POIZNER v. FREMONT GENERAL CORPORATION

Filed 2/28/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

STORY CONTINUED FROM PART II..

 . . . But the fiction on which the action of trover was founded, namely, that a defendant had found the property of another, which was lost, has become, in the progress of law, an unmeaning thing, which has been by most courts discarded; so that the action no longer exists as it did at common law, but has been developed into a remedy for the conversion of every species of personal property. It lies for bank notes sealed in a letter (Moody v. Keeney, 7 Ala. 218); for negotiable instruments (Comparet v. Burr, 5 Blackf. 419); for a judgment (Hudspeth v. Wilson, 2 Dev. N. C. 372); for a promissory note which has been paid (Pierce v. Gibson, 9 Vt. 216); for copies of a creditors account (Fulton v. Cunningham, 16 Vt. 697); for a writ of execution issued on a judgment (Keeler v. Fasset, 21 Vt. 539); and for certificates of shares of stock (Anderson v. Nicholas, 28 N. Y. 600; Atkins v. Gamble, 42 Cal. 98; Von Schmidt v. Bourne, 50 Id. 616.) (Payne v. Elliot, supra, 54 Cal. at pp. 340‑341.)

Payne v. Elliot, supra, 54 Cal. at page 342 stated further: It is, therefore, the shares of stock which constitute the property which belongs to the shareholder. Otherwise, the property would be in the certificate; but the certificate is only evidence of the property; and it is not the only evidence, for a transfer on the books of the corporation, without the issuance of a certificate, vests title in the shareholder: the certificate is, therefore, but additional evidence of title, and if trover is maintainable for the certificate, there is no valid reason why it is not also maintainable for the thing itself which the certificate represents. For, as the Supreme Court of Connecticut say, If a certificate of stock is unlawfully retained when demanded, what is presumed to have been converted? The certificate has no intrinsic value disconnected from the stock it represents. No one would say that the paper alone had been converted--that the conversion of the paper constitutes the entire wrong. The real act done in such cases is precisely the same as that done here--no more, no less; and to say that trover will lie in one case and not in the other, is to make a distinction where in reality there is no difference. * * * The stock in both cases was converted; and we think that in these days, when the tendency of courts is to do away with technicalities not based upon reason, a technical distinction of this character should no longer be sustained. (Ayres v. French, 41 Conn. 151.) In Boylan v. Hagnel, 8 Nev. 352, and in Kuhn v. McAllister, 1 Utah, 275, actions of this character for shares of stock were sustained. It follows that the Court below did not err in overruling the demurrer to the complaint, or in rendering judgment for the plaintiff for the value of the stock and interest thereon from the time of the conversion until the time of the trial.

Thus, Payne v. Elliot, supra, 54 Cal. 339 concluded that to allow a conversion action if the defendant misappropriated shares of stock by converting share certificates but disallow the action if the defendant misappropriated shares of stock without converting share certificates would perpetuate a technicalit[y] not based upon reason  (id. at p. 342). Payne concluded that the defendants conversion of shares of stock, an intangible property interest, without converting share certificates was an actionable conversion.

Olschewski v. Hudson, supra, 87 Cal.App. at page 288 stated of Payne v. Elliot, supra, 54 Cal. 339: That case in fact does say: The fiction on which the action of trover was founded, namely, that a defendant had found the property of another, which was lost, has become, in the progress of the law, an unmeaning thing which has been by most courts discarded; so that the action no longer exists as it did at common law, but has been developed into a remedy for the conversion of every species of personal property. This language is also quoted in 24 Cal. Jur. 1030, section 7, which text is supported only by the one authority above mentioned. But this is too broad a statement as to the application of the doctrine of conversion or trover, and it was unnecessary to the determination of the issue in that case. All that was involved in the Payne case, supra, was the question as to whether conversion would lie for the unlawful appropriation of shares of stock in a mining company. Shares of stock are represented by certificates which are evidence of a definite interest in the assets of a company. Shares of stock are tangible and may be identified. It is the uniform rule of law that shares of stock in a company are subject to an action in conversion. (26 R. C. L. 1105; 7 R. C. L. 197, sec. 166; Ralston v. Bank of California, 112 Cal. 208, 213 [44 Pac. 476]; Jackins v. Bacon, 63 Cal. App. 463, 468 [218 Pac. 1027]; People v. Flanagan, 60 Cal. 1 [44 Am. Rep. 52].) (Italics added.)

Olschewski v. Hudson, supra, 87 Cal.App. 282 held that the alleged misappropriation of a list of laundry customers, which was not reduced to writing but was known to an employee, was not an actionable conversion and affirmed the sustaining of a demurrer to the plaintiffs complaint. Olschewski likened the list of laundry customers to a companys goodwill and stated: Unlawful interference with property rights in the goodwill of a business, or the benefits of trade and patronage of a specific list of customers in a definite route may be protected by injunctive relief in a court of equity. [Citations.] But there is nothing definite or tangible in the character of the ordinary list of laundry customers which makes an effort to transfer the district in which they live subject to an action in conversion. No authority has been furnished, which sustains the maintenance of an action in trover or conversion for the unlawful interference with a laundry route, or any similar property right. Clearly the proceeding in conversion was not intended to reach so intangible, uncertain, and indefinite a property right. The very meaning of the word conversion, as it is used in this sense, is to change into another form, substance or state; to transform, or change, as in law, the wrongful appropriation to ones own use of the goods of another. (Standard Dictionary.) The very definition of the word presupposes the existence of tangible goods or chattels in a form capable of being changed or transformed, turned over, delivered, or appropriated for the use and benefit of the wrongdoer. In 38 Cyc. 2011 it is said that conversion lies for every species of tangible personal property which is the subject of private ownership. In this case conversion is used as a term synonymous with trover. (Blacks Law Dictionary, 1174.) Trover comes from a French word meaning to find, and is defined as a form of action which lies to recover damages against one who has, without right converted to his own use goods or personal chattels, in which the plaintiff has a general or special property. . . .  It was originally an action of trespass on the case where goods were found by the defendant and retained against the plaintiffs rightful claim. The manner of retaining possession soon came to be disregarded, as the substantial part of the action is the conversion to the defendants use; so that the action lies whether the goods came into the defendants possession by finding or otherwise, if he fails to deliver them upon the rightful claim of the plaintiff. It differs from detinue and replevin in this, that it is brought for damages and not for the specific articles; and from trespass in this, that the injury is not necessarily a forcible one, as trover may be brought in any case where trespass for injury to personal property will lie. (3 Bouviers Law Dictionary, 3d Rev. 3326.) Various authorities confine the application of the proceeding of trover or conversion to the wrongful interference with specific tangible goods or chattels. In substance it (trover) is a remedy to recover the value of personal chattels wrongfully converted by another to his own use. (1 Chitty on Pleading, 14th Am. ed., 146.) It is a generic term applied to those torts, arising from the wrongful conversion of any particular piece of personal property owned by another. (Spellman v. Richmond & D. R. Co., 35 S. C. 475 [28 Am. St. Rep. 858, 14 S. E. 947].) In form it is a fiction, in substance a remedy to recover the value of personal chattels wrongfully converted by another to his own use. (1 Burr. 31.) Trover lies for specific chattels wrongfully converted, and not for money had and received for payment of debts. It does not operate on chattels generally, but specifically, such as money in coin, or bills, animals or other property capable of identification as being the actual property or thing wrongfully taken or converted. (Kerwin v. Balhatchett, 147 Ill. App. 561, 566.) And in 26 R. C. L. 1105, it is said: An action in trover is not maintainable for the conversion of a bill or note unless the plaintiff can show that he was entitled to the possession of the specific property in question. From the foregoing authorities it appears that the action of trover or conversion lies only for the wrongful appropriation of goods, chattels or personal property which is specific enough to be identified, and not to such indefinite, intangible and uncertain property rights as the mere goodwill of a business, or trade secrets (Roystone v. Woodbury, 67 Misc. Rep. 265 [122 N. Y. Supp. 444]), or a newspaper route (Boehm v. Spreckels, 183 Cal. 239 [191 Pac. 5]), or a licensed market stall for transacting trade. (Meier v. Wilkens, 15 App. Div. 97 [44 N. Y. Supp. 274].) (Olschewski, supra, at pp. 286‑288.)

Contrary to Olschewski v. Hudson, supra, 87 Cal.App. 282, we see no indication in Payne v. Elliot, supra, 54 Cal. 339 that the Supreme Court concluded that shares of stock were tangible property and therefore were the proper subject of a conversion action. In our view, rather than attempt to conform to the common law rule restricting a conversion action to tangible property, Payne acknowledged that shares of stock were intangible property and rejected the common law rule, at least as applied to shares of stock.[1] Moreover, the statement in Payne that the action no longer exists as it did at common law, but has been developed into a remedy for the conversion of every species of personal property (id. at p. 341) suggests a much broader rejection of the restrictive common law rule. Although the authorities cited for that statement all involved either documents evidencing intangible property or documents with their own inherent value (ibid.), Payne went beyond those authorities by holding that the conversion of shares of stock was actionable even without the conversion, or even the existence, of a document evidencing ownership of the shares. Payne rejected the common law rule that only a tangible property interest can be unlawfully converted.[2]

The specific holding in Olschewski v. Hudson, supra, 87 Cal.App. 282 was that a list of laundry customers that had not been reduced to writing was more akin to business goodwill or a trade secret than to tangible personal property and was too intangible, uncertain, and indefinite a property right to be the subject of a conversion action. (Id. at pp. 286‑288.)[3] We recognize that the common law of conversion, which developed initially as a remedy for the dispossession or other loss of chattel (1 Harper et al., Torts (rev. 3d ed. 2006) Interference with Chattels, 2.7, pp. 178-183), may be inappropriate for some modern intangible personal property, the unauthorized use of which can take many forms. In some circumstances, newer economic torts have developed that may better take into account the nature and uses of intangible property, the interests at stake, and the appropriate measure of damages. On the other hand, if the law of conversion can be adapted to particular types of intangible property and will not displace other, more suitable law, it may be appropriate to do so. (Payne v. Elliot, supra, 54 Cal. at pp. 340-342.) The appropriate scope of a conversion action as applied to intangible personal property has been the subject of scholarly and informative discussion. (See, e.g., Harper et al., supra, 2.13, pp. 204-214; Comment, Analyzing the Urge to Merge: Conversion of Intangible Property and the Merger Doctrine in the Wake of Kremen v. Cohen (2005) 42 Hous. L.Rev. 489; 1 Dobbs, Law of Torts (2001) Direct and Intentional Interference with Property, 63, pp. 132-135; Comment, The Conversion of Intangible Property: Bursting the Ancient Trover Bottle with New Wine (1991) 1991 B.Y.U. L.Rev. 1681; Prosser and Keeton, Torts, supra, Intentional Interference with Property,  15, pp. 90-92; see also Kremen v. Cohen (9th Cir. 2003) 337 F.3d 1024, 1029-1036.[4])

A net operating loss is a definite amount (see 26 U.S.C. 172(c)) that can be recorded in tax and accounting records. The significance of this, in our view, is not that the intangible right is somehow merged or reflected in a document, but that both the property and the owners rights of possession and exclusive use are sufficiently definite and certain.[5] The misappropriation of a net operation loss without compensation in the manner alleged in the complaint, causing damage to Indemnity as alleged, is comparable to the misappropriation of tangible personal property or shares of stock for purposes relevant here. We see no sound basis in reason to allow recovery in tort for one but not the other. We therefore decline to follow either Olschewski v. Hudson, supra, 87 Cal.App. 282 or the dictum in Thrifty-Tel, Inc. v. Bezenek, supra, 46 Cal.App.4th at page 1565. At this juncture, we need not decide whether in these circumstances the cause of action should differ in any material respect from a traditional conversion action. (See generally Comment, The Conversion of Intangible Property: Bursting the Ancient Trover Bottle with New Wine, supra, 1991 B.Y.U. L.Rev. 1681.) For purposes of ruling on the demurrer, it is sufficient to conclude as we do that the misappropriation of intangible net operating losses alleged here supports a cause of action for conversion.

5. Count Eleven Fails to Allege a Proper Cause of Action

Indemnity alleges in count eleven that the alleged misappropriation of funds by Fremont General and Insurance Group was not fair and reasonable to Indemnity as required by Insurance Code section 1215.5. Indemnity seeks to recover the full value of the assets misappropriated.

Insurance Code section 1215.5, part of the Insurance Holding Company System Regulatory Act, states among other things that the terms of transactions by insurers with their affiliates must be fair and reasonable, that an insurer must notify the commissioner before entering into certain types of transactions, and that the commissioner may disapprove the transaction. (Id., subds. (a)(1), (b), (d).) Section 1215.10, subdivision (b) states that the commissioner, after notice and a hearing, may impose a civil monetary forfeiture on certain individuals who knowingly violate or permit a violation of the reporting requirement of section 1215.5. Section 1215.10, subdivision (c) states that if an insurer or any director, officer, employee, or agent of the insurer has engaged in any transaction or entered into a contract which is subject to Section 1215.5 and which would not have been approved had approval been requested, the commissioner may order that insurer or individual to cease and desist any further activity under the transaction or contract. Section 1215.10, subdivision (c) states further that the commissioner, after notice and a hearing, may also order the insurer to void any contracts and restore the status quo if this action is in the best interest of the policyholders, creditors, or the public.[6] Section 1215.9, subdivision (a) states that the commissioner may apply to the superior court to enjoin a violation of the act or any rule, regulation, or order by the commissioner under the act, and for other equitable relief.

Indemnity argues: Insurance Code section 1215.10, subdivision (c) empowers the Commissioner to require insurers (Comstock and Fremont Indemnity) to void contracts that violate Insurance Code section 1215.5 and restore the status quo. This is precisely what the Commissioner seeks to do through the eleventh cause of actionhe seeks to void the unfair transactions at issue, and seeks to restore Comstock and Fremont Indemnity to the status quo ante.

Section 1215.10, subdivision (c) authorizes the commissioner to order an insurer to cease and desist activity under a transaction or contract only if the insurer was required by section 1215.5 to notify the commissioner of the proposed transaction or contract but failed to do so, and only if the commissioner would not have approved the transaction or contract had approval been requested. This is the clear implication of the first sentence of section 1215.5, subdivision (c). The second sentence states that the commissioner may also order the insurer to void any contracts and restore the status quo . . .  after notice and a hearing. We construe this to mean that in addition to issuing a cease and desist order in the circumstances described in the first sentence, the commissioner may also order the insurer to void any contracts and restore the status quo in those same circumstances. Thus, section 1215.10, subdivision (c) does not authorize the commissioner to void contracts and restore the status quo unless (1) the insurer was required by section 1215.5 to notify the commissioner of the proposed transaction or contract but failed to do so, and (2) the commissioner would not have approved the transaction or contract had approval been requested. The complaint does not allege that those were the circumstances here and therefore fails to state a cause of action under the statute.

Moreover, Insurance Code section 1215.10, subdivision (c) provides for administrative enforcement of the Insurance Holding Company System Regulatory Act by authorizing the commissioner, after notice and a hearing, to order an insurer to void a transaction or contract and restore the status quo, but does not state that the commissioner may commence a judicial action seeking those remedies. Section 1215.19, subdivision (a) authorizes the commissioner to apply to the superior court to enjoin a violation of the act or any rule, regulation, or order by the commissioner under the act, and for other equitable relief, but does not authorize the commissioner to commence a judicial action to void a transaction or contract or restore the status quo absent an actual or threatened violation of an order by the commissioner to that effect. Indemnity cites no statutory language and offers no legislative history indicating a legislative intent to create a cause of action by the commissioner to void a transaction or contract or restore the status quo absent such a prior order by the commissioner. Indemnity does not request leave to amend. The fact that the Insurance Holding Company System Regulatory Act creates a comprehensive scheme for administrative enforcement and a judicial remedy to enforce administrative action strongly suggests that the remedies provided are exclusive. (Farmers Ins. Exchange v. Superior Court (2006) 137 Cal.App.4th 842, 850.) We conclude that Indemnity has shown no prejudicial error in the sustaining of the demurrer to count eleven.

6. The Sustaining of the Demurrer to Count Twelve Was Error

Indemnity alleges in count twelve that Fremont General and Insurance Group made improper distributions of the assets of Comstock and Indemnity within the meaning of Insurance Code section 1215.16 by misappropriating funds in the manners alleged. Indemnity seeks to recover the alleged improper distributions.

Fremont General and Insurance Group argued in support of their demurrer and argue again on appeal that the term distributions as used in Insurance Code section 1215.16, subdivision (a) is limited to the distribution of shares of stock or monetary bonuses. Section 1215.16, subdivision (a) states that the receiver under an order for liquidation or rehabilitation of a domestic insurer may recover from any parent corporation, holding company, or other controlling person or affiliate the amount of distributions other than distributions of shares of the same class of stock paid by the insurer on its capital stock, or any payment in the form of a bonus, termination settlement, or extraordinary lump sum salary adjustment made by the insurer or its subsidiary to a director, officer, or employee, provided that the distribution or payment was made within one year before the petition for liquidation, conservation, or rehabilitation. Subdivision (b) states that the receiver cannot recover a distribution if the parent or affiliate shows that the distribution was lawful and reasonable when it was paid, and that the insurer did not know and could not reasonably have known that the distribution might adversely affect the ability of the insurer to fulfill its contractual obligations.

The statute refers to distributions rather than distributions of shares of stock, and the statutory language does not suggest that the term distributions is limited to only distributions of shares of stock. Moreover, the apparent purpose of the provision to allow the receiver to recover assets conveyed unreasonably to a parent corporation or other controlling person or affiliate suggests that the Legislature did not intend such a restrictive meaning of the term distributions as the defendants suggest. In support of their demurrer, the defendants cited a legislative committee analysis stating that the bill Authorizes receivers for insolvent insurers to recover from holding companies and affiliates distributions of shares, and bonuses or other extraordinary salary adjustments . . . . (Assem. Com. on Insurance, Analysis of Sen. Bill No. 1666 (1991-1992 Reg. Sess.) as amended June 16, 1992, p. 4.) They also cited an enrolled bill report stating, This bill authorizes receivers for insolvent insurers to treat distributions to holding company employees of shares and bonuses or other extraordinary salary adjustments by the insolvent insurer . . . as a fraudulent conveyance . . . . (Off. of Insurance Advisor, Enrolled Bill Rep. on Sen. Bill No. 1666 (1991-1992 Reg. Sess.) Aug. 12, 1992, p. 3.)[7] We do not view these brief summaries as comprehensive statements of the intent of the statute. Moreover, although legislative history can help to disclose the intent of the Legislature when a statute is unclear or ambiguous, the statutory language is the primary indication of legislative intent. (S. B. Beach Properties v. Berti (2006) 39 Cal.4th 374, 379.) Absent some indication in the language of the statute that the term distributions was intended to mean only distributions of shares of stock, we will not construe the statute so restrictively.

7. Other Reasons Asserted in the Demurrer Do Not Support the Sustaining

of the Demurrer

Fremont General and Insurance Group argued as an independent basis for their demurrer to counts one (declaratory relief), two (permanent injunction), and three (breach of contract) that even absent the letter agreement, Fremont General had a fiduciary obligation to use Comstocks net operating losses to offset the taxable income of other affiliated companies. They argued that Indemnity was not entitled to compensation for that use because Indemnity had no taxable income and therefore could not benefit from its own use of the net operating losses. The factual premise that Indemnity had no taxable income is not alleged in the complaint and is contrary to the allegation in the complaint that Indemnity remains a taxpayer. We therefore cannot affirm the sustaining of the demurrer to counts one, two, and three on this basis.

Fremont General and Insurance Group argued as an independent basis for their demurrer to counts eight (avoidance of fraudulent transfers), nine (avoidance of voidable preferences), and ten (avoidance of fraudulent transfers) that those counts are not pled with the specificity required for a cause of action based on a statute. They neglected to argue either in the trial court or on appeal in what manner the complaint fails to allege the elements required to establish a right to relief under the applicable statutes. Absent specific argument on this point, we perceive no pleading deficiency and cannot affirm the demurrer to those counts on this basis.

Fremont General and Insurance group made various other arguments in support of their general demurrer that would not dispose of an entire cause of action and therefore cannot support the sustaining of the demurrer to any count. We express no opinion concerning the parties respective legal arguments on those issues.

DISPOSITION

The judgment is reversed with directions to the superior court to (1) vacate its order sustaining the demurrer without leave to amend to each count alleged in the complaint, and (2) enter a new order sustaining the demurrer without leave to amend as to count eleven only and overruling the demurrer as to the other counts. Indemnity is entitled to recover its costs on appeal.

CERTIFIED FOR PUBLICATION

CROSKEY, Acting P. J.

We Concur:

KITCHING, J.

ALDRICH, J.

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Analysis and review provided by San Diego County Property line attorney.

[1] Shares of stock in a corporation are intangible property (Ashton v. Heydenfeldt (1899) 124 Cal. 14, 16; see Navistar Internat. Transportation Corp. v. State Bd. of Equalization (1994) 8 Cal.4th 868, 875), although a certificate representing those shares is tangible property (Englert v. Ivac Corp. (1979) 92 Cal.App.3d 178, 184).

[2] Similarly, the Court of Appeal in A & M Records, Inc. v. Heilman (1977) 75 Cal.App.3d 554, 570 concluded that the unauthorized duplication and sale of music recordings constituted conversion, stating, The court correctly found that such misappropriation and sale of the intangible property of another without authority from the owner is conversion. [Citations.]

[3]Thrifty-Tel, Inc. v. Bezenek, supra, 46 Cal.App.4th at page 1565 cited only Olschewski v. Hudson, supra, 87 Cal.App. 282, Adkins v. Model Laundry Co., supra, 92 Cal.App. 575, and two out-of-state cases in support of the statement, Courts have traditionally refused to recognize as conversion the unauthorized taking of intangible interests that are not merged with, or reflected in, something tangible. Adkins followed Olschewski and held that the plaintiff in an action for breach of a laundry services contract could not recover tort damages for the conversion of individual customers on a laundry route. (Adkins, supra, at pp. 583-585.)

[4] The Ninth Circuit requested a decision from the California Supreme Court on the question whether an Internet domain name was within the scope of property subject to the tort of conversion under California law, and on related questions concerning the merger doctrine articulated in the passage from Thrifty-Tel, Inc. v. Bezenek, supra, 46 Cal.App.4th at page 1565 quoted ante. (Kremen v. Cohen (9th Cir. 2003) 325 F.3d 1035, 1038; see Cal. Rules of Court, rule 8.548.) The California Supreme Court denied the request. (Kremen v. Cohen, supra, 337 F.3d at p. 1031.) Deciding the question for itself under California law, the Ninth Circuit discussed Payne v. Elliot, supra, 54 Cal. 339, Olschewski v. Hudson, supra, 87 Cal.App. 282, and other authorities. (Kremen, supra, at pp. 1030‑1033.) The Ninth Circuit ultimately stated that it need not decide whether California adheres to the merger doctrine because assuming that some degree of merger is required under California law, all that is required is some connection to a document or tangible object. (Id. at p. 1033.) The Ninth Circuit concluded that an electronic database, an intangible document, associated the domain name with particular computers connected to the Internet and satisfied any merger requirement. (Id. at pp. 1033‑1034.)

[5] The ownership of a thing is the right of one or more persons to possess and use it to the exclusion of others. In this Code, the thing of which there may be ownership is called property. (Civ. Code,  654.)

[6] Insurance Code section 1215.10, subdivision (c) states in full: Whenever it appears to the commissioner that any insurer subject to this article or any director, officer, employee, or agent thereof has engaged in any transaction or entered into a contract which is subject to Section 1215.5 and which would not have been approved had approval been requested, the commissioner may order the insurer to cease and desist immediately any further activity under that transaction or contract. After notice and hearing the commissioner may also order the insurer to void any contracts and restore the status quo if this action is in the best interest of the policyholders, creditors, or the public.

[7] We take judicial notice of the two items of legislative history, which were submitted to the trial court with a request for judicial notice in the NOL action.