Opinion
Index No.: 32423/2017
03-05-2018
IBIS CAPITAL GROUP, LLC, Plaintiff, v. DAVID FLETCHER d/b/a FLETCHER & ASSOCIATES, and DAVID FLETCHER, Defendants.
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:
| Notice of Motion/Amended Affirmation of Christopher R. Murray, Esq./Exhibit A-D | 1-2 |
| Plaintiff's Memorandum of Law (Amended) | 3 |
| Affidavit of David Fletcher in Opposition/Exhibits A-C | 4 |
| Defendants' Memorandum of Law | 5 |
| Reply Affirmation of Christopher R. Murray, Esq./Exhibit 1 | 6 |
| Plaintiff's Reply Memorandum of Law | 7 |
| Affidavit of David Fletcher | 8 |
| Defendants' Additional Memorandum of Law | 9 |
| Affirmation of Nicholas P Giuliano, Esq./Plaintiffs Memorandum of Law in Support ofSummary Judgment/Exhibit A-H | 10-11 |
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 E. 17th St. Owners, Inc., 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 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, 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).
Defendants do not distinguish whether their affirmative defense is for civil or criminal usury.
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 Network, supra at 279-80; Intima-Eighteen, Inc., supra; Zoo Holdings, LLC 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 Network, Inc. for TVT Capital, LLC v Epazz, Inc., 252 F.Supp.3d 274, 279-80 [SDNY 2017] (quoting Scantek Medical Inc. v 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 v. Phelps, 41 NY2d 238, 242) 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 [1st Dept 1991] (citations omitted). Moreover, "[w]here a corporation is barred from asserting usury, so is its individual guarantor." Colonial Funding Network, supra at 280 (citing Schneider, supra 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 Bytes, Inc. v Arch Capital Funding, LLC, 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. See, e.g., IBIS Capital Group, LLC v Four Paws Orlando LLC, 2017 WL 1065071 [Sup Ct Nassau County March 10, 2017] (collecting cases); Merchant Cash and Capital, LLC v Yehowa Medical Services, Inc., 2016 WL 4478805 [Sup Ct Nassau County July 29, 2016]; Professional Merchant. Advance Capital, LLC v Your Trading Room, LLC, 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 Bytes, supra at 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 Bytes, supra at 817 (citing Professional Merchant Advance Capital, LLC v C Care Services, LLC, 2015 WL 4392081 at *4 [SDNY July 15, 2015]; Merch. Funding 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.
The second factor, which has been "deemed quintessential is whether the agreement has a finite term or not." K9 Bytes, supra 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 Group, LLC 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 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 Room, LLC, 2012 NY Slip Op 33785[U] [Sup Ct Suffolk County])." IBIS Capital Group, LLC 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. Plaintiff shall have judgment for $23,314.00, plus pre-judgment interest at 9% pursuant to CPLR §5001(a), and costs. Plaintiff shall settle judgment with the County Clerk, as provided herein, within 20 days of this Decision and Order.
In light of the Court's conversion of Plaintiff's motion to dismiss to a motion for summary judgment, Plaintiff's request to strike scandalous material from Defendants' answer is denied as moot.
Plaintiff does not identify any provision in the Merchant Agreement which provides for recovery of attorneys' fees. Nor has Plaintiff provided a copy of its retainer agreement or invoices in support of its request for fees. Therefore, attorneys' fees are not awarded.
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.