Judge David J. Cowan, Case BP063500 2022-09-20 Tentative Ruling

Please notify Dept. 1’s courtroom staff by email (SMCDept1@lacourt.org) or by telephone (213-633-0601) no later than 8:30 a.m. the day of the hearing if you wish to submit on the tentative ruling rather than argue the motion. If you submit on the tentative, you must immediately notify the other side that you will not appear at the hearing. If you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the motion. Please keep in mind that appearing at the hearing and simply repeating the arguments set forth in the papers is not a good use of the court’s time or the parties’ time.

Ruling: The Court finds Beneficiary entitled to $14.139 million credit against the market value offset. The amount of the market value offset will be determined after receipt of updated expert valuation reports.

In 2003, Former Trustees (through a Trust-owned LLC, MH Holdings II H ("MH2")) leased Tower Grove to an entity owned by Charles Dickens, and gave Dickens' entity "an option to purchase Tower Grove." (12/2/21 Joint Stipulated Statement of Facts (JSSF), para. 21.) Former Trustee Klein, as manager of MH2, loaned Dickens $1.5 million "to finance the entitlement processing and recording of tract map plans" for Tower Grove, and the loan was secured by a deed of trust against Tower Grove. In 2004, Former Trustees (through MH2) sold Tower Grove to Tower Park Properties (“TPP”), another entity owned by Dickens, for $23.75 million, “financed entirely by the Trust MH2 loaned the purchase price to TPP, secured by another deed of trust against Tower Grove, and “no moneys actually left the Trust or . . . LLCs to finance the purchase price.” (JSSF, para. 24.)

After the sale of Tower Grove to Dickens, the Trust extended two loans to Dickens: a $12 million credit line in 2006 (the “Construction Loan”) and a $7 million credit line in 2010 (the “Exit Financing Loan”). Dickens drew roughly $17.6 million from these loans, consisting of $10.6 million from the Construction Loan and $5.538 million from the Exit Financing Loan. (JSSF, para. 25-27, 30-32.) Some of the disbursed funds were used to improve or develop Tower Grove, but the extent of expenditure back into Tower Grove was not clear to the Court. (See JSSF, para. 25 (Dickens undisputedly made “a series of draws as construction progressed” under the Construction Loan)) Thus, the Court requested a further offer of proof from Beneficiary regarding the amount of funds used to improve Tower Grove. (7/14/22 Order, p. 24.) The Court also requested input from Beneficiary and Former Trustees as to whether post-sale loan monies should be recoverable as a category of damages, issuing an OSC Re: Proximate Cause.

On April 29, 2018, Beneficiary filed his Consolidated Objections to Pending Accountings of the Former Trustees. As relevant to this trial, Beneficiary objected to Former Trustees' gross mismanagement of Tower Grove, particularly the sale and loans to Dickens, arguing "all that is left to do is quantify the damage" from Former Trustees' conduct.

On February 28, 2019, this Court granted in part and denied in part Beneficiary's Motion for Summary Adjudication of the Former Trustees' liability for “damages stemming from [their] alleged misconduct concerning” Tower Grove. The Court found the “Former Trustees acted with gross negligence in approving the . . . sale of Tower Grove to Dickens in 2004,” but indicated this was "a finding of ‘breach,’ but not of ‘liability.’” The Court found that “triable issues of fact exist related to ‘trust performance’; the propriety of Mr. Klein, as LLC manager, in entering into various loan agreements with Mr. Dickens; the Former Trustees’ liability for surcharge; proximate cause; and the existence of damages.”

On March 4, 2021, the Court set trial on the Tower Grove objection to the Former Trustees' accounting petitions.

On December 23, 2021, Beneficiary and Former Trustees filed a Joint Stipulation Re: Tower Grove Trial Dates providing that the first phase of trial would pertain to the value of Tower Grove, the second phase of trial would pertain to the amount of damages from Former Trustees' breach of trust and Former Trustees' defenses, and the third phase of trial would pertain to attorney's fees and costs incurred in connection with the Tower Grove litigation.

On February 4, 2022, the Court entered a Trial Sequence Order indicating the Court would first determine whether Former Trustees are equitably estopped from asserting Tower Grove’s would not have properly sold for $23.75 million in 2004 per an Option Agreement with Dickens.

On February 24, 2022, the Court issued an order finding that Former Trustees “are estopped from denying that a sale of Tower Grove $23.75 million in 2004 would have been proper and reflective of Tower Grove’s value” and found that sale to be “an appropriate basis for equitable surcharge reflecting lost profits for Former Trustees’ breach of trust in selling Tower Grove, less offset according to proof.”

On April 15, 2022, the Court issued its Final Second Interim Ruling Re: Lost Profits. In this Ruling, the Court reached an initial conclusion that “the Trust suffered losses of $76,337,000, consisting of $22,325,000 in net sales proceeds reinvested between 2004 and 2021 at an annual rate of return of 7.5%, accumulating $54,012,000 in interest,” subject to potential offset based on the value of Tower Grove. The Court indicated it could not determine the "amount of offset for the current fair market value of Tower Grove, which will be determined in the valuation phase of trial," and issued an OSC Re: Scope of Testimony for Valuation Phase to discuss expected witness testimony relating to valuation.

On May 31, 2022, the Court issued its Interim Ruling on OSC Re: Scope of Valuation Phase Testimony and Issuance of OSC Re: Scope of Trial. As relevant here, the Court issued an OSC Re: Scope of Trial requesting supplemental briefing "regarding the inclusion of damages arising from the Dickens loan[s]," indicating it was receptive to revisiting its prior rulings excluding damages relating to the loans (as opposed to the sale of Tower Grove). The Court indicated it was "inclined to allow Beneficiary to introduce a supplemental report" regarding the current market value of Tower Grove, "and to allow Former Trustees to supplement the report of their own valuation expert" as needed, in order to determine the offset value of Tower Grove "from the date of trial rather than the date of foreclosure."

On July 14, 2022, the Court issued its Final Ruling on the OSC Re: Scope of Trial, OSC Re: Scope of Valuation Phase Testimony, a motion in limine. As relevant here, the Court issued an OSC Re: Proximate Cause Evidence requesting “a further offer of proof identifying evidence Beneficiary intends to use to establish proximate cause for further lost profits not established in prior rulings, including as to whether loan disbursements to Dickens can be traced to improvements to Tower Grove.”

On August 5, 2022, Beneficiary filed a Brief in response to the OSC Re: Proximate Cause.

On September 16, 2022, Former Trustees filed evidentiary objections to the Declaration of Lisa McCurdy filed September 9, 2022.[1]

In his responsive Brief, Beneficiary offers three theories of recovery for the disbursements: (1) that the post-sale loans were proximately caused by the sale of Tower Grove to Dickens, without an intervening event breaking the chain of causation; (2) that funds from post-sale loans used by Dickens to improve the Property should be recoverable in light of the offset against Beneficiary’s damages based on the value of Tower Grove; and (3) that the post-sale loans were grossly negligent regardless of whether the loans were caused by the original sale to Dickens.

The Court principally considers, and accepts, the second theory—which the Court refers to hereon as to as the “offset credit” theory. Under the offset credit theory, loan funds disbursed to Dickens and used to improve the Property will essentially serve as a “credit” against an offset to damages based on the market value of Tower Grove. The Court has already determined that Beneficiary’s recovery “will be offset by the fair market value of Tower Grove, to be determined in the valuation phase of trial, in order to determine the Trust’s actual losses.” (4/15/22 Order, p. 4; see also 5/31/22 Order, p. 28-31 (permitting updated expert reports regarding the value of Tower Grove to obtain a more current idea of its value).) Thus, under this theory, Beneficiary’s established damages will be offset by the market value of Tower Grove, but the amount of that offset will first be reduced by the value of loan funds used to improve Tower Grove.

Critically, adoption of the offset credit theory avoids improperly expanding the scope of this trial. On December 23, 2021, the parties jointly stipulated to a three-phased trial—the first phase addressing the value of Tower Grove, the second phase addressing the amount of damages from Former Trustees’ sale of Tower Grove to Dickens, and the third phase addressing attorneys’ fees and costs incurred in Tower Grove-related litigation.

Beneficiary’s third theory of recovery would expand the trial, requiring determination of whether the post-sale loans were grossly negligent. This issue has not been addressed earlier in this trial, and so would introduce a novel issue into the trial. “Generally it is a triable issue of fact whether there has been such a lack of care as to constitute gross negligence [citation] but not always [citation].” (Decker v. City of Imperial Beach (1989) 209 Cal.App.3d 349, 358 (citing Devito v. State of California (1988) 202 Cal.App.3d 264, 272 (complaint failed to allege facts which could establish gross negligence))) Though Beneficiary argues Judge Beckloff considered the post-sale loans in the Removal Trial and heard “unrebutted expert testimony” regarding Former Trustees’ negligence, this is not sufficient to establish the loans were grossly negligent as a matter of law. (Brief, pp. 20-24.) Judge Beckloff was not then considering whether Former Trustees should be held liable for gross negligence relating to the loans. The Court is substantially unpersuaded it would be proper to find Former Trustees were grossly negligent based on testimony from 2013 without permitting Former Trustees an opportunity to rebut that evidence—which, again, would substantially expand the scope of the trial.

Though Beneficiary argues the Court should now find the post-sale loans were grossly negligent, Beneficiary’s counsel confirmed he is “not pursuing damages based upon those subsequent transactions.” (8/26/22 Compendium of Transcripts, pp. 102-105 (2/4/22 Tr. at p. 12:14-28).)[2] Counsel later clarified that he meant he would seek damages relating to the post-sale loans as “consequences of that sale” of Tower Grove to Dickens, as per the first theory of recovery, discussed below. (Id.; see 7/14/22 Order, p. 18.) But counsel’s statements are irreconcilable with Beneficiary’s third theory of recovery, which is an attempt to “go through liability over those subsequent transactions” and pursue “damages based upon those subsequent transactions.” (Id.)

First Theory of Recovery—Post-Sale Loans Proximately Caused by Sale of Tower Grove

Beneficiary’s first theory of recovery, despite consistency with Beneficiary’s prior positions, would also expand the scope of the trial by requiring litigation over proximate cause, particularly over whether certain events (such as the 2008 recession) break the chain of causation. While Beneficiary asserts the damages were foreseeable "as a matter of law," the cases relied upon do not support determining issues of proximate cause “as a matter of law. (See Brief, p. 9-12; Enriquez v. Smythe (1985) 173 Cal.App.3d 691, 696-699 (affirming based on "substantial," but "not uncontradicted" evidence of attorney's negligence and a "continuous causal chain [which] is easy to follow")); Horowitz v. Fitch (1963) 216 Cal.App.2d 303, 311-312 (jury "told that the defendant had admitted legal liability" and would only be determining damages, and given "instructions [that] correctly express the rule that a negligent defendant is liable for all compensable damages proximately caused by his negligent act”); Jones v. South San Francisco (1950) 96 Cal.App.2d 427, 438 (“Certainly, it was for the jury to say whether, as a result of the city’s negligence, pedestrians were reasonably liable to walk in the street where they might be injured by automobiles”); Carroll v. Cent. Ctys. Gas Co. (1929) 96 Cal.App. 161, 163 ("if the original negligence was such that in the ordinary and natural course of events, the second negligent act should have been anticipated as reasonably likely to happen, the proximate cause of the injury may be laid in the first negligent act."))

Simply put, none of these cases support determining whether an intervening cause was foreseeable or not as a matter of law. The “determination of whether the intervening act is foreseeable is a question of fact unless under the undisputed facts there is no room for a reasonable difference of opinion.” (Schrimscher v. Bryson (1976) 58 Cal.App.3d 660, 664 (emphasis added); see Jones, supra, 96 Cal.App.2d at 438.) The Court has already rejected the argument that foreseeability is properly addressed as a matter of law, noting its prior finding that triable (i.e., disputed) issues of fact exist regarding proximate cause. (See 7/14/22 Order, p. 21 (“Given that Beneficiary already sought to resolve the issue of proximate cause by way of a dispositive pre-trial motion, and the Court found triable issues of fact prevented resolution of that issue, it would not make sense to now conclude the issue can be resolved as a matter of law.”); see 2/28/19 MSA Order.) Beneficiary’s Brief did not demonstrate that the issue is now properly resolved as a matter of law contrary to the Court’s prior findings.

Ultimately, it is not necessary to resolve proximate cause issues here. Proximate cause primarily addresses “whether there is a sufficient connection between the risks created by defendants' conduct and the injury [the plaintiff] suffered to hold defendants responsible,” i.e. liable. (Novak v. Continental Tire North America (2018) 22 Cal.App.5th 189, 196.) As a “normative or evaluative” legal concept, proximate “causation ‘focuses on public policy considerations.’” (Id.) In particular, proximate cause addresses “the extent to which a defendant should be held liable for unforeseeable consequences” in a given case.” (Id. (“[p]roximate cause rules apply in individual cases . . . and ‘take into account the particular context in which any act or injury occurred.’”)) A defendant may be relieved of liability by an unforeseeable “intervening cause which breaks the chain of causation from the original negligent act.” (Schrimscher, supra, 58 Cal.App.3d at 664 (whether “an act breaks the chain of causation [depends on] the foreseeability of that act”))

But the offset credit theory does not hold Former Trustees “liable” for the loans to Dickens or suggest that Former Trustees’ approval of the loans “caused” an “injury” to Beneficiary. The Court has already determined the market value of Tower Grove, recovered by the Trust, must be an offset against any equitable surcharge against Former Trustees for losses caused by the sale of Tower Grove. As discussed further below, it is undisputed that the Trust-owned LLCs disbursed millions of dollars to Dickens specifically for improvements to Tower Grove. The offset credit adjusts the market value offset to account for improvements funded at the Trust’s expense—it is a reduction of an offset, not a judgment for recovery of the funds loaned to Dickens.

Hence, it is unnecessary to reach the contested factual issue of whether losses from the post-sale loans were proximately caused by the sale to Dickens. By extension, there is no occasion to determine whether intervening events “break[] the chain of causation” between the sale and the loans, or between the loans and the Trust’s current losses, because the Court is not finding that Former Trustees were grossly negligent or otherwise liable for those loans. Rather, Former Trustees are benefitting from an offset (potentially substantial) reducing the surcharge against them for their gross negligence in selling Tower Grove to Dickens. It would be inequitable to overstate the amount of that offset, which would effectively punish the Trust for spending money to improve Tower Grove; the Court returns to this issue below. The offset credit is fundamentally not a finding of liability or judgment against Former Trustees—it is simply a component of the Tower Grove offset in Former Trustees’ favor.

Former Trustees offer limited argument against the offset credit theory, principally focusing on the appropriate amount of offset credit rather than the viability of the theory. (See Response, pp. 25-26.) Indeed, Former Trustees acknowledge the Court’s ruling that “the actual moneys disbursed under the Post-Sale Loans may be used as an ‘offset to an offset,’” but argue the Court also ruled that “interest, fees, and penalties on those loans would not be” included in the credit. (Response, p. 25; 7/14/22 Order, p. 23 fn. 12.) Former Trustees argue, however, that the offset credit theory would provide an impermissible “double recovery” for Beneficiary. (Response, pp. 16, 26.) Thus, the Court first considers Former Trustees’ argument for rejecting the offset credit theory, and then turns to the parties’ disputes over specific amounts to be included in the credit.

Former Trustees argue the offset credit theory should be rejected because Beneficiary would experience a prohibited “double recovery.” (See Sanchez v Martinez (2020) 54 Cal.App.5th 535, 546 (discussing “the rule against double recovery.”)) “‘[R]egardless of the nature or number of legal theories advanced by [a] plaintiff, [the plaintiff] is not entitled to more than a single recovery for each distinct item of compensable damage supported by the evidence.’ [Cites.] ‘Double or duplicative recovery for the same items of damage amounts to overcompensation and is therefore prohibited.’” (Id.) Former Trustees argue the Court was “wrong as a matter of law” in concluding the Trust would not experience a double recovery, and argues the Court should “revisit its prior ruling[].” (Response, p. 16; see Sanchez, supra, 54 Cal.App.5th at 546 (double recovery ensues when plaintiffs “seek compensation for the very same harm.”))

The Court rejected Former Trustees’ double recovery argument in the July 14, 2022 Order for two reasons. First, the market value “offset is inconsistent with exclusion of these damages.” (7/14/22 Order, pp. 23-24.) Failing to credit funds used to improve Tower Grove, increasing its market value, against the market value offset “would essentially put the Trust in a position where its damages are being reduced by the value of improvements it paid” for, “punish[ing] the Trust for extending post-sale loans” used to benefit the Property. (Id.) Second, Beneficiary would not be “leveraging the loans against the same person—Beneficiary foreclosed on the loan security after the borrower defaulted and is now pursuing damages against the lender for gross negligence preceding the loans,” meaning the Trust “is recovering the security from the borrower and the loaned funds from the ‘lender,’” not recovering both from the same. (Id.)

The Court expressly recognized there would be “on some level . . . a double recovery” for the Trust to the extent it recovers the security for the loans and receives a partial credit for funds loaned to Dickens secured by the Property. But the Court explained that there would be “no double liability for Former Trustees’ gross negligence or Dickens’ defaults.” This is wholly consistent with the “rule against double recovery,” which prohibits plaintiffs from offering distinct theories of recovery that “seek compensation for the very same harm.” (Sanchez, supra, 54 Cal.App.5th at 546.) The rule against double recovery is based on the principle that “one injury gives rise to only claim for relief”—thus, it is improper to seek repetitive compensation “for the very same harm.” (Id.; Slater v. Blackwood (1975) 15 Cal.3d 791, 795.)

But the injury caused by the grossly negligent sale to Dickens is not the same harm as the injury caused by Dickens’ defaults on his loans. The latter injury was remedied by foreclosure on Tower Grove, which precluded Beneficiary from recovering the loan balance from Dickens. But Beneficiary has not obtained any recovery for injury to the Trust caused by Former Trustees’ grossly negligent sale of Tower Grove. That injury can be separately remedied without violating the rule against double recovery.

Sanchez does not support Former Trustees’ argument that it would be improper for Beneficiary to experience a limited “double recovery” against different parties for different harms. Nor do the other cases relied upon by Former Trustees support this conclusion; these cases equally support the conclusion that one may not enjoy inflated recovery for the same injury. (Response, p. 17; see Fuller v. Capitol Sky Park (1975) 46 Cal.App.3d 727, 732 (“compensatory” damages are “intended and calculated to make the injured person whole, not to reward him or enrich him over and above his loss; it is this intendment which gives rise to the principle of no double recovery”); Jaramillo v. State of California (1978) 81 Cal.App.3d 968, 970-71 (concluding negligent plaintiff's recovery of "damages attributable to his own negligenc would "violate the prohibition against double recovery.”)) Finally, it bears repeating that the offset credit theory is not really a “theory of recovery” of damages at all—merely an equitable addition to, or consequence of, the market value offset to the Trust’s recovery for the harm caused by Former Trustees.

In reality, the offset credit theory is the best way to address double recovery issues in this case. The Trust has already recovered the Property, which has been improved using loaned funds. Due to concerns about double recovery where Beneficiary is seeking damages for gross negligence in approving the sale of the Property, the Court concluded the current value of Tower Grove would be used as an offset, reducing damages owed by the Former Trustees (if any). But there is no dispute that the value of Tower Grove was affected by Dickens’ improvements to Tower Grove using loaned funds (though there may have been other effects on its value). Reducing the Trust’s damages by the improved value of the Property would be inequitable where its current value is on some level the product of the Trust’s investments.

The market value offset is intended to avoid double recovery for the Trust; otherwise, the Trust would experience a windfall by foreclosing on Tower Grove and recovering damages for its sale. In turn, the offset credit theory does not produce a double recovery; it avoids punishing the Trust for its investments. It is necessary to take account of funds invested by the Trust to improve the value of Tower Grove where the Court is reducing the Trust’s recovery by that value. A contrary result would be manifestly unfair to the Trust and unjustifiably benefit Former Trustees. (7/14/22 Order, p. 23.) Fundamentally, there could be no offset for the increased value of Tower Grove without the Trust investing into improving Tower Grove. The Court therefore (again) rejects Former Trustees’ double recovery argument.

Next, Former Trustees argue the credit could be “at most” $13.981 million, representing $10.601 million disbursed under the Construction Loan and $3.38 million disbursed under the Exit Financing Loan. Former Trustees argue the credit should exclude $2 million disbursed under the Exit Financing Loan because those funds were “used for administrator claims and vendor claims.” The Court briefly notes this calculation seems to be erroneous—it is undisputed that $5.538 million was disbursed under the Exit Financing Loan and $2 million of those funds were used for administrative and vendor expenses, leaving $3.538 million (not $3.38 million) for use on Tower Grove itself, for a maximum credit of $14.139 million (not $13.981 million).

In response, Beneficiary argues there “would have been no ‘vendor and administrative claims’ had the improvements not been made, and further, these claims needed to be paid off in order to clear the liens on the Property and allow the Trust to recover the Property through foreclosure.” (Reply, p. 10 fn. 3.) Beneficiary argues “there would be no Property value to offset” without the payments. (Reply, p. 10 fn. 3.)

The Court was not persuaded by Beneficiary’s argument that the offset credit should include administrative and vendor expenses “necessary” to “get the property out of bankruptcy” and foreclose on it. (Brief, p. 17 fn. 7.) The purpose of the offset credit is to adjust the market value offset for monies disbursed and used to improve Tower Grove, thereby increasing its value. This rationale cannot be extended to monies disbursed merely to recover Tower Grove; though those payments could have been necessary to proceed with foreclosure, Beneficiary has not explained how these payments affected the market value of Tower Grove, which does not depend on who owns it. (Pacific Mut. Life Ins. Co. v. County of Orange (1985) 187 Cal.App.3d 1141, 1147 (market value is “‘the amount of cash or its equivalent which property would bring if exposed for sale in the open market’” without undue advantage for buyer or seller.))

Put another way, the purpose of the offset credit is to adjust for improvements to the Property using Trust funds—not to compensate Beneficiary for the expenses of foreclosure and bankruptcy. In that regard, this exclusion from the credit is without prejudice to consideration of these expenses as damages during the attorneys’ fees phase of the trial, particularly where those expenses appear connected to Tower Grove-related litigation in bankruptcy court. The Court is merely concluding that these funds were not used to improve Tower Grove, and therefore not relevant to the market value offset.

The Court is not merely ‘punting’ the issue to a later date for convenience—this exclusion is justified by the parties’ December 23, 2021 trial sequence stipulation. The third phase of trial concerning attorneys’ fees and costs will be heavily litigated where the Trust incurred significant expenses in bankruptcy litigation. To conduct an efficient trial, it is important to segregate issues relating to the expenses of bankruptcy litigation from distinct issues relating to the market value of Tower Grove. The Court is not depriving Beneficiary of relief by finding that issues regarding administrative expenses and vendor expenses incurred in bankruptcy litigation should be addressed in the phase of trial relating to litigation expenses. That will be a significant phase of trial revolving around years of bankruptcy litigation, briefly summarized below.

In May 2008, after Dickens’ entities defaulted on loans from the Trust-owned LLCs, the LLCs “recorded [a] notice of default.” (JSSF, para. 27-28.) Two months later, on July 2008, TPP initiated bankruptcy. (JSSF, para. 28.) In April 2010, the bankruptcy court confirmed a “plan of reorganization” for TPP and the parties into a new loan agreement “that restructured the first three loans” and provided exit financing to TPP. (JSSF, para. 30.) TPP soon “emerged from bankruptcy” and in January 2011, TPP obtained new “financing” from Secured Capital Partners, LLC (“SCP”), an entity owned by Victor Noval. (JSSF, para. 30, 33.) SCP then “invested $8-9 million in Tower Grove,” “purchased the interest of [a] junior lien-holder,” and another Noval-controlled entity “obtained an 80% membership interest in TPP,” resulting in litigation relating to Tower Grove. (JSSF, para. 34-36.)

On January 3, 2013, due to “[a]ll of these outstanding disputes/lawsuits,” Former Trustees, TPP, Dickens, MH2, and “related parties” entered into a settlement agreement which “modified the Tower Park Plan in the Bankruptcy Court.” (JSSF, para. 38, 41-42.) The parties moved for the bankruptcy court to approve the settlement, which “contained a series of provisions that were expressly conditioned upon the Bankruptcy Court’s approval, and that approval becoming final without any appeal.” (JSSF, para. 42-43.) The “unconditional provisions” required TPP to make “an immediate, non-refundable payment of $5 million to the Trust” and “dismiss with prejudice” adversary proceedings, and included “releases in favor of the Trust-related parties . . . effective even if the Conditional Provisions ultimately did not become effective.” (JSSF, para. 44.)

Soon thereafter, Beneficiary applied in California probate court “for an order immediately suspending Former Trustees” and filed an objection to the motion for the bankruptcy court to approve the settlement. (JSSF, para. 55.) The probate court suspended Former Trustees “with respect to the Settlement” and “appointed Fiduciary Trust International (‘FTI’) as Trustee ad litem” with directions to “analyze whether the Settlement Agreement was ‘proper and in the best interests of the Trust.’” (JSSF, para. 47.) FTI then filed a “limited joinder” to Beneficiary’s objection to approval of the settlement. (JSSF, para. 48.)

On January 23, 2013, “the Bankruptcy Court approved the Settlement.” (JSSF, para. 49.) Beneficiary and FTI separately appealed the order approving the settlement, seeking relief from the United States District Court for the Central District of California. (JSSF, para. 50-51.) On July 1 2016, the District Court affirmed the order, and FTI appealed to the Ninth Circuit. (JSSF, para. 52; In re Tower Park Props. (C.D. Cal. Jul. 1, 2016) No. CV 13-1518-GHK.) The Ninth Circuit reversed the order affirming the bankruptcy court, “finding that the Conditional Provisions were ‘void and of no force and effect ab initio,’ based on the Beneficiary’s timely appeal.” (JSSF, para. 54; In re Tower Park Props. LLC (9th Cir. 2017) 704 F. App’x 702).

But the termination of the conditional provisions did not terminate litigation over Tower Grove. On July 18, 2016, during the above litigation, “TPP transferred the Tower Grove Property to SCP” and the Trust soon initiated judicial and non-judicial foreclosure proceedings on the deed of trust securing the Exit Financing Loan, seeking to recover Tower Grove from SCP. (JSSF, para. 57-58.) The Trust later “initiated non-judicial foreclosure proceedings as to the deeds of trust securing all four notes.” (JSSF, para. 60.)

TPP and SCP pursued litigation to stop the foreclosure. In March 2019, TPP and SCP filed a state court action “to enjoin foreclosure” on Tower Grove, which was unsuccessful. (JSSF, para. 61.) In May 2019, SCP filed for bankruptcy “less than 24 hours before the foreclosure sale” and SCP’s bankruptcy case was later dismissed “as a bad faith filing.” (JSSF, para. 61-62.). SCP also argued the foreclosure was barred by a stay in TPP’s bankruptcy case, asserting it had transferred Tower Grove back to TPP. (JSSF, para. 63.) But the bankruptcy court soon “confirm[ed] that the TPP bankruptcy did not prevent foreclosure.” (JSSF, para. 65.) Ultimately, the Trust reacquired Tower Grove “in an August 2019 foreclosure sale with a credit bid of $100,000 against the outstanding debt on the Fourth Deed of Trust, the most junior lien.” (JSSF, para. 65.)

The Court’s (non-exhaustive) summary of this litigation demonstrates the importance of properly compartmentalizing different items of damages. Expenses incurred in the foregoing litigation are properly addressed in the trial phase concerning fees and costs incurred in that litigation—not as a component of offset in the trial phase concerning valuation of Tower Grove. Hence, the Court declines to include administrative and vendor expenses as a component of the offset credit, without prejudice to returning to these expenses later on in this trial.

The Court determines the credit to offset is $14.139 million, representing only those funds actually used to improve Tower Grove ($10.601 million from the Construction Loan and $3.538 million from the Exit Financing Loan). The Court requested that Beneficiary identify “relevant evidence to establish [what] funds were used for improvements.” (7/14/22 Order, p. 24.)

Beneficiary did identify such evidence, including testimony from Dickens as well as Former Trustees Pair and Reynolds to the effect that funds disbursed under the Construction Loan were used to develop infrastructure for Tower Grove (e.g., "regrading," "sewers, insurance, storm drain "landscaping, the drainage, grading, the utilities"). (See Brief, p. 17-20.) Beneficiary also offered the “Reorganization Plan submitted to the Bankruptcy Court . . . stat[ing] that the $7 million exit loan financing would be used as follows: $2 million for Administrator Claims and Critical Vendor Claims, $5 million to complete construction on the infrastructure of the Property.” (Brief, p. 17 (emphasis added); see JSSF, para. 29-30 (undisputed that bankruptcy court confirmed "plan of reorganizatio for Tower Park Properties including "an additional $7 million in new exit financing," i.e., the Fourth Loan))

Strikingly, Former Trustees do not appear to dispute that the funds disbursed under the Construction Loan and Exit Financing Loan were used on Tower Grove, except for $2 million from the Exit Financing Loan diverted to administrative and vendor expenses “to get the property out of bankruptcy,” as addressed above. (Brief, p. 17 fn. 7.) Former Trustees did not object to or otherwise contest evidence provided in Beneficiary’s brief regarding the use of disbursed funds to improve Tower Grove (again, other than administrative and vendor expenses). Thus, the Court’s interim determination of the amount of offset credit is based on undisputed facts (including in the December 2, 2021 JSSF) and uncontroverted evidence. As a result, there is no need to receive further testimony regarding the credit, as the uncontested evidence provided in the briefing supports only one conclusion.

The Court finds Beneficiary entitled to $14.139 million credit against the market value offset. The amount of the market value offset will be determined after receipt of updated expert valuation reports.

[1] The Court SUSTAINS Former Trustes' objection to paragraph 5 of the McCurdy Declaration. The referenced email is not relevant here. The Court is not considering whether Former Trustees knew in 2012 that Beneficiary “would not approve of . . . the settlement agreement.” Though Former Trustees argue the disruption of conditional provisions of the settlement may have constituted an intervening event breaking the chain of causation, the Court is not now reaching disputed issues of causation for reasons discussed below.

[2] “But we are not pursuing damages based on those subsequent transactions for the very reason that you thought that we might have to deal with the liability issue there. We don't care. We're not going go through liability over those subsequent transactions. The liability that we are imposing and seeking to impose is what the Court has already determined on a summary judgment, and that is that there was a breach, a gross breach of trust, gross negligence, and a breach of fiduciary duties as a result of the sale to Mr. Dickens. And the consequences of that sale are what we're talking about, which is why we're all focused on the sale price, and that's it.”