Statute of Limitations Issues in a Stock Conversion Tort
The limitations period for conversion is two years. Limitations accrues on property wrongfully taken when the property was taken. On property legally possessed by the defendant, limitations accrues when the defendant either refuses a demand for its return or otherwise clearly repudiates the plaintiff’s rights. The discovery rule applies when the defendant’s initial possession is lawful. Because the corporation's possession of the plaintiff's stock is always initially lawful, the discovery rule would apply in every stock conversion case. Ordinarily, the discovery rule provides that the cause of action accrues for limitations purposes when the plaintiff knows or should know in the exercise of reasonable diligence that the wrongful conduct has occurred. Included in the usual "reasonable diligence" standard is the notion of "constructive notice," in which a plaintiff is charged with notice of documents filed in the public record.
Tolling the Tort Statute of Limitations
The corporation's fiduciary duties to its shareholders affects how the discovery rule is applied. Corporations have a duty of disclosure to their shareholders. Texas courts have held defendants with a duty of disclosure may not take advantage of the doctrine of constructive notice in the application of the discovery rule. When fidicuciary duties are present actual notice is required. The Texas Supreme Court in Yeaman v. Galveston City Co. ruled that a “shareholder is entitled to rely upon [the corporation] not attempting to impair his interest. He is chargeable with no vigilance to preserve his stock or its fruits from appropriation by the corporation, but may confide in its protection for their security.” Therefore, “statutes of limitation have no application until there is a clear and unequivocal disavowal of the trust, and notice of it brought to the cestui que trust.” The shareholder must have notice of overt conduct by the corporation denying or repudiating his interests for limitations to accrue.
One court noted: “Given that repudiation triggered accrual, it was conceivable that situations could arise,
when dealing with dividends or preemptive rights, where the corporation did nothing to repudiate them and the shareholder did nothing to secure them. Should that circumstance have occurred, then limitations would never have begun. . . . Had that occurred, limitations would never have begun, and the corporation would have been perpetually liable.” That result was exactly the situation in Yeaman in which the corporate defendant failed to recognize the ownership interests of a shareholder, and the claim brought 72 years later by his descendants was not time-barred.