Summary
listing the elements of conversion under New York law, including whether "the defendant's possession of the property was unauthorized"
Summary of this case from Charles Schwab & Co. v. Retrophin, Inc.Opinion
00 Civ. 2671 (JSM).
January 2, 2001
J. Joseph Bainton, New York, NY, for Plaintiff.
Alexander H. Schmidt, New York, NY, Steven J. Cohen, New York, NY, for Ddefendants.
OPINION and ORDER
Wisetex Trading Ltd. ("Plaintiff") brings this action for conversion, unjust enrichment, and for imposition of a constructive trust against Irwin Gindi ("Gindi") and William B. Wachtel ("Wachtel") (collectively "Defendants"). Defendants' motion to dismiss for failure to state a claim is granted.
For the purposes of this motion to dismiss, the allegations in the complaint are accepted as true. In March 1999, Defendants, through their holding company Cherry Holdings, Inc., purchased CWT Specialty Stores, Inc. ("CWT"). Gindi became CEO of CWT, and Wachtel became Executive Vice President. When Defendants purchased CWT it was indebted to Foothill Capital Corp. ("Foothill"). Defendants personally guaranteed the debt to Foothill.
Plaintiff, a trading company that acts as an agent between buyers and sellers of merchandise, had been employed by CWT since 1992. In the course of dealing between the companies, Plaintiff would place apparel orders for CWT with third-party vendors, who would then ship the goods to Plaintiff. Plaintiff would in turn send the apparel to CWT for sale in its Cherry Webb stores.
Despite placing orders with Plaintiff after its acquisition by Defendants, CWT at some point refused to pay for goods that had already been delivered, refused to pick up goods stored at a nearby warehouse, and repudiated CWT's obligations on orders it had placed for the Spring and Fall 1999 seasons. Plaintiff duly brought breach of contract claims against CWT. When CWT filed for bankruptcy, those claims were stayed by the Trustee.
Plaintiff subsequently brought this action against Defendants personally. Plaintiff alleges that Defendants purposefully caused CWT to dishonor its obligations to Plaintiff in order to capitalize the failing CWT and therefore reduce their personal exposure on the debt to Foothill. Plaintiff also alleges that Defendants acted out of personal animus toward Edward Finkelstein, CWT's CEO until several days after the purchase. Finkelstein was a 15% shareholder of Plaintiff and was also the father of Plaintiff's CEO. Plaintiff does not allege, however, that Defendants removed any money from the corporation for their own personal use.
Plaintiff's claims have no merit. Plaintiff first alleges that Defendants converted the goods sold to them by Plaintiff by selling the goods in their stores and retaining the money paid to them by their customers without paying Plaintiff. Defendants were thus able to reduce their personal liability on the loan to Foothill. Under New York law, the elements of conversion are: (1) the plaintiff has an immediate right to possession of the property converted; (2) the defendant's possession of the property was unauthorized; (3) the defendant acted to exclude the rights of the lawful owner of the property; (4) the property is specifically identifiable; and (5) the defendant is obligated to return the property. See Scholastic, Inc. v. Harris, 80 F. Supp.2d 139, 152 (S.D.N.Y. 1999) (citing Key Bank v. Grossi, 642 N.Y.S.2d 403 (App.Div. 1996)). A claim for conversion that is redundant of a breach of contract claim should be dismissed, see id. (listing cases), and a mere obligation to pay money does not support a claim for conversion, see Ehrlich v. Howe, 848 F. Supp. 482, 492 (S.D.N.Y. 1994) (listing cases).
CWT was in rightful possession of the funds when its customers paid for their goods. To the extent that CWT's retention of that money could be construed as conversion, Plaintiff has not established that it had an immediate right to possession of any specifically identified funds or that those particular funds were to be treated in a certain manner. Rather, Plaintiff is making the simple and straightforward complaint that it did not get paid. Such a claim is not legally cognizable as conversion.
Plaintiff next argues that Defendants were unjustly enriched by their failure to pay for goods already delivered by Plaintiff. To state a claim for unjust enrichment, a plaintiff must allege that the defendant "was enriched at the plaintiff's expense and that the circumstances are such that equity and good conscience require that defendant make restitution."Mina Inv. Holdings Ltd. v. Lefkowitz, 16 F. Supp.2d 355, 361 (S.D.N.Y. 1998) (listing cases). Because unjust enrichment is quasi-contractual in nature, such claims are typically unenforceable where a valid contract governs the transaction. See id. (listing cases). Plaintiff's claim is in essence a repleading of its breach of contract claims currently pending in the related bankruptcy proceeding, and therefore must fail.
Third, Plaintiff asks that a constructive trust be imposed in the amount of CWT's profits from the goods that Plaintiff sold them. A constructive trust may be appropriate where there exists: (1) a confidential or fiduciary relation, (2) a promise, express or implied, (3) a transfer made in reliance on that promise, and (4) unjust enrichment. See Bankers Sec. Life Ins. Soc'y v. Shakerdge, 428 N.Y.S.2d 623, 624 (1980) (listing cases). Plaintiff concedes that no fiduciary relationship exists here. More importantly, mere non-payment of a debt where the debtor is permitted to commingle the funds is an insufficient ground for imposition of a constructive trust. See McKey v. Paradise, 299 U.S. 119, 122, 57 S.Ct. 124, 125 (1936); In re Black Geddes, Inc., 35 B.R. 830, 836-37 (Bankr.S.D.N.Y. 1984). Plaintiff's allegation that Defendants caused CWT to refrain from paying its debt to Plaintiff simply amounts to a claim for non-payment where the money remained in the corporation and Defendants were not unjustly enriched. In addition, Plaintiff does not allege that Defendants are currently in possession of any funds upon which the Court would impose such a trust. For the foregoing reasons, Defendants' motion to dismiss the complaint is granted.
SO ORDERED.