Inventory Generation Inc. v. Silverline Services Inc.

Background

Inventory Generation Inc. and Earl David brought a proposed class action concerning five merchant cash advance agreements. The complaint alleged violations of the Racketeer Influenced and Corrupt Organizations Act, conspiracy to violate that statute, fraud, breach of contract, and violations of 42 U.S.C. § 1983 against certain defendants. It also sought a declaration that the agreements were legally void.

Inventory Generation entered into one agreement with Proventure Capital Funding LLC (PCF) on October 25, 2022. The agreement provided a $15,000 advance in exchange for repayment of $22,485 through daily automated bank payments. The complaint alleged that the agreement’s effective interest rate was unlawfully high, that a 10% origination fee reduced the actual amount received to $13,500, and that the agreement was fraudulent and unconscionable. Earl David personally guaranteed Inventory Generation’s performance.

The agreement contained broad arbitration provisions covering any action or dispute relating to the agreement or involving PCF and a merchant or guarantor. It also contained court-selection provisions for litigation relating to the agreement. PCF and Benjamin Aryeh moved to stay the claims against them and compel arbitration under the Federal Arbitration Act. They also requested attorneys’ fees and costs for bringing the motion.

Arbitration ruling

The court held that the arbitration provisions were binding and broad. Earl David had signed every page of the agreement, including the pages containing those provisions, and Inventory Generation did not dispute the formation of a binding contract.

The court distinguished between challenges to the agreement as a whole and challenges specifically directed at the arbitration provisions. Inventory Generation’s allegations that the agreement was criminally usurious, fraudulently induced, unconscionable, and illegal challenged the agreement as a whole. Under federal arbitration law, those challenges were to be decided first by an arbitrator unless the challenge specifically attacked the arbitration clause.

The court separately considered Inventory Generation’s argument that the arbitration and court-selection provisions conflicted. It found the provisions complementary rather than contradictory. The arbitration provisions governed disputes that a party elected to arbitrate, while the court-selection provisions governed related court proceedings, such as proceedings to compel arbitration or confirm or challenge an arbitration award. The court therefore granted the PCF defendants’ motion to compel arbitration.

The court noted that the arbitrator would also decide whether Inventory Generation’s claims fell within the scope of the arbitration provisions if the arbitrator upheld the agreement against Inventory Generation’s validity challenges.

Fees and costs

The court denied the request for attorneys’ fees and costs. It found that the request was cursory and that Inventory Generation had made colorable, though unsuccessful, arguments about whether its claims could be arbitrated. The court concluded that the arguments were not sufficiently baseless or meritless to justify an award.

Stay and remaining claims

The court stayed the litigation pending arbitration as to claims that solely implicated the PCF defendants or alleged joint conduct involving them. The stay covered Inventory Generation’s claims under the Racketeer Influenced and Corrupt Organizations Act and its conspiracy claim, as well as its requests for declaratory relief and its fraud and alternative breach-of-contract claims, but only as to the PCF defendants.

The court did not stay claims against other defendants that had not already been dismissed. Those claims, including the claims under 42 U.S.C. § 1983, were to proceed in court because they did not name the PCF defendants. The court directed Inventory Generation and the PCF defendants to submit joint status letters every 90 days about the arbitration.