LLC Recovery of a Debt

Author: LegalEase Solutions

Provide an analysis of potential claims and principal liability based on the facts of the case.

SUMMARY

Brief facts:

Blackheart International, LLC (“Blackheart”) is a limited liability company incorporated under the laws of West Virginia. Trivec-Avant Corporation (“Trivec”) is a company having its principal place of business in the State of California. This matter relates to recovery of a debt that Blackheart owes to Trivec. The balance amount owed by Blackheart comes to $394,733.00 as of February 24, 2015, for goods ordered and accepted by Blackheart from Trivec from January 30, 2014, through March 24, 2014. Blackheart was a reseller of Trivec’s antenna products for many years, dating prior to 2008. Blackheart was acquired by General Stability, Inc. (GS) in early 2013. GS is headed by Mr. Steaphan Weir. Even after the acquisition, several invoices from Trivec were paid promptly in 2013. Subsequently, Blackheart failed to meet its payment obligations to Trivec. Blackheart also subsequently sold, and received payment from U.S. Government contractors for, a substantial portion of the goods. Despite these sales, Blackheart refused to pay Trivec or to provide an accounting. Mr. Weir failed to disclose the real facts related to its ownership or financial status of Blackheart for a long time. Relying on the previous goodwill and business relationship Trivec believed Mr. Weir would try and make the outstanding dues on the invoices for goods already supplied to Blackheart.

The memo explores the potential claims available to Trivec-Avant Corporation under the circumstances. The terms and conditions for the sale of goods and supply of services are governed by the laws of the State of New York.

SHORT ANSWER

Under New York law, there is no impediment to imposing personal liability against a corporate officer if he or she has personally participated in or had actual knowledge of the fraud or illegality, which includes misrepresentation of a material fact. Even though evidence of a special relationship between the parties is required to claim negligent misrepresentation, fraudulent misrepresentation is appropriate when there is a material representation of existing fact or a material omission. However, in order to claim misrepresentation or omission of material fact, existence of a fiduciary duty between the parties, or some duty to disclose omitted information, is essential.

Furthermore, in order to claim personal liability from purchaser’s corporate officers, a specific cause of action for fraud against corporate officers is essential.  West Virginia law also provides for a cause of action for fraud against corporate officers and they will be personally liable for tortuous acts of the corporation. Corporate officers will also be personally liable for fraudulent transfers or conveyances, and conversion or civil theft. However, a cause of action under unfair or deceptive trade practice is applicable only in consumer-oriented claims.

RESEARCH FINDINGS

  1. Misrepresentation

“‘The elements of a cause of action sounding in fraud are a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages.’” High Tides, LLC v. DeMichele, 88 A.D.3d 954 (2d Dept. 2011) (quoting Introna v. Huntington Learning Ctrs., Inc., 78 A.D.3d 896, 898 (2d Dept. 2010); see Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147 (2009)).

“Where a cause of action is based on a misrepresentation or fraud, ‘the circumstances constituting the wrong shall be stated in detail.’” High Tides, LLC, 88 A.D.3d at 957 (quoting CPLR 3016 (b)). “The purpose of this pleading requirement ‘is to inform a defendant of the complained-of incidents.’” Id. (quoting Eurycleia Partners, LP., 12 N.Y.3d at 559). “However, courts have recognized that, in certain circumstances, it may be ‘almost impossible to state in detail the circumstances constituting a fraud where those circumstances are peculiarly within the knowledge of [an adverse] party.’” Id. at 957 (quoting Jered Contr. Corp. v. New York City Tr. Auth., 22 N.Y.2d 187, 194, 292 N.Y.S.2d 98 (1968)).

Under such circumstances, the heightened pleading requirements of CPLR 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct” including the adverse party’s knowledge of, or participation in, the fraudulent scheme.

Id. at 957 (quoting Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d at 492, 860 N.Y.S.2d 422, 890 N.E.2d 184 (2008)).

 

    1. Negligent Misrepresentation – New York

“[I]n order to make a prima facie showing on a cause of action premised upon negligent misrepresentation , a plaintiff must establish, among other elements, that it relied upon the fraudulent misrepresentation,  and that as a result, it was induced to engage in a specific course of conduct.” Ross v. Louise Wise Servs., 8 N.Y.3d 478 (2007); Meyercord v. Curry, 38 A.D.3d 315 (2007).

“‘[L]iability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.’” High Tides, LLC, 88 A.D.3d at 959-60 (quoting Kimmell v. Schaefer, 89 N.Y.2d 257, 263, 652 N.Y.S.2d 715 (1996)). “‘A special relationship does not arise out of an ordinary arm’s length business transaction between two parties.’” Id. (quoting US Express Leasing, Inc. v. Elite Tech. [NY], Inc., 87 A.D.3d 494, 497 (1st Dept. 2011). Further, “‘an arm’s length borrower-lender relationship is not of a confidential or fiduciary nature.’” Id. (quoting Dobroshi v. Bank of Am., N.A., 65 A.D.3d 882, 884 (1st Dept. 2009)).

It should be noted that a “claim of negligence by omission is analytically distinct from the negligent misrepresentation claim, although it relies on much the same proof.” G. ex rel. G. v. Athletic Alliance Risk Purchasing Grp., 193 Misc. 2d 190, 194-95, 747 N.Y.S.2d 884, 886 (Sup. Ct. 2002). “The difference is that, in the negligent misrepresentation claim, the relevant duty is to speak accurately, and the breach lies in failure to reasonably verify the facts before speaking.” Id. Theoretically, if a reasonable care is taken to speak accurately as to the expected level of security, personal liability for negligent misrepresentation might be defeated, even if such expectation were not met. Id. “With respect to negligence by omission, however, the duty is to act, with due care, once one undertakes to act.” Id. In the instant matter it will be difficult to argue that two commercial parties dealing at arms-length are in a special relationship of confidence or trust. In New York, evidence of a special relationship between the parties is required to claim negligent misrepresentation. Gardianos v. Calpine Corp., 16 A.D.3d 456, 456, 791 N.Y.S.2d 628, 629 (2005). Therefore, a negligent misrepresentation would not be a good argument under the facts of this case.

    1. Fraudulent Misrepresentation – New York.

“Fraudulent misrepresentation is established upon proof of the following: (1) misrepresentation, concealment or nondisclosure of a material fact; (2) intent to deceive; (3) justifiable reliance upon the misrepresentation; and (4) injury as a result of such reliance.” Drew v Sylvan Learning Ctr. Corp., 16 Misc 3d 836, 839 (Civ. Ct. 2007) (Channel Master Corp. v. Aluminium Limited Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259 (1958)).

The elements of a cause of action or defense sounding in fraud are: (1) a misrepresentation of an existing fact; (2) which misrepresentation was false and known to be false; (3) which misrepresentation was made for the purpose of inducing the other party to rely upon it; (4) the other party justifiably did so rely upon said misrepresentation; and (5) such misrepresentation resulted in injury.

 

Westbury Small Bus. Corp. v Ballarine, 128 Misc 2d 469, 475 (Sup Ct 1985) affd, 125 A.D.2d 462 (2d Dept. 1986) (citing Channel Master Corporation v. Aluminum Limited Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259, 151 N.E.2d 833 (1958)).

 

Additionally, “[t]he ‘commission of a tort’ doctrine permits personal liability to be imposed on a corporate officer for misfeasance or malfeasance, i.e., an affirmative tortious act; personal liability cannot be imposed on a corporate officer for nonfeasance, i.e., a failure to act.” Peguero v. 601 Realty Corp., 58 A.D.3d 556, 559, 873 N.Y.S.2d 17, 21 (2009). Therefore, “there is no impediment to imposing personal liability against a corporate officer if it is established that he [or she] personally participated in or had actual knowledge of the fraud or illegality.” People ex rel. Schneiderman v. One Source Networking, Inc., 125 A.D.3d 1354 (N.Y. App. Div. 2015) (citing People ex rel. Spitzer v. Frink Am., Inc., 2 A.D.3d 1379, 1381, 770 N.Y.S.2d 225 (2003)).

    1. Misrepresentation or Material Omission – New York.

“Generally, in a claim for fraudulent misrepresentation, a plaintiff must allege ‘a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.’” Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178, 944 N.E.2d 1104, 1108 (2011) (quoting Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 (1996)).  However, for an omission to be material, the omitting party must have some duty to make the omitted material known.  Id.

In Mandarin, the plaintiff claimed that defendant’s omission of his ownership interest in a painting, when providing the appraisal, was a fraudulent, material misrepresentation intended to induce plaintiff’s reliance. Id. The court held that plaintiff’s claim failed to state a cause of action for material omission. The court reasoned that in order to claim fraudulent omission, the complaint should allege that the defendant owed a fiduciary duty to plaintiff. (see P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V., 301 A.D.2d 373, 376 (1st Dept. 2003) (“A cause of action for fraudulent concealment requires, in addition to the four foregoing elements (of fraudulent misrepresentation), an allegation that the defendant had a duty to disclose material information and that it failed to do so”)). Mandarin Trading Ltd., 16 N.Y.3d at 179.

Here, Trivec would have to show that Mr. Weir or Mr. Barber had a personal duty to disclose the change in ownership, or finicial difficulties of BHI, before they could be held liable for fraudulent omission.  ON the facts provided, and as further discussed below, that appears unlikely.

    1. Misrepresentation or Omissions and Contractual Relationship.

Only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.

 

Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc., 115 A.D.3d 128, 137, 980 N.Y.S.2d 21, 28 (2014) (see e.g. Silver Oak Capital L.L.C. v. UBS AG, 82 A.D.3d 666, 667, 920 N.Y.S.2d 325 (1st Dept.2012)).

 

“In other words, in view of the disclaimer, no representations exist and that being so, there can be no reliance.” Id. (citing HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 201, 941 N.Y.S.2d 59 (1st Dept.2012)). “In assessing whether a contractual claim will preclude a claim of breach of fiduciary duty, the question is whether there exists an independent basis for the fiduciary duty claims apart from the contractual claims, even if both are related to the same or similar conduct.” Coventry Real Estate Advisors, L.L.C. v. Developers Diversified Realty Corp., 84 A.D.3d 583, 585 (2011).

In Coventry Real Estate Advisors, L.L.C., the LLC Agreements provided for, but did not mandate, delegation of the day-to-day management to defendant Developers Diversified Realty Corporation (DDR). Therefore, the plaintiffs contended that the LLC Agreements constituted an independent source of fiduciary duties for DDR, thus rendering the fiduciary duty claim non-duplicative of the breach of contract claim under the development and managing agreements. However, the court held that “the LLC Agreements do not ascribe any fiduciary duties to DDR.” Id. at 585.  According to the court, “[s]ince plaintiffs do not posit any other independent source of fiduciary duty for DDR, any fiduciary duty claim arising under the Management Agreements must be dismissed as duplicative of plaintiffs’ contractual claims for breach of those agreements.” Id.

A claim of misrepresentation by omission may not be raised on a contractual relationship as aforementioned without a fiduciary duty.  Here, part 2.8 of Trivec’s terms and conditions may contain a waiver such as that mentioned in Basis Yield Alpha Fund. 2.8  states that the contract supersedes any representations between the parties. Therefore, If Basis Yield is found to be controlling on this point, Trivec’s claims for misrepresentation are likely to fail.

    1. Fraudulent Misrepresentation – West Virginia

West Virginia statute that deals with fraudulent misrepresentation is in the employer –employee context. In an action related to employee’s claim against an employer for fraudulent misrepresentation concerning the employee’s workers’ compensation claim, the employee must (1) plead his or her claim with particularity, specifically identifying the facts and circumstances that constitute the fraudulent misrepresentation, and (2) prove by clear and convincing evidence all essential elements of the claim, including the injury resulting from the fraudulent conduct.

Bowens v. Allied Warehousing Servs., Inc., 229 W. Va. 523, 525-26, 729 S.E.2d 845, 847-48 (2012).

Additionally, “[a]n officer of a corporation may be personally liable for the tortious acts of the corporation, including fraud, if the officer participated in, approved of, sanctioned, or ratified such acts.” Bowling v. Ansted Chrysler-Plymouth-Dodge, Inc., 188 W. Va. 468, 469, 425 S.E.2d 144, 145 (1992). In Cato v. Silling, 137 W.Va. 694, 73 S.E.2d 731 (1952), it was held that:

[A]n officer of a corporation is not personally liable for the corporation’s torts unless he directed, sanctioned, or participated in the wrongful acts, including fraud: ‘A director or an officer of a corporation does not incur personal liability for its torts merely by reason of his official character unless he has participated in or sanctioned the tortious acts[.]

 

Bowling v. Ansted Chrysler-Plymouth-Dodge, Inc., 188 W. Va. 468, 472, 425 S.E.2d 144, 148 (1992) (quoting Cato, 137 W.Va. at 717, 73 S.E.2d at 745, cert. denied, 348 U.S. 981, 75 S.Ct. 572, 99 L.Ed. 764 (1955)).

In the instant case, Mr. Weir did not deny the fact that Blackheart owes Trivec substantial payment, but stated that Blackheart is currently undergoing financial difficulties and is thus unable to pay the Balance. However, Mr. Weir may be liable under WV law if he is personally guilty of making false representations as to material matters in connection with Blackhert’s and GS’s actions. Mr. Weir will be personally liable if he has willingly participated in acts of fraud and deceit. See generally 18B Am.Jur.2d Corporations § 1877 (1985 & Supp.1992); Annot., 90 A.L.R.3d 916 (1979 & Supp.1992). Thus, it can be concluded that as an officer of Blackheart and GS, Mr. Weir would be personally liable for the tortious acts of the corporation, including fraud, as he participated in, approved of, sanctioned, or ratified such acts of Blackheart.

  1. Fraudulent Conveyance/Transfer
    1. New York  

New York has adopted the provisions of the Uniform Fraudulent Conveyance Act as article 10 of the Debtor and Creditor Law. Section 276 of the Debtor and Creditor Law provides that every conveyance made with the Actual intent to hinder, delay or defraud creditors is fraudulent and void. In this connection the actual intent to defraud consists of deception intentionally practiced to frustrate the legal rights of another.

 

  1. Indus., Inc. v. Jeremias, 66 A.D.2d 178, 181, 411 N.Y.S.2d 945, 948 (1978) (see 37 C.J.S. Fraud s 2, subd. b)).

“As to the merits of this claim, a creditor asserting a claim under Debtor and Creditor Law § 276 may rely on badges of fraud to establish intent.” Dowlings, Inc. v. Homestead Dairies, Inc., 88 A.D.3d 1226, 1231 (2011) (see Matter of Shelly v. Doe, 249 A.D.2d 756, 758 (1998)). “Badges of fraud may include ‘(1) a close relationship between the parties to the transaction, (2) a secret and hasty transfer not in the usual course of business, (3) inadequacy of consideration, … and ( [4] ) retention of control of the property by the transferor after the conveyance.’” Id. (quoting Matter of Shelly, 249 A.D.2d at 758).

“A prime example of this type of fraud is where a debtor transfers his property to another while retaining the use thereof so as to continue in business free from the claims of creditors.” S. Indus., Inc. v. Jeremias, 66 A.D.2d 178, 181, 411 N.Y.S.2d 945, 948 (1978).

Debtor and Creditor Law § 273 provides that ‘[e]very conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent … without regard to his [or her] actual intent if the conveyance is made or the obligation is incurred without a fair consideration.’ ‘A finding of constructive fraud pursuant to section 273 may thus be predicated upon proof of insolvency and lack of fair consideration, without a showing of actual motive or intent to defraud.’

 

Zanani v. Meisels, 78 A.D.3d 823, 824, 910 N.Y.S.2d 533, 535 (2010).

As is evident from Debtor and Creditor Law § 273, “[b]oth insolvency and inadequacy of consideration are prerequisites to a finding of constructive fraud “ Matter of American Inv. Bank v. Marine Midland Bank, 191 A.D.2d 690, 691 (1993). “The burden of proving both insolvency and the lack of fair consideration is upon the party challenging the conveyance.” Id. at 692. “On the other hand, section 276 requires proof that the transferor actually intended to ‘hinder, delay, or defraud’ any present or future creditors.” Zanani v. Meisels, 78 A.D.3d 823, 825, 910 N.Y.S.2d 533 (2010) (citing Debtor & Creditor Law § 276)).

In Bedford Hills Supply, Inc. v. Hubert, 251 A.D.2d 438, 674 N.Y.S.2d 404 (1998), seller of plumbing supplies sued corporate purchaser for account stated and fraud, and sought personal liability from purchaser’s corporate officers. The court held that seller did not have fraud cause of action against the corporate officers. Id. The court reasoned that because the officers did not have actual knowledge of the involuntary dissolution of the company by the state for non-payment of corporate taxes at the time the purchase were made, plaintiff seller could not establish personal liability for fraud. Id.

“But indebtedness is one thing, and insolvency is another.” Voorhees v. Unger, 165 A.D. 566, 569, 151 N.Y.S. 98, 100 (App. Div. 1914). “Insolvency is present when the fair value of his salable assets is less than the amount required to pay existing debts as they become due.” Ede v. Ede, 193 A.D.2d 940, 941-42, 598 N.Y.S.2d 90, 92 (1993) (citing Debtor and Creditor Law § 271(1)). “Equally important, fair consideration requires that the exchange not only be for equivalent value, but also that the conveyance be made in good faith.” Id.

Further, DCL § 278 specifically provides that, where a conveyance is fraudulent as to a creditor, the creditor may, “as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser, … [h]ave the conveyance set aside … to the extent necessary to satisfy his claim” (DCL § 278 (1)(a)). Thus, for example, if Trivec is able to establish that the transfer of assets to third parties by Mr. Weir was a fraudulent conveyance, and that the third parties were not bona fide purchasers of those goods for fair consideration, then Trivec could presumably have the transfer of the assets by Mr. Weir set aside to the extent necessary to satisfy Trivec’s claim. However, whether these buyers would qualify as bona fide purchasers is beyond the scope of this memo.

“As a general rule, the relief to which a defrauded creditor is entitled in an action to set aside a fraudulent conveyance is limited to setting aside the conveyance of the property which would have been available to satisfy the judgment had there been no conveyance.” Joslin v. Lopez, 309 A.D.2d 837, 839, 765 N.Y.S.2d 895, 898 (2003). “A money judgment against the transferee may also be an available form of substitute relief where the transferee has disposed of the wrongfully conveyed property in some manner which makes it impossible to return.” Id.

Here, it appears Mr. Weir may have had actual knowledge that Blackheart was insolvent due in that it may not have had stable assests in excess of its debts when it placed the purchase orders.  Therefore, it may be possible, broadly, to construe the transfers as fraudulent.  However, because Mr. Weir’s personal actions in the facts provided do not come into play before the transfers were made, it may be very difficult to establish personal liability.  Trivec would have to show that Weir personally and intentionally caused the orders to be placed, with the personal intent to never pay Trivec.  That facts as provided have little that appears to support this claim.

    1. West Virginia

The West Virginia Uniform Fraudulent Transfers Act makes transfers by debtors “fraudulent if made under certain circumstances.” Nicholas Loan & Mortgage, Inc. v. W.Va. Coal Co-Op, Inc., 209 W. Va. 296, 301, 547 S.E.2d 234, 239 (2001) (quoting Rich v. Rich, 185 W.Va. 148, 150 (1991)). “The Act provides that a creditor may prove that a transfer was fraudulent by showing that the debtor acted with actual intent to hinder, delay or defraud a creditor.” Id. Uniform Fraudulent Transfers Act, W. Va.Code § 40–1A–1, et seq. (2010), in pertinent part, states:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

 

(1) With actual intent to hinder, delay or defraud any creditor of the debtor[.]

Id.

The Act sets forth a catalog of expressly nonexclusive factors in determining whether the debtor made a transfer, or incurred an obligation, with an actual intent to hinder, delay, or defraud one or more creditors as follows:

(1) The transfer or obligation was to an insider;

(2) The debtor retained possession or control of the property transferred after the transfer;

(3) The transfer or obligation was disclosed or concealed;

(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5) The transfer was of substantially all the debtor’s assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

 

Id. at 301-02 (citing W.Va.Code, 40–1A–4(b) (1986).

“The above list of factors ‘includes most of the badges of fraud that have been recognized by the courts [.]’” Id. (quoting Uniform Fraudulent Transfers Act, § 4, cmt. (5)). “‘Proof of the existence of any one or more of the factors enumerated in (W.Va.Code, 40–1A–4(b)) may be relevant evidence as to the debtor’s actual intent but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation.’” Id. at 302 (quoting Uniform Fraudulent Transfers Act, § 4, cmt. 5). “The finder of fact is best situated to ‘take into account all indicia negativing as well as those suggesting fraud.’” Id. (quoting Uniform Fraudulent Transfers Act, § 4, cmt. 6). According to the court, the “jury or other fact-finder would be best suited to consider the competing factual positions of the parties, and the application of the factors contained in W.Va.Code, 40–1A–4(b) to those factual positions.” Id.

Moreover, the general rule is “that corporate officers have a duty to see that their corporation obeys the law.” Mullins v. Venable, 171 W. Va. 92, 96, 297 S.E.2d 866, 871 (1982); see W. Knepper, Liability of Corporate Officers and Directors § 1.01 (1969); 19 Am.Jur.2d, Corporations § 1271 (1965),

As above, in order to prove fraudulent transfer, Trivec will have to show that Mr. Weir’s conduct personally sought to use Blackheart’s financial difficulties with the apparent intent of disposing of the debt in an impending bankruptcy.

  1. Conversion and Civil Theft
    1. New York

The New York analogue of claims for civil theft is conversion. Smith Barney, Harris Upham & Co. Inc. v. Luckie, 245 A.D.2d 17, 19 (1997). Therefore, a separate statutory civil theft type remedy is not available in New York.

In New York the claim of conversion is recognized as a tort claim. Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 286, 864 N.E.2d 1272, 1273 (2007). An “unlawful exercise of dominion and control over plaintiff’s property constitutes a conversion.” Gen. Elec. Co. v. Am. Exp. Isbrandtsen Lines, Inc., 37 A.D.2d 959, 327 N.Y.S.2d 93, 95 (1971). “Interference with the right to possession is the essence of a conversion.” Id. “It is not necessary that one take actual physical possession of property to be guilty of conversion.” Id.  “Any wrongful exercise of dominion by one other than the owner is a conversion.” Id. “Nor is a wrongful intention to possess the property of another an essential element of a conversion.” Id. 959-60.  “It is sufficient if the owner has been deprived of his property by the defendant’s unauthorized act in assuming dominion and control.” Id. “No manual taking of the property or application of it to the defendant’s own use is required.” Id. “The exercise of dominion over property to the exclusion of and in defiance of the owner’s right is a conversion.” Id. More importantly, “conversion occurs when there is a refusal to return the property upon demand.”  Salatino v. Salatino, 64 A.D.3d 923, 881 N.Y.S.2d 721, 723 (2009).

“A cause of action alleging conversion of funds must allege ‘legal ownership or an immediate right of possession to specifically identifiable funds and that the defendant[s] exercised an unauthorized dominion over such funds to the exclusion of the plaintiff’s rights.’” Zendler Const. Co. v. First Adjustment Grp., Inc., 59 A.D.3d 439, 440, 873 N.Y.S.2d 134, 136 (2009) (quoting Selinger Enters., Inc. v. Cassuto, 50 A.D.3d 766, 768 (2d Dept. 2008)). However, “‘{t]he mere right to payment cannot be the basis for a cause of action alleging conversion.’” Id. (quoting Selinger Enters., Inc., 50 A.D.3d at 768).

“Two key elements of conversion are (1) plaintiff’s possessory right or interest in the property … and (2) defendant[s’] dominion over the property or interference with it, in derogation of plaintiff’s rights.” Palermo v. Taccone, 79 A.D.3d 1616, 1620, 913 N.Y.S.2d 859, 863 (2010).

Additionally, it has been held that “[t]he basic essence of conversion is civil theft, capable of resulting in a transfer of the stolen property to a third party, and, thus, giving rise to a compensatory remedy for its value, if not retrievable for the owner.” Shmueli v. Corcoran Grp., 9 Misc. 3d 589, 593, 802 N.Y.S.2d 871, 875 n. 2 (Sup. Ct. 2005) (see, Hartford Accident & Indem. Co. v. Walston & Co., Inc., 21 N.Y.2d 219, 287 N.Y.S.2d 58, 234 N.E.2d 230 (1967)).

In Zendler Const. Co. v. First Adjustment Grp., Inc., 59 A.D.3d 439, 873 N.Y.S.2d 134 (2009), plaintiff brought an action, inter alia, to recover unpaid fees for services based on an account stated and for conversion. The plaintiff company prepared real property damage estimates for public adjusters. Plaintiff brought action against two public adjusting corporations, (“First Adjustment” and “B & S”), and certain named officers of those corporations to recover unpaid fees for services based upon an account stated and conversion. The Supreme Court refused to dismiss the claims against the individual appellants on the ground that the complaint sounded in conversion as well as breach of contract. The judgment was modified by the appellate division as to the individual defendants because it found that the action sounded in breach of contract and not in tort, and there was no basis in the record to pierce the corporate veil. Id. at 441.

In the instant case, in order to distinguish itself from Zendler Const., Trivec would have to establish that Mr. Weir’s conduct, independent from BHI, was more than just a breach of contract and sufficiently independent of any breach such that his independent tort liability on each element of conversion would be met. Alternatively, Trivec would have to attempt to pierce the corporate veil in regards to any conversion claim, and attempt to show that Mr. Weir used BHI to personally convert Trivec’s property. On the facts provided, that would appear to be a distant possibility at best. Finally, the case law indicates that a specific demand and refusal to give the goods back is necessary to claim conversion. It is unclear whether Trivec’s demand for payment is sufficient and the research did not yield instructive case law.

Punitive or exemplary damages may be recovered “for an act of conversion where the circumstances establish that the conversion was accomplished by malice or reckless or wilful disregard of the plaintiff’s right.” Ashare v. Mirkin, Barre, Saltzstein & Gordon, P.C., 106 Misc. 2d 866, 869, 435 N.Y.S.2d 438, 441 (Sup. Ct. 1980) aff’d as modified, 81 A.D.2d 650, 441 N.Y.S.2d 408 (1981) aff’d, 54 N.Y.2d 891, 429 N.E.2d 425 (1981). “Punitive damages are permitted when the defendant’s wrongdoing is not simply intentional but ‘evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations.’” Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 489, 868 N.E.2d 189, 196 (2007) (quoting Walker v. Sheldon, 10 N.Y.2d 401, 405, 179 N.E.2d 497 (1961)).

Here, if Trivec were successful in proving Mr. Weir wantonly, and willfully or intentionally, disregarded its rights to the property or payment, it seems possible that the court may entertain a claim for punitive damages.

    1. West Virginia

Any distinct act of dominion wrongfully exerted over the property of another, and in denial of his rights, or inconsistent therewith, may be treated as a conversion and it is not necessary that the wrongdoer apply the property to his own use. And when such conversion is proved the plaintiff is entitled to recover irrespective of good or bad faith, care or negligence, knowledge or ignorance.

 

Rodgers v. Rodgers, 184 W. Va. 82, 86, 399 S.E.2d 664, 668 (1990) (quoting Syllabus Point 3, Pine & Cypress Mfg. Co. v. American Eng’g & Constr. Co., 97 W.Va. 471, 125 S.E. 375 (1924)).

            Therefore, in West Virginia, “a person who is charged with conversion of property need not be shown to have acted in bad faith or to have been negligent.” Rodgers, 184 W. Va. at 95. “[A]ny distinct act of dominion wrongfully exerted over property of another, and in denial of his rights, or inconsistent therewith, may be treated as conversion.” Politino v. Azzon, Inc., 212 W. Va. 200, 205, 569 S.E.2d 447, 452 (2002).

As mentioned above, the converted property was sold to third parties like General Dynamics Information Systems and Dallas Aviation, in violation of the terms of the parties’ agreement. The title of the goods sold to third parties did not pass to Blackheart until Trivec’s receipt of payment in full from Blackheart. As a result, Blackheart did not have legal title to the goods sold to third parties. This could amount to civil theft and conversion against Mr. Weir if sufficient facts could show he personally exerted the requisite dominion or control over Trivec’s goods. Based on the foregoing, and facts as provided, this cause would appear questionable, especially in light of the New York holding, finding the claim sounded in contract rather than tort.

  1. Tortious interference with business transactions
    1. New York

“The elements of tortious interference with contractual relations are ‘(1) the existence of a contract between plaintiff and a third party; (2) defendant’s knowledge of the contract; (3) defendant’s intentional inducement of the third party to breach or otherwise render performance impossible; and (4) damages to plaintiff.’” M.J. & K. Co. v. Matthew Bender & Co., 220 A.D.2d 488, 490, 631 N.Y.S.2d 938, 940 (1995) (quoting Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94, 595 N.Y.S.2d 931, 612 N.E.2d 289 (1993)).

“To make out a claim for tortious interference with business relationships, a plaintiff must show that the defendant interfered with the plaintiff’s business relationships either with the sole purpose of harming the plaintiff or by means that were unlawful or improper.” Nassau Diagnostic Imaging & Radiation Oncology Associates, P.C. v. Winthrop-Univ. Hosp., 197 A.D.2d 563, 563-64, 602 N.Y.S.2d 650, 651 (1993) (see, Guard–Life Corp. v. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445 (1980)).

Therefore, tortious interference with business relationship is established if a party commits an intentional wrongful act resulting in breach or breakdown of a business relationship. The party claiming tortious interference of business relationship does not have to prove the existence or breach of a contract. In the instant case, Blackheart and Trivec are engaged in business transactions and have contractual obligations between them. While it may be possible to allege that Mr. Weir’s actions were motivated by economic self-interest, it would seem a stretch to argue that Weir and BHI were separate and distinct parties such that Weir’s actions could be seen as a third party interfering with the BHI-Trivec relationship.  This is because Weir, through GS, was also a member of BHI. . Therefore, a claim for tortuous interference with business transactions against Mr. Weir supported individually seems unlikely.

    1. West Virginia.

The state has have recognized tortious interference with business interests with contractual relation. Torbett v. Wheeling Dollar Sav. & Trust Co., 173 W. Va. 210, 215, 314 S.E.2d 166, 171 (1983). “Most often plaintiffs in tort actions for interference with prospective contractual relations are businesses.” Torbett v. Wheeling Dollar Sav. & Trust Co., 173 W. Va. 210, 216, 314 S.E.2d 166, 173 (1983). “To establish prima facie proof of tortious interference, a plaintiff must show: (1) existence of a contractual or business relationship or expectancy;(2) an intentional act of interference by a party outside that relationship or expectancy;(3) proof that the interference caused the harm sustained; and(4) damages.” Id. at 211.

Both the New York and West Virginia laws are similar in this aspect.

  1. Unfair/deceptive trade practices

Unfair/deceptive trade practices mostly relates to a consumers. Pursuant to [General Business Law] section 349,

“deceptive business acts or practices are unlawful, and a ‘[petitioner] under section 349 must prove three elements: first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the [consumer] suffered injury as a result of the deceptive act.’

People ex rel. Schneiderman v. One Source Networking, Inc., 125 A.D.3d 1354 (N.Y. App. Div. 2015) (quoting Electrical Waste Recycling Group, Ltd. v. Andela Tool & Mach., Inc., 107 A.D.3d 1627, 1629, 968 N.Y.S.2d 765, lv. dismissed 22 N.Y.3d 1111, 982 N.Y.S.2d 439, 5 N.E.3d 587)).

            Court has held that “[s]tating a cause of action to recover damages for a violation of General Business Law § 349 is fairly straight forward.” Midland Funding, LLC v. Giraldo, 39 Misc. 3d 936, 961 N.Y.S.2d 743, 751 (Dist. Ct. 2013). “In order to properly plead a cause of action under GBL § 349, the party pleading the claim ‘should identify consumer-oriented misconduct which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages.’” Id. (quoting Wilner v. Allstate Ins. Co., 71 A.D.3d at 162 (2d Dept. 2010)).

In West Virginia, “The Unfair Trade Practices Act, W.Va.Code §§ 33-11-1 to 10, and the tort of bad faith apply only to those persons or entities and their agents who are engaged in the business of insurance.” Hawkins v. Ford Motor Co., 211 W. Va. 487, 488, 566 S.E.2d 624, 625 (2002).

However, in this matter the transaction between the parties is purely contractual or business related and therefore not consumer-oriented. Therefore, a cause of action under unfair trade practice may not lie.