Does California Penal Code Section 496 Apply to Business Disputes?

underwood-penal-code-496-business-disputes-300x300Recently, the California Supreme Court clarified that California Penal Code section 496 applies to business disputes. This is significant as Section 496 outlines penalties for someone who buys or receives stolen property, or property obtained through theft or extortion. (Penal Code § 496.) Of particular concern is 496, subdivision (c), which allows triple damages and attorneys’ fees as available remedies for someone who converts stolen property. (Id.) Over the years, there has been a longstanding debate in California on whether Penal Code section 496 applies to business disputes. 

On the one hand, California appellate courts held that section 496 did apply to business disputes according to the wording of the statute. On the other hand, California appellate courts also held that section 496 did not apply to business disputes involving theft through fraud or misrepresentation. A recent California Supreme Court case finally resolved the split.

The California Appellate Court Split

In Switzer v. Wood (2019) 35 Cal.App.5th 116, Ted Switzer sued Robert Wood and Access Medical, LLC for breach of contract, fraud, breach of fiduciary duty, negligence, and civil remedies under section 496(c). (Id., at 119.) Switzer alleged that he went into business with Wood, and Wood then sold valuable property belonging to Switzer while Wood kept the profits for himself. (Id., at 121.) 

The trial court found for Switzer but did not award treble damages under section 496(c). (Id., at 124.) The trial court ruled that section 496(c) was not applicable to business disputes. (Id.) Switzer appealed, and the Court of Appeal reversed the trial court’s judgment. (Id., at 125.)

Relying on previous case law, the Court of Appeal ruled that a criminal conviction was not required for the treble damages remedy. (Id., at 126.) The Court of Appeal found that Wood and Access Medical’s actions were considered theft under section 496, and this caused Switzer to suffer actual harm. (Id., at 127-128.) The Court of Appeal concluded that Wood and Access Medical violated section 496, and so Switzer was entitled to treble damages under section 496. (Id., at 128.)

Meanwhile, another California appellate court came to the opposite conclusion. In Siry Investment, L.P. v. Farkhondehpour (2020) 45 Cal.App.5th 1098, Moe Siry, Saeed Farkhondehpour, and Morad Neman organized a partnership to invest in real estate. (Id., at 1109.) Eventually, Farkhondehpour and Neman diverted money from Siry to themselves, and they lied to Siry about the income and expenses. (Id., at 1110.) Siry sued them for this underpayment and diversion. (Id.)

The trial court entered judgment for Siry, including treble damages under section 496(c). (Id., at 1113.) The defendants appealed, and the Court of Appeal reversed the trial court’s judgment on this issue. (Id.) 

The Court of Appeal concluded that section 496(c) only provides treble damages for stolen property because the Legislature intended the statute to target “the market for stolen goods”. (Id., at 1137.) The Court of Appeal held section 496(c) does not provide treble damages for other types of theft, such as fraud, misrepresentation, or breach of fiduciary duty. (Id., at 1134.) In other words, business disputes were not subject to section 496.

As seen here, California law was split on whether section 496 applied to business disputes. Eventually, however, Siry made its way up to the Supreme Court of California, who finally resolved the split in appellate court decisions in a recent ruling. 

The California Supreme Court Decision

In Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, the California Supreme Court granted review of Siry’s case to resolve the split in Court of Appeal decisions. (Id., at 342.) The main issue for the Supreme Court was whether treble damages under section 496(c) applied to business disputes. (Id., at 347.)

Ultimately, the Supreme Court sided with the reasoning in Switzer, ruling that section 496(c) treble damages applied in business disputes. (Id., at 361.) Furthermore, the Supreme Court held that defendants’ actions constituted theft under section 496. (Id.) 

The Supreme Court also held that to establish theft, the plaintiff must demonstrate the defendant had a certain level of criminal intent. (Id., at 362.) In this case, the defendants demonstrated the requisite intent, writing:

“Although we are not asked here to determine whether plaintiff would have been able to prove theft, we observe 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.’ (People v. Ashley (1954) 42 Cal.2d 246, 264, 267 P.2d 271.). . . 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.’ (Id., at p. 264, 267 P.2d 271.) In this case, the record appears consistent with a conclusion that defendants acted not innocently or inadvertently, but with careful planning and deliberation reflecting the requisite criminal intent.” (Id.) 

The Supreme Court decision in Siry established that Section 496 can be applied to business disputes, if the plaintiff can establish the proper level of intent from the defendant. Of note is the applicability of section 496(c), which allows the plaintiff treble damages as a remedy. This ruling expands the amount of relief a plaintiff can receive in business-related lawsuits involving fraud, misrepresentation, or any event where the plaintiff can claim theft occurred. 

An Example

“Shawn” and “Julie” are business partners who invest in real estate together. Shawn and Julie share the profits and expenses equally. They have several buildings across California which they lease and manage separately, but they report to each other about the properties’ accounting. 

Eventually, Shawn and Julie’s relationship breaks down. The two of them cannot agree on how to do further business. Making matters worse, Shawn carries out several business decisions that loses the partnership money. 

Julie becomes angry and wants to get the money she believes she is owed. Julie begins lying to Shawn about the profits and expenses of the properties that she is managing while she takes the money for herself.

Shawn finds out that Julie has been lying about the properties and sues her for fraud and breach of fiduciary duty. Shawn seeks treble damages pursuant to California Penal Code section 496(c). 

For Shawn to receive treble damages, he must establish that Julie committed theft with the requisite intent. This should not be hard to prove, since Julie was purposefully lying to Shawn about the properties she was managing. Shawn will likely be able to recover treble damages from Julie. 

How Underwood Law Firm Can Help You

Under a recent California Supreme Court decision, California Penal Code section 496 now applies to business disputes. This includes the remedy of treble damages under section 496(c). The plaintiff must, however, prove the proper level of intent to receive this remedy. 

Here at Underwood Law Firm, our knowledgeable attorneys are here to help navigate the complex web of case law and statutes surrounding partitions. If you are trying to plan a partition order, or just have any questions, please do not hesitate to reach out to our office.

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