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Defendants Alfredo Ayala and Juan Luis Ayala owned farm labor contracting businesses and shared business offices and office staff. The defendants were charged with insurance and tax fraud by underreporting their salary amounts. Alfredo and Juan pleaded no contest to workers’ comp 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 company. After a hearing, the district court awarded damages to the insurance companies measured by the amount of lost premiums caused by the defendant’s false salary reporting.
IN The People v. Alfredo Ayala, The People v. Juan Luis AyalaF083941, F083974, California Court of Appeals, Fifth District (March 16, 2023) affirmed a lengthy opinion that reviewed in detail the facts and evidence of the defrauded workers’ compensation insurers, affirming the reimbursement decisions based on the evidence presented by the insurers.
ACTUAL BACKGROUND
The defendants alleged a factual basis for their claims based on police reports and court 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 court reduced Count 21 to a misdemeanor and ordered Alfredo to serve three years of probation on the condition that Alfredo obey all laws, pay restitution to the EDD, and return for a restitution hearing. The trial court held a restitution hearing on both defendants on July 9, 2021, and issued its decision on August 24, 2021. The trial court denied the defendants’ later-filed motion for reconsideration on December 17, 2021, and sentenced Juan to three years in prison. in jail, suspended that sentence and placed him on probation for two years.
PREMIUM FRAUD
Typical workers’ compensation insurance policies are based on estimates. The experience change is determined by comparing a specific employer’s wages and losses to other similar employers. The experience change may lower the premium if the employer has good safety practices, but may result in a higher premium if the employer has a negative history of accidents.
THE COURT OF LAW
The district court stated that the restitution would make the victims whole and not entitle them to profits, but in this case the district court used the findings of the insurance companies’ auditors as “[q]out honestly, [it] just felt … was more believable.”
DISCUSSION
Crime victims in California have a constitutional and statutory right to receive full compensation 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 damages to losses caused by the criminal conduct for which the defendant was convicted.
The trial court did not abuse its discretion in finding that defendant’s criminal conduct was responsible for the insurers’ lost premiums and the amounts of those losses.
In a restitution hearing, the prosecution must determine the amount of the victim’s financial loss, not the criminal conduct underlying the charges. The restitution negotiations are intended to be informal and do not require any particular type of evidence. The district court may accept a property owner’s statement in the protection report about the value of the stolen or damaged property as prima facie evidence of loss.
Defendants argued that the trial court could not grant back pay unless the plaintiff presented direct evidence that defendants intentionally falsified payroll and submitted falsified wages to generate lower premiums.
The defendants’ pleas of no contest and accompanying waiver were sufficient to support the trial court’s award of back pay based on the defendants’ massive underreporting of wages to the insurance companies in order to reduce their insurance premiums.
The trial court did not abuse its discretion in ordering restitution because it used a rational method to determine the insurers’ economic losses
The defendants’ pleas of no contest established that the defendants intentionally and falsely underreported their monthly salary to the insurance companies in order to pay lower premiums. In addition, intentional underpayment of insurance premiums constitutes a financial loss.
The method adopted by the trial court appeared rational to the Court of Appeal and it concluded that it did not produce an arbitrary result.
Under the plain language of the statute, the victim’s economic loss must result from the defendant’s conduct. Victims are only entitled to an amount in compensation to make them whole, but nothing more, from their actual losses as a result of the defendants’ criminal conduct. The Court of Appeals concluded that the trial court did not abuse its discretion when it granted a refund of the full amount of unreported wages, as opposed to limiting the award to the wage amounts reflected in the invalidated paycheck record even if it had not rejected the defendants’ evidence. .
To the extent the extent and nature of the defendants’ misconduct precludes a precise determination of the insurers’ losses, the equities favor the insurers in calculating the amount of restitution payable. After reviewing all the relevant considerations, the Court of Appeal was satisfied that there was a factual and rational basis for the district court’s decision on restitution. No abuse of discretion or other basis for reversal has been shown.
The Court of Appeal therefore concluded that the district court did not abuse its discretion in calculating restitution in this case and affirmed the judgments.
Insurance fraud convictions, especially convictions for workers comp insurance fraud, are rare. The fraudsters often get away with their crime. When there is a conviction, like that of the Ayala brothers, the convicted defendants must make restitution to the workers’ compensation insurers they admitted defrauding. The court reviewed each insurer’s testimony and ordered restitution based on the insurers’ evidence of the premiums they should have received. These insurers should be emulated by every insurer who is a victim of insurance fraud where the fraudster is convicted and provides evidence and demands full reimbursement, as well as the insurance companies that were defrauded by the Ayalas. Restitution is often paid immediately because failure to pay results in probation and defendants go straight to jail.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, 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 attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com
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