Opinion
Index No. 601297-23 Motion Seq. No. 1
07-25-2023
AMANDEEP SINGH, OM VEGETABLE INC. d/b/a BAD ASH FARMERS MARKET, KULJIT KAUR, KAUR FARMS INC., 3350 KAUR FARMS INC., A&S VEGETABLES INC., AMEET PROPERTIES LLC, AMEET FOOD INC., OM LIQUORS INC., and KS VEGETABLES CORP., Plaintiffs, v. THE LCF GROUP, INC. and ANDREW PARKER, Defendants.
Unpublished Opinion
Submission Date: 6/26/23
Present: HON. TIMOTHY S. DRISCOLL Justice.
SHORT FORM ORDER
HON. TIMOTHY S. DRISCOLL J.S.C.
Papers Read on these Motions:
Papers Read on these Motions:Affirmation in Support with Exhibits .................................................................... x
Memorandum of Law in Support ................................................................................................. x
Memorandum of Law in Opposition ............................................................................................ x
Reply Memorandum of Law ......................................................................................................... x
Presently pending before the Court is Defendants' motion for an Order 1) dismissing the action pursuant to CPLR § 3211(a)(1), (5), and (7), and 2) pursuant to CPLR § 3024(b), striking paragraphs eleven through thirty-seven and seventy-seven through eighty from the Amended Complaint. For the following reasons, Defendants' motion to dismiss is granted and motion to strike is denied as moot.
BACKGROUND
A. The Parties' History
The Complaint alleges as follows:
Plaintiffs have been operating a grocery and food retail store ("Store"), which employed approximately forty-six individuals. The Store is owned by Jar 259 Food Corp. ("Jar 259"). Since March 2020, Key Food Stores Co-Operative, Inc. ("Key Food"), the primarily supplier to the Store took over the operations of the Store. On February 14, 2022, Key Food advised that as of February 19, 2022, it would no longer operate the Store.
Since March 2020, Plaintiffs faced financial stress and, out of desperation, turned to merchant cash advance ("MCA") agreements to fund its projects and continued operations. Jar 259, Singh, and Kaur, continued to operate Jar 259's affiliates, Kaur Farms Inc. ("Kaur Farms") and OM Vegetable Inc. ("OM").
During the COVID-19 pandemic, The LCF Group Inc. ("LCF") entered into a separate loan agreements titled "Merchant Agreement" ("MCA Agreements") with 3350 Kaur Farms Inc., OM, and Jar 259 (collectively, "Borrowers") pursuant to which the Borrowers purportedly sold future receipts and became obligated to make daily payments to LCF until a set amount was paid. The MCA Agreements were, in actuality, illegal business loans that were repayable at a criminally usurious interest rate. On February 18, 2022, Jar 259 was forced to file bankruptcy as a direct result of the loans entered into with Defendants.
Andrew Parker ("Parker"), the principal owner and Chief Executive Officer of LCF, cofounded the company in February 2011, primarily functioning as a broker of MCA transactions. Parker became the sole shareholder of LCF in 2015 and has complete decision-making authority over all aspects of LCF's operations. As a broker, LCF, through Parker, originated transactions by matching merchants seeking MCA funding with other MCA funders or investors. At the direction of Parker, LCF expanded its operations to serve as a "direct" funder. Direct funders utilize their own capital to fund merchants and service their own MCA transactions.
In or about 2015, LCF began exploring credit facilities to augment its funding operations. LCF was required to collateralize its transaction via rules designated within the financing agreements. In an interview with DeBanked on March 24, 2022, Robert Kleiber, LCF's new Chief Financial Officer, explained that LCF started out funding on C and D paper, which means issuing credit to borrowers with very bad credit. Klieber explained that LCF had since expanded its funding to A paper. Before merchants started challenging their agreements on usury grounds, LCF admitted on its website that the transactions were "Short Term Business Loans." LCF also posted testimonials on its website calling its product loans.
Parker operates an illegal loansharking Racketeering Influenced and Corrupt Organizations Act ("RICO") enterprise through a series of companies that are either owned or controlled by him (the "Enterprise"). While each entity may maintain separate books and records from each other, Parker and LCF form a cohesive unit to further the goals of the Enterprise. The collection tactics used by Parker demonstrate that the transactions are loans.
The MCA Agreements utilized by the Enterprise and Parker, including those entered into by Plaintiffs, are unconscionable contracts of adhesion that are not negotiated at arms-length. Instead, they contain one-sided terms that prey upon the desperation of small businesses and their individual owners and help conceal the fact that the transactions are really loans. The Complaint provides a list of alleged 1) one-sided terms, and 2) blatantly false statements. Additionally, the MCA Agreements are designed to fail and result in the merchant's default by 1) forcing the merchant to wait until the end of the month before invoking the reconciliation provision, 2) preventing the merchant from obtaining other financing, and 3) requiring the merchant to continuously represent and warrant that there has been no material adverse changes, financial or otherwise, in such condition, operation, or ownership of the merchant.
In direct contravention of New York's strong public policy against penalty provisions, the MCA Agreements 1) require the merchant to sign a confession of judgment entitling the MCA Company to liquidated attorneys' fees based on a percentage of the amount owed rather than a good faith estimate of the attorneys' fees required to file a confession of judgment, 2) accelerate the entire debt upon an event of default, and 3) require the merchant to turn over 100% of all receivables if it misses just one fixed daily payment. To evade state usury laws, the MCA Agreements include a sham reconciliation provision to give the appearance that the loans do not have a definite term. The MCA Agreements falsely represent that the fixed daily payment amount is a good faith estimate of the percentage of receivables purchased. By doing so, the Enterprise ensures that if sales decrease, the required fixed daily payments remain the same. In fact, the fixed daily payment is calculated by dividing the payback amount by the intended duration of the loan. The Enterprise does not have a reconciliation department, does not perform reconciliations, and has never refunded a merchant money as required under their sham reconciliation provision.
The transactions are, in economic reality, loans that are absolutely repayable. The MCA Agreements contain several hallmarks of a loan agreement, as detailed in the Complaint. Usurious intent can be discerned from internal negotiations and underwriting practices. The number of days for payback has no relation to the timing of the percentage of receivables that the MCA Companies were purporting to purchase. Instead of providing reconciliation, troubled merchants are presented with the opportunity to refinance the loan into a new loan, which leads to the merchant paying interest upon interest, resulting in interest rates into the many thousandths percent range. Defendants systemically offer refinancing to address merchant cash flow to reap additional benefits from their high interest loans and avoid any reconciliation. Defendants also consistently describe their products as "loans" in their direct communications with merchants, describe themselves as "lenders," and describe the merchants as "borrowing" funds.
Defendants also require that the merchants execute confessions of judgment that the MCA Companies could file if the merchant fails to make as few as two daily payments under their agreements. Additionally, Defendants engage in other "unscrupulous" behavior toward their merchants, including failing to advance merchants the full amounts provided for in their agreements and charging exorbitant fees for services that are never provided and costs that are never incurred. If the merchant cannot meet the demands, the Enterprise, through one of its MCA Companies-here, LCF-files pre-signed affidavits of confessions, obtains a judgment against the merchant, and aggressively pursues collection enforcement. Many merchants are forced to shut their doors, file for bankruptcy or both, as was the case with the Borrowers in this action.
LCF entered into a total of eight loans with one of the Borrowers. The Third Loan, Fourth Loan, and Seventh Loan are the transactions at issue with respect to damages under RICO. The Fifth Loan, Sixth Loan, and Eighth Loan are the transactions at issue with respect to improper j udgments.
On March 2, 2021, LCF provided a loan to Jar 259 ("First Loan"), which was personally guaranteed by Amandeep Singh ("Singh") and his wife, Kuljit Kaur ("Kaur"). On May 21, 2021, LCF provided a second loan ("Second Loan") to Jar 259, which was also personally guaranteed by Singh, Kaur, and A&S Vegetables Inc. ("A&S"). The details of the First Loan and Second Loan are outlined in the Complaint.
On May 28, 2021, LCF provided a third loan to OM ("Third Loan"), which was personally guaranteed by Jar 259 and A&S. On the face of the agreement, LCF was to advance $200,000 minus $6,430 in fees charged for originating the loan. The payback was $260,000 through 105 fixed daily payments of $2,476.19 per day. The intended interest rate was 71%, not counting fees.
On June 8, 2021, LCF issued a fourth loan ("Fourth Loan") to Kaur Farms, which was also personally guaranteed by Jar 259, A&S, and OM. On the face of the agreement, LCF was to advance $25,000 minus $930 in fees charged for originating the loan. The payback was $36,250 through 105 fixed daily payments of $345.24 per day. The intended interest rate was 107%, not counting fees.
On October 26, 2021, LCF provided a fifth loan to Kaur Farms ("Fifth Loan") that was personally guaranteed by Singh, Kaur, Jar 259, A&S, and OM. The Fifth Loan is the subject of the first improper confession of judgment filed by LCF. On the face of the agreement, LCF was to advance $75,000 minus $3,680 in fees charged for originating the loan. The payback was $108,750 through 120 fixed daily payments of $906.25 per day. The intended interest rate was 104%, not counting fees. As a condition of the loan, LCF required Borrowers to pay off the balance of a prior loan with the proceeds of the Fifth Loan. As a result, Borrowers netted only $66,451.12, resulting in paying interest on interest.
On December 28, 2021, LCF provided a sixth loan ("Sixth Loan") to Jar 259. It was personally guaranteed by A&S, Ameet Properties LLC, 3350 Kaur Farms, Kaur Farms, OM, and Ameet Food Inc. The Sixth Loan is the subject of the second improper confession of judgment filed by LCF. On the face of the agreement, LCF was to advance $300,000 minus $30,430 in fees charged for originating the loan. The payback was $447,000 through 40 fixed daily payments of $11,175 per day. The intended interest rate was 306%. The Sixth Balance Addendum provided that proceeds in the amount of $36,753.90 would be used to pay-off the remaining balance from the previous MCA agreement.
On December 30, 2021, OM entered into a seventh loan ("Seventh Loan") with LCF. It was personally guaranteed by both Jar 259 and A&S. On the face of the agreement, LCF was to advance $250,000 minus $25,430 in fees charged for originating the loan. The payback was $372,500 through thirty fixed daily payments of $12,416.67 per day. The intended interest rate was 408%.
The loan was to be repaid through fixed daily ACH withdrawals in the amount of $12,416.67 ("Daily Payment"), which was disguised as a purported good faith estimate of 15% of Borrowers' daily receivables. The Daily Payment was a sham and was unilaterally dictated by LCF and Parker. The negotiated term of the loan was approximately 41 days. On its face, the loan had an interest rate in excess of 427%. Additionally, Borrowers were required to pay a purported "Origination Fee" as further consideration for making the loan, which was directly withheld from the Purchase Price per Appendix A of the Seventh Loan. The Seventh Balance Addendum provided that proceeds, in the amount of $83,002.84, would be used to payoff the remaining balance from the previous MCA Agreement.
In an attempt to disguise the true nature of these transactions, LCF unilaterally named the amount advanced "Purchase Price," and the amount to be repaid with interest "Purchased Amount." LCF also unilaterally named the fixed daily payment as the "Specific Daily Amount." It also unilaterally pretended that the "Specific Daily Amount" represented an approximation of 15% of the merchant's daily receivables. Each of these terms is a sham. Plaintiff was obligated to repay funds well above the amounts advanced by Defendants.
On January 3, 2022, OM entered into the eighth loan ("Eighth Loan") with LCF. It was personally guaranteed by Jar 259, A&S, 3350 Kaur Farms, Kaur Farms, Ameet Properties, Ameet Food, OM Liquors Inc. ("OM Liquors"), and KS Vegetables Corp. ("KS Vegetables"). The Eighth Loan is the subject of the third improper confession of judgment filed by LCF.
While these Loan Transactions purport to provide for the sale of assets, they are, in fact, loans. The Loan Documents have all the characteristics of a loan and they should be properly characterized as such. The Loan Documents place the obligation on Borrowers and not on any account debtor to repay LCF. The Loan Documents set the sum due not as a percentage of the receipts but as an absolute figure of the specific daily amount regardless of whether any accounts receivable are collectible or not. Stated differently, Borrowers remain liable for the debt and bear the risk of non-payment by the account debtor, while LCF only bears the risk that the account debtor's non-payment will leave the borrower unable to satisfy the loan. The terms and conditions of the Loan Transactions reflect that no sale of receipts ever took place, and the purported form of the transaction was merely a sham to evade applicable usury laws. In reality, the Loan Transactions were loans that charged interest rates that exceeded the maximum 25% permitted under New York law. Taking advantage of the financially distressed conditions in which it found its Borrowers, LCF built a number of unconscionable clauses in the Loan Documents and Loan Transactions, and presented it to Borrowers on a take-it-or-leave-it basis, particularly, the sham reconciliation provisions.
In late December 2021, Borrower's revenue experienced a downturn. Pursuant to the terms of the Loan Documents, Singh reached out to LCF to request a reconciliation. LCF refused Singh's requests. Unable to pursue a reconciliation and with the required payments overwhelmingly exceeding the amount Borrowers could sustain and stay in business, Borrowers became unable to comply with the arbitrary daily payments unilaterally mandated by LCF. In January 2022, the Borrowers informed LCF in writing that they could no longer afford to pay the unlawful terms dictated by LCF. In response, LCF stated that the debt could be paid down through any means, including cash. On January 11, 2022, LCF filed actions seeking confessions of judgment declaring a breach even though revenues declined and LCF refused to honor the reconciliation provisions of the Fifth, Sixth, and Seventh Loans.
Plaintiffs assert the following causes of action: 1) against Parker individually pursuant to 18 U.S.C. § 1962, 2) conspiracy under 18 U.S.C. § 1962(d) against LCF, and 3) vacatur of judgment as against LCF.
B. The Parties' Positions
Defendants argue that the third cause of action must be dismissed. This claim is framed as vacatur of judgment but appears to arise from theories of fraud and usury. Vacatur of a judgment by confession is not a standalone cause of action. Rather, it is the relief that a party seeks if it prevails on a claim that would undermine the judgment by confession. Plaintiffs cannot assert a claim to vacate a judgment by confession on a usury theory. Business entities are barred from asserting usury as the basis of a claim for affirmative relief, and Plaintiffs stand in the shoes of a corporation. Plaintiffs have also failed to allege facts sufficient to state a fraud claim. The crux of Plaintiffs' claim is that they disagree with the legal characterization of the Agreements as a purchase of future receivables, and contend that an affidavit submitted by Parker to the Clerk was fraudulent as a result. Alleged reliance by a third-party-in this case, the Nassau County Clerk-does not establish a fraud claim. Moreover, standing to challenge the papers upon which a judgment by confession is based belongs to third-party creditors of the judgment debtor, not the judgment-debtors. Further, a judgment by confession did not require the Parker Affidavit. The sole function of the Parker Affidavit was to reduce the amount of the judgment by crediting the judgment-debtors with payments made. Plaintiffs' theory also fails because they have not pled any material misrepresentations of fact with particularity.
Defendants further contend that Plaintiffs' claims must be dismissed because the agreements were not loans, much less usurious loans. The transaction was a purchase and sale of future receivables, not a loan subject to usury laws. The Court cannot presume an agreement is void for illegality if it is capable of any interpretation that would be valid and lawful. Moreover, New York Courts have broadly rejected Plaintiffs' theory that purchases and sales of future receivables are disguised loans. Additionally, any contractual provision rendering payment contingent upon factors outside the buyer's control are fatal to a usurious loan claim.
Defendants aver that Plaintiffs' RICO claims must be dismissed because they have not sustained any ripe RICO injuries. Plaintiffs never allege that they actually paid more out of pocket than they physically received on the Agreements. Additionally, the individual Plaintiffs' claims fail because they do not allege that they personally paid anything. Moreover, entry of a judgment against the Plaintiffs is not an out-of-pocket financial loss sufficient to confer RICO standing. Plaintiffs' RICO claims also fail because they have not alleged facts showing that the instant transactions involved interstate commerce. The RICO claims are also barred by res judicata and are improperly contingent upon the success of their third claim.
Defendants argue that Plaintiffs have failed to allege a RICO enterprise. Plaintiffs' only fact allegations pertaining to Parker are that he acts as LCF's CEO and signs affidavits as an officer of the company. Further, to allege a RICO violation, a party must state the existence of a RICO enterprise that is separate and distinct from the RICO person. There are no factual allegations alleging how the actions of the "enterprise" were distinct from LCF Group's corporate actions, or how the "enterprise" was distinct from LCF operating through its officers and attorneys. Even assuming, arguendo, that the distinctness of the person and enterprise could be satisfied, there is nothing in the Complaint suggesting that Parker or anyone else corrupted LCF.
Defendants contend that the second claim for RICO conspiracy also fails because the underlying RICO claim fails. Additionally, Plaintiffs fail to allege that each defendant knowingly agreed to participate in the underlying violation. Moreover, in the context of a RICO conspiracy claim, a corporation cannot conspire with itself or with its own employees or agents. Plaintiffs' RICO conspiracy claim is indistinguishable from their claim under Section 1962(c), except that Plaintiffs have named LCF alongside Parker to circumvent the person-enterprise distinction. Plaintiffs also fail to allege a substantive RICO violation. Finally, the Court should strike scandalous and irrelevant allegations from the Amended Complaint.
In response, Plaintiff argues that the third cause of action is a standalone claim. Defendants have caused improper judgments to be entered against Plaintiffs in direct violation of CPLR § 3218. The affidavits falsely represented that the guarantees were breached by Plaintiffs. The third claim states a cognizable cause of action and is supported by allegations demonstrating that the improper judgments were entered based on false representations made by Defendants through affidavits filed with the Court. Pursuant to CPLR § 5015(a), the court may vacate an order or judgment based upon fraud, misrepresentation, or other misconduct of an adverse party. Here, the Parker affidavits contained falsehoods including an event of default that did not happen and a theory of liability inconsistent with the agreements. Where a false affidavit has been used to obtain a confessed judgment, recourse lies through a plenary action.
Plaintiff contends that the RICO claims are not barred by res judicata, and the third claim is not a disguised usury or fraud claim. A plenary action is the only procedural vehicle for raising defenses to a confessed judgment, and Plaintiffs' ability to raise usury in defense to confessed judgments is well-established and cannot be waived. Usurious contracts are void ab initio, and corporations may invoke usury as a defense to loan enforcement where the rate exceeds the 25% criminal usury rate.
Plaintiffs aver that the totality of the circumstances renders the MCA Agreements loans. The hallmark of a loan is that the lender is absolutely entitled to repayment under all circumstances, which is the case here. Further, the question of unlawful debt is not subject to resolution at the motion to dismiss stage, as usury is a question of fact. In the instant MCA Agreements, the reconciliation provisions are shams, Defendants intended the agreements to have finite terms, the borrowers retained control over the receivables and assumed all risk, and Defendants had full recourse against Plaintiffs under virtually any circumstances, including, indirectly, Jar 259 declaring bankruptcy.
Plaintiffs argue that the Amended Complaint sufficiently pleads a RICO enterprise, conspiracy, and injuries. Plaintiffs allege that LCF exists as a separate and distinct legal entity and can be a RICO enterprise, and Parker is a principal, owner, and CEO of LCF and engaged in unlawful conduct that violates RICO. Plaintiffs allege an abundance of facts demonstrating that Parker was a culpable person separate and distinct from the Enterprise. As to damages, Plaintiffs specifically calculated overpayments for each of the loans and assert additional damages for attorneys' fees and costs associated with the unlawful entry and enforcement of the improper judgments. Plaintiffs also allege that the enterprise's affairs affect interstate commerce insofar as Defendants regularly contract with merchants throughout the United States, communicate with them through emails, and use ACH withdrawals to withdraw funds from bank accounts throughout the country. Finally, the Amended Complaint's allegations should not be stricken, as the allegations Defendants seek to strike demonstrate the unlawful conduct of the enterprise, the RICO conspiracy, and support the interstate commerce engaged in by Defendants.
On reply, Defendants contend that Plaintiffs fail to address the presumptions against their usurious loan allegations or the actual legal standards recited in Defendants' motion to dismiss. The Agreements in this case not only satisfied the three-factor test for dismissal of a usury claim, but they also contained express provisions mandating that all payments to the buyer are conditioned upon the seller actually generating and collecting receivables. That term is independently fatal to Plaintiffs' usury arguments because it mandates that LCF accept the risk of loss. Plaintiffs' denial of the contract's terms go beyond merely disputing labels, as they ask the Court to disregard entire contract provisions because such terms are fatal to their usury theory.
Defendants contend that Plaintiffs' third claim must be dismissed. CPLR § 5015(a) does not govern the vacatur of judgments by confession but rather, governs vacatur of certain judgments and orders and only applies to vacatur of a judgment "on motion." Plaintiffs' allegations largely hinge upon usury but they never dispute that the Second Department has expressly held that they cannot assert usury as the basis for an affirmative claim to vacate a confessed judgment. Plaintiffs also do not dispute that they failed to plead facts establishing a fraud claim.
Defendants argue that Plaintiffs have not sustained any ripe RICO injuries. Plaintiffs do not dispute that they received more money from LCF than they ever paid to or on account of LCF. Plaintiffs argue that the Court should calculate alleged injury as the total amounts purchased by LCF less the total amounts received by Plaintiffs. That theory, however, puts the cart before the horse because a RICO injury is only ripe if the amount actually collected by the buyer is greater than the amount received by the sellers. Additionally, a party alleging legal fees as RICO damages must show that the legal fees were proximately caused by a RICO violation, and they still must have sustained a net loss.
Defendants aver that Plaintiffs' conclusory allegations do not plausibly assert that the transactions involved interstate commerce. Plaintiffs' RICO claims are also barred by res judicata and contingent upon succeeding on their defective claim to vacate the judgment. Plaintiffs have also failed to plead a distinct RICO enterprise. Defendants further note that an officer of a corporation verifying affidavits for the company, as required by the CPLR, does not satisfy the RICO distinctness requirement.
Defendants contend that the second claim for RICO conspiracy fails because Plaintiffs have not identified any non-conclusory factual allegations of conspiracy. Nor have Plaintiffs cited to any binding authority holding that a plaintiff can circumvent the RICO person/enterprise distinctness requirement by pleading that the enterprise entity, LCF, can also be held liable as a conspirator. Plaintiffs also do not dispute that they have failed to plead a pattern of racketeering activity or fraud by wire. Thus, their claim hinges upon the collection of unlawful debt theory, which fails. Finally, the Court should strike the scandalous and irrelevant allegations from the Amended Complaint. The inclusion of material primarily intended to injure, prejudice, or harass another person is not only scandalous, but frivolous.
RULING OF THE COURT
Defendants' motion to dismiss is granted. The central question in this action is whether the parties' MCA Agreements are usurious loans concealed in the sheep's clothing of a purchase of future receivables. That is because Plaintiffs' RICO claim under 18 U.S.C. § 1962(c) is based on the collection of "unlawful debt," which is defined, in relevant part, as "a debt (A) ... which is unenforceable under State or Federal law in whole or in part as to principal or interest because of the laws relating to usury, and (B) which was incurred in connection with . . . the business of lending money or a thing of value at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate." See 18 U.S.C. § 1961(6). Plaintiffs' second cause of action for RICO conspiracy is dependent upon the first cause of action alleging a substantive RICO violation. See Grafstein v. Schwartz, 78 A.D.3d 772, 773 (2d Dept. 2010). Relatedly, the third cause of action alleges that the confessions of judgment should be vacated because the transactions were disguised to conceal that they were, in fact, usurious loans. See Am. Compl. ¶¶ 252-60 (alleging that Parker signed affidavits falsely representing to the Court that the transactions were lawful sales of receivables and "[c]ontrary to the knowing misrepresentations made by LCF, the Loan Transactions between LCF and the Plaintiffs were not a purchase of receivables but, rather, they were disguised as such to conceal the fact that LCF had made criminally usurious loans to Plaintiffs, charging interest at rates in excess of twenty-five (25%) in violation of N.Y. Penal Law § 190.40").
Plaintiffs cannot establish usury, however, because the MCA Agreements are not loans. "The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be." LG Funding LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664, 665 (2d Dept. 2020). In determining whether a transaction constitutes a usurious loan, the court must consider the transaction in its totality, judged by its true character, rather than by the name, color, or form that the parties have seen fit to give it. Id. at 665. The transaction is not a loan unless the principal sum advanced is absolutely repayable. Generally, courts balance three factors in determining whether repayment is absolute or contingent: "1) whether there is a reconciliation provision in the agreement; 2) whether the agreement has a finite term; and 3) whether there is any recourse should the merchant declare bankruptcy." Id. Accord Principis Capital, LLC v. I Do, Inc., 201 A.D.3d 752, 754 (2d Dept. 2022).
The Court will utilize the framework set forth in LG Funding in analyzing whether the MCA Agreements are loans. As to the first factor, each of the MCA Agreements contain an identical reconciliation provision ("Reconciliation Provision") that states:
1.4 Reconciliation of Specific Daily amount. The specific daily amount represents the Specified Percentage of Merchant's future receipts. Merchant may request that Company reconcile Merchant's actual receipts by either crediting or debiting the difference back to or from the Account so that the amount Company debited in the most recent calendar month equaled the Specified Percentage of future receipts that Company collected in that calendar month. Any reconciliation request must be 1. In writing 2. Include a complete copy of Merchant's bank statement for the calendar month at issue and 3. Be sent to Company . . . within 30 days after the last day of the calendar month at issue. It is solely the Merchant's responsibility to send a complete bank statement. Failure to send a written reconciliation request within 45 days of the last day of the calendar month at issue forfeits that month's reconciliation.See MCA Agreements, Am. Compl. at Exhs. L-Q.
Plaintiffs allege that the Third Loan, Fourth Loan, and Seventh Loan are the transactions at issue with respect to damages under RICO, and the Fifth Loan, Sixth Loan, and Eighth Loan are the transactions at issue with respect to improper judgments. See Am. Compl. ¶¶ 120-21. Accordingly, the Court will examine the MCA Agreements that memorialize Plaintiffs' alleged Third through Eighth Loans.
Plaintiffs argue that the Reconciliation Provision is a "sham" in which "Plaintiffs were restricted to making one reconciliation request within 30 days after the last day of the calendar month," asserting that courts have recognized that such limitations render the reconciliation provision useless if the merchant experiences a mid-month decline in revenues. The Court acknowledges that the time limitations in the Reconciliation Provision impose a hardship, but balances that portion of the provision against the fact that the Reconciliation Provision is not discretionary. See, e.g, LG Funding, LLC, 181 A.D.3d at 665 (motion to dismiss affirmative usury defense was denied where, inter alia, the reconciliation provision provided that the funder may, upon the merchant's request, "adjust the amount of any payment due under this [MCA] Agreement at [its] sole discretion and as it deems appropriate"); Davis v. Richmond Capital Group, LLC, 194 A.D.3d 516, 517 (1st Dept. 2021) (plaintiffs alleged that MCA agreements were loans where, inter alia, the reconciliation provisions were discretionary).
As to the second LG Funding factor, the MCA Agreements do not contain a finite term or absolute payment schedule. Rather, the MCA Agreements provide, at Section 1.10, that "[t]here is no interest rate or payment schedule and no time period during which the Purchase Amount must be collected by Company." Plaintiffs' allegation that discovery will confirm that "when the Enterprise is negotiating the terms of an MCA agreement with a merchant, it does so by describing the agreement as having a finite number of days, weeks, or payments, as was the case when negotiating with the respective borrowers here," see Pls. Memo of Law at 16, is conclusory.
With respect to the third LG Funding factor, Section 1.10 of the MCA Agreements states that "Merchant going bankrupt or going out of business, in and of itself, does not constitute a breach of this Agreement." This further weighs against a finding that the agreements are loans. See Unique Funding Solutions LLC v. A-Z Imports Exports LLC, 183 N.Y.S.3d 727 (Sup. Ct. Nassau Cty. 2023) (MCA agreement was not a loan where, inter alia, it listed events of default including suspension, dissolution, or termination of the business, but specifically excluded bankruptcy).
The Court is not persuaded that the Events of Default were defined "so broadly that a default with full recourse could occur under any conceivable circumstance." See Pls. Memo of Law at 18. The MCA Agreements provide, in relevant part:
1.12 Protections Against Default. The following Protections 1 through 8 may be invoked by Company, immediately and without notice to Merchant in the event: (a) Merchant takes any action to discourage the use of electronic check processing that are settled through Processor, or permits any event to occur that could have an
adverse effect on the use, acceptance, or authorization of checks for the purchase of Merchant's services and products including but not limited to direct deposit of any checks into a bank account without scanning into the Company electronic check processor; (b) Merchant changes its arrangements with Processor in any way that is adverse to Company; (c) Merchant changes the electronic check processor through which the Receipts are settled from Processor to another electronic check processor, or permits any event to occur that could cause diversion of any of Merchant's check transactions to another processor; (d) Merchant interrupts the operation of this business (other than adverse weather, natural disasters or acts of God) transfers, moves, sells, disposes, transfers or otherwise conveys its business or assets without (i) the express prior written consent of Company, and (ii) the written agreement of any purchaser or transferee to the assumption of all of Merchant's obligations under this Agreement pursuant to documentation satisfactory to Company; or (e) Merchant takes any action, fails to take any action, or offers any incentive-economic or otherwise-the result of which will be to induce any customer or customer to pay for Merchant's services with any means other than payments, checks, or deposits that are settled through Processor. Any of these events places merchant in default under this Agreement.
Plaintiffs contend that bankruptcy is effectively an event of default because a bankruptcy debtor must cease using its pre-petition accounts, which would block LCF from collecting payments.
Such a reading of Section 1.12, however, conflicts with the express provision in Section 1.10 that bankruptcy or going out of business is not a breach of the agreement. The Court reconciles these provisions by interpreting the agreements to exclude bankruptcy as an event of default. Cf. Moulton Paving, LLC v. Town of Pougkeepsie, 98 A.D.3d 1009, 1012 (2d Dept. 2009) ("[W]here two seemingly conflicting contract provisions reasonably can be reconciled, a court is required to do so and to give both effect") (emphasis in original), quoting LI Equity Network, LLC v. Village in the Woods Owners Corp., 79 A.D.3d 26, 35 (2d Dept. 2010).
The Court notes that Appendix A of the MCA Agreements states that a $2,500 default fee is charged each time the merchant defaults, but that is not dispositive on the central question whether these transactions are loans. Additionally, Plaintiffs' argument that Defendants treated Jar 259's bankruptcy filing as an event of default speaks to a breach of contract, not to the character of the transactions at issue.
In sum, the Court concludes that the MCA Agreements are not loans. To be sure, there are aspects of the transactions that are troubling, particularly the high interest rates alleged by Plaintiffs and the limitations on reconciliation in the MCA Agreements. Indeed, it is not lost on the Court that the Amended Complaint, at its core, presents the subject transactions as a Dickensian web of debt that ultimately resulted in bankruptcy. The Court also notes that several recent federal cases-many of them cited by Plaintiff-have applied what appears to be a heightened level of scrutiny to merchant cash advance agreements. But that is not the law of this state.
Accordingly, unless and until binding precedent provides additional guidance in determining if and when merchant cash advance agreements are disguised loans, the Court must apply controlling New York State case law. Similarly, the Court will follow the weight of the authority of the trial courts-which, as evidenced by Defendants' footnote listing over seventy supporting state court decisions, has largely declined to find agreements for the purchase of future receivables to be loans. As set forth above, the Court has closely considered the transactions in their totality and weighed the LG Funding factors in determining that the monies advanced by LCF were not absolutely repayable.
CONCLUSION
Defendants' motion to dismiss is granted. Settle judgment on ten (10) days' notice.
All matters not decided herein are hereby denied.
This constitutes the decision and order of the Court.