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Sheley v. Harrop

California Court of Appeals, Third District, Butte

March 20, 2017

NANCY LEE SHELEY, Cross-complainant and Respondent,
v.
LINDA HARROP et al., Cross-defendants and Appellants.

         APPEAL from a judgment of the Superior Court of Butte County No. 159961, Sandra L. McLean, Judge. Affirmed as modified.

          Titus K. Lin for Cross-defendants and Appellants.

          Gregory P. Einhorn and Virginia L. Gingery for Cross-complainant and Respondent.

          MURRAY, J.

         Richard G. Sheley (the decedent) formed and operated a corporation, George's Pest Control, Inc. (the corporation). Cross-complainant/respondent Nancy Lee Sheley (respondent), the decedent's wife at the time of his death, owns a 25 percent share in the corporation. After the decedent's death in 2011, cross-defendants/appellants Linda Harrop and Valerie Richard (appellants), decedent's daughters from a prior marriage, together came to own a 75 percent share in the corporation. After appellants assumed control, the corporation commenced an action against respondent. An amended complaint added appellants as plaintiffs. Respondent filed a cross-complaint against appellants. Appellants filed an anti-SLAPP special motion to strike the cross-complaint. (Code Civ. Proc., § 425.16.)[1] The trial court granted the motion as to respondent's fourth cause of action, sounding in intentional infliction of emotional distress, and otherwise denied the motion.

         On appeal, appellants assert that the trial court erred in denying their special motion to strike the first, second, and third causes of action in respondent's cross-complaint because the alleged conduct arose out of their constitutional right to petition, and respondent could not establish a probability of prevailing on the merits. Alternatively, appellants contend the trial court should have granted their motion as to the specific allegations involving protected activity in the first, second, and third causes of action.

         We conclude that certain of respondent's allegations in each of the remaining three causes of action arise out of protected activity. We further conclude that, as to those particular allegations which are based on protected activity, respondent failed to establish that the claims were legally sufficient and factually substantiated. Therefore, we modify the trial court's order by granting appellants' motion to strike the specific claims founded on allegations of protected activity in each remaining cause of action in the cross-complaint.

         As so modified, we affirm.

         FACTUAL AND PROCEDURAL BACKGROUND

         The Underlying Lawsuit

         According to appellants' complaint, the decedent formed the corporation, a pest control service provider, in 1975. The decedent managed the corporation, and owned it jointly with his then-wife, appellants' mother, Nina Sheley (Nina). Nina died in 1981 and left her shares in the corporation in trust for the benefit of the appellants, with the decedent serving as trustee. Shortly after Nina's death, the decedent met and married respondent. The decedent and respondent managed the corporation together until the decedent died on March 7, 2011. In 2001, the corporation sold its assets to Clark Pest Control of Stockton, Inc. (Clark), for a purchase price believed to be $3, 000, 000. After the sale, the corporation continued to exist to receive recurring payments related to the sale of the corporate assets. The complaint alleged that, during the time between when the decedent married respondent and the decedent's death in 2011, the decedent and respondent managed the corporation notwithstanding the fact that they did not own a majority interest. Following the decedent's death in 2011, appellants received Nina's shares of the corporation from the trust, as well as the decedent's remaining shares pursuant to his will. As a result, appellants each held 187.5 shares, affording them together, a 75 percent ownership interest in the corporation. Respondent held a 25 percent ownership interest.

         According to the complaint, following the decedent's death, respondent had sole possession of the corporate records. Appellants attempted to obtain the corporate records from respondent, but respondent was uncooperative and only produced the records after months of requests. The complaint alleged that, in reviewing the records furnished by respondent, appellants discovered a number of suspicious financial transactions.

         The complaint named the corporation as plaintiff and asserted causes of action to recover damages for conversion, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty based on actions taken by respondent in cooperation with the decedent. An amended complaint added appellants as plaintiffs and asserted a fourth cause of action for the imposition of a constructive trust and for an accounting.

         Respondent's Cross-Complaint

         Respondent filed a cross-complaint, denying the material allegations in the complaint and asserting four causes of action against appellants.[2] In the first cause of action, to recover damages for breach of fiduciary duty, respondent asserted that appellants breached their fiduciary duty to her by “paying themselves excessive salaries, by wrongfully converting corporate assets, by filing and maintaining a frivolous lawsuit against [her] and by failing to make pro-rata disbursements to [her] as a minority shareholder of the corporation.” (Italics added.) In the second cause of action, to recover damages for conversion, respondent asserted that appellants “have willfully, intentionally and wrongfully converted corporate assets..., all to [respondent]'s direct and proximate detriment, and converted them to their own use by, among other things, paying themselves excessive salaries, making disbursements to themselves without making pro-rata disbursements to [respondent], and by wrongfully utilizing corporate assets to fund the above-captioned frivolous lawsuit brought in bad faith against [respondent].” (Italics added.) In the third cause of action, to recover damages for negligence, respondent asserted that appellants had breached the duty they owed to her “by, among other things, failing to make timely disbursements to [her] as a minority shareholder..., by wrongfully depleting and wasting corporate assets to fund the instant litigation against [her] without any reasonable justification, and by paying themselves excessive salaries as officers of [the corporation], thereby further wasting corporate assets.” (Italics added.) In the fourth cause of action, to recover damages for intentional infliction of emotional distress, respondent alleged that appellants' conduct was outrageous and caused her to suffer severe emotional distress.

         Special Motion to Strike

         Appellants filed a special motion to strike the cross-complaint pursuant to section 425.16. Appellants asserted that the act of filing a lawsuit was a protected activity within the meaning of section 425.16. Appellants further asserted that the filing of the lawsuit was a “core component[]” of the cross-complaint, and observed that allegations related to the filing and maintaining the lawsuit appeared in each cause of action. While appellants acknowledged that each cause of action in the cross-complaint contained allegations of unprotected activity, they argued that the protected activity was a significant portion of each cause of action. Appellants asserted that where a cause of action is founded in both protected and unprotected activity, the entire cause of action is subject to being struck pursuant to an anti-SLAPP motion unless the protected activity was “ ‘merely incidental' ” to the unprotected activity. Appellants further asserted that the protected activity in the cross-complaint could not be characterized as merely incidental to any of the causes of action. Appellants contended that they had made their threshold showing of demonstrating that the cross-complaint's causes of action arose out of protected activity. Therefore, each cause of action in the cross-complaint must be struck unless respondent could demonstrate a probability of prevailing on the merits.

         According to appellants, respondent could not possibly meet her burden. Appellants asserted that the act of filing a lawsuit alleging any tort other than malicious prosecution was subject to absolute privilege under Civil Code section 47, subdivision (b). Thus, as to asserted causes of action premised on protected activity, appellants argued that respondent could not demonstrate a probability of prevailing on the merits because the conduct on which she based her claims was privileged.

         Respondent's Opposition

         Respondent asserted that appellants had failed to meet their threshold burden of demonstrating that the cross-complaint arose from acts undertaken in furtherance of a protected activity. Respondent drew a distinction between activity that constitutes evidence related to liability and liability actually based on protected activity. Respondent asserted that her allegations related to appellants' alleged misuse of corporate assets to fund the litigation were not the same as alleging that appellants were liable for the very act of filing the underlying lawsuit. According to respondent, appellants' filing of the lawsuit was not the basis underlying her causes of action. Rather, the specific allegations which formed the basis for the cross-complaint involved appellants' wrongful withholding of disbursements from her as a minority shareholder. Thus, having failed to establish that the cross-complaint was a “SLAPP suit, ” appellants failed to make their threshold showing.

         Respondent further asserted that, even if appellants met their prima facie burden, she could demonstrate a probability of prevailing on the merits. Based on Mann v. Quality Old Time Service, Inc. (2004) 120 Cal.App.4th 90 (Mann), respondent contended that, when a cause of action raises both protected and unprotected activity, an anti-SLAPP motion should be denied when the opposing party shows a probability of prevailing on any part of the cause of action.[3] Respondent reiterated her factual allegations, as supported by her exhibits, and asserted that the facts alleged would support a judgment in her favor on each of the cross-complaint's four causes of action.

         Respondent further asserted that, because the causes of action in her cross-complaint did not arise from protected activity, appellants' privilege defense asserted pursuant to Civil Code section 47, subdivision (b), was inapplicable. According to respondent, none of the facts alleged included retaliation for filing a lawsuit against her. She asserted that her causes of action would lie whether or not appellants commenced the underlying lawsuit against her.

         With her opposition papers, respondent submitted a declaration as well as exhibits in support of her factual allegations. The exhibits included share certificates; the September 28, 2001, agreement of purchase and sale of assets between the corporation as seller and Clark as buyer, which contemplated an initial cash payment of $1, 000, 000 and an additional sum of $815, 712.28 to be paid over 180 installment payments, and which included a covenant not to compete; a payment amortization schedule detailing the payments to be made by Clark to the corporation; a spreadsheet, prepared by respondent from corporate records, detailing disbursements paid from the corporation to her, appellants, and the decedent during the decedent's lifetime; Nina's last will and testament; and corporate profit-and-loss statements for 2012 and 2013.

         Appellants' Reply

         In their reply, appellants asserted that each of the causes of action in the cross-complaint arose, at least in part, from the protected activity of filing a lawsuit against respondent. They further asserted that the protected activity was not merely incidental to the causes of action. Thus, according to appellants, the entirety of each cause of action fell within the ambit of section 425.16. Appellants disputed respondent's contention that the filing of the underlying lawsuit did not form the basis for the cross-complaint, observing that the background facts and each cause of action referred to the filing and maintaining of the underlying lawsuit. Relying on the language in section 425.16, subdivision (e)(4), which states that protected activity includes “any other conduct in furtherance” of the exercise of the right of petition, appellants argued that, contrary to respondent's position, funding the underlying lawsuit was a protected activity.

         Appellants further asserted that respondent had failed to meet her burden of demonstrating a probability of prevailing on the merits of her causes of action. Appellants contended that much of the evidence on which respondent relied was inadmissible. They also contended that much of the conduct alleged by respondent as giving rise to her claims was protected from judicial scrutiny under the business judgment rule, and that the decision to issue disbursements to shareholders is a matter within the discretion of the board of directors. Appellants argued that respondent failed to submit any admissible evidence to support a claim that they acted in bad faith or with fraudulent intent. With regard to the conversion cause of action, appellants asserted that respondent's financial interest in the corporation was limited to share ownership, and shareholders do not own corporate property or have any immediate right to receive corporate profits. Thus, respondent could not demonstrate a right of immediate possession.

         Appellants further asserted that, even if the trial court concluded that respondent satisfied her burden regarding all unprotected activity, it should nonetheless strike all allegations in the cross-complaint concerning protected activity.

         Oral Argument in the Trial Court

         After issuing a tentative decision denying the motion in major part, the trial court heard oral argument. Appellants argued that the trial court employed an incorrect standard in its tentative decision. According to appellants, the correct standard in determining whether allegations of protected activity in a cause of action will survive a challenge under the anti-SLAPP statute is whether the protected activity is merely incidental to the cause of action, whereas in the tentative decision, the trial court denied the motion on the ground that there were substantial allegations of unprotected activity.

         According to appellants, the correct approach was not to look at what the unprotected conduct was, but rather to consider the protected conduct and inquire whether that conduct was merely incidental to the cause of action. If merely incidental, then the cause of action survives. Appellants noted that the cross-complaint alleged the filing and maintaining of the underlying lawsuit as background facts, and each of the first three causes of action recited the filing and maintaining of the underlying lawsuit as “liability-creating acts.” Appellants suggested that the cross-complaint combined unprotected conduct with protected conduct in order to prevent them from asserting their rights under the anti-SLAPP statute. Appellants argued that, based on the nature of the pleadings, the protected activity could not be deemed merely incidental to the causes of action.

         Appellants also disagreed with the tentative decision's conclusion that the “lawsuit-related claims” pertained to mismanagement of funds rather than the filing and maintaining of the underlying lawsuit. Appellants emphasized that the anti-SLAPP statute is to be construed broadly and further noted that section 425.16 expressly states that not only are statements made in the exercise of the right of petition protected, but conduct in furtherance of the right of petition is also protected. In this regard, appellants noted that the corporation could not exercise its right of petition if it could not pay for the lawsuit.

         Respondent agreed with the tentative decision. In response to appellants' argument that she artfully pleaded the cross-complaint to avoid anti-SLAPP consequences, respondent disagreed with the assertion that allegations concerning the filing and maintaining of the underlying lawsuit should have been pleaded separately from the other allegations, as such allegations could not independently form the basis for liability. Respondent further ...


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