Misappropriation of Property by Fraud or Fictitious Transfer
The misappropriation of property by fraudulently or fictitiously transfering stock ownership on the corporate books constitutes stock conversion.
Misappropriation of Property as Conversion
The Texas Supreme Court in Yeaman v. Galveston City Co. stated that the refusal of a corporation to recognize the ownership interest of a shareholder "appropriates" his property. A corporation can also convert stock by falsely transferring ownership on the company books from the true owner to someone else. This might be done innocently by a corporation where there are competing claims to the same stock, or it might be done by a majority shareholder intentionally trying to squeeze out a minority. This was the fact situation in Davis v. Sheerin. In any event, the misappropriation of the shareholder's property constitutes conversion for which the corporation may face liability.
In Mathews v. First Citizens Bank, the plaintiff was a stockholder in American Optical Company. Someone stole the plaintiff's stock certificate, but the plaintiff did not discover the theft for two years. In the meantime, a third party pledged the share certificate to First Citizens Bank, and upon default of the loan, the Bank sold the stock. The stock certificate eventually was presented to American Optical, which cancelled the certificate and registered the new owner. The plaintiff brought a conversion claim against both the bank and the corporation for the misappropriation of his property and recovered a judgment for monetary damages jointly and severally against both. The Dallas Court of Appeals affirmed, holding: “If a corporation recognizes a forged or unauthorized assignment of a certificate of stock and power of attorney to transfer, and registers the transfer on its books, or if it registers a transfer without any assignment or authority from the owner, it is guilty of a conversion of the shares, and the registered owner may maintain an action against it for damages.”
Misappropriation of Property Through Fraud
One other factual situation is not uncommon. The majority owner and the minority owner might have had an agreement that the plaintiff was actually a shareholder, but just not one of record. Perhaps the plaintiff was subject to a non-compete or was working for a competitor at the time that the plaintiff and defendant decided to start their venture so that there was some need to keep plaintiff as a “silent partner.” Perhaps plaintiff’s credit was poor, and the parties worried that having the plaintiff as a shareholder of record would harm the company’s ability to borrow. In these cases, the defendant is acting in the capacity as a trustee with both parties acknowledging the plaintiff’s equitable ownership interest. However, when the parties
come into conflict later, the defendant takes advantage of the situation and denies that plaintiff is (or ever was) a shareholder. Discovery in such a case must isolate what the agreement or understanding was between the parties, what promises were made, and how and to what extent the defendant acknowledged plaintiff’s ownership interest. If the agreement can be proven, then the defendant is liable for conversion. If the defendant continues to maintain that there never was an agreement, then the plaintiff has an alternative remedy for fraud.