FLEETWOOD SERVICES LLC et al v. COMPLETE BUSINESS SOLUTIONS GROUP INC et al
Filing
33
MEMORANDUM, AS OUTLINED HEREIN. SIGNED BY CHIEF JUDGE JUAN R. SANCHEZ ON 4/10/2019. 4/10/2019 ENTERED AND COPIES MAILED TO COUNSEL AND E-MAILED.(amas)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
FLEETWOOD SERVICES, LLC, et al.
v.
COMPLETE BUSINESS SOLUTIONS
GROUP, INC.
doing business as
PAR FUNDING
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CIVIL ACTION
No. 18-268
MEMORANDUM
Juan R. Sánchez, C.J.
April 10, 2019
Plaintiffs Fleetwood Services, LLC (Fleetwood Services), Robert L. Fleetwood, and
Pamela A. Fleetwood (collectively, Plaintiffs), on their own behalf and on behalf of those similarly
situated, bring claims for violations of the federal Racketeer Influenced and Corrupt Organizations
Act (RICO) and Texas law against Defendants Complete Business Solutions Group, Inc. (CBSG),
Prime Time Funding, LLC (PTF), and unnamed John and Jane Does (the Investor Defendants).
Plaintiffs assert the Defendants worked together to exploit cash-strapped small businesses by
luring them into endless cycles of usurious debt under the guise of false promises of consulting
services and debt reduction. CBSG and PTF each moved to dismiss the claims against them. For
the reasons explained below, the Court denied their motions to dismiss in its order of March 29,
2019.
FACTS 1
Robert and Pamela Fleetwood are the owners of Fleetwood Services, a Texas limited
liability company, which provides golf course construction, development, renovation, and
1
This matter was originally filed in Texas state court. The matter was then removed to the United
States District Court for the Northern District of Texas and transferred to the Eastern District of
Pennsylvania pursuant to 28 U.S.C. § 1404(a). On February 15, 2018, Fleetwood filed its First
Amended Complaint, from which the Court draws the facts, unless otherwise indicated.
remodeling services. CBSG is a Delaware corporation headquartered in Philadelphia,
Pennsylvania. PTF is a Pennsylvania entity also headquartered in Pennsylvania.
CBSG and PTF are engaged in the merchant cash advance industry, which is the merchantto-merchant equivalent of consumer pay-day lending—an industry allegedly notorious for its
predatory practices and extremely high interest rates. PTF and CBSG, along with the unidentified
Investor Defendants, work together to fund, originate, underwrite, and service loans, which, like
their consumer analogs, feature exorbitant annualized interest rates. Defendants have been engaged
in this business—mostly through their online presence—since at least 2015.
In late 2016 or early 2017, Fleetwood Services experienced a cash shortage, but was
ineligible for conventional financing. As a result, it entered into several merchant cash advance
agreements, which ultimately encumbered the business with an obligation to make daily payments
of $6,667.00 to its lenders. In January 2017, Fleetwood Services was approached by PTF and
CBSG, who, through various email exchanges, offered to provide it with financial consulting and
a debt consolidation program that would “provide capital for paying off existing debt as well as
capital with which to grow the business.” Am. Compl. ¶ 31. More specifically, PTF and CBSG
claimed their assistance would reduce Fleetwood Services’s daily payments by $1,666.75.
Defendants’ promises, according to the Amended Complaint, were lies manufactured to
conceal the true purpose behind CBSG and PTF’s offer, which was to “worsen [] Fleetwood
Services’s cash flow and thereby increase its dependence on further loans exclusively from []
CBSG.” Am. Compl. ¶ 41. And, this is exactly what is alleged to have happened to Fleetwood
Services. After the funds provided at the beginning of the relationship were exhausted, Fleetwood
Services was left “paying thousands of dollars more to [] CBSG than it had been paying prior to
the debt consolidation program.” Am. Compl. ¶ 40. Moreover, at around the time Fleetwood
2
Services experienced cash flow issues created by its obligation to Defendants, CBSG offered
Fleetwood Services the “opportunity” to restructure its agreement with CBSG by spreading the
amount owed over a larger number of smaller payments. As part of this supposed accommodation,
CBSG charged Fleetwood Services $11,000 in “Finance Charges,” which were not provided for
in the parties’ agreement. Am. Compl. ¶ 44. Ultimately, Fleetwood Services escaped its
relationship with Defendants on July 5, 2017, after receiving a traditional small business loan that
it used to repay Defendants in full, including what Plaintiffs’ characterize as an undisclosed
annualized percentage rate of interest at 114.07%.
The relationship between Plaintiffs and CBSG was governed by the terms of the “Factoring
Agreement,” which was executed on or about January 4, 2016. 2 See CBSG Mot. to Dismiss Ex.
A at 2. 3 The Factoring Agreement obligated CBSG to provide Fleetwood Services with $370,000
(the Purchase Price) allegedly in exchange for $547,000 worth of Fleetwood Services accounts
receivables (the Receipts Purchased Amount). Id. at 2. However, allegedly unlike a traditional
factoring agreement, the fair market value of the accounts receivable (i.e., the Receipts Purchased
Amount) was unilaterally dictated by CBSG and based upon the creditworthiness of Fleetwood
Services—not the creditworthiness of the customers who were to pay the accounts receivable or
2
Black’s Law Dictionary defines “factoring” as “the buying of accounts receivable at a discount”
and explains “the price is discounted because the factor (who buys them) assumes the risk of delay
in collection and loss on the accounts receivable.” Factoring, Black’s Law Dictionary (10th ed.
2014).
3
Ordinarily, a Court may not consider material extraneous to the complaint on a motion to dismiss.
See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). There are,
however, several exceptions to this general rule, including one for “indisputably authentic
documents integral to or explicitly relied upon in the complaint.” Schmidt v. Skolas, 770 F.3d 241,
249 (3d Cir. 2014). Here, the First Amended Complaint explicitly relies upon the Factoring
Agreement, and no party has challenged the authenticity of the document. Accordingly, the Court
will consider it in adjudicating the instant motions.
3
any appraisal of the actual value of Fleetwood Services’ accounts receivable. Am. Compl. ¶ 34.
The Factoring Agreement obligated Fleetwood Services to repay the Receipts Purchased Amount
in 110 daily installments of $5,000.25, which were effectuated by electronic automated clearing
house debits from Fleetwood Services’s Texas-based bank accounts. These daily payments were,
like the Receipts Purchased Amount, also divorced from Fleetwood Services’s actual accounts
receivable because the Factoring Agreement made “any and all receivables from any customer in
any amount based on any sale subject to Defendant CBSG for payment of the daily fixed debit.”
Id. ¶ 35.
The Factoring Agreement contained several other terms material to the instant motions.
These additional terms include: (1) a declaration the money provided by CBSG to Fleetwood
Services “is not intended to be, nor shall it be construed as a loan;”; (2) CBSG’s promise to refund
Fleetwood Services any amount greater than the maximum lawful interest rate, in the event “a
court determines that [CBSG] has charged or received interest” under the Agreement; and (3) a
Pennsylvania choice of law provision. CBSG Mot. to Dismiss Ex. A at 2. 4 Along with the
4
The pertinent paragraph of the Agreement states:
[Fleetwood Services] and CBSG 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 [CBSG] to [Fleetwood
Services]. [Fleetwood Services] agrees that the Purchase Price is in exchange for
Future Receipts pursuant to this Agreement [and] equals the fair market failure of
such Receipts. [CBSG] 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 [CBSG] with respect to the full amount of the Receipts shall be
conditioned upon [Fleetwood Service’s] sale of products and services and the
payment therefore by [Fleetwood Service’s] customers in the manner provided in
Section 1.1. IN NO EVENT SHALL THE AGGREGATE OF THE AMOUNTS
RECEIVED BE DEEMED INTEREST HEREUNDER. In the event that a court
determines that [CBSG] has charged or received interest hereunder, and that said
amount is in excess of the highest applicable rate, the rate in effect hereunder shall
be automatically reduced to the maximum rate permitted by applicable law and
4
Factoring Agreement, the Defendants also required Fleetwood Services to ensure repayment by
granting CBSG security interests in “all accounts, chattel paper, documents, equipment, general
intangibles, instruments and inventory . . . now or hereafter owned or acquired by [Fleetwood
Services] and (b) all proceeds, as that term is defined in Article 9 of the UCC,” and obligating
Pamela and Robert Fleetwood to personally guarantee Fleetwood Services paid CBSG the
Receipts Purchased Amount ($547,000). CBSG Mot. to Dismiss Ex. A at 5-6.
Based on the forgoing, Plaintiffs filed an Amended Complaint asserting claims for breach
of Texas Business & Commercial Code § 17.44(a) (Count I); the Texas Usury Statute (Count II);
common law fraud (Count III); RICO (Count IV); common law civil conspiracy (Count VI); and
common law negligent misrepresentation (Count VII). In addition, the Amended Complaint seeks
specific performance of paragraph 1.10 of the Factoring Agreement (Count V). CBSG and PTF
moved to dismiss the Amended Complaint on February 16, 2018, and March 27, 2018,
respectively. Although Defendants seek to dismiss Counts IV, V, and VII specifically, they claim
the Factoring Agreements were not usurious loans under governing Pennsylvania law, an argument
which, if credited, all parties agreed would require the dismissal of all but a few of Plaintiffs’
claims.
[CBSG] shall promptly refund to [Fleetwood Services] any interested received by
[CBSG] in excess of the maximum lawful rate, it being intended that merchant not
pay or contract to pay, and that [CBSG] not receive or contract to receive, directly
or indirectly in any manner whatsoever, interest in excess of that which may be paid
by [Fleetwood Services] under applicable law. [Fleetwood Services]
ACKNOWLEDGES THAT PENNSYLVANIA LAW APPLIES TO THE
WITHIN AGREEMENT.
Agreement ¶ 1.10 (emphasis in original).
5
The Court held oral argument on the motions on November 2, 2018, and on March 29,
2019, it issued an order granting CBSG’s motion as to Count V and denying it in all other respects.
This order also denied PTF’s motion to dismiss in its entirety. The Court writes now to supplement
the order with the basis for its ruling.
DISCUSSION
Counts IV, V, and VII allege violations of RICO, seek specific performance, and allege
negligent misrepresentation, respectively. The Defendants move to dismiss these counts pursuant
to Federal Rule of Civil Procedure 12(b)(6). To survive a motion to dismiss for failure to state a
claim pursuant to Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as
true, 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 is facially plausible
when the facts pleaded “allow[] the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Id.
In evaluating a Rule 12(b)(6) motion, a court first must separate the legal and factual
elements of the plaintiff's claims. See Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.
2009). The court “must accept all of the complaint's well-pleaded facts as true, but may disregard
any legal conclusions.” Id. at 210-11. The court must then “determine whether the facts alleged in
the complaint are sufficient to show that the plaintiff has a ‘plausible claim for relief.’” Id. at 211
(quoting Iqbal, 556 U.S. at 679).
Before the Court can address the Defendants’ arguments, it must first characterize the
Factoring Agreement. If the Factoring Agreement is in substance a factoring agreement, i.e., a
purchase of accounts receivable below their face value, then there can be no usury—and thus the
Amended Complaint must be dismissed to the extent it relies on illegality of the alleged interest
rates charged. See Equip. Fin., Inc. v. Grannas, 218 A.2d 81, 82 (Pa. Super. Ct. 1966) (noting
6
usury is not at issue where “there is no loan or use of money on the part of the buyer”); Stedman
v. Georgetown Sav. & Loan Ass’n, 595 S.W.2d 486, 489 (Tex. 1979) (“For usury to apply there
must be an overcharge by a lender for the use, forbearance, or detention of the lender’s money so
as to constitute interest.”). If the Factoring Agreement functions as a loan, however, the Court
must (1) determine whether it is subject to the usury laws of Pennsylvania or Texas, as the
Agreement calls for the application of Pennsylvania law but the Plaintiffs assert Texas law applies,
and (2) assess the merits of the Amended Complaint.
Despite the obvious significance of the issue, neither CBSG nor PTF offer any substantive
defense of the Factoring Agreement as a true factoring agreement. CBSG claims—without legal
citation or explanation—the transaction between it and Fleetwood Services is subject to Article 9
of the Uniform Commercial Code, which governs secured transactions. See CBSG Mot. to Dismiss
2. PTF makes no argument at all. As a result of Defendants’ failure to effectively address this
issue, the Court assumes—without deciding and only for purposes of the instant motions to
dismiss—the Factoring Agreement was a loan. The Court’s assumption is undergirded by the
allegations in the Amended Complaint and a review of the Factoring Agreement as a whole. 5 See
Simpson v. Penn Discount Corp., 5 A.2d 796, 798 (Pa. 1939) (“As usury is usually accompanied
by subterfuge and circumvention . . . to present the color of legality, it is the duty of the court to
examine the substance of the transaction as well as its form.”); Gonzales County Sav. & Loan
Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976) (“It has often been said that courts will look
5
The Court’s assumption is supported by the allegations in the Amended Complaint describing:
(1) how the “Daily Specified Amount,” i.e., the daily $5,000.25 debit from Fleetwood Services’
bank account, operated as a fixed loan payment, (2) how the “Purchased Amount,” i.e., the
$547,000 Fleetwood Services was obligated to repay, was the sum of the principal and interest of
the loan; and (3) the manner in which the Factoring Agreement shifted all risk of loss from
Defendants to Fleetwood Services and Pamela and Robert Fleetwood. See Am. Compl. ¶¶ 47-58.
7
beyond the form of the [transaction] to its substance in determining the existence or nonexistence
of usury . . . Labels put on particular charges are not controlling.”).
Assuming the Factoring Agreement is a disguised loan, the Court must determine whether
the Factoring Agreement is governed by Pennsylvania law (as specified in Paragraph 1.10 of the
Factoring Agreement) or Texas law (as Plaintiffs argue). The parties agree if the Court concludes
Pennsylvania law applies to claims arising from the Factoring Agreement, all but a few of
Plaintiffs’ causes of action must be dismissed (i.e., those that rely on a finding the Factoring
Agreement constituted a loan with usurious interest under Texas law). They also agree the Court
must apply Pennsylvania’s choice of law principles to resolve the alleged conflict between
Pennsylvania and Texas usury laws. Pennsylvania utilizes Restatement (Second) of Conflict of
Laws § 187(2) where there is a “true conflict” involving a question of contract law. See Berg
Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 463-64 (3d Cir. 2005). 6 Restatement Section 187(2)
requires the Court to apply the law of the state specified in the agreement unless:
(a) The chosen state has no substantial relationship to the parties or the transaction and
there is no other reasonable basis for the parties’ choice, or
(b) Application of the law of the chosen state would be contrary to a fundamental policy
of a state which has a materially greater interest than the chosen state in the
determination of the particular issue and which, under the rule of § 188 [of Restatement
(second) of Conflicts of Law], would be the state of the applicable law in the absence
of an effective choice of law by the parties.
Kaneff v. Del. Title Loans, Inc., 587 F.3d 616, 621-22 (3d Cir. 2009) (quoting Restatement §
187(2)); see also Chestnut v. Pediatric Homecare of Am., Inc., 617 A.2d 347, 350-51 (Pa. Super.
Ct. 1992) (applying Restatement § 187).
6
A “true conflict” exists where “the governmental interests of [multiple] jurisdictions would be
impaired if their law were not applied.” Budget Rent-A-Car Sys., Inc. v. Chappell, 407 F.3d 166,
170 (3d Cir. 2005) (alteration in original).
8
The Defendants’ conclusory arguments to the contrary notwithstanding, Plaintiffs have
averred sufficient facts to warrant the application of Texas law. As an initial matter, the Court finds
a “true conflict” between Pennsylvania and Texas law concerning usury. In Kaneff (discussed in
greater detail below), the Third Circuit has recognized “there [could] be no question” a “true
conflict” existed where the law of one jurisdiction has an applicable usury law, and the other does
not. Kaneff, 587 F.3d at 622 (noting Delaware does not have usury laws, and Pennsylvania does
have a general usury law, and concluding “[t]here can be no question that there is a true conflict
between Delaware and Pennsylvania in their approach to and treatment of usurious interest.”). This
is the case here: Pennsylvania has no usury protections for businesses, and Texas does. Compare
15 Pa. Cons. Stat. § 1510 (“A business corporation shall not plead or set up usury, or the taking of
more than the lawful rate of interest…as a defense to any action…or to enforce payment of…any
obligation executed or effected by the corporation.”) with Tex. Fin. Code § 305.001(a-1)(“A
creditor who contracts for or receives interest that is greater than the amount authorized by this
subtitle in connection with a commercial transaction is liable to the obligor….”). Accordingly, the
Court finds there is a true conflict between Pennsylvania and Texas usury laws.
Having found a “true conflict,” the Court turns to Restatement § 187(2)(b), which calls for
a two-part inquiry. 7 First, the Court must determine whether, under Restatement § 188, the chosen
state or another state’s law would apply in the absence of the choice of law provision. Restatement
§ 188 calls for the application of the law of the state which has
7
Restatement §187(2)(a) permits a court to disregard a choice of law provision where the chosen
state “has no substantial relationship to the parties or to the transaction and there is no other
reasonable basis for the parties’ choice.” This provision is inapplicable. CBSG’s principal place
of business is located in Pennsylvania where Plaintiffs concede that at least part of the parties’
course of dealing took place. Amended Compl. § 21; Opp’n to CBSG Mot. 10. As a result, §
187(2)(a) provides no basis to disregard the choice of law provision.
9
the most significant relationship to the transaction as determined by several factors,
including: (a) the place of contracting, (b) the place of negotiation of the contract,
(c) the place of performance, (d) the location of the subject matter of the contract,
and (e) the domicile, residence, nationality, place of incorporation and place of
business of the parties.
Restatement § 188(1-2); see also Hammersmith v. TIG Ins. Co., 480 F.3d 220, 233 (3d Cir. 2007)
(applying the § 188 factors to determine whether Pennsylvania had the most significant contacts
in a choice of law analysis). 8 Second, if the Court finds the § 188 balancing requires the application
of the law of a state other than the chosen state, the Court must then determine whether applying
the chosen state’s law would contravene a “fundamental policy” of the other state. Restatement §
187(2)(b). So, to apply Texas law, the Court must find Texas has the most significant relationship
to the transaction and a fundamental public policy of Texas would be violated by the application
of Pennsylvania law.
The issue before the Court is similar to the one decided by the Third Circuit in Kaneff. 587
F.3d 616. Kaneff—a Pennsylvania resident—traveled to Delaware to obtain a short-term loan
secured by a lien against the title to her automobile. The annualized interest rate of the loan was
approximately 300%. After falling behind on her payments, Delaware Title Loans (DTL)
repossessed her vehicle, and Kaneff sued DTL in Pennsylvania state court. DTL removed the
action and sought to compel arbitration. Kaneff opposed the motion to compel on
unconscionability grounds. In deciding the arbitrability of Kaneff’s challenge to the title loan, the
8
Pennsylvania Supreme Court has never formally disavowed the rule of lex loci contractus, which
calls for the application of the law of the place of contracting. Hammersmith, 480 F.3d at 227-29
(describing the history of Pennsylvania choice of law jurisprudence in contract and tort actions).
Nevertheless, the Third Circuit has predicted the Pennsylvania Supreme Court would extend its
ruling abolishing lex loci delicti in tort matters in favor of the application of the “law of the forum
with the most interest in the problem” to contract matters. Id.at 228-29. This Court will, as it must,
follow the Third Circuit’s lead. Id.; see also Pacific Employers Ins. Co. v. Global Reinsurance
Corp. of America, 693 F.3d 417, 432 (3d Cir. 2012).
10
Court considered whether it must apply the law of Pennsylvania—which prohibits usurious loans
to consumers—or the law of Delaware—which does not prohibit usurious loans, but was the state
law selected in the contract’s choice of law provision.
The Third Circuit found Pennsylvania had a more significant interest than Delaware
because the plaintiff lived in Pennsylvania, the collateral was located in Pennsylvania, and, that if
Kaneff’s car were repossessed and she lost her job as a result, Pennsylvania would have to pay her
unemployment and medical benefits, and lose the taxes generated from her income. Citing
Pennsylvania’s “antipathy to high interest rates such as the 300.01 percent interest charged in the
contract at issue,” the Court also found applying Delaware law would violate a fundamental public
policy of the Commonwealth. Id at 624. As a result, the Court found the law of Pennsylvania
should be applied to Kaneff’s title loan, and the choice of law provision in the loan documents
discarded. Id.
A similar situation is before the Court here. As an initial matter, Plaintiffs have averred
sufficient facts—which the Court must accept as true—to establish Texas’s materially greater
interest in this dispute. As Plaintiffs aver, Fleetwood Services is a Texas limited liability company
headquartered in Dallas, Texas, and Robert and Pamela Fleetwood are individuals residing in
Dallas, Texas. Amend. Compl. ¶¶ 18-20. Furthermore, the commercial and personal property—
including Robert and Pamela’s home and personal assets—securing repayment is located in Texas.
Amend. Compl. ¶ 43. Plaintiffs also allege Defendants’ “conduct in inducing Plaintiffs to enter
into the [Factoring Agreement] involved a series of consumer and commerce related transactions
that substantially occurred within the state of Texas.” Amend. Compl. ¶ 61. In light of these
circumstances (and Defendants’ failure to explain how or why the Court should disregard them,
or consider other factors weighing in favor of Pennsylvania’s relationship to the transaction at
11
issue), the Court finds Texas has a more significant relationship to the transaction than
Pennsylvania.
The Court also finds applying Pennsylvania law would violate a fundamental public policy
of Texas, namely its “antipathy” to high interest rates, regardless of the nature of the debtor. Kaneff,
587 F.3d at 624. As Plaintiffs point out, the Texas constitution prohibits usury. See Opp’n to
CBSG Mot. at 10 (citing Texas Const., Art. XVI § 11). Moreover, the Texas Financial Code sets
a specific maximum interest rate for lending for “a business, commercial, investment, or other
similar purpose.” See Tex. Fin. Code § 303.009(c). The Texas Financial Code also permits private
causes of action for usury in commercial transactions. Texas Fin. Code § 305.001(a-1)(“A creditor
who contracts for or receives interest that is greater than the amount authorized in this subtitle in
connection with a commercial transaction is liable to the obligor….”) (emphasis added). This
statutory framework makes clear the existence of Texas’s fundamental public policy against the
payment of excessive interest rates—no matter the character of the debtor. As a result, enforcing
Pennsylvania law—which affirmatively prohibits several types of business entities from claiming
a usury defense—would violate Texas’s policy. See 15 Pa. Con. Stat. § 1510(a). 9 On this basis,
9
In full, this statutory provisions states:
A business corporation shall not plead or set up usury, or the taking of more than
the lawful rate of interest, or the taking of any finance, service or default charge in
excess of any maximum rate therefor provided or prescribed by law, as a defense
to any action or proceeding brought against to recover damages on, or to enforce
payment of, or to enforce any other remedy on, any obligation executed or effected
by the corporation.
15 Pa. Con. Stat. § 1510(a). Although this provision applies directly to “business corporations,” it
is elsewhere made applicable to “domestic associations” and “foreign associations.” See 15 Pa.
Con. Stat. § 114 (“A domestic association other than a business corporation shall be subject to
section 1510 . . . with respect to obligations . . . to the same extent as if the domestic association
were a domestic business corporation.”); 15 Pa. Con. Stat. § 402(g) (“A foreign association shall
be subject to section 1510 . . . with respect to obligations . . . to the same extent as if the foreign
association were a domestic business corporation.”).
12
the Court finds that applying Pennsylvania law would violate Texas’s fundamental public policy
against usury.
Having determined Texas has the most significant relationship to the transaction at issue
here and enforcing Pennsylvania law would violate Texas’s fundamental public policy against
usury without regard to the nature of the debtor, the Court concludes the Factoring Agreement is
subject to Texas law. See Kaneff, 587 F.3d at 621-22; Chestnut, 617 A.2d at 350-51; Restatement
(Second) of Conflict of Laws § 187(2). The Court will, therefore, deny the motions to dismiss to
the extent they are premised on Defendants’ argument that their conduct was permissible under
Pennsylvania law. The Court next turns to the merits of the Defendants’ motions. Because the
motions focus primarily on the Plaintiffs’ RICO claim, the Court will consider that issue first, and
then address Defendants’ arguments with respect to the specific performance and negligent
misrepresentation claims.
The heart of Plaintiffs’ Amended Complaint, and the focus of CBSG and PTF’s respective
motions to dismiss, is the civil RICO claim. At issue is the application of 18 U.S.C. § 1962(c),
which makes it unlawful “for any person employed by or associated with any enterprise engaged
in, or the activities of which affect, interstate . . . commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or
collection of unlawful debt.” To state a claim for relief under this statute, a person 10 must allege
“(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” In re Ins.
Brokerage Antitrust Litig., 618 F.3d 300, 362 (3d Cir. 2010). 11 A person must also establish
10
A “person” is “any individual or entity capable of holding a legal or beneficial interest in
property.” 18 U.S.C. § 1961(3).
11
Texas law applies to the Factoring Agreement, but the Court applies federal law to the RICO
claim. See Williams v. Stone, 109 F.3d 890, 895 (3d Cir. 1997) (noting “the state law offenses the
[plaintiffs’] claim were committed by [the defendant] serve no more than a ‘definitional purpose’
13
standing to bring a RICO claim by alleging he was “injured . . . by reason of a violation of § 1962.”
Anderson v. Ayling, 396 F.3d 265, 269 (3d Cir. 2005). CBSG and PTF each move to dismiss on
the grounds the Amended Complaint fails to allege a cognizable enterprise, predicate acts of
racketeering activity, and lack of standing. None of these arguments is availing. 12
First, Defendants argue the Amended Complaint fails to adequately allege a RICO
“enterprise.” The RICO statute defines an “enterprise” as “any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals associated in fact although
not a legal entity.” 18 U.S.C. § 1961(4). Here, Plaintiffs allege the existence of an “association-infact” enterprise, which requires its own three-part showing: “(1) there exists an ongoing
organization, formal or informal; (2) the various associates of the organization function as a
continuing unit; and (3) the organization has an existence separate and apart from the alleged
pattern of racketeering activity.” Schwartz v. Lawyers Title Ins. Co., 970 F. Supp. 2d 395, 402
(E.D. Pa. 2013) (citing United States v. Turkette, 452 U.S. 576, 583 (1981)). To ultimately prevail,
a plaintiff must also establish three “structural” features of the enterprise: “a purpose, relationships
among those associated with the enterprise, and longevity sufficient to permit these associates to
pursue the enterprise’s purpose.” Id. (quoting Boyle v. United States, 556 U.S. 938, 940 (2009)).
The Court finds the Amended Complaint satisfies both Turkette and Boyle at this stage.
The Amended Complaint describes the “Lending Enterprise” as a group of John and Jane Doe
vis-à-vis an allegation of a RICO violation—they merely define the types of activity that may
constitute predicate acts pursuant to the federal RICO statute”). The parties cite primarily to Third
Circuit and Supreme Court authority in support of their respective positions, and so the Court
assumes for purposes of the instant motions that Third Circuit precedent applies. However, the
Court will defer making a definitive ruling on this choice of law question until the parties have had
an opportunity to fully brief the issue.
12
In their opposition, Plaintiffs also address whether they have adequately alleged a pattern of
racketeering. However, Defendants do not appear to have raised this issue so the Court will not
consider it.
14
individuals and two corporate entities associated with one -another which that engaged in unlawful
activity, including in a course of conduct (i.e., mail and wire fraud, and the collection of unlawful
debts—both of which are discussed below) for a common purpose (to make money). This
“Lending Enterprise” also featured included an informal, on-going organization which operated as
a unit to provide both legal credit services and the allegedly usurious loans. It is thus sufficient
under Turkette. See United States v. Bergrin, 650 F.3d 257, 270 (3d Cir. 2011). To the extent
Defendants challenge the third Turkette element—the alleged enterprise’s existence separate and
apart from the business entities—the Court is satisfied Plaintiffs have met this requirement. The
Amended Complaint alleges Defendants have done more than carry on the normal affairs of actors
in the legal credit market. Rather, the Amended Complaint explains how they each worked
together in this scheme to originate, underwrite, and service loans with illegal interest rates. Each
player in the enterprise had a different role, but the alleged enterprise was greater—and distinct
from—its component parts (at least some of which were likely legitimate).
The Court is also satisfied that the Amended Complaint meets the Boyle requirements. The
Amended Complaint “plausibly impl[ies]” the purpose of the enterprise was to make money by
means of luring small businesses into otherwise unenforceable loans or collecting unlawful debts,
there were relationships between each of the members (the John and Jane Does provided the
capital, PTF brokered the loans, and CBSG serviced them), and sufficient longevity (from at least
2015) to accomplish that purpose. Brokerage, 618 F.3d at 370. Thus, the Amended Complaint is
also sufficient under Boyle.
CBSG also challenges Plaintiffs’ ability to plead the existence of an enterprise because
companies engaged in the “provision of routine credit services,” like CBSG, are beyond the scope
of RICO liability. CBSG Mot. to Dismiss 11-12. CBSG cites Jubelirer v. Mastercard Int’l., Inc.,
15
68 F. Supp. 2d 1049, 1052-53 (W.D. Wisc. 1999), and In re Mastercard Int’l, Inc., 132 F. Supp.
2d 468, 487 (E.D. La. 2001) in support of this position. The Court is not persuaded. As an initial
matter, Jubelirer and Mastercard were the product of concerns about unbounded RICO liability
based on the “many million combinations of merchant, MasterCard and lender.” Jubelirer, 68 F.
Supp. 2d at 1053. Nothing in this case suggests a similar issue here. Moreover, the persuasive
value of Jubelirer and Mastercard, which turned on the plaintiffs’ failure to allege hierarchical or
consensual decision making, is unclear in light of Boyle, which rejected a rigid definition of
association-in-fact enterprises. See Boyle, 556 U.S. at 948. 13 As a result, the Court will not dismiss
the RICO claim on this basis.
The Defendants next challenge the RICO claim on the basis the Amended Complaint fails
to adequately allege “racketeering activity,” as required by 18 U.S.C. § 1962(c). The definition of
“racketeering activity” includes wire fraud in violation of 18 U.S.C. § 1343. 18 U.S.C. § 1961(1).
“Mail or wire fraud consists of (1) a scheme to defraud, (2) use of the mail or interstate wires to
13
More specifically, the Supreme Court noted:
As we said in Turkette, an association-in-fact enterprise is simply a continuing unit
that functions with a common purpose. Such a group need not have a hierarchical
structure or a “chain of command”; decisions may be made on an ad hoc basis and
by any number of methods—by majority vote, consensus, a show of strength, etc.
Members of the group need not have fixed roles; different members may perform
different roles at different times. The group need not have a name, regular meetings,
dues, established rules and regulations, disciplinary procedures, or induction or
initiation ceremonies. While the group must function as a continuing unit and remain
in existence long enough to pursue a course of conduct, nothing in RICO exempts
an enterprise whose associates engage in spurts of activity punctuated by periods of
quiescence. Nor is the statute limited to groups whose crimes are sophisticated,
diverse, complex, or unique; for example, a group that does nothing but engage in
extortion through old-fashioned, unsophisticated, and brutal means may fall
squarely within the statute's reach.
Boyle, 556 U.S. at 948.
16
further that scheme, and (3) fraudulent intent.” Bonavitacola Elec. Contractor, Inc. v. Boro
Developers, Inc., 87 F. App’x 227, 231 (3d Cir. 2003) (citing United States v. Pharis, 298 F.3d
228, 233 (3d Cir. 2002)). 14
At its core, the Amended Complaint alleges the Defendants engaged in a scheme to defraud
by intentionally misrepresenting the enforceability of the Factoring Agreement, when, in fact, the
Factoring Agreement was a usurious, and thus unenforceable, loan. As evidence, Plaintiffs allege
the existence of (but have not actually filed with the Court) two email exchanges between
Plaintiffs, PTF, and CBSG, in January 2017, in which Defendants fraudulently (1) claimed the
Agreement would help move Fleetwood Services away from cash advances and save money, and
(2) the Agreement was legally enforceable. In further support of its claim, Plaintiffs allege
Defendants’ use of the interstate wires to electronically debit its bank account “further created the
impression” the Factoring Agreement was enforceable, and once Fleetwood Services experienced
issues making payments, Defendants used emails and other wire communications to bolster this
impression.
The Defendants claim the allegations supporting Plaintiffs’ wire fraud theory are
insufficient to withstand scrutiny under Federal Rule of Civil Procedure 9(b), which requires a
party to “state with particularity the circumstances constituting fraud,” and applies to RICO claims
alleging wire fraud. Schwartz, 970 F. Supp. at 406. The purpose of this heightened burden is to
“place the defendants on notice of the precise misconduct with which they are charged, and to
safeguard defendants from spurious charges of immoral and fraudulent behavior.” Id. (quoting
14
“The mail fraud and the wire fraud statute are ‘in pari materia and are, therefore, to be given
similar constructions.” United States v. Fumo, 628 F. Supp. 2d 573, (E.D. Pa. 2007) (quoting
United States v. Tarnopol, 561 F.2d 466, 475 (3d Cir. 1977), abrogated on other grounds by Griffin
v. United States, 502 U.S. 46 (1991)). Thus, cases construing the mail fraud statute are equally
applicable to the wire fraud statute. Id.
17
Seville Indust. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984)).
Allegations of a misrepresentation’s date, place, or time are sufficient, but not necessary to satisfy
Rule 9(b); a plaintiff is also “free to use alternative means of injecting precision and some measure
of substantiation into their allegations of fraud.” Seville, 742 F.2d at 791. Nevertheless, a plaintiff
“must allege who made a misrepresentation to whom and the general content of the
misrepresentation.” Lum v. Bank of Am., 361 F.3d 217, 224 (3d Cir. 2004), abrogated in part on
different grounds by Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). Conditions of a
person’s mind, including knowledge and intent, “may be alleged generally.” Fed. R. Civ. P. 9(b);
see also Marangos v. Swett, 341 F. App’x 752, 757 (3d Cir. 2009) (“Rule 9(b) requires particularity
when pleading fraud, but it allows factual matter concerning malice, intent, and knowledge to be
alleged generally under the ‘less—than—rigid—though still operative—strictures of Rule 8.’”
(quoting Ashcroft v. Iqbal, 556 U.S. 662, 687 (2009))).
Defendants argue the Amended Complaint must be dismissed because it fails to “specify
the identity of any person making any purported misrepresentation; the time, place[,] and content
of the alleged misrepresentation; and the method by which the misrepresentation was
communicated and to whom.” CBSG Mot. to Dismiss 14. The Court disagrees. The Court is
satisfied Plaintiffs have alleged “who made a misrepresentation to whom and the general content
of that misrepresentation,” Lum, 361 F.3d at 224, and that the Amended Complaint suffices to put
Defendants on the notice of the “precise misconduct with which they are charged,” Seville, 742
F.2d at 791. As recounted above, the Amended Complaint alleges (1) a scheme to defraud
borrowers and their guarantors by luring them into credit arrangements with illegal interest rates,
despite Defendants’ knowledge of the illegality of those rates, (2) the use of the wires (i.e., January,
2017, emails and ACH debits between Defendants and Fleetwood Services furthering the false
18
impression of the enforceability of the unenforceable agreements) to further the scheme, and (3)
Defendants engaged in this scheme with the intent to defraud (which may be averred generally).
As a result, the Court will deny Defendants’ motion to dismiss on this ground.
Even if the Amended Complaint failed to properly allege wire fraud, the Court would not
grant Defendants’ motion to dismiss on the grounds Plaintiffs failed to establish a RICO violation.
An enterprise violates RICO not only by conducting its affairs through a “pattern of racketeering
activity,” but also by engaging in the “collection of unlawful debt.” 18 U.S.C. § 1962(c). An
“unlawful debt” is defined as a debt “(A) incurred or contracted . . . which is unenforceable under
State or Federal law in whole or in part as to principal or interest because of the laws relating to
usury, and (B) . . . which was incurred in connection with . . . the business of lending money . . .
at a rate usurious under State or Federal law, where the usurious rate is at least twice the
enforceable rate.” 18 U.S.C. § 1961(6). Defendants do not challenge Plaintiffs’ allegation the
payments Fleetwood Services made amounted to “collection of unlawful debt” and the Amended
Complaint sufficiently alleges a RICO violation based on this theory.
The Defendants also move to dismiss on the grounds Plaintiffs lack standing to prosecute
their RICO claim. As noted above, RICO standing “requires a plaintiff to show (1) that he was
injured (2) by reason of a violation of § 1962.” Anderson, 396 F.3d at 269. The “injury” element
“can be satisfied by allegations and proof of actual monetary loss, i.e., an out-of-pocket loss.” Maio
v. Aetna, Inc., 221 F.3d 472, 483 (3d Cir. 2000). Three factors guide the assessment of whether an
alleged RICO violation proximately caused the injury: “(1) the directness of the injury, (2) the
difficulty of apportioning damages, and (3) whether there are direct victims of the alleged violation
that could better vindicate the policies underlying RICO.” Knopick v. UBS Fin. Servs., Inc., 121
19
F. Supp. 3d 444, 460 (E.D. Pa. 2015) (citing Holmes v. Sec. Inv’r Prot., 503 U.S. 258, 269-70
(1992)).
Defendants offer little argument in support of their position. They claim the Amended
Complaint “fail[s] to state what damages [Plaintiffs have] actually suffered as a result of
Defendants’ actions.” CBSG Mot. to Dismiss 15; see also PTF Mot. to Dismiss 8 (“Plaintiffs have
not shown any damages caused by Defendants’ actions.”). The Court disagrees. As Plaintiffs point
out, Plaintiffs allege they have been damaged in the amount of the usurious interest payments and
lost profits. Am. Compl. ¶ 121. Both categories of damages are compensable RICO injuries. See
Maio, 221 F.3d 472; see also Frankford Trust Co. v. Advest, Inc., 943 F. Supp. 531, 533-34 (E.D.
Pa. 1996) (“The vast majority of cases that have addressed this issue . . . have ruled that lost profits,
or expectancy damages are recoverable under RICO, subject to proof of proximate causation and
that the damages are not speculative.”). As a result, the Court finds Plaintiffs have alleged a
cognizable loss.
The Court also finds Plaintiffs’ alleged damages—the usurious payments and lost profits—
were proximately caused by Defendants’ RICO violations—Defendants’ pattern of racketeering
activity and collection of unlawful debts. Defendants did not make any argument as to how or why
the factors discussed in Knopick and Holmes weigh against a finding of proximate cause.
Accordingly, the Court need not analyze them in any great depth, other than to say the usurious
payments and lost profits appear to stem directly from Defendants’ alleged violations of both
aspects of § 1962(c), the Court perceives no potential difficulty apportioning damages (at least at
this stage), and there does not appear to be a more directly injured party. Knopick, 121 F. Supp. 3d
at 460. As a result, the Court finds the Amended Complaint alleges sufficient proximate cause.
20
The Amended Complaint sufficiently alleges an association-in-fact enterprise, RICO
violations, and damages sufficient to establish Plaintiffs’ standing to bring their claim. The Court
will, therefore, deny Defendants’ motions to dismiss as they pertain to Plaintiffs’ RICO claim.
Having addressed the sufficiency of Plaintiffs’ RICO claim, the Court turns to the claims
for specific performance (Count V) and negligent misrepresentation (Count VII). CBSG moves to
dismiss Count V of the Amended Complaint, which is entitled “Contract,” and seeks recovery
based on Paragraph 1.10 of the Factoring Agreement. The Court will dismiss Count V, but not for
the reasons advanced by CBSG. Count V is properly construed as a claim for specific performance
of Paragraph 1.10. However, Texas law
15
does not recognize a cause of action for specific
performance independent of a claim for breach of the underlying contract, and Plaintiffs have not
alleged CBSG breached Paragraph 1.10 by retaining the difference between what it was paid in
interest and the legal maximum rate of interest after a court characterized the Factoring Agreement
as a loan. Stafford v. S. Vanity Magazine, Inc., 231 S.W.3d 530, 535 (Tex. App. 2007) (“Specific
performance is an equitable remedy that may be awarded upon a showing of breach of contract.”).
Thus, this stand-alone claim for specific performance shall be dismissed without prejudice to
reassertion as a measure of damages.
Finally, Defendants’ motions challenge Plaintiffs’ claim for negligent misrepresentation
(Count VII), arguing that the Amended Complaint is too vague. CBSG offers no legal citation in
support of its argument, and PTF only gestures towards Rule 9(b) without explaining how or why
15
The Court applies Texas law to this claim because it is tied directly to the Factoring Agreement,
which the Court found is governed by the law of Texas, and because the law of Texas would apply
in the absence of the transfer from the Northern District of Texas to this Court. See Van Dusen v.
Barrack, 376 U.S. 612, 639 (1964) (“[W]here the defendants seek transfer, the transferee district
court must be obligated to apply the state law that would have been applied if there had been no
change in venue. A change of venue under § 1404(a) generally should be, with respect to state law,
but a change in courtrooms.”).
21
that rule would apply. See CBSG Mot. to Dismiss 15; PTF Mot. to Dismiss 8. The Court will not
dismiss this aspect of the Amended Complaint. Although Texas law appears to govern the
substantive aspects of the claim, Van Dusen, 376 U.S. at 639, it is not clear—and Defendants have
not explained—whether courts in the Fifth Circuit apply Rule 9(b)’s specific pleading
requirements to negligent misrepresentation claims arising under Texas law. Compare Benchmark
Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003) (noting “[a]lthough Rule
9(b) by its terms does not apply to negligent misrepresentation claims, this court has applied the
heightened pleading requirements when the parties have not urged a separate focus on the negligent
misrepresentation claims”), with Am. Realty Trust, Inc. v. Hamilton Lane Advisors, Inc., 115 F.
App’x 662, 668 (5th Cir. 2004) (“Rule 9(b)’s stringent pleading requirements should not be
extended to causes of action not enumerated therein. Accordingly, plaintiffs’ negligent
misrepresentation claims are only subject to the liberal pleading requirements of Rule 8(a).”). In
light of Defendants’ failure to explain why the allegations are too vague or whether Rule 9(b)
applies to this claim—and the Court’s conclusion that the RICO claim which also references
Defendants’ alleged misrepresentations is sufficient to go forward—the Court will deny the
motions to dismiss.
CONCLUSION
In light of the foregoing, the Court granted CBSG’s motion to dismiss as it pertains to
Count V, and denied it in all other respects, and denied PTF’s motion to dismiss in its entirety.
BY THE COURT:
/s/ Juan R. Sánchez
Juan R. Sánchez, C.J.
22
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