Motion for Security DENIED.

In essence, the original complaint alleged: The operating agreement of 807 South Valley, LLC [the LLC] provides that title to property purchased by must be held in the name of the LLC, members must approve sale, and that profits must be distributed. By oral agreement, a member who found property would get a 10% commission.

Vale St. property: Plaintiff found the property, paid $15,000 to get the owner to vacate (“cash for keys”) and sold the property but he was not reimbursed and was denied a commission.

South Valley Property: Defendant purchased the property to sell but a member, Kamran Mansoori, secretly quitclaimed it to another entity without consideration and then caused the entity to sell it for a profit without the LLC members’ consent.

Banyan Property: Plaintiff located the property and bought it for the LLC, receiving a 2.5% commission as real estate agent. Mansoori asked for and received $6500 of the commission to make improvements but sold the property through another agent. Plaintiff seeks a commission and share of the profits.

Defendant demurred for reasons that included failure to comply with Corp. Code §17709.02 (nominal plaintiff must seek relief from the entity the before bringing a derivative action). Before the hearing, Plaintiff filed an amended complaint.

1st Amended Complaint adds three new Plaintiffs and alleges that one of the new Plaintiffs, Famimi, communicated with Mansoori as manager of the LLC, about the South Valley property and asked him for mediation “in his individual capacity and on behalf of the LLC” but Mansoori refused.

The amended pleading primarily focuses on the South Valley Property which Plaintiffs claim was purchased by the LLC but which Mansoori quitclaimed to another entity and sold without sharing the profit. Five causes of action are based on this transaction:

1. Conspiracy

2. Breach of fiduciary duty

3. Breach of operating agreement

4. Breach of good faith & fair dealing

5. Accounting

The 6th cause of action for breach of the operating agreement is based on the alleged oral agreement for a commission on sale of the Vale Street property. A similar commission claim is made as to the Banyan property, along with a claim for plaintiff’s profit as an LLC member.

Corp. Code §17709.02(a) states that the statute applies to actions brought “in right of” of an LLC, i.e., a derivative action brought on behalf of an LLC. But it is unclear whether plaintiff is bringing claims individually, or derivatively on behalf of the LLC.

Certainly, the caption of the First Amended Complaint does not assist in this analysis, because derivative actions list the suing party as a nominal plaintiff, and the LLC as the nominal defendant, as does the caption of an action directly against the LLC.

In the body of the First Amended Complaint, the plaintiffs added facts demonstrating their efforts to obtain the relief requested, as required by Corp. Code §17709.02(a)(2) for derivative actions. For direct actions against an LLC, compliance with the section appears unnecessary.

The causes of action and relief requested, however, appear solely to seek redress for the plaintiffs only, and do not expressly seek derivative relief on behalf of the LLC.

So, the court is a bit confused. The requirement of security under section 17709.02(b) applies only to derivative actions, so security would not be required for an action directly against an LLC.

In sorting this issue out, the court will quote from Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312 (citations omitted):

Shareholders may bring two types of actions, “a direct action filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder,” or a “ derivative action filed on behalf of the corporation for injury to the corporation for which it has failed or refused to sue.” . . . “The two actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholders (direct action) or to the corporation (derivative action).” ( Ibid.) When the claim is derivative, the “shareholder is merely a nominal plaintiff…. Even though the corporation is joined as a nominal defendant …, it is the real party in interest to which any recovery usually belongs.”

Given the two types of claims are mutually exclusive, it behooves us to separate the claims at issue here.

Vale Street and Banyon Properties: Ranzoni’s claims relating to these two properties appear directed against he LLC, i.e., that the LLC owes him money for unpaid commissions and 10% profit bonus. Given these claims do not appear derivative, the section 17709.02(b) security requirement would not apply.

South Valley Property: Plaintiffs’ causes of action regarding this property concern the alleged diversion of the LLC’s interest in the property to another entity. As plaintiffs’ did not have an interest in the property individually, but only held interests indirectly through the LLC, the only recovery can be had derivatively. Thus, it would appear these causes of action would be subject to section 17709.02(b).

Assuming the foregoing analysis is correct, we now determine if security is warranted. The ground sought by defendant LLC for the security is Section 17709.02(b)(1):

“That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members.”

As noted above, the only causes of action which could be termed derivative are those relating to the South Valley Property. Assuming plaintiffs are seeking recovery of lost profits as to this property, they can only be doing so on behalf of the LLC. The court finds that if successful, plaintiffs will benefit the LLC and the other members by obtaining lost profits from the non-LLC defendants that should have gone to the LLC due to the loss of the South Valley Property.

Accordingly, the court denies the motion for security. But assuming the court’s analysis regarding the First Amended Complaint is correct, plaintiffs should amend to clarify which claims are direct and which are derivative.