Chase Manhattan Bank, N.A. v. Cve, Inc.

• Decision Date: 23 May 2002
• Docket Number: No. 3-01-128.,3-01-128.
• Citation: 206 F.Supp.2d 900
• Parties: The CHASE MANHATTAN BANK, N.A., On Behalf of Itself and as Administrator of the Custodian Account for the Charles A. Moore Residual Trust, Plaintiff, v. CVE, INC., J. Lynn Wilson, Donald C. Orr, W.R. Kinkade, and Robert L. Bibb, Defendants.
• Court: U.S. District Court — Middle District of Tennessee

206 F.Supp.2d 900

The CHASE MANHATTAN BANK, N.A., On Behalf of Itself and as Administrator of the Custodian Account for the Charles A. Moore Residual Trust, Plaintiff, v. CVE, INC., J. Lynn Wilson, Donald C. Orr, W.R. Kinkade, and Robert L. Bibb, Defendants.

No. 3-01-128.

United States District Court, M.D. Tennessee, Nashville Division.

May 23, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Malcolm Leonard McCune, Mathew R. Zenner, Blackburn & McCune, PC, Nashville, TN, Mary Anne Hall, Schnader, Harrison, Segal & Lewis, LLP, Atlanta, GA, John C. Porter, Atlanta, GA, for Plaintiff.

Wallace Wordsworth Dietz, E. Steele Clayton, IV, Matthew M. Curley, Bass, Berry & Sims, Nashville, TN, for Defendants.

MEMORANDUM

WISEMAN, Senior District Judge.

This case stems from an erroneous transfer of shares from a custodian account managed by Plaintiff Chase Manhattan Bank, Inc. ("Chase") to Defendant CVE, Inc. ("CVE"). Chase has filed a complaint seeking a declaratory judgment rescinding the transaction. In addition, Chase's initial complaint states four other causes of action: (1) unjust enrichment (2) breach of trust, (3) conversion, and (4) fraud. CVE has moved to dismiss each of Chase's claims. A hearing on CVE's motion was held on March 22, 2002.

I. Factual Background

Chase is a New York corporation with its principal place of business in New York, New York. Defendant CVE is a Tennessee corporation with its principal place of business in Nashville, Tennessee.

On October 11, 1989, a trust (hereinafter referred to as the "Moore Trust") was created by the last will and testament of Charles A. Moore for the benefit of his son, William C. Moore, and his wife, Sheila D. Moore. William and Sheila Moore were named Co-Trustees of the Moore Trust. On November 7, 1991, the Co-Trustees entered into a Custodian Account agreement with Manufacturers Hanover Trust Company. The purpose of the account (hereinafter referred to as the "Custodian Account") was to hold certain assets of the Moore Trust.¹ The terms of the agreement provide that it will be governed by the laws of the State of New York, which is where all of the assets in the account are held. The agreement further provides that the custodian is not permitted to make or execute investment decisions without the approval of the Co-Trustees.²

Among the assets held by the Moore Trust in the Custodian Account were 370 shares of stock in CVE, Inc. The shares were acquired over 50 years ago by an ancestor of Charles Moore. CVE is a privately held corporation based in Nashville, Tennessee with no market for its stock. On more than one occasion, representatives of CVE approached Chase with offers to repurchase the stock from the Moore Trust. The beneficiaries declined each offer.

Defendant J. Lynn Wilson is Secretary and Treasurer of CVE. Robert J. Eknoian is the representative of Chase Manhattan responsible for the Custodian Account. On August 21, 1998, Wilson made a verbal offer to Eknoian to purchase the shares for $376.70 each, or a total of $139,379.00, and on August 24, 1998, Wilson sent a letter to Chase to that effect. Once received, the letter was sent to Chase's Corporate Actions Department to be forwarded to the Co-Trustees of the Moore Trust for review.

The Corporate Actions Department at Chase mistakenly treated the letter as an order to execute the transaction, and the stock certificates representing the 370 shares in CVE were sent to CVE. Upon receipt of the certificates, on September 14, 1998, a check for $139,379.00 was sent by CVE to Chase.

On September 15, 1998, the beneficiaries of the Moore Trust discovered the sale and alerted Chase, demanding a return of the shares. Chase made immediate efforts to recover the shares. That day, Eknoian telephoned Wilson, informed him of the error, and sought to recover the shares. Again on September 17, 1998, Chase tendered a return of the $139,379.00, and again CVE refused. On October 27, 1998, Chase submitted a written request to cancel the transfer. On November 30, 1998, CVE refused that request in writing.

Some time after this transaction, Defendant Donald Orr, president and majority shareholder of CVE, sold his 5,680 shares (representing 51% of the outstanding shares) for a price approximately three times the price per share paid to the trust. Chase contends that this transaction is evidence of deceptive and fraudulent activity.

In a separate action, the Co-Trustees filed suit against Chase in state court in Georgia for conversion, negligence, and breach of contract in connection with Chase's sale of the CVE shares. The suit alleges that the sale was unauthorized and in breach of Chase's obligations to exercise due care, as well as in violation of the Custodian Account Agreement.

II. Standard of Review

Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a party to move to dismiss a claim for "failure to state a claim upon which relief can be granted." Fed. R.Civ.P. 12(b)(6). In examining a complaint in the context of a motion to dismiss, the complaint is to be construed liberally in favor of the plaintiff and all allegations of fact are taken as true. See Lawrence v. Chancery Court, 188 F.3d 687, 691 (6th Cir.1999). A motion to dismiss should be granted if it appears that the plaintiff can prove no set of facts in support of the claim that would entitle the plaintiff to relief. See id.

III. Discussion

A. Choice of Law

The parties dispute which law should apply to Chase's claims. A federal court sitting in diversity must follow the conflict of law rules of the state in which it sits. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). The characterization of the claim as a contract claim, a tort claim, or an equitable claim will affect the choice of law rules. Therefore, the Court must first decide under which conflict of laws analysis this case falls—contract, tort, or both.

1. Contract Claims

Chase's ultimate goal in this suit is to rescind the transaction in which it transferred the shares of CVE to defendant. This transaction is represented by an implied contract that Chase performed when it tendered the shares of CVE stock. Tennessee law provides that the law of the place where the contract was made governs the construction and validity of the contract unless the parties in good faith designate another jurisdiction. See Davis v. Connecticut General Life Ins. Co., 743 F.Supp. 1273 (M.D.Tenn.1990). The place of contracting is the place where the contract is consummated. See Bowman v. Price, 143 Tenn. 366, 226 S.W. 210 (1920).

In the instant case, because there is not an express agreement, the parties did not explicitly state what law should apply. The offer letter was sent from CVE in Tennessee to Chase's office in New York. The Corporate Actions Department that executed the transaction (which constituted the acceptance) is located in New York. The check representing payment for the shares was sent to New York, and the shares were tendered from Chase's New York office, where they were held. Given the circumstances, it appears that the implied contract for sale was consummated in New York. Therefore, New York substantive law must govern the construction and validity of the contract, and the evaluation of Chase's contract claims.

2. Tort Claims

With respect to conflicts of laws involving tort claims, Tennessee has adopted the "most significant relationship" approach of the Restatement (Second) of Conflict of Laws. Wayland v. Peters, 1997 WL 776338 (Tenn.Ct.App.1997) (citing Hataway v. McKinley, 830 S.W.2d 53 (Tenn.1992)). This approach provides that the rights and liabilities of the parties to an action in tort are determined by the local law of the state that has the most significant relationship to the incident and the parties involved. See id. (citing Restatement (Second) of Conflict of Laws (1971) §§ 6, 145, 146, and 175). The most significant relationship is determined by examining: (1) the place of the alleged injury, (2) the place where the injurious conduct occurred, (3) the domicile and/or place of business of the parties involved, and (4) the place where the relationship of the parties is centered. See Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 136 (6th Cir.1996).

The circumstances of this case indicate that the state of Tennessee bears the most significant relationship to the parties and events that brought about the tort claims in this suit. The actions that constitute injurious conduct are the alleged deceptive misrepresentations made at the time of the offer and the later refusals to return the property once the errant transfer was discovered. These actions took place in Tennessee. As for the domicile of the parties, Chase's primary place of business is New York, while CVE's is Tennessee, and both companies operate nationally. The transaction was initiated in Tennessee but it was eventually consummated in New York. Although it is difficult to determine in which state the relationship of the parties is centered, Tennessee appears to have the most significant relationship to the incident and the parties, and its substantive law therefore governs the tort claims in this dispute.

3. Unjust Enrichment

Section 221 of the Restatement (Second) of Conflict of Laws suggests that unjust enrichment cases fall somewhere between contract and tort. Although Tennessee courts have not enumerated conflict of laws principles to be considered in determining which state's laws to apply to an unjust enrichment claim, the Restatement provides helpful guidance. See Restatement (Second) of Conflict of Laws §§ 221 (1971). Under the Restatement test, the local law of the state which "has the most significant relationship to the occurrence and the parties" should be applied. The Restatement outlines the factors that should be taken into account in making this determination: (a) the place where a relationship between the parties was...