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Indemnification

Darrel Einsphar was a manager of the special finance department of Quality Mitsubishi, Inc.'s car dealership (hereinafter "Quality"). He and another employee in the department recommended high risk buyers to Premier Members Federal Credit Union (hereinafter "Premier") for car loans. Ms. Einsphar was sued by Premier for fraud for "power booking," a practice of artificially inflating the value of vehicles, thereby creating a better loan to value ratio to induce Premier to approve the car loans. Premier discovered the issue and sued Mr. Einsphar, the other employee, and Quality, their employer, for fraud.

Mr. Einsphar filed a cross-claim against his employer, Quality, for indemnification on Premier's claims. Indemnification in an employment relationship is based on agency principles stating that an employee is an agent of an employer who is a principal. The general rule is that an agent is entitled to indemnification from the principal for losses incurred in performance of the agency that, because of the parties' relationship, should fairly be borne by the principal. Mr. Einsphar was seeking reimbursement of any damages that he would be required to pay to Premier from his employer under the theory that his employer was responsible for the "power booking" scheme because Mr. Einsphar did the scheme in the course of his employment relationship.

However, in 1986, Colorado abolished the common law doctrine of indemnity with the adoption of the Uniform Contribution among Tortfeasor's Act. Under this Act, if an employee and employer are joint participants in tortious conduct, one cannot seek indemnity from the other. Yet, the right to indemnity still exists where the principal has directed an innocent agent to do an act which is tortious. The question for the trial court was whether Mr. Einsphar was a joint tortfeasor or an innocent agent with Quality.

The trial court found that Mr. Einsphar intentionally added vehicle options on the forms which were not actually on the vehicles, that he knew these "power booked" values were false, and that he intended that Premier rely on the false vehicle values so that Premier would accept the loans and he would be paid commissions. Therefore, Mr. Einsphar was not an innocent agent and had no right to seek indemnification from Quality. The trial court dismissed the indemnification claim and held a bench trial on the fraud claim.

The trial court entered judgment against Mr. Einsphar for fraud. Mr. Einsphar appealed to the Court of Appeals. However, the Court of Appeals found that an employee-tortfeasor is barred from seeking indemnification from his or her vicariously liable employer when, as here, the employee knew he or she was engaging in wrongful conduct. Based on the trial court's finding, Mr. Einsphar knew he was engaging in a wrongful act; Mr. Einsphar was not an "innocent agent." Accordingly, the court of appeals affirmed the decision of the trial court, holding that Mr. Einsphar did not have the right to seek indemnification from Quality.

Case 2013 COA 128 No. 12CA0906; Premier Members Federal Credit Union v. Block.

If you have a question about an employment related issue, contact an attorney to discuss your rights.

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