Judge Curtis A. Kin, Case Number: 24STCV03957, Date: 2024-06-25 Tentative Ruling

Plaintiff REV Capital (California) Inc. moves for a right to attach order against defendant ALO, LLC in the amount of $97,110.86 and defendant Bella + Canvas, LLC in the amount of $2,576,853.51.

Plaintiff REV Capital (California) Inc. (“REV”) is a financial services company known as a “Factor,” which purchases “Accounts” from businesses for a percentage of the value of the Accounts. (Shifrin Decl. ¶¶ 8, 10.) As defined in the Uniform Commercial Code (“UCC”), codified in the California Commercial Code, and as pertinent to this action, an “Account” is a “right to payment of a monetary obligation, whether or not earned by performance… for services rendered or to be rendered.” (Com. Code § 9102(a)(2)(ii).) A Factor purchases Accounts from the “Factoring Client.” (Shifrin Decl. ¶ 9.) Persons who owe payments on the Accounts to the Factoring Client are known as “Account Debtors.” (Shifrin Decl. ¶ 9; see also Com. Code § 9102(a)(3) [defining “Account debtor” as “a person obligated on an account”].)

On June 23, 2022, defendant Bella + Canvas, LLC (“Bella”) and non-party BaronHR West, Inc. (“Baron”) entered into a Staffing Agreement, whereby Baron agreed to provide staffing services and Bella agreed to pay for such services. (Shifrin Decl. ¶ 14 & Ex. A at §§ 3, 5(A-C).)

On October 13, 2023, REV purchased and was assigned the interest of Amerisource Funding, Inc. (“Amerisource”) in various Accounts Receivable Assignment and Financing Agreements, under which Amerisource had the right to collect on Baron’s Accounts. (Shifrin Decl. ¶¶ 17, 18.) Also on October 11, 2023, REV and Baron entered into a Factoring and Security Agreement (“FSA”), whereby REV purchased Baron’s Accounts. (Shifrin Reply Decl. ¶ 21 & Ex. B at §§ 1.35, 2.1.2, 2.1.4.)

Under the FSA, Baron granted REV a first priority security interest in the “Collateral.” (Shifrin Reply Decl. ¶ 21 & Ex. B at § 8.1.) “Collateral” is defined in the FSA to include Baron’s Accounts. (Shifrin Reply Decl. ¶ 21 & Ex. B at § 1.9.) Baron irrevocably authorized REV to “[r]eceive, take, endorse, assign, deliver, accept and deposit, in the name of Purchaser or Seller, proceeds of any Collateral.” (Shifrin Reply Decl. ¶ 21 & Ex. B at § 10.1.1.) Baron also irrevocably authorized REV to notify any Account Debtor “obligated with respect to any Account, that the underlying Account has been assigned to [REV] by [Baron] and that payment thereof is to be made to the order of and directly and solely to [REV].” (Shifrin Reply Decl. ¶ 21 & Ex. B at §§ 1.32 [defining Payer as Account Debtor], 10.1.6.) REV’s security interests in Baron’s Collateral were perfected by the filing of UCC-1 Financing Statements and UCC-3 Financing Statement Amendments with the California Secretary of State. (Shifrin Decl. ¶¶ 19, 20, 23; Shifrin Reply Decl. ¶ 7 & Ex. G.)

On October 16, 2023, Baron sent to its customers a Notice of Assignment. (Shifrin Decl. ¶ 24.) The notice stated as follows:

We are pleased to inform you that our company (the “Vendor”) has assigned our Accounts Receivable to Baron Finance California Inc. d/b/a REV Capital in accordance with Article 9 of the Uniform Commercial Code…. Effective immediately all payments due to Vendor are to be made payable and remitted directly to:

Please record the receipt of this Notice of Assignment and Direction of Payment in your Accounts Payable office. The undersigned hereby irrevocably directs and authorizes you to make all payments on Accounts Receivable owed to Vendor payable to REV Capital or to whomever REV Capital may so direct….

Please acknowledge the receipt of this Notification by completing the assignment and returning a copy by email to the attention of REV Capital, copied herein.

Susan Luthcke, accounts payable manager, signed and returned the Notice of Assignment to REV. (Shifrin Decl. ¶¶ 29, 30 & Ex. C.) REV contends that Luthcke is the accounts payable manager of both defendants ALO and Bella. (Shifrin Decl. ¶ 28.) After Luthcke signed and returned the Notice of Assignment, both ALO and Bella made payments to REV. (Shrifin Decl. ¶ 30.) After these payments, an entity named Dynasty Capital (“Dynasty”), which provided merchant cash advances to Baron, demanded that defendants send payments to Dynasty instead of Baron. (Shifrin Decl. ¶ 31.) On November 30, 2023, counsel for Baron advised defendants that Dynasty’s instructions were erroneous and instructed defendants to make payments to Baron. (Shifrin Decl. ¶ 32 & Ex. D.)

From December 1 to December 20, 2023, ALO made three payments totaling $69,905.04 to Baron, and Bella made four payments totaling $2,472,209.52 to Baron. (Shifrin Decl. ¶ 34 & Ex. E.) Defendants have refused to pay REV these amounts defendants had instead paid to Baron. (Shifrin Decl. ¶ 35.)

“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. § 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.

(CCP § 484.090(a)(1-4).) “The Attachment Law statutes are subject to strict construction….” (Epstein v. Abrams (1997) 57 Cal.App.4th 1159, 1168.)

Defendants’ requests to take judicial notice of Exhibits 1 to 5 are GRANTED, pursuant to Evidence Code § 452(d). REV’s evidentiary objections to the declaration of Delfino Barragan are OVERRULED.

“[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).)

REV’s claims against defendants are based on the claims that defendants owe Baron under the Staffing Agreements. REV has presented the Staffing Agreement between Baron and Bella. (Shifrin Decl. ¶ 14 & Ex. A [Staffing Agreement between Baron and Bella].) As for ALO, although REV did not present a written Staffing Agreement between Baron and ALO, ALO concedes the existence of such an agreement. (Barragan Decl. ¶ 3 [“Baron West entered into written staffing agreements to provide Defendants with staff to perform various tasks at Defendants’ warehouse….”].) Further, ALO made payments to BaronHR West for staffing. (Shifrin Decl. ¶ 34 & Ex. E.) As discussed further below, pursuant to Commercial Code § 9406(a) and the Notice of Agreement signed by the undisputed Accounts Payable manager of both defendants, REV was assigned the right to collect on payments that both defendants owe Baron.

Defendants argue that REV’s claim is not based on any contract between itself and defendants. (Opp. at 5:28-6:1.) That is true, but CCP § 483.010(a) does not necessarily require the plaintiff to be the party to a contract. The statute only requires that plaintiff’s claim is based on a contract that is express or implied. As stated above, REV’s claims against defendants ALO and Bella are based on amounts that defendants owe to Baron under written Staffing Agreements. (FAC ¶¶ 16-18, 35, 37, 39, 45, 47, 49; Barragan Decl. ¶ 3.) That is sufficient.

Accordingly, REV demonstrates a valid basis for attachment pursuant to the Staffing Agreements.

“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.)

Under the FSA between Baron and REV, REV purchased Baron’s accounts. (Shifrin Reply Decl. ¶ 6 & Ex. F at §§ 2.1.1, 2.1.4.) The FSA allows REV to bring any actions to collect on any Account that REV purchased. (Shifrin Reply Decl. ¶ 6 & Ex. F at § 10.1.2.) “Once a claim has been assigned, the assignee is the owner and has the right to sue on it.” (Johnson v. County of Fresno (2003) 111 Cal.App.4th 1087, 1096.) Accordingly, as assignee of Baron’s Accounts, REV has the right to enforce payments owed on those Accounts.

In addition, the FSA also granted REV a continuing first priority security interest in Baron’s Accounts. (Shifrin Reply Decl. ¶ 6 & Ex. F at §§ 1.9, 8.1.) REV’s security interest was perfected through the filing of financing statements with the California Secretary of State. (Shifrin Reply Decl. ¶ 7 & Ex. G; Com. Code § 9310(a).) Under Commercial Code § 9607(a)(3), “[i]f so agreed, and in any event after default,” a secured party may “[e]nforce the obligations of an account debtor….” (Com. Code § 9607(a)(3).) Further, under Commercial Code § 1305(b): “Any right or obligation declared by this code is enforceable by action unless the provision declaring it specifies a different and limited effect.”

REV’s entitlement to collect on Baron’s Accounts (including the Accounts of defendants) is based on Commercial Code § 9406(a), which states, in relevant part:

[A]n account debtor on an account…may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, signed by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.

It is undisputed that, by October 18, 2023, defendants received a Notice of Assignment, signed by Baron as assignor and stating that Baron’s Accounts were assigned to REV and that payments should be remitted directly to REV as assignee. (Shifrin Decl. ¶ 29 & Ex. C.)

Despite having been notified that payment on Baron’s Accounts were to be remitted to REV instead of Baron, defendants made seven payments to Baron instead of REV from December 1, 2023, to December 20, 2023. (Shifrin Decl. ¶ 34.) Specifically, as evidenced by bank statements reflecting wire transfers, ALO made three payments totaling $69,905.04 to Baron, and Bella made four payments totaling $2,472,209.52 to Baron. (Shifrin Decl. ¶ 34 & Ex. E.)

To begin with, the amount sought to be attached is based on the so-called “misdirected” payments to Baron in December 2023, which is a fixed amount as required by CCP § 483.010(b). Further, pursuant to Commercial Code §§ 9406(a), 9607(a)(3) and 1305(b), REV has the right, as a secured party under the FSA, to bring a suit against defendants to recover such misdirected payments.

Defendants argue in the opposition that REV has not demonstrated that it is a secured party. As discussed above with respect to the terms of the FSA between Baron and REV and the perfecting of the security interest, REV has demonstrated that it is a secured party.[1]

Defendants also argue that the FSA was for financing and not for a sale of accounts; thus, according to defendants, REV has failed to show that any amounts are owed to REV pursuant to the FSA. The terms of the FSA belie this contention. The FSA states: “Notwithstanding the creation of this security interest, the relationship of the Parties shall be that of Purchaser and Seller of accounts, and not that of lender and borrower.” (Shifrin Decl. ¶ 6 & Ex. F at § 8.2.) The FSA also provides that the “relationship of the Parties is that of Purchaser and Seller. All transactions under this Agreement are account purchase transactions.” (Shifrin Supp. Decl. ¶ 6 & Ex. F at § 26.) Under the FSA, “Seller [i.e., Baron] does not retain any legal or equitable interest in any Purchased Account sold under this Agreement.” (Shifrin Supp. Decl. ¶ 6 & Ex. F at § 26.) Even if certain language in the FSA references the fact that REV was given the option to purchase Accounts (Shifrin Supp. Decl. ¶ 6 & Ex. F at § 2.1.2 [“Purchaser may, but shall not be required to, purchase from Seller such Accounts as Purchaser determines to be Eligible Accounts”]), defendants acknowledged that REV, in fact, purchased their Accounts by making payments to REV after having signed the Notice of Assignment. (Shifrin Decl. ¶¶ 29, 30 & Ex. C.) Consequently, REV is not a lender. Rather, REV is the assignee of Baron’s Accounts and is entitled to collect on payments owed to Baron.

For the foregoing reasons, REV demonstrates the probable validity of its claims against defendants ALO and Bella.

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).)

REV 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.) REV also demonstrates that the amount to be secured by the attachment is greater than zero. (Apps. ¶ 8; see also Shifrin Decl. ¶ 36.)

Defendants argue that the amount to be secured by attachment should be reduced because they had to pay staffing companies other than Baron to remedy Baron’s failure to pay temporary staff that it provided. (Barragan Decl. ¶¶ 5-8.) The amount to be secured by an attachment shall be reduced by the “amount of any claim of the defendant asserted as a defense in the answer pursuant to Section 431.70 if the defendant’s claim is one upon which an attachment could be issued had an action been brought on the claim when it was not barred by the statute of limitations.” (CCP § 483.015(b)(3).)

Defendants asserted an affirmative defense of recoupment based on Baron’s breach under the Staffing Agreements. (See Answer, First Affirmative Defense.) Under the Staffing Agreements between Baron and defendants, Baron assumed full responsibility for paying temporary employees. (Shifrin Decl. ¶ 14 & Ex. A at § 3(F).) Baron agreed to indemnify defendants for any breach of any obligation Baron has in the Staffing Agreements. (Shifrin Decl. ¶ 14 & Ex. A at § 9(b).) Baron failed to pay the temporary employees that it provided to defendants. (Barragan Decl. ¶ 4.) As a result, defendants were forced to contract with two different staffing companies to remedy Baron’s breach of the Staffing Agreement. (Barragan Decl. ¶¶ 6, 7.) Defendants claim they paid a total of $426,749.63 to such staffing companies. (Barragan Decl. ¶ 8.)

Based on the foregoing, defendants demonstrate a claim upon which an attachment could be issued. Under Commercial Code § 9404(a)(2), REV’s rights as an assignee are subject to “[a]ll terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract.” Because defendants have a claim of indemnification against Baron, the assignor, under the Staffing Agreements, REV is equally subject to such claim as the assignee.

REV argues that the amount of attachment should not be reduced because, by making the payments evidenced by the wire transfers, defendants admit to having received the staffing for which it paid. Even if this contention were true, Commercial Code § 9404(a)(2) does not expressly prohibit recoupment where, as here, the basis for recoupment (i.e., Baron’s failure to pay staff) occurred after the basis for attachment arose (i.e., defendants misdirected payments to Baron instead of REV). According to the express provisions of the Corporations Code, all that is required for recoupment is that the basis for recoupment arise from the same transaction or contract. Here, both the misdirected payments to Baron and defendants’ claim for indemnification against Baron arise from the Staffing Agreements between defendants and Baron.

REV also objects to the declaration of Delfino Barragan, defendants’ Warehouse Operations and Safety Manager, which defendants rely upon as the basis for recoupment. REV contends that the declaration does not establish Barragan’s personal knowledge regarding the basis for defendants’ recoupment. The Court disagrees. Barragan avers that he is responsible for compliance with all company policies and procedures and human resources duties. (Barragan Decl. ¶ 2.) Barragan’s averment adequately forms the basis for his averment that defendants had to enter into agreements with other staffing companies to remedy Baron’s failure to pay staff, as required under defendants’ Staffing Agreements with Baron.

Despite defendants’ potential entitlement to recoupment, the amount by which the attachments should be reduced is not altogether clear. Delfino states that defendants paid staffing company iStaffing $336,450.42 to pay the labor costs that Baron failed to pay. (Barragan Decl. ¶ 8.) Defendants do not state how the payment to iStaffing should be allocated between ALO and Bella. Accordingly, the Court declines to reduce the attachment for either defendant by the amount paid to iStaffing.

Delfino further states that Bella paid $90,299.21 to staffing company Partners Personnel for labor costs that Baron failed to pay. (Barragan Decl. ¶ 8.) Pursuant to CCP § 483.015(b)(3), Bella is entitled to a reduction of $90,299.21.

With respect to the amounts to be attached, the Court further notes that defendants do not dispute the asserted calculations for interest. With respect to estimated attorney fees and costs, REV seeks to attach $20,000 in fees and $5,000 in costs against each defendant. (See Shifrin Decl. ¶ 38.) For what is essentially a straightforward contract-based case, these amounts are unreasonable. The Court will reduce asserted fees and costs for each defendant by half.

Based on the foregoing, the Court finds that REV is entitled to attachment against ALO, LLC in the amount of $84,610.86 ($97,110.86 requested - $2,500 costs - $20,000 fees). The Court further finds that REV is entitled to attachment against Bella + Canvas, LLC in the amount of $2,474,054.30 ($2,576,853.31 requested - $2,500 costs - $10,000 fees - $90,299.21 payment to Partners Personnel).

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).” REV provides this statement. (Apps. ¶ 5.)

Defendants argue that Baron has filed for bankruptcy. (RJN Exs. 1, 2.) However, REV’s claim is not against Baron, but against defendants. Defendants do not explain how Baron’s bankruptcy stay is applicable to them, even if REV seeks to enforce the Staffing Agreements made between Baron and defendants.

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. REV moves to attach any property of defendants.

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. REV does not discuss the proper amount of undertaking. The Court will order an undertaking in the amount of $10,000 for each defendant.

The application against ALO, LLC is GRANTED IN PART in the amount of $84,610.86. The application against Bella + Canvas, LLC is GRANTED IN PART in the amount of $2,474,054.30. Before any writ will issue, plaintiff REV Capital (California) Inc. shall post an undertaking in the amount of $10,000 for each defendant. The Court will sign the Proposed Right to Attach Orders, electronically received April 24, 2024, with adjustments to the amounts to be attached in accordance herewith.

[1] In the moving papers, REV inadvertently provided an FSA between BaronHR LLC and REV, not BaronHR West Inc. and REV. (Shifrin Decl. ¶ 21 & Ex. B; Shifrin Reply Decl. ¶ 4.) REV provided the FSA between it and BaronHR West Inc. with the reply. (Shifrin Reply Decl. ¶ 6 & Ex. F.) Normally, new evidence on reply is prohibited. (See Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537 [“The general rule of motion practice, which applies here, is that new evidence is not permitted with reply papers”].) However, it appears that, except for the seller of the Accounts, i.e., BaronHR LLC instead of BaronHR West Inc., the terms are identical. (Shifrin Reply Decl. ¶¶ 5, 6.) During the hearing on June 24, 2024, defendants, if they so wish, will be provided a full opportunity to argue whether or not the FSA submitted with the reply granted REV a security interest in BaronHR West Inc.’s Accounts.