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Yellowstone Capital v Central USA Wireless

August 11, 2018 | Legal Decisions by State, New York

Numerous New York Courts have reviewed the provisions of agreements structured almost exactly as the agreement at issue in this case, and have uniformly held that such agreements are not usurious. The reasoning of all of these cases applies equally to the present dispute. The merchant agreement is not a loan, and the usury statutes do not apply (see also, Champion Auto Sales, LLC, supra.  Volunteer Pharmacy is a decision from a trial court in Westchester County that not only represents the quintessential outlier, but is not controlling or precedential case law, and is not even settled case law.

Supreme Court, Erie County
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Decided on June 25, 2018
Supreme Court, Erie County

Yellowstone Capital LLC, Plaintiff,

against

Central USA Wireless LLC d/b/a CENTRAL USA WIRELESS AND CHRISTOPHER R. HILDENBRANT, Defendants.

811837/2017

HODGSON RUSS, LLP

Steven W. Wells, Esq., Of Counsel

Christopher Castro, Esq., Of Counsel

Attorneys for Plaintiff

LAW OFFICE OF LEWIS A. BARTELL

Lewis A. Bartell, Esq., Of Counsel

Attorneys for Defendant
Timothy J. Walker, J.

Defendants have moved, pursuant to CPLR 5015, to vacate a certain Confession of Judgment, void certain merchant agreements, and enjoin any prosecution thereon. Defendants' arguments (that the transactions effectuated by the merchant agreements at issue are actually loans) have been submitted time and time again to a plethora of New York Courts, and have almost uniformly been rejected. Indeed, as this Court has previously determined in similar matters, the merchant agreements are, in fact, business contracts that are entered into between sophisticated business parties, which clearly reflect the purchase of a certain percentage of a merchant's total future accounts receivable, up to a certain amount, for a specified purchase price. The terms of these merchant agreements are abundantly clear and, in most cases, these arrangements allow merchants to survive a period of cashflow shortage.

Equally important, every posited argument in support of Defendants' motion has already been considered and rejected numerous times by the trial courts of the State of New York. Additionally, there is clear Appellate Division case law determining that judgment debtors (such as Defendants) cannot challenge judgments entered against them by confession unless they are defective on their face, were entered without authority or in violation of its terms, were procured in violation of any due process requirements, or were the result of fraud - none of which are present in this case (see Summerour, Inc. v. Bradhil Industries Inc., 91 AD2d 902, 902 [1st Dept. 1983]).

Courts across the state have considered almost identical arguments and agreements, and have (almost uniformly) denied motions to vacate on the grounds that (1) a judgment debtor must commence a plenary action, rather than a motion, if it seeks to challenge the merchant agreement and the confession of judgment that was entered against it; and/or (2) that the merchant agreements do not constitute loans subject to the usury laws (see, e.g., EBF Partners, LLC v. Kevin R. Hackenberg d/b/a Nu Wave Botanicals and Kevin Hackenberg, Index No. 802383/2017 [Erie Co. June 30, 2017]; Yellowstone Capital, LLC v. Jevin, Index No. 802457/2017 [October 6, 2017]).

There have been over twenty-eight (28) recent cases where New York State Courts considered substantially similar motions, involving substantially similar merchant agreements, and almost all of those courts denied the relief, at least in part, because a judgment debtor may not seek to invalidate a confession of judgment entered against the judgment debtor on the grounds that it resulted from a usurious loan by way of motion (see NYSCEF DOC. NO. 30). In no less than thirty-eight (38) recent decisions, New York Courts have determined that the merchant agreements at issue (which are all substantially or exactly the same as the merchant agreement at issue here) do not constitute loans (see NYSCEF DOC. NO. 30; see also Champion Auto Sales, LLC et al. V. Pearl Beta Funding, LLC, 159 AD3d 507 [1st Dept. 2018] [wherein the court determined that "the underlying agreement lending to the judgment by confession was not a usurious transaction"]). The merchant agreement at issue in Champion Auto is substantially similar to the merchant agreement in this case. Because there are no other Appellate Division decisions directly on point, the Champion Auto decision is binding on this Court (Phelps v. Phelps 128 AD3d 1545, 1547 [4th Dept. 2015]).

In addition, CPLR 3218(a) provides that: "a judgment by confession may be entered, without an action, either for money due or to become due...upon an affidavit executed by the [confessing party]." The affidavit of confession "is sufficient if it adequately sets out the facts giving rise to the underlying debt..." (Spires v. Mihou, 273 AD2d 844 [4th Dept. 2000]). This sufficiency requirement exists to protect third parties, i.e., creditors of the confessing party, who would be injured by a collusively obtained confession (Eurofactors Int'l, Inc. v. Jacobowitz, 21 AD2d 443, 445 [2nd Dept. 2005]). Furthermore, courts will enforce a confession of judgment supported by consideration "irrespective of the alleged manner in which the underlying guarantee was procured" (Demchuk v. North Fork Bank & Trust Co., 121 AD2d 680, 680 [2nd Dept. 1986]). Courts will set aside a judgment by confession only where the party challenging the confession demonstrates "by a preponderance of clear, positive and satisfactory evidence... fraud, misconduct or other [similar] circumstances..." (City of Poughkeepsie v. Albano, 122 AD2d 14, 14-15 [2nd Dept. 1986]). Critically, "only a third-party judgment creditor has standing to question on motion the validity of a judgment by confession ... [whereas] a defendant debtor who seeks to attack such a judgment must proceed by plenary action" (Id. at 14) emphasis added; see also Bufkor, Inc. v. Wasson & Fried, Inc., 33 AD2d 636, 636 [4th Dept. 1969] [reversing the [*3]Trial Court's decision to vacate a judgment by confession on motion and holding that a plenary trial was required]).

In this case, the Confession of Judgment unequivocally complies with CPLR § 3218: (1) It states the sum for which judgment may be entered; (2) It authorizes the entry of judgment in Erie County and others; (3) It states concisely the facts out of which the debt arose and showed that the sum confessed is justly due, and (4) It is supported by an affidavit setting forth the default that was the basis for filing the Confession of Judgment.

Counsel for merchants filing these types of motions have previously, almost exclusively, cited the decision in Merchant Funding Services, LLC v. Volunteer Pharmacy, Inc., 55 Misc 3d 316 [Westchester Co. Dec. 30, 2016] as the basis for attempting to use motion practice to vacate confessions of judgment. Volunteer Pharmacy is a decision from a trial court in Westchester County that not only represents the quintessential outlier, but is not controlling or precedential case law, and is not even settled case law (as it is the subject of an appeal to the Second Department). Indeed, the Second Department has consistently held that a confession of judgment can only be vacated by a plenary action (see Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 [2nd Dept. 2012]; Estate of Zelman v. Scibelli, 157 AD2d 705 [2nd Dept. 1990]; A.B.J.M. Corp. v. Prudenti, 270 AD2d 219 [2nd Dept. 2000]; and City of Poughkeepsie, 122 AD2d at 14). Hence, the decision in Volunteer Pharmacy, is a ruling on a procedural issue, and is no more "binding" on Plaintiff than it is on this Court.

Moreover, in Merchant Funding Services, LLC v. Micromanos Corporation et al., (Index No. EF000598-2017), this Court analyzed the same merchant agreement as did the court in Volunteer Pharmacy, and came to a completely opposite conclusion: "Defendants' position is grounded on a dubious misreading of the [Merchant] Agreement." This Court dismissed the defendants' bases for claiming that the merchant agreement resulted in a loan (which are substantially the same bases asserted in the Motion for Defendants' claim that the YSC Merchant Agreement creates a loan), and ruled as follows:

Therefore, the Secured Merchant Agreement is not on its face and as a matter of law a criminally usurious loan. Consequently, Defendants have failed to establish an exception to the general requirement that relief from a judgment entered against them upon the filing of an affidavit of confession of judgment must be sought by way of a separate plenary action.

Micromanos at p. 5.

Thus, Defendants lack standing to challenge the Judgment by way of motion practice and may only seek to have it vacated in a plenary action. There is no such action pending in Erie County, or anywhere else in New York. Defendants' Motion is denied for this threshold reason.

Assuming arguendo, if Defendants had standing, the merchant agreement does not create a usurious loan. Instead, as expressly provided in the agreement, the transaction is a purchase of a specified percentage of all future receipts generated by the merchant's accounts receivable, up to the "Purchased Amount".

"Usury is an affirmative defense, and a heavy burden rests upon the party seeking to impeach a transaction based upon usury" (Hochman v. Larea, 14 AD3d 653, 654 [2nd Dept. 2005] [internal citations omitted]). "Thus, usury must be proved by clear and convincing evidence as to all its elements and usury will not be presumed" ( Id.) "There is a strong presumption against the finding of usury" (Transmedia Rest. Co., Inc. v. 33 E. 61 Street Rest. Corp., 184 Misc 2d 706, 710, 710 [Sup. Ct. NY Co. 2000]). The only "proof" that Defendants submit in support of their usury claim are self-serving misconstructions of cherry-picked provisions of the merchant agreement, and an outright disregard for contrary provisions contained in that document.

Criminal usury requires a loan. Pursuant to New York Penal Law § 190.40, the statute relied upon by Defendants, a person commits criminal usury where he "knowingly charges, takes or receives interest on a loan or forbearance of any money or other property, at a rate exceeding twenty-five percent per annum." Thus, the statute requires a "loan," payment of "interest," and intent (Accord, Seidel v. E. 17th Street Owners, Inc., 79 NY2d 735, 744 [1992] ["If the transaction is not a loan, there can be no usury, however unconscionable the contract may be"]). "In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow money upon the usurious terms dictated by the lender" (Donatelli v. Siskind, 170 AD2d 433, 434 [2nd Dept. 1991]).

"[A] primary indicia of usury is repayment of the principal sum advanced absolutely" (see Merchants Advance, LLC v. Tera K, LLC T/A Tribeca Frank Crabetta, 2008 NY Misc. LEXIS 10889, at p. * 4 [Sup. Ct. NY Co. Dec. 19, 2008]). This is a strict and inflexible requirement (see Zoo Holdings, LLC v. Clinton, 11 Misc 3d 1051(A), 814 NYS 2d 893, at p. * 4 [Sup. Ct. NY Co. Jan. 24, 2006]). "Where payment or enforcement rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest" (Prof'l Merch. Advance Capital, LLC v. Your Trading Room, LLC, 2012 NY Misc. LEXIS 6757, at pp. *13-14 [Sup. Ct. Suffolk Co. Nov. 28, 2012]); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 35 Misc 3d 1205(A) [Sup. Ct., Suffolk Co., 2012]; O'Farrell v. Martin, 163 Misc.353 [City Ct., NY 1936]). In this case, payment of the "Purchased Amount" is contingent upon the merchant generating sufficient accounts receivable such that the "Specified Percentage" of those receivables will support payment of the Purchased Amount over a reasonable period of time, and, therefore, the payment is not absolutely payable.

Numerous courts — at least thirty-eight (38) — have reviewed the provisions of merchant agreements structured almost exactly as the agreement at issue in this case, and uniformly held that such agreements are not usurious (see NYSCEF DOC. NO. 31). Recently, my colleague (Hon. Henry Nowak, J.S.C.) issued a decision in Yellowstone Capital, involving a challenge to a merchant agreement on the grounds that it was criminally usurious. Justice Nowak's analysis focused on whether "the agreement was actually a purchase for accounts receivables [or] a loan with a usurious interest rate. . . ." Justice Nowak noted that:  A distinguishing factor between a purchase of accounts receivable and a loan is the burden [*4]of risk and the contingency of repayment. In a purchase of accounts receivable, repayment is for an indefinite term, contingent on the amount of accounts receivable. Thus, the lender bares the risk that there could be no or low daily receipts. However, if the lender holds only a loan, repayment is absolute and the merchant bears the risk of non-payment by the account debtor; while the lender only bears the risk that the account debtor's non-payment will leave the merchant unable to satisfy the loan.

Recognizing that the agreement at issue had a reconciliation clause, Justice Nowak determined that New York Courts have found that the presence of a reconciliation provision such as the one in this matter is a significant factor in determining that the agreement should be characterized as a purchase of accounts receivables as opposed to a loan." He distinguished the cases relied upon by the merchant there — the same cases relied upon by Defendants in this case — Merchant Funding Services, LLC v. Volunteer Pharmacy Inc., 55 Misc 3d 316, 318 [Sup. Ct. Westchester Co. 2016] and Pearl Capital Rivis Ventures v. RDN Construction, 54 Misc 3d 470, 474 [Sup. Ct. Westchester Co. 2016]), "because there was no evidence that the agreements at issue included reconciliation provisions. Accordingly, the court held that the merchants had "not demonstrated that the agreement is a usurious loan in violation of Penal Law § 190.40. (Id.)

Numerous New York Courts have reviewed the provisions of agreements structured almost exactly as the agreement at issue in this case, and have uniformly held that such agreements are not usurious. The reasoning of all of these cases applies equally to the present dispute. The merchant agreement is not a loan, and the usury statutes do not apply (see also, Champion Auto Sales, LLC, supra.

It is abundantly clear that the "Daily Payment," both in its initial calculation, based upon Plaintiff's review of Defendants' past performance, and any adjustment based upon the reconciliation provisions is directly based upon the Specified Percentage of accounts receivable Plaintiff purchased. That is clearly not how a loan is structured.

Defendants never requested that a reconciliation be conducted. Instead, Defendants ceased remitting Daily Payments after remitting only $20,982.00 of the $80,245.00 in accounts receivable Plaintiff purchased.

For the reasons set forth above, the Motion is denied as a matter of law. In addition, the Court determines, in light of the history of these litigated matters and known binding precedent, Plaintiff is entitled to recover reasonable attorneys' fees and costs incurred in defending the Motion, subject to the submission of an affirmation setting forth the time detail with narratives.

Dated: June 25, 2018

Buffalo, New York

_____________________________________

HON. TIMOTHY J. WALKER, J.C.C.

Acting Supreme Court Justice

8th Judicial District

Cash & Carry Filing LLC v Perveez

August 11, 2018 | Legal Decisions by State, New York

Defendants (borrowers) may challenge the judgment by confession only by trial in a plenary action, and not by motion. Moreover, defendants lack standing to challenge the affidavit of confession of judgment. An affidavit of confession of judgment pursuant to CPLR 3218 “is intended to protect creditors of a defendant,” not the defendant itself.

Supreme Court, New York County
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Cash & Carry Filing Serv., LLC v Perveez 2017 NY Slip Op 03047 Decided on April 20, 2017 Appellate Division, First Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on April 20, 2017
Acosta, J.P., Richter, Andrias, Kahn, Gesmer, JJ.
3593 154341/15

[*1]Cash and Carry Filing Service, LLC, Plaintiff-Respondent,

v

Rehan Perveez, et al., Defendants-Appellants.

Lawrence G. Nusbaum, Jr., New Rochelle, for appellants.

Newman Law, P.C., Cedarhurst (Evan M. Newman of counsel), for respondent.

 

Order, Supreme Court, New York County (Manuel J. Mendez, J.), entered on or about November 6, 2015, which, to the extent appealed from as limited by the briefs, denied defendants' motion to vacate a judgment by confession entered May 1, 2015, or to schedule a plenary hearing to determine whether the underlying agreement leading to the judgment by confession is enforceable, unanimously affirmed, with costs.

Defendants may challenge the judgment by confession only by trial in a plenary action, and not by motion (see Scheckter v Ryan, 161 AD2d 344, 345 [1st Dept 1990]). Moreover, defendants lack standing to challenge the affidavit of confession of judgment. An affidavit of confession of judgment pursuant to CPLR 3218 "is intended to protect creditors of a defendant," not the defendant itself (Giryluk v Giryluk, 30 AD2d 22, 25 [1st Dept 1968], affd 23 NY2d 894 [1969]; County Natl. Bank v Vogt, 28 AD2d 793, 794 [3d Dept 1967], affd 21 NY2d 800 [1968]; Regency Club at Wallkill, LLC v Bienish, 95 AD3d 879, 879 [2d Dept 2012]). In any event, the affidavit in this case is sufficient (Giryluk, 30 AD2d at 25).

Defendants' assertions of duress in executing the June 10, 2014 agreement leading to the judgment by confession are unavailing. In order to claim duress defendants had to show that plaintiff used a "wrongful threat" to force defendants to enter into the agreement, and defendants failed to make that showing (Madey v Carman, 51 AD3d 985, 987 [2d Dept 2008], lv denied 11 NY3d 708 [2008]; see Foundry Capital Sarl v International Value Advisers, LLC, 96 AD3d 620 [1st Dept 2012]). "Financial pressures, even in the context of unequal bargaining power, do not constitute economic duress" (Grubel v Union Mut. Life Ins. Co., 54 AD2d 686, 686 [2d Dept 1976], lv denied 41 NY2d 807 [1977]; see also Liberty Marble v Elite Stone Setting Corp., 248 AD2d 302, 304 [1st Dept 1998]).

We have considered defendants' remaining arguments and find them unavailing.

THIS CONSTITUTES THE DECISION AND ORDER

OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: APRIL 20, 2017

CLERK

Yellowstone Cap v. Central USA Wireless

June 25, 2018 | Legal Decisions by State, New York

“The only ‘proof’ that Defendants submit in support of their usury claim are self-serving misconstructions of cherry-picked provisions of the merchant agreement, and an outright disregard for contrary provisions contained in that document,”

“The Court determines, in light of the history of these litigated matters and known binding precedent, Plaintiff is entitled to recover reasonable attorneys’ fees and costs incurred in defending the Motion [..],”

Supreme Court, Erie County
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[pdf-embedder url="http://mcarelief.wpengine.com/wp-content/uploads/2018/08/YellowstoneCentralUSAWireless.pdf"]

Wilkinson Floor Cov. v Cap Call, LLC

May 16, 2018 | Legal Decisions by State, New York

In New York there is a predisposition against declaring that contracts are usurious. This is especially true with respect to commercial agreements, where usurious agreement[s] will not be presumed from facts equally consistent with a lawful purpose. Additionally, because plaintiffs’ obligation to pay them future receivables is conditioned on plaintiffs’ receipt of such, the agreements at issue are not loans.

Supreme Court, New York County
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2018 NY Slip Op 50709(U)

Wilkinson Floor Covering, Inc., and Stephen Wilkinson, Plaintiffs,
v.
Cap Call, LLC, TVT Capital, LLC, Yellowstone Capital, LLC,
and Ace Funding Source, LLC, Defendants.

160256/2016

Supreme Court, New York County

Decided on May 16, 2018

For Plaintiffs:

AMOS WEINBERG

49 Somerset Dr. S.

Great Neck, NY 11020

For Cap Call, LLC and TVT Capital, LLC:

David A Picon

PROSKAUER ROSE LLP

Eleven Times Square

New York, NY 10036

For Yellowstone:

Vadim Serebro

1 World Trade Center Suite 8500

New York, NY 10007

For Ace Funding Source, LLC:

Jamie Paul Polon

Mavrides, Moyal Packman, Sadkin & LLP

1981 Marcus Ave Ste E117

New Hyde Park, NY 11042

Carmen Victoria St. George, J.

In this action, plaintiffs seek to vacate four confessions of judgment entered against them. In addition, they seek a declaration from this Court that the confessions of judgment are illegal and usurious contracts. In motion sequence 001, defendants Cap Call, LLC and TVT Capital,

LLC, move to dismiss the action as against them. In motion sequence 002, defendant Yellowstone Capital, LLC moves to dismiss the complaint as against it. In motion sequence 003, Ace Funding Source, LLC moves to dismiss the complaint as against it. Plaintiffs oppose all three motions. Motion sequences 001, 002, and 003 are consolidated for disposition and granted for the reasons below.1

According to the complaint, plaintiffs entered into usurious loan agreements with the various defendants. Plaintiffs assert that the interest rates exceeded 25%, the maximum allowable in New York, and that defendants "masked" the usury by framing the agreements as Merchant Cash Advance Agreements, or purchases of future receipts of the business, and requiring fixed daily payments. Plaintiffs claim that these daily payments exceeded the amount they borrowed, and the amount added was a usurious interest. Along with each loan, plaintiffs signed a confession of judgment, which all parties filed upon plaintiffs' refusal to pay. Plaintiffs allege the confessions of judgment should be vacated.Cap Call and TVT move jointly for relief. The October 10, 2016 agreement between Cap Cal and plaintiffs provided that Cap Call would pay plaintiffs $100,000 for $145,900 of plaintiffs' future receivables. Around October 3, 2016, TVT purchased $85,200 of plaintiffs' future receivables for $60,000. According to Cap Call and TVT, plaintiffs promptly breached the agreements, refusing to make the required payments. Therefore, Cap Call and TVT attempted to exercise their rights under the confessions of judgment. They contend that plaintiffs incorrectly characterize these as loan agreements because on their face and in their substance they are contracts for the purchase and sale of future receivables. Under the agreements, plaintiffs had the option of 1) allowing Cap Call and TVT to deduct the amounts plaintiffs owed them pursuant to a specified method, or 2) requiring plaintiffs to remit 15% of its daily receipts — $1,999 for Cap Call, and $,1,199.20 for TVT. Because these amounts might not reflect 15% of the receipts, the agreement further provided for a monthly reconciliation. The agreement further provided that plaintiffs' payments depended on the generation by plaintiffs of sales proceeds and explicitly stated that the agreement was not a loan.Motion sequence number 002 relates to plaintiffs' agreement with Yellowstone. Around September 14, 2016, plaintiffs entered into a secured merchant agreement with defendant Yellowstone. Under this agreement, Yellowstone paid plaintiff $375,000 in exchange for $517,500 of plaintiffs' future accounts receivable. The agreement contained similar provisions regarding the payment of these receivables — that is, plaintiffs were to pay Yellowstone 15% of its daily receipts, setting forth a daily payment of $4,313 per business day, and providing for reconciliations. Rather than making payments of the receivables, plaintiffs commenced this action less than three months later. The third motion relates to ACE Funding Source's (AFS) October 10, 2016, agreement with plaintiffs. Under this agreement, AFS paid plaintiffs $150,000 for $217,350 in future receivables.After careful consideration, the Court grants all three motions to dismiss. While this case was being argued, the First Department was considering the appeal of a nearly identical action, in which plaintiffs moved to vacate confessions of judgment to enforce a contract to enforce a merchant agreement to purchase future receivables. The trial court dismissed the action.

Recently, the First Department issued its decision and affirmed the trial court's determination. In that case, the First Department found that "the evidence demonstrates that the underlying agreement leading to the judgment by confession was not a usurious transaction" (Champion Auto Sales, LLC v Pearl Beta Funding, LLC, 159 AD3d 507, 507 [1st Dept 2018] [Champion]). This determination is consistent with trial court decisions in other judicial departments.

Champion set forth this general principle without extensive discussion of the facts. None of the facts and arguments plaintiffs make here mandate a contrary determination in this action because, as movants unanimously contend, Penal Law § 190.40, for criminal usury, does not state a cause of action for civil liability (Scantek Med., Inc v Sabella, 582 F Supp 2d 472, 474 [SDNY 2008]). Instead, in a civil action, criminal usury only can be asserted as an affirmative defense to an action to recover money due under a loan. In addition, both a corporation and its guarantor are precluded from asserting usury (Scneider v Phelps, 41 NY2d 238, 242 [1977]; see Seidel v, 18 East 17th St. Owners, Inc., 79 NY2d 735, 740 [1992]; Intima-Eighteen, Inc. v A.H. Schreiber Co., 172 AD2d 456, 457 [1st Dept] [citing General Obligations Law § 5-521 (1)], lv denied, 78 NY2d 856 [1991]).

Even if such a complaint were possible, plaintiffs have not established usury. "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" (NY Capital Asset Corp. v F & B Fuel Oil Co., Inc., Sup Ct Westchester County, Ecker, J. [2018 NY Slip Op 50310 (U)], at * 14). Moreover, in New York there is a predisposition in this State against declaring that contracts are usurious (id.; see Transmedia Restaurant Co., Inc. v 33 E. 61st Street Restaurant Corp., 184 Misc 2d 706, 710 [Sup Ct NY County 2000]). This is especially true with respect to commercial agreements, where "usurious agreement[s] will not be presumed from facts equally consistent with a lawful purpose" (Schaff v Borsher, 82 AD2d 880, 880 [2nd Dept 1981]). Additionally, because plaintiffs' obligation to pay them future receivables is conditioned on plaintiffs' receipt of such, the agreements at issue are not loans (citing Professional Merchants Advance Capital, LLC v Your Trading Room, LLC, 2012 WL 12284924, at *5 (Sup. Ct. Suffolk County Nov. 28, 2012), aff'd, 123 AD3d 1101 [2nd Dept 2014]).Movants also point to CPLR § 3218, which sets forth the requirements for a judgment by confession. As they argue, the documents in dispute contain all the information that CPLR § 3218 (a) requires. Thus, plaintiffs have not presented a viable challenge to the judgment by confession.Based on the above, and on the documents and materials submitted, this Court concludes that plaintiffs have failed to state a valid claim — and that, moreover, they have failed to satisfy their high burden of showing that the binding agreements at issue were usurious or otherwise unenforceable. The Court need not reach the argument that if it denies dismissal, it should stay this action and compel arbitration. Accordingly, it isORDERED that motion sequences 001, 002, and 003 are granted; and it is furtherORDERED that this action is dismissed in its entirety with prejudice.

Dated: May 16, 2018

CARMEN VICTORIA ST. GEORGE, J.S.C.

Change Cap Prtnrs v. Volt Elec. Sys.

April 3, 2018 | Delaware, Legal Decisions by State

Ultimately the court rejected borrower’s efforts to override the Delaware choice of law clause because even though the court agreed that a usurious agreement would violate a fundamental public policy of both New York and Texas, borrower failed to show that either Texas or New York had a “materially greater interest” in the enforcement of the receivables purchase agreement/loan than did Delaware.

SUPERIOR COURT OF DE
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CHANGE CAPITAL PARTNERS FUND I, LLC, a Delaware limited
liability company, Plaintiff/Amended Counterclaim Defendant,
v.
VOLT ELECTRICAL SYSTEMS, LLC, a Texas limited liability company
and PAUL J. BOUDREAUX, JR., Defendants/Amended Counterclaim Plaintiffs.
C.A. No. N17C-05-290 RRC

SUPERIOR COURT OF THE STATE OF DELAWARE

Submitted: January 10, 2018
April 3, 2018

On Plaintiff's Motion to Dismiss Amended Counterclaim. GRANTED.

MEMORANDUM OPINION

Kate Harmon, Esquire, Rafael X. Zahralddin, Esquire, and Shelley A. Kinsella, Esquire, Elliot Greenleaf, P.C., Wilmington, Delaware, Attorneys for Plaintiff/Amended Counterclaim Defendant Change Capital Partners Fund I, LLC.

Marc S. Casarino, Esquire, White and Williams LLP, Wilmington, Delaware, Attorney for Defendants/Amended Counterclaim Plaintiffs Volt Electrical Systems, LLC and Paul J. Boudreaux, Jr.

Page 2

COOCH, R.J.

I. INTRODUCTION
        In this Motion by Change Capital Partners Fund I, LLC ("Plaintiff") to Dismiss Defendants' Amended Counterclaim, Plaintiff argues, pursuant to Superior Court Civil Rule 12(b)(6), that this Court should honor the parties' choice-of-law provision, which designates Delaware law, in their operative "Merchants Receivables Purchase and Security Agreement" contract. Defendant Volt Electrical Systems, LLC ("Volt") and Defendant Paul J. Boudreaux, Jr. ("Boudreaux" and, collectively with Volt, "Defendants") argue in response that Delaware law should not govern this transaction as to Counts I-IV of the Complaint because either New York or Texas would be the "default state(s)" for those counts in the absence of a choice-of-law clause in the contract, enforcement of the loan transaction under Delaware law would be contrary to fundamental principles of New York and Texas law, and New York and Texas have materially greater interests in the determination of this issue than does Delaware. Defendants acknowledge that Count V is governed by Delaware law.1

This Court finds, however, that Delaware law governs this transaction. Delaware courts are generally reluctant to subvert parties' agreed-upon choice-of-law provisions. This Court may in appropriate cases ignore a choice-of-law clause through the exception in Restatement (Second) of Conflicts § 187(2)(b), which allows parties to a contract to disregard the chosen state's governing law and apply the law of a state that would have applied absent the choice-of-law clause (the "default state") if the default state has a materially greater interest than the chosen state in the determination of the issue and application of the law of the chosen state would be contrary to a fundamental policy of the default state. The Court does not find that use of this exception is proper under these facts. Therefore, the Court will not disrupt the Delaware choice-of-law clause. The Court grants Plaintiff's Motion to Dismiss the Amended Counterclaim.

Page 3

II. PROCEDURAL HISTORY AND FACTS
        The parties submitted at the Court's request a "Parties' Statement of Agreed Upon: (i) Procedural History; (ii) Facts; and (iii) Restated Contentions" (the "Agreed Statement") on January 9, 2018. The Agreed Statement follows below:

PROCEDURAL HISTORY
[Plaintiff] filed the Complaint commencing the instant action on May 22, 2017. Defendants filed their Answer and Counterclaim (the "Counterclaim") on July 5, 2017. [Plaintiff] filed a Motion on Behalf of Plaintiff Change Capital Partners Fund I, LLC to Dismiss Defendants' Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) on July 25, 2017 (the "Initial Motion to Dismiss"). Thereafter, Defendants sought leave to amend the original Counterclaim on August 2, 2017, which leave was granted by this Court on August 14, 2017. [Plaintiff] withdrew the Initial Motion to Dismiss on August 9, 2017 and Defendants filed the Amended Counterclaim on August 15, 2017. The Amended Counterclaim lodges five causes of action, four of which are predicated upon New York or Texas statutes: (i) N.Y. Penal Law § 190.40; (ii) N.Y. Gen. Bus. Law § 349; (iii) Tex. Fin. Code § 305.001(a) and § 304.001; (iv) Tex. Bus. & Com. Code § 17.44(a); and (v) negligence/negligent misrepresentation.

On August 29, 2017, [Plaintiff] filed its Motion on Behalf of Plaintiff Change Capital Partners Fund I, LLC to Dismiss Defendants' Amended Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) (the "Motion to Dismiss"). Defendants' Responsive Brief in Opposition to Plaintiff's Motion to Dismiss Amended Counterclaim was filed on September 29, 2017. Thereafter, the Reply in Support of Motion on Behalf of Plaintiff Change Capital Partners Fund I, LLC to Dismiss Defendants' Amended Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) (the "Reply") was filed by [Plaintiff] on October 13, 2017. A hearing was held on the Motion to Dismiss before the Court on November 20, 2017 (the "Hearing"). Both prior to and after the Hearing, [Plaintiff] approached the Defendants regarding the potential for resolving the matter via mediation, further settlement discussions or some other form of alternative dispute resolution. The parties could not reach agreement on any form of resolution. Consequently, the Parties are providing this Agreed Statement pursuant to the Court's instructions after the Hearing.

FACTS
On October 4, 2016, Azadian Group, LLC ("Azadian"), Volt and Boudreaux entered into a Merchant Receivables Purchase and Security Agreement (the "Agreement").

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The fully executed Agreement contains a choice of law provision designating Delaware law to apply to issues arising from the Agreement.

On April 18, 2017, Azadian assigned the Agreement to [Plaintiff] (the "Assignment"). Azadian and [Plaintiff] are both Delaware limited liability companies headquartered in New York. Volt is a Texas limited liability company located in Texas. Boudreaux is a Texas resident and the Managing Member of Volt. Volt and Boudreaux executed the Agreement in Texas.2

III. THE PARTIES' CONTENTIONS
        [The parties restated their contentions in the Agreed Statement:]

A. Plaintiff's Contentions

[Plaintiff] hereby incorporates its Motion to Dismiss and Reply as if fully set forth herein.

1. Pursuant to the terms of the Agreement, Azadian agreed to purchase Volt's future receivables for a flat fee of $350,000.00, less fees and expenses, for a total payment of $338,000.00. Volt agreed to transfer $472,500.00 of purchased receivables to Azadian. Boudreaux personally guaranteed Volt's obligations under the Agreement. Azadian fully satisfied its obligations under the Agreement and paid Volt $338,000.00. Thereafter, Volt transferred a total of $248,590.00 in purchased receivables to Azadian. Volt's last transfer to Azadian was on April 12, 2017. Consequently, Defendants defaulted on their obligations under the Agreement, leaving $223,910.00 in purchased receivables not transferred to Azadian. The Agreement contains provisions allowing Azadian to recover attorneys' fees and interest in the event that the Defendants default,

2. For purposes of a Motion to Dismiss, the Court must accept only well pled allegations as true; the Court need not accept conclusions of law averred in the Amended Counterclaim as true. Further, with regard to well-pled allegations, the test is whether Defendants may recover under any reasonably conceivable set of circumstances.

3. Delaware law applies to this matter in its entirety. The Agreement contains a provision of law designating Delaware law as the law applicable to any dispute that arising from the Agreement. There is no dispute that Azadian fulfilled its obligations under the Agreement. The Defendants have defaulted under the terms of the Agreement in perhaps the most material and fundamental of their obligations to Azadian and, subsequently, [Plaintiff]. That Delaware law should

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apply to Defendant' default under the Agreement is squarely within Azadian's and the Defendants' intent as enshrined at Section 19.1 of the Agreement. Delaware law applies because Azadian is a Delaware limited liability company and Azadian and the Defendants agreed to designate Delaware law as the applicable law for any disputes concerning the Agreement, which facts establish a material relationship between the Agreement and Delaware. The facts of this matter provide no exception to Delaware's long held, fundamental public policy in allowing parties freedom to contract.

4. Because Delaware law applies, Counts 1 through IV of the Amended Counterclaim must be dismissed. Count V of the Amended Counterclaim must also be dismissed given the insufficient allegations to establish that [Plaintiff] is liable for Azadian's alleged conduct prior to the Agreement being executed. Defendants have failed to sufficiently allege that [Plaintiff] had knowledge of Defendants' existing claims against Azadian at the time the Agreement was assigned to [Plaintiff].

5. To the extent that the Court determines that Delaware law does not apply, the Court must determine if New York and/or Texas law apply to this matter.

a. Counts I and II must be dismissed because the alleged conduct did not occur in New York and, consequently, the New York statutes upon which Defendants rely are not applicable.
b. Further, Count I must be dismissed because N.Y. Penal Law § 190.40 may not be used as a predicate for a cause of action by an entity, even if the cause of action is that which seeks a declaratory judgment, but only as an affirmative defense.
c. Count II must also be dismissed because the Defendants are not consumers for purposes of N.Y. Gen. Bus. Law § 349 and Defendants have not alleged any basis that would allow a factfinder to determine that Defendants are consumers. Defendants' averment in the Amended Counterclaim that they are consumers is not a well-pled factual allegation but is rather a conclusion of law that need not be accepted by the Court. The Agreement does not fall within the purview of N.Y. Gen. Bus. Law § 349 because it has no impact on New York's consumer public and it is not a consumer transaction; Defendants have not alleged any bases upon which a fact finder could find to the contrary.
d. Counts III and IV must be dismissed because Texas law does not apply to the Agreement.
e. Count IV must also be dismissed because Defendants have failed to allege any bases upon which they could be found to be "consumers" under Tex. Bus. & Com. Code § 17.44. Defendants' baseless averments regarding their status as consumers is a legal conclusion that need not be accepted by the

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Court. Further, Defendants have failed to allege any basis upon which the fact finder could find that Azadian knew that the loaned funds were going to be used to purchase or lease goods or services as required by Texas law. As noted in the Motion to Dismiss, [Plaintiff] does not concede that the Agreement is a loan transaction but acknowledges that, for purposes of the Motion to Dismiss, the Court must accept all well-pled factual allegations in the Amended Counterclaim as true. Further, [Plaintiff] asserts that Defendants' averments pertaining to the nature of the Agreement are conclusions of law that need not be accepted by the Court, rather than well-pled factual allegations.

B. Defendants' Contentions

The Defendants incorporate their briefing on the Motion to Dismiss and their arguments as stated on the record at the Hearing, and this synopsis is not intended to limit, restrict, or waive any of the Defendants' positions.

1. The transaction in dispute is a loan and not a purchase of future accounts receivables.

2. The loan originated and was funded by Azadian (and [Plaintiff] via the Assignment) in New York.

3. The Defendants were at all relevant times located in Texas.

4. Delaware has no relationship to the parties or the subject transaction.

5. The annualized interest rate charged by Azadian (and [Plaintiff] via the Assignment) is at least 102%.

6. The loan transaction is usurious under New York and Texas law.

7. New York and Texas have well-settled public policies against usurious loan transactions.

8. New York and Texas law would apply but for a choice-of-law provision in the loan documentation referencing Delaware.

9. Delaware law recognizes that promiscuous use of Delaware choice-of law provisions to circumvent another state law that would apply but for the choice of-law provision warrants disregard of the Delaware choice-of-law provision and application instead of the law of the other state(s).

10. [Plaintiff] is wrong that the Defendants may not rely upon New York law. The Defendants are permitted under New York law to seek a declaration

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that the criminally usurious nature of the loan transaction warrants cancellation of the transaction.

11. [Plaintiff] is wrong that the Defendants may not rely upon New York law because they are not a consumer. The Defendants have pleaded that they are a consumer for purposes of New York law, and this is accepted for purposes of the Motion to Dismiss. Nevertheless, as evidenced by the information presented by the Defendants, New York law applies broadly to protect consumers and businesses that have been taken advantage of in usurious loan transactions.

12. The Defendants may also recover under Texas law since they have been subjected to criminally usurious loan practices in both New York and Texas. [Plaintiff] is wrong that Texas law does not permit a claim unless there exists the conjunctive "contracting for and receiving" usurious interest, where the applicable Texas statute plainly allows for a claim in the disjunctive of "contracting for or receiving" usurious interest. In this instance, Azadian (and [Plaintiff] via the Assignment) has both contracted for and received usurious interest in violation of Texas law.

13. The Defendants have pleaded that they are a consumer for purposes of Texas law, and this is accepted for purposes of the Motion to Dismiss. As such, [Plaintiff] is wrong to suggest that the Defendants' claims under Texas law should be dismissed for not being a consumer.

IV. STANDARD OF REVIEW
        Upon a motion to dismiss under Superior Court Rule 12(b)(6), the Court "(i) accepts all well-pleaded factual allegations as true, (ii) accepts even vague allegations as well-pleaded if they give the opposing party notice of the claim, (iii) draws all reasonable inferences in favor of the non-moving party, and (iv) only dismisses a case where the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances."3 However, the Court will "ignore conclusory allegations that lack specific supporting factual allegations."4

V. DISCUSSION
        Delaware law applies to this matter because the parties entered into a choice-of-law provision, which designated Delaware as the applicable law for disputes

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arising from the Agreement. Delaware courts are "strongly inclined" to respect the widely recognized and fundamental principle of freedom to contract.5 This Court will not interfere unless "upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract."6 "[W]ith very limited exceptions, [Delaware] courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits. Upholding freedom of contract is a fundamental policy of this State."7

Here, Defendants argue four causes of action in their Amended Counterclaim. Counts One and Two allege violations of New York laws8 and Counts Three and Four allege violations of Texas law.9 Defendants' argument that the public policy exception to the generally held Delaware rule that courts in this state will honor a choice-of-law clause is unavailing because the exception is inapplicable here. As such, Delaware law applies to the Agreement. Accordingly, Plaintiff's Motion to Dismiss Amended Counterclaim is granted because Defendants' Amended Counterclaim asserts the applicability of New York and Texas anti-usury statutes but where Delaware law was agreed by the parties to apply to the loan transaction. Also, Defendants' Count Five "Negligence and Negligent Misrepresentation" claim is dismissed because Defendants' claim only pertains to Azadian's conduct, not Plaintiff's.A. Delaware Choice-of-Law and the Exception in Restatement (Second) of Conflicts § 187(2)(b)"Delaware [c]ourts will honor a contractually-designed choice of law provision so long as the jurisdiction selected bears some material relationship to the transaction."10 The existence of a choice-of-law clause establishes a material relationship between the chosen state and the transaction. "Title 6, section 2708(a)

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of the Delaware Code recognizes that a choice of law clause is a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State."11

Where an agreement does not contain a choice-of-law provision, Delaware courts will apply the "most significant relationship" test of Restatement (Second) of Conflicts § 188.12 However, where, as here, the contracting parties designate a state's laws to apply, the Restatement (Second) of Conflicts § 187 instructs:

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

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(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.13

Delaware courts have recognized the exception in Restatement (Second) of Conflicts § 187(2)(b) stating, "the Restatement is generally supportive of choice-of-law provisions, but recognizes that allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of such provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens."14 "A mere difference between the laws of two states will not necessarily render the enforcement of a cause of action arising in one state contrary to the public policy of another."15

B. The Restatement (Second) of Conflicts § 187(2)(b) Exception Does Not Apply.Defendants argue that the § 187(2)(b) exception applies to the Agreement because "Delaware law clearly would not apply in the absence of the choice-of-law provision"16 and "New York and Texas have strong public policies against usurious loan transactions . . . ."17 Defendants rely heavily on Ascension Ins. Holdings, LLC v. Underwood to argue the applicability of the Restatement exception. Ascension held that:

where the parties enter a contract which, absent a choice-of-law provision, would be governed by the law of a particular state (which I will call the "default state"), and the default state has a public policy under which a contractual provision would be limited or void, the Restatement recognizes that allowing the parties to contract

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around that public policy would be an unwholesome exercise of freedom of contract.18

Ascension is distinguishable from the facts of this case. As a subsequent Court of Chancery case held: "[t]o take advantage of this Restatement-based exception, [defendant] would have to demonstrate both: (1) that enforcement of the Non-Competition Provisions would be contrary to California public policy—even assuming that California would be the state whose law would apply if not for the choice-of-law provisions; and (2) that California has a "materially greater interest" than Delaware in the enforcement or non-enforcement of the Non-Competition Provisions."19Put simply, in order for Defendants to disregard the Agreement's choice-of-law clause designating Delaware, they must demonstrate that absent the choice-of-law provision, New York or Texas would be the "default state" whose law would apply, enforcement of the loan transaction under Delaware law would be contrary to a fundamental public policy of New York and/or Texas, and New York and/or Texas has a materially greater interest than Delaware in the enforcement or non-enforcement of the loan transaction. Defendant must make a showing of all of the above in order to invoke the Restatement (Second) of Conflicts § 187(2)(b) exception.20Defendants fail to demonstrate that the Restatement (Second) of Conflicts § 187(2)(b) exception applies here. Defendants fail to sufficiently demonstrate each factor as is required under the Restatement. As such, this Court will not disrupt the long-recognized, fundamental principle in favor of a freedom of contract.1. Defendants have failed to identify a "default state" whose law would apply absent the choice-of-law provision, which identifies Delaware.Defendants argue that without the choice-of-law clause in the Agreement, Delaware law would not apply. However, Defendants never identify an alternative

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state's law that would apply. Defendants do not name a "default state."21 Defendants appear to argue that because "Defendants are located in Texas"22 and "Azadian is headquartered in New York City and the transaction was handled [in New York]"23 either Texas or New York should be the default state. Defendants' argument here casts too wide a net.

Defendant relies on Ascension. However, the facts of Ascension—as well as the cases that follow it24—are distinguishable to those here. The Court of Chancery in Ascension applied the Restatement (Second) of Conflicts § 187(2)(b) exception to find that the contractually agreed Delaware choice of law should be ignored, and California law should be applied.25 However, the case only involved two possible states whose laws could apply: Delaware or California. The default state was therefore obvious. Defendants here have not identified which, if either, state would be the default state. Defendants have failed to demonstrate that there is an alternative state like in Ascension that would apply absent the choice-of-law clause in the Agreement.Furthermore, the contract at issue in Ascension was a non-compete clause in a "contract between a corporation doing business in California and an employee residing in California, entered into in California and to be performed predominantly in California—not in Delaware."26 The contract "was negotiated in California and involved an agreement not to compete that was limited almost completely to areas within California, by virtue of the geographic scope of the Plaintiff's business."27 It is axiomatic that, absent the Delaware choice of law, the state in which the non-compete clause was intended to apply would be the default state.

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Here, the Agreement was for a loan transaction. There is no state, by virtue of the loan itself, that would clearly apply. The loan was executed in New York, between a Delaware corporation with its principal place of business in New York and Texas corporation with its principal place of business in Texas and a Texas citizen. A loan is not akin to the non-compete clause in Ascension wherein the geographic scope of the non-compete necessarily invoked California.Ascension and the three cases that have followed28 all involve non-compete clauses and choice-of-law conflicts between the same two states: Delaware and California. Ascension is distinguishable to the facts here and Defendants' reliance on it is inapposite.2. Defendants have demonstrated that enforcement of the loan transaction would be contrary to New York and/or Texas public policy.Defendants cite authority to support their argument that usurious loans are contrary to Texas and New York public policy.29 This Court agrees that these sources stand for the proposition that these two states have public policies against usurious loans. Restatement (Second) of Conflicts § 187(2)(b) requires a showing that "application of the law of the chosen state would be contrary to a fundamental policy of a state . . . ." Usurious loans are contrary to fundamental public policies of both New York and Texas. The Texas Finance Code, § 302.001 (b) states that "[a]ll contracts for usurious interest are contrary to public policy and subject to the appropriate penalty prescribed by Chapter 305." "New York has a strong public policy against interest rates which exceed 25%, which policy must be enforced."30Delaware usury laws, on the other hand, place no cap on interest.31 "Delaware usury law provides no cap on interest rates, but instead allows interest to be charged in an amount pursuant to the agreement governing the debt."32 Thus, as Defendants

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argue, application of Delaware law to the Agreement would be contrary to both New York and Texas public policy against usurious loans.

This Court recognizes that courts in New York and Texas have upheld usury laws from other states;33 however, the Restatement (Second) of Conflicts § 187(2)(b) exception refers to a law that is "contrary to a fundamental public policy . . . ." For purposes of the analysis in this case, this Court acknowledges that usurious loans are contrary to fundamental public policy in New York and Texas.In addition to the above two factors, to avoid application of Delaware law pursuant to the choice-of-law clause in the Agreement, Defendants must demonstrate that New York and/or Texas has a materially greater interest than Delaware in the enforcement or non-enforcement of the loan transaction. Defendants have failed to demonstrate that either New York or Texas has a "materially greater interest" in the Agreement than does Delaware. Aside from the argument that New York or Texas would apply as the "default state" absent the choice-of-law clause ascribing Delaware law to the Agreement because Azadian has its principal place of business in New York and the transaction was handled in New York, Defendants make no argument as to this factor of the Restatement (Second) of Conflicts § 187(2)(b) exception.Defendants argue that "[t]he underlying loan transaction has absolutely no connection to Delaware."34 However, this Court finds that because Azadian is a Delaware LLC and because Azadian and Defendants originally entered into the Agreement, which established Delaware choice of law, the Agreement has a connection to Delaware.

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In general, Delaware courts will not "easily" invalidate a contract.35 It is only when faced with a threat to some fundamental public policy even greater than the freedom to contract will the courts do so.36 There is an inherent difficulty in avoiding a contract on the argument that it conflicts with public policy:37

Delaware courts are rightly reluctant to accept . . . arguments [that a contract should be invalidated because it conflicts with public policy]. And when they do, it is not because a person has entered into a contract that has become financially inconvenient for them to honor, but because the enforcement of the contract threatens a well-recognized policy interest of concern to our polity in general. That is, this exception [for the avoidance of a contract due to a conflict with public policy] does not exist as a sword for parties to avoid their contracts when avoidance suits their personal interests, but as a shield to protect the community in general when the terms of a contract endanger the public interest.38

Delaware courts are "strongly inclined to respect [parties'] agreement . . . ,"39 "When parties have chosen a state's contract law to govern their contract, it is illogical to assume that they wished to have the enforceability of that contract judged by another state's law."40 Delaware courts regularly express their reluctance to allow avoidance of the contractual choice-of-law provision.As was well-stated in a 2006 analogous Court of Chancery case: "[t]o enter into a contract under Delaware law and then tell the other contracting party that the contract is unenforceable due to the public policy of another state is neither a position that tugs at the heartstrings of equity nor is it commercially reasonable."41 That court further observed:

When a rational businessperson enters into an agreement establishing a transaction or relationship and provides that disputes arising from the agreement shall be governed by the law of an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. We seriously doubt that any rational businessperson, attempting to provide by contract for an efficient and businesslike resolution of possible future disputes, would intend that the laws of multiple jurisdictions would apply to a single

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controversy having its origin in a single, contract-based relationship. Nor do we believe such a person would reasonably desire a protracted litigation battle concerning only the threshold question of what law was to be applied to which asserted claims or issues. Indeed, the manifest purpose of a choice-of-law clause is precisely to avoid such a battle.42

Delaware has a strong presumption in favor of the long-held principle of freedom of contract.43 This Court will therefore not disrupt the mutually agreed-upon contract terms of the Agreement, including the Delaware choice-of-law provision. Accordingly, Counts One through Four alleging violations of New York and Texas law are dismissed.C. Defendants' Count Five "Negligence and Negligent Misrepresentation" Claim is Dismissed Because the Amended Counterclaim Alleges no Knowledge Against Plaintiff.Defendants argue that Plaintiff is liable to the same degree as Azadian because Plaintiff is an assignee with knowledge of the alleged "criminally usurious loan."44 Defendants argue that

an "assignee [Plaintiff] takes his claim subject to the equities of third persons against the assigned right where he has knowledge of such equities." [Papendick, 1981 LEXIS 675 at *20] In other words, when the assignee purchases assets with full knowledge that a third party has potential claims, the assignee is liable to the same extent as the assignor. The court noted that the assignee's recourse would be to seek indemnification from the assignor.

Here, the Amended Counterclaim sufficiently alleges that [Plaintiff] knew that the agreement between Azadian and Defendants involved a criminally usurious loan.45

As a threshold matter in this analysis, it should be noted that Defendants rely on Delaware case law to argue this claim.46 At oral argument, when asked by the

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Court, Defendants agreed that "Delaware law applies to Count V" and "New York or Texas [applies] to Counts I, II, III, and IV."47

Defendants contend that Plaintiff "knew that the agreement between Azadian and Defendants involved a criminally usurious loan."48 However, nowhere in the Amended Counterclaim do Defendants assert that Plaintiff had knowledge—much less "full knowledge"49 —of Defendants' potential claims against Azadian. Defendants only make a conclusory assertion that Plaintiff "is liable as assignee of the Loan Agreement."50 Defendants also mention that Plaintiff "stands in the shoes of Azadian under the Loan Agreement[,] however this still falls short of pleading a claim that Plaintiff had knowledge sufficient to impute liability by way of Azadian's alleged actions. Thus, Defendants' Count Five claim for "Negligence and Negligent Misrepresentation" is dismissed.51

VI. CONCLUSION
        The choice-of-law provision in the Agreement, which designates Delaware law, will apply. As such, Counts One through Four of Defendants' Amended Counterclaim alleging New York and Texas law are dismissed. Further, Count Five of Defendants' Amended Counterclaim is dismissed because Defendants fail to assert that Plaintiff had knowledge of Defendants' potential claims against Azadian. Without more, Defendants have not made a claim against Plaintiff for "Negligence and Negligent Misrepresentation."

Plaintiff's Motion to Dismiss Defendants' Amended Counterclaim is GRANTED.

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IT IS SO ORDERED./s/_________
Richard R. Cooch, J.

cc: Prothonotary

--------

Footnotes:

1. Def.s' Resp. at 12-13 (citing Papendick v. Robert Bosch GmbH, 1981 Del. Super. LEXIS 675 (Del. Super. 1981)); Tr. of Oral Arg., November 20, 2017, at 26.2. Parties' Statement of Agreed Upon (i) Procedural History; (ii) Facts; and (iii) Restated Contentions, D.I. 38.3. Turf Nation, Inc. v. UBU Sports, Inc., 2017 WL 4535970, at *5 (Del. Super. Ct. Oct. 11, 2017) (citing Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536 (Del. 2011)).4. Id. (quoting Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998)).5. Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del.Ch.2005), aff'd in pertinent part, 892 A.2d 1068, 2006 WL 196379 (Del. Jan. 24, 2006).6. Id. at 1056; see also Maddock v. Greenville Retirement Community, L.P., 1997 WL 89094, at *7-8 (Del.Ch. Feb.26, 1997) ("Only a very strong showing that a contract term is a gross violation of the policies embodied in this common law rule [that reasonable restraints be upheld] would permit [plaintiff] to escape the economic bargain that he entered.") (citations omitted).7. Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015).8. Def.s' Am. Counterclaim at 11-13 (citing N.Y. Penal Law § 190.40 and N.Y. Gen. Bus. Law § 349).9. Id. at 13- 17 (citing Tex. Fin. Code §305.001(a), Tex. Fin. Code § 305.004(a), and Tex. Bus. & Comm. Code § 17.44 (a)).10. Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 766 (Del. Ch. 2014) (quoting J.S. Alberici Const. Co. v. Mid-W. Conveyor Co., 750 A.2d 518, 520 (Del. 2000)).11. 1 Oak Private Equity Venture Capital Ltd. v. Twitter, Inc., 2015 WL 7776758, at *9 (Del. Super. Ct. Nov. 20, 2015) (internal quotation marks omitted).12. § 188 of the Restatement will apply in cases where the parties do not specific a choice of law:

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.

These contacts are to be evaluated according to their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189- 199 and 203.

Restatement (Second) of Conflict of Laws § 188 (1971).

The Restatement (Second) Conflict of Laws §6(2) provides that the following seven factors are also relevant in conducting a choice of law inquiry:

(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.

Deuley v. DynCorp Int'l, Inc., 8 A.3d 1156, 1160-61 (Del. 2010).

13. Restatement (Second) of Conflict of Laws § 187 (1971)14. Ascension, 2015 WL 356002, at *2.15. Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 45 (Del. Ch. 2012) (quoting J.S. Alberici Const. Co., 750 A.2d at 520).16. Def.s' Resp. at 4. Notably, Defendants fail to declare whether New York or Texas would be the default state. Defendants only assert that absent a choice-of-law clause, the default state would not be Delaware.17. Id.18. 2015 WL 356002, at *2.19. Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *18 (Del. Ch. July 22, 2015).20. Ascension, 2015 WL 356002, at *3 (finding that "[i]f both these questions are answered in the affirmative, California law will apply notwithstanding the choice-of-law provision in the [contract].").21. This Court notes that Defendants asserted at oral argument that "Counts I and II are New York Law, and Counts III and IV are Texas law." Tr. of Oral Arg., November 20, 2017, at 27. Defendants also asserted that another potential "outcome is that Texas law applies to all counts or New York law applies to all counts or they're split in some fashion." Id. at 32. Defendants also seem to claim that identifying a "default state" at this juncture is premature because, as was stated at oral argument, "[w]e'll do discovery. [Counsel for Defendants] will be back before Your Honor in some other form or fashion in terms of a later motion to address what law should apply . . . and move forward from there." Id. at 32-33. This Court disagrees. Defendants must now identify a "default state" in order to complete the analysis and determine whether that default state has a "materially greater interest in the issue" than Delaware. Ascension, 2015 WL 356002, at *3. Defendants failed to do so.22. Def.s' Resp. at 1.23. Id. at 4.24. See EBP Lifestyle Brands Holdings, Inc. v. Boulbain, 2017 WL 3328363, at *7 (Del. Ch. Aug. 4, 2017); Fyfe Co., LLC v. Structural Grp., Inc., 2016 WL 4662333, at *5 (D. Md. Sept. 7, 2016); Kan-Di-Ki, LLC, 2015 WL 4503210, at *17.25. Ascension, 2015 WL 356002, at *5.26. Id. at *5.27. Id. at *3 (footnote omitted).28. EBP Lifestyle Brands Holdings, Inc., 2017 WL 3328363, at *7; Fyfe Co., 2016 WL 4662333, at *5; Kan-Di-Ki, LLC, WL 4503210, at *17.29. Def.s' Resp. at 4 (citing Texas Finance Code, § 302.001 (b); In re McCorhill Pub., Inc., 86 B.R. 783, 793 (S.D.N.Y. 1988); Murlar Equities Partnership v Jimanez, 2016 N.Y. Misc. LEXIS 3541, *10-12 (N.Y. Sup. Ct. Sept. 1, 2016)).30. In re McCorhill Pub., Inc., 86 B.R. at 793.31. 5 Del. C. § 943; Kaneff v. Delaware Title Loans, Inc., 587 F.3d 616, 622 (3d Cir. 2009) ("Delaware has no usury law."); Madden v. Midland Funding, LLC, 237 F. Supp. 3d 130, 149 (S.D.N.Y. 2017).32. Madden, 237 F. Supp. 3d at 149.33. See, e.g., Walter E. Heller & Co. v. Chopp-Wincraft Printing Specialties, Inc., 587 F. Supp. 557, 560 (S.D.N.Y. 1982) (holding Illinois choice of law applied instead of New York because usury "is not a favored defense, particularly in the circumstances here where a corporation rather than a helpless consumer is involved"); Saturn Capital Corp. v. Dorsey, 2006 WL 1767602, at *8 (Tex. App. June 29, 2006) (holding that "[i]n Texas, there is nothing inherently violative of public policy in contracting for another state's usury laws to apply. . . . However, choice of law provisions . . . may not be used as a subterfuge to avoid the usury law that would otherwise apply.") (internal quotation marks omitted); see also Bradt v. W. Pub. Co., 1991 WL 230182, at *4 (Tex. App. Oct. 31, 1991), writ denied (Feb. 12, 1992) ("Texas public policy does not forbid the choice of law of another state to control as to usury questions if there exists a reasonable connection between the contract and such other state.").34. Def.s' Resp. at 4.35. Benihana of Tokyo, Inc. v. Benihana, Inc., 2005 WL 3753046, at *14 (Del.Ch. Dec. 8, 2005) (citing the "fundamental principle that parties should have the freedom to contract and that their contracts should not easily be invalidated").36. Libeau, 880 A.2d at 1058 (stating that Delaware courts will "reluctant[ly] [invalidate a contract when] the enforcement of the contract threatens a well-recognized policy interest of concern to our polity in general.").37. Id.38. Id.39. Id. at 1056-57 (Del.Ch.2005).40. Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1049 (Del. Ch. 2006).41. Id. at 1050.42. Id. at 1048 n.25 (quoting Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 469 (1992)).43. Texas Instruments Inc. v. Tandy Corp., 1992 WL 200604, at *5 (Del. Ch. Aug. 13, 1992) (recognizing a "powerful presumption in favor of freedom of contract.").44. Def.s' Resp. at 12-13 (citing Papendick, 1981 Del. Super. LEXIS 675).45. Id. at 13 (citations omitted).46. Id. at 12 (citing Papendick, 1981 Del. Super. LEXIS 675).47. Tr. of Oral Arg., November 20, 2017, at 26-27; see also Catlin Specialty Ins. Co. v. CBL & Assocs. Properties, Inc., 2017 WL 4784432, at *5 (Del. Super. Ct. Sept. 20, 2017) (analyzing Delaware choice-of-law rules in the insurance context stating that "it would be impractical to apply the law of multiple states to a claim under one insurance policy covering multiple locations."); Abry Partners, 891 A.2d at 1048 n.25 (quoting Nedlloyd Lines, 3 Cal. 4th at 469 ("[w]e seriously doubt that any rational businessperson, attempting to provide by contract for an efficient and businesslike resolution of possible future disputes, would intend that the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based relationship.").48. Id.at 13.49. Id.50. Def.s' Am. Counterclaim at 20.51. This Court need not reach the unraised issue of whether the Superior Court has jurisdiction over Count V, to the extent it alleges a "negligent misrepresentation" claim. See, e.g., Wypie Investments, LLC, v. Wayne Homschek, 2018 WL 1581981, at *15 (Del. Super. Ct. Mar. 28, 2018) (quoting Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *11 (Del. Super. Ct. Feb. 15, 2013) ("It is well-settled Delaware law that the Court of Chancery has exclusive jurisdiction over claims of negligen[t] misrepresentation.").

Champion Auto v Pearl Beta Fund.

March 15, 2018 | Legal Decisions by State, New York

The previous court properly dismissed the complaint seeking to vacate the judgment by confession, it was not a usurious loan.  Only appellate case on MCA loans, agreed with predominate opinion in NY that MCAs are not loans.

Supreme Court, Appellate Division
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Champion Auto Sales, LLC v Pearl Beta Funding, LLC 2018 NY Slip Op 01645 Decided on March 15, 2018 Appellate Division, First Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on March 15, 2018
Acosta, P.J., Richter, Kapnick, Kahn, Gesmer, JJ.
5995 158692/16

[*1]Champion Auto Sales, LLC, et al., Plaintiffs-Appellants,

v

Pearl Beta Funding, LLC, Defendant-Respondent.

Amos Weinberg, Great Neck, for appellants.

DLA Piper, LLP, Baltimore, MD (Michael Bakhama of the bar of the State of Maryland, admitted pro hac vice, of counsel), for respondent.

Order, Supreme Court, New York County (Erika M. Edwards, J.), entered June 16, 2017, which granted defendant's motion to dismiss the complaint, unanimously affirmed, without costs.

The court properly dismissed the complaint seeking to vacate the judgment by confession. The evidence demonstrates that the underlying agreement leading to the judgment by confession was not a usurious transaction (see generally Giventer v Arnow, 37 NY2d 305, 309 [1975]; see Feld v Apple Bank for Sav., 116 AD3d 549, 553 [1st Dept 2014], lv denied 23 NY3d 908 [2014]).

We have considered plaintiffs' other challenges to the judgment by confession and find them unavailing.

THIS CONSTITUTES THE DECISION AND ORDER OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: MARCH 15, 2018

CLERK

 

 

Ibis Capital Group, LLC, v. David Fletcher

March 5, 2018 | Legal Decisions by State, New York

The first such factor which every court cited as indicative of whether a transaction is a loan is whether the agreement contains a reconciliation provision. The second factor, which has been deemed quintessential is whether the agreement has a finite term or not. Because Plaintiff’s ability to collect sales proceeds from F&A was contingent upon F&A actually generating sales and obtaining revenue, neither party could have known when they entered into the Merchant Agreement how long it would actually take for F&A to repay the Purchased Amount. That uncertainty created enough of a contingency for courts to find that the term of such agreements was indefinite and the nature of the agreement was contingent. The third and final factor which courts consider is whether there is any recourse available to the Buyer if the merchant Seller declares bankruptcy.

Supreme Court, Rockland County
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2018 NY Slip Op 30829(U)

IBIS CAPITAL GROUP, LLC, Plaintiff,
v.
DAVID FLETCHER d/b/a FLETCHER & ASSOCIATES, and DAVID FLETCHER, Defendants.

Index No.: 32423/2017

SUPREME COURT : STATE OF NEW YORK COUNTY OF ROCKLAND

March 5, 2018

NYSCEF DOC. NO. 67

To commence the statutory time period for appeals as of right (CPLR 5513 [a]), you are advised to serve a copy of this order, with notice of entry, upon all parties.

HON. PAUL I. MARX, J.S.C.

DECISION AND ORDER

Motion Date: November 3, 2017
Motion Sequence # 1

The following papers, numbered 1 to 11, were read on Plaintiff’s motion to dismiss Defendants’ affirmative defenses and counterclaims and to strike scandalous and irrelevant content from the answer, which the Court converted to a motion for summary judgment:

Upon reading the foregoing papers, it is ORDERED that Plaintiff’s motion for summary judgment is granted for the reasons which follow.

BACKGROUND

Plaintiff, a New York company, filed the instant action against Defendant David Fletcher d/b/a David Fletcher & Associates (“F&A”), a sole proprietorship in Tulsa, Oklahoma, for breach of a purchase and sale agreement entered into between the parties on or about October 19, 2016

(“Merchant Agreement”). Plaintiff also sues Defendant David Fletcher, individually, in his capacity as guarantor. The Merchant Agreement is for the purchase by Plaintiff of “a percentage … of the proceeds of each future sale by Seller [F&A] whether the proceeds are paid by cash, check, ACH, credit card, debit card, bank card, charge card and/or other means (collectively “Future Sale Proceeds”) until [Plaintiff] received the [specified] amount ($26,240.00) for the purchase price” of $20,500.00.

Defendants answered the complaint, asserting usury as an affirmative defense and counterclaim.Plaintiff moved to dismiss the affirmative defense and counterclaim and to strike scandalous and irrelevant matter from the answer.The Court converted the motion to dismiss to one for summary judgment, directed the parties to e-file further submissions, if any, by November 3, 2017, when the motion would be deemed fully submitted. The Court stayed discovery pending disposition of the motion. Decision and Order dated September 29, 2017 (Hon. Gerald E. Loehr, JSC). Both sides submitted additional papers.

DISCUSSION

Plaintiff requests summary judgment against Defendants, “jointly and severally, in the amount of $23,314.00 plus pre-judgment interest at 9 percent from the date of the Defendants’ breach on November 18, 2016, through the entry of judgment, plus attorneys’ fees and costs, and such other and further relief as the Court deems just and proper.” Affirmation of Nicholas P. Giuliano, Esq. at 6. Plaintiff seeks dismissal of Defendants’ usury counterclaim, contending that Defendants may not assert usury as an affirmative claim. Plaintiff argues that Defendants may only assert criminal usury as an affirmative defense; however, the defense does not apply here.Plaintiff contends that the usury laws have no application to the Merchant Agreement, because it was not a loan. Plaintiff asserts that the usury laws apply only to a loan or forbearance of money. Plaintiff’s Memorandum of Law (Amended) at 6 (citing NYS Gen Oblig. Law § 5-501; Seidel v 18 E17th StOwnersInc., 79 NY2d 735, 744 [1992]; Donatelli v Siskind, 170 AD2d 433, 434 [2nd Dept 1991]). Plaintiff states that the Merchant Agreement was for the purchase and sale of F&A’s future receivables and sales proceeds. Plaintiff argues that it was not a loan because the payments to Plaintiff were contingent upon F&A’s receipt of sales proceeds. Furthermore, the

Page 3

Merchant Agreement did not have a specific end date. Plaintiff claims that at all times, it bore the risk of not being repaid the funds it had advanced to F&A. Plaintiff contends that it lacked the intent to enter into a usurious agreement, as evidenced by the language of the agreement, specifically pointing to Sections 4.1 and 5.5(a). Plaintiff argues that further evidence that the transaction was not a loan was demonstrated by the reconciliation provision in the Merchant Agreement, which allowed either party to adjust the estimate daily payment amount to reflect F&A’s sales proceeds.

Defendants argue that the Merchant Agreement was indeed for a usurious loan, as shown by the fact that it provided for a fixed daily payment of $209.00 by electronic check or ACH payment until F&A had repaid the agreed upon amount of $26,240.00. Defendants explain that the total amount paid to F&A pursuant to the Merchant Agreement was $20,500.000, less startup fees. The difference between those amounts is $5,740.00, which they allege would have amounted to 28% interest if it had to be repaid over the course of a year. Defendants explain, however, that the interest rate was actually just over 56%, based upon the daily amount they were required to pay under the Merchant Agreement. Defendants calculated that interest amount by determining that by making daily payments of $209.00 each weekday, the full amount under the Merchant Agreement would be repaid after 126 payments, or 176 days in total, after adding in weekends and bank holidays. Thus, Defendants conclude, “[s]ince 28% interest had to be paid back in just under half a year, that was an annual interest rate of just over 56%.” Affidavit of David Fletcher at ¶ 10. Defendants contend that there was nothing in the Merchant Agreement which made the daily ACH-debit of $209 from F&A’s bank account contingent upon its sales or receipts. They state that the daily amount was automatically withdrawn from F&A’s bank account each business day. Defendants could not stop or block the debit, otherwise F&A would be in default of the Merchant Agreement.As an initial matter, Defendants’ affirmative defense of civil usury, to the extent that it is alleged,1 is dismissed. Arbuzova v Skalet, 92 AD3d 816, 816-17 [2nd Dept 2012]. Neither a corporation nor an individual guarantor of a corporate obligation may raise the defense of civil usury. Id. (citing General Obligations Law § 5-521 (“No corporation shall hereafter interpose the defense of usury in any action.”); Schneider v Phelps, 41 NY2d 238, 242; Tower Funding v Berry Realty, 302 AD2d 513, 514).

Page 4

Defendants may only assert criminal usury as an affirmative defense “as described in section 190.40 of the penal law.” Gen. Oblig. Law § 5-521(3); Colonial Funding Networksupra at 279-80; Intima-EighteenInc., supraZoo HoldingsLLC v Clinton, 11 Misc3d 1051(A) [Sup Ct New York County 2006].Defendants’ counterclaim for usury is also dismissed. A corporation “‘can assert criminal usury as a defense, [but it] cannot bring civil claims under the criminal statute’.” Colonial Funding NetworkIncfor TVT CapitalLLC v EpazzInc., 252 F.Supp.3d 274, 279-80 [SDNY 2017] (quoting Scantek Medical Incv Sabella, 582 F.Supp.2d 472, 474 [SDNY 2008]). “The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan (see Hammelburger v Foursome Inn Corp., 54 NY2d 580, 589; Schneider vPhelps, 41 NY2d 238, 242) and may not, as attempted here, be employed as a means to effect recovery by the corporate borrower.” Intima-EighteenIncv A.H.Schreiber Co., 172 AD2d 456, 457-58 [1st Dept 1991] (citations omitted). Moreover, “[w]here a corporation is barred from asserting usury, so is its individual guarantor.” Colonial Funding Networksupra at 280 (citing Schneidersupra at 242); Arbuzova,supra at 816).The crux of the issue is whether the transaction was a loan with an absolute repayment requirement, which would support a criminal usury defense, rather than a purchase of future receivables. If the Merchant Agreement outlines a sufficiently risky transaction, it cannot be considered a loan, as a matter of law. K9 BytesIncv Arch Capital FundingLLC, 56 Misc3d 807, 818 [Sup Ct Westchester County 2017]. A number of other trial courts have examined the very same type of agreement that is at issue in this case and have identified a number of factors to consider. Seee.g., IBIS Capital GroupLLC v Four Paws Orlando LLC, 2017 WL 1065071 [Sup Ct Nassau County March 10, 2017] (collecting cases); Merchant Cash and CapitalLLC v Yehowa Medical ServicesInc., 2016 WL 4478805 [Sup Ct Nassau County July 29, 2016]; Professional MerchantAdvance CapitalLLC v Your Trading RoomLLC, 2012 WL 12284924 [Sup Ct Suffolk County Nov. 28, 2012]. In most instances, similar transactions have been found, upon consideration of the factors, to be purchases of receivables rather than loans.The reported decisions set forth three principal factors which the courts have used to determine whether repayment under a merchant agreement constitutes a loan.K9 Bytessupra at

Page 5

817-819. New York law applies a presumption against finding that a transaction is usurious. Central to a determination of whether a transaction qualifies as a loan is whether or not the party who has purchased future receivables has an absolute right to repayment regardless of the circumstances. As the Appellate Division has long held, “‘[f]or a true loan it is essential to provide for repayment absolutely and at all events or that the principal in some way be secured as distinguished from being put in hazard.'” Id. at 816 (quoting Rubenstein v Small, 273 AD 102, 104 [1st Dept 1947]).

The first such factor which every court cited as indicative of whether a transaction is a loan is whether the agreement contains a reconciliation provision. A reconciliation provision gives the merchant the ability to request an adjustment of the amount being withdrawn from its account based on its sales proceeds. The purpose of the reconciliation provision is to allow the merchant to pay according to its receivables, so that the merchant pays less than the daily amount when its business is not doing well or pays more when its business is doing well. If a merchant agreement does not include a reconciliation provision, it may be characterized as a loan. K9 Bytessupra at 817 (citing Professional Merchant Advance CapitalLLC v C Care ServicesLLC, 2015 WL 4392081 at *4 [SDNY July 15, 2015]; MerchFunding Servs., LLC v Volunteer Pharmacy Inc., 55 Misc.3d 316, 318 [Sup Ct Westchester County 2016].The Merchant Agreement in this case contains a reconciliation provision in the “letter for the Adjustable Automated Clearing House Program” which is incorporated into the Merchant Agreement. Notice of Motion, Exhibit C, Section D at 10. The provision states that:

Every two (2) weeks after the funding of the Purchase Price to Seller (the “calculation Period”), either Buyer or Seller (the “notifying party”) may give written notice to the other (the “receiving party”) requesting an increase or decrease in the Daily Payment Amount based upon … the Daily average revenues (in the case of the Total Revenues Program) during the preceding Calculation Period.

The provision continues, stating that the Daily Payment Amount may be increased or decreased based upon the Purchased Percentage of all revenues during the Calculation Period. The provision concludes with the explanation that “[t]he intent of the foregoing adjustments shall be for Buyer to receive the Purchased Percentage of … all revenues, as applicable, of Seller until Buyer has received an amount equal to the Purchased Amount.” Id.

Page 6

The second factor, which has been “deemed quintessential is whether the agreement has a finite term or not.” K9 Bytessupra at 817. The Merchant Agreement does not contain a definite term. In arguing otherwise, Defendants arrived at a term by using the Daily Payment Amount of $209.00 set forth in the Merchant Agreement and calculating the amount of time it would have taken F&A to repay the Purchased Amount if it paid the Daily Payment Amount. Having determined that it would have taken 176 days to do so, Defendants contend that the term of the Merchant Agreement was 176 days. However, because Plaintiff’s ability to collect sales proceeds from F&A was contingent upon F&A actually generating sales and obtaining revenue, neither party could have known when they entered into the Merchant Agreement how long it would actually take for F&A to repay the Purchased Amount. That uncertainty created enough of a contingency for courts to find that the term of such agreements was indefinite and the nature of the agreement was contingent.In IBIS Capital GroupLLC v Four Paws Orlando LLC, 2017 WL 1065071 at * 4 [Sup Ct Nassau County], the court examined the nearly identical agreement and found that “[e]ven if [it] disregarded the existence of the other contingencies, IBIS could never have possessed usurious intent because it was impossible for the parties to know when, if ever, IBIS might collect the full purchased amount, or whether IBIS would even be entitled to collect the full purchased amount.” The parties would not have had sufficient data when they entered into the agreement “to calculate the comparable equivalent to an interest rate …”. Id.The third and final factor which courts consider is whether there is any recourse available to the Buyer if the merchant Seller declares bankruptcy. The Merchant Agreement expressly states that “Buyer, Seller and Guarantor(s) acknowledge and agree that if Seller has not violated the terms of this Agreement, the fact that it goes bankrupt or out of business shall not (a) be considered a Breach, or (b) obligate Guarantor(s) to pay the Purchased Amount to Seller.” Notice of Motion, Exhibit C, Merchant Agreement, Section 4.5 at 5. That provision weighs further in favor of finding that the Merchant Agreement was not a loan.Upon consideration of all of the factors, the Merchant Agreement cannot be considered to be a loan, as a matter of law. The payment amount was subject to adjustment, the term of the Merchant Agreement was indefinite, repayment was contingent upon Defendants’ receipt of revenues and Plaintiff had no recourse against Defendants in the event of F&A declaring bankruptcy. “‘Where

Page 7

payment or enforcement rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest.’ (Professional Merchant Advance Capital LLC v Your Trading RoomLLC, 2012 NY Slip Op 33785[U] [Sup Ct Suffolk County]).” IBIS Capital GroupLLC v Four Paws Orlando LLC, 2017 WL 1065071 [Sup Ct Nassau County]. Accordingly, Defendants’ criminal usury defense is dismissed.

Plaintiff has presented evidence that Defendants breached the Merchant Agreement, as Plaintiff collected only $2,926.00 of the purchased receivables up to Defendants’ termination of Plaintiff’s access to the designated bank account on or about November 18, 2016. Plaintiff is due and owing a balance of $23,314.00 from Defendants. Affidavit of David Lechner, Exhibit H. Defendants have not responded to Plaintiff’s Notice to Admit, which included a request to admit that F&A has generated receivables and collected sales proceeds in excess of $233,140.00 since it terminated Plaintiff’s access to its portion of the sales proceeds. Plaintiff has established that Defendants are in breach of the Merchant Agreement.Defendants have not disputed any of these facts. Plaintiff is entitled to summary judgment as a matter of law.Accordingly, Plaintiff’s motion for summary judgment is granted.2 Plaintiff shall have judgment for $23,314.00, plus pre-judgment interest at 9% pursuant to CPLR §5001(a), and costs.3Plaintiff shall settle judgment with the County Clerk, as provided herein, within 20 days of this Decision and Order.The foregoing constitutes the Decision and Order of this Court.

Dated: March 5, 2018
New City, NY

ENTER/s/_________
HON. PAUL I. MARX, J.S.C.

GTR Source, LLC v Futurenet Group

March 3, 2018 | Legal Decisions by State, New York

Decision, in favor of Lender – COJ specifically allowed entry in six counties, although Defendant claimed CPLR §3218 requires a single county. However, COJs are interpreted in favor of creditors, and defendant only has standing to void the COJ if it violates due process. Due process does not per se (1) require the designation by affidavit of a single county, or (2) prohibit the designation by affidavit of as many as six counties, for the potential entry of judgment by confession against a debtor.

 

Supreme Court, Orange County
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Decided on March 13, 2018
Supreme Court, Part-orange County

GTR Source, LLC, Plaintiff,

against

Futurenet Group, Inc. d/b/a FUTURENET GROUP and PARIMAL D. MEHTA, Defendants.

EF001776-2018

For Plaintiff: Steven S. Wells, Esq., Hodgson Russ LLP, Buffalo, NY, and Ariel Bouskila, Esq., New York, NY

For Defendants: Shane R. Heskin, Esq. and Stuart Wells, Esq., White and Williams LLP, New York, NY
Catherine M. Bartlett, J.

The following papers numbered 1 to 7 were read on Defendants' motion for an order vacating a judgment by confession entered against them on February 14, 2018:

Notice of Motion - Affirmation / Exhibits - Affidavit / Exhibits - Memorandum 1-4

Affirmation in Opposition / Exhibits - Affidavit / Exhibits - Memorandum 5-7

Upon the foregoing papers, it is ORDERED that the motion is disposed of as follows:

In November 2017, the parties entered into a "Merchant Agreement" (the "Agreement") pursuant to which plaintiff GTR Source, LLC ("GTR") purchased from defendant Futurenet Group, Inc. ("Futurenet") its future receivables in the amount of $291,800.00 for the total purchase price of $200,000.00. Futurenet's obligations under the Agreement were personally guaranteed by defendant Parimal D. Mehta ("Mehta"). Futurenent and Mehta are resident in the State of Michigan.

In conjunction with the Agreement Mehta executed an Affidavit of Confession of Judgment on behalf of Futurenet and himself. So far as pertains to the motion before this court, the Affidavit authorized the entry of judgment in favor of GTR and against Futurenet and Mehta in the Federal District Court for the Southern District of New York, and in the Supreme Court of the State of New York for the counties of Richmond, Orange, Westchester, Kings, Erie and Ontario.

In February 2018, Futurenet defaulted on its obligations under the Agreement, whereupon GTR, in reliance on the Affidavit of Confession of Judgment, entered Judgment in this Court on February 14, 2018 against Futurenet and Mehta in the amount of $95,849.00 (the amount confessed less the amount paid), plus attorney's fees pursuant to contract in the amount of 25% of the unpaid balance, plus interest and costs, totaling in all the sum of $120,154.42.

Defendants move to vacate the Judgment against them on the ground that the Affidavit of Confession of Judgment does not comply with the requirements of CPLR §3218. Section 3218 provides in pertinent part:

(a) Affidavit of defendant. ...[A] judgment by confession may be entered, without an action, either for money due or to become due...upon an affidavit executed by the defendant:1. stating the sum for which judgment may be entered, authorizing the entry of judgment, and stating the county where the defendant resides or if he is a non-resident, the county in which entry is authorized;....(b) Entry of judgment. At any time within three years after the affidavit is executed, it may be filed with the clerk of the county where the defendant stated in his affidavit that he resided when it was executed or, if the defendant was then a non-resident, with the clerk of the county designated in the affidavit....

Defendants contend:

(1) that CPLR §3218 requires an Affidavit of Confession of Judgment for out-of-state residents to designate a single county in which a Judgment by Confession may be filed;(2) that the single-county requirement is jurisdictional;(3) that, inasmuch as the Affidavit of Confession of Judgment at issue here designated six New York counties wherein Judgment by Confession was authorized, it failed to comply with the requirements of CPLR §3218; and consequently,(4) that the Judgment herein must, upon motion by the Judgment Debtor, be declared void and vacated.

As a general matter, a debtor seeking to vacate a judgment entered against him upon the [*2]filing of an affidavit of confession of judgment may not proceed by way of motion, but must instead seek relief by commencing a separate plenary action. See, The Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 (2d Dept. 2012); Rubino v. Csikortos, 258 AD2d 638 (2d Dept. 1999); L.R. Dean, Inc. v. International Energy Resources, Inc., 213 AD2d 455, 456 (2d Dept. 1995); City of Poughkeepsie v. Albano, 122 AD2d 14 (2d Dept. 198); Cash and Carry Filing Service, LLC v. Perveez, 149 AD3d 578 (1st Dept. 2017). See also, Siegel, New York Practice §302 (6th ed.).

This rule is not without exception. "The theoretical basis for all judgments by confession is that a defendant may consent in advance to jurisdiction of a 'given court' (National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311...)." Atlas Credit Corp. v. Ezrine, 25 NY2d 219, 227 (1969). Accordingly, a judgment by confession may be vacated upon motion at the behest of the judgment debtor when it was "entered without authority." See, Ripoli v. Rodriguez, 53 AD2d 638 (2d Dept. 1976). The Ripoli Court wrote:

Confessions of judgment are always carefully scrutinized and, in judging them, a liberal attitude should be assumed in favor of judgment***. Confession of judgment entered without authority may be vacated on motion.

Ripoli v. Rodriguez, supra (quoting 4 Weinstein-Korn-Miller, N.Y.Civ.Prac., ¶3218.04 [emphasis added]). Thus, in Irons v. Roberts, 206 AD2d 683 (3d Dept. 1994) , the Third Department held that the unauthorized entry of confessed judgment in a county other than one to which the debtor had consented was void as to the debtor). Id., at 684-685. Similarly, "if the judgment has been entered in violation of the affidavit's terms, such as where it states a time that has not arrived or a contingency that has not occurred," it has been entered without authority and is subject to vacatur on motion by the debtor. See, Siegel, NY Prac. §302 (6th ed.).

Defendants, however, did authorize the entry of the judgment by confession at issue here: they consented to entry of this judgment in Orange County, and judgment was entered in accordance with the terms of their Affidavit of Confession of Judgment. They argue, instead, that a judgment by confession entry of which they authorized is nevertheless void as to them because the terms of the affidavit are defective, i.e., because those terms do not comply with the requirements of CPLR §3218.

Under well established authority, the alleged violation of CPLR §3218 may render the judgment by confession subject to vacatur at the behest of a bona fide creditor, but the debtor Defendants lack standing to contest the terms of their Affidavit of Confession of Judgment unless entry of judgment pursuant thereto was so unfair as to violate Defendants' due process rights.

As the First Department held in Cash and Carry Filing Service, LLC v. Perveez, supra:

[Debtors] lack standing to challenge the affidavit of confession of judgment. An affidavit of confession of judgment pursuant to CPLR 3218 "is intended to protect creditors of a [debtor]," not the [debtor] itself.

Id., 149 AD3d at 578. See also, The Regency Club at Wallkill, LLC v. Bienish, 95 AD3d at 879. Accordingly, David Siegel observes: While a defect in the terms of the affidavit may therefore be exploited by another creditor — even though the underlying transaction is valid — it may not be exploited by the debtor. If the transaction is proper, the affidavit is irrelevant as far as the debtor is concerned.

Siegel, NY Prac. §302 (6th ed.). This principle is eloquently illustrated by Steward v. Katcher, [*3]283 A.D. 50 (1st Dept. 1953).

Steward v. Katcher involved the application of C.P.A. §543, the predecessor statute to CPLR §3218. Section 543(1) provided that a statement (i.e., affidavit) of confession of judgment "may be filed with the county clerk of the county of which the defendant was a resident at the time of making such statement." The debtor corporation maintained its principal offices in Queens County, but explicitly agreed to entry of the judgment in New York County. The debtor thereafter sought to cancel and set aside the New York County judgment, asserting that because it was entered in a county other than its county of residence in violation of C.P.A. §543, it was "jurisdictionally void." Id., 283 A.D. at 51-52.

The Steward Court crystallized the issue as follows:

This appeal poses the question as to whether a judgment entered upon a confession of judgment filed in a county other than the one in which the defendant resides is so jurisdictionally and fatally defective that it is a nullity; or whether it is voidable so that as between themselves, and if creditors' rights do not intervene, the parties may waive the filing requirements of Section 543.

Id., at 51. The Court recognized that if the requirements of C.P.A. §543 were jurisdictional in nature, they could not be waived and the judgment was a nullity. However, observing that (1) the Legislature never indicated that a judgment entered in violation of Section 543 was void and unenforceable (id., at 52), (2) "[t]he legislative regulation of methods of obtaining judgments by confession has always been directed toward the protection of creditors of the defendant" (id., at 53), and (3) the salutary purpose thereof is "substantially accomplished when the improperly filed judgment may be voided by such a creditor" (id.), the Court stated: We cannot conclude, therefore, that the Legislature intended, inexorably and under all circumstances, to deprive such plaintiffs of the opportunity to enforce substantial rights because of procedural error, whether knowing or unknowing. To reach any other construction would require a conclusion that the Legislature intended a pointless, prejudicial and unreasonable discrimination. "A bad result suggests a wrong construction, for the legislature is presumed to have intended to do justice, unless its language compels the opposite conclusion" [cit.om.]. If valid as to any person, the judgment is not an absolute nullity. [cit.om.].

Steward v. Katcher, supra, 283 A.D. at 53-54.

Accordingly, the Steward Court concurred in the holding of Williams v. Mittlemann, 259 AD 697 (2d Dept. 1940) that a judgment by confession filed in a county other than that prescribed by C.P.A. §543 was void as to a bona fide intervening judgment-creditor, but held that the judgment before it was not void as to the judgment debtor, and accordingly denied the debtor's motion to cancel and set aside the confessed judgment. Id., 283 A.D. at 54.

In opposition to the foregoing authority, Defendants cite Yellowstone Capital, LLC v. Sun Knowledge Inc., Orange County Index No. EF001023-2017 (Onofry, J., April 21, 2017). While Yellowstone involves CPLR §3218, the successor statute to C.P.A §543, the case is not otherwise meaningfully distinguishable from Steward v. Katcher, supra, but reaches a contrary result without taking account of Steward or the principles underlying that decision.

In support of its holding that a judgment by confession filed in a county other than that prescribed by CPLR §3218 is subject to vacatur on motion by the judgment debtor, the [*4]Yellowstone court cited Cole-Hatchard v. Nicholson, 73 AD3d 834 (2d Dept. 2010). In that case, the debtor, the perpetrator of a Ponzi scheme, confessed judgment in favor of two of his many victims. A non-party receiver moved to vacate the judgment on behalf inter alia of other victims of the Ponzi scheme (i.e., of other creditors or potential creditors) on the ground that the affidavit of confession of judgment did not comply with the requirements of CPLR §3218(a)(2). Based on an array of caselaw involving the standing of other creditors to move to vacate a judgment by confession, the Second Department in Cole-Hatchard held that the receiver had standing to move to vacate based on non-compliance with CPLR §3218. See, id., 73 AD3d at 835-836.

Cole-Hatchard v. Nicholson has subsequently been cited, correctly, for the proposition that a judgment by confession filed upon an affidavit which does not comply with CPLR §3218 is void as to, and subject to vacatur upon motion by, a bona fide intervening judgment creditor. See, Rubashkin v. Rubashkin, 98 AD3d 1018 (2d Dept. 2012); Massey Knakal Realty of Brooklyn LLC v. W.J.R. Associates, 41 Misc 3d 1239(A) (Sup. Ct. Kings Co. 2013). Indeed, the Massey court correctly applied the principle upheld by Steward v. Katcher, supra: it ruled that while affidavits which failed to comply with CPLR §3218(a)(2) rendered judgments by confession "void to the extent the judgments affect the interests of third parties" (citing Cole-Hatchard), "the defects in the affidavits do not affect the validity of the judgments of confession as against [the debtor]." Massey Knakal Realty of Brooklyn LLC, supra, at *6 (emphasis added).

Inasmuch as the Yellowstone opinion reflects no consideration of this critical distinction between the standing of other creditors and the lack of standing of the judgment debtor to move to vacate a judgment by confession for non-compliance with CPLR §3218, this court declines to follow Yellowstone Capital, LLC v. Sun Knowledge Inc., supra. Assuming without deciding that the Affidavit of Confession of Judgment herein was non-compliant with CPLR §3218 and hence defective because Defendants consented therein to the entry of judgment in more than one county, the court holds that (1) the debtor Defendants lack standing to challenge the terms of their Affidavit, (2) the resulting Judgment by Confession is not void as to them, and (3) thus, the Judgment is not subject to vacatur on the grounds asserted in their motion.

Finally, Defendants rely on the Court of Appeals' decision in Atlas Credit Corporation v. Ezrine, 25 NY2d 219 (1969). In that case, the question was whether New York would afford full faith and credit to a Pennsylvania cognovit judgment entered upon a warrant of attorney which authorized entry of judgment by confession against the debtor anywhere in the world without notice. The Court began:

With the enactment of the Civil Practice Law and Rules (1962) there came a new requirement that the obligor state in the affidavit "the county where [he] resides, or, if he is a non-resident, the county in which entry is authorized" (CPLR 3218, subd. (a), par. 1). The purpose of this change was "so that proper county for entry" of the judgment will be ascertainable from the affidavit (5th Report, Advisory Comm. on Prac. and Pro., NY Legis. Doc., 1961, No. 15, p. 503). Although the change was primarily to protect creditors, it affords some minimal protection to the obligor in that he may be able to ascertain whether judgment was been confessed against him.

Id., 25 NY2d at 226 (emphasis added). Noting that a warrant of attorney authorizing judgment is "so drastic that to honor consent to entry of a judgment anywhere in the world, in advance of commencement of an action, and coupled with a waiver of notice, is not in accordance with [*5]fundamental principles of justice and fair play," and stressing the "vital importance" of "particularity in the selection of a jurisdiction", the Court held that "a warrant of attorney which permits entry of a judgment by confession anywhere in the world without notice violates due process and deprives the rendering court of jurisdiction." Id., at 231-232.

However, in Fiore v. Oakwood Plaza Shopping Center, Inc., 78 NY2d 572 (1991) cert. denied 506 U.S. 823 (1992), the Court of Appeals reconsidered Atlas Credit Corporation in the light of intervening U.S. Supreme Court precedent [FN1] and held that "the conclusion reached in Atlas concerning the per se unconstitutionality of the Pennsylvania cognovit scheme is...no longer valid in light of the subsequent Supreme Court decisions." Id., 78 NY2d at 579. More particularly, citing Overmyer Co. v. Frick Co., 405 U.S. 174, 185 (1972), the Fiore Court held that a debtor's "due process rights to notice and hearing prior to a civil judgment are subject to waiver", and further, that the effectiveness of a debtor's waiver of those rights by affidavit of confession of judgment depends on whether the waiver was "voluntary, knowing, and intelligently made." Id., at 578-579, 581.

Defendants have proffered no due process or waiver analysis. Given the Court of Appeals' rejection in Fiore of Atlas' holding that a procedure whereby entry of judgment without notice may be entered anywhere in the world constitutes per se a due process violation, it is quite clear that due process does not per se (1) require the designation by affidavit of a single county, or (2) prohibit the designation by affidavit of as many as six counties, for the potential entry of judgment by confession against a debtor. Furthermore, since Defendants have not raised the issue, the court is not at this juncture confronted with the question whether the particular circumstances of this case give rise to a due process violation, or whether the Defendants voluntarily, knowingly and intelligently waived their due process rights.

The court has considered Defendants' remaining contentions and finds them to be without merit.

Thus, Defendants have failed to demonstrate their entitlement to vacatur of the judgment by confession entered against them on February 14, 2018. Any relief from that Judgment must be pursued by way of a separate plenary action.

It is therefore

ORDERED, that Defendants' motion to vacate the February 14, 2018 Judgment by Confession against them is denied without prejudice to their seeking relief by way of plenary action.

The foregoing constitutes the decision and order of this Court.

Dated:March 13, 2018

Goshen, New York

E N T E R

______________________________________

HON. CATHERINE M. BARTLETT, A.J.S.C. Footnotes

Footnote 1:See, Overmyer Co. v. Frick Co., 405 U.S. 174 (1972) (holding that Ohio cognovit procedure is not per se unconstitutional); Swarb v. Lennox, 405 U.S. 191 (1972) (holding that Pennsylvania cognovit procedure is not per se unconstitutional).

LG FUNDING, LLC v. CITY NORTH GRILL CORP.

March 2, 2018 | Legal Decisions by State, New York

Not a loan – There is no term in the agreement that would require 56% interest as defendants would suggest. Therefore, even assuming this court were to determine that said agreement is a loan, which it does not, there is no evidence that the amount of interest charged is usurious.In all events, there is no basis to deem the transaction a loan but instead, as courts in this county have repeatedly held, the transaction is an agreement to purchase receivables and not a loan.

Supreme Court Nassau County
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2018 NY Slip Op 30372(U)

LG FUNDING, LLC, Plaintiff,
v.
CITY NORTH GRILL CORP. D/B/A RIVERDALE GRILL HOUSE
AND IGOR BIRZH, Defendants.

Index No.: 606786/2017

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NASSAU

IAS Part 17

RECEIVED: March 2, 2018
February 26, 2018

NYSCEF DOC. NO. 34

Mot. Seq. No.: 001

DECISION AND ORDER

LEONARD D. STEINMAN, J.

The following papers, in addition to any legal memoranda of law submitted by the parties, were reviewed in preparing this Decision and Order:

Plaintiff's Notice of Motion, Affidavit & Exhibits.....................................1
Defendants' Reply Affidavit & Exhibits.................................................2
Plaintiff's Reply Affidavit in Support & Exhibits .......................................3

In this action, plaintiff LG Funding, LLC, seeks to recover from defendants for an alleged breach of a February 8, 2017 Merchant Agreement between LG Funding and defendant City North Grill Corp. ("City North"). Pursuant to the terms of the agreement, City North sold and plaintiff purchased certain City North accounts receivable for a sum of $45,690. In exchange for the purchase, City North agreed to pay plaintiff 15% of its daily revenue until plaintiff received $64,879.80. Pursuant to the agreement, if a default were to occur, the $64,879.80 was due to plaintiff immediately. The individual defendant, Igor Birzh, guaranteed performance of City North.Plaintiff contends that it performed under the contract but that City North breached its agreement by failing to pay amounts due. Plaintiff seeks $50,879 owed on the

receivables, $150 for insufficient funds fees pursuant to the contract, and $2,500 for a default fee under the contract.

Plaintiff commenced this action with the filing of the Summons and Verified Complaint on July 12, 2017. Defendants appeared in the action and asserted various affirmative defenses and counterclaims. Defendants contend that the Merchant Agreement at issue is a usurious loan. Plaintiff seeks to dismiss the seventh affirmative defense and each counterclaim (one through six), all of which rely on the usurious loan argument, except as set forth below.Pursuant to CPLR § 3211(a)(7), the court "[w]hen assessing a motion to dismiss a complaint or counterclaim .... for failure to state a cause of action, the court must afford the pleading a liberal construction, accept as true all facts as alleged in the pleading, accord the pleader the benefit of every possible inference, and determine only whether the facts as alleged fit within any cognizable legal theory." V Groppa Pools, Inc. v. Massello, 106 A.D.3d 722 (2d Dept. 2013); see also Dorce v. Gluck, 140 A.D.3d 1111 (2d Dept. 2016).Notably, on a motion to dismiss, a party is not obligated to demonstrate evidentiary facts to support the allegations contained in the pleadings. See Aurora Loan Services, LLC v. Cambridge Home Capital, LLC, 12 Misc.3d 1152(A)(Supreme Ct. Nassau Co. 2006). And "[w]hether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss." EBC I, Inc. v. Goldman Sachs & Co., 5 N.Y.3d 11, 19 (2005); International Oil Field Supply Services Corp. v. Fadeyi, 35 A.D.3d 372 (2d Dept. 2006). "[A] court may consider any factual submissions made in opposition to a motion to dismiss in order to remedy pleading defects." See Quimones v. Schaap, 91 A.D.3d 739 (2d Dept. 2012); see also CPLR 3211(c). "[T]he criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one." Leon v. Martinez, 84 N.Y.2d 83 (1994).Pursuant to the Penal Law, a party raising a claim of criminal usury must demonstrate that the lender "knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate

Page 3

exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period." Penal Law § 190.40. "There is a strong presumption against the finding of usury." Giventer v. Arnow, 37 N.Y.2d 305 (1975). A "heavy burden rests upon the party seeking to impeach a transaction based upon usury. Thus, usury must be proved by clear and convincing evidence as to all its elements and usury will not be presumed." Hochman v. LaRea, 14 A.D.3d 653 (2d Dept. 2005), see also Freitas v. Geddes Sav. Loan Assn., 63 N.Y.2d 254, 261 (1984).

Plaintiff asserts first that the Merchant Agreement does not contain usurious terms but in all events it is not a loan but instead the purchase of accounts receivable and therefore would not be covered by the statute. Defendants contends that the transaction is a loan agreement and points to the Addendum page which defendants read to require it to pay $2,000 per week until the loan is paid. Defendants calculate that the interest rate could be 56% percent. However, a careful review of the agreement reflects that the most defendants could be responsible each week to pay is 15% of the weekly revenue - capped at $2,000. There is no term in the agreement that would require 56% interest as defendants would suggest. Therefore, even assuming this court were to determine that said agreement is a loan, which it does not, there is no evidence that the amount of interest charged is usurious.In all events, there is no basis to deem the transaction a loan but instead, as courts in this county have repeatedly held, the transaction is an agreement to purchase receivables and not a loan. See LG Funding, LLC v. Christenbury Eye Center, P.A., 2017 WL 6550160 (Sup. Ct. Nassau Co. 2017); see also LG Funding, LLC v. Balsamo, 2017 WL 6806304 (Sup. Ct. Nassau Co. 2017); Merchant Cash and Capital LLC v. Yohowa Medical Services, Inc., 2016 WL 4458806 (Sup. Ct. Nassau Co. 2016) ("Under the terms of the subject Agreement, if Seller/Defendant produces no daily revenue, no payments are required, and there is no absolute obligation of repayment.")Based upon the determinations above, the Seventh Affirmative Defense and the First Counterclaim, Second Counterclaim, Third Counterclaim, Fifth Counterclaim and Sixth Counterclaim are dismissed.

Page 4

The remaining counterclaim (Fourth Counterclaim) seeks a declaration that defendant Igor Birzh did not have the authority to bind City North and therefore City North is not bound by the agreement. This counterclaim is similar to the Second through Fourth Affirmative Defenses, which also challenge Birzh's authority to enter into the agreement and whether the agreement is binding on City North. Plaintiff has not sought to dismiss these affirmative defenses. Because City North may litigate the issue of whether it is bound by the agreement as a result of its affirmative defenses and because its obligations will not be in doubt after the merits of the affirmative defenses are determined --it will either be obligated to pay all of the sums under the contract or nothing --the Fourth Counterclaim is dismissed as mere surplusage.Any relief requested not specifically addressed herein is denied.This constitutes the Decision and Order of this court.Dated: February 26, 2018
Mineola, New York

ENTER:/s/_________
LEONARD D. STEINMAN, J.S.C.

EBF Partners, LLC v. Evolving Solutions Inc.

February 27, 2018 | Indiana, Legal Decisions by State

The Indiana Court of Appeals compared Indiana’s prohibition against cognovit notes with the Full Faith and Credit Clause of the United States Constitution. Against this backdrop, the Court of Appeals considered the implications of the Indiana laws and their public policy with the Full Faith and Credit Clause and the Supremacy Clause. Ultimately, the court concluded that Indiana courts have a duty to enforce a validly obtained judgment from another state.

Ind. App.
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Rapid Capital Fin. v Natures Mkt. Corp.

October 18, 2017 | Legal Decisions by State, New York

Found for lender – because review of the terms of the agreement establishes as a matter of law that it is a purchase agreement rather than a loan, defendants’ usury defense has no merit, and must be dismissed pursuant to CPLR 3211(b).

Reconciliation Provision – While the reconciliation provision here may not have specifically provided a mechanism for defendant to affirmatively seek an adjustment, it imposes on plaintiff an obligation to reconcile defendant’s account so that the amount debited per month would equal the specified percentage; the only proviso on that obligation is that it only continues as long as defendant continues to supply its monthly bank statements as contemplated in the agreement.

Right to inspect financial records – these protective mechanisms do not negate the reconciliation mechanism; they merely protect plaintiff from the types of trickery illustrated by examples offered in defendants’ submissions, such as the possibility that the merchant could hide its receipts by depositing them elsewhere.

Security Agreement – this protection of plaintiff’s ultimate ability to collect its full entitlement is insufficient, alone, to establish that this nominal purchase agreement is, instead, actually a loan.

Supreme Court, Westchester County
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Decided on October 11, 2017
Supreme Court, Westchester County

Rapid Capital Finance, LLC, Plaintiff,

against

Natures Market Corp and Gobran Nagi, Defendants.

54646/2017
Terry J. Ruderman, J.

The following papers were considered in connection with plaintiff's motion pursuant to CPLR 3211 to dismiss certain affirmative defenses and the counterclaim asserted by defendants, and pursuant to CPLR 3024(b) to strike scandalous and irrelevant allegations from defendants' answer and counterclaim:

PapersNumbered

Notice of Motion, Affidavit, Exhibits A - C, and Memorandum of Law 1

Affidavit in Opposition, Exhibit A, and Memorandum of Law 2

Plaintiff Rapid Capital Finance, LLC is a Florida LLC. On November 30, 2016, plaintiff and defendants entered into an agreement denominated a Merchant Agreement, which provided for plaintiff's purchase from defendant Natures Market Corp. of future receivables with a face value of $38,100, for the purchase price of $30,000. In exchange for plaintiff's payment of the purchase price, Natures Market would turn over to plaintiff future receivables, through daily debits of $152.00 from Natures Market's bank account, which, according to the agreement, amounted to 9.1% of Natures Market's average daily sales. The agreement defines events of default, and provides that if a defined default occurs, the full uncollected purchase amount would be immediately due and payable to plaintiff, along with costs and attorneys fees. Individual defendant Gobran Nagi personally guaranteed the obligation.

Plaintiff's complaint alleges that defendants defaulted by blocking collection of further receivables, leaving a balance due of $30,288, along with interest, costs, and attorney's fees. It sues for breach of contract and guarantee, unjust enrichment, and attorney's fees. Defendants' answer asserts as a defense that the Merchant Agreement is unenforceable because it is actually a loan agreement rather than an agreement to purchase receivables, and as such, it is criminally usurious because calculations based on the agreement's repayment provisions establishes that the agreement actually imposes an annual interest rate of 127%. The counterclaim, on the same grounds, seeks a declaratory judgment so stating.

Plaintiff now moves pursuant to CPLR 3211 to dismiss the affirmative defenses claiming usury and the counterclaim to the same effect, and pursuant to CPLR 3024(b) to strike allegedly scandalous and irrelevant allegations from defendants' answer.

Analysis

Initially, the branch of plaintiff's motion seeking to strike scandalous and irrelevant allegations from defendants' answer pursuant to CPLR 3024(b) is denied. The contention that the master agreement is a loan disguised as a purchase agreement, and, as a loan, is usurious, is a legitimate legal position; it is neither scandalous nor irrelevant.

In moving to dismiss, CPLR 3211(a)(1) and (a)(7) may be used to seek dismissal of the counterclaim, while a party may move to dismiss a defense pursuant to CPLR 3211(b) "on the ground that a defense is not stated or has no merit." "In reviewing a motion to dismiss an affirmative defense, the court must liberally construe the pleadings in favor of the party asserting the defense and give that party the benefit of every reasonable inference" (Bank of NY v Penalver, 125 AD3d 796, 797 [2d Dept 2015] [internal quotation marks and citations omitted]). "If there is any doubt as to the availability of a defense, it should not be dismissed" (id.). Dismissal may be warranted under CPLR 3211(a)(1) "if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law" (Leon v Martinez, 84 NY2d 83, 88 [1994]). The question is whether the terms of the Merchant Agreement conclusively establishes the invalidity of the claim that the transaction was actually a loan, on terms that were criminally usurious.

Plaintiff relies, for its conclusive documentary evidence, on the merchant agreement itself, arguing that by its terms the agreement establishes as a matter of law that the transaction was not a loan, and therefore is not subject to the usury loans. "Usury laws apply only to loans or forbearances, not investments. If the transaction is not a loan, there can be no usury, however unconscionable the contract may be" (Seidel v 18 East 17th St. Owners, Inc., 79 NY2d 735, 744 [1992] [internal citations and quotation marks omitted]).

It is not dispositive that the agreement is not called a loan, and that it affirmatively states that it is not a loan. In Qualis Care, L.P. v Everglades Regional Med. Ctr., Inc., (232 AD2d 323, 324 [1st Dept 1996]), the Court held that there was a question of fact as to whether an "agreement to 'purchase' defendant's accounts receivable was in fact a loan, disguised as a purchase." By calling a transaction a merchant agreement, a plaintiff "does not shield it from a judicial determination that such agreement contemplates a criminally usurious transaction" (see Pearl Capital Rivis Ventures, LLC v RDN Constr., Inc., 54 Misc 3d 470 [Sup Ct, Westchester County 2016]). Since it is legally possible that a purported agreement to purchase receivables may in fact be a loan, the absence of a promissory note does not preclude the possibility that a merchant agreement is a loan.

"Purchases and sales of future receivables and sales proceeds are common commercial transactions expressly contemplated by the Uniform Commercial Code" (IBIS Capital Group, LLC v Four Paws Orlando LLC, 2017 NY Slip Op 30477(U), 2017 NY Misc. LEXIS 884 [Sup Ct, Nassau County 2017]). A number of trial-level decisions have considered and rejected arguments that agreements to purchase receivables were loans (see e.g. IBIS Capital Group, LLC v Four Paws Orlando LLC, 2017 NY Slip Op 30477[U] [Sup Ct, Nassau County, 2017]; Merchant Cash & Capital, LLC v Yehowa Med. Servs., Inc., 2016 NY Slip Op 31590[U], *5 [Sup Ct, Nassau County, 2016]; Merchant Cash & Capital, LLC v Ethnicity Inc., 2016 NY Slip Op. 32593(U) at 3-4, 2016 WL 7655827 at 2, 2016 NY Misc LEXIS 4856 at *3-4 [Sup Ct, [*2]Nassau County 2016]; Professional Merchant Advance Capital, LLC v Your Trading Room, LLC, 2012 NY Slip Op 33785[U], *6 [Sup Ct, Suffolk County, 2012]).

Other decisions have held those merchants' arguments to be valid, or at least possibly viable (see e.g. Merchant Funding Servs., LLC v Volunteer Pharm., Inc., 55 Misc 3d 316 [Sup Ct, Westchester County 2016]). In Professional Merch. Advance Capital, LLC v C Care Servs., LLC (2015 US Dist LEXIS 92035, *11, 2015 WL 4392081 [SD NY 2015]), the Court "reserve[d] ruling on damages pending a supplemental submission from Plaintiff as to whether the Agreement — though nominally structured as a sale of accounts receivable — in fact violate[d] New York's criminal usury law." It noted that "[l]ooking beyond the form of [the] transaction and examin[ing] its substance, it could be argued that the Agreement, which obligates Defendants to make a minimum weekly payment irrespective of C Care's accounts receivable and subjects Plaintiff to no downside whatsoever aside from the risk that the borrower will fail to make the required payments, is in fact a loan." (id. at *13).

A useful and thorough analysis was recently provided by Justice Linda Jamison in K9 Bytes, Inc. v Arch Capital Funding, LLC (56 Misc 3d 807, 816 [Sup Ct, Westchester County 2017]). That discussion explains that "[i]n determining whether a transaction is a loan or not, the court must examine whether or not defendant is absolutely entitled to repayment under all circumstances. 'For a true loan it is essential to provide for repayment absolutely and at all events or that the principal in some way be secured as distinguished from being put in hazard'" (K9 Bytes, 56 Misc 3d at 816, quoting Rubenstein v Small, 273 App Div 102, 104 [1st Dept 1947].)

"[T]here are certain factors that a court should look for to see if repayment is absolute or contingent. The first, and the one cited by each and every court that found that the transaction was not a loan, is whether or not there is a reconciliation provision in the agreement. The reconciliation provisions allow the merchant to seek an adjustment of the amounts being taken out of its account based on its cash flow (or lack thereof). 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.).

Here, the parties' agreement contains such a reconciliation provision, which provides that

"RCF will debit the Specific Amount each period and upon receipt of the merchant's monthly bank statements to reconcile the merchant's account by either crediting or debiting the difference from or back to the merchant's bank account so that the amount debited per month equals the Specified Percentage. It is solely the merchant's responsibility to send all of their bank statements and a missed month forfeits all future reconciliations" (Plaintiff's Exhibit A p. 1)

Defendant argues that although the parties' agreement includes the foregoing reconciliation provision, that provision may not be relied on to establish that repayment is contingent rather than absolute, because defendant had no control or ability to enforce plaintiff's compliance with the reconciliation procedure. That is, unlike in K9 Bytes, the reconciliation provision here did not "allow the merchant to seek an adjustment of the amounts being taken out of its account based on its cash flow (or lack thereof) [i]f [it] is doing poorly" (see id. [emphasis added]). Indeed, defendant suggests, a request by defendant for reconciliation would violate the material adverse change covenant, which would constitute a default.

Defendants' argument must fail. While the reconciliation provision here may not have specifically provided a mechanism for defendant to affirmatively seek an adjustment, it imposes on plaintiff an obligation to reconcile defendant's account so that the amount debited per month would equal the specified percentage; the only proviso on that obligation is that it only continues as long as defendant continues to supply its monthly bank statements as contemplated in the agreement. Therefore, if the merchant's receipts decreased, after the monthly reconciliation defendant would be entitled to a downward adjustment, so that the amount plaintiff ultimately debited would be limited to 9.1% of the merchant's receipts.

Defendants protest that other provisions of the agreement ensured that plaintiff would never adjust down its monthly debited sum, in that the agreement gives plaintiff the ability to investigate the merchant's finances in the event its monthly receipts are low. However, these protective mechanisms do not negate the reconciliation mechanism; they merely protect plaintiff from the types of trickery illustrated by examples offered in defendants' submissions, such as the possibility that the merchant could hide its receipts by depositing them elsewhere.

Another consideration in distinguishing between loans and purchases of receivables is that a loan has a finite term, with a definite point at which repayment is required, whereas the period over which repayment will be made for a receivables purchase agreement is indeterminate (see K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d at 817). Under a receivables purchase, the time in which the collection of a percentage of the merchant's sales proceeds will be complete is contingent upon the merchant generating sales and those sales resulting in the collection of revenue (id., citing IBIS Capital Group, LLC v. Four Paws Orlando LLC, 2017 NY Slip Op 30477(U) [Sup Ct Nassau County 2017]).

Defendants also point to their execution of a security agreement giving plaintiff a security interest in all Natures Market's accounts, to argue that the transaction must be a loan since "[f]or a true loan it is essential to provide for repayment absolutely and at all events or that the principal in some way be secured as distinguished from being put in hazard" (K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d at 816, quoting Rubenstein v Small, 273 App Div 102, 104 [1st Dept 1947] [internal quotation marks omitted] [emphasis added]). However, this protection of plaintiff's ultimate ability to collect its full entitlement is insufficient, alone, to establish that this nominal purchase agreement is, instead, actually a loan.

Because review of the terms of the agreement establishes as a matter of law that it is a purchase agreement rather than a loan, defendants' usury defense has no merit, and must be dismissed pursuant to CPLR 3211(b). The counterclaim seeking a declaratory judgment on the same ground must be dismissed for the same reason.

Based upon the foregoing, it is hereby,

ORDERED that plaintiff's motion is granted to the extent that the defense and counterclaim based on the claim of usury are dismissed, and it is further

ORDERED that the parties are directed to appear on Monday, November 13, 2017, at 9:30 a.m., in the Preliminary Conference Part, Westchester County Supreme Court, 111 Dr. Martin Luther King Boulevard, White Plains, New York.

This constitutes the Decision and Order of the Court.

Dated: October 11, 2017

White Plains, New York

HON. TERRY JANE RUDERMAN, J.S.C.

QFC, LLC v Iron Centurian LLC

July 5, 2017 | Legal Decisions by State, New York

“Denominating a loan document by another name, as in this case, by calling it a Merchant Agreement, and including in it verbiage of [the funder’s] purported purchase of accounts receivable that is unsupported by actual [business] receivables dedicated to repayment, does not shield it from the judicial determination that it contemplates a criminally usurious transaction, which is void ab initio as a matter of law.”

Supreme Court Westchester County
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Colonial Funding Network v Epazz

May 9, 2017 | Legal Decisions by State, New York

The court focused on the reconciliation clause noting that “Defendants’ argument that the actual daily payments ensure that TVT will be paid the full receipts purchased amounts within approximately 61 to 180 business days . . . is contradicted by the reconciliation provisions which provide that if the daily payments are greater than 15% of Epazz’s daily receipts, TVT must credit the difference to Epazz, thus limiting Epazz’s obligation to 15% of daily receipts.” The court further noted that “[n]o allegation is made that TVT ever denied Epazz’s request to reconcile the daily payments.”

US Dist Ct Southern Dist NY
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K9 Bytes, Inc. v Arch Capital Funding, LLC

May 4, 2017 | Legal Decisions by State, New York

The reported decision sets forth three principal factors which the courts have used to determine whether repayment under a merchant agreement constitutes a loan. The first such factor which every court cited as indicative of whether a transaction is a loan is whether the agreement contains a reconciliation provision. The second factor, which has been deemed quintessential is whether the agreement has a finite term or not. Because Plaintiff’s ability to collect sales proceeds from F&A was contingent upon F&A actually generating sales and obtaining revenue, neither party could have known when they entered into the Merchant Agreement how long it would actually take for F&A to repay the Purchased Amount. That uncertainty created enough of a contingency for courts to find that the term of such agreements was indefinite and the nature of the agreement was contingent. The third and final factor which courts consider is whether there is any recourse available to the Buyer if the merchant Seller declares bankruptcy.

Supreme Court, Westchester County
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Jonathan M. Proman, Esq.

Attorney for Plaintiffs

30 Wall St., 8th Fl.

New York, NY 10005

Guiliano McDonnell et al.

Attorneys for Arch

170 Old Country Rd., No.608

Mineola, NY 11501

Proskauer Rose LLP

Attorneys for Cap Call

11 Times Sq.

New York, NY 10036
Linda S. Jamieson, J.

The following papers numbered 1 to 10 were read on these motions:

Paper/Number

Notice of Motion 1

Affirmation and Exhibits 2

Affirmation and Exhibits 3

Memorandum of Law 4

Notice of Motion, Affirmation and Exhibits 5

Memorandum of Law 6

Memorandum of Law, Affirmation and Exhibits in Opposition 7

Reply Affirmation and Exhibits 8

Reply Memorandum of Law 9

Reply Memorandum of Law 10

There are two motions to dismiss before the Court, one filed by each defendant. Although the defendants are similarly-situated, in that each is a company that provides working capital to businesses, using contracts that expressly state that they are "Merchant Agreements" and not loans, the forms that each company uses are different in one main respect, as will be discussed below.

Background

A brief summary of the relevant facts is necessary. Certain of the plaintiffs entered into three different agreements with Arch Capital Funding, LLC ("Arch") during 2015 and 2016. Pursuant to these agreements, Arch gave plaintiffs $166,000, and plaintiffs gave Arch future receivables worth $241,334. Each of these three agreements provided that Arch could take no more than 13-15% of that day's receivables, or a set daily amount. The agreements state that payments made to Arch "shall be conditioned upon Merchant's sale of products and services and the payment therefore by Merchant's customers." The agreements had no termination date, but provided for an automatically renewable one-year term (the "evergreen provision").

The agreements all provide that Arch shall, upon plaintiffs' request, "reconcile the Merchant's account by either crediting or debiting the difference between the amount debited and the Specified Percentage, from or back to the Merchant's bank account so that the amount debited each month equals the Specified Percentage." This is the "reconciliation provision." The agreements also allow plaintiffs to request that the estimated daily amount be changed.

Plaintiff Epazz, Inc. ("Epazz") and defendant Cap Call, LLC ("Cap Call") entered into an agreement [FN1] dated February 2016 in which Cap Call gave Epazz $120,000 in exchange for future receivables of $179,880. The agreement provides, similarly to the Arch agreements, for Cap Call to take no more than 15% of the daily receipts, or a fixed daily amount of $1,635. The agreement provides that the receipts shall be "from settlement amounts which would otherwise be due to Merchant from electronic check transaction or other payment processing transactions." The agreement also had an evergreen provision, just as the Arch agreements did. Although Cap Call argues that its agreement [*2]contains a reconciliation provision, a review of the language that it points to does not support this. As Cap Call states in its memorandum of law, the provision only provides that Cap Call can "view Epazz's bank account 'in order to calculate the amount of [Epazz's] daily payment.'" Unlike the Arch agreements, it does not state that Epazz can seek to have the amount changed. Nor does it state that any overage or underpayment will be repaid to plaintiffs or taken from plaintiffs.

Plaintiffs breached the agreements on or about March 1, 2016, and commenced this action soon after.

Analysis

The amended complaint contains twelve causes of action. Three concern usury, and four concern RICO, 18 U.S.C. § 1962. In sum, the claims are: (1) to vacate the judgments by confession because of usury "and other wrongful conduct;" (2) to obtain a judgment against defendants because of usury, and to vacate the agreements; (3) to obtain a judgment based on the overcharge of interest; (4) damages for the violation of the Licensed Lender Law, NY Banking Law § 340; (5) damages arising under RICO, subsection (a); (6) damages arising under RICO, subsection (b); (7) damages arising under RICO, subsection (c); (8) damages arising under RICO, subsection (d); (9) to obtain a judgment rescinding the agreements; (10) damages for fraudulent inducement; (11) damages for unconscionability; and (12) damages for prima facie tort.

Arch argues that certain of the claims — the first, second, ninth and eleventh — all must be dismissed out of hand because they are not actionable claims under New York law. Beginning with the first, to vacate the confessions of judgment because of usury, the Court cannot agree with Arch that there is no such cause of action. Rather, all of the cases cited by Arch allow for such relief upon a plenary action — which plaintiffs have commenced. See, e.g., Malhado v. Cordani, 153 AD2d 673, 544 N.Y.S.2d 674, 675 (2d Dept. 1989) ("A person seeking to vacate a confession of judgment and judgment entered thereon must commence a plenary action for that relief."); L.R. Dean, Inc. v. Int'l Energy Res., Inc., 213 AD2d 455, 456, 623 N.Y.S.2d 624, 625 (2d Dept. 1995) ("The general rule is that a party seeking to set aside an affidavit of confession of judgment and to vacate a judgment entered thereon must commence a plenary action for that relief."). The first cause of action cannot thus be dismissed on this basis. However, this claim is addressed in detail below.

Next, the ninth cause of action seeks recission based on misrepresentations or unilateral mistake. Putting aside whether recission can be pled as a claim or not, there are no facts alleged that would support a claim based on misrepresentations or unilateral mistake. Plaintiffs claim that defendants misled them by representing that they were entering into "loans governed by [*3]usury laws," but instead caused them "to enter into 'merchant agreements.'"[FN2] They state that they would not have knowingly entered into merchant agreements, because what they really wanted were loans. Indeed, plaintiffs allege that "the word 'purchase' or 'sale' would have caused Passley to decline a transaction with [defendants] because a loan — the product Passley wanted to obtain — is not a purchase or sale."

A review of the contracts in this action shows that not only do they all clearly state that they involve purchases or sales, but they all expressly state that they are not loans. Even if someone were confused by the contracts, or did not understand the obligation or the process, by reading the documents, one would grasp immediately that they certainly were not straightforward loans. The very first heading on the page was "Merchant Agreement," and the second heading says "Purchase and Sale of Future Receivables." (This is the third heading on the Cap Call agreement, with the second reading "Merchant Information.")

For plaintiffs to state that they would not have entered into a purchase or sale if they had known that that is what they were doing is utterly undermined by the documents themselves. As the Second Department has held, in Karsanow v. Kuehlewein, 232 AD2d 458, 459, 648 N.Y.S.2d 465, 466 (2d Dept. 1996), "the subject provision was clearly set out in the . . . agreements, and where a party has the means available to him of knowing by the exercise of ordinary intelligence the truth or real quality of the subject of the representation, he must make use of those means or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations." So too here, plaintiffs had the means to understand that the agreements set forth that they were not loans. As it has long been settled that a party is bound by that which it signs, the Court finds that the ninth cause of action, for recission based on misrepresentation or mistake, and the tenth cause of action, for fraudulent inducement based on misrepresentation, must be dismissed as a matter of law. Pimpinello v. Swift & Co., 253 NY 159, 162-63 (1930) ("the signer of a deed or other instrument, expressive of a jural act, is conclusively bound thereby. That his mind never gave assent to the terms expressed is not material. If the signer could read the instrument, not to have read it was gross negligence; if he could not read it, not to procure it to be read was equally negligent; in either case the writing binds him.").

As for the eleventh cause of action, which seeks judgment voiding the merchant agreements because of unconscionability, defendants state, without contradiction, that unconscionability is not a claim, but a defense. The Court agrees. "The concept of unconscionability . . . does not create a new cause of action to recover damages . . . but, rather, provides a defense for a party opposing enforcement of a contract or a cause of action for rescission of a contract. Thus, the plaintiffs' causes of action founded upon unconscionability do not set forth cognizable claims and should have been dismissed." Bevilacque v. Ford Motor Co., 125 AD2d 516, 519, 509 N.Y.S.2d 595, 599 (2d Dept. 1986). See also Lewis v. Hertz Corp., 181 AD2d 493, 495, 581 N.Y.S.2d 305, 307 (2d Dept. 1992). The eleventh cause of action is thus dismissed.

The twelfth cause of action seeks damages for prima facie tort as an "alternative" cause of action. "Prima facie tort affords a remedy for the infliction of intentional harm, resulting in damage, without excuse or justification, by an act or a series of acts which would otherwise be lawful. The requisite elements of a cause of action for prima facie tort are (1) the intentional infliction of harm, (2) which results in special damages, (3) without any excuse or justification, (4) by an act or series of acts which would otherwise be lawful." Freihofer v. Hearst Corp., 65 NY2d 135, 142-43 (1985). Indeed, "there is no recovery in prima facie tort unless malevolence is the sole motive for defendant's otherwise lawful act or, in Justice Holmes' characteristically colorful language, unless defendant acts from 'disinterested malevolence'." Burns Jackson Miller Summit & Spitzer v. Lindner, 59 NY2d 314, 333 (1983) (emphasis added).

Here, it is quite clear, from reviewing all of plaintiffs' papers, that defendants' sole motivation was profit (or greed, as plaintiffs would have it.). According to plaintiffs' papers, defendants did not care one whit about plaintiffs, other than to view them as "cash cows." There is no "disinterested malevolence," the basis for a claim of prima facie tort and, accordingly, the twelfth cause of action is dismissed.

The fourth cause of action seeks damages based on defendants' alleged violation of Licensed Lender Law § 340.[FN3] A [*4]review of this statute shows that it only applies to loans made to individuals. Even assuming that the transactions here were loans, none were made to individuals. Plaintiffs' reliance on the section of the statute that states that it covers loans "in a principal amount of fifty thousand dollars or less for business and commercial loans" ignores the second paragraph, which limits the applicability to companies that engage in the business of making loans to individuals. As plaintiffs have failed to allege that defendants are in the business of making loans to individuals, this cause of action must be dismissed.

Turning next to the usury claims, the second cause of action seeks judgment against defendants based on usury. It has long been settled in this state that criminal usury may only be asserted as a defense by a corporation, and never as a means to seek affirmative relief.[FN4]
While the statute expressly prohibits only the interposition of usury as a defense, this court has employed the principle that a party may not accomplish by indirection what is directly forbidden to it and has accorded the rule a broader scope. Thus, it is well established that the statute generally proscribes a corporation from using the usury laws either as a defense to payment of an obligation or, affirmatively, to set aside an agreement and recover the usurious premium. The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan and may not, as attempted here, be employed as a means to effect recovery by the corporate borrower.

Intima-Eighteen, Inc. v. A.H. Schreiber Co., 172 AD2d 456, 457-58, 568 N.Y.S.2d 802, 804 (1st Dept. 1991). The Court must thus dismiss the second cause of action.

The third cause of action, which seeks judgment "based on an [*5]overcharge of interest" and to void the agreements, is nothing more than another way of pleading usury as a form of affirmative relief. Plaintiffs actually acknowledge this, stating that "a usury claim falls within the meaning of overcharge of interest." Thus, this claim must also be dismissed.

The first cause of action, and the RICO claims, turn on whether or not the agreements are usurious. In order to determine that, the Court must first determine whether the contracts are loans or not. "Usury laws apply only to loans or forbearances, not investments. If the transaction is not a loan, there can be no usury, however unconscionable the contract may be." Seidel v. 18 E. 17th St. Owners, Inc., 79 NY2d 735, 744 (1992).

In New York, there is a presumption that a transaction is not usurious. As a result, claims of usury must be proven by clear and convincing evidence, a much higher standard than the usual preponderance. Giventer v. Arnow, 37 NY2d 305, 309 (1975). In determining whether a transaction is a loan or not, the Court must examine whether or not defendant is absolutely entitled to repayment under all circumstances. "For a true loan it is essential to provide for repayment absolutely and at all events or that the principal in some way be secured as distinguished from being put in hazard. " Rubenstein v. Small, 273 App. Div. 102, 104 (1st Dept. 1947).

Many trial courts have examined similar agreements in the last several years, and have largely determined that most of them are not loans, but purchases of receivables. See, e.g., Merchant Cash and Capital, LLC v. Yehowa Medical Services, Inc., 2016 WL 4478805 at *5 (Sup. Ct. Nassau Co. July 29, 2016) ("Under the terms of the subject Agreement, if Seller/Defendant produces no daily revenue, no payments are required, and there is no absolute obligation of repayment. While the terms of payment provided for in the Agreement may be onerous, they do not involve a loan or forbearance of money, and are unaffected by civil or criminal usury status."); Professional Merchant Advance Capital, LLC v. Your Trading Room, LLC, 2012 WL 12284924 (Sup. Ct. Suff. Co. Nov. 28, 2012) ("Upon review of the record adduced on this motion, the court finds that Waryn failed to establish that the subject agreement to purchase credit card receivables was a loan and not an agreement to purchase future receivables for a lump sum discounted purchase price payable in advance by the plaintiff in exchange for a contingent return.").

The very recent case of IBIS Capital Group, LLC v. Four Paws Orlando LLC, 2017 WL 1065071 (Sup. Ct. Nassau Co. March 10, 2017), reviewed many of these cases. Reading through all of them, it is clear that there are certain factors that a court should look for to see if repayment is absolute or contingent. The first, and the one cited by each and every court that found [*6]that the transaction was not a loan, is whether or not there is a reconciliation provision in the agreement. The reconciliation provisions allow the merchant to seek an adjustment of the amounts being taken out of its account based on its cash flow (or lack thereof). 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. See, e.g., Retail Capital, LLC v. Spice Intentions Inc., 2017 WL 123374 at *2 (Sup. Ct. Queens Co. Jan. 3, 2017) (not a loan when "The agreement provided a reconciliation on demand provision whereby the parties [were each] permitted to demand the monthly reconciliation of funds from the other to ensure that neither entity collected more or less of the sales proceeds than they were contractually entitled to collect from the designated bank account.").

If there is no reconciliation provision, the agreement may be considered a loan. See Professional Merchant Advance Capital, LLC v. C Care Services, LLC, 2015 WL 4392081 at *4 (SDNY July 15, 2015) (agreement obligated merchant "to make a minimum weekly payment irrespective of" the accounts receivable," such that it was a loan); Merch. Funding Servs., LLC v. Volunteer Pharmacy Inc., 55 Misc 3d 316, 318, 44 N.Y.S.3d 876, 878 (Sup. Ct. West. Co. 2016). In this action, the Arch agreements all provide for reconciliation. The Cap Call agreement, in contrast, does not, as discussed above in the Background section.

The next provision that is deemed quintessential is whether the agreement has a finite term or not. If the term is indefinite, then it "is consistent with the contingent nature of each and every collection of future sales proceeds under the contract." IBIS Capital Group, LLC v. Four Paws Orlando LLC, 2017 WL 1065071 at *5 (Sup. Ct. Nassau Co. March 10, 2017). This is because defendants' "collection of sales proceeds is contingent upon [plaintiffs'] actually generating sales and those sales actually resulting in the collection of revenue." Id. Indeed, "neither party could have known when the Agreement might end because [plaintiffs'] collection of sales proceeds was wholly contingent upon the outside factor of customers actually . . . paying for products and services. The existence of this uncertainty in the length of the Agreement is an express recognition by the parties of the wholly contingent nature of this Agreement." Id. at 5-6. See also Merchant Cash and Capital, 2016 WL 4478805 at *4 ("the period over which such payment would take place was indeterminate."); Chartrock v. National Bank of California, Index No. 708688/2016 at 2 (Sup. Ct. Queens Co. Jan. 17, 2017) (same); Platinum Rapid Funding Group Ltd. v. VIP Limousine Services, Inc., Index No. 604163/2015 at 5 [*7](Sup. Ct. Nassau Co. June 8, 2016). All of the agreements here have this provision.

The final factor, cited in Ibis, is whether the defendant has any recourse should the merchant declare bankruptcy. The Ibis agreement provides that if the merchant declares bankruptcy, it will not be a breach, nor will it obligate the guarantors to pay. This is a much more forgiving provision, not present in any of the agreements in the instant action. It is virtually impossible to read the Cap Call agreement, but it does appear that Section 3.1 states that bankruptcy is a basis for declaring a default. The Arch agreement does not state that bankruptcy is a basis for a default, but it does state that should the merchant file for bankruptcy, the personal guaranty may be enforced, and Arch may file the confession of judgment. This factor thus weighs against defendants.

Having weighed all of the factors, the Court finds that the Arch agreements are sufficiently risky such that they cannot be considered loans, as a matter of law. Under no circumstances could Arch be assured of repayment, because its agreements are contingent on a merchant's success, and the term is indefinite. Accordingly, the Court dismisses the usury claims against Arch in their entirety. Not only does this dismiss the first cause of action as to Arch, but it also dismisses the fifth, sixth, seventh and eighth causes of action, the RICO claims, as to Arch. The Court notes that RICO claims have "a heightened pleading requirement because such assertion has been found to be an unusually potent weapon — the litigation equivalent of a thermonuclear device." Besicorp Ltd. v. Kahn, 290 AD2d 147, 151, 736 N.Y.S.2d 708, 712 (3d Dept. 2002).

Each of these RICO claims requires that a defendant do one of two things: either (1) have collected an unlawful debt; or (2) engaged in a pattern of racketeering activity. See 18 U.S.C.A. § 1962(a) ("It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt . . . ."). Since the Court has already determined that Arch did not collect an unlawful debt, it can only be liable under RICO if it engaged in a pattern of racketeering activity. According to plaintiffs, in order to constitute a pattern of racketeering activity, there must be activity of a continuing nature. Indeed, "In order to sustain a civil RICO claim, a party is required to allege that the multiple predicates constitute a pattern of racketeering activity. Further, to allege a pattern of racketeering activity, a party must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." NY Mortg. Servicing Corp. v. Dake, 179 AD2d 1007, 1007, 579 N.Y.S.2d 276, 277 (4th Dept. 1992).

Plaintiffs allege that this activity consisted of Arch and Cap Call, "through its [sic] representatives, engaged in more than two loan misrepresentations, whether through loan-only emails or verbally." The Court has already found that there were no actionable misrepresentations, as set forth above at pages 5-7. Nor are there any other allegations that can constitute a "pattern of racketeering." The Court thus dismisses all of the RICO claims as to Arch, and all of the RICO claims alleging a "pattern of racketeering activity" as to Cap Call.

However, the same finding of "non-loan" does not necessarily hold true for the Cap Call agreement. The Cap Call agreement appears to remove much of the risk from the calculation, by omitting the reconciliation provision from the agreement. The Court thus cannot find, as a matter of law, that the Cap Call transaction is not a loan. As a result, the Court cannot grant Cap Call's motion to dismiss the first cause of action.

To the extent that the fifth, sixth, seventh and eighth causes of action seek damages based on the alleged collection of an "unlawful debt," they are not dismissed because the Court has not determined that the transaction was not a loan. Should the Court ultimately determine that the Cap Call transaction was, in fact, a loan and was usurious, these claims may be valid.

The foregoing constitutes the decision and order of the Court.

Dated: May 4, 2017

White Plains, New York

____________________________

HON. LINDA S. JAMIESON

Justice of the Supreme Court Footnotes

Footnote 1:The agreement is nearly illegible. Cap Call should have at least attached a blank exact duplicate so that the Court could have read it more easily.

Footnote 2:Plaintiffs fail to identify specifically how every one of these alleged misrepresentations can be attributed to each defendant. Instead, plaintiffs allege, without any detail, that the person making the alleged misrepresentation is somehow "affiliated" with a defendant.

Footnote 3:This section provides, in relevant part, that "No person or other entity shall engage in the business of making loans in the principal amount of twenty-five thousand dollars or less for any loan to an individual . . . and in a principal amount of fifty thousand dollars or less for business and commercial loans, and charge . . . a greater rate of interest than the lender would be permitted by law to charge if he were not a licensee. . . . For the purposes of this section, a person or entity shall be considered as engaging in the business of making loans in New York . . . if it solicits loans in the amounts prescribed by this section within this state and, in connection with such solicitation, makes loans to individuals then resident in this state, except that no person or entity shall be considered as engaging in the business of making loans in this state on the basis of isolated, incidental or occasional transactions which otherwise meet the requirements of this section." (Emphasis added).

Footnote 4:The Court is puzzled by plaintiffs' assertion, at Section VII of their memorandum of law, that usury is an affirmative claim since it is black letter law in this state that corporations may not use it affirmatively.

 

Yellowstone Capital, LLC v Sun Knowledge Inc.

April 21, 2017 | Legal Decisions by State, New York

Borrower won decision to set aside a COJ filed on Orange County. CPLR 3218 states that a COJ should be filed in the county in which the debtor resides, or, if debtor is an out-of-state resident, the county in the agreement.  Borrower was located in a nearby county in NY, and was not out-of-state, so Orange County was not the right venue. The forum selection clause in the MCA agreement did not comply with CPLR 3218 and would not be enforced.

Supreme Court, Orange County
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[pdf-embedder url="http://mcarelief.wpengine.com/wp-content/uploads/2018/08/Yellowstone-v-Sun-Knowledge.pdf" title="Yellowstone v Sun Knowledge"]

Merchant Funding Srvs. v Volunteer Pharm. Inc.

December 30, 2016 | Legal Decisions by State, New York

The requirement of the two guarantors (along with the other facts) demonstrate that the principal sum advanced was absolutely repayable with calculated interest that exceeds the legal rate. Lender offers no evidence that it purchased certain of VP’s receivables, that such receivables were dedicated to the repayment of the monies loaned, and that the risk inherent in the payment by way of these receivables was borne by MFS.   No need for plenary action – By recognizing the lack of necessity for a plenary action in cases where criminal usury is clear from the submissions attendant to a motion under CPLR 5015 [a] [3], the victims of predatory lending through such illegal loan agreements are spared the needless cost in time and money of pursing a plenary action, the outcome of which would be the same.

 

Supreme Court, Westchester County
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Decided on December 30, 2016
Supreme Court, Westchester County

Merchant Funding Services, LLC, Plaintiff,

against

Volunteer Pharmacy Inc. d/b/a VOLUNTEER PHARMACY, TOBY C. FROST and CAMILLA FROST, Defendants.

58741/16

Renata Bukhman, Esq.

Attorney for Plaintiff

17 State Street - Suite 4000

New York, New York 10004

Amos Weinberg, Esq.

Attorney for Defendants

49 Somerset Drive South

Great Neck, New York 10020
David F. Everett, J.

The following papers were read on the motion:

Notice of Motion/Affidavit in Supp/Exhibits A-E/Memorandum of Law

Aff in Opp/Exhibits A-D/Memorandum of Law in Opp

Reply Memorandum of Law

A judgment based on a loan agreement that is usurious on its face does not

require a plenary action to vacate that judgment. The fact that the loan agreement is

denominated by another name does not shield it from a judicial determination that such [*2]agreement contemplates a criminally usurious transaction.

Defendants Volunteer Pharmacy Inc. d/b/a Volunteer Pharmacy (VP), Toby C. Frost

(T. Frost) and Camilla Frost (C. Frost) move for an order, pursuant to CPLR 5015, vacating the confession of judgment, voiding the written Merchant Agreement, and cancelling and enjoining prosecution on the Merchant Agreement on the ground that it contemplates an illegal transaction. The motion is opposed.

Upon the forgoing papers, the motion is granted.[FN1]

The following facts are taken from the parties' motion papers, opposition papers, annexed exhibits and the record, and are undisputed unless otherwise indicated.

On or about June 21, 2016, plaintiff Merchant Funding Services, LLC (MFS) filed an affidavit of nonpayment in support of the entry of a confession of judgment in the Office of the Westchester County Clerk. Along with the affidavit of nonpayment, MFS submitted copies of two affidavits of confession of judgment dated February 11, 2016. One was executed by C. Frost and the other by T. Frost. In their respective affidavits, C. Frost and T. Frost confessed judgment and authorized the entry of judgment in favor of MFS and against VP and each of them in the sum of $74,750.00, less any payments timely made under the terms of a written document drafted by MFS entitled Merchant Agreement (Agreement). Both affidavits of confession of judgment were dated and executed on the same date as the Agreement, that being February 11, 2016.

The affidavit of nonpayment submitted in support of entry of the confession of judgment states, in relevant part, that on February 11, 2016, VP entered into a secured merchant agreement pursuant to which "MFS agreed to buy all rights of the Defendant VP's future accounts receivable, having a face value of $74,750.00. The purchase price for these receivables was $50,000.00" (aff of nonpayment, ¶ 3). The affidavit of nonpayment further states: "[p]ursuant to the Agreement, Defendant VP authorized MFS to debit from its bank account, by means of an online ACH [Automated Clearing House] debit, a percentage of Defendant VP's accounts receivable (the 'Specified Percentage'), until the purchased amount of receivables — $74,750 — was paid in full" (aff of nonpayment, ¶ 4). The Specified Percentage set forth in the Agreement is 15%.

The judgment of confession entered in the Office of the Westchester County Clerk on June 23, 2016, adjudged MFS entitled, with execution thereof, to recover from defendants, jointly and severally, the sum of $34,887.00, plus interest at 16% in the amount of $107.05, plus costs and disbursements in the amount of $225.00, plus attorneys' fees in the amount of $8,721.75, for a total sum of $43,940.80.

Defendants now move for an order vacating the judgment on the ground that the underlying Agreement constituted a usurious loan, cloaked as a purchase of defendants' receivables, based on: the lack of forgiveness of the loan if defendants are unable to collect the receivables; the annual percentage rate of 167% for the $50,000 loan resulting from fixed payments of $999.00 each business day over a period of approximately 105 days; and the Agreement's elimination of all risk and contingency from plaintiff's ability to collect, and that [*3]enforcement of a judgment based on a usurious contract is improper and against public policy.

In his affidavit in support of the motion to vacate, T. Frost avers that "MFS never asked for the identity of any receivable or customer of [VP]," and that the only review performed by MFS prior to entering into the transaction was that of "prior bank statements to gauge [VP's] cash flow" (T. Frost at 2). T. Frost denies any connection or relationship between MFS and VP's receivables, stating "MFS no more purchased [VP's] receivables than a bank which gives people loans after getting proof of their employment is purchasing their future paychecks" (id.). He argues that the Agreement was drafted so as to remove all risk and contingency from MFS, with VP's guarantors responsible for full payment, without contingency, should there be an event of default under the Agreement, and points to certain provisions in the Agreement which support his position.

MFS opposes the motion as procedurally defective for not proceeding by way of a plenary action, and on the ground that the Agreement between it and the corporate defendant is not usurious, because it memorialized a purchase and sale of future accounts receivable, rather than a loan. It is MFS's position that the Agreement constitutes evidence confirming that MFS provided $50,000.00 to VP in exchange for the return of $74,750.00, denominated in the Agreement as the "Receipts Purchased Amount." According to the affidavit of nonpayment submitted in opposition by MSF underwriter Tsvi Davis (Davis), VP defaulted after making payments totaling $39,863.00, leaving a balance due and owing in the amount of $34,887.00 (notice of motion, exhibit D). Davis further states that, under the terms of the confession of judgment affidavits, MFS is also entitled to legal fees equal of 25% of the default amount ($34,887.00), for the sum of $8,741.75, plus costs (id.).

CPLR 5015 (a) (3) provides that the Court may vacate a judgment on grounds of "fraud, misrepresentation, or other misconduct of an adverse party." Here, defendants contend that the Agreement is criminally usurious and void ab initio as a matter of law, because it contemplates payment by the corporate defendant of interest at the annual rate of 167%, a rate that exceeds the legal rate of interest of 25% for a corporation (see Penal Law § 190.40).

To this end, defendants maintain that the Specified Percentage of 15%, as set forth in the Agreement, is unrelated to the actual interest rate being charged, explaining, in relevant part, that:

"[i]f a lender makes a loan at 167% annual interest and calculates that this 167% interest loan can be repaid using 15% of the borrower's income, and the lender calls the 15% a 'specified percentage' of the daily income, the 15% has nothing to do with the interest rate being paid on the loan. The interest rate is 167%. Plaintiff's agreement made the 'specified percentage' irrelevant by writing it out of the agreement and replacing it with the fixed daily payment of $999.00."

It is well settled that, while the defense of civil usury is unavailable to corporate entities in New York, the defense of criminal usury may lie in situations where the lender knowingly charges a corporate entity annual interest in excess of 25% on a loan. Penal Law § 190.40 states that:

"[a] person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other [*4]property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period."

A finding of criminal usury requires: "proof that the lender (1) knowingly charged, took or received (2) annual interest exceeding 25% (3) on a loan or forbearance. The first element requires proof of the general intent to charge a rate in excess of the legal rate rather than the specific intent to violate the usury statute. Accordingly, the borrower satisfies his prima facie burden of proving usury by showing that the note given to the lender evidences a loan and reserves an illegal rate of interest. If usury is proved, the loan is deemed void, and the lender sacrifices his principal and interest"

(In re David Schick, Venture Mtge. Corp., and A & D Trading Group, LLC, Debtors, 245 BR 460, 473-474 [Bankr. SD NY] [2000] [internal citations omitted]; General Obligations Law § 5-522 [2]). "In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender"

(Donatelli v Siskind, 170 Ad2d 433, [2d Dept 1991] [internal citations omitted]). "Further, there can be no usury unless the principal sum is repayable absolutely" (Transmedia Rest. Co. v 33 E. 61st Rest. Corp., 184 Misc 2d 706, 711 [Sup Ct, NY County 2000]). The question here is whether the particular transaction under scrutiny "was made in good faith and not as a cover for a loan" (72 Am Jur 2d, Interest and Usury, § 85), and what effect to give to C. Frost's and T. Frost's guarantees, since the giving of a guaranty is one of the factors " to be considered in determining whether the transaction is in fact a loan or purchase and sale" (id.). "There can be no usury unless the principal sum advanced is repayable absolutely. If it is payable upon some contingency that may not happen, and that really exposes the lender to a hazard of losing the sum advanced, then the reservation of more than legal interest will not render the transaction usurious, in the absence of a showing that the risk assumed was so unsubstantial as to bear no reasonable relation to the amount charged.This risk of loss is to be distinguished from the risk of nonpayment that is inherent in every loan and that may only be compensated for by statutory interest; the risk of loss by the death or insolvency of the borrower is the ordinary risk that every person runs who lends money on personal security only"

(72 NY Jur 2d Interest and Usury, § 87).

MFS asserts, in the aforementioned affidavit of nonpayment, that it agreed to buy all [*5]rights to VP's future accounts receivable, having a face value of $74,750.00, for a purchase price of $50,000.00, and that the repayment of the $74,750.00 was to be accomplished by debiting VP's bank account by the Specified Percentage of 15% until that amount was paid in full. The documents belie this claim, and the Court is troubled by the inclusion of this misstatement in the affidavit submitted to the County Clerk and Court.

The Addendum to Secured Merchant Agreement (Addendum) states, in pertinent part:

"1. Should any of the terms of this Addendum conflict with the terms of the agreement . . . then the terms of this Addendum shall govern and be controlling . . . a. By signing below, the Merchant hereby requests and acknowledges that the Specified Percentage shall be revised to $999.00 per business day . . . "

(notice of motion, exhibit A).

Therefore, doing basic mathematical calculations, the controlling payment schedule set forth in the Agreement with Addendum contemplates a criminally usurious interest rate of approximately 167%, as claimed by VP.

In addition, there is absolutely no evidence that the parties' arrangement contemplated plaintiff to be an investor or partner in defendants' business. MFS fails to point to a non-recourse provision in the Agreement by which it assumed the risk that it might not be able to collect payments from VP's accounts receivable. Merely telling the Court that risk is contemplated under the terms of the Agreement is inadequate, especially where, as here, the Agreement provided for Court review is illegible, with excessively small print (aff in opp, exhibit A). The requirement of the two guarantors, along with the other facts and circumstances set forth clearly demonstrate that the principal sum advanced was absolutely repayable with calculated interest that exceeds the legal rate (72 Am Jur 2d, Interest and Usury, § 85; Penal Law § 190.40), and supports a finding that the evidence outweighs the presumption against a finding of usury (Freitas v Geddes Sav. & Loan Assn., 63 NY2d 254, 261 [1984]).

Upon review of the documents and consideration of the parties' respective arguments, the Court comes to the inevitable conclusion that the real purpose of the Agreement was for plaintiff to lend money to defendants at the usurious interest rate set forth therein, and that defendant agreed to borrow the money based on the same usurious terms dictated by plaintiff. In its opposition, MFS offers no evidence that it purchased certain of VP's receivables, that such receivables were dedicated to the repayment of the monies loaned, and that the risk inherent in the payment by way of these receivables was borne by MFS. Denominating a loan document by another name, as in this case, by calling it a Merchant Agreement, and including in it verbiage of MFS's purported purchase of accounts receivable that is unsupported by actual VP receivables dedicated to repayment, does not shield it from the judicial determination that it contemplates a criminally usurious transaction, which is void ab initio as a matter of law.

Finally, the Court disagrees with MFS's contention it must deny VP's motion due to its failure to proceed by way of a plenary action. Where, as here, the Agreement, on its face, contemplates a criminally usurious transaction, there is no question of fact for a trier of fact to resolve, and a motion under CPLR 5015 is adequate.

In further clarification of the Court's position, it should be noted that when the Appellate Division, Second Department, last addressed this issue, it stated: "Generally, a person seeking to [*6]vacate a judgment entered upon the filing of an affidavit of confession of judgment must commence a plenary action" (emphasis added) (Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 [2012]). The specific use of the word "generally" would seem to indicate that there is no ironclad requirement for a plenary action in all such cases. While cases dating back at least 65 years have held that a motion by "a judgment debtor who seeks to set aside a judgment entered by confession, on grounds of fraud or misconduct, must proceed by plenary action, not by motion," those cases "have so held, on grounds that sharply contested issues of fact should not be resolved upon affidavits, but rather by trial in a plenary action" (Scheckter v Ryan, 161 AD2d 344, 345 [1990]).

In the instant case, however, the submitted affidavits and exhibits clearly and unequivocally demonstrate that the Agreement is criminally usurious on its face, obviating the need for a superfluous plenary action. Scheckter makes reference to Siegel, NY Prac § 302, which states, "[U]nder CPLR 5015 [a] [3] a mere motion would seem adequate to the task today." The Court agrees with that observation. In particular, by recognizing the lack of necessity for a plenary action in cases where criminal usury is clear from the submissions attendant to a motion under CPLR 5015 [a] [3], the victims of predatory lending through such illegal loan agreements are spared the needless cost in time and money of pursing a plenary action, the outcome of which would be the same.

Accordingly, it is

ORDERED that defendants' motion is granted; and it is further

ORDERED that the confession of judgment, under index number 58741/2016, entered in the Office of the Westchester County on June 23, 2016, is vacated; and it is further

ORDERED that the Judgment Clerk mark the judgment records accordingly.

This constitutes the decision and order of the Court.

Dated: December 30, 2016

White Plains, New York

ENTER:

_______________________________

HON. DAVID F. EVERETT, A.J.S.C.

Footnotes

Footnote 1:This decision and order is issued sua sponte for the sake of further clarification of the Court's determination. It in no way changes the outcome of the Court's original decision and order, the decretal paragraphs of which remain the same.

Pearl Cap Rivis Vent., v. RDN Constr.

October 15, 2016 | Legal Decisions by State, New York

The Court is further troubled by the witness’s testimony to the effect that plaintiff is able to escape an element of risk by deeming a borrower’s failure to pay to be willful or otherwise unjustified, and entitling it to seek payment in full under the personal guarantee. It became clear that there was no evidence to support his purchase of receivables argument, or that the parties’ arrangement contemplated that plaintiff was an investor or partner in defendants’ business.

This required guaranty, along with the other facts and circumstances set forth clearly demonstrate that the principal sum advanced was absolutely repayable with calculated interest that exceeds the legal rate

New York Supreme Court
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Decided: October 25, 2016

Peter B. Ackerman, Esq., White Plains, Attorney for Plaintiff.

Denominating a loan document by another name does not shield it from a judicial determination that such agreement contemplates a criminally usurious transaction.

Plaintiff Pearl Capital Rivis Ventures, LLC (Pearl), represented by counsel, commenced this action against RDN Construction, Inc. (RDN), Robbie Neely, as Guarantor (Neely), by filing a summons with notice seeking to recover on its causes of action for unjust enrichment and breach of contract, the sum of $9,481.00, together with attorney's fees in the amount of $3,160.00, for a total of $12,641.00, plus interest from July 2, 2015, costs and disbursements. Issue was not joined as defendants failed to answer, move or otherwise appear in the action. Thereafter, by motion dated March 10, 2016, plaintiff moved for a default judgment against defendants.

The subject contract is a document titled “Merchant Agreement” dated December 2, 2014 (Agreement). The Agreement, provided by plaintiff to defendants, contains the following pertinent terms: “Purchase Price: $9,000.00 Specified Percentage 15%1 Specific Daily Amounts: $198 Receipts Purchased Amount: $13,050” (see Exhibit 1—Agreement). In support of its motion for a default judgment, plaintiffs claimed, and defendants, by their default, did not dispute that, they (defendants) breached the agreement by failing to make payments thereunder in the amount of $9,481.00. According to the affidavit of Pearl's Head of Underwriting, submitted in support of the motion for default, the ledger annexed to that motion “shows that defendants began with a total of loaned funds of $13,050.00,2 against which they paid a total of $6,734.00, leaving a balance due of $6,316.00, to which—per the agreement—has been added check bounce fees of $665.00 and the contractual default fee of $2,500, making a total due to $9,481.00.” Plaintiff also claimed entitlement, under Agreement ¶ 3.4, to recover any costs associated with this action, plus reasonable attorney fees in the amount of $3,160.00. Plaintiff also alleged that defendant Neely guaranteed defendant RDN's performance under the Agreement.

By prior order of another justice, before whom this matter was then pending, a default judgment was granted on April 29, 2016, as to the issue of liability, after which plaintiff filed a notice of inquest and certificate of readiness on May 4, 2016. An inquest was held before this Court on September 16, 2016, and the Court makes findings based on the evidence presented at that time.

The sole witness presented by plaintiff was Pearl's Chief Risk Officer. Based on the witness's sworn testimony, plaintiff loaned $9,000.00 to defendant RDN with an agreed-upon total payback amount of $13,050.00. Defendant reportedly also agreed to a $2,500 default penalty plus attorney's fees. The witness testified that defendant was supposed to make 66 payments of $198 each. The payments of $198 were to be made every weekday, excluding legal holidays, until there was a total payback of $13,050.00, i.e., a period of approximately 13 weeks. Pearl had access to debit electronically the aforesaid payments from RDN's bank account, into which RDN was supposed to deposit its receivables.

The witness testified that defendant paid back $6,700.00 of the $9,000.00 loaned, but at some point, the debit requests for $198 per day started to bounce. The witness testified that the parties renegotiated defendant's payment schedule, adjusting it downward to $100 per day, but that $100 debits bounced as well. The witness testified that defendant incurred the $2,500.00 default fee pursuant to contractual language that states that such amount is owed if debits “bounce” four or more times consecutively, or there is a total of eight “bounces” throughout the term of the “advance,” both of which events are alleged to have happened in this case. The witness further testified Pearl charged defendant $665.00 in bounced debit fees, based on a charge of $35.00 for each of the 19 bounced debits, which the witness testified is the amount it was charged by the bank for each bounce.

Based on the witness's testimony, and a concern that plaintiff might be seeking a criminally usurious award, the Court questioned the witness about the daily interest rate, which the witness testified he was unable to provide. Relying on the figures contained in the Agreement and the testimony of the witness, and using the traditional method of computation in determining whether interest is usurious (see Band Realty Co. v. North Brewster, Inc., 37 N.Y.2d 460 [1975] ), the Court calculated that the Agreement mandated an interest rate of approximately 180% per annum. The fact that defendants defaulted does not preclude this Court from addressing the issue of an illegal transaction and unclean hands, because “it would be most inappropriate to permit a userer to recover on a loan for which he could be prosecuted” (Blue Wolf Capital Fund II, L.P. v. American Stevedoring, Inc., 105 A.D.3d 178, 184, 961 N.Y.S.2d 86 [1st Dept 2013] [internal quotation marks and citation omitted]; Janke v. Janke, 47 A.D.2d 445, 449–450, 366 N.Y.S.2d 910 [4th Dept 1975], affd 39 N.Y.2d 786 [1976]; Holland v. Ryan, 307 A.D.2d 723, 725, 762 N.Y.S.2d 740 [4th Dept 2003] ).

While the defense of civil usury is unavailable to corporate entitles in New York, the defense of criminal usury may lie in situations where the lender knowingly charges a corporate entity annual interest in excess of 25% on a loan. Penal Law § 190.40 states that:

“[a] person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period.”

A finding of criminal usury requires:

“proof that the lender (1) knowingly charged, took or received (2) annual interest exceeding 25% (3) on a loan or forbearance. The first element requires proof of the general intent to charge a rate in excess of the legal rate rather than the specific intent to violate the usury statute. Accordingly, the borrower satisfies his prima facie burden of proving usury by showing that the note given to the lender evidences a loan and reserves an illegal rate of interest. If usury is proved, the loan is deemed void, and the lender sacrifices his principal and interest” (In re David Schick, Venture Mtge. Corp., and A & D Trading Group, LLC, Debtors, 245 B.R. 460, 473–474 [Bankr.SD NY] [2000] [internal citations omitted]; General Obligations Law § 5–522 [2] ).

“In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender”

(Donatelli v. Siskind, 170 A.D.2d 433, 565 N.Y.S.2d 224, [2d Dept 1991] [internal citations omitted] ). “Further, there can be no usury unless the principal sum is repayable absolutely” (Transmedia Rest. Co. v. 33 E. 61st Rest. Corp., 184 Misc.2d 706, 711, 710 N.Y.S.2d 756 [Sup Ct, N.Y. County 2000] ). The question is whether a particular transaction under scrutiny “was made in good faith and not as a cover for a loan” (72 Am Jur 2d, Interest and Usury, § 85), and what effect to give to Neely's guaranty, since the giving of a guaranty is one of the factors “to be considered in determining whether the transaction is in fact a loan or purchase and sale” (id.).

“There can be no usury unless the principal sum advanced is repayable absolutely. If it is payable upon some contingency that may not happen, and that really exposes the lender to a hazard of losing the sum advanced, then the reservation of more than legal interest will not render the transaction usurious, in the absence of a showing that the risk assumed was so unsubstantial as to bear no reasonable relation to the amount charged. This risk of loss is to be distinguished from the risk of nonpayment that is inherent in every loan and that may only be compensated for by statutory interest; the risk of loss by the death or insolvency of the borrower is the ordinary risk that every person runs who lends money on personal security only” (72 N.Y. Jur 2d Interest and Usury, § 87).

Here, the witness claimed that the total amount owed does not depend on an exorbitant interest rate, but rather, is based on a purchase of account receivables agreement. According to his testimony:

“We generally do not use the term loan ever ․ we call it an advance because in essence according to the language of the contract, what we're doing is we're purchasing a portion of your future receivables that don't exist, which means we are becoming a partner in your business, and when our interest in your business is satisfied, which would be that payback amount, we exit, we're no longer your partner, you go out on your own, you continue on, our interest that we've invested in has been satisfied to that amount and we move along ․ if you look at the language we're not allowed to write anywhere a loan. It's illegal. So we don't have it written anywhere loan, when we speak to a customer, I mean sometimes there's a rep there that slips up and will say loan, but they are correct, these are not called loans” (tr at 23–24).

However, upon further questioning by the Court, it became clear that there was no evidence to support his purchase of receivables argument, or that the parties' arrangement contemplated that plaintiff was an investor or partner in defendants' business. While the witness spoke generally of instances, such as a flooded warehouse, under which plaintiff might not be able to collect repayment with interest from a customer, he was unable, when pressed by the Court to point to a non-recourse provision in the Merchant Agreement by which plaintiff assumed the risk that it might not be able to collect payments from the instant defendants' account receivables. Merely telling the Court that risk is contemplated under the terms of the Agreement is inadequate, especially where, as here, the Agreement provided for Court review is illegible, with excessively small print. The Court is further troubled by the witness's testimony to the effect that plaintiff is able to escape an element of risk by deeming a borrower's failure to pay to be wilful or otherwise unjustified, and entitling it to seek payment in full under the personal guarantee provided by RDN's owner, Robby Neely. This required guaranty, along with the other facts and circumstances set forth clearly demonstrate that the principal sum advanced was absolutely repayable with calculated interest that exceeds the legal rate (72 Am Jur 2d, Interest and Usury, § 85), and supports a finding that the evidence outweighs the presumption against a finding of usury (Freitas v. Geddes Sav. & Loan Assn., 63 N.Y.2d 254, 261 [1984] ).

The Court comes to the inevitable conclusion that the real purpose of the Agreement was for plaintiff to lend money to defendants at the usurious interest rate set forth therein, and that defendant agreed to borrow the money based on the same usurious terms dictated by plaintiff. Denominating a loan document by another name, as in this case, by calling it a “Merchant Agreement,” does not shield it from the judicial determination that it contemplates a criminally usurious transaction. Accordingly, as the party seeking to exact criminally usurious interest, plaintiff is also “not entitled to equitable relief” (Blue Wolf Capital Fund II, L.P. v. American Stevedoring, Inc., 105 A.D.3d at 184, 961 N.Y.S.2d 86), thus negating any claim for unjust enrichment.

For the reasons set forth above, it is the Court's decision and order that plaintiff is not entitled to recover principal or interest, nor is it entitled to recover any of the other fees or costs requested, or arising out of, this matter.

FOOTNOTES

1.  According to the testimony adduced at the inquest, plaintiff had the option of collecting either the fixed amount of $198 per day, or 15% of defendant's deposits.

2.  Despite the affiant's phraseology, the $13,050.00 actually represents the amount plaintiff expected to receive in return for the $9,000.00 advanced to RDN.

DAVID F. EVERETT, J.

Platinum Rapid Funding v VIP Limousine Servs.

June 8, 2016 | Legal Decisions by State, New York

For Lender – Agreement and the Guaranty repayment is not absolute; the transaction is sufficiently risky such that it cannot be considered a loan as a matter of law and; therefore, defendants’ affirmative defense alleging the transaction is a usurious loan must be stricken as without merit. The document states it is not a loan, is labeled a “purchase and sale” agreement, contains a reconciliation provision, is of an indefinite term and does not call for payment in the event of Bankruptcy.

New York Supreme Court County of Nassau
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Oasis Legal Fin. Grp. v. Coffman

August 15, 2015 | Colorado, Legal Decisions by State

We hold that litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making “loans” subject to Colorado’s UCCC even if the plaintiffs do not have an obligation to repay any deficiency if the litigation proceeds are ultimately less than the amount due.  These transactions create debt, or an obligation to repay, that grows with the passage of time.

Colorado Supreme Court
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Klein v On Deck Capital, Inc.

June 24, 2015 | Legal Decisions by State, New York

Subject – Choice of laws. Generally, courts will enforce a choice-of-law clause so long as the chosen law bears a reasonable relationship to the parties or the transaction. A basic precept of contract interpretation is that agreement should be construed to effectuate the parties’ intent. Where an agreement is clear and unambiguous, a court is not free to alter it and impose its personal notions of fairness.

Supreme Court, Westchester County
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Klein v On Deck Capital, Inc. 2015 NY Slip Op 50958(U) Decided on June 24, 2015 Supreme Court, Westchester County Lefkowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 24, 2015
Supreme Court, Westchester County

Richard S. Klein and NORTHERN WESTCHESTER INTERNAL MEDICINE, P.C., Plaintiffs,

against

On Deck Capital, Inc., Defendant.

62996-2014
Joan B. Lefkowitz, J.

To commence the statutory time period for appeals as of right (CPLR 5513[a]), you are advised to serve a copy of this order, with notice of entry, upon all parties.

DECISION & ORDER

Index No: 62996-2014

Motion Return Date:

March 20, 2015

Motion Seq. No.1

The following papers (e-filed documents 7-30) were read on the E-filed motion by defendant for an order dismissing the complaint pursuant to CPLR 3211(a)(1) and (7).

Notice of Motion, Affirmation (Exhibits A-D)

Affidavit in Support (Exhibits A-E)

Memorandum of Law

Affirmation in Opposition (Exhibits A-E)

Reply Memorandum of Law

Upon reading the foregoing papers it is

ORDERED the motion is granted and the complaint is dismissed.

On August 16, 2013, the plaintiff, Northern Westchester Internal Medicine, P.C., borrowed $100,000.00 from defendant. The plaintiff, Richard S. Klein, guaranteed the loan. The terms of the loan called for the repayment of the loan in 251 installments of $543.66, to be paid on the first business day following disbursement of the principal and continuing on each and every business day thereafter until fully paid, or a total of $137,000.00. The plaintiff, Northern Westchester Internal Medicine, P.C., repaid the loan in full. The plaintiff, Richard Klein, made [*2]no payments on the loan or his guaranty.

Plaintiffs now sue claiming the loan is usurious under New York law, and seek to recover $37,000.00 which Northern Westchester Internal Medicine, P.C., claims it paid in interest.

Plaintiffs claim the effective interest rate of the loan is 37%, and defendant concedes the effective interest rate of the loan exceeds 25% (the criminal usury rate in New York [Penal Law 190.40]).

However, the defendant claims that a corporation has no cause of action for usury, and moves to dismiss the complaint upon the grounds that the complaint fails to state a cause of action (CPLR 3211[a][7]), and that there is a defense founded upon documentary evidence (CPLR 3211[a][1]). “A motion pursuant to CPLR 3211(a)(1) to dismiss a complaint on the ground that a defense is founded on documentary evidence may be appropriately granted only where the documentary evidence utterly refutes the plaintiff’s factual allegations, conclusively establishing a defense as a matter of law. On a motion to dismiss the complaint pursuant to CPLR 3211(a)(7) for failure to state a cause of action, the court must afford the pleading a liberal construction, accept all facts as alleged in the pleading to be true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (Atlantic Capital Realty v Cayuga Capital Mgmt., 116 AD3d 890, 890 [2d Dept 2014] [internal quotations and citations omitted).

The defendant argues that pursuant to the loan agreement Virginia law applies, and that the loan is not usurious under Virginia law. Moreover, defendant argues that even if New York law were applied plaintiffs have no cause of action for usury.

Choice of Law

Paragraph 39 of the “Business Loan and Security Agreement” signed by plaintiff provides,

“[O]ur relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) Virginia law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (I) Lender is located in Virginia, (ii) Lender makes all credit decisions from Lender’s office in Virginia, (iii) the Loan is made in Virginia (that is, [*3]no binding contract will be formed until Lender receives and accepts Borrower’s signed Agreement in Virginia) and (iv) Borrower’s payments are not accepted until received by Lender in Virginia.”

“Generally, courts will enforce a choice-of-law clause so long as the chosen law bears a reasonable relationship to the parties or the transaction. A basic precept of contract interpretation is that agreement should be construed to effectuate the parties’ intent. Where an agreement is clear and unambiguous, a court is not free to alter it and impose its personal notions of fairness. The freedom of contract, however, has its limits. Courts will not, for example, enforce agreements that are illegal or where the chosen law violates some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal. If the foreign law does not entail any such violation full effect should be given to law of our sister State” (Welsbach Electric Corp. v Mastec North America, Inc., 7 NY3d 624, 629 [2006] [ internal quotation marks and citations omitted]).

Here, Virginia law governs the parties’ relationship. Pursuant to their agreement the parties intended Virginia law to apply. Moreover, Virginia law bears a reasonable relationship to the loan and the application of Virginia law is not offensive to New York public policy. Virginia law bears a reasonable relationship to the loan since defendant is headquartered in Virginia and the agreement provides that all payments are not considered made until received in Virginia (Astoria Fed. Mtge. Corp. v Pellicane, 78 AD3d 632 [2d Dept 2010]). In addition, plaintiff failed to meet its “heavy burden of proving that application of [Virginia] law would be offensive to a public policy of the State” (Welsbach Elec. Corp. 7 NY3d at 632). Virginia and New York law are similar in that each precludes an action by a corporation for usury (GOL 5-21[3]); Intima-Eighteen, Inc. v A.H. Schreiber Co., Inc., 172 AD2d 456 [1st Dept 1991], lv denied 78 NY2d 856 [1991]). The only difference is New York law permits a corporation to interpose a defense of criminal usury to an action against it for payment (GOL 5-521[3]), while Virginia law does not. Here, however, plaintiff does not seek to assert a defense to an action, but rather, as a corporation, it seeks to assert a cause of action for usury and recover the interest it paid. However, New York law does not permit a corporation to employ GOL 5-521 (3) “as a means to effect recovery by the corporate borrower” (see, Intima-Eighteen , Inc., supra, at 457).

Accordingly, the complaint is dismissed for failure to state a cause of action because Virginia law applies and Virginia law, as conceded by plaintiffs, does not permit a corporation to sue for usury.

New York Law

Even if New York law were applied the complaint fails to state a cause of action. GOL 5-521[3], which permits corporations to assert the defense of criminal usury, does not permit corporations to assert a cause of action for usury (Intima-Eighteen, Inc., supra). Moreover, documentary evidence in the form of the merged loan agreement signed by the plaintiff, [*4]Northern Westchester Internal Medicine, P.C., establishes that the loan was a business loan, made for business purposes, and thus it refutes plaintiffs’ unsubstantiated and undocumented claim that the business loan defendant made to Northern Westchester Internal Medicine, P.C., to be used for the business purposes stated in the loan agreement was in reality a personal loan made to Richard Klein to be used as a down payment on a vacation home in Florida (see, Schneider v Phelps 41 NY2d 238 [1978]).

Finally, plaintiff’s cause of action for unjust enrichment is dismissed “since the existence of an express contract, [the loan agreement], between the parties governing the particular subject matter precludes recovery under such a theory” ( Cooper, Bamundo, Hecht & Longworth, LLP v Kucsinski, 14 AD3d 644, 646 [2d Dept 2005]).

E N T E R,

Dated: White Plains, New York

June 24, 2015_________________________________

HON. JOAN B. LEFKOWITZ, J.S.C.

Ewing Oil, Inc. v. John T. Burnett, Inc.

June 15, 2015 | Legal Decisions by State, New Jersey

This opinion is in line with earlier opinions in which judgment debtors unsuccessfully sought to challenge enforcement of foreign judgments in New Jersey by arguing that the underlying claim was contrary to the public policy of New Jersey. As long as the forum court possesses personal jurisdiction over the defendant and the judgment is not entered in violation of due process, the judgment will be enforceable in New Jersey even though the underlying claim could not have been successfully asserted in a New Jersey court.

SUPERIOR COURT OF NEW JERSEY
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(NOTE: The status of this decision is Published.)

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

EWING OIL, INC.,

APPROVED FOR PUBLICATION

 

June 19, 2015

 

APPELLATE DIVISION

 

Plaintiff-Respondent,

v.

JOHN T. BURNETT, INC., HENRY A.

JACKSON and C&H TIRE SERVICE

CENTER, INC.,

Defendants,

and

ESTATE OF JOHN T. BURNETT,1

Defendant-Appellant.

_______________________________

June 19, 2015

 

Before Judges Lihotz, St. John and Rothstadt.

On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. DJ-154160-12.

Blumberg & Rosenberg, P.A., attorneys for appellant (Henry A. Loeb, on the briefs).

Duane Morris, LLP, attorneys for respondent (Christopher L. Soriano, of counsel and on the brief).

The opinion of the court was delivered by

LIHOTZ, P.J.A.D.

This matter examines the enforceability of a sister-state judgment entered pursuant to a cognovit provision contained in a guaranty agreement against individual guarantors of a corporate debt. Plaintiff, Ewing Oil Co., Inc., a Maryland Corporation, sued John T. Burnett, Inc. (JTB, Inc.), a New Jersey corporation, for payment under a supply agreement. The corporate obligations were unconditionally guaranteed by defendants John T. Burnett, Henry A. Jackson, and C&H Tire Service Center, Inc. (C&H), which collectively operated a retail gasoline service station with JTB, Inc. in Monmouth County.

Summary judgment was entered against JTB, Inc. and plaintiff confessed judgment against the guarantors (Maryland judgment). Thereafter, plaintiff initiated an action in New Jersey to record the Maryland judgment for purposes of seeking its enforcement. New Jersey recorded the judgment by default on July 24, 2012.

Burnett's estate (the Estate), through its executrix, moved to vacate the default judgment against Burnett, pursuant to Rule 4:50-1(d), asserting pre-judgment notice was not waived and the judgment's domestication in New Jersey violated due process. The Estate also sought to collaterally attack the judgment, maintaining New Jersey had plenary authority to exercise jurisdiction over its enforcement, pursuant to the contract's forum selection clause.

The Law Division denied the motion and the Estate filed this appeal, reasserting its challenges against New Jersey's recognition of the foreign judgment. Following review of the record and applicable law, we reject these arguments and affirm.

These facts are found in the motion record and are not disputed. On March 18, 2009, plaintiff and JTB, Inc. executed a ten-year commercial supply agreement (CSA), in which plaintiff agreed to supply gasoline and other petroleum products to JTB, Inc. Burnett solely owned JTB, Inc., and Jackson solely owned C&H. Together the two were partners in the gas station in Monmouth County.

The CSA included several provisions granting plaintiff security for JTB, Inc.'s payment. Aside from a $20,000 deposit to be applied against any outstanding sums owed, plaintiff was granted a security interest in any products or equipment it provided to or installed on the gas station's premises. With respect to the collateral, plaintiff obtained rights of entry and repossession "in addition to all rights and remedies available to [plaintiff] as a secured party under the New Jersey Uniform Commercial Code and as are otherwise available to [it] at law or in equity."

The CSA also contained the following forum selection clause

This Agreement shall be governed and construed in accordance with the laws of the State of Maryland and the courts of the State of Maryland shall have exclusive jurisdiction over any claims or controversies which arise under this Agreement. However, the courts of the [S]tate of New Jersey shall have jurisdiction in connection with any collection or enforcement action that [plaintiff], at its option, may elect to bring. . . .

Further assurances were included in an accompanying suretyship contract, executed by the individual and corporate guarantors (Guaranty). The scope of the Guaranty was broad and encompassed all amounts due and owing by JTB, Inc. under the CSA for "payments, charges, expenses[,] and costs of every kind and nature" arising out of or from the CSA. The Guaranty was executed on the same day as the CSA.

The Guaranty also contained a cognovit provision, which stated

3. Waiver of Notices, Confession of Judgment, Jurisdiction. Without notice to Guarantor, [plaintiff] may waive or modify any of the terms of the Agreement relating to [JTB, Inc.]'s performance without discharging or otherwise affecting Guarantor's obligations hereunder. Guarantor waives demand, diligence, presentment, protest[,] and notice of every kind. Guarantor acknowledges that the Agreement is governed by Maryland law and establishes Maryland as the appropriate jurisdiction for any actions arising out of, or relating to, the Agreement. Guarantor also hereby acknowledges, consents[,] and agrees that the provisions of this Guaranty and the rights of all parties mentioned herein shall be governed by the laws of the State of Maryland and interpreted and construed in accordance with such laws, and any court of competent jurisdiction of the State of Maryland shall have jurisdiction in any proceeding instituted to enforce this Guaranty and any objections to venue are hereby waived. However, the courts of the [S]tate of New Jersey may have jurisdiction in connection with any enforcement and/or collection action that [plaintiff], at its sole option, may elect to bring in that state. GUARANTOR FURTHER IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY-AT-LAW OR CLERK OF ANY COURT OF COMPETENT JURISDICTION OF THE STATE OF MARYLAND, OR ELSEWHERE, TO APPEAR AT ANY TIME FOR GUARANTOR IF ANY ACTION BROUGHT AGAINST GUARANTOR ON THIS GUARANTY TO CONFESS OR ENTER JUDGMENT AGAINST GUARANTOR FOR HIS OBLIGATIONS UNDER THIS GUARANTY, INCLUDING COURT COSTS AND REASONABLE ATTORNEYS' FEES.

JTB, Inc. breached its duties and obligations under the CSA. On June 3, 2011, plaintiff issued a notice of default and termination of the CSA to JTB, Inc. and the guarantors. The notice stated $18,205.45 was to be remitted within ten days or plaintiff would "commence pursuit of available legal remedies." Neither JTB, Inc. nor the guarantors made payment. By November 30, 2011, the amount due increased to $225,197.34. Plaintiff commenced an action in the Circuit Court for Washington County, Maryland against JTB, Inc. for the outstanding debt along with attorney's fees.

On December 6, 2011, plaintiff obtained a default judgment against JTB, Inc. for $258,976.94. The Maryland court also entered a judgment by confession against Burnett and the other guarantors on the same day. Personal post-judgment service of the confessed judgment was effectuated on Burnett; its entry was not opposed.

The Maryland judgment was recorded in New Jersey on July 24, 2012, under DJ-154160-12. On August 13, 2012, Burnett passed away. His widow was named executrix. The Estate moved to vacate entry of the foreign judgment pursuant to Rule 4:50-1(d), challenging its validity and enforceability.

Following oral argument, Judge Thomas F. Scully denied the motion, finding the Maryland judgment was entered in accordance with Maryland procedure and law; Burnett had a fair opportunity to challenge the validity of the judgment in Maryland, after its entry, but failed to timely do so; and, in light of the Full Faith and Credit clause, New Jersey's recognition of a foreign judgment, entered pursuant to a valid and enforceable cognovit provision, did not violate due process. An order was entered on January 29, 2014. This appeal followed.

On appeal, the Estate renews the arguments presented before the Law Division, stating: (1) the absence of pre-judgment notice violates basic due process and cannot be remedied by an opportunity to a post-judgment hearing; (2) pre-judgment notice rights under the cognovit provision of the surety agreement were not voluntarily, intelligently, and knowingly waived; and (3) New Jersey is the only forum with jurisdiction to determine compliance with due process requirements and the enforceability of the confession of judgment clause, thus allowing the Estate to assert available meritorious defenses against its enforcement.

The issues on appeal require legal determinations, subject to our de novo review. In doing so, we do not defer to "'a trial court's interpretation of the law and the legal consequences that flow from established facts.'" Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 382 (2010) (brackets omitted) (quoting Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

Whether the Maryland judgment may be registered in New Jersey implicates the Full Faith and Credit clause of the United States Constitution, which mandates "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." U.S. Const. art. IV, 1. The clause requires a foreign judgment "properly entered in accordance with local procedure is entitled to full faith and credit in any other state provided . . . the judgment is not entered in violation of due process of law." Sec. Ben. Life Ins. Co. v. TFS Ins. Agency, Inc., 279 N.J. Super. 419, 424 (App. Div.) (citation and internal quotation marks omitted), certif. denied, 141 N.J. 95 (1995). See N.J.S.A. 2A:49A-27. Thus, any judgment properly executed in a foreign state, which complies with the requirements of the due process clause is entitled to full faith and credit in New Jersey. See In re Triffin, 151 N.J. 510, 524 (1997). On the other hand, a foreign judgment, entered without providing the necessary protections safeguarded by the Fourteenth Amendment of the United States Constitution and the fundamental rights clause of Article 1, paragraph 1 of the New Jersey Constitution, may not be enforced. See generally, Greenberg v. Kimmelman, 99 N.J. 552, 568 (1985) ("[A]rticle 1, paragraph 1, like the [F]ourteenth [A]mendment, seeks to protect against injustice and against the unequal treatment of those who should be treated alike. To this extent, [A]rticle 1 safeguards values like those encompassed by the principles of due process and equal protection.").

When viewed through the prism of due process protections, a foreign judgment will not be entitled to full faith and credit in New Jersey if a defendant can demonstrate the forum state lacked personal or subject matter jurisdiction, Tara Enters., Inc. v. Daribar Mgt. Corp., 369 N.J. Super. 45, 56 (App. Div. 2004), or if a defendant was denied adequate notice and a reasonable opportunity to be heard. Sonntag Reporting Serv., Ltd. v. Ciccarelli, 374 N.J. Super. 533, 538 (App. Div. 2005). "[A]bsent such due process defenses, . . . litigation pursued to judgment in a sister state is conclusive of the rights of the parties in the courts of every state as though adjudicated therein." Ibid. (citing DeGroot, Kalliel, Traint & Conklin, P.C. v. Camarota, 169 N.J. Super. 338, 343 (App. Div. 1979)). See also Arnold, White & Durkee, P.C. v. Gotcha Covered, Inc., 314 N.J. Super. 190, 201 (App. Div.) (stating New Jersey courts are "obliged to recognize a foreign money judgment, unless the defendant demonstrates that the foreign jurisdiction lacked personal jurisdiction of defendant, the judgment was obtained by fraud[,] or was entered contrary to due process"), certif. denied, 157 N.J. 543 (1998).

Although confessed judgments are viewed with "judicial distaste" in New Jersey, Ledden v. Ehnes, 22 N.J. 501, 510 (1956), constitutional and public policy challenges against their enforcement have been advanced and found legally untenable. See United Pac. Ins. Co. v. Estate of Lamanna, 181 N.J. Super. 149, 155-56 (Law Div. 1981) ("New Jersey courts have long recognized foreign judgments by confession and have held that they are entitled to full faith and credit. . . . No public policy [in New Jersey] denies recognition to a foreign judgment by confession."). Rather, the law is clear: "Entry of judgment based upon a warrant to confess judgment does not . . . necessarily offend due process, as long as the due process requirements of reasonable notice and opportunity to be heard are knowingly and voluntarily waived." Tara Enters., supra, 369 N.J. Super. at 56 (citing Lamanna, supra, 181 N.J. Super. at 156). See also D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 187, 92 S. Ct. 775, 783, 31 L. Ed. 2d 124, 135 (1972) (holding confessed judgments are "not, [per se], violative of the Fourteenth Amendment due process" protections, as reasonable notice and opportunity to be heard could be waived).

Maryland Court Rule 2-611 governs confessed judgments in that state. The rule provides such judgments "may be entered by the circuit court clerk upon the filing of a complaint accompanied by the original or a copy of the instrument authorizing the confessed judgment and an affidavit specifying the amount due and stating the address of the defendant." Schlossberg v. Citizens Bank, 341 Md. 650, 655-56 (1996).

Upon entry of a judgment by confession, the clerk is required to notify the defendant of the entry of judgment and of the deadline for filing a motion to "open, modify or vacate" the judgment. Md. Rule 2-611(b).

If the defendant so moves, the circuit court must determine whether there is a "substantial and sufficient basis for an actual controversy as to the merits of the action." Md. Rule 2-611(d). In other words, the court must determine whether the defendant has a potentially meritorious defense to the confessed judgment complaint. The court does not, however, decide the merits of the controversy at this stage. [PAUL V. NIEMEYER AND LINDA M. SCHUETT, Maryland Rules Commentary 466 (4th ed. 2014)]. If the court finds that a basis for a defense exists, the rule requires the court to order that the confessed judgment be opened, modified, or vacated so that the defendant can file a responsive pleading to the plaintiff's complaint and the merits can be determined. Md. Rule 2-611(d).

[Id. at 656.]

Applications to open, modify, or vacate entry of default must be filed within sixty days of service. See Md. Rule 2-611(d) & 2-321(b)(1) ("A defendant who is served with an original pleading outside of the State [of Maryland] but within the United States shall file an answer within [sixty] days after being served.").

Further, Maryland law does not presuppose a waiver is valid. In fact, Maryland Rule 2-611(b) requires the trial court to determine, among other things, "the pleadings and papers demonstrate a factual and legal basis for entitlement to a confessed judgment."

In this matter, the Estate suggests the motion judge erred in concluding plaintiff fully complied with Maryland procedures in entering its judgment against Burnett. However, the Estate does not dispute the same complaint contained separate requests for judgment against JTB, Inc. and to confess judgment against the guarantors. The pleading appended all documentation necessary to identify the rights and responsibilities of the respective parties. Plaintiff filed and served its complaint against JTB, Inc. and the other defendants; no response or objection was filed. Once judgment was entered against the corporation, plaintiff was free to request relief against the guarantors.

The Estate also suggests Burnett's waiver of pre-judgment notice contained in the Guaranty was uncounseled and, therefore, uninformed. We cannot agree.

There is no statement of personal knowledge by the executrix stating whether Burnett consulted with legal counsel prior to executing the CSA or Guaranty. Plaintiff certified JTB, Inc. defaulted under the CSA and provided the documents supporting entry of judgment against it. JTB, Inc. never challenged the action or the relief sought. Proof of the Guaranty and its execution by Burnett was also provided to support judgment under the cognovit provision.

Moreover, the Guaranty is clearly written and its waiver provisions are boldly identified, as is the confession of judgment clause. Importantly, plaintiff's action was based on the Guaranty, not the terms of its CSA with JTB, Inc. See Tara Enters., supra, 369 N.J. Super. at 59 (holding a guarantee of a note that contains a cognovit provision alone is insufficient to permit confession of judgment against the guarantors). Further, the provision contains a succinct statement that Maryland law governs enforcement and that any attorney so appointed may enter judgment against the guarantors.

Maryland law provides

an evidentiary hearing to determine whether [the] defendant's waiver was voluntarily, knowingly, and intelligently made before a confessed judgment may be entered by the court. Rather, the burden is on [the] defendant in its motion to vacate and in any hearing thereon to set forth fully the evidence showing either that the alleged amount owed had no basis in fact (e.g., was miscalculated) or that the agreement was not knowingly and voluntarily entered.

[Atl. Leasing & Fin., Inc. v. IPM Tech., Inc., 885 F.2d 188, 193 (4th Cir. 1989).]

The Estate has failed to meet this burden. After reviewing all the documents and considering the executor's certification, we find no support for concluding Burnett's execution of the Guaranty was involuntary or unknowing.

We also reject the Estate's due process challenge. The Maryland judgment was entered and plaintiff served Burnett, individually, as mandated by Maryland Rule 2-611(a). The post-judgment process affords additional notice and an opportunity to challenge the confessed judgment's validity within sixty days of its entry. This fully complies with the rigors of due process. See Tara Enters., supra, 369 N.J. Super. at 56 (recognizing "[i]n certain contexts . . . a post-judgment hearing may afford the requisite due process"). Despite the availability of a constitutionally valid post-judgment procedure to challenge entry of the judgment in Maryland, which could include whether Burnett's waiver was knowing and voluntary, Burnett did not act within the permitted sixty-day period. Thereafter, plaintiff properly filed its complaint to domesticate the Maryland judgment in New Jersey, attaching all requisite documents.

Contrary to the Estate's contention, a waiver hearing is not mandated prior to confessing judgment, so long as the waiver provisions are clear and unambiguous. See Billingsley v. Lincoln Nat'l Bank, 271 Md. 683, 693 ("Overmyer cannot be read to mandate a 'waiver hearing' prior to entry of a confessed judgment and, insofar as one may be required thereafter, it was clearly available to [the] appellants at the hearing on their motion to vacate. No more is required.").

In this state action to domesticate the Maryland judgment, the Estate cannot now raise substantive claims collaterally attacking the enforceability of the cognovit provision or its voluntary acceptance, as these issues could and should have been presented in the Maryland post-judgment process. Sec. Ben. Life Ins., supra, 279 N.J. Super. at 424. Burnett was given notice of the judgment and had the right to petition the Maryland court to open, modify, or vacate that judgment if a valid basis to do so was presented. See Md. Rule 2-611(d). For reasons not disclosed, he chose not to do so.2 Judge Scully's determination of the validity of Burnett's waiver to pre-judgment notice and declination to pursue post-judgment process must be upheld. Id. at 426 (barring a defendant from raising in an action to register a judgment "any of the issues that were, could[,] or should have been litigated in the [foreign] action" resulting in the judgment).

Finally, the Estate alleges New Jersey was an express forum set forth in the CSA, suggesting plaintiff "can neither delimit New Jersey's plenary jurisdiction nor its availability as a forum for collateral attack when a foreign entity seeks to utilize New Jersey's jurisdiction for enforcement." The Estate is incorrect.

The terms of the parties' agreement designates New Jersey as a supplementary forum for "collection or enforcement action[s]" filed for domestication within its borders. As we noted, review of a domesticated foreign judgment by our courts is limited to whether the constitutional guarantee of notice and a hearing has been satisfied. See Sontag, supra, 374 N.J. Super. at 537. Having answered that question in the affirmative, we reiterate "[t]he appropriate forum for a defendant to raise defenses to a claim is in the tribunal where the judgment was rendered." Ibid.

Affirmed.

 

1 We have modified the caption to reflect the facts of record. Specifically, John T. Burnett, an original defendant in this action passed away on August 13, 2012. His widow, Kathy Burnett, was appointed executrix of his estate on April 24, 2013. The Estate moved to vacate a foreign judgment entered by confession against John T. Burnett on December 6, 2013.

2 We note this record contains no facts to support the Estate's claim the Maryland court lacked personal jurisdiction to enter the judgment against Burnett.

Moneyforlawsuits V. Tammy Rowe

March 29, 2012 | Legal Decisions by State, Michigan

Benchmark Choice of Laws case for Michigan

USDC East. Dt. OF MI S. Div.
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Richard Clark v AdvanceMe

May 12, 2011 | California, Legal Decisions by State

Richard B. Clark, et al. v. AdvanceMe, Inc. under which AdvanceMe agreed to a settlement payment of $23.4 million and forfeited the right to pursue further payments from the plaintiff merchants. The litigation in California should make MCA businesses especially cautious when conducting business in California.

USDC Cent Dist CA
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Commercial Coin Laundry Systems v Enneking

June 29, 2007 | Indiana, Legal Decisions by State

The foreign action to domesticate the judgment will not review the merits of the original decision, applying the principle of res judicata, but the court can inquire into whether the foreign court’s finding of personal and subject matter jurisdiction was correct.

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Appellate Court of Illinois,First District, First Division.

COMMERCIAL COIN LAUNDRY SYSTEMS, Plaintiff-Appellee, v. LOON INVESTMENTS, LLC., Defendant-Appellant.

No. 1-06-3718.

    Decided: June 29, 2007

Johnson & Bell, Ltd., Chicago (Garrett L. Boehm, Jr., Kevin G. Owens and Julie E. Benes, of counsel), for Appellant. Russel G. Winick & Associates, P.C., Naperville (Russel G. Winick, of counsel), for Appellee.

Plaintiff, Commercial Coin Laundry Systems, is an Illinois general partnership engaged in the business of installing and maintaining commercial laundry equipment in multiple-unit apartment buildings.   Defendant, Loon Investments, LLC., is a Wisconsin limited liability company and the current owner of the apartment building located at 1657 South 17th Street in Milwaukee, Wisconsin (the property).   Plaintiff had signed an agreement with the prior owner of the property for the purpose of installing and maintaining laundry equipment there.   As the result of alleged vandalism and theft of laundry equipment on the property, plaintiff sued defendant alleging breach of contract, damage to personal property and conversion.   Defendant moved to dismiss for lack of personal jurisdiction, and the circuit court of Cook County denied the motion. For the reasons set forth below, we reverse.

BACKGROUND

On August 4, 1988, plaintiff signed a written lease agreement with Ruth Kuehn, who was then the owner of the subject property, which has 29 apartments.   Plaintiff leased the laundry areas in order to install and operate coin-operated laundry machines for use by tenants.   In return for use of the laundry areas, plaintiff agreed to pay the lessor 15% of the coin receipts from the machines, and an additional $1,600 flat fee to reimburse the lessor for improvements to the laundry areas.   Plaintiff alleged that it prepared and negotiated the lease from its offices in Chicago.

The lease stated that title of the machines remained with plaintiff and that “lessor does not assume any responsibility for any loss, damage or destruction of said laundry equipment by fire, theft or any other casualty beyond lessor's reasonable control or prevention.”   The lessor was responsible for “all janitorial and housekeeping services for the laundry room and equipment” and warranted that “the premises have adequate utilities and proper venting and there will be no building code violations which adversely affect” plaintiff's ability to run laundry machines.

The lease was for “a term of 10 years commencing August 30, 1988.” However, the lease stated that it “shall continue for additional ten year terms unless terminated in writing by either lessee or lessor.”   The parties agree that, pursuant to this renewal provision, the lease did renew after the expiration of the first term on August 30, 1998.   The second term is in effect and continues until August 30, 2008.

The lease provided that it was binding on future owners of the property:

“This Lease Agreement shall be binding upon and shall inure to the benefit of the lessor and the lessee and their respective successors and assigns, including any future owners, beneficiaries or lessee of the Building, it being the intention of the parties that the interest granted to lessee herein shall run with the land and building.”

The lease had a choice-of-law provision, which stated:  “This agreement shall be governed by the laws of the State of Illinois.”   The lease also provided that “[t]he Lease shall not take effect until accepted by lessee at the office of lessee in Chicago, Illinois.”

On September 1, 1999, defendant acquired the building.   Plaintiff filed suit in Cook County, Illinois, against defendant alleging counts for breach of contract, damage to personal property and conversion.   The complaint alleged that “beginning very shortly after defendant acquired the building and continuing up to the present time, [plaintiff] has suffered repeated acts of vandalism, break-ins, and theft of its laundry equipment.”   The alleged incidents included “coin boxes being broken into, washer hoses disconnected, electrical cords cut, concrete poured into the washers, and oil poured into the dryers.”   On February 13, 2006, plaintiff “discovered that all of its laundry machines had been stolen from each of the laundry rooms.”

Plaintiff alleged that prior to defendant's acquisition of the building, it had experienced no incidents of vandalism or theft there.   However, after defendant's acquisition, plaintiff has been forced to replace its laundry machines on four occasions.   Plaintiff alleged that tenants had informed its agent that defendant's maintenance man had intentionally cut the electrical cords on all of its laundry machines.

In addition to the incidents of theft and vandalism, plaintiff also alleged utility problems, such as “blown fuses, drainage problems in the laundry room, water shut off to the laundry room, no electricity for the equipment, no lights in a laundry room and no electricity for a laundry room.”   Plaintiff alleged that it had experienced no utility problems prior to defendant's acquisition and that it contacted defendant repeatedly asking defendant to provide adequate security and utilities but defendant never did so.

In response to the complaint, defendant filed a motion to dismiss for lack of personal jurisdiction.   In support of its motion, defendant submitted the affidavit of Daryl Nirode, who stated that he was the “Controller” of defendant, which is a Wisconsin limited liability corporation with its principal place of business in Milwaukee.   Nirode stated that defendant did not own or manage any property within Illinois, that it did not conduct any business in Illinois and that it had no offices or employees in Illinois.

In response, plaintiff submitted the affidavit of S. Saul Silverstein, who stated that he was a general partner of plaintiff, which is an Illinois general partnership with its office in Chicago, Illinois.   Silverstein stated that plaintiff calculates and pays the rent due under the lease and administers its laundry equipment service from its offices in Chicago and that defendant has accepted rent payments from plaintiff for years.

On November 29, 2006, the trial court denied defendant's motion.   The order did not make factual findings or identify the section of the jurisdictional statute pursuant to which the court was exercising jurisdiction over the defendant.   On December 28, 2006, plaintiff petitioned this court for leave to appeal, which was granted.   For the following reasons, we reverse.

ANALYSIS

“When the circuit court decides a jurisdictional question solely on the basis of documentary evidence, as it did in this case, the question is addressed de novo on appeal.”  Rosier v. Cascade Mountain, Inc., 367 Ill.App.3d 559, 561, 305 Ill.Dec. 352, 855 N.E.2d 243 (2006);  Alderson v. Southern Co., 321 Ill.App.3d 832, 846, 254 Ill.Dec. 514, 747 N.E.2d 926 (2001).  “The plaintiff bears the burden of establishing a prima facie basis upon which jurisdiction over an out-of-state resident may be exercised.”   Rosier, 367 Ill.App.3d at 561, 305 Ill.Dec. 352, 855 N.E.2d 243;  Alderson, 321 Ill.App.3d at 846, 254 Ill.Dec. 514, 747 N.E.2d 926;  Khan v. Van Remmen, Inc., 325 Ill.App.3d 49, 53-54, 258 Ill.Dec. 628, 756 N.E.2d 902 (2001).

Section 2-209 of the Code of Civil Procedure (735 ILCS 5/2-209 (West 2004)) sets forth when Illinois courts will exercise personal jurisdiction over a defendant.   Subsection 2-209(a), which governs specific jurisdiction, lists 14 grounds by which a defendant may subject itself to Illinois jurisdiction.   735 ILCS 5/2-209(a)(1) through (a)(14) (West 2004).   Subsection 2-209(b), which governs general jurisdiction, lists four grounds, only two of which apply to corporations:  “(3) * * * a corporation organized under the laws of this State;  or (4) * * * [a] corporation doing business within this State.”  735 ILCS 5/2-209(b)(3), (b)(4) (West 2004).   Subsection 2-209(c) is a “catch-all provision” which permits Illinois courts to “ ‘exercise jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution and the Constitution of the United States.’ ”  Rosier, 367 Ill.App.3d at 561, 305 Ill.Dec. 352, 855 N.E.2d 243, quoting 735 ILCS 5/2-209(c) (West 2004).   Subsection 2-209(c) permits an Illinois court to exercise personal jurisdiction to the extent permitted by the due process clause of the fourteenth amendment to the United States Constitution.  Klump v. Duffus, 71 F.3d 1368, 1371 (7th Cir.1995) (Illinois long-arm statute was amended in 1989 to add subsection 2-209(c), which is “coextensive with the due process requirements of the United States Constitution”).

An exercise of jurisdiction under any of these three subsections must also comport with the due process clause.   The due process clause limits a state's exercise of personal jurisdiction over a nonresident defendant to those instances where the defendant had at least “ minimum contacts” with the state.  Rosier, 367 Ill.App.3d at 561, 305 Ill.Dec. 352, 855 N.E.2d 243.   This court recently described the minimum contacts standard as follows:

“The minimum contacts standard ensures that ‘requiring the out-of-state resident to defend in the forum does not “ ‘offend traditional notions of fair play and substantial justice.’ ” '  [Citation.]  The minimum contacts analysis must be based on some act by which the defendant purposefully availed itself of the privilege of conducting activities within the forum state, in order to assure that a nonresident will not be haled into a forum solely as a result of random, fortuitous, or attenuated contacts with the forum or the unilateral acts of a consumer or some other third person.”  Rosier, 367 Ill.App.3d at 561-62, 305 Ill.Dec. 352, 855 N.E.2d 243.

In the case at bar, plaintiff claimed that this court may exercise jurisdiction under subsection 2-209(a) or (c) but not (b).  Plaintiff did not claim, as subsection 2-209(b) requires, that defendant was a corporation organized under the laws of or doing business within the State of Illinois.   735 ILCS 5/2-209(b)(3), (b)(4) (West 2004).   Plaintiff claimed that the following three grounds of subsection a applied:

“(1) The transaction of any business within this State;

* * *

(7) The making or performance of any contract or promise substantially connected with this State;

* * *

(10) The acquisition of ownership, possession or control of any asset or thing of value present within this State when ownership, possession or control was acquired * * *[.]” 735 ILCS 5/2-209(a)(1), (a)(7), (a)(10) (West 2004).

On appeal, plaintiff did not claim that defendant transacted business in Illinois, made or performed a contract in Illinois or acquired control over Illinois property.   Instead plaintiff claimed that it was the prior owner who took these actions and that the prior owner's actions subjected the defendant to personal jurisdiction in Illinois.   Plaintiff claimed that “the material acts subjecting Loon to the jurisdiction of Illinois are those acts performed by the original lessor, Kuehn,” and that defendant subjected itself to jurisdiction as a “successor in interest.”   Plaintiff claimed jurisdiction solely because “Loon's predecessor in title, Kuhn, did these acts, thereby subjecting Loon as a successor in interest to the Real Property to the same jurisdiction.”   In short, plaintiff is claiming derivative personal jurisdiction.   In essence, plaintiff asks us first to determine whether this court would have had jurisdiction over the prior owner and second to attribute that jurisdiction to the defendant.

Plaintiff claims that this court may attribute the first owner's personal jurisdiction to the second owner because personal jurisdiction “ran with the land.”   The claim is:  the first owner took actions with respect to a lease that allegedly subjected the first owner to personal jurisdiction, the building was then sold while the lease was still in effect, and personal jurisdiction, like the lease itself, “ran with the land” so that this court acquired personal jurisdiction over any subsequent owner.   None of the cases cited by the plaintiff support its theory of derivative personal jurisdiction or “runs with the land” jurisdiction, nor can this court find any.  Rosier, 367 Ill.App.3d at 568, 305 Ill.Dec. 352, 855 N.E.2d 243 (this court held that, by failing to offer any supporting legal authority or reasoning, plaintiffs waived consideration of their theory for asserting personal jurisdiction over defendants);  People v. Ward, 215 Ill.2d 317, 332, 294 Ill.Dec. 144, 830 N.E.2d 556 (2005) (“A point raised in a brief but not supported by citation to relevant authority * * * is therefore forfeited”);  Ferguson v. Bill Berger Associates, Inc., 302 Ill.App.3d 61, 78, 235 Ill.Dec. 257, 704 N.E.2d 830 (1998) (“it is not necessary to decide this question since the defendant has waived the issue” by failing to offer case citation or other support as Supreme Court Rule 341 requires);  210 Ill.2d R. 341(h)(7) (argument in appellate brief must be supported by citation).

On this issue of derivative jurisdiction, defendant cited Natural Gas Pipeline Co. of America v. Mobil Rocky Mountain, Inc., 155 Ill.App.3d 841, 108 Ill.Dec. 50, 508 N.E.2d 211 (1986).   In a situation similar to the facts at bar, the defendant in Natural Gas acquired an interest in a contract through an assignment from the original signatory.  Natural Gas, 155 Ill.App.3d at 842, 108 Ill.Dec. 50, 508 N.E.2d 211.   The plaintiff in Natural Gas made a jurisdictional claim similar to the claim of the plaintiff in the case at bar.   The Natural Gas plaintiff claimed that this court had personal jurisdiction over the nonresident defendant since the defendant had “initiated the course of dealings that resulted in a contract between the parties.”  Natural Gas, 155 Ill.App.3d at 846, 108 Ill.Dec. 50, 508 N.E.2d 211.   This court in Natural Gas held:  “This argument is specious;  [defendant] never dealt with [plaintiff].  [Defendant] was merely an assignee of the original contract that was negotiated and signed by [plaintiff].”  Natural Gas, 155 Ill.App.3d at 846, 108 Ill.Dec. 50, 508 N.E.2d 211.   Thus, this court has previously held that merely being a successor in interest to a contract is insufficient, without more, to confer personal jurisdiction.

Plaintiff did not claim that the relationship between the prior owner and the defendant was one of agent and principal (Brandt v. Agrimar Corp., 801 F.Supp. 164, 169 (C.D.Ill.1992) (agent's “jurisdiction-triggering activities can be imputed to” principal));  parent and subsidiary corporations (Brandt, 801 F.Supp. at 169 (“this Court can assert jurisdiction over an out-of-state parent (or grandparent) corporation through the activities of its subsidiary”));  or primary stockholder and corporation (Rosier, 367 Ill.App.3d at 566, 305 Ill.Dec. 352, 855 N.E.2d 243 (“The remedy of disregarding or piercing the corporate veil in order to get to assets held by an individual will be employed where there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist * * * ”)).   Plaintiff did not claim that this court had personal jurisdiction by means of any of these other relationships, and the record would not support such a claim.

On appeal, plaintiff did not claim any basis for jurisdiction except for its “ran with the land” theory.   Thus plaintiff, who bears the burden of establishing a prima facie case for jurisdiction, waived any other possible claims for jurisdiction.  Supreme Court Rule 341, which governs the content of appellate briefs, provides that any “[p]oints not argued are waived and shall not be raised * * * on petition for rehearing.”   210 Ill.2d R. 341(h)(7).

Since we reject plaintiff's theory of derivative jurisdiction, we examine defendant's own contacts with the state of Illinois to determine if we may exercise personal jurisdiction.   The documentary evidence submitted by the parties established that defendant had the following contacts with our state:

1.  Contract with an Illinois tenant;

2.  Receipt in Wisconsin of rent mailed from Illinois;

3.  Possession and control over Illinois equipment;  and

4.  Illinois choice-of-law clause.

The above list of contacts is almost identical to the list of contacts which this court rejected as a basis for jurisdiction in Mellon First United Leasing v. Hansen, 301 Ill.App.3d 1041, 235 Ill.Dec. 508, 705 N.E.2d 121 (1998).   The plaintiff in Mellon claimed that the following contacts were sufficient for jurisdiction:

1.  Contract with an Illinois tenant;

2.  Receipt in Illinois of rent mailed from California;

3.  Leasing of Illinois equipment;  and

4.  Illinois forum-selection clause.

Like we did in Mellon, we reject these contacts as a sufficient basis for jurisdiction.  Mellon, 301 Ill.App.3d at 1050, 235 Ill.Dec. 508, 705 N.E.2d 121.

We will analyze each of these contacts in turn.   First in the case at bar, defendant's purchase of the property resulted in its assumption of a contract with an Illinois resident.   However, the mere fact of entering into a contract with an Illinois resident does not subject a nonresident defendant to Illinois jurisdiction.  Hendry v. Ornda Health Corp., 318 Ill.App.3d 851, 854, 252 Ill.Dec. 208, 742 N.E.2d 746 (2000) (“merely entering into a contract with a resident of Illinois is not sufficient by itself to subject a nonresident to in personam jurisdiction in Illinois”);  Mellon, 301 Ill.App.3d at 1048, 235 Ill.Dec. 508, 705 N.E.2d 121 (“Where a nonresident merely enters into a contract with a resident of the forum state, this fact is not sufficient by itself to subject the nonresident to the in personam jurisdiction of the forum state”).

In Mellon, this court distinguished between a passive and an active contracting party.  Mellon, 301 Ill.App.3d at 1048-49, 235 Ill.Dec. 508, 705 N.E.2d 121.   If the nonresident is a passive party who merely accepts the other party's contract terms, that passive acceptance is not enough to confer jurisdiction.  Mellon, 301 Ill.App.3d at 1048, 235 Ill.Dec. 508, 705 N.E.2d 121.   By contrast, if the nonresident took an active role such as dictating or vigorously negotiating the contract terms or inspecting equipment or facilities in Illinois, then this active role in Illinois will confer jurisdiction.   Mellon, 301 Ill.App.3d at 1048-49, 235 Ill.Dec. 508, 705 N.E.2d 121.   In the case at bar, plaintiff concedes that defendant did not take an active role;  that is why plaintiff resorted to its derivative jurisdiction claim.   Defendant passively assumed the contract through its acquisition of the building, and this passive act alone is insufficient to confer jurisdiction.

Second, the simple mailing of rent payments to or from Illinois is not enough to confer jurisdiction on Illinois.  Mellon, 301 Ill.App.3d at 1047, 235 Ill.Dec. 508, 705 N.E.2d 121.   Third, plaintiff claims that the laundry machines were Illinois machines, that defendant thus acquired possession and control over Illinois machines, and that this control gave Illinois jurisdiction over defendant.   This court has previously held that the possession and control by a nonresident of Illinois equipment for use in a foreign jurisdiction does not confer jurisdiction on Illinois.  Mellon, 301 Ill.App.3d at 1047, 235 Ill.Dec. 508, 705 N.E.2d 121 (nonresident did not transact business or perform a contract in Illinois when it leased a postage meter machine from an Illinois corporation for use in California);  c.f. Jamik, Inc. v. Days Inn of Mount Laurel, 74 F.Supp.2d 818, 821 (N.D.Ill.1999) (installation in a New Jersey hotel of bathtubs manufactured in Illinois did not give an Illinois court personal jurisdiction over New Jersey hotel owners).

Fourth, the only factor weighing in favor of finding jurisdiction is the Illinois choice-of-law clause.   Although a relevant consideration, a choice-of-law clause “by itself” does not confer personal jurisdiction.  Bolger v. Nautica International, Inc., 369 Ill.App.3d 947, 952, 308 Ill.Dec. 335, 861 N.E.2d 666 (2007), quoting Morecambe Maritime, Inc. v. National Bank of Greece, S.A., 354 Ill.App.3d 707, 713, 290 Ill.Dec. 468, 821 N.E.2d 780 (2004). Usually when a choice-of-law clause is noted as part of a jurisdiction finding, the clause is merely “one more arrow in [plaintiff's] quiver.”  AM International Leasing Corp. v. National Council of Negro Women, Inc., 627 F.Supp. 1302, 1307 (N.D.Ill.1986).

Although plaintiff was the party that drafted the contract and filled it with boilerplate language conducive to its business, it chose to include only a choice-of-law clause, not a stronger and enforceable forum-selection clause.   Aon Corp. v. Utley, 371 Ill.App.3d 562, 568, 309 Ill.Dec. 69, 863 N.E.2d 701 (2006) (enforcing a forum-selection clause as a basis for personal jurisdiction in Illinois over California defendant);  IFC Credit Corp. v. Aliano Brothers General Contractors, Inc., 437 F.3d 606, 609 (7th Cir.2006) (enforcing a forum-selection clause as a waiver by defendant to its objections to personal jurisdiction in Illinois).   Plaintiff cannot now be heard to complain about the form contract that it crafted.   C.f. Mellon, 301 Ill.App.3d at 1045, 235 Ill.Dec. 508, 705 N.E.2d 121 (court gave little effect to a “forum selection clause contained in ‘boilerplate’ language”).

Last and least, plaintiff spends a portion of its brief discussing the fact that there are signs in the laundry areas informing consumers to call plaintiff in case of problems with the laundry machines.   The signs establish that plaintiff expected to have an ongoing and on-site relationship with the Wisconsin property. However, plaintiff's maintenance activities in Wisconsin cannot be used to establish personal jurisdiction in Illinois over the defendant.  Gordon v. Tow, 148 Ill.App.3d 275, 280, 101 Ill.Dec. 394, 498 N.E.2d 718 (1986) (“In assessing a nonresident's contacts with this State, ‘[o]nly the acts of defendant can be considered in determining whether business was transacted in Illinois.’ ”).

CONCLUSION

For the foregoing reasons, we reverse the trial court's decision denying the defendant's motion and dismiss for lack of personal jurisdiction.

Reversed.

Justice ROBERT E. GORDON delivered the opinion of the court:

McBRIDE, P.J., and GARCIA, J., concur.

Southwest Concrete Products v. Gosh Construction Corp.

November 1, 1990 | California, Legal Decisions by State

Courts do not just look to the surface of the contract – that is,whether or not the creditor labels the agreement a “loan” vs. a “merchant cash advance,” for example. Rather, courts will view the transaction “in light of all the circumstances and with a view to substance rather than form.”

However, court concludes that the late charge provided in the contract is not subject to the usury law because it does not constitute payment for the “loan or forbearance of any money.” (Cal. Const., art. XV, § 1.) It is exempt from the usury law under the time-price doctrine and the principle that a debtor by voluntary act cannot render an otherwise valid contract usurious.

Superior Court of Riverside County
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Cheidem Corp. v. Farmer

July 6, 1982 | Delaware, Legal Decisions by State

Challenging a COJ – Plaintiff was required to demonstrate that when the defendants signed the warrant (COJ), they understood that they were waiving their right to defend against entry of judgment before default had occurred. The plaintiff did not produce any evidence of defendants’ understanding on this point. It merely elicited testimony that defendants were advised by counsel before signing.

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449 A.2d 1061 (1982)

CHEIDEM CORP., a Delaware Corporation, Assignee of Mary-Ellen Enterprises, Inc., a Delaware Corporation, Plaintiff, v. James L. FARMER, Dorothy J. Farmer, William M. Dungee and Doretha C. Dungee, Defendant.

Superior Court of Delaware, New Castle County.

Submitted April 22, 1982.

Decided July 6, 1982.

Joseph B. Green, of Green & Green, Wilmington, for plaintiff.

Gregg E. Wilson, Wilmington, for defendant.

O'HARA, Judge.

Plaintiff, Cheidem Corporation, is the assignee-obligee on a mortgage and judgment bond with warrant of attorney. The warrant *1062 does not contain any conditions precedent for exercise; neither delay nor default is necessary for execution. Plaintiff complained that defendants had breached a condition of the bond to make one joint monthly payment to plaintiff for both the mortgage it held as well as for an assumed mortgage on the property. Prior to the assignment, it had been the defendants' custom to forward the amount of payment for the assumed debt directly to the primary holder. Plaintiff, however, insisted on the method agreed to in the bond and refused to accept payment limited to the mortgage it held.

Plaintiff attempted to enter judgment by confession against defendants, James and Dorothy Farmer and William and Doretha Dingee, pursuant to 10 Del.C. § 2306(a) and Superior Court Rule of Civil Procedure 58.1, although no actual default had occurred.

A hearing was held to determine whether defendants had waived their right to notice before judgment. See 10 Del.C. § 2306(b). Plaintiff was reluctant to delve into the waiver issue and merely elicited testimony that defendants had legal counsel before signing the warrant. At this hearing, and over plaintiff's objection, the Court also considered the issue of whether the debt to plaintiff was in arrears. The Court decided that judgment could not be entered because the debt payments were current. On appeal, the Supreme Court reversed and remanded for consideration of such issues as whether judgment can be entered absent default, whether such entry is constitutional, and whether the Court can inquire into the status of the debt at the 10 Del.C. § 2306(b) waiver hearing.

Cognovit or confession of judgment is a common law device permitting a creditor to obtain judgment without trial of defenses. A confession of judgment is the written authority of the debtor and a direction for entry of judgment against him. It cuts off all defenses and right of appeal. See 47 Am.Jur., Judgments, § 1107 and 1 Wooley § 776 (1906) (hereinafter "Wooley"). Such devices have been recognized in Delaware statutes since the Code of 1852. The current codification is found in 10 Del.C. § 2306(a):

§ 2306. Entry of judgment by confession. (a) A judgment by confession may be entered by the Prothonotary, either for money due or to become due, or to secure the obligee against a money contingent liability, or both, on the application by the obligee or assignee of a bond, note or other obligation containing a warrant for an attorney-at-law or other person to confess judgment.

Confession can also be made in open Court under Superior Court Rule of Civil Procedure 58.2(a):

A judgment by confession may be entered in open court by the Superior Court either for money due or to become due, or to secure the obligee against a money contingent liability, or both, on the application by the obligee or assignee of a bond, note or other obligation containing a warrant for an attorney-at-law or other person to confess judgment.

The cognovit instrument at issue here is a warrant of attorney.

If the judgment confessed be with respect to a pending action, it is simply termed a judgment by confession. If the judgment confessed be made in relation to no action actually begun, it likewise is a judgment by confession, but for the purpose of distinguishing it from the former class, is termed judgment on warrant of attorney. 1 Wooley § 776 at 539.

Thus, a warrant of attorney is a waiver of notice and a consent to entry of a stated sum based on an agreement between two or more parties. The courts honor these agreements by turning them into judgments under the statutory process. Keystone Fuel Oil Co. v. Del-Way Petroleum, Inc., Del.Super., 364 A.2d 826 (1976). However, even though the defendant in a confession action has waived all defenses by contract, our courts are permitted to inquire into the validity of that waiver. 10 Del.C. § 2306(b) states:

A judgment by confession shall not be entered as a final judgment, effective in *1063 all respects as a judgment after trial, until the Prothonotary gives written notice to the defendant-obligor by certified mail, return receipt requested, of an opportunity for a judicial determination as to whether the defendant-obligor understandingly waived his right to notice and an opportunity to be heard prior to the entry of final judgment against him.

Thus, before judgment may be entered, the defendant has an opportunity to disprove the waiver and prevent entry.

The plain meaning of 10 Del.C. § 2306 permits entry of judgment for debts "to become due" upon the consent of the debtor. Cognovit provisions have been found to "serve a proper and useful purpose in the commercial world", D. H. Overmyer Co. v. Frick Co., 405 U.S. 174, 92 S. Ct. 775, 31 L. Ed. 2d 124 (1972), and exercise of a warrant to enter an unmatured debt has been upheld by Delaware courts. In Rhoades v. Mitchell, Del.Super., 47 A.2d 174 (1946), a question on the entry of judgment for a debt not yet due was answered affirmatively. The Court found that such a judgment was a form of security.

A warrant of attorney to confess judgment may furnish substantial provision for collateral security for the payment of a debt, or the performance of an obligation due at the time of the execution of the warrant, or to become due in the future. Where the warrant to confess judgment is without limit of time there is no necessity to await the maturity of the obligation before entry of judgment. Id. at 179.[1]

Thus, since the warrant sub judice does not contain any time or default conditions, it was subject to exercise prior to default under 10 Del.C. § 2306(a).

Confession of judgment statutes have been found not to be per se invalid and thus not constitutionally offensive. D. H. Overmyer Co. v. Frick Co., supra; Swarb v. Lennox, 405 U.S. 191, 92 S. Ct. 767, 31 L. Ed. 2d 138 (1972). However, due process requires that the consent involved in the warrant must be shown to be knowing, intelligent and voluntary. D. H. Overmyer Co. v. Frick Co., supra. Although the Overmyer and Swarb cases involved judgments for debts already in default, the constitutional issue is identical: Can a party validly waive his right to notice and hearing before his property is encumbered by a lien.[2]

In Overmyer, the Court held that due process rights to notice and a hearing prior to civil judgment are subject to waiver. The Court cited National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 84 S. Ct. 411, 11 L. Ed. 2d 354 (1964) and Boddie v. Connecticut, 401 U.S. 371, 91 S. Ct. 780, 28 L. Ed. 2d 113 (1971), in further support of this principle. It analogized to the criminal standard for a valid waiver: a waiver must be voluntary, knowing, and intelligently made, Brady v. United States, 397 U.S. 742, 90 S. Ct. 1463, 25 L. Ed. 2d 747 (1970), or an intentional relinquishment or abandonment of a known right or privilege, Johnson v. Zerbst, 304 U.S. 458, 58 S. Ct. 1019, 82 L. Ed. 1461 (1938). The plaintiff bears the burden of showing that such a waiver has occurred under Civil Rules 58.1(d)(5) and 58.2(b)(4)(II).[3]

*1064 Delaware law also provides additional rights to the defendant. 10 Del.C. § 2306(j) provides:

Notwithstanding the opportunity for hearing provided in subsection (b) above the defendant-obligor will not be deemed to have waived the right to present defenses of which he had no knowledge at the time he signed the instrument containing a warrant of attorney to confess judgment, or which arose subsequent to the signing of such instrument. A stay of execution shall be automatically given on all judgments entered hereunder until the defendant-obligor is afforded an opportunity for hearing to present those defenses not deemed to have been waived. Prior to execution the Prothonotary shall serve notice to the defendant-obligor in the manner above provided for residents or nonresidents as the case may be, and such notice shall include a warning that defendant-obligor's property will be seized and sold or his wages attached on failure to appear.

Thus, even if consent is found to be valid after a 10 Del.C. § 2306(b) hearing, a defendant-obligor will not be held to have waived the right to present defenses he did not know he had at the time he signed the instrument or which arose subsequent to the signing of that instrument. These defenses, too, may be considered by the Court prior to entry of judgment or can stay a judgment already entered. Therefore, the Delaware statute meets the due process standard established in Overmyer and Swarb because it provides an express means for testing the validity of the waiver prior to entry of judgment.

If the consent to judgment prior to default is found valid, a defendant is protected from excessive judgments even though the statute does not expressly provide for inquiry into the amounts actually due. The Court has inherent power to ascertain the correct amount due in rendering judgment, Szymanski v. Hearn, Del.Super., 61 A.2d 656 (1948), and the defendant has recourse to equity for action against the obligee as described by Wooley, supra, note 1. Other judicial remedies are also available to a defendant should an excessive judgment be entered. The judgment may be opened through a Superior Court Civil Rule 60 motion. The burden on the defendant should not be onerous under this procedure because the motion is directed to the discretion of the Court and is decided in accord with principles of equity. Sussex Finance Co. v. Goslee, Del.Super., 82 A.2d 743 (1951). However, this procedure cannot be used to avoid the consequences of valid consent itself. Keystone Fuel Oil Co. v. Del-Way Petroleum, Inc., supra. Further remedy, should a creditor attempt to use the confession of judgment procedure to harass a debtor, would lie in an action for abuse of process. See Prosser, Law of Torts, § 121 (1971).

In this case, plaintiff was required to demonstrate that when the defendants signed the warrant, they understood that they were waiving their right to defend against entry of judgment before default had occurred. The plaintiff did not produce any evidence of defendants' understanding on this point. It merely elicited testimony that defendants were advised by counsel before signing. However, that same counsel successfully, if erroneously, maintained in this Court, that the statute did not permit entry of judgment before default. Thus, advice of counsel was not conclusive on the issue of knowing waiver.

*1065 In addition, there was no evidence submitted on the issue of the voluntariness of the waiver. This issue was raised but not decided in Overmyer. Although the Overmyer Court concluded that cognovit judgments were not per se invalid, it noted that this decision must be tempered by a case by case approach. The validity of a waiver can be limited by findings that it resulted from an adhesion contract, from disparity of bargaining power, or that it was invalidated by a failure of a quid pro quo in exchange for the cognovit provision.[4]Overmyer, 455 U.S. at 188, 92 S. Ct. at 783-784.

Therefore, in light of these unresolved issues surrounding the waiver, this Court finds that the plaintiff did not demonstrate that defendants' waiver was knowing, intelligent and voluntary. Entry of judgment must be denied.

IT IS SO ORDERED.

NOTES

[1] "The practice in Delaware [under common law] is, that a judgment for the penalty, and where the condition is not for the payment of money, but for the performance of some collateral undertaking, the execution follows the judgment and the creditor proceeds at his peril, subject to the interference of a court of equity, if he takes execution before a breach has been committed, or after a breach, for a sum larger than the damage actually sustained." 1 Wooley § 792 (1906).

[2] See Osmond v. Spence, D.Del., 327 F. Supp. 1349 (1971), vacated and remanded for reconsideration, 405 U.S. 971, 92 S. Ct. 1189, 31 L. Ed. 2d 245 (1972), for a discussion of the constitutional infirmities of the previous Delaware Confession of Judgment statute which failed to provide a prejudgment waiver hearing. That statute was revised two months after the Osmond decision.

[3] Rule 58.1(d)(5):

"(d) The notice letter required by paragraph (a)(4) shall be mailed by the Prothonotary to each debtor by certified mail, return receipt requested, together with a copy of the affidavit required by 10 Del.C. § 2306(c). The notice letter, on a form supplied by the Prothonotary, shall contain the following information:

* * * * * *

(5) That he may appear in Court, giving an address for said Court, on the second motion day following the date on which said notice letter was mailed, or any specified motion day subsequent thereto, at which time he may object to the entry of judgment and a hearing will be scheduled by the Court. At said hearing the plaintiff will be required to prove that the debtor has effectively waived his rights to notice and a hearing prior to the entry of judgment."

Rule 58.2(b)(4)(II):

"(b) Application for the entry of judgment by confession in open court shall be as follows:

(4) The plaintiff shall prove:

(II) The defendant obligor has effectively waived his constitutional rights concerning the entry of judgment and the right to execute thereon."

[4] This Court has scrutinized sales contracts and found them unconscionable where the cognovit provision was made obscure by its manner of placement. Architectural Cabinets, Inc. v. Gaster, Del.Super., 291 A.2d 298 (1971).

Giventner v. Arnow

June 9, 1975 | Legal Decisions by State, New York

Benchmark usury case in NY, stated rate was usurious after the effect of quarterly compounding was taken into calculation.  If the penalty for making a usurious agreement is loss of principal and interest it should not matter whether the illegal rate is boldly stated or indirectly arrived at by periodically compounding a legal rate. The usury defense must be established by “clear evidence as to all the elements essential thereto”. The court will not assume that the parties entered into an unlawful agreement , and when the terms of the agreement are in issue, and the evidence is conflicting, the lender is entitled to a presumption that he did not make a loan at a usurious rate.

Court of Appeals of the State of New York.
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37 N.Y.2d 305 (1975)

Michael Giventer, as Executor of Emanuel Choper, Deceased, Respondent, v. Samuel Arnow et al., Appellants.

Court of Appeals of the State of New York.

Argued June 9, 1975.

Decided July 8, 1975.


Attorney(s) appearing for the Case

Duncan S. MacAffer for appellants.

Arthur J. Harvey for respondent.

Chief Judge BREITEL and Judges JASEN, GABRIELLI, JONES and FUCHSBERG concur; Judge COOKE taking no part.


[37 N.Y.2d 307]

WACHTLER, J.On July 1, 1970 the plaintiff's testator, Emanuel Choper, an attorney, loaned $13,410.67 to the defendants, Samuel and Pearl Arnow. On this same date the defendants executed a promissory note by which they agreed to pay back that sum "one year after date * * * with interest at 7½% per annum, compunded [sic] quarterly." When the note fell due, the defendants refused to pay either principal or interest and the plaintiff, Choper's executor, commenced this action. The question is whether the note is usurious.

At the time the note was executed, the maximum rate of interest was fixed at "7.50 per cent per annum" (see General Obligations Law, § 5-501, subds 1, 2; 3 NYCRR 4.1). Thus if the note did not require that the interest be compounded quarterly, it would not violate the usury statute. However if the interest is compounded quarterly, as the note provides, the effective annual rate would be 7.72%.1 Because of this the defendants argue the note is usurious, and void, and the lender forfeits both interest and principal (see General Obligations Law, § 5-511, subd 1).2 The plaintiff concedes that the provision for compounding the interest is illegal, but not usurious. He argues that only the compounding clause should be nullified and without it the remainder of the note is legal and enforceable.

Special Term found the note usurious and granted defendants'

[37 N.Y.2d 308]

motion for summary judgment. By a divided court, the Appellate Division reversed (44 A.D.2d 160). There the majority was more impressed with the plaintiff's argument, which they felt was buttressed by (p 161) "`the established principle that the presumption is against the taking of usury, which must be established by clear evidence as to all the elements essential thereto.'" Accordingly, they granted summary judgment to the plaintiff for the face amount of the note (p 161) "together with interest at the rate of 7½% per annum".It is true that the compounding of interest is not, by itself, usurious (Stewart v Petree, 55 N.Y. 621, 623; Young v Hill, 67 N.Y. 162). The usury statute does not prohibit the payment of interest upon interest (General Obligations Law, § 5-501). Nevertheless agreements to pay compound interest have not found favor with the courts.

Generally the courts will enforce such an agreement when it is made after simple interest has accrued (Stewart v PetreesupraNewburger-Morris Co. v Talcott, 219 N.Y. 505, 510; compare Young v Hillsupra) for then it "only secures to the creditor a remuneration for that which he has lost" (Stewart v Petreesupra, p 623). But it is well-settled that "a promise to pay interest upon interest is void if made at a time before simple interest has accrued" (Newburger-Morris Co. v Talcottsupra, p 510). Even in these cases, of course, the creditor has the same right to demand additional interest once the debtor fails to make timely payment. However it is considered against public policy to encourage creditors to silently permit debts to progressively mount at the expense of debtors who, often unaware of the consequences of the prior agreement, tend to confuse forebearance with indulgence (see Young v Hillsupra, p 167). Obviously this rule has nothing to do with the usury statute and does not require resort to the severe penalties provided for. The policy involved is adequately fostered by merely invalidating the compounding clause and limiting the creditor's recovery to principal and simple interest.

This rule however has no application to the facts of this case. Although this note provided that interest should be compounded quarterly, there was no provision that the loan be repaid or that interest be paid in quarterly installments. According to the terms of the instrument, no payment was due until "one year from date" of execution. This, in other

[37 N.Y.2d 309]

words, was not a case where the parties simply agreed in advance to compound interest upon default, which, in furtherance of public policy, calls for a limited sanction invalidating the compounding clause. Since no quarterly payments were ever due, the agreement to compound the interest was simply a computation device for increasing the interest due upon maturity. It was, as the defendants state, "merely a way of expressing an interest rate of 7.72%." As indicated, this is a "greater sum * * * than is prescribed in section 5.501" and the note must be considered void and uncollectable (General Obligations Law, § 5-511, subd 1).Indeed if we were to hold otherwise, by only invalidating the compounding clause, we would be recognizing a convenient hedging device for avoiding the more severe penalties of the usury statute. If the penalty for making a usurious agreement is loss of principal and interest it should not matter whether the illegal rate is boldly stated or indirectly arrived at by periodically compounding a legal rate.

Finally we note, as the Appellate Division did, that the usury defense must be established by "clear evidence as to all the elements essential thereto" (Grannis v Stevens, 216 N.Y. 583, 591). The court will not assume that the parties entered into an unlawful agreement (White v Benjamin, 138 N.Y. 623). On the contrary when the terms of the agreement are in issue, and the evidence is conflicting, the lender is entitled to a presumption that he did not make a loan at a usurious rate (White v BenjaminsupraMeaker v Fiero, 145 N.Y. 165; Rosenstein v Fox, 150 N.Y. 354; Grannis v Stevenssupra).

However there is no need to employ the presumption here, since the terms of the loan are not in dispute, both sides acknowledging that the note evidences the complete agreement between the parties. Thus the note itself establishes, on its face, clear evidence of usury.

The order of the Appellate Division should be reversed and the order of Special Term reinstated.

Order reversed, without costs, and order of Supreme Court, Albany County, reinstated.

FootNotes

1. This figure is based on the traditional rather than the present-value method of computation (see Band Realty Co. v North Brewster, Inc.37 N.Y.2d 460).

2. The Legislature has provided a "less severe penalty" for banks, which only risk losing interest — unless interest has been paid, in which case the debtor can recover twice the amount paid (General Obligations Law, § 5-511, subd 1 and Practice Commentary, McKinney's Cons Laws of NY, Book 23A, p 234).

In Re Grand Union

December 1, 1913 | California, Legal Decisions by State

Holding that the true character of the transaction was a loan rather than a transaction for the purchase and sale of pianos.

The case held as the classic definition of a loan defines the term as a contract by which one delivers a sum of money to another and the latter agrees to return at a future time, a sum equivalent to that which he borrows.

In order to constitute a loan there must be a contract whereby in substance, one party transfers to the other a sum of money which the other agrees to repay absolutely together with such additional sums as may be agreed upon for its use.
US Court of Appeals, Sec. Cir.
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219 F. 353 (2nd Cir. 1914)
In re GRAND UNION CO.
No. 87.
United States Court of Appeals, Second Circuit.
December 15, 1914

         On Petition for Rehearing, January 22, 1915.

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         This cause comes here on petition to revise and appeal from a final order made and entered in the United States District Court for the Southern District of New York on June 8, 1914, denying a motion made by the Hamilton Investment Company for an order directing the receiver and trustee of the Grand Union Company to account to it for any and all moneys that he had collected or that had come into his possession from the Grand Union Company out of certain leases and for other relief.

         The Grand Union Company is a corporation organized under the laws of the state of New York, which maintained a place of business at No. 311 Third avenue, borough of Manhattan, city of New York. It was engaged in the business of selling pianos upon the installment plan and giving leases instead of bills of sale to the purchasers; the purchasers agreeing to pay weekly or monthly, as the case might be, for the pianos purchased. The Hamilton Investment Company is a corporation organized under the laws of the state of Illinois and having its principal office in Chicago in that state.

         On January 20, 1912, the Grand Union Company and the Hamilton Investment Company entered into a contract with each other in which the former agreed to 'sell' and the latter agreed to 'buy' from time to time piano leases. Portions of the contract follow:

         'First. First party hereby agrees to sell and second party agrees to buy from time to time such of said contracts which shall draw 6 per cent. interest per annum, and which second party shall indicate will be acceptable to it, paying therefor 70 per cent. of the face value thereof, upon delivery duly assigned and guaranteed and their acceptability duly indicated by second party, and paying a further 20 per cent. of the face value of said contracts as nearly as practicable in quarterly installments, but not to exceed 20 per cent. of the amounts that shall from time to time be thereafter collected upon said contracts until a total of 90 per cent. shall have been paid, as the full purchase price of said contracts.

         'When first party shall sell pursuant hereto contracts which shall have been given by divers purchasers payable in installments, and any of which shall not be promptly met, first party shall promptly repurchase any such contracts so in arrears for cash at par for the balance uncollected thereon, or substitute therefor other acceptable contracts of equal value and shall then also pay cash for such portions as shall be then in default.

         'Second. First party shall in every case execute an absolute assignment and guaranty satisfactory in form to second party of all its right, title, and interest in and to each of the contracts which upon delivery second party shall control, and second party shall thereafter be alone entitled to receive all moneys due and owing thereon and shall have sole and exclusive charge of the collections of same.

         'And whereas, the business of first party is such that it is deemed desirable that the collections on the contracts shall be made at its own office or place of business, it is therefore agreed that first party shall have the right to designate some acceptable person to act as agent of second party to receive all moneys in behalf of second party and to do such other work in connection

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therewith as the second party may desire. First party hereby guaranteeing and holding itself responsible for the acts of such agent and agreeing that it will see that such agent execute and give acceptable surety bond to protect the interests and rights of second party in the discharge of said acts and duties. By way of remuneration of such services second party hereby agrees to pay said agent the sum of twenty-five dollars per month and it is understood that second party shall at any time in the exercise of its own judgment have power to remove or dismiss from its employ any such agent and replace him by another.

         'Fourth. First party hereby guarantees the prompt payment of the principal and interest of all such contracts.

         'Fifth. It is agreed and understood that in the event of nonpayment at maturity of any of the installments of principal or interest on any of said contracts by reason of the insolvency of the debtors or for any reason, then second party is hereby given the right and option without notice to apply any moneys in its hands or that may thereafter come into its possession, belonging to said first party in settlement and discharge of such installments so in default. * * *

         'In the event of failure or refusal of any debtor to retain the merchandise after delivery to him, the title thereto shall revert to and remain in second party until the amount due on any such contracts is fully paid and discharged. * * *

         In the event of the failure or refusal of the debtor indicated in any of said contracts for any reason whatsoever to pay the whole amount due upon any contract so purchased or to be purchased by it hereunder, and if first party shall have failed to repurchase the same within the time herein provided, then second party is hereby authorized if it sees fit to institute such legal proceedings as in its judgment or of its attorney may be necessary or proper to enforce the payment of any such contract. First party expressly agrees to pay and reimburse second party for all costs, expense, including attorney's and stenographer's fees, which may be incurred thereby.'

         On January 2, 1913, an involuntary petition in bankruptcy was filed against the Grand Union Company in the District Court for the Southern District of New York and a receiver and trustee were successively appointed in such proceeding. Thereafter, because of the interference by the receiver with the collection by the Hamilton Investment Company of the installments due and payable on the piano leases purchased from the Grand Union Company, the Hamilton Investment Company made application to the District Court for an order permitting it to proceed with the collection of the balances due on all of the leases purchased by it from the bankrupt, and restraining the receiver from in any manner attempting to collect any of the installments maturing under the leases, and directing him to account for any and all moneys that he had collect, or that had come into his possession from the bankrupt arising out of any or all of said leases. It was alleged that prior to the filing of the petition in bankruptcy the Grand Union Company collected on the leases certain moneys amounting approximately to $2,898.33, which under the contract belonged to the Hamilton Investment Company, and which had not been turned over to it. It was also alleged that the receiver had collected or was about to collect all amounts due under the leases assigned and that he intended to include the same in the general fund and assets of the bankrupt estate. The Hamilton Investment Company claims to be the true and lawful owner of the leases assigned to it under the contract.

         The trustee opposing the application of the Hamilton Investment Company claims that the contract is not a contract for the sale and purchase of leases, but one providing for loans with the leases as security; that such a contract of loan is contrary to the charter of the petitioner and the statutes of Illinois and is ultra vires and void; that it is contrary to the Banking Law of the state of New York; that the relation between the petitioner and the bankrupt is that of debtor and creditor; that the relief sought should be denied and judgment entered ordering the delivery to the trustee of all the leases assigned by the bankrupt to the petitioner.

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         Henry J. & Charles Aaron, of Chicago, Ill., for appellant.

         Myers & Goldsmith, of New York City (Henry A. Heiser, of New York City of counsel), for appellee.

         Before LACOMBE, WARD, and ROGERS, Circuit Judges.

         ROGERS, Circuit Judge (after stating the facts as above).

         The court below denied the petitioner's application because in its opinion the contract was in reality not a contract for the purchase and sale of piano leases as it purported on its face to be, but was one providing for loans with the leases as security. The court was also of the opinion that such a contract of loan was contrary to the charter of the petitioner and the existing statutes of the state of Illinois and was ultra vires and void. It also adjudged the contract to be in violation of the Banking Law of the state of New York, and it held that the transactions between the bankrupt and the petitioner created a relation of debtor and creditor. Judgment was accordingly entered ordering the delivery to the trustee of all the piano leases assigned by the bankrupt to the petitioner, and the petitioner was ordered to account to the trustee for moneys which it had collected on the leases subsequent to the receivership. It was also ordered that all moneys received under the contract by the petitioner prior to the filing of the involuntary petition in bankruptcy should be credited by it to an amount not exceeding the sum actually paid and advanced by it to the bankrupt upon leases in reduction of the indebtedness for moneys paid by it to the bankrupt.

         We have to determine in the first place, therefore, whether error was committed in holding that the contract into which these parties entered was one of loan and not of sale. The kind of business the petitioner is engaged in has grown within the past few years to large proportions. There are a number of concerns in different parts of the United States which are engaged in the same kind of transactions. The question involved is new and the case may almost be said to be one of first impression.

         A sale is the transfer of property in a thing for a price in money. The transfer of the property in a thing sold from a buyer to a seller for a price is the essence of the transaction. And the transfer is a transfer of the general or absolute property as distinguished from a special property.

         A loan of money is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows.

         'In order to constitute a loan there must be a contract whereby, in substance one party transfers to the other a sum of money which that other agrees to repay absolutely, together with such additional sums as may be agreed upon for its use. If such be the intent of the parties, the transaction will be considered a loan without regard to its form.' 39 Cyc. 926.

         The contract these parties entered into was on its face an agreement on the part of the Grand Union Company 'to sell' and on the part of the Hamilton Investment Company 'to buy' piano leases. In the transfer of the leases under this contract the Grand Union Company

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issued what it stamped 'Bill of Sale,' in which it set forth in detail the leases, the names of the lessees, the amounts due, and the amounts paid, and declared that it 'hereby sells, assigns, and transfers to Hamilton Investment Company' 'all right, title, and interest in and to the contracts, leases, and mortgages above named,' and 'that entries have been made on our books disclosing the absolute sale thereof to the Hamilton Investment Company. ' The parties appear to have thought, or to have wanted the public to think, if we accept the language they used at its face value, that they were engaged in buying and selling leases. But was that the real nature of the transaction which they engaged?

         As the contract provides in terms for a 'sale,' we agree that, before we can hold the transaction involved a loan and not a sale, the fact should clearly appear that it was in reality a loan and not a sale. It may be conceded that the evidence to prove a transaction to be different from what it appears to be from the written papers, as to show an absolute deed to be a mortgage, or a transaction fair on its face to be usurious or otherwise illegal, must be clear and convincing. In determining, however, the meaning of the contract which these corporations made and the nature of the transactions into which they entered, it will not be difficult to find out what it was they intended, if we examine the agreement in its entirety and closely examine its various provisions. It is not necessary to go outside of the writing, as is done when a deed absolute on its fact is shown to be a mortgage, to discover the true character of the transaction. The parties have expressed their intention in the written agreement. We arrive at their intention, not from any detached part of the instrument, but from an examination of the whole of the writing. If in the written contract the parties call a transaction in which they have engaged a 'sale,' we are to assume ordinarily that they have used the term correctly and in its technical sense. But if the contract goes on to set out in detail the facts of the transaction and the statement thus made clearly discloses that what the parties called a sale was in reality not a sale, but a loan or a bailment or a mortgage, the court must decide according to the real nature of the transaction, without regard to the term the parties applied to it. It is necessary in contracts of this nature to scrutinize them closely for the purpose of ascertaining the real import and the real intention of the parties.

         A case, in some particulars resembling the case now under consideration, came before the District Court of the United States for the Eastern District of Kentucky in 1913. In re American Fibre Reed Co., 206 F. 309. That case, like this one, arose in bankruptcy upon an intervening petition filed by a corporation which claimed to have purchased certain accounts owing to the bankrupt corporation. The trustee in that case, as in this, had proceeded to collect certain of the accounts, which the intervening petitioner alleged had been purchased from the corporations prior to their bankruptcy, and was retaining them in his possession, claiming them as a part of the estates of the bankrupts, on the ground that the transactions between the parties did not amount to a buying of the accounts, but were in substance and

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effect nothing more or less than a pledging of the accounts by the corporations to the intervening petitioner for a loan in each instance of a certain per cent. of the face value of the accounts and at a usurious rate of interest. In that case, as in this, the corporations 'sold' the accounts to the petitioner, and the accounts were collected by the vendors at their expense, the proceeds to be applied first to the payment of the amount advanced by the vendee to the vendors, and the remainder of the amounts collected went to the vendors for their own benefit. The amount paid by the vendee was about 75 per cent. of the face value of the account, and accounts so 'sold' were stamped on the books of the vendors as 'sold' to the intervening petitioner. The accounts, having been collected by the vendors, were turned over to their paid employe, a person mutually acceptable to both parties, and he at once transmitted the same to the vendee. If accounts were not paid when they matured and the debtors were insolvent, the vendors were bound to repurchase the accounts within five days of written notice of default. In all this there is a close resemblance to the transactions involved in the present suit. The court refused to recognize the right of the vendee, the intervening petitioner. 'In so far,' said the court, 'as the contracts in question here use words fit for a contract of purchase, they are mere shams and devices to cover loans of money at usurious rates of interest.'

         It remains, however, to point out an important difference in the facts of that case and the facts in this case. In that case there was no sale, because the absolute property in the accounts was not transferred to the so-called vendee. It was not transferred, because the 'vendee' or purchaser only acquired the right to have or to take from the proceeds of the accounts the amount it had advanced thereon and its stipulated usurious interest, and the remainder of the proceeds represented an interest in the accounts which vendors had at all times retained and which was to go to them or for their benefit. To that extent the vendees had retained a property right in the accounts sold, and the court held that this prevented there being an absolute sale, and it construed the transaction to have been a loan at a usurious rate. But in the case at bar the proceeds belonged to the vendee and the vendors retained no right in any part thereof. The case was affirmed in Home Bond Co. v. McChesney, 210 F. 893, 127 C.C.A. 552 (1914); the court calling attention to the fact that the record disclosed a mutual intendment that the right at least to 20 per cent. of the full value of each of the accounts receivable was always to remain in the bankrupts, except only for purposes of security, and adding: 'This right could not be both sold and owned by the bankrupts.'

         A second case, which in some particulars also resembles the one now under consideration, came before the United States District Court for the Northern District of Illinois in June of this year. Chase & Baker Co. v. National Trust & Credit Co., 215 F. 633. In that case, as in this, a corporation agreed to 'buy' from another all acceptable accounts, and the vendor was to act as the vendee's agent, without compensation or cost, to collect and receive in trust for the vendee the amounts paid in on such accounts. But the sums so paid were not

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to be commingled with the funds of the vendor, and were to be at once transmitted in the form in which they were received to the vendee. The vendor guaranteed payment and agreed to repurchase at face value all accounts in default. The vendee agreed to pay the face value of the accounts less certain discounts, the amount of which depended on the length of time the accounts ran. These ran from 1 per cent. on 15-day accounts to 7 per cent. on 18-day accounts. The vendee further agreed to pay 78 per cent. on 30-day accounts, and from that down to 73 per cent. on 180-day accounts. In this case the vendor and guarantor of the accounts filed a bill in equity to rescind the transactions and recover back the accounts or the proceeds thereof on repayment of the purchase price, with legal interest, on the ground that the transactions were ultra vires. The basis for the charge of ultra vires was that such sales, viewed from the standpoint of the purchaser, were discounts; that discounting was a banking function; that defendant, although empowered to purchase accounts, could not lawfully engage in the business of purchasing accounts, because that was a banking business, and corporations could not be organized under the general incorporation act of Illinois to do a banking business.

         It was claimed that the vendor or seller of the accounts was entitled to an accounting on the ground that the apparent sales were in fact only devices or subterfuges to conceal loans and that such loans were usurious. Circuit Judge Mack held that a court of equity would not be frustrated in ascertaining the real intention of the parties to make a usurious loan by the fact that parol proof thereof would contradict the written evidence of the apparent transaction, and that if in fact both parties intended a usurious loan, then, in so far as the transactions were still executory, the debtor might recover his collateral on payment of the debt, with legal interest. But as the bill in his opinion fell short of making any clear charges that both parties actually contemplated and made loans disguised as sales with guaranties, and merely gave plaintiffs' conclusion of law that the transactions amounted to loans, he declined to dismiss the bill, but gave leave to amend it, so as properly to charge, if plaintiffs were so advised, that the transactions were in fact usurious loans.

         We have stated somewhat fully these two cases, because they deal with contracts much resembling the contract involved in the present suit, and also because they are the only cases, so far as we are aware, in which the courts have passed on this class of contracts. While the documents in those cases were not identical with each other, and the documents in neither are identical with those in the case at bar, so that the exact questions in this case were not in those, yet the decisions rendered shed light on the matters to be decided in the pending case.

         Stripped of the verbiage with which the parties have sought to clothe their transactions, the naked facts disclose that what they were doing was not a sale, but a loan, and that the leases were turned over simply by way of security. The Grand Union Company needed money, and the Hamilton Company advanced it. The method as set forth in the opinion of the special master was as follows:

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'The conduct of the parties in the transactions under the contract of January 20, 1912, was as follows: The rates at which the unpaid balances on the leases are claimed to have been purchased by the Hamilton Investment Company were based on the maturity of the contracts, the following discounts being charged: Six per cent. on contracts maturing in 12 months; 7 per cent. on those maturing in from 12 to 16 months; 8 per cent. on those maturing in from 16 to 20 months; 9 per cent. on contracts maturing in from 20 to 24 months; and 10 per cent. on those maturing in from 24 to 30 months. A further deduction of 20 per cent. was made from the total unpaid balances of the leases purchased, and the amount placed on the books of the petitioner to the credit of what was known as the 20 per cent. reserve account, to be remitted in quarter-annual payments of 20 per cent. of amounts collected and remitted under the leases, provided no leases were in default, in which case the amount of such default was to be deducted from the 20 per cent. reserve. A payment of from 70 to 74 cents on the dollar on the unpaid balance due on each lease was made to the Grand Union Company at the time such lease was assigned and delivered to the petitioner, except where the lease did not mature within 30 months of the date of such transfer. Where the lease exceeded 30 months, the Grand Union Company received from the petitioner only 70 per cent. of such portion of the unpaid balance as would mature within 30 months; the remaining 30 per cent. being represented by the petitioner's discount of 10 per cent. and the amount credited to the 20 per cent. reserve account. The balance of the unpaid installments under the lease which would mature beyond 30 months was placed on the books of the petitioner in what was known as the special reserve account. The petitioner claims to have purchased in its entirety each lease having more than 30 months to run, but that settlement for the installments that would mature beyond 30 months was withheld until the leases had paid off to a point where they would have but 30 months to run. Mr. Rees, president of the Hamilton Investment Company, referring to one of the leases in question which had more than 30 months to run, testified, however, as follows: 'Our method has been this: If an account ran 60 months, as in that case, we would make a settlement for the first 30 months maturing at the time of purchase, and perhaps in 12 months we would purchase 12 months additional of that contract. I mean we would make settlement for it. Our object, you understand, is to purchase only paper that matures in 30 months."

         The money thus advanced was repaid by the Grand Union Company in the following manner: It collected at its own expense all installments of rent as they became due under the leases, put all such moneys into its general funds, and out of such general funds remitted the aggregate amount of its collections to the Hamilton Investment Company at Chicago; and on all sums due under the leases it was paying interest to the Hamilton Investment Company at the rate of 6 per cent. per annum, although the leases themselves bore no interest. It is true that the contract stated that the moneys due on the leases should be collected by one Lesser, who was an agent of the Hamilton Investment Company, and who was to remit to it at Chicago, for which he was to receive a salary of $25 per month. But this device cannot prevent the real nature of the transaction from being disclosed. Lesser is admitted to have been during this whole time the manager of the Grand Union Company, and his salary was paid by it, and he received not one cent from the Hamilton Investment Company. Moreover, Lesser put whatever money he received on the leases, as has been said, into the general funds of the Grand Union Company. We have, then, money advanced to be repaid in installments; the time for payment being determined by the periods fixed in the respective leases for the payment of moneys due on such leases, the contract also providing

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for the payment of interest, and payment actually made by the Grand Union Company out of its general funds.

         The Hamilton Investment Company claims that under the contract the absolute title passed to it for a price in money, and that therefore the transaction was a sale. We cannot concur in this view. The leases passed to it, to be sure; but it took them by way of security, and not as an absolute owner. On the payment of these leases they were returned to the Grand Union Company. The Hamilton Investment Company wrote the Grand Union Company;

         'We do not make any indorsement of any sort on the leases, so that when they are paid out you will receive them back from us in the same condition in which we had received them from you.'

         And if default was made in the payment of any of the leases they were returned to the Grand Union Company, which either paid them itself or substituted other leases in their place. The president of the petitioner was asked:

         'Where you purchase a paper (piano lease) under which the purchaser of the piano agrees to make monthly payments, and it appears that you can't collect from that purchaser the amount that you paid initially, the initial payment would then go back to the Grand Union Company, and they either must make a payment to you or substitute some other paper; that is, the loss, if any, under that contract, must be sustained by the Grand Union Company, and not your company?'

         And he replied 'Yes.' The fact that the bankrupt guaranteed payment of principal and interest on all leases 'purchased' by the petitioner does not, standing alone, convert the transaction from a sale into a loan. It is, however, a circumstance which we can take into consideration in arriving at the true intent of the parties. If the transaction was in reality a sale, it would seem as though the vendor's duty was at an end when the title passed, and that thereafter there would have been no obligation to guarantee payment or to make the collections. It 'sold' at a discount accounts that were good, and made itself responsible for every conceivable loss. If the contract was one of sale, it is strange that after the vendor had sold its right, title, and interest it should have agreed to collect the money due under the leases at its own expense, making itself liable for the acts of the collecting agent, and putting the money it received into its general funds. The purchaser of the leases never looked to the persons obligated by the leases for the money due it; but it looked to the vendor, and to it only. If the lessee failed to pay the vendor, then the vendor repurchased the lease from the vendee for cash at par for the balance due on the defaulted contract.

         We observe, also, that when these leases were transferred to the Hamilton Investment Company the latter gave no notice to the debtors of the fact of assignment, although upon the assignment and sale of a chose in action it is almost invariably the case that the assignee gives such notice. These piano leases did not provide for the payment of interest on the installments as they became due, and yet under the contract between the Grand Union Company and the Hamilton Investment Company the latter paid the former from 90 per cent. to 94

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per cent. of the face value of the leases, and the Grand Union Company was required to pay the Hamilton Investment Company 6 per cent. per annum on the face of the leases which the latter concern took over. In paying from 90 per cent. to 94 per cent. of the face value of the leases, the Hamilton Investment Company was deducting from 6 per cent. to 10 per cent. interest in advance; that is, it was taking discount. Discount is taking out of the principal sum and the retention by the lender of the interest charged for the use of the principal. That it was discount is made plain, too, by the fact that the Grand Union Company also paid interest monthly at the rate of 6 per cent. per annum. It is rather a surprising proposition we are asked to accept, when we are told that these transactions are sales, and not loans. If the Hamilton Investment Company bought these leases, why does the Grand Union Company pay it interest on them? When a horse or a suit of clothes is sold, whoever heard of an agreement on the part of the seller to pay interest to the buyer on the value of the horse during its life or on the value of the suit of clothes so long as it is worn?

         Another important circumstance that indicates that the transaction was not a sale is found in that provision in the contract in which it is agreed that, in event of the failure or refusal of any debtor under a piano lease to retain the merchandise after delivery to him, the title should revert to and remain in the Hamilton Investment Company 'until the amount due in any such contract is fully paid and discharged. ' If the Hamilton Investment Company really purchased the piano leases outright, and took absolute title as purchaser, there would have been no necessity for any such provision as that title should revert to it 'until the amount due on any such contract is fully paid and discharged. ' The amount due on the contract means the amount which the Hamilton Investment Company loaned to the Grand Union Company on that particular lease.

         The Hamilton Investment Company is, as we have seen, an Illinois corporation. The Illinois Corporation Act provides, in section 1, chapter 2:

         'That corporations may be formed in the manner provided for in this act for any lawful purpose except banking, insurance, real estate, brokerage, the operation of railroads and the business of loaning moneys,' etc.

         The charter of the corporation, originally the Ft. Dearborn Trust Company, the name being afterwards changed to the Hamilton Investment Company, defines its object as follows:

         '2. The object for which this corporation is formed is to do a general brokerage and commission business, and to buy property other than corporate stocks and real estate at judicial, fiduciary, trustees', pledgors', mortgagees', and other liquidating sales, and convert the property so bought into money, but not to engage in the business of loaning money, and to have a place of business where promissory notes or other evidences of indebtedness may be made payable.'

         It thus appears that it is by its charter prohibited from 'engaging in the business of loaning money. ' There is no principle of law better settled than that a corporation cannot enter into a contract which is expressly prohibited by its charter or by statute. A contract so

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made is absolutely void. No performance on either side can give it any validity. Jackson, etc., Railway v. Hooper, 160 U.S. 514, 16 Sup.Ct. 379, 40 L.Ed. 515 (1896); Central Transportation Co. v. Pullman's Car Co., 139 U.S. 24, 11 Sup.Ct. 478, 35 L.Ed. 55 (1891).

         But we are told that the defense of ultra vires cannot be raised in this collateral proceeding. The phrase 'ultra vires' unfortunately has been used to designate, not only acts beyond the express and implied powers of the corporation, but also acts which are contrary to public policy or contrary to some statute expressly prohibiting them. The latter class of acts are now termed 'illegal,' and the term 'ultra vires' is confined to the former class. 'Ultra vires contracts are contracts which are beyond the statutory powers of the corporation, and not contracts expressly prohibited by statute and contrary to the public policy of the Legislature. ' Cook on Corporations (7th Ed.) vol. 3, p. 2161, note. We do not need to consider when the defense of ultra vires may or may not be interposed. The objection here is, not that the contract is ultra vires, but that it is illegal. While a corporation is held in some states to be estopped from setting up the defense of ultra vires by having received the benefits of the contract, the courts so holding do not apply that principle to cases in which the contract is absolutely void. National Home Building, etc., Co. v. Home Savings Bank, 181 Ill. 3554 N.E. 619, 64 L.R.A. 399, 72 Am.St.Rep. 245; 10 Cyc. 1161, 1162.

         The law is well settled that property or money parted with on the faith of an illegal contract can be recovered back. In Central Transportation Co. v. Pullman's Car Co., 139 U.S. 24, 60, 11 Sup.Ct. 478, 488, 39 L.Ed. 55 (1891), the Supreme Court, speaking through Mr. Justice Gray, said:

         'A contract ultra vires being unlawful and void, not because it is in itself unmoral, but because the corporation, by the law of its creation, is incapable of making it, the court, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties, so far as could be done consistently with adherence to law, by permitting property or money, parted with on the faith of the unlawful contract, to be recovered back, or compensation to be made for it.'

         So Lord Justice Mellish, in the English Court of Appeals, in Taylor v. Bowers, 1 Q.B.D. 291, 299 (1876), said:

         'If money is paid or goods delivered for an illegal purpose, the person who had so paid the money or delivered the goods may recover them back before the illegal purpose is carried out; but if he waits till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither can he maintain an action. The law will not allow that to be done.'

         The rule is stated in 2 Comyn on Contracts, 361, as follows:

         'Where money has been paid on illegal contract, it is a general rule that if the contract be executed, and both parties are in pari delicto, neither of them can recover from the other the money so paid; but if the contract continues executory, and the party paying the money be desirous of rescinding it, he may do so and recover back by action of indebitatus assumpsit for money had and received. And this distinction is taken in the books, that where the action is in affirmance of an illegal contract, the object of which is to enforce the performance of an engagement prohibited by law, clearly such an action can in no case be maintained; but where the action proceeds in

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disaffirmance of such a contract, and instead of endeavoring to enforce it presumes it to be void, and seeks to prevent the defendant from retaining the benefit which he derived from an unlawful act, then it is consonant to the spirit and policy of the law that the plaintiff should recover.'

         The contract of January 20, 1912, is an executory contract, not having been fully performed, and the trustee is therefore entitled to have transferred to himself all leases assigned to the Hamilton Investment Company by the bankrupt Grand Union Company and all moneys collected by the Hamilton Investment Company subsequent to the filing of the involuntary petition in bankruptcy. As to the moneys received by the Hamilton Investment Company prior to the filing of the involuntary petition, it was proper that that company should be credited with such moneys, not exceeding the sum actually paid and advanced by it to the bankrupt upon leases in reduction of the indebtedness for moneys paid by it to the bankrupt.

         We do not find it necessary to consider the other questions raised in this case. We have found no error, and are satisfied that the prayer of the petitioner should be denied, and that the order of the court below should be affirmed.

         It is so ordered.

         On Petition for Rehearing.

         A petition for rehearing is presented and must be denied. The decree denied the relief which the Hamilton Investment Company sought and in addition granted affirmative relief to the trustee. Because such affirmative relief was granted the rehearing is asked.

         The petitioner alleges in his petition that 'the only pleading filed in his case by the trustee is his answer,' and that the answer is purely defensive and does not ask for affirmative relief. The general rule has been as well established as any in the law that to entitle a defendant in equity to affirmative relief he should file a cross-bill, which had to be regularly served, put in issue and heard as any original bill. Rule 30 (198 F. xxvi, 115 C.C.A. xxvi) of the new equity rules promulgated by the Supreme Court in November, 1912, obviates the necessity of filing a cross-bill, and affirmative relief may be asked now in the answer.

         The petitioner, in making this application for a rehearing on the ground above stated, apparently has lost sight of the nature of the proceedings in the court below. This was not a regular suit based upon a bill of complaint and an answer. There was no bill of complaint and no answer. The present petitioner had obtained an order requiring the receiver to show cause why he should not be restrained from collecting any installments under the piano leases which had been transferred to it, and to account for any money he had collected. An affidavit was made by the attorney of the receiver to the effect that the Hamilton Investment Company was not authorized to do business in the state of New York. Judge Mayer granted the motion to show cause, provided the Hamilton Company gave a bond conditioned that it would pay to the trustee anything that it had collected under the piano leases if its claim was overruled, and thereupon referred the whole matter to Mr. Mason as special master. The master reported

365

that the transactions of the Hamilton Investment Company were ultra vires and that the contract with the bankrupt had no legal effect for that reason. In this situation the trustee was entitled to affirmative relief, to wit, an accounting, and the order to surrender the leases was incidental to it.

 

Yellowstone Capital v Central USA Wireless

Decided on June 25, 2018
Supreme Court, Erie County

Yellowstone Capital LLC, Plaintiff,

against

Central USA Wireless LLC d/b/a CENTRAL USA WIRELESS AND CHRISTOPHER R. HILDENBRANT, Defendants.

811837/2017

HODGSON RUSS, LLP

Steven W. Wells, Esq., Of Counsel

Christopher Castro, Esq., Of Counsel

Attorneys for Plaintiff

LAW OFFICE OF LEWIS A. BARTELL

Lewis A. Bartell, Esq., Of Counsel

Attorneys for Defendant
Timothy J. Walker, J.

Defendants have moved, pursuant to CPLR 5015, to vacate a certain Confession of Judgment, void certain merchant agreements, and enjoin any prosecution thereon. Defendants’ arguments (that the transactions effectuated by the merchant agreements at issue are actually loans) have been submitted time and time again to a plethora of New York Courts, and have almost uniformly been rejected. Indeed, as this Court has previously determined in similar matters, the merchant agreements are, in fact, business contracts that are entered into between sophisticated business parties, which clearly reflect the purchase of a certain percentage of a merchant’s total future accounts receivable, up to a certain amount, for a specified purchase price. The terms of these merchant agreements are abundantly clear and, in most cases, these arrangements allow merchants to survive a period of cashflow shortage.

Equally important, every posited argument in support of Defendants’ motion has already been considered and rejected numerous times by the trial courts of the State of New York. Additionally, there is clear Appellate Division case law determining that judgment debtors (such as Defendants) cannot challenge judgments entered against them by confession unless they are defective on their face, were entered without authority or in violation of its terms, were procured in violation of any due process requirements, or were the result of fraud – none of which are present in this case (see Summerour, Inc. v. Bradhil Industries Inc., 91 AD2d 902, 902 [1st Dept. 1983]).

Courts across the state have considered almost identical arguments and agreements, and have (almost uniformly) denied motions to vacate on the grounds that (1) a judgment debtor must commence a plenary action, rather than a motion, if it seeks to challenge the merchant agreement and the confession of judgment that was entered against it; and/or (2) that the merchant agreements do not constitute loans subject to the usury laws (see, e.g., EBF Partners, LLC v. Kevin R. Hackenberg d/b/a Nu Wave Botanicals and Kevin Hackenberg, Index No. 802383/2017 [Erie Co. June 30, 2017]; Yellowstone Capital, LLC v. Jevin, Index No. 802457/2017 [October 6, 2017]).

There have been over twenty-eight (28) recent cases where New York State Courts considered substantially similar motions, involving substantially similar merchant agreements, and almost all of those courts denied the relief, at least in part, because a judgment debtor may not seek to invalidate a confession of judgment entered against the judgment debtor on the grounds that it resulted from a usurious loan by way of motion (see NYSCEF DOC. NO. 30). In no less than thirty-eight (38) recent decisions, New York Courts have determined that the merchant agreements at issue (which are all substantially or exactly the same as the merchant agreement at issue here) do not constitute loans (see NYSCEF DOC. NO. 30; see also Champion Auto Sales, LLC et al. V. Pearl Beta Funding, LLC, 159 AD3d 507 [1st Dept. 2018] [wherein the court determined that “the underlying agreement lending to the judgment by confession was not a usurious transaction”]). The merchant agreement at issue in Champion Auto is substantially similar to the merchant agreement in this case. Because there are no other Appellate Division decisions directly on point, the Champion Auto decision is binding on this Court (Phelps v. Phelps 128 AD3d 1545, 1547 [4th Dept. 2015]).

In addition, CPLR 3218(a) provides that: “a judgment by confession may be entered, without an action, either for money due or to become due…upon an affidavit executed by the [confessing party].” The affidavit of confession “is sufficient if it adequately sets out the facts giving rise to the underlying debt…” (Spires v. Mihou, 273 AD2d 844 [4th Dept. 2000]). This sufficiency requirement exists to protect third parties, i.e., creditors of the confessing party, who would be injured by a collusively obtained confession (Eurofactors Int’l, Inc. v. Jacobowitz, 21 AD2d 443, 445 [2nd Dept. 2005]). Furthermore, courts will enforce a confession of judgment supported by consideration “irrespective of the alleged manner in which the underlying guarantee was procured” (Demchuk v. North Fork Bank & Trust Co., 121 AD2d 680, 680 [2nd Dept. 1986]). Courts will set aside a judgment by confession only where the party challenging the confession demonstrates “by a preponderance of clear, positive and satisfactory evidence… fraud, misconduct or other [similar] circumstances…” (City of Poughkeepsie v. Albano, 122 AD2d 14, 14-15 [2nd Dept. 1986]). Critically, “only a third-party judgment creditor has standing to question on motion the validity of a judgment by confession … [whereas] a defendant debtor who seeks to attack such a judgment must proceed by plenary action” (Id. at 14) emphasis added; see also Bufkor, Inc. v. Wasson & Fried, Inc., 33 AD2d 636, 636 [4th Dept. 1969] [reversing the [*3]Trial Court’s decision to vacate a judgment by confession on motion and holding that a plenary trial was required]).

In this case, the Confession of Judgment unequivocally complies with CPLR § 3218: (1) It states the sum for which judgment may be entered; (2) It authorizes the entry of judgment in Erie County and others; (3) It states concisely the facts out of which the debt arose and showed that the sum confessed is justly due, and (4) It is supported by an affidavit setting forth the default that was the basis for filing the Confession of Judgment.

Counsel for merchants filing these types of motions have previously, almost exclusively, cited the decision in Merchant Funding Services, LLC v. Volunteer Pharmacy, Inc., 55 Misc 3d 316 [Westchester Co. Dec. 30, 2016] as the basis for attempting to use motion practice to vacate confessions of judgment. Volunteer Pharmacy is a decision from a trial court in Westchester County that not only represents the quintessential outlier, but is not controlling or precedential case law, and is not even settled case law (as it is the subject of an appeal to the Second Department). Indeed, the Second Department has consistently held that a confession of judgment can only be vacated by a plenary action (see Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 [2nd Dept. 2012]; Estate of Zelman v. Scibelli, 157 AD2d 705 [2nd Dept. 1990]; A.B.J.M. Corp. v. Prudenti, 270 AD2d 219 [2nd Dept. 2000]; and City of Poughkeepsie, 122 AD2d at 14). Hence, the decision in Volunteer Pharmacy, is a ruling on a procedural issue, and is no more “binding” on Plaintiff than it is on this Court.

Moreover, in Merchant Funding Services, LLC v. Micromanos Corporation et al., (Index No. EF000598-2017), this Court analyzed the same merchant agreement as did the court in Volunteer Pharmacy, and came to a completely opposite conclusion: “Defendants’ position is grounded on a dubious misreading of the [Merchant] Agreement.” This Court dismissed the defendants’ bases for claiming that the merchant agreement resulted in a loan (which are substantially the same bases asserted in the Motion for Defendants’ claim that the YSC Merchant Agreement creates a loan), and ruled as follows:

Therefore, the Secured Merchant Agreement is not on its face and as a matter of law a criminally usurious loan. Consequently, Defendants have failed to establish an exception to the general requirement that relief from a judgment entered against them upon the filing of an affidavit of confession of judgment must be sought by way of a separate plenary action.

Micromanos at p. 5.

Thus, Defendants lack standing to challenge the Judgment by way of motion practice and may only seek to have it vacated in a plenary action. There is no such action pending in Erie County, or anywhere else in New York. Defendants’ Motion is denied for this threshold reason.

Assuming arguendo, if Defendants had standing, the merchant agreement does not create a usurious loan. Instead, as expressly provided in the agreement, the transaction is a purchase of a specified percentage of all future receipts generated by the merchant’s accounts receivable, up to the “Purchased Amount”.

“Usury is an affirmative defense, and a heavy burden rests upon the party seeking to impeach a transaction based upon usury” (Hochman v. Larea, 14 AD3d 653, 654 [2nd Dept. 2005] [internal citations omitted]). “Thus, usury must be proved by clear and convincing evidence as to all its elements and usury will not be presumed” ( Id.) “There is a strong presumption against the finding of usury” (Transmedia Rest. Co., Inc. v. 33 E. 61 Street Rest. Corp., 184 Misc 2d 706, 710, 710 [Sup. Ct. NY Co. 2000]). The only “proof” that Defendants submit in support of their usury claim are self-serving misconstructions of cherry-picked provisions of the merchant agreement, and an outright disregard for contrary provisions contained in that document.

Criminal usury requires a loan. Pursuant to New York Penal Law § 190.40, the statute relied upon by Defendants, a person commits criminal usury where he “knowingly charges, takes or receives interest on a loan or forbearance of any money or other property, at a rate exceeding twenty-five percent per annum.” Thus, the statute requires a “loan,” payment of “interest,” and intent (Accord, Seidel v. E. 17th Street Owners, Inc., 79 NY2d 735, 744 [1992] [“If the transaction is not a loan, there can be no usury, however unconscionable the contract may be”]). “In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow money upon the usurious terms dictated by the lender” (Donatelli v. Siskind, 170 AD2d 433, 434 [2nd Dept. 1991]).

“[A] primary indicia of usury is repayment of the principal sum advanced absolutely” (see Merchants Advance, LLC v. Tera K, LLC T/A Tribeca Frank Crabetta, 2008 NY Misc. LEXIS 10889, at p. * 4 [Sup. Ct. NY Co. Dec. 19, 2008]). This is a strict and inflexible requirement (see Zoo Holdings, LLC v. Clinton, 11 Misc 3d 1051(A), 814 NYS 2d 893, at p. * 4 [Sup. Ct. NY Co. Jan. 24, 2006]). “Where payment or enforcement rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest” (Prof’l Merch. Advance Capital, LLC v. Your Trading Room, LLC, 2012 NY Misc. LEXIS 6757, at pp. *13-14 [Sup. Ct. Suffolk Co. Nov. 28, 2012]); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 35 Misc 3d 1205(A) [Sup. Ct., Suffolk Co., 2012]; O’Farrell v. Martin, 163 Misc.353 [City Ct., NY 1936]). In this case, payment of the “Purchased Amount” is contingent upon the merchant generating sufficient accounts receivable such that the “Specified Percentage” of those receivables will support payment of the Purchased Amount over a reasonable period of time, and, therefore, the payment is not absolutely payable.

Numerous courts — at least thirty-eight (38) — have reviewed the provisions of merchant agreements structured almost exactly as the agreement at issue in this case, and uniformly held that such agreements are not usurious (see NYSCEF DOC. NO. 31). Recently, my colleague (Hon. Henry Nowak, J.S.C.) issued a decision in Yellowstone Capital, involving a challenge to a merchant agreement on the grounds that it was criminally usurious. Justice Nowak’s analysis focused on whether “the agreement was actually a purchase for accounts receivables [or] a loan with a usurious interest rate. . . .” Justice Nowak noted that:  A distinguishing factor between a purchase of accounts receivable and a loan is the burden [*4]of risk and the contingency of repayment. In a purchase of accounts receivable, repayment is for an indefinite term, contingent on the amount of accounts receivable. Thus, the lender bares the risk that there could be no or low daily receipts. However, if the lender holds only a loan, repayment is absolute and the merchant bears the risk of non-payment by the account debtor; while the lender only bears the risk that the account debtor’s non-payment will leave the merchant unable to satisfy the loan.

Recognizing that the agreement at issue had a reconciliation clause, Justice Nowak determined that New York Courts have found that the presence of a reconciliation provision such as the one in this matter is a significant factor in determining that the agreement should be characterized as a purchase of accounts receivables as opposed to a loan.” He distinguished the cases relied upon by the merchant there — the same cases relied upon by Defendants in this case — Merchant Funding Services, LLC v. Volunteer Pharmacy Inc., 55 Misc 3d 316, 318 [Sup. Ct. Westchester Co. 2016] and Pearl Capital Rivis Ventures v. RDN Construction, 54 Misc 3d 470, 474 [Sup. Ct. Westchester Co. 2016]), “because there was no evidence that the agreements at issue included reconciliation provisions. Accordingly, the court held that the merchants had “not demonstrated that the agreement is a usurious loan in violation of Penal Law § 190.40. (Id.)

Numerous New York Courts have reviewed the provisions of agreements structured almost exactly as the agreement at issue in this case, and have uniformly held that such agreements are not usurious. The reasoning of all of these cases applies equally to the present dispute. The merchant agreement is not a loan, and the usury statutes do not apply (see also, Champion Auto Sales, LLC, supra.

It is abundantly clear that the “Daily Payment,” both in its initial calculation, based upon Plaintiff’s review of Defendants’ past performance, and any adjustment based upon the reconciliation provisions is directly based upon the Specified Percentage of accounts receivable Plaintiff purchased. That is clearly not how a loan is structured.

Defendants never requested that a reconciliation be conducted. Instead, Defendants ceased remitting Daily Payments after remitting only $20,982.00 of the $80,245.00 in accounts receivable Plaintiff purchased.

For the reasons set forth above, the Motion is denied as a matter of law. In addition, the Court determines, in light of the history of these litigated matters and known binding precedent, Plaintiff is entitled to recover reasonable attorneys’ fees and costs incurred in defending the Motion, subject to the submission of an affirmation setting forth the time detail with narratives.

Dated: June 25, 2018

Buffalo, New York

_____________________________________

HON. TIMOTHY J. WALKER, J.C.C.

Acting Supreme Court Justice

8th Judicial District

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