Business Law Journal

In 2016, Defendant 409 North Camden, LLC (“409 North Camden”) was formed as a manager-managed LLC to manage a two-story office building, which had been owned by six friends (and later, their heirs) since 1963. Plaintiff Camden Systems, LLC (“Camden Systems”) became a member of 409 North Camden in July 2020 by purchasing the membership interests of three existing members, ending up with a 22.5% interest in the company. Camden Systems became one of ten members of 409 North Camden.

On January 11, 2021, the manager of 409 North Camden circulated a notice that the company’s annual meeting would take place on February 20, 2021, and included copies of three documents which were to be discussed at the meeting; which notice also stated that an agenda and annual report would be distributed “a few days” prior to that meeting. On February 11, 2021, the manager sent all members a meeting agenda for the upcoming meeting, listing four action items to be voted on. Camden Systems’ attorney subsequently asserted that the January 11 meeting notice did not state the general nature of the business to be transacted, and the February 11 notice (which did specify the business to be transacted) was untimely because it was sent less than 10 days before the meeting – all in violation of the California Corporations Code. The annual meeting was held as scheduled on February 20, 2021, and all four action items were voted on and approved by a majority of the members present (with Camden Systems present but abstaining from each vote).

On March 25, 2021, Camden Systems filed a lawsuit in its individual capacity and derivatively on behalf of 409 North Camden, against 409 North Camden (as a nominal defendant) and its members – based in part on the alleged impropriety of authorizations for cash distributions made between 2016 and July 2020, and the actions taken at the February 20, 2021 meeting.
On May 3, 2021, all of the members except Camden Systems adopted a written resolution that 409 North Camden would cease making cash distributions and instead reserve all excess funds for defense of the lawsuit, and that 409 North Camden would indemnify and hold the manager and its members harmless against the lawsuit. On February 8, 2022, the manager circulated an agenda for the upcoming annual meeting to members of 409 North Camden explaining the status of the lawsuit, and listing specific items from 2020 and 2021, to be ratified one by one, in response to Camden Systems’ allegations regarding the inadequacy and untimeliness of prior meeting agendas. Such actions to be ratified included (a) cash distributions, (b) the four actions taken at the February 2021 meeting, and (c) the indemnification resolution. On February 19, 2022, the annual meeting was held and the member defendants ratified all listed items by majority vote.

On May 10, 2022, the member defendants moved for (and were granted) summary judgment on the grounds that: (1) the 2022 ratification of the actions taken in February 2021 cured any defects in the adequacy and timeliness of prior meeting agendas; (2) Camden Systems did not have standing to challenge actions taken before it became a member of the company in 2020 (and even if Camden Systems had standing, the cash distributions were properly ratified in 2022); and (3) the indemnification resolution was properly authorized under the operating agreement.

Camden Systems argued on appeal that LLCs did not have rights of ratification in the same way those rights were available to corporations, labor unions, and other organizations, on the basis that the Corporations Code expressly granted ratification powers to shareholders and boards, but failed to grant any comparable power to members of an LLC. However, the Court of Appeal noted that an LLC “shall have all the powers of a natural person in carrying out its business activities” (see Corporations Code § 17701.05); and an LLC would have the same authority as an individual to ratify a previous action. The Court of Appeal held, accordingly, that 409 North Camden’s 2022 ratifications of its 2021 actions were effective and cured any defects in 409 North Camden’s prior actions.

Camden Systems further argued that it could bring a derivative lawsuit on 409 North Camden’s behalf to challenge actions taken between February 2017 and June 2020 because it was “a member, of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains” (see Corporations Code § 17709.02, subd. (a)(1)); as a $50,000 distribution made in late 2020, after Camden Systems became a member, was a “part of [those] transaction[s]”. However, the California Court of Appeal held that even if Camden Systems had standing to challenge the $50,000 distribution, that distribution was explicitly and duly ratified during the February 2022 meeting – and Camden Systems had no standing to challenge that distribution therefore.

Finally, Camden Systems argued that 409 North Camden’s operating agreement could not be interpreted to authorize 409 North Camden to indemnify the member defendants; and that even if the operating agreement permitted it, it must be unanimously approved pursuant to Corporations Code § 17704.07, subd. (c)(4), which provides “the consent of all members of the limited liability company is required to do ... ¶ ... ¶ any other act outside the ordinary course of the limited liability company's activities.” The California Court of Appeal held, however, that the plain language of the operating agreement authorized 409 North Camden to indemnify the member defendants; and the operating agreement deviated from and duly superseded the statutory default provision, pursuant to Corporations Code § 17701.10, subd. (d).
A ratification (when it can be procured) is often used as a cure-all for unauthorized or defective actions by business entities – but the applicability and adequacy of ratification procedures may not be as clear as they first appear. Though the California Court of Appeal found in this instance that ratification was proper and effective, a careful analysis by counsel may be prudent if you discover that the steps taken by your business may not have been technically correct the first time around. If you have any questions about what the options available to your business might be in such a scenario, please contact the authors or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. The applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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