Opinion ID: 424016
Heading Depth: 1
Heading Rank: 5

Heading: Gregg's claim for conversion of his dividends

Text: 90 Gregg alleged that USI converted his dividend checks, and alternatively the funds they represented, for June, September, and December 1972. The court in its July 1981 order granted summary judgment for USI on this claim. The claim has been extinguished to the extent of compensatory damages by the judgment entered for Gregg on his breach of contract claim for his withheld dividends, but the claim for punitive damages was not extinguished. Gregg asserts he was entitled to have the punitive damages issue submitted to the jury. Punitive damages are available for conversion under both Florida law and New York law. 9 91 Beginning with the USI dividend payable June 1, 1972 and continuing through dividends payable December 1972, a total of six dividends, USI intercepted from the channels of payment the dividends payable to Gregg and held them under its control. To cover each dividend declared USI transferred from its account in Chemical Bank, in New York, to a special dividend account in the same bank, sufficient funds to pay the dividend to all stockholders including Gregg. 92 USI first requested Chemical Bank on May 24, 1972 to stop payment of the dividend payable to Gregg on June 1. Dividends had been declared and were due June 1 on preferred stock and June 19 on common stock. The bank told USI that checks already had been prepared for both payments and that so long as Gregg was a shareholder of record checks would continue to be made to him automatically by the bank's computer. USI then instructed the bank to cancel Gregg's June checks, to send them to USI, and to change Gregg's mailing address so that future dividend checks payable to him would come to USI rather than to him. The bank pulled the June 1 check and later the June 19 check, placed both in its vault, and several months later marked them void and sent them to USI. On June 15 Gregg called USI and inquired about his missing June 1 check, but USI gave him no information of its whereabouts. Two checks for September dividends and two for December, payable to Gregg, were pulled by the bank and sent to USI, which ended up in possession of six checks totaling about $65,000. 10 Officers of USI discussed ways that it could realize the funds represented by the checks, but it made no effort to carry through. Until trial the funds out of which the checks were payable remained in the special dividend accounts at Chemical Bank, and USI maintained possession of Gregg's checks. As already described, Gregg demanded of Chemical Bank that it reissue his dividend checks, and on USI's instruction the bank refused. Also the Leesburg Bank offered to postpone selling Gregg's pledged stock if Chemical would send it Gregg's withheld dividends, and Chemical, on USI's instruction, refused. In summary, USI exercised control over where Gregg's dividend checks would be sent, over the checks themselves, and over the dividend accounts and the funds in the accounts. 93 In granting summary judgment the district court applied New York law to define conversion 11 as follows: 94 Any unjustified exercise of dominion over property by one who is not the owner of the property and who is not entitled to possession of the property which interferes with the right to possession of another who is lawfully entitled to such possession. 95 In measuring whether there was a conversion under New York law, the court held that under New York [conflict of laws] rules, the law of the state in which a corporation is incorporated governs the fiduciary obligations of the corporate officers and the general relations between shareholders and management. Thus the court looked to the law of Delaware, where USI was incorporated, to determine if the corporation had committed acts with respect to Gregg that were within the New York definition of conversion. 96 USI asserts, and Gregg does not dispute, that its declaration of each dividend created a debtor-creditor relationship between it and Gregg. It says that Gregg owed it a liquidated sum on the $500,000 note, that it could properly withhold Gregg's dividends as an offset, and that its doing so was not, in the words of the New York law, an unjustified exercise of dominion over property which Gregg was lawfully entitled to possess. USI puts forward no other legal basis for its actions than its assertion that it was entitled to and did offset the dividends against Gregg's obligation on the note. 97 As the predicate for his conversion theory Gregg relies upon cases holding that once a corporation that has declared a dividend sets aside an identified fund for the payment of the dividend, it becomes a trustee for the benefit of the shareholders entitled to the dividend. 12 Gregg asserts that USI, as trustee, exercised dominion over trust assets of which he was the beneficiary and that he was entitled to possess, and claimed the same adversely to him as beneficiary, and thereby USI became a converter. 98 The district court did not address the viability under New York law of Gregg's theory that a trust relationship was created. Rather, accepting the trust theory arguendo, the court adopted USI's position that it acted justifiably because it withheld Gregg's dividends as an offset against his liability on the note. There was no such justification. Under the undisputed facts USI did not engage in an offset at all. Under New York law setoff is complete when three steps have been taken: a decision to exercise the right, some action that accomplishes the setoff, and some record evidencing that the right of setoff has been exercised. Clarkson Co. v. Shaheen, 533 F.Supp. 905, 925 (S.D.N.Y.1982); see also Aspen Industries, Inc. v. Marine Midland Bank, 74 A.D.2d 59, 426 N.Y.S.2d 620, 622 (1980), rev'd on other grounds, 52 N.Y.2d 575, 439 N.Y.S.2d 316, 421 N.E.2d 808 (1981) (setoff does not automatically occur each time a bank holds a matured debt of the depositor; a binding overt act must actually be made). 99 USI failed on all three prongs of the New York requirement. It directed that Gregg's checks be held and turned over to it, and it held control of the checks and of the funds in the dividend accounts that consisted of Gregg's dividends. But it did not offset. It merely exercised--and retained--control pending hostilities, 13 while reserving to itself the right to assert--and asserting--at 100 cents on the dollar the very claims that it now says the dividends were offset against. In the abortive Delaware suit USI claimed $400,000, the full principal amount of Gregg's note, plus interest, and in an ex parte hearing proved up its claim in this amount. U.S. Industries, Inc. v. Gregg, 348 F.Supp. 1004, 1009 (D.Del.1972). The Leesburg bank intervened in the Delaware case seeking to protect its interest in the withheld dividends and to quash the sequestration order. The court declined to protect the bank but clarified that no dividends were included in the sequestration. USI never paid the withheld dividends to the bank. 100 When later sued in this case by Gregg, USI asserted its rights under the note without recognizing any offset. To the contrary its claim excluded the possibility of an offset. USI counterclaimed for the full principal amount of the note (less the initial $100,000 payment) and alleged that no part of this indebtedness had been paid. While not evidencing any reduction in Gregg's note through applying the withheld dividends, when USI answered Gregg's contract claim it denied that it owed him the dividends he claimed. USI secured a judgment for the full $400,000 of unpaid principal plus interest from due date with no credit for either the principal of the withheld dividends or the interest thereon. Gregg did not secure the economic value of his dividends by an offset but through suing USI for his dividends on a contract theory and obtaining a judgment. USI's course of conduct is the antithesis of offset. 14 101 Because the court erred in accepting USI's offset theory, the conclusion that USI was not guilty of conversion must be reversed. Whether, with this contention out of the way, USI is guilty of converting either checks or dividends, or both, is an issue for the district court. 15 102