Supreme Court clarifies damages and fees in business theft disputes

In an unanimous opinion Thursday, the California Supreme Court, for the first time, established the treble damages and attorney fees trial courts are allowed to award under California Penal Code Section 496 in cases of theft that apply to business disputes and other cases where the defendant is alleged to have stolen any form of property.

This decision clarifies the statute applies to not only theft involving stolen property but also theft-related tort involving fraud, misrepresentation or breach of fiduciary duty.

Chief Justice Tani G. Cantil-Sakauye wrote the opinion and Justice Joshua P. Groban filed a concurring opinion, which Justice Leondra R. Kruger joined. The justices found that, “A plaintiff may recover treble damages and attorney’s fees under section 496(c) when property has been obtained in any manner constituting theft.” Siry Investment L.P. v. Farkhondehpour, S262081, (C.A. Sup. Ct., filed May 8, 2020).

The opinion reverses a decision from a 5th District Court of Appeal panel, which reasoned a literal and broad reading of the statute would “transmogrify the law of remedies” for such tort cases and eclipse traditional damages remedies, which limit recovery to actual damages. It also believed this interpretation of the law would effectively “repeal the punitive damages statutes” and allow plaintiffs to bypass the strict standards they must meet when pursuing punitive damages.

Robert Cooper and Gregory D. Hagen of Wilson Elser Moskowitz Edelman & Dicker LLP as well as sole practitioner Brian D. Sampson represented the plaintiff.

“We are extremely delighted with the Supreme Court’s rejection of the lower court’s narrow interpretation of such a critical statute,” Cooper said in a statement. “The Supreme Court’s seminal decision confirms our view that a business partner that misappropriates partnership property is subject to triple damages and attorney fees. This landmark decision has significant impact on numerous pending lawsuits throughout California, eliminating the prior conflict created by different appellate courts.”

Richard L. Knickerbocker of Knickerbocker Law Firm, sole practitioner Mohammad Fakhreddine, David R. Fisher of Fisher Klein & Wolfe LLP, as well as Robert A. Olson and Edward L. Xanders of Greines Martin Stein & Richard LLP represent the defendants.

Knickerbocker said via email he recognized the Supreme Court did not rule in his favor regarding Section 496(c) but the justices invited the Legislature to review and consider if the statute should be amended.

“We hope the Legislature will act and get a second look at the statute because, as it stands, it’s overbroad and has been widely abused by litigants and attorneys who are pleading a 496(c) cause of action whenever there is any claim of money owed,” he wrote.

Despite stating on multiple occasions the statute was unambiguous, Cantil-Sakauye did say the Legislature is free to amend the law if it created unintended consequences.

Cooper said in an interview Thursday, “We don’t believe that there is a need for the Legislature to correct anything because there’s already sufficient safeguards built into the statute to avoid the abuse that the court of appeal was concerned about.”

This case, which has gone on for almost 20 years, originated from allegations that Siry Investment’s real estate partners were siphoning rental income away from it into a third party company it did not have access to, concealing the funneling of the funds.

While in trial court, Siry obtained terminating sanctions and a default judgment against the defendants, who subsequently argued the eight-figure award given to the plaintiff was erroneously excessive.

Another issue that arose in the case was whether the defendants can move for a new trial after a default judgment was issued against them, alleging the trial court miscalculated damages. The justices found they can, affirming the appellate court’s decision.

Knickerbocker wrote, “We are very pleased with the Supreme Court’s decision affirming a defaulting party’s right to move for a new trial. The trial judge is always the most familiar with the proceedings and the facts of the particular case to allow him or her to correct errors in the judgment short of an appeal. That saves the congested courts otherwise unnecessary appeals and the litigants otherwise related unnecessary fees and costs.”

Cooper said plaintiff’s counsel did not spend a lot of time challenging this matter, “But the decision is helpful in that it clarifies the law on the recurring procedural issues pertaining to post-trial motions. That’s important because the context of litigating post-judgment motions has been deemed to be a procedural minefield. So the decision, although it doesn’t address the merits of our arguments, does clarify the law and resolves the conflicting authorities on that particular topic.”

He added that based on the 10% post-judgment interest and the appellate attorneys’ fees for the past six years, he expects the trial court to enter another eight-figure judgment on remand.