Judge James C. Chalfant, Case Number: 23STCV21093, Date: 2023-10-05 Tentative Ruling

CRECFIV ATO Holdings LLC v.

E.L. Lotus LLC et. al, 23STCV21093

Tentative decision on motion for appointment of receiver: granted

Plaintiff CRECFIV ATO Holdings LLC (“Lender”) moves for the appointment of Mitch Vanneman (“Vanneman”) as a receiver to protect, maintain, manage, and operate real property at 118 Astronaut Ellison S Onizuka St., Los Angeles, CA 90012 (“Property”).

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

Lender filed the Complaint on August 31, 2023 against Defendants E.L. Lotus LLC (“Borrower”), Afshin Etebar (“Afshin”), and Babak Etebar (“Babak”), alleging (1) breach of loan documents; (2) account stated; (3) money lent; (4) breach of guaranties; (5) judicial foreclosure of deed of trust and deficiency judgment; (6) specific performance and appointment of receiver; (7) claim and delivery; and (8) injunctive relief. The Complaint alleges in pertinent part as follows.

By assignment, Lender loaned Lotus $47,570,000 pursuant to a Loan Agreement signed on June 7, 2021 (“Loan”) and a Note pursuant thereto for the same amount. A deed of trust recorded on June 9, 2021 (“DOT”) encumbers the Property and other collateral described therein in favor of Lender to secure the Loan. A UCC-1 financing statement perfects this interest.

Also on June 7, 2021, Afshin and Babak signed Indemnity and Guaranty Agreements (“Guaranties”) guaranteeing the payment and performance of “Costs” and “Guaranteed Recourse Obligations of Borrower” as defined therein. A separate Completion Guaranty required each to guarantee the complete and punctual construction of the project on the Property. A Carry Guaranty required each to guarantee the prompt payment of certain reserves, monthly payments, and other costs, fees and charges. An Environmental Indemnity required each to indemnify Lender from claims related to certain environmental and hazardous substances.

On January 18 and March 7, 2023, Borrower made draw requests of $346,810.64 and $258,103.38, respectively. The request represented that it was no event of default had occurred at the time nor would occur with the request. Sections 9.13 and 9.14 of the Loan require appropriate equity contributions as a condition precedent to the Lander advancing funds pursuant to a draw request. Borrower failed to make those contributions. Lender would not have advanced the funds if it had known this.

On June 22, 2023, Lender notified Borrower that it had failed to pay the full amount due under the Note. A second demand letter on July 26 gave notice that the Loan matured under its own terms on July 1. As of August 31, Borrower owes $46,532,685.87 plus attorney’s fees and costs in this action. Borrower and Guarantors have also defaulted for failure to complete the mixed residential and retail condominium construction project per the DOT and Completion Guaranty.

In the event of default under the Loan, section 3.1(d) of the DOT allows the Lender to apply for appointment of a receiver for the Property without notice to Borrower. Borrower irrevocably consented to such appointment in those circumstances. Borrower also appointed Lender with the power of attorney to perform various duties as to the Property. Borrower’s majority owner Lennar Homes of California, Inc. (“Lennar”) now refuses to engage in substantive discussions about the completion and protection of the Property, efforts to appoint a receiver, or other matters. Lennar has effectively abandoned any efforts to financially support the Property.

Lender seeks an award against Borrower $46,532,685.87, plus fees and costs both for this action and for the hiring of a consultant. The damages award should accrue interest at the rates listed in the Note. Lender also seeks judgment against the Guarantors in an amount to be determined, plus attorney’s fees and costs.

Lender further seeks judicial foreclosure of the DOT and judgment for the sale of the property securing it, with proceeds applied to amounts owed to Lender, and a turnover order for the same property. Lender seeks appointment of a receiver and an order to turn the Property over to said receiver.

On September 8, 2023, Lender personally served Afshin with the Complaint, Summons, and moving papers.

On September 12, 2023, Lender personally served Borrower and Babak with the Complaint, Summons, and moving papers.

CCP section 564(b) provides that the court has authority to appoint a receiver in any of the following pertinent circumstances: (2) in an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt; (9) in all cases where necessary to preserve the property or rights of any party; and (11) in an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage, or separate assignment document. If under CCP section 564(b)(11), the appointment may continue after entry of a judgment for specific performance if appropriate to protect, operate, or maintain real property encumbered by a deed of trust or mortgage or to collect rents therefrom while a pending nonjudicial foreclosure under power of sale in a deed of trust or mortgage is being completed.

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 provision in the loan documents that expressly provides for the appointment of a receiver in the event of default is not controlling but is of some evidentiary value. Barclays Bank of California v. Superior Court (“Barclays”) (1977) 69 Cal.App.3d 593, 601-02.

Borrower currently possesses the Property. Lavian Decl., ¶5. On June 7, 2021, Lender’s predecessor-in-interest CRECFIV Holdings, LLC (“Predecessor”) executed a Loan to Borrower for a maximum principal amount of $47,570,000 and a Note to the same effect. Lavian Decl., ¶¶ 6-7, Exs. A, C.

To secure the Loan, a DOT recorded on June 9, 2021 encumbered both the Property and other collateral described therein. Lavian Decl., ¶8, Ex. D. Section 3.1 authorizes judicial foreclosure or foreclosure by power of sale upon default. Lavian Decl., ¶8, Ex. D. Section 3.1(d) also authorizes Lender to move for appointment of a receiver for the Property, without notice to Borrower or regard to the adequacy of the Property or the repayment of the Loan. Lavian Decl., ¶8, Ex. D. Borrower waived any notice of and defense to such appointment and agreed not to oppose any application for it. Lavian Decl., ¶8, Ex. D.

Lender perfected its interest in the Property and other collateral via a fixture filing recorded on June 8, 2021 as Instrument No. 0912366 and a UCC-1 financing statement. Lavian Decl., ¶9, Exs. E-F.

On July 30, 2021, Predecessor assigned its rights under the Loan, Note, and DOT to Lender. Lavian Decl., ¶6, Ex. B.

On June 22, 2023, Lender gave notice via letter to Borrower and Guarantors that Borrower had defaulted under the Note for failure to pay on June 1, 2023. Lavian Decl., ¶12, Ex. G. On July 26, 2023, Lender gave notice via a second letter that the Maturity Date of the Loan was July 1, 2023, at which time all accrued and unpaid sums thereunder became due. Lavian Decl., ¶13, Ex. H. The failure to repay those obligations at the time also constituted an event of default. Lavian Decl., ¶13, Ex. H. The letter demanded repayment of the outstanding $45,208,381.18 balance. Lavian Decl., ¶13, Ex. H.

Despite these demand letters, Borrower has not taken any action to repay the outstanding indebtedness. Lavian Decl., ¶14. Borrower has also defaulted for failure to complete the construction project on the Property on a timely basis. Lavian Decl., ¶15.

Lender is informed that Borrower has abandoned the Property, which now lacks appropriate security and is at risk of immediate harm. Lavian Decl., ¶16. The failure to complete the project and the mechanics liens recorded against the Property also place the Property in peril. Lavian Decl., ¶16. The incomplete structure thereon is in immediate jeopardy of potentially irreparable damage, including the risk that unhoused persons will use the incomplete structure thereon as shelter. Lavian Decl., ¶16. Each of these constitute standalone events of default. Lavian Decl., ¶17.

The outstanding balance under the Loan as of August 31, 2023 is $46,532,685.87 plus accrued interest and fees and costs connected to the enforcement of Lender rights and remedies. Lavian Decl., ¶18. Lender performed all covenants and conditions required under the Loan, Note, DOT, fixture filing, and UCC-1 filing. Lavian Decl., ¶19.

Lender moves for the appointment of a receiver for the Property pursuant to CCP sections 564(b)(2), (9), and (11) and a TRO to enjoin Borrower from transferring, concealing, removing, impairing, or using the Property pending an OSC hearing. Mot. at 9. No opposition has been filed.

The court has authority to appoint a receiver in an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt. CCP §564(b)(2).

Lender shows that the Borrower is in default. The Note was for a maximum principal amount of $47,570,000. Lavian Decl., ¶7, Ex. C. A July 26, 2023 demand letter listed the amount owed as $45,208,381.18. Lavian Decl., ¶13, Ex. H. The outstanding balance as of August 31, 2023 is $46,532,685.87 plus accrued interest, fees, and costs. Lavian Decl., ¶18.

Borrower has also defaulted for failure to complete the construction project on the Property on a timely basis. Lavian Decl., ¶15. Lender is informed that Borrower has abandoned the Property, which now lacks appropriate security and is at risk of immediate harm. Lavian Decl., ¶16. The failure to complete the project and the mechanics liens recorded against the Property also place the Property in peril. Lavian Decl., ¶16. The incomplete structure thereon is in immediate jeopardy of potentially irreparable damage, including the risk that unhoused persons will use the incomplete structure thereon as shelter. Lavian Decl., ¶16. Each of these constitute standalone events of default. Lavian Decl., ¶17.

After an event of default, section 3.3 of the DOT permits the Lender or an appointed receiver to take possession and control of the Property, manage and operate it, preserve and maintain it, repair and alter it, complete any construction or repair of the planned improvements in accordance with the approved budget, market or lease the Property, and collect all rents and profits from it. Mot. at 9; Lavian Decl., ¶8, Ex. D.

Appointment of a receiver is appropriate under CCP section 564(b)(2) and the unopposed motion is granted. Lender requests the appointment of Mitch Vanneman (“Vanneman”) as receiver. The proposed order reflects that Lender wants the receiver to manage and oversee completion of the Project construction, including issuing up to $8 million in receiver certificates, and then sell it. Vanneman is located in Illinois and the court is unclear how much work is required to complete the construction and how Vanneman would do so from Chicago.

Further, the proposed order is not on the Judicial Council form for a capital receiver that the court requires.
The court will discuss these issues with counsel at hearing.