Playing Field Tilts in Business Tort Cases

By John Patton

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A California Court of Appeal ruling is changing how the parties in a business dispute calculate whether to go to court by holding out hope of collecting treble damages plus attorney fees.

Normally, parties to a civil lawsuit are confined to recovery of the actual damages that they suffered due to another’s wrongful conduct, and must bear their own legal fees in the litigation process. The most common exception is a contract entitling the prevailing party to recover attorney’s fees.

These rules typically turn the decision on whether to file a lawsuit into an economic one, in which the risks and costs of pursuing litigation are balanced against the potential rewards of successfully pursuing such relief.  Few practical business owners or individuals want to spend more money pursuing justice than they are likely to recover at the end of the litigation process, and this is a major factor to be considered when a dispute arises.

But a fairly recent decision of the California Court of Appeal, interpreting a criminal statute, alters the playing field in civil cases where the claimant can prove the deprivation of money or property by false pretenses.  Such situations could have broad application to tort cases of fraud, cases not uncommon to business and other disputes.  The typical business tort case often involves claims that one party misrepresented something that caused the other to enter into the transaction and suffer loss.

In Bell v. Feibush (2013) 212 Cal.App.4th 1041, a civil case in which a lender sued a borrower for obtaining a loan under false pretenses, the court examined Section 496 of the California Penal Code, concerning the crime of receiving stolen property.  Bell reconfirmed prior criminal cases holding that a party who is a principal in a theft of property may also be guilty of receiving stolen property.  It also held that money, or anything else that can be the subject of a theft, constitutes “property” for purposes of the statute.  It also found that a prior criminal conviction was not required to support a finding of civil liability under Section 496.  Based on these holdings, the court found that the defendant had obtained property from the plaintiff by false pretenses, and thus was guilty of receiving stolen property under Section 496.  It then examined subpart (c) of Section 496, which authorizes any victim of such a crime to bring an action to recover “three times the amount of actual damages… sustained…, costs of suit, and reasonable attorney’s fees.”

Bell holds that this provision applies to a civil suit for fraud based upon the defendant’s obtaining money from the plaintiff by use of false pretenses. It also holds that a prior criminal conviction is not required to support a finding of civil liability under Section 496, or for imposition of these civil remedies.  Therefore, even without a contract that provided for recovery of legal fees by the prevailing party, the plaintiff in Bell was entitled to recover her legal fees, and three times the amount of the loan procured by the fraud, among other recoveries.

This holding means that a defendant in a civil action for fraud can be exposed to treble damages and liability for the plaintiff’s legal fees if the plaintiff can prove that the defendant obtained property under false pretenses, and that this caused harm to the plaintiff.  In other words, a plaintiff utilizing a claim under Section 496 may be able to recover additional damages, plus his or her attorney’s fees, where such relief was not previously recoverable.  The holding of Bell means that victims of fraud may be able to economically justify a civil action for recovery of their losses due to the fraud, where such an action previously might not have made business sense.

Bell also means that the court system will likely see the increased use of Penal Code Section 496 in the civil context, and that the Legislature will likely be asked by insurance companies or the business community to reexamine how far its provisions should go toward penalizing such conduct, or rewarding parties with extra damages in such cases.  But absent action by the Legislature or the California Supreme Court, Bell is the rule of law for now in California, and a powerful aid to victims of fraud that tips the existing playing field in their favor.

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John H. Patton, a partner at Patton & Sullivan, specializes in business and real estate law at the trial and appellate levels.

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