‘Faithless Servant’ Doctrine Alive and Well in New Jersey with Recent New Jersey Supreme Court Case
The New Jersey Supreme Court reaffirmed the ‘faithless servant’ doctrine on September 22, 2015 in Kaye v. Rosefielde, 223 N.J. 218 (2015). The faithless servant doctrine refers to the common-law equitable remedy whereby the employee may be compelled by the Court to disgorge (or forfeit) compensation earned during any period of disloyalty. What is significant about this recent decision is that the Supreme Court of New Jersey unanimously held that an employer may seek disgorgement of a disloyal employee’s salary even if the misconduct does not cause any actual damage to the employer.
Bruce Kaye, who managed several Atlantic City timeshare business entities, brought a case against his former Chief Operating Officer and General Counsel, Alan Rosefielde, an attorney admitted to practice law in New York, but not in New Jersey. Rosefielde made $500,000 per year, paid out monthly to his company Plumrose Company. Rosefielde worked for Kaye for approximately two years, and throughout that time period, engaged in egregious misconduct.
The Supreme Court outlined Rosefielde’s history of disloyalty as follows:
- In February 2003, Rosefielde urged Kaye to form a new entity and then drafted the operating agreement to increase his personal interest in the company beyond the agreement reached with Kaye. Rosefielde also diverted another employee’s ten percent interest in the company to himself.
- In September 2004, Rosefielde created a new entity unbeknownst to Kaye by presenting a signature page to Kaye and his son, advising them that their signatures were needed for a document relating to the son’s trusts. The new entity managed the timeshares in exchange for a ten percent management fee that went to Rosefielde.
- In 2003 and 2004, timeshare unit owners defaulted and could not be located. Rather than pursue foreclosure proceedings, Rosefielde had the signatures of defaulting timeshare owners forged on false quitclaim deeds.
- Rosefielde applied for health insurance for company sales representatives who were independent contractors by misrepresenting the contractors’ employment status to the insurance company. The insurance company then issued health insurance to the independent contractors.
- In March 2004, Rosefielde billed his employer $4000 for a trip to Las Vegas that was not business-related. Rosefielde stayed in a hotel with three adult film stars during his trip.
- Rosefielde made several sexual advances toward two women employees, which exposed his employer to a risk of liability for sexual harassment claims.
Upon discovering these issues, Kaye fired Rosefielde and sued him and his related companies in Chancery Court. The trial court rescinded Rosefielde’s interest in several entities, awarded compensatory damages to the plaintiff in the amount of $4,000 for Rosefielde’s non-business-related trip to Las Vegas, punitive damages, and legal fees. However, the trial court decided against ordering disgorgement of Rosefielde’s salary, holding that Rosefielde’s breach of his fiduciary obligations caused no actual damage to his employer. The Appellate Division affirmed the trial court’s decision in Kaye v. Rosefielde, 432 N.J. Super. 421, 434 (App. Div. 2013). The Supreme Court granted certification on the issue of equitable disgorgement.The Supreme Court discussed Cameco v. Gedicke, 157 N.J. 504 (1999), which is a case that the Court referred to as its “most detailed analysis of the duty of loyalty.” Slip op. at 22. Moreover, the Court explained that in Cameco, equitable disgorgement was a remedy not contingent on a finding of damages. Beyond the holding in Cameco, the Court also noted that the principle that a court may order disgorgement even though the conduct of the agent does not harm the principal is set forth in the Restatement (Second) commentary. The Court concluded, “Accordingly, we reaffirm the holding of Cameco that an employer may seek disgorgement of a disloyal employee’s compensation as remedy for the breach of the duty of loyalty, with or without a finding of economic loss.” Slip op. at 32-33. The Court then remanded the case back to the trial court to determine whether the record in this case warrants the remedy of economic disgorgement of Rosefielde’s salary for his periods of disloyalty.