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ADVANCE SERVICES GROUP LLC, Plaintiff, v. ACADIAN PROPERTIES AUSTIN LLC d/b/a Acadian Properties Austin and Shannon Badeaux, Brandon Badeaux, Defendants.
The following e-filed papers read herein:
NYSCEF Doc Nos. Notice of Motion/Order to Show Cause/Petition/Cross Motion and Affidavits (Affirmations) 9, 11-12, 14 16-18
Opposing Affidavits (Affirmations) 17-18
Reply Affidavits (Affirmations) 26-29
Upon the foregoing papers in this breach of contract action, plaintiff Advance Service Group LLC i/s/h/a Advance Services Group LLC (Advance, Funder or plaintiff) moves (in motion sequence [mot. seq.] one) for an order, pursuant to CPLR 3212, granting it summary judgment against defendants.
Defendants, Acadian Properties Austin LLC d/b/a Acadian Properties Austin (Acadian, Merchant or Defendant-Seller), Shannon Badeaux (Defendant-Guarantor 1) and Brandon Badeaux (Defendant-Guarantor 2) (collectively, defendants), cross-move (in mot. seq. two) for an order, pursuant to CPLR 3212, for summary judgment dismissing the complaint.
This Breach of Contract Action
On December 30, 2019, Advance commenced this action against Acadian, the Defendant-Seller, and defendants Shannon Badeaux and Brandon Badeaux, the Defendant-Guarantors, by filing a summons and a verified complaint. The complaint alleges that Advance is “a New York limited liability company engaged in the receivable financing business” (complaint at ¶ 1). The complaint further alleges that:
“Pursuant to a receivable purchase agreement and personal guaranty dated 10/22/2019 (collectively ‘Agreement’), Plaintiff purchased from Defendant-Seller $74,500.00 (‘Purchased Amount’) of each future account and payment obligation owing to defendant-seller from its customers as they are generated in the course of Defendant-Seller's business (‘Future Receivables’).
“The Agreement contains the parties’ express consent to the jurisdiction of the courts located in the State of New York.
“Pursuant to the Agreement, Plaintiff was authorized to collect via an ACH electronic debit of the Future Receivables, until such time that Plaintiff collected the total amount of purchased receivables.
“Critical to facilitating this transaction, the Agreement contains Defendant-Seller's express covenant not to revoke its ACH authorization to Plaintiff or otherwise take any measure to interfere with Plaintiff's ability to collect the Future Receivables.
“Contrary to Defendant-Seller's express covenant set forth above, Defendant-Seller materially breached the terms of the Agreement on 12/26/2019 by changing the designated bank account without Plaintiff's authorization, by placing a stop payment on Plaintiff's debits to the account or by otherwise taking measures to interfere with Plaintiff's ability to collect the Future Receivables” (id. at ¶¶ 5-9).
The complaint asserts the following three causes of action: (1) breach of contract against Acadian, the Defendant-Seller; (2) breach of the guaranty against Shannon Badeaux, Defendant-Guarantor 1; and (3) breach of the guaranty against Brandon Badeaux, Defendant-Guarantor 2.
On January 21, 2020, defendants collectively answered the complaint. Notably, defendants answer contains the following express admissions and a general denial:
“Defendants admit the allegations as to the parties’ capacity, admit signature of the documents alleged, admit any payment that plaintiff received from defendants through plaintiff's ACH debit from the business bank account and otherwise generally deny each and every allegation in the complaint” (answer at ¶ 1).
Defendants’ answer also asserts several affirmative defenses, which are not specifically identified as such, including that: (1) plaintiff is “mischaracterizing its agreement”; (2) “[t]he agreement was a criminally usurious loan ․”; (3) “[t]he agreement was a loan, not a risk-laden purchase of future receivables”; (4) “[t]he plaintiff breached the contract by declaring a default where there was no default under the terms of the contract”; (5) “[a]ny charge for ‘default’ or ‘blocked account’ fees is an unenforceable penalty and not any reasonable liquidated damage”; (6) lack of subject matter jurisdiction “as both the plaintiff and the business defendant are out of state entities”; and (7) plaintiff lacks standing and capacity (id. at ¶¶ 2, 4, 7, 12, 14, 15 and 16).
Advance's Summary Judgment Motion
Advance now moves for summary judgment based on the fact affidavit of Juliana Bullaro (Bullaro), Advance's Collections Manager, who attests that on October 22, 2019, Acadian entered into a merchant agreement with Advance (Merchant Agreement), pursuant to which Acadian “sold its future receivables and sales proceeds with a face value of $74,500.00 to ADVANCE ․ for the purchase price of $50,000.00.” Bullaro attests that, under the Merchant Agreement, Acadian authorized Advance “to debit from a designated business account, a specified percentage of [Acadian's] sales proceeds until such time [as] ADVANCE ․ received the full purchased amount.”
Bullaro attests that the Merchant Agreement provided that Acadian “was obligated to deposit all sales proceeds into the designated account” and that Advance “would collect its specified percentage of [Acadian's] daily sales by initiating ACH debits on each business day.” Bullaro asserts that Acadian was obligated “not to interfere with ADVANCE[’s] collection of the specified proceeds or it would be in default of the [Merchant] Agreement.” Bullaro further attests that defendant Shannon Badeaux executed a personal guaranty of Acadian's performance under the Merchant Agreement.1
Bullaro attests that Acadian “eventually defaulted [under] the Agreement, leaving an outstanding balance of $76,399.30” and are, thus, liable to Advance for the outstanding receivables, costs and attorneys’ fees. Notably, Bullaro does not provide any other factual details regarding Acadian's alleged default.
Defendants’ Summary Judgment Cross Motion
Defendants oppose Advance's summary judgment motion and cross-move for summary judgment dismissing the complaint. Defendants, in opposition, submit a memorandum of law in which they contend that Advance's summary judgment motion should be denied because “Plaintiff has failed in its burden to ‘recite all material facts’ ” and Advance has failed to address any of defendants’ defenses set forth in its answer.
Defendants’ summary judgment cross motion, which is based on a memorandum of law and an attorney affirmation, argues that the Merchant Agreement is void for lack of mutuality of obligation, as a matter of law. Defendants contend that:
“[u]nder the terms of plaintiff's contract, once it received the contract signed by defendants with the authorization and means for plaintiff to effectuate an ACH-daily debit from defendants’ bank account, plaintiff was under no obligation to advance or loan any money, at all.”
Defendants rely on paragraph 1.3 of the Merchant Agreement entitled “Future Purchases,” which provides that “FUNDER reserves the right to rescind the offer to make any purchase payments hereunder, in its sole discretion.”
Defendants also contend that the Merchant Agreement is criminally usurious, since Acadian received $50,000.00 from Advance in exchange for $74,500.00, which is equivalent to 49% interest “if it had to be paid back over a year ․” Defendants argue that “Plaintiff's agreement has all the language, and more, found fatal by LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 ” (LG Funding decision).
Advance's Opposition to the Cross Motion and Reply
Advance, in opposition to the cross motion and in further support of its summary judgment motion, submits a memorandum of law arguing that defendants’ acceptance of the $50,000.00 sale proceeds negates their claim that the Merchant Agreement is void for lack of mutuality of obligation. Advance asserts that “[o]nce Defendants accepted the funds ․ they nonetheless became obligated to repay Plaintiff under the Revenue Based Factoring Agreement.”
Advance also argues that defendants misrepresent the Merchant Agreement “as being subject to the prohibition on criminal usury when the transaction at issue was not a loan” “but a purchase of Plaintiff’[s] future accounts-receivables” for which “there is no finite term ․” Advance relies on paragraph 1.2 of the Merchant Agreement, which provides that:
“1.2 Term of Agreement. This Agreement shall have an indefinite term that shall last ․ until all the Merchant's obligations to FUNDER are fully satisfied. This shall include but not be limited to any renewals, outstanding fees or costs” (emphasis added).
Advance argues that the LG Funding decision is factually distinguishable because the Merchant Agreement at issue here “is not based upon Defendants’ creditworthiness, it is instead based on Defendants’ future cash flow, and is not allocated to specific receivable.”
Advance further argues that paragraph 1.9 of the Merchant Agreement specifically provides that “the Purchase Price is in exchange for the sale of future Receipts” and “provides for ․ additional merchant protection from being charged a usurious interest rate should the transaction be adjudged as a loan”:
“1.9 Sale of Receipts. Merchant and FUNDER agree that the Purchase Price under this Agreement is in exchange for the Purchased Amount and that such Purchase Price is not intended to be, nor shall it be construed as a loan from FUNDER to Merchant. Merchant agrees that the Purchase Price is in exchange for the sale of future Receipts pursuant to this Agreement equals the fair market value of such Receipts. FUNDER has purchased and shall own all the Receipts described in this Agreement up to the full Purchased Amount as the Receipts are created. Payments made to FUNDER in respect to the full amount of the Receipts shall be conditioned upon Merchant's sale of products and services and the payment therefore by Merchant's customers in the manner provided in Section 1.1. In no event shall the aggregate of all amounts be deemed as interest hereunder and charged or collected hereunder exceed the highest rate permissible at law. In the event that a court determines that FUNDER has charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by applicable law and FUNDER shall promptly refund to Merchant any interest received by FUNDER in excess of the maximum lawful rate, it being intended that Merchant not pay or contract to pay, and that FUNDER not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by Merchant under applicable law” (emphasis added).
Advance argues that similar merchant agreements have been upheld by New York courts. Notably, all of the cases that Advance cites pre-date the LG Funding decision.
Defendants, in further support of their summary judgment cross motion, submit a reply affidavit from Shannon Badeaux, who attests that:
“While there were innumerable words in the agreement trying to paint a purchase, or a payment of a percent of receipts, the only action under the agreement was that [Advance] was advancing $50,000 to Acadian upon [Advance] placing its ACH debit on Acadian's bank account to draw out $886.90 every day, with nothing under the agreement enabling Acadian to stop the debit until [Advance] repaid itself the $74,500” (emphasis added).
Badeaux references a “hypothetical reconciliation provision” in the Merchant Agreement, which provided that “FUNDER may, upon Merchant's request, adjust the amount of any payment due under this Agreement at FUNDER's sole discretion and as it deems appropriate in servicing this Agreement.” Badeaux argues that “[Advance] was permitted to reconcile[e] the account going backwards, but did not have to” and “Acadian had no right to stop the $886.90 daily debit from its account awaiting any such reconciliation.”
Defendants argue that “[t]he [Merchant] agreement unquestionably had no relationship to the purchase of receivables or receipts.” Defendants assert that they have outstanding discovery requests and that “[a]ll of the items sought by defendants would prove that the agreement had nothing to do with any purchase by [Advance].” Defendants further argue that Advance lacks standing because it failed to comply with Limited Liability Company Law § 206, which requires limited liability companies to publish their articles of organization. Notably, defendants have withdrawn their mutuality of obligation defense.
Summary judgment is a drastic remedy that deprives a litigant of his or her day in court and should, thus, only be employed when there is no doubt as to the absence of triable issues of material fact (Kolivas v Kirchoff, 14 AD3d 493 ; see also Andre v Pomeroy, 35 NY2d 361, 364 ). “The proponent of a motion for summary judgment must make a prima facie showing of entitlement to judgment, as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact” (Manicone v City of New York, 75 AD3d 535, 537 , quoting Alvarez v Prospecvt Hosp., 68 NY2d 320, 324 ; see also Zuckerman v City of New York, 49 NY2d 557, 562 ; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 ). If it is determined that the movant has made a prima facie showing of entitlement to summary judgment, “the burden shifts to the opposing party to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action” (Garnham & Han Real Estate Brokers v Oppenheimer, 148 AD2d 493 ).
Here, Advance seeks summary judgment on its breach of contract claim under the Merchant Agreement with Acadian and the personal guarantees executed by defendants Brandon and Shannon Badeaux. Defendants, in opposition, do not dispute that Acadian defaulted under the Merchant Agreement or that the guarantors failed to make payments under the guarantees after Acadian's contractual default. Instead, defendants primarily argue that the Merchant Agreement was a prohibited, criminally usurious loan, rather than a legal purchase of future receivables.
“It is well established that there can be no usury in the absence of a loan or forbearance of money” (Donatelli v Siskind, 170 AD23d 433, 434 ). The Second Department has held that:
“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” (id.).
The defense of usury “must be established by clear evidence as to all the elements essential thereto” (Giventer v Arnow, 37 NY2d 305, 309 ).
In analyzing a usury defense asserted in a revenue purchase case, courts must consider the transaction “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” (LG Funding LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664, 665 ). To determine whether a transaction is a loan masked as a purchase for future receivables, it is necessary to examine whether the plaintiff is “absolutely entitled to repayment under all circumstances” (see K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d 807, 816 (Sup. Ct Westchester County 2017)). In the recent LG Funding decision, the Second Department held that “courts weigh three factors when determining whether repayment is absolute [making it a loan] or contingent [making it a purchase for future receivables]: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy” (LG Funding LLC, 181 AD3d at 666).
“With respect to the first factor, the absence of a reconciliation agreement would point to a loan rather than a purchase of future receivables” (MCA Master Fund (MMF) v Universal Scrap Motors Inc., 2021 NY Slip. Op. 30097 [U], *2 [Sup Ct Nassau County 2021]). The reconciliation provision in the Merchant Agreement, like the reconciliation provision at issue in the LG Funding decision, provides that Advance “may, upon Merchant's request, adjust the amount of any payment due under this Agreement at [its] sole discretion and as it deems appropriate in servicing this Agreement” (emphasis added). Since the reconciliation provision gave Advance sole discretion for any payment adjustment, this suggests that Advance's entitlement to repayment was absolute, rather than contingent, and therefore is indicative of a loan, as a matter of law (see LG Funding LLC, 181 AD3d at 666).
Second, the Merchant Agreement, unlike a loan, does not have a finite term. Paragraph 1.2 of the Merchant Agreement thus provides that “[t]his Agreement shall have an indefinite term that shall last either until all the Merchant's obligations to FUNDER are fully satisfied” (emphasis added). However, this is just one of the three factors that must be weighed in determining the true nature of the transaction at issue.
Finally, paragraphs 2.9 and 1.11 of the Merchant Agreement provide that if Acadian files for bankruptcy or is placed under an involuntary filing, Advance is immediately entitled to enforce the personal guaranties and enter a confession of judgment against Acadian. These provisions reflect that bankruptcy is a default under the Merchant Agreement, entitling Advance to an immediate judgment against Acadian. Thus, Advance did not assume the risk that Acadian would have no future receivables and repayment was absolute, not contingent, and weighs in favor of treating this transaction as a loan rather than a purchase of receivables.
Upon weighing the foregoing three factors, as required under the LG Funding decision, Acadian's repayment under the Merchant Agreement is absolute rather than contingent under the first and third prongs of the three-part test, and therefore, the Merchant Agreement is a loan. The record reflects that Acadian received $50,000.00 from Advance in exchange for $74,500.00, which is equivalent to 49% interest if the funds had to be paid back over a year. “A transaction is usurious under civil law when it imposes an annual interest rate exceeding 16%” (Abir v Malky, Inc., 59 AD3d 646, 649 ; see also General Obligations Law § 5-501  and Banking Law § 14-a ). Consequently, the transaction at issue was a usurious loan, rather than a purchase of future receivables.
This finding, though, invokes paragraph 1.9 of the Merchant Agreement, which provides, in relevant part, that:
“In the event that a court determines that FUNDER has charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by applicable law and FUNDER shall promptly refund to Merchant any interest received by FUNDER in excess of the maximum lawful rate, it being intended that Merchant not pay or contract to pay, and that FUNDER not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by Merchant under applicable law” (emphasis added).
However, Advance cannot avoid the legal consequences of its illegal usurious loan to Acadian (i.e., dismissal of the complaint) by dictating an alternative remedy (i.e., reduction of the usurious rate, pursuant to paragraph 1.9 of the Merchant Agreement). Essentially, Advance apparently seeks to enforce the terms of an illegal contract. Once Advance commenced litigation for breach of the Merchant Agreement, thereby invoking this court's jurisdiction and Acadian's usury defense, the dispute regarding the nature of the transaction and its legal remedy fell squarely within the court's determination. Before invoking this court's jurisdiction, Advance did not reconcile the amount withdrawn from Acadian's account, despite the fact that it had sole discretion to do so under the Merchant Agreement. Accordingly, it is
ORDERED that Advance's motion for summary judgment (in mot. seq. one) is denied; and it is further
ORDERED that defendants’ summary judgment cross motion (in mot. seq. two) is granted, and the complaint is dismissed.
This constitutes the decision, order and judgment of the court.
1. Bullaro does not address the personal guaranty allegedly executed by Brandon Badeaux.
Mark I. Partnow, J.
Response sent, thank you
Docket No: 528151/19
Decided: March 12, 2021
Court: Supreme Court, Kings County, New York.
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