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Two federal decisions find no claim for conversion of loan proceeds One of the trickier aspects of the cause of action for "conversion" appears when a plaintiff claims that the defendant converted money. Although conversion was once limited to tangible, moveable property, like a piece of furniture, courts now recognize claims for conversion of bank accounts and other specifically identifiable funds. The question recently arose here as to whether there is a cause of action for conversion of the proceeds of a loan. In its lawsuit, the plaintiff claimed that the defendants had wrongfully taken possession of money which the plaintiff had loaned to someone else. However, the plaintiff claimed that the defendants received the money before it declared the loan to be in default and demanded the repayment of the amounts loaned. Even though one might think that there would be extensive caselaw on this subject, research here showed only two recent decisions by the United States District Court for the Southern District of New York discussing this question. The answer, according to the federal court, is that there is no immediate right to possess money which the plaintiff loaned, and therefore one of the elements of conversion is missing. There may be a claim for breach of contract against the borrower, but the plaintiff has no claim for conversion. A claim for conversion requires that the plaintiff have the right to immediate possession of the property One of the questions in a conversion claim is whether the plaintiff has the immediate right to possession of property. Where a plaintiff has no legal title or possessory interest in funds at the time of transfer, there is no claim for conversion. Thea v. Thea, 284 A.D.2d 245, 726 N.Y.S.2d 655 (1st Dept 2001)(affirming order dismissing complaint, including conversion claim, where plaintiff trust beneficiaries alleged that defendant had unduly influenced plaintiffs decedent to transfer to her funds from his IRA: plaintiffs failed to state claim for conversion because they had no legal title or possessory interest in the funds at the time of the transfer). Global View: only the borrower has a conversion claim while the lender has a claim for breach of contract In Global View Ltd. Venture Capital v. Great Central Basin Exploration, L.L.C., 288 F. Supp.2d 473 (S.D.N.Y. 2003), the United States District Court for the Southern District of New York dismissed a claim for conversion of loan proceeds. The plaintiff, Global View, entered into a loan agreement with the defendant, GCBE, whereby Global View loaned money to GCBE for use in acquiring natural gas interests. Global Views causes of action included a claim for conversion against Merit (the corporate manager of GCBE) and Salazar and Bloch (two of its shareholders), alleging that Salazar and Bloch transferred GCBEs funds to themselves and to Merit. Defendants argued that Global View had no immediate right to possession until the date on which the loan would be due; instead only GCBE, the borrower under the loan, had the right to possess the money in dispute, and therefore only GCBE would have standing to assert a cause of action for conversion. Global View responded that, because of GCBEs breach of the loan agreement, the loan proceeds belonged to it. The District Court agreed with the defendants that Global View had failed to state a cause of action for conversion against Bloch, Salazar, and Merit, since the only party with standing to assert the conversion claim was the borrower, GCBE. The District Court found that Global View's alleged conversion damages were not distinct from its claim for breach of contract, i.e. the loan agreement. Instead, the money at issue represented damages in contract, and the Court found that Global View had no immediate possessory interest in that money. Citadel: no conversion claim because lender had no right to possess the loan proceeds after it makes the loan In Citadel Management Inc. v. Telesis Trust, Inc., 123 F.Supp.2d 133 (S.D.N.Y. 2000), another tribunal of the District Court for the Southern District of New York granted defendants' motion to dismiss a conversion claim arising from an agreement which the defendants characterized as a loan and the plaintiff characterized as an investment agreement. The plaintiff, Citadel, had transferred eleven million dollars to another entity ("Equal") under a written agreement according to which Equal was to invest the funds. Instead of investing the funds as per the agreement, Equal transferred the funds immediately to others, including defendants Telesis and Hertzog (a director of Equal), who then transferred them again to other defendants. The Complaint alleged that Telesis and Hertzog converted the funds when they transferred them from Equal to their own accounts and that the other defendants converted those funds by accepting them. With regard to the conversion liability of the other defendants, the Court stated: Thus the conversion claims against all the other defendants are derivative of the conversion claim against Hertzog and Telesis. In other words, if Hertzog and Telesis did not convert the funds when they transferred money into their accounts, then the other defendants'
later receipt of funds from Hertzog and Telesis could not constitute conversion because Citadel would no longer have owned the funds when Telesis possessed them and transferred them on to the other defendants. As in Global View, the Court found that the transfer of the funds by Equal to other persons was no actionable wrong other than a breach of contract: Citadel would be fully compensated on a contract claim against Equal, so no additional damages would be warranted in conversion
.Citadel tacitly admits that it is essentially seeking to enforce its contractual rights by referring to the Agreement as the source of its right to the funds
.No separately actionable wrong was committed when Telesis transferred the funds to the other defendants. Citadel has failed to make out the first element of conversion. Id. at 149-50. Nonetheless, the Court proceeded to analyze Citadels pleading of the other elements of conversion: The law presumes that ownership lies with the person in possession of property or money. Where, as here, the funds were transferred for the benefit of Equal free and clear of all liens, interests, charges, and encumbrances, Equal, as the recipient of the funds, was free to treat the funds as it wished. This sort of autonomy over property is one of the classic indicia of ownership. Whether this presumption holds depends in part on the nature of the transaction that led to possession. In this case, Citadel characterizes its agreement with Equal as an "investment against security" contract, whereas the defendants characterize it as a loan. A loan of money is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows. In the context of a loan the presumption of ownership is irrebuttable. In other words, in transferring the funds to the debtor, the creditor relinquishes title and ownership over the funds in exchange for a claim for damages against the debtor in the amount of the loanwhen the loan becomes due. Thus if the agreement was a loan as the defendants contend, Citadel did not have ownership over the funds at the time when Equal transferred them, and therefore cannot assert a conversion claim. Id. at 150. (Emphasis added; internal citations and punctuation omitted.) Finding a question of fact as to the intent of the parties, the Court accepted as true for the purposes of the motion to dismiss facts as pleaded by Citadel. Having determined that Citadel failed to state a cause of action for conversion against Telesis and Hertzog, the defendants who were alleged to have transferred the funds out of Citadels account, the Court dismissed the "derivative" conversion claims against the defendants alleged to have received the funds. The common-law claim for conversion has evolved dramatically over time and claims for conversion of funds now appear frequently in business disputes. The analysis in these two recent decisions by the federal court hearing cases in the business capital of the world, New York City, in all likelihood will be the basis for deciding the next case in the New York state courts claiming conversion on the basis of wrongful transfer of loan proceeds.
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