Lateral Recovery LLC v. BMF Advance, LLC

Background

Lateral Recovery LLC, Benchmark Builders, Inc., FTE Networks, Inc., Jus-Com LLC, and Focus Wireless, LLC sued Funderz.net, LLC; Joseph Yitzchakov, also known as Joseph Isaacov; Gavriel Yitzchakov, also known as Gabe Isaacov; and unnamed investors. The plaintiffs alleged that Funderz operated under the assumed names HOP Capital and Business Merchant Funding. They asserted claims under the Racketeer Influenced and Corrupt Organizations Act, a federal statute commonly called RICO, for collecting unlawful debt and for participating in a RICO conspiracy.

The plaintiffs alleged that FTE entered into six merchant-cash-advance agreements with Funderz through HOP and Business Merchant Funding in October and November 2018. The plaintiffs characterized the transactions as loans disguised as purchases of future receivables. They alleged that the agreements required fixed daily automated-bank withdrawals, contained discretionary or illusory reconciliation provisions, imposed effective interest rates ranging from 250% to more than 1,000%, and used other provisions that shifted repayment risk to FTE.

The defendants moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). At this stage, the court generally accepts plausible factual allegations as true and asks whether the complaint states a legally sufficient claim, using the same standard as a motion to dismiss for failure to state a claim.

Court’s Analysis

The court held that the plaintiffs plausibly alleged that the agreements were loans rather than sales of future receivables. Applying New York’s framework, the court considered whether the agreements had enforceable reconciliation provisions, whether repayment had a fixed or effectively fixed term, and whether the funder retained recourse if the merchant entered bankruptcy. The court found that the reconciliation and adjustment provisions were discretionary, that the agreements had de facto fixed repayment terms, and that the agreements otherwise placed the risk of nonpayment on the merchant rather than the funder. The widely varying fixed daily payments also supported the allegation that the payments were not genuine estimates of receivables.

The court further held that the plaintiffs plausibly alleged an unlawful debt under RICO. The alleged interest rates far exceeded New York’s 25% criminal-usury limit and were at least twice the enforceable rate required by RICO’s definition of unlawful debt. The court also found sufficient allegations that the defendants knowingly and intentionally engaged in the alleged lending scheme, including allegations concerning the use of sham reconciliation provisions, trade names, fixed repayment periods, and defendants’ descriptions of the transactions as loans.

The court rejected the argument that the alleged RICO enterprise was not distinct from the defendants. The plaintiffs alleged an association-in-fact enterprise consisting of Funderz, the Isaacov brothers, and unnamed investors, while naming Joe and Gabe as the individuals who participated in the enterprise. The court also held that an enterprise may exist even if its purpose is entirely unlawful, so long as the complaint adequately alleges an ongoing organization whose members functioned as a continuing unit.

The court found sufficient allegations that Joe and Gabe participated in operating or managing the enterprise, including allegations that they helped create and implement the agreements and collection methods, made financial decisions, directed collection efforts, and acted under the HOP and Business Merchant Funding names. Because the unlawful-debt theory was adequately pleaded, the court did not decide whether the separate wire-fraud allegations satisfied the heightened pleading requirements for fraud.

The court also rejected the defendants’ arguments against the RICO conspiracy claim. Because the underlying RICO violation was adequately pleaded, the court found that the argument that the conspiracy necessarily failed was unavailing. The court further concluded that the alleged unnamed investors were not merely Funderz employees or owners and that the complaint adequately alleged their involvement in funding and approving the transactions.

Disposition

Judge Rochon denied the Funderz Defendants’ and Gabe’s motions for judgment on the pleadings. The court did not determine that the defendants were ultimately liable or that the plaintiffs would prevail; it determined only that the Amended Complaint adequately pleaded the asserted RICO and RICO-conspiracy claims. The clerk was directed to terminate the motions at ECF Nos. 87 and 89.