Business Law Journal

After the derivative plaintiff lost the bench trial and appeal, the court awarded the prevailing defendant his ordinary costs under Cal. Code of Civil Proc. §1032(b) and Cal. Rules of Ct. 8.891. Plaintiff moved to tax the costs, arguing that, since he had defeated an earlier motion to post bond filed by the defendant at the outset of his derivative lawsuit, that under Corp. Code §17709.02 the prevailing defendant was later barred from recovering his costs by those same corporate codes. He argued that Corp. Code §17709.02 trumps the standard cost shifting provisions set forth in Code of Civil Proc. §1032(b) and Cal. Rules of Ct. 8.891.

The Court of Appeal was less than impressed by the plaintiff’s arguments.

Forcing a derivative plaintiff to post a bond at the outset of a case is designed to guard against frivolous derivative lawsuits. It allows the defendant managers, directors, or officers facing derivative claims to move for an order requiring the plaintiff to post a bond early in the litigation to cover costs in the event the claims fail. Corp. Code §800 and §17709.02.

 “If the plaintiff loses the derivative suit, the defendant can collect its costs against the bond. This case presents an unusual twist on this bond situation. A losing plaintiff in a derivative lawsuit claims the bond statute blocks the defense ability to collect the costs that ordinarily go to victors.” Barrios v. Chraghchian, No. B341773, 2026 WL 145207, *1 (Cal. Ct. of Appeal, Jan. 20, 2026).

The Court found the plaintiff’s arguments lacked a statutory basis and were contrary to case law.

The Court of Appeal analyzed Corp. Code §17709.02 and found that it contradicted the plaintiff’s arguments.  The relevant statute discussing the bond amount and attorney fees, §17709.02(c)(2), specifically states:  “A ruling by the court on the motion [for a bond] shall not be a determination of any issue in the action or of the merits of the action.” This statutory language directly rebutted the plaintiff’s argument that the trial court’s earlier determination denying the bond motion at the outset of the case was also a determination that no costs could be awarded later to a prevailing defendant.  

The plaintiff cited a few cases which the Court of Appeal rejected outright. However, it found that a citation to Brusso v. Running Springs Country Club, Inc., 228 Cal. App.3d 92 (1991), was the “single pertinent precedent” although it was contrary to the plaintiff’s arguments.

In Brusso, the derivative shareholder plaintiffs challenged a business transaction entered into by the company, and brought the case to trial. The plaintiff shareholders lost the trial. The victorious defendants moved for an award of attorney fees based on an attorney fees clause in the deal documents. The plaintiff argued the usual fee statute did not apply because he had sued in a derivative action, and the analog to §17709.02, Corp. Code §800 barred the defendants’ claim to attorney fees. Brusso, supra, 228 Cal.App.3d at 99. The trial court rejected Brusso’s contention and the Court of Appeals affirmed.  “[W]hen plaintiffs lose a shareholders derivative action it seems appropriate that they, not the corporation, must bear the burden of costs and attorneys fees…[o]therwise, they could prosecute frivolous lawsuits on the corporation’s behalf without fear if only the corporation were liable.” Brusso, supra, 228 Cal.App.3d at 99-100.

In Barrios, the Court of Appeal recognized “Brusso’s main point was that the analog to §17709.02 is a special purpose procedural statute that does not create any exception to more generally applicable rules.” Barrios v. Chraghchian, No. B341773, 2026 WL 145207, *4 (Cal. Ct. of Appeal, Jan. 20, 2026) [emphasis in original]. Thus, the Barrios court held, the more generally applicable rules awarding ordinary costs to prevailing parties, Code of Civil Proc. §1032(b) and Cal. Rules of Ct. Rule 8.891, governed the case, and not Corp. Code §17709.02. Thus, the prevailing derivative defendants were entitled to their costs of suit, just as the trial court ruled.

AALRR has a dedicated team of attorneys focused on all areas of business litigation, including derivative claims filed by equity holders.  If you or your company are involved in a dispute over corporate governance, please contact the authors or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. 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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