COMMONWEALTH OF KENTUCKY

CLARK DISTRICT COURT

09-F-00183

COMMONWEALTH OF KENTUCKY PLAINTIFF

VS.

XXXXXXXXX DEFENDANT

BENCH BRIEF

ON THEFT BY FAILURE TO MAKE REQUIRED DISPOSITION OF PROPERTY

This Bench Brief discusses how Kentucky’s Embezzlement Crime, a/k/a known as “Theft by Failure to Make Required Disposition of Property.”

1.  “Theft by Failure to Make Required Disposition of Property” is an Embezzlement Crime.

KRS 514.070(1) provides that:

A person is guilty of theft by failure to make required disposition of property received when:

(a)  He obtains property upon agreement or subject to a known legal obligation to make specified payment or other disposition whether from such property or its proceeds or from his own property to be reserved in equivalent amount; and

(b)  He intentionally deals with the property as his own and fails to make the required payment or disposition.

Although the wording is inartful at best, the intent of the statute to criminalize a situation where a person takes property (which can include cash) from someone, knowing that the property or cash is to be delivered or paid to another, but who instead appropriates the property or cash for himself. A classic example is the employee who is supposed to deposit the cash receipts from his register to the bank, but instead keeps it for himself. The statute does provide that the property obtained by the person must be obtained by either (1) an agreement to make specified payment or other disposition, or (2) if no agreement, subject to an already existing obligation which is known to the person obtaining property. Implicit is that the payment or disposition is to be made to a third party. Unfortunately, because of the inartful wording of this statute, this provision has become a way for businesses to attempt to gain an advantage in a debtor/creditor situation. However, this was never the intent of the statute.

The Kentucky Crime Commission / LRC Commentary is useful in interpreting the intent of the statute. KRS 500.100 provides that “[t]he commentary accompanying the code may be used as an aid in construing the provisions of this code.”

According to the Commentary:

Theft liability under this section is limited to intentional violations of the obligations imposed. However, it is provided that “an officer or employee of the government or of a financial institution” is presumed to know his obligations in regard to funds received for a specified purpose as well as a presumption that he used the funds for his own purpose, if he fails to account or if an audit reveals a shortage.

An example of property obtained “subject to a known legal obligation.” Is a contractor or architect who fails to apply payments to claims of mechanic’s or materialman’s liens…

The example provided in the commentary shows that an obligation to a third party or entity is contemplated. It is not intended to be an obligation from a debtor to a creditor. Later, the Commentary makes this point even more plainly:

It is not the purpose of this statute to impose a criminal sanction in the relationship of debtor and creditor. To constitute an offense there must be a breach of trust, growing out of a contract or confidential relation.

Hence, this statute is a codification of the old embezzlement laws, where a person breaches a trust or violates a fiduciary duty.

2.  Kentucky Case Law has interpreted the statute in accordance with the Commentary.

In Commonwealth v. Jeter, 590 S.W. 346 (Ky. App. – 1979), the defendant was charged with four counts of theft by failure to make required disposition of property under KRS 514.070. In that case, one woman went to the Defendant’s furniture store and paid full purchase price for a refrigerator and a stove. Both items were to be delivered. After much delay, the stove was delivered (although in unsatisfactory condition), but the refrigerator was never delivered. Another woman bought a washing machine, but it was never delivered either. A third person bought a washing machine and a dryer; the washing machine was delivered in disrepair and the dryer was never delivered. A fourth person bought a washing machine, and it was never delivered.

In determining whether the furniture salesman was guilty of theft under KRS 514.070, the Court cited the very last sentence of the official commentary cited above, and held:

We feel that the literal language of the statute, itself, is most persuasive. A careful reading of the statute leads one to the conclusion that this statute was not enacted to penalize the type of fact pattern as is alleged in the Commonwealth’s case against Jeter. The alleged actions would more property have supported an indictment for theft by deception under KRS 514.040.

We agree with the decision of the Fayette Circuit Court and certify that KRS 514.070 does not proscribe the type of transaction whereby a seller accepts money for the purchase of merchandise and then refuses to deliver the property as promised. The statute was instead enacted to penalize the misapplication of property received by another.

In the present case, the roles are reversed between the debtor and creditor. However it is still a debtor / creditor relationship.

The Supreme Court in Commonwealth v. Perry, 219 S.W.3d 720 (Ky. – 2007) recently upheld the principle in the Jeter case, although it distinguished the case and found the defendant guilty under KRS 514.070. In distinguishing the cases, the Court relied upon the principle that delivery to a third party was contemplated, precisely the distinction that this Bench Brief argues exists in the wording of the statute (again, inartfully worded):

We believe the fact pattern in the present case falls within the ambit of KRS 514.070. Perry took the $375 pursuant to an agreement to use the money specifically to buy an engine for Taylor from a junkyard, and then failed to buy the engine and kept the money. Unlike Jeter, where payment was directly made to the seller/retailer for purchase of the goods, Perry was acting as the agent for Taylor in the purchases of the engine from a third party – the junkyard. This was not simply a case of failure to deliver purchased goods.

[It should be noted that the Supreme Court did not completely rule out a situation where KRS 514.070 could apply in the absence of a third party. In fact, the Court spoke approvingly of Hellard v. Commonwealth, 829 S.W.2d 427, 429 (Ky. App.—1992), where there was no third party, and in which the defendant had rented a VCR from a rental center, and did not pay. However, in that case the defendant forged another person’s name to the rental agreement, and at the time of forging the contract, had no intention of EVER paying the company. Hellard by his forgery knew that he was obligating another or perhaps fictitious person to pay for the VCR, and thus, his case fell within the wording of the statute. Regardless, that case was not a case involving a legitimate debtor-creditor relationship.]

In the instant case, theft by deception – which requires an intent to deceive at the time of the rental agreement – does not apply. There is no forgery here, and the complaint itself states that the defendant made sixteen payments before not paying any more. The breach of an installment contract after 16 payments does not imply an intent to steal at the time of the agreement. As the Commentary – which was quoted and adopted by the Supreme Court in Perry – [i]t is not the purpose of this statute to impose a criminal sanction in the relationship of debtor and creditor. To constitute an offense, there must be a breach of trust, growing out of a contract or confidential relation.”

This is a CIVIL case, and should be treated as such.

Respectfully submitted,

______

B. Scott West

Asst. Public Advocate

116 N. 2nd St.

Richmond, KY 40475

(859) 623-8413

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