Judge James C. Chalfant, Case Number: 22STCV05934, Date: 2024-08-01 Tentative Ruling

Lesley F. Testan, et al. v. Susan Novell, et al., 22STCV05934

Tentative decision on motion for approval of receiver’s final report and account: granted

Receiver Stephen J. Donnell (“Receiver”) moves for approval of his final account and report.

The court has read and considered the moving papers (no opposition was filed) and renders the following tentative decision.

Plaintiff Lesley F. Testan (“Lesley”) commenced this proceeding on February 16, 2022. The First Amended Complaint (“FAC”)^{^[1]} filed on April 28, 2022, alleges causes of action for (1) breach of fiduciary duty, (2) judicial dissolution, (3) appointment of a receiver, (4) violation of Business and Professions (“Bus. and Prof.”) Code section 17200, and (5) declaratory relief. The FAC alleges as follows.

Defendant Testan Law (“Testan Law”) is a civil litigation firm founded in 1996 in which Steven Testan (“Steven”) was a partner. In November 2013, Steven formed TCC to acquire the Building and co-manage it with his partners in Testan Law. Steven had a 62% interest in TCC and served as its Manager until his death in May 2021.

Following Steven’s death, Lesley, his wife, inherited his 62% interest in TCC. Despite the TCC Operating Agreement (“Operating Agreement”) identifying Lesley as his successor, Defendant Susan Novell, Esq. (“Novell”) has acted as Manager of TCC despite having only 1% interest in the entity. Novell has refused to cede the Manager role to Lesley and has refused to provide information concerning the Building, including whether the mortgage is being serviced.

Lesley has reason to believe otherwise as of April 2022. Lesley was also unable to finish tax returns by the March 2022 deadline because she lacked the necessary financial information for TCC and the Building.

Additionally, Novell instructed Defendant Patricia Beyer, Esq. (“Beyer”) to sign a retroactive Addendum extending Testan Law’s lease through December 31, 2023 for a monthly rent of $1,443.43. The Addendum contains an unwarranted confidentiality provision. As the Lease initially expired in August 2019, Novell improperly attempted to retroactively extend the Lease by preparing this Addendum after Steven’s death, omitting the date to hide that fact. It is therefore void and the product of fraud.

Lesley seeks (1) a decree dissolving TCC; (2) appointment of a receiver to take possession of the Building and all other property, accounts, records, and books of TCC, to accept all receipts, pay current debts, conduct a review of the financial records of TCC, to report the findings to the court, and wind up and dissolve TCC; (3) compensatory and general damages; (4) a constructive trust concerning all assets Defendants have received collected in managing the Building; (5) declaratory relief that Lesley has the right to be the Manager of the Building and TCC to protect her 62% interest therein; (6) restitution of all funds improperly retained by Novell and Testan Law; and (7) attorney’s fees and costs.

On February 22, 2022, Lesley personally served Testan Law with the Complaint and summons.

On May 27, 2022, Lesley served Defendant Testan Law by substitute service with the FAC and summons.

On November 13, 2023, the parties reached a tentative settlement through mediation. The settlement agreement is final as of July 8, 2024 but is as yet unsigned.

Pursuant to CRC 3.1184(a), a receiver must present by noticed motion or stipulation of all parties: (1) a final account and report; (2) a request for the discharge; and (3) a request for exoneration of the receiver’s surety. No memorandum is required in support of the motion unless the court orders otherwise. CRC 3.1184(b). Notice must be given to every person or entity known to the receiver to have a substantial, unsatisfied claim that will be affected by the order or stipulation, regardless of whether that person or entity is a party to the action or has appeared in it. CRC 3.1184(c).

If any allowance of compensation for the receiver or for an attorney employed by the receiver is claimed in an account, it must state in detail what services have been performed by the receiver or the attorney and whether previous allowances have been made to the receiver or attorney, and the amounts. CRC 3.1184(d).

The court may assess the costs of the receivership against the receivership property. Andrade v. Andrade, (1932) 216 Cal. 108, 110. The court may assess those costs against the plaintiff if it finds that the plaintiff wrongfully obtained an unnecessary receivership (Smith v. Hill, (1965) 237 Cal.App.2d 374, 387), and against the defendant if the plaintiff properly obtained the appointment of a receiver and has established his or her cause of action. Maggiora, 249 Cal.App.2d at 712-13. The court may also apportion the costs between the parties. Baldwin v. Baldwin, (12947) 82 Cal.App.2d 851, 856.

Receiver moves for an order approving his Final Account and Report for the management of the Receivership. Receiver has served all persons known to have any legal interest in the Receivership Estate. The Notice contained the email for Receiver’s counsel’s law firm, from which any interested party could request a full copy of the moving papers. No opposition was filed.

Upon being appointed by the court in June 2022, Receiver began requesting and gathering documents for a fuller understanding of the issues regarding the care and maintenance of the Property. Donell Decl., ¶3. Receiver discovered a complication with the leasing arrangements on the Property that might interfere with its sale: Defendant/Cross-Complainant Testan Law leased the entire premises from TCC for an extended period of time, while all other tenants also leased portions of the premises leased by Testan Law. Donell Decl., ¶4. Also, Receiver discovered the Property’s insurance coverage was about to be cancelled. Ibid. Insurance was essential because the building on the Property had been previously damaged by wildfire. Donell Decl., ¶5. There also was uncertainty as to who was responsible for paying for things such as utilities and maintenance expenses, and several subleases were coming up for renewal. Donell Decl., ¶5. Receiver retained a CPA, Brian Landau, to assist. Ibid.

By August 2022, the Receiver determined he needed to take control of the sale of the Property. Donell Decl., ¶6. The litigants could not agree on how to operate the Property, and expenses for the Property began increasing while revenue decreased as tenant leases expired. Ibid. Plaintiff applied ex parte to expand the Receiver’s powers, and the court granted the application. Ibid. Receiver also determined he would require counsel to assist him with court filings and negotiations. Donell Decl., ¶7. The court approved the retention of Receiver’s counsel, Michael Bubman, Esq., on January 4, 2023. Ibid.

Receiver identified five issues that had to be addressed before the Property could be sold: (1) the peculiar master lease with Testan Law and leases with other tenants, (2) the collection of outstanding member contributions by TCC, (3) deferred and ongoing maintenance at the Property, (4) addressing insurance issues, and (5) determining the Property’s true value. Donell Decl., ¶8.

In October 2022, Receiver prepared a 90-day cash flow report that reflected that the Property would generate a net loss of $188,000 through December 2022, and the losses would increase thereafter. Donell Decl., ¶ 9. Receiver communicated the situation to the parties and informed them he would need to make a capital call on the owners or take out a loan from a third-party or one of the owners to fund the costs of sale. Donell Decl., ¶10.

The Receiver negotiated a termination of Testan Law’s long-term lease in exchange for a month-to-month lease that would terminate upon the Property’s sale. Donell Decl., ¶¶ 12-15. The remaining tenants’ leases were not renewed which, although it was necessary to prepare the Property for sale, also exacerbated cash flow issues. Donell Decl., ¶15.

In December 2022, the Receiver negotiated a $500,000 revolving line of credit from Plaintiff Lesley in order to address the negative cash flow and maintain the status quo pending a sale. Donell Decl., ¶¶ 17-18.

On March 2023, Receiver retained Chris Swatosh of Pacific Partners Commercial, Inc., to market and sell the Property. Donell Decl., ¶ 22. The Property was on the market for 159 days, its listing viewed 43,115 times, and it was shown to 13 interested parties before three made offers. Donell Decl., ¶ 23. Receiver accepted an offer for $6.3 million, and escrow opened on July 30, 2023, contingent on the buyer’s due diligence. Ibid.

The prospective buyer discovered that, because of the Property’s history and the increasing costs in the California insurance market, it would cost 300% more to insure than either party to the sale had expected. Donell Decl., ¶ 24. The buyer terminated escrow on August 28, 2023 because of the unexpected insurance quote. Ibid.

After the purchase fell through, the Receivership funds were soon to be depleted and Receiver was reluctant to take out further loans. Donell Decl., ¶26. Receiver’s counsel negotiated the issuance of additional Receiver’s Certificates by stipulation of all parties. Ibid.

The Receiver asked Swatosh to return to the two other prospective buyers to renegotiate their offers. Donell Decl., ¶27. After extensive negotiation, Receiver agreed to sell the Property to a different buyer for $5 million, which the Receiver found consistent with market trends. Ibid. The Receiver verified his opinion on the Property’s value with a commercial real estate auctioneer, which confirmed that a $5 million price was reasonable. Donell Decl., ¶28. On October 30, 2023, the court approved the sale. Donell Decl., ¶32.

The Receivership collected total revenue of $5,809,532.45 (including the $5 million sale price for the Property) and expended $5,265,870.75. Donell Decl., ¶¶ 34-35. The professional fees of the Receiver, his counsel, and his CPA totaled $147,049.20, $120,718.03, and $34,193.88, respectively. Donell Decl., 6. An additional $47,500 is estimated for their services through the close of the Receivership. Donell Decl., ¶¶ 36-37. Receiver also estimates that $492,881.70 will be distributed to the parties in accordance with their settlement. Donell Decl., ¶38.

^{^[1]} The operative pleadings are the Third Amended Complaint and the First Amended Cross-Complaint, to which both sides have long-standing pending demurrers. There is no need for the court to set forth these allegations for this motion.