Must an Embezzling Pharmacist Repay Wages Received?

MAY 01, 2006
Joseph L. Fink III, BSPharm, JD

Issue of the Case

A pharmacist pleaded guilty to embezzling a substantial sum from the pharmacy where he practiced and served as manager. He repaid that amount to his former employer. The employer was not satisfied, however; he filed a lawsuit against the pharmacist to recover an additional amount. The case presented the issue of whether the pharmacy owner was entitled to recover the additional amount over and above what the errant pharmacist had already repaid.

Facts of the Case

A pharmacist pleaded guilty to the act of embezzling $179,549.91 from the pharmacy where he practiced and served as manager in a Midwestern state. His guilty plea led to conviction of the crime and incarceration. Although he repaid that amount to his former employer, the employer was not satisfied. The employer filed a lawsuit against the pharmacist to recover an additional $500,000 in punitive damages and an additional $313,283.54 in compensatory damages covering the amount of wages, bonuses, health insurance, and deferred benefits paid to the pharmacist during the time he was engaged in the embezzlement. The case ended up in a US Bankruptcy Court when the pharmacist filed for bankruptcy protection from the claim.

As the name implies, punitive damages are assessed as punishment to the wrongdoer or to discourage the type of conduct in which the wrongdoer engaged. These damages are in an amount over and above the amount that will compensate the injured party for his or her property loss. Punitive damages generally can be awarded when the wrongful act was accompanied by fraud, for instance (such as in this case), or wanton and wicked conduct. The other type of damages sought— compensatory—are calculated to compensate the injured party for the injury sustained. They are designed to replace the loss caused by the illegal act.

The Court's Ruling

The pharmacist argued that the bankruptcy laws provided him protection from the claims of the former employer that exceeded the amount embezzled, because the financial obligation was tied to his employment. The owner of the pharmacy argued that the bankruptcy statutes specifically excluded from bankruptcy protection the additional punitive and compensatory damages sought, because the money was gained illicitly by the pharmacist through false pretense or actual fraud—ie, the pharmacy could recover the 2 additional amounts. The pharmacist won.

The Court's Reasoning

The court focused on the fact that the financial obligation of the employer to pay wages, bonuses, health insurance, and deferred benefits was based on the employer-employee contract of employment. A breach of that contract by the employee, through his devious misdirection of funds of the pharmacy, is a breach of the fiduciary duty of an employee implicit in an employment contract. A fiduciary duty is derived from " being in a position of trust or confidence and creating an obligation of scrupulous good faith and candor in dealings with the parties."Clearly, when the owner of a pharmacy entrusts the conduct of the business affairs of the enterprise to a manager and pharmacist, such an obligation would exist. The court here ruled, however, that this mere contractual breach does not rise to a level sufficient to make the debt accessible for payment when the person is under bankruptcy protection.

In response, the pharmacy owner argued that the attempted recovery of the $500,000 plus $313,283.54 was based not on contract-law principles, but on the fraud perpetrated by the pharmacist/ manager. The court did not accept that argument, ruling that there was no direct connection between the embezzled amount of $179,549.91 and the larger amount for which recovery was sought. In the view of the court, the embezzlement activities created a debt of $179,549.91, and the pharmacist/ manager had repaid that amount. Focusing on the wages and other compensation, the court emphasized that the pharmacist/manager had indeed performed his duties as a pharmacist in conformity with the " standard skill and care" applicable to professional practice and that his activities related to the embezzlement did not interfere with his " dispensing prescriptions or otherwise performing his duties as a pharmacist."

The bankruptcy laws are designed for the benefit and relief of both creditor and debtor in a case where the latter cannot, or is not willing to, pay his or her debts. Sometimes the laws work to the advantage of the creditor and sometimes to the debtor. Here, they worked to shield the errant pharmacist from his employer's effort to recoup wages and other compensation paid while he was engaged in his devious financial activities for personal enrichment at the expense of the pharmacy owner.

Dr. Fink is professor of pharmacy law and policy at the University of Kentucky College of Pharmacy, Lexington.