Recent Developments in Business Torts Litigation

Editor

Jason Twinning

Attorney in Washington, DC and Maryland



§ 1.1 Introduction

“The hand of history lies heavy upon the tort of conversion.”  Prosser, The Nature of Conversion, 42 Cornell LQ 168, 169 (1957).  With roots dating back to the Norman Conquest of England in 1066, the cause of action had its original underpinnings as an alternative to deciding rightful ownership of disputed property by “wager of battle”—a physical altercation or duel between alleged victim and thief.  Ames, The History of Trover, 11 Harv. L. Rev. 277, 278 (1897).

While life-and-death duels aren’t required anymore to ascertain ownership, the stakes of modern litigation over disputed property interests often carry existential consequences for the parties’ business interests.  Despite being an ancient cause of action, conversion claims continue to impact present-day business disputes.  Dozens of purported class action lawsuits pending in multiple jurisdictions seek to use the tort of conversion as a mechanism for adjudicating the proper ownership of billions of dollars the federal government paid for Paycheck Protection Program (PPP) loans pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Some courts have begun to assess how conversion claims may apply to disputes over blockchain cryptocurrencies.  Still other recent decisions assess the cause of action’s applicability to everything from membership interests in limited liability companies, to theft of a manuscript that played a key role in exposing movie producer Harvey Weinstein’s history of committing sexual assault and rape.

§ 1.2 The Development of the Cause of Action

§ 1.2.1 Brief History of Conversion, and Its Gradual Expansion to Include Some Forms of Intangible Property.

Conversion is an intentional act of “dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel.”  Restatement (Second) of Torts § 222A[1] (1965).  Originally, this meant interferences with or misappropriation of only tangible “goods”—personal property capable of being lost or stolen.  See W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 15, at 90 (5th ed. 1984).  Because intangible rights could not be “lost or found” in the eyes of the common law, the general rule was that “an action for conversion [would] not normally lie, when it involves intangible property” because there was no physical item that could be misappropriated.  See Sporn v. MCA Records, 58 N.Y.2d 482, 489, 462 N.Y.S.2d 413, 448 N.E.2d 1324 (1983).

Despite this long-standing reluctance to expand conversion beyond the realm of tangible property, most courts have determined there was “no good reason for keeping up a distinction that arose wholly from that original peculiarity of the action” and allowed conversion claims to reach “things represented by valuable papers, such as certificates of stock, promissory notes, and other papers of value.”  See Ayres v. French, 41 Conn. 142, 150, 151 (1874) (emphasis added).  This, in turn, led to recognition of conversion when an intangible property right can be united—or “merged”—with a tangible object.  New York’s highest court explained:

[F]or practical purposes [the shares] are merged in stock certificates which are instrumentalities of trade and commerce…. Such certificates ‘are treated by business men as property for all practical purposes.’ … Indeed, this court has held that the shares of stock are so completely merged in the certificate that conversion of the certificate may be treated as a conversion of the shares of stock represented by the certificate.

See Agar v. Orda, 264 N.Y. 248, 251, 190 N.E. 479 (1934); see also Sporn, 58 N.Y.2d at 489, 462 N.Y.S.2d 413, 448 N.E.2d 1324 (plaintiff could maintain conversion claim where defendant infringed plaintiff’s “intangible property right to a musical performance by misappropriating a master recording—a tangible item of property capable of being physically taken”).

To some courts, the “lack of a compelling reason to prohibit conversion for redress of a misappropriation of intangible property underscores the need for reevaluating the appropriate application of conversion.”  Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 291, 864 N.E.2d 1272, 1277 (2007).  This reevaluation has led some courts to hold that conversion claims can embrace purely intangible property.  See, e.g., Kremen v. Cohen, 337 F.3d 1024, 1033–1034 (9th Cir. 2003) (internet domain name; applying California law); Shmueli v. Corcoran Group, 9 Misc.3d 589, 594, 802 N.Y.S.2d 871 (Sup. Ct., N.Y. County 2005) (computerized client/investor list); Town & Country Props., Inc. v. Riggins, 249 Va. 387, 396–397, 457 S.E.2d 356, 363–364 (1995) (person’s name).

The Restatement (Second) of Torts recognizes this development, noting as to “Conversion of Documents and Intangible Rights”:

  • Where there is conversion of a document in which intangible rights are merged, the damages include the value of such rights.
  • One who effectively prevents the exercise of intangible rights of the kind customarily merged in a document is subject to a liability similar to that for conversion, even though the document is not itself converted.

Restatement (Second) of Torts § 242 (1965).  Yet, the restatement cautions that this “final step” in the law of conversion “does not accord very well with the traditional common law limitations of conversion; and courts which prefer to adhere to the older theory may prefer to regard the liability as one for an intentional inference with the right, which is not identical with conversion, but is similar to it in its nature and legal consequences.”  Id. § 242, comment e.

Prosser and Keeton similarly recognize “[t]here is perhaps no very valid and essential reason why there might not be conversion of” intangible property.  Prosser & Keeton § 15, at 91–92.  Yet they admonish that although “[t]he American economy has experienced an increasing use of intangible ideas. … it would seem preferable to fashion other remedies, such as unfair competition, to protect people from having intangible values used and appropriated in unfair ways.”  Id. at 92.

Accordingly, some courts still insist that conversion claims cannot reach purely intangible rights.  See, e.g., Allied Inv. Corp. v. Jasen, 354 Md. 547, 562, 731 A.2d 957, 965 (1999) (secured interests in corporation stock, collateral assignment of a partnership interest, and proceeds from each); Northeast Coating Tech., Inc. v. Vacuum Metallurgical Co., Ltd., 684 A.2d 1322, 1324 (Me. 1996) (interest in information contained in prospectus); Montecalvo v. Mandarelli, 682 A.2d 918, 929 (R.I. 1996) (partnership interest).  Even courts that adhere to this more traditional view, however, frequently recognize exceptions—for example, “when a plaintiff can allege that the defendant converted specific segregated or identifiable funds, a conversion claim for money may survive.”  See, e.g., Sage Title Grp., LLC v. Roman, 455 Md. 188, 203, 166 A.3d 1026, 1035 (2017) (citation, internal quotation marks omitted).  However, a claim for conversion will fail if the plaintiff cannot establish his right to the funds held in the segregated account.  See, e.g., Cumis Ins. Soc., Inc. v. Citibank, N.A., 921 F. Supp. 1100, 1110 (S.D.N.Y. 1996) (dismissing conversion claim where “there is no allegation of any wrongful or improper act of dominion by [defendant] in contravention of [plaintiff’s] rights.  The alleged acts constituting a conversion are specifically permitted under U.C.C. Article 4–A.”).  Moreover, if a defendant diverts funds from a segregated account, the plaintiff proves his right to those funds, but the defendant satisfies an adverse judgment through use of other funds; there is no liability for conversion, because the plaintiff has suffered no damages.  See Patel v. Strategic Grp., LLC, — N.E.3d —, 2020 WL 6193637, at *8 (8th Dist. Ct. Cuyahoga Cty. Ohio, Oct. 22, 2020) (“Once the trial court returned the full value of the alleged converted property to Patel — as occurred when the trial court awarded Patel $50,000 on his breach of contract claim — Patel suffered no damages pursuant to his conversion action.”).

§ 1.2.2 Elements, Defenses, and Available Remedies

A common thread runs through each jurisdiction’s unique recitation of the elements of conversion—“a wrongful taking, detention, or interference with, or an illegal assumption of ownership or possession, or illegal use or misuse, of the personal property of another.  The gist of the tort is the exercise, or intent to exercise, dominion or control over the property of another in denial of, or inconsistent with, his or her rights in the property.”  7 American Law of Torts § 24:1.  At its most basic, conversion is “any distinct act of dominion wrongfully exerted over the property of another, in denial of the plaintiff’s right, or inconsistent with it.”  Mian v. Sekerci, No. CV N17C-05-585 JRJ, 2019 WL 4580024, at *4 (Del. Super. Ct. Sept. 13, 2019).

The two “key elements” of conversion are (1) the plaintiff’s possessory right or interest in the property and (2) a defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights.  Palermo v. Taccone, 79 A.D.3d 1616, 913 N.Y.S.2d 859 (4th Dep’t 2010); see also Burlesci v. Petersen (1998) 68 Cal.App.4th 1062, 1066, 80 Cal.Rptr.2d 704 (elements are “(1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages”).

Some jurisdictions additionally require that the plaintiff must have demanded return of the property, and the defendant refused.  See Cypress Creek EMS v. Dolcefino, 548 S.W.3d 673 (Tex. App. Houston 1st Dist. 2018), petition for review filed, (July 17, 2018) (listing elements).  Under that analysis, without a demand for possession there’s been no deprivation, and accordingly no harm.  Community Bank, Ellisville, Mississippi v. Courtney, 884 So. 2d 767 (Miss. 2004).

Other courts require demand and refusal only when the defendant’s original possession came about lawfully.  See In re Rausman, 50 A.D.3d 909, 910, 855 N.Y.S.2d 263, 265 (2008) (absent some indication that defendant’s original withdrawal of funds from a Swiss bank account pursuant to the power of attorney was unlawful, conversion claim could not have accrued until a demand was made); Lange-Fitzinger v. Lange, No. A153791, 2019 WL 3424959, at *5 (Cal. Ct. App. July 30, 2019). (“when the defendant’s original possession of the property was not tortious … plaintiff must prove that defendant refused to return the property after a demand for its return”).  But even then, exceptions may apply.  Cuprys v. Volpicelli, 170 A.D.3d 1477, 1478, 97 N.Y.S.3d 325, 327 (2019) (“If possession of the property is originally lawful, a conversion occurs when the defendant refuses to return the property after a demand or sooner disposes of the property.”) (emphasis added); see also CIT Commc’ns Fin. Corp. v. Level 3 Commc’ns, LLC, No. CIV.A.06C-01-236 JRS, 2008 WL 2586694, at *2 (Del. Super. Ct. June 6, 2008) (although “Delaware law does support the notion that if a party was once in lawful possession of the plaintiff’s property, the plaintiff must first make a demand … for return of the property[, t]his requirement is excused when the alleged wrongful act is of such a nature as to amount, in itself, to a denial of the rights of the real owner.”) (internal quotation marks omitted).

Just as in any other tort action, a plaintiff alleging conversion bears the burden of proving the extent of the damages he or she suffered.  Dileo v. Horn, 189 So. 3d 1189 (La. Ct. App. 5th Cir. 2016).  Damages awarded in an action for conversion are determined by the value of the property converted, and if disputed, the plaintiff bears the burden of proof.  Gould v. Ochsner, 2015 WY 101, 354 P.3d 965 (Wyo. 2015).  See Restatement (Second) of Torts § 242, Comment e (in cases involving intangible property there is “very little practical importance whether the tort is called conversion, or a similar tort with another name” because “[i]n either case the recovery is for the full value of the intangible right so appropriated”).

When it comes to defenses, “[c]onversion is a strict liability tort.  The foundation of the action rests neither in the knowledge nor the intent of the defendant.  Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious.  Therefore, questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial.”  Pegues v. Raytheon Space & Airborne Sys., No. 217CV05420DSFGJSX, 2018 WL 8062690, at *3 (C.D. Cal. Dec. 3, 2018) (quoting Burlesci v. Petersen, 68 Cal. App. 4th 1062, 1066 (1998)).  Nor, generally, can an after-the-fact attempt to return converted property “cure” the conversion.  IBM Corp. v. Comdisco, Inc., 1993 Del. Super. LEXIS 183, *41, 1993 WL 259102.

Actual consent or acquiescence is a complete defense to a claim of conversion.  In re CIL Limited, 582 B.R. 46 (Bankr. S.D.N.Y. 2018), amended on reconsideration, 2018.  Absence of damage to the plaintiff is a good defense, see Baye v. Airlite Plastics Co., 260 Neb. 385, 618 N.W.2d 145 (2000), as is abandonment of the property by the plaintiff.  Toll Processing Services, LLC v. Kastalon, Inc., 880 F.3d 820 (7th Cir. 2018); Boaeuf v. Memphis Station, L.L.C., 107 N.E.3d 817 (Ohio Ct. App. 8th Dist. Cuyahoga County 2018); Lowe v. Rowe, 173 Wash. App. 253, 294 P.3d 6 (Div. 3 2012); Greenpeace, Inc. v. Dow Chemical Co., 97 A.3d 1053 (D.C. 2014).  Similarly, a defendant who possessed the property to accommodate plaintiff has a complete defense to conversion when the property was wrongfully removed by a third person.  Williams v. Edwards, 82 Ga. App. 76, 60 S.E.2d 538 (1950).

Other defenses which may mitigate the damages, but do not constitute a complete defense, include:

  • possession originally acquired in a lawful manner,
  • bona fide purchase without notice,
  • lack of profit or benefit to the defendant,
  • benefits conferred by the defendant on the plaintiff by making voluntary payments on the plaintiff’s obligations,
  • reasonable care in handling the property by the defendant,
  • defendant’s failure to use the property,
  • plaintiff’s indebtedness to the defendant,
  • plaintiff’s intention prior to the conversion to use the property unlawfully, or
  • negligence on the part of the plaintiff.

90 C.J.S. Trover and Conversion § 68.  “Other claims which are not a defense include that the defendant is not in possession of the property sued for, the property is in legal custody, advice of counsel, contributory negligence, the First Amendment, lack of consideration, and commingling of the property with other property before the conversion.”  Id.

§ 1.3 Recent Case Developments

As conversion claims grew to encompass intangible property, the Restatement noted “[t]he law is evidently undergoing a process of expansion, the ultimate limits of which cannot as yet be determined.”  Restatement (Second) of Torts § 242 (1965).  It remains so, as new cases seek to apply the ancient cause of action to pressing modern circumstances.

COVID-19, the CARES Act, and PPP Reimbursement Litigation

As noted above, dozens of purported class action lawsuits pending in multiple jurisdictions seek to use the tort of conversion as a mechanism for adjudicating the proper ownership of billions of dollars the federal government paid for Paycheck Protection Program (PPP) loans pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  See, e.g., In re Paycheck Prot. Program Agent Fees Litig., No. MDL 2950, 2020 WL 4673430, at *1 (U.S. Jud. Pan. Mult. Lit. Aug. 5, 2020) (denying consolidation of 62 federal lawsuits pending in 26 districts).

To assist businesses struggling with the effects of the COVID-19 pandemic, Congress sought to incentivize those businesses to keep workers on their payroll by guaranteeing PPP loans made through Small Business Administration (“SBA”)-approved lenders (and offering forgiveness under certain conditions).  “Congress didn’t create the PPP from whole cloth.  Rather, it ‘temporarily add[ed] a new product,’” to the SBA’s “existing [Section] 7(a) Loan Program.”  Lopez v. Bank of Am., N.A., No. 20-CV-04172-JST, 2020 WL 7136254, at *1 (N.D. Cal. Dec. 4, 2020) (citing Business Loan Program Temporary Changes; Paycheck Protection Program Interim Final Rule (the “SBA Rule”), 85 Fed. Reg. 20811 (Apr. 15, 2020)).[1]

However, the CARES Act created an unorthodox system for paying “agents” who assisted the small businesses in obtaining a PPP loan (e.g., attorneys; accountants; consultants; brokers; other persons or entities who prepare an applicant’s application for financial assistance, or who assist a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans).  See, e.g., U.S. Dep’t of Treasury, PPP Information Sheet Lenders, https://home.treasury.gov/system /files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf (last visited Jan. 12, 2021).

To further assist distressed businesses, the CARES Act prohibited agents from collecting fees directly from any PPP applicant.  But rather than have the SBA compensate those agents directly, the Act required the SBA to pay processing fees to the lenders according to a sliding percentage driven by the loan’s size, and for agents to then pursue payment from those lenders out of the fees the lenders received from the SBA.  According to SBA guidance (id.):

Processing fees will be based on the balance of the financing outstanding at the time of final disbursement.  SBA will pay lenders fees for processing PPP loans in the following amounts:

  • Five (5) percent for loans of not more than $350,000;
  • Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
  • One (1) percent for loans of at least $2,000,000.

Agent fees will be paid out of lender fees.  The lender will pay the agent.  Agents may not collect any fees from the applicant.  The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:

  • One (1) percent for loans of not more than $350,000;
  • 50 percent for loans of more than $350,000 and less than $2 million; and
  • 25 percent for loans of at least $2 million.

Unsurprisingly, disputes arose between lenders and agents over how much, if at all, various agents were entitled to be paid out of funds the lenders had received from the SBA.  Those disputes led to a blizzard of litigation, in which the agents advanced conversion claims as one theory of recovery, alleging that the CARES Act and related SBA regulations gave agents “a right to immediate possession of the agent fees,” out of funds that lenders “refused to provide … to Plaintiff and the class….”  See Prinzo & Assoc’s, LLC v. BMO Harris Bank, N.A., Case No. 1:20-cv-3256 (N.D. Ill. 2020) (Complaint, ¶¶ 86–92).  “By withholding these fees,” the lenders were alleged to have “maintained wrongful control over [agents’] property inconsistent with [agents’] entitlements under the SBA regulations,” amounting to “civil conversion by retaining monies owed to Plaintiff and Class members.”  Id.

In Leigh King Norton & Underwood, LLC v. Regions Fin. Corp., No. 2:20-CV-00591-ACA, 2020 WL 6273739, at *12 (N.D. Ala. Oct. 26, 2020), the court dismissed plaintiffs’ conversion claims.  The court noted that “under Alabama law, a conversion claim for money will survive only if “the money itself, not just the amount of it, [is] specific and capable of identification.”  Id. at *11 (quoting Edwards v. Prime, Inc., 602 F.3d 1276, 1303 (11th Cir. 2010) (alteration in original)).  And to be capable of identification, the money must be “traceable to a special account” or come from “segregated sources.”  Id.  Plaintiffs contended that because the funds “emanated” from a specifically identified source—i.e., the processing fees the SBA pays lenders under the PPP—the funds were sufficiently specific and identifiable.  The court disagreed, holding “the fact that money ‘emanates’ from a specific source is not enough; the funds themselves must be identifiable, either because they are physically identifiable or because they have been entirely sequestered from all other funds.”  Id. at *12 (emphasis added).  Accordingly, the court dismissed plaintiffs’ conversion claims.

Similar lawsuits saw the courts dismiss plaintiffs’ conversion claims on the ground that where agents failed to comply with separate SBA rules, neither the CARES Act nor any SBA rule implementing the PPP created an entitlement to the fees—and without an immediate right to possession, conversion claims cannot stand.  For example, in Lopez v. Bank of Am., N.A., supra, a sole proprietor bookkeeper helped his client apply for a PPP loan by compiling the client’s payroll information, reviewing the numbers to determine the appropriate loan amount, and filling out an application with Bank of America on his client’s behalf.  2020 WL 7136254 at *4.  His client received a PPP loan in the amount of $70,243, and he sought to recover his fee ($702.43, or 1%) from Bank of America out of the origination fee it had received from the government.  Id.

Bank of America refused, arguing that plaintiff never entered into a compensation agreement with Bank of America, and neither the CARES Act nor the SBA Rule entitled an agent to fees from a lender in the absence of such a direct agreement between agent and lender.  Id. at *7.  Plaintiff therefore sued on behalf of a purported class, alleging that the defendant lender was “obligated to set aside money to pay, and to pay, agents in accordance with PPP Regulations for work performed on behalf of a client in relation to the preparation and/or submission of a PPP loan application that resulted in a funded PPP loan.”  Id. at *5.

The court disagreed.  Pre-existing SBA rules required an agent “must execute and provide to SBA a compensation agreement,” which “governs the compensation charged for services rendered or to be rendered to the Applicant or lender in any matter involving SBA assistance.”  Id. at *2 (citing 13 C.F.R. § 103.5(a)).  And because nothing in the CARES Act superseded this rule, the court “conclude[d] that the CARES Act and the SBA Rule do not require lenders to pay agent fees for assistance with PPP loan applications, except as required under a written compensation agreement.”  Id. at *8.  Accordingly, because the plaintiff “was not entitled to agent fees under the CARES Act or SBA Rule, he had no ‘right to possession of the property,’” without which the conversion claim necessarily failed.  Id. at *9.

Several other courts have employed a similar analysis.  See Am. Video Duplicating Inc. v. Citigroup Inc., No. 20-cv-03815-ODW (AGRx), 2020 WL 6712232, at *4 (C.D. Cal. Nov. 16, 2020) (citing Sanchez, PC v. Bank of S. Tex., No. CV-20-00139, 2020 WL 6060868 (S.D. Tex. Oct. 14, 2020); Johnson v. JPMorgan Chase Bank, N.A., No. CV-20-4100 (JSRx), ––– F.Supp.3d ––––, 2020 WL 5608683 (S.D.N.Y. Sept. 21, 2020); Sport & Wheat, CPA, PA v. ServisFirst Bank, Inc., No. 20-cv-05425-TKW-HTC, ––– F.Supp.3d ––––, 2020 WL 4882416 (N.D. Fla. Aug. 17, 2020)).

Cryptocurrency Disputes

A Bitcoin is a unit of virtual currency, or “cryptocurrency” that exists only on the internet, without direct ties to any single nation’s monetary systems (though Bitcoins are regularly exchanged for sovereign currencies like the U.S. Dollar and the British Pound).  Bitcoins are stored in virtual “wallets” created by the official Bitcoin software, which can store Bitcoins of a single user, or of multiple users using built-in “Accounts” functionality that tracks each user’s Bitcoin balance independently.

The currency is highly volatile—on March 12, 2020, as the COVID-19 pandemic first began to impact the United States, one Bitcoin traded for $3,858; on January 12, 2021, it traded briefly for more than $36,604 per Bitcoin.  See https://www.coinbase.com/price/bitcoin (last visited Jan. 12, 2021).  The currency is based upon a blockchain[2] that contains a public ledger of all the transactions in the Bitcoin network.  Initial interest in the currency was small, limited initially to those seeking to engage in transactions that could not be easily traced.  Over time, as the currency gained wider exposure, retailers opened up to using bitcoin in 2012 and 2013.  See https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp (last visited Jan. 12, 2021).

Bitcoin is now traded on a number of non-centralized independent exchanges, and the currency can also be bought and sold through broker-dealers.  Id.  As Bitcoin has become more prevalent, courts are being asked to resolve whether it’s something that conversion claims can reach, which requires asking (and beginning to answer) questions as foundational as: is Bitcoin tangible, or intangible, property?

Ox Labs, Inc. v. Bitpay, Inc., No. CV 18-5934-MWF (KSX), 2020 WL 1039012, at *5–6 (C.D. Cal. Jan. 24, 2020).[3]  Bitcoin is quasi-tangible property.

Plaintiff provided an advanced trading platform to exchange cryptocurrency, including Bitcoin.  Defendant’s business involved regularly purchasing and selling Bitcoins—including on plaintiff’s platform—to enable other businesses to accept the cryptocurrency for online payments.  At the conclusion of several transactions, plaintiff inadvertently credited Defendant with 200 additional Bitcoins.  The error went unnoticed for over a year, when plaintiff realized approximately 200 Bitcoins were missing from its accounts, but could not locate the source of the missing Bitcoins.  Months later, defendant also identified the error as part of an internal accounting review, and alerted the plaintiff.  Negotiations ensued as to the correct valuation of the 200 Bitcoins, which had appreciated substantially since the initial error—on the date of the error the value was about $260-$300 per Bitcoin on the markets; when the error was identified by defendant, the value was about $1,050 per Bitcoin.  Defendant offered payment based on the lower amount, but plaintiff refused.  By the time plaintiff filed suit, nearly three years after the initial error, the value was more than $6,623 per Bitcoin.

Because California’s statute of limitations for conversion is longer for tangible property (3 years) than intangible property (2 years), the court had to decide a fairly metaphysical question: what sort of thing is Bitcoin, really?  Defendant argued that Bitcoin is intangible property (and thus subject to a shorter limitations period), “because it is a digital currency without a tangible form.”  But according to plaintiff, “Bitcoins do not exist in the detached realm of ideas; rather, they are digital currencies that rely on a shared public ledger … which records all confirmed transactions.”  Plaintiff relied on Fabricon Products v. United California Bank, 264 Cal. App. 2d 113, 70 Cal. Rptr. 50, 53 (1968), where the California Court of Appeal determined that a check for money is tangible property subject to the three-year statute of limitations.

The court agreed with plaintiff, stating: “Bitcoin is not merely an ‘idea’ that is entirely divorced from any physical form.  Rather, it is dependent on blockchain, a public ledger which records all the transactions.”  The Court also found support in another decision that concluded Bitcoins are commodities that can be regulated by the Commodities Futures Trading Commission.  See CFTC v. McDonnell, 287 F. Supp. 3d 213, 228 (E.D.N.Y. 2018) (“Virtual currencies are ‘goods’ exchanged in a market for a uniform quality and value.  They fall well-within the common definition of ‘commodity’ as well as the [Commodity Exchange Act]’s definition of ‘commodities’ as ‘all other goods and articles … in which contracts for future delivery are presently or in the future dealt in.’”).  Accordingly, the longer limitations period applied.

BDI Capital, LLC v. Bulbul Investments LLC, 446 F. Supp. 3d 1127 (N.D. Ga. 2020).  Unlike money, Bitcoin is “specific intangible property” which can be recovered under a conversion theory.

In this case, an owner of Bitcoin sued the operator of a cryptocurrency exchange, alleging that the defendant unlawfully retained plaintiff’s Bitcoin, and asserting a claim for conversion.  Defendant operated a trading platform that allowed its users to buy and sell Bitcoins against U.S. Dollars.  In 2013, plaintiff set up an account on defendant’s trading platform.  In 2017, plaintiff attempted to withdraw all of its Bitcoins stored on defendant’s platform, but was met with error messages.  After various unsuccessful efforts to resolve the issue, plaintiff learned that defendant was in the process of shutting down or had already shuttered its trading platform.  Defendant allegedly decided to close its trading platform because the banks it used had elected to discontinue their business with entities involved with cryptocurrencies.

Plaintiff, through counsel, issued a demand letter to defendant for all balances in plaintiff’s virtual wallet.  When defendant failed to respond to the letter, plaintiff filed suit, arguing defendant should be held liable for conversion because it failed to return plaintiff’s Bitcoin upon demand.  Noting that no Georgia court had addressed “whether bitcoins, as virtual, intangible cryptocurrency, may be the subject of a conversion action at all,” the court noted potential analogues—although generally “specific intangible property may be the subject for an action for conversion, … as fungible intangible personal property, money, generally, is not subject to a civil action for … conversion.” (citations omitted).  The court accordingly inquired whether Bitcoins were “money” (and thus incapable of recovery through a conversion theory) or something different.  The court ultimately was persuaded that Bitcoins could be the subject of a conversion action, because of each Bitcoin’s specificity and identity—the Bitcoin blockchain providing “a giant ledger that tracks the ownership and transfer of every Bitcoin in existence.”  (quoting Kleiman v. Wright, No. 18-CV-80176, 2018 WL 6812914, 2018 U.S. Dist. LEXIS 216417 (S.D. Fla. Dec. 27, 2018)).  According to the court, Bitcoins therefore are sufficiently identifiable to be considered “specific intangible property” subject to an action for conversion.

Other Notable Decisions

McGowan v. Weinstein, No. 219CV09105ODWGJSX, 2020 WL 7210934 (C.D. Cal. Dec. 7, 2020).  In this case the court found a private espionage operation that stole an advance copy of Rose McGowan’s memoir exposing Harvey Weinstein as a rapist—for the purpose of informing a public relations effort to discredit McGowan—did not state a claim for conversion of her intellectual property.

For many years, the defendant used his power in the movie industry to sexually victimize women.  According to the plaintiff, when defendant learned that plaintiff planned to expose him as her rapist in her memoir, Brave, he and his agents mobilized a complex scheme to protect his reputation.  Part of the alleged scheme included using a private intelligence company, known as Black Cube, to obtain the content of Brave before its publication to help inform the smear campaign against its author.

Plaintiff alleged that the defendants were liable for conversion (among other counts) because they “planned to and did implement a scheme to obtain as much of Brave as possible before the book was published, causing interference with [McGowan]’s possession of the confidential manuscript.”  Defendants moved to dismiss on grounds that (1) plaintiff failed to allege a complete dispossession of the manuscript; and (2) her claim was preempted by the Copyright Act.  In opposition, McGowan argued that (1) intangible property can be subject to conversion even if it can be duplicated; and (2) a conversion claim did not require her to have been completely dispossessed of her copy of the manuscript.  According to plaintiff, when Black Cube stole a copy of much of her manuscript—“and was apparently paid handsomely for that theft”—it disturbed and disrupted her right to maintain sole and exclusive possession of the intellectual property until its publication.

The court found plaintiff’s conversion claim preempted by the federal Copyright Act.  “[W]here a plaintiff is only seeking damages from a defendant’s reproduction of a work—and not the actual return of a physical piece of property—the claim is preempted.”  Because “the essence of her claim is that Defendants made an unlawful reproduction of her manuscript of Brave and interfered with her right to be the only person in possession of a copy,” plaintiff’s claim sounded in copyright.  “[W]rongful possession of copies does not typically give rise to a conversion claim if the rightful owner retains possession of the original or retains access to other copies.”  According to the court, “possession of copies of documents—as opposed to the documents themselves—does not amount to an interference with the owner’s property sufficient to constitute conversion.”  And where “the alleged converter has only a copy of the owner’s property and the owner still possesses the property itself, the owner is in no way being deprived of the use of h[er] property.”

Mahon v. Mainsail LLC, No. 20-CV-01523-YGR, 2020 WL 6750150, at *9 (N.D. Cal. Nov. 17, 2020).  An unfulfilled demand for return of unauthorized copies of intellectual property can overcome Copyright Act preemption concerns, regardless of whether the demand came before filing suit.

An independent filmmaker who created the film “Strength and Honor” entered into an agreement with defendant to distribute the film and provided master copies of the film.  However, the Film was released with unauthorized covers and trailers, which plaintiff alleged violated the agreement.  Plaintiff immediately sent “cease and desist” letters instructing defendant to remove the film from distribution.  The Film continued to be distributed around the world, which Mahon claims could only occur based on master copies provided to defendant.  Indeed, plaintiff learned that defendant’s subcontractor had shipped copies of the film to companies around the world, on defendant’s instruction, after plaintiff’s “cease and desist” letter.

Plaintiff filed suit, asserting claims for direct and contributory copyright infringement, illicit trafficking in counterfeit labels, fraud, and conversion against Mainsail.  The Court initially dismissed the conversion claim as preempted by the Copyright Act, because it was based solely on conversion of intangible property (copyrights).  The Court noted, however, that “claims for conversion of intangible property that includes an ‘extra element,’ such as demand for return of tangible property, [are] not preempted.”  Plaintiff amended his complaint reasserting the conversion claim, but added allegations that defendant obtained master copies (i.e., tangible property) of the film and never returned them.  According to the court, this sufficiently stated a claim for an “extra element”—allowing plaintiff to seek recovery of tangible property (the master copies), as opposed to merely asserting unauthorized copying of the intangible property.

Still, defendant argued that plaintiff’s conversion claim should fail because plaintiff purportedly authorized defendant’s use of the master copies.  The court rejected this argument, noting that even if plaintiff initially authorized defendant to use master copies “it strains credulity that [defendant] could have innocently relied on that authorization [through seven years] of litigation and numerous ‘cease and desist’ letters from the [plaintiff].”  Moreover, the court “fail[ed] to see any law … that requires [plaintiff] to have asked [defendant] for return of the property before filing his suit.”  Accordingly, the Court denied defendant’s motion to dismiss the amended conversion claim.

Bamford v. Penfold, L.P., No. CV 2019-0005-JTL, 2020 WL 967942 (Del. Ch. Feb. 28, 2020).  In this case Delaware’s Chancery Court confirmed that conversion claims may encompass membership interests in a limited liability company, no differently than stock in a corporation.

The defendant was plaintiff’s financial advisor and longtime friend—“a relationship that was closer than most brothers,” according to the complaint.  Because of his great trust in the defendant, plaintiff did not inquire further when the defendant (falsely) advised him to waive the conversion feature in debt issued by the entity they co-owned in connection with a reorganization.  Through that reorganization, the defendant obtained complete control of the entity, and, the plaintiff alleged, engaged in misappropriation and self-dealing.

Plaintiff asserted that the defendant’s actions amounted to conversion of plaintiff’s membership interests in the LLC.  Defendant moved to dismiss, arguing that the intangible property at issue should be treated differently than other intangibles, such as shares of stock, of the kind customarily held to have been merged into a tangible document. 

The court disagreed, holding “[t]here is no basis for treating a share of stock in a corporation and a membership interest in an LLC differently for purposes of conversion.  A share of stock represents a bundle of rights defined by the laws of the chartering state and the corporation’s certificate of incorporation and bylaws.  A membership interest in an LLC represents a bundle of rights defined by the laws of the chartering state, any substantive provisions in the certificate of formation (typically none), and the LLC agreement.  Just as a share of stock is subject to conversion, so too is a membership interest in an LLC.”

Voris v. Lampert, 7 Cal. 5th 1141, 1153, 446 P.3d 284, 292 (2019), reh’g denied (Oct. 23, 2019).  Lost wages are not recoverable under a theory of conversion.

For over a year, plaintiff worked alongside defendant to launch three start-up ventures, partly in return for a promise of later payment of wages.  After a falling out, plaintiff was fired and the promised compensation never materialized.  Plaintiff sued the companies and won, successfully invoking both contract-based and statutory remedies for the nonpayment of wages.  He then sought to hold defendant personally responsible for the unpaid wages on a theory of common law conversion.  Plaintiff asserted that by failing to pay the wages, the companies converted his personal property to their own use and that defendant was individually liable for the companies’ misconduct.

The Superior Court for Los Angeles County entered judgment on the pleadings for defendant.  On appeal, California’s Supreme Court further affirmed the trial court, finding that conversion “is not the right fit for the wrong that [plaintiff] alleges, nor is it the right fix for the deficiencies [plaintiff] perceives in the existing system of remedies for wage nonpayment.”  Plaintiff asserted “a right to money that did once exist, but which he believes was squandered.  At least in such cases, [he] argues, the nonpayment of wages should be treated as a conversion of property, not as a failure to satisfy a ‘mere contractual right of payment.’”

The Court refused to endorse this logic, because it “would require us to indulge a similar fiction: namely, that once [plaintiff] provided the promised services, certain identifiable monies in his employers’ accounts became [his] personal property, and by failing to turn them over at the agreed-upon time, his employers converted [his] property to their own use.”  Distinguishing a previous decision that suggested a common law claim such as conversion might lie “under appropriate circumstances” for an employer’s misappropriation of gratuities left for employees, the Court stated “an employer’s misappropriation of gratuities is not the same as an employer’s withholding of promised wages.  When a patron leaves a gratuity for an employee (or employees), it arguably qualifies as a specific sum of money, belonging to the employee, that is capable of identification and separate from the employer’s own funds; indeed, the employee (or employees) for whom it was left has ownership of the gratuity by statute. … Unpaid wages are different in each of these respects.”  A claim for unpaid wages “simply seeks the satisfaction of a monetary claim against the employer, without regard to the provenance of the monies at issue.  In this way, a claim for unpaid wages resembles other actions for a particular amount of money owed in exchange for contractual performance—a type of claim that has long been understood to sound in contract, rather than as the tort of conversion.”

Am. Lecithin Co. v. Rebmann, No. 12-CV-929 (VSB), 2020 WL 4260989 (S.D.N.Y. July 24, 2020).  Although domain names are intangible property, New York allows conversion claims for interference with one’s right to “possession” of the name.

Plaintiffs’ company brought suit in connection with defendant’s registration of certain domain names, and his retention of those domain names after plaintiffs terminated his employment.  Plaintiffs alleged that while defendant was one of plaintiffs’ officers, he “registered under his own name, or transferred to his own name” the eight domain names identical in substance to a trademark that had been previously registered by plaintiffs.  After terminating defendant’s employment, plaintiffs directed him to turn over all company property, but defendant did not transfer the domain names despite multiple demands.

Plaintiffs alleged conversion based on defendant’s transferring the domain names to his own name and continuing to retain them.  Defendant argued that the domain names were intangible property incapable of conversion under New York law.  Recognizing New York’s long-standing hesitancy to allow conversion claims for intangible property, the court nonetheless traced an ongoing trend away from such rigidity, as the law seeks to adapt to an increasingly electronic, computerized information economy.

The court highlighted C.D.S., Inc. v. Zetler, 298 F. Supp. 3d 727, 759 (S.D.N.Y. 2018) (finding, after bench trial, that when defendant changed the registration of various domain names belonging to plaintiff to his own LLC, he “interfered with [plaintiff’s] possessory interest” in the property, and was liable for conversion), and Triboro Quilt Mfg. Corp. v. Luve LLC, No. 10 Civ. 3604, 2014 WL 1508606, at *9 (S.D.N.Y. Mar. 18, 2014) (“New York courts recognize exceptions [to the normal rule that only physical property can be converted] when the rightful owner of intangible property is prevented from creating or enjoying a ‘legally recognizable and protectable property interest in his idea’ such as by being prevented from registering the domain name for a website or being denied access to a database he created.”).  Because “domain names also have inherent value, particularly where they implement an intellectual property right like a trademark,” the court, “motivated by the need for the common law to respond … to the demands of commonsense justice in an evolving society,” the Court concluded that New York law permits a plaintiff to sue for conversion based on interference with a domain name. (quoting Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 289 (2007).

[1] “Section 7(a) of the Small Business Act … permits extension of financial assistance to small businesses when funds are ‘not otherwise available on reasonable terms from non-Federal sources.’”  United States v. Kimbell Foods, Inc., 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979).

[2] Blockchain is a specific type of database that stores data in a particular way—as new data comes in, it is entered into a fresh block; once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order.  Blockchain databases are most commonly used as a ledger for transactions.  In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control.  Decentralized blockchains are immutable, which means that the data entered is irreversible.  For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.  See https://www.investopedia.com/terms/b/blockchain.asp (last visited Jan. 12, 2021).

[3] An earlier order from the same case reviews the facts that gave rise to the dispute.  See Ox Labs, Inc. v. Bitpay, Inc., No. CV 18-5934-MWF (KSX), 2019 WL 6729667, at *4 (C.D. Cal. Sept. 27, 2019).

 

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