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

Background

Plaintiffs sued a group of merchant cash advance companies and various executives. They alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), a conspiracy to violate RICO, and wrongful execution. Defendants moved to dismiss the Third Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which asks whether the complaint states a legally sufficient and plausible claim.

State-Court Judgment and Claim Preclusion

Defendants argued that plaintiffs’ claims were barred by res judicata, a rule that generally prevents parties from relitigating claims that were or could have been raised in an earlier case. They also relied on the Rooker-Feldman doctrine, which limits federal district courts’ ability to review final state-court judgments.

The court rejected those arguments. It explained that the state-court matter involved enforcement of a confessed judgment based on one transaction, while this federal case challenged the defendants’ alleged broader fraudulent conduct and operations under RICO. The court therefore found that the state action had no preclusive effect on this case and that Rooker-Feldman did not apply.

RICO Claim

To plead a civil RICO claim, a plaintiff must allege conduct involving an enterprise through a pattern of racketeering activity or through the collection of unlawful debt. Defendants argued that plaintiffs had not adequately pleaded either a qualifying enterprise or the collection of unlawful debt.

The court rejected the enterprise argument because the complaint described multiple distinct entities with separate ownership, control, officers, records, and bank accounts, even though some ownership overlapped. The complaint also alleged different roles for the entities and executives in soliciting, underwriting, funding, servicing, and collecting the disputed obligations.

The court also found that plaintiffs sufficiently pleaded the collection of unlawful debt. Under RICO, unlawful debt includes debt that is unenforceable because of usury laws and that arose from lending money at a sufficiently usurious rate. The court explained that determining whether a merchant cash advance is truly a sale of receivables or instead a loan depends on the transaction’s actual substance, including who bears the risk that receivables will not be collected.

The complaint alleged that the reconciliation provisions were largely ineffective, that the agreements commonly had fixed repayment terms, and that defendants retained recourse against merchants or guarantors in bankruptcy. Considering those allegations, the court was persuaded that plaintiffs had adequately pleaded that the agreements were usurious loans under New York law and met RICO’s unlawful-debt requirement.

RICO Conspiracy

Defendants’ only argument against the RICO conspiracy claim was that plaintiffs had not sufficiently pleaded a RICO violation. Because the court rejected that premise, it held that the conspiracy claim survived the motion to dismiss.

Wrongful Execution

Regarding the wrongful-execution claim, the court stated that, in light of the New York Court of Appeals’ decision in Plymouth Venture Partners, II, L.P. v. GTR Source, LLC, the proper vehicle for litigating that claim was New York Civil Practice Law and Rules § 5240. The court scheduled a telephone conference for October 12, 2022, at 10:30 a.m. Eastern Time.

Disposition

Judge Andrew L. Carter, Jr. denied defendants’ motions to dismiss. The clerk was directed to terminate the specified electronic docket entries.