Judge: Armen Tamzarian, Case: 22STCV19089, Date: 2023-01-10 Tentative Ruling

Case Number: 22STCV19089    Hearing Date: January 10, 2023    Dept: 52

Plaintiffs HAPI Foundation and Strategic Realty Holdings, LLC’s Motion for Appointment of a Receiver

Plaintiffs HAPI Foundation (HAPI) and Strategic Realty Holdings, LLC move to appoint a receiver to sell nominal defendant Normandie Lofts Ktown, LLC’s (Normandie) real property located at 167 S. Normandie Ave., Los Angeles, CA 90004. 

Background

            In June 2022, plaintiffs filed this action against defendant KB Vision Foundation (KB) for judicial dissolution of Normandie Lofts Ktown, LLC, the nominal defendant. 

Normandie has three members: HAPI, Strategic Realty Holdings, and KB.  Normandie has one asset: the subject property at 167 S. Normandie Ave. in Los Angeles.  Normandie owes millions of dollars on two outstanding loans: $3.2 million (plus interest) on an unsecured loan from defendant KB (Lorin Decl., ¶ 7) and about $7.55 million (plus interest) on a loan from non-party Rose Community Capital, which was later assigned to non-party Impact Mortgage Opportunities Fund, and which is secured by the subject property (Lorin Decl., ¶ 6).

Under Normandie’s LLC agreement, its real property can only be sold or refinanced with the consent of all three members.  In July 2022, a non-party offered to purchase the property from Normandie for $8.2 million.  (Lorin Decl., ¶ 10, Ex. C.)  KB did not consent to the sale.  (Lorin Decl., ¶ 10.)  The loan assigned to Impact Mortgage matured in August 2022, and Normandie defaulted.  (Lorin Decl., ¶ 12.)  Impact Mortgage issued a notice of default on August 17, 2022.  (Lorin Decl., ¶ 13, Ex. D.) 

Legal Standard

Courts may appoint a receiver: (1) “In an action… between partners or others jointly owning or interested in any property… where it is shown that the property or fund is in danger of being lost, removed, or materially injured”; (6) “Where a corporation is insolvent, or in imminent danger of insolvency …”; or (9) “In all other cases where necessary to preserve the property or rights of any party.”  (Code Civ. Proc., § 564, subd. (b).)  “The receiver is the agent of the court and not of any party, and as such: (1) Is neutral; (2) Acts for the benefit of all who may have an interest in the receivership property; and (3) Holds assets for the court and not for the plaintiff or the defendant.”  (Cal. Rules of Court, rule 3.1179(a).) 

“Ordinarily, if there is any other remedy, less severe in its results, which will adequately protect the rights of the parties, a court should not take property out of the hands of its owners.”  (Golden State Glass Corp. v. Superior Court of Los Angeles County (1939) 13 Cal.2d 384, 393.)  However, “the availability of other remedies does not, in and of itself, preclude the use of a receivership.  [Citation.]  Rather, a trial court must consider the availability and efficacy of other remedies in determining whether to employ the extraordinary remedy of a receivership.”  (City and County of San Francisco v. Daley (1993) 16 Cal.App.4th 734, 745.)

Prior Motion to Appoint Receiver

Plaintiffs first moved to appoint a receiver in September 2022.  On November 9, 2022, the court denied the motion without prejudice.  The court stated:

[Plaintiffs’] evidence suffices to show that nonjudicial foreclosure will likely begin soon.  Plaintiffs submitted the declaration of Edward Lorin, which states “the chances of the Property being sold at as much as $8.2 million or the amount necessary to fully satisfy the balance on the Loan are much less if the Property is sold via a foreclosure sale.  Conversely, if the Property can be sold, through a receivership or otherwise, then this irreparable injury will be minimized, if not avoided entirely.”  [Citation.] Defendants offer no evidence (or argument) that sale at nonjudicial foreclosure is likely to result in the same price as sale by a receiver. An impending sale against Normandie’s will, which is likely to result in a lower sale price, establishes that the property “is in danger of being lost, removed, or materially injured.” (CCP § 564(b)(1).)

(Nov. 9 Minute Order, p. 3.)  The court, however, denied the motion because plaintiffs had “not established that the drastic remedy of receivership is necessary.”  (Ibid.) 

Analysis

The evidence since the court denied the prior motion has changed in one key respect: the alternatives have failed.  Months have passed, and the parties attended a mediation.  They still have found no solution.  The record shows no available and effective remedies other than receivership.  In similar circumstances, the Court of Appeal stated, “The acrimony and divisiveness created by these two factions in marketing and selling real estate by utilizing” an alternative to receivership “was sufficient to justify the appointment of a receiver.”  (Gold v. Gold (2003) 114 Cal.App.4th 791, 809.)

KB’s CEO and founder, Dr. Renee Kaswan, states she has met or corresponded with two real estate firms about obtaining a Federal Housing Administration loan for Normandie.  (Kaswan Decl., ¶ 30.)  Kaswan states, “Discussions with” the two firms “are ongoing.”  (Id., ¶ 31.)  This evidence does not suffice to show FHA funding is a feasible alternative.  That remains speculative. 

            Aside from suggesting alternatives to receivership, KB makes one chief argument: plaintiffs’ motion improperly attempts to protect non-party Edward Lorin from his personal liability on the loan from Rose.  Defendant argues that, because Lorin is not a party, his interest cannot support appointing a receiver under Code of Civil Procedure section 564.  Defendant, however, overlooks what exactly the receivership property would be and whose interests the receiver would protect.  As plaintiffs’ proposed order indicates, they move to appoint a receiver not just to control the real property at 167 S. Normandie Ave, but to control the entirety of Normandie Lofts KTown, LLC.  They propose appointing a receiver “to take possession, custody and control of Normandie Lofts KTown, LLC and, in particular,” that real property.  (Prop. Order, p. 2, ¶ 1.) 

This case is an action between entities “jointly owning or interested in any property or fund.”  (Code Civ. Proc., § 564(b)(1).)  That property or fund is Normandie Lofts KTown, LLC.  The parties’ interests in the subject property derive from their interests in the LLC. 

Plaintiffs provide sufficient evidence that the LLC “is in danger of being… materially injured.”  (Code Civ. Proc., § 564(b)(1).)  It is undisputed that the LLC’s liabilities far exceed its assets.  Moreover, as the court noted in its order on November 9, 2022, the loan from Impact Mortgage “continues to accrue over $2,000 in interest each day.”  (Nov. 9, 2022 Minute Order, p. 4.)  But, because KB refuses to consent to a sale and the parties have found no other solution, the real property could soon be sold in a foreclosure sale instead of a market sale.  A market sale would maximize the proceeds from selling the LLC’s sole asset.  The harm to Normandie keeps growing.  Selling the property sooner than later would help to minimize the harm to Normandie.  Doing so would also serve the parties, Normandie’s members. 

Appointing a receiver to take possession of the LLC with the power to sell the property may benefit Lorin—but only incidentally to its primary purpose of benefiting the LLC and the parties.  Even if appointing a receiver incidentally benefits Lorin more than it benefits KB, it also benefits KB.  It is not fair to harm all parties to avoid benefiting someone else. 

Furthermore, appointing a receiver with the power to sell real property does not give the receiver sole discretion to do so.  A receiver’s sale of property in his or her possession must be “pursuant to an order of the court” after giving required notice.  (Code Civ. Proc., § 568.5.)  “The sale is not final until confirmed by the court.”  (Ibid.)  To justify selling property, the receiver must show both that selling is necessary and that it is necessary when the receiver proposes instead of later.  (Cal-American Income Property Fund VII v. Brown Development Corp. (1982) 138 Cal.App.3d 268, 275 & fn. 7.) 

The receiver appointed may find a way to protect the LLC without selling its real property.  The receiver could agree with KB that the best way to do so is not by selling now, but instead by compelling Edward Lorin (due to his personal guarantee) to pay Normandie’s debt to Impact Mortgage.

Disposition

            Plaintiffs’ motion to appoint a receiver is granted.  The parties are ordered to meet and confer no later than January 17 regarding (a) whom to appoint as receiver and (b) the exact language of the court’s order appointing a receiver.  The parties shall submit a joint status report or a stipulated proposed order to the court no later than January 23.