Phansalkar v. Andersen Weinroth & Co., L.P.
| Decision Date | 16 September 2003 |
| Docket Number | No. 02-7928(L).,No. 02-7984(XAP).,02-7928(L).,02-7984(XAP). |
| Citation | 344 F.3d 184 |
| Parties | Rohit PHANSALKAR, Plaintiff-Consolidated-Defendant-Appellee-Cross-Appellant, v. ANDERSEN WEINROTH & CO., L.P., G. Chris Andersen, and Stephen D. Weinroth, Defendants-Consolidated-Plaintiffs-Appellants-Cross-Appellees, AW & CO., INC. Defendant-Appellant-Cross-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
ANDREW J. ROSSMAN, Esq., Akin, Gump, Strauss, Hauer & Fled LLP, New York, NY, for Plaintiff-Consolidated-Defendant-Appellee-Cross-Appellant.
DANIEL P. LEVITT, Esq., (Shearman & Sterling, on the brief), for Defendants-Consolidated-Plaintiffs-Appellants-Cross-Appellees and Defendant-Appellant-Cross-Appellee.
Before: JACOBS and STRAUB, Circuit Judges, and WOOD, District Judge.1
This is an appeal from a final judgment, entered in the United States District Court for the Southern District of New York (Shira A. Scheindlin, District Judge), awarding Plaintiff-Consolidated-Defendant-Appellee-Cross-Appellant Rohit Phansalkar ("Phansalkar") $4,417,655.40, plus prejudgment interest, on his claim for conversion of shares of stock.
This diversity action arises out of the employment relationship that once existed between Phansalkar, an investment banker, and Defendants-Consolidated-Plaintiffs-Appellants-Cross-Appellees Andersen Weinroth & Co., L.P. ("AW" or "the firm"), a small merchant banking firm, and its two partners, G. Chris Andersen ("Andersen") and Stephen Weinroth ("Weinroth"). After a lengthy bench trial involving numerous claims and counterclaims, the district court made the following four determinations, which are at the core of this appeal.2
First, the district court determined that AW unlawfully converted Phansalkar's shares of stock in an entity called Millenium Cell ("MCEL"). Andersen and Weinroth had sold Phansalkar an equity interest in MCEL out of their own, personal accounts, at a favorable price, as an employment incentive. That interest consisted of 637,902 shares of stock (the "MCEL Shares"). The district court found that the MCEL Shares were part of plaintiff's compensation from AW.
Second, the district court concluded that Phansalkar breached his contract with, and his duties of loyalty and good faith to, AW, by failing to disclose his receipt of various benefits (i.e., stock options, stock shares, fees, and business opportunities) which he had received from other companies in consideration of his service on those companies' boards. AW's policy was that such benefits belonged to AW and that employees were to report and pass on those benefits to the firm.
Third, the district court held that, pursuant to New York's faithless servant doctrine, Phansalkar's disloyalty required him to forfeit compensation, but only compensation derived from transactions with respect to which he had been disloyal. The district court limited Phansalkar's forfeiture in this manner, based on its interpretation of our decisions in Musico v. Champion Credit Corp., 764 F.2d 102 (2d Cir. 1985) and Sequa Corp. v. GBJ Corp., 156 F.3d 136 (2d Cir.1998),3 and based on its findings that "Phansalkar did not engage in a scheme to defraud AW" and that Phansalkar's "isolated misdeeds did not permeate his entire employment relationship." Phansalkar II, at *110-11, 2001 WL 1524479 at *34. In keeping with this approach, the district court did not require Phansalkar to forfeit the MCEL Shares, because it found that Phansalkar committed no disloyal acts with respect to MCEL.
Fourth, the district court awarded AW some, but not all, of the relief it sought for Phansalkar's breach of contract and breach of fiduciary duty in failing to disclose and to pass on to AW the benefits he received for his service on other companies' boards. The district court granted AW relief with respect to the benefits that were freely transferable (i.e., cash fees and stock shares), but declined to grant relief with respect to certain stock options that were not freely transferable. The district court concluded that AW had failed to prove that it was harmed by Phansalkar's failure to disclose the existence of those options. The district court held that AW was in the same position after discovering this disloyalty, as it would have been if Phansalkar had fulfilled his duties, because AW did not have any right to control options that are held in an employee's name but belong to AW.
AW appeals three of the district court's determinations: (1) its decision to limit forfeiture and not to order Phansalkar to forfeit his MCEL Shares and certain other compensation received, (2) its finding that AW converted Phansalkar's MCEL Shares and its calculation of damages on that claim, and (3) its determination that AW is not entitled to any remedy for Phansalkar's failure to disclose his receipt of certain stock options. AW asserts the first and second contentions in the alternative. Phansalkar appeals the district court's use of an allegedly incorrect standard to calculate damages on his conversion claim.
For the reasons stated below, we reverse in part and affirm in part. We reverse the district court's decision to limit forfeiture of Phansalkar's compensation to compensation derived from transactions as to which Phansalkar was disloyal. We hold that New York's faithless servant doctrine requires Phansalkar to forfeit all compensation received after his first disloyal act. This forfeiture is required because there was no agreement for Phansalkar's compensation to be determined on a task-by-task basis for tasks he personally performed.
We affirm the district court's conclusion that the investment opportunities provided to Phansalkar by AW, and the benefits derived from those opportunities, were compensation, for the purposes of New York's faithless servant doctrine. These investment opportunities and benefits include the opportunity to invest in MCEL and the MCEL Shares.
We vacate the district court's determination that AW was not harmed by Phansalkar's failure to disclose the existence of certain stock options that belong to AW. We find that the district court could not properly make this determination, without first considering whether AW had a policy that enabled it to assert control over options held in the name of departing or former employees. If such a policy existed, Phansalkar's failure to disclose the existence of these options may have caused AW harm. We thus remand for further fact finding with respect to any such policy, and, if necessary, for consideration of an appropriate remedy.
Our determination that Phansalkar must forfeit the MCEL Shares renders it unnecessary to reach the other issues raised on appeal, including the parties' arguments regarding the district court's finding that AW converted the MCEL Shares and its calculation of damages on that claim.
The crux of this dispute is who is entitled to the various financial interests Phansalkar received, or allegedly should have received, during the final nine months of his employment with AW. The flow of interests to Phansalkar in that time period is a complex matter. This complexity is due in part to the particular staffing, income, and compensation structures at AW, and in part to the wide variety of the transactions at issue. The key facts, as found by the district court, are as follows.
AW is a small, limited liability partnership that finds and creates investment opportunities for itself, its partners, and outside investors. During the relevant time period, AW had three categories of staff: actual partners, nominal partners, and other employees. Andersen and Weinroth were the only actual partners; they were the only signatories to the partnership agreement. Three individuals were nominal partners: Phansalkar, non-party Alan Brumberger ("Brumberger") and non-party James Rawlings ("Rawlings"). AW gave nominal partners the title of "partner" and, in many respects, treated them as actual partners. For the purpose of this decision, we will use the word "partners" to refer to both actual partners and nominal partners.
AW's income consisted primarily of cash fees, options, warrants, and "carried interests," derived from the firm's investments. (A "carried interest," in this context, is a percentage of the profits earned by the investors in a particular AW transaction, which percentage was paid to AW.) AW's income also included the compensation earned by AW partners and other employees for their service on boards of directors of companies with which AW did business. AW required that this "Directors' Compensation" be passed on to the firm. Directors' Compensation was a very important source of revenue for AW, because it was the only source of revenue upon which the firm could rely from year to year.
Pursuant to AW policy, all Directors' Compensation belonged to the firm, whether that compensation took the form of fees or in-kind compensation, such as stock options. See Phansalkar II, at *48-49, 2001 WL 1524479 at *16. This policy applied even to stock options issued in the director's name, which often were not freely transferable. A June 8, 1999 memorandum to AW partners stated: "when [such options] are realized, the economic value belongs to the firm." Joint Appendix to the Parties' Submissions on Appeal ("Joint Appendix") at A 2297; see also Phansalkar II, at *49-50, 2001 WL 1524479 at *16. To ensure that AW could track and collect Directors' Compensation, AW required its partners and employees to report to AW their directorships and the benefits associated with those directorships.
AW's compensation to its partners differed from its compensation to its other employees. AW partners usually did not receive salaries. Instead, they received "Partner Allocations" (i.e., portions of the firm's non-cash income, generally securities,...
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