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

Heading: Misconduct Warranting Forfeiture

Text: 74 Phansalkar argues that his misconduct does not warrant the forfeiture of any compensation, because his misconduct was simply a failure to disclose, and because the district court made an explicit finding that he did not intend to defraud AW. Phansalkar asserts that all New York decisions that require forfeiture involve fraud or intentional wrongdoing by the employee. We reject this argument and find that Phansalkar's actions and omissions warrant forfeiture. 75 New York courts have used two different standards to determine whether an employee's misbehavior warrants forfeiture. Both standards derive from decisions of the New York Court of Appeals from the late nineteenth century. The Court of Appeals enunciated the first standard in 1885 in Turner v. Konwenhoven, where it stated in dictum that a disloyal employee forfeits promised compensation only when the misconduct and unfaithfulness... substantially violates the contract of service. 100 N.Y. 115, 120, 2 N.E. 637 (1885); see also Abramson v. Dry Goods Refolding Co., 166 N.Y.S. 771, 773 (1st Dep't App. Term 1917) (relying on Turner 's dictum and stating that an employee forfeits promised compensation only where his disloyalty permeates the employee's service in its most material and substantial part). Lower New York courts have followed Turner 's dictum and found agents' disloyalty to be substantial in a variety of circumstances. 12 They have found disloyalty not to be substantial only where the disloyalty consisted of a single act, or where the employer knew of and tolerated the behavior. 13 76 The New York Court of Appeals enunciated the second standard for determining whether an employee's misbehavior warrants forfeiture in 1886 in Murray v. Beard, where it stated: 77 An agent is held to uberrima fides in his dealings with his principal, and if he acts adversely to his employer in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services. 78 102 N.Y. at 508, 7 N.E. 553. 79 We first highlighted this passage in Musico (as discussed further below) because it suggests that New York maintains a strict rule against limiting a faithless servant's forfeiture. We highlight it now because it also suggests that misconduct by an employee that rises to the level of a breach of a duty of loyalty or good faith is sufficient to warrant forfeiture. The New York Court of Appeals confirmed this suggestion in 1936 in Lamdin v. Broadway Surface Advertising Corp., where it held that an employee who fell below the standard required by the law of one acting as an agent or an employee of another forfeits salary due. 272 N.Y. at 138, 5 N.E.2d 66; see also Feiger, 41 N.Y.2d at 929, 394 N.Y.S.2d 626, 363 N.E.2d 350 (no forfeiture where employee was not guilty of any breach of fidelity). 80 Notwithstanding the existence of these two standards, New York courts have not reconciled any differences between them, or defined the circumstances, if any, in which one standard should apply rather than the other. Notably, the New York Court of Appeals has not mentioned its dictum in Turner, since it decided that case. We need not delve further into these questions, however, because we find that Phansalkar's behavior warrants forfeiture under both standards. 81 Phansalkar's misconduct warrants forfeiture under the standard enunciated in Turner, because Phansalkar's disloyalty was not limited to a single, isolated incident, but rather occurred repeatedly, in nearly every transaction on which he worked. Phansalkar breached his duties of loyalty and good faith with respect to his work with Zip, Osicom, Sync, and Entrada Networks. The only transaction for which Phansalkar had substantial responsibility and was completely loyal was the Sorrento transaction. Phansalkar's disloyalties lasted for many months, and persisted boldly through an opportunity to correct them in June 2000, when Phansalkar and Andersen discussed the various interests accumulated during Phansalkar's tenure. We conclude that where disloyalty occurs in four out five of an employee's primary areas of responsibility and continues over many months, it substantially violates the terms of an employee's service. 82 Our conclusion is also based in part on the fact that Phansalkar was one of five primary actors at AW and was entrusted with funds that were part of the firm's one reliable source of income. As Phansalkar was told when he joined the firm, AW required its partners and employees sitting on boards to report and contribute to the firm all Directors' Compensation and opportunities. The reason for this was that the partnership relied upon these funds to give the partnership a stable income that could be counted on through good times and bad, e.g., even when transactional business was scarce. Phansalkar thus breached a critical duty when he failed to disclose his receipt of this income and these opportunities, which belonged to AW. We find that Phansalkar's disloyalty permeate[d] [his] service in its most material and substantial part. Abramson, 166 N.Y.S. at 773. 14 83 Phansalkar's misconduct warrants forfeiture also under the standard enunciated in Murray and Lamdin, because Phansalkar unquestionably violated specific duties owed to AW. As discussed above, the district court found that Phansalkar breached his duties by failing to disclose six different interests or opportunities that he received as a representative of AW. 84 New York law is clear that an employee is prohibited from acting in any manner inconsistent with his agency or trust. Lamdin, 272 N.Y. at 138, 5 N.E.2d 66. [A]bsent an agreement otherwise, an employee who makes a profit or receives a benefit in connection with transactions conducted by him on behalf of his employer is under a duty to give such profit or benefit to his employer, whether or not it was received by the employee in violation of his duty of loyalty. Western Elec. Co., 41 N.Y.2d at 295, 392 N.Y.S.2d 409, 360 N.E.2d 1091 (citing Restatement (Second) of Agency §§ 388, 403 (1958)). When an employee violates this duty, [n]ot only must the employee or agent account to his principal for secret profits but he also forfeits his right to compensation for services rendered by him if he proves disloyal. Lamdin, 272 N.Y. at 138, 5 N.E.2d 66. 85 Here, Phansalkar acted in a manner inconsistent with his agency by withholding from AW cash, stocks, and other interests that belonged to AW and that should have been turned over to the firm, as a part of the firm's only reliable source of income. He also acted in a manner inconsistent with his agency by specifically declining Sync's offer to place an AW designee on its Board, without having told AW of the opportunity. In addition, he repeatedly violated his affirmative duty to give AW the Directors' Compensation he received on AW's behalf. These breaches are more than sufficient to warrant forfeiture. 86 Finally, we reject Phansalkar's argument that his misconduct does not warrant forfeiture because the district court found that he did not intend to defraud AW when he failed to disclose his Directors' Compensation and other benefits received. The district court made this finding in the context of rejecting AW's claim that Phansalkar's compensation agreement was voidable because of fraud; the court concluded that AW could not prove the requisite scienter for this claim because AW failed to show that Phansalkar took any affirmative steps to conceal the benefits he received. See Phansalkar II, at -91, 2001 WL 1524479 at . We find nothing in New York law to suggest that a specific intent to defraud is necessary to render misconduct sufficient to warrant forfeiture. See, e.g, Lamdin, 272 N.Y. at 137, 5 N.E.2d 66 (where employee advances his own interests by procuring due bills instead of cash and, in doing so, does harm to his employer's interest, misconduct is sufficient to warrant forfeiture, in the absence of the employer's acquiescence); cf. Beatty v. Guggenheim Exploration Co., 223 N.Y. 294, 305, 119 N.E. 575 (1918) (Crane, J., dissenting) (disagreeing with majority determination that disloyal employee could not recover compensation, and arguing that such a determination was improper because there was no showing that employee acted in bad faith or with malice). 87 The record shows that Phansalkar intended for AW not to receive certain income and benefits, and to that end he not only withheld information from AW but also declined the offer to AW of a Sync Board seat. The record also shows that Phansalkar intended to keep at least some of these benefits for himself — because he knowingly received and retained them without ever disclosing them to AW. In taking these actions, Phansalkar disregarded his affirmative duty to act in his employer's best interests. See Maritime Fish Prods., 474 N.Y.S.2d at 286. We find that Phansalkar acted with sufficient knowledge of his omissions, and their consequences, to warrant forfeiture under New York law. 88 We now turn to whether the district court should have limited Phansalkar's forfeiture as it did.