Fee/Costs Award of $96,518 Affirmed on Appeal in Favor of Prevailing LLC Co-Manager.
Prevailing party status, we would observe, does focus on pragmatics, especially under Civil Code section 1717 (which allows recovery of fees under certain circumstances where there is a fees clause). The next case illustrates that in the context of a dissolution/buy-out dispute between co-managers of a California limited liability company.
In Smith v. Arakelian, Case No. B247253 (2d Dist., Div. 4 Jan. 7, 2014) (unpublished), one LLC co-manager filed a complaint seeking dissolution/accounting of the LLC pursuant to corporate provisions specifying ways of avoiding a dissolution through an early buy-out by the opposing side. Unfortunately, recourse to this early remedy was not be utilized. After about 2 years of litigation and appraisals, one of the co-managers got bought by the other co-manager for $700,000. But, bought-out manager also obtained a lower court award of prevailing party attorney’s fees/costs based on a broadly worded LLC operating agreement clause allowing for fee recovery. What amount? $96,518 was the judicially-rewarded tally to bought-out LLC co-manager.
Loser appealed; loser lost again.
Because the Civil Code section 1717 “on the contract” analysis is liberal in nature, pragmatics govern as far as deciding the “prevailing party”—what side really achieved his litigation objectives (given male litigants were involved here)? The trial court decided bought-out party.
That did not seem to be an incorrect call at all by the appellate court. After all, winner did try to disassociate and obtain compensation, but was met with 2 years of litigation that finally resulted in a buyout. Think “mitigation of litigation” (maybe we just coined a word) isn’t factored into the ultimate judicial thinking? You would be wrong, because it is. Here, there was a statutory scheme for an early buyout, one not adopted by the losing party, pursuing litigation instead. Let us tell you the consequence in the appellate court’s own words of opting for the more vociferous route: “. . . [appellant] not only refused to purchase [respondent’s] shares immediately after the appraisal, but also contested the action for over a year before then. A purchasing party in an action for dissolution may avoid liability for most or all fees by promptly invoking its statutory right to a buyout under Corporations Code section 17707.03, subdivision (c).” (Slip Op., p. 9.) That did not occur here—no mitigation of litigation, so the fee award was sustained.
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