Paul A. Hurst, etc. v. Dezer/Reyes Corp.

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No. 95-1608
No. 95-1747
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Paul A. Hurst, as Trustee for *
American Classics, Inc., *
*
Plaintiff - Appellant/ *
Cross Appellee, *
* Appeals from the United States
v. * District Court for the
* Western District of Missouri.
Dezer/Reyes Corporation; *
Michael Dezer, *
*
Defendants - Appellees/ *
Cross Appellants. *
*
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Submitted: November 13, 1995
Filed: April 26, 1996
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Before McMILLIAN and LOKEN, Circuit Judges, and DUPLANTIER,* District
Judge.
___________
LOKEN, Circuit Judge.
In this diversity case governed by New York law, the trustee of
American Classics, Inc. ("ACI"), a defunct Missouri corporation, sued
Dezer/Reyes Corporation ("Dezer/Reyes") for breach of a Management Contract
and also asserted claims against Dezer/Reyes and its principal owner,
Michael Dezer, for quantum meruit and for conversion of ACI's intangible
property right to the name and trade dress of "Chevy's Diner and Bar" in
New York City. After a second jury awarded ACI substantial quantum meruit
and conversion damages, the district court entered judgment on that
verdict, and both sides
*The HONORABLE ADRIAN G. DUPLANTIER, United States District
Judge for the Eastern District of Louisiana, sitting by
designation.
appeal. We affirm the jury's quantum meruit award against Dezer/Reyes,
reverse the conversion and punitive damage awards, affirm the district
court's dismissal of the claims against Michael Dezer, and remand for entry
of an amended final judgment.
I. Background.
On June 7, 1986, Dezer/Reyes and ACI entered into a Management
Contract in which Dezer/Reyes agreed to build and own a "Chevy's Diner &
Bar" in New York City, and ACI agreed to develop and manage the nightclub
using ACI's established "Chevy's" concept. That concept featured a
1950s/early-1960s theme, decor, and music; buffet dining; a dance floor;
and choreographed entertainment by the staff. In the Management Contract,
ACI retained complete control over the New York operations, and Dezer/Reyes
agreed to pay a percentage of its gross revenues as ACI's management fee.
The agreement provided that, upon termination, Dezer/Reyes "shall
immediately cease to operate the Business" and to use ACI's "trademark,
service mark, tradename, logo or other proprietary mark . . . distinctive
trade dress, forms, slogans, signs, uniforms, symbols or devices associated
therewith." Dezer/Reyes built the New York nightclub, which opened in
February 1987. ACI was paid fees under the Management Contract until March
1989.
In 1988, General Motors Corporation ("GM") sued ACI in an Illinois
federal court, claiming unauthorized use of GM's "Chevy" trademark. In
November 1988, after the court issued a permanent injunction in GM's favor,
ACI and GM entered into a Settlement Agreement that recognized GM's
ownership of the "Chevy" mark but permitted ACI to use the "Chevy's" name
on exterior signs and advertising at its nightclubs until October 1989, and
on interior materials and supplies for an additional four years.
On March 28, 1989, Dezer/Reyes and ACI entered into a new agreement.
Without disclosing its settlement with GM, ACI granted
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Dezer/Reyes a ten-year exclusive license to use ACI's "Proprietary Marks"
to operate a "Chevy's Diner and Bar" in New York City in exchange for an
immediate payment of $75,000. Paragraph 11 of this agreement terminated
the 1986 Management Agreement, adding: "It is not the intent of the
parties to have the termination of the Management Contract affect the
conduct of the Business by [Dezer/Reyes] in any way, other than the
cessation of the management obligations of [ACI]." Shortly thereafter,
Dezer/Reyes learned of the GM litigation and the GM-ACI settlement
agreement. Taking the position it had been defrauded, Dezer/Reyes stopped
payment on its $75,000 check. Though it continued operating the New York
"Chevy's" until the fall of 1990, and indeed hired one of ACI's employees
to manage the nightclub, Dezer/Reyes made no further payments to ACI under
either agreement.
ACI commenced this damage action in mid-1990. ACI's amended
complaint sought compensatory damages for breach of the Management Contract
or a recovery in quantum meruit, and compensatory and punitive damages for
conversion of ACI's business concept. Dezer/Reyes counterclaimed for
fraud. Prior to trial, the district court held the Management Contract
unenforceable because ACI had no right to the "Chevy's" mark. The court
submitted ACI's quantum meruit and conversion claims and Dezer/Reyes's
fraud counterclaim to the jury, which rejected the counterclaim and awarded
ACI $119,324.48 in quantum meruit damages and $496,667.50 in conversion
damages against both Michael Dezer and Dezer/Reyes.
Following post-trial motions, the district court dismissed ACI's
claims against Dezer personally because ACI had failed to pierce the
Dezer/Reyes corporate veil. The court held that the conversion award
against Dezer/Reyes was excessive and, when ACI refused to accept a
remittitur, ordered a new trial. The second jury returned a verdict
awarding ACI $46,000 in quantum meruit damages, $150,000 in conversion
damages, and $500,000 in punitive damages. On appeal, ACI urges us to
affirm the first jury's damage
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awards against both defendants and to order a new trial on the issue of
punitive damages. Dezer/Reyes urges us to reverse the adverse judgment on
the second jury's verdict. Michael Dezer urges us to uphold his dismissal
following the first trial.
II. Quantum Meruit.
The parties spend little time debating the second jury's award of
$46,000 in quantum meruit damages. Dezer/Reyes argues that there can be
no recovery in quantum meruit because its relationship with ACI was
governed by two express contracts. However, the district court held the
Management Contract unenforceable because ACI's essential proprietary mark,
"Chevy's," was invalid. The equitable doctrine of quantum meruit may
properly be used to prevent unjust enrichment when a party has rendered
valuable services under an invalid or unenforceable contract. See Farash
v. Sykes Datatronics, Inc., 452 N.E.2d 1245, 1246-47 (N.Y. 1983); Taylor
& Jennings, Inc. v. Bellino Bros. Constr. Co., 483 N.Y.S.2d 813, 815 (App.
Div. 1984). Neither party questions the amount of the quantum meruit
award; it must be affirmed.
III. Conversion.
The parties devote most of their appellate attention to ACI's
recovery for the tort of conversion. Conversion is the "denial or
violation of the plaintiff's dominion, rights, or possession" of property.
Sporn v. MCA Records, Inc., 462 N.Y.S.2d 413, 415 (Ct. App. 1983).
Historically, only tangible property could be converted; in New York, as
in most jurisdictions, there could be no conversion of "incorporeal species
of property." Matzan v. Eastman Kodak Co., 521 N.Y.S.2d 917, 918 (App.
Div. 1987). If this traditional doctrine applies, ACI's conversion claim
clearly fails because Dezer/Reyes always owned the tangible assets of the
New York nightclub. For example, in MBF Clearing Corp. v. Shine, 623
N.Y.S.2d 204, 206 (App. Div. 1995), the court held that, absent
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wrongful dominion over physical assets, there could be no cause of action
for converting a business's "time, assets, associations, employees'
services and equipment."
The expanded attention given intangible and intellectual property
rights in recent decades has produced theories for expanding the tort of
conversion to include misappropriation of such intangibles. While
cognizant of the trend, New York courts have, at most, cautiously embraced
such theories. As the court said in Ippolito v. Lennon, 542 N.Y.S.2d 3,
6 (App. Div. 1989), "Even under an expanded definition of the tort,
conversion is limited to those intangible property rights customarily
merged in, or identified with, some document." That is the position taken
in Restatement of Torts 2d § 242. It is, in our view, as far as the New
York courts would expand the scope of conversion.
ACI did not base its conversion claim on intangible property rights
customarily merged in a document. Rather, ACI claimed that defendants
converted its business concept. ACI argues that it may assert that tort
claim because it has a property right in the business concept that was
confirmed in Two Pesos, Inc. v. Taco Cabana, Inc., 112 S. Ct. 2753 (1992).
However, Two Pesos simply acknowledged that restaurant trade dress may be
protected under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a). ACI has
no federal trademark rights and asserted no claim under the Lanham Act.
Two Pesos does not define ACI's rights under New York law.
The district court concluded that "New York does recognize a cause
of action for conversion of a tangible expression or implementation of an
idea," citing Murray v. National Broadcasting Co., 844 F.2d 988 (2d Cir.),
cert. denied, 488 U.S. 955 (1988). However, in Murray the Second Circuit
affirmed dismissal of "state law claims for breach of implied contract,
misappropriation, conversion, and unjust enrichment" based upon the
district court's determination that plaintiff had no property interest
because its
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idea for a new television program was not novel. 844 F.2d at 994. Murray
did not involve a dispute among the parties to a licensing arrangement.
Therefore, it sheds no light on what causes of action may be appropriate
here, and it certainly cannot override more specific New York cases
defining the tort of conversion, such as Ippolito and MBF Clearing Corp.1
ACI licensed its business concept to Dezer/Reyes. The lynchpin of
that license, the trademark "Chevy's," proved to be invalid. Claiming
fraud, Dezer/Reyes refused to pay its licensor but continued reaping
benefits from the licensed concept. ACI sued, complaining that Dezer/Reyes
used the licensed intangibles without paying the bargained fees. This is
fundamentally a contract dispute. Under New York law, "a tort claim will
not arise where plaintiff is essentially seeking enforcement of the
bargain." In re Chateaugay Corp., 10 F.3d 944, 958 (2d Cir. 1993)
(quotation omitted). The district court erred in submitting ACI's
conversion claim to both juries.
IV. Punitive Damages.
ACI's claim for punitive damages falls with its claim that defendants
committed the tort of conversion. It is well-settled in New York that
punitive damages are not available in an action for breach of contract or
for quantum meruit unless defendants' conduct was actionable as an
independent tort of a sufficiently egregious nature. See New York Univ.
v. Continental Ins. Co., No. 302, 1995 WL 761955, at *2 (N.Y., Dec. 27);
Sforza v. Health Ins. Plan of Greater NY, Inc., 619 N.Y.S.2d 734, 736 (App.
Div. 1994). ACI has
1
Moreover, if Murray did govern this action, we would conclude
that a nightclub concept based upon a theme from the 1950s, such as
"Chevy's," is not sufficiently novel and original to give rise to
a protectable property interest. See Paul v. Haley, 588 N.Y.S.2d
897, 902-03 (App. Div. 1992); Murray, 844 F.2d at 992-93; Ring v.
Estee Lauder, Inc., 702 F. Supp. 76 (S.D.N.Y. 1988), aff'd, 874
F.2d 109 (2d Cir. 1989) (per curiam).
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failed to satisfy either prong of this narrow exception to the general
rule. Therefore, we reverse the second jury's award of punitive damages
and reject ACI's contention that there should be a new trial on the issue
of punitive damages.
V. Claims Against Michael Dezer.
During the first trial, at the close of ACI's evidence and again at
the close of all evidence, Michael Dezer filed written motions for judgment
as a matter of law ("JAML"). Those motions stated in conclusory fashion:
"Defendant moves the Court to instruct the jury that under the pleadings,
the law, and the evidence, their verdict must be in favor of this
defendant." Following the adverse jury verdict, the district court granted
Dezer's renewed motion for JAML on the ground that ACI had contracted with
Dezer/Reyes and had failed to "pierce the corporate veil" so as to impose
liability on Dezer personally. ACI has preserved an appeal from that
ruling.
ACI first argues that the district court's ruling was procedurally
flawed. ACI posits that Dezer's conclusory pre-verdict motions failed to
"specify the judgment sought and the law and the facts on which the moving
party is entitled to the judgment." Fed. R. Civ. P. 50(a)(2). Therefore,
Dezer's post-verdict JAML motion was improperly granted on a ground not
preserved prior to the verdict. See Diercks v. Durham, 959 F.2d 710, 714
(8th Cir. 1992); 5A James W. Moore, Moore's Federal Practice ¶ 50.08 at 50-
86 (2d ed. 1994). The district court acknowledged this principle but
concluded that Dezer's pre-verdict motions sufficiently preserved his post-
verdict attack on the sufficiency of ACI's evidence because the court had
not permitted oral argument to flesh out the basis for the pre-verdict
motions.
To apply the rule that a post-verdict JAML motion must be limited to
grounds asserted prior to submission of the case to the
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jury, we must know what grounds were fairly raised by the pre-verdict
motions. That is an issue committed to the district court's discretion.
Exercise of that discretion must of course be informed by the purpose of
the Rule 50(a)(2) requirement, namely, "that the motion be made before the
case is submitted to the jury, so that the responding party may seek to
correct any overlooked deficiencies in the proof." Rule 50 Advisory
Committee Notes to the 1991 Amendment to Subdivision (a).
Here, Dezer filed perfunctory written pre-verdict motions. We
discourage motions of this type and note that, had his post-verdict motion
been denied, Dezer would likely have failed to preserve any JAML issue for
appeal. See Jones Truck Lines, Inc. v. Argo, 237 F.2d 649, 651-52 (8th
Cir. 1956). However, the district court construed the pre-verdict motions
as adequate to challenge the sufficiency of ACI's evidence. Because ACI
makes no showing that it lacked fair notice of the veil-piercing issue or
an opportunity to cure the deficiencies in its proof, we have no basis to
conclude that the district court abused its discretion by considering the
merits of Dezer's post-verdict JAML motion.
ACI next argues that the district court erred in holding that ACI
must pierce the Dezer/Reyes corporate veil to recover damages from Dezer
personally. We have concluded that ACI has no cause of action for
conversion. Our focus now is on quantum meruit. A C I
contracted with Dezer/Reyes. ACI dealt with Dezer only in his capacity as
an officer and shareholder of Dezer/Reyes. Thus, ACI could not sue Dezer
for breach of the Management Contract unless it could pierce that corporate
veil. See, e.g., New York Ass'n for Retarded Children, Inc. v. Keator, 606
N.Y.S.2d 784, 785 (App. Div. 1993). However, ACI correctly notes that "the
mere existence of a written contract governing the same subject matter does
not preclude [quantum meruit] recovery from non parties so long as the
other requirements for quasi contracts are met." Seiden Assocs., Inc. v.
ANC Holdings, Inc., 754 F. Supp. 37, 40 (S.D.N.Y. 1991).
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The key to any quantum meruit recovery from a non-contracting party
such as Dezer is proof that he unjustly received and retained an
independent benefit from the plaintiff's contractual services. See Custer
Builders v. Quaker Heritage, Inc., 344 N.Y.S.2d 606, 609 (App. Div. 1973).
Here, ACI points only to financial benefits that accrued to Dezer from the
Management Contract because Dezer/Reyes was a Subchapter S corporation for
income tax purposes. Those are not independent benefits. They therefore
provide no basis for imposing quantum meruit liability on Dezer personally
when ACI agreed to do business with, and provided its contractual services
to, a bona fide corporate entity, Dezer/Reyes. That the contracts proved
to be unenforceable gives rise to a quantum meruit claim against the
beneficiary of ACI's contract services, Dezer/Reyes, but provides no
independent basis for such a claim against Dezer. Thus, the district court
properly granted JAML in his favor.
VI. Conclusion.
We have considered the additional issues raised in the parties'
appellate briefs and conclude that each is without merit. The judgment of
the district court is reversed and the case is remanded with instructions
to enter an amended judgment (i) awarding ACI judgment against Dezer/Reyes
in the amount of $46,000 on ACI's quantum meruit claim, and (ii) dismissing
ACI's remaining claims with prejudice. Interest on this judgment under 28
U.S.C. § 1961 will run from the date judgment was entered in the district
court, October 24, 1994. See Fed. R. App. P. 37.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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