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United States District Court, Southern District of New York

May 19, 2003


The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge


On December 13, 2002, Fabry's S.r.L. ("Fabry's") initiated this action against IFT International, Inc. ("IFT") and Antonio Maggioni, as officer of IFT, asserting seven claims: breach of contract, breach of agency agreement, breach of fiduciary duty, conversion, fraud, negligent misrepresentation, and unfair dealing.*fn1 Fabry's now moves for partial summary judgment against IFT on the breach of contract and conversion claims pursuant to Rule 56 of the Federal Rules of Civil Procedure ("Rules"). Defendants cross move pursuant to the Federal Arbitration Act, 9 U.S.C. § 3-4, to compel arbitration and stay the current action. In its reply, Fabry's further moves for sanctions and reasonable attorney's fees to be imposed on defendants and their counsel pursuant to Rules 11 and 56(g). For the foregoing reasons, plaintiff's motion for partial summary judgment is granted and defendants' cross-motion to compel arbitration is denied. Plaintiff's motion for sanctions and attorneys fees is also denied.


A. The Agency Agreement

Fabry's is an Italian company that sells merchandise in the United States. See Amended Verified Complaint ("Compl.") ¶ 3. IFT is a New York corporation that imports and distributes apparel and accessories. See Defendants' Petition to Compel Arbitration ("Def. Pet.") ¶ 6. On or about December 23, 1998, Fabry's and IFT entered into a Credit Guarantee and Collection Services Agreement (the "Agreement"). See Local Rule of Civil Procedure 56.1 Statement of Material Facts in Support of Plaintiff's Motion for Summary Judgment ("Pl. 56.1") ¶ 1. This Agreement enabled Fabry's to sell merchandise in the United States; using IFT as its agent for the collection of payments, and the management of its accounts. See id. ¶ 2; Def. Pet. ¶ 6.*fn2

Pursuant to the Agreement, Fabry's forwarded original invoices for merchandise to IFT and notified its debtors that collection would be managed exclusively by IFT. See Pl. 56.1 ¶¶ 2, 4-5. In turn, IFT was to collect the accounts receivable and forward them to Fabry's, less IFT's fees and transfer costs. See id. ¶¶ 5-6; Def. Pet. ¶ 6. The Terms and Conditions attached to the Agreement required IFT to forward the receivables on the 10th, 20th, and 30th of each month. See Agreement, Ex. A to Compl. at 9. The Terms and Conditions further provide that the "initial annual fee of 2.5% (two point five percent) will be calculated on the actual sales volume realized." Id. The Agreement also specified that payments made to Fabry's would be at a cost of $20 per wire transfer, or at no cost by regular check. See id.

In 2002, IFT received $354,450.78 in payments from plaintiff's customers. See Pl. 56.1 ¶ 7. Although defendant made regular reports to Fabry's of its receipt of these payments as required under the Agreement, it did not forward the money to Fabry's. See Pl. 56.1 ¶ 7; Def. Pet. ¶ 3. As a result, Fabry's terminated the Agreement by fax and registered letter on December 5, 2002. See Pl. 56.1 ¶ 8; 12/5/02 Letter from F. Mercati to IFT, Ex. C to 2/26/03 Affidavit of Massimiliano Martini, officer of Fabry's ("Martini Aff."). Fabry's then sent Maggioni a letter on December 17, 2002, informing him that if IFT received any further payments from its customers, IFT was to notify Fabry's and forward all payments to it. See Pl. 56.1 ¶ 9; 12/17/02 Letter from Martini to Maggioni ("Martini Ltr."), Ex. D to Martini Aff. Fabry's claims that it has "demanded payment on several occasions." Martini Aff. ¶ 11.

After the termination of the Agreement, IFT received an additional $122,489.59 from plaintiff's customers, which it did not forward to Fabry's, bringing the total revenue collected to $548, 546.76. See Pl. 56.1 ¶¶ 10-11; Payment Plan, Ex. E to Martini Aff. Fabry's concedes that, pursuant to the agreement, IFT is entitled to fees in the amount of $13,713.66, or 2.5 percent of the revenue that IFT has collected but not transferred. See Plaintiff's Reply to Memorandum of Law in Support of its Motion for Partial Summary Judgment ("Pl. Rep.") at 7.

B. The Arbitration Clause

Article 21 of the Agreement contains a "Controversies Resolution" provision, which details the dispute resolution mechanisms that Fabry's and IFT would use for certain disputes arising out of the Agreement. See Agreement at 7-8. The first clause provides that the parties "shall attempt in good faith to resolve by mediation any dispute arising out of or relating to this Agreement and to the attached Terms and Conditions." Id. at 7. The second clause of article 21 mandates arbitration if "the parties have been unable to resolve by mediation any dispute arising from the interpretation of this agreement." Id.


A. Legal Standard

Rule 56 provides for summary judgment 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 the moving party is entitled to judgment as a matter of law." See Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Under this standard, an issue of fact is material if it "might affect the outcome of the suit under the governing law." Shade v. Housing Auth. of City of New Haven, 251 F.3d 307, 314 (2d Cir. 2001) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). "An issue of fact is `genuine' if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. In its determination of whether a genuine issue of material fact exists, this Court must make all inferences and resolve all ambiguities in favor of the non-moving party. See Anderson, 477 U.S. at 255.

Once the moving party has met its burden of demonstrating no genuine issue of material fact, the nonmoving party must present "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). That is, the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see also Elec. Inspectors, Inc. v. Village of East Hills, 320 F.3d 110, 117 (2d Cir. 2003). "Statements that are devoid of any specifics, but replete with conclusions, are insufficient to defeat a properly supported motion for summary judgment." Bickerstaff v. Vassar Coll., 196 F.3d 435, 452 (2d Cir. 1999); see also Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998) ("If the evidence presented by the non-moving party is merely colorable, or is not significantly probative, summary judgment may be granted.") (internal quotation marks, citations, and alterations omitted). Conclusory statements, conjecture or speculation cannot by themselves create a genuine issue of material fact. See Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996).

B. Breach of Contract

Fabry's claims that IFT breached the Agreement by failing to transfer the money that defendant received from plaintiff's customers in 2002 and 2003. See Compl. ¶¶ 48-50. There are four elements of breach of contract under New York Law: the making of a contract; performance of the contract by the plaintiff; breach of the contract by the defendant; and damages suffered by the plaintiff. See Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F. Supp. 1051, 1060 (S.D.N.Y. 1996), aff'd, 108 F.3d 1369 (2d Cir. 1997).

Fabry's asserts that summary judgment is appropriate because Fabry's accepted IFT's offer to provide collection services in return for consideration, and thus the Agreement is a valid contract. See Plaintiff's Memorandum of Law in Support of Partial Summary Judgment ("Pl. Mem.") at 8. Fabry's claims that, pursuant to the contract, it sold merchandise to U.S. buyers in 2002 and notified them that all payments must be made directly to IFT. See Pl. 56.1 ¶ 2. Moreover, Fabry's contends that IFT has admitted that, from October 2002 through January 2003, it "collected on behalf of Fabry's the total sum [of] $548,546.76," which it has not paid to Fabry's. Id. ¶ 11.

In response, IFT contends that although it has collected "an amount of monies" that it has not transferred to Fabry's, the amount to be remitted to Fabry's "is in dispute by virtue of fees and expenses which are due and owing to IFT pursuant to the Agreement." Def. Pet ¶ 3. IFT's assertion that the amount of money to be transferred to Fabry's is "in dispute" is not supported by any admissible evidence. Such an assertion, without more, cannot create a genuine issue of material fact. Accordingly, summary judgment is granted to Fabry's on the breach of contract claim.

C. Conversion

"`Conversion is any unauthorized exercise of dominion or control over property by one who is not the owner of the property which interferes with and is in defiance of a superior possessory right of another in the property.'" Schwartz v. Capital Liquidators, Inc., 984 F.2d 53, 53 (2d Cir. 1993) (quoting Meese v. Miller, 436 N.Y.S.2d 496, 500 (4th Dep't 1981)).*fn3 When the original possession is lawful, "conversion does not occur until the defendant refuses to return property after demand or until he sooner disposes of the property." Id. at 54 (quoting Johnson v. Gumer, 464 N.Y.S.2d 318, 319 (4th Dep't 1983)).

Under New York law, "[i]t is well settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question." Mfrs. Hanover Trust Co. v. Chemical Bank, 559 N.Y.2d 704, 712 (1990); see also Key Bank of New York v. Grossi, 642 N.Y.S.2d 403, 405 (3d Dep't 1996); Anglo-Iberia Underwriting Mgmt Co. v. Lodderhose, 224 F. Supp.2d 679, 689 (S.D.N.Y. 2002). However, an action for conversion cannot be validly maintained "where damages are merely being sought for breach of contract." Peters Griffin Woodward, Inc. v. WCSC, Inc., 452 N.Y.S.2d 599, 600 (1st Dep't 1982). A plaintiff must show acts that were unlawful or wrongful as opposed to mere violations of contractual rights. See Calcutti v. SBU, Inc., 223 F. Supp.2d 517, 523 (S.D.N.Y. 2002).

The money at issue here is specifically identifiable as payments for the merchandise sold by Fabry's to its customers in the United States that was collected by IFT. Fabry's was the rightful owner of this money as the owner of the property sold to its customers in the United States. While IFT was authorized to collect payments from plaintiff's customers for whom it had been assigned the invoices, it was obliged to transfer the payments, less fees and transfer costs, to Fabry's on the 10th, 20th and 30th of each month. Although Fabry's has demanded payments "on several occasions," IFT has retained control over the revenue and thus interfered with plaintiff's superior possessory right. Martini Aff. ¶ 11. Moreover, after Fabry's terminated the Agreement and demanded that "[s]hould IFT receive payments of monies due and owing to Fabry's by its Customers, IFT is instructed to notify Fabry's immediately and to forward such monies to Fabry's accordingly," IFT continued to accept payments and retain them without authorization. Pl. 56.1 ¶ 9; Martini Ltr.

IFT's continued retention of the payments collected from plaintiff's customers without authorization and in defiance of plaintiff's superior right of ownership is sufficient to establish conversion as an action distinct from any breach of contract claim. Because IFT has not disputed the facts as set forth in plaintiff's moving papers regarding its possession of payments made by plaintiff's customers, there is no genuine issue of material fact in dispute and thus summary judgment is granted to Fabry's on the claim of conversion.


IFT and Maggioni move to compel arbitration of the Complaint pursuant to clause 21.2 of the Agreement. Defendants contend that this Court should order the parties to arbitrate their dispute because the Agreement contains a valid arbitration clause, the Agreement containing the clause affects commerce among the several states within the meaning of the Federal Arbitration Act ("FAA"), and there is a dispute between the parties arising out of the Agreement. See Def. Pet. ¶¶ 3, 7, 12-14. Fabry's concedes that the arbitration clause is valid, but argues that it is a narrow clause and that the issues before this Court are outside its scope. See Pl. Mem. at 5-6; Pl. Rep. at 5-6.

A. Legal Standard

The determination of whether a dispute is arbitrable under the FAA comprises two questions: "(1) whether there exists a valid agreement to arbitrate at all under the contract in question . . . and if so, (2) whether the particular dispute sought to be arbitrated falls within the scope of the arbitration agreement." Hartford Acc. and Indem. Co. v. Swiss Reinsurance Amer. Corp., 246 F.3d 219, 226 (2d Cir. 2001) (quoting National Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 135 (2d Cir. 1996)).

Here, the parties agree that there is a valid arbitration clause, and thus the only relevant question is its scope. Because there is "a strong federal policy favoring arbitration . . . where, as here, the existence of an arbitration agreement is undisputed, doubts as to whether a claim falls within the scope of that agreement should be resolved in favor of arbitrability." Ace Capital Re Overseas Ltd. v. Cent. United Life Ins. Co., 307 F.3d 24, 28 (2d Cir. 2002) (internal quotation marks and citations omitted). Although federal policy favors arbitration, however, it is a matter of consent under the FAA and "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001) (quoting AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986)).

The Second Circuit has established a three-part inquiry for determining whether a particular dispute falls within the scope of the arbitration agreement. See id. First, "a court should classify the particular clause as either broad or narrow." Id. Second, if the clause is narrow, "the court must determine whether the dispute is over an issue that "is on its face within the purview of the clause,' or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause." Id. (quoting Rochdale Vill., Inc. v. Public Serv. Employees Union, 605 F.2d 1290, 1295 (2d Cir. 1979)). "Where the arbitration clause is narrow, a collateral matter will generally be ruled beyond its purview." Id. Third, if the arbitration clause is broad, "`there arises a presumption of arbitrability' and arbitration of even a collateral matter will be ordered if the claim alleged `implicates issues of contract construction or the parties' rights and obligations under it." Id. (quoting Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 23 (2d Cir. 1995)).

B. Discussion

1. The Arbitration Clause Is Narrow

Fabry's contends that the clause is narrow and does not cover its claims against IFT. An arbitration clause is broad if "the language of the clause, taken as a whole, evidences the parties' intent to have arbitration serve as the primary recourse for disputes connected to the agreement containing the clause." Id. at 225. On the other hand, a clause is narrow if "arbitration was designed to play a more limited role in any future dispute." Id.

Clause 21.2 of the Agreement is a narrow clause. It mandates that "[i]f the parties have been unable to resolve by mediation any dispute arising from the interpretation of this agreement," the dispute shall be submitted to a single arbitrator. Agreement at 7. In contrast to the mediation clause, which requires the parties to attempt to resolve by mediation "any dispute arising out of or relating to this Agreement and to the attached Terms and Conditions," the arbitration clause only refers to the "interpretation of this agreement." Id. The parties' use of precise language in the arbitration clause suggests an intent to limit arbitration to a particular subset of disputes.

2. The Dispute on Its Face Is Not Within the Purview of the Arbitration Clause
The next question is whether the dispute "is over an issue that is on its face within the purview of the clause, or over some collateral issue that is somehow connected to the main agreement that contains the arbitration clause." Louis Dreyfus Negoce, 252 F.3d at 224. The current dispute arises out of IFT's admitted failure to remit payments it has collected for Fabry's. Plaintiff's action makes claims for breach of contract, breach of agency agreement, breach of fiduciary duty, conversion, fraud, negligent misrepresentation, and unfair dealing for IFT's failure to remit the payments it has collected.

On its face, this dispute does not fall within the purview of the arbitration clause. IFT does not claim that its failure to remit the money it owes Fabry's is a result of a dispute over the interpretation of the Agreement. Although IFT does argue that there is a dispute between the parties concerning the amount of money it owes to Fabry's, it does not argue that this disagreement arises out of differing interpretations of the Agreement. Indeed, IFT and Maggioni do not explain or give any indication of the nature of the dispute over the amount of money IFT owes Fabry's. IFT and Maggioni's petition to compel arbitration is therefore denied.


Fabry's moves for sanctions and reasonable attorney's fees to be imposed on defendants and their counsel pursuant to Rules 11(b) and 56(g). Fabry's contends that defendants' petition to compel arbitration contains "several unsupported and blatantly false statements concerning important facts." Pl. Rep. at 10.

A. Legal Standard

A violation of Rule 11 occurs: (1) where a pleading has been interposed for an improper purpose, or (2) where the claims, defenses, and other legal contentions therein are not warranted by existing law or by a non-frivolous argument for a change in the existing law. See Fed.R.Civ.P. 11(b). "An argument constitutes a frivolous legal position for purposes of Rule 11 sanctions if, under an objective standard of reasonableness, it is clear . . . that there is no chance of success and no reasonable argument to extend, modify or reverse the law as it stands." Morley v. Ciba-Geigy Corp., 66 F.3d 21, 25 (2d Cir. 1995) (quoting Caisse Nationale de Credit Agricole-CNCA v. Valcorp, Inc., 28 F.3d 259, 264 (2d Cir. 1994)).

A Rule 11 sanction "is not a judgment on the merits of an action. Rather, it requires the determination of a collateral issue: whether the attorney has abused the judicial process, and, if so, what sanction would be appropriate." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395 (1990). As such, Rule 11 sanctions are not appropriate for all unsuccessful or unpersuasive arguments. See Shafii v. British Airways, PLC, 83 F.3d 566, 570 (2d Cir. 1996) (holding an unsuccessful opposition motion to remand not sanctionable under Rule 11); K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 131 (2d Cir. 1995) (finding that although plaintiff's claims were properly dismissed on summary judgment, award of Rule 11 sanctions not warranted).

The Second Circuit has repeatedly held that "[s]anctions should only be imposed if `it is patently clear that a claim has absolutely no chance of success,' and all doubts should be resolved in favor of the signing attorney." K.M.B. Warehouse Distribs., Inc., 61 F.3d at 131 (quoting Rodick v. City of Schenectady, 1 F.3d 1341, 1350 (2d Cir. 1993)). The imposition of sanctions is discretionary, and should be granted "with caution." Knipe v. Skinner, 19 F.3d 72, 77 (2d Cir. 1994).

B. Discussion

Defendants' petition to compel arbitration, while not persuasive, does not warrant Rule 11 sanctions. The dispute between the parties arises from a contract that contains an arbitration clause. Therefore, it is not patently unreasonable for defendants to have moved to compel arbitration pursuant to the clause. See Salovaara v. Eckert, 222 F.3d 19, 34 (2d Cir. 2000) ("[F]aulty" attorney's positions "were not so untenable as a matter of law as to necessitate sanction" and were not "the type of abuse of the adversary system Rule 11 was designed to guard against.") (internal quotations and citations omitted).

Resolving ambiguities in the light most favorable to the signing attorney, there is no evidence that defendants' primary purpose in bringing the petition to compel arbitration was "for any improper purpose, such as to harass or to cause unnecessary delay." Fed.R.Civ.P. 11(b)(1). As such, sanctions are not justified under Rule 11(b)(1). For the same reason, sanctions are not warranted under Rule 56(g), which authorizes the court to impose sanctions for affidavits "presented in bad faith or solely for the purpose of delay." There is no evidence that defendants have presented affidavits in bad faith.

Fabry's contends that the petition has false factual statements in violation of Rules 11 and 56. See Pl. Rep. at 8-10. IFT makes several allegations related to plaintiff's unwillingness to continue mediation (e.g., "In contravention of the Agreement Fabry's prematurely withdrew from the mandatory mediation. . . ."). Def. Pet. ¶ 8. Fabry's contends that it fully cooperated during mediation until the proceedings were concluded. See Pl. Rep. at 3. Although the parties' positions differ, IFT's allegations are not necessarily false. The parties simply dispute what ultimately caused the mediation to fail. Whatever the answer, it is irrelevant to the merits of the motion to compel arbitration. See supra Part III. IFT's statements are neither material nor blatantly false, therefore, sanctions are unwarranted.


In sum, Fabry's is entitled to summary judgment on its claims that IFT unlawfully converted plaintiff's property and breached its contract with Fabry's. Moreover, this dispute is outside the scope of the parties' arbitration agreement. Accordingly, defendants' petition to compel arbitration is denied and plaintiff's motion for partial summary judgment is granted.

This case is referred to Magistrate Judge Douglas Eaton for a damages inquest.


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