4/3 DCA Amended Judgment To Reflect Unsuccessful Shareholder Liable For Fees And Costs Under Contractual Fees Clause; Corporation Dodged $1,357,410 Fee Award And $34,358.90 In Costs.
Here is another case where there was a complete change in fortune on appeal for a corporation sued as a nominal defendant in a derivative action.
In Bailey v. Cremach Tech, Inc., Case Nos. G054026/G054474 (4th Dist., Div. 3 April 10, 2019) (unpublished), a shareholder brought a meritless shareholder derivative suit, naming a prevailing party individual defendant where a contractual fees clause was involved and also naming the corporation as a nominal defendant. (In this area of the law, the corporation cannot oppose on the merits because it is effectively a plaintiff and a nominal defendant.) When prevailing individual defendant moved for fees and costs, the lower court awarded $1,357,410 in fees and $34,358.90 in costs against corporation but refusing to award anything against the losing plaintiff individual shareholder.
Corporation did well to appeal. The 4/3 DCA, in a 3-0 opinion authored by Presiding Justice O’Leary, reversed the fees and costs award against corporation and amended the judgment to reflect that the award should be made against the losing individual plaintiff shareholder. The reason is that the corporation should not be liable under Civil Code section 1717 given that it could not oppose the derivative action such that the true losing party, the shareholder, should be the one to bear the burden of the fee/costs award. In doing so, the panel relied heavily on the on-point reasoning in Brusso v. Running Springs Country Club, Inc., 228 Cal.App.3d 92, 99-100, 107-108 (1991).