Bruce Kaye v. Alan P. Rosefielde (073353) ( 2015 )

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
Bruce Kaye v. Alan P. Rosefielde (A-93-13) (073353)
Argued February 3, 2015 – Decided September 22, 2015
PATTERSON, J., writing for a unanimous Court.
In this appeal, the Court considers whether a court may order the equitable remedy of disgorgement of an
employee’s compensation when the employee has breached his or her duty of loyalty to the employer, but the
employer has not sustained economic loss as a consequence of the breach.
Plaintiff Bruce Kaye, the controlling principal of three entities that sell and manage timeshare interests in
resort properties in Atlantic County, hired defendant Alan P. Rosefielde, an attorney admitted to practice law in New
York but not in New Jersey, initially as outside counsel, and then as an employee. After defendant had worked
closely with plaintiff for approximately four months, the parties entered an agreement providing that, as
compensation for his services, defendant would earn an annual salary of $500,000. For approximately two years,
defendant served as Chief Operating Officer for several of the timeshare entities, and effectively functioned as their
general counsel. In that capacity, defendant committed serious misconduct by acting on his own behalf instead of
for his employers’ benefit, and exposing his employers to potential liability. Based on this misconduct, and
dissatisfaction with defendant’s performance, plaintiff terminated defendant’s employment.
Plaintiff Kaye and the companies that employed defendant commenced suit against defendant, asserting
claims for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of the duty of
loyalty. In addition to claiming compensatory and punitive damages for the alleged disloyalty, plaintiffs sought
rescission of the parties’ agreements and disgorgement of monies received by defendant or his company. Following
a lengthy trial, the court found that defendant engaged in egregious conduct, including self-dealing, fraudulent
acquisition of an ownership interest in one of the entities, and conspiracy to forge deeds to various properties, which
the court held to constitute a breach of his duty of loyalty, breach of fiduciary duty, legal malpractice, and civil
fraud. The trial court rescinded defendant’s interest in several entities, and awarded compensatory damages,
punitive damages and legal fees. Although the trial court stated that it is difficult to imagine the commission of
more egregious conduct by a corporate officer, it declined to order the equitable disgorgement of defendant’s salary
as a remedy for breach of the duty of loyalty, because the breach did not result in any actual damage to the plaintiff
entities, which it believed was required by Cameco, Inc. v. Gedicke, 157 N.J. 504 (1999).
The Appellate Division affirmed in part, and reversed in part, the determinations by the trial court. The
trial court’s determination that plaintiffs were not entitled to the remedy of disgorgement was affirmed. 432 N.J.
Super. 421 (App. Div. 2013). This Court granted certification, limited to the issue of whether a court may award the
remedy of disgorgement of a disloyal employee’s salary to an employer that has sustained no economic damage.
217 N.J. 586 (2014).
HELD: In accordance with the broad discretion afforded to courts fashioning equitable remedies that are fair and
practical, the remedy of equitable disgorgement may be awarded in an appropriate case even in the absence of a
finding that the employer sustained economic loss as a result of the employee’s disloyal conduct. If a court
determines that disgorgement is an appropriate equitable remedy, it should apportion that compensation and order
disgorgement of only the compensation received during the period in which the employee breached the duty of
loyalty.
1. Whether equitable disgorgement is permitted without proof of actual damages is a question of law for which
appellate review is de novo, and therefore no deference is owed to the legal conclusions reached by the trial court
and the Appellate Division. (p. 14)
1
2. The duty of loyalty requires that, while employed, an employee not act contrary to the employer’s interest in all
matters connected with the employment relationship. The contexts giving rise to claims of employee disloyalty are
so varied as to preclude mechanical application of abstract rules of law, and therefore require a fact-specific
analysis, as this Court recognized in Cameco, under the factors stated there. Under those factors, a court considers
the parties’ expectations of the services that the employee will perform in return for his or her compensation, as well
as the egregious nature of the misconduct that leads to the claim. (pp. 14-16)
3. The appropriate relief for a breach of the duty of loyalty likewise depends upon the specific facts of the matter,
which can warrant either legal or equitable relief. While the exercise of equitable discretion is not governed by
fixed rules and principles, implicit in the process is the exercise of conscientious judgment directed by law and
reason toward a just result appropriate to the specific dispute. (pp. 17-18)
4. One of the equitable remedies available for a breach of the duty of loyalty is the disgorgement of the disloyal
employee’s past compensation. The remedy of disgorgement is derived from principles of contract law that
recognize that if the employee breaches the duty of loyalty at the heart of the employment relationship, he or she
may be compelled to forego the compensation earned during the period of disloyalty. The disgorgement remedy is
consonant with the purpose of a breach of the duty of loyalty claim because, when an employee abuses his or her
position and breaches the duty of loyalty, the employee fails to meet the employer’s expectation of loyalty in the
performance of the job duties for which he or she is paid. Disgorgement may also have a valuable deterrent effect
providing notice that adverse consequences will follow a breach of the duty of loyalty. (pp. 18–20; 24-25)
5. This Court, in Cameco, recognized that disgorgement is not precluded by the absence of monetary damages
proximately caused by the employee’s disloyalty, and cited with approval principles stated in the Restatement
(Second) Agency, at section 469, to the same effect. The Court reaffirms the principles stated in Cameco,
recognizing that an employer may seek disgorgement of a disloyal employee’s compensation, even in the absence of
economic loss. This view is also consistent with the Restatement (Second) Agency, at section 469, comment a, and
the Restatement (Third) Agency, at section 8.01, comment d (2). The Court further states that requiring an employer
to demonstrate that it has sustained economic loss would conflict with the justifications for disgorgement. (pp. 21-
25)
6. The trial court should consider the following factors in deciding whether disgorgement is an appropriate remedy:
the employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to
which those acts placed the employer’s business in jeopardy, and the degree of planning to undermine the employer
that is undertaken by the employee. Where appropriate, a trial court should apportion the employee’s compensation,
rather than ordering a wholesale disgorgement that may be disproportionate to the misconduct at issue. (pp. 26-27)
7. Based on these principles, the Court reverses the determination of the Appellate Division on the claim for
disgorgement, and remands the matter to the trial court to determine whether that remedy should be imposed. If the
trial court determines that plaintiffs are entitled to disgorgement, it should apportion defendant’s compensation and
order disgorgement only for pay periods in which he committed acts of disloyalty. (pp. 27-28)
The judgment of the Appellate Division is REVERSED with respect to the remedy of equitable
disgorgement, and the matter is REMANDED to the trial court for further proceedings consistent with this decision.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, and SOLOMON; and JUDGE
CUFF (temporarily assigned) join in JUSTICE PATTERSON’s opinion. JUSTICE FERNANDEZ-VINA did
not participate.
2
SUPREME COURT OF NEW JERSEY
A-93 September Term 2013
073353
BRUCE KAYE, Individually and as TRUSTEE
OF THE BRUCE KAYE REVOCABLE TRUST and
the BRUCE KAYE DYNASTY TRUST, JASON
KAYE, FLAGSHIP RESORT DEVELOPMENT
CORPORATION, FIRST RESORTS MANAGEMENT
COMPANY, INC., ATLANTIC PALACE
DEVELOPMENT, LLC, and LA SAMMANA
VENTURES, LLC,
Plaintiffs-Appellants,
v.
ALAN P. ROSEFIELDE, PLUMROSE COMPANY,
INC., and ROSE ASSOCIATES, INC. OF
MIAMI,
Defendants-Respondents,
and
LA SAMMANA MANAGEMENT, LLC, and BA
MANAGEMENT, LLC,
Defendants,
v.
DEBORAH KAYE, 2000 BRUCE KAYE
DYNASTY TRUST, HOWARD ALTER, SUSAN
TUNNEY, MICHAEL VALENTI, RONNIE
STRANSKY, KENNETH WOLFE, and
DENNIS RICHARD,
Third-Party Defendants.
Argued February 3, 2015 – Decided September 22, 2015
On certification to the Superior Court,
Appellate Division, whose opinion is
1
reported at 432 N.J. Super. 421 (App. Div.
2013).
Edwin J. Jacobs, Jr., argued the cause for
appellants (Jacobs & Barbone, attorneys; Mr.
Jacobs and YooNieh Ahn, on the brief).
John C. Connell argued the cause for
respondents (Archer & Greiner, attorneys;
Mr. Connell and Benjamin D. Morgan, on the
brief).
JUSTICE PATTERSON delivered the opinion of the Court.
In this appeal, we determine whether a court may order the
equitable disgorgement of an employee’s compensation when the
employee has breached his or her duty of loyalty to his or her
employer, but the employer has not sustained economic loss as a
consequence of that breach.
This matter arose from a dispute between Bruce Kaye (Kaye),
who managed several timeshare business entities, and Alan
Rosefielde (Rosefielde), an attorney whom Kaye initially
retained as outside counsel and later hired as an employee. For
approximately two years, Rosefielde served as Chief Operating
Officer (COO) of some of Kaye’s timeshare businesses, and
functioned, in effect, as those entities’ General Counsel. In
that capacity, Rosefielde committed serious misconduct by acting
on his own behalf instead of acting for his employers’ benefit
and exposing his employers to potential liability. That
misconduct, among other issues, led to Rosefielde’s dismissal
and this litigation.
2
Kaye, in his individual capacity and as trustee of two
trusts, Kaye’s son Jason Kaye, and business entities that Kaye
owned sued Rosefielde and several entities. Plaintiffs asserted
claims based on Rosefielde’s breach of fiduciary duty, fraud,
legal malpractice, unlicensed practice of law, and breach of the
duty of loyalty. Following a lengthy bench trial, the trial
court found that Rosefielde engaged in egregious conduct
constituting a breach of his duty of loyalty, breach of his
fiduciary duty, legal malpractice, and civil fraud.
The trial court rescinded Rosefielde’s interest in several
entities, awarded compensatory damages, punitive damages, and
legal fees, and dismissed Rosefielde’s counterclaims. It
declined, however, to order the equitable disgorgement of
Rosefielde’s salary as a remedy for his breach of the duty of
loyalty, on the ground that his breach did not result in damage
or loss to the entities that employed him. The Appellate
Division affirmed that determination, and this Court granted
certification on the issue of equitable disgorgement.
Relying on this Court’s holding in Cameco, Inc. v. Gedicke,
157 N.J. 504 (1999), and other authority, we hold that the
remedy of equitable disgorgement is available to a trial court
even absent a finding that the employer sustained economic loss
by virtue of the employee’s disloyal conduct. In accordance
with the broad discretion afforded to courts fashioning
3
equitable remedies that are fair and practical, a trial court
may order disgorgement of an employee’s compensation as a remedy
for a breach of loyalty in an appropriate case. If a court
determines that disgorgement is an appropriate equitable remedy,
it should apportion that compensation and compel disgorgement of
only the compensation that the employee received during pay
periods in which he or she acted in violation of the duty of
loyalty.
Accordingly, we reverse the determination of the Appellate
Division on this issue and remand to the trial court to
determine whether the remedy of disgorgement should be imposed
in this case.
I.
A.
We derive our account of the dispute that led to this
litigation from the trial court’s factual findings.1 Kaye is the
controlling principal of three entities created to sell and
manage timeshare interests in resort properties in Atlantic
1 The trial court’s factual findings, briefly summarized herein,
are described in greater detail in the Appellate Division’s
comprehensive opinion. Kaye v. Rosefielde, 432 N.J. Super. 421,
431-53 (App. Div. 2013). Although Rosefielde disputed many of
the trial court’s factual findings, before this Court he
challenges neither the trial court’s factual findings nor its
conclusion that he breached his duty of loyalty. Accordingly,
we make no determination regarding the evidentiary support for
those findings.
4
County: plaintiff Flagship Resort Development Corporation
(Flagship), plaintiff Atlantic Palace Development, LLC (Atlantic
Palace), and plaintiff La Sammana Ventures, LLC (La Sammana
Ventures). In 1997, Kaye retained Rosefielde, an attorney
admitted to practice law in New York, but not New Jersey, to
represent him personally on tax and estate planning matters, and
to provide legal services to some of the business entities he
owned.
In 2002, Rosefielde accepted an offer from Kaye to work for
his business entities as a full-time, salaried employee. In
December 2002, after Rosefielde had been working closely with
Kaye for approximately four months, Kaye and Rosefielde entered
into a formal agreement. Under the terms of that agreement,
Rosefielde would earn an annual salary of $500,000, to be paid
to his company, defendant Plumrose Company, Inc. (Plumrose), on
a monthly basis, in equal shares by Flagship and Atlantic
Palace.2 The trial court found that Rosefielde served as both
2 The salary was characterized as a “retainer” on monthly
invoices submitted by Rosefielde. The parties agreed that
Rosefielde would work autonomously and that he would not be
required to report to a superior. Although the terms of the
business arrangement suggest an intent that Rosefielde function
as an independent contractor, and the record suggests that it
was anticipated early in the relationship that Rosefielde would
serve in that capacity, the parties agree that he was an
employee of the entities for which he served as COO and provided
legal services. We thus address the issue before us on the
assumption that Rosefielde was an employee.
5
COO and General Counsel of Flagship and Atlantic Palace, and
that his two roles were “inextricably intertwined.” Based on
the trial court’s findings, Rosefielde committed serious
misconduct in his handling of several transactions during his
two-year tenure as an employee of these entities.
The first incident of misconduct was the creation in
February 2003 of a separate entity, La Sammana Management, LLC
(La Sammana Management), to manage the timeshare interests owned
by La Sammana Ventures. According to Kaye and other witnesses,
Rosefielde urged Kaye to form this new entity. However, instead
of precisely following Kaye’s instructions for the allocation of
interests in La Sammana Management, Rosefielde drafted the
operating agreement so as to increase his personal interest in
the company and that of one of his companies, defendant Rose
Associates, Inc. (Rose Associates), beyond the interest that had
been agreed to by Kaye. The trial court also found that,
between December 2003 and July 2004, Rosefielde orchestrated the
diversion of another employee’s ten percent interest in La
Sammana Ventures to himself, contrary to Kaye’s wishes; that
diversion was not discovered until nearly two years later, when
Rosefielde’s employment was terminated.
Second, in September 2004, unbeknownst to Kaye, Rosefielde
created a new entity, defendant BA Management, LLC (BA
Management), in which his company Rose Associates had a twenty
6
percent ownership interest. Though Rosefielde testified that BA
Management would manage the sale of only La Sammana Ventures
timeshares, its operating agreement recited that the company was
established to “manage the sale of timeshare units throughout
the world.” Rosefielde further testified that it would manage
those timeshares in exchange for a ten percent management fee.
According to the trial court’s factual findings, Rosefielde
obtained the signatures of Kaye and his son Jason Kaye on the
operating agreement by “false pretenses.” He presented them
with a signature page, advising them that their signatures were
needed for a document relating to the son’s trusts; they did not
realize until later that they had agreed to form a new entity to
Rosefielde’s benefit.
Third, following defaults in 2003 and 2004 by timeshare
unit owners who could not be located, Rosefielde decided not to
pursue costly foreclosure proceedings. Instead, throughout 2003
and 2004, Rosefielde arranged for the signatures of defaulting
timeshare owners to be forged on false quitclaim deeds, and
reassured employees who were suspicious of the deeds that they
were valid.
Fourth, in May 2004, Rosefielde applied for health
insurance for the Flagship and Atlantic Palace sales
representatives, who were all independent contractors, by
misrepresenting the contractors’ employment status to an
7
insurance company. In the insurance application, Rosefielde
identified a dormant corporation that he personally owned,
Paradise Global Realty, Inc. (Paradise), as the employer of the
sales representatives, and verified the application as both the
dormant company’s president and its attorney. A Flagship
employee then created letterhead for Paradise, and Rosefielde
signed a letter to the insurer falsely representing that the
sales representatives were full-time employees of Paradise. On
the basis of Rosefielde’s misrepresentations, the insurer issued
health insurance to the independent contractors.
Fifth, in March 2004, Rosefielde billed Flagship $4000 for
expenses incurred during a trip to Las Vegas that was not
business-related. During that trip, Rosefielde stayed in a
hotel suite with three women who, according to other employees
who were also on the trip, were adult film stars.
Finally, the trial court found that Rosefielde made
multiple inappropriate sexual advances toward two women employed
by Flagship, subjecting his employer to a risk of liability for
sexual harassment claims.
On January 13, 2005, following his discovery of some of
Rosefielde’s misconduct and dissatisfaction with Rosefielde’s
performance, Kaye terminated Rosefielde’s employment as COO and
General Counsel of Flagship and Atlantic Palace.
B.
8
Following the termination of Rosefielde’s employment, this
action was brought in the Chancery Division by Kaye (in his
individual capacity and as Trustee of the Bruce Kaye Revocable
Trust and the Bruce Kaye Dynasty Trust), his son Jason Kaye, and
four corporate entities, Flagship, First Resorts Management
Company, Inc., Atlantic Palace, and La Sammana Ventures.
Plaintiffs named as defendants Rosefielde individually, his
companies Plumrose and Rose Associates, and the two jointly
owned entities involved in Rosefielde’s alleged misconduct, La
Sammana Management and BA Management.
Plaintiffs’ second amended complaint asserted, among other
claims, that Rosefielde was an “unfaithful servant.” Plaintiffs
alleged that Rosefielde was “unfaithful” to his employers, Kaye
and the corporate plaintiffs, that he committed fraud against
them, and that he willfully aided and abetted his employers’
competitors. In support of that claim, plaintiffs enumerated
several alleged acts of disloyalty committed by Rosefielde
during his employment. Plaintiffs also asserted claims for
breach of fiduciary duty, civil fraud, legal malpractice, and
the unlicensed practice of law.3
3 Although one count of the complaint set forth a cause of action
identified as a claim for “theft,” the facts alleged in that
count appear to relate to plaintiffs’ fraud claims.
9
In addition to seeking compensatory and punitive damages
for the alleged disloyalty, plaintiffs sought rescission of the
agreements that Rosefielde allegedly induced Kaye to sign,
injunctive relief, and “[d]isgorgement and return of all
payments, profits, disbursements and other funds received by any
defendant pursuant to [the allegedly fraudulent] documents or
pursuant to [Rosefielde’s alleged] conduct” as set forth in the
complaint. Rosefielde and his co-defendants denied all
allegations and asserted counterclaims against the plaintiffs.
The case was tried before a judge sitting without a jury
over twenty-six trial days, and was decided by the trial court
in an oral determination supplemented by a written opinion. In
a ruling that is unchallenged in this appeal, the trial court
held, in part, that Rosefielde engaged in egregious conduct
constituting a breach of his duty to Kaye and his companies and
that he was an unfaithful servant.4 The court cited, as examples
of Rosefielde’s misconduct in breach of his duty of loyalty,
Rosefielde’s “self-dealing” with respect to La Sammana
Management and La Sammana Ventures, his “fraudulent acquisition”
4 The trial court also found that Rosefielde committed legal
malpractice and fraud. On those claims, it awarded compensatory
damages in the amount of $4000, the amount charged by Rosefielde
for his Las Vegas trip, awarded more than $800,000 in counsel
fees and costs to plaintiffs, and ordered rescission of
Rosefielde’s interests in La Sammana Ventures, La Sammana
Management, and BA Management. It dismissed all counts of the
counterclaim filed by Rosefielde and the other defendants.
10
of an ownership interest in BA Management, his inappropriate
conduct toward female employees, his request for corporate
reimbursement of the expenses incurred on his trip to Las Vegas,
his “solicitation of two employees” to forge quitclaim deeds,
his conspiracy to forge those deeds, his retaliation against an
employee who refused to forge quitclaim deeds, his fraudulent
application to a health insurer on behalf of the sales
representatives, and his conduct of the unlicensed practice of
law.
Although the trial court commented that “[i]t is difficult
to imagine the commission by a corporate officer of more
egregious conduct,” it declined to grant the remedy of
disgorgement demanded by plaintiffs. The court noted that there
was no evidence that Rosefielde’s breach of his fiduciary
obligations to his employer resulted in actual damage to any of
the plaintiff entities. It interpreted this Court’s decision in
Cameco, supra, 157 N.J. at 518-19, to hold that in order to
compel disgorgement of a disloyal employee’s compensation, a
court must first find that “the employee’s breach proximately
caused the requested damages.”
Rosefielde appealed the trial court’s rulings in
plaintiffs’ favor. Plaintiffs cross-appealed, arguing that the
trial court’s decision not to order the remedy of disgorgement
constituted error.
11
The Appellate Division affirmed in part, and reversed in
part, the trial court’s determination. Kaye, supra, 432 N.J.
Super. at 494-95. The panel found that the trial court’s
findings were sufficiently supported by the evidence presented
at trial and affirmed the trial court’s judgment in plaintiffs’
favor on their legal malpractice, civil fraud, and breach of
fiduciary duty claims. Id. at 476-82. The panel reversed the
trial court’s award of legal fees on plaintiffs’ malpractice
claim, finding the award to be disproportionate to the
compensatory damage award in the amount of $4000, and remanded
to the trial court for a recalculation of those fees. Id. at
485-87. Again citing the modest award of compensatory damages,
the Appellate Division panel reversed the trial court’s award of
punitive damages and remanded the issue for reconsideration.
Id. at 488-92.
The panel, however, affirmed the trial court’s
determination that plaintiffs were not entitled to the remedy of
disgorgement. Id. at 434. The panel commented only that the
trial court’s findings of fact were grounded in the record and
that its legal analysis was “unassailable.” Ibid.
We granted plaintiffs’ petition for certification, limited
to the question of whether a court may award the remedy of
disgorgement of a disloyal employee’s salary to an employer that
has sustained no economic damage. 217 N.J. 586 (2014).
12
II.
Plaintiffs assert that this Court’s decision in Cameco,
supra, 157 N.J. at 518-19, allows for the remedy of disgorgement
without proof of economic loss. They argue that Cameco permits
a trial court to order disgorgement of an employee’s
compensation during periods in which the employee was disloyal,
if the record disclosed a basis for that remedy. Plaintiffs
assert that their argument is also supported by the Appellate
Division’s decision in Simulation Systems Technologies, Inc. v.
Oldham, 269 N.J. Super. 107, 111-12 (App. Div. 1993).
Plaintiffs further contend that if disgorgement is unavailable
as a remedy for an employee’s breach of his or her duty of
loyalty to an employer that does not incur damages, the
employer’s claim would be rendered meaningless.
Defendants counter that the Appellate Division properly
affirmed the trial court’s exercise of its discretion, as a
court of equity, in denying disgorgement. They emphasize the
language in Cameco stating that disgorgement “may be ordered” in
addition to “traditional damages,” reasoning that the language
does not require the disgorgement remedy be awarded. Defendants
further assert that Joseph Toker, Inc. v. Cohen, 67 N.J. Super.
68, 81-82 (App. Div. 1961), in which the Appellate Division
declined to order repayment of monthly advances to an unfaithful
13
employee, controls and does not permit disgorgement in the
setting of this case.
III.
Whether equitable disgorgement is permitted without proof
of actual damages is a question of law. “When deciding a purely
legal issue, review is de novo.” Fair Share Hous. Ctr., Inc. v.
N.J. State League of Municipalities, 207 N.J. 489, 493-94 n.1
(2011) (citing Manalapan Realty, L.P. v. Twp. Comm. of
Manalapan, 140 N.J. 366, 378 (1995)). Accordingly, “we owe no
deference to the legal conclusions reached by the trial court
and Appellate Division.” Borough of Harvey Cedars v. Karan, 214
N.J. 384, 401 (2013) (citing Manalapan Realty, supra, 140 N.J.
at 378).
Plaintiffs here seek equitable disgorgement as a remedy for
their claim for breach of the duty of loyalty. As this Court
has observed, “[l]oyalty from an employee to an employer
consists of certain very basic and common sense obligations. An
employee must not while employed act contrary to the employer’s
interest.” Lamorte Burns & Co. v. Walters, 167 N.J. 285, 302
(2001) (citing Chernow v. Reyes, 239 N.J. Super. 201, 204 (App.
Div.), certif. denied, 122 N.J. 184 (1990)); see also AYR
Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 503-05
(App. Div. 1993) (noting that corporate officers and directors
owe duty of loyalty); Auxton Computer Enters., Inc. v. Parker,
14
174 N.J. Super. 418, 425 (App. Div. 1980) (recognizing that
employee owes duty of loyalty to employer); Restatement (Third)
of Agency § 8.01 (2005) (Restatement (Third)) (providing that
“[a]n agent has a fiduciary duty to act loyally for the
principal’s benefit in all matters connected with the agency
relationship”); Restatement (Second) of Agency § 387 (1958)
(Restatement (Second)) (same).
The Court’s most detailed analysis of the duty of loyalty
was set forth in its opinion in Cameco. There, the trial court
dismissed the employer’s claim against its employee, a food
product transportation manager, who formed a company that served
two of the employer’s competitors. Cameco, supra, 157 N.J. at
509-10. The trial court found that the employee’s business
consumed no more than fifteen minutes of the employee’s time per
workday, that it did not interfere with the employee’s
performance of his responsibilities, that the employee did not
breach his duty of loyalty, and that the employer suffered no
damage. Id. at 512-13. The Appellate Division reversed the
trial court’s determination that the employee had not breached
his duty of loyalty and remanded for a new trial on that issue,
but otherwise affirmed the trial court’s judgment. Id. at 514.
The Court in Cameco recognized that a breach of the duty of
loyalty claim requires a fact-specific analysis. Id. at 516
(citing Auxton Computer Enters., supra, 174 N.J. Super. at 424).
15
“The contexts giving rise to claims of employee disloyalty are
so varied that they preclude the mechanical application of
abstract rules of law.” Ibid. Invoking principles set forth in
the Restatement (Second), the Court explained:
The scope of the duty of loyalty that an
employee owes to an employer may vary with the
nature of their relationship. Employees
occupying a position of trust and confidence,
for example, owe a higher duty than those
performing low-level tasks. Assisting an
employer’s competitor can constitute a breach
of the employee’s duty of loyalty.
[Restatement (Second), supra,] § 394 comment
a. Similarly, an employee’s self-dealing may
breach that duty. Id. §§ 387, 393.
[Ibid.]
To guide trial courts, the Court identified four factors
relevant to the determination of whether an employee-agent
breached his or her duty of loyalty: 1) the “existence of
contractual provisions” relevant to the employee’s actions; 2)
the employer’s knowledge of, or agreement to, the employee’s
actions; 3) the “status of the employee and his or her
relationship to the employer,” e.g., corporate officer or
director versus production line worker; and 4) the “nature of
the employee’s [conduct] and its effect on the employer.” Id.
at 521-22; see also Lamorte, supra, 167 N.J. at 303 (noting
factors). Thus, a trial court considers the parties’
expectations of the services that the employee will perform in
return for his or her compensation, as well as the
16
“egregiousness” of the misconduct that leads to the claim.
Cameco, supra, 157 N.J. at 521-22.
Just as the trial court’s determination of the disloyalty
claim mandates a fact-sensitive inquiry, so does its fashioning
of a remedy. “Depending on the facts of the case, an employee’s
breach of the duty of loyalty can give rise to either equitable
or legal relief.” Cameco, supra, 157 N.J. at 518 (citing United
Bd. & Carton Corp. v. Britting, 63 N.J. Super. 517 (Ch. Div.
1959), aff’d, 61 N.J. Super. 340 (App. Div.), certif. denied, 33
N.J. 326 (1960)); see also Restatement (Third), supra, § 8.01
comment d(1) (explaining that breach can give rise to legal and
equitable remedies).
As a general rule, courts exercising their equitable powers
are charged with formulating fair and practical remedies
appropriate to the specific dispute. Rutgers Cas. Ins. Co. v.
LaCroix, 194 N.J. 515, 529 (2008) (“‘In doing equity, [a] court
has the power to adapt equitable remedies to the particular
circumstances of each particular case.’” (quoting Mitchell v.
Oksienik, 380 N.J. Super. 119, 130-31 (App. Div. 2005))); see
also US Bank Nat’l Ass’n v. Guillaume, 209 N.J. 449, 476 (2012)
(“‘In fashioning relief, the Chancery judge has broad
discretionary power to adapt equitable remedies to the
particular circumstances of a given case.’” (quoting Marioni v.
Roxy Garments Delivery Co., Inc., 417 N.J. Super. 269, 275 (App.
17
Div. 2010)). “While equitable discretion is not governed by
fixed principles and definite rules, ‘[i]mplicit [in the
exercise of equitable discretion] is conscientious judgment
directed by law and reason and looking to a just result.’” In
re Estate of Hope, 390 N.J. Super. 533, 541 (App. Div.) (quoting
State v. Madan, 366 N.J. Super. 98, 109-10 (App. Div. 2004)),
certif. denied, 191 N.J. 316 (2007); see also Marioni, supra,
417 N.J. Super. at 275 (noting “Chancery judge is required to
apply accepted legal and equitable principles”).
In the array of equitable remedies available to the trial
court, one option is the “disgorgement” of the disloyal
employee’s past compensation.5 Cameco, supra, 157 N.J. at 518-
19; see also Cnty. of Essex v. First Union Nat’l Bank, 186 N.J.
46, 61 (2006) (noting in fiduciary duty context that “unjust
enrichment/disgorgement is an equitable claim”). The principle
that a court may order disgorgement of an employee’s
5 Some judicial opinions and the Restatement (Third) use the term
“forfeiture” as an alternative to the term “disgorgement”; the
two terms are closely analogous. See, e.g., Cameco, supra, 157
N.J. at 519-22; Restatement (Third) § 8.01 comment d(2); see
also Charles A. Sullivan, Mastering the Faithless Servant?:
Reconciling Employment Law, Contract Law, and Fiduciary Duty,
2011 Wis. L. Rev. 777, 794 (2011) (noting that “courts tend to
speak of ‘forfeiture’ when compensation has not been paid and
‘disgorgement’ when the master seeks to recover what has been
paid before the [servant’s] faithlessness was discovered, but
the principle is the same”).
18
compensation for his or her breach of the duty of loyalty is set
forth in the Restatement (Second):
An agent is entitled to no compensation for
conduct which is disobedient or which is a
breach of his duty of loyalty; if such conduct
constitutes a wilful and deliberate breach of
his contract of service, he is not entitled to
compensation even for properly performed
services for which no compensation is
apportioned.
[Restatement (Second), supra, § 469.]
Although section 469 of the Restatement (Second) characterizes
the principle of disgorgement as a “defense,” the availability
of that remedy “is not limited to its use as a defense to an
agent’s claim for compensation.” Restatement (Third), supra, §
8.01 comment d(2). Disgorgement may be a remedy if a court
finds in favor of a plaintiff on an affirmative claim. See
Cameco, supra, 157 N.J. at 518-22.
Comment b on section 469 of the Restatement (Second)
clarifies the close nexus between the rule stated in that
section and contract law, and illuminates one rationale
underlying that rule. It explains:
A serious violation of a duty of loyalty or
seriously disobedient conduct is a wilful and
deliberate breach of the contract of service
by the agent, and, in accordance with the rule
stated in Section 456, the agent thereby loses
his right to obtain compensation for prior
services, compensation for which has not been
apportioned.
19
[Restatement (Second), supra, § 469 comment
b.]
Section 456 of the Restatement (Second), identified in
comment b as a source of the rule set forth in section 469,
addresses the extent to which a principal must pay a discharged
agent for services properly rendered by that agent:
If a principal properly discharges an agent
for breach of contract, . . . the principal is
subject to liability to pay to the agent, with
a deduction for the loss caused the principal
by the breach of contract:
(a) 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[.]
[Id. § 456.]6
Thus, the equitable remedy of disgorgement is derived from
a principle of contract law: if the employee breaches the duty
of loyalty at the heart of the employment relationship, he or
she may be compelled to forego the compensation earned during
the period of disloyalty. The remedy is substantially rooted in
the notion that compensation during a period in which the
employee is disloyal is, in effect, unearned.
6 Section 8.01 of the Restatement (Third) encompasses the rules
set forth in Restatement (Second) sections 456 and 469. See
Restatement (Third), supra, § 8.01 Reporter’s Notes comment a.
20
Guided by those principles, we consider the question
presented by this appeal: whether a showing of economic loss by
an employer is a prerequisite to granting the remedy of
equitable disgorgement. That remedy has been discussed only
rarely in our appellate decisions.
In Simulation Systems, supra, the Appellate Division
reviewed a trial court’s decision that awarded damages in favor
of an employer whose employee formed a separate competing
company, but that denied the remedy of disgorgement in the
absence of proof as to how many working hours the employee spent
on his personal venture. 269 N.J. Super. at 108-10. The trial
court further stated its understanding that New Jersey law does
not recognize disgorgement of compensation paid to a disloyal
employee, and concluded that the proofs presented at trial were
inadequate. Id. at 110. The Appellate Division declined to
determine whether this Court would adopt sections 456 and 469 of
the Restatement (Second) and generally recognize such a remedy.
Id. at 112. The panel reasoned that the record lacked proof of
the method by which the employee was compensated and affirmed
the trial court’s dismissal of the plaintiff’s claim for
disgorgement. Id. at 111-12.
In Cameco, supra, following its detailed analysis of the
legal principles controlling whether an employee has breached
his or her duty of loyalty, the Court briefly discussed
21
equitable disgorgement and clarified that the remedy is not
contingent on a finding of damages. See 157 N.J. at 518-19,
522. The Court first identified legal remedies that might be
available for a breach of the duty of loyalty -- profits earned
from a competing enterprise while still employed and
“compensation for a direct injury suffered by the employer as a
result of the employee’s breach,” including the value of an
employer’s lost opportunity or the employee’s “secret profit.”
Id. at 518 (citing Chernow, supra, 239 N.J. Super. at 205;
United Bd. & Carton, supra, 63 N.J. Super. at 532-33). The
Court then expressly noted the absence of any showing in Cameco
that the employer had suffered money damages “proximately
caused” by the employee’s disloyalty. Ibid. Notwithstanding
that finding, the Court observed that “in addition to more
traditional damages, an employer may seek forfeiture of its
employee’s compensation,” and suggested that “forfeiture” of
part of the employee’s salary might be appropriate in that case.
Id. at 519, 522. Cameco clearly stands for the principle that
disgorgement is available as a remedy, even when there is no
finding of economic loss to the employer.
Moreover, in Cameco, supra, the Court cited with approval
Restatement (Second) section 469. Id. at 520. That Restatement
(Second) provision includes in its commentary the principle that
a disloyal agent is not entitled to compensation, “even though
22
the conduct of the agent does not harm the principal.”
Restatement (Second), supra, § 469 comment a; accord Restatement
(Third), supra, § 8.01 comment d(2) (stating that “[t]he better
rule does not condition the availability of forfeiture as a
remedy on whether a principal can establish damage”). Thus, the
Court in Cameco clearly envisioned that in a case such as the
one before it, in which no economic loss could be proven,
disgorgement of the disloyal employee’s salary would nonetheless
be one alternative in the range of remedies available to the
trial court.7 To the extent that Joseph Toker, supra, 67 N.J.
Super. at 81-82, on which defendants rely, can be read to
conflict with this principle, its holding in that regard was
implicitly abrogated by Cameco.
7 Numerous federal and state decisions applying the law of our
sister jurisdictions follow this principle. See, e.g., Huber v.
Taylor, 469 F.3d 67, 77-78 (3d Cir. 2006) (applying Texas law);
Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184, 200 (2d
Cir. 2003) (applying New York law); Bos. Children’s Heart
Found., Inc. v. Nadal-Ginard, 73 F.3d 429, 435, 436 n.7 (1st
Cir. 1996) (applying Massachusetts law); Wilshire Oil Co. of
Tex. v. Riffe, 406 F.2d 1061, 1062-63 (10th Cir.) (applying
Oklahoma law), cert. denied, 396 U.S. 843, 90 S. Ct. 105, 24 L.
Ed. 2d 92 (1969); J.C. Peacock, Inc. v. Hasko, 16 Cal. Rptr.
518, 358 (Ct. App. 1961); Ross v. Calamia, 13 So. 2d 916, 917
(Fla. 1943); ABC Trans Nat’l Transp., Inc. v. Aeronautics
Forwarders, Inc., 413 N.E.2d 1299, 1314-15 (Ill. App. Ct. 1980);
Wenzel v. Hopper & Galliher, P.C., 830 N.E.2d 996, 1000-01 (Ind.
Ct. App. 2005); Chelsea Indus., Inc. v. Gaffney, 449 N.E.2d 320,
327 (Mass. 1983); Feiger v. Iral Jewelry, Ltd., 363 N.E.2d 350,
351 (N.Y. 1977); Efird v. Clinic of Plastic & Reconstructive
Surgery, P.A., 147 S.W.3d 208, 220 (Tenn. Ct. App. 2003); Burrow
v. Arce, 997 S.W.2d 229, 240 (Tex. 1999); Faultersack v.
Clintonville Sales Corp., 34 N.W.2d 682, 683-84 (Wis. 1948).
23
In a different setting -- a county government’s claim for
the disgorgement of fees earned by a bank that obtained its
position as a bond underwriter through bribery -- this Court
reaffirmed that equitable disgorgement is not contingent on a
showing of economic loss. First Union, supra, 186 N.J. at 49,
59. There, although the county acknowledged that it did not
suffer damages on certain bond transactions, the Court explained
that “unjust enrichment/disgorgement is an equitable claim . . .
grounded in the theory that a wrongdoer should not profit from
its wrongdoing regardless of whether the innocent party suffered
any damages.” Id. at 61. That basic principle is not limited
to the bond underwriting fee context addressed by the Court in
First Union. Nothing in that case suggests that its holding as
to disgorgement would not apply with equal force to a disloyal
employee.
The disgorgement remedy is consonant with the purpose of a
breach of the duty of loyalty claim: to secure the loyalty that
the employer is entitled to expect when he or she hires and
compensates an employee. See Lamorte Burns, supra, 167 N.J. at
302; see also Burrow v. Arce, 997 S.W.2d 229, 237-38 (Tex. 1999)
(explaining that agent “is not entitled to be paid when he has
not provided the loyalty bargained for and promised”). When an
employee abuses his or her position and breaches the duty of
loyalty, he or she fails to meet the employer’s expectation of
24
loyalty in the performance of the job duties for which he or she
is paid. Moreover, disgorgement “may also have a valuable
deterrent effect because its availability signals agents that
some adverse consequences will follow a breach of fiduciary
duty.” Restatement (Third), supra, § 8.01 comment d(2); see
also Burrow, supra, 997 S.W.2d at 237-38 (explaining role of
disgorgement as deterrent to agent disloyalty). Requiring an
employer to demonstrate that it has sustained economic loss “is
inconsistent with a basic premise of remedies available for
breach of fiduciary duty.” Restatement (Third), supra, § 8.01
comment d(2); see also Burrow, supra, 997 S.W.2d at 238
(explaining that requiring principal to prove “damages would
conflict with both justifications” for disgorgement).
Accordingly, we reaffirm the holding of Cameco that an
employer may seek disgorgement of a disloyal employee’s
compensation as a remedy for the breach of the duty of loyalty,
with or without a finding of economic loss. We adopt the view
of disgorgement as a remedy for the breach of an employee’s duty
of loyalty stated by comment a to section 469 of the Restatement
(Second) and comment d(2) to section 8.01 of the Restatement
(Third).
Because the trial court rejected the remedy of disgorgement
on the improper premise that Cameco required a finding of
economic loss to the employer, it did not determine whether the
25
record in this case warrants that remedy under the controlling
principles of law. Accordingly, this matter must be remanded
for that determination. In this and other matters in which the
trial court finds a breach of the duty of loyalty, the trial
court should consider the following factors when considering
whether disgorgement is an appropriate remedy: the employee’s
degree of responsibility and level of compensation, the number
of acts of disloyalty, the extent to which those acts placed the
employer’s business in jeopardy, and the degree of planning to
undermine the employer that is undertaken by the employee. In a
particular case, other factors may guide the court in the
exercise of its discretion to impose an equitable remedy. See
Cameco, supra, 157 N.J. at 521-22 (listing potentially relevant
factors). The trial court should state its reasons for granting
or denying disgorgement.
In imposing the remedy of disgorgement, depending on the
circumstances, a trial court should apportion the employee’s
compensation, rather than ordering a wholesale disgorgement that
may be disproportionate to the misconduct at issue. As the
Court noted in Cameco, when read together, sections 456 and 469
of the Restatement (Second) provide that “an employer may
recover compensation paid to a periodically paid employee for
any periods during which the employee committed acts of
disloyalty.” Cameco, supra, 157 N.J. at 520 (citing Simulation
26
Sys., supra, 269 N.J. Super. at 111-12); accord Jet Courier
Serv., Inc. v. Mulei, 771 P.2d 486, 500 (Colo. 1989) (en banc)
(relying on Restatement (Second) sections and holding employee
paid monthly is disentitled to compensation only for pay periods
in which he was disloyal). Relying on the commentary to
Restatement (Second) section 456, the Appellate Division
explained “apportioned services” as follows:
“If an agent is paid a salary apportioned to
periods of time, or compensation apportioned
to the completion of specified items of work,
he is entitled to receive the stipulated
compensation for periods or items properly
completed before his renunciation or
discharge. This is true even if, because of
unfaithfulness or insubordination, the agent
forfeits his compensation for subsequent
periods or items.”
[Simulation Sys., supra, 269 N.J. Super. at
111 (quoting Restatement (Second), supra, §
456 comment b).]
In Simulation Systems, the Appellate Division explained
that the record did not show how often the employee was paid,
and was “totally devoid of evidence which pinpoint[ed] the pay
period in which each disloyal act was committed and of evidence
that show[ed] the amount of compensation apportioned to that
period.” Id. at 111-12. Here, in contrast to Simulation
Systems, the trial court’s thorough factual findings provide
substantial information about the timing of Rosefielde’s
disloyal acts and the frequency and amount of his compensation.
27
Rosefielde, through his company Plumrose, was paid his $500,000
annual salary on a monthly basis, in equal shares by Flagship
and Atlantic Palace. Thus, if the trial court decides on remand
that plaintiffs are entitled to disgorgement, it should
apportion Rosefielde’s compensation, ordering disgorgement only
for monthly pay periods in which he committed acts of
disloyalty.8
IV.
The judgment of the Appellate Division is reversed with
respect to the remedy of equitable disgorgement, and the matter
is remanded to the trial court for further proceedings
consistent with this opinion.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, and
SOLOMON; and JUDGE CUFF (temporarily assigned) join in JUSTICE
PATTERSON’s opinion. JUSTICE FERNANDEZ-VINA did not
participate.
8 If a court finds that an employee has been disloyal during all
pay periods, it may order disgorgement of all of the employee’s
salary.
28
SUPREME COURT OF NEW JERSEY
NO. A-93 SEPTEMBER TERM 2013
ON CERTIFICATION TO Appellate Division, Superior Court
BRUCE KAYE, Individually and as TRUSTEE OF THE BRUCE
KAYE REVOCABLE TRUST and the BRUCE KAYE DYNASTY TRUST,
JASON KAYE, FLAGSHIP RESORT DEVELOPMENT CORPORATION,
FIRST RESORTS MANAGEMENT COMPANY, INC., ATLANTIC PALACE
DEVELOPMENT, LLC, and LA SAMMANA VENTURES, LLC,
Plaintiffs-Appellants,
v.
ALAN P. ROSEFIELDE, PLUMROSE COMPANY, INC., and
ROSE ASSOCIATES, INC. OF MIAMI,
Defendants-Respondents,
and
LA SAMMANA MANAGEMENT, LLC, and BA MANAGEMENT, LLC,
Defendants,
v.
DEBORAH KAYE, 2000 BRUCE KAYE DYNASTY TRUST,
HOWARD ALTER, SUSAN TUNNEY, MICHAEL VALENTI, RONNIE
STRANSKY, KENNETH WOLFE, and DENNIS RICHARD,
Third-Party Defendants.
DECIDED September 22, 2015
Chief Justice Rabner PRESIDING
OPINION BY Justice Patterson
CONCURRING/DISSENTING OPINIONS BY
DISSENTING OPINION BY
REVERSE AND
CHECKLIST
REMAND
CHIEF JUSTICE RABNER X
JUSTICE LaVECCHIA X
JUSTICE ALBIN X
JUSTICE PATTERSON X
JUSTICE FERNANDEZ-VINA -------------------- --------------------
JUSTICE SOLOMON X
JUDGE CUFF (t/a) X
TOTALS 6