Law firm’s restitution reduced in theft appeal

The Court of Appeals of Virginia has reduced a $125,000 restitution award granted to a law firm after its real estate paralegal pled guilty to embezzling nearly $650,000.

The circuit court awarded the restitution for several expenses the firm alleged were caused by the embezzlement, including insurance costs, forensic accounting fees, bar sanctions and “anticipated future costs.”

But Judge Daniel E. Ortiz said that some of those costs “were too attenuated because the Commonwealth failed to prove the costs were directly related to [the] crime or the firm had independent duties related to account management and employee supervision.”

To resolve tension between the “but for” and the “attenuation” restitution analyses, Ortiz looked to proximate cause to determine whether the damages or losses were directly caused by the offense.

Ortiz was joined in the opinion by Judge Wesley G. Russell Jr. Judge Stuart A. Raphael concurred but disagreed with the proximate cause rationale.

The July 26 opinion is Tyler v. Commonwealth (VLW 022-7-280).

Stephen K. Armstrong, a criminal defense attorney with Armstrong Law in Chesterfield, agreed with the court’s reduction.

“The firm had a duty to both actively monitor and/or supervise any activity involving funds (firm accounts) and especially IOLTA and client trust fund accounts,” he said in an email to Virginia Lawyers Weekly. “The fact that nobody at the firm reviewed the bills OR the bank statements for years is baffling, if only for the sake of general monetary oversight.”

He added that he thinks “it was incumbent on the firm to take on the additional expenses, not only in an effort to prevent future situations, but to ‘restore the firm to its pre-crime’ status.”

Embezzlement

Catherine Tyler began working for the law firm Dygert, Wright, Hobbs & Hernandez in 2003 as a bookkeeper and later became its real estate paralegal.

Around 2012, Tyler began embezzling funds. The firm didn’t discover this until January 2020 because, as one of the attorneys testified, nobody at the firm reviewed the bills or bank statements.

By that time, Tyler had drained most of the firm’s accounts and stolen a $300,000 payoff check intended for a real estate client.

Due to the complexity of its accounts, the firm hired a forensic accountant who determined that Tyler embezzled nearly $650,000.

Tyler pled guilty to one count of embezzlement. The firm requested restitution for the embezzled amount and for expenses totaling about $125,000.

Those expenses included: new checks, office locks, and overdraft fees; malpractice and real estate insurance; legal fees defending against a client lawsuit, handling the firm’s lawsuit against Tyler, and other unspecified fees; forensic accounting; Virginia State Bar sanctions and audits; and anticipated future costs.

The circuit court awarded the firm $125,808.25 for restitution of expenses over Tyler’s objection and denied reconsideration, prompting her to appeal.

Proximate cause

Ortiz explained that restitution provisions have been interpreted to give trial courts significant discretion in using restitution as a remedial tool, but that discretion is limited in two ways.

Restitution “‘must be reasonable in relation to the nature of the offense, the background of the offender and the surrounding circumstances’ [and] must be for loss or damage directly caused by the defendant’s offense.”

The judge said the Supreme Court of Virginia applied the “directly caused by” language to prevent restitution being ordered for losses that were too attenuated in a 2007 case which barred the recovery of costs incurred to prevent future criminal activity.

Ortiz also noted a 2016 opinion from the Court of Appeals of Virginia, which held that “loss or damage is not too remote if a defendant’s offense is a ‘but for’ cause of the harm.”

However, he said, “‘but for’ causation-in-fact … might impose unlimited liability … for a large number of remote or insignificant causes in time and space,” which creates some tension with the attenuation issue.

The court resolved this tension by borrowing “aspects of proximate cause to inform a restitution award analysis.”

The use of a proximate court analysis, “would give trial courts freedom to draw on experience, common sense, and other legal principles in deciding whether a loss or damage was directly caused by the defendant’s offense.”

“Tyler’s criminal conduct proximately caused the insurance costs because the firm’s failure to oversee its accounts and Tyler could not independently cause the harm it suffered and did not act as an intervening cause between Tyler’s acts and the harm.” – Judge Daniel E. Ortiz

Restitution available

Here, the court found that Tyler was the but for cause of $922.02 in office expenses. If she hadn’t embezzled money, compromised accounts and kept her office key, the firm wouldn’t have needed to change accounts, buy new checks, pay overdraft fees or change locks.

Even though the expenses were prompted by a concern that Tyler would reoffend, they were expenses to restore the firm to its pre-crime status, rather than measures taken solely to prevent future crime.

The opinion also concluded that insurance costs of $14,060.50 — including tail coverage after the firm’s malpractice insurer refused to reinsure it — were directly caused by Tyler.

“Tyler’s criminal conduct proximately caused the insurance costs because the firm’s failure to oversee its accounts and Tyler could not independently cause the harm it suffered and did not act as an intervening cause between Tyler’s acts and the harm,” Ortiz wrote.

The court found that the legal fees for defending the suit brought by a client were directly related to the embezzlement, as was the suit the firm brought against Tyler and the firm’s forensic accounting fees, because the firm “could not have continued as a functioning business without unraveling the extent of Tyler’s crime.”

Too attenuated

Some costs were too attenuated, though. Ortiz said there was no proven connection between Tyler’s embezzlement and the unspecified legal fees. An award for $10,367.50 had to be reversed.

Further, the court found that Tyler’s conduct didn’t directly lead to the Virginia State Bar fees and anticipated future audit costs because the firm had an independent duty to monitor and reconcile its accounts and supervise Tyler that did not flow from her offense.

In total, the court reversed $49,583.80 of the $125,000 restitution award.