Direct Liability Only At Issue—No Fee Recovery.
In American Rag Cie, LLC v. Haralambus, Case No. B246285 (2d Dist., Div. 5 Feb. 27, 2015) (unpublished), plaintiff LLC sued defendant 14% shareholder for fiduciary duty, contract breach, declaratory relief and unjust enrichment, which inspired defendant’s cross-complaining against plaintiff and other cross-defendants for several tort and contractual claims. The lower court, after a bench trial, entered judgment against all parties except for plaintiff’s declaratory relief claim. Defendant moved for fees, claiming to be the prevailing party on the fiduciary duty and contractual breach claims based on an indemnification clause in the LLC operating agreement. The trial court said “no,” prompting an appeal.
The appellate court affirmed the “no” ruling. A fair reading of the indemnification clause showed it only applied to third party claims, not direct liability involving the LLC and constituent members/shareholders. This was made clear by the fact that the indemnification clause allowed the LLC board to control his defense, which would only be realistic in a third-party claim situation rather than a dispute with the LLC directly.