Airlines Reporting Corp. v. Pishvaian

• Decision Date: 08 August 2001
• Docket Number: No. CIV. A. 00-2133-A.,CIV. A. 00-2133-A.
• Parties: AIRLINES REPORTING CORP., Plaintiff, v. Michael PISHVAIAN, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

155 F.Supp.2d 659

AIRLINES REPORTING CORP., Plaintiff, v. Michael PISHVAIAN, et al., Defendants.

No. CIV. A. 00-2133-A.

United States District Court, E.D. Virginia, Alexandria Division.

August 8, 2001.

COPYRIGHT MATERIAL OMITTED

Charles Erik Gustafson, Esquire, LeClair Ryan, Alexandria, VA, for Plaintiffs or Petitioners.

Richard H. Gins, Esquire, Steven Harold Greenfeld, Esquire, Gins & Greenfeld P.C., Washington, DC, for Defendants or Respondents.

MEMORANDUM OPINION

ELLIS, District Judge.

At issue on plaintiff's motion for summary judgment in this diversity action are the following questions:

(i) whether a travel agency is liable to plaintiff for conversion of airline ticket sales proceeds where the agreement between plaintiff and the travel agency permitted the agency to commingle the proceeds with other agency funds;

(ii) whether a travel agency is liable to plaintiff for conversion of blank ticket stock where the ticket stock is held in trust by the travel agency and then disposed of in a manner not authorized by the agreement;

(iii) whether the defendant, who is the sole officer and shareholder of the travel agency, is liable for any conversion committed by the travel agency, acting through its employee; and

(iv) whether the defendant is liable for any breach of a fiduciary duty owed to the plaintiff under the agreement.

I. Facts¹

This action is brought by plaintiff Airlines Reporting Corporation ("ARC"), a Delaware corporation with its principal place of business in Arlington, Virginia, to recover losses it alleges were caused by defendant Michael Pishvaian. Defendant holds 100% ownership interest in C.W. Travel, Inc., a Maryland corporation currently in Bankruptcy proceedings. In addition, defendant serves as C.W. Travel's sole officer and director.

In November 1996, C.W. Travel applied to ARC for accreditation as a travel agency—a predicate step to entering into an Airline Reporting Agreement ("ARA"), through which ARC provides blank airline ticket stock to a travel agency for issuance to its customers. In C.W. Travel's application for accreditation, defendant stated, inter alia, that only he and Chris Franklin, the manager of C.W. Travel, would have access to the blank ticket stock and that defendant would be involved in the day-to-day operations of the agency. Based on these representations and a review of C.W. Travel's application, ARC provided C.W. Travel with accreditation as a travel agency, and accordingly, the parties entered into an ARA.

Under the ARA, ARC provided C.W. Travel with blank ticket stock, which C.W. Travel was to hold in trust.² In addition, the ARA required C.W. Travel to prepare and submit to ARC weekly sales reports listing all ticket stock issued to customers during that week. Based on these sales reports, ARC was empowered to withdraw the sales proceeds, minus a commission, from a bank account that C.W. Travel designated.³ C.W. Travel was permitted under the ARA to commingle the proceeds from the airline ticket sales with all other funds of C.W. Travel, provided sufficient funds remained for withdrawal for any ticket stock issued to customers during the previous week.

Throughout the term of the ARA, defendant did not work at C.W. Travel, but instead worked full-time at a nearby restaurant. Defendant only visited the C.W. Travel office between one to three times a week. In the course of the visits, he met with the manager, signed checks, and discussed the weekly sales reports. In February 1999, Rebecca Price replaced Chris Franklin as manager of C.W. Travel. Price was given complete control over the issuance of the ticket stock, as well as sole responsibility for reporting sales and remitting proceeds to ARC. She became the primary contact between C.W. Travel and ARC. No notice of the personnel change was given to ARC, despite a provision in the ARA that requires travel agencies to submit a Miscellaneous Change Form and Personal History Form to notify ARC in the event of any change in the identity of employees with access to the blank ticket stock.⁴

In January 2000, ARC initiated an audit of C.W. Travel because of irregularities it had discovered in C.W. Travel's weekly sales reports. This audit revealed that Price had engaged in a practice of issuing tickets and failing to report or pay for those tickets. According to this audit, ARC discovered that Price was routinely withholding certain ticket sales from the weekly reports to prevent ARC from debiting the proceeds of these sales from C.W. Travel's bank account.⁵ In other words, Price would sell tickets and collect money for the sale of the tickets, but would fail to report the sale to ARC. These funds were often used by C.W. Travel to pay other, more immediate obligations of C.W. Travel. While defendant authorized these payments by signing the requisite checks, he was unaware that a debt to ARC had been incurred and not paid. Apart from signing checks and discussing the weekly sales reports, defendant took no action relating to the sale of airline tickets or the filing of the weekly reports. During defendant's visits to C.W. Travel, Price never told defendant that the sales reports issued to ARC were inaccurate. Yet, Price had told defendant on more than one occasion that she was overwhelmed with her workload and that C.W. Travel was encountering financial difficulty. Defendant responded by hiring an additional travel agent to assist Price. When defendant did become aware of the results of ARC's audit, he immediately stopped further sales of tickets. Moreover, upon ARC's request, defendant returned to ARC all remaining blank ticket stock. On February 8, 2000, ARC terminated the ARA.

The record reflects that Price's failure to report the tickets that had been issued to customers in the weekly reports to ARC caused losses to ARC of between $400,000 and $500,000. Furthermore, ARC suffered an additional $80,000 loss owing to C.W. Travel's failure to make funds available for ticket sales that it had reported to ARC. On December 22, 2000, plaintiff filed an eight-count complaint⁶ against defendants Pishvaian, Rebecca Price,⁷ and Michael Price.⁸ At issue on plaintiff's motion for partial summary judgment are Count II (breach of fiduciary duty) and Count III (conversion). Following oral argument on plaintiff's motion, the summary judgment motion was taken under advisement, and the parties were directed to file supplemental memoranda. See ARC v. Pishvaian, C.A. No. 00-2133-A (E.D.Va. June 15, 2001). The supplemental memoranda having been filed, the matter is now ripe for resolution.

II. Analysis

A. Conversion

Plaintiff contends that the undisputed facts establish that defendant is liable to ARC for the conversion of (i) ARC's blank ticket stock and (ii) the proceeds from the sale of plaintiff's ticket stock not reported to ARC.

In Virginia,⁹ conversion is "any distinct act of dominion wrongfully exerted over the property of another, and in denial of his rights, or inconsistent therewith." See Federal Ins. Co. v. Smith, 144 F.Supp.2d 507 (E.D.Va. 2001) (quoting Universal C.I.T. Credit Corp. v. Kaplan, 198 Va. 67, 92 S.E.2d 359, 365 (1956)). To assert a claim for conversion, a plaintiff must prove by a preponderance of the evidence (i) the ownership or right to possession of the property at the time of the conversion and (ii) the wrongful exercise of dominion or control by defendant over the plaintiff's property, thus depriving plaintiff of possession. See Universal, 92 S.E.2d at 365.

Plaintiff contends that this two-part test is met here with regard to both the proceeds and the ticket stock because the ARA explicitly provided that C.W. Travel held in trust for ARC both the proceeds from the sale of the ticket stock, and the ticket stock. Yet, whether a trust relationship is formed does not end with the citation of isolated provisions in the parties' agreement. Instead, "[t]he Court has an obligation to go beyond the terminology used in an effort to determine the substance of the relationship between the parties."¹⁰ Accordingly, a review of the entire agreement is necessary to ascertain whether the proceeds from the sale of airline tickets and the ticket stock were held in trust for ARC. A showing that the ticket stock and proceeds were held in trust is required for plaintiff to establish the first element of conversion, namely ownership or right to possession of the ticket stock and proceeds. Absent such a showing, a claim for conversion fails, and plaintiff may show, at most, a debtor-creditor relationship.

1. Proceeds from Ticket Sales

A review of the ARA compels the conclusion that the relationship between the parties with respect to the ticket sales proceeds is not one of trust, but rather a debtor-creditor relationship. This is so because, with respect to ticket sales proceeds, critical aspects of a trust relationship under Virginia law are absent from the agreement. Specifically, contrary to Virginia law, the ARA (i) does not prohibit —indeed allows—permissive commingling of "trust" assets with general assets of the agency; and (ii) does not contain restrictions on the use of these funds.¹¹ The absence of these requirements in the ARA reflects an apparent lack of concern regarding defendant's handling of the ticket sales proceeds that is fatal to any claim that the ARA creates a trust as to the proceeds. Thus, in essence, the agreement establishes a debt for the price of the ticket sold that becomes due and owing, not upon sale of the ticket and the collection of proceeds, but instead at the end of each week when a report is filed that documents the ticket sales by C.W. Travel.¹²

Plaintiff seeks to avoid this result by arguing that Virginia law treats commingling of assets differently from other jurisdictions. Specifically, plaintiff cites Federal Reserve Bank of Richmond v. Peters, 139 Va. 45, 123 S.E. 379 (1924) for the proposition that when the trustee commingles trust assets with other assets,...