Colonial Funding Network, Inc. v. Epazz, Inc. et al
OPINION & ORDER: The motion by Colonial and TVT to dismiss the counterclaims for failure to state a claim and to strike certain affirmative defenses (Dkt. No. 39) is granted in part and denied in part. The motion to dismiss the counterclaims is grant ed. The motion to strike the first, seventh, ninth, tenth, eleventh, thirteenth, and fourteenth affirmative defenses is granted. The motion to strike the second, eighth, and twelfth defense is denied. The motion by Vantiff, Andrew Fellus, and Warren Fellus to dismiss the counterclaims for failure to state a claim (Dkt. No. 61) is granted. Motions terminated: granting 61 MOTION to Dismiss 3rd-Party Counterclaims, filed by Warren Fellus, Vantiff, LLC, Andrew Fellus, granti ng in part and denying in party 39 MOTION to Dismiss Notice of Motion to Dismiss Defendants' Counterclaims Pursuant to Fed. R. Civ.P.12(b)(6), filed by Colonial Funding Network, Inc., TVT Capital LLC. (Signed by Judge Louis L. Stanton on 5/9/2017) (ap)
ELECTRONICALLY FILED '
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
COLONIAL FUNDING NETWORK, INC. as
servicing provider for TVT Capital,
16 Civ. 5948
- against OPINION & ORDER
EPAZZ, INC., CYNERGY CORPORATION, and
SHAUN PASSLEY a/k/a Shaun A. Passley,
EPAZZ, INC. and SHAUN PASSLEY,
- against TVT CAPITAL, LLC, VANTIFF, LLC,
COLONIAL FUNDING NETWORK, INC. , ANDREW
FELLUS, WARREN FELLUS, JOHN DOES 1-10,
and JANE DOES 1-10,
Plaintiff Colonial Funding Network, Inc.
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.
Epazz is an Illinois corporation based in Chicago.
(Dkt. No. 8)
Epazz's principal. Id.
2. Passley, an Illinois citizen, is
TVT is 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.
is the plaintiff in this action as servicing provider for TVT.
Vantiff 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.
Andrew 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 counterclaims. Id.
Epazz and TVT entered into three merchant cash advance
(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
(the "purchase price"). Id.
17-19, 30, Exhs. A-Cat
1. Under each Agreement Epazz has to pay 15% of its daily
receipts to TVT until the receipts purchased amount is paid in
39, Exhs. A-C at 1. Passley personally guaranteed
Epazz's performance under each of the Agreements. Id., Exhs. A-C
Epazz 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 payments. Id.
Colonial 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).
Defendants 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.
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
The movants argue that the counterclaims should be
dismissed because the Agreements are purchases, not loans, and
therefore cannot be usurious.
1. Usury and Overcharge of Interest Claims
The 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.
In Scantek Medical Inc. v. Sabella, 582 F. Supp. 2d 472,
(S.D.N.Y. 2008), Judge McMahon held:
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
In 1965, New York amended its statute to allow
corporations to "interpose  a defense of criminal usury" in
Law § 5-521(3).
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
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 105l(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, 2008).
(alterations in Scantek).
Where a 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).
None of the cases defendants cite, Opp.
(Dkt. No. 55) at 9,
13-14, hold otherwise. They involved individuals and
unincorporated entities, not corporations.
Accordingly, the motions to dismiss the usury counterclaims
A claim for overcharge of interest can only be based on
interest overcharged on a loan. It cannot arise from a purchase.
"The 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
1990), quoting In re Binghamton, 133 A.D.2d 988,
N.Y.S.2d 140, 141
(3d Dep't 1987). "If the transaction is not a
'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.
(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.
"Further, 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. Stevens, 00 Civ. 3619 (DC), 2001 WL 1313387, at *4
(S.D.N.Y. Oct. 25, 2001), quoting Lehman v. Roseanne Inv'rs
Corp., 106 A.D.2d 617, 618, 483 N.Y.S.2d 106, 108 (2d Dep't
In this case, the "receipts purchased amounts" are not
payable absolutely. Payment depends upon a crucial contingency:
the continued collection of receipts by Epazz from its
customers. TVT is only entitled to recover 15% of Epazz's daily
receipts, and if Epazz's sales decline or cease the receipts
purchased amounts might never be paid in full. See Counterclaims,
Exhs. A-C at 1. The Agreements specifically provide that
"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." Id. at 3, § 1.9.
Defendants' argument that the actual daily payments ensure
that TVT will be paid the full receipts purchased amounts within
approximately 61 to 180 business days, id.
contradicted by the reconciliation provisions which provide that
if the daily payments are greater than 15% of Epazz's daily
receipts, TVT must credit the difference to Epazz, thus limiting
Epazz's obligation to 15% of daily receipts. No allegation is
made that TVT ever denied Epazz's request to reconcile the daily
payments. TVT's right to collect the receipts purchased amounts
from Epazz is in fact contingent on Epazz's continued collection
of receipts. See Kardovich v. Pfizer, Inc.,
97 F. Supp. 3d 131,
140 (E.D.N.Y. 2015), quoting Amidax Trading Grp. v. S.W.I.F.T.
S CRL ,
6 7 1 F . 3d 14 0 , 14 7 ( 2 d Ci r . 2 0 11 )
( "where a con c 1 us or y
allegation in the complaint is contradicted by a document
attached to the complaint, the document controls and the
allegation is not accepted as true") .
None of defendants' arguments, Counterclaims
change the fact that whether the receipts purchased amounts will
be paid in full, or when they will be paid, cannot be known
because payment is contingent on Epazz generating sufficient
receipts from its customers; and Epazz, rather than TVT,
controls whether daily payments will be reconciled.
Defendants rely on three cases for their position that
these Agreements are loans as a matter of law. First, in a
report and recommendation on a plaintiff's motion for a default
judgment for breach of a contract whereby the defendant sold
$163,726 of its receivables to the plaintiff for an upfront sum
of $115,300, Magistrate Judge Freeman remarked in a footnote
that "It is not entirely clear to this Court what differentiates
Merch. Cash & Capital LLC
this arrangement from a loan .
v. Edgewood Grp., LLC, 14 Civ. 3497
at *4, n.5.
(OF), 2015 WL 4430643,
(S.D.N.Y. July 2, 2015). Whether the arrangement was
a loan was not briefed and was not determinative to the outcome;
indeed Judge Freeman stated that "this question involves factual
issues not presently before the Court," id. at *9, n.7, and held
that "this Court cannot conclude, as a matter of law, that the
transaction at issue was a loan," id. at *4, n.5, citing Express
Working Capital, LLC v. Starving Students, Inc., 28 F. Supp. 3d
(N.D. Tex. 2014). Judge Koeltl adopted Judge Freeman's
recommendation. See 2015 WL 4451057
(S.D.N.Y. July 20, 2015).
Judge Sullivan granted a plaintiff's unopposed motion for
summary judgment for breach of a contract under which plaintiff
advanced $1,084,850 in exchange for $1,317,700 of defendant's
future receipts to be paid in weekly payments of $35,000, but
reserved ruling on damages "pending a supplemental submission
from Plaintiff as to whether the Agreement structured as a sale of accounts receivable -
in fact violates
New York's criminal usury law." Professional Merch. Advance
Capital, LLC v. C Care Servs., LLC, 13 Civ. 6562
4392081, at *4
(S.D.N.Y. July 15, 2015)
(RJS), 2015 WL
After a supplemental submission was filed,
Judge Sullivan ruled
in the plaintiff's favor on the usury issue stating that
the Court is satisfied by Plaintiff's supplemental submission
that the contract is probably not usurious. Specifically, the
contract is structured in a manner whereby if a $35,000 weekly
payment represent more than the weekly accounts receivable of
Defendant C Care Services, LLC ("C Care") for a particular week,
Plaintiff credits that difference back to C Care . . . . In light
of the new information, the contract appears to be structured
not as a loan but as a sale of accounts receivable.
Professional Merch. Advance Capital, LLC, 13 Civ. 6562 (RJS),
Slip Order at *1-2, ECF Dkt. No. 74
(S.D.N.Y. Aug. 3, 2015)
("Professional I I") ; see Siegelaub Decl.
( Dkt. No. 4 3) , Exh. 6.
Neither Judge Sullivan nor Judge Freeman held the
agreements before them to be usurious loans; they merely raised
an un-briefed question, with dicta supporting the result in this
In Clever Ideas, Inc. v. 999 Rest. Corp., No. 602302/06,
2007 N.Y. Slip Op. 33496(U), 2007 N.Y. Misc. LEXIS 9248
Ct. Oct. 12, 2007), a suit for breach of a contract for purchase
of future credit card receipts, plaintiff moved to dismiss the
defendant's usury defense. The court's description of the
contract's terms included neither a reconciliation provision,
nor payment contingent on the amount of receipts generated. Id.
It found "there are no reasonable means of non-payment, and
accordingly no risk of non-payment" and denied the motion,
holding that "The transactions at issue here are clearly payable
absolutely, and thus loans." Id. at *5-6. 1 In important respects
the clear facts differ from those in this case.
This case is closer to Platinum Rapid Funding Group Ltd. v.
VIP Limousine Services, Inc., No. 604163-15, 2016 N.Y. Slip Op.
32226(U), 2016 N.Y. Misc. LEXIS 4131 (Sup. Ct. Oct. 27, 2016),
where the court dismissed defendant's usury defense and granted
summary judgment to plaintiff on its breach of contact claim,
Following discovery, the court denied the defendant's motion for summary
judgment on the grounds of usury, holding that "The court will not assume
that the parties entered into an unlawful agreement, and when the terms of
the agreement are in issue, and the evidence is conflicting, the lender is
entitled to a presumption that he did not make a loan at a usurious rate."
Clever Ideas, Inc., No. 602302/06, 2009 N.Y. Slip Op. 30284(U), 2009 N.Y.
MiBc, LEXIS 3994, at *3 (Sup, Ct. Jan, 29, 2009) ("Clever II"),
differentiating Clever "in two material respects," id. at *8,
that also apply to this case. First, id. at *8-9,
The Court there stated that obligation to make payment was
unconditional, but these are not the terms of the Merchant
Agreements in the instant case. The only source of payment is
deposited receipts from future transactions. Plaintiff assumes
the risk that there will be no receipts, and therefore no
payment. The personal guaranty is no broader than the obligations
under the Agreement, and the requirement of payment by the
Guarantor is no greater than that of the Merchant.
Secondly, this Court does not take the position that the
intention of the Funder is relevant to an interpretation of an
Agreement which is unambiguous on its face. Since the Agreement
specifically provides that it involves the purchase of accounts
unconditional repayment by the Merchant or the
Guarantor, it is not a loan, and thereby not governed by the
General Obligations or Banking Law as they relate to usury.
Similarly, in Merchant Cash & Capital, LLC v. Transfer
International Inc., No.
605136/16, 2016 N.Y. Slip Op. 32395(0),
2016 N.Y. Misc. LEXIS 4515 (Sup. Ct. Nov. 2, 2016) the defendant
sold $115,200 of its future sales proceeds and receivables to
plaintiff to be paid in daily payments representing 13% of its
daily revenue in exchange for an upfront payment by plaintiff of
$80,000. Id. at *1. The agreements provided for initial daily
payments of $609, which "could be adjusted downward in the event
that the average daily receipts were less than anticipated, and
adjusted upward in the event that the average daily receipts
were greater than anticipated." Id. at *3, 7. The defendant
argued that this was a usurious loan because the plaintiff was
guaranteed to get the full amount within approximately nine
months since "the provision for adjustment was unenforceable
because there was no time limit for MCC to respond to
defendants' request for adjustment." Id. at *4. The court
dismissed defendant's usury defense, holding that the agreement
was not a loan because "plaintiff assumed the risk that, if the
receipts were less than anticipated, the period of repayment
would be correspondingly longer, and the investment would yield
a correspondingly lower annual return." Id. at *7-8.2
Accordingly, the motions to dismiss the counterclaim for
overcharge of interest and to strike the affirmative defense of
usury are granted.
2. Fraudulent Inducement
Defendants claim that if the Agreements are not usurious
loans, then they were procured by fraud. They allege that TVT
and Andrew Fellus several times referred to merchant cash
advance Agreements as loans, that in reliance on those
statements defendants believed that the Agreements would be
loans, that defendants would not have entered into the
Agreements knowing they were purchases, and that defendants were
harmed as a result by incurring the costs of the Agreements.
Although MCC bore the risk of bankruptcy, 2016 N.Y. Misc. LEXIS 4515, at *5,
and here bankruptcy is an event of default, Counterclaims ~ 64, Exhs. A-C at
3, § 3.1, TVT bears the risk that sales will decline or cease, because
failure to generate receiptB iB not an event of default, Bee id.
"The elements of a fraud cause of action consist of 'a
misrepresentation or a material omission of fact which was false
and known to be false by the defendant, made for the purpose of
inducing the other party to rely upon it, justifiable reliance
of the other party on the misrepresentation or material
omission, and injury.'" Pasternack v. Lab. Corp. of Am. Holdings,
27 N.Y.3d 817, 827, 59 N.E.3d 485, 491, 37 N.Y.S.3d 750, 756
(2016), quoting Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d
173, 178, 944 N.E.2d 1104, 1108, 919 N.Y.S.2d 465, 469 (2011).
Defendants do not claim that they were misled with regard
to the amount of their payment obligation, only that they were
misled into believing that their payment obligation would be
absolute when it actually is contingent. Their injury from that
is unclear. 3
Justifiable reliance on those statements is dispelled by
the heading on the first page of each Agreement, signed by
defendants, which states "Purchase and Sale of Future
Receivables," and is followed by "Merchant hereby sells, assigns
and transfers to Funder .
all of Merchant's future receipts
. until such time as the 'Receipts Purchased Amount' has
been delivered by Merchant to Funder." Counterclaims, Exhs. A-C
Defendants are only harmed by this if their intent was to accept the
advances and then renege on their obligation to deliver the purchased
receipt5 claiming u5ury.
at 1. 4 "Under New York law, reasonable reliance is precluded when
'an express provision in a written contract contradicts a prior
alleged oral representation in a meaningful fashion.'" Republic
Nat'l Bank v. Hales, 75 F. Supp. 2d 300, 315 (S.D.N.Y. 1999),
quoting Villa Marin Chevrolet v. Gen. Motors Corp., 98 Civ. 6167
(JG), 1999 WL 1052494, at *5 (E.D.N.Y. Nov. 18, 1999); Stone v.
Schulz, 231 A.D.2d 707, 707-08, 647 N.Y.S.2d 822, 823 (2d Dep't
("Where, as here, there is a 'meaningful' conflict between
an express provision in a written contract and a prior alleged
oral representation .
plaintiff will be unable to establish
that he reasonably relied on the alleged oral representations")
The motions to dismiss the eighth counterclaim, for
fraudulent inducement, are granted.
To the extent that defendants seek rescission based on
fraud, this counterclaim must be dismissed for the same reason
as the fraudulent inducement counterclaim: no injury to
defendants from the misstatements is apparent, and the
unambiguously clear language in the Agreements that they are
4 Defendants' argument that "Each merchant cash advance agreement refers to
itself as a 'Factoring' Agreement,u and "Factoring refers generally to loans
made against a company's accounts receivable,u Counterclaims~~ 13, 77, 86, is
not persuasive. Black's Law Dictionary defines "Factoru as "Someone who buys
accounts receivable at a discount.u Black's Law Dictionary (lOth ed. 2014).
s The written "Loan Application,u Counterclaims ~~ 119-121, was an application
by Eppaz to TVT. The Agreements, prepared by TVT and signed by Epazz,
describe only purchases.
purchases preclude justifiable reliance on prior statements that
referred to loans. Materiality and justifiable reliance are
required for rescission based on fraud. See Allen v. WestpointPepperell, Inc., 945 F.2d 40, 44
(2d Cir. 1991)
of a claim for rescission based on fraud are misrepresentation,
concealment or nondisclosure of a material fact; an intent to
deceive; and an injury resulting from justifiable reliance by
the aggrieved party.").
To the extent defendants seek rescission because of
unilateral mistake, rescission is not available where, like
here, the transaction cannot be undone without prejudicing the
other party. "[A] court sitting in equity can rescind a contract
for unilateral mistake if failure to rescind would unjustly
enrich one party at the other's expense, and the parties can be
returned to the status quo ante without prejudice." Gessin Elec.
Contrs., Inc. v.
95 Wall Assocs., LLC, 74 A.D.3d 516, 520, 903
N.Y.S.2d 26, 29 (1st Dep't 2010); Dahari v. Libov,
199, 31 Misc. 3d 1207(A), 2011 WL 1331913, at *3 (Civ. Ct. 2011)
("The Court may also rescind a contract based on unilateral
mistake, but only when there is no prejudice to the other party
and the parties can be returned to status quo.").
Additionally, rescission for unilateral mistake is not
available because Epazz's mistake is due to its own careless
reading of the Agreements it signed. Rescission for unilateral
mistake is available only if "the mistake is material and made
despite the exercise of ordinary care by the party in error."
NCR Corp. v. Lemelson Med., Educ. & Research Found., 99 Civ.
(KNF), 2001 WL 1911024, at *7 (S.D.N.Y. Apr. 2,
2001), quoting William E. McClain Realty, Inc. v. Rivers, 144
A.D.2d 216, 218, 534 N.Y.S.2d 530, 531 (3rd Dep't 1988).
"[R]escission of a contract is not appropriate where a
unilateral mistake is the product of negligence." Id., citing
Bailey Ford, Inc. v. Bailey, 55 A.D.2d 729, 730, 389 N.Y.S.2d
181, 183 (3rd Dep't 1976).
Furthermore, "New York law does not permit reformation or
rescission of a contract for unilateral mistake alone. A
unilateral mistake must be 'coupled with some fraud.'" De Sole
v. Knoedler Gallery, LLC, 137 F. Supp. 3d 387, 429 (S.D.N.Y.
2015), quoting Allen, 945 F.2d at 44. Because defendants cannot
establish fraud, the motion to dismiss the seventh counterclaim
for rescission must be granted.
"Under New York law, unconscionability is an affirmative
defense to the enforcement of a contract." Ng v. HSBC Mortg.
Corp., 07 Civ. 5434
(RRM), 2011 WL 3511296, at *8
10, 2011). Defendants have raised unconscionability as a defense
to Colonial's complaint, but they also assert it as a
counterclaims against TVT. "A cause of action for
unconscionability may not be used to seek affirmative relief."
Id., citing Galvin v. First Nat'l Monetary Corp., 624 F. Supp.
("the doctrine of unconscionability is
in the nature of an affirmative defense, and does not give rise
to a cause of action"); see Knox v. Countrywide Bank, 4 F. Supp.
3d 499, 513 (E.D.N.Y. 2014)
("to the extent that the complaint
alleges causes of action based on .
. unconscionability, those
claims are dismissed"); Fortune Limousine Serv., Inc. v. Nextel
Commc'ns, 35 A.D.3d 350, 354, 826
392, 396 (2d Dep't
("The third cause of action seeking affirmative relief on
the ground of unconscionable contract terms must also be
dismissed as '[t]he doctrine of unconscionability is to be used
as a shield, not a sword, and may not be used as a basis for
Accordingly, while defendants' unconscionability defense
may survive, their ninth counterclaim made on the same grounds
5 . Prima Facie Tort
In the event that the Agreements are found not to be
usurious and not procured by fraud, defendants seek alternative
relief for prima facie tort. Defendants claim that "The genesis
of the 'merchant cash advance agreements' exclusively was the
malevolent and malicious purpose of acquiring usurious gains,
despite public policy against such conduct," and "The
counterclaim plaintiffs were damaged" as a result. Counterclaims
169-171. But a prima facie tort claim will be defeated where
the conduct complained of is motivated by economic self-interest.
Under New York Law, there are four elements required to support
a claim for prima facie tort: ( 1) intentional infliction of
causing special damages,
(3) without excuse or
justification, and (4) by an act or series of acts that would
otherwise be lawful. Ross v. Mitsui Fudosan, Inc., 2 F. Supp.
2d 522, 531 (S.D.N.Y. 1998) (citing Curiano v. Suozzi, 63 N.Y.2d
113, 480 N.Y.S.2d 466, 469, 469 N.E.2d 1324 (1984)). "The first
element requires 'disinterested malevolence,' which means that
'the plaintiff cannot recover unless the defendant's conduct was
not only harmful, but done with the sole intent to harm.'" Hall
[v. City of White Plains], 185 F. Supp. 2d  at 304 [S.D.N.Y.
2002] (quoting Twin Labs., Inc. v. Weider Health & Fitness, 900
F.2d 566, 571 (2d Cir. 1990)). Accordingly, "motives other than
disinterested malevolence, 'such as profit, self-interest, or
business advantage' will defeat a prima facie tort claim." Twin
Labs., 900 F.2d at 571 (internal citations omitted).
Restis v. Am. Coal. Against Nuclear Iran, Inc., 53 F. Supp. 3d
(S.D.N.Y. 2014). See AREP Fifty-Seventh, LLC v. PMGP
Assocs., L.P., 115 A.D.3d 402, 403, 981 N.Y.S.2d 406, 408
(dismissing prima facie tort claim where the conduct
was motivated by a desire to undermine a business competitor).
The motions to dismiss the tenth counterclaim are granted.
6. Breach of the Covenant of Good Faith and Fair Dealing
Defendants allege that, Counterclaims
Alternatively, TVT Capital breached the covenant of good faith
and fair dealing by, through conduct averred above, engineering
forfeiture of the right to account reconciliation and otherwise
preventing the counterclaim plaintiffs from availing themselves
of the very contract provisions that TVT Capital likely asserts
make the agreements something other than a loan.
Defendants argue that this claim is well pleaded "because
the counterclaims aver that TVT Capital in practice regularly
does not honor account reconciliation requests, and seeks to
trigger forfeiture of account reconciliation and other things to
lock-in a fixed payment obligation, those things violate the
covenant of good faith and fair dealing." Opp. at 53. However,
beyond those broad assertions, the counterclaims are devoid of
allegations that TVT ever denied Epazz's requests for account
reconciliation, or that TVT did anything to trigger forfeiture
by Epazz of account reconciliation.6
The motion to dismiss the eleventh counterclaim is granted.
7. Civi1 RICO C1aims
Epazz and Passley profess to be victims of racketeering by a
criminal organization (counterclaim defendants and their
affiliates). This racketeering injury was inflicted by some
references, written and oral, to the Agreements as "loans."
These, and other circumstances, deceived Epazz and Passley into
taking the Agreements as being loans, and entering into them, to
But every misdescription, even if advantageous to its
author, is not fraud. The purpose and economic effect of the
Agreements are in major respects congruent with loans, and with
small adjustments in their terms, they would be loans. The
differences in terms are significant (for instance, they affect
To the extent defendants seek to vindicate the rights of other merchants,
they do not show standing to do so.
whether the obligation to repay is contingent or absolute), but
not so striking that a mischaracterization of them justifies
epithets of criminality. Grouping both loans and these purchases
of future income as "loans" is overbroad and inaccurate, but it
is not a crime.
That is illustrated by this case itself, where Epazz and
Passley devote their primary emphasis to their argument that the
very Agreements in this case are indeed loans
pp. 16 to
37 of their brief) . The "loan" or "purchase" distinction has
already produced a small body of litigation whose results in
particular cases are not known until the court has ruled.
That process is not helped by extravagant invocation of
laws prohibiting racketeering by organized crime, and the
counterclaims asserted under the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. § 1962, are dismissed.
8. Motion to Strike Affirmative Defenses
Colonial also moves to strike most of the affirmative
defenses on the ground that they are contradicted by the
Rule 12(f) of the Federal Rules of Civil Procedure provides that
a "court may strike from a pleading an insufficient defense or
any redundant, immaterial, impertinent, or scandalous matter."
Fed. R. Civ. P. 12(f); see Emmpresa Cubana Del Tabaco v. Culbro
Corp., 213 F.R.D. 151, 155 (S.D.N.Y. 2003). But courts "should
not tamper with the pleadings unless there is a strong reason
for so doing." Lipsky v. Commonwealth United Corp., 551 F. 2d
887, 893 (2d Cir. 1976). Motions to strike affirmative defenses
are thus "generally disfavored," Emmpresa Cubana Del Tabaco, 213
F.R.D. at 155 (internal quotation marks and citations omitted),
and should be denied "unless it is clear that the allegations
in question can have no possible bearing on the subject matter
of the litigation," Quanta Specialty Lines Ins. Co. v. Investors
Capital Corp., No. 06 Civ. 4624 (PKL), 2008 WL 1910503, at *4
(S.D.N.Y. Apr. 30, 2008).
Burck v. Mars, Inc., 571 F. Supp. 2d 446, 456 (S.D.N.Y. 2008).
"In order to strike a defense as 'insufficient,' not only
must there be no questions of law or fact that might allow the
defense to succeed, but the plaintiff must also show that it
would be prejudiced by the inclusion of the defense." Tradewinds
Airlines, Inc. v. Soros, 08 Civ. 5901 (JFK), 2013 WL 6669422, at
(S.D.N.Y. Dec. 17, 2013). "The burden of additional discovery
and increasing the duration and expense of litigation can
constitute sufficient prejudice." Id.
The motion to strike the first defense of criminal usury
and the thirteenth defense that TVT lent money without a license
as required by New York's Licensed Lender Law, N.Y. Banking Law
340 et seq., is granted because, as discussed above, the
Agreements are purchases and not loans.
The motion to strike the fourteenth defense for estoppel is
granted for the same reason. The Agreements are not loans
because Epazz's payment obligation is contingent. There could be
no detrimental reliance by Epazz on statements that indicated
that payment would be required absolutely.
The motion to strike the seventh defense of failure to
mitigate damages is granted because it is premised on the notion
that plaintiff had a duty to collect the entire receipts
purchased amounts when the Agreements were entered into, see
74, 79-80, 93, 95, a premise contradicted by
the Agreements' terms which require collection of the receipts
purchased amounts over time in the form of daily withdrawals
from Epazz's bank account.
The motion to strike the ninth defense of fraud, the tenth
defense seeking rescission because of fraud, and the eleventh
defense seeking rescission because of unilateral mistake are
granted for the reasons discussed above, because the Agreements'
clear language preclude defendants'
justifiable reliance on
prior statements that referred to loans.
The motion to strike the second defense that "The plaintiff
lacks standing because it is not a party to the agreements
allegedly breached" is denied. While the Agreements authorize
Colonial to act as servicing agent for TVT, that alone does not
necessarily suffice to confer to it standing to sue for TVT's
injury. See generally Sprint Commc'ns Co., L.P. v. APCC Servs.,
554 U.S. 269, 128 S. Ct. 2531 (2008); Cortlandt St. Recovery
Corp. v. Hellas Telecomms., 790 F.3d 411 (2d Cir. 2015);
CWCapital Asset Mgmt., LLC v. Chi. Props., LLC, 610 F.3d 497
(7th Cir. 2010).
The motion to strike the eighth defense that "Defendants
are not liable for any conduct for which attorneys'
be awarded" is denied. While the Agreements provide for recovery
of attorneys' fees in the event of defendants' breach,
defendants deny that TVT disbursed the full purchase price
amounts and argue that that excuses them from performance.
The motion to strike the twelfth defense of
unconscionability is denied because unconscionability involves
considerations beyond the contract terms. See, e.g., In re BH
Sutton Mezz LLC, No. AP 16-1187
(Bankr. S.D.N.Y. Dec. 1, 2016)
(SHL), 2016 WL 8352445, at *11
("The doctrine of
unconscionability seeks to prevent sophisticated parties with
grossly unequal bargaining power from taking advantage of less
Colonial may renew its motion to strike these defenses if
it can meet the "stringent three-pronged test" that "(1) there
must be no question of fact that might allow the defense to
(2) there must be no substantial question of law that
might allow the defense to succeed; and (3) the plaintiff must
be prejudiced by the inclusion of the defense." City of N.Y. v.
FedEx Ground Package Sys., 314 F.R.D. 348, 355 (S.D.N.Y. 2016).
The motion by Colonial and TVT to dismiss the counterclaims
for failure to state a claim and to strike certain affirmative
(Dkt. No. 39) is granted in part and denied in part.
The motion to dismiss the counterclaims is granted. The motion
to strike the first,
seventh, ninth, tenth, eleventh,
thirteenth, and fourteenth affirmative defenses is granted. The
motion to strike the second, eighth, and twelfth defense is
The motion by Vantiff, Andrew Fellus, and Warren Fellus to
dismiss the counterclaims for failure to state a claim (Dkt. No.
61) is granted.
New York, New York
q , 2017
LOUIS L. STANTON
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