Judge: Curtis A. Kin, Case: 24STCV01692, Date: 2024-04-04 Tentative Ruling

Case Number: 24STCV01692    Hearing Date: April 4, 2024    Dept: 82

Plaintiff Ladder Capital Realty III, LLC seeks the appointment of a receiver with respect to three multi-family housing complexes.  

I.       Factual Background

            Defendants 13001 Vanowen LLC, 15042 Dickens LLC, and 21133 Saticoy LLC are entities whose purpose is to acquire, renovate, and re-rent 56 units located within three multi-family housing complexes. (Farahi Decl. ¶ 2.) The properties are located at 13001 Vanowen Street in North Hollywood (“Vanowen Property”), 15042-15046 Dickens Street in Los Angeles (“Dickens Property”), and 21133 Saticoy Street in Los Angeles (“Saticoy Property”) (collectively, “Properties”). (Farahi Decl. ¶ 2.)

On December 14, 2021, defendants entered into a loan transaction (“Loan”) with Ladder Capital Finance LLC (“Original Lender”), whereby defendants initially borrowed $15,700,000. (Alexander Decl. ¶¶ 6, 7.) The Loan is evidenced by a written Loan Agreement and a Promissory Note (“Note”), both dated December 14, 2021. (Alexander Decl. ¶¶ 6, 7 & Exs. A, B.) On the same date, defendants executed a Deed of Trust wherein they granted Original Lender a first-priority lien in the Properties. (Alexander Decl. ¶ 8 & Ex. C; see also id. ¶ 6 & Ex. A at § 4.1.8 [defendants agreed to defend priority of “Deed of Trust” in favor of Original Lender], Schedule I [“Mortgage” defined as first priority “Deed of Trust”].) Defendants also executed an Assignment of Leases and Rents (“ALR”) where they granted a first-priority lien in the leases and rents of the Properties. (Alexander Decl. ¶ 10 & Ex. D; see also id. ¶ 6 & Ex. A at § 4.1.8 [defendants agreed to defend priority of “Assignment of Leases” in favor of Original Lender], Schedule I [“Assignment of Leases” defined as first priority “Assignment of Leases and Rents”].) The Loan Agreement, Note, Deed of Trust, and ALR are hereinafter referred to as the “Loan Documents.”

            Plaintiff Ladder Capital Realty III, LLC has been assigned all rights, title, and interest in the Loan and Loan Documents. (Alexander Decl. ¶ 12.)

            Plaintiff alleges several breaches of the Loan Agreement, as follows:  

• Defendants have not renovated certain units at the Vanowen Property and the Saticoy Property, in violation of Section 4.1.24 of the Loan Agreement. (Id. ¶ 13.)

• At the time the Loan was made, defendants misrepresented that Unit 15044-A at the Dickens property has 2 bedrooms when it only has one bedroom. (Id. ¶ 13.)

• Electrical work, retrofitting of windows, plumbing, drywall, and other alterations were done at the Vanowen Property without plaintiff’s approval and in excess of the cost threshold set in the Loan Agreement, in violation of Section 4.1.11 of the Loan Agreement. (Id. ¶ 14.)

• Defendants did not deliver its annual financial statements for Fiscal Year 2022 within 90 days after its end to plaintiff, as required by Section 4.1.7(b) of the Loan Agreement. (Id. ¶ 16.)

• Defendants did not deliver the items required under Section 4.1.7(d) of the Loan Agreement pertaining to August 2023 to plaintiff. (Id. ¶ 16.)

• Defendants have failed to keep the Properties in good working order and make necessary repairs, in violation of Section 4.1.2 of the Loan Agreement. (Id. ¶ 17.)

• Defendants failed to notify plaintiff of threatened litigation that might have a material adverse effect to the Properties, in violation of Section 4.1.4 of the Loan Agreement. (Id. ¶ 17.)

• Defendants have allowed code violations to remain outstanding on the Property, in violation of Section 4.1.2 of the Loan Agreement. (Id. ¶ 17.)

• Defendants have failed to replace the existing Interest Rate Cap Agreement on or before December 6, 2023 – 30 days of when the then-existing Interest Rate Cap Agreement was scheduled to expire. (Id. ¶¶ 18-20.)

On October 26 and December 7 of 2023 and February 29, 2024, plaintiff provide notices of the purported defaults set forth above to defendants. (Alexander Decl. ¶¶ 21, 29 & Exs. E, G.) On January 8, 2024, plaintiff notified defendants that based on their failure to cure the defaults, plaintiff was accelerating the indebtedness owed under the Note and other Loan Documents. (Alexander Decl. ¶ 22 & Ex. F.) As of January 1, 2024, the indebtedness includes the principal of $12,008,743.00; interest, including default interest; late charges and other fees, including attorney fees; and all other amounts under the Loan Documents. (Alexander Decl. ¶ 23.)

Plaintiff seeks a receiver on the grounds that the Properties are not currently secured or safe and are significantly deteriorating due to defendants’ purported mismanagement. (Alexander Decl. ¶ 27.)

II.      Analysis

A.           Evidentiary Objections

Defendants’ evidentiary objections are OVERRULED. “A witness’ personal knowledge of a matter may be shown by any otherwise admissible evidence….” (Evid. Code § 702.) Such admissible evidence includes business records, which are admissible despite the hearsay rule “when offered to prove [an] act, condition, or event if: [¶] (a) The writing was made in the regular course of a business; [¶] (b) The writing was made at or near the time of the act, condition, or event; [¶] (c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and [¶] (d) The sources of information and method and time of preparation were such as to indicate its trustworthiness.” (Evid. Code § 1271.)

Declarant Michael Alexander is a Managing Director of Ladder Capital Finance LLC, an affiliate of plaintiff. (Alexander Decl. ¶ 3.) Alexander’s job functions include reviewing, analyzing, monitoring, and researching loans held by plaintiff which are in default. (Alexander Decl. ¶ 3.) Alexander’s averments are based on his review of applicable business records, specifically records relating to the servicing of the subject Loan. (Alexander Decl. ¶¶ 2, 5.) The records were made in the regular course of business; were made at or near the time by – or from information transmitted by – a person with knowledge; and the business records are maintained on industry-standard electronic computing equipment. (Alexander Decl. ¶ 5.) Alexander’s averments satisfy the requirements of Evidence Code § 1271.

For the foregoing reasons, even if Alexander did not personally witness the condition of the Properties represented in the notices of default, Alexander may introduce the notices of default and testify as to the condition of the properties based on the content of the notices.[1]

B.           Right to Appointment of Receiver

A receiver should not be appointed unless absolutely essential, because no other remedy will suffice. (City & County of San Francisco v. Daley (1993) 16 Cal.App.4th 734, 745.) This is so because the appointment of a receiver is recognized as a drastic, time consuming, expensive, and potentially unjust remedy to be used as a final resort. (See Weil & Brown, Civ. Proc. Before Trial § 9:743 et seq.; see also Alhambra-Shumway Mines v. Alhambra Gold Mine Corp. (1953) 116 Cal.App.2d 869, 873.) “The appointment of a receiver is a drastic remedy and is one which should not be invoked unless there is an actual or threatened cessation or diminution of the business.” (In re Jamison Steel Corp. (1958) 158 Cal.App.2d 27, 35.)

Pursuant to CCP § 564(b)(1), (b)(2), (b)(9) and (b)(11), plaintiff seeks the appointment of a receiver with respect to the Properties. The receiver would operate the Properties and collect rents, as well as be authorized to market and sell the Properties.

Under CCP § 564(b), a court may appoint a receiver in an action by a party whose right in a property is probable and where it is shown that the property is in danger of being lost, removed, or materially injured. (CCP § 564(b)(1).) A receiver may also be appointed in an action by a secured lender for the foreclosure of a deed of trust and sale of the property where it appears that the property is in danger of being lost, removed, or materially injured. (CCP § 564(b)(2).)  

A court may also appoint a receiver “where necessary to preserve the property or rights of any party.” (CCP § 564(b)(9).) Additionally, a court may appoint a receiver “[i]n an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage, or separate assignment document.” (CCP § 564(b)(11).)

The Deed of Trust provides for appointment of a receiver in the “Event of Default.” In the Event of Default, “Lender, as a matter of right and without notice to Borrower or anyone claiming under Borrower…shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers of the Property…and Borrower hereby irrevocably consents to such appointment and waives notice of any application therefor and agrees not to oppose any application therefor by Lender.” (Alexander Decl. ¶¶ 8, 24 & Ex. C at § 16.20.) The receiver “shall have all the usual powers and duties of receivers in like or similar cases, including, without limitation, the full power to hold, develop, rent, lease, manage, maintain, operate and otherwise use or permit the use of the Property….” (Alexander Decl. Ex. C at § 16.20.)

Although a recital “that upon default the beneficiary shall be entitled to the appointment of a receiver is not binding upon the courts, such a recital nevertheless has some evidentiary weight.” (Barclays Bank of California v. Superior Court (1977) 69 Cal.App.3d 593, 602 [pertaining to recital in trust deed].) “Ascribing to the recital such evidentiary weight, it reasonably follows that it presents a prima facie, but rebuttable, evidentiary showing of the beneficiary’s entitlement to appointment of a receiver.” (Ibid.; see also Mines v. Superior Court (1932) 216 Cal. 776, 778-79 [“Specific performance being a proceeding within the cognizance of a court of equity, the court had jurisdiction in such a proceeding to appoint a receiver….”].)

Under the Loan Agreement, an “Event of Default” occurs when defendants have failed to cure the breach of a term, covenant, or condition of the Loan Agreement. (Alexander Decl. ¶ 6 & Ex. A at § 10.1(a)(xxiii), Schedule I [definition of “Event of Default”].) The Deed of Trust incorporates the definitions of the Loan Agreement. (Alexander Decl. ¶ 8 & Ex. C at Art. 13.)

Under Section 4.1.2 of the Loan Agreement, defendants “shall keep the Property in good working order and repair, and from time to time make, or cause to be made, all reasonably necessary repairs, renewals, replacements, betterments and improvements thereto….” (Alexander Decl. ¶ 6 & Ex. A at § 4.1.2.) Under Section 4.1.24 of the Loan Agreement, defendants shall diligently pursue and complete all “Renovation Work,” defined as “all labor performed or materials installed in connection with the renovation” of each of the subject properties, by the “Completion Date,” defined as the earlier of 120 days after commencing the Renovation Work to a unit or the Maturity Date, or the date when the final payment of principal of the Note becomes due. (Alexander Decl. ¶ 6 & Ex. A at § 4.1.2, Schedule I [definition of “Renovation Work,” “Completion Date,” and “Maturity Date”].)

As stated above, plaintiff alleges several breaches of the Loan Agreement. Considering that a receiver should not be appointed unless “there is an actual or threatened cessation or diminution of the business” (In re Jamison Steel Corp., 158 Cal.App.2d at 35), the Court focuses on those breaches that directly pertain to the condition of the subject Properties, which are the assets defendants use to operate their business and which secure the amount due under the Loan.

As set forth in the Notice of Default letter dated October 26, 2013, defendants have not “Completed certain Renovation Work by the Completion Date in accordance with the requirements of Section 4.1.24 of the Loan Agreement (including, without limitation, with respect to units 1, 2, 5, 7, 8, 9, 15, 16, 17 or 18 at the Vanowen Property or unit 9 at the Saticoy Property).” (Alexander Decl. ¶¶ 13, 21 & Ex. E.)

As set forth in the Notice of Default letter dated February 29, 2024, the Properties are in a state of disrepair, specifically:

Saticoy Property

• The exterior metal fencing is broken.
• The gutter/drainage system needs to be replaced due to structural and safety concerns.
• Multiple support awning beams are deteriorated/rotted to the point of needing replacement.
• Ground floor balconies contain debris, including downed trees, and are a fire hazard.
• Multiple balconies show cracking and have potential structural issues.
• Water damage is present on ceilings.
• Unit sliding doors were unlocked or contained no handle/locks at all, which allows access from the street. In at least one unit (#16), beer bottles and cigarettes were located therein.
• There were no caps on the gas lines in the demo units.
• Substandard water lines/valves and design issues which creates a higher probability of cracking/flooding. Unit 18 showed signs of such issues.
• Drywall removed without completing asbestos tests, which has been an ongoing issue, even though defendants represented to plaintiff that no drywall was being removed and requested allocation of funds in connection with same.
• Missing wall units on the ground level that were not boarded up.
• Stairs in unit 20 are offset and showing signs of collapse.
• Mold growing in multiple units was observed.

Vanowen Property

• Parts of the roof are not covered by shingles and there are open vents that have led to water damage and mold (notably, units 7 and 18 have suffered significant water damage/mold).
• Unit 3 has also suffered from water damage due to the unit above. The tenant in the unit above has been trying to catch all the intruding water (which is entering through her window) in containers, an issue that she has been asking defendants to fix since February 2022. This appears to be an issue for other tenants as well as plastic wrapping/bags were observed taped to windows of other occupied units.
• There are open holes in the walls on the 1st and 2nd floors of nearly every vacant unit from HVAC wall units being removed and not boarded up, which creates safety issues as well as additional water damage concerns.
• Broken exterior windows.
• There were no caps on the gas lines in the demo units.
• Broker gutters and no down spouts to allow for proper drainage, which causes

rainwater to exit directly onto the walkways and into the pool.

• The pool appears to be out of service for some time.

Dickens Property

• Water damage in unrenovated and renovated units.
• Design flaws and incomplete renovations in contrast to what defendants previously represented to plaintiff and which plaintiff already provided funds in connection with.
• Signs of termite issues/damage.

(Alexander Decl. ¶¶ 28, 29 & Ex. G.)

Defendants do not meaningfully dispute that an “Event of Default” as defined in the Loan Agreement and Deed of Trust has occurred. With respect to the renovations, defendants do not dispute that the renovations have not occurred. (See Farahi Decl. ¶¶ 8, 15, 17 [admitting to delays in renovation of Vanowen Property and Saticoy Property].) With respect to the issues set forth in the February 29, 2024 Notice of Default, defendants contend that the issues are “overblown.” (Farahi Decl. ¶ 19.) Except for gas line caps which are purportedly no longer missing and the Properties having been locked and secured (Farahi Decl. ¶ 19), defendants do not dispute that the issues set forth by plaintiff, including water damage and/or mold, are not reasonably necessary repairs under Section 4.1.2 of the Loan Agreement.

Instead, defendants argue that a receiver should not be appointed because plaintiff has unclean hands. (See Bennallack v. Richards (1899) 125 Cal. 427, 433 [“He who seeks the appointment of a receiver must himself come into court with clean hands”].) Defendants maintain that plaintiff has delayed in responding to their renovation funding requests. (See Farahi Decl. ¶¶ 8, 15-17.) Under the Loan Agreement, defendants are entitled to disbursement of funds to renovate the Properties subject to satisfaction of specified conditions, including approval of the renovation expenses and compliance with a Budget and Renovation Plan. (Alexander Decl. ¶ 6 & Ex. A at § 2.12(a), (e).) Defendants do not state whether the conditions have been met. (See Supp. Alexander Decl. ¶ 7 [“When Borrower failed to follow the Loan Documents and failed to satisfy the conditions for funding (which was a frequent occurrence), Lender repeatedly informed Borrower what was deficient, why the requests were denied, and what was necessary to satisfy the conditions for funding. It was then up to Borrower to correct the deficiencies in such request – which Borrower did not do”].) Accordingly, defendants do not demonstrate that they were entitled to funding for renovations or that plaintiff has unclean hands.

For the foregoing reasons, plaintiff provides a showing sufficient to demonstrate that the assets of defendants are in danger of deterioration, such that a receiver is necessary to preserve their assets. Defendants have not rebutted plaintiff’s entitlement to appointment of a receiver pursuant to the Deed of Trust upon an Event of Default.  Accordingly, plaintiff is entitled to a receiver under CCP § 564(b)(1), (b)(2), (b)(9), and (b)(11).

C.           Nomination of Receiver

Plaintiff nominates Trigild IVL, LLC, acting by and through Chris Neilson and/or Ian Lagowitz as the receiver. Trigild, through Lagowitz, is qualified to serve as receiver. (See Lagowitz Decl. ¶¶ 2, 3 & Ex. 1.) Defendants have not opposed the nomination.

However, plaintiff did not provide the CV of Chris Neilson. The Court is unable to evaluate whether Neilson is qualified to act as receiver. Absent any sufficient reason to include Neilson in the order appointing receiver, the Court will strike Neilson’s name from the proposed order.

D.           Proposed Order

The Court will enter the Proposed Order, electronically received March 12, 2024, subject to striking or altering certain provisions to be discussed during the hearing, including, among others:

·         Failure to attach the Deed of Trust describing the real property subject to being placed in receivership

·         Provisions requiring the Court-appointed Receiver to obtain the approval of the Lender (plaintiff Ladder Capital Realty III LLC) before taking certain actions

·         Provisions entirely absolving the Receiver and his agents from liability for any actions whatsoever, without qualification

·         Compensation provisions for the Receiver

·         Sealing provisions contrary to California Rules of Court, rules 2.550, et seq.

E.           Undertaking for Preliminary Injunction and Receiver

Plaintiff seeks a preliminary injunction. (Mtn. at 14:20-21; Prop. Order at ¶ 1(d).) Plaintiff must file an undertaking in support of the preliminary injunction. (CCP § 529.) Plaintiff does not address the proper amount for an undertaking. The Court will order a bond in the amount of $10,000.

The receiver must file an undertaking. (CCP § 567(b); Rule of Court 3.1178.) Plaintiff does not address the proper amount for a receiver undertaking.  The Court shall order the receiver to file an undertaking in the amount of $10,000.

III.     Conclusion

            The motion is GRANTED. Within ten (10) days hereof, plaintiff Ladder Capital Realty III, LLC is ordered to post a bond in the amount of $10,000. Within ten (10) days hereof, receiver Trigild IVL, LLC is ordered to post a bond in the amount of $10,000.