Project No 33 LLC vs Fiore Management Inc et al

Case Number

23CV03719

Case Type

Hearing Date / Time

Fri, 01/17/2025 - 10:00

Nature of Proceedings

CMC; Motion: Order

Tentative Ruling

For all reasons discussed herein, the motion of receiver Ryan C. Baker for an order modifying the Court’s September 5, 2023, Order is granted.

Background: 

On August 25, 2023, plaintiff Project No. 33 LLC, filed a verified complaint against defendants Fiore Management Inc. (Fiore) and Light Effect Apparel (Light Effect), which plaintiff alleges is a wholly owned subsidiary of Fiore created solely for the purpose of holding 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 (the 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 included 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 a 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, plaintiff’s managing member attended a meeting of defendants’ board of directors during which the president and chief executive officer 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 holds a significant portion of the secured and unsecured debt that comprises Fiore’s long-term liabilities which currently exceed $8 million and which include the promissory note. (FAC, ¶ 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 stipulated to the appointment. On September 1, 2023, plaintiff filed with the Court a joint stipulation (the appointment stipulation) for the appointment and nomination of Ryan C. Baker (Baker) as a general equity receiver, which is executed by counsel for the parties.

On September 5, 2023, the Court entered an order (the September 5 Order) approving and granting the appointment stipulation, appointing Baker as a general equity receiver over the operations and assets of Fiore (the receivership estate), subject to conditions, and setting forth the duties, powers, and responsibilities of Baker and the obligations of Fiore as well as the compensation which Baker is authorized to receive.

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 September 5 Order to require the Court’s approval for the sale of assets in receivership and in excess of $150,000 as requested by the parties. On the same date, the Court separately entered an order authorizing Baker to employ counsel of record.

The motion of Jason Welsh for leave to intervene:

On August 23, 2024, Jason Welsh (Welsh) filed in this action a motion (the motion to intervene) for leave to intervene under Code of Civil Procedure section 387. Attached to the motion to intervene as exhibit 2 is a copy of the complaint in intervention which Welsh proposed to file in this action.

In the motion to intervene, Welsh asserted that a judicially supervised settlement (the settlement) was entered into by the parties in Santa Barbara Superior Court case no. 22CV00597 entitled Jason Welsh v Fiore Management Inc. (the Welsh Action). Welsh contends that pursuant to the settlement, the parties agreed: (1) that Fiore owes Welsh the sum of $216,497 (the settlement sum); (2) that Welsh is entitled to judgment in the amount of the settlement sum; (3) that the parties disagree as to whether Welsh must file a creditor’s claim for the settlement sum or whether the settlement sum should be paid immediately upon entry of judgment; (4) that Welsh shall intervene in the present action and file a motion requesting that the Court issue an order instructing Baker to place the settlement sum in an escrow account and determine whether Welsh must file a creditor’s claim; (5) that Baker does not contest the amount of the judgment but may oppose the request of Welsh to be paid without filing a creditor’s claim; and (6) that Welsh agrees not to take any additional action that would encumber the assets of Fiore or to otherwise enforce the judgment. (Motion, Exh. 1.)

In his response to the motion to intervene, Baker did not oppose or object to the filing the proposed complaint in intervention by Welsh, but asserted a right to dispute or contest facts alleged in or relief prayed for in the complaint in intervention to the extent these facts or relief are not memorialized in the terms of the settlement.

Apart from Welsh, no other party filed an opposition or other response to the motion to intervene.

The September 16, 2024, motions of Baker:

On September 16, 2024, Baker filed an unopposed motion (the approval motion) for an order approving the rejection of leases of non-residential real properties located at 1237 S. Gene Autry Trail in Desert Hot Springs, California, 3000 S. Robertson Blvd., Suite 245, in Los Angeles, California, and 13310 Little Morongo Road, Bldg. 2, Suite A, in Desert Hot Springs, California (collectively, the subject properties), the abandonment of any personal property remaining at the subject properties, and the rejection of an equipment lease with Raymond Handling Concepts Corp. dba Raymond Leasing Corporation.

Also on September 16, 2024, Baker separately filed a motion (the modification motion) for an order modifying September 5 Order to include a preliminary injunction precluding the commencement, prosecution, or enforcement of any action against Fiore with respect to property of the receivership estate absent the approval of the Court, among other things.

In support of the modification motion, Baker asserts that the September 5 Order establishes a procedure for creditors of the receivership estate to assert claims and requires that Baker notify all potential claimants to submit completed claim forms which will be reviewed and either accepted or rejected by Baker. (Baker Decl., ¶ 6; Sept. 5 Order, ¶ 6(a)-(d).) To the extent a claim is rejected, the September 5 Order authorizes the claimant to challenge that rejection in court. (Baker Decl., ¶ 6; Sept. 5 Order, ¶ 6(d) [requiring Baker to scheduling a hearing on 15 days’ notice to resolve any disputed claims].) Once all claims submitted by creditors of the receivership estate have been resolved, Baker states that he will seek approval of a plan for distribution of the assets of the receivership in accordance with the September 5 Order. (Baker Decl., ¶ 6; Sept. 6 Order, ¶ 6(e).)

Baker asserts that the claims procedure set forth in the September 5 Order and described above will assist Baker to determine the validity of potential claims and manage the total assets and liabilities of the receivership estate, and will ensure that legitimate creditors obtain a proportionate share of assets upon distribution. (Baker Decl., ¶ 8.)

Baker further contends that creditors of the receivership estate have indicated that they do not intend to follow the plan for distribution set forth in the September 5 Order. (Baker Decl., ¶ 8.) Specifically, Baker contends that Welsh has stated that, upon entry of a stipulated judgment in the Welsh Action, Welsh will take all steps necessary to satisfy that judgment, including by levying on the assets of the receivership estate. (Ibid.) Baker asserts that if Welsh or other creditors are permitted to execute or levy on assets of the receivership estate, Baker’s ability to operate and manage the receivership estate will be hampered, and legitimate creditors will not receive their proportionate share of assets. (Ibid.)

As an example, Baker states that as of July 1, 2024, the cash on hand of the receivership estate totaled $44,041.24. (Baker Decl., ¶ 9.) Pursuant to an agreement reached with Southern California Edison (SCE), the receivership estate is paying to SCE monthly installments of $22,035 in repayment of unpaid sums due to SCE from Fiore. (Ibid.) Baker asserts that if Welsh or any other creditor levies receivership assets, the receivership will not have sufficient cash to pay SCE or other normal operating expenses, which could result in, among other things, power loss at locations where operations are being conducted. (Ibid.)

For all reasons described above and in the Baker declaration, Baker argues, the creditors of the receivership estate should be enjoined from taking any action which would detrimentally affect Baker’s ability to manage and protect its assets for distribution to legitimate creditors. (Baker Decl., ¶ 10.)

Baker also submits the declaration of his counsel, Michael J. Gomez (Gomez), who declares that Welsh filed the Welsh Action before the appointment of Baker as receiver in this action, and that Welsh alleges he is owed certain sums from Fiore. (Gomez Decl., ¶ 3.) Baker made the decision to settle with Welsh rather than continue with the Welsh Action. (Id. at ¶ 3.)

Gomez further asserts that he is in the process of memorializing a stipulated judgment with Welsh’s counsel, the terms of which were placed on the record in the Welsh Action. (Gomez Decl., ¶ 3.) Though Gomez anticipated that Welsh would follow the claims procedure set forth in paragraph 6 of the September 5 Order once a stipulated judgment was entered in the Welsh Action, counsel for Welsh has advised Gomez that Welsh intends to execute on assets of the receivership to satisfy that judgment. (Id. at ¶¶ 3-4 & Exh. 1 [email from Welsh’s counsel].) Gomez also contends that, while Baker has been successful in keeping certain creditors “at bay” by informally discussing their claims and the September 5 Order, other claimants may also try to seize assets of the receivership in the future or refuse to follow the claims process set forth in the September 5 Order. (Id. at ¶ 5.) According to Gomez, at least one party has refused to turn over assets to Baker. (Ibid.)

The December 6, 2024, Minute Order and the Welsh complaint in intervention:

On December 6, 2024, the Court entered a Minute Order (the Minute Order) granting the approval motion and the motion to intervene. The Court ordered Welsh to, on or before December 13, 2024, separately file the complaint in intervention attached as exhibit 2 to the motion to intervene, and to serve notice of the Court’s ruling and the filing of the complaint in intervention by Welsh.

Pursuant to the Minute Order, the Court continued the hearing on the modification motion to provide Welsh an opportunity to respond to that motion upon the filing by Welsh of the complaint in intervention. The Court ordered Welsh to, on or before January 6, 2024, file and serve any response to the modification motion.

On December 13, 2024, Welsh filed and ostensibly served the complaint in intervention.

Joinder and opposition to the modification motion:

On December 23, 2024, claimant and creditor Daman and Associates, LLP (Daman) filed a joinder in the modification motion.

On January 8, 2025, Welsh filed an opposition and amended opposition to the modification motion.

Apart from the joinder and opposition described above, the Court has no record of any other party having filed an opposition or other response to the modification motion.

Analysis:

To determine the modification motion, the Court finds it useful to provide a brief discussion of legal authority relevant to the issues presented and the procedural history of this action as it relates to the appointment of Baker as receiver.

The appointment of a receiver is a provisional remedy designed to “preserve[] the status quo of property while litigation is pending.” (Southern California Sunbelt Developers, Inc. v. Banyan Limited Partnership (2017) 8 Cal.App.5th 910, 925.) Statutory authorization for the appointment of a receiver in a pending action or proceeding appears in Code of Civil Procedure section 564, subdivision (b), which provides that the court may appoint a receiver under circumstances where, among other things, a creditor brings an action to subject property to the creditor’s claim; a plaintiff with a probable interest in or right to property or proceeds of property shows that the property is “in danger of being lost, removed, or materially injured”; a corporation is “is insolvent, or in imminent danger of insolvency”; and in “all other cases where necessary to preserve the property or rights of any party.” (Code Civ. Proc., § 564, subd. (b)(1), (5) & (9); Marsch v. Williams (1994) 23 Cal.App.4th 238, 245-246; see also Turner v. Superior Court (1977) 72 Cal.App.3d 804, 811 [the “requirements of Code of Civil Procedure section 564 are jurisdictional”].) (Note: Undesignated code references herein shall be to the Code of Civil Procedure unless otherwise noted.)

“The function of the receiver is to aid the court in preserving and managing the property involved in a particular lawsuit for the benefit of those to whom it can ultimately be determined to belong.” (City of Sierra Madre v. SunTrust Mortgage, Inc. (2019) 32 Cal.App.5th 648, 656-657.) As an agent of the Court pursuant to the September 5 Order, Baker is required, among other things, to act “for the benefit of all who may have an interest in the receivership property”, and to hold assets “for the court and not for the plaintiff or the defendant.” (Cal. Rules of Court, rule 3.1179(a)(2) & (3).)

Section 568 sets forth the powers of a receiver which include “under the control of the Court … such acts respecting the property as the Court may authorize.” (Code Civ. Proc., § 568; see also Hillman v. Stults (1968) 263 Cal.App.2d 848, 876 [“[i]t 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”].) The September 5 Order enumerates the powers, duties, and responsibilities of Baker under the circumstances present here. Relevant here, the terms of the September 5 Order require Baker to “interface with [Fiore’s] lenders and creditors to … administer the claims process” set forth in the September 5 Order. (Sept. 5 Order, ¶ 4(p).)

The claims process described in the September 5 Order authorizes Baker, without further order of the Court, to “develop and initiate” a procedure to solicit claims from creditors of the receivership estate. (Sept. 5 Order, ¶ 6.) Under this procedure, a claimant who wishes to participate in the distribution, if any, of funds of the receivership estate is “required to submit a completed claim form, under oath, to [Baker] by regular mail or electronic mail such that the claim form is received by [Baker].” (Sept. 5 Order, ¶ 6(b).) The September 5 Order directs Baker to “review and reconcile the purported creditors’ claims against the records in the possession of [Baker] and/or the receivership estate” and to “make a determination regarding whether to object to or approve a claim form” on any of the grounds set forth in the September 5 Order. (Sept. 5 Order, ¶ 6(c).) Once the claim forms are reconciled, Baker must “seek Court approval of a plan of distribution.” (Sept. 5 Order, ¶ 6(e).)

The Court will first address the opposition of Welsh to the modification motion. As a preliminary matter, Baker contends that because the opposition of Welsh was not filed in the time prescribed under Code of Civil Procedure section 1005, subdivision (b), the Court should exercise its discretion to reject, and refuse to consider, the opposition. (Jack v. Ring LLC (2023) 91 Cal.App.5th 1186, 1210.)

As further discussed above, the Court ordered Welsh to file and serve any response to the modification motion on or before January 6, 2025. For reasons unknown to the Court, Welsh filed his opposition on January 8, 2025, in violation of the Minute Order. Moreover, the filing of the opposition on January 8, 2025, violates California Rules of Court, rule 3.1300(a) and Code of Civil Procedure section 1005, subdivision (b), which require papers opposing a motion to be filed and served “at least nine court days” before the hearing. (Cal. Rules of Court, rule 3.1300(a); Code Civ. Proc., § 1005, subd. (b).) Welsh offers no information or argument to demonstrate good cause or substantial justification for the late filing of the opposition to the modification motion, or for Welsh’s violation of the Minute Order, code requirements, and court rules.

Notwithstanding Welsh’s violation of the Minute Order, code requirements, and court rules, absent from the reply of Baker is any reasoned legal or factual argument showing why Baker was prejudiced by the late filing of Welsh’s opposition to the modification motion. Though the Court will consider the late-filed opposition absent any showing of prejudice, Welsh and his counsel are reminded of their obligation to comply with court orders, court rules, and code requirements.

In his opposition, Welsh states that he filed the Welsh Action in order to determine the fair value of his membership interest in Fiore after Fiore failed to provide notification of its reorganization or procedural guidance for the exercise of dissenters’ rights. (Opp. at p. 2, ll. 16-22.) Welsh contends that throughout the Welsh Action, Fiore obstructed the valuation process. (Id. at ll. 23-24.) According to Welsh, the settlement reached in the Welsh Action reflects an agreement regarding the valuation of Welsh’s shares and the award owed to Welsh which Fiore and Baker now seek to evade by filing the modification motion. (Id. at p. 3, ll. 2-5.)

Welsh also contends in a general and conclusory manner that the creditor claims procedure set forth in the September 5 Order does not apply to him because he is a shareholder of Fiore, and requests that the Court instruct Baker to place the amount of $216,467 in an escrow account to satisfy any judgment entered in the Welsh Action without the need for Welsh to file a creditor’s claim in this action. (Opp. at p. 3, l. 12-p. 4, l. 12.)

Though there is no information showing that a judgment has been entered in the Welsh Action, to the extent Welsh obtains a judgment against Fiore based on the settlement further described above, the conclusory arguments asserted by Welsh in his opposition to the motion are wholly insufficient to show why Welsh is not required to follow the creditor claim procedure set forth in the September 5 Order. For example, Welsh offers no legal authority to support his conclusion that a shareholder of a corporation cannot become a creditor of that corporation including under circumstances where that shareholder obtains a money judgment against the corporation, whether or not the money judgment arises from the exercise of dissenters’ rights.

Moreover, and subject to exceptions which do not appear to be present here, property in the custody of a receiver appointed by the court “is generally not subject to garnishment or attachment without the court's consent. [Citations.] Because the receiver is appointed by the court, he becomes an officer of the court; thus his custody is actually the custody of the court.” (Robbins v. Bueno (1968) 262 Cal.App.2d 79, 84-85.)

Though the parties offer no arguments or information to show or suggest that Welsh is prohibited from creating a judgment lien under the provisions of section 697.010 et seq. as to any money judgment that may be entered in the Welsh Action, or from asserting the priority of any judgment lien created by Welsh over other creditor claims which may be asserted against the receivership estate, to the extent a judgment is entered in Welsh’s favor in the Welsh Action, that judgment may not be enforced by levy upon any property of Fiore which is in the custody of Baker or the Court. (See also Strain v. Superior Court (1914) 168 Cal. 216, 220 [to the extent a levy upon property in the possession of the receiver interferes with the duties of the receiver respecting that property, it may be punishable as contempt].)

For all reasons discussed above, and notwithstanding that the opposition of Welsh is procedurally inappropriate as to Welsh’s request for an order directing Baker to place assets of Fiore into an escrow account to satisfy any judgment Welsh obtained by Welsh in the Welsh Action, Welsh has failed to show sufficient grounds for a denial of the modification motion.

Furthermore, while the record presently before the Court also does not show that any other party or creditor has levied or intends to imminently levy upon or otherwise attempt to seize assets or property of the receivership estate, the Court previously noted in the Minute Order that it intends to exercise its discretion in a manner which ensures that the distribution of the receivership estate including the payment of creditor claims occurs in a fair, orderly, and efficient manner, without inappropriate or improper interference or conflict by Welsh or any other party. The modification proposed by Baker appears appropriate under the circumstances present here, and necessary to prevent any interference with the ability, authority, and duty of Baker to keep, manage, and preserve the receivership estate, and to ensure that the collection and compromise of creditor claims or debts proceeds in an appropriate manner as authorized under the September 5 Order. Upon further consideration, and for all reasons further discussed above, there exist sufficient grounds to modify the September 5 Order in the manner proposed by Baker. For these reasons, the Court will grant the modification motion.

The Court has reviewed the proposed order submitted by Baker and intends to sign it.