Court filing
Benworth FL Motion to Dismiss FRBSF Complaint (D.E. 169) — OTO Analytics v. Benworth
Record facts
| Court | U.S. District Court for the District of Puerto Rico |
|---|---|
| Filed | 2024-10-01 |
U.S. District Court for the District of Puerto Rico · No. 3:23-cv-01034-GMM · Doc. 169 · 2024-10-01 · Docket on CourtListener
Summary
Benworth Capital Partners, LLC's motion to dismiss the Federal Reserve Bank of San Francisco's Complaint and Complaint in Intervention, filed October 1, 2024 as Document 169 in OTO Analytics, LLC v. Benworth Capital Partners PR, LLC, et al., Civil No. 23-01034 (GMM), in the U.S. District Court for the District of Puerto Rico. It recounts PPP Liquid Facility Letters of Agreement executed May 4, 2020, January 14, 2021 and January 30, 2023, incorporating Operating Circular No. 10, under which the Federal Reserve advanced approximately $4.3 billion used to fund over 300,000 PPP loans. It states that an arbitrator's final award of June 11, 2024 required Benworth FL to pay Womply nearly $118 million and that roughly $67 million of principal is outstanding. It argues the four alleged breaches are pleaded conclusorily and that the Federal Reserve uses group pleading. The filing is 20 pages.
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Full text
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
OTO ANALYTICS, LLC,
Plaintiff,
v.
BENWORTH CAPITAL PARTNERS PR,
LLC; BENWORTH CAPITAL
PARTNERS, LLC; BERNARDO
NAVARRO and CLAUDIA NAVARRO,
Defendants.
Civil No. 23-01034 (GMM) cons.
Civil No. 24-01313 (GMM)
FEDERAL RESERVE BANK OF SAN
FRANCISCO,
Plaintiff-Intervenor
v.
OTO ANALYTICS, LLC; BENWORTH
CAPITAL PARTNERS PR, LLC, et al.,
Defendants in Intervention.
FEDERAL RESERVE BANK OF SAN
FRANCISCO,
Consolidated Plaintiff,
v.
BENWORTH CAPITAL PARTNERS PR,
LLC, et al.,
Consolidated Defendants.
DEFENDANT BENWORTH CAPITAL PARTNERS, LLC’S MOTION TO DISMISS THE
FEDERAL RESERVE’S COMPLAINT AND COMPLAINT IN INTERVENTION
TO THE HONORABLE COURT:
COMES NOW Defendant Benworth Capital Partners, LLC (“Benworth FL”), through the
undersigned counsel, respectfully requests the dismissal of the Federal Reserve Bank of San
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 1 of 20
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Francisco’s (“Federal Reserve”) Complaint [Case No. 24-cv-01313, D.E. 1] (“Complaint” or
“Compl.”) and Complaint in Intervention [Case No. 23-cv-01034, D.E. 146] (“Complaint in
Intervention” or “Compl. Int.”) (collectively, the “Complaints”)1 and as grounds therefore
STATES and PRAYS as follows:
BACKGROUND
To facilitate the Paycheck Protection Program (“PPP”) that was implemented by the
United States Small Business Administration (“SBA”), the Federal Reserve extended credit to
eligible financial institutions—like Benworth FL—that originated loans under the PPP Liquid
Facility. See Compl. ¶¶ 18–19; Compl. Int. ¶¶ 9–10. To that end, Benworth FL and the Federal
Reserve executed the PPP Liquid Facility Letters of Agreement on May 4, 2020, January 14,
2021, and January 30, 2023 (“LOA”), each of which contained substantially the same language
and incorporated the Reserve Bank’s Operating Circular No. 10 (“Operating Circular”) (the
LOA and Operating Circular, together, the “Agreements”). See Compl. ¶¶ 19–20 & Ex. A–B;
Compl. Int. ¶¶ 10–11 & Ex. A–B.
Beginning in February 2021, Benworth FL contracted with Oto Analytics (“Womply”) to
use its services to collect loan files from borrowers to originate PPP loans. See Compl. ¶¶ 39, 42;
Compl. Int. ¶¶ 29, 32. Retrieving a borrower’s loan files from Womply was of “particular
importance, as the SBA will only provide payment to Benworth [FL] on a given PPP loan that is
not eligible for forgiveness once the corresponding guaranty application is approved.” See
Compl. ¶ 43; Compl. Int. ¶ 38. If the SBA rejected the application to guaranty a PPP loan—say,
because Womply failed to provide Benworth FL with a borrower’s complete loan file or if
Womply provided Benworth FL a fraudulent loan file—then Benworth FL would not receive any
1
This Court granted the Federal Reserve’s request to consolidate Case Numbers 24-cv-01313 and 23-cv-01034.
[Case No. 23-cv-01034, D.E. 155].
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 2 of 20
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payment on the loan from the SBA for the advances the Federal Reserve provided. See
Compl. ¶¶ 42–43; Compl. Int. ¶¶ 37–38. Throughout the PPP, the Federal Reserve provided
Benworth FL approximately $4.3 billion in advances under the Agreements. See Compl. ¶ 36;
Compl. Int. ¶ 26. Benworth FL used these advances to fund over 300,000 PPP Loans. Id.
In August 2021, Womply commenced arbitration proceedings against Benworth FL,
seeking payment of unpaid fees that Benworth FL purportedly owed it under their services
agreements. See Compl. ¶ 40; Compl. Int. ¶ 35. At the arbitration, Benworth FL raised, among
other things, that Womply was withholding loan files it needed to provide to the SBA to
guaranty certain PPP loans so that it could pay back the Federal Reserve. See Compl. ¶¶ 42, 44;
Compl. Int. ¶¶ 37, 40. This is typical of Womply, as it has been publicly criticized in the past for
failing to provide information to lenders and the federal government and has faced fraud
allegations.2 See Compl. Int. ¶ 31. Indeed, “[a]s detailed in a December 2022 report by the Select
Subcommittee on the Coronavirus Crisis, starting in May 2021, Womply refused to provide
requested information to a lender, Fountainhead, and the SBA Office of Inspector General (the
“SBA OIG”) to aid an investigation into potential fraud related to a group of Womply-referred
loans.” Id. The report also noted that Womply (1) “also resisted providing data to Benworth [FL]
to assist an SBA OIG investigation” and (2) “declined to provide the information to Benworth
[FL] and directed the SBA OIG to fill out a web form on the ‘Contact Us’ section of Womply’s
website.” Id. ¶ 32.
During the arbitration, but before an arbitration award was entered, Womply brought the
instant action (Case No. 23-cv-01034) seeking to unwind transfers of approximately $171
million between Benworth FL and Benworth Capital Partners PR, LLC (“Benworth PR”) that it
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 3 of 20
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suggests were fraudulent. See Compl. ¶ 45; Compl. Int. ¶ 41. On October 12, 2023, this Court
stayed this case pending a final award in the arbitration. See Compl. Int. ¶ 44; [Case No. 23-cv-
01034, D.E. 96]. On June 11, 2024, the arbitrator entered a final award requiring “Benworth FL
to pay Womply nearly $118 million in unpaid fees, interest, and costs” and Womply “to
promptly transmit these loan files to Benworth FL or reinstate Benworth FL’s access to those
files via Womply’s technology platform, to the extent it has not yet done so.” See Compl. ¶¶ 41,
44; Compl. Int. ¶ 40. This Court lifted the stay two weeks later. See Compl. Int. ¶ 50; [DE 119].3
On July 10, 2024, the Federal Reserve filed its own action against Benworth FL,
Benworth PR, Bernardo Navarro (“Mr. Navarro”), and Claudia Navarro (“Mrs. Navarro, and
together with Mr. Navarro, the “Navarros”) (Case No. 24-cv-01313). See generally Compl. It
then moved to intervene in Womply’s action, which this Court granted, and filed the Complaint
in Intervention on August 2, 2024, against Benworth FL, Benworth PR, the Navarros, and
Womply. See generally Compl. Int.
In the Complaints, the Federal Reserve alleges that Benworth FL breached the
Agreements because: (1) the Federal Reserve “‘deem[s] itself insecure with respect to the
financial condition of’ Benworth FL and Benworth FL’s ability to perform its obligations,” see
Compl. ¶ 32; Compl. Int. ¶ 22, (2) “Benworth FL’s Insolvency (as defined under the Operating
Circular),” id., (3) Benworth FL purportedly “breached multiple representations, warranties, or
covenants it made under the . . . Agreements,” see Compl. ¶ 33; Compl. Int. ¶ 23, and (4)
“Benworth FL has failed to comply with the terms of the PPP for at least some portion of the
2
On April 3, 2024, “Womply agreed to pay $26 million to the Federal Trade Commission to settle charges
related to deceptive acts or practices in connection with Womply’s advertising of PPP services to small business
consumers.” Compl. Int. ¶ 33 n.6.
3
Womply has petitioned to confirm the award in the Northern District of California while Benworth FL has
petitioned to vacate it. See Compl. ¶ 41 n.7; Compl. Int. ¶ 40 n.7. Those petitions are still pending, and thus, the
challenged arbitration award is not enforceable until a federal court confirms it.
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 4 of 20
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outstanding Pledged PPP loans,” see Compl. ¶ 34; Compl. Int. ¶ 24. Despite alleging that
Benworth FL’s breaches are “not limited to” these four, see Compl. ¶¶ 32–33; Compl. Int. ¶¶ 22–
23, the Federal Reserve identifies no other breaches in the Complaints. As of the filing of the
Complaints, the aggregate principal amount outstanding was approximately $67 million, less
than 2% of the total advances. Id.
As to the first two breaches, the Federal Reserve maintains that it has deemed itself
financially insecure and Benworth FL insolvent “based on Benworth FL’s inability to pay the
[arbitration award] and financial statements, reports, and other information disclosed by
Benworth FL to the Reserve Bank.” See Compl. ¶ 32; Compl. Int. ¶ 22. The Federal Reserve
does not specify which financial statements, reports, or “other information” form the basis for
Benworth FL’s alleged breach, nor does it attach any of these documents or “other information”
to the Complaints. See generally id.
As to the third breach, the Federal Reserve alleges Benworth FL “[mis]represent[ed] that
no event of default had occurred or was continuing” and failed to “promptly notify the [Federal
Reserve] when events of default occurred.” See Compl. ¶ 33; Compl. Int. ¶ 23. The Federal
Reserve does not identify when Benworth FL purportedly made these misrepresentations, who
made them, or what events of default had occurred or were continuing when the
misrepresentations were made. See generally id. Nor does the Federal Reserve address which
events of default Benworth FL failed to provide it prompt notice of. See generally id.
As to the fourth breach, the Federal Reserve alleges that “the SBA has denied over $60
million of Benworth FL’s requests for guaranty purchase of Pledged PPP Loans” because
Benworth FL “did not have appropriate documentation to support its request for guaranty
purchases for all of the relevant PPP loans, either due to Womply’s withholding of the
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 5 of 20
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appropriate documentation . . . or due to other problems internal to Benworth FL.” See
Compl. ¶ 34; Compl. Int. ¶ 24.
In the Complaint, the Federal Reserve brings a claim for “breach of contract and
collection of money” based on these allegations (Count I). See Compl. ¶¶ 64–67. Moreover, the
Reserve Bank brings fraudulent transfer, alter ego, and veil piercing claims (Counts II through
VII) that hinge on the Federal Reserve’s ability to accelerate Benworth FL’s debt because it has
allegedly breached the Agreements. See id. ¶¶ 68–105. Finally, the Federal Reserve claims that
Benworth FL converted the “PPP Collateral” when it transferred funds to Benworth PR and the
Navarros. See id. ¶¶ 106–110.4 The Federal Reserve does not identify which claim is against
which defendant in any of its causes of action. See id. ¶¶ 64–110.
In the Complaint in Intervention, the Federal Reserve brings a single claim for
declaratory relief, seeking declarations that (1) “the Reserve Bank has a properly perfected first-
priority lien and security interest in the Defendants’ assets to the extent such assets constitute, in
whole or in part, PPP Collateral”; (2) “Womply may only collect from the Defendants’ assets to
the extent such assets are not PPP Collateral”; and “(3) as to any non-PPP Collateral assets, the
Reserve Bank may recover at least pro rata with Womply.” and. See Compl. Int. ¶¶ 55–62 &
Prayer for Relief. Because the Federal Reserve is hoping to “recover at least pro rata with
Womply,” the declarations it requests depend, in part, on the Federal Reserve’s ability to
accelerate Benworth FL’s debt as a result of its alleged defaults under the Agreements. See id.
4 While the Federal Reserve's allegation that Benworth FL inappropriately transferred collateral must be taken as
true for the purposes of this motion, Benworth FL disputes the claim. The collateral, defined as loans Benworth FL
provided to borrowers, see Compl. Ex. B § 2.1, has not been transferred to Benworth PR or the Navarros. Benworth
FL still retains ownership of the collateral (the loans) and simply services the loans through Benworth PR. See id. ¶¶
56, 62. All proceeds from these loans are still being remitted to the Federal Reserve in accordance with the
Agreements.
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LEGAL STANDARD
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) (citation
omitted). The facts alleged in the Complaints “must be enough to raise a right to relief above the
speculative level . . . .” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2005); Lozada v.
Dejoy, No. 20-1674, 2023 WL 2433860, at *8 (D.P.R. Mar. 9, 2023) (quotation omitted). A
court should grant a motion to dismiss when the complaint provides “[t]hreadbare recitals of the
elements of a cause of action, supported by mere conclusory statements,” or the complaint
“tenders naked assertions devoid of further factual enhancement.” Iqbal, 556 U.S. at 678
(citations and quotations omitted). “A pleading that offers labels and conclusions or a formulaic
recitation of the elements of a cause of action will not do.” Id. “A plaintiff is not entitled to
‘proceed perforce’ by virtue of allegations that merely parrot the elements of the cause of
action.” Betancourt-Colon v. Kimco PR Mgmt. Corp., No. CV 22-1055 (DRD), 2023 WL
6393065, at *3 (D.P.R. Sept. 30, 2023) (citation omitted). “When allegations, though disguised
as factual, are so threadbare that they omit any meaningful factual content, we will treat them as
what they are: naked conclusions.” A.G. ex rel. Maddox v. Elsevier, Inc., 732 F.3d 77, 81 (1st
Cir. 2013).
ARGUMENT
I.
The Court Should Dismiss the Federal Reserve’s Breach of Contract Claim for
Failure to State a Claim.
The Court should dismiss the Federal Reserve’s breach of contract claim, see Compl. ¶¶
64–67, because it fails to state a claim upon which relief can be granted. Under California law,5
5
The Agreements are “governed by the law of the State in which the Bank’s head office is located”—here,
California. See Compl. Ex. B § 18.0.
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 7 of 20
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“the elements of a cause of action for breach of contract are (1) the existence of the contract, (2)
plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the
resulting damages to the plaintiff.” Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821
(2011). Here, each of the four breaches that the Federal Reserve alleges is conclusory and lacks
the necessary specificity to meet the pleading standard. Vieira v. First Am. Title Ins. Co., 668 F.
Supp. 2d 282, 288–89 (D. Mass. 2009) (noting that it is insufficient “to allege, in a conclusory
fashion, that the facts demonstrate a breach of contract” and a pleading “must explain what
obligations the alleged contract imposed on each of the parties to avoid dismissal under Rule
12(b)(6)”). Although it generally references four purported breaches in its “Relevant Facts,” see
id. ¶¶ 32–34, the Federal Reserve fails to sufficiently identify specific conduct by Benworth FL
that constitutes a breach and uses vague and indefinite language, such as “including but not
limited to,” that is inherently ambiguous and leaves the door open to unpled breaches. Benworth
FL addresses each of the Federal Reserve’s alleged breaches in turn.
A. Breaches #1 and #2: The Federal Reserve “deem[s] itself insecure with
respect to the financial condition of Benworth FL and Benworth FL’s ability
to perform its obligations,” and Benworth FL’s insolvency.
The Federal Reserve alleges that “various events of default ha[ve] occurred under
the . . . Agreements.” See Compl. ¶ 31. “Events of Default” under the Operating Circular has a
specific meaning:
(i)
the Borrower fails to repay or satisfy any Obligation when due;
(ii)
the Borrower fails to perform or observe any of its obligations or
agreements under the Lending Agreement or under any other instrument
or agreement delivered or executed in connection with the Lending
Agreement or under any other agreement with the Bank or another
Reserve Bank;
(iii)
any representation or warranty made or deemed to be made by the
Borrower under or in connection with the Lending Agreement, or that is
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contained in any certificate, document or financial or other statement
delivered by it or in connection with the Lending Agreement, is inaccurate
in any material respect on or as of the date made or deemed made;
(iv)
the Insolvency of the Borrower;
(v)
the Lending Agreement or any other agreement delivered or executed in
connection with the Lending Agreement ceases, for any reason, to be in
full force and effect, or any person so asserts or any security interest or
lien created hereby ceases to be enforceable or have the same effect and
priority purported to be created hereby;
(vi)
the creation of an encumbrance upon Collateral, or placement of a levy,
judicial seizure of, or an attachment upon Collateral;
(vii)
whenever the Bank deems itself insecure with respect to the financial
condition of the Borrower or the Borrower’s ability to perform its
Obligations.
Id. at Ex. B § 2.1 (emphasis added). While the Federal Reserve specifically identifies its alleged
financial insecurity (subsection (vii)) and Benworth FL’s insolvency (subsection (iv)) as the only
events of default in its Complaint, the Federal Reserve nonetheless alleges that this is a non-
exhaustive list of defaults. See id. ¶ 32 (providing that these “[e]vents of default include, but
were not limited to,” events (iv) and (vii) (emphasis added)). If this is a reference to the
purported defaults under subsections (ii) and (iii) identified by the Federal Reserve in its letter
dated February 27, 2024, see id. at Ex. D pg. 1, the Federal Reserve did not allege how Benworth
FL has failed to perform or observe any of its contractual obligations (subsection (ii)) nor which
representation or warranty made by Benworth FL was materially inaccurate as of the date made
(subsection (iii)). In any event, the Federal Reserve failed to plead such events of default in its
Complaint.
As to Benworth FL’s alleged insolvency, the Operating Circular defines “Insolvency” as:
(i)
the condition of insolvency;
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(ii)
that a proceeding relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to adjudicate an entity bankrupt or insolvent or
seeking reorganization, adjustment, dissolution, liquidation or other relief
with respect to the Borrower or the Borrower’s debt is commenced;
(iii)
that an assignment for the benefit of the Borrower’s creditors occurs;
(iv)
that a receiver, custodian, conservator, or the like is appointed for the
Borrower or for any of its United States or foreign branches or agencies;
(v)
that the Borrower has been closed by order of its supervisory authorities,
or a public officer has been appointed to take over such entity;
(vi)
that the Borrower ceases or refuses to make payments in the ordinary
course of business, or admits in a record its inability to pay its debt as they
become due;
(vii)
the Borrower’s business is suspended, or any party has presented or filed a
petition for winding-up or liquidating the Borrower; or
(viii) any other circumstances that evince the Borrower’s inability to pay its
debts when due.
Id. at Ex. B § 2.1. The Federal Reserve does not specify which, if any, of the eight possible
meanings of “Insolvency” applies to Benworth FL.
Instead, the only reasoning the Federal Reserve has alleged for deeming itself financially
insecure or Benworth FL insolvent is that (1) Benworth FL does not have sufficient funds to pay
the arbitration award, and (2) “financial statements, reports, and other information disclosed by
Benworth FL to the Reserve Bank.” Id. ¶¶ 30, 32. Because of these events of default, the Federal
Reserve posits that it can accelerate the entire amount outstanding, over $66 million. Id. ¶ 32
(“As a consequence of these events of default, the entire amount outstanding on Benworth FL’s
Advances from the PPPLF has become due and owing.”).
The Federal Reserve’s allegations are hardly enough to satisfy the federal pleading
standard. The Complaint fails in many respects to provide any specific facts or details explaining
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precisely which of the definitions of “Insolvency” Benworth FL falls into or how the Federal
Reserve’s financial position has been compromised. Levy v. State Farm Mut. Auto. Ins. Co., 150
Cal. App. 4th 1, 5 (2007) (“Facts alleging a breach, like all essential elements of a breach of
contract cause of action, must be pleaded with specificity.”); see also Block Sci. Inc. v. True
Diagnostics, Inc., No. 21-cv-1118 JLS (JLB), 2022 WL 485010 (S.D. Cal. Feb. 16, 2022)
(dismissing a portion of a breach of contract claim because plaintiff did not precisely allege how
the defendants “failed to use commercially reasonable efforts” in making a delivery). Notably,
the Operating Circular provides eight distinct definitions for “Insolvency,” yet the Federal
Reserve does not identify which of these apply to Benworth FL. Instead, it generally asserts
insolvency and financial insecurity as an event of default without any factual or legal foundation
as to how Benworth FL meets any of the criteria under the Agreements. The Federal Reserve
does not even allege that Benworth FL, for instance, has missed any payments or failed to timely
pay down its debt to the Federal Reserve in the ordinary course of business (as opposed to on an
accelerated basis). See id. at Ex. B § 2.1 (defining Insolvency in subsection (vi) as “the Borrower
ceases or refuses to make payments in the ordinary course of business, or admits in a record its
inability to pay its debt as they become due”). Without more detailed allegations, the Federal
Reserve has not sufficiently alleged that Benworth FL is, in fact, insolvent pursuant to the
Operating Circular or that the Federal Reserve’s financial insecurity is objectively reasonable.
In its attempt to justify that events of default have occurred, the Federal Reserve relies on
Womply’s unconfirmed arbitration award. Id. ¶ 30. To be precise, the Federal Reserve contends
that it is financially insecure and Benworth FL is insolvent because, in December 2023,
Benworth FL “acknowledged to the [Federal Reserve] . . . that it did not have access to sufficient
funds” to pay a potential arbitration award in the hundreds of millions of dollars. Id. But
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Benworth FL’s inability to pay an unconfirmed arbitration award does not necessarily mean that
it cannot satisfy its obligation to the Federal Reserve under the Agreements—payment of the
advanced amounts as PPP loan borrowers pay down their debt in the ordinary course of business,
as opposed to when the Federal Reserve accelerates the entire debt—particularly given the
Federal Reserve’s position as a first-priority creditor. See id. ¶ 61. Indeed, the Federal Reserve
has not affirmatively alleged that Benworth FL cannot or has not paid down the debt in the
ordinary course of business. See generally id. In addition, a challenged arbitration award does
not constitute a finalized debt that would render Benworth FL insolvent because it lacks the
finality required to be considered a current liability for purposes of insolvency. D.H. Blair & Co.,
Inc. v. Gottdiener, 462 F.3d 95, 104 (2d Cir. 2006) (“Because arbitration awards are not self-
enforcing, they must be given force and effect by being converted to judicial orders by courts . . .
.”). The Federal Reserve’s sole basis for deeming itself financially insecure and Benworth FL
insolvent is the unconfirmed arbitration award, but without further facts showing how this
award—which is still in contention—affects Benworth FL’s ability to meet its obligations to the
Federal Reserve, the claim remains speculative and insufficient under the pleading standard.
The Federal Reserve also vaguely references that it reviewed “financial statements,
reports, and other information” that Benworth FL provided to it, but fails to specify which
documents in particular were reviewed or how those documents establish the Federal Reserve’s
financial insecurity or Benworth FL’s insolvency. See id. ¶ 32. Without identifying the specific
documents or “other information” relied upon, the Federal Reserve has insufficiently pled the
basis for the claimed events of default.
Finally, the Federal Reserve avers that the events of default “includ[e], but [are] not
limited to,” the two that are alleged. Id. ¶ 32. Such an open-ended allegation fails to notify
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Benworth FL of its breaches and leaves it without sufficient information to respond to the
Complaint or raise proper affirmative defenses and would expand discovery to subjects beyond
what the Federal Reserve has specifically alleged. In other words, allowing the Federal Reserve’s
breach claim to go forward as is, would require Benworth FL to guess which other “events of
default” apply and then raise and prove affirmative defenses that may ultimately not apply at
trial.
B. Breach #3: Benworth FL “breached multiple representations, warranties or
covenants it made under the . . . Agreements.”
The Federal Reserve alleges the advances it made to Benworth FL have become recourse
obligations because it has “determined that Benworth FL had breached multiple representations,
warranties, or covenants it made under the . . . Agreements.” See Compl. ¶ 33. While the
Agreements reference twenty-four different representations, warranties, and covenants Benworth
FL made to the Federal Reserve, see id. at Ex. B §§ 9.1(a)–(h), 10.0 (a)–(o), the Federal Reserve
alleges that Benworth FL’s breaches “included, but were not limited to,” just two of them: (1) “a
breach of the representation that no event of default had occurred or was continuing,” id. ¶ 33;
see also id. at Ex. B § 9.1(i), and (2) “a breach of the covenant to promptly notify the [Federal
Reserve] when events of default occurred,” id. ¶ 33; see also id. at Ex. B § 10.0(n). These
allegations are insufficient for three reasons.
First, the Federal Reserve does not identify which events of default had occurred or were
continuing at the time Benworth FL made these representations. If this is a reference to the
events of default above, see supra § I.A., then the Federal Reserve has not alleged that Benworth
FL was “Insolvent,” as defined by the Operating Circular, or that it was financially insecure at
the time Benworth FL made the representation. See generally id. ¶ 33. Nor can it. Benworth FL
made this representation when it executed the Agreements on January 30, 2023, see id. at Ex. A,
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at 8, but the Federal Reserve alleges that Benworth FL informed it “of certain developments
impacting its financial position” on December 27, 2023, almost a year after the representation,
see id. ¶ 30. Likewise, the arbitrator did not enter an interim award until December 21, 2023, and
a final award until June 11, 2024. See id. ¶ 41. If it is referring to some other event of default, the
Federal Reserve has not alleged it.
Second, the Federal Reserve also does not allege which event of default Benworth FL
failed to promptly notify it about. If the Federal Reserve is referring to the same ones above, then
its allegations are inconsistent, as it alleges that Benworth FL did promptly notify it of the
arbitration award and its finances just six days after the interim award. Id. ¶ 30. If it is referring
to some other event of default, the Federal Reserve has, again, not alleged it.
And third, the Federal Reserve uses the same “including but not limited to” language to
identify Benworth FL’s breaches of the representations, warranties, and covenant provisions. Id.
¶ 33. By identifying just two out of the twenty-four representations, warranties, and covenants
but including this expansive language, the Federal Reserve prevents Benworth FL from
identifying applicable defenses and enlarges the scope of discovery beyond what has been pled.
C. Breach #4: Benworth FL “has failed to comply with the terms of the PPP for
at least some portion of the outstanding Pledged PPP loans.”
The Federal Reserve claims that all outstanding advances have become recourse
obligations because it “has become aware that Benworth FL has failed to comply with the terms
of the PPP for at least some portion of the outstanding Pledged PPP Loans.” Id. ¶ 34. The
Federal Reserve alleges that the “SBA has already denied over $60 million of Benworth FL’s
requests for guaranty purchase of Pledged PPP loans” because of either “Womply’s withholding
of the appropriate documentation” or “other problems internal to Benworth FL.”
These allegations suffer from some of the same deficiencies as the other alleged breaches.
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 14 of 20
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The Federal Reserve does not allege (1) which specific terms of the PPP Benworth FL has failed
to comply with, (2) what actions by Benworth FL amount to a violation of the PPP, (3) which
portion of Benworth FL’s PPP portfolio was denied because of Benworth FL’s violation of the
PPP as opposed to Womply’s actions, and (4) which “problems internal to Benworth FL” have
caused violations of the PPP.
For these reasons, the Court should dismiss the Federal Reserve’s breach of contract
claim or, at a minimum, require that it cure the above defects in its Complaint.
II.
If the Court Dismisses the Breach of Contract Claim, then the Federal Reserve’s
Fraudulent Transfer Claims and Declaratory Judgment Are Not Ripe and Fail
to State a Claim.
Based on the Court’s prior ruling on Benworth FL’s motion to dismiss Womply’s
fraudulent transfer claims, [see D.E. 96], the ripeness and ability of the Federal Reserve to state
fraudulent transfer and declaratory judgment claims in the Complaints hinges on it sufficiently
alleging that Benworth FL has an accelerated debt that is due because it breached the
Agreements. See Compl. ¶¶ 71 (alleging that defendants made fraudulent transfers to defraud the
Federal Reserve of a debt that is due in Count II), 75–77 (alleging “constructive fraudulent
transfer” because Benworth FL transferred money so that the Federal Reserve would be “unable
to collect . . . the amounts currently due and owing under the Program Agreements” in Count
III); 82 (alleging in its rescissory claim that “the [Federal Reserve] has no other recourse for
payment of the amounts due and owing under the Program Agreements” in Count IV); 91–92
(seeking a declaration in Count V that Benworth PR is an alter ego of Benworth FL because
“Benworth FL owes the [Federal Reserve] a debt of at least $66,980,967.08” and that “[a]n
actual controversy exists regarding whether Benworth PR is liable for Benworth FL’s debt to the
[Federal Reserve]”), 103–104 (same but seeking a declaration in Count VI that the Federal
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Reserve can pierce the corporate veil and collect from the Navarros); see also Compl. Int. ¶¶ 52–
62 (seeking a declaration that it has a first-priority security interest over Womply in the assets it
seeks to unwind and attach to the extent such assets constitute PPP Collateral, and alleging that
an actual controversy exists with the defendants because Benworth FL has a debt that is due and
the defendants have assets that “must be made available to satisfy any obligations under the
Program Agreements, including any unpaid Advances, on a first-priority basis”). All such claims
inextricably depend on a well-pled breach of contract claim allowing the acceleration of
Benworth FL’s debt, which the Federal Reserve has failed to do. The Court should thus dismiss
these claims under Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6).
Under Puerto Rico law a transaction executed “in fraud of creditors”—i.e., a fraudulent
transfer—may be rescinded, when a creditor cannot otherwise recover a debt that is due. P.R.
Laws Ann. tit. 31, §§ 6231 & 6233. One of the elements of such a claim is that the defendant be
a true debtor of the plaintiff. See Sucesión Almazán v. López, 20 P.R. Dec. 537, *2 (1914).
Ripeness, for its part, is a component of justiciability under Article III that turns on whether issues
are ready for judicial decision and the hardship of delaying court review. Reddy v. Foster, 845 F.3d
493, 500-01 (1st Cir. 2017). The key factor is whether the claim depends on uncertain or
contingent events that may never happen. See Lincoln House, Inc. v. Dupre, 903 F.2d 845, 847
(1st Cir. 1990).
Previously in this case, the Court considered whether Womply’s fraudulent transfer
claims were ripe in the absence of a final award establishing that Benworth FL was indebted to
Womply. [D.E. 96]. The Court found that Womply’s claims were ripe because “Womply
plausibly alleged that Benworth FL owed Womply approximately $200 million for fees and
services rendered and that Benworth FL transferred funds to Benworth PR a corporation wholly
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 16 of 20
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owned by the same owners of Benworth FL.” [Id. at 9]. As demonstrated above, however, the
Federal Reserve has failed to establish that Benworth FL breached the Agreements and thus that
Benworth FL owes it an accelerated debt of over $66 million. The Court should thus find that
these claims are not ripe. See, e.g., Lincoln House, Inc. v. Dupre, 903 F.2d 845, 847 (1st Cir.
1990) (RICO claim premised on alleged pattern of racketeering activity “to divert assets of
[defendant] so that those assets might not be reached by the [plaintiff],” found as unripe for
judicial resolution where “the only injury alleged by [the plaintiff] is its hypothetical inability to
recover from [defendant], if [plaintiff] obtains judgment, in some amount, in the pending state
court breach of contract action”). Similarly, if the Court finds that the Federal Reserve has failed
to allege a breach of contract claim, then there is no actual controversy existing between the
Federal Reserve and Benworth FL because Benworth FL’s debt to the Federal Reserve will not
be due on an accelerated basis. See id. These claims, too, warrant dismissal.
III.
The Federal Reserve Fails to State a Claim for Conversion.
In Count VII, the Federal Reserve alleges that a portion of what Benworth FL transferred
to Benworth PR included the “PPP Collateral,” as defined by the Agreements, “over which the
[Federal Reserve] holds a first-priority lien and, therefore, is the rightful property of the [Federal
Reserve].” See Compl. ¶¶ 106–110. The Court should dismiss this claim because the Federal
Reserve fails to allege an essential element of a conversion claim under Puerto Rico law and
attempts to improperly disguise its breach of contract claim as a conversion claim.
Montalvo v. LT’s Benjamin Records, 56 F. Supp. 3d 121 (D.P.R. 2014) is instructive on
this issue. There, the plaintiff sought royalties pursuant to an agreement with the defendant. See
id. at 127. When the defendant refused to pay plaintiff these royalties, the plaintiff sued for
breach of contract and conversion, among other claims. See id. at 127–28. On defendant’s
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motion, the Court dismissed the conversion claim for two reasons, both of which are applicable
here: first, the plaintiff failed to allege that the defendant’s acquisition of plaintiff’s property was
“malicious and wrongful,” a necessary element for a conversion claim under Puerto Rico law,
and second, that “Plaintiffs’ allegations [were] sound in contract, rather than tort.” Id. at 139.
The same is true here. The Federal Reserve has not alleged that Benworth FL (or any of
the other defendants) maliciously and wrongfully acquired its property or transferred any of the
PPP Collateral (the borrowers’ loans), which it has not, see supra n.4. See generally Compl. ¶¶
106–110; see also Fed. Ins. Co. v. Banco de Ponce, 582 F. Supp. 1388, 1393 (D.P.R. 1984)
(noting that the Puerto Rico Supreme Court has held that “the intentional tort of conversion is not
the simple acquisition of another’s property, but the malicious and wrongful privation of the
ownership rights, the illegal exercise, or the assumption of authority over another’s property,
thereby depriving the lawful owner or possessor, permanently or for an indefinite period, of its
use and enjoyment.” (citations and internal quotation marks omitted)). In addition, the Federal
Reserve, as a remedy, seeks the “PPP Collateral” under the Agreements, rendering its cause of
actions “sound in contract, rather than tort.” Montalvo, 56 F. Supp. 3d at 139.
IV.
The Court Should Dismiss the Complaints Because It Is a Shotgun Pleading that
Improperly Groups Defendants.
Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the claim
showing that the pleader is entitled to relief[.]” Fed. R. Civ. P. 8(a)(2). Pursuant to Rule 10(b),
A party must state its claims or defenses in numbered paragraphs, each limited as
far as practicable to a single set of circumstances. A later pleading may refer by
number to a paragraph in an earlier pleading. If doing so would promote clarity,
each claim founded on a separate transaction or occurrence—and each defense
other than a denial—must be stated in a separate count or defense.
“A shotgun pleading is a complaint that violates either Federal Rule of Civil Procedure Rule
8(a)(2) or Rule 10(b), or both.” Sanchez-Sifonte v. Fonseca, CV 22-1444 (RAM), 2023 WL
Case 3:23-cv-01034-GMM Document 169 Filed 10/01/24 Page 18 of 20
19
5753677, at *2 (D.P.R. Sept. 6, 2023) (quoting Barmapov v. Amuial, 986 F.3d 1321, 1324 (11th
Cir. 2021)). Guided by the Eleventh Circuit, this Court has noted that there are four types of
shotgun pleadings: (1) “a complaint containing multiple counts where each count adopts the
allegations of all preceding counts, causing each successive count to carry all that came before
and the last count to be a combination of the entire complaint[;]” (2) “a complaint that is replete
with conclusory, vague, and immaterial facts not obviously connected to any particular cause of
action[;]” (3) “a complaint that does not separate each cause of action or claim for relief into a
different count[;]” and (4) “a complaint that assert[s] multiple claims against multiple
defendants without specifying which of the defendants are responsible for which acts or
omissions, or which of the defendants the claim is brought against.” Id. (quoting Barmapov, 986
F.3d at 1324 (internal quotation marks omitted)).
The Complaint falls victim to the first and fourth definitions of a shotgun pleading. As to
the first, the Federal Reserve incorporates by reference in each claim the allegations in every
claim that came before it. See Compl. ¶¶ 64, 68, 72, 78, 88, 100, 106; Compl. Int. ¶ 55. As to the
fourth, the Federal Reserve improperly uses “group pleading” to allege claims against all the
defendants without identifying which claims concern each of them separately. See Sanchez v.
Pereira-Castillo, 590 F.3d 31, 48 (1st Cir. 2009) (holding that the trial court “must determine
whether, as to each defendant, a plaintiff’s pleadings are sufficient to state a claim on which
relief can be granted.” (emphasis in original)); Betancourt-Colon v. Kimco PR Management
Corp., No. 22-1055 (DRD), 2023 WL 6393065, at *5 (D.P.R. Sept. 30, 2023) (“[A] complaint
should at least set forth minimal facts as to who did what to whom, when, where, and why.”
(citations and quotations omitted)); see also Hardwick v. 3M Co., 87 F.4th 315, 320 (6th Cir.
2023) (“[A] plaintiff cannot sue ten defendants—by lumping them all together in his
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allegations—when the more particular facts would allow him to proceed against only one. (Much
less none.) For even a plaintiff who meets the ‘actual-injury requirement’ . . . does not thereby
obtain a license to sue anyone over anything.” (citations omitted)). As a result, the Court should
dismiss the Complaint.
CERTIFICATE OF SERVICE: We hereby certify that on this same date the foregoing
motion was filed with the Clerk of the Court using the CM/ECF system, which will send
notification of such filing to all attorneys and participants of record.
RESPECTFULLY SUBMITTED.
In San Juan, Puerto Rico, on this 1st day of October, 2024.
PO Box 195168
San Juan, PR 00919-5168
Tel.: 787.766.7000
Fax: 787.766.7001
s/ Roberto A. Cámara-Fuertes
Roberto A. Cámara-Fuertes
USDC-PR 219002
rcamara@ferraiuoli.com
s/ Jaime A. Torrens-Dávila
Jaime A. Torrens-Dávila
USDC-PR 223810
jtorrens@ferraiuoli.com
s/ Mónica Ramos Benítez
Mónica Ramos-Benítez
USDC-PR 308405
mramos@ferraiuoli.com
Counsel for Benworth Capital Partners, LLC
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