Spooky Legal Development: Penal Code § 496 Makes Attorneys’ Fees & Treble Damages Available In Civil Business Fraud Cases

October 31, 2023 |

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The California Supreme Court recently expanded the money damages available to civil plaintiffs in business fraud actions.

In Siry Investment, L.P. v. Farkhondehpour, the Court declared that California Penal Code section 496(c) permits plaintiffs in business fraud actions to recover attorneys’ fees and treble damages from defendants who fraudulently divert limited partnership cash distributions. This ruling gives plaintiffs a powerful tool at trial and strong leverage in settlement negotiations by expanding their money judgment potential.

The Facts:

Siry involved a messy shell corporation façade: one of the limited partners, Siry Investment, L.P. (plaintiff), sued the general partner and three limited partners (defendants), alleging that the defendants fraudulently diverted cash distributions from the limited partnership to themselves. More particularly, the plaintiff alleged that the defendants improperly directed income from the partnership to a shell entity merely named “DTLA,” which the defendants owned. The net effect of these actions was to direct the partnership to underpay the plaintiff’s cash distributions.

Although the defendants disputed the plaintiff’s allegations, the central issue that was litigated was the amount of compensation the plaintiff was entitled to receive on its fraud claim. Specifically, the plaintiff argued that 496(c) applied to its fraud claim. Section 496(c) says that victims of theft may bring an action for “three times the amount of actual damages . . . costs of suit, and reasonable attorney’s fees.” The defendants argued that 496(c) did not apply in business fraud cases. The trial court sided with the plaintiff and awarded the damages. The defendants appealed.

The Question:

The issue on appeal was:  may a trial court award treble damages and attorneys’ fees pursuant to Penal Code section 496(c) in a case involving fraudulent diversion of partnership cash distributions?

The Decision:

The Court’s decision turned on the language of 496(a), which states:

“‘Every person who buys or 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 incarceration.”

Here, the defendants committed fraud when they intentionally and unlawfully diverted property (the cash distributions) that belonged to the plaintiff to their shell entity, DTLA. The Court explained that the defendants’ fraudulent diversion of cash distributions also constituted theft under subsection (a) because they knowingly diverted and received limited partnership cash distributions that belonged to another. In other words, by intentionally using DTLA to improperly receive the plaintiff’s cash distributions, the defendants knowingly received stolen property and committed theft.

The Court’s holding that the business fraud constituted theft was the latchkey for the plaintiff. Because the defendants obtained the cash distributions fraudulently (i.e., “in a manner constituting theft”) 496(c)’s special civil remedies attached to the plaintiff’s fraud claim. And because the plaintiff proved he suffered actual harm from the fraudulent diversion of its cash distributions, the defendants were exposed to treble damages and attorneys’ fees in excess of seven million dollars.

Despite this holding, plaintiffs should not get too excited. To access 496(c)’s special remedies, plaintiffs “must establish criminal intent on the part of the defendant.” This safeguard keeps 496(c) from becoming a nostrum for plaintiffs, who must still prove the applicable criminal intent.

What does Siry mean for businesses?

Siry involved a claim of fraud between limited partners over cash distributions. But this holding is not limited to its facts. In any corporate business dispute, if there is a risk of fraud, there is now a risk of 496(c) coming into play. Plaintiffs may enjoy this new tool to increase money judgments at trial or leverage during negotiations. Meanwhile, business owners should heed the decision and take it as a strong cause to always conduct themselves in a proper and non-fraudulent manner.

If you have any questions about effectively prosecuting a business fraud action, please contact the authors or any of our experienced attorneys at Boutin Jones.