Pac. Marine Ctr., Inc. v. Phila. Indem. Ins. Co.

• Decision Date: 30 March 2017
• Docket Number: No. 1:13-cv-00992-DAD-SKO.,1:13-cv-00992-DAD-SKO.
• Parties: PACIFIC MARINE CENTER, INC., Plaintiff, v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of California

248 F.Supp.3d 984

PACIFIC MARINE CENTER, INC., Plaintiff,

v.PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.

No. 1:13-cv-00992-DAD-SKO.

United States District Court, E.D. California.

Signed March 30, 2017

Filed March 31, 2017

Jeff Reich, Reich Law Firm, Fresno, CA, for Plaintiff.

Stacey D. Chau, William S. Kronenberg, Kronenberg Law, P.C., Oakland, CA, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Dale A. Drozd, UNITED STATES DISTRICT JUDGE

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 Vartanian² 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 Sona³ 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...