I. INTRODUCTION
Pursuant to Section 855 of the California Public Utilities Code, the California Public Utilities Commission ("Commission") issues this Order Instituting Investigation ("OII"), Notice of Hearing, and Order to Show Cause ("OSC") regarding the Live Oaks Springs Water Company ("Live Oaks"), and Live Oaks Enterprises, LLC, ("LOLLC"), and Nazar Najor, which hereafter are jointly and/or severally referred to as "the Respondents." In addition, to Mr. Najor, the OII lists an apparent major creditor of LOLLC, City National Bank, and a receiver the bank retained, Mr. Matthew Semmer, as respondents to this OII. This action arises as a result of City National Bank's (hereinafter "City National"), decision through Mr. Semmer to seize the bank accounts and other capital of LOLLC as a result of a default by LOLLC on a $1.5 million loan instrument issued by 1st Pacific Bank of California,1 on July 5, 2006, to Live Oaks Holding, LLC.
Mr. Najor disputes when LOLLC obtained the loan from 1st Pacific Bank, and whether the assets of Live Oaks Water Company were actually pledged as collateral for the loan. The applicable Deed of Trust that accompanies the Business Loan Agreement defines collateral to include "...all water, water rights and ditch rights, including stock in utilities with ditch or irrigations rights),..." The Business Loan Agreement's language grants the bank all of the owner's water, water rights, and ditch rights as well as any of his other right, title and interest in specifically described real property in Boulevard, California.
The owner of Live Oaks contends that when he obtained the underlying
$1.5 million loan, the bank was only entitled to look to the assets of LOLLC for repayment. The Commission is not in a position to fully adjudicate the default action between Mr. Najor and City National Bank, but to the extent that City National Bank is looking to the assets of Live Oaks to repay the loan proceeds, the Commission has the ability to govern the distribution of revenues derived from the water company. Thus, it is necessary to name both City National and its receiver, Mr. Semmer, as respondents to this OII.
The Division of Water Audits is concerned that because of his actions (whether inadvertent or deliberate) in pledging the assets of Live Oaks Water Company as collateral for the City National loan, Mr. Najor, has committed an ultra vire act as a business owner, one that is void ab initio under Section 851 of the Public Utilities Code since Mr. Najor never sought or obtained the Commission's approval to pledge the assets of Live Oaks as collateral to obtain the City National loan. Because Mr. Semmer has, by seizing the financial assets of Live Oaks, de facto become intimately involved in the operations of Live Oaks, and the Commission has an obligation to determine if he is in fact in the water utility business and is thus subject to the Commission's regulatory oversight. The Commission's overall focus in bringing this action is to ensure that Live Oaks Water Company's customers continue to receive uninterrupted water service, that to the extent Mr. Semmer is exercising powers of a public utility he acknowledges the obligations and requirements of being a Commission-regulated utility including reporting requirements, hiring of staff, conducting water testing, maintenance of plant and the other obligations of providing water service.
Given the complexities of the situation, under Section 855, the Commission has an obligation to consider whether Mr. Najor is in fact fit to continue operating Live Oaks or whether under Section 855 of the Public Utilities Code the Commission should consider seeking appointment of a receiver to assume operations of Live Oaks until a responsible owner can be found to assume operations of Live Oaks.
Section 855 states:
Whenever the commission determines, after notice and hearing, that any water or sewer system corporation is unable or unwilling to adequately serve its ratepayers or has been actually or effectively abandoned by its owners, or is unresponsive to the rules or orders of the commission, the commission may petition the superior court for the county within which the corporation has its principal office or place of business for the appointment of a receiver to assume possession of its property and to operate its system upon such terms and conditions as the court shall prescribe. . . . The court shall provide for disposition of the facilities and system in like manner as any other receivership proceeding in this state.
This statute requires the Commission to institute an investigation to ensure that Live Oaks' customers continue to receive water service on an uninterrupted basis, to determine if a receiver should be appointed to assume operations of Live Oaks, to determine whether Mr. Najor is fit to continue operating Live Oaks, and whether
Mr. Najor should be subject to penalties or fines for apparently pledging the assets of Live Oaks as collateral for a loan without obtaining prior Commission approval. It should be noted that the Commission seeks to avoid unnecessary litigation or the creation or the prospect of two competing receivers attempting to manage a small water company.
1 Although the loan was initially issued by 1st Pacific Bank in 2006, as a result of a merger, City National Bank became the holder in due course of the original loan.
