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Federal Insurance Co. v. Fairbotham

United States District Court, E.D. Michigan, Northern Division

December 12, 2017

FEDERAL INSURANCE COMPANY, Plaintiff,
v.
PENNY FAIRBOTHAM, Defendant.

          OPINION AND ORDER STATING FINDINGS OF FACT AND CONCLUSIONS OF LAW

          THOMAS L. LUDINGTON UNITED STATES DISTRICT JUDGE

         On 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. § 600.2919(a).

         After 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. 14.

         Judge 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.

         Rep. & 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.

         I.

         Mrs. 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.

         Mrs. 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, Inc.

         A.

         Initially, 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.

         When 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.

         Mrs. 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.

         At the 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.

         Ms. 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 missing.

         B.

         In 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. Id.

         After 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 them.

         Mr. 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. Id.

         Mr. 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.

         Mr. 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.

         Mr. 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.[1]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 .

         Mr. 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.

         Mr. 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.[2] 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 insurance company.

(emphasis added).

         Jim 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[3]. 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. Skiba.

         RGL 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 ...


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