92 Palm Foods LLC v Fundamental Capital LLC

[*1] 92 Palm Foods LLC v Fundamental Capital LLC 2023 NY Slip Op 50960(U) Decided on September 11, 2023 Supreme Court, Suffolk County Hackeling, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 11, 2023
Supreme Court, Suffolk County

92 Palm Foods LLC and Sergio Tovar, Plaintiffs,

against

Fundamental Capital LLC, Defendant.



Index No. 617237/2022



PLAINTIFFS' ATTORNEYS:
Lurie Strupinsky, LLP
15 Warren Street, Suite 36
Hackensack, NJ 07601

DEFENDANT'S ATTORNEYS:
Ainsworth Gorkin PLLC
P.O. Box 605
New York, NY 10038
C. Stephen Hackeling, J.

Upon reading and filing defendant's notice of motion to dismiss and memorandum of law in support (NYSCEF Doc. Nos. 17 through 25), plaintiff's memorandum of law in opposition (NYSCEF Doc. No. 26) and all the pleadings and proceedings heretofore had herein, it is

ORDERED that motion sequence no. 002 is granted.

Factual Background

Fundamental Capital, LLC (hereinafter the "Purchaser") is in the business of merchant cash advance wherein it provides working capital to businesses in exchange for a percentage of their future account receivables. Plaintiffs commenced this action against the Purchaser for a declaratory judgment voiding the confession of judgment based upon, inter alia, coercion, criminal usury, and unconscionability.

The Purchaser, by a written Merchant Cash Advance Agreement dated June 28, 2022 (the "Merchant Agreement") purchased $906,130.40 of the future account receivables of 92 Palm Foods LLC (the "Merchant") for the sum of $638,120.00. In consideration of the payment, Sergio Tovar (the "Guarantor")(the "Purchaser" and "Guarantor" collectively referred to as the [*2]"Plaintiffs") simultaneously executed a Guaranty of Performance which provides, in part, that "the [Merchant] is not willing to enter into the [Merchant Agreement] unless Guarantor(s) irrevocably, absolutely and unconditionally guarantees prompt and complete performance to [the Merchant] entering into the Merchant Agreement." [NYSCEF Doc. No. 19].

A default in the Merchant Agreement allegedly occurred on July 13, 2022 and thereafter the Suffolk County Clerk recorded a $145,926.34 Judgment By Confession on August 16, 2022. Shortly thereafter, Plaintiffs commenced this action.

Defendant's Motion to Dismiss

Defendant filed its pre-answer motion to dismiss the case based upon the following arguments: (1) Confession of Judgment did not contain an Illegal Notarization; (2) Plaintiffs were not "coerced" into signing the Confession of Judgment; (3) the Merchant Agreement is not usurious; (4) the Merchant Agreement was not Unconscionable; and (5) Plaintiffs fail to state a cause of action for Injunctive relief. For the following reasons, Defendant's motion to dismiss is granted.

On a motion to dismiss under CPLR § 3211, "the pleading is to be afforded a liberal construction" and a court must "accept the facts as alleged in the complaint as true, accord plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." (Leon v Martinez, 84 NY2d 83, 87-88 [1994].) Under CPLR § 3211 (a)(1), the court must determine whether "the documents submitted conclusively establishes a defense to the asserted claims as a matter of law." (Id. at 88.)

Plaintiffs' first cause of action must be dismissed because,"[a]ny claimed deficiencies in the confession of judgment are not available to the judgment debtor (see, Giryluk v. Giryluk, 30 AD2d 22, 289 N.Y.S.2d 458, affd. 23 NY2d 894, 298 N.Y.S.2d 91; Magalhaes v. Magalhaes, 254 A.D. 880, 5 N.Y.S.2d 43). CPLR § 3218 is intended to protect creditors of a defendant from judgments entered on confession by collusion. Id. at 25. (see also 4 Weinstein-Korn-Miller, NY Civ. Prac., par. 3218.03.) But even if the Court considers Plaintiffs' arguments regarding the claimed deficiencies, they also fail.

The Alleged "Illegal Notarization"

Plaintiffs first cause of action must be dismissed because the Confession was properly notarized. Plaintiffs assert in their complaint that the Confession was not in compliance with NY CLS Exec. Law § 135(c) as it was made by a Virginia notary who was not located in New York State. This argument is unavailing for two reasons. First there is no evidence regarding Mr. Tovar's location at the time he signed the affidavit. Defendant's attorney's statement in a memorandum of law is insufficient. "Attorney affirmations that have no personal knowledge of the germane facts have no intrinsic evidentiary value." Morales v. Coram Materials Corp., 51 AD3d 86, 853 N.Y.S.2d 611 (2d Dept. 2008).

Second, the New York Validity of Foreign State Notarizations is governed by CPLR § 2309(c) which validates oaths taken outside New York. See Midfirst Bank v. Agho, 121 AD3d 343 (2nd Dept. 2014). The Court adopts the Purchaser's cited authority that the failure to obtain a "Certificate of Authority" with the Confession is not a fatal defect in the subject instance. See Williams v. Light, 196 AD3d 668 (2d Dept. 2021); Bank of New York v. Vytalingam, 144 AD3d 1070 (2d Dept. 2016).

Plaintiffs' other alleged inconsistencies with the Confession (interest rate, incorrect [*3]county, etc.) lack merit. "Although CPLR § 3218 calls for no more than a concise statement of the facts, there must be sufficient genuine detail to enable other creditors to investigate the claim and ascertain its validity. Because of the possibility of fraud, sufficient particularity to place the confessing debtor in jeopardy for perjury. The statute and its gloss do not require a procrustean dovetailing of detail. Such an overly meticulous reading would place in doubt all but the most exquisitely composed affidavits." Princeton Bank & Tr. Co. v. Berkley, 57 AD2d 348 (2d Dept. 1997). It is sufficient that there appears to be an honest recital of enough detail to permit a check of its genuineness and to simplify an investigation of the underlying facts. Errors of detail which are clearly not prejudicial and, as here, are minor, or are balanced by other details which correct them, should not have the devastating effect of invalidating the judgment. Id. at 354.

Coercion

Defendants next argue that Plaintiffs' second cause of action for coercion must be dismissed for failure to state a claim for relief. The Court agrees.

"A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will" (Austin Instrument v. Loral Corp., 29 NY2d 124, 130 [1971]). Generally, "the aggrieved party must demonstrate that threats of an unlawful act compelled his or her performance of an act which he or she had the legal right to abstain from performing" (Polito v. Polito, 121 AD2d 614, 615 [1986]; see Dubi v. Skiros Corp., 66 AD3d 954, 954 [2009]; Feuer v. Darkanot, 36 AD3d 753, 753-754 [2007]). "[T]he threat must be such as to deprive the party of the exercise of free will." (Polito v Polito, 121 AD2d at 615; see Stewart M. Muller Constr. Co. v. New York Tel. Co., 40 NY2d 955, 956 [1976]; Cavalli v. Cavalli, 226 AD2d 666, 667 [1996]). "Generalized contentions that a party felt pressured . . . are insufficient" (Cavalli v. Cavalli, 226 AD2d at 667; see Desantis v. Ariens Co., 17 AD3d 311, 311 [2005]).

Here, Plaintiffs make two allegations in this regard. First in paragraph 28 of the complaint they allege that "Defendant's agents applied high pressure tactics." Second, in paragraph 40 they allege "Defendants implicitly threatened unlawful acts." Plaintiffs' generalized contentions do not come close to the specific factual allegations needed to plead a cause of action for coercion. Plaintiffs fail to make an allegation containing the name of the individuals or of the "agent" that allegedly used pressure tactics. Plaintiffs own pleading admits that the threats were "implied" and they fail to specify the nature of the threatened "unlawful acts." For these reasons, Defendant's motion to dismiss the second cause of action is granted.

Criminal Usury and Unconscionability

Plaintiffs also assert that the Merchant Agreement was in reality a usurious loan disguised as a sale of fictitious, nonexistent accounts receivable and that the contractual agreement was unconscionable.

Both parties agree that "[u]sary laws apply only to loans or forbearances, not investments. If the transaction is not a loan, there can be no usury, however unconscionable the contract may be." Siedel v. 18 East 17th St. Owners, Inc., 79 NY2d 735, 744 (1992). Both parties also agree that the law requires the court to consider three questions to determine whether the agreement is a loan: "(1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy." LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 AD3d 664, 665 [*4](2d Dept. 2020). See also Principis Capital, LLC v. I Do, Inc., 201 AD3d 752 (2d Dept. 2022).

Reconciliation Provision in the Agreement

With respect to the first prong of the test enunciated in LG Funding, LLC, Defendant correctly references the Merchant Agreement at ¶ 1.18. The Court in LG Funding stated that "[f]actors a court should look for in an agreement to see if repayment is absolute or contingent include the existence of a reconciliation provision - which allows a merchant to seek an adjustment of the amounts taken from its account based on its cash flow - and an agreement without such a provision may be considered a loan." K9 Bytes, Inc. v. Arch Capital Funding, LLC, 56 Misc 3d 807, 57 N.Y.S.3d 625 (Sup. Ct. Westchester Cty. 2017).

Paragraph 1.18 of the Merchant Agreement, entitled "Adjustments to the Specific Daily Amount" clearly allows the Merchant to seek an adjustment of the amounts taken from the account. The Agreement States:

¶ 1.18.1 ..... Additionally, if Merchant has not defaulted under this Agreement, Merchant may request that [the Purchaser] reconcile Merchant's actual receipts and adjust the Specific Daily Amount so that the amount received by [the Purcharer in the future more closely represents the Specified Percentage.¶ 1.18 2. Merchant may request a reconciliation by sending [the Purchaser] a request in writing, including by email, and including a copy of Merchant's most recent bank statements or credit card statements (which statements shall also include the Merchant's bank account report showing transactions in the month to date). Upon receipt of a written reconciliation request from Merchant, FC may request any and all information from Merchant that [the Purchaser],in its sole judgment, believes is necessary to accurately reconcile the amount [the Purchaser] has received from Merchant with the actual Specified Percentage. [The Purchaser] shall not be required to adjust the Specific Daily Amount until such time as it has received all such requested information. After each adjustment made pursuant to this paragraph, the new dollar amount shall be deemed the Specific Daily Amount until any subsequent adjustment.

Here, the Court finds that the Merchant Agreement's express language does allows the Merchant to seek an adjustment of the amounts taken from its account based on its cash flow. As such, the first prong of the test set forth in LG Funding, LLC is satisfied.

Finite Term

With respect to the second prong of the test enunciated in LG Funding, LLC, the Merchant Agreement expressly provides at paragraph 1.8, entitled "Nature of Transaction" that:

Merchant is selling a portion of its future revenue stream and rights to payment to [the Purchaser] at a discount, on a nonrecourse basis, and is not borrowing money from [the Purchaser]. There is no interest rate or fixed payment schedule and no time period during which the Purchased Receipts must be collected, or Receipts Purchased Amount realized by [the Purchaser]. If future Receipts are remitted more slowly than [the Purchaser] may have anticipated or projected or if the full Receipts Purchased Amount is never received by [the Purchaser] due to adverse changes to or the termination of Merchant's business or otherwise, and Merchant has not breached this Agreement, Merchant would not owe anything to [the Purchaser] and would not be in breach of or default under this Agreement.

Viewing the Merchant Agreement as a whole, the court finds that it is not a loan repayable "absolutely." As it appears that the amount of the monthly payments could change upon a proper request and the Merchant Agreement is not a loan of finite duration, Defendant has established the second prong of the test set forth in LG Funding, LLC. (See also Unique Funding Solutions LLC v. A-Z Imports Exports LLC, 78 Misc 3d 1209(A), 183 N.Y.S.3d 727 (Sup. Ct. Nassau Cnty 2023) citing United Senior Props. of Olathe, LLC, 181 AD3d at 665-666)).

Recourse in the Event of Bankruptcy

The parties also disagree regarding the third prong of the test set forth in LG Funding, LLC that queries whether there is any recourse should the merchant files a bankruptcy petition. Here, Plaintiffs conflate the Merchant Agreement and the Confession. The third-prong of the test questions whether there is recourse should the merchant file bankruptcy - not whether the guarantor files bankruptcy. Plaintiffs cite to a provision in the Confession where the Guarantor agrees that any debt that the Guarantor might owe to the Merchant is non-dischargeable pursuant to Bankruptcy Code § 523(a)(2)(A) should the Guarantor file bankruptcy.[FN1] A review of the Merchant Agreement however reveals no representation regarding the Merchant filing for bankruptcy. In fact, the Agreement provides:

If future Receipts are remitted more slowly than [Purchaser] may have anticipated or projected or if the full Receipts Purchased Amount is never received by [Purchaser] due to adverse changes to or the termination of Merchants business or otherwise, and Merchant has not breached this Agreement, Merchant would not owe anything to [Purchaser] and would not be in breach of or default under this Agreement. [Purchaser] is buying the Purchased Receipts knowing the risks that Merchants business may not perform as expected or fail, and [Merchant] assumes these risks based on Merchant's representations, warranties and covenants in this Agreement.(emphasis added).

This provision in the Merchant Agreement contemplates a "termination of Merchant's business or otherwise" and directs that such business termination is not a breach. The Merchant Agreement's terms answers the third-prong; Purchaser has no recourse should the Merchant file bankruptcy (or go out of business).

Finally, Plaintiffs allege that the Merchant Agreement is unconscionable. Defendants however provide copies of four other merchant cash advance agreements to which Plaintiffs were a party.[FN2] As such, it appears to the court that Plaintiffs are sophisticated business people with prior experience with these types of agreements and cannot allege unconscionability of this agreement when it participated in four prior similar agreements.

Accordingly, the Court grants Defendant's motion to dismiss in its entirety for the reasons set forth above.

Dated: September 11, 2023
HON. C. STEPHEN HACKELING, J.S.C. Footnotes

Footnote 1:Even if the proper test was whether the Guarantor files a bankruptcy petition, such a provision is likely unenforceable. Parties are not free to contract around dischargeability of debt. "Non-dischargeability determinations under Bankruptcy Code § 523(a) are within the exclusive jurisdiction of bankruptcy courts." In re St. Laurent, 991 F.2d 672, 675 (11th Cir. 1993).

Footnote 2:According to the four agreements [NYSCEF Doc. No. 24], prior to entering into the Merchant Agreement, the Merchant sold $633,500 of its future receivables.