Collecting on a Loss Following an Employee Fraud

Employee Fraud Series

This article is from a four-part series offering valuable insights on managing fraud for businesses.  Each article is co-written by MNP’s Bailey Rivard and Breanne Campbell of SVR Lawyers.  

Part 1: Managing Corporate Risk when Employee Fraud is Suspected
Part 2: Mitigating the Company’s Risk After an Employee Fraud
Part 3: Collecting on a Loss Following an Employee Fraud
Part 4: Preventing and Detecting Employee Fraud

Article 3 of 4: Collecting on a Loss Following an Employee Fraud

In our last article - Mitigating the Company’s Risk After an Employee Fraud - we discussed a few of the steps a company should take to preserve evidence, protect its position pending litigation, as well as some costs and benefits in deciding whether to commence litigation to recover on a loss caused by an employee fraud. This article will discuss some of the steps involved in attempting to recover on the loss, from making an insurance claim, to commencing an action, to collecting on a judgment.

Insurance 

As noted previously, the company should consult with its insurance broker to determine whether it has a crime policy in place that will cover losses caused by employee theft. Coverage may exist in a standalone crime policy or could be included as an insert to a property policy.

• If the company has coverage, it will need to submit a proof of loss to its insurer. The insurer will require sufficient evidence to substantiate the amount of the loss before it will make a payment. If the company has a standalone crime policy, there may be some coverage for the cost of external parties who assist in preparing the proof of loss.
• If the loss is paid out by the insurer, then the insurer might choose to “subrogate” on the loss. That is, the insurer will step into the company’s shoes and issue a Statement of Claim against the employee, in the company’s name. The company will be obligated to cooperate with the insurer in its attempts to recover on the loss. If the limits of insurance do not fully cover the loss, then it is open to the insurer and the company to agree to both work together to recover on the loss, and split the legal fees and any amounts recovered on a pro rata basis (or however they may agree).
• Finally, if there is no insurance coverage for the loss, the company would be responsible for all the legal fees but would also be entitled to all of the funds recovered.

Asset Review 

It is not unusual in cases of employee fraud to discover the employee has no assets to enforce a judgment against. For example, the employee may have a gambling problem and the stolen money was used to fund that habit. On occasion, however, the stolen money will be used to make mortgage payments, invest, or to purchase valuable assets. Although the ability to recover on a loss is not the only reason to issue a Statement of Claim against the employee, it is an important factor to consider before incurring the expense of litigation. We already discussed some of the searches the company will conduct in our second article in this fraud series, including:

• The company will have already conducted a search at the Land Titles Office to determine if the employee owns any property. By reviewing the title, the company should be able to determine whether there is any equity in the property after the mortgage is considered.
• If the employee’s bank records were obtained as a result of a Norwich Order, then those can be reviewed with an eye to determining what other assets the employee may have. For example, perhaps they are making monthly payments towards a car lease, perhaps they are transferring money into a registered retirement savings account (RRSP), or recently purchased a large asset.
• The company can also pull the employee’s credit report and a report from the Personal Property Registry, as long as the company complies with the applicable privacy legislation. These reports will show the employee’s credit history, security agreements, and will include any prior judgments registered against the employee. A review of these registrations will help the company determine who will have priority ahead of it should the company obtain judgment.

Issuing the Statement of Claim 

Once the company has decided it wishes to obtain a judgment against the employee, it needs to start by serving the employee with a Statement of Claim. This can be done at the same time the employee is terminated for cause. A Statement of Claim is a document that outlines the allegations against the employee and seeks judgment against the employee for the amount stolen. The company should also consider whether any other parties could be liable for the loss. For example, the company’s auditor may have neglected to detect the on-going fraud, the financial institution may have accepted fraudulent cheques, or the officers or directors of the employer company may have breached their duty to appropriately manage the assets of the corporation. Any defendants named in the Statement of Claim will be given an opportunity to file a Statement of Defence. 

Obtaining Judgment 

If the defendants fail to file the Statement of Defence within the required timeframe, the company can note the defendants in default and proceed to obtain a judgment. If the defendants do file a Statement of Defence, then the company will have to proceed through the steps of litigation. However, if the evidence against the defendants is strong enough such that there is no genuine issue for trial and a judge can make a decision on the basis of affidavit evidence alone, then the company can apply for summary judgment. A report from a forensic accountant will be helpful in explaining how the fraud occurred and in quantifying the total loss for the court. 

Collecting on a Judgment 

In certain situations, such as where a third party other than the employee is sued, the third party may have insurance to pay out on a loss. However, collecting on a judgment against an employee can be more laborious and time-consuming. Once the company has obtained a judgment, it can register its writ of enforcement against the employee at the Land Titles Office and at the Personal Property Registry and begin the collections process. These steps can include:

• Conducting an Examination in Aid of Enforcement – This will require the employee to answer questions about his or her assets under oath.
• Issuing a garnishee summons pursuant to the Civil Enforcement Act – A garnishee summons can be served on the employee’s bank, new employer, or anyone who owes money to the employee. This is a document that will require the third party to instead post the available funds into court, rather than pay them to the employee. The funds will then be distributed to the various secured parties or other writ holders in accordance with the priorities outlined in the Civil Enforcement Act. It is noteworthy that certain assets cannot be garnished until the employee has been criminally convicted, such as an RRSP.
• Retaining a bailiff to attend the employee’s residence to seize assets – A bailiff can attend at the property to seize certain assets which can then be sold, and the proceeds distributed amongst the creditors in accordance with the Civil Enforcement Act. According to the Civil Enforcement Act, certain assets are exempt from seizure. For example, the employee is entitled to $4,000 worth of clothing, one vehicle worth up to $5,000, and a principal residence up to a value of $40,000.

Reporting to the Police/RCMP 

There are many reasons why a company would choose to report the crime to the police or RCMP. For example, the company may want to send a message to its other employees that fraud is not tolerated. The company may want to ensure that future companies do not hire this employee. The company’s insurance policy may require the fraud be reported. Finally, as noted above, the employee needs to be criminally convicted before retirement benefits (like an RRSP) can be garnished. 

Once the forensic investigation is complete and the litigation is underway, the company should turn its mind to fraud prevention and detection policies. This will be the subject of our next article - Preventing and Detecting Employee Fraud.

Disclaimer: This article is provided solely for information purposes. The information presented does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice.

Contact:

Breanne Campbell
[email protected]
403.231.8215

Breanne is a partner at SVR Lawyers and advises clients on a broad range of fraud claims including theft of corporate opportunity, employee embezzlement, and insurance fraud.

Bailey Rivard, CPA, CA·IFA, CBV, CFE, CFF
[email protected] 
403.536.2185

Bailey is a partner in MNP’s Valuations, Forensics and Litigation Support Services group. She provides independent investigation and litigation support services to clients and counsel when fraud or other wrongdoing is suspected.