Bell v. Feibush — Six Years Later

Bell v. Feibush

It’s been almost six years since Morris & Stone broke new legal ground with the decision of Bell v. Feibush, and I thought I’d take a look at some of the cases that sprang from the case.

In case you are unfamiliar, I represented a woman named Sharon Bell, who had been fleeced by a family member named Igal Feibush. Bell had loaned Feibush some $200,000, based in part on his representation that he owned the copyright to “tough love” and would use the money to market that concept. Feibush never repaid Bell, and Bell retained me to go after the money. It was our contention that he never owned the claim copyright and/or had no intention to market it.

This situation had arisen in prior cases, wherein someone commits fraud in order to obtain money, and I was always frustrated that the worst that could happen is that the plaintiff will obtain a judgment for the amount the defendant took. It typically results in a net loss to the plaintiff, even in victory, because unless there is a statute or contract that provides for the recovery of attorney fees, those fees are not recoverable. In a fraud claim a plaintiff can ask for punitive damages, but punitive damages are based on the financial situation of the defendant. If the defendant has no net worth, as was the case here, there will be little or no punitive damages.

In an earlier case, I looked at the Penal Code sections relating to theft, and discovered Penal Code section 496, which provides for triple damages and punitive damages for receiving stolen goods. It was designed by the legislature as a means to discourage people from receiving stolen property. More research revealed that “receiving” stolen goods is not as specific as it appears. Section 496 provides:

(a) 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, shall be punished by imprisonment in a county jail for not more than one year . . .

Thus, the person who steals your watch also violates section 496 if he withholds it, since he would necessarily know that the property is stolen. From a criminal conviction standpoint, a defendant cannot be found guilty for both stealing and receiving the same item, but he can be convicted of either.

Penal Code section 496(c) then provides:

(c) Any person who has been injured by a violation of subdivision (a) or (b) may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.

The Bell case presented the strongest fact pattern for application of my research into receiving stolen goods. I added a claim for violation of Penal Code section 496, alleging that Feibush had used a false artifice – the claim that he was going to use the money to promote his tough love trademark – as a means to take the money from Bell. After our demand for the return of the money, he refused to do so, meaning that he was withholding the money in the manner defined by section 496.

We prevailed in the trial court, receiving a judgment for triple the amount of the money given to Feibush, plus attorney fees. A complete victory.

Feibush appealed, making a number of arguments, including a claim that he first had to be criminally convicted under Penal Code section 496, and that money is not a form of property. All his arguments failed, and the Court of Appeal upheld the judgment in full, electing to publish the decision so that it could act as precedent in future cases.

Interestingly, both the trial judge and the justices on the Court of Appeal said, in essence, that they did not like the scenario I had created, because they worried that every breach of contract claim would not now become a claim under section 496, but they had to concede that my interpretation of the law was unassailable. Indeed, there was a strong effort to depublish Bell v. Feibush in order to take away its precedential value, with some claiming it would turn every breach of contract claim into a claim under section 496.

It is within this context that I took a look at the decisions that have subsequently cited to Bell v. Feibush, to see if these concerns ever came to fruition, as well as to see if it spun off any new legal concepts. There are approximately 22 decisions that have cited to Bell, and here is just a sampling.

United States v. Flores

I was the most surprised to discover that Bell v. Feibush has crossed over into criminal law cases and is being cited as support for certain criminal convictions. I had applied the reasoning of criminal cases to a civil matter, and in turn the criminal courts had looked to the reasoning of Bell v. Feibush to interpret the intent of section 496.

For example, in the case of United States v. Flores, Edwin Flores, a native and citizen of Mexico, appealed his conviction for attempting to reenter the United States after being deported in violation of 8 U.S.C. § 1326(a). Flores moved to dismiss the indictment because the underlying basis of his deportation was a 2001 conviction of three counts of receiving stolen property under California Penal Code § 496(a), which the Immigration and Naturalization Service (“INS”) deemed an aggravated felony theft offense under 8 U.S.C. § 1101(a)(43)(G). That chapter provides that aliens can be deported if convicted of aggravated felonies, which include “a theft offense (including receipt of stolen property) … for which the term of imprisonment is at least one year.”

The Court of Appeals had to decide whether a California conviction for receipt of stolen property is categorically an aggravated felony within the Immigration and Naturalization Act (“INA”). Although that federal appeals court had previously ruled that California’s receipt of stolen property statute “fits within the generic definition of theft,” (Verdugo-Gonzalez v. Holder, 581 F.3d 1059, 1061 (9th Cir. 2009)), Flores challenged this conclusion because the federal generic definition of “theft” requires a lack of consent on the part of the property owner, and property may be “stolen” under California law with the owner’s consent, e.g. by fraudulent means.

It was our argument in Bell v. Feibush that linked section 496 to section 484, the latter of which defines “theft.” Flores argued that the definition of section 484 does not match the generic federal “theft offense” which requires taking property without the owner’s consent. There must be such a match in order to find violation of a federal law.

Relying on Bell v. Feibush and other authorities, the court concluded that knowingly receiving stolen property still deprives the owner of the property, and on that basis upheld Flores’ conviction and deportation.

Strange to think that my decision in 2012 to add a claim under section 496 to a civil complaint would lead to a chain of events that six years later impacted a criminal conviction and deportation, but good to see that my arguments held up even under that level of scrutiny.

Lacagnina v. Comprehend Sys., Inc.

This fact pattern is a little complex, but here is how it was summarized by the court.

After a 10-day trial, a jury ruled in favor of appellant David Lacagnina on his claims for fraud, breach of contract, and breach of the covenant of good faith and fair dealing against respondents Comprehend Systems, Inc. (Comprehend) and its two cofounders, Richard Morrison and Jud Gardner. From June 1, 2012 to November 20, 2013, when he was terminated, Lacagnina worked for Comprehend as vice president of business development. The gist of Lacagnina’s claims was that he was fraudulently induced to enter into an employment agreement with Comprehend by false representations made to him by Morrison and Gardner. The jury rendered a special verdict and awarded Lacagnina a total of $556,446 in damages, including $226,446 in damages for fraud and $75,000 for emotional distress. However, the trial court granted respondents’ motion for judgment notwithstanding the verdict on the fraud claim on the ground that Lacagnina was not damaged by the alleged fraud, and entered an amended judgment against respondents in the amount of $255,000. Lacagnina appealed from that judgment, and from the trial court’s order granting respondents’ motion for nonsuit.

In Bell v. Feibush, we had argued that the “theft” referred to in section 496 should be interpreted by the definition of theft set forth in section 484, and that definition provides that theft includes theft of labor. The main contention on appeal in Lacagnina was whether the defendants had stolen plaintiff’s labor, such to bring it under section 496.

Lacagnina’s argument was twofold. First, he asserted that Bell v. Feibush held that a criminal conviction under section 496, subdivision (a), is not a prerequisite to recovery of treble damages under section 496, subdivision (c). Second, he asserted that his labor was taken by “fraudulent representation” or “false … pretense” within the meaning of a second statute, section 484, which defines theft, and therefore falls within the definition of “property which may be obtained in a manner constituting theft” under section 496, subdivision (a). Thus, Lacagnina contended he was entitled to treble damages and attorneys’ fees for the “theft” of his “labor” by Comprehend.

As I had experienced in Bell v. Feibush, the trial court and Court of Appeal both characterized this argument as “creative,” but unlike the result I achieved, the Court of Appeal found it to “inconsistent with the plain language and structure of the Penal Code.” Lacagnina v. Comprehend Sys., Inc. (2018) 25 Cal.App.5th 955, 968. Here is how the court reasoned it out and distinguished it from Bell:

We start, as we must, with the plain statutory language. Lacagnina contends that section 496 “contains a civil remedy for, among other things, ‘theft’ of ‘labor’ procured by misrepresentation or false pretense.” But it does *969 not. Section 496, which bears the heading “Receiving stolen property,”14 makes no reference to labor. Rather, it is limited by its terms to the purchase or receipt of “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 ….” (§ 496, subd. (a), italics added; see also id., subd. (b) [same] ). But the crux of the issue is that labor is not “property” as that term is used in the Penal Code. “[T]he Penal Code defines property to include ‘both real and personal property’ and further defines personal property to include ‘money, goods, chattels, things in action, and evidences of debt.’ (§ 7, pars. (10), (12).)” (People v. Gonzales (2017) 2 Cal.5th 858, 871, 216 Cal.Rptr.3d 285, 392 P.3d 437.) The statutory definition makes no reference to labor or other services. Nor is there any indication of any intent to use the term “property” in section 496 more broadly than the definition of the same term already provided by the Penal Code. “ ‘ “[W]hen the Legislature uses a term of art, a court construing that use must assume that the Legislature was aware of the ramifications of its choice of language.” ’ [Citation.]” (Ibid.)

Nor does Lacagnina’s reliance on section 484 help him. That statute provides the following broad definition of theft: “Every person who shall feloniously steal, take, carry, lead, or drive away the personal property of another, or who shall fraudulently appropriate property which has been entrusted to him or her, or who shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money, labor or real or personal property, …, is guilty of theft.” (§ 484, subd. (a), italics added.) The italicized language appears in a clause codifying the common law crime of theft by false pretense, which includes defrauding another person of labor by false or fraudulent representation. (See People v. Williams (2013) 57 Cal.4th 776, 784–788, 161 Cal.Rptr.3d 81, 305 P.3d 1241; Bell, supra, 212 Cal.App.4th at p. 1048, 151 Cal.Rptr.3d 546.) However, section 484 defines theft, not property; that labor may be the object of a “theft” does not transform it into “stolen property.”

To be sure, courts have observed that “ ‘[a]nything that could be the subject of a theft can also be property under section 496.’ ” (Bell v. Feibush, supra, 212 Cal.App.4th at p. 1049, 151 Cal.Rptr.3d 546 (Bell ).) However, that broad dictum does not assist Lacagnina, since in Bell, “Feibush was found liable for fraud, i.e., for the fraudulent acquisition of property (money) from its owner (Bell).” (Ibid.) Lacagnina does not cite any reported case, nor have we been able to identify one, in which a court has deemed labor or services a form of “property” that can be stolen, as distinct from personal property, whether tangible or intangible. (Cf. People v. Kozlowski (2002) 96 Cal.App.4th 853, 864–869, 117 Cal.Rptr.2d 504 [Personal Identification Number (PIN) code used to access bank automatic teller machines is intangible personal property capable of being extorted]; People v. Gopal (1985) 171 Cal.App.3d 524, 541, 217 Cal.Rptr. 487 [copy of stolen trade secrets]; People v. Norwood (1972) 26 Cal.App.3d 148, 157, 103 Cal.Rptr. 7 [county warrant]; see also People v. Kunkin (1973) 9 Cal.3d 245, 249, 107 Cal.Rptr. 184, 507 P.2d 1392 [assuming, without deciding, that Attorney General personnel roster listing names, home addresses, and home telephone numbers of undercover narcotics agents was “property” within the meaning and intended scope of section 496].)

For these reasons, we find no ambiguity in the statutory language, and therefore no need to consult its legislative history. (See Delaney v. Superior Court (1990) 50 Cal.3d 785, 798, 268 Cal.Rptr. 753, 789 P.2d 934 [if statutory language is clear and unambiguous, no need to resort to indicia of the intent of the Legislature].) We nevertheless have scrutinized the legislative history, which does not support Lacagnina’s position. Senate Bill No. 1068 (1972 Reg. Sess.), which ultimately created section 496, subdivision (c), “ ‘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.’ ” (Bell, supra, 212 Cal.App.4th at p. 1047, 151 Cal.Rptr.3d 546, quoting Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal.App.4th 1, 17–18, 89 Cal.Rptr.3d 455, disapproved on another ground in Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 337, 120 Cal.Rptr.3d 741, 246 P.3d 877.) When introduced, the bill provided for a civil action by any public carrier injured by the knowing purchase, receipt, concealment, or withholding of stolen property, but it was subsequently amended to expand the class of potential plaintiffs to include any person injured by a violation of section 496. (Bell at p. 1047, 151 Cal.Rptr.3d 546.) Bell concluded the legislative history showed that “the Legislature believed the deterrent effect 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.” (Ibid.; accord, Citizens of Humanity, supra, 171 Cal.App.4th at p. 18, 89 Cal.Rptr.3d 455 [“Penal Code section 496, as amended, has as its goal the elimination of markets for stolen merchandise by allowing those injured by the sale of knowingly stolen merchandise to recover damages”].) It is difficult to fathom, to say the least, how imposing treble damages in an employment dispute over unpaid sales commissions could advance the legislative purpose to “dry up the market for stolen goods.” Moreover, we note that to the extent that the statutory treble damages provision was intended to deter misconduct, the punitive damages claim that Lacagnina asserted—unsuccessfully—served the same function.

Thus, Lacagnina is clearly distinguishable from Bell v. Feibush. It comes down to the simple conclusion that this was a mere dispute over unpaid compensation, with no showing of fraud, and hence no fake artifice to induce the payment of money. Lacagnina therefore demonstrates that the concerns of the judge and justices in Bell – that all breach of contract claims would become 496 claims – was unfounded. Counsel for Lacagnina did in fact attempt to use Bell as a blueprint for such a claim, but to no avail since the facts just were not there to support it.

Agape Family Worship Ctr., Inc. v. Gridiron

Bell v. Feibush crossed over into several federal court cases, with what I would at first blush say was with mixed results, but in the cases where it was rejected, it was due to the facts and not on a rejection of the holding.

For example, in the case of Agape Family Worship Ctr., Inc. v. Gridiron (“Agape”), defendant Donald Richard Gridiron, Jr. stole substantial sums of money from Plaintiff Agape Family Worship Center. For his crime, Gridiron is now incarcerated and spending the remainder of his sentence in a federal penitentiary in California. Agape initiated a civil action to recover damages resulting from the theft. Agape then brought a Motion for Summary Judgment, arguing that the case could be decided as a matter of law. Agape Family Worship Ctr., Inc. v. Gridiron, No. 5:15-CV-1465-ODW-SP, 2018 WL 2540274 (C.D. Cal. May 30, 2018).

In denying plaintiff’s summary judgment motion on the 496 claim, the court went off on a strange tangent, relying on a case called Grouse River Outfitters Ltd v. NetSuite, Inc., No. 16–cv–02954–LB, 2016 WL 5930273 (N.D. Cal. Oct. 12, 2016). Grouse focused on a “dual-liability” limitation, concluding that while a defendant can both steal and withhold property, he cannot be liable for both unless both are separate wrongs. Grouse concluded that since Bell had requested the money back, Feibush could be held liable for both taking and then refusing to return it. In Agape, the plaintiff had not requested the return of the money, and as Grouse had done, the court concluded that a 496 claim could not be stated because “that additional level of conduct—withholding the money after demand for payment—was not present.”

But more than that, the court repeatedly pointed out that the defendant was serving time for the crime, and appears to hold that the poor defendant should not be hit with treble and punitive damages as a form of punishment, when the jail time was already acting as punishment.

This latter point is sophistry, because if section 496 intended that damages were recoverable only where the defendant is not prosecuted, it would have stated so. There is nothing to indicate that was the intention of the Penal Code section, especially given that the civil penalties are articulated in the actual criminal statute. The more rational interpretation is that the legislature contemplated that the civil remedies would be in addition to the criminal penalties.

Ultimately, this is only dicta, since the Agape court first concluded that the plaintiff had no 496 claim as a result of failing to demand the return of the money. The primary takeaway from Agape then is to be sure to demand the return of the money.

Kayne v. Mense

The unpublished decision of Kayne v. Mense is another example of how the courts’ concerns about the monster I was creating were unfounded.

Kayne was the majority owner of Fortune Fashion Industries, LLC (FFI), which screen printed T-shirts and sold them to retailers. In 1994 Kayne, Mense, FFI, and others formed Cottonsmith to manufacture plain T-shirts to sell to FFI and others for dying or printing. From 1995 until 2006 Kayne and Mense were the sole shareholders of Cottonsmith, with each owning 50 percent. In 2006, Kayne and Mense entered into an “Amended and Restated Operating Agreement” that reduced Kayne’s share to 10 percent, increased Mense’s to 90 percent, and made Mense the sole manager of Cottonsmith in exchange for Mense’s promise to eliminate Kayne’s guaranty of Cottonsmith’s line of credit. According to Kayne, Mense and Cottonsmith failed to do so, notwithstanding Kayne’s numerous requests.

By September 2010, FFI was experiencing financial difficulty and owed Cottonsmith a great deal of money. FFI had pending shirt orders from two customers and wanted to order shirts from Cottonsmith to fulfill those orders, but Cottonsmith refused to accept FFI’s order due to the outstanding debt. The parties met and negotiated the “Fabric Purchase Agreement” at the heart of most of the claims in this case, the nature and terms of which are contested. According to Kayne, he personally advanced and entrusted to Cottonsmith $750,000, which the parties understood and agreed was not a loan, but an advance to purchase fabric to manufacture shirts to fill FFI’s order, with Kayne owning the fabric and bearing the risk of loss. If FFI was unable to purchase the shirts Cottonsmith manufactured, Cottonsmith could sell the shirts to another buyer. In any event, Kayne would be repaid $750,000 from the sale of the shirts (to FFI or others) or the fabric. According to Mense and Cottonsmith, the transaction was a $750,000 loan by Kayne to FFI to be treated by Cottonsmith as an advance for the T-shirts being ordered, so that after they were manufactured, the $750,000 “would be credited against the purchase price which would otherwise have been payable by FFI to Cottonsmith on delivery of the completed” shirts.

The parties agree that Cottonsmith purchased the fabric and manufactured the T-shirts, but FFI was unable to purchase them, so Cottonsmith sold them to another buyer. Instead of paying Kayne $750,000 from the proceeds of that sale, Cottonsmith credited it against FFI’s outstanding debt to Cottonsmith.

Kayne filed an action against Mense and Cottonsmith on August 24, 2011. He asserted two breach of contract causes of action, one pertaining to failure to repay Kayne $750,000 pursuant to the Fabric Purchase Agreement and the other alleging breach of the Amended and Restated Operating Agreement through (1) wrongful distributions to Mense of at least $2,648,000, (2) refusing to provide financial records for Cottonsmith for 2011, and (3) failing to pay funds due to Kayne under the agreement. He further alleged conversion of the $750,000 fabric advance against Mense and Cottonsmith and breach of fiduciary duty against Mense, which was based upon the conversion of the $750,000 fabric advance, failure to pay Kayne amounts due under the Amended and Restated Operating Agreement, failing to eliminate Kayne’s personal guaranty, failing to disclose the $2,648,000 in distributions, and failure to provide financial information. Kayne also sought rescission of the Amended and Restated Operating Agreement, an accounting, and imposition of a constructive trust.

Mense and Cottonsmith cross-complained against Kayne and his family trust. Cottonsmith alleged Kayne committed fraud by representing to Mense that FFI would be able to pay Cottonsmith in full for everything Cottonsmith supplied to FFI and by concealing FFI’s “desperate financial predicament,” thereby inducing Cottonsmith to deliver its products to FFI, incur costs for the benefit of FFI, and pay Kayne a consulting fee. Cottonsmith further alleged these acts constituted a breach of Kayne’s fiduciary duty and that receipt of the consulting fee unjustly enriched Kayne. It further alleged Kayne breached his guaranty of FFI’s credit memo to Cottonsmith by refusing to pay. Cottonsmith also alleged breach of contract by Kayne as FFI’s alter ego, with respect to both failing to pay FFI’s debt to Cottonsmith and failing to pay Cottonsmith 50 percent of revenues generated through FFI sales to Cottonsmith’s former customers, as agreed in 2009. Mense also alleged fraud and breach of fiduciary duty against Kayne based on all prior allegations.

On April 11, 2013, about one month before trial commenced, Kayne obtained leave to amend his complaint to add a cause of action alleging that Cottonsmith and Mense violated Penal Code section 496 through embezzlement of the $750,000 fabric advance. Kayne alleged he entrusted defendants with $750,000 for the specific, agreed purpose of purchasing fabric, with the understanding that the money would be returned to him, but defendants “intentionally and fraudulently appropriated” the money for their own purposes and failed to reimburse Kayne from the proceeds of the sale of the fabric or shirts made from it. Kayne further alleged defendants had no right to retain that money or apply it to FFI’s debt to Cottonsmith. Kayne sought the remedies provided by Penal Code section 496, subdivision (c), i.e., treble damages, attorney fees, and costs.

Following a 19–day trial, the jury returned verdicts for Kayne and against Cottonsmith and/or Mense on all claims submitted to it. Specifically, the jury found Cottonsmith and Mense breached the Amended and Restated Operating Agreement and awarded damages of $844,899. The jury also found Cottonsmith and Mense breached the Fabric Purchase Agreement and awarded Kayne damages of $892,500. The jury further found Mense breached a fiduciary duty to Kayne and acted with oppression, fraud, or malice. The jury also found Cottonsmith and Mense violated Penal Code section 496. The jury also found for Kayne on every cause of action in the Mense–Cottonsmith cross-complaint. The jury awarded Kayne $750,000 in punitive damages.

On appeal, the court reversed the damages awarded on the 496 claim, concluding simply that there was no fraud or theft.  Kayne v. Mense (2016) No. B254975, 2016 WL 1178671.

We conclude the Legislature could not possibly have intended Penal Code section 496 to apply in the circumstances of an ordinary contractual dispute arising in the course of an ongoing, legitimate business relationship, such as that of the parties in this case. Although the jury ultimately agreed with Kayne that Cottonsmith breached the Fabric Purchase Agreement by applying Kayne’s $750,000 loan against FFI’s debt, rather than repaying Kayne, Cottonsmith did not simply take and keep Kayne’s money without intent to perform, as in Bell. Cottonsmith manufactured the shirts with the fabric purchased with Kayne’s money and, when FFI was unable to purchase them, sold them to another buyer, as permitted by the terms of the Fabric Purchase Agreement. And although Cottonsmith breached the agreement by improperly crediting the amount of the $750,000 loan against FFI’s debt, this was qualitatively different than simply failing or refusing to repay the loan, as in Bell, in that Kayne was the majority owner of FFI, and FFI necessarily benefited from the $750,000 credit. Cottonsmith’s inappropriate handling of the $750,000 was not comparable to the fraud perpetrated upon Bell or to the knowing purchase, receipt, concealment, or withholding of stolen property the Legislature had in mind when it enacted Penal Code section 496, subdivision (c). This was, instead, a legitimate business transaction involving parties with a long business relationship in which Cottonsmith partially performed its obligations. Applying the remedies provided in Penal Code section 496, subdivision (c) in this context would not serve the legislative purpose of eliminating markets for stolen property.

In conclusion, the case authority we created six years ago with Bell v. Feibush is still alive and well, so long as it is applied to a proper fact pattern. Failing to perform a contract, standing alone, will not support a claim under section 496.

Update: Subsequent to this article, a greater split grew among the the Courts of Appeal over my interpretation of Penal Code section 496(c), and whether it permitted treble damages and attorney fees. To resolve the issue, the California Supreme Court agreed to hear an appeal in the case of Siry Investment, L.P. v. Farkhondehpour.

In its July 21, 2022 opinion, the Supreme Court used Bell v. Feibush as the starting point, and then discussed the appellate decisions that followed. The Court concluded that the reasoning of Bell v. Feibush was proper, putting to rest any challenges to the precedent we set, unless the Legislature decides to change the law.

This was a new and surreal experience for me. Normally, when an appeal is taken in one of my cases, I’m there to defend my reasoning. Siry Investment was not one of my cases, so I could not offer any support as the Supreme Court took a microscope to all my arguments in Bell v. Feibush. With this experience, I appreciate even more the need to make a rock solid argument in any appeal brief.