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Finding of conversion and fraudulent concealment affirmed where brother signed sister’s name on check

Where plaintiff’s brother surrendered an annuity fund, signed plaintiff’s name on the check from the fund, and deposited the funds in his own account, all without plaintiff’s consent or knowledge, the trial court’s verdict that defendant brother was liable for conversion was affirmed, as was the finding that the statute of limitations was tolled by defendant’s fraudulent concealment. In Pomeroy v. McGinnis, No. E2020-00960-COA-R3-CV (Tenn. Ct. App. July 16, 2021), plaintiff and defendant were brother and sister. When their mother sold her house and moved in with defendant, the proceeds from the sale were used to purchase an annuity. Plaintiff and defendant were named as co-owners and beneficiaries of the annuity, with the mother named as the annuitant (although the annuity never produced an income stream). The trial court found, based on the testimony of the parties, that the purpose of the annuity was to ensure that the mother would eventually qualify for Medicaid benefits.

In 2012, defendant submitted a form surrendering the annuity, and a check was made payable to plaintiff and defendant. Defendant signed both his own name and plaintiff’s name on the check, then deposited the proceeds into a joint account he shared with his then wife. When defendant and his wife were later divorcing in 2019, the annuity came to light, and the wife informed plaintiff that she had seen a check that appeared to have been endorsed by someone else on her behalf. Plaintiff alleged that she had no knowledge of the annuity, the surrender, or the check until these divorce proceedings in 2019, and accordingly filed this suit for conversion against defendant.

After denying defendant’s motion for summary judgment, the trial court held a bench trial. The trial court found plaintiff’s testimony that she was not involved in setting up the annuity and had no knowledge of it to be credible, and it ruled that defendant was liable for conversion. Further, the trial court found that plaintiff had satisfied the elements of fraudulent concealment such that the three-year statute of limitations was tolled and the case was not time-barred. These rulings were affirmed on appeal.

To make a claim for conversion, a plaintiff must show “(1) the appropriation of another’s property to one’s own use and benefit, (2) by the intentional exercise of dominion over it, (3) in defiance of the true owner’s rights.” (internal citation and quotation omitted). Defendant implied in his brief that a check could not be considered “tangible personal property,” but the Court quickly pointed out that “conversion of checks is actionable” in Tennessee, as “checks designate specific amounts of money for use for specific purposes.” (internal citations omitted).

On appeal, defendant argued that although plaintiff was a named owner on the annuity, “they were owners in name only and that the effect of the transaction establishing the annuity was to create something of a constructive trust for Decedent [mother] with [defendant’s] ‘legal posture’ in the nature of a trustee or custodian.” Defendant thus argued that plaintiff had no real ownership interest in the check and could not make a claim for conversion. The Court pointed out that even crediting defendant’s assertion that the annuity was meant to be a trust for the mother, to accomplish the purpose of qualifying her for Medicaid she had to be “divested of ownership over the annuity funds,” and plaintiff and defendant as the named owners had equal ownership interest of the annuity. The Court ruled that because “the owners were in control of any changes to the annuity and were the individuals to whom the annuity funds were to be paid in the event of a surrender, …the evidence preponderates in favor of the trial court’s finding that [defendant] and [plaintiff] held joint ownership interest in the annuity.”

The Court rejected defendant’s argument that plaintiff needed to establish an inter vivos gift from her mother to prove an ownership interest in the annuity. The Court noted that the fact that decedent’s funds were used to purchase the annuity did not affect who was named as owners, and if plaintiff were not an owner because she could not prove a gift, then such an argument would “divest [defendant] of any ownership interest in the annuity funds as well.” The Court also rejected defendant’s argument that this case was analogous to the property division in a divorce case, stating that there was no authority “holding that the statutory scheme applicable to distribution of marital property in a divorce should govern ownership of an annuity jointly titled to two persons who are neither married to each other nor involved in divorce proceedings.” Based on the evidence, the Court affirmed the ruling that plaintiff “possessed a one-half ownership interest in the annuity funds.”

The Court next analyzed defendant’s claim that the conversion case was barred by the statute of limitations. Conversion of a negotiable instrument is subject to a three-year statute of limitations pursuant to Tenn. Code Ann. § 47-3-118(g). “In general, when the property converted is a negotiable instrument, the damage is done, and the tort is complete when the instrument is negotiated, regardless of the plaintiff’s ignorance of the conversion.” (internal citation omitted). Although the discovery rule does not apply to the statute of limitations for conversion of negotiable instruments, the limitations period can be tolled by a showing of fraudulent concealment. (internal citations omitted). Because plaintiff filed this suit more than seven years after defendant forged her name on the check and cashed it, the case was time-barred unless plaintiff could show fraudulent concealment here.

To prove fraudulent concealment, a plaintiff must show:

(1) that the defendant took affirmative action to conceal the cause of action or remained silent and failed to disclose material facts despite a duty to do so; (2) that the plaintiff could not have discovered the cause of action despite exercising reasonable care and diligence; (3) that the defendant had knowledge of the facts giving rise to the cause of action; and (4) that the defendant concealed material facts from the plaintiff by withholding information or making use of some device to mislead the plaintiff, or by failing to disclose information when he or she had a duty to do so.

(internal citation and quotation omitted). It was undisputed here that the third element was met.

Regarding the first and fourth element, the Court pointed out that both “require that a duty exist on the defendant’s part to disclose material facts to the plaintiff,” and defendant argued he had no duty under the facts of this case. (internal citation omitted). After pointing out that defendant’s actions “essentially amounted to forgery,” the Court stated that defendant’s “argument that he had no duty to disclose his actions to [plaintiff] is based primarily on his contention that [plaintiff] had no ownership interest in the check proceeds,” an argument already rejected by the Court. Because plaintiff held a one-half ownership interest, the Court ruled that defendant “had a duty as the other co-payee to inform [plaintiff] of the check’s existence and, of course, to refrain from endorsing the check in her name without her authorization.”

Defendant further argued that “he could not have had a duty to disclose the material facts concerning the annuity proceeds and the check because [plaintiff] did not know anything about the transaction and therefore could not reasonably have relied on [defendant] to learn the status of the annuity funds.” The Court rejected this assertion, stating:

Once [plaintiff] was named a co-owner of the annuity, her authorization was necessary for surrender of the annuity and subsequently for proper endorsement of the check representing the annuity’s proceeds. We determine that [defendant] did not have the authority to surrender the annuity or cash the check without [plaintiff’s] authorization, giving rise to a duty to inform her, as his co-owner and co-payee, of the transaction.

Because defendant “remain[ed] silent and fail[ed] to disclose material facts despite a duty to do so,” the first and fourth elements of fraudulent concealment were satisfied.

The second element required plaintiff to show that she “could not have discovered the cause of action despite exercising reasonable care and diligence.” (internal citation omitted). The trial court credited plaintiff’s testimony that she was never made aware of the annuity, that she played no role in her mother’s finances, and that she had no idea the annuity existed until she found out through defendant’s divorce proceedings, and “the trial court’s credibility determinations are not to be disturbed on appeal absent clear and convincing evidence to the contrary.” (internal citation omitted). Based on these findings, the Court ruled that plaintiff had satisfied the third element, and that the conversion claim was not time-barred because the statute of limitations was tolled due to defendant’s fraudulent concealment.

After modifying the judgment due to a $90 mathematical error, the Court of Appeals affirmed the award to plaintiff of half the amount of the check plus prejudgment interest.

The trial court and the Court of Appeals came to the right decision in this case, as the elements of conversion and fraudulent concealment were both met here. This opinion contains a rather thorough discussion of conversion of a negotiable instrument and fraudulent concealment by failure to disclose, and it should be on the radar of any attorney handling a case with these issues.

NOTE: This opinion was released three months after oral arguments in this case.

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