Can a person legally use the threat of potential criminal, administrative or disciplinary charges in addition to civil liability in a demand to an opposing party to pay a debt?
No. Due to recent clarifications in California law, a threat in this regard may be considered extortion.
Prior to the initiation of the trial process, the vast majority of civil disputes are resolved by the parties outside of court. Common legal platitude claims that 95% of lawsuits result in a settlement. Demand letters are typically utilized to force parties into settling their disputes outside of court before the litigation process even begins. While these are great tools, certain types of demand letters run the risk of being considered extortion.
In one recent case, a lawyer, representing an employer Company, sent a letter (the demand letter) to the lawyer of the ex-employee manager of the Company which began as follows:
“As you are aware, I have been retained to represent the Company. We are in the process of uncovering the substantial fraud, conversion and breaches of contract that your client has committed on my client.... To date we have uncovered damages exceeding $75,000, not including interest applied thereto, punitive damages and attorneys' fees. If your client does not agree to cooperate with our investigation and provide us with a repayment of such damages caused, we will be forced to proceed with filing a legal action against him, as well as reporting him to the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service regarding tax fraud, the Better Business Bureau, as well as to customers and vendors with whom he may be perpetrating the same fraud upon [sic].”
The letter goes on to list the employee’s alleged transgressions, including failure to pay the Company’s employees, sales taxes and bills.
Based on this letter, the ex-employee sued the Company’s lawyer for extortion and won, even though there was evidence that the ex-employee was responsible for many of the wrongs alleged in the demand letter. (Mendoza v. Hamzeh (2nd Dist.2013) 214 Cal.App.4th 799.)
California bases a private cause of action for civil extortion on Penal Code Section 518. Extortion is defined as “the obtaining of property from another, with his consent” but “induced by a wrongful use of force or fear” (Pen. Code, § 518.) Fear, for purposes of extortion may be induced by a threat, either: to accuse the individual threatened of any crime or to expose, or impute to him any deformity, disgrace or crime (Pen. Code, § 519.)
Penal Code section 523 expands on this idea of extortion, stating that “every person who, with intent to extort any money or other property from another, sends or delivers to any person any letter or other writing, whether subscribed or not, expressing or implying, or adapted to imply, any threat such as is specified in Section 519, is punishable in the same manner as if such money or property were actually obtained by means of such threat.’ (Pen. Code, § 523.)” (Flatley v. Mauro (2006) 39 Cal.4th 299, 326.)
Finally, extortion is “the threat to accuse the victim of a crime or ‘expose, or impute to him ... any deformity, disgrace or crime’ (Pen. Code, § 519) accompanied by a demand for payment to prevent the accusation, exposure, or imputation from being made.” (39 Cal.4th at p. 332, fn. 16, 46 Cal.Rptr.3d 606, 139 P.3d 2.)
According to the Mendoza case, the threat to report a crime may constitute extortion even if the victim did in fact commit a crime. The threat to report a crime may in and of itself be legal. But when the threat to report a crime is coupled with a demand for money, the threat becomes illegal, regardless of whether the victim in fact owed the money demanded. (Flatley, supra, 39 Cal.4th at pp. 326–327.)
“ ‘The law does not contemplate the use of criminal process as a means of collecting a debt.’ [Citations.]” ( Ibid.) While the Mendoza case involved an attorney’s demand, the law on extortion applies to lawyers and non-lawyers alike—anyone who threatens to report a crime coupled with a demand for money. (Penal Code §§ 518, 519; People v. Goldstein (1948) 84 Cal.App.2d 581.)
In the Mendoza case, the lawyer threatened to report Mendoza's “substantial fraud” to the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service, the Better Business Bureau and Mendoza's customers and vendors if Mendoza did not pay “damages exceeding $75,000.” In other words, threats to report “wrongs” to other government agencies (not just the District Attorney) may constitute extortion.
While lawyers and non-lawyers alike need to be aware of the risk of extortion, lawyers, have additional standards which may pose risks when they make “overzealous” demands. California Attorneys also must look to the California Rules of Professional Conduct. CRPC 5-100(A) states:
“A member shall not threaten to present criminal, administrative, or disciplinary charges to obtain an advantage in a civil dispute.”
Failure to comply with these rules can result in the loss or suspension of a license, or the imposition of a fine, pecuniary sanction, or other sanction of a quasi-criminal nature (CRPC 5-100(B)).
Does this mean I cannot threaten to report a party to the necessary authorities under any circumstance?
No. Threats which are not coupled with a demand for money do not constitute criminal extortion. Quoting Flatly: “Thus, our opinion should not be read to imply that rude, aggressive, or even belligerent pre-litigation negotiations, whether verbal or written, that may include threats to file a lawsuit, report criminal behavior to authorities or publicize allegations of wrongdoing, necessarily constitute extortion. [Citation.] Nor is extortion committed by an employee who threatens to report the illegal conduct of his or her employer unless the employer desists from that conduct. In short, our discussion of what extortion as a matter of law is limited to the specific facts of this case.” (Flatley, supra, 39 Cal.4th at p. 332, fn. 16.)
In other words, as long as the threat is made with hopes of correcting misconduct, there is no extortion in a threat to report a party to the necessary authorities. In addition, informing a party that they may face litigation if they do not comply with your demands is not considered extortion. Extortion comes into play when, in exchange for payment, you claim you will not report the offending party.
It is important to note, this is simply one example of how a demand letter can become extortion. For example, if someone were to threaten a business for pricing services differently for men and women, but then immediately takes money to settle the matter, this too may be considered extortion. In light of the usefulness of a demand letter, each individual demand must be carefully handled and evaluated. Consequently, the particular situation you may be facing should be reviewed by an attorney before you decide to send out a demand letter.
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