California limited liability company disputes | Courtroom war stories and lessons learned

A Dissolved LLC Can Still Recover Attorney Fees

An LLC Jungle post from last year addressed the issue of whether derivative claims can be pursued for a dissolved LLC.  See: Can Derivative Claims be Pursued for a Dissolved or Cancelled LLC?  The short answer is “yes.”

A recent opinion published by California’s First Appellate District — Vera v. REL-BC, LLC — addresses the related question of whether a dissolved LLC can recover contractual “prevailing party” attorney fees after successfully defending a lawsuit.

Facts: dissolved LLC obtains summary judgment against plaintiff’s claims in a real estate dispute

In 2011, REL-BC, LLC and a second LLC (SNL Real Estate Solutions, LLC) bought property in Oakland to renovate and resell.  After the renovation project was finished, the LLCs sold the property to the plaintiff.

Over the next three years, the property experienced multiple problems relating to flooding, sewer line problems, and collapsing exterior stairs.  In their pre-sale disclosures, the LLCs stated they were not aware of any water intrusion or sewer system problems.  Three years and three days after the sale, the plaintiff sued the LLCs for breach of the purchase agreement’s disclosure obligations, along with other claims.

The LLCs moved for summary judgment on the grounds that plaintiff’s claims were untimely under the three-year statute of limitations in Civil Code section 338(d) for actions based on fraud.  The trial court granted the motion and entered judgment for the LLCs.

The LLCs then filed a motion requesting an award of “prevailing party” attorney fees based on a fee recovery provision in the purchase agreement.

Trial court: no fees for dissolved LLC because it “lacks capacity”

The trial court awarded fees to SNL (which was still an active LLC), but denied fees to REL-BC (which had dissolved).  The trial court reasoned that REL-BC, “as a dissolved entity, lacks the capacity to present its application for attorney’s fees.”

REL-BC appealed.

Court of Appeal: dissolved LLC can recover fees

The Court of Appeal reversed the trial court’s order denying fees to REL-BC.

The court acknowledged that under Corporations Code section 17707.08, after the two-step process of dissolution and cancellation, an LLC’s “powers, rights, and privileges shall cease.”  However, the court noted, “the cancellation of an LLC does not completely end its ability to transact its affairs.”

Under Corporations Code section 17707.06(a),

A limited liability company that has filed a certificate of cancellation nevertheless 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.

Further, under Corporation Code section 17707.06(b),

No action or proceeding to which a limited liability company is a party abates by the filing of a certificate of cancellation for the limited liability company or by reason of proceedings for its winding up and dissolution.

The court concluded: “By the plain language of these statutes, REL-BC cannot be denied its fees merely because it is a dissolved or canceled entity.”

Lesson

A dissolved LLC can still obtain an award of prevailing party attorney fees after successful litigation.