Case Number: SS021680 Hearing Date: April 18, 2014 Dept: O

SS021680
ROYAL AMERICAN v. LUFT

Based on the showing made by the LLC and its members, the settlement and dismissal are fair, reasonable and not the product of collusion. For this reason, the request to approve dismissals and settlement is GRANTED.

ANALSYIS: Royal American Film Company, LLC, Joseph W. Luft, John T. Kimble and Michael A. Mesnick entered into a settlement agreement whereby all of their claims both derivative and direct claims. The only claims excluded from the settlement are those against Cyrus Godfrey. RAF and its members seek the Court’s approval of the settlement and attendant dismissals, as they involve derivative claims.

The only party objecting is Cyrus Godfrey, who is neither a member or in any way a de facto shareholder of the LLC. Godfrey argues the dismissal should be rejected as there is evidence that Mesnick and Kimble used corporate funds for personal expenditures.

RAF and its members maintain Godfrey lacks standing to object to the settlement. They also argue Godfrey’s objection to the settlement is at odds with the interests of his former client, Joseph Luft. Godfrey purportedly represented Luft in filing the derivative action. Luft now agrees to settle the action and Godfrey is taking a directly contradictory position. RAF and its members assert this is in violation of his ethical duties.

Ordinarily, a plaintiff has an absolute right to dismiss. CCP §581(c). However, the courts have recognized circumstances under which there is a limitation on that right, including shareholder derivative actions or class actions, where the plaintiff is not the sole party in interest. See 6 Witkin, Cal. Proc. 5th (2008) PWT, § 292.

A plaintiff in a derivative suit is essentially suing in the capacity of a trustee or a guardian ad litem. “The principles governing the conduct of a guardian ad litem are in full strictness applicable to the conduct of such a plaintiff stockholder…The court and not the guardian ad litem has the power to compromise the rights of minors under suitable circumstances. So far, therefore, as this motion to dismiss is concerned it is not even properly before this court for consideration.” Spellacy v. Superior Court in and for Los Angeles County (1937) 23 Cal.App.2d 142, 147. Thus, a derivative action may not be voluntarily dismissed without prior court approval.

In the context of class actions, which also involve nominal plaintiffs who are not the sole parties in interest, a court must determine whether a settlement is “fair, adequate and reasonable.” “It should consider relevant factors, such as the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.” Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1801. Likewise, a guardian ad litem seeking approval of the compromise of a minor’s or incompetent person’s claims must present the court with all facts bearing on the “reasonableness” of the settlement. See CRC Rule 7.950; Espericueta v. Shewry (2008) 164 Cal.App.4th 615, 625. The trial court has broad discretion to determine whether the settlement is fair. Dunk, supra, 48 Cal.App.4th at 1801.

Luft, Kimble and Mesnick, the only members of the LLC, all unanimously agreed that the claims asserted by each against the other, individually and on behalf of RAF, should be dismissed due to the expense of litigation and their belief that Cyrus Godfrey injured the corporation through his mismanagement and abuse of his corporate position. See Supplemental Brief filed on 3/25/14, Ex. F, Settlement Agreement and Release, ¶2. Luft, Kimble and Mesnick are also settling due to the financial drain this litigation is having on the LLC. The litigation has been pending for approximately a year and a half and it has been protracted, generating three multivolume related cases.

Godfrey is not a member and has no equity interest in the LLC. Godfrey has no standing to object to the dismissal of the derivative claims. Godfrey argues he has standing to challenge the settlement because it makes unflattering statements and/or opinions about him. Godfrey fails to submit any authority to support his position.

When Godfrey represented Joe Luft in the derivative action, Luft was his nominal client but in reality, it was the LLC whose interest he was advancing. By asserting that the settlement essentially dispenses with valid corporate claims, Godfrey is not taking a position adverse to RAF LLC.

Godfrey submits evidence detailing Kimble’s purported use of corporate funds for personal expenses. However, this does not necessarily establish that the settlement is unreasonable. All three LLC members agreed to dismissal of the claims. Even if Kimble personally used funds, the members unanimously agree that in order to move forward with revenue generating business and to avoid any further financial drain from this litigation, the entire litigation, including derivative claims, must be dismissed. There is no fraud evidence from the evidence. The parties have engaged in a cost-benefit analysis and found that the litigation is causing more harm than the acts it purportedly seeks to vindicate.

Based on the showing made by the LLC and its members, the settlement and dismissal are fair, reasonable and not the product of collusion. For this reason, the request to approve dismissals and settlement is GRANTED.