California Penal Code §496, subdivision(a), provides: “Every person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained … shall be punished by imprisonment in a county jail for not more than one year….”
OK; got it. Commit theft, go to jail. But what does this have to do with civil lawsuits?
Well, check out subdivision (c): “Any person who has been injured by a violation of subdivision (a) … may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.”
Wow. That’s a powerful remedy potentially enabling a civil litigant to recover far more than she lost by the theft. In addition, because Penal Code §484 defines “theft” to include the conduct of one who acts to “fraudulently appropriate property which has been entrusted to him or her,” or who “knowingly and designedly” defrauds through “any false or fraudulent representation or pretense,” PC §496 would seem to apply to the types of embezzlement and fraud claims commonly alleged in business disputes.
Penal Code §496(c) Gets a Mixed Reception in the Court of Appeal
Civil litigants attempting to use PC §496, however, have received a mixed reception in the Court of Appeal. In the 2013 case of Bell v. Feibush, the plaintiff was allowed to use the statute in a case alleging that defendant induced her to loan him money by falsely asserting that he owned a specific trademark and needed the money to settle a lawsuit over his interests in a related enterprise. In 2018’s Lacagnina v. Comprehend Systems, however, the employee plaintiff’s effort to use PC §496 in a case seeking lost compensation was unsuccessful. The court held that plaintiff’s labor was not a form of “property” that can be stolen under the statute. On the other hand, in the later case of Switzer v. Wood, the court ruled that PC §496 applied to claims of fraud and breach of contract in the joint venture/limited liability company context.
The California Supreme Court’s Holding on Using Penal Code §496(c) in Business Litigation
Just recently, in Siry Investment v. Farkhondehpour, the California Supreme Court upheld the use of PC §496(c) in a business dispute, settling some controversies about its use. The plaintiff in the case alleged that its business partners diverted revenue from their partnership and also charged the partnership for unrelated expenses. It ultimately obtained an award from the court of: (1) actual compensatory damages, with interest, of $956,487; (2) another $1,912,974, reflecting trebling pursuant to section 496(c); (3) attorney’s fees totaling $4,010,008.97; and (4) costs of $187,109.13—for a total of $7,066,579.10. That’s a big amount over and above plaintiff’s actual damages. The Court of Appeal, however, held that PC §496(c) does not apply in “theft-related tort cases” involving fraud, misrepresentation, or breach of fiduciary duty. It accordingly struck the awards of treble damages and attorneys’ fees.
Reversing on this point, the Supreme Court explicitly endorsed the analysis of Bell and Switzer, agreeing that PC §496(c) is unambiguous, and that read together with sections 496(a) and 484, the result is that a plaintiff may recover treble damages and attorney’s fees under section 496(c) when property has been obtained in any manner constituting theft. The Court held also that PC §496(c) applied to the specific conduct in the case, i.e., the fraudulent diversion of partnership funds.
While the Court expressed some concern about policy considerations that might support cabining the statute’s reach—i.e., the transformation of many ordinary disputes into fraud cases with ballooning damages—it reasoned that the section’s requirement of actual fraudulent intent would exclude ordinary commercial defaults from its purview. Additionally, such policy concerns are better addressed to the Legislature, which can amend the section if it chooses.
The Siry decision will prove to be a powerful weapon for plaintiffs in business dispute cases, as long as they can prove that their partners’ sins are more than just innocent defaults.