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Funding Metrics, LLC v. Decision One Debt Relief LLC

United States District Court, S.D. Florida

August 9, 2019

FUNDING METRICS, LLC, Plaintiff,
v.
DECISION ONE DEBT RELIEF LLC; D1 SERVICING GROUP, LLC; VERITAS LEGAL PLAN, INC.; ANGELO ANZALONE; VICTOR CASTALDO; JOHN SANDOVAL; and STEVEN SCORSONE, Defendants.

          OMNIBUS ORDER

          ROY K. ALTMAN, UNITED STATES DISTRICT JUDGE.

         THIS MATTER comes before the Court upon (1) the Motion to Dismiss [the] Amended Complaint (“MTD”), filed by Decision One Debt Relief, LLC (“DDR”), and John Sandoval (“Sandoval”) on April 8, 2019 [ECF No. 87][1]; (2) D1 Servicing Group, LLC's (“D1”) Motion to Join Motion to Dismiss (“Mot. Join”), filed on June 18, 2019 [ECF No. 112][2]; and (3) D1's Motion to Set Aside Clerk's Default (“Mot. Set Aside”), filed on June 21, 2019 [ECF No. 120].[3] The Court held a hearing on these motions on June 24, 2019, at which the parties presented their oral arguments. The Court has carefully considered the parties' briefing, the arguments of counsel, and the applicable law.

         I. THE LAW

         “To survive a motion to dismiss [under 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) (alteration added) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To meet this “plausibility standard, ” a plaintiff must “plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (alteration added) (citing Twombly, 550 U.S. at 556). Pleadings must contain “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (citation omitted). “The mere possibility the defendant acted unlawfully is insufficient to survive a motion to dismiss.” Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1261 (11th Cir. 2009) (citation omitted), abrogated on other grounds by Mohamad v. Palestinian Auth., 566 U.S. 449 (2012).

         It is likewise well-established that, on a motion to dismiss, the Court must construe the complaint in the light most favorable to the plaintiff and accept the plaintiff's factual allegations as true. See Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997) (citing SEC v. ESM Grp., Inc., 835 F.2d 270, 272 (11th Cir. 1988)). But unsupported factual allegations and legal conclusions receive no such deference. See Iqbal, 556 U.S. at 679 (“While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”).

         II. THE FACTS

         The Amended Complaint contains four counts: (1) Count I alleges a violation of 18 U.S.C. § 1962(c) (“RICO”) against all of the Defendants; (2) Count II raises a tortious interference claim against DDR and Sandoval; (3) Count III levies a conversion claim against DDR and Sandoval; and (4) Count IV, relying on New York law, alleges that DDR and Veritas Legal Plan, Inc. (“Veritas”) accepted a “fraudulent conveyance.” See generally Am. Compl. [ECF No. 75].

         The Plaintiff, Funding Metrics, LLC (“FM”), provides “cash advance funding” to merchants, many of whom are small businesses. Am. Compl. ¶¶ 2, 22-28.[4] FM also enters into separate security agreements with the merchants, by which FM acquires a security interest in the merchants' receivables, inventory, and other assets. Am. Compl. ¶¶ 25-26. DDR, on the other hand, “presents itself as being able to renegotiate and restructure merchant agreements with FM.” Id. ¶ 2. FM describes DDR as a “debt relief” company that “persuades merchants to stop paying their cash advance funders based on its representations that DDR will negotiate a reduction in their obligations.” MTD Resp. at 4 (citing Am. Compl. ¶¶ 2-3, 29-41). Sandoval is the founder and CEO of DDR. Am. Compl. ¶ 18.

         FM contends that DDR induces merchants, by mail and e-mail, to “stop paying their cash advance providers and [to] pay DDR instead, based on representations that DDR will provide the merchants with negotiation services and [that] Veritas will defend them.” MTD Resp. at 5 (citing Am. Compl. ¶¶ 2-8, 37-43). According to the Amended Complaint, DDR induced 30 of FM's merchant-clients to breach their contracts with FM-resulting in losses to FM of “over $1, 000, 000, ” as well as “injury to the merchants, who end up having paid DDR for nothing while getting deeper into debt to FM.” MTD Resp. at 5 (citing Am. Compl. ¶¶ 27, 42, 77-78).

         III. ANALYSIS

         A. Count 1: Civil RICO

         To state a viable civil RICO claim, FM must allege: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). In support of its attack on FM's RICO claim, DDR raises three principal arguments. First, it says the RICO claim is “unripe” because FM has not yet “foreclosed on [its] collateral” by suing the defaulting merchants. MTD at 8-9. Second, it contends that FM has not established the necessary degree of distinctness between the “persons” comprising the enterprise and the enterprise itself. MTD at 18. Third, it argues that FM cannot maintain its RICO claim against the Defendants because FM was not directly harmed by the Defendants' alleged fraud. MTD at 9-12.

         DDR's first and second arguments should not long detain us. First, it is well-settled that a civil RICO claim may accrue “even when the amount of loss may be reduced by other lawsuits” because the “possibility of recovery on other claims affects the amount of RICO damages, not the accrual of the RICO claim.” See Liquidation Comm'n of Banco Intercontinental, S.A. v. Renta, 530 F.3d 1339, 1350 (11th Cir. 2008). Accordingly, the Court rejects DDR's suggestion that FM's decision not to foreclose upon the merchants' collateral somehow precludes FM, as a matter of law, from pursuing a RICO claim against DDR directly. Second, the allegations in the Amended Complaint make clear that the alleged RICO enterprise consists of two separate corporate entities-DDR and Veritas-working together with two different individuals-Sandoval and Anzalone. Am. Compl. ¶¶ 1-11. Because the alleged enterprise is not merely between either DDR and its agents or Veritas and its agents, the purported enterprise does not, as DDR suggests, lack in distinctiveness. See United States v. Goldin Indus., Inc., 219 F.3d 1268, 1270 (11th Cir. 2000) (finding that the plain language of § 1962(c) envisions two separate entities and requiring that each defendant be separate and distinct from the “enterprise”). The Court therefore rejects DDR's second argument for the dismissal of FM's RICO claim.

         On its third attempt, though, DDR hits its target. A civil RICO plaintiff must establish that the defendant's racketeering activity proximately caused his injuries. See Beck v. Prupis, 162 F.3d 1090, 1095 (11th Cir. 1998). And it is axiomatic that “proximate cause” requires a direct relationship between the “injury asserted and the injurious conduct alleged.” Holmes v. Sec. Inv'r Prot. Corp., 503 U.S. 258, 268 (1992). In describing this “directness requirement, ” the Supreme Court has articulated the following three principles (the “Holmes principles”) that lower courts should consider in evaluating the sufficiency of a RICO plaintiff's proximate-cause averments:

First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent, factors. Second, quite apart from problems of proving factual causation, recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.

Holmes, 503 U.S. at 269. At its core, then, Holmes stands for the proposition that “a plaintiff who complain[s] of harm flowing merely from the misfortunes visited upon a third person by the defendant's [bad] acts [is] generally said to stand at too remote a distance to recover.” Id. at 268-69.

         Fourteen years after Holmes, the Supreme Court, in Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006), adopted five “motivating principles”-principles the Eleventh Circuit has deployed as factors[5]-that animate this “directness requirement”: (1) “the difficulty that can arise when a court attempts to ascertain the damages caused by some remote action”; (2) “the speculative nature of the proceedings that would follow if [the plaintiff] were permitted to maintain its claim”; (3) “whether the alleged harm could have resulted from factors other than [the plaintiff's] alleged acts of fraud”; (4) “any appreciable risk of duplicative recoveries”; and (5) “whether the immediate victims of [the] alleged RICO violation can be expected to vindicate the laws by pursuing their own claims.” Anza, 547 U.S. at 458-60 (cleaned up) (the “Anza factors”).

         For its part, the Eleventh Circuit has repeatedly employed either the five Anza factors or the three Holmes principles to dispose of civil RICO claims where, as here, the defendant's conduct did not directly cause the plaintiff's injuries. So, for example, in Green Leaf Nursery v. E.I. DuPont De Nemours & Co., 341 F.3d 1292 (11th Cir. 2003), the plaintiff argued that the defendants had engaged in RICO violations by “hid[ing] and falsif[ying]” evidence in several lawsuits around the country. Dismissing the RICO claim, the Eleventh Circuit held that the “directness inquiry is not a question of specific intent.” Id. at 1307. Indeed, whether or not the defendants had specifically intended to obstruct justice or tamper with witnesses, the salient question, the court said, was whether the defendant's alleged pattern of racketeering activity had directly caused the plaintiff's injuries. Id. at 1308. Accord Bivens Gardens Office Bldg., Inc. v. Barnett Banks of Fla., Inc., 140 F.3d 898 (11th Cir. 1998) (dismissing shareholders' civil RICO claims against the company because the shareholder-plaintiffs were not the targets of the company's alleged pattern of racketeering activity); Johnson Enterprises of Jacksonville, Inc. v. FPL Group, 162 F.3d 1290 (11th Cir. 1998) (plaintiff could not assert a RICO claim based on fraudulent misrepresentations the defendant made to third parties); Pelletier v. Zweifel, 921 F.2d 1465 (11th Cir. 1991) (holding that, where the predicate acts supporting a civil RICO claim are mail or wire fraud, the plaintiff must have been a target of the scheme to defraud); Allocco v. City of Coral Gables, 221 F.Supp.2d 1317 (S.D. Fla. 2002), aff'd, 88 Fed.Appx. 380 (11th Cir. 2003) (same); Halpin v. Crist, 405 Fed.Appx. 403, 406 (11th Cir. 2010) (rejecting civil RICO claims premised on defendants' scheme to defraud the Florida Department of Corrections because, although the scheme resulted in the plaintiff-prisoners paying more for certain goods, a RICO plaintiff “may not assert misrepresentations that were directed toward another person or entity, but [rather must] be the target of the scheme to defraud”).

         As in many of these cases, all of the Anza factors weigh strongly in DDR's favor here. Starting with the first and third factors-“the difficulty that can arise when a court attempts to ascertain the damages caused by some remote action” and “whether the alleged harm could have resulted from factors other than [the plaintiff's] alleged acts of fraud”-no court could ever reliably conclude that it was DDR's conduct that directly caused FM's damages, because there are, with respect to each individual merchant, at least three other potential, intervening causes: viz. (1) the merchants' independent decision, in the first instance, to accept DDR's representations and to enter into contracts with DDR;[6] (2) the merchants' subsequent, independent decision to breach their contracts with FM;[7] and (3) the merchants' final, independent decision, after breaching, not to attempt to reconcile with FM by, among other things, settling with FM, either in full or at a discount, see Am. Compl. ¶¶ 42(f)-(g), 42(m) (averring that some of the merchants reached a separate agreement with FM to settle their contractual disputes “without the assistance of DDR negotiators”). Indeed, with or without DDR, some or all of the merchants may well have decided to breach their contractual obligations with FM sua sponte. By this same token, even merchants who knew or strongly suspected that DDR's statements were fraudulent might nevertheless have used the opportunity presented by DDR to cut ties with FM-either because they perceived FM's rates as usurious or for some other legitimate business reason. Cf. Anza, 547 U.S. at 459 (“Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [FM's] lost sales were the product of [DDR's RICO violation].”). In any of these highly plausible scenarios, DDR's alleged RICO violations would have had no meaningful effect-that is to say, no direct effect-on FM's injuries. Because, in short, the merchants at all times retained the power either to remain with FM or, as the case may be, to breach, their intervening actions are precisely the sort of “independent factors” that, as Anza instructs, break the causal chain.

         For this same reason, the second Anza factor-“the speculative nature of the proceedings that would follow if [the plaintiff] were permitted to maintain its claim”-redounds heavily to DDR's benefit. After all, whether, and to what extent, any or all of the merchants' intervening decisions contributed to FM's injuries-or whether, instead, FM's injuries were caused entirely by DDR's misrepresentations-is impossible (or, at least, very difficult) to say.

         The fourth factor-the risk of “duplicative recoveries”-likewise supports dismissal. Whatever happens here, FM will retain the right to bring indisputably cognizable breach-of-contract claims against the merchants directly. Allowing it to proceed against DDR, also, leaves open the possibility that, when all is said and done, FM's RICO claims will have left it (unduly) enriched by “duplicative recoveries.” Here, FM halfheartedly complains that some of these merchants may be insolvent. MTD Resp. at 7. And so they may be. But some others, as FM concedes, are not. Id. In either event, difficulties in collection do not render FM's double recoveries-once against the merchant and a second time against DDR-any less “duplicative.”

         The fifth and final Anza factor-“whether the immediate victims of [the] alleged RICO violation can be expected to vindicate the laws by pursuing their own claims”-similarly militates in favor of dismissal. The client-merchants are, in this case, the “immediate victim better situated to sue.” Bridge, 553 U.S. at 658. And, as the Anza Court noted, “directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.” Id. at 460 (cleaned up).[8]

         Moreover, nothing in the Amended Complaint suggests that DDR's purported scheme specifically targeted FM. Instead, as relevant here, the Amended Complaint makes the following allegations: (1) the direct targets of DDR's fraudulent scheme were the merchants-not FM; (2) DDR only ever made false and fraudulent representations to the merchants-again, never to FM; and (3) all of the many calls, e-mails, and correspondence that, together, constitute the sine qua non of DDR's fraudulent scheme were, again, between DDR and the merchants-not FM. Am. Compl. ¶¶ 1, 3, 7, 9, 62. Notably, the Amended Complaint also includes no allegations that DDR's “pattern of racketeering activity” ever targeted, or was in any way intended to defraud, FM. Cf. Am. Compl. ¶ 3 (“The Merchants are in fact systematically defrauded . . . DDR has established a deceptive business practice of making misleading and often outright false representations to merchants . . . .”). To the contrary, the Amended Complaint makes plain that DDR “parasit[ically]” targeted, not just FM's merchant-clients, but also merchants who entered into cash advance agreements with other funders. See Am. Compl. ¶ 92. In short, DDR's fraudulent conduct was “aimed primarily at a third party”-the merchants-and not at FM. Green Leaf Nursery, 341 F.3d at 1307.

         Against all this, FM says that Holmes and Anza have been substantially undermined by the Supreme Court's decision in Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008). Bridge, in FM's view, stands for the proposition that a civil RICO plaintiff “need not be the sole, or even primary ‘target' of fraud.” MTD Resp. at 15. At oral argument, FM even suggested that Bridge somehow eliminated or significantly modified Anza's “directness requirement.” But Bridge did no such thing. Quite to the contrary, Bridge specifically adopted the “proximate-cause principles articulated in Holmes and Anza.” Bridge, 553 U.S. at 657-58.

         In fact, far from altering the Court's proximate-cause analysis, Bridge involved the entirely separate question of whether § 1962(c)-the statute at issue here-requires plaintiffs to “show that they relied on petitioners' fraudulent misrepresentations.” Bridge, 553 U.S. at 648. At least two circuit courts of appeals-the Sixth and the Eleventh-had, over the years, read this “reliance” element into the statute.[9] In holding that § 1962(c) contains no such “reliance” element, the Court explained: “If petitioners' proposed requirement of first-party reliance seems to come out of nowhere, there is a reason: Nothing on the face of the relevant statutory provisions imposes such a requirement.” Id. To the contrary, “[u]sing the mail to execute or attempt to execute a scheme to defraud is indictable as mail fraud, and hence a predicate act of racketeering under RICO, even if no one relied on any misrepresentation. And one can conduct the affairs of a qualifying enterprise through a pattern of such acts without anyone relying on a fraudulent misrepresentation.” Id. (cleaned up).

         Having rejected the defendants' principal argument that § 1962(c) contains a reliance element, the Court turned to the defendants' alternative position-that “a plaintiff who brings such a claim must show that it relied on the defendant's misrepresentations in order to establish the requisite element of causation.” Id. at 653. Here, the Court applied both the Anza factors and the Holmes principles to conclude that the plaintiffs had, in fact, established the requisite level of directness between the defendants' conduct and their own injuries. Id. at 654-60. In this respect, Bridge's holding was ...


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