Gemma v. Sweeney

          For Plaintiff: Max Wistow, Esq.

          For Defendant: John B. Daukas, Esq.; William Mark Russo, Esq.; William M. Dolan, Esq.

          DECISION

          STERN, J.

         Richard L. Gemma, as Receiver for BR Asset Management, LLC, f/k/a Benrus, LLC (BRAM or Plaintiff), filed this suit, alleging Michael F. Sweeney (Sweeney), Duffy & Sweeney, Ltd. (D&S), PalmLake, Group, LLC (PalmLake), and Barry Gertz (Gertz) (collectively Defendants) engaged in actionable lending practices. Before this Court are Defendants' respective motions to dismiss Plaintiff's Second Amended Complaint (Complaint or SAC) pursuant to Super. R. Civ. P. 12(b)(6).^[1]

         I

         Facts

         This Court will briefly summarize the facts as alleged in the Complaint. BRAM was a retailer that designed, marketed, branded, and sold consumer products, including watches and backpacks. SAC ¶ 7. In or around 2014, and all relevant times thereafter, Defendants Sweeney and D&S provided legal counsel and representation to BRAM. Id. ¶¶ 8, 9. In or around April of 2016, BRAM was projecting $1, 000, 000 in sales but lacked the cash flow to pay expenditures relating to production costs; Defendants Sweeney and D&S were aware of BRAM's financial situation. Id. ¶¶ 10-11. By April 20, 2016, Defendants Sweeney, D&S, and BRAM had reached a financing agreement, in principle, pursuant to which BRAM would receive $499, 621.14 to fund the production of backpacks. Id. ¶ 12. According to Plaintiff, the parties understood the financing arrangement was a "bridge loan." Id. Defendants internally referred to the financing transaction as a loan. Id. ¶ 13.

         On April 22, 2016, Defendants Sweeney and D&S notified BRAM that some of the funds had been advanced in the amount of $149, 886.34. Id. ¶ 15. On that same day, Defendant Sweeney signed and submitted PalmLake's Articles of Organization to the Florida Secretary of State, identifying himself as the authorized Manager of PalmLake. Id. ¶ 14.^[2] On April 23, 2016-after having already advanced funds-BRAM and Defendant Sweeney, purportedly on behalf of PalmLake, executed a financing transaction styled as a sale of BRAM's backpack purchase orders to Defendant PalmLake, for a total purchase price of $499, 621.14 (Agreement). SAC, Ex. A ¶ 2. Defendants Sweeney and D&S negotiated and drafted the Agreement, which provided for an initial advance of $149, 886.34, a "fee" to PalmLake equal to 15% of the advances within ninety (90) days, and a Florida choice-of-law provision. SAC ¶¶ 19, 21, 44, 45.

         On May 5, 2016, Defendant Sweeney personally advanced $22, 500 to BRAM in addition to the purchase price to fund BRAM's production of watches. Id. ¶ 23. On or about May 20, 2016, BRAM and Defendant Sweeney, purportedly on behalf of PalmLake, entered into a supplemental financing agreement (First Addendum), drafted by Defendants Sweeney and D&S, which like the Agreement, contained a Florida choice-of-law provision and provided for a 15% "fee" due to PalmLake. Id. Ex. B ¶¶ 1, 2, 7. The First Addendum reflected the additional $22, 500 advance. Id. ¶ 1. On May 20, 2016, the balance of the original purchase price was purportedly advanced. Id. Ex. B ¶ 1.^[3]

         On June 23, 2016, Expeditors, a shipping and delivery company, emailed a request for $77, 533.00 to BRAM, copying Defendant Sweeney, who in turn forwarded the email to Defendant Gertz, writing, "[w]e need to advance this for shipping and duties for the large backpack order we funded . . . I will wire today so not to delay and you can send me half." Id. ¶¶ 32, 33. On June 23, 2016, Defendant Sweeney responded to Expeditors, stating that he would be "wiring the $77, 553 . . . from [his] UBS account." Id. ¶ 34. Defendant Gertz replied to Defendant Sweeney, stating, "I will write [sic] half to your personal account." Id. ¶ 35. Defendant Sweeney did, in fact, wire the money on June 23, 2016. Id. ¶ 34. On or about June 28, 2016, BRAM and Defendant Sweeney, purportedly on behalf of PalmLake, entered into a supplemental financing agreement (Second Addendum, together with First Addendum, "Addenda"), drafted by Defendants Sweeney and D&S, which like the Agreement, contained a Florida choice-of-law provision and provided for a 15% "fee" due to PalmLake. Id. Ex. C ¶¶ 2, 7. The Second Addendum reflected the additional $77, 533 advance. Id.

         Beginning in July of 2016, Defendants Sweeney, D&S, and D&S employees (acting on their behalf) demanded and collected payments from BRAM and subsequently deposited amounts collected into D&S's "Client Trust Account" for BRAM. Id. ¶¶ 49-52. Most of the payments came from BRAM's account debtors. Id. ¶ 51. After entering the Trust Account, D&S caused substantially all funds to be distributed directly to Defendants Sweeney and Gertz, individually, and not to PalmLake. Id. ¶ 53. BRAM repaid a total of $689, 625.26, plus an additional $4, 000 "legal fee." Id. ¶ 56.

         Plaintiff filed suit in the above-captioned matter on May 25, 2018, and an amended complaint on July 30, 2018. Plaintiff filed the operative Second Amended Complaint on April 25, 2019. Defendants filed their respective 12(b)(6) motions. On July 19, 2019, this Court heard oral argument on those motions and reserved decision.

         II

         Standard of Review

         '"The sole function of a motion to dismiss is to test the sufficiency of the complaint.'" Palazzo v. Alves, 944 A.2d 144, 149 (R.I. 2008) (quoting Rhode Island Affiliate, ACLU, Inc. v. Bernasconi, 557 A.2d 1232, 1232 (R.I. 1989)). A court must assume the truth of a complaint's allegations and "examine the facts in the light most favorable to the nonmoving party." A.F. Lusi Construction, Inc. v. Rhode Island Convention Center Authority, 934 A.2d 791, 795 (R.I. 2007) (citations omitted). This Court may only grant a motion to dismiss upon being convinced that a plaintiff would not be "entitled to relief under any conceivable set of facts." Estate of Sherman v. Almeida, 747 A.2d 470, 473 (R.I. 2000). Our Supreme Court has yet to adopt the federal courts' recently altered interpretation of the legal standard employed with respect to a Rule 12(b)(6) motion to dismiss. Chhun v. Mortgage Electronic Registration Systems, Inc., 84 A.3d 419, 422 (R.I. 2014) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Nevertheless, allegations that are "more in the nature of legal conclusions rather than factual assertions are not necessarily assumed to be true." DiLibero v. Mortgage Electronic Registration Systems, Inc., 108 A.3d 1013, 1016 (R.I. 2015) (citation omitted).

         III

         Analysis

         A

         Usury (Rhode Island Law)

         Count II asserts usury claims against all Defendants pursuant to Rhode Island's Interest and Usury statute set forth in G.L. 1956 §§ 6-26-1 et seq. Plaintiff alleges "Defendants Sweeney, Gertz, and purportedly PalmLake loaned money to BRAM at an interest rate in excess of the maximum rate of interest in Rhode Island . . . ." SAC ¶ 74. The applicable statute provides,

"no person, partnership, association, or corporation loaning money to or negotiating the loan of money for another, except duly licensed pawnbrokers, shall, directly or indirectly, reserve, charge, or take interest on a loan, whether before or after maturity, at a rate that shall exceed the greater of twenty-one percent (21%) per annum." Sec. 6-26-2(a).

         "Contracts in violation of § 6-26-2 are usurious and void, and the borrower is entitled to recover any amount paid on the loan." NV One, LLC v. Potomac Realty Capital, LLC, 84 A.3d 800, 805 (R.I. 2014).

         1

         Gertz

         Gertz moves to dismiss Count II, arguing that he did not loan money or receive interest in connection with the subject financing transactions; this argument runs counter to the well-settled principles applicable on a 12(b)(6) motion. This Court must assume the truth of all facts alleged by Plaintiff at this stage of the litigation-even those made with "great generality." See Haley v. Town of Lincoln, 611 A.2d 845, 848 (R.I. 1992). "Vagueness, lack of detail, conclusionary statements, or failure to state facts or ultimate facts" will not justify dismissal at the pleadings stage. Butera v. Boucher, 798 A.2d 340, 353 (R.I. 2002). Plaintiff has repeatedly alleged Gertz, in his individual capacity, loaned money at usurious interest rates. For example, Plaintiff alleges "Defendants Sweeney, Gertz, and purportedly PalmLake loaned money to BRAM" at a usurious rate (SAC ¶ 74); "[a]ll Defendants reserved, charged, demanded and took from BRAM interest in excess of the maximum rate" (SAC ¶ 75) (emphasis added); and "Defendants Sweeney, Gertz, and purportedly PalmLake willfully and knowingly reserved, charged, or took for a loan or advance of money." SAC ¶ 79 (emphasis added). Determining which parties extended credit and in what capacity is a fact-based inquiry not appropriate for resolution on a motion to dismiss. Cf. Federated Capital Corp. v. Lushinks, No. CV136034997S, 2013 WL 3315766, at *3 (Conn. Super. Ct. June 11, 2013) (citation omitted) (opining that determination of whether defendants contracted in individual capacity was a question properly reserved for the jury).

         That the Agreement and its Addenda list PalmLake as the supposed financier does not alter this Court's analysis. Plaintiff has alleged such documentation "did not accurately reflect the true arrangement between the parties and was intended to disguise a usurious transaction." SAC ¶ 18.^[4]Under strikingly analogous circumstances, courts have credited a complainant's allegations that the actual lender was not, in fact, the one identified in the financing documents. Eul v. Transworld Systems, No. 15 C 7755, 2017 WL 1178537, at *7 (N.D. Ill. Mar. 30, 2017) ("It is plausible to infer from Plaintiffs' allegations that the identification of Chase or Bank One as lender on the loan documents was a self-serving statement, insofar as it facilitated the alleged [] scheme."); Ubaldi v. SLM Corp., 852 F.Supp.2d 1190, 1203 (N.D. Cal. 2012). A court need not accept the truth of matters asserted in appended documents without considering, among other things, who authored the documents, their reliability, and the plaintiff's purpose for attaching the documents in the first instance. Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 455 (7^th Cir. 1998). Particularly considering our Supreme Court's recent warning against relying on a loan's face to assess whether a transaction, in substance, functioned as a usurious one, NV One, LLC, 84 A.3d at 805, this Court must proceed with skepticism in relying on the purported financing documents at this juncture. The Complaint sufficiently alleges Gertz loaned money and received usurious interest. Thus, Gertz's motion is denied.

         2

         D&S

         Much like Gertz, D&S moves to dismiss Count II, contending, among other things, that D&S did not profit from the alleged loan and served merely as PalmLake's agent and Plaintiff's attorney. Yet, this argumentation assumes the Agreement and Addenda conclusively establish PalmLake acted as the sole financier; the Court is not at liberty to make this factual assumption. See supra, § III(A)(1). Therefore, the Court cannot determine if D&S acted as a lender receiving usurious proceeds or an attorney receiving reasonable attorney's fees.

         Indeed, Plaintiff has alleged facts directly contrary to the ones D&S would have this Court adopt. Plaintiff alleges, "Defendant Sweeney was acting for himself and on behalf of D&S" (SAC ¶ 61), and that Defendant Sweeney loaned money to BRAM. Id. ¶ 74. Plaintiff has also alleged "[a]ll Defendants acted in concert in (i) making the loans; (ii) demanding payment on the loans; and (iii) achieving receipt of funds in excess of the 21% per annum maximum interest rate . . . ." Id. ¶ 76.^[5] The agency and grouping issues embedded in Plaintiff's allegations simply cannot be resolved through a 12(b)(6) motion. Scarvalone v. Kowalewicz, 26 A.D.2d 885, 885-86 (N.Y.App.Div. 1966) (affirming denial of motion to dismiss by co-owner of property where complaint alleged dealings with one co-owner conducting for and on behalf of other co-owner). At this stage of the proceedings, this Court cannot discern the parties' respective roles without drawing impermissible inferences against Plaintiff. D&S's motion is accordingly denied.

         3

         Sweeney

         Defendant Sweeney moves to dismiss Count II, arguing that the Agreement upon which the Receiver predicates his usury claim contains a Florida choice-of-law provision, thereby precluding Plaintiff from maintaining a Rhode Island-based usury claim. He argues that the Agreement and its Addenda reasonably designate Florida law because "the financier, PalmLake, is a Florida company organized under Florida law and PalmLake and BRAM are two sophisticated companies with the ability to choose the law that would govern their relationship." Mem. Supp. of Def. Sweeney's Mot. Dismiss 21. Plaintiff counters by asserting, inter alia, that the choice-of-law provision is unenforceable because the individual Defendants organized PalmLake "for the sole purpose of evading Rhode Island law and never treated [PalmLake] as a separate legal entity . . . ." SAC ¶ 71.

         "As a general rule, parties are permitted to agree that the law of a particular jurisdiction will govern their transaction." Sheer Asset Management Partners v. Lauro Thin Films, Inc., 731 A.2d 708, 710 (R.I. 1999). However, Rhode Island law places certain limitations on a party's right to have a contract enforced in accordance with the law of his or her choosing. Id.

"It is almost universally held that the parties, in exercising the power to select the jurisdiction whose law they intend to have control the obligations, rights, and duties under their contract, must act in good faith and with no purpose of evasion or of avoiding some provision of the law of the place of making." Owens v. Hagenbeck-Wallace Shows Co., 58 R.I. 162, 173, 192 A. 158, 164 (1937).

         Furthermore, the parties may not contrive or create fictitious contact with an otherwise non-interested jurisdiction to validate a choice-of-law provision. Id. (explaining the chosen state's laws must have a "real, and not a mere fictitious, connection with the subject-matter of the transaction"); see also 125 A.L.R. 482 § 1 (noting a court must apply the parties' chosen law "provided it is the law of a place with which some of the vital elements of the transaction are connected . . . and provided it has not been selected by the parties as a means of evading the usury law of the state to which the transaction would otherwise be referable"). Our Supreme Court has cited the Restatement, which provides,

'"the law of the state chosen by the parties to govern their contractual rights and duties will be applied . . . unless . . . the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice."' Sheer Asset Management Partners, 731 A.2d at 710 (quoting ...