Opinion
Index No. 654673/2021
03-30-2022
The HEDAYA CAPITAL GROUP, INC., Plaintiff, v. PARK FALLS INDUSTRIAL MANAGEMENT LLC, Yong Liu, Faith Group Company, Xiaoqing Wu, and Rockway International LLC, Defendants.
Lazarus & Lazarus, P.C., New York, NY (Harlan M. Lazarus of counsel), for plaintiff. Kaufman, Dolowich & Voluck, LLP, Hackensack, NJ (Catherine R. Everett of counsel), for defendants.
Lazarus & Lazarus, P.C., New York, NY (Harlan M. Lazarus of counsel), for plaintiff.
Kaufman, Dolowich & Voluck, LLP, Hackensack, NJ (Catherine R. Everett of counsel), for defendants.
Gerald Lebovits, J.
The following e-filed documents, listed by NYSCEF document number (Motion 001) 5, 6, 7, 8, 9, 10, 13, 14, 15, 16, 17, 18, 19, 20, 21, 24, 25, 26, 27, 28 were read on this motion for SUMMARY JUDGMENT.
In this breach-of-contract action, plaintiff, Hedaya Capital Group, Inc., seeks to collect sums that defendants allegedly owe under the terms of a merchant-cash-advance agreement, often called a "factoring agreement."
Hedaya entered into the factoring agreement with defendant Park Falls Industrial Management LLC. Park Falls's obligations under the agreement were guaranteed by defendants Yong Liu, Xiaoqing Wu, Faith Group Company, and Rockway International LLC. Hedaya alleges that Park Falls defaulted under the agreement. Hedaya claims that given that default, it is entitled to approximately $1.3 million in liquidated damages: The average monthly revenue that Hedaya asserts it derived from the agreement prior to the default (approximately $45,000), multiplied by the number of months remaining in the agreement at the time of default (29).
Hedaya brought this action for that sum (plus interest and attorney fees) against Park Falls as its contractual counterparty and against the other defendants as guarantors. The parties joined issue in the action on October 6, 2021. (See NYSCEF No. 4 [defendants’ answer].) On December 17, 2021—before any conference had been held in the action or any discovery produced—Hedaya brought this motion for summary judgment against the guarantors. (See NYSCEF No. 5.) The motion is denied.
Park Falls itself is currently in bankruptcy. (See NYSCEF Nos. 11-12.)
DISCUSSION
Hedaya contends on this motion that defendants owe it at least $1.3 million in liquidated damages under the terms of its factoring agreement with Park Falls. But Hedaya has not established on this record that it is entitled as a matter of law to judgment for that sum, for five independent reasons.
Hedaya states in its motion papers that although it is entitled under the agreement to payment of twice the product of its average monthly revenue times the number of remaining months—i.e. , more than $2.6 million—it is currently only seeking that product itself (which Hedaya refers to as the "Outstanding Balance"). (NYSCEF No. 6 at 521-25 [affidavit of Ezra Hedaya]; see also id. at 34 20 [b] [factoring agreement].)
This court does not agree with defendants’ argument that the action as a whole should be stayed based on the pendency of Park Falls's bankruptcy proceeding. (See NYSCEF No. 16 at40-41.) As Hedaya contends, the guarantors’ liability under their guarantees—and its right to enforce that liability in this action—is not affected by Park Falls's bankruptcy. (See Fleet Natl. Bank v Marrazzo , 23 AD3d 337, 338 [2d Dept 2005].) It is also premature to stay this action based merely on the potential for double recovery—particularly since it is not clear that the guarantors can raise any recovery by Hedaya in the bankruptcy proceeding as a defense or offset to its claims against them here. (See NYSCEF No. 6 at 40 1 [scope of guarantor's liability under the guarantee, and waivers of defenses].)
First , Hedaya's complaint and opening motion papers omit an exhibit to the factoring agreement that supplies material terms of that agreement. Second , even if this court were to consider the version of the exhibit that Hedaya submits on reply, Hedaya has not demonstrated that this document is the final, operative version of the exhibit. Third , and relatedly, the version of the contractual exhibit submitted on reply itself lacks a crucial provision that the factoring agreement describes it as containing—a provision underlying at least 50% of the total sum claimed in this action. Fourth , even if this court were to overlook these shortcomings in Hedaya's legal arguments supporting its contractual claims to liquidated damages, it has not made out a prima facie showing as a factual matter that it is entitled to the claimed damages. Fifth , all else aside, defendants have not yet had an opportunity to obtain any discovery, rendering this motion premature under CPLR 3212 (f).
I. Hedaya's Failure to Establish All Material Terms of the Parties’ Agreement
A. The Missing Term Sheet
Hedaya's complaint and summary-judgment motion both rely on—and attach copies of—the underlying factoring agreement with Park Falls. The factoring agreement, in turn, repeatedly incorporates by reference provisions set forth on a "Term Sheet" that is putatively "attached hereto as Exhibit A." (See Summons & Complaint, NYSCEF No. 1, Exhibit 1 at 1 ["Term Sheet"].) Thus, for example, the factoring agreement states that the term sheet sets forth (i) covenants that Park Falls must satisfy under the agreement; (ii) the agreement's end date; (iii) the commission and other fees to which Hedaya is entitled on each receivable that it purchased from Park Falls (and a minimum monthly commission); (iv) the discount at which Park Falls could obtain cash advances from Hedaya on purchased receivables; (v) the total amount in advances that Park Falls could obtain; (vi) the percentage fee if Park Falls obtains an excessive advance; (vii) the interest owed by Park Falls on outstanding balances under the agreement; and (viii) part of the basis for calculating the amount of liquidated damages owed by Park Falls in the event of default. (See NYSCEF No. 1 at Exhibit 114 [a]-[b], 1 ["Contract Period"], 7 [a] and [e], 6 [a]-[b], 7[c], 8 [a], 20 [b].)
The difficulty for Hedaya is that the versions of the factoring agreement provided in its complaint and its opening papers on summary judgment do not attach the term sheet. (See NYSCEF No. 1 at 11-31; NYSCEF No. 6 at 18-38.) Absent the term sheet, this court has no way to assess the scope of Park Falls's obligations under the agreement, or the amount in liquidated damages that Hedaya might be entitled to in the event of a default on those obligations.
The calculations underlying Hedaya's claimed damages are premised on Park Falls having defaulted under the agreement in May 2021 (thus triggering the agreement's liquidated-damages provision), as set forth in a notice of default that is putatively attached to the complaint. (See NYSCEF No. 1 at21-25; NYSCEF No. 6 at17-22 [client affidavit]; NYSCEF No. 8 at10-15 [statement of material facts]; NYSCEF No. 6 at 76 ["Park Falls Industrial Management LLC Balance Calculation"].) But the notice of default is not attached to the complaint or Hedaya's opening motion papers, either.
Hedaya does not dispute that the term sheet is a necessary element of its contract claims. Indeed, shortly after defendants filed their opposition, Hedaya filed what it referred to as a "Corrected Exhibit 1 to the Complaint," which appends to the factoring agreement correspondence between the parties that includes a document entitled "Term Sheet for Factoring Facility." (See NYSCEF Dkt. Entry 22; NYSCEF Doc. No. 22 at 22-31.) Hedaya's reply papers on this motion both include and rely upon these documents. (See NYSCEF Nos. 26-28.)
Hedaya also filed a "Corrected Exhibit 3 to the Complaint," which includes a May 14, 2021, notice of default and demand for payment, along with various proofs of mailing. (See NYSCEF Dkt Entry No. 23; NYSCEF Doc. No. 23.)
Hedaya's attempt to remedy the deficiencies in its motion papers is unavailing. A party moving for summary judgment cannot satisfy its prima facie burden through evidentiary material submitted for the first time on reply. (See Anderson & Anderson LLP-Guangzhou v North Am. Foreign Trading Corp. , 165 AD3d 511, 514 [1st Dept 2018], citing L'Aquila Realty, LLC v Jalyng Food Corp. , 103 AD3d 692 [2d Dept 2013].)
Given that plaintiff did not seek leave to amend its complaint to include the previously omitted documents, Hedaya's reliance on these documents in reply is akin to seeking summary judgment for an unpleaded claim. This court may not grant summary judgment on an unpleaded claim if the opposing party was misled to its prejudice. (See Weinstock v Handler , 254 AD2d 165, 166 [1st Dept 1998].) The absence of the documents in question from Hedaya's complaint and opening papers on this motion prejudiced defendants by depriving them of the opportunity to address the documents in opposing summary judgment.
B. The Missing Proof that the Belatedly Submitted Term Sheet is Final
Even if this court were to consider this term-sheet-related evidence, the belatedly submitted documents would not remedy the shortcomings in Hedaya's proof with respect to the material terms of the parties’ agreement.
Hedaya has not shown that the term sheet submitted on reply is the final, operative version of that document. The factoring agreement, executed on October 8 and October 9, 2020, states that the term sheet is "attached hereto as Exhibit A." (NYSCEF No. 22 at 2.) As submitted by Hedaya on this motion, the term sheet, signed by Park Falls on September 21, 2020, is not appended directly to the factoring agreement. Instead, it follows a September 18, 2020, letter from Hedaya to Park Falls, stating that Hedaya "would be willing to consider an accounts receivable factoring facility on the terms set forth in the attached term sheet." (NYSCEF No. 22 at 22.) The September 18 letter cautions in bold, though, that "this letter and the attached term sheet are intended to serve only as a framework for discussion" and that the term sheet is only "an outline of material terms"; and it states that the "definitive documentation" of an agreement between the parties "will include, in addition to the provisions outlined in the term sheet," provisions that "in our opinion[ ] are customary and typical for this type of transaction." (Id. [bolding omitted].) And Hedaya's reply papers do not explain why the proffered term sheet, if final, was not attached to the factoring agreement as stated in that agreement, nor executed at the same time as the other contractual documents.
C. The Terms that are Still Missing from the Belatedly Submitted Term Sheet
More fundamentally, the term sheet signed on September 21 is missing provisions that are key to Hedaya's liquidated-damages claim. As noted above, the factoring agreement provides that Hedaya may, on request, provide Park Falls with cash advances on Park Falls receivables purchased by Hedaya (NYSCEF No. 22 at 6 [ 6 [a]]; that the aggregate amount of all advances "at any one time outstanding shall in no event exceed the Facility Amount specified in the term sheet" (id. ); that if the aggregate advance amount does exceed the Facility Amount, Park Falls will owe interest on this "Overadvance" at a rate "specified in the Term Sheet as the Overadvance Interest Rate" (id. at 6 [b]); and that Park Falls also must pay an "Overadvance Fee" that is "equal to the percentage specified in the Term Sheet" (id. at 7 [c]).
These provisions matter greatly for Hedaya's damages claim. According to Hedaya's one-page damages calculation (see NYSCEF No. 6 at 76), overadvance fees made up nearly half of the average monthly revenue that it realized from the agreement prior to Park Falls's default—the figure that Hedaya then used to determine its total liquidated damages under 20 [b] of the factoring agreement (see NYSCEF No. 22 at 17). Taking into account overadvance-based interest as well, lost revenue from overadvances constitutes, in practice, more than half of Hedaya's claimed $1.3 million in damages.
Hedaya's one-page damages calculations state that "Interest" makes up another 20% of its average monthly revenue pre-default. (See NYSCEF No. 6 at 76.) Hedaya's damages calculations do not break out the different categories of interest that might accrue under the agreement—itself a shortcoming of movant's proof. Regardless, though, overadvance interest would need to compose only a tiny proportion of total interest for overadvance-related revenue to exceed 50% of Hedaya's total pre-default revenue. (See id. )
Park Falls only owes overadvance fees and interest once the aggregate cash-advance amount exceeds the specified "Facility Amount." Knowing that amount is therefore necessary to understand the basis for (and calculations of) Hedaya's claimed damages. But the term sheet submitted by Hedaya on reply does not include a Facility Amount (or, for that matter, an Overadvance Interest Rate). (See NYSCEF No. 22 at 24-25.) Thus, even if this court were to consider the term sheet and treat it as an operative provision of the parties’ factoring agreement, it still would not establish prima facie the necessary legal basis for Hedaya's damages claim.
II. Hedaya's Failure to Support its Claimed Damages Figure
Hedaya's papers do not establish prima facie the factual basis for its damages claim, either. As noted above, Hedaya relies primarily on a one-page calculation of its damages (seemingly drawn from a spreadsheet program). (See NYSCEF No. 6 at 522-24 [affidavit of Ezra Hedaya]; id. at 76 [damages calculation].) But the figures set forth on that page (which, in addition to overadvance, or "OA Fees," include amounts in "Interest" and "Other Charges") are neither explained nor documented in Hedaya's opening or reply papers. Given the complexity of the numerous contractual provisions under which Hedaya is entitled for different reasons to payment from defendants, this showing is not sufficient.
Defendants’ opposition papers challenge the probative value of Hedaya's one-page damages calculation. (See NYSCEF Nos. 16 at18-33 [attorney affirmation]; NYSCEF No. 14 [accountant's affidavit].) On reply, Hedaya submits an affidavit from the executive who performed the damages calculations (see NYSCEF No. 27 [affidavit of Jack Hedaya].) That affidavit says only that the affiant calculated the damages owed by "multiplying the average of seven months of commissions ($10,851.40), interest ($9,266.94), fees ($22,266.74) and other charges ($2,647.74) due to Hedaya pursuant to Section 7, 8 and 9 of the Factoring Agreement and the Term Sheet" prior to the default by the number of months remaining under the agreement. (Id. at 25.) The affidavit does not, however, explain where those numbers came from.
This affidavit does attach what appear to be additional screenshots from Hedaya's record-keeping programs, reflecting the various sources of Hedaya's revenue (or balances owed by Park Falls) under the factoring agreement. (See NYSCEF No. 27 at 5-7.) But those different categories of revenue (or monies owed) are not self-explanatory. Nor, in any event, does the affidavit identify or supply the documents or information underlying the categories that appear in the proffered screenshots.
Hedaya also provides a number of what appear to be account statements for Park Falls generated by Hedaya's recordkeeping software, contending that these statements are prima facie evidence of Park Falls's obligations under the agreement. (See NYSCEF No. 6 at 77-84.) Neither the Ezra Hedaya nor Jack Hedaya affidavits explain those statements (or how they are generated), however. Additionally, Hedaya's claimed liquidated damages are based on what it represents to have been a monthly average of the revenue that it earned between October 2020 and mid-May 2021. But the account statements only cover January through May 2021. (See NYSCEF No. 6 at 78-84.)
Additionally, the factoring agreement deems account statements to be prima facie evidence only if they are sent by Hedaya to Park Falls and retained for 30 days without objection. (See NYSCEF No. 6 at 224 [a] [factoring agreement].) Beyond conclusory statements in Ezra Hedaya's opening and reply affidavits (see id. at 526; NYSCEF No. 26 at 10), there is no evidence—whether on the face of the account statements themselves or elsewhere—that the statements were ever sent to Park Falls. On reply, Ezra Hedaya also states for the first time that the monthly statements were "available to Park Falls through an online portal." (NYSCEF No. 26 at 11.) But he does not provide any details or supporting documentation for the existence of that portal—not even a screenshot. Nor does Hedaya provide legal arguments for why the availability of statements through a website is sufficient to satisfy the requirements of § 4 (a) of the agreement.
III. The Absence of Discovery
Beyond the legal and factual shortcomings of Hedaya's motion papers, summary judgment is denied for the further reason that no discovery has yet occurred in this action, rendering Hedaya's motion premature. (See CPLR 3212 [f].) Hedaya does not attempt to rebut defendants’ argument on this point. (See NYSCEF No. 16 at 38.)
Given this court's disposition of the motion on these five independent grounds, the court does not reach defendants’ argument that the claimed liquidated damages are an unenforceable penalty. Nor does this court consider whether granting the claimed liquidated damages would be the functional equivalent of awarding usurious interest on a loan.
A guarantor's liability "may be broader than and exceed the scope of that of the principal," should the guarantee waive the guarantor's right to raise defenses that the principal could have asserted. (Raven Elevator Corp. v Finkelstein , 223 AD2d 378, 378 [1st Dept 1996].) This court need not, and does not, decide whether the language of the guarantees forecloses the guarantors from challenging plaintiff's liquidated-damages claim as asserted against them—whether on the grounds that the claimed damages are a penalty or that they constitute usurious interest.
Accordingly, for the foregoing reasons, it is
ORDERED that Hedaya's motion for summary judgment under CPLR 3212 is denied.