A Colorado automotive finance manager accused of ‘power-booking’ learns that committing fraud invalidates his claims for compensation.
In simplest legal terms, indemnification involves a compensation or reparation for a loss. A recent Colorado case demonstrates that an employer has no responsibility to indemnify an employee who has knowingly acted wrongfully.
In late August of 2013, the Colorado Court of Appeals ruled in the case 2013 COA 128. No. 12CA0906. Premier Members Federal Credit Union v. Block. The case was an appeal by the defendant, Darrell Einspahr, of a fraud claim brought by Premier.
Einspahr previously worked as a manager in the special finance department of Quality Mitsubishi, Inc., a company owned by Henry Block that operates in association with the Broadway Automotive Group, Inc., also named in the original suit. Einspahr’s job involved advocating that Premier underwrite car loans for potentially high-risk automobile buyers. Premier sued Einspahr and another employee of Quality, Inc., accusing both of a fraudulent practice known as ‘power-booking.’
Power-booking involves the dealer’s representative (in this case Einspahr) falsely appraising the value of a vehicle to potential loan companies, thereby enticing them to approve seemingly more lucrative loans by luring them with artificially inflated loan-to-value ratios. This is typically achieved by fictitiously adding expensive options—such as a sport package or high-end stereo—to a submitted statement regarding the vehicle.
During the course of the appeal, Einspahr took issue with two elements of Premier’s successful case against him.
Firstly, the special finance manager argued that the trial court had wrongly rejected his request for a trial by jury. The appeals court responded by pointing out that Einspahr, quite simply, had failed to pay his fee for a jury trial prior to a statutory deadline. Thus, the trial court was deemed correct in denying him this request.
Secondly, and more importantly, Einspahr contended that his counter-claim against his employer had been wrongly dismissed. In this claim, Einspahr endeavored to make the case that his employer had been aware that he was engaging in the fraudulent activity of power-booking, and therefore was vicariously liable. The court responded that regardless of whether Quality was attentive to his power-booking or not, Einspahr knowingly engaged in a wrongful act, and thus could not be construed as an “innocent agent” according to the accepted legal definition of Agency. (Restatement (Second) of Agency § 439 cmt. g). Consequently, Einspahr was denied his claim to indemnity (i.e. compensation for loss) from his former employer.
A few legal principles emerge from Einspahr’s story. Intentional fraud on the part of an agent precludes indemnity obligations on the part of the principal and, if you want a jury trial, make sure you pay your fees on time.