Everything's a RICO!

Siry Investment L.P. v. Farkhondehpour, No. S262081 (Cal. Jul. 21, 2022)

This was a contentious case that resulted in a default judgment. The decision of the Court of Appeal addressed a whole bunch of issues. The Supreme Court granted review of two: (1) Can a defendant in default move for a new trial?; and (2) How broadly does Penal Code § 496(c), which permits the victim of theft or receipt of stolen property to bring a civil action to recover treble damages and attorneys’ fees, extend?

The first question is pretty easy and the Court’s ruling largely tracks that of the Court of Appeal. A defaulted defendant has the right to appeal certain things, which includes whether the trial court made an error of law in awarding damages after a prove up. That being the case, judicial economy supports the defendant’s being able to raise the same issue in a new trial motion. 

The second question is harder because the question is somewhat caught between text and policy. Read literally, the statutes permit a civil, treble damages with attorneys’ fees cause of action for any fact pattern that can be shoehorned into “theft.” And given that theft includes obtaining money by a false statement, that means § 496(c) creates an enhanced remedy for fraud, as well as a bunch of other torts and maybe even breach of contract, provided the requisite intent can be proven. 

That, however, is a seemingly massive expansion of civil remedies. And notably, § 496(c) has been on the books for 50 years, but nobody thought it worked that way until around 2009, when the first published case about it came down. The Court of Appeal came down on the side of policy. It declined to read the statute literally because that would imply that the Legislature intended “to overthrow long-established principles of law” without a clear statement that it intended to do so. 

But the Supreme Court here chooses text over policy. The Court finds that, although the policy concerns “give pause,” the result to be obtained from a literal reading of the unambiguous statutes is not so absurd that the text can be waived away. The Court notes that, if the Legislature didn’t mean what it said, it is always free to amend the statute. After all, resolving policy concerns is a fundamentally legislative task. The court thus funds that the fact pattern before it—the defendant had fraudulently diverted cash distributions from a partnership—satisfied § 496(c).

Justice Groban, joined by Justice Kruger, concurs. He expresses his belief that, mostly due to the need to prove the mens rea for theft, the Court’s interpretation of § 496(c) is unlikely to create a sea change by massively expanding remedies in ordinary commercial or consumer law cases.

Court of Appeal affirmed in part and reversed in part.

Justice Groban’s hopefulness aside, this is a big deal. I get why the Court picked the path it did. It’s literally what the statute says. 

But it’s nonetheless pretty strong medicine. The Court essentially blessed a RICO remedy for most common law fraud. If I am a plaintiff (and sometimes I am), I am going to have a lot of motive to cram the fact pattern of any dispute into something that can meet one of the many species of “theft” in the Penal Code.

 

UCL Penalties Case Goes to a Jury

Nationwide Biweekly Admin., Inc. v. Superior Court, No. A150264 (D1d1 Jun 12, 2018)

Before yesterday, had I been asked whether there’s a right to jury trial in an case brought by a public prosecutor seeking statutory penalties under the Unfair Competition Law, off of the top of my head, I would have guessed no. I vaguely recall having read some cases that say that. Plus the UCL is, so far as California state law goes, a beast of equity. That’s probably what the Court of Appeal first thought too, when it summarily denied a writ Defendant in this case took from the superior court’s striking their jury trail demand. But the Supreme Court granted review and transferred the case back to the Court of Appeal, ordering an assessment of the merits.

And when they got into the merit of it, it turns out everyone’s assumptions were wrong. In a solid, thoughtful analysis, the Court holds that an enforcement action for penalties under the UCL is more closely equivalent to an action at law in the common law of England in 1850 than something at equity. (That’s the test for when there’s a jury trial right under the state constitution.) The Court primarily relies on a U.S. Supreme Court case, Tull v. United States, 481 U.S. 412 (1987) and an older decision of the California Supreme Court, People v. One 1941 Chevrolet Coupe, 37 Cal.2d 283 (1951) to hold that the gist of an enforcement action seeking statutory penalties is to punish, which is a legal, not equitable, practice. The Court holds however, that the jury right applies only to liability. Much like a criminal sentence, a calculation of civil penalties is classically within the discretionary power of the court.

As I recollected, there are a handful of Court of Appeal cases that seemingly go the other way. But the Court plows through them, showing that: (1) they deny a right to jury trial under the Sixth Amendment (although a civil penalties case is punitive, it is not criminal); or (2) they contain cursory or no analysis, or blindly cite to the Sixth Amendment cases, to deny the right without doing any requisite Seventh Amendment (or in California, Article I, § 16) analysis that looks to remedies and equivalents at common law. Finding no other case that has actually done the work, the Court finds these cases unconvincing.

Tthe People also suggest that they could sever off the penalties issue and have their demand for injunctive relief tried first to the court. Because that would necessarily entail a liability ruling, doing so would effectively foreclose Defendant’s jury trial right on liability in any later trial on penalties. But the Court of Appeal rejects that argument. It is true that in California procedure (unlike federal procedure) a court can try a equitable cause of action first, with the court’s fact finding in that trial being preclusive on a later jury trial. Although there’s good authority to do that on a cause-of-action-by-cause-of-action basis, nothing supports to ability to so finely parse the legal and equitable remedies that flow from a single claim.

Writ granted.