First Fin. Bank v. Fox Capital Grp., Inc.

633 F.Supp.3d 1041

FIRST FINANCIAL BANK, Plaintiff, v. FOX CAPITAL GROUP, INC., Defendant.

Case No. 1:21cv691

United States District Court, S.D. Ohio, Western Division

Filed September 30, 2022

Jeffrey M. Hendricks, Susan Moeller Argo, Graydon Head & Ritchey LLP, Cincinnati, OH, for Plaintiff.

Daniel A. DeMarco, Colten Joseph Siedlarczyk, Hahn Loeser & Parks LLP, Cleveland, OH, for Defendant.

OPINION & ORDER

Michael R. Barrett, United States District Judge

This matter is before the Court upon Defendant Fox Capital Group, Inc.'s Motion to Dismiss Plaintiff's Complaint. (Doc. 5). Plaintiff First Financial Bank has filed a Response in Opposition (Doc. 6); and Defendant has filed a Reply (Doc. 8).

I. BACKGROUND

Plaintiff First Financial Bank is an Ohio banking corporation with a principal place of business in Cincinnati, Ohio. (Doc. 2, PAGEID 256). Defendant Fox Capital Group, Inc. is a Florida corporation with its principal place of business in Hallandale, Florida. (Id., PAGEID 257). In 2018, Plaintiff entered into a series of agreements with Shining Knight Realty which created loan obligations on the part of Shining Knight ("Loan Agreements"). (Id.) As part of the security for the obligations, Shining Knight signed a mortgage agreement ("Mortgage"). (Id., PAGEID 257-58). The Mortgage granted Plaintiff a first-priority security interest in the following:

1.1.7 all moneys, credits and other property of any nature whatsoever of Mortgagor now or hereafter in the possession of, in transit to or from, under the custody or control of, or on deposit with (whether held by Mortgagor individually or jointly with another) Mortgagee or any affiliate of Mortgagee, including but not limited to cash collateral accounts, construction disbursement accounts and reserve accounts (but excluding fiduciary accounts, if any) . . .

(Id., PAGEID 258) (referred to hereinafter as "Collateral"). Because it is the depository bank where the accounts are maintained, Plaintiff has control of Shining Knight's deposit accounts. (Id.) Plaintiff filed a Uniform Commercial Code ("U.C.C.") Financing Statement with the Ohio Secretary of State to perfect its security interest in the Collateral. (Id.)

Plaintiff also entered into a series of agreements with The Wexford Place, Inc. and Wexford Care Center, Inc., including a Guaranty, pursuant to which the companies jointly and severally guaranteed the full and prompt payment of all obligations owed by Shining Knight. (Doc. 2, PAGEID 259). As security, Plaintiff and the Wexford Companies entered into a security agreement dated January 26, 2018 ("Security Agreement") which granted Plaintiff a first-priority security interest in all business assets of the Wexford Companies, including, but not limited to, all accounts receivable, deposit accounts, cash proceeds, documents, and general intangibles, whether then existing or thereafter acquired, and all proceeds and products thereof (also referred to hereinafter as "Collateral"). (Id.) Because it is the depositary bank where the accounts are maintained, Plaintiff has control of the Wexford Company's deposit accounts. (Id.) Plaintiff filed a U.C.C. Financing Statement with the Ohio Secretary of State to perfect its security interest in the Collateral. (Id.)

Shining Knight and the Wexford Companies are now in default on these obligations. (Id., PAGEID 260). Plaintiff is owed approximately $4 million on the obligations. (Id.) Plaintiff has filed suit against Shining Knight and the Wexford Companies in Hamilton County Court of Common Pleas in order to collect on the sums due. (Id.)

Plaintiff discovered that Shining Knight and the Wexford Companies entered into factoring agreements with Defendant. (Id., PAGEID 261). As part of these factoring agreements, Shining Knight and the Wexford Companies sold or pledged certain of their accounts receivables and all proceeds thereof ("Receivables") to Defendant without the consent of Plaintiff. (Id.) The Security Agreement, Loan Agreements and Mortgage expressly prohibited Shining Knight and the Wexford Companies from selling, pledging, encumbering or otherwise disposing of any Collateral without the prior written consent of Plaintiff. (Id.) Despite this prohibition, Plaintiff believes that between November of 2019 and May 2020, Defendant collected approximately $588,463.00 in Receivables from Shining Knight and the Wexford Companies. (Id.) Plaintiff claims that the Receivables are Collateral subject to Plaintiff's perfected first-priority security interest. (Id.) Plaintiff has made a formal demand to Defendant for the return of the sums collected, but Defendant has failed to do so. (Id.)

In its Complaint, Plaintiff brings a claim of conversion under Ohio law for the return of the sums collected by Defendant. In their Motion to Dismiss, Defendant maintains that Plaintiff fails to state a claim for conversion because there is no conversion where the subject of the claim is money or funds transferred from a deposit account.

II. ANALYSIS

A. Standard of Review

In reviewing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), this Court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true and draw all reasonable inferences in favor of the plaintiff." Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008) (quoting Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007)). Federal Rule of Civil Procedure 8 provides that all pleadings must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Although particular detail is not generally necessary, the factual allegations "must be enough to raise a right to relief above the speculative level" such that the claim "is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556-57, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).

B. Conversion

Under Ohio law, the elements of a conversion claim are: "1) plaintiff's ownership or right to possession of the property at the time of the conversion; 2) defendant's conversion by a wrongful act or disposition of plaintiff's property rights; and 3) damages." NPF IV, Inc. v. Transitional Health Servs., 922 F. Supp. 77, 81 (S.D. Ohio 1996) (citing Haul Transport of VA, Inc. v. Morgan, Slip Op. No. CA 14859, Montgomery Cty., 1995 WL 328995 (Ohio App. 1995); Fayette Inv. Corp. v. Jack Johnson Chevrolet Co., 119 Ohio App. 111, 197 N.E.2d 373 (1963)).

Defendant first argues that the transfers of money cannot form the basis of a conversion claim. However, as this Court has explained, "a security interest in proceeds qualifies as a perfected security interest if the security interest in the original collateral was perfected." Fifth Third Bank (Cent. Ohio) v. Avnet, Inc., No. 2:04-CV-00538, 2005 WL 8161571, at *5 (S.D. Ohio Oct. 6, 2005) (citing Ohio Rev. Code § 1309.315(A)(1) ("A security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien . . .")).

Next, Defendant argues that any money transferred to Defendant was transferred from deposit accounts free and clear of any security interests of Plaintiff.¹ Defendant relies on Ohio Revised Code § 1309.332(A) and (B), which provide:

(A) A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

(B) A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

Ohio Rev. Code § 1309.332 (U.C.C. § 9-332 as adopted in Ohio).

Plaintiff responds that the conversion took place when the accounts receivable were sold, so that the actual transfers do not form the basis of the claim and Ohio Revised Code § 1309.332 is inapplicable. Plaintiff maintains that its security interest in the Accounts Receivable and its proceeds remains enforceable against Defendant.

During the period of time in which the parties were briefing Defendant's Motion to Dismiss, Ohio's Eleventh District Court of Appeals decided the same issue now presented to this Court. See Cortland Sav. & Banking Co. v. Platinum Rapid Funding Grp., Ltd., 182 N.E.3d 1259, 1264, (Ohio Ct. App. 2021).

In Cortland Bank, the plaintiff was a community bank which entered into a commercial security agreement with 21st Century Concrete Construction ("21st Century"). 182 N.E.3d at 1260. Under the security agreement, Cortland Bank was granted a security interest in assets owned by 21st Century, including a deposit account maintained by Cortland Bank. Id. at 1260-61. The defendant, Platinum Rapid Funding Group ("Platinum"), entered into three merchant agreements with 21st Century, whereby Platinum agreed to make two advances of $250,000 and one advance of $846,000 to 21st Century in exchange for a percentage of 21st Century's future receivables in the total amount of $1,526,000. Id. at 1261. 21st Century authorized Platinum to withdraw weekly payments from the deposit account maintained at Cortland Bank. Id. From March 2018 to March 2019, $869,250 was transferred from the checking account to Platinum. Id. 21st Century later defaulted on its loan with Cortland Bank. Id. Cortland Bank...