Judge James C. Chalfant, Case 20STCV04933 2023-04-20 Tentative Ruling

Plaintiff John J. Menchaca, bankruptcy trustee for Hefner P. Hefner (“Trustee” and sometimes “Menchaca”) moves for the appointment of a receiver for Defendant Just Float, Inc. (“Just Float”). Defendants Just Flow and Michael D. Ruskow (“Michael”) separately oppose.[1]

The court has read and considered the moving papers, oppositions,[2] and reply, and renders the following tentative decision.

Plaintiff Trustee filed his Complaint on February 5, 2020, against Defendants Michael, Sarah S. Ruskow (“Sarah”), Matthew, Andreas Kramer (“Kramer”), and Just Float. The Complaint alleges claims for (1) breach of contract, (2) promissory estoppel, (3) specific performance, (4) fraud and deceit, (5) involuntary dissolution of Just Float, (6) breach of fiduciary duty by majority shareholders, (7) derivative action for a breach of fiduciary duty by the controlling director, (8) appointment of a receiver, (9) removal of director, and (10) unjust enrichment. The verified Complaint alleges in pertinent part as follows.

Just Float is a corporation that offers individual sensory deprivation tanks. Michael is its Chief Financial Officer (“CFO”), and he owns at least 50% of the voting shares and up to 50% of all outstanding shares. Compl., ¶4. Sarah is Michael’s wife, and Matthew is Michael’s brother. Compl., ¶4. Depending on various versions of events, Matthew either owns 10% or 20% non-voting equity interest, owns 20% voting equity interest, or just loaned money to Just Float. Kramer is Just Float’s Executive Director hired by Michael. Compl., ¶6.

The Complaint alleges both derivative and direct causes of action by the trustee for the bankruptcy estate of In re Hefner P. Hefner and Annalisa L. Hefner, Bankr. Case No. 2:18-bk-19685-VZ (“Bankruptcy Estate”) against Kramer, the Ruskows, and Just Float. Compl., ¶1. Menchaca is the Trustee and successor-in-interest to Hefner and Annalisa L. Hefner (“Annalisa,” collectively “Debtors”). Compl., ¶2. Trustee’s interest includes at least 50% of the voting shares and up to 50% of all outstanding shares in Just Float. Compl., ¶2.

On June 21, 2013, Hefner and Michael incorporated Just Float and each received 500 shares of voting stock. Compl., ¶18. Hefner became Just Float’s President and Secretary, and Ruskow became its CFO. Compl., ¶18. They were the only two officers and directors at all relevant times. Compl., ¶18.

As President, Hefner was responsible for designing and managing the construction of Just Float’s business premises, which took place between June 2014 and October 2015. Compl., ¶19. He also was responsible for creating marketing programs and pricing strategies, managing the press, conducting interviews, and hiring and training employees. Compl., ¶19.

As CFO, Michael was responsible for paying vendors and handling internal administration and supervision of labor. Compl., ¶22. Michael did not prepare any financial statements or file corporate tax returns from the beginning of Just Float’s operations through 2017. Compl., ¶22.

The relationship between Hefner and Michael deteriorated, which led to constant argument over management styles. Compl., ¶23. Michael also refused to allow Hefner to receive a salary as Just Float’s general manager, even though Hefner worked 60 to 80 hours per week. Compl., ¶25. Because the two were the only directors, Hefner could not set a salary for himself as manager without Michael’s consent. Compl., ¶24.

By November 3, 2017, Hefner’s personal financial situation was such that he could not continue to work for Just Float uncompensated. Compl., ¶26. He emailed Michael with a request for a monthly salary of $8,000 if he was to remain in charge of the business. Compl., ¶26. Because of Just Float’s growth, he also asserted that the company should have a regular bookkeeper to maintain financials and an independent accountant to regularly report on the company’s financial condition. Compl., ¶37. He further asked Michael to maintain his equity stake but withdraw from any voting. Compl., ¶37.

On November 6, 2017, Michael refused Hefner’s request for a salary and did not address the other issues. Compl., ¶¶ 27, 38. He demanded that Hefner prioritize the payment of money Just Float owed to Michael, Matthew, and his parents. Compl., ¶38. At this point, the balance on a loan to Just Float from Michael’s parents was $67,000. Compl., ¶39. There is no evidence that Michael loaned any money to the business. Compl., ¶40. If Hefner agreed to these demands, he would have to work without income for several more years. Compl., ¶40.

On November 10, 2017, Hefner gave notice of immediate resignation as Just Float’s day-to-day manager. Compl., ¶41. He told Michael to take over daily operations. Compl., ¶41. In retaliation, on November 11, 2017, Michael emailed Hefner a board resolution that proposed to remove Hefner and make Michael CEO. Compl., ¶42. This would give him full control of Just Float finances. Compl., ¶42. Hefner refused and sent an email clarifying that he only wanted to step down as day-to-day manager, not as CEO or director. Compl., ¶43. Michael responded that it was not his intent to remove Hefner as director, which was false. Compl., ¶43.

On November 28, 2017, Michael filed a complaint (the “2017 complaint”) that sought to have the state either appoint a provisional director or remove Hefner as a director. Compl., ¶44. By then, Michael had taken matters into his own hands by locking Hefner out of all Just Float systems and its bank accounts. Compl., ¶48. Michael acknowledged Hefner as a director and shareholder but refused him access to Just Float’s records unless a court ordered it. Compl., ¶49.

On December 28, 2017, in violation of the company’s bylaws, Michael authorized an owner’s distribution of $9,500 to himself but not to Hefner and without his input as CEO. Compl., ¶54.

On January 1, 2018, without Hefner’s knowledge, Michael paid his parents $25,000 from Just Float. Compl., ¶53. That month, he retained Kraemer as day-to-day manager without Hefner’s input or consent. Compl., ¶55. Kraemer was paid $55,000 that year. Compl., ¶55. Michael also put himself on payroll and made further distributions to himself totaling $33,483.84 without any similar distribution to Hefner. Compl., ¶56. In May 2018, Michael added Sarah to the payroll over Hefner’s objection and paid her $18,711.08. Compl., ¶56.

The total paid by Just Float to Michael, Sarah, and Kramer in 2018 was $116,590.92, more than the $96,000 salary Hefner requested in November 2017 before he resigned. Compl., ¶56. In 2019, Just Float continued to pay all three without Hefner’s consent but made no distributions to Hefner. Compl., ¶57.

On May 7, 2018, Hefner received a three-day notice to pay rent or quit Just Float’s Premises from landlord Stewart Wang, M.D., Inc. (“Wang”). Compl., ¶59. The three-day notice alleged that Just Float owed back rent of $24,690.04. Compl., ¶59. Afraid of a lawsuit against him as Just Float’s co-guarantor, Hefner emailed Michael to ask about funds Just Float had to pay rent. Michael responded that the company only had $4,000 available. Compl., ¶60. Michael blamed Hefner’s pursuit of growth without building an emergency fund and falsely asserted that he had to divert funds into maintenance and repair over the previous six months. Compl., ¶60. The real reason Michael failed to pay the rent was that he had paid $74,038.46 in distributions to himself, his family, and Kraemer. Compl., ¶¶ 60-61.

On May 21, 2018, Hefner, Michael, and Matthew signed a shareholders’ agreement (“Agreement”) to resolve the 2017 complaint and associated cross-complaint. Compl., ¶68, Ex. 1. Under the Agreement, all Just Float shareholders agreed to sell the company and list it with the business broker Veld Group (“Veld”). Compl., ¶68, Ex. 1 (Agreement, §3). The goal was to maximize the sale price and complete the sale within 90 days. Compl., ¶68, Ex. 1 (§3).

Pursuant to the Agreement, both Hefner and Michael must approve any non-recurring business expense over $500. Compl., ¶72, Ex. 1 (§8). Additionally, Kraemer and Michael may not receive combined monthly compensation of over $6,000. Compl., ¶72, Ex. 1 (§10).

Hefner and Michael agreed to enter into a tolling agreement for all claims that were or could be alleged against each other, would dismiss them without prejudice, and would drop their complaints and grant each other immunity upon a sale of the business. Compl., ¶73, Ex. 1 (§5). Hefner also agreed to pay the $24,690.04 back rent as a loan to Just Float. Compl., ¶68, Ex. 1 (§1). Matthew agreed to release all claims against Hefner, Michael, and Just Float upon completion of the sale. Compl., ¶74, Ex. 1 (§6).

The parties agreed to apply the proceeds from the sale in the following priorities: Veld’s commission, the $36,000 loan from Michael’s parents, the $24,690.04 loan from Hefner, a credit card debt with Bank of America for $26,000, and miscellaneous bills. Compl., ¶69, Ex. 1 (§4). The Agreement calculated a $22,721 difference between an April 2017 distribution to Hefner for $10,279 and $33,000 in salary distributions to Michael since December 2017. Compl., ¶71, Ex. 1 (§4). Hefner would receive 25% of this $22,721, or $5,680, from the proceeds of the sale after the shareholders resolved the miscellaneous bills. Compl., ¶71, Ex. 1 (§4). The remaining sale proceeds would be distributed among the three shareholders, with Matthew receiving 20% and the other two 40% each. Compl., ¶¶ 69-70, Ex. 1 (§4).

Hefner paid the rent check as the Agreement required. Compl., ¶72. The court dismissed the 2017 complaint on June 22, 2018. Compl., ¶73. The parties signed a listing agreement with Veld on May 30, 2018. Compl., ¶75, Ex. 2.

In June 2018, Michael informed Hefner that he planned to drop a vender and hire Sarah to manage Just Float’s online marketing. Compl., ¶79. Hefner reminded him that any expenditures over $500 require his approval. Compl., ¶79. Michael reassured him that the Agreement was in place, but he still hired Sarah over Hefner’ objection. Compl., ¶80.

In May 2018, Michael agreed to pay Kraemer $8,000 and make him an Executive Director without disclosure to Hefner. Compl., ¶77. In later months of 2018, Kraemer and Michael agreed to treat the monthly amount Kraemer received less than $8,000 as a deferred liability without Hefner’s consent. Compl., ¶78. By December 31, 2018, Michael also incurred $24,500 in consulting fees to Kraemer. Compl., ¶78.

The wages and consulting fees for Michael, Sarah, and Kraemer in 2018 totaled $10,118.51 per month, which was $4,118.51 over the $6,000 limit. Compl., ¶81. The wages and consulting fees for Michael, Sarah, and Kraemer in the first three and a half months of 2019 exceeded the cap by $8,635.45 per month. Compl., ¶82.

At the time of the Chapter 7 petition, the assets of the Debtors’ Bankruptcy Estate included a 40% voting equity interest in Just Float, a $24,609 loan made to Just Float on May 21, 2018, and a countersuit filed against Michael. Compl., ¶¶ 12, 14.

The schedule of creditors with unsecured claims on the Bankruptcy Estate includes a $38,626.60 credit card debt for “Marcus by Goldman Sachs.” Compl., ¶15. Debtors assert that $24,609 of this debt was used to pay Just Float’s rent to Wang to avoid eviction and is the personal loan Debtors made to Just Float on May 21, 2018. Compl., ¶¶ 15, 68.

Wang is also a creditor with an unsecured claim of $653,600 based on Hefner and Michael’s personal guarantee of the lease for the Premises. Compl., ¶16.

Matthew is a creditor for both a $4,000 personal loan and $400,000 invested in Just Float. Compl., ¶16.

Michael’s parents are listed as creditors because of a $36,000 balance on the construction expense loan, which they now assert Hefner guaranteed even though there is no evidence of a guarantee. Compl., ¶16.

Trustee seeks $249,715.04 in damages, plus punitive damages, attorney’s fees, and 10% interest from May 22, 2019. Compl., ¶¶ 162-64, 170. Trustee also seeks specific performance of the Agreement. Compl., ¶168. He further requests a decree dissolving and winding up Just Float. Compl., ¶¶ 171-172. The court should appoint a receiver to manage Just Float’s affairs until the court issues a determination as to Just Float’s dissolution. Compl., ¶179. Trustee also seeks injunctive relief against Defendants.

On September 7, 2021, Kraemer filed a Cross-Complaint against Cross-Defendants Michael, Sarah, Matthew, and Just Float. The Cross-Complaint alleges claims for (1) express indemnity against Just Float, (2) breach of contract against Just Float, (3) equitable indemnity against all Cross-Defendants, (4) contribution against all Cross-Defendants, (5) declaratory relief against all Cross-Defendants, (6) negligent misrepresentation against Michael, (7) intentional misrepresentation against Michael, and (8) concealment against Michael. The Cross-Complaint alleges in pertinent part as follows.

Kraemer has served as Just Float’s Executive Director in an independent contractor capacity beginning in 2018. As of the Cross-Complaint, Just Float owes him $25,000 and he no longer works for it.

When Michael hired Kraemer, he represented that he owned and operated Just Float, and had decisional authority. The Complaint alleges that Michael knew his authority was limited and that hiring and paying Kraemer exceeded that authority.

Before Kraemer’s engagement with Just Float ended, Michael signed an indemnification agreement whereby Just Float agreed to indemnify and defend Kraemer in this action. Michael and Just Float have not honored this agreement, and Kraemer has suffered damages including attorney’s fees and costs.

Kraemer seeks (1) a declaration of the percentage of negligence and fault of Cross-Defendants contributing to the damages at issue in the Complaint, (2) a judgment against Cross-Defendants either equal to any judgment against Kramer or proportionate to the degree of fault for each Cross-Defendant in causing the underlying injuries, (3) an order that Cross-Defendants indemnify Kraemer for any liability or judgment in Trustee’s favor, (4) judicial determination of the respective rights and duties of the parties relating to Kraemer’s claim, (5) attorney’s fees and costs, (6) punitive damages, (7) restitution, and (8) compensatory, general, special, incidental, and consequential damages with interest.

On March 25, 2021, Department 20 (Hon. Kevin Brazile) overruled Kraemer’s demurrer to the Complaint but granted in part a motion to strike without leave to amend.

On April 23, 2021, Department 20 rejected Trustee’s application for service of Matthew by publication.

On August 25, 2021, Michael and Sarah filed a substitution of attorney from pro per status to Pavel Ekmekehyan, Esq. (“Ekmekehyan”).

On September 7, 2021, Kraemer Trustee, Michael, Sarah, and Just Float with the Cross-Complaint.

On September 13, 2021, Department 20 granted Trustee’s application for service of Matthew by publication. Trustee filed proof of publication on October 19, 2021.

On October 8, 2021, Just Float filed notice of substitution of counsel from David Shemano, Esq. to Stephen Hammers, Esq. (“Hammers”).

On December 6, 2021, at Trustee’s request, Department 20 entered Matthew’s default.

On June 1, 2022, the parties stipulated to set aside Mathew’s default, which Department 20 granted.

On November 17, 2022, Department 20 overruled Matthew’s demurrer to the Complaint.

CCP section 564(b) provides that the court has authority to appoint a receiver in any of the following pertinent circumstances: (1) in an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor's claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured; and (9) in all other cases where necessary to preserve the property or rights of any party.

The appointment of a receiver is a drastic remedy to be utilized only in “exceptional cases.” As such, a receiver should not be appointed unless absolutely essential and because no other remedy will serve its purpose. City & County of San Francisco v. Daley, (1993) 16 Cal.App.4th 734, 744. A plaintiff who seeks appointment of a receiver of certain property under CCP section 564(b)(1) has the burden to establish by a preponderance of the evidence that plaintiff has a joint interest with defendant in the property, that the property is in danger of being lost, removed or materially injured, and that plaintiff's right to possession is probable. Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp., (1953) 116 Cal.App.2d 869, 873.

From May 2018 through March 2020, and after Hefner resigned as Just Float’s day-to-day manager, Michael had final authority for Just Float’s payroll, including for himself and Sarah. Kraemer Decl., ¶2. Kraemer did not have any input into Just Float activities after he left in March 2020. Kraemer Decl., ¶3.

On September 4, 2020, Michael provided answers to Requests for Admissions (“RFAs”). Woo Decl., ¶5, Ex. D. In response to RFAs 7-11, Michael admitted that Just Float did not pay Hefner or Michael compensation between 2013 to 2016, and that it did not pay Hefner compensation in 2017. Ex. D.

For RFA 18, Michael denied that he caused Just Float to pay him regular payments for either salary or profit distributions from December 2017 thereafter. Ex. D. Michael clarified that he never authorized distributions. Ex. D. For a year after Hefner’ resignation, Sarah and Michael worked without pay while living on welfare in a trailer park. Ex. D. Just Float started paying them because they otherwise would have needed to find other jobs. Ex. D.

For RFA 19, Michael denied that Hefner did not authorize the payments Just Float made to Michael from December 2017. Ex. D. Hefner agreed to Kraemer and Michael’s salaries during the Agreement’s 90-day period. Ex. D. The intention and spirit of the Agreement was for those wages to continue past that period. Ex. D.

For RFA 22, Michael admitted that he caused Just Float to pay Kraemer regular payments of wages, contractor payments, or reimbursements in 2018. Ex. D. He explained that Kraemer is a talented business consultant who helped Michael increase Just Float’s gross revenue over 50% in two years. Ex. D.

On September 13, 2022, Trustee took Michael’s deposition. Woo Decl., ¶3, Ex. B, p. 16. Michael explained that he and Sarah had transitioned from consultants to employees before the COVID-19 pandemic. Ex. B, p. 16. After COVID-19, he moved away from paying independent contractors for Just Float. Ex. B, p. 16.

Kraemer’s last day of work was March 2020. Ex. B, p. 26. He was executive director but never a shareholder, company officer, or member of the board of directors. Ex. B, pp. 26-27. Just Float did not rehire Kraemer or any other consultants after COVID-19 passed. Ex. B, p. 16.

Michael denied that he ever authorized a distribution from Just Float to himself. Ex. B, p. 20. Distributions must go to all shareholders for approval. Ex. B, p. 20.

Sarah first joined Just Float as a volunteer when Hefner left in 2017. Ex. B, p. 28. She joined the payroll in 2018. Ex. B, p. 28.

Whoever was in charge of company finances at any given time would have to approve Michael’s payroll or consulting fees. Ex. B, p. 21. This would normally be a CEO or executive director. Ex. B, p. 24. Kraemer negotiated everyone’s salaries in 2018 after he reviewed the company financials with Michael. Ex. B, pp. 24-25, 27-28. They also decided together to add Sarah to the payroll. Ex. B, pp. 28-29.

In 2018, Michael received a salary of $28,000 and Sarah received $19,000. Ex. B, pp. 24-25. Michael’s salary slightly increased in 2019. Ex. B, p. 26.

Michael took a meager salary of $6,000 per month in 2022, or $72,000 annually. Ex. B, pp. 21-22. His wife Sarah also receives $6,000 per month. Ex. B, p. 23. This is a submarket rate, as even Hefner asked for $96,000 a year before he left Just Float. Ex. B, p. 25. Just Float never paid Hefner that amount because he left before conversations got to that point. Ex. B, p. 25.

Just Float has had the same single bank account with Bank of America since December 2018. Ex. B, p. 86. Only Hefner and Michael have the authority to sign checks for that account. Ex. B, p. 29. As far as Michael knows, Hefner has not signed any checks since June 2018. Ex. B, p. 29. A December 2018 check for $5,000 has Michael’s signature and appears to have a note “shareholder redemption.” Woo Decl., ¶4, Ex.B, pp. 86-87, Ex. C. Michael did not remember what this payment was for, but Just Float’s ledger should provide that information. Ex. B, p. 87.

Michael did not recall if in 2019 Hefner gave Just Float consent to pay Michael payroll or consulting fees. Ex. B, pp. 50-51. Michael did not seek Hefner’ permission to pay Sarah in 2019 because it was not a non-recurring expense. Ex. B, p. 51.

The Agreement limited expenditures to Michael and Kraemer at $6,000 per month, but for only the 90 days after the parties signed it. Ex. B, pp. 35, 52. The sum of payments to Michael, Sarah, and Kraemer did not exceed $6,000 per month until after the Agreement’s 90-day period expired. Ex. B, p. 52. Although the Agreement has no express reference to 90 days, the spirit of the Agreement was just to begin the sale of the company during this period. Ex. B, pp. 52-53. They intended to reevaluate it after the 90-day period, but that did not happen because Hefner filed for bankruptcy. Ex. B, p. 53. Section 10 limiting the monthly compensation does not refer to a 90-day period clause, but the Agreement makes clear that this is the intent of the whole document. Ex. B, p. 54.

There was a rush to pay the rent because of the three-day notice. Ex. B, p. 68. As part of the plan to sell Just Float, Hefner decided to pay the outstanding rent in the three-day notice. Ex. B, pp. 68-69. There was no urgency to sign the Agreement so that Hefner would make the payment. Ex. B, p. 69. Michael was not relying on Hefner to make that payment, but he hoped that Hefner would do so. Ex. B, p. 70.

Michael provided Trustee with the 2018 and 2019 Just Float profit and loss statements during good-faith negotiations. Woo Decl., ¶7, Ex. F, pp. 73-74. The statements showed net loss of $63,577.99 in 2018 and net income of $28,378.42 in 2019, yielding a deficit of $35,199.57 across those two years. Ex. F.

On January 4, 2021, Michael texted Kraemer, asking why he was filing documents in this action without discussing it with Michael. Woo Decl., ¶8, Ex. G. Kraemer responded that he was defending himself as he must. Ex. G. He noted that Just Float should be covering his costs for the action, but it is not doing so. Ex. G. It was bad enough that he had to deal with this after “busting my ass for you for two years.” Ex. G.

Michael responded that Kraemer should not act like he was anything special. Ex. G. Kraemer was paid well for a job that he did, and the minute Just Float stopped paying him he stopped caring about the company. Ex. G.

On January 18, 2021, Michael apologized for his comments and said that the stress from this action has made him emotionally charged. Ex. G. He admitted that he could not have made Just Float successful without Kramer’s hard work, and he would always be grateful for it. Ex. G.

On June 20, 2022, Matthew demurred to the Complaint, asserting that the Agreement was an unenforceable agreement to agree on a future business sale contract. Woo Decl., ¶9, Ex. H. As such, it was not sufficiently definitive to be enforceable. Ex. H.

On November 17, 2022, Department 20 overruled Matthew’s demurrer. Woo Decl., ¶10, Ex. I. The court ruled that the Agreement was definitive in that it required concrete exchange of funds, equity, and a release of claims for compensation through a sale of Just Float within 90 days. Ex. I. The Agreement required good faith effort to sell the company, and Hefner alleges that Defendants did not make that effort. Ex. I.

Byron Moldo, Esq. is an attorney who has handled complex receivership matters in various industries. Woo Decl., ¶6, Ex. E. He has also represented receivers and worked with various federal, state, county and city taxing and regulatory agencies. Ex. E.

Hefner and Michael co-founded Just Float in 2013 and spent two years preparing its facility for clients. Michael Decl., ¶4.[4] In 2015, their relationship began to deteriorate as they disagreed over repayment of company debts, use of company funds, and management responsibilities. Michael Decl., ¶5.

On November 10, 2017, Hefner sent Michael an email stepping aside from day-to-day operations of Just Float. Michael Decl., ¶6, Ex. A. Hefner said that Michael could either assume management himself or let the business fail. Ex. A. Michael stepped up as manager the same day. Michael Decl., ¶7. Hefner has not assisted in day-to-day managerial duties or any board meetings since. Michael Decl., ¶10.

Hefner’s rapid departure caused turmoil within Just Float and created widespread concern among employee’s about their jobs. Michael Decl., ¶7. Michael worked 60-70 hours week to ensure the company continued operations, and Sarah volunteered her time. Michael Decl., ¶8.

Michael also hired Kraemer in January 2018 as a consultant to perform a review of Just Float’s business operations. Michael Decl., ¶9. Kraemer’s original role was just to identify and resolve any problems with Just Float’s business model and develop strategies for its long-term viability. Michael Decl., ¶9. His performance convinced Michael that he would be an asset, so Michael offered him an executive director position in May 2018. Michael Decl., ¶9.

Michael also hired Sarah in May 2018 to assist with marketing. Michael Decl., ¶24. Sarah has a degree in business management and extensive knowledge of social media platforms. Michael Decl., ¶24.

In 2017 and 2018, Just Float experienced cash flow issues. Michael Decl., ¶11. It had to both make payments on outstanding loans and remedy various building maintenance problems Hefner neglected when he was manager. Michael Decl., ¶11. In April 2018, Wang sent an invoice for $24,690.04 in overdue rent. Michael Decl., ¶12. Wang sent the three-day notice on May 7, 2018. Michael Decl., ¶12.

The financial issues and his strained relationship with Hefner led Michael to consider selling Just Float. Michael Decl., ¶13. In May 2018, Michael and Hefner discussed that possibility to see if they could resolve their dispute. Michael Decl., ¶14.

On May 21, 2018, shareholders Matthew, Michael, and Hefner entered the Agreement to sell Just Float with a 90-day timeline. Michael Decl., ¶15, Ex. B. Hefner agreed to pay the $24,690.04 in overdue rent, which they would treat as a loan to Just Float. Ex. B. They agreed to list Just Float for sale with broker Veld, with the intent to maximize the sale price and complete the sale within 90 days. Ex. B.

Michael understood that the Agreement had a goal to sell within 90 days. Michael Decl., ¶18. The parties wanted to keep expenses low during this 90-day period to retain cash flow despite limited resources. Michael Decl., ¶19. The Agreement required that Hefner and Michael must both approve any non-recurring business expense of over $500. Michael Decl., ¶19, Ex. B. Kraemer and Michael also could not receive combined monthly compensation of over $6,000. Michael Decl., ¶19, Ex. B.

The shareholders did not execute listing agreements with Veld until May 30 and June 1, 2018. Michael Decl., ¶¶ 16-17, Ex. C. The asking price was $485,000. Michael Decl., ¶17, Ex. C. Veld never discussed any offers with the shareholders. Michael Decl., ¶20. Michael did not hear from Veld until July 2019, the month that the listing agreement expired. Michael Decl., ¶20.

The day after the 90-day period in the Agreement expired, Hefner filed for bankruptcy. Michael Decl., ¶20. Michael has since tried to work with Trustee to negotiate a reasonable purchase price for Hefner’s Just Float shares. Michael Decl., ¶21.

Sarah has been involved with all aspects of Just Float’s social media, developed advertising campaigns, managed social media review platforms, and managed in-house projects. Michael Decl., ¶25. Social media following and membership drastically increased by 2019. Michael Decl., ¶25. Her efforts allowed Just Float to end its relationship with an advertising firm that cost more than the revenue its efforts yielded. Michael Decl., ¶26. Sarah’s salary grew with the company’s revenue. Michael Decl., ¶26.

Kraemer focused on balancing company needs with company spending. Michael Decl., ¶27. Under his direction, employees received a fair but submarket salary. Michael Decl., ¶27. Michael’s original salary was $6,000 per month, less than the $8,000 Hefner wanted before he left. Michael Decl., ¶27. Because of Michael’s overtime work and Just Float’s increase in revenue, Just Float gave him a $5,000 bonus in December 2018. Michael Decl., ¶28. Just Float originally categorized this as a shareholder redemption or distribution but later corrected it in Just Float’s books. Michael Decl., ¶28.

Revenue grew from $781,000 at the end of 2017 to $1.174 million in 2019. Michael Decl., ¶29; Michael Just Float Decl., ¶2. Although the COVID-19 pandemic affected Just Float as a business that relies on in-person visitation, it stayed open. Michael Decl., ¶30; Michael Just Float Decl., ¶2.

Kramer is no longer with Just Float, but Sarah and Michael continue to handle day-to-day operations. Michael Decl., ¶¶ 32-33. It has been difficult to supervise a business that is open 12 hours a day, six days a week, and contend with this litigation. Michael Decl., ¶34. As a result, Michael has decided to engage a business broker to list Just Float for sale. Michael Decl., ¶34. The broker is preparing new paperwork and marketing materials for Just Float’s sale. Michael Decl., ¶31, Ex. D. It includes an SBA loan proposal of $872,900 from Bank of the West based on a business valuation of $959,000, almost double its $485,000 value in 2018. Michael Decl., ¶¶ 31, 35, Ex. D.

Until a sale occurs, Michael continues to work to ensure Just Float preserves its value as a business entity. Michael Decl., ¶36. Sarah and Michael are working with a marketing agency to improve sales and marketing, redesign the website, and build a membership retention campaign. Michael Decl., ¶37. Michael is also preparing a series of manual-type documents to allow potential buyers and the future owner to understand all Just Float systems. Michael Decl., ¶38.

To the extent that it asserts that the $6,000 cap under the Agreement applies to both Sarah and Michael, this motion implies that Michael cannot receive more than $3,000 for his work. Michael Decl., ¶39. Sarah was not a party to the Agreement, which has expired. Michael Decl., ¶39.

Michael has already found it difficult to live on the submarket salary he now receives. Michael Decl., ¶40. This litigation has drained his savings and he cannot survive on a lower salary than he now receives. Michael Just Float Decl., ¶4. If his salary is capped, he will need to look for other employment. Michael Decl., ¶40.

A requirement that a receiver approve every expenditure over $500 would deprive Michael of any control over Just Float. Michael Just Float Decl., ¶5. The approval process would require time that Michael does not have, and the receivership would incur additional costs. Michael Just Float Decl., ¶5. Combined with Michael’s need to find a new job to supplement his income, this could destroy Just Float or make it less marketable. Michael Just Float Decl., ¶5.

Just Float’s profit and loss statements show a net loss of $61,127.60 in 2020, a net gain of $36,031.16 in 2021, and a net loss of $44,971.55 in 2022. Woo Reply Decl., ¶2, Ex. J.

Plaintiff Trustee applies for the appointment of a limited receiver, relying on CCP section 564(b)(9), which provides the court with authority to appoint a receiver in all cases where necessary to preserve the property or rights of any party. Trustee seeks a receiver only to ensure that Defendants follow the provisions of the Agreement. Defendants Michael and Just Float oppose.

In May 2018, the parties entered the Agreement to list Just Float with the intent of obtaining the best purchase offer within 90 days. Section 8 provides that Hefner and Michael must both approve any non-recurring business expense of over $500. Section 10 provides that Kraemer and Michael could not receive combined monthly compensation of over $6,000.

Although the shareholders signed a listing agreement with Veld, Veld did not inform them of an offer within 90 days of the Agreement. Michael did not hear from Veld until July 2019, upon the expiration of the listing agreement.

Michael had total authority for payroll decisions and Kraemer is no longer at the company. Kraemer Decl., ¶¶ 2-3. Michael’s salary after the Agreement was $6,000 per month. Michael Decl., ¶27. At his deposition, Michael admitted that his salary slightly increased in 2019. Woo Decl., ¶3, Ex. B, p. 26. He stated that he took a salary of $6,000 per month in 2022, or $72,000. Woo Decl., ¶3, Ex. B, pp. 21-22. His wife Sarah, with whom Michael files a joint tax return, receives the same amount. Ex. B, p. 23.

Because of Michael’s overtime work and Just Float’s increase in revenue, he admits that Just Float gave him a $5,000 bonus in December 2018. Michael Decl., ¶28. The check has a notation that it is a shareholder redemption, but Michael now asserts this was an accounting error that Just Float has fixed. Woo Decl., ¶4, Ex. C, pp. 86-87; Michael Decl., ¶28.

The total salary and distributions received by Michael, Sarah, and Kraemer for 2018 was $116,590.92 and for the first three months of 2019 was $51,224.05. Michael breached the Agreement by over $100,000, which is one of the reasons this lawsuit was filed. Mot. at 5.

Michael asserts that the Agreement is an unenforceable agreement to agree. Michael Opp. at 10. Additionally, the Agreement intended the sale of Just Float to occur within 90 days, and it expired when that did not happen. The Agreement’s restrictions on monthly salaries and non-recurring business expenses also expired after 90 days. Michael Opp. at 10-11.

Michael explains that the shareholders wanted to keep expenses low during this 90-day search for a buyer to retain cash flow despite limited resources. Michael Decl., ¶19. The sum of payments to Michael, Sarah, and Kraemer did not exceed $6,000 per month until after the Agreement’s 90-day period expired. Woo Decl., ¶3, Ex. B, p. 52. As a result, Michael and Kraemer never breached the Agreement. Michael asserts that it would be unreasonable to believe that shareholders randomly put provisions in the Agreement that are not related to the primary goal of selling the company in 90 days. Michael Opp. at 11.

Trustee argues that the Agreement does not impose a time restriction on sections 8 and 10, which provide the spending limits at issue. Only Section 3 refers to the 90-day period, and it merely states that the shareholders will list the business with Veld with the goal of maximizing the sale price and completing a sale within 90 days. Michael Decl., ¶15, Ex. B. The vague word “goal” does not imply a strict expiration date. Even if the goal was to sell within 90 days, the Agreement did not exclude the possibility of selling later.[5] If the parties could perform well beyond 90 days, the other provisions did not expire either. Reply at 3-4.

Trustee notes that Michael’s argument that the Agreement is an agreement to agree was addressed by Department 20 on Matthew’s demurrer. Woo Decl., ¶¶ 9-10, Exs. H-I. The court held that the Agreement was definitive in that it required concrete exchange of funds, equity, and a release of claims for compensation through a sale of Just Float within 90 days. Woo Decl., ¶10, Ex. I. This suggests that the Agreement required good faith effort to sell the company. Woo Decl., ¶10, Ex. I.

The court need not address these arguments because a receivership is inappropriate even if Trustee is correct. See post.

The Complaint alleges that Just Float paid Sarah $18,711.08 in 2018. Compl., ¶56. Michael stated in deposition that he took a salary of $6,000 per month in 2022, or $72,000, and his wife Sarah, with whom he files a joint tax return, receives the same amount. Woo Decl., ¶3, Ex. B, pp. 21-23. Michael asserts that Sarah’s salary grew with Just Float’s revenue, which she helped improve through her involvement in social media and in-house projects. Michael Decl., ¶¶ 25-26.

Trustee asserts that the Agreement’s $6,000 limit on Michael’s compensation extends to Sarah’s pay such that the couple’s combined salary must not exceed $6,000. He asserts that Michael hired and paid Sarah as a workaround to the $6,000 limit in the Agreement. Mot. at 9.

The Agreement does not mention Sarah. Michael Decl., ¶15, Ex. B. Trustee argues that the Agreement does not mention Sarah because Hefner did not know that she was working and collecting a salary when he entered into the Agreement. Reply at 4. Assuming arguendo that this is true, it is irrelevant because the parties’ intent in the Agreement controls. Based on the evidence presented, Trustee has not shown that hiring Sarah was a deliberate workaround in violation of the implied covenant of good faith and fair dealing. At this stage, the evidence does not support a conclusion that the Agreement limits Sarah’s salary or ties it to Michael’s salary.

In appointing even a limited receiver based on a claim of company mismanagement – which is what Trustee’s claim about Michael’s failure to adhere to the Agreement is -- the court always evaluates whether a receiver will do a better job of running the company than current management. There must be a good reason to substitute a receiver for that person. Otherwise, the status quo management should remain in place and alternative remedies considered. There are multiple reasons to deny appointment of a receiver in this case.

First, as Michael argues, Trustee filed this suit threes ago. Michael Opp. at 1. Trustee fails to explain why he waited so long to protect the company’s assets.

Second, and related to the first reason, any need to protect the company’s assets is stale. Michael has admitted that he received more than $6,000 per month in 2018 after including his end-of-year $5,000 bonus. Michael Decl., ¶¶ 27-28. Michael’s monthly salary in 2022 met but did not exceed the $6,000 limit. Woo Decl., ¶3, Ex. B, pp. 21-22. Based on the current evidence, Sarah’s salary is not included in the Agreement. Kraemer is no longer with the company and any excess salary he received in 2018 is no longer of import. Thus, Trustee’s only evidence of breach of the Agreement is for the year 2018; any claim of current mismanagement would have to be based on the inclusion of Sarah’s salary.

Third, Michael will be unable to run the company without receiving a salary. The reasons that Michael needs a salary as manager mirror those that led Hefner to quit the day-to-day operation. Hefner needed a salary because his personal financial situation was such that he could not continue to work for Just Float uncompensated. Compl., ¶26. Michael asserts that he cannot support his family on a lower salary than he has now. Michael Just Float Decl., ¶4. This salary is already submarket and less than the $8,000 per month that Hefner wanted. Michael Decl., ¶27. If his salary further decreases, he will need to look for other employment and cannot devote all his energy to Just Float. Michael Decl., ¶40. This could harm or destroy the company at a time when he is trying to sell the business for the benefit of all. Michael Decl., ¶¶ 36-38; Michael Just Float Decl., ¶5.

Trustee asserts that, with or without the Agreement, any payment to Michael is wasteful because Just Float shareholders are not entitled to a salary. Mot. at 8. Trustee adds that Michael’s hardship does not justify evasion of enforcement of the Agreement and denial of his motion. Michael is a shareholder and enforcement of the Agreement would improve Michael’s assets by increasing the corporation’s cash flow. Reply at 2-3. Michael admitted in deposition that Just Float never paid Hefner a salary when he was day-to-day manager. Woo Decl., ¶3, Ex. B, p. 25. This is what led Hefner to resign from that role. Compl., ¶¶ 26-27, 37-41.[6]

This may be true, but the court’s duty is not to ascertain whether the Agreement is enforceable and that Trustee will win at trial, but rather whether the appointment and payment of a receiver is a better remedy than paying Michael to keep the company going. It is better to pay Michael and Sarah a modest salary than pay a receiver who is unfamiliar with the business.

Fourth, the fragile state of the company will not bear the cost of a receiver. Trustee presents 2018 and 2019 profit and loss statements showing a loss of $35,199.57. Woo Decl., ¶7, Ex. F. Statements from the following years show a loss of $61,127.60 in 2020, a gain of $36,031.16 in 2021, and a loss of $44,971.55 in 2022. Woo Reply Decl., ¶2, Ex. J.

Michael asserts that company revenue grew from $781,000 at the end of 2017 to $1.174 million in 2019. Michael Decl., ¶29; Michael Just Float Decl., ¶2. Michael does not provide financial documents to support these assertions. He also indicates that the value of the company may have increased. Veld’s listing agreement in 2018 listed a sale price of $485,000. Michael Decl., ¶17, Ex. C. The latest marketing materials include an SBA loan proposal of $872,900 from Bank of the West based on a business valuation of $959,000, almost double the 2018 asking price. Just Float Opp. at 4; Michael Decl., ¶¶ 31, 35, Ex. D. These marketing materials are not persuasive, but they have some evidentiary value. Even if they are pie-in-the sky, and the company is worth only $485,000 or less, a limited receivership for that small of a company could destroy the business.

Fifth and most important, there are alternative remedies available to Trustee, including injunctive relief and a provisional director. If Trustee can show that the Agreement is enforceable and that it should include Sarah’s salary, he could obtain a preliminary injunction to prevent Michael from violating its provisions. This might kill the company, but no more so than a receiver. If Sarah’s salary is not within the scope of the Agreement’s implied covenant, Trustee could seek a provisional director in the hope of him or her voting to alter or exclude her salary. The drastic remedy of a receivership is not the best remedy available.

[1] Defendant Matthew Ruskow (“Matthew”) submitted a notice of joinder to Just Float’s opposition. Without a memorandum of points and authorities, this represents only a cheerleading effort.

[2] The footnotes in the opposition of Defendants’ Michael and Sarah violate the 12-point type required by CRC 2.104 and have not been read or considered.

Defendant Just Float failed to lodge a courtesy copy of its opposition in violation of the Presiding Judge’s First Amended General Order Re: Mandatory Electronic Filing. Just Float’s counsel is admonished to provide courtesy copies in all future filings.

[3] Trustee relies on allegations in the verified Complaint. A verification on behalf of a plaintiff corporation may be made by any officer, but the complaint shall not be considered as evidence. CCP §446. It would appear that Trustee stands in the same role as a corporate officer providing a verification and that the Complaint cannot be considered as evidence.

Additionally, a person verifying a pleading may do so on information and belief. CCP §446(a). While Trustee’s verification contends that he knows the facts in the Complaint pertaining to “financial matters, payments and financial transactions”, he does not contend that he has knowledge of any other allegations. It is obvious from his role that Trustee does not have firsthand knowledge of any facts occurring before the bankruptcy was filed.

As a result of both issues, the Complaint’s allegations arguably are not evidence. Nonetheless, their consideration would not affect the outcome of this motion.

[4] Michael has prepared two declarations, one for his own opposition (“Michael Decl.”) and one for Just Float’s opposition (“Michael Just Float Decl.”)

[5] The listing agreement with Veld did not expire until July 2019. Michael Decl., ¶20.

[6] Michael’s admission actually is more limited. He testified only that Just Float never paid Hefner because he left before conversations got to that point. Woo Decl., ¶3, Ex. B, p. 25.