As we reported in October of 2011, we persuaded an Orange County Superior Court Judge to apply Penal Code section 496(c) – making it illegal to receive stolen goods – to a case where the defendant had failed to repay a loan. The loan agreement did not provide for attorney fees, so by bringing the civil action under Penal Code section 496(c), our client was entitled not only to recovery of all of her attorney fees, but treble damages as well.
The case involved a loan made by our client to the defendant, who we will call Joe Badguy. Badguy and his entities failed to repay the loan, and we were retained by the plaintiff to sue. I am always bothered by cases where the worst that can happen to the defendant is that he is made to repay the money that he borrowed in the first place (plus interest). Most attorneys would have pursued this as a garden variety breach of contract case. However, since the loan agreement did not provide for attorney fees, Badguy would face no downside in fighting such an action. Sure, he would incur his own attorney fees, but at the end of the day the case would likely have settled for less than what was owed, or gone to trial and resulted in a judgment for only the loan amount. Our client would have been left far from whole.
We figured out a better way. Penal Code section 496(c) makes it illegal to receive stolen property, and provides for a civil action to recovery any losses that result from violation of that criminal code. We included a cause of action under that statute, arguing that Badguy had used a false pretense to obtain the money from our client. Basically, he told her he had a certain valuable trademark, and that the money from the licensing of that trademark would be used to repay the loan. It turned out he did not own that trademark, and he made no money from its licensing.
A quick aside for an important concept. Picture that an aluminum salesman comes to your door and sells you aluminum siding for $12,000. He presents you with and you sign an agreement for the installation of the aluminum siding, you pay the $12,000, and then he never installs it. You sue for breach of contract, but during discovery you find out that he is not even a licensed contractor and has no access to aluminum siding. You can add a claim for fraud, and that gives you a shot at punitive damages, but basically your damages are the same under both the breach of contract and fraud causes of action — the $12,000 you paid for the aluminum siding that was never installed.
But here’s the thing. If he had come to your door, put a gun in your face and stolen the $12,000, everyone would understand that was a theft. The fact that he used a bogus contract instead of a gun to steal the money from you does not make it any less of a theft. That reality is so self-evident, but it escapes many judges. Kudos to Judge James Di Cesare who understood that a theft is a theft, whether by way of burglary, robbery or bogus contract.
Let me make this perfectly clear. It a party enters into a contract, and simply fails to perform, that is still nothing more than a breach of contract. But if a party enters into a contract in order to obtain money or other property from the other party to the contract, knowing that he has no ability to perform, that is both fraud and theft. Badguy argued on appeal that if the court affirmed this verdict, all breach of contract actions would become claims for theft. As you can see, that simply is not true.
And now back to our story. The Judge agreed that this was more than a simple breach of contract, and amounted to receipt of stolen property (the money). Although he expressed that he didn’t like it, because it afforded a set “penalty” with none of the considerations of a punitive damages claim, he agreed that the criminal statute applied, and awarded three times the damages, and all of our attorney fees. Our client had loaned Badguy $202,500, but the total judgment was just under $700,000.
Although Judge Di Cesare saw this as a bad thing, from the viewpoint of the victim and her attorney, this application of Penal Code section 496(c) affords another huge benefit. The same result (albeit without the attorney fees) could be achieved with a fraud action and the award of punitive damages. However, punitive damages require a showing of the defendant’s net worth and the ability to pay the damages. That can be a huge hurdle when the defendant is someone like Joe Badguy, because he won’t have any property in his name or show any personal income. The purpose of punitive damages — punishing a wrongdoer — is sometimes thwarted where it is most appropriate, if the defendant is successful at hiding his assets. Conversely, the treble damages under 496(c) are a fixed penalty, and require no such showing.
Joe Badguy appealed the treble damages aspect of the judgment, claiming (1) his conduct did not amount to a theft; (2) that a civil action could not proceed under 496(c) unless he had first been criminally convicted; and (3) if he was the party who stole the money, he could not be convicted for receiving it.
The Court of Appeal rejected his arguments, and affirmed the judgment. The Court found that the criminal statute means exactly what it says. It agreed with us that theft by false pretense (the bogus contract) is still a theft, that there need not first be a criminal conviction, and that even the person who steals the money is still liable for receiving it. As icing on the cake, the Court of Appeal decided that our application of the statute, and the fact that the statute has generated no appellate decisions, made the opinion worthy of publication. In the future, when we advance this theory and encounter a judge who just can’t wrap his or her mind around the concept, we can cite to our own case as authority.
Here is the published opinion.
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