Judge: Curtis A. Kin, Case: 23STCV28278, Date: 2024-05-23 Tentative Ruling

Case Number: 23STCV28278    Hearing Date: May 23, 2024    Dept: 86

Plaintiff American Business Bank moves for a right to attach order against defendants D T S Enterprise, Inc. and Leslie Dain Sorg in the amount of $789,535.74, as well as a temporary protective order.[1]  Plaintiff American Business Bank moves for a right to attach order against defendant D T S Builders Inc. in the amount of $483,089.35, as well as a temporary protective order.

I.       Factual Background

            On December 28, 2020, plaintiff American Business Bank entered into a Business Loan Agreement (“Loan Agreement”) (Loan No. 7310022-1) with defendant D T S Enterprise Inc. (“DTSE”) (Pyle Decl. ¶ 4 & Ex. 1.) In addition to loan disbursements, the Loan Agreement provided for extension of a revolving line of credit. (Id. ¶¶ 4, 7 & Ex. 1.) The Loan Agreement governed all loans and lines of credit issued by plaintiff and remained effective until all loans have been paid in full. (Id. ¶¶ 6, 8, 9.)

On December 28, 2020, plaintiff extended a line of credit to DTSE (Loan No. 7310022-3) pursuant to the Loan Agreement in the amount of $500,000. (Id. ¶ 10.) As a condition of the line of credit, DTSE executed a Promissory Note (“Note”) in favor of plaintiff on December 28, 2020. (Id. ¶ 11 & Ex. 2.)

            The funds disbursed pursuant to the Loan Agreement were secured by collateral specified in a Collateral Security Agreement executed by DTSE in favor of plaintiff. (Id. ¶ 12 & Ex. 3.) Defendants Leslie Dain Sorg and Ryan Thomas Isbell guarantied DTSE’s performance under the Loan Agreement by executing Commercial Guaranties. (Id. ¶¶ 12, 13 & Exs. 3, 4.)

            On December 23, 2022, defendant D T S Builders Inc. (“DTSB”) executed a Commercial Security Agreement in favor of plaintiff, securing repayment of Loan No. 7310022-1 in the amount of $488,576.05. (Id. ¶ 31 & Exs. 9, 13, 14.)

            Pursuant to the Loan Agreement, DTSE received loan disbursements and drew from the line of credit. (Id. ¶¶ 15, 18 & Exs. 6, 8.) Outstanding unpaid balances in the amount of $479,089.35 for the loan disbursements and $305,446.39 for the line of credit, which totals $784,535.74, remain due. (Id. ¶¶ 17, 20 & Ex. 7.)

II.      Applicable Law

            “Upon the filing of the complaint or at any time thereafter, the plaintiff may apply pursuant to this article for a right to attach order and a writ of attachment by filing an application for the order and writ with the court in which the action is brought.” (CCP § 484.010.)

The application shall be executed under oath and must include: (1) a statement showing that the attachment is sought to secure the recovery on a claim upon which an attachment may be issued; (2) a statement of the amount to be secured by the attachment; (3) a statement that the attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based; (4) a statement that the applicant has no information or belief that the claim is discharged or that the prosecution of the action is stayed in a proceeding under the Bankruptcy Act (11 U.S.C. section 101 et seq.); and (5) a description of the property to be attached under the writ of attachment and a statement that the plaintiff is informed and believes that such property is subject to attachment. (CCP § 484.020.)

            The application for a writ of attachment must be supported “by an affidavit showing that the plaintiff on the facts presented would be entitled to a judgment on the claim upon which the attachment is based.” (CCP § 484.030.)

The Court shall consider the showing made by the parties, as well as the pleadings and other papers in the record. (CCP § 484.090(a), (d).) The Court shall issue a right to attach order if it finds all of the following:

(1) The claim upon which the attachment is based is one upon which an attachment may be issued.

(2) The plaintiff has established the probable validity of the claim upon which the attachment is based.

(3) The attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based.

(4) The amount to be secured by the attachment is greater than zero.

(CCP § 484.090(a)(1-4).)

            At the times prescribed by CCP § 1005(b), the defendant must be served with a copy of the summons and complaint, notice of application and hearing, and a copy of the application and supporting affidavits. (CCP § 484.040.)

“The Attachment Law statutes are subject to strict construction….” (Epstein v. Abrams (1997) 57 Cal.App.4th 1159, 1168.)

III.     Analysis

1.    Notice

The proofs of service attached to the moving papers indicates that service was timely.

2.    Arbitration

Plaintiff filed a motion to compel arbitration against all defendants, which was heard on March 13, 2024, in Department 40 (Hon. Anne Richardson, presiding).[2]  Judge Richardson granted the motion to compel arbitration as to defendants DTSE, DTSB, and Sorg and stayed this action as to the Complaint against them.[3]  (3/13/24 Minute Order at 6.)

CCP § 1281.8(b) states in pertinent part (emphasis added):

A party to an arbitration agreement may file in the court in the county in which an arbitration proceeding is pending, or if an arbitration proceeding has not commenced, in any proper court, an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.

The Court cannot grant an attachment if this showing has not been made. (California Retail Portfolio Fund GMBH & Co. KG v. Hopkins Real Estate Group (2011) 193 Cal.App.4th 849, 856-57.)

In California Retail Portfolio Fund, the Court of Appeal held “the apparent insolvency of a party to an arbitration agreement, or other evidence showing that the party was experiencing severe financial difficulties, is sufficient to satisfy the ineffectual relief requirement.” (California Retail Portfolio Fund, 193 Cal.App.4th at 857.) The California Retail Portfolio Fund court concluded there was sufficient evidence of insolvency where the defendant’s CFO wrote in an email that he was concerned about the defendant’s overall liquidity, that there was a risk of defaulting on certain notes, that income was down, that revenue was not covering overhead costs, and that assets would need to immediately be sold off. (Id. at 860.) The California Retail Portfolio Fund court reached this conclusion after relying on a federal case, China National Metal Products Import/Export Co. v. Apex Digital Inc. (C.D. Cal. 2001) 155 F.Supp.2d 1174, in which evidence of “the company's unwillingness to pay its debts, threats by its customers for claims of indemnification in the millions of dollars, and a statement from the company's president that the company was having financial difficulties, thus making it hard to meet its obligations,” was sufficient to satisfy the ineffectual relief requirement. (Id. at 856.)

“The term ‘insolvency’ has two generally accepted definitions: (1) where there is an excess of liabilities over assets; and (2) where one is unable to meet his obligations as they mature in the ordinary course of business.” (Id. at 859-60.) “[T]he inability to pay damages is an alternative to insolvency” and can also satisfy section 1281.8. (Id. at 862.)

            Here, plaintiff has made a sufficient showing of ineffectual relief for purposes of CCP § 1281.8(b).  Plaintiff demonstrates that defendants have not paid the amounts owed under the Loan Agreement and Note. (Pyle Decl. ¶ 53.) While that showing, standing alone, might be insufficient, as the mere failure to pay obligations is as consistent with an unwillingness to pay as it is with an inability to pay.  Defendants, however, have also failed to provide financial documents evidencing their financial condition, which, under the circumstances, raises the inference of an inability to pay and attempt to conceal such inability.  (Pyle Decl. ¶¶ 21, 22, 53.)  The insolvency and inability to pay is also consistent defendants entering into forbearance agreements after initially failing to make required payments to plaintiff.  (Pyle Decl. ¶¶ 25-45.)

Accordingly, plaintiff has made a sufficient showing of entitlement to provisional remedies from this Court.

3.    Basis of Attachment

“[A]n attachment may be issued only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim or claims is a fixed or readily ascertainable amount not less than five hundred dollars ($500) exclusive of costs, interest, and attorney’s fees.”  (CCP § 483.010(a).)  “An attachment may not be issued on a claim which is secured by any interest in real property arising from agreement ….”  (CCP § 483.010(b).) 

            With respect to DTSE, the amount sought to be attached is based on amounts due under a written Loan Agreement and Note executed by DTSE in favor of plaintiff. (Pyle Decl. ¶¶ 4, 11 & Exs. 1, 2.)

            With respect to Sorg, the amount sought to be attached is based on their guaranties that DTSE will pay all amounts due under the Loan Agreement. (Id. ¶¶ 13, 14 & Exs. 4, 5.)

            With respect to DTSB, the amount sought to be attached is based on its Commercial Security Agreement securing Loan No. 7310022-1 with specified collateral. (Id. ¶ 31 & Ex. 9.) The Commercial Security Agreement executed by DTSB secured the money owed by DTSE under the Loan Agreement and Note. (Ibid.)

No oppositions were filed. Accordingly, DTSE and Sorg do not dispute that the total due under the Loan Agreement and Note is $784,535.74. (Id. ¶¶ 17, 20 & Ex. 7.) DTSB does not dispute that loan disbursements under Loan No. 7310022-1 total $479,089.35, which is secured by the collateral specified in the Commercial Security Agreement. (Id. ¶ 17 & Ex. 7.)

4.    Probable Validity of Plaintiff’s Claims

“A claim has ‘probable validity’ where it is more likely than not that the plaintiff will obtain a judgment against the defendant on that claim.” (CCP § 481.190.) “If the defendant opposes the application, ‘the court must then consider the relative merits of the positions of the respective parties and make a determination of the probable outcome of the litigation.’ [Citations.]” (Pech v. Morgan (2021) 61 Cal.App.5th 841, 855.)

            With respect to DTSE, both the Loan Agreement and Note require payment of funds disbursed by plaintiff when due or otherwise be in default. (Pyle Decl. ¶¶ 22, 25 & Ex. 1, 2.) Plaintiff has not received any payments due since May 1, 2023. (Id. ¶¶ 16, 19, 46 & Exs. 6, 8, 15, 16.) On November 15, 2023, pursuant to the Loan Agreement, plaintiff has accelerated the amounts due under the Loan Agreement and Note and declared them immediately payable and due. (Id. ¶¶ 48, 49 & Ex. 17.) A total of $784,535.74 remains due. (Id. ¶¶ 17, 20 & Ex. 7.)

            With respect to Sorg, she guaranteed DTSE’s performance under the Loan Agreement and Note agreed to make payments on demand. (Id. ¶¶ 13, 14, 27, 29 & Exs. 4, 5.) Despite demand, Sorg has not made any payments due under the Loan Agreement and Note. (Id. ¶¶ 28, 30 & Exs. 15, 16.)

            Accordingly, plaintiff demonstrates the probable validity of its claim for breach of contract against defendants DTSE and Sorg. (Compl. ¶¶ 35-42, 46-50 [DTSE], 73-75 [Sorg], 79-81 [Isbell].)

            With respect to DTSB, DTSB and DTSE agreed that the property specified in the Commercial Security Agreement that they executed may serve as collateral to secure amounts owed by DTSE under Loan No. 7310022-1. (Id. ¶ 31 & Ex. 9.) DTSE has not paid the amounts due under the Loan Agreement and Note. (Id. ¶¶ 17, 20 & Ex. 7.) Accordingly, plaintiff demonstrates a probable validity of being able to foreclose on the collateral. (Compl. ¶¶ 61-63.)

5.    Purpose and Amount of Attachment

The other required findings under CCP § 484.090 are that the “attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based” and that the “amount to be secured by the attachment is greater than zero.” (CCP § 484.090(a)(3), (a)(4).)

Plaintiff declares that “[a]ttachment is not sought for a purpose other than the recovery on a claim upon which the attachment is based.” (Apps. ¶ 4.) Plaintiff also declares that “the prejudgment writ of attachment is sought by ABB to collect any and all collateral of the defendants and protect it pending the arbitration hearing and award so as to allow the award and subsequent judgment to be enforceable.” (Pyle Decls. ¶ 55.)

Plaintiff also demonstrates that the amount to be secured by the attachment is greater than zero, either $483,089.35 with respect to DTSB ($4,000 added to total balance for estimated costs and attorney fees) or $789,535.74 for the other defendants ($5,000 added to total balance for estimated costs and attorney fees) remains due.[4] (Id. ¶¶ 17, 20 & Ex. 7.)

6.    Bankruptcy

CCP § 484.020(d) requires a “statement that the applicant has no information or belief that the claim is discharged in a proceeding under Title 11 of the United States Code (Bankruptcy) or that the prosecution of the action is stayed in a proceeding under Title 11 of the United States Code (Bankruptcy).” Plaintiff provides this statement. (Apps. ¶ 5.)

7.    Property Subject to Attachment

With respect to DTSE and DTSB, CCP § 487.010(a) states that, where the defendant is a corporation, all corporate property for which a method of levy is provided in CCP § 488.300, et seq. is subject to attachment. Plaintiff moves to attach any property of DTSE and DTSB.

With respect to Sorg, CCP § 487.010(c) lists categories of property subject to attachment where the defendant is a natural person. The property listed in item 9(c) of the application as to Sorg is expressly subject to attachment under CCP § 487.010(c).

8.    Exemptions

No claims of exemptions have been filed.

9.    Undertaking

CCP § 489.210 requires the plaintiff to file an undertaking before issuance of a writ of attachment. CCP § 489.220 provides, with exceptions, for an undertaking in the amount of $10,000. Plaintiff does not address the proper amount of an undertaking. The Court will order an undertaking in the amount of $10,000 as to the writ of attachment for each defendant.

10. Temporary Protective Order

Plaintiff also seeks a temporary protective order pursuant to CCP § 486.010, et seq. If plaintiff is entitled to a right to attach order, a temporary protective order may issue if plaintiffs “will suffer great or irreparable injury (within the meaning of Section 485.010) if the temporary protective order is not issued.” (CCP § 486.020.)

Based on DTSE’s failure to pay amounts due under the Loan Agreement and Note, plaintiff speculates that DTSE is insolvent and the other defendants are attempting to “hide, distribute and dissipate the assets of DTSE, and DTSB.” (Pyle Decl. ¶ 53.) This is merely speculative. Considering that the amounts at issue in this action have not been reduced to judgment, it would not be in the interest of justice to issue the temporary protective orders as proposed. (CCP § 486.040.) Writs of attachment sufficiently protect plaintiff’s interests.

IV.     Conclusion

            With respect to D T S Enterprise, Inc. and Leslie Dain Sorg, the applications are granted in the amount of $789,535.74. Plaintiff American Business Bank is ordered to post an undertaking for each of these defendants in the amount of $10,000 before any writ shall issue.

With respect to D T S Builders Inc., the application is granted in the amount of $483,089.35. Plaintiff American Business Bank is ordered to post an undertaking for this defendant in the amount of $10,000 before any writ shall issue.