Summary
granting employer's motion to recover $50,000 obtained by employee through "bribery-kickback scheme"
Summary of this case from Henry v. Concord Limousine, Inc.Opinion
603678/09
August 20, 2013, Decided
Melvin L. Schweitzer, J.
Consolidated Edison Company of New York, Inc. (Con Edison) brings this action against Richard Zebler (Mr. Zebler) alleging fraud, breach of fiduciary duty, damages, and unjust enrichment based on Mr. Zebler's bribery-kickback scheme. Con Edison moves for partial summary judgment pursuant to CPLR 3212 on its second cause of action for breach of fiduciary duty.
Background
The following facts are taken from plaintiff's complaint. Con Edison is a regulated utility that provides electric, gas, and steam service to over 9.2 million residents in the five boroughs of New York City and Westchester County. Mr. Zebler, a former Chief Construction Inspector for Con Edison, was convicted in 2011 of accepting bribes from a construction contractor, Felix Associates, LLC (Felix Associates), between December 2006 and January 2009.
The Bribery-Kickback Scheme
Mr. Zebler was employed by Con Edison for approximately thirty years. During the 26-month period of Mr. Zebler's alleged bribery-kickback scheme, Con Edison paid Mr. Zebler no less than $344,405.88 in salary and non-pension benefits. Mr. Zebler allegedly entered into a criminal bribery-kickback scheme under which Felix Associates made regular payments to Mr. Zebler of approximately $500 per week. Mr. Zebler allegedly met with Felix Associates every month and received approximately $2,000 at each meeting. Mr. Zebler allegedly accepted a separate $20,000 bribe payment to provide favorable treatment on a special project that Con Edison awarded to Felix Associates. Plaintiff alleges that Mr. Zebler demanded that Felix Associates increase his regular bribe payments from $2,000 a month to $3,000 a month during a conversation that was recorded by the principal of Felix Associates on October 24, 2008, immediately after Mr. Zebler accepted a $5,000 bribe payment. Plaintiff alleges that Mr. Zebler accepted $50,000 aggregate amount in bribes.
In exchange for the bribe payments, Mr. Zebler allegedly provided favorable treatment to Felix Associates, including (a) approving inflated invoices that overcharged Con Edison for work performed, and (b) expediting payments to the contractor. Con Edison believes that Mr. Zebler caused it to overpay Felix Associates at least $730,000. Con Edison claims that Mr. Zebler's scheme ceased only when Federal agents arrested Mr. Zebler in January 2009. In 2011, Mr. Zebler pleaded guilty to the criminal charges against him, and the federal criminal court sentenced Mr. Zebler to 24 months of imprisonment, followed by 3 years of supervised release.
The Criminal Court's Award of Restitution to Con Edison
As part of the criminal proceeding against Mr. Zebler, the government asked Con Edison to submit a request for criminal restitution under the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. § 3663A. The MVRA provides for limited restitution to crime victims, like Con Edison. While the MVRA is not a substitute for civil litigation, nor is it a determination of damages, it does provide the possibility of some restitution to crime victims, to the extent permitted under the MVRA. Con Edison obtained a restitution order for 20% ($68,881.18) of the $344,405.88 in compensation and non-pension benefits that Mr. Zebler was paid during the period of his crimes.
Under the law of criminal restitution, an employer can only receive the difference in value between the services of an honest and loyal employee, and that of the dishonest and disloyal employee involved in the crime, as determined by the criminal court after evaluating a host of culpability factors. For example, in Mr. Zebler's case, the criminal court weighed various factors including (1) the amount of bribes Mr. Zebler received, (2) the amount of intended loss created by Mr. Zebler's scheme, (3) the length of Mr. Zebler's scheme, (4) Mr. Zebler's seniority at Con Edison, and (5) Mr. Zebler's level of participation in the bribery scheme relative to other former Con Edison employees who were involved in similar schemes. The MVRA limits restitution solely to the amount of actual, provable loss incurred by the crime victim, which is the reduced value to Con Edison of Mr. Zebler's services in light of his criminal misconduct.
New York's Faithless Servant Doctrine
The law of criminal restitution is different from New York's faithless servant doctrine. The two serve entirely different purposes, and consequently, their respective analyses focus on different factors. U.S. v Brannon, 2011 U.S. Dist. LEXIS 9976, 2011 WL 251168, 3 (WDNC 2011) ("The concept of civil damages is very broad, incorporating many different kinds of compensation for an injury or loss. . . . Criminal restitution, on the other hand, is a statutorily-based award of compensation for specific losses proximately caused by an offense." Because of Mr. Zebler's alleged bribery-kickback scheme, Con Edison concludes that Mr. Zebler is a faithless servant. Under New York's "faithless servant doctrine," Con Edison seeks to recoup from Mr. Zebler the $344,405.88 in compensation that Con Edison paid him during this period plus the $50,000 in bribes that he confessed to accepting. Con Edison also seeks punitive damages of $197,202.94, an amount equal to one-half of the damages in this action.
The faithless servant doctrine does not consider criminal culpability, nor does it require the Court to value the loss of honest services. Under the faithless servant doctrine, the act of being disloyal to one's employer is itself sufficient grounds for disgorging all compensation received during the period of disloyalty, and does not depend on actual harm to the employer.
Discussion
Con Edison's second cause of action alleges Mr. Zebler's breach of fiduciary duty, for which Con Edison seeks summary judgment. To obtain summary judgment, the moving party must establish its cause of action "sufficiently to warrant a court's directing judgment in its favor as a matter of law." Gilbert Frank Corp. v Fed. Ins. Co., 70 NY2d 966, 967, 520 N.E.2d 512, 525 N.Y.S.2d 793 (1988). In order to defeat the motion, the defending party must produce admissible evidence to establish a factual issue requiring trial. Id. The motion must be scrutinized in a light most favorable to the opposing party. Negri v Stop and Shop, Inc., 65 NY2d 625, 626, 480 N.E.2d 740, 491 N.Y.S.2d 151 (1985). CPLR 3212 (b) provides in relevant part, that a motion for summary judgment "shall be granted if, upon all the papers and proof submitted, the cause of action of defense shall be established sufficiently to warrant the court as a matter of law in directing judgment in favor of any party." Summary judgment is a "drastic remedy, the procedural equivalent of a trial, and should not be granted where triable issues of fact are raised that cannot be resolved on conflicting affidavits." Epstein v Scally, 99 AD2d 713, 714, 472 N.Y.S.2d 318 (1st Dept 1984). "Issue finding, as opposed to issue determination, is the key to summary judgment." Menzel v Plotnick, 202 AD2d 558, 559, 610 N.Y.S.2d 50 (2d Dept 1994).
Once the moving party has established a prima facie showing of any material issue of fact, the opponent must raise material and triable issues of fact. Manzel.
Collateral Estoppel
Con Edison contends that by accepting bribes and conspiring with a contractor to steal from Con Edison, Mr. Zebler breached his fiduciary duty. Mr. Zebler acknowledges that he accepted bribes for giving Felix Associates favorable treatment with respect to expediting payments, but rejects that he approved inflated invoices. Plaintiff asserts that having been convicted of criminal bribery in federal court, Mr. Zebler is collaterally estopped from contesting the facts underlying his misconduct. S. T. Grand, Inc. v City of New York, 32 NY2d 300, 305, 298 N.E.2d 105, 344 N.Y.S.2d 938 (1973). This rule has been applied in cases like this, where the defendant's employer sought civil damages for breach of fiduciary duty based on the defendant's conduct underlying his criminal conviction. See e.g. National Bank of Pakistan v Basham, 148 AD2d 399, 539 N.Y.S.2d 347 (1989) (holding that "defendant's guilty plea should be given collateral estoppel effect [in an action involving an employee's breach of fiduciary duty], even though the conviction was entered upon a plea of guilty").
Plaintiff argues that collateral estoppel is also mandated by federal criminal statute. 18 U.S.C. § 3664(l) — which is part of the statutory law assisting crime victims to obtain court-ordered criminal restitution — establishes that Mr. Zebler's conviction estops him from denying the essential allegations of his bribery conviction. Plaintiff asserts that in convicting Mr. Zebler, the criminal court necessarily established that between December of 2006 and January of 2009, Mr. Zebler accepted bribes from a contractor. Plaintiff states that in exchange for the bribe payments, Mr. Zebler (a) approved fraudulent invoices causing Con Edison to overpay its contractors and (b) improperly used his position to expedite the contractor's services.
Defendant does not dispute that he is collaterally estopped from denying the acceptance of bribe payments. Accordingly, Mr. Zebler is collaterally estopped from disputing or trying to relitigate facts that establish as a matter of law that Mr. Zebler was involved in a bribery-kickback scheme.
Faithless Servant Doctrine
The faithless servant doctrine has been firmly established in New York for over a century and requires an employee to exercise the utmost good faith, including a duty of loyalty, toward his employer. In Murray v Beard, 102 NY 505, 7 N.E. 553, 2 N.Y. St. 466 (1886), the Court of Appeals described the obligation of an employee as follows:
An Agent is held to uberrima fides [utmost good faith] in his dealings with his principal; and if he acts adversely to his employer in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such a fraud upon the principal as to forfeit any right to compensation for services. Id. at 508. See also Feiger v Iral Jewelry, Ltd., 41 NY2d 928, 928-29, 363 N.E.2d 350, 394 N.Y.S.2d 626 (1977) (holding that "[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary"); Wechsler v Bowman, 285 NY 284, 291-92, 34 N.E.2d 322 (1941) (holding that "the principal is entitled to recover from his unfaithful agent any commission paid by the principal and all moneys paid by a purchaser whether as a bribe paid to the agent of the seller or otherwise ").
The faithless employee forfeits his compensation even when "the services were beneficial to the principal, or [when] the principal suffered no provable damage as a result of the breach of fidelity by the agent." Feiger v Iral Jewelry, 41 NY2d at 928-929. "This is because the function [of a breach of fiduciary duty action], unlike an ordinary tort or contract case, is not merely to compensate the plaintiff for wrongs committed by the defendant but . . . to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates." Diamond v Oreamuno, 24 NY2d 494, 498, 248 N.E.2d 910, 301 N.Y.S.2d 78 (1969) (emphasis in original) (internal quotes and citations omitted).
Plaintiff argues that Mr. Zebler breached his fiduciary duty of loyalty to Con Edison by engaging in his criminal bribery-kickback scheme. Defendant argues that not every transgression renders an employee liable as a "faithless servant." Defendant contends that invocation of the doctrine is designed to counteract pervasive and substantial disloyalty that infects every aspect of employment over a significant and continuous period of time. Defendant argues that there is a triable issue of fact concerning whether the defendant was disloyal as reviewing invoices submitted by Felix Associates occupied approximately 15% of the defendant's time, and that there is no allegation that the defendant was disloyal the other 85% of his work time. Defendant argues that his disloyal conduct was so insubstantial that it should be excused from the faithless servant doctrine.
Plaintiff contends that no triable issue of fact exists over whether Mr. Zebler substantially breached his duty of loyalty to Con Edison, as Mr. Zebler accepted 26 monthly bribe payments from a construction contractor he was being paid to oversee. Plaintiff argues that collateral estoppel operates to impose liability on Mr. Zebler because he was convicted and sentenced based on accepting bribes. Criminal misconduct constitutes a breach of the employee's duty of loyalty. National Bank of Pakistan v Basham, 148 AD2d 399, 539 N.Y.S.2d 347 (1989); Curiale v Capolino, 883 F Supp 941, 948 (SDNY 1995) (holding that an employee's acceptance of bribes to influence his official action "obviously breached the duty of loyalty he owed to his employer").
Mr. Zebler has not raised material and triable issues of fact. A former employee's criminal conviction for disloyal conduct and Mr. Zebler's acceptance of twenty-six monthly bribe payments mandate summary judgment in favor of the employer on the breach of loyalty claim.
Compensatory Damages
Plaintiff asserts that, under the faithless servant doctrine, Mr. Zebler forfeits the $394,405.88 in salary and non-pension benefits he received during the period of his disloyalty. Defendant argues that because he spent only 15% of his time on disloyal activities, his forfeiture should be limited to 15% of his compensation based on a theory of apportioning his criminal and non-criminal activities. Defendant contends that isolated incidents of wrongdoing "where the employer knew of and tolerated the behavior" do not justify the invocation of the faithless servant rule and the resulting forfeiture of everything that has been otherwise earned. Phansalkar v Anderson, Weinroth & Co., 344 F3d 184, 202 (2003). Plaintiff argues that apportioning the amount of compensation to be forfeited under the faithless servant doctrine has been limited to circumstances where the employer and employee previously agreed that the employee would be paid on a task-by-task basis. See Schneider v Wien & Malkin LLP., 5 Misc 3d 1011(A), 798 N.Y.S.2d 713, 2004 NY Slip Op 51328(U) (Sup Ct NY County 2004).
The faithless servant doctrine strictly requires salaried employees, such as Mr. Zebler, to forfeit 100% of their compensation. Plaintiff argues that this requirement is consistent with the policy rationale behind the forfeiture rule, which is to prevent breaches of fiduciary duty "by removing from agents and trustees all inducements to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates." Diamond v Oreamuno, 24 NY2d at 498. Plaintiff argues that the risk of giving up a mere percentage of one's salary is simply not enough for self dealing and is not enough to prevent breach of fiduciary duty. Accordingly, as a salaried employee not paid on a task-by-task basis, Mr. Zebler must forfeit all of the $394,405.88 in salary and non-pension benefits received during the 26-month period of his disloyalty, even though he claims to be acting disloyal only 15% of the time.
Mr. Zebler's Bribes
Con Edison argues that, under the faithless servant doctrine, Mr. Zebler must disgorge the $50,000 in bribes. Defendant does not dispute this point. The court agrees with Con Edison.
Punitive Damages
Con Edison contends that because Mr. Zebler's conduct was criminal, morally reprehensible, and harmed a public utility and its customers, punitive damages of $197,202.94 should be awarded. Defendant argues that punitive damages are not warranted herein. Con Edison argues that defendant's criminal and highly immoral conduct evinces the moral culpability that calls for punitive damages. Con Edison further indicates that taking part in a criminal bribery scheme justifies an award of punitive damages. Prote Contracting Co. v Board of Educ., 230 AD2d 32, 41, 657 N.Y.S.2d 158 (1st Dept 1997). Particularly where "the defendant's wrongdoing has been intentional and deliberate, and has the character of outrage frequently associated with crime," courts have found punitive damages appropriate.
An award of punitive damages is justified when the alleged behavior is willful, wanton, reckless, or otherwise evinces a high degree of moral culpability. Stalker v Stewart Tenants Corp., 93 AD3d 550, 940 N.Y.S.2d 600 (1st Dept 2012). Here, there is no dispute that Mr. Zebler engaged in a systematic scheme for twenty-six months to criminally defraud his employer for his own financial gain. Plaintiff notes that Mr. Zebler even had the temerity to demand a "raise" in his bribe amount, revealing his intent not only to continue, but toe escalate the harm caused by his scheme. As such, an award of punitive damages is entirely proper. Don Buchwald & Assocs. v. Rich, 281 AD2d 329, 723 N.Y.S.2d 8 (1st Dept 2001). Con Edison's request for punitive damages for one-half times the compensatory damages is amply supported by decisions involving employees who breached their fiduciary duty. See Giblin v Murphy, 73 NY2d at 772, affg 97 AD2d 668, 469 N.Y.S.2d 211 (3d Dept 1983). The motion for punitive damages is therefore granted to the extent of an additional $197,292.94.
Accordingly, it is
ORDERED that Con Edison's motion for compensatory damages in the amount of $394,405.88, plus pre-judgment interest pursuant to CPLR 5001 at the rate of nine (9) percent per annum from January 31, 2009 to date is granted; and it is further
ORDERED that Con Edison's motion to recover $50,000 which defendant obtained in his illegal bribery-kickback scheme is granted; and it is further
ORDERED that Con Edison's motion for punitive damages is granted in the amount of $197,292.94; and it is further
ORDERED that Con Edison is to submit an Order and Judgment providing for the Clerk to compute interest.
Dated: August 20, 2013
ENTER:
/s/ Melvin L. Schweitzer
J.S.C.