California Court of Appeals clarifies the application of the discovery rule to the statute of limitations. One of the first issues to consider when defending an older criminal case is the statute of limitations (SOL).
We often challenge the criminal pleading on a Demurrer when the allegations violate the relevant SOL.
While a prosecutor can generally cure the problem with an amended pleading, the issue of when the SOL started is ultimately a question of fact for the trier of fact in the case.
In the recent California Court of Appeals case of People v. Rodriguez, et al. (Appellate Case No. B305512), the Second Appellate District applied the “discovery rule,” which says that the SOL for certain financial and fraud crimes begins to run only when the victim, or law enforcement, discovers that a crime has occurred.
Fraud crimes, by nature, are often not immediately noticed by the victim, especially if they are a large organization or the perpetrator uses complex means to disguise their fraudulent activity. Under the discovery rule:
- prosecutors must plead and prove when and how the facts concerning the fraud became known to the victim,
- that the victim lacked knowledge of the crime before the claimed date of discovery, and,
- that the victim had no means of knowing of the fraud sooner and notice, which, if followed up with reasonable inquiry, would have led to the discovery of the fraud at an earlier date.
This third requirement – an inquiry notice provision – was squarely at issue in Rodriguez's case. Let's review this case further below.
Details of the Case
Rodriguez and his co-defendant worked together at an engineering firm in Southern California. Any Engineer who has passed the relevant subject matter area exams is granted a seal that they affix to sets of plans and other engineering reports submitted to government agencies.
The engineer's seal demonstrates that the plans have been reviewed by a qualified professional and meet all safety and code requirements.
Co-defendant Gutierrez worked as an architectural designer at the firm from 2000 to 2008. Rodriguez worked there from 1995 to 2014 as an engineering draftsman. Neither defendant was a licensed engineer.
In December 2007, one of the firm's owners saw a folder on Gutierrez's desk with invoices for Gutierrez's own company, along with documents on the firm's letterhead bearing the owner's seal, which he had not authorized.
Gutierrez did admit to moonlighting and using the firm's letterhead without permission, and he was terminated. However, they did not suspect Rodriguez was also involved in the moonlighting scheme.
In March 2014, one of the owners received a call from a potential client who said Rodriguez had offered him a discount if he paid cash. An audit of Rodriguez's computer was conducted, revealing documents related to multiple projects with the owner's engineering seal, again without permission. Rodriguez admitted to moonlighting and was also terminated.
Criminal Complaint Filed and Conviction
The owners of the engineering firm reported them to the police, and a criminal complaint was filed in February 2018, charging hundreds of felony counts, including the following:
To comply with the four-year statute of limitations for fraud offenses, the prosecution alleged March 12, 2014, when the victims discovered the crimes.
Defendants waived a jury trial and were convicted of hundreds of counts each at a bench trial. Both were sentenced to serve 365 days in county jail and perform significant community labor.
Motion to Dismiss for Violating SOL
Before the closing arguments, the defendants moved to dismiss based on the statute of limitations. They showed evidence that beginning in 2009, the firm created records and received payments for multiple unauthorized projects.
There were several meetings at which projects and invoices were discussed, and the firm's controller regularly met with the owners to review the company's books.
Defendants focused on one unauthorized project in 2013 that resulted in unpaid accounts receivable. They argued that at the very latest, the company was on notice in 2013 when appropriate follow-up regarding the delinquent account receivable would have led to the discovery of the fraud scheme and forgeries.
Court of Appeals Decision
On appeal, the defendants focused on the March 12, 2014, alleged discovery date. The Court of Appeals found that the prosecution's alleged discovery date, which the potential client alerted the owners to Rodriguez's promise of a discount for paying cash, was supported by substantial evidence and affirmed the convictions.
The Court of Appeals noted that the controller, not the firm's owners, was the person who could have been charged with knowledge before 2014.
However, that fact was irrelevant; the court said that even if the controller's knowledge was imputed to the engineering firm, the individual owner whose seal was used and the firm's clients who were deceived were the victims, not the firm.
Thus, the controller's actual or constructive knowledge, even if imputed to the business, didn't trigger the statute of limitations.
They also rejected the defendant's argument that the controller's periodic audits put the firm's owners on inquiry notice. The Court said the audits would have established moonlighting, but that was not a crime.
Further, they said that while the audits would have led to an inference of wrongdoing, they would not necessarily have revealed a crime.
In a portion of the opinion likely to be cited in future fraud cases, the Court decided that the discovery of a financial loss is not synonymous with the discovery of a crime against the business.
Important Points On Discovery Rule
While the Court of Appeals acknowledged that a different inference about the import of the controller's audits was plausible, the trial court had found the opposite. On the deferential substantial evidence standard, the Court could not find that the trial court's determination was so unreasonable as to require reversal.
Rodriguez clarifies two essential points about the application of the discovery rule. First, a controller's constructive knowledge about fraud, even if imputed to the business, does not necessarily get imputed to the business owners.
This may be the critical question depending on who the named victim is in a criminal proceeding. Second, the discovery of a financial loss, even by the victim, does not in itself qualify as the discovery of a crime sufficient to trigger the statute of limitations.
The case ultimately provides the government with a broader time frame to bring criminal charges upon properly drafted pleadings.
Dmitry Gorin and Alan Eisner are partners at Eisner Gorin LLP, a Los Angeles-based criminal defense law firm. They are State-Bar Certified Criminal Law Specialists with experience in high-stakes criminal defense matters nationally in state and federal courts. Robert Hill is an associate attorney at the firm.