Court of Appeal Agrees that Penal Code Section 496(c) Allows Recovery of Treble Damages and Attorney Fees for Failure to Repay a Loan if Money Gained Through False Pretense.

Sorry, this tip probably won't be of any help unless you practice in California (although many states follow California, so you may have something similar — look at how many states now have an anti-SLAPP statute). But if you do work in the Golden State, this ruling could be very useful in your practice.

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 our client for 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 Joe Defendant, who 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, Defendant 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 recover any losses. We included a cause of action under that statute, arguing that Defendant 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 a salesman comes to your door and sells you aluminum siding for your house 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 (1) he is not even a licensed contractor; (2) he has no access to aluminum siding; and (3) he has been sued for the same scam before. Is there anyway to punish this guy so he does not keep doing the same scam? You could add a claim for fraud, and that would give you a shot at punitive damages, but basically your damages are the same under both the breach of contract and fraud actions — 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.

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 attorneys could start alleging breach of contract actions as thefts, he agreed that the criminal statute applied, and awarded three times the damages, and all of our attorney fees. Our client had loaned Defendant $202,500, but the total judgment was just under $700,000.

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. The treble damages under 496(c) are a fixed penalty, and require no such showing.

Defendant appealed the treble damages aspect of the judgment, claiming that the criminal code did not apply because he had to first be criminally convicted, and that as the party that allegedly 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, 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. As the cherry on top of the icing, the Court of Appeal specifically held that we are also entitled to recover all of our attorney fees spent fighting the appeal.

Here is the published opinion.

11 thoughts on “Court of Appeal Agrees that Penal Code Section 496(c) Allows Recovery of Treble Damages and Attorney Fees for Failure to Repay a Loan if Money Gained Through False Pretense.

  1. Pingback: Bell v. Igal Feibush | Court of Appeal Opinion | Your Own Law Firm

  2. Does section 496(c) apply to anyone who gains money by fraud? As suggested in the article, the statute leapfrogs all the uncertainty and procedural obstacles (or protections) of Civil Code section 3294.

    • Your question is precisely why both the trial court and the Court of Appeal said they were not happy about giving me what I was asking for, because they were fearful that all fraud claims will now be alleged as theft claims. The definition of “theft” in Penal Code section 484 is very broad, and includes any taking “by any false or fraudulent representation or pretense”. Interestingly, it not only includes theft of money and property, it includes theft of “labor”.

  3. This may be the same question as posed by the previous poster, but what do you think would have happened if you did not include a cause of action for 496 in your initial complaint, but simply proceeded with a fraud claim and then amended to conform to proof at a later date (i.e. orally in closing argument). Same result?

  4. Good results. Actually, I am an attorney who practices in California and have used this statute for some time with success.

    In my case, I “jointed ventured” with an attorney who took a check over $300,000.00, which I was 1/2 owners and a joint payee, and deposited it to his bank appropriating the funds. Eventually I sued the attorney for my 1/2 plus other funds he owed, and during the trial, discovered what he did with the check, ie, depositing it into his bank. After court that day, I took the copy of the check to the bank where he deposited the check and demanded 1/2 of it, which, as expected they told me to shove it. I did, right into the Superior Court for “refusal to return stolen funds” upon my demand, seeking 3 times damages. They demurred, and demurrer overruled. Then, I recovered my 1/2 from the attorney and the bank then move to dismiss as I had recovered my 1/2 damages from the attorney. No, I argued, I was entitled to 3 times damages, and that met that after the credit for my 1/2 from the attorney, they just owed the remaining 2 x damages. The trial court agreed, and they took it up the Court of Appeal on a writ, which was denied (the Court of Appeal agreed). The bank then settled the case—no reported opinions. Why? Because the bank could be liable for the millions they receive on forged check all to the victims. Would you want it known.

    I have used in in other cases. It is a great tool.

    Please don’t contact me, I’m retiring.

  5. What is the statute of limitations for code 496c (and therefore, going over treble damages)? I see it section 338.c.1 it could be three years, or based on Section 337, enforcing the contract, is four years. (I am a lay person, and am considering suing, but it has been more than 3 years, but less than 4 years, principal amount is $14k, so not really worth Civil court, unless I can get treble damages.)

    • I always assume everything has a one year statute of limitations, and that usually keeps me out of trouble. Why wait more than a year to sue?

      As to section 496(c) (the parentheses are important, because 496c is something completely different), I’ve never had a need to research the issue, but I think the deadline would be three years. The SOL for a contract breach is not controlling. But don’t quote me.

  6. Understand that on 496(c) the statute applies not only to those who steal the property, but those who have possession and then, upon demand of the owner, refuses to turn the property over to the rightful owners. The statute thus would start upon the demand by the owner against the holder of the property, such being the act in violation of the statute which creates the cause of action. That can be years later than the actual stealing of the property and actually can be at any time.

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