Litigants in CA Have Powerful New Remedy



In Siry Investments vs. Saeed Farkhondehpour, 13 Cal. 5th 333 (2022), the California Supreme Court recently issued a decision that expands the remedies available to civil litigants who are victims of financial theft. California Penal Code § 496(a) criminalizes the knowing receipt of stolen property and allows a litigant to bring a civil action under this statutory provision, even if the wrongdoer is not criminally prosecuted. The Supreme Court held that Penal Code § 496 applies where there is a wrongful diversion of funds or assets from a business, provided that the requisite criminal intent can be shown. Because treble damages and recovery of attorneys’ fees are available under Section 496(c), a defendant that is sued under this Penal Code statute can have significant exposure.


Summary of Decision:


The parties in Siry formed a partnership to renovate and lease out a commercial building. As is common in this situation, the partnership agreement divided the cash distributions with specific percentages to be paid to each partner.


Unbeknownst to the plaintiff partner, the defendant partners created a separate entity and instructed the building tenants to pay rent into a separate account. The defendants also charged a variety of personal expenses to the partnership. These actions resulted in a considerable underpayment of cash distributions to the plaintiff. The defendants ensured that the plaintiff remained unaware of the underpayments by misrepresenting the building’s rental income and the partnership’s legitimate expenses.


Upon eventual discovery of these facts, plaintiff commenced a lawsuit and asserted causes of action for breach of contract, breach of fiduciary duty, fraud, the violation of Penal Code § 496. The Supreme Court analyzed Section 496 and the history of the statute to conclude that a litigant in a business dispute may recover treble damages and attorneys’ fees under Section 496(c) when property—including diverted company funds— has been obtained in any manner constituting theft. The Court determined that the definition of theft set forth in Penal Code § 484, which includes knowingly taking another’s money through a false representation or false pretense, applies to a civil action under Section 496.


The Court elaborated that not all disputes in which a plaintiff alleges that money or property was obtained through fraud will amount to “theft” within the meaning of the Penal Code statute. To prove theft under Penal Code § 496, a plaintiff must establish criminal intent on the part of the defendant beyond “mere proof of nonperformance or actual falsity.” This requirement prevents “ordinary commercial defaults” from being transformed into a theft. If misrepresentations or unfulfilled promises “are made innocently or inadvertently, they can no more form the basis for a prosecution for obtaining property by false pretenses than can an innocent breach of contract.” In Siry, the Court concluded that the defendants did not act innocently or inadvertently, but with careful planning and deliberation reflecting the requisite criminal intent.


Implications for Future Litigants:


The California Supreme Court resolved a conflict among lower court rulings by clarifying that treble damages and attorneys’ fees pursuant to Penal Code § 496(c) are recoverable in theft-related civil cases. A plaintiff must still prove that the defendant knowingly committed theft, which may be difficult to establish. However, any plaintiff that is contemplating bringing a lawsuit involving stolen property


should evaluate whether they can assert a claim under this Penal Code provision. Essentially, the Supreme Court has blurred the lines between criminal and civil cases, providing civil litigants with a powerful new weapon to add to their arsenal.

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