Diversion of LLC Funds Is Not “Protected Activity” Under California’s Anti-SLAPP Statute
California’s anti-SLAPP statute (Code of Civil Procedure section 425.16) aims to protect defendants from meritless lawsuits designed to chill “protected activity” — i.e., the exercise of rights of petition or free speech on matters of public concern. Any defendant facing such a lawsuit can file a special motion to strike, and if the motion is granted the lawsuit will be dismissed.
California’s courts of appeal have been flooded with anti-SLAPP cases. Some clear themes have emerged. Generally, a lawsuit targeting a defendant’s litigation activity is likely to be stricken on an anti-SLAPP motion. In contrast, a lawsuit based on the defendant’s tortious conduct outside of litigation will usually overcome an anti-SLAPP motion.
In an opinion recently published by California’s Second Appellate District — Manlin v. Milner (order of publication here) — the court addressed a case where the trial court granted an anti-SLAPP motion in a lawsuit alleging that the manager of a group of LLCs diverted LLC funds for the purpose of financing personal litigation claims against a LLC member.
Facts: lawsuit alleges LLC manager diverted LLC funds to defend manager against LLC member’s claims
Roger Manlin, a member of several real estate investment LLCs, filed a lawsuit against Steven Milner, his co-member and the manager of the LLCs. The lawsuit alleged that Milner, without Manlin’s knowledge or consent, engaged in self-serving conduct in breach of both his fiduciary duties and the LLC operating agreements.
Milner and the LLCs, represented by the law firm Hamburg, Karie, Edwards & Martin (“the Firm”), filed a cross-complaint against Manlin alleging various claims.
Manlin then filed a cross-complaint alleging additional claims, direct and derivative, against both Milner and the Firm. Manlin’s cross-complaint alleged that Milner and the Firm breached fiduciary duties by wrongfully diverting funds from the LLCs in order to pay Milner’s personal legal expenses of defending Manlin’s claims against him individually.
Milner and the Firm filed a special motion to strike Manlin’s cross-complaint under the anti-SLAPP statute, arguing that “funding litigation constitutes protected petitioning activity.”
Trial court: financing litigation is “protected conduct;” anti-SLAPP motion granted
The trial court granted the anti-SLAPP motion, holding that Manlin’s claims were “based on the payment of funds to maintain a lawsuit.” The court struck Manlin’s cross-complaint in its entirety.
Court of Appeal: reversed; diversion of funds is not “protected conduct;” purpose of diversion is not relevant
The Court of Appeal reversed.
The court held that the “gravamen” of Manlin’s cross-claims was that Milner and the Firm breached fiduciary duties owed to Manlin and the LLCs “by diverting the LLCs’ money to fund Manlin’s legal expenses.” Breaching fiduciary duties by diverting LLC funds was not “protected activity” under the anti-SLAPP statute.
The court rejected Milner’s argument (and the trial court’s holding) that funding litigation constitutes protected petitioning activity. The court held the key element of Manlin’s claims was the “self-dealing act of diverting funds from the LLCs in which Manlin owns an interest.” The additional allegations describing the way in which the diverted funds were used — i.e., to finance litigation — were not relevant. The court held: “No element of Manlin’s claim depends on the purpose for that diversion, but only on the diversion itself and whether it constituted self-dealing.”
Since the gravamen of Manlin’s claims was “the misuse of corporate funds, not the wrongful litigation,” the anti-SLAPP statute did not apply.
Under the holding of the Manlin v. Milner opinion, the anti-SLAPP statute will not provide a shield against claims based on the diversion of LLC assets, even of those diverted assets are used for litigation.