The New Y-Capp, Inc. v. Arch Capital Funding, LLC

Background

The New Y-Capp, Inc., Jonathan Eugene Coleman, Donna Zemoria Pierce-Baylor, Radiant Images, Inc., and Gianna Wolfe sued Arch Capital Funding, LLC, MCA Recovery, LLC, High Speed Capital, LLC, Yellowstone Capital, LLC, Yellowstone Capital West, LLC, Tsvi H. Davis, Yitzhak D. Stern, and John and Jane Doe investors. Plaintiffs alleged that defendants provided money to struggling small businesses through instruments described as purchase agreements that were actually loans. Plaintiffs further alleged that defendants used those arrangements to avoid state usury laws and charge unlawful and unconscionable interest rates.

Plaintiffs also alleged that defendants required them to sign affidavits confessing judgment. A state court entered a judgment by confession against The New Y-Capp, Inc., Coleman, and Pierce-Baylor in December 2017, totaling $613,746.13. On May 11, 2020, the New York Supreme Court in Erie County vacated that judgment and dismissed the state-court action so the parties could litigate the underlying factual and legal issues in this federal case.

Defendants filed four motions to dismiss the second amended complaint. They argued, among other things, that the Rooker-Feldman doctrine barred the federal action. That doctrine generally prevents a federal district court from reviewing and rejecting a state-court judgment.

Court’s analysis

The court focused on whether a state-court judgment that existed when the federal action began but was later vacated still triggered the Rooker-Feldman doctrine. The court concluded that it did not. Because the state-court judgment had been vacated, plaintiffs were no longer losing parties for purposes of that doctrine, and there was no existing state-court judgment for the federal court to review or reject.

The court also rejected defendants’ argument that federal jurisdiction had to be determined only from the circumstances existing when the action was filed. The court reasoned that plaintiffs could have filed the action after the state judgment was vacated, when Rooker-Feldman would not have barred the action based on that judgment. Applying the filing-time rule rigidly would therefore require an unnecessary refiling solely because the judgment was later vacated.

The court did not decide the merits of plaintiffs’ claims under the Racketeer Influenced and Corrupt Organizations Act, conspiracy, fraud, or wrongful execution. Instead, it said that the state-court vacatur potentially changed the relevant facts and that plaintiffs had identified only the one judgment that was later vacated. Plaintiffs were directed to identify any other judgments relevant to the Rooker-Feldman analysis.

Disposition

Judge Andrew L. Carter, Jr. denied defendants’ motions to dismiss without prejudice to refiling after plaintiffs filed an amended complaint. The court granted plaintiffs leave to amend and ordered them to file the amended complaint within thirty days of the order’s filing.