The statutory right to judicial dissolution in California comes with a hook — the defendants can avoid dissolution by exercising a “buyout” procedure. This is true in both LLCs (Corporations Code section 17703.03) and limited partnerships (Corporations Code section 15908.02).
A recent opinion published by California’s Second Appellate District — Guttman v. Guttman — addresses whether a plaintiff can halt an almost completed court-ordered buyout by filing a voluntary dismissal of the case.
Facts: plaintiff sues for dissolution; defendants trigger buyout procedure; plaintiff views appraised buyout price as “lowball” and dismisses case
Siblings Bruce Guttman, Phillip Guttman, and Judith Douglas were co-equal general partners of the Guttman Family Limited Partnership, which owned valuable real estate in Los Angeles County. Bruce filed a lawsuit against Phillip and Judith alleging a cause of action for dissolution, along with other claims for breach of fiduciary duty and waste.
In response to the lawsuit, Phillip and Judith filed a motion invoking the statutory buyout procedure under section 15908.02(b), electing to purchase Bruce’s partnership interest to avoid dissolution of the partnership. The trial court granted the motion, stayed the lawsuit, set a bond, and appointed three appraisers to determine the fair market value of Bruce’s interest as of the date he filed the lawsuit.
A few months later, the three appraisers lodged their valuation conclusions, which ranged between $37,180,000 and $39,037,000.
At a status hearing with the court, Bruce’s attorney characterized the appraisals as “flawed” and “lowball,” contending the valuation should have been closer to $58 million. The next day, Bruce filed a request for dismissal of the entire action without prejudice. The clerk entered the dismissal.
Phillip and Judith filed an ex parte application to vacate the dismissal on the grounds that the case could not be dismissed when the buyout procedure was already underway.
Trial court: dismissal rejected; buyout cannot be halted at plaintiff’s whim
The trial court granted Phillip and Judith’s application, vacated Bruce’s dismissal, and reinstated the buyout procedure.
The court held that the dismissal was “improperly entered” by the clerk, commenting that it would be “terribly inefficient and a waste of resources” to allow a plaintiff to “dismiss the action and ‘start over’ because he is unhappy with the valuations.” The court also held that for the statutory buyout procedure to be effective, one party should not be able to “overrule the appraisers’ valuations.”
Court of Appeal: affirmed
The Court of Appeal affirmed.
The court held that once a trial court grants a buyout motion, the buyout procedure “supplants” the action for dissolution, and the plaintiff “no longer controls” the claim.
While the right to dismiss an action is broad under Code of Civil Procedure section 581, it is not absolute. Under section 581, an action cannot be dismissed after the “commencement of trial,” which has been defined broadly by case law in a variety of contexts. The determination of whether a “trial” has commenced is shaped largely by policy considerations, including avoiding abuse, waste, and the frustration of statutory schemes.
Here, the court held, “Bruce’s dismissal of the dissolution cause of action would frustrate the statutory scheme under section 15908.02.” If dismissal was allowed, Bruce would “effectively nullify” the trial court’s buyout order, denying Phillip and Judith the “relatively quick and efficient resolution of the issue the buyout procedure was intended to provide.” Bruce could essentially hit a “start over” button any time he was “unhappy” with the appraisers’ valuations. The court observed: “The result not only frustrates the statutory scheme, but is patently unfair to Phillip and Judith and an obvious waste of judicial resources.”
The court also held that the buyout procedure met the broad definition of “commencement of trial” because it was “potentially dispositive.” In other cases, an attempted dismissal has been vacated where the trial court had issued a tentative ruling on a demurrer, motion for summary judgment, or motion for terminating sanctions — all likewise potentially dispositive. While the buyout order did not determine the merits of the dissolution action, it determined that there would be no trial on the claim and thus “effectively disposed of” the claim.
Under the holding of Guttman, a plaintiff cannot dismiss a claim for dissolution after the trial court has already granted a defendant’s motion invoking the statutory buyout mechanism in section 15908.02.
Less clear is a whether dismissal without prejudice is allowed after a defendant files a buyout motion but before the court grants the motion. The Guttman opinion noted a few other cases where dismissal was allowed under those circumstances, but in those cases the dismissals were with prejudice (reducing the element of “gamesmanship”), and the cases did not address whether the stay — triggered by the filing of defendant’s motion based on the statutory language — would bar dismissal. That issue will doubtlessly be addressed in a future opinion.