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May 15, 1985

RUSSELL J. MOKHIBER, on behalf of the FORD MOTOR COMPANY, Plaintiff,

The opinion of the court was delivered by: KNAPP



 In this diversity action plaintiff (hereinafter the "instant plaintiff"), *fn1" a shareholder of the Ford Motor Company (the "Company"), a Delaware corporation with its headquarters in Michigan, seeks to require certain attorneys to repay to the Company the sum of $230,000 (plus pre-judgment interest) claimed to have been improperly received by them in an allegedly unauthorized settlement of a previous derivative suit.

 The attorneys involved in the previous litigation are two firms, Saxe, Bacon & Bolan, P.C. (the "Cohn firm"), principally represented by Roy M. Cohn, Esq., and Orenstein, Snitow, Sutak & Pollack (the "Pollack firm"), principally represented by Allan Pollack, Esq. These attorneys are hereinafter collectively referred to as the "defendant lawyers." In 1978, the defendant lawyers were retained by a partnership known as Bader and Bader, and two other Company stockholders, to institute a derivative action (the "Bader action") on behalf of the Company and all its stockholders. *fn2" After approximately 18 months of litigation before the New York courts, that action was conditionally dismissed on grounds of forum non conveniens, and Michigan was designated the appropriate forum. No suit was ever filed in Michigan, but about four months after the New York dismissal the dispute was settled. The only obligation assumed by any defendant was the Company's agreement to pay $230,000 to the plaintiffs' attorneys. It is that sum which the instant plaintiff seeks to recover on the Company's behalf.


 The defendant lawyers claim to have relied upon two sources of information in drawing their complaint in the Bader action. The first source was a high company official (whose identity has, for obvious reasons, been kept confidential, and who will hereinafter be referred to as the "informant") who was extensively interviewed by James J. Crisona, Esq., a member of the Pollack firm and a former Justice of the New York Supreme Court. The informant, through Mr. Crisona, is said to have convinced the defendant lawyers that they had a valid claim based on various revelations of misconduct by Henry Ford II, the then Chairman of the Company's Board of Directors. *fn3" The second source of information was an announcement by the United States Department of Justice that it was conducting an investigation into widespread rumors that the Company had made illicit payments to officials of the Indonesian Government. Although announcement of the Justice Department's investigation preceeded the Bader action, the original complaint relied exclusively on the first of the above sources, while subsequent amended complaints relied on both.

 The allegations of the third amended (and ultimate) complaint may conveniently be divided into two categories: those counts (1, 2, 3, 4, 6, 7, 9 and 10) apparently relying upon the informant's revelations; and those counts (5 and 8) apparently relying upon the Justice Department's announcement. The "informant" counts allege that Mr. Ford, with the acquiescence of several Directors, engaged in a wide variety of self-dealing, waste and mismanagement: expenditures in excess of $1,000,000 per year for an apartment in the Carlyle Hotel in New York City for the exclusive use of Mr. Ford and his family; the purchase of two residences in London for his personal use; obtaining kickbacks amounting to $750,000 in connection with contracts granted to a co-defendant and a corporation affiliated with the latter; causing the Company to enter into various over-priced contracts, on condition that the contractor provide furnishings for Mr. Ford's personal residences; accepting, as Chairman of the Board, excessive annual remuneration in the amount of $992,000 for which he performed "little, if any, services"; receiving payments for for providing advance information of the Company's real estate investments; and causing the Company to invest over $50,000,000 in a Philippines project in exchange for a $2,000,000 cash payment made to an otherwise unidentified "defendant."

 The Justice Department counts alleged that Mr. Ford caused the Company to pay a $1,000,000 bribe to an official of the Indonesian government in exchange for favorable action on a contract for which the Company was bidding; that he tried to cover up the payment by forging, altering and back-dating contracts, books and records; and that the Company's accounting firm concealed and destroyed corporate financial records pertaining to the alleged bribe.

 These allegations were supplemented by the Bader plaintiff's answers to interrogatories which, so far as are here particularly relevant, charged Mr. Ford with personally having misused several million dollars of company assets. The relevant interrogatory answer was organized under several headings: "Transportation"; "Personal Luxuries for Henry Ford II"; "Personnel and Nepotism"; and "Miscellaneous Unauthorized and Illegal Corporate Enterprises." It charged that Mr. Ford had used corporate funds and aircraft to transport furnishings across the ocean for use at his residences and the residences of his close friends, specifically, an ornate fireplace, pet dogs and cats whenever their owner ("his close and personal friend") "felt her pets were in need of a change in climate." It alleged that Mr. Ford used Company aircraft for his personal transportation and the transportation of his family and friends; and that he maintained six to nine corporate limousines and drivers in New York for his personal use and the personal use of other directors, family and friends. In addition to causing the Company to maintain a private apartment at the Carlyle Hotel, as alleged in the complaint, the Interrogatory answer asserted that the Company kept for Mr. Ford's use in Dearborn, Michigan a sauna bath, private gym and full-time masseur, private dining room staffed by Company personnel ("It is estimated that each lunch Mr. Ford eats costs the shareholders approximately $200.00 per person . . .") and that the Company was preparing a similar "personal setup" in Detroit with furnishings said to cost several million dollars. Mr. Ford was said to have staffed the home of his "close and personal" friend with Company personnel, and to have caused the Company to hire her family and former employees when they were not the most qualified applicants for their jobs. The Interrogatory answer further claimed that the Company "(p)icked up the tab for bird hunting in Scotland, for Mr. Ford and his friends," and paid for a large private party he threw in 1977. Finally, the Interrogatory answer charged Mr. Ford and his family with misusing the Company's telephone credit card.

 The merits of the foregoing accusations were never addressed in the New York litigation. Indeed, the defendants in the Bader action never interposed an answer, the litigation being exclusively addressed to an omnibus defense motion demanding: dismissal of the third amended complaint for plaintiff's failure to make a proper demand upon the Board of Directors; dismissal on grounds of forum non conveniens ; or, in the alternative, disqualification of the Cohn firm, and posting by plaintiffs of a bond for costs. Justice Fraiman of the New York County Supreme Court ordered the Bader plaintiffs to post a $250,000 bond, but denied all other relief. The Company appealed to the Appellate Division. That court, leaving all other questions undecided, reversed on the issue of forum non conveniens and directed that the complaint be dismissed on the condition that all the defendants agree to accept service of process in the State of Michigan and to waive any jurisdictional or statute of limitations defenses should any of the causes of action in the final Bader complaint be there refiled. Bader & Bader v. Henry Ford II, et all. (1st Dep't 1979) 66 A.D.2d 642; 414 N.Y.S.2d 132. The Bader plaintiffs appealed to the New York Court of Appeals, which, on September 18, 1979, dismissed the appeal. 48 N.Y.2d 649; 421 N.Y.S.2d 199; 396 N.E.2d 481.


 Although none of the allegations of the Bader complaint were litigated, they were not wholly without impact on the Company. When the Attorney General of the United States had announced his investigation into the Indonesian allegations, the Company's Board of Directors had established a special audit committee of its members to conduct its own investigation into those allegations. When the Bader complaint was filed the Board expanded the authority of that special committee,instructing it to investigate the Bader allegations as well. The special committee was provided with copies of the several Bader complaints and with the above-described answers to Interrogatories. By the time the Bader complaint was conditionally dismissed by the Appellate Division, the special committee's labors had produced at least two results which are here claimed to be relevant: (1) Mr. Ford had been billed for and had paid the sum of $34,585 with respect to unauthorized expenditures for which the special committee had found him to be responsible; and (2) other personnel had been billed for and paid $11,215.40 for other unauthorized expenditures. Shortly thereafter, the special committee caused the Company to circulate four directives which restated, clarified or modified regulations concerning use of Company aircraft in the United States, use of Company car and driver service, provision of personal services by the Company, and "use of Shoreham West apartment." These directives were re-circulated in May of 1980.

 According to statements attributed to Mr. Ford, his repayments were with respect to personal use of the suite in the Carlyle Hotel which had been mentioned in the Bader complaint and in the Bader plaintiffs' answers to interrogatories. The repayment of $11,215.40 by other Company personnel appears to have been unrelated to anything referred to in the Bader litigation. The four directives seem related to the allegations of the Bader complaint.

 According to the Company, these directives, as well as the Audit Committee's investigation of the Bader allegations, "resulted in increased attention among (the Company's) Board of Directors, officers and employees to the policies and procedures of the Company, including the continuing requirement to maintain complete and accurate records of the use of corporate facilities and assets." *fn4" However, it is not contended that they had any identifiable impact on the rate of the Company's expenditures, or that any monetary savings from such increased attention have been identified. Moreover, although the new directives had been in place for approximately four years when discovery in the instant action was closed, there is no indication in the record that the actual conduct of any officer or employee was influenced by the directives, or that they had significant effect upon the Company's total expenditures for any accounting period. *fn5"


 When the Appellate Division conditionally dismissed the Bader action, the defendant lawyers and the Company found it in their respective interests to enter into settlement negotiations rather than pursue the litigation. Although the defendant lawyers remained convinced that the informant had provided them with an adequate basis to institute a lawsuit, they had by this time realized that he was incapable of leading them to any evidence of legally cognizable wrongdoing by Mr. Ford or any other officer, director or employee of the Company. *fn6" Similarly, their reliance on the Justice Department had been vitiated by the investigation's failure to produce results. *fn7" Moreover, their canvass of the Michigan Bar had revealed that no competent attorney was available to represent them at an affordable fee, and they themselves were of the professional opinion that it would be difficult successfully to litigate against the Company in its home state. And, finally, their clients, unwilling to provide further financing for the litigation or to make the necessary trips to Michigan in order to pursue it, had given them peremptory instructions to drop it. *fn8"

 The Company, on the other hand, was convinced that the law suit was wholly without merit and that its continuation by the defendant lawyers would prove futile. It was nonetheless apprehensive that its mere existence would produce unfavorable publicity hurtful to the Company, would divert the energies of important officials from the pursuit of the Company's business, and would involve undeterminable -- if not uncontrollable -- ...

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