Premium Merchant Funding 18, LLC v. Honan

Background

Premium Merchant Funding 18, LLC and Premium Merchant Funding 26, LLC described themselves as hard-money lenders. They alleged that they purchased receivables from Honan Property Management, LLC and other entities in March and May 2022, with Scott Crandall Honan signing the agreements as owner and guarantor. The plaintiffs alleged that defendants made false or incomplete statements about the businesses and moved money among accounts, causing the plaintiffs to provide financing that was not repaid.

The complaint asserted claims for fraud, fraudulent inducement, unjust enrichment, breach of a contractual disclosure duty, and violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The RICO claim was the Sixth Cause of Action. The plaintiffs later added a RICO conspiracy theory in a RICO case statement. FPC MOB I Tenant Partners, LLC; Forsyth Physicians Center MOB I, LLC; Forsyth Physicians Center SPE I, LLC; Resurgens Forsyth Medical Center, LLC; and OVRH26 SPE, LLC moved to dismiss. The motions were not opposed.

RICO Claims

The court concluded that the complaint and RICO case statement failed to state a RICO claim or a RICO conspiracy claim. First, the court held that the plaintiffs lacked standing to pursue RICO damages at that point. The alleged financial injury was the defendants’ failure to repay amounts due under the Merchant Agreements. Because the plaintiffs had not brought a breach-of-contract action to recover those amounts, the court found that the alleged RICO injury was not yet definite. It stated that the plaintiffs had to pursue and exhaust the available state-law remedies before claiming that racketeering activity caused a separate loss.

The court also held that the RICO allegations failed to plead the required “pattern of racketeering activity,” also called continuity. The alleged mail and wire fraud occurred between February and April 2022. The court found no facts showing that the conduct threatened to continue into the future, so the plaintiffs did not plead open-ended continuity. It also found that a period of roughly two or three months was too short to establish closed-ended continuity, which requires conduct over a substantial period.

The court determined that the continuity defect could not be fixed by amendment because the alleged conduct occurred during a completed period of about 12 weeks and had not recurred. It therefore dismissed the Sixth Cause of Action with prejudice and without leave to amend as to the moving defendants. Because the same facts supported the RICO conspiracy theory, the court found no basis to permit that claim to be added. The court then dismissed the Sixth Cause of Action on its own initiative as to the other defendants as well.

Diversity Jurisdiction and Remaining Claims

After dismissing the only federal claim, the court found no federal-question jurisdiction. It then examined diversity jurisdiction. The plaintiffs were limited liability companies, whose citizenship depends on the citizenship of their members. The complaint alleged that they were “foreign” LLCs and maintained offices in New York, but did not allege the citizenship of their members. The complaint also did not adequately allege the citizenship of the defendant LLCs, which likewise depends on the citizenship of their members.

The court therefore could not determine whether complete diversity existed. It dismissed the remaining state-law claims without prejudice to filing an amended complaint that adequately alleges the citizenship of the plaintiff LLCs and the citizenship of the defendants to the extent the plaintiffs can allege it based on knowledge or information and belief. The court declined to exercise supplemental jurisdiction over those claims after dismissal of the federal claim and stated that the plaintiffs would need to pursue them in state court unless they could successfully plead diversity jurisdiction.

Disposition

The court granted the defendants’ motions to dismiss. It directed the Clerk to dismiss the Sixth Cause of Action with prejudice and the remaining causes of action without prejudice. The plaintiffs could amend the state-law claims if they could properly plead diversity jurisdiction, but the court stated that the RICO claim could not be refiled and warned that an attempt to do so could lead to sanctions. Judge Colleen McMahon issued the decision and order.