Trade Partners Beware: Siry Decision Likely Gives Trade Disputes More Bite | payne and fears
The California Supreme Court issued a ruling last week in Siry Investments vs. Saeed Farkhondehpour this could significantly expand the remedies available to partners or other parties to a business dispute who are victims of financial theft related to company assets and funds. Section 496(a) criminalizes the receipt of stolen property and provides for treble damages and attorneys’ fees for the party who suffers the loss. In a surprise opinion, the Supreme Court has ruled that Article 496 of the Penal Code can apply whenever there is misappropriation of money or assets from a partnership, a liability company Limited or another company, provided that the requisite criminal intent to deprive others of such funds can be shown. For the applicant in Siry, the application of Article 496 increased the result by several million. The Siry The decision will likely make available to plaintiffs in certain trade disputes remedies for treble damages and attorneys’ fees that are not generally available for similar claims in other contexts.
Partners have diverted partnership funds for their own use
The parties in Siry 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 partnership’s cash distributions with partner-specific percentages.
But the defendant partners created a separate entity and demanded that the tenants of the building pay rent to it instead of the general partnership. The defendants thus misappropriated the rental income of the partnership. Defendants also began charging personal and other non-partnership expenses. The net effect of these actions was to order the partnership to underpay the plaintiff for its cash distributions. The two defendants ensured that the plaintiff was unaware of the underpayments by misrepresenting to him the rental income of the building and the expenses of the partnership, by lying to him about what had to be his cash distributions.
Plaintiff sued Defendants for underpaying Plaintiff and improperly diverting the partnership’s rental income to their own coffers.
Supreme Court applies Article 496 of the Penal Code to partnership dispute
The Supreme Court analyzed Section 496 and the bill’s enactment history to conclude that a plaintiff in a trade dispute may recover treble damages and attorneys’ fees under Section 496. (c) where property, including misappropriated partnership funds or distributions, has been obtained in any manner that constitutes theft. The Court determined that the definition of theft set out in Section 484 of the Penal Code, which defines theft as knowingly and willfully taking money belonging to another through false representation or false pretense, would apply to a civil action under section 496(c). He concluded that section 496(c) applies to conduct in Siry because the unambiguous legal provision covers fraudulent misappropriation of partnership funds. In doing so, the Court rejected a limited view of section 496.
The Court clarified that any commercial or consumer disputes alleging that a defendant obtained money or property by fraud, misrepresentation or breach of a contractual promise will not constitute theft within the meaning of the law. Instead, to prove theft under Section 496, a plaintiff must establish criminal intent on the part of the defendant beyond “mere proof of actual non-performance or falsity.” This requirement prevents “ordinary commercial defects” from turning into theft. If false statements or broken promises “are made innocently or inadvertently, they can no more form the basis of a lawsuit for obtaining property under false pretenses than an innocent breach of contract.” In Sirythe Court found that the defendants did not act innocently or inadvertently, but with careful planning and deliberation reflecting the required criminal intent.
Implications for future litigants
Future litigants should consider the potential application of Section 496 of the Penal Code to disputes between partners of LLC members.
Siry now makes clear that Section 496 of the Penal Code can apply whenever there is a misappropriation of money or assets from a partnership, LLC or other business provided the required intent to deprive others of these funds can be demonstrated. For future litigation between business partners, parties should be aware that treble damages and attorneys’ fees may be available if the requisite wrongful intent to steal or embezzle partners’ partnership or LLC funds or members of the LLC can be demonstrated.