Can Members Ratify Defective Decisions by a California LLC?

In California, limited liability companies (LLC) are a popular method of ownership of real property and their operation is important to understand.

In the recent Second District Court of Appeal decision of Camden Systems, LLC v. 409 North Camden, LLC, Camden Systems, LLC appealed from the judgment entered in favor of defendants 409 North Camden, LLC and its individual members after the trial court granted defendants’ summary judgment motion.

Camden Systems’s complaint sought declarations that certain actions taken by members of 409 North Camden, including distributions to the members, were invalid, and it sought return of the distributed funds.

In its motion, 409 North Camden acknowledged that some of the actions taken by its members at the company’s February 2021 annual meeting were invalid in light of defective notice of the meeting, but it argued that at its February 2022 annual meeting a majority of the members ratified the prior actions, thereby curing any defect in the 2021 notice.

The trial court agreed and granted summary judgment in favor of 409 North Camden.

On appeal, Camden Systems contended that the members’ ratification of the actions taken at the February 2021 meeting did not cure the defective notice because members of limited liability companies, unlike corporations, may not ratify prior actions taken on behalf of company.

However, the California Revised Uniform Limited Liability Company Act (Corp. Code, § 17701.01 et seq.; the Act),which governs the management and operation of limited liability companies, provides that a limited liability company generally “shall have all the powers of a natural person in carrying out its business activities.” (§ 17701.05.)

Because a natural person has the power to ratify acts taken on the person’s behalf, limited liability companies likewise may, through their members, ratify actions previously taken on behalf of the company.

In addition, the court did not err in upholding the resolution adopted by the majority of 409 North Camden’s members to indemnify its members and advance defense costs and expenses incurred in the lawsuit filed by Camden Systems.

In 1963 a group of six friends purchased a two-story office building in Beverly Hills. From 1963 until 2016 the purchasers (and some of their heirs) owned the building as tenants in common without any formal partnership agreement.

In 2016 the owners, still composed of the original purchasers and their heirs, formed 409 North Camden as a manager-managed limited liability company and transferred ownership of the office building to the company.

At the time of its formation, 409 North Camden had 13 members. Jeffrey Young, the son of one of the original owners, was elected as the manager of the company.

In 2020 Camden Systems became a member of 409 North Camden by purchasing the membership interests of three existing members.

As of October 2020, there were 10 members of the company, all of whom—except for Camden Systems—were the building’s original purchasers or their family members. Camden Systems owned a 22.5 percent interest in the company, comprising the largest single membership interest.

The operating agreement of 409 North Camden provides that “[t]he Company shall make quarterly distributions of Available Cash at such times and in such amounts as determined by the Manager, subject to the approval of the Members.”

Since September 2016, the company distributed approximately $773,000 in Available Cash to its members. Each distribution was authorized by a majority of the members. The members did not authorize any distributions after Camden Systems became a member in July 2020.

On January 11, 2021, Young sent the members of 409 North Camden a notice that the company’s annual meeting would take place on February 20, 2021. The notice included copies of three documents Young indicated would be discussed at the meeting regarding potential building upgrades or modifications.

The notice stated an agenda and annual report would be distributed “a few days” prior to the meeting. No other topics of discussion or potential action items were mentioned in the notice.

On February 11, 2021, Young sent the company’s members a meeting agenda for the upcoming meeting, which listed four action items that members would vote on at the meeting: (1) re- election of Young as manager; (2) withholding cash distributions for the first quarter of 2021; (3) authorization of payment of expenses in excess of $10,000; and (4) approval of a “[m]anagement assistance fee” of $1,500 per month to member Kenneth Young.

On February 15, 2021, an attorney for Camden Systems sent a letter to Jeffrey Young complaining that Young had failed to produce certain corporate records Camden Systems had previously requested.

Camden Systems’s attorney asserted the records were necessary for his client to prepare for the upcoming member meeting, and therefore, it intended to object to any business taking place at the February 20 meeting without having first received the records.

Camden Systems also provided a notice to Young that it intended to object to any business being conducted by the members at the February 20 meeting because the January meeting notice did not state the general nature of the business to be transacted, as required by the Corporations Code.  

Further, although the February 11 notice specified the business to be transacted at the meeting, the notice was untimely because it was sent less than 10 days before the meeting, in violation of the Code.

The annual meeting was held as scheduled on February 20, 2021. Joseph Shabani, the manager of Camden Systems, attended the meeting and reiterated Camden Systems’s objections as stated in its attorney’s letter and notice.

The four action items listed in the meeting agenda were voted on and approved by a majority of the members who were present. Shabani, on behalf of Camden Systems, abstained from each vote.

On March 25, 2021 Camden Systems, in its individual capacity and derivatively on behalf of 409 North Camden, filed this action against 409 North Camden (as a nominal defendant) and its members (member defendants), alleging causes of action for breach of fiduciary duty, breach of contract, and declaratory relief.

The allegations in the complaint were based, in part, on the alleged impropriety of the authorizations for cash distributions made between 2016 and July 2020 and the actions taken at the February 2021 meeting.

On May 3, 2021, prior to responding to the complaint, the member defendants adopted a written resolution regarding the pending litigation. The resolution stated in its recitals that after Camden Systems became a member of 409 North Camden, Shabani and his attorney told Young that Shabani “expect[ed] to buy” the remaining interest in 409 North Camden and “‘things will not go well for you if you refuse to sell the property to him.’”

Shabani had also contacted individual members and threatened to sue them if they did not sell their interests in the company to him. According to the resolution, the member defendants were “uniform in their decision that they do not want to sell their interest in the Company or the Property at all and certainly not to Shabani under these circumstances.”

The member defendants resolved that 409 North Camden would not make upcoming cash distributions and would instead reserve all excess funds for defense of the lawsuit.

In addition, the member defendants agreed 409 North Camden “shall indemnify and hold the Manager and the Members harmless” against the lawsuit and shall “advance defense costs and expenses accordingly.” The resolution was dated May 3, 2021 and signed by all members of the company except Camden Systems.

The annual meeting was held on February 19, 2022. The members approved by majority vote the ratification of the prior cash distributions, the actions taken at the February 2021 meeting, and the indemnification resolution.

Shabani, on behalf of Camden Systems, voted no or abstained from each vote, except the ratification of the 2021 vote to pay expenses in excess of $10,000, for which Shabani voted yes.

The meeting minutes do not state that Shabani or Camden Systems objected to the ratification process prior to or during the meeting.

The third amended complaint alleged three causes of action against the member defendants: a request for declaratory relief finding the actions taken at the February 2021 meeting were without force and legal effect because the meeting notice was untimely and/or did not sufficiently state the nature of the business to be conducted; a claim for money had and received based on the allegedly improper cash distributions; and a request for declaratory relief finding the May 2021 indemnification resolution was invalid because the company was without legal authority to indemnify the members.

On May 10, 2022, the member defendants moved for summary judgment, or in the alternative, summary adjudication.

The member defendants argued that, even if the notice for the February 2021 meeting was defective, it was undisputed that the notice for the February 2022 meeting, at which the members ratified their earlier actions, was timely and sufficiently detailed.

The ratification thus cured any defects in the prior actions. Further, regarding the cause of action for money had and received, Camden Systems did not have standing to challenge actions taken before it became a member of the company in 2020, and, even if it had standing, the cash distributions were ratified during the procedurally proper 2022 meeting. Finally, the indemnification resolution was authorized under the operating agreement.

In opposition, Camden Systems argued the purported ratification in 2022 had no legal effect because limited liability companies do not have the power to ratify earlier actions.

Camden Systems further argued it had standing to pursue the money had and received cause of action even though it was not a member of the company when the distributions were authorized because at least one distribution payment was made after Camden Systems became a member of the company.

Finally, the indemnification resolution was ineffective because any action not within the ordinary course of the company’s business required unanimous consent of the members.

On July 26, 2022, following a hearing, the trial court granted the motion for summary judgment, and on September 13, 2022, the court entered judgment in favor of the member defendants. Camden Systems timely appealed.

The Act provides that the activities and conduct of a limited liability company are generally governed by its operating agreement.

With certain enumerated exceptions, the operating agreement may establish rules that differ from the statutory default rules.

To the extent an operating agreement “does not otherwise provide for a matter,” the matter is governed by the Act.

Declaratory relief is available to any person interested under a written instrument who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property in cases of actual controversy relating to the legal rights and duties of the respective parties. (Code Civ. Proc., § 1060.)

Declaratory relief pursuant to this section has frequently been used as a means of settling controversies between parties to a contract regarding the nature of their contractual rights and obligations.

Likewise, the correct interpretation of a statute is a particularly suitable subject for a judicial declaration.

Resort to declaratory relief therefore is appropriate to attain judicial clarification of the parties’ rights and obligations under the applicable law.

The member defendants do not dispute that the initial notice for the February 20, 2021 meeting, sent in January 2021, did not contain the general nature of the business to be discussed or the proposals to be approved—specifically, the reelection of Young as manager, withholding of first and second quarter distributions, payment of certain expenses, and payment of a management assistance fee to Kenneth Young.

It is also undisputed the second notice of the meeting, sent on February 11, 2021, was sent less than 10 days prior to the meeting. Accordingly, the actions approved at the meeting were invalid at the time.

Despite the invalidity of the February 2021 actions, Camden Systems was not entitled to a declaration the actions taken at the meeting were invalid because the actions were subsequently ratified.

Camden Systems did not dispute that the notice for the February 2022 meeting (at which the ratification votes were taken) was sent more than 10 days in advance of the meeting and contained sufficient information regarding the actions to be addressed.

Instead, Camden Systems contended the ratification was ineffective because the members did not have legal authority to ratify their earlier actions.

The concept of ratification is derived from the law of agency that has repeatedly been applied in the context of corporate governance.

In the context of acts by agents, ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him.

The effect of a ratification is that the authority which is given to the purported agent relates back to the time when he performed the act.

A ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified.

Applying this law, courts have found an action that was initially within the authority of a corporation’s board but was not properly authorized may be ratified through a resolution of its board of directors when duly assembled.

A resolution of the board of directors declaring a dividend, even though it is unlawful in its inception for lack of a duly held meeting, can be ratified by the board of directors.

Execution of a note secured by real property that was originally approved at a procedurally defective board meeting was ratified by subsequent resolutions adopted at procedurally proper board meetings.

A resolution acknowledging existence of loan at full board meeting ratified loan allegedly negotiated by corporation’s president without board’s authorization.

Ratification is generally not permitted when it will prejudice the rights of a third party. No unauthorized act can be made valid, retroactively, to the prejudice of third persons, without their consent.

Camden Systems did not contend on appeal that ratification was improper because Camden Systems suffered prejudice from the company’s ratification of the February 2021 actions.

Camden Systems conceded shareholders and boards of directors have rights of ratification, but it contended such rights do not extend to limited liability companies.

Camden Systems did not cite any authority for the proposition that general principles of ratification cannot be applied to limited liability companies in the same way those principles are applied to corporations, labor unions, and other organizations.

Instead, Camden Systems argued the Corporations Code expressly grants ratification powers to shareholders and boards, but grants no comparable power to members of a limited liability company.

However, a limited liability company generally shall have all the powers of a natural person in carrying out its business activities. It follows that a limited liability company would have the same authority as an individual to ratify a previous action.

In the absence of any authority prohibiting a limited liability company from ratifying an earlier action, there is no basis for a declaration that the actions taken as a result of the February 2021 meeting, which were later ratified by a majority of the members with proper notice, were invalid.

In fact, Camden Systems effectively received the remedy it initially sought—a procedurally proper vote on the actions taken.

A common count for money had and received is not a specific cause of action; rather, it is a simplified form of pleading normally used to aver the existence of various forms of monetary indebtedness.

A cause of action for money had and received is stated if it is alleged [that] the defendant ‘is indebted to the plaintiff in a certain sum for money had and received by the defendant for the use of the plaintiff.

The claim is viable wherever one person has received money which belongs to another, and which in equity and good conscience should be paid over to the latter.

The plaintiff must prove that the defendant received money intended to be used for the benefit of the plaintiff, that the money was not used for the plaintiff’s benefit, and that the defendant has not given the money to the plaintiff.

Camden Systems argued the member meetings between February 2017 and June 2020 were not properly noticed, and therefore, the votes taken at those meetings approving cash distributions to members were invalid, resulting in the members’ receipt of funds that rightfully belonged to the company.

That argument failed because Camden Systems did not have standing to challenge actions taken by the company prior to Camden Systems’s membership, and further, as discussed, the 2020 votes were ratified in February 2022.

A member of a limited liability company may bring a derivative lawsuit on the company’s behalf only if the plaintiff was a member, of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains.

It is undisputed that Camden Systems was not a member of the company until
July 2020.

However, even if Camden Systems had standing to challenge the decision to make the $50,000 distribution, that distribution was explicitly ratified during the February 2022 meeting, and, as discussed, the ratification was procedurally proper and legally effective.

Camden Systems did not identify any other portion of the 2017 to 2019 distributions that was made after it became a member of the company.

Accordingly, it had no standing to bring a derivative claim challenging those distributions.

LESSONS:

1.         The California Revised Uniform Limited Liability Company Act (Corp. Code, § 17701.01 et seq.; the Act), which governs the management and operation of limited liability companies, provides that a limited liability company generally “shall have all the powers of a natural person in carrying out its business activities.” (§ 17701.05.)

2.         The Act provides that the activities and conduct of a limited liability company are generally governed by its operating agreement. With certain enumerated exceptions, the operating agreement may establish rules that differ from the statutory default rules. To the extent an operating agreement “does not otherwise provide for a matter,” the matter is governed by the Act.

3.         The concept of ratification is derived from the law of agency that has repeatedly been applied in the context of corporate governance. In the context of acts by agents, ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him.

4.         Ratification is generally not permitted when it will prejudice the rights of a third party.  No unauthorized act can be made valid, retroactively, to the prejudice of third persons, without their consent.

5.         However, a limited liability company generally shall have all the powers of a natural person in carrying out its business activities. It follows that a limited liability company would have the same authority as an individual to ratify a previous action.

6.         A member of a limited liability company may bring a derivative lawsuit on the company’s behalf only if the plaintiff was a member, of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains.

Record a Judgment Lien and Keep a Corporation Active

In the recent case of Longview International v. Stirling, Anne Catambay appealed the denial of her motion to expunge a judgment lien on real property. She contended that because the judgment creditor was a corporation that was suspended at the time the lien was created, the lien was void.

The Appellate Court concluded that recording an abstract of judgment is a procedural act that is retroactively validated once a suspended corporation’s powers are reinstated. As a result, it found the trial court had correctly denied the motion.

Anne Catambay’s husband was sued in Santa Clara County for embezzlement. That lawsuit resulted in a judgment against him for over one million dollars. A corporation––Longview International, Inc.––was the judgment creditor.

Longview International recorded an abstract of judgment in San Mateo County, creating a judgment lien on real property owned by Catambay’s husband in that county (a house in Redwood City). Two days later, Catambay’s husband conveyed the Redwood City house to her as part of a marital settlement agreement in their then-pending dissolution proceeding.

Catambay discovered that at the time Longview International recorded the abstract of judgment its corporate powers had been suspended because it had failed to file an annual statement of information and pay a $25 fee to the state of Delaware. She filed a motion in the Santa Clara County embezzlement case, asking to intervene in the action and seeking to expunge the judgment lien from the Redwood City property.

Longview International opposed the motion arguing that its corporate powers had been reinstated, which retroactively validated any actions it took while suspended, including recording the abstract of judgment.

The Appellate Court noted that Catambay’s motion to expunge the judgment lien was not authorized by any statute, and may not even be the appropriate vehicle to secure the relief she sought.  But even if it assumed the trial court had authority to grant the motion, denial was proper because there is no basis for removing the lien.

A judgment lien on real property is created by recording an abstract of a money judgment with the county recorder in which the real property is located. (Code of Civil Procedure § 697.310,(a).) Upon recording, the lien automatically attaches to all real property the judgment debtor owns within that county.

The effect of the lien is to secure the debt; it allows the judgment to be satisfied from the proceeds of a sale of the property. The lien remains until the judgment creditor files an acknowledgement of satisfaction of judgment (a certified copy should then be recorded) or agrees to release the lien. For a judgment lien to be valid, an abstract of judgment must be properly recorded and contain all the information required by statute.

Catambay did not dispute that the abstract of judgment was filed with the county recorder and complied with the necessary statutory formalities. She contended the lien was invalid because Longview International’s corporate powers were suspended when the abstract was filed, and suspended corporations are not allowed to take any action to enforce a judgment.

A suspended corporation loses all "corporate powers, rights, and privileges.” (Rev. & Tax. Code § 23301.) The right to enforce a civil judgment is one of the rights lost.

Catambay was correct that at the time Longview International recorded the abstract it did not have the legal authority to do so. That does not end the inquiry, though, because a corporation can retroactively validate unauthorized actions taken during a suspension by correcting the condition causing the suspension and applying for a certificate of revivor. (Rev. & Tax. Code § 23305) Longview International obtained such a revival of its powers, before Catambay moved to expunge the lien.

The revival of corporate powers retroactively validates any procedural steps taken on behalf of the corporation in the prosecution or defense of a lawsuit while the corporation was under suspension.

Accordingly, so long as recording an abstract of judgment is a “procedural step” in prosecuting a lawsuit, the abstract recorded in the case (which by operation of law created a judgment lien) was retroactively validated upon the revival of Longview International’s corporate powers.

Most litigation activity has been characterized as procedural for purposes of corporate revival. Obtaining a writ of attachment––a collection method that is a close analogue to the judgment lien here––has been found to be a procedural step subject to retroactive validation.

Even obtaining the underlying judgment is procedural and subject to later validation if a corporation is suspended when the judgment is issued.

If obtaining a judgment is considered a procedural step, the Appellate Court saw no reason why enforcing one would not be.

Catambay argued that Longview International’s enforcement action should be considered substantive because she was not a party to the litigation underlying the judgment and the lien affected rights she acquired in the property during the period of suspension.

But any interest Catambay has in the property is subject to the judgment lien that was recorded before she acquired it. Giving effect to that lien does not take anything away from Catambay, and the Appellate Court saw no reason for her to be rewarded with more than she had to begin with.

Therefore, Longview International’s recording of an abstract of judgment while the corporation was suspended is a procedural matter which was retroactively validated when its corporate powers were restored.

Catambay made an alternative argument: that even if the abstract of judgment is retroactively validated, it would not affect her interest in the property because the validation did not occur until the corporation’s powers were revived, which was after the date the property was transferred to her.

She invoked California’s “race-notice” statute, which provides that one who purchases property without notice of an unrecorded, previously created interest takes the property free of that unrecorded interest. (Civil Code § 1214.) The argument assumes the abstract of judgment when recorded was void–– something that “is without legal efficacy, is incapable of being enforced by law.”  A void instrument, even if recorded, does not create an interest in real property, and it is not effective to provide notice of an adverse interest in the property to a later purchaser.

But the abstract of judgment was not void. At the time it was recorded, it was capable of being enforced by law––upon Longview International obtaining a revival of its corporate powers, which would retroactively validate the lien and make it fully enforceable.

In the case, the abstract complied with all the statutory requirements, but Longview International could not enforce the judgment until it obtained a revivor. When Catambay took title to the property it was always possible that Longview International would cure its incapacity and be able to enforce its rights. The abstract of judgment was not void given the existence of that possibility.

The purpose of the recording statutes is to protect purchasers of real property by giving them notice of all existing and outstanding estates, titles, or interests in the property, whether valid or invalid, which may affect their rights as purchasers. The recorded abstract gave Catambay notice that Longview International asserted an interest in the Redwood City property, one that could be enforced upon the revival of its corporate powers.  She therefore received the property subject to that interest.

A conveyance of real property subject to a judgment lien does not affect the lien, which can be enforced against the transferee. There was no basis for removing the judgment lien.

LESSONS:

1.         Upon obtaining a money judgment, obtain an abstract of judgment from the Court and record it in all counties that the judgment debtor owns real property.

2.         Corporations should always maintain its corporate status, and should file with the California Secretary of State the annual Statement of Information before the Corporation is suspended.

3.         If the corporation is suspended, it should comply with the necessary requirement to obtain certificate of revivor.

4.         If a corporation's powers are reinstated, it retroactively validates any actions it took while suspended, including recording an abstract of judgment.

Can an Alter Ego Defendant be Added to a Judgment in California?

This issue was the subject of the recent decision in Hacker v. Fabe, where the trial court granted a motion by the Labor Commissioner to amend a judgment to add Ron Hacker as an alter ego judgment debtor.

Hacker appealed and contended there was “virtually no evidence” he commingled his assets or operations with those of the judgment debtor; the original judgment was not renewed during the 10-year limitation period; the doctrine of laches bared the alter ego motion; and the denial of an earlier alter ego motion barred the current motion under res judicata principles.

The appellate court found that Hacker’s arguments lacked merit and affirmed the trial court’s order and judgment.

The litigation began in 2005, when Jacqueline Fabe, an attorney, filed a claim for unpaid wages with the Labor Commissioner against her employer, 1538 Cahuenga Partners, LLC (Cahuenga or the company). Fabe obtained an award of almost $13,000.

A month after Fabe filed her claim, Cahuenga and its principal, Hacker, filed a malpractice suit against Fabe. Fabe filed a retaliation claim with the Commissioner. She prevailed on her retaliation claim, and the Commissioner sued Cahuenga, seeking damages (Fabe’s defense costs) for the illegal retaliation. Fabe also cross-complained in the malpractice suit, seeking indemnity for her legal expenses.

Later, an amended judgment was entered in favor of the Commissioner for more than $297,000, plus interest, and in favor of Fabe for more than $101,000 (to be offset against any recovery by the Commissioner).

For years thereafter, the Commissioner and Fabe sought to enforce the judgment, without success.

In 2020, the Commissioner filed a motion to amend the judgment to add Mr. Hacker as the alter ego of Cahuenga. The motion stated the approaching 10-year anniversary of the judgment prompted the Commissioner to seek to amend that judgment in order to create the possibility of obtaining some justice for Fabe.

The court entered the second revised amended judgment adding Hacker as an alter ego judgment debtor.

The essence of the alter ego doctrine is that justice be done. What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.

A corporate identity may be disregarded—the “corporate veil” pierced—where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.

Under the alter ego doctrine, then, when the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.

In California, two conditions must be met before the alter ego doctrine will be invoked.

First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.

Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.

Factors for the trial court to consider include the commingling of funds and assets of the two entities, identical equitable ownership in the two entities, use of the same offices and employees, disregard of corporate formalities, identical directors and officers, and use of one as a mere shell or conduit for the affairs of the other. No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied.

The court cited Hacker’s complete control over Cahuenga, his control of the litigation, his sharing of attorneys with Cahuenga, his transfer of the company immediately after the judgment, and his destruction of relevant records of assets.

It is reasonable to infer from Hacker’s manipulation of the company and destruction of its records that the separate personalities of the corporation and the shareholder do not in reality exist.

The essence of the alter ego doctrine is that justice be done, and Hacker did show no abuse of discretion in the trial court’s alter ego ruling.

Hacker next argued that the judgment was not renewed within the 10-year renewal period, and so had expired and cannot be enforced. He was mistaken.

A judgment is enforceable “upon entry” and “upon the expiration of 10 years after the date of entry of a money judgment,” the judgment “may not be enforced”.

The Commissioner filed an alter ego motion to amend the judgment before the 10-year renewal period had expired.

Hacker wrongfully contended the 10 years run from the date of the original judgment.

When an amended judgment is entered, the 10-year period within which the judgment must be enforced or renewed commences upon the date of entry of the amended or modified judgment.

If, in light of the lapse of time and other relevant circumstances, a court concludes that a party’s failure to assert a right has caused prejudice to an adverse party, the court may apply the equitable defense of laches to bar further assertion of the right.

For purposes of laches, a defendant has been prejudiced by a delay when the defendant has changed his position in a way that would not have occurred if the plaintiff had not delayed.

Hackers unsupported assertions did not establish either unreasonable delay or prejudice.

LESSONS:

1.         A corporate identity may be disregarded—the “corporate veil” pierced—where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.

2.         First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.

3.         Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.

4.         The essence of the alter ego doctrine is that justice be done.

Is an Actual Injury Necessary for Violation of Business and Professions Code section 17200?

A cause of action for violation of B&P Code section 17200 is routinely alleged in complaints against California corporations and limited liability companies, and the recent decision in Lagrisola v. North American Financial Corporation clarified the rules regarding such a claim.

In 2017, Loreto and Mercedes Lagrisola (the Lagrisolas) applied for and obtained a loan from North American Financial Corporation (NAFC), secured by a mortgage on their residence.

In 2021, the Lagrisolas sued NAFC, individually and on behalf of a class of similarly situated persons.

In the operative First Amended Complaint (FAC), the Lagrisolas alleged that NAFC was not licensed to engage in lending in the state of California between 2014 and 2018 and asserted violations of Business and Professions Code section 17200.

The trial court sustained NAFC’s demurrer to the FAC without leave to amend, concluding that the allegations in the FAC were insufficient to establish an actual economic injury, necessary for standing under Business and Professions Code section 17200.

The Lagrisolas asserted on appeal that the trial court erred in reaching each of the foregoing conclusions.

The appellate court agreed with the trial court, and affirmed its ruling.

NAFC is a Nevada based business entity with offices in California. In 2017, the Lagrisolas borrowed $550,000 from NAFC, secured by real property in San Diego.

This was one of 319 loans NAFC originated to California consumers between July 1, 2014 and August 27, 2018. NAFC acted as both the loan broker and the lender on the loans, but was licensed in California only as a broker.

NAFC was not licensed to lend money to consumers in California, as required by Financial Code section 22100, during the relevant time period.

The Lagrisolas were unaware that NAFC was not licensed as a finance lender and would never have signed up to a loan with NAFC had they been informed that the company was not legally permitted to make loans to them or to any other California borrower.

In the first cause of action in the FAC, they alleged that NAFC violated Business and Professions Code section 17200 by engaging in unlicensed lending in violation of Financial Code sections 22100 and 22751.

They contend that NAFC earned “illegal interest” by engaging in this unlawful lending, and that the retention of such profits “constitutes a loss of money or property” to them, and other similarly situated plaintiffs.

In the second cause of action, the Lagrisolas asserted violations of Business and Professions Code section 17200 based on the alleged deceptive act of failing to disclose that NAFC was not licensed to make loans in California.

As in the first cause of action, they alleged that NAFC earned illegal interest which it is required to forfeit to the borrowers.

NAFC filed a demurrer to the FAC, and the trial court concluded that the allegations in the FAC did not adequately allege an injury in fact and therefore failed to establish standing to bring a claim under Business and Professions Code section 17200.

Business and Professions Code section 17200 (commonly referred to as the Unfair Competition Law, or the “UCL”) defines unfair competition as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500).

Section 17204 further provides, in relevant part, that actions for relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.

The latter statute was amended in 2004 with the passage of Proposition 64. The purpose of Proposition 64 was to materially curtail the universe of those who may enforce the UCL in a private action by confining standing to those actually injured by a defendant’s business practices, and to prohibit private attorneys from filing lawsuits for unfair competition where they have no client who has been injured in fact under the standing requirements of the United States Constitution.

To satisfy the narrower standing requirements imposed by Proposition 64, a party must now:

 (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and

(2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.

NAFC contended that the FAC failed to adequately allege that the Lagrisolas suffered an injury in fact or lost money or property as a result of its licensing status. The trial court agreed.

It explained that a loan has no subjective or intangible value, and that the Lagrisolas cannot establish standing (injury in fact) by alleging that they now possess something they would not have similarly valued or selected had they been aware of the unlicensed status of the lender. The loan the Lagrisolas obtained was identical to the terms and characteristics they desired.

The point of the Proposition 64 amendment was to impose additional requirements on plaintiffs beyond merely having suffered an ‘unlawful, unfair or fraudulent business act or practice, namely, having lost money or property as a result of that practice.

The Lagrisolas did not allege that they did not want a loan in the first instance, that they paid any more for their loan than they otherwise would have, or that they could have obtained the loan at the same or lower price from another lender that was licensed.

Nor did they allege that they suffered any particular harm because of NAFC’s unlicensed status.

Rather, they conceded in the FAC that NAFC was licensed as a broker and, although they set forth the additional requirements that NAFC would have had to meet to be licensed as a lender as well, they do not contend that NAFC would not have been able to meet those requirements.

The Lagrisolas alleged that they would not have agreed to the loan, or perhaps would have obtained a loan from another vendor if they had known that NAFC was not licensed as a lender.

But the Lagrisolas did not assert that a comparable loan was available from a licensed lender, or that NAFC’s unlicensed status harmed them in any way. Notably, the FAC alleged that NAFC resold the loans, but it does not allege that the purchasers were not licensed.

Thus, at the end of the day, the plaintiffs were left with a loan from a presumably licensed lender, at the bargained for rate. The plaintiffs received the benefit of their bargain, having obtained the bargained for loan at the bargained for price.

Further, as the trial court explained loans are not the same as padlocks, for example: Unlike a product or consumable good, a loan has no subjective or intangible value, its value is wholly dependent on its terms, such as the interest rate, principal amount and number of payments.

The Lagrisolas ultimately got the loan they bargained for.

The Lagrisolas did not allege that NAFC made an affirmative representation about the product.

The Lagrisolas did not allege that NAFC made an affirmative representation about its licensing status.

They did not allege that NAFC made any affirmative statements about its licensure status or, perhaps more importantly, that the Lagrisolas relied on any statements NAFC made about its licensure status when choosing to enter into the loan transaction with NAFC.

Proposition 64’s requirement that the plaintiff’s economic injury be caused by the unfair competition requires a showing of a causal connection or reliance on the alleged misrepresentation.

The Lagrisolas did not allege that any injury to them was caused by a misrepresentation or omission, or that they relied on any such misrepresentation or omission. Put another way, the Lagrisolas could not show that they suffered any economic injury because of, or resulting from, NAFC’s failure to inform them that it did not have a lending license.

LESSONS:

1.         Business and Professions Code section 17200 defines unfair competition as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1, commencing with Section 17500.

2.         Section 17204 further provides, in relevant part, that actions for relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.

3.         To satisfy the narrower standing requirements imposed by Proposition 64, a party must now: (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.

Can a UD Complaint in California be Amended to Correct the Name of a Legal Entity?

In the recent appellate decision in 1215 Fell SF Owner LLC  v. Fell St. Automotive Clinic, the three consolidated appeals arose from two related unlawful detainer proceedings filed by Fell Holdings LLC (Fell Holdings) and Stanyan Holdings LLC (Stanyan Holdings), and appellants Fell Street Automotive Clinic (Fell Street Clinic), Stanyan Street Automotive Clinic (Stanyan Street Clinic), and Laurence Nasey (Nasey) sought review of certain postjudgment orders.

Fell Holdings and Stanyan Holdings misdescribed themselves as California limited liability companies rather than Delaware limited liability companies in their unlawful detainer complaints.

Arguing that this pleading defect deprived the trial court of fundamental jurisdiction because a legally nonexistent entity has no capacity to sue, appellants argued that all judicial action taken in the cases was void ab initio.

The appellate court rejected appellants’ argument.

Even if it accepted the premise of appellants’ claim—that the pleading discrepancy at issue, minor or not, has jurisdictional implications—the issue is whether the discrepancy is curable by amendment, not whether all judicial action in the cases should be treated automatically as a nullity.

The appellate court reversed and remanded so that respondents could pursue curative amendments under Code of Civil Procedure section 473, subdivision (a)(1).

All three appeals turned on a single issue arising out of the same set of background facts. In brief, those facts are as follows. For many years, Nasey owned two separate properties in San Francisco (the Properties), one on Fell Street, and one on Stanyan Street. At these locations Nasey operated a sole proprietorship under the dba’s, “Ted & Al’s Towing” and “Ted & Al’s Service.”

He lost ownership of the Properties in a nonjudicial foreclosure during the pandemic, but managed to remain in business by agreeing to a leaseback arrangement with the new owners, Fell Holdings and Stanyan Holdings respectively.

This leaseback arrangement was memorialized in a September 2020 settlement agreement (the Settlement Agreement).

Under the Settlement Agreement, Fell Street Clinic and Stanyan Street Clinic became tenants of Fell Holdings and Stanyan Holdings for a period of months, and during that time Nasey was given the opportunity to repurchase the Properties.

For each of the Properties, the parties stipulated to entry of judgment against appellants if Nasey failed to close escrow on the contemplated repurchase (the Stipulations for Entry of Judgment).

Shortly after entering the Settlement Agreement, Fell Holdings and Stanyan Holdings filed but did not serve two unlawful detainer proceedings, one naming Stanyan Street Clinic as the tenant defendant (the Stanyan Street case), and the other naming Fell Street Clinic as the tenant defendant (the Fell Street case).

Pursuant to the Stipulations for Entry of Judgment, on February 19, 2021, the trial court filed identical judgments in the Stanyan Street case and in the Fell Street case (the Eviction Judgments).

The Eviction Judgments were initially filed under seal and provided for a forbearance period during which appellants were obligated to pay certain rental arrearages and current monthly rent on a monthly schedule.

In late 2022, however, after the deadline for Nasey’s repurchase of the Properties passed, respondents brought motions to unseal and to enforce the Eviction Judgments.

On December 21, 2022, the court issued identical orders unsealing and granting enforcement of the Eviction Judgments (collectively the Enforcement Orders).

In April 2023, appellants moved to vacate the Eviction Judgments and the Enforcement Orders, for the first time arguing a lack of fundamental jurisdiction on the ground that Fell Holdings and Stanyan Holdings are not California limited liability companies; that those alleged entities have no legal existence; and that, as a result, all judicial action in both cases, from the date they were filed, was null and void.

The court rejected this argument, and on August 4, 2023 issued substantively identical orders denying the vacatur motions (the Denial of Vacatur Orders).

At the heart of all three appeals is a single question arising from what respondents argue is, at worst, a minor pleading error in each of the unlawful detainer complaints.

That question is: Because the respondents misdescribed themselves as California limited liability companies rather than Delaware limited liability companies, does the naming discrepancy require us to conclude that the Eviction Judgments are void in both cases, entitling appellants to restoration of possession of the Properties and return of the earnest money deposit?

Reprising the argument they made in the trial court, appellants urged that the answer is yes.

Appellants argued that the named unlawful detainer plaintiffs, Fell Holdings and Stanyan Holdings, are not real entities and have no capacity to sue or enter into contracts.

This is so, appellants contended, based on allegations Fell Holdings and Stanyan Holdings make in describing themselves.

Appellants contended it has been settled for over 100 years that if a party does not exist, it cannot enter into legal agreements, be represented by counsel, or prosecute or defend any legal action.

Because no entity named Fell Holdings LLC, a California limited liability company or Stanyan Holdings LLC, a California limited liability company exists, appellants argued that the trial court lacked fundamental jurisdiction to enter judgment.

Indeed, they go even further.  They contend that the jurisdictional defect at issue here, which is unwaivable and may be raised at any time, cannot be cured by amendment.

Respondents, for their part, do not contest the principle that a court lacks fundamental jurisdiction to proceed in an action initiated by a nonexistent party or that jurisdictional defects may be raised at any time, including after entry of judgment, but claim instead that the incorrect description of the corporate plaintiffs in this case does not involve a problem of “nonexistence.”

Rather, pointing to a cryptic passage in a century-old Court of Appeal opinion that has never been cited for the proposition respondents urge to be adopted, they say their misdescription of their own corporate identity should be ignored as a “trivial” scrivener’s error.

Neither appellants’ position nor respondents’ position is correct.

Putting to one side for a moment the legal consequence of the pleading discrepancy at issue here (i.e., whether it deprived the trial court of jurisdiction ab initio), there is a long line of cases, involving plaintiffs who mistakenly pleaded the identity of a business entity defendant by the wrong name and the error was discovered long after the filing of the complaint, often after a statute of limitations deadline ran against the correctly described defendant.

In this situation, curative amendments were allowed under section 473 if it could be said that the error was nothing more than a “misnomer” correctible by a change in the description of the defendant, but not if the correction required the addition of a party against whom, in substance, the original complaint stated no viable cause of action.

This analysis applies in “ ‘wrong defendant’ ” as well as “ ‘wrong plaintiff’ ” cases.

In both scenarios, the allowance of amendment and relation back to avoid the statute of limitations does not depend on whether the parties are technically or substantially changed; rather the inquiry is as to whether the nature of the action is substantially changed.

Appellants are mistaken in claiming the pleading discrepancy involved in this case is beyond repair.

The twist in this case is that the pleading discrepancy at issue in this case was brought to the attention of the trial court after entry of judgment.

The appellate court concluded that it makes no difference.

Appellants conceded that amendments after judgment are allowed on an application for relief after the judgment has been vacated or reversed, but contend that a motion for relief under section 473, subdivision (b) must be filed within six months after judgment and therefore would be untimely in this case.

Section 473, subdivision (b), which confers authority to grant parties or their legal representatives relief from any judgment, dismissal, order, or other proceeding taken against them based on mistake, inadvertence, surprise, or excusable neglect, is not the pertinent source of discretion.

The pertinent source of discretionary authority is section 473, subdivision (a)(1), which authorizes pleading amendments in furtherance of justice, and on any terms as may be proper, subject to no specified time limit.

Where a defendant raises an issue of fundamental jurisdiction by vacatur motion filed after entry of judgment on the ground that there is a previously undiscovered pleading defect in the plaintiff’s complaint—as appellants did here, when they pointed out the misdescription of respondents’ pleaded state of domicile for the first time more than two years after the Eviction Judgments were entered—the plaintiff is entitled to respond by seeking leave to cure the defect under section 473, subdivision (a)(1).

Accordingly, the appellate court reversed the Denial of Vacatur Orders in both underlying unlawful detainer cases and remand with directions that the trial court (1) vacate the Eviction Judgments and the Enforcement Orders without prejudice to their possible reinstatement if respondents are able to cure the potential jurisdictional defects appellants have identified; and (2) entertain and decide any motion from respondents under section 473, subdivision (a)(1) seeking to amend the complaints in these actions.

Only if the pleading defects appellants have identified are not correctible will there be any need to consider procedural consequences under the nullity doctrine.

LESSONS:

1.         Carefully determine and plead the precise legal name of any parties in a complaint.

2,         Curative amendments are allowed under section 473 if it could be said that the error was nothing more than a “misnomer” correctible by a change in the description of the defendant, but not if the correction required the addition of a party against whom, in substance, the original complaint stated no viable cause of action.

3.         Section 473, subdivision (b), which confers authority to grant parties or their legal representatives relief from any judgment, dismissal, order, or other proceeding taken against them based on mistake, inadvertence, surprise, or excusable neglect, is not the pertinent source of discretion in all cases.

4.         The pertinent source of discretionary authority may be section 473, subdivision (a)(1), which authorizes pleading amendments in furtherance of justice, and on any terms as may be proper, subject to no specified time limit.