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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 14, 2019

Conversion Claim Based on Alleged Right to Receive Shares Dismissed

On October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Alrai Naked Opportunity, LLC v. Naked Brand Group Ltd., 2019 NY Slip Op. 33241(U), dismissing a conversion claim based on the alleged right to receive share, explaining:

Plaintiffs claim for conversion fails to state a claim, and is dismissed. A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. To establish this claim, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiffs rights.

Generally, the conversion of intangible property is not actionable. Intangible property, however, may be considered tangible for purposes of a conversion claim where the plaintiff has a physical representation of it, i.e., stock certificates or the electronic record or registration of such stock certificates, and alleges the taking of that physical representation. Thus, to allege a claim for conversion of stock certificates, the plaintiff must allege that it was issued stock certificates, or that they were electronically recorded in plaintiffs name, and they were taken by defendant. The plaintiff must allege that the stock was issued to it, or that it had some other kind of possession of the shares, and that the defendant took the shares. The mere right to payment may not form the basis for a conversion claim.

Here, Alrai alleges an improper conversion of its right to receive additional shares in NBG based on Alrai’s beneficial interest in Bendon. Alrai fails to allege that it possessed the NBG share certificates, or any other physical manifestation of the allegedly converted shares. It also fails to allege that the shares were previously registered in its name. Alrai alleges merely a beneficial right, pursuant to its agreement with a third party, EJG, to additional NBG shares. This mere right to payment ofNBG shares is not sufficient to establish a present possessory interest for purposes of a conversion claim. Indeed, Alrai cannot even allege that it possessed the Bendon shares which it was to exchange for the NBG shares. The Bendon Final Share Register issued prior to the merger does not list Alrai as the owner or possessor of Bendon shares. While the Deeds gave Alrai a beneficial interest in certain Bendon shares, at no time prior to the closing of the merger did Alrai have a possessory interest in NBG shares. Further, under the Deeds, the number of NBG shares that Alrai ultimately was going to get upon the closing of the merger was not fixed. In fact, the Deeds at section 7.1(e) specifically disclosed to Alrai that, prior to the closing, NBG and/or Naked could issue further shares or other securities that may be convertible into share” or which could enable the holder to buy additional shares, which contingencies may be both material and adverse to the rights of a holder of the Sale Shares Alrai. The PIPE was precisely that type of contingency which diluted Alrai’s potential shares in NBG, and which was disclosed to Alrai in section 7.1 (e) of the Deeds.

Essentially, Alrai’s claim is a contract-based dispute over the number of shares that it was entitled to under the Deeds and the Merger Agreement. While Alrai may not pursue a contract claim under the Merger Agreement since it was not a party to that agreement, Alrai may pursue such a claim against EJG based on breach of the Deeds. Alrai’s conversion claim is insufficient as a matter of law.

(Internal quotations and citations omitted).

Commercial litigation often involves conversion claims. As this decision shows, conversion can involve not just physical objects, but also intangible property. However, as this decision also shows, there must be a physical representation of that property and that the claim must relate to the conversion of that physical representation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves money or electronic files.

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Posted in Commercial, Conversion
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