Stellar Beach Rentals, LLC v. Redstone Advance, Inc.

Background

Stellar Beach Rentals, LLC and John Kozak sued Redstone Advance, Inc., Gavriel Yitzchakov, Simon Yitzchakov, City Capital NY LLC doing business as Redstone Advance, Yoel Getter, Nair & Levin, P.C., and other named and unnamed defendants. Plaintiffs alleged that Defendants used three merchant cash advance contracts to provide money that was described as being repaid from a percentage of business revenue, but was actually repaid through fixed payments unrelated to actual revenue. Plaintiffs alleged that the agreements therefore operated as unlawful loans and that Defendants used aggressive collection methods after Plaintiffs missed payments.

Those methods allegedly included using a Connecticut prejudgment-attachment statute to freeze Plaintiffs’ bank accounts and using Uniform Commercial Code liens and powers of attorney directed at third parties that handled Plaintiffs’ money. Plaintiffs asserted claims under the Racketeer Influenced and Corrupt Organizations Act, a federal racketeering statute; the federal racketeering-conspiracy provision; common-law fraud; breach of contract; 42 U.S.C. § 1983; and the Computer Fraud and Abuse Act. They also sought a declaration that the contracts were void and an injunction against enforcing them.

Preliminary-injunction standard

The court explained that a preliminary injunction requires proof of irreparable harm, meaning harm that is actual and imminent and cannot be adequately repaired later with money; either a likelihood of success on the merits or serious questions fairly requiring a trial, together with hardships that strongly favor the plaintiff; and a favorable public interest. The court described irreparable harm as essential to obtaining this temporary relief.

Court’s analysis

The court found that Plaintiffs adequately supported their claim that account freezes and liens threatened the destruction of their business. The Responding Defendants argued that the account freezes had ended and that Plaintiffs had not sufficiently supported their claims about liens and powers of attorney. The court rejected that argument, noting that Plaintiffs had raised the issues during the briefing and submitted a supporting affidavit, while the Responding Defendants did not deny using those collection devices.

The court also found serious questions concerning Plaintiffs’ § 1983 claims. Plaintiffs alleged that Defendants failed to comply with the Connecticut prejudgment-attachment statute because they did not properly draft and serve a complaint, provide required affidavits, or give adequate notice. The court identified concerns about affidavits submitted by City Capital and Getter even though the agreements appeared to be with Redstone. It concluded that the questions about compliance with the statute were sufficiently serious to support an injunction.

The court further found that the balance of hardships favored Plaintiffs because of the potential collapse of their business, while the Responding Defendants had not identified comparable hardships. It concluded that the public interest also favored Plaintiffs, citing the public interest in enforcing statutes such as the racketeering and computer-fraud statutes. Nair & Levin, City Capital, and Getter had stated at the hearing that they took no position on the injunction, and the court applied the injunction against the Responding Defendants and defendants who had not responded.

Order

The court issued the preliminary injunction and ordered Defendants, along with persons acting together with them, not to issue or maintain attachments or levies against Plaintiffs’ bank accounts or accounts over which Plaintiffs had signing authority. The order also barred them from issuing or maintaining liens, including Uniform Commercial Code liens, against Plaintiffs’ assets or property or against property held for Plaintiffs by third parties, including booking agents and payment processors. Finally, it barred them from using or maintaining powers of attorney to affect Plaintiffs’ property or assets.

The court applied the $1,000 bond previously posted for the temporary restraining order to the preliminary injunction. It declined to extend the injunction to Plaintiffs’ unspecified “related entities,” because Plaintiffs had not provided a clearly defined list and a preliminary-injunction order must describe the restrained acts and affected parties in reasonable detail.