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Another Faithless Servant Required to Forfeit Compensation

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  • Posted on: Mar 16 2017

Last November, this Blog discussed the faithless servant doctrine under New York law. (Here.) As explained, the courts have applied the doctrine to a wide variety of misconduct, including, but not limited to, conflicts of interest, stealing money or goods, and secretly starting a competing business. Any act that can give rise to a claim for breach of fiduciary duty will trigger the doctrine.

The penalty for violating the doctrine is harsh: the employee must forfeit all compensation earned since the first date of employment, even though the employee’s services may have otherwise benefitted the employer or the employer suffered no damages. Indeed, any value provided by the employee through loyal service is irrelevant. Thus, if an employee, even an otherwise valuable employee, is found to have been disloyal, then the employee will be required to disgorge all compensation even if the harm caused by the misconduct was minimal and the employee otherwise provided valuable service during the period of employment.

Recently, Justice Ramos of the Supreme Court, New York County, Commercial Division, had the opportunity to rule on a summary judgment motion involving the doctrine. On February 27, 2017, Justice Ramos issued a decision in Schulhof v. Jacobs, 2017 NY Slip Op. 50264(U), where he found the defendant, an art dealer, liable for fraud and breach of fiduciary duty and held that she not only had to account for the fraud, but also had to forfeit her commission on a sale of art work under the faithless servant doctrine.

Background

The action arose from a written agreement dated October 25, 2011 between the plaintiff, Michael P. Schulhof (“Schulhof”), and the defendant, Lisa Jacobs (“Jacobs”) (a private curator and art consultant) (“October Agreement”), pursuant to which Jacobs was to locate a buyer for a painting in the Schulhof Collection (the “Work”) for a minimum purchase price of $6 million in exchange for a $50,000 fee.

The October Agreement required Jacobs to contact Schulhof prior to approaching any prospective purchaser, and prohibited her from presenting or seeking offers below $6 million without written confirmation of the lower price. Additionally, Jacobs could not “accept any fee from the purchaser, in cash or in kind”.

On November 1, 2011, Jacobs met with Amy Wolf (“Wolf”), an art dealer, to discuss the sale of the Work. Jacobs informed Wolf that the asking price for the Work was $6.5 million. By November 2, 2011, Jacobs and Wolf reached an agreement for the sale of the Work at the asking price.

Shortly thereafter, on November 4, 2011, Wolf invited Jacobs to send her an invoice for the Work. The next day, on November 5, 2011, Jacobs informed Schulhof that she had a potential purchaser for the Work.

On November 7, 2011, Jacobs informed Schulhof by email that she “was able to get the [buyer] up to 5.5 million. We have a firm deal.” Schulhof accepted the deal. Jacobs suggested that the transaction be structured as a two-step process, stating that the buyer wanted to remain anonymous. Honoring the request, Schulhof sold the Work to Jacobs for $5,450,000, and Jacobs immediately resold it to Wolf for $5.5 million.

On November 11, 2011, Jacobs executed a contract with Wolf for the sale of the Work for $6,500,000 (“November Agreement”). After receiving the $6.5 million from Wolf, Jacobs wired $5,450,000 to Schulhof on November 16, 2011. Jacobs never informed Schulhof that she received a $1 million profit in connection with the sale of the Work or that the buyer had accepted the $6.5 million offer.

Approximately one year later, Schulhof discovered that the purchase price for the Work was actually $6.5 million and that Jacobs kept not only her agreed $50,000, but also an additional $1 million from the sale of the Work.

The Complaint

On August 26, 2013, Schulhof filed a complaint against Jacobs asserting causes of action for breach of fiduciary duty, fraud, breach of contract, restitution, and unjust enrichment. The complaint sought compensatory damages in excess of $1 million, as well as punitive damages.

Following the completion of fact discovery, each party filed a motion for summary judgment.

The Court’s Decision

The court granted Schulhof’s motion for summary judgment, finding that Jacobs had “misrepresented” the terms of the sale of the Work knowing “that the buyer was actually willing and ready to pay” more than was represented by Jacobs (e.g., $6.5 million).

In addition, the court found that the fraud occurred in the context of a fiduciary relationship, which obligated Jacobs “to disclose the $6.5 million offer prior to entering into the November Agreement.”  Given Jacobs “disloyalty” and breach of fiduciary duty, the court considered Jacobs to be a faithless servant, requiring her to account “for the $1 million of secret profits earned for the sale of the Work,” and “forfeit the $50,000 in compensation” she had earned under the October Agreement.

Takeaway

The faithless servant doctrine is a potent weapon for employers faced with an employee who acts with disloyalty during his/her employment. Although this Blog queried whether the doctrine was too draconian last year, it is hard to disagree with its application in Schulhof.  After all, the defendant was found to have secretly profited from the sale of goods, at the expense of the plaintiff, in breach of her fiduciary duties.

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