Judge: Mary H. Strobel, Case: 23STCV06620, Date: 2023-04-20 Tentative Ruling

Case Number: 23STCV06620    Hearing Date: April 20, 2023    Dept: 82

            Plaintiff Zions Bancorporation, National Association, dba California Bank & Trust (“Plaintiff”) moves for appointment of a receiver “to locate, take possession of and liquidate all assets of defendants, DSWR Inc., Domus Construction & Design, Inc., Statewide Restoration, Inc. and SR Colorado Inc. (‘Borrowers’) and DSWR Holdings LLC (‘Guarantor’) (collectively, ‘Defendants’), wherever located, as more particularly described as collateral in the Credit, Security And Guaranty Agreement [attached as Exhibit 1 to Plaintiff’s Verified Complaint] …, together with all income, revenues, profits, proceeds and payments therefrom, as well as, all books and records related thereto (collectively, the ‘Collateral’).”  (Ex Parte 2.)  Plaintiff also moves for a preliminary injunction in aid of the receivership. 

Procedural History

            On March 24, 2023, Plaintiff filed a verified complaint against Defendants for breach of contract, common counts, conversion, appointment of a receiver, breach of guaranty, and other claims. 

            On April 3, 2023, the court denied Plaintiff’s ex parte application for appointment of a receiver, finding insufficient evidence of urgency or emergency.  The court scheduled an OSC re: appointment of a receiver for April 20, 2023, and deemed the ex parte application and supporting documents as the moving papers.  The court ordered Plaintiff to give notice.

            On April 5, 2023, Plaintiff filed five proofs of service showing personal service of the summons, complaint, ex parte papers, and other documents on all five Defendants on March 30, 2023.

            On April 5, 2023, Plaintiff also filed a notice of the court’s April 3 ruling and proof of service showing that the notice was served on all five Defendants, by mail, on April 4, 2023. 

            No opposition to the OSC has been received. 

Analysis 

            Plaintiff moves for appointment of a receiver pursuant to Code of Civil Procedure sections 564(b)(1), (6), and (9).  (Ex Parte 12-13.) CCP section 564(b)(1), (6), and (9) authorize the appointment of a receiver in a pending action, as follows:

(1)  In an action … by a creditor to subject any property or fund to the creditor’s claim, … on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds of the property or fund, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured.

[¶¶]

(6) Where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights….

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(9) in all other cases where necessary to preserve the property or rights of any party….

“In this state a receiver may be appointed only as permitted by Code of Civil Procedure section 564.”  (Barclays Bank of California v. Sup.Ct. (1977) 69 Cal.App.3d 593, 597.) 

Appointment of a receiver is a drastic provisional remedy that the court should only grant when facts are presented by admissible evidence that clearly establish a receiver is necessary to protect the property and maintain the status quo.  (Barclay Bank of California v. Superior Court (1977) 69 Cal. App. 3d 593, 597; City and County of San Francisco v. Daley (1993) 16 Cal.App. 4^th 734, 744).  The appointment of a receiver is an equitable remedy and should be used only when necessary and where other legal remedies are unavailable.  (Rogers v. Smith (1946) 76 Cal.App.2d 16, 21). 

Factual Background

Plaintiff submits evidence of the following.  On or about January 28, 2019, Plaintiff, Borrowers, and Guarantor entered into a written Credit, Security And Guaranty Agreement (as amended, the “Credit Agreement”). Concurrently, Borrowers executed and delivered to Plaintiff a Form of Revolving Note (“Note”) for the principal sum of $3,000,000.00, exclusive of interest, for value received.  (Toal Decl. ¶ 8, Exh. 1-2.)  On or about April 2, 2020, Borrowers entered into a written First Amended Credit, Security And Guaranty Agreement, adding SR Colorado Inc. as a borrower and making certain other amendments (collectively with Guaranty, the “Loan Documents”).  (Id. ¶ 9, Exh. 3.)

As part of the Credit Agreement, Borrowers, and Guarantor granted to Plaintiff a security interest in all accounts, equipment and fixtures, general intangibles, intellectual property, investment property, equity interests, financial assets, key man life insurance policies, contract rights, right of payment, deposit accounts, goods, instruments, letters of credit, cash, certificates of deposit, insurance proceeds, security agreements, eminent domain proceeds, condemnation proceeds, tort claim proceeds, ledger sheets and cards, files, correspondence, records, books of account, business papers, computers, computer software and programs, tapes, disks and documents, and all proceeds and products of such property, and as more fully described in the Security Agreement (“Collateral”). Borrowers and Guarantors’ grant of a security interest to Plaintiff further provides that said Collateral secures the prompt payment and performance of the obligations of the loan parties under the Loan Documents.  (Id. ¶ 14, Exh. 1.)

Plaintiff perfected its security interest in the Collateral by filing a UCC financing statement for each of the Borrowers and Guarantor with the Delaware, California, and Oregon Secretaries of State, respectively.  (Id. ¶ 15, Exh. 4.)

On September 16, 2022, the Borrowers ceased operations, laid off their employees, and closed their doors. (Toal Declr. ¶ 5.) On or about September 23, 2022, Borrowers sent an email to customers, stating, in part,

We regret to inform you that, due to competitive market dynamics, Statewide Restoration and all affiliated entities have ceased operations. We encourage you to seek out a third-party vendor to complete all ongoing projects.

(Id. ¶ 6 and Exh. 6.)

On or about September 30, 2022, Borrowers defaulted on their loans. (Id. ¶ 5.) Plaintiff submits evidence that “[e]vents of monetary and non-monetary defaults under the Loan Documents have occurred and continue to occur, including but not limited to, (a) the Borrowers’ failure to make the interest payment due on September 30, 2022, or any subsequent payment due thereafter; (b) the Borrowers’ failure to satisfy certain financial covenants specified in the Credit Agreement; and (c) Borrowers’ cessation of operations, termination of employees and work stoppage on September 16, 2022; (d) Borrowers’ inability and general failure to pay its debts as they become due; and (e) Guarantor’s failure to make payment under the Guaranty.”  (Id. ¶ 17.)  After Plaintiff accelerated the unpaid balance due, “[t]here is now due, owing and payable to Plaintiff from the Borrowers and Guarantor the principal sum of $3,000,000.00, together with unpaid accrued interest, late charges and other fees and charges, plus attorneys’ fees and costs of suit, pursuant to the terms of the Loan Documents.”  (Id. ¶ 18.)

Since the default on September 30, 2022, Plaintiff has been attempting to obtain information as to the location and collection of Plaintiff’s collateral. (Id. ¶ 7.)  Plaintiff asserts that “the management of Borrowers has abandoned the businesses.”  (Ibid.) 

Plaintiff’s Vice President in the Special Assets Department, Michael Toal, describes Plaintiff’s efforts to recover the Collateral and the need for a receivership as follows:

19. The Borrowers operated their fire and water restoration business out of eight offices in California, Oregon and Washington. The Credit Agreement, as amended, contains a California choice of law provision and Los Angeles County venue selection and jurisdiction clauses. Plaintiff’s remaining Collateral principally consists of the following (1) accounts receivable owed to Borrowers by either homeowners or insurance companies; (2) approximately ten vans titled in the name of the Borrowers; and (3) furniture, fixtures and equipment at Borrowers’ various offices. In order to locate and recover the accounts receivable, I have been attempting to obtain copies of the underlying contracts between the Borrower and their clients and of insurance claims, but have been hampered by the absence of Borrowers’ employees in gathering this documentation. As of an April 2022 field report, the net accounts receivable were approximately $1.257 million and consisted of process payments subject to mechanics’ liens. The Borrowers’ CFO, Greg Wolf, told me that upon the close of business closing, there were approximately $20 million of projects in work in progress in various stages, but it is undetermined how much of this is collectible since projects were not completed and some homeowners have threatened offsets. The Borrowers had retained an attorney to collect on several of the unpaid receivables, but the attorneys do not represent the Plaintiff. I have been able to locate five of the ten vans currently in the possession of former employees of the Borrowers, but do not have the documentation to transfer title. The landlords in eight different offices are in possession of the left over furniture, fixtures and equipment of Borrowers, but Plaintiff does not have landlord waivers to take control of them.

20. The appointment of a Receiver is necessary in order to locate, take possession of and liquidate the Collateral, including accounts receivable, insurance claims, FF&E and motor vehicles…..

21. The Collateral is Plaintiff’s only remaining source of security for and repayment of the Borrowers’ loan and Guarantor’s guaranty. The Borrowers and Guarantor’s defaults on their obligations owed to Plaintiff will not be cured since Defendants have closed their doors and ceased operations….

(Toal Decl. ¶¶ 19-21.)

Under section 9.02(e) of the Credit Agreement, Plaintiff has various rights and remedies in the Event of Default, including to “(i) enter on any premises of the Borrower on which any of the Collateral may be located and, without resistance or interference by the Borrower, take possession of the Collateral, (ii) dispose of any Collateral on any such premises, (iii) require the Borrower to assemble and make available to Lender at the expense of the Borrower any Collateral at any place and time designated by Lender which is reasonably convenient for both parties, (iv) remove any Collateral from any such premises for the purpose of effecting a sale or other disposition thereof….”   (Id. Exh. 1.) 

Furthermore, under section 9.02(f), “(i) Borrower will promptly upon reasonable request of Lender instruct all account debtors to remit all payments in respect of Accounts to a mailing location selected by Lender and (ii) Lender shall have the right to enforce Borrower’s rights against its customers and account debtors, and Lender or its designee may notify Borrower’s customers and account debtors that the Accounts of Borrower have been assigned to Lender or of Lender’s Security Interest therein, and may (either in its own name or in the name of a Borrower or both) demand, collect (including without limitation by way of a lockbox arrangement), receive, take receipt for, sell, sue for, compound, settle, compromise and give acquittance for any and all amounts due or to become due on any Account, and file any claim or take any other action or proceeding to protect and realize upon the Security Interest of the holders of the Obligations in the Accounts.”  (Ibid.) 

Plaintiff is Entitled to a Receivership Over Defendants’ California Property

            With respect to Defendants’ property held in California, Plaintiff is entitled to a receivership pursuant to CCP section 564(b)(1), (6), and (9).

As summarized above, Plaintiff submits undisputed evidence that is has a security interest in Defendants’ Collateral pursuant to the Credit Agreement and Loan Documents.  Plaintiff also submits evidence that “the proceeds of the property or fund, is probable, and … that the property or fund is in danger of being lost, removed, or materially injured.”  (§ 564(b)(1).)  Specifically, Plaintiff submits evidence that the “remaining Collateral principally consists of the following (1) accounts receivable owed to Borrowers by either homeowners or insurance companies; (2) approximately ten vans titled in the name of the Borrowers; and (3) furniture, fixtures and equipment at Borrowers’ various offices.”  (Toal Decl. ¶ 19.)  Further, since the management and employees of the Borrowers and Guarantor have abandoned their businesses, this Collateral is in danger of being lost, removed, or materially injured.  (Id. ¶¶ 6-7 and 19-21, Exh. 6.)  Accordingly, appointment of a receiver pursuant to section 564(b)(1) is proper.

As discussed, Defendants have defaulted on the loan and guaranty; ceased business operations; and have stopped paying their debts to other creditors as well.  Accordingly, the evidence establishes that Defendants are “insolvent, or in imminent danger of insolvency, or ha[ve] forfeited [their] corporate rights….”  (§ 564(b)(6); see also Cal. Comm. Code § 1201(b)(23) [“insolvent” means “having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute; [or] being unable to pay debts as they become due”].)

            For the same reasons discussed above, appointment of a receiver is “necessary to preserve the property or rights of any party.”  (§ 564(b)(9).) 

            The motion is granted with respect to property located in California.

Preliminary Injunction

Plaintiff moves for a preliminary injunction to aid in the receivership.  (See Proposed Order 8-9.)  The proposed injunctive relief is appropriate with respect to a receivership over California-held property. 

Receivership Over Non-California Property; and Associated Injunctive Relief

Plaintiff also moves for appointment of a receiver over Defendants’ property “wherever located.”  (Ex Parte 2.)  Plaintiff’s evidence shows that “Borrowers operated their fire and water restoration business out of eight offices in California, Oregon and Washington.”  (Toal Decl. ¶ 19.)  Apparently, Plaintiff seeks an order authorizing the receiver to take possession of property in states outside of California and engage in other receivership activities outside of California.  (See Ex Parte 10-11.)  Plaintiff also seeks injunctive relief requiring, among other things, that Defendants and their agents “relinquish and turn over possession of the Receivership Property, including but not limited to all of its assets (including any cash) to the Receiver” and “direct all other third parties in possession thereof to turn over all keys, books, records, inventory, books of account, ledgers, operating statements, control and passwords to website(s) and/or web domains, budgets and all other Receivership Property records relating to the Receivership Property, wherever located.”  (Proposed Order 9 [bold italics added].) 

Plaintiff does not sufficiently brief its request for relief with respect to property held outside of California.  (See Rutter, Cal. Prac. Guide, Enforcing Judgments and Debts, ¶ 4:916 [“The powers of a receiver appointed by a state court are limited to property within the state's borders…. If property of the receivership estate is located outside the state, it may be necessary to appoint an ancillary receiver in the situs state.”]; see also Taylor v. Taylor (1923) 192 Cal. 71, 76 [“That the courts of one state cannot make a decree which will operate to change or directly affect the title to real property beyond the territorial limits of its jurisdiction must be conceded. The doctrine that a court, not having jurisdiction of the res, cannot affect it by its decree is firmly established.”].) 

Plaintiff implies that a choice of law provision vests this court with jurisdiction to authorize receivership activities with respect to property and other matters in other states.  (Ex Parte 10; Suppl. Smith Decl. ¶ 5 [“Pursuant to Section 12.16 of the subject Credit Agreement …, the agreement between the parties is governed by California law, and each party submitted to the non-exclusive jurisdiction of the courts situated in Los Angeles County….”].)  However, the legal argument is not developed in the moving brief or in Plaintiff’s declarations.

The court will continue the hearing so that Plaintiff can submit a supplemental brief addressing whether the receivership order may apply to non-California property and/or authorize receiver to engage in receivership activities outside of California.  Plaintiff should cite published California appellate decisions in support of its position and should also address the scope of the proposed preliminary injunction with respect to property and persons located outside of California. 

Receiver’s Qualifications

            Plaintiff nominates Theodore Lanes as the receiver.  Lanes is qualified to serve as receiver.  (See Lanes Decl. ¶¶ 3-5, Exh. 1; Cal. Rules of Court, Rule 3.1117(b).)  Defendants have not opposed the nomination.

Receiver’s Bond and Injunction Bond

            Receiver must file an undertaking.  (CCP § 567(b); Cal. Rules of Court, Rule 3.1178.)  Plaintiff proposes a receiver undertaking of $10,000.  (Ex Parte 16, citing CCP § 566(b).)  Subject to discussion at the hearing, that amount appears reasonable.

            Plaintiff must file an undertaking in support of the preliminary injunction.  (CCP § 529.)  Plaintiff does not address the amount of undertaking for the injunction.  (Ex Parte 16.)  Subject to argument, the court will require a $10,000 undertaking for the preliminary injunction. 

Proposed Order

            The proposed order requires modifications, including as follows.  The court will discuss further required modifications at the hearing. 

            ¶ 4.d, ¶ 5, ¶ 7, ¶ 11, and ¶ 26.  The proposed order must be amended to state that court approval is required before the Receiver hires legal counsel or files lawsuits.

            Plaintiff indicates that it seeks appointment of a receiver to hire legal counsel and file lawsuits to collect unpaid receivables.  (See Toal Decl. ¶¶ 19-20; Suppl. Smith Decl. ¶¶ 3-10.)  Considering that the remaining Collateral includes “accounts receivable owed to Borrowers by either homeowners or insurance companies” (Toal Decl. ¶ 19), it may be appropriate for Receiver to take these actions.  However, the court does not have sufficient information at this time about these potential lawsuits to grant an order authorizing these receivership actions without further court approval.  Further, since the Defendants operated in at least three different states, hiring counsel and filing lawsuits raises potential jurisdictional issues that require further legal briefing and court approval.  Plaintiff’s attorney may respond to these issues at the hearing. 

            ¶ 4.c and ¶ 6.  The proposed order must be amended to state that court approval is required before the sale of receivership property. 

            ¶ 8.  The court is considering whether to strike this entire paragraph concerning “Police Assistance.”  It appears unnecessary and also overbroad.  Plaintiff’s counsel may argue at the hearing. 

            ¶ 9.a.  The first sentence must be modified to state that “[t]he Receiver may issue Receivership Certificates after obtaining prior approval from the court.” 

Conclusion

            The motion for appointment of a receiver is granted in part.  The court grants a receivership and preliminary injunction only with respect to property located and held in California.  Plaintiff must amend the proposed order as specified in the “Proposed Order” section of this tentative ruling, immediately above, and as further directed at the hearing.

            Plaintiff to file an undertaking for the preliminary injunction in the amount of $10,000.

            Receiver to file an undertaking in the amount of $10,000.

The court will continue the hearing so that Plaintiff can submit a supplemental brief addressing whether the receivership order may apply to non-California property and/or authorize receiver to engage in receivership activities outside of California.  Plaintiff should cite published California appellate decisions in support of its position and should also address the scope of the receivership and proposed preliminary injunction with respect to property and persons located outside of California.  The supplemental brief shall not exceed 5 pages.  Defendants shall also be permitted to file a supplemental opposition brief, not exceeding 5 pages, on these same issues.  No further briefing or evidence on any other issues is permitted.