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, Scott Crockett, and unidentified defendants. The complaint asserted claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), including a claim under 18 U.S.C. § 1962(c), a RICO-conspiracy claim under § 1962(d), and common-law fraud against EBF.

The dispute centered on a May 21, 2021 revenue-based funding agreement. Under that agreement, EBF purchased $199,500 of SCI’s future receipts for $150,000, and Schoenwald guaranteed the agreement. The agreement stated that SCI was selling future revenue rather than borrowing money, and that EBF assumed the risk that SCI’s business could slow, fail, or cease operations. It also included a reconciliation process under which SCI could request an adjustment so that EBF’s withdrawals matched 15% of SCI’s actual receipts.

Plaintiffs alleged that the agreement was actually a usurious loan with an annual interest rate of 230.5%. They also alleged that EBF used misleading terminology, solicited them through emails, required proceeds from the 2021 agreement to pay an earlier 2019 agreement, and charged fraudulent fees. The 2019 agreement involved EBF’s purchase of $108,800 of SCI’s future receipts for $80,000. EBF moved to dismiss the Second Amended Complaint and requested sanctions under Federal Rule of Civil Procedure 11.

Rulings on the Claims

The court applied the pleading standards for a motion to dismiss under Rule 12(b)(6), which requires a complaint to allege enough facts to make a claim plausible. Fraud claims also must describe the alleged fraudulent conduct in detail under Rule 9(b).

For the RICO claim under § 1962(c), the court focused on whether Plaintiffs plausibly alleged the collection of an “unlawful debt.” Under RICO, that requires a debt that is unenforceable because of usury, incurred in the business of lending at a usurious rate, and charged at least twice the legally enforceable rate. The court relied on its earlier ruling that the 2021 Funding Agreement was not a loan because EBF was not absolutely entitled to repayment under all circumstances. Because the agreement was not a usurious loan, Plaintiffs could not plausibly allege that it created an unlawful debt under RICO. The court also found that Plaintiffs’ allegations concerning the 2019 agreement and alleged wire fraud were conclusory and did not plausibly plead a pattern of racketeering activity. The court granted the motion to dismiss the § 1962(c) claim.

The court dismissed the § 1962(d) RICO-conspiracy claim because Plaintiffs had not plausibly stated a substantive RICO violation under § 1962(c).

The court also dismissed the common-law fraud claim. Plaintiffs alleged that EBF’s origination, wire-transfer, and automated-clearing-house fees were disguised interest charges and were not connected to services provided. The court concluded that Plaintiffs had not identified a misrepresentation separate from their rejected theory that the funding agreement was a usurious loan. The court again concluded that the 2021 Funding Agreement was not a usurious loan and held that the fraud claim failed for the same reason.

Sanctions

Rule 11 requires attorneys and litigants to have evidentiary support for factual allegations and a reasonable legal basis for their filings. The court found sanctions appropriate because Plaintiffs and their counsel repeated allegations that the court had previously rejected, despite an earlier warning about Rule 11 obligations.

The court also found that Plaintiffs alleged, contrary to the payment records, that the 2021 agreement was used to pay off an outstanding balance under the 2019 agreement. The records showed that the 2019 agreement had been paid in full on May 18, 2020—more than a year before the 2021 agreement was signed. The court concluded that Plaintiffs’ contrary allegations violated Rule 11 and that sanctions were appropriate.

Disposition

The court granted EBF’s motion to dismiss. Because this was the second adjudication of Plaintiffs’ claims, the claims were dismissed with prejudice, and the case was closed. The court also granted EBF’s motion for sanctions. It directed EBF’s counsel to submit, within 30 days, a memorandum discussing a request for reasonable attorneys’ fees and a declaration describing the fees incurred. The opinion directed submission of materials supporting a fee request; it did not state a final fee amount.