Opinion
CV-99-1275-ST
April 18, 2001
OPINION
Plaintiff, Ryan Bonneau ("Bonneau"), contends that he is entitled to recover unpaid commissions from defendant Crossland Mortgage Corp. ("Crossland Mortgage"). In response, Crossland Mortgage claims that Bonneau is not entitled to recover any commissions because he violated his duty of loyalty and breached his duty of good faith and fair dealing. In addition, during the Pretrial Conference, the court allowed Crossland Mortgage to amend its Second Counterclaim for Violation of Duty of Loyalty to include the remedy of disgorgement of all compensation paid to Bonneau during his employment.
Both parties agree that equity governs Crossland Mortgage's affirmative defense and counterclaim alleging that based on Bonneau's alleged disloyalty and bad faith, Bonneau may not recover any unpaid compensation and must restore to Crossland Mortgage all past compensation received. However, Bonneau argues that even if he did violate his fiduciary duties to Crossland Mortgage, he does not forfeit all right to compensation during the entire period of his employment. Instead, Bonneau contends that he ought to be paid for time periods or tasks performed while properly performing his duties to Crossland Mortgage and that his compensation should be apportioned accordingly.
Crossland Mortgage urges that, as a matter of law, Bonneau forfeits all right to compensation due to his disloyal acts, relying primarily on American Timber Trading Co. v. Niedermeyer, 276 Or. 1135, 558 P.2d 1211 (1976). In that case, the corporation's president secretly diverted corporate assets for his own benefit in excess of $150,000. The corporation, which was insolvent and liquidated, sought to recover not only the diverted funds, but also over $226,000 in salary which it had paid to its president during the time that he was breaching his fiduciary duties. The court first acknowledged the general rule favoring the corporation:
The remedy of restoration of compensation is an equitable principle and its applicability is dependent upon the individual facts of each case. The general rule, however, is that a corporate officer who engages in activities which constitute either a breach of his duty of loyalty or a wilful breach of his contract of employment is not entitled to any compensation for services rendered during that period of time even though part of those services may have been properly performed.
Id at 1155, 558 P.2d at 1223 (citations omitted).
Seeing "no reason for making an exception to the general rule in this case," it explained:
The equities are entirely on the side of the corporation and its minority stockholders and creditors. This is not a situation like that involved in Richardson v. Blue Grass Mining Co., 29 F. Supp. 658 (E.D. Ky 1939), aff'd 127 F.2d 291 (6th Cir), cert denied 317 U.S. 639 (1942), where the court did not allow a recovery of compensation because of the "phenomenal" success of the corporation under the defendants' management. In this case, the continuing series of deliberate diversions of corporate funds, secret accounting manipulations, and other wilful breaches of [the president's] fiduciary duties, which culminated in the looting of corporate assets through the exchange agreement, led almost inevitably to the collapse of [the corporation]. Rather than contributing to the success and profitability of the corporation, [the president's] management of [the corporation] was largely responsible for its insolvency and eventual liquidation.
Id at 1156, 558 P.2d at 1223 (citations omitted).
In contrast, it is not yet clear in this case whether the equities are entirely on the side of Crossland Mortgage. Certainly Crossland Mortgage does not claim that it has collapsed due to Bonneau's alleged disloyalty. Instead, the allegations in this case more closely mirror other Oregon cases allowing apportionment of the disloyal employee's compensation.
In Marnon v. Vaughan Motor Co., Inc., 184 Or. 103, 194 P.2d 992 (1948), the agent did not disclose its secret profit to his principal. The court noted that the rule requiring a disloyal agent to forfeit any right compensation for services rendered "is not an inflexible one," but "ultimately rests in the discretion of the court." Id at 171, 194 P.2d at 1021. Because the agent had made a valuable contribution to the principal and could be divested of the fruit of his disloyalty, the court held that a denial of reasonable compensation to the agent was inappropriate.
Olsen v. Producers Life Ins. Co., 250 Or. 517, 443 P.2d 172 (1968) applied the flexible rule of Marnon. During his last week of employment, the plaintiff successfully persuaded about half of the other northwest agents to leave defendant and half of those to join him at anther company. The court recognized that the plaintiff's work likely contributed to the defendant's success, but could not ascertain how much. Because it was hard to assess the loss caused to defendant by plaintiff's disloyalty, the court affirmed the trial court's decision to deny the plaintiff's claim for renewal commissions as "an appropriate solution." Id at 522, 443 P.2d at 174.
In a similar situation, Horton v. Whitehill, 121 Or. App. 336, 340-41, 854 P.2d 977, 980 (1993), a corporate officer usurped corporate business opportunities by creating a separate competitive business. Because the corporation did not prove the amount of monetary loss caused by the breach of fiduciary duty, the court held that "the appropriate equitable remedy" was to return to the corporation all salary and bonuses paid to the corporate officer during his two-month period of breach.
Taylor v. Berkheimers, Inc., 48 Or. App. 901, 618 P.2d 452 (1980), also apportioned the loss caused by a less than faithful corporate employee. In that case, a terminated corporate officer sued to recover a bonus due under his employment contract equal to 10% of pre-tax profits. As an affirmative defense, the employer alleged that the plaintiff had breached his fiduciary duty of loyalty by paying a corporate employee $8,000 of corporation funds without authorization of the Board of Directors and by concealing those payments in the company's financial records. The trial court allowed the plaintiff to recover his bonus, but ordered restitution of $8,000, based on "the nature of plaintiff's breach of loyalty, particularly that plaintiff received no personal gain and was motivated by a desire to benefit the defendant corporation" and "in light of the success of [the defendant corporation] under his leadership." Id at 903-04, 618 P.2d 453. Based on the trial court's discretion, the Oregon Court of Appeals affirmed, noting that the plaintiff's acts of disloyalty was not "the serious breach that would prohibit recovery in a court of equity, American Timber v. Niedermeyer, supra, or the kind of `willful and deliberate' breach that would preclude recovery under the Restatement (Second) of Agency § 456, Comment C, as incorporated in § 469, Comment B (1957). Id at 908 n2, 618 P.2d 455 n2.
The apportionment principle is endorsed by the Restatement (Second) of Agency, § 456, which provides as follows:
If a principal properly discharges an agent for breach of contract, or the agent wrongfully renounces the employment, 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; and
(b) the value, not exceeding the agreed ratable compensation, of services properly rendered for which the compensation is not apportioned if, but only if, the agent's breach is not wilful and deliberate.
Comment C, referenced by Taylor, addresses "Unapportioned services" and provides as follows:
If the agent has rendered services, compensation for which is not apportioned in the contract of service, and his renunciation or other breach of contract is not wilful, he is entitled to an amount equal to the fair value of his services, not exceeding the agreed compensation, minus any damage caused to the principal by his breach of contract. A breach of contract is wilful and deliberate, as those words are herein used, only when the agent, in complete disregard of his contractual obligations, fails to perform or misperforms the promised services and has no substantial moral excuse for so doing, or is guilty of disloyal or grossly insubordinate conduct.
In contrast, Comment B addresses "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.
In addition, § 469 of the Restatement (Second) of Agency provides that:
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.
Comment B, referenced in Taylor, states that: "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."
Based on a review of these authorities, it is clear that Oregon follows the Restatement (Second) of Agency approach and does not have a rigid rule requiring forfeiture of all compensation paid to a disloyal employee. Instead, it appears that the goal is to avoid the unjust enrichment of either party by focusing upon the particular circumstances of the case.
Assuming that Crossland Mortgage proves that Bonneau breached his fiduciary duty by forging documents, making false entries and/or knowingly accepting or creating false information in the course of originating loans, apportionment of Bonneau's compensation may be appropriate. Some loans originated by Bonneau may not be based on any false documentation. Since Bonneau's compensation is based on funded loans which he serviced, his compensation is subject to apportionment between loans originated with and without false documentation. Therefore, pursuant to Comment C to § 456 of the Restatement (Second) of Agency, Bonneau may be able to recover compensation for originating loans that have no false documentation as "completion of specified items of work."
Furthermore, no evidence has been presented as yet to substantiate any loss or expense caused to Crossland Mortgage by Bonneau or the value of Bonneau's services rendered to Crossland Mortgage. Bonneau's motive is unknown. Nor at this early junction can this court determine if the alleged disloyalty is sufficiently "willful and deliberate" to preclude any recovery of compensation by Bonneau.
Accordingly, if Bonneau breached his fiduciary duties to Crossland Mortgage, this court must determine if the breach is sufficiently serious to require Bonneau to forfeit all of his compensation. If not, then this court must determine what compensation, if any, is due Bonneau from Crossland Mortgage to achieve an equitable result. To assist in this determination, the court will submit these issues to an advisory jury pursuant to FRCP 39(c).