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Los Angeles Federal Credit Union v. Edgar Madatyan et al

October 11, 2012


(Los Angeles County Super. Ct. No. EC048952) APPEAL from a judgment of the Superior Court of Los Angeles County, David S. Milton, Judge.

The opinion of the court was delivered by: Mosk, J.




Plaintiff and respondent Los Angeles Federal Credit Union (the Credit Union) prevailed in an action for conversion against defendants and appellants Edgar Madatyan and Elvis Madatyan*fn1 concerning an insurance check Edgar endorsed that was payable jointly to the owner of the damaged car and to GAD Auto Body Shop (GAD), a defendant owned by Elvis. The Credit Union, which had loaned the car owner money to purchase the car and had a lien on the car, claimed to have an interest in the insurance check because of the lien and because the loan agreement required the car owner to maintain insurance on the car. We hold that the defendants converted the insurance proceeds because the Credit Union had an equitable lien in those insurance proceeds. We therefore affirm.


On August 1, 2008, the Credit Union financed the purchase of a 2000 Bentley by Areg Khachikian in the amount of $136,126. The loan agreement provided that the car was collateral for the loan and required Khachikian to maintain insurance for the car. The insurance provision of the loan agreement stated, in part, "You promise to maintain property insurance in an amount necessary to protect Our security interest in the collateral, with a policy as specified by Us, in the amount and for the period required by Us, and with Us named as loss payee for Our protection. Such insurance shall protect against loss by fire, theft, and collision . . . ."*fn2

Paul Pitts, the Credit Union's collection manager, testified that Khachikian fulfilled his responsibility to maintain insurance on the car through a policy with Allstate. Pitts was not sure if the Credit Union was named as an additional insured on the policy as required by the loan agreement. During argument at the close of the court trial, the Credit Union's attorney conceded, and the trial court found, that Khachikian failed to name the Credit Union as an additional insured on the Allstate insurance policy.

In October 2008, Khachikian took his car to GAD to be repaired. Elvis owned, and Edgar managed, GAD. An Allstate adjuster went to the body shop and appraised the damage to Khachikian's car at $39,697.35. Allstate sent Khachikian a check for that amount, naming Khachikian and GAD as payees, but not the Credit Union.

Khachikian took the insurance check to GAD and asked Edgar to endorse it. Edgar went with Khachikian to Bank of America to obtain a signature guarantee of Edgar's endorsement. Edgar endorsed the check on behalf of GAD. Khachikian left the bank without cashing the check. Edgar did not know Khachikian before Khachikian brought his car to GAD. Edgar did not know that the Credit Union had a lien on Khachikian's car before he endorsed the check.

In a declaration of which the trial court took judicial notice, Elvis stated that Khachikian's request that GAD endorse the check was not unusual. In Elvis's experience, "Sometimes customers decide to go somewhere else, do the work themselves, or simply hold the money until we complete the work so they know it was done right. Since I am confident of the quality of our work, and since we have a lien on the vehicle for any work performed (which means we do not release the vehicle under we are paid) I have not, in the past, refused to endorse the checks, nor, until now, experienced any problems due to endorsing a check."

Pitts testified that insurance companies make checks payable to an insured and an auto shop to ensure that the car is repaired. In Pitts's experience, such checks were cashed "[o]nly at the completion of the repair work to the vehicle[,] then the check is signed off by the Credit Union and paid to the body shop for the services completed." Pitts explained that in the usual case, insurance checks were made out to the Credit Union and the body shop, and not the "customer" and the body shop, because the Credit Union had an interest in the car. As a payee on the check, the Credit Union would endorse the check after the work was completed. That was the only way to ensure that the repairs were made.

Khachikian had not authorized GAD to work on the car, and GAD had not worked on the car. The insurance check was cashed. GAD did not receive any money from the check, from Allstate, or from Khachikian.

When Khachikian did not make the payments required by the loan agreement, the Credit Union repossessed the car from GAD where it had been abandoned. Upon repossessing the car, the Credit Union determined that the car was damaged and that an insurance claim had been made with respect to the damage. The Credit Union incurred costs of $47,000 to repair the car. GAD charged ...

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