Silvermark Corporation v. Rosenthal & Rosenthal Inc., 2008 NY Slip Op 30248(U) (N.Y. Sup. Ct. 1/25/2008)

• Court: New York Supreme Court
• Writing for the Court: Helen E. Freedman
• Citation: Silvermark Corporation v. Rosenthal & Rosenthal Inc., 2008 NY Slip Op 30248(U) (N.Y. Sup. Ct. 1/25/2008), 2008 NY Slip Op 30248, 0602026/2007, Sequence No. 001 (N.Y. Sup. Ct. Jan 25, 2008)
• Decision Date: 25 January 2008
• Docket Number: Sequence No. 001,0602026/2007
• Parties: SILVERMARK CORPORATION, Plaintiff, v. ROSENTHAL & ROSENTHAL INC, and STAR CITY SPORTSWEAR, INC., Defendants.

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2008 NY Slip Op 30248(U)

SILVERMARK CORPORATION, Plaintiff, v. ROSENTHAL & ROSENTHAL INC, and STAR CITY SPORTSWEAR, INC., Defendants.

0602026/2007

Sequence No. 001

Supreme Court of the State of New York, New York County.

January 25, 2008.

HELEN E. FREEDMAN, J.

Plaintiff Silvermark Corporation ("Silvermark"), brought this action against its factor Rosenthal & Rosenthal, Inc. ("Rosenthal"), and Star City Sportswear, Inc ("Star City"), a Silvermark's client, for breach of contract, breach of covenant of good faith and fair dealing, goods sold and delivered, unjust enrichment, fraud, and tortious conversion. Rosenthal now moves to dismiss the complaint based on documentary evidence pursuant to CPLR 3211(a)(1) and for failure to state a cause of action pursuant to CPLR(a)(7). Rosenthal also seeks an award of attorneys' fees pursuant to the terms of its contract with plaintiff and imposition of sanctions on the grounds that plaintiff's claims are frivolous.

For the reasons set forth below, Rosenthal's motion to dismiss is granted as to the first, third, fourth, fifth, and sixth causes of action and it is denied as to the second cause of action.

Background

Silvermark is a corporation engaged in the manufacturing of apparel. On or about October 9, 2002, Silvermark entered into a Factoring Agreement ("the Agreement"), with Rosenthal, a company engaged in providing factoring services to vendors. Pursuant to the Agreement, Rosenthal purchased certain approved accounts receivable from Silvermark and advanced sums to it based on the net amount of the purchased receivables. Rosenthal then collected payment from Silvermark's customers and remitted to it any funds remaining after payment of Rosenthal's advances, charges, and interest charges according to the terms of the Agreement.

The relevant portions of the Agreement provide as follows:

2. . . . We shall not be responsible for any non-payment ()la receivable because of the assertion of any claim or dispute by a customer or the exercise of any counterclaim or offset (whether or not such claim, dispute, counterclaim or offset relates to the specific receivable) ..

3. . . . You shall report to us in writing all disputes and claims made by your customers, and the return of or offer to return any goods, and you will promptly settle all such claims and disputes at your expense.. We reserve the right at any time to charge back to your account the full amount of the receivable that has been the subject of a credit issued by you without our consent or that has been involved in any other claim, dispute or return asserted by your customer, and you agree to pay us upon demand the full amount thereof. The charge back to your account of the amount of any receivable shall not be deemed a reassignment thereof to you and title thereto, to the proceeds thereof, to all security and guarantees therefor and to your interest in the goods represented thereby, shall remain in us.

7.. . . All statements, reports or accountings rendered or issued by us to you, including such trial balances and sales summaries, shall be deemed accepted and be finally conclusive and binding upon you unless you notify us to the contrary by registered or certified mail within sixty days after the date such statement, report or accounting is sent to you.

11.... In the event we shall retain counsel for the purpose of enforcing the performance, payment or collection of any of the Obligations, then and in that event you agree to pay the reasonable fees of our counsel, plus any and all expenses and disbursements incurred in connection therewith and/or incidental thereto.

In April and May 2006, Rosenthal purchased certain invoices representing the shipment of items from Silvermark to Star City, a wholesaler of ladies sportswear, for the value of $364,542.98, When the invoices became over due, Rosenthal sought payment directly from Star City and was advised, by telephone and in a letter captioned "Notice of Dispute," that Star City was withholding payment because of issues regarding the quality of the goods. By letter dated June 23, 2006, Rosenthal notified Silvermark that Star City had disputed the invoices and that the amount of $364,542.98 would be charged back in August. By letter dated July 6, 2006, Silvermark responded that it had not received notice from Star City that the goods were rejected. On August 22, 2006, Rosenthal charged back to Silvermark the amount of $364,542.98. However, at the beginning of September, Rosenthal received a payment from Star City and credited Silvermark's account in the amount of $104,772.50. This payment reduced the amount owed by Star City to Silvermark to 259,770.48. In mid-September, Rosenthal sent Silvermark a statement representing all August transactions, including the charge backs at issue here. Silvermark did not object to the statement within the following sixty days. Instead, few months later, by letter dated January 17, 2007, Silvermark advised Rosenthal that it wanted a copy of the dispute notice from Star City and that it wished to discuss this matter. Star City's dispute notice was provided to Silvermark few days later.

In the Complaint, Silvermark alleges, inter alia, that Rosenthal was also the factor for Star City, that the latter was heavily indebted to Rosenthal, and that Rosenthal devised a fraudulent scheme to collect the amounts owed to it. Silvermark maintains that Rosenthal took control of the business and operations of Star City, fabricated disputes regarding goods received by Star City to avoid paying vendors, and diverted to itself the moneys that had been already credited to the vendors' accounts. In particular, Silvermark alleges that Rosenthal Fabricated Star City's dispute notice as a pretext for Star City to charge back Silvermark's account and provide a justification for Rosenthal's charge backs. Silvermark seeks compensatory damages in the amount of 259,770.48, consequential and punitive damages.

Discussion

Breach of Contract Claim.

Rosenthal contends that the first cause of action, the breach of contract claim, should be dismissed because the Agreement provides for an unfettered right to charge back the factored invoices when a customer raises a claim or dispute as a reason for non-payment, regardless of whether that claim or dispute has merit. Rosenthal also contends that the charge backs are binding on Silvermark because it did not object to them by certified or registered `nail within sixty days after the issuance of the monthly statement containing the charge backs, as required by the Agreement. In opposition, Silvermark contends that Rosenthal breached the Agreement by issuing the charge backs based on a dispute that was fabricated.

The law is well established that "a factor may exercise its contractual right of charge back without verifying the merits of the dispute between the seller and the eventual buyer." Tex Styles Group, Inc, v. Republic Factors Corp., 106 A.D.2d 257, 258 (1^st Dep't 1984) (citing Danleigh Fabrics, Inc. v. Gaynor-Stafford Inds., 62 N.Y.2d 677 (1984)). However, the rationale for that rule resides in the nature of a factor's business: "the factor does not purport to conduct its customer's business for the customer; the factor merely assures the customer against loss by reason of financial inability of the buyer to pay; all other problems remain those of the factor's customer." Garden State Yarn v. Rosenthal Rosenthal, Inc., 99 A.D.2d 721, 722 (1^st Dep't 1984). Here, plaintiff's allegations that Rosenthal took control over the business operation of Star City, ultimately interfering with the relationship between Silvermark and Star City, raise a question as to whether Rosenthal's conduct comported with the nature of a factor's business and whether the general rule should not apply where the allegation is that the factor itself fabricated the dispute raised by the plaintiffs customer. However, even assuming, argueiulo, that Rosenthal's charge backs were improper, the breach of contract claim must be dismissed because Silvermark has failed to object to them in a timely fashion pursuant to the terms of the Agreement. Under the Agreement, Silvermark had sixty days to object to the September statement evidencing the charge backs but did not raise a dispute until...