Business Associations, Pages 932–937

Kahane v. Jansen

California Court of Appeal, 2008

Facts:

TATA, a law firm, held an option to purchase property and its owner, Tucker, was pursuing a development plan and rezoning application for the property. Tucker asked his attorney, Kahane, to prepare an operating agreement for an LLC to purchase and develop the property for TATA. TATA would assign its option to the LLC, and the LLC would purchase the property, give the commercial parcels back to TATA, and develop and sell new homes on the rest of the property, which TATA would pay one-third of the cost for. The operating agreement provided that the LLC would be managed by a management committee of three people, starting as TATA and two others who were to be elected by its members.

The LLC contracted with Jansen to serve as the general contractor and to do many related tasks like get the subdivision maps approved and sell the homes. He also invested $100,000 in the LLC, a 10% equity position. He also got a percentage of the cost of the development. The next year, the members signed a borrowing agreement which empowered both Tucker and Jansen as managers of the LLC.

Disputes arose between Jansen and Tucker over how to allocate and reimburse costs between the LLC and TATA. At meetings about these disputes, Kahane was sometimes present and introduced as the attorney for the LLC. Jansen eventually filed suit against Kahane for breaching his duty to the LLC and its members by favoring the interests of Tucker or TATA over its other members, at the least by not disclosing his potential conflict of interest.

The key issue was whether to treat the LLC like a corporation, where Kahane would have only owed a duty to the LLC itself, or like a partnership, where Kahane would also owe a duty to its individual members. The trial judge granted judgment in favor of Kahane. Kahane then filed this action for malicious prosecution against the Jansens and their attorneys.

Procedural History:

Defendants filed special motions to strike which were granted with costs, leaving Kahane to pay nearly $130,000 in fees and costs.

Issue:

Did defendants have probable cause that Jansen was a manager and that Kahane owed a duty to the members of the LLC?

Rule:

LexisNexis IconWestLaw LogoPage 935–936

Probable cause to initiate or to prosecute a lawsuit is viewed leniently by the courts. The lawsuit need only be "legally tenable." "Only those actions that any reasonable attorney would agree are totally and completely without merit may form the basis for a malicious prosecution suit."

Reasoning:

  • The LLC members gave written consent conferring managerial status upon Jansen. While it was in a borrowing document, its plain language does not limit its scope to borrowing. It gives unlimited managerial power to Jansen and Tucker. It merely spelled out their borrowing powers for the benefit of the lender. If they wanted to limit their powers to that scope, they could have said so. Even if Jansen did not have managerial power, it was entirely plausible for him to interpret the written consent as his election to manager.

  • Cases neither preclude Jansen's claims nor address the question of the attorney-client relationship of an LLC and its members. Jansen had probable cause to claim that Kahane was also the attorney for its members or at least owed them a fiduciary duty.

Holding:

Yes, Jansen had probable cause to believe that he was a manager and that Kahane owed the members a fiduciary duty. Affirmed.


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