Judge James C. Chalfant, Case 21STLC04554 2022-08-04 Tentative Ruling

People of the State of California v. Aero Institute, 21STLC04554

Tentative decision on application for appointment of receiver: granted

Plaintiff People of the State of California (“People”) seeks the appointment of a receiver over the property of Defendant AERO Institute (“AERO”).

The court has read and considered the moving papers (the opposition was not considered except on AERO’s right to defend) and reply,[1] and renders the following tentative decision.

Plaintiff commenced this proceeding on June 17, 2021 alleging a cause of action for involuntary dissolution. The Complaint alleges in pertinent part as follows.

AERO is a non-profit public benefit corporation with the charitable mission of educating the public regarding science, technology, and aerospace issues. To that end, AERO Institute has hosted a variety of programs with schools and libraries, including pre-teacher programs for adults interested in becoming teachers to improve their ability to teach mathematics and sciences.

AERO’s sole source of funding is cooperative agreements with the National Aeronautics and Space Administration (“NASA”). Based on its representation that it would operate as a charitable organization, AERO received tax-exempt status form the Internal Revenue Service (“IRS”).

On June 20, 2021, the Los Angeles County District Attorney's Office filed a criminal complaint against AERO’s then-executive director Kimberly Anne Shaw (“Shaw”) and consultant Susan Miller (“Miller”) as well as the former mayor of Palmdale James Coleman Ledford (“Ledford”), charging them with embezzlement, misappropriation of public funds, and grand theft. On August 22, 2018, the criminal court issued a temporary restraining order (“TRO”) freezing access to AERO’s bank accounts to prevent dissipation of assets.

After Miller and Shaw’s indictment, AERO board member Curtis Cannon (“Cannon”) became interim executive director until February 2018 when he became its sole director.

On January 16, 2020, Miller pled guilty to the charge of misappropriation of funds in violation of Penal Code section 424(a)(l).

On January 20, 2020, Shaw pled guilty to the charge of filing a false tax return on behalf of AERO in violation of Revenue and Taxation (“R&T”) Code section 19705(a). In doing so, Shaw stipulated to the underlying factual basis in the criminal complaint. Miller and Shaw both agreed to relinquish any interest they may have in AERO’s assets.

After Ledford accepted a plea agreement on April 22, 2021, the criminal court lifted the TRO freezing AERO’s assets.

Since Cannon became interim executive director in 2017, AERO has failed to file required documents with the IRS. Throughout 2018, Business Manager/Vice President of Business Operations Amber Abel (“Abel”) issued letters ending the employment of multiple high-ranking employees until November 30, 2018, when Cannon ended Abel’s employment. Since the August 2018 TRO, AERO has ceased all programs furthering its charitable mission. AERO’s counsel has since stated that the organization plans to cease operations.

The People seek (1) an order involuntarily dissolving AERO under the provisions of Corporations Code (“Corp. Code”) sections 6510 and 6518, providing for satisfaction of all of its lawful debts, and distributing remaining assets in a manner consistent with its charitable mission and any other restrictions; and (2) for attorney’s fees and costs.

On July 2, 2021, the People served AERO with the Complaint and Summons by substitute service, effective July 12, 2021.

On July 23, 2021, the court reclassified the matter from Civil Limited to Civil Unlimited.

On August 6, 2021, the People filed a motion to stay the proceedings of Susan Miller v. AERO Institute, LASC No. 21AVCV0051, pending resolution of this case. On September 23, 2021, the People re-filed the motion to stay which the court granted on October 29, 2021.

On August 12, 2021, AERO filed a demurrer without motion to strike. The court overruled the demurrer.

Business and Professions (“Bus. and Prof.”) Code section 6513 provides that the court has authority to appoint a receiver when, at the time of the filing of a complaint for involuntary dissolution or at any time thereafter, the court has reasonable grounds to believe that unless a receiver of the corporation is appointed, the interests of the corporation or the public or charitable purpose of the corporation will suffer pending the hearing and determination of the complaint.

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 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.

Per its 2006 Articles of Incorporation, AERO is organized for public and charitable purposes. Trang Decl., ¶13, Ex. H. Its specific purpose is “to facilitate, integrate, and collaborate in joint education and research projects between government, academia, and industry, to serve as a technology demonstrator to both the onsite and distance education community with leading-edge technology infrastructure in telecommunications, wireless access, and digital broadcasting, and to carry on other charitable and educational activities associated with these purposes as may be authorized by law.” Trang Decl., ¶13, Ex. H. As its property is irrevocably dedicated to charitable purposes and not to the benefit of a director or officer, upon dissolution and repayment of debts and liabilities the company’s estate is to be distributed to another non-profit fund or foundation operated for charitable purposes that is tax exempt. Trang Decl., ¶13, Ex. H.

In AERO’s Statement of Information dated October 21, 2015, Miller was listed as AERO’s Secretary, and Shaw was listed as its CEO. Trang Decl., ¶14, Ex. I.

The original Form 990 for AERO in 2016 lists its highest compensated employees as Shaw, paid $75,000, and Chairman Danny Roberts (“Roberts”), paid $71,780. Trang Decl., ¶7, Ex. C. The Form 990 did not list any independent contractors that received compensation. Trang Decl., ¶7, Ex. C. An amended form reduced Roberts’ compensation to $6,000, acknowledged that accountant Amber Able (“Able”) was paid $141,541, and listed listing two independent contractors – insurance provider California Choice, which received $112,164, and consultant EDA, which received $150,980. Trang Decl., ¶7, Ex. C. The form did not disclose Shaw’s connection to EDA. Trang Decl., ¶7.

While the signature block on Part II of the Form 990 for AERO in 2017 listed Cannon as a director, Part VII listed him as a Secretary receiving $90,404. Trang Decl., ¶21, Ex. P.

On December 11, 2020, during the criminal case against Shaw, Miller, and Ledford, Cannon submitted a declaration as part of AERO’s motion to lift the TRO freezing its assets. Trang Decl., ¶2, Ex. A. In the declaration, Cannon asserted that he had been an AERO Board member since 2009 and the Executive Director from May 2017 to February 2018. Trang Decl., ¶2, Ex. A. Shaw was AERO’s President and Chief Executive Officer until May 2017, working for AERO Institute as a consultant thereafter until August 2018. Trang Decl., ¶3, Ex. A. Miller was a contractor and Executive Director doing contract work for AERO and receiving payment until May 2018. Trang Decl., ¶3, Ex. A. As of the declaration, neither Shaw nor Miller had an existing connection to AERO. Trang Decl., ¶3, Ex. A.

On October 5, 2017, Shaw’s criminal counsel wrote to Cannon requesting that AERO partially indemnify Shaw for her defense. Trang Decl., ¶4, Ex. A. Cannon consulted with AERO’s counsel and determined that it was required to do so via prior agreement, although he later negotiated a cap on how much AERO would pay. Trang Decl., ¶4, Ex. A. Between May and July 2018, Cannon transferred over $175,000 from AERO accounts as a part of the indemnification. Trang Decl., ¶16, Ex. K. He later declined to indemnify Miller for the cost of her defense in another case as it concerned her work as an independent contractor. Trang Decl., ¶4, Ex. A.

Cannon also asserted that with its funds frozen, AERO had been unable to operate except to defend itself in ongoing litigation, respond to some requests for documents from NASA, and attempt to have its accounts unfrozen. Trang Decl., ¶5, Ex. A. With all employees terminated and backpay and other debts owed, Cannon sought to unfreeze the assets solely to have those debts paid and gift the rest to a charity acceptable to the attorney general – not to continue operations. Trang Decl., ¶5, Ex. A. AERO has since repeated this position in its Answer to this Complaint, asserting that it sees no point in trying to resume operations. RJN Ex. 1.

Cannon was Palmdale’s Economic Development Manager starting February 2018. Trang Decl., ¶20, Ex. O. As a government employee, Cannon was reqruied to file a Form 700 Statement of Economic Interests with the Fair Political Practices Commission. Trang Decl., ¶20. Despite this, Cannon failed to disclose his AERO income in his 2017 and 2018 Form 700s, marking that he had no reportable income. Trang Decl., ¶20, Ex. O.

Per Government Code section 12586(g), AERO’s Board, less any interested directors, is responsible for reviewing executive director compensation to ensure that it is reasonable. Trang Decl., ¶10. The Board meeting minutes from December 12, 2017 show that the Board unanimously agreed to provide year-end bonuses to staff, including unspecified executive bonuses to the Business Manager and Executive Director in lieu of salary step increases. Trang Decl., ¶10, Ex. F. This occurred while Cannon was the Executive Director, and he also signed the minutes as Board secretary; at the time he was the only director on the Board. Trang Decl., ¶10, Ex. F. AERO has not produced records supporting an authorization of payment of any compensation to Cannon that complies with Government Code section 12586(g) or Corporations Code section 5233. Trang Decl., ¶11.

On May 2, 2019, NASA’s Office of Inspector General (“OIG”) issued a letter to AERO demanding the return of unauthorized funds in violation of the terms of the Cooperative Agreements and the Code of Federal Regulations. Trang Decl., ¶17, Ex. L. NASA had discovered $3,296,638.01 in cost disallowances that were incurred under multiple NASA Cooperative Agreements, meaning that AERO is liable for that amount to the federal government. Trang Decl., ¶17, Ex. L. These cost disallowances included $189,800 paid to Ledford when he was mayor, $923,468.70 paid to Shaw as a consultant when she was also receiving payment as CEO, and payment of $327,148.31 of Shaw’s legal fees in the criminal action. Trang Decl., ¶17, Ex. L. Cannon had previously claimed that any AERO assets were “excess funds” and unspent “indirect costs” to which the company had absolute right. Trang Decl., ¶17, Ex. L. NASA responded that the Cooperative Agreements between the parties are not cost-plus agreements. Trang Decl., ¶17, Ex. L. Additionally, the Non-Profit Organization Indirect Cost Negotiation Agreement that AERO signed with the Department of Interior (“DOI”) required that, if the final rate of indirect costs for that year “is less than the provisional rate, the organization will be required to pay back the difference to the funding agency.” Trang Decl., ¶17, Ex. L. NASA reminded AERO that interest and fees were accruing on the amount owed. Trang Decl., ¶17, Ex. L.

On January 21, 2020 Shaw pled guilty to the charge of filing a false tax return on behalf of AERO in violation of R&T Code section 19705(a). Trang Decl., ¶8, Ex. D. In doing so, she also surrendered any interest in various accounts. Trang Decl., ¶8, Ex. D. The prosecution clarified that her release of claims to these AERO accounts was the extent of restitution sought from Shaw personally. Trang Decl., ¶8, Ex. D.

On January 16, 2020, Miller pled guilty to the charge of misappropriation of funds in violation of Penal Code section 424(a)(l), and received three years’ probation. Trang Decl., ¶9, Ex. E. The prosecutor clarified that any restitution would be satisfied by AERO Institute funds currently frozen by the TRO, to which Miller would surrender all claims. Trang Decl., ¶9, Ex. E.

On April 22, 2020, Ledford pled guilty to perjury charges in violation of Penal Code section 118(a). Trang Decl., ¶15, Ex. J.

On January 7, 2021, AERO’s counsel sent the Deputy Attorney General assigned to this case a spreadsheet reflecting estimates of anticipated creditor claims against AERO. Trang Decl., ¶18, Ex. M. The claims included employment expenses for (a) Cannon of $74,000 at $2,000 per month since January 2018; (b) $250,000 to the firm that represented Shaw in her criminal case; and (c) $100,000 to AERO’s counsel for a retainer. Trang Decl., ¶18, Ex. M. The email also stated that Miller’s indemnification claim– now stayed – would be owed. Trang Decl., ¶¶ 18-19, Ex. M-N. Counsel estimated that AERO would have $1.2 million leftover for another charity, with the understanding that expedited litigation would enable it to donate more. Trang Decl., ¶18, Ex. M.

On June 23, 2021, the District Attorney’s Office filed a criminal action against Cannon alleging (1) two counts of perjury by declaration under Penal Code section 118(a), one on February 27, 2018 and one on April 6, 2020; and (2) misappropriation of federal funding from NASA in violation of Penal Code section 424(a)(l). Trang Decl., ¶6, Ex. B. This criminal case is still pending. Trang Decl., ¶6.

On April 19, 2022, AERO’s counsel explained that while the company intended to dissolve, it opposed involuntary dissolution because that would allow NASA to make unwarranted claims on its funds. Trang Decl., ¶12, Ex. G. AERO had no choice but to oppose this action, knowing that it would be wasting time and money on discovery and motions in the process. Trang Decl., ¶12, Ex. G. Plaintiff replied that NASA and other creditors would have an opportunity to bring their claims even in voluntary dissolution. Trang Decl., ¶12.

As of March 31, 2020, AERO’s corporate status has been suspended by the Secretary of State. RJN Ex. 2.

The People apply for the appointment of Byron Moldo as Receiver for all AERO assets pursuant to Bus. and Prof. Code section 6513.

The court has authority to appoint a receiver when, at the time of the filing of a complaint for involuntary dissolution or at any time thereafter, the court has reasonable grounds to believe that unless a receiver of the corporation is appointed, the interests of the corporation or the public or charitable purpose of the corporation will suffer pending the hearing and determination of the complaint. Bus. and Prof. Code §6513.

The rights and privileges of a domestic corporation may be suspended for non-payment of taxes. R&T Code §23301. “The purpose of [R&T] Code section 23301 is to ‘prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern’. Palm Valley Homeowners Assn., Inc. v. Design MTC, (2000) 85 Cal.App.4^th 553, 560. A corporation suspended for non-payment of taxes is disabled form resort to the courts for any purpose, including defending a lawsuit. Id.

AERO has been suspended by the Secretary of State, apparently for non-payment of taxes, and does not have the right to oppose this action. RJN Ex. 2. AERO asserts that it did not receive the proper 60-day notice of suspension, the suspension is therefore not effective, and it cannot bar opposition. Opp. at 15; Petti Decl., ¶60. This is not the proper forum for relitigating the suspension. AERO must either seek relief from the FTB and Secretary of State or make an affirmative claim that the suspension was improper.

AERO does not have the right to oppose this motion, and the opposition and supporting declaration have not been considered.

Pursuant to Bus. & Prof. Code section 6513, the court clearly has reasonable grounds to believe that the interests of AERO, the public, or the charitable purpose of AERO will suffer pending the hearing and determination of the complaint unless a receiver of the corporation is appointed.

AERO’s Articles of Incorporation provide that any money received is to be used towards charitable purposes, including upon its dissolution. Trang Decl., ¶13, Ex. H. The People provide evidence that AERO has ceased doing business and intends to dissolve and give the rest of its funds to a charity of the Attorney General’s choosing after settling all debts. Mot. at 9; Trang Decl., ¶5, Ex. A; RJN Ex. 1.

AERO opposes involuntary dissolution because that would allow NASA to make an “entirely unwarranted claim” on AERO’s funds. Trang Decl., ¶12, Ex. G. AERO therefore intends to litigate this case to advocate for voluntary dissolution, knowing that it will exhaust resources in the process. Mot. at 10; Trang Decl., ¶12, Ex. G. AERO previously said that the residue of assets for donating to the next charity will be greater if it can avoid litigation. Trang Decl., ¶18, Ex. M.

AERO has no employees and conducts no charitable operations, but it has $1.8 million in assets. The issue for receivership is whether a receiver will be better able to manage these assets for the charitable purpose of the company better than current management. Shaw, Miller, and Ledford have all pled guilty and none are involved in the company’s operation. Cannon is the only one left to run AERO and he has a pending criminal case for perjury and misappropriation of NASA funds arising out of his operation of the company.

Plainly, a receiver is better able to pursue AERO’s interests than Cannon. This conclusion is not dependent upon Cannon’s guilt in the criminal case but rather his actions. He was on the Board when the company paid illicit funds to staff and wasted NASA funds. See Mot. at 4. In January 2021, his attorney proposed to use AERO funds to pay him $74,000 as compensation since January 2018, $250,000 to Shaw for her criminal case, $100,000 to AERO’s counsel for a retainer, and potentially some unstated monies for Miller’s indemnification claim. Trang Decl., ¶18, Ex. M. These expenses apparently have been mostly paid and arguably none should have been. The court is not aware of a Labor Code duty to advance the legal fees for a former employee facing criminal charges where the employee is charged with embezzling from his or her employer and there certainly is no legal duty to indemnify the attorney’s fees of a former employee who pleads guilty.

Additionally, Cannon’s stated reason for avoiding involuntary dissolution -- that it would allow NASA to make unwarranted claims on its funds – is nonsensical. NASA and other creditors will have an opportunity to bring their claims against AERO whether the company voluntarily or involuntarily dissolves. See Reply at 5-6. Moreover, non-profit charities are no different from other corporations in having an obligation to pay their debts. If AERO stole money from NASA -- and the guilty pleas show that its management did -- there is nothing inconsistent with the company’s charitable purpose in repaying the debt.

Ultimately, this is a matter for negotiation and no person could do it better than an impartial receiver. Cannon’s self-interest precludes him from involvement in the distribution of AERO’s assets.

The motion for appointment of a receiver is granted. Moldo is qualified and is appointed as the Receiver. Although the People seek an order of involuntary dissolution, that is a matter for the I/C court to decide. This court has merely appointed a receiver to manage the company’s assets. The court also will not permit the Receiver to employ attorneys or accountants at this time.

[1] The People failed to lodge a courtesy copy of the reply in violation of the Presiding Judge’s First Amended General Order Re: Mandatory Electronic Filing. Counsel is admonished to provide courtesy copies in all future filings.

[2] The People request judicial notice of (1) AERO’s Answer in this action (RJN Ex. 1); and (2) search results for AERO on the Secretary of State’s database of California corporations (RJN Ex. 2). The court need not judicially notice RJN Ex. 1 as it is always free to review filings in the current action. The second request is granted. Evid. Code §452(c).