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Estate of Beim v. Hirsch

121 Fed.Appx. 950, 2005 WL 332412 (3d Cir. 2005)

AGENCY; VICARIOUS LIABILITY—Vicarious liability can not be established where an employee’s conduct would be outrageously criminal and not in any sense in the service of the employer’s interest.

Investors lost money in what was essentially a check-kiting scheme. A financing company’s employee ostensibly sold “Factoring Agreements” on behalf of his employer. In fact, he sold some for his own account. One such Factoring Agreement was for accounts receivable for good allegedly sold by a particular manufacturer. In reality, there was no such manufacturer; there was no inventory; and no goods were sold. The employee “was really engaging in short-term loans in which he agreed to repay the amount his investors gave him along with a ‘discount fee,’ i.e., interest.” The employee’s “only apparent source of money to repay the loans he received in addition to the interest he promised was the money he received from other investors. ... To keep the scheme going at the time he was to repay an investor’s loan, [the employee] would often present the investor with the profit due and a cashier’s check for the initial investment, but convinced the investor to ‘reinvest’ the check.” The investors were presented with a number of official bank checks signed by a bank employee, and, “in order to verify that the funds were available, [the schemer] would call [the bank employee] and put [the investors] on the phone or [the investors] would independently call [the bank employee] and she would affirmatively state that [the schemer’s] checks were always honored, that sufficient funds were ‘always available’ to cover his checks, and money was coming into his accounts on a daily basis, and the bank would honor any of his checks, and that [the schemer] had an excellent relationship with the bank.” One of the investors also spoke to other bank employees who made similar representations, “allegedly at the instruction of [the same bank employee].” To obtain such favorable treatment, the schemer gave the bank employee various gifts, “including airplane tickets, hotel accommodations and consumer gifts… .”

At issue before the Court, was whether the bank was vicariously liable for its employee’s acts. Under New Jersey law, “vicarious liability would attach only where an employee was acting within the scope of [his or her] employment. To determine whether an employee is acting within the scope of employment, New Jersey courts apply the Second Restatement of Agency test.” It is a two part test, the first part being: “(1) Conduct of a servant is within the scope of employment if, but only if: (a) it is of the kind he is employed to perform; (b) it occurs substantially within the authorized time and space limits; (c) it is actuated, at least in part, by a purpose to serve the master, and (d) if force is intentionally used by the servant against another, the use of force is not unexpectable by the master.” The second criteria is as follows: “(2) Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.”

The lower court found that the test as to whether the bank employee’s conduct “was of the kind that she was employed to perform was met because the trier of fact could conclude that [the bank employee] was authorized to write cashier’s checks drawn on a customer’s account and provide [payees] with assurances that the checks would be honored by the bank.” The lower court also found that the bank employee’s conduct “occurred substantially within the authorized time and space limits.” However, the lower court ultimately ruled in favor of the bank because “vicarious liability could not be established where an employee’s conduct ‘would be “outrageously criminal” and “not in any sense in the service of the employer’s interest.’” The fact that the bank employee received gifts from the schemer was evidence that the bank employee’s “illegal conduct was entirely in furtherance of her own personal interest.” There was no dispute that the bank employee “was intentionally and criminally aiding and abetting [the schemer] by concealing his overdrafts and misrepresenting the condition of his overdrawn accounts, and [the bank employee’s] conduct was in no way in furtherance of [the bank’s] interests.”

On appeal, the Appellate Division pointed out that there was no evidence that the bank employee was acting in the interest of the bank. It didn’t matter to the Court that the bank employee “was extraordinarily trustworthy and a competent and long-time, loyal employee” because that did not prove that the bank employee acted out of a desire to benefit the bank. It may have been that the bank employee’s involvement in the scheme was out of character, but, according to the Court, this did “not offer any explanation as to why she did what she did.” On the other hand, the Court was persuaded that the bank employee’s gifts from the schemer were evidence that the bank employee’s conduct was motivated by self-interest.


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