Key Decisions

November 2012- One Who Endorses A Check Can Be Liable

(filed under: Key Decisions Archive | November 20, 2012)

One Who Endorses A Check Can Be Liable For Conversion Regardless Of Whether He Knows Of An Equitable Lien Or Even Receives The Proceeds

Los Angeles Federal Credit Union v. Madatyan
(Cal. Ct. of App., 2d Dist.), filed October 11, 2012

KEY FACTS

The Los Angeles Federal Credit Union financed Areg Khachikian’s $136,126 purchase of a 2000 Bentley.  The loan agreement provided that the car was collateral for the loan and required Khachikian to maintain insurance for the car with the Credit Union as an additional insured.  However, Khachikian failed to name the Credit Union as an additional insured on the Allstate insurance policy that covered the vehicle.

After an accident damaged the Bentley, Khachikian took his car to an auto body shop to get a repair estimate.  Elvis Madatyan owned, and Edgar Madatyan managed, the shop.  Allstate Insurance Company sent Khachikian a $39,697.35 check to cover the damage, naming Khachikian and the shop as payees, but not the Credit Union.

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

Khachikian cashed the check, but did not have the Bentley repaired.  He paid nothing to the shop.  He also stopped paying on the loan.  He later filed bankruptcy.

The credit union sued the only solvent potential defendants, the shop and the Madatyans.  The trial court found that by assisting Khachikian in negotiating the insurance check, defendants “interfered with the [Credit Union’s] right” and therefore were liable for conversion.

HOLDING & REASONING

The Court of Appeal affirmed.  It rejected the defendants’ contention that they could not have converted the Credit Union’s property because they did not receive and were never in control of the proceeds of the insurance check.  It also rejected their contentions a check cannot be converted solely by the act of endorsing it, the Credit Union had no interest in the check as the check was made payable to the shop and Khachikian, and did not know of the Credit Union’s existence.

Conversion is the wrongful exercise of dominion over the property of another.  The elements of a conversion claim are:  (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.  Conversion is a strict liability tort.  The defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial.

A lender has an equitable lien against insurance proceeds when its loan agreement calls for it to be named as an insured.  As such the Credit Union had an interest in the insurance proceeds.

By endorsing the draft, the defendants interfered with the Credit Union’s interest in the proceeds.

ANALYSIS

While the result is welcomed by lenders, the court’s decision raises several interesting issues.

The court relied on the case of McCafferty v. Gilbank, 249 Cal.App.2d 569, (1967), for the proposition that endorsing a check can constitute conversion.  However, there, the endorser knew of the lien on the proceeds.

Because equitable liens can arise in many circumstances, under the Court’s ruling, anyone who either signs off on a check or receives a check in payment of something can be liable for conversion to an unknown lien holder.  Here, the shop appreantly gave an estimate, but never actually worked on the Bentley.  Would it still be liable if it had repaired the car and received the check proceeds in payment?  Of course, if the Bentley had been repaired the lender’s security interest would not have been impaired.

Additionally, the opinion does not directly address how the shop’s conduct was a cause of the Credit Union’s damage.  Allstate put the shop’s name on the check only because it understood the shop was doing the work and would claim a lien.  The shop had no right to the proceeds unless it actually did the work.  Arguably, Khachikian’s decision to take insurance money without authorizing repairs was the sole cause of harm to the credit union (along with the failure to identify the credit union as a loss payee on the insurance policy).