Call for an appointment 888-481-9995

The Conversion Tort as Applied to Stock

The conversion tort has been applied to interference with stock ownership rights, and may provide a powerful protection for minority shareholders.

conversion tort

The Stock Conversion Tort

Unique Nature of the Stock Conversion Tort 

The tort cause of action for conversion of stock is something of an anomaly as it has developed in Texas. “Texas law has never recognized a cause of action for conversion of intangible property.” Tangible property is “capable of being handled or touched and may be evaluated by the physical senses;” whereas intangible property “has no physical existence.” Therefore, it would seem that the conversion tort would not apply to stock, which is an undivided interest in the corporate “trust fund” and is separate and independent of whatever tangible property is owned by the corporation.

The exception to the tangible property requirement is “where an underlying intangible right has been merged into a document.” The courts’ reason that the intangible “rights had been merged” into a tangible document, and the action is for the conversion of “the value of the rights represented by [the document].” Although the property rights represented by the document are intangible, the document itself is tangible and may be converted. The application of this “merger doctrine” to make the intangible property right of stock ownership into a tangible piece of property subject to the conversion tort is somewhat puzzling. Obviously, the stock certificate is a document that represents the stockholder’s ownership rights, and which is capable of being converted. Yet, Texas law is very clear that the ownership rights in the stock do not merge with the stock certificate. Under Texas law, a plaintiff may recover for conversion of his “stock” even no stock certificates were ever issued.

In Watts v. Miles, no certificates evidencing ownership of stock in the corporation were ever issued to any of the shareholders. The San Antonio Court of Appeals held that the “fact that certificates evidencing ownership of shares of stock were never issued is irrelevant.” The plaintiff could recover for the conversion of his stock if he could prove that he performed his obligation but that despite demands by plaintiff, the corporation had refused to transfer the stock to plaintiff. Conversely, in Davidson v. Atmar, the defendant did take unauthorized possession of the plaintiff’s stock certificates, but the court held that the plaintiff did not have a conversion tort claim for the value of the stock: “The six stock certificates themselves, as distinguished from the stock in the corporation which they represented, were property. But as these certificates were not indorsed by appellee, he could acquire no right in the stock in the corporation, nor could he make any use of the certificates. He had no right, by reason of his possession of the un[e]ndorsed certificates, to interfere with appellee in his status as a stockholder, and, in fact, did not attempt to assert any such rights. . . . Appellee remained all the while the owner of his shares of stock, as distinguished from his stock certificates, and was in full control and enjoyment of the same. Consequently, he had no cause of action for the conversion of the stock. The conversion of an un[e]ndorsed certificate of stock is not a conversion of the stock.”

No Texas appellate opinion has attempted an explanation of the peculiarities of this application of the merger doctrine to the tort of conversion. It may be that the physical stock certificate, evidencing to the stock ownership, is presumed to exist by law and that the corporation is deemed at all times to be in possession of the certificate, with a duty to deliver a copy to the shareholder upon demand, so that by means of the same legal fiction that treats the corporation as an actual, separate person, any interference with the stockholder’s property rights in his stock is deemed by the law to be the wrongful possession by the fictitious corporate person of the fictitious tangible document. No court has ever made this argument in Texas; nevertheless, Texas law is well-settled that stock ownership is subject to conversion tort, without regard to any proof as to the handling of the actual certificate, since the Texas Supreme Court so held in 1891.

Furthermore, as traditionally developed, the tort of conversion is an offense against possession and not title; it may be committed against one who has legal possession, regardless of who has title. Yet Texas law clearly holds that the shareholder never actually possesses his stock. “Upon the issuance of a certificate evidencing he definite interest in the common fund existing in the individual, the possession of the stock evidenced by the certificate does not pass from, but is retained by, the corporation. The certificate is simply the evidence in the hand of the subscriber on which he may be able to base an assertion of interest in the common fund.” The stock at all time remains “in the possession of the corporation.” Yet, it is indisputably settled in Texas law that shares of stock in a corporation, which “are a species of personal property, belonging to the holder thereof, entirely separate and distinct from the property of the corporation itself,” are subject to a claim for conversion claim.

In the 1880 Texas Supreme Court case of Baker v. Wasson, the plaintiff sued two defendants for stock conversion who had fraudulently obtained a transfer on the corporation’s book of ten shares of Houston & Texas Central Railway Company belonging to the plaintiff. Judgment was rendered for plaintiff for $4,000 and interest, as damages for value of the stock. In acknowledging the usual requirement that converted property be tangible, the Supreme Court seems to say that stock is just an exception: “Shares in incorporated companies, though not visible or tangible and capable of actual, manual delivery, have, nevertheless, long been recognized as having value and many other characteristics of property.” The Court noted that because the “company only, had the power to cancel the old stock and issue new,” ordinarily the corporation would be liable to the true owner “if this was done illegally and wrongfully, whether through negligence or fraud.” The wrongful transferee of the plaintiff’s shares would ordinarily have no liability “if he did not have notice, or was not in law charged with notice, of the invalidity, if any, of his own title” unless he had engaged in a “fraudulent combination between the company and [the transferee], by which the new stock was wrongfully issued to him,” in which case the plaintiff “would have his remedy against both for damages.” The company’s liability arises from “its undertaking to hold the stock for the benefit of the true owner of the certificate”—the same “contractual relation whereby the corporation acquires and holds the stockholder’s investment under express recognition of his right and for a specific purpose” that gives rise to the corporation’s duties as a trustee—and more “than upon that of a technical tort.” Therefore, the cause of action for conversion of stock has developed from the very beginning as something of a hybrid between a claim for breach of fiduciary duties and the traditional tort remedy, in which the corporation’s duty as trustee to preserve the shareholder’s property rights is enforced by means of the damages remedy of the conversion tort, without necessarily strictly complying with all of the technical requirements of the common law tort.

Proper Defendant

Most cases for conversion of stock involve corporate actions that directly or indirectly deprive or impair the plaintiff’s ownership interest.  As noted above, the corporation acts as trustee over the plaintiff’s share ownership. The corporation is the party who has possession of the stock and the duty to preserve it. The proper defendant on these claims is the corporation. 

Elements of the Stock Conversion Tort

The elements of the stock conversion tort are as follows:

  1. Plaintiff’s ownership or right to the stock;
  2. A corporate act that destroys or impairs the stock’s value;
  3. Demand;
  4. Refusal.

The third and fourth elements are excused “if it was apparent that the defendant would not reverse its conduct.” 

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

Next:

Proof of Ownership>

Share the content
Retain Fryar Law Firm for an Initial Consultation Click Here
Future of Shareholder Oppression Law

Follow Us

Tell Me More About Fryar Law Firm

Fryar Law Firm knows the stock conversion tort.
Request our brochure WORKING WITH FRYAR LAW FIRM

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.

 

 

 

Fryar Law Firm Top 50 Verdicts in the Nation 2015Fryar Law Firm Largest 2015 Fraud Verdict in Texas
Filling In The Gaps Part 1 Published! Download your Copy Today
Retain Fryar Law Firm for an Initial Consultation Click Here