Suppose a businessman purchases inventory from a warehouse and then resells it. Suddenly, the owner of the goods appears and seeks compensation for her goods on the basis that the warehouse had converted the goods. The businessman protests that he acted in good faith, had no knowledge of the conversion and had paid full value for the goods. The owner responds that she is equally blameless and the goods were, and still are, hers. Can the businessman be held liable to the owner for conversion? The Second District Court of Appeal recently tackled this question in Regent Alliance Ltd. v. Rabizadeh, 2014 Cal. App. LEXIS 1080 (Cal. App. 2d Dist. Nov. 25, 2014).

The question, however, is far from new. Hammurabi, who reigned nearly four thousand years ago in Babylon, addressed it specifically in his famous law code:

If any one lose an article, and find it in the possession of another: if the person in whose possession the thing is found say “A merchant sold it to me, I paid for it before witnesses,” and if the owner of the thing say, “I will bring witnesses who know my property,” then shall the purchaser bring the merchant who sold it to him, and the witnesses before whom he bought it, and the owner shall bring witnesses who can identify his property.  The judge shall examine their testimony–both of the witnesses before whom the price was paid, and of the witnesses who identify the lost article on oath.  The merchant is then proved to be a thief and shall be put to death.  The owner of the lost article receives his property, and he who bought it receives the money he paid from the estate of the merchant.

Code of Hammurabi § 9 (L.W. King trans.)

The U.S., however, follows the rule that nemo dat quod non habet (no one gives what he does not have).  In other words, no one can take good title from a thief (someone might from a fraudster, but that’s a subject for another post).  This rule is enshrined in Section 2403 of the California Uniform Commercial Code which provides in relevant part: “A purchaser of goods acquires all title which his transferor had or had power to transfer . . .”.

In Regent Alliance Ltd., the Court of Appeal, in an opinion by Justice Frances Rothschild, noted that the tort of conversion is a strict liability tort and that questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial (citing Burlesci v. Petersen, 68 Cal. App. 4th 1062, 1066 (1998). Therefore, bona fide purchasers of converted goods will ordinary be liable for conversion.  Although the majority characterized the rule as non-controversial, Justice Jeffrey W. Johnson dissented on the basis the majority’s holding “favors the original owner, who will almost always prevail against the subsequent bona fide purchaser, and reduces the incentive for the owner to take precautions in delivering possession of goods.”  In support, Justice Johnson cited my former teacher, Yale Law School Professor Alan Schwartz. Schwartz & Scott, Rethinking the Laws of Good Faith Purchase, 111 Colum. L. Rev. 1332 (2011) (I studied under Professor Schwartz when he was teaching at the University of Southern California).

In their article, Professors Schwartz and Scott point out that not all countries follow theNemo Dat rule.  Many countries employ what is known as the “Market Overt” doctrine pursuant to which bona fide purchasers from merchants can prevail over the erstwhile owner of stolen goods.  They state that the Market Overt rule can be traced back to Hammurabi’s Code, but I think it is really quite different.  Hammurabi allows the owner to get his goods back and the buyer to recover from the dead merchant’s estate.

[Literary postscript - The Code of Hammurabi was inscribed in cuneiform script in the Akkadian language on a seven-foot tall basalt stele.  Akkadian is a Semitic language that died out two millenia ago.  However, several great Akkadian literary works have survived, including the Epic of Gilgamesh and the Enuma Elish.  I once had a cat that I named after the most memorable character in the Epic of Gilgamesh -  Enkidu.  The epic is best known for its account of the great flood. The Enuma Elish provides an account of the beginning of the world.  Both are worth the read.]