Opinion ID: 783603
Heading Depth: 4
Heading Rank: 1

Heading: Investment Opportunities as Compensation

Text: 105 In reaching our decision that Phansalkar must forfeit his interests in his MCEL and Headway investments, we reject his final argument regarding forfeiture. Phansalkar contends that the investment benefits he received, or should have received, from the opportunities to invest in MCEL and Headway, are not compensation for the purposes of New York's faithless servant doctrine, because Phansalkar was required to risk his own capital to receive those benefits. Phansalkar further contends that, because those investment benefits are not compensation, they cannot be subject to forfeiture. 106 No New York court has decided whether a disloyal employee should forfeit benefits received from investment opportunities provided at a discounted price by his employer. Cf. McDougal v. Apple Bank for Sav., 200 A.D.2d 418, 606 N.Y.S.2d 215, 216 (1st Dep't 1994) (raising, but not deciding, question of whether the rule regarding a faithless employee's forfeiture of compensation applies to plaintiff's rights under the option agreements (citation omitted)). The district court found that Phansalkar's investment benefits were compensation, because the investments were offered to him in [c]onnection with his [s]ervice at AW, Phansalkar II, at , 2001 WL 1524479 at , at a discounted price, id. at , 2001 WL 1524479 at . The district court drew upon decisions holding that investment opportunities and the benefits of those opportunities may be considered compensation for the purpose of federal taxation and securities law. See, e.g., Comm'r of Internal Revenue v. Lo Bue, 351 U.S. 243, 247, 76 S.Ct. 800, 100 L.Ed. 1142 (1956) (employee realized taxable gain when he received and then exercised nontransferable stock options to purchase common stock in employer's company at below market price); United States v. Ostrander, 999 F.2d 27, 30-31 (2d Cir.1993) (opportunity to purchase securities, if regarded as a benefit by the recipient, can be thing of value or compensation for purposes of federal securities laws). 107 We agree with the district court that, for the purposes of New York's faithless servant doctrine, investment opportunities — like Phansalkar's opportunities to invest in MCEL and Headway — are a form of compensation. When an employer makes an investment opportunity available to an employee to reward him for his work and to give him an incentive to continue working for the employer, that opportunity and any benefit realized should be subject to forfeiture like any other form of compensation. The fact that an employee must use his own capital to take advantage of such an opportunity does not require a different conclusion. 108 The effect of ordering Phansalkar to forfeit his interest in MCEL is slightly different from the effect of ordering Phansalkar to forfeit his interest in Headway. This is because AW withheld (or withdrew) the MCEL Shares from Phansalkar before he realized any value from those Shares. In contrast, AW delivered 44,000 shares of Headway stock to Phansalkar, and he then sold those shares for a profit. Thus, with respect to MCEL, there is no need to quantify the investment benefit provided to Phansalkar. Because AW has maintained control over the MCEL Shares, Phansalkar simply forfeits any right to them. 20 With respect to Headway, there is a need to quantify the investment benefit provided. The profit Phansalkar made when he sold the Headway shares appears to be the appropriate measure of the benefit provided. However, because this point was not fully developed below, we remand to the district court on this issue. 21 B. AW's Stock Options in Phansalkar's Name 109 The final issue on appeal is how to treat the stock options that Phansalkar received as Directors' Compensation, which belong to AW, but are still in Phansalkar's name. As discussed above, AW sued Phansalkar for failing to disclose these options, on theories of breach of contract and breach of fiduciary duty. The district court held that, with respect to the two sets of options which belong to AW and as to which Phansalkar acted disloyally (the 40,000 Zip Options and the 35,000 Osicom Options), AW is entitled only to the money realized when the options are exercised. 22 The court declined to grant AW any specific remedy, such as being given the right to direct the exercise of the options at a particular point in time, because it found that AW's right to the options was not prejudiced by Phansalkar's disloyalty. 110 The lower court reasoned, implicitly if not explicitly, that because AW could not prove that it had the right to decide when options held in the name of a current employee could be exercised, AW should not be given that power over options held in the name of a former employee. The court apparently believed that such a remedy would place AW in a better position with respect to Phansalkar than it was with respect to a current employee. The court thus declined to formulate any remedy for the Zip and Osicom Options, and held that AW would simply remain the holder of a contingent right to the economic value of those options once they are realized. Phansalkar III, at -61, 2002 WL 1402297 at -19. 111 We vacate the district court's finding that AW is in the same position today with respect to the Zip and Osicom Options as it would have been had Phansalkar fulfilled his duties as an employee. The district court made this determination without first considering whether AW's ability to control stock options held in the name of a former employee was any different than its ability to control stock options held in the name of a current employee. We find that the district court should have engaged in further fact finding as to the existence of a policy that would have permitted AW to control the Zip and Osicom Options (if AW had known about them), once Phansalkar informed AW of his intent to leave the firm, or after he actually left. If such a policy existed, and Phansalkar's disloyalty prevented or frustrated AW's ability to assert its rights under that policy, then the district court must find that AW was harmed by Phansalkar's disloyalty and consider what remedy is appropriate to redress that harm. 23 On remand, the district court may consider any failure or delay on AW's part to demand that Phansalkar exercise the options, or to supply Phansalkar with any capital necessary for him to do so. It may also take note of any restrictions on Phansalkar's ability to exercise the options.