Embezzlement, Misappropriation and the Breach of Fiduciary Duty
A business dispute involving missing funds or misused assets is one of the most volatile challenges a San Diego company can face. Whether the entity is a corporation, an LLC, or a partnership, the central issue almost always converges on a single factor: The violation of trust.
Embezzlement and misappropriation are among the most serious forms of business fraud, especially when an officer, partner, member, or other fiduciary misuses funds or assets entrusted to them.
When an officer, owner, or investor embezzles funds or misappropriates assets, it is not merely a “disagreement.” In California, this is a specific violation of the law known as a Breach of Fiduciary Duty. It may surprise you that California law also holds those given the honor of responsibility to a higher standard as well. Those workers who are in a position of “trust” or “confidence,” or have responsibilities involving the company’s money or accounting can also owe the business a fiduciary duty.
Understanding the Terms: Embezzlement vs. Misappropriation
While often used interchangeably, these terms describe the unlawful taking or use of property entrusted to someone’s care.
- Embezzlement: Often involves the fraudulent taking of personal property or money by someone to whom it was entrusted.
- Misappropriation: A broader category involving the intentional, illegal use of funds for a purpose other than that for which they were intended—such as paying personal debts with company capital.
In a business setting, a fiduciary relationship must exist where one party has entrusted funds or assets to another. This breach of trust and unfair business practice is the basis for most civil lawsuits in these matters.
Is an Employee a Fiduciary?
A common question business owners ask is whether a theft by an employee constitutes a breach of fiduciary duty. In California, while every employee owes a Duty of Loyalty, not every employee is a formal fiduciary. However, an employee becomes a de facto fiduciary if they are in a “position of trust and confidence” where they exercise substantial control over the business’s affairs.
Common examples of employee fiduciaries include:
- The Controller or Head of Accounting: Because they have autonomous control over the “keys to the vault.”
- The Payroll Manager: Because they have the power to create “ghost employees” or alter compensation records.
- Key Managers: Anyone with the authority to bind the company to contracts or manage significant assets without constant oversight.
The Layers of Duty in a Business Setting
While this may seem like a lot to a non-attorney, these layers actually carry significant meaning. Think of it as a cake with multiple layers. The two main ingredients in the cake are “Loyalty” and “Care.”
The bottom of the cake, the biggest section, might be legally referred to as a “Duty of Loyalty.” Most general employees owe their employer a duty of loyalty. Employees are charged with a Duty of loyalty, not to steal from the company or help competitors.
The middle layer of the cake is a little smaller. Those who have responsibility and trust are often also responsible for a Duty of Care, competence and diligence, (I won’t be careless with your money or negligent with your assets), or a fiduciary duty, which is a blend of both loyalty and care. As attorneys, we argue that these trusted employees are “de facto fiduciaries.”
The top of the cake involves serious offenses, often involving officers or owners of the company. What is the difference in these types of cases?
‘Why do the different layers of Duty matter?” The answer lies in the available remedies under California law.
For example, a breach of the Duty of Loyalty under California law may provide the remedy of damages, an order (injunction) to stop violating that responsibility, as well as termination for cause. However, a trusted employee, one who manages the money or accounting, may violate the fiduciary duty providing available remedies including damages, restitution, and potentially, punitive consequences.
Owners, partners, members, shareholders, and investors and officers of a company owe duties of Loyalty and Care, and remedies in these cases can include disgorgement of profit, accounting actions, and removal from office.
Other types of misappropriation or embezzlement include:
- Submitting false or inflated claims for business expenses
- The receipt of gifts or fees from vendors of the company / kickbacks
- Commingling or the payment of personal obligations through company funds
- Falsification or modification of accounting or payroll records
- The payment of family or friends for work which was not performed
The “Gold Fever” Phenomenon
“Business partner fraud… It never happens until you make money. It’s like gold fever. People with all the greatest virtues you’ve ever seen—all of a sudden the company is expanding, and money disappears. This includes shareholder fraud, officer fraud, and usurpation—the taking of corporate assets in secret.” — Dan Watkins, Founding Partner
Listen to our Recent Sound Business Insights Podcast:
Episode 14 – Shareholders’ Rights and Disputes”
Common Patterns of Misappropriation
Misappropriation is often a systematic strategy that unfolds over time. To protect your interests, it is vital to recognize the “Red Flags” of internal fraud:
- Accounting & Payroll Fraud: Setting up fictitious entities, creating false invoices, or altering payees on checks.
- Asset Misuse: The mishandling of property, inventory, IT equipment, or vehicles. Company assets belong to all partners; their loss directly impacts the value of your investment.
- Expense & Vendor Schemes: Submitting inflated business expenses or receiving “kickbacks” from company vendors.
- Commingling Funds: Using company accounts to satisfy personal obligations or family expenses.
Is that what an employee did?
Is that how a partner, or the majority interest is treating you or the company?
Why Proving Embezzlement Requires Experienced Counsel
Many business owners are disappointed by the lack of interest from law enforcement in these cases. Proving misappropriation requires extensive legal skill and forensic accounting.
Simply reviewing the books is rarely enough. Perpetrators often create distorted entries to hide their tracks, later claiming “incompetence” if caught. The Watkins Firm utilizes a unique approach to uncover the facts, trace the source of funds, and establish the chronology of the breach.
Your Legal Remedies and Recovery
A civil lawsuit for embezzlement or misappropriation pursues financial damages and restitution. In California, a breach of fiduciary duty opens the door to substantial remedies:
- Full Accounting: The right to a court-ordered investigation of the financial situation.
- Disgorgement of Profits: The requirement that the wrongdoer surrenders all financial gains achieved through their breach.
- Rescission: The ability to cancel or “undo” contracts or buyouts based on false representations.
- Punitive Damages: Financial awards intended to punish the wrongdoer and set an example to discourage future misconduct.
Protect Your Business Options
If you suspect a fellow member, partner, or employee of taking money from your company, timing is critical. Resolving these disputes quickly and cost-effectively is the only way to repair relationships when possible and move the company forward.
The Watkins Firm brings more than four decades of experience to San Diego business ownership disputes. We work to recover your assets while balancing the needs of the business with the priorities of your life.
Contact the Watkins Firm at 858-535-1511 for a principled, grounded consultation on your rights and your path to recovery.
Contact Proven San Diego Misappropriation of Funds and Embezzlement Lawyers
If someone in your business has been placed in a position of trust and misappropriates or embezzles funds we can put a stop to it, and work to recover monetary damages and other restitution based upon what has happened to your business.
Learn more about how the Watkins Firm can help with misappropriation of funds and embezzlement. We invite you to review our podcast Episode 32 – Business Fraud as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.