Case Corp. v. Gehrke

• Decision Date: 08 June 2004
• Docket Number: No. 1 CA-CV 03-0360.,1 CA-CV 03-0360.
• Citation: 91 P.3d 362,208 Ariz. 140
• Parties: CASE CORPORATION, a Delaware corporation; Case Credit Corporation, a Delaware corporation, Plaintiffs-Appellants, v. Duane GEHRKE and Denise Gehrke, husband and wife, Defendants-Appellees.
• Court: Arizona Court of Appeals

91 P.3d 362

208 Ariz. 140

CASE CORPORATION, a Delaware corporation; Case Credit Corporation, a Delaware corporation, Plaintiffs-Appellants, v. Duane GEHRKE and Denise Gehrke, husband and wife, Defendants-Appellees.

No. -0360.

Court of Appeals of Arizona, Division 1, Department A.

June 8, 2004.

Quarles & Brady Streich Lang LLP, By Robert F. Miles, Scott A. Klundt, Rachel M. Bacalzo, Phoenix, Attorneys for Plaintiffs-Appellants.

Jaburg & Wilk, P.C., By Kathi Mann Sandweiss, Roger L. Cohen, Phoenix, Attorneys for Defendants-Appellees.

OPINION

SNOW, Judge.

¶ 1 Plaintiffs-appellants Case Corporation and Case Credit Corporation appeal the trial court's entry of partial summary judgment in favor of defendant-appellees Duane and Denise Gehrke on Case's claim that the Gehrkes converted proceeds owed to Case pursuant to a business relationship. For the following reasons, we reverse the trial court's judgment and remand for further proceedings.

FACTS AND PROCEDURAL HISTORY

¶ 2 Duane Gehrke is the President and Denise Gehrke is the Secretary of Utility Equipment Company ("UEC"), an Arizona corporation in the retail business of selling trenching equipment, backhoes, and other heavy construction equipment. UEC was a dealer of Case products. On May 30, 1990, Duane Gehrke, on behalf of UEC, signed a "Wholesale Financing and Security Agreement" with Case. Pursuant to the agreement Case financed equipment and products purchased from Case by UEC for resale to retail customers.

¶ 3 Under the agreement, Case held a security interest in:

(a) All [UEC's] now owned and hereafter acquired inventory, equipment, and other movable property, ... obtained from or financed by [Case] ... (collectively referred to as the "Inventory");

(b) All proceeds of Inventory, including but not limited to, cash, deposits, accounts receivable, trade-ins, chattel paper and instruments arising from the sale, lease or demonstration of Inventory (the "Proceeds of Inventory").

The agreement also provided that proceeds of inventory be remitted to Case in accordance with the terms outlined in related agreements. A related agreement, the Schedule of Discounts and Terms, required that payment be remitted to Case "within seven calendar days from the date a Unit is Sold at Retail."

¶ 4 Paragraph six of the agreement also provided that Case could require that proceeds of inventory be segregated from UEC's other funds.

[UEC] shall, upon receipt of written demand by [Case] and as [Case] may direct, hold all Proceeds of Inventory in express trust for [Case] and deliver to [Case] all Proceeds of Inventory which are in [UEC's] possession and/or deposit all such Proceeds of Inventory in a separate account and not commingle such Proceeds of Inventory with any other funds of [UEC]. If any Proceeds of Inventory are evidenced by notes, leases, rental agreements or checks ("documents"), [UEC] hereby assigns and, upon demand, shall deliver and/or endorse such documents to [Case].

Case did not request that UEC maintain the proceeds of inventory in express trust or in an account separate from UEC's other funds.

¶ 5 On December 15, 2000, Case sent a letter to UEC notifying UEC that it was in substantial default and that Case was terminating all of their agreements. The letter specified that UEC had failed to remit full payment for ten pieces of equipment. In response, UEC filed a petition for relief under Chapter 11 in bankruptcy on December 22, 2000. In June 2002, Case filed a two count lawsuit against the Gehrkes. In the first count, Case sought to recover against Duane Gehrke on his guarantee of UEC's obligations under its agreement with Case.¹ In the second count, Case alleged that Duane and Denise Gehrke had converted proceeds from UEC's sale of Case equipment having a value of $638,366.36 by not transferring the proceeds from the sale of the equipment to Case when Case had a security interest in both the equipment and the proceeds of sale.

¶ 6 The Gehrkes moved for partial summary judgment on the conversion claim. Citing Autoville, Inc. v. Friedman, 20 Ariz. App. 89, 510 P.2d 400 (1973) as controlling, the Gehrkes argued that non-specified and unsegregated funds could not be the subject of a conversion claim. The Gehrkes asserted and Case did not dispute that, throughout its relationship with Case, UEC maintained a general operating account into which it deposited the proceeds of sale of both Case and non-Case inventory, and no effort was made to segregate the proceeds of Case's secured goods. Consequently, the Gehrkes argued, the proceeds resulting from the sale of Case products lost their character as identifiable funds and could not be the subject of the tort of conversion.

¶ 7 Case responded that the Gehrkes' argument was "simply wrong." Case contended that because it held a security interest in the inventory and proceeds from the sale of the inventory, it had an ownership interest in the proceeds and could therefore maintain an action for conversion. Case admitted, for purposes of the motion, that it had never demanded pursuant to the agreement that UEC hold the proceeds of Case inventory in trust, deposit the proceeds into a separate account, or not commingle Case proceeds with UEC's other funds.

¶ 8 After oral argument, the trial court granted the Gehrkes' motion for partial summary judgment on the conversion claim. The court found that Autoville controlled. The court reasoned:

The title to the inventory was in Utility Equipment Company ("UEC"), and all proceeds were deposited to the general corporate account of UEC before any demand was made by Plaintiffs to segregate the funds. "... conversion does not lie to enforce the mere obligation to pay a debt which may be discharged by the payment of money generally," 20 Ariz.App. 89, 92,510 P.2d 400. The court denied a motion for reconsideration and entered partial summary judgment on the conversion claim in favor of the Gehrkes. The court included language pursuant to Arizona Rule of Civil Procedure 54(b) and stayed the remaining proceedings in the superior court pending appeal. Case filed a timely appeal and we have jurisdiction pursuant to A.R.S. § 12-2101(B) (2003).

DISCUSSION

¶ 9 On appeal, Case argues that the trial court erred by entering partial summary judgment in UEC's favor because Case had a security interest in the proceeds of sale of its equipment, and that the Gehrkes' use of those proceeds gave rise to a viable claim for conversion against them. The Gehrkes admit that Case had a security interest in the proceeds of sale, but argue that a security interest alone in the proceeds of sale is insufficient to give rise to a cause of action for conversion. According to the Gehrkes, before a conversion action could be brought, the proceeds of sale would have to be placed in a separate, segregated account or otherwise subject to an express trust. The Gehrkes cite two cases from this court, Autoville and Universal Marketing and Entertainment, Inc. v. Bank One of Arizona, 203 Ariz. 266, 53 P.3d 191 (App.2002), to support their argument. We disagree with the Gehrkes that the cases support the trial court's entry of summary judgment against Case on the conversion claim.

¶ 10 Summary judgment may be granted when "there is no genuine issue as to any material fact and [ ] the moving party is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(c). In reviewing a trial court's decision on a motion for summary judgment, we determine de novo whether any genuine issues of material fact exist and whether the trial court properly applied the law. Eller Media Co. v. City of Tucson, 198 Ariz. 127, 130, ¶ 4, 7 P.3d 136, 139 (App.2000). We view the facts and the inferences drawn therefrom in the light most favorable to the party against whom judgment was entered. Prince v. City of Apache Junction, 185 Ariz. 43, 45, 912 P.2d 47, 49 (App.1996).

A. Conversion

¶ 11 Conversion is defined as "an act of wrongful dominion or control over personal property in denial of or inconsistent with the rights of another." Sears Consumer Fin. Corp. v. Thunderbird Prods., 166 Ariz. 333, 335, 802 P.2d 1032, 1034 (App. 1990); see also Universal Marketing, 203 Ariz. at 268,

¶ 6, 53 P.3d at 193 (citing Restatement (Second) of Torts § 222(A)(1) (1965)). To maintain an action for conversion, a plaintiff must have had the right to immediate possession of the personal property at the time of the alleged conversion. Sears Consumer Fin. Corp.,

166 Ariz. at 335,

802 P.2d at 1034; Empire Fire & Marine Ins. Co. v. First Nat'l Bank of Ariz., 26 Ariz.App. 157, 159, 546 P.2d 1166, 1168 (App. 1976). A secured party has the right to take possession of the collateral upon default, and so has sufficient possessory interest to bring a conversion action in those circumstances. Id. While a conversion claim cannot be maintained to collect on a debt that could be satisfied by money generally, Autoville, 20 Ariz.App. at 92,

510 P.2d at 403, money can be the subject of a conversion claim if the money "can be described, identified or segregated, and an obligation to treat it in a specific manner is established." Id. at 91, 510 P.2d at 402.

1. Applicability of Autoville

¶ 12 The trial court in this case relied on Autoville when finding no viable claim for conversion. In Autoville, Friedman entered an oral agreement with Caplan and Siegel, the stockholders of a used car dealership called Autoville, Inc. 20 Ariz.App. at 90,510 P.2d at 401. Under the agreement, Friedman would obtain vehicles at wholesale prices and provide them to Autoville for resale. Id. Upon sale of each vehicle, Friedman was to receive the wholesale cost he had expended and a service fee. Id. Under this arrangement, Autoville completed fifty-nine transactions, but remitted to Friedman his share of only thirty-one sales. Id. at 91, 510 P.2d at 402. Caplan and Siegel liquidated all their vehicles, deposited the funds in Autoville's corporate account, and withdrew the funds...