Judge James C. Chalfant, Case Number: 24STCV24661, Date: 2024-10-17 Tentative Ruling

Plaintiff Andrew Modlin (“Modlin”) applies for a preliminary injunction to enjoin Defendants Oakhurst Income Fine I, LP (“Oakhurst”) and Platinum Loan Services (“PLS”) from foreclosing on Modlin’s real property located at 1450 Blue Jay Way, Los Angeles, CA 90069 (the “Blue Jay Way Property”).

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

Plaintiff filed the Complaint on July 16, 2024, which alleges claims for declaratory relief against both Defendants and for breach of the implied covenant of good faith and fair dealing against Oakhurst. The Complaint alleges in pertinent part as follows.

On or about March 2, 2022, Oakhurst made a joint loan to Modlin and non-party Adam Bierman (“Bierman”) in the principal amount of $5,000,000 (the “Loan”). PLS is the servicer of the Loan.

The Loan was secured by deeds of trust on two separate parcels of real property— the Blue Jay Way Property owned by Modlin and a property owned by Bierman. The Loan repayment terms were interest-only for two years followed by a balloon payment of principal. Oakhurst understood that Modlin and Bierman intended to refinance the Loan prior to maturity.

A few months after the Loan funded, Bierman told Oakhurst that he wanted to sell his property without using the entire proceeds to Oakhurst to pay down the Loan. Oakhurst agreed, accepting a $1,000,000 paydown in exchange for a reconveyance of its deed of trust on Bierman’s property. The $1,000,000 amount was substantially less than the proceeds of the sale of Bierman’s property and substantially less than half of the Loan balance. At no time did Modlin consent to the sale of Bierman’s property without all the proceeds being used to pay down the Loan.

The sale of Bierman’s property closed in or about October 2022, and only $1,000,000 was paid to Oakhurst. Oakhurst now is seeking to foreclose on the Blue Jay Way Property based on Modlin’s failure to make the balloon payment and has recorded a notice of default and a notice of trustee’s sale.

On September 24, 2024, the court granted Modlin’s ex parte application for a temporary restraining order (“TRO” and order to show cause re: preliminary injunction (“OSC”) to enjoin Defendants from foreclosing on the Blue Jay Way Property. The court ordered Modlin to serve Defendants with the TRO/OSC and to file a proof of service by August 28, 2024.

An injunction is a writ or order requiring a person to refrain from a particular act; it may be granted by the court in which the action is brought, or by a judge thereof; and when granted by a judge, it may be enforced as an order of the court. Code of Civil Procedure (“CCP”) §525. An injunction may be more completely defined as a writ or order commanding a person either to perform or to refrain from performing a particular act. See Comfort v. Comfort, (1941) 17 Cal.2d 736, 741. McDowell v. Watson, (1997) 59 Cal.App.4th 1155, 1160.[1] It is an equitable remedy available generally in the protection or to prevent the invasion of a legal right. Meridian, Ltd. v. City and County of San Francisco, et al., (1939) 13 Cal.2d 424.

The purpose of a preliminary injunction is to preserve the status quo pending final resolution upon a trial. See Scaringe v. J.C.C. Enterprises, Inc., (1988) 205 Cal.App.3d 1536. Grothe v. Cortlandt Corp., (1992) 11 Cal.App.4th 1313, 1316; Major v. Miraverde Homeowners Assn., (1992) 7 Cal.App.4th 618, 623. The status quo has been defined to mean the last actual peaceable, uncontested status which preceded the pending controversy. Voorhies v. Greene (1983) 139 Cal.App.3d 989, 995, quoting United Railroads v. Superior Court, (1916) 172 Cal. 80, 87. 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402.

A preliminary injunction is issued after hearing on a noticed motion. The complaint normally must plead injunctive relief. CCP §526(a)(1)-(2).[2] Preliminary injunctive relief requires the use of competent evidence to create a sufficient factual showing on the grounds for relief. See e.g. Ancora-Citronelle Corp. v. Green, (1974) 41 Cal.App.3d 146, 150. Injunctive relief may be granted based on a verified complaint only if it contains sufficient evidentiary, not ultimate, facts. See CCP §527(a). For this reason, a pleading alone rarely suffices. Weil & Brown, California Procedure Before Trial, 9:579, 9(ll)-21 (The Rutter Group 2007). The burden of proof is on the plaintiff as moving party. O’Connell v. Superior Court, (2006) 141 Cal.App.4th 1452, 1481.

A plaintiff seeking injunctive relief must show the absence of an adequate damages remedy at law. CCP §526(4); Thayer Plymouth Center, Inc. v. Chrysler Motors, (1967) 255 Cal.App.2d 300, 307; Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565. The concept of “inadequacy of the legal remedy” or “inadequacy of damages” dates from the time of the early courts of chancery, the idea being that an injunction is an unusual or extraordinary equitable remedy which will not be granted if the remedy at law (usually damages) will adequately compensate the injured plaintiff. Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565.

In determining whether to issue a preliminary injunction, the trial court considers two factors: (1) the reasonable probability that the plaintiff will prevail on the merits at trial (CCP §526(a)(1)), and (2) a balancing of the “irreparable harm” that the plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction. CCP §526(a)(2); 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402; Pillsbury, Madison & Sutro v. Schectman, (1997) 55 Cal.App.4th 1279, 1283; Davenport v. Blue Cross of California, (1997) 52 Cal.App.4th 435, 446; Abrams v. St. Johns Hospital, (1994) 25 Cal.App.4th 628, 636. Thus, a preliminary injunction may not issue without some showing of potential entitlement to such relief. Doe v. Wilson, (1997) 57 Cal.App.4th 296, 304. The decision to grant a preliminary injunction generally lies within the sound discretion of the trial court and will not be disturbed on appeal absent an abuse of discretion. Thornton v. Carlson, (1992) 4 Cal.App.4th 1249, 1255.

A preliminary injunction ordinarily cannot take effect unless and until the plaintiff provides an undertaking for damages which the enjoined defendant may sustain by reason of the injunction if the court finally decides that the plaintiff was not entitled to the injunction. See CCP §529(a); City of South San Francisco v. Cypress Lawn Cemetery Assn., (1992) 11 Cal.App.4th 916, 920.

On or about March 2, 2022, Oakhurst made the Loan jointly to Bierman and Modlin in the principal amount of $5,000,000. Modlin Decl., ¶2, Ex. A. The Loan was secured by deeds of trust on two separate parcels of real property— Modlin’s residence at the Blue Jay Way Property and a property owned by Bierman. Modlin Decl., ¶2, Ex. A. The Note provides for two years of interest-only payments, followed by a balloon payment of the principal balance in April 2024. Modlin Decl., ¶2, Ex. A.

The Blue Jay Way Property is also subject to a $4.5 million deed of trust from Shellpoint Mortgage Servicing (“Shellpoint”). Modlin Decl., ¶5. The Shellpoint deed of trust is in the first position with priority over Oakhurst’s deed of trust. Modlin Decl., ¶5.

In 2019 Modlin purchased the Blue Jay Way Property for approximately $11 million. Modlin Decl., ¶3. Prior to issuing the Loan, Oakhurst appraised the Blue Jay Way Property at $13 million. Modlin Decl., ¶3. Modlin is personally familiar with the value of the Blue Jay Way Property because he purchased it, lived there from the time, and has worked with brokers to market it for lease and sale. Modlin Decl., ¶3. In his opinion, the Blue Jay Way Property is worth approximately $12 million. Modlin Decl., ¶3.

Modlin has listed the Blue Jay Way Property for sale at $10.9 million, a price less than its full value, to generate additional interested buyers who might bid against each other; and because the threatened foreclosure puts downward pressure on the obtainable price. Modlin Decl., ¶4.

The Loan closed on or about March 11, 2022. Modlin Decl., ¶6, Ex. B. A few months after the Loan closed, Bierman told Oakhurst that he wanted to sell his collateral without using the entire proceeds to Oakhurst to pay down the Loan. Oakhurst agreed, accepting a $1,000,000 paydown in exchange for a reconveyance of its deed of trust on Bierman’s property. Modlin Decl., ¶7. Modlin knows this information because Bierman told him and later sent him a copy of Oakhurst’s October 20, 2022 payoff demand. Modlin Decl., ¶7, Ex. C. Modlin was unaware of Oakhurst’s arrangement with Bierman and did not agree to it. Modlin Decl., ¶9.

Bierman’s sold his property for approximately $5.7 million, and it was encumbered by an approximately $3.4 million senior mortgage. Modlin Decl., ¶8. Oakhurst ultimately released its deed of trust for the $1 million paydown. Modlin Decl., ¶7, Ex. D.

Modlin did not discover that Oakhurst had released Bierman’s collateral for less than the full sale proceeds until sometime in late 2023. Modlin Decl., ¶10. At that time, Bierman told Modlin that he did not have the money to pay his share of the loan. Modlin Decl., ¶10. Because Oakhurst had released Bierman’s collateral for less than the full sale proceeds, the principal loan balance became $4 million instead of $2.7 million. Modlin Decl., ¶11. In addition, because interest was accruing on the larger principal balance, the monthly interest payments were more than $30,000 per month instead of approximately $20,000 per month. Modlin Decl., ¶11. Modlin did not have enough money to pay the Loan unless he sold the Blue Jay Way Property. Modlin Decl., ¶11.

Modlin moved out of the Blue Jay Property temporarily around this time because he was traveling and wanted to rent it on a short-term basis for additional income. Modlin Decl., ¶12. After discovering the issue with Oakhurst, Modlin decided to continue the short-term rentals, using his personal furniture and furnishings to rent the Blue Jay Way Property as furnished for $40,000 per month. Modlin Decl., ¶12.

In or about November 2023, Bierman and Modlin jointly engaged James Kim, Esq. (“Kim”) of the law firm Cole Schotz, P.C. to approach Oakhurst about restructuring the Loan. Modlin Decl., ¶13. Kim approached Oakhurst about a loan modification, but Oakhurst declined to accept anything other than payment in full. Modlin Decl., ¶13.

On January 30, 2024, Modlin filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Central District of California, initiating bankruptcy case no. 2:24-bk-10695-SK (the “Bankruptcy Case”). Modlin Decl., ¶14.

On August 15, 2024, the bankruptcy court dismissed the Bankruptcy Case upon Oakhurst’s motion. Modlin Decl., ¶15. With the bankruptcy case dismissed and a foreclosure again imminent, Modlin could no longer rent the Blue Jay Way Property, so he moved back in early September 2024, and it again became his primary residence. Modlin Decl., ¶16.

On August 27, 2024, Modlin filed a notice of appeal with the United States Bankruptcy Appellate Panel of the Ninth Circuit and that same day he filed a motion for stay pending appeal and an application for an order shortening time. Modlin Decl., ¶17.

Oakhurst has recorded a notice of trustee’s sale. Modlin Decl., ¶18, Ex. E. The trustee’s sale is currently scheduled for October 1, 2024, at 11:00 a.m. Modlin Decl., ¶18.

Throughout the Bankruptcy Case, Modlin admitted that he and Bierman were partners with respect to the $5 million Loan from Oakhurst. Landau Decl., ¶2, Ex. 2. Business partners Modlin and Bierman induced Oakhurst to loan them $5 million on terms that included the Addendum to the note providing for the release of collateral upon principal paydown. Fine Decl., ¶4. The terms for release of collateral are for the benefit of the borrowers. Fine Decl., ¶4.

Throughout 2024, Oakhurst has been delayed in realizing upon its collateral resulting in substantial accruals of additional interest, fees, and costs. Landau Decl., ¶3. Oakhurst’s notice of default period expired in January of 2024. Landau Decl., ¶3. At that point, Modlin filed a Chapter 11 bankruptcy case to stay Oakhurst’s sale set for January 30, 2024. Landau Decl., ¶3. The bankruptcy court dismissed the bankruptcy case on August 15, 2024. Landau Decl., ¶3. On September 25, 2024, the bankruptcy court denied Modlin’s motion for stay pending appeal, and the bankruptcy court and Ninth Circuit Bankruptcy Appellate Panel both denied Modlin’s motion for stay pending appeal. Landau Decl., ¶3.

Oakhurst is owed $4,948,225.47 as of September 30, 2024. Landau Decl., ¶4; Fine Decl., ¶2. Interest continues to accrue until satisfaction of the Loan at the rate of $1,611.11 per day. Landau Decl., ¶4; Fine Decl., ¶2. Senior encumbrances to Oakhurst are (1) $156,512 in annual real estate taxes per the Los Angeles County Tax Collector claim (Ex. 3) and (2) a first priority lien held by Shellpoint in the amount of $4.5 million. Landau Decl., ¶4. Thus, the gross encumbrances total approximately $9.6 million. Landau Decl., ¶4.

Modlin has listed the Blue Jay Way Property listed for $10.9 million. Landau Decl., ¶5. Modlin also has listed the Blue Jay Way Property for rent at $65,000 monthly. Landau Decl., ¶5. Per Modlin’s listing agreement, Modlin is listing the property for a 5% real estate commission totaling $545,000. Landau Decl., ¶6.

Based on its location, the Blue Jay Way Property is subject to the City of Los Angeles mansion tax of 5.5% upon sales in excess of $10 million. Landau Decl., ¶5. Together with other governmental transfer taxes, a total of $654,000 in transfer taxes must be paid for a sale at $10.9 million. Landau Decl., ¶5, Ex. 4. Thus, there is a minimum of $1.2 million in tax and broker closing costs upon sale plus miscellaneous closing costs for escrow, title insurance, and other matters. Landau Decl., ¶7.

Modlin claimed an intent to reside in the Blue Jay Way Property and the bankruptcy court expressly rejected the claim and disallowed a homestead exemption. Landau Decl., ¶8, Ex. 6.

Oakhurst’s foreclosure sale is presently set for October 22, 2024. Landau Decl., ¶9. As set forth above, Oakhurst has no equity cushion for its lien position. Landau Decl., ¶9. Thus, any future accrual of taxes, interest on the Shellpoint first mortgage or further Oakhurst interest may result in a loss to Oakhurst upon foreclosure because those amounts are not recoverable from its collateral. Landau Decl., ¶9.

Modlin commenced a JAMS arbitration case to adjudicate his claim against Oakhurst on October 9, 2024. Landau Decl., ¶11. JAMS Arbitration Rules & Procedures Article 33.1 states: “In most circumstances, the dispute should be heard and be submitted to the Tribunal for decision within nine months after the initial preliminary conference required by Article 22, and the final award should be rendered within three months thereafter. The parties and the Tribunal will use their best efforts to comply with this schedule.” Landau Decl., ¶11. Thus, counsel for loan servicing agent PLS, reasonably believes that the JAMS arbitration case will take at least nine months before entry of an award. Landau Decl., ¶12. The attorney’s fees and costs Oakhurst will incur in litigating Modlin’s claims in the superior court and the JAMS arbitration are estimated to be at least $250,000. Landau Decl., ¶12.

Plaintiff Modlin applies for a preliminary injunction to enjoin Defendants to cease any action to foreclose on the Blue Jay Property. PLS opposes for itself and for Oakhurst.

In California, there can be but one form of action for the recovery of any debt secured by a mortgage (deed of trust) and that form of action is foreclosure of the security. CCP §726(a); Pacific Valley Bank v. Schwenke, (“Schwenke”) (1987) 189 Cal. App. 3d 134, 140. If the beneficiary seeks a deficiency judgment in excess of the security’s value, he is limited to judicial foreclosure rather than non-judicial foreclosure. Id. The existence of the security denies the secured creditor the right to bring an independent claim on the underlying note. Id. (citation omitted). In effect, whenever there is a deed of trust to secure a debt, there can be but one action for the debt’s recovery. Id. The law steps in and limits the action to foreclosure proceedings to enforce the debt. Id. (citation omitted). As a corollary, the debtor, by signing a note secured by the deed of trust, does not unconditionally promise to pay the entire obligation and only makes a conditional promise to pay any deficiency if a judicial sale does not satisfy the debt. Id. (citation omitted).

CCP section 726(a) has both a "single-action" aspect, which limits the creditor to a single action to enforce the secured debt, and a "security-first" aspect, which requires the creditor to exhaust the security before seeking recourse against the debtor personally. Cal. Civ. Prac. Real Property Litigation §4:77. App. at 7.

Modlin relies heavily on Schwenke, supra, 189 Cal. App. 3d at 134, where the court applied this law to a situation in which two borrowers (O’Brien and Schwenke) jointly borrowed from the bank, and one of them (O’Brien), pledged real estate as collateral to secure the loan. Id. at 137. O’Brien later re-financed the property, but the bank accepted less than the full proceeds of the refinancing to pay down the joint loan. Id. at 138. The bank did not notify Schwenke of the money received from the O’Brien escrows or of the reconveyance of his deeds of trust. Id.

The court found that CCP section 726’s one-action rule was a complete bar to the bank’s action against Schwenke. Id. at 141. A creditor is not allowed to circumvent the statute by divesting himself of his security without the debtor’s consent. If he does so, he has waived his right to proceed on the note. Id.

The bank argued that Schwenke’s consent was not necessary since he was not the trustor on the deed of trust, but that ignored the fact that the note and deed of trust together formed one loan contract. Id.

Emphasis on whether the bank’s collection from O’Brien amounted to an “action” was misplaced. Where a trustor and the beneficiary agree that the latter may release a deed of trust without retiring the note, there is no violation of CCP section 726 since the debtor is entitled to waive its protections. Id. at 141-42. But where the bank releases security without a borrower’s consent, the release need not be characterized as an “’action.” What is crucial is that it was done without Schwenke’s knowledge. Id. at 142.

The Schwenke court cited Cooper v. Burch, (“Cooper”) (1906) 3 Cal.App. 470, 471, where three partners signed a promissory note and executed a mortgage to Cooper. Two of the partners and Cooper executed partial releases of the mortgage as portions of the property were sold, but money given for the releases was not applied to the note. The third debtor had no knowledge of the release of security or disposition of the funds. The court held that release of the mortgage without his knowledge or consent relieved him from liability on the note. Id. at 142. Finally, Schwenke found that the bank’s characterization of the loan as made to the partnership of O’Brien and Schwenke was against the evidence. Id. at 144.

Since there was no agreement between Schwenke and the bank to alter the terms of the loan contract, the bank was not excused from performance. Id. at 146. The bank’s release of security in violation of CCP section 726 relieved Scwenke of any personal liability. Id. at 146.

Modlin also relies on Security Pacific Nat'l Bank v. Wozab, (“Wozab”) (1990) 51 Cal. 3d 991, 1004–05, where the California Supreme Court applied the security first principle in a different context. There, the lender set off money in a borrower’s deposit account before foreclosing on its real property collateral. The court asked: “Dies an improper bank setoff result in the forfeiture of the underlying debt?” Id. at 1004. The court answered no. Id. Allowing t he bank to sue on the debt does not violate the two fundamental purposes of CCP section 726: (a) preventing multiplicity of lawsuits against the debtor and (b) requiring exhaustion of the security before a resort to the debtor’s unencumbered assets. Id. This was because the extra-judicial setoff was not an “action”. Id. at 998, 1004. A complete forfeiture of the debt also would be punitive. Id. at 1006. The result would be different if the bank refuses the debtor's demand to return the setoff funds. Then, the security-first rule would preclude the bank both from foreclosing the security interest and proceeding on the underlying debt. Id. App. at 7.

Modlin argues that, under this case authority, Oakhurst has waived its collateral and forfeited its debt. Like the secured lender in Schwenke, Oakhurst released one borrower’s collateral without consent of the other borrower. As the California Supreme Court warned in Wozab, Oakhurst refused Modlin’s request to honor the one-action rule -- i.e., reduce the underlying debt as if it had taken the full proceeds of Bierman’s collateral. Accordingly, it has waived both the security and the debt. App. at 7.

PLS attempts to distinguish Schwenke. While the co-borrower aspect of Schwenke appears to create similarity, the distinctions between Schwenke and the case at bar are material and determinative: (1). Both borrowers pledged real property collateral for the Modlin loan; (2). Modlin consented to the collateral release terms as evidenced by the Addendum that requires Oakhurst to release one of the real property collateral parcels upon principal paydown; (3). Oakhurst complied with the requirements and terms of the Addendum and its failure to do so would have been a breach of the note. Opp. at 5-6.

PLS argues that Schwenke has no application to this case where the terms of the Loan require that collateral be released upon certain conditions. Modlin agreed at the inception of the Loan to the very term for release of collateral that he now claims renders the Loan unenforceable. Civil Code §3517 (“No one can take advantage of his own wrong.”). Modlin’s consent renders Schwenke inapposite. Opp. at 6.

PLS argues that Wozab contains no independent reasoning supporting Modlin’s claim that Oakhurst’s loan is unenforceable under the one-action rule after Oakhurst complied with the Addendum. Wozab is a security first case and stands for the principle that a secured lender may not setoff funds from a borrower’s bank account against a debt secured by real property without first foreclosing on the security. If the secured lender does take the money as a setoff, it risks waiving their security interest. Oakhurst did not engage in any setoff or other action that remotely triggers the one-action rule under Wozab. Opp. at 5, n.2.

The court concludes that PLS’s distinctions of Scwenke and Wozab are ineffectual. Modlin has a good argument, and has shown a probability of success, that his lack of consent to Oakhurst’s release of Bierman’s property excused him (Modlin) from personal liability on the Loan. That is what Schwenke and the “security first” aspect of CCP section 726(a) is about.

It is not clear, however, that this lack of consent prevents foreclosure on the Blue Jay Way Property. The security for the Loan consisted of multiple liens -- both Blue Jay Way and Bierman’s property. The issue is what happens when Oakhurst released less than the full equity in Bierman’s property without Modlin’s consent? Does that undermine Oakhurst’s lien on the Blue Jay Way Property? The release of Bierman’s property was not a judicial action and allowing foreclosure on Blue Jay Way would not violate either of the fundamental purposes of CCP section 726: (a) preventing multiplicity of lawsuits against the debtor and (b) requiring exhaustion of the security before a resort to the debtor’s unencumbered assets. Indeed, it is consistent with the analysis in Wozab, supra, 51 Cal. 3d at 1004–05.

The court need not reach a conclusion on this issue except that Modlin has not shown that the release of the Bierman security without Modlin’s consent also requires release of the Blue Jay Way security.

PLS notes that the promissory note Addendum contains an express requirement that Oakhurst release one of the properties upon principal paydown of the note:

“The Lender and Borrower do hereby agree that the property located at either 4619 Roma Ct, Los Angeles CA 90292, or 1450 Blue Jay Way, Los Angeles CA 90069 shall be released from the loan agreement by way of principal paydown such that the loan-to-value of the remaining asset is less than or equal to 65% of the market value at the time of such release. Lender may or may not require an updated appraisal at time of release and final approval of release to be determined at lenders sole and absolute discretion.” Modlin Decl., Ex. A (emphasis added).

There is no dispute that Oakhurst performed in accordance with the Addendum when releasing the Roma Property. Thus, the question on the merits is whether the Addendum is a valid and binding agreement that does not violate CCP Section 726. Opp. at 4-5.

Modlin contends that Oakhurst cannot argue that it was permitted to violate the rule because it obtained an advance waiver in the addendum to the note. Courts have long upheld the principle that the one-action rule is not waivable in advance. Cadle Co. II v. Harvey, (“Harvey”) (2000) 83 Cal. App. 4th 927, 932 (anti-deficiency statutes and CCP section 726 reflect policy limiting the right to recover deficiency judgments and debtor cannot be compelled to waive them in advance). App. at 8.

This judicial rule against advance waivers was codified in Civil Code section 2953:

“Any express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property, whereby the borrower agrees to waive the rights, or privileges conferred upon the borrower by … Sections 580a or 726 of the Code of Civil Procedure, shall be void and of no effect.”

See Salter v. Ulrich, (1943) 22 Cal. 2d 263, 267 (“The rule against waivers in advance has been codified by section 2953 of the Civil Code, which was adopted in 1937.”). Under these clear authorities, Oakhurst’s cannot rely on an advance waiver of the one-action rule. App. at 8.

PLS argues that Modlin cites no decision for the proposition that a note containing specific collateral release terms constitutes an unlawful advance waiver. If so, then every construction loan that has a partial collateral release clause triggers the one-action rule. A plain reading of the Addendum reveals there is no waiver in the Addendum. Third, Modlin’s consent exists in the Addendum and the Addendum did not require a second formal consent under the terms of the deed of trust. Modlin could have negotiated for that notice but did not do so. Opp. at 6-7.

PLS argues that Harvey, supra, 83 Cal.App.4th 927, is a “sham guaranty” case in which a purported guarantor waives anti-deficiency protections. Since the guaranty is a sham, the waivers of anti-deficiency protections set forth in an otherwise valid guaranty are void. As such, it has no precedential value. Opp. at 7.

PLS’s argument is untenable. It ignores Civil Code section 2953’s plain language as well as Harvey’s language that “well-established principles” reflect that advance waivers of deficiency are not permitted by legislative policy. Modlin is also correct that PLS’s analogy to construction loan partial releases are not an advance waiver; they are terms that future waivers will occur during the course of construction. Reply at 4. The court accepts that the Addendum’s advance waiver is ineffectual for any effort by Oakhurst to obtain a deficiency judgment against Modlin.[4] [5]

PLS also argues that Modlin has repeatedly confirmed that he and Bierman were business partners in connection with the Oakhurst loan. Landau Decl., ¶2, Ex. 2. The note confirms that it is a business purpose loan. Modlin Decl., Ex. A, ¶11. Under Corporation Code section 16301, an act of a partner, including the execution of an instrument in the partnership name in the ordinary course the partnership business binds the partnership, unless the partner had no authority to act for the partnership. Bierman’s consent binds the partnership. Opp. at 7-8.

Modlin rebuts this defense. As in Schwenke, the facts do not support a partnership decision to release Bierman’s property The Note and Deeds of Trust were not executed on behalf of any partnership. In any event, a general partner’s consent is imputed to the general partnership for partnership purposes, not personal purposes. Modlin personally owns the Blue Jay Way Property and Bierman personally owned his property. Bierman could not waive Modlin’s rights under the one-action rule by obtaining a release for his personal property.

PLS also relies on equitable estoppel, which applies in circumstances where a party has induced another into forbearing to act. Lantzy v. Centex Homes, (2003) 31 Cal..App.4th 363, 383. The elements of estoppel are: (1) the party to be estopped must be appraised of the facts; (2) he must intend that his conduct shall be acted upon; (3) the other party must be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury. Driscoll v. City of Los Angeles, (1967) 67 Cal.2d 297, 305. The doctrine applies to a public entity in the same manner as a private party when the elements of equitable estoppel have been shown, and when the injustice which would result from a failure to estop the agency is sufficient to justify any adverse effect upon public interest or policy which would result. City of Long Beach v. Mansell, (1970) 3 Cal.3d 462, 496-97.

PLS argues that business partners Modlin and Bierman induced Oakhurst to loan them $5 million on terms that included the Addendum to release collateral upon principal paydown. No additional consent to release collateral was required beyond the paydown of the loan as set forth in the Addendum. Modlin was aware of these facts when Bierman paid down the loan and Bierman obtained the release of his property as collateral. Oakhurst was unaware that Modlin would claim that the Blue Jay Way Property and Modlin himself were released upon compliance with the Loan terms. Oakhurst relied upon the terms of the Addendum when releasing the Roma Property. Fine Decl., ¶ 5, 6. Opp. at 8.

This argument is spurious. The pertinent facts would be those surrounding the release of Bierman’s property as collateral, not Modlin’s claim that the one-action rule applies.

Modlin has shown a probability of success under CCP section 726 against his personal liability on the Loan but not against foreclosure of the Blue Jay Way Property.

In determining whether to issue a preliminary injunction, the second factor which a trial court examines is the interim harm that plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction. Donahue Schriber Realty Group, Inc. v. Nu Creation Outreach, (2014) 232 Cal.App.4th 1171, 1177. This factor involves consideration of the inadequacy of other remedies, the degree of irreparable harm, and the necessity of preserving the status quo. Id.

Modlin argues that, if this application is not granted, the Blue Jay Way Property will be sold at the trustee’s sale and he will be deprived of his most valuable single asset. Real property is usually deemed ‘unique,’ so that injury or loss cannot be compensated in damages, and injunctive relief is therefore more readily granted.” Weil & Brown, Cal. Prac. Guide, Civ. Pro. Before Trial, § 9:509 (2024). Thus, Modlin’s loss would not be adequately compensated with monetary damages if the Blue Jay Way Property is sold at a trustee’s sale. App. at 9.

Modlin argues that this harm greatly exceeds any harm that will be suffered by Defendants if injunctive relief is granted. If Defendants prevail, their only injury will be a delay in foreclosure, a brief delay given that the matter will be litigated before an arbitrator resulting in fewer procedural delays. Baypoint Mortg. Corp. v. Crest Premium Real Est. etc. Tr., (1985) 168 Cal. App. 3d 818, 824–25 (balance of harms weighed in favor of plaintiff who was facing foreclosure because defendant will have suffered only some delay in foreclosure).

PLS notes that Modlin’s argument about the uniqueness of residential property only applies if the moving party genuinely resides in the property. A remedy at law is adequate for investment property. Real Estate Analytics, LLC v. Vallas, (2008) 160 Cal.App.4th 463, 468. Opp. at 11.

Modlin previously sought to claim a homestead exemption in the Blue Jay Property that was rejected by the bankruptcy court. Landau Decl., ¶ 8; Ex. 6. More recently, in September 2024 rulings denying Modlin’s motions for stay pending appeal, the bankruptcy court and Ninth Circuit Bankruptcy Appellate Panel denied Modlin’s motions for a stay pending appeal because Modlin did not prove irreparable harm in the foreclosure loss of the Bluey Jay Way Property. Landau Decl., ¶3.

Modlin is being dishonest if he now claims to reside in the Blue Jay Way Property as a means to manufacture the presumption of uniqueness for real property. If Modlin did recently move back to the Blue Jay Property, he did so after receiving Oakhurst’s August 28, 2024 notice of trustee’s sale. Most importantly, Modlin admits that he is listing the property for $10.9 million and online records confirm the property is listed for rent at $65,000 monthly. Landau Decl., ¶ 5. Modlin is obviously still treating the Blue Jay Way Property as an investment property whether he has occasionally slept there or not. Opp. at 11.

Modlin replies that he is willing to sell the Blue Jay Way Property in bankruptcy for two reasons. First, the bankruptcy code allows a debtor to sell property free and clear of liens without the lienholder’s consent – an ability the debtor lacks outside of bankruptcy. Second, selling the property allowed Modlin to propose a feasible plan of reorganization -- i.e., a Chapter 11 plan that would provide for payment of Oakhurst’s secured claim in full. Having succeeded in getting Modlin’s bankruptcy case dismissed and preventing him from selling or renting the Blue Jay Way Property, Oakhurst cannot complain that Modlin has decided to return to his home. Reply at 6-7.

Like the bankruptcy court, this court does not believe that the Blue Jay Way Property is anything more than an investment property for Modlin. It is still unique, but damages can be an adequate remedy at law.

PLS argues that Oakhurst will be harmed by a delay in foreclosure because the equity in the Blue Jay Way Property has been exhausted. Oakhurst’s notice of default period expired in January 2024. At that point, Modlin filed a bad faith Chapter 11 bankruptcy case to stay Oakhurst’s sale on January 30, 2024, which was an election of remedies. After finding that Modlin filed his bankruptcy case in bad faith, the bankruptcy court dismissed the bankruptcy case on August 15, 2024. Landau Decl., ¶3. Oakhurst is now owed $4,948,225.47 as of September 30, 2024 with a per diem interest accrual of $1,611.11. Fine Decl., ¶2, Ex. 1.

Senior encumbrances to Oakhurst consist of $156,512 in annual real estate taxes (Landau Decl., ¶4) and a first priority lien held by Shellpoint in the amount of $4.5 million. (Modlin Decl., ¶5). Thus, gross encumbrances total $9,604,737.47 in the following priority: Taxes: $156,512 Shellpoint: $4,500,000 Oakhurst: $4,948,225.47.

Modlin has the Blue Jay Property listed for $10.9 million. Modlin Decl., ¶4. There is a minimum of $1.2 million in tax and broker closing costs upon sale plus miscellaneous closing costs for escrow, title insurance and other matters. As such, a sale at $10.9 million yields at net of $9,601,000 as follows: 1. Sale price: $10,900,000 2. Taxes: $654,000 3. Commission: $545,000 4. Miscellaneous: $100,000. Based on the listing price for the Blue Jay Property, closing costs and the senior encumbrances, any delay in foreclosure results in immediate harm to Oakhurst. Opp. at 10.

Modlin replies that Oakhurst introduces no evidence of the value of the Blue Jay Way Property except to say that Modlin lowered the listing price after his bankruptcy case was dismissed and foreclosure was imminent. This is hardly proof of value. Reply at 7.

The short answer is that the listing price is not proof of real market value, but it is evidence of maximum value. PLS was entitled to rely on it for its equity calculations. Oakhurst will suffer monetary harm if foreclosure is delayed, particularly if it has waived any right to pursue Modlin personally on the Loan.

[1] The courts look to the substance of an injunction to determine whether it is prohibitory or mandatory. Agricultural Labor Relations Bd. v. Superior Court, (1983) 149 Cal.App.3d 709, 713. A mandatory injunction — one that mandates a party to affirmatively act, carries a heavy burden: “[t]he granting of a mandatory injunction pending trial is not permitted except in extreme cases where the right thereto is clearly established.” Teachers Ins. & Annuity Assoc. v. Furlotti, (1999) 70 Cal.App.4th 187, 1493.

[2] However, a court may issue an injunction to maintain the status quo without a cause of action in the complaint. CCP §526(a)(3).

[3] Plaintiff Modlin requests judicial notice of the following documents from his bankruptcy case: (1) his Summary of Assets and Liabilities and Schedules (Modlin RJN, Ex. 1); (2) his application for an order authorizing employment of special litigation counsel (Modlin RJN, Ex. 2); (3) his reply in support of the application to employ special litigation counsel (Modlin RJN, Ex. 3); (4) PLS’s motion to convert or dismiss the bankruptcy case (Modlin RJN, Ex. 4); (5) a bankruptcy court order dismissing Modlin’s Chapter 11 case (Modlin RJN, Ex. 5); (6) Modlin’s notice of appeal (Modlin RJN, Ex. 6); (7) his motion for a stay pending appeal (Modlin RJN, Ex. 7); (8) his application to set the stay application hearing on shortened notice (Modlin RJN, Ex. 8); (9) PLS’s opposition to a hearing on shortened notice (Modlin RJN, Ex. 9); (10) the bankruptcy court order on Modlin’s application (Modlin RJN, Ex. 10); and (11) Modlin’s Ninth Circuit Bankruptcy Appellate Panel motion for reinstatement of bankruptcy case pending appeal (Modlin RJN, Ex. 11). Modlin RJN, ¶¶ 1-11.

At the TRO/OSC hearing, both counsel agreed that the exhibits are conformed copies. The requests are granted. Evid. Code §452(d).

[4] At the hearing on Modlin’s application for a TRO, the court allowed for the possibility that the prohibition against advance waivers might only apply to the anti-deficiency rules and not the one-action rule. The Court invited Oakhurst to focus on that issue in its response, but Oakhurst’s papers have nothing to say on this point. Reply at 2-3.

[5] Finally, Modlin contends that Oakhurst’s secret arrangement with Bierman violates the notice provisions in the deed of trust, which states all notices must be given to the "Property Address." Modlin Decl., Ex. A. The “Property Address” is defined as both Bierman’s and Modlin’s addresses. Id. Oakhurst’s $1 million paydown notice was only provided to Bierman. Modlin Decl., Ex. B. App. at 8.

PLS does not respond to this argument, but Modlin does not explain how the lack of proper notice affects the one-action rule. It does not. Instead, it merely helps explain why Modlin was ignorant of the release of Bierman’s property.