Business Law Journal

In Passport 420, LLC v. Starr Indemnity & Liability Co. (Cal.App.2d, Oct. 1, 2026, No. B343113) 2026 WL 2948480 (“Passport”), a California Court of Appeal recently considered a situation involving an insurance carrier’s rescission of an aircraft insurance policy due to the policyholder’s failure to disclose that a portion of the funds used to purchase the aircraft had been embezzled. In Passport, the Court analyzed California’s statutory framework concerning the process of negotiating insurance contracts and held that when an applicant for insurance fails to disclose known facts which are material to the insurance contract, an insurer may rescind the contract when it ultimately discovers the truth - even if the insurer never inquired about those facts prior to issuing the contract.

The facts involved in the underlying civil action date back to 2016, when William Parrish—a successful engineer, businessman, and licensed pilot—hired Michael Avenatti as his attorney. At Avenatti’s suggestion, the two decided to purchase a private jet together and prepared an operating agreement creating Passport 420, LLC (the “Company”), which was comprised of two members – Avenatti’s law firm, Avenatti & Associates APC (“A&A”), and a separate limited liability company controlled by Parrish, Spring Creek Research LLC (“Spring Creek”). The Company’s operating agreement contained certain provisions which, in pertinent part, provided that the Company’s Manager had “full and complete authority, power and discretion to manage and control the affairs of the Company, to make all decisions regarding such matters, and to perform any and all other acts and activities customary or incident to the Company’s purpose.” The operating agreement further provided that the Company would be bound by any and all actions of the Manager “taken in accordance with” the operating agreement. Avenatti was appointed as the Company’s first Manager, and no formal elections for that position were held at any point thereafter.

The operating agreement was executed in July 2016, and the Company took delivery of the purchased aircraft in January 2017. The Company subsequently hired Christopher Ohman to pilot and manage the maintenance of the aircraft. Ohman also completed the Company’s application for an aircraft insurance contract from Starr Indemnity & Liability Company (“Starr”). The application requested myriad information including, among other things, aircraft identification and maintenance arrangements, pilot qualifications, and any liens or loans secured by the aircraft. The application did not request information regarding the source(s) of the funds used to purchase the aircraft nor the financial conditions of the Company and/or its members, and Starr made no inquiry concerning any such information during the underwriting process.

Starr ultimately issued the aircraft insurance contract to the Company, which carried a one-year term period and had an effective date of January 26, 2017. Most notably, the contract contained a “War Risk” endorsement stating that Starr would pay for the “physical loss” of the aircraft caused by, “…seizure… by, or under the order of any government, public or local authority, whether civil, military or de facto[.]”

By early 2018, the relationship between Parrish and Avenatti had significantly deteriorated; Avenatti had stopped paying the Company’s bills and Ohman had resigned as the Company’s pilot. Parrish eventually took over managerial duties and started paying the Company’s bills, but Avenatti refused to acknowledge Parrish’s assumption of his managerial duties and/or formally appoint Parrish as the Company’s Manager in writing. Around February 2019, Parrish applied to renew the Company’s aircraft insurance policy with Starr for another one-year term. The application was signed by Parrish on the Company’s behalf and had inserted Parrish’s information in place of Avenatti.

Avenatti was indicted for wire and bank fraud on April 10, 2019, and the United States Treasury Department seized the Company’s jet the same day. As it turns out, the $2 million A&A contributed to purchase the Company’s jet had been embezzled by Avenatti from one of his other clients. Approximately two weeks later, Parrish submitted an insurance claim to Starr seeking to recover the $4 million insured value of the jet less the $10,000 deductible (for a total of $3,990,000), which Parrish requested be paid to him individually rather than to the Company. Starr eventually sent the Company a reservation of rights (“ROR”) letter advising that it was declining to pay the claim until it had completed its investigation, and the Company commenced its civil suit against Starr approximately two weeks later, alleging causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing.

Two months after Avenatti’s criminal case concluded with his conviction, Starr denied the Company’s claim and purported to rescind the aircraft insurance policy. Relying on the evidence of Avenatti’s crimes, Starr’s stated reasoning for denying the claim was (among other purported policy exclusions and conditions) that the Company had concealed material facts—i.e., that the aircraft was purchased using stolen funds—from Starr during the underwriting process. At the close of the Company’s case, Starr moved for judgment on the grounds that the Company’s concealment of Avenatti’s embezzlement entitled it to rescind the policy. The trial court denied the motion, and the jury subsequently found in favor of the Company, awarding it: (i) $3,990,000 for Starr’s breach of the insurance policy; (ii) $1,048,331.51 in prejudgment interest; (iii) $1,417,068.27 in attorney’s fees; (iv) $125,971.01 in costs and (v) $15 million in punitive damages.

On appeal, the Court in Passport held that the trial court erred when it denied Starr’s motion for judgment based on its equitable rescission claim. Noting the dispute to be a “classic case of concealment,” the Court relied upon the applicable provisions of the Insurance Code concerning an insurance applicant’s disclosure obligations to support its finding that Passport failed to disclose the material fact that a portion of the funds used to purchase the aircraft had been embezzled by Avenatti, thereby increasing the risk the aircraft would be seized by the government and entitling Starr to rescind the policy once it discovered that material fact. Because the rescission issue was dispositive, the Court did not reach Starr’s remaining contentions, including its policy-exclusion defenses, the challenge to the bad-faith finding, or its attacks on the attorney’s fees and punitive damages awards.

In reaching its finding, the Court pointed to the testimony given by Starr’s underwriter and his supervisor during the underlying civil trial that the use of embezzled funds in the Company’s aircraft purchase was a material fact, and that Starr would not have issued the policy had it known the truth. It did not matter that Starr failed to inquire as to the source of the Company’s aircraft purchase funds and/or any other aspect of the Company’s finances during the underwriting process; rather, the Court read §§ 332, 334 and 336 of the Insurance Code together to provide the materiality of a concealed fact does not depend on the insurer’s inquiry or the reasonableness of any investigation it conducts. Instead, the Court held that an insurance applicant’s affirmative duty to disclose all known material facts to an insurer under § 332 relieves the insurer of any duty to inquire about a particular material fact unless (i) that fact is distinctly implied from other revealed facts or (ii) the insurer has actual knowledge that certain facts disclosed in an application were untrue. As succinctly stated by the Court, “the question is not whether Starr asked about the source of [the Company’s] funds. The question is whether its underwriting decision would have been different had [the Company] disclosed the true facts.” Answering this question in the affirmative, the Court held, as a matter of law, that “no reasonable insurer would insure property against government seizure if it knew the property was acquired with embezzled funds.”

Finally, the Court held that, under California’s general agency laws, Avenatti’s knowledge of the concealed material fact (i.e., that he contributed embezzled funds used to purchase the aircraft) must be imputed to the Company as its Manager at the time. The Court also found that the “malevolent agent exception” to the general imputation rule—under which neither a “malevolent” or “rogue” agent’s actions (that are hostile to the principal) nor the agent’s knowledge of his misdeeds are imputed to his principal—did not apply. Unlike the circumstances involved in other cases where the “malevolent agent exception” applied due to a “rogue” agent’s hostile actions, the Court in Passport found Avenatti’s actions benefitted the Company (at least initially) because the embezzled funds allowed the Company to complete its jet purchase. Although the Court (in a footnote) clarified that it viewed Parrish and the Company as “victims” of Avenatti, it refused the apply the “malevolent agent exception” because: (i) Avenatti embezzled his client’s money after he became the Company’s manager; (ii) Avenatti was acting as the Company’s agent when he contributed the embezzled funds to purchase the Company’s aircraft; (iii) the purchase was made by the Company using embezzled funds for the Company’s unknowing benefit, not by Avenatti as an individual for his own purposes; and (iv) Avenatti was acting as the Company’s manager and in its interest when the Company obtained the Starr insurance policy.

Because nothing in the record suggested that Starr was not dealing with the Company in good faith when it issued the aircraft insurance policy, the Court found that Avenatti’s concealment of his crimes must be imputed to the Company. Accordingly, Starr was entitled to rescind that policy when it discovered the truth of that concealed material fact.

In sum, the Court’s decision in Passport highlights the imbalance of the respective obligations and duties owed by insurance applicants and insurers during the insurance application negotiation process, and underscores the importance for individuals and/or companies to conduct thorough due diligence when entering into business with others. 

For a thorough review of the potential risks and obligations owed by you and/or your company under a contract, please contact the authors or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

© 2026 Atkinson, Andelson, Loya, Ruud & Romo

California’s Fourth District Court of Appeal recently addressed an important statute of limitations issue for lenders and borrowers, holding that a qualifying partial payment made before the limitations period expires can restart the clock on a promissory note even when the payment is made by a third party on the debtor’s behalf.  Thus, the factfinder must decide whether the payments had that effect rather than disposing of the case on summary judgment.

 Procedural History

 MLA Capital and the Alvarezes sued Linda for breach of the promissory notes and common counts. Linda moved for summary judgment or, in the alternative, summary adjudication, contending that the claims were barred by the applicable statutes of limitations.

The trial court granted summary judgment without identifying the limitations period applicable to each cause of action. The trial court concluded that because Linda neither knew of nor directed the entity that made the payments, no triable issue of material fact existed as to whether those payments tolled or restarted the limitations periods. The Court of Appeal reversed, holding that triable issues precluded summary judgment, and directed the trial court to enter a new order denying Linda’s motion and the case must proceed to further litigation.

Facts

Charles and Linda Keagle borrowed $250,000 from MLA Capital in 2007 and $200,000 from the Alvarezes in 2008 to finance a restaurant venture in Corona. They failed to make payments or repay either loan upon maturity in 2012 or 2013. MLA Capital and the Alvarezes did not accelerate the Promissory Notes and did not sue the Keagles.

In 2016, Charles explained to MLA Capital that the Keagles incurred legal expenses unrelated to the Promissory Notes and were required to make settlement payments to their former business partner. Charles proposed making payments starting December 2018.

Beginning in August 2018, C&C Organization, a company related to the Keagles’ restaurant businesses, began making monthly payments to both lenders and continued doing so through March 2020, notwithstanding Charles’s death in September 2019.  One such payment, a check signed by Charles, included the notation “Note principal reduction.”

MLA Capital and the Alvarezes sued Linda in February 2022, after C&C Organization stopped making payments, and she failed to satisfy the outstanding indebtedness.

Holding

 The Court of Appeal held that MLA Capital’s and the Alvarezes’ claims were governed by the six-year statute of limitations under California Uniform Commercial Code section 3118, rather than the general four-year period applicable to written contracts under Code of Civil Procedure section 337, because section 3118 specifically governs actions to enforce notes payable at a definite time.

The Court also held that Code of Civil Procedure section 360 applies to claims governed by Commercial Code section 3118, finding that a qualifying partial payment made before the limitations period expires can restart the limitations period.

Analysis

The Six Year Statute of Limitation applied here

The Court of Appeal identified and analyzed each applicable statute of limitation to plaintiffs’ causes of action and found that the six-year statute of limitations set forth in California Uniform Commercial Code section 3118 (a) controlled because it was more recent and more specific to the facts here.

The Court further held that the same six-year period applied to the causes of action for common counts because the common counts claims were derivative of the plaintiffs’ claim for breach of the promissory notes.

Partial payments can restart the clock regardless of who makes the payments

Plaintiffs argued that partial payments by C&C Organization restarted the statute of limitation period. The Court agreed. Under Code of Civil Procedure section 360, a qualifying partial payment of principal or interest on a promissory note can constitute an acknowledgment of the debt and start a new limitations period. The Court rejected Linda’s argument that a separate signed writing was required.

Most importantly, the Court rejected Linda’s argument that the payment must be made personally by the debtor. Under California law, Code of Civil Procedure section 360 may apply where payment is made by a third-party agent authorized to act on the debtor’s behalf.

Because C&C Organization’s payments continued through March 2020, the Court concluded that, if ultimately proven to be authorized partial payments, they could have restarted the six-year limitations period.

Key Takeaways

 The decision is relevant for lenders, borrowers, and title professionals handling distressed real estate debt.

• The expiration of the statute of limitation may not be determined simply by looking at the maturity date of the note.  Partial payments made before the expiration may restart the clock.
• Lenders should not assume that an old note is time-barred without reviewing the payment history.
• Any payments made by the borrower, whether directly or through a third party, may have significant consequences in connection with the statute of limitations.

If you have any legal issues relating to the payment of a loan, please contact the authors of this article or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

© 2026 Atkinson, Andelson, Loya, Ruud & Romo

In Buchheim v. Anaya (Cal.App.2d, Aug. 25, 2026, No. B339494) 2026 WL 2490938 (“Buchheim”), a California Court of Appeal recently analyzed a dispute concerning a series of financial transactions between a lender and borrower who had been working together over many years to buy and flip residential real estate. In Buchheim, the Court of Appeal held that in financial matters, unexplained statements of fervent belief lose to an objective record of fact, even on summary judgment.

Effective July 1, 2026, the California Secretary of State (CA SOS) has changed the way that businesses can file certain documents with the CA SOS.  These changes will impact any corporations and limited liability companies which use third parties such as attorneys or accountants to file their annual statements of information, as well as certain other specified documents.

Many California businesses incorporate in Delaware. It is a common, and sometimes sensible choice. But incorporating elsewhere does not let a company sidestep the protections California law provides its resident shareholders. A new decision from California’s Court of Appeal, Salamon v. Orchid Global, Inc., drives that point home — and it is required reading for anyone who owns shares in, sits on the board of, or advises a Delaware company that calls California home.

What happens when a judge issues a decision based on legal authority that does not exist?  And what happens if the party adversely affected by that phony decision was oblivious to that fact until after the order was issued?  In what feels like a sign of the times, the California Court of Appeal recently confronted an issue that would have been unthinkable a few years ago: a court order based, in part, on case law that was entirely fabricated by a computer program and no one blinked an eye—at least until it was too late.

Every insurance policy has a maximum limit on the dollar amount that the policy will pay for a covered claim.  Some policies also contain sublimits that apply to specific types of losses.  Policyholders may mistakenly believe that these sublimits are in addition to the primary coverage limits that are available under the policy.  In reality, sublimits restrict or cap the maximum dollar amount that a policy will pay for a risk that is subject to the sublimit, regardless of the total primary coverage amount listed in the policy. 

In Haun v. Pagano (Cal.App.4th, Feb. 18, 2026, No. D084385) 2026 WL 455372 (“Haun”), a California Court of Appeal recently analyzed the impact of a unilateral fee-shifting provision involving competing claims for financial elder abuse brought under the Elder Abuse and Dependent Adult Child Protection Act (codified as Welfare and Institutions Code §§ 15600, et seq.) In Haun, the Court of Appeal held that section 15657.5(a) does not bar an award of attorneys’ fees for defense work that overlaps entirely with the successful prosecution of the prevailing petitioner’s own financial elder abuse claim.

The California Court of Appeal recently affirmed a trial court’s decision to award costs to a prevailing defendant in a member derivative action, even though the derivative plaintiff defeated a bond motion under Cal. Corp. Code §17709.02 at the outset of the case. In Barrios v. Chraghchian, No. B341773, 2026 WL 145207, *1 (Cal. Ct. of Appeal, Jan. 20, 2026), the plaintiff, Mr. Barrios, was an investor in the limited liability company and brought derivative claims against the company's managers, including the named defendant, Mr. Chraghchian, alleging that under their direction the company engaged in unauthorized transactions.

Why This Case Matters: This case alters the normal rules of priority. Recorded agreements that say they are covenants or equitable servitudes can be deemed to be permit conditions that survive foreclosures of prior liens.