NRO Boston LLC v Yellowstone Capital LLC

[*1] NRO Boston LLC v Yellowstone Capital LLC 2020 NY Slip Op 51103(U) Decided on September 29, 2020 Supreme Court, Rockland County Berliner, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 29, 2020
Supreme Court, Rockland County

NRO Boston LLC, NRO EDGARTOWN LLC, JASON INDELICATO and ALICE INDELICATO, individually and on behalf of all those similarly situated, Plaintiffs,

against

Yellowstone Capital LLC, DAVID GLASS, YITZHAK STERN, and THE JOHN AND JANE DOE INVESTORS, Defendants.



037005/2019



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
Robert M. Berliner, J.

The following papers, numbered 1 to 15, were read on Defendants' respective motions to dismiss Plaintiffs' Complaint:

Motion Sequence #1

Notice of Motion/Affidavit in Support/Memorandum of Law in Support/Exhibits(A-J) 1-3

Memorandum of Law in Opposition/Exhibits(1-4) 4

Memorandum of Law in Reply 5

Motion Sequence #2

Notice of Motion/Affirmation in Support/Memorandum of Law in Support/Exhibits(A-C) 6-8

Memorandum of Law in Opposition/Exhibits(1-4) 9

Memorandum of Law in Reply 10

Motion Sequence #3

Notice of Motion/Affidavit in Support/Memorandum of Law in Support 11-13

Memorandum of Law in Opposition/Exhibits(1-4) 14

Memorandum of Law in Reply 15

Upon the foregoing papers, it is ORDERED that these motions 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 The MCA Agreements contemplated that 10-15% of NRO's daily revenue was to be withdrawn and deposited into a bank account until Yellowstone received the agreed upon purchase amount. For example, on June 29, 2016, NRO agreed to sell $409,738.00 of its future business receivables to Yellowstone in return for an upfront sum of $270,000.00. The Agreement stated that 15% of NRO Boston's daily revenue was to be paid to Yellowstone until it received the purchase amount of $409,738.00. From February 2016 to July 2016, NRO Boston entered into five of these MCA Agreements with Yellowstone, while NRO Edgartown entered into four of 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 that all Defendants violated of 18 USC § 1962, also known as the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Specifically, Plaintiffs alleges that Defendants are liable under RICO because the MCA Agreements were actually loans charged at usurious rates. Additionally, Plaintiffs allege that all Defendants violated the Massachusetts Consumer Protection Statute. Moreover, Plaintiffs seek to vacate the Judgments by Confession against Defendant Yellowstone only, pursuant to CPLR § 5015.

Defendants Yellowstone, Stern, and Glass filed respective pre-answer motions to dismiss the Complaint. Plaintiffs filed one opposition addressing all three motions. Because of the similarity of Defendants' arguments, the Court addresses all three motions herein. First, the Court addresses whether to dismiss Plaintiffs' RICO causes of action.

I. RICO Causes of Action

Plaintiffs allege that Defendants violated section 1962(c) of RICO by associating with an enterprise and participating in the enterprise's affairs through collecting unlawful debt. Plaintiffs also allege that Defendants violated 1962(d) by conspiring to violate RICO. All three movants set forth various arguments that Plaintiffs' RICO claims should be dismissed for failure to state a claim and a defense stated in documentary evidence, pursuant to CPLR § 3211(a)(7) and CPLR § 3211(a)(1), respectively. Defendants Stern and Glass contend that Plaintiffs failed to state causes of action under RICO by failing to plead a RICO person and RICO enterprise. The Court first addresses this argument because it is dispositive of whether to dismiss the RICO causes of action.

Defendants Stern and Glass contend that the Complaint fails to allege how the actions of the alleged enterprise were distinct from Yellowstone's actions or how the enterprise was distinct from Yellowstone and its alleged officers, agents, subsidiaries, and employees. In opposition, Plaintiffs argue that the RICO enterprise consists of not only Yellowstone and a few of their employees or officers but also the John Doe and Jane Doe Investors ("the Investors") and non-party MCA Recovery LLC ("MCA Recovery"). They allege that the Investors and MCA Recovery are neither officers nor employees of Yellowstone, and therefore, the alleged enterprise consists of separate entities and individuals associated-in-fact for the common purpose of carrying on an ongoing criminal enterprise of collecting upon loans that charge interest at more than twice the enforceable rate.

"In determining a motion to dismiss pursuant to CPLR 3211(a)(7), the court must afford the pleading a liberal construction, accept the facts as alleged in the complaint as true, accord the plaintiff the benefit of every favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." Integrated Const. Services, Inc. v Scottsdale Ins. Co., 82 AD3d 1160, 1162 [2d Dept 2011][internal citations omitted]; Goshen v Mut. Life Ins. Co. of New York, 98 NY2d 314 [2002]; Bokhour v GTI Retail Holdings, Inc., 94 AD3d 682 [2d Dept 2012]. "In assessing a motion under CPLR 3211(a)(7), . . . a court may freely consider affidavits submitted by the plaintiff to remedy any defects in the complaint and 'the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one.'" Leon v Martinez, 84 NY2d 83, 88 [1994][internal citations omitted]; see CPLR §3026. "Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss." EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005].

"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 F3d 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 F3d 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 [*2]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 (1987)."

Riverwoods Chappaqua Corp. v Marine Midland Bank, N.A., 30 F3d 339, 344 [2d Cir 1994]; see also U1IT4Less, Inc. v FedEx Corp., 871 F3d 199 [2d Cir 2017]. "Whether a corporate defendant is distinct from an association-in-fact enterprise turns on whether the enterprise is more than the defendant carrying out its ordinary business through a unified corporate structure unrelated to the racketeering activity. . ." U1IT4Less, 871 F3d at 207 [internal citations omitted].

Here, Plaintiffs contend that the Complaint sufficiently alleges a RICO enterprise distinct from the RICO person Yellowstone because it alleges that the enterprise includes, in addition to Yellowstone and various officers and employees, the Investors and MCA Recovery. In the Complaint, Plaintiffs allege that Yellowstone is one of the largest merchant cash advance companies, who provides funds to small businesses in need, through instruments that are purported to be asset purchase agreements but are loans charged at usurious rates. Specifically, Yellowstone solicits borrowers, pools funds from the Investors to fund the MCA agreements, underwrites and enters into the agreements, collects the alleged unlawful debt, and directs MCA Recovery to obtain a judgment in Yellowstone's name and collect upon the debt. With respect to the Investors, the Complaint alleges that they:

"have been and continue to be responsible for providing Yellowstone with all or a portion of the pooled funds necessary to fund the usurious loans . . . and to approve and ratify the Enterprise's efforts to collect upon the unlawful debts by, among other things, approving early payoff terms, settlement agreements and other financial arrangements with borrowers to collect upon the unlawful debt."

Compl. ¶ 193. Additionally, it alleges that MCA Recovery provides legal services to the enterprise and collects upon the debt, by preparing affidavits of confessions of the borrowers and filing them with clerks of New York Courts. Plaintiffs also allege that Yellowstone has a partial ownership interest in MCA Recovery.

In reviewing the Complaint, the Court finds that the Complaint merely alleges that the Investors and MCA Recovery are agents within Yellowstone's corporate structure, such that it fails to allege that Yellowstone associates with others to form an enterprise sufficiently distinct from itself. In other words, the alleged actions of the Investors and MCA Recovery are part of Yellowstone's ordinary business of lending funds to small businesses at usurious rates and collecting on the debt when the businesses default on their payments. Although the Complaint alleges that MCA Recovery and the Investors maintain, books, records, and bank accounts independent of each other and Yellowstone, this is of no consequence. See In re GM LLC Ignition Switch Litig., 2016 US Dist LEXIS 92499, *135 [SD NY July 15, 2016, No. 14-MD-2543 (JMF); 14-MC-2543 (JMF)]["a corporation acting in concert and in the ordinary course of business with its agents and employees is not a RICO enterprise, whether or not the agents are external or internal to the corporation"]; Lynn v. McCormick, 2017 US Dist LEXIS 207543, *16, 2017 WL 6507112 [SDNY Dec. 18, 2017, No. 17-CV-1183 (CS)]["Plaintiffs here fail to state a claim against Trustco because the association-in-fact they allege is comprised of Trustco and its employees and agents conducting Trustco's corporate business of collecting on its judgments against Plaintiffs."]. Consequently, Plaintiffs failed to state a claim that the alleged RICO [*3]enterprise is distinct from the RICO person Yellowstone. While Plaintiffs cite to McNider in support of their contentions, this Court declines to follow that same reasoning on the distinctness issue. McNider Mar., LLC v Yellowstone Capital, LLC, 2019 NY Misc LEXIS 6165, *12 [Sup Court Erie County, Nov. 19, 2019]. Thus, the Court finds that Plaintiffs failed to state a claim for a violation of RICO pursuant to 18 USC § 1962(c).

Furthermore, Plaintiffs failed to state a cause of action based upon 18 USC § 1962(d), alleging conspiracy to violate RICO, because it is dependent upon their substantive RICO claim. See Grafstein v Schwartz, 78 AD3d 772, 773 [2d Dept 2010]; see also Knoll v Schectman, 275 Fed Appx 50, 51 [2d Cir 2008]. Based upon the foregoing, the Court dismisses Plaintiffs' civil RICO claims for failing to state a cause of action. Next, the Court addresses whether to dismiss Plaintiff's third cause of action, against Yellowstone only, seeking to vacate the Judgments by Confession.

II. Vacate Judgment Pursuant to CPLR § 5015

Plaintiffs' third cause of action seeks to vacate the Judgments by Confession entered against them by the Rockland County Clerk. Defendant Yellowstone alleges that Plaintiffs failed to state a cause of action under CPLR § 5015(a)(3) because the Complaint fails to allege any fraud, misrepresentation, or misconduct in obtaining the Judgments. In opposition, Plaintiffs allege, inter alia, that the Complaint alleges a criminal usury scheme in obtaining the Judgments, and thus sufficiently alleges misconduct by Yellowstone.[FN1]

Pursuant to CPLR § 5015(a)(3), the court may relieve an aggrieved party from a judgment based on the ground of fraud, misrepresentation, or other misconduct of an adverse party. "[T]hese factors are applicable to what has either occurred prior to the judgment or was the means by which the judgment was obtained." Nachman v Nachman, 274 AD2d 313, 314 [1st Dept 2000].

Here, Plaintiffs allege that Yellowstone implemented a business scheme of lending small businesses funds at usurious and unenforceable rates, while intentionally misrepresenting the nature of the transactions as merchant cash advance agreements. Plaintiffs further allege that as part of this business scheme, MCA Recovery "prepared an affidavit that intentionally misrepresented the nature of the transactions as sale receivables in order to induce the Clerk of the Supreme Court of New York, County of Rockland, to enter a judgment against Plaintiffs on account of the unlawful debt, which he did." Complaint ¶ 198. In New York, loans at usurious rates are void and unenforceable. See Hammelburger v Foursome Inn Corp., 54 NY2d 580 [1981]. As such, intentionally misrepresenting the nature of a legally void and unenforceable transaction, in order to obtain relief from the court to collect upon the unenforceable debt, may constitute misconduct under CPLR § 5015(a)(3). Accordingly, the Court finds that Plaintiffs have sufficiently plead conduct that would constitute fraud, misrepresentation, or other misconduct by an adverse party in obtaining the Judgments by Confession. Therefore, the Court denies the portion of Yellowstone's motion seeking to dismiss Plaintiffs' third cause of action for [*4]vacatur of the Judgments by Confession. Lastly, the Court considers whether to dismiss Plaintiffs' cause of action based upon Massachusetts State Law.

III. Cause of Action Pursuant to the Massachusetts Consumer Protection Statute

Plaintiffs allege that all Defendants violated Massachusetts General Laws, Chapter 93A, Sections 2 and 11, also known as the Consumer Protection Statute. It prohibits unfair or deceptive acts or practices that cause injury to residents of Massachusetts in the context of trade or business. Plaintiffs allege that they were injured through Defendants' unfair and deceptive practice of inducing them to enter into loan agreements at usurious rates, while intentionally disguising the true nature of the transaction. All Defendants seek to dismiss this cause of action against them based on various theories, which are addressed below. First, the Court will determine whether Plaintiffs may bring a cause of action under the law of the Commonwealth of Massachusetts.

A. Whether Massachusetts General Law Is Applicable

Defendants Yellowstone and Glass allege that the Massachusetts statute does not apply to the case at bar because the MCA Agreements provide that New York law governs the Agreements. While New York law indeed governs claims arising out of the Agreements, this cause of action under the Massachusetts Consumer Protection Act is one sounding in tort rather than breach of contract, and, therefore, is outside the scope of the choice of law provision. See Twinlab Corp. v Paulson, 283 AD2d 570, 571 [2d Dept 2001]; see also Plastic Surgery Assocs., S.C. v Cynosure, Inc., 407 F Supp 3d 59, 78 [D Mass 2019]["the Court concludes that the choice of law provision in the . . . purchase agreements does not apply to Plaintiffs' claims under Chapter 93A, § 11 because those claims sound in tort, rather than in contract, and therefore fall outside the provision's scope."]. Therefore, Plaintiffs are not precluded from bringing this cause of action. Next, the Court addresses whether Plaintiffs failed to state a cause of action based upon a violation of Mass. Gen. Law ch. 93A, § 11.

B. Whether Plaintiffs Failed to State A Cause of Action

Defendant Yellowstone alleges that Plaintiffs failed to state a cause of action under Mass. Gen. Law ch. 93A, § 11 by failing to allege (1) an injury and (2) an unfair or deceptive act or practice.

"A consumer alleging a 93A violation must establish (1) that the defendant has committed an unfair or deceptive act or practice; (2) injury; and (3) a causal connection between the injury suffered and the defendant's unfair or deceptive act. A practice is unfair if it falls within the penumbra of some common-law, statutory, or other established concept of unfairness; is immoral, unethical, oppressive, or unscrupulous; and causes substantial injury to other businessmen." Gould v Bank of NY Mellon, 123 F Supp 3d 197, 205 [D Mass 2015][internal citations omitted]. "To recover damages or attorney's fees under c. 93A, § 11, a plaintiff must show that he has suffered a loss of money or property, real or personal." Tech Plus, Inc. v Ansel, 59 Mass App Ct 12, 19 [2003][internal citations omitted].

Here, Plaintiffs indeed state a cause of action against all Defendants. They allege that [*5]Defendants, through their own individual acts contributing to Yellowstone's alleged business scheme, induced Plaintiffs to enter loans at usurious rates while intentionally disguising the true nature of the transaction. Such a practice may sufficiently constitute as a deceptive act or practice under 93A, as well as an unfair act. See Saturn Funding, LLC v NRO Boston, LLC, 2017 Mass Super LEXIS 3, *10 [Super Ct, Suffolk County Feb. 21 2017, No. SUCV201602523B]["This Court thus far finds irrefutable the defendants' position that a violation of G.L.c. 271, §49 (the usury statute of Massachusetts) would likely constitute a violation of G.L.c 93A, §2"]. Additionally, Plaintiffs sufficiently allege injury, as the Judgments by Confession were rendered against them, and pursuant to those Judgments, a demand and levy were executed in New York City, though all NRO's funds are held in Massachusetts.

In addition, Defendant Yellowstone alleges that Plaintiffs fail to state a cause of action because the alleged unfair or deceptive act depends upon Plaintiffs' theory that the agreements were usurious loans, an argument which fails because the agreements were indeed purchases of business receivables rather than loans. In order to determine whether a transaction was a loan subject to the laws of usury, such a finding "requires a close look at the details of the transaction." In re Burm, 554 BR 5, 17 [Bankr Court, ED Mass 2016]. Therefore, the Court declines to make such a determination at this juncture because it is too premature to do so as the Court is limited to its review of the papers as a motion to dismiss. Next, the Court addresses whether Plaintiffs sufficiently alleged facts against Defendants Stern for a violation of 93A.

C. Whether Plaintiffs Allege Sufficient Facts Against Defendant Stern

Defendant Stern alleges that Plaintiffs fail to allege any unfair or deceptive acts carried out by him that occurred substantially or primarily in Massachusetts. Stern also alleges that because a U.S. District Court for the District of Massachusetts issued an Order dismissing an action against him for lack of personal jurisdiction in a case that Plaintiffs filed against him and his co-Defendants, Plaintiffs are collaterally estopped from alleging that he engaged in conduct in Massachusetts.

A cause of action for a violation of Mass. Gen. Law chapter 93A, section 11 applies to unfair and deceptive acts or practices that "occurred primarily and substantially within the commonwealth." In determining whether to dismiss such a cause of action at the pleading stage, the Supreme Judicial Court of Massachusetts has stated:

"We conclude that the analysis required under § 11 should not be based on a test identified by any particular factor or factors because of a tendency to shift the focus of inquiry away from the purpose and scope of c. 93A. Section 11 suggests an approach in which a judge should, after making findings of fact, and after considering those findings in the context of the entire § 11 claim, determine whether the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth."

Kuwaiti Danish Computer Co. v Digital Equip. Corp., 438 Mass 459, 473 [2003][emphasis added]; see also Berklee College of Music, Inc. v Music Indus. Educators, Inc., 733 F Supp 2d 204, 213 [D Mass 2010]. "Due to the fact sensitivity of the primarily and substantially test, federal courts applying Chapter 93A have generally rejected motions to dismiss on this ground, [*6]so long as the complaint alleges that the plaintiff is located, and claims an injury in Massachusetts." Oliver Wyman, Inc. v Adam, 2016 US Dist LEXIS 130534, *42 [SD NY September 22, 2016, No. 15 Civ. 5305 (RJS)][internal citations omitted].

Here, Plaintiffs allege that the Indelicatos are residents of Massachusetts and that NRO Boston and NRO Edgartown are Massachusetts corporations, with their principle places of businesses located within Massachusetts. They further allege that after receiving Judgments by Confession entered by the Rockland County Clerk, on December 12, 2016, MCA Recovery "directed a New York City Marshal, Vadim Babarovich, to unlawfully serve a Levy and Demand on First Commons Bank despite knowing that any funds held by NRO were held at its local branch in Massachusetts." Complaint ¶ 199. Based upon the previously stated case law and the location of the Plaintiffs and their alleged injury, the Court declines to dismiss the Mass Gen Law ch. 93A claim as against Defendant Stern at this juncture. Furthermore, the Court is unpersuaded by Defendant Stern's argument that Plaintiffs are collaterally estopped from alleging that he had any contacts in Massachusetts due to the District Court's previous order. See Back Bay Farm, LLC v Collucio, 230 F Supp 2d 176, 188 [D Mass 2002]["the case law is clear that the personal jurisdiction inquiry is separate and distinct from the question of whether the allegedly deceptive acts occurred primarily and substantially within the commonwealth."].

Based upon the foregoing, the Court denies the portions of all moving Defendants' motions seeking to dismiss Plaintiffs' cause of action alleging violation of the Massachusetts Consumer Protection Act.

All arguments raised and materials submitted on this matter have been considered by the Court, notwithstanding the absence of specific reference thereto. All requests for relief not explicitly granted herein are denied, in the Court's discretion.

Based upon the foregoing it is

ORDERED that Plaintiffs' first cause of action alleging violation of 18 USC § 1962(c) is dismissed as against Defendants Yellowstone Capital, LLC, David Glass, and Yitzhak Stern; and it is further

ORDERED that Plaintiffs' second cause of action alleging violation of 18 USC § 1962(d) is dismissed as against Defendants Yellowstone Capital, LLC, David Glass, and Yitzhak Stern; and it is further

ORDERED that Defendants Yellowstone Capital, LLC, David Glass, and Yitzhak Stern file Answers within thirty (30) days of the date herein.

The foregoing constitutes the Decision and Order of the Court.

Dated: New City, New York

E N T E R

September 29, 2020

__________________________

HON. ROBERT M. BERLINER, J.S.C. Footnotes

Footnote 1:Defendant Stern and Defendant Glass seek to dismiss this cause of action. The Complaint, however, clearly states that the cause of action is as against Yellowstone only. Therefore, the Court will not review their arguments.