II. BACKGROUND
A. A Member of the Najor Family Has Operated Live Oaks Since 1982.
In 1992, Mr. Elia Najor sought Commission approval of a previously unapproved 1982 transfer of ownership of what is today Live Oaks. The Application was approved subject to certain conditions including the requirement that the operator make certain capital improvements, a formal name change to Live Oaks Water Company, and agreement that the operator would seek Commission approval before adding additional customers. Decision ("D.")92-09-001 ratified retroactively the informal transfer of ownership that had taken place a decade earlier. The current owner of Live Oaks,
Mr. Nazar Najor, appeared in the proceeding as Elia Najor's representative. The decision noted that at the time of the Decision Live Oaks had 138 customers. The area was part of a resort that included a service area that included a general store, restaurant, and resort facilities.
One of the noteworthy provisions of D.92-09-001 was the finding of fact that "All water utility business should be accounted for under the name Live Oak Springs Water Company." Id. p. 401. Unfortunately, apparently this recommendation has not been followed and now it is the Commission's task to ensure the continuity of utility service for Live Oaks Water Company's customers and to determine the extent to which the receiver, Mr. Semmer, and by extension, City National Bank intends to become a public utility owner and operator subject to the Commission's jurisdiction and control.
B. Mr. Nazar Najor Obtains a Loan
In July of 2005, Mr. Nazar Najor, signed a promissory note for $1.5 million to 1st Pacific Bank, which had an initial interest rate of 9.75% with a term of 36 months. Based apparently on the belief that he had legally segregated the assets of the water company, Live Oaks, from the Holding Company, Mr. Najor neither sought nor obtained Commission approval to pledge the assets of Live Oaks in conjunction with this loan, However, in July of 2006, a Deed of Trust was issued that states unambiguously that the issuer of the loan was looking to the assets of the Live Oaks as collateral for the loan.
A primary focus of this OII is whether City National Bank is entitled to any public utility funds or assets to repay this loan.
C. The 2007 Intra-Family Transaction
In 2007, Elia Najor, the original purchaser of Live Oaks in 1982, was
93 years of age. He decided that he no longer was interested in being involved in the operations of Live Oaks, and on June 1, 2007 he signed a sales agreement that effectively transferred ownership of the Live Oaks (subject to Commission approval) to his sons Daniel and Ramsey and his daughter-in-law, Lauren, who are the three principals of Live Oaks Enterprises, LLC. These individuals, along with Nazar Najor, the company's manager, had been de facto operating the company for many years. The sales agreement called for a purchase price of $185,000 which was the book value of the property at the time.
After a review by the Division of Water and Audits, the Commission issued D. 08-09-008, approving the sale. One condition of the approval was that the new owners commit to approximately $50,000 in capital upgrades to bring the system up to the standards of General Order 103. The decision supports the transaction by stating that the proposed sale greatly reduces the chances that the system would be abandoned upon the death of Mr. Elia Najor. The decision explicitly gives Live Oaks Enterprises LLC responsibility for operating the water system.
It is particularly noteworthy that, even though Mr. Nazar Najor had obtained a $1.5 million loan for Live Oaks Holding Company LLC in 2005, he did not disclose this fact to the Division of Water and Audits at any time. Moreover, Mr. Elia Najor did not disclose the existence of this loan when he sought the Commission's approval to sell the water utility to his offspring and daughter-in-law. As was noted above in this narrative, Live Oaks Water Company's assets were apparently inadvertently pledged as collateral for this loan.
D. Mr. Nazar Najor Defaults on the Loan
In mid-2009, Mr. Nazar Najor ceased payments on the aforementioned
$1.5 million loan. Subsequently, the holder of the note unsuccessfully attempted to collect on the loan. Earlier this year, the City National Bank retained the services of a receiver- Matthew Semmer, to collect on the unpaid amount due on the loan. Mr. Najor contends that Live Oaks Enterprises, LLC does not own Live Oaks Water Company, but acknowledges that he did prepare a Fictitious Name Statement stating that Live Oaks Enterprises owns the Water Company.
E. Collection Efforts Commence
Within the past month, Mr. Semmer, acting at the behest of his client, City National Bank, seized the bank accounts of Live Oaks Water Company. Since that time Mr. Semmer has disbursed what he views to be sufficient funds to Mr. Najor to maintain continuity of service to the customers of Live Oaks Water Company. No interruption of service has occurred to date.
E. The July 17th Superior Court Hearing
The Commission initially learned about the seizure of Live Oaks Water Company's bank accounts when Mr. Najor contacted the Commission's General Counsel during the week beginning July 9, 2012. Later that week Legal Division was informed that a hearing was set on July 17th at 8:45 a.m. in the Superior Court of San Diego County regarding Mr. Semmer's seizure of Live Oaks Water Company's bank accounts. Because of the Commission's concern about maintaining water services to Live Oaks' customers, Assistant Chief Counsel Jason Zeller wrote a detailed letter to presiding Judge Joel R. Wohlfeil, explaining the applicable California Public Utilities statutes that govern the disposition of utility assets. In his letter, Mr. Zeller explained that under the express terms of Section 851, loans looking to the assets of a Commission-regulated water utility as collateral (which have not obtained prior Commission approval) are void.
Despite this letter, and Legal Division's best efforts to forestall this result, Judge Wohlfeil approved Mr. Semmer's seizure of Live Oaks Springs Water Company's bank accounts. As a result, Mr. Semmer, and by extension, his client, City National Bank, appear to be in the utility business in California, along with the putative manager, Mr. Nazar Najor, and the other members of the Najor family. One of the purposes of this OII is to determine who has the authority and responsibility for continuing to operate Live Oaks Springs Water Company and to ensure that its customers continue to have water service.
Because of the complexity of the various underlying transactions involving both land nearby the company's headquarters that may be owned by members of the Najor family and/or various corporations, holding companies and other forms of corporate ownership, and the apparent pledging of Live Oaks Springs Water Company's assets as collateral for the promissory note, the Commission's inquiry in this OII will delve into the actions initiating and the ultimate responsibility for the underlying loan transaction and will trace the changes in ownership of the promissory note since 2005. Because of the urgency of the underlying situation, the above account of the transactions involving this promissory note may contain some inaccuracies that will be corrected during the OII.
F. Violations
If proven at an evidentiary hearing, the information discussed above would constitute the following violations of Section 851 and/or 854(a), 855, 2100 et. seq.
1. It appears that some of the named respondents are either operating or participating in the management of a privately-held water utility without authority of the Commission.
2. Nazor Najor appears to have obtained a $1.5 million loan without Commission authorization or approval and has (whether deliberately or inadvertently) pledged assets of Live Oaks Springs Water Company as collateral for this loan. This action appears to have violated Section 851 of the Public Utilities Code and Mr. Najor may be subject to a penalty for this action.
3. Mr. Semmer, acting in his capacity as receiver for City National Bank, has seized assets belonging to Live Oaks Springs Water Company even though the underlying loan that he is collecting for is void as regards to water company assets being pledged as collateral. Mr. Semmer's seizure of these assets appears to violate Section 851 of the Public Utilities Code, and thus he may be subject to fines and or penalties for this action.
4. Mr. Semmer, acting in his capacity as receiver for City National Bank, appears to be participating either directly or indirectly in the management of a Commission-regulated utility, Live Oaks Water Company, without possessing authorization to do so from this Commission. Mr. Semmer's involvement in the management of Live Oaks Springs Water Company appears to violate Section 854(a) of the Public Utilities Code because he has not received authorization from this Commission to manage or otherwise be involved in the operation of a Commission-regulated public utility. Mr. Semmer may be subject to fines or penalties for these actions.
5. The Commission must determine whether Mr. Semmer, has either de facto or de jure become an owner or operator of a public utility and is thereby subject to the jurisdiction of this Commission.
6. The Commission must determine whether by seizing the assets of Live Oaks Springs Water Company, Mr. Semmer has violated any applicable Commission orders, rules requirements, or statutes that govern the operation of Commission-regulated utilities.
7. The Commission must determine whether City National Bank, as the holder of the promissory note in due course, has become a public utility and whether as a result of its actions in collecting on this note has entered the public utility business and is therefore subject to the jurisdiction of the Commission. City National Bank may be subject to fines and penalties as a result of its actions.
Therefore, IT IS ORDERED that:
1. An investigation on the Commission's own motion is instituted into the operations and practices of the following Respondents: Live Oaks Springs Water Company; Mr. Nazar Najor, manager of Live Oaks Springs Water Company; and to the extent their actions affect the operations of Live Oaks Springs Water Company,
Mr. Matthew Semmer, receiver for City National Bank; and City National Bank.
2. The Respondents are directed to show cause why the Commission should not declare the underlying promissory note between Mr. Nazar Najor and the holder in due course of the loan, City National Bank, is void with regard to the assets of Live Oaks Springs Water Company.
3. The Respondents are further directed to show cause why an order imposing fines, penalties, or other remedies should not be issued for their violations of Commission rules, regulations, or orders, as stated herein.
4. A hearing will be held as soon as practical after an assigned Administrative Law Judge ("ALJ") convenes a Prehearing Conference pursuant to Rule 7.2 and calendars a date, time, and location for a hearing in a subsequent ruling or order. The ALJ will determine the findings of fact and conclusions of law regarding the issues stated herein.
5. The Respondents must provide the Chief ALJ (within 30 days after the date of this order) a written statement indicating whether the Respondents will appear at the hearing and present evidence in response to the issues stated herein.
6. The Respondents must also submit in writing to the Director of the Division of Water & Audits within 30 days after the date of this Order, the following:
A listing of the name, billing address, classification (e.g., residential, commercial), type of service (i.e., meter or
flat-rate), and date and amount of last billing;
7. The Respondents must obtain the Commission's prior written approval before executing any agreement for the sale, transfer, or encumbrance of any ownership interests in Live Oaks Springs Water Company or its water system.
8. This OII constitutes the Notice of Opportunity for Hearing pursuant to Section 855.
9. During the pendency of this proceeding, Respondents must comply with and cease and desist from any and all violations of any Commission order, rule, or regulation and any pertinent Public Utilities Code statutory provision.
10. Staff may propose amending this OII to include additional Respondents or charges. Certain parties may be added or deleted to this proceeding as additional facts emerge during the Commission's investigation. Any such proposal must be presented to the Commission in the form of a motion to amend the OII.
11. The Division of Water & Audits if it elects to do so, may present additional evidence either by testimony or through documentation, bearing on the operations and/or practices of the Respondents. The additional evidence may show whether the Respondents continued to engage in improper conduct after the issuance of the OII, which may affect the type and level of fines or sanctions imposed in this proceeding. Any additional information that the Staff wishes to advance as evidence in this proceeding must be provided to the Respondents in advance of any hearings in accordance with the schedule established by the assigned Administrative Law Judge or Commissioner at a Prehearing Conference. The Staff need only respond to discovery regarding the issues stated above in this order.
12. The Respondents, and any agent, representative, employee, consultant, or other individual or person acting on behalf of the Respondents, are ordered to cooperate with the Division of Water & Audits Staff in accordance with Section 314 and provide access to the Live Oaks Springs Water Company's, Live Oaks Springs and/or Matthew Semmer's accounts (as applicable to payments made from Live Oaks Springs Water Company's assets as reimbursement for the $1.5 million promissory note), City National Bank's accounts (as applicable to payments made from Live Oaks Springs Water Company's assets -either directly or via the actions of Matthew Semmer-in connection with the repayment of the $1.5 million promissory note and other papers whether in electronic or paper form), which the Respondents must preserve until further orders by the Commission.
13. This ordering paragraph suffices for the "preliminary scoping memo" required by Rule 5.2 of the Commission Rules of Practice and Procedure ("Rule"). This proceeding is categorized as an adjudicatory proceeding and will be set for evidentiary hearing. The issues of this proceeding are framed in the above order. A Prehearing Conference shall be scheduled for the purpose of setting a schedule for this proceeding, including dates for the exchange of additional written testimony, determining which of the Staff's witnesses will need to testify, and addressing discovery issues. As to categorization of this proceeding, this order is appealable pursuant to Rules 7.1(c) and 7.6. Any person filing a response to this Order Instituting Investigation, Notice with Opportunity to be Heard, and Order to Show Cause must state in any response the objections to such orders and notice regarding the need for hearings; the issues to be considered; or the proposed schedule. However, objections must be confined to jurisdictional issues that could nullify any eventual Commission decision adjudicating the merits of the alleged violations and may not address factual allegations that an evidentiary hearing will decide.
14. The Executive Director will send by certified mail, return receipt requested, a copy of this Order to the Respondents at the following addresses:
Live Oaks Springs Water Company
Nazar Najor, Manager
PO Box 1241
Boulevard, CA 91905
Jack R. Leer ESQ.
Seltzer, Caplan, McMahon, Vitek
2100 Symphony towers
750 B Street
San Diego, CA 92101
Matthew Semmer
Novascend Asset Solutions
5755 Oberlin Drive, Suite 301
San Diego, CA 92121
Steven R. Bechen
City National Bank
8889 Rio San Diego Drive, Suite 101
San Diego, CA 92108
This order is effective today.
Dated August 2, 2012, at San Francisco, California.
MICHAEL R. PEEVEY
President
TIMOTHY ALAN SIMON
MICHEL PETER FLORIO
CATHERINE J.K. SANDOVAL
MARK FERRON
Commissioners
