The Supreme Court of California recently held that treble damage and attorneys' fees awards under California Penal Code § 496(c) are available in many civil fraud cases.
California Penal Code § 496(c), enacted in 1972, allows victims of theft to sue anyone who knowingly receives their stolen property, and it provides for the recovery of treble damages and attorneys' fees.
Traditionally, to recover more than actual damages in a civil case, a plaintiff would have to prove that the defendant's conduct warrants punitive damages. That requires a higher standard of proof and a showing of ill intent beyond proving the elements of an offense. However, under the Supreme Court's new decision, damages may be multiplied with a lesser showing.
In Siry Investment, L.P. v. Farkhondehpour, Moe Siry, Saeed Farkhondehpour, and Morad Neman formed a partnership to renovate and lease space in a mixed-use building in downtown Los Angeles in 1998. The partnership agreement named one general partner, of which Farkhondehpour was president, and four limited partners.
In June 2007, the plaintiff (one of the limited partners) sued certain partners for underpaying the plaintiff and improperly diverting the partnership's rental income to their own coffers. The jury found for the plaintiff, awarding actual damages of $242,975 and punitive damages of $1.1 million against Farkhondehpour and $2 million against Neman. The trial court denied a subsequent motion for a new trial, but reduced the punitive damages awards to $728,925 against each Farkhondehpour and Neman.
After several years of litigation, the defendants appealed the original default judgment and the amended judgment, challenging the trial court's award of treble damages and attorney's fees under Section 496(c). Plaintiff cross-appealed from the amended judgment, challenging the defendants' standing, as parties in default, to file a motion for a new trial asserting legal error relating to calculation of damages. The Court of Appeals found for the defendants on standing and finding Section 496(c) inapplicable.
The California Supreme Court’s Opinion
Chief Justice Tani G. Cantil-Sakauye, authoring the opinion of the Supreme Court, reversed the Court of Appeals, ruling that Section 496(c) applied to ordinary business disputes regarding the diversion of funds. Further, the Supreme Court disagreed that the statute should be read narrowly to only apply in cases concerning stolen cargo.
The Supreme Court said that Section 496(c) is unambiguous, and that read together with Sections 496(a) and 484, Section 496(c) must be understood to provide that a plaintiff may recover treble damages and attorney's fees when property has been obtained in any manner constituting theft.
The Supreme Court also found that Section 496(c) applied to the conduct at issue and that the unambiguous relevant language covers fraudulent diversion of partnership funds. Chief Justice Cantil-Sakauye and the Court found that the defendants' conduct fell within the parameters of conduct constituting a violation of Section 496(a), as they received “property” (the diverted partnership funds) belonging to the plaintiff, and having “obtained” the diverted funds “in a manner constituting theft.” The defendants also concealed or withheld those funds (and/or aided in concealing or withholding them) from the plaintiff. They did all of this, the Court said, “knowing” the diverted funds were “so … obtained”, in accordance with the language of Section 496(a).
The defendants' violation of Section 496(a) caused the plaintiff to suffer actual damage, loss, or harm, the Supreme Court held.
Further, the Court stated that the state legislature is the appropriate body to address whether Section 496(c) should be altered in light of the Court of Appeals’ “repeated constructive focus” on these and related policy issues.
Tempering its decision, the Court explained that to prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond “mere proof of nonperformance or actual falsity.” This requirement, the Court explained, prevents ordinary commercial defaults from being transformed into a theft that would support enhanced damages under Section 496(c). As a result, a plaintiff must still prove that the defendant knew they were taking or receiving money or property that they knew did not belong to them.
The Supreme Court affirmed the judgment of the Court of Appeals to the extent it recognized and confirmed the defendants' standing to move for a new trial—more precisely, a new judgment hearing—on the ground that the trial court committed errors in law when awarding and calculating damages. However, the judgment was reversed to the extent the appellate court declined to read Section 496(c)'s words in their full and natural manner, by construing that subdivision to withhold, rather than afford, treble damages and attorney's fees when property “has been obtained in any manner constituting theft.”
In addition, civil remedies for receiving stolen property under Section 496(c) were available for fraudulent diversion of a partnership's cash distributions because the conduct fell within the scope of Section 496(a), as obtaining property in a manner constituting theft and, with knowledge it was so obtained, concealing or withholding the property from its owner, causing harm. The term "theft" in Section 496 included forms of theft within the general theft statute and could apply in a business dispute where the requisite criminal intent was shown. Siry Investment, L.P. v. Farkhondehpour, 2022 Cal. LEXIS 4052, 2022 WL 2840312 (Cal. July 21, 2022).