Does the Voluntary Dismissal of an Unlawful Detainer Action Bar Recovery of Attorney's Fees in California?

The recent decision in Riverside Mining Limited v. Quality Aggregates, considered parties who entered into a lease agreement allowing defendant and appellant Quality Aggregates (Quality) to mine on a property owned by plaintiff and respondent Riverside Mining Limited (Riverside Mining). 

The business relationship soured, and litigation began. 

 

The appeal contested two orders issued after Riverside Mining voluntarily dismissed the unlawful detainer action. 

 

One is an order denying Quality’s motion for attorney fees under Code of Civil Procedure section 998, and the other an order granting Riverside Mining’s motion to disburse to it certain payments Quality had deposited with the court.

 

The appellate court affirmed both orders. 

 

Riverside Mining owns a property of more than 150 acres in Jurupa Valley. In 2017, Quality leased about 73 acres that the parties call the Pyrite Quarry. 

 

The lease agreement includes a provision shifting attorney fees to the prevailing party in any action, either at law or in equity, to enforce or interpret the terms of the agreement. 

 

According to Quality, by 2020, Riverside Mining began infringing on its leasehold in various ways. 

 

In 2021, Quality sued Riverside Mining, alleging breach of contract, trespass, and quiet title claims.

 

In August 2022, Riverside Mining filed an unlawful detainer action, seeking to evict Quality from the Pyrite Quarry for various alleged breaches of the lease agreement. The appeal concerned the unlawful detainer lawsuit. 

 

Near the outset of the unlawful detainer lawsuit, the parties filed a stipulation that could help preserve the funds at issue during the litigation. They stipulated under that Quality would deposit with the court amounts “otherwise payable to” Riverside Mining “as monthly rental payments” under the lease agreement. 

 

The stipulation explained Riverside Mining’s position that Quality’s breach of the lease agreement “constitutes forfeiture” of the lease agreement, while Quality’s position was it “has not breached nor forfeited the lease agreement” and intended to “continue paying rent.” 

 

As requested, the court ordered Quality to deposit with the Clerk of the Court those funds otherwise payable to Riverside Mining as monthly rent for the pendency of the above-captioned action.

In 2022, Quality offered to compromise under Code of Civil Procedure section 998, proposing settlement of the unlawful detainer action “by entry of a dismissal with prejudice” of the action, “each party to bear their own attorneys’ fees and costs.” 

 

Riverside Mining did not accept the offer. 

 

In 2023, after substantial discovery but before trial, Riverside Mining requested the unlawful detainer action be dismissed without prejudice. The trial court entered the dismissal. 

 

Later, Quality filed a memorandum of costs, claiming $118,372.65, a sum that included no attorney fees, but did include costs and the costs of the services of expert witnesses. Riverside Mining did not object to these costs, paying them in full in May 2023. 

 

Meanwhile, Riverside Mining filed a motion requesting disbursement to it of the payments Quality had deposited with the court per the September 2022 stipulation. 

 

According to the motion, the amount deposited totaled $228,000. Quality opposed the disbursement motion. 

 

Quality also filed a motion for attorney fees under section 998. Quality requested an award of $199,514.38, based on a 1.25 multiplier. Riverside Mining opposed the fee motion. 

 

The trial court granted Riverside Mining’s disbursement motion and denied Quality’s motion for attorney fees. 

Quality argued it was entitled to recover attorney fees incurred after its section 998 offer because the lease agreement has a prevailing party attorney fee clause and Riverside Mining failed to obtain a result more favorable than Quality’s offer to compromise. The trial court disagreed, applying Ford Motor Credit Company v. Hunsberger.

 

Generally, except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

 

Prevailing party includes a defendant in whose favor a dismissal is entered.

 

Consequently, after Riverside Mining voluntarily dismissed this lawsuit, it properly paid Quality’s costs. 

 

Attorney fees are not normally recoverable costs. Rather, under what is known as the "American rule," each party to a lawsuit must ordinarily pay his or her own attorney fees.

 

Nevertheless, recoverable litigation costs include attorney fees when the party entitled to costs has a legal basis, independent of the costs statutes and grounded in an agreement, statute, or other law, upon which to claim recovery of attorney fees.

 

Civil Code section 1717 governs the award of attorney’s fees as costs in contract actions where the contract has an attorney fee provision.

 

If an unlawful detainer action is based on an alleged breach of the lease during an unexpired term (e.g., nonpayment of rent, improper use of the premises), then it is an action sounding in contract.

 

The statute requires any prevailing party attorney fee provision be treated as mutual, regardless of its wording, to avoid the perceived unfairness of one- sided attorney fee provisions.

 

Also, the statute defines “prevailing party” as “the party who recovered a greater relief in the action on the contract.” 

 

There may be one prevailing party, or no party prevailing on the contract.

 

Sometimes, the trial court has discretion to determine who prevailed: If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees. 

 

Other times, however, the trial court has only one option. For example, if a party achieves a “‘simple, unqualified win’” on a contract claim, the trial court must find that party prevailed. 

Importantly here, Civil Code section 1717(b)(2), specifies that “[w]here an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.” 

 

This means that if, as here, a case is dismissed voluntarily, a prevailing party attorney fee clause does not alone permit recovery of attorney fees. 

 

Although Quality made a valid section 998 offer to compromise this case, section 998 does not, expressly authorize an award of attorney fees. Attorney fees are recoverable as costs only if there is some other statutory or contractual right to such fees. 

 

In Ford, the court of appeal applied these principles to facts like this case. The plaintiff sued alleging breach of a contract involving a lease agreement that included a unilateral attorney fee clause, made bilateral by Civil Code section 1717(a). The court noted no appellate authority had held Civil Code section 1717(b)(2) trumps section 998, but found a plain reading of the relevant statutes leads to this result.

 

The distinction between a voluntary dismissal (which is a result in a defendant’s favor) and a trial (which could result in a judgment in either side’s favor) is one of policy. 

 

Civil Code section 1717, subdivision (b)(2), reflects a determination that the American rule that parties bear their own attorney fees should not change where a defendant in a contract action prevails by voluntary dismissal. 

 

In the decade and a half since Ford, no appellate authority has parted ways with it and interpreted the statutes as Quality proposed. Additionally, section 998 has been amended since Ford, and the Legislature did not abrogate it. 

 

When a statute has been construed by the courts, and the Legislature thereafter reenacts that statute without changing the interpretation put on that statute by the courts, the Legislature is presumed to have been aware of, and acquiesced in, the courts’ construction of that statute.

 

LESSONS:

 

1.         Generally, except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

 

2.         Attorney fees are not normally recoverable costs. Rather, under what is known as the "American rule," each party to a lawsuit must ordinarily pay his or her own attorney fees.

 

3.         Sometimes, the trial court has discretion to determine who prevailed: If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees. 

 

4.         Although Quality made a valid section 998 offer to compromise this case, section 998 does not, expressly authorize an award of attorney fees. Attorney fees are recoverable as costs only if there is some other statutory or contractual right to such fees. 

Who Can Recover for Negligent Infliction of Emotional Distress?

In the recent unanimous decision by the California Supreme Court in Downey v. City of Riverside, the Court considered the extent that close relatives can recover for negligent infliction of emotional distress. 

Since the 1968 decision in Dillon v. Legg, California courts have recognized a plaintiff’s right to recover in negligence for serious emotional distress suffered as a result of witnessing injuries inflicted on a close relative. 

 

Recovery for negligent infliction of emotional distress is available, however, only if the plaintiff is present at the scene of the injury- producing event at the time it occurs and is then aware that it is causing injury to the victim.

 

In the prototypical case, exemplified by the facts of Dillon, a parent watches as a negligent driver collides with her child. The parent, who is contemporaneously aware of both the driver’s negligent conduct and the child’s resulting injury, is permitted to sue the driver for her emotional trauma. 

 

The facts of this case required the Supreme Court to consider a new question about emotional distress recovery: What if the plaintiff is aware that injury has been inflicted on the victim, but not of the defendant’s role in causing the injury?

 

Plaintiff Jayde Downey was giving driving directions to her daughter over cell phone when her daughter was severely injured in a car crash. Downey heard the collision and its immediate aftermath, but she could not see what had caused it. She claimed that the fault lies partially with individuals and entities responsible for the condition of the roadway where the crash occurred and sued them for negligent infliction of emotional distress. 

 

The Court of Appeal concluded, however, that Downey was not entitled to recover emotional distress damages against the defendants unless at the time of the crash she was aware of a causal connection between her daughter’s injuries and the defendants’ alleged negligence in maintaining the intersection. 

 

The Supreme Court concluded this was error. For purposes of clearing the awareness threshold for emotional distress recovery, it is awareness of an event that is injuring the victim — not awareness of the defendant’s role in causing the injury — that matters. 

 

In some cases, as in Dillon, these two things may be effectively the same. 

 

In many medical malpractice cases, for instance, a bystander ordinarily will not be aware that injury is being inflicted on the victim without also being aware that medical practitioners are, through their deficient care, causing harm. 

 

But when a bystander witnesses what any layperson would understand to be an injury-producing event — such as a car accident, explosion, or fire — the bystander may bring a claim for negligent infliction of emotional distress based on the emotional trauma of witnessing injuries inflicted on a close relative. 

 

This is true even if the bystander was not aware at the time of the role the defendant played in causing the victim’s injury. 

 

Jayde Downey’s daughter, Malyah Jane Vance, was driving in the City of Riverside when her vehicle was struck by another car.

 

Vance was seriously injured as a result of the collision. At the time of the collision, Downey was talking to Vance by cell phone to give her driving directions to an office close to the intersection. 

 

On her end of the line, Downey heard Vance suddenly gasp, then say “Oh!” in fear or shock. A split second later, Downey heard the sounds of an explosive metal-on-metal vehicular crash, shattering glass, and rubber tires skidding or dragging across asphalt. 

 

Downey knew from the sounds she heard that Vance had been involved in a car crash. As the sound of tires dragging across asphalt faded, Downey — having heard no sounds or vocalizations from Vance — understood that Vance was injured so seriously that she could not speak. 

 

This was confirmed by a stranger who rushed to the scene to help and told Downey over the phone to quiet down so that he could “find a pulse.” 

 

After the crash, Downey and Vance sued the driver of the other car involved in the collision. 

They also sued the City of Riverside and Ara and Vahram Sevacherian, the owners of private property adjacent to the intersection where the crash occurred. 

 

Among other things, their complaint sought recovery for negligent infliction of emotional distress on Downey, who suffered emotional trauma as a result of hearing her daughter’s accident occur in real time. 

 

Downey alleged the City was at least in part responsible for the accident, and thus for Downey’s emotional distress, because the traffic markings, signals, warnings, medians, and fixtures thereon (or lack thereof), were so located constructed, placed, designed, repaired, maintained, used, and otherwise defective in design, manufacture and warning that they constituted a dangerous condition of public property that created an unreasonable and foreseeable risk of injury and harm to occupants of vehicles in the intersection.

 

Downey alleged the Sevacherians, too, contributed to the accident by failing to trim vegetation on their property, which had obstructed the view of traffic. 

 

The City and the Sevacherians demurred to the complaint. They argued that Downey could not allege a negligent infliction of emotional distress claim against them because at the time of the collision she was not aware of how their alleged negligence had caused the collision. 

 

Agreeing with the defendants, the trial court sustained the demurrers without leave to amend. It explained that the complaint’s allegations were insufficient to show that Downey had a contemporaneous awareness of the injury-producing event — not just the harm Vance suffered, but also the causal connection between defendants’ tortious conduct and the injuries Vance suffered.

 

On appeal, Downey argued that it was unnecessary for her to show contemporaneous awareness of the defendants’ tortious conduct to state a claim for negligent infliction of emotional distress. In a divided decision, the Court of Appeal rejected the argument. 

 

Negligent infliction of emotional distress is not an independent tort, but the tort of negligence, to which traditional elements of duty, breach of duty, causation, and damages apply. 

 

Although negligent infliction of emotional distress is a species of the long-established tort of negligence, its origins are considerably more recent. As previously explained, the recognition of a bystander’s claim for the negligent infliction of emotional distress was the outgrowth of two significant developments in California tort law. 

 

The first development was the recognition of the infliction of emotional distress as a discrete tort cause of action. 

 

Although the law had previously recognized emotional distress as a significant component of a plaintiff’s damages for various established torts such as assault and false imprisonment, the court for the first time accepted both freedom from emotional distress as an interest worthy of protection in its own right, and the proposition that it is possible to quantify and compensate for the invasion of that interest, even when unaccompanied by physical harm. 

 

The second development concerned the treatment of emotional distress claims in cases involving negligence— particularly in cases involving emotional harms resulting from negligently inflicted physical injury to another. 

 

For many years, the general rule in California was that no recovery is permitted for a mental or emotional disturbance, or for a bodily injury or illness resulting therefrom, in the absence of a contemporaneous bodily contact or independent cause of action, or an element of willfulness, wantonness, or maliciousness, in cases in which there is no injury other than one to a third person, even though recovery would have been permitted had the wrong been directed against the plaintiff.

 

Unless the plaintiff personally suffered bodily injury as a result of the defendant’s negligence or was in the “zone of danger” and suffered physical injury as a result of emotional trauma, damages for emotional distress were not recoverable in negligence actions. 

 

This general rule significantly limited the recovery available for mental or emotional disturbances caused by another’s danger, or sympathy for another’s suffering when that suffering was negligently inflicted. 

Plaintiffs traumatized by having witnessed a loved one being injured or killed in an accident could recover for the trauma only if the plaintiffs were also physically injured, or else were so close to the accident that they feared for their own safety. 

 

As a result of Dillon, the law in California — and now elsewhere — recognizes that bystanders who witness a close relative being negligently injured have a cause of action for negligence and may recover damages for their trauma.

 

To fill this gap, the Supreme Court in a previous decision articulated three essential limits on a bystander’s recovery for negligently caused emotional distress. 

 

A plaintiff may recover damages for emotional distress caused by observing the negligently inflicted injury of a third person if, but only if, said plaintiff: (1) is closely related to the injury victim; (2) is present at the scene of the injury- producing event at the time it occurs and is then aware that it is causing injury to the victim; and (3) as a result suffers serious emotional distress — a reaction beyond that which would be anticipated in a disinterested witness and which is not an abnormal response to the circumstances.

 

Applying these limits, the Supreme Court held that the mother who had not witnessed her son being struck by a car could not recover emotional distress damages because she could not satisfy the second requirement. 

 

This case likewise turns on the second requirement, that the bystander plaintiff be present at the scene of the injury-producing event at the time it occurs and be then aware that it is causing injury to the victim. 

 

The question is whether, to satisfy this requirement, the plaintiff must understand not only that a close relative is suffering injury, but also that the defendant’s negligent conduct or omissions have caused the injury.

 

In answering the question presented, the Supreme Court emphasized that the requirements pertain to just one element of the negligence claim, which is the scope of the duty that an alleged tortfeasor owes to relatives of a victim who suffer emotional distress upon observing an event that injures the victim. 

 

A plaintiff who can satisfy the requirements will not prevail unless the plaintiff proves not only that the defendant owed the plaintiff a duty but also that the defendant’s breach of that duty caused the plaintiff’s damages. 

 

There can be no recovery for emotional distress caused by the negligent infliction of injury on a third party unless the plaintiff contemporaneously understands that the injury-causing event is in fact causing injury to the victim. 

 

Recognizing that the Supreme Court has not previously required contemporaneous awareness of the defendant’s contribution to the injury, as distinct from awareness of the injury-causing event, the question becomes whether the Court should impose such a requirement now. It saw no persuasive reason to do so. 

 

It is, of course, true that not all forms of emotional trauma associated with harm to a loved one are compensable. The plaintiff must have suffered trauma from perceiving the injury-producing event, itself rather than on viewing or learning about the injurious consequences of the defendant’s conduct. 

 

But this means only that the emotional trauma must be the result of directly witnessing and understanding that harm is being done — not the result of learning of the harm after the fact. 

A plaintiff is not merely experiencing the results of an injury-causing event when that plaintiff witnesses an accident or other event that has resulted in severe injury to a loved one. 

 

The emotional trauma that comes from witnessing such an accident exists regardless of whether the plaintiff is aware at the time of the accident of all the individuals or entities that have contributed to the accident through their conduct. 

 

The telecommunications technology has created more scenarios where potential plaintiffs might witness a loved one being injured.  Thus, the Supreme Court declined to superimpose an additional limitation that would require awareness not only of the injury-producing event.

 

The Court of Appeal concluded that Downey was “present” at the scene of the car crash because “she contemporaneously sensed auditorily the accident and the fact Vance was injured.” 

 

Neither precedent nor considerations of tort policy support requiring plaintiffs asserting bystander emotional distress claims to show contemporaneous perception of the causal link between the defendant’s conduct and the victim’s injuries. 

 

Here, Downey alleged that when she was on the phone with her daughter she heard metal crashing against metal, glass shattering, and tires dragging on asphalt — from which she knew immediately that her daughter had been in a car accident. 

 

Downey has also alleged that she understood that her daughter was seriously injured because she could no longer hear her after the crash and a stranger indicated difficulty in finding a pulse.

 

LESSONS:

 

1.         A plaintiff may recover damages for emotional distress caused by observing the negligently inflicted injury of a third person if, but only if, said plaintiff: (1) is closely related to the injury victim; (2) is present at the scene of the injury- producing event at the time it occurs and is then aware that it is causing injury to the victim; and (3) as a result suffers serious emotional distress — a reaction beyond that which would be anticipated in a disinterested witness and which is not an abnormal response to the circumstances.

 

2.         A plaintiff who can satisfy the requirements will not prevail unless the plaintiff proves not only that the defendant owed the plaintiff a duty but also that the defendant’s breach of that duty caused the plaintiff’s damages. 

 

3.         There can be no recovery for emotional distress caused by the negligent infliction of injury on a third party unless the plaintiff contemporaneously understands that the injury-causing event is in fact causing injury to the victim. 

 

4.         Neither precedent nor considerations of tort policy support requiring plaintiffs asserting bystander emotional distress claims to show contemporaneous perception of the causal link between the defendant’s conduct and the victim’s injuries. 

Can Members Ratify Defective Decisions by a California LLC?

In California, limited liability companies (LLC) are a popular method of ownership of real property and their operation is important to understand.

In the recent Second District Court of Appeal decision of Camden Systems, LLC v. 409 North Camden, LLC, Camden Systems, LLC appealed from the judgment entered in favor of defendants 409 North Camden, LLC and its individual members after the trial court granted defendants’ summary judgment motion. 

 

Camden Systems’s complaint sought declarations that certain actions taken by members of 409 North Camden, including distributions to the members, were invalid, and it sought return of the distributed funds. 

 

In its motion, 409 North Camden acknowledged that some of the actions taken by its members at the company’s February 2021 annual meeting were invalid in light of defective notice of the meeting, but it argued that at its February 2022 annual meeting a majority of the members ratified the prior actions, thereby curing any defect in the 2021 notice. 

 

The trial court agreed and granted summary judgment in favor of 409 North Camden. 

 

On appeal, Camden Systems contended that the members’ ratification of the actions taken at the February 2021 meeting did not cure the defective notice because members of limited liability companies, unlike corporations, may not ratify prior actions taken on behalf of company. 

 

However, the California Revised Uniform Limited Liability Company Act (Corp. Code, § 17701.01 et seq.; the Act),which governs the management and operation of limited liability companies, provides that a limited liability company generally “shall have all the powers of a natural person in carrying out its business activities.” (§ 17701.05.) 

 

Because a natural person has the power to ratify acts taken on the person’s behalf, limited liability companies likewise may, through their members, ratify actions previously taken on behalf of the company. 

 

In addition, the court did not err in upholding the resolution adopted by the majority of 409 North Camden’s members to indemnify its members and advance defense costs and expenses incurred in the lawsuit filed by Camden Systems. 

 

In 1963 a group of six friends purchased a two-story office building in Beverly Hills. From 1963 until 2016 the purchasers (and some of their heirs) owned the building as tenants in common without any formal partnership agreement. 

 

In 2016 the owners, still composed of the original purchasers and their heirs, formed 409 North Camden as a manager-managed limited liability company and transferred ownership of the office building to the company. 

 

At the time of its formation, 409 North Camden had 13 members. Jeffrey Young, the son of one of the original owners, was elected as the manager of the company.

 

In 2020 Camden Systems became a member of 409 North Camden by purchasing the membership interests of three existing members. 

 

As of October 2020, there were 10 members of the company, all of whom—except for Camden Systems—were the building’s original purchasers or their family members. Camden Systems owned a 22.5 percent interest in the company, comprising the largest single membership interest. 

 

The operating agreement of 409 North Camden provides that “[t]he Company shall make quarterly distributions of Available Cash at such times and in such amounts as determined by the Manager, subject to the approval of the Members.”

 

Since September 2016, the company distributed approximately $773,000 in Available Cash to its members. Each distribution was authorized by a majority of the members. The members did not authorize any distributions after Camden Systems became a member in July 2020. 

 

On January 11, 2021, Young sent the members of 409 North Camden a notice that the company’s annual meeting would take place on February 20, 2021. The notice included copies of three documents Young indicated would be discussed at the meeting regarding potential building upgrades or modifications. 

 

The notice stated an agenda and annual report would be distributed “a few days” prior to the meeting. No other topics of discussion or potential action items were mentioned in the notice. 

 

On February 11, 2021, Young sent the company’s members a meeting agenda for the upcoming meeting, which listed four action items that members would vote on at the meeting: (1) re- election of Young as manager; (2) withholding cash distributions for the first quarter of 2021; (3) authorization of payment of expenses in excess of $10,000; and (4) approval of a “[m]anagement assistance fee” of $1,500 per month to member Kenneth Young. 

 

On February 15, 2021, an attorney for Camden Systems sent a letter to Jeffrey Young complaining that Young had failed to produce certain corporate records Camden Systems had previously requested. 

 

Camden Systems’s attorney asserted the records were necessary for his client to prepare for the upcoming member meeting, and therefore, it intended to object to any business taking place at the February 20 meeting without having first received the records. 

 

Camden Systems also provided a notice to Young that it intended to object to any business being conducted by the members at the February 20 meeting because the January meeting notice did not state the general nature of the business to be transacted, as required by the Corporations Code.  

Further, although the February 11 notice specified the business to be transacted at the meeting, the notice was untimely because it was sent less than 10 days before the meeting, in violation of the Code. 

 

The annual meeting was held as scheduled on February 20, 2021. Joseph Shabani, the manager of Camden Systems, attended the meeting and reiterated Camden Systems’s objections as stated in its attorney’s letter and notice. 

 

The four action items listed in the meeting agenda were voted on and approved by a majority of the members who were present. Shabani, on behalf of Camden Systems, abstained from each vote. 

 

On March 25, 2021 Camden Systems, in its individual capacity and derivatively on behalf of 409 North Camden, filed this action against 409 North Camden (as a nominal defendant) and its members (member defendants), alleging causes of action for breach of fiduciary duty, breach of contract, and declaratory relief. 

 

The allegations in the complaint were based, in part, on the alleged impropriety of the authorizations for cash distributions made between 2016 and July 2020 and the actions taken at the February 2021 meeting. 

 

On May 3, 2021, prior to responding to the complaint, the member defendants adopted a written resolution regarding the pending litigation. The resolution stated in its recitals that after Camden Systems became a member of 409 North Camden, Shabani and his attorney told Young that Shabani “expect[ed] to buy” the remaining interest in 409 North Camden and “‘things will not go well for you if you refuse to sell the property to him.’” 

 

Shabani had also contacted individual members and threatened to sue them if they did not sell their interests in the company to him. According to the resolution, the member defendants were “uniform in their decision that they do not want to sell their interest in the Company or the Property at all and certainly not to Shabani under these circumstances.” 

 

The member defendants resolved that 409 North Camden would not make upcoming cash distributions and would instead reserve all excess funds for defense of the lawsuit. 

 

In addition, the member defendants agreed 409 North Camden “shall indemnify and hold the Manager and the Members harmless” against the lawsuit and shall “advance defense costs and expenses accordingly.” The resolution was dated May 3, 2021 and signed by all members of the company except Camden Systems. 

 

The annual meeting was held on February 19, 2022. The members approved by majority vote the ratification of the prior cash distributions, the actions taken at the February 2021 meeting, and the indemnification resolution. 

 

Shabani, on behalf of Camden Systems, voted no or abstained from each vote, except the ratification of the 2021 vote to pay expenses in excess of $10,000, for which Shabani voted yes. 

The meeting minutes do not state that Shabani or Camden Systems objected to the ratification process prior to or during the meeting. 

 

The third amended complaint alleged three causes of action against the member defendants: a request for declaratory relief finding the actions taken at the February 2021 meeting were without force and legal effect because the meeting notice was untimely and/or did not sufficiently state the nature of the business to be conducted; a claim for money had and received based on the allegedly improper cash distributions; and a request for declaratory relief finding the May 2021 indemnification resolution was invalid because the company was without legal authority to indemnify the members.

 

On May 10, 2022, the member defendants moved for summary judgment, or in the alternative, summary adjudication. 

 

The member defendants argued that, even if the notice for the February 2021 meeting was defective, it was undisputed that the notice for the February 2022 meeting, at which the members ratified their earlier actions, was timely and sufficiently detailed. 

 

The ratification thus cured any defects in the prior actions. Further, regarding the cause of action for money had and received, Camden Systems did not have standing to challenge actions taken before it became a member of the company in 2020, and, even if it had standing, the cash distributions were ratified during the procedurally proper 2022 meeting. Finally, the indemnification resolution was authorized under the operating agreement. 

 

In opposition, Camden Systems argued the purported ratification in 2022 had no legal effect because limited liability companies do not have the power to ratify earlier actions. 

 

Camden Systems further argued it had standing to pursue the money had and received cause of action even though it was not a member of the company when the distributions were authorized because at least one distribution payment was made after Camden Systems became a member of the company. 

 

Finally, the indemnification resolution was ineffective because any action not within the ordinary course of the company’s business required unanimous consent of the members. 

 

On July 26, 2022, following a hearing, the trial court granted the motion for summary judgment, and on September 13, 2022, the court entered judgment in favor of the member defendants. Camden Systems timely appealed. 

 

The Act provides that the activities and conduct of a limited liability company are generally governed by its operating agreement. 

 

With certain enumerated exceptions, the operating agreement may establish rules that differ from the statutory default rules. 

 

To the extent an operating agreement “does not otherwise provide for a matter,” the matter is governed by the Act. 

 

Declaratory relief is available to any person interested under a written instrument who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property in cases of actual controversy relating to the legal rights and duties of the respective parties. (Code Civ. Proc., § 1060.) 

 

Declaratory relief pursuant to this section has frequently been used as a means of settling controversies between parties to a contract regarding the nature of their contractual rights and obligations.

 

Likewise, the correct interpretation of a statute is a particularly suitable subject for a judicial declaration.

 

Resort to declaratory relief therefore is appropriate to attain judicial clarification of the parties’ rights and obligations under the applicable law.

 

The member defendants do not dispute that the initial notice for the February 20, 2021 meeting, sent in January 2021, did not contain the general nature of the business to be discussed or the proposals to be approved—specifically, the reelection of Young as manager, withholding of first and second quarter distributions, payment of certain expenses, and payment of a management assistance fee to Kenneth Young. 

 

It is also undisputed the second notice of the meeting, sent on February 11, 2021, was sent less than 10 days prior to the meeting. Accordingly, the actions approved at the meeting were invalid at the time. 

 

Despite the invalidity of the February 2021 actions, Camden Systems was not entitled to a declaration the actions taken at the meeting were invalid because the actions were subsequently ratified. 

 

Camden Systems did not dispute that the notice for the February 2022 meeting (at which the ratification votes were taken) was sent more than 10 days in advance of the meeting and contained sufficient information regarding the actions to be addressed. 

 

Instead, Camden Systems contended the ratification was ineffective because the members did not have legal authority to ratify their earlier actions. 

 

The concept of ratification is derived from the law of agency that has repeatedly been applied in the context of corporate governance. 

 

In the context of acts by agents, ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him.

The effect of a ratification is that the authority which is given to the purported agent relates back to the time when he performed the act.

 

A ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified.

 

Applying this law, courts have found an action that was initially within the authority of a corporation’s board but was not properly authorized may be ratified through a resolution of its board of directors when duly assembled. 

 

A resolution of the board of directors declaring a dividend, even though it is unlawful in its inception for lack of a duly held meeting, can be ratified by the board of directors.

 

Execution of a note secured by real property that was originally approved at a procedurally defective board meeting was ratified by subsequent resolutions adopted at procedurally proper board meetings.

 

A resolution acknowledging existence of loan at full board meeting ratified loan allegedly negotiated by corporation’s president without board’s authorization.

 

Ratification is generally not permitted when it will prejudice the rights of a third party. No unauthorized act can be made valid, retroactively, to the prejudice of third persons, without their consent.

 

Camden Systems did not contend on appeal that ratification was improper because Camden Systems suffered prejudice from the company’s ratification of the February 2021 actions. 

 

Camden Systems conceded shareholders and boards of directors have rights of ratification, but it contended such rights do not extend to limited liability companies. 

 

Camden Systems did not cite any authority for the proposition that general principles of ratification cannot be applied to limited liability companies in the same way those principles are applied to corporations, labor unions, and other organizations. 

 

Instead, Camden Systems argued the Corporations Code expressly grants ratification powers to shareholders and boards, but grants no comparable power to members of a limited liability company.

 

However, a limited liability company generally shall have all the powers of a natural person in carrying out its business activities. It follows that a limited liability company would have the same authority as an individual to ratify a previous action. 

 

In the absence of any authority prohibiting a limited liability company from ratifying an earlier action, there is no basis for a declaration that the actions taken as a result of the February 2021 meeting, which were later ratified by a majority of the members with proper notice, were invalid.

In fact, Camden Systems effectively received the remedy it initially sought—a procedurally proper vote on the actions taken. 

 

A common count for money had and received is not a specific cause of action; rather, it is a simplified form of pleading normally used to aver the existence of various forms of monetary indebtedness.

 

A cause of action for money had and received is stated if it is alleged [that] the defendant ‘is indebted to the plaintiff in a certain sum for money had and received by the defendant for the use of the plaintiff.

 

The claim is viable wherever one person has received money which belongs to another, and which in equity and good conscience should be paid over to the latter.

 

The plaintiff must prove that the defendant received money intended to be used for the benefit of the plaintiff, that the money was not used for the plaintiff’s benefit, and that the defendant has not given the money to the plaintiff.

 

Camden Systems argued the member meetings between February 2017 and June 2020 were not properly noticed, and therefore, the votes taken at those meetings approving cash distributions to members were invalid, resulting in the members’ receipt of funds that rightfully belonged to the company. 

 

That argument failed because Camden Systems did not have standing to challenge actions taken by the company prior to Camden Systems’s membership, and further, as discussed, the 2020 votes were ratified in February 2022. 

 

A member of a limited liability company may bring a derivative lawsuit on the company’s behalf only if the plaintiff was a member, of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains.

 

It is undisputed that Camden Systems was not a member of the company until
July 2020. 

 

However, even if Camden Systems had standing to challenge the decision to make the $50,000 distribution, that distribution was explicitly ratified during the February 2022 meeting, and, as discussed, the ratification was procedurally proper and legally effective. 

 

Camden Systems did not identify any other portion of the 2017 to 2019 distributions that was made after it became a member of the company.

 

Accordingly, it had no standing to bring a derivative claim challenging those distributions. 

 

LESSONS:

 

1.         The California Revised Uniform Limited Liability Company Act (Corp. Code, § 17701.01 et seq.; the Act), which governs the management and operation of limited liability companies, provides that a limited liability company generally “shall have all the powers of a natural person in carrying out its business activities.” (§ 17701.05.) 

 

2.         The Act provides that the activities and conduct of a limited liability company are generally governed by its operating agreement. With certain enumerated exceptions, the operating agreement may establish rules that differ from the statutory default rules. To the extent an operating agreement “does not otherwise provide for a matter,” the matter is governed by the Act. 

 

3.         The concept of ratification is derived from the law of agency that has repeatedly been applied in the context of corporate governance. In the context of acts by agents, ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him.

 

4.         Ratification is generally not permitted when it will prejudice the rights of a third party.  No unauthorized act can be made valid, retroactively, to the prejudice of third persons, without their consent.

 

5.         However, a limited liability company generally shall have all the powers of a natural person in carrying out its business activities. It follows that a limited liability company would have the same authority as an individual to ratify a previous action. 

 

6.         A member of a limited liability company may bring a derivative lawsuit on the company’s behalf only if the plaintiff was a member, of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains.