Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC

• Decision Date: 13 April 2012
• Docket Number: No. 269PA11.,269PA11.
• Citation: 723 S.E.2d 744
• Parties: VARIETY WHOLESALERS, INC. v. SALEM LOGISTICS TRAFFIC SERVICES, LLC; Salem Logistics, Inc.; Salem Logistics Transport Services, LLC; Winston Transportation Management, LLC; Overbrook Leasing, LLC; Salem Logistics Transport Finance, LLC; David F. Eshelman; and Ark Royal Capital, LLC.
• Court: North Carolina Supreme Court

723 S.E.2d 744

VARIETY WHOLESALERS, INC.

v.SALEM LOGISTICS TRAFFIC SERVICES, LLC; Salem Logistics, Inc.; Salem Logistics Transport Services, LLC; Winston Transportation Management, LLC; Overbrook Leasing, LLC; Salem Logistics Transport Finance, LLC; David F. Eshelman; and Ark Royal Capital, LLC.

No. 269PA11.

Supreme Court of North Carolina.

April 13, 2012.

On discretionary review pursuant to N.C.G.S. § 7A–31 of a unanimous decision of the Court of Appeals, ––– N.C.App. ––––, 712 S.E.2d 361 (2011), affirming in part and reversing in part an order on summary judgment entered 19 April 2010, as amended on 12 May 2010, by Judge Howard E. Manning, Jr. in Superior Court, Vance County. Heard in the Supreme Court 10 January 2012.

Wyrick Robbins Yates & Ponton LLP, Raleigh, by K. Edward Greene, Tobias S. Hampson, and Paul J. Puryear, Jr., for plaintiff-appellant.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Greensboro, by Jim W. Phillips, Jr. and Alexander Elkan, for defendant-appellee Ark Royal Capital, LLC.

Bell, Davis & Pitt, P.A., Winston–Salem, by William K. Davis and Alan M. Ruley, for North Carolina Bankers Association, amicus curiae.HUDSON, Justice.

Here we address whether summary judgment was appropriately entered on claims of conversion and constructive trust when a third party came into possession of funds, ownership of which was disputed between the primary contracting parties. We hold that the record forecasts genuine issues of material fact with respect to both claims, and we therefore reverse and remand for further proceedings.

Background

Variety Wholesalers (“Variety”) is a large retail corporation with stores in fourteen states. To support its stores, Variety maintains significant shipping and trucking operations. At times pertinent here Salem Logistics (“Salem”), now bankrupt, provided logistical services to businesses, including freight bill auditing services. Ark Royal Capital, LLC (“Ark”) is an investment company that provides, among other services, asset-based loan arrangements to businesses. Asset-based loans are described here as a means for undercapitalized companies that cannot obtain traditional loans to receive a loan in exchange for a security interest in their assets, often accounts receivable.

In March 2006 Salem entered into an asset-based loan agreement with Ark. Under that agreement (hereafter “Finance Agreement”) Ark provided a revolving line of credit to Salem through which Salem could pay its operating expenses. In exchange, Salem gave Ark a security interest in all its assets. The Finance Agreement capped the line of credit at the lesser of $2.2 million or 80% of Salem's “Eligible Accounts,” which it defined as “valid, legally enforceable obligation[s]” that were “not subject to any claim, dispute or other defense.” Under the Finance Agreement Ark required Salem to forward any funds it received and to instruct its customers to send payments directly to a lockbox account maintained by Ark at Wachovia Bank (now Wells Fargo ¹). Ark used the money that came into the lockbox account to pay itself the interest and principal on Salem's revolving line of credit, thereby making further credit available to Salem. Salem had multiple clients that paid into the lockbox account, and the funds from those multiple clients were not segregated. Ark's Chief Operating Officer, Allison Hanslik, joined Salem's Board of Directors under the loan arrangement. Hanslik and research analyst David Pearson reviewed Salem's accounts on a weekly basis before issuing borrowing certificates.

In July 2007 Variety entered into a contract (hereafter “Freight Agreement”) with Salem under which Salem would provide freight bill payment and auditing services.² The Freight Agreement has two distinct parts. Schedule A, titled “Services Provided,” describes the services that Salem would provide to Variety under that Agreement. Salem agreed to receive all of Variety's freight bills from the carriers, audit the bills, prepare a master invoice for the bills, and send the invoice to Variety weekly. Variety would then send Salem the full amount shown on the master invoice. Salem would then pay the carriers. Schedule B of the Freight Agreement, titled “Contractor Rates and Charges,” describes the amounts Variety would pay to Salem for its services: $0.68 for each paper freight bill, $0.38 for each electronic freight bill, and $0.18 per small package. By letter Salem requested that Variety send the amounts on the master invoices directly to the Wachovia account, but did not inform Variety that the account was actually controlled by Ark.

Throughout the time Variety operated under the Freight Agreement, the company fielded complaints from its carriers that their payments were arriving late or not at all. Variety worked with Salem in an effort to alleviate the problem. Salem promised to do so but problems continued. Variety terminated the Freight Agreement in December 2008 and filed suit in January 2009 for recovery of approximately $888,000 it had forwarded to Salem which had not been paid to carriers. In the process Variety sought and received an order of attachment on the Wachovia account it believed belonged to Salem. In so doing Variety discovered that the account actually belonged to Ark. Variety demanded the missing funds be returned by Ark but Ark refused. Variety then amended its complaint to add Ark as a defendant.

The trial court conducted a period of discovery and depositions and received filings in support of and opposition to the parties' motions for summary judgment. After a hearing, the trial court entered summary judgment for Variety on its claim of conversion against Ark, and for Ark on Variety's claim of constructive trust. The trial court ordered Ark to pay Variety $887,889.37, plus interest. The Court of Appeals reversed, and entered summary judgment for Ark on both issues. We now reverse and remand on both issues.

Summary Judgment

The standard of review for an order of summary judgment is firmly established in this state. We review a trial court's order granting or denying summary judgment de novo. Builders Mut. Ins. Co. v. N. Main Constr., Ltd., 361 N.C. 85, 88, 637 S.E.2d 528, 530 (2006) (citation omitted). Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law.” N.C.G.S. § 1A–1, Rule 56(c) (2011). “All facts asserted by the adverse party are taken as true, and their inferences must be viewed in the light most favorable to that party.” Dobson v. Harris, 352 N.C. 77, 83, 530 S.E.2d 829, 835 (2000) (citations omitted). “The showing required for summary judgment may be accomplished by proving an essential element of the opposing party's claim does not exist, cannot be proven at trial, or would be barred by an affirmative defense....” Id. (citation omitted).

Conversion

Variety's first claim against Ark alleges conversion. This Court has stated that “[t]he tort of conversion is well defined as ‘an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or the exclusion of an owner's rights.’ ” Peed v. Burleson's, Inc., 244 N.C. 437, 439, 94 S.E.2d 351, 353 (1956) (citation omitted). This definition has been cited as recently as 20 March 2012 by the Court of Appeals. Vaseleniuck Engine Dev., LLC v. Sabertooth Motorcycles, LLC, ––– N.C.App. ––––, ––––, –––S.E.2d ––––, –––– (2012). There are, in effect, two essential elements of a conversion claim: ownership in the plaintiff and wrongful possession or conversion by the defendant. See Gadson v. Toney, 69 N.C.App. 244, 246, 316 S.E.2d 320, 321–22 (1984). For Variety to maintain a conversion action against Ark, Variety must first establish that it retained ownership of the funds it sent to Salem under Schedule A of the Freight Agreement.

Before both the Court of Appeals and this Court, Variety offered a theory of bailment to show that it retained ownership of the funds at issue, but we conclude it is unnecessary to address the bailment argument. The question is one simply of contractual intent: whether the agreement between Variety and Salem contemplated that the funds sent by Variety under Schedule A would become Salem's property or would merely pass through Salem on their way from Variety to Variety's carriers.

Variety argues that the contract's terms specifically describe a several step process in which the funds Variety sent to Salem under Schedule A would be used exclusively and immediately to pay Variety's carriers. The pertinent steps of this process as shown in Schedule A (“Services Provided”) of the Freight Agreement are: “7. A master invoice id [sic] prepared once a week and submitted to Client in electronic or hard copy format (or both)[.] 8. Payment is received from client. 9. Monies are immediately distributed to carriers[.]”

The Court of Appeals interpreted the provisions of the contract to contemplate that in Step 8, Variety would pay Salem the amount on the master invoice in compensation for Salem's services, and that in Step 9, Salem would pay, out of its general funds, the bills to the carriers. Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, ––– N.C.App. ––––, ––––, 712 S.E.2d 361, 365 (2011). The court based its conclusion on its interpretation of the term “payment” and the use of different terms (“payment” vs. “monies”) in Steps 8 and 9. Id. at ––––, 712 S.E.2d at 365. Specifically, the court stated that

Black's Law Dictionary defines payment as “[t]he money or other valuable thing so delivered in satisfaction of an obligation.”

The use of the term “payment” is clear, so we may infer that Variety and Salem intended that the money transferred was for the satisfaction of an obligation in...