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Imputation Where the Employee’s Fraud Benefits the Employer

Where a corporate insider’s fraud harms a third party, an important, if not dispositive, issue will become whether the knowledge of the insider committing the fraud is imputed to the corporation. Wardley Better Homes and Gardens v. Cannon, 2002 UT 99, 61 P.3d 1009 and Hodges v. Gibson Prods. Co., 811 P.2d 151 (Utah 1991). In Wardley, Arles Hansen was an agent of the real estate brokerage Wardley Better Homes and Gardens. Hansen fraudulently altered four one-day real estate brokerage listings, extending the listings for one-year. When another real estate broker sold the listed real estate, under a legitimate listing, in less than a year from the execution of the listing with Wardley, Wardley sued for its commission under the fraudulently-altered listing agreement. The knowledge of Hansen (the agent) was imputed to Wardley (the broker). The Utah Supreme Court in Wardley analyzed its own earlier opinion, Hodges v. Gibson Prods. Co., 811 P.2d 151, 156-57 (Utah 1991), in part as follows:

The court of appeals thus correctly recognized that under Hodges “knowledge of an employee can be imputed to his employer when an employee tortiously brings a legal action” that is in some degree motivated to fulfill the employer’s purposes. Wardley Better Homes & Garden v. Cannon, 2001 UT App. 48, ¶ 10, 21 P.3d 235 [Court of Appeals Decision]. . . .

Wardley, 2002 UT 99, 61 P.3d 1009 at ¶ 20. The Wardley case is unlike a case where the employee was embezzling money from the employer. By fraudulently altering the listing agreement, Hansen was attempting to defraud a third party for both his benefit and Wardley’s benefit, because they would be entitled to split a 7% real estate commission. An embezzler’s actions are not “in some degree motivated to fulfill the employer’s purposes.”

Highlighting this distinction are the underlying facts: Wardley initiated this action for its benefit in an effort to recover its commission under the fraudulently-altered listing agreement. The issue on appeal was whether Wardley’s lawsuit was meritless, requiring the award of attorney fees under Utah Code Ann. § 78-27-56 (now Utah Code Ann. § 78A-5-825). Because Hansen’s knowledge properly was imputed to Wardley, Wardley knew the listing was fraudulent and brought the action in bad faith.

© 2014 Mark A. Larsen

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