Judge: Curtis A. Kin, Case: 21STCV13141, Date: 2023-05-16 Tentative Ruling

Case Number: 21STCV13141    Hearing Date: May 16, 2023    Dept: 82

            Receiver Pacific Crest Realty Advisors, LLC (“Receiver”) moves for an order to include real property commonly known as 661 W 65th Street, Los Angeles, CA 90044 (“Property” or “65^th Street Property”) in the Receivership Estate. 

Judicial Notice

Receiver’s Request for Judicial Notice (“RJN”) Exhibits 1-12 – Granted. 

Receiver’s Reply RJN Exhibits 13-14 – Granted. 

Relevant Procedural History

            On April 6, 2021, Plaintiff Sound Equity High Income Dept Fund, LLC (“Plaintiff’) filed a verified complaint against Defendants Top Flight Investments LLC, Palms Blvd Venice Beach, LLC, Doug Sanchez, and Andre Wegner for multiple causes of action for judicial foreclosure and specific performance of deed of trust, among other claims.

            On April 13, 2021, the court (Judge James Chalfant) granted in part Plaintiff’s ex parte application (“Ex Parte”) for appointment of a rents, issues, and profits receiver; OSC re: confirmation of receiver; TRO; and OSC re: preliminary injunction.  After a hearing, the court appointed Sydney Constantinescu (“Receiver”) as a rents and profits receiver for six properties.  The court set the OSC for hearing on May 25, 2021, and set a briefing schedule. 

            On April 20, 2021, after Doug Sanchez timely filed a preemptory challenge to Judge Chalfant, the matter was reassigned to Judge Mary Strobel in Department 82. 

On April 27, 2021, Plaintiff filed a notice of stay of proceedings with regard to Defendant Top Flight Investments, LLC, based on a bankruptcy petition filed by Top Flight on or about April 26, 2021.  Defendants filed a notice of stay of proceedings based on the same bankruptcy petition, as to all parties, on May 6, 2021.  

            On May 13, 2021, Plaintiff filed a notice of termination or modification of the bankruptcy stay. 

At the hearing on May 25, 2021, the court confirmed the appointment of the rents and profits receivership as to the six properties capable of being rented, but declined to extend the receivership to the remaining properties, all under varying states of construction, or to expand the receivership to a “capital receivership” largely on the grounds of the existing Chapter 11 case. 

On May 26, 2021, this court entered its order Confirming Appointment of Receiver (“Receivership Order”) as to the six rent-producing properties.

On July 6, 2021, Defendants Palms Blvd. Venice Beach, LLC, Doug Sanchez, and Andre Wegner filed a verified answer to Plaintiff’s verified complaint.  That same date, Doug Sanchez and Andre Wegner filed a cross-complaint against Plaintiff for declaratory relief, injunctive relief, and accounting.  Plaintiff has answered the cross-complaint. 

Starting July 2011, Receiver has filed multiple interim reports and accountings. 

On February 18, 2022, Plaintiff filed a Notice of Dismissal of Bankruptcy Case with Restriction Against Debtor’s Refiling.  The notice states that the Bankruptcy Court dismissed Top Flight’s Chapter 11 case on February 17, 2022, with a two-year bar to refiling. 

On March 10, 2022, the court granted Plaintiff’s motion to impose a full equity receivership on Top Flight.  At the hearing, the court granted Plaintiff’s oral request to omit the 65^th Street Property from the Receivership Estate.  (See Minute Order dated 3/10/22 at 1 and 10.) 

On March 17, 2022, the court entered an Order Appointing Equity Receiver and Preliminary Injunction (“2022 Appointment Order”).  The 2022 Appointment Order granted Receiver the authority to take possession of the receivership property and “to operate, manage, maintain, preserve, market, and sell the Property ….”  The term “Property” in the order refers to real property listed in Exhibit A.  The 65^th Street Property is not included as a receivership property in Exhibit A.

On August 1, 2022, Top Flight filed a cross-complaint against Plaintiff and other cross-defendants.  Plaintiff has answered. 

From October 2022 through April 2023, Receiver filed multiple motions for orders authorizing the sales of receivership property.  The court granted those motions, after hearings.   On April 14, 2023, Defendant Wegner filed an opposing declaration to the four motions for orders authorizing the sale of real property that were heard on April 27, 2023.  The court’s minute order dated April 27, 2023, provides a discussion of Wegner’s objections, which the court overruled. 

On April 4, 2023, Receiver filed and served the instant motion for an order to include the 65^th Street Property in the Receivership Estate.  On April 19, 2023, the court granted Receiver’s ex parte application for an order advancing the hearing date to May 16, 2023.  On April 24, 2023, Receiver filed and served a notice of court order advancing the hearing date to May 16, 2023.  No opposition to the motion has been received.  

On May 9, 2023, Receiver filed and served a reply, which indicated that no opposition has been received.  A separate proof of service states that the reply was served on some lienholders on May 10, 2023.  For a hearing on May 16, service on May 10 was untimely.  (CCP § 1005(b).)   

On May 11, 2023, three court days before the hearing, Plaintiff filed and served a notice of joinder in Receiver’s motion to include the 65^th Street Property in the Receivership Estate. 

Analysis   

Notice

            Notice of the motion appears proper, as stated above. 

            However, to the extent Receiver relies on his declaration submitted with the ex parte application to shorten time, filed April 18, 2023, Receiver did not state in the notice of motion that he would be relying on that specific evidence.  (See Mot. 1-2.)

May Receiver Augment the Receivership Estate with Additional Property?

The Receiver moves to include the 65^th Street Property within the Receivership Estate.  As noted above, the court granted Plaintiff’s oral request to omit the 65^th Street Property from the Receivership Estate at the hearing on March 10, 2022.  (See Minute Order dated 3/10/22 at 1 and 10.)  Notably, Plaintiff did not file the motion to include the 65^th Street Property in the Receivership Estate.  Rather, three court days before the hearing, Plaintiff filed a belated “joinder” which states: “Plaintiff joins and supports the Receiver’s Motion given that Sound Equity has a secured interest in the 65th Street Property and inclusion of the 65th Street Property in the Receivership Estate would allow the 65th Street Property to be sold free and clear without need for additional proceedings.”

Plaintiff has not filed a declaration or brief explaining its change in position from the March 10, 2022, hearing.  Nor has Plaintiff filed a declaration asserting that any changed circumstances from March 10, 2022, have placed the 65^th Street Property in danger of being lost or injured.  A threshold issue is whether a court-appointed receiver has statutory grounds to seek an expansion of a receivership estate in such circumstances.  “In this state a receiver may be appointed only as permitted by Code of Civil Procedure section 564.”  (Barclays Bank of California v. Sup.Ct. (1977) 69 Cal.App.3d 593, 597.) 

Receiver relies on CCP sections 564(b)(2) and 568.  Section 564(b)(2) states that a receiver may be appointed by the court “[i]n an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt.”  Section 564(b)(2) authorizes the court to appoint a receiver upon motion of the secured lender.  The statute does not address the circumstances in which a court-appointed receiver may later seek to expand the receivership estate.

Section 568, titled “Powers,” states as follows: “The receiver has, under the control of the Court, power to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may authorize.”  The term “property” in section 568 is reasonably interpreted to refer to the property over which a receivership was appointed pursuant to section 564.  In this case, the Receiver was appointed to take possession, custody, and control of all of Top Flight’s assets.  However, the 65^th Street Property was omitted from the Appointment Order at request of Plaintiff. 

Receiver also cites U. S. Overseas Airlines v. Alameda County (1965) 235 Cal.App.2d 348, 353, which states in pertinent part as follows: “A receiver is an officer or representative of the court appointed to take charge of and manage property which is subject to litigation, for the purpose of preserving it and ultimately disposing of it pursuant to final judgment. A receiver is not an agent of either party to the action but represents all persons interested in the property involved.”  (italics in original.)  Relatedly, Receiver cites Maggiora v. Palo Alto Inn, Inc. (1967) 249 Cal.App.2d 706, 712, which states in pertinent part: “The pertinent question on a motion for a receivership is whether the facts alleged in a petitioner's complaint and affidavits establish at least a probability of a joint or common interest in an enterprise which is in danger of loss, removal, or material injury, as required by the statute.”  (Maggiora, supra at 716 [bold italics added by court].) 

            Subject to further argument, the court tentatively concludes that the court may, in a proper case, grant an expansion of the Receivership Estate upon motion from the Receiver if there is evidence that such action is necessary to preserve the Receivership Estate from harm or otherwise benefits the Receivership Estate.  A receiver is an agent of the court and the court’s powers to control the scope of a receivership are broad.  However, the court is not inclined to exercise such powers unless it is shown that Plaintiff, as the party holding an interest in the Property, agrees to such expansion of the Receivership Estate and also that the requirements of CCP section 564 are met to grant a receivership over the 65^th Street Property. 

Evidence to Expand Receivership Estate

The 65^th Street Property is vacant land that Receiver valued at approximately $180,000 in November 2021.  (11/8/21 Constantinescu Decl. ¶ 37.)  In his March 30, 2023, declaration, Receiver declares that he has received an offer to purchase the Property for $315,000.  (3/30/23 Constantinescu Decl. ¶ 7.)  Plaintiff has a deed of trust securing its interest in the Property.  (Hansen Decl. ¶¶ 28-34, Exh. 14.)

Receiver apparently moves to expand the Receivership Estate to include the 65^th Street Property based on CCP section 564(b)(2), discussed above.  (Mot. 7.)  Receiver contends that Top Flight “attempted to transfer the 65^th Street Property to another entity, presumably to avoid the inclusion of the Property in these proceedings.”  Relatedly, Receiver contends that “instead of making the improvements required under the terms of the 65^th St. Loan, Top Flight destroyed the house that was previously on the Property and has made no attempt to comply with the other terms of the 65th St. Loan, including the requirement that Top Flight provide certain documents to Sound Equity.”  (Mot. 7-8.)  Due to these alleged actions, Receiver contends that the Property is in danger of being “lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed.”  (§ 564(b)(2).) 

Receiver relies predominately on a declaration of Ken Hansen, dated April 8, 2021, and a declaration of Receiver Sid Constantinescu, dated November 8, 2021, that were submitted in support of ex parte applications filed earlier in this case.  (See Hansen Decl. ¶¶ 28-34; 11/8/21 Constantinescu Decl. ¶¶ 37-41.)  These declarations pre-date the court’s March 10, 2022, ruling to appoint a receivership.  In that ruling, the court specifically discussed the April 8, 2021, Hansen declaration, including evidence that “[t]ransferring title to the 65th St. Property to Defendant Palms Blvd Venice Beach, LLC without Plaintiff’s knowledge or consent” was an event of default that justified appointment of a receiver.  (See Minute Order date 3/10/22 at 10.) Similarly, Receiver’s declaration dated November 8, 2021, was referred to in the March 10, 2022, ruling and provides evidence that the home on the 65^th Street Property was demolished prior to the court’s ruling on the motion to appoint receiver.  (11/8/21 Constantinescu Decl. ¶¶ 37-41.)  While such evidence may have supported granting a receivership over the 65^th Street Property in March 2022, Plaintiff requested that the court omit the Property from the Receivership Estate.  Absent some explanation for the change in position, Plaintiff’s request to omit the 65^th Street Property undermines the assertion that there is a danger to the Property that requires appointment of a receivership. 

Receiver also relies, in part, on his declaration dated March 30, 2023, filed in support of this motion.  In that declaration, Receiver opines that Defendant Palm Blvd. did not provide consideration for the transfer of the 65^th Street Property from Top Flight.  (3/30/23 Constantinescu Decl. ¶ 4.)  Receiver does not sufficiently explain the basis for his opinion.  (See Ibid.)  More importantly, that transfer was discussed in the declarations filed in support of the motion to appoint receiver, which was ruled upon in March 2022.  Hansen asserted in his April 2021 declaration that the transfer occurred without Plaintiff’s “knowledge or consent.”  (See Hansen Decl. ¶ 33.)  Nonetheless, Plaintiff requested to omit the Property from the Receivership Estate.  In that context, Receiver’s opinion that there was a lack of consideration for the transfer is not, in itself, a basis to expand the Receivership Estate to include the Property. 

In his March 30, 2023, declaration, Receiver also states that “Top Flight’s members have repeatedly trespassed and vandalized several of the properties within the Receivership Estate as retaliation for the Receiver’s appointment and its efforts to monetize the collateral.”  (3/30/23 Constantinescu Decl. ¶ 5.)  Receiver does not specify which properties have been trespassed upon and vandalized or when such events occurred.  He does not state in this declaration that the 65^th Street Property, which is vacant, has been subject to trespass or vandalism or is in danger of being lost or materially injured.  This evidence does not, in itself, justify an expansion of the Receivership Estate. 

Receiver also submits a request for judicial notice showing that Defendant Palm Blvd. was suspended by the California Secretary of State on August 2, 2021, and remains suspended as of March 23, 2023.  (Mot. 6-7; RJN Exh. 11-12.)  However, this suspension occurred before the court’s March 2022 ruling on the appointment motion.  Thus, it is not sufficient in itself to expand the receivership. 

In a declaration dated April 17, 2023, filed with the ex parte application to shorten time, Receiver provided more detailed evidence of alleged trespass and vandalism, including with respect to the 65^th Street Property.  (4/17/23 Constantinescu Decl. ¶ 13.)  If Receiver intended to rely on this evidence, he should have so specified in the notice of motion or in the notice of the court’s order shortening time.  He failed to do so. 

If the April 17, 2023, declaration is considered, it provides mixed evidence regarding the need to expand the Receivership Estate to include the Property.  Receiver declares that since his appointment, he has “discovered repeated squatters onsite, [who] engaged in criminal activity including the selling and use of illegal drugs, prostitution, indecent exposure, destruction of real property and illegally trespassing.”  (4/17/23 Constantinescu Decl. ¶ 13.)  He also declares that the Property has “become a dumping ground for the entire neighborhood.”  (Ibid.)  While Receiver suggests that such activity is still occurring, he also states that he has “obtained substantial unsolicited interest in the 65th Street Property, all within the market-correct range of sale prices, from several brokers and investors familiar with the Top Flight portfolio.”  (4/17/23 Constantinescu Decl. ¶¶ 7, 13.)  Thus, Receiver indicates that a primary purpose of the motion is to include the 65^th Street Property in the Receivership Estate so that it can be immediately sold.  (Id. ¶¶ 16-17.)  Receiver’s belief that a sale of the 65^th Street Property would be in the best interest of the Receivership Estate is not, in itself, a basis to expand the Receivership Estate pursuant to CCP section 564(b)(2).  Ongoing criminal activity and dumping on the Property could be a basis to include the Property in the Receivership Estate, as it creates a risk of deteriorating property value, marketability, and security.  (Id. ¶¶ 13-15.)  However, if there is substantial interest in the Property, as Receiver claims, that suggests there may not be a present risk of harm to the Property that justifies expansion of the receivership.  Further, Plaintiff may be able to foreclose on its deed of trust and sell the Property itself.  Counsel should address these issues at the hearing.   

On May 9 and 10, 2023, Receiver served a reply in support of the motion.  Service on May 10 was untimely.  (CCP § 1005(b).)  Even if considered, the reply does not adequately explain the change in position from the March 2022 hearing.  On May 11, 2023, three days before the hearing, Plaintiff also filed a joinder in the motion.  As discussed above, the joinder does not include a memorandum of points and authorities or a declaration explaining Plaintiff’s change in position from March 2022 or showing that the Property is in danger of being lost, removed, or materially injured.  Accordingly, the reply and joinder do not sufficiently address the Court’s concerns herein about the Receiver’s request.

Conclusion

At the hearing, Counsel should address: (1) the reasons for Plaintiff’s change in position from the March 10, 2022, hearing with respect to the 65^th Street Property; and (2) whether there is currently any criminal activity or dumping on the 65^th Street Property that requires immediate appointment of a Receiver to protect the Property from loss or damage.  Subject to discussion, the court may continue the hearing for supplemental declarations from Receiver and Plaintiff on these issues.  Defendants would have the opportunity to submit an opposition to any supplemental declarations. 

Alternatively, should Plaintiff adequately explain its change in position from the March 10, 2022, hearing, the court will consider granting the motion based on the evidence of criminal activity and dumping set forth in Receiver’s April 17, 2023, declaration.  (4/17/23 Constantinescu Decl. ¶¶ 13-15.)  Defendants’ attorneys should specifically respond to the April 17, 2023, declaration of Receiver at the hearing. 

            Should the court grant the motion to include the 65^th Street Property in the Receivership Estate, Receiver would need to make a separate motion for an order authorizing the sale of the Property.  (See 4/17/23 Constantinescu Decl. ¶¶ 16-17.)