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Pacific Marine Center, Inc. v. Philadelphia Indemnity Insurance Co.

United States District Court, E.D. California

March 30, 2017

PACIFIC MARINE CENTER, INC., Plaintiff,
v.
PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

         This matter concerns a dispute over an insurance contract. A court trial was held commencing on October 18, 2016 and concluding on October 27, 2016. For the reasons explained below, the court finds plaintiff has not met its burden of proof and therefore finds in favor of defendant and will direct that judgment be entered for defendant.

         Procedural Background

         This action was initially filed by both Pacific Marine Center, Inc.[1] and its apparent principal-Sona Vartanian-in her individual capacity, in Madera County Superior Court in May 2013, and removed here on diversity grounds by defendant Philadelphia Indemnity Insurance Company (“PIIC”) in June 2013. (Doc. No. 1.) Cross motions for summary judgment were filed in January 2016. (Doc. Nos. 76, 84.) The court denied those motions by order dated March 18, 2016, with the exception that the court dismissed Sona Vartanian as a plaintiff in her individual capacity. (Doc. No. 134.) As noted, a bench trial was conducted in October 2016. Following trial, the court directed the parties to submit proposed findings of fact and conclusions of law, which the parties separately filed on November 10, 2016. (Doc. Nos. 195, 196.)

         Pursuant to Federal Rule of Civil Procedure 52, the court now finds the following facts and separately states its conclusions of law. Fed.R.Civ.P. 52(a)(1).

         Findings of Fact

         The evidence presented to this court at the bench trial consisted of eleven witnesses and ninety-one exhibits. The court also considered as evidence certain selections of a deposition transcript from Zane Averbach, Esq., a former attorney for Sona Vartanian, who was deemed unavailable to testify at trial. Mr. Averbach's deposition testimony was read into the record at trial. The trial witnesses who were sworn and testified included Sona Vartanian, Howard Gastwirth, Ronald Miller, Thomas Leith, Elaine Barajas, Hagop Vartanian, attorney Thomas Nast, James Stanley Deakin, Barry Cohen, Robert R. Hastey, and James Schratz. Thirty-three joint exhibits were submitted and all were admitted in their entirety. Additionally, fifty-eight exhibits, either in whole or in part, from the separate exhibit lists of defendant and plaintiff were admitted into evidence. All of this evidence has been considered in the court's decision, as have the parties' trial briefs and other submissions and arguments. The court now finds the following facts.

         Hagop Vartanian[2] started a business selling boats and boating accessories on Highway 41 in Madera, California in 1996. The business-Pacific Sales and Leasing, doing business as Pacific Marine Center-was predominantly run by Hagop, with occasional help from his sister Sona[3] starting in 2002. A related corporation known as Pacific Marine Center, Inc. was also founded by Hagop during this period. This corporation, the plaintiff in the present case, lay dormant for a number of years until it was reactivated by Hagop's lawyer, Tom Nast.

         In 2001 Hagop was indicted on federal criminal charges for subscribing to false tax returns and making false statements on loan applications in violation of 26 U.S.C. § 7206 and 18 U.S.C. § 1014. In March 2003, following a jury trial, Hagop Vartanian was convicted on all counts. He was sentenced in July 2005 to a fifteen-month term of imprisonment but remained free on bail pending appeal. On May 25, 2007, Hagop's judgment of conviction was affirmed by the Ninth Circuit Court of Appeals leading to the setting of November 15, 2007 as the date by which he would be required to surrender himself to the custody of the U.S. Bureau of Prisons. Once the Vartanian family learned Hagop's convictions had been upheld on appeal and he would be incarcerated, the family took steps at the direction of attorney Nast to ensure Hagop's business would survive his incarceration. Attorney Nast was particularly concerned the IRS would seek to levy on the business in order to satisfy Hagop's tax debts, and constructed an intra-family transaction to attempt to prevent that from taking place. The plan called for the activation of the formally dormant Pacific Marine Center, Inc., which would enter into an asset purchase with Hagop for his complete boat inventory at fair market value. Those assets would be purchased by a promissory note with an extended, thirty-year payment schedule, preferably executed at a moment when the boat inventory was fairly low, which would help to keep the monthly payments under the promissory note to a minimum. (See, e.g., Parties' Joint Ex. JX-5.) Under this plan, Hagop would resign any position within the corporation, which would convert to a closed corporation, and would sell his stock to a family member for a nominal amount of $500. Following his release from imprisonment, the stock could later be repurchased by Hagop from the trusted family member for the same nominal payment, while the assets would be left within the corporation.

         This plan had multiple potential benefits for the Vartanian family.[4] Hagop could maintain his business throughout his incarceration by putting it under the care of one of his family members. In the event the IRS decided to attempt to levy on Hagop's property, the only business-related asset available to be levied on would be the promissory note. The extended payment scheme and the low monthly payments would leave the note a clearly undesirable target to levy on for the IRS. Further, even in the event the IRS did levy on the note, the payments would be minimal, which would allow the business to continue to function despite any additional monthly payments required. Once Hagop repurchased the stock from the family member at some point after the threat of an IRS levy had passed, he would again be in control of his business, having lost only a moderate per-month payment to the IRS in the event it levied on his property (i.e., the promissory note).

         Many, if not all, of the Vartanian family members were present for multiple discussions regarding the execution of this plan. At least Sona and Hagop, as well as their brother Kirk Vartanian, were present at these meetings, and Sona's son Marty may also have been present. It is unclear whether Sona and Hagop's parents, who apparently lived in the family home with Hagop, were present for any of these meetings. Attorney Nast was certainly present at them and once he had laid out the plan for the family's consideration, the family collectively discussed who would be the best caretaker for the business. Kirk was rejected for this role because he had financial and legal troubles of his own, and Marty was eliminated because he was too young and inexperienced to serve as principal. Sona therefore presented the only logical choice, and the family agreed she should purchase the corporation's stock and serve as a caretaker for the business while Hagop was in prison.

         Attorney Nast explained to the family that there could be no enforceable agreement, written or oral, that Sona would sell the stock back to Hagop after he was released from his imprisonment. Nast was concerned that, if such an agreement were formulated, the family members might be required to either reveal that the transfer was fraudulent or lie under oath when questioned by IRS agents. Therefore, attorney Nast advised there simply had to be a “family understanding” that the corporation's stock would be returned to Hagop once he was released from prison and the threat of the IRS levying on the property had cleared. According to attorney Nast's testimony, which the court found to be quite credible, both Sona and Hagop understood the nature of this “family understanding, ” and there was never any doubt among the family members that the business would revert to Hagop after he was released from prison and was clear of the threat of an IRS levy.

         Shortly before reporting to prison in November 2007, Hagop executed a power of attorney in favor of his sister Sona, again at the direction of attorney Nast, which would allow Sona to finalize the transactions and set in motion the asset protection scheme. (Parties' Joint Ex. JX-3.) The final purchase agreement between Pacific Marine Center and Hagop was entered into in June 2008, with Sona signing both on behalf of the corporation as its president and for Hagop via his power of attorney. Also using the power of attorney, Sona executed several other documents, including a promissory note reconciling a variety of undocumented loans she had supposedly made to Hagop in years past. This new promissory note, executed in June 2008, indebted Hagop to Sona for more than $270, 000, and was secured by the promissory note by which Pacific Marine Center purchased the assets of the business from Hagop. Thus, were Hagop to fail to pay Sona under this June 2008 note executed by Sona as to both parties to the transaction, he would forfeit any payment for the business assets of Pacific Marine Center. It is unclear how Hagop purportedly incurred the debt reflected in this note: Sona testified at trial that the debt reflected prior loans she had made to Hagop, while an e-mail entered into evidence suggested that some of the debt constituted loans Sona had made to Pacific Marine Center. (See Parties' Joint Ex. JX-10.)[5]

         Hagop was released from prison sometime in late 2008 or early 2009, and then promptly detained pursuant to an immigration hold while awaiting a deportation hearing. At the deportation hearing, Sona testified that if her brother was allowed to remain in this country she would give him a job at Pacific Marine Center. Sona testified before the immigration court that Hagop would be running the business if he was allowed to stay in the United States, and that his involvement was necessary to keep the business afloat. Based at least in part on this testimony, Hagop was not ordered deported and he returned to Pacific Marine Center in May 2009. Over the succeeding months, Sona helped Hagop fill out probation reports, which depicted him working as a general adviser in boat sales at Pacific Marine Center and Pacific Sales and Leasing.[6] Hagop helped run the business during this time, selling boats, buying boats at auction for Pacific Marine Center, and managing the business.

         Though Hagop testified he did not draw a salary from Pacific Marine Center and was not directly compensated for his work there, following his release from prison, accounting records supplied introduced into evidence by plaintiff at trial show Pacific Marine Center making hundreds of payments to Hagop between July 2008 and July 2010. The payments were frequently made multiple times per month, at irregular intervals and for irregular amounts. (Exh. P-1.) The smallest individual payment was for $80, while the largest was for $45, 000. (Id.) Sometimes the payments were made in cash, while most of the payments were made by check. (Id.) The payments were frequently in whole dollar amounts, though not always. (Id.) Most surprisingly, multiple payments were frequently made on the same day, such as payments for $3, 800, $600, and $700, all of which were made separately to Hagop on April 8, 2010. (Id.) The court finds Sona's explanation for the irregularity of these payments not to be credible.[7] Though no evidence was presented directly on this point, the most reasonable inference the court can draw from the evidence presented at trial-and the one it does draw-is that these payments reflect the sale of boats, boating accessories, or other goods and services by Pacific Marine Center. Thus, it appears the business paid much of its profits to Hagop on an ongoing basis throughout Sona's guardianship. This also happens to be the manner one might expect a closed corporation to pay the owner and proprietor of that corporation.

         In August 2009, shortly after Hagop's return to the business, the California Department of Motor Vehicles (DMV) executed search warrants at Pacific Marine Center as well as at one of Kirk Vartanian's businesses. At trial, Sona identified this event as the beginning of the downfall of her relationship with her brother Hagop. Nevertheless, there was little evidence presented at trial of any change in the siblings' relationship until almost a year later.

         In July 2010, and possibly for some months preceding, the relationship between Hagop and Sona soured. Among other issues, the two disputed Hagop's purchase of certain boats at auction on behalf of Pacific Marine Center, Hagop's hiring of certain employees, Sona's purported failure to pay bills of the business that were coming due, complaints from customers about Sona's handling of the business, and the decreasing amount of boat inventory that was being kept on-hand by the business. At some point during this month, Sona hired an accountant to advise her how much would be outstanding on the asset purchase agreement, if all the payments that had been made to Hagop were counted as payments made under that agreement. She then contacted an attorney, Zane Averbach, who gave her a notice to post at the business advising those working there that Hagop did not work or consult for Pacific Marine Center.[8]Attorney Averbach subsequently contacted both Hagop and attorney Nast on Sona's behalf to tell Hagop to stay away from Pacific Marine Center. Hagop responded by revoking the power of attorney by which he had authorized Sona to act on his behalf while he was incarcerated.

         The dispute between the sister and brother came to a head on July 24, 2010. According to Sona's testimony at trial, Hagop physically assaulted her and threatened her that day and drove her out of the business, changing the locks and stealing all of Pacific Marine Center's boats. Hagop testified that the two did argue, with Sona eventually telling him to stay away from Pacific Marine Center before she left. Hagop maintained he did not assault his sister. Further, Hagop testified he did not change the locks on the building. According to Hagop, Sona did not return to the business for several days after this argument, at which point the landlord came to the business asking Hagop about unpaid rent.[9] Hagop testified that because he had not seen Sona and was worried about the landlord also seizing the boat inventory if he took back the property for failure to pay rent, Hagop moved the boats next door to his property at 10452 Highway 41. Further, according to Hagop, he believed the boats to be his property in any event based upon his the “family understanding” that had been reached. Under that agreement, Pacific Marine Center had always remained his business and his sister Sona had just been taking care of it while he was in prison. Hagop testified it was his understanding that because his money purchased the boats, they were ultimately his, and that was why he took them.

         Hagop took a number of steps consistent with his professed understanding that he was the rightful owner of the boats. Shortly after taking the boats and moving them to his property, Hagop sent Sona a letter indicating he had repossessed the boats, providing her with an inventory of the items he had repossessed. Additionally, in August 2010, Hagop called Elaine Barajas, the insurance broker who had sold the insurance policy to Pacific Marine Center, to discuss an insurance bill. During the call, he advised Ms. Barajas he had taken over the business. This prompted Barajas to reach out to Sona to confirm whether Hagop was the appropriate contact for Pacific Marine Center. Barajas was told by Sona that there was a legal dispute between her and her brother, Hagop about who owned the business. Sona also instructed Barajas to reduce the coverage on the insurance policy by eliminating Hagop's building at 10452 Highway 41 from the coverage and lowering the overall policy limits. Hagop meanwhile had contacted the DMV directly as well, seeking to have titles re-issued for any boats he had taken possession of for which Sona had retained possession of the titles. It appears from the evidence admitted at trial that at least some of those titles were reissued by the DMV at Hagop's request.

         During the successive months, Sona and Hagop entered into mediation to attempt to resolve their business differences and settle the accounts between them. The mediation was unsuccessful, and Sona ultimately filed suit against Hagop in state court. In November 2010, Sona cancelled her insurance policy with Philadelphia Indemnity and received a portion of her premium in return. She ultimately submitted a claim to Philadelphia Indemnity in March 2011 via her then-attorney, Barry Cohen, alleging in that claim that Hagop had stolen the boats from her and that the theft was a compensable event covered under the insurance contract.[10] During the approximately eight months between when the alleged theft occurred and when the matter was tendered to the insurance company, Sona never filed a complaint with police claiming to be the victim of a theft of any kind.[11]

         Ultimately, Philadelphia Indemnity retained outside counsel, and after investigating the matter, denied Sona's claim in March 2013. Among the reasons Philadelphia Indemnity gave for refusing coverage were the following: (1) it appeared no theft had occurred, and that whatever had happened between Hagop and Sona was the result of an intra-family legal dispute; and (2) it appeared Hagop was either an employee or an authorized representative of Pacific Marine Center, and any losses due to his wrongdoing were therefore excluded under the policy. (Parties' Joint Ex. JX-33.)

         Conclusions of Law

         At the outset, it is important to understand what is alleged by plaintiff in the complaint filed in this action. The only insurance claim plaintiff ever tendered to the defendant was one arising from an alleged theft. Moreover, an alleged theft is the only basis for the claim against the defendant insurance company that plaintiff has presented in this civil action. In the original complaint, plaintiff specifically alleged: defendant insured the business against “loss by theft;” “inventory and other items at Pacific Marine's place of business were stolen” in late July 2010; and that plaintiff had notified defendant “of the theft loss” and defendant refused to pay despite the coverage provided by the insurance policy. (Doc. No. 1 at 10.) Moreover, plaintiff's complaint specifically alleged that the defendant's coverage denial “for the theft loss and failure to reimburse plaintiffs for the theft loss” was what constituted the breach of contract. (Id.)

         It is undisputed that the policy at issue provides coverage beyond merely that for theft loss. (Parties' Joint Ex. JX-1.) Indeed, the policy actually covers “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” (Id.) This is generally known as an “all-risk” policy, which covers losses stemming from theft, property damage, and other sources. Direct physical loss under an all-risk policy generally may include losses due to either theft or conversion. See Intermetal Mexicana, S.A. v. Ins. Co. of N. Am., 866 F.2d 71, 78 (3d Cir. 1989) (interpreting Pennsylvania law and holding conversion is covered under an all-risk policy); EOTT Energy Corp. v. Storebrand Int'l Ins. Co., 45 Cal.App.4th 565, 569 (1996) (theft). However, plaintiff here never moved to amend the complaint in order to attempt to expand its theory of liability, and the operative complaint simply does not allege that defendant breached the insurance contract because it failed to cover Hagop's unauthorized conversion of the property. Therefore, in light of the allegations of the complaint and the theory of liability consistently pursued by plaintiff in this litigation all the way through trial, plaintiff proving a theft occurred is necessary for it to prevail here. See Coleman v. Quaker Oats Co., 232 F.3d 1271, 1292-94 (9th Cir. 2000) (holding plaintiff could not proceed on theories of liability not raised in the complaint); see also Scantlin v. General Elec. Co., Case No EDCV 10-00333 VAP(OPx), 2014 WL 12579821, at *4-8 (C.D. Cal. Dec. 22, 2014) (no new theory of case allowed on the eve of trial without showing manifest injustice); Merchant Transaction Sys., Inc. v. Nelcela, Inc., No. CV 02-1954-PHX-MHM, 2009 WL 723001, at *18 (D. Ariz. Mar. 18, 2009) (concluding court need not consider new theories of the case after party was provided full and fair opportunity to present their claim); Giddings v. Vision House Prod., Inc., 584 F.Supp.2d 1222, 1226 (D. Ariz. 2008) (“Where a plaintiff sets forth one theory in the complaint and does not move to amend until summary judgment proceedings, it is barred from proceeding on a new theory.”) (citing Coleman, 232 F.3d at 1292); Lloyd v. Ashcroft, 208 F.Supp.2d 8, 11 (D.D.C. 2002) (“A plaintiff cannot change the theory of his case in his post-trial motion in order to survive a Rule 50 motion for judgment as a matter of law. He is bound by what he pled and attempted to prove at trial”).

         With this in mind, below the court will address the law applicable to the consideration of plaintiff's claim.

         1.Breach ...


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