United States District Court, S.D. New York
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,
TVT CAPITAL, LLC, VANTIFF, LLC, COLONIAL FUNDING NETWORK, INC., ANDREW FELLUS, WARREN FELLUS, JOHN DOES 1-10, and JANE DOES 1-10, Counterclaim Defendants.
OPINION & ORDER
L. STANTON U.S.D.J.
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.
is an Illinois corporation based in Chicago. Counterclaims
(Dkt. No. 8) ¶ 2. Passley, an Illinois citizen, is
Epazz's principal. Id. ¶ 1, 3.
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.
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.
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
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.
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
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).
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.
movants argue that the counterclaims should be dismissed
because the Agreements are purchases, not loans, and
therefore cannot be usurious.
Usury and Overcharge of Interest Claims
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.
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,
(alterations in Scantek).
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).
the cases defendants cite, Opp. (Dkt. No. 55) at 9, 13-14,
hold otherwise. They involved individuals and unincorporated
entities, not corporations.
the motions to dismiss the usury counterclaims are granted.
Overcharge of Interest
for overcharge of interest can only be based on interest
overcharged on a loan. It cannot arise from a purchase.
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.
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.