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Baral v. Schnitt

California Court of Appeals, Second District, First Division

February 5, 2015

ROBERT C. BARAL, Plaintiff and Respondent,
DAVID SCHNITT, Defendant and Appellant.


APPEAL from an order of the Superior Court of Los Angeles County, No. BC475350, Maureen Duffy-Lewis, Judge.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Ervin Cohen & Jessup, Michael C. Lieb and Leemore L. Kushner for Defendant and Appellant

Sauer & Wagner, Gerald L. Sauer and Amir A. Torkamani for Plaintiff and Respondent

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BENDIX, J. [*]

This is an appeal from an order denying a special motion to strike under Code of Civil Procedure, section 425.16.[1] We are asked to add our voice to the growing debate among appellate districts as to whether section 425.16 (anti-SLAPP statute) authorizes excision of allegations subject to the anti-SLAPP statute (protected activity) in a cause of action that also contains meritorious allegations not within the purview of that statute (mixed cause of action). The trial court applied appellate and Supreme Court authority holding that the statute does not. (See, e.g., Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811 [124 Cal.Rptr.3d 256, 250 P.3d 1115] (Oasis); Mann v. Quality Old Time Service, Inc. (2004) 120 Cal.App.4th 90 [15 Cal.Rptr.3d 215] (Mann).) We agree and affirm.


The original and first amended complaints and first two special motions to strike

Respondent Robert Baral and appellant David Schnitt owned a company, IQ BackOffice LLC (IQ), with others.[2] Baral’s original complaint, filed in December 2011, contained 18 causes of action. Baral alleged that Schnitt had engaged in fraud and multiple breaches of fiduciary duty, including seizing control and secretly negotiating the sale of IQ to his advantage, while excluding Baral’s membership interest and comanagement powers. The fifth and sixth causes of action (slander and libel) in the original complaint incorporated the latter allegations. Baral also averred that Schnitt unilaterally retained Moss Adams to conduct an investigation of IQ after Schnitt discovered misappropriation of corporate assets prior to the sale of the business.

Baral contended that Schnitt determined the scope of Moss Adams’s examination and knowingly gave Moss Adams false information in order to discredit Baral. He also alleged that Schnitt directed Moss Adams not to interview Baral in connection with its examination. As a result of Schnitt’s claimed falsehoods, Moss Adams incorrectly concluded in its report that Baral had engaged in certain unauthorized transactions and that there was incomplete support for others. Schnitt subsequently refused to correct the false information contained in the report, which was ultimately published to both the potential purchaser and the members of IQ.

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On May 17, 2012, the trial court determined that the fifth and sixth causes of action should be struck because they were protected under section 425.16. Because these defamation claims were based exclusively on communications made in a prelitigation fraud investigation, the trial court concluded that the absolute litigation privilege under Civil Code section 47, subdivision (b) (litigation privilege) applied to “the statements allegedly made by [Schnitt] while conducting the investigation in anticipation of litigation.”

Also on May 17, 2012, the trial court ruled on Schnitt’s demurrer to the other causes of action. It sustained the demurrer with leave to amend as to nine of the remaining 16 causes of action, sustained it without leave to amend as to five causes of action, and overruled the demurrer as to two causes of action. Baral filed a notice of appeal from the May 17, 2012 rulings, which he abandoned in January 2013 after he obtained new counsel. (Baral v. Schnitt (Jan. 22, 2013, B242569. app. dism.)..)

In June 2012, Baral, through his former counsel, filed a first amended complaint. The first amended complaint contained 11 causes of action; none was a defamation claim. Baral averred that Schnitt had frozen Baral out of participation in the Moss Adams audit and that Schnitt had made false representations to auditors in an effort to discredit Baral. On July 23, 2012, Schnitt filed another anti-SLAPP motion to strike 10 of the 11 causes of action from the first amended complaint.[3] According to Schnitt, each incorporated allegations about the Moss Adams audit that had been the subject of his first motion to strike.

The second amended complaint and third special motion to strike

On January 24, 2013, Baral, who was then represented by new counsel, filed a second amended complaint. The second amended complaint contained four causes of action: breach of fiduciary duty, constructive fraud, negligent misrepresentation, and declaratory relief.[4] Baral asserted that Schnitt violated his fiduciary duties in usurping Baral’s ownership and management interests in IQ so that Schnitt could benefit from what was initially a secret sale of IQ. As one example of Schnitt’s alleged breach of fiduciary duty, Baral asserted that Schnitt prevented him from participating in Moss Adams’s investigation in an effort to force Baral’s cooperation in the sale of IQ. That cause of action sought the trial court’s assistance in reopening the investigation, in which Baral would participate, and preventing Schnitt from interfering with corrections to the report, if any, taken by Moss Adams.

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More specifically, Baral alleged that in 2003 he was a certified public accountant and owned and operated an accounting firm, R.C. Baral & Company, Inc. (R.C. Baral). In August or September 2003 Schnitt was having a dispute with his partner in CoEfficient Back Office Solutions LLC (CoEfficient) when he approached Baral to invest and become a partner in CoEfficient. Both R.C. Baral and CoEfficient specialized in “outsourcing” business services to companies that did not internally handle those needs.

Baral, Schnitt, and nonparty Dennis Foster ultimately orally agreed in 2003 to operate IQ as a new outsourcing company. They agreed to act as comanaging members, with Schnitt holding a 35 percent interest and Baral a 30 percent interest. Baral alleged that, unbeknownst to him, in September 2003 Schnitt filed with the California Secretary of State documents that identified Schnitt as the sole managing member. Also without Baral’s knowledge, in October 2003 Schnitt executed an operating agreement for IQ that identified Schnitt as the sole manager and member of IQ.

Baral further alleged the parties operated IQ as comanaging partners from 2003 until 2010, when Schnitt began unilateral negotiations for the sale of IQ to LiveIt Investment, Ltd. (LiveIt). As part of the purchase agreement to sell IQ, Schnitt agreed to sell a 72.6 percent interest in IQ based on his representation that he was the sole member and manager of IQ. Schnitt negotiated an employment position and ownership interest for himself without Baral’s knowledge or consent. Also in connection with the sale, in November 2010 Schnitt retained Moss Adams to audit IQ’s financial statements. Moss Adams issued an auditor’s report on December 15, 2010, which concluded that the financial statements fairly represented IQ’s financial position.

Later, in December 2010 Schnitt discovered that Baral’s son, who was a bookkeeper for IQ, had misappropriated funds belonging to IQ. When apprised of this, Baral guaranteed that he would indemnify IQ for any losses caused by his son. Schnitt retained Moss Adams to determine the amount of misappropriated assets. Baral averred that on Schnitt’s instructions, Moss Adams did not interview Baral during its investigation or otherwise allow Baral to submit information to the auditors. Schnitt’s motivation for excluding Baral from the investigation was to leverage Baral’s cooperation with the sale of IQ.

Baral also alleged that the Moss Adams investigative report, which was distributed by Schnitt to Baral and various third parties in February 2011, contained inaccurate conclusions. Schnitt refused to instruct Moss Adams to withdraw the report or reopen the investigation to consider additional information that would be provided by Baral. In March 2011, Baral reimbursed IQ for all funds allegedly misappropriated by his son.

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In addition, Baral alleged that in April 2011, Schnitt, Baral, and Foster sold IQ to LiveIt. In connection with the sale, the parties entered into a number of agreements, which reflected that Baral was a member and manager of IQ from its inception in 2003. In May 2011, after the sale of IQ had closed, Baral renewed his efforts to provide information to the Moss Adams auditors, to no avail.

On February 22, 2013, Schnitt filed an anti-SLAPP motion, seeking to strike all references to the Moss Adams audit in the first (breach of fiduciary duty), second (constructive fraud), and fourth (declaratory relief) causes of action and related prayers for relief.[5] Schnitt asserts that, under Cho v. Chang (2013) 219 Cal.App.4th 521 [161 Cal.Rptr.3d 846] (Cho) and City of Colton v. Singletary (2012) 206 Cal.App.4th 751 [142 Cal.Rptr.3d 74] (City of Colton), the trial court should have struck these allegations notwithstanding that the first, second, and fourth causes of action contain other allegations that are not within the purview of the anti-SLAPP statute, and notwithstanding that Schnitt chose not to argue that Baral could not make a prima facie showing of prevailing on the merits of those surviving allegations.

The trial court denied the anti-SLAPP motion on December 13, 2013. Without expressly deciding whether the second amended complaint contained allegations of protected activity, the trial court concluded: “[The] Anti-SLAPP motion still applies to causes of action or to an entire complaint, not allegations. Cases cited state that if a cause of action contains portions that are subject to anti-SLAPP and portions that are not, the defendant can move to strike those portions that are subject, i.e. the cause of action would be considered to contain two ‘counts’; one count subject and one count not. No case allows striking allegations per se under [section] 425.16; that is within the province of a regular motion to strike.” Schnitt filed this timely appeal.

After the trial court denied Schnitt’s anti-SLAPP motion, Schnitt filed a motion to quash Baral’s subpoena to Moss Adams, which was denied on September 23, 2014 (September 23 Order). In the September 23 Order, the trial court stated that the “[l]ititgation privilege is not a discovery privilege.... The audit ...

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