How Employee F&I Fraud Can Come Home to Roost

June 2009, Auto Dealer Today - WebXclusive

by Thomas B. Hudson, Esq. - Also by this author

So, your dealership’s employee dummies-up a credit application with bogus income information in order to get the bank to buy the deal, enabling the employee to earn his commission. No one else at the dealership is aware of the fraud. Then, the employee’s acts are discovered.

That’s a real problem for the employee, but the dealership should be off the hook for any liability, since no one else at the dealership was in on the scheme or knew anything about it, right?

Wrong! Here’s a recent case that illustrates one example of a dealership’s potential liability in situations like these.

Rosemary Dillinger and Clifford Mounts bought a vehicle from Rub Chevrolet Buick Oldsmobile, Inc. When applying for credit to finance the purchase, Dillinger and Mounts signed a blank credit application. A Rub employee later completed the application with false income information.

First National Bank of Ottawa, believing the application to be truthful, agreed to buy the financing contract. After Dillinger and Mounts defaulted and the vehicle was repossessed, First National Bank sued Dillinger, Mounts and the dealership for breach of contract and fraudulent misrepresentation. The trial court ruled for First National Bank with respect to its allegations against Dillinger and Mounts and found that Rub fraudulently misrepresented their incomes, but rejected First National Bank’s claim that the dealership breached its contract.

First National Bank appealed that latter ruling. The Appellate Court of Illinois reversed the trial court on this issue, finding that the employee’s falsification did constitute a breach of contract by Rub.

Rub’s contract with First National Bank contained a warranty that the sale of the vehicle was completed in accordance with federal and state law. First National Bank argued that the sale to Dillinger and Mounts violated a state law prohibiting wire fraud. The state law elements of wire fraud included showing: (1) a scheme to defraud by means of false pretenses, representations, or promises; and (2) transmission of a document in furtherance of the scheme.

The appellate court noted that undisputed evidence established that Rub’s employee violated the wire fraud provision. The court held Rub liable for breach of its contractual warranty to First National Bank as a result of that conduct because Rub did not establish that the employee acted outside the scope of his employment.

So, at the end of the day, the dealership is liable on a fraud and a breach of contract claim for the illegal actions of its employee.

Perhaps it is time to tighten up on the oversight of your dealership’s F&I processes and procedures. Maybe a little compliance and ethics training would be a good idea, too.

Vol. 6, Issue 3

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