Filed 3/3/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
SIRY INVESTMENT, L.P., B277750
(Consolidated with B279009
Plaintiff and Appellant, and B285904)
v. (Los Angeles County
Super. Ct. No. BC372362)
SAEED FARKHONDEHPOUR et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of Los
Angeles County. Stephanie M. Bowick, Judge; and Edward B.
Moreton, Judge. Affirmed as modified.
Wilson, Elser, Moskowitz, Edelman & Dicker, Gregory D.
Hagen, and Robert Cooper for Plaintiff and Appellant.
Richard L. Knickerbocker for Defendants and Appellants
Saeed Farkhondehpour, individually and as trustee of the 1994
Farkhondehpour Family Trust, and 416 South Wall Street, Inc.
Fisher & Wolfe and David Fisher for Defendant and
Appellant Morad Neman, individually and as former trustee of
the Neman Family Irrevocable Trust and the Yedidia
Investments Defined Benefit Plan.
Greines Martin Stein & Richland, Robert A. Olson, and
Edward L. Xanders for Defendant and Appellant Morad Neman,
individually and as former trustee of the Neman Family
Irrevocable Trust and the Yedidia Investments Defined Benefit
Plan.
******
This is the fourth appeal in this longstanding lawsuit, and
challenges a $7 million default judgment entered after the trial
court issued terminating sanctions. Among the many issues
raised by the parties on appeal, three present significant legal
questions: (1) May a trial court issue terminating sanctions when
the discovery a party contumaciously refuses to provide
encompasses fewer than all the issues in a case; (2) May a party
in default file a motion for new trial raising “[e]rror[s] in law,”
including the inapplicability of certain remedies under the
allegations as pled; and (3) May a trial court award treble
damages and attorney fees under Penal Code section 496,
subdivision (c), in a case involving the fraudulent diversion of
business funds rather than trafficking in stolen goods?
On the first question, we conclude that a trial court is not
foreclosed from issuing terminating sanctions just because the
underlying discovery encompasses only a subset of the issues in
the case. On the second question, we conclude that a party
against whom a default has been entered may file a motion for
new trial attacking the default judgment as containing “error[s]
in law.” And on the third question, we conclude that Penal Code
section 496, subdivision (c) only authorizes an award of treble
damages or attorney fees when the underlying conduct involves
2
trafficking in stolen goods; in so doing, we respectfully part ways
with Switzer v. Wood (2019) 35 Cal.App.5th 116 (Switzer), which
holds to the contrary.
After considering all of the parties’ arguments in these
consolidated cross-appeals, we affirm the entry of terminating
sanctions but modify the judgment to eliminate the awards of
treble damages and attorney fees.
FACTS AND PROCEDURAL HISTORY
1
I. Facts
In 1998, Moe Siry, Saeed Farkhondehpour
(Farkhondehpour), and Morad Neman (Neman) formed a limited
partnership to renovate and lease space in a mixed-use building
in downtown Los Angeles. The partnership agreement named
one general partner (namely, 416 South Wall Street, Inc. (416
South Wall Street), of which Farkhondehpour was president) and
four limited partners (namely, Siry Investment, L.P. (Siry), the
1993 Farkhondehpour Family Trust (of which Farkhondehpour
was trustee), the Neman Family Irrevocable Trust (of which
Neman was trustee), and the Yedidia Investment Defined Benefit
Plan Trust (of which Neman was also trustee)). The agreement
divvied up the partnership’s cash distributions as follows: Siry
was to receive 39.60 percent; the Farkhondehpour Family Trust,
29.70 percent; the Neman Family Irrevocable Trust, 19.80
percent; and the Yedidia plan, 9.90 percent. A separate entity—
1 As is appropriate on review of a default judgment, we draw
these facts from the allegations of the operative fifth amended
complaint, as well as documents subject to judicial notice. (Los
Defensores, Inc. v. Gomez (2014) 223 Cal.App.4th 377, 392-393
(Los Defensores); Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6
(Evans).)
3
namely, Investment Consultants, LLC (Investment
Consultants)—was responsible for acting as property manager,
for making the required cash distributions, and for managing the
renovations.
In 2003, Farkhondehpour, Neman, and 416 South Wall
Street created an entity named DTLA, required the building’s
tenants to pay their rent to DTLA, and through these means
started to “improperly divert rental income away from the
. . . [limited] partnership and into DTLA.” Farkhondehpour and
Neman also began to charge personal and other non-partnership
expenses to the partnership. The net effect of these actions was
to direct Investment Consultants to underpay Siry its cash
distributions. What is more, Farkhondehpour and Neman
ensured that Siry remained unaware of the underpayments by
misrepresenting to Siry the building’s rental income and the
partnership’s expenses, effectively lying to Siry about what its
cash distributions should have been.
II. Procedural Background
A. Siry’s lawsuit, first trial and reversal
In June 2007, Siry sued Neman, Farkhondehpour, 416
South Wall Street, and the trusts over which they were trustees
(collectively, defendants) for underpaying Siry and improperly
2
diverting the partnership’s rental income to their own coffers.
2 Siry also sued the limited partnership, but it was not
dismissed as part of the terminating sanctions. The partnership
had since been dissolved, and Siry’s prosecution of the action
presumed that the partnership was effectively dismissed. We
presume the same.
This was the second lawsuit arising out of the partnership.
In 2003, Farkhondehpour and Neman sued Siry for breach of a
4
The matter proceeded to a jury trial in October 2009. At
that time, Siry’s operative second amended complaint sought (1)
dissolution and winding up of the limited partnership, (2) an
accounting, (3) damages for breach of the agreement, and (4)
damages for breach of fiduciary duty. The jury found for Siry,
awarding actual damages of $242,975 and punitive damages of
$1.1 million against Farkhondehpour and $2 million against
Neman. The trial court denied a subsequent motion for a new
trial, but reduced the punitive damages awards to $728,925
against each Farkhondehpour and Neman.
In December 2012, we reversed the jury’s verdict. (Siry
Inv., L.P. v. Farkhondehpour (Dec. 12, 2012, B223100, B234655)
2012 Cal.App.Unpub.LEXIS 9014 [nonpub opn.].) We did so
because the special verdict form submitted to the jury did not
require the jury to specify whether Farkhondehpour and Neman
were liable to Siry individually or as trustees of the various
trusts. This defect rendered the verdict “hopelessly ambiguous”
and, because “who is liable [was] key,” necessitated a remand for
a re-trial. (Id., at *2, *4, *6-*7, *11.)
B. Issuance of terminating sanctions on remand
On remand, Siry propounded two rounds of discovery on
defendants—a first round in October 2013 and a second in
January 2014. As discussed in more detail below, defendants did
not compliantly respond to the discovery or to the trial court’s
subsequent orders to respond to that discovery without objection.
different agreement, and Siry cross-claimed for underpayment of
cash distributions from the partnership. After an arbitrator
rejected Farkhondehpour’s and Neman’s claims, Siry settled its
remaining cross-claims in 2007, with the requirement that
Farkhondehpour and Neman provide an accounting (and, if
warranted, a redistribution) of the partnership’s profits.
5
In late June 2015, Siry moved for terminating sanctions
due to defendants’ steadfast refusal to respond to Siry’s discovery
requests or to obey the court’s multiple orders compelling
responses. At that time, Siry’s operative fifth amended complaint
sought (1) compensatory damages for breach of the partnership
agreement, breach of an oral contract, breach of fiduciary duty,
3
aiding and abetting breach of fiduciary duty, and fraud; (2)
punitive damages; (3) treble damages pursuant to Penal Code
section 496, subdivision (c); and (4) attorney fees under Penal
Code section 496 as well as Code of Civil Procedure section
4
1029.8 (on the ground that defendants were acting as unlicensed
contractors and unlicensed broker-dealers). Siry had not sought
treble damages or attorney fees prior to the first trial. Mere
weeks before filing its motion for terminating sanctions, Siry
served defendants with notices that it was seeking $4 million in
punitive damages against each of them.
Defendants opposed the motion with a brief and nearly
1,700 pages of exhibits. The court held two hearings and issued a
written order striking defendants’ answers and entering their
default.
C. Default prove-up and entry of judgment
Siry filed over 2,000 pages of documents in anticipation of
the hearing at which it would prove up its damages.
After reviewing the documentation, the court in July 2016
issued an order finding that Siry had “met its evidentiary burden
3 Siry later dismissed its breach of contract and aiding and
abetting claims.
4 All further statutory references are to the Code of Civil
Procedure unless otherwise indicated.
6
as to all claims.” The court went on to enter default judgment
against defendants awarding Siry (1) actual compensatory
damages of $956,487, comprised of $534,118 in actual damages
plus $422,369 in pre-judgment interest; (2) treble damages of
$2,869,461 pursuant to Penal Code section 496, subdivision (c);
(3) punitive damages of $4 million (plus $1 against only 416
South Wall Street); (4) attorney fees totaling $4,010,008.97; and
(5) costs of $187,109.13. The total came to $12,023,067.10.
D. Reduction of damages upon a new trial motion
In August 2016, defendants filed a motion for new trial on
several grounds. Among other things (and as pertinent to this
appeal), defendants argued that the trial court had awarded
excessive damages and committed errors in law by (1) awarding
treble damages under Penal Code section 496, subdivision (c); (2)
miscalculating the treble damages award; (3) awarding a
constitutionally excessive amount of punitive damages; (4)
allowing Siry to collect both treble damages and punitive
damages, rather than requiring Siry to elect between them; and
(5) awarding Siry attorney fees under Penal Code section 496,
subdivision (c) and section 1029.8.
After Siry opposed the motion, the trial court in September
2016 partially denied and partially granted the motion. As a
threshold matter, the court ruled that defendants had standing to
make a new trial motion notwithstanding the entry of default.
On the merits, the court ruled that (1) treble damages were
properly awarded under Penal Code section 496, subdivision (c),
but (2) it had miscalculated the treble damages award (and
reduced them to $1,912,974); (3) its award of $4 million in
punitive damages was constitutionally excessive (and reduced the
damages to $1 million each against Farkhondehpour and
7
Neman); (4) Siry would have to elect between treble damages and
punitive damages; and (5) attorney fees were properly awarded
under Penal Code section 496, subdivision (c) and section 1029.8.
In early October 2016, Siry filed a notice electing to collect
treble damages (rather than punitive damages).
In late October 2016, the court entered an amended
judgment against defendants, jointly and severally, awarding
Siry (1) actual compensatory damages of $956,487, comprised of
$534,118 in actual damages plus $422,369 in pre-judgment
interest; (2) treble damages of $1,912,974 pursuant to Penal Code
section 496, subdivision (c); (3) attorney fees totaling
$4,010,008.97; and (4) costs of $187,109.13. The total came to
$7,066,579.10.
E. Appeals
Defendants filed a timely appeal from the original default
judgment, and from the amended judgment. Siry filed a timely
5
cross-appeal from the amended judgment.
5 Siry and Neman also filed timely appeals from the trial
court’s October 2017 order reducing the amended judgment by
the amount of costs defendants were awarded for prevailing in
the appeal of the jury’s verdict. However, none of the parties
contests the merits of the offset in this consolidated appeal.
As Siry conceded at oral argument, it argued for the first
time in its cross-reply brief that the offset order to the amended
judgment effectively constitutes a second amended judgment and
that the failure of Farkhondehpour, the Farkhondehpour Trust,
and 416 South Wall Street to file notices of appeal from the offset
order precludes them from raising any challenges in these
consolidated cross-appeals. Apart from being waived (Garcia v.
McCutchen (1997) 16 Cal.4th 469, 482, fn. 10 (Garcia)
[arguments raised for the first time in a reply brief are waived]),
this argument lacks merit: A further notice of appeal is required
8
DISCUSSION
The issues raised in this appeal and cross-appeal fall into
two broad categories—namely, (1) defendants’ challenge to the
entry of terminating sanctions, and (2) the parties’ various
challenges to the amount of the default judgment. We will
address each separately.
I. Terminating Sanctions
Defendants argue that the trial court erred in issuing
terminating sanctions.
A. Pertinent facts
1. Siry’s discovery requests and the trial court’s
orders compelling responses to those requests
Following remand from this court’s ruling overturning the
2009 jury verdict, Siry propounded two rounds of discovery
relevant to this appeal.
a. October 2013 requests for document
production regarding liability
In mid-October 2013, Siry issued each of the defendants
requests to produce documents relating to, among other things,
(1) their “interest in” the partnership, the property, 416 South
Wall Street, DTLA, and Investment Consultants; (2) the
“compensation [each defendant] received from” the partnership,
416 South Wall Street, DTLA, and Investment Consultants; (3)
the partnership agreements, operating agreements, and
only when an amendment to a judgment “results in a substantial
modification of [the] judgment” (Dakota Payphone, LLC v.
Alcaraz (2011) 192 Cal.App.4th 493, 504 (Dakota)); an
“amend[ment] to add costs” is not a “substantial modification”
(id., at pp. 504-505; Sanchez v. Strickland (2011) 200 Cal.App.4th
758, 765); and the offset order merely offset costs. Neither logic
nor policy warrants treating an amendment subtracting costs
differently from one adding them.
9
dissolution documents for the partnership and 416 South Wall
Street; (4) the partnership’s operating expenses, profits, losses,
income, assets, expenditures and distributions; and (5) any
payments and transfers of assets to/from Investment
Consultants, DTLA, and 416 South Wall Street. Siry requested
documents created between January 1, 2002 and December 31,
2010.
Defendants did not respond to these requests by the
production deadline.
The trial court issued four separate orders compelling
defendants to respond to these requests and to do so without any
objections. First, on Valentine’s Day 2014, the court granted
Siry’s motion to compel and ordered defendants to produce
responsive documents by St. Patrick’s Day 2014. Second, on
April 4, 2014, the trial court confirmed that its first order
required the production to be without objections and set a new
deadline of April 23, 2014. Third, on July 15, 2014, the court
once again ordered defendants to produce documents without
objections. And, fourth, on October 9, 2014, the court refused to
reconsider its third order and adopted a discovery referee’s
recommendation that defendants produce responsive documents
without objection. The court also imposed monetary sanctions of
$10,000 against Farkhondehpour and his counsel (who, at that
time, was representing all of the defendants) for their
6
intransigence in not complying with the court’s prior orders.
6 We affirmed that order in Siry Inv., L.P. v.
Farkhondehpour (Sept. 5, 2017, amended Sept. 13, 2017,
B260560) 2017 Cal.App.Unpub.LEXIS 6325 [nonpub. opn.].
10
b. January 2014 requests for document
production and special interrogatories regarding financial
condition
In mid-January 2014, Siry issued each of the defendants (1)
a second set of requests for document production, and (2) special
interrogatories. The document requests sought, among other
things, “[a]ll documents that relate, refer or pertain to” each
defendant’s financial accounts, tangible personal property,
intangible personal property, retirement accounts, assets,
transfer of assets, liabilities, compensation received and owed,
tax records, real property interests, financial records, interest
and dividends, and monies owed. The special interrogatories
paralleled the document requests, seeking answers regarding
each of the above listed categories of documents. Siry requested
information from January 1, 2010 to mid-January 2014. Prior to
propounding this discovery on defendants’ financial condition,
Siry sought and obtained an order authorizing such discovery
pursuant to Civil Code section 3295, subdivision (c), and making
all responses due on February 15, 2014. At the hearing on
Valentine’s Day 2014, Siry voluntarily narrowed the scope of its
document requests and special interrogatories to only those
“financial [documents] presented to third parties.”
Defendants did not respond to the narrowed requests by
the due date.
The trial court issued two separate orders compelling
defendants to respond to these requests and to do so without any
objections. First, on April 4, 2014, the court ordered defendants
to “produce responsive documents” and answer the
interrogatories without objections by April 23, 2014. Second, on
October 9, 2014, the court adopted the discovery referee’s
11
recommendation that defendants respond to this discovery
without objection.
2. Defendants’ non-compliance with the trial
court’s orders
Notwithstanding the trial court’s express warning that
continued non-compliance “may result in . . . terminating
sanctions,” defendants never complied with any of the court’s
orders because, to this day, defendants have never produced
responsive documents or answered the interrogatories without
objections. Instead, defendants responded to the court’s orders
(1) by serving multiple “responses” that consisted entirely of
objections or non-compliant answers (such as “not applicable”)
without the disclosure of any documents or information, some of
which reached nearly 400 pages in length; (2) by repeatedly
challenging the court’s orders through motions for clarification,
reconsideration, relief from waiver, and a stay of discovery; or, as
to Farkhondehpour, (3) by making a last-minute offer to come
down to Farkhondehpour’s or Investment Consultants’s office to
7
search for documents. Worse yet, defendants’ counsel below
engaged in tactics that can only be characterized as
underhanded: He on July 3, 2014, filed an ex parte motion for
clarification of whether the court’s earlier April 4, 2014 order
required disclosure without objections, but the motion only cited
the portion of the court’s April 4 minute order setting forth its
tentative ruling (which said objections could be made) rather than
its actual, final ruling (which said they could not); Siry was not
present at the hearing on the ex parte motion (and thus unable to
point out this misrepresentation) because counsel had not
7 Neman has been represented by new counsel since the
terminating sanctions were entered.
12
properly given Siry notice of the ex parte filing; and, after the
court granted relief based on the representations in the ex parte
filing and Siry subsequently moved the court to reconsider that
relief in light of the falsity of those representations, counsel
opposed Siry’s motion.
3. Entry of terminating sanctions
In its July 2015 oral ruling and August 2015 written order,
the trial court granted Siry’s June 2015 motion for terminating
sanctions against defendants. Defendants’ “18 months of lack of
compliance” with the [discovery] requests and the multiple court
orders compelling responses to those requests, the court found,
constituted a “history” of “willful,” “flagrant,” “persistent[]” and
“deliberate” discovery “abuse.” In the court’s view, defendants’
practice of responding to Siry’s requests and the court’s orders
with “document dump[s]” and Farkhondehpour’s last-minute
offer to look in his and Investment Consultants’s warehouse for
responsive documents constituted “gamesmanship,” not
compliance. What is more, defendants’ “stall tactics” as to
discovery of “significance” to the merits of Siry’s claims and of
defendants’ financial wherewithal (as relevant to punitive
damages) “severely prejudiced” Siry “in [its] ability to properly
prepare for trial” within the statutory deadline for retrial
following remand. In light of this history of non-compliance, the
looming deadline for retrial, and ineffectiveness of the prior
monetary sanction and threat of terminating sanctions, the court
found that “a less severe sanction will clearly not now yield
compliance” because defendants’ “stall tactics would continue
even if the court were to come up with some type of lesser
sanction.”
B. Analysis
13
The Civil Discovery Act (section 2016.010 et seq.) imbues
trial courts with “broad” discretion to sanction the “misuse of the
discovery process.” (Lopez v. Watchtower Bible & Tract Society of
New York (2016) 246 Cal.App.4th 566, 604 (Lopez); § 2023.030.)
As pertinent here, “misuse of the discovery process” includes (1)
“[f]ailing to respond [to] or to submit to an authorized method of
discovery, (2) “[m]aking an evasive response to discovery,” and (3)
“[d]isobeying a court order to provide discovery.” (§ 2023.010,
subds. (d), (f) & (g).) When confronted with such misuse, a court
may impose (1) monetary sanctions (§ 2023.030, subd. (a)), (2)
sanctions that deem specified issues to be “established” or that
“prohibit” the non-compliant party from raising “opposing
. . . claims or defenses” (so-called “issue sanctions”) (id., subd. (b)),
(3) sanctions that preclude the admission of evidence (so-called
“eviden[tiary] sanction[s]”) (id., subd. (c)), or (4) “terminating
sanction[s],” which include “striking [a defendant’s] answer” (id.,
subd. (d)). We review an order granting terminating sanctions
for an abuse of discretion. (Lopez, at p. 604.) Critically, our task
is to assess “whether the trial court abused its discretion in
ordering dismissal as a sanction” (Laguna Auto Body v. Farmers
Ins. Exchange (1991) 231 Cal.App.3d 481, 491), rather than
assess “‘whether the trial court should have imposed a lesser
sanction’” (Liberty Mutual Fire Ins. Co. v. LcL Administrators,
Inc. (2008) 163 Cal.App.4th 1093, 1105). We review any
subsidiary factual findings for substantial evidence. (Department
of Forestry & Fire Protection v. Howell (2017) 18 Cal.App.5th 154,
192 (Howell).)
When faced with a party’s misuse of the discovery process,
a trial court “should” impose “[t]he penalty . . . appropriate to the
dereliction.” (Deyo v. Kilbourne (1978) 84 Cal.App.3d 771, 793
14
(Deyo); Reedy v. Bussell (2007) 148 Cal.App.4th 1272, 1293
(Reedy).) That is because the purpose of discovery sanctions is to
“protect the interests of the party entitled to[,] but denied[,]
discovery,” not to “punish[]” the non-compliant party or to “put
the prevailing party in a better position than he would have had
if he had obtained the discovery sought.” (Deyo, at p. 793;
Sherman v. Kinetic Concepts, Inc. (1998) 67 Cal.App.4th 1152,
1163 (Sherman); Doppes v. Bentley Motors, Inc. (2009) 174
Cal.App.4th 967, 992.) Proportionality is critical when it comes
to terminating sanctions because they altogether deny the non-
compliant party a hearing on the merits and thus implicate due
process. (Lopez, supra, 246 Cal.App.4th at p. 604.)
To ensure proportionality, trial courts should generally
take an “incremental” approach—that is, they should “attempt[]
less severe alternative[ sanctions]” unless the “record clearly
shows lesser sanctions would be ineffective.” (Lopez, supra, 246
Cal.App.4th at p. 604; Howell, supra, 18 Cal.App.5th at pp. 191-
192.) In calibrating the sanction that is appropriate for the
dereliction, trial courts must make a “meaningful effort to
determine whether . . . alternative[, lesser sanctions] would be
effective” at inducing the non-compliant party to produce the
discovery, thereby “protect[ing] the interests of the party entitled
to . . . discovery.” (Lopez, at p. 606; Deyo, supra, 84 Cal.App.3d at
p. 793.) In undertaking this effort, trial courts should examine
the “totality of the circumstances,” including: (1) whether the
party’s non-compliance is the latest chapter in a longer “history of
abuse,” which looks to “the number of formal and informal
attempts to obtain the discovery” as well as whether prior court
orders compelling discovery have gone unheeded (Mileikowsky v.
Tenet Healthsystem (2005) 128 Cal.App.4th 262, 279-280
15
(Mileikowsky); Lang v. Hochman (2000) 77 Cal.App.4th 1225,
1246 (Lang)); (2) whether the party’s non-compliance was
“willful” (McGinty v. Superior Court (1994) 26 Cal.App.4th 204,
212; Parker v. Wolters Kluwer United States, Inc. (2007) 149
Cal.App.4th 285, 297 (Parker)); (3) whether the non-compliance
persisted despite warnings from the court that greater sanctions
might follow (Electronic Funds Solutions, LLC v. Murphy (2005)
134 Cal.App.4th 1161, 1184 (Electronic Funds)); (4) whether the
non-compliance encompasses all or only some of the issues in the
case (Reedy, supra, 148 Cal.App.4th at p. 1293); and (5) the
extent of the “detriment to the propounding party” that flows
from the inability to obtain the discovery at issue (Lang, at p.
1246).
Because terminating sanctions are the most “drastic”
penalty, they are typically a “last resort” to be “used sparingly.”
(Howell, supra, 18 Cal.App.5th at p. 191; Lopez, supra, 246
Cal.App.4th at p. 604; Deyo, supra, 84 Cal.App.3d at p. 793.)
However, they may still be appropriate “as a first measure” in
“extreme cases” where a litigant violates a court order and
“persists in the outright refusal to comply with [its] discovery
obligations.” (Deyo, at pp. 793, 795; Howell, at pp. 191-192; Fred
Howland Co. v. Superior Court of Los Angeles (1966) 244
Cal.App.2d 605, 612 (Fred Howland).) Put differently, the
imposition of lesser sanctions is “not an absolute prerequisite” to
the imposition of terminating sanctions for violation of a court
order. (Alliance Bank v. Murray (1984) 161 Cal.App.3d 1, 10;
Deyo, at p. 787.)
The trial court in this case did not abuse its discretion in
coming to the conclusion, after examining the totality of the
circumstances, that terminating sanctions were the appropriate
16
sanction for defendants’ non-compliance. Defendants have a
fulsome history of discovery abuse: They ignored Siry’s two
rounds of post-remand discovery and then flouted multiple court
orders to provide documents and responses without objection,
preferring instead to make multiple motions for clarification and
reconsideration, to bury Siry and the court with “document
dump[s],” and then to try to avoid the consequences of their
discovery misconduct by making feckless, last-minute offers to
rummage through their files for responsive documents.
Defendants’ conduct was both willful and, worse yet,
calculated: They frankly admitted, when opposing Siry’s motion
for leave to file a fifth amended complaint, that they had been
“evaluat[ing] the risk” that their willful non-compliance might
ripen into terminating sanctions vis-à-vis their maximum
exposure under the prior complaint(s). “[A] litigant’s conscious
decision to deliberately” “evade the discovery process” “based on
the perception [that] damages are limited to a particular amount”
is inimical to the orderly litigation of disputes. (Behm v. Clear
View Technologies (2015) 241 Cal.App.4th 1, 10; Electronic
Funds, supra, 134 Cal.App.4th at p. 1178.) For this reason,
Farkhondehpour’s argument that the terminating sanctions are
invalid because Siry’s otherwise timely notice fixing the amount
of punitive damages was not filed until just before Siry sought
terminating sanctions necessarily fails. Further, defendants
persisted in their non-compliance despite express warning from
the trial court that terminating sanctions were on the horizon.
As discussed more fully below, the discovery that defendants
steadfastly refused to provide covered a broad swath of issues
central to defendants’ liability and the measure of damages. And
Siry’s inability to obtain this discovery for the 18-plus months
17
between its propounding and the court’s terminating sanctions
order not only deprived Siry of that information, but also left Siry
with almost no time on the clock before the three-year period for
retrial following remand expired (§ 583.310, subd. (a)(3)).
As this analysis indicates, defendants “persist[ed] in [an]
outright refusal to comply with [their] discovery obligations,”
making this one of the “extreme cases” where terminating
sanctions were appropriate in the first instance for violation of a
court order because issue and evidentiary sanctions would have
been ineffectual. (Deyo, supra, 84 Cal.App.3d at pp. 793, 795;
Howell, supra, 18 Cal.App.5th at pp. 191-192; Fred Howland,
supra, 244 Cal.App.2d at p. 612; see also Collisson & Kaplan v.
Hartunian (1994) 21 Cal.App.4th 1611, 1617-1622 [imposing
terminating sanctions as a first penalty].) Defendants’ assertion
on appeal that the trial court made only a “conclusory,”
“nominal[],” “casual,” un-“genuine[],” and “[in]sincere” effort to
evaluate lesser sanctions flatly mischaracterizes the record,
which shows that the court considered all of the circumstances
set forth above. Defendants’ further observation that the only
defendant previously subject to monetary sanctions was
Farkhondehpour overlooks that all defendants had engaged in
the same underlying discovery misconduct and that misconduct
had all been orchestrated by the same attorney; the court thus
had ample reason to find that the ineffectiveness of the monetary
sanction against Farkhondehpour (and defendants’ counsel)
applied with equal force to all defendants. And
Farkhondehpour’s contention that Siry’s motion for terminating
sanctions was defective because it, and the underlying discovery
orders he violated, were unaccompanied by a separate statement
or any due date for responses lacks merit because it ignores that
18
a separate statement is not required for a motion for terminating
sanctions (Cal. Rules of Court, rule 3.1345(a)) or for a motion to
compel when there has been no response (id., rule 3.1345(b)), that
the trial court’s initial orders to compel set forth due dates, and
that its later orders without due dates merely denied defendants’
seemingly endless stream of motions for reconsideration and
confirmed the earlier orders that defendants had already
violated.
C. Defendants’ arguments
1. Are terminating sanctions available when the
underlying discovery requests do not encompass all issues in the
case?
Defendants argue that a trial court may issue terminating
sanctions against a defendant only if the discovery that a
defendant refuses to provide encompasses all of the issues to be
tried. When a defendant’s non-compliance involves anything less
than all the issues, they reason, sanctions that terminate the
entire proceeding put the propounding party “in a better position
than [it] would have [been] . . . had [it] obtained [that] discovery.”
(Deyo, supra, 84 Cal.App.3d at p. 793; Sherman, supra, 67
Cal.App.4th at p. 1163.) Thus, they conclude, the trial court in
this case abused its discretion in issuing terminating sanctions
because the discovery Siry sought reached only the discrete
issues of “alter ego” and defendants’ “financial condition,” and not
every issue in Siry’s affirmative case or defendants’ proffered
affirmative defenses of res judicata and the statute of limitations.
Farkhondehpour elaborates on this argument in his reply brief on
appeal by asserting that Siry has failed to prove its case was
prejudiced by defendants’ non-compliance. This argument lacks
merit legally and factually.
Defendants’ argument is legally flawed for three reasons.
19
First and foremost, it is inconsistent with the law
governing discovery sanctions. That law grants trial courts
“broad” discretion to consider “the totality of the circumstances”
in making the sanction fit the violation. (Parker, supra, 149
Cal.App.4th at p. 297; Lang, supra, 77 Cal.App.4th at p. 1246.)
Defendants’ proffered rule would trade this flexibility for
ossification by converting one factor—namely, the breadth of
issues involved in the discovery—from a relevant circumstance
into a dispositive one. (Reedy, supra, 148 Cal.App.4th at p. 1293.)
It would also require courts to endure “defiant disobedience” of
their orders compelling discovery if those orders pertained to
discovery addressing fewer than all the issues in a case, even
though trial courts are “not required to allow . . . abuse to
continue ad infinitum.” (Mileikowsky, supra, 128 Cal.App.4th at
p. 280; Miranda v. 21st Century Ins. Co. (2004) 117 Cal.App.4th
913, 929 (Miranda).) Not surprisingly, courts have rejected
defendants’ rule. (E.g., Miranda, at pp. 928-929 [affirming
terminating sanctions against a plaintiff for non-compliance with
order compelling discovery pertaining to causation alone].)
To be sure, some cases contain language that arguably
supports the issue-based limitation on discovery sanctions urged
by defendants. In Caryl Richards, Inc. v. Superior Court (1961)
188 Cal.App.2d 300 (Caryl Richards), the court stated that a trial
court “abuses its discretion” “when its [sanctions] order . . . denies
a party any right to defend the action or to present evidence upon
issues of fact which are entirely unaffected by the discovery
procedure before it.” (Id. at p. 305.) But the non-complying party
in Caryl Richards had complied with every discovery request and
order except an order to disclose the chemical formula of its
hairspray, which it asserted was a trade secret (id. at pp. 301-
20
305); on those facts, Caryl Richards held, a terminating sanction
went too far. Caryl Richards did not speak to parties, like
defendants here, who have steadfastly refused to comply with
multiple discovery requests or orders. Nor do any of the other
cases cited by defendants. (E.g., McArthur v. Bockman (1989)
208 Cal.App.3d 1076, 1080-1081 [party’s non-compliance limited
to information regarding its wealth; terminating sanctions held
excessive]; Wilson v. Jefferson (1985) 163 Cal.App.3d 952, 958-
959 [party’s non-compliance limited to discovery regarding
affirmative defense; terminating sanctions held excessive]; Lopez,
supra, 246 Cal.App.4th at p. 606 [party’s non-compliance limited
to information regarding other victims of sexual abuse not
involved in the case; terminating sanctions held excessive];
Thomas v. Luong (1986) 187 Cal.App.3d 76, 81-82 [party’s non-
compliance limited to failure to appear for deposition, but party
offered to stipulate to liability; terminating sanctions held
excessive].)
Second, a rule prohibiting trial courts from issuing
terminating sanctions unless the discovery in question
encompasses every issue in a case would incentivize litigants to
engage in behavior that is inimical to the Civil Discovery Act’s
purposes of “‘enhanc[ing] the truth-seeking function’” of litigation
and “‘eliminat[ing] trial strategies that focus on gamesmanship
and surprise.’ [Citation.]” (Jaurez v. Boy Scouts of America, Inc.
(2000) 81 Cal.App.4th 377, 389.) On the one hand, litigants
served with discovery requests encompassing fewer than every
issue would be immune from terminating sanctions, and thus
freer to ignore those requests—or orders compelling compliance
with them—because the maximum sanction would be an issue or
evidentiary sanction. But selective lawlessness is still
21
lawlessness, and is something our system of justice does not
tolerate. (Electronic Funds, supra, 134 Cal.App.4th at p. 1178
[“[I]f a [litigant] chooses to participate [in litigation], he or she
must play by the rules.”].) This is just as true for a rule that
would enable—and hence encourage—such lawlessness by
defendants alone, for whom terminating sanctions mean an
adverse damages award. And where, as here, discovery is
propounded on remand, terminating sanctions are likely never to
be available because any post-remand discovery, to avoid being
duplicative of the discovery propounded prior to trial and appeal,
is likely to be more limited in scope (in terms of time or subject
matter). This impermissibly rewrites the Civil Discovery Act by
deleting terminating sanctions as an option after a remand. (See
Fairmont Ins. Co. v. Superior Court (2000) 22 Cal.4th 245, 250-
251 [noting that Civil Discovery Act applies post-remand].) On
the other hand, under defendants’ proposed rule, litigants
seeking to keep terminating sanctions as an available remedy
would have every incentive to propound overly broad discovery
requests, a result also at odds with the efficient exchange of
information. We decline to construe the Civil Discovery Act in a
way that creates such perverse incentives. (E.g., Pacific Sunwear
of California, Inc. v. Olaes Enterprises, Inc. (2008) 167
Cal.App.4th 466, 480.)
Third, a party seeking terminating sanctions for another
party’s discovery misconduct need not prove prejudice where, as
here, the misconduct relates to discovery the moving party
propounded. (Electronic Funds, supra, 134 Cal.App.4th at p.
1184 [rejecting argument that, absent a showing of prejudice,
terminating sanctions constitute a “windfall”]; cf. Parker, supra,
149 Cal.App.4th at p. 301 [“nonpropounding party” may obtain
22
terminating sanctions “only if . . . [it] shows it suffered a
detriment as the result of the sanctioned party’s misuse of the
discovery process”].) This rule makes sense. A prejudice
requirement would be “difficult,” if not “impossible,” for a
propounding party to meet because a showing of prejudice would
likely turn on the significance of the information that the non-
compliant party is refusing to disclose. (Electronic Funds, at p.
1184.) A prejudice requirement would also empower intransigent
parties to continue their intransigence on the ground that the
documents they were withholding are not that important. As we
noted above, such selective lawlessness is still lawlessness.
Defendants’ argument is also factually flawed. Contrary to
what defendants represent in their briefs, Siry’s discovery
encompassed far more than the issues of alter ego and
defendants’ financial condition. The mid-October 2013 requests
sought documents involving the workings and finances of—as
well as each defendant’s interests in—the various entities (416
South Wall Street, DTLA and Investment Consultants) used to
effectuate the allegedly improper diversion of the partnership’s
cash distributions. The January 2014 requests sought documents
and answers to special interrogatories regarding each defendants’
finances. Together, these requests sought more recent documents
relevant to show whether defendants had, in fact, improperly
diverted the partnership’s cash distributions; to show which
defendants had done so, which, as we noted in the prior appeal,
was “key”; and to show what assets each defendant had available
to satisfy any verdict for punitive damages. Thus, these requests
spanned a broad swath of subjects that went to the heart of the
retrial that Siry, in late 2013 and early 2014, expected to
prosecute. (Accord, Rawnsley v. Superior Court (1986) 183
23
Cal.App.3d 86, 91 [discovery seeking documents that would show
that “assets have been converted and diverted” are “fundamental
to [a plaintiff’s] case”]; In re Marriage of Michaely (2007) 150
Cal.App.4th 802, 810 [discovery seeking more updated
information is appropriate].)
2. Did the trial court err in issuing terminating
sanctions notwithstanding Neman’s assertion of the privilege
against self-incrimination?
Neman alone argues that the trial court lacked the
authority to issue terminating sanctions against him once he
asserted the privilege against self-incrimination.
a. Additional facts
On September 19, 2014, a federal grand jury in Los Angeles
indicted Neman, in his capacity as Chief Executive Officer of a
company called Pacific Eurotex, for evading federal currency
reporting requirements while laundering drug trafficking
proceeds.
Although the indictment occurred long after Siry had
propounded its discovery requests, after Neman had violated
numerous court orders compelling production without objections,
and after the court’s penultimate pre-terminating sanctions
discovery order of October 9, 2014, Neman on October 22, 2014
invoked the privilege against self-incrimination in seeking a stay
of this case pending resolution of the criminal case, which the
trial court denied but then granted a continuance of the trial date
to account for Neman’s unavailability as a witness. Neman also
served on October 27, 2014 supplemental discovery responses
objecting to every request “based on his Fifth Amendment
privilege rights.” The trial court overruled that objection in its
terminating sanctions order, finding that it was “not going to
24
relitigate the basis or validity of [its pre-assertion] orders
[compelling production].”
b. Analysis
The Fifth Amendment’s guarantee that “[n]o person
. . . shall be compelled in any criminal case to be a witness
against himself” operates as a defense to civil discovery, if timely
asserted. (U.S. Const., 5th Amend.; Cal. Const., art. I, § 15;
§ 2017.010 [discovery reaches “any matter, not privileged”], italics
added; Fuller v. Superior Court (2001) 87 Cal.App.4th 299, 305
(Fuller) [“Privileged matters . . . lie beyond the reach of discovery
. . .”].) This privilege against self-incrimination reaches only
those communications that are (1) compelled, (2) testimonial, and
(3) incriminating. (United States v. Doe (1984) 465 U.S. 605, 611
(Doe).)
In assessing whether the privilege applies to excuse
compliance with the Civil Discovery Act, courts ask two
questions.
First, is the requested disclosure protected by the privilege?
Because the responses to Siry’s discovery requests would
“‘disclose the contents of [Neman’s] mind’” and therefore are
testimonial (Pa. v. Muniz (1990) 496 U.S. 582, 594, quoting
Curcio v. United States (1957) 354 U.S. 118, 128), the
applicability of the privilege here turns on whether the discovery
sought is “incriminating” and “compelled.” As a general matter, a
communication is “incriminating” if it “furnish[es] a link in the
chain of evidence needed to prosecute the claimant for a
. . . crime.” (Hoffman v. United States (1951) 341 U.S. 479, 486
(Hoffman).) And because a litigant’s “say-so does not of itself
establish the hazard of incrimination” (ibid.), the litigant bears
the burden of “object[ing] with specificity,” which triggers the
25
trial court’s duty to “‘conduct[] “a particularized inquiry, deciding,
in connection with each specific area that the [propounding] party
seeks to explore, whether or not the privilege is well-founded.’”
[Citation.]” (Warford v. Medeiros (1984) 160 Cal.App.3d 1035,
1045 (Warford), italics omitted; In re Marriage of Sachs (2002) 95
Cal.App.4th 1144, 1151 (Sachs); Alpha Media Resort Investment
Cases (2019) 39 Cal.App.5th 1121, 1133.)
In assessing whether the special interrogatories are
privileged in this case, Neman’s answers would be compelled
(because he was being compelled by the court to respond to
them), but would be incriminating only if it is “evident from the
implications of the question, in the setting in which it is asked,
that a responsive answer to the question or an explanation of
why it cannot be answered might be dangerous because injurious
disclosure could result.” (Hoffman, supra, 341 U.S. at pp. 486-
487; People v. Seijas (2005) 36 Cal.4th 291, 304.) In assessing
whether the production of documents is privileged in this case,
Neman’s creation of the documents to be produced was not
compelled because he voluntarily created those documents (Doe,
supra, 465 U.S. at p. 612), but his act of production would be
compelled (again, because he was being compelled by the court to
produce them). However, his act of production would be
incriminating only if that act “‘admit[ted]’” facts previously
unknown to Siry—namely, “‘that the [responsive documents]
existed, were in his possession or control, and were authentic.’
[Citation.]” (United States v. Hubbell (2000) 530 U.S. 27, 36.)
Second, if the requested discovery responses are found to be
covered by the privilege, what should the court do about it?
Because a pending criminal indictment does not give a person “‘a
blank check to block all civil litigation on the same or related
26
underlying subject matter,’” the trial court must “assess[]” “‘the
nature and substantiality of the injustices claimed’” by the
propounding and responding parties, and seek to “fairly balance”
their interests, preferably by “accommodat[ing]” those “competing
interests.” (Fuller, supra, 87 Cal.App.4th at pp. 306-307; Pacers,
Inc. v. Superior Court (1984) 162 Cal.App.3d 686, 690; Avant!
Corp. v. Superior Court (2000) 79 Cal.App.4th 876, 882.)
The trial court did not err in overruling Neman’s assertion
of the privilege against self-incrimination for three reasons.
First, Neman never “object[ed] with specificity.” Instead,
he responded with a blanket objection to all discovery without
any attempt to explain how any answers he would provide to the
special interrogatories or how his act of producing the requested
documents would incriminate him for crimes involving Pacific
Eurotex, a company nowhere mentioned in this litigation. Such a
“blanket refusal to testify [or provide discovery responses] is
unacceptable” and insufficient to constitute an assertion of the
privilege. (Sachs, supra, 95 Cal.App.4th at p. 1151; Warford,
supra, 160 Cal.App.3d at p. 1044 [“‘[T]here is no blanket Fifth
Amendment right to refuse to answer questions.’”].) Neman
responds that he never made a “‘blanket refusal’” because he
repeated the same boilerplate refusal for each individual
discovery request, but Neman’s mastery of the cut-and-paste
feature to refuse to answer each individual request is functionally
indistinguishable from a blanket refusal. Neman also faults Siry
for not filing a further motion to compel in order to flesh out
Neman’s defective invocation of the privilege, but the burden of
invoking the privilege is on its holder (Sachs, at pp. 1151-1152)
and we decline to adopt a rule shifting the burden onto the
opposing party to remedy a defective invocation.
27
Second, even if we ignored Neman’s defective assertion of
the privilege, Neman has not carried his burden of showing that
an “injurious disclosure could result” (Hoffman, supra, 341 U.S.
at pp. 486-487) by “demonstrat[ing] some ‘nexus’ between the
information requested [by Siry] and the risk of criminal
prosecution and conviction.” (Troy v. Superior Court (1986) 186
Cal.App.3d 1006, 1012.) Neman was indicted for various
currency transactions involving Pacific Eurotex from 2012
through 2014; the discovery sought in this case involves the
dealings of several corporations and a limited partnership—none
of which Neman contends has any associations with Pacific
Eurotex—between 2002 and 2010, as well as Neman’s financial
data from January 2010 through January 2014. The requisite
nexus is absent. Neman points to his attorney’s declaration, filed
with a motion to stay or continue the trial, that a nexus exists
because Neman was charged with money laundering and the
discovery in this case would require him to respond to questions
about his financial holdings. However, this explanation—
namely, any question about money is privileged whenever
someone is charged with money laundering—is at far too high a
level of generality to establish the requisite showing of a “danger”
of “injurious disclosure,” especially where, as here, Neman
operates numerous entities that may or may not have
intertwined financial dealings. This argument also provides no
basis for extending the privilege to the non-financial discovery
sought by Siry’s October 2013 requests for production of
documents regarding liability.
Neman asserts that he need not establish any nexus
because (1) his attorneys in the criminal matter recommended
that he assert the Fifth Amendment privilege in this case, (2) the
28
trial court has yet to conclude there is no nexus, (3) the trial court
already determined that there was a nexus because it briefly
continued the trial on the basis of his Fifth Amendment objection,
(4) a trial court in a different case stayed that case against
Neman, and (5) this court has already determined that there was
a nexus because we issued an alternative writ in 2017 directing
the trial court to sustain Neman’s Fifth Amendment objection to
six document requests (for the period starting January 1, 2015,
as limited by the trial court) posed during a 2017 debtor’s
8
examination.
Each of these assertions is meritless. A trial court is
required to assess for itself whether a “nexus” exists, not just
take the word of a party’s lawyer on that issue. The trial court
never ruled on whether there is a nexus between the indictment
and Siry’s discovery because Neman never asserted a specific
objection; his assertion of an ineffectual, blanket objection does
not somehow excuse him from having to prove that his
interrogatory answers and act of producing documents posed a
danger of incriminating him. The trial court’s grant of a brief
continuance of trial was due to Neman’s unavailability as a
witness, not because responding to Siry’s pending discovery
requests might prove incriminating. (See, e.g., Evid. Code, § 240
[defining unavailability of a witness].) Whether a nexus exists
between the pending charges and the allegations of a different
case says nothing about whether such a nexus exists in this case.
And our issuance of an alternative writ with regard to specific
8 We grant Neman’s motion to augment the record and for
judicial notice of documents related to the debtor’s examination
and writ proceedings. (Evid. Code, §§ 452, subd. (d), & 459, subd.
(a).)
29
objections Neman made to different document requests covering
a different time period cannot cure the deficiency of his blanket
assertion of privilege to Siry’s discovery, particularly when
Neman ultimately withdrew his writ petition.
Lastly, even if we ignored Neman’s defective assertion of
the privilege and the absence of any nexus, Neman did not assert
his Fifth Amendment privilege until October 2014, long after Siry
propounded its discovery and the trial court repeatedly ordered
Neman to respond. In arguing that his October 2014 assertion of
the privilege renders the trial court’s terminating sanctions
ruling improper, Neman is effectively arguing that a litigant’s
assertion of the privilege against self-incrimination retroactively
excuses prior misuse of the discovery process. This argument is
legally unfounded. (Cf. Brown v. Superior Court (1986) 180
Cal.App.3d 701, 712 [“privilege against self-incrimination” may
be “waived by a failure to make a timely objection”].) It is also
factually unfounded, as the trial court’s terminating sanctions
order was based upon Neman’s contumacious conduct in ignoring
the court’s orders, and not upon any assertion of the privilege
against self-incrimination after those orders were issued. (Cf.
Alvarez v. Sanchez (1984) 158 Cal.App.3d 709, 712-713 [noting
that “striking of the defendant’s answer and the resultant default
procedure are too harsh a sanction for exercising” the privilege
against self-incrimination].) Contrary to what Neman suggests,
it also does not matter that Siry amended its operative complaint
to allege specific damages demands after he (defectively) asserted
the privilege. He had proper notice of those allegations by the
time his answer was struck and default was entered (§ 580, subd.
(a)); more to the point, Neman had the power to assert the
30
privilege more specifically after Siry amended its complaint but
nonetheless chose to rest on his defective, blanket objection.
3. Is the trial court’s finding that Farkhondehpour
never complied with its orders supported by substantial evidence?
Farkhondehpour alone argues that he did, in fact, comply
with the trial court’s multiple orders compelling responses,
without objection, to Siry’s October 2013 and January 2014
discovery requests.
Farkhondehpour certainly responded to Siry’s discovery
requests. In response to Siry’s October 2013 requests for
production, Farkhondehpour filed (1) untimely responses with
objections in February 2014 explaining why he was not going to
provide any responsive documents because the documents sought
(a) pertained to non-compensable damages (that is, damages
waived when the prior lawsuit between the parties was settled in
2007), (b) had already been produced prior to remand (but
additional copies would be made available at Farkhondehpour’s
office), or (c) did not exist; and (2) supplemental responses in
June 2015 that (a) preserved objections, and (b) explained why he
was still not going to provide any responsive documents because
the documents sought (i) had already been produced or were
otherwise in Siry’s possession, (ii) never existed, or (iii) were
“available” for inspection at Investment Consultants’s offices. In
response to Siry’s January 2014 requests, Farkhondehpour filed
(1) a single blanket objection in April 2014 explaining that he was
not going to provide any responsive documents or answer any
interrogatories because the discovery sought was “unnecessarily
burdensome, harassing and overbroad”; and (2) supplemental
responses in June 2015 that (a) preserved objections, (b)
explained that any documents responsive to the production
requests did not exist or were “available” for inspection at
31
Investment Consultants’s office, (c) provided answers to the vast
majority of the special interrogatories (54 out of the 65 posed to
Farkhondehpour individually and 80 out of the 112 posed to
Farkhondehpour as trustee) that the interrogatory was “not
applicable,” had no response, or was duplicative, and (c) provided
answers to the remaining interrogatories and attached eight
pages of spreadsheets.
Substantial evidence supports the trial court’s finding that
these responses did not constitute compliance. Farkhondehpour
was ordered to produce every document requested and answer
every special interrogatory posed without objection.
Farkhondehpour never did so. Farkhondehpour points to his
offers to open up the doors to his (or Investment Consultants’s)
warehouse for Siry to come in and hunt for documents. But this
is not what the trial court ordered. To treat Farkhondehpour’s
“[l]ast-minute tender of documents” as wiping away the prior 16
to 20 months of intransigence would impermissibly “reward
. . . brinksmanship.” (Sauer v. Superior Court (1987) 195
Cal.App.3d 213, 230.) Farkhondehpour says that he provided
Siry with financial documents pertaining to four different
companies during settlement negotiations, but those documents
constituted an infinitesimal portion of the requested discovery.
Farkhondehpour lastly asserts that Siry judicially admitted that
it had received satisfactory responses to its discovery responses;
this is a flat-out misrepresentation of the record.
II. Amount of the Default Judgment
Defendants challenge the trial court’s award of (1) treble
damages under Penal Code section 496, subdivision (c), and (2)
attorney fees. In its cross-appeal, Siry challenges the trial court’s
recalculation of treble damages, its reduction in punitive
32
damages, and its requirement that Siry elect between treble and
punitive damages on the ground that defendants lacked standing
to make the motion for new trial that prompted the court to
9
reduce the amount of the default judgment. We will address the
second issue first.
A. Standing to move for a new trial
Siry argues the trial court erred in amending the default
judgment in response to defendants’ motion for new trial not
because the amendments were incorrect, but because defendants,
as parties in default, did not have standing to make such a
motion at all. Because this argument requires us to construe the
new trial statute and resolve other questions of law, our review is
de novo. (John v. Superior Court (2016) 63 Cal.4th 91, 95 (John);
Greene v. Marin County Flood Control & Water Conservation
Dist. (2010) 49 Cal.4th 277, 287.)
An “aggrieved party” may move the trial court to “vacate[]”
a “verdict” or “other decision” and “grant[]” “a new or further
trial” if, among other reasons, that party can show an “[e]rror in
law, occurring at the trial and excepted to by the party making
the application” if that error “materially affect[ed] [its]
substantial rights.” (§ 657, subd. (7).) But may a “party” in
9 Defendants do not challenge the trial court’s calculation of
actual damages, and Siry does not challenge the court’s
requirement that Siry elect between treble and punitive
damages, the reduction in the punitive damages award, or the
offset for costs defendants incurred during the prior appeal. And
although Siry suggests that the trial court’s calculation of treble
damages was incorrect, we decline to entertain that suggestion
because Siry waited until its reply brief to raise it. (Garcia,
supra, 16 Cal.4th at p. 482, fn. 10.)
33
default move for a new trial when, by virtue of the default, there
was no trial in the first place?
We conclude that the answer is “yes,” at least when the
party is seeking to move for a new trial on the ground that the
court made an “error in law” in calculating damages. Although
the entry of default precludes the defaulting defendant from
further participation in the proceedings (and thus from
“except[ing] to” the error during the prove-up hearing) (Devlin v.
Kearny Mesa AMC/Jeep/Renault (1984) 155 Cal.App.3d 381, 385
(Devlin); Forbes v. Cameron Petroluems, Inc. (1978) 83
Cal.App.3d 257, 262; Christerson v. French (1919) 180 Cal. 523,
525), the plaintiff still bears the burden of proving its entitlement
to damages to the court. (Barragan v. Banco Bch (1986) 188
Cal.App.3d 283, 302; § 585, subd. (b).)
More to the point, the entry of default does not entirely
render a defaulting defendant persona non grata. Even a
defaulting defendant may appeal the resulting default judgment
on the grounds that the damages award (1) “is so
disproportionate to the evidence as to suggest that the verdict
was the result of passion, prejudice or corruption” (Uva v. Evans
(1978) 83 Cal.App.3d 356, 363 (Uva)), (2) “is so out of proportion
to the evidence that it shocks the conscience of the appellate
court” (ibid.), or (3) is “contrary to law” (see Lasalle v. Vogel
(2019) 36 Cal.App.5th 127, 139 [defaulting party may appeal
refusal to set aside verdict on these grounds]).
Because a defaulting defendant can appeal a default
judgment on these grounds, “[w]e see no reason to preclude [that
defendant] from seeking a new trial (or, more precisely, a new
judgment hearing) on th[ose] ground[s] . . .” (Don v. Cruz (1982)
131 Cal.App.3d 695, 704 (Don); Jacuzzi v. Jacuzzi Bros. (1966)
34
243 Cal.App.2d 1, 23-24; Misic v. Segars (1995) 37 Cal.App.4th
1149, 1154.) Allowing a defaulting party to bring excessive
damages based on errors in law to the trial court’s attention in a
new trial motion puts those potential errors before the court with
greater familiarity with the case, does so in a manner likely to
yield a faster result, and may thereby altogether obviate the need
for an appeal. (Accord, Don, at p. 705.) Our Supreme Court has
held that parties may not “challenge [a] damage award on
appeal[] without [first making] a motion for a new trial”; to do
otherwise is to “unnecessarily burden the appellate courts with
issues which can and should be resolved at the trial level.”
(Shroeder v. Auto Driveway Co. (1974) 11 Cal.3d 908, 919.) That
logic applies with equal force here.
Siry resists this conclusion with four arguments.
First, it cites language from Howard Greer Custom
Originals v. Capritti (1950) 35 Cal.2d 886 (Howard Greer), where
our Supreme Court stated that a defaulting defendant “cannot
. . . move for a new trial” because it “is out of court and is not
entitled to take any further steps in the” case. (Id. at pp. 888-
889.) Seven years later, however, the Supreme Court in Carney
v. Simmonds (1957) 49 Cal.2d 84 (Carney), retreated from
Howard Greer’s sweeping language when it held that a new trial
motion is appropriate in many different situations “except
possibly in the case of default judgments . . . where there may be
the question of the right of the moving party to make any
objection to the judgment.” (Id. at p. 90.) Because defaulting
defendants may appeal the damages award of a default judgment
in the three circumstances delineated above, they have the “right
. . . to make an[] objection to the judgment” and thus, under
35
Carney, may also move for a new trial in those same
circumstances.
Second, Siry urges that a close reading of the cases
allowing defaulting defendants to move for a new trial reveals a
four-part classification scheme, and that under that scheme, only
defendants who challenge damages as being excessive due to
insufficiency of the evidence (rather than due to legal errors) may
file a motion for new trial. This makes sense, Siry continues,
because the plaintiff at a default prove-up hearing can be faulted
only for presenting insufficient evidence but not for errors in law
made by the court. None of the cases Siry cites even hints at the
rule Siry purports to draw from them; indeed, some have nothing
to do with excessive damages at all. More to the point, Siry’s
proffered rule is wholly inconsistent with the judicial economy-
based rationale for allowing defaulting defendants to file a
motion for new trial as to legal errors they can challenge on
appeal because Siry’s rule would preclude new trial motions for
issues that are clearly subject to challenge on appeal. What is
more, Siry’s proffered blame-based rationale for its rule is a
fiction, as the facts of this case vividly illustrate. Siry is the
party who urged the trial court to award quadruple damages on
top of punitive damages and who then offered a spirited defense
of that position in opposing defendants’ motion for new trial,
rendering hollow its claim on appeal that plaintiffs are invariably
blameless for a trial court’s legal errors.
Third, Siry contends that a defaulting party’s right to
challenge disproportionate or legally erroneous damages awards
on appeal should, at best, authorize that party to file a motion for
relief under section 473, but not a motion for new trial. But
section 473 provides relief for mistakes made by a party or its
36
counsel (§ 473, subd. (b)) and for void judgments (id., subd. (d)),
and provides no relief for errors of law by a court in awarding
“damages which are excessive as a matter of law.” (Don, supra,
131 Cal.App.3d at pp. 702-703.) The proper vehicle for getting
such issues before the trial court that entered the default
judgment is a motion for new trial.
Fourth, Siry cites cases holding that a defaulting defendant
may not file a motion for new trial under any circumstances.
(E.g., Devlin, supra, 155 Cal.App.3d at pp. 385-386; Brooks v.
Nelson (1928) 95 Cal.App. 144, 147-148.) We respectfully part
ways with these decisions, which did not consider the rationale
we adopt—namely, that there is no reason to deprive the trial
court of the power to consider challenges to the excessiveness or
legal propriety of damages when those very same issues can
undoubtedly be raised on appeal.
In this case, defendants’ challenges to the damages
awarded in the original default judgment all constitute “error[s]
in law” properly subject to a motion for a new trial. The court’s
recalculation of treble damages reduced what was effectively
quadrupled damages down to treble damages; the court’s
reduction of the punitive damages award was grounded in the
constitutional law defining when such damages become so
excessive as a matter of law as to deny a defendant due process;
and the court’s ruling that Siry must elect between treble and
punitive damages involved construction of the law. (Cf. Seffert v.
Los Angeles Transit Lines (1961) 56 Cal.2d 498, 507 [only trial
37
court may sit as a “thirteenth juror” in evaluating the amount of
10
damages].)
10 Because these reasons for granting a new trial all involve
“error[s] in law” cognizable under subdivision (7) of section 657
rather than any reweighing of the evidence (Glendale Fed. Sav. &
Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d
101, 122 [distinguishing challenges to the excessiveness of
damages based on the evidence presented from a court’s “failure
to apply the proper legal measure of damages”]; Gober v. Ralph’s
Grocery Co. (2006) 137 Cal.App.4th 204, 214 [“in deciding the
constitutional maximum [for punitive damages], a court does not
decide whether the verdict is unreasonable based on the facts”]),
Siry’s belatedly developed argument that the trial court’s new
trial order is void because it cites subdivision (5) of section 657 is
not well taken. To be sure, the court cited only subdivision (5)
and that subdivision requires a trial court to “weigh[] the
evidence” (§ 657, second paragraph). But it is clear from the trial
court’s reasons for granting a new trial that the court cited the
wrong statutory ground for relief. A court’s failure to state the
proper ground for relief under section 657 does not abrogate its
reasons for granting that relief. (Oakland Raiders v. National
Football League (2007) 41 Cal.4th 624, 634 [“‘the words “ground”
and “reason” have different meanings,’” and “[t]he word ‘ground’
refers to any of the seven grounds listed in section 657”]; Previte
v. Lincolnwood, Inc. (1975) 48 Cal.App.3d 976, 988 [reviewing
court is “confined” “to the specific reason or reasons given by the
trial court for [its new trial] order”], italics added.) More to the
point, it does not void the new trial order (Sandoval v. Qualcomm
Inc. (2018) 28 Cal.App.5th 381, 421-424 [trial court’s citation to
the “wrong subdivision” of section 657 does not void new trial
order when its reason was valid under a different subdivision],
review granted on other grounds, Jan. 16, 2019, S252796; see
also Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 906
[trial court’s failure to specify ground for relief does not void its
new trial order]), at least where, as here, a new trial was sought
38
B. Propriety of certain damages awards
Defendants argue that the trial court erred in awarding
treble damages under Penal Code section 496, subdivision (c) and
in awarding attorney fees. When entering judgment against a
defaulting defendant, a trial court acts as a “gatekeeper,” not a
rubber stamp. (Kim v. Westmoore Partners, Inc. (2011) 201
Cal.App.4th 267, 272 (Kim); Electronic Funds, supra, 134
Cal.App.4th at p. 1179.) This is a “serious” and sober
responsibility (Kim, at pp. 272-273), requiring the court to assure
itself that the plaintiff has made a “prima facie case” showing
entitlement to each type of damages under (1) the relevant
statute, contract, or legal doctrine, and (2) the well-pled
allegations in its operative complaint. (Johnson v. Stanhiser
(1999) 72 Cal.App.4th 357, 361-362; Los Defensores, supra, 223
Cal.App.4th at pp. 392-393.) In undertaking this task, the court
must accept as true all “well-pled[] allegations” in the operative
complaint, but need not accept “contentions, deductions or
conclusions of fact or law.” (Evans, supra, 38 Cal.4th at p. 6.)
Where, as here, the relief challenged on appeal has “penal
attributes” (as both treble damages and attorney fees do (Rony v.
Costa (2012) 210 Cal.App.4th 746, 757 (Rony))), the trial court
must also require the plaintiff to “strict[ly] compl[y]” with all
statutory prerequisites for that relief (Baker v. San Francisco Gas
& Electric Co. (1904) 141 Cal. 710, 712). We independently
review a trial court’s ruling that the complaint entitles a plaintiff
on the ground corresponding with the trial court’s reasons
(Collins v. Sutter Memorial Hospital (2011) 196 Cal.App.4th 1,
16-17 [“A new trial order ‘can be granted only on a ground
specified in the motion.’”], citation omitted).
39
to damages where, as here, that ruling rests on questions of
statutory interpretation and the application of undisputed facts
to the law. (John, supra, 63 Cal.4th at p. 95; Martinez v.
Brownco Construction Co. (2013) 56 Cal.4th 1014, 1018.)
1. Treble damages and attorney fees under Penal
Code section 496, subdivision (c)
Penal Code section 496 is entitled “Receiving or concealing
stolen property.” (Pen. Code, § 496.) Subdivision (a) makes it a
crime to (1) “buy[] or receive[] 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 (2)
“conceal[], sell[], [or] withhold[] any property from the owner,
knowing the property to be so stolen or obtained.” (Id., subd. (a).)
Subdivision (c) empowers “[a]ny person who has been injured by
a violation of subdivision (a)” to “bring an action for three times
the amount of actual damages [he has ] . . . sustain[ed]” as well as
for “costs of suit[] and reasonable attorney’s fees.” (Id., subd. (c).)
This case presents the question: Does Penal Code section
496, subdivision (c) authorize Siry to obtain treble damages
where the underlying conduct did not involve trafficking in stolen
property, but rather the improper diversion of a limited
partnership’s cash distributions through fraud,
misrepresentation, and breach of fiduciary duty?
The courts have taken different approaches to the issue.
Siry urges that we follow Switzer, supra, 35 Cal.App.5th
116, Bell v. Feibush (2013) 212 Cal.App.4th 1041 (Bell),
Worldwide Travel, Inc. v. Travelmate US, Inc. (S.D. Cal. 2016)
2016 U.S. Dist. LEXIS 43942 (Worldwide Travel), and Allure
Labs, Inc. v. Markushevska (N.D. Cal. 2019) 606 B.R. 51, 63-66
(Allure Labs). These cases hold that treble damages are available
whenever the defendant’s underlying conduct involves any type of
40
fraudulent conduct or misrepresentation. (Switzer, at pp. 119-
120 [fraud, conversion of property; treble damages available];
Bell, at p. 1043 [theft by false pretense; treble damages
available]; Worldwide Travel, at *18-23 [conversion, theft by false
pretenses; treble damages available]; Allure Labs, at pp. 57-58
[embezzlement; treble damages available].) Their holdings rest
on a literal reading of the Penal Code: Section 496, subdivision
(a) reaches the “recei[pt of] . . . property . . . that has been
obtained in any manner constituting theft” (Pen. Code, § 496,
subd. (a), italics added), and “theft” is elsewhere defined to
include “fraudulently appropriat[ing] property which has been
entrusted to him or her” or “knowingly and designedly, by any
false or fraudulent representation or pretense, defraud[ing] any
other person of money, labor or real or personal property” (id.,
§ 484, subd. (a)), so Penal Code section 496, subdivision (c) must
authorize treble damages for any type of conduct qualifying as
“theft,” including fraud, conversion, and theft by false pretenses.
(Switzer, at pp. 126-131; Bell, at pp. 1045-1049.)
Defendants urge that we follow Lacagnina v. Comprehend
Systems, Inc. (2018) 25 Cal.App.5th 955 (Lacagnina), Grouse
River Outfitters Ltd. v. NetSuite, Inc. (N.D. Cal. 2016) 2016 U.S.
Dist. LEXIS 141478 (Grouse River), and Agape Family Worship
Ctr., Inc. v. Gridiron (C.D. Cal. 2018) 2018 U.S. Dist. LEXIS
91338 (Agape Family). For various reasons, each of these cases
has rejected Bell’s declaration that “[a]nything that could be the
subject of a theft can also be property under Penal Code section
496” (Bell, supra, 212 Cal.App.4th at p. 1049). Lacagnina viewed
Bell’s declaration as “broad dictum,” and went on to reject the
plaintiff’s argument that Penal Code section 496 applied to a
theft of labor; “that labor may be the object of a ‘theft,’”
41
Lacagnina reasoned, “does not transform it into ‘stolen
property.’” (Id. at pp. 969-970.) Grouse River and Agape Family
both rejected treble damages because, in their view, the civil
defendant’s initial “theft” of the property through fraud precluded
treble damages for the simultaneous act of receiving that “stolen”
property. (Grouse River, at *38-40; Agape Family, at *1-2, 14-15.)
We chart yet a different path in ruling that treble damages
are not available under Penal Code section 496, subdivision (c) in
cases where the plaintiff merely alleges and proves conduct
involving fraud, misrepresentation, conversion, or some other
type of theft that does not involve “stolen” property.
The “first task” of any court “in construing a statute is to
ascertain the intent of the Legislature so as to effectuate the
purpose of the law.” (Dyna-Med, Inc. v. Fair Employment &
Housing Com. (1987) 43 Cal.3d 1379, 1386.) Although “the words
of [a] statute” “[o]rdinarily” “provide the most reliable indication
of legislative intent” (People v. Vidana (2016) 1 Cal.5th 632, 638),
this “‘plain meaning’ rule does not prohibit a court from
determining whether the literal meaning of a statute comports
with its purpose.” (Lungren v. Duekmejian (1988) 45 Cal.3d 727,
735).
Time and again, our Supreme Court has refused to
“‘presume that the Legislature intends, when it enacts a statute,
to overthrow long-established principles of law unless such
intention is clearly expressed or necessarily implied.’” (Brodie v.
Workers’ Comp. Appeals Bd. (2007) 40 Cal.4th 1313, 1325,
quoting People v. Superior Court (Zamudio) (2000) 23 Cal.4th
183, 199); Van Horn v. Watson (2008) 45 Cal.4th 322, 333,
superseded by statute on another ground as stated in Ennabe v.
Manosa (2014) 58 Cal.4th 697, 719.) The reason for this refusal
42
is a pragmatic one—namely, that “[i]t is doubtful that the
Legislature would . . . institute[] . . . significant change through
silence.” (Riverside County Sheriff’s Dept. v. Stiglitz (2014) 60
Cal.4th 624, 646-647; see also In re Christian S. (1994) 7 Cal.4th
768, 782 [“reject[ing] the view that the Legislature silently enacts
major social policy”].)
In our view, reading Penal Code section 496 to authorize an
award of treble damages whenever a plaintiff proves (or, in the
case of a default, sufficiently alleges) any type of theft—whether
it be fraud, misrepresentation, conversion, or breach of fiduciary
duty—by which the defendant obtains money or property would
institute a “significant change” for two reasons.
First, it would transmogrify the law of remedies for those
torts. Until now, the damages remedy for these torts has been
limited to the amount of damages actually caused by the fraud,
misrepresentation, conversion or breach of fiduciary duty. (Civ.
Code, § 3333 [defining damages “[f]or the breach of an obligation
not arising from contract” as “the amount which will compensate
for all the detriment proximately caused thereby . . .”]; Fragale v.
Faulkner (2003) 110 Cal.App.4th 229, 236 [applying this measure
of damages to tort of fraud not involving real property]; Benson v.
Southern California Auto Sales, Inc. (2015) 239 Cal.App.4th
1198, 1208 [applying this measure of damages to tort of
misrepresentation]; Michelson v. Hamada (1994) 29 Cal.App.4th
1566, 1583 [applying this measure of damages to tort of breach of
fiduciary duty]; Persson v. Smart Inventions, Inc. (2005) 125
Cal.App.4th 1141, 1165 [“fraud damages are [calculated] under
the out-of-pocket loss rule”]; Civ. Code, § 3336 [damages for
wrongful conversion is the “value of the property at the time of
the conversion” plus “fair compensation for the time and money
43
properly expended” in its pursuit].) Treble damages under Penal
Code section 496, if held applicable to these torts, would all but
eclipse these traditional damages remedies. (Accord, Lacagnina,
supra, 25 Cal.App.5th at p. 972 [“If every plaintiff in an
employment or contract dispute could also seek treble damages”
under Penal Code section 496, “such claims would become the
rule rather than the exception”].)
Second, reading Penal Code section 496 to apply in theft-
related tort cases would effectively repeal the punitive damages
statutes. (California Cannabis Coalition v. City of Upland (2017)
3 Cal.5th 924, 945 [noting “strong presumption” against “implied
repeal”].) Until now, a plaintiff seeking greater than
compensatory damages had to prove, by clear and convincing
evidence, that the defendant was “guilty of oppression, fraud, or
malice.” (Civ. Code, § 3294, subd. (a).) If Penal Code section 496
applied to these torts, a plaintiff could obtain treble damages
merely by proving the tort itself by a preponderance of the
evidence. (Evid. Code, §§ 500, 115 [preponderance of the
11
evidence is the default burden in civil cases].)
What is more, our Legislature has not shouted, stated, or
even whispered anything about Penal Code section 496 effecting
such a “significant change” to the universe of tort remedies.
Rather, the Legislature had a far more targeted goal in mind
11 Because Penal Code section 496, subdivision (c) authorizes
an award of attorney fees along with treble damages, extending
its reach beyond the context of stolen property would have a third
significant effect: It would authorize fee shifting in nearly every
tort cause involving fraud, misrepresentation, or breach of
fiduciary duty, thereby creating a gaping exception to the general
rule against such fee shifting. (§ 1021).
44
when it enacted Penal Code section 496’s treble damages
remedy—namely, “to dry up the market for stolen goods.” (Bell,
supra, 212 Cal.App.4th at p. 1047.) Penal Code section 496’s
focus on stolen goods is reflected in the statute’s title, which
specifies that it deals with “Receiving stolen property.” (People v.
Hull (1991) 1 Cal.4th 266, 272 [“‘“section headings”’” “‘are
entitled to considerable weight’” “‘“in determining legislative
intent”’”], citation omitted.) It is reflected in the traditional
understanding of the crime defined in Penal Code section 496,
subdivision (a), which requires proof that “(1) the property was
stolen; (2) the defendant knew the property was stolen; and, (3)
the defendant had possession of the stolen property.” (People v.
Land (1994) 30 Cal.App.4th 220, 223.) And it is reflected in
Penal Code section 496, subdivision (c)’s legislative history, which
is replete with discussions about how best to achieve the “goal of
eliminating markets for stolen property, in order to substantially
reduce the incentive to hijack cargo from common carriers.”
(Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171
Cal.App.4th 1, 17-18, overruled on other grounds as stated in
Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 337
(Kwikset).) Although the Legislature ultimately opted not to
limit the treble damages remedy to actions against “public
carriers,” its focus never strayed from drying up the market for
stolen goods. (Ibid., italics omitted) Because imposing treble
damages in cases alleging fraud, misrepresentation, breach of
fiduciary duty and other torts outside the context of stolen
property does nothing to “advance the legislative purpose to ‘dry
up the market for stolen goods,’” we cannot even infer any
legislative intent to affect this significant change.
45
The Legislature’s silence is even more deafening when
contrasted with other statutes that speak with a much clearer
voice in creating the extraordinary remedy of treble damages.
(E.g., Bus. & Prof. Code, § 16750, subd. (a) [treble damages
available for violations of the Cartwright Act setting state
antitrust laws]; id., § 17082 [treble damages available for
violations of the Unfair Competition Law]; Civ. Code, §§ 52, subd.
(a) & 54.3, subd. (a) [treble damages available for violations of the
Unruh Civil Rights Act]; id., § 1719, subd. (a)(2) [treble damages
available to payee for passing checks with insufficient funds]; id.,
§ 3345 [treble damages available “in actions brought by, on behalf
of, or for the benefit of senior citizens or disabled persons . . . to
redress unfair or deceptive acts or practices or unfair methods of
competition”]; Gov. Code, § 12651, subd. (b) [treble damages
available for violations of the False Claims Act]; Lab. Code,
§ 230.8, subd. (d) [treble damages available for denying
employees’ wages “to engage in child-related activities” protected
by statute]; see also 18 U.S.C. § 1964(c) [treble damages available
under the federal Racketeer Influenced and Corrupt
Organizations Act].)
Because we cannot presume that our Legislature intended
to so significantly alter the universe of tort remedies without
saying anything about its desire to do so, we conclude that Penal
Code section 496’s language sweeps more broadly than its intent
and hold that it does not provide the remedy of treble damages
for torts not involving stolen property. We recognize that
Switzer, and to a lesser extent, Bell, came to the contrary
conclusion based on their view that Penal Code section 496’s
language was controlling. Switzer took an additional step, noting
that legislative intent can sometimes trump a statute’s plain
46
language, but choosing to focus on whether extending treble
damages to all tort cases involving “theft” was such an outlandish
outcome as to be deemed “absurd.” (Switzer, supra, 35
Cal.App.5th at pp. 129-131.) As explained above, we take the
path Switzer chose not to take and conclude that Penal Code
section 496’s language diverges from the Legislature’s intent and
that its narrower intent is controlling.
Siry’s final salvo is to assert that it properly alleged a
violation of Penal Code section 496 in its operative complaint.
That may be true, but it is irrelevant because, as we now hold,
Penal Code section 496—no matter how well it is pled—does not
provide the remedy of treble damages based on the underlying
allegations in this case.
In light of the unavailability of treble damages under Penal
Code section 496, Siry’s election to receive treble damages over
punitive damages is a nullity; in its place, Siry is entitled to
receive the $1 million in punitive damages assessed against each
Farkhondehpour and Neman.
2. Attorney fees
As a general rule, California follows the so-called
“American rule” when it comes to attorney fees: Parties in civil
litigation bear their own unless a statute or contract provides
otherwise. (§ 1021; Eden Township Healthcare Dist. v. Eden
Medical Center (2013) 220 Cal.App.4th 418, 425.) The trial court
awarded Siry attorney fees under two statutes—namely, Penal
Code section 496, subdivision (c), and section 1029.8. The fee
award under Penal Code section 496 was in error because, as we
hold above, that statute does not reach the type of conduct
involved in this case.
47
This leaves section 1029.8 as the sole basis for attorney
fees. That statute empowers a trial court to award “all costs and
attorney’s fees” against “[a]ny unlicensed person who causes
injury or damage to another person as a result of providing goods
or performing services for which a license is required.” (§ 1029.8,
subd. (a).) The court found a fee award under section 1029.8 to
be appropriate because defendants acted as (1) unlicensed
construction contractors, and (2) unlicensed broker-dealers. We
separately consider each basis for the award.
a. Did defendants act as unlicensed
contractors involved in construction activity?
California requires “person[s] engaged in the business or
acting in the capacity of a contractor” to be licensed. (Bus. &
Prof. Code, § 7031.) For these purposes, and as pertinent here, a
“contractor” is “any person who [(1a)] undertakes to or [(1b)]
offers to undertake to, or [(1c)] purports to have the capacity to
undertake to, or [(1d)] submits a bid to, or [(1e)] does himself or
herself or by or through others [(2)] construct, alter, repair, add
to, subtract from, improve, move, wreck or demolish any building
. . .” (Id., § 7026.) Requiring contractors to be licensed
“provide[s] minimal assurance that all persons offering such
services in California have the requisite skill and character,
understand applicable . . . laws and codes, and know the
rudiments of administering a contracting business.” (Hydrotech
Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995.)
As construed by the courts, a “contractor” is only a person
or entity who (1) actually performs construction services
(Contractors Labor Pool, Inc. v. Westway Contractors (1997) 53
Cal.App.4th 152, 165 (Westway); WSS Industrial Construction,
Inc. v. Great West Contractors, Inc. (2008) 162 Cal.App.4th 581,
587-593 (WSS Industrial); (2) “supervise[s] the performance of
48
construction services” (Westway, at p. 165; WSS Industrial, at p.
593 [“overseeing” construction work]); or (3) agrees by contract to
be “‘solely responsible’” for construction services (Vallejo
Development Co v. Beck Development Co. (1994) 24 Cal.App.4th
929, 935-936, 939-940 (Vallejo Development)). In the last two
scenarios, a license is required even if the construction work is
actually performed by someone else. (Bus. & Prof. Code, § 7026
[reaching work “by or through others”]; Vallejo Development, at p.
941.) However, a license is not required if a person or entity
merely coordinates construction services performed by others
(The Fifth Day, LLC v. Bolotin (2009) 172 Cal.App.4th 939, 947-
950), or supplies labor for those services (Westway, at pp. 164-
165).
In its operative complaint, Siry alleged the following in
support of its entitlement to attorney fees by virtue of defendants’
status as unlicensed contractors:
“Although the construction done at the 241
property was performed by a third party, companies
controlled by the defendants, including Investment
Consultants, received construction management fees
even though none of the defendants or their
companies had a contractor’s license. As a result,
defendants deprived Siry of its share of the
partnership funds based on defendants’ payment of
partnership funds (as construction management fees)
to entities controlled by them. By doing so,
defendants obtained the benefits of construction work
at Siry’s expense because Siry had no ownership
interest in the entities controlled by defendants. In
addition, without a license, defendants, by
themselves and through others, engaged in, or
managed, construction activities, thus meeting the
definition of a contractor under Bus. & Prof. Code
49
§ 7026. For example, defendant Saeed
Farkhondehpour performed construction
management activities without a license by
supervising the work. Finally, by entering into a
construction contract with an unlicensed contractor
and/or by making payments to an unlicensed
contractor, defendants aided and abetted unlicensed
construction.”
These allegations do not entitle Siry to attorney fees under
section 1029.8 for two reasons.
First, as to every defendant but Farkhondehpour, Siry has
not sufficiently alleged that they qualify as “contractors” in the
first place. Siry’s conclusory allegation that defendants “meet[]
the definition of a contractor” is a “conclusion of fact or law” that
we must disregard. (Evans, supra, 38 Cal.4th at p. 6.) And Siry’s
more specific allegations fare no better because they do not allege
that these defendants actually performed any construction
services, supervised any construction services, or agreed by
contract to be solely responsible for construction services.
Without such allegations, these defendants are not themselves
“contractors.” They also cannot be held liable for attorney fees
under section 1029.8 because the statute imposes liability against
those who are unlicensed contractors, not those who use
unlicensed contractors. (Rony, supra, 210 Cal.App.4th at p. 757
[noting that section 1029.8 “contains no language . . . extending
its reach to those who ‘use’ the services of unlicensed persons”].)
Second, and as to all defendants, Siry has not alleged that
it suffered “injury or damage . . . as a result of” defendants’
“perform[ance of services] for which a license is required.”
(§ 1029.8, subd. (a), italics added.) As set forth above, Siry’s sole
allegation in this regard is that it was harmed by “defendants’
payment of partnership funds (as construction management fees)
50
to entities controlled by [defendants].” However, the harm
occasioned by this diversion of partnership funds would have
occurred—and, under defendants’ theories for recovery, would
have been improper—even if each defendant had a contractor’s
license. Where an “injury ‘“would have happened anyway,
whether or not the defendant”’” engaged in tortious behavior,
then that tort “‘“was not a cause in fact, and of course cannot be
the legal or responsible cause”’” of that injury. (Grotheer v.
Escape Adventures, Inc. (2017) 14 Cal.App.5th 1283, 1303; Toste
v. CalPortland Construction (2016) 245 Cal.App.4th 362, 370.)
Because Siry failed to allege that defendants’ unlicensed status is
what caused its injury, Siry failed to show that its injury was “as
a result of” that unlicensed status, as required by section 1029.8.
(See Kwikset, supra, 51 Cal.4th at p. 326 [“‘The phrase ‘as a
result of’ in its plain and ordinary sense means ‘caused by’ and
requires a showing of a causal connection or reliance on the
alleged misrepresentation.’ [Citation.]”].) Siry’s sole rejoinder is
to argue that defendants’ deprivation of Siry’s “share of
partnership funds . . . based on their construction-related
shenanigans . . . trigger[ed] attorney’s fees under section 1029.8.
End of story.” This argument labors under the same
misconception as Siry’s complaint—namely, that awarding
attorney fees under section 1029.8 requires no causal link
between the lack of a license and harm to the plaintiff. Section
1029.8’s plain language forecloses this argument.
b. Did defendants act as unlicensed broker-
dealers selling securities?
California law prohibits any “broker-dealer” from
“effect[ing] any transaction in, or induc[ing] or attempt[ing] to
induce the purchase or sale of, any security . . . unless the broker-
dealer” is licensed. (Corp. Code, § 25210.) A “broker-dealer” is
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“any person engaged in the business of effecting transactions in
securities in this state for the account of others or for [his] own
account.” (Id., § 25004, subd. (a).) And a “security” is defined by
reference to a long list of investment vehicles (id., § 25019),
although that list is meant to be “illustrative” rather than
exhaustive (People v. Graham (1985) 163 Cal.App.3d 1159, 1164
(Graham)). Given this approach, “the ‘critical question’ . . . is
whether [the] transaction [at issue] falls within the regulatory
purpose of the law regardless of whether it involves an
instrument [or vehicle] which comes within the literal language
of the definition.” (People v. Figueroa (1986) 41 Cal.3d 714, 735.)
The purpose of this licensing law is “‘to protect the public against
the imposition of unsubstantial, unlawful and fraudulent stock
and investment schemes and the securities based thereon.’
[Citation.]” (Id. at p. 736.)
As construed by the courts, an investment vehicle
constitutes a security if it satisfies one of two tests: (1) the “risk-
capital test” first articulated in Silver Hills Country Club v.
Sobieski (1961) 55 Cal.2d 811 (Silver Hills), or (2) the “federal
test” first articulated in SEC v. W.J. Howey Co. (1946) 328 U.S.
293 (Howey). (See generally, People v. Black (2017) 8 Cal.App.5th
889, 900.)
In its operative complaint, Siry alleges the following in
support of its entitlement to attorney fees by virtue of defendants’
status as unlicensed broker-dealers selling securities:
“The creation/sale of the limited partnership
interest at issue here qualifies as a security (i.e., an
investment contract) as defined by Corporations Code
section 25019. [Siry] was damaged as a result of
defendants’ unlicensed activities in violation of
Corporations Code section 25004 [governing broker
52
dealers]. Specifically, defendants sold securities to
others (e.g., [Siry’s] limited partnership interest) in
the capacity of a broker-dealer without a license.”
These allegations do not entitle Siry to attorney fees under
section 1029.8 because Siry has not sufficiently alleged strict
compliance with the prerequisites necessary for its partnership
interest to qualify as a “security.”
To begin, Siry’s conclusory allegation that its “limited
partnership interest . . . qualifies as a security” is a “‘“conclusion
of . . . law”’” entitled to no weight whatsoever. (Evans, supra, 38
Cal.4th at p. 6.) The same is true of its companion allegation that
the interest qualifies as “an investment contract”—both because
it is conclusory and because the term “investment contract” is “so
broad as to give little more guidance than the term ‘security’”
(Graham, supra, 163 Cal.App.3d at p. 1165, fn. 4).
Although a limited partnership interest can constitute a
“security” “under appropriate circumstances” (Graham, supra,
163 Cal.App.3d at p. 1166; People v. Simon (1995) 9 Cal.4th 493,
499), Siry has not alleged that those circumstances exist here
because it has not alleged that its limited partnership interest
satisfies either the risk-capital or federal tests.
A limited partnership interest qualifies as a “security”
under the risk-capital test only if it involves “[(1)] an attempt by
an issuer to raise funds for a business venture or enterprise; [(2)]
an indiscriminate offering to the public at large where the
persons solicited are selected at random; [(3)] a passive position
on the part of the investor; and [(4)] the conduct of the enterprise
by the issuer with other people’s money.” (Silver Hills, supra, 55
Cal.2d at p. 815.) Siry never alleged that it was solicited “at
random”; to the contrary, Siry submitted declarations indicating
53
that it was solicited due to the long-time friendship between its
principal and Farkhondehpour and Neman.
A limited partnership interest qualifies as a “security”
under the federal test only if it “involves an investment of money
in a common enterprise with profits to come solely from the
efforts of others.” (Howey, supra, 328 U.S. at p. 301.) Although
the terms of the limited partnership agreement appended to the
operative complaint indicate that the limited partners were to
have no management or control over the limited partnership and
that the general partner was to have “exclusive control,” Siry
repeatedly alleges in its operative complaint that these
contractual limitations were “disregarded” and that
Farkhondehpour and Neman, despite being limited partners,
“control[led], dominate[d], manage[d] and operate[d]” the limited
partnership. Because Siry’s allegations that the limited
partnership agreement was being ignored preclude reliance on
that agreement in lieu of a well-pled allegation that Siry was
merely a passive investor, Siry needed to affirmatively plead its
passivity. But there is no such allegation in Siry’s operative
complaint, and its absence is fatal.
Siry’s sole remaining contention is that two provisions in
the limited partnership agreement otherwise suggest that the
parties’ limited partnership interests were securities. Siry points
to (1) the general partner’s power to refuse to consent to a limited
partner’s transfer of its partnership interest “if such transfer
would constitute a violation of any rule, law, or securities
regulation,” and (2) the prohibition against a limited partner
assigning its interest “if, in the opinion of counsel to the
Partnership, such assignment may not be effectuated without
registration under the Securities Act of 1933, as amended, or
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would result in the violation of . . . federal or state securities
laws.” Rather than constituting proof that the limited partners
definitively viewed their interests as securities, these provisions
reflect uncertainty on that question and a marked desire not to
engage in transactions that would subject them to securities
laws—an odd result if the parties already viewed the limited
partnership interest as a security.
c. Are the attorney fees awards invalid for other
reasons?
In light of our conclusion that there is no statutory basis for
the court’s award of attorney fees, we have no occasion to
consider defendants’ remaining arguments that the trial court
also erred in (1) awarding fees for litigation prior to the
settlement of the initial lawsuit between the parties, (2)
awarding fees for litigation prior to the filing of the third
amended complaint when Siry first sought attorney fees in this
case, or (3) awarding fees when Siry never gave notice of a
maximum amount of attorney fees.
* * *
Where, as here, “a trial court erroneously award[ed] [one
type of damages,] a reviewing court may, instead of reversing the
entire judgment, make an order of modification striking that
portion relating to [the erroneously awarded] damages and affirm
the judgment as so modified.” (Crogan v. Metz (1956) 47 Cal.2d
398, 405; accord, Mega RV Corp. v. HWH Corp. (2014) 225
Cal.App.4th 1318, 1344; cf. Van Sickle v. Gilbert (2011) 196
Cal.App.4th 1495, 1521-1522 [“when a judgment is vacated on
the ground [that] the damages awarded exceeded those pled,” the
reviewing court ordinarily affirms and modifies the judgment to
reduce the damages, but may allow the trial court to decide
whether to vacate the default to allow further amendment].)
55
DISPOSITION
The amended judgment is affirmed as modified. We order
that the amended judgment be modified to (1) strike the
$1,912,974 treble damages award in its entirety and substitute in
its place the $2 million punitive damages award, with
Farkhondehpour (jointly and severally as an individual and as a
trustee) and Neman (jointly and severally as an individual and as
a trustee) severally liable for $1 million each, and (2) strike the
$4,010,008.97 attorney fees award in its entirety. The parties are
to bear their own costs on appeal.
CERTIFIED FOR PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
_________________________, P.J.
LUI
_________________________, J.
CHAVEZ
56