Judge James C. Chalfant, Case Number: 24STCV06253, Date: 2024-05-16 Tentative Ruling

BMO Bank N.A. v. Carlotta USA LLC, et al.,

24STCV06253

Tentative decision on confirmation of appointment of receiver: granted

Plaintiff BMO Bank N.A. (“Bank”) seeks confirmation of the appointment of David P. Stapleton (“Receiver”) to take possession of property and collect the rents from the tenants and subtenants of real property and improvements.

The court has read and considered the moving papers, opposition, and reply, and renders the following tentative decision.

On March 13, 2024, Plaintiff BMO Bank filed a Complaint against Defendants Carlotta USA LLC (“Carlotta USA”), Beethoven Nine LLC (“Beethoven 9”), Beethoven Ten LLC (“Beethoven 10”), Phillippe Journo (“Journo”), and Compagnie De Phalsbourg S.A.R.L. (“Compagnie”), alleging causes of action for (1) breach of loan agreement (Carlotta Loan); (2) breach of promissory note (Carlotta Loan); (3) money lent (Carlotta Loan); (4) judicial foreclosure (Carlotta Loan); (5) breach of loan agreement (Beethoven Loan); (6) breach of promissory note (Beethoven Loan); (7) money lent (Beethoven Loan); (8) judicial foreclosure (Beethoven Loan); (9) breach of guaranty agreement (Carlotta Loan); (10) breach of guaranty agreement (Beethoven Loan); (11) breach of environmental indemnity agreement (Carlotta Loan); and (12) breach of environmental indemnity agreement (Beethoven Loan). The Complaint alleges in pertinent part as follows.

Plaintiff Bank is the successor by merger to Bank of the West. Compl. at 1. Plaintiff Bank and Carlotta USA are parties to a June 28, 2018 “Term Loan Agreement” (“Carlotta Loan”). Compl. ¶16. The Carlotta Loan was amended by eight subsequent modifications and reaffirmation of the loan documents beginning October 18, 2018 through July 5, 2023. Compl. ¶16. Plaintiff Bank made the Carlotta Loan to Carlotta USA in the amount of $22,500,000. Compl. ¶16, Ex. A.

The Carlotta Loan is evidenced by a Promissory Note dated June 28, 2018 (“Carlotta Note”). Compl. ¶17, Ex. B. The Carlotta Loan and Carlotta Note have not been revoked or superseded, and each remain in full force and effect in accordance with their respective terms. Compl. ¶18. Plaintiff Bank made all required advances on the Carlotta Loan to Carlotta USA and has performed all other terms and conditions under the Carlotta Loan and Carlotta Note. Compl. ¶19.

Defendant Carlotta USA was in default at the time the eighth modification and reaffirmation of loan documents were executed. Compl. ¶20. The eighth modification extended the “Maturity Date” of the Carlotta Loan to April 5, 2024 and required Carlotta USA to make interest payments beginning May 1, 2023, and to continue making payments in the amount of $800,000 on July 7, 2023, $800,000 on August 5, 2023, and $400,000 on January 5, 2024. Compl. ¶21.

Carlotta USA did not begin making interest payments on May 1, 2023, and failed to make the subsequent payment installments. Compl. ¶22. Plaintiff Bank sent Carlotta USA notices of default on September 5, 2023 and November 14, 2023, demanding payment of the past-due amounts within five calendar days. Compl. ¶24. Carlotta USA did not cure the defaults. Compl. ¶24. On or about December 22, 2023, Plaintiff Bank sent Carlotta USA a notice of default declaring all sums owing under the Carlotta Loan and Carlotta Note immediately due and payable and demanding payment within seven calendar days. Compl. ¶25. Carlotta USA did not make the payments demanded by the December 22, 2023 notice. Compl. ¶26.

The outstanding principal balance on the Carlotta Loan and Carlotta Note is $15,899,973.06 with an accrued interest of $795,029.19 as of December 19, 2023 and accruing interest, late charges, costs of collection, fees, expenses and charges including reasonable attorney’s fees and costs due to Bank. Compl. ¶27.

Carlotta USA executed and delivered a Deed of Trust on June 28, 2018 (“Carlotta DOT”) to secure its obligations under the Carlotta Loan and Carlotta Note. Compl. ¶28. The Carlotta DOT named Bank as the beneficiary. Compl. ¶28, Ex. C. The Carlotta Note, Carlotta DOT, and certain other documents as amended from time to time, granted Bank a first priority lien and security interest in (i) the real property and improvements described therein and commonly described as 638 New High Street, Los Angeles, CA and 643, 649, 665, and 675 North Spring Street, Los Angeles, CA (collectively, the “Carlotta Property”); (ii) all rents, issue and profits generated of and from the Carlotta Property (the “Carlotta Rents”); and (iii) all of the personal property and fixtures described therein (collectively with the Carlotta Rents, the “Carlotta Personal Property”) for the purpose of securing, inter alia, Carlotta USA’s obligations under the Carlotta Loan and Carlotta Note. Compl. ¶29.

The Carlotta Loan, Note, DOT, and other documents permit Bank to seek appointment of a receiver to take over management and control of the Carlotta Property and Carlotta Personal Property, including the Carlotta Rents. Compl. ¶30. Bank has no adequate remedy at law to enforce its rights in the Carlotta Property and Carlotta Personal Property. Compl. ¶32.

Bank, Beethoven 9 and Beethoven 10 (the “Beethoven Defendants”) are parties to an April 11, 2019 “Term Loan Agreement” (“Beethoven Loan”). Compl. ¶58. The Beethoven Loan was amended by six subsequent modifications and reaffirmation of the loan documents beginning July 5, 2020 through July 5, 2023. Compl. ¶58. Bank made the Beethoven Loan to Beethoven Defendants in the amount of $4,902,000. Compl. ¶58, Ex. E.

The Beethoven Loan is evidenced by a “Promissory Note” dated April 11, 2019 (“Beethoven Note”). Compl. ¶59, Ex. F. The Beethoven Loan and Beethoven Note have not been revoked or superseded, and each remain in full force and effect in accordance with their respective terms. Compl. ¶60. Bank made all required advances on the Beethoven Loan to Beethoven Defendants and has performed all other terms and conditions under the Beethoven Loan and Beethoven Note. Compl. ¶61.

Beethoven Defendants were in default at the time the sixth modification and reaffirmation of loan documents were executed. Compl. ¶62. The sixth modification extended the “Maturity Date” of the Beethoven Loan to April 5, 2024 and required Beethoven Defendants to make interest payments beginning May 1, 2023, and to continue making payments in the amount of $200,000 on July 7, 2023, $200,000 on August 5, 2023, and $400,000 on January 5, 2024. Compl. ¶63.

Beethoven Defendants did not begin making interest payments on May 1, 2023, and failed to make the subsequent payment installments. Compl. ¶64. Bank sent Beethoven Defendants notices of default on September 5, 2023 and November 14, 2023, demanding payment of the past-due amounts within five calendar days. Compl. ¶66. Beethoven Defendants did not cure the defaults. Compl. ¶66. On or about December 22, 2023, Bank sent Beethoven Defendants a notice of default declaring all sums owing under the Beethoven Loan and Beethoven Note immediately due and payable and demanding payment within seven calendar days. Compl. ¶67. Beethoven Defendants did not make the payments demanded by the December 22, 2023 notice. Compl. ¶68.

The outstanding principal balance on the Beethoven Loan and Beethoven Note is $4,002,000.00 with an accrued interest of $200,102.08 as of December 19, 2023 and accruing interest, late charges, costs of collection, fees, expenses and charges including reasonable attorney’s fees and costs due to Bank. Compl. ¶70.

Beethoven Defendants executed and delivered a Deed of Trust on April 11, 2019 (“Beethoven DOT”) to secure its obligations under the Beethoven Loan and Beethoven Note. Compl. ¶71. The Beethoven DOT named Bank as the beneficiary. Compl. ¶71, Ex. G. The Beethoven Note, Beethoven DOT, and certain other documents as amended from time to time, granted Bank a first priority lien and security interest in (i) the real property and improvements described therein and commonly described as 608 and 610 New High Street, Los Angeles, CA (aka 615-631North Spring Street, Los Angeles, CA), 648 New High Street, Los Angeles CA, 677/679 North Spring Street, Los Angeles, CA (collectively, the “Beethoven Property”); (ii) all rents, issue and profits generated of and from the Beethoven Property (the “Beethoven Rents”); and (iii) all of the personal property and fixtures described therein (collectively with the Beethoven Rents, the “Beethoven Personal Property”) for the purpose of securing, inter alia, Beethoven’s obligations under the Beethoven Loan and Beethoven Note. Compl. ¶72.

The Beethoven Loan, Note, DOT, and other documents permit Bank to seek appointment of a receiver to take over management and control of the Beethoven Property and Beethoven Personal Property, including the Beethoven Rents. Compl. ¶73. Bank has no adequate remedy at law to enforce its rights in the Beethoven Property and Beethoven Personal Property. Compl. ¶75.

Plaintiff Bank seeks a judgment against Defendants for the following: (1) general and special damages; (2) an order adjudging that the rights, claims, ownership, liens, title, interests, and demands of Defendants in their respective properties are subsequent to and subject to Bank’s lien under the respective Deeds of Trust; (3) an order providing Bank with immediate and exclusive possession of all rents and personal properties of the Defendants; (4) an order appointing a receiver during the pendency of this action; (5) injunctive relief; (6) costs of suit; (7) prejudgment and post-judgment interest; and (8) all other actions or remedies deemed just and proper.

Defendants Carlotta USA, Beethoven 9, Beethoven 10, Journo, and Compagnie filed an Answer on April 18, 2024.

On April 16, 2024, the court appointed Stapleton as a rents and profits receiver only and issued an order to show cause (“OSC”) re confirmation of receiver as to possession of Defendants’ properties.

Pursuant to CCP section 564(b), “[a] receiver may be appointed by the court in which an action or proceeding is pending, or by a judge of that court,…(11) [i]n 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. The appointment may be continued 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.” CCP § 564(b)(11).

“[T]he appointment of a receiver rests in a large measure in the sound discretion of the court. However, such power is not entirely uncontrolled and must be exercised with due regard to the facts presented in each particular case. And because the remedy of receivership is so drastic in character, ‘Ordinarily, if there is any other remedy, less severe in its results, which will adequately protect the rights of the parties, a court should not take property out of the hands of its owners.” Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1953) 116 Cal.App.2d 869, 873; see also Medipro Medical Staffing LLC v. Certified Nursing Registry, Inc. (2021) 60 Cal.App.5th 622, 628.

The Properties are adjacent and contain several parking lots, a bakery, a financial lending store, and other retail tenants. Ibarra Decl., ¶38. The Property is largely vacant. Ibarra Decl., ¶39. Defendants have not provided clarity whether the Property is being professionally managed or has professional security to safeguard against potential vandalism, break-ins, and other acts that could significantly diminish the value of the Property, as well as, loss of tenants. Ibarra Decl., ¶39. A property manager is necessary to maximize occupancy as much of the value of the Property is being wasted due to lack of occupancy. Ibarra Decl., ¶41.

Defendants and/or their agents are also continuing to collect thousands of dollars in monthly rents from the Property despite having stopped paying any debt service to Bank on the subject loans. Ibarra Decl., ¶40. Further, Defendants are severely delinquent on real estate property taxes, which also put the Property at risk. Ibarra Decl., ¶42. As of January 29, 2024, Carlotta USA owes at least $466,828.97 in property taxes on the Carlotta Property, consisting of a delinquent amount of $233,414.51 and penalties assessed in the amount of $23,341.42. Ibarra Decl., ¶42. As of January 30, 2024, the Beethoven Defendants owe at least $127,103.40 in property taxes on the Beethoven Property, consisting of a delinquent amount of $63,551.72 and penalties assessed in the amount of $6,355.16. Ibarra Decl., ¶43.

Stapleton is fully qualified to serve as Receiver and to take control of the Property and the revenues, issues and profits thereof, and preserve it for the estate. Stapleton Decl., ¶¶ 1-12, 17. Stapleton has no involvement with any of the parties to this action that would create a conflict of interest if he were to be appointed as the receiver. Stapleton Decl., ¶15. Neither is Stapleton related to any judge of the Los Angeles Superior Court by consanguinity or affinity within the third degree. Stapleton Decl., ¶15.

Dave Torres (“Torres”) is a licensed California Broker and Chief Financial Officer of Heidt Torres Co., a property development and management company specializing in property and asset management. Torres Decl., ¶1. Torres has served as a property manager for Defendant Compagnie’s following properties: (1) 608 and 610 New High Street, Los Angeles (aka 615-631 North Spring Street, Los Angeles, CA), (2) 648 New High Street, Los Angeles, CA, and (3) 677/679 North Spring Street, Los Angeles, CA (the “Properties”) since the beginning of 2020. Torres Decl., ¶¶ 2-3.

Torres’ company provides maintenance and general building upkeep at the Properties. Torres Decl., ¶4. The company keep the Properties sealed off from trespassers, changing the locks when necessary to prevent trespass and inspecting the Properties regularly for any sign of trespass. Torres Decl., ¶4. The company also takes immediate action to address the discovery of any trespass and secure the Properties. Torres Decl., ¶4. Furthermore, the company addresses issues of graffiti and conduct regular maintenance to remove any graffiti on the Properties. Torres Decl., ¶¶ 4-5. The company continuously monitors the Properties to address any vandalism as well. Torres Decl., ¶¶ 4-5.

Torres’s company also responds to any requests related to the Properties as they arise in a prompt manner. Torres Decl., ¶6. Some of these requests come directly from the Chinatown Business Improvement District, which is aware that Torres’s company is responsible for the maintenance of the Properties. Torres Decl., ¶6.

Plaintiff Bank seeks confirmation of the appointment of Receiver to take possession of the Properties and collect the rents from the tenants and subtenants.

Defendants have filed an opposition in which they do not oppose receivership for the purpose of collecting rent and paying property taxes from collected rent but do oppose expansion of Receiver’s duties to maintain the Properties. They argue that Bank’s concern about vandalism, break-ins, and harm is speculation and inconsistent with Defendants’ evidence that the Properties have been professionally managed since 20210. Opp. at 5-6.

Bank replies that it agrees that Defendants’ management can maintain the Properties but wants Receiver to have the powers of a rents and profits receiver per the Judicial Council Form RC-200 of (1) entering into leases with new tenants and evicting defaulting tenants, (2) demanding that Defendants turn over any security deposits, prepaid rent, other rental or lease payments, and funds in property management bank accounts, and (3) demand that Defendants turn over books and records. Bank also wants Receiver to be able to pay property taxes, which currently total over $620,000, from sources other than rent. Reply at 1, 3.

The application for confirmation of the appointment of Receiver is granted. The court will discuss the above issues, as well as the date for a Receivership status conference, with counsel at hearing.