In this week's opinion in Ekren v. K&E Real Estate Investments, 2014 NCBC 56, Judge Bledsoe outlined how a derivative action plaintiff can recover attorneys' fees.
What Constitutes A 'Substantial Benefit"?
Fees are specifically allowed by §57D-8-05(1) for a plaintiff in a derivative action against an LLC if the action results in a "substantial benefit to the LLC."
North Carolina's appellate courts have not construed that term in the LLC context but the Court of Appeals has ruled in a case involving similar language under North Carolina's Business Corporation Act that:
the plaintiff need not necessarily be the prevailing party, nor must the derivative claim have proceeded to a final judgment or order.
Op. ¶13 (quoting Aubin v. Susi, 149 N.C. App. 320, 326, 560 S.E.2d 875, 880 (2002).
The Business Court found further light shed on the term "substantial benefit" by looking to the Model Business Corporation Act, which references in a comment the United States Supreme Court's interpretation of similar language in MBCA §7.46(1). The Supreme Court said in the case of Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) that:
[A] substantial benefit must be something more than technical in its consequence and be one that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder’s interest.
Id. at 396.
The Plaintiff in the Ekren Case Obtained A "Substantial Benefit" For The LLC Even Though The Defendant Granted Her All The Relief Demanded In Her Complaint Before Judgment
The Defendant in the Business Court case argued that the Plaintiff had not obtained a substantial benefit because the Defendant had voluntarily returned to the LLC title to the four properties which he had originally transferred to himself from the LLC, and he had also returned $20,000 he had removed from the LLC account. The Defendant further argued that he was justified in these actions because he merely meant to "safeguard" the LLC's assets from the Plaintiff, who Defendant said was engaging in "irrational and pathological behavior which appeared to be the product of a degenerative disease." Op. ¶17.
Because the properties had been returned and the $20,000 had been returned, and those items were the only relief sought by the Plaintiff, the Business Court had dismissed all the claims as moot in March 2014.
Even so, Judge Bledsoe was buying none of the Defendant's arguments that his good intentions as opposed to the lawsuit, had prompted the result. He said:
all of the evidence brought forward by the parties shows that the catalyst for the return of the LLC’s assets was the filing and prosecution of Plaintiff’s lawsuit. Although [the Defendant] contends he was going to return the LLC’s assets, he did not do so after Plaintiff’s pre-suit demand, and he did not take any action prior to Plaintiff’s suit to have a receiver or trustee appointed to receive the LLC’s assets he claimed he held in trust. Even if he planned to return the assets to the LLC, the fact that he returned them when he did – and thus the timing of relief to the LLC – was because of the litigation.
So the Court found that the Plaintiff had obtained a "substantial benefit" for the LLC by obtaining the return of the properties and the funds. It awarded $33,704.50 in attorneys' fees after reducing the amount sought and finding some of the fees sought to be "excessive, redundant or otherwise unnecessary." Op. ¶34.
Recovering For Rule 11 Type Violations In A Derivative Action
The LLC statute allows for the recovery of attorneys' fees if the court finds that any filing:
was not well grounded in fact or was not warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law and that it was interposed for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
N.C. Gen. Stat. §57D-8-05(3).
If that language sounds familiar, it may be because it "sets out a standard similar to the standard for sanctions under Rule 11 of the North Carolina Rules of Civil Procedure." Op. ¶20.
But there's a difference between this section and Rule 11, A Rule 11 analysis has "three prongs." A violation of any of the three prongs -- which are "(1) factual sufficiency, (2) legal sufficiency, and (3) improper purpose" -- makes out a Rule 11 violation. Op. ¶23.
The LLC statute, by contrast, requires showing an “improper purpose” in addition to finding that same document 'was not well grounded in fact or was not warranted by existing law. '" Op. ¶23.
The Defendant escaped from being tagged with attorneys' fees despite filing an Answer containing defenses that the Court said were "not well-grounded in law." Judge Bledsoe found that the Defendant's actions were not motivated by an improper purpose based on the "totality of the objective circumstances." Op. ¶28.
But don't think that this case gives you the license to raise unfounded defenses. Judge Bledsoe "caution[ed] . . . that [his] ruling [was] based on the specific circumstances of this case and [was] not in any way intended to suggest a general rule that a party may assert claims or defenses that are not well-grounded in law without consequences under N.C.G.S. § 57D-8-05(3)." Op. ¶28.
Avoid "Block Billing" Because It Can Result In A Reduction Of Fees
A good point for those seeking to recover attorneys' fees is to avoid "block billing." That is the pretty common practice for aggregating all of your time entries for a client on a given day without providing the hours expended for each separate task. Judge Bledsoe cited a couple of cases for the propositions that:
- “[B]lock billing is not objectionable ‘per se,’ though it may increase the risk that the trial court, in reasonable exercise of its discretion, will discount a fee request, and that
- block billing precludes the court from determining that all of the amounts claimed . . . are both compensable and reasonable.
Op. ¶33 (quoting Jaramillo v. Cnty. of Orange, 200 Cal. App.4th 811, 830 (Cal. Ct. App. 2011) and Dixon v. Astrue, 2008 U.S. Dist. LEXIS 9903, *11 (E.D.N.C. Feb. 8, 2008))
Based on his review of the Plaintiff's counsel's blocked billed time entries, Judge Bledsoe excluded nearly 80 hours of billing recorded by Plaintiff's attorney on the basis that those hours were "excessive, redundant, or otherwise unnecessary." Op. ¶35.
Notwithstanding that reduction in fees, Judge Bledsoe said that Plaintiff's counsel was "a highly experienced and able litigator and practitioner," and that his hourly rate of $275 was reasonable. Op. ¶¶39-40.