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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF ROCKLAND
APOLLO FUNDING CO.,
Index No.: 136379/2023
Plaintiff(s),
-against-
K HAYNES TRUCKING LLC, DBA K HAYNES
TRUCKING and KEVIN DAMONE HAYNES
Defendants(s),
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF'S MOTION TO DISMISS
DEFENDANTS'COUNTERCLAIMS
/s/ Sean O’Brien, Esq.
Sean O’Brien, Esq.
Piekarski Law PLLC
Attorneys for Plaintiff
1 Whitehall St., 2nd Fl
New York, New York 10004
Phone: (646) 968-8203
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TABLE OF CONTENTS
TABLE OF CONTENTS ..................................................................................................................... 2
PRELIMINARY STATEMENT ........................................................................................................... 7
STATEMENT OF FACTS................................................................................................................... 8
ARGUMENT ........................................................................................................................................ 8
I. LEGAL STANDARD ......................................................................................................... 8
II. THE COURT SHOULD DISMISS THE COUNTERCLAIM FOR FAILURE
TO STATE A CAUSE OF ACTION UPON WHICH RELIEF MAY BE GRANTED
AND BASED UPON DOCUMENTARY EVIDENCE ............................................................. 9
A. The Counterclaims Are Barred ..................................................................................... 9
B. The Agreement is Not a Loan and Cannot Be Usurious ........................................ 11
C. The First, Second and Third Counterclaims for Fraud, Intentional
Misrepresentation and Negligent Misrepresentation Should be Dismissed ................ 19
D. The Fourth Counterclaim for Unjust Enrichment Should be Dismissed ........ 22
E. The Fifth Counterclaim Should Be Dismissed ......................................................... 23
F. The Sixth Counterclaim Should be Dismissed ......................................................... 24
G. The Seventh Counterclaim Should be Dismissed .................................................... 25
CONCLUSION ................................................................................................................................... 29
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Table of Authorities
Federal Cases
Colonial Funding Network, Inc. v. Epazz, Inc.,
No. 16 Civ. 5948 (LLS), 2017 U.S. Dist. LEXIS 70747 (S.D.N.Y. May 9, 2017) ................................. 10
Scantek Med., Inc. v. Sabella,
582 F. Supp. 2d 472 (S.D.N.Y. 2008) ........................................................................................................ 10
Endico Potatoes v. CIT Group/Factoring,
67 F.3d 1063 (2d Cir. 1995)……………………………………………………………………………17-18
Hydro Invs., Inc. v. Trafalgar Power, Inc.,
227 F.3d 8 (2d Cir. 2000)………………………………………………………………………………20-21
Lowell v. Twin Disc, Inc.,
527 F.2d 767 (2d Cir. 1975)........................................................................................................................ 25
N. Shipping Funds I, L.L.C. v. Icon Capital Corp.,
921 F. Supp. 2d 94 (S.D.N.Y. 2013) .......................................................................................................... 26
State Cases
Stuart Lipsky, P.C. v. Price,
215 A.D.2d 102 (1st Dep't 1995) ................................................................................................................. 9
People v. N.Y City Transit Auth.,
59 N.Y.2d 343 (1983).................................................................................................................................... 9
Leder v. Spiegel,
31 A.D.3d 266 (1st Dep't 2006) ................................................................................................................... 9
Courthouse Corp. Ctr. L.L.C. v. Schulman,
74 A.D.3d 725 (2d Dep't 2010) .................................................................................................................... 9
Strunk v. N.Y State Bd. of Elections,
35 Misc. 3d 1208 (Sup. Ct. Kings Cty. 2012) ............................................................................................. 9
Arbuzova v. Skalet,
92 A.D.3d 816 (2d Dep't 2012) .................................................................................................................. 10
Intima-Eighteen, Inc. v. A.H. Schreiber Co.,
172 A.D.2d 456 (1st Dep't 1991) ............................................................................................................... 10
Dilg v. Banko/US.,
244 A.D. 223 (1st Dep't 1935) ................................................................................................................... 10
Hochman v. LaRea,
14 A.D.3d 653 (2d Dep't 2005) ............................................................................................................ 10, 12
Zoo Holdings, L.L.C. v. Clinton,
11 Misc. 3d 105l(A) (Sup. Ct. New York Cty. 2006)……………………………………………..…10,12
3
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Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp.,
184 Misc. 2d 706, 710 N.Y.S.2d 756 (N.Y. Sup. Ct. 2000)....................................................................... 12
Seidel v. 18 E. 17th St. Owners, Inc.,
79 N.Y.2d 735,586 N.Y.S.2d 240 (1992) ................................................................................................... 12
Donatelli v. Siskind,
170 A.D.2d 433, 565 N.Y.S.2d 224 (2d Dep't 1991) ................................................................................. 12
Prof'! Merch. Advance Capital, L.L.C. v. Your Trading Room, L.L.C.,
No. 17469-12, 2012 N.Y. Misc. LEXIS 6757 (N.Y. Sup. Ct. Nov. 28, 2012) ......................................... 13
Kelly, Grossman & Flanagan, L.L.P. v. Quick Cash, Inc.,
950 N.Y.S.2d 723 (2012).............................................................................................................................. 13
O'Farrell v. Martin,
292 N.Y.S. 581 (1936) .................................................................................................................................. 13
Champion Auto Sales, L.L.C. v. Pearl Beta Funding, L.L.C.,
159 A.D.3d 507 (1st Dep't 2018)............................................................................................................13-14
LG Funding, L.L.C. v. United Senior Props. of Olathe, L.L.C.,
181 A.D.3d 664 (2d Dep't 2020) ............................................................................................................ ... 15
K9 Bytes, Inc. v. Arch Capital Funding, L.L.C.,
56 Misc. 3d 807 (N.Y. Sup. Ct. 2017) ................................................................................................. 14, 17
Orchid Constr. Corp. v. Gottbetter,
89 A.D.3d 708 (2d Dep't 2011) ................................................................................................................... 20
Ne. Steel Prods., Inc. v. John Little Designs, Inc.,
80 A.D.3d 585 (2d Dep't 2011) ................................................................................................................... 20
Hense v. Baxter,
79 A.D.3d 814 (2d Dep't 2010) ................................................................................................................... 20
Eurycleia Partners, LP v. Seward & Kissel, L.L.P. ,
12 N.Y.3d 553 (2009) ................................................................................................................................... 20
AFA Protective Sys. v. AT&T,
57 N.Y.2d 912 (1982) ................................................................................................................................... 22
Cayuga Harvester, Inc. v. Allis-Chalmers Corp.,
95 A.D.2d 5 (4th Dep't 1983) ...................................................................................................................... 22
Dress Shirt Sales, Inc. v. Hotel Mart. Assocs.,
12 N.Y.2d 339 (1963) ................................................................................................................................... 22
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Mandarin Trading Ltd. v. Wildenstein,
16 N.Y.3d 173 (2011).................................................................................................................................. 22
Litvinoff v. Wright,
150 A.D.3d 714 (2d Dep't 2017) ................................................................................................................ 23
25 Bay Terrace Assoc., L.P. v. Pub. Serv. Mut. Ins. Co.,
194 A.D.3d 668 (2d Dep't 2021) ................................................................................................................ 24
Moran v. Erk,
11 N.Y.3d 452, 901 N.E.2d 187, 872 N.Y.S.2d 696 (2008) ..................................................................... 24
Celauro v. 4C Foods Corp.,
187 A.D.3d 836 (2d Dep't 2020) ................................................................................................................ 24
1357 Tarrytown Rd. Auto, L.L.C. v. Granite Props., L.L.C.,
142 A.D.3d 976, 37 N.Y.S.3d 341 (2d Dep't 2016) ................................................................................. 24
Kurtzman v. Bergstol,
40 A.D.3d 588, 835 N.Y.S.2d 644 (2d Dep't 2007) ................................................................................. 25
Pokoik v. Pokoik,
982 N.Y.S.2d 67, 115 A.D.3d 428 (1st Dep't 2014) ................................................................................. 26
Sokolojj'v. Harriman Estates Dev. Corp.,
96 N.Y.2d 409, 754 N.E.2d 184, 729 N.Y.S.2d 425 (2001) ..................................................................... 26
Calabrese Bakeries, Inc. v. Rockland Bakery, Inc.,
102 A.D.3d 1033, 960 N.Y.S.2d 514 (3d Dep't 2013) ............................................................................. 26
Precision Glass Tinting, Inc. v. Long,
293 A.D.2d 594, 740 N.Y.S.2d 138 (2d Dep't 2002) ............................................................................... 26
Gibbs v. Breed, Abbott & Morgan ,
271 A.D.2d 180, 710 N.Y.S.2d 578 (1st Dep't 2000) ............................................................................... 26
Graubard Mallen Dannett & Horowitz v. Moskovitz ,
86 N.Y.2d 112, 629 N.Y.S.2d 1009, 653 N.E.2d 1179 (1995)................................................................. 27
Keller v. Loews Corp.,
69 A.D.3d 451, 894 N.Y.S.2d 376 (1st Dep't 2010) ................................................................................. 27
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In re Matter of Mankin,
88 A.D.3d 717, 930 N.Y.S.2d 79 (2d Dep't 2011).................................................................................... 27
Talansky v. Schulman,
2 A.D.3d 355, 770 N.Y.S.2d 48 (1st Dep't 2003) ..................................................................................... 27
Snyder v. Puente De Brook. Realty Corp.,
297 A.D.2d 432, 746 N.Y.S.2d 517 (3d Dep't 2002)................................................................................ 27
Christian v. Christian,
42 N.Y.2d 63, 365 N.E.2d 849, 396 N.Y.S.2d 817 (1977) ....................................................................... 27
Petracca v. Petracca,
101 A.D.3d 695, 956 N.Y.S.2d 77 (2d Dep't 2012) ................................................................................. 27
In re Matter of Ferrara,
7 N.Y.3d 244,852 N.E.2d 138,819 N.Y.S.2d 215 (2006) ....................................................................... 27
Saul v. Cahan,
153 A.D.3d 947 (2016) ............................................................................................................................... 27
State Statutes
N.Y. C.P.L.R. 3211.......................................................................................................................................... 7, 9
N.Y. Penal Law§ 190.40 ...................................................................................................................... 10, 11, 12
N.Y. C.P.L.R. 3016............................................................................................................................................ 20
N.Y. Gen. Oblig. Law§ 3.59 ............................................................................................................................ 26
Other
Restatement (Second) of Contracts § 205 cmt. d (1981) .................................................................................. 24
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PRELIMINARY STATEMENT
APOLLO FUNDING CO. ("APOLLO" or "Plaintiff') respectfully submits this
Memorandum of Law in support of its motion to dismiss the Defendants' Counterclaims for failure
to state a cause of action upon which relief may be granted and based upon documentary evidence
pursuant to sections 3211(a)(7) & (a)(l) of the New York Civil Practice Law and Rules (the
"CPLR"), respectively.
Despite asserting seven counterclaims with respect to a single agreement, the Defendants
fail to raise any claims that can withstand a motion to dismiss. Initially, Defendants' Counterclaims
completely misrepresent the facts to the Court. The Counterclaims falsely and inappropriately
allege that the subject transaction is a criminally usurious loan. On that allegation alone, the
majority of the Defendants' arguments must fail. Upon this false predication, Defendants allege
various claims, none of which have any merit.
This action is predicated on a breach of contract by Defendants, K HAYNES TRUCKING
LLC, DBA K HAYNES TRUCKING ("Merchant") and KEVIN DAMONE HAYNES
("Guarantor" and together with Merchant "Defendants") breach of personal guaranty of
performance.
The Parties entered into an agreement in or around August 2, 2023, whereby APOLLO
agreed to purchase, and Merchant agreed to sell, $22,650.00 (the "Purchased Amount") of
Merchant's future receivables (the "Agreement"). Pursuant to the Agreement, Merchant agreed to
remit 11% of its receivables each week to APOLLO until the full Purchased Amount was remitted
to APOLLO. Guarantor personally guaranteed Merchant's performance of its obligations to
APOLLO pursuant to the Agreement.
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Defendants' Counterclaims are predicated on the proposition that the subject agreements
are usurious loans. However, precedent in the courts of the state of New York, including each
appellate division tasked with analyzing these contracts, and dozens of trial courts (over hundreds
of decisions) have consistently held that contracts similar to the ones at bar are not loans and thus
cannot be usurious.
The underlying transaction is not a loan and was never characterized as a loan to the
Defendants. As such, none of the laws and legal doctrines presented in Defendants' Counterclaims
are even remotely applicable.
The claims asserted by Defendants lack any merit or truth in actual fact, and as such, cannot
state a cause of action for relief. This is especially so, where, as here, the Defendants have received
a lot more money than what they paid to APOLLO, and accordingly, there is no way the Defendants
could have sustained damages.
Accordingly, for the foregoing and forthcoming reasons, it is respectfully requested that
this court dismiss the counterclaims and grant such other and further relief as this court deems just
and proper.
STATEMENT OF FACTS
The facts relevant to the Motion are set forth in the accompanying Affirmation of Sean
O’Brien ("Piekarski Aff.") and the Affidavit of Nick Kolesar ("Client Aff."). For the sake of
brevity, only those facts most relevant to the Motion with be set forth herein.
ARGUMENT
I. LEGAL STANDARD
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Pursuant to N.Y. C.P.L.R. 321 l(a)(7), a complaint or, in this case, a counterclaim, should
be dismissed if, accepting all of the allegations as true and drawing all reasonable inferences in the
pleader's favor, the counterclaim fails to state a cause of action. See Stuart Lipsky, P.C. v. Price,
215 A.D.2d 102, 103 (1st Dep't 1995).
Pursuant to Rule 32ll(a)(7) of the New York Civil Practice Law and Rules, the Court
should dismiss any cause of action where a party has failed to state a cause of action. The standard
on a motion to dismiss for failure to state a cause of action is whether there are allegations which
fail to state a viable cause of action, that consist of bare legal conclusions, or that are inherently
incredible or unequivocally contradicted by documentary evidence, are not entitled to such
consideration. Leder v. Spiegel, 31 A.D.3d 266, 267 (1st Dep't 2006).
Additionally, a court is not under any obligation to accept a pleading that is full of legal
conclusions, unwarranted inferences, unwarranted deductions, baseless conclusions of law or
sweeping legal conclusions cast in the form of factual allegations. See Strunk v. N.Y State Bd. of
Elections, 35 Misc. 3d 1208 (Sup. Ct. Kings Cty. 2012).
In the current instance, even assuming that the facts alleged in the counterclaim were true,
which they are not, Defendants' counterclaim should be dismissed as a matter of law as the
counterclaim fails to state a cause of action against Plaintiff for which relief may be granted.
II. THE COURT SHOULD DISMISS THE COUNTERCLAIM FOR
FAILURE TO STATE A CAUSE OF ACTION UPON WHICH RELIEF
MAY BE GRANTED AND BASED UPON DOCUMENTARY
EVIDENCE.
A. The Counterclaims Are Barred.
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Defendants assert counterclaims on the argument that the subject transaction is a usurious
loan. Even if the court were to entertain the counterclaims, despite its lack of truthful facts, this
claim must fail.
It is black letter law that corporations and their guarantors are barred from asserting any
claim sounding in usury as an affirmative claim for relief. See, e.g., Colonial Funding Network,
Inc. v. Epazz, Inc., No. 16 Civ. 5948 (LLS), 2017 U.S. Dist. LEXIS 70747, at *5 (S.D.N.Y. May
9, 2017) (dismissing multiple claims seeking to declare that an agreement was a criminally
usurious loan and to recover damages). Arbuzova v. Skalet, 92 A.D.3d 816 (2d Dep't 2012);
Intima-Eighteen, Inc. v. A.H. Schreiber Co., 172 A.D.2d 456 (1st Dep't 1991) ("The statutory
exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action
seeking repayment of a loan..."); Dilg v. Bank of US., 244 A.D. 223 (1st Dep't 1935); Hochman
v. LaRea, 14 A.D.3d 653,654 (2d Dep't 2005); ScantekMed., Inc. v. Sabella, 582 F. Supp. 2d 472,
474 (S.D.N.Y. 2008); Zoo Holdings, L.L.C. v. Clinton, 11 Misc. 3d 105l(A) (Sup. Ct. New York Cty.
2006). Pursuant to the foregoing, New York courts have routinely dismissed actions for declaratory
judgments or to vacate judgments by confession on the grounds of usury.
For instance, in Paycation Travel, Inc. v. Glob. Merch. Cash, Inc., the plaintiff commenced
an action to vacate a judgment by confession on the basis that the underlying transaction
constituted a usurious loan. 141 N.Y.S.3d 319 (2d Dep't 2021). The defendant moved for
summary judgment. Id. The Supreme Court denied the defendant's motion. Id. On appeal, the
Second Department reversed and granted the defendant's motion, holding as follows:
General Obligations Law § 5-521 bars a corporation such as the plaintiff from
asserting usury in any action, except in the case of criminal usury as defined in
Penal Law§ 190.40, and then only as a defense to an action to recover repayment
of a loan, and not as the basis for a cause of action asserted by the corporation for
affirmative relief. Accordingly, the Supreme Court should have granted that branch
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of the defendant's motion which was for summary judgment dismissing so much of
the first cause of action as alleged criminal usury in violation of Penal Law §
190.40.
Id. (internal citations omitted).
Similarly, in OT Aspekt & Chiropractic, the plaintiffs commenced a plenary action to
vacate a judgment by confession. 154 N.Y.S.3d 217. The plaintiffs sought "a declaratory
judgment that all... transactions related to the agreement... be deemed void ab initio...on the ground
that the agreement was a criminally usurious and unenforceable loan." Id. (internal quotation
marks omitted). The defendant moved to dismiss, arguing that the plaintiffs were impermissibly
using usury as the basis for an affirmative claim. Id. The Court agreed and dismissed the plaintiffs'
cause of action for declaratory judgment. Id.1
Respectfully, OT Aspekt & Chiropractic and Paycation Travel are directly on point. Just
as in those cases, Defendants here are impermissibly seeking affirmative relief based upon the
usury statute. This contravenes New York law and accordingly, Defendants counterclaim should
be dismissed.
B. The Agreement is Not a Loan and Cannot Be Usurious
Even if the court were to allow the counterclaims to move forward despite the arguments
above, which it should not, the counterclaims must be dismissed because the underlying agreement
is not a loan, and thus cannot be usurious.
1
The Court also dismissed plaintiffs' causes of action for vacatur of judgment, restitution, and
wrongful execution. Id.
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Defendants' counterclaims are centered on a single oft asserted, seldom successful
allegation "the contract is a loan." New York courts have been inundated with these
unsubstantiated claims hundreds of times over the years with trial courts all over the state ruling
that the subject transactions are in fact what they say they are-purchases of receivables and not
loans.
It is well settled "[u]sury is an affirmative defense, and a heavy burden rests upon the party
seeking to impeach a transaction based upon usury." Hochman, 14 A.D.3d at 654 (internal citations
omitted). "Thus, usury must be proved by clear and convincing evidence as to all its elements and
usury will not be presumed." Id. "There is a strong presumption against the finding of usury."
Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp., 184 Misc. 2d 706, 710, 710 N.Y.S.2d 756 (N.Y.
Sup. Ct. 2000) (Sup. Ct. N.Y. Co. 2000).
Criminal usury requires a loan. Under N.Y. Penal Law§ 190.40, a person has partaken in
such a "scheme" where he "knowingly charges, takes or receives . . . interest on a loan or
forbearance of any money or other property, at a rate exceeding twenty-five percent per annum."
Id. Thus, the statute requires a "loan," payment of "interest," and intent. See Seidel v. 18 E. 17th
St. Owners, Inc., 79 N.Y.2d 735, 744, 586 N.Y.S.2d 240 (1992) ("If the transaction is not a loan,
there can be no usury, however unconscionable the contract may be."). "In order for a transaction
to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose
of the transaction was, on the one side, to lend money at usurious interest reserved in some form
by the contract and, on the other side, to borrow money upon the usurious terms dictated by the
lender." Donatelli v. Siskind, 170 A.D.2d 433,434, 565 N.Y.S.2d 224,226 (2d Dep't 1991).
"[A] primary indicia of usury is repayment of the principal sum advanced absolutely." See
Merchants Advance, LLC v. Tera K, LLC TIA Tribeca Frank Crabetta, 2008 N.Y. Misc. LEXIS
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10889, at p. * 4 (Sup. Ct. N.Y. Co. Dec. 19, 2008). "Where payment or enforcement rests upon a
contingency, the agreement is valid even though it provides for a return in excess of the legal rate
of interest." Prof'! Merch. Advance Capital, L.L.C. v. Your Trading Room, L.L.C., No. 17469-12,
2012 N.Y. Misc. LEXIS 6757, at *13-14 (N.Y. Sup. Ct. Nov. 28, 2012) (Sup. Ct. Suffolk Co. Nov.
28, 2012); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 950 N.Y.S.2d 723 (Sup. Ct.,
Suffolk Co., 2012); O'Farrell v. Martin, 292 N.Y.S. 581 (1936) (City Ct., N.Y. 1936).
In this case, payment of the Purchased Amount is contingent upon the Merchant generating
revenue such that the Specified Percentage of those receivables will be able to support payment of
the Purchased Amount over a period of time, and, therefore, the payment is not absolutely payable.
Simply put, if there is no revenue, there is no payment due. The absolute nature of the repayment
is also assessed with regards to the conditions of enforcement of the guarantee. The more
unconditional and easily triggered a guarantee is, the more the contract will look like a loan. Here,
the agreement at hand merely provides for a guaranty of performance, so it is not unconditional.
This does not resemble the functioning of a loan guarantee.
Numerous courts, almost too many to count, have reviewed the provisions of merchant
agreements structured almost exactly as the Merchant Agreement at issue in this case and
uniformly held that such agreements are not usurious.
Until March 15, 2018, merchant cash advance companies relied upon the overwhelming
weight of trial court authority, which ruled that their merchant agreements did not constitute loans
and were, therefore, not usurious. Now, there is binding Appellate Division authority on this issue
pursuant to the First Department's decision in Champion Auto Sales, L.L.C. v. Pearl Beta Funding,
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L.L.C., 159 A.D.3d 507 (1st Dep't 2018). In upholding the trial court's ruling in Champion Auto,
the First Department held that:
The court properly dismissed the complaint seeking
to vacate the judgment by confession. The evidence
demonstrates that the underlying agreement leading
to the judgment by confession was not a usurious
transaction.
Id. at 507 (citations omitted).
In K9 Bytes, the court was analyzing two different merchant agreements to determine,
among other things, whether they constituted loans subject to usury laws. The three factors that
the court considered were (1) the presence of a functional reconciliation provision, (2) whether the
merchant agreement had a finite term, and (3) whether the MCA had recourse should the merchant
declare bankruptcy. In reaching these factors, the K9 Bytes Court reviewed the body of case law
that existed at that time and, in particular, IBIS Capital Group, LLC v. Four Paws Orlando LLC
(2017 NY Slip Op 30477[U] [Sup Ct, Nassau County, Mar. 10, 2017]. In K9 Bytes, the Court
determined that the Arch Capital merchant agreements satisfied the first two factors, but not the
third. The Court ruled "[h]aving weighed all of the factors, the court finds that the Arch agreements
are sufficiently risky such that they cannot be considered loans, as a matter of law. Under no
circumstances could Arch be assured of repayment, because its agreements are contingent on a
merchant's success, and the term is indefinite." K9 Bytes at 818. The Court in K9 upheld an
agreement satisfying only two of the three prongs, it follows that in this matter, where all three
factors are present, the Agreement cannot be a loan. The analysis was in fact adopted by the second
department in Olathe and more recently in Principis Capital, LLC v. I Do Inc. et al. AD3d (2d Dept
2022) where the courts held that if the agreement satisfies all three prongs it cannot be a loan as a
matter of law. As discussed above, the agreement at issue does not contain a fixed term, does
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not provide recourse in the event of bankruptcy and lastly contains a mandatory reconciliation
provision, using the word "shall" as such the subject agreements are not loans, and thus not
usurious.
The Second Department adopted the reasoning in LG Funding, L.L.C. v. United Senior
Props. of Olathe, L.L.C., 181 A.D.3d 664 (2d Dep't 2020) and the court set a litmus test in
determining the true nature of an agreement. The Second Department ruled that three factors are
to be analyzed: (1) Whether the agreement provided a mandatory reconciliation provision; (2)
Whether the agreement had a set term; and (3) Whether the agreement had recourse against the
guarantor in the event of the merchants' filing for bankruptcy, or if bankruptcy was an event of
default. As will be discussed below, the Agreement at issue here, plainly satisfies all three prongs,
and as such cannot be usurious, as a matter of law.
In spite of the Defendants' erroneous analysis of the present Agreement, the subject
Agreement does satisfy all three prongs for it to be determined as a matter of law as a Merchant
Cash Advance Agreement, and not as a loan. First, the reconciliation provision provides that
Merchant has a "right to reconciliation" and may request it at the e-mail address listed and under
the conditions mentioned in the following provision:
As long as an Event of Default, or breach of this agreement, has not occurred, Merchant, at
any time, may request a retroactive reconciliation of the total Remittance Amount. All
requests hereunder must be in writing to info@mcaservicingcompany.com. Said request
must include copies of all of merchant's bank account statements, credit card processing
statements, and accounts receivable report outstanding if applicable, from the date of this
Agreement through and including the date the request is made. If you have questions or
comments about your financing, you may contact us by email at
questions@mcaservicingcompany.com. AFC retains the right to reasonably request additional
documentation including bank login or access to view all Merchant's accounts using third
party software, to correctly and accurately perform the reconciliation and Merchant's refusal
to provide access shall negate AFC’s obligation to adjust the Remittance until the Merchant
provides the appropriate documentation.
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(See NYSCEF Doc. No. 2, Agreement, Sect. 1.3 Reconciliation).
Second, the Agreement does not contain any fixed term. The Agreement was set in a way to
continue until such time as Merchant has generated enough receivables to remit the entirety of the
purchased amount to the Plaintiff, however long that may take, and as such was not subject to any
term. Lastly, filing for bankruptcy was not an event of default pursuant to the agreement.
Notably, an Ontario court has previously ruled in analyzing a similar agreement 111
American Water Restoration Inc. et al. v. Alif Inc dba Fundkite, Index No. 130145-2021. In
American Water, the court ruled that because the reconciliation provision contained the mandatory
language in the reconciliation provision, such that the funder "shall" perform the reconciliation,
the agreement was not a loan. In American Water, the court dismissed the complaint because
"documentary proof disproves usury" because the fact that the reconciliation uses "shall" which is
mandatory the contention of usury is wholly negated.
In the instant matter, Plaintiff’s agreement contains the same language. Specifically, the
reconciliation provision at issue provides that if Merchant was entitled to a reconciliation or an
adjustment to the remittances, the Plaintiff "shall" perform such reconciliation, which just like in
American Water, renders the provision mandatory, thus negating the contention of usury.
Accordingly, this Court is bound by existing precedent, some of which precedent was not even
mentioned in the Plaintiffs' motion papers, to rule that the transaction resulting from the Merchant
Agreement is, as it states it is, a purchase of a percentage of Defendant Company’s total future
accounts receivables - not a loan. Nearly every court presented with the issue of whether or not a
Merchant Agreement is contingent on receipt of future receipts has determined that the single
most important factor in determining if the transaction is a loan is whether or not the merchant
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agreement in question contains a clear-cut reconciliation provision. K9 Bytes, Inc. v. Arch Capital
Funding, L.L.C., 56 Misc. 3d 807, 816-18 (N.Y. Sup. Ct. 2017). Such a provision allows the
merchant to seek an adjustment of the aggregate daily payments to accurately reflect the specified
percentage of accounts receivable purchased. Id.
Per the reconciliation provision, neither party could know when or if the Purchased
Amounts under the Merchant Agreements would be remitted (if Merchants' total accounts
receivable went to $0, the daily remittances would be reduced to $0)- the existence of this
uncertainty was an express recognition by the parties of the wholly contingent nature of the
Merchant Agreement and expression of an indefinite term. See id. at 817-18 (emphasis added).
The Estimated Daily Payment, both in its initial calculation, based upon Plaintiff's review of the
Defendants' past performance, and any adjustment based upon the Reconciliation Provision, is
directly based upon the Specified Percentage of accounts receivable purchased by Plaintiff. The
daily remittance amount described in the first page of the contract is therefore merely a good faith
estimate of the merchant's receivables and not a fixed dollar amount which is distinguishable from
that of a loan.
In addition to examining the elements on which the likelihood of repayment is based,
appellate courts have also focused on who actually bears the risk of the Merchant's revenue
shortfall. In Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063, 1068-69 (2d Cir. 1995), in order
to assess whether the agreement constitutes a true sale or a secured transaction, the Second Circuit
based its analysis on the transfer of risk: "Where the lender has purchased the accounts receivable,
the borrower's debt is extinguished and the lender's risk with regard to the performance of the
accounts is direct, that is, the lender and not the borrower bears the risk of nonperformance by the
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account debtor." See, Endico, Id. at 1069 In such event, the transaction is properly characterized as
the purchase of accounts receivables. Here, Plaintiff’s Agreement states that:
Merchant is selling a portion of a future revenue stream to AFC at a
discount, and is not borrowing money from AFC, therefore there is no
interest rate or payment schedule and no time period during which the
Purchased Amount must be collected by AFC. The Remittance is a good
faith estimate of AFC's share of the future revenue stream. Merchant going
bankrupt or going out of business, or experiencing a slowdown in business,
or a delay in collecting its receivables, in and of itself, does not constitute
a breach of this Agreement. AFC is entering this Agreement knowing the
risks that Merchant's business may not perform as expected or fail, and
AFC assumes these risks based on Merchant's representations, warranties
and covenants in this Agreement, which are designed to give AFC a
reasonable and fair opportunity to receive the benefit of its bargain. (See
NYSCEF Doc. No. 2, Agreement).
Plaintiff suffers immediate financial loss if Merchant does not generate sufficient
receivables due to adverse business conditions, thereby confirming the non-lending nature of the
transaction.
In Principis, the court further adopted its holding and held the merchant cash advance
company "established that the transaction set forth in the agreement was not a loan." Id. at 754.
Specifically, "[t]he terms of the agreement specifically provided for adjustments to the monthly
payments made by [the merchant] to the plaintiff based on changes in [the merchant's] monthly
sales." Id. "Concomitantly, as the amount of the monthly payments could change, the term of the
agreement was not finite." Id. "Moreover, no contractual provision existed establishing that the
declaration of bankruptcy would constitute an event of default." Id. Taken together, the court noted
that Principis "established its prima facie entitlement to judgment as a matter of law on the
complaint by demonstrating the existence of an agreement and breach ... the court should have
granted that branch of [Principis'] motion which was for summary judgment".
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Accordingly, this Court should hold that the subject Agreement is, as it states it is, a
purchase of a percentage of Merchant's total future accounts receivable - and not a loan. Indeed,
not only does the transaction satisfy all three prongs set forth by the prior appellate division cases
when ascertaining the true nature of the transaction, but also as a matter of law, the transaction
cannot be deemed a loan.
C. The First, Second and Third Counterclaims for Fraud, Intentional
Misrepresentation and Negligent Misrepresentation Should be
Dismissed
Defendants' first counterclaim alleges that Plaintiff marketed various financing products,
but defrauded the Defendants because in reality (or Defendants' warped sense thereof) the offered
products "were non-compliant, illicit, unlawful, untrue, and false as contained within the
agreement but also pursuant to federal and state banking lending and business regulations and
laws." Counterclaim at P s . 9 - 1 9 .
Defendants’ second counterclaim alleges that Plaintiff "intentionally... misrepresented ... "
the nature of the agreements and the offered products were not "compliant, illicit, unlawful, untrue,
and false pursuant to federal and state banking lending and business regulations and laws"
Counterclaim at Ps. 27-34.
Defendants
Preview
FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF ROCKLAND APOLLO FUNDING CO., Index No.: 136379/2023 Plaintiff(s), -against- K HAYNES TRUCKING LLC, DBA K HAYNES TRUCKING and KEVIN DAMONE HAYNES Defendants(s), MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF'S MOTION TO DISMISS DEFENDANTS'COUNTERCLAIMS /s/ Sean O’Brien, Esq. Sean O’Brien, Esq. Piekarski Law PLLC Attorneys for Plaintiff 1 Whitehall St., 2nd Fl New York, New York 10004 Phone: (646) 968-8203 1 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 TABLE OF CONTENTS TABLE OF CONTENTS ..................................................................................................................... 2 PRELIMINARY STATEMENT ........................................................................................................... 7 STATEMENT OF FACTS................................................................................................................... 8 ARGUMENT ........................................................................................................................................ 8 I. LEGAL STANDARD ......................................................................................................... 8 II. THE COURT SHOULD DISMISS THE COUNTERCLAIM FOR FAILURE TO STATE A CAUSE OF ACTION UPON WHICH RELIEF MAY BE GRANTED AND BASED UPON DOCUMENTARY EVIDENCE ............................................................. 9 A. The Counterclaims Are Barred ..................................................................................... 9 B. The Agreement is Not a Loan and Cannot Be Usurious ........................................ 11 C. The First, Second and Third Counterclaims for Fraud, Intentional Misrepresentation and Negligent Misrepresentation Should be Dismissed ................ 19 D. The Fourth Counterclaim for Unjust Enrichment Should be Dismissed ........ 22 E. The Fifth Counterclaim Should Be Dismissed ......................................................... 23 F. The Sixth Counterclaim Should be Dismissed ......................................................... 24 G. The Seventh Counterclaim Should be Dismissed .................................................... 25 CONCLUSION ................................................................................................................................... 29 2 2 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Table of Authorities Federal Cases Colonial Funding Network, Inc. v. Epazz, Inc., No. 16 Civ. 5948 (LLS), 2017 U.S. Dist. LEXIS 70747 (S.D.N.Y. May 9, 2017) ................................. 10 Scantek Med., Inc. v. Sabella, 582 F. Supp. 2d 472 (S.D.N.Y. 2008) ........................................................................................................ 10 Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063 (2d Cir. 1995)……………………………………………………………………………17-18 Hydro Invs., Inc. v. Trafalgar Power, Inc., 227 F.3d 8 (2d Cir. 2000)………………………………………………………………………………20-21 Lowell v. Twin Disc, Inc., 527 F.2d 767 (2d Cir. 1975)........................................................................................................................ 25 N. Shipping Funds I, L.L.C. v. Icon Capital Corp., 921 F. Supp. 2d 94 (S.D.N.Y. 2013) .......................................................................................................... 26 State Cases Stuart Lipsky, P.C. v. Price, 215 A.D.2d 102 (1st Dep't 1995) ................................................................................................................. 9 People v. N.Y City Transit Auth., 59 N.Y.2d 343 (1983).................................................................................................................................... 9 Leder v. Spiegel, 31 A.D.3d 266 (1st Dep't 2006) ................................................................................................................... 9 Courthouse Corp. Ctr. L.L.C. v. Schulman, 74 A.D.3d 725 (2d Dep't 2010) .................................................................................................................... 9 Strunk v. N.Y State Bd. of Elections, 35 Misc. 3d 1208 (Sup. Ct. Kings Cty. 2012) ............................................................................................. 9 Arbuzova v. Skalet, 92 A.D.3d 816 (2d Dep't 2012) .................................................................................................................. 10 Intima-Eighteen, Inc. v. A.H. Schreiber Co., 172 A.D.2d 456 (1st Dep't 1991) ............................................................................................................... 10 Dilg v. Banko/US., 244 A.D. 223 (1st Dep't 1935) ................................................................................................................... 10 Hochman v. LaRea, 14 A.D.3d 653 (2d Dep't 2005) ............................................................................................................ 10, 12 Zoo Holdings, L.L.C. v. Clinton, 11 Misc. 3d 105l(A) (Sup. Ct. New York Cty. 2006)……………………………………………..…10,12 3 3 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp., 184 Misc. 2d 706, 710 N.Y.S.2d 756 (N.Y. Sup. Ct. 2000)....................................................................... 12 Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735,586 N.Y.S.2d 240 (1992) ................................................................................................... 12 Donatelli v. Siskind, 170 A.D.2d 433, 565 N.Y.S.2d 224 (2d Dep't 1991) ................................................................................. 12 Prof'! Merch. Advance Capital, L.L.C. v. Your Trading Room, L.L.C., No. 17469-12, 2012 N.Y. Misc. LEXIS 6757 (N.Y. Sup. Ct. Nov. 28, 2012) ......................................... 13 Kelly, Grossman & Flanagan, L.L.P. v. Quick Cash, Inc., 950 N.Y.S.2d 723 (2012).............................................................................................................................. 13 O'Farrell v. Martin, 292 N.Y.S. 581 (1936) .................................................................................................................................. 13 Champion Auto Sales, L.L.C. v. Pearl Beta Funding, L.L.C., 159 A.D.3d 507 (1st Dep't 2018)............................................................................................................13-14 LG Funding, L.L.C. v. United Senior Props. of Olathe, L.L.C., 181 A.D.3d 664 (2d Dep't 2020) ............................................................................................................ ... 15 K9 Bytes, Inc. v. Arch Capital Funding, L.L.C., 56 Misc. 3d 807 (N.Y. Sup. Ct. 2017) ................................................................................................. 14, 17 Orchid Constr. Corp. v. Gottbetter, 89 A.D.3d 708 (2d Dep't 2011) ................................................................................................................... 20 Ne. Steel Prods., Inc. v. John Little Designs, Inc., 80 A.D.3d 585 (2d Dep't 2011) ................................................................................................................... 20 Hense v. Baxter, 79 A.D.3d 814 (2d Dep't 2010) ................................................................................................................... 20 Eurycleia Partners, LP v. Seward & Kissel, L.L.P. , 12 N.Y.3d 553 (2009) ................................................................................................................................... 20 AFA Protective Sys. v. AT&T, 57 N.Y.2d 912 (1982) ................................................................................................................................... 22 Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5 (4th Dep't 1983) ...................................................................................................................... 22 Dress Shirt Sales, Inc. v. Hotel Mart. Assocs., 12 N.Y.2d 339 (1963) ................................................................................................................................... 22 4 4 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011).................................................................................................................................. 22 Litvinoff v. Wright, 150 A.D.3d 714 (2d Dep't 2017) ................................................................................................................ 23 25 Bay Terrace Assoc., L.P. v. Pub. Serv. Mut. Ins. Co., 194 A.D.3d 668 (2d Dep't 2021) ................................................................................................................ 24 Moran v. Erk, 11 N.Y.3d 452, 901 N.E.2d 187, 872 N.Y.S.2d 696 (2008) ..................................................................... 24 Celauro v. 4C Foods Corp., 187 A.D.3d 836 (2d Dep't 2020) ................................................................................................................ 24 1357 Tarrytown Rd. Auto, L.L.C. v. Granite Props., L.L.C., 142 A.D.3d 976, 37 N.Y.S.3d 341 (2d Dep't 2016) ................................................................................. 24 Kurtzman v. Bergstol, 40 A.D.3d 588, 835 N.Y.S.2d 644 (2d Dep't 2007) ................................................................................. 25 Pokoik v. Pokoik, 982 N.Y.S.2d 67, 115 A.D.3d 428 (1st Dep't 2014) ................................................................................. 26 Sokolojj'v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 754 N.E.2d 184, 729 N.Y.S.2d 425 (2001) ..................................................................... 26 Calabrese Bakeries, Inc. v. Rockland Bakery, Inc., 102 A.D.3d 1033, 960 N.Y.S.2d 514 (3d Dep't 2013) ............................................................................. 26 Precision Glass Tinting, Inc. v. Long, 293 A.D.2d 594, 740 N.Y.S.2d 138 (2d Dep't 2002) ............................................................................... 26 Gibbs v. Breed, Abbott & Morgan , 271 A.D.2d 180, 710 N.Y.S.2d 578 (1st Dep't 2000) ............................................................................... 26 Graubard Mallen Dannett & Horowitz v. Moskovitz , 86 N.Y.2d 112, 629 N.Y.S.2d 1009, 653 N.E.2d 1179 (1995)................................................................. 27 Keller v. Loews Corp., 69 A.D.3d 451, 894 N.Y.S.2d 376 (1st Dep't 2010) ................................................................................. 27 5 5 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 In re Matter of Mankin, 88 A.D.3d 717, 930 N.Y.S.2d 79 (2d Dep't 2011).................................................................................... 27 Talansky v. Schulman, 2 A.D.3d 355, 770 N.Y.S.2d 48 (1st Dep't 2003) ..................................................................................... 27 Snyder v. Puente De Brook. Realty Corp., 297 A.D.2d 432, 746 N.Y.S.2d 517 (3d Dep't 2002)................................................................................ 27 Christian v. Christian, 42 N.Y.2d 63, 365 N.E.2d 849, 396 N.Y.S.2d 817 (1977) ....................................................................... 27 Petracca v. Petracca, 101 A.D.3d 695, 956 N.Y.S.2d 77 (2d Dep't 2012) ................................................................................. 27 In re Matter of Ferrara, 7 N.Y.3d 244,852 N.E.2d 138,819 N.Y.S.2d 215 (2006) ....................................................................... 27 Saul v. Cahan, 153 A.D.3d 947 (2016) ............................................................................................................................... 27 State Statutes N.Y. C.P.L.R. 3211.......................................................................................................................................... 7, 9 N.Y. Penal Law§ 190.40 ...................................................................................................................... 10, 11, 12 N.Y. C.P.L.R. 3016............................................................................................................................................ 20 N.Y. Gen. Oblig. Law§ 3.59 ............................................................................................................................ 26 Other Restatement (Second) of Contracts § 205 cmt. d (1981) .................................................................................. 24 6 6 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 PRELIMINARY STATEMENT APOLLO FUNDING CO. ("APOLLO" or "Plaintiff') respectfully submits this Memorandum of Law in support of its motion to dismiss the Defendants' Counterclaims for failure to state a cause of action upon which relief may be granted and based upon documentary evidence pursuant to sections 3211(a)(7) & (a)(l) of the New York Civil Practice Law and Rules (the "CPLR"), respectively. Despite asserting seven counterclaims with respect to a single agreement, the Defendants fail to raise any claims that can withstand a motion to dismiss. Initially, Defendants' Counterclaims completely misrepresent the facts to the Court. The Counterclaims falsely and inappropriately allege that the subject transaction is a criminally usurious loan. On that allegation alone, the majority of the Defendants' arguments must fail. Upon this false predication, Defendants allege various claims, none of which have any merit. This action is predicated on a breach of contract by Defendants, K HAYNES TRUCKING LLC, DBA K HAYNES TRUCKING ("Merchant") and KEVIN DAMONE HAYNES ("Guarantor" and together with Merchant "Defendants") breach of personal guaranty of performance. The Parties entered into an agreement in or around August 2, 2023, whereby APOLLO agreed to purchase, and Merchant agreed to sell, $22,650.00 (the "Purchased Amount") of Merchant's future receivables (the "Agreement"). Pursuant to the Agreement, Merchant agreed to remit 11% of its receivables each week to APOLLO until the full Purchased Amount was remitted to APOLLO. Guarantor personally guaranteed Merchant's performance of its obligations to APOLLO pursuant to the Agreement. 7 7 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Defendants' Counterclaims are predicated on the proposition that the subject agreements are usurious loans. However, precedent in the courts of the state of New York, including each appellate division tasked with analyzing these contracts, and dozens of trial courts (over hundreds of decisions) have consistently held that contracts similar to the ones at bar are not loans and thus cannot be usurious. The underlying transaction is not a loan and was never characterized as a loan to the Defendants. As such, none of the laws and legal doctrines presented in Defendants' Counterclaims are even remotely applicable. The claims asserted by Defendants lack any merit or truth in actual fact, and as such, cannot state a cause of action for relief. This is especially so, where, as here, the Defendants have received a lot more money than what they paid to APOLLO, and accordingly, there is no way the Defendants could have sustained damages. Accordingly, for the foregoing and forthcoming reasons, it is respectfully requested that this court dismiss the counterclaims and grant such other and further relief as this court deems just and proper. STATEMENT OF FACTS The facts relevant to the Motion are set forth in the accompanying Affirmation of Sean O’Brien ("Piekarski Aff.") and the Affidavit of Nick Kolesar ("Client Aff."). For the sake of brevity, only those facts most relevant to the Motion with be set forth herein. ARGUMENT I. LEGAL STANDARD 8 8 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Pursuant to N.Y. C.P.L.R. 321 l(a)(7), a complaint or, in this case, a counterclaim, should be dismissed if, accepting all of the allegations as true and drawing all reasonable inferences in the pleader's favor, the counterclaim fails to state a cause of action. See Stuart Lipsky, P.C. v. Price, 215 A.D.2d 102, 103 (1st Dep't 1995). Pursuant to Rule 32ll(a)(7) of the New York Civil Practice Law and Rules, the Court should dismiss any cause of action where a party has failed to state a cause of action. The standard on a motion to dismiss for failure to state a cause of action is whether there are allegations which fail to state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or unequivocally contradicted by documentary evidence, are not entitled to such consideration. Leder v. Spiegel, 31 A.D.3d 266, 267 (1st Dep't 2006). Additionally, a court is not under any obligation to accept a pleading that is full of legal conclusions, unwarranted inferences, unwarranted deductions, baseless conclusions of law or sweeping legal conclusions cast in the form of factual allegations. See Strunk v. N.Y State Bd. of Elections, 35 Misc. 3d 1208 (Sup. Ct. Kings Cty. 2012). In the current instance, even assuming that the facts alleged in the counterclaim were true, which they are not, Defendants' counterclaim should be dismissed as a matter of law as the counterclaim fails to state a cause of action against Plaintiff for which relief may be granted. II. THE COURT SHOULD DISMISS THE COUNTERCLAIM FOR FAILURE TO STATE A CAUSE OF ACTION UPON WHICH RELIEF MAY BE GRANTED AND BASED UPON DOCUMENTARY EVIDENCE. A. The Counterclaims Are Barred. 9 9 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Defendants assert counterclaims on the argument that the subject transaction is a usurious loan. Even if the court were to entertain the counterclaims, despite its lack of truthful facts, this claim must fail. It is black letter law that corporations and their guarantors are barred from asserting any claim sounding in usury as an affirmative claim for relief. See, e.g., Colonial Funding Network, Inc. v. Epazz, Inc., No. 16 Civ. 5948 (LLS), 2017 U.S. Dist. LEXIS 70747, at *5 (S.D.N.Y. May 9, 2017) (dismissing multiple claims seeking to declare that an agreement was a criminally usurious loan and to recover damages). Arbuzova v. Skalet, 92 A.D.3d 816 (2d Dep't 2012); Intima-Eighteen, Inc. v. A.H. Schreiber Co., 172 A.D.2d 456 (1st Dep't 1991) ("The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan..."); Dilg v. Bank of US., 244 A.D. 223 (1st Dep't 1935); Hochman v. LaRea, 14 A.D.3d 653,654 (2d Dep't 2005); ScantekMed., Inc. v. Sabella, 582 F. Supp. 2d 472, 474 (S.D.N.Y. 2008); Zoo Holdings, L.L.C. v. Clinton, 11 Misc. 3d 105l(A) (Sup. Ct. New York Cty. 2006). Pursuant to the foregoing, New York courts have routinely dismissed actions for declaratory judgments or to vacate judgments by confession on the grounds of usury. For instance, in Paycation Travel, Inc. v. Glob. Merch. Cash, Inc., the plaintiff commenced an action to vacate a judgment by confession on the basis that the underlying transaction constituted a usurious loan. 141 N.Y.S.3d 319 (2d Dep't 2021). The defendant moved for summary judgment. Id. The Supreme Court denied the defendant's motion. Id. On appeal, the Second Department reversed and granted the defendant's motion, holding as follows: General Obligations Law § 5-521 bars a corporation such as the plaintiff from asserting usury in any action, except in the case of criminal usury as defined in Penal Law§ 190.40, and then only as a defense to an action to recover repayment of a loan, and not as the basis for a cause of action asserted by the corporation for affirmative relief. Accordingly, the Supreme Court should have granted that branch 10 10 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 of the defendant's motion which was for summary judgment dismissing so much of the first cause of action as alleged criminal usury in violation of Penal Law § 190.40. Id. (internal citations omitted). Similarly, in OT Aspekt & Chiropractic, the plaintiffs commenced a plenary action to vacate a judgment by confession. 154 N.Y.S.3d 217. The plaintiffs sought "a declaratory judgment that all... transactions related to the agreement... be deemed void ab initio...on the ground that the agreement was a criminally usurious and unenforceable loan." Id. (internal quotation marks omitted). The defendant moved to dismiss, arguing that the plaintiffs were impermissibly using usury as the basis for an affirmative claim. Id. The Court agreed and dismissed the plaintiffs' cause of action for declaratory judgment. Id.1 Respectfully, OT Aspekt & Chiropractic and Paycation Travel are directly on point. Just as in those cases, Defendants here are impermissibly seeking affirmative relief based upon the usury statute. This contravenes New York law and accordingly, Defendants counterclaim should be dismissed. B. The Agreement is Not a Loan and Cannot Be Usurious Even if the court were to allow the counterclaims to move forward despite the arguments above, which it should not, the counterclaims must be dismissed because the underlying agreement is not a loan, and thus cannot be usurious. 1 The Court also dismissed plaintiffs' causes of action for vacatur of judgment, restitution, and wrongful execution. Id. 11 11 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Defendants' counterclaims are centered on a single oft asserted, seldom successful allegation "the contract is a loan." New York courts have been inundated with these unsubstantiated claims hundreds of times over the years with trial courts all over the state ruling that the subject transactions are in fact what they say they are-purchases of receivables and not loans. It is well settled "[u]sury is an affirmative defense, and a heavy burden rests upon the party seeking to impeach a transaction based upon usury." Hochman, 14 A.D.3d at 654 (internal citations omitted). "Thus, usury must be proved by clear and convincing evidence as to all its elements and usury will not be presumed." Id. "There is a strong presumption against the finding of usury." Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp., 184 Misc. 2d 706, 710, 710 N.Y.S.2d 756 (N.Y. Sup. Ct. 2000) (Sup. Ct. N.Y. Co. 2000). Criminal usury requires a loan. Under N.Y. Penal Law§ 190.40, a person has partaken in such a "scheme" where he "knowingly charges, takes or receives . . . interest on a loan or forbearance of any money or other property, at a rate exceeding twenty-five percent per annum." Id. Thus, the statute requires a "loan," payment of "interest," and intent. See Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735, 744, 586 N.Y.S.2d 240 (1992) ("If the transaction is not a loan, there can be no usury, however unconscionable the contract may be."). "In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow money upon the usurious terms dictated by the lender." Donatelli v. Siskind, 170 A.D.2d 433,434, 565 N.Y.S.2d 224,226 (2d Dep't 1991). "[A] primary indicia of usury is repayment of the principal sum advanced absolutely." See Merchants Advance, LLC v. Tera K, LLC TIA Tribeca Frank Crabetta, 2008 N.Y. Misc. LEXIS 12 12 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 10889, at p. * 4 (Sup. Ct. N.Y. Co. Dec. 19, 2008). "Where payment or enforcement rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest." Prof'! Merch. Advance Capital, L.L.C. v. Your Trading Room, L.L.C., No. 17469-12, 2012 N.Y. Misc. LEXIS 6757, at *13-14 (N.Y. Sup. Ct. Nov. 28, 2012) (Sup. Ct. Suffolk Co. Nov. 28, 2012); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 950 N.Y.S.2d 723 (Sup. Ct., Suffolk Co., 2012); O'Farrell v. Martin, 292 N.Y.S. 581 (1936) (City Ct., N.Y. 1936). In this case, payment of the Purchased Amount is contingent upon the Merchant generating revenue such that the Specified Percentage of those receivables will be able to support payment of the Purchased Amount over a period of time, and, therefore, the payment is not absolutely payable. Simply put, if there is no revenue, there is no payment due. The absolute nature of the repayment is also assessed with regards to the conditions of enforcement of the guarantee. The more unconditional and easily triggered a guarantee is, the more the contract will look like a loan. Here, the agreement at hand merely provides for a guaranty of performance, so it is not unconditional. This does not resemble the functioning of a loan guarantee. Numerous courts, almost too many to count, have reviewed the provisions of merchant agreements structured almost exactly as the Merchant Agreement at issue in this case and uniformly held that such agreements are not usurious. Until March 15, 2018, merchant cash advance companies relied upon the overwhelming weight of trial court authority, which ruled that their merchant agreements did not constitute loans and were, therefore, not usurious. Now, there is binding Appellate Division authority on this issue pursuant to the First Department's decision in Champion Auto Sales, L.L.C. v. Pearl Beta Funding, 13 13 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 L.L.C., 159 A.D.3d 507 (1st Dep't 2018). In upholding the trial court's ruling in Champion Auto, the First Department held that: The court properly dismissed the complaint seeking to vacate the judgment by confession. The evidence demonstrates that the underlying agreement leading to the judgment by confession was not a usurious transaction. Id. at 507 (citations omitted). In K9 Bytes, the court was analyzing two different merchant agreements to determine, among other things, whether they constituted loans subject to usury laws. The three factors that the court considered were (1) the presence of a functional reconciliation provision, (2) whether the merchant agreement had a finite term, and (3) whether the MCA had recourse should the merchant declare bankruptcy. In reaching these factors, the K9 Bytes Court reviewed the body of case law that existed at that time and, in particular, IBIS Capital Group, LLC v. Four Paws Orlando LLC (2017 NY Slip Op 30477[U] [Sup Ct, Nassau County, Mar. 10, 2017]. In K9 Bytes, the Court determined that the Arch Capital merchant agreements satisfied the first two factors, but not the third. The Court ruled "[h]aving weighed all of the factors, the court finds that the Arch agreements are sufficiently risky such that they cannot be considered loans, as a matter of law. Under no circumstances could Arch be assured of repayment, because its agreements are contingent on a merchant's success, and the term is indefinite." K9 Bytes at 818. The Court in K9 upheld an agreement satisfying only two of the three prongs, it follows that in this matter, where all three factors are present, the Agreement cannot be a loan. The analysis was in fact adopted by the second department in Olathe and more recently in Principis Capital, LLC v. I Do Inc. et al. AD3d (2d Dept 2022) where the courts held that if the agreement satisfies all three prongs it cannot be a loan as a matter of law. As discussed above, the agreement at issue does not contain a fixed term, does 14 14 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 not provide recourse in the event of bankruptcy and lastly contains a mandatory reconciliation provision, using the word "shall" as such the subject agreements are not loans, and thus not usurious. The Second Department adopted the reasoning in LG Funding, L.L.C. v. United Senior Props. of Olathe, L.L.C., 181 A.D.3d 664 (2d Dep't 2020) and the court set a litmus test in determining the true nature of an agreement. The Second Department ruled that three factors are to be analyzed: (1) Whether the agreement provided a mandatory reconciliation provision; (2) Whether the agreement had a set term; and (3) Whether the agreement had recourse against the guarantor in the event of the merchants' filing for bankruptcy, or if bankruptcy was an event of default. As will be discussed below, the Agreement at issue here, plainly satisfies all three prongs, and as such cannot be usurious, as a matter of law. In spite of the Defendants' erroneous analysis of the present Agreement, the subject Agreement does satisfy all three prongs for it to be determined as a matter of law as a Merchant Cash Advance Agreement, and not as a loan. First, the reconciliation provision provides that Merchant has a "right to reconciliation" and may request it at the e-mail address listed and under the conditions mentioned in the following provision: As long as an Event of Default, or breach of this agreement, has not occurred, Merchant, at any time, may request a retroactive reconciliation of the total Remittance Amount. All requests hereunder must be in writing to info@mcaservicingcompany.com. Said request must include copies of all of merchant's bank account statements, credit card processing statements, and accounts receivable report outstanding if applicable, from the date of this Agreement through and including the date the request is made. If you have questions or comments about your financing, you may contact us by email at questions@mcaservicingcompany.com. AFC retains the right to reasonably request additional documentation including bank login or access to view all Merchant's accounts using third party software, to correctly and accurately perform the reconciliation and Merchant's refusal to provide access shall negate AFC’s obligation to adjust the Remittance until the Merchant provides the appropriate documentation. 15 15 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 (See NYSCEF Doc. No. 2, Agreement, Sect. 1.3 Reconciliation). Second, the Agreement does not contain any fixed term. The Agreement was set in a way to continue until such time as Merchant has generated enough receivables to remit the entirety of the purchased amount to the Plaintiff, however long that may take, and as such was not subject to any term. Lastly, filing for bankruptcy was not an event of default pursuant to the agreement. Notably, an Ontario court has previously ruled in analyzing a similar agreement 111 American Water Restoration Inc. et al. v. Alif Inc dba Fundkite, Index No. 130145-2021. In American Water, the court ruled that because the reconciliation provision contained the mandatory language in the reconciliation provision, such that the funder "shall" perform the reconciliation, the agreement was not a loan. In American Water, the court dismissed the complaint because "documentary proof disproves usury" because the fact that the reconciliation uses "shall" which is mandatory the contention of usury is wholly negated. In the instant matter, Plaintiff’s agreement contains the same language. Specifically, the reconciliation provision at issue provides that if Merchant was entitled to a reconciliation or an adjustment to the remittances, the Plaintiff "shall" perform such reconciliation, which just like in American Water, renders the provision mandatory, thus negating the contention of usury. Accordingly, this Court is bound by existing precedent, some of which precedent was not even mentioned in the Plaintiffs' motion papers, to rule that the transaction resulting from the Merchant Agreement is, as it states it is, a purchase of a percentage of Defendant Company’s total future accounts receivables - not a loan. Nearly every court presented with the issue of whether or not a Merchant Agreement is contingent on receipt of future receipts has determined that the single most important factor in determining if the transaction is a loan is whether or not the merchant 16 16 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 agreement in question contains a clear-cut reconciliation provision. K9 Bytes, Inc. v. Arch Capital Funding, L.L.C., 56 Misc. 3d 807, 816-18 (N.Y. Sup. Ct. 2017). Such a provision allows the merchant to seek an adjustment of the aggregate daily payments to accurately reflect the specified percentage of accounts receivable purchased. Id. Per the reconciliation provision, neither party could know when or if the Purchased Amounts under the Merchant Agreements would be remitted (if Merchants' total accounts receivable went to $0, the daily remittances would be reduced to $0)- the existence of this uncertainty was an express recognition by the parties of the wholly contingent nature of the Merchant Agreement and expression of an indefinite term. See id. at 817-18 (emphasis added). The Estimated Daily Payment, both in its initial calculation, based upon Plaintiff's review of the Defendants' past performance, and any adjustment based upon the Reconciliation Provision, is directly based upon the Specified Percentage of accounts receivable purchased by Plaintiff. The daily remittance amount described in the first page of the contract is therefore merely a good faith estimate of the merchant's receivables and not a fixed dollar amount which is distinguishable from that of a loan. In addition to examining the elements on which the likelihood of repayment is based, appellate courts have also focused on who actually bears the risk of the Merchant's revenue shortfall. In Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063, 1068-69 (2d Cir. 1995), in order to assess whether the agreement constitutes a true sale or a secured transaction, the Second Circuit based its analysis on the transfer of risk: "Where the lender has purchased the accounts receivable, the borrower's debt is extinguished and the lender's risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of nonperformance by the 17 17 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 account debtor." See, Endico, Id. at 1069 In such event, the transaction is properly characterized as the purchase of accounts receivables. Here, Plaintiff’s Agreement states that: Merchant is selling a portion of a future revenue stream to AFC at a discount, and is not borrowing money from AFC, therefore there is no interest rate or payment schedule and no time period during which the Purchased Amount must be collected by AFC. The Remittance is a good faith estimate of AFC's share of the future revenue stream. Merchant going bankrupt or going out of business, or experiencing a slowdown in business, or a delay in collecting its receivables, in and of itself, does not constitute a breach of this Agreement. AFC is entering this Agreement knowing the risks that Merchant's business may not perform as expected or fail, and AFC assumes these risks based on Merchant's representations, warranties and covenants in this Agreement, which are designed to give AFC a reasonable and fair opportunity to receive the benefit of its bargain. (See NYSCEF Doc. No. 2, Agreement). Plaintiff suffers immediate financial loss if Merchant does not generate sufficient receivables due to adverse business conditions, thereby confirming the non-lending nature of the transaction. In Principis, the court further adopted its holding and held the merchant cash advance company "established that the transaction set forth in the agreement was not a loan." Id. at 754. Specifically, "[t]he terms of the agreement specifically provided for adjustments to the monthly payments made by [the merchant] to the plaintiff based on changes in [the merchant's] monthly sales." Id. "Concomitantly, as the amount of the monthly payments could change, the term of the agreement was not finite." Id. "Moreover, no contractual provision existed establishing that the declaration of bankruptcy would constitute an event of default." Id. Taken together, the court noted that Principis "established its prima facie entitlement to judgment as a matter of law on the complaint by demonstrating the existence of an agreement and breach ... the court should have granted that branch of [Principis'] motion which was for summary judgment". 18 18 of 29 FILED: ROCKLAND COUNTY CLERK 09/05/2023 04:44 PM INDEX NO. 034051/2023 NYSCEF DOC. NO. 13 RECEIVED NYSCEF: 09/05/2023 Accordingly, this Court should hold that the subject Agreement is, as it states it is, a purchase of a percentage of Merchant's total future accounts receivable - and not a loan. Indeed, not only does the transaction satisfy all three prongs set forth by the prior appellate division cases when ascertaining the true nature of the transaction, but also as a matter of law, the transaction cannot be deemed a loan. C. The First, Second and Third Counterclaims for Fraud, Intentional Misrepresentation and Negligent Misrepresentation Should be Dismissed Defendants' first counterclaim alleges that Plaintiff marketed various financing products, but defrauded the Defendants because in reality (or Defendants' warped sense thereof) the offered products "were non-compliant, illicit, unlawful, untrue, and false as contained within the agreement but also pursuant to federal and state banking lending and business regulations and laws." Counterclaim at P s . 9 - 1 9 . Defendants’ second counterclaim alleges that Plaintiff "intentionally... misrepresented ... " the nature of the agreements and the offered products were not "compliant, illicit, unlawful, untrue, and false pursuant to federal and state banking lending and business regulations and laws" Counterclaim at Ps. 27-34. Defendants