The California Supreme Court last week issued a ruling in Siry Investments v. Saeed Farkhondehpour which can dramatically expand the remedies available to partners or others in a commercial dispute who are victims of financial theft in relation to company assets and funds. Section 496(a) criminalizes receiving stolen property and provides for treble damages and attorney’s fees to the aggrieved party. In a surprising opinion, the Supreme Court ruled that section 496 of the Penal Code can be applied any time there is a diversion of money or assets from a partnership, limited liability company or other business, provided that the requisite criminal intent to ‘deprived others of those funds can be shown. For the plaintiff in syria, the application of section 496 increased the score by many millions. of syria The ruling is likely to make available to plaintiffs in some business disputes remedies for treble damages and attorney’s fees not typically available for similar claims in other contexts.
The partners diverted partnership funds for their own use
The parties in syria formed a partnership to renovate and lease space in a mixed-use building. As with most partnership or limited liability agreements, the parties’ agreement divided the distributions of partnership money by specific percentages to the partners.
But the defendant partners created a separate entity and required the tenants of the building to pay rent to them instead of the partnership. Thus, defendants improperly diverted rental income from the partnership. The defendants also began charging personal and other non-partnership expenses to the partnership. The net effect of these actions was to direct the partnership to pay plaintiff its cash distributions. The two defendants ensured that the plaintiff did not know about the underpayments by presenting the defendant with building rental income and partnership expenses, lying to the plaintiff about what her cash distributions should be.
The plaintiff sued the defendants for underpaying the plaintiff and improperly transferring partnership rental income to their coffers.
The Supreme Court applies Article 496 of the Criminal Code to Partnership Disputes
The Supreme Court analyzed section 496 and the bill’s enactment history to conclude that a plaintiff in a business dispute may recover treble damages and attorney’s fees under section 496(c) when property—including partnership funds or diverted distributions – is obtained in any manner constituting theft. The court held that the definition of theft set forth in Article 484 of the Penal Code, which defines theft as knowingly and intentionally taking money belonging to another through a false representation or false pretense, would apply to a civil action under section 496(c). It found that section 496(c) applies to conduct in syria because the express statutory provision covers the fraudulent diversion of partnership funds. In doing so, the Court rejected a narrow view of Article 496.
The court explained 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 constitute theft within the meaning of the statute. Instead, to prove theft under section 496, a plaintiff must establish criminal intent on the part of the defendant beyond “mere proof of actual default or falsity.” This requirement prevents “ordinary commercial damages” from becoming theft. If misrepresentations or unfulfilled promises “are made innocently or unintentionally, they can no more form the basis of a criminal prosecution for taking property by false pretenses than an innocent breach of contract.” IN syriaThe court concluded that the defendants did not act innocently or unintentionally, but with careful planning and thought, reflecting the necessary criminal intent.
Implications for future litigants
Future litigants will need to consider the potential application of Penal Code Section 496 to disputes between partners of LLC members.
syria now makes clear that section 496 of the Penal Code can be applied whenever there is a diversion of money or assets from a partnership, LLC or other business, provided the necessary intent to deprive others of those funds. For future disputes between business partners, the parties should be aware that treble damages and attorney’s fees may be available if the requisite wrongful intent to steal or divert partnership or LLC funds from the partners can be shown or LLC members.