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A New York state judge has spelled out conditions under which a corporate shareholder can bring a conversion action when corporate — not individual — assets are improperly transferred and the conversion diminishes the value of the shares held by the plaintiff. In doing so, Manhattan Supreme Court Justice Eileen Bransten last week set aside a jury verdict granting $4.3 million in compensatory and punitive damages. The case, Ehrlich v. Hambrecht, 600708/03, involved two partners, plaintiff Harold Ehrlich and defendant George Hambrecht. The pair created three corporate entities — an investment fund in 1995, a company that acted as general partner and a company that acted as an investment adviser. Then they had a falling out over the financial relationship among the various entities. They created the fund first, then a company called EB Capital Advisors to act as its general partner. The third entity, Barlow Partners, a company owned exclusively by Hambrecht, was the fund’s investment manager. Over two years, the parties amended their original ownership interests on several occasions. In 1996, Hambrecht infused additional capital into the fund and, in return, took a 99 percent stake in the company. Ehrlich owned the remaining 1 percent and for his day-to-day participation in the business received 50 percent of a management fee paid to Barlow Partners. Ehrlich also had an option to acquire 50 percent of EB Capital. In April 2001, Hambrecht made Barlow Partners general manager to the fund. According to Ehrlich, Hambrecht also changed the management agreement without his knowledge. This change, Ehrlich claims, transferred to Barlow Partners control over the management fee that the fund used to pay EB Capital Advisors and thereby reduced the value of his property interest in EB Capital. The management fee became the focal point of a suit in which Ehrlich sued alleged conversion. This occurs when one party wrongly takes possession or control of another’s property interests. The jury ruled in favor of Ehrlich on several grounds. The biggest element of the verdict dealt with the conversion claim. The jury awarded Ehrlich $3.4 million for this claim and added $1 million against Barlow Partners in punitive damages. It also awarded Ehrlich $689,882 for a breach of contract claim. Bransten granted defendants’ request to set aside the verdict. “The Court always had difficulty, in fact, it had a ‘major problem,’ in understanding Ehrlich’s convoluted theory of conversion,” the judge wrote. Ehrlich’s claim fell short because his ownership interest in EB Capital was not converted as he said. Instead, EB Capital’s entitlement to fees — if anything — was converted. Its shareholder Ehrlich could not bring a conversion claim as an individual, Bransten ruled. She said the only asset that may have been converted was a corporate asset belonging to EB Capital, not an asset that belonged to Ehrlich. The rights to the fees, ruled Bransten, did not belong to Ehrlich. “Allowing recovery for conversion under circumstances such as these, would authorize direct tort recovery to shareholders for impropriety that reduced the value of their interest in a corporation under a theory that their property was ‘converted,’” the judge held. “It has not been alleged or established,” she held, “that Barlow improperly assumed possession of Ehrlich’s shares in [EB Capital] or that Ehrlich’s interest in the corporation was actually transferred or ‘converted.’” She explained that “Enrlich contends that through a conversion of a corporate asset (not his own asset), the value of his interest in the corporation declined … and that he suffered a special personal injury in the process.” Bransten explained that Ehrlich may have a cause of action for the loss he allegedly suffered but that an action of conversion was not the proper route because EB Capital, not Ehrlich, had the right to these fees. “Ehrlich,” Bransten wrote, “has not demonstrated any precedent authorizing recovery for conversion based on the decrease in value of shares owned as a result of an improper transfer of a corporate asset.” Mark Zimmett represented Ehrlich. Joseph Moodhe of Debevoise & Plimpton represented Hambrecht and Barlow.

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