K9 Bytes, Inc. v. Arch Capital Funding, LLC

• Citation: 56 Misc.3d 807,57 N.Y.S.3d 625
• Parties: K9 BYTES, INC., Epazz, Inc., Strantin, Inc., MS Health Inc., and Shaun Passley, Plaintiffs, v. ARCH CAPITAL FUNDING, LLC, Cap Call, LLC, John Does 1–10, and Jane Does 1–10, Defendants.
• Decision Date: 04 May 2017
• Court: United States State Supreme Court (New York)

56 Misc.3d 807

57 N.Y.S.3d 625

K9 BYTES, INC., Epazz, Inc., Strantin, Inc., MS Health Inc., and Shaun Passley, Plaintiffs,

v.ARCH CAPITAL FUNDING, LLC, Cap Call, LLC, John Does 1–10, and Jane Does 1–10, Defendants.

Supreme Court, Westchester County, New York.

May 4, 2017.

Jonathan M. Proman, Esq., New York, Attorney for Plaintiffs.

Guiliano McDonnell et al., Mineola, Attorneys for Arch.

Proskauer Rose LLP, New York, Attorneys for Cap Call.

LINDA S. JAMIESON, J.

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 agreement¹ 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 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, N.Y. 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 A.D.2d 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 A.D.2d 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 usury laws," but instead caused them "to enter into ‘merchant agreements.’ "² 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 A.D.2d 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 N.Y. 159, 162–63, 170 N.E. 530 (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 A.D.2d 516, 519, 509 N.Y.S.2d 595, 599 (2d Dept.1986). See also Lewis v. Hertz Corp., 181 A.D.2d 493, 495, 581 N.Y.S.2d 305, 307 (1st 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 N.Y.2d 135, 142–43, 490 N.Y.S.2d 735, 480 N.E.2d 349 (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 N.Y.2d 314, 333, 464 N.Y.S.2d 712, 451 N.E.2d 459 (1983) (emphasis added).

Here, it is quite clear, from...