Judge: Stephen P. Pfahler, Case: 22CHCP00400, Date: 2023-03-21 Tentative Ruling

Case Number: 22CHCP00400    Hearing Date: March 21, 2023    Dept: F49

Dept. F-49

Date: 3-21-23 (a/f 4-13-23 via 1-17-23 minute order)

Case #22CHCP00400

Trial Date: Not Set

PRELIMINARY INJUNCTION/RECEIVER

MOVING PARTY: Plaintiffs, Abel Gonzalez, et al.

RESPONDING PARTY: Defendants, Pueblo Restaurants, Inc., et al.

RELIEF REQUESTED

Motion for Preliminary Injunction

Motion for Appointment of Receiver

SUMMARY OF ACTION

Plaintiffs Abel Gonzalez , Albert Gonzalez, Sr., and Albert Gonzalez, Jr. allege a 50% ownership interest in Pueblo Restaurant, Inc., as follows: Abel with 25%, Albert Sr. with 9.95%, and Albert Jr. with 15.05%. Defendant Daniel Torres owns the other 50% share. Pueblo Restaurant operates in “four properties” within the County of Los Angeles.

The parties are all identified corporate officers. Plaintiffs acknowledge that Torres is also responsible for operations management. Plaintiffs allege Torres improperly hired family members and “directed funds” towards them, unilaterally increased his salary without approval of the board, and utilized corporate revenues for personal lifestyle expenses and withdrew cash. Plaintiffs also allege that Torres excluded Plaintiffs from operations, failed to pay any returns on shares, or provide an accounting. Plaintiffs additionally allege the opening of a new restaurant and “event production company” with a third party in Bakersfield without the consent of Plaintiffs, yet using corporate funds.

On November 17, 2022, Plaintiffs filed their 177 paragraph verified complaint for Involuntary Dissolution of Corporation, Breach of Fiduciary Duty, and Accounting. Defendant Torres answered on January 9, 2023.

RULING: Granted in Part/Denied in Part.

Plaintiffs Abel Gonzalez, Albert Gonzalez, Sr., and Albert Gonzalez, Jr. move for the appointment of a receiver and preliminary injunction enjoining Torres from “interfering with the receiver and receivership” until the discharge of the receiver. Defendants in opposition challenge the assertions of Plaintiffs presented in support of the claims for imposition of a receiver and injunctive relief, and suggests a less extreme solution for resolution of the disputes.

Plaintiffs in reply reiterates the basis of the receiver and injunction on the basis of the “hundreds of thousands dollars” of missing cash from the business. Plaintiffs also hint at the possibility of embezzlement. Plaintiffs acknowledge the latest shareholder, but also maintain lack of access to corporate records, and therefore remain reticent that a receiver appointment is required to prevent further cash “bleeding.” Plaintiffs deny the effectiveness of the suggested third party accountant as a means of shoring up the business transactions and cash distributions.

Plaintiff moves for appointment of a receiver pursuant to Code of Civil Procedure section 564(b)(1) & (9). 

“In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor's claim, or between partners or others jointly owning or interested in any property or fund, 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.”

(Code Civ. Proc., § 564, subd. (b)(1).)

Code of Civil Procedure section 564 subdivision (b)(9) authorizes the appointment of a receiver “in all other cases where necessary to preserve the property or rights of any party.” Plaintiffs seek the appointment of a receiver in order to preserve any and all value in the Pueblo Restaurant, Inc. corporate entity. Plaintiffs allege the “funneling of assets and sales to other entities” endangers Plaintiffs’ 50% shareholder value.

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). 

Receivership is a provisional remedy, in which a court appoints an officer and agent of the court to take charge of and actually manage property involved in litigation, in order to preserve it for disposition in accord with the final judgment.  (Shannon v. Superior Court (1990) 217 Cal.App.3d 986.)  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). 

The motion itself consists of a statement of authority for the imposition of a receiver with the factual support coming from the declarations of two individual plaintiffs, Albert Gonzalez, Jr. and Abel Gonzalez. The declarations largely parrot the claims in the operative complaint regarding unilateral decision making by Torres without input from the 3 other shareholders, including employment of family members, denial of access to financial records, and various withdrawals and expenses not related to business operations. The declaration finds support in the significant decline in deposits to the bank account, refusal to distribute profits to shareholders, denial of shareholder meetings for a certain period of time, and evidentiary proof of checks issued to outside entities, among the exhibits.

Defendants deny any threat to the diminution of corporate assets, specifically note the harshness of the remedy created by a receivership and the financial impact to the business. In counter to the declarations of Plaintiffs, Daniel Torres maintains Plaintiffs withheld information regarding their actual awareness and involvement with the business, knowledge of finances, and access to the records. Torres specifically maintains his aunt, Rosa Torres, has been an employee of the restaurant for 35 years, and Plaintiffs have always known her. IRevEvents is a Pueblo Restaurant business for event hosting, which operates at the same location as the one of the restaurants, and also a known entity. Employee Jesus Lomeli is an employee of both Pueblo restaurants and 1RevEvents. Torres maintains he was entitled to a raise after not receiving one for years, and the loan to Buick was for an employee, and was reimbursed by the employee. Torres held a shareholder meeting on February 6, 2023. Torres also addresses the invoice payments, with an explanation for the expenses, including Plaintiffs’ awareness of said expenses. Revenues dropped during the Covid pandemic. Torres offers the hiring of a third party accountant to audit any and all books.

The reply includes a supplemental declaration of Albert Gonzalez, Jr., which shows an extensive number of months without any net cash deposit made to the Pueblo Restaurant, Inc. bank account beginning on January 20, 2020, through December 2022. Albert Gonzalez, Sr., denies approval for a number of representations made by Torres, including raises, loans, or investments into new business entities. Finally, attorney Scott Zeidman summarizes the cash withdrawals from business coffers in a response to the Torres’ declaration.

Although Plaintiffs cite to Code of Civil Procedure section 564 subdivision (b)(1) & (9), the court notes the involuntary dissolution cause of action, and therefore availability of Corporation Code section 1803, as a basis of a receiver in the most extreme scenario. “If, at the time of the filing of a complaint for involuntary dissolution or at any time thereafter, the court has reasonable grounds to believe that unless a receiver of the corporation is appointed the interests of the corporation and its shareholders will suffer pending the hearing and determination of the complaint, upon the application of the plaintiff, and after a hearing upon such notice to the corporation as the court may direct and upon the giving of security pursuant to Sections 566 and 567 of the Code of Civil Procedure, the court may appoint a receiver to take over and manage the business and affairs of the corporation and to preserve its property pending the hearing and determination of the complaint for dissolution.”

Corp. Code, § 1803

Notwithstanding the involuntary dissolution cause of action, the competing declarations seemingly imply an interest in maintaining restaurant operations rather than a total dissolution of the business. Under this presumption, appointment of a receiver for a restaurant operation of this scale facially appears as an extreme solution. “Appointment of a receiver may well result in serious injury to the name and good will of a solvent, going concern, and that if there is any other adequate remedy, which is less severe and which will protect the rights of the parties, a court should not take the drastic step of appointing a receiver.” (In re Jamison Steel Corp. (1958) 158 Cal.App.2d 27, 36.)

A review of the motions, opposition, and reply, including the competing opening quotes and declarations, at a minimum establishes a unilateral raise without board consent; acknowledgment of Irma Torres as an employee, but an accusation of unapproved payments to Irma Torres in the form of rent payments as the partial owner of at least one site; disputed approval/denial of a short term loan to the employee for a car purchase; and, a disputed account regarding approval for the operation of the event venue business. The court accepts the summary of the payments presented by Torres from January 2019 to February 15, 2022, but the statement only addresses February, August, September and November 2021 and January to February 2022, while Plaintiffs show a number of additional dates without any accounted for costs or lack of revenue though explains the cash withdrawals/cashier’s check as a form of preferred payment for certain vendors which appears undisputed. [Torres Decl., ¶¶ 26-27.] Torres also represents paid refunds for cancelled event bookings. [Torres Decl., ¶ 29.] The court acknowledges the Paycheck Protection Program loan, but the court cannot determine whether the subject amounts are part of the unaccounted expense claim or perhaps the subject of additionally transferred funds. The summary includes the disputed claim of $500,000 in back rent owed, with Irma Torres as the acknowledged 50% owner of at least one property, and therefore landlord on the lease agreement. The court assumes a mix of unilateral action by Torres, as well as a potential series of prior agreements that the parties now either deny or contend are bound by different terms. The court declines to consider the veracity of any positions or such possibilities under the circumstances of the instant motion.

While the court accepts the downturn in business during the covid emergency period, the amount of documentary discrepancy in paid amounts, lack of revenue information, and potential concerns for collusion on the lease agreement with Irma Torres, especially relative to the zero deposits periods, indicates activity in need of further examination. Under the circumstances, in considering the necessity of a receiver versus a lesser remedy, the court agrees with Plaintiffs that a simple audit of the business while perhaps uncovering where the money went, insufficiently accounts for potential future operations involving both the parties, as well as the potential involvement of Irma Torres. (City & County of San Francisco v. Daley (1993) 16 Cal.App.4th 734, 745.) The apparent deadlock of the shareholder directors and disagreements of approval over past and presumably future direction, in particular, supports the finding for the appointment of a receiver, as opposed to even simply relying on an audit under the guise of injunctive relief (see below) (In re Jamison Steel Corp., supra, 158 Cal.App.2d at pp. 36 [“‘The power of a court of equity to appoint a receiver of a corporation either because it has no properly constituted governing body, or because there are such dissensions in its governing body as to make it impossible for the corporation to carry on its business with advantage to its stockholders, appears to be settled; but it is equally well settled that this power is subject to certain limitations, namely, it must always be exercised with great caution, and only for such time and to such extent as may be necessary to preserve the property of the corporation and protect the rights and interests of its stockholders’”].) The court therefore finds a basis for appointment of receiver.

As for the injunction, however, the court finds the request vague and therefore difficult to craft an order. “[T]he general rule is that an injunction is prohibitory if it requires a person to refrain from a particular act and mandatory if it compels performance of an affirmative act that changes the position of the parties.” (Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 446.) “An injunction designed to preserve the status quo as between the parties and to restrain illegal conduct is prohibitory, not mandatory, and does not require heightened appellate scrutiny.” (Oiye v. Fox (2012) 211 Cal.App.4th 1036, 1048.) “The granting of a mandatory injunction pending trial is not permitted except in extreme cases where the right thereto is clearly established.” (Teachers Ins. & Annuity Assn. v. Furlotti (1999) 70 Cal.App.4th 1487, 1493.)

The court considers both irreparable harm and the likelihood of prevailing on the merits. (Millennium Rock Mortg., Inc. v. T.D. Service Co. (2009) 179 Cal.App.4th 804, 812.) “An evaluation of the relative harm to the parties upon the granting or denial of a preliminary injunction requires consideration of: ‘(1) the inadequacy of any other remedy; (2) the degree of irreparable injury the denial of the injunction will cause; (3) the necessity to preserve the status quo; [and] (4) the degree of adverse effect on the public interest or interests of third parties the granting of the injunction will cause.’” (Vo v. City of Garden Grove (2004) 115 Cal.App.4th 425, 435.) “‘[T]he more likely it is that plaintiffs will ultimately prevail, the less severe must be the harm that they allege will occur if the injunction does not issue .... [I]t is the mix of these factors that guides the trial court in its exercise of discretion.’” (Right Site Coalition v. Los Angeles Unified School Dist. (2008) 160 Cal.App.4th 336, 342.) “The ultimate questions on a motion for a preliminary injunction are (1) whether the plaintiff is 'likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant,’ and (2) whether there is ‘a  reasonable probability that the plaintiffs will prevail on the merits’” (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 408. Procedurally, an application for a preliminary injunction, must be based upon sufficient evidence.  (CCP §527(a); Bank of America v. Williams (1948) 89 Cal.App.2d 21, 29.)

In considering the appointment of the receivership itself, the parties may negotiate the imposition of a complete receivership, or perhaps a more limited role. The role of the receiver can be limited thereby allowing business operations from experienced personnel, instead of a complete takeover. (Gold v. Gold (2003) 114 Cal.App.4th 791, 802–803.) In considering the receivership itself, the court finds the support for the basis for a concurrent injunction in principle on the same grounds as the appointment of the receiver, but it’s not clear how Plaintiffs seek to enjoin Torres from “interfering with the receiver” or even perhaps force cooperation. The court therefore finds the injunction redundant and unnecessary, and denies this part of the motion.

The court declines to craft an injunctive order given the approval of the imposition of a receivership. Again, the receivership finds support in that the state of operations presents a threat of future business degradation and shareholder losses. A simple accounting will meet needs for a successful examination of the business, but lacks sufficient support for preserving current and future business operations.

In ordering the receiver’s bond, the court may also impose a bond requirement on the Plaintiffs. Given Plaintiffs’ undisputed interest in the business, the court finds no basis for imposition of a bond beyond the required receiver bond. (Southern California Sunbelt Developers, Inc. v. Banyan Limited Partnership (2017) 8 Cal.App.5th 910, 928-929.)

As for the receiver’s bond, the applicant is responsible for submitting a proposed amount covering cash and personal property coming into the possession of the receiver. (Code Civ. Proc. 567; Cal. Rules of Court, rule 3.1178.) The motion lacks support for any requested amount. The court therefore orders Plaintiffs to present amount, but Defendant may also submit argument challenging the bond amount.

Plaintiffs are ordered to also submit an appointment order to the court. (Code Civ. Proc., § 568, Cal. Rules of Court, rule 3.1179.) The receiver may not appoint counsel without approval of the court. (Cal. Rules of Court, rule 3.1180.)

The order appointing the receiver is immediately appealable. (Code Civ. Proc., § 904.1 subd. (a)(7).)

Motion to Quash scheduled for June 12, 2023.

Plaintiffs to give notice.