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THE FEDERAL INSURANCE CO. v. SMITH

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the law of conversion is inapplicable to the case for three reasons: (1) FIC did not have a right to the money at the time it was converted and thus has no standing to maintain the action; (2) she acted in good faith, had no knowledge of the fraud, and never exercised dominion or control over the funds; and (3) FIC’s claim against her was merely an "undocumented intangible property right." We disagree and hold that, under the facts and circumstances of this case, Susan Smith is deemed to have converted all of the funds that Myron Smith fraudu- lently obtained and applied to her debts, whether she directly handled them or not.

Because this matter is in federal court on diversity grounds, the choice of law rules of the forum state, Virginia, apply. Klaxon v. Sten- tor, 313 U.S. 487, 496-97 (1941). The applicable Virginia choice of law rule, lex loci delicti, requires the application of Virginia substan- tive law to this case. See Milton v. IIT Res. Inst., 138 F.3d 519, 521 (4th Cir. 1998). Where circumstances of this case are without directly applicable precedent in Virginia courts, we instead draw from princi- ples of conversion law in Virginia and elsewhere to predict how this case would be decided in Virginia courts. In doing so, we review the district court’s determinations of Virginia law de novo. Salve Regina College v. Russell, 499 U.S. 225, 231-32 (1991). The essential facts of the case are not in dispute on appeal.

I.

A. FIC’s Standing to Pursue Conversion Claim

We first address, and dispense with, Susan Smith’s claim that FIC has no standing to bring a conversion action because it did not have a right to the funds at the time of conversion. AFBA, Myron Smith’s employer and the immediate victim of his fraudulent actions, had a right to the funds at the time of conversion. FIC paid AFBA for the loss and AFBA explicitly assigned all of its rights and claims relating to Myron Smith’s thefts to FIC. Therefore, FIC is subrogated to the rights and claims of AFBA, and FIC has standing to pursue a claim of conversion against Susan Smith.

B. Dominion and Control over Funds

Next, we address Susan Smith’s claim that she cannot be held lia- ble because she was acting in good faith without knowledge of the

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