Opinion
Index No. 654935/2022
08-25-2023
S&M Industries, LLC D/B/A Green Nation General Contracting, Plaintiff, v. Advantage Platform Services, Inc. D/B/A Advantage Capital Funding, Defendant.
Lebedin Kofman, LLP, New York, NY (Michael S. Leinoff of counsel), for plaintiff. Park Avenue Recovery LLC, New York, NY (Jackée Missick of counsel), for defendant.
Unpublished Opinion
Lebedin Kofman, LLP, New York, NY (Michael S. Leinoff of counsel), for plaintiff.
Park Avenue Recovery LLC, New York, NY (Jackée Missick of counsel), for defendant.
Hon. Gerald Lebovits, J.S.C.
The following e-filed documents, listed by NYSCEF document number (Motion 001) 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 were read on this motion to DISMISS.
In this action on a merchant-cash-advance agreement, defendant Advantage Platform Services, Inc. d/b/a Advantage Capital Funding moves to dismiss the complaint under CPLR 3211 (a) (1) and (a) (7) against plaintiff-merchant S&M Industries, LLC d/b/a Green Nation General Contracting. Defendant's motion is granted in part and denied in part.
BACKGROUND
On May 17, 2022, S&M and Advantage executed a merchant-cash-advance agreement under which S&M sold $33,500 of future receivables to Advantage in exchange for an upfront payment of $25,000. As security for the agreement, Advantage filed "one or more UCC-1 forms consistent with the UCC." (NYSCEF No. 4 at ¶ 4 [amended complaint].)
Within a few weeks of signing the agreement and receiving payment of the $25,000-purchase price, S&M defaulted on June 17, 2022. (NYSCEF No. 7 at 3.) Advantage alleges that the default occurred when S&M denied Advantage's request for proof of S&M's receivables so that, pursuant to the agreement, a reconciliation of 15% of S&M's current receivables could be assessed. S&M also allegedly denied Advantage access to any automatic withdrawals. Following S&M's alleged default, Advantage sent letters to S&M's third-party creditors demanding that they turn over all funds they would otherwise have paid to S&M. In response, PepsiCo, Inc., an S&M client, canceled two construction projects it had with S&M. Cash App, another client, locked S&M out of its account. Homeowners Mary and James Johnson canceled their home remodeling contract with S&M. And Premium Solar Patios, which acted as a general contractor to S&M and referred it $10,000 per month in business, ceased employing S&M.
On December 20, 2022, S&M commenced this action to recoup damages it incurred from losing these clients. S&M alleges the following causes of action against Advantage: (1) abuse of process; (2) negligence per se for Advantage's violation of UCC 9-108 ; (3) negligence per se for Advantage's violation of UCC 9-312 ; (4) tortious interference with contractual relations; (5) tortious interference with business relations; and (6) declaratory judgment voiding the MCA agreement.
DISCUSSION
On a motion to dismiss under CPLR 3211, "the pleading is to be afforded a liberal construction" and a court must "accept the facts as alleged in the complaint as true, accord plaintiff[] the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." (Leon v Martinez, 84 N.Y.2d 83, 87-88 [1994].) Under CPLR 3211 (a) (1), the court must determine whether "the documentary submitted conclusively establishes a defense to the asserted claims as a matter of law." (Id. at 88.) And under CPLR 3211 (a) (7), "the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one." (Id.)
1. Advantage's motion to dismiss S&M's first cause of action for abuse of process
To plead abuse of process, three elements must be satisfied: (1) "regularly issued process, civil or criminal, compelling the performance or forbearance of some prescribed act"; (2) "the person activating the process must be moved by a purpose to do harm without that which has been traditional described as economic or social excuse or justification"; and (3) use of the process for "some collateral advantage or corresponding detriment to the plaintiff which is outside the legitimate ends of the process." (Roberts v Pollack, 92 A.D.2d 440, 444 [1st Dept 1983] [internal quotation marks omitted].) In terms of the first element, S&M asserts that "process" may include "attachment, execution, [and] garnishment" (see Williams v Williams (23 N.Y.2d 592, 596 n 1 [1969]), and therefore there is "no reason" why UCC-1 statements should not also qualify. (NYSCEF No. 11 at 3.) Advantage, however, argues that S&M's assertion is unsupported by any case law and that because Advantage has not served S&M with a summons and complaint, S&M's abuse-of-process claim fails. (NYSCEF No. 7 at 5.)
Although this court agrees with S&M that "process" pursuant to an abuse-of-process claim includes more than just service of the summons and complaint, the court concludes that a UCC-1 statement does not qualify. After this court's review of the case law, it was able to find only one case addressing whether a UCC-1 statement may be considered "process" under an abuse-of-process claim. In Weisberger v Rubinstein (2008 NY Slip Op 33513[U], at *7 [Sup Ct, NY County Dec. 24, 2008]), the court dismissed defendants' abuse-of-process cause of action after concluding that under Article 9 of the UCC, "filing a UCC-1 statement is not a civil process that compels any performance." Although Weisberger is not binding on this court, the court finds that decision's reasoning persuasive and adopts it here.
Regarding the second element of an abuse-of-process claim, S&M contends that in issuing the UCC-1 statements to S&M's clients, Advantage was "fully aware" and "intended" that the recipients would cut ties with S&M rather than turn over money owed. (NYSCEF No. 4 at ¶ 11.) S&M claims that Advantage's malicious intent is "implicit" and that, by only suing S&M, Advantage "appears" to be trying to force S&M "into an unsustainable position in which they cannot do business until Defendant gets paid." (NYSCEF No. 11 at 4.) S&M argues that if Advantage truly intended to recover its money it would sue S&M's third-party clients. Although all reasonable inferences must be drawn in S&M's favor, S&M's allegations about Advantage's intent are no more than conclusory statements without factual or legal support. And, as Advantage notes, Advantage's acts were authorized by UCC 9-607 (a) (3), which provides that in the event of a debtor's default, "a secured party may obtain collateral directly from an account debtor." (Worthy Lending LLC v New Style Contrs., Inc., 39 N.Y.3d 99, 104 [2022].)
Advantage argues that S&M has not satisfied the third element of its abuse-of-process claim, because S&M consented to the UCC-1 filing by signing the parties' MCA agreement. S&M, however, asserts that the relevant provision of the agreement only provides that Advantage may use UCC-1 liens "to give notice of [a] security interest," not to restrain S&M's receivables or interfere with its business relationships. (NYSCEF No. 11 at 5.) But S&M's complaint does not plead facts suggesting that Advantage's conduct went beyond what the UCC s authorizes. Indeed, as previously discussed, Advantage was well within its rights to notify S&M's third-party creditors of its claim to the specific assets. (See UCC 9-607 [a] [3].) That notification was within "the legitimate ends" contemplated by the UCC. (Roberts, 92 A.D.2d at 444.)
Because S&M has not satisfied the elements of its abuse-of-process claim, the branch of Advantage's motion seeking dismissal of that claim is granted.
2. Advantage's motion to dismiss S&M's second cause of action for negligence per se and violation of UCC 9-108
Advantage moves to dismiss S&M's claim that Advantage's description of the collateral in the parties' agreement is a violation of UCC 9-108 and rises to the level of negligence per se. Section 9-108 (a) states that "a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described." And according to subsection (b), collateral is sufficiently identified if the description includes the "specific listing, "category," "quantity," or other "objectively determinable" method of identification. A "supergeneric description" of collateral is not sufficient, such as the phrase "all the debtor's assets" or "all the debtor's personal property." (UCC 9-108 [c].)
Advantage argues that S&M's claim is without merit because to prove negligence per se for violating a statute, S&M had to show, "where the violation of the statute caused harm, a negligence standard, and it must either cause special harm or constitute defamation per se." (NYSCEF No. 7 at ¶ 7 [Advantage's affirmation in support], quoting Frechtman v Gutterman, 115 A.D.3d 102, 104 [1st Dept 2014].) But Frechtman is not relevant to the present action, because that case addressed only negligence in the context of defamation and defamation per se claims.
Advantage also asserts that under the UCC, a description of the collateral need not be specific and can be a general description so long as identification is possible. (NYSCEF No. 13 at 6.) Advantage also asserts that S&M consented to the collateral language by signing the agreement, so S&M's claim should fail. S&M, on the other hand, asserts that Advantage owed it a duty to comply with the UCC and that it breached this duty by creating an impermissibly vague UCC-1 financing statement. S&M states that "[v]iolation of a State statute that imposes a specific duty constitutes negligence per se." (NYSCEF No. 11 at 6, quoting Rivera v 203 Chestnut Realty Corp., 173 A.D.3d 1085, 1087 [2d Dept 2019].) S&M also argues that Advantage has not provided any authority suggesting why "consent" would overcome the strictures of the UCC. (NYSCEF No. 11 at 7.) And S&M claims that the question of consent is immaterial, because under UCC 9-108 (c), "a description of collateral as 'all the debtor's assets' or 'all the debtor's personal property' does not reasonably identify the collateral."
The UCC-1 statement identifies the collateral as all of S&M's "present and future accounts, chattel paper, deposit accounts, personal property, assets and fixtures, general intangibles, instruments, equipment, inventory wherever located, and proceeds now or hereafter owned or acquired by Seller." (NYSCEF No. 14 at 2 [UCC-1 statement].). According to NRT NY, LLC v Middlegate Funding LLC (2020 NY Slip Op 34297[U], *11 [Sup Ct, NY County 2020]), "if a third party could determine what items of the debtor's collateral are subject to the creditor's security interest," the collateral is considered reasonably identified. More evidence is needed at this point to determine if the collateral as stated in the parties' agreement is "too vague" or "supergeneric." Since the facts asserted by S&M show more than a sheer possibility that Advantage has acted unlawfully, the branch of Advantage's motion seeking to dismiss S&M's second cause of action is denied.
3. Advantage's motion to dismiss S&M's third cause of action for negligence per se and violation of UCC 9-312
Advantage seeks to dismiss S&M's third cause of action alleging that Advantage's actions violate UCC 9-312 and rise to the level of negligence per se. Section 9-312 (b) provides that "a security interest in tangible money may be perfected only by the secured party's taking possession under section 9-313." And under section 9-313, "taking possession" requires that the secured party either take actual possession or, if the collateral is held by a third party, produce a record signed by the third party acknowledging that it is, or will be, holding the collateral for the secured party.
S&M argues that Advantage breached its duty to comply with the UCC by directing third parties to turn over their money to Advantage even though the parties did not indicate in writing that the money was held for the benefit of Advantage. Advantage argues this claim is without merit and alleges that at least one of S&M's clients, Pepsi, acknowledged the debt owed by it to the debtor via a "true copy" of an email received from a Pepsi representative. (NYSCEF No. 7 at ¶ 9.) But, as S&M notes, this email is not included as an exhibit on the motion. This court therefore may not consider it.
Advantage states that S&M's allegations are too ambiguous and not supported by any case law or evidence that Advantage's conduct was the proximate cause of S&M's alleged injury. Because this action is still at the pleading stage, documentary evidence is not required. S&M's assertions that its clients cancelled their business relationships with S&M after Advantage sent out the UCC statements is sufficient at this stage to allege that Advantage's conduct was the actual and proximate cause for S&M's harm. Advantage has neither attached the alleged Pepsi email nor submitted evidence of signed records by S&M's other clients. This court concludes that S&M has properly pleaded this cause of action, and the branch of Advantage's motion seeking to dismiss the claim is denied.
4. Advantage's motion to dismiss S&M's fourth cause of action for tortious interference with contractual relations
A claim for tortious interference with contractual relations requires "the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of the contract, defendant's intentional procurement of the third-party's breach of the contract without justification, actual breach of the contract, and damages resulting therefrom." (Lama Holding Co. v Smith Barney, 88 N.Y.2d 413, 424 [1996].) In Law Offs. of Ira H. Leibowitz v Landmark Ventures, Inc. (131 A.D.3d 583, 585 [2d Dept 2015]), the Court dismissed defendant's counterclaim for tortious interference with a contract, because defendant failed to "adequately plead facts that would establish that the plaintiffs, in communicating with the third party to secure their attorney's fees, intentionally procured that party's breach of the stipulation of settlement."
S&M claims that it had contracts with third-party clients; that Advantage intended to interfere with those contracts via the UCC-1 statements; and that S&M was harmed after its clients later cancelled their contracts with it. (NYSCEF No. 4 at ¶¶ 24, 25.) But, like the defendant in Law Offices of Ira H. Leibowitz, S&M has not adequately plead facts to establish that Advantage-by notifying the clients of Advantage's security interest-"intentionally procured" those contract cancellations. S&M does not submit evidence to suggest that Advantage was not justified in communicating with S&M's clients. Although S&M asserts that no documentary evidence is needed at this stage of the proceedings, it still must sufficiently plead the elements of its claim. It has not done so.
Advantage argues that it knew about S&M's third-party clients by using information obtained by examining S&M's records, which were made available to Advantage around the time of the parties' execution of their agreement. (NYSCEF No. 7 at ¶ 8.) Advantage also asserts that it was justified in communicating with S&M's clients under the UCC. According to Advantage, after S&M's default, Advantage became the sole owner of the "Purchased Amount of Future Receipts" and was therefore allowed to contact the clients concerning the receivables owed. Advantage states that S&M was made aware of this in the agreement and consented to it when it submitted its clients' contact information. Advantage therefore argues that its actions did not rise to the level of tortious interference, because it acted in a "commercially reasonable manner" in seeking to collect payment from S&M's account debtors. (Manufacturers & Traders Trust Co. v Pro-Mation, Inc., 115 A.D.2d 976, 976 [4th Dept 1985].)
This court agrees with Advantage. S&M does not plead sufficient facts to support its fourth cause of action for tortious interference with contractual relations. Thus, the branch of Advantage's motion seeking to dismiss S&M's fourth cause of action is granted.
5. Advantage's motion to dismiss S&M's fifth cause of action for tortious interference with business relations
To succeed on a claim for tortious interference with a business relationship, a movant "must prove (1) that it had a business relationship with a third party; (2) that the defendant knew of that relationship and intentionally interfered with it; (3) that the defendant acted solely out of malice or used improper or illegal means that amounted to a crime or independent tort; and (4) that the defendant's interference caused injury to the relationship with the third party." (Amaranth LLC v J.P. Morgan Chase & Co., 71 A.D.3d 40, 47 [1st Dept 2009].)
S&M argues that Advantage intended to interfere with S&M's business relationships when Advantage informed S&M's clients of its security interest in S&M's accounts. (NYSCEF No. 4 at ¶ 28.) S&M asserts that Advantage knew or should have known that "UCC-1 statements are not permitted to be used to collect money not in possession of the issuer," and that S&M's business relationships were injured when the clients cancelled their contracts with S&M.
S&M, however, has not satisfied all the elements required to support its tortious-interference claim. S&M has not submitted facts to plead the third element-that Advantage acted "solely out of malice or used improper or illegal means that amounted to a crime or independent tort." (Amaranth, 71 A.D.3d at 47.) In a claim for tortious interference with prospective business relations, the party asserting the claim must meet a "more culpable conduct" standard. (Law Offs. of Ira H. Leibowitz, 131 A.D.3d at 585.) This standard is met where the interference was accomplished by "wrongful means or where the offending party acted for the sole purpose of harming the other party." (Id.) "Wrongful means" include physical violence, fraud, misrepresentation, and civil suits/criminal prosecutions. But "[w]here the offending party's actions are motivated by economic self-interest, they cannot be characterized as solely malicious." (Id.)
Advantage cites Bank of India v Weg & Myers (257 A.D.2d 183, 191 [1st Dept 1999]) for the proposition that "[t]he secured party's right to possession of the collateral upon default may be asserted against a third party in possession, which may not properly refuse upon the secured party's request for delivery." S&M, however, argues that Weg & Myers does not support Advantage's position because, in that case, the Court also stated that the third party should have sought judicial direction before disposing of the "disputed proceeds." (Id. at 191.) Thus, S&M asserts that a secured party may not simply demand and expect immediate delivery of any money in the possession of a third party that is owed to a liened party; rather, judicial intervention-like that sought by S&M in the present action-is necessary.
But S&M misinterprets the Bank of India opinion. In Bank of India, the Court wrote that the third party, not the secured party, should have sought judicial direction before disposing of the collateral. Contrary to S&M's claims, the statement in Bank of India that judicial direction was warranted does not qualify its prior statement that a secured party has an absolute right to possession of the collateral. Here, the third parties are S&M's alleged clients, not Advantage. Thus, Advantage, as a secured party, was justified in asserting its right to possession against the third-party clients. (See UCC 9-607 [a] [3].)
For support, Advantage also cites Manufacturers & Traders. Advantage asserts that the facts in that case are like those of the case at hand, except that Manufacturers dealt with repayment of a loan, while this case deals with payment of future receivables. (See Manufacturers & Traders, 115 A.D.2d at 976.) In Manufacturers & Traders, the Court held that after the debtor's default, the bank-lender was authorized by the UCC and by the terms of the security agreement to notify all accounts-receivable debtors to remit their payments directly to the bank. (Id.) Advantage argues that, as in Manufacturers & Traders, it owns the rights to the receivables and was authorized under the UCC and the parties' agreement to request payment of the receivables directly from the third-party debtors. Thus, Advantage did not engage in tortious interference.
This court agrees with Advantage. The branch of Advantage's motion seeking dismissal of S&M's fifth cause of action is granted.
6. Advantage's motion to dismiss S&M's sixth cause of action seeking a declaratory judgment voiding the merchant-cash-advance agreement
Advantage seeks to dismiss S&M's claim for a declaratory judgment voiding the merchant-cash-advance agreement. S&M asserts that the agreement is a loan and is therefore subject to usury laws, whereas Advantage argues that the agreement is one for future receivables. In determining whether an MCA agreement is a loan or a sales agreement for future receivables, a court must determine whether a reconciliation clause exists; whether there is a defined, finite term in which the money must be repaid; and whether the buyer has recourse if the seller files for bankruptcy. (K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc.3d 807, 816-818 [Sup Ct, Westchester County 2017].) If there is no reconciliation clause (or the clause is discretionary), the term is definite, and the buyer has recourse if the seller files for bankruptcy, the loan-versus-sales-agreement factors point toward the conclusion that the agreement is loan.
Advantage asserts that there is a reconciliation clause in the agreement (NYSCEF No. 2 at 2 ¶ 2) and that repayment is contingent on each collection of future-sales proceeds under the agreement. As a result, Advantage contends, the agreement does not guarantee absolute repayment of the money. Advantage also argues that the term in which the money must be repaid is indefinite. (NYSCEF No. 2 at 2 ¶ 4.)
S&M, on the other hand, asserts that the agreement qualifies as a loan because the reconciliation clause is too indefinite. (NYSCEF No. 11 at 14.) S&M argues that the reconciliation clause is discretionary in that Advantage retains sole discretion in deciding whether to hold and use the reconciliation. (NYSCEF No. 11 at 14 [quoting the agreement's reconciliation clause: "Buyer may, at Buyer's sole discretion as it deems appropriate and upon Seller's request, adjust the amount of the then-applicable ATA due...."].) And, in the event of default, Advantage is permitted to demand immediate payment of the uncollected purchase amount. Further, S&M asserts that even though the agreement states that there is no definite term for repayment, the agreement's provisions suggest otherwise. The terms specify that payment is to be collected every weekday until Advantage receives the purchased amount and that a default occurs when "two or more ACH transactions attempted by Buyer within one calendar month are rejected by Seller's bank." (NYSCEF No. 11 at 15.) S&M concludes that these provisions allow for a term of 100 days, with up to five days of grace. S&M contends, therefore, that the agreement does include a definite term for repayment, making the agreement a loan.
S&M denies as "factually false" Advantage's claim that "if the Plaintiff'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." (NYSCEF No. 11 at 16.) But this claim is merely a restatement of a provision of the parties' agreement, which states that "[i]f 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." (NYSCEF No. 2 at 2 ¶ 4.) Contrary to S&M's assertions, this provision addresses a situation in which S&M's business goes bankrupt and provides that, in that situation, S&M would be relieved of any further obligation to make payments. (See NYSCEF No. 11 at 16 [stating that "[t]here is nothing specifically in § 4 that about the event of a bankruptcy or the effects thereof"].) This court agrees with Advantage that Advantage has no recourse under the agreement if S&M declares bankruptcy. (See K9 Bytes, Inc., 56 Misc.3d at 818.)
Nonetheless, when drawing all reasonable inferences in S&M's favor, S&M's allegations establish a cognizable claim. S&M has sufficiently supported its claim that the agreement may be a loan through its allegations of the discretionary nature of the reconciliation clause and the alleged term in which the money was to be repaid. S&M's claim is further supported by the agreement's provision "making rejection of an automated debit on two or three occasions without prior notice an event of default entitling defendant[] to immediate repayment of the full uncollected purchased amount." (Davis v Richmond Capital Group, LLC, 194 A.D.3d 516, 517 [1st Dept 2021] [finding that this factor supported the court's determination not to dismiss plaintiffs' claim that the agreements were loans subject to usury laws].)
7. Advantage's request for attorney fees and costs of defending this action
Because this court denies those branches of Advantage's motion seeking to dismiss S&M's negligence per se and declaratory-judgment causes of action (second, third, and sixth causes of action), Advantage is not entitled to attorney fees under the agreement's attorney-fee provision. (See NYSCEF No. 2 at 6 ¶ 16.3 ["In any such arbitration or lawsuit, under which Buyer shall recover Judgment against Seller, Seller shall be liable for all of Buyer's costs of the lawsuit, including but not limited to all reasonable attorneys' fees and court costs."] [emphasis added].)
Accordingly, it is
ORDERED that defendant's motion to dismiss is granted in part and denied in part, and the first, fourth, and fifth causes of action of the amended complaint are dismissed; and it is further
ORDERED that defendant is directed to serve an answer to the remaining causes of action asserted in the amended complaint within 20 days after entry of this order; and it is further
ORDERED that the parties shall appear before this court for a preliminary conference on September 29, 2023.