HSCM Bermuda Fund, Ltd. v. 24 Capital, LLC

Background

HSCM Bermuda Fund Ltd. and HSCM F1 Master Fund Ltd. lent Seeman Holtz Property and Casualty, Inc. $25 million under a 2016 loan agreement. The loan was secured by a security interest in SHPC’s assets, including accounts receivable, insurance-related accounts, deposit accounts, and proceeds. HSCM alleged that the security interest was properly perfected through financing statements filed in Florida and Delaware.

SHPC had been in default since at least November 2019. HSCM declared the default and said that more than $180 million in principal and accrued interest was due. In April 2021, Newco entered into a factoring arrangement with National Seniors Insurance Inc. Newco later claimed an interest in certain receivables and funds belonging to SHPC, contacted SHPC’s vendors and account debtors, and demanded that they pay Newco instead of SHPC. HSCM alleged that these actions caused at least $1.4 million owed to SHPC to become inaccessible.

HSCM sued Newco seeking a declaration that HSCM’s security interest had priority, damages and equitable relief for conversion, and possession of the collateral through replevin. Newco moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), which concerns subject-matter jurisdiction, and 12(b)(6), which concerns whether a complaint states a legally sufficient claim.

Jurisdiction

The court held that it had diversity jurisdiction. The opinion states that HSCM’s plaintiffs were citizens of Bermuda and that Newco was a citizen of New York, Florida, and Puerto Rico. The court found a reasonable probability that the amount in controversy exceeded the $75,000 statutory threshold. HSCM alleged that SHPC owed more than $180 million, that Newco claimed $870,920.20 from SHPC, and that at least $1.4 million in SHPC funds had been frozen or made inaccessible. The court denied Newco’s motion to dismiss for lack of subject-matter jurisdiction.

Declaratory-judgment claim

The court held that HSCM plausibly alleged an actual and substantial dispute concerning the priority of its perfected security interest in SHPC’s assets. HSCM alleged that its interest was superior to any interest asserted by Newco and that Newco had refused to stop interfering with the collateral. The court therefore denied Newco’s motion to dismiss the declaratory-judgment claim.

Conversion claim

The court held that HSCM plausibly alleged the elements of conversion: an interest in the property and Newco’s interference with that interest. HSCM alleged that it had the right to possess SHPC’s assets after the loan default and that Newco interfered by seeking payments from SHPC’s vendors and pursuing claims against SHPC. The court also found that the allegedly frozen accounts were sufficiently identifiable property for purposes of a conversion claim. The court denied Newco’s motion to dismiss the conversion claim.

Replevin claim

Replevin is a remedy for recovering a specific, identifiable item of personal property from a defendant who possesses it. The court held that HSCM failed to state a replevin claim because it did not allege that Newco possessed the accounts receivable or other property that HSCM sought to recover. The court granted Newco’s motion to dismiss the replevin claim and dismissed that claim with prejudice.

Rule 8 and disposition

The court rejected Newco’s separate argument that the amended complaint did not provide fair notice because it sometimes made allegations against multiple defendants. Although the complaint was not perfectly drafted, the court found that it specifically described Newco’s alleged conduct and adequately notified Newco of the claims and their factual basis.

The court granted in part and denied in part Newco’s motion to dismiss. HSCM’s replevin claim was dismissed with prejudice. HSCM could proceed against Newco on the declaratory-judgment and conversion claims. The court also directed the parties to discuss mediation or a settlement conference and to submit a status update or proposed discovery schedule.