NRO Bos. LLC v. Yellowstone Capital LLC

• Decision Date: 09 April 2021
• Docket Number: 037005/2019
• Citation: 147 N.Y.S.3d 375,72 Misc.3d 267
• Parties: NRO BOSTON LLC, NRO Edgartown LLC, Jason Indelicato and Alice Indelicato, individually and on behalf of all those similarly situated, Plaintiffs, v. YELLOWSTONE CAPITAL LLC, David Glass, Yitzhak Stern, and The John and Jane Doe Investors, Defendants.
• Court: New York Supreme Court

72 Misc.3d 267

147 N.Y.S.3d 375

NRO BOSTON LLC, NRO Edgartown LLC, Jason Indelicato and Alice Indelicato, individually and on behalf of all those similarly situated, Plaintiffs,

v.YELLOWSTONE CAPITAL LLC, David Glass, Yitzhak Stern, and The John and Jane Doe Investors, Defendants.

037005/2019

Supreme Court, Rockland County, New York.

Decided on April 9, 2021

White & Williams LLP on behalf of Plaintiffs.

Proskauer Rose LLP on behalf of Defendant Yellowstone Capital LLC.

Wells & Mendelberg PLLC on behalf of Defendant David Glass.

Stein Adler Dabah & Zeikowitz LLP on behalf of Defendant Yitzhak Stern

DECISION AND ORDER

Robert M. Berliner, J.

It is ORDERED that defendants' respective motions for summary judgment and plaintiffs' motion seeking leave to file their first amended complaint pursuant to CPLR 3025 (b) are disposed of as follows:

This action arises out of nine merchant cash advance agreements ("MCA Agreements") between Plaintiffs NRO Boston LLC and NRO Edgartown LLC (collectively "NRO entities") and Defendant Yellowstone Capital, LLC ("Yellowstone"). The MCA Agreements contemplate that the NRO entities sell their future business receivables at a specific purchase amount to Yellowstone in return for an upfront sum. The MCA Agreements contemplated that 10-15% of NRO's daily revenue was to be withdrawn and deposited into a bank account until Yellowstone received the agreed upon purchase amount. From February 2016 to July 2016, NRO Boston entered into five of these MCA Agreements with Yellowstone, while NRO Edgartown entered into four of the same. Jason Indelicato and Alice Indelicato, the owners of the NRO entities, personally guaranteed the MCA Agreements. When the NRO entities defaulted on the payments to Yellowstone, Yellowstone filed affidavits of confessions of judgments in this Court against both NRO entities and the Indelicatos. Thereafter, the Rockland County Clerk entered two judgments by confession, which amounted to a combined total of over $1.6 million ("Judgments by Confession").

On December 13, 2019, the NRO entities and the Indelicatos (collectively, "Plaintiffs") filed this Complaint against Yellowstone, Yellowstone's co-founder David Glass and CEO Yitzhak Stern, and various Jane and John Doe Investors. In their Complaint, Plaintiffs allege violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the Massachusetts Consumer Protection Statute. Additionally, the Complaint seeks to vacate the Judgments by Confession, pursuant to CPLR § 5015.

By Decision and Order dated September 29, 2020, this Court granted in part and denied in part all the named Defendants' respective motions to dismiss Plaintiffs' Complaint. The Court dismissed the two RICO causes of action against all Defendants due to Plaintiffs' failure to adequately plead a RICO person distinct from a RICO enterprise. Meanwhile, the claims against all Defendants for violation of Massachusetts Consumer Protection Statute remained, as well as the claim sounding in vacatur of the Judgments by Confession pursuant to CPLR § 5015(a)(3) as against Defendant Yellowstone. Now, before the Court are Defendants' respective motions for summary judgment and Plaintiffs' motion seeking leave to file their First Amended Complaint. The Court addresses all four motions herein because the relief sought among the parties' applications are intertwined. First, the Court addresses Plaintiffs' motion because the determination thereof impacts the arguments raised in Defendants' motions.

I. Plaintiffs' Motion for Leave to File an Amended Complaint Pursuant to CPLR § 3025(b)

In their motion, Plaintiffs seek leave to file their First Amended Complaint, which seeks to assert violations of RICO and vacatur of the Judgments by Confession pursuant to CPLR 5015(a)(3). The substantive changes in the Proposed Amended Complaint from the original Complaint pertain to the distinctness requirement between the RICO person and RICO enterprise. All named Defendants oppose Plaintiffs' motion for the following reasons: (1) Plaintiffs' RICO causes of action fail to meet the distinctness requirement; (2) Plaintiffs' RICO causes of action fail to adequately plead injury so as to confer standing upon Plaintiffs; (3) Plaintiffs' Proposed Amended Complaint prejudices and surprises the parties; (4) Plaintiffs' class allegations must fail as they failed to timely move for class action certification pursuant to CPLR § 902 ; (5) the Indelicato Plaintiffs do not have standing to assert violations of RICO as shareholders; and (6) Plaintiffs' failure to include a redlined version of their Proposed Amended Complaint is fatal to their motion. Now, the Court addresses whether Plaintiffs' Proposed Amended Complaint prejudices or surprises the Defendants.

A. Whether Plaintiffs' Proposed Amended Complaint Prejudices or Surprise the Defendants

"Leave to amend a pleading should be freely given (see CPLR 3025[b] ), provided the amendment is not palpably insufficient, does not prejudice or surprise the opposing party, and is not patently devoid of merit." Douglas Elliman, LLC v. Bergere , 98 A.D.3d 642, 949 N.Y.S.2d 766 [2d Dept. 2012] [internal citations and quotations omitted]. It is within the Court's "broad discretion" whether to grant leave to amend. Tarek Youssef Hassan Saleh v. 5th Ave. Kings Fruit & Vegetables Corp. , 92 A.D.3d 749, 750, 939 N.Y.S.2d 102 [2d Dept. 2012]. "The defendants cannot legitimately claim surprise or prejudice, where the proposed amendments were premised upon the same facts, transactions or occurrences alleged in the original complaint." Janssen v. Incorporated Vil. of Rockville Ctr. , 59 A.D.3d 15, 27-28, 869 N.Y.S.2d 572 [2d Dept. 2008] [internal citations omitted].

Here, Defendants failed to meet their burden that there is prejudice or surprise to warrant denial of Plaintiffs' motion for leave to amend their Complaint. Indeed, Plaintiffs' causes of action in their Proposed Amended Complaint are based upon the same set of facts and transactions alleged in the original Complaint. Also, the parties are still in the early stages of discovery and no note of issue has been filed. The Court notes that although Plaintiffs did not file this motion until approximately three months after this Court dismissed Plaintiffs' RICO causes of action, this delay alone does not rise a level of prejudice to warrant denial of Plaintiffs' motion. Next, the Court determines whether the Proposed Amended Complaint is palpably insufficient or patently devoid of merit.

B. Whether Plaintiffs' Complaint Is Palpably Insufficient or Devoid of Merit

"To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statute, 18 U.S.C. § 1962 ; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962." DeFalco v. Bernas , 244 F.3d 286, 305 [2d Cir. 2001] [internal citations omitted]. "To establish a violation of § 1962(c), in turn, a plaintiff must show that a person engaged in (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Cruz v. FXDirectDealer , LLC, 720 F.3d 115, 120 [2d Cir. 2013] [internal citations omitted]. The U.S. Court of Appeals for the Second Circuit has stated:

"We have made clear that, by virtue of the distinctness requirement, a corporate entity may not be both the RICO person and the RICO enterprise under section 1962(c). Id. This does not foreclose the possibility of a corporate entity being held liable as a defendant under section 1962(c) where it associates with others to form an enterprise that is sufficiently distinct from itself. In this regard we have noted that a section 1962(c) claim may be sustained where there is only a partial overlap between the RICO person and the RICO enterprise, Jacobson v. Cooper , 882 F.2d 717, 720 (2d Cir. 1989), and that a defendant may be a ‘RICO "person" and one of a number of members of the RICO "enterprise,’ " Cullen v. Margiotta , 811 F.2d 698, 730 (2d Cir.), cert. denied , 483 U.S. 1021 [107 S.Ct. 3266, 97 L.Ed.2d 764] (1987)."

Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A. , 30 F.3d 339, 344 [2d Cir. 1994] ; see also U1IT4Less, Inc. v. Fedex Corp. , 871 F.3d 199 [2d Cir. 2017]. In Riverwoods , the Second Circuit found that a corporate entity cannot be both a RICO person and RICO enterprise where a corporation associates with itself and its employees to form an enterprise. Meanwhile, the U.S. Supreme Court has distinguished the factual allegations in Riverwoods from cases where a natural person is alleged to be a RICO person:

"This case concerns a claim that a corporate employee is the ‘person’ and the corporation is the ‘enterprise.’ It is natural to speak of a corporate employee as a ‘person employed by’ the corporation. § 1962(c). The earlier Second Circuit precedent concerned a claim that a corporation was the ‘person’ and the corporation, together with all its employees and agents, were the ‘enterprise.’ See Riverwoods Chappaqua Corp. v. Marine Midland Bank, N. A. , 30 F.3d 339, 344 ([2d Cir.] 1994) (affirming dismissal of complaint) ... And the Second Circuit's other precedent also involved significantly different allegations compared with the instant case ... We do not here consider the merits of these cases, and note only their distinction from the instant case."

Cedric Kushner Promotions, Ltd. v. King , 533 U.S. 158, 121 S.Ct. 2087, 150 L.Ed.2d 198 [2001]. There, the U.S. Supreme Court found that a complaint meets the distinctness requirement when it alleges a natural person as the RICO person and the corporation as a RICO enterprise. Id. "A corporate employee who conducts the corporation's affairs through an unlawful RICO pattern of activity uses that corporation as a vehicle whether he is, or is not, its sole owner." Id. at 164-65, 121 S.Ct. 2087 [internal citations and quotation marks omitted]. As the U.S. District Court for the Southern District of New York has interpreted it:

" Cedric Kushner asks courts to...