Pacific Marine Center, Inc. et al v. Philadelphia Indemnity Insurance Company

Filing 198

FINDINGS of FACT and CONCLUSIONS of LAW signed by District Judge Dale A. Drozd on 3/30/2017. CASE CLOSED. (Sant Agata, S)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 PACIFIC MARINE CENTER, INC., 12 Plaintiff, 13 14 15 No. 1:13-cv-00992-DAD-SKO v. FINDINGS OF FACT AND CONCLUSIONS OF LAW PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant. 16 17 This matter concerns a dispute over an insurance contract. A court trial was held 18 commencing on October 18, 2016 and concluding on October 27, 2016. For the reasons 19 explained below, the court finds plaintiff has not met its burden of proof and therefore finds in 20 favor of defendant and will direct that judgment be entered for defendant. 21 PROCEDURAL BACKGROUND 22 This action was initially filed by both Pacific Marine Center, Inc.1 and its apparent 23 principal—Sona Vartanian—in her individual capacity, in Madera County Superior Court in May 24 1 25 26 27 28 Plaintiff has attempted to suggest a need to differentiate between Pacific Marine Center, Inc. and Pacific Marine Center, the “doing business as” designation of another related company, Pacific Sales and Leasing. This distinction is largely irrelevant for purposes of deciding this case. The evidence presented at trial suggests this dispute focuses on one business, which may have had various corporate forms at various times, but functioned as a single entity. Since neither party has demonstrated a need to distinguish between “Pacific Marine Center, Inc.” and “Pacific Marine Center,” the court will do so below only when necessary. 1 1 2013, and removed here on diversity grounds by defendant Philadelphia Indemnity Insurance 2 Company (“PIIC”) in June 2013. (Doc. No. 1.) Cross motions for summary judgment were filed 3 in January 2016. (Doc. Nos. 76, 84.) The court denied those motions by order dated March 18, 4 2016, with the exception that the court dismissed Sona Vartanian as a plaintiff in her individual 5 capacity. (Doc. No. 134.) As noted, a bench trial was conducted in October 2016. Following 6 trial, the court directed the parties to submit proposed findings of fact and conclusions of law, 7 which the parties separately filed on November 10, 2016. (Doc. Nos. 195, 196.) 8 9 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). 10 FINDINGS OF FACT 11 The evidence presented to this court at the bench trial consisted of eleven witnesses and 12 ninety-one exhibits. The court also considered as evidence certain selections of a deposition 13 transcript from Zane Averbach, Esq., a former attorney for Sona Vartanian, who was deemed 14 unavailable to testify at trial. Mr. Averbach’s deposition testimony was read into the record at 15 trial. The trial witnesses who were sworn and testified included Sona Vartanian, Howard 16 Gastwirth, Ronald Miller, Thomas Leith, Elaine Barajas, Hagop Vartanian, attorney Thomas 17 Nast, James Stanley Deakin, Barry Cohen, Robert R. Hastey, and James Schratz. Thirty-three 18 joint exhibits were submitted and all were admitted in their entirety. Additionally, fifty-eight 19 exhibits, either in whole or in part, from the separate exhibit lists of defendant and plaintiff were 20 admitted into evidence. All of this evidence has been considered in the court’s decision, as have 21 the parties’ trial briefs and other submissions and arguments. The court now finds the following 22 facts. Hagop Vartanian2 started a business selling boats and boating accessories on Highway 41 23 24 in Madera, California in 1996. The business—Pacific Sales and Leasing, doing business as 25 Pacific Marine Center—was predominantly run by Hagop, with occasional help from his sister 26 ///// 27 28 2 Hagop Vartanian is also known as “Jack,” but has been referred to as Hagop in the court’s prior orders, and will be similarly referred to here. 2 1 Sona3 starting in 2002. A related corporation known as Pacific Marine Center, Inc. was also 2 founded by Hagop during this period. This corporation, the plaintiff in the present case, lay 3 dormant for a number of years until it was reactivated by Hagop’s lawyer, Tom Nast. 4 In 2001 Hagop was indicted on federal criminal charges for subscribing to false tax 5 returns and making false statements on loan applications in violation of 26 U.S.C. § 7206 and 18 6 U.S.C. § 1014. In March 2003, following a jury trial, Hagop Vartanian was convicted on all 7 counts. He was sentenced in July 2005 to a fifteen-month term of imprisonment but remained 8 free on bail pending appeal. On May 25, 2007, Hagop’s judgment of conviction was affirmed by 9 the Ninth Circuit Court of Appeals leading to the setting of November 15, 2007 as the date by 10 which he would be required to surrender himself to the custody of the U.S. Bureau of Prisons. 11 Once the Vartanian family learned Hagop’s convictions had been upheld on appeal and he would 12 be incarcerated, the family took steps at the direction of attorney Nast to ensure Hagop’s business 13 would survive his incarceration. Attorney Nast was particularly concerned the IRS would seek to 14 levy on the business in order to satisfy Hagop’s tax debts, and constructed an intra-family 15 transaction to attempt to prevent that from taking place. The plan called for the activation of the 16 formally dormant Pacific Marine Center, Inc., which would enter into an asset purchase with 17 Hagop for his complete boat inventory at fair market value. Those assets would be purchased by 18 a promissory note with an extended, thirty-year payment schedule, preferably executed at a 19 moment when the boat inventory was fairly low, which would help to keep the monthly payments 20 under the promissory note to a minimum. (See, e.g., Parties’ Joint Ex. JX-5.) Under this plan, 21 Hagop would resign any position within the corporation, which would convert to a closed 22 corporation, and would sell his stock to a family member for a nominal amount of $500. 23 Following his release from imprisonment, the stock could later be repurchased by Hagop from the 24 trusted family member for the same nominal payment, while the assets would be left within the 25 corporation. 26 ///// 27 28 3 Because multiple people involved in this dispute have the last name Vartanian, both Hagop and his sister Sona will be referred to by their first names. 3 This plan had multiple potential benefits for the Vartanian family.4 Hagop could maintain 1 2 his business throughout his incarceration by putting it under the care of one of his family 3 members. In the event the IRS decided to attempt to levy on Hagop’s property, the only business- 4 related asset available to be levied on would be the promissory note. The extended payment 5 scheme and the low monthly payments would leave the note a clearly undesirable target to levy 6 on for the IRS. Further, even in the event the IRS did levy on the note, the payments would be 7 minimal, which would allow the business to continue to function despite any additional monthly 8 payments required. Once Hagop repurchased the stock from the family member at some point 9 after the threat of an IRS levy had passed, he would again be in control of his business, having 10 lost only a moderate per-month payment to the IRS in the event it levied on his property (i.e., the 11 promissory note). 12 Many, if not all, of the Vartanian family members were present for multiple discussions 13 regarding the execution of this plan. At least Sona and Hagop, as well as their brother Kirk 14 Vartanian, were present at these meetings, and Sona’s son Marty may also have been present. It 15 is unclear whether Sona and Hagop’s parents, who apparently lived in the family home with 16 Hagop, were present for any of these meetings. Attorney Nast was certainly present at them and 17 once he had laid out the plan for the family’s consideration, the family collectively discussed who 18 would be the best caretaker for the business. Kirk was rejected for this role because he had 19 financial and legal troubles of his own, and Marty was eliminated because he was too young and 20 inexperienced to serve as principal. Sona therefore presented the only logical choice, and the 21 family agreed she should purchase the corporation’s stock and serve as a caretaker for the 22 business while Hagop was in prison. 23 24 25 26 27 28 4 It would appear fair to characterize this plan as a scheme. The court expresses no opinion about whether this scheme or any of its component parts might have constituted a fraudulent conveyance, as that matter is not before the court at this time. See Mejia v. Reed, 31 Cal. 4th 657, 664–66 (2003) (noting California’s version of the Uniform Fraudulent Transfer Act renders a conveyance fraudulent as to both present and future debtors if it is done “[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor”) (quoting Cal. Civ. Code § 3439.04(a)). Nothing said here should be taken, however, to suggest that this court approves of this arrangement. 4 1 Attorney Nast explained to the family that there could be no enforceable agreement, 2 written or oral, that Sona would sell the stock back to Hagop after he was released from his 3 imprisonment. Nast was concerned that, if such an agreement were formulated, the family 4 members might be required to either reveal that the transfer was fraudulent or lie under oath when 5 questioned by IRS agents. Therefore, attorney Nast advised there simply had to be a “family 6 understanding” that the corporation’s stock would be returned to Hagop once he was released 7 from prison and the threat of the IRS levying on the property had cleared. According to attorney 8 Nast’s testimony, which the court found to be quite credible, both Sona and Hagop understood the 9 nature of this “family understanding,” and there was never any doubt among the family members 10 that the business would revert to Hagop after he was released from prison and was clear of the 11 threat of an IRS levy. 12 Shortly before reporting to prison in November 2007, Hagop executed a power of attorney 13 in favor of his sister Sona, again at the direction of attorney Nast, which would allow Sona to 14 finalize the transactions and set in motion the asset protection scheme. (Parties’ Joint Ex. JX-3.) 15 The final purchase agreement between Pacific Marine Center and Hagop was entered into in June 16 2008, with Sona signing both on behalf of the corporation as its president and for Hagop via his 17 power of attorney. Also using the power of attorney, Sona executed several other documents, 18 including a promissory note reconciling a variety of undocumented loans she had supposedly 19 made to Hagop in years past. This new promissory note, executed in June 2008, indebted Hagop 20 to Sona for more than $270,000, and was secured by the promissory note by which Pacific 21 Marine Center purchased the assets of the business from Hagop. Thus, were Hagop to fail to pay 22 Sona under this June 2008 note executed by Sona as to both parties to the transaction, he would 23 forfeit any payment for the business assets of Pacific Marine Center. It is unclear how Hagop 24 purportedly incurred the debt reflected in this note: Sona testified at trial that the debt reflected 25 prior loans she had made to Hagop, while an e-mail entered into evidence suggested that some of 26 ///// 27 ///// 28 ///// 5 1 the debt constituted loans Sona had made to Pacific Marine Center. (See Parties’ Joint Ex. JX- 2 10.)5 3 Hagop was released from prison sometime in late 2008 or early 2009, and then promptly 4 detained pursuant to an immigration hold while awaiting a deportation hearing. At the 5 deportation hearing, Sona testified that if her brother was allowed to remain in this country she 6 would give him a job at Pacific Marine Center. Sona testified before the immigration court that 7 Hagop would be running the business if he was allowed to stay in the United States, and that his 8 involvement was necessary to keep the business afloat. Based at least in part on this testimony, 9 Hagop was not ordered deported and he returned to Pacific Marine Center in May 2009. Over the 10 succeeding months, Sona helped Hagop fill out probation reports, which depicted him working as 11 a general adviser in boat sales at Pacific Marine Center and Pacific Sales and Leasing.6 Hagop 12 helped run the business during this time, selling boats, buying boats at auction for Pacific Marine 13 Center, and managing the business. 14 Though Hagop testified he did not draw a salary from Pacific Marine Center and was not 15 directly compensated for his work there, following his release from prison, accounting records 16 supplied introduced into evidence by plaintiff at trial show Pacific Marine Center making 17 hundreds of payments to Hagop between July 2008 and July 2010. The payments were 18 frequently made multiple times per month, at irregular intervals and for irregular amounts. (Exh. 19 20 21 22 23 24 25 26 27 28 5 Notably, the fact that Sona believed loans made by her to Pacific Marine Center should be repaid by Hagop comports with the “family understanding” that the business belonged to Hagop and would eventually be returned to him some time following his release from prison. 6 In her trial testimony, Sona explained she only put down Pacific Marine Center in the “employment” section of the United States Probation Office reports in order to reflect any possible address Hagop could be at during normal business hours, not to reflect that he was actually employed there. Indeed, at trial, Sona maintained that Hagop was never employed at Pacific Marine Center. Hagop too testified that he was not an “employee” of Pacific Marine Center, though this appears to be based on his belief that he was always the owner of the business. The court finds Sona’s attempts to explain away the reports she completed and submitted to the United States Probation Office to be totally devoid of credibility. As discussed further below, it is clear Hagop worked at Pacific Marine Center following his release from custody, regardless of whether he is more appropriately described as “employee,” “authorized representative,” or “proprietor.” 6 1 P-1.) The smallest individual payment was for $80, while the largest was for $45,000. (Id.) 2 Sometimes the payments were made in cash, while most of the payments were made by check. 3 (Id.) The payments were frequently in whole dollar amounts, though not always. (Id.) Most 4 surprisingly, multiple payments were frequently made on the same day, such as payments for 5 $3,800, $600, and $700, all of which were made separately to Hagop on April 8, 2010. (Id.) The 6 court finds Sona’s explanation for the irregularity of these payments not to be credible.7 Though 7 no evidence was presented directly on this point, the most reasonable inference the court can 8 draw from the evidence presented at trial—and the one it does draw—is that these payments 9 reflect the sale of boats, boating accessories, or other goods and services by Pacific Marine 10 Center. Thus, it appears the business paid much of its profits to Hagop on an ongoing basis 11 throughout Sona’s guardianship. This also happens to be the manner one might expect a closed 12 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 13 14 Motor Vehicles (DMV) executed search warrants at Pacific Marine Center as well as at one of 15 Kirk Vartanian’s businesses. At trial, Sona identified this event as the beginning of the downfall 16 of her relationship with her brother Hagop. Nevertheless, there was little evidence presented at 17 trial of any change in the siblings’ relationship until almost a year later. 18 In July 2010, and possibly for some months preceding, the relationship between Hagop 19 and Sona soured. Among other issues, the two disputed Hagop’s purchase of certain boats at 20 auction on behalf of Pacific Marine Center, Hagop’s hiring of certain employees, Sona’s 21 7 22 23 24 25 26 27 28 Sona testified at trial that these were all payments by Pacific Marine Center under the original asset purchase scheme, which obligated the business to pay approximately $7,000 a month to Hagop. These payment records reflect that Hagop was paid many times that amount per month; receiving $30,000 in November 2008, $72,480 in July 2009, and $37,155 in February 2010, for example. (See Plaintiff’s Ex. P-1.) Sona testified that there were a number of reasons motivating the payments to be made to Hagop in this disjointed manner: first, she did not trust Hagop and wanted to pay him off as soon as possible so she could be free of him; second, she felt obligated to pay him as quickly as possible because he was her family; third, Hagop had many bills and whenever he had a bill due he would simply come to her and she would give him money in the needed amount which she chose to consider as payments on the loan; and fourth, there was simply nothing in the asset purchase agreement that said she could not pay him in this disjointed manner. The court simply does not find any of these shifting explanations provided by Sona for the manner in which the payments were made to be credible. 7 1 purported failure to pay bills of the business that were coming due, complaints from customers 2 about Sona’s handling of the business, and the decreasing amount of boat inventory that was 3 being kept on-hand by the business. At some point during this month, Sona hired an accountant 4 to advise her how much would be outstanding on the asset purchase agreement, if all the 5 payments that had been made to Hagop were counted as payments made under that agreement. 6 She then contacted an attorney, Zane Averbach, who gave her a notice to post at the business 7 advising those working there that Hagop did not work or consult for Pacific Marine Center.8 8 Attorney Averbach subsequently contacted both Hagop and attorney Nast on Sona’s behalf to tell 9 Hagop to stay away from Pacific Marine Center. Hagop responded by revoking the power of 10 attorney by which he had authorized Sona to act on his behalf while he was incarcerated. 11 The dispute between the sister and brother came to a head on July 24, 2010. According to 12 Sona’s testimony at trial, Hagop physically assaulted her and threatened her that day and drove 13 her out of the business, changing the locks and stealing all of Pacific Marine Center’s boats. 14 Hagop testified that the two did argue, with Sona eventually telling him to stay away from Pacific 15 Marine Center before she left. Hagop maintained he did not assault his sister. Further, Hagop 16 testified he did not change the locks on the building. According to Hagop, Sona did not return to 17 the business for several days after this argument, at which point the landlord came to the business 18 19 20 21 22 23 24 8 Specifically, the notice dated July 22, 2010, signed and posted by Sona at Pacific Marine Center was entitled “ALERT/CAUTION,” directed to “Any Person Hired By Or Working For Hagop (Jack ) Vartanian (“Jack”)/To Whom This May Concern” and read as follows: It has come to my attention that Jack, who is my brother, has been telling people that he works or consults for the Company and/or has hired people who may believe that they have been hired by or are working for the Company. 26 Please be advised that Jack does not work or consult for the Company and that anyone hired by or working for him does not work for the Company. Further, if you take instruction from Jack without confirming any instruction with me you can not work for the Company 27 Please conduct yourself accordingly. 25 28 (Parties’ Joint Ex. JX-16) (emphasis in original). 8 1 asking Hagop about unpaid rent.9 Hagop testified that because he had not seen Sona and was 2 worried about the landlord also seizing the boat inventory if he took back the property for failure 3 to pay rent, Hagop moved the boats next door to his property at 10452 Highway 41. Further, 4 according to Hagop, he believed the boats to be his property in any event based upon his the 5 “family understanding” that had been reached. Under that agreement, Pacific Marine Center had 6 always remained his business and his sister Sona had just been taking care of it while he was in 7 prison. Hagop testified it was his understanding that because his money purchased the boats, they 8 were ultimately his, and that was why he took them. 9 Hagop took a number of steps consistent with his professed understanding that he was the 10 rightful owner of the boats. Shortly after taking the boats and moving them to his property, 11 Hagop sent Sona a letter indicating he had repossessed the boats, providing her with an inventory 12 of the items he had repossessed. Additionally, in August 2010, Hagop called Elaine Barajas, the 13 insurance broker who had sold the insurance policy to Pacific Marine Center, to discuss an 14 insurance bill. During the call, he advised Ms. Barajas he had taken over the business. This 15 prompted Barajas to reach out to Sona to confirm whether Hagop was the appropriate contact for 16 Pacific Marine Center. Barajas was told by Sona that there was a legal dispute between her and 17 her brother, Hagop about who owned the business. Sona also instructed Barajas to reduce the 18 coverage on the insurance policy by eliminating Hagop’s building at 10452 Highway 41 from the 19 coverage and lowering the overall policy limits. Hagop meanwhile had contacted the DMV 20 directly as well, seeking to have titles re-issued for any boats he had taken possession of for 21 which Sona had retained possession of the titles. It appears from the evidence admitted at trial 22 that at least some of those titles were reissued by the DMV at Hagop’s request. 23 ///// 24 9 25 26 27 28 Pacific Marine Center was originally located at 10452 Highway 41, a building owned by Hagop. During Hagop’s incarceration, the business expanded to include the neighboring property at 10432 Highway 41. This property was owned by Ron Miller, and leased originally by Kirk Vartanian, before the lease was transferred to Sona. Pacific Marine Center was thereafter run from both locations, with offices and various components of the business being conducted at both of the adjoining addresses. The insurance policy in question here initially covered both addresses. 9 1 During the successive months, Sona and Hagop entered into mediation to attempt to 2 resolve their business differences and settle the accounts between them. The mediation was 3 unsuccessful, and Sona ultimately filed suit against Hagop in state court. In November 2010, 4 Sona cancelled her insurance policy with Philadelphia Indemnity and received a portion of her 5 premium in return. She ultimately submitted a claim to Philadelphia Indemnity in March 2011 6 via her then-attorney, Barry Cohen, alleging in that claim that Hagop had stolen the boats from 7 her and that the theft was a compensable event covered under the insurance contract.10 During 8 the approximately eight months between when the alleged theft occurred and when the matter 9 was tendered to the insurance company, Sona never filed a complaint with police claiming to be 10 the victim of a theft of any kind.11 11 Ultimately, Philadelphia Indemnity retained outside counsel, and after investigating the 12 matter, denied Sona’s claim in March 2013. Among the reasons Philadelphia Indemnity gave for 13 refusing coverage were the following: (1) it appeared no theft had occurred, and that whatever 14 10 15 16 17 18 19 At trial, Sona testified that she advised Ms. Barajas, who worked for a local insurance brokerage, to submit a claim in connection with Hagop’s purported theft to Philadelphia Indemnity in August 2010. The court does not find Sona’s testimony in this regard to be credible. Barajas’ persuasively testified in direct contradiction to Sona’s version of these events, noting that Sona never told her to submit a claim but rather simply told her that there was a legal dispute about the business and to reduce the coverage. Further, Sona’s former attorney Barry Cohen, who drafted the original claim tender letter to Philadelphia Indemnity in March 2011, testified that he was not aware of the claim having been tendered at any point prior to his letter. Obviously, had the claim been tendered and remained pending without response for seven months, this likely would have been noted in attorney Cohen’s claim tender letter. 20 11 21 22 23 24 25 26 27 28 Contrary to the misconceptions of plaintiff’s counsel, the point of Sona’s failure to call the police is not that it was required by the insurance policy in order for there to be coverage. Whether there was a reporting requirement in the policy is not before the court, because defendant has not raised plaintiff’s failure to comply with any such policy requirement as a defense to plaintiff’s breach of contract claim. Rather, Sona’s failure to call the police is evidence suggesting all parties to this family dispute, including Sona herself, understood that whatever occurred here was not a theft. This is also why evidence of Sona reporting the alleged theft to the DMV is irrelevant. Whether the DMV actually had potential authority under the law to investigate the alleged theft of boats is immaterial. Even were that to be the case, Sona’s trial testimony that she believed the DMV was the proper authority to report such a crime to is simply not credible. Sona—a well-educated, articulate business woman and college professor—must know what is obvious to any reasonable person: if, as she claims occurred, someone physically assaults you, threatens you, and steals $800,000 in property from you, you call 911, not the DMV. In suggesting otherwise, Sona does serious damage to her credibility as a witness. 10 1 had happened between Hagop and Sona was the result of an intra-family legal dispute; and (2) it 2 appeared Hagop was either an employee or an authorized representative of Pacific Marine Center, 3 and any losses due to his wrongdoing were therefore excluded under the policy. (Parties’ Joint 4 Ex. JX-33.) 5 CONCLUSIONS OF LAW 6 At the outset, it is important to understand what is alleged by plaintiff in the complaint 7 filed in this action. The only insurance claim plaintiff ever tendered to the defendant was one 8 arising from an alleged theft. Moreover, an alleged theft is the only basis for the claim against the 9 defendant insurance company that plaintiff has presented in this civil action. In the original 10 complaint, plaintiff specifically alleged: defendant insured the business against “loss by theft;” 11 “inventory and other items at Pacific Marine’s place of business were stolen” in late July 2010; 12 and that plaintiff had notified defendant “of the theft loss” and defendant refused to pay despite 13 the coverage provided by the insurance policy. (Doc. No. 1 at 10.) Moreover, plaintiff’s 14 complaint specifically alleged that the defendant’s coverage denial “for the theft loss and failure 15 to reimburse plaintiffs for the theft loss” was what constituted the breach of contract. (Id.) 16 It is undisputed that the policy at issue provides coverage beyond merely that for theft 17 loss. (Parties’ Joint Ex. JX-1.) Indeed, the policy actually covers “direct physical loss of or 18 damage to Covered Property at the premises described in the Declarations caused by or resulting 19 from any Covered Cause of Loss.” (Id.) This is generally known as an “all-risk” policy, which 20 covers losses stemming from theft, property damage, and other sources. Direct physical loss 21 under an all-risk policy generally may include losses due to either theft or conversion. See 22 Intermetal Mexicana, S.A. v. Ins. Co. of N. Am., 866 F.2d 71, 78 (3d Cir. 1989) (interpreting 23 Pennsylvania law and holding conversion is covered under an all-risk policy); EOTT Energy 24 Corp. v. Storebrand Int’l Ins. Co., 45 Cal. App. 4th 565, 569 (1996) (theft). However, plaintiff 25 here never moved to amend the complaint in order to attempt to expand its theory of liability, and 26 the operative complaint simply does not allege that defendant breached the insurance contract 27 because it failed to cover Hagop’s unauthorized conversion of the property. Therefore, in light of 28 the allegations of the complaint and the theory of liability consistently pursued by plaintiff in this 11 1 litigation all the way through trial, plaintiff proving a theft occurred is necessary for it to prevail 2 here. See Coleman v. Quaker Oats Co., 232 F.3d 1271, 1292–94 (9th Cir. 2000) (holding 3 plaintiff could not proceed on theories of liability not raised in the complaint); see also Scantlin v. 4 General Elec. Co., Case No EDCV 10-00333 VAP(OPx), 2014 WL 12579821, at *4–8 (C.D. Cal. 5 Dec. 22, 2014) (no new theory of case allowed on the eve of trial without showing manifest 6 injustice); Merchant Transaction Sys., Inc. v. Nelcela, Inc., No. CV 02-1954-PHX-MHM, 2009 7 WL 723001, at *18 (D. Ariz. Mar. 18, 2009) (concluding court need not consider new theories of 8 the case after party was provided full and fair opportunity to present their claim); Giddings v. 9 Vision House Prod., Inc., 584 F. Supp. 2d 1222, 1226 (D. Ariz. 2008) (“Where a plaintiff sets 10 forth one theory in the complaint and does not move to amend until summary judgment 11 proceedings, it is barred from proceeding on a new theory.”) (citing Coleman, 232 F.3d at 1292); 12 Lloyd v. Ashcroft, 208 F. Supp. 2d 8, 11 (D.D.C. 2002) (“A plaintiff cannot change the theory of 13 his case in his post-trial motion in order to survive a Rule 50 motion for judgment as a matter of 14 law. He is bound by what he pled and attempted to prove at trial”). 15 With this in mind, below the court will address the law applicable to the consideration of 16 plaintiff’s claim. 17 1. 18 In order to demonstrate a breach of contract under California law, a party must show: (1) Breach of Contract 19 the existence of a contract; (2) plaintiff’s performance under the contract or excuse for 20 nonperformance; (3) defendant’s breach; and (4) resulting damages to the plaintiff. Oasis West 21 Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011). California courts have held “all risk” 22 policies generally cover losses due to theft. EOTT Energy Corp., 45 Cal. App. 4th at 569. 23 Theft is defined statutorily in California as a criminal act, with an accompanying mens 24 rea.12 Cal. Penal Code § 484; see also People v. Lawson, 215 Cal. App. 4th 108, 113–14 (2013) 25 12 26 27 28 Plaintiff has refused to abandon its argument that conversion is the same as theft, and revisited this theme again in its trial brief. (Doc. No. 160 at 19–20) (arguing that because there is no tort action for theft, the court should adopt a definition of conversion as analogous because it is “a pretty good ‘street’ definition of ‘theft’”). Further, plaintiff asserts theft should be defined for purposes of this action as either analogous to conversion or as “taking someone else’s property without their consent,” a definition plaintiff proposes without citation to any authority. (Id. at 12 1 (theft by larceny requires intent to steal the property); People v. Zangari, 89 Cal. App. 4th 1436, 2 1441–42 (2001) (mens rea of theft requires “the intent to permanently deprive a person of 3 property”); Ferraro v. Pacific Fin. Corp., 8 Cal. App. 3d 339, 348 n.3 (1970) (Penal Code § 484 4 requires “intent to permanently deprive the owner of its possession”). The intent which underlies 5 a theft must be felonious, and because the crime of theft requires the “intent to steal,” “California 6 courts for over 150 years have recognized” that “a good faith belief that the specific property 7 taken is one’s own” is a defense to a charge of theft. People v. Tufunga, 21 Cal. 4th 935, 938–39 8 (1999). This principle is also called having a “claim of right.” Id.; see also People v. Anderson, 9 235 Cal. App. 4th 93, 99 (2015) (“The claim-of-right defense provides that a defendant’s good 10 faith belief, even if mistakenly held, that he has a right or claim to property he takes from another 11 negates the felonious intent necessary for conviction of theft or robbery.”) 12 In the insurance context, California courts have explained that words such as “theft,” 13 “stolen,” “robbery,” and “pilferage,” are words “that are well understood, and . . . are used in 14 insurance policies in their common and ordinary meaning.” Barnett v. State Farm General Ins. 15 Co., 200 Cal. App. 4th 536, 543 (2011) (quoting Granger v. New Jersey Ins. Co., 108 Cal. App. 16 290, 294 (1930)). Particularly, in order for an alleged theft to be covered under an insurance 17 policy in California, a felonious taking of property is required. Barnett, 200 Cal. App. 4th at 543. 18 As the California Court of Appeal explained: 19 20 21 22 23 24 25 26 27 28 The requirement in the words “theft” and “stolen” of a felonious taking is critical because it is not enough to commit a “trespass” against another’s right of possession, rather there must exist a criminal “intent to steal,” or “animus furandi,” that consists of “the intent, without a good faith claim of right, to permanently deprive the owner of possession.” 19.) Plaintiff argues the court must adopt its interpretation of the word “theft,” because California law requires the contract to be interpreted in favor of the insured. (Id.) Again, plaintiff simply fails to understand its case. This is not primarily a tort action, but rather one for breach of an insurance contract. Protesting that there is no tort action for theft and that one must instead allege conversion is irrelevant here. This court has never held that proof of conversion in another suit (i.e. Sona’s personal action against her brother Hagop in state court) precludes a determination of theft in this suit. It has simply held that the actions do not present the same claim. What is placed at issue by plaintiff’s claim here is what “theft” means in terms of this insurance contract as a matter of California law. 13 1 Id. (quoting People v. Davis, 19 Cal. 4th 301, 305 (1998)). Analyzing the issue further, the 2 California Court of Appeals noted: 3 4 5 6 7 8 9 10 11 12 [The act in question] cannot constitute a “theft” because it was neither criminal nor . . . was there any evidence of an intent to deprive Barnett of his property permanently and in a criminal manner, rather than by due process of law. The initial taking was not a criminal act because a claim of right dispels the criminal character necessary to constitute a theft within the common meaning of the word. . . . Stated simply, a claim of right to take disputed property negates the criminal intent necessary for theft. Section 511 of the Penal Code codifies this principle, providing that a claim of right vitiates criminal charges where the property was appropriated openly and avowedly, and under a claim of title preferred in good faith, even though such claim is untenable. Thus, in the insurance context, the fact that the alleged wrongdoer acted under a bona fide claim of title removes the criminal character from his or her act, and, therefore, takes the loss out of the coverage of a policy covering loss via such offenses. 13 Id. at 544–45 (internal citations and quotations omitted) (emphasis added). Because what is at 14 issue is a claim of right, it is axiomatic the claim “may later be undercut or proven inferior or 15 unavailing once the matter is litigated, but this does not change the fact the initial taking is not 16 criminal under California law.” Id. at 545. “[T]he third party’s intent matters,” and a “claim of 17 right at the time of the taking . . . dispels the criminal character required to constitute a theft.” Id. 18 at 546; see also Stevens v. Zurich Am. Ins. Co., Case No. 3:14-cv-02043 SC, 2015 WL 5258763, 19 at *3 (N.D. Cal. Sept. 9, 2015) (“To the extent that Stevens was deprived of his property, it was 20 not done ‘in a criminal manner.’”); Sager v. USAA Cas. Ins. Co., SA CV 12-1015 FMO (MLGx), 21 2014 WL 12594137, at *5-6 (C.D. Cal. Mar. 31, 2014) (granting summary judgment in favor of 22 the defendant insurance company on plaintiff’s breach of insurance contract claim which was 23 premised on the allegation that his former girlfriend had refused to return his property he had left 24 at the condominium they had shared and that a theft had therefore occurred which was covered by 25 his insurance policy). As indicated above and perhaps most importantly here, an alleged thief 26 who acts under a good faith claim of right need not establish that their subjective belief was 27 reasonable. People v. Romo, 220 Cal. App. 3d 514, 518 (1990); see also Heatley v. Tilton, No. 28 08cv0580-L(WMc), 2009 WL 943786, at *10 (E.D. Cal. Apr. 7, 2009); Page v. Runnels, No. C 14 1 2 04-1009 SI (pr), 2006 WL 2925690, at *3 (N.D. Cal. Oct. 12, 2006). A claim of right requires a “good faith belief that the specific property taken is one’s 3 own.” Tufunga, 21 Cal. 4th at 939 (emphasis added). Whether such a good faith belief exists is 4 determined based upon the circumstances presented. However, “[b]ad faith means simply that the 5 action or tactic is being pursued for an improper motive.” Gemini Aluminum Corp. v. California 6 Custom Shapes, Inc., 95 Cal. App. 4th 1249, 1263 (2002). Bad faith can be shown by 7 demonstrating a party acted for improper purposes such as causing delay or harassment. Id. A 8 complete lack of merit in a legal proceeding may be evidence of bad faith, but does not 9 conclusively determine it and it is not mandatory for the court to find that it does. Summers v. 10 Cathedral City, 225 Cal. App. 3d 1047, 1073 (1990). 11 2. Exclusions 12 In California, exclusionary clauses in insurance contracts are strictly construed against the 13 insurer and in favor of the insured. E.M.M.I. Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th 465, 471 14 (2004). “Any ambiguity or uncertainty in an insurance policy is to be resolved against the 15 insurer.” Crane v. State Farm Fire & Cas. Co., 5 Cal. 3d 112, 115 (1971). The insurer bears the 16 burden of proof to demonstrate that a claim falls within a policy’s exclusionary provisions. North 17 Am. Bldg. Maint., Inc. v. Fireman’s Fund Ins. Co., 137 Cal. App. 4th 627, 642 (2006) (citations 18 omitted). “[S]trict construction does not mean strained construction; under the guise of strict 19 construction, [a court] may not rewrite a policy to bind the insurer to a risk that it did not 20 contemplate and for which it has not been paid.” National Union Fire Ins. Co. v. Lynette C., 228 21 Cal. App. 3d 1073, 1077 (1991). Where the terms of an insurance policy are not defined, the 22 court is “to look first to the language of the contract in order to ascertain its plain meaning or the 23 meaning a layperson would ordinarily attach to it.” Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 24 18–19 (1995). 25 An insurance claim is properly excluded under an entrustment exclusion if the loss was 26 caused by the person to whom the property was entrusted. Su v. New Century Servs., Inc., No. 27 CV 12–03894 DDP (SSx), 2013 WL 5775160, at *3–4 (C.D. Cal. Oct. 25, 2013); see also Atlas 28 Assurance Co. v. McCombs Corp., 146 Cal. App. 3d 135, 144 (1983). Courts have found that 15 1 terms such as “entrustment” may or may not be ambiguous depending on the language of the 2 insurance contract. Compare Atlas Assurance Co., 146 Cal. App. 3d at 144 (finding no 3 ambiguity) with Intransit, Inc. v. Travelers Prop. & Cas. Co. of Am., Case No. No. 1:11–CV– 4 03146–CL, 2012 WL 5208170, at *10 (D. Ore. Oct. 22, 2012) (finding the entrustment provision 5 of a policy to be ambiguous). 6 An insurance claim is properly excluded under an authorized representative exclusion if 7 the taking of property was done by an authorized representative. See Stanford Univ. Hosp. v. 8 Federal Ins. Co., 174 F.3d 1077, 1084–85 (9th Cir. 1999); Southern California Counseling 9 Center v. Great Am. Ins. Co., 162 F. Supp. 3d 1045, 1050–53 (C.D. Cal. 2014), aff’d 667 Fed. 10 App’x 623 (9th Cir. 2016). An authorized representative exclusion “covers those who by 11 authorization of the insured are given access to and permitted to handle the insured’s funds” or 12 other property. Stanford Univ. Hosp., 174 F.3d at 1085. Such a provision “excludes coverage 13 for misappropriation of funds by those individual or entities authorized by the insured to have 14 access to the funds—in essence, those whom the insured empowers to act on its behalf.” Id. 15 Barring language to the contrary included in the agreement, exclusions such as an 16 authorized representative or entrustment exclusion still apply “even if the loss occurs after” the 17 authorization or entrustment has terminated, “so long as there is a ‘causal connection between the 18 act of entrustment and the resulting loss.’” Su, 2013 WL 5775160 at *4; see also Bita Trading, 19 Inc. v. Nationwide Mut. Ins. Co., No. 13cv1548 JM (WVG), 2015 WL 433557, at *7 (S.D. Cal. 20 Feb. 3, 2015) (finding entrustment exclusion barred claim for property damage caused by lessee 21 despite termination of tenancy); Plaza 61 v. North River Ins. Co., 446 F. Supp. 1168, 1171 (M.D. 22 Pa. 1978) (“The mere fact that Majo had been told to vacate the site does not change this taking 23 into a theft. Regardless of the status of the parties’ legal relations on December 5, 1973, Majo 24 had come into possession of the disputed goods as a result of its work under the construction 25 contract and was carrying them off under a claim of right arising from that contract. This is a risk 26 against which Defendant did not insure.”). 27 ///// 28 ///// 16 1 ANALYSIS 2 1. No Theft Occurred 3 “[T]he insured has the initial burden of showing that ‘the occurrence forming the basis of 4 its claim is within the basic scope of insurance coverage.”’ Estes v. State Farm Mut. Auto. Ins. 5 Co., Civil No. 15-cv-0757-JAH (WVG), 2016 WL 4595949, at *3 (S.D. Cal. May 18, 2016) 6 (quoting Aydin Corp. v. First State Ins. Co., 18 Cal. 4th 1183, 1188 (1998). Based upon the 7 evidence presented at trial the court concludes that plaintiff did not meet its burden of 8 demonstrating that a theft occurred. In order to demonstrate a theft occurred, plaintiff bore the 9 burden of proving Hagop had the necessary mens rea to commit a theft. Based on the evidence 10 11 presented, plaintiff simply failed to meet this burden. The evidence presented at trial tends to establish Hagop and Sona entered into a “family 12 understanding,” concocted by the family attorney, to transfer Hagop’s business assets to a 13 dormant corporation in order to avoid a potential IRS levy on those assets. This plan was 14 specifically designed by its architect to help ensure Hagop’s business would continue to be a 15 functioning entity following his release from prison. The testimony from Hagop’s attorney, 16 which the court found to be credible, was that Hagop had a subjective expectation the business 17 would ultimately be returned to him, following the service of his prison term. Hagop too testified 18 at trial to this understanding and, at least on this point, the court found his testimony to be 19 credible. Hagop also believed Pacific Marine Center was ultimately his business, regardless of 20 the current corporate structure of that business. This subjective belief alone, which the court finds 21 to be credible, would likely be sufficient to require that judgment be entered in favor of 22 defendant. See Romo, 220 Cal. App. 3d at 518 (“An unreasonable belief that [an alleged thief] 23 had a legal right to take another’s property will suffice so long as he can establish his claim was 24 made in good faith.”). Nevertheless, there was additional evidence introduced at trial that 25 convinces this court no theft occurred here. 26 The evidence at trial established that Hagop acted toward the property in question as one 27 would act toward property to which they believed they had a rightful claim. As noted above, 28 shortly after removing the boats from the neighboring property, he sent his sister a letter through 17 1 counsel stating that he had repossessed the boats. Hagop also provided an inventory of the boats 2 and other items removed from the neighboring premises in an attachment to the letter to his sister. 3 Further, Hagop contacted the insurance agent, Ms. Barajas, to discuss the insurance coverage on 4 the building, and advised her he had taken over the business. He also contacted the DMV 5 himself, seeking to have titles re-issued for any boats he had taken possession of for which Sona 6 had retained possession of the titles. All of these actions are consistent with a conclusion that 7 Hagop had a good faith claim of right to the business assets of Pacific Marine Center.13 Besides Hagop’s belief and attorney Nast’s persuasive testimony that the transaction was 8 9 carried out pursuant to a “family understanding” that the business would be eventually be 10 returned to Hagop, the parties to this agreement did not act as one would toward a normal, arms- 11 length business transaction. This further supports the court’s decision that no theft occurred here. 12 First, Sona executed the final purchase agreement for the business assets on behalf of Hagop 13 using his power of attorney and for Pacific Marine Center as its principal. Such obvious self- 14 dealing is inherently suspicious, but not nearly so odd as Sona’s subsequent execution of a 15 promissory note reconciling various undocumented “loans” she made to her brother, again using 16 his power of attorney to execute that note on his behalf, and secured by his interest in the original 17 Pacific Marine Center note. Additionally, Pacific Marine Center continued to pay Hagop 18 throughout his time in prison and following his release from custody and return to the business. 19 These payments were on an irregular and varied basis, and much more closely match the regular 20 profits from each sale that an owner of a closely-held corporation could expect to receive than 21 they do payments on a loan as suggested by Sona. Though the agreement between the parties 22 called only for approximately $7,000 to be paid to Hagop per month, the funds provided him 23 were frequently many times that each month. 24 The transfer of significant funds to Hagop in this haphazard and splintered manner 25 strongly suggests that Hagop, in fact, continued to run the business as though it were his own. 26 Though the only purpose of selling the assets to a corporate entity pursuant to the “family 27 28 13 The court also notes that Pacific Marine Center remains an active business many years later, still under the management of Hagop, despite a conversion judgment in favor of Sona. 18 1 understanding” was to limit the likelihood and impact of a levy from the IRS on the business, no 2 evidence was introduced that the IRS ever did levy on Hagop’s assets in Pacific Marine Center. 3 In the absence of such a levy, Pacific Marine Center could continue to pay Hagop all the normal 4 profits he would have earned from running his business. It appears the plaintiff here did exactly 5 that. Evidence was presented at trial that Hagop continued to work for Pacific Marine Center 6 after his release from prison up until his business relationship with Sona soured completely. The 7 court finds this evidence of Hagop’s continued involvement in the operation of the business to be 8 credible. All of this reinforces the conclusion that there was at least a good faith claim on 9 Hagop’s part that Pacific Marine Center was his business. 10 Additionally, in the aftermath Sona herself did not act as one would be expected to act 11 toward a theft. Indeed, she treated it as though Hagop had a good faith claim of right to the 12 property in question. Rather than calling the police after her brother allegedly assaulted her and 13 stole the better part of $1 million dollars in assets from her, she renegotiated her insurance 14 coverage, filed a lawsuit against her brother, and entered into settlement negotiations in relation 15 to the allegedly stolen business assets. Sona did not advise the insurance company any theft had 16 occurred until approximately eight months had passed, at which point efforts to settle the dispute 17 between her and her brother had begun to falter. Though Sona testified at trial that she reported 18 the theft to the DMV, the court infers that the report to DMV was more likely done to consternate 19 her brother and escalate the conflict between them rather than as an actual effort to seek an 20 investigation of a theft, which the DMV at any rate apparently never conducted.14 21 In sum, the court concludes that plaintiff has not met its burden to prove a theft occurred. 22 Plaintiff did not introduce sufficient evidence at trial to demonstrate Hagop lacked a good faith 23 claim of right to the possession of the property allegedly stolen. Lacking proof of Hagop’s 24 felonious intent, this loss of property is not covered as a theft under the insurance policy. 25 Therefore, defendant did not breach its insurance contract with plaintiff by failing to pay 26 27 28 14 It can also reasonably be inferred from the lack of evidence of a DMV investigation that DMV authorities also did not view what had allegedly occurred as a theft but rather as a dispute between sister and brother who were involved in business with one another. 19 1 plaintiff’s claim for the allegedly stolen property. 2 2. 3 Additionally, the court finds in the alternative that, even if a theft had occurred, coverage 4 would be barred by the exclusions contained in the parties’ insurance contract. Concerning these 5 exclusions, the contract states: 6 We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. 7 8 ... 9 h. 10 11 12 The Exclusions Would Bar Coverage Even if a Theft Had Occurred Dishonest or criminal act by you, any of your partners, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose. (Parties’ Joint Ex. JX-1 at 66–68) (emphasis added).15 13 The parties dispute whether Hagop was either an authorized representative of plaintiff, or 14 whether he was entrusted with Pacific Marine Center’s boat inventory. If either is true, coverage 15 was appropriately denied under the above exclusion. The insurance contract does not specifically 16 define either the phrase “authorized representatives” or the word “entrust.” Plaintiff argues the 17 term “entrust” means “to deliver to (another) something in trust.” (Doc. No. 160 at 28–29) (citing 18 Freedman v. Queen Ins. Co., 56 Cal. 2d 454, 457–58 (1961)). Though plaintiff’s trial brief 19 spends many pages seeking to distinguish the court decisions upon which defendant relies, 20 plaintiff has proffered no definition for the term “authorized representatives” as it is used in the 21 policy. (Doc. No. 160 at 30–35.) While not providing a definition of the term “entrust,” 22 defendant argues an authorized representative is one “who has been given access to and permitted 23 to handle the insured’s funds, and generally is ‘in essence, those whom the insured empower to 24 act on its behalf.’” (Doc. No. 158 at 7–8 (citing Stanford Univ. Hosp. v. Federal Ins. Co., 174 25 F.3d 1077, 1085 (9th Cir. 1999)).) Predominantly, plaintiff’s argument here is that, regardless of 26 whether Hagop was ever entrusted with the property or was an authorized representative of the 27 28 15 These page numbers reflect the court’s count of the pages contained within this voluminous exhibit which were not numbered. 20 1 company, he was not so entrusted or authorized at the time of the alleged theft. (Doc. No. 160 at 2 28–35.) Plaintiff’s argument is unpersuasive. 3 The court finds neither of these terms ambiguous. Similar to plaintiff’s construction, to 4 “entrust” property to another means to “deliver something to (another).” Webster’s Third New 5 International Dictionary (Philip Babcock Gove ed. 2002), at 759 (hereinafter “Webster’s”). To 6 “authorize” is “to endorse, empower, justify, or permit by or as if by some recognized or proper 7 authority.” Webster’s at 146–47. A representative, meanwhile, is defined as “one that represents 8 another as agent, deputy, substitute, or delegate usually being invested with the authority of the 9 principal,” or “one that represents a business organization: salesman.” Webster’s at 1926–27. 10 Therefore, “anyone to whom you entrust the property for any purpose” means anyone to whom 11 property is delivered for any reason. An “authorized representative” is simply one who has been 12 permitted to represent a business. 13 Under California law, the insurer bears the burden of proving that an exclusion under the 14 policy applies. Aydin Corp. v. First State Insurance Co., 18 Cal. 4th 1183, 1189-90 (1998); 15 Mable Bridge Funding Group Inc. v. Euler Hermes American Credit Indemnity Co., Case No. 16 5:12-cv-02729, 2016 WL 7034050, at *7 (N.D. Cal. Dec. 2, 2016) (citing Gray v. Zurich Ins. Co., 17 65 Cal.2d 263, 274 (1966)). It is clear in this case that defendant has met that burden by 18 demonstrating that Hagop was both an authorized representative of plaintiff and was entrusted 19 with its property. The evidence presented at trial established that Hagop had access to both 20 properties on which plaintiff’s business was located, including keys to the buildings. It also 21 demonstrated that Hagop conducted business on behalf of Pacific Marine Center, including 22 attending auctions to purchase boats, communicating with customers concerning boat sales, 23 selling boats at the Pacific Marine Center location, signing checks on behalf of Pacific Marine 24 Center, and apparently receiving payments from the business’s profits on a regular basis. 25 Sona’s contrary explanations regarding this conduct ring hollow to the court. Her 26 testimony that her brother, Hagop, was never authorized to conduct business on behalf of Pacific 27 Marine Center, stole checks, broke into her office, changed the locks without her permission, and 28 was actually completely uninvolved in the business of Pacific Marine Center are simply not 21 1 credible. Sona herself testified previously at Hagop’s deportation hearing in April 2009 that her 2 brother was the only one who could manage the Pacific Marine Center business. She also 3 repeatedly filled out paperwork for her brother’s supervising probation officer depicting Hagop as 4 working on behalf of Pacific Marine Center. These various contradicting testimony and 5 statements undercut Sona’s credibility as a witness. Further, Sona’s posting of a notice at the 6 business that employees hired by Hagop did not work for Pacific Marine Center would be a 7 surprising act if Hagop had actually had no involvement in the business between November 2007 8 and July 2010, since one would not typically need to advise their employees that an outsider 9 completely uninvolved in the operations of a business is, in fact, not involved in the operations of 10 11 that business. Of course, the court does not find Hagop’s trial testimony entirely credible either. For 12 instance, the court does not believe Hagop’s testimony that he received no money in exchange for 13 his work selling boats on behalf of Pacific Marine Center. Rather, as the court has already 14 indicated, the payment records appear to correspond to the regular withdrawals an owner might 15 take from the profits of his closed corporation generated through sales. Serious doubts about the 16 veracity of both Hagop and Sona’s testimony aside, it is clear to the court that Hagop had access 17 to the boat inventory in this case, was empowered to act and did act on behalf of Pacific Marine 18 Center, and represented the company in many of its dealings. This leads directly to the inevitable 19 conclusion that Hagop was entrusted with the property, and was an authorized representative of 20 Pacific Marine Center. As such, any alleged theft committed by him was, by the terms of the 21 insurance policy, excluded from coverage. Therefore, there was no breach of the parties’ 22 insurance contract by the defendant. 23 3. Breach of the Covenant of Good Faith and Fair Dealing 24 As the court noted in its prior order denying the parties’ cross motions for summary 25 judgment, any tort action for the breach of the covenant of good faith and fair dealing is 26 predicated upon a finding of a breach of contract. (Doc. No. 134.) An insurer may always 27 “simply deny the request and take its chance that the trier of fact in an action alleging bad faith 28 breach of the contractual duty to defend will agree that no defense was owed.” Eigner v. 22 1 Worthington, 57 Cal. App. 4th 188, 195–96 (1997); see also Avery Dennison Corp. v. Allendale 2 Mut. Ins. Co., 310 F.3d 1114, 1117 (9th Cir. 2002) (“Except perhaps in highly extraordinary 3 circumstances, California does not permit recovery on a bad faith claim unless insurance benefits 4 are due under the policy.”). Since the court has determined there was no breach of contract by 5 defendant here, there is likewise no breach of the covenant of good faith and fair dealing. 6 CONCLUSION 7 Given the above findings of fact and conclusions of law, the court determines the 8 insurance contract at issue here was not breached and judgment must be entered in favor of the 9 defendant. This order constitutes the findings and conclusions required by Rule 52(a) of the 10 Federal Rules of Civil Procedure. The Clerk of Court is directed to enter judgment in favor of 11 defendant on all of plaintiff’s claims in accordance with Federal Rule of Civil Procedure 58(b) 12 and to close this case.16 13 IT IS SO ORDERED. 14 Dated: March 30, 2017 UNITED STATES DISTRICT JUDGE 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 The parties are referred to the Federal Rules of Civil Procedure and the Federal Rules of Appellate Procedure with respect to the time in which to file any post-trial motions or notices of appeal. 23

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