether the agreement: contains a finite term. Indeed, in Pearl Delta Funding LLC, v. ABC Auto LLC, 78 Misc.3d 1242(A), 188 N.Y.S.3d 915 [Supreme Court Nassau County 2023] the court held that language in agreement that the "Merchant is selling a portion of a future revenue stream to. Purchaser at a discount, not borrowing money from Purchaser; therefore[,] there is no interest rate or payment schedule and no time period during which the Purchased Amount must be collected" demonstrates the agreement does not contain a finite term (id). In this case the agreement similarly states that the "merchant is selling a portion of a future revenue stream to BMF at a discount, not borrowing money from BMP, therefore there is no interest rate or payment schedule and no time period during which the Purchased Amount must be collected by BMF" (see, Secured Purchase Agreement, page 1 [NYSCEF Doc. No. 2]). Thus, clearly, the agreement did not contain a finite term.
Next, the defendants argue that a holistic examination of the agreement demonstrates it functioned as a loan and not as a merchant cash advance. Of course, even if there is technical compliance with the three criteria noted above, an agreement can still be deemed a loan where "[t]he agreement also contains provisions suggesting that [the merchant's] obligation to repay was absolute and not contingent on its actual accounts receivable" (LG Funding LLC, supra). Thus, for the agreement to be considered a merchant cash advance there must be a real risk on the part of the funder that the merchant may have reduced revenues or even no revenue. Cases that have concluded merchant agreements are really loans have all based that conclusion upon the fact the reconciliation provision was virtually impossible to employ, essentially guarantying a recovery of the funds advanced (see, Haymount Urgent Care PC v. GoFuno Advance. LLC, .609 F.Supp.3d 237 [S.D.N.Y. 2022], Lateral Recovery LLC v. Queen Funding LLC, 2022 WL 2829931 [S.D.N.Y. 2022], Fleetwood Services LLC v, Richmond Capital Group LLC, 2023 WL 3882697 [2d Cir. 2023]). As noted, in this case the reconciliation provision is not a sham, rather, it is a valid provision available to the merchant if necessary. Therefore, the above infirmities do not create any questions of fact in this regard.
Further, there are. cases that raise questions whether a merchant agreement may. be, a loan because one or two Instances, where payment is not made requires payment due in full (see, SAM Industries LLC, v. Advantage Platform Services Inc., 80 Misc.3d 1203(A), 194 N.Y.S.3d 464 [Supreme Court, New York County 2023], Davis, supra, Lateral Recovery LLC, supra), The agreement in this case states that an event of default will exist if the merchant "fails to give BMF 24 hours advance notice that there will be insufficient funds, in the account such that the ACH of the remittance amount will not honored by Merchant's bank" (see, Secured Purchase Agreement, ¶3.1. (d) [NYSCEF Doc. No. 2]). However, there are no cases that hold the mere fact an event of default may exist if the bank maintains insufficient funds, standing alone, means the agreement is a loan. This issue is always utilized to buttress, other indicia of a loan, such as an improper reconciliation provision. As noted, in this case the reconciliation provision is proper. Therefore, this event of default, by itself, does not mean the entire agreement was a loan.
The defendants also argue the agreement was both procedurally and substantively unconscionable. There can be no allegations of unconscionability where the parties have previously entered into similar agreements, undermining assertions: of naivete and improper tactics or unreasonable provisions (see, 92 Palm Foods LLC, supra). Moreover, the defendants do not really elaborate or describe the inherent unconsoionability of the agreement other than to note the interest rate is "outrageous" and the "reasonable damages" clause is unconscionable as well (see. Memorandum: in Opposition, page 20 [NYSCEF Doc. No. 46]), Thus, vague or conclusory allegations of unconscionability are insufficient to raise any questions of fact in this regard.
Lastly, it is well .settled that a trial court maintains' broad discretion to deny summary judgement and to afford parties the opportunity to engage in discovery (CPLR §3212(f)). Thus, "the court has discretion, to. deny a motion for summary judgment, or to order a continuance to permit affidavits to be obtained or disclosure to be had, if facts essential to justify opposition to the motion may exist but cannot then be stated. For the court to delay action on the: motion, there must be a likelihood of discovery leading to such evidence. The mere hope that evidence sufficient to defeat the motion may be uncovered during the discovery process is insufficient" (Spatola v. Geico Corp., 5 A.D.3d 469, 773 N.Y.S.2d 111 [2d Dept., 2004]).
The basis seeking- denial so the- parties can engage in discovery all concern the precise amount owed and have nothing to do with questions of fact whether the defendants are liable. Thus, discovery is not a basis to deny summary judgement.
Therefore, based on the: foregoing, the motion seeking summary judgement that money is owed is granted. The precise, amount owed will be determined at a hearing wherein the parties will be afforded an opportunity to present any evidence in support of their positions. In that regard the defendants are entitled to discovery to support their assertions the amount sought is excessive.
The parties will be notified about the time and date of such hearing.
The .motion seeking to dismiss the counterclaims is hereby granted.
So ordered.