Court Finds Texas Businessman Defrauded $3M from Texas Mutual

June 24, 2002

A federal bankruptcy court ruled that Dallas businessman Aharon Chen and A.C. Painting Inc., his now-bankrupt company, defrauded more than $3 million from Texas Mutual Insurance Co., a workers’ compensation provider.

Chen was ordered to pay $1.3 million and attorney’s fees to Texas Mutual. In addition, the court upheld the company’s claim against Chen’s business’ bankruptcy estate for another $2.5 million, plus attorney’s fees and interest.

Texas Mutual investigators found that Chen reportedly classified some 100 employees on his company’s payroll as independent contractors; investigators took note when A.C. Painting began filing claims for workers not reported at audit. Chen paid his unreported employees through a hidden account dubbed the “blue account.” Texas Mutual attorneys accessed A.C. Painting’s computer hard drive to discover the hidden account.

By reporting a smaller staff to Texas Mutual than it actually had, A.C. Painting paid lower premiums than it should have-workers’ compensation premiums are determined partially by the number of employees a company has.

During the bankruptcy proceedings, Texas Mutual presented evidence of more unreported “independent contractors” who actually qualified as A.C. Painting employees. Judge Steven A. Felsenthal, U. S. Bankruptcy Judge for the Northern District of Texas, Dallas Division, found that the “independent contractor” designation was not appropriate for workers’ compensation purposes. He cited the Texas Insurance Code, which requires a policyholder to “make full disclosure to its insurance company of information concerning its true ownership, change of ownership, operations, or payroll and any of its records pertaining to workers’ compensation insurance.”

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