ITG Brands, LLC v. Yellowstone Capital, LLC

Background

ITG Brands sued a group of merchant-cash-advance companies and executives. It alleged that the defendants used agreements described as purchases of future business receipts to make and collect loans with very high interest rates. ITG Brands alleged that these transactions helped cause the collapse of Zoom Insights, LLC, a marketing firm to which ITG Brands had advanced more than $24 million. ITG Brands later acquired Zoom’s claims against the defendants at a judgment execution sale.

The complaint asserted four causes of action: two claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) for collecting an unlawful debt, a RICO conspiracy claim, and claims seeking a declaration that the Yellowstone, World Global, and Funderz agreements were usurious loans and that related interest had to be refunded.

The defendants filed four motions to dismiss. The Yellowstone Defendants moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The Funderz Defendants and David Glass moved under Rules 12(b)(1), concerning federal subject-matter jurisdiction, and 12(b)(6). Gavriel Yitzchakov moved under Rule 12(b)(6). Tsvi Davis had been served but had not appeared.

Standing

The Funderz Defendants argued that ITG Brands lacked constitutional standing because Zoom, not ITG Brands, suffered the alleged injury. The court rejected that argument at the pleading stage. It held that ITG Brands had alleged an economic injury sufficient to meet the injury-in-fact requirement and had acquired Zoom’s claims. The court therefore found that ITG Brands satisfied the standing requirement.

RICO Claims Based on Unlawful Debt

RICO allows a claim based on collecting an “unlawful debt” only when the debt is unenforceable under state or federal usury law and was incurred at a rate at least twice the enforceable rate. The parties agreed that North Carolina law applied to the relevant transactions, so the court did not conduct a choice-of-law analysis.

The court held that North Carolina’s general usury statute does not limit interest rates for loans greater than $25,000. Each transaction alleged in the complaint exceeded that amount. As a result, even if the merchant-cash-advance agreements were loans, North Carolina’s general usury statute could not make them unlawful debts for purposes of the RICO claims.

The court also rejected ITG Brands’ argument that North Carolina’s Unfair and Deceptive Trade Practices Act could supply the required usury-law predicate. The court explained that the statute prohibits unfair or deceptive practices but does not establish an enforceable interest rate. It therefore could not support RICO claims based on collecting an unlawful debt. The court granted the defendants’ motions to dismiss the substantive RICO claims.

RICO Conspiracy

A RICO conspiracy claim requires an agreement to violate RICO’s substantive provisions. Because the complaint failed to state the underlying substantive RICO claims, the court also granted the defendants’ motions to dismiss the RICO conspiracy claims.

Declaratory Judgment Claims

ITG Brands sought declarations that the agreements were loans rather than purchases of accounts receivable, that their interest rates exceeded lawful limits, and that excess interest had to be refunded. Because ITG Brands had not established that the transactions were usurious under North Carolina law, the court dismissed the declaratory-judgment claims against the Yellowstone and Funderz Defendants.

Leave to Amend and Disposition

ITG Brands requested permission to amend its complaint if the claims were dismissed. The court denied that request, finding amendment futile because the substantive RICO claim based on collecting an unlawful debt failed as a matter of law.

The court granted the defendants’ motions to dismiss the complaint, directed the clerk to terminate the identified motions, and directed the clerk to close the case. The opinion did not state that the dismissal was with or without prejudice.