DONNER MANAGEMENT COMPANY v. SCHAFFER (2006)

Donner Management Company ² appeals from an order awarding attorney fees to Michael Schaffer, following the dismissal without prejudice of Donner's shareholder derivative lawsuit against Schaffer and nominal defendant Asia Web Holdings, Inc. (Asia Web).³  In the unpublished portion of this opinion, we (1) deny Schaffer's motion to dismiss the appeal, and (2) reject Donner's argument that the trial court abused its discretion in granting Schaffer relief under Code of Civil Procedure section 473 for a late filing of his attorney fees motion.   In the published portion of this opinion, we hold the trial court did not err in determining that Schaffer was the prevailing party who should be awarded attorney fees based on a security voluntarily posted by Donner under Corporations Code 4 section 800.   Accordingly, we affirm the order.

FACTUAL AND PROCEDURAL BACKGROUND

Schaffer was a director and the chief executive officer of Asia Web. On March 13, 2002, Donner filed a derivative shareholder complaint against Schaffer and nominal defendant Asia Web, alleging Schaffer had breached his fiduciary duty and engaged in conversion, and requesting an accounting.   On April 22, 2002, Asia Web filed a motion requesting that Donner post a bond pursuant to section 800, subdivision (c).  To support the bond motion, Asia Web submitted a declaration from the current chairman of its board of directors explaining that Schaffer had resigned from the corporation, and detailing reasons why the lawsuit was detrimental to the corporation.

To avoid a discovery stay pending litigation of the bond motion, Donner voluntarily deposited a $50,000 cashier's check as security to satisfy the bond request, as allowed under section 800, subdivision (e) and Code of Civil Procedure section 995.710.   A stipulated order filed June 11, 2002, provided:  “Plaintiffs hereby agree that pursuant to Code of Civil Procedure § 995.710 the officer of the Court is authorized to collect, sell or otherwise apply this deposit to enforce the liability of plaintiffs, or any of them, if any, on the deposit․ [¶] ․ [¶] It is further stipulated and agreed that defendant Michael Schaffer may participate in the security deposited by plaintiffs.   Defendants Asia Web Holdings, Inc. and Michael Schaffer reserve their respective rights to apply for attorneys fees and costs and oppose any application by either of them.”  (Emphasis omitted.)

Thereafter, the parties conducted discovery and the matter was set for trial.   Meanwhile, in February or March 2004, Asia Web appointed a special litigation committee, composed of a newly elected board of directors, to investigate whether the lawsuit was of benefit to the corporation.   After interviewing various parties to the litigation and examining documents, on April 12, 2004, the special litigation committee notified Donner of its conclusion that based on its business judgment it was not in the best interests of the company to continue the litigation.   To reach this conclusion, the special litigation committee considered “a wide range of issues, independent of the merits of the litigation, including but not limited to the impact of this litigation on the time and resources of [company] personnel, its impact on future operations and fundraising efforts․”

Accordingly, on May 28, 2004, Donner moved to dismiss the action without prejudice, based on its recognition that a “special litigation committee defense” in favor of the defendants had been established which barred the action.   In moving to dismiss the action, Donner advised the court that it was not necessary to hold a full evidentiary hearing on the matter because Donner had concluded the members of the special litigation committee were properly independent and the committee had performed an adequate investigation, thus establishing the special litigation committee defense.

Schaffer did not oppose the motion to dismiss, but asserted that the dismissal should be with prejudice, contending that the lawsuit was without merit and had been brought to advance Donner's personal interests.   The trial court rejected Schaffer's request for a dismissal with prejudice, finding that Schaffer had not presented any evidence to prove his assertions.   The court dismissed the action without prejudice on August 6, 2004.

Schaeffer filed a motion for attorney fees and costs based on the $50,000 security posted by Donner under section 800.   The court ruled that Schaffer was the prevailing party entitled to attorney fees.   To support its ruling, the court found that the special litigation committee defense was more than a procedural defense;  Schaffer was successful in “mak[ing] the case go away”;  and there was no recovery on the complaint.⁵

DISCUSSION

I.-II.**

III. Award of Attorney Fees to Schaffer as the Prevailing Party Under Section 800

Donner challenges the propriety of the trial court's decision to award attorney fees under the section 800 security to Schaffer as the prevailing party.   Donner argues fees should not be awarded under section 800 without a determination that (1) there was no reasonable possibility the lawsuit would benefit the corporation, and (2) the lawsuit was frivolous.   Further, he asserts Schaffer cannot properly be characterized as the prevailing party given that the lawsuit was dismissed without prejudice with no reflection on the merits.

A. Attorney Fees Under Section 800

To evaluate Donner's first two arguments, we review the legal principles applicable to attorney fees awards under section 800.

Attorney fees may not be awarded absent statutory authorization or contractual agreement.  (Code Civ. Proc., § 1021;  Santisas v. Goodin (1998) 17 Cal.4th 599, 607, fn. 4, 71 Cal.Rptr.2d 830, 951 P.2d 399.) Section 800 provides a statutory basis for attorney fees in shareholder derivative lawsuits. (See Brusso v. Running Springs Country Club, Inc. (1991) 228 Cal.App.3d 92, 101, 278 Cal.Rptr. 758 (Brusso ).)

To compel a plaintiff-shareholder in a derivative lawsuit to furnish a bond securing payment of the defendant's attorney fees, section 800 requires that the defendant “establish[ ] a probability,” based on affidavits or oral testimony, (1) “[t]hat there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders [,][or] (2)[t]hat the [defendant] moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.” (§ 800, subds.(c)(2), (d), italics added.)   If the defendant does not satisfy one of the section 800 grounds for a bond and accordingly no bond or other security is posted, the defendant will not be entitled to section 800 attorney fees even if he or she prevails at the end of the litigation.  (Alcott v. M.E.V. Corp. (1987) 193 Cal.App.3d 797, 799, 238 Cal.Rptr. 520;  Friedman, Cal. Practice Guide:  Corporations, supra, ¶ 6.659.1, pp. 6-138.15 to 1-138.16.) On the other hand, if the defendant does establish one of the section 800 grounds, the court fixes the amount of the bond (not to exceed $50,000) “to be furnished by the plaintiff for reasonable expenses, including attorneys' fees, which may be incurred by the moving party and the corporation in connection with the action, including expenses for which the corporation may become liable pursuant to Section 317.” ¹⁰ (§ 800, subd. (d).)

To prevent collateral estoppel effect, section 800, subdivision (d) provides that a court's ruling granting or denying the motion for security “shall not be a determination of any issue in the action or of the merits thereof.”  (See 3 Witkin, Cal. Procedure:  Actions, supra, § 337, p. 431.)   If a defendant makes a successful motion under section 800 requiring the plaintiff to post a bond as security for attorney fees, and the plaintiff fails to post the bond, the trial court must dismiss the action. (§ 800, subd. (d);  see Brusso, supra, 228 Cal.App.3d at p. 105, 278 Cal.Rptr. 758.)

A plaintiff in a derivative lawsuit has the option of “avoid[ing] the inconvenience and delay of the motion proceeding by voluntarily posting a bond in the aggregate amount of $50,000, either before or after a motion [for security] is made.   This will be deemed full compliance, and any pending motion must be dismissed.”  (3 Witkin, Cal. Procedure:  Actions, supra, § 338, p. 432;  § 800, subds. (e), (f).) ¹¹

The purpose of the section 800 security provision is to prevent unwarranted shareholder derivative lawsuits.  (3 Witkin, Cal. Procedure:  Actions, supra, § 335, p. 429;  Brusso, supra, 228 Cal.App.3d at p. 104, 278 Cal.Rptr. 758.)   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, supra, 108 Cal.App.4th at p. 183, 133 Cal.Rptr.2d 408), and the corporation has chosen not to pursue the litigation.  “ ‘[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.’․  ‘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 employees, can constitutionally require 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.’ ” (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.

There are no provisions in section 800 addressing what, if any, showing must be made when a defendant seeks to collect on a bond that was posted voluntarily.   We need not decide whether a “no benefit” finding must be made by a trial court at the conclusion of a case after a voluntary posting, because in any event the standard was effectively satisfied here based on the establishment of the special litigation committee defense underlying the dismissal order.

In assessing whether there is no reasonable possibility the action will benefit the corporation, the court “must evaluate the possible defenses which the plaintiffs would have to overcome before they could prevail at trial.”  (2 Ballantine & Sterling, Cal. Corporation Laws, supra, § 293.02, p. 14-23.)   One such potential defense is the “ ‘business judgment rule’ ” defense (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 869, 47 Cal.Rptr. 392;  Marble v. Latchford Glass Co. (1962) 205 Cal.App.2d 171, 175-176, 22 Cal.Rptr. 789), which includes the special litigation committee defense based on the committee's decision that pursuit of the lawsuit is not in the best interests of the company (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. 186-187, 133 Cal.Rptr.2d 408).   To determine whether a defense based on a special litigation committee's decision 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, supra, at pp. 185, 188, 133 Cal.Rptr.2d 408.)   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.  (Id. at p. 185, 133 Cal.Rptr.2d 408.)

The establishment of the special litigation committee defense determined that the plaintiffs-shareholders could not prevail in the litigation brought to protect the corporation's interests.   Thus, the special litigation committee defense ended the litigation without providing a remedy to the corporation.   If a bond hearing had been held and the court had been persuaded at that time that it was likely a special litigation committee defense would be successful, the court would have been compelled to find there was no reasonable possibility the litigation would benefit the corporation.¹²  Assuming arguendo a “no benefit” finding was required, the requirement was effectively satisfied in conjunction with the dismissal without prejudice based on the establishment of the special litigation committee defense.

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.  Section 800 evinces a legislative determination that plaintiffs-shareholders in a derivative action should bear the risk of attorney fees liability if there is no reasonable possibility the lawsuit would benefit the corporation.   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 v. Juno Oil Co. (1954) 42 Cal.2d 11, 21, 23-24, 265 P.2d 1;  Alcott v. M.E.V. Corp., supra, 193 Cal.App.3d at p. 799, 238 Cal.Rptr. 520;  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, 71 Cal.Rptr.2d 830, 951 P.2d 399;  Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 565, 21 Cal.Rptr.3d 331, 101 P.3d 140;  Agnew v. State Bd. of Equalization, supra, 134 Cal.App.4th at pp. 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.

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.   In reaching its prevailing party determination, the trial court relied on the 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 (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, 77 Cal.Rptr.2d 262;  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, 71 Cal.Rptr.2d 830, 951 P.2d 399.)

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, 64 Cal.Rptr.2d 659.)   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 and fn. 15, 77 Cal.Rptr.2d 262;  Heather Farms, supra, 21 Cal.App.4th at p. 1574, 26 Cal.Rptr.2d 758;  see Santisas v. Goodin, supra, 17 Cal.4th at p. 622, 71 Cal.Rptr.2d 830, 951 P.2d 399 [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, 64 Cal.Rptr.2d 659;  Heather Farms, supra, 21 Cal.App.4th at pp. 1570, 1574, 26 Cal.Rptr.2d 758;  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, 64 Cal.Rptr.2d 659.)

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.

Under the facts of this case, 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.

FOOTNOTES

2.   Appellants also include Charles Greer, Norman Schwartz, David Reiter, David Levy, Elliot Pearlman, and David Burney.   We refer to appellants collectively as “Donner.”

3.   During the pendency of the derivative lawsuit, Asia Web merged with Case Financial, Inc., and adopted the latter company's name.   For simplicity, we refer to the company as Asia Web. Asia Web is not a party to this appeal.

FN4. Subsequent statutory references are to the Corporations Code unless otherwise specified..  FN4. Subsequent statutory references are to the Corporations Code unless otherwise specified.

5.   The trial court also ruled that a cross-complaint filed by Schaffer, which had been adjudicated in favor of Donner on summary judgment, did not impact Schaffer's prevailing party status.   Other than a passing comment in a footnote in its appellate brief, Donner does not challenge this aspect of the court's ruling.

FOOTNOTE.   See footnote *, ante.

10.   Section 317 sets forth the standards governing a corporate agent's request for indemnification from the corporation for payment of attorney fees.  (See Brusso, supra, 228 Cal.App.3d at pp. 102-103, 278 Cal.Rptr. 758.)

11.   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.”Additionally, Code of Civil Procedure section 995.710 sets forth the procedure utilized by Donner, which allows a deposit in lieu of a bond.

12.   The court was not required, of course, to make this finding at a pretrial bond hearing because Donner elected to voluntarily post security.

HALLER, Acting P.J.

WE CONCUR:  McDONALD and O'ROURKE, JJ.