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FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023
NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024
EXHIBIT A
FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023
NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF ROCKLAND
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NEWCO CAPITAL GROUP VI LLC,
Plaintiff, Index No. 160987/2014
-against- VERIFIED ANSWER
AND COUNTERCLAIMS
JMF SOLUTIONS INC. D/B/A JMF SOLUTIONS;
JMF SOLUTIONS, INC., JMF; LEASEDMINDS; JMF
NETWORKS and JOHN MICHAEL FRANCIS, II,
Defendants.
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Defendants JMF Solutions Inc. d/b/a JMF Solutions, JMF Solutions, Inc., (“JMF
Solutions”) JMF, Leasedminds, JMF Networks (collectively referred to herein as the “JMF
Defendants”) and John Michael Francis (“Francis”) by their attorneys, the Law Offices of
Carole R. Bernstein, as and for their verified answer and counterclaims, allege:
1. Denies knowledge or information sufficient to form a belief as to the truth of
the allegations contained in paragraph 1 of the verified complaint.
2. Admits the allegations contained in paragraphs 2 and 3 of the verified
complaint.
3. Denies knowledge or information sufficient to form a belief as to the truth of
the allegations contained in paragraphs 4, 5, 6 and 7 of the verified complaint and
respectfully refers the Court to the terms and conditions of the Agreement referred to therein
for a complete and accurate representation of the contents thereof.
4. Francis and the JMF Defendants deny the allegations contained in paragraph 8
of the verified complaint and respectfully refer the Court to the terms and conditions of the
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Agreement referenced therein thereto for a complete and accurate representation of the
contents thereof.
5. The JMF Defendants deny knowledge or information sufficient to form a
belief as to the truth of the allegations contained in paragraphs 9 and 11 of the verified
complaint.
6. The JMF Defendants deny the allegations contained in paragraphs 10 and 12
of the verified complaint.
7. Francis denies the allegations contained in paragraph 13 of the verified
complaint.
8. Francis and the JMF Defendants deny the allegations contained in paragraph
14 of the verified complaint.
9. Repeat and reallege paragraphs 1 to 8 of their verified answer as if more fully
set forth herein.
10. The allegations contained in paragraph 16 of the verified complaint constitute
legal conclusions to which no response is required. To the extent a response is required, the
allegations are denied.
11. The JMF Defendants deny the allegations contained in paragraphs 17, 18 and
19 of the verified complaint.
12. Repeat and reallege paragraphs 1 to 11 of their verified answer as if more
fully set forth herein.
13. Francis denies the allegations contained in paragraph 21 of the verified
complaint and respectfully refers the Court to the terms and conditions of the document
referenced therein thereto for a complete and accurate representation of the contents thereof.
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14. The JMF Defendants and Francis deny the allegations contained in paragraphs
21 of the verified complaint.
15. Francis denies the allegations contained in paragraph 22 of the verified
complaint.
AS AND FOR A FIRST DEFENSE
16. The verified complaint fails to state a cause of action upon which relief may
be granted.
AS AND FOR A SECOND DEFENSE
17. Plaintiff Newco Capital Group VI LLC (“Newco”) failed to provide the JMF
Defendants with written notice of any alleged default.
18. Newco failed to provide the JMF Defendants with opportunity to cure alleged
default.
AS AND FOR A THIRD DEFENSE
19. Newco’s claims are barred for lack of personal jurisdiction over the JMF
Defendants and Francis.
AS AND FOR A FOURTH DEFENSE
20. The Agreement referenced in the verified complaint should be rescinded as
the agreement was entered into by the JMF Defendants under economic duress.
AS AND FOR A FIFTH DEFENSE
21. Newco’s claims are barred inasmuch as the Agreement was a loan charging
interest at a criminally usurious rate, to wit, 87.989%.
AS AND FOR A SIXTH DEFENSE
22. Newco’s claims are barred to the extent that the Agreement contains punitive,
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unconscionable provisions that are penal in nature and unrelated to any real alleged damages
suffered.
AS AND FOR A SEVENTH DEFENSE
23. Newco’s claims are barred as the Agreement was a contract of adhesion.
AS AND FOR A EIGHTH DEFENSE
24. Newco’s claims are barred by the doctrine of waiver, laches, unclean hands or
estoppel.
AS AND FOR A NINTH DEFENSE
25. Newco’s claim for damages is barred for its breach of the covenant of good
faith and fair dealing.
AS AND FOR A TENTH DEFENSE
26. Newco has engaged in fraudulent, deceptive and misleading conduct against
the JMF Defendants and Francis.
AS AND FOR A TENTH DEFENSE
27. Newco breached the RPA first.
COUNTERCLAIMS
Factual Background
28. JMF Solutions is corporation organized under the laws of the State of
Alabama with its place of business located in Alabama. JMF Solutions is an 18-year-old
telecommunications company that provides critical services including but not limited to data,
VOIP, Cloud, Managed and Datacenter services to numerous business in the southeastern
United States, including hospitals, state and local government agencies and many non-profit
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companies.
29. Upon information and belief, Newco is one of many related merchant cash
advance companies (“MCA”), with its principal place of business in New York. Newco’s
success depends upon carrying out a fraudulent scheme to collect upon unlawful debts and
otherwise fraudulently obtain funds, from small businesses and there owners such as the
JMF Defendants and Francis, through the use of its sham MCA agreement, misleadingly
referred to in this case as a “Revenue Purchase Agreement” (“RPA”) .
30. For nearly a decade, MCAs operated under the radar of regulators, compiling
over 25,000 confessions of judgment against small businesses and their individual owners.
Unfortunately, the type of conduct engaged in by Newco is a ballooning national problem
that has raised the attention of both state and federal regulators.
31. To that end, in November 2018, Bloomberg News published what would be
the first in a series of groundbreaking news articles exposing the abuses of the predatory
MCA industry, including its use of confessions of judgments to seize out-of-state bank
accounts. A copy of the Bloomberg article “Sign Here to Lose Everything” is annexed as
Ex. A.
32. As a direct result of the light shined on these abuses, the New York
Legislature quickly took action, banning the use of out-of-state confessions of judgment in
September 2019. In support, the Legislature cited Bloomberg News.
The MCA Industry Spawned from the 2008 Financial Crisis.
33. One of the earliest MCA companies, Yellowstone Capital LLC, was co-
founded in 2009 by David Glass, an inspirational character for the movie “Boiler Room.” As
Mr. Glass confessed to Bloomberg News, “it’s a lot easier to persuade someone to take
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money than to spend it buying stock.” Just like in the movie, MCA companies utilize high-
pressure boiler room tactics, employing salespersons with absolutely no financial background
whatsoever.
34. As Bloomberg previously reported, the MCA Industry is “essentially payday
lending for businesses,” and “interest rates can exceed 500 percent a year, or 50 to 100 times
higher than a bank’s.” The MCA Industry is a breeding ground for “brokers convicted of
stock scams, insider trading, embezzlement, gambling, and dealing ecstasy.” As one of these
brokers admitted, the “industry is absolutely crazy. … There’s lots of people who’ve been
banned from brokerage. There’s no license you need to file for. It’s pretty much
unregulated.” A copy of the Bloomberg article “Wall Street Finds New Subprime with 125%
Business Loans” is annexed as Ex. B. A copy of the Yahoo Finance article “’We’re Coming
for You:’ Inside the Merchant Cash Advance Industry’ is annexed as Ex. C.
35. Many states, like New York, have laws prohibiting predatory interest rates. In
order to evade these criminal usury laws, MCA companies, such as Newco, disguise their
agreements as “purchases of future receivables.” MCA companies promote a fiction that,
rather than making loans to merchants, they are purchasing, at a discount, a fixed amount of
the merchant’s future receivables, usually to be repaid through a fixed daily payment or, in
this case, a weekly payment that purports to represent a percentage of the merchant’s
receipts. The “form” of the contract thus allows MCAs to represent to courts that they, not
the merchant, assume the risk that the merchant will fail to generate receivables. But the
picture they paint is contrary to reality. By operation of their agreements’ events of default
and draconian remedies, the MCA companies exert complete control over the relationship
and compel the merchant to make the fixed payments or suffer the devastating consequences.
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36. Regulators have also taken action. On July 31, 2020, the New York Attorney
General brought suit against a group of MCA companies, as well as their principals, alleging
that their MCA agreements constitute criminally usurious loans.
37. On July 31, 2020, the Securities and Exchange Commission shut down an
MCA company. In its complaint, the SEC alleged that Par Funding “made opportunistic
loans, some of which charged more than 400% interest, to small businesses across America.”
The FBI thereafter raided its offices, confiscating a cache of guns, millions of dollars in cash,
and a private airplane.
38. On June 10, 2020, the Federal Trade Commission filed a complaint against
John Braun and his various companies alleging various fraudulent and deceptive practices in
connection with MCAs. Indeed, Mr. Braun and his alleged ruthless conduct in connection
with his ongoing role as a principal in an MCA company was prominently on display in a
recent article published in the New York Times.
39. On December 8, 2020, the New Jersey Attorney General also filed suit against
Yellowstone, alleging it cheated “financially-strapped small businesses and their owners out
of millions of dollars nationwide by luring them into predatory loans disguised as cash
advances on future receivables with interest rates far exceeding the interest rate caps in the
State’s usury laws.”
40. On December 23, 2020, New York signed into law the Small Business Truth
in Lending Law, which is aimed at “protecting small business owners,” and “requires key
financial terms such as the amount financed, fees and annual percentage rate (APR) to be
disclosed at the time a credit provider or broker makes an offer of financing of $500,000 or
less.”
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41. As Gretchen Morgensen of NBC News recently reported, however, the
financial greed of predatory lenders, like Newco, has only accelerated in the wake of Covid-
19, where many businesses experienced a downturn in business as well as receivables and
needed access to cash to survive.
42. In light of the Bloomberg articles and the recent actions by regulators and
governmental agencies, courts are scrutinizing these so-called “revenue purchase
agreements,” in many instances finding them to be nothing more than criminally usurious
loans. Indeed, as least one Commercial Division Justice out of Erie County reversed his own
prior decision in Yellowstone Capital, LLC v. Jevin, Index No. 802457/2017 (Erie Co.
October 10, 2017), where he previously held that the very same Yellowstone agreement was
not a loan as a matter of law. This time, upon further reflection, Judge Nowak not only
upheld the claims of usury, but also upheld the RICO claims asserted therein. Numerous
courts have followed suit. See McNider Marine v. Yellowstone Capital, LLC, Index No.
806796/2018 (Erie Co. November 19, 2019); See also,, Davis v. Richmond Capital Group,
194 A.D.3d 516 (1st Dept. 2021); NRO Boston LLC v. Yellowstone Capital LLC, 72 Misc.3d
267 (Rockland Co. 2021) (upholding RICO claims); LG Funding LLC v. United Senior
Properties of Olathe LLC, 181 A.D.3d 664 (2d Dep’t. 2020); Funding Metrics LLC v. NRO
Boston, 2019 WL 4376780 (N.Y. Co. 2019); Funding Metrics, LLC v. D & V Hospitality, 62
Misc.3d 966 (Westchester Co. 2019), rev’d on other grounds, 197 A.D.3d 1150 (2d Dep’t
2021); NRO Boston LLC v. Yellowstone Capital LLC, 72 Misc.3d 267 (Rockland Co. 2021)
(upholding RICO claims). Fleetwood Servs., LLC v. Ram Capital Funding LLC, 2021 WL
1987320 (S.D.N.Y. 2021) (upholding RICO claims under MCA agreement); Davis v.
Richmond Capital Group, 194 A.D.3d 516 (1st Dept. 2021).
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The Newco RPA Is Substantively And Procedurally Unconscionable.
43. Like many MCA companies, Newco preys upon cash-strapped businesses that
cannot readily obtain financing from banks and other traditional lenders. Although their
MCA Agreements are titled “Revenue Purchase Agreement” and purport to represent the
sale/purchase of a businesses’ future revenue, Newco markets, underwrites and collects upon
their MCA transactions as loans, with interest rates far above those permissible under New
York Law.
44. In its marketing, Newco expressly describe their MCA Agreements as “loans”
and describe themselves as “lenders.”
45. Newco also consistently describe its products as “loans” in their direct
communications with merchants and describe themselves as “lenders” and the merchants as
“borrowing” funds.
46. Newco also shows in their underwriting practices that their agreements are
loans. Typically, banks and other institutions that purchase account receivables perform
extensive due diligence into the credit worthiness of the account debtors whose receivables
they are purchasing. By comparison, when underwriting the MCA Agreements, Newco did
not evaluate JMF Solutions receivables, which are the assets Newco purportedly bought.
Instead, Newco simply requested three (3) months of JMF Solutions bank account
statements.
47. JMF Solutions fell victim to all of these predatory tactics. On August 17,
2023, JMF Solutions and Mr. Francis, as Guarantor, entered into an RPA with Newco
whereby Newco purported to purchase $332,500 (“Purchased Amount”) of JMF’s
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receivables for $250,0001 (the “Purchase Price”). The RPA required weekly payments in the
fixed amount of $8,313.00 until the “Purchased Amount” had been paid. As explained
herein, the transaction was a loan with a rate of interest at a criminally usurious rate, to wit,
87.989%. A redacted copy of the RPA is annexed as Ex. D.
48. In addition, The RPA entered into between JMF Solutions and Newco is an
unconscionable contract of adhesion that was not negotiated at arms-length.
49. The RPA contains one-sided terms that prey upon the desperation of the
small business, like JMF Solutions and its owner, and helps conceal the fact that the
transaction contained therein is really a usurious loan.
50. Among these one-sided terms, the RPA includes: (1) a provision giving
Newco the irrevocable right to withdraw money directly from JMF Solutions’ bank account,
including collecting checks and signing invoices in the JMF Solutions name; (2) a provision
preventing JMF Solutions from transferring or selling the assets of its business; (3) a one-
sided attorneys’ fees provision obligating JMF Solutions to pay Newco’s attorneys’ fees
upon the event of default in a fee equal to 30% of the remaining balance and requiring JMF
Solutions to agree that such fee is “reasonable;” (4) a venue and choice-of-law provision
requiring JMF Solutions and Mr. Francis to litigate in a foreign jurisdiction under the laws of
a foreign jurisdiction; (5) a personal guarantee which purports to be a guaranty of
“performance” unless there is a default, in which case, it is an absolute guaranty of payment
of the Purchased Amount; (6) a jury trial waiver; (7) a waiver of any claims against Newco
“under any legal or equitable theory” for “lost profits, lost revenues, lost business
opportunities,” and any form of damages and, if JMF Solutions and/or Francis raise such
1
Newco breached the RPA by providing only $237,450, having deducted $12,550 in fees at the inception of
the loan.
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claims, the RPA seeks to impose Newco’s attorney’s fees, “jointly and severally” on JMF
Solutions and Mr. Francis; (8) a class action waiver; (9) an overreaching collateral and
security agreement providing a UCC lien over all of the JMF Defendants’ assets and Mr.
Francis’s personal assets; (10) a prohibition against obtaining financing from other sources;
(11) an assignment of the lease of JMF Solutions’ premises in favor of Newco; (12) the right
to direct all credit card processing payments to Newco; (13) a power-of-attorney to settle all
obligations due to Newco; and (14) a power of attorney authorizing Newco to “file any
claims or taken any action or institute any proceeding…”
51. In a classic example of the height of “chutzpah” the RPA actually contains a
provision stating that the RPA shall not be construed “as against the preparing party” which
in this case (and every case), is Newco, as the RPA is on a pre-printed form and none of the
terms are negotiable.
52. The RPA is also unconscionable because it contains contain numerous
knowingly false statements. Among these knowingly false statements are that: (1) the
transaction contained in the RPA is not a loan, (2) the fixed weekly payment is a good-faith
estimate of the merchant’s receivables, and (3) the Guaranty is not a guarantee of payment,
but merely a guaranty of performance of the terms of the RPA.
53. In fact, in a tacit admission that the RPA is, in fact, a criminally usurious loan,
the RPA (i) requires JMF Solutions (and Francis) to waive the defense of usury and (ii) seeks
to avoid the knowing consequences of lending money at criminally usurious rates by
including a provision that states that
…in no event shall the aggregate of all amounts or any
portion thereof be deemed interest hereunder and in the
event it is found to be interest despite the parties hereto
specifically representing that it is NOT interest, it shall
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be found that no sum charged or collected hereunder
shall exceed the highest rate permissible at law. In the
event that a court nonetheless determines that [Newco]
has charged or received interest hereunder in excess of
the highest applicable rate, the rate in effect hereunder
shall automatically be reduced to the maximum rate
permitted by applicable law and Newco shall promptly
refund to merchant any interest received by Newco in
excess of the maximum lawful rate, it being intended
that Merchant not contract or pay and that Newco not
receive or contract to receive directly or indirectly in
any manner whatsoever interest in excess of that which
may be paid by Merchant under applicable law.
54. This brazen attempt to “blue line” a criminally unlawful loan bespeaks
volumes of the nature of the transaction contained in the RPA: a criminally usurious loan.
55. The RPA is also unconscionable because it is designed to fail. Among other
things, the RPA is designed to result in a default in the event that the merchant’s business
suffers any downturn in sales by preventing the merchant from obtaining other financing.
56. The RPA also contains numerous improper penalties that violate New York’s
strong public policy. Among these improper penalties, the RPA (1) entitles Newco to
attorneys’ fees in an amount equal to 30% of the alleged debt due to it (in this case, Newco
claims $89,774.40 in attorney’s fees which is automatically assessed upon an event of
default); (2) accelerates the entire debt upon an event of default, and (3) requires JMF
Solutions to turn over 100% of all its receivables if it misses just one fixed weekly payment.
The Reconciliation Provision Contained in the RPA Was Illusory and A Sham to
Disguise the Loan.
57. In order to evade state usury laws, Newco included a sham reconciliation
provision in the RPA to give the appearance that the loans do not have a definite term.
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58. Under a legitimate reconciliation provision, if a merchant pays more through
its fixed weekly payments than it actually received in receivables, the merchant is entitled to
see the repayment of any excess money paid. Thus, if sales decrease, so do the payments.
59. For example, if an MCA company purchased 25% of the merchant’s
receivables, and the merchant generated $100,000 in receivables for the month, the most that
the MCA company is entitled to keep is $25,000. Thus, if the merchant paid $40,000 through
its fixed weekly payments, then the merchant is entitled to $15,000 back under the sham
reconciliation provision.
60. In order to ensure that a merchant can never use its sham reconciliation
provision, however, Newco falsely represents that the fixed weekly payment amount is a
good-faith estimate of the percentage of receivables purchased. By doing so, Newco ensures
that if sales decrease, the required fixed daily payments remain the same.
61. For example, if 25% of a merchant’s actual monthly receivables would result
in a daily payment of $1,000, Newco falsely states that the good-faith estimate is only $500
per day so that if sales did in fact decrease by 50%, the merchant would not be able to invoke
the reconciliation provision.
62. Moreover, Newco conditions granting reconciliation on the merchant
providing any and all documents that Newco may request; a merchant’s failure to provide
every single document Newco could possibly request provides Newco with a complete basis
to deny the reconciliation regardless of changes to the merchant’s receivables.
63. Newco controlled the possibility of reconciliation under the so-called
onerous reconciliation provision in the RPA. The RPA permitted Defendants to seek
adjustments to the weekly fixed payment, but only (1) if no Event of Default occurred and
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(2) after providing to Newco (i) copies of all bank account statements, credit card
processing statements, and accounts receivable report from the date the parties entered into
the RPA through and including the date of the reconciliation request. In addition, Newco
retained the right to request additional heretofore undefined additional documentation
including, but not limited to, bank login or access to view all of JMF Solutions’ accounts
using third party software. These conditions effectively made reconciliation under the
RPA remote and highly improbable.
64. Indeed, the capacious phrase “additional documentation” allowed Newco to
demand materials wholly ancillary to the reconciliation, impossible to obtain, or utterly
fanciful. Nothing in the RPA prohibited Newco from demanding, for example, that JMF
Solutions produce the birth certificates and marriage licenses of their customers. In effect,
the RPA armed Newco with the power to veto any adjustment to the weekly amount, and
placed the risk associated with any such adjustment squarely on JMF Solutions.
65. The sham reconciliation process was unenforceable by Defendants. There
was no ability under the RPA for JMF Solutions to stop Newco’s ACH debit from their
account pending a request for reconciliation. Indeed, during the “investigative”
process, there was no right nor ability to stop the automatic debit of the fixed weekly
payment. Second, and relatedly, the RPA rendered the possibility of filing a
timely reconciliation request remote. Pursuant to the RPA, any failure to pay the weekly
fixed amount of $8,313.00 was an event of default that permanently foreclosed any
possibility of future reconciliation.
66. Courts applying New York law have construed such conditions in MCA
Agreements as rendering the reconciliation provisions illusory such that they are actually
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loans. See, e.g., Haymount Urgent Care PC v. GoFund Advance, LLC, 609 F. Supp. 3d 237
(S.D.N.Y. 2022) (finding MCA agreements like loans where “while the reconciliation
provision purports to be ‘mandatory,’ its structure nonetheless vests substantial discretion in
[MCA lender] to deny reconciliation: the reconciliation provision expressly permits the
lender ‘to request additional documentation . . . and notes that ‘refusal to provide access shall
be a breach’ such that the lender ‘shall have no obligation to reconcile. It is readily apparent
how the lender could use this contractual right to obtain from the merchant further
documentation as a procedural pretext for denying reconciliation’”); Lateral Recover, LLC v.
Cap. Merch. Servs., LLC, 632 F. Supp. 3d 402 (S.D.N.Y. 2022) (“CMS”) (“It is thus also
plausible to read the reconciliation provision as being virtually illusory. In the first place, the
provision is contingent upon the merchant producing satisfactory documentation to the
funder providing the funder a ready means to deny reconciliation”); AKF, Inc. v. W. Foot &
Ankle Ctr., 632 F. Supp. 3d 66 (E.D.N.Y. 2022) (similar); McNider Mar., LLC v. Yellowstone
Capital, supra (similar).
67. Newco designed its reconciliation provision to be effectively impossible for
a merchant to use because it would be placed in default if it missed a weekly fixed payment
while its reconciliation request was still pending—which is certain since a merchant can
only request reconciliation where it is experiencing a slowdown in projected revenue—and
being in default voids the merchant’s right to reconciliation. Courts applying New York
law have found such reconciliation provisions that would put the merchant in default
before reconciliation would be performed based on missed payments to be illusory and
render the MCA Agreements being loans. CMS, at 456-57. Fleetwood Services, LLC v.
Richmond Capital Group, LLC, 2023 WL 3882697 (2d Cir. 2023)
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68. Relatedly, the fact that the RPA would place JMF Solutions in default for
missing a fixed weekly payment over the course of the RPA’s term renders them loans as
numerous courts applying New York law have ruled less onerous default provisions render
MCA agreements loans. CMS, at 458 (finding MCA Agreement like a loan where the
“merchant has to pay a fixed amount on a daily basis. If it fails to do so just three times, a
default is declared”); Davis v. Richmond Capital Group, 194 A.D.3d 516 (1st Dep’t 2021)
(finding MCA Agreements like a loan where there were “provisions making rejection of an
automated debit on two or three occasions without prior notice an event of default”);
People v. Richmond Capital Group LLC, 80 Misc.3d1213(A)(N.Y. Co. 2023) (finding
MCA agreements to be loans where default would occur after three missed payments).
69. Finally, on information and belief, Newco did not maintain a reconciliation
department and did not have any one trained or otherwise dedicated to performing any
reconciliation of a merchant’s accounts.
Newco Intentionally Disguised the True Nature of the Transaction.
70. Despite the documented form, the transaction contemplated by the RPA is, in
economic reality, a loan that is absolutely repayable. Among other hallmarks of a loan
disguised as a purchase of future revenues:
(a) The Weekly Payments were fixed and the so-called
reconciliation provision was mere subterfuge to avoid New
York’s usury laws. Rather, just like any other loan, the
Purchased Amount was to be repaid within a specified
time;
(b) The default and remedy provision purported to hold the
JMF Defendants absolutely liable for repayment of the
Purchased Amount. The loan sought to obligate the JMF
Defendants to ensure sufficient funds were maintained in
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the Account to make the Weekly Payments without regard
to whether or not such amount was paid by its customers;
(c)The RPA does not identify specific receivables of JMF
Solutions that Newco purportedly purchased, and it was
JMF Solutions—not Newco—that was responsible for
collecting receivables Newco allegedly purchased. This
feature in MCA agreements has been found by Courts
applying New York law to render them loans. Haymount,
at 249 (“Nor does any MCA agreement identify particular
revenues or accounts that were supposedly purchased, so
there is no transfer of ‘risk of nonpayment by any specific
customer. Moreover, the MCA agreements leave
merchants with the responsibility to collect revenues from
all their accounts”).
(d) The transaction was underwritten based upon an
assessment of the JMF Defendants’ credit worthiness; not
the creditworthiness of any account debtor;
(e) The Purchased Amount was not calculated based upon
the fair market value of the JMF Defendants’ future
receivables, but rather was unilaterally dictated by Newco
based upon the interest rate it wanted to be paid. Indeed, as
part of the underwriting process, Newco did not request any
information concerning the JMF Defendants’ account
debtors upon which to make a fair market determination of
their value;
(f) The amount of the Weekly Payment was determined
based upon when Newco wanted to be paid, and not based
upon any good-faith estimate of the JMF Defendants’
future account receivables;
(g) Newco assumed no risk of loss due to the JMF
Defendants’ failure to generate sufficient receivables
because the failure to maintain sufficient funds in the
Account constituted a default under the agreement ;
(h) Newco required that the JMF Defendants undertake
certain affirmative obligations and make certain
representations and warranties that were aimed at ensuring
that JMF Solutions would continue to operate and generate
receivables and a breach of such obligations,
representations and warranties constituted a default, which
fully protected Newco from any risk of loss resulting from
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NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024
the JMF Defendants’ failure to generate and collect
receivables.
(i) Newco required that the JMF Defendants grant it a
security interest in its receivables and other intangibles and,
further, that the individual owner, Mr. Francis, personally
guarantee the performance of the representations,
warranties and covenants, which Newco knew were
breached from day one.
(j) in the event the JMF Defendants file for bankruptcy or
are placed under an involuntary filing, Newco would be
entitled to enforce the Guaranty against Mr. Francis. New
York courts have held that such a provision in an MCA
evidences that the agreements were loans. Davis v.
Richmond Group, 150 N.Y.S.3d 2 (1st Dep’t 2021);
Fleetwood Services v. Richmond Capital, 2023 WL
3882697 (2d. Cir. 2023).
FIRST COUNTERCLAIM
(Declaratory Relief)
71. Defendants repeat and reallege paragraphs 28-70 of the Counterclaim as if
more fully set forth herein.
72. A declaratory judgment is required by this Court to determine the rights and
obligations of the parties with respect to the RPA .
73. A declaratory judgment must be issued declaring that Newco has no right to
enforce any security rights and that Newco is barred from enforcing unconscionable and
illegal interest rates on a sham loan.
74. Under controlling New York law, the RPA is void ab initio. See Adar Bays,
LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021).
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75. JMF seeks a declaration that the RPA is in reality a criminally usurious loan
which is void and unenforceable as well as the Francis Guaranty purporting to personally
guarantee the repayment of a criminally usurious loan.
SECOND COUNTERCLAIM
(Fraud)
76. Defendants repeat and reallege paragraphs 28-75 of the Counterclaim as if
more fully set forth herein.
77. The terms of the RPA state that Newco will pay the Purchase Price (of
$250,000) to JMF Solutions to purchase $332,500 (“Purchased Amount”) of JMF’s
receivables. However, Newco only provided $237,450 to JMF Solutions.
78. Unbeknownst to JMF Solutions, Newco improperly deducted an “ACH
Origination Fee” equal to 2.5% of the purchase price ($6,250.00) to cover cost of origination
and ACH Setup. This fee was fraudulent as it was simply a ploy to extract additional funds
from JMF Solutions and did not actually comprise of related expenses pertaining to
origination. None of these fees had any relationship to any services actually rendered and
instead were disguised interest charges.
79. Also, unbeknownst to JMF Solutions, Newco deducted an Underwriting Fee
of 2.5% of the purchase price ($6,250.00) for underwriting and related expense. This fee was
fraudulent as this was simply a sham to extract more funds from the JMF Defendants. None
of these fees had any relationship to any services actually rendered and instead were
disguised interest charges. Indeed, Newco performed little or no due diligence and conducted
very little underwriting when entering into the RPA. Newco required little more than three
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months of bank statements from the JMF Defendants and issued its approval of the JMF
Defendants in a matter of hours.
80. The RPA represented that these fees were for services or costs purportedly
provided by or incurred by Newco in connection with the RPA, but, in reality, these services
or costs were never provided or incurred or were otherwise provided or incurred for amounts
far below those stated in the RPA and the so-called “fees” were nothing more than additional
profits reaped by Newco under the RPA.
81. Newco knew that its representations concerning the nature and purpose of the
Origination Fee, Underwriting Fee and other fees were false and misleading at the time they
entered into the RPA.
82. On information and belief, Newco also deducted NSF Fees and Default Fees
which were similarly a fraudulent ploy to extract funds from the JMF Defendants by using a
sham misnomer characterization of fees.
83. These false representations were made in order to induce the JMF Defendants
into believing that the fees charged to them and deducted from the Purchased Amount of the
RPA were legitimate fees charged to offset the costs of services provided by Newco under
the RPA.
84. The JMF Defendants reasonably relied upon these representations in entering
into the RPA and, ultimately paying, the fees through the Weekly Payments.
85. As a result of the foregoing fraudulent conduct, Defendants have been
damaged in an amount to be proven at trial.
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THIRD COUNTERCLAIM
(Breach of Contract)
86. Defendants repeat and reallege paragraphs 28-85 of the Counterclaim as if
more fully set forth herein.
87. Under the RPA, Newco promised to advance certain amounts as identified in
Ex. D hereto.
88. Newco did not advance the amounts as promised.
89. As a direct and proximate result of Newco’s breach of the RPA, Defendants
have been damaged in the amount detailed above.
WHEREFORE, Defendants pray for judgment as follows:
1. That the court enter an order dismissing the verified complaint in its entirety;
2. Declaring that the revenue purchase agreement by and between Newco and JMF
Solutions constitutes a loan transaction, and thus, is void because Newco intended
to charge and receive a criminally usurious interest rate in excess of 25%;
3. Declaring that Personal Guaranty executed by Francis is void as it purports to be a
guarantee of a usurious loan;
4. Ordering Newco to repay all principal and interest to JMF Solutions that it
previously paid to Newco in connection with the criminally usurious loan,
including prejudgment interest;
5. granting an injunction against Newco permanently enjoining it from enforcing
any of its rights under the criminally usurious loans;
6. Awarding JMF direct and consequential damages;
7. Awarding attorneys fees, reason
Preview
FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 EXHIBIT A FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF ROCKLAND ----------------------------------------------------------------x NEWCO CAPITAL GROUP VI LLC, Plaintiff, Index No. 160987/2014 -against- VERIFIED ANSWER AND COUNTERCLAIMS JMF SOLUTIONS INC. D/B/A JMF SOLUTIONS; JMF SOLUTIONS, INC., JMF; LEASEDMINDS; JMF NETWORKS and JOHN MICHAEL FRANCIS, II, Defendants. ----------------------------------------------------------------x Defendants JMF Solutions Inc. d/b/a JMF Solutions, JMF Solutions, Inc., (“JMF Solutions”) JMF, Leasedminds, JMF Networks (collectively referred to herein as the “JMF Defendants”) and John Michael Francis (“Francis”) by their attorneys, the Law Offices of Carole R. Bernstein, as and for their verified answer and counterclaims, allege: 1. Denies knowledge or information sufficient to form a belief as to the truth of the allegations contained in paragraph 1 of the verified complaint. 2. Admits the allegations contained in paragraphs 2 and 3 of the verified complaint. 3. Denies knowledge or information sufficient to form a belief as to the truth of the allegations contained in paragraphs 4, 5, 6 and 7 of the verified complaint and respectfully refers the Court to the terms and conditions of the Agreement referred to therein for a complete and accurate representation of the contents thereof. 4. Francis and the JMF Defendants deny the allegations contained in paragraph 8 of the verified complaint and respectfully refer the Court to the terms and conditions of the FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 Agreement referenced therein thereto for a complete and accurate representation of the contents thereof. 5. The JMF Defendants deny knowledge or information sufficient to form a belief as to the truth of the allegations contained in paragraphs 9 and 11 of the verified complaint. 6. The JMF Defendants deny the allegations contained in paragraphs 10 and 12 of the verified complaint. 7. Francis denies the allegations contained in paragraph 13 of the verified complaint. 8. Francis and the JMF Defendants deny the allegations contained in paragraph 14 of the verified complaint. 9. Repeat and reallege paragraphs 1 to 8 of their verified answer as if more fully set forth herein. 10. The allegations contained in paragraph 16 of the verified complaint constitute legal conclusions to which no response is required. To the extent a response is required, the allegations are denied. 11. The JMF Defendants deny the allegations contained in paragraphs 17, 18 and 19 of the verified complaint. 12. Repeat and reallege paragraphs 1 to 11 of their verified answer as if more fully set forth herein. 13. Francis denies the allegations contained in paragraph 21 of the verified complaint and respectfully refers the Court to the terms and conditions of the document referenced therein thereto for a complete and accurate representation of the contents thereof. -2- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 14. The JMF Defendants and Francis deny the allegations contained in paragraphs 21 of the verified complaint. 15. Francis denies the allegations contained in paragraph 22 of the verified complaint. AS AND FOR A FIRST DEFENSE 16. The verified complaint fails to state a cause of action upon which relief may be granted. AS AND FOR A SECOND DEFENSE 17. Plaintiff Newco Capital Group VI LLC (“Newco”) failed to provide the JMF Defendants with written notice of any alleged default. 18. Newco failed to provide the JMF Defendants with opportunity to cure alleged default. AS AND FOR A THIRD DEFENSE 19. Newco’s claims are barred for lack of personal jurisdiction over the JMF Defendants and Francis. AS AND FOR A FOURTH DEFENSE 20. The Agreement referenced in the verified complaint should be rescinded as the agreement was entered into by the JMF Defendants under economic duress. AS AND FOR A FIFTH DEFENSE 21. Newco’s claims are barred inasmuch as the Agreement was a loan charging interest at a criminally usurious rate, to wit, 87.989%. AS AND FOR A SIXTH DEFENSE 22. Newco’s claims are barred to the extent that the Agreement contains punitive, -3- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 unconscionable provisions that are penal in nature and unrelated to any real alleged damages suffered. AS AND FOR A SEVENTH DEFENSE 23. Newco’s claims are barred as the Agreement was a contract of adhesion. AS AND FOR A EIGHTH DEFENSE 24. Newco’s claims are barred by the doctrine of waiver, laches, unclean hands or estoppel. AS AND FOR A NINTH DEFENSE 25. Newco’s claim for damages is barred for its breach of the covenant of good faith and fair dealing. AS AND FOR A TENTH DEFENSE 26. Newco has engaged in fraudulent, deceptive and misleading conduct against the JMF Defendants and Francis. AS AND FOR A TENTH DEFENSE 27. Newco breached the RPA first. COUNTERCLAIMS Factual Background 28. JMF Solutions is corporation organized under the laws of the State of Alabama with its place of business located in Alabama. JMF Solutions is an 18-year-old telecommunications company that provides critical services including but not limited to data, VOIP, Cloud, Managed and Datacenter services to numerous business in the southeastern United States, including hospitals, state and local government agencies and many non-profit -4- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 companies. 29. Upon information and belief, Newco is one of many related merchant cash advance companies (“MCA”), with its principal place of business in New York. Newco’s success depends upon carrying out a fraudulent scheme to collect upon unlawful debts and otherwise fraudulently obtain funds, from small businesses and there owners such as the JMF Defendants and Francis, through the use of its sham MCA agreement, misleadingly referred to in this case as a “Revenue Purchase Agreement” (“RPA”) . 30. For nearly a decade, MCAs operated under the radar of regulators, compiling over 25,000 confessions of judgment against small businesses and their individual owners. Unfortunately, the type of conduct engaged in by Newco is a ballooning national problem that has raised the attention of both state and federal regulators. 31. To that end, in November 2018, Bloomberg News published what would be the first in a series of groundbreaking news articles exposing the abuses of the predatory MCA industry, including its use of confessions of judgments to seize out-of-state bank accounts. A copy of the Bloomberg article “Sign Here to Lose Everything” is annexed as Ex. A. 32. As a direct result of the light shined on these abuses, the New York Legislature quickly took action, banning the use of out-of-state confessions of judgment in September 2019. In support, the Legislature cited Bloomberg News. The MCA Industry Spawned from the 2008 Financial Crisis. 33. One of the earliest MCA companies, Yellowstone Capital LLC, was co- founded in 2009 by David Glass, an inspirational character for the movie “Boiler Room.” As Mr. Glass confessed to Bloomberg News, “it’s a lot easier to persuade someone to take -5- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 money than to spend it buying stock.” Just like in the movie, MCA companies utilize high- pressure boiler room tactics, employing salespersons with absolutely no financial background whatsoever. 34. As Bloomberg previously reported, the MCA Industry is “essentially payday lending for businesses,” and “interest rates can exceed 500 percent a year, or 50 to 100 times higher than a bank’s.” The MCA Industry is a breeding ground for “brokers convicted of stock scams, insider trading, embezzlement, gambling, and dealing ecstasy.” As one of these brokers admitted, the “industry is absolutely crazy. … There’s lots of people who’ve been banned from brokerage. There’s no license you need to file for. It’s pretty much unregulated.” A copy of the Bloomberg article “Wall Street Finds New Subprime with 125% Business Loans” is annexed as Ex. B. A copy of the Yahoo Finance article “’We’re Coming for You:’ Inside the Merchant Cash Advance Industry’ is annexed as Ex. C. 35. Many states, like New York, have laws prohibiting predatory interest rates. In order to evade these criminal usury laws, MCA companies, such as Newco, disguise their agreements as “purchases of future receivables.” MCA companies promote a fiction that, rather than making loans to merchants, they are purchasing, at a discount, a fixed amount of the merchant’s future receivables, usually to be repaid through a fixed daily payment or, in this case, a weekly payment that purports to represent a percentage of the merchant’s receipts. The “form” of the contract thus allows MCAs to represent to courts that they, not the merchant, assume the risk that the merchant will fail to generate receivables. But the picture they paint is contrary to reality. By operation of their agreements’ events of default and draconian remedies, the MCA companies exert complete control over the relationship and compel the merchant to make the fixed payments or suffer the devastating consequences. -6- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 36. Regulators have also taken action. On July 31, 2020, the New York Attorney General brought suit against a group of MCA companies, as well as their principals, alleging that their MCA agreements constitute criminally usurious loans. 37. On July 31, 2020, the Securities and Exchange Commission shut down an MCA company. In its complaint, the SEC alleged that Par Funding “made opportunistic loans, some of which charged more than 400% interest, to small businesses across America.” The FBI thereafter raided its offices, confiscating a cache of guns, millions of dollars in cash, and a private airplane. 38. On June 10, 2020, the Federal Trade Commission filed a complaint against John Braun and his various companies alleging various fraudulent and deceptive practices in connection with MCAs. Indeed, Mr. Braun and his alleged ruthless conduct in connection with his ongoing role as a principal in an MCA company was prominently on display in a recent article published in the New York Times. 39. On December 8, 2020, the New Jersey Attorney General also filed suit against Yellowstone, alleging it cheated “financially-strapped small businesses and their owners out of millions of dollars nationwide by luring them into predatory loans disguised as cash advances on future receivables with interest rates far exceeding the interest rate caps in the State’s usury laws.” 40. On December 23, 2020, New York signed into law the Small Business Truth in Lending Law, which is aimed at “protecting small business owners,” and “requires key financial terms such as the amount financed, fees and annual percentage rate (APR) to be disclosed at the time a credit provider or broker makes an offer of financing of $500,000 or less.” -7- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 41. As Gretchen Morgensen of NBC News recently reported, however, the financial greed of predatory lenders, like Newco, has only accelerated in the wake of Covid- 19, where many businesses experienced a downturn in business as well as receivables and needed access to cash to survive. 42. In light of the Bloomberg articles and the recent actions by regulators and governmental agencies, courts are scrutinizing these so-called “revenue purchase agreements,” in many instances finding them to be nothing more than criminally usurious loans. Indeed, as least one Commercial Division Justice out of Erie County reversed his own prior decision in Yellowstone Capital, LLC v. Jevin, Index No. 802457/2017 (Erie Co. October 10, 2017), where he previously held that the very same Yellowstone agreement was not a loan as a matter of law. This time, upon further reflection, Judge Nowak not only upheld the claims of usury, but also upheld the RICO claims asserted therein. Numerous courts have followed suit. See McNider Marine v. Yellowstone Capital, LLC, Index No. 806796/2018 (Erie Co. November 19, 2019); See also,, Davis v. Richmond Capital Group, 194 A.D.3d 516 (1st Dept. 2021); NRO Boston LLC v. Yellowstone Capital LLC, 72 Misc.3d 267 (Rockland Co. 2021) (upholding RICO claims); LG Funding LLC v. United Senior Properties of Olathe LLC, 181 A.D.3d 664 (2d Dep’t. 2020); Funding Metrics LLC v. NRO Boston, 2019 WL 4376780 (N.Y. Co. 2019); Funding Metrics, LLC v. D & V Hospitality, 62 Misc.3d 966 (Westchester Co. 2019), rev’d on other grounds, 197 A.D.3d 1150 (2d Dep’t 2021); NRO Boston LLC v. Yellowstone Capital LLC, 72 Misc.3d 267 (Rockland Co. 2021) (upholding RICO claims). Fleetwood Servs., LLC v. Ram Capital Funding LLC, 2021 WL 1987320 (S.D.N.Y. 2021) (upholding RICO claims under MCA agreement); Davis v. Richmond Capital Group, 194 A.D.3d 516 (1st Dept. 2021). -8- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 The Newco RPA Is Substantively And Procedurally Unconscionable. 43. Like many MCA companies, Newco preys upon cash-strapped businesses that cannot readily obtain financing from banks and other traditional lenders. Although their MCA Agreements are titled “Revenue Purchase Agreement” and purport to represent the sale/purchase of a businesses’ future revenue, Newco markets, underwrites and collects upon their MCA transactions as loans, with interest rates far above those permissible under New York Law. 44. In its marketing, Newco expressly describe their MCA Agreements as “loans” and describe themselves as “lenders.” 45. Newco also consistently describe its products as “loans” in their direct communications with merchants and describe themselves as “lenders” and the merchants as “borrowing” funds. 46. Newco also shows in their underwriting practices that their agreements are loans. Typically, banks and other institutions that purchase account receivables perform extensive due diligence into the credit worthiness of the account debtors whose receivables they are purchasing. By comparison, when underwriting the MCA Agreements, Newco did not evaluate JMF Solutions receivables, which are the assets Newco purportedly bought. Instead, Newco simply requested three (3) months of JMF Solutions bank account statements. 47. JMF Solutions fell victim to all of these predatory tactics. On August 17, 2023, JMF Solutions and Mr. Francis, as Guarantor, entered into an RPA with Newco whereby Newco purported to purchase $332,500 (“Purchased Amount”) of JMF’s -9- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 receivables for $250,0001 (the “Purchase Price”). The RPA required weekly payments in the fixed amount of $8,313.00 until the “Purchased Amount” had been paid. As explained herein, the transaction was a loan with a rate of interest at a criminally usurious rate, to wit, 87.989%. A redacted copy of the RPA is annexed as Ex. D. 48. In addition, The RPA entered into between JMF Solutions and Newco is an unconscionable contract of adhesion that was not negotiated at arms-length. 49. The RPA contains one-sided terms that prey upon the desperation of the small business, like JMF Solutions and its owner, and helps conceal the fact that the transaction contained therein is really a usurious loan. 50. Among these one-sided terms, the RPA includes: (1) a provision giving Newco the irrevocable right to withdraw money directly from JMF Solutions’ bank account, including collecting checks and signing invoices in the JMF Solutions name; (2) a provision preventing JMF Solutions from transferring or selling the assets of its business; (3) a one- sided attorneys’ fees provision obligating JMF Solutions to pay Newco’s attorneys’ fees upon the event of default in a fee equal to 30% of the remaining balance and requiring JMF Solutions to agree that such fee is “reasonable;” (4) a venue and choice-of-law provision requiring JMF Solutions and Mr. Francis to litigate in a foreign jurisdiction under the laws of a foreign jurisdiction; (5) a personal guarantee which purports to be a guaranty of “performance” unless there is a default, in which case, it is an absolute guaranty of payment of the Purchased Amount; (6) a jury trial waiver; (7) a waiver of any claims against Newco “under any legal or equitable theory” for “lost profits, lost revenues, lost business opportunities,” and any form of damages and, if JMF Solutions and/or Francis raise such 1 Newco breached the RPA by providing only $237,450, having deducted $12,550 in fees at the inception of the loan. -10- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 claims, the RPA seeks to impose Newco’s attorney’s fees, “jointly and severally” on JMF Solutions and Mr. Francis; (8) a class action waiver; (9) an overreaching collateral and security agreement providing a UCC lien over all of the JMF Defendants’ assets and Mr. Francis’s personal assets; (10) a prohibition against obtaining financing from other sources; (11) an assignment of the lease of JMF Solutions’ premises in favor of Newco; (12) the right to direct all credit card processing payments to Newco; (13) a power-of-attorney to settle all obligations due to Newco; and (14) a power of attorney authorizing Newco to “file any claims or taken any action or institute any proceeding…” 51. In a classic example of the height of “chutzpah” the RPA actually contains a provision stating that the RPA shall not be construed “as against the preparing party” which in this case (and every case), is Newco, as the RPA is on a pre-printed form and none of the terms are negotiable. 52. The RPA is also unconscionable because it contains contain numerous knowingly false statements. Among these knowingly false statements are that: (1) the transaction contained in the RPA is not a loan, (2) the fixed weekly payment is a good-faith estimate of the merchant’s receivables, and (3) the Guaranty is not a guarantee of payment, but merely a guaranty of performance of the terms of the RPA. 53. In fact, in a tacit admission that the RPA is, in fact, a criminally usurious loan, the RPA (i) requires JMF Solutions (and Francis) to waive the defense of usury and (ii) seeks to avoid the knowing consequences of lending money at criminally usurious rates by including a provision that states that …in no event shall the aggregate of all amounts or any portion thereof be deemed interest hereunder and in the event it is found to be interest despite the parties hereto specifically representing that it is NOT interest, it shall -11- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 be found that no sum charged or collected hereunder shall exceed the highest rate permissible at law. In the event that a court nonetheless determines that [Newco] has charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by applicable law and Newco shall promptly refund to merchant any interest received by Newco in excess of the maximum lawful rate, it being intended that Merchant not contract or pay and that Newco not receive or contract to receive directly or indirectly in any manner whatsoever interest in excess of that which may be paid by Merchant under applicable law. 54. This brazen attempt to “blue line” a criminally unlawful loan bespeaks volumes of the nature of the transaction contained in the RPA: a criminally usurious loan. 55. The RPA is also unconscionable because it is designed to fail. Among other things, the RPA is designed to result in a default in the event that the merchant’s business suffers any downturn in sales by preventing the merchant from obtaining other financing. 56. The RPA also contains numerous improper penalties that violate New York’s strong public policy. Among these improper penalties, the RPA (1) entitles Newco to attorneys’ fees in an amount equal to 30% of the alleged debt due to it (in this case, Newco claims $89,774.40 in attorney’s fees which is automatically assessed upon an event of default); (2) accelerates the entire debt upon an event of default, and (3) requires JMF Solutions to turn over 100% of all its receivables if it misses just one fixed weekly payment. The Reconciliation Provision Contained in the RPA Was Illusory and A Sham to Disguise the Loan. 57. In order to evade state usury laws, Newco included a sham reconciliation provision in the RPA to give the appearance that the loans do not have a definite term. -12- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 58. Under a legitimate reconciliation provision, if a merchant pays more through its fixed weekly payments than it actually received in receivables, the merchant is entitled to see the repayment of any excess money paid. Thus, if sales decrease, so do the payments. 59. For example, if an MCA company purchased 25% of the merchant’s receivables, and the merchant generated $100,000 in receivables for the month, the most that the MCA company is entitled to keep is $25,000. Thus, if the merchant paid $40,000 through its fixed weekly payments, then the merchant is entitled to $15,000 back under the sham reconciliation provision. 60. In order to ensure that a merchant can never use its sham reconciliation provision, however, Newco falsely represents that the fixed weekly payment amount is a good-faith estimate of the percentage of receivables purchased. By doing so, Newco ensures that if sales decrease, the required fixed daily payments remain the same. 61. For example, if 25% of a merchant’s actual monthly receivables would result in a daily payment of $1,000, Newco falsely states that the good-faith estimate is only $500 per day so that if sales did in fact decrease by 50%, the merchant would not be able to invoke the reconciliation provision. 62. Moreover, Newco conditions granting reconciliation on the merchant providing any and all documents that Newco may request; a merchant’s failure to provide every single document Newco could possibly request provides Newco with a complete basis to deny the reconciliation regardless of changes to the merchant’s receivables. 63. Newco controlled the possibility of reconciliation under the so-called onerous reconciliation provision in the RPA. The RPA permitted Defendants to seek adjustments to the weekly fixed payment, but only (1) if no Event of Default occurred and -13- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 (2) after providing to Newco (i) copies of all bank account statements, credit card processing statements, and accounts receivable report from the date the parties entered into the RPA through and including the date of the reconciliation request. In addition, Newco retained the right to request additional heretofore undefined additional documentation including, but not limited to, bank login or access to view all of JMF Solutions’ accounts using third party software. These conditions effectively made reconciliation under the RPA remote and highly improbable. 64. Indeed, the capacious phrase “additional documentation” allowed Newco to demand materials wholly ancillary to the reconciliation, impossible to obtain, or utterly fanciful. Nothing in the RPA prohibited Newco from demanding, for example, that JMF Solutions produce the birth certificates and marriage licenses of their customers. In effect, the RPA armed Newco with the power to veto any adjustment to the weekly amount, and placed the risk associated with any such adjustment squarely on JMF Solutions. 65. The sham reconciliation process was unenforceable by Defendants. There was no ability under the RPA for JMF Solutions to stop Newco’s ACH debit from their account pending a request for reconciliation. Indeed, during the “investigative” process, there was no right nor ability to stop the automatic debit of the fixed weekly payment. Second, and relatedly, the RPA rendered the possibility of filing a timely reconciliation request remote. Pursuant to the RPA, any failure to pay the weekly fixed amount of $8,313.00 was an event of default that permanently foreclosed any possibility of future reconciliation. 66. Courts applying New York law have construed such conditions in MCA Agreements as rendering the reconciliation provisions illusory such that they are actually -14- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 loans. See, e.g., Haymount Urgent Care PC v. GoFund Advance, LLC, 609 F. Supp. 3d 237 (S.D.N.Y. 2022) (finding MCA agreements like loans where “while the reconciliation provision purports to be ‘mandatory,’ its structure nonetheless vests substantial discretion in [MCA lender] to deny reconciliation: the reconciliation provision expressly permits the lender ‘to request additional documentation . . . and notes that ‘refusal to provide access shall be a breach’ such that the lender ‘shall have no obligation to reconcile. It is readily apparent how the lender could use this contractual right to obtain from the merchant further documentation as a procedural pretext for denying reconciliation’”); Lateral Recover, LLC v. Cap. Merch. Servs., LLC, 632 F. Supp. 3d 402 (S.D.N.Y. 2022) (“CMS”) (“It is thus also plausible to read the reconciliation provision as being virtually illusory. In the first place, the provision is contingent upon the merchant producing satisfactory documentation to the funder providing the funder a ready means to deny reconciliation”); AKF, Inc. v. W. Foot & Ankle Ctr., 632 F. Supp. 3d 66 (E.D.N.Y. 2022) (similar); McNider Mar., LLC v. Yellowstone Capital, supra (similar). 67. Newco designed its reconciliation provision to be effectively impossible for a merchant to use because it would be placed in default if it missed a weekly fixed payment while its reconciliation request was still pending—which is certain since a merchant can only request reconciliation where it is experiencing a slowdown in projected revenue—and being in default voids the merchant’s right to reconciliation. Courts applying New York law have found such reconciliation provisions that would put the merchant in default before reconciliation would be performed based on missed payments to be illusory and render the MCA Agreements being loans. CMS, at 456-57. Fleetwood Services, LLC v. Richmond Capital Group, LLC, 2023 WL 3882697 (2d Cir. 2023) -15- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 68. Relatedly, the fact that the RPA would place JMF Solutions in default for missing a fixed weekly payment over the course of the RPA’s term renders them loans as numerous courts applying New York law have ruled less onerous default provisions render MCA agreements loans. CMS, at 458 (finding MCA Agreement like a loan where the “merchant has to pay a fixed amount on a daily basis. If it fails to do so just three times, a default is declared”); Davis v. Richmond Capital Group, 194 A.D.3d 516 (1st Dep’t 2021) (finding MCA Agreements like a loan where there were “provisions making rejection of an automated debit on two or three occasions without prior notice an event of default”); People v. Richmond Capital Group LLC, 80 Misc.3d1213(A)(N.Y. Co. 2023) (finding MCA agreements to be loans where default would occur after three missed payments). 69. Finally, on information and belief, Newco did not maintain a reconciliation department and did not have any one trained or otherwise dedicated to performing any reconciliation of a merchant’s accounts. Newco Intentionally Disguised the True Nature of the Transaction. 70. Despite the documented form, the transaction contemplated by the RPA is, in economic reality, a loan that is absolutely repayable. Among other hallmarks of a loan disguised as a purchase of future revenues: (a) The Weekly Payments were fixed and the so-called reconciliation provision was mere subterfuge to avoid New York’s usury laws. Rather, just like any other loan, the Purchased Amount was to be repaid within a specified time; (b) The default and remedy provision purported to hold the JMF Defendants absolutely liable for repayment of the Purchased Amount. The loan sought to obligate the JMF Defendants to ensure sufficient funds were maintained in -16- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 the Account to make the Weekly Payments without regard to whether or not such amount was paid by its customers; (c)The RPA does not identify specific receivables of JMF Solutions that Newco purportedly purchased, and it was JMF Solutions—not Newco—that was responsible for collecting receivables Newco allegedly purchased. This feature in MCA agreements has been found by Courts applying New York law to render them loans. Haymount, at 249 (“Nor does any MCA agreement identify particular revenues or accounts that were supposedly purchased, so there is no transfer of ‘risk of nonpayment by any specific customer. Moreover, the MCA agreements leave merchants with the responsibility to collect revenues from all their accounts”). (d) The transaction was underwritten based upon an assessment of the JMF Defendants’ credit worthiness; not the creditworthiness of any account debtor; (e) The Purchased Amount was not calculated based upon the fair market value of the JMF Defendants’ future receivables, but rather was unilaterally dictated by Newco based upon the interest rate it wanted to be paid. Indeed, as part of the underwriting process, Newco did not request any information concerning the JMF Defendants’ account debtors upon which to make a fair market determination of their value; (f) The amount of the Weekly Payment was determined based upon when Newco wanted to be paid, and not based upon any good-faith estimate of the JMF Defendants’ future account receivables; (g) Newco assumed no risk of loss due to the JMF Defendants’ failure to generate sufficient receivables because the failure to maintain sufficient funds in the Account constituted a default under the agreement ; (h) Newco required that the JMF Defendants undertake certain affirmative obligations and make certain representations and warranties that were aimed at ensuring that JMF Solutions would continue to operate and generate receivables and a breach of such obligations, representations and warranties constituted a default, which fully protected Newco from any risk of loss resulting from -17- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 the JMF Defendants’ failure to generate and collect receivables. (i) Newco required that the JMF Defendants grant it a security interest in its receivables and other intangibles and, further, that the individual owner, Mr. Francis, personally guarantee the performance of the representations, warranties and covenants, which Newco knew were breached from day one. (j) in the event the JMF Defendants file for bankruptcy or are placed under an involuntary filing, Newco would be entitled to enforce the Guaranty against Mr. Francis. New York courts have held that such a provision in an MCA evidences that the agreements were loans. Davis v. Richmond Group, 150 N.Y.S.3d 2 (1st Dep’t 2021); Fleetwood Services v. Richmond Capital, 2023 WL 3882697 (2d. Cir. 2023). FIRST COUNTERCLAIM (Declaratory Relief) 71. Defendants repeat and reallege paragraphs 28-70 of the Counterclaim as if more fully set forth herein. 72. A declaratory judgment is required by this Court to determine the rights and obligations of the parties with respect to the RPA . 73. A declaratory judgment must be issued declaring that Newco has no right to enforce any security rights and that Newco is barred from enforcing unconscionable and illegal interest rates on a sham loan. 74. Under controlling New York law, the RPA is void ab initio. See Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021). -18- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 75. JMF seeks a declaration that the RPA is in reality a criminally usurious loan which is void and unenforceable as well as the Francis Guaranty purporting to personally guarantee the repayment of a criminally usurious loan. SECOND COUNTERCLAIM (Fraud) 76. Defendants repeat and reallege paragraphs 28-75 of the Counterclaim as if more fully set forth herein. 77. The terms of the RPA state that Newco will pay the Purchase Price (of $250,000) to JMF Solutions to purchase $332,500 (“Purchased Amount”) of JMF’s receivables. However, Newco only provided $237,450 to JMF Solutions. 78. Unbeknownst to JMF Solutions, Newco improperly deducted an “ACH Origination Fee” equal to 2.5% of the purchase price ($6,250.00) to cover cost of origination and ACH Setup. This fee was fraudulent as it was simply a ploy to extract additional funds from JMF Solutions and did not actually comprise of related expenses pertaining to origination. None of these fees had any relationship to any services actually rendered and instead were disguised interest charges. 79. Also, unbeknownst to JMF Solutions, Newco deducted an Underwriting Fee of 2.5% of the purchase price ($6,250.00) for underwriting and related expense. This fee was fraudulent as this was simply a sham to extract more funds from the JMF Defendants. None of these fees had any relationship to any services actually rendered and instead were disguised interest charges. Indeed, Newco performed little or no due diligence and conducted very little underwriting when entering into the RPA. Newco required little more than three -19- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 months of bank statements from the JMF Defendants and issued its approval of the JMF Defendants in a matter of hours. 80. The RPA represented that these fees were for services or costs purportedly provided by or incurred by Newco in connection with the RPA, but, in reality, these services or costs were never provided or incurred or were otherwise provided or incurred for amounts far below those stated in the RPA and the so-called “fees” were nothing more than additional profits reaped by Newco under the RPA. 81. Newco knew that its representations concerning the nature and purpose of the Origination Fee, Underwriting Fee and other fees were false and misleading at the time they entered into the RPA. 82. On information and belief, Newco also deducted NSF Fees and Default Fees which were similarly a fraudulent ploy to extract funds from the JMF Defendants by using a sham misnomer characterization of fees. 83. These false representations were made in order to induce the JMF Defendants into believing that the fees charged to them and deducted from the Purchased Amount of the RPA were legitimate fees charged to offset the costs of services provided by Newco under the RPA. 84. The JMF Defendants reasonably relied upon these representations in entering into the RPA and, ultimately paying, the fees through the Weekly Payments. 85. As a result of the foregoing fraudulent conduct, Defendants have been damaged in an amount to be proven at trial. -20- FILED: ROCKLAND COUNTY CLERK 01/18/2024 09:29 PM INDEX NO. 034861/2023 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 01/18/2024 THIRD COUNTERCLAIM (Breach of Contract) 86. Defendants repeat and reallege paragraphs 28-85 of the Counterclaim as if more fully set forth herein. 87. Under the RPA, Newco promised to advance certain amounts as identified in Ex. D hereto. 88. Newco did not advance the amounts as promised. 89. As a direct and proximate result of Newco’s breach of the RPA, Defendants have been damaged in the amount detailed above. WHEREFORE, Defendants pray for judgment as follows: 1. That the court enter an order dismissing the verified complaint in its entirety; 2. Declaring that the revenue purchase agreement by and between Newco and JMF Solutions constitutes a loan transaction, and thus, is void because Newco intended to charge and receive a criminally usurious interest rate in excess of 25%; 3. Declaring that Personal Guaranty executed by Francis is void as it purports to be a guarantee of a usurious loan; 4. Ordering Newco to repay all principal and interest to JMF Solutions that it previously paid to Newco in connection with the criminally usurious loan, including prejudgment interest; 5. granting an injunction against Newco permanently enjoining it from enforcing any of its rights under the criminally usurious loans; 6. Awarding JMF direct and consequential damages; 7. Awarding attorneys fees, reason