Employer Recourse Options for Employee Credit Card Theft
Many employers issue company credit cards to trusted employees as a convenient means to pay employee travel related expenses, handle vendor payments, and cover other types of recurring business expenses. Unfortunately, sometimes employees will succumb to temptation and misuse a business credit card to pay for personal items or obtain cash, and because of the multiplicity of credit payment facilities, it is possible for the employee to conceal the identity of the payee appearing on the credit card statement. For example, an employee with a PayPal® account can change the name of the payee, so the employee can charge personal expenses or cash and the charges on the credit card statement will be listed in the name of a legitimate company vendor, defeating audit and financial controls. Since the dishonest employee is generally trusted, personal expenses and cash can accumulate into hundreds of thousands of dollars of embezzled funds.
Employer options to recover credit card embezzlement from the credit card issuer are limited, and usually the employee who has misused the credit card has no assets that can be attached. Insurance coverage for employee dishonesty may provide the employer with some protection, at least up to the insurance policy limits. Generally, credit card companies will reimburse a credit card holder for charges made on lost or stolen credit cards, and if the employee who used the credit card stole the credit card (i.e. was not authorized to use the credit card for any reason), recovery of payments made on the credit card from the credit card issuer may be obtained on that basis. However, cardholder contracts typically include terms providing that the cardholder is liable for all charges made on a credit card that the cardholder allows another person use, regardless of whether the charges were authorized. Thus, the cardholder contract will prevent an employer from recovering unauthorized charges from the credit card issuer if the employee was permitted to use the credit card for any reason.
The Truth In Lending Act (“TILA”) limits credit card holder liability for unauthorized use to $50.00, and this limitation applies to business credit cards. 15 U.S.C. § 1602(c); American Airlines, Inc. v. Remis Industries, Inc., 494 F.2d 196, 200 (2nd Cir. 1974). However, the limitation of liability does not apply after the employer pays the credit card bill, but instead only protects the employer from a lawsuit by the credit card issuer for unpaid credit card charges. Azur v. Chase Bank, USA, 601 F.3d 212, 217 (3rd Cir. 2010). Moreover, under the doctrine of apparent authority, the credit card issuer is not liable under the TILA or the credit card contract if the card user has apparent authority to use the credit card. Azur, supra; DBI Architects, P.C. v. Am. Express Travel-Related Services, Co., 388 F.3d 363, 368 (C.A. District of Columbia Cir. 2004). What constitutes apparent authority is based on state law agency principles. Regulation Z, 12 C.F.R. pt. 226, Supp. I, at 418. Frequently, apparent authority is established by demonstrating that the employer has repeatedly paid the unauthorized credit card charges. DBI Architects, supra.
Through oversight or because of other reasons such as inadequate financial controls it is not uncommon for an employer to have paid unauthorized credit card charges for months and even years before discovering the embezzlement. However, by paying the credit card charges, the employer has cloaked the unauthorized employee with apparent authority to use the credit card and may thereafter be prevented from recovering compensation from the credit card issuer for the unauthorized charges, which may amount to several hundred thousand dollars. See, Permobile v. Am. Express Travel Related Servs. Co., 51 F.Supp. 2d 825, 829 (M.D. Tenn. 2008) ($1,296,680 in unauthorized credit card charges); DBI Architects, supra ($296,949 in unauthorized credit card charges); Minskof v. American Express Travel Related Servs. Co., 1995 U.S. Dist Lexis 12930, *6 (S.D. N. Y.) ($260,891.75 in fraudulent credit card charges); Annett Holdings, Inc. v. Kum $ Go, L.C., 801 N.W.2d 499, 501 (Iowa Sup. 2011) ($298,524.79 in unauthorized credit card charges).
While recourse may not be available to employers under the credit card contract and the TILA, employers have successfully recovered embezzled funds from credit card issuers and vendors based upon claims of negligence, conversion and negligent misrepresentation. Permobile v. Am. Express, supra (allowing suit against credit card issuer to proceed on claims of negligence, conversion and negligent misrepresentation; Permobile, Inc. v. GMRI, Inc., 2011 U.S. Dist LEXIS 12451 (M.D. Tenn.) (allowing suit against vendor accepting credit card to proceed on claims of negligence, conversion and negligent misrepresentation). On the issue of negligent misrepresentation, privity of contract is not required. See, Id; Azur, supra. However, on the issue of negligence, when no contractual relationship exists, the economic loss rule can be asserted to bar recovery from a third party vendor). Annett Holdings, supra. The economic loss rule bars recovery in negligence when the injured party has only monetary damages. Id. The applicability of the economic loss rule depends upon state law. See, Id; Permobile v. Am. Express, supra; Azur, supra.
The best way to manage the risk of employee credit card theft short of eliminating employee credit cards is to institute strict financial controls (including careful review of credit card statements and payment approval procedures), outside audits, and to maintain employee dishonesty insurance with adequate policy limits. In employee credit card misuse situations, claims and defenses under the TILA, the credit card contract and state law are fact intensive and can be highly nuanced. There are many advantages to consulting with an attorney concerning employee theft and embezzlement issues. Folkerth and Folkerth has substantial experience addressing and pursuing employee theft and embezzlement issues.
Disclaimer: This article has been prepared by attorneys employed by this firm and is provided for general information purposes only to permit you to learn more about our firm, our services and the experience of our attorneys. The information presented is not legal advice, may not be applicable or may be contrary to the laws of certain jurisdictions, is not to be acted upon as legal advice, may not be current, and is subject to change without notice.