Case #1: Appellate Sanctions Are Imposed.
In Alexandros v. Cole, Case No. G043715 (4th Dist., Div. 3 Dec. 30, 2011) (unpublished), plaintiffs lost a minority shareholder breach-of-fiduciary duty suit against various defendants and then lost their appeal. However, the appellate court also awarded $10,000 (out of a requested $30,000) in sanctions to defendants because plaintiffs’ attorneys admitted violating California Rules of Court relating to appellate practice--including irrelevant documents in the appellants’ appendices and making numerous unsupported factual statements without record citations. [BLOG OBSERVATION--Co-contributor Mike has litigated securities cases on the defense side against the attorneys who were sanctioned.]
Case #2: Brusso Allows for Defendants to Obtain Section 1717 Fees Against Nonsignatory Plaintiffs in Derivative Actions.
In our January 29, 2009 post on West Hill Farms v. RCO Ag Credit (a nonpublished Fifth District decision), we learned that winning defendants in shareholder derivative lawsuits are usually limited to the amount of a posted Corporations Code section 800 bond (capped at $50,000). However, West Hill Farms did observe that there were other bases for an award that is not so capped--namely, Brusso v. Running Springs Country Club, Inc., 228 Cal.App.3d 92, 107-108 (1991), where a court determined that a successful defendant may collect fees from plaintiff shareholders under Civil Code section 1717 if derivative claims are based on a contract containing a fees clause. Well, Brusso was front and center in the companion case to the one we just discussed, with that case being Conrad v. KOR Electronics, Inc., Case Nos. G044457/G044682 (4th Dist., Div. 3 Dec. 30, 2011) (unpublished).
Conrad involved nonsignatory plaintiff shareholders who lost a derivative suit against numerous defendants (KOR shareholders, KOR directors, and KOR), with the lower court awarding two adverse fees awards against one plaintiff broken down as $747,012 to KOR directors/KOR and $919,224 to two shareholders. Even though the losing plaintiff was a nonsignatory shareholder to repurchase/investor agreements with a fees clause, the lower court determined that Brusso allowed the recovery.
On the whole, the fee awards were affirmed on appeal. Acting Presiding Justice Rylaarsdam, who wrote this and the prior companion opinion on behalf of 3-0 panels, found that the derivative action did seek to rescind the contracts and that Brusso was still good law. (Brusso is must reading in this area, based not only on section 1717 but on the inequity of allowing nonsignatory derivative plaintiffs to recover fees under the substantial benefit doctrine unless a similar substantial benefit through fee recovery was conferred upon the winning defendants under 1717 reciprocity principles.) However, the fee award in favor of Cole had to be reversed because he was not a party to the contract and was not an intervenor defending on KOR’s behalf. Plaintiff also correctly challenged the fees awarded to KOR, because derivative plaintiff cannot be assigned a corporation’s liability to pay to itself the corporation’s own attorney’s fees and any corporate indemnification duty to directors for their fees is separate from recovery of fees against a derivative litigant. Fortuitously, the trial court had apportioned fees between Cole, KOR and another director entitled to fees so that this formula allowed the appellate court the good fortune to reduce the fees to the other director down to $249,004 (down from $747,012). With that reduction, the remainder of the fee awards were sustained. [BLOG OBSERVATION--In many federal and state securities suits, plaintiffs do not face fee exposure absent frivolous conduct because there are no fee-shifting bases. However, if there is a fees clause involved in a derivative context, plaintiffs attorneys are well advised to advise their clients that there well might be exposure under Brusso in California derivative litigation.]