Judge Stephen I. Goorvitch, Case Number: 23STCV08125, Date: 2024-07-26 Tentative Ruling

Judge: Stephen I. Goorvitch, Case: 23STCV08125, Date: 2024-07-26 Tentative Ruling

Proposed Intervening Defendant Nonghyup Bank, as Trustee of Meritz Private Real Estate Fund 27, c/o Meritz Alternative Investment Management (“Meritz” or the “Proposed Intervenor”) seeks leave to intervene in this action as a defendant. Meritz moves for mandatory intervention pursuant to Code of Civil Procedure section 387(d)(1)(B), or, in the alternative, permissive intervention pursuant to section 387(d)(2). Plaintiff Wilmington Trust National Association, as Trustee on behalf of the Holders of GCT Commercial Mortgage Trust 2021-GCT, Commercial Mortgage Passthrough Certificates, Series 2021-GCT (“Plaintiff”) opposes the motion.

This action arises from the $465 million debt financing of properties known as the “Gas Company Tower” and “World Trade Center Parking Garage” located at 555 W. Fifth Street and 350 S. Figueroa Street in Los Angeles, CA (the “property”). The $465 million loan facility for the property was split into three tranches: (1) the $350 million senior mortgage loan; (2) a $65 million Mezzanine A loan; and (3) a $50 million Mezzanine B loan. Only the senior loan is secured by a deed of trust on the property. Plaintiff, as assignee of the senior lender, seeks specific performance of the rents, issues, and profits clause of the deed of trust securing the $350 million senior loan for the Property. A receiver has been appointed to manage the property, collect rents, and market the property for sale. Meritz, an assignee of a mezzanine lender and potential bidder, now contends that it has a direct interest in the property and the outcome of this action. The court concludes that Meritz’s asserted interest is, at most, indirect and consequential. Accordingly, the motion is denied.

On or about February 5, 2021, Citi Real Estate Funding Inc. and Morgan Stanley Bank, N.A. (the “Original Senior Lenders”) originated a $350 million mortgage loan (“Senior Loan”), which was securitized into a commercial mortgage-backed security (“CMBS”) facility that is currently administered by Plaintiff. The Senior Loan is secured by a deed of trust that encumbers the Property. (Allegrette Decl. ¶¶ 2-5, Exh. 1.)

Simultaneously with origination of the Senior Loan, Citigroup Global Markets Realty Corp. and Morgan Stanley Mortgage Capital Holdings LLC (“Original Mezz A Lenders”) originated a $65 million Mezzanine A loan, as evidenced by, among other documents, a Mezzanine A Loan Agreement (“Mezz A Loan”). Meritz submits evidence that it acquired ownership of the Mezz A Loan on or about March 4, 2021, having purchased the loan from the Original Mezz A Lenders. (Id. ¶¶ 3, 9, Exh. 5-1 and 5-2.) According to Meritz’s principal and co-founder, Russ Allegrette, the Mezz A Loan is secured by a pledge of 100% membership interests in the owners of the Property, Defendants Maguire Properties – 350 S. Figueroa, LLC, and Maguire Properties – 555 W. Fifth, LLC. (Id. ¶¶ 3, 9; see also Suppl. Allegrette Decl. ¶ 2.) As stated succinctly by Plaintiff, Meritz holds only “a pledge of membership interests in the Defendant property owners.” (Amended and Replacement Memorandum in Opposition to Application to Intervene [“Oppo.”] 10:28.)[1]

On April 12, 2023, Plaintiff filed its verified complaint seeking specific performance of the terms and provisions of the deed of trust and appointment of a receiver. On April 19, 2023, the court (Beckloff, J.) appointed Gregg Williams as receiver (the “receiver”) to manage and market the property, collect rents, and review and evaluate offers from third parties with respect to the sale of the property. On May 24, 2023, the court entered an order confirming the appointment.

Meritz has expressed interest in bidding on the property and contacted the receiver directly in March 2024 seeking a tour of the Property. (Receiver Decl. ¶¶ 3-6.) In March 2024, Meritz, as a non-party, filed an opposition to the receiver’s ex parte application for authorization to enter a lease with the City of Los Angeles for certain premises in the property. The receiver later withdrew that motion.

On May 3, 2024, the receiver filed an ex parte application for approval of an exclusive listing agreement in order to sell the property. Meritz filed an opposition. The court granted the ex parte application. (See court’s minute order, dated May 13, 2024.)

Under Code of Civil Procedure section 387(d)(1)(B), a non-party may intervene as a matter of right if that non-party “claims an interest relating to the property or transaction that is the subject of the action and that person is so situated that the disposition of the action may impair or impede that person's ability to protect that interest, unless that person's interest is adequately represented by one or more of the existing parties.” The moving party must make a timely application and submit a proposed pleading. (See Code Civ. Proc. § 387(c) and (d)(1).) “Section 387 should be liberally construed in favor of intervention.” (Simpson Redwood Co. v. State of California (1987) 196 Cal.App.3d 1192, 1200.)

Under Code of Civil Procedure section 387, “the trial court has discretion to permit a nonparty to intervene where the following factors are met: (1) the proper procedures have been followed; (2) the nonparty has a direct and immediate interest in the action; (3) the intervention will not enlarge the issues in the litigation; and (4) the reasons for the intervention outweigh any opposition by the parties presently in the action.” (Siena Court Homeowners Ass'n, supra, 164 Cal.App.4th at 1428.)

For mandatory intervention, Meritz must show that the “interest relating to the property or transaction which is the subject of the action … is a significantly protectable interest.” (Siena Court Homeowners Ass’n v. Green Valley Corp. (2008) 164 Cal.App.4th 1416, 1423-1424.) “To demonstrate a significant protectable interest, an applicant must establish that the interest is protectable under some law and that there is a relationship between the legally protected interest and the claims at issue.” (Citizens for Balanced Use v. Mont. Wilderness Ass’n (9th Cir. 2011) 647 F.3d 893, 897.)

Meritz argues that it should be granted mandatory intervention “given [its] position as the mezzanine lender, its interests in the Property, the subject matter of this action, and the outcome of this action.” (Application to Intervene (“Appl.”) 13:7-9.) The court disagrees.

Meritz does not claim an interest in the property that is the subject of this action. The complaint includes a single cause of action for specific performance of the deed of trust that secures the Property. (Compl. ¶¶ 16-24.) Only the Senior Loan is secured by the deed of trust on the Property. The Mezz A Loan, which was assigned to Meritz, does not hold a security interest in the Property. (See Allegrette Decl. ¶¶ 2-11, Exh. 1-5.) This is clear from the Intercreditor Agreement (“ICA”), in which Meritz’s predecessor acknowledged that the Mezz A Loan “does not constitute or impose … a lien or encumbrance upon, or security interest in any portion of the Premises or any other collateral securing the Senior Loan or any assets of Borrower….” (Id. Exh. 6 at p. 27, ¶ 2(a).)

Nor does Meritz claim an interest in the transaction that is the subject of this action. In the complaint, Plaintiff alleges that the borrower has defaulted on the Senior Loan by failing to make payments due and that Plaintiff is entitled to specific performance of terms and conditions of the deed of trust, which encumbers the Property. (Compl. ¶¶ 16-24.) The claim does not involve any default on the Mezz A Loan or any contractual dispute related to the Mezz A Loan, the ICA, or the interrelationship between the senior and mezzanine lenders. (See generally California Physicians’ Service v. Superior Court (1980) 102 Cal.App.3d 91, 96 [health insurer’s contract claim was not the “transaction” at issue in the subscriber’s tort action].)

Meritz suggests that it has an interest in the property or transaction at issue in the complaint because “Mezz A Borrower pledged one hundred percent (100%) of its membership interests in the Defendants to Original Mezz A Lenders to secure the Mezz A Loan.” (Appl. 5:19-20.) As phrased in the reply, Meritz contends that if it were “to exercise remedies as contemplated under the Pledge Agreement, Meritz would own and control the Receivership Defendants.” (Reply 3:19-21.) This argument is not persuasive. If Meritz exercised its purported remedies, it would own and control the receivership defendants and therefore would not need to intervene. Rather, Meritz seeks to intervene on its own behalf as a mezzanine lender. Further, Meritz concedes that “there is an event of ‘default’ under the Senior Loan and that Defendants would not have access to such sums to make payments to Mezz A Lender.” (Appl. 4:21-23.) Meritz does not present any evidence suggesting that, if it exercised rights to assume membership interests in the Defendants, it would have any greater interest in the Property than it does now as a mezzanine lender. Under such circumstances, Meritz does not show that a lien on membership interests of the Defendants confers a protectable interest in the Property or in the transaction at issue in the complaint. (See Corp. Code § 17701.04(a) [“A limited liability company is an entity distinct from its members.”]; § 17703.04(a) [debts, obligations, and liabilities of an LLC “do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager”].)

Citing various provisions of the loan documents, Meritz contends that the action could indirectly impact its interests as a mezzanine lender. (See Appl. 4-10.) As an example, Meritz states that “the Senior Loan Agreement also makes extensive reference to the existence of the Mezzanine A Loan and Mezzanine B Loan, including: (i) stating in Section 1.1 that ‘the lien and security interests created by each Mezzanine Loan Agreement, the Other Mezzanine Loan Documents and any loan documents entered into with respect to a Replacement Mezzanine Loan’ are ‘Permitted Encumbrances’ on the Property.” (Appl. 4:3-7.) Meritz cites section 8.5 of the Senior Loan Agreement, which pertains to the remittance of debt service payments under the Mezz A Loan from Property cash flow. (Appl. 4:12-16.) As Meritz concedes, these provisions are conditioned “so long as no Event of Default had occurred.” (Appl. 4:10.) Later, Meritz cites to provisions of the ICA that, according to Meritz, authorize payments to mezzanine lenders “following repayment of the Senior Loan.” (Appl. 7:23.) Since it is undisputed that an event of default has occurred and the Senior Loan has not been repaid, Meritz’s interest in excess proceeds is indirect and consequential. (See Continental Vinyl Products Corp. v. Mead Corp. (1972) 27 Cal.App.3d 543, 550 [“an unsecured creditor of a defendant who will be rendered unable to pay the debt if he loses a lawsuit is held to have only a consequential interest not justifying intervention in the litigation”]; see also Id. at 553 [“a shareholder has a consequential but not direct interest in the outcome of litigation involving the corporation”].)

Meritz also asserts that “the ICA reflects additional agreements between the Original Senior Lender and the Mezzanine Lenders in respect of matters such as removal and replacement of the property manager for the Properties, budget approval and requests for disbursement of sums held in reserve.” (Appl. 7:25-28, citing Allegrette Decl. ¶ 14.) Relatedly, Meritz asserts that section 15(a) of the ICA requires “written consent” of the mezzanine lenders in certain circumstances. (Appl. 8.) Meritz’s briefs and the Allegrette declarations do not analyze the specific contract terms upon which Meritz relies or explain how they are relevant to this action, including the court’s appointment of a receiver. Accordingly, the arguments are forfeited for purposes of this application. (Nelson v. Avondale HOA (2009) 172 Cal.App.4th 857, 862-863 [“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”].) Moreover, in its proposed answer, Meritz does not allege any defense based on breach of the ICA or other loan document. This action concerns Defendants’ default and the specific performance of the deed of trust, and Meritz does not show that any contract dispute related to the ICA is directly at issue in this action.

The court has considered Meritz’s remaining contentions, including about “the complexity of the capital stack utilized in this transaction by the Original Senior Lenders.” (See Appl. 2:7-8.) None convinces the court that Meritz “claims an interest relating to the property or transaction that is the subject of the action.” (Code Civ. Proc. § 387(d)(1)(B).) Accordingly, Meritz is not entitled to mandatory intervention.

The court also concludes that Meritz’s interests as a mezzanine lender, including its interests in any excess proceeds from the Property, are adequately represented by the court’s appointment of a receiver and the court’s review and approval of any offer to purchase the property. “A receiver is an agent and officer of the court, and is under the control and supervision of the court…. The receiver is also a fiduciary who must act for the benefit of all parties interested in the property.” (City of Chula Vista v. Gutierrez (2012) 207 Cal.App.4th 681, 685.) Meritz does not argue or present evidence that the Receiver has acted in bad faith or has taken any actions inconsistent with an intention to maximize the value of the Property. Nor does Meritz develop any argument that Plaintiff, acting for the Senior Lender, has acted in bad faith or taken actions inconsistent with maximizing the value of the Property. (See Continental Vinyl Products Corp. v. Mead Corp. (1972) 27 Cal.App.3d 543, 553 [denying major shareholder’s request to intervene because there was “no allegation of bad faith on the part of the trustee or implication that he intends to abandon prosecution of the litigation to the fullest extent possible”].) Finally, the receiver has given Meritz notice of the ex parte applications he has filed in this action; Meritz does not claim a lack of notice of any proceeding; and the court has considered Meritz’s oppositions to applications filed by the Receiver. (See Receiver’s Statement 2; see also Cal. Rules of Court, Rule 3.1184(c) [notice for receiver’s final report].) Therefore, Meritz’s motion for mandatory intervention is denied.

The court denies permissive intervention for several reasons. As discussed, Meritz does not have a direct and immediate interest in this action. Moreover, intervention will greatly enlarge the issues in the litigation. Finally, the purported reasons for intervention do not outweigh the opposing parties’ concerns. Indeed, the court has genuine concerns that Meritz is pursuing intervention merely to obtain a strategic advantage in purchasing the building. Previously, Meritz opposed the receiver’s efforts to retain a broker to market and sell the property. Some of Meritz’s arguments were factually incorrect. For example:

Counsel for the Bank argued that the listing agreement favors a sale to the City of Los Angeles. To the contrary, the listing agreement caps the commission for a sale to the City of Los Angeles and provides the same or higher commissions for a sale to purchasers other than the City or County of Los Angeles. Regardless, the court will review and approve any sale, which will include a review of all credible offers, so the listing agent cannot sell the property to the City of Los Angeles if there is a better offer.

(Court’s Minute Order, dated May 13, 2024, at 2.) More important, Meritz had no valid reason to oppose retention of a real estate broker to list the property for sale. (See ibid.) Meritz’s opposition appears to have been nothing more than an attempt to delay the real estate listing to a time when there would be fewer prospective buyers and more comparable buildings, which would benefit Meritz’s efforts to purchase the building:

At the hearing, counsel for Nonghyup expressed concern that the Receiver is seeking appointment of a receiver on an ex parte basis and seeks to list the property in mid-June. The court finds no basis to delay appointment of a listing agent, as counsel for Nonghyup raises no valid objections to the listing agreement. Nor did counsel raise any concerns that suggest the court would benefit from further briefing. To the contrary, the court finds good cause to handle this matter on an expedited basis: (1) There are “identified potential buyers for the Property that may not be available three months from now,” including both the City and County of Los Angeles; (2) Any “delay works against the market’s perceived value of the Property;” (3) “Spring is the ideal time to list a commercial real estate investment property in Southern California;” and (4) It is prudent to sell the property before the uncertainty of the election. (See Declaration of Jeffrey Bramson, ¶¶ 16-21.) The court also relies on the representation of Gregg Williams that he is aware of four comparable properties in receivership that will be marketed later this year, which may make it difficult to sell the property, i.e., based upon the competition, especially given the declining market for office real estate.

(Ibid.) The receiver—who is a neutral party in this dispute—raises a legitimate concern that Meritz will use intervention to obstruct any actions by the receiver that are inconsistent with Meritz’s interests as a bidder on the property. Meritz previously did so in attempting to delay the receiver’s efforts to list the building for sale. Simply, Meritz has a conflict of interest. Meritz cannot seek intervention to protect its alleged security interest while seeking to purchase the building. Such an outcome would permit Meritz to attempt to sabotage any effort to sell the property to a purchaser other than Meritz. Therefore, the motion for permissive intervention is denied.

Based upon the foregoing, the Proposed Intervenor’s motion is denied. Counsel for the receiver shall provide notice and file proof of service with the court.

[1] A $50 million Mezzanine B loan (“Mezz B Loan”) was also originated as part of the debt facility related to the Property. In its motion, Meritz has not claimed an interest in the Mezz B Loan. (See Allegrette Decl. and Suppl. Allegrette Decl. generally.)