Nonsignatories: LLC Members Receiving Distributions In De Facto Dissolution Liable For Fee Exposure To Prevailing Party In LLC Dispute Where Fee Clause Existed Between LLC And Plaintiff Listing Broker

 

Former Corporations Code Section 17355(a)(1)(B) Allows For Fee Entitlement In Litigation, But Not Fees Incurred In Arbitration.

     In CB Richard Ellis, Inc. v. Terra Nostra Consultants, Case No. G049803 (4^th Dist., Div. 3 Oct. 7, 2014) (partially published; fee discussion published), plaintiff listing broker sued to recover a commission in an arbitration between plaintiff and a seller LLC, with seller LLC having no assets to satisfy the arbitration award eventually obtained against it by broker due to a de facto dissolution in which monetary distributions were made to LLC members. Broker then brought formal litigation against the LLC members under former Corporations Code section 17355(a)(1)(B), which allows for causes of action against a dissolved LLC to be brought against LLC members obtaining distributions to members “upon dissolution of the limited liability company.” (The current statute, Corporations Code section 17707.07(a)(1), is not that materially different in nature.) The jury awarded broker $354,000 but the lower court refused to award both fees incurred by broker as against LLC members for work in the prior arbitration and at the subsequent trial.

     After finding that a “de facto” dissolution qualified as a dissolution under the statute, Justice Ikola—on behalf of a 3-0 panel of our local Santa Ana appellate court—determined that fees were allowable for broker’s trial efforts as against LLC members given the language in section 17355(a)(1)(B) and the analogy to Reynolds Metals Co. v. Alperson, 25 Cal.2d 124 [a venerable Civil Code section 1717 alter ego decision]. “This is not an alter ego case. But the statutory remedy provided by former section 17355 is similar to alter ego doctrine in that it prohibits investors from inequitably leaving creditors high and dry with an empty judgment against an insolvent entity.” (Slip Op., pp. 18-19.)

     However, different matter with respect to broker’s request to recover fees incurred in the arbitration. LLC members were not liable for any aspect of the arbitral judgment given that former section 17355 only authorizes third parties to enforce against members of a dissolved LLC the causes of action that ordinarily would be brought against the LLC. (Interestingly enough because of this statutory language, this meant broker had to re-prove the contract claim no matter that it had obtained a prior arbitration award against the LLC. The appellate court did find the lower court erred by admitting the entire arbitral award at trial, but found the error was not prejudicial in nature.)