Penal Code 484b PC - Diversion of a Construction Loan
Construction projects require large sums of money to be paid, much of it upfront. The building industry depends on the ability to receive vast amounts of cash, sometimes on relatively short notice.
With large sums constantly changing hands, there is always a risk that dishonest contractors and those within real estate might be tempted to divert money intended to cover construction costs.
Contractors frequently obtain construction loans to pay for these expenses, but these loans carry a certain amount of risk to the lender because since the project isn't completed yet, they must lend the money in good faith.
For that reason, under Penal Code 484b PC, it's a crime in California to divert money from a construction loan for any purpose other than that for which the loan was issued. If you're accused of violating this law, you could face felony charges with penalties of up to 3 years in prison.
PC 484b says, “Any person who receives money for the purpose of obtaining or paying for services, labor, materials or equipment and willfully fails to apply such money for such purpose by either willfully failing to complete the improvements for which funds were provided or willfully failing to pay for services, labor, materials or equipment provided incident to such construction, and wrongfully diverts the funds to a use other than that for which the funds were received, shall be guilty of a public offense and shall be punishable….”
Simply put, PC 484b allows the prosecution of people who receive money for construction purposes, fail to use it for its intended purpose, and divert and use it for other purposes. Construction loans are intended to pay for services, labor, materials, and equipment. Let's review this state law further below.
What Does the Law Say?
As noted, under California Penal Code 484b, it's a crime to divert money loaned for "obtaining or paying for services, labor, materials or equipment."
This includes diverting existing loan funds and obtaining an additional loan under false pretenses. For example, the lender could be a company, such as a bank, or a private individual, such as a homeowner making a down payment to a contractor.
To be found guilty of this crime, the prosecution must prove that:
- You received money for the express purpose of procuring services, labor, materials, or equipment for a construction project;
- You willfully failed to use the money for its intended purpose, whether by failing to complete the project itself or failing to pay for the services/labor/materials for which it was given; and
- You instead willfully used the funds for some other purpose.
What Are Some Examples?
EXAMPLE 1: Dan is a developer who plans to build a multi-family dwelling on a piece of land he's purchased, and he obtains a construction loan to hire the contractors to build it.
Before construction can begin, however, Dan loses a great deal of money invested in another company that failed, and he quickly uses the construction funds to pay off his debts.
As a result, Dan could be charged under PC 484b PC for diverting construction money for something else.
EXAMPLE 2: Alice is a subcontractor hired by a contractor to work on a construction project. The contractor gives her money from the construction loan, but instead of using it for materials or labor, she uses it to purchase a car for herself.
Here, Alice could be charged with violating PC 484b for diverting construction funds intended for the project and using them for other purposes.
What Are the Related Crimes?
Several California laws are related to Penal Code 484b diversion of a construction loan, such as the following:
- Penal Code 487 PC – grand theft,
- Penal Code 484 PC – petty theft;
- Penal Code 532f PC – mortgage fraud;
- Penal Code 459 PC - burglary;
- Business and Professions Code 7027.3 BPC - fraudulent use of contractor's license.
What Are the Penalties for PC 484b?
A violation of PC 484b can be charged either as a misdemeanor or a felony, depending on the circumstances of the case:
- If the diverted amount is less than $2350, the charge is a misdemeanor. If convicted, you could face up to 6 months in jail;
- If the diverted amount is $2350 or greater, it's a "wobbler," meaning prosecutors may charge it either as a felony or as a misdemeanor;
- If you're convicted of a misdemeanor at this level, you could face up to a year in county jail. If a felony, you could face up to 3 years in prison.
Additionally, suppose you're convicted of diverting a construction loan at any level. In that case, you will likely have to pay fines and restitution to the victim for the amount diverted.
What Are the Defenses for PC 484b?
Because there may be many reasons a loan is not used for its intended purpose, willfulness is the determining factor when prosecutors try to obtain a conviction.
In other words, they must show that you willfully diverted the money instead of being overwhelmed with debt or misspending it due to faulty accounting or planning. So, most defenses against PC 484b charges have something to do with disproving willfulness. Some examples are discussed below.
Perhaps we can argue that you became insolvent and couldn't complete the job. If you were drowning in debt when obtaining the loan and could not complete the project with the funds provided, you may be civilly liable, but you shouldn't be charged with a crime.
Perhaps we can argue that there was mismanagement of funds. For example, suppose you didn't finish the project because of poor budgeting or money management, but all the money you gave was devoted to the project.
In that case, you may be civilly liable, but your attorney may be able to get the criminal charges dismissed. If you are under investigation or arrested for Penal Code 484b diversion of a construction loan, contact our law firm to review the case details and legal options.
Perhaps we can negotiate with the prosecutor for reduced charges or convince them not to file formal charges in the first place (DA reject). Feel free to contact us for a case review via phone or the contact form. Eisner Gorin LLP is based in Los Angeles, CA.
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