                          UNPUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT


THE FEDERAL INSURANCE COMPANY,         
                 Plaintiff-Appellee,
                 v.
SUSAN M. SMITH,
              Defendant-Appellant,
                                                  No. 01-1857
                and
MICHAEL C. SMITH; ESTATE OF
MYRON SMITH, by Susan M. Smith,
beneficiary,
                       Defendants.
                                       
            Appeal from the United States District Court
         for the Eastern District of Virginia, at Alexandria.
                   T. S. Ellis, III, District Judge.
                          (CA-00-397-A)

                      Argued: September 24, 2002

                      Decided: February 25, 2003

      Before LUTTIG and TRAXLER, Circuit Judges, and
     Norman K. MOON, United States District Judge for the
       Western District of Virginia, sitting by designation.



Affirmed by unpublished opinion. Judge Moon wrote the opinion, in
which Judge Luttig joined. Judge Traxler wrote an opinion concurring
in part and dissenting in part.
2                THE FEDERAL INSURANCE CO. v. SMITH
                             COUNSEL

ARGUED: Douglas Elwood Bywater, TATE & BYWATER, LTD.,
Vienna, Virginia, for Appellant. Edward Graham Gallagher, WICK-
WIRE GAVIN, P.C., Vienna, Virginia, for Appellee. ON BRIEF:
Julia A. Bitner, WICKWIRE GAVIN, P.C., Vienna, Virginia, for
Appellee.



Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).


                              OPINION

MOON, District Judge:

   Appellant Susan M. Smith was the wife of Myron Smith, who
worked for the Armed Forces Benefit Association ("AFBA") as a life
insurance claims analyst. Myron Smith stole a total of $300,000 from
AFBA in an insurance fraud scheme, whereby he obtained checks
payable to his brother for the death of persons falsely claimed to have
named his brother as beneficiary. Susan Smith is not alleged to have
had knowledge of her husband’s fraudulent scheme, but a significant
portion of the $300,000 was used to pay off her debts and obligations.
Myron Smith was later killed in California, leaving Susan the benefi-
ciary of a large life insurance policy.

   Appellee Federal Insurance Company ("FIC") provided insurance
coverage for the AFBA, including coverage for losses resulting from
employee theft. FIC paid AFBA for its losses, and AFBA assigned all
claims and rights of recovery relating to Myron Smith’s thefts to FIC.

   FIC brought this conversion action against Susan Smith seeking
recovery of the $300,000. The trial judge, in a non-jury trial, found
that Susan Smith was liable to FIC for conversion of $229,449.24 of
the $300,000 Myron Smith fraudulently obtained from the AFBA.
Susan Smith seeks reversal of the trial court’s decision, asserting that
                 THE FEDERAL INSURANCE CO. v. SMITH                    3
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
4                THE FEDERAL INSURANCE CO. v. SMITH
theft and never exercised dominion and control over the funds. There
is no directly applicable law in Virginia regarding a conversion action
against an innocent person for whose benefit embezzled funds have
been spent. This requires that we consider general principles of con-
version law in Virginia and elsewhere.

   Virginia law defines conversion as any distinct act of dominion or
control wrongfully exerted over the property of another, either incon-
sistent with, or in denial of, the owner’s rights. Hairston Motor Co.
v. Newsome, 253 Va. 129, 135, 480 S.E.2d 741, 744 (1997). A plain-
tiff seeking recovery on a claim of conversion must prove that the
defendant converted it by "any" wrongful exercise of dominion or
control that deprived the plaintiff of his rightful possession. See, e.g.,
Universal C.I.T. Credit Corp. v. Kaplan, 198 Va. 67, 75-76, 92 S.E.2d
359, 365 (1956), citing 19 Michie’s Jurisprudence, Trover and Con-
version, § 4 at 27. The Virginia Supreme Court, in Universal C.I.T.,
provided the following description of conversion:

     Any distinct act of dominion wrongfully exerted over the
     property of another, and in denial of his rights, or inconsis-
     tent therewith, may be treated as a conversion and it is not
     necessary that the wrongdoer apply the property to his own
     use. And when such conversion is proved, the plaintiff is
     entitled to recover, irrespective of good or bad faith, care or
     negligence, knowledge or ignorance.

Id. at 76.

   As a rule, a wronged party can recover money converted if the pos-
sessor did not receive it in good faith or for valuable consideration,
even if the money has changed forms. See, e.g., Bader v. Central Fid.
Bank, 245 Va. 286, 427 S.E.2d 184 (where the plaintiff’s bank paid
on a forged instrument, the plaintiff could bring suit against the bank
for conversion of the instruments). See also In re Whitacre Sunbelt,
Inc., 211 B.R. 411, 417-18 (Bankr. N.D. Ga. 1997), Restatement
(Second) of Torts § 229 cmt. d (1965). In order to recover in conver-
sion for money that has changed forms, however, the proceeds must
be traceable to the original conversion. Central Nat’l Bank v. Con-
necticut Mut. Life Ins. Co., 104 U.S. 54, 66-68 (1881) ("[money’s]
character is not changed by being placed to [a holder’s] credit in his
                 THE FEDERAL INSURANCE CO. v. SMITH                    5
bank account." Id. at 66). When proceeds can be traced to an embez-
zlement or conversion, courts in a majority of states considering the
issue have allowed the wronged party to recover in two distinct sce-
narios, among others. Many states allow the wronged party to recover
life insurance proceeds from the beneficiary when the policy premi-
ums were paid with embezzled funds, usually by imposing a resulting
or constructive trust on the life insurance proceeds. 24 A.L.R. 2d 672
(1952). Similarly, in a majority of states that have ruled on the issue,
a chattel purchased with stolen money can be recovered if the posses-
sor did not give consideration for it. 38 A.L.R. 3d 1354 § 8 (1971).
Nothing in Virginia law indicates that Virginia courts would not fol-
low the majority on these issues; we believe Virginia courts would
likely adopt the same approach in this case. In these scenarios, there
were specific funds upon which a trust could be imposed, i.e., the pro-
ceeds of the life insurance policy bought with stolen funds and the
chattels bought with the stolen funds. Thus we believe Virginia would
allow an action against an individual for funds transferred to that indi-
vidual. Here, debts were paid with stolen funds and the question is
whether Virginia would allow a conversion action in the absence of
direct physical dominion and control over the proceeds. We hold that
it would.

   Susan Smith argues that she could not have converted the funds
because she did not have sufficient dominion and control over them,
and essentially that she was an innocent party to the conversion.
While Susan Smith is assumed to have been acting in good faith, she
gave no valuable consideration for any of the money that she directly
controlled or that was paid to her accounts. The trial judge meticu-
lously traced the embezzled funds to Susan Smith’s accounts, whether
the ultimate account was a bank account, or the payment of her debts.
In so doing, he considered four categories of checking transactions
and found the requisite dominion and control by Susan Smith over
each.

   First, the trial judge considered what he called the clearest example
of conversion. In this transaction, Myron Smith gave Susan Smith a
$4,500 check, written on a USAA Savings Bank checking account
("USAA account") he held jointly with his brother. Susan Smith sub-
sequently deposited the check into a North West Federal Credit Union
account ("NWFCU account"), held jointly by Susan and Myron
6               THE FEDERAL INSURANCE CO. v. SMITH
Smith. In another transaction, the trial judge considered a $56,000
check given to Susan Smith by Myron Smith. This check was drawn
on the USAA bank account with instructions for Susan Smith to
deposit the funds into their joint NWFCU account, and to use those
funds to pay off the couple’s NWFCU loans. Susan Smith deposited
the $56,000 check and directed that the funds be used to pay loans on
which they were jointly obligated. Thus, the stolen funds or their
equivalent were in her physical possession before her debts were paid
with them. We therefore hold that the facts and circumstances are suf-
ficient to support the trial judge’s determination that Susan Smith
exercised dominion and control over the $4,500 check, and hold that
she is liable to FIC for that portion of the converted money. We like-
wise hold the facts and circumstances sufficient to support the trial
judge’s finding that Susan Smith is liable to FIC for the conversion
of the $56,000 check, money Susan Smith deposited to pay her joint
obligations with Myron Smith.

   A more difficult analysis is required when considering the funds
over which Susan Smith exercised no physical dominion or control.
One category of these funds involved Myron Smith issuing checks,
totaling $57,261.52, drawn on his USAA checking account, to satisfy
individual obligations of Susan Smith and joint obligations of the cou-
ple. In effect, Myron Smith converted the funds, then transferred them
to his bank account, and then used the funds to pay Susan Smith’s
non-bank creditors to which she and Myron were jointly and severally
liable.

   If Susan Smith had actually handled the checks before they were
used to satisfy her financial obligations, the transaction would be
indistinguishable from the $56,000 check described above. We refuse
to draw a distinction, however, based on the presence or lack of actual
physical control over the funds. Susan Smith knew that when she
incurred a debt, it would be paid by her husband from funds available
to him, including funds derived from her salary as a Central Intelli-
gence Agency employee. It was by their prior arrangement that
Myron handled the couple’s finances and would pay bills as they
were presented. Myron Smith, in sending the payment, was doing
only what Susan Smith expected of him and knew he would be doing
on her behalf. Thus, there was virtually no distinction between her
delivering the checks to her creditors and her husband mailing the
                 THE FEDERAL INSURANCE CO. v. SMITH                   7
checks to her creditors. Furthermore, physical handling of converted
property is not essential for liability for conversion, i.e. Michie’s
Jurisprudence, Trover and Conversion, § 4 at 27, citing Wholesale
Coal Co. v. Price Hill Colliery Co., 98 W.Va. 438, 128 S.E.2d (1925).

   In this case, Susan Smith gave no consideration for the funds that
were used to enrich her financial position by paying off her debts, and
FIC’s rights to the funds continued through the time the funds were
used to pay those debts, at which point Susan Smith’s creditors gave
valuable consideration for the funds, effectively by canceling her
debt. Looney v. Belcher, 169 Va. 160, 166-68, 192 S.E. 891 (Va.
1937) (forbearance of debt constitutes valuable consideration as one
party is abandoning a legal right). When the debt was paid, the value
of her estate, over which she had control, was increased in the amount
of the payment. Thus, the funds were traced into her estate, and the
fact that the funds were in the form of credit at this stage and no lon-
ger cash is of no matter. See Bader v. Central Fid. Bank, 245 Va. 286,
427 S.E.2d 184 (Va. 1993). We therefore hold that the facts and cir-
cumstances are sufficient to support the trial judge’s determination
that Susan Smith exercised dominion and control over the $57,261.52,
and that she is liable to FIC for the conversion.

   Myron Smith also issued, in a separate category of transactions
identified by the trial judge, a check for $137,000 on the USAA
account that was deposited into Susan Smith’s and his joint NWFCU
account and subsequently used to pay off various loans, bills, and
other obligations of Susan Smith. We will apply the same analysis for
this transaction as for the above $57,261.52 category. FIC presented
evidence showing that $111,687.72 of these funds were used to pay
Susan and Myron Smiths’ joint obligations and expenses. We like-
wise hold that the facts and circumstances are sufficient to support the
trial judge’s determination that Susan Smith is liable for conversion
of $111,687.72 of these funds.

   In total, Susan Smith is liable to FIC for $229,449.24 of the funds
stolen by Myron Smith from the AFBA.

                 C. Property Subject to Conversion

  Finally, Susan Smith urges this court to hold that the embezzled
funds, used for her benefit, were an "undocumented intangible prop-
8                 THE FEDERAL INSURANCE CO. v. SMITH
erty right," and therefore not subject to the law of conversion, relying
upon United Leasing Corp. v. Thrift Ins. Corp., 247 Va. 299, 440
S.E.2d 902 (1994). In Thrift, a corporate officer of defendant Thrift
Insurance forged documents that secured his personal loan. The
forged documents purportedly were a guaranty of his parents to
secure their son’s loan by pledging a number of shares of stock they
held in Thrift Insurance. When the officer defaulted, plaintiff United
Leasing demanded that Thrift turn the shares of stock over to it. The
Court held that United Leasing never had a right to the shares, but had
only an "undocumented intangible property right" that did not give
rise to a common law cause of action for conversion. Id. at 304-06.
   Susan Smith’s argument fails because unlike the plaintiff in Thrift,
FIC had a right to the funds at the moment of embezzlement. Myron
Smith fraudulently obtained checks from AFBA. He never had a right
to the checks or the funds they represented, and AFBA remained the
rightful owner of those funds. Thus, FIC’s claim is not to an undocu-
mented intangible property right, but to a clearly established property
right.

                                   II.
   The trial court also considered an alternative unjust enrichment the-
ory under which FIC could recover from Susan Smith, determining
that FIC was entitled to a smaller portion of embezzled funds,
$96,687.72,* on this theory. We will not consider the alternative the-
ory of unjust enrichment because the case is resolved in FIC’s favor
on the conversion claims.

                                  III.
    In conclusion, the judgment of the trial court is affirmed.
                                                            AFFIRMED

   *The unjust enrichment claim was based on a starting amount of
$150,000, representing the funds Myron Smith obtained through one of
the two fraudulent schemes. The remaining $150,000 would have been
challenged on statute of limitations grounds. The trial court then calcu-
lated the portion of $150,000 that directly and unjustly enriched Susan
Smith in order to arrive at the $96,687.72 figure.
                 THE FEDERAL INSURANCE CO. v. SMITH                    9
TRAXLER, Circuit Judge, concurring and dissenting:

   Because I do not believe that under Virginia law Susan Smith
would be held liable on a theory of conversion for the money fraudu-
lently obtained by her husband, I cannot agree that FIC is entitled to
claim the full fraud loss amount from her. However, I agree with the
district court on the alternative ground of unjust enrichment for a por-
tion of the claim. For these reasons, I concur in part I.A. of the major-
ity opinion, but respectfully dissent as to the remainder.

                                   I.

   Susan’s husband, Myron Smith, collected life insurance benefits
from false claims he submitted under two bogus policies he obtained
from AFBA. Both policies identified Myron’s brother, Michael C.
Smith, as the primary beneficiary. AFBA approved both claims and
paid out benefits of $300,000 in four separate checks. Two checks,
totaling $150,000, were issued in 1997 and two checks totaling the
same amount were issued in 1998. All four checks were made payable
to Michael and deposited into a joint USAA account in the names of
Michael and Myron. There is no evidence that Susan had any knowl-
edge of the scheme or of her husband’s receipt of this money.

   During a routine investigation in the fall of 1998, the Central Intel-
ligence Agency ("CIA"), which employed Susan, discovered unusu-
ally large deposits in Myron and Susan’s joint North West Federal
Credit Union ("NWFCU") account. The CIA informed AFBA of the
possible theft of life insurance proceeds around July 22, 1999. AFBA,
in turn, contacted appellee FIC to initiate a claim under FIC’s fidelity
policy issued to AFBA. FIC accepted the claim and paid AFBA
$290,000 on December 21, 1999.

   In March 2000, FIC filed an action in the district court against
Susan and Michael for conversion and against Myron’s estate (Myron
having died a few months earlier) for conversion and fraud. The court
dismissed the claims against Michael and Myron’s estate without
prejudice for lack of service of process. The court then granted partial
summary judgment on FIC’s motion that it had standing to assert the
remaining conversion claim against Susan, and thereafter conducted
a bench trial. At the conclusion of the evidence, FIC moved without
10               THE FEDERAL INSURANCE CO. v. SMITH
objection to amend its complaint to add a claim against Susan for
unjust enrichment as to insurance proceeds from 1998.1

   The court gave FIC a judgment of $229,449.24 against Susan on
its conversion claim, representing the portion of the $300,000 that
was used to pay Susan’s personal obligations as well as obligations
for which Susan and Myron were jointly responsible. The court calcu-
lated this figure based on disbursements it broke into four categories.
Category 1 reflected checks drawn by Myron on the USAA account
totaling $57,261.52, which Myron used to satisfy Susan’s individual
and joint obligations. Category 2 reflected one $56,000 check drawn
on the USAA account by Myron and given to Susan, who deposited
the check into their joint NWFCU account and directed NWFCU to
pay off various joint NWFCU loans. Category 3 reflected one
$137,000 check drawn by Myron on the USAA account that was
deposited in the NWFCU account and used to pay off assorted bills,
loans, and other obligations of Susan and Myron. Category 4 was a
single $4,500 USAA account check made payable to Susan, which
she deposited into the NWFCU account. See Federal Ins. Co. v.
Smith, 144 F.Supp. 2d 507, 512-16 (E.D. Va. 2001). The district court
also found that FIC was entitled to judgment on a portion of this
amount ($96,687.72) on the alternative ground of unjust enrichment.
The lower figure on the unjust enrichment claim resulted from the
expiration of the statute of limitations on a portion of the loss amount.

                                   II.

   By the time FIC brought this action to recover the stolen money,
the two-year statute of limitations had apparently run on a consider-
able portion of FIC’s unjust enrichment claim, sharply limiting the
amount of recovery available under that theory. Thus, in order to
recover the total sum paid out to Myron, FIC pursued a claim for con-
version, which carries a five-year statute of limitations. In my judg-
ment, the need to proceed under conversion has compelled FIC to try
to fit a square peg into a round hole.
  1
   It appears that plaintiff limited this motion to the 1998 proceeds
because any claim to prior proceeds was barred by the statute of limita-
tions.
                 THE FEDERAL INSURANCE CO. v. SMITH                    11
   As my colleagues explain, there is no direct controlling precedent
in Virginia allowing a conversion action against an innocent third
party for whose benefit embezzled funds have been spent. Thus, we
look to general principles of conversion law in Virginia and else-
where. As the district court and my colleagues point out, the tort of
conversion encompasses "[a]ny distinct act of dominion wrongfully
exerted over the property of another, and in denial of his rights, or
inconsistent therewith . . . irrespective of good or bad faith, care or
negligence, knowledge or ignorance." Universal C.I.T. Credit Corp.
v. Kaplan, 92 S.E.2d 359, 365 (Va. 1956); see also Hairston Motor
Co. v. Newsome, 480 S.E.2d 741, 744 (Va. 1997). In my view, how-
ever, Susan’s exercise of dominion or control is irrelevant. The prop-
erty at issue cannot be recovered under a theory of conversion
because the four AFBA checks were cashed, the cancelled checks
were returned to AFBA, and the cash received in return lost its iden-
tity when it was commingled with other funds.

   Conversion descends from the common law action of trover. It
"originated . . . as a remedy against the finder of lost goods who
refused to return them to the owner but instead ‘converted’ them to
his own use." Restatement (Second) of Torts § 222A cmt. a (1965).
Whether property could be the subject of an action for conversion was
assessed on the basis of the fiction of losing and finding, i.e., any tan-
gible chattel that could be lost and found could be converted. See W.
Page Keeton, et al., Prosser & Keeton on the Law of Torts, § 15, pp.
90-92 (5th ed. 1984). Initially, it was held that money could not be
converted unless it was contained within a bag or chest. See Holiday
v. Hicks (1598) 2 Cro. Eliz. 638, 661. However, subsequent cases in
England held that specific money could be the basis of an action for
conversion if there was an obligation to pay or deliver money as it
had been initially identified or segregated. This treatment has per-
sisted and many jurisdictions still require that money be identified or
segregated in the manner that a specific chattel can be. See, e.g.,
Allied Inv. Corp. v. Jasen, 731 A.2d 957, 966 (Md. 1999); SSI Med.
Servs., Inc. v. Cox, 392 S.E.2d 789, 792 (S.C. 1990); Johnson v. Life
Ins. Co. of Alabama, 581 So.2d 438, 442-43 (Ala. 1991); Taylor v.
Powertel, Inc., 551 S.E.2d 765, 769-70 (Ga. Ct. App. 2001); DeChris-
tofaro v. Machala, 685 A.2d 258, 263 (R.I. 1996).

  The limitation on the tort of conversion to tangible property has
been gradually relaxed so that some courts have also come to permit
12               THE FEDERAL INSURANCE CO. v. SMITH
actions involving documents in which intangible property rights have
been merged, such as with a check, a promissory note, or a stock cer-
tificate. See Prosser & Keeton, supra, at 91. Because the document
symbolizes or embodies the right to property, the conversion of the
document has been held to include conversion of the intangible rights
that the document represents, and to carry damages for it. See id.
However, the evolution of the tort has largely stopped with the kind
of intangible rights merged in or identified with a document. In keep-
ing with the scope of this evolution, Virginia has allowed conversion
claims premised on documented intangible property rights. See
United Leasing Corp. v. Thrift Ins. Corp., 440 S.E.2d 902, 906 (Va.
1994); Unlimited Screw Prods., Inc. v. Malm, 781 F.Supp. 1121, 1131
(E.D. Va. 1991) (interpreting Virginia law). However, where the
rights at issue amount to undocumented intangible property rights —
those that are not merged with a document and so cannot be physi-
cally possessed — Virginia’s Supreme Court has held that they can-
not be validly claimed in an action for conversion. See Thrift, 440
S.E.2d at 906 (holding that plaintiff’s undocumented intangible prop-
erty rights, represented by a fraudulent stock certificate, are not sub-
ject to a cause of action for conversion).

   In this case, the property that Myron fraudulently obtained was rep-
resented by the four checks, each of which he deposited into the joint
USAA checking account he shared with his brother. Once he depos-
ited the AFBA checks into the USAA account and they were paid, the
fraudulently obtained orders to pay money were fulfilled and cancel-
led. Thus, the original documents (the four checks) ceased to embody
any intangible property rights and the funds formerly represented by
the checks became part of a fungible pool of debits and credits in the
bank. The funds formerly represented by the checks were not segre-
gated and, in my opinion, were no longer susceptible to an action for
conversion.

    This is not to say that cash or negotiable instruments cannot be
recovered on a theory of conversion. See, e.g., United States v. Mof-
fitt, Zwerling & Kembler, P.C., 83 F.3d 660, 670 (4th Cir. 1996). So
long as money is kept separate and identifiable, it can be converted.
Jasen, 731 A.2d at 966; Lewis v. Fowler, 479 So.2d 725, 726 (Ala.
1985) (money must be segregated to be susceptible to an action for
                   THE FEDERAL INSURANCE CO. v. SMITH                       13
               2
conversion). Nor is this to say that FIC could not have pursued
Myron Smith for converting the four original checks. The critical dis-
tinction is that Susan Smith was never involved in the act of convert-
ing the checks and did not benefit from Myron’s actions until after the
documents supporting FIC’s intangible property right had been ful-
filled and cancelled. Despite the lower court’s assiduous efforts to
trace what was owed to FIC, once the AFBA checks were cashed,
there ceased to be any meaningful way to treat the funds they once
  2
   Bader v. Central Fidelity Bank, 427 S.E.2d 184 (Va. 1993), should
not be read broadly for the proposition that "a wronged party can recover
money converted . . . even if the money has changed forms." Majority
Opinion, supra, p. 4. Rather, Bader specifically deals with a bank’s obli-
gation to an account holder upon payment on a forged instrument and
should not be extrapolated to cases such as this involving innocent third
parties.
   The nature of how funds are held in a bank account illustrates why
they do not lend themselves to a conversion action. The Virginia
Supreme Court has described the limitations on the means of identifying
funds as a specific chattel in the comparable context of susceptibility to
set off between funds made the subject of a special deposit with notice
to a bank and those deposited into an unrestricted general account:
      The general rule is that the relation between a general depositor
      and the bank in which his deposit is made is simply that of
      debtor and creditor. The moneys deposited immediately become
      the property of the bank, and the latter becomes debtor of the
      depositor . . . . Thus, the bank has a right of set off of any debt
      due it by the depositor against such deposit. However when
      funds are deposited for a special purpose with notice to the bank,
      the deposit does not become the property of the bank and the
      right of set-off does not exist.
Bernardini v. Cent. Nat’l Bank of Richmond, 290 S.E.2d 863, 864 (Va.
1982) (internal quotations and citations omitted). "By depositing the
checks in a general account and commingling them with other nonex-
empt money, the . . . funds lost whatever exemptions they may have
had." Id. at 865. This characterization also holds true in the context of
conversion. See Universal Mktg. and Entm’t, Inc. v. Bank One of Ari-
zona, N.A., 53 P.3d 191, 194 (Ariz. 2002) (citing Bernardini for the
proposition that funds in a bank account, unless segregated, should not
be recoverable under a theory of conversion).
14                THE FEDERAL INSURANCE CO. v. SMITH
represented as having been segregated according to the common law
requirements necessary to sustain an action for conversion.3

   This much of the fiction of losing and finding associated with the
tort must remain intact, else the concept of conversion itself loses its
distinct character. If this were simply a matter of holding on to a
"hoary limitation," there might be no cause for concern. Prosser &
Keeton, supra, § 15 at 91. However, the dangers of conversion losing
such a distinguishing quality are readily apparent. Susan’s debts were
settled by payments made directly out of the USAA account on her
behalf or by payment of checks into and out of her jointly-held
NWFCU account by Myron. Under the theory advanced by the dis-
trict court and affirmed here, if money is paid out of an account that
contains some portion of funds "traceable" to a prior act of conver-
sion, then any innocent third party receiving the benefit of that "trace-
able" money might be liable for conversion and compelled to pay it
back. Such a principle sets no practical limit on the extent to which
a court may pursue and authorize the repossession of funds.

   There is a solution in this case, however, that makes a revision of
the concept of conversion unnecessary. It is outlined in the alternative
holding of the district court and in the language used by my colleague
to describe Susan’s culpability:

      In this case, Susan Smith gave no consideration for the
      funds that were used to enrich her financial position by pay-
      ing off her debts, and FIC’s rights to the funds continued
      through the time the funds were used to pay those debts, at
      which point Susan Smith’s creditors gave valuable consider-
      ation for the funds. . . . When the debt was paid, the value
      of her estate . . . was increased in the amount of the pay-
      ment.
  3
   Even if a Virginia court were to permit this case to proceed on a the-
ory of conversion, I do not believe there is any way Susan could be held
to have exerted dominion or control over the $57,261.52 in checks (the
Category 1 funds) that Myron himself wrote directly out of the USAA
account.
                 THE FEDERAL INSURANCE CO. v. SMITH                   15
Majority Opinion, supra at 7. I agree with this assessment, but believe
it points to a different conclusion. The theory described is one of
assumpsit, or unjust enrichment, not of conversion, and the law of
unjust enrichment is well-settled in Virginia. See, e.g., Furr v. Arnold,
119 S.E.2d 242, 246 (Va. 1961) ("It is a general rule that where one
man has in his hands money which, according to the rules of equity
and good conscience, belongs to and ought to be paid to another, an
action will lie for such money as money received by defendant to
plaintiff’s use."); Robertson v. Robertson, 119 S.E. 140, 141 (Va.
1923) ("Assumpsit will lie whenever the defendant has received
money which is the property of the plaintiff, and which the defendant
is obliged by natural justice and equity to refund." (citation omitted));
Shores v. Shaffer, 146 S.E.2d 190, 194-95 (Va. 1966) (same). It is
under the theory of unjust enrichment that I believe this case should
be categorized. Had such a claim been advanced in a timely manner
and the plaintiff not run afoul of the statute of limitations, I am sure
it would have been on this theory alone that the district court would
have been able to find Susan liable for a much greater amount. That
the plaintiff cannot recover the entire fraud loss amount on an unjust
enrichment theory now does not warrant our bending the tort of con-
version to the breaking point.

                                  III.

   I would award FIC only the amount recoverable on the alternative
ground of unjust enrichment, not the additional amount represented
by the ground of conversion. Thus, I concur in part I.A. of the major-
ity opinion, but respectfully dissent as to the remainder.
