When sending a demand letter, whether the sender is an attorney or a lay person, it can be tempting to come in guns blazing. While it is standard practice to threaten civil litigation, sometimes the sender will contemplate other threats, such as threatening criminal prosecution or calling the IRS (or FTB). However, while it may be only human to try and maximize the leverage present in the demand letter in order to effectuate a result, making threats to report someone in a demand letter can result in liability for civil extortion and place the demand letter outside of the litigation privilege. This article discusses the often fine and blurry line between a strongly worded demand letter and an extortionate threat.
Before exploring the case law, a quick primer on the law defining civil extortion is in order. Extortion is defined as “the obtaining of property from another, with his consent . . . induced by a wrongful use of force or fear . . . .” Pen. Code § 518. Fear, for purposes of extortion, “may be induced by a threat of any of the following: 1. To do an unlawful injury to the person or property of the individual threatened or of a third person. 2. To accuse the individual threatened . . . of any crime. 3. To expose, or impute to him . . . any deformity, disgrace, or crime. 4. To expose a secret affecting him . . . . 5. To report his . . . immigration status or suspected immigration status.” Pen. Code § 519. Moreover, attempted extortion is just as punishable as successful extortion. Pen. Code § 523.
Threats that may be legal on their own can become extortionate “when coupled with a demand for money.” Philippine Export & Foreign Loan Guarantee Corp. v. Chuidian, 218 Cal. App. 3d 1058, 1079 (1990). Extortionate threats are criminal regardless of “whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim.” Flatley v. Mauro, 39 Cal. 4th 299, 327 (2006) (citations omitted). Moreover, the victim need not be accused of a specific crime—vague intimations suffice, provided that “‘the accusations . . . put the intended victim of the extortion in fear of being accused of some crime.’” Id. (quoting People v. Sanders, 188 Cal. 744, 749-50 (1922)).
Origin of the Species: Flatley v. Mauro
The seminal case on the issue of civil extortion in California is Flatley v. Mauro, 39 Cal. 4th 299 (2006). In that case, Michael Flatley, the “Lord of the Dance” himself, received a demand letter from attorney D. Dean Mauro on behalf of a woman who claimed that Flatley had raped her in a Las Vegas hotel room. In the demand letter, Mauro threatened that “all pertinent information and documentation, if in violation of an U.S. Federal, Immigration, I.R.S., S.S. Admin., U.S. State, Local, Commonwealth U.K., or International Laws, shall immediately be turned over to any and all appropriate authorities” if Flatley did not immediately settle the case. Id. at 308-09. The letter also threatened to send press releases to a laundry list of media outlets if Flatley declined to settle. Id. at 309. In subsequent phone calls with Flatley’s attorneys, Mauro said it would take “seven figures” to settle the matter and prevent him from “going public.” Id. at 311.
After declining to pay Mauro, Flatley sued Mauro for, among other things, civil extortion. Id. at 305. Mauro filed an anti-SLAPP motion to strike Flatley’s complaint, arguing that his demand letter, upon which Flatley’s complaint was premised, was subject to the litigation privilege. Id. at 311. Flatley argued that Mauro’s letter constituted extortion and was therefore illegal conduct unprotected by the litigation privilege. Id. The trial court agreed with Flatley and denied Mauro’s anti-SLAPP motion. Id. The Court of Appeal affirmed. Id.
The California Supreme Court affirmed the Court of Appeal and held that because Mauro’s letter and subsequent phone calls constituted extortion, were illegal as a matter of law, and thus unprotected by the litigation privilege. Id. at 333. The court held that Mauro’s threats to accuse Flatley of rape squarely met the definition of extortion in that he “threatened to ‘accuse’ Flatley of, or ‘impute to him,’ ‘crimes’ and ‘disgrace.’” Id. at 330 (citing Pen. Code § 519). The court also reasoned that Mauro’s vaguer threats to report Flatley for unspecified violations of immigration and tax law established extortion because they put Flatley in fear of being accused, and were placed even more firmly within the realm of extortion because these alleged violations were unrelated to Mauro’s client’s claim against Flatley. Id. at 330-31.
Despite the foregoing, the court did attempt to cabin its holding to the facts of the case:
We emphasize that our conclusion that Mauro’s communications constituted criminal extortion as a matter of law are based on the specific and extreme circumstances of this case. . . . [O]ur opinion should not be read to imply that rude, aggressive, or even belligerent prelitigation 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. . . . Nor is extortion committed by an employee who threatens to report the illegal conduct. In short, our discussion of what extortion as a matter of law is limited to the specific facts of this case.
Id. at 332 n.16 (emphasis added).
Flatley’s Progeny: Trying to Draw the Line
The court’s firm repudiation of Mauro’s aggressive pre-litigation tactics has cast a long shadow over demand letters in later cases, resulting in liability for attorneys.
Although not as over-the-top as Mauro’s demand letter, an attorney’s demand letter in Mendoza v. Hamzeh, 215 Cal. App. 4th 799 (2013) was threatening enough for the Court of Appeal to affirm the trial court’s holding that it was extortionate. In that letter, attorney Reed Hamzeh told plaintiff Miguel Mendoza, a former employee of Hamzeh’s client, Hamzeh demanded a payment of at least $75,000, or he would “be forced” to report Mendoza 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.” Id. at 802. The court held that “Hamzeh’s threat to report criminal conduct to enforcement agencies and to Mendoza’s customers and vendors, coupled with a demand for money, constitutes ‘criminal extortion as a matter of law.’” Id. at 806. Importantly, the court also noted that although Hamzeh’s threats were not as egregious as those in Flatley, they still constituted extortion as a matter of law, concluding that “[t]he rule must be a bright line rule.” Id. at 807.
The courts further refined the Flatley rule in Stenehjem v. Sareen, 226 Cal. App. 4th 1405 (2014), when the Court of Appeal reconfirmed that veiled threats still can constitute extortion as a matter of law. Jerome Stenehjem sued his former employer, AKON, and his boss, Surya Sareen, for wrongful termination after he was terminated for misconduct. Stenehjem sent an email to Sareen’s counsel demanding a settlement payment and vaguely invoking a potential qui tam case based on AKON’s allegedly fraudulent billing practices. In particular, Stenehjem wrote that he did not want to “involve the United States Attorney General, the Department of Justice or the DOD, nor did he “wish to make a Federal case out of this,” nor was it his “first choice to procede [sic] with the Qui Tam option.” Id. at 1422. Despite the more veiled and circumspect threats to report Sareen to the authorities, the court concluded that Stenehjem’s email constituted extortion as a matter of law because “[i]t threatened to expose Sareen to federal authorities for alleged violations of the False Claims Act unless he negotiated a settlement of Stenehjem’s private claims.” Id. at 1422. The could reasoned that just because Stenehjem’s threats were “less than explicit” did not render them legal—“that Stenehjem’s threats may have been ‘veiled’ . . . or ‘half-couched in legalese does not disguise their essential character as extortion.’” Id. at 1425 (citations omitted). Finally, the court also noted that the conduct threatened to be exposed by Stenehjem was unrelated to his claim for wrongful termination. Id. at 1423.
On the other end of the spectrum, the court in Malin v. Singer, 217 Cal. App. 4th 1283 (2013) determined that a pre-litigation demand letter with no “overt” threat to report the plaintiff to authorities was not extortion as a matter of law and thus survived an anti-SLAPP challenge by virtue of being subject to the litigation privilege. Plaintiff Michael Malin was accused, in a letter from defendant celebrity lawyer Marty Singer, who was representing Malin’s business partner Shereene Arazm, of misappropriating company funds, including “to arrange sexual liaisons with older men.” Id. at 1288. The demand letter, in addition to threatening a civil lawsuit, accused plaintiff of “engag[ing] in insurance scams designed to defraud . . . insurers,” “hid[ing] assets from creditors as well as from the taxing authorities.” Id. The court held that the letter did not constitute extortion as a matter of law, and contrasted it with the letters at issue in Flatley and Mendoza, reasoning that “Singer’s demand letter did not expressly threaten to disclose Malin’s alleged wrongdoings to a prosecuting agency or the public at large.” The court also noted that the “secret” threatened to be exposed was related to Singer’s client’s claims against Malin, unlike the conduct threatened to be exposed in Flatley and Mendoza, which “had no reasonable connection to the underlying dispute.” Id. at 1299.
Federal Courts Weigh In
The federal courts have also had opportunities to interpret Flatley and its progeny. The California Central District Court held that a letter from a composer plaintiff to a music production company defendant threatening to, inter alia, “file a criminal complaint with the FBI [and] seek whatever criminal punishment the justice department might see fit” was extortion as a matter of law. Baker v. FirstCom Music, No. LACV 16-8931-VAP (JPRx), 2017 U.S. Dist. LEXIS 222010, at *19 (C.D. Cal. July 27, 2017). Reaching the opposite conclusion, the California Central Bankruptcy Court held in King v. McCarthy (In re McCarthy), No. 2:12-bk-40506 ER, 2013 Bankr. LEXIS 4708 (C.D. Cal. Nov. 6, 2013) that a creditor’s threat to “picket [debtor’s] home and [debtor’s and debtor’s] spouse’s respective workplaces, and to obtain media coverage of Plaintiff’s non-payment of the amounts due Debtor” did not constitute extortion as a matter of law. Id. at *10.
Analysis and Takeaways
Although whether civil extortion exists as a matter of law is a slippery question, certain “dos and don’ts” for demand letters can be extrapolated from the leading cases:
- Don’t threaten to report the recipient to the authorities. In Flatley, Mendoza, Stenehjem, and Baker, all of the senders made threats to report the recipients, and all of those communications were held to be extortionate as a matter of law. However, per Flatley’s footnote, this threat must be coupled with a demand for money to be extortionate. Flatley, 39 Cal. 4th at 332 n.16. One still may threaten to report someone to the authorities if not also demanding money. However, a demand letter is almost always aimed toward monetary recovery. Therefore, a best practice would be to avoid threats to report the recipient to any and all authorities.
- Don’t get cute, either. The sender in Stenehjem did not explicitly condition his reporting the recipient to the authorities on payment of his demand, but instead tried to avoid making a direct threat by saying he did not “want . . . to involve” various federal authorities in his dispute with the recipient. Recognizing this tactic as a mafia-style “it’d be a real shame if something happened to you”-type threat, the court firmly established that even “veiled” threats can constitute extortion as a matter of law. Accordingly, when drafting a demand letter, don’t try to veil your threats—a court is likely to see right through such an attempt.
- If you must bring up other wrongdoing, do draft carefully. The line between the “cute” but illegal threats of Stenehjem and the more plain, legal statements of wrongdoing in Malin is blurry at best. The main difference between the two is how delicately they are drafted. One could argue, as the plaintiff did in Malin, that Singer’s mention of violation of tax laws and insurance fraud constituted an implicit threat to report the plaintiff for those violations. While the court in Malin reasoned that Singer’s demand letter was allowable because there was no “overt” threat, Stenehjem—decided a year after Malin—confirmed that implicit—or “covert”—threats can also qualify as extortion. Although it is unclear whether a court would interpret the statements in Malin as “implicit” threats with the benefit of Stenehjem as precedent, it is advisable to err on the side of “just stating the facts” side of the scale and mention knowledge of violations of the law without mentioning the relevant authorities.
- If you must bring up other wrongdoing, do make sure it is related to the underlying claims. Although it is unclear whether “unrelatedness” is a prerequisite to a finding that a threat to report or reveal is extortionate, courts are clear in that they view threats to reveal misconduct that is related to the underlying claim more favorably. In Flatley and Stenehjem, the courts both explicitly noted that the conduct threatened to be exposed was unrelated to the underlying claims against the recipients of the demand letters, thus weighing in favor of a finding of extortion. On the other hand, the threat found to be extortionate by the sender in Baker was ostensibly related to his underlying claims for, inter alia, fraud, copyright infringement, and RICO violations. One could harmonize the seemingly conflicting rulings on relatedness by requiring relatedness for the “secret” prong of Penal Code section 519, and not requiring it for the “crime” prongs of that section. See Malin, 217 Cal. App. 4th at 1299 (“[T]he ‘secret’ that would allegedly expose [Malin] and others to disgrace was inextricably tied to Arazm’s pending complaint. . . . We cannot conclude that the exposure of Malin’s alleged activities would subject him to any more disgrace than the claim that he was an embezzler.”); see also id. (holding that Singer’s letter was not extortionate because, unlike the letters in Flatley and Mendoza, it did not “contain . . . express threats [to report Malin to prosecuting agencies or the IRS] and others that had no reasonable connection to the underlying dispute”) (emphasis added).
The law on civil extortion is a highly fact-specific world of fine lines. Because of the nuanced law on the subject, the safest bet is to avoid making threats to report the recipient of the demand letter to any authority for a supposed criminal violation, whether explicit or implicit. However, as the foregoing cases demonstrate, there is substantial wiggle room, particularly when it comes to the “secret exposure” prong of the penal code. In any event, it behooves prospective plaintiffs and their counsel to think twice before making threats to report in a demand letter.