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Can the Criminal Law Concept of “Receiving Stolen Property” Apply to LLC Disputes?

In the LLC Jungle, allegations of “misappropriation” are common.  LLC members and managers sometimes improperly divert the LLC’s funds and property for their own personal use.  That bad behavior usually leads to claims of breach of fiduciary duty and breach of the operating agreement.

But at its core, such conduct is also “theft.”  As such, can the harsh Penal Code remedies for “receiving stolen property” apply?

Under one of 2019’s most unusual LLC-related published Court of Appeal opinions — Switzer v. Wood — California’s Fifth Appellate District held “yes.”

Facts: LLC managing member steals LLC’s funds and property

Ted Switzer and Robert Clark “Sonny” Wood II formed a short-lived LLC for the purpose of selling medical devices.  According to Switzer’s allegations, not long after the business was formed Wood stole “large sums of money or income belonging to Switzer” and valuable property belonging to the LLC (spinal implant devices).  Switzer sued, alleging the typical claims both directly and derivatively — e.g., breach of fiduciary duty, breach of contract, fraud, and others — but also alleged that Woods’ conduct violated Penal Code section 496.

Penal Code section 496(a) provides for criminal punishment for “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 the property to be so stolen or obtained[.]”

Penal Code section 496(c) then provides: “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.”

Trial court judgment: Penal Code remedies don’t apply to “business disputes”

After a 21-day jury trial, the jury returned a verdict in favor of Switzer and against Wood.  The jury found that the actual damages caused by Wood amounted to $1,289,165.00 on the direct claims, and an additional $401,232 on the derivative claims.

In post-trial proceedings, Switzer submitted a proposed judgment that, pursuant to Penal Code section 496(c), included an award of three times the amount of actual damages determined by the jury.  Switzer argued this remedy was mandatory under section 496(c).  Switzer also filed a motion for attorney fees under section 496(c).

Wood objected, arguing the statute was not intended to apply to “ordinary business disputes,” where other remedies were available.

The trial court entered judgment in favor of Switzer, but refused to apply the enhanced remedies under Penal Code section 496(c).  The trial court reasoned that allowing treble damages in standard business disputes “would lead to an unreasonable result.”  In the trial court’s view, the Legislature could not have intended section 496 to apply in the case of an ordinary business dispute.

Switzer appealed.

Court of Appeal Opinion: Penal Code remedies apply

The Court of Appeal reversed, holding that Penal Code section 496 applied.

The court held:

A criminal conviction is not a prerequisite to recovery of treble damages.  All that is required for civil liability to attach under section 496(c), including entitlement to treble damages, is that a ‘violation’ of subdivision (a) or (b) of section 496 is found to have occurred. … A violation may be found to have occurred if the person engaged in the conduct described in the statute.

The court found no reason to deviate from the plain meaning of the statutory language, stating: “The wording of the statute makes no exception for cases involving preexisting business relationships ….  Based on the plain wording of section 496(c), the Legislature apparently believed that any violation of section 496(a) …, if proven, would warrant the availability of treble damages.”  (Emphasis original.)

The court concluded that because the jury found that Wood’s conduct violated Penal Code section 496(a), Switzer was entitled to an award of three times his actual damages.

Lesson

“Receiving stolen property” can lead to civil remedies as well as criminal punishment.  If an LLC manager or member participates in the theft of the LLC’s property, they might be subjected to an award of treble damages and attorney fees under Penal Code section 496.

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