Judge Holly J. Fujie, Case Number: 24STCV02587, Date: 2024-08-14 Tentative Ruling

MOVING PARTY: Plaintiffs 4E Capital LP, Pharm Capital, LLC and Alexey Mikhaylov (“Plaintiffs”)

RESPONDING PARTY: Pacific Consolidated Holdings Group, Inc. (“PCH”) and OBM PDG, LLC (“OBM”) (collectively sometimes “Defendants”)

The Court has considered the moving, opposition and reply papers. The Court has considered the objections filed to the declarations and sustains all objections except as to statements of fact contained therein that are within the personal knowledge of the declarant, as opposed to statements of opinion and conclusions of law.

This case arises from a lending relationship between Plaintiffs and Defendant PCH. On January 31, 2024, Plaintiffs filed a lawsuit against Defendants and on June 26, 2024, they filed their First Amended Complaint (the “FAC”), the currently operative pleading. The FAC alleges claims for Breach of Contract, Fraudulent Conveyance (actual and constructive and aiding and abetting same), Common Law Fraudulent Transfer (and aiding and abetting same), Larceny, Breach of Fiduciary Duty (and aiding and abetting same), Fraud, Negligent Misrepresentation, Accounting and Declaratory Relief.

In the FAC, Plaintiffs allege, in pertinent part, that “Pursuant to the Side Letters for the second set of loans, the Second 4E and Mikhaylov Loans, and the binding Restructuring [Letter of Intent (the “LOI”)], PCH assigned the PDG Notes [three promissory notes in a total amount of approximately $10,621,254 (the “Notes”) between OBM and PDG, Carpenteria and Rincon) to Plaintiffs and the other lenders.” (FAC, ¶136.)

The Memorandum refers to an alleged assignment to Plaintiffs and “other [unidentified] lenders,” who are presumably lenders separate and distinct from Plaintiffs. The parties agree that the Notes are the only substantial asset owned by OBM and that OBM is a wholly owned subsidiary of Defendant PCH. An interpleader action regarding the Notes is currently pending in the Santa Barbara County Superior Court as Pacific Dutch Group, LLC, et al., v. OBM PDG, LLC Case No. 24CV0182 (the “Interpleader Action”).

On June 5, 2024, Judge Stephen I. Goorvich of this Court issued writs of attachment on behalf of Plaintiffs and against PCH “for any property of a defendant who is not a natural person for which a method of levy is provided.” Writs of attachment to non-natural persons do not apply to shares of stock. (Code of Civil Procedure, Sections 488.300, et seq.)

On July 19, 2024, Plaintiffs presented to this Court an Ex Parte Application for a Temporary Restraining Order (“TRO”) to enjoin Defendants from proceeding with an allegedly fraudulent transfer consisting of a proposed restructuring transaction (the “Farfalla Transaction”) for the debt of PCH. The details on the Farfalla Transaction are set out in a memorandum sent to “Certain Creditors of Pacific Consolidated Holdings Group, Inc.” dated July 11, 2024 (the “Memorandum”). In the Memorandum, PCH represented that while it “presently does not believe it has any material asset value at this time,” the one asset it has is its 100% ownership interest in OBM, and that OBM has an interest as the holder of the Notes from the Dutch Group. The Memorandum states that while OBM “historically held interests in” the Dutch Group [Declaration of Omar Mangalji (“Mangalji Decl.”), ¶ 3], that ownership interest was the subject of a “comprehensive buyout” by the Dutch Group. (Mangalji Decl., ¶7.)

In connection with a settlement of issues between OBM and the Dutch Group, the Dutch Group and its related entities CPL and Rincon each gave a promissory note to OBM. The Notes were all executed as of January 19, 2022 and were in the original amounts of $19,128,071.96 (the Dutch Group), $1,382,806.50 (CPL) and $919,910 (Rincon), for a total amount due to OBM of $21,430.788.46. For the purposes of this order, the three promissory notes will be referred to as the “Notes” and the Dutch Group, CPL and Rincon will be referred to as the “Dutch Group.”

The Memorandum proposed to creditors, including Plaintiffs, that they exchange their position as creditors of PCH for member interests in a new entity, Farfalla Capital Investments, LLC (“Farfalla”), in return for which PCH would enter into a Secured Promissory Note in favor of Farfalla (the “Farfalla Note”) in a principal amount not to exceed the approximate value of the Notes, which would be secured by a first-priority, perfected lien in PCH’s entire ownership interest in OBM, the holder of the Notes. The Memorandum is silent as to whether or when payments would be made by PCH on the Farfalla Note.

The Memorandum represents that Farfalla “will” receive a first-priority security interest in “PCH’s entire ownership interest in OBM,” but not a first-priority, perfected lien in the Notes themselves. Farfalla therefore does not receive the Notes themselves but only receives a security interest in the company that owns the Notes. Meanwhile, the Notes are the subject of an interpleader action in the Santa Barbara Court which Dept. 1 of this Court will be asked tomorrow to transfer to this Department.

No representation is made that the Notes are not in default, that PCH will make payments on a set schedule, or at all, that regular payments, or any payments, will be made by the Dutch Group under the Notes or that all, or in fact any payments made under the Notes will in turn be paid to Farfalla. Under the terms of the Farfalla Transaction, however, PCH would effectively retain no assets, since its one asset is pledged to Farfalla. The fact that if Plaintiffs did not agree to enter into the Farfalla Transaction they would be able to pursue their creditor’s claim against PCH would therefore be meaningless.

The Court is not ruling whether or not Plaintiffs have a security or an assignment interest in the Notes themselves. Plaintiffs, however, have alleged contract claims which Judge Goorvich has held are likely to prevail. Plaintiffs have also alleged claims in this lawsuit for fraudulent transfers which are sufficiently generally pled to cover the Farfalla Transaction. The Farfalla Transaction would result in the transfer of what PCH itself describes as the “one exception” to its belief that it has no material asset value.

As the Memorandum states: “[i]f OPBM PDG fails to meet its obligations to [Farfalla] under the Secured Promissory Note, [Farfalla], in addition to the traditional remedies granted a secured lender, will have the right to foreclose on and take possession of PCH’s entire ownership interest in OBM PMG and its assets as a going concern.” OBM’s assets consist of the Notes. Without the assets of OBM, i.e., the Notes, PCH has no “material asset value.”

In return, the members of Farfalla would be entitled to “distributions from Farfalla from funds PCH pays to Farfalla on the Farfalla Note,” but only at the Manager’s discretion. Even those potential payments are not guaranteed or even set by PCH in any way. While the original amount of the Notes was $21.4 million in January 2022 and there were stipulated monthly payments from the Dutch Group to OBM which presumably reduced the value of the Notes to approximately $10,621,254 over a period of two years (a reduction in principal value of approximately $10,778,746)[1], only “some of [those payments] were occasionally remitted by OBM PDG to PCH.” (Mangalji Decl., ¶ 8.)

Moreover, under the Memorandum, not only is there no requirement that all payments received by PCH on the Notes will be paid to Farfalla, but in fact “THERE IS NO GUARANTEE THAT YOU WILL EVER RECEIVE ANY DISTRIBUTION FROM [FARFALLA] OR ANY PAYMENTS WITH RESPECT TO THE PCH OBLIGATIONS ASSIGNED PURSUANT TO THE PROPOSED RESTRUCTURE.” The interest rate on the Notes is 0%.

The Memorandum set a deadline of July 19, 2024, close of business, for creditors to enter into a non-binding agreement to become members of Farfalla or to retain their status as creditors of PCH after the creation of Farfalla. PCH has represented to the Court that – even without Plaintiffs’ participation – the “significant participation” required to effectuate the Farfalla Transaction has been met, such that if the PI is not issued, it will go forward. If the Farfalla Transaction goes forward, Plaintiffs will have no assets from which to satisfy their

Under the Farfalla Transaction as contemplated, Plaintiffs therefore have the option either to: 1) accept the offer of membership in Farfalla and lose their current claims against Plaintiffs, with some vague possibility of distributions from Farfalla if PCH pays Farfalla on the Farfalla Note; or 2) reject or otherwise not respond to the offer and retain their claims as against PCH, which would then become an entity with no assets.

After oral argument on the Ex Parte Application, the Court expressed a tentative decision to grant the TRO in order to maintain the status quo pending full briefing and argument on a Preliminary Injunction (“PI”). In light of this tentative decision, the parties instead stipulated to the issuance of an Order to Show Cause (“OSC”) for this date why a PI should not be ordered: (1) restraining and enjoining Defendants PCH and OBM from proceeding with the Frafala Transaction or an Assignment for Benefit of Creditors (“ABC”); and (2) restraining and enjoining OBM and PDG and PCH from taking any other actions to transfer PCH’s interest in OBM, and PCH and OBM’s claimed interests in the Notes throughout the pendency of this action.

Initially, the Court finds that the potential effect of the Farfalla Transaction is to create an effective lien on the Notes as part of the first security interest conveyed in OCM, which owns the Notes, while at the same time allowing PCH to continue to enjoy the benefits of potential payments to be made on the Notes (albeit subject to the possibility of making payments on the Farfalla Note). The Farfalla Transaction would therefore effect a transfer of the Notes within the meaning of CC Section 3439.01(i).

“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 nonissuance of the injunction. . . . . 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 v. State of California (1992) 4 Cal.4th 668, 677-78 (citations omitted).)

Judge Goorvich has held that Plaintiffs have a substantial likelihood of prevailing on their breach of contract claims, at least, for the amount of their debt, which is in excess of $10 million. (June 5, 2024 Order granting Applications for Writs of Attachment at pp. 8-10.) The Court further finds that the allegations of the Sixth Cause of Action of the FAC sufficiently allege a basis for proceeding on a fraudulent conveyance claim regarding the Farfalla Transaction under Civil Code (“CC”) Section 3439.04(a)(1).

“A fraudulent conveyance is a transfer from the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.” (Nautilus, Inc. v. Yang (2017) 11 Cal.App.5^th 33, 39; CC, Section 3439.04(a).) A transfer is fraudulent “if the debtor made the transfer (1) with actual intent to hinder, delay, or defraud any creditor, or (2) without receiving reasonably equivalent value in return, and…intended to, or reasonably believed or reasonably should have received, that he or she would incur debts beyond his or her ability to pay as they became due.” (Kirkeby v. Superior Court (2004) 33 Cal.App.4^th 642, 648.)

In addition to making fraudulent transfers voidable, the Uniform Fraudulent Transfers Act (“UFTA”) also permits a plaintiff to seek “[a]n injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or other property of the transferee.” (CC Section 3439.07(a)(3)(A).) Whether a conveyance is made with fraudulent intent is a question of fact, and proof often consists of inferences from the circumstances surrounding the transfer. (Filip v. Bucurenciu (“Filip”) (2005) 129 Cal.App.4^th 825, 835.) Civil Code Section 3439.04 sets forth the factors that determine actual intent. These factors are: (1) whether the transfer or obligation was to an insider; (2) whether the debtor retained possession or control of the property; (3) whether the transfer or obligation was disclosed or concealed; (4) whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) whether the transfer was subject of substantially all the debtor’s assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation; (9) whether the debtor was insolvent or became insolvent shortly after a substantial debt was incurred; and (10) whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

There is no minimum number of relevant factors that must be present before the scales tip in favor of finding actual intent to defraud. (Filip at 834.) The Court therefore analyzes the relevant factors.

The Farfalla Transaction would cause PCH to issue a promissory note in the full amount of the Notes, secured by PCH’s stock in OBM, to an entity which it has created for the purpose of avoiding its debts. PCH has no means to pay on the Secured Promissory Note except by using payments that it may receive on the Notes. Thus, the income stream from the Notes is the only asset of PCH since the OBM stock itself does not produce income. Therefore, an effective lien on the payments on the Notes – PCH’s only source of income and assets – is to be effectively transferred to Farfalla, an entity created by PCH for the purpose of eliminating its own debt. Farfalla is an insider of PCH in this transaction. The Court finds that this factor weighs in favor of the Farfalla Transaction being a fraudulent transaction.

PCH retains ownership of the stock in OBM while retaining the right to income from the Notes as the 100% owner of OBM. This factor weighs in favor of designation of the Farfalla Transaction as a fraudulent transaction.

(3) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit

Plaintiffs had filed suit before this transaction was offered to PCH’s creditors. This factor weighs in favor of designation of the Farfalla Transaction as a fraudulent transaction.

See factor (1). This factor weighs in favor of designation of the Farfalla Transaction as a fraudulent transaction.

(5) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation

The consideration is cancellation of PCH’s debt and other claims from the lenders other than Plaintiff in an amount not established and so this factor cannot be evaluated.

(6) Whether the debtor was insolvent or became insolvent shortly after a substantial debt was incurred

If the Farfalla Transaction closes, PCH would become indebted in the amount of the Secured Promissory Note, with its only asset encumbered in an equal amount, rendering it insolvent. This factor weighs in favor of designation of the Farfalla Transaction as a fraudulent transaction.

The Court finds that the balance of the Section 3439.04 factors weighs in favor of a finding that there is a substantial likelihood that Plaintiffs will prevail on their fraudulent transfer claim under CC Section 3439.04.

In the absence of an injunction, Plaintiffs would be harmed because they would be required to choose between maintaining their claims against an effectively insolvent entity and trading those claims for an interest in an entity that does not guarantee any payments whatsoever.

If this Court were to issue this injunction, Defendants would be unable to close the Farfalla Transaction. As the Court does not intend to enjoin Defendants from entering into an Assignment for the Benefit of Creditors, they would be in no worse position than they were in before this proceeding was begun. While PCH claims that it would be harmed because the Farfalla Transaction is the only way that it can avoid insolvency, as it has reached this position through the borrowing that has put it in this position, the relative harm to the Parties weighs in favor of Plaintiffs who lent the money rather than in favor of Defendants, who borrowed those funds and did not pay them back.

Because the Court finds that good cause exists for the issuance of a preliminary injunction against Defendants’ proceeding with the transaction outlined in the Memorandum July 11, 2024 or any similar restructuring involving the rights to the Notes other than an Assignment for the Benefit of Creditors, the Court therefore issues a Preliminary Injunction against Defendants on condition of Plaintiffs’ posting a bond in the amount of $______________ within __ days of the date of this order.

Parties who intend to submit on this tentative must send an email to the Court at SMC_DEPT56@lacourt.org as directed by the instructions provided on the court website at www.lacourt.org. If the department does not receive an email and there are no appearances at the hearing, the motion will be placed off calendar.

Hon. Holly J. Fujie

Judge of the Superior Court

[1] In the Letter of Intent between lenders, including Plaintiffs, and PCH, which was executed in April of 2023, the total principal amount of the Notes was represented by PCH to be $14,815, 005.95 - $6,615,782 less than it had been when the Notes were executed and $4,193,751 more than it was represented to be a year later.