Smith v. Arakelian CA24 ( 2014 )

Filed 1/7/14 Smith v. Arakelian CA24
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
WILLIAM SMITH, B247253
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. BC435220)
v.
GARY ARAKELIAN,
Defendant and Appellant.
APPEAL from judgment of the Superior Court of Los Angeles County, Michael
Johnson, Judge. Affirmed.
Schreiber & Schreiber, Edwin C. Schreiber and Eric A. Schreiber for Defendant
and Appellant.
Charlston, Revich & Wollitz and Tim Harris for Plaintiff and Respondent.
_________________________
This is an appeal from a judgment granting respondent William Smith attorney
fees and costs. Appellant Gary Arakelian and Mr. Smith were co-owners of Ventura
Investors Group (VIG), a California limited liability company. The fee award arose from
an action by Mr. Smith to dissolve the company or induce a buyout. Mr. Arakelian
argues Mr. Smith did not prevail in the action, and thus should not receive attorney fees
or costs. We disagree.
FACTUAL AND PROCEDURAL SUMMARY
Mr. Arakelian and Mr. Smith incorporated VIG in January 2005. They served as
the company’s only co-managers, each owning 50 percent of the shares. Governed by a
written operating agreement, VIG’s primary purpose was to own and operate real
property. Its only asset was an office building at 11326 Ventura Boulevard in Studio
City. Pursuant to their agreement, Mr. Arakelian managed remodeling and real estate
activities, while Mr. Smith handled bookkeeping and tax matters.
Sometime in 2010, Mr. Smith became concerned with Mr. Arakelian’s conduct in
managing the company. He claimed Mr. Arakelian “tried to act as if the LLC
belong[ed]” only to him. Mr. Smith contended Mr. Arakelian reneged on agreements to
sell the property, demanded capital contributions and administrative fees, claimed Mr.
Smith was in default for refusal to pay such fees, and planned to engage in contracts
without Mr. Smith’s signature, which the operating agreement required. In April 2010,
Mr. Smith filed a complaint seeking dissolution and accounting of VIG pursuant to
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former Corporations Code section 17351, subdivision (a). He sought reimbursement
within 15 days of a court decree confirming the appraisal of his shares, or in the
alternative, the dissolution and windup of the company.
Mr. Arakelian hired attorney Joel Farkas to oppose Mr. Smith’s complaint on
behalf of VIG, and at the expense of the company. Mr. Arakelian joined in VIG’s
1
Former Corporations Code section 17351 was repealed and reenacted as
Corporations Code section 17707.03 without substantive change. (Stats. 2012, ch. 419,
§ 19 [repealed]; Stats. 2012, ch. 419, § 20 [reenacted].) We use both section numbers in
this opinion.
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demurrer to Mr. Smith’s complaint. In his answer, Mr. Arakelian denied “each and
every allegation and contention made in [Mr. Smith’s] complaint” and raised six
affirmative defenses. He also asserted an affirmative defense that VIG’s operating
agreement prohibited dissolution. When Mr. Arakelian refused to participate in his
deposition, the court imposed monetary sanctions and twice ordered him to appear. It
also granted a motion for entry of a preclusion sanction that prevented Mr. Arakelian
from contesting Mr. Smith’s complaint for dissolution.
Mr. Smith filed a motion seeking to disqualify Mr. Farkas from representing VIG,
and to prevent Mr. Arakelian from using company funds for the litigation. In August
2010, the court ordered Mr. Arakelian to account for fees and costs, and disqualified Mr.
Farkas. We denied Mr. Arakelian’s petition for writ of supersedeas (Smith v. Ventura
Investors Group, LLC (Sept. 22, 2010, B226761) [nonpub. opn.]), and affirmed the order
disqualifying Mr. Farkas and prohibiting the use of VIG funds in the dispute. (Smith v.
Ventura Investors Group, LLP et al. (June 7, 2011, B226761) [nonpub. opn.].)
In September 2011, Mr. Arakelian moved to purchase Mr. Smith’s interest in VIG
pursuant to former Corporations Code section 17351, subdivision (b)(1), now
Corporations Code section 17707.03, subdivision (c)(1), under the terms of the operating
agreement. Mr. Smith opposed the motion because Mr. Arakelian sought a buyout only
after more than a year spent contesting the dissolution action. Mr. Smith also was
concerned that granting the buyout motion might prejudice his ability to recover attorney
fees incurred due to Mr. Arakelian’s delay in seeking a buyout. However, the court
granted the motion and appointed three appraisers. By April 2012, all three appraisers
valued Mr. Smith’s 50 percent interest in VIG at $700,000. The court denied Mr.
Arakelian’s motion to vacate the appraisal. Later Mr. Arakelian completed the buyout
process under former Corporations Code section 17351, subdivision (b), now
Corporations Code 17707.03, subdivision (c), by tendering $700,000 to Mr. Smith. In
2
The record on appeal does not indicate the outcome of the demurrer.
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December 2012, the court dismissed Mr. Smith’s original complaint, found him to be the
prevailing party, and awarded him $96,518 in attorney fees and costs pursuant to the fee
clause in the operating agreement. It denied Mr. Arakelian’s motion for attorney fees.
He filed a timely notice of appeal.
DISCUSSION
Mr. Arakelian argues the trial court erred in determining Mr. Smith was the
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prevailing party in the dispute pursuant to Civil Code 1717. He contends the judgment
awarding attorney fees and costs to Mr. Smith should be reversed.
Code of Civil Procedure section 1032, subdivision (a)(4) provides courts with the
discretion to award costs to the “prevailing party” in an action. In contract actions,
section 1717, subdivision (a) requires courts to award reasonable attorney fees and costs
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to the “party prevailing.” Here, the company’s operating agreement, signed by both Mr.
Arakelian and Mr. Smith, sets forth the buyout procedures during a dissolution event and
provides for attorney fees and costs to the prevailing party in a dispute. This contract
forms the basis for the present appeal. Because the “prevailing party” definition of Code
of Civil Procedure section 1032 is “not determinative” in contract disputes, the “party
prevailing” definition of section 1717 governs our analysis. (Zintel Holdings, LLC v.
McLean (2012) 209 Cal. App. 4th 431, 438.) “‘California courts liberally construe the
term “‘“on a contract”’” as used within section 1717. [Citations.] As long as the action
“involve[s]” a contract it is “‘on [the] contract’” within the meaning of section 1717.
[Citations.]’” (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008)
162 Cal. App. 4th 858, 894 (Blickman Turkus).) The “party prevailing” is “the party who
recovered a greater relief in the action on the contract.” (§ 1717, subd. (b)(1).)
Two cases are instructive for determining how to apply the section 1717 prevailing
party definition to the present matter. “[T]he trial court is to compare the relief awarded
3
All statutory references are to the Civil Code, unless otherwise indicated.
4
When authorized by contract, attorney fees are permissible as costs. (Code Civ.
Proc., § 1033.5, subd. (a)(10).)
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on the contract claim or claims with the parties’ demands on those same claims and their
litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and
similar sources. [This] determination is to be made . . . only by ‘a comparison of the
extent to which each party ha[s] succeeded and failed to succeed in its contentions.’
[Citation.]” (Hsu v. Abbara (1995) 9 Cal. 4th 863, 876 [finding party obtaining “simple,
unqualified win” on single contract claim was party prevailing and entitled to attorney
fees under section 1717].) Courts “should be guided by ‘equitable considerations.’ For
example, a party who is denied direct relief on a claim may nonetheless be found to be a
prevailing party if it is clear that the party has otherwise achieved its main litigation
objective. [Citations.]” (Id. at p. 877.) Where “an action is dismissed, a court may base
its attorney fees decision on a pragmatic definition of the extent to which each party has
realized its litigation objectives, whether by judgment, settlement, or otherwise.
[Citation.]” (Santisas v. Goodin (1998) 17 Cal. 4th 599, 622 (Santisas) [finding
defendants were prevailing parties where plaintiffs voluntarily dismissed the action].)
We review a court award of attorney fees to a prevailing party for abuse of
discretion. (Silver v. Boatwright Home Inspection, Inc. (2002) 97 Cal. App. 4th 443, 449.)
“‘“Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason,
all of the circumstances before it being considered. The burden is on the party
complaining to establish an abuse of discretion, and unless a clear case of abuse is shown
and unless there has been a miscarriage of justice a reviewing court will not substitute its
opinion and thereby divest the trial court of its discretionary power.”’” (Ibid.) “The trial
court exercises a particularly ‘wide discretion’ in determining who, if anyone, is the
prevailing party for purposes of section 1717(a).” (Blickman Turkus, supra,
162 Cal.App.4th at p. 894.)
The trial court did not err in designating Mr. Smith as the prevailing party. When
he filed his initial complaint, Mr. Smith sought the appraisal of his ownership interest and
a timely buyout, and if that was not possible, an order of dissolution. From the
beginning, his litigation objective was clear: to quickly disassociate from the company,
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and obtain compensation for his ownership interest. By the time he moved to purchase
Mr. Smith’s interest in the company, Mr. Arakelian had opposed the complaint for over
one year, had resisted cooperating with depositions, and had challenged the unanimous
appraisal. The court granted a motion to sanction and preclude him from contesting Mr.
Smith’s dissolution petition. By all indications, Mr. Arakelian attempted to prevent Mr.
Smith from achieving his litigation objective. When Mr. Arakelian later paid Mr. Smith
$700,000 for his interest in the company, Mr. Smith received what he wanted, although at
a later date than he had requested in his complaint. Thus, the trial court did not abuse its
discretion in finding Mr. Smith to be the prevailing party.
Mr. Arakelian contends Mr. Smith was not the prevailing party because the court
dismissed his original petition for dissolution, and he did not receive any monetary
recovery since the appraised value merely compensated Mr. Smith for his preexisting
interest in the company. To the contrary, as the court in Santisas observed, “it seems
inaccurate to characterize the defendant as the ‘prevailing party’ if the plaintiff dismissed
the action only after obtaining, by means of settlement or otherwise, all or most of the
requested relief . . . .” (Santisas, supra, 17 Cal.4th at p. 621.) Here, the court dismissed
Mr. Smith’s complaint after he received payment from Mr. Arakelian, and achieved his
requested relief. Most significantly, Mr. Smith would not have received a buyout of his
interest pursuant to former Corporations Code section 17351, subdivision (b), now
Corporations Code section 17707.03, subdivision (c), without filing his original action.
(Former Corp. Code, § 17351, subd. (b)(1) [“In any suit for judicial dissolution, the other
members may avoid the dissolution of the limited liability company by purchasing for
cash the membership interests owned by the members so initiating the proceeding . . . .”
(Italics added.)].) Thus, it was no abuse of discretion to designate Mr. Smith as the
prevailing party.
Mr. Arakelian argues that Mr. Smith opposed the buyout, so when Mr. Arakelian
tendered $700,000 to him, Mr. Smith did not achieve his alleged objective of dissolving
the company. Mr. Arakelian claims the court in Merlino v. Fresno Macaroni Mfg. Co.
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(1946) 74 Cal. App. 2d 120 (Merlino), held that a party prevailed when it purchased the
interest of another party seeking dissolution. The court reasoned that where “[p]laintiffs
failed to obtain what they sought in their complaint and defendants obtained the
affirmative relief prayed for in their answer,” the defendants who completed the buyout
prevailed. (Id. at p. 125.) That case does not support Mr. Arakelian’s argument for
several reasons. First, unlike the defendants in Merlino, Mr. Arakelian never prayed for
the buyout remedy in his answer. Second, the plaintiffs in Merlino sought dissolution,
and “did not retreat [from that position] until shortly before the termination of the
litigation.” (Ibid.) To the contrary, Mr. Smith sought a buyout, and in the alternative,
dissolution of the corporation. He opposed Mr. Arakelian’s buyout motion largely
because it was untimely. Over the course of a year, Mr. Arakelian contested Mr. Smith’s
complaint, resisted cooperating with discovery, and challenged the unanimous appraisal.
Finally, Mr. Smith achieved the relief he sought in his complaint when Mr. Arakelian
paid him $700,000. As a result, Merlino does not support Mr. Arakelian here, and the
court did not abuse its discretion in designating Mr. Smith as the prevailing party.
Mr. Arakelian also contends that as a matter of law Mr. Smith cannot be the
prevailing party once Mr. Arakelian invoked his statutory buyout right. He claims that
“once invoked, the statutory buyout process ‘supplants the action for involuntary
dissolution,’” which precludes the party seeking dissolution from prevailing. In support
of his position, he cites Panakosta Partners, LP v. Hammer Lane Management, LLC
(2011) 199 Cal. App. 4th 612, 631 (Panakosta) [affirming trial court’s denial of buyout
motion for lack of jurisdiction because plaintiffs had dismissed original dissolution
action], quoting Go v. Pacific Health Services, Inc. (2009) 179 Cal. App. 4th 522 (Go)
[party initiating action for involuntary dissolution opposed granting of motion for buyout
on grounds that she should have been allowed to litigate dissolution claim].
In neither of these cases did the court address a prevailing party determination for
purposes of awarding attorney fees. In Go, the court held that once a party invoked its
statutory right to a buyout within the timeframe provided for in the court decree, the
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opposing party had no right to continue contesting the dissolution action. (Go, supra,
179 Cal.App.4th at pp. 530-531.) The buyout remedy provides relief for parties who
“aspire to buy out the moving party, with minimal expenditure of time and money that
would otherwise be spent in litigation . . . .” (Id. at p. 531.) That finding is consistent
with the dissolution and buyout framework in former Corporations Code section 17351,
which provides a right to purchase a moving party’s shares in order to preserve the
corporation. However, this case is distinguishable. Here, Mr. Arakelian moved for a
buyout only after the parties had incurred a year of litigation expenses. Although Mr.
Smith initially opposed the buyout, he did so to preserve his ability to recover over a year
of litigation costs. In addition, unlike in Go, Mr. Smith did not insist on pursuing only
dissolution. Instead, Mr. Smith’s original complaint requested buyout as one of two
alternative remedies. After Mr. Arakelian offered a buyout, Mr. Smith accepted
payment. As a result, the court did not abuse its discretion in finding Mr. Smith to be the
prevailing party.
Mr. Arakelian also contends the timing of his buyout petition should not influence
the court’s determination as to which side is the prevailing party. The relevant standard
requires that we examine “‘the extent to which each party ha[s] succeeded and
failed . . . in its contentions.’” (Hsu, supra, 9 Cal.4th at p. 876.) In doing so, we consider
the “pleadings, trial briefs, opening statements, and similar sources.” (Ibid.) Here, Mr.
Arakelian’s conduct prior to filing the buyout petition reveals his contentions, and
accordingly, is relevant in the court’s determination of his litigation objectives. (See
Santisas, supra, 17 Cal.4th at p. 622.) During that time, he opposed Mr. Smith’s
complaint for a buyout or dissolution, as evidenced by his multiple filings. Under these
circumstances, the court acted within its discretion in considering Mr. Arakelian’s
conduct during the time before his ultimate petition for a buyout.
Finally, Mr. Arakelian claims that affirming the trial court’s finding that Mr.
Smith is the prevailing party amounts to poor public policy and chills litigation because a
plaintiff cannot be rewarded for achieving a remedy not afforded by law. He argues that
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a party who refuses to purchase after the appraisal is only liable for expenses “incurred
by the moving parties in the appraisal process.” Mr. Arakelian relies on Trahan v.
Trahan (2002) 99 Cal. App. 4th 62, 75. In that case, a party appealed the trial court’s
confirmation of a negative appraised value of a corporation. (Ibid.) The case is
consistent with former Corporations Code section 17351, now Corporations Code section
17707.03, which grants a moving party the right to attorney fees where a purchasing
party elects and then reneges on a buyout. (Former Corp. Code, § 17351, subd. (b)(3).)
Mr. Arakelian appears to argue that, since he ultimately accepted the buyout, he should
not be responsible for any attorney fees or costs. However, Mr. Arakelian’s buyout did
not follow the typical buyout procedure. Unlike the defendant in Trahan, Mr. Arakelian
not only refused to purchase Mr. Smith’s shares immediately after the appraisal, but also
contested the action for over a year before then. A purchasing party in an action for
dissolution may avoid liability for most or all fees by promptly invoking its statutory
right to a buyout under Corporations Code section 17707.03, subdivision (c). It is not
against public policy to affirm an award of fees and costs to the prevailing party in this
case.
DISPOSITION
The judgment is affirmed. Respondent to have his costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
EPSTEIN, P. J.
We concur:
WILLHITE, J. MANELLA, J.
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