Judge: Richard Y. Lee, Case: 30-2021-01208258, Date: 2022-12-15 Tentative Ruling
Defendant, Aryabhata Group, LLC moves for an order requiring “Defendant and Cross-Plaintiff The Picerne Group, Inc. (“TPG”) to provide Aryabhata with an undertaking in the amount of $64,443,940.37 as a condition to maintaining the Notice of Pendency of Action that TPG recorded with the Orange County Recorder on July 16, 2021 (the “Lis Pendens”) and which remains a cloud on the title of the commercial real property located in the City of Newport Beach at 1701 Corinthian Way; 4251, 4253, and 4255 Martingdale Drive; 4200, 4220, and 4250 Scott Drive; and 16600 Dove Street, Assessor's Parcel Numbers 427-172-02, 427-172-03, 427-172-OS and 427-172-06 (“Newport Crossing Property”).” Aryabhata also seeks an order requiring TPG to pay Aryabhata $8,000 as an award of reasonable costs and attorneys’ fees incurred in bringing this motion pursuant to CCP section 405.38.
TPG’s Evidentiary Objections to Aryabhata’s Evidence (ROA 1014)
Declaration of Michael Kluchin
Objection No. 1: Sustain.
Objection No. 2: Sustain.
Objection No. 3: Sustain.
Objection No. 4: Sustain.
Objection No. 5: Sustain.
Objection No. 6: Sustain.
Objection No. 7: Sustain.
Objection No. 8: Sustain.
Objection No. 9: Sustain.
Objection No. 10: Sustain.
Declaration of Robert Franko
Objection No. 1: Overrule.
Objection No. 2: Overrule.
Objection No. 3: Overrule.
Objection No. 4: Sustain.
Objection No. 5: Sustain.
Merits
Code of Civil Procedure section 405.34, states, in part:
Subject to the provisions of Sections 405.31 and 405.32, at any time after a notice of pendency of action has been recorded, and regardless of whether a motion to expunge has been filed, the court may, upon motion by any person with an interest in the property, require the claimant to give the moving party an undertaking as a condition of maintaining the notice in the record title . . . . The court may permit evidence to be received in the form of oral testimony and may make any orders it deems just to provide for discovery by any affected party. An undertaking required pursuant to this section shall be of such nature and in such amount as the court may determine to be just. In its order requiring an undertaking, the court shall set a return date for the claimant to show compliance and if the claimant fails to show compliance on the return date, the court shall order the notice of pendency of action expunged without further notice or hearing. (Code Civ. Proc. § 405.34.)
“[A]n undertaking given as a condition of expungement or nonexpungement of a lis pendens serves to protect only against damages that actually result from the expungement or nonexpungement.” (Elder v. Carlisle Ins. Co. (1987) 193 Cal.App.3d 1313, 1319.)
The proper measure of damages is based on a determination of the effect the filing of the lis pendens. (CMSH Co. v. Antelope Development, Inc. (1990) 223 Cal.App.3d 174, 181.) Damages must actually result from the filing of the lis pendens. (Ibid.) Comparing the difference between the fair market value of the property at the time of the filing of the lis pendens with its fair market value at the time of its termination, and allowing an offset for appreciation in fair market value minus interest and tax damages is proper. (Ibid.) “Where the measure of damages turns on the value of the property, whether liability sounds in contract or in tort, the normal standard is that of market value. [Citation.]” (Id. at p. 182.)
The amount of the undertaking may include carrying costs of the property such as “taxes, interest cost and expenses of maintaining the property while lis pendens clouds title; and if property is declining in value, lost profits on resale;” and attorneys’ fees and costs in removing the cloud on title. (Weil & Brown, Cal. Practice Guide: Civ. Proc. Before Trial (The Rutter Group June 2022 update) ¶¶ 9:449-9.449.2.) The burden of proof is on the moving party, here, Aryabhata. (Id. at ¶¶ 9:440.3, 9:448.1.)
Here, as an initial matter, Aryabhata has an interest in the Newport Crossing Property, as it acquired Newport Crossing Property in June 2021 from Starboard MacArthur Square, LP. (Declaration of Michael Kluchin (“Kluchin”), ¶ 2.) This statement is properly objected to as lacking personal knowledge and foundation. However, it cannot be reasonably disputed that Aryabhata claims an interest in the Newport Crossing Property.
Whether Aryabhata is a good faith purchaser for value or fraudulently obtained title to the property at issue and has unclean hands, and determining the merits of the action is not appropriate for the purposes of this motion to compel TPG to provide an undertaking, nor will the Court make any analysis or determination as to these issues.
Mr. Kluchin, an authorized agent of Aryabhata, provides that Aryabhata paid a total of $47,080,725.89 to acquire the Newport Crossing Property for the purpose of quickly developing it into a high value apartment complex, and that to cover the $45 million base purchase price, Aryabhata obtained a $30 million short-term loan (“Bridge Loan”) from Preferred Bank which current bears an interest rate of 7.75%. (Kluchin Decl., ¶ 2.)
Mr. Kluchin also provides that Aryabhata intended to quickly refinance the Bridge Loan into a construction loan, the latter of which it was immediately ready, willing, and able to obtain, and that it obtained a construction financing analysis shortly after it acquired the Newport Crossing Property from a highly qualified commercial real estate investment bank which included a quote for a partial recourse 65% loan-to-cost ratio (“LTC”) construction loan which was an optimal choice for Aryabhata’s investment, but that Aryabhata was unable to obtain the construction loan due to TPG’s recordation of the Lis Pendens, and was unable to fund the construction bid it received in November 2021, as well as stopped Aryabhata from starting construction in 2021. (Kluchin Decl., ¶¶ 4, 6.) He states that after the Court declined to expunge TPG’s Lis Pendens, Aryabhata went back to the same vendor and requested an updated construction financing analysis and was informed that a partial recourse 65% LTC construction loan was no longer available. (Kluchin Decl., ¶ 6.)
Mr. Kluchin provides that the Bridge Loan was originally scheduled to mature on June 30, 2022, that the maturity date of the Bridge Loan was pushed back and matures on December 30, 2022, and that Preferred Bank recently informed Aryabhata that it will not further extend the maturity date of the Bridge Loan beyond December 30, 2022. (Kluchin Decl., ¶¶ 2, 7, 8.)
Aryabhata requests an order for an undertaking in the amount of $64,443,940.37.
Carrying Costs, Taxes, and Interest
Aryabhata requests a total of $3,764,044.33 for this category.
Mr. Kluchin states that “Aryabhata has already paid $542,276.58 in property taxes; $708,642.72 in development costs; $30,958.48 in property insurance costs; $2,032,208.22 in interest expenses to carry the Bridge Loan; $37,500 for an extension fee to push back the maturity date of the Bridge Loan, and [that] it will also have to incur another $412,458.33 in interest expenses in the next 45 days before the Bridge Loan matures on December 30, 2022.” (Kluchin Decl., ¶ 7.)
TPG does not address this category of damages in its memorandum of points and authorities in opposition to the motion. However, TPG’s objection to this portion of Mr. Kluchin’s declaration (Objection No. 7) is sustained as it lacks personal knowledge, and lacks foundation.
Because Aryabhata fails to provide admissible evidence to support this category of purported damages, the Court DENIES the motion to compel an undertaking as to costs associated with carrying the Newport Crossing Property and the anticipated amount for interest expenses in the amount of $3,764,044.33.
Capital Paid to Purchase Newport Crossing Property
Aryabhata request $17,060,000 for the capital it paid to purchase Newport Crossing Property.
Mr. Kluchin states that Aryabhata paid roughly $15 million of the $45 million purchase price, along with approximately $2.06 million in closing costs and reserves to close the acquisition on June 30, 2021. (Kluchin Decl., ¶ 2.) He also provides that Preferred Bank informed Aryabhata that it will not further extend the maturity date of the Bridge Loan beyond December 30, 2022, putting Aryabhata at substantial risk of default, and that if it defaults, Preferred Bank will foreclose on the Newport Crossing Property, and that Aryabhata will be at substantial risk of losing of the equity it has invested into it. (Kluchin Decl., ¶ 8.)
TPG correctly asserts that what Preferred Bank told Aryabhata constitutes inadmissible hearsay, and that Kluchin’s declaration and these statements are otherwise objectionable based on lack of personal knowledge and lack of foundation.
Aryabhata also submits the Declaration of Robert Franko, President and CEO of First Choice Bank in Cerritos who has over 38 years of experience in the banking industry, including “extensive experience with secured real property financing and real estate development projects,” and who has “in depth first-hand knowledge of how the recordation of a lis pendens against commercial real property affects a lender’s analysis as to whether or not to extend a loan to the owner of that property.” (Declaration of Robert Franko, ¶¶ 2, 3.) He provides that he has discussed with representatives of Aryabhata, the Lis Pendens on the Newport Crossing Property, the $30 million short-term Bridge Loan that Aryabhata obtained from Preferred Bank to acquire the Newport Crossing Property, and their desire to re-finance the Bridge Loan with a construction loan to fund the development of the Property into a high value residential apartment complex. (Id., ¶¶ 5, 6.) He concludes that “[i]t is [his] opinion that no commercial bank or other sophisticated lender would agree to extend a construction loan to Aryabhata secured by the [Newport Crossing] Property while the Lis Pendens remains on title to the [Newport Crossing] Property, based upon the likelihood that any such construction loan’s security interest in the Property would be deemed subordinate to the Lis Pendens, thereby impairing the potential collectability of that construction loan.” (Id., ¶ 7.)
TPG also properly objects to paragraphs six and seven of the Declaration of Robert Franko such that Mr. Franko’s opinion is not considered.
As Aryabhata fails to provide admissible evidence to support that Preferred Bank will not further extend the maturity date of the Bridge Loan, and fails to provide evidence showing that it is at risk of defaulting on the Bridge Loan or will be unable to raise the $30 million required to pay off the Bridge Loan before it matures, such that it will be damaged in the amount of $17,060,000, the Court DENIES the motion to compel this amount for an undertaking.
Anticipated Lost Profits
Aryabhata requests $42,738,340 as the estimated amount of lost profits it will suffer for the inability obtain a construction loan to start and complete construction as planned.
Mr. Kluchin provides that in the first year following completion of the construction, Aryabhata estimates that the redeveloped property would have generated a net operating income of $9 million, which equates to a fair market value of $203,000,000 based on a four and a half percent capitalization rate, and that the difference between the fair market value of the Newport Crossing Property at the time the Lis Pendens was filed ($45 million) and the estimated fair market value of the property at the time of its likely termination in mid-2024 ($203,000,000) if Aryabhata had been able to obtain a construction loan and promptly proceed with its original development plans is $158,000,000. (Kluchin Decl., ¶ 5.) Mr. Kluchin states “[a]fter accounting for construction costs, Aryabhata estimates it will suffer lost profits in an amount exceeding $42,738,340.” (Ibid.)
TPG properly objects to these statements as lacking personal knowledge and lacking foundation.
Aryabhata fails to provide sufficient admissible evidence to support the estimated fair market value of Newport Crossing Property at the time of completion of construction, and to support lost profits in the amount of $42,738,340. Accordingly, the Court DENIES the motion to compel an undertaking in the amount of $42,738,340 for lost profits. this amount is not included in the undertaking.
Attorneys’ Fees As Part of Undertaking
Aryabhata requests $881,556.04 for attorneys’ fees it has incurred and anticipates it will incur to successfully defend this action.
Mr. Kluchin states that Aryabhata has already incurred more than $380,000 in attorneys’ fees in connection with this litigation and that it expects that it will be forced to incur additional attorneys’ fees and costs in an amount that exceeds $500,000 if the matter proceeds to trial. (Kluchin Decl., ¶ 10.)
Initially, the Court notes that the evidence does not support the specific amount of $881,556.04 that Aryabhata requests, and while the motion asserts that Aryabhata has incurred $381,556.04 in reasonable attorneys’ fees and costs in this action, citing to the Kluchin Declaration, the declaration does not so state.
In addition, TPG properly objects to Mr. Kluchin’s statement based on lack of personal knowledge, lack of foundation, and the secondary evidence rule.
Accordingly, the Court DENIES the motion to compel an undertaking for attorneys’ fees incurred, anticipated to be incurred.
Based on the foregoing, the Court DENIES the motion in its entirety.
Attorneys’ Fees for the Instant Motion
Aryabhata requests an order requiring TPG to pay Aryabhata no less than $8,000 as an award of reasonable costs and attorneys’ fees incurred in bringing this motion pursuant to Code of Civil Procedure section 405.38.
Aryabhata argues that should the Court grant the motion, attorneys’ fees should not be awarded since TPG has acted with “substantial justice” in opposing this motion. It also argues that should the Court deny Aryabhata’s motion, it should award TPG its attorneys’ fees in opposing the motion because this motion lacks substantial justification due to (1) the inexcusable delay in the bringing the motion, and (2) the motion is unsupported by any admissible evidence.
Code of Civil Procedure section 405.38 states:
The court shall direct that the party prevailing on any motion under this chapter be awarded the reasonable attorney's fees and costs of making or opposing the motion unless the court finds that the other party acted with substantial justification or that other circumstances make the imposition of attorney's fees and costs unjust.
(Code Civ. Proc. § 405.38.)
As the Court DENIES the motion in its entirety, the Court also DENIES Aryabhata’s request for attorneys’ fees in bringing the motion.
Although TPG argues that the Court should award it its attorneys’ fees in opposing the motion if the motion is denied, TPG does not set for any amount in the memorandum of points and authorities filed in opposition, and none of TPG’s counsel’s declarations, i.e., Declaration of Nicholas A. Dellefave (ROA 1016) and Declaration of Benjamin P. Pugh (ROA 1020), discusses hourly rates or the time spent on the opposing papers to support its request for attorneys’ fees.
As a result, the Court DENIES TPG’s request for attorneys’ fees to oppose the motion.
TPG’s Request for Judicial Notice (ROA 1024, 1026, 1028)
TPG requests that the Court judicially notice 14 documents, including those previously filed under seal for discovery motions (ROA 653, 645, 646), other filings in this action and related to this action, deeds, and documents filed with the California Secretary of State.
A court may deny a request for judicial notice on the ground that the material is not relevant to the determination of the issues. (State Compensation Ins. Fund v. ReadyLink Healthcare, Inc. (2020) 50 Cal.App.5th 422, 442-443.
The Court denies the request for judicial notice as the materials that TPG seeks to judicially notice are not relevant to the determination of the motion.
Aryabhata to give notice.