Opinion ID: 783603
Heading Depth: 4
Heading Rank: 2

Heading: Limiting Forfeiture Ordered Against a Faithless Servant

Text: 89 Early decisions by the New York Court of Appeals suggest that New York's law of forfeiture requires disloyal agents to forfeit all compensation, without limitation. More recent decisions by lower New York courts, however, have endorsed the principle that faithless servant forfeitures can be limited in specified circumstances. We first discussed this development in Musico, 764 F.2d at 113, and review it briefly here. 90 In Murray v. Beard, the New York Court of Appeals stated that a disloyal employee forfeit[s] any right to compensation for services. Murray, 102 N.Y. at 508, 7 N.E. 553 (1886) (emphasis added). The Court of Appeals applied this rule in that case to deny a timber broker's claim to commissions due for arranging a sale of timber, because the broker had undertaken competing obligations to different dealers. The Court of Appeals quoted Murray 's language fifty years later in Lamdin, and affirmed the dismissal of a suit by a disloyal employee for the balance of salary due to him. See Lamdin, 272 N.Y. at 138-39, 5 N.E.2d 66. Although the Lamdin decision stated that a disloyal agent forfeits any right to compensation, that statement was dictum, given that in Lamdin the employer had not sought forfeiture of salary already paid to the disloyal employee. 91 Since these decisions, New York's lower courts have endorsed limiting forfeiture to compensation paid during the time period of disloyalty. This limitation of forfeiture developed in the context of cases in which agency agreements apportioned compensation to periods of time. Musico, 764 F.2d at 113. 92 In Musico, this Court considered whether New York courts would relax the law on forfeiture even further, to allow an employee to keep compensation for the tasks he performed loyally, during the time period in which he was disloyal in other work. We held that New York law would permit such relaxation where: (1) the parties had agreed that the agent will be paid on a task-by-task basis ( e.g., a commission on each sale arranged by the agent), (2) the agent engaged in no misconduct at all with respect to certain tasks, and (3) the agent's disloyalty with respect to other tasks neither tainted nor interfered with the completion of the tasks as to which the agent was loyal. Id. at 114. We held that where these three criteria are met, a disloyal employee forfeits only compensation earned in connection with the specific tasks as to which he was disloyal; he retains compensation earned in connection with the specific tasks as to which he was loyal. In Musico the agents had entered into four separate contracts with the principal. We found that the agents' disloyalty affected only two of the four contracts. Accordingly, we held that the agents forfeited only compensation earned pursuant to the two contracts as to which the agents were disloyal. See id. 93 We noted in Musico that limitation of forfeiture by time period and by task reflected the position taken by the Restatement (Second) of Agency, §§ 469 and 456 (1958). 15 See Musico, 764 F.2d at 113. We highlighted the fact that the Restatement explicitly states that the only circumstance in which forfeiture can be limited to compensation for particular tasks is where the contract itself allocates compensation among tasks. See id.; Restatement (Second) of Agency § 469 (1958) (an agent who wilfully and deliberately breaches his contract of service is not entitled to compensation even for properly performed services for which no compensation is apportioned). Our holding in Musico adhered to the Restatement's limitation. 94 We subsequently reaffirmed Musico 's reasoning in Sequa. Sequa involved a consulting agreement that specified that the agent would receive a particular fee for each leveraged leasing transaction he completed (the agreement stated that the agent's fee for each transaction would be one-half percent of the purchase price of the capital asset, plus ten percent of the residual value of the asset when resold). See Sequa, 156 F.3d at 140. The agent consulted on over forty transactions under the contract during the time period at issue. The district court found that the agent was disloyal with respect to only one of those transactions, and ordered the agent to forfeit only his fee on that transaction. See id. at 146. We affirmed this decision. See id. at 147. 16 95 In affirming, we considered and rejected an argument that a disloyal agent's forfeiture should be even more limited. In Sequa, the agent argued that he should not be required to forfeit his entire fee on the one transaction as to which he was disloyal, because the disloyal act affected only a very small component of the transaction ( i.e., the disloyalty was limited to misstatement of a $29,000 expense, in the context of a very large transaction on which the agent earned a $900,000 fee). We rejected this argument, based on our concern that we should not relax New York's rule of forfeiture any further than we had done in Musico, in part because no New York state court had yet endorsed the relaxation we allowed in Musico. We pointed out that our Musico limitation thus had a tenuous posture, and hence that in Sequa we were being relatively generous to limit the agent's forfeiture to the fees from the one transaction as to which he was disloyal, rather than to require forfeiture of the fees from all transactions. Sequa, 156 F.3d at 147. 96 The New York Court of Appeals has never specifically delineated the appropriate limitations of forfeiture (if any) under the faithless servant doctrine. As noted above, New York's lower courts have limited forfeiture to the time period of disloyalty, but appear never to have been faced with the question whether forfeiture should further be limited to compensation for specific tasks as to which the agent was disloyal. 17 No reported New York state court decision has mentioned Musico or Sequa. Thus, as was the case at the time of our decision in Sequa, New York courts have given us no reason to retreat from, or to expand, our holding in Musico. 18