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Recent Developments Regarding Penal Code Section 496

One of the benefits of growing up in the 1970s was the opportunity to tune into television and watch the officers of the California Highway Patrol (CHP) patrolling the highways of Los Angeles every week on Chips. The blend of drama and corny comic relief appealed to viewers, and to this day every time a pair of CHP officers cruise together down a Los Angeles freeway, it evokes memories of Ponch and Jon doing the same. While the characters were not real, many of the fact patterns on the show were, including trucks being hijacked by criminals for their cargo (with Ponch and Jon coming to the rescue in the nick of time). More goods come through the ports of Los Angeles and Long Beach than anywhere else in the United States, and the temptation to loot big rigs filled with those goods proved too strong for some wrongdoers in the 1960s and early 1970s. In 1972, just before Chips arrived on the scene, the California Senate recognized this problem and undertook a rescue operation of its own via an amendment to Penal Code Section 496.

As originally enacted in 1872, Section 496 codified the common law crime of receipt of stolen property. Exactly a century later, in 1972, Senate Bill 1068 was introduced at the request of the California Trucking Association with the goal of “eliminating markets for stolen property, in order to substantially reduce the incentive to hijack cargo from common carriers.” The bill ultimately led to the adoption of Penal Code Section 496(c), which provides a civil remedy permitting any party injured by a violation of Penal Code Section 496(a) to bring a civil action for treble damages, as well as attorneys’ fees and costs.

In December of 2013, the “Closing Argument” column of Los Angeles Lawyer featured a discussion of Bell v. Feibush, the California Court of Appeal’s first major appellate decision interpreting Section 496© and previewed potential application of the decision to fraud scenarios. Nearly seven years have passed since Bell, and California appellate courts (as well as U.S. District Courts applying California law) have provided some clarity regarding the coverage and application of Section 496(c). These decisions reveal that the statute is being pled in factual situations that appear to go well beyond the original intent of the statute, which was to dry up the markets for stolen property (hijacked cargo) by punishing the purchaser or recipient of such goods – a third party who receives the stolen goods from the thief. Bell concluded that “the Legislature believed the deterrent effects of criminal sanctions was not enough to reduce thefts. The means to reduce thefts, the Legislature concluded, was to dry up the market for stolen goods by permitting treble damage recovery by ‘any person’ injured by the knowing purchase, receipt, concealment, or withholding of property stolen or obtained by theft.”

Why not all the civil remedy against the thieves themselves? There are already various caused of action available to protect an injured plaintiff, e.g., fraud and conversion, under which the victim can recover actual in addition to punitive damages.

Despite the original intent of the statute, recent decisions show that Section 496(c) is being pleaded not just against third party recipients of stolen goods but against the thieves themselves. However, to use the “civil action” option in this way requires the innocent party to first ask the thief to return the property.

A Case of “Toughlove”

In Bell, Defendant Igal J. Feibush induced Sharon Bell to loan him $202,500 on the false pretense that he owned the trademark “Toughlove” and needed the money to settle a pending lawsuit over his interests in what he called the “Toughlove” industry (involving the rehabilitation of troubled individuals through strict counseling and other treatments). The defendant represented that once he settled the lawsuit, he had a business plan to launch a revamped version of Toughlove that would earn millions of dollars. Unfortunately for Bell, the representations were false, the business was a scam, and when she asked for her money bac, the defendant gave her excuse after excuse and never repaid her.

Bell pleaded breach of contract, fraud, and violation of Section 496. Based on the face of the statute, the facts did not appear appropriate for a Section 496 claim. Did Feibush “buy or receive” stolen property? Is it possible for the same individual to both steal and receive stolen property in the same transaction? The court concluded that it was. “Bell’s counsel argued Feibush had violated section 496(a) because ‘he stole the property by means of a false artifice, and he maintained custody of that property to the exclusive on [Bell]. The trial court awarded Bell treble damages but stated, ‘I really don’t like it, to be honest with you, but that is what [Penal Code section 496] says.’” As a result of the trial court’s findings, Bell was awarded treble damages ($607,500) on her $202,500 claim in the form of a default judgment against Feibush. Later opinions considering Section 496 causes of action key in on one seemingly innocuous detail from the Bell case, viz., that Bell first asked for her money back from the defendant before making her claim. These courts have referred to this as the “extra conduct” required for a valid Section 496(c) claim.

Allowing such a generous civil remedy under Section 496(c) without an accompanying criminal conviction under Section 496(c) without an accompanying criminal conviction under Section 496(a) raised an eyebrow or tow. In fact, Feibush argued on appeal that this result would open the door for any collecting creditor to claim that a breach of contract constitutes a fraud, and in turn a criminal theft under Penal Code Section 484 (when in fact there was no criminal conviction) leading to the civil remedy available under Section 496(c). While affirming the judgment, the appellate court expressed its policy concerns over this result:

Feibush argues that permitting Bell to recover treble damages under Section 496(c) is contrary to public policy and permits litigants to circumvent limitations on remedies. Our decision to affirm the default judgment is based on straightforward statutory interpretation…. We are not unmindful of Feibush’ s policy concerns about the potential consequences of our interpretation of Section 496(c). But it is the task of the Legislature to address those policy concerns.

Bell further confirmed that a criminal conviction is not a prerequisite to the recovery of treble damages in a civil action under Section 496(c).

Feibush also argued on appeal that he could not be liable for both theft and receiving stolen property as Section 496(a) precludes dual liability for both theft of the property and for buying or receiving the stolen property, known as the “dual-liability bar.” However, Bell confirmed that the money or property in question could be both stolen and received or withheld by the same person as required by the statute. While the statute’s original intent was to eliminate the market for stolen goods by providing the victim of a theft a civil remedy against the person who buys or receives the stolen goods, Bell confirmed that the “thief” and the “recipient” can be the same person, so long as the victim asks for the money or property back before making their claim under Section 496. If the property is not returned after the victim asks for it back, it can then be argued that the stolen property was “Withheld” by the thief, bringing the thief under the statute and providing the civil remedies of Section 496(c).

A review of state and federal opinions since Bell that consider Section 496(c) illuminates the importance in correctly pleading the statute in the civil context and further reveals the willingness of courts to apply the statute to ordinary business disputes normally governed by breach of contract, conversion, and fraud causes of action. Selected opinions “two from the California Appellate Courts and two from United States District Courts applying California law) feature a variety of fact patterns and pleadings, resulting in varying levels of success.

U.S. District Court Opinions

In Grouse River Outfitters v. NetSuite, the plaintiff (an outdoor equipment retailer) hired defendant NetSuite to install a comprehensive software system to coordinate the plaintiff’s business, including running transactions at point of sale, tracking inventory, and maintaining customer records. In its complaint, Grouse River alleged that NetSuite breached its contractual commitments and committed fraud by misrepresenting the capabilities of its software and NetSuite’s ability to provide a system that could perform as promised. In addition to breach of contract and fraud-based causes of action, Grouse River included a claim for violation of Section 496 seeking the treble damages remedy of Section 496(c).

In granting NetSuite’s motion to dismiss the Section 496 cause of action, the court made four points that are instructive when considering how to properly plead the statute. First, Grouse River did not identify false representations or plead fraud with particularity so as to qualify as “theft” under Section 496(a). Second, the court determined that the property in question “the money paid by Grouse River to NetSuite) did not have the character of being “Stolen” when it came into NetSuite’s hands, because at the time it was paid, it was for products and services that NetSuite was going to provide to Grouse River under the contract. This determination led the court to its third point, which was a discussion of the “dual liability” issue raised in the Bell case. The court confirmed the holding in Bell that the plaintiff’s “extra conduct” in asking for the money back was enough to avoid the dual-liability bar of section 496(a). However, there was no allegation made in the complaint that Grouse River asked for its property back prior to making its Section 496 claim. Finally, the court noted that Grouse River failed allege an essential element of a Section 496 claim: the defendant’s knowledge that the goods were stolen.

In Agape Family Worship Center v. Gridiron, which received national media coverage, the “extra conduct” of asking for the money back was once again a key factor leading to the failure of the plaintiff’s Section 496(c) claim. In 1992, Agape Family Worship Center (a large non-denominational church located in New Jersey) hired Defendant Donald Gridiron, Jr., a certified public accountant to assist with its accounting needs. By 2008, Gridiron had taken over most of the church’s financial and accounting duties. In 2014, after Agape discovered that one of its checks was returned for nonsufficient funds, Gridiron informed the church that he had a severe gambling addiction and had stolen a large sum of money from the church over a period of seven years (later determined to be in excess of $4.5 million). Gridiron was arrested and received a sentence of 57 months in prison.

On the civil side, Agape filed a complaint against Gridiron and a codefendant for breach of fiduciary duty, fraud, conversion, money had and received, and receipt of stolen property under Section 496(c). On a motion for summary judgment, Agape sought its actual damages ($4,615,963.54). punitive damages, and treble damages and attorneys’ fees under Section 496(c). Gridiron did not contest entry of summary judgment as to the actual damages and even offered to stipulate to such a judgement. Gridiron did, however, opposes the church’s request for treble damages and attorney’s fees under Section 496(c).

In its decision, the court granted summary judgement on all causes of action with the exception of the Section 496 claim, which was denied because the church presented no evidence that they asked for the money bac, the “additional conduct” that was found to be necessary in the Bell and Grouse decisions.

California Appellate Court Opinions

The First Appellate District of the California Court of Appeal confirmed that there are some outer boundaries to what constitutes “property” when pleading a Section 496 claim. In Lacagnina v. Comprehend Systems, the appellant filed suit against his former employers and its two cofounders, arguing that he was fraudulently induced to enter into an employment agreement. The essence of Lacagnina’s Section 496(c) claim that was that his labor, contacts, industry knowledge, and other trade secrets were stolen from him by false pretense within the meaning of Section 484, allowing him to pursue treble damages against his former employer for “receiving: stolen property. The trial court found no evidence to support this claim and granted nonsuit.

On appeal, Lacagnina made two arguments. First, he argued that under Bell a criminal conviction under Section 496(a) was not a prerequisite to recovery of treble damages under Section 496(c) (a point established in Bell to which the appellate court promptly agreed. Second, he asserted that his labor was taken from him by “fraudulent representation” or “false pretense” within the meaning of Section 484 (defining theft) which would allow him to proceed under Section 496(c) for treble damages and attorneys’ fees for the theft of his labor. The appellate court was unconvinced, holding that such a reading would be inconsistent with the plain language of the statute. The appellate court found it significant that while Section 484 referred to “labor” as something that could be the subject of a theft, Section 496 makes no such reference. Moreover, the court was unable to identify any reported case in which a court deemed labor or services a form of “property” that can be stolen.

In the most recently reported California case involving Section 496(c), Switzer v. Wood, the Fifth District Court of Appeal reversed a trial court’s decision not to award treble damages and attorneys’ fees under Section 496(c) even though the trial court had found that the defendants’ actions constituted a violation of Section 496(a). In Switzer, the plaintiff’s originated in the context of a joint venture arrangement under which the profits from a business enterprise (the sale of medical devices) were to be distributed in equal shares to the parties. According to the allegations of the cross-complaint, not long after the business venture started, defendant Wood wrongfully took possession of money belonging to the business as well as property belonging to the business as well as property belonging to Switzer and kept business profits for himself rather than distributing them as agreed.

In refusing to award treble damages under Section 496(c) to the plaintiff, the trial court reasoned the despite the literal wording of the statute, “the Legislature could not have intended to apply the treble damage remedy to wrongful conduct committed in the context of a joint venture or preexisting business relationship where ordinary fraud and breach of contract remedies would be available. Moreover , the trial court explained that application of the treble damages remedy in standard breach of contract, fraud, conversion, and misrepresentation claims would lead to an unreasonable result, and that legislative history indicated that “the treble damage remedy had a narrow purpose of ‘tak[ing] the profit out of cargo thievery.’”

The appellate court disagreed. Examining the plain meaning of the statute, the appellate court found that any violation of Section 496(a) warrants the availability of treble damages under Section 496(c). Further, it did not believe application of the statute to traditional business relationships was unreasonable, stating:

The fact that the treble damage remedy may come into play where (as here) the parties were in a preexisting business relationship in which the remedies at law have traditionally been limited (e.g., for fraud, conversion or breach of contract) – while arguably a valid policy argument – manifestly falls short of establishing the absurdity exception…. In other words, the potential results of following the unambiguous literal wording of section 496(c) are not so absurd or unreasonable that we would be justified to override its plain meaning.

Even though the appellate court found the statutory language to be clear and unambiguous (which would normally preclude a review of legislative history) the appellate court went out of its way to take issue with the trial court’s interpretation of the legislative record. Whereas the trial court emphasized the original narrow purpose of the statute (as lobbied for by the California Trucking Association to provide a civil remedy to “for-hire” carriers injured by a violation of Section 496 (a)) the appellate court in Switzer noted that this narrow remedial focus was ultimately broadened by the state legislature as reflected in the final version of the statute, which provides a remedy to “any person” injured by a violation of the statute.

Pleading a Section 496 Cause of Action

Lacagnina lays out the elements required to plead a cause of action for violation of Section 496 as follows: 1) the property was stolen or obtained in a manner constituting theft, 2) the defendant knew the property was so stolen or obtained, and 3) the defendant received or had possession of the stolen property. However, if the case does not involve a traditional “receipt of stolen property” fact pattern, then before pleading, the victim needs to first ask for the money or property back. By making this request, the plaintiff avoids the dual-liability bar discussed in Bell, and stolen property can take on the additional character of “withheld” property, opening the door to a potential claim against the thief under Section 496.

Practitioners with fact patterns supporting breach of contract, conversion or fraud causes of action might consider whether adding a Section 496 claim with its robust treble damages and attorneys’ fees remedies makes sense. In light of the recent holding in Switzer, the plaintiffs’ bar has an open invitation to pleading Section 496 claims in business disputes that previously might have warranted only fraud claims. Moreover, as attorneys’ fees are only awardable in California if provided for by contract or by statute, Section 496(c) provides a rare opportunity to seek attorneys’ fees outside of a specific contractual providing the same.

Those who disagree with the appellate courts’ current interpretation of Section 496 will have to wait for the California Supreme Court to take a case up on appeal or seek clarification from the legislature on the true intent of the statute. Until then, Section 496 will remain a viable option for plaintiffs seeking enhanced remedies or the increased leverage pleading the cause of action might provide.