Judge Mary H. Strobel, Case 21STCV31210 2023-03-14 Tentative Ruling

Hon. Mary H. Strobel The clerk for Department 82 may be reached at (213) 893-0530.

Plaintiff JL Financing, LLC (“Plaintiff”) moves for a writ of attachment against Defendant Charles L. Sanchez, Jr. (“Defendant”) in the amount of $482,081.17.

On August 24, 2021, Plaintiff filed a complaint against Defendant for breach of promissory note.

Defendant initially defaulted on the complaint. On March 1, 2022, the court (Judge Theresa Traber) entered default judgment against Defendant for $300,000 in damages, $174,265.14 in prejudgment interest, $6,638.65 in attorney’s fees, $577.38 in costs, and $600 in pre-default late charges, for a total amount of $482,081.17. The court’s minute order dated March 1, 2022, states in pertinent part: “Plaintiff JL FINANCING, LLC, has made a sufficient showing to substantiate its right to recover $300,000 representing the principal sum on the unpaid loan, $174,265.14 in prejudgment interest, and $577.38 in court costs. The Court also finds that Plaintiff may recover two $300 pre-default late charges but denies its request for $16,575 in post-default ‘late’ charges equal to ten percent (10%) of the amount of each payment that would have been due after default was declared. After deducting these improper late fees from the total damages recovered, Plaintiff is also entitled to recovery $6,638.65 in attorney’s fees under Local Rule 3.214(a).”

Defendant moved to set aside the default and default judgment. On October 7, 2022, Judge Traber granted the motion. On October 26 and 27, 2022, Defendant answered and also filed a cross-complaint for fraud, unfair business practices, and negligent misrepresentation. The answer states multiple affirmative defenses, including based on the “doctrine of merger” and one-form-of-action rule.

On December 1, 2022, Plaintiff filed the instant application for writ of attachment seeking the same amount awarded in the default judgment, $482,081.17. The court has received Defendant’s opposition and Plaintiff’s reply.

“Upon the filing of the complaint or at any time thereafter, the plaintiff may apply pursuant to this article for a right to attach order and a writ of attachment by filing an application for the order and writ with the court in which the action is brought.” (CCP § 484.010.)

The application shall be executed under oath and must include: (1) a statement showing that the attachment is sought to secure the recovery on a claim upon which an attachment may be issued; (2) a statement of the amount to be secured by the attachment; (3) a statement that the attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based; (4) a statement that the applicant has no information or belief that the claim is discharged or that the prosecution of the action is stayed in a proceeding under the Bankruptcy Act (11 U.S.C. section 101 et seq.); and (5) a description of the property to be attached under the writ of attachment and a statement that the plaintiff is informed and believes that such property is subject to attachment. (CCP § 484.020.)

“The application [for a writ of attachment] shall be supported by an affidavit showing that the plaintiff on the facts presented would be entitled to a judgment on the claim upon which the attachment is based.” (CCP § 484.030.)

The Court shall issue a right to attach order if the Court finds all of the following:

(1) The claim upon which the attachment is based is one upon which an attachment may be issued.

(2) The plaintiff has established the probable validity of the claim upon which the attachment is based.

(3) The attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based.

“A claim has ‘probable validity’ where it is more likely than not that the plaintiff will obtain a judgment against the defendant on that claim.” (CCP § 481.190.)

“The Attachment Law statutes are subject to strict construction.” (Epstein v. Abrams (1997) 57 Cal.App.4th 1159, 1168.)

“The court’s determinations [for an application for writ of attachment] shall have no effect on the determination of any issues in the action other than issues relevant to proceedings [for attachment]. The court’s determinations under this chapter shall not be given in evidence nor referred to at the trial of any such action.” (CCP § 484.100.)

The application is based on Plaintiff’s causes of action for breach of contract. To establish a claim for breach of contract, a plaintiff must prove: (1) existence of a contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach of the contract; and (4) damages incurred by plaintiff as a result of the breach. (Durell v. Sharp Healthcare, (2010) 183 Cal.App.4th 1350, 1367.)

Plaintiff submits evidence of the following. On or about December 5, 2017, Defendant executed an adjustable rate note in the principal amount of $300,000 payable to Pensco Trust Company FBO John Gregg II IRA. (Declaration of John Lee Gregg III (“Gregg Decl.”) ¶ 2, Exh. A.)[1] The note was due and payable on or before January 1, 2023. (Ibid.) The note was secured by a deed of trust encumbering multiple parcels of real property in Los Angeles, CA, A.P. Nos. 5422-009-040, 5422-009-041, 5422-009-022, 5422-009-023, 5422-009-012, 5422-090-024, 5422-009-25, 5422-009-026, 5422-010-012, 5422-010-020 (“Property”).[2] (Id. ¶ 3, Exh. B.) The deed of trust was recorded December 18, 2017. (Id. ¶ 3, Exh. B.) The deed of trust was junior and subordinate to a senior deed of trust on the same Property executed on November 15, 2017, by Defendant. The senior deed of trust secured a promissory note in the amount of $600,000 executed by Defendant in favor of JL Financing, LLC, the plaintiff in this action. (Id. ¶ 5, Exh. C.)

Defendant defaulted on the payments required by the note secured by the senior deed of trust on or about January 14, 2019. A notice of default and notice of trustee’s sale were served on Defendant with respect to the Property. On February 21, 2020, a non-judicial foreclosure sale was held and Plaintiff, the lender on the first note, was the successful bidder for the Property in the amount of $600,000. (Id. ¶¶ 6-9.)

As a result of this foreclosure, the $300,000 loan became unsecured and Pensco Trust Company FBO John Gregg II IRA to Defendant became a “sold-out junior lienor.” (Id. ¶ 10.) Defendant failed to make the payments required by the second note. There is now due and owing $300,000 on that second note. (Id. ¶ 11.) As a general rule, “[t]he ‘one form of action’ rule of [CCP] section 726 does not apply to a sold-out junior lienor.” (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 39.) Further, because the security has been foreclosed upon, the sold-out junior lienor is generally not barred by CCP section 580d from pursuing a deficiency judgment. (See Black Sky Capital, LLC v. Cobb (2019) 7 Cal.5th 156, 165 [“Because no sale occurred under the deed of trust securing the junior note in this case, section 580d does not bar a deficiency judgment on the junior note.”].)

By written assignment dated August 10, 2021, Pacific Premier Trust Co., successor to Pensco Trust Company, Custodian FBO John Greg II IRA, assigned the claim for this debt to Plaintiff. (Id. ¶ 12, Exh. E.)

In his opposing declaration and cross-complaint, Defendant acknowledges that he executed the December 5, 2017, note in favor of Pensco Trust Company FBO John Gregg II IRA and that he received the $300,000 loan. (Sanchez Decl. ¶¶ 1-11; Cross-Compl. ¶¶ 6-16.)

The foregoing evidence, if not rebutted, supports all elements of Plaintiff’s contract claim in the principal amount of $300,000. Specifically, Plaintiff submits evidence of the existence of the contract (the December 5, 2017 note); Plaintiff’s performance of the note; Defendant’s breach; damages of $300,000; and Plaintiff’s right to enforce the note by virtue of the assignment.

In his declaration John Lee Gregg II claims that the amount of interest due is set forth in the “computation of interest and other documents filed herewith.” (Gregg Decl. ¶ 20.) However, Plaintiff has not submitted calculations of pre-judgment interest. The court does not compute interest in the first instance. While the default judgment entered by Judge Traber included pre-judgment interest, that judgment was set aside and has no ongoing legal effect.

The note includes a provision requiring Defendant to pay Plaintiff the attorney’s fees and costs necessary to enforce the note. (Gregg Decl. Exh. A at ¶ 6(E).) The court, in its discretion, finds the requests for $6,680 in fees and $577.38 in costs to be reasonable for this type of collection action and the amount of the alleged default. (See CCP § 482.110(b).)

Based on the foregoing, unless rebutted in opposition, Plaintiff shows a probably valid contract claim with an attachable amount of $307,257.38.

In opposition, Defendant does not dispute that he executed the December 5, 2017, note; that the loan was disbursed; that he defaulted in the principal amount of $300,000; or that the claim was assigned to Plaintiff. Rather, Defendant states that the “main premise” of his defense “is that Plaintiff and Cross-Defendants are violating California’s one-form-of-action rules in spite of their attempt to circumvent such by ‘hiding the ball’ through familial ties and their associations to a number of subsidiaries.” (Oppo. 8.)

“In determining the probable validity of a claim where the defendant makes an appearance, the court must consider the relative merits of the positions of the respective parties and make a determination of the probable outcome of the litigation.” (See Loeb & Loeb v. Beverly Glen Music, Inc. (1985) 166 Cal.App.3d 1110, 1120.)

While Defendant invokes California’s “one-form-of-action” rules, he does not cite or discuss any relevant statute or published decisions in his opposition brief. Moreover, by assignment, Plaintiff stands in the shoes of a sold-out junior lienor. As noted, case law provides that the one-form-of-action rule in section 726 and also anti-deficiency judgment rule in section 580d generally do not apply to a sold-out junior lienor. (Roseleaf, supra, 59 Cal.2d at 39; Black Sky, supra, 7 Cal.5th at 165.) Defendant has not sufficiently briefed his defenses, which apparently seek to invoke some exception to these general rules. “When an appellant fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as waived.” (Nelson v. Avondale HOA (2009) 172 Cal.App.4th 857, 862-863.)

Although not so stated in opposition, Defendant may rely on dictum in Black Sky suggesting that the anti-deficiency judgment rule of section 580d may not apply when a single creditor holds both the senior and junior liens and there is evidence of “evasive loan splitting.” (See Ans. ¶¶ 3-4, citing Black Sky.) In Black Sky, the defendants entered into two separate loan transactions with the same bank, one in August 2005 and the other in September 2007. The loans were secured by two separate deeds of trust encumbering the same property. The second deed of trust was subordinate and junior to the first. Our Supreme Court considered “whether section 580d bars a deficiency judgment on a junior lien held by a senior lienholder that sold the property comprising the security for both liens.” (Black Sky, supra, 7 Cal.5th at 163.) Notably, the Court did not consider “whether section 726 or any other statute bars or limits such a deficiency judgment.” (Ibid.) The one-form-of-action rule, to which Defendant refers in opposition, is found in section 726 not section 580d.

The Court in Black Sky found that section 580d did not bar the bank’s deficiency action on the second note. As relevant here, the Court stated:

Where there is evidence of gamesmanship by the holder of senior and junior liens on the same property, a substantial question would arise whether the two liens held by the same creditor should—in substance, if not in form—be treated as a single lien within the meaning of section 580d….[¶]

But we have no occasion here to decide the applicability of section 580d in these or other gamesmanship scenarios. The Cobbs do not allege, and there is no evidence to suggest, that the two notes in this case arose from intentional loan splitting; they were executed in separate transactions more than two years apart. And the bare assertion by the Cobbs that Black Sky's purchase of the property for $ 7.5 million at a public auction in October 2014 was “substantially less than the appraised value of the Subject Property as of August 1, 2013”—with no evidence of irregularity at the public auction or price stability between the appraisal and auction—is not enough to suggest that $ 7.5 million was a lowball bid designed to “effect an excessive recovery by obtaining a deficiency judgment” on the junior lien.….[¶]

Where, as here, there is no allegation of evasive loan splitting or recovery in excess of what any junior lienholder would be able to recover, we see no reason to depart from a straightforward reading of section 580d. Because no sale occurred under the deed of trust securing the junior note in this case, section 580d does not bar a deficiency judgment on the junior note.

Black Sky expressly did not decide the applicability of section 580d, or the one-form-of-action rule in section 726, in “gamesmanship scenarios.” While the Court suggested that its holding might not apply if there was evidence of “evasive loan splitting,” the Court did not decide the point and it did not establish a legal standard for determining whether improper “loan splitting” occurred. “An opinion is not authority for propositions not considered.” (People v. Knoller (2007) 41 Cal.4th 139, 154-55.) Defendant has not cited any other legal authority describing a legal standard for “evasive loan splitting” or the factors a court would consider in determining whether “gamesmanship scenarios” should make section 580d or section 726 applicable to a sold-out junior lienor.

Black Sky also did not address the specific circumstances present here, in which the senior lienor forecloses on the secured property and later obtains by assignement the junior lienor’s claim for deficiency on a second note. Defendant cites no authority or legal standard from which this court could assess whether “evasive loan splitting” or other gamesmanship has occurred.

The evidence also does not sufficiently support Defendant’s claim that evasive loan splitting has occurred. The anti-deficiency statutes “are designed to prevent creditors from buying in at their own sales at deflated prices and realizing double recoveries by holding debtors for large deficiencies.” (Roseleaf, supra, 59 Cal.2d at 38.) Defendant contends that evasive loan splitting has occurred because “the Junior Deed of Trust Plaintiff is now seeking to collect on originated from John Lee Gregg II, who is his father.” Defendant states that “after the Junior Deed of Trust was allegedly defaulted on … it was shortly after assigned to J L Financing, LLC for collections, which … is the corporation who held the $600,000 first mortgage and is associated with John Lee Gregg III on paper, though both John Gregg II and John Lee Gregg III in practice.” Defendant claims that he never completed any applications for the two loans. Rather, “John Lee Gregg II walked the various parcels with Mr. Sanchez and agreed to loan him the funds to develop the property.” (Oppo. 9; see Sanchez Decl. ¶ 10.)

The loans were made by two different entities, Plaintiff and Pensco Trust Company FBO John Gregg II IRA, and approximately 20-30 days apart. John L. Gregg III declares that he has no interest in the second entity, and that neither his father (Gregg II) or his father’s IRA have an interest in Plaintiff. (Gregg Decl. ¶¶ 4, 5.) Plaintiff also submits evidence that Defendant completed two separate applications for the loans, one dated November 14, 2017, and the other dated December 8, 2017. (Id. Exh. F, G.) The second application referred to the $600,000 loan as an already existing lien on the Property. (Id. Exh. G.) In his declaration, Defendant claims he did not file two applications, but presents no explanation for the two separate applications submitted in evidence by Plaintiff. Plaintiff foreclosed on the Property after serving a notice of default and notice of trustee’s sale. (Id. ¶¶ 6-7.) Defendant submits no evidence of irregularities in the foreclosure proceedings or that the sale price was below fair market value. (See Sanchez Decl.) This evidence suggests that Defendant obtained loans from two separate entities and that evasive loan splitting did not occur.

While Defendant has not identified the legal standard for “evasive loan splitting,” there is some evidence that, in conjunction with other factors, might plausibly support such a defense. John Lee Gregg III is the managing member of Plaintiff and also the son of John Greg II, who directs the IRA held by Pensco Trust Company FBO John Gregg II IRA. The two loans were made less than a month apart. The deeds of trust named the same trustee, Gregg’s Artistic Homes, Inc., of which Gregg III is chief executive officer. The second loan was assigned to Plaintiff after the security was foreclosed upon. (See Gregg Decl. ¶¶ 4-12; Sanchez Decl. Exh. F.) However, Defendant cites no authority that familial ties between two lenders and the trustee, or a time period of less than a month, are themselves determinative of a claim of evasive loan splitting under the anti-deficiency laws. Beyond the existence of the familial ties, Defendant cites no evidence that Gregg II and Gregg III “collaborated” to circumvent the anti-deficiency laws. (See Oppo. 10.) As noted, Defendant submits no evidence of irregularities in the foreclosure proceedings or that the sale price was below fair market value. (See Sanchez Decl.) Without evidence of irregularities in the foreclosure or that the sale price was inadequate, the concerns about loan splitting discussed in Black Sky do not appear to be present. Defendant is not precluded from further developing his defenses, including with discussion of relevant authorities, in future proceedings.

Having considered the relative merits of the parties’ positions, the court finds that Plaintiff has a probably valid contract claim against Defendant in the amount of $307,257.38. Although Plaintiff is likely entitled to pre-judgment interest, Plaintiff has not submitted interest calculations and has not proven up that part of its claim for purposes of this application.

“[A]n attachment may be issued only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim or claims is a fixed or readily ascertainable amount not less than five hundred dollars ($500) exclusive of costs, interest, and attorney's fees.” (CCP § 483.010(a).) “An attachment may not be issued on a claim which is secured by any interest in real property arising from agreement ….” (CCP § 483.010(b).) “If the action is against a defendant who is a natural person, an attachment may be issued only on a claim which arises out of the conduct by the defendant of a trade, business, or profession. (§ 483.010(c); see Advance Transformer co. v. Sup.Ct. (1974) 44 Cal.App.3d 127, 143-144.)

Here, Plaintiff’s application for writ of attachment is based on a promissory note where the total amount allegedly due is in excess of $500. Because the Property was foreclosed upon by the senior deed of trust, the December 5, 2017, note is not secured by real property. Defendant admittedly executed the promissory note as part of his trade, business, or profession. (See Oppo. 11:3-5; Sanchez Decl. ¶ 10; Gregg Decl. Exh. F, G.) Plaintiff’s damages are fixed and readily ascertainable from the terms of the promissory note and from Plaintiff’s declaration.

Defendant argues that the requested attachment is barred by CCP section 483.010(c) because “it concerns a loan granted to a natural person for the purpose of purchasing real property to lease, and further, is based on the sale of foreclosed upon real property.” (Oppo. 11.) Section 483.010(c) states in relevant part: “An attachment may not be issued on a claim against a defendant who is a natural person if the claim is based on the sale or lease of property, a license to use property, the furnishing of services, or the loan of money where the property sold or leased, or licensed for use, the services furnished, or the money loaned was used by the defendant primarily for personal, family, or household purposes.” Defendant appears to misunderstand the import of this bolded, italicized language in his opposition. As noted, the evidence shows the loan was used for business purposes. (See Oppo. 11:3-5; Sanchez Decl. ¶ 10; Gregg Decl. Exh. F, G.) Defendant submits no evidence that the loan was used primarily for personal, family, or household purposes. This exemption does not apply.

Code of Civil Procedure section 484.090 states that the Court shall issue a right to attach order if “the attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based . . . [and] the amount to be secured by the attachment is greater than zero.”

Plaintiff declares, and the court finds, that attachment is not sought for a purpose other than the recovery on Plaintiff’s claim. (Appl. ¶ 4.) The amount to be secured is greater than zero.

4. Reduction of Amount to be Secured Based on Offset Claims or Affirmative Defenses

Code of Civil Procedure section 483.015(b) provides that the amount to be secured by the attachment shall be reduced by, inter alia: “(2) The amount of any indebtedness of the plaintiff that the defendant has claimed in a cross-complaint filed in the action if the defendant’s claim is one upon which an attachment could be issued.” Defendant has the burden of proof to satisfy the requirements of attachment for any offset claim. (See CCP § 483.015 and Lydig Construction, Inc. v. Martinez Steel Corp. (2015) 234 Cal.App.4th 937, 945.)

Defendant has not shown that the attachment should be reduced by an attachable claim for offset or related affirmative defense.

Plaintiff requests attachment against Defendant, a natural person, of items listed in CCP section 487.010(c) and (d). (Application ¶ 9c.) That request is proper.

While Defendant’s memorandum of points and authorities implies he is claiming exemptions (Oppo., p 13), Defendant does not claim exemptions in the documents filed in opposition.

Code of Civil Procedure section 489.210 requires the plaintiff to file an undertaking before issuance of a writ of attachment. Code of Civil Procedure section 489.220 provides, with exceptions, for an undertaking in the amount of $10,000. Neither party argues for a different amount of undertaking.

Plaintiff requests a temporary protective order “enjoining any transfer of assets outside the ordinary course of business pending a hearing on the Application for a Right to Attach Order.” (Appl. ¶ 14.) Because a hearing on the application has been held, and because the court grants the attachment, the request for a TPO is denied as moot.

The application for writ of attachment is granted in the amount of $307,257.38. Plaintiff to post an undertaking of $10,000.

[1] Gregg declares that the note was executed on or about December 19, 2017. (Gregg Decl. ¶ 2.) The note itself is dated December 5, 2017, and the deed of trust securing the note was signed December 8, 2017, and recorded December 18, 2017. (Id. Exh. A, B.) The opposition and cross-complaint both refer to a note dated December 5, 2017. (Oppo. 2; Cross-Compl. ¶ 6.) The exact date the note was executed is immaterial.

[2] The last two of these AP numbers are stated differently in Gregg’s declaration as 5422-009-012, 5422-009-020. The court has cited the numbers as listed in the deed of trust. Defendant does not argue that this discrepancy in Gregg’s declaration is material.