BNB BANK v. MAIN STREET MERCHANT SERVICES INC (2022)

The following papers having been read upon this motion:

Notice of Petition, Petition, with Exhibits (Doc No. 1-9)

Respondent's Cross-Motion to Dismiss, Affidavit, and Exhibits (Doc #14-15, 17-18)

Respondent's Memo of Law In Opposition and in Support of Cross-Motion (Doc #16)

Petitioner's Memo of Law in Opposition and in Further Support (Doc #19)

Respondent's Memo of Law in Further Support (Doc #21)

ORDERED that respondent's motion seeking dismissal of the within petition is granted.

Petitioner, BNB Bank f/k/a The Bridgehampton National Bank, commenced this special proceeding on May 29, 2020 by the filing of a Notice of Petition and Verified Petition seeking an order, “pursuant to NY C.P.L.R. § 5225 (b), directing respondent, Main Street Merchant Services, Inc., to: (i) deliver the subject property or assets received by respondent subject to two Secured Merchant Agreements, described in the annexed petition, in its possession and control in which judgment creditor BNB has an interest; (ii) to execute and deliver to BNB any documents necessary to effect said turnover and payment to BNB.” Respondent opposes and cross-moves to dismiss.

It is undisputed that petitioner previously commenced an action entitled BNB Bank f/k/a The Bridgehampton National Bank v Kix and Stylz Inc. and Robert E. Marks, under Index No. 00161/2019, against non-parties Kix and Stylz Inc. and Robert E. Marks to recover amounts due and owing pursuant to a loan agreement. Judgment in favor of The Bridgehampton National Bank and against Kix and Stylz Inc. and Robert E. Marks issued from Suffolk County Court and was subsequently entered on November 20, 2019 in the amount of $18,250.08 (“2019 Judgment”). Said judgment authorized petitioner to “recover possession of the Collateral, as defined in the Loan Agreement, dated June 1, 2015” “including but not limited to all personal property and fixtures, all goods, inventory, equipment, money, instruments, farm products, documents, deposit accounts, chattel paper, contract rights and general intangibles (collectively, the “Collateral”) wherever it may be located.”

Petitioner contends that the loan agreement (“Kix Agreement”), which was the basis of the 2019 Judgment, extended a line of credit and was entered into by Petitioner and Kix and Stylz Inc. (“Kix”) on or about June 1, 2015 and was personally guaranteed by Robert E. Marks. The petition asserts that by its terms the Kix Agreement granted petitioner a “lien and security interest in all personal property and fixtures of [Kix and Stylz Inc.], including without limitation, its accounts receivable.” The court notes that the specific language “accounts receivable” is not contained in the agreement or the judgment or the UCC-1 filed by petitioner.

Petitioner states that it had secured its interest by filing a UCC-1 financing statement in the Office of the Secretary of State on June 1, 2015 and that the debtors defaulted under the Line of Credit Agreement by failing to make the monthly payment which was due August 10, 2018 and payments which were due thereafter. The Security Interest provision in the Line of Credit Agreement provides for “a continuing security interest in and lien on the following property:

i) all of your personal property and fixtures which you now own or are in existence or hereafter acquired or created, wherever located, of whatever kind and description, tangible or intangible, including without limitation, all goods’, inventory equipment, money, instruments farm products, documents, deposit accounts, chattel paper, contract rights and general intangibles, as these terms are defined in the Uniform Commercial Code.

In the course of its efforts to enforce the 2019 Judgment, petitioner conducted discovery and learned that Kix had previously entered into two agreements for the purchase and sale of future receivables, each entitled “Secured Merchant Agreement.” Such agreements were entered into by Kix and Stylz Inc. and respondent on or about February 21, 2018 and June 1, 2018.

Pursuant to the February 21, 2018 Merchant Agreement, Kix sold, assigned and transferred future receivables in the amount of $8,394.00 to Main Street Merchant Services Inc. (“Main St”) in exchange for a lump sum payment of $6,000.00. The agreement required Kix to transfer 15% of each day's transactions into a deposit account maintained for Main St until the total sum of $8,394.00 was paid. The June 1, 2018 agreement provided for the sale of $7,495.00 in future receivables for the sum of $5,000.00, payable at 15% per transaction per day. The Security Agreements that accompanied the Secured Merchant Agreements granted respondent “a security interest in all assets now owned [by Kix and Stylz, Inc.], or hereafter acquired, including without limitation: (a) all accounts, including without limitation, all deposit accounts, accounts-receivable, and other receivables, chattel paper, documents, equipment, general intangibles, instruments, and inventory, as those terms are defined by Article 9 of the Uniform Commercial Code (the “UCC”), now or hereafter owned or acquired by Merchant; and (b) all proceeds, as that term is defined by Article 9 of the UCC(“a” and “b” collectively, the “Collateral”).” Respondent perfected its security interest with respect to the June 1, 2018 Security Agreement by filing a UCC-1 financing statement with the Secretary of State on August 8, 2018.

Although it appears that Kix made payments to respondent pursuant to the terms of an agreement, rather than a foreclosed security interest, petitioner contends that payments made to respondent under the “Secured Merchant Agreements” were based upon a subordinate security interest in the accounts receivables that petitioner was entitled to receive by virtue of its superior security interest. The petition includes three causes of action: for turnover pursuant to CPLR 5225(b), conversion, and for an order pursuant to Article 9 of the UCC directing respondent to make payment of all amounts due in partial or full satisfaction of the judgment. Petitioner asserts that “Main Street is the transferee of property or assets from the Debtors that Petitioner has an interest in, including the value of the assets, monies, funds, and/or other property received by Main Street in connection with the Security Agreements.” Petitioner's reference to “Security Agreements” is intended to refer to the Merchant Agreements referenced above, which contain a security interest provision. Petitioner seeks an order “directing Main Street to turn over to Petitioner all assets, monies, funds, and/or other property held by Main Street in which the Petitioner has an interest.” Petitioner further argues that Main St. is “petitioner's obligor” and further asserts that Main St. “is in possession of property or assets of the Debtors that Petitioner has an interest in pursuant to the Agreement.”

Respondent cross moves to dismiss the petition pursuant to CPLR § 3211(a)(1) and (7), arguing that it received monies from Kix prior to Kix defaulting on any agreement with petitioner, and prior to petitioner obtaining its judgment against Kix, thus petitioner has no right to exercise its security interest and assert a claim to monies remitted by Kix prior to its default with petitioner. Based upon Petitioner's allegations, respondent argues that Kix's default under its agreement with petitioner occurred at the time of its missed August 10, 2018 payment. Respondent received its last payment from Kix approximately one month prior. In support of its motion, respondent submits the affidavit of Joseph Massaro, respondent's Director of Risk Management who states that respondent is a merchant advance company that provides cash advances to businesses in return for a percentage of the businesses future receivables. He outlines the terms of the agreements essentially as set forth above and further avers that payments totaling $6,400.00 were made under the February 2018 Agreement leaving a balance owed of $2,594.00 and that payments totaling $300.00 were made under the June 2018 agreement, leaving a balance owed in the amount of $7,195.00. It is asserted that Kix made its last payments under the 2018 Merchant Agreements on July 12, 2018, leaving the total sum of $9,789.00 outstanding. This is supported by a Statement of Account for each Merchant Agreement, annexed to Massaro's affidavit.

In considering a party's motion to dismiss for failure to state a cause of action pursuant to CPLR 3211(a)(7), the pleadings must be given a liberal construction, the allegations must be accepted as true and the stated claims must be given every possible favorable inference in determining whether or not they fit into any cognizable legal theory (Chanko v. Am. Broad. Companies Inc., 27 NY3d 46, 29 NYS3d 879 [2016]; Goshen v. Mut. Life Ins. Co. of New York, 98 NY2d 314, 746 NYS2d 858 [2002]; Leon v Martinez, 84 NY2d 83, 88 [1994]). The Court may also consider affidavits submitted to remedy any defects in the complaint in ascertaining whether or not a cause of action exists (Chanko, supra; Leon supra). If the Court considers evidentiary material in a motion to dismiss, the analysis becomes whether or not a cause of action exists, not whether or not Plaintiff has stated one (Sokol v. Leader, 74 AD3d 1180, 904 NYS2d 153 [2d Dept. 2010]; Guggenheimer v. Ginzburg, 43 NY2d 268, 274—75, 372 NE2d 17 [1977]; Porat v. Rybina, 177 AD3d 632, 111 NYS3d 625 [2d Dept. 2019]). However, a pleading may be dismissed if it is established that a material fact asserted by the pleader is not actually a fact and there is no significant dispute regarding it (McMahan v. McMahan, 131 AD3d 593, 15 NYS3d 190 [2d Dept. 2015]).

A motion to dismiss a complaint pursuant to CPLR 3211 (a)(1) may be granted only if the documentary evidence submitted by the moving party utterly refutes the factual allegations of the complaint and conclusively establishes a defense to the claims as a matter of law (see Goshen v Mutual Life Ins. Co. of NY, 98 NY2d 314, 326, 746 NYS2d 858 [2002]; Gawrych v Astoria Fed. Sav. & Loan, 148 AD3d 681, 48 NYS3d 450 [2d Dept 2017]; Granada Condominium III Assn. v Palomino, 78 AD3d 996, 913 NYS2d 668 [2d Dept 2010]). For evidence to qualify as “documentary,” it must be unambiguous, authentic, and undeniable (see Granada Condominium III Assn. v Palomino, supra; Fontanetta v John Doe 1, 73 AD3d 78, 84-86, 898 NYS2d 569 [2d Dept 2010]), and items such as judicial records, mortgages, deeds, and contracts, will qualify in the proper case (see Gawrych v Astoria Fed. Sav. & Loan, supra; Eisner v Cusumano Constr., Inc., 132 AD3d 940, 941-942, 18 NYS3d 683 [2d Dept 2015]; Fontanetta v John Doe 1, supra, at 84-85).

In opposition to the cross-motion, petitioner improperly and belatedly seeks to reframe its conception of Kix's default. In the petition, it was asserted that Kix defaulted by failing to make the August 10, 2018 payment and subsequent monthly payments. Now, petitioner seeks to change its position to backdate the event of default by asserting that the default actually occurred when Kix gave Main St a security interest in its assets. Although such an action may constitute an event of default under the Loan Agreement, it is clear that petitioner did not seek to hold Kix in default, accelerate the debt or enforce its security interest at any time prior to August 10, 2018. Nor did it consider Kix to be in default prior to August 2018, as is evidenced by its verified petition.

UCC § 9-601 provides that after default, a secured party “may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure.” Although no judgment was awarded until November 20, 2019 and it does not seem that petitioner sought to foreclose on any interest in the secured property prior to the filing of the within proceeding, petitioner, without evidence or offered precedent, seems to be asserting that title to all of Kix's assets immediately vested in petitioner on the purported date of default (offered for the first time in opposition papers) and that any action by Kix in honoring a contractual obligation by making payment from those assets subsequent to that date is invalid and must be set aside. Petitioner also alternately states that respondent is in possession of property of the debtors in which petitioner holds an interest; however, this assertion is offered without factual basis.

CPLR 5225 allows a judgment creditor to seek an order directing the payment of money or delivery of property in which the judgment debtor has an interest. Where, as here, an asset is not in the possession of the judgment debtor but is instead in the possession of a third party, “a judgment creditor must first establish that the judgment debtor has an interest in the property held by the third party, and then must demonstrate either that the judgment debtor is entitled to possess the property or that the judgment creditor has a right to the property superior to that of the party who possesses it” (CPLR 5225(b); MRI Enterprises, Inc. v Hausknecht, 142 AD3d 1078, 1080, 38 NYS3d 220, 223 [2d Dept 2016]; quoting Matter of Miraglia v Essex Ins. Co., 96 AD3d 945, 945, 947 NYS2d 138 [2d Dept 2012]; Sirotkin v Jordan, LLC, 141 AD3d 670, 35 NYS3d 443 [2d Dept 2016]). Under Debtor and Creditor Law, transfers made without full and fair consideration may be set aside if made when a debtor is insolvent (Gelberd v Esses, 96 AD2d 573, 465 NYS2d 264 [2d Dept 1983]); however, satisfaction of a prior debt constitutes fair consideration (Palermo Mason Const., Inc. v. Aark Holding Corp., 300 AD2d 458, 752 NYS2d 99 [2d Dept. 2002]). A transfer made by an insolvent creditor in payment of an antecedent debt is not fraudulent if it simply prefers one creditor over another (Zelouf Int'l Corp. v. Rivercity, LLC, 123 AD3d 1114, 999 NYS2d 523 [2d Dept. 2014]). Here, petitioner does not claim a fraudulent transfer. It simply claims to have superior rights to money that was paid in partial satisfaction of a debt.

Petitioner has not sufficiently alleged facts to support any assertion that Kix or Robert E. Marks, the judgment debtors, have an interest in any funds held by respondent. Rather, petitioner primarily alleges that petitioner has an interest in the funds held by respondent (“respondent is in possession of funds in which [p]etitioner has an interest” (Petition at ¶12); “[respondent] received payments from [Kix] which petitioner was entitled to receive due to its superior security interest” (Petition ¶15); and “[respondent] is the transferee of property or assets from [Kix] that [p]etitioner has an interest in” (Petition ¶18)). Petitioner's reliance on Gelberd v Esses, supra, in support of its position is misplaced as Gelberd involved allegations that the judgment debtor transferred assets to defraud its creditors, which is not asserted here. Gelberd provides, in part, “In proceedings pursuant to CPLR 5225 (subd. [b]), wherein a judgment creditor seeks payment from a transferee of the judgment debtor, the creditor has the burden of establishing that his rights are superior to those of the transferee. Whether such rights are superior is a matter to be determined by applying the fraudulent conveyance provisions of the Debtor and Creditor Law (internal citations omitted).”

Petitioner argues that the issue of whether or not the property was transferred without consideration is irrelevant because petitioner has superior property rights. However, petitioner has failed to provide the court with any precedent to establish that the situation herein described qualifies as superior rights under CPLR 5225(b). All of the authority that has been brought to this court's attention to address this issue involves transfers without consideration. Petitioner offers no support for the position that it is entitled to claw back funds that were paid to a third party pursuant to a contractual obligation under the circumstances presented. Accordingly, petitioner's first cause of action fails to state a claim for turnover pursuant to CPLR 5225(b) and is dismissed on this basis.

The Court turns next to petitioner's second cause of action for conversion. “Conversion is the unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights” (State of New York v Seventh Regiment Fund, 98 NY2d 249, 259, 746 NYS2d 637 [2002] [internal quotation marks and citation omitted]). In order to succeed on its second cause of action to recover damages for conversion petitioner must show that it had (1) legal ownership or an immediate right of possession to a specific identifiable thing and (2) that the respondent exercised an unauthorized dominion over the thing in question to the exclusion of the petitioner's right (see Giardini v Settanni, 159 AD3d 874, 875, 70 NYS3d 57, 58 [2d Dept 2018]; Mackey Reed Elec., Inc. v Morrone & Assoc., P.C., 125 AD3d 822, 824, 6 NYS3d 65 [2d Dept 2015]; Zendler Const. Co., Inc. v First Adj. Group, Inc., 59 AD3d 439, 873 NYS2d 134 [2d Dept 2009]). Although petitioner may allege a right to the funds held by respondent, petitioner failed to state sufficient facts to support an assertion that it had ownership, possession or control of the disputed funds. Accordingly petitioner's second cause of action for conversion is dismissed.

Petitioner's third cause of action asserts that respondent is petitioner's obligor, that respondent is in possession of property or assets of the debtor that petitioner has an interest in and that Main St has an obligation under the UCC to pay petitioner any money respondent received from Kix. The petitioner further states, “Thus, Main Street must satisfy its obligations as Petitioner's obligor by paying to Petitioner the entire amount held under the Security Agreements as of April 7, 2020 and thereafter.”

UCC 9-102 (59) provides, “Obligor” means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation. The term does not include issuers or nominated persons under a letter of credit.”

Petitioner's recitation of facts does not support the premise that Main St is its obligor, nor does it support the allegation that respondent is in possession of property or assets of the debtor. Petitioner's third cause of action seeking an order under some unspecified section of Article 9 of the New York Uniform Commercial Code “directing Main Street to make payment of all amounts due in partial or full satisfaction of the Judgment” is dismissed for failure to state a cause of action.

Based upon the foregoing, respondent's motion seeking dismissal of the petition based upon failure to state a cause of action is granted. The portion of respondent's motion seeking dismissal based upon CPLR 3211(a)(1) need not be considered.

Vincent J. Martorana, J.