Judge: Mark C. Kim, Case: 22LBCV00327, Date: 2022-12-06 Tentative Ruling

Case Number: 22LBCV00327    Hearing Date: December 6, 2022    Dept: S27

1.     Background Facts

Plaintiff, Redwood Mortgage Investors VII filed this action against Defendants, Long Beach Square Partners, LLC, LBB Housing Partners, LP, Andrew Hanna, Global Premier development, Inc., Living Hope Housing Foundation, and PLM Lender Services, Inc. for judicial foreclosure of deed of trust, recovery of personal property collateral/claim and delivery, foreclosure of security interest and declaratory relief, specific performance of deed of trust and appointment of receiver, and damages for breach of contract.    

2.     Motion for Appointment of Receiver

a.     Relevant Facts

Defendant, Long Beach Square Partners, LLC (“LBSP”) owned the subject property until 2019, when it sold the property to Defendant, LBB Housing Investors, LP (“LBB”) and took a seller take-back note and deed of trust against the property.  LBB purchased the property using a loan from Plaintiff, Redwood, and LBSP’s lien stood in second position behind Redwood’s.  In March of 2022, LBSP completed a foreclosure sale of the property and took the property subject to Redwood’s lien.  Shortly after the sale, LBSP undertook work to remediate various concerns on the property, including vagrancy and drug use, and during that work, it discovered environmental contamination.  It conveyed information about the contamination to Plaintiff, who then filed this action in July and subsequently filed this motion for appointment of a receiver in September. 

Plaintiff seeks an order appointing a receiver for the purposes of (a) remediating the environmental contamination on the property, (b) collecting rents and profits, if any, and (c) selling the property. 

b.     Initial Procedural Note

Neither party has complied with the general order for electronic filing insofar as it requires:

“Declarations, Proofs of Service, and Exhibits to documents must be text searchable when technologically feasible without impairment of the document's image and must be bookmarked within the document pursuant to California Rules of Court, rule 3.1110(f)(4).”

Pursuant to CRC 3.1110(f)(4), “Electronic exhibits must meet the requirements in rule 2.256(b). Unless they are submitted by a self-represented party, electronic exhibits must include electronic bookmarks with links to the first page of each exhibit and with bookmark titles that identify the exhibit number or letter and briefly describe the exhibit.”

The parties’ failure to comply with these requirements rendered review of the exhibits to the motion extremely difficult.  The Court asks Counsel to ensure compliance with this and all other Rules of Court in the future in connection with this and other actions. 

c.     Initial Substantive Notes

Defendant makes certain incorrect statements in its opposition, which will be briefly addressed here.  First, it contends, repeatedly, that Plaintiff is only seeking a receiver for the purpose of selling the property.  The moving papers repeatedly indicate the receiver is being sought to inspect and remediate environmental damage AND to sell the property. 

Defendant also argues CCP §726 precludes this motion.  §726 provides that there shall be only one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property, which action must be in accordance with the provisions of this chapter (which provides for judicial foreclosure).  Defendant cites no authority for the position that a receiver cannot be appointed to aid in the sale of the property in the event the criteria of §564 are met, and the Court knows of no such authority.  This argument is therefore rejected. 

d.     Issues Presented

There are several issues presented by way of this motion.  The first issue is whether LBSP has any obligations to Redwood and whether Redwood has any remedies as against LBSP.  The second issue is whether there is any authority for the relief requested.  The final issue is whether the equities weigh in favor of imposition of a receiver and, if so, what the scope of the receivership should be. 

e.     Obligations Running Between the Parties

The threshold issue is whether and what obligations LBSP has to Redwood under the circumstances.  The parties discuss and disagree concerning the interpretation of Cornelison v. Kornbluth (1975) 15 Cal.3d 590.  In Cornelison, Mary Cornelison sold her property to Maurice and Leona Chanon, and Cornelison took back a promissory note secured by a first deed of trust on the home.  Thereafter, the Chanons sold the property to John Kornbluth, and four years later Kornbluth sold the property to Richard Larkins.  At that time, the Chanons became in default on the promissory note, and Cornelison had the property sold at a trustee’s sale.  Cornelison then filed a lawsuit against Kornbluth, alleging he agreed to be bound by and perform all covenants contained in the note and deed of trust, and breached the covenants by selling the property to Larkins, failing to pay property taxes, failing to make payments on the note, and failing to property care for and maintain the premises.  Cornelison sued for breach of contract and waste. 

The Cornelison Court held, in pertinent part:

Upon the transfer of real property covered by a mortgage or deed of trust as security for an indebtedness, the property remains subject to the secured indebtedness but the grantee is not personally liable for the indebtedness or to perform any of the obligations of the mortgage or trust deed unless his agreement to pay the indebtedness, or some note or memorandum thereof, is in writing and subscribed by him or his agent or his assumption of the indebtedness is specifically provided for in the conveyance.  Id. at 597.

Accordingly, we hold that in situations arising under section 580d, recovery for waste against the mortgagor following nonjudicial foreclosure sale is barred by the section's proscription against deficiency judgments when the waste actually results from the depressed condition of the general real estate market but not when the waste is caused by the “bad faith” acts of the mortgagor.  Id. at 605.    

LBSP argues Cornelison makes clear it can only be liable to Redwood for damages over and above the deficiency balance at sale if it acted in bad faith.  Redwood argues Cornelison relates to monetary damages only, but does not preclude a receivership or any remedy against the property itself.

Cornelison is not directly on point to either party’s position, as it did not address the question posed.  Because receivership is a creature of statute, the Court is inclined to find Redwood can pursue receivership so long as it establishes a statutory ground for doing so. 

f.      Statutory Grounds for Receivership

The next issue is whether Plaintiff has shown the existence of any statutory ground for imposition of a receivership.  Plaintiff relies on CCP §564(b) and (c) authorize a receivership under the circumstances.  Plaintiff also relies on Civil Code §2929.5.

i.              §564(b)(1) and (2)

Plaintiff first relies on §564(b)(1) and (2), which provide:

(b) A receiver may be appointed by the court in which an action or proceeding is pending, or by a judge of that court, in the following cases:

(1) In an action by a … creditor … whose right to or interest in the property … is probable, and where it is shown that the property … is in danger of being lost, removed, or materially injured.

(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. 

The parties agree that there is environmental contamination on the property.  They disagree concerning whether this means the property is in danger of being lost, removed, or materially injured.  Notably, it appears the crux of Plaintiff’s argument is that its INTEREST in the property is in danger of being lost, removed, or materially injured, but not that the PROPERTY ITSELF is in such danger.  Plaintiff’s argument is that its loan is accruing interest at the rate of almost $2000/day, which is not being paid, and therefore it is in danger of not being paid in full because the property is contaminated. 

Specifically, the parties also agree that LBCP is currently under contract to sell the property to a company called Meta.  They disagree, however, concerning whether Meta can get out of the sale if the property is contaminated and the contamination cannot be remediated.  Notably, the sales contract is ambiguous in this regard.  The contact is attached to the Declaration of Kashani, filed in support of the opposition purportedly as Exhibit F, but not so labeled.  In the “contingencies” section of the contract, at ¶4(a)(ii) (notably, there are two subdivision iis in ¶4(a), and this is the second subsection ii), the contract requires LBCP to make the property available for appraisal activities, including environmental studies.  There is nothing in the contract clarifying what happens if those studies do not come back in a manner that is satisfactory to Meta. 

Plaintiff argues it is concerned that the sale to Meta will fall apart, and it will end up holding the proverbial ball with respect to the environmental contamination when it purchases the property at the foreclosure sale and then attempts to resell the property.  This environmental waste, however, has already been committed.  The property itself is not in any danger of being made MORE environmentally damaged.  Instead, LBCP’s debt is getting larger every day, and Plaintiff’s ability to recover 100% of that debt is what is in danger of being damaged.  Plaintiff failed to show §564(b) applies under the circumstances. 

ii.             §564(b)(9)

§564(b)(9) permits appointment of a receiver “(9) In all other cases where necessary to preserve the property or rights of any party.”  Pursuant to Barclays Bank of Cal. V. Superior Court (1977) 69 Cal.App.3d 593, 600, the parties’ agreement to appointment of a receiver in their contract constitutes prima facie support for imposition of a receiver under this section.  The Environmental Agreement between Plaintiff and LBB, which LBCP has assumed, provides for appointment of a receiver in the event of noncompliance with the terms of the parties’ environmental agreement.  The parties’ trust deed also contemplates appointment of a receiver in the event of any default under the terms of the agreement. 

Plaintiff argues a receiver is appropriate because the loan is in default, taxes are delinquent, and the property is contaminated.  LBCP, in opposition, contends it is not in default on any property taxes subsequent to its purchase in March of 2022 and it has offered to share all environmental contamination information with Plaintiff but Plaintiff refuses the offer.  Plaintiff, in reply, contends taxes are not unpaid for 2022 only because they are not due until December, and the offer to review the environmental contamination information contains unpermitted conditions. 

Notably, LBCP did not address the issue of the loan being in default.  LBCP also did not address past taxes, which appear to remain unpaid.  The Court wishes to hear from LBCP at the time of the hearing concerning the status of all back taxes and of its ongoing payment obligation to Plaintiff. 

Information about environmental contamination is clearly a key issue between the parties.  Plaintiff does not know the nature of the contamination, and the nature of the contamination will speak to the extent and expense of any required clean-up, any diminution in value, the likelihood that the sale will go forward, etc.  LBCP has offered environmental information in exchange for a confidentiality agreement.  Plaintiff contends such an agreement is not appropriate.  The parties’ environmental agreement is attached as Exhibit F to the Burwell Declaration.  It requires LBB, and therefore LBCP, to inform Plaintiff of and take steps to clean up any “Hazardous Substance” that results in a “Hazardous Substance Claim.”  It defines “Hazardous Substance Claim” as any and all enforcement, cleanup, removal, remedial or other governmental or regulatory actions, agreements, or orders threatened, instituted or completed pursuant to any Environmental Laws…

LBCP contends the government has not issued any order concerning any hazardous substance claim.  Plaintiff argues this is immaterial, as it is clear such substances are on the property.  Plaintiff’s sole evidence of contamination is found at ¶11 of the Burrell Declaration, wherein he states, “The project manager told me that in the course of the demolition, LBSP had found contamination from the cracked hydraulic lifts and perhaps another source.” 

LBCP did not meet its burden to show that there has been a Hazardous Substance Claim, such that receivership would be appropriate per the terms of the parties’ contract. 

iii.            §564(b)(11)

Plaintiff next relies on §564(b)(11), which allows the Court to appoint a receiver for purposes of collecting rent.  Both parties agree that there is no rent being paid on the property.  It does not seem reasonable that the receiver would be able to create a rent-generating situation on the dirt plot of land that forms the basis of this lawsuit.  Additionally, even though this section permits a receiver to collect rent, it is not clear that a receiver appointed under this section can complete construction or something similar to generate rent.  This section therefore does not support imposition of a receiver. 

iv.            §564(c)

Plaintiff also seeks appointment of a receiver per §564(c), which provides, “A receiver may be appointed, … by the superior court in an action brought by a secured lender to enforce the rights provided in Section 2929.5 of the Civil Code, to enable the secured lender to enter and inspect the real property security for the purpose of determining the existence, location, nature, and magnitude of any past or present release or threatened release of any hazardous substance into, onto, beneath, or from the real property security. The secured lender shall not abuse the right of entry and inspection or use it to harass the borrower or tenant of the property. Except in case of an emergency, when the borrower or tenant of the property has abandoned the premises, or if it is impracticable to do so, the secured lender shall give the borrower or tenant of the property reasonable notice of the secured lender's intent to enter and shall enter only during the borrower's or tenant's normal business hours. Twenty-four hours' notice shall be presumed to be reasonable notice in the absence of evidence to the contrary.”

At most, the Court could appoint a receiver, under this section, to inspect the potential environmental hazard.  The Court would prefer that the parties communicate concerning the hazard Defendant found and allow Plaintiff to inspect the hazard without the need for a receiver to do so.

v.             Civil Code §2929.5

Civil Code §2929.5 prohibits Defendant from engaging in any act that will substantially impair the mortgagee’s security.  Plaintiff argues it needs the documents relating to the environmental damage in order to evaluate its right to a receivership under this section.  Plaintiff concedes that actual authority for imposition of a receiver is not found in §2929.5, but instead in §564(c), which was discussed above.  This code section does not create independent grounds for appointment of a receiver.

vi.            Conclusion

The Court wishes to hear from the parties at the time of the hearing in connection with the following issues:

·         What documents and information does Defendant have concerning any environmental problems on the property, and how can Defendant ensure those documents are given to Plaintiff?

·         What are Defendant’s current outstanding financial obligations with respect to the property?  Are back taxes from prior to 2022 owed?  Are arrangements being made to pay those back taxes?  Is Defendant intending to make any payments to Plaintiff pending the sale of the property?  Is Defendant able to do so?  Why is Defendant not doing so? 

·         If Defendant is not going to pay back taxes owed and/or ongoing accruing interest on the property, would appointment of a receiver under §564(b)(9) for the purpose of selling the property be appropriate?  What are some equitable measures that could be taken to protect Plaintiff’s interest in the property?  Could the receiver look for alternative potential purchasers of the property besides Meta, who could stand in position behind Meta should Meta not complete the sale?

·         What is the timeline of the Meta sale?  Could the Court set an OSC re: appointment of a receiver for a date certain and require Defendant to show the sale is going forward on the scheduled timeline in order to avoid appointment of a receiver?