Haymount Urgent Care PC v. GoFund Advance, LLC

Background

The plaintiffs were Haymount Urgent Care PC, Indigo Installations, Inc., their principals, and other plaintiffs. They alleged that defendants in the merchant-cash-advance industry used agreements labeled as purchases of future receivables to make what were actually high-interest loans, and then used improper collection methods. The amended complaint asserted claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), RICO conspiracy, breach of contract, fraud, declaratory judgment, and 42 U.S.C. § 1983, which permits claims for constitutional violations carried out under color of state law.

The defendants moved to dismiss every claim except breach of contract. The agreements required daily automated bank withdrawals, included personal guaranties and default remedies, and contained reconciliation provisions that purported to allow adjustments based on revenue. The plaintiffs alleged that the agreements imposed fixed repayment obligations and did not truly transfer the risk of revenue shortfalls to the defendants.

RICO and RICO Conspiracy

The court denied the motion to dismiss the RICO claim based on collection of unlawful debts. Applying New York law, the court held that the complaint adequately alleged that the merchant-cash-advance agreements functioned as loans rather than genuine purchases of receivables. The court focused on the agreements’ fixed daily remittances, limited and discretionary reconciliation process, personal guaranties, immediate repayment provisions after default, and procedures allowing account attachments. These provisions could show that the defendants did not bear the risk that the merchants’ revenues would fall.

Because the complaint adequately alleged that the transactions were loans, and because the defendants did not dispute at this stage that the implied interest rates exceeded twice New York’s criminal-usury rate, the court held that the complaint adequately pleaded debts that qualified as “unlawful debts” under RICO.

The court also denied the motion to dismiss the RICO claim based on a pattern of wire fraud, but limited that claim. The allegation that defendants used misleading names to make automated withdrawals after Haymount attempted to block them was adequately pleaded and supported a possible pattern of wire fraud. The theory based on excessive but disclosed fees was not viable. The court denied the motion to dismiss the RICO-conspiracy claim because the substantive RICO claim was adequately pleaded. The limitation concerning disclosed excessive fees also applied to the conspiracy theory.

Section 1983 Claim

The court denied the motion to dismiss the § 1983 claim in its entirety. The plaintiffs alleged that defendants used Connecticut’s prejudgment-attachment process to freeze bank and medical-insurance-reimbursement accounts without following statutory requirements, including serving the required complaint, affidavit, and notice.

The court held that, accepting the allegations as true at the motion-to-dismiss stage, the complaint adequately alleged that defendants acted under color of state law and deprived plaintiffs of property without due process. The court did not decide whether the contractual waivers of notice and a hearing were valid. It concluded that those waivers did not justify dismissal because the complaint alleged that defendants failed to follow the statutory safeguards governing use of the attachment procedure.

Declaratory Judgment

The court granted in part the motion concerning declaratory judgment. The plaintiffs sought a declaration that the merchant-cash-advance agreements were void from the beginning because they were criminally usurious loans. The court dismissed that part of the claim, explaining that New York law permits corporations to raise criminal usury as a defense but does not permit them to bring an affirmative claim seeking to invalidate the agreements on that basis.

The plaintiffs also sought a declaration that the settlement involving Indigo was invalid because it was obtained through economic pressure and by bypassing Indigo’s counsel. The court denied the motion as to that aspect of the claim. The complaint adequately alleged that defendants used allegedly unlawful account restraints to pressure Indigo into settling and that defendants’ counsel negotiated directly with Indigo despite its representation in the litigation. This part of the declaratory-judgment claim could proceed only against GoFund Advance, which was the settlement counterparty identified by the court.

Fraud Claim

The court granted in part the motion concerning fraud. It dismissed the theory that defendants committed fraud by charging excessive underwriting and automated-clearinghouse fees. The fees were disclosed in the agreements, and the complaint did not adequately allege a separate misrepresentation, independent legal duty, or other basis for treating the dispute as fraud rather than breach of contract.

The court allowed the fraud theory concerning allegedly unauthorized automated bank withdrawals to proceed against GoFund Advance. The complaint specifically alleged that GoFund attempted to bypass a block on withdrawals by taking $60,000 under the name “GoFund b” rather than “GoFund.” Because the allegations concerned no defendant other than GoFund Advance, the court dismissed the fraud claim against all other defendants.

Disposition and Case Management

The court stated that the motion to dismiss the First Amended Complaint was granted in part and denied in part. The RICO and racketeering-conspiracy claims survived subject to the disclosed-fee limitation. The § 1983 claim survived in full. The agreement-invalidity portion of the declaratory-judgment claim was dismissed, while the Indigo-settlement portion survived only against GoFund Advance. The fraud claim was dismissed against all defendants other than GoFund Advance, and only the allegedly fraudulent automated-withdrawal theory could proceed against that defendant.

Judge Rakoff also dissolved the previously imposed stay, directed the parties to prepare a new case-management plan with a trial-ready date three months from the order, and required them to contact the court’s chambers and law clerk within one week after entry of the order.