Opinion
Civil Action No. 3:00CV282.
January 25, 2001
MEMORANDUM OPINION
This matter is before the Court on motions to dismiss all but Count I of the Second Amended Complaint herein pursuant to Fed.R.Civ.P. 12(b)(6). Separate motions have been made by the Defendant Young Express, Inc., David C. Young, and Frank Young collectively (Young Defendants) and the Defendant Wachovia Bank, N.A. (Wachovia). The parties have consented to the jurisdiction of this Court pursuant to 28 U.S.C. § 636(c) and the motions are ready for resolution following briefing and oral argument. For the reasons discussed below, the Young Defendants' Motion to Dismiss all but count I is GRANTED; Wachovia's motion to dismiss count IV is GRANTED; and discovery as to Count I is reinstated pursuant to a schedule to be established forthwith by the Court.
The matter was transferred to the undersigned from the Honorable David G. Lowe, United States Magistrate Judge, because of the conflict (as defined by the Code of Conduct for United States Judges) created by stock ownership by Judge Lowe or a related party in the recently-added party, Wachovia. Order, Oct. 26, 2000.
Procedural History
The original Complaint was filed in this Court on May 4, 2000, by the Plaintiff, Orix Credit Alliance (Orix), against only the Young Defendants. Thereafter, Orix filed an Amended Complaint adding Wachovia as an additional defendant and the Court (J. Lowe) partially resolved a motion by the Young Defendants to dismiss the original Complaint as against them. Specifically, the Court granted the motion to dismiss Counts II (breach of fiduciary duties) and III (conversion) of the original Complaint, but the Court took under advisement (pending the filing of an amended complaint) the Young Defendants' motion to dismiss the entire complaint (which was based on a forum selection clause in the underlying agreement) as well as the demands for injunctive and related relief (appointment of a receiver) as set forth in Counts IV and V. (Mem. Op., Oct. 10, 2000).
Which became the pending Second Amended Complaint, the pleading entitled Amended Complaint having never been served or answered.
The Second Amended Complaint was filed and the case was thereupon transferred to this Court. Discovery was then stayed by agreement of the parties, with the concurrence of the Court, pending resolution of the instant motions that followed. Order, Nov. 14, 2000. The Young Defendants have not included in their present motion to dismiss their earlier objection to this forum and the objection is therefore deemed withdrawn, leaving Count I (breach of contract) unchallenged as to its legal sufficiency. The Young Defendants' motions to dismiss Counts IV and V of the original Complaint (which were taken under advisement by the Court) are deemed to be moot as a result of the filing of the Second Amended Complaint, although the same arguments are renewed in their pending motion to dismiss.
The Court would not be inclined to deny venue in any event even if the choice of forum for the action is not considered to be at the option of the Plaintiff per the language of the controlling agreement because of the exercise of the Court's discretion pursuant to 28 U.S.C. § 1404(a). Denial is deemed appropriate where all of the subject activity which is in issue occurred during the performance phase of the contract in Virginia and where more delay would result from any dismissal or transfer in addition to the necessary delay that has already occurred as the result of the transfer of the case to this Court.
Rule 12(b)(6) Standard
A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) is a challenge on the face of the pleadings to the effect that even accepting as true all non-conclusory factual allegations in the complaint and drawing all reasonable inferences in favor of the non-moving party, the plaintiff cannot prevail as a matter of law. See, e.g., Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Adams v. Baun, 697 F.2d 1213, 1216 (4th Cir. 1982); Puerto Rico ex Re. Quiros v. Alfred L. Snapp Sons, 632 F.2d 365, 367 (4th Cir. 1980); Johnson v. Mueller, 415 F.2d 354, 355 (4th Cir. 1969); Mackethan v. Peat Marwick, Mitchel Co., 439 F. Supp. 1090, 1094 (E.D. Va. 1977). Conclusory allegations that are unsupported by factual assertions are not sufficient to withstand dismissal. See e.g., Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir. 1981), aff'd., 460 U.S. 325 (1983); Breeden v. Richmond Community College, 171 F.R.D. 189, 195 (M.D.N.C. 1997). The Defendants do not rely on any "matters outside the pleadings" and do not otherwise request summary judgment relief pursuant to Fed.R.Civ.P. 56. Fed.R.Civ.P. 12(c). The Court therefore analyzes the relevant issues only with reference to the sufficiency of the non-conclusionary factual allegations of the Complaint.
Relevant Factual Allegations
The Second Amended Complaint (Complaint) alleges the following facts that are relevant to the resolution of the instant motions:
1. Orix and Young Express entered into a lease agreement, dated December 21, 1998, whereby Orix purchased IBM Mainframe computer and software (equipment) and leased it to Young Express for the total sum of $88,080, plus taxes, payable in equal monthly amounts of $1,835 over forty-eight months (Compl. ¶ 8).
2. Young Express granted Orix a security interest in and lien on the equipment as well as all tangible assets (inventory, machinery, etc.) and intangible property including accounts receivable (hereafter referred to collectively as the Collateral). (Compl. ¶¶ 10, 11).
3. Orix filed the required UCC-I financing statement to perfect its lien. (Compl. ¶ 13).
4. Thereafter, Wachovia extended credit to Young Express and was given a non-purchase money security and lien interest in and on all of Young Express's personal property. (Compl. ¶ 16).
5. Wachovia also perfected its security interest by filing the relevant financing statements but it did so after Orix so that it became a "junior creditor" to Orix. (Compl. ¶ 17).
6. Young Express made only one payment on the lease to Orix on August 8, 1999, representing two months of the obligation and leaving a balance due and owing of approximately $84,000. (Compl. ¶ 15).
7. Young Express ceased doing business by September 1999 and its corporate existence officially ended on January 1, 2000, when it failed to file required fees and reports with the Virginia State Corporation Commission. (Compl. ¶¶ 19, 22).
8. Defendant David Young informed Orix in December 1999 that Wachovia forced the cessation of Young Express and that Wachovia was collecting Young Express's accounts receivable directly to apply to the outstanding indebtedness owed by Young Express to Wachovia. (Compl. ¶ 24).
9. Wachovia had not notified Orix as a senior creditor that Wachovia had taken possession of any of the Collateral.
10. Orix contacted Wachovia orally and in writing (by letter of December 23, 1999) after Orix was put on notice by the Defendant David Young that Wachovia was collecting Young Express accounts receivable directly and demanded that Wachovia deliver to Orix all proceeds that had been collected to Orix because of its perfected superior security interest. (Compl. ¶ 27).
11. Wachovia initially responded to Orix's demand by denying it had received any of the Collateral. (Compl. ¶ 29).
12. However, Wachovia ultimately admitted in March 1999 that it had in fact received proceeds from the collection of accounts receivable by Young Express, but only before it was notified by Orix of its perfected superior security interest. (Compl. ¶ 30).
13. Wachovia has refused to deliver or otherwise pay to Orix the portion of the Collateral it received from Young Express. (Compl. ¶ 37).
14. Orix ultimately repossessed the equipment and purchased it for a total of $5000 after no bids were received at auction. (Order, Oct. 10, 2000 at 3).
Analysis I. The Wachovia Conversion Claim (Count IV)
The Court deems it appropriate to first discuss and resolve Wachovia's motion to dismiss the only claim against it (Count IV) inasmuch as an analysis of the issues involved is relevant to the disposition of the remaining allegations involving the other defendants.Wachovia moves to dismiss Count IV on the basis that there is no allegation that Orix took any measures to exercise its priority right such as taking possession of the subject collateral (the proceeds from collection of the Young Express accounts receivable) before it put Wachovia on notice of its perfected superior security interest. Orix asserts in response that it did not have to do anything once it had perfected its superior security interest and that Wachovia as a "junior creditor" must surrender everything it collected to Orix. Orix affirmatively charges that Wachovia wrongfully converted the Collateral because the payment by Young Express was not pursuant to any express agreement between Young Express and Wachovia and therefore it was outside the ordinary course of business in the nature of a fraudulent conveyance.
Indeed, as confirmed at oral argument, Orix takes the position that it is entitled to any collateral collected by Wachovia even if it sat back and did nothing, including putting Wachovia or any other "junior creditor" on notice only after all the available collateral was taken into the latter's possession.
Orix urges the Court to agree with its conclusory allegation that the assignment of receivables to Wachovia was outside the ordinary course of business and that it must therefore be rejected as a proper preference. (Pl.'s Opp'n to Def.'s Mot. to Dismiss at 8). Orix emphasizes this distinction in the hope that it will distinguish the assignment of receivables by Young Express to Wachovia from that authority (discussed infra) that does not require a preference among creditors who have not taken affirmative action to protect their secured interests. See generally, Orix Credit Alliance, Inc. v. Sovran Bank, N.A., 4 F.3d 1262, 1267-1268 (4th Cir. 1993) (discussing the propriety of debtor's assignment of proceeds from sale of Orix-secured collateral to its cash accounts where lender applied the funds to pay down debtor's loan balance). In a motion to dismiss, the Court need not accept as true this type of conclusory allegation and it does not in this instance.
The underlying security agreement provides that New York law controls in any dispute. However, both New York and Virginia law are the same inasmuch as both utilize the same Uniform Commercial Code provisions (UCC) relevant to the issues involved. Likewise, the case law of both jurisdictions is consistent in regard to the matter. One such rule is that a debtor in default under the circumstances in this case has no fiduciary duty to a particular secured creditor and is under no duty to prefer a superior creditor over a junior one in transferring collateral for fair value unless a controlling agreement mandates a preference by the preclusion of any non-fraudulent transfer to other than the "superior":
[A]n insolvent debtor may generally make a valid transfer of a portion or the whole of his assets to a bona fide creditor on account of an existing indebtedness, if that is the sole purpose of the debtor and the transfer is for full value. This is true even though such transfer may be and is intended by the debtor and creditor to give such creditor a preference to the exclusion of others.
Bank of Commerce v. Rosemary and Thyme, Inc., 218 Va. 781, 784, 239 S.E.2d 909, 912 (1978); Va. Code § 55-80.
See also Farm Stores, Inc. v. School Feeding Corp., 477 N.Y.S.2d 374, 378 (1984) (holding that an insolvent is permitted in good faith to assign payments or assets to certain bona fide creditors to the exclusion of others unless the creditor is the insolvent's director or officer); N.Y.C.L.S. U.C.C. § 9-501 (1999); see also Fitzpatrick v. Flannagan, 106 U.S. 648, 659 (1882) (in interpreting Mississippi law, the Court held that "no preference could be held to be unfair which, tested by the rules of law, is legal."). For purposes of simplicity, all further citations to the relevant UCC provision will be to the Virginia codification since the two statutory versions and interpretative authority are identical in all essential respects.
The Plaintiff does not assert in the Complaint that the security agreement does anything more than give it the right to take possession upon default. It is also clear as of this point in time under both New York and Virginia law that a junior creditor does not have to seek out and provide notice to a superior creditor before accepting in good faith the transfer of an asset from a defaulting debtor. There is nothing to suggest here, even after considering all reasonable inferences to be drawn from the factual allegations of the Complaint in favor of the Plaintiff, that the transfer of collateral from Young Express to Wachovia was other than in the regular course of business toward satisfaction of a bona fide debt. The fact (as accepted as true for purposes of the motion) that there was no express written agreement authorizing the transfer of the accounts receivable to Wachovia is therefore of no avail to Orix.
It is correct that the act of conversion requires the wrongful exercise of dominion over the property of another "'irrespective of good or bad faith, care or negligence, knowledge or ignorance.'" Harry Clayton Cook, Jr. v. 1031 Exchange Corp., et al., 1992 WL 885015, *2 (Va.Cir.Ct. Nov. 12, 1992) (quoting Universal C.I.T. Credit Corp. v. Kaplan, 198 Va. 67, 76, 92 S.E.2d 359, 365 (1956)). However, the gravamen here is that regardless of Orix's priority, Wachovia had an absolute right to collect the receivables under both New York law and Virginia law. In this case, typical of everyday commercial practice, Wachovia had a legitimate right to the Collateral which it exercised or, at the very least, there is no basis other than unsubstantiated allegation that it acted with the fraudulent intent required to sustain a charge of conversion before it was put on notice of the superior claim of Orix. Mills v. Miller Harness Company, Inc., 229 Va. 155, 157, 326, S.E.2d 665, 666 (1985). Therefore, at no time prior to its actual knowledge did Wachovia exercise wrongful dominion over the Collateral.
Furthermore, whether or not a logical interpretation of § 8.9-503 requires some exercise of self-help by a superior creditor to put all juniors on sufficient notice so as to effectuate a superior's priority right to possession (as urged by Wachovia), the factual allegations of the Complaint do not support an act of wrongful dominion or fraudulent intent by Wachovia as of the time it took possession of the Collateral. The question in this case is therefore succinctly answered in the following excerpt from a relevant authority:
The Court (J. Lowe) previously held that § 8.9-503 contemplates some action by the secured party to take possession of the Collateral "before its superior lien can prevail." (Mem. Op., Oct. 10, 2000 at 7). Plaintiff relies in large part on case law outside the two state jurisdictions and federal circuits relevant to the case (with one distinguishable exception) and the cases cited are distinguishable on their facts in one way or another, including the fact that tangible collateral issues are involved. It is, of course, appropriate to refer to the law of other jurisdictions when that of the jurisdiction involved is of no assistance. However, the Court finds sufficient guidance from the New York and Virginia authority cited (or distinguished) in this memorandum and Def.'s Reply to Pl.'s Opp'n to Mot. to Dismiss (at 7-9). Therefore, further discussion and analysis of the case law cited by the Plaintiff in regard to the issue is neither necessary nor appropriate.
If direct collection under § 9-502 is accomplished by a junior secured creditor, should it have a duty to remit the collections to the senior? Under general principles of negotiability, the junior should be entitled to retain the collections free of the claims of the senior, if it has collected in good faith and without knowledge of the senior's interest. Constructive knowledge in the form of an earlier UCC filing should not be enough. On the other hand, in contrast to a junior's sale of tangible collateral where the senior's lien follows the goods, a junior's direct collection on third-party obligations is highly prejudicial to the senior. Therefore, the junior should be required to remit collections to the senior if it has actual knowledge or reason to know of the senior's existence. However, a UCC search by the junior should not be required.
Barkley Clark, The Law of Secured Transactions Under the Uniform Commercial Code ¶ 4.04(1) (Rev. ed. 2000) (emphasis added).
A separate basis for dismissal of the conversion claim against Wachovia is expressed in the ruling already made in this case regarding the allegation of conversion in the original Complaint against the individual Young Defendants. The Court (J. Lowe) held that the conversion claim as initially pled would apply only if the Plaintiff alleged that the intangible property rights represented by its security interest in the Collateral arose from or merged with the lease agreement so as to become subject to an act of conversion as tangible property. (Mem. Op. Oct. 10, 2000, at 7) (citing to United Leasing Corp. v. Thrift Ins. Corp, et al., 247 Va. 299, 305, 440 S.E.2d 902, 906 (1994)). The rationale for the Court's ruling, which remains the law of this case for the corresponding allegations in the pending Complaint, is that the theory of conversion only applies to tangible property rights and therefore no such rights arose unless the Plaintiff attempted to exercise its right to possession of the Collateral under § 8-503 pursuant to the express authority of the lease agreement.
In an attempt to reinvigorate its conversion claim against all parties, Orix argues that Wachovia "incorrectly rel[ies] on language from Judge Lowe's memorandum opinion" that the accounts receivable cannot be converted because they are intangible property. (Pl.'s Opp'n to Def.'s Mot. to Dismiss at 17). In this case, not only is the claim for conversion unsustainable because the it is legal for insolvent debtors to prefer one creditor over another (at least absent knowledge of a superior claim), but, as the Court has already decided, a claim for conversion must be for tangible property or intangible property that has merged with a valid document such as a promissory note or bond. United Leasing Corp. v. Thrift Insurance Corp., 247 Va. at 305, 440 S.E.2d at 905. Despite the surviving breach of contract claim and its position as a secured creditor, Orix cannot otherwise show that the receivables were "clear, definite, undisputed, and obvious property right[s] in a thing to which they are entitled to immediate possession." Id. see also Roemer and Zeller, Inc. v. Ace Transmission Center, Inc., 454 N.Y.S.2d 377, 378 (1982) (even when a party has priority over a secured interest in tangible property, there is no requirement "that any particular creditor may unilaterally prevent seizure of a debtor's assets solely as an incident" of the party's seniority because its lien will still have priority with respect to proceeds). None of the cases cited by Orix persuade the Court otherwise, including Nat'l Acceptance Co. of America v. Virginia Capital Bank, 498 F. Supp. 1078, rev'd in part, aff'd in part, and remanded, 673 F.3d 1314 (1981), for which there is no published opinion accompanying the reversal thus rendering it unavailable as controlling authority.
The Complaint, as amended, does not allege that Orix made any attempt to enforce its right to immediate possession of the intangible receivables before Wachovia took possession. Orix admits it made no such attempt. Thus, even viewing all of the factual allegations in the light most favorable to Plaintiff, as a matter of law Wachovia permissibly accepted assignment of the Young Defendants' receivables until it was apprised of the Orix senior secured status and therefore authority such asUnited Leasing Corp. is controlling.
The Plaintiffs also urge a theory of estoppel, but it is only is applicable, if at all, to the breach of contract claim which is not a subject of the instant motions.
Counts II and III
This Court (J. Lowe) previously dismissed Counts II (Breach of Fiduciary Duty) and III (Conversion) as to the Young Defendants, without prejudice. The Second Amended Complaint realleges the same claims without material variance. The rationale of the Court's earlier ruling, incorporated herein by reference, therefore controls and Counts II and III of the pending Complaint are therefore DISMISSED.Counts V and VI
The Plaintiff also seeks injunctive relief as against the Young Defendants, including the appointment of a receiver to marshal and control the subject funds. Such relief, by definition and long-standing precedent, is only appropriate if there is no other adequate remedy at law. Johnson v. Collins Entertainment Co., Inc., 199 F.3d 710, 726 (4th Cir. 1999) (citing Grupo Mexicano De Desarrollo, S.A., et al. v. Alliance Bond Fund, Inc., et al., 527 U.S. 308 (1999)). Only Count I remains alleging breach of contract for which there is an adequate remedy at law if the Plaintiff shall prevail, namely, a monetary judgment there can be no claim for the Collateral already obtained by Wachovia before it received notice of the Plaintiff's superior claim for the reasons previously stated. Counts IV and V are therefore also DISMISSED.CONCLUSION
For the reasons stated, the requested relief sought in both motions to dismiss is GRANTED.
An appropriate Order shall issue.
ORDER
This matter is before the Court on a motion to dismiss Counts II, III, V, and VI of the Second Amended Complaint (Complaint) by the Defendants Young Express, Inc., David C. Young, and Frank Young, collectively (Young Defendants), and a motion to dismiss Count IV by the Defendant Wachovia Bank, N.A. (Wachovia). For the reasons set forth in the accompanying Memorandum Opinion, it is hereby
ORDERED that both motions are GRANTED and Counts II-VI are DISMISSED as to all defendants. It is further
ORDERED that counsel for the Plaintiff and the Young Defendants shall contact the Court forthwith for purposes of scheduling a status conference as to the remaining claim contained in Count I of the pending Complaint.
Let the Clerk of the Court forward a copy of this Order and the accompanying Memorandum Opinion to all counsel of record.
It is so ORDERED.