GWG Mca Capital, Inc. v. Nulook Capital, LLC

• Decision Date: 07 March 2019
• Docket Number: 17-CV-1724 (GRB)
• Parties: GWG MCA CAPITAL, INC., Plaintiff, v. NULOOK CAPITAL, LLC, JOEL NAZARENO, ROBERT AURIGEMA, JOHN GUZZETTI, ANTHONY MANNINO, H. RUSSELL HEISER, and HEISER ENTERPRISES, LLC, Defendants.
• Court: U.S. District Court — Eastern District of New York

GWG MCA CAPITAL, INC., Plaintiff, v. NULOOK CAPITAL, LLC, JOEL NAZARENO, ROBERT AURIGEMA,JOHN GUZZETTI, ANTHONY MANNINO, H. RUSSELL HEISER,and HEISER ENTERPRISES, LLC, Defendants.

17-CV-1724 (GRB)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

March 7, 2019

MEMORANDUM & ORDER

GARY R. BROWN, United States Magistrate Judge:

This hard-fought action involves allegations that defendants misappropriated millions of dollars from plaintiff through a complex fraudulent scheme, and, upon consent of the parties, is before the undersigned for all purposes. Docket Entry No. ("DE") 216. Pending before the Court are the following motions:

1. Defendants Nulook Capital, LLC ("Nulook"), John Guzzetti, and Anthony Mannino each move under Rule 12(b)(6) to dismiss the Racketeer Influenced and Corrupt Organizations ("RICO") claims against them;

2. Defendant Joel Nazareno moves under Rule 12(b)(6) to dismiss the RICO claims against him, and asks the Court to decline supplemental jurisdiction over the state law claims against him;

3. Defendant Robert Aurigema moves under Rule 12(b)(6) to dismiss the fraudulent misrepresentation and negligent misrepresentation claims against him;

4. Defendants H. Russell Heiser and Heiser Enterprises LLC ("Heiser Enterprises") both move under Rule 12(b)(6) to dismiss the RICO claims, tortious interference with contracts claims, and conversion claims against them;

5. Defendants Nulook, Guzzetti, and Mannino (collectively, the "Nulook Defendants") move pursuant to Rule 12(f) to strike paragraph 39 from the First Amended Complaint;

6. Defendant Nazareno moves to have Edward Stone, Esq. disqualified as counsel for Plaintiff.

See DE 144, 149, 150, 160.

STATEMENT OF FACTS

I. THE UNDERLYING TRANSACTION

The following facts are taken from the First Amended Complaint and accepted as true for the purposes of the motions to dismiss. Sung Cho v. City of N.Y., 910 F.3d 639, 642, n.1 (2d Cir. 2018) ("Because a court that rules on a defendant's motion to dismiss a complaint must accept as true all of the factual allegations contained in the complaint . . . we describe the facts as alleged in the complaint, drawing all reasonable inferences in the plaintiff's favor") (citation and quotations omitted).

This case centers around funds which defendant Nulook borrowed from MCA Capital, LLC ("MCA"), a company later purchased by GWG MCA Capital, Inc. ("Plaintiff"). DE 114, ("Comp.") at ¶¶ 2, 15. Nulook is owned by defendants Aurigema, Guzzetti, and Mannino. Id. at ¶ 3. Mannino was Nulook's CEO and Aurigema was Nulook's "de-facto" CFO. Id. at ¶ 48.

Nulook provides merchant cash advances to small businesses in exchange for the right to receive the businesses' future accounts receivable on a daily or weekly basis. Id. at ¶ 14. To finance its own operations, Nulook borrowed $3.75 million from MCA (the "Loan"). Id. at ¶ 15. To memorialize the terms of the Loan, Nulook and MCA executed a Revolving Credit Agreement (the "Credit Agreement") on September 20, 2014. DE 14-6. To protect MCA's interest, the CreditAgreement provided MCA with a security interest. Id., § 4.

In issuing merchant cash advances, Nulook contracted with former defendant International Professional Services, Inc. ("PSC") which provided back-office servicing for Nulook's portfolio. Comp. at ¶¶ 18-19. Defendant Nazareno is a principal and Executive Director of PSC. Id. at ¶ 7. In September 2015, H. Russell Heiser became the new CEO of PSC. Id. at ¶ 37. Heiser also loaned money to PSC and Nazareno. Id. In addition to back-office servicing, PSC operated a platform from which it allowed multiple investors to syndicate a merchant cash advance. Id. at ¶ 20. At some point after Nulook contracted with PSC, MCA, Nulook, and PSC executed a Collection Subordination Agreement, in which PSC "recognize[d] all priorities and other rights granted thereby to MCA" as a result of the Credit Agreement. Id. at ¶ 22. Randall Jacobs, counsel for Nulook, emailed a copy of the Subordination Agreement to Nazareno, Mannino, and Aurigema. Id. at ¶ 39.

II. ALLEGED CONSPIRACIES

Plaintiff alleges three interrelated conspiracies. The first, beginning on December 22, 2014, occurred when Mannino, Guzzetti, and Aurigema wanted access to more funds for Nulook from MCA, but MCA declined. Id. at ¶ 29. Instead, Nulook turned to PSC, which was willing to extend loans totaling $200,000. Id. at ¶ 30. MCA confirmed that this single agreement would not be a breach of the Credit Agreement. Id. at ¶ 31. Neither MCA, nor plaintiff, ever waived or relinquished their rights in the security interest created by the Credit Agreement. Id. at ¶ 33. In that agreement with PSC, Nulook impermissibly "double pledged" collateral in which MCA had a security interest. Id. at ¶ 34. Nulook then entered into five additional agreements with PSC, double pledging collateral to support additional loans totaling $1,450,000. Id. at ¶¶ 35-36. To conceal funds paid to PSC, Nulook used a notation resembling those used to record payments to plaintiff in Nulook's bank statements. Id. at ¶¶ 44-46.

The second alleged conspiracy began in early 2016, when plaintiff determined that Nulook's receivables and cash reserves (the "Borrowing Base") was insufficient to support the outstanding debt to plaintiff.¹ Id. at ¶ 47. Throughout 2016, Aurigema and Mannino emailed Borrowing Base reports to plaintiff at least 20 times—all of which plaintiff alleges were false and misleading because they failed to show that Nulook allowed PSC to collect cash proceeds to which plaintiff was entitled. Id. at ¶¶ 48-49. Aurigema was the "point person" for sending Borrowing Base Reports, and once wired $47,000 to Nulook from his personal bank account to positively affect the Borrowing Base. Id. at ¶ 50. Nulook also represented to plaintiff that it had received an equity investment, which Plaintiff alleges was false, and wired $500,000 to plaintiff to reduce the Loan balance. Id. at ¶¶ 51-52. Instead, the $500,000 was borrowed from PSC as part of the first conspiracy and secured by a double pledge. Id. at ¶ 52.

In July 2016, Patrick Preece² confirmed a conversation he had with Nulook, in which Nulook had received a commitment from "friends and family" investors that would allow Nulook to pay down the Loan balance by $125,000 per month. Id. at ¶ 53. Plaintiff sent a default letter to Nulook on July 28, 2016, and in December 2016, Nulook agreed to certain provisions to cure its defaults, including limiting its operating expenses to $20,000 per month and remitting all funds in excess of that amount to plaintiff, in exchange for plaintiff not foreclosing on the Loan. Id. at ¶ 56. None of the defendants told plaintiff that hundreds of thousands of dollars each month were being diverted to PSC. Id. Plaintiff signed a Forbearance Agreement on December 21, 2016, as a result of these negotiations. Id. at ¶ 61.

The third, and last, conspiracy commenced within two months of the execution of the Forbearance Agreement when Nulook ceased making payments to plaintiff. Id. at ¶ 62. At thattime, Nazareno and Heiser intentionally ceased sending debit instructions to Nulook's automated clearinghouse ("ACH"). Id. at ¶ 63. PSC then engaged a new ACH processor to debit Nulook merchants and deposit money in bank accounts controlled by Nazareno. Id. at ¶ 64. Plaintiff alleges Nazareno, Heiser, and Heiser Enterprises continue to debit funds from Nulook merchants and that the conspiracy is ongoing. Id. at ¶ 67. On April 26, 2017, this Court appoints a receiver over PSC. See DE 38. The court-appointed Receiver identified several issues with PSC's financial situation, which are now included in the amended allegations. Comp. at ¶ 73; see also DE 217. Specifically, plaintiff alleges:

• PSC failed to record revenues in its books and records after August 2015,

• PSC's assets and liabilities in the existing books and records cannot be reconciled with representations it made in its tax filings,

• PSC moved funds from PSC to entities owned or affiliated with Nazareno, and did not record those movements in its books and records, and

• Nazareno routinely used funds from PSC's operation account for personal expenses and personal loans.

Comp. at ¶ 73. After the receiver was appointed, defendants diverted any incoming money to non-party JJ and AA Enterprises, LLC ("JJ & AA"), which is owned by Mannino and Guzzetti, to continue their scheme. Id. at ¶¶ 74-75.

The complaint then purports to set forth eight claims for relief: (1) RICO violations under 18 U.S.C. § 1962(c), (2) RICO violations under 18 U.S.C. § 1962(d) (together the "RICO claims"), (3) fraudulent misrepresentation, (4) negligent misrepresentation, (5) fraudulent conveyances, (6) tortious interference with contracts, (7) conversion, and (8) breach of contracts.

MOTIONS TO DISMISS

The motions to dismiss involve five of the claims for relief: (1) the RICO claims, (2)fraudulent misrepresentation, (3) negligent misrepresentation, (4) tortious interference with contract, and (5) conversion. Each is discussed in turn.

Motions to dismiss are decided under the well-established standard of review for such matters. "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v Twombly, 550 U.S. 544, 570 (2007)). "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679 (citation omitted). In addition to the face of the complaint, "the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered." Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007) (citation omitted).

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