Steel River Systems v. Variant Alternative Income Fund

Background

Steel River Systems, LLC entered into a Loan and Servicing Agreement with Variant Alternative Income Fund, Pier Special Opportunities Fund, LP, and Greenhill Debt Management, LLP. Variant and Pier loaned Steel River a total of $5,617,550.75 through eight promissory notes. The agreement provided for a 115% preferred return to Variant and Pier, as well as additional payments tied to collections from debt portfolios purchased with the loan proceeds.

After Steel River experienced operational and financial problems, Variant declared events of default, filed a Uniform Commercial Code financing statement against certain Steel River assets, and gave notice of a planned public sale of collateral. Steel River filed this action and sought to stop the sale. Variant agreed to halt the sale while the case proceeded. The court then denied Steel River’s temporary restraining order as moot but left its motion for a preliminary injunction pending.

Steel River’s complaint asserted: (1) a claim under New York Uniform Commercial Code § 9-625(a), alleging that the defendants were enforcing their security interests unlawfully because the loans were criminally usurious; (2) civil claims under the Racketeer Influenced and Corrupt Organizations Act, commonly called RICO, based on alleged unlawful-debt collection, wire fraud, and interstate transportation of stolen money; and (3) a request for a declaration that Variant’s UCC filing was void.

Motion to Dismiss

The court granted the defendants’ motion to dismiss Steel River’s UCC claim. Under New York law, a loan is criminally usurious if it provides for an annual interest rate of at least 25%. The court held, however, that only payments that qualify as interest are included in that calculation. Interest must have a degree of certainty and regularity.

The court distinguished the New York Court of Appeals’ decision in Adar Bays, LLC v. GeneSYS ID, Inc., which treated the reasonably determinable value of a contingent stock-conversion option as interest. Here, the additional payments to Variant and Pier depended on the continued collection of receivables, payment of fees and expenses, and satisfaction of the 115% preferred return. The agreement set no minimum additional return, and the lenders accepted the risk that they might receive nothing beyond the preferred return. Because those additional payments could not reasonably be determined when the parties entered the agreement, the court did not count them as interest for purposes of criminal usury. The court concluded that the agreement was not criminally usurious and granted the motion to dismiss the UCC claim.

The court dismissed Steel River’s RICO claims in their entirety. The unlawful-debt theory failed because Steel River had not shown that the agreement involved a usurious rate. The wire-fraud and interstate-transportation theories also failed because the complaint did not identify specific fraudulent communications, participants, or facts showing that property was knowingly stolen, converted, or taken by fraud. The court further held that the complaint did not adequately allege a continuing pattern of racketeering activity or a RICO enterprise separate from the alleged conduct.

The court dismissed Steel River’s declaratory-judgment claim because it sought a declaration about the same issue presented by the UCC claim and therefore would not provide an independent, useful remedy.

Preliminary Injunction and Disposition

Steel River’s preliminary-injunction motion sought to prevent the defendants from enforcing or collecting on the agreement, including through UCC remedies. A preliminary injunction requires, among other things, a likelihood of success on the merits or sufficiently serious questions supporting relief. Because the court concluded that the agreement was not criminally usurious and dismissed all of Steel River’s underlying claims, it denied the preliminary-injunction motion.

The court’s conclusion states that it denied Steel River’s motion for a preliminary injunction and dismissed Steel River’s complaint in its entirety. The Clerk was directed to terminate all pending motions and close the case. Judge Naomi Reice Buchwald did not reach the defendants’ alternative argument that New York law might bar the claims because the total lending exceeded $2.5 million.