Project No 33 LLC vs Fiore Management Inc et al

Case Number

23CV03719

Case Type

Hearing Date / Time

Fri, 05/17/2024 - 10:00

Nature of Proceedings

CMC; Motion for Order Confirming Transfer of Intellectual Property Assets

Tentative Ruling

For all reasons discussed herein, the motion of receiver Ryan C. Baker for an order authorizing, approving, and confirming the transfer of the intellectual property assets of defendant Light Effect Apparel, LLC, is granted.

Background: 

This action was commenced with the filing of a verified complaint on August 25, 2023, by plaintiff Project No. 33 LLC, against defendants Fiore Management Inc. (Fiore) and Light Effect Apparel (Light Effect), which is alleged to be a wholly owned subsidiary of Fiore created solely for the purpose of holding the intellectual property rights associated with Fiore’s “Canndescent” brand of cannabis products. (See Compl., ¶¶ 10-11.) As alleged in the complaint:

On February 21, 2023, plaintiff, Fiore, and Light Effect entered into a promissory note under which plaintiff agreed to provide a loan in the amount of up to $1 million, plus 10 percent interest, with the outstanding amount to be repaid either within 15 days of plaintiff’s demand, upon the occurrence of an “Event of Default” as defined in the promissory note, or by February 21, 2025. (Compl., ¶¶ 13-14 & Exh. 1.) In exchange, Fiore and Light Effect (collectively, defendants) agreed to, among other things, pledge certain collateral to secure their obligations to plaintiff which includes a first priority, senior security interest in the intellectual property rights of Light Effect. (Id. at ¶ 15.)

Between March 14 and June 15, 2023, plaintiff wired the total of $975,985.62 to Fiore pursuant to the terms of the promissory note, and on June 15, 2023, plaintiff filed a UCC-1 financing statement with the Wyoming Secretary of State. (Compl., ¶¶ 16-17 & Exh. 2.)

On July 20, 2023, the managing member of plaintiff attended a meeting of defendants’ board of directors during which the President and CEO of Fiore concluded that Fiore was insolvent. (Compl., ¶¶ 3, 18.) The insolvency of Fiore constitutes an “Event of Default” under the promissory note entitling plaintiff to immediate payment of the outstanding principal balance of the promissory note plus costs. (Id. at ¶¶ 4, 19-20.) Plaintiff asserts that it holds a significant portion of the secured and unsecured debt that comprises Fiore’s long-term liabilities which currently exceed $8 million including the promissory note. (Id. at ¶ 2.) Because Fiore is insolvent or in immediate danger of insolvency, plaintiff is entitled to the appointment of a receiver under Code of Civil Procedure section 564, to which Fiore and other significant secured creditors have agreed. (Id. at ¶ 6.)

The complaint alleges three causes of action: (1) breach of contract (against Fiore and Light Effect); (2) appointment of receiver (against Fiore); and (3) claim and delivery (against Light Effect).

On August 31, 2023, plaintiff filed an unopposed ex parte application for an order appointing a general equity receiver under Code of Civil Procedure section 564, asserting that Fiore has consented and stipulated to the appointment of a receiver. On September 1, 2023, a joint stipulation for the appointment and nomination of Ryan C. Baker (the joint appointment stipulation) was filed with the court by plaintiff.

On September 5, 2023, the court entered an order approving and granting the joint appointment stipulation, appointing Ryan C. Baker (Baker) as a general equity receiver over the operations and assets of Fiore subject to conditions, and setting forth the duties, powers, and responsibilities of the receiver and the obligations of Fiore as well as the compensation which Baker is authorized to receive (the Appointment Order). Having received no objections, on September 18, 2023, the court entered an order confirming the appointment of Baker, the posting by Baker of a security bond, the filing of the oath required under Code of Civil Procedure section 566, subdivision (a), and modifying the Appointment Order to require court approval for Baker to sell receivership assets in excess of $150,000. On the same date, the court entered a separate order authorizing Baker to employ counsel of record effective September 5, 2023.

On February 23, 2024, Baker filed a motion for an order: (1) authorizing Baker to sell, transfer, assign, convey, and deliver (collectively, transfer) to plaintiff via Fiore all of Light Effect’s intellectual property assets which consist of trademarks (the IP assets), subject to the terms and conditions set forth in an “Intellectual Property Rights Purchase and Transfer Agreement” (the IP Agreement); (2) authorizing Baker to enter into the IP Agreement on behalf of Fiore as the sole shareholder of Light Effect; (3) authorizing Baker to execute any necessary documentation to consummate the transfer whether on behalf of the receivership estate, Fiore, or Light Effect; (4) permitting Baker and plaintiff to modify, amend, or supplement the IP Agreement and related documentation if signed by both parties without further order of the court; and (5) authorizing Baker to windup the affairs of Light Effect and to wind down Light Effect.

In the declaration submitted by Baker in support of the present motion, Baker states that, following his appointment as receiver, he learned that the only assets held by Light Effect are the IP assets that are the subject of the present motion, and that Light Effect has no function other than holding the IP assets. (Baker Decl., ¶ 4.) Baker also determined that selling the IP assets as part of an overall sale of the assets of Fiore would not generate any meaningful value. (Ibid.)

Baker also investigated selling the IP assets separately. (Baker Decl., ¶ 4.) Based on his experience selling intellectual property and his contacts, Baker believes that the IP assets are of limited value and would yield less than $500,000. (Ibid.) As a result, any proceeds realized from a sale of the IP assets would go to plaintiff and the receivership would incur administrative expenses from the sale process. (Ibid.) For this reason, Baker views the IP assets as a liability and therefore turned to plaintiff to pay for ongoing fees to keep the IP assets active (which would have otherwise drained resources that could go to creditors and stakeholders) in order to preserve the resources of the receivership. (Ibid.)

During his efforts to maximize the value of the IP assets by reducing the debt owed by Fiore to plaintiff, Baker learned that plaintiff also claims that it is owed over $500,000 in additional unsecured debt. (Baker Decl., ¶ 5 & Exh. 1, Schedule 1.) Baker was able to negotiate the elimination of the debt owed by Fiore to plaintiff, with the exception of the amount of $50,000.00 which will constitute an unsecured claim once plaintiff takes the IP assets. (Id. at ¶ 5.) Baker declares that, without the court’s approval of the IP Agreement, the receivership will carry the burden of keeping the IP assets active to the detriment of Fiore’s creditors and stakeholders. (Ibid.)

Plaintiff has filed a notice of joinder in the motion of Baker. No opposition or other response to the motion has been filed by any other person or entity.

Analysis:

A “receiver’s functions and powers are controlled by statute, by the order appointing him, and by the court’s subsequent orders. [Citations.] Code of Civil Procedure sections 568 and 568.5 authorize the receiver to perform such acts respecting the property as the court may authorize, including the sale of real and personal property upon notice and subject to court confirmation. [¶] Judicial confirmation of a receiver’s sale rests upon the appointing court’s sound discretion exercised in view of all the surrounding facts and circumstances and in the interest of fairness, justice and the rights of the respective parties. [Citation.] The proper exercise of discretion requires the court to consider all material facts and evidence and to apply legal principles essential to an informed, intelligent, and just decision.” (Cal-American Income Property Fund VII v. Brown Development Corp. (1982) 138 Cal.App.3d 268, 273–274, footnotes omitted; see also Code Civ. Proc., §§ 568 & 568.5 [setting forth the receiver’s powers].) “It is well settled that a trial court has broad discretion in its directions and approvals given to a receiver in respect to management of the property.” (Hillman v. Stults (1968) 263 Cal.App.2d 848, 876.)

In support of the motion, Baker requests judicial notice of the verified complaint filed in this matter by plaintiff and of the Appointment Order. (RFJN, ¶¶ 1-2 & Exhs. 1 & 2.) Though not necessary, the court will grant the request of Baker for judicial notice of these documents. (Evid. Code, § 452, subd. (d)(1).)

Under Code of Civil Procedure sections 568 and 568.5 and the Appointment Order, Baker is empowered to sell or transfer the IP Assets which are comprised of the intellectual property of a wholly owned subsidiary of Fiore. Available information indicates that the maintenance of the IP assets, which are of limited value, will cause the receivership to incur expenses to the detriment of other stakeholders and creditors. The proposed transfer of the IP assets to plaintiff will result in the elimination of the secured debt owed to plaintiff in this matter and thereby reduce the liability that plaintiff seeks to impose on the receivership. There is no information to indicate that a higher price for the IP assets could be obtained through a third party sale. Moreover, it appears that any proceeds from a third party sale of the IP assets would be claimed by and deliverable to plaintiff thus providing no benefit to other creditors. For this reason, the available information also indicates that Baker has realized the largest amount possible for the IP assets.

There is no information to demonstrate that any other party apart from plaintiff has asserted an interest in the IP assets. Though the court notes that on February 28, 2024, after the present motion was filed, claimant and creditor Daman and Associates, LLP (Daman), filed a notice of appearance in this matter. (see Feb. 28, 2024, Notice, fn. 1.), Daman is included in the service list attached to the proof of service of the present motion. The court has no record of the filing of any opposition to the present motion.

Based upon the court’s review of the evidence and information offered by Baker in the present motion and in consideration of the arguments presented and the status of this action, it appears to the court that the transfer of the IP assets to plaintiff would improve the position of the receivership and other creditors, stakeholders, and parties to this matter. Therefore, and for all reasons discussed above, in the interests of fairness, justice, and the rights of the respective parties, the court will grant the present motion, authorize Baker to enter into the IP Agreement on behalf of Fiore, authorize and approve the transfer of the IP assets to plaintiff, and enter the order as requested in the motion. The court has reviewed the proposed order submitted by Baker and intends to sign it.