Gull Keys I LLC v. Fulton Advisory Beef Fund I

Background

Gull Keys I LLC alleged that Fulton Advisory Beef Fund I, LLC and AGEX Inc. breached agreements concerning the purchase and collection of livestock receivables. Gull Keys also alleged that Blake Adams and Wendell Thuss breached an Indemnity Guaranty under which they guaranteed Fulton’s and AGEX’s obligations under the Framework Agreement after specified events occurred.

Gull Keys alleged that Fulton and AGEX failed to transfer to a designated Collection Account funds collected from buyers on receivables purchased by Gull Keys. Gull Keys claimed that these actions triggered four conditions in the Indemnity Guaranty: fraud involving collateral, misappropriation of collateral funds, misapplication of receivable payments, and conversion of receivable payments. The defendants did not dispute that Gull Keys adequately alleged misappropriation or misapplication. They sought dismissal of the portions based on fraud and conversion under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim.

Fraud-Based Theory

The court held that Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity, applied even though fraud was alleged as a triggering condition in a contract claim rather than as a separate fraud claim. The required details included the allegedly fraudulent statements, who made them, when and where they were made, and why they were fraudulent.

Gull Keys alleged generally that AGEX and Fulton falsely stated that they would transfer collected funds to the Collection Account and that they knew they would not fully comply with the Framework Agreement. The court found these allegations insufficient because they did not identify the time, place, or specific speaker for even one allegedly fraudulent statement. The court also noted that, under New York law, a promise to perform contractual obligations generally does not constitute fraud merely because the promisor allegedly did not intend to perform when making the promise.

The court therefore granted in part the motion to partially dismiss the Third Cause of Action to the extent it was based on the fraud condition in the Indemnity Guaranty. The court granted that dismissal without leave to amend.

Conversion-Based Theory

The court denied the motion to the extent the Third Cause of Action was based on conversion of payments related to receivables. The Indemnity Guaranty did not define “conversion” beyond referring to proceeds or payments related to receivables, and the defendants did not provide authority showing that the term necessarily incorporated every element of a separate New York conversion claim.

The court also found that Gull Keys had plausibly alleged that the conversion condition occurred. Gull Keys alleged that it had a superior right to the collected funds and that AGEX and Fulton used funds that should have been paid to Gull Keys to pay other financiers, creditors, or third-party lenders. According to the court, those allegations were sufficient at the motion-to-dismiss stage to allege that Gull Keys was excluded from exercising its asserted contractual rights over the funds.

Disposition

Judge Mary Kay Vyskocil granted in part and denied in part the defendants’ motion to partially dismiss the Amended Complaint. The motion was granted as to the fraud-based portion of the Third Cause of Action, without leave to amend, and denied as to the conversion-based portion. The court directed the Clerk of Court to terminate the motion at docket entry 48.