CB Richard Ellis, Inc. v. Terra Nostra Consultants

Opinion IKOLA, J. Plaintiff CB Richard Ellis, Inc. (CBRE), citing a 2004 listing agreement, sought a commission after the 2005 sale of 38 acres of land in Murrieta, California (the Property). Arbitration proceedings between CBRE and the seller, Jefferson 38, LLC (Jefferson), resulted in a confirmed arbitral award in CBRE’s favor, but no monetary satisfaction for CBRE because Jefferson had no assets by the time of the arbitral award and judgment. This action represents CBRE’s attempt to recover damages from Jefferson’s individual members. A jury trial resulted in a $354,000 judgment in favor of CBRE. 1 Both defendants and CBRE appeal the judgment, citing alleged errors pertaining to jury instructions, the admissibility of evidence, juror misconduct, attorney fees, and prejudgment interest. We reject the parties’ contentions, except with regard to CBRE’s entitlement to attorney fees. *409 FACTS In March of 2004, CBRE and Jefferson signed an exclusive sales listing agreement for the Property. CBRE agreed to use its “best efforts to effect a sale” of the Property within the term of the listing agreement. Subject to certain exclusions, Jefferson agreed to pay a sales commission of 6 percent of the gross sales price for any sale completed within the term of the listing agreement. Utilizing its expertise and contacts, CBRE sought a buyer for the Property. On September 16, 2004, Covenant Development, Inc. (Covenant), through its agent David Stolte of NAI Capital, transmitted a letter of intent to Jefferson to purchase the Property for $11 million. Jefferson directly responded to Stolte the next day with a counteroffer of $12 million. Before this exchange of letters, an individual representing Jefferson told Stolte that Jefferson had fired CBRE because they had not moved the sale forward fast enough. Meanwhile, CBRE continued to market the Property. On November 10, 2004, CBRE contacted a Jefferson representative regarding additional potential buyers. Jefferson responded with a letter the next day, stating Jefferson’s position that the listing agreement expired six months from its March 8, 2004 listing date. Jefferson acknowledged a pending letter of intent identifying Walmart as a prospective buyer, a deal that would result in a commission for CBRE. But Jefferson otherwise expressed its dissatisfaction with CBRE’s performance, which (according to the letter) led Jefferson to allow the listing agreement to expire. CBRE claims the term of the listing agreement was actually one year, plus applicable extensions based on the circumstances of the sale. 2 There is no evidence CBRE took action to insert themselves into the negotiations between Jefferson and Covenant. In a transaction between Jefferson and an entity to which Covenant assigned its interests, the sale of the Property eventually closed on July 11, 2005, for a gross sales price of $11,800,000. Escrow would have closed sooner but for two extensions requested and paid for by Covenant. NAI Capital (the buyer’s agent) received a commission payment of $354,000 (i.e., *410 3 percent of the gross sales price) out of an aggregate commission of $708,000 (i.e., 6 percent of the gross sales price); the other half of the commission was paid to L. James Grattan & Associates, which was designated as the seller’s agent. Roy Matthew Haskin (a defendant and judgment debtor) worked for L. James Grattan & Associates and began representing Jefferson as the seller’s agent “right around [the] same time” Covenant submitted its offer. Roy Matthew Haskin personally received $264,000 for his services. CBRE did not receive a commission. There is no evidence CBRE attempted to make a claim upon the funds deposited into escrow. On July 12, 2005, $11,025,625 was transferred into Jefferson’s bank account as a result of the close of escrow. The next day, Jefferson transferred all but $474.45 out of its account. This money was ultimately transferred in varying amounts to defendants and others. There is no evidence CBRE made a claim upon Jefferson at this time or otherwise attempted to interfere with the distribution of funds. In July 2006, CBRE initiated arbitration against Jefferson in accordance with a clause in the listing agreement. CBRE was apparently unsuccessful in its attempt to add four individuals to the arbitration who are now defendants and appellants (Roy Randall Haskin, Roy Matthew Haskin, Jack DiLemme, and Hanan Haskell). The arbitration eventually proceeded as a default “prove-up” hearing because Jefferson did not (and claimed it could not) comply with its obligation to pay required deposits. The arbitrator issued a $960,649.30 award in favor of CBRE, comprised of a 6 percent commission ($708,000), pre-award interest ($206,578.05), and attorney fees and costs ($46,071.25). The arbitration award was confirmed and judgment entered in the amount of $985,439.80 by the Los Angeles Superior Court, a judgment affirmed on appeal. (CB Richard Ellis, Inc. v. Jefferson 38, LLC (Oct. 21, 2010, B220598) [nonpub. opn.].) In June 2009, CBRE filed a complaint for breach of written contract and prohibited distributions in the instant case against defendants, the alleged individual members of Jefferson. A jury trial commenced in July 2011. By way of a special verdict, the jury found that CBRE and Jefferson entered into a contract, CBRE performed its contract obligations, all the conditions occurred that were required for Jefferson’s performance, Jefferson failed to perform, and CBRE was harmed in the amount of $354,000 by that failure to perform. The jury also found the dissolution of Jefferson occurred and Jefferson made a distribution to its members upon dissolution. In separate special verdicts, the jury found each of the defendants were members of *411 Jefferson, then specified the amount distributed to each of these defendants upon the dissolution of Jefferson. 3 The court entered judgment in accordance with the special verdicts, awarding $354,000 to CBRE and against defendants (jointly and severally up to their individual limit as established by the jury’s determination of the amount distributed to each defendant upon dissolution). The court denied CBRE’s posttrial motions for attorney fees and prejudgment interest, as well as defendants’ motions for a new trial and judgment notwithstanding the verdict. DISCUSSION I. Defendants’ Appeal Defendants do not challenge the sufficiency of the evidence with regard to any of the jury’s factual findings, e.g., Jefferson’s breach of contract, CBRE’s damages, defendants’ membership in Jefferson, or the amount distributed to each defendant upon Jefferson’s dissolution. Instead, defendants claim they are entitled to a new trial based on instructional error, evidentiary error, and juror misconduct. A. Instruction of Jury Regarding Dissolution of Limited Liability Companies In general, members of a limited liability company are not liable for the “debts, obligations, or other liabilities” of the limited liability company. (Corp. Code, § 17703.04, subd. (a); see id., subds. (b)-(e) [identifying ways in which members can be held liable, including alter ego liability, a member’s participation in tortious conduct, and a member explicitly agreeing to personal liability for particular obligations].) 4 *412 CBRE successfully argued that defendants should be held liable for Jefferson’s breach of contract in failing to pay CBRE a commission. Part of CBRE’s case involved proving Jefferson was a dissolved limited liability company, which lacked the ability to pay CBRE as a result of its distribution of assets to its members without reserving sufficient funds to pay CBRE. Former sections 17350 to 17357 (current §§ 17707.01-17707.09) addressed the dissolution of limited liability companies and related issues. (See Kwok v. Transnation Title Ins. Co. (2009) 170 Cal.App.4th 1562, 1567 [89 Cal.Rptr.3d 141].) After dissolution, “[t]he dissolved company . . . ‘continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it in order to collect and discharge obligations, disposing of and conveying its property, and collecting and dividing its assets.’ [Citation.] After all known debts and liabilities of the company have been paid or adequately provided for, any remaining assets are distributed among the members according to their respective rights and preferences. [Citation.] A certificate of cancellation of the company may then be filed with the Secretary of State.” (Kwok v. Transnation Title Ins. Co., supra, 170 Cal.App.4th at p. 1568.) CBRE brought its first cause of action for breach of contract against defendants pursuant to former section 17355, subdivision (a)(1), 5 which provided in relevant part: “Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following: [f] (A) Against the dissolved limited liability company, to the extent of its undistributed assets . . . . [f] (B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.” Thus, key issues in the case include when Jefferson dissolved and whether assets were distributed to defendants by Jefferson “upon dissolution.” 6 The court (over defendants’ objection) instructed the jury with CBRE’s requested special instruction No. 2 as follows: “Dissolution of a limited liability *413 company occurs when it ceases operating in the ordinary course of its business, with the intention, on the part of its members, not to resume the ordinary course of its business. Dissolution of a limited liability company is not the same as cessation of all business activity. A limited liability company may continue to do business after it has dissolved for the purpose of winding up its affairs, paying its creditors and distributing its remaining assets, fil] In determining whether a dissolution of Jefferson . . . occurred, you may consider all evidence bearing on that issue, including, for example, the ordinary business of the limited liability company, the assets of the limited liability company both before and after a distribution, the continuation of the ordinary business and the cessation of its ordinary business activities.” Essentially, to avoid conditioning relief to CBRE on the precise date of formal dissolution, special instruction No. 2 utilizes the concept of “de facto” dissolution, i.e., the notion that dissolution can occur “although the formalities of corporate dissolution were not completed.” (Central Coast Baptist Assn. v. First Baptist Church of Las Lomas (2007) 171 Cal.App.4th 822, 828 [65 Cal.Rptr.3d 100]; see Hentschel v. Fidelity & Deposit Co. (8th Cir. 1937) 87 F.2d 833, 836 [“A de facto dissolution . . . means that a dissolution has in circumstances and in fact taken place, as where the corporation by reason of insolvency, or other reason, suspends all its obligations and goes into liquidation without having technically availed itself of statutory procedure provided for that purpose”].) Applying this instruction, the jury concluded that Jefferson dissolved and defendants received distributions upon dissolution, presumably based on undisputed evidence that Jefferson’s only substantial asset was the Property, the proceeds of the July 2005 sale of the Property were distributed immediately after the sale, Jefferson conducted no substantial business after the close of escrow, and Jefferson filed a certificate of cancellation with the California Secretary of State on February 27, 2006 (signed Feb. 16 by Hanan Haskell and Roy Randall Haskin), indicating Jefferson had been dissolved in a vote by all of its members. Defendants contend special instruction No. 2 incorrectly states the law. The court rejected defendants’ proposed special instruction on the issue, which tracked (nearly word for word) former section 17350. 7 *414 Defendants’ position is that the jury should have been limited to inquiring whether one of the three conditions to dissolution (as stated in former § 17350, (1) an occurrence specified in the governing documents, (2) a majority vote of the members to dissolve, or (3) a judicial dissolution decree) had happened before distribution to defendants. According to defendants, the jury cannot be allowed to determine the date of dissolution by conducting a free-ranging inquiry into when a limited liability company ceases to operate in the ordinary course of business. Thus, defendants posit, so long as the distribution of funds to members comes before the de jure dissolution of a limited liability company, the distribution was not “upon dissolution.” (Cf. Bacarella Transportation Services, Inc. v. Right Way Logistics, LLC (D.Conn. 2009) 639 F.Supp.2d 249, 254—257 [granting summary judgment in favor of members because limited liability company was not dissolved at time of lawsuit].) By limiting “dissolution” to the specified statutory conditions, defendants seek to prohibit the application of former section 17355 when the distribution precedes, as relevant here, the vote of the members to dissolve the limited liability company. It is unclear whether the Legislature intended former section 17350 to preclude a determination (for purposes of an action pursuant to former § 17355 or otherwise) that a limited liability company dissolved prior to the date of any of the three circumstances specified. Certainly, the plain language of the statute* * 8 does not explicitly preclude that possibility. The statute did not say there are no other potential causes of dissolution. Nor did the statute indicate that satisfaction of one of the three statutory events is the exclusive determinant of dissolution. Pertinent legislative history likewise does not provide an answer to this question. To break this interpretive logjam, we interpret former section 17350 in light of the purposes of the entire statutory scheme, and in particular the purpose of former section 17355, subdivision (a)(1). It is self-evident that former section 17355, subdivision (a)(1), was designed to prevent the unjust enrichment of members of limited liability companies, when such members have received assets the dissolved company needs to pay creditors. (See Gottlieb v. Kest (2006) 141 Cal.App.4th 110, 154 [46 Cal.Rptr.3d 7] [former § 17355 “simply creates an enforcement mechanism so that company liabilities can be recovered out of distributed assets; it ‘compelfs] [a member] to *415 return distributed assets’ ”].) Other sections contemplated that limited liability companies will not distribute funds to members without reserving sufficient assets to pay debts and liabilities. (Former §§ 17254, 17353.) If defendants’ interpretation of the statutory scheme were correct, companies (and their members) could avoid the force of former section 17355, subdivision (a)(1)(B), by the simple expedient of transferring assets out of the company the day before voting to dissolve. On the other hand, CBRE’s interpretation of former section 17350 allows for a jury to find that the company had actually dissolved at the time of the distribution, based on the reality of the company’s finances and operations. We agree with CBRE and hold that the jury was correctly instructed. “De facto” dissolution is an acceptable predicate to a claim under former section 17355, subdivision (a)(1)(B). B., C. * II. CBRE’s Cross-appeal CBRE limits its appeal to the court’s denial of CBRE’s posttrial motions for attorney fees and prejudgment interest. A. Attorney Fees The court denied CBRE’s motion for attorney fees on the ground that such an award was not authorized as a matter of law; thus, our review is de novo. (Conservatorship of Whitley (2010) 50 Cal.4th 1206, 1213 [117 Cal.Rptr.3d 342, 241 P.3d 840].) “Unless authorized by either statute or agreement, attorney’s fees ordinarily are not recoverable as costs.” (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 127 [158 Cal.Rptr. 1, 599 P.2d 83] (Reynolds).) CBRE claims attorney fees are authorized by the listing agreement (which was signed by Jefferson, not defendants) 12 in conjunction with CBRE’s *416 statutory basis for recovery against defendants (i.e., Jefferson’s members). We agree with CBRE’s position and therefore reverse the court’s order denying the recovery of attorney fees. Former section 17355, subdivision (a)(1)(B), provided: “Causes of action against a dissolved limited liability company . . . may be enforced against any of the following:” “(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.” The statute explicitly authorizes CBRE to enforce its breach of contract “cause of action” against defendants. Thus, subject to the limitation that they cannot be held liable beyond the amount they were distributed “upon dissolution,” Jefferson’s members were deemed to be statutory parties to the contract with CBRE by reason of the jury’s findings pertaining to Jefferson’s dissolution. The obvious purpose behind this statute is to dissuade limited liability companies from distributing funds to its members without paying creditors (or reserving sufficient funds to pay contingent claims) during the winding up process. Because CBRE could recover attorney fees pursuant to the listing agreement against Jefferson, former section 17355 likewise authorized the recovery of attorney fees against defendants (i.e., Jefferson’s members), so long as the total recovery against any individual member does not exceed that member’s distribution upon dissolution. Allowing defendants to escape payment of attorney fees would only encourage abuses by limited liability companies seeking to avoid the payment of attorney fees when there are disputed creditor’s claims. Our statutory analysis is buttressed by Reynolds, supra, 25 Cal.3d 124. In Reynolds, our Supreme Court addressed whether nonsignatories to a contract can share the benefits and burdens of a prevailing party attorney fees clause. The plaintiff (a supplier) sued the defendants (shareholders and directors of a bankrupt corporation supplied by the plaintiff) on an alter ego theory. (Id. at p. 127.) The trial court rejected the alter ego theory and awarded attorney fees to the shareholder defendants, based on a contract signed by the bankrupt corporation. (Ibid.) Highlighting the policy of reciprocity established in Civil Code section 1717, 13 the Reynolds court affirmed the award. (Reynolds, at pp. 128-129.) “Its purposes require section 1717 be interpreted to further *417 provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorney’s fees should he prevail in enforcing the contractual obligation against the defendant.” (Id. at p. 128.) Reynolds concluded that the shareholder defendants must be entitled to recover attorney fees because if they had lost, they clearly would have been held liable for the supplier’s attorney fees as the alter egos of the bankrupt corporation. (Id. at p. 129; see Pueblo Radiology Medical Group, Inc. v. Gerlach (2008) 163 Cal.App.4th 826, 828-829 [77 Cal.Rptr.3d 880] [applying Reynolds].) This is not an alter ego case. But the statutory remedy provided by former section 17355 was similar to alter ego doctrine in that it prohibited investors from inequitably leaving creditors high and dry with an empty judgment against an insolvent entity. Likewise, had defendants prevailed on the merits in this action, CBRE should not have been able to disclaim its contractual obligation to pay attorney fees for an unsuccessful attempt to enforce the listing agreement. In sum, CBRE is entitled to an award of reasonable attorney fees as the prevailing party in this civil litigation. We disagree, however, with CBRE’s contention that it should be allowed to recover the attorney fees it incurred when it arbitrated its breach of contract claim with Jefferson. Defendants are simply not liable for any aspect of the arbitral judgment, whether for damages, attorney fees, costs, or interest. Former section 17355 did not hold members liable for judgments entered against a dissolved limited liability company. Instead, it authorized third parties to enforce against members of a dissolved limited liability company the causes of action that ordinarily would be brought against the limited liability company. B. Prejudgment Interest * DISPOSITION The postjudgment order denying CBRE’s motion for attorney fees is reversed and the matter is remanded for a new hearing as to the amount of *418 attorney fees. The judgment and accompanying postjudgment order denying recovery of prejudgment interest are affirmed. CBRE shall recover costs incurred on appeal, as it prevailed on almost all of the issues raised. O'Leary, P. J., and Aronson, J., concurred. Footnotes [1] Judgment was entered against the following 25 defendants: C&R Consultants, Inc.; Jack DiLemme; Israel Feit; Hanan Haskell; Roy Matthew Haskin; Roy Randall Haskin; Haskin, Inc.; Jack DiLemme, Inc.; Terra Nostra Consultants; Zvi Ben Zvi; Tomy Deutsch; Eitan Feldbaum; Zvi Frankenthal; Avi Gross; Moshe Gross; Bruce G. Keeton, trustee of the Bruce G. Keeton Trust; Amiram Lasker; Jacob Oren; Charles Ratzersdorfer; Naftali Ratzersdorfer; Dov Schwartz; David Tarabulsi; Zvi Tennenbaum; Yair Weill; and Haim Weiss. Each defendant was held jointly and severally liable up to a specific individual maximum liability, which was established by the jury for each defendant based on the amount distributed to that defendant upon dissolution of Jefferson. Judgment was entered by default with regard to two of the defendants, Haskin, Inc., and Jack DiLemme, Inc. The other 23 defendants appealed the judgment and appear by counsel before this court. [2] The first section of the agreement grants to CBRE “the exclusive right to sell the Property for a period commencing March 8, 2004 and ending midnight March 8, 2004.” The parties are in agreement that this was a typographical error and that the listing agreement was not intended to apply for only one day. CBRE claims the agreement should have stated March 8, 2005, as the termination date. Jefferson claims it was a six-month listing agreement and that the month was typed incorrectly (March rather than September). A fair amount of the lengthy trial was devoted to deciding this and related contract performance issues, although the parties’ briefs largely ignore the trial testimony because of the nature of the appeal. [3] This description oversimplifies matters for purposes of avoiding unnecessary confusion. Actually, the jury found that the following defendants were not members of Jefferson: C&R Consultants, Inc., KSI Funding, Inc. (KSI), Jack DiLemme, Roy Matthew Haskin, and Roy Randall Haskin. But all of these defendants except KSI were found to be partners in Terra Nostra Consultants (which was a member of Jefferson) and were held liable for the judgment on that ground. [4] All statutory references are to the Corporations Code unless otherwise stated. The California Revised Uniform Limited Liability Company Act (§ 17701.01 et seq., added by Stats. 2012, ch. 419, § 20) took effect on January 1, 2014, supplanting the Beverly-Killea Limited Liability Company Act (former § 17000 et seq., repealed by Stats. 2012, ch. 419, § 19). We apply the Beverly-Killea Limited Liability Company Act because this dispute arose before 2014. But we will cite the revised statutes when there is no relevant difference between the two acts or for purposes of comparing the provisions of the two acts. [5] Section 17707.07, subdivision (a)(1), is nearly identical to former section 17355, subdivision (a)(1). [6] Special instruction No. 1, which was provided to the jury and is not challenged by defendants on appeal, states as follows: “To recover damages from defendants for Jeffersonfs] breach of contract, [CBRE] also must prove all of the following, for each defendant: [][] 1. The defendant was a member of Jefferson .... [f] 2. Jefferson . . . dissolved; [1] 3. The defendant received a distribution of funds from Jefferson . .. ; and [f] 4. The distribution was made upon dissolution of Jefferson . . . .” [7] “A limited liability company shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: [f] (a) At the time specified in the articles of organization, if any, or upon the happening of the events, if any, specified in the articles of organization or a written operating agreement, ffl (b) By the vote of a majority in interest of the members, or a greater percentage of the voting interests of members as may be specified in the articles of organization or a written operating agreement, [f] (c) Entry of a decree of judicial dissolution pursuant to [former section] 17351.” (Former § 17350.) Section 17707.01 *414 is similar to former section 17350, although it adds one additional circumstance in which dissolution occurs (i.e., lack of any members for 90 days). [8] A “limited liability company shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following.” (Former § 17350.) [*] See footnote, ante, page 405. [12] Paragraph 18 of the listing agreement states, “In the event of any dispute between Owner and Broker relating to this Agreement, the Property or Owner’s or Broker’s performance hereunder, Owner and Broker agree that such dispute shall be resolved by means of binding arbitration .... The prevailing party in the arbitration proceeding shall be entitled to recover its expenses, including the costs of the arbitration proceeding, and reasonable attorneys’ fees.” In the attached schedule to the listing agreement, section 5 states in relevant part, “If Broker is *416 required to institute legal action against Owner relating to this Schedule or any agreement of which it is a part, Broker shall be entitled to reasonable attorneys’ fees and costs.” [13] “In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.” (Civ. Code, § 1717, subd. (a).) [*] See footnote, ante, page 405.