November 14, 2022
Stroock Client Alert
By: Stephen J. Newman, Rebecca Mandel
The recent California Supreme Court ruling in Siry Investment, L.P. v. Farkhondehpour, 13 Cal. 5th 333 (2022), held that treble damages and attorneys’ fees can be awarded pursuant to California Penal Code section 496(c) in theft-related business tort cases. This opinion may have opened the floodgates to plaintiffs’ attorneys interested in expanding the scope of remedies in a wide range of business disputes. Just as in the 1980s and 1990s when plaintiffs’ attorneys pleaded creative claims under the civil liability provisions of the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), the California Penal Code’s expansive damages provisions may well lead to similar efforts. Treble damages and attorneys’ fees are powerful remedies that plaintiffs’ attorneys will not hesitate to seek now that they are available.
California Penal Code section 496(a) provides that anyone who knowingly receives stolen property may be criminally punished. “Every person who...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, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained” is subject to criminal punishment. To further deter theft and to allow victims a basis for relief against an offender, Penal Code section 496(c) also provides civil remedies for anyone who is harmed by a violation of Penal Code section 496(a).
Until the Siry Investment decision, California courts were split on whether Penal Code section 496(c) applies to business disputes.
California’s Fifth Appellate District held in Switzer v. Wood, 35 Cal. App. 5th (2019), that Penal Code section 496 applies to claims where a manager or member misappropriated LLC assets. In examining the plain and unambiguous meaning of the statute, the Court found that any violation of Penal Code section 496(a) warrants the availability of treble damages under section 496(c).
By contrast, the Second Appellate District departed from Switzer, ruling in Siry, 45 Cal. App. 5th (2020), as modified on denial of reh’g (Mar. 23, 2020), that Penal Code section 496 does not apply to entity misappropriation claims, such as an improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation, and breach of fiduciary duty. The Court held that the scope of Penal Code section 496 is limited in cases where the “plaintiff merely alleges and proves conduct involving fraud, misrepresentation, conversion, or some other type of theft that does not involve ‘stolen’ property.” The Court reasoned that the Legislature’s intent when it enacted Penal Code section 496’s treble damages remedy was targeted to “dry up the market for stolen goods,” not to authorize treble remedies in all cases. The California Supreme Court then granted review and reversed the Second District, resolving the conflict largely in line with the Switzer court’s approach. See 13 Cal. 5th 333.
In Siry, the California Supreme Court held that Penal Code section 496(c) can apply to a broad range of business disputes. The Supreme Court found that the plain language of Penal Code section 496(c) “covers fraudulent diversion of partnership funds.” Even so, the Court cautioned that “not all commercial or consumer disputes alleging that a defendant obtained money or property through fraud, misrepresentation, or breach of a contractual promise will amount to a theft. 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 prevents ordinary commercial defaults from being transformed into a theft.” Siry, 13 Cal. 5th at 361-362.
The California Supreme Court held that a plaintiff may recover treble damages and attorneys’ fees under Penal Code section 496(c) when property has been stolen in any manner constituting theft. Although further caselaw may illustrate the breadth of potential claims, and perhaps limitations on such claims, nothing in Siry itself appears to preclude claims based on alleged theft of intangible property, such as data, trade secrets or other intellectual property.
Garden-variety business tort cases involving fraud, breach of fiduciary duty, and breach of contract may prompt attorneys to seek the steep penalties of Penal Code section 496(c). In light of Siry, many plaintiffs’ attorneys may interpret the ruling as a green light to add a Penal Code section 496(c) claim in the civil context. Even if such a claim is defensible – because to succeed the plaintiff must prove a knowing violation of the law, something that needs to be proved in most civil cases – the presence of a Penal Code section 496 claim in a case may affect the scope of discovery as well as the tenor of settlement negotiations. It may also affect media coverage of a case and have a reputational impact on a defendant whether or not the claim ultimately can be proved.
The defense issues are similar to those when civil RICO claims were pleaded frequently. Ultimately, the federal courts placed substantial limitations on civil RICO claims, and as a result they are rarely pleaded now except in extreme circumstances. But for a time these claims often clouded even run-of-the-mill business and consumer disputes, leading to aggressive monetary demands from plaintiffs’ counsel. It remains to be seen whether a similar pattern will emerge in California now that the California Supreme Court has opened the door to broader use of the Penal Code’s anti-theft provisions in civil cases, or whether instead new doctrine will evolve to limit the use of the claim to truly egregious examples of theft.
November 14, 2022
Stroock Client Alert
By: Stephen J. Newman, Rebecca Mandel
The recent California Supreme Court ruling in Siry Investment, L.P. v. Farkhondehpour, 13 Cal. 5th 333 (2022), held that treble damages and attorneys’ fees can be awarded pursuant to California Penal Code section 496(c) in theft-related business tort cases. This opinion may have opened the floodgates to plaintiffs’ attorneys interested in expanding the scope of remedies in a wide range of business disputes. Just as in the 1980s and 1990s when plaintiffs’ attorneys pleaded creative claims under the civil liability provisions of the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), the California Penal Code’s expansive damages provisions may well lead to similar efforts. Treble damages and attorneys’ fees are powerful remedies that plaintiffs’ attorneys will not hesitate to seek now that they are available.
California Penal Code section 496(a) provides that anyone who knowingly receives stolen property may be criminally punished. “Every person who...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, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained” is subject to criminal punishment. To further deter theft and to allow victims a basis for relief against an offender, Penal Code section 496(c) also provides civil remedies for anyone who is harmed by a violation of Penal Code section 496(a).
Until the Siry Investment decision, California courts were split on whether Penal Code section 496(c) applies to business disputes.
California’s Fifth Appellate District held in Switzer v. Wood, 35 Cal. App. 5th (2019), that Penal Code section 496 applies to claims where a manager or member misappropriated LLC assets. In examining the plain and unambiguous meaning of the statute, the Court found that any violation of Penal Code section 496(a) warrants the availability of treble damages under section 496(c).
By contrast, the Second Appellate District departed from Switzer, ruling in Siry, 45 Cal. App. 5th (2020), as modified on denial of reh’g (Mar. 23, 2020), that Penal Code section 496 does not apply to entity misappropriation claims, such as an improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation, and breach of fiduciary duty. The Court held that the scope of Penal Code section 496 is limited in cases where the “plaintiff merely alleges and proves conduct involving fraud, misrepresentation, conversion, or some other type of theft that does not involve ‘stolen’ property.” The Court reasoned that the Legislature’s intent when it enacted Penal Code section 496’s treble damages remedy was targeted to “dry up the market for stolen goods,” not to authorize treble remedies in all cases. The California Supreme Court then granted review and reversed the Second District, resolving the conflict largely in line with the Switzer court’s approach. See 13 Cal. 5th 333.
In Siry, the California Supreme Court held that Penal Code section 496(c) can apply to a broad range of business disputes. The Supreme Court found that the plain language of Penal Code section 496(c) “covers fraudulent diversion of partnership funds.” Even so, the Court cautioned that “not all commercial or consumer disputes alleging that a defendant obtained money or property through fraud, misrepresentation, or breach of a contractual promise will amount to a theft. 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 prevents ordinary commercial defaults from being transformed into a theft.” Siry, 13 Cal. 5th at 361-362.
The California Supreme Court held that a plaintiff may recover treble damages and attorneys’ fees under Penal Code section 496(c) when property has been stolen in any manner constituting theft. Although further caselaw may illustrate the breadth of potential claims, and perhaps limitations on such claims, nothing in Siry itself appears to preclude claims based on alleged theft of intangible property, such as data, trade secrets or other intellectual property.
Garden-variety business tort cases involving fraud, breach of fiduciary duty, and breach of contract may prompt attorneys to seek the steep penalties of Penal Code section 496(c). In light of Siry, many plaintiffs’ attorneys may interpret the ruling as a green light to add a Penal Code section 496(c) claim in the civil context. Even if such a claim is defensible – because to succeed the plaintiff must prove a knowing violation of the law, something that needs to be proved in most civil cases – the presence of a Penal Code section 496 claim in a case may affect the scope of discovery as well as the tenor of settlement negotiations. It may also affect media coverage of a case and have a reputational impact on a defendant whether or not the claim ultimately can be proved.
The defense issues are similar to those when civil RICO claims were pleaded frequently. Ultimately, the federal courts placed substantial limitations on civil RICO claims, and as a result they are rarely pleaded now except in extreme circumstances. But for a time these claims often clouded even run-of-the-mill business and consumer disputes, leading to aggressive monetary demands from plaintiffs’ counsel. It remains to be seen whether a similar pattern will emerge in California now that the California Supreme Court has opened the door to broader use of the Penal Code’s anti-theft provisions in civil cases, or whether instead new doctrine will evolve to limit the use of the claim to truly egregious examples of theft.
