East West Bank v. Herbl, Inc., et al

Case Number

23CV02629

Case Type

Hearing Date / Time

Mon, 01/08/2024 - 10:00

Nature of Proceedings

Receiver’s Motion for Issuance of Order Authorizing and Confirming Sale of Receivership Personal Property

Tentative Ruling

East West Bank v. Herbl, Inc., et al.                    

Case No. 23CV02629

           

Hearing Date: January 8, 2024                                  

HEARING:              Receiver’s Motion for Issuance of Order Authorizing and Confirming Sale of Receivership Personal Property

ATTORNEYS:        For Plaintiff East West Bank: Marshal J. Hogan and Bryce A. Suzuki

                        For Receiver Kevin Singer: Blake C. Alsbrook

                        (For other appearances see list.)

                                   

TENTATIVE RULING:

For the reasons set forth herein, the motion for issuance of order authorizing and confirming sale of receivership personal property is granted. The sale of the accounts receivable shall be free and clear of liens and interests.

Background:

This action commenced on June 20, 2023, by the filing of the complaint by plaintiff East West Bank (“EWB”) against defendant Herbl, Inc. (“Herbl”) for breach of contract, appointment of receiver, and injunction in aid of receiver.

As alleged in the complaint:

On March 21, 2022, EWB and Herbl entered into a loan agreement whereby EWB agreed to provide a revolving line of credit to Herbl in the original principal amount of up to $15 million. (Complaint, ¶¶ 5, 6.) Herbl agreed to pay EWB the principal sum of $15 million, or as much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. (Complaint, ¶ 8.)

By way of a commercial security agreement, Herbl granted EWB a security interest in all, or substantially all, of Herbl’s personal property. (Complaint, ¶¶ 9, 10.)

On November 14, 2022, EWB sent Herbl correspondence providing notice of Herbl’s defaults under the terms of the loan documents. (Complaint, ¶ 13.) On November 11, 2022, EWB and Herbl entered into a forbearance and repayment agreement whereby EWB agreed to temporarily forgo exercising its legal remedies provided that Herbl either raised additional equity of no less than $10 million or refinanced with another lender and pay the loan in full, no later than December 31, 2022. (Complaint, ¶¶ 14, 15.)

On December 21, 2022, EWB sent correspondence to Herbl providing notice of an additional default under the terms of the loan documents. (Complaint, ¶ 16.) Herbl failed to raise the additional equity or to refinance by the due date or at any time thereafter. (Complaint, ¶ 17.)

On January 6, 2023, EWB and Herbl entered into a change of terms agreement that provided for a decreased principal amount of the note and a recalculation of interest. (Complaint, ¶¶ 18, 19.)

On January 9, 2023, EWB sent Herbl correspondence providing notice of Herbl’s defaults. (Complaint, ¶ 20.) On March 21, 2023, EWB and Herbl entered into a second amendment to the loan agreement and forbearance agreement wherein Herbl acknowledged the default under the loan documents. (Complaint, ¶ 22.) Herbl also consented to the appointment of a receiver and agreed it would not contest the appointment of a receiver. (Complaint, ¶ 23.)

On June 28, 2023, the court entered an order approving stipulation for appointment of Kevin Singer as receiver. Mr. Singer’s enumerated powers and duties as receiver include:

“Market for sale, and subject to notice to all parties and with the consent of

the Court, sell all, or substantially all, of the receivership assets, including the Defendant’s business as a going concern, execute all documents required for such sale, and undertake any and all duties required to effectuate such sale. All applications for approval of such sale, or any other sale of assets with a proposed purchase price of more than $250,000, shall be brought before this Court by the Receiver on noticed motion or if time does not allow, by ex parte notice to all parties.” (June 28, 2023 Order, ¶ (3)(x).)

On December 26, 2023, Singer filed the present motion for issuance of order authorizing and confirming sale of receivership personal property. Singer seeks to sell Herbl’s accounts receivable, of approximately $8,728.240.00 to Distro Accounts Receivable, LLC (“Distro”) for $600,000.00.

On December 27, 2023, an order shortening time for hearing of the motion was entered. Opposition, if any, was to be filed no later than January 3, 2025. No opposition has been filed.

Analysis:

“A receiver may, pursuant to an order of the court, sell real or personal property in the receiver's possession upon the notice and in the manner prescribed by Article 6 (commencing with Section 701.510) of Chapter 3 of Division 2 of Title 9. The sale is not final until confirmed by the court.” (Code Civ. Proc., § 568.5

“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, 274.) A receiver has a duty to attempt to realize the largest amount from the sale of the receivership property. (Id. at p. 276 fn. 8.)

By way of declaration, Singer declares:

“One of HERBL’s primary assets is a significant is a significant amount of outstanding, uncollected accounts receivable due from various cannabis dispensaries, totaling approximately $8,728,240. For purposes of simplification and clarification for the Court, HERBL was a distributor of cannabis, meaning that it purchased from growers/manufacturers and sold to retailers on “terms”, meaning that it would be paid within a predetermined time period. In many cases the retailers thereafter failed to remit payment, and HERBL therefore retains a right to

collect.” (Singer Dec., ¶ 4.)

“After my appointment, I retained WeCann, a notable California cannabis asset broker, to assist me in the marketing process for the various assets in this matter. WeCann and my Receivership Administration team spent significant time valuing and marketing the Accounts Receivable, among other property of HERBL.” (Singer Dec., ¶ 6.)

“In an effort to assist the various brands and manufacturers who were not paid by HERBL, my team scheduled a round table and discussed an arrangement by which the brands/manufacturers could purchase accounts receivable related to the sale of their own products and attempt to collect themselves. Unfortunately, this proposal was rejected by the brands and manufacturers, many of whom were angry and unhappy regarding the demise of HERBL and the general state of the cannabis market in California. I explained to these brands and manufacturers that, to the extent they did not purchase their own accounts receivable, it was my job as Receiver to sell the Accounts Receivable on the open market to the highest bidder, free and clear of liens and claims, meaning that it was quite possible they would not be paid anything, as unsecured creditors. Despite my attempts, the retailers were not forthcoming, and I continued my marketing efforts.” (Singer Dec., ¶ 7.)

Following discussions, and adjustments to the offer, Distro and Singer, with the assistance of his team, and exercising his business judgment, determined $600,000.00 to be a fair and reasonable purchase price for the accounts receivable. (Singer Dec., ¶¶ 8, 9.)

The APA provides for the sale of the Accounts Receivable free and clear of liens and interests, meaning that no individual or entity will be allowed to claim amounts due and owing from any Accounts Receivable actually collected. Selling free and clear of liens is the only manner in which the Accounts Receivable can be marketed and sold. To the extent that any brands and manufacturers claim rights under payments received, their recovery will be made available from the Receivership Estate funds in their position as unsecured creditors.” (Singer Dec., ¶ 10.)

Singer has obtained approval of plaintiff for the sale. (Singer Dec., ¶ 12.)

The court, having reviewed the moving papers, finds that the sale is fair, reasonable, and in the best interests of the parties under the circumstances. The motion will be granted.