Civil litigators typically assert civil claims based on civil statutes. But in Siry Investment, L.P. v. Farkhondehpour, 13 Cal.5th 333 (2022) (“Siry”), the California Supreme Court held that the fraudulent diversion of funds can sometimes give rise to a claim for stolen property under Penal Code Section 496 (“Section 496”). Since then, there has been a marked increase in civil plaintiffs asserting Section 496 claims alongside civil fraud claims. More recent cases, however, have pared back the statute’s reach in important ways.
Section 496 Explained
Section 496(a) makes the receipt, concealment, or withholding of stolen property a criminal offense. Specifically, the statute imposes criminal liability on
“[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 …”
To establish a claim for receipt of stolen property under Section 496, a plaintiff must prove: “(1) the property was stolen; (2) the defendant knew it was stolen; and (3) the defendant had possession of it.” In re Anthony J., 117 Cal.App.4th 718, 728 (2004). “Although it is not a specific intent crime, a necessary element of the offense of receiving stolen property is actual knowledge of the stolen character of the property.” People v. Rodriguez, 177 Cal.App.3rd 174, 179 (1986).
The kicker? Subsection (c) of the statute allows any person injured by a violation of Section 496(a) to bring an action for three times the amount of actual damages, costs of suit, and reasonable attorney’s fees.
Plaintiff Must Both Plead and Prove Defendant’s Knowledge that the Funds Were Stolen
Two post-Siry cases emphasize that a Section 496 plaintiff must plead and prove the defendant’s knowledge that the property they received was stolen.
LA Tech and Consulting, LLC v. American Express Company involved a dispute over money that was withdrawn from the plaintiff’s account by third-party Doe Defendants without plaintiff’s approval. Case No. SA CV 22-01213-DOC-KES, 2022 WL 17350939 (C.D. Cal. Nov. 28, 2022), at *1, aff’d on this issue by LA Tech and Consulting, LLC v. American Express Company, No. 22-56221, 2023 WL 8166780 (9th Cir. Nov. 24, 2023). Allegedly, AMEX’s online payment system improperly allowed the Does to transfer money from plaintiff’s account to the Does’ AMEX credit line. Id. at *1. AMEX moved to dismiss the Section 496 claim, arguing that the operative pleading insufficiently alleged that AMEX “knowingly received, withheld, or concealed stolen property.” Id. at *2.
Plaintiff countered that it need not plead knowledge that the funds were stolen, as that issue is best left to the jury to decide, and in any event, it had sufficiently pled AMEX’s knowledge that it received stolen funds because it alleged that (1) AMEX designed a system that only require a cardholder to obtain someone’s check to link their checking account and authorize payment, and (2) AMEX falsely represented that it was authorized by plaintiff to transfer funds to itself in plaintiff’s name. Id. at *3.
The court rejected both of plaintiff’s arguments, noting first that “failure to plead facts sufficient to establish requisite knowledge under Section 496 is fatal at the pleading stage.” Id. at *4 (citing Freeney v. Bank of Am. Corp., No. CV 15-2376-JGB-PJWX, 2016 WL 5897773, at *12 (C.D. Cal. Aug. 4, 2016), judgment entered sub nom. Freeney v. Bank of Am. [C]orp., No. EDCV152376JGBPJWX, 2017 WL 382228 (C.D. Cal. Jan. 25, 2017) (dismissing Section 496 claim because plaintiffs did not plausibly allege that defendant had actual knowledge that the transfers associated with the accounts involved stolen money). The court further recognized that the fact AMEX had allegedly designed a system that made third-party fraud a “mere possibility” – without more – was not sufficient to meet the knowledge requirement. Id.
Similarly, in Tu Le v. Prestige Community Credit Union, defendant credit union Prestige moved for summary judgment on a Section 496 claim, arguing that plaintiffs had failed to present facts suggesting that Prestige knew a non-profit church account holder (“Church”) was stealing investor funds. Case No. 8:22-cv-00259-JVS, 2023 WL 9689133 (C.D. Cal. Nov. 6, 2023). Plaintiffs argued that Prestige knew, or should have known, about the Church President’s financial fraud convictions. Id. at *11. The court found otherwise as plaintiffs had failed to show how knowledge of that conviction resulted in Prestige’s knowledge that the Church obtained its money by false pretenses. Id.
One-Year Statute of Limitations Applies to Recovery of Treble Damages Under Section 496
Want to take advantage of treble damages under Section 496? Better move fast.
In both the Tu Le case discussed above, and May v. Google LLC, the plaintiffs argued that the three-year statute of limitations set forth in CCP § 338(a) should apply to a Section 496 treble damages claim. 2023 WL 9689133 at *9; Case No. 24-cv-01314-BLF, 2024 WL 4681604, *8 (N.D. Cal. Nov. 4, 2024). In both cases, the plaintiff lost, and the courts applied a one-year statute of limitations instead.
As the Tu Le court explained: “[T]he settled rule in California is that statutes which provide for recovery of damages additional to actual losses incurred, such as double or treble damages, are considered penal in nature[], and thus governed by one-year period of limitations stated in [CCP] § 340[a].” 2023 WL 9689133 at *9. See also May, 2024 WL 4681604 at *8 (same). The May court was unpersuaded by dicta in Siry because the Siry court did not address the statute of limitations for treble-damages claims under Section 496.
The Presumption Against Extraterritoriality May Bar a Section 496 Claim
A pair of post-Siry decisions lay the groundwork for dismissal of a Section 496 claim where the receipt, withholding or concealment of stolen property occurs outside of California.
Penal Code § 27(a)(1) restricts criminal liability in California to those “persons who commit, in whole or in part, any crime within th[e] state.” California has a presumption against extraterritoriality, under which a state statute is considered inapplicable to “occurrences outside the state, ... unless such intention [of the statute’s extraterritoriality] is clearly expressed or reasonably to be inferred from the language of the act or from its purpose, subject matter or history.” Sullivan v. Oracle Corp., 51 Cal.4th 1191, 1207 (2011).
The court in Dfinity USA Rsch. LLC v. Bravick, expressly considered the extraterritorial reach of Section 496 and held that “the state legislature did not intend for [Section 496(a)] to broadly reach other conduct in other states.” No. 22-cv-03732-EJD, 2023 WL 2717252, at *4 (N.D. Cal. Mar. 29, 2023). Accordingly, the Dfinity court dismissed plaintiff’s Section 496 against a Michigan resident defendant who failed to return equipment belonging to his employer Dfinity (a Delaware company based in California) that he was originally given while working for the company in California. Id. at *5. Similarly, in Scosche Industries, Inc. v. S & T Montgomery Distributing, Inc., the Court considered whether defendants’ preparation of fraudulent bills in Alabama that were sent to a corporation located in California could serve as the basis for a Section 496 Claim. Case No. 2:22-cv-09030-SVW-MAA, 2024 WL 4003894 (C.D. Cal. June 5, 2024). Because the alleged fraudulent act itself occurred outside the state, the Court reasoned that Section 496 could only apply if defendants’ direction of fraudulent bills created out of state to a corporation located in California could be “considered a more than de minimis preparatory act which occurred in California.” Id. at *4.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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