“Wayward and Unruly Agent” Found To Forfeit All Compensation Under The Faithless Servant Doctrine

• Posted on: Jan 25 2023

By: Jeffrey M. Haber

The faithless servant doctrine¹ provides that an employee who is faithless in the performance of their duties (i.e., breaches their duty of loyalty to the employer) is not entitled to recover either salary or commission.² While the language of the rule may imply a broad application, courts generally apply the rule relatively narrowly.³ Courts will usually hold an employee liable under the faithless servant doctrine only if the employee has usurped a corporate opportunity or actively stolen from the employer.⁴ That was the scenario in Nichtberger v. Paramount Painting Group, LLC, 2023 N.Y. Slip Op. 30200(U) (Sup. Ct., N.Y. County Jan. 19, 2023) (here).

[Ed. Note: the factual background comes from Plaintiff’s complaint and the motion court’s decision and order.] 

Nichtberger involved an action to recover monies allegedly owed to Plaintiff by the Corporate Defendants for breach of contract, as well as for damages to Plaintiff by the Individual Defendants for fraudulent business practices and stealing Plaintiff’s personal property.

In November 2009, L&L Painting Company, Inc. (“L&L”) and Plaintiff agreed to form Paramount Painting Group, LLC (“PPG”). Pursuant to the agreement, Plaintiff received an “advanced loan from PPG’s future profits” in the amount of $500,000. Plaintiff was also made President of PPG, with a salary of $208,000 per year.

In addition to his salary, Plaintiff maintained that he had a verbal agreement with Defendants to compensate him an extra $50,000 per year, thereby bringing his guaranteed salary to approximately $250,000 per year.

The parties also agreed to a bonus plan, whereby Plaintiff would receive 50% of the first $3 million in net profits that PPG achieved, and 25% of the net profits generated in excess of $4 million.

In the latter part of 2012, Plaintiff claimed that PPG had not paid any bonus money or profit-share that was due to him pursuant to the 2009 agreement. In addition, although PPG continued paying Plaintiff’s $4,000 weekly salary, it allegedly stopped paying the additional $50,000 supplement after the first year in breach of the parties’ oral agreement. 

According to Plaintiff, the yearly breaches of the oral and written agreements crippled his financial condition and prevented him from servicing his outstanding debts. Consequently, Plaintiff informed the Individual Defendants about his dire financial situation, and pleaded with them to honor the agreement to pay the additional $50,000 in salary and the earned bonuses. Defendants allegedly refused.

Plaintiff maintained that Defendants reported false net income figures to him in order to withhold bonus payments that would have been due to him. As Plaintiff became more and more suspicious of Defendants’ alleged fraudulent accounting practices, Plaintiff began bringing to Defendants’ attention discrepancies in the profit and loss statements that the Corporate Defendants provided to him. Defendants were allegedly unwilling to correct the discrepancies.

In March 2019, Plaintiff resigned from PPG.

After Plaintiff’s resignation, Defendants allegedly induced Plaintiff’s customers to continue working with PPG, which Defendants were purportedly able to do from files they had taken from Plaintiff’s personal office. Plaintiff alleged that Defendants did not pay him for any of the work done for his former clients.

Between 2010 to March 2019, Plaintiff had purchased and acquired numerous pieces of artwork, memorabilia and various other items, many which had a unique and personal value to Plaintiff. These “Chattel” were property of and owned by Plaintiff and were all stored and/or displayed in Plaintiff’s personal office at PPG. Plaintiff maintained that one or more of the Individual Defendants and/or their agents broke into Plaintiff’s office and stole all the Chattel.

On June 23, 2021, Plaintiff pled guilty to Grand Larceny in the Second Degree in connection with the theft of approximately $1.4 million from PPG, which he obtained by diverting checks made payable to PPG into a separate checking account he controlled. Pursuant to the plea agreement, Plaintiff received no jail sentence. Instead, he received a conditional discharge and an order to pay $1,436,072.56 in restitution to PPG in the form of a $500,000 bank check and a $936,072.56 confession of judgment.

Plaintiff sued Defendants, alleging breach of contract, fraud, replevin⁵ and conversion. Defendants moved to dismiss. The motion court granted in part and denied in part the motion.

The court granted that part of Defendants’ motion to dismiss Plaintiff’s claims for compensation in the form of salary, bonus and/or profit sharing. As noted by the court, in a prior lawsuit brought by PPG to recover the money that Plaintiff had stolen, the court held that Plaintiff was not entitled to recover any compensation under the faithless servant doctrine.

The court explained that “‘ongoing and pervasive’ misconduct of a ‘wayward and unruly agent’ like that of an employee who embezzles money from his employer, forfeits all compensation after the first faithless act”.⁶ Therefore, concluded the court, “[g]iven [Plaintiff’s] admission [in the plea agreement] to systematically diverting [PPG’s] checks to himself over many years, he has forfeited all compensation”.⁷ 

Moreover, said the court, Plaintiff’s claim to $50,000 a year based upon the parties’ alleged verbal agreement violated the statute of frauds and the merger clause in the 2009 agreement, which required all modifications to be in writing.⁸

Further, the court dismissed the fraud claim on the ground that it duplicated Plaintiff’s breach of contract claim.⁹

Finally, the court denied the motion with regard to the replevin and conversion claims. The court held that “[r]egardless of whether the faithless servant doctrine applie[d] with equal force to property purchased with the compensation, there [were] questions of fact as to whether or not Plaintiff actually did use money stolen from Defendants or his (now forfeited) compensation to purchase the artwork etc., that plaintiff kept in his office”.¹⁰ 

Takeaway

The faithless servant doctrine, also known as equitable forfeiture, is based on agency principles, and has been applied to brokers, salaried employees, attorneys, arts and entertainment representatives, and executors of estates. 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. 

In Nitchberger the doctrine was easily applied as Plaintiff admitted to stealing money from PPG in his plea agreement. Accordingly, under the doctrine, he was not entitled to the salary and compensation that he sought. 

Footnotes

1. This Blog examined the faithless servant doctrine here, here and here.
2. See Feiger v. Iral Jewelry, 41 NY2d 928, 928 (1977).
3. See, e.g., W. Elec. Co. v. Brenner, 41 N.Y.2d 291, 295 (1977); Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc., 100 A.D.2d 81, 88 (1st Dept. 1984).
4. See Visual Arts Found., Inc. v. Egnasko, 91 A.D.3d 578, 579 (1st Dept. 2012); Soam Corp. v. Trane Co., 202 A.D.2d 162, 162 (1st Dept. 1994) (employee promoted competitor’s products over employer’s); Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 203 (2d Cir. 2003) (employee usurped corporate opportunity).
5. In a replevin action, the plaintiff seeks the return of property, not money damages. Genger v. Genger, 2016 N.Y. Slip Op. 30602 (Sup. Ct., N.Y. County 2016) (“The objective of replevin is recovery of the property, and the alternative relief or remedy is ‘fixation of its value.’”) (citations omitted). A replevin action can arise in a number of situations, such as where two or more parties claim a right to possess personal property, but only one has a superior right to that property, or where the property was lawfully withheld but was not released to the person having the greater right to the property. To prevail in a replevin action, therefore, the plaintiff must establish that the defendant is in possession of property to which the plaintiff claims a superior right. Nissan Motor Acceptance Corp. v. Scialpi, 94 A.D.3d 1067 (2d Dept. 2012). This Blog wrote about replevin here.
6. Slip Op. at *2 (quoting, Cheryl & Co v. Krueger, 536 F. Supp. 3d 182, 213 (S.D. Ohio 2021) (citationsomitted), and citing, In re Blumenthal, 32 A.D.2d 767, 768 (1st Dept. 2006)).
7. Id.
8. Id.
9. Id. Under the duplication doctrine, a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract [that] govern[s] a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated[,]” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim. Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted).
10. Slip Op. at *3.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.