The Law Office of Kurt H King

March 27, 2012

Embezzler Entitled to Offset for Accounting Firm’s Failure to Catch the Embezzlement

Filed under: Litigation — kurthking @ 4:54 pm
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Interesting new Missouri case out of the Eastern Division of the Court of Appeals involving embezzlement of roughly $2.4 million–Moore Automotive Group v. Lewis, et al., Slip Op. No. ED95870 (Filed March 20, 2012).

Over 8 years, the Chief Financial Officer of the plaintiff automotive group (the “Group”) embezzles over $2.4 million to “pay her personal expenses.”  The accounting firm used by the Group fails to catch the embezzlement.  When finally caught, the CFO/employee pleads guilty in U.S. District Court.  The Group sues the employee for the $2.4 million and the court grants summary judgment for the Group against the employee, based on written motions without a trial to the court or jury.  The employee appeals, contending that it is error to grant summary judgment because there is a material fact as to how much the $2.4 million should be reduced by offsets.  The main offsets are the $1.5 million the accounting paid firm paid the Group for its mistakes in not catching the embezzlement; another $500,000 of accounting fees that the accounting firm “forgave”–wrote off; and $115k from American Express. 

All agreed that the $115k paid by American Express to the Group is an offset which reduced the $2.4 million total.  The main question addressed by the court of appeals is whether the $1.5 million paid in settlement by the accounting firm is also an offset.  Ultimately, the court of appeals ruled that “yes” the $1.5 million is an offset, and sent the case back down to the trial court without reaching the argument for further offset due to the $500k forgiveness of accounting fees.

The main rule of law applied is simple–“Under Missouri law, a plaintiff is entitled to only one satisfaction of the same wrong.”   So, the Group cannot have judgment against  the employee for $2.4 million, take the $1.5 million in settlement from that the accounting firm, ($500k accounting fee write off?), and receive $115k from American Express since all that would total $4 million for a $2.4 million loss. 

So the Group hatched Plan A–argue that the $1.5 million was for something else besides the embezzlement.  This the Group could not show.  In fact the facts pointed the opposite direction as important witnesses basically said that the reason why the accounting firm paid the $1.5 million was to settle the Group’s claim against the firm for failure to prevent or detect the embezzlement.  

Losing on that one, the Group goes to Plan B–the Collateral Source Rule precludes the embezzler from benefitting from the $1.5 million paid by a collateral source, i.e., the accounting firm.  But, the Rule is mainly to prevent the wrongdoer from benefitting from payments by insurance companies  to which the injured plaintiff typically pays insurance premiums.  Clearly a wrongdoer should not benefit from insurance for which the injured plaintiff has been paying out his/her/its own pocket.  While the Rule has been stretched a bit beyond the typical insurance scenario, the court of appeals declines to pull it so far as to cover the accounting firm’s payment of $1.5 million.

The Group loses on Plan B too.  The court of appeals simply sees the $1.5 million settlement as a contract after the loss and not as insurance premium payments.  The Rule does not apply and the result is that the $1.5 million offset applies to cut the Group’s damages to around $900k (and maybe down another $500k for the accounting fees that firm wrote off).

This may seem like a big win for the embezzler–and it is–but the accounting firm and American Express could sue her for indemnity or contribution to recover the money they had to pay the Group due to to the embezzlement.  The result may be more lawsuits  against the embezzler by the accounting firm for $1.5 million and maybe another $500k, and $115k by American Express–which may or may not happen depending on whether the embezzler is now bankrupt, litigation costs, etc.  There was also reference to sale of her assets in connection with her plea bargain on criminal charges in federal court  so there may be some restitution required there that might conceivably put some money back in the pockets of the accounting firm and American Express.

Of note for attorneys is the court of appeals’ indication that a claim for offset should be pled as an affirmative defense or the offset may be lost.

Kurt H. King

Law Office of Kurt H. King, 20 E. Franklin, Liberty, Clay County, Missouri 64068

816.781.6000

Civil & Business Litigation, Bankruptcy

Personal Injury & Workers’ Compensation

Family Law–Child Custody & Support, Paternity, Dissolution & Modification

www.kurthking.com

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