Opinion
02 Civ. 4683 (KMW) (HBP)
November 7, 2003
MEMORANDUM OPINION AND ORDER
I. Introduction
Plaintiff moves, pursuant to Fed.R.Civ.P. 15(a), to amend its complaint to add claims for breach of contract and conversion. Defendant moves to amend its answer to add an affirmative defense and counterclaim pursuant to the California anti-forfeiture statute, California Civil Code Section 3275.
For the reasons set forth below, plaintiff's motion is granted in all respects and defendant's motion is denied.
II. Facts
The Proposed Amended Complaint alleges the following facts which I assume to be true for purposes of this motion. Jackson Nat'l Life Ins. Co. v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994); Da Cruz v. Towmasters of New Jersey, Inc., 217 F.R.D. 126, 128 n.l (E.D.N.Y. 2003); Binder v. National Life, 02 Civ. 6411 (GEL), 2003 WL 21180417 at *2 (S.D.N.Y. May 20, 2003); Gabourel v. Bouchard Transp. Co., 901 F. Supp. 142, 144 (S.D.N.Y. 1995).
On January 21, 2000, plaintiff and defendant entered into a contract for the production, manufacturing, marketing and distribution of a text book and software package called Language Proof Logic ("LPL") (Proposed Amended Complaint ("Proposed Am. Compl.") at ¶ 8). The contract provided that plaintiff would bear the costs of production and manufacturing LPL, and defendant would bear the costs of marketing, selling and distributing LPL (Proposed Am. Compl. ¶ 8). Under the contract, defendant was to pay plaintiff a 35% advance of the net price of all copies of LPL delivered to defendant (Proposed Am. Compl. ¶ 8). Defendant was to report sales to plaintiff on a monthly basis and perform accounting on a semi-annual basis (Proposed Am. Compl. ¶ 8). Defendant was to pay plaintiff 65% of the net sales of LPL, less any advances previously paid (Proposed Am. Compl. ¶ 8). In addition to the 65% fee, the contract also provided that defendant would pay plaintiff an additional $2.00 surcharge for each copy of LPL sold (Proposed Am. Compl. ¶ 9). Finally, the contract provided that it could be terminated upon mutual agreement of the parties, but such termination would not be effective until one year from the date of termination (The Publishing Agreement, dated March 27, 2000 ("Contract") at 3, Annexed as Exhibit A to the Proposed Am. Compl.).
Plaintiff produced 13,500 copies of `LPL and delivered them to defendant, which defendant marketed and sold (Proposed Am. Compl. ¶¶ 12-13). Defendant failed to provide plaintiff with monthly sales reports, a semi-annual accounting and failed to pay the $2.00 per book surcharge (Proposed Am. Compl. ¶¶ 14-15). On January 4, 2002, after repeated requests for payment and an alleged lack of adequate assurances, plaintiff terminated the contract (Proposed Am. Compl. ¶¶ 23, 24). While defendant made some payments, both before and after the termination of the contract, there still remains an unpaid balance (Proposed Am. Compl. ¶¶ 19, 20, 22, 28). Plaintiff alleges that defendant currently owes it $140,154.92 for royalties, $18,210 for surcharges, along with $75,000 for LPL stock still in defendant's possession and $5,000 in surcharges on this outstanding stock (Proposed Am. Compl. ¶ 45).
In its proposed amended counterclaim, defendant contends that (1) it has invested approximately $250,000 in marketing of LPL, which resulted in LPL's unprecedented success, (2) it had made payments of $100,000 and owed only $17,000 on the date plaintiff terminated the contract, and (3) plaintiff has refused its offers to pay all money due, less the amounts defendant claims are due to it as a result of the improper termination of the contract (Defendant's Memorandum of Law in Support of Application to Amend the Amended Answer, dated March 3, 2003 ("Def. Memo of Law in Support"), at 4). Defendant claims that termination of the contract will deprive it of future income from sales of LPL and will result in plaintiff being unjustly enriched (Def Memo of Law in Support at 1).
III. Plaintiff's Motion to Amend His Complaint
A. Applicable Standard
The standards applicable to a motion to amend a pleading are well settled and require only brief review. Leave to amend a pleading should be freely granted when justice so requires. Fed.R.Civ.P. 15(a);Foman v. Davis, 371 U.S. 178, 182 (1962); Dluhos v. The Floating Abandoned Vessel, Known as "New York", 162 F.3d 63, 69 (2d Cir. 1998); Gumer v. Shearson, Hammill Co., 516 F.2d 283, 287 (2d Cir. 1974). "Nonetheless, the Court may deny leave if the amendment (1) has been delayed unduly, (2) is sought for dilatory purposes or is made in bad faith, (3) the opposing party would be prejudiced, or (4) would be futile." Lee v. Regal Cruises. Ltd., 916 F. Supp. 300, 303 (S.D.N.Y. 1996), aff'd, 116 F.3d 465 (2d Cir. 1997). Accord American Home Assur. Co. v. Jacky Maeder (Hong Kong) Ltd., 969 F. Supp. 184, 187-88 (S.D.N.Y. 1997).
A proposed amendment is futile when it fails to state a claim.Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990) ("Although Fed.R.Civ.P. 15(a) provides that leave to amend should be given freely when justice so requires, where, as here, there is no merit in the proposed amendments, leave to amend should be denied."); Mina Inv. Holdings Ltd, v. Lefkowitz, 184 F.R.D. 245, 257 (S.D.N.Y. 1999); Parker v. Sony Pictures Entm't, Inc., 19 F. Supp.2d 141, 156 (S.D.N.Y. 1998), aff'd in pertinent part, vacated in part on other grounds sub nom., Parker v. Columbia Pictures Indus., 204 F.3d 326 (2d Cir. 2000); Yaba v. Cadwalader, Wickersham Taft, 931 F. Supp. 271, 274 (S.D.N.Y. 1996); Prudential Ins. Co. v. BMC Indus., Inc., 655 F. Supp. 710, 711 (S.D.N.Y. 1987) (Although leave to amend should be freely given, "it is inappropriate to grant leave when the amendment would not survive a motion to dismiss."). See generally Dluhos v. Floating Abandoned Vessel known as "New York", supra, 162 F.3d at 69-70. "The proposed Amended Complaint may therefore be scrutinized as if defendant's objections to the amendments constituted a motion to dismiss under Fed.R.Civ.P. 12(b)(6)."Journal Publ'g Co. v. American Home Assur. Co., 771 F. Supp. 632, 635 (S.D.N.Y. 1991).
The Court of Appeals has repeatedly noted that the trial court has "broad" discretion in ruling on a motion to amend. Local 802, Associated Musicians v. Parker Meridien Hotel, 145 F.3d 85, 89 (2d Cir. 1998); Krumme v. Westpoint Stevens Inc., 143 F.3d 71, 88 (2d Cir. 1998). See generally Grace v. Rosen-stock, supra, 228 F.3d at 53-54.
B. Proposed Amendments to Complaint
Since defendant consents to plaintiff's adding its proposed tenth claim — which asserts a claim for breach of an oral contract (Plaintiff's Memorandum of Law in Support of Motion to Amend Complaint, dated March 17, 2003 ("Pl. Memo of Law in Support"), at 2) — the only issue with respect to plaintiff's motion is its proposed claim for conversion on the theory that defendant has failed to pay the royalties owed to plaintiff which it collected on plaintiff's behalf (Plaintiff's Memorandum of Law in Support of Motion to Amend, dated March 17, 2003 ("Pl. Memo of Law in Support"), at 2). Defendant opposes the motion on the grounds of futility (Defendant's Memorandum of Law in Opposition to Plaintiff's Motion to Amend, dated March 28, 2003 ("Def. Memo of Law in Opposition"), at 4). Specifically, defendant alleges plaintiff cannot meet all the required elements of a claim for conversion (Def. Memo of Law in Opposition at 4-5).
The elements of conversion under California law are (1) plaintiff's ownership or right to property, (2) defendant's conversion by wrongful act or disposition of property rights, and (3) damages. Burlesci v. Peterson, 68 Cal.App.4th 1062, 1066, 80 Cal.Rptr.2d 704, 706 (1998).
The contract relevant to this dispute provides that California law is applicable (Contract at 3).
California law is clear that the mere failure to pay contractual debt does not give rise to a claim for conversion. In Farmers Ins. Exch. v. Zerin, 53 Cal.App.4th 445, 452, 61 Cal.Rptr.2d 707, 710 (1997), the Court stated:
[A] mere contractual right of payment, without more, will not [give rise to a claim of conversion]. For example, in Imperial Valley L. Co. v. Globe G. M. Co. (1921) 187 Cal. 352 [ 202 P. 129], the tenant entered into an agreement to raise crops on leased land and to pay the landlord one-fourth of the crop as rental. However, the tenant sold the entire crop and the proceeds were used to pay other debts of the tenant. The landlord brought an action for conversion. The Supreme Court concluded no claim was stated because the rental agreement established no title to or lien upon the crop but only established the measure of damages for breach of contract. (Id. at pp. 353-354.)See also Thomsen v. Culver City Motor Co., 4 Cal.App.2d 639, 645, 41 P.2d 597, 600 (1935) ("We do not believe, furthermore, that there was a conversion of the bank's property at all. The bank gave authority to sell the cars — in fact, expected them to be sold. Where one is authorized to sell personal property for another, a conversion of the property does not result from a failure to pay over the proceeds. (65 Cor. Jur. 34)".
Although defendant cites Farmers Ins. and Thornsen accurately, it overlooks other authorities in California that sustain the proposed claim for conversion.
California has long recognized that an agent who collects money on behalf of its principal and fails to pay that money over to its principal is subject to a claim for conversion. As stated by Justice Traynor inHaigler v. Donnelly, 18 Cal.2d 674, 117 P.2d 331 (1941):
A broker or agent is ordinarily liable for converting the funds of his principal when he refuses to account for them upon proper demand. Wood v. Blaney, 107 Cal. 291, 40 P. 428; Bellus v. Peters, 165 Cal. 112, 130 P. 1186, Stacy v. Browne, 99 Okla. 104, 219 P. 336: Jones v. Smith, 65 Misc. 528, 120 N.Y.S. 865; see C.J.S. Agency, § 143, p. 19. While it is true that money cannot be the subject of an action for conversion unless a specific sum capable of identification is involved (Baxter v. King, 81 Cal.App. 192, 253 P. 172), it is not necessary that each coin or bill be earmarked. When an agent is required to turn over to his principal a definite sum received by him on his principal's account, the remedy of conversion is proper. Salem Light Traction Co. v. Anson, 41 Or. 562, 67 P. 1015, 69 P. 675.Accord Fischer v. Machado, 50 Cal.App.4th 1069, 1072, 58 Cal.Rptr.2d 213, 215 (1996); Weiss v. Marcus, 51 Cal.App. M 590, 599, 124 Cal.Rptr. 297, 303 (1975).
Plaintiff alleges in its proposed claim for conversion that defendant "collected royalties for the sales of LPL on behalf of [plaintiff]," that defendant "is not entitled to [plaintiff's] royalties," and that defendant "unlawfully converted these royalty payments to its own use" (Proposed Am. Compl. ff 126-28. Admittedly, plaintiff does not expressly allege an agency relationship between itself and defendant, but the foregoing language can be fairly read to imply an agency relationship. Bearing in mind that all plaintiff need do at this juncture is to clear the relatively low hurdle set forth in Conley v. Gibson, 355 U.S. 41, 45-46 (1957), and also bearing in mind that all ambiguities in the pleadings must be construed in plaintiff's favor, see generally Philips v. University of Rochester, 316 F.3d 291, 293-94 (2d Cir. 2003); Jackson Nat'l Life Ins, v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994), I conclude that plaintiff has adequately alleged an agency relationship between itself and defendant in which defendant has failed to pay money collected on plaintiff's behalf and that the conversion claim is, therefore, not futile.
Defendant argues that the proposed conversion claim is invalid due to other independent limitations on a claim of conversion. However, since none of the alternative theories cited by defendant effect the validity of the theory discussed in the text, I do not address them.
C. Proposed Amendment to Amended Answer
Defendant also seeks to amend its answer for a second time to assert a fifteenth affirmative defense and ninth counter-claim based on California's anti-forfeiture statute, California Civil Code Section 3275 (Def. Memo of Law in Support at 1). Plaintiff opposes the motion on the grounds of futility (Plaintiff's Memorandum of Law in Opposition to Defendant's Motion to Amend, dated March 17, 2003, at 6). Specifically, plaintiff argues that Section 3275 provides relief from forfeiture only in transactions involving goods or real estate, and not in a contract for personal services, such as the contract in issue here (Pl. Memo of Law in Opposition at 6).
Section 3275 provides:
Relief In Case Of Forfeiture: Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.
Defendant contends that a finding that it breached the contract with plaintiff, along with the termination of the contract, would result in the forfeiture of the distribution business in which defendant has invested substantial time and money (Defendant's Reply Memorandum of Law, dated March 24, 2003 ("Def. Reply" Memo"), at 3).
In opposition to defendant's motion, plaintiff claims that a defense or counterclaim based on Section 3275 is viable only if specific performance of the contract is available, as a remedy because the relief that would necessarily flow from such a defense or counterclaim would be reinstatement of the contract. Plaintiff further claims that specific performance is not available as a remedy here because the contract is a personal service contract and California Civil Code Section 3390 expressly prohibits the specific enforcement of such contracts.
Distributorships, such as this one, have been found to constitute contracts for personal services. For example, in Coykendall v. Jackson, 17 Cal.App.2d 729, 62 P.2d 746 (1936), the parties entered into a contact under which defendant was granted the exclusive right to purchase, merchandise, distribute and resell an unspecified automotive product. Although the precise procedural posture of the decision is not clearly set forth in the opinion, the court held that a decree of specific performance could not be granted:
[This contract is one] for personal services, and the cases are unanimous that an executory contract for personal services involving a personal relation of confidence between the parties, or involving liabilities or duties, which in express terms impute or indicate reliance on the character and personal ability of the parties, cannot be assigned, nor can such a contract be specifically enforced. (Subd. 1 of sec. 3390 of the Civil Code; Fitch v. Brockmon, 3 Cal. 348; Montgomery v. De Picot, 153 Cal. 509 [ 96 P. 305, 126 Am. St. Rep. 84]; Sumner v. Nevin, 4 Cal.App. 347 [ 87 P. 1105]; Walton v. Davis, 22 Cal.App. 456 [ 134 P. 795].)Coykendall v. Jackson, supra, 17 Cal.App.2d at 730-731, 62 P.2d at 746. See also Poultry Producers of Southern California, Inc. v. Barlow, 189 Cal. 278, 208 P. 93 (1922) (ruling that a farmer who breaches contractual duty to provide eggs for three years cannot be subject to specific performance requiring him to produce the eggs).
In this case, the application of the anti-forfeiture statute would result in reinstatement of defendant's rights of distributorship or co-publication. This, in turn, would require plaintiff and defendant to work together closely to sell LPL. At several points, the contract calls for the parties to work together in selling the product. For example, the contract provides "[d]ecisions to revise and/or reprint the Work shall be made by mutual agreement of [the parties]," " [a]11 determinations concerning paper, printing and binding of the Work; the content and presentation of the cover and packaging of the Work; and the interior design of the Work shall be agreed upon by [the parties] in consultation," and "[t]he list price for the Work in U.S. dollars shall be agreed upon and fixed by [the parties] in consultation" (Contract at 1-2). California courts have held that Section 3390 does not permit the remedy of specific performance under these circumstances. Wooley v. Embassy Suites, Inc., 227 Cal.App.3d 1520, 1534, 278 Cal.Rptr. 719, 728 (1991) (specific performance not an appropriate remedy if the agreement "call [s] for a series of complex and delicate business decisions and requires mutual cooperation and trust, both of which have ceased to exist in the wake of rancorous litigation between the parties.").
Defendant cites several cases in support of its argument that Section 3275 applies to service contracts and that Section 3390 is not a bar to relief. Specifically, defendant relies on O'Morrow v. Borad, 27 Cal.2d 794, 167 P.2d 483 (1946), in which an insured party was spared forfeiture of insurance coverage, pursuant to Section 3275, despite its failure to abide by a cooperation clause in the contract, and Vally View Home of Beaumont, Inc. v. The State Dep't of Health Servs., 146 Cal.App.3d 161, 194 Cal.Rptr. 56 (1983), in which the court ruled that a health care provider was entitled to payment from the state for services rendered to "Medi-Cal" beneficiaries, despite plaintiff's failure to first submit authorization forms as required by applicable regulations. Reliance on these cases is misplaced. Neither case involved relief that would entail the close, long term working relationship that is at issue here. Defendant also claims that injunctive relief, preventing plaintiff — from terminating the contract, is available pursuant to California Civil Code Section 3423(e)(2), which provides for specific performance if the contract involves services "of a special, unique, unusual, extraordinary, or intellectual character, which gives it peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law." (Def. Reply Memo of Law at 3-4). This statute has frequently been invoked in cases involving the services of professional athletes and entertainers.See generally Motown Record Corp. v. Brockert, 207 Cal.Rptr. 574, 160 Cal.App.3d 123 (1984) (contract involving services of professional musician); Lemat Corp. v. Barry, 80 Cal.Rptr. 240, 275 Cal.App.2d 671 (1969) (contract involving services of professional basketball player); Foxx v. Williams, 52 Cal.Rptr. 896, 244 Cal.App.2d 223 (1966) (contract involving services of professional performer). This contract to market and distribute does not meet these requirements, as evidenced by the fact that plaintiff has already hired another entity to perform the duties (PI. Memo of Law in Support at 5 n. 3).
Defendant next states that "the mere fact that specific performance may not be an available remedy for enforcement of a personal service contract, see CA Civil § 3390(1), does not preclude other forms of relief set forth in California statutes for the enforcement of a personal services contract. . . . The anti-forfeiture statute, CA Civil § 3275, provides just such an alternative form of relief in the case of personal service contracts" (Def. Reply Memo of Law at 4). This argument makes no sense and is inconsistent with defendant's other arguments because the only relief that would avoid a forfeiture is specific performance. If defendant seeks some other form of anti-forfeiture relief under Section 3275, it has not identified the relief. Furthermore, it does not seem that any other sort of relief is available in this case that would avoid the claimed forfeiture.
Defendant's final argument is that the contract involved both goods and services (Def. Reply Memo of Law at 5). This argument does not alter the fact that services are at the core of the contract and constitute a non-reversible part of the contract. Even if I assume that part of the contract calls for the sale of goods, it simply does not alter the foregoing analysis. Thus, this argument also fails.
Plaintiff also opposes the motion on the grounds that anti-forfeiture is only applicable if defendant can show that plaintiff was unjustly enriched (Pl. Memo of Law in Support at 4). Since I deny defendant's motion on other grounds, however, a discussion of this issue is not required.
Thus, defendant's motion for leave to amend must be denied on the grounds of futility because "there is no merit in the proposed amendmen[t]." Health-Chem Corp. v. Baker, supra, 915 F.2d at 810.
IV. Conclusion
Accordingly, for all the forgoing reasons, plaintiff's motion to amend the complaint is granted in all respects. Defendant's cross-motion to amend its answer and counterclaims is denied in all respects. Plaintiff is directed to serve and file the amended complaint within ten (10) days of the date of this Order.
SO ORDERED