Background
Plaintiffs Serenity Investments, LLC and the Daniel V. Tierney 2011 Trust agreed to sell Social Finance, Inc. (SoFi) stock to Sun Hung Kai Strategic Capital, Ltd. (SHK). Orrick, Herrington & Sutcliffe LLP (Orrick) served as the administrative agent, and Scenic Advisement, Inc. (Scenic) as the broker. Due to errors by Orrick and Scenic, the stock was mistakenly transferred to SHK before payment, despite SHK having put the transaction on hold. SoFi failed to reverse the transfer as instructed, and SHK later discovered it owned the shares. Years later, after SoFi announced plans to go public, SHK affirmed ownership under penalty of perjury and converted the shares.
When Plaintiffs discovered the issue, they demanded the return of shares, which had significantly increased in value. SHK initially offered only the original, lower purchase price. Plaintiffs then sued SHK for conversion, among other claims. SHK, in turn, filed a third-party complaint against Orrick and Scenic, asserting claims for equitable indemnity and statutory contribution based on their alleged negligence in handling the transaction. The district court granted summary judgment to Orrick and Scenic on the equitable indemnity claim, holding that conversion is an intentional tort, which under California law, precludes equitable indemnity against negligent joint tortfeasors. Plaintiffs later settled their claims with SHK, and SHK appealed the summary judgment ruling.
The Court’s Holding
The Ninth Circuit reversed the district court’s grant of summary judgment, holding that under California law, conversion is a strict liability tort for which equitable indemnity is available against negligent joint tortfeasors. The court reasoned that while a conversion requires an intentional act of depriving another of possession, it does not require wrongful intent, bad faith, knowledge, or even negligence. Citing recent California Supreme Court precedent, specifically Voris v. Lampert (2019) and B.B. v. County of Los Angeles (2020), the panel clarified that conversion is a strict liability offense.
The court distinguished strict liability torts from intentional torts in the context of equitable indemnity. Intentional tortfeasors, due to their higher culpability and social condemnation, generally cannot seek indemnity from negligent co-tortfeasors. However, strict liability torts, like conversion, are rooted in different policy concerns and allow for apportionment of liability based on comparative fault. The Ninth Circuit concluded that the district court erred by characterizing conversion as an intentional tort for purposes of equitable indemnity, thus improperly barring SHK’s claim against Orrick and Scenic. The case was remanded for further proceedings consistent with this holding.
Key Takeaways
- Conversion under California law is a strict liability tort, meaning it does not require wrongful intent or knowledge, only an intentional act of depriving another of possession.
- A tortfeasor found liable for conversion may seek partial equitable indemnity from concurrently negligent tortfeasors.
- This ruling aligns conversion with other strict liability torts where comparative fault principles permit the apportionment of liability among multiple wrongdoers.
- The court clarified the distinction between an “intentional act” (which is part of conversion) and an “intentional tort” (which generally bars equitable indemnity).
Why It Matters
This decision provides crucial clarity on the nature of conversion under California law and its implications for equitable indemnity claims. By definitively classifying conversion as a strict liability tort in this context, the Ninth Circuit opens the door for defendants facing conversion claims to seek contribution from other parties whose negligence contributed to the loss. This is a significant shift from the district court’s prior interpretation, which would have left a conversion defendant solely responsible without recourse.
For attorneys, this means that even if a client is found liable for conversion, there is now a clearer pathway to seek partial indemnity from other negligent parties involved in the transaction. This promotes a more equitable distribution of financial responsibility based on relative culpability, aligning conversion with other strict liability torts where principles of comparative fault are applied. It underscores the importance of carefully evaluating all parties’ roles and potential negligence when litigating conversion claims in California.