Donner Management Co. v. Schaffer

The purpose of the section 800 security provision is to prevent unwarranted shareholder derivative lawsuits. (3 Witkin, Cal. Procedure, supra, Actions, § 335, p. 429; Brusso, supra, 228 Cal.App.3d at p. 104.) The justification for the security is derived from the fact that the cause of action and potential remedy belong to the corporation, not the shareholder (see Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173 , 183 [ 133 Cal.Rptr.3d 408 ]), and the corporation has chosen not to pursue the litigation. As explained by the California Supreme Court: “[E]very stockholder who ... is unable to induce the corporation, through its board of directors, to institute a particular action on its own behalf, and who undertakes as its volunteer representative to sue on the cause asserted by him, may be required to furnish security.” (Beyerbach v. Juno Oil Co. (1954) 42 Cal.2d 11 , 21 [ 265 P.2d 1 ] (Beyerbach).) “In these circumstances the Legislature, for the protection of third persons who have dealt with the corporation, as well as for the protection of the corporation and its officers and employe[e]s, can constitutionally require that the stockholder who would act as in the nature of a guardian ad litem must, as a condition of prosecuting the action on behalf of the corporation, either show a reasonable probability that the suit will be successful or secure the payment of the defendants’ expenses should they prevail. The Legislature, of course, can attribute some weight to the fact that the corporation has not seen fit to institute action on a cause which either belongs to it or to no one.” (Id. at pp. 23-24; see also Chase v. Super-Cold Corp. (1958) 163 Cal.App.2d 83 , 85 [ 328 P.2d 812 ].)

1. No-reasonable-possibility-of-benefit Standard

Donner argues that no fees should be awarded unless there has been compliance with section 800’s provision that a mandatory bond requires a showing of no reasonable possibility of benefit to the corporation from the action. Donner contends that because plaintiffs voluntarily posted the security in this case, this showing has not been made.

After initially filing our opinion in this case, we granted a rehearing and asked the parties to file supplemental briefs on the issue of whether a plaintiff’s voluntary posting of a security excuses the requirement that a defendant show no reasonable possibility of benefit to the corporation. Having considered the parties’ arguments, we conclude that when a plaintiff voluntarily posts security, the defendant may seek to enforce the security as the prevailing party at the conclusion of the case without having to retrospectively satisfy the no-reasonable-possibility-of-benefit standard.

When interpreting statutes, we seek to ascertain legislative intent so as to effectuate the purpose of the law. (DuBois v. Workers’ Comp. Appeals Bd. (1993) 5 Cal.4th 382 , 387 [ 20 Cal.Rptr.2d 523 , 853 P.2d 978 ].) Our first task is to look at the language of the statute itself. (Ibid.) Section 800 contains no express language addressing what, if any, showing must be made when a defendant seeks to collect on a security that was posted voluntarily. However, section 800’s voluntarily posting provision suggests that once security is posted by the plaintiff, the bond is available to pay for the defendant’s attorney fees should the defendant emerge as the prevailing party. Section 800, subdivision (e) states: “If the plaintiff shall, either before or after a motion is made pursuant to subdivision (c), or any order or determination pursuant to the motion, furnish a bond in the aggregate amount of fifty thousand dollars ($50,000) to secure the reasonable expenses of the parties entitled to make the motion, the plaintiff has complied with the requirements of this section and with any order for a bond theretofore made, and any such motion then pending shall be dismissed and no further or additional bond shall be required.” (Italics added.) The phrase “to secure the reasonable expenses of the parties entitled to make the motion” reflects that the security, once posted, is available to pay for the prevailing defendant’s expenses. There is nothing to indicate that a prevailing defendant must make an additional showing to access the security.

Additionally, the bond statute mandates dismissal of the bond motion after a voluntary posting of security. This feature supports a conclusion that the Legislature did not intend to require a retrospective determination of the no-reasonable-possibility-of-benefit standard. When a plaintiff voluntarily posts security, the section 800 bond motion is not merely placed in abeyance waiting for resolution at the conclusion of the case. Instead, the motion is dismissed, eliminating the need and the opportunity for the court to rule on whether the moving party met its statutory burden. Thus, when a prevailing defendant seeks to collect on the security at the conclusion of the case, there is no pending bond motion upon which the trial court is expected to rule. Section 800’s dismissal provision correlates with a legislative intent to dispense with the no-reasonable-possibility-of-benefit requirement in the event of a voluntary posting of security.

Moreover, from a practical perspective, imposition of a no-reasonable-possibility-of-benefit requirement at the conclusion of the litigation would fashion an awkward adjudicatory rule. The statute imposes this requirement as a threshold determination to be made by the trial court based on an assessment of whether there is a reasonable possibility the litigation will be of benefit to the corporation. After the case is concluded, retrospective evaluation of the no-reasonable-possibility-of-benefit standard would require

the trial court to ascertain whether it would have been persuaded at the commencement of the lawsuit that the “no benefit” showing had been made so as to compel posting of a bond. It is unlikely the Legislature would have intended to impose such a speculative task on the parties or the trial court.

Our conclusion, derived from the plain language and substantive structure of the statute, is also supported by the California Supreme Court’s discussion of the bond statute in Beyerbach, supra, 42 Cal.2d 11 . In Beyerbach, the court recognized that the Legislature was entitled to impose special rules on shareholder derivative lawsuits because of their unique characteristics. In upholding the constitutionality of the bond statute, Beyerbach reasoned that the Legislature could determine that normally corporations will pursue their own causes of action when of benefit to the corporation, and that shareholders may abuse the right to bring a derivative suit. (Id. at p. 23.) Accordingly, it was reasonable for the Legislature to enact a statute requiring a plaintiff-shareholder in a derivative lawsuit to “either show a reasonable probability that the suit will be successful or secure the payment of the defendants’ expenses should they prevail.” (Beyerbach, supra, 42 Cal.2d at pp. 23-24, italics added.) The analysis in Beyerbach underscores that the purpose of the security is to restrain derivative lawsuits filed by shareholders instead of the corporation itself, and supports that once the security is furnished so as to allow the plaintiff to proceed with the litigation, the security is available to reimburse the defendant should the defendant prevail.

In evaluating the constitutionality of the pretrial bond requirement, the Beyerbach court noted that the no-reasonable-possibility-of-benefit standard provides a due process safeguard for the plaintiff. (Beyerbach, supra, 42 Cal.2d at p. 24.) However, in a situation where the plaintiff voluntarily posts bond, the plaintiff is, of his or her own accord, in effect choosing to substitute one benefit (the defendant’s burden to show the lawsuit is not beneficial to the corporation prior to obtaining a bond) for another benefit (the speedier resolution of the lawsuit by dispensing with litigation of the bond motion). The fact that the defendant will be able to collect on the security only if he or she is the prevailing party ensures that the plaintiff will not be unfairly deprived of his or her posted funds. Under these circumstances, there is no due process imperative for imposing the no-reasonable-possibility-of-benefit standard at the conclusion of the case in a situation where the plaintiff voluntarily furnished security.

Donner contends that if a prevailing defendant is not required to meet the no-reasonable-possibility-of-benefit standard at the conclusion of the case, plaintiffs will not be inclined to voluntarily post security. We do not find this

to be a pivotal consideration impacting our interpretation of section 800. As noted, the essential purpose of the section 800 bond statute is to create a deterrent to unwarranted shareholder derivative lawsuits by providing a mechanism for securing a prevailing defendant’s expenses up to $50,000. The voluntary posting option is a corollary provision that allows a plaintiff to avoid the delay inherent in litigating a defendant’s bond motion. When deciding whether to post bond, the plaintiff must decide if the benefits of voluntarily posting (i.e., quicker resolution of the case) outweigh the risk that the plaintiff might lose the case and forfeit the security. However, regardless of whether the defendant’s bond motion is litigated or resolved voluntarily, the statute’s purpose of imposing a security impediment to shareholder derivative lawsuits remains intact. There is nothing in the legislative scheme suggesting the statute should be interpreted to maximize voluntarily posting, at the expense of expanding litigation at the conclusion of the case by requiring a retrospective determination of the no-reasonable-possibility-of-benefit standard. To the extent voluntary posting should be encouraged as a matter of public policy, any restructuring of the section 800 bond statute to further this goal is a matter for the Legislature to consider.

To support its argument that the no-reasonable-possibility-of-benefit standard should be evaluated in hindsight after the conclusion of the case, Donner cites the parties’ stipulation at the time of the voluntary posting which provides that the deposit could be applied to enforce the plaintiffs’ liability “if any.” (Italics added.) Donner posits that the stipulation’s recognition that liability on the bond was not established by the posting contemplates further proceedings, and that the parties understood these further proceedings would include litigation of the no-reasonable-possibility-of-benefit standard. We are not persuaded. At the time Donner voluntarily posted security, liability on the security was not established because it was not known which party would prevail. The reference to the undetermined bond liability in the stipulation does not shed any definitive light on the issue of whether the no-reasonable-possibility-of-benefit standard should be included in the matters to be resolved once the defendant prevailed. For the reasons stated above, we conclude it should not.

2. Frivolousness Standard

Donner further argues that as a matter of policy an award of fees under section 800 should require a showing the plaintiff’s lawsuit was frivolous. Donner posits that if this requirement is not imposed, there will be a chilling effect on shareholder derivative lawsuits because shareholders will know attorney fees liability will be incurred in any case in which they voluntarily

provide security and a special litigation committee thereafter ascertains the lawsuit should not be pursued for business reasons, even if the allegations in the complaint are meritorious.

Donner is essentially asking us to rewrite the section 800 bond requirements. There is no frivolousness requirement for attorney fees recovery expressly or implicitly set forth in section 800. Donner’s request for the insertion of a frivolousness standard is a policy matter for the Legislature, not the courts.

B. Prevailing Party Determination After Dismissal Without Prejudice

Section 800 does not define the circumstances under which the defendant may obtain attorney fees on a bond or other security furnished by the plaintiff. Consistent with the intent of section 800 and other legislative schemes authorizing attorney fees, the courts and commentators have inferred that a defendant may enforce a security posted under section 800 if he or she is determined to be the prevailing party. (See Beyerbach, supra, 42 Cal.2d at pp. 21, 23-24; Alcott v. M. E. V. Corp., supra, 193 Cal.App.3d at p. 799; Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:659, p. 6-138.15.) The definition of prevailing party is not uniform under California law, and many attorney fees statutes contain a technical definition applicable to the particular statutory scheme. (See, e.g., Santisas v. Goodin, supra, 17 Cal.4th at p. 609; Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553 , 565 [ 1 Cal.Rptr.3d 331 , 101 P.3d 140 ]; Agnew v. State Bd. of Equalization (2005) 134 Cal.App.4th 899 , 908-909 [ 36 Cal.Rptr.3d 464 ].) Because section 800 does not define prevailing party, we must construe the meaning of the term for purposes of a section 800 attorney fees award after a dismissal without prejudice without the benefit of any express statement of legislative intent.

In reaching its prevailing party determination, the trial court relied on the practical standard set forth in Damian v. Tamondong (1998) 65 Cal.App.4th 1115 [ 77 Cal.Rptr.2d 262 ] (Damian). As we shall explain, we conclude the court applied the correct standard and reasonably exercised its discretion to characterize Schaffer as the prevailing party.

Schaffer asserts the definition of prevailing party set forth in Code of Civil Procedure section 1032 (which applies to an award of costs) is the standard applicable to section 800 fees. Code of Civil Procedure section 1032, subdivision (a)(4) defines prevailing party as including a “defendant in whose favor a dismissal is entered,” with no requirement that the court evaluate the merits of the lawsuit. An opposite standard for prevailing party is set forth in

Civil Code section 1717, subdivision (b)(2) (applicable to contractual attorney fees awards for contract claims), which precludes an award of attorney fees after a voluntary dismissal, regardless of the potential merits of the action. The courts have repeatedly rejected the contention that either of these prevailing party standards should be automatically applied in cases where the authorizing attorney fees statute does not define prevailing party. (Gilbert v. National Enquirer, Inc. (1997) 55 Cal.App.4th 1273 , 1276-1277 [ 64 Cal.Rptr.2d 659 ] (Gilbert); Damian, supra, 65 Cal.App.4th at pp. 1123-1126, 1129; Heather Farms Homeowners Assn. v. Robinson (1994) 21 Cal.App.4th 1568 , 1572-1574 [ 26 Cal.Rptr.2d 758 ] (Heather Farms); see Santisas v. Goodin, supra, 17 Cal.4th at pp. 614-615, 617.)

In the absence of legislative direction in the attorney fees statute, the courts have concluded that a rigid definition of prevailing party should not be used. (Gilbert, supra, 55 Cal.App.4th at p. 1277.) Rather, prevailing party status should be determined by the trial court based on an evaluation of whether a party prevailed “ ‘on a practical level,’ ” and the trial court’s decision should be affirmed on appeal absent an abuse of discretion. (Ibid.; Damian, supra, 65 Cal.App.4th at pp. 1126, 1129-1130 & fn. 15; Heather Farms, supra, 21 Cal.App.4th at p. 1574; see Santisas v. Goodin, supra, 17 Cal.4th at p. 622 [pragmatic definition of prevailing party, based on extent to which party has realized litigation objectives, applies to tort claims under contractual attorney fees provision]; Castro v. Superior Court (2004) 116 Cal.App.4th 1010 , 1018, 1022-1024 [ 10 Cal.Rptr.3d 865 ] [policy underlying particular attorney fees statute considered as part of practical test].)

This “practical level” standard has been applied in cases involving a dismissal without prejudice. (Gilbert, supra, 55 Cal.App.4th at pp. 1277-1278; Heather Farms, supra, 21 Cal.App.4th at pp. 1570, 1574; Parrott v. Mooring Townhomes Assn., Inc. (2003) 112 Cal.App.4th 873 , 875, 879 [ 6 Cal.Rptr.3d 116 ].) For example, in Gilbert, a case involving a plaintiff who voluntarily dismissed certain causes of action without prejudice in order to expedite the appeal of other causes of action that had been stricken on demurrer, the appellate court affirmed the trial court’s decision that it was premature to decide which party had prevailed “on a practical level.” (Gilbert, supra, at pp. 1277-1278.)

Given that there is no statutory definition of prevailing party here, the flexible, pragmatic standard generally used by the courts to determine prevailing party status applies. Thus, the matter is to be determined by the trial court in the exercise of its discretion based on practical considerations.

Donner contends that because this case involves a dismissal without prejudice that did not reflect on the merits of the allegations in the complaint, the trial court could not properly characterize Schaffer as a prevailing party. Donner’s argument is premised on the unique characteristic of the special litigation committee defense. The special litigation committee defense is rooted in the business judgment rule, which restrains courts from unduly interfering in the good faith business decisions of corporate directors. (Finley v. Superior Court (2000) 80 Cal.App.4th 1152 , 1157-1163 [ 96 Cal.Rptr.2d 128 ]; Desaigoudar v. Meyercord, supra, 108 Cal.App.4th at pp. 183-184, 186-188.) When a committee of directors concludes that pursuit of the derivative lawsuit is not in the best interests of the company, the trial court must determine whether this decision abrogates the lawsuit. (Finley v. Superior Court, supra, 80 Cal.App.4th at p. 1158.) To determine whether the special litigation committee defense should prevail, the court does not evaluate the merits of the lawsuit, but only considers whether the committee members acted independently and made an adequate investigation of the controversy. (Desaigoudar v. Meyercord, supra, 108 Cal.App.4th at pp. 185, 188.) If the court finds a disinterested committee made a good faith, reasonable inquiry before reaching its decision that the lawsuit should not be prosecuted, the committee’s decision provides a complete defense to the derivative lawsuit. (Ibid)

We conclude the trial court reasonably exercised its discretion to find that Schaffer was the prevailing party. Donner’s dismissal of the complaint was not truly voluntary; rather, it was compelled by the special litigation committee’s decision that it was not in the best interests of the corporation to continue the lawsuit. Even though the special litigation committee’s decision did not establish that the allegations in the complaint lacked merit, it did establish that the lawsuit itself could not be pursued because of the peculiar nature of the business judgment rule/special litigation committee defense which blocks litigation that is properly determined not to be in the best interests of the company. Thus, as a practical matter, the special committee’s decision ended the litigation in favor of Schaffer and against plaintiffs. Donner has not proffered any persuasive argument as to why, under the circumstances of this case, the trial court was necessarily required to also consider the underlying merits of the allegations in the complaint. We conclude the trial court did not abuse its discretion in finding that Schaffer prevailed because the lawsuit ended based on the existence of a complete defense, and with no recovery obtained by Donner on behalf of the corporation.

DISPOSITION

The order is affirmed. Donner to pay Schaffer’s costs on appeal.

McDonald, J., and O’Rourke, J., concurred.

Appellants’ petition for review by the Supreme Court was denied December 13, 2006, S146798.