January 16, 2015
Commercial Transactions Committee
Commercial Transactions e-Bulletin
BUSINESS LAW SECTION
Commercial
Transactions
Committee
Co-Chair
Katherine Bell
STATE BAR OF CALIFORNIA
Innocent Buyer Liable for Conversion
Regent Alliance Ltd. v. Rabizadeh, et al., 2014 WL 6661557 (Cal. Ct. App.
2014)
Paul Hastings LLP
Co-Chair
John R Engel
Sulllivan Hill Lewin Rez & Engel
Co Vice-chair
R. Paul Barkes
Hogan Lovells US LLP
Co Vice-chair
John E. Stoner
Aliso Viejo
Business Law Section
Coordinator
John Buelter
415-538-2341
A Hong Kong clothing manufacturer brought an action for conversion against
(1) its California storage warehouse, (2) a second warehouse to which the first
warehouse transferred the clothing without the manufacturer’s knowledge or consent,
and (3) a buyer that purchased for resale the clothing from the second warehouse, for
value, in good faith and without actual or constructive notice that the clothing had been
converted. The trial court granted summary judgment in favor of the buyer defendant,
reasoning that innocent purchasers of converted goods are not liable for
conversion. The Court of Appeal, in a divided decision, held that conversion is a strict
liability tort and that innocent purchasers are liable, even when the converted goods
have changed hands multiple times, because they received possession from one who
had no title and no right or power to transfer the goods (i.e., one with void title rather
than voidable title).
The Court acknowledged two exceptions to the strict liability rule: (1) a fraud
exception for goods purchased by an innocent buyer from one who obtained them by
means of fraudulent misrepresentation (i.e., one with voidable title rather than void
title), and (2) a UCC exception for goods purchased by an innocent buyer from a
consignee to which the goods are voluntarily relinquished by a consignor that does not
protect itself by filing a UCC financing statement (i.e., the strict liability rule does not
apply to an innocent transferee because the consignor did not file a financing
statement that would have given the buyer constructive notice of the conversion). But
the Court said neither exception applied, based on the facts in the case, to overcome
the strict liability rule.
The Court fails to cite any specific section of the Commercial Code that deals
with the issue of how much an innocent buyer, or an original owner, should be
protected from the misconduct of others (e.g., section 2403 (power to transfer; good
faith purchase of goods; “entrusting”), section 2326 (sale on approval and sale or
return; consignment sales and rights of creditors), and sections 9109(a)(4), 9103(d)
and 9319 (applying Division 9 to consignments)). Had it done so, the opinion might
have been more complicated than necessary, but more persuasive. As is, the opinion
is probably consistent with these Commercial Code sections. It’s helpful to note that
the second warehouse likely was a mere bailee rather than a “consignee” for the
purpose of sale or the like, or a “merchant” dealing in goods of that kind, and that the
buyer defendant was likely a “good faith purchaser for value” rather than a better
protected “buyer in the ordinary course of business”.
This e-Bulletin was prepared by John R. Engel, Co-Chair of the Commercial
Transactions Committee.
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