AH Wines, Inc. v. C6 Capital Funding LLC

Full title: AH WINES, INC./ GREAT COLISEUM, L.L.C., THE/ THE GREAT COLISEUM, L.L.C.…

Court: STATE OF NEW YORK SUPREME COURT COUNTY OF ONTARIO

Date published: Aug 19, 2020

2020 N.Y. Slip Op. 32699 (N.Y. Sup. Ct. 2020)

Opinion

Index #: 127393-2020

08-19-2020

AH WINES, INC./ GREAT COLISEUM, L.L.C., THE/ THE GREAT COLISEUM, L.L.C./ GREAT COLISEUM, L.L.C. d/b/a AH WINES/ LODI CITY WINERY/ LODI WINE COMPANY/ WINERY DIRECT DISTRIBUTORS and JEFFREY WAYNE HANSEN, Plaintiffs, v. C6 CAPITAL FUNDING LLC, Defendant.

APPEARANCES ON SUBMISSION Mark R. Basile, Esq. Catherine P. McGovern, Esq. THE BASILE LAW FIRM, P.C. Attorneys for Plaintiff Jonathan E. Samon, Esq. THE RUBIN LAW FIRM, PLLC Attorneys for Defendant

Odorisi, J.

NYSCEF DOC. NO. 43 APPEARANCES ON SUBMISSION Mark R. Basile, Esq.
Catherine P. McGovern, Esq.
THE BASILE LAW FIRM, P.C.
Attorneys for Plaintiff Jonathan E. Samon, Esq.
THE RUBIN LAW FIRM, PLLC
Attorneys for Defendant DECISION Odorisi, J.

This action arises out of a confession of judgment. Pending before this Court is Plaintiffs' Order to Show Cause seeking a preliminary injunction enjoining Defendant from taking any further action to enforce a Judgment entered in this Court on February 29, 2019.

Based upon a review of: Plaintiffs' Order to Show Cause dated July 12, 2020 (Doc. #14), the Affidavit of Jeffrey Wayne Hansen, dated July 1, 2020, with exhibits (Doc. #15), the Affirmation of Mark R. Basile, Esq., dated July 9, 2020, with exhibits (Doc. #26)- submitted in support of the Preliminary Injunction; the Affirmation of Jonathan E. Samon, Esq., dated August 4, 2020, with exhibits (Doc. #28), the Affidavt of Brian Stulman, dated August 4, 2020, with exhibits (Doc. #32)- submitted in opposotion to the application; and the Affirmation of Catherine McGovern, Esq., dated Augst 11, 2020, with exhibits (Doc. #37), and the Affidavit of Richard Gerlach, dated (unknown)- submitted in reply, as well as upon consideration of this matter on submission, this Court hereby GRANTS the requested preliminary injunction.

LAWSUIT FACTS

This action relates to a Confession of Judgment ("Confession") dated February 27, 2019 and entered on February 28, 2019. The Confession was premised upon an Agreement between AH Wines and C6 Capital on November 1, 2018, the "Purchase Agreement for the Sale of Receipts" ("Agreement"). Plaintiffs contend that the Agreement is actually a risk-free loan charging a criminally usurious rate disguised as a sale of receivables.

AH Wines, Inc. ("AH Wines") produces, distributes and sells wines in Lodi, California. Plaintiff Jeffrey Hansen ("Hansen") is the CEO, President and Owner of AH. In October 2018, AH Wines was in financial need and sought a loan from C6. AH Wines was put in touch with C6 by a broker for hard money lenders.

On November 1, 2018, AH Wines and C6 entered into an Agreement whereby C6 loaned $300,000 to AH Wines with the expectation of being repaid $426,000 in future receivables from future sales by AH Wines until the entire amount of $426,000 was repaid. The amount was repayable based upon 15% of the proceeds from the future sales by AH Wines until the amount was repaid. AH Wines actually received $297,000, with a 1% Original Issue Discount withheld as a bank or professional fee. The purchased amount was to be repaid through daily fixed and equal ACH withdrawals from a designated AH Wines bank account in the sum of $3,380.95 daily for 126 fixed daily payments. The daily payment was not 15% of receipts; no 15% calculation was made in connection with the future receipts. Also on November 1, 2018, the parties to the Agreement signed an Addendum concerning a change in the repayment schedule from $3,380.95 daily payments to a $17,750 weekly repayment schedule between November 6, 2018 and when the amount would be paid in full, in 24 weeks.

C6 collected six weekly payments of $17,750.00, totaling $106,500.00. Plaintiffs contend that the money repaid was coming from the money loaned, and not from receivables. After making the first six payments, Plaintiffs contend AH Wines was unable to maintain the weekly fixed payments based upon receipts.

On November 5, 2018, Hansen executed an Affidavit of Confession of Judgment drafted in C6's favor and against each Plaintiff named in this action, naming them as Judgment Debtors. Plaintiffs contend that the Coliseum Defendants and Lodi Defendants named on the Confession and resulting judgment were not parties to the Agreement and are not judgment debtors. Hansen also signed a Personal Guaranty of Performance on November 1, 2018.

The funds were deposited on November 6, 2018.

On February 28, 2019, a judgment was entered in Ontario County Court under Index No. 123060/2019 in favor of C6 and against each Plaintiff in the sum of $401,207.31.

PROCEDURAL HISTORY

This action was commenced on July 2, 2020. On July 9, 2020 the Complaint was amended. The Amended Complaint sets forth the following causes of action: vacatur of the confession pursuant to CPLR 5015(a)(3), declaratory judgment, vacatur and rescission based on fraudulent misrepresentation, and violation of public policy due to the Legislature prohibiting confessions of judgment against non-New York residents.

Following a conference with the Court, an Order to Show Cause was signed on July 12, 2020. The Order to Show Cause contains the following TRO provision:

ORDERED that, sufficient reason having been shown, therefore, pending hearing of Plaintiffs' within application, the Defendant is temporarily restrained and enjoined from taking any further steps in any manner to enforce said judgment pending hearing and determination of this application. . . .

LEGAL DISCUSSION

Plaintiffs move for a preliminary injunction against C6, seeking to enjoin C6 from taking any further action to enforce the Judgment entered on February 28, 2019. CPLR 6301 gives a Court the authority to grant preliminary injunctive relief:

A preliminary injunction may be granted in any action where it appears that the Defendant threatens or is about to do, or is doing or procuring of suffering to be done, an act in violation of the Plaintiff's rights respecting the subject of the action, and tending to render the judgment ineffectual, or in any action where the plaintiff has demanded and would be entitled to a

judgment restraining the Defendant from the commission or continuance of an act, which, if committed or continued during the pendency of the action, would produce injury to the plaintiff. . . .

In order for a party to obtain a preliminary injunction, the party must establish that (1) there is a likelihood of ultimate success on the merits, (2) that there is a prospect of irreparable harm if the relief is not granted, and (3) that the balance of equities favor the moving party. See Doe v Axelrod, 73 NY2d 748 (1988). A preliminary injunction is a drastic remedy and should be issued cautiously. See Uniformed Firefighters Assn. of Greater New York v City of New York, 79 NY2d 236 (1992). This relief "should be awarded sparingly, and only where the party seeking it has met its burden of providing both the clear right to the ultimate relief sought and the urgent necessity of preventing irreparable harm." City of Buffalo v Mangan, 49 AD2d 697, 697 (4^th Dept 1975).

When evaluating a motion for a preliminary injunction a court must be mindful that preliminary injunctions are intended to "preserve the status quo pending a determination on the merits," not to determine the ultimate rights of the parties. Young v Crosby, 87 AD3d 1308 (4^th Dept 2011). "A motion for a preliminary injunction is addressed to the sound discretion of the trial court, and the decision of the trial court on such a motion will not be disturbed on appeal, unless there is a showing of an abuse of discretion." Marcone APW, LLC v Servall Co., 85 AD3d 1693, 1695 (4^th Dept 2011).

As noted supra, the first prong when considering a preliminary injunction is whether a likelihood of ultimate success has been established. "A preliminary injunction is a provisional remedy. Its function is not to determine the ultimate rights of the parties, but to maintain the status quo until there can be a full hearing on the merits." Gambar Enters. v Kelly Servs., 69 AD2d 297 (4^th Dept 1979). "[A] likelihood of ultimate success must not be equated with a final determination on the merits." Times Square Books, Inc. v City of Rochester, 223 AD2d 270, 278 (4^th Dept 1996). See also, Biles v Whisher, 160 AD3d 1159, 1161 (3^rd Dept 2018) (stating that a court may find a likelihood of success even where defendant's opposition raises factual questions, as "'success need not be a certainty to obtain a preliminary injunction'") (citations omitted). "'To sustain its burden of demonstrating a likelihood of success on the merits, the movant must demonstrate a clear right to relief which is plain from the disputed facts.'" Wegman v Altieri, 55 Misc3d 1216(A), *5 (Sup Ct Monroe Co 2015), quoting Related Prop., Inc. v Town Bd. of Town/Village of Harrison, 22 AD3d 587, 590 (2^nd Dept 2005).

Next, a court must assess whether there will be irreparable injury if the provisional relief is withheld. See Destiny USA Holdings, LLC v Citigroup Global Markets Realty Corp., 69 AD3d 212, 220 (4^th Dept 2009). "'Economic loss, which is compensable by money damages, does not constitute irreparable harm.'" Mangovski v DiMarco, 175 AD3d 947, 949 (4^th Dept 2019) (citation omitted). "[I]rreparable injury generally cannot be established where any damages sustained are calculable, because the plaintiff in such a case would have an adequate remedy in the form of monetary damages." Destiny USA, 69 AD3d at 220. "Where . . . a litigant can be fully recompensed by a monetary award, a preliminary injunction will not issue." Prince Paper & Twine Co. v Miller, 182 AD2d 748, 750 (2^nd Dept 1992).

Finally, a court will evaluate the third and final prong, the balancing of the equities. For this prong to be satisfied, "'[i]t must be shown that the irreparable injury to be sustained . . . is more burdensome . . . than the harm caused to [the nonmoving party] through imposition of the injunction.'" Destiny USA, 69 AD3d at 223 (citation omitted).

Likelihood of Success

Plaintiffs' likelihood of success depends upon the true nature of the transaction at issue.

In assessing whether a transaction is truly a usurious loan, "the courts will be vigilant to judge the transaction by its real character rather than by the form and color which the parties have seen fit to give it." Archer Motor Co. v Relin, 255 AD 333, 335 (4^th Dept 1938). It is "common practice for those engaged in usury to disguise the true nature of their transactions. . . ." Matter of People v JAG NY, LLC, 18 AD3d 950, 952 (3^rd Dept 2005). The Court of Appeals has stated:

The question in each case is, and necessarily must be, whether the agreement be fair and reasonable, or a mere device to evade the usury statutes. . . "what we have to find in the transaction is the intention of the parties. *** It was early recognized by the courts than if the form of the contract were to be controlling, the statute against usury would be substantially unenforceable, and thus it was made the duty of the court in each ease presented to examine into the substance of the transaction between the parties and determine whether the intent which pervaded it was one which violated the statute."

Hartley v Eagle Ins. Co. of London, England, 222 NY 178, 185 (1918) (citation omitted).

"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 WL 1065071, *2 (SupCt Nassau Co 2017). Where merchant funding agreements are deemed to actually be "usurious loans disguised a purchases of accounts receivable", the court "typically found no provisions for forgiveness or modification of the loans, such as viable and enforceable reconciliation provisions, in the event that the funding companies would not collect the daily amounts required." McNider Marine, LLC v Yellowstone Capital, LLC, 2019 WL 6257463, *3 (SupCt Erie Co 2019). "Focusing on the reconciliation provision in a given merchant agreement is appropriate because it often determines the risk to the funding company. If the funding company truly is collecting a specified percentage of accounts receivable, then the funding company bears the risk of a downturn in the merchant's business." Id. at *4. "If, however, the merchant is unable to adjust fixed payments in the event of a reduction of its accounts receivable, and the funding company can collect the amount due and owing by way of a personal guarantee and confession of judgment, there is far less risk to the funding company." Id. "Therefore, whether the merchant may reconcile its fixed payment amount when there is a reduction of accounts receivable is often determinative of whether repayment is absolute or contingent. If repayment is absolute, then the arrangement must be considered a loan as opposed to a purchase of accounts receivable." Id. If a reconciliation provision is found to be illusory because there is no true duty to reconcile, that mitigates in favor of deeming the transaction a loan. Id.

Absolute entitlement to repayment must also be assessed. "'For a true loan it is essential to provide for repayment absolutely and at all events or that the principals in some way secured as distinguished from being put in a hazard.'" NY Capital Asst Corp. v F&B Fuel Oil Co., Inc., 58 Misc3d 1229(A), *6 (SupCt Westchester Co 2018) (citation omitted). "[T]here can be no usury unless the principal sum advanced is repayable absolutely." Id. "When payment or enforcement rests on a contingency, therefore, the agreement is valid though it provides for a return in excess of the legal rate of interest." Id.

Additionally, the use of a personal guaranty and confession of judgment gives far less risk to the funding company. See McNider, 2019 WL 6257463, at *4.

An analysis of each factor with respect to the facts presented herein reveals that Plaintiffs have established a likelihood of success on the merits as to whether the transaction at issue was a funding agreement or a prohibited usurious loan. The Agreement's reconciliation provision provides:

Seller May Request Changes to the Daily Amount. The initial Daily Amount is intended to represent the Specified Percentage of Seller's daily Future Receipts. For so long as no Event of Default has occurred, once each calendar month, Seller may request that Buyer adjust the Daily Amount to more closely reflect the Seller's actual Future Receipts times the Specified Percentage. Seller agrees to provide Buyer any information requested by Buyer to assist in this reconciliation. No more often than once a month, Buyer may adjust the Daily Amount on a going-forward basis to more closely reflect the Seller's actual Future Receipts times the Specified Percentage. Buyer will give Seller notice five business days prior to any such adjustment. After each adjustment made pursuant to this paragraph, the new dollar amount shall be deemed the Daily Amount until any subsequent adjustment.

Agreement, ¶2 (Doc. #4) (emphasis added).

While the language of the reconciliation provision makes it seem as though AH Wines had the absolute right to a reconciliation, implementation of the provision is solely in C6's discretion: C6 may adjust the daily amount to reflect actual future receipts, but there is no mandate for C6 to do so. As such, Plaintiffs establish a likelihood of success on their claim that the reconciliation provision is illusory because the language of the provision reserved to C6 the right to reject AH Wine's request for a reconciliation.

In opposition, C6 notes that AH Wines received the benefit of reconciliation because C6 chose to assist in that regard. Whether C6 was willing to reconcile is not relevant, however; the language of the Agreement is controlling, and the Agreement does not require C6 to agree to reconcile. By virtue of the unambiguous Agreement, AH Wines did not have an enforceable right of reconciliation.

Moreover, the Agreement sets a definite term by providing as follows:

Effective November 1, 2018 Seller. . . hereby sells, assigns and transfers to C6 CAPITAL FUNDING, LLC. . . without recourse, the Specified Percentage of the proceeds of each future sale made by Seller (collectively "Future Receipts") until Buyer has received the Purchased Amount. . . .

Agreement, at 1 (Doc. 4).

Likewise, the Addendum provides:

Buyer will ACH Debit $17,750.00, which represented 5.25 times the Initial Daily Amount, from Seller's Account on a weekly basis, every Wednesday, until the Purchased Amount is delivered.

Addendum, at 1 (Doc. #7).

Here, the "Purchased Amount" is the amount of money advanced ($300,000) plus $126,000 in interest. The Agreement provided for daily repayments of $3,380.95, and the Addendum provides for weekly repayments of $17,750.00. Based upon the weekly payments, the amount due would have been repaid in 24 weeks. AH Wines was bound by weekly ACH debits. If the amount was actually repayable at a specified percentage of the proceeds of future sales, the amount of the weekly deductions would have fluctuated and the maturity date would not be calculable.

The Court acknowledges Section 4 of the Agreement, which provides:

Sale of Future Receipts (THIS IS NOT A LOAN): Seller is selling a portion of a future revenue stream to Buyer at a discount, not borrowing money from Buyer. There is no interest rate or payment schedule and no time period during which the Purchased Amount must be collected by Buyer. If Future Receipts are remitted more slowly than Buyer may have anticipated or projected because Seller's business has slowed down, or if the full Purchased Amount is never remitted because Seller's business went bankrupt or otherwise ceased operations in the ordinary course of business, and Seller has not breached this Agreement, Seller would not owe anything to Buyer and would not be in breach of or default under this Agreement. Buyer is buying the Purchased Amount of Future Receipts knowing the risks that Seller's business may slow down or fail, and Buyer assumes these risks based on Seller's representations, warranties and covenants in this Agreement that are designed to give Buyer a reasonable and fair opportunity to receive the benefit of the bargain. By this Agreement, Seller transfers to Buyer full and complete ownership of the Purchase Amount of Future receipts and Seller retains no legal or equitable interest therein. Seller agrees than it will treat Purchase Price and Purchased Amount in a manner consistent with a sale in its accounting records and tax returns. Seller agrees that Buyer is entitled to audit Seller's accounting records upon reasonable Notice in order to verify compliance. Seller waives any rights of privacy, confidentiality or taxpayer privilege in any such litigation or arbitration in which Seller asserts that this transaction is anything other than sale of future receipts.

Agreement, ¶4 (Doc. #4).

The language of Paragraph 4 is directly contradicted by the Agreement and Addendum, as set forth supra. The "real character" of the transaction is relevant, not the "form and color which the parties have seen fit to give it." Archer Motor Co., 255 AD at 335.

Finally, Plaintiffs establish a likelihood of success that the guaranty and Confession of Judgment further ensured that C6 would, with certainly, receive payment. C6 did not undertake risk; the documents were crafted such that C6 ensured it would receive payment one way or another. The guaranty provides:

Buyer is not willing to enter into this Purchase Agreement unless Guarantor irrevocably, absolutely and unconditionally guarantees prompt and complete performance to Buyer of all of the obligations of Seller. . .

Guarantor hereby irrevocably, absolutely and unconditionally guarantees to Buyer prompt and complete performance of all of Seller's obligations under the Purchase Agreement. . . .

Guaranty, at 1 (Doc. #6).

Pursuant to the terms of the guaranty, C6 is relieved of any risk of loss because it has the right to collect Hansen's personal assets, in addition to those of the corporate Plaintiffs set forth in the Confession.

Plaintiffs establish a likelihood of success on the merits as to whether this transaction was a usurious loan. A loan with an overall interest rate exceeding 25% per annum constitutes criminal usury in violation of GOL Section 5-501 and Penal Law Section 190.40. Plaintiffs has shown a likelihood of success on the claim that the Agreement minimally charged interest in excess of 25% annually.

Irreparable Harm

Plaintiffs' Hansen Affidavit details extensively the irreparable harm that would befall Plaintiffs if an injunction is not granted. See Affidavit of Jeffrey Hansen, ¶¶22-39 (Doc. #15). A loss of goodwill and damage to customer relationships is evidence of irreparable harm not remedied by monetary damages. See Eastview Mall, LLC v Grace Holmes, Inc., 182 AD3d 1057 (4^th Dept 2020). While conclusory assertions in that regard are insufficient to establish irreparable harm, specified allegations can rise to the level of making the requisite showing. Cf. John G. Ullman & Associates, Inc. v BCK Partners, Inc., 139 AD3d 1358, 1359 (4^th Dept 2016). "The loss of goodwill and damage to customer relationships, unlike the loss of specific sales, is not easily quantified or remedied by monetary damages." Marcone APW, LLC v Servall Co., 85 AD3d 1693, 1697 (4^th Dept 2011). Plaintiffs' Complaint further alleges that they do not stand to suffer purely economic losses, as only equitable relief is sought: vacating the Confession.

Plaintiffs establish irreparable harm.

Balancing of the Equities

As to the relative harm each party would suffer with and without injunctive relief, taking ail considerations into account, the equities tip in favor of Plaintiffs and against a potentially predatory lender charging usurious interest, a practice afforded no protection in New York. C6 will not suffer irreparable harm if it is enjoined from enforcing the judgment during the pendency of this action; C6's interests herein are truly monetary only. While Plaintiffs may incur some economic damages if the injunction is not granted, Plaintiffs are also at risk of damage to their goodwill and possibly their business' existence.

The equities tip in Plaintiffs' favor.

Plaintiffs' application for a preliminary injunction is GRANTED.

CONCLUSION

Based upon all of the foregoing, it is the Decision and Order of this Court that Plaintiff's application for a preliminary injunction is GRANTED.

Accordingly, and as the prevailing party, Plaintiffs are directed to E-file a Proposed Order within thirty days.

Signed at Rochester, New York on August 19, 2020.

/s/ _________

HONORABLE J. SCOTT ODORISI

Supreme Court Justice