Streamlined Consultants, Inc. v. EBF Holdings, LLC

Background

Streamlined Consultants, Inc., doing business as Streamlined Consultants, and Moshe Schoenwald sued EBF Holdings LLC, doing business as Everest Business Funding and EBF. Streamlined Consultants is a New York corporation, and Schoenwald is its principal. Everest is a Delaware limited liability company with its principal place of business in Doral, Florida.

The parties signed a revenue-based funding agreement on May 21, 2021. Under that agreement, Everest purchased $199,500 of Streamlined Consultants’s future receipts for $150,000, and Schoenwald acted as guarantor. The agreement provided for daily withdrawals of $1,209.09, while also allowing Streamlined Consultants to request a monthly reconciliation so that the withdrawals would equal 15% of its actual receipts. The agreement stated that Streamlined Consultants was selling future revenue rather than borrowing money, that there was no interest rate or fixed payment schedule, and that Everest assumed the risk that the business might slow down, fail, or enter bankruptcy.

Plaintiffs alleged that the agreement was actually a loan disguised as a sale of future receipts. They calculated an alleged annual interest rate of 230.5% by comparing the purchased amount with the daily payment and disregarding the reconciliation provision. They brought claims for rescission based on unconscionability and for a declaration that the agreement was criminally usurious and unenforceable.

Motion and Legal Standard

EBF moved to dismiss the First Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. The court considered the funding agreement because the complaint relied on it and attached it. The court stated that where the agreement contradicts the complaint’s allegations about its terms, the agreement controls.

Analysis

The court applied New York law because the funding agreement included a New York choice-of-law provision. It first held that the plaintiffs could not bring affirmative claims based on criminal usury. Under the New York law discussed in the opinion, a corporation may assert criminal usury as a defense to an action seeking repayment of a loan, but may not use criminal usury as the basis for claims seeking to invalidate an agreement or obtain other affirmative relief.

Because both the rescission claim and the declaratory-relief claim depended on the allegation that the funding agreement was criminally usurious, the court held that the First Amended Complaint was subject to dismissal in its entirety.

The court also addressed the merits of the usury theory in the alternative. It explained that usury requires a loan or an agreement to delay repayment. To determine whether a revenue-purchase agreement is really a loan, New York courts examine whether repayment is required in all circumstances, including whether the agreement has a reconciliation provision, whether it has a fixed term, and whether the funder has recourse if the business enters bankruptcy.

The court found that all three factors weighed against treating this agreement as a loan. First, the reconciliation provision required Everest to reconcile the withdrawals if Streamlined Consultants requested reconciliation and supplied the necessary information. Second, the agreement had no fixed term or payment schedule, because the time needed to collect the purchased amount depended on future receipts. Third, bankruptcy did not automatically constitute a default or breach, and the agreement did not give Everest a right to immediate repayment upon bankruptcy. The court therefore held that, even if plaintiffs could bring affirmative usury claims, those claims would fail as a matter of law.

The court also rejected plaintiffs’ argument that dismissal was improper because EBF had removed the case to federal court. Removal and the sufficiency of the complaint are separate issues, and a defendant may seek dismissal after removing a case. The court further stated that plaintiffs could not add a different unconscionability theory through their opposition brief, and that New York law would not allow an unconscionability claim to seek affirmative relief in any event.

Disposition

Judge Kenneth M. Karas granted EBF’s motion to dismiss. The court stated that the dismissal was without prejudice because this was the first adjudication of plaintiffs’ claims on the merits. Plaintiffs could file a second amended complaint within 30 days if they had a good-faith basis to do so. The court stated that failure to amend properly and on time would result in dismissal of the claims with prejudice, without further notice. The Clerk was directed to terminate the pending motion.

Classification note

This is classified as a procedural order because the court ruled on a Rule 12(b)(6) motion to dismiss, even though it also discussed why the usury theory would fail on the merits.