State Decisions and Issues

New York

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Yellowstone Capital v Central USA Wireless

Legal Decisions by State, New York

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.,… Read More »

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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

Legal Decisions by State, New York

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… Read More »

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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

Domesticating Judgments in NJ & NY

Legal Issues by State, New Jersey, New York

Originally published here Domestication of Foreign Judgments  in NY & NJ Under New York law, the procedure for domesticating an out-of-state judgment is very straightforward when the judgment was obtained on the merits. The process is slightly more involved, however, when the judgment was obtained by default, as domestication of the latter requires the filing of a “Motion… Read More »

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Originally published here

Domestication of Foreign Judgments  in NY & NJ

Under New York law, the procedure for domesticating an out-of-state judgment is very straightforward when the judgment was obtained on the merits. The process is slightly more involved, however, when the judgment was obtained by default, as domestication of the latter requires the filing of a “Motion for Summary Judgment in Lieu of Complaint.”

In New Jersey, the domestication procedure is equally straightforward in both scenarios. Below you can view a sample copy of our letter of engagement; simply click the link for the letter appropriate to your needs.

Letters of Engagement:

New York Domestication – Judgment On the Merits
New York Domestication – Default Judgment
New Jersey Domestication

Below you will find some interesting and informative cases regarding various domestication issues.

Becker v Becker
Supreme Court of Nassau County denied plaintiff-wife’s motion to convert foreign judgment of divorce, granted by Dominican Republic, to a New York state judgment because it was not entitled to full faith and credit and it did not meet the definition of a foreign country money judgment. Although a plaintiff could ask the court to recognize a judgment of a foreign country, the court cannot convert a foreign country judgment into a New York judgment except by either a plenary action or by motion pursuant to CPLR § 3213 (motion for summary judgment in lieu of complaint). The present action also did not fall within the scope of the definition of a Foreign Country Money Judgment, as defined by CPLR § 5301(b), which includes only those foreign judgment which either grant or deny recovery of a sum of money.

Cadle v Ayala
Second Department Appellate Division denied plaintiff’s motion for summary judgment in lieu of complaint pursuant to CPLR 5213, brought to enforce a foreign judgment entered upon default. Although CPLR §3213 does not require plaintiff to affirmatively plead and prove facts to establish long-arm jurisdiction over the out-of-state defendant, which must be raised by the defendant in opposition to the motion, the plaintiff still bears the burden of establishing that the defendant was properly served with the motion. Upon denial, plaintiff’s moving papers shall be deemed the complaint and the plaintiff may still move for leave to enter a default judgment upon proper proof.

Fiore v Oakwood Plaza Shopping Center
The Court of Appeals affirmed an order of the Supreme Court, granting a motion by plaintiffs for summary judgment in lieu of complaint pursuant to CPLR § 3213, to domesticate two Pennsylvania judgments. The Court held that a Pennsylvania cognovit judgment, (similar to confession of judgment) a judgment based on a contractual provision whereby an obligor consents in advance to the creditor’s obtaining a judgment without notice or hearing, was entitled to full faith and credit in New York courts. To determine whether a cognovit judgment is entitled to full faith and credit, it must be determined that the judgment debtor made a voluntary, knowing and intelligent waiver of the right to notice and an opportunity to be heard

Glass Contractors v Target Supply and Display
Second Department Appellate Division reversed an order of the Civil Court of New York City, which denied plaintiff’s motion for summary judgment in lieu of complaint based on a default judgment in Nebraska. The court emphasized that foreign judgments obtained by default may only be domesticated through a plenary action which may be initiated by a motion for summary judgment in lieu of complaint pursuant to CPLR § 3213. In reviewing such foreign judgments, the court’s inquiry is limited to ascertaining whether the Nebraska courts had personal jurisdiction over defendants. The court determined that defendant had sufficient contacts within Nebraska to subject it in personam jurisdiction under Nebraska long-arm statute.

Yellowstone Cap v. Central USA Wireless

Legal Decisions by State, New York

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Wilkinson Floor Cov. v Cap Call, LLC

Legal Decisions by State, New York

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,… Read More »

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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.

Champion Auto v Pearl Beta Fund.

Legal Decisions by State, New York

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,… Read More »

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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

Legal Decisions by State, New York

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]),… Read More »

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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

Legal Decisions by State, New York

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… Read More »

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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.

Legal Decisions by State, New York

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… Read More »

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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.

Rapid Capital Fin. v Natures Mkt. Corp.

Legal Decisions by State, New York

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… Read More »

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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

Legal Decisions by State, New York

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Colonial Funding Network v Epazz

Legal Decisions by State, New York

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K9 Bytes, Inc. v Arch Capital Funding, LLC

Legal Decisions by State, New York

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… Read More »

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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.

Legal Decisions by State, New York

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Merchant Funding Srvs. v Volunteer Pharm. Inc.

Legal Decisions by State, New York

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… Read More »

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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.

Legal Decisions by State, New York

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… Read More »

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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.

Legal Decisions by State, New York

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Klein v On Deck Capital, Inc.

Legal Decisions by State, New York

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… Read More »

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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.

Giventner v. Arnow

Legal Decisions by State, New York

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,… Read More »

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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).

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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