Misappropriation of Property by Fraud or Fictitious Transfer
Texas Business Litigation Attorneys Handling Cases Involving the Misappropriation of Property
When a corporation refuses to recognize a shareholder’s ownership interests, or transfers stock ownership by fraudulent means, the corporation may have committed misappropriation of property by fraud or fictitious transfer.
For minority shareholders in Texas, it is particularly important to understand the ways in which majority shareholders can misappropriate property, how Texas law treats this forms of misappropriation of property, and potential remedies for minority shareholders. A Texas corporate law attorney can help.
Refusing to Recognize Minority Shareholder Interests as Misappropriation of Property
One of the ways that misappropriation of property can occur is when a corporation, or its majority shareholders, refuses to recognize the ownership interests of a minority shareholder. This is also known in the law as “conversion,” which is defined as “an intentional act by a defendant causing a serious and substantial interference with or the destruction of the chattel of the defendant.”
In the case Yeaman v. Galveston City Co. (1914), the Supreme Court of Texas clarified that a corporation’s refusal to recognize a minority shareholder’s ownership interest constitutes an appropriation of that shareholder’s property.
To be clear, simply refusing to recognize an individual’s interest in property may rise to the level of misappropriation of property and conversion, and the party refusing to recognize ownership interests may be liable.
Fraud Can Open a Company to Liability for Misappropriation of Property
Not completely unlike the scenario above from Yeaman, situations in which a majority shareholder refuses to recognize a minority shareholder altogether can constitute fraud, and the majority shareholder may be liable for misappropriation of property if the minority shareholder is harmed. For instance, a company might have a “silent partner” for a number of different reasons.
According to an article in Entrepreneur, a “silent partner” is markedly distinct from an investor under SEC regulations, which means that any silent partners must be involved in “voting and decision-making.” Typically, then, silent partners also have ownership interests in the company in a way that mere investors do not.
What happens in a scenario where a majority shareholder—or majority shareholders—take on a silent partner but do not intend to actually provide that silent partner with the rights and responsibilities of a minority shareholder, and in fact refuses to recognize that the person is a partner in any capacity at all? In short, this may constitute fraud.
Generally speaking, Texas law recognizes fraud as a crime in which a first party (the majority shareholder) makes a material representation (that the silent partner is a minority shareholder with ownership rights) that he knows to be false but asserts as true.
As a result of that misrepresentation, the minority shareholder relies on his ownership rights in the business and eventually suffers harm when the majority shareholder refuses to recognize his ownership rights. Fraud requires intent, and when fraud results in the misappropriation of property (unlawfully taking the property to which the minority shareholder was entitled), the majority shareholder can be liable.
Fictitious Transfer of Property Can Constitute Misappropriation
As we noted above, Texas courts recognize that a company’s refusal simply to recognize property ownership can constitute misappropriation of property. In other situations, property—typically of minority shareholders—can be fictitiously transferred in a manner that also constitutes misappropriation of property. In such scenarios, the fictitious transfer of property may be either intentional or unintentional. Regardless of the intent of the corporation, however, it may be liable for damages.
In the case of Davis v. Sheerin (1988), the Texas Court of Appeals ruled that the majority shareholder fictitiously transferred ownership rights of the minority shareholder in order to squeeze him out. This is an example of a misappropriation of property by fictitious transfer that is done intentionally.
A corporation can also be liable for misappropriation of property through fictitious transfer even when it happens unintentionally. In the case of Mathews v. First Citizens Bank (1963), the plaintiff’s stock certificate was stolen (but the plaintiff did not know), a third party forged the plaintiff’s name and pledged the stock certificate to secure a loan at a bank.
When that third party defaulted, the bank sold the stock certificate to a new owner (thinking it was doing so lawfully). The plaintiff realized the stock certificate had been stolen and argued the bank was liable for misappropriation of property and conversion.
The Court of Appeals cited the following: “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 conversation of the shares, and the registered owner may maintain an action against it for damages.”
While the Court did not find in favor of the plaintiff in this case, it clarified that unknowingly engaging in the fictitious transfer of property can open an entity (like a bank, or a corporation) to liability. The fictitious transfer of property can sometimes involve an intent to misappropriate property (as with fraud), but intent is not a necessary element in order for liability to attach.
Misappropriation of Property Examples
In sum, misappropriation of property examples might include the following:
- Majority shareholder recognizes a minority shareholder as such, but intentionally refuses to recognize some or all of the minority shareholder’s property interests in the company;
- Majority shareholder intentionally refuses to recognize a “silent partner” altogether, possibly constituting the misappropriation of property by fraud;
- Majority shareholder fictitiously—and intentionally—transfers property owned by a minority shareholder in order to “squeeze out” the minority shareholder; and/or
- Third party recognizes fictitious property as belonging to Party B (as a result of many different possible scenarios) when it actually belongs to Party A, unintentionally misappropriating Party A’s property by fictitious transfer.
Discuss Your Case with a Texas Business Litigation Attorney
Cases involving the misappropriation of property by fraud or fictitious transfer can be extremely complex, and it is important to speak with a Texas business litigation attorney about your case. An aggressive advocate at Lindquist Wood Edwards LLP can speak with you today. Contact us for more information.