## Facts

- Insurers issued an insurance policy on Brian Scharbarth’s tractor-truck; Associates Commercial Corp. (Associates) held a perfected security interest and was named as loss payee.
- After mechanical problems, Scharbarth arranged a staged “theft” of the truck at a Nevada truck stop and the truck was dismantled in New Mexico.
- Scharbarth submitted a theft claim; the insurers’ investigator expressed strong suspicion that the claim was fraudulent.
- Despite the suspicions, the insurers paid $62,210 as a business decision to avoid potential bad-faith exposure from delaying settlement.
- Associates received $49,647.51 to satisfy the outstanding secured debt and, in return, assigned its interest in the truck to the insurers.
- Scharbarth ultimately pled guilty to mail fraud stemming from the staged theft.
- After fraud confirmation, the insurers sought restitution from both Associates and Scharbarth.

## Issues

1. Whether insurers who paid a claim while strongly suspecting fraud may obtain restitution from an innocent loss payee/lienholder that received proceeds to satisfy a legitimate secured debt.
2. Whether the insurers are entitled to restitution from the fraudulent insured, and whether restitution should be limited to the insured’s personal gain or extend to the full amount paid.

## Decision

- The court granted summary judgment for Associates and denied restitution against it.
- The court granted summary judgment against Scharbarth on restitutionary liability, while allowing further argument on whether damages should be limited to his personal receipt or encompass the full payment.

## Legal Principles

- A payor who voluntarily pays with knowledge of facts indicating probable fraud, to avoid perceived business or litigation risk, generally cannot recharacterize the payment as a mistake of fact to recover from an innocent recipient.
- Restitution is disfavored against an innocent payee who received funds in good faith on a valid underlying obligation and changed position in reliance on the payment (e.g., by releasing a lien/assigning collateral rights).
- In fraud-based unjust enrichment, restitution ordinarily lies against the wrongdoer rather than innocent third parties who merely received payment as part of a legitimate transaction.
- Where liability is established, the restitution measure may present a separate question: whether it equals the defendant’s personal enrichment or the loss caused by the fraud.

## Conclusion

The court held that insurers who knowingly paid a highly suspicious claim could not shift the loss to an innocent secured lender named as loss payee, but could pursue restitution from the insured who orchestrated the fraud, with the amount of restitution left for further determination.


Terra Nova Ins. Co. v. Assocs. Com. Corp., 697 F. Supp. 1048 (E.D. Wis. 1988)