Supreme Court, Richmond County, June 22, 2022

Jeffrey S. Zachter, Hackensack, New Jersey, for defendant.

Brandon Schwartz, New York City, for plaintiffs.

The decision and order is as follows:

Plaintiffs Tender Loving Care Homes Inc. and its principal Frederick A. Baker commenced the present plenary action by{**76 Misc 3d at 316} filing a summons and complaint on or about November 10, 2021. Plaintiffs subsequently filed an amended complaint on November 12, [*2]2021, which corrected certain procedural errors but did not assert any additional causes of action. Plaintiffs assert four causes of action in their pleading. Plaintiffs' main cause of action seeks a declaratory judgment that the contract entered into between Tender and defendant Reliable Fast Cash, LLC, and the personal guaranty signed by plaintiff Baker, are "criminally usurious loans" disguised as "receivables purchase agreements." Plaintiffs' second cause of action seeks a declaratory judgment that the confession of judgment signed by plaintiffs is invalid as it is a product of the allegedly illegal contract. Plaintiffs' third cause of action seeks a declaratory judgment that the forum selection clause of the contract is invalid and thus that this court does not have jurisdiction over the matter. Finally, plaintiffs assert a cause of action for unjust enrichment.

Frederick Baker is the owner of plaintiff Tender Loving Care Homes Inc. Tender entered into a contract dated September 13, 2018, with defendant Reliable. Under the terms of the agreement, Reliable purchased the rights to Tender's future receivables, having a face value of $356,762 for the purchase price of $238,000. In exchange for the purchase price, Tender authorized Reliable to debit $2,744 daily from an agreed upon bank account, which was intended to represent an estimate of 42% of Tender's daily revenue, until the purchase amount was paid in full. This agreed upon amount was based upon an estimation that Tender's average monthly sales amounted to $153,000 at the time of signing. In addition to signing the agreement in his corporate capacity, Mr. Baker also signed a personal guaranty and an affidavit of confession of judgment, which Reliable would hold in escrow pending a default by Tender. In sum and substance, the confession of judgment stated that in the event of a default defendant would file the judgment in the amount of $356,762 less any receivables not yet purchased plus interest at a rate of 16%, plus attorney's fees. It is undisputed that in or around October of 2018 Tender blocked payments from the specified bank account resulting in a breach of the contract. Reliable thereafter filed the judgment in the amount of $73,318.48 representing the contractual balance owed at the time of breach, to wit, $54,833.82 plus attorney's fees and costs. Reliable waived prejudgment interest.

Defendant Reliable now moves by notice of motion (seq No. 001) for an order dismissing the plaintiffs' case pursuant to{**76 Misc 3d at 317} CPLR 3211 (a) (1) and (7). In sum and substance defendant argues that the documentary evidence supporting its motion clearly establishes that the underlying contract at issue is a valid agreement to purchase future receivables and is not a loan from which a finding of usury could be made. Defendant further argues that the confession of judgment that resulted from plaintiffs' breach of the underlying contract is also enforceable, as it is simply a stipulated remedy for that breach. Finally, defendant argues that this court has jurisdiction over the matter as the parties agreed to a valid forum selection clause, and the defendant is located within New York State.

Oral argument of the present motion was held on March 21, 2022. During that argument plaintiffs withdrew their causes of action relating to the jurisdiction of this court and conceded that the matter could be legally adjudicated in this forum (tr at 10, Mar. 21, 2022). Plaintiffs further argued that even if the court determines that the contract is a valid agreement to purchase accounts receivable, and not a loan, their complaint is still viable as it asserts causes of action sounding in fraud and breach of contract that would apply regardless of the nature of their loan. However, as a preliminary matter, plaintiffs have only asserted four causes of action in this matter, none of which sound in breach of contract. [*3]

When considering a motion to dismiss pursuant to CPLR 3211 a pleading is to be afforded a liberal construction. The court must generally accept the facts alleged as true and afford them every possible favorable inference. (See Rushaid v Pictet & Cie, 28 NY3d 316 [2016].) On a motion pursuant to CPLR 3211 (a) (7) to dismiss for a failure to state a cause of action, the court must only determine whether the facts as alleged fit within a cognizable legal theory. (See Edelman v Berman, 195 AD3d 995 [2d Dept 2021].) Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining an (a) (7) motion to dismiss. (See Kaufman v Kaufman, 206 AD3d 805 [2d Dept 2022].) A motion to dismiss pursuant to CPLR 3211 (a) (1) on the ground that a defense is founded on documentary evidence may be appropriately granted only where the documentary evidence offered utterly refutes the plaintiff's factual allegations, conclusively establishing a defense as a matter of law. (See Ruffino v Serio, 206 AD3d 775 [2d Dept 2022]; Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314 [2002].){**76 Misc 3d at 318}

Declaratory Judgment

Defendant initially moves pursuant to CPLR 3211 (a) (1) to dismiss plaintiffs' primary cause of action seeking a finding that the contract at issue is an unlawful usurious loan. In support of its motion defendant offers the contract at issue together with an affidavit from Reliable's manager, Mendel Chanin. When considering a motion to dismiss pursuant to CPLR 3211 (a) (1) the court is constrained to only consider documentary evidence that utterly refutes the plaintiffs' factual assertions as a matter of law. (See Minzer v Minzer, 206 AD3d 721 [2d Dept 2022].) Here, plaintiffs assert that the contract at issue is not what it appears to be, an agreement to purchase future accounts receivable, but rather is a disguised loan which contains a hidden provision charging usurious interest far in excess of New York State's permitted civil rate of 16% and criminal rate of 25%. (See Adler v Marzario, 200 AD3d 829 [2d Dept 2021]; Bakhash v Winston, 134 AD3d 468 [1st Dept 2015].) If this assertion is found to be correct, a usurious loan is void on its face and relieves the borrower of the obligation to pay both principal and interest thereon. (See General Obligations Law § 5-511; Abraham v American Gardens Co., 189 AD3d 741 [2d Dept 2020].) However, "[t]he rudimentary element of usury is the existence of a loan . . . and where there is no loan, there can be no usury, however unconscionable the contract may be." (Principis Capital, LLC v I Do, Inc., 201 AD3d 752, 754 [2d Dept 2022].)

In support of its motion to dismiss, defendant argues that the contract is exactly what it purports to be, a legal agreement to purchase accounts receivable, and not a loan. In fact, clause 4 of the contract, entitled "Sale of Future Receipts," begins with the words "THIS IS NOT A LOAN."^[FN*] When determining the nature of an agreement to purchase receivables, language purporting to state its nature is not conclusive; rather, the contract "must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties [*4]have seen fit to give it." (See LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664, 665 [2d Dept 2020] [internal quotation marks omitted].) When considering such an agreement courts are primarily charged with determining whether the party purchasing the receivables{**76 Misc 3d at 319} is entitled to repayment under all circumstances, as unless a principal sum advanced is repayable absolutely, the transaction cannot be a loan. (See Rubenstein v Small, 273 App Div 102 [1st Dept 1947].) "Usually, courts weigh three factors when determining whether repayment is absolute or contingent: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy." (See LG Funding at 666.) In New York, there is a presumption that an arm's length transaction between negotiating parties is not usurious. (See Giventer v Arnow, 37 NY2d 305 [1975]; see also K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d 807 [Sup Ct, Westchester County 2017].)

[1] Clause 23 of the contract asserts that both parties reviewed the contract with an attorney of their choosing and relied upon that attorney's guidance and advice. Clause 14.12 of the contract reiterates that the plaintiff Tender was represented by counsel and asserts that plaintiff Tender "is a sophisticated business entity familiar with the kind of transaction covered by the Agreement." Throughout the contract there are multiple assertions that the agreement is not a loan and is an agreement to purchase a percentage of Tender's accounts receivable. Regarding the three factors above, the agreement does not set a finite term for repayment. Rather, it indicates that Reliable would withdraw 42% of Tender's accounts receivable until the purchase amount was recovered. Moreover, the figure of 42% is not a firm percentage as clause 2 of the contract authorized Reliable to request reconciliation to adjust the percentage to "more closely reflect the Seller's actual future receipts." Finally, clause 4 of the agreement clearly states that "if the full purchase amount is never remitted because Seller's business went bankrupt . . . Seller would not owe anything to Buyer and would not be in breach of or default under the agreement." Accordingly, after considering the three factors above, and after considering the context of the agreement in its entirety, the court can conclude as a matter of law that it is a valid agreement to purchase future accounts receivable, and not a disguised loan. Thus, defendant's motion to dismiss the cause of action seeking a declaratory judgment that the agreement is a usurious loan must be granted. (See Calvary LLC v Funding Metrics, LLC, 2021 NY Slip Op 33613[U] [Sup Ct, Orange County 2021]; see also Merchant Cash & Capital, LLC v Sogomonyan, 2017 NY Slip Op 31111[U] [Sup Ct, Nassau{**76 Misc 3d at 320} County 2017]; NY Capital Asset Corp. v F & B Fuel Oil Co., Inc., 58 Misc 3d 1229[A], 2018 NY Slip Op 50310[U] [Sup Ct, Westchester County 2018].)

[2] In addition to the reasons set forth above, and although not raised by defendant, by its own assertion plaintiff "Tender Loving Care Homes Inc." appears to be a corporation organized and existing under the laws of North Carolina. New York General Obligations Law § 5-521 bars a corporation, foreign or domestic, from asserting a claim of usury in any action, except as an affirmative defense to an action to recover repayment of a loan. A claim of usury cannot form the basis of a cause of action asserted for affirmative relief. (See Paycation Travel, Inc. v Global Merchant Cash, Inc., 192 AD3d 1040 [2d Dept 2021]; see also Intima-Eighteen, Inc. v Schreiber Co., 172 AD2d 456 [1st Dept 1991].) This rule has been applied to actions to vacate judgments by confession. (See OT Aspekt & Chiropractic PLLC v Fox Capital Group, Inc., 73 Misc 3d 1208[A], 2021 NY Slip Op 50977[U] [Sup Ct, Queens County 2021].) The same rule applies to individual guarantors of a corporate obligation, who are also precluded from asserting an affirmative cause of action for usury. (See Webar, Inc. v Capra, 212 AD2d 594 [2d Dept 1995]; see also American Water Restoration, Inc. v AKF Inc., 74 Misc 3d 1203[A], 2022 NY Slip Op 50030[U] [Sup Ct, Ontario County 2022].) As such, [*5]plaintiffs' cause of action seeking affirmative relief in the form of a declaratory judgment that the agreement is actually a disguised usurious loan must be dismissed as a matter of law on this alternative ground. (See LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 [2d Dept 2020].)

Fraud and Misrepresentation

Plaintiffs' second cause of action sounds in fraud and misrepresentation. Under general principles of contract law, a contract, or a judgment of confession, can be voided if it is the result of fraud in the inducement or an intentional misrepresentation. (See Ferrarella v Godt, 131 AD3d 563 [2d Dept 2015].) However, pursuant to CPLR 3016 (b) a cause of action based upon misrepresentation or fraud is only sustainable if the circumstances constituting the fraud are plead in sufficient detail. (See Colasacco v Robert E. Lawrence Real Estate, 68 AD3d 706 [2d Dept 2009].) The essential elements of a cause of action sounding in fraud are (1) a misrepresentation or a material omission of fact which was known to be false by the defendant, (2) made for the purposes of inducing the other party{**76 Misc 3d at 321} to rely upon it, (3) justifiable reliance of the other party, and (4) injury. (See Nafash v Allstate Ins. Co., 137 AD3d 1088 [2d Dept 2016].)

Here, plaintiffs fail to assert their cause of action sounding in fraud with the required specificity. (See Dumas v Fiorito, 13 AD3d 332 [2d Dept 2004].) Plaintiffs' complaint contains no specific factual assertions as to how the plaintiffs, who were represented by counsel, were fraudulently induced into signing the contract. Rather, plaintiffs generally argue that the "fraud" was the nature of the contract itself, claiming that the agreement was "misrepresented" to them as an agreement to purchase receivables, while it was actually a usurious loan. For the reasons set forth at length above, this court has ruled, as a matter of law, that the contract at issue is not a loan, and therefore could not be usurious. Thus, as plaintiffs have failed to allege any actionable fraud or misrepresentation on the part of Reliable, their cause of action sounding in fraud must be dismissed. (See Professional Merchant Advance Capital LLC v Your Trading Room, LLC, 2012 NY Slip Op 33785[U] [Sup Ct, Suffolk County 2012]; see also Monroe 719, LLC v McGhee, 199 AD3d 682 [2d Dept 2021].)

Unjust Enrichment

[3] Finally, plaintiffs assert a cause of action for "unjust enrichment" on the ground that the amount set forth in the judgment of confession is incorrect. To adequately plead a viable cause of action for unjust enrichment a plaintiff must allege that other party was enriched, at that party's expense, and that it is against equity and good conscience to permit the other party to retain what is sought to be recovered. (See Trenholm-Owens v City of Yonkers, 197 AD3d 521 [2d Dept 2021]; see also Carriafielio-Diehl & Assoc., Inc. v D&M Elec. Contr., Inc., 12 AD3d 478 [2d Dept 2004].) Here, plaintiffs assert that they made payments in compliance with the agreement that went unrecorded by the defendant when it calculated the amount of the judgment. In support of its motion to dismiss, Reliable offers an unsworn and unexplained "statement of account" that allegedly shows all the payments made by plaintiffs. However, this document is insufficient to conclusively disprove that additional payments were made and unrecorded. In the context of a motion to dismiss the court is obligated to consider the factual assertions made by the plaintiffs as true, and only determine if a cause of action was sufficiently [*6]pleaded. The court finds plaintiffs' unjust enrichment claim was sufficiently{**76 Misc 3d at 322} pleaded. (See Harris v Lichtenstein, 2021 NY Slip Op 30487[U] [Sup Ct, NY County 2021].) While the existence of a valid contract generally negates an unjust enrichment claim, defendant does not raise that argument in its moving papers. (See Klein v Deutsch, 193 AD3d 707 [2d Dept 2021].) Moreover, as plaintiffs have elected to not assert a cause of action for breach of contract, while simultaneously contesting the validity of the contract at issue, they were justified in raising a quasi-contractual theory of recovery at the pleading stage. (See Plumitallo v Hudson Atl. Land Co., LLC, 74 AD3d 1038 [2d Dept 2010]; see also Northeast Remsco Constr. v John P. Picone, Inc., 36 Misc 3d 1209[A], 2012 NY Slip Op 51229[U] [Sup Ct, Nassau County 2012].) Accordingly, the matter will proceed to discovery on the theory of unjust enrichment unless plaintiffs move to amend their complaint to assert a breach of contract claim in light of the court's decision herein.

Accordingly, for the reasons set forth above and for the reasons set forth in its moving papers, defendant's motion to dismiss the plaintiffs' case is hereby granted, in part. Plaintiffs' causes of action sounding in fraud and for a declaratory judgment are hereby dismissed with prejudice. (See Chan Ming v Chui Pak Hoi, 163 AD2d 268 [1st Dept 1990]; see also Shahid v Legal Aid Socy., 173 AD3d 1099 [2d Dept 2019].) The matter will proceed with discovery on the plaintiffs' cause of action for unjust enrichment only.