California Supreme Court Allows Treble Damages For Improper Limited Partnership Distributions

Section 496(a) of the California Penal Code criminalizes the receipt of stolen property.  Section 496(c) provides that a person injured by a violation of Section 496(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".   Neither statutory provision immediately comes to my mind in the case of diversions of limited partnership distributions.

Yet, in Siry Investment, L.P. v. Farkhondehpour, 2022 WL 2840312, the California Supreme Court recently held that Section 496(c) is unambiguous and covers "fraudulent diversion of partnership funds".   Unusually, the issue was before the court as a result of a default judgment and thus the defendants were deemed to have admitted all material allegations, including the allegation of theft.  Thus, the Court observed that not all commercial or consumer disputes alleging that a defendant obtained money or property through fraud, misrepresentation, or breach of contract will amount to theft.  According to the Court, the plaintiff must establish criminal intent beyond  mere proof of nonperformance or actual falsity.   Despite these cautionary words, I expect that the Court's holding will encourage more plaintiffs to seek treble damages and attorney's fees in commercial disputes.