conversion in law

Applying Conversion Law to Denial of Stock Ownership

The corporation has a duty to recognize the ownership and property rights of its shareholders. When a corporation cancels and existing owner's shares or refuses to register a transfer of ownership to a new shareholder, the corporation commits conversion in tort law. Both of these situation involve formal corporate action or refusal to act with respect to the official stock transfer ledger, but all corporate action "in denial of or inconsistent" with the stockholder's ownership rights constitutes is actionable in conversion law.

Expanding the Reach of the Stock Conversion Tort in Law

A slightly more nuanced situation arises when the objective factual record is ambiguous as to whether and when the plaintiff became a shareholder or whether the plaintiff transferred his shares to the majority shareholder prior to the lawsuit. In these cases, the majority shareholder uses his power over the corporation to cause the corporation to deny the plaintiff’s share ownership. Often, the stock certificates are never formally issued, and the blank stock certificates simply sits in the corporate book. Frequently, the owners even neglect to create a stock ledger showing the names and number of shares held by each shareholder, or the owners fail to keep the ledger up to date with subsequent transfers or issuances. When disputes arise later, the majority shareholder is tempted to claim that the minority shareholder is not a shareholder because the minority shareholder does not have a share certificate or because the minority shareholder’s interest is not recorded in the corporate books. As a legal matter, the issuance of the stock certificate is not necessary for a person to be a shareholder. The same is true with regard to the stock ledger.

As a practical matter, there is no real difference between the corporation cancelling the plaintiff’s shares on its books or recording a false transfer of the plaintiff’s shares to the majority shareholder and the corporation taking a position in court that the plaintiff is no longer or never was a shareholder. Both situations equally result in the conversion of the plaintiff’s shares.

Problem of Proof

Nevertheless, there is the problem of proof. Very frequently, the majority shareholder will play dumb, taking a definite position through his actions that the plaintiff is not a shareholder, while maintaining in court that “we are here to determine whether or not the plaintiff is a shareholder.” For the plaintiff to have a remedy for denial of share ownership, the denial must be unambiguous. The defendant’s pleading in the alternative probably won’t satisfy the elements necessary to prove fraud or conversion. Therefore, the plaintiff should create as many opportunities as possible for the defendant to take the position of non-ownership. These would include demanding a shareholder’s meeting, demanding to examine the shareholder’s list, demanding inspection of the share ledger or other books and records, and demanding issuance of share certificates. The defendant’s response to each of these demands will provide evidence of a denial of ownership. Furthermore, small derivative claims for, say, misappropriation of corporate funds or claims to enforce a demand for inspection of books and records may be defended by a denial of share ownership. A motion for summary judgment on the defense to these actions can smoke out an affidavit taking an unequivocal position.

Most useful will be requests for admission and the deposition of the majority shareholder. The goal is to pin down an unequivocal statement that the plaintiff is not a shareholder. Often, the defendant will attempt to hedge and state that he is not sure whether the plaintiff is a shareholder and that the court will decide that issue. Every effort must be made to force the defendant to take a position as to whether in his mind the plaintiff was or was not a shareholder. If the defendant states that he doesn’t know whether the plaintiff was a shareholder, then he must surely know that he never believed that the plaintiff was a shareholder. Witnesses are often loathe to disavow the legal positions stated in pleadings or motion papers. Inevitably, the witness will claim not to be a lawyer and not able to offer a legal opinion on the question of the plaintiff’s share ownership, but the witness will have to admit that he at all times believed himself to be an owner in the business and could not have believed that the plaintiff was his co-owner at the same time. In the end, an admission that the defendant will not admit that the plaintiff is a shareholder and consequently will not treat him as such is probably good enough. Juries don’t like gamesmanship.

Finally, care must be taken in forcing a clear position on whether the plaintiff was a shareholder at one time and subsequently ceased to be a shareholder or whether the plaintiff never was a shareholder. If the defendant’s position is that the plaintiff ceased to be a shareholder, then all aspects of the transaction must be nailed down. When did the plaintiff cease to be a shareholder? What was the nature of the transaction? What was the consideration paid? How was the change documented? What were the understandings of the parties regarding the transactions? What representations were made? How did the way that the parties treated each other, or referred to each other differ before and after the supposed transfer?

If the question is whether the plaintiff was ever a shareholder, then the usual situation is that there was some sort of agreement or understanding that the plaintiff would become a shareholder, but that a final agreement was never reached or that the plaintiff never satisfied the conditions necessary to become a shareholder. Often the claim is made that there was a vague intent to transfer shares to the plaintiff, but that this simply never got done. Sometimes the claim is that the plaintiff was supposed to pay for the shares and never did. Sometimes the claim is that claim is that there were discussions about making the plaintiff a shareholder, but that no final agreement was ever reached. Again, unless the defendant’s position is simply that plaintiff was never a shareholder and the defendant cannot imagine why the plaintiff would think that he was, care must be taken to prove up the specifics of what conditions were necessary for ownership to transfer to the plaintiff. What were the specific terms of the agreement? When was plaintiff supposed to have performed? What did the plaintiff do and what was left undone?

Denial of Shareholder Status in Conversion Law

Courts have recognized that positions taken in the defendants’ pleadings can conclusively prove conversion. In Neylan v. Brammer, the defendant’s pleadings “not only admitted that no such request [for issuance of the stock certificates] would have been complied with, but further denied any right in [plaintiff], asserted [the defendant’s] own exclusive ownership thereof, and declared her purpose to at all times maintain the same. Hence any necessity for a demand had been obviated; the conversion having become complete.” Similarly, deferring to the court as to whether or not the plaintiff is really a shareholder does not prevent a finding of conversion: “Application to a court for guidance in determining whether property should be returned, while it may show good intentions, does not defeat a suit for conversion.”

Davis v. Sheerin as a conversion claim

With the demise of the shareholder oppression doctrine in Ritchie v. Rupe, minority shareholders will be forced to deal with oppression conduct through alternative causes of action. One of these alternatives specifically endorsed by the Ritchie Court was the tort of conversion.

If Davis v. Sheerin, had been decided as a conversion claim, the result would have been almost identical—perhaps even more favorable to the plaintiff. The court of appeals held that the defendant in Davis committed oppressive conduct justifying a compulsory buy-out based primarily on a false denial that the plaintiff was a shareholder and a false claim that the plaintiff had “gifted” his shares to the defendant decades prior to the trial—“conspiring to deprive one of his ownership of stock in a corporation, especially when the corporate records clearly indicate such ownership.” This conduct is one form of dominion or control over stock ownership interests that Texas courts have recognized as constituting stock conversion.

Actually, Davis was tried on a conversion claim; however, the jury found that the defendants did not convert appellee's stock. While the jury found that the defendants conspired to deprive the plaintiff of his stock ownership in the corporation, it also found that the conspiracy was not the proximate cause of any damages. The findings seem inconsistent on their face and irreconcilable with what the appellate court characterized as undisputed facts that conclusively prove a denial of share ownership. The answer probably has more to do with the inconsistency in the plaintiff’s theories of liability in the presentation of the case. The case seems to have been tried primarily on the theory that the plaintiff was a shareholder and was entitled to a buy-out. The trial court granted a declaratory judgment that plaintiff was a 45% shareholder. From the jury’s perspective, the claim that plaintiff was still a shareholder (oppression) and was no longer a shareholder (conversion) must have seemed fatally inconsistent. In conversion law, the plaintiff is required to elect whether he wants his ownership to be restored or wants damages for the loss prior to submission of the case to the jury. Apparently, this was not done, resulting in a logical inconsistency that the jury obviously struggled to resolve. Given that the jury otherwise found in favor of the plaintiff, it must have resolved this apparent contradiction by finding that the defendants unsuccessfully
attempted to convert plaintiff’s shares—so, yes, the defendants conspired to deprive plaintiff of his stock ownership; but, no, the defendants did not actually succeed in converting those shares; and, no, the unsuccessful conspiracy did not cause any actual damages. The court should probably have ruled that the jury’s affirmative answer that the plaintiff “did not make a gift of his stock to appellants, represent that he would, nor agree to do so in the future” established liability for conversion as a matter of law based on the undisputed facts.