Must an Embezzling Pharmacist Repay Wages Received?

Issue of the Case

A pharmacist pleaded guilty to embezzlinga substantial sum from the pharmacywhere he practiced and served asmanager. He repaid that amount to hisformer employer. The employer was notsatisfied, however; he filed a lawsuitagainst the pharmacist to recover anadditional amount. The case presentedthe issue of whether the pharmacyowner was entitled to recover the additionalamount over and above what theerrant pharmacist had already repaid.

Facts of the Case

A pharmacist pleaded guilty to theact of embezzling $179,549.91 fromthe pharmacy where he practiced andserved as manager in a Midwesternstate. His guilty plea led to convictionof the crime and incarceration.Although he repaid that amount to hisformer employer, the employer was notsatisfied. The employer filed a lawsuitagainst the pharmacist to recover anadditional $500,000 in punitive damagesand an additional $313,283.54 in compensatorydamages covering the amountof wages, bonuses, health insurance, anddeferred benefits paid to the pharmacistduring the time he was engaged in theembezzlement. The case ended up in aUS Bankruptcy Court when the pharmacistfiled for bankruptcy protectionfrom the claim.

As the name implies, punitive damagesare assessed as punishment tothe wrongdoer or to discourage thetype of conduct in which the wrongdoerengaged. These damages are in anamount over and above the amountthat will compensate the injured partyfor his or her property loss. Punitivedamages generally can be awardedwhen the wrongful act was accompaniedby fraud, for instance (such as in thiscase), or wanton and wicked conduct.The other type of damages sought—compensatory—are calculated to compensatethe injured party for the injurysustained. They are designed to replacethe loss caused by the illegal act.

The Court's Ruling

The pharmacist argued that thebankruptcy laws provided him protectionfrom the claims of the formeremployer that exceeded the amountembezzled, because the financial obligationwas tied to his employment. Theowner of the pharmacy argued that thebankruptcy statutes specifically excludedfrom bankruptcy protection theadditional punitive and compensatorydamages sought, because the moneywas gained illicitly by the pharmacistthrough false pretense or actualfraud—ie, the pharmacy could recoverthe 2 additional amounts. The pharmacistwon.

The Court's Reasoning

The court focused on the fact thatthe financial obligation of the employerto pay wages, bonuses, health insurance,and deferred benefits was basedon the employer-employee contract ofemployment. A breach of that contractby the employee, through his deviousmisdirection of funds of the pharmacy,is a breach of the fiduciary duty of anemployee implicit in an employmentcontract. A fiduciary duty is derivedfrom " being in a position of trust orconfidence and creating an obligationof scrupulous good faith and candor indealings with the parties."Clearly,when the owner of a pharmacyentrusts the conduct of the businessaffairs of the enterprise to a managerand pharmacist, such an obligationwould exist. The court here ruled, however,that this mere contractual breachdoes not rise to a level sufficient tomake the debt accessible for paymentwhen the person is under bankruptcyprotection.

In response, the pharmacy ownerargued that the attempted recovery ofthe $500,000 plus $313,283.54 wasbased not on contract-law principles, buton the fraud perpetrated by the pharmacist/manager. The court did not acceptthat argument, ruling that there was nodirect connection between the embezzledamount of $179,549.91 and the largeramount for which recovery wassought. In the view of the court, theembezzlement activities created a debtof $179,549.91, and the pharmacist/manager had repaid that amount.Focusing on the wages and other compensation,the court emphasized that thepharmacist/manager had indeed performedhis duties as a pharmacist in conformitywith the " standard skill and care"applicable to professional practice andthat his activities related to the embezzlementdid not interfere with his " dispensingprescriptions or otherwise performinghis duties as a pharmacist."

The bankruptcy laws are designed forthe benefit and relief of both creditor anddebtor in a case where the latter cannot,or is not willing to, pay his or her debts.Sometimes the laws work to the advantageof the creditor and sometimes tothe debtor. Here, they worked to shieldthe errant pharmacist from his employer'seffort to recoup wages and othercompensation paid while he wasengaged in his devious financial activitiesfor personal enrichment at the expenseof the pharmacy owner.

Dr. Fink is professor of pharmacylaw and policy at theUniversity of KentuckyCollege of Pharmacy,Lexington.