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Dear Customer, I do not understand how a proper disbursement of funds from a company (complete with income tax reporting) is a conversion.
If the business partner decides to pursue this matter in court, they will have the burden of showing that you took the disbursement without any right or authority to do so. The negative side to your case is that you were the signatory on the account and took the funds yourself, but in a small business this is not terribly unusual. I cannot guarantee the outcome of any case (even those of my own clients), but given the facts as you have posted them, I do not see a strong case against you for conversion.
They are now trying to use the amount 1099 in a settlement agreement. I was never paid anything during my partnership and my partner said he fired me in writing. I believe they sent me the 1099 to cover themselves on unpaid wages. Can they use this against me as conversion, unpaid wages, and to lower the settlement amount?
The fact that a 1099 was issued is not dispositive of anything. It is simply evidence that someone in the company issued the document saying that you received income. You can dispute it, and dispute the basis for the computation. The fact that it is issued (particularly the timing and the proximity to the funds being issued) may play a role in how much weight a finder of fact (judge or jury) will place on it, but you are not stuck with it, and it certainly will not control in a case against you for conversion under these facts.