In re No. 97-49008 TS
Chapter 7
PEGASUS, INC.,


Debtor.
___________________________/

RICHARD J. SPEAR, TRUSTEE, A.P. No. 98-4574 AT

Plaintiff,
vs.
REGENCY INSURANCE SERVICES,
Defendant.
___________________________/A. INTRODUCTION
In this adversary proceeding, plaintiff Richard J. Spear (the “Trustee”), the trustee of the above-captioned bankruptcy estate, seeks to recover a portion of a payment made by the debtor (“Pegasus”) to defendant Regency Insurance Services (“Regency”), Pegasus’ insurance broker, in July 1996, prior to the commencement of the bankruptcy case. The payment was made to enable Regency to purchase business insurance for Pegasus. At trial, the Trustee proved that a portion of the payment was not used for that purpose but was instead diverted by Regency to its own purposes.
In his complaint, the Trustee alleged two legal theories to support his prayer for the recovery of the diverted money. First, he alleged that the money had been fraudulently transferred under section 3439 of the California Civil Code: i.e., a transfer for less than reasonably equivalent value while the debtor is insolvent or that renders the debtor insolvent. Because the transfer in question occurred more than one year before the bankruptcy petition was filed, the Trustee could not assert a fraudulent transfer claim under 11 U.S.C. § 548. See 11 U.S.C.A. § 548 (West Supp. 1998). However, section 544(b) of the Bankruptcy Code permits a trustee to avoid a fraudulent transfer under state law which has a longer statute of limitations. See 11 U.S.C.A. § 544(b) (West Supp. 1998). See Cal. Civ. Code § 3439 (West Supp. 1998). Second, he alleged that the money constituted unearned insurance premiums.
The proceeding was tried to the Court on October 29, 1998 and submitted for decision. During closing argument, the Court found that the Trustee had carried his burden of proving that the debtor had transferred money to Regency for which it had received less than reasonably equivalent value. However, the Court also found that the Trustee had failed to prove that the debtor did so at a time when the debtor was insolvent or that the debtor was rendered insolvent as a result of the transfer as required by section 3439. See Cal. Civ. Code § 3439 (West Supp. 1998).
In response to the Court’s oral ruling, the Trustee made an oral motion to amend his pleadings according to proof to assert a theory of common law fraud. Regency objected to the motion on the ground of prejudice. Regency contended that, if it had known that the Trustee was proceeding on a common law fraud theory, Regency would have conducted both its discovery and its defense at trial differently. The Court took the motion and the decision in the underlying case under submission.
Having considered the matter further, the Court concludes that it need not rule on the oral motion. While the Trustee failed to establish all the elements of his first claim for relief, he did establish all the elements of his second claim for relief. Consequently, the Court will grant judgment in favor of the Trustee on the second claim for relief in the amount of $28,536.35. The facts and law upon which this decision is based are discussed below.
B. FINDINGS OF FACT
The facts relevant to this proceeding occurred in 1996. At that time, Pegasus was in the business of salvaging ships: i.e., taking worn out military ships and turning them into scrap. In early 1996, Pegasus began employing Regency as its retail insurance broker.
On July 31, 1996, Ron Edwards (“Edwards”) and Stephen Ho (“Ho”), the principals of Pegasus, met with officials from the City of Vallejo (the “City”) to finalize arrangements for the lease of business premises from the City. The City required certain insurance as a condition of entering into the lease with Pegasus. For that reason, various principals and agents of Regency, including Mohammed Hijazi (“Hijazi”), Victor Jacinto (“Jacinto”), and Jess Dhumad (“Dhumad”), also attended the meeting. Regency gave Pegasus a written quotation for the cost of the insurance required by the City in the amount of $98,584.59 (the “July 29, 1996 Quotation”) (Plaintiff’s Exhibit 1), and Pegasus gave Regency a check for this amount (Plaintiff’s Exhibit 2).
The July 29, 1996 Quotation identifies the items comprising the total of $98,584.59 as follows:
Port risk hull & liability $ 6,835.49 (installment payment was due on 4 July)
Buildings (fire and special
perils) 2,081.25 (balance of policy premium)
Equipment (fire and special
perils) 13,000.00 (deposit to bind as of 1 August)
General & Pollution
liability 21,731.25 (deposit to bind as of 1 August)
Workers Compensation & E.L. 54,936.59 (deposit to bind as of 1 August)
__________
$98,584.59

On September 6, 1996, Regency sent a letter to Pegasus (the “September 6, 1996 Letter”) confirming the insurance for which Regency had contracted on Pegasus’s behalf and the amounts paid and to be paid for that insurance (Plaintiff’s Exhibit 36). The September 6, 1996 Letter identifies the following amounts as having been paid from the $98,584.59 check:
Port risk hull & liability $ 6,835.49 (installment payment)
Buildings (fire and special
perils) 2,081.25 (installment payment)
Equipment (fire and special
perils) 13,000.00 (deposit to bind)
General & Pollution
liability 21,731.25 (deposit)
Workers Compensation & E.L. 54,936.59 (deposit)
$98,584.59

Sometime in September 1996, Jacinto disappeared. Edward first became aware of his disappearance when he was visited by the District Attorney. As a result of his communications with the District Attorney, Edwards became concerned about the status of Pegasus’s insurance. In Jacinto’s absence, he contacted Hijazi to attempt to resolve those concerns.
Sometime in October 1996, Edwards met with Hijazi to discuss this subject. At that meeting, Hijazi showed him a document (the “Disputed Second Page”) (Defendant’s Exhibit C-2) that purported to reflect how the $98,584.59 check was to be applied. The Disputed Second Page stated that the proceeds of the $98,584.59 check would be applied as follows:
Port risk hull & liability $6,835.49 pyment due 7/4/96
Buildings 2,081.25 balance of policy premium
Equipment 10,000.00 estimated annual commissions to
Regency fully earned
3,000.00 risk mgmt and placement fee to
Victor Jacinto fully earned
General & Pollution liability 11,562.50 premium deposit
418.75 deposit on taxes and filing fees
3,750.00 estimated annual commissions to
Regency fully earned
6,000.00 risk mgmt and placement fee to
Victor Jacinto fully earned
Workers Compensation & Employers
liability 27,291.00 held deposit to Eagle pacific
18,645.60 estimated annual commissions to
Regency fully earned
9,000 risk mgmt and placement fee to Victor
Jacinto fully earned

In sum, according to the Disputed Second Page, of the $98,584.59 paid by Pegaus to Regency for the purpose of purchasing business insurance, $50,395 was to be used to pay “commissions” and “risk management fees,” and only $48,189.59 was to be used to obtain insurance coverage.
Hijazi testified at trial that the Disputed Second Page had been faxed to both Edwards and Ho on July 29, 1996, prior to the meeting with the City, as part of the July 29, 1996 Quotation. This testimony directly contradicted both Edwards’ and Ho’s testimony. As stated above, Edwards testified that he saw the July 29, 1996 Quotation for the first time at the July 31, 1996 meeting with the City and did not see the Disputed Second Page until his meeting with Hijazi in October 1996.
Ho also testified that he did not see the Disputed Second Page prior to the meeting with Hijazi in October 1996. Both Edwards and Ho testified that they never agreed to pay Regency or Jacinto either commissions or risk management fees. Both also testified that it was their understanding that Regency’s commissions would be paid by the insurer.
The Court found the testimony provided by Edwards and Ho credible and did not believe Jacinto’s testimony. To some extent, Hijazi admitted that he lacked personal knowledge of what had occurred since Jacinto was the person who primarily handled the Pegasus account until his disappearance. More important, it was simply not credible that Edwards and Ho would have agreed to pay Regency $98,584.59 for the purposes set forth on the Disputed Second Page: i.e., more than 50 percent of this sum going to pay commissions and “risk management fees.” Hijazi’s insistence that Edwards and Ho had agreed to such an absurd proposition seriously undermined his credibility on all matters.
Hijazi attempted to insulate Regency from liability for Jacinto’s conduct by testifying that Jacinto was not an employee of Regency, but merely an independent contractor. However, the documents admitted into evidence made it clear that, regardless of how Regency characterized its relationship with Jacinto, Jacinto was held out by Regency to Pegasus as its authorized agent. As a result, Regency may not disclaim liability for his conduct. Moreover, it is undisputed that the $98,584.59 check was deposited into Regency’s trust account.
The Trustee’s claim is calculated as follows: In his complaint, the Trustee sought return of the entire $98,584.59, alleging that the entire amount of the check had been diverted. In his trial brief, the Trustee conceded that a portion of the funds in question were used to purchase insurance and reduced the estate’s claim to $68,403.30 plus interest and costs. At the conclusion of the trial, the Trustee further reduced the estate’s claim to $28,536.35.
The calculation of this amount is set forth in Plaintiff’s Exhibit 51. The Trustee amended Plaintiff’s Exhibit 51 at trial to delete the last entry in the far right hand column referencing the second MOAC policy. The entry reflected the receipt by Regency back from the wholesale broker of $13,301.97. The Trustee conceded at trial that Regency did not receive these funds. As a result, the total amount paid out by Regency with respect to this policy was increased, and the amount of the Trustee’s claim decreased proportionately. This exhibit sets forth the amounts paid by or on behalf of Pegasus to Regency and the amounts paid by Regency for insurance on behalf of Pegasus. The Trustee’s claim represents the difference between these two amounts less a $10,000 partial refund paid to Pegasus by Regency in the Fall of 1996. Plaintiff’s Exhibit 51 identifies the evidentiary exhibits from which the entries on Plaintiff’s Exhibit 51 are derived.
As Plaintiff’s Exhibit 51 shows, in almost every instance, Regency quoted a higher premium for the insurance policy than the actual cost of the premium. Pegasus paid the amount of the quotation, and Regency pocketed the difference or paid it out to Jacinto or Dhumad, its “independent contractors.” In one instance--the Orion “policy”--no policy was ever purchased. The difference between the amounts paid by or on behalf of Pegasus and the amounts paid out by Regency on Pegasus’s behalf is $38,536.35. After crediting Regency for the $10,000 partial refund, the Trustee’s claim is $28,536.35.
C. CONCLUSIONS OF LAW
The Trustee’s second claim for relief described in the complaint as a claim for the return of unearned premiums. The Trustee did not discuss the legal basis for this claim or cite any authority for it in either his trial brief or closing argument. Rather, he relied initially on a fraudulent transfer theory and, when this theory failed, on common law fraud. Nevertheless, the Court concludes that the second claim for relief adequately pleads a legal claim entitling the plaintiff to a money judgment, and that the Trustee has proved the necessary elements of the claim, thereby entitling him to relief in the amount stated above.
A claim for the return of unearned insurance premiums may be characterized, most simply, as a claim for money had and received. Such a claim is well established under California law. “A cause of action is stated for money had and received if the defendant is indebted to the plaintiff in a certain sum ‘for money had and received for the use of the plaintiff.’” Schultz v. Harney, 27 Cal. App. 4th 1611, 1623 (1994), quoting Pike v. Zadig, 171 Cal. 273, 275-76 (1915). At trial, the Trustee proved that Pegasus paid a certain sum to Regency to be used for Pegasus’s purposes and that Regency did not use the sum for these purposes. Therefore, Regency is obligated to return the sum to Pegasus.
The second claim for relief may also be characterized as a claim for conversion. To prove a claim for conversion, three elements must be established:

(1) plaintiffs’ ownership or right to possession of the property at the time of conversion; (2) defendants’ conversion by a wrongful act or disposition of plaintiffs’ property rights; and (3) damages.

Tyrone Pacific International, Inc. v. MV Eurychili, 658 F.2d 664, 666 (9th Cir. 1981). The Trustee established all three elements of such a claim in the trial of this proceeding.
The money paid to Regency clearly belonged to Pegasus. Pegasus paid the money in question to Regency for the sole purpose of paying insurance premiums. Regency wrongfully disposed of the money by diverting it its own purposes. Pegasus has suffered damage as a result of the diversion by being deprived of its property. The measure of damages in a conversion action is the value of the property at the time of its conversion. See Cal. Civ. Code § 3336 (West 1997). As noted above, the net amount of the funds diverted is $28,536.35. Pegasus is entitled to interest on this amount from the date of the conversion, which for simplicity sake will be deemed to be November 19, 1996, the date on which Regency paid to a partial refund of $10,000 to Pegasus. The Court finds in favor of plaintiff in the sum of $28,536.35 plus interest from the date of conversion. Counsel for the plaintiff is directed to submit a proposed form of judgment in accordance with this decision.
Dated: December 2, 1998
_______________________________
United States Bankruptcy Judge





I, the undersigned, a regularly appointed and qualified clerk in the office of the United States Bankruptcy Court for the Northern District of California at Oakland, hereby certify:
That I, in the performance of my duties as such clerk, served a copy of the foregoing document by depositing it in the regular United States mail at Oakland, California, on the date shown below, in a sealed envelope bearing the lawful frank of the Bankruptcy Court, addressed as listed below.
I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct.
Dated: December ___, 1998



Office of the United States Trustee
Document placed in UST mailbox at
US Bankruptcy Court
1300 Clay Street, Third Floor
Oakland, CA 94612

Law Offices of A. Nick Shamiyeh
2221 Olympic Blvd., Ste. 100
Walnut Creek, CA 94595

Dennis D. Davis
Goldberg, Stinnett, Meyers & Davis
44 Montgomery St., Ste. 2900
San Francisco, CA 94104

CANB DocumentsNorthern District of California


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