OriginClear Inc. v. GTR Source, LLC

ORIGINCLEAR INC, et al., Plaintiffs, v. GTR SOURCE, LLC, et al., Defendants.

No. 20-CV-7026-FPG

United States District Court, W.D. New York

December 14, 2021

DECISION AND ORDER

HON FRANK P. GERAJCI, JR. United States District Judge.

INTRODUCTION

On February 12, 2021, Plaintiffs, OriginClear, Inc. (“OriginClear”), Progressive Water Treatment Inc. (“Progressive”), and Tener Riggs Eckelberry Jr. (“Riggs) (collectively, “Plaintiffs”) filed an Amended Complaint asserting, inter alia, New York usury law claims, claims pursuant to the Racketeer Influenced and Corrupt Organizations Act (the “RICO Act”), and a claim for unjust enrichment. ECF No. 12. In response, Defendants, GTR Source, LLC, (“GTR”) and Tzvi “Steve” Reich (“Reich”) (collectively “Defendants”), filed a Motion to Dismiss for failure to state a claim. ECF No. 16. Plaintiffs filed a response, ECF No. 19, Defendants replied, ECF No. 21, and after seeking Court approval, Plaintiffs filed a sur-reply, ECF No. 24, and later, a letter in further support of their position, ECF No. 25.

For the reasons discussed, Defendants' motion to dismiss is GRANTED IN PART and DENIED IN PART.

BACKGROUND^[1]

OriginClear, a company that sells a line of on-site, point-of-use water treatment products, operated at a financial deficit between 2016 and 2018. ECF No. 12 ¶¶ 10, 32. Specifically, in 2016, OriginClear's revenue was $5, 071, 095, operating expenses were $5, 071, 644, and total loss from operations was $3, 589, 714. Id. ¶ 33. In 2017, the total revenue was $3, 355, 632, operating expenses were $5, 943, 915, and total loss from operations was $5, 294, 054. Id. ¶ 35. In 2018, the total revenue was $4, 637, 698, operating expenses were $5, 216, 031, and total loss from operations was $4, 062, 351. Id. ¶ 37. In an attempt to address these financial issues, Plaintiffs contacted GTR. Id. ¶ 38.

Defendant GTR, a Merchant Cash Advance (“MCA”) company, markets its service to desperate small businesses that in some cases have done business with other MCA companies. Id. ¶ 28. MCAs operate similarly to payday loans-a lump sum of cash is taken out as an advance on a borrower's future sales, which are paid back, in addition to an expensive premium, through automatic deductions from the borrower's bank account. ECF No. 12 ¶ 14.

I. July and August Agreements

On July 20, 2018, OriginClear and GTR entered into a “Merchant Agreement” (the “July Agreement”), under which GTR loaned $160, 000 to OriginClear in exchange for repayment in the amount of $239, 840. Id. ¶ 39. Pursuant to the July Agreement, OriginClear's repayment amount would be made through daily withdrawals from a designated OriginClear bank account in the amount of $3, 999. Id. ¶ 42. This amount was determined by GTR to be a “good faith” estimate of 10% of OriginClear's accounts receivables. Id. However, at no time did GTR review or calculate OriginClear's receivables. Id. According to Plaintiffs, this imposed an effective interest rate of 49.9%, or 303.68% annually. Id. ¶ 39.

Prior to issuing funds, GTR required Riggs, individually and in his capacity as President of OriginClear, to execute a Security Agreement, Guaranty of Performance, and Affidavit of Confession of Judgment. ECF No. 12 ¶ 43. Essentially, the documents provided GTR with a security interest in Plaintiffs' property and gave GTR the right to seek repayment from any of the Plaintiffs in the event of default or a false and/or misleading representation, warranty, or covenant made in the July Agreement or Guarantee-a condition which was to be determined at GTR's sole discretion. Id. ¶ 46. The Confession also required, in the event of a default, that Plaintiffs cover legal fees in the amount of 25% of the outstanding repayment amount, plus interest at the highest rate permitted. Id. ¶ 49.

After delivering the fully executed July Agreement-including the Confession and Guaranty-OriginClear received $120, 002 from GTR. Id. ¶ 50. $39, 998 was withheld. Id. The withholding thus effectively increased the interest rate to 99.86%, or 607.75% annually. Id. ¶ 51. Between July 24, 2018, and August 29, 2018, GTR made daily withdrawals from OriginClear's accounts totaling $107, 973. ECF No. 12 ¶ 52.

In an attempt to cure the deficient financing provided under the July Agreement, the parties entered into another Merchant Agreement on August 28, 2018 (the “August Agreement”). Pursuant to the August Agreement, GTR loaned $240, 000 to OriginClear in exchange for repayment in the amount of $359, 760. Id. ¶ 54. Pursuant to the August Agreement, OriginClear's repayment amount would be made through daily withdrawals from a designated OriginClear bank account in the amount of $5, 534. Id. ¶ 63. This amount was determined by GTR to be 10% of OriginClear's eligible receivables. Id. However, at no time was a review or actual calculation of OriginClear's receivables performed by GTR. Id. According to Plaintiffs, this imposed an effective interest rate of 49.9%, or 280.26% annually. Id. ¶ 54.

Like the July Agreement, prior to issuing funds, GTR required Riggs, individually and in his capacity as President of OriginClear, to execute a Security Agreement, Guaranty of Performance, and Affidavit of Confession of Judgment which were materially identical to those executed in accordance with the July Agreement. ECF No. 12 ¶¶ 56-58. After delivering the fully executed documents, OriginClear received an additional $82, 137, thus, bringing the total amount of money provided to OriginClear to $202, 139, rather than the agreed upon $240, 000. Id. ¶ 59. Noticing the withholdings, OriginClear's controller contacted Reich and requested an explanation for why nearly $40, 000 was being withheld. Id. ¶ 60. After discussions, Reich agreed to refund OriginClear $15, 996, bringing the aggregate amount of funds received by OriginClear to $218.135. Id. Throughout this period, GTR continued to make withdrawals from OriginClear's account. Id.

On October 8, 2018, in accordance with the August Agreement, OriginClear's financial controller contacted Reich to request a reconciliation of the daily payment, as the $5, 534 withdrawal was much higher than 10% of OriginClear's eligible receivables (which was actually about $1, 751) and was creating serious financial strain. Id. ¶¶ 67, 68. Despite providing OriginClear's bank statements and explaining the sources of various funds, Reich rejected OriginClear's reconciliation request. ECF No. 12 ¶ 69. Instead, Reich suggested the parties enter into another Merchant Agreement. Id. OriginClear rejected the offer and again requested reconciliation either in the amount of $1, 751, or in the amount of $2, 299 (calculated using receivables from the high performance of September 2018). Id. ¶ 70. Again, the request was rejected, and Reich stated that he “would rather just file, ” presumably, a legal claim, than agree to the reconciliation. Id. ¶ 72. A third reconciliation request was made and again rejected. Id. ¶¶ 73-74. Instead, Reich proposed that OriginClear wire a $100, 000 payment to GTR, in exchange for a later reduction in daily payment. Id. ¶ 74. Plaintiffs did not agree.

Despite OriginClear's numerous failed attempts at reconciliation, GTR continued to make daily withdrawals. The withdrawals amounted to $351, 469. ECF No. 12 ¶ 75. In other words, OriginClear received $218, 135 from GTR and paid back $351, 469 in less than four months. Id. ¶ 76.

II. Settlement Agreement

As of the date of the last withdraw, October 30, 2018, $8, 291 remained payable under the August Agreement. Id. ¶ 96. Nevertheless, on December 13, 2018, the parties entered a settlement agreement (the “Settlement”) wherein OriginClear agreed to pay $80, 000 to GTR through 38 equal monthly installments-beginning January 15, 2019-in complete satisfaction of the August Agreement. Id. ¶ 97, 98. Pursuant to the Settlement, GTR agreed that it would no longer pursue collection efforts. Id. ¶ 101.

OriginClear paid in accordance with the Settlement for 14 months-bringing the total amount of consideration paid to GTR between the July Agreement, August Agreement, and Settlement to $379, 469. Id. ¶ 103. Pursuant to the plain language of the Settlement, OriginClear was then entitled to a 90-day moratorium that could be utilized without notice. ECF No. 12 ¶ 103. While OriginClear sought the moratorium protection to which it was entitled, GTR was not permitted to pursue collect for a 90-day period and was obligated to provide OriginClear with a 10-day period to cure any potential default. See Id. ¶¶ 104-06.

Yet, without giving notice to Plaintiffs, and contrary to the Settlement, on March 19, 2019, GTR moved to obtain a judgment in Ontario County, New York, by filing the August Confession. Id. ¶ 108, 110. Judgment was thereafter entered in favor of GTR.^[2] Id. ¶ 114.

On October 12, 2020, Plaintiffs filed the present action in state court. On December 2, 2020, Defendants removed.

LEGAL STANDARD

To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter ‘to state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim for relief is plausible when the plaintiff pleads facts sufficient to allow the Court to draw reasonable inferences that the defendant is liable for the alleged misconduct. Id. In reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must accept as true the factual allegations in the complaint and draw all reasonable inferences in favor of the plaintiff. See Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 100 (2d Cir. 2005). At the same time, the Court is not required to credit “[l]egal...