John Whalen was employed by the City of Binghamton as the director of Parks and Recreation. In his capacity as the director, Whalen was to collect various fees and was entrusted with related funds. In April 2014, Whalen pled guilty to grand larceny after stealing more than \($50,000\) from the City of Binghamton between 2007 and 2012. Following the guilty plea, the City of Binghamton commenced an action based on Whalen’s breach of loyalty and fiduciary duty. The City of Binghamton sought to recover all compensation paid to Whalen during the period of theft and to acquire a declaration that it no longer must furnish health insurance to Whalen. The trial court ruled that Whalen’s otherwise “unblemished” 35 years of service to the City of Binghamton, raised issues of fact whether relinquishment of compensation was justified under the faithless servant doctrine. The City of Binghamton appealed.
JUDGE PETERS New York law with respect to the disloyal or faithless performance of employment duties has developed for well over a century. Firmly rooted in this state’s jurisprudence is the principle that “an employee is to be loyal to his [or her] employer and is ‘prohibited from acting in any manner inconsistent with his [or her] agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his [or her] duties.’”
Under what is commonly referred to as the faithless servant doctrine, “[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his [or her] services is generally disentitled to recover his [or her] compensation, whether commissions or salary.” Thus, where an employee “engage[s] in repeated acts of disloyalty, complete and permanent forfeiture of compensation, deferred or otherwise, is warranted.”
There is no dispute that defendant’s admission to stealing more than \($50,000\) from plaintiff over the course of a nearly six-year period constitutes conclusive proof of such facts and established plaintiff’s entitlement to judgment as a matter of law on the issue of liability.
…The Court of Appeals has made clear that forfeiture of compensation is required even when some or all of “the services were beneficial to the principal, or [when] the principal suffered no provable damage as a result of the breach of fidelity by the agent.”
“This is because the function of [a breach of fiduciary duty] action, unlike an ordinary tort or contract case, is not merely to compensate the plaintiff for wrongs committed by the defendant but … to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates.”
In light of defendant’s “persistent pattern of disloyalty” over the six-year period at issue, his purported exemplary performance of his duties when he was not stealing from plaintiff does not insulate him from the application of the faithless servant doctrine. Nor is there any basis for apportioning forfeiture of compensation to the specific tasks as to which defendant was disloyal. To be sure, such a limitation has been recognized by the Second Department, as well as federal courts that have considered the issue. However, apportioning the amount of compensation to be forfeited under the faithless servant doctrine has been limited to circumstances where, unlike here, the employee or agent is compensated on a task-by-task basis.
As the Second Department has observed: “This view is consistent with the position taken by the Restatement, which addresses the issue directly. The Restatement provides that ‘[a]n agent is entitled to no compensation for conduct which is disobedient or which is a breach of his [or her] duty of loyalty’
(Restatement [Second] of Agency § 469). Nevertheless, the principal is obligated to pay to 149*149 the agent, despite the breach, ‘the agreed compensation for services properly rendered for which the compensation is apportioned in the contract, whether or not the agent’s breach is wilful and deliberate’ (Restatement [Second] of Agency § 456). Under the Restatement view, therefore, ‘the agent is entitled to retain compensation only for properly performed tasks for which compensation is specifically apportioned by contract.’”
Task-by-task forfeiture for salaried employees, like defendant, would not only run afoul of “New York’s strict application of the forfeiture doctrine,” but would also have the ill effect of “embroiling courts in deciding how much general compensation should be forfeited, where the general compensation was awarded while the agent was acting disloyally in some, but not all, of his [or her] work.” For these reasons, we decline to relax the faithless servant doctrine so as to limit plaintiff’s forfeiture of all compensation earned by defendant during the period in which he was disloyal.
Finally, as for the precise amount of damages, plaintiff submitted documentary evidence establishing that it paid defendant \($316,535.54\) in compensation between January 2007 and November 2012, and defendant failed to submit any competent proof to dispute that figure. Accordingly, plaintiff is entitled to summary judgment on the issue of damages and a declaration that it is relieved of its obligation to provide defendant with health insurance benefits earned through his employment.
CRITICAL THINKING:
Why do you think the trial court ruled in the opposite manner? What do you think was its line of reasoning?
ETHICAL DECISION MAKING:
Consider the WH framework for ethics. What values do you think the trial court and the appellate court weighed when they made their respective decisions?