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Phansalkar v. Andersen Weinroth & Co., L.P.
Citation: 344 F.3d 184Docket: Docket Nos. 02-7928(L), 02-7984(XAP)
Court: Court of Appeals for the Second Circuit; September 16, 2003; Federal Appellate Court
An appeal has been filed regarding a final judgment from the United States District Court for the Southern District of New York, where Plaintiff Rohit Phansalkar was awarded $4,417,655.40 plus prejudgment interest for the conversion of stock shares. The case stems from Phansalkar's prior employment with Andersen Weinroth & Co. L.P. (AW) and its partners, G. Chris Andersen and Stephen Weinroth. Key determinations from the district court include: 1. AW unlawfully converted Phansalkar’s stock shares in Millennium Cell (MCEL), which were sold to him as part of his compensation. 2. Phansalkar breached his contract and fiduciary duties by failing to disclose benefits received from other companies while on their boards, which AW claimed belonged to them. 3. Under New York’s faithless servant doctrine, Phansalkar was required to forfeit some compensation due to disloyalty, but the forfeiture was limited to transactions related to his disloyal acts, as the court found no pervasive scheme to defraud AW. Thus, he was not required to forfeit the MCEL shares. 4. The court granted AW partial relief for the breach of contract, allowing recovery for cash fees and freely transferable stock shares, but denied relief for certain stock options that were not freely transferable, ruling that AW did not demonstrate harm from Phansalkar's failure to disclose these options. AW is appealing three aspects of the district court's decisions: the limitation on forfeiture and the decision not to require the forfeiture of MCEL shares, the ruling of conversion regarding those shares, and the denial of any remedy for the undisclosed stock options. Phansalkar contests the district court's damage calculation standard regarding his conversion claim. The court's decision is partially reversed and partially affirmed. It reverses the limitation on forfeiture of Phansalkar’s compensation to only that derived from disloyal transactions, ruling instead that under New York’s faithless servant doctrine, all compensation received after his first disloyal act must be forfeited, as there was no agreement for task-specific compensation. The court affirms that investment opportunities and benefits provided to Phansalkar by AW, including investments in MCEL and MCEL Shares, constitute compensation under the doctrine. The court vacates the district court's finding that AW was not harmed by Phansalkar's failure to disclose certain stock options, determining that a policy enabling AW to control options held by departing employees must be assessed first. The case is remanded for further examination of any such policy and potential remedies. The requirement for Phansalkar to forfeit the MCEL Shares negates the need to address other appellate issues regarding AW's conversion of those shares and the associated damage calculations. In the background, the dispute centers on the financial interests Phansalkar received during the last nine months of his employment at AW, complicated by the firm's staffing and compensation structures. AW is a small partnership that sources investment opportunities, with three categories of staff: actual partners, nominal partners, and other employees. The actual partners are the only signatories to the partnership agreement, while nominal partners, including Phansalkar, are treated similarly. AW generates income primarily from fees, options, warrants, and carried interests, with "Directors’ Compensation" being crucial for revenue stability. AW mandates that all Directors’ Compensation, including stock options, belongs to the firm, even when issued in the director's name. A June 8, 1999 memorandum indicated that the economic value of realized options belonged to AW. To track Directors’ Compensation, AW mandated that partners and employees report their directorships and associated benefits. Partners, unlike other employees, typically did not receive salaries but instead received "Partner Allocations," which represented portions of the firm’s non-cash income, primarily securities from transactions. Compensation decisions for partners were made by Andersen and Weinroth, with a vesting policy allowing one-third of an interest to vest annually over three years. Partner Allocations were paid out only when profits were monetized. AW also covered partners' overhead, expenses, and offered discounted investment opportunities, which were also part of compensation. Phansalkar joined AW around February 1998 as a nominal partner, receiving a $250,000 salary and a share of Partner Allocations decided by Andersen and Weinroth. He was treated as a partner, attended meetings, accessed confidential information, and had investment opportunities. Phansalkar left AW in June 2000 to become Chairman and CEO of Osicom Technologies, Inc. After his departure, AW accused him of failing to disclose certain Directors’ Compensation and claimed he was not entitled to returns on Investment Opportunities he had pursued while at AW. During his last 18 months, Phansalkar worked on four transactions, utilized three Investment Opportunities, and served on three boards. The district court thoroughly examined these issues in Phansalkar II and III, focusing on his work, Directors’ Compensation from other companies, and his disloyalties to AW. Notably, Phansalkar facilitated a significant transaction for Zip Global Network, which raised approximately $10 million, closing in September 1999. AW received a cash fee and stock warrants from a transaction where it designated two directors to the Zip Board of Directors through AW Zip, LLC, a fund-pooling entity it created. One designee, Phansalkar, received 40,000 options to purchase Zip shares and 600 shares of Zip Telecom Holdings. He obtained these on October 15, 1999, and in early 2000, respectively. The district court found that Phansalkar's role and compensation were representative of AW's interests, but he did not report the Zip Options or Zip Shares to AW, violating firm policy. Despite this non-disclosure, the court concluded there was insufficient evidence of intentional concealment, particularly since Phansalkar provided an AW employee with Minutes that referenced the Zip Options. In a separate engagement with Osicom in 1999, AW led a $7.5 million private placement and created FIBR Holdings, LLC for this purpose, resulting in $300,000 in fees and a 20% carried interest. Phansalkar, designated as an Osicom director, received 35,000 options and $3,000 in fees, which he similarly failed to disclose to AW. The court again found no proof of intentional concealment of these benefits. Phansalkar was also involved in a $1.5 million private placement for Sorrento, an Osicom affiliate, which closed on March 1, 2000. AW invested with a mix of partner funds and borrowed funds, while Phansalkar invested $60,000. AW raised an additional $6.5 million from outside investors through Sorrento Holdings, LLC, earning $1.95 million in fees and a 20% profit interest, along with warrants or options for facilitating director placements. Andersen was appointed to the Sorrento Board of Directors and received 100,000 Sorrento options, while Phansalkar joined the Sorrento Advisory Board with a grant of 300,000 options. The district court found Andersen was aware of Phansalkar's grant due to his participation in a board meeting where the Sorrento Option Plan was approved and receipt of the plan outlining Phansalkar's options. The court determined it was reasonable for Phansalkar to believe Andersen was aware of his options. However, Phansalkar ultimately only received 100,000 options instead of the 300,000 initially granted. In the spring and summer of 2000, AW facilitated a private placement of Sync Research, Inc. shares and a merger with Osicom's Networks Access unit, creating Entrada Networks. AW established Entrada Holdings, LLC for this purpose and was compensated through a cash fee and a 20% carried interest. Before the merger, Sync indicated it would appoint Phansalkar to the Entrada Networks board. After Phansalkar joined Osicom, he was granted options to purchase 50,000 shares and later received another 100,000 options upon his official appointment to the Entrada Networks Board. The district court found Phansalkar secured his board seat while still with AW but did not disclose this to AW, nor did he seek a board seat for AW. Additionally, he failed to inform AW of an offer for an AW designee on the Sync board, which he declined. Despite these omissions, the court ruled that the Entrada Options did not belong to AW, as neither set was granted in Phansalkar's capacity as an AW employee. AW also did not prove it would have received any options had Phansalkar disclosed the board opportunities. Lastly, Phansalkar capitalized on three investment opportunities at AW, notably his investment in Millenium Cell. In late 1998, AW initiated the development of MCEL, a hydrogen fuel concept utilizing sodium borohydride, committing to raise $1 million in equity. Original investors included Andersen, Weinroth, Brumberger, and Rawlings, while Phansalkar initially declined to invest. In December 1999, Andersen and Weinroth presented Phansalkar with an opportunity to buy up to $100,000 in equity at favorable terms to encourage his retention at the firm. Phansalkar viewed this as a beneficial offer and invested $60,000 in February 2000, with checks deposited into Andersen and Weinroth's personal accounts. At that time, MCEL was preparing for an IPO and had not issued stock certificates. Phansalkar aided in securing private investors and underwriters for the IPO, which occurred on August 9, 2000. He owned 637,902 shares of MCEL, later selling 252,000 shares to his friend Kowaloff for $25,000. AW was unaware of this transaction until May 2000. In early 2000, Phansalkar contributed $60,000 to AW’s $1.5 million investment in Sorrento, a private placement exclusive to AW partners. He believed the investment was favorable, yet had not received any shares or returns by the district court’s final decision, as returns were contingent on AW repaying a $750,000 loan secured by Sorrento stock. In 2000, Andersen, as a director of Headway, offered partners a chance to buy shares below market value. Phansalkar invested $50,000 and received 44,000 shares in return, which he subsequently sold for a $40,000 profit. Phansalkar's compensation in 1999 included a $250,000 salary and Partner Allocations, which comprised 20% of AW's warrants from the Zip transaction, 17.5% of carried interest in the Osicom private placement, and 7.5% of AW's interest in Treasure Master. Phansalkar expressed dissatisfaction with both his Partner Allocations and the notice that his salary would cease in 2000, indicating he was considering leaving AW. In response to his dissatisfaction, Andersen and Weinroth offered him an investment opportunity in MCEL to encourage him to remain with the firm. In 2000, Phansalkar received no salary or Partner Allocations, but was offered three discounted investment opportunities and a $100,000 loan from AW. The court found that each investment opportunity constituted compensation. By the start of litigation, Phansalkar had received his entire salary for 1999 but had not yet received his share of the Partner Allocations or repaid the loan, although he had sold shares from one of his investments. In June 2000, Phansalkar accepted an offer to become Chairman and CEO of Osicom, receiving a $250,000 salary, options for 450,000 shares, and a cash fee contingent on a merger or acquisition. Following this, he and Andersen worked to document his interests in various AW transactions, culminating in a memorandum that included Phansalkar's handwritten comments, which were incorporated into the final document. Draft memoranda related to Phansalkar include handwritten comments and consistently state that Andersen and Weinroth sold Phansalkar 637,902 shares of MCEL for $60,000, with shares to be distributed after MCEL's IPO. Each draft notes Phansalkar's 100,000 Sorrento Options but omits any mention of his Directors’ Compensation from the Zip and Osicom boards. Phansalkar and Andersen did not finalize any memorandum or consensus on Phansalkar’s interests. Tensions between Phansalkar and AW escalated after Phansalkar learned of Andersen's removal from the Sorrento Board, which he communicated to Andersen in late June 2000. Subsequently, Weinroth ordered the return of the 637,902 shares to Andersen and Weinroth, which was documented in a revised Ownership Schedule. A letter from Andersen on September 6, 2000, marked the first notification to Phansalkar regarding the share transfer and stated that the $60,000 he paid would offset a personal loan from AW. AW later discovered Phansalkar's receipt of various compensation, including Zip and Osicom options and fees, which he had not yet exercised or sold. Procedurally, AW filed suit against Phansalkar on September 11, 2000, in New York for breach of contract, breach of fiduciary duty, and conversion, alleging disloyalty and misappropriation of property. Phansalkar countered with his own claims against AW, including conversion and breach of contract, related to the MCEL Shares and promised compensation. The cases were consolidated for a bench trial, which was divided into two phases. The first phase addressed Phansalkar’s claims about the MCEL Shares and AW’s defenses, while the second phase dealt with other compensation claims from Phansalkar and AW's counterclaims regarding his Directors’ Compensation. The district court evaluated both claims and relevant damages throughout the trial. The court determined that AW was unlawfully deprived of Phansalkar’s MCEL Shares, while Phansalkar was found to have breached his fiduciary duties of loyalty and good faith to AW by not disclosing several key items, including the Zip Options and various fees. However, AW failed to prove that Phansalkar intentionally concealed the Directors’ Compensation, and thus, no fraud was established. Although Phansalkar was found disloyal, the court rejected AW's claim for complete forfeiture of all compensation under New York’s faithless servant doctrine, allowing forfeiture only for specific transactions tied to his disloyal acts. The court ordered Phansalkar to forfeit warrants from the Zip transaction and carried interest from the Osicom private placement, but he was not required to forfeit his 1999 salary, certain investment interests, or profits from his Headway investment. Additionally, Phansalkar was held liable for breach of fiduciary duty and breach of contract for failing to report Directors’ Compensation, with AW’s recovery limited to quantifiable damages from specific disloyal acts. The court found that AW had not suffered harm from Phansalkar's non-disclosure of certain options, as they only had a contingent right to their economic value. Following a bench trial, findings of fact may only be overturned if they are clearly erroneous, with the appellate court giving deference to the trial court's credibility assessments. Legal conclusions and mixed questions of law and fact are reviewed de novo. The federal courts are tasked with predicting how the highest court of the forum state would resolve any uncertainties in state law, giving significant weight to the decisions of that court and proper regard to lower court decisions, while also considering federal court interpretations of state law. The appeal centers on whether the district court incorrectly determined the amount of compensation that Phansalkar should forfeit from awards received in 1999 and 2000. The appellate court acknowledges the challenges faced by the district court in managing the complex litigation and appreciates its balanced approach in addressing overlapping claims. However, it concludes that Phansalkar was required to forfeit all compensation awarded after October 15, 1999, due to disloyalty, which includes an interest in MCEL. As a result, Phansalkar cannot contest AW’s retention of the MCEL shares, making further consideration of his conversion claim unnecessary. New York’s faithless servant doctrine, rooted in agency law and established for over a century, applies to Phansalkar's relationship with AW. Despite Phansalkar being referred to as a “partner,” he is recognized as an agent of AW and thus subject to the duties associated with that role. Under New York law, agents have a duty of loyalty to their principals, which includes the obligation to act in good faith and avoid any actions inconsistent with their agency. Breaches of this duty can lead to the agent being denied compensation, regardless of whether the principal suffered any actual damages. Specifically, an unfaithful agent must forfeit any commissions or salary related to transactions where disloyalty occurred. The district court determined that Phansalkar violated his loyalty obligations by failing to disclose several key items, leading to a decision that he should forfeit compensation linked to his disloyal acts. Phansalkar does not dispute the finding of breach but challenges the court's decision to limit forfeiture only to the compensation tied to specific disloyal transactions. He contends that his misconduct was merely a failure to disclose and that he did not intend to defraud. However, the court rejected this argument, asserting that forfeiture is warranted for his actions, which constituted misconduct under New York law. The court acknowledged two standards from historical New York cases for determining forfeiture eligibility, indicating that disloyalty must significantly violate the service contract to warrant forfeiture. The judgment reflects a balance between the nature of the misconduct and the extent of disloyalty in relation to Phansalkar's overall service. Lower New York courts have consistently recognized substantial disloyalty by agents in various contexts, considering disloyalty "not substantial" only in cases of a single act or when the employer was aware and tolerated the behavior. The New York Court of Appeals established a critical standard in *Murray v. Beard* (1886), asserting that an agent must demonstrate utmost good faith towards their principal, and any adverse actions or undisclosed interests constitute fraud, leading to forfeiture of compensation. This principle was reaffirmed in *Lamdin v. Broadway Surface Advertising Corp.* (1936), which determined that an employee falling short of loyalty standards forfeits their salary. Despite these standards, New York courts have not clarified their application or reconciled differences between them, and the Court of Appeals has not referenced the *Turner* dictum since that decision. In the case at hand, Phansalkar’s behavior meets the criteria for forfeiture under both standards due to repeated acts of disloyalty across nearly all transactions he managed, except for the Sorrento transaction. His misconduct persisted for months, even after an opportunity for correction arose in June 2000. The assessment concludes that disloyalty in four out of five primary responsibilities over an extended period constitutes a substantial violation of service terms. Furthermore, Phansalkar, as one of five key actors at AW, was entrusted with significant funds, emphasizing the expectation of loyalty and reporting obligations related to Directors’ Compensation. Phansalkar breached his fiduciary duties to the partnership, AW, by failing to disclose income and opportunities that rightfully belonged to AW, which were essential for its stable income. His actions exemplified disloyalty, as he withheld cash, stocks, and other interests from AW, including declining an offer for AW to have representation on Sync’s Board without notifying AW. New York law mandates that employees must not act inconsistently with their agency, and any profits made from transactions on behalf of the employer should be disclosed and turned over to the employer. Phansalkar's repeated failures to report Directors’ Compensation and other benefits further demonstrated his disloyalty. The district court found that the absence of intent to defraud did not mitigate the misconduct, as New York law does not require specific intent for forfeiture of compensation due to disloyalty. The court concluded that Phansalkar intended to withhold income from AW, amounting to sufficient grounds for forfeiture of his compensation. Phansalkar intended to retain certain benefits for himself by knowingly receiving and not disclosing them to AW, thereby violating his duty to act in his employer's best interests. This behavior established grounds for forfeiture under New York law, as Phansalkar was aware of his omissions and their implications. The document examines whether the district court's limitation on Phansalkar’s forfeiture was appropriate. Historically, New York law mandated that disloyal agents forfeit all compensation without limitation, as illustrated by cases like *Murray v. Beard* and *Lamdin*, where disloyal employees were denied compensation due to competing obligations or misconduct. However, more recent lower court rulings suggest that forfeiture can be limited under certain conditions, notably when compensation is apportioned by time or task. In *Musico*, it was determined that a disloyal employee could retain compensation for tasks performed loyally during periods of disloyalty if three criteria were met: 1) task-based payment agreements, 2) no misconduct related to specific tasks, and 3) disloyalty not affecting the completion of loyal tasks. In that case, forfeiture was restricted to compensation for contracts affected by disloyalty, aligning with the Restatement (Second) of Agency principles. An agent who intentionally breaches their contract is not entitled to compensation for any services rendered, even if those services were performed correctly. This principle, rooted in the Restatement (Second) of Agency, was upheld in the cases of Músico and Sequa. In Sequa, the agent's consulting agreement specified fees based on transaction values, and the district court found disloyalty in only one of over forty transactions, leading to a forfeiture of fees solely from that transaction. The agent contended that the forfeiture should be more limited since the disloyalty pertained to a minor expense within a much larger transaction. However, this argument was rejected, emphasizing a cautious approach to forfeiture rules in New York. The New York Court of Appeals has not clearly defined the limitations of forfeiture under the faithless servant doctrine, and the lower courts have typically limited forfeiture to the period of disloyalty without addressing whether it should pertain to specific disloyal tasks. The district court's interpretation in the case of Phansalkar limited forfeiture further than Músico and Sequa, suggesting that forfeiture should be restricted to instances where there is no broad scheme of fraud and where disloyalty does not taint all transactions. Given the tenuous nature of the Músico precedent, the court expressed reluctance to further relax forfeiture rules. The only reported decisions applying a "transaction-by-transaction" limitation of forfeiture are Músico and Sequa, both involving agreements that defined compensation for specific tasks. This limitation has not been applied in cases of salary-based compensation or when employees receive benefits from transactions they did not work on. It effectively avoids disputes over how much general compensation should be forfeited when disloyalty occurs in part of the employee’s work. In the case of Phansalkar, his 1999 compensation agreement included a salary of $250,000 and discretionary Partner Allocations determined by Andersen and Weinroth, without specific fees tied to individual transactions. Similarly, his 2000 agreement provided for Partner Allocations but no salary, with investment opportunities left entirely to the discretion of his employers. The compensation Phansalkar received in 1999 and 2000 came from various transactions, for which he had varying levels of responsibility. Forfeiture cannot be limited to certain transactions when the compensation structure is general rather than task-specific. Therefore, Phansalkar is required to forfeit all compensation received after October 15, 1999, the start date of his disloyalty, which includes: (1) the portion of his $250,000 salary from that date until the end of 1999; (2) his interest in Treasure Master received as part of the 1999 Partner Allocations; and (3) any benefits from his investments in MCEL and Headway made in 2000. The decision concludes by rejecting Phansalkar's argument against the forfeiture of these investment interests. Phansalkar argues that the investment benefits from opportunities to invest in MCEL and Headway should not be classified as compensation under New York's faithless servant doctrine since he was required to risk his own capital to obtain these benefits. He asserts that, as these benefits are not compensation, they cannot be forfeited. The legal precedent regarding whether disloyal employees must forfeit benefits from discounted investment opportunities remains unresolved in New York courts. The district court, however, determined that Phansalkar's investment benefits constituted compensation because they were offered in connection with his service and at a discounted price. This conclusion was supported by cases indicating such opportunities can be considered compensation for federal taxation and securities law purposes. For the faithless servant doctrine, it is held that investment opportunities offered as a reward for an employee's work should be subject to forfeiture, regardless of the necessity for the employee to use personal capital. The implications of forfeiture differ between MCEL and Headway; AW retained control over the MCEL shares, meaning Phansalkar forfeits any rights to them without quantification of the benefit. Conversely, since Phansalkar sold Headway shares for profit, the benefit needs quantification, which requires further examination by the district court. Lastly, the issue of stock options held in Phansalkar's name, which belong to AW and were not disclosed by Phansalkar, pertains to breach of contract and fiduciary duty claims. The district court determined that AW is entitled only to the monetary value realized from the exercise of two sets of options (40,000 Zip Options and 35,000 Osicom Options) held by Phansalkar, who acted disloyally. The court declined to grant AW specific rights to direct the exercise of these options, reasoning that AW could not demonstrate it had authority over options held by current employees and thus should not gain such power over options held by a former employee. As a result, AW retains only a contingent right to the economic value of the options when realized. On appeal, the court found that the district court failed to adequately consider whether AW's control over stock options for a former employee differed from that of a current employee. The appellate court suggested further fact-finding to determine if a policy existed that would have allowed AW to control the options after being informed of Phansalkar's intent to leave. If such a policy existed and Phansalkar's disloyalty obstructed AW’s rights, then AW may have been harmed, necessitating an appropriate remedy. The appellate court reversed the district court's decision limiting Phansalkar's forfeiture to compensation related to his disloyal acts. Phansalkar must forfeit all compensation received after his first act of disloyalty, including part of his salary, interests in Treasure Master, and benefits from MCEL and Headway investments. Specifically, he must repay AW any profits from the sale of Headway shares and return his $60,000 investment in MCEL, while the court will determine whether this amount can be offset against a loan owed to AW and if Phansalkar is entitled to interest on the $60,000. The court remands the case to the district court to address issues related to Kowaloff's alleged purchase of 252,000 shares of MCEL from Phansalkar and to consider claims concerning Phansalkar's $60,000 investment in Sorrento. The court affirms the district court's finding that the investment opportunities given to Phansalkar by AW, and any benefits gained, constitute compensation under New York's faithless servant doctrine. However, the court vacates the district court's ruling that AW's position regarding the Zip and Osicom Options is unchanged due to Phansalkar's failure to fulfill his employment duties. It remands for a determination of whether AW had a policy regarding control over options held by departing or former employees, and if so, to consider an appropriate remedy for the Zip and Osicom Options. The district court's previous opinions relevant to the appeal include a denial of AW's motion for partial summary judgment concerning Phansalkar's conversion claim, bifurcation of the case for trial, and findings presented in two additional opinions detailing the proceedings. The phrase "limitation of forfeiture" is clarified to mean restricting forfeiture to compensation related to disloyal transactions. The record indicates Phansalkar had no significant transactions in his first year, and while he was promised a $2,500 fee from Zip, this is not contested since he disclosed it in writing. The court notes the district court did not determine the market price of MCEL at the time of Phansalkar's investment, only that it was "discounted." AW alleges Phansalkar acted disloyally by sharing the MCEL investment opportunity with Kowaloff without AW's consent and that Phansalkar breached the MCEL operating agreement by transferring interest to Kowaloff. Phansalkar counters that AW has waived this argument by not raising it earlier, highlighting that the judge noted AW did not claim any misconduct related to Phansalkar's MCEL shares. Phansalkar's purchase of MCEL Shares is alleged to be fraudulent, as he concealed that he was purchasing them jointly with Kowaloff. However, the court decides that Phansalkar must forfeit these shares on different grounds and does not need to address the disloyalty claim related to MCEL. The district court recognized Phansalkar's $60,000 investment in Sorrento as part of his 2000 compensation but did not specifically reject the forfeiture argument concerning it. It remains unclear whether AW argued for the forfeiture of the Sorrento investment, and since this point was not addressed in AW’s appeal, the court will not disturb the district court's decision on this matter, remanding it for further consideration regarding potential forfeiture. The district court found that Phansalkar's disloyalty regarding the board seats of Sync and Entrada Networks did not harm AW. Additionally, it was established that Phansalkar received 100,000 Sorrento Options, which AW was aware of but did not instruct him to act upon. These findings are affirmed, and the parties agree that New York law governs the case, with a stipulation that Phansalkar was not a partner at AW, thus excluding partner-related rights and obligations from the litigation. Although AW argues for broader findings of disloyalty regarding other matters, these are deemed unnecessary for the court's decision, as Phansalkar's disloyalty sufficiently warrants forfeiture of all compensation post-October 15, 1999. Allegations of an employee stealing cork from an employer at frequent intervals can serve as a valid defense against the employee's claim for a share of profits, provided they are proven. Similarly, if an employee is found to have persuaded coworkers to leave and attempted to lure customers away, these actions could justify denying a bonus claim. Forfeiture of profits is appropriate when a jury finds that employees fraudulently removed contracts from employer files and appropriated royalty checks. Courts have supported the forfeiture of commissions after disloyal acts if the employer can demonstrate that such acts were not isolated incidents or that the employee's activities amounted to actual competition rather than mere preliminary steps. A single act of disloyalty, such as a lawyer removing files to start a competing practice, does not constitute a persistent pattern of disloyalty warranting forfeiture. Furthermore, no substantial contract violation occurred when an employer retained an insubordinate employee, as the district court found the employee's disloyalty to be isolated incidents that did not constitute a scheme to defraud. The district court's decision to limit forfeiture was based on flawed reasoning, as it incorrectly assessed the scope of the employee's disloyal acts, which spanned multiple responsibilities over several months. An employee cannot negate a substantial violation of service terms by highlighting valuable contributions to the employer while ignoring misconduct in other areas. The New York Court of Appeals has not explicitly utilized the Restatement to restrict forfeiture under the faithless servant doctrine, but has indicated that a faithless servant is generally not entitled to recover compensation, including salary and commissions, as established in Feiger. The court's decision to uphold the district court's ruling in Sequa is based on specific facts: a written consultancy agreement with per-transaction compensation and the agent's misconduct occurring in only one of over forty transactions, which aligns with the conditions for limitation of forfeiture outlined in Músico. The court distinguishes that the similarity in compensation structures is more significant than the number of agency agreements involved. Several cases, such as GRG Group, Inc. v. Ravenal and Royal Carbo Corp. v. Flameguard, Inc., demonstrate forfeiture due to disloyalty, where courts upheld the forfeiture of substantial compensation during periods of disloyal conduct. Furthermore, Bon Temps Agency Ltd. v. Greenfield illustrates that an employee who acted disloyally is not entitled to fees related to tasks performed during that time. While federal district courts have debated the applicability of limiting forfeiture by task under New York law, they typically have not addressed the specific issues relevant to this case. Cases like Sequa Corp. v. Gelmin and Interpool Ltd. v. Patterson have examined Músico's holding but generally declined to restrict forfeiture based on disloyalty in individual transactions, particularly when multiple agency agreements are present. From late 1987 through August 1989, salary payments were limited to this time frame, as noted in the case aff'd without opinion, 952 F.2d 393 (2d Cir. 1991). A federal district court ruled that forfeiture of commissions earned by a disloyal purchasing agent is limited to transactions where disloyalty occurred, citing Danish Fur Breeders Ass’n v. Furrico Furs, Inc. (1989), where the agent retained commissions on 20,000 furs purchased loyally. The issue of Kowaloff's rights to 252,000 MCEL shares sold by Phansalkar remains unresolved, and the district court is instructed to clarify any related claims without speculation. It is determined that AW is not entitled to retain capital invested by Phansalkar in MCEL and Headway, and must return $60,000 and $50,000 to him, respectively, with the district court to decide on any applicable interest. The district court established that AW did not prove ownership of the Entrada Networks options and that Phansalkar's disloyalty regarding the Sorrento options was not substantiated. As a result, AW has no claim to either set of options. Should the district court consider remedies on remand, it is noted that this case differs from typical profit retention situations due to restrictions on Phansalkar’s ability to transfer options. Thus, the district court may explore alternative remedies, including the establishment of a constructive trust to address equity concerns when ownership of property is contested based on equitable principles.