As a safeguard against frivolous derivative lawsuits brought “on behalf of” an LLC, Corporations Code section 17709.02 allows a defendant to file a motion for an order requiring the plaintiff to post a bond at the outset of the case. If the court decides there is “no reasonable possibility” that the claims will benefit the LLC or its members, or that the moving party did not participate in the transaction complained of, then the court can order the plaintiff to post a bond in an amount up to $50,000, which can be available to the LLC and the moving party upon the action’s favorable termination.
If the LLC’s managers — sued as defendants in a derivative action — make such a motion at the outset of the case and the court denies the motion, does that impact the managers’ ability to recover prevailing party costs if they ultimately prevail in the case? A case recently published by California’s Second Appellate District — Barrios v. Chraghchian — addresses the question.
Facts: defendants lose bond motion but win case
Plaintiff Albert Barrios invested in an LLC managed by Defendants Patrick Chraghchian and Joel Leebove. Barrios sued both in a derivative action, claiming that they allowed the LLC to engage in unauthorized transactions.
At the beginning of the case, Defendants filed a motion under section 17709.02 seeking the imposition of a bond, which the court denied.
The case ultimately went to trial, and Defendants prevailed. Barrios appealed and lost.
Trial court: cost award to Defendants as prevailing parties in the case
The trial court awarded prevailing party costs to Defendants, ruling that Defendants prevailed both at trial and on appeal. The trial court rejected Barrios’ motion to tax costs.
Barrios appealed, arguing that the trial court’s denial of the bond motion at the outset of the case precluded a later award of prevailing party costs to Defendants.
Court of Appeal: affirmed
The Court of Appeal rejected Barrios’ argument, holding it “is doubly flawed: it lacks a statutory basis, and contrary case law forecloses it.”
The court recited the language of section 17709.02 in its entirety, noting the language from subdivision (c)(2): “A ruling by the court on the motion shall not be a determination of any issue in the action or of the merits of the action.”
The court also observed: “Missing from this lengthy block quotation are words like when defendants lose a bond motion, these defendants are not entitled to costs, even if they ultimately prevail in the lawsuit. There is nothing even close.”
Turning to case law, the court explained that in a prior case addressing the analogous statute applying to corporate derivative actions (Corporations Code section 800), the court confirmed that the derivative nature of an action “does not create any exception” to the more general statutes governing recovery of prevailing party fees and costs.
Lesson
Under the Barrios opinion, the outcome of a motion for bond at the beginning of a derivative action has no impact on the later determination of entitlement to prevailing party costs.
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