Case Number: 18STCV04315    Hearing Date: October 09, 2020    Dept: 86

KIDMAN v. FELDMAR

Case Number: 18STCV04315

Hearing Date: October 9, 2020

[Tentative]       ORDER DENYING PLAINTIFFS’ APPLICATION FOR APPOINTMENT OF A RECEIVER

Plaintiffs, Shawna F. Kidman and Jason S. Feldmar, as co-trustees of the Bart Feldmar Living Trust, acting on behalf of the Trust as well as derivatively on behalf of Felbro Food Products, Inc. seek an order appointing a receiver over Felbro to assume control of Felbro’s accounts and control over Felbro. Defendants, Michael Feldmar and Daniel Feldmar, oppose the motion. Felbro also purportedly opposes the motion.1

The application to appoint a receiver is denied.

APPLICABLE LAW

Appointment of a receiver is an extreme provisional remedy. The Court should grant the remedy only when facts are presented by admissible evidence that clearly establish a receiver is necessary to protect property and maintain the status quo. (Barclay Bank of California v. Superior Court (1977) 69 Cal. App. 3d 593, 597.)

A receiver may not be appointed except in the classes of cases expressly set forth in the statutes. (Turner v. Superior Court (1977) 72 Cal. App. 3d 804, 811.) “Code of Civil Procedure section 564 contains a principal source of authority for trial courts to appoint receivers.”  (Ibid.)  “The requirements of Code of Civil Procedure section 564 are jurisdictional, and without a showing bringing the receiver within one of the subdivisions of that section the court’s order appointing a receiver is void.” (Ibid. [citing Rondos v. Superior Court (1957) 151 Cal. App. 2d 190, 195].)

ANALYSIS

Plaintiff seeks the appointment of a receiver on the grounds a receiver is necessary to due to the breaches of fiduciary duties by Defendants.

Pursuant to Code of Civil Procedure section 564, subdivision (b), the court may appoint a receiver in the following cases: “In an action . . . between partners or other jointly owning or interest in any property . . . where it is shown that the property . . . is in danger of being lost, removed, or material injured” or “where necessary to preserve the property or rights of any party.” (Code Civ. Proc. § 564 subdivisions (b)(1) and (b)(9).) Code of Civil Procedure section 564 also provides for a receiver “[w]here a corporation has been dissolved . . . [and w]here a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights.” (Code Civ. Proc. § 564, subds. (b)(5) and (b)(6).)

“[W]here there is evidence that the plaintiff has at least a probable right or interest in the property sought to be placed in receivership and that the property is in danger of destruction, removal or misappropriation, the appointment of a receiver will not be disturbed on appeal.” (Sachs v. Killeen (1958) 165 Cal.App.2d 205, 213.)

Felbro’s Board currently consists of three members: Defendant Daniel Feldmar, Plaintiff Kidman and the court-appointed provisional director, Richard Corgel. (Kidman Decl., ¶ 4, Ex. 1.)

Plaintiffs argue a receiver is necessary to address the disputes between Felbro’s Directors which in large part, they argue, stem from Defendant Daniel Feldman’s unwillingness to comply with Board resolutions. Plaintiffs’ motion identifies several acts of misconduct by Defendants. Plaintiffs contend Defendants have:

  1. taken unauthorized compensation (Kidman Decl., ¶¶ 37-38, 41, 99-101; Ex. R [Board Resolutions]);
  2. given themselves unauthorized perquisites (Kidman Decl., ¶¶ 37-38, 41, 99-101; Ex. R [Board Resolutions].);
  3. refused to follow Board resolutions and directives (Kidman Decl., ¶¶ 69-105);
  4. refused to provide the Board with requested information (Kidman Decl., ¶¶ 69-105);
  5. threatened the Court-appointed provisional director (Kidman Decl., ¶ 106);
  6. withheld the non-managing shareholder’s tax distributions and indemnities to pressure that shareholder into selling or giving away its shares (in defiance of Board resolutions) (Kidman Decl.,   ¶¶ 26-31, 102);
  7. used Felbro’s cash reserves against its non-managing shareholder, including by unreasonably engaging two law firms to appear in this action at Defendants’ direction, without providing any undertaking to Felbro or any accounting of these fees to the Board (Kidman Decl., ¶¶ 85-91); and
  8. retaining numerous of accountants and consultants on Felbro’s funds to make conclusory declarations on their behalf. (Kidman Decl., ¶¶ 22- 23, 43-45, 54(h), 87.)

(Motion 8:14-25.)

Plaintiffs also argue Defendants’ misconduct is negatively affecting Felbro’s business. Much of what Plaintiffs raise occurred prior to the court’s appointment of a provisional director.

In response to Plaintiffs’ claims, Defendants contend they are valuable contributors to Felbro. They also dispute any mismanagement.

Since the appointment of the provisional director on April 11, 2019, Plaintiffs allege the following acts by Defendants warrant the appointment of a receiver: (1) Daniel Feldman breached Board resolutions passed on June 25, 2020; (2) Defendants breached a Board resolution of July 31, 2020; and (3) Defendants breached Board resolutions passed on December 31, 2019.

As to the Board resolutions of June 25, 2020, the evidence from the parties indicates all resolutions except one (Resolution 3) have been implemented. It appears Resolution 3 may not need to be implemented based on Felbro’s positive financial condition.

As to the July 31, 2020 resolution, Plaintiffs concede Defendants agreed to comply. Plaintiffs contend, however, Defendants’ compliance was directly related to this motion.

Finally, as to the December 31, 2019 resolutions, Defendants assert they have complied with one resolution. As to the other, they claim the vote on the resolution was invalid based on a conflict of interest. The issue appears unresolved.

Plaintiffs also allege Defendants have “failed to provide the Board information and address issues that are affecting Felbro.” (Motion 17:21-22.) Such information, according to Plaintiffs, has been outstanding for over six months “or, in some cases, years.” (Motion 17:23.) The deficiencies relate to the conduct of business and business planning—a strategic plan, a capital improvements plan (“sought for years”), “meaningful plans and/or analyses exploring whether Felbro’s operations can be consolidated in a single location,” sales and marketing plans, budgets for 2020, management goals, a list of standard operating procedures, explanation for legal expenses, credit card reporting system and a proposed information technology policy.

Much of this planning, however, is within the Board’s power to complete. To the extent Defendant Daniel Feldman does not participate and/or is uninterested, there are two other Board members who apparently have no conflict. Those Board members can proceed as necessary with planning. As for explanation as to the legal expenses, as those are (apparently) Felbro’s expenses, it would appear explanation can be obtained from the attorneys who provided the services.

Finally, Plaintiffs recite a litany of alleged misconduct occurring in July and August 2020 they summarize as harassment of the provisional director including “outrageous threats.” (Motion 19:6-23.) The behavior included “histrionic” letters, discovery demands, threat of removal proceedings and a frivolous claim of age discrimination by Defendant Michael Feldman.

Despite the alleged misconduct, the provisional director testified at deposition that he did not believe a receiver for Felbro was necessary to maintain customers, remain solvent or preserve Felbro’s assets. The provisional director did testify there is conflict.

While the court has some concerns about Felbro and Defendants’ actions, those concerns do not justify the appointment of a receiver. The court is not persuaded the extreme remedy of a receiver is warranted under the circumstances as they stand today. It just does not appear necessary.

As noted by Defendants, our Supreme Court in Golden State Glass Corp. v. Superior Court (1939) 13 Cal.2d 384 has explained “a court of equity has power to appoint receiver of a going corporation upon a showing that there are such dissensions in its governing body as to create a virtual suspension of its business.” (Id. at p. 392.)2

The evidence does not suggest Felbro is struggling financially. Defendants note in the past 10 years, Felbro’s operating and net income have been positive for each year from 2012 to the present. (Seigel Decl. ¶¶ 2-8; Schwartz Decl. ¶¶ 16-17.) In fact, in the last two years, Felbro posted its highest sales; by all accounts Felbro is a thriving and profitable business. (Schwartz Decl. ¶¶ 25-28; Seigel Decl. ¶¶ 11-14; Daniel Decl. ¶¶ 22-24.) Moreover, Felbro is thoroughly solvent and its working capital ratio is “excellent for a company of its size.” (Seigel Decl. ¶ 9; Schwartz Decl. ¶ 25.) Additionally, since 2015, Felbro has continued to make large cash distributions to the two shareholders. (Seigel Decl., ¶¶ 15-16, 18.)

The court acknowledges it has the authority to appoint a receiver without regard a business’s solvency or some threat of insolvency. (Koshaba v. Koshaba (1942) 56 Cal.App.2d 302.)3  Nonetheless, the court’s appointment authority should be “sparingly exercised” and not “in a doubtful case.” (Id. at 314.)

While there is evidence of Board conflict as to Felbro’s management and operation, the conflict does not evidence jeopardy to Felbro’s viability. The court would not characterize the disputes as “garden-variety, everyday corporate disputes” as Defendants do. The court would not characterize the disputes as “a complete breakdown in Felbro’s corporate governance,” as Plaintiffs do either. It is indisputable that Felbro is effectively operating as a going concern. Of course, it might operate more effectively (i.e., profitably) without conflict on the Board, but the conflict here does not warrant a receiver. While Defendants might ultimately find themselves civilly liable to Felbro in this litigation, the facts today do not justify the appointment of a receiver.

CONCLUSION

Accordingly, based on the evidence before the court today, the motion is denied.

IT IS SO ORDERED.

October 9, 2020                                                                     ________________________________

                                                                                                                   Hon. Mitchell Beckloff

                                                                                                                   Judge of the Superior Court

1. Felbro’s retention of attorneys in this matter is problematic. Plaintiffs challenge the propriety of Felbro’s opposition; Plaintiffs argue Felbro’s attorneys are not authorized to act on behalf of Felbro absent approval by the Board. The Board has not authorized the retention of the attorneys. Felbro’s counsel shall address at the hearing who is directing its services. Is there any evidence before the court demonstrating Felbro’s counsel has been retained by Felbro pursuant to Board action? The provisional director testified at deposition the Board has never considered a resolution to authorize counsel to act on behalf of Felbro. The court actually views this issue as the strongest evidence supporting the appointment of a receiver.

2. The facts in Golden State Glass are also similar here.

3. “The fact that the corporation is a solvent, going concern does not deprive the court of the power to appoint a receiver. Although the power should be sparingly exercised, and never used in a doubtful case, it is well settled that a court of equity has inherent power to appoint a receiver at the request of a stockholder on the grounds of fraud or mismanagement, or where, because of dissensions on the board, it cannot properly function.” (Koshaba v. Koshabasupra, 56 Cal.App.2d at 314.)