Failure to Make Demand Dooms Conversion Claim

On April 15, 2020, Justice Sherwood of the New York County Commercial Division issued a decision in SH575 Holdings LLC v. Reliable Abstract Co., L.L.C., 2020 NY Slip Op. 31293(U), holding that the failure to make a demand for the return of property doomed a conversion claim, explaining:

The tort of conversion is established when one who owns and has a right to possession of personal property proves that the property is in the unauthorized possession of another who has acted to exclude the rights of the owner. The elements of conversion are (1) plaintiff’s possessory right or interest in certain property and (2) defendant’s dominion over the property or interference with it in derogation of plaintiff’s rights. A plaintiff need only allege and prove that the defendant interfered with plaintiff’s right to possess the property. The defendant does not have to have taken the property or benefitted from it. A conversion claim may not be maintained where damages are merely sought for a breach of contract.

Here, the escrow was made pursuant to the Agreement. That document is not attached to any of the papers in these motions. Plaintiff alleges cancellation pursuant to the purchase agreement required Carlebach to immediately return the $1,000,000 deposit to SH575 Holdings. However, there is no contract or contract claim between plaintiff and the moving defendants who received the funds from the escrow account. Accordingly, claims against them are not shown to be duplicative of a contract claim.

When a conversion claim is asserted with respect to money, the funds must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner. While the Funds were allegedly placed in the unsegregated attorney escrow account, plaintiff argues the Funds were still identifiable, since they made up the vast majority of the funds in that account and no additional funds were paid in after the Funds were disposed. While none of the moving defendants are alleged to have been the initial actor in the conversion, they are alleged to have received funds from the escrow account which were identifiable as plaintiff’s. A person may be liable for conversion by conniving with another in an act of conversion liability for conversion may therefore be established by evidence that a party received wrongfully taken funds, knowing them to have been wrongfully taken, and he or she is chargeable with culpable knowledge of the wrongful act. Here, the allegations of defendants’ knowledge of Carlebach’s wrongful actions are vague, conclusory and based solely on information and belief without an indication of the source of the information, and therefore are insufficient.

A longstanding line of authority recognizes that one who comes lawfully into possession of property cannot be charged with conversion thereof until after a demand and refusal. It is not disputed the moving defendants were due money from the escrow fund and were paid from the escrow fund. Plaintiff has not alleged it made a demand for the return of the Funds. Accordingly, the conversion claims against the moving defendants fail.

(Internal quotations and citations omitted).

Commercial litigation often involves conversion claims. As this decision shows, conversion can involve not just physical objects, but sometimes money as well. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves money or electronic files.