Opinion
99 CIV. 11420 (DLC).
November 27, 2000.
Noel W. Hauser, Noel W. Hauser and Associates, New York, NY., Attorney for plaintiff.
Nathan Schwed, Zeichner Ellman Krause LLP, New York, NY., Attorney for defendant Citibank, N.A.
OPINION AND ORDER
One defendant in this case, Citibank, N.A. ("Citibank"), moves to dismiss Counts II, III, and IV of plaintiff's amended complaint pursuant to Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim. For the reasons discussed below, this motion is converted into a summary judgment motion and is granted.
BACKGROUND
A. Procedural History
Plaintiff originally filed this diversity action on November 18, 1999, against David Rock Ltd. ("DRL") and David Rock ("Rock"), as an individual, to recover $99,205.09, representing the unpaid balance for goods sold and delivered by plaintiff to defendants. On September 18, 2000, plaintiff filed an amended complaint adding defendants SaSun Jewelry Inc. ("SaSun") and Citibank. Subsequently, plaintiff's counsel represented to the Court that defendant Rock had filed a Petition for Bankruptcy and that plaintiff no longer intended to proceed to judgment against DRL. By Order of October 13, 2000, this Court stayed proceedings against defendant Rock pending the outcome of the bankruptcy proceedings and dismissed the proceedings against DRL. Limited discovery has taken place among the remaining parties.
B. Conversion of Motion
Although Citibank has moved to dismiss the action pursuant to Rule 12(b)(6), Fed.R.Civ.P., both Citibank and the plaintiff submitted evidence in connection with this motion. A court can convert a motion to dismiss into a motion for summary judgment under such circumstances, see Rule 12(c), Fed.R.Civ.P., at least where the non-movant "should reasonably have recognized the possibility that the motion might be converted into one for summary judgment [and was not] taken by surprise and deprived of reasonable opportunity to meet facts outside the pleadings."Gurary v. Winehouse, 190 F.3d 37, 43 (2d Cir. 1999) (internal quotations omitted); see also Groden v. Random House, Inc., 61 F.3d 1045, 1052-53 (2d Cir. 1995).
The plaintiff should have been aware that the motion might be converted into a summary judgment motion since Citibank submitted an affidavit as well as four exhibits. The submission of these additional papers — each of which is essential to Citibank's motion — was sufficient to put plaintiff on notice that Citibank was relying on facts outside the pleadings to make its argument. Indeed, plaintiff submitted seven exhibits with its opposition papers, including an internal Citibank memorandum. Moreover, plaintiff has not disputed any of the factual contentions raised by Citibank. These circumstances make it appropriate to treat the current motion as a motion for summary judgment.
C. Factual History
Based on the evidence and arguments submitted by the parties, these facts are undisputed. Plaintiff is a jewelry wholesaler that delivered merchandise to DRL "on memorandum," that is, on consignment. As of October 8, 1999, DRL owed the plaintiff $99,205.09.
Citibank began extending credit to DRL in or about October 1997. Citibank holds a security interest in all of DRL's assets to secure DRL's obligations to Citibank, pursuant to a fully executed General Security Agreement dated October 1, 1997. The security interest was perfected by the filing of UCC-1 financing statements with the Secretary of State of the State of New York and the City Register of New York County. After David Rachmuth, the principal of DRL, informed Citibank that DRL would be unable to continue in business owing to financial difficulties, Rachmuth met with representatives of Citibank and Sasun, a jewelry manufacturer, on November 2, 1999, to discuss DRL's financial situation and a surrender of collateral to Citibank. Citibank was owed in excess of $1,250,000.00. Rachmuth informed Citibank that DRL had ceased doing business, although employees were still answering phones to give the impression that the company was still in business and to maintain the collectability of the accounts receivable.
Citibank asserts, without dispute from the plaintiff, that it determined that it was in its best interest to fulfill as many pending orders as possible. It entered into an agreement with Sasun, by which Sasun would both use DRL's name to fill existing orders and to conduct its own additional business, and would aid Citibank in collecting outstanding receivables and recovering merchandise "on memorandum" with DRL's customers. In addition, Citibank conducted two public auctions of DRL inventory: the first, on December 15, 1999, of inventory that remained at DRL's premises; and the second, on September 26, 1999, of merchandise recovered from DRL's customers. The first sale yielded $160,506.51, and the second $185,269.90. As of October 2, 2000, after applying the proceeds of the auctions and the collections of DRL's accounts receivable, DRL's remaining debt to Citibank was $357,521.23, plus fees, costs and expenses.
DISCUSSION
A. Choice of Law The parties do not address choice of law but do rely primarily on New York law in making their arguments. In a diversity action, the choice of law analysis is based on the forum state's choice of law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). In Babcock v. Jackson, 240 N.Y.S.2d 743, 749 (N Y 1963), the New York Court of Appeals adopted a flexible approach to choice of law, focusing on the law of the state with the most significant interest in the dispute. See also Padula v. Lilarn Properties Corp, 620 N.Y.S.2d 310, 311 (1994). For contract claims, New York courts apply a
center of gravity or grouping of contacts approach. Under this approach, courts may consider a spectrum of significant contacts, including the place of contracting, the places of negotiation and performance, the location of the subject matter, and the domicile or place of business of the contracting parties. New York courts may also consider public policy where the policies underlying conflicting laws in a contract dispute are readily identifiable and reflect strong governmental interests. The traditional choice of law factors, the places of contracting and performance, are given the heaviest weight in this analysis.Brink's Ltd. v. South African Airways, 93 F.3d 1022, 1030-31 (2d Cir. 1996) (internal citations omitted), cert. denied, 117 S.Ct. 959 (1997). In this case, plaintiff is a California corporation, while defendant Rock is a resident and citizen of New York and defendants Sasun and Citibank are New York corporations. Plaintiff sold and delivered the goods at issue in New York. In conjunction with the parties' reliance on New York law, the Court concludes that New York law applies in this case. See, e.g., Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984) ("[I]n the absence of a strong countervailing public policy, the parties to a litigation may consent by their conduct to the law to be applied.").
B. Standard for Summary Judgment
Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P.; accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994). In deciding whether to grant summary judgment, therefore, this Court must determine (1) whether a genuine factual dispute exists based on the evidence in the record, and (2) whether the fact in dispute is material based on the substantive law at issue.
With respect to Citibank, the plaintiff alleges a right to recovery in Counts II, III, and IV. The Court addresses the merits of each Count in turn.
1. Count II
The plaintiff alleges in Count II that Citibank wrongfully foreclosed on DRL's assets, and that Citibank knew or should have known that plaintiff shipped the merchandise to DRL "on memorandum" with a reservation by the plaintiff of title to the goods unless and until paid for in full. Specifically, plaintiff alleges that around November 2, 1999, Rock and DRL surrendered all tangible and intangible property in their possession to Citibank whereupon Citibank delivered some or all of that property to defendant SaSun without the plaintiff's knowledge or permission. Citibank and SaSun thereafter sold all of the property and divided the proceeds.
Citibank moves to dismiss Count II because the merchandise delivered by the plaintiff to DRL became subject to Citibank's security interest when it was received by DRL. Citibank asserts, and the plaintiff concedes, that as a secured creditor of DRL, its interests are superior to those of plaintiff, an unsecured general creditor that never perfected its interest. See Pentech Int'l, Inc. v. Wall Street Clearing Co., 983 F.2d 441, 444 (2d Cir. 1993) (noting that Article 9 of the Uniform Commercial Code ("UCC") gives priority to secured creditors unless the UCC provides otherwise). Citibank points to New York's Uniform Commercial Code ("UCC"), which provides that "a person who delivers goods [consignor] to another [consignee] is subordinate to a person who would have a perfected security interest in the goods if they were the property of the debtor." N.Y.U.C.C. § 9-114(2) (McKinney 1991). Plaintiff fails to address the substance of this argument, reiterating that its dealings with DRL were "on memorandum," a fact not in dispute in this case.
Pursuant to UCC Section 2-326, when delivered goods may be returned by the buyer, even though they conform to the contract, the transaction is a "sale on approval" if the goods are delivered primarily for use, and a "sale or return" if delivered primarily for resale. The former are subject to the claims of the buyer's creditors only at acceptance, while the latter are subject to such claims while in the buyer's possession. N YU.C.C. §§ 2-326(1) and 2-326(2) (McKinney 1991). Under the UCC, a transaction, although identified as "on memorandum," is treated as a "sale or return" with respect to claims of creditors of the buyer/consignee — and therefore subject to the claims of the buyer's creditors while in the buyer's possession — where the goods are delivered to a consignee for sale and the consignee "maintains a place of business at which he deals in goods of the kind involved" under a name other than that of the consignor, In re Ide Jewelry Co., 75 B.R. 969, 974 (Bankr. S.D.N.Y. 1987), unless the consignor does one of three things: (1) complies with the filing provision of UCC Article 9; (2) deals with a consignee who "is generally known by his creditors to be substantially engaged in selling the goods of others;" or (3) posts a sign in compliance with applicable law providing for a consignor's interest. N.Y.U.C.C. § 2-326(3); see also Gem Diamond Company of New York v. Klein, No. 92 Civ. 2503 (KMW), 1995 WL 72382, *1-*2 (S.D.N.Y. Feb. 21, 1995); In re Ide, 75 B.R. at 973-74. Consignments may be deemed to be "sale or return" transactions even where the transaction is "not a sale with title passing to the buyer." In re Ide, 75 B.R. at 974 (internal quotation omitted).
Plaintiff has not argued or alleged that it has a perfected security interest and is a secured party, or that any of the exceptions set forth in Section 2-326(3) apply. In fact, it has not addressed Citibank's arguments concerning UCC Sections 9-114 and 2-326. In the excerpt of the deposition of Carl Rachmuth included in plaintiff's opposition papers, Rachmuth testifies that DRL maintained merchandise received from others on memorandum "[t]o a limited extent." This, without more, does not rise to the level of being "substantially engaged" in selling goods for others as required by Section 2-326(3).
The authorities upon which the plaintiff relies are easily distinguished. One of the cases on which the plaintiff relies — for the proposition that a secured creditor derives no advantage if he knows that the debtor does not own the property or that the property is subject to a prior lien on the part of another creditor, In re Creditors of Edward Bibinger, Inc., 210 N.Y.S.2d 319 (N.Y. A.D. 1961) — was decided under pre-UCC law. The other case addresses a dispute between two secured creditors. See General Electric Company v. Halmar Distributors, 968 F.2d 121 (1st Cir. 1992). The plaintiff also cites UCC Section 9-112, which addresses the rights of owners of collateral where the collateral is not owned by the debtor. Plaintiff, however, fails to indicate how this provision applies to the instant case. As noted above, pursuant to Article 9, plaintiff's provision of goods to DRL "on memorandum" is deemed a "sale or return" even though title had not passed to DRL. Because the plaintiff failed to take one of the three steps enumerated in UCC Section 2-326 to protect its interest, the goods are subject to the claims of the consignee's creditors, namely Citibank. In re Ide, 75 B.R. at 974. Accordingly, summary judgment is granted to Citibank on Count II.
2. Count III
The plaintiff alleges in Count III that Citibank had a duty to dispose of the DRL property in a commercially reasonable manner, which it failed to do. Citibank argues that Count III should be dismissed because plaintiff, as an unsecured — and therefore junior — creditor lacks standing to object to the actions taken by a secured creditor with respect to disposition of its collateral.
A secured party must dispose of collateral in good faith and in a commercially reasonable manner. N.Y.U.C.C. § 9-504 (McKinney 1991). If the secured party fails to do so, "the debtor or any person entitled to notification or whose security interest has been made known to the secured party prior to the disposition has a right to recover from the secured party." N.Y.U.C.C. § 9-507(1) (McKinney 1991). Notification is owed to the debtor and to those secured parties who have sent "written notice of a claim of an interest in the collateral" to the selling party. N YU.C.C. §§ 9-504(3) and 9-505(2) (McKinney 1991). There is no duty to provide such notice to a party lacking a security interest in the collateral. Hong Kong and Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. 133, 146 (W.D.N.Y. 1992).
Plaintiff has submitted no evidence that it provided Citibank with written notice of its interest in collateral nor has it argued or alleged that it is a secured party. Further, it has not contested Citibank's assertion that it lacks standing to contest Citibank's disposition of any tangible assets belonging to DRL.
The parties appear to dispute, however, whether Citibank's UCC-1 filings cover DRL and Rock's "goodwill" or "going concern" value which, presumably, would affect Citibank's status as a secured creditor and plaintiff's standing to contest the sale of goodwill value. The General Security Agreement and Citibank's UCC-1 Financing Statements cover "general intangibles," which are defined by UCC Section 9-106 as "any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money." N.Y.U.C.C. § 9-106 (McKinney 1991). The Official Comment to Section 9-106 indicates that goodwill is included within the meaning of "general intangibles."See also In re Leasing Consultants Inc., 486 F.2d 367, 371 n. 5 (2d Cir. 1973) (noting that "general intangibles" includes goodwill under UCC Section 9-106). Because there is no dispute that the UCC-1 filings and the General Security Agreement cover "general intangibles," there is no fact in dispute material under the substantive law at issue. Accordingly, summary judgment is granted to Citibank as to the claims in Count III.
3. Count IV
Finally, Count IV alleges that Citibank's transfer of the Rock and DRL property to SaSun violated the Bulk Sales Act. N.Y.U.C.C. § 6 (McKinney 1991). Citibank argues that Count IV should be dismissed because the transfer is not subject to the Bulk Sales Act.
A bulk transfer is "any transfer in bulk and not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise or other inventory . . . of an enterprise subject to his Article." N.Y.U.C.C. § 6-102 (McKinney 1991). Not every such transfer is governed, however, by the provisions of the Bulk Sales Act. As Citibank points out, Section 6-103 provides that "transfers in settlement or realization of a lien or other security interests" are not subject to the Bulk Sales Act. N.Y.U.C.C. § 6-103(3) (McKinney 1991). See also In re Interstate Cigar Co., 240 B.R. 816, 823 (Bankr. E.D.N.Y. 1999) (describing and applying the UCC sections governing the Bulk Sales Act).
Plaintiff has not responded to Citibank's contention that the transfer is exempted from the Bulk Sales Act because Citibank has a security interest in DRL's property and arranged to sell DRL's assets in partial satisfaction of that interest. Accordingly, summary judgment is granted to Citibank on Count IV.
CONCLUSION
For all of the foregoing reasons, Citibank's motion to dismiss Counts II, III, and IV of the amended complaint is converted into a motion for summary judgment and is granted.