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Colonial Funding Network, Inc. v. Epazz, Inc.

United States District Court, S.D. New York

May 9, 2017

COLONIAL FUNDING NETWORK, INC. as servicing provider for TVT Capital, LLC, Plaintiff,
EPAZZ, INC., CYNERGY CORPORATION, and SHAUN PASSLEY a/k/a Shaun A. Passley, Defendants. EPAZZ, INC. and SHAUN PASSLEY, Counterclaim Plaintiffs,

          OPINION & ORDER

          LOUIS L. STANTON U.S.D.J.

         Plaintiff Colonial Funding Network, Inc. ("Colonial") and TVT Capital, LLC ("TVT") move to dismiss counterclaims asserted by Epazz, Inc. ("Epazz") and Shaun Passley ("Passley, " and together with Epazz, "defendants") for failure to state a claim upon which relief can be granted, and to strike certain affirmative defenses as insufficient. Vantiff, LLC ("Vantiff"), Andrew Fellus, and Warren Fellus move to dismiss the counterclaims for failure to state a claim.


         Epazz is an Illinois corporation based in Chicago. Counterclaims (Dkt. No. 8) ¶ 2. Passley, an Illinois citizen, is Epazz's principal. Id. ¶ 1, 3.

         TVT is a Delaware LLC based in Roslyn, New York, whose members are citizens of New York. Id. ¶¶ 4, 7-8. Colonial is a New York corporation based in New York City. Id. ¶ 6. Colonial is the plaintiff in this action as servicing provider for TVT.

         Vantiff is a New York LLC based in Bethpage, New York, whose members are citizens of New York. Id. ¶¶ 5, 7-8. The counterclaims allege that Vantiff "does business as, or is the alter ego of, TVT Capital" and "as used in this pleading, the term TVT Capital includes Vantiff, LLC." Id. ¶ 5.

         Andrew Fellus and Warren Fellus, both New York citizens, are co-managing members of TVT. Id. ¶¶ 7-8. Defendants allege that they "caused TVT Capital and Colonial Funding Network, Inc. to engage in, and otherwise ha[ve] engaged in or caused, the conduct averred" in the counterclaims. Id.

         Epazz and TVT entered into three merchant cash advance agreements (the "Agreements") whereby Epazz sold a total of $898, 500 of its future receipts (the "receipts purchased amounts") to TVT in exchange for upfront advances totaling $600, 000 (the "purchase price"). Id. ¶¶ 17-19, 30, Exhs. A-C at 1. Under each Agreement Epazz has to pay 15% of its daily receipts to TVT until the receipts purchased amount is paid in full. Id. ¶ 39, Exhs. A-C at 1. Passley personally guaranteed Epazz's performance under each of the Agreements. Id., Exhs. A-C at 4-5.

         Epazz agreed to deposit all its receipts into a designated bank account from which it authorized TVT to debit specific daily amounts each business day as base payments to be credited against 15% of daily receipts. Id. ¶¶ 36-37, 39-40, Exhs. A-C at 1. The specific daily amounts are $2, 439 for each of the first two Agreements and $2, 915 for the third Agreement. Id. Upon reviewing Epazz's monthly bank statements, TVT is required to either credit or debit the difference between the specific daily amounts and 15% of Epazz's daily receipts. Id. ¶ 49, Exhs. A-C at 1. Epazz is responsible to provide its bank statements to TVT; if it fails to provide bank statements or if it misses a month, TVT is not required to reconcile future payments. Id.

         Colonial filed suit in New York Supreme Court alleging that Epazz stopped depositing all its receipts into the designated bank account, thus preventing it from collecting the daily payments. See Notice of Removal (Dkt. No. 1).

         Defendants removed the action to this court and filed an answer which asserted several affirmative defenses and counterclaims claiming that the Agreements are criminally usurious loans under New York Penal Law §§ 190.40 and 190.42 (which prohibit interest on a loan or forbearance exceeding 25% interest per annum), or resulted from fraud. Counterclaims ¶¶ 22-38, 110-129. As defendants see it, Epazz borrowed $600, 000 and has to repay $898, 500, which if payable within a year would represent 49.75% interest. Defendants argue that the receipts purchased amounts are payable in less than a year because the specific daily amounts ensures payment in full within approximately 61 to 180 business days (three to nine months) resulting in an interest rate that significantly exceeds 25% per annum. Id. ¶¶ 43-48.

         The movants argue that the counterclaims should be dismissed because the Agreements are purchases, not loans, and therefore cannot be usurious.


         1. Usury and Overcharge of Interest Claims

         a . Usury

         The first two counterclaims seek to impose civil liability (damages) on all counterclaim defendants for TVT's claimed criminal usury. That is not allowed under New York law which allows a corporation to assert criminal usury as a defense, but not as a claim for affirmative relief.

         In Scantek Medical Inc. v. Sabella, 582 F.Supp.2d 472, 474 (S.D.N.Y. 2008), Judge McMahon held:

New York's criminal usury statute prohibits a person from knowingly charging interest on a loan at a rate exceeding 25% per annum. N.Y. Penal Law § 190.40. The statute does not provide for civil liability and from 1860 until 1965, corporations were prohibited by law from asserting criminal usury as a defense to claims brought in a civil action. Hammelburger v. Foursome Inn Corp., 54 N.Y.2d 580, 589, 446 N.Y.S.2d 917, 431 N.E.2d 278 (1981). In 1965, New York amended its statute to allow corporations to "interpose[] a defense of criminal usury" in civil litigation. N.Y. Gen. Oblig. Law § 5-521(3). The legislature created this exception because it felt that "it would be most inappropriate to permit a usurer to recover on a loan for which he could be prosecuted." Hammelburger, 54 N.Y.2d at 590, 446 N.Y.S.2d 917, 431 N.E.2d 278 (citation omitted).
Although corporations like plaintiff can assert criminal usury as a defense, they cannot bring civil claims under the criminal statute. "The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan." Intima-Eighteen, Inc. v. A.H. Schreiber Co., 172 A.D.2d 456, 568 N.Y.S.2d 802, 804 (1st Dep't 1991) (citations omitted). In a New York State Supreme Court case seeking a declaratory judgment that securities offerings were void as usurious loans, the court granted defendants' motion to dismiss stating, "[I]nsofar as the complaint seeks affirmative monetary relief, plaintiff improperly attempts to use a shield created by the Legislative as a sword." Zoo Holdings, LLC v. Clinton, 11 Misc.3d 1051(A), 814 N.Y.S.2d 893, 893 (Sup. Ct. 2006). In another New York Supreme Court Case, the court determined that the defendant corporation's counterclaim for usury was barred under New York law and that "the affirmative defense may only be asserted as an offset to plaintiffs' claims only to the extent that it is alleged that plaintiffs have engaged in criminal usury." Donenfeld v. Brilliant Techs. Corp., No. 600664/07, 20 Misc.3d 1139(A), 2008 WL 4065889, at *1 (N.Y. Sup. Ct. July 14, 2008).

(alterations in Scantek).

         Where a corporation is barred from asserting usury, so is its individual guarantor. See Schneider v. Phelps, 41 N.Y.2d 238, 242, 359 N.E.2d 1361, 1364, 391 N.Y.S.2d 568, 571 (1977); Arbuzova v. Skalet, 92 A.D.3d 816, 816, 938 N.Y.S.2d 811, 811 (2d Dep't 2012).

         None of the cases defendants cite, Opp. (Dkt. No. 55) at 9, 13-14, hold otherwise. They involved individuals and unincorporated entities, not corporations.

         Accordingly, the motions to dismiss the usury counterclaims are granted.

         b. Overcharge of Interest

         A claim for overcharge of interest can only be based on interest overcharged on a loan. It cannot arise from a purchase.

         "The rudimentary element of usury is the existence of a loan or forbearance of money." Feinberg v. Old Vestal Rd. Assocs., 157 A.D.2d 1002, 1003, 550 N.Y.S.2d 482, 483 (3d Dep't 1990), quoting In re Binghamton, 133 A.D.2d 988, 989, 521 N.Y.S.2d 140, 141 (3d Dep't 1987). "If the transaction is not a loan, 'there can be no usury, however unconscionable the contract may be.'" Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735, 744, 598 N.E.2d 7, 11-12, 586 N.Y.S.2d 240, 244-45 (1992), quoting Orvis v. Curtiss, 157 N.Y. 657, 661, 52 N.E. 690, 691 (1899). "When determining whether a transaction constitutes a usurious loan it must be 'considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.'" Abir v. Malky, Inc., 59 A.D.3d 646, 649, 873 N.Y.S.2d 350, 353 (2d Dep't 2009), quoting Ujueta v. Euro-Quest Corp., 29 A.D.3d 895, 895, 814 N.Y.S.2d 551, 552 (2d Dep't 2006). "Whether a transaction constitutes a cover for usury is a question of fact." Id., citing Ujueta, 29 A.D.3d at 895, 814 N.Y.S.2d at 552. "In order for a transaction to constitute a loan, there must be a borrower and a lender; and it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender." Donatelli v. Siskind, 170 A.D.2d 433, 434, 565 N.Y.S.2d 224, 226 (2d Dep't 1991), citing Orvis, 157 N.Y. at 661, 52 N.E. at 691.

         "Further, there can be no usury unless the principal sum advanced is repayable absolutely." Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp., 710 N.Y.S.2d 756, 760, 184 Misc.2d 706, 711 (Sup. Ct. 2000), citing 72 N.Y. Jur. 2d Interest and Usury § 87. "When payment or enforcement rests on a contingency, the agreement is valid though it provides for a return in excess of the legal rate of interest." Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 950 N.Y.S.2d 723, 35 Misc.3d 1205(A), 2012 WL 1087341, at *6 (Sup. Ct. 2012), quoting O'Farrell v. Martin, 292 N.Y.S. 581, 584, 161 Misc. 353, 354 (City Ct. 1936). Further, "a loan is not usurious merely because there is a possibility that the lender will receive more than the legal rate of interest." Phlo Corp. v. Stevens, ...

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