## Facts

- West Hills Farms, Inc. and California Pistachio, LLC, shareholders of RCO AG Credit, Inc. (a closely held corporation), filed a shareholder derivative action alleging RCO paid unnecessary fees to a related entity.
- RCO demurred on the ground that plaintiffs failed to make a presuit demand on the board and failed to plead demand futility as required by Cal. Corp. Code § 800(b)(2).
- The trial court sustained successive demurrers; after plaintiffs conceded no demand was made and the court found futility allegations insufficient, it sustained the demurrer to the third amended complaint without leave to amend.
- While the case was pending, RCO moved under Cal. Corp. Code § 800(c)–(f) for an order requiring plaintiffs to post security for defense expenses.
- The trial court found no reasonable possibility the derivative claims would benefit the corporation or its shareholders and ordered plaintiffs to post the statutory maximum security of $50,000.
- Judgment was entered for RCO on the pleadings after dismissal.
- As prevailing defendant, RCO sought post-judgment attorney’s fees and costs totaling more than $361,000.
- The trial court limited any recovery to the $50,000 security posted.

## Issues

1. Under Cal. Corp. Code § 800, may a prevailing defendant in a shareholder derivative action recover all reasonable defense attorney’s fees and costs from the shareholder plaintiffs, or is recovery limited to the amount of security ordered and posted under § 800(c)–(e)?

## Decision

- The Court of Appeal affirmed the post-judgment order limiting recovery to the $50,000 security.
- The court held that Cal. Corp. Code § 800 is a security-for-expenses statute and does not authorize a fee award against shareholder plaintiffs beyond the bond amount.
- Section 800 permits reimbursement of defense expenses from the posted security; it does not create uncapped, personal fee liability for shareholder plaintiffs.
- The statutory cap on security supported the conclusion that the Legislature did not intend broader fee shifting under § 800.

## Legal Principles

- Cal. Corp. Code § 800(c)–(f) authorizes a court to require a derivative plaintiff to post security for reasonable defense expenses, including attorney’s fees, upon a finding that there is no reasonable possibility the action will benefit the corporation or its shareholders.
- A prevailing defendant’s recovery of fees and costs under § 800 is limited to the amount of security actually ordered and posted; § 800 does not provide an independent basis to impose additional fee liability on plaintiffs beyond the security.
- Absent separate statutory or contractual authorization, defense fees beyond the security amount are not recoverable from shareholder plaintiffs under § 800.

## Conclusion

The court held that Cal. Corp. Code § 800 provides a limited security mechanism in shareholder derivative litigation: when security is ordered and posted, a prevailing defendant may recover reasonable fees and costs only up to that amount, not the full defense tab from the shareholder plaintiffs.


West Hills Farms, Inc. v. RCO AG Credit, Inc., 170 Cal. App. 4th 710, 88 Cal. Rptr. 3d 458 (Ct. App. 5th Dist. 2009)