Coral Capital Solutions LLC v. Disrupt Social, LLC

Background

Disrupt Social, LLC entered into a factoring agreement with Coral Capital Solutions LLC on October 5, 2022. Factoring is a financing arrangement in which a company sells its accounts receivable—the money customers supposedly owe it—to another company for faster payment. Disrupt Social agreed that the receivables sold to Coral Capital represented genuine sales or services, and Evan Hart Bloomberg, Disrupt Social’s sole member, guaranteed the agreement and accepted personal liability for Disrupt Social’s obligations.

Between January and April 2024, Coral Capital bought more than $1.5 million in receivables purportedly owed by CBS Interactive for services invoiced during those months. Coral Capital received no payment and defendants did not pay the required factoring fees. CBS Interactive later stated that it had not received any 2024 invoices from Disrupt Social and that Disrupt Social had performed no paid services for it from January through April 2024. The evidence showed that the last invoice CBS Interactive received from Disrupt Social was dated December 1, 2023.

Coral Capital’s second amended complaint asserted five causes of action: breach of contract against Disrupt Social and Bloomberg, fraud in the inducement, conversion, and a constructive-trust claim against Disrupt Social. Defendants moved to dismiss the second amended complaint. Coral Capital moved for summary judgment after discovery ended.

Motion to dismiss

Defendants argued that Coral Capital had sued the wrong entity because the factoring agreement involved a Wyoming Disrupt Social entity, while the complaint also described a Nevada Disrupt Social entity. The court rejected that argument. It held that the complaint identified the Wyoming entity that was party to the factoring agreement and that Coral Capital had expressly stated it was suing only that entity, not the Nevada entity.

The court dismissed count five, the constructive-trust claim. Under the agreements, New York law applied. The court explained that a constructive trust is an equitable remedy generally unavailable when a valid contract provides an adequate legal remedy. It also noted the absence of a fiduciary or confidential relationship between the parties. The court did not resolve whether New York law recognizes a standalone constructive-trust cause of action because the claim failed for these other reasons. Counts one through four survived the motion to dismiss.

Summary judgment on the contract claims

The court held that Coral Capital was entitled to summary judgment on counts one and two, the contract claims. It found no genuine dispute about the relevant facts: the factoring agreement and guaranty warranted that the receivables represented genuine sales or services; Coral Capital performed its obligations; the CBS Interactive receivables purchased in 2024 were fabricated; and defendants failed to pay the required factoring fees.

The court rejected defendants’ argument that Coral Capital had assumed the risk that the invoices would not be paid. The agreement’s credit-risk provision applied to an account debtor’s financial inability to pay, not to fabricated invoices. The court also rejected defendants’ assertion that they had honestly believed the receivables were valid. Under the contract, the relevant issue was whether the representation was true, not whether defendants claimed to have believed it.

The court accepted the uncontested damages calculation of $1,511,819.44, consisting of $1,257,075.36 advanced for the fabricated receivables plus unpaid contractual fees calculated through October 9, 2024. The court also ruled that Coral Capital was entitled to prejudgment interest and attorneys’ fees under the factoring agreement and guaranty.

Summary judgment on fraud and conversion

The court denied summary judgment on count three, the fraudulent-inducement claim. Coral Capital relied on statements that the receivables represented genuine sales or services and on Bloomberg’s answer of “no” to an application question asking whether he had any outstanding judgment. Bloomberg said he believed CBS Interactive was paying Disrupt Social for its services and did not know about a $100,000 American Express judgment when he completed the application. These disputes created a genuine issue about whether defendants knew, or recklessly disregarded, that the statements were false.

The court also denied summary judgment on count four, the conversion claim. Coral Capital argued that defendants wrongfully retained money paid for fabricated receivables and used some of it for Bloomberg’s personal expenses. The court held that Coral Capital had not shown how the alleged conversion was different from the alleged breach of contract or what separate wrongful conduct and damages supported the conversion claim.

Affirmative defenses and sanctions

The court held that defendants waived their affirmative defenses to the contract claims because they did not raise those defenses in opposition to Coral Capital’s summary-judgment motion. The court separately declined to rule prematurely on defenses that had not been asserted in response to the operative complaint.

The court denied Coral Capital’s request for sanctions under Federal Rule of Civil Procedure 37. Coral Capital complained that defendants failed to provide documents requested during Bloomberg’s deposition, but it had not obtained a court order requiring defendants to produce those documents. The court held that a court order and noncompliance with that order were required for the requested sanctions.

Disposition

The defendants’ motion to dismiss was granted in part: count five was dismissed, and counts one through four survived. Coral Capital’s motion for summary judgment was granted in part: summary judgment was granted on counts one and two and denied on counts three and four. The court directed the parties to meet with their clients and propose next steps if they could not resolve the case.