Silvermark Corp. v Rosenthal & Rosenthal Inc.
Annotate this CaseDecided on January 25, 2008
Supreme Court, New York County
Silvermark Corporation, Plaintiff,
against
Rosenthal & Rosenthal Inc. and Star City Sportswear, Inc., Defendants.
602026/07
Attorneys for Plaintiff
Storch Amini & Munves PC
2 Grand Central Tower
140 East 45th Street, 25th Floor
New York, New York 10017
(212) 490-4100
Att: Kathleen E. Wright, Esq., Elizabeth J. Shampnoi, Esq., Steven G. Storch, Esq. and Bonnie A. Tucker, Esq.
Attorneys for Defendants
Toback, Bernstein & Reiss LLP
15 West 44th Street, 12th Floor
New York, New York 100036
(212) 869-2300
Att: Arthur M. Toback, Esq.
Helen E. Freedman, J.
Plaintiff Silvermark Corporation ("Silvermark"), brought this action against its factor Rosenthal & Rosenthal, Inc. ("Rosenthal"), and Star City Sportswear, Inc. ("Star City"), a Silvermark's client, for breach of contract, breach of covenant of good faith and fair dealing, goods sold and delivered, unjust enrichment, fraud, and tortious conversion. Rosenthal now moves to dismiss the complaint based on documentary evidence, pursuant to CPLR 3211(a)(1), and for failure to state a cause of action, pursuant to CPLR 3211 (a)(7). Rosenthal also seeks an award of attorneys' fees pursuant to the terms of its contract with plaintiff and imposition of sanctions on the grounds that plaintiff's claims are frivolous.
For the reasons set forth below, Rosenthal's motion to dismiss is granted as to the first, third,
fourth, fifth, and sixth causes of action and it is denied as to the second cause of action.
Background
Silvermark is a corporation engaged in the manufacturing of apparel. On or about October 9, 2002, Silvermark entered into a Factoring Agreement ("the Agreement"), with Rosenthal, a company engaged in providing factoring services to vendors. Pursuant to the Agreement, Rosenthal purchased certain approved accounts receivable from Silvermark and advanced sums to it based on the net amount of the purchased receivables. Rosenthal then collected payment from Silvermark's customers and remitted to it any funds remaining after payment of Rosenthal's advances, charges, and interest charges according to the terms of the Agreement.
The relevant portions of the Agreement provide as follows:
2. . . . We shall not be responsible for any non-payment of a receivable because of the assertion of any claim or dispute by a customer or the exercise of any counterclaim or offset (whether or not such claim, dispute, counterclaim or offset relates to the specific receivable) . . . .
3. . . . You shall report to us in writing all disputes and claims made by your customers, and the return of or offer to return any goods, and you will promptly settle all such claims and disputes at your expense. . . . We reserve the right at any time to charge back to your account the [*2]full amount of the receivable that has been the subject of a credit issued by you without our consent or that has been involved in any other claim, dispute or return asserted by your customer, and you agree to pay us upon demand the full amount thereof. The charge back to your account of the amount of any receivable shall not be deemed a reassignment thereof to you and title thereto, to the proceeds thereof, to all security and guarantees therefor and to your interest in the goods represented thereby, shall remain in us.
7. . . . All statements, reports or accountings rendered or issued by us to you, including such trial balances and sales summaries, shall be deemed accepted and be finally conclusive and binding upon you unless you notify us to the contrary by registered or certified mail within sixty days after the date such statement, report or accounting is sent to you.
11. . . . In the event we shall retain counsel for the purpose of enforcing the performance, payment or collection of any of the Obligations, then and in that event you agree to pay the reasonable fees of our counsel, plus any and all expenses and disbursements incurred in connection therewith and/or incidental thereto.
In April and May 2006, Rosenthal purchased certain invoices representing the shipment of items from Silvermark to Star City, a wholesaler of ladies sportswear, for the value of $364,542.98. When the invoices became over due, Rosenthal sought payment directly from Star City and was advised, by telephone and in a letter captioned "Notice of Dispute," that Star City was withholding payment because of issues regarding the quality of the goods. By letter dated June 23, 2006, Rosenthal notified Silvermark that Star City had disputed the invoices and that the amount of $364,542.98 would be charged back in August. By letter dated July 6, 2006, Silvermark responded that it had not received notice from Star City that the goods were rejected. On August 22, 2006, Rosenthal charged back to Silvermark the amount of $364,542.98. However, at the beginning of September, Rosenthal received a payment from Star City and credited Silvermark's account in the amount of $104,772.50. This payment reduced the amount owed by Star City to Silvermark to 259,770.48. In mid-September, Rosenthal sent Silvermark a statement representing all August transactions, including the charge backs at issue here. Silvermark did not object to the statement within the following sixty days. Instead, few months later, by letter dated January 17, 2007, Silvermark advised Rosenthal that it wanted a copy of the dispute notice from Star City and that it wished to discuss this matter. Star City's dispute notice was provided to Silvermark few days later.
In the Complaint, Silvermark alleges, inter alia, that Rosenthal was also the factor for
Star City, that the latter was heavily indebted to Rosenthal, and that Rosenthal devised a
fraudulent scheme to collect the amounts owed to it. Silvermark maintains that Rosenthal took
control of the business and operations of Star City, fabricated disputes regarding goods received
by Star City to avoid paying vendors, and diverted to itself the moneys that had been already
credited to the vendors' accounts. In particular, Silvermark alleges that Rosenthal fabricated Star
City's dispute notice as a pretext for Star City to charge back Silvermark's account and provide a
justification for Rosenthal's charge backs. Silvermark seeks compensatory damages in the
amount of 259,770.48, consequential and punitive damages.
[*3]Discussion
Breach of Contract Claim.
Rosenthal contends that the first cause of action, the breach of contract claim, should be dismissed because the Agreement provides for an unfettered right to charge back the factored invoices when a customer raises a claim or dispute as a reason for non-payment, regardless of whether that claim or dispute has merit. Rosenthal also contends that the charge backs are binding on Silvermark because it did not object to them by certified or registered mail within sixty days after the issuance of the monthly statement containing the charge backs, as required by the Agreement. In opposition, Silvermark contends that Rosenthal breached the Agreement by issuing the charge backs based on a dispute that was fabricated.
The law is well established that "a factor may exercise its contractual right of charge back without verifying the merits of the dispute between the seller and the eventual buyer." Tex Styles Group, Inc. v. Republic Factors Corp., 106 AD2d 257, 258 (1st Dep't 1984) (citing Danleigh Fabrics, Inc. v. Gaynor-Stafford Inds., 62 NY2d 677 (1984)). However, the rationale for that rule resides in the nature of a factor's business: "the factor does not purport to conduct its customer's business for the customer; the factor merely assures the customer against loss by reason of financial inability of the buyer to pay; all other problems remain those of the factor's customer." Garden State Yarn v. Rosenthal & Rosenthal, Inc., 99 AD2d 721, 722 (1st Dep't 1984). Here, plaintiff's allegations that Rosenthal took control over the business operation of Star City, ultimately interfering with the relationship between Silvermark and Star City, raise a question as to whether Rosenthal's conduct comported with the nature of a factor's business and whether the general rule should not apply where the allegation is that the factor itself fabricated the dispute raised by the plaintiff's customer. However, even assuming, arguendo, that Rosenthal's charge backs were improper, the breach of contract claim must be dismissed because Silvermark has failed to object to them in a timely fashion pursuant to the terms of the Agreement. Under the Agreement, Silvermark had sixty days to object to the September statement evidencing the charge backs but did not raise a dispute until mid-January when the charge backs were deemed accepted and binding, and any objection to them had been waived. For this reason, the breach of contract claim is dismissed.
Breach of the Covenant of Good Faith and Fair Dealing Claim.
Rosenthal contends that the second cause of action, the breach of the covenant of good faith and fair dealing, should be dismissed because it cannot stand on its own in the absence of a valid breach of contract claim. Opposing the motion, Silvermark contends that this is an independent cause of action supported by allegations that Rosenthal issued the charge backs in bad faith, preventing Silvermark from reaping the fruits of their Agreement.
Implied in every contract there is a covenant of good faith and fair dealing. Greenwich Village Assoc. v. Salle, 110 AD2d 111, 115 (1st Dep't 1985). Encompassed within this implied promise is a pledge that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Dalton v. Educ. Testing Serv., 87 NY2d 384, 389 (1995) (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 263 NY 79, 87 (1933)). New York courts have repeatedly affirmed that a claim for breach of the implied covenant of good faith can stand on its own, independent of a breach of contract claim, where a plaintiff alleges that a defendant has exercised its rights under the contract in bad faith in [*4]order to deprive the other party of the fruit of its bargain. See Maddaloni Jewelers, Inc. v. Rolex Watch U.SA. Inc., 41 AD3d 269 (1st Dep't 2007); Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 309 AD2d 288 (1st Dep't 2003); Gross v. Empire Healthchoice Assur., Inc., 16 Misc 3d 1112(A) (Sup. Ct. NY Co. 2007). Here, plaintiff has alleged that Rosenthal diverted to itself the funds that Star City owed to Silvermark and improperly exercised its right to charge back as part of a fraudulent scheme which resulted in Silvermark's deprivation of the benefit of its Agreement with Rosenthal. These allegations are sufficient to support a claim for breach of the covenant of good faith, independent of a breach of contract claim. Thus the second cause of action remains.
Goods Sold and Delivered Claim.
With respect to the third cause of action for goods sold and delivered, this claim must be dismissed. To recover on an action for the price pursuant to the New York version of the Uniform Commercial Code, a plaintiff must show that: (1) it had a contract with the buyer, (2) the buyer failed to pay the purchase price, and (3) the buyer accepted the goods. See Weil v. Murray, 161 F. Supp. 2d 250, 254-55 (S.D.NY 2001); McKinney's Uniform Commercial Code § 2-709(1)(a) (2001). Insofar as the Complaint alleges that the goods were sold to and accepted by Star City, Silvermark fails to meet the first element of its claim. As Silvermark's factor, Rosenthal merely purchased the accounts receivable created from the sale of the goods to Star City, and not the goods themselves. Moreover, Silvermark's allegations that Rosenthal acted as the owner of the goods by taking control of the business and operations of Star City are also unavailing in supporting a claim to recover the price of the goods. A secured creditor does not become a successor in interest to its borrower by taking control of the borrower's assets. See Spielman v. Acme Nat. Sales Co., 169 AD2d 218, 222 (3d Dep't 1991). Therefore, absent a showing that the Silvermark-Star City contract was formally assigned to Rosenthal, the latter cannot be considered to be the owner of the goods that Star City purchased from plaintiff. Thus the third cause of action is dismissed.
Unjust Enrichment Claim.
Silvermark's fourth cause of action for unjust enrichment must be dismissed for failure to state a claim. Rosenthal and Silvermark had a valid and enforceable written contract. Unjust enrichment is a quasi-contractual claim which may not be maintained where there is a contract between the parties covering the same subject matter. Goldstein v. CIBC World Markets Corp., 6 AD3d 295 (1st Dep't 2004) (citing Clark-Fitzpatrick, Inc. v. Long Is. R.R Co., 70 NY2d 382 (1987)).
Fraud Claim.
With respect to the fifth cause of action for fraud, that claim is dismissed as subsumed in the breach of the covenant of good faith and fair dealing claim and as duplicative of that claim, since it is based on alleged fraudulent misrepresentations related to Rosenthal's implied obligation to exercise its right to charge back in good faith.
Tortious Conversion Claim.
In its sixth cause of action, Silvermark alleges a claim for tortious conversion and seeks to impress a constructive trust upon the amounts charged back by Rosenthal. This claim is dismissed for failure to state a cause of action. "Conversion is an unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights. Money, if specifically identifiable, may be the subject of a conversion action." [*5]Peters Griffin Woodward, Inc. v. WCSC, Inc., 88 AD2d 883 (1st Dep't 1982) (internal citations omitted). Here, Silvermark's allegations that it owned the monies charged back are contradicted by a specific provision in the Agreement which states that Rosenthal retained ownership of the purchased accounts receivable, and title to their proceeds, even after a charge back had occurred. (Agreement, ¶3) Thus, the conversion claim is dismissed. Moreover, a constructive trust is a remedy for fraud which would be inappropriate for the court to consider it at this juncture. Bankers Security Life Ins. Soc. v. Shakerdge, 49 NY2d 939 (1980).
Punitive Damages.
Plaintiff is not entitled to recover punitive damages. Punitive damages are only available for claims involving a gross and wanton fraud or wrong perpetrated upon the public at large. See Garrity v. Lyle, 40 NY2d 354, 357-58 (1976); see also Rocanova v. Equitable Life Assur. Soc. of U.S., 83 NY2d 603 (1994). Here, Silvermark seeks recovery for only a private wrong.
Legal Fees and Sanctions.
Rosenthal is not entitled to recover legal fees at this juncture. The Agreement provides for reimbursement of legal fees in the event the factor "shall retain counsel for the purpose of enforcing the performance, payment or collection of any of the Obligations." (Agreement, ¶ 11.)
That appears to refer to claims against third parties. Moreover, since plaintiff's complaint is not entirely dismissed, neither attorneys' fees nor sanctions are appropriate.
Based on the foregoing, it is hereby
ORDERED that Defendant Rosenthal's motion to dismiss against Silvermark is granted to the extent that the first, third, fourth, fifth, and sixth causes of action in the complaint are severed and dismissed, and it is further
ORDERED that the action is continued as to the second cause of action stated in plaintiff's complaint, and it is further
ORDERED that the parties are directed to appear for a status conference on February 26th,
2008, at 9:30 a.m. in courtroom 208, 60 Centre Street, New York, New York 10007.
Dated: January 25, 2008
Enter:
_________________________
Helen E. Freedman, J.S.C.
Appearances
Attorneys for Plaintiff
Storch Amini & Munves PC
2 Grand Central Tower
140 East 45th Street, 25th Floor
New York, New York 10017
[*6]
(212) 490-4100
Att: Kathleen E. Wright, Esq., Elizabeth J. Shampnoi, Esq., Steven G. Storch, Esq.
and Bonnie A. Tucker, Esq.
Attorneys for Defendants
Toback, Bernstein & Reiss LLP
15 West 44th Street, 12th Floor
New York, New York 100036
(212) 869-2300
Att: Arthur M. Toback, Esq.
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