Ernie's association with Larsen ended shamefully, for both Ernie and for Larsen.
By 1922, no one would buy a JL-6 and Larsen was having trouble paying creditors. He had another aircraft, a war plane, that he was negotiating to sell to the US military. He demonstrated its capabilities in October 1921, but although the Army and Navy were interested, it appears that he had not sold any.
His J-L Attack Plane, as it was called, was equipped with 30 machine guns and a 400-horsepower Liberty motor, could fly 141 miles per hour, and could cruise for 400 miles. Like the JL-6, it was a monoplane made of duralumin. There is no evidence that Ernie had much to do with this airplane. When it was flown from Long Island to Washington DC to demonstrate, Ernie was not listed among the crew.
The J-L Attack Plane, along with Larsen's factory, was destroyed in a fire on February 8, 1922. The New York Tribune, February 9, 1922, reported "Planes Worth $50,000 Destroyed in L.I. Fire: Blaze from blow torch razes two hangars of J. L. Aircraft Corporation." The paper said that there were high winds that fanned the flames, which started in the woodwork and canvas covering the hangars. Several airplanes were saved.
Larsen made a claim for insurance. Larsen explained that Ernie had been working that evening, repairing a radiator, when he overturned a torch, which then ignited gasoline that was on the floor of the hanger. The J-L Attack Plane, which he valued at $85,000, was destroyed. Larsen had insured the plant and its contents for $250,000, and by early 1923 the insurance company had paid out $190,000.
The insurance company had become suspicious and hired the Schindler Detective Agency to investigate. Since Ernie was said to have accidentally started the fire, he was deposed by the court. The March 7, 1923 New York Times carried a headline saying: "Says Plane Maker Ordered Plant Fire: Mechanic charges that Larsen gave him $1,500 for Long Island job."
Ernie said that he had been asked to come to Larsen's home in New York City on February 7, 1922. There, Larsen directed Ernie to set the fire "because he did not need it any longer." Ernie was given careful instructions for what to do: pour gasoline on the floor, light it, wait awhile before calling for assistance, and in the meantime drag an airplane out of the shop, in order to ally suspicion. A month later, Ernie received $1,500 and was later sent on a trip to Europe. Ernie was kept on the payroll "for some time afterward."
On June 19, 1923, The New York Times carried a story which reported on Larsen's response to a suit brought by The Commercial Union Assurance Company, which was trying to recover the $18,000 they had paid out on Larsen's insurance claim. Larsen and his attorneys claimed that Larsen was victim of a conspiracy to harm him, arising because of a dispute related to an aviation contest.
Larsen had created an air race to be held in Omaha, and as prizes he offered a silver trophy and a $3,000 cash award to the winner. An oil tycoon from Tulsa, named C.B. Wrightsman, owned the winning airplane, but Larsen moved to block the contest committee from awarding the prize. Larsen said that the pilot had a concealed gas tank in the plane, which violated the rules of the race. Larsen claimed that Wrightsman instigated the investigation out of anger.
In the arson case, Larsen testified on his own behalf before the New York Supreme Court on June 20, 1923. The New York Times headline (June 21, 1923) headline said: "Denies He Plotted To Burn His Plant: Larsen, airplane builder, on witness stand, contradicts employe's testimony. Lays charges to rival. Defendant asserts he was worth half million dollars at time of fire."
Larsen denied that he had visited with Ernie the night before the fire. He claimed that Ernie had called him on the night of the fire to report that the hangars were burning. He said that he rushed to the scene and found Ernie there, apologizing, saying "I couldn't help it." In the same testimony he also admitted that he had used the insurance money he received to pay off some overdue accounts.
Larsen's lawyer, when questioning Ernie, attempted to get Ernie to admit that he had made his statement against Larsen because he had been threatened by Walter L. Schindler, the head of the detective agency investigating the case. Ernie stated that Schindler had threatened that he would be "taken to Mineola," by which Ernie had the impression that Schindler meant to imply that Ernie would be taken to jail "unless he told the truth."