United States District Court, E.D. Michigan, Northern Division
OPINION AND ORDER STATING FINDINGS OF FACT AND
CONCLUSIONS OF LAW
L. LUDINGTON UNITED STATES DISTRICT JUDGE
April 18, 2016, Plaintiff Federal Insurance Company (Federal)
filed a complaint against Defendant Penny Fairbotham (Mrs.
Fairbotham). ECF No. 1. Federal alleged that Mrs. Fairbotham
pled no contest to embezzling $174, 690.00 from its subrogee,
Jim Wernig, Inc.. Accordingly, Federal contended and that
Mrs. Fairbotham is liable to it for her wrongful conversion
of the funds. Plaintiff also asserts that it is entitled to
treble damages and attorneys' fees pursuant to M.C.L.
Mrs. Fairbotham filed an answer on May 13, 2016 the case was
referred to Magistrate Judge Patricia T. Morris for pretrial
management. See ECF No. 4. On November 1, 2016, Plaintiff
Federal Insurance Company filed a motion for summary
judgment. ECF No. 10. Mrs. Fairbotham filed a response on
November 18, 2016. ECF No. 12. After the motion was fully
briefed, Judge Morris issued a report recommending that
Federal's motion for summary judgment be denied. ECF No.
Morris found that Mrs. Fairbotham's no contest plea was
not entitled to any preclusive effect under Michigan law, and
thus did not resolve her civil responsibility to Federal for
the embezzled funds. She further explained as follows:
Plaintiff's provision of Fairbotham's case history
from the Gaylord Police Department, her payment schedule as
ordered by the state court, emails from the Otsego County
Prosecutor, and a newspaper article noting that Fairbotham
was arrested on charges of embezzlement likewise fail to
demonstrate that she embezzled from JWI. (Doc. 10 Exs. 5, 6,
7, 8). Plaintiff has failed to carry its burden in
demonstrating that Fairbotham was the tortfeasor responsible
for the damages incurred by JWI, the amount of those damages,
and that Plaintiff is entitled to reclaim the damages
incurred by JWI.
& Rec. at 9, ECF No. 14. The Court entered an order
adopting the report and recommendation on April 10, 2017. A
bench trial was scheduled and was held on November 7, 2017.
Mrs. Fairbotham attended. Federal called a single witness:
Mr. Eugene Skiba. Pursuant to Federal Rule of Civil Procedure
52(a)(1), the following are the relevant facts.
Fairbotham managed two businesses, the Value Corral and
U-Save Auto (the businesses) operated by Plaintiff's
insured, Jim Wernig, Inc. (Wernig) in the city of Gaylord,
Michigan. The Value Corral was described as a “buy
here/pay here” used car business primarily serving
customers who are unable to obtain other financing. U-Save
Auto is a car rental franchise. Both businesses were
ultimately located in a common building, but were separate
businesses with separate business records.
Fairbotham's husband was purchasing and operating the
Value Corral between 2003 and 2007 pursuant to a land
contract sales agreement with Eugene Skiba (Mr. Skiba). Mr.
Skiba is also an owner of Jim Wernig, Inc. Mrs. Fairbotham
served as manager during the time she and her husband
operated the businesses. Around 2008, Mr. Skiba reclaimed
ownership of the Value Corral because Mr. Fairbotham fell
behind on his land contract payments. Mrs. Fairbotham,
however, continued to manage the Value Corral for Jim Wernig,
Mrs. Fairbotham ran the Value Corral and Mike Murphy ran the
U-Save Auto. The businesses were ultimately moved into one
building and then Mrs. Fairbotham ran both of them. Trial Tr.
at 68:24-69:6. Between early 2011 and 2012, Kyle Skiba
(Kyle), Mr. Skiba's son, and Kyle's friend Jae
Stinson (Jae) began filling in for Mrs. Fairbotham. Mrs.
Fairbotham worked at the businesses the majority of the time,
but she did not work every other Saturday. Id. at
66:1-9. She also took periodic vacations and occasional
weekdays off. Id. When she was not working, Jae
would operate the businesses. When Jae did not fill in for
her, Kyle would. Neither Jae nor Kyle ever worked
contemporaneously with Mrs. Fairbotham.
Mrs. Fairbotham was working, she was the only one who
accessed cash and checks from customers and recorded the
transactions in the computer bookkeeping software. There was
only one set of log-in credentials for the computer system,
which were Mrs. Fairbotham's credentials. Id. at
64:8-24. The other employees were authorized to use Mrs.
Fairbotham's log- in credentials. Id. at
64:5-18. Mrs. Fairbotham trained Jae to use the bookkeeping
software. With one limited exception, no employees besides
Mrs. Fairbotham, Jae, Kyle, and Mike Murphy had access to
cash, checks, or the computer system during the relevant time
periods. See Id. at 67:25- 66:8; 68:24-69:6.
Fairbotham testified that Jae and Kyle were instructed to
deposit the cash and checks received each day that they
worked. Id. at 122:1-24. She further testified that
each time Jae or Kyle filled in for her, cash and checks were
always deposited prior to her return. Id. Mr. Skiba
testified, on the contrary, that Jae and Kyle told him that
Mrs. Fairbotham instructed them not to make deposits but to
leave the cash and checks at the businesses until she
returned. Id. at 67:1-24.
close of business each day, Mrs. Fairbotham prepared a
summary of the day's business (hereinafter “daily
reports” or “bank deposit reports”) and
provided a copy to Mr. Skiba's financial manager, Marilyn
Willits (Ms. Willits), at the Jim Wernig Chevrolet
dealership. Id. at 73:1-23 93:16-21; Pl.'s Tr.
Br. Ex. 1 (RGL Report) at 2, ECF No. 25-2. The daily reports
recorded cash and checks collected at the businesses,
payments for business expenses made in cash or by check, and
a receipt for the daily bank deposits made. Trial Tr. at
73:1-23 93:16-21. The daily income was entered into
the bookkeeping software.
Willits was to reconcile the daily reports she received from
Mrs. Fairbotham with the bank statements from First Federal
Bank. Pl.'s Tr. Br. Ex. 1 (RGL Report) at 2. With one
potential exception, between 2008 and 2013 neither Mr. Skiba
nor Ms. Willits questioned Mrs. Fairbotham regarding the
daily reports she furnished them, questioned her about the
finances of the businesses, or suspected that any money was
addition to filling in for Mrs. Fairbotham as an employee at
the businesses, Jae was also a customer of U-Save. On one
occasion in July of 2013, Jae reported to Mr. Skiba that he
rented two vehicles over the long fourth of July Weekend.
79:4-9. He reported to Mr. Skiba that he paid somewhere
between 50 and 100 dollars for each. Trial Tr. at 79:4-9. Jae
informed him that he prepared and stapled the rental
agreements to the outside of two envelopes, wrote a
description on the envelopes, placed the cash inside the
envelopes, placed the envelopes into the cash register, and
later discovered that the cash was not deposited at First
Federal Bank. Trial Tr. at 79:10-82:5; 97:19-102:23. Mrs.
Fairbotham was not working the day Jae rented the vehicles.
learning about the missing money from Kyle, Mr. Skiba
confronted Mrs. Fairbotham. Ms. Fairbotham was unable to
locate Jae's envelopes or money, but did locate the
rental agreements. Id. Mr. Skiba called the police.
Id. Mrs. Fairbotham allegedly said she would write
him a check for the missing money. Id. Sometime
thereafter, Mrs. Fairbotham approached Mr. Skiba indicating
she had located the envelopes and handed Mr. Skiba envelopes
with cash inside. Id. Although the amount of money
was correct, the envelopes did not match the description Jae
provided, as they were plain envelopes with no writing on
Skiba also reported that Mrs. Fairbotham told him she found
the envelopes in the “file” whereas Jae told Kyle
he put them in the cash register. Id. Additionally,
Mr. Skiba had previously noted when examining the rental
agreements that the corners were ripped, as if they had been
stapled to the original envelopes and then torn off. However,
the envelopes produced to him by Mrs. Fairbotham had no
staple marks. Id. Mr. Skiba examined recent deposit
reports and discovered that no cash deposits had been made
for roughly two months, though he was quite sure there were
cash rentals made during that period of time. Id.
Mr. Skiba then placed Mrs. Fairbotham on leave pending an
internal investigation, and ultimately dismissed her.
Skiba directed Kyle, Jae, and Ms. Willits to begin an
internal investigation of the Value Corral's books.
Id. at 83:6-85:20. He testified that they reviewed
“several thousand pages” of daily reports
produced by Mrs. Fairbotham each day to Ms. Willits between
2008 and 2013. Id. at 86:21-25. He testified that
Kyle, Jae, and Ms. Willits found the original daily reports
prepared by Mrs. Fairbotham, and a second set of photocopied
reports prepared by Mrs. Fairbotham to conceal the missing
funds. Id. at 72:24-76:13; 94:14-97:15.
Skiba testified that the original copies of the daily reports
contained “miscellaneous paid-outs” or
“pay-outs, ” indicating that cash intake had been
paid out for various purposes such as fuel. Id. at
72:24-76:13; 94:14-97:15. These miscellaneous pay-outs tended
to take place between 5:50pm and 6:01pm each day.
Importantly, these miscellaneous pay-outs contained no
corresponding receipts documenting the use of the cash.
Id. at 72:24-76:13; 94:14-97:15.
Skiba testified that the copies of these daily reports that
Mrs. Fairbotham furnished to Ms. Willits did not match the
originals located at the businesses. Id. at
72:24-76:13; 94:14- 97:15. The supporting receipts and
deposit slips were photocopied along with the deposit report
so as to physically cover up the entry on the deposit report
for the miscellaneous payout amount.Id. at 72:24-76:13;
94:14-97:1.; RGL Report at 2, ECF No. 25-2. Thus,
Ms. Willits could not see an entry for miscellaneous payout
amounts, but only was able to read the total cash, total
checks, and total deposit. Id. at 72:24-76:13;
94:14-97:1.; RGL Report at 2, ECF No. 25-2
Skiba and his employees prepared a summary of their findings
for each month of the relevant period, and found a cash
shortage of roughly $183, 000 between 2008 and 2013.
See Skiba Aff. at 4, ECF No. 10-10. The breakdown of
loss by year was as follows: 2008: $2, 827; 2009: $21, 590;
2010: $31, 177; 2011: $59, 862; 2012: $39, 340; 2013: $28,
475. Id. The shortage represented the difference
between the amount of the business's cash and check
revenue as reflected in the daily reports and the bookkeeping
records, and the amount deposited at the bank.
Skiba testified that he later engaged CPA firm Miller &
Cook, LLP to review the findings. Trial Tr. at 84:3-6;
85:14-16. Miller & Cook sent Mr. Skiba a letter, dated
September 15, 2013, which describes their procedures and
conclusions. The letter provides as follows:
We have performed procedures in the following page 1 and
referenced schedules which were agreed to by you, solely to
assist you in the answering your request for information.
This engagement to apply agreed-upon procedures was performed
in accordance with attestation standards established by the
America Institute of Certified Public Accountants. The
sufficiency of the procedures is solely the responsibility of
the specified users of the report. Consequently, we make no
such representation regarding the sufficiency of the
procedures listed in the following page 1 and referenced
schedules either for the purpose for which this report has
been requested or for any other purpose. The results of
our procedures are listed in the following page 1. We
were not engaged to, and did not, perform an examination, the
objective of which would be the expression of an opinion on
the accompanying information. Accordingly, we do not express
such an opinion. Had we performed additional procedures,
other matters might have come to our attention that would
have been reported to you. This report is solely for
your information and use and is not intended to be and should
not be used by anyone other than you. We understand you may
share this report with local law enforcement and your
Wernig submitted a claim to Federal based on the internal
investigation, claiming embezzled funds in an amount of
roughly $183, 000. Federal then engaged RGL Logistics to
conduct an examination of the embezzlement claim. RGL
reviewed the documents provided to them by Mr. Skiba, which
included system bank deposit reports, deposit slips, and bank
statements. Pl.'s Tr. Br. Ex. 1 (RGL Report) at
4, ECF No. 25-2. They too compared the revenue information
with the bank statements. Id. Specifically, RGL
examined a sample size of 18 months including March and June
of each year from 2008 to 2013, and February through
September of 2011. Id. RGL prepared a report of its
findings, and compared them with the loss claimed by Mr.
found a 98.53% percent correlation between Mr. Skiba's
claimed loss of $65, 400 for the sample months and the $64,
400 loss they calculated using the records he provided to
them. Id. at Schedule 1. Based on the correlation
between these two calculations, RGL extrapolated that
correlation for the entirety of the period of claimed ...