Franklin Capital Funding, LLC v. Austin Bus. Fin., LLC

676 F.Supp.3d 515

FRANKLIN CAPITAL FUNDING, LLC, Plaintiff, v. AUSTIN BUSINESS FINANCE, LLC, and MXT Solutions, LLC, Defendants.

Case Number 22-10947

United States District Court, E.D. Michigan, Southern Division

Signed June 7, 2023

John A. Behrendt, Melissa Benton Moore, Bodman PLC, Troy, MI, for Plaintiff.

Jesse Louis Roth, Kathleen H. Klaus, Maddin, Hauser, Roth & Heller, P.C., Southfield, MI, for Defendants.

OPINION AND ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS

DAVID M. LAWSON, United States District Judge

Plaintiff Franklin Capital Funding, LLC loaned money to a Florida automobile dealer (Excell Auto Group) and took a security interest in all its assets. Franklin also purchased Excell's factoring debt from defendant Austin Business Finance, LLC under an agreement in which Austin agreed not to extend any more credit to Excell, to factor any more of Excell's receivables, or to accept any payments from Excell. In its amended complaint, Franklin alleges that Austin breached all these promises by employing defendant MXT Solutions, LLC as its alter ego to extend more credit to Excell and to receive payments from it that should have gone to Franklin. Austin has filed a motion to dismiss the amended complaint, arguing that it fails to state any viable claims against it. MXT has moved to dismiss on the ground that the Court does not have personal jurisdiction over it. The motions are fully briefed, and oral argument will not assist in their resolution. The Court will decide the motions on the papers submitted. E.D. Mich. LR 7.1(f)(2). The amended complaint states facts that establish Austin's liability to Franklin both directly and through its alleged alter ego, MXT. And because the amended complaint sufficiently alleges that MXT was Austin's alter ego, and Austin consented to personal jurisdiction in this Court, Franklin may proceed against MXT here. The motions to dismiss will be denied.

I.

The facts are taken from the amended complaint. Plaintiff Franklin is a private company that makes and services small business loans. In addition to making principal loans to customers, Franklin purchases its customers' existing financing obligations owed to other creditors in order to consolidate customers' loans. Defendants Austin and MXT are merchant cash advance funding (factoring) companies. They buy companies' accounts receivables at discounted cash purchase prices then regularly debit those companies' bank accounts until the purchase price is repaid.

The dispute in this case involves non-party Excell Automotive Group, a Florida corporation, and its Florida-based affiliates, Karma of Palm Beach and Karma of Broward. In November 2021, Excell obtained a $6 million loan from Franklin. The terms of the loan agreement granted Franklin a security interest in all of Excell's personal property and the property of its affiliates, including all accounts receivable, deposit accounts, and property "now or later in possession of the Lender, or as to which Lender now or later controls possession by documents or otherwise." Am. Compl., ECF No. 45, ¶¶ 22, 28, PageID.1103-05; Continuing Security Agreement, ¶ 2, ECF No. 45-4, PageID.1157-58. To perfect its security interest, Franklin filed a UCC-1 financing statement in the State of Florida. The financing statement described Excell's collateral as "all after-acquired property, including all of debtor's accounts, future accounts, contract rights, future sales, receipts and other obligations," and warned that Excell "has also agreed to hold in trust for secured party all payments received in connection with secured party's collateral, and from the sale, lease or other disposition of such collateral." Am. Compl., ¶ 30, ECF No. 45, PageID.1106; Excell Financing Statement, ECF No. 45-5, PageID.1176-78. Franklin also filed UCC-1 financing statements for Excell's affiliates.

At the same time that Franklin made the loan to Excell, it also purchased Excell's outstanding financial obligations to defendant Austin, which arose from a January 2021 funding agreement that Austin had made with Excell while doing business under the name "GetBackd." As part of the assignment of its interests to Franklin, Austin promised not to enter into any further funding agreements or otherwise do business with Excell. The assignment agreement states:

On and after the date of this Assignment, Assignor [Austin] covenants to Assignee [Franklin] that, so long as Assignee has a UCC financing statement filed of record against any of the Companies [Excell and its affiliates] . . . that includes language notifying parties that further sales, assignments, pledges or encumbrances with respect to the collateral described in Assignee's UCC financing statement are prohibited, or words of similar import: (a) Assignor shall not purchase any portion of accounts, future accounts, contract rights, future sales, receipts or other obligations from such Debtor, (b) Assignor shall not extend credit to such Debtor, (c) Assignor shall not take a security interest in the assets of such Debtor, and (d) if Assignor violates any of the provisions of clauses (a), (b), or (c) above, its debt and lien shall be subordinate and it shall be subject to a permanent standstill and it shall not take any legal action or otherwise exercise any rights or remedies against such Debtor. Assignor further covenants and agrees that it shall not accept any payments from any of the Companies on account of, or related to, the Obligations . . . and Assignor acknowledges and agrees that any such payments, if received, shall be held in trust for the benefit of Assignee and promptly paid over to Assignee in the form received . . . .

Assignment Agreement, ¶ 6, ECF No. 45-8, PageID.1198. The assignment agreement elsewhere describes "Obligations" as

all outstanding obligations of Excell Auto Group, Inc. and each of its affiliates owing to Assignor [Austin] under that certain Future Receivables Sale Agreement, dates as of January 20, 2021, by and between Assignor and Company [Excell and its affiliates] and all rights of Assignor under any similar or related documents (including without limitation, any guaranties, security agreements, forbearance agreements, settlement agreements and judgments), including with respect to all collateral securing the obligations of Company under the Merchant Agreement or securing any guaranties in respect thereof.

Id. at PageID.1197.

Although the assignment agreement repeatedly references Excell's affiliates, it only references Austin's affiliates once, in a preceding paragraph, in which Austin "represents and warrants" that "Assignor (including any of its affiliates) has not entered into any written or oral agreement with Company relating to this Assignment." Id. at ¶ 4, PageID.1197. Austin consented that "any dispute, controversy or claim (whether or not arising out of or in connection with this Assignment) between Assignor and Assignee shall be governed by and construed in accordance with the laws of the State of Michigan." Id. at ¶ 8, PageID.1198. Austin further submitted "to the non-exclusive jurisdiction and venue of the federal court located in the Eastern District of Michigan or the state courts located in Oakland County, Michigan." Ibid. Franklin filed UCC-3 financing statements to perfect the assignment.

On November 29, 2021, defendant MXT entered into a merchant cash advance agreement with Excell, through which MXT purchased Excell's "future accounts and contract rights arising from the sale of goods or rendition of services to [Excell's] customers." Id. at ¶ 44, PageID.1111; MXT Future Receivables Sale Agreement, ¶ 1.1, ECF No. 45-11, PageID.1229. Excell agreed to remit future receivables to MXT "by receiving Customer payments into a designated bank account approved by" MXT, which then would be debited by MXT. Id. at ¶ 1.2. The agreement obligated Excell to make 52 such payments to MXT of $31,250 each. Excell, however, made at least five debit transactions directly to Austin, not MXT. Excell's bank records indicate that Austin debited payments totaling $157,000 from Excell's Chase Bank accounts between December 2021 and March 2022. Excell also made at least eight debit transactions directly to GetBackd, totaling $250,000. And after debiting funds from Excell's accounts, Austin and MXT transferred those funds to one another. Franklin alleges that Austin and MXT conspired with Excell to enter into a new funding agreement and take the proceeds from accounts receivable from Excell, which constituted Franklin's collateral. It further alleges that Austin, directly or through MXT and GetBackd, debited funds from Excell that Excell should have paid to Franklin.

In its amended complaint, Franklin contends that MXT is a subsidiary and alter ego of Austin, and that Austin used MXT to enter into a new merchant cash advance agreement with Excell to avoid the Assignment Agreement with Franklin. To back that up, Franklin alleges that Austin is the sole member of MXT; that MXT has no employees; and that MXT relies upon Austin employees Xan Myburgh, Michail Myburgh, and Tucker Sulzberger to act as uncompensated agents on its behalf. It also states that both Austin's and MXT's cash advance agreements with Excell were executed by Xan Myburgh, who is CEO of Austin and a member of MXT. Finally, the complaint alleges that Austin and MXT both operate under the trade name GetBackd and share the same office space. The defendants acknowledge that they share an office, but they explain that they each pay their proportionate share of expenses and maintain separate books, records, and bank accounts.

The record includes unsworn declarations from MXT corporate counsel Christopher Mundt. In the declarations, Mundt states that MXT does not have any clients in Michigan, does not target any advertising to Michigan, does not own any real property in Michigan, does not have any bank accounts in Michigan, has no contracts with Michigan residents, and never has solicited...