Judge: H. Jay Ford, III, Case: 24SMCV05678, Date: 2025-01-31 Tentative Ruling

Case Number: 24SMCV05678    Hearing Date: January 31, 2025    Dept: O

Case Name:               C and H Holdings v. Element 7 CA, LLC, et al.

SUBJECT:                MOTION FOR APPOINTMENT OF RECEIVER AND                                                             PRELIMINARY INJUNCTION

MOVING PARTY:   Plaintiff C and H Holdings

RESP. PARTY:         (1) Defendant Element 7 CA, LLC (“Borrower”)

                                    (2) Defendant GH Group, Inc.

TENTATIVE RULING

            Plaintiff C and H Holdings’ Motion for Appointment of Receiver and Preliminary Injunction is GRANTED as to the appointment of receiver and request for injunction. 

            Plaintiff moves for appointment of a receiver over (1) all assets obtained or owned by or in the possession of Element 7 CA, LLC (“Borrower”), including (1) 13 entities who were pledged as collateral for the loan underlying this action (“Pledged Entities”); and (2) 10 additional entities (“Additional Entities”).  Plaintiff seeks appointment of a receiver pursuant to CCP §564(b)(1), (6) and (9), 4 Cal. Code of Regs. §15024 and the parties’ Loan Documents. 

I.  Plaintiff establishes entitlement to appointment of a receiver over the Borrower and certain Pledged Entities

            The following facts are established by undisputed evidence:

·       As successor-in-interest to the original debtor, Plaintiff holds a security interest in thirteen entities pursuant to Pledge and Security Agreements executed in connection with the $3,300,000 Secured Promissory Note issued by Borrower to Plaintiff’s predecessor-in-interest.  (Traina Dec., ¶¶6(a)-(n), 17 and 18, Exs. 3(a)-(n).)  (Excluding GH Group, Inc., the entities are (1) Element 7 South San Francisco, LLC; (2) E7 Rio Dell, LLC; (3) Element 7 Marina, LLC; (4) Element 7 Firebaugh LLC; (5) Element 7 Crescent City LLC; (6) E7 Oakland LLC; (7) Element 7 Suisun City LLC; (8) Element 7 Contra Costa LLC; (9) Element 7 SF3 LLC; (10) E7 LA LLC; (11) Element 7 Greenfield LLC; (12) RR Enterprises LA LLC; (13) Element 7 Oceanside LLC and GH Group, Inc. (collectively the “Pledged Entities.”)

·       Borrower defaulted on the Secured Promissory Note and Loan.  (Traina Dec., ¶¶19-20.)  Borrower disputes the amount due and owing but it does not dispute the fact of its default.

·       Borrower and two the Pledged Entities (Element 7 Firebaugh LLC (“Firebaugh”) and Element 7 Marina LLC (“Marina”)) are delinquent in taxes, as evidence by state tax liens recorded against them in the amounts of $32,157.99, $100,453.60 and $143,551.90.  (Levine Dec., ¶¶4(a)-(i), Exs. 2(a)-(i); see also Plaintiff’s RJN, ¶¶2(a)-(i).)

·       On January 5, 2025, four new State Tax Liens were recorded against Borrower’s subsidiaries, including one of the Pledged Entities against whom liens had already been filed, Firebaugh.  (Plaintiff’s Supplemental RJN, Exs. A-D.)

·       A judgment was entered against Borrower and several other entities, including five of the Additional Pledged Entities identified in the Notice of the Ex Parte Application, jointly and severally in the amount of $2,865,000 and in favor of American Patriot Brands, Inc. and GH Group, Inc.  (Levine Dec., Ex. 4; RJN Ex. 4.)  The judgment was entered as a result of Borrower’s and other entities’ default on payments due under the parties’ settlement agreement. (Plaintiff’s Supplemental Request for Judicial Notice, Ex. F, pp. 7-8.)

·       Of the thirteen Pledged Entities, only five of them have active cannabis licenses.  (Traina Dec., ¶¶15(a)-15(e), Exs. 7-11.)  E7 LA LLC, one of the Pledged Entities, had a license but it expired in June 2023.  (Levine Dec., ¶5(a).) 

·       On December 2, 2024, another lawsuit was filed by Shield Management Group, LLC against Borrower and several of the Pledged Entities (Firebaugh, Marina, E7 Rio Dell LLC (“Rio”)) seeking $734,944 in damages for breach of contract, specifically failure to pay for goods ordered. (Supplemental RJN, Ex. E.) 

·       The eight Pledged Entities without active licenses do not have them because their business ventures have been abandoned for various reasons, including inhospitable market, overly burdensome governmental regulations and unacceptable potential liabilities.  (Black Dec., ¶¶1(a)-(f).) 

·       Marina was issued a notice of violation and suspended by the Department of Cannabis Control as of May 15, 2024 for violating CEQA, 4 CCR §15010.  (Levine Dec., Ex. 8.)

Plaintiff establishes grounds for appointment of a receiver under CCP §564(b)(1), (6) and/or (9) as to the following entities:

(1) Borrower;

(2) Firebaugh;

(3) Marina;

(4) Rio;

(5) Element 7 Oceanside (“Oceaside”);

(6) RR Enterprises LA LLC (“RR Enterprises LA LLC”);

(7) Element 7 Greenfield (“Greenfield”);

(8) E7 LA LLC (“LA”);

(9) Element 7 SF3 LLC (“SF3”);

(10) Element 7 Contra Costa (“Contra Costa”);

(11) Element 7 Suisun City LLC (“Suisun”);

(12) Element 7 Crescent City LLC (“Crescent City”).

            Plaintiff has established Borrower and the Pledged Entities are “in imminent danger of insolvency,” Plaintiff’s interests in the loan and the Pledged Entities as collateral are “in danger of being lost, removed, or materially injured,” and/or a receiver is “necessary to preserve the property or rights of” Plaintiff. 

            “A debtor is insolvent if, at a fair valuation, the sum of the debtor's debts is greater than the sum of the debtor's assets.”  (Civ. Code, § 3439.02(a).)  “A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.”  (Civ. Code, § 3439.02(b).)

            Here, Plaintiff establishes based on undisputed evidence that Borrower has defaulted on the $3,300,000 loan at issue in this action.  Plaintiff states the current amount due on the loan is over $7 million. 

            Borrower has been unable to pay its taxes.  As a consequence, tax liens have been filed against it. 

            Borrower has an outstanding judgment against it $2,865,000 in American Patriot, et al. v. Element 7, Inc.  The judgment in American Patriot was only entered as a consequence of Borrower’s default on the stipulation entered in that action.  Borrower was required under the stipulation to pay $625,000 by December 15, 2023 and it defaulted on that payment, resulting in entry of judgment against it pursuant to the stipulation.  (Plaintiff’s Supplemental Request for Judicial Notice, Ex. F, pp. 7-8.)

            Borrower has been sued by Shield Management for $734,944.  Shield management alleges Borrower failed to pay for goods. 

            At least eight of the Pledged Entities owned by Borrower have essentially abandoned the business purposes for which they were formed.  Of the five Pledged Entities that do purportedly have their licenses, two have substantial tax liens filed against them (Firebaugh and Marina).  Firebaugh and Marina have also been sued for failure to pay for goods obtained from Shield Management Group. 

            These facts establish Borrower’s inability to generally pay its debts.  A presumption of insolvency therefore arises under Civil Code §3439.02(b).

            In response, Borrower fails to rebut the presumption that it is in imminent danger of insolvency.  The Chief Operating Officer of Borrower and both the Pledged Entities and Additional Pledged Entities, Josh Black, submits a declaration in opposition to Plaintiff’s Motion to Appoint Receiver.  Black testifies that (1) the eight unlicensed entities are unlicensed because their business ventures have essentially been abandoned; (2) the current cannabis licenses held by Defendants remain operative and in good standing with no risk of regulatory action or compliance issues; (3) the market value of the licenses held by the five Pledged Entities Oakland: $3,000,000; (2) South San Francisco: $1,500,000; (3) Rio Dell: $1,500,000; (4) Marina

$3,500,000; and (5) Firebaugh: $2,500,000; and (4) “Element 7 entities are actively engaged in managing the tax liabilities.”  (Black Dec., ¶¶1-4.) 

            Black’s testimony regarding the good standing of the licenses held by Oakland, South San Francisco, Rio Dell, Marina and Firebaugh lacks foundation and is conclusory.  Likewise, Black’s valuation of the value of the cannabis licenses held by these entities is entirely speculative, lacking in foundation and conclusory.  The value of the licenses are also of little value without evidence of these entities’ liabilities. 

            For example, both Marina and Firebaugh hold licenses allegedly worth $3,500,000 and $2,500,000.  Based on the evidence submitted, both these entities have substantial tax liability and must defend against the Shield Management lawsuit.  Marina was also allegedly cited and suspended for CEQA violations in May 2024.  These are only those liabilities identified by Plaintiff in connection with this motion.  Defendants fail to establish that even using Black’s conclusory and speculative valuations of their licenses, Marina’s and Firebaugh’s assets exceed their liabilities.

            Black’s response to the outstanding tax liens against Borrower, Marina and Firebaugh is also unsatisfactory.  Black states the tax liability is being “managed.”  Black fails to explain what being “managed” means.  Black does not testify that the taxes have been paid or will be paid at a specific date.  The fact that Borrower, Marina and Firebaugh are unable to pay taxes is especially significant, because tax delinquency could lead to suspension of their right to do business in California.  (Rev. & Tax. C. §23301.) 

            Borrower argues Plaintiff also fails to establish it is a senior creditor, because it has not established that it perfected its lien. “Except as provided in subdivisions (d), (e), (g), and (h), priority between a judgment lien on personal property and a conflicting security interest or agricultural lien in the same personal property shall be determined according to this subdivision. Conflicting interests rank according to priority in time of filing or perfection. In the case of a judgment lien, priority dates from the time filing is first made covering the personal property. In the case of a security interest or agricultural lien, priority dates from the earlier of the time a filing is first made covering the personal property or the time the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection.”  (Code Civ. Proc., § 697.590(b).)  “A security interest in personal property perfected by the filing of a financing statement under the law of a jurisdiction other than this state, or perfected by another method pursuant to the law of a jurisdiction other than this state, has priority over a judgment lien in the same personal property.”  (Code Civ. Proc., § 697.590(h).) Borrower argues Plaintiff fails to address whether the membership interests are certificated or uncertificated, and “filing a UCC-1 financing statement alone” may not be sufficient to perfect a security interest in a certificated membership interest.  (Defendants’ Opposition, 12:18-19.) 

            However, Plaintiff has submitted sufficient evidence to establish that its lien has more likely than not been perfected.  (Traina Dec., ¶9(a)-(m), Exs. 4(a)-(m); Levine Dec., ¶3(a)-(k), Exs. 1(a)-(k).)  Plaintiff filed a UCC Financing Statement with the California Secretary of State as to the Pledged Entities on November 12, 2021.  (Id.)  The stipulated judgment in American Patriot was entered in March 2024, approximately 3 years after Plaintiff perfected its security interests in the Pledged Entities.  (GH Group, Inc. Opposition, Vega Dec., ¶3.)

            Borrower and the Pledged Entities also agreed in the Pledge and Security Agreements that Plaintiff’s security interests in the Pledged Entities would be a “first priority continuing security interest.”  (Traina Dec., Exs. 3(a)-(n).)  Borrower and Pledged Entities agreed that they would take any further action required to perfect Plaintiff’s security interests therein.  (Traina Dec., Exs. 3(a)-(n), §3(a)(duplicated in each agreement).)  It is therefore Borrower’s burden to present evidence that Plaintiff’s filing of the UCC-1 financing statements was insufficient to perfect Plaintiff’s security interests, as well as an explanation as to why they did not do what was necessary to perfect those interests.  Defendants fail to do so.

            GH Group, Inc. filed its own opposition to the Motion for Receiver.  GH Group, Inc. argues Borrower and a number of the Additional Pledged Entities are currently paying the stipulated judgment entered against them in American Patriot.  GH Group, Inc. maintains a receivership would terminate and interfere with the business operations of Borrower and the Additional Entities who are judgment debtors under the stipulated judgment. 

            However, the Vega declaration is the only evidence submitted in support of the opposition and it does not establish any of these assertions.  Vega’s declaration lacks foundation and makes conclusory statements.  The requested receivership is not intended to liquidate Borrower, Pledged Entities or Additional Pledged Entities.  Moreover, GH Group, Inc. has no interest in the Pledged Entities.  The only judgment debtors under the American Patriot stipulated judgment are Borrower and a number of the Additional Pledged Entities. 

            For these reasons, Plaintiff establishes entitlement to the requested receivership based on CCP §564(1), (6) and/or (9) as to the following entities:  (1) Borrower; (2) Firebaugh;

(3) Marina; (4) Rio; (5) Oceaside; (6) RR Enterprises LA LLC; (7) Greenfield; (8) LA; (9) SF3;

(10) Contra Costa; (11) Suisun; (12) Crescent City (“Receivership Entities”).

            Moreover, Borrower has provided no reassurance that the operations of the Receivership Entities will improve.  Borrower expressly agreed that, upon default, Plaintiff would be entitled to exercise any rights, powers, and remedies available at law or equity, which would include receivership. (Traina Dec., Ex. 2, §8(e).)  Pledged Entities also agreed, in the event of default, Plaintiff would be entitled to “all rights and remedies of a secured party under the UCC,” including “the right, to the maximum extent permitted by law, to exercise all voting consensual and other powers of ownership pertaining to the Pledged Collateral as if Pledgee were the sole and absolute owner thereof.”  (Traina Dec., Exs. 3(a)-(n), §8(a)(1).)  Borrower and Pledged Entities cannot claim surprise that Plaintiff seeks to remove control from them and place it in the hands of a receiver. 

            Other provisional remedies are also inadequate.  As Plaintiff points out, the Receivership Entities are engaged in the cannabis industry, which is subject to very specific rules and regulations.  The cannabis regulations contemplate a receivership as an acceptable successor to an owner/license holder and sets for the procedure for the successor to continue business operations.  Moreover, the issues raised by Plaintiff are not amenable to attachment or injunctive relief.  The evidence supports a finding of mismanagement or neglect of the Receivership Entities operations and potential waste.  Attachment would not compel Receivership Entities not to waste or breach legal obligations.  Likewise, it would be impossible to draft an injunction to compel or prohibit Receivership Entities to manage their business in a way to preserve Plaintiff’s interests and avoid whatever is causing their imminent insolvency and/or loss or damage. 

            For these reasons, Plaintiff’s Motion for Appointment of Receiver is GRANTED as to the Receivership Entities.  As to the remaining Pledged Entities and Additional Pledged Entities, Plaintiff fails to establish imminent insolvency, potential loss or damage or necessity of the receivership to preserve Plaintiff’s right or interest therein.  With respect to the Additional Pledged Entities, Plaintiff fails to establish any interest in them.  Additional Pledged Entities were not pledged as collateral for the $3,300,000 Secured Promissory Note, nor has Plaintiff submitted any evidence that would justify appointment of a receiver over them.

III.  Plaintiff’s Request for Preliminary Injunction and Bond Amounts

            “A preliminary injunction may be granted at any time before judgment upon a verified complaint, or upon affidavits if the complaint in the one case, or the affidavits in the other, show satisfactorily that sufficient grounds exist therefor.” CCP §527(a). 

            “An injunction may be granted in the following cases:

            (1) When it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually.

            (2) When it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.

            (3) When it appears, during the litigation, that a party to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the action respecting the subject of the action, and tending to render the judgment ineffectual.

            (4) When pecuniary compensation would not afford adequate relief.

            (5) Where it would be extremely difficult to ascertain the amount of compensation which would afford adequate relief.

            (6) Where the restraint is necessary to prevent a multiplicity of judicial proceedings.

            (7) Where the obligation arises from a trust.”  CCP §526(a). 

            In deciding whether to issue a preliminary injunction, a court must weigh two interrelated factors:  (1) the likelihood that the moving party will ultimately prevail on the merits, and (2) the relative interim harm to the parties from issuance or non-issuance of the injunction.  (Butt v. State of California (1992) 4 Cal. 4th 668, 677-78; Alliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal. App. 4th 1292, 1299.)  “The trial court’s determination must be guided by a ‘mix’ of the potential-merit and interim-harm factors; the greater the plaintiff's showing on one, the less must be shown on the other to support an injunction.”  (Butt, supra, 4 Cal. 4th at 678.)

            The general objective in issuing a preliminary injunction is to preserve the status quo.  (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 528.)  In addition, it is rarely appropriate to grant a preliminary injunction that not only does not preserve the status quo but also grants the ultimate relief sought in the action, before trial.  (Paramount Pictures Corp. v. Davis (1965) 228 Cal.App.2d 827.)  A preliminary injunction must not issue unless the plaintiff can demonstrate reasonable probability that he will prevail on the merits, regardless of the balancing of the hardships or the irreparable nature of the harm.  (San Francisco Newspaper Printing Co. v. Superior Court (1985) 170 Cal.App.3d 438, 442.) 

            Plaintiff’s request for preliminary injunction is granted.  Plaintiff’s requested injunction would enjoin Defendants from interfering with the receivership in various ways.  Such a request is typically made in connection with requests for appointment of a receiver in or to ensure the parties’ compliance with and prevention of interference with the receivership order.  (Edmon and Karnow, Cal. Prac. Guide:  Civ. Proc. Before Trial (Rutter Group 2024), ¶9.749.1 (practice note).)

            “At the hearing of an application for appointment of a receiver on notice or ex parte, the applicant must, and other parties may, propose and state the reasons for the specific amounts of the undertakings required from (1) the applicant by Code of Civil Procedure section 529, (2) the applicant by Code of Civil Procedure section 566(b), and (3) the receiver by Code of Civil Procedure section 567(b), for any injunction that is ordered in or with the order appointing a receiver.”  (CRC Rule 3.1178.) 

            In Plaintiff’s proposed order, Plaintiff sets a receiver bond amount of $10,000 and a TRO/Injunction bond amount of $10,000.  The bonds are set at these amounts absent objection by Defendants and a proposed alternative bond amount with supporting evidence.

IV.  Kevin Singer qualified as receiver

            Kevin Singer submits a declaration in support of his appointment.  (Singer Dec. filed on December 3, 2024.)  The Court finds Singer qualified to serve as a receiver over Receivership Entities.  Singer has been appointed a court receiver for over 30 cannabis businesses.  (Singer Dec., ¶¶5, 7-35.)  He has also taken on consulting assignments for cannabis businesses.  (Id. at ¶6.) 

V.  Evidentiary Objections and Requests for Judicial Notice

12/3/24 Plaintiff’s RJN—GRANTED

1/17/25 Defendants’ Objections to Traina—OVERRULED

1/24/25 Plaintiff’s Objections—SUSTAINED as to Objection Nos. 2, 3, 13-15, 17-19 and OVERRULED as to Objection Nos. 1, 4-12, 16

1/24/25 Plaintiff’s Supplement RJN—GRANTED