Metropolitan News-Enterprise

 

Friday, July 22, 2022

 

Page 1

 

California Supreme Court:

Party in Default Has Standing to Make New-Trial Motion

Cantil-Sakauye Says Such a Motion Is Authorized Based on Claim of Excessive Damages; Declares That

Damages May Be Trebled, Punitive Damages Added, Where Partner Misappropriates Company Funds

 

By a MetNews Staff Writer

 

A party that is in default has standing to seek a new trial based on an award of excessive damages, the California Supreme Court held yesterday, declaring also in the opinion that treble damages and attorney fees may be recovered under a theft statute based on a partner’s appropriation of company funds.

There was initially a $12 million default award, lowered by the court to $7 million after a new trial was granted, in part, on Sept. 28, 2016, by Los Angeles Superior Court Judge Stephanie Bowick.

Chief Justice Tani Cantil-Sakauye authored the opinion for a unanimous court. Justice Joshua P. Groban added thoughts in a concurring opinion in which Justice Leondra Kruger joined.

The court affirmed a March 3, 2020 opinion by Div. Two of the Court of Appeal for this district to the extent that it recognized the standing of a defaulting party to seek a new trial on the ground that the damage award constituted an error in law. However, it reversed Div. Two’s determination, set forth in an opinion by Justice Brian M. Hoffstadt, that Penal Code §496(c) “only authorizes an award of treble damages or attorney fees when the underlying conduct involves trafficking in stolen goods,” not the diversion of business funds.

Hoffstadt’s View

With respect to standing, Hoffstadt noted that Code of Civil Procedure §657 authorizes a new-trial motion based on an “[e]rror in law, occurring at the trial and excepted to by the party making the application.” He wrote:

“But may a ‘party’ in default move for a new trial when, by virtue of the default, there was no trial in the first place?

“We conclude that the answer is ‘yes,’ at least when the party is seeking to move for a new trial on the ground that the court made an ‘error in law’ in calculating damages.”

Hoffstadt noted that there are decisions to contrary but remarked:

“We respectfully part ways with these decisions, which did not consider the rationale we adopt—namely, that there is no reason to deprive the trial court of the power to consider challenges to the excessiveness or legal propriety of damages when those very same issues can undoubtedly be raised on appeal.”

 Cantil-Sakauye Agrees

The chief justice said the Supreme Court’s 1974 decision in Shroeder v. Auto Driveway Co., which conditioned a challenge on appeal of a damage award on a motion for a new trial having been made, “foreshadowed the determination reached by the appellate court below,” declaring:

“Efficiency and prudent allocation of judicial resources counsel us to apply the same reasoning in the circumstances of this case, and to agree with the Court of Appeal below that defendants’ challenges to the damages awarded in the original and amended default judgments are properly viewed as ‘[e]rror[s] in law’ under Code of Civil Procedure section 657, subdivision 7.”

She commented:

“Quite simply, it would waste resources to require an appellate court to resolve an issue that can and should be resolved at the trial court level.”

Penal Code §496

 

Penal Code §496(a) provides that “[e]very 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” is guilty of a crime, and subd. (c) says:

“Any person who has been injured by a violation of subdivision (a)…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.”

Courts of Appeal—most recently the Fifth District in its 2019 decision in Switzer v. Wood—have found the statute applicable to business torts.

Div. Two’s Opinion

In expressing a contrary view, Hoffstadt noted that the section “is entitled ‘Receiving or concealing stolen property.’ ” Treble damages “are not available” under the statute, he wrote, “in cases where the plaintiff merely alleges and proves conduct involving fraud, misrepresentation, conversion, or some other type of theft that does not involve ‘stolen’ property.”

The justice reasoned that a contrary view would “transmogrify the law of remedies” for torts involving theft, pointing out:

“Until now, the damages remedy for these torts has been limited to the amount of damages actually caused by the fraud, misrepresentation, conversion or breach of fiduciary duty.”

He added that “reading Penal Code section 496 to apply in theft-related tort cases would effectively repeal the punitive damages statutes,” explaining:

“Until now, a plaintiff seeking greater than compensatory damages had to prove, by clear and convincing evidence, that the defendant was ‘guilty of oppression, fraud, or malice.’…If Penal Code section 496 applied to these torts, a plaintiff could obtain treble damages merely by proving the tort itself by a preponderance of the evidence.”

Legislature’s Intent

Hoffstadt added:

“Because we cannot presume that our Legislature intended to so significantly alter the universe of tort remedies without saying anything about its desire to do so, we conclude that Penal Code section 496’s language sweeps more broadly than its intent and hold that it does not provide the remedy of treble damages for torts not involving stolen property.”

He also said that by applying §496 to torts would authorize an award of attorney fees “in nearly every tort case involving fraud, misrepresentation, or breach of fiduciary duty, thereby creating a gaping exception to the general rule against such fee shifting.”

Supreme Court’s Conclusion

Cantil-Sakauye proclaimed the statute to be unambiguous and that the “relevant language covers fraudulent diversion of partnership funds.”

She said that the plaintiff “qualifies under section 496(c) as ‘[a]ny person who has been injured by a violation of subdivision (a)’—and hence is entitled to “bring an action for three times the amount of actual damages, if any...and reasonable attorney’s fees.”

The chief justice cautioned:

“Although we are not asked here to determine whether plaintiff would have been able to prove theft, we observe that not all commercial or consumer disputes alleging that a defendant obtained money or property through fraud, misrepresentation, or breach of a contractual promise will amount to a theft. To prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’”

In his separate opinion, Groban highlighted that point and opined that “the majority opinion’s interpretation of section 496 will not allow for the recovery of treble damages in all, or even most, consumer or commercial disputes involving tort or breach of contract claims.”

There was initially a $12 million default award, lowered by the court to $7 million after a new trial was granted on Sept. 28, 2016, by Los Angeles Superior Court Judge Stephanie Bowick.

Plaintiff’s Attorney Comments

Robert Cooper of the downtown Los Angeles firm of Wilson, Elser, Moskowitz, Edelman & Dicker LLP, an attorney for the plaintiff, Siry Investment L.P., said yesterday:

“We are extremely delighted with the Supreme Court’s rejection of the lower court’s narrow interpretation of such a critical statute. The Supreme Court’s seminal decision confirms our view that a business partner that misappropriates partnership property is subject to triple damages and attorney fees. This landmark decision has significant impact on numerous pending lawsuits throughout California, eliminating the prior conflict created by different appellate courts.”

“We were particularly pleased the court accepted this case for review, even though 96% of all petitions for review are summarily denied. The various parties have been litigating for nearly 20 years in this case, and we look forward to having final closure in this case shortly. Once the appellate attorneys’ fees and interest calculations are resolved on remand, we expect another eight-figure judgment to be entered.”

The case is Siry Investment v. Farkhondehpour, 2022 S.O.S. 3181.

Santa Monica attorney Richard L. Knickerbocker, who represented three of the defendants, had this to say:

“Today, we won in part and lost in part. We are very pleased with the Supreme Court’s decision affirming a defaulting party’s right to move for a new trial. The trial judge is always the most familiar with the proceedings and the facts of the particular case to allow him or her to correct errors in the judgment short of an appeal. That saves the congested courts otherwise unnecessary appeals and the litigants otherwise related unnecessary fees and costs.”

He added:

“As to the Penal Code section 496c, the Supreme Court looked at the plain language of the statute and found it to be unambiguous and, thus, to apply to all forms of theft. The Supreme Court, however, must have also agreed with the reasoning of our Court of Appeal since today’s opinion is inviting the Legislature to review and consider our Court of Appeal’s decision to see if the statute should be amended in accordance therewith, meaning to limit the application of section 496c. We hope the Legislature will act and get a second look at the statute because, as it stands, it’s overbroad and has been widely abused by litigants and attorneys who are pleading a 496c cause of action whenever there is any claim of money owed.”

 

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