252 F. Supp. 3d 274
S.D.N.Y.2017Background
- Epazz (Illinois) and its principal Passley sold future receivables to TVT (a Delaware LLC) via three merchant cash advance agreements: Epazz received $600,000 upfront in exchange for $898,500 of "receipts purchased amounts," with TVT entitled to 15% of daily receipts until paid in full. Passley personally guaranteed performance.
- Agreements required Epazz to deposit receipts into a designated account from which TVT debited specific daily amounts; TVT was required to reconcile monthly so only 15% of actual daily receipts was owed, and reconciliation depended on Epazz providing bank statements.
- Colonial (servicing agent for TVT) sued in New York Supreme Court alleging Epazz stopped depositing receipts; defendants removed and filed counterclaims alleging the transactions were usurious loans, fraud, and other claims (RICO, rescission, unconscionability, breach of covenant).
- Defendants argued the deals were loans because the advance/repayment terms yielded an effective annual rate >25% (if repaid within months under fixed daily amounts). Plaintiffs/movants contended the agreements were purchases of receivables, not loans, so usury and related claims fail.
- The court considered contract language ("Purchase and Sale of Future Receivables" and contingency on future customer payments), reconciliation provisions, and caselaw, and granted motions to dismiss most counterclaims and to strike several affirmative defenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Criminal usury counterclaims (seeking affirmative relief) | Usury applies only as a defense; a corporation cannot bring civil claims under criminal usury statute. | Agreements are loans and payback results in >25% annual interest, so civil liability should follow criminal usury. | Dismissed: criminal usury is an affirmative defense only; corporations (and guarantors) cannot assert it as a claim for damages. |
| Overcharge-of-interest / whether transactions are loans | Transactions are sales of receivables (contingent on future receipts), not loans; reconciliation limits absolute repayment. | Fixed daily payments demonstrate likely repayment within months, producing usurious rates — thus loans. | Dismissed: transaction characterized as purchase; repayment is contingent on future receipts, so not a loan as a matter of law at pleading stage. |
| Fraudulent inducement / rescission / unilateral mistake | Statements calling the deals "loans" cannot support fraud because the written agreements unambiguously describe purchases; no plausible justifiable reliance or resulting injury. | Parties orally represented the transactions as loans and defendants relied on those representations to their detriment. | Dismissed: contract headings/terms preclude reasonable reliance; rescission fails for same reasons and unilateral mistake is barred by prejudice and negligence standard. |
| Unconscionability / prima facie tort / RICO / breach of covenant | Contract terms are enforceable; unconscionability cannot be asserted as affirmative relief; economic motives defeat prima facie tort; RICO allegations overstated. | Contracts are unconscionable; defendants were maliciously targeted for usurious gains; TVT prevented reconciliation and acted in bad faith. | Unconscionability claim (as counterclaim for relief) dismissed; prima facie tort and RICO dismissed; breach of covenant dismissed for lack of specific factual allegations that TVT denied reconciliations. |
Key Cases Cited
- Scantek Med. Inc. v. Sabella, 582 F. Supp. 2d 472 (S.D.N.Y.) (corporations may interpose criminal usury as a defense but cannot bring civil claims under criminal usury statute)
- Hammelburger v. Foursome Inn Corp., 54 N.Y.2d 580 (N.Y. 1981) (legislative history and limits on asserting usury in civil actions)
- Pasternack v. Lab. Corp. of Am. Holdings, 27 N.Y.3d 817 (N.Y. 2016) (elements of fraud require material misrepresentation, justifiable reliance, and injury)
- Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735 (N.Y. 1992) (no usury where transaction is not a loan; courts look to the transaction's real character)
- Twin Labs., Inc. v. Weider Health & Fitness, 900 F.2d 566 (2d Cir. 1990) (prima facie tort requires disinterested malevolence; profit motives negate claim)