Preview
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NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
PEOPLE OF THE STATE OF NEW YORK, by
LETITIA JAMES, Attorney General of the
State of New York,
Petitioners,
-against-
RICHMOND CAPITAL GROUP LLC, also
doing business as Ram Capital Funding and
MEMORANDUM OF LAW
Viceroy Capital Funding, and now known
IN SUPPORT OF THE
as RCG Advances LLC;
VERIFIED PETITION
RAM CAPITAL FUNDING LLC;
VICEROY CAPITAL FUNDING INC., also
doing business as Viceroy Capital Funding;
ROBERT GIARDINA, individually and as a
principal of RICHMOND CAPITAL GROUP Index No. ___________
LLC, RAM CAPITAL FUNDING LLC, and
VICEROY CAPITAL FUNDING INC.;
IAS Part ____________
JONATHAN BRAUN, also known as John
Braun, individually and as a principal of
RICHMOND CAPITAL GROUP LLC, RAM Assigned to Justice __________
CAPITAL FUNDING LLC, and VICEROY
CAPITAL FUNDING INC.;
TZVI REICH, also known as Steve Reich,
individually and as a principal of
RICHMOND CAPITAL GROUP LLC, RAM
CAPITAL FUNDING LLC, and VICEROY
CAPITAL FUNDING INC.; and
MICHELLE GREGG, individually and as a
principal of RICHMOND CAPITAL GROUP
LLC, RAM CAPITAL FUNDING LLC, and
VICEROY CAPITAL FUNDING INC.;
Respondents.
LETITIA JAMES
Attorney General of the State of New York
Attorney for Petitioners
28 Liberty Street, New York, New York 10005
Of Counsel:
JANE M. AZIA, Bureau Chief, Bureau of Consumer Frauds and Protection
LAURA J. LEVINE, Deputy Bureau Chief
JOHN P. FIGURA, Assistant Attorney General
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TABLE OF CONTENTS
STATEMENT OF FACTS ............................................................................................. 1
A. Respondents’ Business Model ............................................................................. 1
B. Respondents’ Deceptive and Unconscionable Business Practices .................... 5
C. Respondents Threaten and Harass Merchants ................................................. 8
D. Respondents File False Affidavits in New York Courts .................................... 8
E. Respondents’ Conduct Causes Severe Harm ..................................................... 9
THE ATTORNEY GENERAL’S INVESTIGATION..................................................... 9
ARGUMENT ................................................................................................................ 12
I. STATUTORY FRAMEWORK FOR PROCEEDINGS UNDER EXECUTIVE
LAW § 63(12)........................................................................................................ 12
II. RESPONDENTS HAVE COMMITTED REPEATED AND PERSISTENT
ILLEGAL ACTS IN THE FORM OF USURY AND LENDING MONEY
WITHOUT A LICENSE ...................................................................................... 14
A. Respondents Market and Underwrite Their Merchant Cash Advances
as Loans .......................................................................................................... 18
B. Respondents’ Merchant Cash Advances are Loans Because They Are
Subject to Repayment Absolutely .................................................................. 21
1. Respondents’ Cash Advances Are Loans Because They Are Repaid
at Fixed Amounts that Are Not Reconciled Based on Merchants’
“Receivables” ............................................................................................ 22
2. Respondents’ Merchant Cash Advances Are Loans Because They Are
Subject to Finite Repayment Terms ....................................................... 24
3. Respondents’ Agreements Are Loans Because They Ensure
Repayment Through Security, Personal Guarantees, and
Confessions of Judgment ......................................................................... 26
a. Security in the Event of Bankruptcy or Business Failure .............. 26
b. Respondents’ Use of Confessions of Judgment ................................ 28
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C. Respondents Charge Interest, Including Interest Disguised as “Fees,”
at Annual Interest Rates Far above the Maximum Rates Permissible
under New York Law ..................................................................................... 28
III. RESPONDENTS HAVE ENGAGED IN REPEATED AND PERSISTENT
FRAUD ................................................................................................................. 30
A. Respondents Make Extensive Misrepresentations in their Dealings with
Merchants ....................................................................................................... 30
1. Respondents Misrepresent to Merchants Their Fees, Their Cash
Advance Amounts, and the Amounts They Debit from Merchants’
Bank Accounts ......................................................................................... 30
2. Respondents Misrepresent the Fundamental Structure of Their Cash
Advances .................................................................................................. 33
B. Respondents Engage in Fraud by Obtaining Court Judgments Based on
False Affidavits............................................................................................... 36
1. Respondents Conceal from Courts Their Illegal Usury by
Misrepresenting the Nature of Their Debits from Merchants’
Accounts ................................................................................................... 36
2. Respondents Obtain Judgments by Filing False Affidavits
Misrepresenting Merchants’ Payment Histories and Balances ............ 37
C. Respondents Engage in Fraud by Causing Merchants to Agree to
Unconscionable Contracts .............................................................................. 38
1. Respondents’ Agreements are Procedurally Unconscionable ................ 40
2. Respondents’ Agreements Are Substantively Unconscionable .............. 41
IV. RESPONDENTS HAVE ENGAGED IN REPEATED ILLEGAL CONDUCT
IN THE FORM OF HARASSMENT AND AGGRAVATED HARASSMENT ... 42
V. RESPONDENTS GIARDINA, BRAUN, REICH, AND GREGG ARE
INDIVIDUALLY LIABLE ................................................................................... 44
A. Robert Giardina is Individually Liable ......................................................... 45
B. Jonathan Braun is Individually Liable ......................................................... 45
C. Tzvi “Steve” Reich is Individually Liable ...................................................... 46
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D. Michelle Gregg is Individually Liable ........................................................... 46
VI. THE COURT SHOULD ORDER A PERMANENT INJUNCTION,
RESCISSION, RESTITUTION, AND OTHER RELIEF.................................... 47
A. The Court Should Grant Injunctive Relief .................................................... 47
B. The Court Should Order Rescission of Respondents’ Agreements ............... 48
C. The Court Should Order Respondents to Pay Restitution and Damages .... 49
D. The Court Should Order Disgorgement ........................................................ 50
E. The Court Should Order an Accounting ........................................................ 50
F. The Court Should Order Respondents to Pay Costs ..................................... 50
CONCLUSION............................................................................................................. 51
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TABLE OF AUTHORITIES
Page(s)
CASES
Bernstein Family Ltd. Partnership v. Sovereign Partners, L.P.,
66 A.D.3d 1 (1st Dep’t 2009) .................................................................................. 14
Bevilacque v. Ford Motor Co.,
125 A.D.2d 516 (2d Dep’t 1986) ............................................................................. 48
Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring Inc.,
105 A.D.3d 178 (1st Dep’t 2013) ................................................................. 16-17, 21
Bouffard v. Befese, LLC,
111 A.D.3d 866 (2d Dep’t 2013) ........................................................................ 16-17
Clever Ideas v. 999 Restaurant Corp.,
No. 0602302/2006, 2007 WL 3234747 (Sup. Ct. N.Y. Cnty.
Oct. 12, 2007) ......................................................................................... 17, 22, 26-27
Del Rubio v. Duchesne,
284 A.D. 89 (1st Dep’t 1954) .................................................................................. 17
Donatelli v. Siskind,
170 A.D.2d 433 (2d Dep’t 1991) ....................................................................... 16, 21
Fleetwood Servs., LLC v. Complete Bus. Solutions Grp., Inc.,
No. 2:18-cv-00268-JS, 2019 WL 5422884 (E.D. Pa. Oct. 23, 2019) ........... 39-40, 42
Freedom Discount Corp. v. Korn,
28 A.D.2d 517 (1st Dep’t 1967) ........................................................................ 12, 43
Funding Metrics, LLC v. D & V Hospitality, Inc.,
62 Misc. 3d 699 (Sup. Ct. Westchester Cnty. 2019) ............................. 18, 21-22, 37
Funding Metrics, LLC v. NRO Boston, LLC,
No. 64204/2016, 2019 WL 4376780 (Sup. Ct. Suffolk Cnty. Aug. 28, 2019)…..…18
Giardina v. James,
No. 156209/19 (Sup. Ct. N.Y. Cnty. Oct. 29, 2019) ............................................... 10
Gillman v. Chase Manhattan Bank,
73 N.Y.2d 1 (1988) ............................................................................................. 39-40
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Hillair Capital Investments, L.P. v. Integrated Freight Corp.,
963 F. Supp. 2d 336 (S.D.N.Y. 2013) ..................................................................... 29
In re People v. Applied Card Sys., Inc.,
27 A.D.3d 104 (3d Dep’t 2005), aff’d, 11 N.Y.3d 105 (2008)................. 12-13, 30, 50
K9 Bytes, Inc. v. Arch Capital Funding, LLC,
56 Misc. 3d 807 (Sup. Ct. Westchester Cnty. 2017) ....................................... passim
Lefkowitz v. Bull Inv. Group,
46 A.D.2d 25 (3d Dep’t 1974) ................................................................................. 13
McNider Marine, LLC v. Yellowstone Capital, LLC,
No. 806769/2018, 2019 WL 6257463 (Sup. Ct. Erie Cnty. Nov. 19, 2019) ........... 17
Merchant Funding Servs., LLC v. Volunteer Pharmacy, Inc.,
55 Misc. 3d 316 (Sup. Ct. Westchester Cnty. 2016) vacated on
procedural grounds, 179 A.D.3d 1051 (2d Dep’t 2020) ................................... 18, 20
New York v. Avco Fin. Serv. of N.Y.,
50 N.Y.2d 383 (1980) .............................................................................................. 39
New York v. Ford Motor Co.,
136 A.D.2d 154 (3d Dep’t 1988) ............................................................................. 49
New York v. ITM, Inc.,
52 Misc. 2d 39 (Sup. Ct. N.Y. Cnty. 1966) ............................................................. 13
New York v. Maiorano,
189 A.D.2d 766 (2d Dep’t 1993) ............................................................................. 49
New York v. Princess Prestige Co.,
42 N.Y.2d 104 (1977) .................................................................................. 14, 47, 49
New York v. Wolowitz,
96 A.D.2d 47 (2d Dep’t 1983) ................................................................................. 39
P & HR Solutions, LLC v. Ram Capital Funding, LLC,
No. 650238/2019, 2019 WL 5579682 (Sup. Ct. N.Y. Cnty. Oct. 24, 2019)...... 17, 38
Pearl Capital Rivis Ventures, LLC v. RDN Const., Inc.,
54 Misc. 3d 470 (Sup. Ct. Westchester Cnty. 2016) ........................................ 18, 21
People v. Apple Health & Sports Clubs,
80 N.Y.2d 803 (1992) .............................................................................................. 45
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People v. Apple Health & Sports Clubs, Ltd.,
206 A.D.2d 266 (1994), leave to appeal dismissed, 84 N.Y.2d 1004 (1994) .......... 14
People v. Court Reporting Inst., Inc.,
245 A.D.2d 564 (2d Dep’t 1997) ............................................................................. 45
People v. Coventry First LLC,
13 N.Y.3d 108 (2009) .............................................................................................. 48
People v. CSA - Credit Solutions of Am. Inc.,
No. 401225/09, 2012 WL 1577961 (Sup. Ct. N.Y. Cnty. Apr. 30, 2012) ............... 14
People v. Dell, Inc.,
21 Misc. 3d 1110[A] (Sup. Ct. Albany Cnty. 2008)................................................ 47
People v. Ernst & Young, LLP,
114 A.D.3d 569 (1st Dep’t 2014) ............................................................................ 50
People v. Gen. Elec. Co.,
302 A.D.2d 314 (1st Dep’t 2003) ............................................................................ 13
People v. Greenberg,
27 N.Y.3d 490 (2016) ........................................................................................ 12, 47
People v. Greenberg,
95 A.D.3d 474 (1st Dep’t 2012), aff’d, 21 N.Y.3d 439 (2013) ................................ 12
People v. Scalera,
57 Misc. 3d 975 (City Ct. Hudson Cnty. 2017) ..................................................... 43
People v. Security Elite Group, Inc.,
No. 450025/2015, 2019 WL 5191214 (Sup. Ct. N.Y. Cnty. Oct. 15, 2019)............ 50
People v. Trump Entrepreneur Initiative LLC,
137 A.D.3d 409 (1st Dep’t 2016) ............................................................................ 13
People v. Veleanu,
89 A.D.3d 950 (2d Dep’t 2011) .......................................................................... 50-51
People v. Wilco Energy Corp,
284 A.D.2d 469 (2d Dep’t 2001) ............................................................................. 30
People v. Williams,
45 Misc. 3d 1202(A), (Crim. Ct. N.Y. Cnty. Sept. 29, 2014).................................. 44
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People v. World Interactive Gaming Corp.,
185 Misc. 2d 852 (Sup. Ct. N.Y. Cnty. 1999) ........................................................ 12
Principis Capital, LLC, v. Gary Buchanan Enters., LLC,
No. 515816/2017, 2018 WL 2985707 (Sup. Ct. Kings Cnty. June 06, 2018) ........ 18
Richmond Capital Group LLC v. Megivern,
No. 151406/2018, 2018 WL 6674300 (Sup. Ct. Richmond Cnty.
Nov. 28, 2018) ................................................................................................ 8, 37-38
Rockwell v. Morris,
12 A.D.2d 272 (1st Dep’t 1961) .............................................................................. 14
Rubenstein v. Small,
273 A.D. 102 (1st Dep’t 1947) ......................................................................... passim
Stockwell v. Richardson,
101 N.Y. 643 (1886) .......................................................................................... 17, 21
Stransky v. DiPalma,
137 A.D.3d 1734 (4th Dep’t 2016) ......................................................................... 29
VisionChina Media Inc. v. S’holder Rep. Servs. LLC,
109 A.D.3d 49 (1st Dep’t 2013) .............................................................................. 48
Webb v. Odell,
49 N.Y. 583 (1872) .................................................................................................. 48
STATE STATUTES
Banking Law
§ 14-a(1) ............................................................................................................ 14-15
§ 340 ........................................................................................................................ 15
§ 356 .................................................................................................................. 15, 16
Executive Law
§ 63(12) ............................................................................................................ passim
General Obligations Law
§ 5-501(1) ............................................................................................................... 15
McKinney’s Statutes
§ 321 ........................................................................................................................ 12
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Penal Law
§ 190.40 ................................................................................................................... 15
§§ 240.26(1), 240.26(3)....................................................................................... 42-43
§ 240.30(2).......................................................................................................... 43-44
§§ 1370, 1371 .......................................................................................................... 12
RULES
CPLR
§ 8303(a)(6) ............................................................................................................. 50
MISCELLANEOUS AUTHORITIES
72 N.Y. Jur. 2d Interest and Usury § 107................................................................... 29
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Petitioners, the People of the State of New York, by Letitia James, Attorney
General of the State of New York (NYAG), submit this Memorandum of Law in
support of the Verified Petition (“Petition”) pursuant to Executive Law § 63(12)
against Respondents Richmond Capital Group LLC (“Richmond”), Ram Capital
Funding LLC (“Ram”), Viceroy Capital Funding Inc. (“Viceroy”), Robert Giardina,
Jonathan Braun, Tzvi “Steve” Reich, and Michelle Gregg.
The NYAG seeks injunctive relief, rescission of agreements, restitution,
damages, disgorgement of profits, an accounting, costs, and such other and further
relief as the Court deems just and proper for Respondents’ persistent and repeated
fraudulent and illegal conduct in connection with their marketing, issuance, and
servicing of merchant cash advances.
STATEMENT OF FACTS
As set forth more fully and in the Affirmation of Assistant Attorney General
John P. Figura (“Figura Aff.”) and in the Petition, since at least 2015, Respondents
Richmond, Ram and Viceroy, through the participation and at the direction of
individual Respondents Giardina, Braun, Reich, and Gregg, have preyed upon small
businesses by loaning money in the form of so-called “merchant cash advances.”
Respondents misrepresent the nature of the advances and their terms. The cash
advances are in fact usurious, fraudulent, unconscionable loans, with interest rates
in the triple and quadruple digits.
A. Respondents’ Business Model
Respondents prey on merchants located in New York and throughout the
United States. E.g., Ex. 95 (Affidavit of Jennifer E. Savastino (“Savastino Aff.”)) ¶ 1
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(merchant located in Solvay, New York); Ex. 1 (Affidavit of Michael T. Pennington
(“Pennington Aff.”)) ¶ 1 (merchant located in Mesa, Arizona). 1 Respondents target
“small business owners” who are in need of funding to support their businesses and
unable to get credit from “banks and traditional lenders.” E.g., Ex. 20 at 2, 4 (page
from Richmond website); Ex. 61 (Affidavit of Jerry W. Bush (“Bush Aff.”)) ¶¶ 2-3
(merchant was contacted by a broker working with Richmond after it was denied a
small business loan from a bank). In desperate need of cash to keep their
businesses afloat, merchants succumb to Respondents’ misrepresentations, high-
pressure sales tactics, and promise of readily available, short-term funding. E.g.,
Ex. 98 (Affidavit of Adrien F. Theriault (“Theriault Aff.”)) ¶¶ 2-5, 12-13; Ex. 61
(Bush Aff.) ¶¶ 2-3; Figura Aff. ¶ 34.
Respondents loan money under the guise of a merchant cash advance, which
they describe as a “Purchase and Sale of Future Receivables.” E.g., Ex. 1 at
RCLG000098909. As a general matter, as set forth below, an issuer of a merchant
cash advance provides a merchant with a lump sum payment in exchange for a
share of the merchant’s future sales proceeds, or “receivables,” up to a certain total
repayment amount. Infra at 22-23. As a result, unlike a loan, a merchant cash
advance does not guarantee an issuer with a regular payment or a fixed, finite term.
Infra at 25. Instead, payment amounts may vary through a “reconciliation” process
in which the issuer adjusts or “reconciles” the merchant’s payment amounts in
accordance with its actual receivables. Infra at 22-23. Because payment amounts
1 Exhibits cited herein are exhibits to the Affirmation of John P. Figura.
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vary, the lengths of repayment terms also vary. Id at 25. This variability and lack
of security create certain risks for issuers but also create certain protections for
merchants by reducing required payments when business is slow. Infra at 23.
In contrast, a traditional closed-end installment loan has a fixed regular
payment amount and a finite repayment term. Infra at 25. In exchange for the
certainty this structure provides for creditors (and the rigidity it imposes on
borrowers), New York law guarantees certain protections to loan borrowers,
including a maximum interest rate of 16%. Infra at 15. The law also imposes
certain regulations on loan issuers, including the requirement of specialized licenses
and regular oversight by governmental entities. Infra at 15-16.
Respondents style their transactions as merchant cash advances – “purchases
of receivables,” e.g., Ex. 1 at RCLG000098909 – in order to evade New York’s legal
protections and requirements concerning loans. But in fact, Respondents’
transactions function as loans, and as a result their customers are entitled to the
protections afforded to borrowers of loans under New York law.
Respondents market and underwrite their cash advances as loans. Ram
describes itself on its website as a “private lender” offering “loans” to small
businesses. Ex. 21 at 2. Richmond also advertises “business loan[s]” on its website.
Ex. 20 at 5. Respondents and the brokers they work with also offer “loans” when
they call merchants by telephone to market Respondents’ cash advances, as when
Respondent Braun called a merchant and asked, “Are you ready to take our loan?”
Ex. 69 (Affidavit of Michael Gianni (“Gianni Aff.”)) ¶ 8; see also, e.g., Ex. 85
(Pennington Aff.) ¶ 2; Figura Aff. ¶ 41. Respondents and the brokers they work
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with tell merchants the cash advances are repaid through daily payments at fixed
amounts, which range from $149 to $14,999, and are subject to fixed repayment
terms, such as 60 days – just as if they were loans. E.g., Ex. 57 (Affidavit of John A.
Brewer (“Brewer Aff.”)) ¶ 8; Ex. 75 (Affidavit of Nabih Kadri (“Kadri Aff.”)) ¶ 3; Ex.
91 (Affidavit of Paul Price (“Price Aff.”)) ¶¶ 3-4, 19; Ex. 273 at RCLG000044150; Ex.
274 at RCLG000023563; Figura Aff. ¶ 42.
Consistent with their marketing, Respondents’ written agreements state
fixed daily payment amounts and indicate finite repayment terms. E.g., Ex. 218 at
RCLG000086674 (Ram agreement stating total repayment amount of $59,960 and
daily payment of $999, indicating a 60-day term); id. at RCLG000086673 (email
from Respondent Reich describing the term of Ram’s agreement as “60 days”). After
funding a merchant cash advance, Respondents debit payments from merchants’
bank accounts each day at the fixed amounts stated in their agreements, which they
do not reconcile based on the merchants’ “receivables.” E.g., Ex. 91 (Price Aff.) ¶¶
24-25; Figura Aff. ¶¶ 63-68.
In addition to setting fixed daily payments and finite repayment terms,
indicating that their cash advances are loans, Respondents also require their cash
advances to be guaranteed and secured far beyond merchants’ “receivables.” In
their agreements, Respondents purport to purchase “all proceeds” of merchants and
all of their “accounts, chattel paper, documents, equipment, general intangibles,
instruments, and inventory.” E.g., Ex. 1 at RCLG000098914. The agreements state
that Respondents’ rights are guaranteed and that Respondents hold secured
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interests pursuant to the Uniform Commercial Code that persist even in the event
of a merchant’s bankruptcy. E.g., id.
Because Respondents’ cash advances involve high daily payments and short
repayment terms, their annual interest rates are in the triple and even quadruple
digits. Ex. 43 (Affidavit of Data Scientist Chansoo Song (“Song Aff.”)) ¶¶ 23, 30; see
generally Ex. 283. For example, Richmond issued a $10,000 merchant cash advance
to A&R Vila Carriers, Inc., a trucking company based in Hialeah, Florida, that was
to be repaid in ten payments of $1,999, for a total repayment amount of $19,900.
Ex. 101 at RCLG000051252; see also id. RCLG000051250 (email from Braun
stating, “YES THAT IS 10 PAYMENTS”). The annual interest rate on this
transaction, treating Richmond’s fees as interest, was 3,910%. Ex. 283 at 1. For
comparison, the usury limit under New York law caps annual interest rates at 16%,
and the criminal usury limit is 25%. Infra at 15.
B. Respondents’ Deceptive and Unconscionable Business
Practices
Respondents’ dealings with merchants are marked by fraud and
unconscionability. Respondents pursue merchants in moments of financial
desperation, e.g., Ex. 61 (Bush Aff.) ¶¶ 2-3, and misrepresent the terms of their
agreements, see generally Figura Aff. ¶¶ 80-148.
Respondents advertise, “[W]e need no personal guarantee of collateral from
business owners seeking our merchant cash advances,” Ex. 20 at 2, but their
agreements expressly require each merchant cash advance to be backed by a
“Personal Guaranty of Performance,” e.g., Ex. 1 at RCLG000098914. Respondents
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represent that they will provide flexible payment plans and “work with” merchants
who are having difficulty making their daily payments, e.g., Ex. 69 (Gianni Aff.) ¶ 7;
Ex. 21 at 2; Ex. 20 at 4, and that they will “reconcile” merchants’ daily payment
amounts to ensure that payments are no more than a “Specified Percentage” of
merchants’ revenues, e.g., Ex. 1 at RCLG000098909. In reality, Respondents debit
merchants’ accounts each day by fixed daily amounts, Figura Aff. ¶¶ 63-68, which
they do not reconcile, as Respondent Braun has admitted under oath. Ex. 38 (Tr. of
Jonathan Braun (“Braun Tr.”)) at 151:8-152:18; see also id. at 148:12-18, 150:5-11.
Respondents repeatedly provide merchants with cash advances significantly
smaller than represented, deducting fees or other amounts that are not disclosed or
are disclosed only in unclear, deceptive language. Figura Aff. ¶¶ 81-98, 102-103.
Respondents also regularly debit more from merchants’ accounts than stated in
their agreements and change the amounts of their advances and fees after
merchants have signed the agreements. Figura Aff. ¶¶ 99-101, 104-109.
Respondents’ agreements, which were until late 2017 and early 2018 printed
in tiny, illegible type, Figura Aff. ¶ 45, contain numerous substantively
unconscionable provisions. Among these are clauses requiring merchants to provide
signed, notarized confessions of judgment, which Respondents represent in their
agreements that they will file in court only in certain limited circumstances. E.g.,
Ex. 1 at RCLG000098911 § 1.10. Respondents then file the confessions based on
any purported default, even a small number of missed payments, even though their
agreements do not provide for doing so. See, e.g., Ex. 150 at 3 ¶ 11; Ex. 148 at
RCLG000043370 § 1.10; Figura Aff. ¶¶ 143-48. Respondents file the confessions in
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New York State Supreme Court in counties such as Richmond, Erie, Ontario, and
Dutchess, regardless of whether the merchants are located in those counties or even
in New York. Figura Aff. ¶ 125. In fact, many merchants are located as far away as
California. E.g., Figura Aff. Ex. 69 (Gianni Aff.) ¶ 1.
Respondents file confessions of judgment with no notice to the merchant and
with no other supporting documents beside Respondents’ own affidavits and
affirmations, e.g., Ex. 150 at 1-6, and the confessions are then quickly processed by
each court’s clerk with no judicial review, Figura Aff. ¶¶ 124-29. The filing of a
confession results in a judgment in Respondents’ favor, usually within a day of
filing the confession and sometimes just days after the merchant signed the
confession and Respondents’ agreement. Id. ¶ 128. Respondents have obtained at
least 400 judgments in their favor from New York State Supreme Court by filing
confessions of judgment in this way. Id. ¶ 129.
Respondents’ agreements contain numerous other unconscionable provisions
in addition to those allowing Respondents to immediately obtain and execute
judgments against merchants by using confessions of judgment. These include
clauses providing for interest rates in the triple and quadruple digits, Figura Aff. ¶¶
75-79, provisions requiring merchants to provide Respondents with access to their
bank accounts, e.g., Ex. 1 at RCLG000098909, and power-of-attorney clauses giving
Respondents power to sign checks and collect moneys due on merchants’ behalf, id.
at RCLG000098910 § 1.9; see also Figura Aff. ¶ 153.
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C. Respondents Threaten and Harass Merchants
Respondents threaten and harass merchants to coerce them to repay their
cash advances. Braun, on behalf of Respondents, has called merchants’
representatives and insulted them, sworn at them, and threatened to seize their
assets, destroy their businesses, and do violence to them and their families, Figura
Aff. ¶¶ 154-56. Braun has made such threats as, “‘I know where you live. I know
where your mother lives,” “‘I will take your daughters from you,’” Ex. 69 (Gianni
Aff.) ¶ 26, and “Be thankful you’re not in New York, because your family would find
you floating in the Hudson,” Ex. 85 (Pennington Aff.) ¶ 45.
D. Respondents File False Affidavits in New York Courts
Respondents file false affidavits in New York courts to obtain money
judgments. They misrepresent to courts that merchants have defaulted after
making “Specified Percentage Payments” on their cash advances, falsely indicating
that Respondents reconcile merchants’ payment amounts based on a “Specified
Percentage” of their receivables. E.g., Ex. 57 (Brewer Aff.) ¶¶ 18-19; Ex. 60 (Brewer
Aff. Ex. C) at 2 ¶ 4, 3 ¶ 11; Figura Aff. ¶¶ 130-36. In making such
misrepresentations Respondents conceal from courts that their cash advances are
not purchases of merchants’ receipts but are in fact usurious loans. See id.
Respondents also submit affidavits that misrepresent merchants’ payment histories
and amounts still due, Figura Aff. ¶¶ 137-42, as one New York court has already
found, Richmond Capital Group LLC v. Megivern, No. 151406/2018, 2018 WL
6674300, at *4 (Sup. Ct. Richmond Cnty. Nov. 28, 2018)) (Ex. 204).
8
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E. Respondents’ Conduct Causes Severe Harm
Respondents inflict immense harm on the merchants they purport to help.
They wrongly obtain judgments against merchants, strip money from merchants’
bank accounts, and force them into downward spirals of unending debt and
financial ruin. E.g., Ex. 69 (Gianni Aff.) ¶ 34; Ex. 75 (Kadri Aff.) ¶¶ 30-33; Ex. 98
(Theriault Aff.) ¶ 24; Figura Aff. ¶¶ 157-65. Merchants have been forced to take
desperate measures to deal with their purported debts to Respondents. One
merchant was prevented from paying its employees as a result of collections from
Ram, causing two to quit, and it was able to stay in business only by relying on
personal credit cards. Ex. 85 (Pennington Aff.) ¶ 47. The principal of another
merchant attempted to take his life to escape from a spiral of debt that began with a
cash advance from Richmond. Ex. 61 (Bush Aff.). ¶¶ 27-29. Numerous recipients of
cash advances from Respondents have been forced to shut their doors, e.g., id. ¶ 28,
and many have filed for bankruptcy, Figura Aff. ¶ 165.
THE ATTORNEY GENERAL’S INVESTIGATION
The NYAG commenced an investigation into Respondents’ practices in
December 2018 after publication by the financial news periodical Bloomberg of an
investigative exposé that reported that Richmond had caused small businesses to
enter into loans with triple-digit interest rates, used confessions of judgment to
quickly obtain and execute judgments against merchants, and left merchants in
financial ruin as a result. Zachary R. Mider & Zeke Faux &, “Sign Here to Lose
Everything, Part 4: Marijuana Smuggler Turns Business-Loan Kingpin While out
9
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NYSCEF DOC. NO. 304
Preview
FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK PEOPLE OF THE STATE OF NEW YORK, by LETITIA JAMES, Attorney General of the State of New York, Petitioners, -against- RICHMOND CAPITAL GROUP LLC, also doing business as Ram Capital Funding and MEMORANDUM OF LAW Viceroy Capital Funding, and now known IN SUPPORT OF THE as RCG Advances LLC; VERIFIED PETITION RAM CAPITAL FUNDING LLC; VICEROY CAPITAL FUNDING INC., also doing business as Viceroy Capital Funding; ROBERT GIARDINA, individually and as a principal of RICHMOND CAPITAL GROUP Index No. ___________ LLC, RAM CAPITAL FUNDING LLC, and VICEROY CAPITAL FUNDING INC.; IAS Part ____________ JONATHAN BRAUN, also known as John Braun, individually and as a principal of RICHMOND CAPITAL GROUP LLC, RAM Assigned to Justice __________ CAPITAL FUNDING LLC, and VICEROY CAPITAL FUNDING INC.; TZVI REICH, also known as Steve Reich, individually and as a principal of RICHMOND CAPITAL GROUP LLC, RAM CAPITAL FUNDING LLC, and VICEROY CAPITAL FUNDING INC.; and MICHELLE GREGG, individually and as a principal of RICHMOND CAPITAL GROUP LLC, RAM CAPITAL FUNDING LLC, and VICEROY CAPITAL FUNDING INC.; Respondents. LETITIA JAMES Attorney General of the State of New York Attorney for Petitioners 28 Liberty Street, New York, New York 10005 Of Counsel: JANE M. AZIA, Bureau Chief, Bureau of Consumer Frauds and Protection LAURA J. LEVINE, Deputy Bureau Chief JOHN P. FIGURA, Assistant Attorney General FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 TABLE OF CONTENTS STATEMENT OF FACTS ............................................................................................. 1 A. Respondents’ Business Model ............................................................................. 1 B. Respondents’ Deceptive and Unconscionable Business Practices .................... 5 C. Respondents Threaten and Harass Merchants ................................................. 8 D. Respondents File False Affidavits in New York Courts .................................... 8 E. Respondents’ Conduct Causes Severe Harm ..................................................... 9 THE ATTORNEY GENERAL’S INVESTIGATION..................................................... 9 ARGUMENT ................................................................................................................ 12 I. STATUTORY FRAMEWORK FOR PROCEEDINGS UNDER EXECUTIVE LAW § 63(12)........................................................................................................ 12 II. RESPONDENTS HAVE COMMITTED REPEATED AND PERSISTENT ILLEGAL ACTS IN THE FORM OF USURY AND LENDING MONEY WITHOUT A LICENSE ...................................................................................... 14 A. Respondents Market and Underwrite Their Merchant Cash Advances as Loans .......................................................................................................... 18 B. Respondents’ Merchant Cash Advances are Loans Because They Are Subject to Repayment Absolutely .................................................................. 21 1. Respondents’ Cash Advances Are Loans Because They Are Repaid at Fixed Amounts that Are Not Reconciled Based on Merchants’ “Receivables” ............................................................................................ 22 2. Respondents’ Merchant Cash Advances Are Loans Because They Are Subject to Finite Repayment Terms ....................................................... 24 3. Respondents’ Agreements Are Loans Because They Ensure Repayment Through Security, Personal Guarantees, and Confessions of Judgment ......................................................................... 26 a. Security in the Event of Bankruptcy or Business Failure .............. 26 b. Respondents’ Use of Confessions of Judgment ................................ 28 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 C. Respondents Charge Interest, Including Interest Disguised as “Fees,” at Annual Interest Rates Far above the Maximum Rates Permissible under New York Law ..................................................................................... 28 III. RESPONDENTS HAVE ENGAGED IN REPEATED AND PERSISTENT FRAUD ................................................................................................................. 30 A. Respondents Make Extensive Misrepresentations in their Dealings with Merchants ....................................................................................................... 30 1. Respondents Misrepresent to Merchants Their Fees, Their Cash Advance Amounts, and the Amounts They Debit from Merchants’ Bank Accounts ......................................................................................... 30 2. Respondents Misrepresent the Fundamental Structure of Their Cash Advances .................................................................................................. 33 B. Respondents Engage in Fraud by Obtaining Court Judgments Based on False Affidavits............................................................................................... 36 1. Respondents Conceal from Courts Their Illegal Usury by Misrepresenting the Nature of Their Debits from Merchants’ Accounts ................................................................................................... 36 2. Respondents Obtain Judgments by Filing False Affidavits Misrepresenting Merchants’ Payment Histories and Balances ............ 37 C. Respondents Engage in Fraud by Causing Merchants to Agree to Unconscionable Contracts .............................................................................. 38 1. Respondents’ Agreements are Procedurally Unconscionable ................ 40 2. Respondents’ Agreements Are Substantively Unconscionable .............. 41 IV. RESPONDENTS HAVE ENGAGED IN REPEATED ILLEGAL CONDUCT IN THE FORM OF HARASSMENT AND AGGRAVATED HARASSMENT ... 42 V. RESPONDENTS GIARDINA, BRAUN, REICH, AND GREGG ARE INDIVIDUALLY LIABLE ................................................................................... 44 A. Robert Giardina is Individually Liable ......................................................... 45 B. Jonathan Braun is Individually Liable ......................................................... 45 C. Tzvi “Steve” Reich is Individually Liable ...................................................... 46 ii FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 D. Michelle Gregg is Individually Liable ........................................................... 46 VI. THE COURT SHOULD ORDER A PERMANENT INJUNCTION, RESCISSION, RESTITUTION, AND OTHER RELIEF.................................... 47 A. The Court Should Grant Injunctive Relief .................................................... 47 B. The Court Should Order Rescission of Respondents’ Agreements ............... 48 C. The Court Should Order Respondents to Pay Restitution and Damages .... 49 D. The Court Should Order Disgorgement ........................................................ 50 E. The Court Should Order an Accounting ........................................................ 50 F. The Court Should Order Respondents to Pay Costs ..................................... 50 CONCLUSION............................................................................................................. 51 iii FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 TABLE OF AUTHORITIES Page(s) CASES Bernstein Family Ltd. Partnership v. Sovereign Partners, L.P., 66 A.D.3d 1 (1st Dep’t 2009) .................................................................................. 14 Bevilacque v. Ford Motor Co., 125 A.D.2d 516 (2d Dep’t 1986) ............................................................................. 48 Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring Inc., 105 A.D.3d 178 (1st Dep’t 2013) ................................................................. 16-17, 21 Bouffard v. Befese, LLC, 111 A.D.3d 866 (2d Dep’t 2013) ........................................................................ 16-17 Clever Ideas v. 999 Restaurant Corp., No. 0602302/2006, 2007 WL 3234747 (Sup. Ct. N.Y. Cnty. Oct. 12, 2007) ......................................................................................... 17, 22, 26-27 Del Rubio v. Duchesne, 284 A.D. 89 (1st Dep’t 1954) .................................................................................. 17 Donatelli v. Siskind, 170 A.D.2d 433 (2d Dep’t 1991) ....................................................................... 16, 21 Fleetwood Servs., LLC v. Complete Bus. Solutions Grp., Inc., No. 2:18-cv-00268-JS, 2019 WL 5422884 (E.D. Pa. Oct. 23, 2019) ........... 39-40, 42 Freedom Discount Corp. v. Korn, 28 A.D.2d 517 (1st Dep’t 1967) ........................................................................ 12, 43 Funding Metrics, LLC v. D & V Hospitality, Inc., 62 Misc. 3d 699 (Sup. Ct. Westchester Cnty. 2019) ............................. 18, 21-22, 37 Funding Metrics, LLC v. NRO Boston, LLC, No. 64204/2016, 2019 WL 4376780 (Sup. Ct. Suffolk Cnty. Aug. 28, 2019)…..…18 Giardina v. James, No. 156209/19 (Sup. Ct. N.Y. Cnty. Oct. 29, 2019) ............................................... 10 Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1 (1988) ............................................................................................. 39-40 iv FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 Hillair Capital Investments, L.P. v. Integrated Freight Corp., 963 F. Supp. 2d 336 (S.D.N.Y. 2013) ..................................................................... 29 In re People v. Applied Card Sys., Inc., 27 A.D.3d 104 (3d Dep’t 2005), aff’d, 11 N.Y.3d 105 (2008)................. 12-13, 30, 50 K9 Bytes, Inc. v. Arch Capital Funding, LLC, 56 Misc. 3d 807 (Sup. Ct. Westchester Cnty. 2017) ....................................... passim Lefkowitz v. Bull Inv. Group, 46 A.D.2d 25 (3d Dep’t 1974) ................................................................................. 13 McNider Marine, LLC v. Yellowstone Capital, LLC, No. 806769/2018, 2019 WL 6257463 (Sup. Ct. Erie Cnty. Nov. 19, 2019) ........... 17 Merchant Funding Servs., LLC v. Volunteer Pharmacy, Inc., 55 Misc. 3d 316 (Sup. Ct. Westchester Cnty. 2016) vacated on procedural grounds, 179 A.D.3d 1051 (2d Dep’t 2020) ................................... 18, 20 New York v. Avco Fin. Serv. of N.Y., 50 N.Y.2d 383 (1980) .............................................................................................. 39 New York v. Ford Motor Co., 136 A.D.2d 154 (3d Dep’t 1988) ............................................................................. 49 New York v. ITM, Inc., 52 Misc. 2d 39 (Sup. Ct. N.Y. Cnty. 1966) ............................................................. 13 New York v. Maiorano, 189 A.D.2d 766 (2d Dep’t 1993) ............................................................................. 49 New York v. Princess Prestige Co., 42 N.Y.2d 104 (1977) .................................................................................. 14, 47, 49 New York v. Wolowitz, 96 A.D.2d 47 (2d Dep’t 1983) ................................................................................. 39 P & HR Solutions, LLC v. Ram Capital Funding, LLC, No. 650238/2019, 2019 WL 5579682 (Sup. Ct. N.Y. Cnty. Oct. 24, 2019)...... 17, 38 Pearl Capital Rivis Ventures, LLC v. RDN Const., Inc., 54 Misc. 3d 470 (Sup. Ct. Westchester Cnty. 2016) ........................................ 18, 21 People v. Apple Health & Sports Clubs, 80 N.Y.2d 803 (1992) .............................................................................................. 45 v FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 People v. Apple Health & Sports Clubs, Ltd., 206 A.D.2d 266 (1994), leave to appeal dismissed, 84 N.Y.2d 1004 (1994) .......... 14 People v. Court Reporting Inst., Inc., 245 A.D.2d 564 (2d Dep’t 1997) ............................................................................. 45 People v. Coventry First LLC, 13 N.Y.3d 108 (2009) .............................................................................................. 48 People v. CSA - Credit Solutions of Am. Inc., No. 401225/09, 2012 WL 1577961 (Sup. Ct. N.Y. Cnty. Apr. 30, 2012) ............... 14 People v. Dell, Inc., 21 Misc. 3d 1110[A] (Sup. Ct. Albany Cnty. 2008)................................................ 47 People v. Ernst & Young, LLP, 114 A.D.3d 569 (1st Dep’t 2014) ............................................................................ 50 People v. Gen. Elec. Co., 302 A.D.2d 314 (1st Dep’t 2003) ............................................................................ 13 People v. Greenberg, 27 N.Y.3d 490 (2016) ........................................................................................ 12, 47 People v. Greenberg, 95 A.D.3d 474 (1st Dep’t 2012), aff’d, 21 N.Y.3d 439 (2013) ................................ 12 People v. Scalera, 57 Misc. 3d 975 (City Ct. Hudson Cnty. 2017) ..................................................... 43 People v. Security Elite Group, Inc., No. 450025/2015, 2019 WL 5191214 (Sup. Ct. N.Y. Cnty. Oct. 15, 2019)............ 50 People v. Trump Entrepreneur Initiative LLC, 137 A.D.3d 409 (1st Dep’t 2016) ............................................................................ 13 People v. Veleanu, 89 A.D.3d 950 (2d Dep’t 2011) .......................................................................... 50-51 People v. Wilco Energy Corp, 284 A.D.2d 469 (2d Dep’t 2001) ............................................................................. 30 People v. Williams, 45 Misc. 3d 1202(A), (Crim. Ct. N.Y. Cnty. Sept. 29, 2014).................................. 44 vi FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 People v. World Interactive Gaming Corp., 185 Misc. 2d 852 (Sup. Ct. N.Y. Cnty. 1999) ........................................................ 12 Principis Capital, LLC, v. Gary Buchanan Enters., LLC, No. 515816/2017, 2018 WL 2985707 (Sup. Ct. Kings Cnty. June 06, 2018) ........ 18 Richmond Capital Group LLC v. Megivern, No. 151406/2018, 2018 WL 6674300 (Sup. Ct. Richmond Cnty. Nov. 28, 2018) ................................................................................................ 8, 37-38 Rockwell v. Morris, 12 A.D.2d 272 (1st Dep’t 1961) .............................................................................. 14 Rubenstein v. Small, 273 A.D. 102 (1st Dep’t 1947) ......................................................................... passim Stockwell v. Richardson, 101 N.Y. 643 (1886) .......................................................................................... 17, 21 Stransky v. DiPalma, 137 A.D.3d 1734 (4th Dep’t 2016) ......................................................................... 29 VisionChina Media Inc. v. S’holder Rep. Servs. LLC, 109 A.D.3d 49 (1st Dep’t 2013) .............................................................................. 48 Webb v. Odell, 49 N.Y. 583 (1872) .................................................................................................. 48 STATE STATUTES Banking Law § 14-a(1) ............................................................................................................ 14-15 § 340 ........................................................................................................................ 15 § 356 .................................................................................................................. 15, 16 Executive Law § 63(12) ............................................................................................................ passim General Obligations Law § 5-501(1) ............................................................................................................... 15 McKinney’s Statutes § 321 ........................................................................................................................ 12 vii FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 Penal Law § 190.40 ................................................................................................................... 15 §§ 240.26(1), 240.26(3)....................................................................................... 42-43 § 240.30(2).......................................................................................................... 43-44 §§ 1370, 1371 .......................................................................................................... 12 RULES CPLR § 8303(a)(6) ............................................................................................................. 50 MISCELLANEOUS AUTHORITIES 72 N.Y. Jur. 2d Interest and Usury § 107................................................................... 29 viii FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 Petitioners, the People of the State of New York, by Letitia James, Attorney General of the State of New York (NYAG), submit this Memorandum of Law in support of the Verified Petition (“Petition”) pursuant to Executive Law § 63(12) against Respondents Richmond Capital Group LLC (“Richmond”), Ram Capital Funding LLC (“Ram”), Viceroy Capital Funding Inc. (“Viceroy”), Robert Giardina, Jonathan Braun, Tzvi “Steve” Reich, and Michelle Gregg. The NYAG seeks injunctive relief, rescission of agreements, restitution, damages, disgorgement of profits, an accounting, costs, and such other and further relief as the Court deems just and proper for Respondents’ persistent and repeated fraudulent and illegal conduct in connection with their marketing, issuance, and servicing of merchant cash advances. STATEMENT OF FACTS As set forth more fully and in the Affirmation of Assistant Attorney General John P. Figura (“Figura Aff.”) and in the Petition, since at least 2015, Respondents Richmond, Ram and Viceroy, through the participation and at the direction of individual Respondents Giardina, Braun, Reich, and Gregg, have preyed upon small businesses by loaning money in the form of so-called “merchant cash advances.” Respondents misrepresent the nature of the advances and their terms. The cash advances are in fact usurious, fraudulent, unconscionable loans, with interest rates in the triple and quadruple digits. A. Respondents’ Business Model Respondents prey on merchants located in New York and throughout the United States. E.g., Ex. 95 (Affidavit of Jennifer E. Savastino (“Savastino Aff.”)) ¶ 1 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 (merchant located in Solvay, New York); Ex. 1 (Affidavit of Michael T. Pennington (“Pennington Aff.”)) ¶ 1 (merchant located in Mesa, Arizona). 1 Respondents target “small business owners” who are in need of funding to support their businesses and unable to get credit from “banks and traditional lenders.” E.g., Ex. 20 at 2, 4 (page from Richmond website); Ex. 61 (Affidavit of Jerry W. Bush (“Bush Aff.”)) ¶¶ 2-3 (merchant was contacted by a broker working with Richmond after it was denied a small business loan from a bank). In desperate need of cash to keep their businesses afloat, merchants succumb to Respondents’ misrepresentations, high- pressure sales tactics, and promise of readily available, short-term funding. E.g., Ex. 98 (Affidavit of Adrien F. Theriault (“Theriault Aff.”)) ¶¶ 2-5, 12-13; Ex. 61 (Bush Aff.) ¶¶ 2-3; Figura Aff. ¶ 34. Respondents loan money under the guise of a merchant cash advance, which they describe as a “Purchase and Sale of Future Receivables.” E.g., Ex. 1 at RCLG000098909. As a general matter, as set forth below, an issuer of a merchant cash advance provides a merchant with a lump sum payment in exchange for a share of the merchant’s future sales proceeds, or “receivables,” up to a certain total repayment amount. Infra at 22-23. As a result, unlike a loan, a merchant cash advance does not guarantee an issuer with a regular payment or a fixed, finite term. Infra at 25. Instead, payment amounts may vary through a “reconciliation” process in which the issuer adjusts or “reconciles” the merchant’s payment amounts in accordance with its actual receivables. Infra at 22-23. Because payment amounts 1 Exhibits cited herein are exhibits to the Affirmation of John P. Figura. 2 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 vary, the lengths of repayment terms also vary. Id at 25. This variability and lack of security create certain risks for issuers but also create certain protections for merchants by reducing required payments when business is slow. Infra at 23. In contrast, a traditional closed-end installment loan has a fixed regular payment amount and a finite repayment term. Infra at 25. In exchange for the certainty this structure provides for creditors (and the rigidity it imposes on borrowers), New York law guarantees certain protections to loan borrowers, including a maximum interest rate of 16%. Infra at 15. The law also imposes certain regulations on loan issuers, including the requirement of specialized licenses and regular oversight by governmental entities. Infra at 15-16. Respondents style their transactions as merchant cash advances – “purchases of receivables,” e.g., Ex. 1 at RCLG000098909 – in order to evade New York’s legal protections and requirements concerning loans. But in fact, Respondents’ transactions function as loans, and as a result their customers are entitled to the protections afforded to borrowers of loans under New York law. Respondents market and underwrite their cash advances as loans. Ram describes itself on its website as a “private lender” offering “loans” to small businesses. Ex. 21 at 2. Richmond also advertises “business loan[s]” on its website. Ex. 20 at 5. Respondents and the brokers they work with also offer “loans” when they call merchants by telephone to market Respondents’ cash advances, as when Respondent Braun called a merchant and asked, “Are you ready to take our loan?” Ex. 69 (Affidavit of Michael Gianni (“Gianni Aff.”)) ¶ 8; see also, e.g., Ex. 85 (Pennington Aff.) ¶ 2; Figura Aff. ¶ 41. Respondents and the brokers they work 3 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 with tell merchants the cash advances are repaid through daily payments at fixed amounts, which range from $149 to $14,999, and are subject to fixed repayment terms, such as 60 days – just as if they were loans. E.g., Ex. 57 (Affidavit of John A. Brewer (“Brewer Aff.”)) ¶ 8; Ex. 75 (Affidavit of Nabih Kadri (“Kadri Aff.”)) ¶ 3; Ex. 91 (Affidavit of Paul Price (“Price Aff.”)) ¶¶ 3-4, 19; Ex. 273 at RCLG000044150; Ex. 274 at RCLG000023563; Figura Aff. ¶ 42. Consistent with their marketing, Respondents’ written agreements state fixed daily payment amounts and indicate finite repayment terms. E.g., Ex. 218 at RCLG000086674 (Ram agreement stating total repayment amount of $59,960 and daily payment of $999, indicating a 60-day term); id. at RCLG000086673 (email from Respondent Reich describing the term of Ram’s agreement as “60 days”). After funding a merchant cash advance, Respondents debit payments from merchants’ bank accounts each day at the fixed amounts stated in their agreements, which they do not reconcile based on the merchants’ “receivables.” E.g., Ex. 91 (Price Aff.) ¶¶ 24-25; Figura Aff. ¶¶ 63-68. In addition to setting fixed daily payments and finite repayment terms, indicating that their cash advances are loans, Respondents also require their cash advances to be guaranteed and secured far beyond merchants’ “receivables.” In their agreements, Respondents purport to purchase “all proceeds” of merchants and all of their “accounts, chattel paper, documents, equipment, general intangibles, instruments, and inventory.” E.g., Ex. 1 at RCLG000098914. The agreements state that Respondents’ rights are guaranteed and that Respondents hold secured 4 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 interests pursuant to the Uniform Commercial Code that persist even in the event of a merchant’s bankruptcy. E.g., id. Because Respondents’ cash advances involve high daily payments and short repayment terms, their annual interest rates are in the triple and even quadruple digits. Ex. 43 (Affidavit of Data Scientist Chansoo Song (“Song Aff.”)) ¶¶ 23, 30; see generally Ex. 283. For example, Richmond issued a $10,000 merchant cash advance to A&R Vila Carriers, Inc., a trucking company based in Hialeah, Florida, that was to be repaid in ten payments of $1,999, for a total repayment amount of $19,900. Ex. 101 at RCLG000051252; see also id. RCLG000051250 (email from Braun stating, “YES THAT IS 10 PAYMENTS”). The annual interest rate on this transaction, treating Richmond’s fees as interest, was 3,910%. Ex. 283 at 1. For comparison, the usury limit under New York law caps annual interest rates at 16%, and the criminal usury limit is 25%. Infra at 15. B. Respondents’ Deceptive and Unconscionable Business Practices Respondents’ dealings with merchants are marked by fraud and unconscionability. Respondents pursue merchants in moments of financial desperation, e.g., Ex. 61 (Bush Aff.) ¶¶ 2-3, and misrepresent the terms of their agreements, see generally Figura Aff. ¶¶ 80-148. Respondents advertise, “[W]e need no personal guarantee of collateral from business owners seeking our merchant cash advances,” Ex. 20 at 2, but their agreements expressly require each merchant cash advance to be backed by a “Personal Guaranty of Performance,” e.g., Ex. 1 at RCLG000098914. Respondents 5 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 represent that they will provide flexible payment plans and “work with” merchants who are having difficulty making their daily payments, e.g., Ex. 69 (Gianni Aff.) ¶ 7; Ex. 21 at 2; Ex. 20 at 4, and that they will “reconcile” merchants’ daily payment amounts to ensure that payments are no more than a “Specified Percentage” of merchants’ revenues, e.g., Ex. 1 at RCLG000098909. In reality, Respondents debit merchants’ accounts each day by fixed daily amounts, Figura Aff. ¶¶ 63-68, which they do not reconcile, as Respondent Braun has admitted under oath. Ex. 38 (Tr. of Jonathan Braun (“Braun Tr.”)) at 151:8-152:18; see also id. at 148:12-18, 150:5-11. Respondents repeatedly provide merchants with cash advances significantly smaller than represented, deducting fees or other amounts that are not disclosed or are disclosed only in unclear, deceptive language. Figura Aff. ¶¶ 81-98, 102-103. Respondents also regularly debit more from merchants’ accounts than stated in their agreements and change the amounts of their advances and fees after merchants have signed the agreements. Figura Aff. ¶¶ 99-101, 104-109. Respondents’ agreements, which were until late 2017 and early 2018 printed in tiny, illegible type, Figura Aff. ¶ 45, contain numerous substantively unconscionable provisions. Among these are clauses requiring merchants to provide signed, notarized confessions of judgment, which Respondents represent in their agreements that they will file in court only in certain limited circumstances. E.g., Ex. 1 at RCLG000098911 § 1.10. Respondents then file the confessions based on any purported default, even a small number of missed payments, even though their agreements do not provide for doing so. See, e.g., Ex. 150 at 3 ¶ 11; Ex. 148 at RCLG000043370 § 1.10; Figura Aff. ¶¶ 143-48. Respondents file the confessions in 6 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 New York State Supreme Court in counties such as Richmond, Erie, Ontario, and Dutchess, regardless of whether the merchants are located in those counties or even in New York. Figura Aff. ¶ 125. In fact, many merchants are located as far away as California. E.g., Figura Aff. Ex. 69 (Gianni Aff.) ¶ 1. Respondents file confessions of judgment with no notice to the merchant and with no other supporting documents beside Respondents’ own affidavits and affirmations, e.g., Ex. 150 at 1-6, and the confessions are then quickly processed by each court’s clerk with no judicial review, Figura Aff. ¶¶ 124-29. The filing of a confession results in a judgment in Respondents’ favor, usually within a day of filing the confession and sometimes just days after the merchant signed the confession and Respondents’ agreement. Id. ¶ 128. Respondents have obtained at least 400 judgments in their favor from New York State Supreme Court by filing confessions of judgment in this way. Id. ¶ 129. Respondents’ agreements contain numerous other unconscionable provisions in addition to those allowing Respondents to immediately obtain and execute judgments against merchants by using confessions of judgment. These include clauses providing for interest rates in the triple and quadruple digits, Figura Aff. ¶¶ 75-79, provisions requiring merchants to provide Respondents with access to their bank accounts, e.g., Ex. 1 at RCLG000098909, and power-of-attorney clauses giving Respondents power to sign checks and collect moneys due on merchants’ behalf, id. at RCLG000098910 § 1.9; see also Figura Aff. ¶ 153. 7 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 C. Respondents Threaten and Harass Merchants Respondents threaten and harass merchants to coerce them to repay their cash advances. Braun, on behalf of Respondents, has called merchants’ representatives and insulted them, sworn at them, and threatened to seize their assets, destroy their businesses, and do violence to them and their families, Figura Aff. ¶¶ 154-56. Braun has made such threats as, “‘I know where you live. I know where your mother lives,” “‘I will take your daughters from you,’” Ex. 69 (Gianni Aff.) ¶ 26, and “Be thankful you’re not in New York, because your family would find you floating in the Hudson,” Ex. 85 (Pennington Aff.) ¶ 45. D. Respondents File False Affidavits in New York Courts Respondents file false affidavits in New York courts to obtain money judgments. They misrepresent to courts that merchants have defaulted after making “Specified Percentage Payments” on their cash advances, falsely indicating that Respondents reconcile merchants’ payment amounts based on a “Specified Percentage” of their receivables. E.g., Ex. 57 (Brewer Aff.) ¶¶ 18-19; Ex. 60 (Brewer Aff. Ex. C) at 2 ¶ 4, 3 ¶ 11; Figura Aff. ¶¶ 130-36. In making such misrepresentations Respondents conceal from courts that their cash advances are not purchases of merchants’ receipts but are in fact usurious loans. See id. Respondents also submit affidavits that misrepresent merchants’ payment histories and amounts still due, Figura Aff. ¶¶ 137-42, as one New York court has already found, Richmond Capital Group LLC v. Megivern, No. 151406/2018, 2018 WL 6674300, at *4 (Sup. Ct. Richmond Cnty. Nov. 28, 2018)) (Ex. 204). 8 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304 RECEIVED NYSCEF: 06/17/2020 E. Respondents’ Conduct Causes Severe Harm Respondents inflict immense harm on the merchants they purport to help. They wrongly obtain judgments against merchants, strip money from merchants’ bank accounts, and force them into downward spirals of unending debt and financial ruin. E.g., Ex. 69 (Gianni Aff.) ¶ 34; Ex. 75 (Kadri Aff.) ¶¶ 30-33; Ex. 98 (Theriault Aff.) ¶ 24; Figura Aff. ¶¶ 157-65. Merchants have been forced to take desperate measures to deal with their purported debts to Respondents. One merchant was prevented from paying its employees as a result of collections from Ram, causing two to quit, and it was able to stay in business only by relying on personal credit cards. Ex. 85 (Pennington Aff.) ¶ 47. The principal of another merchant attempted to take his life to escape from a spiral of debt that began with a cash advance from Richmond. Ex. 61 (Bush Aff.). ¶¶ 27-29. Numerous recipients of cash advances from Respondents have been forced to shut their doors, e.g., id. ¶ 28, and many have filed for bankruptcy, Figura Aff. ¶ 165. THE ATTORNEY GENERAL’S INVESTIGATION The NYAG commenced an investigation into Respondents’ practices in December 2018 after publication by the financial news periodical Bloomberg of an investigative exposé that reported that Richmond had caused small businesses to enter into loans with triple-digit interest rates, used confessions of judgment to quickly obtain and execute judgments against merchants, and left merchants in financial ruin as a result. Zachary R. Mider & Zeke Faux &, “Sign Here to Lose Everything, Part 4: Marijuana Smuggler Turns Business-Loan Kingpin While out 9 FILED: NEW YORK COUNTY CLERK 06/17/2020 10:51 AM INDEX NO. 656346/2018 NYSCEF DOC. NO. 304