Judge: Robert S. Draper, Case: BC695301, Date: 2022-10-13 Tentative Ruling

Case Number: BC695301    Hearing Date: October 13, 2022    Dept: 78

Superior Court of California 

County of Los Angeles 

Department 78 

Nominal Defendant 10801 National, LLC’s Application to Stay and Ascertain Value of Membership Interest is GRANTED.

The Judicial Dissolution Cause of Action is stayed pending valuation.

Within seven days, the parties are to submit independent lists of five neutral appraisers, from which the Court will select three to undertake the appraisal process.

The purchasing parties are ordered to issue a bond in the amount of $100,000.00.

FACTUAL BACKGROUND

This is an action for breach of fiduciary duties. The Third Amended Complaint (“TAC”) alleges as follows. Nominal Defendant 10801 National LLC (“National”) was formed to control real property at 10801 National Boulevard, Los Angeles, California 90064. (TAC ¶ 9.) Defendant Farhad “Frank” Rahban (“Rahban”), until recently, managed National. (TAC ¶ 13.) Rahban misused the properties’ funds for his own personal benefit. (SAC ¶¶ 19(b)-(d).) The members of National demanded that Rahban step down after discovering his misbehavior. (TAC ¶ 15.) Rahban told National that he would step down but is now refusing to do so. (Ibid.)

Plaintiff Fortune Company, LLC (“Plaintiff”) brings this action both directly and derivatively on behalf of the harmed National. (TAC ¶ 18.)

PROCEDURAL HISTORY 

On February 22, 2018, Plaintiffs filed the Complaint.

On May 30, 2018, Plaintiffs filed the First Amended Complaint:

On November 15, 2018, Plaintiffs filed the Second Amended Complaint asserting seven causes of action:

1.    Breach of Fiduciary Duty (Derivative);

2.    Fraudulent Concealment (Derivative):

3.    Conversion (Derivative);

4.    Breach of Contract (Derivative);

5.    Breach of the Implied Covenant of Good Faith and Fair Dealing (Derivative);

6.    Accounting (Direct); and,

7.    Accounting (Derivative).

On May 16, 2022, Plaintiffs filed the operative Third Amended Complaint, adding a cause of action for Judicial Dissolution pursuant to Corporations Code § 17707.3.

On August 9, 2022, National filed the instant Motion for Stay of Proceedings.

On September 7, 2022, Plaintiff Saeed Younessi (“Saeed”) filed an Opposition.

On August 29, 2022, National filed a Reply.

On September 7, 2022, the Court heard argument on the matter and continued the hearing. The Court ordered the parties to meet and confer in good faith to negotiate a buy-out price, and to issue a joint statement as to the result of the meet and confer process.

Between September 28, 2022, and October 6, 2022, all parties filed statements indicating that the meet and confer process was unsuccessful.

DISCUSSION 

I.              MOTION FOR STAY PURSUANT TO CORPORATIONS CODE SECTION 17708.3(c)

Nominal Defendant National moves for a stay of the proceedings and for a determination of fair market value pursuant to Corporations Code section 17707.03(c).

Section 17707.03(c) states:

(1) In any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interests owned by the members so initiating the proceeding, the “moving parties,” at their fair market value. In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties, including, without limitation, the operating agreement, may be deducted from the amount payable to the moving party or parties; provided, that no member who sues for dissolution on the grounds set forth in paragraph (3), (4), or (5) of subdivision (b) shall be liable for damages for breach of contract in bringing that action. 

(2) If the purchasing parties elect to purchase the membership interests owned by the moving parties, are unable to agree with the moving parties upon the fair market value of the membership interests, and give bond with sufficient security to pay the estimated reasonable expenses, including attorney's fees, of the moving parties if the expenses are recoverable under paragraph (3), the court, upon application of the purchasing parties, either in the pending action or in a proceeding initiated in the superior court of the proper county by the purchasing parties, shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the membership interests owned by the moving parties

 (3) The court shall appoint three disinterested appraisers to appraise the fair market value of the membership interests owned by the moving parties, and shall make an order referring the matter to the appraisers so appointed for the purpose of ascertaining that value. The order shall prescribe the time and manner of producing evidence, if evidence is required. The award of the appraisers or a majority of them, when confirmed by the court, shall be final and conclusive upon all parties. The court shall enter a decree that shall provide in the alternative for winding up and dissolution of the limited liability company, unless payment is made for the membership interests within the time specified by the decree. If the purchasing parties do not make payment for the membership interests within the time specified, judgment shall be entered against them and the surety or sureties on the bond for the amount of the expenses, including attorney’s fees, of the moving parties. Any member aggrieved by the action of the court may appeal therefrom.

(4) If the purchasing parties desire to prevent the winding up and dissolution of the limited liability company, they shall pay to the moving parties the value of their membership interests ascertained and decreed within the time specified pursuant to this section, or, in the case of an appeal. On receiving that payment or the tender of payment, the moving parties shall transfer their membership interests to the purchasing parties.

(5) For the purposes of this section, the valuation date shall be the date upon which the action for judicial dissolution was commenced. However, the court may, upon the hearing of a motion by any party, and for good cause shown, designate some other date as the valuation date.

Here, National argues that the determination of a fair market value of Plaintiffs’ interest in National is necessary as Defendants have repeatedly attempted to buy-out Plaintiffs, but the parties were unable to come to a determination of fair market value.

In Opposition, Plaintiffs make three arguments.

First, Plaintiffs argue that as section 17707.03 specifically allows for “other members” of the LLC to initiate the appraisal process, National, as a nominal defendant, does not have standing under the statute.

Though Plaintiffs do not cite any authority specifically stating as such, Plaintiffs note that several courts have remarked on the need for a corporate entity appearing as a nominal defendant to stay removed from the action, as no party has the right to “impose on the corporation the burden of fighting their battle.” (Patrick v. Alacer Corp. (2008) 167 Cal.App.4^th 995, 1007-08.)

While the Court does not wish to wax philosophical about the inherent desires of corporate entities, there does seem to be a difference between using a nominal defendant corporation to demur to its own causes of action, as occurred in Patrick, compared to imposing on a corporation the burden of avoiding its own death, as is being discussed here. Here, the LLC is not being wielded by some members to gain advantage over other members; instead, it is being used to initiate a process by which the LLC may continue, and the parties objecting to its continuance can be fairly compensated for their departure.

Additionally, as National notes, National’s Operating Agreement specifically authorizes a member to transfer or otherwise dispose of their interest whether voluntarily or involuntarily, or by operation of law or otherwise, “to the company or to any other Member.” (National Operating Agreement Section 7.2(a).)

Accordingly, absent any authority demonstrating that a nominally appearing defendant LLC is barred from initiating the appraisal procedure under 17707.03, the Court will not prevent the appraisal from taking place due to linguistic technicalities.

Next, Plaintiffs argue that the instant motion is barred by laches, as section 17707.03 was intended to expedite the dissolution process. Here, Plaintiffs note, litigation has been proceeding for 4.5 years, so this intent is greatly frustrated.

However, as National notes in its Reply, Plaintiffs only added a cause of action for Judicial Dissolution in their Third Amended Complaint, filed in May 2022. As this Motion was filed in August 2022, National caused no significant delay. Moreover, Plaintiffs cannot argue that National delayed in seeking an expedited dissolution process when Plaintiffs themselves did not initiate the dissolution process until 4.5 years into litigation.

Finally, Plaintiffs argue that as National has never made a proposal for a Fair Market Value to purchase Plaintiffs’ share, no disagreement to the Fair market Value between Plaintiffs and the purchasing party has occurred. (Younesi Decl. ¶ 3.) In Reply, “National requests for Plaintiffs to provide their valuation.” (Reply at p. 4.)

Plaintiffs’ argument is well taken. Absent some indication that the parties are unable to reach a fair market valuation of Plaintiffs’ share in the LLC, section 17707.03 does not apply. More importantly, by formally meeting and conferring with the intention of coming to a mutually agreeable valuation, the Court hopes that the parties can come to an agreeable number, thereby saving both parties, and the Court, the headache of invoking the formal procedures required by the Corporations Code.

II.             STAYING OF ENTIRE PROCEEDING OR JUST JUDICIAL DISSOLUTION

The parties also disagree about whether a stay, should it occur, would apply only to the cause of action for judicial dissolution, or to all causes of action.

Plaintiffs argue that the statute facially applies only to “the winding up and dissolution proceeding.”

National responds by arguing that “it is impracticable [] to resolve the remaining causes of action first, before determining the fair market value of Plaintiffs’ interests and allowing National’s members the opportunity to purchase the interests through the company.” (Reply at p. 3.)

Section 17707.03(c)(2) clearly states that the court “shall stay the winding up and dissolution proceeding.” .  If the Legislature intended for the statutory stay to apply to the entire action, it would have said so.  But it did not and without any authority interpreted the statute otherwise, the plain language is clear and the stay will only issue as to Plaintiff’s dissolution proceedings.

III.           BOND AMOUNT

Finally, the parties disagree about the bond amount that should be required under section 17707.03(c)(2). Should an appraisal be necessary, the Court will consider the proper bond amount that National must post at the next hearing.

IV.          ADDENDUM FOR OCTOBER 13, 2022, HEARING

As all parties concur that no valuation amount could be reached through the meet and confer process, National’s Motion for Stay for Valuation pursuant to Corporations Code section 17707.03(c) is GRANTED.

The Judicial Dissolution Cause of Action is stayed pending valuation.

Within seven days, the parties are to submit independent lists of five neutral appraisers, from which the Court will select three to undertake the appraisal process.

The purchasing parties are ordered to issue a bond in the amount of $100,000.00

DATED:  October 13, 2022           _____________________________ 

Hon. Robert S. Draper 

Judge of the Superior Court