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FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018
NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019
"A"
EXHIBIT
FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018
NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019
SUPREME COURT OF THE STATE OF NEW YORK,
COUNTY OF NEW YORK
___---________--------------______________------------X
JAMES DAVIS II and MEDISALE, INC.,
Plaintiffs,
-against-
RICHMOND CAPITAL GROUP, LLC; INFLUX CAPITAL INDEX 656346/18
GROUP, LLC, a/k/a/ INFLUX CAPITAL, LLC; GTR SOURCE,
LLC; ADDY SOURCE, LLC; YES CAPITAL FUNDING
GROUP, LLC, d/b/a/ YES FUNDING SERVICES, LLC; AMENDED COMPLAINT
JONATHAN BRAUN; MICHELLE GREGG; TSVI REICH
a/k/a STEVE REICH; ROBERT GIARDINA; BRYAN BAKER
d/b/a BAKER CAP FUNDING d/b/a BAKER CAPITAL
FUNDING; REBAR CAPITAL, LLC; SPG ADVANCE, LLC;
AZRIEL INZELBUCH a/k/a DAVID B FRANK;
and TZVI DAVIS a/k/a STEVEN DAVIS,
Defendants.
PLEASE TAKE NOTICE that Plaintiffs hereby appear by Grimble &
LoGuidice, LLC, and complain of Defendants as follows:
INTRODUCTION
1. Plaintiffs own a small business.
2. Plaintiffs entered into a series of Merchant Cash Advance ("MCA") agreements
with Defendants.
3. In inducing Plaintiffs to enter into said agreements, Defendants engaged in
overreaching conduct, made misleading, false and fraudulent claims; collected sums in excess of
those agreed to;failed to account for excess sums collected; and sought and achieved an
unlawfully high return on minimal investment.
4. Defendants, acting in concert, induced Plaintiff to make early payoffs of funds
advanced, including the entire profit, based, in part, upon the time value of the funds advanced,
by make unlawful and false representations.
5. Defendants fraudulently inflated pay-off amounts of outstanding obligations.
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6. Defendants imposed charges that did not represent actual expenses incurred by
Defendants, which falsely represents that the expenses had been incurred.
7. Defendants acted in concert with regard to the tortious activity alleged
hereinbelow.
8. Defendants utilized and disseminated, without permissions, confidential financial
information including social security numbers and tax ID numbers, and other sensitive financial
information.
Plaintiffs'
9. Defendants misused access to the bank accounts and disseminated
Plaintiffs'
information obtained from bank accounts.
10. Upon information and belief, performed unlawful credit checks, in order to
further their unlawful schemes.
11. Said unlawful activity is,inter alia, in violation of the Racketeer Influenced and
Corrupt Organizations Act, ("RICO") statutes.
JURISDICTION
12. Jurisdiction is proper in the State of New York, County of New York, based upon
Defendants'
the residences, place of business, and transaction of business in New York.
PARTIES
13. Plaintiff MEDISALES, INC. ("MEDISALES") is a Florida corporation having
offices located at 10151 Deerwood Park, Bldg 200, Suite 250, Jacksonville Florida 32256
14. Plaintiff James Davis, II isthe principal of Medisales, and is a co-obligor on
Medisales'
confessions of judgment as alleged below, and a guarantor of payment as to
obligations to the MCA Defendants.
15. Defendant INFLUX CAPITAL GROUP, LLC ("Influx") is,upon information and
belief, a domestic limited liability company with offices at 111 John Street, New York, NY.
16. Defendant GTR SOURCE, LLC ("GTR"); is,upon information and belief, a New
Jersey limited liabilitycompany, licensed to do business in the State of New York, having a
principal place of business at 111 John Street, New York, NY.
17. Upon information and belief, GTR was first licensed to do business in New York,
on or about February 5, 2018.
18. Upon information and belief, GTR was formed on or about August 14, 2017.
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19. Upon information and belief, GTR also maintains an office at 1006 Monmouth
Avenue, Lakewood, NY 08701.
20. Defendant ADDY SOURCE, LLC ("ADDY") is,upon information and belief, a
New Jersey limited liability company formed on or about March 26, 2018.
21. Defendant SPG ADVANCE, LLC ("SPG") is, upon information and and belief, a
domestic limited liability company having a designated principal place of business as 1221
McDonald Street (Avenue?), Brooklyn, NY. 11230, and/or c/o Lazer Preizler-Burech Weinstock,
5306 New Utrecht Avenue, Brooklyn, NY 11219.
22. Upon information and belief, SPG uses the trade name/trademark $PG., without
any registration thereof.
23. Upon information and belief, SPG is also owned or controlled by Defendants
Braun, Reich and Davis.
24. Upon information and belief, SPG also maintains an office at 111 John Street,
New York, New York.
25. Defendant YES CAPITAL FUNDING GROUP, LLC, d/b/a/ YES FUNDING
SERVICES, LLC ("YFS") is,upon information and belief, a domestic limited liability company
having offices at 111 John Street, New York, NY.
26. RICHMOND CAPITAL GROUP, LLC ("RCG") is,upon information and belief,
a domestic limited liability company having offices at 111 John Street, New York, NY.
27. Upon information and belief, RCG was formed on or about August 25, 2013, by
Defendants Braun and Reich.
28. Upon information and belief, RCG uses the d/b/a Richmond Capital Group
without authority from the New York State Department of State, hiding its identity as a limited
liability company.
29. Upon information and belief, the use of the trade name YES FUNDING
SERVICES, LLC, by YSF is unlawful in that no such entity has been formed in any state of the
United States.
30. Defendant JONATHAN BRAUN ("Braun") is an individual residing at,39
Washington Ave Staten Island, NY 10314.
31 Upon information and belief, Braun maintains a principal place of business at 111
John Street, New York, NY.
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32. Defendant Braun's conduct of his various MCA businesses as well as his prior
"A."
criminal history is noted in the article annexed as Exhibit
33. Upon information and belief, based in part upon the news article recited below,
Braun is a convicted felon with ties to organized crime, who has, as alleged below, violated the
civil RICO statutes in collusion with the other named Defendants.
34. STEVE REICH a/k/a/ Tsvi Reich upon information and a co-
("Reich") is, belief,
owner and/or principal and/or partner of Influx, GTR, ADDY, SPG, RCG and YSF.
35. Upon information and belief, Reich maintains a place of business at 111 John
Street, New York, NY.
36. Defendant MICHELLE GREGG ("Gregg") is an individual who has executed
various fraudulent and false documents for court filings on behalf of the MCA companies
Defendants, and who is,upon information and belief, a partial owner of some or all of the
corporate Defendants.
37. Gregg has been held by Courts in this jurisdiction to filefalse affidavits in
connection with MCA agreement and associated judgments.
38. Upon information and belief, Gregg maintains a principal place of business at 111
John Street, New York, NY.
39. Upon information and belief, Gregg resides at 4415 43rd Avenue, Apartment N5,
Sunnyside, NY 11104.
40. ROBERT GIARDINA ("Giardina") is,upon information and belief, an individual
with a principal place of business at 111 John Street, New York, NY.
41. Giardina is,upon information and belief the managing partner of RCG, Influx,
GTR, Addy, and YCF, and share in the profits thereof.
42. Giardina has claimed to be the principal officer of RCG, although other
Defendants allege that Reich and Braun are the individuals in control.
43. BRIAN BAKER ("Baker") is,upon information and belief, an individual
employed by the corporatized Defendants, as an account manager, and who shares in other
Defendants illegal profits, as set forth more fully below.
44. Baker has an office at 111 John Street, New York, NY, which office is an office
in common with RCG, Braun, Reich, Davis, Influx, YFS, Addy, Girardina, and other
Defendants.
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45. Baker uses, without governmental authority or registration, the trade name Baker
Capital Funding and Bakercap Funding, which lattername is reflected in his email.
46. At alltimes relevant hereto, Baker held himself out as a funder for the
transactions alleged herein below, as an undisclosed agent of other Defendants,
47. REBAR CAPITAL, LLC ("Rebar"), is a New Jersey limited liability company
that is closely associated with Defendants Reich, Braun and Davis, and which has acted in
concert with said individual Defendants and their respective business entities as alleged below.
48. Defendants AZRIEL INZELBUCH a/k/a David B Frank ("Frank") is an owner or
partial owner, an individual having control of, and sharing the income and profits of Rebar.
49. Tzvi Davis a/k/a Steven Davis ("Davis") is an individual residing at 2201
Avenue M, Brooklyn, New York.
50. With regard to the allegations of this Complaint, SCF has acted, through Rebar,
Baker, Frank, Braun, and Reich as an undisclosed agent of Reich and Braun, and the various
business entities named as Defendants herein, as set forth more fully below.
FACTS COMMON TO ALL CLAIMS
The Nature of MCA Agreements
51. An MCA is a transaction whereby a funder agrees to advance funds to small
business entities ("merchants") in transactions that are structured as purchases of future
receivables to provide a short-term source of cash flow to small businesses, which would not
otherwise qualify for traditional financing.
52. Most jurisdictions consider MCA agreements to be factoring agreements, and not
loans, and therefore not subject to usury restrictions.
53. MCA funders provide short term financing that is often otherwise unavailable to
sm.all businesses.
54. However, the recent widespread abuses of MCA agreements have caused
increased scrutiny of the practice of underfunding and weaponizing of confessions of judgment.
55. The structure of the transaction should be simple. An MCA funding company
purchases a portion of the merchant's future receivables, at a discounted price.
52. Then, the funding company debits the merchant's account in an agreed upon
amount"
amount, either daily or weekly, until the "purchased of receivables are remitted to the
funding company.
53. These periodic payments are generally debited by the MCA funder via ACH
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transfer.
54. The amount of the periodic debit is calculated by the funding company's
underwriters. It isset up as a percentage (usually 8% to 15%) of the merchant's estimated
average daily or weekly receivables.
55. Accordingly, MCA agreements specify three specific dollar amounts: a) the
amount,"
"funded which is the amount that the merchant receives from the MCA funding
amount,"
company; b) the daily (or other periodic) payment amount; and c) the "purchased also
"RTR,"
called the which is the total amount that the MCA is to receive in return for advancing
the funded amount.
56. If there is a change in the merchant's business, the MCA Agreements generally
state that the merchant can request to adjust the periodic payment amount to more accurately
merchants'
reflect the intended percentage of the issues. This process is often referred to as
"reconciliation."
57. For legitimate and honest MCA companies, a reconciliation extends the duration
of the merchant's payment schedule, by reducing the periodic remittances.
58. If the merchant has been timely paying and requires additional funding, the MCA
funder may fund additional sums in a new agreement and roll over any sums stilldue under the
original agreement into the new agreement.
59. In this case, as set forth below, the process of rolling over prior balances was
perverted to generate more income for the corporate Defendants. Defendants inflated the
balances due under prior agreements, to increase what they receive from the merchant without
additional consideration.
60. Generally, merchants in need of MCA financing must fillout an application
containing personal and business confidential financial information, including such sensitive
items as social security number, birth date and address.
61. The application must also provide business tax returns, financial reports, and
business history. The application also usually contains names and contact information of
referrals and references, that are used to verify the principal's identity and merchant's business
history.
62. The application is often made through a broker, referred to as an individual sales
office ("ISO"), who then finds an MCA funder.
63. MCA funders may seek to merchants through in-house contractors or employees.
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64. The merchant's application gives the ISO a limited authority to divulge the
information contained therein to MCA funding companies, in order to obtain the best deal for the
merchant.
65. Once a funding company accepts the application from the ISO, the funding
company runs a credit check, to determine if itwants to enter into an MCA agreement with the
merchant.
66. MCA companies also require merchants to execute automated clearing house
("ACH") authorizations that let the MCA company withdraw funds from the merchant's account
upon the MCA company's direction.
67. These ACH payments authorizations are used to withdraw the daily payment
amounts.
68. In this action, the Defendants wrongfully took ACH payments to which the
Defendants were not entitled.
69. MCA agreements also require personal guaranties of the merchant's principal, in
this case, James Davis, II,are parties to the confession of judgment.
70. It has become common practice for MCA companies to require m.erchants to
execute a confession of judgment the MCA agreement.
71. The confession of judgment is m.eant to act as a surety and should only be filed
upon a default.
72. In order to file a confession of judgment, the funder must submit an affidavit on
personal knowledge of an agent of the funding company. This affidavit should set forth the
terms of the agreement, the amount funded, and the date of that funding, the amounts paid, and
the date and form of the merchant's defau.lt. The affidavit should be accompanied by a copy of
the MCA Agreement and, ideally, a payment ledger to corroborate the sworn statements of the
affidavit.
POTENTIAL ABUSE
73. There are serious opportunities for abuse and overreaching in MCA transactions.
74. The Defendants in this action, acting jointly and severally, engaged in unfair and
unconscionable practices concerning the MCA agreements alleged herein.
75. Plaintiff ceded a great deal of power and control of itsfinancial affairs to the
Defendants.
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76. Almost universally, and specifically in the transactions that are alleged in this
merchants'
action, an MCA company requires direct access to the bank accounts, enabling the
MCA to see what funds the merchant has, or had, and what the merchant's expenses and income
are.
77. This also enables the MCA company easily to note any pattern of daily ACH
transactions that would indicate funding by other MCA companies to the same merchant (a
"stacking"
practice called in the MCA industry)
78. The MCA company will have access to the Merchant's tax identification number
and social security number of itsprincipal, as well as dates of birth and other information
typically provided in regard to credit checks.
79. The daily payments that are made under an MCA agreement are ACH payments,
which are taken directly from the Merchant's bank account upon demand by the MCA company.
The Merchant, in effect, has to trust the MCA company not to take excessive ACH withdrawals.
80. The Merchant will execute a confession of judgment ("COJ") as security for the
payment of the obligations under the MCA agreement and the merchant relies on the MCA
company's good faith not to filethe COJ and get a judgment when there is no default or obtain a
judgment for more than the outstanding obligation.
81. Often the COJ form will contain provisions that are far harsher than the terms of
the MCA agreement itself,and will be used, upon default or even upon a false allegation of a
default where no default occurs, to extort large sums of money from merchants.
82. MCA agreements will have personal guarantees and the merchant's principal will
be on the COJ.
83. The MCA agreement obligations may also be secured by a UCC-1 filing.
84. This leaves the merchant and its principal, such as the Plaintiffs in this action,
open to unscrupulous MCA funders, like the Defendants.
85. The degree of control ceded to an MCA funder requires good faith on the part of
the funder, and abuses of COJs, UCC-1 filings, and ACH withdrawals can be devastating to the
merchant.
86. Other abuses of the MCA model include imposing exorbitant fees or expenses
which are not actually incurred, either deducting them from the financed amount, or simply
taking itfrom the merchant's bank account.
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87. In many cases, after the merchant has executed the MCA agreement and
accompanying documents, the MCA company funds less than promised by the MCA agreement,
springing unanticipated claims of expenses. In this case, that is the universal practice of
Defendants.
88. The amount of return to the MCA company is also frequently very high.
89. MCA companies can increase the already unconscionable charges to the merchant
"rollovers"
by seeking or refinancing part way through the payoff of an MCA agreement.
90. Typically, the refinancing includes a payoff by a second MCA agreement of the
entire amount due on the first MCA agreement, including the entire profit that was to be earned
"due"
by the MCA company over time; the amount is deducted from the amount actually paid to
the merchant.
91. This is equivalent to refinancing a house, but with the bank deducting not only the
principal owed, but all future interest, and deducting itfrom the loan proceeds at closing.
92. An additional scheme to shorten the payback period, and thus increase the MCA
company's rate of return, is to induce the merchant to pay off an existing MCA obligation,
including the future payments which represent, in part, profits not yet earned by the MCA
company, by dangling an offer of further financing in front of the Merchant, and then, after the
Merchant has signed the papers for the further financing, springing the requirement of the payoff
as a requirement to refinancing the actual funding.
93. This scheme is often done using related companies to make the illusory offer of
the new financing, as is the case herein.
94. This scheme was used by Defendants to obtain an early payoff of the agreement
with RCG, as alleged below.
95. MCA companies also frequently fail to provide an actual business address or
indicate the state of their incorporation, making any litigation against them difficult.
companies'
96. Often, MCA web pages give out no contact information other than an
"800"
telephone number.
97. In this action, these Defendants are a series of individuals and companies forming
effectively a single enterprise, and the entities credit payments to one another in a complicated
"owed,"
and almost indecipherable manners, so as to confuse the Plaintiff as to amounts actual in
order to trick and deceive Plaintiff out of funds that are not justified under the agreements that
exist, regardless of how such agreements are interpreted.
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98. Unscrupulous MCA financers, such as Defendants in this action, also engage in
courses of conduct often used by unscrupulous businesses, including: use of unregistered
assumed names and/or false trade names and/or personal aliases; failing to provide an address in
internet advertising or even on contracts, an actual street address, or even jurisdiction of
formation, or other information that is needed to determine how to serve process on the MCA
merchant; engaging in frequent name changes and/or business asset sales to hide assets from
creditors such as merchants who have been cheated; verbal misrepresentation of the terms of
agreements, which agreements are written in confusing language and printed in small type; and
engaging in abusive, offensive, overbearing and extortionate collection practices.
99. Many MCA companies use unregistered business names and/or omit indicators of
"Inc."
business form, such as "LLC,"and
FACTORING V. LOAN TRANSACTION_S
"loan,"
100. Courts have held that a factoring transaction is not a and therefore usury
statutes do not apply.
101. Such rulings have been made both as to traditional factoring and as to the future
receivables factoring of MCA compames.
102. In traditional factoring, the factor invests in specific, identifiable receivables, and
purchases them at a discount.
103. As an example, a dress manufacturer may make dresses for Macy's, and the sell
them to Macy's, with Macy's agreeing to pay at a later date when the dresses are sold at retail.
104. A traditional factor would buy the Macy's obligation at a discount.
105. In doing so, the factor not only accepts a delay in the return of the investment, but
also accepts the risk that Macy's will not be able to meet itsfuture obligation to pay for the
dresses.
106. Because the factor assumes the risk that Macy's will not be able to pay, the
factoring transaction is not a loan.
107. With MCA financing, there are no specified or identified receivables; the
payments to the MCA company come out of the future revenue stream, which is not yet earned.
108. This obviates the risk incurred by traditional factors; the only risk is thatthe
merchant will have insufficient funds, which is the normal risk incurred in a loan transaction.
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109. Courts have examined specific MCA agreements, on which many at issue in this
action are partially modeled, and noted that the MCA company is purportedly paid a fixed
percentage of the merchant's receivables, and therefore payment amounts may vary and there is
no fixed repayment term.
amount"
110. The Court will note that the usual MCA agreements set the "daily that is
taken from the merchant's bank account every business day as a percentage of receivables.
111. Courts have noted, with regard to historic MCA agreements, that the agreements
contain a provision for adjusting the daily payments to reflect changes in the amount of the
receivables, in a process called reconciliation.
112. A reputable MCA company will adjust the amounts collected and reduce the
amount if necessary, based upon reductions in the merchant's receivables and cash flow.
113. The efficacy of these reconciliation provisions in MCA agreements if the MCA
company does not reconcile voluntarily is open to question.
114. The rulings holding MCA transactions to be other than loans for the purposes of
usury statutes therefore hinges on the reconciliation provisions of MCA agreements, and not all
such agreements have the same terms in this regard.
115. In this action, the MCA Defendants increased ACH withdrawals despite there
being no increase in receivables, all without notice to the Plaintiff merchant.
BACKGROUND and BRIEF SUMMARY
OF THE AGREEMENTS
116. Plaintiff has used MCA funding prior to the events alleged in this action.
117. In one recent transaction, Plaintiff obtained MCA funding through a well-known
MCA company, Yellowstone Capital, LLC ("Yellowstone"), which is not a party to this action.
118. That agreement was funded through Yellowstone by Defendant Davis in early
July 2018.
119. As a part of the funding process, Davis obtained confidential and private
information from the Plaintiffs, including bank account information, social security and tax ID
numbers; financial reports and bank statements, and other data commonly used for credit checks
in loan transactions.
120. In October 2018, Plaintiffs sought additional funding and were informed by
Yellowstone that Davis was no longer in the same capacity at Yellowstone.
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121. Davis was approached as to funding for Plaintiffs, and, at that time indicated that
he would arrange funding through Influx.
122. This led to the MCA agreement with Influx, as alleged in detail below, and the
underpayment of funds alleged therein.
123. A littleless than two weeks later, Plaintiff was contacted by Baker, Reich and/or
Frank, offering to fund approximately another $200,000.00.
124. This offer lead to the firstAddy Source agreement alleged below.
125. Said Defendants represented that this funding was from the same source as the
Influx agreement.
126. In the course of the offer, Defendants sent Plaintiff the Influx MCA agreement
Plaintiffs'
alleged hereinbelow, which already head tax identification and social security
numbers inserted.
127. Upon information and belief, Davis provided these numbers and other
confidential information to Defendants in order to give Defendants information that would make
"sell"
iteasier for them to a further MCA agreement to Plaintiffs.
"backdooring"
128. This discourse, often made in exchange for payment, is called in
the MCA business.
129. In essence, upon information and belief, Davis sold Plaintiffs confidential
information or exchanged itfor a portion of the profits on a further MCA deal with Plaintiffs, all
without Plaintiff s knowledge or permission.
130. While the agreements purport to be legitimate business transactions, taken as a
whole, and in combination with the misconduct of the Defendants alleged herein, the agreements
and conduct are unconscionable.
131. Instead of acting as a legitimate funder to help merchants such as Plaintiffs out
with brief cash shortage issues, Defendants have designed and implemented a scheme to drive
merchants, such as Defendants, out of business and to utilize default and collection procedures to
strip Plaintiffs and other merchants of allassets and ability to continue in business.
132. Part of said course of conduct is to induce merchants, including the Plaintiffs, to
over-extend financing, while imposing hidden charges and wrongfully over collecting funds, so
as to induce a default and, upon the induced default, obtain judgments for greatly increased sums
through improper use of confessions of judgment.
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133. Defendants, particularly including Braun, Davis and Reich, have as a matter of
their business practices threatened to drive merchants out of business, as is set forth more fully in
the annexed article.
SPECIFIC AGREEMENTS
INFLUX AGREEMENT
134. Plaintiffs reallege all of the foregoing allegations.
135. Plaintiffs received an offer, through Rebar, and Baker d/b/a BakerCap, for MCA
funding to be supplied by Defendant Influx.
136. Plaintiffs accepted said offer.
137. Plaintiffs executed the MCA agreement and associated documents, which are
"B"
attached hereto as Exhibit (the "Influx Agreement").
..
LLC,"
138. Said Influx Agreement bears the name "Influx Capital, which is not a trade
name authorized for use by any Defendant, but is instead, a fictitious name used by Defendants
for the purposes of obfuscation.
139. Said agreement is dated October 4, 2018.
140. Plaintiffs executed documents, attached as part of said exhibit, permitting said
Defendant, though an independent ACH company (not a party to this action), to withdraw funds
Plaintiffs'
from bank account.
141. Upon execution of said authorization, the dates and amounts of withdrawals were
controlled by said Defendant and the ACH company, which said ACH company acted as said
Plaintiffs'
Defendant's agent, so long as there were sufficient funds in accounts.
142. Said Defendant also required the execution of a confession of judgment, which
"B."
was executed and is part of Exhibit
143. This Agreement calls for a funded amount
Preview
FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 "A" EXHIBIT FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK ___---________--------------______________------------X JAMES DAVIS II and MEDISALE, INC., Plaintiffs, -against- RICHMOND CAPITAL GROUP, LLC; INFLUX CAPITAL INDEX 656346/18 GROUP, LLC, a/k/a/ INFLUX CAPITAL, LLC; GTR SOURCE, LLC; ADDY SOURCE, LLC; YES CAPITAL FUNDING GROUP, LLC, d/b/a/ YES FUNDING SERVICES, LLC; AMENDED COMPLAINT JONATHAN BRAUN; MICHELLE GREGG; TSVI REICH a/k/a STEVE REICH; ROBERT GIARDINA; BRYAN BAKER d/b/a BAKER CAP FUNDING d/b/a BAKER CAPITAL FUNDING; REBAR CAPITAL, LLC; SPG ADVANCE, LLC; AZRIEL INZELBUCH a/k/a DAVID B FRANK; and TZVI DAVIS a/k/a STEVEN DAVIS, Defendants. PLEASE TAKE NOTICE that Plaintiffs hereby appear by Grimble & LoGuidice, LLC, and complain of Defendants as follows: INTRODUCTION 1. Plaintiffs own a small business. 2. Plaintiffs entered into a series of Merchant Cash Advance ("MCA") agreements with Defendants. 3. In inducing Plaintiffs to enter into said agreements, Defendants engaged in overreaching conduct, made misleading, false and fraudulent claims; collected sums in excess of those agreed to;failed to account for excess sums collected; and sought and achieved an unlawfully high return on minimal investment. 4. Defendants, acting in concert, induced Plaintiff to make early payoffs of funds advanced, including the entire profit, based, in part, upon the time value of the funds advanced, by make unlawful and false representations. 5. Defendants fraudulently inflated pay-off amounts of outstanding obligations. 1 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 6. Defendants imposed charges that did not represent actual expenses incurred by Defendants, which falsely represents that the expenses had been incurred. 7. Defendants acted in concert with regard to the tortious activity alleged hereinbelow. 8. Defendants utilized and disseminated, without permissions, confidential financial information including social security numbers and tax ID numbers, and other sensitive financial information. Plaintiffs' 9. Defendants misused access to the bank accounts and disseminated Plaintiffs' information obtained from bank accounts. 10. Upon information and belief, performed unlawful credit checks, in order to further their unlawful schemes. 11. Said unlawful activity is,inter alia, in violation of the Racketeer Influenced and Corrupt Organizations Act, ("RICO") statutes. JURISDICTION 12. Jurisdiction is proper in the State of New York, County of New York, based upon Defendants' the residences, place of business, and transaction of business in New York. PARTIES 13. Plaintiff MEDISALES, INC. ("MEDISALES") is a Florida corporation having offices located at 10151 Deerwood Park, Bldg 200, Suite 250, Jacksonville Florida 32256 14. Plaintiff James Davis, II isthe principal of Medisales, and is a co-obligor on Medisales' confessions of judgment as alleged below, and a guarantor of payment as to obligations to the MCA Defendants. 15. Defendant INFLUX CAPITAL GROUP, LLC ("Influx") is,upon information and belief, a domestic limited liability company with offices at 111 John Street, New York, NY. 16. Defendant GTR SOURCE, LLC ("GTR"); is,upon information and belief, a New Jersey limited liabilitycompany, licensed to do business in the State of New York, having a principal place of business at 111 John Street, New York, NY. 17. Upon information and belief, GTR was first licensed to do business in New York, on or about February 5, 2018. 18. Upon information and belief, GTR was formed on or about August 14, 2017. 2 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 19. Upon information and belief, GTR also maintains an office at 1006 Monmouth Avenue, Lakewood, NY 08701. 20. Defendant ADDY SOURCE, LLC ("ADDY") is,upon information and belief, a New Jersey limited liability company formed on or about March 26, 2018. 21. Defendant SPG ADVANCE, LLC ("SPG") is, upon information and and belief, a domestic limited liability company having a designated principal place of business as 1221 McDonald Street (Avenue?), Brooklyn, NY. 11230, and/or c/o Lazer Preizler-Burech Weinstock, 5306 New Utrecht Avenue, Brooklyn, NY 11219. 22. Upon information and belief, SPG uses the trade name/trademark $PG., without any registration thereof. 23. Upon information and belief, SPG is also owned or controlled by Defendants Braun, Reich and Davis. 24. Upon information and belief, SPG also maintains an office at 111 John Street, New York, New York. 25. Defendant YES CAPITAL FUNDING GROUP, LLC, d/b/a/ YES FUNDING SERVICES, LLC ("YFS") is,upon information and belief, a domestic limited liability company having offices at 111 John Street, New York, NY. 26. RICHMOND CAPITAL GROUP, LLC ("RCG") is,upon information and belief, a domestic limited liability company having offices at 111 John Street, New York, NY. 27. Upon information and belief, RCG was formed on or about August 25, 2013, by Defendants Braun and Reich. 28. Upon information and belief, RCG uses the d/b/a Richmond Capital Group without authority from the New York State Department of State, hiding its identity as a limited liability company. 29. Upon information and belief, the use of the trade name YES FUNDING SERVICES, LLC, by YSF is unlawful in that no such entity has been formed in any state of the United States. 30. Defendant JONATHAN BRAUN ("Braun") is an individual residing at,39 Washington Ave Staten Island, NY 10314. 31 Upon information and belief, Braun maintains a principal place of business at 111 John Street, New York, NY. 3 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 32. Defendant Braun's conduct of his various MCA businesses as well as his prior "A." criminal history is noted in the article annexed as Exhibit 33. Upon information and belief, based in part upon the news article recited below, Braun is a convicted felon with ties to organized crime, who has, as alleged below, violated the civil RICO statutes in collusion with the other named Defendants. 34. STEVE REICH a/k/a/ Tsvi Reich upon information and a co- ("Reich") is, belief, owner and/or principal and/or partner of Influx, GTR, ADDY, SPG, RCG and YSF. 35. Upon information and belief, Reich maintains a place of business at 111 John Street, New York, NY. 36. Defendant MICHELLE GREGG ("Gregg") is an individual who has executed various fraudulent and false documents for court filings on behalf of the MCA companies Defendants, and who is,upon information and belief, a partial owner of some or all of the corporate Defendants. 37. Gregg has been held by Courts in this jurisdiction to filefalse affidavits in connection with MCA agreement and associated judgments. 38. Upon information and belief, Gregg maintains a principal place of business at 111 John Street, New York, NY. 39. Upon information and belief, Gregg resides at 4415 43rd Avenue, Apartment N5, Sunnyside, NY 11104. 40. ROBERT GIARDINA ("Giardina") is,upon information and belief, an individual with a principal place of business at 111 John Street, New York, NY. 41. Giardina is,upon information and belief the managing partner of RCG, Influx, GTR, Addy, and YCF, and share in the profits thereof. 42. Giardina has claimed to be the principal officer of RCG, although other Defendants allege that Reich and Braun are the individuals in control. 43. BRIAN BAKER ("Baker") is,upon information and belief, an individual employed by the corporatized Defendants, as an account manager, and who shares in other Defendants illegal profits, as set forth more fully below. 44. Baker has an office at 111 John Street, New York, NY, which office is an office in common with RCG, Braun, Reich, Davis, Influx, YFS, Addy, Girardina, and other Defendants. 4 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 45. Baker uses, without governmental authority or registration, the trade name Baker Capital Funding and Bakercap Funding, which lattername is reflected in his email. 46. At alltimes relevant hereto, Baker held himself out as a funder for the transactions alleged herein below, as an undisclosed agent of other Defendants, 47. REBAR CAPITAL, LLC ("Rebar"), is a New Jersey limited liability company that is closely associated with Defendants Reich, Braun and Davis, and which has acted in concert with said individual Defendants and their respective business entities as alleged below. 48. Defendants AZRIEL INZELBUCH a/k/a David B Frank ("Frank") is an owner or partial owner, an individual having control of, and sharing the income and profits of Rebar. 49. Tzvi Davis a/k/a Steven Davis ("Davis") is an individual residing at 2201 Avenue M, Brooklyn, New York. 50. With regard to the allegations of this Complaint, SCF has acted, through Rebar, Baker, Frank, Braun, and Reich as an undisclosed agent of Reich and Braun, and the various business entities named as Defendants herein, as set forth more fully below. FACTS COMMON TO ALL CLAIMS The Nature of MCA Agreements 51. An MCA is a transaction whereby a funder agrees to advance funds to small business entities ("merchants") in transactions that are structured as purchases of future receivables to provide a short-term source of cash flow to small businesses, which would not otherwise qualify for traditional financing. 52. Most jurisdictions consider MCA agreements to be factoring agreements, and not loans, and therefore not subject to usury restrictions. 53. MCA funders provide short term financing that is often otherwise unavailable to sm.all businesses. 54. However, the recent widespread abuses of MCA agreements have caused increased scrutiny of the practice of underfunding and weaponizing of confessions of judgment. 55. The structure of the transaction should be simple. An MCA funding company purchases a portion of the merchant's future receivables, at a discounted price. 52. Then, the funding company debits the merchant's account in an agreed upon amount" amount, either daily or weekly, until the "purchased of receivables are remitted to the funding company. 53. These periodic payments are generally debited by the MCA funder via ACH 5 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 transfer. 54. The amount of the periodic debit is calculated by the funding company's underwriters. It isset up as a percentage (usually 8% to 15%) of the merchant's estimated average daily or weekly receivables. 55. Accordingly, MCA agreements specify three specific dollar amounts: a) the amount," "funded which is the amount that the merchant receives from the MCA funding amount," company; b) the daily (or other periodic) payment amount; and c) the "purchased also "RTR," called the which is the total amount that the MCA is to receive in return for advancing the funded amount. 56. If there is a change in the merchant's business, the MCA Agreements generally state that the merchant can request to adjust the periodic payment amount to more accurately merchants' reflect the intended percentage of the issues. This process is often referred to as "reconciliation." 57. For legitimate and honest MCA companies, a reconciliation extends the duration of the merchant's payment schedule, by reducing the periodic remittances. 58. If the merchant has been timely paying and requires additional funding, the MCA funder may fund additional sums in a new agreement and roll over any sums stilldue under the original agreement into the new agreement. 59. In this case, as set forth below, the process of rolling over prior balances was perverted to generate more income for the corporate Defendants. Defendants inflated the balances due under prior agreements, to increase what they receive from the merchant without additional consideration. 60. Generally, merchants in need of MCA financing must fillout an application containing personal and business confidential financial information, including such sensitive items as social security number, birth date and address. 61. The application must also provide business tax returns, financial reports, and business history. The application also usually contains names and contact information of referrals and references, that are used to verify the principal's identity and merchant's business history. 62. The application is often made through a broker, referred to as an individual sales office ("ISO"), who then finds an MCA funder. 63. MCA funders may seek to merchants through in-house contractors or employees. 6 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 64. The merchant's application gives the ISO a limited authority to divulge the information contained therein to MCA funding companies, in order to obtain the best deal for the merchant. 65. Once a funding company accepts the application from the ISO, the funding company runs a credit check, to determine if itwants to enter into an MCA agreement with the merchant. 66. MCA companies also require merchants to execute automated clearing house ("ACH") authorizations that let the MCA company withdraw funds from the merchant's account upon the MCA company's direction. 67. These ACH payments authorizations are used to withdraw the daily payment amounts. 68. In this action, the Defendants wrongfully took ACH payments to which the Defendants were not entitled. 69. MCA agreements also require personal guaranties of the merchant's principal, in this case, James Davis, II,are parties to the confession of judgment. 70. It has become common practice for MCA companies to require m.erchants to execute a confession of judgment the MCA agreement. 71. The confession of judgment is m.eant to act as a surety and should only be filed upon a default. 72. In order to file a confession of judgment, the funder must submit an affidavit on personal knowledge of an agent of the funding company. This affidavit should set forth the terms of the agreement, the amount funded, and the date of that funding, the amounts paid, and the date and form of the merchant's defau.lt. The affidavit should be accompanied by a copy of the MCA Agreement and, ideally, a payment ledger to corroborate the sworn statements of the affidavit. POTENTIAL ABUSE 73. There are serious opportunities for abuse and overreaching in MCA transactions. 74. The Defendants in this action, acting jointly and severally, engaged in unfair and unconscionable practices concerning the MCA agreements alleged herein. 75. Plaintiff ceded a great deal of power and control of itsfinancial affairs to the Defendants. 7 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 76. Almost universally, and specifically in the transactions that are alleged in this merchants' action, an MCA company requires direct access to the bank accounts, enabling the MCA to see what funds the merchant has, or had, and what the merchant's expenses and income are. 77. This also enables the MCA company easily to note any pattern of daily ACH transactions that would indicate funding by other MCA companies to the same merchant (a "stacking" practice called in the MCA industry) 78. The MCA company will have access to the Merchant's tax identification number and social security number of itsprincipal, as well as dates of birth and other information typically provided in regard to credit checks. 79. The daily payments that are made under an MCA agreement are ACH payments, which are taken directly from the Merchant's bank account upon demand by the MCA company. The Merchant, in effect, has to trust the MCA company not to take excessive ACH withdrawals. 80. The Merchant will execute a confession of judgment ("COJ") as security for the payment of the obligations under the MCA agreement and the merchant relies on the MCA company's good faith not to filethe COJ and get a judgment when there is no default or obtain a judgment for more than the outstanding obligation. 81. Often the COJ form will contain provisions that are far harsher than the terms of the MCA agreement itself,and will be used, upon default or even upon a false allegation of a default where no default occurs, to extort large sums of money from merchants. 82. MCA agreements will have personal guarantees and the merchant's principal will be on the COJ. 83. The MCA agreement obligations may also be secured by a UCC-1 filing. 84. This leaves the merchant and its principal, such as the Plaintiffs in this action, open to unscrupulous MCA funders, like the Defendants. 85. The degree of control ceded to an MCA funder requires good faith on the part of the funder, and abuses of COJs, UCC-1 filings, and ACH withdrawals can be devastating to the merchant. 86. Other abuses of the MCA model include imposing exorbitant fees or expenses which are not actually incurred, either deducting them from the financed amount, or simply taking itfrom the merchant's bank account. 8 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 87. In many cases, after the merchant has executed the MCA agreement and accompanying documents, the MCA company funds less than promised by the MCA agreement, springing unanticipated claims of expenses. In this case, that is the universal practice of Defendants. 88. The amount of return to the MCA company is also frequently very high. 89. MCA companies can increase the already unconscionable charges to the merchant "rollovers" by seeking or refinancing part way through the payoff of an MCA agreement. 90. Typically, the refinancing includes a payoff by a second MCA agreement of the entire amount due on the first MCA agreement, including the entire profit that was to be earned "due" by the MCA company over time; the amount is deducted from the amount actually paid to the merchant. 91. This is equivalent to refinancing a house, but with the bank deducting not only the principal owed, but all future interest, and deducting itfrom the loan proceeds at closing. 92. An additional scheme to shorten the payback period, and thus increase the MCA company's rate of return, is to induce the merchant to pay off an existing MCA obligation, including the future payments which represent, in part, profits not yet earned by the MCA company, by dangling an offer of further financing in front of the Merchant, and then, after the Merchant has signed the papers for the further financing, springing the requirement of the payoff as a requirement to refinancing the actual funding. 93. This scheme is often done using related companies to make the illusory offer of the new financing, as is the case herein. 94. This scheme was used by Defendants to obtain an early payoff of the agreement with RCG, as alleged below. 95. MCA companies also frequently fail to provide an actual business address or indicate the state of their incorporation, making any litigation against them difficult. companies' 96. Often, MCA web pages give out no contact information other than an "800" telephone number. 97. In this action, these Defendants are a series of individuals and companies forming effectively a single enterprise, and the entities credit payments to one another in a complicated "owed," and almost indecipherable manners, so as to confuse the Plaintiff as to amounts actual in order to trick and deceive Plaintiff out of funds that are not justified under the agreements that exist, regardless of how such agreements are interpreted. 9 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 98. Unscrupulous MCA financers, such as Defendants in this action, also engage in courses of conduct often used by unscrupulous businesses, including: use of unregistered assumed names and/or false trade names and/or personal aliases; failing to provide an address in internet advertising or even on contracts, an actual street address, or even jurisdiction of formation, or other information that is needed to determine how to serve process on the MCA merchant; engaging in frequent name changes and/or business asset sales to hide assets from creditors such as merchants who have been cheated; verbal misrepresentation of the terms of agreements, which agreements are written in confusing language and printed in small type; and engaging in abusive, offensive, overbearing and extortionate collection practices. 99. Many MCA companies use unregistered business names and/or omit indicators of "Inc." business form, such as "LLC,"and FACTORING V. LOAN TRANSACTION_S "loan," 100. Courts have held that a factoring transaction is not a and therefore usury statutes do not apply. 101. Such rulings have been made both as to traditional factoring and as to the future receivables factoring of MCA compames. 102. In traditional factoring, the factor invests in specific, identifiable receivables, and purchases them at a discount. 103. As an example, a dress manufacturer may make dresses for Macy's, and the sell them to Macy's, with Macy's agreeing to pay at a later date when the dresses are sold at retail. 104. A traditional factor would buy the Macy's obligation at a discount. 105. In doing so, the factor not only accepts a delay in the return of the investment, but also accepts the risk that Macy's will not be able to meet itsfuture obligation to pay for the dresses. 106. Because the factor assumes the risk that Macy's will not be able to pay, the factoring transaction is not a loan. 107. With MCA financing, there are no specified or identified receivables; the payments to the MCA company come out of the future revenue stream, which is not yet earned. 108. This obviates the risk incurred by traditional factors; the only risk is thatthe merchant will have insufficient funds, which is the normal risk incurred in a loan transaction. 10 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 109. Courts have examined specific MCA agreements, on which many at issue in this action are partially modeled, and noted that the MCA company is purportedly paid a fixed percentage of the merchant's receivables, and therefore payment amounts may vary and there is no fixed repayment term. amount" 110. The Court will note that the usual MCA agreements set the "daily that is taken from the merchant's bank account every business day as a percentage of receivables. 111. Courts have noted, with regard to historic MCA agreements, that the agreements contain a provision for adjusting the daily payments to reflect changes in the amount of the receivables, in a process called reconciliation. 112. A reputable MCA company will adjust the amounts collected and reduce the amount if necessary, based upon reductions in the merchant's receivables and cash flow. 113. The efficacy of these reconciliation provisions in MCA agreements if the MCA company does not reconcile voluntarily is open to question. 114. The rulings holding MCA transactions to be other than loans for the purposes of usury statutes therefore hinges on the reconciliation provisions of MCA agreements, and not all such agreements have the same terms in this regard. 115. In this action, the MCA Defendants increased ACH withdrawals despite there being no increase in receivables, all without notice to the Plaintiff merchant. BACKGROUND and BRIEF SUMMARY OF THE AGREEMENTS 116. Plaintiff has used MCA funding prior to the events alleged in this action. 117. In one recent transaction, Plaintiff obtained MCA funding through a well-known MCA company, Yellowstone Capital, LLC ("Yellowstone"), which is not a party to this action. 118. That agreement was funded through Yellowstone by Defendant Davis in early July 2018. 119. As a part of the funding process, Davis obtained confidential and private information from the Plaintiffs, including bank account information, social security and tax ID numbers; financial reports and bank statements, and other data commonly used for credit checks in loan transactions. 120. In October 2018, Plaintiffs sought additional funding and were informed by Yellowstone that Davis was no longer in the same capacity at Yellowstone. 11 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 121. Davis was approached as to funding for Plaintiffs, and, at that time indicated that he would arrange funding through Influx. 122. This led to the MCA agreement with Influx, as alleged in detail below, and the underpayment of funds alleged therein. 123. A littleless than two weeks later, Plaintiff was contacted by Baker, Reich and/or Frank, offering to fund approximately another $200,000.00. 124. This offer lead to the firstAddy Source agreement alleged below. 125. Said Defendants represented that this funding was from the same source as the Influx agreement. 126. In the course of the offer, Defendants sent Plaintiff the Influx MCA agreement Plaintiffs' alleged hereinbelow, which already head tax identification and social security numbers inserted. 127. Upon information and belief, Davis provided these numbers and other confidential information to Defendants in order to give Defendants information that would make "sell" iteasier for them to a further MCA agreement to Plaintiffs. "backdooring" 128. This discourse, often made in exchange for payment, is called in the MCA business. 129. In essence, upon information and belief, Davis sold Plaintiffs confidential information or exchanged itfor a portion of the profits on a further MCA deal with Plaintiffs, all without Plaintiff s knowledge or permission. 130. While the agreements purport to be legitimate business transactions, taken as a whole, and in combination with the misconduct of the Defendants alleged herein, the agreements and conduct are unconscionable. 131. Instead of acting as a legitimate funder to help merchants such as Plaintiffs out with brief cash shortage issues, Defendants have designed and implemented a scheme to drive merchants, such as Defendants, out of business and to utilize default and collection procedures to strip Plaintiffs and other merchants of allassets and ability to continue in business. 132. Part of said course of conduct is to induce merchants, including the Plaintiffs, to over-extend financing, while imposing hidden charges and wrongfully over collecting funds, so as to induce a default and, upon the induced default, obtain judgments for greatly increased sums through improper use of confessions of judgment. 12 FILED: NEW YORK COUNTY CLERK 03/22/2019 05:59 PM INDEX NO. 656346/2018 NYSCEF DOC. NO. 155 RECEIVED NYSCEF: 03/22/2019 133. Defendants, particularly including Braun, Davis and Reich, have as a matter of their business practices threatened to drive merchants out of business, as is set forth more fully in the annexed article. SPECIFIC AGREEMENTS INFLUX AGREEMENT 134. Plaintiffs reallege all of the foregoing allegations. 135. Plaintiffs received an offer, through Rebar, and Baker d/b/a BakerCap, for MCA funding to be supplied by Defendant Influx. 136. Plaintiffs accepted said offer. 137. Plaintiffs executed the MCA agreement and associated documents, which are "B" attached hereto as Exhibit (the "Influx Agreement"). .. LLC," 138. Said Influx Agreement bears the name "Influx Capital, which is not a trade name authorized for use by any Defendant, but is instead, a fictitious name used by Defendants for the purposes of obfuscation. 139. Said agreement is dated October 4, 2018. 140. Plaintiffs executed documents, attached as part of said exhibit, permitting said Defendant, though an independent ACH company (not a party to this action), to withdraw funds Plaintiffs' from bank account. 141. Upon execution of said authorization, the dates and amounts of withdrawals were controlled by said Defendant and the ACH company, which said ACH company acted as said Plaintiffs' Defendant's agent, so long as there were sufficient funds in accounts. 142. Said Defendant also required the execution of a confession of judgment, which "B." was executed and is part of Exhibit 143. This Agreement calls for a funded amount