56 Misc. 3d 807
N.Y. Sup. Ct.2017Background
- Plaintiffs (several businesses) entered into merchant agreements in 2015–2016 with Arch Capital Funding, LLC and Cap Call, LLC: plaintiffs received cash up front in exchange for future receivables.
- Arch agreements: lent $166,000 total for $241,334 in receivables; agreements capped daily takings at 13–15% or a fixed daily amount; contained an express "reconciliation" on-demand provision and evergreen (auto‑renewing one‑year) terms.
- Cap Call agreement (Epazz): $120,000 advanced for $179,880 in receivables; capped at 15% or fixed daily amount; contained no reconciliation provision (Cap Call only reserved a right to view the bank account to calculate payments).
- Plaintiffs defaulted and sued, pleading 12 causes of action including usury claims, Licensed Lender Law violation, RICO counts, rescission/fraud, unconscionability, and prima facie tort.
- Defendants moved to dismiss; key legal question was whether the merchant agreements are loans (subject to usury and unlawful‑debt RICO liability) or purchases of receivables (not loans).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs can obtain affirmative usury relief (including vacatur of confessed judgments) | Usury applies because the agreements are loans; seek judgments and vacatur for usury/overcharge | Corporations cannot assert criminal usury affirmatively; transactions are not loans | Usury claims seeking affirmative relief dismissed as a matter of law for corporate plaintiffs; affirmative usury relief barred |
| Whether the merchant agreements are loans or purchases of receivables (affecting usury/RICO unlawful‑debt claims) | Agreements are loans in substance and thus subject to usury and unlawful‑debt RICO exposure | Agreements are contingent purchases of receivables (not loans); key terms (reconciliation, indefinite term) show contingency | Arch agreements (with reconciliation and indefinite term) are not loans as a matter of law; usury and related RICO claims against Arch dismissed. Cap Call agreement lacks reconciliation; cannot be resolved as non‑loan on motion |
| Validity of rescission/fraud claims based on alleged misrepresentation that transactions were loans | Plaintiffs were misled to believe they were taking loans and would not have entered purchase agreements | Agreements explicitly state they are "Merchant Agreement" and "Purchase and Sale of Future Receivables"; plaintiffs bound by signed documents | Rescission and fraudulent‑inducement claims dismissed: face of contracts and plaintiff’s ability to read them defeat misrepresentation theory |
| Whether unconscionability and prima facie tort claims are viable | Contract terms are unconscionable and defendants acted malevolently | Unconscionability is a defense, not a standalone claim; prima facie tort requires disinterested malevolence, which plaintiffs do not plead | Unconscionability claim dismissed as not a cause of action; prima facie tort dismissed for failure to allege disinterested malevolence |
| Applicability of Licensed Lender Law (Banking Law § 340) | Statute covers business/commercial loans of specified amounts so defendants violated it | Section applies only to entities engaged in making loans to individuals; defendants not alleged to make such loans | Licensed Lender Law claim dismissed: statute limited to lenders who make loans to individuals and plaintiffs did not plead that fact |
Key Cases Cited
- Malhado v. Cordani, 153 A.D.2d 673 (2d Dept) (plaintiff seeking to vacate confession of judgment must commence a plenary action)
- L.R. Dean, Inc. v. International Energy Resources, 213 A.D.2d 455 (2d Dept) (setting aside confession of judgment requires plenary action)
- Karsanow v. Kuehlewein, 232 A.D.2d 458 (2d Dept) (a party is charged with knowledge of clear contract terms it signed)
- Pimpinello v. Swift & Co., 253 N.Y. 159 (N.Y.) (signer bound by instrument even if they did not read it)
- Freihofer v. Hearst Corp., 65 N.Y.2d 135 (N.Y.) (elements and limits of prima facie tort)
- Burns Jackson Miller Summit & Spitzer v. Lindner, 59 N.Y.2d 314 (N.Y.) (prima facie tort requires disinterested malevolence)
- Seidel v. 18 E. 17th St. Owners, 79 N.Y.2d 735 (N.Y.) (usury statutes apply only to loans/forbearances, not investments)
- Giventer v. Arnow, 37 N.Y.2d 305 (N.Y.) (usury must be proved by clear and convincing evidence)
- Rubenstein v. Small, 273 App. Div. 102 (App. Div.) (for a true loan, repayment must be absolute or principal secured)
- Intima‑Eighteen, Inc. v. Schreiber Co., 172 A.D.2d 456 (1st Dept) (corporations may not use usury laws affirmatively to recover usurious premium)