There is a saying that goes something like: "it's not the size of the dog in the fight that counts, but the size of the fight in the dog." Keeping this saying in mind, I would like to talk to you about what is commonly referred to as an Attorney Fees provision.
 
Many times over the years in my practice, I have met with clients who have come to see me because another party to a written contract that he or she entered into has breached that contract. They pull a copy of the written contract out of a folder and lay it before me. They tell me the story of what happened including that they are glad they took the time to prepare a written contract that would minimize any confusion over what they were agreeing to, which more or less sounds like this:
 
John agrees to sell Mary 500 red sweaters per month for a year. Mary agrees to pay John $10 per red sweater. After 6 months, Mary realizes she can only afford to pay John $10 per sweater if the sweaters are green, and can only afford to pay John $8 per sweater if the sweaters are red. John informs Mary that John only makes red sweaters and that Mary agreed to pay him $10 for each red sweater. Over the last 6 months of the contract therefore, John will lose approximately $6000 (6 months x 500 red sweaters per month x $2 per red sweater [$10 - $8 = $2]).
 
After hearing the above story, the first thing I go looking for in John and Mary's contract is whether or not the contract contains an "Attorney Fees" clause. What is an "Attorney Fees" clause? Section 1717 of the California Civil Code states, in any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce the contract, shall be awarded either to one of the parties or the prevailing party, then the party who is determined to be the party prevailing on the contract shall be entitled to reasonable attorney's fees in addition to other costs. But that is often the problem. If the contract does NOT contain such an "Attorney Fees" provision, then no matter how strong your case, you will not be entitled to recover your attorney's fees from the other party. Now let's go back to John and Mary.
 
John shows me the contract. I look for but do not find an "Attorney Fees" provision in the contract. I give John the bad news. Mary has little incentive to cooperate or settle with John. Even if John hires a lawyer to sue Mary, John will have to pay for his own attorney fees, and Mary will have no obligation to pay for John's attorney fees, even if he is clearly the "prevailing party." At the end of the day, Mary will still only owe John the same $6000. Mary consults with a lawyer, who tells this to Mary, and Mary ends up playing hardball with John and John finally just agrees to accept $8 for each red sweater because it is better than nothing.
 
Now, let's assume that the contract DOES contain an "Attorney Fees" provision. I give John the good news. Mary has a lot of incentive to cooperate or settle with John. If John hires a lawyer to sue Mary, Mary will be at risk to pay John for all of John's attorney fees incurred to enforce the contract if John is the "prevailing party." As Mary really has no defense to the contract, there is strong likelihood that John will be the prevailing party. The attorney fees themselves could easily exceed the $6000 that Mary will owe John. John's attorney fees could easily be $10,000 to $15,000 or more. Mary consults with a lawyer who tells this to Mary, and Mary ends up settling up with John as fast as she can to make sure that John does not hire an attorney to start a costly litigation.
 
In this case, the $6000 that is at stake is the size of the dog in the fight for John. However, the "Attorney Fees" provision puts an awful lot of fight in the dog. I think I may have done injustice to the "dog in the fight" metaphor, but I think you get my meaning. Given the high cost of litigation, it is often the "Attorney Fees" provision that gives a contract its "teeth." Where you feel that it is the other party that is likely to breach a contract, try to make sure your contract has "teeth" by including an "Attorney Fees" provision.
 
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I am often asked by clients what are the differences between corporations and limited liability companies in California. As you might imagine, the differences are too numerous to cover in one short newsletter article. That said, among the characteristics that distinguish limited liability companies from their corporate counterparts, is the enormous flexibility that limited liability companies provide their owners to craft the relations between the owners themselves, and between the owners and the limited liability company. For the remainder of this article I will refer to a limited liability company as a "LLC" or in the plural as "LLCs."
 
Whether addressing management and operating control, distributions of available cash, or allocations of tax attributes, LLCs are enormously flexible. This allows the owners of the LLC wide latitude to craft their respective rights, duties and obligations, and rewards, for participating in the underlying business of the LLC. The place where all of this flexibility plays out is in the Operating Agreement for the LLC.
 
What is the "Operating Agreement?"
 
California Corporations Code Section 17001(ab) states that "Operating Agreement" means any agreement, written or oral, between all of the members (owners) as to the affairs of a LLC and the conduct of its business in any manner not inconsistent with law or the articles or organization. Let's parse the foregoing sentence. The articles of organization can be, and in my experience often are, the bare minimum required to establish the LLC. In other words, in my practice, most articles of organization leave everything to "the law" as far as the members' relations to each other and to the LLC, rather than spell it out in the articles of organization. So this begs the question, what is the law? Without further adieu, let us look at Corporations Section 17005.
 
Corporations Code Section 17005:

 

Subdivision (a) states that except as provided in subdivisions (b) and (c), relations among members and between the members and the LLC are governed by the articles of organization and operating agreement. To the extent the articles of organization or operating agreement do not otherwise provide, this title (i. e., the default provisions of the Corporations Code) governs relations among the members and between the members and the LLC.

 

Subdivision (b) states that the effect of the provisions of this title (i. e., the Corporations Code) may be varied as among the members or as between the members and the LLC by the articles of organization or operating agreement, provided, however, that the provisions of Sections 17059, 17103, 17104, 17152, 17154, and 17155 may only be varied by the articles of organization or a written operating agreement. Notwithstanding the first sentence of this subdivision, neither the articles of organization nor the operating agreement may (now pay close attention because the following four areas cannot be varied by the Operating Agreement):
 

(1) Vary the definitions in Section 17001, except as specifically provided therein.

 

(2) Eliminate the right of a member to assert that a provision in the operating agreement governing the termination of that member's interest and the return of that member's contribution was unreasonable under the circumstances existing at the time the agreement was made.

 

(3) Vary the voting requirements or voting rights set forth in subdivision 17103(b) (the articles of organization may not be amended by less than a majority vote) and subdivision 17103(c) (the members shall have the right to vote on dissolution or merger of the company).

 

 

(4) Vary a member's rights under Sections 17106 and 17453 (information and inspection rights of members).

 

 

Subdivision (c) states that the provisions of Chapter 2 (Formation of the LLC), Chapter 8 (Dissolution of the LLC), Chapter 10 (Foreign LLCs), Chapter 11 (Class actions and Derivative actions), Chapter 12 (Mergers of the LLC), and Chapter 13 (Dissenting members rights) may be varied by the articles of organization or by a written operating agreement only to the extent expressly provided in those chapters.

 

Subdivision (d) states that the fiduciary duties of a manager to the limited liability company and to the members of the LLC may only be modified in a written operating agreement with the informed consent of the members.

 

Subdivision (e) states that the presence in certain provisions of this title of the words "unless otherwise provided in the articles of organization or operating agreement" or words of similar import does not imply that the effect of other provisions may not be varied as among the members by the articles of organization or operating agreement.

 

Subdivision (f) states that if any provision of the articles of organization conflicts with one or more provisions of a written operating agreement, the articles of organization shall control.

 

A Close Look:
 
So, a close look at Corporations Code Section 17005 reveals, that with the exception of the issues addressed by subdivision (b), items (1) through (4), the members, in a carefully crafted Operating Agreement, are largely free to arrange their affairs as between the members, or as between a member and the LLC, in any way they choose. In fact, if the members do not enter into an Operating Agreement, the last sentence of Subdivision (a) makes clear the Corporations Code will do this for them (i. e., the provisions of the Corporations Code will by default become the  "de facto" Operating Agreement of the LLC).
 
If you combine the above flexibility with the ability of an LLC to choose whether to be taxed as a partnership or a corporation, to allow special allocations of items of income, loss, gain, deduction and credit, to have multiple classes of members each with different rights and preferences (not permitted by "S" Corporations), and limited liability of its members for debts of the LLC (not the case with a general partnership), you have a very flexible entity indeed.

 

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I never met Judge Douglas W. Daily. I probably would never have been aware of him had I not been flipping through the June 9, 2009 edition of The Daily Journal, a journal that has long served the Los Angeles legal community. On page 2 there was an article that focused on Judge Daily. Sadly, it was a lengthy obituary that chronicled Judge Daily's distinguished legal career. However, what caught my eye was the headline: "Judge Was 'Music-Maker' of The Ventura County Court." Turns out Judge Daily was a fantastic rock, blues and all around guitar player. I looked at the picture in the article and immediately thought and realized I was looking at a kindred spirit. See I have two passions as well, practicing law and playing guitar.
 
Those of my clients that have been to my new office at 1912 Broadway in Santa Monica, have noticed the many guitars, piano and other musical equipment inside my office. I am not sure whether my clients that have been to my office have noticed the numerous issues of Guitar Player magazine strewn about my law books and office furnishings. In fact recently, after presiding over the closing of a stock purchase agreement at my office, either the buyer or the seller (frankly, I forget which) asked me to play a song for them. This was my first ever request by a client to perform live in my law office. I chose a song I wrote and played and sang. It was an awesome feeling. After guiding my client through his legal needs of the moment, I "changed hats" and then indulged in my other passion of performing an original composition on solo acoustic guitar. It was a wonderful moment.
 
My first passion was the guitar. My older brother got a guitar as a Bar Mitzvah gift and it proceeded to collect dust in the corner of our shared bedroom. One day, inexplicably, I picked it up and dusted it off. I opened a contemporary music book that my brother had lying around and taught myself the chords to Creedence Clearwater's "Proud Mary." I remember at some point going downstairs into the kitchen where my mother was preparing a meal. I was one of four sons. My mother loved to sing, but up until that moment, none of her children had displayed any musical aptitudes. I sat myself down in the kitchen and proceeded to play and sing Proud Mary (apologies to Creedence Clearwater and Tina Turner). I managed to stay on beat and in tune and sang it all the way through. I remember that my mother was standing over the sink; I think she was pealing some vegetables. She just froze until I finished. I don't remember what she did next, but I know she was enthusiastic and supportive. In sum, a guitar player had been born! The year was about 1971.
 
I would not discover my other passion until finally giving in to my father's exhortations to go to law school. The year was 1987. I enrolled in Pepperdine University School of Law. I did not immediately realize it, but I had found my academic and professional path. I enjoy being a lawyer and assisting clients when they require my services. I think it was the great athlete and humanitarian, and Dodger star, Mr. Jackie Robinson, that said, "a life is not important except in the impact it has on other lives." I think Mr. Robinson hit it right on the nail with that one. In my professional activities, the law allows me an opportunity to have a positive impact on other lives. While the practice of law is not easy and has many pressures, it has many rewards, including having a positive impact on other lives. As much as anything else in my law practice, this helps me keep going when the going gets tough.
 
I am sure that the legal community misses Judge Daily. I miss him even though I never met him. I say this because I identify with those lawyers (and judges) who find spiritual sustenance in immersing themselves in their professional legal activities and their contemporary musical activities. Rock on Judge Daily, I hope you are jamming on your axe wherever you are. Even though I never met you, you have had a positive impact on my life and that makes your life important.

 
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