Streamlined Consultants, Inc. v. EBF Holdings, LLC

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STREAMLINED CONSULTANTS, INC. d/b/a STREAMLINED CONSULTANTS, and MOSHE SCHOENWALD, Plaintiffs, v. EBF HOLDINGS, LLC d/b/a EVEREST BUSINESS FUNDING d/b/a EBF, et. al., Defendant.

No. 21-CV-9528 (KMK)

United States District Court, S.D. New York

September 8, 2023

Scott C. Levenson, Esq. Counsel for Plaintiffs

Matthew J. Morris, Esq., William Fassuliotis, Esq., David A Picon, Esq. Proskauer Rose LLP Counsel for Defendant

OPINION & ORDER

KENNETH M. KARAS, United States District Judge:

Plaintiffs Streamlined Consultants, Inc. d/b/a Streamlined Consultants (“SCI”) and Moshe Schoenwald (“Schoenwald,” collectively “Plaintiffs”) filed the instant Action against EBF Holdings, LLC d/b/a Everest Business Funding (“EBF” or “Defendant”), Scott Crockett (“Crockett”), John Does 1-5, and ABC Corporations 1-5 (collectively, “Defendants”) alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c), one count of a RICO conspiracy, 18 U.S.C. § 1962(d), as well as a claim for commonlaw fraud against EBF. (See Second Am. Compl. (“SAC”) (Dkt. No. 18).)^[1]

Before the Court are two Motions filed by EBF: first, a Motion to Dismiss the Second Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6), (see Not. of Mot. (“MTD Not. of Mot.”) (Dkt. No. 29)); and a Motion for Sanctions against Plaintiffs and Plaintiffs' Counsel pursuant to Federal Rule of Civil Procedure 11, (see Not. of Mot. (“Sanctions Not. of Mot.”) (Dkt. No. 32)). For the foregoing reasons, both Motions are granted.

I. Background

A. Factual Background

SCI is a New York corporation; Schoenwald is the principal of SCI. (See SAC ¶¶ 1415.) EBF is a Delaware limited liability company, with its principal place of business in Doral, Florida. (See id. ¶ 16.) Plaintiffs allege upon information and belief that Crockett is the CEO of EBF, and is also located in Doral, Florida. (Id. ¶ 18.) In addition, Plaintiffs allege that John Does 1-5 and ABC Corporations “are unknown entities involved in the procurement, enforcement[,] and collection” of an agreement as discussed in further detail below. (Id. ¶ 19.)

As relevant to the instant Action, the Parties entered a revenue-based funding agreement (the “2021 Funding Agreement”) on May 21, 2021, by which EBF purchased $199,500 worth of SCI's future receipts for a purchase price of $150,000; Schoenwald served as a guarantor. (See SAC Ex. A (“Funding Agreement 1”), at 1 (Dkt. No. 18-1).)^[2] The 2021 Funding Agreement was designed to sell to EBF a 15% cut of SCI's future receipts, which would be automatically withdrawn from SCI's bank account on a daily basis. (See id. at 1-2.) But instead of forcing the Parties to calculate the precise dollar amount to be withdrawn on a daily basis, the 2021 Funding Agreement provided for a daily payment of $1,209.09 based on SCI's monthly average sales and the average weekdays in a calendar month. (See id. at 1.) In recognition of the fact that this agreed-upon daily payment amount may not always reflect 15% of SCI's actual receipts, however, the 2021 Funding Agreement also provided for a process by which SCI could request at the end of each calendar month that EBF reconcile SCI's actual receipts “by either crediting or debiting the difference back to or from [SCI's bank account] so that the amount [EBF] debited in the most recent calendar month equaled” 15% of SCI's actual receipts. (Id. at 2.) If SCI requested reconciliation and followed the proper procedures, then Everest was required to reconcile SCI's actual receipts. (See id. (“Within four business days of [EBF's] reasonable verification of [the necessarily information for reconciliation], [EBF] shall reconcile [SCI's] actual receipts.” (emphasis added)).)

The 2021 Funding Agreement makes clear that “[SCI] is selling a portion of a future revenue stream to [EBF] at a discount, not borrowing money from [EBF],” and therefore, “[EBF] assumes the risk that [f]uture [r]eceipts will be remitted more slowly than [EBF] may have anticipated or projected because [SCI's] business has slowed down, or the full [p]urchased [a]mount may never be remitted because [SCI's] business went bankrupt or otherwise ceased operations in the ordinary course of business.” (Id. at 5; see also id. at 2 (EBF acknowledging that “[t]here is no interest rate or payment schedule and no time period during which the [p]urchased [a]mount must be collected by [EBF]” and that “[EBF] is entering into this [Funding] Agreement knowing the risks that [EBF's] business may slow down or fail, and [EBF] assumes these risks based on [SCI's] representations[,] warranties[,] and covenants in this [Funding] Agreement, which are designed to give [EBF] a reasonable and fair opportunity to receive the benefit of its bargain”).) Failure to satisfy the daily payment amount on a single occasion does not, on its own, constitute default under the terms of the 2021 Funding Agreement. (See id. at 6-7.) Moreover, SCI's potential future declaration of bankruptcy does not, on its own, constitute default under the terms of the 2021 Funding Agreement-or even breach of the 2021 Funding Agreement. (See id.; see also id. at 3 (“[SCI] going bankrupt or going out of business, in and of itself, does not constitute a breach of this Agreement”).) Rather, the 2021 Funding Agreement specifies that failure to satisfy the daily payment amount will only constitute default when “[SCI] fails to provide timely notice to [EBF] such that in any given calendar month there are five consecutive ACH transactions attempted by [EBF] that are rejected by [SCI's] bank and [SCI] fails to communicate and/or provide documentary evidence satisfactory to [EBF] for the failed transactions or failed remittance.” (Id. at 7.)

Plaintiffs cite this funding agreement, as well as other dealings between SCI and EBF, to allege evidence of both RICO acts and a RICO conspiracy between EBF, an unnamed Broker, and Crockett to induce Plaintiffs into a “usurious loan.” (See SAC ¶¶ 1-9; 20-22.) Plaintiffs allege that, through an unnamed Broker who “was an agent or employee” of EBF, (id. ¶ 3), Plaintiffs entered into the 2021 Funding Agreement, (id. ¶ 4). Plaintiffs further allege that, “unbeknownst to Plaintiff[s,] the agreement . . . entered into was not a bona fide [Funding Agreement] but rather a usurious loan that charged an APR of 230.5%.” (Id. ¶ 6.) Specifically, Plaintiffs allege that the 2021 Funding Agreement is intentionally “mistitled” as “Payments Rights Purchase and Sale Agreement,” and instead, is actually a loan. (Id. ¶ 20; see also id. ¶¶ 23-31 (describing the “loan” and its alleged repayment terms).) Plaintiffs allege that as a loan agreement, the 2021 Funding Agreement is actually usurious because, if one were to divide the purchased amount of $199,500 by the daily payment of $1,209.09 (and ignore the reconciliation provision), one could conclude that “repayment” is due within 165 days under the 2021 Funding Agreement; this yields a usurious annual interest rate of 230.5%. (See id. ¶¶ 6, 27-32.)

Plaintiffs cite two other examples of their dealings with EBF to allege that Defendants' conduct represents a “business model [which] employs a phony [funding agreement] as a smokescreen for unlawful lending and debt collection.” (Id. ¶ 9.) First, Plaintiffs point to an earlier agreement between SCI and EBF, entered into on October 11, 2019 (the “2019 Funding Agreement”). (Id. ¶ 21; see also Funding Agreement 2.) The revenue-based funding agreement-which is similar to the 2021 Funding Agreement-states that EBF purchased $108,800 worth of SCI's future receipts for a purchase price of $80,000 and Schoenwald again served as a guarantor. (See Funding Agreement 2 at 1.) Plaintiffs do not appear to allege that this earlier agreement is usurious, (see generally SAC), but they again allege that if one were to divide the purchased amount of $108,000 by the daily rate of payment of $908.67 (and again, ignore the reconciliation provision), one could conclude that the “loan” has an interest rate of 109.5%, (see id. ¶ 21). However, as relevant to the instant Action, Plaintiffs allege that in the 2021 Funding Agreement, “Plaintiff[s] [were] required to pay off the balance of the previous loan with a portion of the proceeds” from the 2019 Funding Agreement “[a]s a condition of the loan.” (Id. ¶ 24; see also id. ¶ 33; Funding Agreement 2, at 16 (“As part of the conditions of this purchase of future payment rights, it is required that the current balance of the advance owed to [EBF], be paid off entirely. In the event the current advance has pending payments, once those payments clear they shall be applied to the Purchase Amount of the new advance as a lump sum[.]”).) Second, Plaintiffs allege that “before entering into the [2021 Funding] Agreement in question, Plaintiffs received over 130 emails soliciting Plaintiffs to engage in further loans” beginning around October 15, 2020 through at least March 15, 2021. (Id. ¶ 22.)^[3]

B. Procedural History

Plaintiffs initiated this Action with the filing of a summons and verified complaint in New York Supreme Court for the County of Rockland (“Rockland County Court”) on July 8, 2021. (See Summons (Dkt. No. 1-1); Compl. (Dkt. No. 1-2).) On October 22, 2021, Plaintiffs filed a first amended complaint, also in Rockland County Court. (See First Am. Compl. (“FAC”) (Dkt. No. 1-4).) On October 28, 2021, Plaintiffs' summons was signed, (see Dkt. No. 1-6), and on November 17, 2021, Defendant removed the Action to this Court on the basis of this Court's diversity jurisdiction, (see Not. of Removal (Dkt. No. 1)).

On November 22, 2021, EBF filed a pre-motion letter in anticipation of moving to dismiss the FAC. (See Dkt No. 7.) After receiving a response from Plaintiffs,...