Judge: Joel L. Lofton, Case: 22AHCV00596, Date: 2022-09-09 Tentative Ruling

Case Number: 22AHCV00596    Hearing Date: September 9, 2022    Dept: X

   Tentative Ruling

Judge Joel L. Lofton, Department X

HEARING DATE:    September 9, 2022                               TRIAL DATE:  No date set.

CASE:                         SADVIPRA, LLC, a California limited liability company, and JOSEMAR A. MERCADO, an individual, v. IBORROW REIT, LP, a Delaware limited partnership, and DOES 1 through 20, inclusive.  

CASE NO.:                 22AHCV00596

ORDER TO SHOW CAUSE RE PRELIMINARY INJUNCTION

MOVING PARTY:              Plaintiffs Sadvipra, LLC and Josemar Mercado

RESPONDING PARTY:     IBorrow Reit, LP

RELIEF REQUESTED

Plaintiff seeks a preliminary injunction enjoining Defendant from:

(1) From including the Late Fee on Principal (defined below) in any payoff demand submitted by Defendant in connection with the Note (defined below), the Deed of Trust (defined below) and/or the Notice of Default (defined below);

(2) From making any demand on Plaintiffs or any of their successors to pay the Late Fee on Principal;

(3) From interfering with or preventing in any way the close of escrow on the new loan or on any sale of the real property located at 1450 North Fair Oaks Avenue, Pasadena, California (the “Property”), on ground that the Late Fee on Principal had not been paid; and/or

(4) From seeking the appointment of a receiver to take possession, custody, and control of the Property under the Note, the Deed of Trust, or any other document related to the Loan.

TENTATIVE RULING

            Plaintiff’s request for a preliminary injunction is GRANTED.

            Plaintiff is ordered to post an undertaking totaling $10,000.

LEGAL STANDARD

“A trial court may grant a preliminary injunction upon a showing that (1) the party seeking the injunction is likely to prevail on the merits at trial, and (2) the ‘interim harm’ to that party if an injunction is denied is greater than ‘the [interim] harm the [opposing party] is likely to suffer if the ... injunction is issued.’ ” (Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc. (2016) 6 Cal.App.5th 1178, 1183.)

DISCUSSION

            Background

            The loan in the present case matured on May 31, 2022. $3,292,577.58 was still owed on the principal on the date of maturation. Defendant demanded a payoff of $329,257.76 pursuant to section 3.4 of the second amended and restated promissory note secured by deed of trust, which provides:

If any payment of interest or principal due hereunder is not made within five (5) days after such payment is due in accordance with the terms hereof, then, in addition to the payment of the amount so due, Borrower shall pay to Lender a "late charge " of ten cents for each whole dollar so overdue to defray part of the cost of collection and handling such late payment. Borrower agrees that the damages to be sustained by the holder hereof for the detriment caused by any late payment are extremely difficult and impractical to ascertain, and that the amount of ten cents ($.10) for each one dollar ($1.00) due is a reasonable estimate of such damages, does not constitute interest, and is not a penalty.

(Complaint, Exhibit E, section 3.4)

            Preliminary Injunction – Likelihood of Success

            Plaintiff argues that a preliminary injunction is proper here because the late charge in the contract is an unlawful penalty.

            Civil Code section 1671, subdivision (b), provides: “Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” “A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages ‘must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.’ ” (Ridgley v. Topa Thrift & Loan Ass’n (1998) 17 Cal.4th 970, 977.)

            “ ‘Absent a relationship between the liquidated damages and the damages the parties anticipated would result from a breach, a liquidated damages clause will be construed as an unenforceable penalty.’ ” (Purcell v. Schweitzer (2014) 224 Cal.App.4th 969, 974; see Garret v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 740 ("We are compelled to conclude that a charge for the late payment of a loan installment which is measured against the unpaid balance of the loan must be deemed to be punitive in character. It is an attempt to coerce timely payment by a forfeiture which is not reasonably calculated to merely compensate the injured lender.").)

            Here, the focal issue is whether Plaintiffs have demonstrated a likelihood that they will prevail in showing that the late charge provision is an unlawful penalty. Defendant asserts that the provision was in the agreed-upon promissory note and is therefore valid. However, noticeably absent from Defendant’s argument is any indication that sought late fees bear a reasonable relationship to actual damages.

            In Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1115-1116, the Court held that a late fee of 10 percent was not a reasonable attempt to estimate administrative costs incurred by a breach. Poseidon is somewhat distinguishable because the late charge provision at issue applied to every late installment. (Id. at p. 1112.) The Court noted that the breaching party could be forced to pay $600 in one instance and over $70,000 in another. (Id. at 1116.) The Court stated that the application of the late fee for the final payment caused the provision to be an unenforceable penalty. (Ibid.)

            Here, the late charge fee is stated to be intended “to defray part of the cost of collection and handling such late payment”. (Complaint, Exhibit E, section 3.4) A late fee of ten percent of the principal, or in this case over $300,000, is not a reasonable estimate of the damages Defendant faces in attempting to collect the principal. There is no indication in the record that a ten percent fee was reasonably estimated to be used as a measure of liquidated damages necessary to cover collecting and handling late payment. Thus, Plaintiff has established a likelihood that they will successfully establish at trial that the late charge is an unenforceable penalty.

            Preliminary Injunction – Interim Harm

            Plaintiffs argue that they face greater harm because they face foreclosure based on Defendant’s demand for the late penalty. On the other hand, Defendant argues that if a preliminary injunction is granted, they would be unable to collect on the late fee.

            Plaintiffs face significant harm considering the pending foreclosure. (See, e.g., Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 824.) In contrast, Defendant faces losing over $300,000 in fees. The issues are also closely linked. If Plaintiff does prevail, Defendant would not be harmed because it was not entitled to recover the late fee in the first place. Further, as explained in the discussion on undertaking, it is not clear that Defendant would be barred from recovering the late fee even if an injunction is granted.

            The issue presented here is closer, but Plaintiffs have demonstrated they face greater harm.

            Because Plaintiff has established a likelihood of success on the merits and a greater showing of harm if the injunction is denied, the Court finds that a preliminary injunction is properly granted here.

            Undertaking

            “On granting an injunction, the court or judge must require an undertaking on the part of the applicant to the effect that the applicant will pay to the party enjoined any damages, not exceeding an amount to be specified, the party may sustain by reason of the injunction, if the court finally decides that the applicant was not entitled to the injunction. Within five days after the service of the injunction, the person enjoined may object to the undertaking. If the court determines that the applicant's undertaking is insufficient and a sufficient undertaking is not filed within the time required by statute, the order granting the injunction must be dissolved.” (Code Civ. Proc. section 529, subd. (a).)

            “ ‘[T]he trial court's function is to estimate the harmful effect which the injunction is likely to have on the restrained party and to set the undertaking at that sum.’ ” (White v. Davis (2003) 30 Cal.4th 528, 551.) “ ‘The amount of the bond is fixed by the judge, exercising sound discretion, based on the probable damage that the enjoined party may sustain because of the injunction. [Citations.]’ ” (Oiye v. Fox (2012) 211 Cal.App.4th 1036, 1061.)

            Defendant requests Plaintiffs be ordered to post an undertaking of $329,257.76 to cover the entire late charge fee, if found to be valid. Plaintiffs assert that a minimal undertaking should be required.

            Defendant argues that section 13.1 of the note would prevent it from recovering the late fee if an injunction is issued because Section 13.1 limits recovery to only against the Premises. Section 13.1 provides:

Limited Recourse Obligations. Notwithstanding anything to the contrary contained herein, but subject to the express obligations contained in the Loan Documents and Section 13.2 below, any claim based on or in respect of any liability of Borrower under this Note, the Deed of Trust or any other Loan Document shall be enforced only against the Premises and any other collateral now or hereafter given to secure this Note and not against any other assets, properties or funds of Borrower; provided, however, that Borrower shall be personally liable for amounts under the Loan Documents to the extent of, but limited to the amount of any loss, costs or damage arising out of the matters described in the following subsections, which liability shall not be limited solely to the Premises and other collateral now or hereafter given to secure this Note but shall include all of the assets, properties and funds of Borrower:

(Complaint, Exhibit E, section 13.1.)

            One of the following subsections include section (s), which provides:

Borrower, any Guarantor (or any person comprising Borrower or any Guarantor), or any affiliate of any of the foregoing, in connection with any enforcement action or exercise or assertion of any right or remedy by or on behalf of Lender under or in connection with this Note, the Deed of Trust, the Guaranty or any other Loan Document, seeks a defense, judicial intervention or injunctive or other equitable relief of any kind or asserts in a pleading filed in connection with a judicial proceeding any defense against Lender or any right in connection with any security for the Loan, which is judicially determined to be frivolous, brought in bad faith, without merit (in the case of a defense) or unwarranted (in the case of a request for judicial intervention or injunctive or other equitable relief)

(Complaint, Exhibit E, section 13.1, subd. (s).)

            The plain language of subsection (s) provides that Plaintiffs could be found personally liable for “amounts under the Loan Documents . . . of any loss, costs or damage” if Plaintiffs seek an unwarranted injunction. Thus, if after a trial on the merits, it is found that the late penalty is valid, the note itself provides that Defendant may be able to seek damages from Plaintiffs personally as opposed to solely from the property itself.

            Plaintiff is ordered to post an undertaking totaling $10,000.

CONCLUSION

Plaintiff’s request for a preliminary injunction is granted conditioned to Plaintiff filing an undertaking.

            Plaintiff is ordered to post an undertaking totaling $10,000 within 5 days of this order.

            Moving Party to give notice.

Dated:   September 9, 2022                            ___________________________________

                                                                                    Joel L. Lofton

                                                                                    Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the court indicating their

intention to submit.  Parties intending to appear are strongly encouraged to appear remotely.  alhdeptx@lacourt.org