Sale Of Shares At Sheriff's Sale May Constitute Conversion

One might expect that a sheriff's sale of stock pursuant to a writ of execution could not result in a viable claim for conversion by a judgment debtor.  A California Court of Appeal, however, has ruled that it could.

In Duke v. Superior Court, Cal. Ct. Appeal Case No. F073712 (filed 11/21/2017; certified for publication 12/13/2017) involved three guarantors of a commercial lease. All three guarantors were shareholders in the corporate lessee.  After the lessor had obtained a judgment against the corporation and its three guarantors, two of the guarantors settled with the lessor and took an assignment of the judgment.   The two guarantors then levied on the third guarantor's shares.  They then purchased the shares at the ensuing sheriff's sale.

The third guarantor then sued the other two; alleging, among other things, conversion.  Now defendants themselves, the two guarantors successfully demurred to the conversion claim.  The Fifth District Court of Appeal held that the two guarantors had acted improperly because they had enforced the full amount of the judgment against the third guarantor rather than a proportionate share of the judgment.  It then turned to the question of whether the sale supported a conversion claim.

Not surprisingly, the two guarantors argued that even if the writ of execution was improper, it is not conversion if they had acted in accordance with judicial process.  The Court of Appeal disagreed:

Our conclusion is guided by common sense and a practical application of the elements of conversion.  Here real parties used a writ of execution, subscribed by a clerk rather than a judge, to levy all of Duke's shares of stock in Skinsation. . . . Accepting Duke's allegations as true, it appears that the parties intentionally over-enforced the judgment to divest Duke of all control and ownership in Skinsation.

The procedural posture of the case is important.  Neither the trial court nor the Court of Appeal held that the defendants were liable for conversion.  In fact, the Court of Appeal noted that "nothing shall prevent real parties from challenging Duke's conversion claim pursuant to a motion for summary judgment, or challenging this cause of action by a subsequent appeal".  Or, as Yogi Berra famously quipped, "It ain't over 'til it's over."