Hurst v. Dezer/Reyes Corp.

• Decision Date: 26 April 1996
• Docket Number: Nos. 95-1608,95-1747,s. 95-1608
• Citation: 82 F.3d 232
• Parties: Paul A. HURST, as Trustee for American Classics, Inc., Plaintiff--Appellant/Cross Appellee, v. DEZER/REYES CORPORATION; Michael Dezer, Defendants--Appellees/Cross Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 232

82 F.3d 232

38 U.S.P.Q.2d 1589

Paul A. HURST, as Trustee for American Classics, Inc., Plaintiff--Appellant/Cross Appellee, v. DEZER/REYES CORPORATION; Michael Dezer,

Defendants--Appellees/Cross Appellants.

Nos. 95-1608, 95-1747.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 13, 1995.

Decided April 26, 1996.

Appeals from the United States District Court for the Western District of Missouri; Sarah W. Hayes, Magistrate Judge.

Martin M. Bauman, St. Joseph, MO, for appellant.

Errol D. Taylor, St. Joseph, MO, for appellee.

Before McMILLIAN and LOKEN, Circuit Judges, and DUPLANTIER, ^* District Judge.

LOKEN, Circuit Judge.

In this diversity case governed by New York law, the trustee of American Classics, Inc. ("ACI"), a defunct Missouri corporation, sued Dezer/Reyes Corporation ("Dezer/Reyes") for breach of a Management Contract and also asserted claims against Dezer/Reyes and its principal owner, Michael Dezer, for quantum meruit and for conversion of ACI's intangible property right to the name and trade dress of "Chevy's Diner and Bar" in New York City. After a second jury awarded ACI substantial quantum meruit and conversion damages, the district court entered judgment on that verdict, and both sides appeal. We affirm the jury's quantum meruit award against Dezer/Reyes, reverse the conversion and punitive damage awards, affirm the district court's dismissal of the claims against Michael Dezer, and remand for entry of an amended final judgment.

I. Background.

On June 7, 1986, Dezer/Reyes and ACI entered into a Management Contract in which Dezer/Reyes agreed to build and own a "Chevy's Diner & Bar" in New York City, and ACI agreed to develop and manage the nightclub using ACI's established "Chevy's" concept. That concept featured a 1950s/early-1960s theme, decor, and music; buffet dining; a dance floor; and choreographed entertainment by the staff. In the Management Contract, ACI retained complete control over the New York operations, and Dezer/Reyes agreed to pay a percentage of its gross revenues as ACI's management fee. The agreement provided that, upon termination, Dezer/Reyes "shall immediately cease to operate the Business" and to use ACI's "trademark, service mark, tradename, logo or other proprietary mark ... distinctive trade dress, forms, slogans, signs, uniforms, symbols or devices associated therewith." Dezer/Reyes built the New York nightclub, which opened in February 1987. ACI was paid fees under the Management Contract until March 1989.

In 1988, General Motors Corporation ("GM") sued ACI in an Illinois federal court, claiming unauthorized use of GM's "Chevy" trademark. In November 1988, after the court issued a permanent injunction in GM's favor, ACI and GM entered into a Settlement Agreement that recognized GM's ownership of the "Chevy" mark but permitted ACI to use the "Chevy's" name on exterior signs and advertising at its nightclubs until October 1989, and on interior materials and supplies for an additional four years.

On March 28, 1989, Dezer/Reyes and ACI entered into a new agreement. Without disclosing its settlement with GM, ACI granted Dezer/Reyes a ten-year exclusive license to use ACI's "Proprietary Marks" to operate a "Chevy's Diner and Bar" in New York City in exchange for an immediate payment of $75,000. Paragraph 11 of this agreement terminated the 1986 Management Agreement, adding: "It is not the intent of the parties to have the termination of the Management Contract affect the conduct of the Business by [Dezer/Reyes] in any way, other than the cessation of the management obligations of [ACI]." Shortly thereafter, Dezer/Reyes learned of the GM litigation and the GM-ACI settlement agreement. Taking the position it had been defrauded, Dezer/Reyes stopped payment on its $75,000 check. Though it continued operating the New York "Chevy's" until the fall of 1990, and indeed hired one of ACI's employees to manage the nightclub, Dezer/Reyes made no further payments to ACI under either agreement.

ACI commenced this damage action in mid-1990. ACI's amended complaint sought compensatory damages for breach of the Management Contract or a recovery in quantum meruit, and compensatory and punitive damages for conversion of ACI's business concept. Dezer/Reyes counterclaimed for fraud. Prior to trial, the district court held the Management Contract unenforceable because ACI had no right to the "Chevy's" mark. The court submitted ACI's quantum meruit and conversion claims and Dezer/Reyes's fraud counterclaim to the jury, which rejected the counterclaim and awarded ACI $119,324.48 in quantum meruit damages and $496,667.50 in conversion damages against both Michael Dezer and Dezer/Reyes.

Following post-trial motions, the district court dismissed ACI's claims against Dezer personally because ACI had failed to pierce the Dezer/Reyes corporate veil. The court held that the conversion award against Dezer/Reyes was excessive and, when ACI refused to accept a remittitur, ordered a new trial. The second jury returned a verdict awarding ACI $46,000 in quantum meruit damages, $150,000 in conversion damages, and $500,000 in punitive damages. On appeal, ACI urges us to affirm the first jury's damage awards against both defendants and to order a new trial on the issue of punitive damages. Dezer/Reyes urges us to reverse the adverse judgment on the second jury's verdict. Michael Dezer urges us to uphold his dismissal following the first trial.

II. Quantum Meruit.

The parties spend little time debating the second jury's award of $46,000 in quantum meruit damages. Dezer/Reyes argues that there can be no recovery in quantum meruit because its relationship with ACI was governed by two express contracts. However, the district court held the Management Contract unenforceable because ACI's essential proprietary mark, "Chevy's," was invalid. The equitable doctrine of quantum meruit may properly be used to prevent unjust enrichment when a party has rendered valuable services under an invalid or unenforceable contract. See Farash v. Sykes Datatronics, Inc., 59 N.Y.2d 500, 465 N.Y.S.2d 917, 452 N.E.2d 1245, 1246-47 (1983); Taylor & Jennings, Inc. v. Bellino Bros. Constr. Co., 106 A.D.2d 779, 483 N.Y.S.2d 813, 815 (1984). Neither party questions the amount of the quantum meruit award; it must be affirmed.

III. Conversion.

The parties devote most of their appellate attention to ACI's recovery for the tort of conversion. Conversion is the "denial or violation of the plaintiff's dominion, rights, or possession" of property. Sporn v. MCA Records, Inc., 58 N.Y.2d 482, 462 N.Y.S.2d 413, 415, 448 N.E.2d 1324 (Ct.App.1983). Historically, only tangible property could be converted; in New York, as in most jurisdictions, there could be no conversion of "incorporeal species of property." Matzan v. Eastman Kodak Co., 134 A.D.2d 863, 521 N.Y.S.2d 917, 918 (1987). If this traditional doctrine applies, ACI's conversion claim clearly fails because Dezer/Reyes always owned the tangible assets of the New York nightclub. For example, in MBF Clearing Corp. v. Shine, 212 A.D.2d 478, 623 N.Y.S.2d 204, 206 (1995), the court held that, absent wrongful dominion over physical assets, there could be no cause of action for converting a business's "time, assets, associations, employees' services and equipment."

The expanded attention given intangible and intellectual property rights in recent decades has produced theories for expanding the tort of conversion to include misappropriation of such intangibles. While cognizant of the trend, New York courts have, at most, cautiously embraced such theories. As the court said in Ippolito v. Lennon, 150 A.D.2d 300, 542 N.Y.S.2d 3, 6 (1989), "Even under an expanded definition of the tort, conversion is limited to those intangible property rights customarily merged in, or identified with, some document." That is the position taken in Restatement of Torts 2d § 242. It is, in our view, as far as the New York courts would expand the scope of conversion.

ACI did not base its conversion claim on intangible property rights customarily merged in a document. Rather, ACI claimed that defendants converted its business concept. ACI argues that it may assert that tort claim because it has a property right in the business concept that was confirmed in Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 112 S.Ct. 2753, 120 L.Ed.2d 615 (1992). However, Two Pesos simply acknowledged that restaurant trade dress may be protected under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a). ACI has no federal trademark rights and asserted no claim under the Lanham Act. Two Pesos does not define ACI's rights under New York law.

The district court concluded that "New York does recognize a cause of action for conversion of a tangible expression or implementation of an idea," citing Murray v. National Broadcasting Co., 844 F.2d 988 (2d Cir.), cert. denied, 488 U.S. 955, 109 S.Ct. 391, 102 L.Ed.2d 380 (1988). However, in Murray the Second Circuit affirmed dismissal of "state law claims for breach of implied contract, misappropriation, conversion, and unjust enrichment" based upon the district court's determination that plaintiff had no property interest because its idea for a new television program was not novel. 844 F.2d at 994. Murray did not involve a dispute among the parties to a licensing arrangement. Therefore, it sheds no light on what causes of action may be appropriate here, and it certainly cannot override more specific New York cases defining the tort of conversion, such as Ippolito and MBF Clearing Corp. ¹

ACI licensed its business concept to Dezer/Reyes. The lynchpin of that license, the trademark "Chevy's," proved to be invalid. Claiming fraud, Dezer/Reyes refused to pay its licensor but continued reaping benefits from the licensed concept. ACI sued, complaining that Dezer/Reyes used the licensed intangibles without paying the bargained fees. This is fundamentally a contract dispute....