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CA Supreme Court Authorizes Use of Penal Code Section 496(c) in Business Tort Cases

CA Supreme Court Authorizes Use of Penal Code Section 496(c) in Business Tort Cases
Photo by Marten Bjork / Unsplash

Penal Code section 496(a) makes it illegal to receive any property stolen or obtained in any manner constituting theft, or to conceal, sell, withhold or aid in concealing, selling or withholding any property from its owner, knowing the property to be so stolen or obtained. But here’s the kicker: to deter theft, section 496(c) authorizes any person injured by a violation of the foregoing to file an action for three times the amount of actual damages plus attorney’s fees.

The courts of appeal have applied section 496(c) differently when it came to business tort cases. Two of them held that treble damages and attorney’s fees are recoverable-one in connection with a loan scam, and the other for a business partner’s fraud and breach of fiduciary duty concerning the distribution of profits. However, two other courts of appeal held that 496(c) remedies are not recoverable-one in connection with the theft of labor in a wage dispute, and the other in connection with the diversion of partnership income (reversed in July 2022 by the Supreme Court in Siry Investment L.P. v. Farkhondehpour 2022 Cal. LEXIS 4052 | 2022 WL 2840312).

In Siry, the Supreme Court resolved this conflict by ruling that treble damages and attorney’s fees pursuant to section 496(c) are recoverable in theft-related business tort cases. The defendants in Siry required the tenants of partnership property to pay their rent to a separate entity so defendants could steal the rental income. Defendants also charged personal expenses to the partnership. To conceal their theft of partnership income, the defendants lied about the amount of rental income and expenses.

The Supreme Court found that the plain language of section 496(c) “covers fraudulent diversion of partnership funds.” The defendants received stolen property that belonged to the plaintiff (his share of the partnership income), having obtained it in a manner constituting theft. They also concealed and withheld those funds from him. And they did this knowing they had stolen the funds from him.

The Supreme Court rejected the appellate court’s concerns that awarding treble damages and attorney’s fees in theft-related business tort cases would drastically alter the traditional remedies for fraud, conversion and breach of fiduciary duty.

It also rejected the lower court’s concern that applying section 496(c) in theft-related business tort cases would allow plaintiffs to recover treble damages by only a preponderance of the evidence. Normally, plaintiffs would be limited to their actual damages in such cases absent proof of fraud, oppression or malice by clear and convincing evidence (a higher standard of proof) needed for an award of punitive damages.

According to the Supreme Court, these concerns were outweighed by the clear language of section 496(c). Further, the Court noted that the Legislature can alter the language of section 496(c) to address this concerns.

Take away: Many business tort cases involve the theft of stolen property-i.e., some form of violation of section 496(a). Accordingly, persons injured by such violations now have the green light to seek three times the amount of their actual damages plus their attorney’s fees if they can prove the defendant knowingly violated section 496(a).