AMF Inc. v. Algo Distributors, Ltd.

• Decision Date: 09 June 1975
• Citation: 369 N.Y.S.2d 460,48 A.D.2d 352
• Parties: AMF INCORPORATED, Respondent, v. ALGO DISTRIBUTORS, LTD., et al., Appellants.
• Court: New York Supreme Court — Appellate Division

Page 460

369 N.Y.S.2d 460

48 A.D.2d 352

AMF INCORPORATED, Respondent, v. ALGO DISTRIBUTORS, LTD., et al., Appellants.

Supreme Court, Appellate Division, Second Department.

June 9, 1975.

Tate & Tate, Albany (Rex S. Ruthman, Albany, of counsel), for appellants.

Rogers, Hoge & Hills, New York City (Kenneth L. Everett, New York City, of counsel), for respondent.

Before GULOTTA, P.J., and MARTUSCELLO, LATHAM, CHRIST and BENJAMIN, JJ.

MARTUSCELLO, Justice.

The defendants appeal from an order which denied their motion to vacate an order of attachment. This appeal raises for review the question whether an ex parte order of attachment, entered without notice to the debtor and without an opportunity for him to be heard, violates the mandates of the due process clause of the Fourteenth Amendment of the Constitution of the United States. More particularly, the defendants challenge the constitutionality of our State attachment procedure when the ground supporting the order of attachment is an alleged cause of action for conversion. ¹

The following are the essential facts. The defendant Algo Distributors, Ltd. (Algo) is a distributor of some of the products manufactured by the plaintiff, AMF Incorporated (AMF). On July 31, 1972 the plaintiff and Algo entered into an agreement whereby AMF acquired a security interest, later perfected, in all inventory sold to Algo, including the proceeds realized from any resale thereof by Algo. This security interest was given to secure the performance of the covenants and obligations of the agreement and to secure the payment of an indebtedness in the face amount of $150,000. The agreement further provided that Algo

'shall have the right in the ordinary course of business to resell the goods to others and to otherwise deal with the goods in any manner which does not impair, reduce the company's (AMF's) security interest in the goods, but Debtor covenants to account to Company for the proceeds of any goods upon request.'

Having accepted delivery of the plaintiff's products to be used in its business inventory, pursuant to the terms of the security agreement, Algo, acting through its president, defendant Alan Swartz, and by its vice president, defendant George Swartz, on February 1, 1973 made and delivered to AMF its promissory note, in the face amount of $113,000, payable on November 10, 1973. The note was signed by the above-mentioned individual defendants in their corporate capacities.

Subsequently, a sale of most of the inventory covered by the security interest occurred. However, Algo refused to turn over any of the proceeds thus realized to AMF and, moreover, defaulted on its promissory note.

On February 13, 1974 the plaintiff obtained an ex parte order of attachment against the property of all of the defendants. The summons, verified complaint and order of attachment, together with the affidavits submitted in support of that application, were served upon the defendants on February 19, 1974. The complaint sets forth three causes of action. In its first cause of action, which is against Algo, AMF seeks, Inter alia, a judgment of foreclosure of its lien on the collateral, including the proceeds from the sales of any collateral. By its second cause of action, the one here pertinent, the plaintiff seeks, Inter alia, to recover damages from all of the defendants for the alleged conversion by them of the proceeds of the sale of the inventory (collateral) acquired by Algo pursuant to the security agreement. In its third cause of action, AMF seeks judgment against Algo for nonpayment of the promissory note, which became due on November 10, 1973.

On February 28, 1974 the defendants moved to vacate the order of attachment on the grounds that the papers upon which the order of attachment was granted were insufficient in that they failed to show that a cause of action for conversion existed in favor of the plaintiff against all of the defendants and that any ex parte attachment based upon subdivision 8 of CPLR 6201 is unconstitutional. Their motion was denied. The defendants now raise the same arguments on appeal.

First, we turn to a consideration of whether the papers submitted in support of the application for the warrant of attachment were legally sufficient and spelled out a cause of action in conversion against all of the defendants. CPLR 6212 (subd. (a)) requires a creditor to show by affidavit ² and other written evidence that a cause of action in favor of a movant exists and to state the ground specified in CPLR 6201 ³ under which the order of attachment is sought. If the complaint and affidavits fail to establish a prima facie cause of action in conversion against each defendant the order of attachment must be vacated, either In toto or as to the particular defendant against whom such a showing is not made (see American Reserve Ins. Co. v. China Ins. Co., 297 N.Y. 322, 79 N.E.2d 425; Zenith Bathing Pavilion v. Fair Oaks S.S. Corp., 240 N.Y. 307, 148 N.E. 532; Stines v. Hertz Corp., 22 A.D.2d 823, 254 N.Y.S.2d 903, affd. 16 N.Y.2d 605, 261 N.Y.S.2d 59, 209 N.E.2d 105).

In its complaint the plaintiff alleges that the defendants Alan, George and Mildred Swartz were officers and shareholders of Algo. No such allegation, however, was made with regard to the other individual defendant, Marion Swartz. It is also alleged that the defendants, in violation of the terms of the security agreement, knowingly converted the proceeds from the sale of the collateral in which AMF had a security interest to their own use and unlawfully distributed those moneys to the individual defendants as payment of salary owed to them. Attached to the complaint, the made a part thereof, were the security agreement signed by George Swartz and the promissory note signed by George and Alan Swartz in their corporate capacities.

In addition to the verified complaint, the plaintiff submitted the supporting affidavit of Harold Suffel, AMF's regional sales manager, who had dealt with Algo on a regular basis. He deposed that in October, 1973 he met with the defendants George and Alan Swartz at Algo's place of business and discussed with them a sale that the corporate defendant had conducted, as advertised in a local newspaper. Mr. Suffel averred that both of those defendants admitted that they had in fact caused a sale to take place in which most of the inventory subject to the security agreement had been sold, through a dealer, to buyers who attended the sale. George Swartz told Suffel that the proceeds of the sale had been received in the form of cash. From the quantity of merchandise which Alan Swartz admitted had been sold, Suffel determined that approximately $62,000 in cash had been received by Algo from the sale. As a result of this computation, Suffel demanded that an immediate payment of at least $50,000 be made to the plaintiff, which request was refused. Instead, George Swartz allegedly told him that all of the moneys received from the sale had been disbursed for the general business purposes of Algo.

On the basis of the foregoing pleadings, we find that a prima facie cause of action has been spelled out against the defendants George and Alan Swartz, but not as against Mildred and Marion Swartz. As we have recently reiterated, in order to establish a cause of action for conversion two things must be shown: first, the plaintiff must demonstrate legal ownership or an immediate superior right of possession to a specific identifiable thing (i.e., specific money); and, second, it must be shown that the defendant exercised unauthorized dominion over the thing in question, to the exclusion of the plaintiff's rights (see Independence Discount Corp. v. Bressner, 47 A.D.2d 756, 365 N.Y.S.2d 44). In the present case, the plaintiff's papers sufficiently establish the existence of a security interest in the collateral and in the proceeds of any sale thereof, the sale of the collateral, the failure by George and Alan Swartz to pay over the proceeds on behalf of Algo upon proper demand therefor and the diversion of the proceeds for general corporate purposes. The crucial issue here is whether the plaintiff had an immediate right to possession of specific moneys. We believe that the express terms of the security agreement created such a right. Under its terms the debtor covenanted to 'account to * * * (plaintiff) for The proceeds of any goods upon request' (emphasis added). Algo, therefore, obligated itself to pay over, upon demand by the plaintiff, the specific proceeds derived from the sale of all merchandise covered by the security agreement.

Indeed, the facts as alleged by the plaintiff are strikingly similar to those present in Independence Discount Corp. (supra). The creditor therein financed the purchase of inventory by the defendant corporation and, pursuant to a security agreement, obtained a security interest in the inventory and in the proceeds from any sale thereof. The inventory was subsequently sold and the proceeds were commingled with the general corporate funds of the debtor. The debtor thereafter went into bankruptcy. The creditor then instituted an action in conversion against the two principal officers and majority shareholders of the defendant corporation. We held that no cause of action in conversion existed. That decision, however, does not require a similar result in this case. The crucial distinction is to be found in the difference between the terms of the security agreements involved in these cases. The agreement in Independence did not impose upon the debtor the obligation to account for specific moneys derived from the sale of the inventory. Rather, it merely provided that upon such sale the debtor was to pay immediately 'all amounts due (plaintiff) with respect to the Products financed * * * (thereunder).' Unlike the case here, no specific fund from which the money owed to the creditor would be paid was intended to be created.

In fact, the case at bar comes witin the ambit of ...