Court Opinion

ID: 6338144
Source: CourtListenerOpinion
Date Created: 2022-05-05 18:01:49.149831+00
Date Added: 2024-06-11T09:23:59.831695
License: Public Domain

Filed 5/5/22
                  CERTIFIED FOR PARTIAL PUBLICATION*

        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                           FIRST APPELLATE DISTRICT

                                   DIVISION ONE

 MATTHEW N. SIROTT et al.,
           Petitioners,
 v.
 THE SUPERIOR COURT OF                       A164037
 CONTRA COSTA COUNTY,
                                             (Contra Costa County
           Respondent;
                                             Super. Ct. No. MSC17-00404)
 BIMAL PATEL et al.,
           Real Parties in Interest.

       The genesis of this case is a business dispute involving a group of
medical doctors and associated entities. Plaintiffs Bimal Patel and EBO
Properties North LLC (EBO) (plaintiffs) sued Matthew and Arlene Sirott and
Robert Robles (defendants) after unsuccessfully seeking to lease a space in a
building owned by 400 Taylor Holdings, LLC (Taylor LLC). The only claims
at issue are derivative claims brought by EBO on behalf of Taylor LLC,
alleging that the denial of the lease caused Taylor LLC to suffer economic
injury. Defendants demurred to the claims on the ground that EBO lacked
standing under Corporations Code1 section 17709.02 to pursue them, because

       Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this
       *

opinion is certified for publication with the exception of part II.A.
       All further statutory references are to the Corporations Code unless
       1

otherwise indicated.

                                        1
during the litigation it relinquished its interest in and was no longer a
member of Taylor LLC. In overruling the demurrer, the court determined
that it had statutory discretion to allow EBO to maintain the derivative
claims even though EBO was no longer a member of Taylor LLC.
      Defendants filed a petition for writ of mandate in this court to
challenge the trial court’s ruling. In the published portion of our decision, we
hold that section 17709.02 requires a party to maintain continuous
membership in a limited liability company to represent it derivatively, just as
section 800 requires a party to maintain continuous ownership in a
corporation to represent it derivatively. (Grosset v. Wenaas (2008) 42 Cal.4th
1100, 1113–1114, 1119 (Grosset).) We further hold that the statutory
discretion conferred on trial courts under section 17709.02, subdivision (a)(1),
to permit “[a]ny member [of an LLC] who does not meet these requirements”
to maintain a derivative suit does not permit courts to excuse a former
member from the continuous membership requirement. While equitable
considerations may warrant exceptions to the continuous membership
requirement, no such considerations were presented here. Accordingly, we
grant defendants’ writ petition and direct the trial court to dismiss EBO’s
derivative claims, leaving it to the court to determine in the first instance
whether the dismissal should be with or without prejudice.
                                     I.
                           FACTUAL AND PROCEDURAL
                                BACKGROUND
      The underlying facts are taken from the third amended complaint, as
well as the trial court’s factual findings in ruling on a cause of action for
reformation that was already tried.
      Matthew Sirott (Sirott), Robles, and Patel are all medical doctors. In
2007, Sirott and Patel formed Taylor LLC, in which they each had a 50

                                         2
percent membership interest. Until 2019, Taylor LLC was the sole owner of
a Pleasant Hill office building in which Sirott, Robles, and Patel practiced.
      Patel is also a member of EBO, a different limited liability company.
He has a 50 percent interest in EBO, as does the other owner, John Ganey.
Patel and Ganey belong to the same medical practice, East Bay Medical
Oncology/Hematology Medical Associates, Inc. (EBMOH). In 2008, Sirott,
Robles, and Patel executed an operating agreement listing Taylor LLC’s
members as EBO (50 percent), Sirott (25 percent), and Robles (25 percent).
The following year, Sirott transferred his interest in Taylor LLC to his family
trust, of which his wife Arlene Sirott is a co-trustee.2
      In fall 2016, Patel proposed to Taylor LLC and Sirott that EBMOH
lease a vacant space in the medical building. Sirott “refused to entertain the
proposal,” voicing concern that the proposed lease would “disadvantage[]
another tenant, . . . the California Radiation Treatment Center, LLC”
(CRTC), which was owned by Sirott, Robles, and EBMOH. EBMOH “was
forced to seek other space for its venture,” and the vacant space was leased to
the medical practice of Sirott and Robles.
      Plaintiffs and Ganey originally sued defendants in March 2017,
asserting breach of fiduciary duty and other claims related to the refusal to
lease the vacant space to EBMOH. That November, plaintiffs and Ganey
filed a second amended complaint in which they alleged individual claims as

      2 The amendment to Taylor LLC’s operating agreement made in
conjunction with the 2009 transfer reflected that the Sirott family trust and
Robles each had a 25 percent membership interest in the company but
incorrectly stated that EBMOH, not EBO, had a 50 percent interest.
Plaintiffs sought reformation to reflect that EBO is the correct entity, and in
December 2019 the trial court found in their favor and ordered that the 2009
amendment be revised accordingly. The reformation claim is not at issue in
this proceeding.

                                        3
well as derivative claims on behalf of Taylor LLC, which was named as a
nominal defendant. Two months later, after defendants demurred to the
complaint, the trial court dismissed Ganey’s derivative claims for lack of
standing because Ganey was not a member of Taylor LLC.
      Meanwhile, in September 2019, the medical building was sold. Before
the sale occurred and for tax purposes, the parties entered an agreement
(Taylor LLC distribution agreement) under which Taylor LLC distributed its
100 percent interest in the building equally to Patel, Ganey, the Sirott family
trust, and Robles as tenants in common. The agreement provided that
Taylor LLC was not thereby dissolved. On the same date and under a
separate distribution agreement (EBO distribution agreement), EBO
transferred its 50 percent membership interest in Taylor LLC to Patel and
Ganey as individuals. Thus, after the property was sold, Patel, Ganey,
Sirott’s family trust, and Robles each held a 25 percent membership interest
in Taylor LLC, and EBO held no interest in it.
      In April 2021, after trial had been continued due to the COVID-19
pandemic, plaintiffs moved for leave to file a third amended complaint that
would “modify [their] damage claims from derivat[ive] to individual claims
and re-add Dr. Ga[]ney as a Plaintiff,” asserting that the “[t]he claims were
transferred/conveyed to Dr. Patel and Dr. Ganey as a result of the sale of [the
medical building].” Plaintiffs also sought to add a new cause of action for
declaratory relief involving Taylor LLC’s operating agreement. In opposing
the motion, defendants argued that no membership interest in Taylor LLC or
ownership of its derivative claims was transferred in conjunction with the
building’s sale. Defendants also argued that Ganey, Patel, and EBO lacked
standing to bring individual claims because the damages claims could “only
be brought derivatively on [Taylor LLC’s] behalf.” (Boldface omitted.)

                                       4
      The trial court granted plaintiffs’ motion in part, permitting plaintiffs
to seek declaratory relief, but denied it “as to modifying [their] damage claims
from derivative to individual claims of Dr. Patel and Dr. Ganey” and as to re-
adding Ganey as a plaintiff. In concluding Patel and Ganey could not assert
individual claims, the court explained that “[t]he gravamen of the wrong is
Dr. Sirott’s breach of duties to Taylor LLC, which is a derivative claim,” and
“[p]laintiffs have not alleged facts that show Patel and Ganey suffered harm
different from that suffered by the LLC.”
      Thereafter, in June 2021, plaintiffs filed the operative complaint, which
continued to name Taylor LLC as a nominal defendant. The complaint
alleged derivative claims for breach of contract, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and gross negligence,
and a claim for declaratory relief. Defendants demurred to the complaint,
arguing as to the derivative claims that EBO lacked standing because it was
no longer a member of Taylor LLC, and Patel lacked standing because he was
not “ ‘a member of record, or beneficiary,’ ” of Taylor LLC “ ‘at the time of the
transaction or any part of the transaction’ ” complained of. (Quoting
§ 17709.02, subd. (a)(1) (§ 17709.02(a)(1)).)
      In September 2021, the trial court overruled the demurrer to the claim
for declaratory relief but continued the hearing on the demurrer to the
derivative claims to permit plaintiffs to file a motion for standing under
section 17709.02. Plaintiffs then filed such a motion, in which they argued
that EBO met the statutory requirements for the court to exercise its
discretion to permit EBO to maintain the derivative claims. (See
§ 17709.02(a)(1).) Alternatively, they argued that either Patel and Ganey
had standing to represent Taylor LLC based on the men’s 2019 receipt of

                                        5
EBO’s transferred interest, or the court could reconsider its prior order and
permit the two men to bring individual claims.
      The hearing on defendants’ demurrer to the derivative claims and
plaintiffs’ section 17709.02 motion was set for November 24, 2021, shortly
before the trial date of December 6. In advance of the hearing, the trial court
issued a tentative ruling granting the section 17709.02 motion in part to
allow EBO to maintain the derivative claims. The court also issued a
tentative ruling sustaining the demurrer without leave to amend as to Patel
and overruling it as to EBO. Defendants contested the tentative rulings to
the extent they permitted EBO to maintain derivative claims. After hearing
argument, the court adopted the rulings as its final orders, which were
entered shortly thereafter. Trial remained set on December 6.
      Defendants filed the instant writ petition in this court on
December 1, 2021, seeking to compel the superior court (1) to set aside its
orders overruling their demurrer to EBO’s derivative claims and granting
EBO’s motion for leave to maintain derivative claims and (2) to dismiss
EBO’s derivative claims for lack of standing. This court stayed the trial and
issued an order to show cause why the relief sought in the petition should not
be granted.3
                                      II.
                                  DISCUSSION
      A.    Plaintiffs’ Procedural Objections and Equitable Arguments for
            Why We Should Not Reach the Petition’s Merits Are Unfounded.
      Before considering whether the trial court properly determined that
EBO had standing to bring derivative claims on behalf of Taylor LLC, we

      3 This matter was originally assigned to Division Three of this court.
After the order to show cause issued, it was transferred to this division due to
recusals in Division Three.

                                       6
address plaintiffs’ preliminary arguments that (1) we are “not empowered to
issue a writ of prohibition or mandate” in response to a trial court’s exercise
of discretion; (2) Arlene Sirott and Robles are not proper petitioners;
(3) judicial estoppel precludes defendants from challenging EBO’s standing
because they previously argued that EBO had standing to bring derivative
claims; and (4) we must deny the petition under principles of unclean hands
and equitable estoppel. All of these contentions lack merit.
            1.    The petition validly seeks a writ of mandate.
      Defendants describe the petition as one for “writ of prohibition,
mandate, or other appropriate relief.” A writ of prohibition “arrests the
proceedings of any tribunal . . . when such proceedings are without or in
excess of the jurisdiction of such tribunal.” (Code Civ. Proc., § 1102.) A writ
of mandate may issue to a lower court to “compel the performance of an act
which the law specially enjoins.” (Id., § 1085.) Thus, a writ of prohibition
prevents a court from acting, and a writ of mandate requires a court to act.
      “A writ of mandate compelling dismissal achieves the same result as a
writ of prohibition preventing the [lower] court from taking further action on
the complaint, and either writ may be appropriate when a court lacks subject
matter jurisdiction” or has acted in excess of jurisdiction, such as by allowing
an action to proceed even though the plaintiff lacks standing. (Big Valley
Band of Pomo Indians v. Superior Court (2005) 133 Cal.App.4th 1185, 1189,
fn. 1; 8 Witkin, Cal. Procedure (6th ed. 2022) Extraordinary Writs, § 240; see
Drink Tank Ventures LLC v. Real Soda in Real Bottles, Ltd. (2021)
71 Cal.App.5th 528, 541–542 [trial court lacks jurisdiction over cause of
action when statutory prerequisites not satisfied].) Here, since defendants
seek to “command[]” the trial court to sustain their demurrer to EBO’s

                                        7
derivative claims, we will treat the petition as one for a writ of mandate.
(See Big Valley Band, at p. 1189, fn. 1.)
      Plaintiffs argue that we lack the power to issue a writ of mandate
because the writ “will only lie to ‘control judicial discretion when that
discretion has been abused.’ ” Although plaintiffs are correct that
“ ‘mandamus does not generally lie to control the exercise of judicial
discretion, the writ will issue “where, under the facts, that discretion can be
exercised in only one way.” ’ ” (Diaz-Barba v. Superior Court (2015)
236 Cal.App.4th 1470, 1483.) Here, defendants contend that the trial court
erred in overruling the demurrer to the derivative claims because EBO lacks
standing to bring those claims as a matter of law, an error that lies squarely
within the category of those reviewable by a petition for writ of mandate.
(See 8 Witkin, Cal. Procedure (6th ed. 2022) Extraordinary Writs, § 100
[“ ‘abuse of discretion’ ” under Code Civ. Proc., § 1085, “means only that the
decision is wrong in law and would be reversed by the reviewing court if its
review power were invoked by the normal process of appeal”].)
      Plaintiffs also cursorily claim that the petition does not raise “a
jurisdictional issue,” and they “deny that an appeal would be an insufficient
remedy.” We agree with defendants that plaintiffs waived these arguments
by failing to develop them. (See Badie v. Bank of America (1998)
67 Cal.App.4th 779, 784–785.) Therefore, we conclude that the petition is an
appropriate vehicle by which defendants may seek relief.
            2.    Arlene Sirott and Robles have standing as petitioners.
      Plaintiffs also claim that Arlene Sirott and Robles are not proper
parties to this writ proceeding because they were included as defendants in
the reformation cause of action, which has already been resolved, and “the
remaining causes of action which are to proceed to trial are alleged against

                                        8
[Sirott] only.” To have standing to seek a writ of mandate, a party must be
“beneficially interested” in the proceeding (Code Civ. Proc., § 1086), which
requires the party to have “ ‘some special interest to be served or some
particular right to be preserved or protected over and above the interest held
in common with the public at large.’ ” (Save the Plastic Bag Coalition v. City
of Manhattan Beach (2011) 52 Cal.4th 155, 165.) Here, not only are Arlene
Sirott and Robles named as defendants in the pending cause of action for
declaratory relief, both also have an interest in the litigation’s outcome more
generally, including because the Sirott family trust and Robles are members
of Taylor LLC. Therefore, we conclude that Arlene Sirott and Robles have
standing to bring the petition.
             3.    Defendants did not take inconsistent positions to which
                   judicial estoppel applies.
      Plaintiffs next argue that judicial estoppel precludes defendants from
claiming that EBO lacks standing to bring the derivative claims. We are not
persuaded.
      “Judicial estoppel is an equitable doctrine designed to maintain the
integrity of the courts and to protect the parties from unfair strategies,” and
it “prohibits a party from asserting a position in a legal proceeding that is
contrary to a position [the party] successfully asserted in the same or some
earlier proceeding.” (Owens v. County of Los Angeles (2013) 220 Cal.App.4th
107, 121.) The doctrine’s elements are “ ‘(1) the same party has taken two
positions; (2) the positions were taken in judicial or quasi-judicial
administrative proceedings; (3) the party was successful in asserting the first
position (i.e., the tribunal adopted the position or accepted it as true); (4) the
two positions are totally inconsistent; and (5) the first position was not taken
as a result of ignorance, fraud, or mistake.’ ” (Ibid.) Even if these elements
are satisfied, a court has discretion not to apply judicial estoppel. (Ibid.)

                                         9
      According to plaintiffs, defendants “clearly [took] two totally
inconsistent positions in the matter” by (1) opposing plaintiffs’ motion to
amend the complaint to add individual claims by Patel and Ganey on the
basis “that only EBO had standing to bring and maintain the derivative
[claims],” a position the trial court accepted; and (2) thereafter arguing that
EBO lacks standing to bring derivative claims. Plaintiffs inaccurately
describe defendants’ arguments in opposing the motion to amend. In fact,
defendants argued only that Patel, Ganey, and EBO lacked standing to bring
individual claims and that the derivative claims were owned exclusively by
Taylor LLC. Defendants did not take any position on who did have standing
to bring derivative claims on Taylor LLC’s behalf, much less specifically claim
that EBO had such standing. Thus, the alleged inconsistency does not exist,
and the elements of judicial estoppel are not met.
            4.    Equitable doctrines do not bar defendants from challenging
                  EBO’s standing to maintain derivative claims.
      Finally, plaintiffs claim that the doctrines of equitable estoppel and
unclean hands bar defendants from seeking relief, based on defendants’
alleged misconduct in conjunction with the 2019 transactions leading up to
the medical building’s sale. We conclude that neither doctrine precludes
defendants from seeking to dismiss EBO’s derivative claims.
      Plaintiffs argue that defendants should not be allowed to contest EBO’s
standing because (1) defendants’ attorney “insisted” on the 2019 distributions
by which EBO lost its interest in Taylor LLC; and (2) in spring 2019, the
parties signed an agreement (the no prejudice agreement) that the
Taylor LLC and EBO distribution agreements would not “prejudice any
[p]arty with respect to any claims or defenses such [p]arty may have . . . in

                                       10
conjunction with” this litigation.4 According to plaintiffs, defendants are in
breach of the no prejudice agreement by attempting to take advantage of
distributions that they urged.
      Under the doctrine of equitable estoppel, “ ‘[w]henever a party has, by
[the party’s] own statement or conduct, intentionally and deliberately led
another to believe a particular thing true and to act upon such belief, [the
party] is not, in any litigation arising out of such statement or conduct,
permitted to contradict it.’ [Citation.] ‘ “Generally speaking, four elements
must be present in order to apply the doctrine . . . : (1) the party to be
estopped must be apprised of the facts; (2) [the party] must intend that [its]
conduct shall be acted upon, or must so act that the party asserting the
estoppel had a right to believe it was so intended; (3) the other party must be
ignorant of the true state of facts; and (4) [the other party] must rely on the
conduct to [its] injury.” ’ ” (Honeywell v. Workers’ Comp. Appeals Bd. (2005)
35 Cal.4th 24, 37.)
      “ ‘The [unclean hands] doctrine demands that a [party] act fairly in the
matter for which [the party] seeks a remedy. [The party] must come into
court with clean hands, and keep them clean, or . . . be denied relief,
regardless of the merits of [the] claim.’ ” (Fladeboe v. American Isuzu Motors
Inc. (2007) 150 Cal.App.4th 42, 56.) The required misconduct “ ‘must relate

      4  Plaintiffs also argue that “by signing the No Prejudice Agreement,
while knowing that their attorney had required that . . . Taylor LLC make
distributions to individual members, [defendants] consented to allow the trial
court to maintain its jurisdiction of the matter for the remainder of the
action” and are therefore “estopped from now claiming the . . . court has lost
its jurisdiction to decide if EBO can maintain the derivative action.”
Defendants do not, however, claim that the trial court lacks jurisdiction over
the matter generally or did not have the power to resolve the issue of EBO’s
standing.

                                        11
directly to the transaction concerning which the complaint is made, i.e., it
must pertain to the very subject matter involved and affect the equitable
relations between the litigants.’ ” (Meridian Financial Services, Inc. v. Phan
(2021) 67 Cal.App.5th 657, 685.) “The misconduct must also ‘ “ ‘ “prejudicially
affect . . . the rights of the person against whom relief is sought so that it
would be inequitable to grant such relief.” ’ ” ’ ” (Ibid.)
      We conclude that plaintiffs have forfeited their claims that these
equitable doctrines bar defendants from raising the issue of EBO’s standing.
Both doctrines present questions of fact. (Kendall-Jackson Winery, Ltd. v.
Superior Court (1999) 76 Cal.App.4th 970, 978 [unclean hands]; Cuadros v.
Superior Court (1992) 6 Cal.App.4th 671, 675 [equitable estoppel].) As a
result, they generally must first be raised in the trial court. (In re Marriage
of Turkanis & Price (2013) 213 Cal.App.4th 332, 353 [equitable estoppel];
Fibreboard Paper Products Corp. v. East Bay Union of Machinists (1964)
227 Cal.App.2d 675, 726 [unclean hands].) Plaintiffs did not argue below
that either doctrine prevented defendants from contesting EBO’s standing.
Although they argued that equitable considerations justified the trial court’s
exercise of discretion to permit EBO to maintain the derivative claims, they
did not argue that the elements of either unclean hands or equitable estoppel
were met. And although plaintiffs mentioned the no prejudice agreement in
their motion for standing under section 17709.02, they did not make any
legal argument based upon it. Thus, the trial court had no occasion to
consider whether either doctrine applied.
      Moreover, even if we were otherwise inclined to consider these issues
for the first time on review, the record is insufficient to demonstrate that
either equitable estoppel or unclean hands applies. In claiming that these
doctrines bar defendants from relief, plaintiffs rely on an email chain

                                         12
purportedly showing that defendants’ attorney “insisted” on the 2019
distributions by which EBO came to lose its interest in Taylor LLC. But this
document was not introduced below, and “[w]rit review does not provide for
consideration of evidence not before respondent court at the time of its
ruling.” (Pomona Valley Hospital Medical Center v. Superior Court (2013)
213 Cal.App.4th 828, 835, fn. 5.)
      The remaining evidence on which plaintiffs rely is the no prejudice
agreement, titled “Agreement re 400 Taylor Holdings LLC,” which was
introduced through Sirott’s declaration in opposition to plaintiffs’ motion for
standing. In relevant part, the agreement provides that it, the Taylor LLC
distribution agreement, and “any other instruments or agreements
pertaining to a conveyance of the [medical building] . . . will not prejudice any
[p]arty with respect to any claims or defenses such [p]arty may have (or claim
to have) in conjunction with [this litigation], with all [p]arties reserving all
rights and remedies in conjunction with [this litigation], notwithstanding the
execution of [the aforementioned agreements].”5
      Plaintiffs contend that defendants breached the no prejudice agreement
by relying on the Taylor LLC and EBO distribution agreements “to support
their demurrer . . . in an effort to have the entire action thrown out of court,
clearly [seeking] to prejudice [plaintiffs’] claims.” The no prejudice
agreement cannot bear the weight plaintiffs place upon it. Even if we were to
assume that defendants breached the agreement by raising the question of
standing, plaintiffs have failed to establish the required elements for

      5The quoted clause also refers to “the Disclaimer Agreement,” which is
defined as another agreement that EBO and “another entity in which Ganey
and Patel are shareholders are entering . . . of which Sirott, the Sirott
Trustees and Robles are third-party beneficiaries.” The parties do not
explain what this agreement is.

                                        13
equitable estoppel, which turn on the parties’ knowledge and intent. (See
Honeywell v. Workers’ Comp. Appeals Bd., supra, 35 Cal.4th at p. 37.)
      Likewise, the claimed breach alone does not establish unclean hands.
That doctrine “protects judicial integrity and promotes justice” and “protects
the court’s, rather that the opposing party’s, interests.” (Kendall-Jackson
Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th at p. 978.) Thus, “[n]ot
every wrongful act constitutes unclean hands.” (Id. at p. 979.) Absent any
cognizable evidence that defendants engineered the EBO distribution
agreement to gain a wrongful advantage in this case, we decline to conclude
that the unclean hands doctrine bars them from contesting EBO’s standing.
      B.      EBO Lacks Standing to Maintain the Derivative Claims Because
              It Is No Longer a Member of Taylor LLC.
      Having concluded that no procedural or equitable considerations
preclude our review of the petition’s merits, we turn to consider whether EBO
retained standing to pursue the derivative claims against Taylor LLC after it
relinquished its interest in Taylor LLC. We conclude it did not.
              1.   Standard of review
      In this writ proceeding, “ ‘the ordinary standards of demurrer review
still apply,’ ” under which we review de novo an order overruling a demurrer.
(San Bernardino County v. Superior Court (2015) 239 Cal.App.4th 679, 683–
684; Guardian North Bay, Inc. v. Superior Court (2001) 94 Cal.App.4th 963,
971.) In doing so, we “accept[] as true all facts properly pleaded in the
complaint in order to determine whether the demurrer should be overruled.”
(Guardian North Bay, at p. 971.) Standing is a question of law that is also
reviewed de novo. (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150–151
(Schrage).)
      Plaintiffs argue that the applicable standard of review is abuse of
discretion, not de novo. We would agree if we were reviewing a finding that

                                        14
EBO made the five showings under section 17709.02(a)(1) required for the
trial court to exercise its discretion to allow a member of an LLC to maintain
a derivative claim. But as we will explain, section 17709.02 requires a party
to have both contemporaneous and continuous membership in a limited
liability company to have standing to bring derivative claims, and the statute
confers discretion on a court to excuse only the former requirement.
Therefore, whether EBO had standing after it was no longer a member of
Taylor LLC—the issue presented in this matter—does not implicate the
court’s statutory discretion, and we review the issue de novo.
             2.    Principles governing standing to bring derivative claims on
                   behalf of a limited liability company.
      “ ‘A limited liability company is a hybrid business entity formed under
the Corporations Code and consisting of at least two “members” [citation]
who own membership interests [citation]. The company has a legal existence
separate from its members. Its form provides members with limited liability
to the same extent enjoyed by corporate shareholders [citation], but permits
the members to actively participate in the management and control of the
company.’ ” (PacLink Communications Internat., Inc. v. Superior Court
(2001) 90 Cal.App.4th 958, 963; see generally § 17701.01 et seq.)
      “The principles governing derivative actions in the context of
corporations apply to limited liability companies.” (Schrage, supra,
69 Cal.App.5th at p. 150; PacLink Communications Internat., Inc. v. Superior
Court, supra, 90 Cal.App.4th at p. 963.) Under these principles, a
corporation’s shareholders “have no direct cause of action or right of recovery
against those who have harmed [the corporation],” but they can “bring a
derivative suit to enforce the corporation’s rights and redress its injuries
when the [corporation] fails or refuses to do so.” (Grosset, supra, 42 Cal.4th
at p. 1108.) “ ‘ “[T]he action is derivative, i.e., in the corporate right, if the

                                         15
gravamen of the complaint is injury to the corporation . . . .” [Citations.] “. . .
The stockholder’s individual suit, on the other hand, is a suit to enforce a
right against the corporation which the stockholder possesses as an
individual.” ’ ” (PacLink, at p. 964.) As noted above, the trial court concluded
that the gravamen of the harm alleged in the derivative claims was to
Taylor LLC, not to Patel or Ganey individually, a ruling plaintiffs do not
challenge.
      Section 17709.02 establishes the requirements for a member to pursue
a derivative suit on behalf of a limited liability company. (See Grosset, supra,
42 Cal.4th at p. 1110; Schrage, supra, 69 Cal.App.5th at p. 158.) The statute
provides that “[n]o action shall be instituted or maintained in right of any
domestic or foreign limited liability company by any member of the limited
liability company unless” two conditions are met. (§ 17709.02, subd. (a).)
Only the first condition (under subdivision (a)(1) of the statute) is at issue
here, as it is uncontested that plaintiffs sufficiently pleaded the existence of
the second condition (under subdivision (a)(2)), which involves a plaintiff’s
pre-litigation actions.
      We hold that section 17709.02 requires both “contemporaneous”
membership—meaning the party seeking to bring a derivative claim was a
member in the LLC at the time of the challenged transaction (or became a
member by gaining an interest from a party who was a member at the time of
the transaction)—and “continuous” membership—meaning the party was a
member throughout the litigation of a derivative claim. The recognition of
these two components is compelled by the text of the statute and the
Supreme Court’s interpretation of section 800, which is similarly worded and
sets forth the requirements for a party to have standing to bring a
shareholder’s derivative action on behalf of a corporation.

                                        16
      The text of section 17709.02(a)(1) requires a plaintiff to allege that it
“was a member of record, or beneficiary, at the time of the transaction or any
part of the transaction of which the plaintiff complains, or that the plaintiff’s
interest later devolved upon the plaintiff by operation of law from a member
who was a member at the time of the transaction or any part of the
transaction complained of.” However, “[a]ny member who does not meet
these requirements may nevertheless be allowed in the discretion of the court
to maintain [an] action on a preliminary showing to and determination by the
court” of five enumerated circumstances, including that “[t]he plaintiff
acquired the interest before there was disclosure to the public or to the
plaintiff of the wrongdoing of which plaintiff complains” and that “the
defendant may retain a gain derived from defendant’s willful breach of a
fiduciary duty” if the action does not proceed. (§ 17709.02(a)(1).)
      In Grosset, the Supreme Court interpreted section 800, whose standing
requirements closely parallel those of section 17709.02. (Grosset, supra,
42 Cal.4th at p. 1110.) Under section 800, subdivision (b), “[n]o action may be
instituted or maintained in right of any domestic or foreign corporation by
any holder of shares or of voting trust certificates of the corporation unless”
two conditions are met. The first condition, under subdivision (b)(1) of
section 800, requires that “[t]he plaintiff alleges in the complaint that
plaintiff was a shareholder, of record or beneficially, or the holder of voting
trust certificates at the time of the transaction or any part thereof of which
plaintiff complains or that plaintiff’s shares or voting trust certificates
thereafter devolved upon plaintiff by operation of law from a holder who was
a holder at the time of the transaction or any part thereof complained of.”
And like section 17709.02, section 800 provides that “any shareholder who
does not meet these requirements may nevertheless be allowed in the

                                        17
discretion of the court to maintain the action on a preliminary showing to and
determination by the court” of five nearly identical enumerated
circumstances, including that “the plaintiff acquired the shares before there
was disclosure to the public or to the plaintiff of the wrongdoing of which
plaintiff complains” and that “unless the action can be maintained the
defendant may retain a gain derived from defendant’s willful breach of a
fiduciary duty.” (§ 800, subd. (b)(1); compare § 17709.02(a)(1).)
      Grosset held that standing to maintain a derivative suit under
section 800, subdivision (b)(1), requires both “contemporaneous ownership”
and “continuous ownership,” which are the same as the concepts of
contemporaneous and continuous membership described above except applied
to stock ownership. (Grosset, supra, 42 Cal.4th at pp. 1109–1111, 1119.) The
contemporaneous ownership requirement derives from section 800,
subdivision (b)(1)’s mandate that the plaintiff either “was a shareholder . . .
at the time of the transaction” or later received shares “by operation of law
from a holder who was a holder at the time of the transaction.” (Grosset, at
pp. 1110–1111.) The continuous ownership requirement derives from
section 800, subdivision (b)’s provision that an action may not be “instituted
or maintained” unless the plaintiff meets the two conditions listed thereafter.
(Grosset, at pp. 1111, 1113–1114.)
      Grosset’s analysis applies here since the relevant provisions of
section 17709.02 and section 800 are nearly identical, and the general rule is
that derivative actions on behalf of limited liability companies are subject to
the same principles governing those on behalf of corporations. Plaintiffs
argue that Grosset’s analysis is inapplicable because “[c]orporations and
LLCs are different, [and] therefore, different rules apply to each.” Although
it is true that not “all laws that apply to corporations also apply to LLCs,”

                                       18
plaintiffs do not identify any distinction between the two types of business
entities that would support different interpretations of essentially the same
language in sections 800 and 17709.02. Therefore, both contemporaneous
membership and continuous membership are required for a plaintiff to have
standing in a derivative action on behalf of an LLC.
      We thus turn to whether EBO had standing to maintain derivative
claims on behalf of Taylor LLC. It is uncontested that EBO meets the
contemporaneous membership requirement under section 17709.02. EBO
was a member of Taylor LLC from 2009 until 2019, and all the “transactions”
plaintiffs challenge occurred during that time period. It is also clear that
EBO does not meet the continuous membership requirement, because in 2019
it relinquished its membership interest in Taylor LLC.
      The only issue left for us to resolve, therefore, is whether the trial court
could nevertheless conclude that EBO had standing to maintain the
derivative claims on behalf of Taylor LCC based on statutory or equitable
considerations. In assuming it could so conclude, the court explained it was
exercising its discretion under section 17709.02(a)(1) to permit EBO to
maintain the derivative claims because plaintiffs made the five showings
necessary for it to do so under that provision. The court expressed its belief
that “[section] 17709.02 gives the Court discretion to allow a member of [an]
LLC who does not meet the requirements of contemporaneous and continuous
ownership to maintain its action.”
      But a court’s discretion to permit a derivative action by “[a]ny member
who does not meet these requirements” (§ 17709.02(a)(1)) does not include
the discretion to confer standing on a plaintiff who is not a member. The
quoted language refers to a “member,” not a “plaintiff,” who fails to “meet
these requirements.” (Ibid., italics added.) Likewise, the first sentence of

                                       19
section 17709.02, subdivision (a), provides that “[n]o action shall be instituted
or maintained . . . by any member of the limited liability company” unless two
conditions are met. (Italics added.) These passages presuppose that the
court’s discretion extends to current members of the LLC, not to plaintiffs
who are no longer members. EBO does not qualify as a “member who does
not meet these requirements” who may nevertheless maintain derivative
claims in the court’s discretion. (§ 17709.02(a)(1).)
      Even apart from these references to a “member,” section 17709.02
authorizes a trial court to exercise its discretion to allow only a party “who
does not meet these requirements” to maintain derivative claims.
(§ 17709.02(a)(1), italics added.) This authorization immediately follows the
sentence describing the contemporaneous membership requirement, which
requires either that “the plaintiff was a member of record, or beneficiary, at
the time of the [complained of] transaction . . . or that the plaintiff’s interest
later devolved upon the plaintiff by operation of law from a member who was
a member at the time of the transaction.” (Ibid.) Thus, “these requirements”
is more naturally read to refer to the requirements that either the plaintiff or
the party from which the plaintiff gained an interest in the limited liability
company was a member at the time of the challenged transaction, not to the
continuous membership requirement, which is based on the introductory
paragraph of subdivision (a). (See Grosset, supra, 42 Cal.4th at p. 1111.)
      Grosset supports this interpretation. Referring to the five showings a
plaintiff must make for a court to exercise its discretion to confer standing
under section 800, subdivision (b)(1), Grosset stated that that provision’s
“contemporaneous ownership requirement will not defeat standing in certain
circumstances where the defendant would otherwise be able to retain a gain
from a willful breach of fiduciary duty and where the plaintiff became a

                                        20
shareholder before disclosure of the alleged wrongdoing.” (Grosset, supra,
42 Cal.4th at p. 1111, italics added.) While not directly addressing the issue,
the Supreme Court clearly suggested that a court has discretion to forgive the
contemporaneous ownership requirement, not the continuous ownership
requirement. Accordingly, we conclude that the trial court erred by
determining that EBO has standing to maintain the derivative claims even
though it is no longer a member of Taylor LLC.6
      We recognize that “equitable considerations may warrant an exception
to the continuous ownership requirement if [a] merger itself is used to
wrongfully deprive [a] plaintiff of standing, or if the merger is merely a
reorganization that does not affect the plaintiff’s ownership interest.”
(Grosset, supra, 42 Cal.4th at p. 1119.) Although Grosset declined to address
these issues “definitively” as they were not implicated in that case (ibid.), a
subsequent Court of Appeal decision held that equitable considerations
permitted the plaintiffs in the case before it, former shareholders of a
corporation, to maintain a derivative suit. (Haro v. Ibarra (2009)
180 Cal.App.4th 823, 826, 837.) In Haro, the corporation’s other
shareholders, who were also officers and directors, had “levied an assessment
of $57,291.67 per share against [the plaintiffs],” and when the plaintiffs
refused to pay “the controlling directors consequently declared [the plaintiffs’]
shares to be forfeited.” (Id. at p. 826.) Although the trial court concluded
that the plaintiffs “lacked standing because they had not paid the assessment
and were no longer shareholders,” Haro concluded that they had “alleged

      6 We express no opinion on whether, in light of our conclusion that
section 17709.02(a)(1) confers discretion to excuse the contemporaneous
membership requirement, the trial court here can or should reconsider its
dismissal of Patel’s derivative claims on the basis that he did not meet that
requirement.

                                       21
equitable considerations that warrant[ed] an exception to the continuous
ownership requirement” and reversed the dismissal of their suit. (Id. at
pp. 826, 837.)
      The equitable considerations contemplated in Grosset and Haro
involved a plaintiff’s being wrongfully deprived of, or not actually losing, its
interest in the corporation. (See Grosset, supra, 42 Cal.4th at p. 1119;
Haro v. Ibarra, supra, 180 Cal.App.4th at p. 826.) Here, however, the
complaint does not allege that defendants engaged in any wrongdoing
involving EBO’s distribution of its interest in Taylor LLC to Patel and Ganey.
Although plaintiffs raised equitable issues in both their motion for standing
and their briefing in this writ proceeding, none of their concerns are
sufficiently established on this record to warrant an exception to the
continuous membership requirement under Grosset. We express no opinion
on whether plaintiffs may be able to amend the complaint to allege such an
exception, however, and the trial court shall determine in the first instance
whether to dismiss EBO’s derivative claims with or without prejudice.
                                      III.
                                  DISPOSITION
      Let a peremptory writ of mandate issue directing respondent superior
court to vacate its order granting in part plaintiffs’ motion for standing under
section 17709.02 and its order overruling defendants’ demurrer to EBO’s
derivative claims and to enter an order that sustains that demurrer. The
court may determine in the first instance whether the demurrer to EBO’s
derivative claims should be sustained with or without leave to amend.
      Upon finality of this opinion, the stay of the trial in respondent
superior court is vacated. Petitioners shall be entitled to their costs in this
proceeding. (Cal. Rules of Court, rule 8.493(a)(1)(A).)

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                                       _________________________
                                       Humes, P.J.

WE CONCUR:

_________________________
Margulies, J.

_________________________
Banke, J.

Sirott v. Superior Court A16403

                                  23
Trial Court:

      Superior Court of the County of Contra Costa

Trial Judge:

      Hon. Steven K. Austin

Counsel for Petitioners:

      Philip Borowsky, Philip Borowsky, a Professional Corporation
      Christopher J. Hayes, Ragghianti Freitas LLP

Counsel for Real Parties in Interest:

      Richard T. Bowles, Cheryl A. Noll, Bowles & Verna LLP

Sirott v. Superior Court A164037

                                        24