Judge James C. Chalfant, Case 23STCV02371 2023-04-20 Tentative Ruling

Plaintiffs Montana Oasis, Inc. (“Montana”) and Villa Adventures, LP (“Villa”) apply for right to attach orders and temporary protective orders (“TPO”) against Defendants Steve Fennelly (“Fennelly”), Jamie Littleton (“Littleton”), Better Soul, Inc. (“Better Soul”), Sea Recovery 2, LLC (“Recovery”), Sea Change Recovery 2, LLC (“Sea Change”), Resurgence Tennessee, LLC (“Resurgence Tennessee”), and Resurgence TX, LLC.[1]

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

A. Statement of the Case

1. Complaint

Plaintiffs Montana and Villa (collectively, “Sellers”) filed the Complaint against Defendants Fennelly, Littleton, Better Soul, Recovery, Sea Change, Resurgence Tennessee, and Resurgence TX on February 1, 2023. The Complaint alleges causes of action for (1) breach of a Unit Purchase Agreement (“UPA”) by Recovery (“Buyer”), (2) breach of a Management Services Agreement (“MSA”) by Buyer, (3) breach of a Security Agreement by Resurgence Tennessee, Resurgence TX, Sea Change, and Better Soul (collectively, “Pledgor Defendants”); (4) breach of a Guaranty by Littleton (“Littleton Guaranty”), (5) breach of a Guaranty by Fennelly (“Fennelly Guaranty”) (Littleton and Fennelly sometimes referred to as “Guarantors”), (6) breach of a Forbearance Agreement by all Defendants; (7) false promise by all Defendants; (8) recovery of possession of collateral against Pledger Defendants, (9) judicial foreclosure against Pledgor Defendants, (10) breach of fiduciary duty by Buyer and Guarantors, (11) aiding and abetting breach of fiduciary duty against Pledgor Defendants, (12) conversion, (13) receiving stolen property, (14) accounting, (15) avoidance of fraudulent conveyance, and (16) passing check on insufficient funds against Better Soul and Littleton. The Complaint alleges in pertinent part as follows.

Plaintiff Sellers are the sole partners of Sea Change Santa Monica, LP (“Operator”), a provider of substance abuse rehabilitation treatment and sober living services. Charles Rosenbleet (“Rosenbleet”) is Plaintiffs’ principal.

Defendants Littleton and Fennelly are Better Soul shareholders and officers. Littleton is the managing member of Defendants Recovery and Sea Change and Fennelly is either another managing member or exercises de facto control over both entities. Fennelly also is either a managing member of or exercises de facto control over Resurgence TX and Resurgence Tennessee.

On June 29, 2022, Sellers entered into a series of agreements with Defendants. Sellers entered into the UPA and MSA with Buyer. Under the UPA, Buyer would purchase all of Sellers’ partnership units in Operator for a $1.2 million base price with Adjustments for Operator’s cash, working capital, and indebtedness as of the UPA’s execution date, payable in installments over 450 days. A later agreement fixed the Adjustments at $199,111.92. The UPA gave Sellers the right to accelerate the full outstanding balance after Buyer failed to make a timely payment.

The MSA required that Buyer manage Operator between the UPA’s effective and closing dates, subject to restrictions. One restriction prohibited Buyer from incurring or guaranteeing any indebtedness without Sellers’ consent. Buyer and its officers and directors, Littleton and Fennelly, had a fiduciary duty to Operator and therefore Sellers. The MSA awarded 100% of new income during this time to Buyer as a Management Fee, payable on closing of the UPA, but Buyer was required to immediately pay that fee to Sellers as a credit against payments due under the UPA.

Sellers also entered into a Security Agreement as the Secured Parties, with Operator and Pledgor Defendants. Pledgor Defendants pledged all their assets (“Collateral”) to secure prompt and complete performance under the UPA and the Guaranties. They could not transfer their interest in the Collateral except in the ordinary course of business.

Littleton and Fennelly each signed Guaranties of the UPA and Security Agreement.

Sellers also assigned their interest in Operator at closing to Buyer and the as yet unformed Sea Change via an Assignment and Assumption Agreement (“Assignment”)

Under the Security Agreement, Sellers could not file UCC-1 financing statements for the Collateral of Operator and the Pledgor Defendants until a breach in one of the other Transaction Agreements: the UPA, MSA, Security Agreement, Guaranties, or Assignment.

On August 18, 2022, Operator and Pledgor Defendants took out an unauthorized loan secured against substantially all of their property. Operator received the $279,780 proceeds from the loans and Defendants withdrew $279,000 for their own purposes. They have withdrawn $4,750 from Operator’s account every business day since August 18, 2022, with the description “reserve advance.”

Defendants have failed to make payments when due under the UPA. On September 15, 2022, Plaintiffs filed a UCC-1 financing statement against the Pledging Debtors in California and a UCC-1 financing statement against Resurgence Tennessee in Tennessee.

On October 24, 2022, the parties entered into a Forbearance Agreement in which Defendants agreed that they had defaulted for failure to pay the installments due under the UPA, failure to pay the accelerated installment payments based on the Management Fee under the MSA, failure to pay the Adjustments when due, obtaining a loan secured against Operator’s assets without Sellers’ consent, and using Operator assets to make payments on the loan. The Forbearance Agreement increased the UPA purchase price by $100,000, revised the payment schedule for installments, reaffirmed the validity of the parties’ agreements, and acknowledged that Sellers had not defaulted on their contract obligations. Plaintiffs agreed to forbear on Defendants’ previous defaults unless Defendants defaulted on the Forbearance Agreement and did not cure after three days’ notice. Defendants would be jointly and severally liable for any breach of the Forbearance Agreement.

Defendants made $119,000 in installment payments under the Forbearance Agreement but failed to make the payments due on December 15 and 31, 2022 and January 15, 2023. On January 17, 2023, Better Soul sent a $45,000 check for the payment due on December 15, 2022 but did not address the other overdue amounts.

On January 19, 2023, Sellers sent notice of default with three days’ notice to cure. The next day, Sellers discovered that the $45,000 check was returned for insufficient funds in Better Soul’s account. Sellers sent a new notice of default. Defendants have not cured the defaults and jointly and severally owe the accelerated unpaid balance of $1,380,111.92.

Sellers seek damages of $1,380,111.92, plus punitive damage and attorney’s fees. Plaintiffs also seek an injunction compelling Defendants to turn over the Collateral to Plaintiffs and a decree of foreclosure permitting a judicial sale of the Collateral.

2. Course of Proceedings

On February 8, 2023, Sellers served Resurgence Tennessee and Resurgence TX with the Complaint and Summons.

On February 10, 2023, Sellers served Sea Change and Recovery with the Complaint and Summons by substitute service, effective February 20, 2023.

On February 16, 2023, the court denied Plaintiffs’ ex parte application for right to attach orders against all Defendants for failure to provide notice and failure to show insolvency or concealment.

On March 22, 2023, Sellers served Resurgence TX with the moving papers for this application.

On March 27, 2023, Sellers served Defendants Better Soul, Sea Change, Recovery, and Resurgence Tennessee with the moving papers for this application.

On March 28, 2023, Defendants Fennelly, Littleton, and Resurgence TX signed Acknowledgments of Receipt for the moving papers for this application.

On April 10, 2023, Defendants filed an Answer.

B. Applicable Law

1. Attachment

Attachment is a prejudgment remedy providing for the seizure of one or more of the defendant’s assets to aid in the collection of a money demand pending the outcome of the trial of the action. See Whitehouse v. Six Corporation, (1995) 40 Cal.App.4th 527, 533. In 1972, and in a 1977 comprehensive revision, the Legislature enacted attachment legislation (CCP §481.010 et seq.) that meets the due process requirements set forth in Randone v. Appellate Department, (1971) 5 Cal.3d 536. See Western Steel & Ship Repair v. RMI, (12986) 176 Cal.App.3d 1108, 1115. As the attachment statutes are purely the creation of the Legislature, they are strictly construed. Vershbow v. Reiner, (1991) 231 Cal.App.3d 879, 882.

A writ of attachment may be issued only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim or claims is a fixed or readily ascertainable amount not less than five hundred dollars ($500). CCP §483.010(a). A claim is “readily ascertainable” where the amount due may be clearly ascertained from the contract and calculated by evidence; the fact that damages are unliquidated is not determinative. CIT Group/Equipment Financing, Inc. v. Super DVD, Inc., (2004) 115 Cal.App.4th 537, 540-41 (attachment appropriate for claim based on rent calculation for lease of commercial equipment).

All property within California of a corporation, association, or partnership is subject to attachment if there is a method of levy for the property. CCP §487.010(a), (b). While a trustee is a natural person, a trust is not. Therefore, a trust’s property is subject to attachment on the same basis as a corporation or partnership. Kadison, Pfaelzer, Woodard, Quinn & Rossi v. Wilson, supra, 197 Cal.App.3d at 4.

If the action is against a defendant who is a natural person, an attachment may be issued only on a commercial claim which arises out of the defendant’s conduct of a trade, business, or profession. CCP §483.010(c). Consumer transactions cannot form a basis for attachment. CCP §483.010(c); Kadison, Pfaelzer, Woodard, Quinn & Rossi v. Wilson, (1987) 197 Cal.App.3d 1, 4 (action involving trust property was a commercial, not a consumer, transaction).

The plaintiff may apply for a right to attach order by noticing a hearing for the order and serving the defendant with summons and complaint, notice of the application, and supporting papers any time after filing the complaint. CCP §484.010. Notice of the application must be given pursuant to CCP section 1005, sixteen court days before the hearing. See ibid.

The notice of the application and the application may be made on Judicial Council forms (Optional Forms AT-105, 115). The application must be supported by an affidavit showing that the plaintiff on the facts presented would be entitled to a judgment on the claim upon which the attachment is based. CCP §484.030.

Where the defendant is a corporation, a general reference to “all corporate property which is subject to attachment pursuant to subdivision (a) of Code of Civil Procedure Section 487.010” is sufficient. CCP §484.020(e). Where the defendant is a partnership or other unincorporated association, a reference to “all property of the partnership or other unincorporated association which is subject to attachment pursuant to subdivision (b) of Code of Civil Procedure Section 487.010” is sufficient. CCP §484.020(e). A specific description of property is not required for corporations and partnerships as they generally have no exempt property. Bank of America v. Salinas Nissan, Inc., (“Bank of America”) (1989) 207 Cal.App.3d 260, 268.

A defendant who opposes issuance of the order must file and serve a notice of opposition and supporting affidavit as required by CCP section 484.060 not later than five court days prior to the date set for hearing. CCP §484.050(e). The notice of opposition may be made on a Judicial Council form (Optional Form AT-155).

The plaintiff may file and serve a reply two court days prior to the date set for the hearing. CCP §484.060(c).

At the hearing, the court determines whether the plaintiff should receive a right to attach order and whether any property which the plaintiff seeks to attach is exempt from attachment. The defendant may appear the hearing. CCP §484.050(h). The court generally will evaluate the attachment application based solely on the pleadings and supporting affidavits without taking additional evidence. Bank of America, supra, 207 Cal.App.3d at 273. A verified complaint may be used in lieu of or in addition to an affidavit if it states evidentiary facts. CCP §482.040. The plaintiff has the burden of proof, and the court is not required to accept as true any affidavit even if it is undisputed. See Bank of America, supra, at 271, 273.

The court may issue a right to attach order (Optional Form AT-120) if the plaintiff shows all of the following: (1) the claim on which the attachment is based is one on which an attachment may be issued (CCP §484.090(a)(1)); (2) the plaintiff has established the probable validity of the claim (CCP §484.090(a)(2)); (3) attachment is sought for no purpose other than the recovery on the subject claim (CCP §484.090(a)(3); and (4) the amount to be secured by the attachment is greater than zero (CCP §484.090(a)(4)).

A claim has “probable validity” where it is more likely than not that the plaintiff will recover on that claim. CCP §481.190. In determining this issue, the court must consider the relative merits of the positions of the respective parties. Kemp Bros. Construction, Inc. v. Titan Electric Corp., (2007) 146 Cal.App.4th 1474, 1484. The court does not determine whether the claim is actually valid; that determination will be made at trial and is not affected by the decision on the application for the order. CCP §484.050(b).

Except in unlawful detainer actions, the amount to be secured by the attachment is the sum of (1) the amount of the defendant’s indebtedness claimed by the plaintiff, and (2) any additional amount included by the court for estimate of costs and any allowable attorneys’ fees under CCP section 482.110. CCP §483.015(a); Goldstein v. Barak Construction, (2008) 164 Cal.App.4th 845, 852. This amount must be reduced by the sum of (1) the amount of indebtedness that the defendant has in a money judgment against plaintiff, (2) the amount claimed in a cross-complaint or affirmative defense and shown would be subject to attachment against the plaintiff, and (3) the value of any security interest held by the plaintiff in the defendant’s property, together with the amount by which the acts of the plaintiff (or a prior holder of the security interest) have decreased that security interest’s value. CCP §483.015(b). A defendant claiming that the amount to be secured should be reduced because of a cross-claim or affirmative defense must make a prima facie showing that the claim would result in an attachment against the plaintiff.

Before the issuance of a writ of attachment, the plaintiff is required to file an undertaking to pay the defendant any amount the defendant may recover for any wrongful attachment by the plaintiff in the action. CCP §489.210. The undertaking ordinarily is $10,000. CCP §489.220. If the defendant objects, the court may increase the amount of undertaking to the amount determined as the probable recovery for wrongful attachment. CCP §489.220. The court also has inherent authority to increase the amount of the undertaking sua sponte. North Hollywood Marble Co. v. Superior Court, (1984) 157 Cal.App.3d 683, 691.

The application for the TPO must be supported by an affidavit. Unlike the showing for an ex parte right to attach order, the showing of great or irreparable injury[3] supporting the TPO may be made on information and belief; admissible evidence of injury is not required. CCP §486.010(b). The court makes the same findings for a TPO as are for an ex parte right to attach order, and has discretion to issue the TPO if it is satisfied that it would be in the interest of justice and equity to do so, taking into account the effect on the defendant of an ex parte writ of attachment, the effect on the plaintiff of a TPO instead of a writ, and any other pertinent factors. CCP §486.030(a).

The TPO shall contain such provisions as the court may require in the interest of justice and equity. CCP §486.040. The TPO may prohibit a transfer of any of the defendant’s property subject to levy by attachment. CCP §486.050(a). The prohibition does not prevent the defendant from issuing checks against his or her accounts to make payroll payments, pay for goods delivered COD to the defendant in the course of business, pay taxes and legal fees, or to the extent the total amount on deposit exceeds the amount sought for attachment. CCP §486.060.

The TPO must be personally served on the defendant together with summons and complaint and the application. CCP §486.080. Service of the TPO creates a lien on any property described in the order. CCP §486.110(a). See Profile Structures, Inc. v. Long Beach Building Material Co., (1986) 181 Cal.App.3d 437, 443 (failure to serve TPO prevents creation of lien and enforcement by contempt). The TPO expires 40 days after being issued, or an earlier date set by the court. CCP §486.090(a). It may be modified by the court on ex parte application. CCP §486.100.

Plaintiff Sellers are the sole partners of Operator, a provider of substance abuse rehabilitation treatment and sober living services. Rosenbleet Decl., ¶3. Rosenbleet is the Plaintiffs’ principal. Rosenbleet Decl., ¶1. Fennelly is Better Soul’s CEO. Rosenbleet Decl., ¶9, Ex. 4. Fennelly told Rosenbleet that he and Littleton are experienced owners of rehabilitation and recovery facilities. Rosenbleet Decl., ¶15.

On June 29, 2022, Sellers and Buyer entered into the UPA and MSA. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. Littleton signed the UPA as Buyer’s managing member, and both Littleton and Fennelly signed as Guarantors. Rosenbleet Decl., ¶4, Ex. 1.

Under the UPA, Buyer would purchase all of Seller’s partnership units in Operator. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. The Purchase Price had a base price of $1,200,000, with Adjustments based on the cash, Net Working Capital, and Indebtedness as of the Execution Date. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. Buyer would make payments starting 90 days after the Execution Date and every 30 days after. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. If Buyer defaulted for failure to make a timely payment and did not cure after five days’ notice, Sellers had the right to accelerate the amount owed. Rosenbleet Decl., ¶¶ 3-4, Ex. 1.

Regulatory authorities must consent to any change in Operator’s ownership. Rosenbleet Decl., ¶8. To accommodate this requirement, the UPA stated that the transfer of possession of the Operator would occur at a Closing Date after the Execution Date, contingent on Buyer fulfilling certain obligations. Rosenbleet Decl., ¶8, Ex. 1.

Under the MSA, Buyer assumed management of Operator as an independent contractor for the period between the Execution and Closing Dates. Rosenbleet Decl., ¶5, Ex. 1. Buyer and its officers and directors have a fiduciary duty to the Operator akin to those of a director. Rosenbleet Decl., ¶5, Ex. 1. Sellers’ agents would maintain master administrative access during this period. Rosenbleet Decl., ¶5, Ex. 1. Buyer was responsible for selecting and supervising all Operator personnel, managing all cash receipts and expenses, ensuring Operator always had sufficient funds, and maintaining professional liability and worker’s compensation insurance. Rosenbleet Decl., ¶5, Ex. 1.

The MSA provided that Buyer would receive 100% of Operator’s net income as a Management Fee during the period between the Execution and Closing Dates. Rosenbleet Decl., ¶5, Ex. 1. Section 5.4 of the MSA and section 2.3.1 of the UPA required that Buyer immediately pay any Management Fee to Sellers, which they would apply to the next unpaid installment of the Purchase Price. Rosenbleet Decl., ¶4, Ex. 1.

Section 7.1 of the UPA provided that without both parties’ consent, Buyer could not (f) incur, assume, or guarantee any indebtedness except in the ordinary course of business; (g) sell, lease, transfer or otherwise dispose of any material portion of Operator’s assets; (k) incur any capital expenditures over $10,000; or (l) loan, make a payment, or enter into any other transaction with, inter alia, any of Guarantors or their affiliates. Rosenbleet Decl., ¶4, Ex. 1. Until Buyer paid the full Purchase Price, section 7.2 prohibited it from making any loan or distribution or paying any compensation other than reimbursement of necessary expenditures. Rosenbleet Decl., ¶4, Ex. 1.

Also on June 29, 2022, Sellers entered into the Security Agreement with Pledgor Defendants. Rosenbleet Decl., ¶4, Ex. 1. Pledgor Defendants pledged all their accounts, books, deposit accounts, general intangibles, instruments and letters of credit, investment property, cash and noncash proceeds, contracts with customers, and all proceeds, products, and profits of the foregoing as Collateral to secure prompt and complete performance under the UPA. Rosenbleet Decl., ¶4, Ex. 1. They could not transfer or sell their interest in the Collateral except in the ordinary course of business. Rosenbleet Decl., ¶4, Ex. 1. Section 9(a) only allowed Sellers to file UCC-1 financing statements for Operator or Pledgor Defendants after an event of default under the UPA. Rosenbleet Decl., ¶4, Ex. 1.

Littleton and Fennelly each signed Guaranties for the UPA, MSA, and Security Agreement. Rosenbleet Decl., ¶4, Ex. 1. The Guarantors absolutely, unconditionally and irrevocably guaranteed any obligations thereunder. Rosenbleet Decl., ¶4, Ex. 1. They also affirmed that the Guaranty was made to induce Sellers to enter into the transaction agreements and in consideration of the substantial benefit each Guarantor would experience as a result. Rosenbleet Decl., ¶4, Ex. 1. Because Littleton and Fennelly created Buyer solely to enter the UPA, Sellers would not have signed the UPA if Littleton and Fennelly did not sign the Guaranties. Rosenbleet Decl., ¶16.

On June 29, 2022, Sellers, Buyer and the non-existent Sea Change signed the Assignment. Rosenbleet Decl., ¶6, Ex. 2. Per the Assignment, Buyer agreed to form Sea Change as a separate company. Rosenbleet Decl., ¶6, Ex. 2. On the Closing Date of the UPA, Sellers would transfer 99% of their rights in Operator to Buyer and the other 1% to Sea Change. Rosenbleet Decl., ¶6, Ex. 2. Sea Change and Buyer would be jointly and severally liable for all of Recovery’s debts and obligations under the UPA. Rosenbleet Decl., ¶6, Ex. 2.

Operator’s bank statements show a $279,780 deposit on August 18, 2022 from Reserve Capital Management, which Better Soul withdrew the same day. Rosenbleet Decl., ¶¶ 7-8, Ex. 3. On August 18, 2022, Wolters Kluwer Lien Solutions (“Wolters”) recorded a UCC-1 Financing Statement for all personal property of Operator and Pledgor Defendants. RJN Ex. 1.

Every business day after August 18, Operator’s bank statements showed a $4,750 withdrawal labeled “Reserve Advance.” Rosenbleet Decl., ¶¶ 7-8, Ex. 3. These decreased to $2,500 per day in October 2022. Rosenbleet Decl., ¶8. This loan was likely a merchant cash advance, which typically has onerous conditions. Rosenbleet Decl., ¶8.

On September 7, 2022, Sellers confronted Defendants via email about the Reserve Capital Management loan and other instances in which Defendants withdrew money from the Operator account in violation of the UPA and MSA. Rosenbleet Decl., ¶9, Ex. 4. Sellers specifically alleged that Defendants used the Operator funds to pay $14,362.13 for expenses not related to its operation. Rosenbleet Decl., ¶¶ 9, 14, Ex. 4.

In the email conversation that followed, Fennelly wrote that Defendants have dedicated “some very expensive and talented professionals to do this turn around.” Rosenbleet Decl., ¶9, Ex. 4. Fennelly also wrote that, although working together would be easier, if Sellers insisted on legal action, “we will come back” and make a move in kind. Rosenbleet Decl., ¶9, Ex. 4.

On September 15, 2022, Sellers filed a UCC-1 statement in California for the Collateral of Pledgor Defendants. RJN Ex. 2. Sellers also filed a UCC-1 statement in Tennessee against Resurgence Tennessee’s Collateral. RJN Ex. 3.

On October 24, 2022, in an attempt to avoid litigation, Sellers and all Defendants signed the Forbearance Agreement. Rosenbleet Decl., ¶10, Ex. 5. In the recitals, Defendants admitted that they had defaulted under the transaction agreements for failure to pay the installments due under the UPA, failure to pay Sellers the Management Fee acquired under the MSA, failure to pay the Adjustments when due, obtaining a loan secured against Operator’s assets without consent, and using Operator assets to pay portions of the loan. Rosenbleet Decl., ¶10, Ex. 5. Defendants acknowledged that Sellers had not defaulted on their contract duties. Rosenbleet Decl., ¶10, Ex. 5.

To induce Sellers’ entry into the Forbearance Agreement, Defendants agreed to adjust the UPA’s base price to $1,300,000. Rosenbleet Decl., ¶10, Ex. 5. The Forbearance Agreement also identified the Adjustments as totaling $199,111.92. Rosenbleet Decl., ¶10, Ex. 5. This fixed the total Purchase Price at $1,499,111.92. Rosenbleet Decl., ¶11, Ex. 5. Per a new payment schedule, Defendants would make installments on the 15th and 30th of every month. Rosenbleet Decl., ¶10, Ex. 5. The installment payments would be two $45,000 payments in December 2022 and two $50,000 monthly payments from January to September 15, 2023. Rosenbleet Decl., ¶10, Ex. 5.

Plaintiffs’ forbearance on Buyer’s defaults under the transaction agreements depended on strict compliance with the new payment schedule and all other terms of the transaction agreements. Rosenbleet Decl., ¶11, Ex. 5. If Defendants defaulted and fail to cure after three days’ notice, Sellers would be entitled to accelerate the outstanding balance on the Purchase Price. Rosenbleet Decl., ¶10, Ex. 5. All Defendants would be jointly and severally liable for the breach. Rosenbleet Decl., ¶10, Ex. 5.

On January 17, 2023, Better Soul sent a $45,000 check for the installment due on December 15, 2022. Rosenbleet Decl., ¶12, Ex. 6. There was another $45,000 installment due December 31, 2022 and a $50,000 installment due on January 15, 2023. Rosenbleet Decl., ¶12.

On January 19, 2023, Sellers sent Defendants a Notice of Default giving three days’ notice to cure by paying the outstanding $95,000. Rosenbleet Decl., ¶13, Ex. 7. On January 20, 2023, Rosenbleet discovered that the check sent for the December 15 payment bounced as “return item chargeback” for insufficient funds. Rosenbleet Decl., ¶¶12-13, Ex. 6. He found that there had been a $45,000 wire transfer from Better Soul to Operator which left Better Soul with insufficient funds for the check, which caused it to bounce. Rosenbleet Decl., ¶13, Ex. 8. On January 20, 2023, Sellers sent a Revised Notice of Default explaining this default. Rosenbleet Decl., ¶13, Ex. 9. The Revised Notice gave Defendants three days to pay the $45,000, and the deadline to pay the other $95,000 remained as set. Rosenbleet Decl., ¶13, Ex. 9.

Defendants did not respond to the notices, and Sellers have accelerated the balance of the Purchase Price. Rosenbleet Decl., ¶13. Defendants jointly and severally owe $1,380,111.92. Rosenbleet Decl., ¶13.

Plaintiff Sellers seek attachment for the sole purpose of recovering the amounts owed under the transaction agreements and Forbearance Agreement. Rosenbleet Decl., ¶18. For any non-resident entity Defendant, Sellers seek to attach property in California that is subject to attachment under CCP section 492.040. Rosenbleet Decl., ¶19. Fennelly has not generally appeared in this case and Sellers seek to attach his bank accounts at three banks in California. Rosenbleet Decl., ¶19.

The oppositions filed by six Defendants are untimely. If the defendant desires to oppose the issuance of the right to attach order sought by plaintiff or objects to the amount sought to be secured by the attachment, the defendant shall file and serve upon the plaintiff no later than five court days prior to the date set for the hearing a notice of opposition. CCP §484.060(a). Defendants untimely filed and served their oppositions on April 14, 2023, only four court days before the hearing on April 20, 2023.

In reply, Sellers invoke CCP section 484.060(a) and argue that the court should not consider the oppositions. Reply at 2. As the reply addresses the oppositions, Sellers were not prejudiced by the late filing and the oppositions have been considered.

The claims against Defendants principally are based on the breach of the Forbearance Agreement and failure to pay the amount owed thereunder. Mem. at 9-10; Rosenbleet Decl., ¶10, Ex. 5. The Forbearance Agreement provides that the amount owed by Defendants jointly and severally is $1,380,111.92. Rosenbleet Decl., ¶13. Sellers have a claim on which to base attachment.

A claim is “readily ascertainable” where the damages may be readily ascertained by reference to the contract and the basis of the calculation appears to be reasonable and definite. CIT Group/Equipment Financing, Inc. v. Super DVD, Inc., (2004) 115 Cal.App.4th 537, 540-41. The fact that the damages are unliquidated is not determinative. Id. But the contract must furnish a standard by which the amount may be ascertained and there must be a basis by which the damages can be determined by proof. Id. (citations omitted).

Under the UPA, the Purchase Price had a base price of $1,200,000, with Adjustments based on the cash, Net Working Capital, and Indebtedness as of the Execution Date. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. The Forbearance Agreement increased the base price by $100,000 and fixed the Adjustments at $199,111.92. Rosenbleet Decl., ¶10, Ex. 5. This fixed the total Purchase Price at $1,499,111.92. Rosenbleet Decl., ¶11, Ex. 5. Although the Forbearance Agreement set a payment schedule, Sellers could accelerate the outstanding balance after a default. Rosenbleet Decl., ¶10, Ex. 5. Defendants agreed to be jointly and severally liable for this amount. Rosenbleet Decl., ¶10, Ex. 5.

Defendants raise three arguments. The first argument is that the terms of the Forbearance Agreement concerning the Purchase Price and the fact that certain payments were made does not make the damages readily ascertainable because there is a genuine dispute about the balance due. The exact balance remains to be ascertained through the discovery process and progress of this case. Fennelly Opp. at 5-6.

Defendants are wrong. The Forbearance Agreement provides the relevant terms for calculating damages after acceleration, which is the $1,499,111.92 Purchase Price, less any amounts paid. Rosenbleet Decl., ¶11, Ex. 5. Sellers have calculated that by then Defendants paid $119,000 of the $1,499,111.92, leaving a balance of $1,380,111.92. Mem. at 10. Defendants fail to provide any evidence to refute this. Reply at 3.

The readily ascertainable damages by reference to the Forbearance Agreement is $1,380,111.92.

The conduct of a trade, business, or profession is generally activity “which occupies the time, attention and effort. . . for the purpose of livelihood or profit on a continuing basis.” Nakasone v. Randall, (1982) 129 Cal.App.3d 757, 764 (quoting Advance Transformer Co. v. Superior Court, (1974) 44 Cal.App.3d 127, 134). “The term ‘business,’ therefore, embraces any activity engaged in for profit or for gain. The phrase ‘engaged in business,’ however, generally is held to imply business activity of a frequent or continuous nature.” Id. There is a distinction between one who spends his time and effort in carrying on an activity for livelihood or profit on a continuing basis and one who merely conserves his personal investments. Id.

Fennelly is Better Soul’s CEO. Rosenbleet Decl., ¶9, Ex. 4. Littleton signed the UPA as Recovery’s managing member. Rosenbleet Decl., ¶4, Ex. 1. Fennelly told Rosenbleet that he and Littleton are experienced owners of rehabilitation and recovery facilities. Rosenbleet Decl., ¶15. The Guaranties include an affirmation that Fennelly and Littleton entered into them to induce Sellers to enter into the Transaction Agreements and in consideration of the substantial benefit each Guarantor would experience as a result. Rosenbleet Decl., ¶4, Ex. 1. Fennelly and Littleton also joined the other Defendants as parties to the Forbearance Agreement. Rosenbleet Decl., ¶10, Ex. 5. The claims against them are commercial claims for which attachment is proper.

Sellers provide evidence that on June 29, 2022, they entered into a series of transaction agreements. Rosenbleet Decl., ¶¶ 3-5, Ex. 1. Buyer signed the UPA, whereby it agreed to pay the Purchase Price in 30-day installments for all interest Sellers had in Operator. Rosenbleet Decl., ¶¶ 3-4, Ex. 1. Under the MSA, Buyer assumed management of Operator between the UPA’s Execution and Closing Dates. Rosenbleet Decl., ¶5, Ex. 1. The UPA restricted Buyer’s management authority such that it could not incur, assume, or guarantee any indebtedness except in the ordinary course of business. Rosenbleet Decl., ¶4, Ex. 1.

Under the Security Agreement, Pledgor Defendants pledged their assets as Collateral and agreed not to transfer interest in this Collateral except in the ordinary course of business. Rosenbleet Decl., ¶4, Ex. 1. Littleton and Fennelly signed Guaranties for the UPA, MSA, and Security Agreement. Rosenbleet Decl., ¶4, Ex. 1. Through an Assignment, Buyer agreed to form Sea Change, which would share in Buyer’s obligations under the UPA in exchange for 1% of Sellers’ rights in Operator on the Closing Date. Rosenbleet Decl., ¶6, Ex. 2.

On October 24, 2022, Sellers and all Defendants signed the Forbearance Agreement. Rosenbleet Decl., ¶10, Ex. 5. Defendants stipulated that they had breached the transaction agreements while Sellers had not. Rosenbleet Decl., ¶10, Ex. 5. Sellers would forbear on claims for those breaches for as long as Defendants followed the installment plan for the new Purchase Price and complied with all other terms of the transaction agreements. Rosenbleet Decl., ¶¶ 10-11, Ex. 5. Defendants then defaulted for failure to make payments due in December 2022 and January 2023.

Defendants do not refute any assertions as to the breach itself. Instead, they argue that Sellers have not shown great or irreparable harm under CCP section 485.010. Fenelly Opp. at 6-7. Defendants misunderstand attachment law. Great or irreparable harm is required for an ex parte application for a right to attachment under CCP section 485.010, but it is irrelevant to a noticed application for attachment. See CCP §484.090. Irreparable harm is relevant to issuance of a TPO, which is addressed post.

The amount to be secured by an attachment shall be reduced by the value of any security interest in the property of the defendant held by the plaintiff to secure the defendant’s indebtedness. CCP §483.015(b)(4). The Security Agreement provides Sellers with the Collateral, which is the assets of the Pledgor Defendants. Rosenbleet Decl., ¶4, Ex. 1. However, Buyer’s lender recorded a UCC-1 first and there is no evidence of the Collateral’s value to Sellers.

Sellers have demonstrated a probability of success on the merits for the amount of $1,380,111.92.

Attachment must not be sought for a purpose other than the recovery on the claim upon which attachment is based. CCP §484.090(a)(3). This application for a right to attach order does not seek attachment for any purpose other than to recover upon Sellers’ claims in this action. Rosenbleet Decl., ¶18. Sellers seek attachment for a proper purpose.

Where the defendant is a natural person, the description of the property must be reasonably adequate to permit the defendant to identify the specific property sought to be attached. CCP §484.020(e). Although the property must be specifically described, the plaintiff may target for attachment everything the individual defendant owns. Bank of America v. Salinas Nissan, Inc., (1989) 207 Cal.App.3d 260, 268. The requirement of specificity avoids unnecessary hearings where an individual defendant is willing to concede that the described property is subject to attachment. Ibid. A general list of categories - e.g., “real property, personal property, equipment, motor vehicles, chattel paper, negotiable and other instruments, securities, deposit accounts, safe-deposit boxes, accounts receivable, general intangibles, property subject to pending actions, final money judgments, and personal property in decedents’ estates” – is sufficient. Ibid.

Sellers assert that they seek to attach Fennelly’s bank accounts at three banks in California as a non-resident attachment. Rosenbleet Decl., ¶19. There are two problems with this approach. First, Sellers fail to show that Fennelly is a non-resident as required by CCP section 492.010(a). The Notice and Acknowledgement for Fennelly, and apparently was signed on his behalf, does not show his residence and Sellers fail to prove it by declaration under CCP section 492.020((b)(1) and (c). Second, Sellers fail to provide any description of attachable property for Fennelly in the application for a right to attach order. This is required for even non-residents under CCP sections 492.020(b) and 484.020(e).

Sellers seek to attach Littleton’s bank accounts with JP Morgan Chase, Wells Fargo, and Bank of America. This description is sufficiently specific.

A plaintiff may seek a TPO to prevent the defendant from transferring property and to create a temporary lien on that property until the hearing on the right to attach order. CCP §486.010(a). Under CCP section 486.010, the application for a TPO shall be supported by an affidavit, which may be on information and belief. The operative period for a TPO when a right to attach order has been issued is the period between the right to attach order’s issuance and execution of a writ of attachment.

Sellers point to two incidents demonstrating a risk that Defendants will hide assets without a TPO. Mem. at 13-14. First, in August 2022, Operator and Pledgor Defendants took an unauthorized loan and withdrew the proceeds from Operator’s bank account. Rosenbleet Decl., ¶¶ 7-9, Exs. 3-4. Second, in January 2023, Better Soul withdrew $45,000 from its bank account and deposited it into Operator’s account so that a $45,000 check would bounce. Rosenbleet Decl., ¶¶ 12-13, Exs. 6, 8. Sellers contend that Buyer’s unauthorized loan, bounced check, transferring funds to unknown accounts, and using affiliates to cover debts warrants a TPO against each Defendant.

Defendants assert that Sellers have not shown great or irreparable harm, which is required by CCP section 486.010, because (1) there is a bona fide dispute between the parties about the debt, (2) Sellers fail to provide sufficient facts for irreparable harm, because Operator still exists, Sellers still own it, and they are very much in control, (3) Sellers still have the business itself as collateral, and (4) there is no evidence that “Resurgence” is insolvent or undercapitalized. Fennelly Opp. at 6-7.

The existence of a bona fide dispute between the parties as to amount owed does not bear on irreparable harm. Additionally, Buyer need not be insolvent for there to be irreparable harm.

As for Operator itself, Sellers own but are not operating the business. Regulatory authorities must consent to any change in Operator’s ownership. Rosenbleet Decl., ¶8. As a result, the UPA states that the transfer of ownership would occur at a Closing Date after the Execution Date. Rosenbleet Decl., ¶8, Ex. 1. Just as with the Collateral, the fact that Operator has remaining value may justify a reduction in the amount of attachment under CCP section 483.015(b)(4), but there is no evidence of this value. Nor does it bear significantly on irreparable harm. As Sellers point out, a TPO would prevent Defendants from dissipating their Collateral or, in case of Buyer, Operator’s assets.

Sellers’ evidence is sufficient to justify a concern that Defendants might move money or the pledged Collateral after the right to attach orders are issued and before they can levy on the accounts. Reply at 4. A TPO will issue against each Defendant except Defendant Defendant Fennelly, for whom attachment is not available. The TPO will exist for 40 days and expire thereafter without further order. CCP §486.090(a).

The applications for a right to attach orders and TPOs against Resurgence Tennessee, Recovery, Resurgence TX, Sea Change, Better Soul, and Littleton are granted in the amount of $1,380,111.92, jointly and severally. No writ of attachment shall issue against any Defendant until Sellers file a $10,000 bond for that Defendant. See CCP §489.220(a). The application for a right to attach order and TPO against Defendant Fennelly is denied.

[1] Plaintiffs point out that, while the Complaint names Resurgence Texas, LLC, the true Defendant is Resurgence TX, LLC. Plaintiffs amended the Complaint on March 23, 2023 to name Resurgence TX, LLC. Reply at 1-2. The court will refer to Resurgence TX, LLC as “Resurgence TX.”

[2] Defendants failed to lodge courtesy copies of their oppositions, and Sellers failed to lodge a courtesy copy of their reply, in violation of the Presiding Judge’s First Amended General Order Re: Mandatory Electronic Filing. Both counsel are admonished to provide courtesy copies in all future filings.

[3] The oppositions suggest that Defendants believe that a risk of irreparable injury is also a requirement for any right to attach order. Fennelly Opp. at 6. It is not. Reply at 3.

[4] Sellers request judicial notice of UCC financing statements filed (1) on August 18, 2022 with the California Secretary of State (RJN Ex. 1), (2) on September 15, 2022 with the California Secretary of State (RJN Ex. 2), and (3) on September 15, 2022 with the Tennessee Secretary of State (RJN Ex. 3). The requests are granted. Evid. Code §452(c).

[5] The oppositions are substantially similar, and all citations are to Fennelly’s opposition.