Is Collection of Illegally Increased Rent a Criminal Violation in California?

In the recent appellate decision of Johnson v. Connie, LLC, Plaintiff Randy R. Johnson, the tenant, appealed from a nominal judgment entered in his favor after the trial court granted a motion for directed verdict against him in favor of Defendant Connie, LLC, the landlord and owner of the property.

The court found Johnson’s payment of illegally increased rent did not support his claim based on the Penal Code section 496 that authorizes civil remedies for its violation.

However, the appellate court agreed with plaintiff that sufficient evidence supported liability under section 496, based upon the statute’s broad wording, and it reversed the judgment and remand for further proceedings.

In 1995, plaintiff entered into a lease to rent an apartment in a triplex, for about $800 a month. The lease did not contain any agreement that plaintiff would perform property management duties and plaintiff never agreed to provide services in exchange for paying reduced rent.

Ownership of the triplex passed to Connie, LLC, in 2020. The LLC’s manager was Heidi Starnes Izzi and her brother Todd Starnes was a member of the LLC.  Plaintiff, by then 70 years old, was paying $1,025 a month for rent.

The LLC hired a property management company, defendant Old Newport Realty, doing business as Genuine Property Management (Genuine). The compensation for Genuine’s services was six percent of rent payments received.

Heidi and Todd wrongly told a director of Genuine that plaintiff had been a resident manager for the property, and that was why his rent was so much lower than the other triplex tenants. Heidi and Todd instructed the director to terminate plaintiff’s role as property manager and “raise the rent to market.”

On December 23, 2020, the director repeated the LLC’s mischaracterization of plaintiff’s tenancy in an e-mail to an attorney: “We acquired a new property. One out of the triplex has a[n] ‘onsite manager’ but no documentation, no employee, employer. Just the owner who passed away gave him a discount on rent and is paying much less. There is no lease at all. Will a 60 day notice suffice to get him out so the owner can renovate and take the property back?”

The director and attorney exchanged several more e-mails that afternoon. In one e-mail, the attorney asked: “Is the property subject to AB1482?” The director responded: “No it is not.”

“AB1482” refers to the Tenant Protection Act of 2019 that limits the maximum increase of a gross rental rate to 10 percent. (Civ. Code, § 1947.12, subd. (a)(1).)

Based on the director’s inaccurate representation, the attorney believed the Act did not protect plaintiff’s rent rate.

The following week, the attorney provided a strategy: “You can take a . . . position that the understanding was that [plaintiff’s] discounted rent was only because he was an employee. You can terminate his employment then raise the rent to market rent. Since there is no written agreement, the risk is that you can’t prove the discounted rent was solely due to his employment, then the increase would be improper.”

Three weeks later, Genuine sent plaintiff a letter advising that his services were no longer needed and that his rent would be increased to $2,450 a month. Plaintiff responded that he understood and, without communicating any objection, subsequently made the increased rent payments for 11 months.

Prior to the increase, the director obtained a copy of plaintiff’s 1995 lease and nothing in the record indicates the director updated the attorney with the information.

Plaintiff’s payments totaled $15,675, of which Genuine received 6 percent and the LLC received 94 percent.

Plaintiff’s counsel filed the underlying lawsuit against the LLC and Genuine (collectively, defendants), and the operative complaint alleged three causes of action against both defendants: (1) breach of contract; (2) a common count for money had and received; and (3) an intentional tort cause of action styled as “Receiving Stolen Property” (the Penal Code section 496 claim).

At the jury trial, Genuine’s director (through deposition testimony) and plaintiff testified to the facts discussed above.

The attorney who the director had consulted confirmed that her legal advice had rested on incorrect information provided by Genuine and the LLC.

Genuine’s principal testified that it ultimately sent plaintiff $17,112, as restitution, representing the invalidly increased rent payments that had been paid, as well as seven percent interest.

The parties agree that the 10 percent rent increase ceiling applied, based on the Act. (Civ. Code, § 1947.12, subd. (a)(1).)

After the close of evidence, defendants moved for a directed verdict. (See Code Civ. Proc., § 630.)

Defendants contended that “the only evidence is that there was a mistake by Genuine Property Management after it even sought the guidance from its counsel, thus there was no stolen property.”

Plaintiff argued there was sufficient evidence to show that money was stolen by false pretense or extortion.

The trial court granted directed verdicts against all causes of action except plaintiff’s breach of contract claim against the LLC. The parties waived a jury trial on the surviving claim and the court entered a nominal judgment of $500 in attorney fees for plaintiff. On appeal, plaintiff challenged the ruling only on his section 496 claim.

Plaintiff contended a directed verdict against his section 496 claim was unwarranted because the evidence supported liability.

Because granting a directed verdict motion removes the matter from the jury, courts traditionally have taken a very restrictive view of the circumstances under which a directed verdict is proper.

The granting of the motion should be reversed if substantial evidence supports the plaintiff’s trial position.

Section 496, subdivision (a) (section 496(a)), provides: “Every person who . . . receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained . . . shall be punished” pursuant to the statute.

“[P]roperty” under section 496(a) includes money. The statute’s subdivision (c) authorizes treble damages, costs of suit, and reasonable attorney’s fees for any person who has been injured by a violation of subdivision (a).

Theft, in turn, is defined in section 484, subdivision (a), as: “Every person who . . . shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money, labor or real or personal property . . . is guilty of theft.”

Obtaining money through false pretenses with criminal intent constitutes a violation of section 496(a).

In the case of Siry Investment, L.P. v. Farkhondehpour, the California Supreme Court held that section 496 applied to a civil default judgment involving the “fraudulent diversion of a partnership’s cash distributions.”

Siry conceded that section 496 would not reach false statements made “‘innocently or inadvertently’”, but also noted “the requisite criminal intent” can be established with facts showing “careful planning and deliberation.”

Nothing in the record shows Genuine’s $17,112 restitution payment to plaintiff included treble damages, costs, and attorney fees.

The appellate court concluded sufficient evidence would allow a jury to find that defendants’ receipt of plaintiff’s illegally increased rent payments amounted to receiving stolen property through false pretenses.

Plaintiff offered evidence that defendants illegally raised his rent through careful planning and deliberation.

Heidi and Todd wrongly told Genuine that plaintiff was the triplex’s property manager.

Genuine wrongly told counsel that plaintiff was the property manager and that he had no written lease, despite obtaining a copy of plaintiff’s 1995 lease prior to the rent increase.

A jury could have reasonably inferred that Genuine’s director’s misrepresentation showed an intention to fraudulently induce plaintiff to hand over money through a knowingly illegal rent hike.

A reasonable jury could further infer that the strategy served the LLC’s plan to end-run around plaintiff’s leasehold rights.

Defendants cannot save the directed verdict by recounting their evidence of a good faith mistake.

They note the 2019 leases for the other triplex tenants both specified that notices intended for the predecessor landlord were to be sent to plaintiff, and that one of the leases was signed by plaintiff as “Property Manager”.

Defendants also cite Heidi’s testimony that, at an estate planning meeting for the triplex’s predecessor owner, it was understood that plaintiff’s “rent was lower because he was managing the property.”

But the likelihood of plaintiff’s success at trial did not govern the appellate court’s review of the directed verdict. Instead, it viewed the facts in the light most favorable to plaintiff and disregarded conflicting evidence.

Doing so, it concluded there was sufficient evidence to support plaintiff’s position on section 496(a) liability.

The appellate court noted that Siry involved a fraudulent diversion of money in the context of a commercial partnership agreement—facts more remote to traditional notions of theft and receipt of stolen property than the theory plaintiff asserted in this case.

However, if Siry’s allegations were sufficient to trigger section 496’s civil remedies, then the facts in this case triggered the statute all the more.

Defendants additionally argued that plaintiff’s section 496 claim should fail as a matter of law because there was no withholding by either defendant—evidenced by the fact that plaintiff never asked for his money back prior to litigation—and, separately, that there was no evidence of concealment of any kind.

But section 496’s plain language prohibits receiving stolen property in the first place.

The judgment was reversed as to the trial court’s ruling on plaintiff’s section 496 claim only. The matter was remanded for further proceedings consistent with the opinion.

LESSONS:

1.         Competent counsel should not rely upon information from the client if it can be investigated and determined to be false.

2.         Obtaining money through false pretenses with criminal intent constitutes a violation of Penal Code section 496(a).

3.         Landlords need to be very careful in determining rent increases so they do not violate Penl Code section 496(a).

4.         All tenancies should be subject to written leases and any increases in monthly rent should conform to the legal limits that are allowed.