Appellate ruling examines discovery rule, SOL in criminal cases

One of the first issues to consider in defending an older criminal case is the statute of limitations. Our firm frequently challenges the criminal pleading on a demurrer when the criminal allegations appear to violate the relevant statute of limitations. While a prosecutor can typically cure the problem with an amended pleading, the issue of when did the statute of limitations start to run is ultimately a question for the trier of fact in the case.

In the recent California Court of Appeal case of People v. Rodriguez, et al., 2021 DJDAR 11964, the 2nd District Court of Appeal applied the "discovery rule," which holds in general that the statute of limitations for certain financial and fraud crimes begins to run only when the victim, or law enforcement, discovers that a crime has occurred. This rule accounts for the fact that fraud crimes, by their very nature, are often not immediately noticed by the victim, especially if the victim is a large organization or the perpetrator employs sophisticated means to disguise the fraudulent nature of his or her activity.

Under the discovery rule, the prosecution must plead and prove when and how the facts concerning the fraud became known to the victim, that the victim lacked knowledge of the crime prior to the claimed date of discovery, and, critically, that the victim had no means of knowing of the fraud sooner or notice which if followed up with reasonable inquiry would have led to the discovery of the fraud at an earlier date. This third requirement -- an inquiry notice provision -- was squarely at issue in Rodriguez's case.

Rodriguez and his co-defendant worked together at an engineering firm in Southern California. Engineers who have passed the relevant subject matter area exams are granted a seal, which they affix to sets of plans and other engineering reports which are submitted to government agencies. The presence of the engineer's seal demonstrates to the government that the plans have been reviewed by a qualified professional and meet all safety and code requirements. Co-defendant Gutierrez worked at the firm in question from 2000 to 2008 as an architectural designer. Rodriguez worked at the firm from 1995 to 2014 as an engineering draftsman. Neither defendant was a licensed engineer.

On December 21, 2007, one of the firm's owners found a folder on Gutierrez's desk containing invoices for Gutierrez's own company, as well as documents on the firm's letterhead bearing the owner's own seal, the use of which he had not authorized. Gutierrez admitted to moonlighting and using the firm's letterhead without permission and was terminated. At the time, the firm's owners did not suspect Rodriguez was also involved in the moonlighting scheme. On March 12, 2014, one of the owners received a call from a potential client who claimed that Rodriguez had offered him a discount if he paid cash. An audit of Rodriguez's work on a computer revealed documents related to multiple projects which bore the owner's engineering seal, again used without permission. Rodriguez admitted to moonlighting when confronted and was also terminated.

The owners of the engineering firm reported the defendants to the police and a criminal complaint charging hundreds of felony counts of forgery, identity theft, and grand theft was filed in February 2018. To comply with the four-year statute of limitations for fraud offenses, the People alleged March 12, 2014, as the date on which the victims discovered the crimes. The defendants waived jury trial and were convicted of hundreds of counts each at a bench trial. Each defendant was sentenced to serve 365 days in county jail and perform a significant amount of community labor.

Before closing arguments, the defendants moved to dismiss based on the statute of limitations. They presented evidence that beginning in 2009, the firm had created records and received payments for dozens of unauthorized projects. There were weekly and monthly meetings at which projects and invoices were discussed, and the firm's controller regularly met with the owners to review the company's books. The defendants focused in particular on one unauthorized project in 2013 which resulted in an account receivable that went unpaid. The defendants argued that, at the very latest, the victim company was on notice in 2013 when reasonable follow-up as to the unpaid account receivable would have led to discovery of the fraud scheme and forgeries.

On appeal, the defendants focused on the March 12, 2014, alleged discovery date. The Court of Appeal found that the prosecution's alleged discovery date -- the date on which the potential client alerted the owners to Rodriguez's promise of a discount for paying cash -- was supported by substantial evidence, and affirmed the defendants' convictions. The Court of Appeal noted that the controller, not the firm's owners, was the individual who could fairly be charged with knowledge prior to 2014. That fact was irrelevant, the court reasoned, because even if the controller's knowledge was imputed to the engineering firm, the individual owner whose seal was used without permission, and the firm's clients who were deceived, were the victims and not the firm itself. Therefore, the controller's actual or constructive knowledge, even if imputed to the business, did not trigger the statute of limitations.

The Court of Appeal rejected the defendants' argument that the controller's periodic audits put the firm's owners on inquiry notice. The court held that the audits would have certainly established that the defendants were moonlighting, but moonlighting is not a crime. While the audits would have led to an inference of wrongdoing, they would not necessarily have revealed a crime. In a portion of the opinion likely to be cited in the future in fraud cases, the court found that discovery of a financial loss is not synonymous with discovery of a crime against the business. While the Court of Appeal acknowledged that a different inference about the import of the controller's audits was plausible, the trial court, sitting as trier of fact, had found the opposite. On the deferential substantial evidence standard, the Court of Appeal could not find that trial court's determination was so unreasonable as to require reversal.

Rodriguez clarifies two important points about the application of the discovery rule. First, a controller's constructive knowledge about a fraud, even if imputed to the business, does not necessarily get imputed to the business owners, which may be the critical question depending on who the named victim is in a criminal proceeding. Second, the discovery of a financial loss, even by the victim personally, does not in of itself qualify as discovery of a crime sufficient to trigger the statute of limitations. The case ultimately provides the government a broader time frame within which to bring criminal charges, upon properly drafted pleadings. 