Convicted Fraudsters Must Make Restitution

Insurers Must Demand & Prove Restitution Required to Make Them Whole

Defendants Alfredo Ayala and Juan Luis Ayala owned farm labor contracting businesses and shared business offices and office staff. Defendants were charged with insurance and tax fraud by underreporting their payroll amounts. Alfredo and Juan pleaded no contest to workers' compensation insurance fraud and tax fraud, agreed to pay restitution to the Employment Development Department (EDD), and requested a restitution hearing to determine restitution owed to their workers' compensation insurance companies. After a hearing, the trial court awarded restitution to the insurance companies measured by the amount of lost premiums caused by defendants' false payroll reporting.

In The People v. Alfredo Ayala, The People v. Juan Luis Ayala, F083941, F083974, California Court of Appeals, Fifth District (March 16, 2023) a lengthy opinion reviewing facts in detail and evidence from the defrauded workers' compensation insurers affirmed the restitution orders based on the evidence presented by the insurers.

FACTUAL BACKGROUND

Defendants stipulated to a factual basis for their pleas based on police reports and grand jury proceedings. Juan pleaded no contest to workers' compensation fraud and tax evasion by false statement, Alfredo pleaded no contest to tax evasion by false statement.

Alfredo waived time for sentencing, and the trial court reduced count 21 to a misdemeanor and ordered Alfredo to serve a three-year term of probation with conditions that Alfredo obey all laws, pay restitution to EDD, and return for a restitution hearing. The trial court held a restitution hearing as to both defendants on July 9, 2021, and announced its decision on August 24, 2021. The trial court denied defendants' subsequently filed motion for reconsideration on December 17, 2021, and sentenced Juan to three years in prison, suspended execution of that sentence, and placed him on probation for two years.

PREMIUM FRAUD

Typical workers' compensation insurance policies are based on estimates. The experience modification is determined by comparing a specific employer's payroll and losses to other similar employers. The experience modification can lower the premium if the employer has good safety practices but can result in a higher premium if the employer has a negative history of accidents.

TRIAL COURT RULING

The trial court stated that restitution should make the victims whole and not entitle them to profit but, in this case, the trial court used the findings of the insurance company auditors whom "[q]uite frankly, [it] just felt ... were more credible."

DISCUSSION

California crime victims have a constitutional and statutory right to receive full restitution for economic losses suffered as a result of a defendant's criminal conduct. When a defendant is convicted and sentenced to state prison, section 1202.4 limits restitution to losses caused by the criminal conduct for which the defendant was convicted.

The Trial Court Did Not Abuse Its Discretion In Determining that Defendants' Criminal Conduct Was Responsible for the Insurance Companies' Lost Premiums and the Amounts of those Losses.

At a restitution hearing, the prosecution is required to establish the amount of the victim's economic loss, not the criminal conduct underlying the charges. Restitution hearings are intended to be informal and do not require any particular kind of proof. The trial court may accept a property owner's statement made in the probation report about the value of stolen or damaged property as prima facie evidence of loss.

Defendants argued that the trial court could not award restitution unless the prosecution presented direct evidence that defendants intentionally falsified payroll and submitted falsified payroll to generate lower premiums.

Defendants' pleas of no contest and accompanying waivers were sufficient to support the trial court's award of restitution based upon defendants' massive underreporting of payroll to the insurers to reduce their policy premiums.

The Trial Court Did Not Abuse Its Discretion Ordering Restitution Because It Used a Rational Method to Determine the Insurance Companies' Economic Losses

Defendants' pleas of no contest established that defendants intentionally and falsely underreported their monthly payroll to the insurers to pay lower premiums. Furthermore, the willful underpayment of insurance premiums constitutes an economic loss.

The methodology adopted by the trial court appeared rational to the Court of Appeals and it concluded did not produce an arbitrary result.

By the plain language of the statute, the victim's economic loss must come as a result of the defendant's conduct. Victims are only entitled to an amount of restitution so as to make them whole, but nothing more, from their actual losses arising out of the defendants' criminal behavior. The Court of Appeals concluded that the trial court did not abuse its discretion in awarding restitution for the total amount of unreported payroll as opposed to limiting the award to the payroll amounts reflected in the voided payroll check register even if it had not rejected defendants' evidence.

To the extent the scope and nature of defendants' misconduct precludes an exact determination of the insurers' losses, the equities favor the insurers as far as calculating the amount of restitution that is due. After reviewing all the relevant considerations, the Court of Appeals was satisfied there was a factual and rational basis for the trial court's restitution order. No abuse of discretion or other ground for reversal has been shown.

The Court of Appeals, therefore, concluded that the trial court did not abuse its discretion in calculating restitution in this case and affirm the judgments.

ZALMA OPINION

Insurance fraud convictions, especially workers' compensation insurance fraud convictions are rare. The fraudsters often get away with their crime. When there is a conviction, like that of the Ayala brothers, must make restitution to the workers' compensation insurers who they admitted they defrauded. The court reviewed the testimony of each insurer and ordered restitution based upon the evidence from the insurers about the premiums they should have received. Those insurers should be emulated by every insurer that is the victim of insurance fraud and provide evidence and demand full restitution, as did the insurers who were defrauded by the Ayalas. Restitution is often paid because failure to pay defeats probation and the defendants go directly to jail.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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