PEB, Inc. v. Premium Merchant Funding 26, LLC

Background

PEB, Inc. brought two claims under the Racketeer Influenced and Corrupt Organizations Act (RICO): one claim alleging participation in a racketeering enterprise and one claim alleging a conspiracy to violate RICO. PEB alleged that Premium Merchant Funding 26, LLC (PMF), Mason G. Kashat, James P. Gieselmann Jr., and Adela Bejko used at least eight merchant-cash-advance agreements as disguised, high-interest loans. PEB sought treble damages.

The agreements described the transactions as purchases of future revenue rather than loans. PEB alleged, however, that PMF required repayment regardless of PEB’s actual collections and that the effective interest rates were usurious under New York law. The agreements each contained an arbitration provision covering disputes arising from or related to the agreements, the guaranty, or the relationship between PMF and PEB. The provision also stated that PMF’s employees, agents, directors, officers, and other listed personnel could enforce it.

PMF separately sued PEB and Harley Padilla in New York State Supreme Court concerning two of the agreements and related guaranties. PEB argued in the federal case that PMF and the individual defendants waived arbitration by bringing and pursuing that state-court action.

Arbitration Agreement and Scope

The court held that PEB and PMF agreed to arbitrate. It described the arbitration clause as exceptionally broad because it covered any dispute related to the agreements or the parties’ relationship, including claims based on contract, tort, or another legal theory. The court ruled that PEB’s RICO claims fell within that language.

The court also ruled that RICO claims are arbitrable under the Federal Arbitration Act. Because both of PEB’s claims were arbitrable, the court did not need to decide whether any non-arbitrable claims should remain stayed.

Waiver and the State-Court Action

The court concluded that any ordinary contractual-waiver argument based on the defendants’ litigation conduct was delegated to the arbitrator under the agreements. The court separately considered whether the defendants should be barred from seeking arbitration under judicial estoppel, a doctrine that can prevent a party from taking inconsistent positions in court proceedings.

The court rejected that argument. It found no contradiction between PMF’s state-court action and its request to compel arbitration in this case. The court noted that the agreements allowed PMF to bring the state-court action and preserved its ability to demand arbitration of related disputes. It also found that PMF had not used this federal case to obtain a litigation advantage before seeking arbitration.

Individual Defendants

The court held that PEB could not continue litigating its RICO claim against Kashat, Gieselmann, and Bejko separately from its claim against PMF. The court ruled that the individual defendants were intended third-party beneficiaries of the arbitration provision because the agreement expressly referred to PMF’s employees, agents, directors, officers, and other personnel who could enforce it.

The court also held that the individual defendants could enforce the arbitration provision under agency principles. PEB alleged that they acted as PMF employees or officers in connection with the agreements, and the alleged misconduct concerned their conduct in those company roles. The court reasoned that allowing PEB to avoid arbitration simply by suing PMF’s personnel would circumvent the agreement.

The court rejected PEB’s argument that the agreements’ alleged illegality prevented arbitration. It explained that a challenge to the agreement as a whole, including a claim that it was usurious or otherwise unenforceable, generally goes to the arbitrator; a court would decide only a challenge directed specifically at the arbitration provision. The court stated that it was not deciding whether the defendants violated RICO.

Disposition

Judge Liman granted Defendants’ motion to compel arbitration and for a stay of the federal proceedings. The order directed the Clerk of Court to close the motion docket entry. The opinion did not decide whether the agreements were usurious or whether PEB’s RICO allegations were ultimately valid.