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Is Conversion an Intentional Tort?

The Defense of Good Faith

If conversion is an intentional tort, then good faith or mistake are defenses. How state of mind works in stock conversion cases.

conversion intentional tort

Good Faith in Conversion -- Intentional Tort? or Strict Liability?

Generally, conversion is not an intentional tort -- meaning that the plaintiff is not required to prove the defendant's intent. The plaintiff establishes conversion by proving ownership of the property and dominion or control of that property by the defendant. In most cases, it is irrelevant whether the defendant acted innocently or intentionally, or even whether the defendant knew that the property belonged to the plaintiff. In that regard, conversion is normally a strict liability tort; however, there are certain exceptions.

Good Faith Is Ordinarily Not a Defense

In an action for conversion, it is usually no defense that the defendant acted in complete innocence and perfect good faith.  “To constitute conversion, there must be an intent on the part of the defendant to assert some right in the property. Wrongful intention is not essential, however; nor is it material, except as to the question of damages, that the defendant acted in good faith or under a mistaken belief as to his rights.”  A mistake as to ownership is not a defense to a claim of conversion.  “It is a conversion suit, and in such a case it is no defense that the defendant was not negligent, or that the plaintiff was negligent, or that the defendant acquired the plaintiff's property through the plaintiff's unilateral mistake, or that the defendant acted in complete innocence and perfect good faith.”

Affirmative Defense of Qualified Refusal

A “qualified refusal,” made in good faith, where the defendant had a reasonable doubt about the plaintiff’s right to immediate possession, is a defense to conversion.  “Where the refusal is not absolute, but is qualified by certain conditions which are reasonable and justifiable, and which are imposed in good faith, and in recognition of the rights of plaintiff, it will not serve as a sufficient basis for an action for conversion.”  The conditions must be reasonable, justifiable, must have a legal foundation such as doubt regarding the plaintiff’s ownership or the defendant’s duty to turn over the property, and must be made in good faith.  Moreover, the reason for the qualified refusal must be specifically stated to the party demanding possession at the time of the refusal, or the defense is waived.  This qualified refusal imposes a duty to make a reasonable inquiry into the right of the claimant to possession.  If the qualified refusal is not reasonable or justifiable under the circumstances, it amounts to a denial of the claimant's rights in the property. 

Conversion May Be an Intentional Tort in Some Instances -

The Good Faith Defense in Stock Conversion

While conversion is not an intentional tort, the defendant must intend to assert some right in the property to be held liable. A defendant would be able to defeat a claim for conversion by proving that its conduct was not for the purpose of asserting a right to the property. For example, if someone places the plaintiff's property in the back of a truck, and the truck driver drives away without realizing that the property is there, the truck driver does not commit conversion. However, if the truck driver knew the property was there, but mistakenly believed it was his own, he would commit conversion. 

In a case involving the deprivation of title to stock, the question of intent never arises. If the defendant intends to deny the plaintiff’s ownership, then wrongful intent is neither necessary nor material, nor is it a defense that the defendant acted in good faith or under a mistaken belief as to his rights. Texas law holds that a corporation that transfers the plaintiffs shares to another party in the innocent belief that the other party is the true owner are nevertheless liable for conversion. The affirmative defense of qualified refusal might come into play where the corporation was unsure of the ownership of the shares and took steps that were reasonable and justifiable to determine the true ownership of the shares.

However, when the plaintiff’s ownership is not denied but the defendant exercises dominion and control by impairing the plaintiff’s rights and benefits of ownership, the defendant's intent may be much more ambiguous. In a claim for constructive conversion through oppressive conduct, there may very well be a question of whether the defendant intended to interfere with the plaintiff’s stock ownership or the plaintiff was merely adversely affected by legitimate corporate actions. In Earthman’s Inc. v. Earthman, the corporation and its directors delayed the transfer of stock awarded to a wife in a divorce while they attempted to enforce a right of first refusal in the court and while her husband and the other individual defendants attempted to intimidate and harass her into selling for an unfair price by threatening to withhold dividends.  The defendants maintained that they never denied the plaintiff’s ownership but had delayed the transfer in good faith and on a reasonable basis.  However, the trial court instructed the jury that the question of good faith was relevant only on the issue of exemplary damages and that good faith was not a defense to the conversion action.  The court of appeals held that this instruction was in error and remanded for a new trial. Therefore, in that case, the trial court's instruction to the jury did follow the general rule, but the court of appeal's holding at least implied that a corporation has the ability to prove good faith as an affirmative defense where the conduct of the corporation might be characterized as a legitimate corporate action with no intention to impair the shareholder's ownership interests. The burden of proof, however, was clearly on the defendant.

The Earthman court noted that the jury would be required to consider “not only the legal relationship of the parties but as well the entire set of circumstances affecting their relationship.”  Additionally, the jury would need to consider the fact that the defendants met with the plaintiff and told her “that it had been decided at such meeting that her stock was worth $200,000.00 and that that was the amount she was to be offered for it. She testified that she was also told she would never be paid a salary or a dividend on her stock and that if she didn't take the offer, false charges would be trumped up against her. This testimony was relevant and material to the jury's determination of whether Earthman’s, Inc. was guilty of conversion in refusing to transfer the stock as requested.”  Therefore, in cases involving constructive stock conversion, the defendant should be able to defend by showing that the conduct alleged to have impaired the plaintiff’s rights were taken in good faith and for a reasonable basis.

However, reliance on the advice of counsel in the innocent belief that the defendant’s position is justified “would not constitute a legal defense to an action for conversion.”  In Rodriguez v. Ortegon, the defendant cited the safe harbor provision of the Texas Business Corporations Act  protecting a director from liability
when he acts in reliance on the advice of counsel.  The record clearly indicated that the defendant knew that the plaintiff was a shareholder, and the court of appeals held that “a party may not assert the legal defense of reliance of corporate counsel when no legal justification for the refusal exists.”  Even the immediate filing of a declaratory judgment action to determine the ownership of the stock will not defeat liability—“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.”

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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