Case Number: ****6986 Hearing Date: March 22, 2021 Dept: 47
Judge Theresa M. Traber, Department 47
HEARING DATE: March 17, 2021 JUDGMENT: November 2, 2018
CASE: 4402 Mammoth Investors LLC v. Stonehaven LLC, et al.
CASE NO.: ****6986
(1) APPLICATION FOR DETERMINATION AFTER DISSOLUTION OF INJUNCTION OF MOTION TO CHARGE CROSS-DEFENDANT/JUDGMENT DEBTOR ARTHUR ASLANIAN’S MEMBERSHIP INTEREST IN 4402 MAMMOTH INVESTORS, LLC AND TO FORECLOSE ON JUDGMENT DEBTOR’S INTEREST; (2) MOTION TO CHARGE CROSS-DEFENDANT/JUDGMENT DEBTOR ARTHUR ASLANIAN’S MEMBERSHIP INTEREST IN 4402 MAMMOTH INVESTORS, LLC AND TO FORECLOSE ON JUDGMENT DEBTOR’S INTEREST
MOVING PARTY: (1)-(2) Cross-Complainant and Judgment Creditor Stonehaven, LLC
RESPONDING PARTY(S): (1)-(2) Cross-Defendant Arthur R. Aslanian
• 04/07/17: Verified Complaint filed.
• 05/16/17: Cross-Complaint filed by Stonehaven, LLC.
• 06/12/17: First Amended Verified Complaint filed.
• 07/21/17: Judgment of dismissal entered as to Defendant Shaoul Levy.
• 09/26/17: Dismissal entered as to Complaint.
• 11/02/18: Judgment entered after Court trial on Cross-Complaint.
• 12/26/18: Appeal filed by Arthur Aslanian.
• 06/15/20: Case reassigned to D47.
STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:
Plaintiff alleged that Defendants failed to timely serve a payoff demand statement after Plaintiff requested one under Civil Code ; 2943 so that it could clear title to the property at issue and sell it. Defendant Stonehaven filed a cross-complaint alleging breach of contract. Stonehaven obtained a judgment on the cross-complaint.
Cross-Complainant Stonehaven now seeks to have its charging order motion heard and moves for an order to charge Cross-Defendant’s membership interest in 4402 Mammoth Investors and to foreclose on Cross-Defendant’s interest.
Cross-Complainant’s ex parte application to have charging order motion heard and determined is GRANTED.
Cross-Complainant’s motion for an order to charge Cross-Defendant/Judgment Debtor’s membership interest in 4402 Mammoth Investors, LLC and to foreclose on Judgment Debtor’s interest is GRANTED. The charging order is hereby issued, and Mammoth is ordered to pay over to Cross-Complainant any distribution that would otherwise be paid to Cross-Defendant.
The lien created by the filing of this motion and continued by the granting of the charging order on this date is hereby foreclosed, and Cross-Defendant’s transferable interest is ordered to be sold under Corporations Code ; 17705(b)(3).
Ex Parte Application to Have Charging Order Motion Heard and Determined
Cross-Complainant Stonehaven, LLC originally filed a motion for a charging order on June 6, 2019 for hearing on July 29, 2019. That motion was denied without prejudice because Stonehaven had not served the judgment debtor directly as required by CCP ; 684.020. Stonehaven then filed another motion for a charging order on July 29, 2019, for hearing on September 23, 2019. This motion was continued several times, and eventually all pending motions were taken off calendar when the case was reassigned to this Department effective June 15, 2020.
Stonehaven now argues that its motion for a charging order should be set for hearing because a preliminary injunction previously issued by the Bankruptcy Court was dissolved on February 12, 2021, and the bankruptcy has been dismissed. Therefore, Stonehaven argues that it is now free to enforce its judgment against Arthur Aslanian’s assets, including his interest in 4402 Mammoth Investors, LLC.
Cross-Defendant Arthur R. Aslanian has filed an opposition to the motion for a charging order itself, in which he agrees that this Court “is now free to rule on this issue.” (Oppo. to Motion to Charge filed 3/3/21, at p. 3.)
Accordingly, the ex parte application to have the charging order motion heard and determined is GRANTED.
Motion for Charging Order and to Foreclose on Lien
Cross-Complainant moves for an order (1) charging the membership interest of Cross-Defendant in 4402 Mammoth Investors, LLC with payment of the unpaid balance of the judgment entered on November 2, 2018 in this action, which currently totals $1,457,204.96 ; (2) directing Mammoth and its members to pay any money or property due or to become due to Cross-Defendant directly to Cross-Complainant until the amount due on the judgment, including interest and postjudgment costs, is paid in full; and (3) foreclosing on the lien and ordering a foreclosure sale of Cross-Defendant’s interest in Mammoth.
1. Charging Order
“Through a charging order, the court may charge the debtor’s interest in the [limited liability company] with payment of the unsatisfied judgment, plus interest.” (Crocker Nat. Bank v. Perroton (1989) 208 Cal.App.3d 1, 6.) Specifically:
If a money judgment is rendered against a partner or member but not against the partnership or limited liability company, the judgment debtor’s interest in the partnership or limited liability company may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section 15907.3, 16504, or 17705.03 of the Corporations Code.
(Code Civ. Proc., ; 708.310.)
Here, the Court rendered a money judgment against Cross-Defendant, a member of 4402 Mammoth Investors, LLC, and not against Mammoth itself. Thus, under CCP ; 708.310, Cross-Defendant’s interest in Mammoth “may be applied toward the satisfaction of the judgment by an order charging [his] interest” under the applicable statute.
Specifically, Corporations Code ; 17705.03, which governs the entry of a charging order against a judgment debtor’s transferable interest in an LLC, provides as follows:
On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.
(Corp. Code ; 17705.03(a).)
Cross-Defendant argues that this aspect of the motion is “moot” because Cross-Complainant is a secured creditor on the real property that is the LLC’s only asset. (Oppo., at p. 3.) It appears that Cross-Defendant’s own argument is now moot, because Cross-Complainant apparently foreclosed on the property and acquired it for a credit bid of $2,200,000. (Second Supplemental Declaration of Attorney Kevin J. Leichter ¶ 5.) This turn of events does not, however, moot this motion, any more than Cross-Complainant’s status as a secured creditor on the property would have. Rather, the statute governing entry of a charging order against an interest in an LLC is clear that obtaining a charging order is the “exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest.” (Corp. Code ; 17705.3(f), bold emphasis added.) Thus, when faced with an outstanding judgment against a member of the LLC, Cross-Complainant could not rely on its status as a secured creditor on property owned by the LLC to obtain the outstanding balance on the judgment from one of its members.
Of course, given the use of the permissive “may” in the relevant statute, the issuance of a charging order is left to the Court’s discretion. (People v. Balt (1947) 78 Cal.App.2d 171, 173 [holding that use of the term “may” in a statute “was meant to be permissive” and that the matter at issue was therefore “within the discretion of the trial judge”]; cf. Fansler v. Fansler (1988) 206 Cal.App.3d 81, 86-87 [holding that a court has discretion to “consider whether the circumstances surrounding the entry of the prior judgment render inequitable its enforcement by lien”].) Here, however, Cross-Defendant has not shown that the equities favor denying the issuance of a charging order. Rather, in light of the LLC’s bankruptcy filing in February 2018, until the recent foreclosure sale, the entire judgment against Cross-Defendant had remained outstanding. (Declaration of Attorney Kevin J. Leichter ¶ 4.) The Court finds that the equities favor the issuance of a charging order under these circumstances.
Accordingly, the motion for a charging order is GRANTED. It remains to be determined, however, whether Cross-Complainant is entitled to the rest of the orders it seeks.
2. Order Directing the LLC to Pay Money It Owes to the Judgment Debtor to the Judgment Creditor
At the outset, the Court notes that a lien on Cross-Defendant’s interest in Mammoth was created as soon as Cross-Complainant served this motion on Cross-Defendant and Mammoth:
A lien on a judgment debtor’s interest in a . . . limited liability company is created by service of a notice of motion for a charging order on the judgment debtor and on either of the following:
* * *
(2) All members or the limited liability company.
(CCP ; 708.320(a).) This lien is extinguished if the motion for charging order is denied. Otherwise, it continues “under the terms of the order.” (CCP ; 708.320(b).) Having granted the motion for charging order, the lien that was created by filing the motion continues under the terms described herein, including the following:
A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.
(Corp. Code ; 17705.03(a), bold emphasis added.)
Thus, Mammoth is required to pay over to Cross-Complainant any distribution that would otherwise be paid to Cross-Defendant. (Ibid.; accord MDQ, LLC v Gilbert, Kelly, Crowley & Jennett LLP (2019) 32 Cal.App.5th 702, 711 [discussing the statute].) The question remains, however, whether these distributions will pay the judgment debt within a reasonable time. If not, Cross-Complainant may be entitled to foreclosure on the lien, as discussed below.
3. Foreclosure on Lien
Cross-Complainant argues that the Court should foreclose on Cross-Defendant’s interest in Mammoth.
To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subdivision (a), the court may do any of the following:
(1) Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made.
(2) Make all other orders necessary to give effect to the charging order.
(3) Upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, foreclose the lien and order the sale of the transferable interest. The purchaser at the foreclosure sale obtains only the transferable interest, does not thereby become a member, and is subject to Section 17705.02.
(Corp. Code ; 17705.03(b), bold emphasis added.)
Cross-Defendant argues that a foreclosure on the lien would be premature because a charging order is not yet in effect. Cross-Defendant cites no authority, however, for the proposition that Cross-Complainant must “wait a reasonable time to bring such a request following the obtaining of a Charging Order in this matter.” (Oppo., at p. 5.) The charging order is “in effect” as of the date of this order, and therefore the Court has the power to foreclose on the lien that was created when the motion was filed and that continues now that the motion has been granted.
Cross-Defendant also argues that foreclosure is not warranted because Cross-Complainant has not made a “showing that distributions under the charging order will not pay the judgment debt within a reasonable time.” (Oppo., at p. 5; Corp. Code ; 17705.03(b)(3).) Cross-Defendant admitted, however, that the LLC’s “only asset is the Real Property.” (Oppo., at p. 3.) Given that Cross-Complainant has presented evidence that this asset has now been foreclosed upon and that Mammoth has no liquid assets, it follows that Mammoth is unlikely to be able to make distributions totaling $1,457,204.96 to Cross-Complainant within a reasonable time. (Second Supp. Leichter Decl. ¶¶ 3, 5, 6.)
Accordingly, there are grounds to foreclose the lien created by the charging order and order the sale of the Cross-Defendant’s transferable interest in Mammoth.
The Court notes that there is a split of authority regarding whether a foreclosure and sale of the judgment debtor’s interest may be ordered without the consent of all members of the LLC other than the debtor. (Compare Hellman v. Anderson (1991) 233 Cal.App.3d 840, 850 [consent not necessary if foreclosure does not unduly interfere with partnership business] with Crocker Nat’l Bank v. Perroton (1989) 208 Cal.App.3d 1, 9 [consent required].) Ultimately, the Court is persuaded by the analysis in Hellman, which concludes, after discussing the Crocker decision at length, that its “inflexible requirement of partners’ consent” should give way to a more flexible “case-by-case” approach. (Hellman, supra, 233 Cal.App.3d at 852.) Under that approach, the “burden of proving undue interference with partnership business” arising from the sale is on the party or parties opposing the foreclosure. (Id. at 853.)
Here, Cross-Defendant has not shown that the foreclosure on his interest will unduly interfere with Mammoth’s business. Cross-Defendant argues that the foreclosure will “further prevent and complicate Mammoth’s exit strategy resulting in further delays to a payment to Stonehaven.” (Oppo,, at p. 6.) Cross-Defendant has not provided any support for this assertion, however. Indeed, Cross-Defendant’s “interest” in the LLC “does not include the right to participate in management.” (Hellman, supra, 233 Cal.App.3d at 852; see also Corp. Code ; 17705.03(b)(3) [“The purchaser at the foreclosure sale obtains only the transferable interest [and] does not thereby become a member . . . .”.) Under the current circumstances, Cross-Defendant has not shown that the foreclosure would unduly interfere with Mammoth’s business.
Accordingly, the motion to foreclose on Cross-Defendant’s transferable interest in 4200 Mammoth Investors, LLC is GRANTED. The lien created by the filing of this motion and continued by the granting of the charging order on this date is foreclosed, and Cross-Defendant’s transferable interest is ordered to be sold.
Moving party to give notice, unless waived.
IT IS SO ORDERED.
Dated: March 22, 2021 ___________________________________
Theresa M. Traber
Judge of the Superior Court