Lateral Recovery, LLC v. Queen Funding, LLC

• Decision Date: 20 July 2022
• Docket Number: 21 Civ. 9607 (LGS)
• Parties: LATERAL RECOVERY LLC, et al., Plaintiffs, v. QUEEN FUNDING, LLC, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

LATERAL RECOVERY LLC, et al., Plaintiffs,
v.
QUEEN FUNDING, LLC, et al., Defendants.

No. 21 Civ. 9607 (LGS)

United States District Court, S.D. New York

July 20, 2022

OPINION AND ORDER

LORNA G. SCHOFIELD, UNITED STATES DISTRICT JUDGE.

Plaintiffs bring this civil action against Defendants Queen Funding, LLC (“Queen Funding”), Yehuda Klein and John and Jane Doe Investors in Queen Funding who funded its operations. Plaintiffs allege that Queen Funding, which is a merchant cash advance (“MCA”) company, Klein and other affiliated investors violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., by engaging in wire fraud and collecting unlawful debt. Defendants move to dismiss both the RICO substantive claim and the RICO conspiracy claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons below, Defendants' motion is denied.

I. BACKGROUND

The following facts are taken from the Complaint and documents attached to, or incorporated by reference in, the Complaint and are construed in the light most favorable to Plaintiffs. See R.M. Bacon, LLC v. Saint-Gobain Performance Plastics Corp., 959 F.3d 509, 512 (2d Cir. 2020).

Plaintiffs include FTE Networks, Inc., and its three subsidiaries Benchmark Builders, Inc., Jus-Com LLC and Focus Wireless, LLC (collectively, “FTE”). Plaintiff Lateral Recovery LLC is an assignee of FTE's claims pursuant to a foreclosure.

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Defendant Queen Funding is an MCA company controlled by Klein that provides funds to small businesses through MCA agreements. Between November 2017 and November 2018, the parties here entered into seven MCA Agreements (the “Merchant Agreements”). Under each Merchant Agreement, Queen Funding purported to purchase a portion of Plaintiffs' receivables in exchange for up-front payments to FTE. The Merchant Agreements specify a purchase price to be paid by Queen Funding, a dollar amount of receivables purchased, the percentage of the merchant's total receivables that the purchase purportedly represents and a daily payment amount to be paid by FTE. FTE's daily payment was debited directly from an FTE bank account. The daily payment amount purported to be a “good-faith estimate of the percentage of receivables purchased” for that month, which in each Merchant Agreement was 13%, regardless of the amount actually purchased. Under the Merchant Agreements, Queen Funding advanced FTE approximately $6,500,000 in cash but collected about $10,500,000 in daily payments during a two-year period. Each Merchant Agreement had an effective annual interest rate between 100% and 300%.

For example, under the parties' first Merchant Agreement, Queen Funding purchased $149,900 of FTE's receivables for a purchase price of $100,000. Queen Funding actually advanced $95,000 to FTE, which was the purchase price less a fee of $5,000. The amount of receivables purchased purportedly represented 13% of FTE's total receivables, resulting in a daily payment by FTE of $4,999 to be paid over six weeks. FTE's payments in this first Merchant Agreement had an equivalent effective annual interest rate of 300% per annum.

The Merchant Agreements include provisions that grant Defendants the irrevocable right to withdraw money directly from FTE's bank accounts -- including collecting checks and signing invoices in FTE's name -- and that prohibit FTE from transferring, moving or selling the

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business or any assets without permission from Defendants. The Merchant Agreements also contain numerous default and remedy provisions. One of these states that an “Event of Default” occurs when “the attempted ACH debit of the [daily payment amount] is rejected two times during the term of [the] Agreement and Merchant does not contact [Queen Funding] in advance of the ACH debit being rejected.” The “Protections against Default” provision states that, upon any of the several events of default listed, “the full uncollected Purchase Amount plus all fees due under this Agreement and the attached Security Agreement become due and payable in full immediately.” The Merchant Agreements also allow Defendants to collect on the personal guaranty by the borrower's individual owners if Plaintiffs are unable to pay or are bankrupt.

II. LEGAL STANDARD FOR MOTION TO DISMISS

On a motion to dismiss, a court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving party but does not consider “conclusory allegations or legal conclusions couched as factual allegations.” Dixon v. von Blanckensee, 994 F.3d 95, 101 (2d Cir. 2021) (internal quotation marks omitted). To withstand 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.'” Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 854 (2d Cir. 2021) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678; accord Dane v. UnitedHealthcare Ins. Co., 974 F.3d 183, 189 (2d Cir. 2020). It is not enough for a plaintiff to allege facts that are consistent with liability; the complaint must “nudge[] [plaintiff's] claims across the line from conceivable to plausible.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); accord Bensch v. Est. of Umar, 2 F.4th 70, 80 (2d Cir. 2021). To survive dismissal, “plaintiffs must provide the grounds upon which [their]

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claim rests through factual allegations sufficient to raise a right to relief above the speculative level.” Rich v. Fox News Network, LLC, 939 F.3d 112, 121 (2d Cir. 2019) (alteration in original) (internal quotation marks omitted).

III. DISCUSSION

A. RICO Legal Standard

To state a civil RICO claim under 18 U.S.C. § 1964, a complaint must plead (1) “that the individual defendants committed a substantive RICO violation” and (2) “that the violation proximately caused an injury to [the plaintiffs'] business or property.” NRP Holdings LLC v. City of Buffalo, 916 F.3d 177, 196 (2d Cir. 2019); see also 18 U.S.C. § 1964(c) (providing a private right of action for persons injured “by reason of” a substantive RICO violation).

To plead a substantive RICO violation, a complaint must allege that the defendant engaged in “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity” or “through . . . collection of unlawful debt.” 18 U.S.C. § 1962(c); Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 n.1 (2d Cir. 2013) (quoting DeFalco v. Bernas, 244 F.3d 286, 306 (2d Cir. 2001)); Sonterra Cap. Master Fund, Ltd. v. Barclays Bank PLC, 366 F.Supp.3d 516, 554 (S.D.N.Y. 2018). “Racketeering activity,” for purposes of RICO, includes “any ‘act' indictable under various specified federal statutes, including the mail and wire fraud statutes ....” Kim v. Kimm, 884 F.3d 98, 103 (2d Cir. 2018) (citing 18 U.S.C. § 1961(1)). A RICO claim must allege every essential element of each predicate act. See, e.g., Lundy v. Cath. Health Sys. of Long Island Inc., 711 F.3d 106, 119 (2d Cir. 2013) (dismissing a RICO claim where the complaint failed to plead predicate acts of mail fraud with particularity).

Conspiracy to violate § 1962(c) is also actionable under § 1964. See 18 U.S.C. §§ 1962(d), 1964. To state a RICO conspiracy, a plaintiff must allege “the existence of an

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agreement to violate RICO's substantive provisions.” Williams v. Affinion Grp., LLC, 889 F.3d 116, 124 (2d Cir. 2018) (internal quotation marks omitted). If a complaint fails to state a substantive RICO claim, it also does not state a claim for RICO conspiracy. See Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128 (1998); Nygard v. Bacon, No. 19 Civ. 1559, 2021 WL 3721347 at *3 (S.D.N.Y. Aug. 20, 2021). The Complaint alleges a violation of RICO and a RICO conspiracy under two independent theories of (1) a pattern of racketeering activity based on wire fraud and (2) the collection of unlawful debt.

B. Pattern of Racketeering Activity -- Wire Fraud

1. Wire Fraud

Defendants argue that the Complaint fails to plead with particularity a RICO predicate act of wire fraud. This argument is incorrect; the Complaint pleads wire fraud with particularity.

Under RICO, wire fraud is one of the predicate offenses that constitute “racketeering activity.” 18 U.S.C. 1961(1). “The essential elements of [mail and wire fraud] are (1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of [interstate] mails or wires to further the scheme.” United States v. Weaver, 860 F.3d 90, 94 (2d Cir. 2017) (internal quotation marks omitted) (second alteration added); see 18 U.S.C. § 1343. Where an alleged predicate act sounds in fraud, such as wire fraud, the plaintiff “must state with particularity the circumstances constituting fraud or mistake.” Lundy, 711 F.3d at 119 (regarding pleading standard for predicate act of mail fraud for RICO claim) (quoting Fed.R.Civ.P. 9(b)); accord Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., 531 F.Supp.3d 673, 726 (S.D.N.Y. Mar. 31, 2021). “The complaint must detail the specific statements that are false or fraudulent, identify the speaker, state when and where the statements were made, and explain why the

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statements were fraudulent.” Williams, 889 F.3d at 124. “Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b); see Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204, 212 (2d Cir. 2020).

The Complaint alleges facts with sufficient particularity for the underlying wire fraud claim. The Complaint alleges that the seven Merchant Agreements contain the following false statements: “(1) the transaction is not a loan, (2) the daily payment is a good-faith estimate of the merchant's receivables, (3) the...