Judge: Mark A. Young, Case: 22SMCV01841, Date: 2023-03-28 Tentative Ruling

Case Number: 22SMCV01841    Hearing Date: March 28, 2023    Dept: M

CASE NAME:           Cutter Mill Credit LA LLC v. Aeon Botanika Los Angeles Inc., et al.

CASE NO.:                22SMCV01841

MOTION:                  Motion for Leave to Amend

                                    Motion for Orders: 1) Authorizing Receiver to Retain Counsel; 2) Confirming Receiver’s Authority to Sell, Transfer, or Assign Licenses; & 3) Approving Preliminary Terms of Sale of Licenses

HEARING DATE:   3/28/2023

BACKGROUND

On October 13, 2022, Plaintiff Cutter Mill Credit LA LLC (“Plaintiff”) filed this action.  This lawsuit arises out of a $1,000,000.00 loan made by Plaintiff to Defendants Golden Phoenix Holdings, LLC and Aeon West Hollywood, Inc. (“Borrowers”) for the development and operation of a retail cannabis business.  On March 5, 2021, Borrowers executed a Secured Promissory Note (“Note”), in the amount $1,000,000.00. Borrowers failed to make the payment of principal and interest due on April 1, 2022 (the “Default”). Plaintiff and Borrowers discussed a possible loan modification. Pursuant to the terms of Note, Plaintiff delivered written notice to the Borrowers on June 22, 2022, in an attempt to resolve their dispute. However, no agreement was reached, and it is unlikely an agreement can be reached. Lender elected accelerate the entire outstanding balance.

Plaintiff obtained an ex parte order appointing a receiver to take control of and manage the retail operations, marshal the assets of the Borrowers secured by the loan documents, and develop a strategy to operate the retail business and/or sell the businesses and assets of the Borrowers. The Receiver represents that it has since taken control of the operations of the Borrowers subject to the provisions of that Order.

Legal Standard

Leave to Amend

If a party wishes to amend a pleading after an answer has been filed, or after a demurrer has been filed and after the hearing on the demurrer, or if he or she has already amended the pleading as a matter of course, the party must obtain permission from the court before amendment. (CCP §§ 473(a)(1), 576.)  Motions for leave to amend the pleadings are directed to the sound discretion of the court. “The court may, in furtherance of justice, and on any terms as may be proper, allow a party to amend any pleading . . ..” (CCP § 473(a)(1); see CCP § 576.) Policy favors liberally granting leave to amend so that all disputed matters between the parties may be resolved. (See Howard v. County of San Diego (2010) 184 Cal.App.4th 1422, 1428.) Absent prejudice to the adverse party, the court may permit amendments to the complaint “at any stage of the proceedings, up to and including trial.” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 761 [internal quotes omitted].) Where leave is sought to add entirely new claims, the court may grant leave to amend if the new claims are based on the same general set of facts, and the amendment will not prejudice the opposing party. (Austin v. Massachusetts Bonding & Ins. Co. (1961) 56 Cal.2d 596, 600-602; Glaser v. Meyers (1982) 137 Cal.App.3d 770, 777 [holding trial court did not abuse its discretion in permitting amendment of complaint, which originally alleged constructive eviction, to allege retaliatory eviction where the new claim was based on the same general set of facts].)

Although denial is rarely justified, a judge has discretion to deny leave to amend if the party seeking the amendment has been dilatory, and the delay has prejudiced the opposing party. (Morgan v. Superior Court (1959) 172 Cal.App.2d 527, 530; Hirsa v. Superior Court (1981) 118 Cal.App.3d 486, 490). An opposing party is prejudiced where the amendment would necessitate a trial delay along with a loss of critical evidence, added preparation expense, increased burden of discovery, etc. (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 486-488 [leave properly denied where plaintiff sought leave on the eve of trial, nearly two years after the complaint was originally filed and gave no explanation for the delay which prejudiced defendant who did not discover or depose many of the witnesses who would support the new allegations and had not marshaled evidence in opposition of the new allegations].)

Procedurally, a motion for leave to amend must state with particularity what allegations are to be amended. Namely, it must state what allegations in the previous pleading are proposed to be deleted and/or added, if any, and where, by page, paragraph, and line number. (CRC, Rule 3.1324(a)(2)-(3).) The motion must be accompanied by a declaration specifying: (1) the effect of the amendment; (2) why the amendment is necessary and proper; (3) when the facts giving rise to the amended allegations were discovered; and (4) the reasons why the request for amendment was not made earlier. (CRC, Rule 3.1324(b).) The motion must also be accompanied by the proposed amended pleading, numbered to differentiate it from the prior pleadings or amendments. (CRC, Rule 3.1324(a)(1).) It is within the court’s discretion to require compliance with Rule 3.1324 before granting leave to amend. (Hataishi v. First American Home Buyers Protection Corp. (2014) 223 Cal.App.4th 1454, 1469.)

Receiver’s Retention of Counsel

            A receiver may not employ an attorney without the approval of the court. (CRC, rule 3.1180.) An application for approval to employ an attorney must state (1) the necessity for the employment; (2) the name of the attorney whom the receiver proposes to employ; and (3) that the attorney is not the attorney for, associated with, nor employed by an attorney for any party. 

Approval of Receiver’s Sale

The power of sales, other than in the ordinary course of business, is provided for in the receivership statutes. (CCP §§ 568; 568.5.) When reviewing a request to authorize and subsequently confirm a sale, the Court is required to determine: (1) that the sale is generally necessary; and (2) that the sale is specifically necessary at the time it is to be conducted. (Cal-American Income Property Fund VII v. Brown Development Corp. (1982) 138 Cal.App.3d 268, 274-275, fn.7.) By default, receiver’s sales are to be conducted in the same manner as execution sales, but the Court may also authorize different procedures. (CCP § 568.5; People v. Riverside University (1973) 35 Cal.App.3d 572, 585 [noting the Court’s authority to order alternative methods of sale].) The receiver’s sale is not final until it is confirmed by Court. (CCP § 568.5.)

The Court’s approval rests in its discretion, “exercised in view of all the surrounding facts and circumstances and in the interest of fairness, justice and the rights of the respective parties.” (Cal-American Income Property Fund VII, supra, 138 Cal.App.3d at 274.) The proper exercise of discretion requires the court to consider all material facts and evidence and to apply legal principles essential to an informed, intelligent, and just decision. (Martin v. Alcoholic Beverage Control Appeals Bd. (1961) 55 Cal.2d 867, 875.) Generally, if there is no cause to refuse a receiver's sale, then the sale should be confirmed. (Riverside University, supra, 35 Cal.App.3d at 582.)

Analysis

Leave to Amend

Plaintiff moves for leave to amend to file the proposed First Amended Complaint (FAC). (Clough Decl., Exs. E, F.) Plaintiff explains that in January 2023, it became aware of additional material facts supporting claims against defendants Golden Phoenix Holdings, LLC and Aeon West Hollywood Inc.

Plaintiff’s motion meets the procedural requirements. Plaintiff provides the proposed pleading and a red-lined version of the pleading. Plaintiff summarizes the proposed amendments as follows:

(1) The addition of proposed paragraphs 19-22; 73-110;

(2) The deletion of the text within paragraphs to cause the pleading to reflect the current state of the parties’ relationship: p. 1, lines 12, 13, 20, 21, 23, and 24; and

(3) clarification for grammatical purposes, in addition to the separation of each cause of action in the prayer for relief.

Counsel explains that in January 2023, Plaintiff learned of new facts pertaining to Defendants’ liability. At the time of GPH and Aeon WeHo’s execution of the Note, GPH and Aeon WeHo had purportedly previously sold no less than a 31.4 percent (31.4%) equity interest in Aeon WeHo to third parties as depicted in correspondence to the City of West Hollywood dated February 2, 2022 (“Feb. 2022 Letter”). (Clough Decl., Ex. A.) Furthermore, in breach of the express terms of the Note prohibiting dilution of Plaintiff’s equity interest in Aeon WeHo (see Note, ¶¶ 5.1 and 5.2), there was a transfer of 53.5 percent (53.5%) equity interest in Aeon WeHo to third party Sporos Capital Partners, LLC. (Id., Ex. B.) Lastly, Defendants Aeon Botanika Los Angeles, Inc. (“Aeon Botanika”) and The Fox Consultancy, Inc. entered into an agreement with non-party Mac License Holdings LLC (“Mac License”), wherein Mac License advanced a total of $180,000 to Aeon Botanika. This loan was purportedly secured by the Type-9 Cannabis Delivery License issued by the Los Angeles Department of Cannabis Regulation under application number LA-S-22-200501-02-01-APP. (Id., Exs. C-D.)

The Court finds no apparent prejudice to defendants or substantial delay on plaintiff’s part. The new allegations stem from the same general facts as the complaint, and would not require significant additional discovery. The additional allegations narrowly target a specific issue, the conveyance of an equity interest in Aeon West Hollywood, Inc. to a third party in breach of the previously-pled agreements. Further, no defendant has responded to the complaint, and are currently in default.  The Court does note that filing of the new complaint will require service of the FAC and the opening of any previously entered defaults.

            Accordingly, leave to amend is GRANTED.

Retention of Counsel

The Receiver requests to retain and employ ArentFox Schiff LLP as counsel. The Receiver was appointed to preserve, safeguard and liquidate the real and personal property assets of the Receivership Defendants (“Receivership Property”) and granted authority to take possession and control of the Receivership Property to administer for the benefit of creditors. The Court issued a preliminary injunction against the Receivership Defendants, enjoining them from interfering with the discharge of the Receiver’s duties under the Order. (Baker Decl., ¶ 3.) The Receiver believes that in order to effectuate his duties as Receiver and best represent the interests of the receivership, the services of counsel are required. (Baker Decl., ¶ 4.) Specifically, the Receiver wishes counsel to assist in enforcing the preliminary injunction which prevents Receivership Defendants from interfering with administration of Receivership Property, communicate and negotiate with interested buyers for sale of Receivership Property, and obtain further instructions and orders from the Court as necessary. (Ibid.)

The Receiver would primarily work with Aram Ordubegian and Annie Y. Stoops from ArentFox. (Baker Decl., ¶ 5.) Mr. Ordubegian and Ms. Stoops regularly represent receivers, assignees for the benefit of creditors, and Chapter 7 and 11 bankruptcy trustees. (Ordubegian Decl., ¶ 3, Ex. A.)  ArentFox is not the attorney for, associated with, nor employed by, an attorney for any party. (Id., ¶9.) ArentFox also finds no conflicts. (Id., ¶ 10.) Furthermore, the partners, counsel, and associates of ArentFox have no interest adverse to, and no connections with, the Plaintiff and Defendants in this case with respect to matters for which ArentFox is to be engaged. (¶ 11.) ArentFox will not represent any entity other than the Receiver in this case, or have any relationship with any such entity that would be adverse to the Receiver. (¶ 12.)

The receiver also explains that Mr. Ordubegian and Ms. Stoops will charge preferred rates of $745 and $655 per hour, respectively, which are lower than their usual rates. (Id., ¶ 4.) Given their experience and knowledge in representing neutral fiduciaries, and the receiver’s averments regarding the necessity of retaining counsel, the Court finds that the retention of ArentFox would be necessary and in the interest of the Receivership.

Accordingly, the Receiver’s motion to retain counsel is GRANTED.

Confirm Authority & Preliminary Sale Terms

The Receiver seeks an order (i) confirming the Receiver is authorized to sell, transfer, assign legal and beneficial ownership of Aeon WeHo’s three co-located cannabis licenses granted on October 22, 2020: Adult Use Retail, Medical Retail, and Consumption Lounge (the “Licenses”) “as is where is,” free and clear of liens, claims, interests and encumbrances known to the Receiver (aside from the Receiver’s security interest arising from the promissory note), and (ii) approving the preliminary terms of a proposed sale of the Licenses to the proposed buyer, Norman Yousif and Off the Charts. (CCP § 568.5.)

As to the Receiver’s authority to sell, before the receivership, Aeon WeHo applied for and was awarded the three cannabis licenses. Practically speaking, it is the only party on title for the licenses and continues to be the only party authorized to operate under the licenses. The Receiver contends that, after the receivership order, it still holds 100% legal and beneficial ownership of the licenses. However, the Receiver notes that there are a few issues with this ownership. Under the City of West Hollywood’s cannabis regulations, equity holders of a holding company of a licensed entity are each considered a “regulatory owner” of the licenses.

The Receiver determined that Golden Phoenix holds 100% equity in Aeon WeHo, both of which are in receivership. In turn, Golden Phoenix is owned by investors (with original owners owning 68.6% and “New A Round Investors” owning 31.4%). (See Baker Decl., Ex. 2.) Under the regulations, the equity holders of Golden Phoenix are considered “Regulatory Owners” of Aeon WeHo’s licenses. (WHMC § 5.70.060.) The Receiver characterizes this as an unforeseen and unintentional loophole, which could allow the equity owners to retain regulatory ownership of assets belonging to the Receivership Defendants (insolvent subsidiary companies), which would greatly diminish the marketability of the cannabis licenses and could be used to circumvent security interests and property rights of secured creditors.

The City considers the Receiver to have 53.6% regulatory ownership of the Licenses. (Baker Decl., ¶ 5.) Prior to the receivership, Aeon WeHo was approved for a variance to transfer 31.4% of regulatory ownership in the Licenses to “New A Round Investors,” for their equity in Golden Phoenix. (Id., ¶ 6.) Because of this 31.4% transfer of equity in Golden Phoenix’s equity, Aeon WeHo – now, the Receivership – only has 53.6% regulatory ownership in Licenses available to transfer before reaching the 85% cap. (Id.) Thus, the Receiver is only able to assign 53.6% “regulatory” ownership in the licenses. That said, Aeon WeHo remains the sole legal and beneficial owner of the licenses. Based on this record the Court agrees that the Receiver currently controls all legal and beneficial ownership of the Licenses through Aeon WeHo.

Accordingly, the Receiver requests that the Court confirm that it is authorized to sell, transfer, assign legal and beneficial ownership of the Aeon WeHo’s cannabis license “as is where is,” free and clear of liens, claims, interests and encumbrances known to the Receiver (aside from the Receiver’s security interest arising from the promissory note). Indeed, based on the record before the court, a successful buyer of the Licenses, for fair market value, would be the 100% legal and beneficial owner of the Licenses and sole owner with authority to operate under the Licenses. While the equity holder of Golden Phoenix are still “regulatory owners” of the Licenses per West Hollywood regulations, this does not provide rights or authority under the Licenses, and they will not share or be responsible for any profits or losses arising from operations under the Licenses. Otherwise, this would circumvent the purpose of the previously established receivership.

The Receiver further proposes that notice should furthermore be provided to (i) the Plaintiff and Defendants (receivership entities) of this action; (ii) the Proposed Buyer (discussed below); (iii) the City of West Hollywood; and (iv) the regulatory owners of the Licenses as set forth in Exhibit 2 to the Baker Declaration. The Court concurs that noticing such parties would provide notice and due process to all stakeholders in the receivership property.

After extensive arms-length negotiations, the Receiver agreed to the Preliminary Sale Terms for Yousif/OTC’s purchase of 100% legal and beneficial ownership, and 53.6% regulatory ownership in the Licenses “as is where is,” free and clear of liens, claims, interests and encumbrances known to the Receiver (aside from the Receiver’s security interest in the Licenses arising from the promissory note), and subject to approval by the Court and a variance approval by the City. (Baker Decl., ¶¶ 7-10, 14.) The Receiver proposes to sell Aeon WeHo’s cannabis licenses to an experienced and well-qualified buyer, Norman Yousif and Off the Charts. Aeon WeHo holds three cannabis licenses. The proposed sale will be a total of $3 million; $2,000,000 will go directly into the estate at closing, and a pledged $1,000,000 pursuant to a promissory note with an 18-month term at 5% interest. OTC shall also provide a good faith deposit to the Receiver in the amount of $500,000 after executing the asset purchase agreement and fund construction and complete buildout of the Premises. Further, OTC shall also obtain assignment of the current lease or enter a new lease for the Premises.

Critically, time is of the essence. The licenses must be in-use and operational by April 22, 2023, or else the licenses may be forfeited. While the City has indicated that if significant progress is being made on construction at the Premises and a viable buyer is in place, a 6-month extension may be granted. (Baker Decl., ¶ 8.) This is not guaranteed. Accordingly, there is insufficient time to perform additional canvasing for other buyers, or an overbid auction. The proposed sale to OTC is the receivership’s only realistic opportunity to sell the licenses to an established cannabis operator with a long history of successful cannabis operations, without risking the value of the licenses. Based on the preliminary terms, the proposed sale to OTC should bring in sufficient proceeds to pay the secured creditor’s claims and the Receivership’s administrative expenses. Therefore, the Court finds that this sale is generally and specifically necessary to protect the interests of the receivership.

Accordingly, the Receiver’s motion is GRANTED and the Court preliminarily approves the terms of the proposed sale.