United States District Court, Southern District of New York
January 8, 2001
MARSHALL MANLEY, PLAINTIFF,
AMBASE CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Ward, District Judge
Plaintiff Marshall Manley brought this action against defendant AmBase
Corporation ("AmBase") for breach of contract. AmBase filed counterclaims
alleging fraud and seeking reformation of the contract and damages. The
Court held a bifurcated trial. Manley's breach of contract claim
was tried to a jury which rendered a verdict in favor of Manley in the
amount of $1.8 million.*fn1 Tr. at 826-27.*fn2 On consent
of both parties, AmBase's counterclaims were tried to the Court. Tr. at
834-35. The following constitute the Court's findings of fact and
conclusions of law with respect to AmBase's counterclaims.
FINDINGS OF FACT
I. Manley's Employment at AmBase and Finley Kumble
In 1985, George Scharffenberger, Chairman and Chief Executive Officer
of the Home Group Inc. (the "Home Group"), which later became AmBase,
asked Manley to work at the Home Group. Tr. at 65. He requested that
Manley join the Home Group as President and serve as Chairman of the Home
Group's subsidiary, the Home Insurance Company. Id. at 67. Manley
commenced his employment in these two positions in March 1985. Id. at
71. In May 1985, Manley also became an officer of the Home Group's
parent, City Investing Corporation ("City Investing"), id. at 168, 281, of
which Scharffenberger was Chairman and Chief Executive Officer. Id. at
Manley served as President from March 8, 1985, through March 15, 1990,
and as a Director from March 8, 1985, through January 31, 1991. P.T.O.
para. 2.*fn3 From December 18, 1987, through March 15, 1990, Manley
served as Chief Executive Officer of the corporation. Id.
In 1981, prior to joining the Home Group, Manley incorporated Marshall
Manley P.C., a California professional corporation, of which he was the
sole shareholder. Marshall Manley P.C. served as a partner at the law
firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey
("Finley Kumble"). Tr. at 44, 107, 180, 184; Def. Ex. B.*fn4 In
discussions leading to Manley's employment, Scharffenberger requested
that Manley remain at Finley Kumble after he commenced his position with
the Home Group. Id. at 89-93. Manley did not tell anyone at the
corporation about Scharffenberger's request that he continue to serve at
Finley Kumble. Id. at 254-58. For clarity, the corporation will hereafter
be referred to as AmBase.
AmBase had a custom and practice that requests by the corporation that
its officers and directors serve at unaffiliated entities be made to the
personnel committee which would, if appropriate, authorize them to do so.
Id. at 473; Def. Ex. F, at 10-11, 26-27. This practice was followed to
enable Manley to serve on the boards of other unaffiliated entities
during his tenure at AmBase. J. Ex. 7, 8, 9, 11, 12, 18, and 21.*fn5
Manley never requested that the personnel committee of AmBase authorize
him to continue serving at Finley Kumble. Tr. at 256.
Nevertheless, Scharffenberger and AmBase's Board of Directors knew that
Marshall Manley P.C. was a partner at Finley Kumble while Manley was
employed by AmBase. Id. at 82; J. Ex. 4, at 2; J. Ex. 6, at 1; J. Ex.
11, at 4; J. Ex. 42; J. Ex. 45. They also knew that Marshall Manley P.C.
was receiving compensation from Finley Kumble at the same time Manley was
receiving compensation from AmBase. Tr. at 469.
II. Provisions for Indemnity in the By-laws and the Employment Agreement
AmBase's by-laws provide, in pertinent part:
The Company shall to the fullest extent permitted by
applicable law as then in effect indemnify any person
(the "Indemnitee") who is or was a director, Advisory
Director or officer of the Company and who is or was
involved in any manner (including, without limitation, as
a party or a witness) or is threatened to be made so
involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether
civil, criminal, administrative or investigative
(including without limitation, any action, suit or
proceeding by or in the right of the Company to procure
a judgment in its favor) (a "Proceeding") by reason of
the fact that such person is or was a director (including
Advisory Director), officer, employee or agent of the
Company, or is or was serving at the request of the
Company as a director (including Advisory Director),
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise
(including, without limitation, any employee benefit
plan), against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with
such Proceeding. . . . Such indemnification shall be a
contract right and shall include the right to receive
payment in advance of any expenses incurred by the
Indemnitee in connection with such Proceeding, consistent
with the provisions of applicable law as then in effect.
J. Ex. 85 para. 23 (emphasis added).
On or about December 18, 1987, Manley entered into a written employment
agreement with AmBase (the "1987 Employment Agreement"). J. Ex. 44;
P.T.O. para. 3. With regard to indemnity, the 1987 Employment Agreement
stated, in pertinent part:
(a) If the Executive is made a party or is threatened to
be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative
(a "Proceeding"), by reason of the fact that he is or was
a director or officer of the Company or is or was serving
at the request of the Company as a director, officer,
member, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is an alleged
act or failure to act in an official capacity as a
director, officer, member, employee or agent, he shall be
indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same
exists or may hereafter be amended, against all expense,
liability and loss (including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Executive in
connection therewith, including, without limitation,
payment of expenses incurred in defending a Proceeding
prior to the final disposition of such Proceeding, and
such indemnification shall continue as to the Executive
even if he has ceased to be a director, officer, member,
employee or agent of the Company or other enterprise and
shall inure to the benefit of his heirs, executors and
J. Ex. 44 para. 11(a) (emphasis added).
III. The Finley Kumble Bankruptcy
In February 1988, Finley Kumble became the subject of an involuntary
petition under the federal bankruptcy laws. P.T.a. para. 4. Francis
Musselman, the trustee of the Finley Kumble bankruptcy estate (the
"Trustee"), and certain creditors, commenced actions against Manley and
Marshall Manley P.C. (the "Finley Kumble Bankruptcy Actions'). Tr. at
108; J. Ex. 87, 88; P.T.O. para. 5.
Manley told Scharffenberger about the Finley Kumble Bankruptcy
Actions. AmBase then retained the law firm of
Cravath, Swaine & Moore
("Cravath") to defend Manley in these actions. Tr. at 109-10; P.T.O.
para. 6. In addition, AmBase retained a bankruptcy law firm, Zalkin, Rodin
& Goodman ("Zalkin"), and an accounting firm, Grant Thornton, to assist
Manley in his defense of the Finley Kumble Bankruptcy Actions. P.T.O.
para. 7. AmBase paid the fees of Cravath, Zalkin, and Grant Thornton. Tr.
at 111; P.T.O. para. 8.
The minutes of the meeting of AmBase's Board of Directors held on May
20, 1988, reflect the following:
Mr. Pyne reported that by reason of the well publicized
reorganization proceeding affecting the Finley, Kumble,
Wagner, Heine, Underberg, Manley, Myerson & Casey law
firm, the President was being required to devote
considerable time to dealing with claims and charges
concerning his former role with that firm to the
detriment of his ability to devote his undivided
attention to the Company's affairs. Upon discussion, it
was deemed prudent that the Company retain Messrs.
Cravath, Swaine & Moore to assist Mr. Manley in the
administration and supervision of claims attributable to
the reorganization and various litigations associated
therewith in order to minimize the distraction of Mr.
Manley from the Company's affairs.
Upon the recommendation of the Personnel Committee and
in order to minimize the distraction of the President
from Company affairs, following discussion, upon
motion duly made, seconded and unanimously carried
(with Mr. Manley abstaining), it was RESOLVED that the
Company retain Cravath, Swaine & Moore and such other
attorneys and experts, as may be appropriate, at
Company expense, to assist Mr. Manley in the
administration and supervision of claims affecting him
and arising subsequent to his date of employment by
the Company or its subsidiaries, which may arise in
connection with, or may occur as a result of, his
association with Finley, Kumble, Wagner, Heine,
Underberg, Manley, Myerson & Casey.
J. Ex. 17, at 18-19.
From February 1988 to March 1990, Manley discussed the Finley Kumble
Bankruptcy Actions with Scharffenberger on numerous occasions. Tr. at
119. He told Scharffenberger about the claims against him, id. at
120-21, the defenses he had asserted, id. at 150-52, and the prospects
for settlement, including settlement offers. Id. at 152-53.
However, Paul Dodyk, the Cravath partner who represented Manley, did
not report to AmBase regarding the progress of the Finley Kumble
Bankruptcy Actions. Id. at 312-13. Furthermore, Cravath's legal bills
rendered to AmBase for payment did not detail the services provided to
Manley by Dodyk but only provided general descriptions of the multiple
projects on which Dodyk and other Cravath attorneys worked. Id. at
1017-25; J. Ex. 240.
Pursuant to a court order, Manley and Marshall Manley P.C. were
regularly required to provide detailed financial information, including
assets, liabilities, income, and expenses to the Trustee. Between
September 15, 1988 and March 12, 1990, Dodyk, on behalf of Manley,
provided financial information to the Trustee and periodically updated the
information. Tr. at 511-20; J. Ex. 77, 90, 130A, 131, 132, 133, 135,
137, 139, 164, 165. From at least September 15, 1988, the date of the
first submission of financial information to the Trustee, Dodyk knew
Manley had a potential claim for indemnification against
AmBase but chose
not to disclose it to the Trustee. He testified at trial that he believed
it was not the type of asset relevant to, or requested by, the Trustee.
Tr. at 299-300, 306-07. At no time up to and including the date on which
Manley and Marshall Manley P.C. settled with the Trustee did Manley
disclose, or authorize Dodyk to disclose, to the Trustee Manley's
potential claim for indemnification against AmBase for the payments he
would make to the Trustee. Id. at 231-32, 269, 299-300.
IV. The 1991 Severance Agreement
On March 15, 1990, while the Finley Kumble Bankruptcy Actions were
pending, AmBase terminated Manley from his positions as Chief Executive
Officer and President. Manley remained a member of AmBase's Board until
January 31, 1991, at which time he was terminated from his position as a
Director. P.T.O. paras. 2, 11.
After AmBase terminated Manley, he began to write letters to AmBase
demanding indemnification for litigations unrelated to the Finley Kumble
Bankruptcy Actions. J. Ex. 223-26, 228, 231-33, 235-37. He also continued
to communicate with Scharffenberger regarding the status of the Finley
Kumble Bankruptcy Actions. Tr. at 121-22; J. Ex. 242, at 1.
On January 31, 1991, AmBase entered into an agreement with Manley which
purported to resolve Manley's claims against AmBase arising out of his
termination (the "1991 Severance Agreement"). J. Ex. 48, 49; P.T.O.
para. 12. The 1991 Severance Agreement stated, "AmBase shall continue to
pay reasonable fees and expenses incurred by its counsel currently
representing you in the liquidation proceedings involving Finley,
Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey." J. Ex. 48
para. 6. The agreement also provided:
The Company shall indemnify and defend you in connection
with matters arising from your service as a Director,
officer or employee of AmBase and its subsidiaries or
affiliates to the extent provided for under the by-laws
of AmBase or any indemnification agreement in effect as
of the Execution Date between yourself and AmBase and any
of its subsidiaries and affiliates, in each case to the
extent permitted under applicable law; provided that in
any case AmBase shall indemnify you (and provide you with
a defense) with respect to any events or circumstances
for which AmBase may from time to time be indemnifying
and defending individuals who have held positions at
AmBase (or its subsidiaries or affiliates) comparable to
the positions held by you prior to your resignation, to
the extent permitted under applicable law.
J. Ex. 48 para. 7.
V. The 1991 Trustee Settlement Agreement
Manley and Marshall Manley P.C. entered into a settlement agreement
with the Trustee, dated September 24, 1991 (the "1991 Trustee Settlement
Agreement"), which resolved the Finley Kumble Bankruptcy Actions against
them in exchange for certain undertakings and future payments to be made
by Manley. P.T.O. para. 9. Under the agreement, Manley was required to
pay $1.452 million four years after the date of the agreement and $1.68
million five years after the date of the agreement. He was also required
to pay a percentage of his income in the sixth year after the date of the
agreement and continue to do so until 2001. Tr. at 126-27. The present
value of the settlement in 1991 was estimated to be $4.5 million. When
Manley entered into the 1991 Trustee Settlement Agreement, he was still
represented by Cravath, Zalkin, and Grant Thornton. Id. at 125. Dodyk
negotiated the agreement on Manley's behalf. Id. at 125, 306-07.
Soon after it was executed, Manley told Scharffenberger that he had
entered into the 1991 Trustee Settlement Agreement. Id. at 232-35. The
agreement was also disclosed to the Bankruptcy Court by the Trustee, and
was the subject of articles in the press. P.T.O. para. 10.
VI. The 1991 AmBase Action and 1993 AmBase Settlement Agreement
On October 22, 1991, Manley filed an action against AmBase (the "1991
AmBase Action"). J. Ex. 85; P.T.O. para. 13. In
the Third Claim for
Relief, Manley sought a declaration that he was entitled to
indemnification for various shareholder derivative actions and other
litigations. Paragraph 24 of the complaint listed eighteen litigations
for which Manley was seeking indemnification. J. Ex. 85, at 8-9, para.
24. Neither paragraph 24 nor any other portion of the complaint in the
1991 AmBase Action identified the Finley Kumble Bankruptcy Actions or
Manley's obligation to make payments to the Trustee. Manley never amended
the complaint to identify the Finley Kumble Bankruptcy Actions, or his
obligation to make payments to the Trustee. Tr. at 562.
However, by February 27, 1992, at his deposition in the 1991 AmBase
Action, Manley complained to AmBase's attorney that AmBase had stopped
paying Cravath's fees. Id. at 238-39, 271, 874; Def. Ex. A, at 200-01. The
statement regarding AmBase's failure to continue paying Cravath's fees
was repeated in an affidavit, executed by Manley on June 12, 1992. J.
Ex. 91 para. 41.
Manley and AmBase resolved the 1991 AmBase Action pursuant to a written
agreement dated May 27, 1993 (the "1993 AmBase Settlement Agreement").
P.T.O. para. 14. The terms of the 1993 AmBase Settlement Agreement were
negotiated by Manley and Richard Bianco, President and Chief Executive
Officer of AmBase since May 1991, through their attorneys. Tr. at 877,
930-33. Manley was represented by Peter Calamari, id. at 561-62, 596-97,
975-76, 999, and AmBase was represented by Colleen McMahon of Paul,
Weiss, Rifkind, Wharton & Garrison ("Paul Weiss"). Id. at 596.
During these negotiations, although the subject of indemnification was
generally discussed, specific matters which would, or would not, be
covered by the agreement, were not discussed. Id. at 564, 977, 1006.
AmBase did not ask for either a verbal or written itemization of
indemnity claims nor did Manley provide one. Id. at 889, 900, 1035-36.
McMahon never discussed indemnification for the payments Manley would
make to the Trustee in the Finley Kumble Bankruptcy Actions with Calamari
or Manley. Id. at 892-93. Calamari testified that he did not know whether
Manley intended to assert an indemnity claim with regard to the Finley
Kumble Bankruptcy Actions. Id. at 1008. During the entire time these
negotiations were ongoing, Manley was no longer an officer or director of
AmBase and his only contact with AmBase was as an adversary in a
lawsuit. Id. at 977-78.
Bianco testified that by entering into the 1993 AmBase Settlement
Agreement, he intended that Manley would have indemnity for those
litigations Manley identified in paragraph 24 of the complaint in the
1991 AmBase Action. Id. at 932. Since becoming President and Chief
Executive Officer of AmBase, Bianco knew of no obligation on the part of
AmBase which existed regarding the payments Manley was to make, and did
make, to the Trustee arising out of the Finley Kumble Bankruptcy
Actions. Id. at 942, 952-55. Manley never told Bianco or anyone else at
AmBase of such an obligation. Id. at 234-35, 930, 942, 952-55.
Manley and Bianco had several discussions on the telephone and in
person in April and May 1993 regarding settlement of the 1991 AmBase
Action. Id. at 930-33. They discussed indemnification for the lawsuits
listed in paragraph 24 of the complaint in the 1991 AmBase Action, as
well as other lawsuits and administrative proceedings which were brought
against Manley after the commencement of the 1991 AmBase Action and
before the execution of the 1993 AmBase Settlement Agreement. Id. at
932-33. However, they did not discuss indemnification for the Finley
Kumble Bankruptcy Actions or the payments Manley was to make to the
Trustee. Id. at 932.
By entering into the 1993 AmBase Settlement Agreement with Manley,
Bianco hoped to end all present and future litigation
by Manley against
AmBase. Id. at 939-40. Manley indicated to Bianco that he agreed that
this was the purpose of the 1993 AmBase Settlement Agreement. Id. at
940. Bianco stated that he relied on Manley's sincerity in this regard.
Id. at 940-41. Accordingly, the 1993 AmBase Settlement Agreement contains
the following "whereas" clause: "WHEREAS, the parties wish to settle all
their disputes, to end all pending litigation between them and to end the
prospect of further litigation between them." J. Ex. 68, at 2.
On April 21, 1993, Calamari faxed to McMahon's associate a first draft
of the settlement agreement, which Calamari had prepared. J. Ex. 58.
Subsequently, Calamari asked McMahon to incorporate the language of the
indemnification paragraph of Manley's 1987 Employment Agreement into the
settlement agreement in place of the language Calamari had originally
prepared. Calamari and McMahon discussed the prior settlement negotiations
which resulted in the 1991 Severance Agreement in which Manley had
expressed concern about pending shareholder derivative actions, and
Manley's prior and continuing desire not to be cast adrift regarding such
actions. Tr. at 883-84.
McMahon faxed a revised draft settlement agreement to Calamari on April
30. Paragraph 5 of this draft was copied from paragraph 11 of the 1987
Employment Agreement, and inserted pursuant to Calamari's specific
request. Id. at 880-84; J. Ex. 61. Paragraph 5(a) of the April 30 draft
commenced with the language: "If Manley is made a party. . . ." J. Ex. 61
(emphasis added). When Calamari received this draft, which contained the
term "is," he expressed concern to McMahon that her use of the word "is"
was an attempt to limit the scope of the indemnity to liabilities arising
prospectively and to exclude potential liabilities which may have arisen
in the past from shareholder derivative litigations, but McMahon assured
him that this was not so. Tr. at 885, 1004-05. McMahon understood the
shareholder derivative litigations identified by Calamari to be the
litigations enumerated in paragraph 24 of the complaint in the 1991
AmBase Action. Id. at 885-91; J. Ex. 85. She also testified that she
believed the indemnity provision in the 1993 AmBase Settlement Agreement
was to be neither broader nor narrower than the indemnification rights
previously possessed by Manley, and was to provide Manley with the full
scope of indemnity rights available under Delaware law. Id. at 883-84,
895, 976-77, 1034.
On May 5, Calamari faxed to McMahon a marked up version of the April 30
draft. Calamari inserted the language "has been or" at the beginning of
paragraph 5(a) so that it read: "If Manley has been or is made a party. .
." J. Ex. 63. McMahon did not object to this language. Paragraph 5 of the
final version of the 1993 AmBase Settlement Agreement provided, in
5. (a) If Manley has been or is made a party or is
threatened to be made a party to any action, suit or
proceeding . . . by reason of the fact that he was a
director or officer of AmBase or any current or former
subsidiary of AmBase, or by reason of the fact that he
was serving at the request of AmBase as a director,
officer, member, employee or agent of another corporation
or of a partnership, joint venture, trust or other
enterprise . . . he shall be indemnified and held
harmless by AmBase to the fullest extent authorized by
Delaware law, as the same exists or may hereafter be
amended, against all expense, liability and loss.
reasonably incurred or suffered by Manley in connection
therewith, including, without limitation, payment of
expenses incurred in defending a Proceeding prior to the
final disposition of such Proceeding.
(b) If a claim under ¶ 5(a) is not paid in full by
AmBase within 30 days after a written claim has been
received by the Company, Manley may at any time
thereafter bring suit against AmBase to
unpaid amount of the claim and, if successful in whole or
in part, Manley shall be entitled to be paid also the
expense of prosecuting such claim. It shall be a defense
to any such action that Manley has not met the standards
of conduct which make it permissible under Delaware law
for the Company to indemnify him for the amount claimed;
provided however, that the allegations, facts and
circumstances which form the basis of any claims that
AmBase asserted against Manley in the Action shall not be
considered as a basis for refusing any indemnification
which Manley is otherwise entitled to hereunder or at
(c) The right to indemnification and the payment of
expenses incurred in defending a Proceeding in advance
of its final disposition conferred in this ¶ 5
shall not be exclusive of any other right that Manley
may have under any statute, provision of the
certificate of incorporation or by-laws of AmBase,
agreement, vote of stockholders or disinterested
directors or otherwise.
J. Ex. 68 para. 5.
Bianco testified that he read and understood the 1993 AmBase Settlement
Agreement before it was signed. Id. at 1014. He first testified that
based upon conversations with Manley, he thought the indemnity provided
for in the 1993 AmBase Settlement Agreement was limited to the list of
lawsuits set forth in the complaint in the 1991 AmBase Action, id. at
932, 939, 1042, but later testified that it also included certain
later-filed actions which he and Manley had discussed. Id. at 1043,
VII. Requests for Payment of Fees
On June 22, 1993, several weeks after the execution of the 1993 AmBase
Settlement Agreement, Manley sent a letter to AmBase enclosing a bill for
$53,038.88 from Grant Thornton for services rendered in the Finley Kumble
Bankruptcy Actions and asking that AmBase pay the bill (the "June 22
Letter"). Tr. at 139-40, 947-48; J. Ex. 67, 70. The June 22 Letter
stated, in pertinent part:
Please find enclosed a copy of a letter dated June 22,
1993, which I received from Grant Thornton.
The enclosed bill comes under the indemnification
provisions of my recent settlement agreement with AmBase,
and previous settlement agreements with AmBase.
Please arrange to have the enclosed bill paid.
J. Ex. 67 at 1.
AmBase agreed to pay $40,000 in settlement of the bill. J. Ex. 70.
According to Bianco, the bill was paid to accommodate Grant Thornton and
preserve a longstanding business relationship. Tr. at 948-49.
On September 15, 1993, Manley sent a letter (the "September 15 Letter")
to AmBase enclosing a bill from Cahill, Gordon & Reindel ("Cahill") for
$63,519.93 and asking AmBase to pay the bill. Tr. at 142; J. Ex. 73. The
bill did not cover any services in connection with the Finley Kumble
Bankruptcy Actions. J. Ex. 73. The September 15 Letter stated, in
Please find enclosed a copy of a letter dated September
2, 1993 and the enclosures referred to therein which I
have received from Mathias Mone of the law firm of Cahill
Gordon & Reindel.
To refresh your recollection, Cahill Gordon & Reindel
law firm was hired directly by AmBase to provide legal
services in the matters referred to in the enclosed
documents. During the course of the recent litigation
I had with AmBase, AmBase decided to substitute
Cravath Swaine & Moore in place of Cahill Gordon &
Reindel. Since the enclosed items are a direct
obligation of AmBase (because you hired Cahill Gordon
& Reindel) and also because the charges would come
under my indemnification rights as more fully set
forth in my most recent settlement with AmBase, will
please forward a check directly to Mr. Mone.
J. Ex. 73 at 1.
AmBase agreed to pay $57,000 in settlement of the bill. According to
Bianco, the bill was paid to accommodate Cahill and preserve a
longstanding business relationship between AmBase and Cahill. Tr. at
949-52; Def. Ex. N.
Bianco did not think the requests contained in the June 22 Letter and
the September 15 Letter were appropriate. Tr. at 356-57. Nevertheless, he
authorized the payment of the Grant Thornton bill after consultation with
counsel. Id. at 948. The AmBase check authorization form issued in
connection with the payment states that the check was to cover
"Compromised payment re: Manley Settlement." J. Ex. 70.
VIII. The 1993 Trustee Settlement Agreement
On December 30, 1993, Manley and Marshall Manley P.C. entered into a
settlement agreement (the "1993 Trustee Settlement Agreement") with
Albert Togut, the Finley Kumble Liquidation Trustee ("Liquidation
Trustee"), pursuant to which Manley and Marshall Manley P.C. agreed to
pay $2.43 million in full satisfaction of all sums due under the 1991
Trustee Settlement Agreement. J. Ex. 75. Manley paid the Liquidation
Trustee $2.43 million. Tr. at 145; J. Ex. 81. The Finley Kumble
Bankruptcy Actions against Manley and Marshall Manley P.C. were dismissed
with prejudice by the Bankruptcy Court on October 12, 1994. J. Ex. 84.
During the negotiations with the Liquidation Trustee which led to the
1993 Trustee Settlement Agreement, Manley retained Calamari at his own
expense. He entered into the agreement without the knowledge or
participation of AmBase.
By letter dated July 22, 1996, Manley, through his counsel, made a
demand upon AmBase to indemnify him for the $2.43 million paid to the
Liquidation Trustee. J. Ex. 126. AmBase first learned of this claim when
it received Manley's demand letter. Tr. at 942. By letter dated October
3, 1996, AmBase rejected the demand. J. Ex. 127. Manley testified that he
did not disclose this claim earlier because he was beholden to AmBase for
his defense and indemnity in pending shareholder derivative litigations.
Tr. at 274-75. He was afraid that if he made a claim for
indemnification, AmBase would not continue paying his attorneys in
connection with the shareholder derivative litigations. Id. at 275.
CONCLUSIONS OF LAW
AmBase seeks reformation of the 1993 AmBase Settlement Agreement.
Reformation may be granted if there is either mutual mistake or
unilateral mistake coupled with fraudulent concealment and the writing
does not reflect the actual agreement reached between the parties. See
Winmar Co. v. Teachers Ins. and Annuity Ass'n of Am., 870 F. Supp. 524,
535 (S.D.N.Y. 1994) (citing Chimart Assocs. v. Paul, 489 N'.E.2d 231,
232-34 (N.Y. 1986)); Weed v. Weed, 634 N.Y.S.2d 569, 570 (App. Div.
1995). AmBase relies on a unilateral mistake coupled with fraudulent
concealment to support its reformation claim. The theory behind such a
claim is that "the parties have reached agreement and, unknown to one
party but known to the other (who has misled the first), the subsequent
writing does not properly express that agreement." Chimart Assocs., 489
N.E.2d at 234.
Because the thrust of a reformation claim is that the writing does not
set forth the actual agreement of the parties, the parol evidence rule
generally does not apply to bar proof of the claimed agreement between
the parties. However, in order to avoid the danger that a party to a
mutually agreed upon written contract that turns out to be
disadvantageous will falsely claim the existence of a different
agreement, New York courts limit actions for reformation by imposing a
heavy burden of proof. See id.
[T]here is a "heavy presumption that a deliberately
prepared and executed written instrument manifests [s] the
true intention of the parties," and a correspondingly
high order of evidence is required to overcome that
presumption. The proponent of reformation must "show in
no uncertain terms, not only that mistake or fraud
exists, but exactly what was really agreed upon between
Id. (citations omitted). Fraud must be "clearly established, particularly
when the negotiations were conducted by sophisticated, counseled business
people." Briand Parenteau Assocs. v. HMC Assocs., 638 N.Y.S.2d 817, 819
(App. Div. 1996) (citing Chimart Assocs., 489 N.E.2d at 233-34). The
burden of proof imposed here has been equated to a clear and convincing
evidence standard. See, e.g., Winmar, 870 F. Supp. at 535-36.
McMahon and Bianco testified that they believed that the indemnity
provisions in the 1993 AmBase Settlement Agreement only covered certain
previously identified litigations. However, there was also persuasive
evidence that both parties intended that Manley would have the same
indemnification rights that he previously possessed, a fact which AmBase
does not contest. The parties carried out their intent by including in
the 1993 AmBase Settlement Agreement language originally contained in
Manley's 1987 Employment Agreement. By agreeing to that language, AmBase
got what it bargained for, an indemnity provision that would provide
Manley with the full scope of indemnity rights that were permitted under
The Court therefore concludes that AmBase has failed to establish that
the 1993 AmBase Settlement Agreement does not reflect the actual
agreement between the parties. Thus, AmBase's reformation counterclaim
fails and it is not necessary to reach the issue of whether Manley
fraudulently concealed information from AmBase. However, since AmBase
also seeks money damages on its fraud counterclaim, the Court will now
consider that issue.
II. Fraudulent Concealment
The fraud counterclaim is based on Manley's alleged fraudulent
concealment of information regarding his intent to claim a right to
indemnification for the sums paid to resolve the Finley Kumble Bankruptcy
Actions. AmBase argues that it was fraudulently induced to enter into the
1993 AmBase Settlement Agreement and that Manley has continued to
perpetrate the fraud to the present day.
In order to state a claim for fraudulent concealment under New York
law, AmBase must show that (a) Manley failed to disclose material
information which he had a duty to disclose, (b) Manley intended to
defraud AmBase, (c) AmBase reasonably relied upon the representation, and
(d) AmBase suffered damage as a result of such reliance. See. e.g.,
Bermuda Container Line Ltd. v. International Longshoremen's Ass'n,
192 F.3d 250, 258 (2d Cir. 1999); Banque Arabe et Internationale
D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir.
1995). Each of these elements must be proved by clear and convincing
evidence. See Banque Arabe, 57 F.3d at 153. For the following reasons,
AmBase has failed to sustain its burden of proof.
A. Manley's Duty to Disclose Information
"Absent a duty to speak, nondisclosure does not ordinarily constitute
fraud." Jolly King Restaurant. Inc. v. Hershey Chan Realty. Inc.,
625 N.Y.S.2d 35, 36 (App. Div. 1995) (citations omitted). When two
parties are engaged in business negotiations, a duty to speak only arises
in three limited circumstances. See. e.g., Brass v. American Film Techs.
Inc., 987 F.2d 142, 150 (2d Cir. 1993) ("A duty to speak cannot arise
simply because two parties may have been on opposite sides of a
bargaining table when a deal was struck between them, for under New York
law the ancient rule of caveat emptor is still alive and well."
(citations omitted)). First, such a duty may arise from the need to
complete or clarify a partial or ambiguous statement. Second, a duty to
disclose may arise from a fiduciary relationship between the parties.
Third, a duty to disclose may arise if one party has superior knowledge
of certain information, that information is not readily available to the
other party, and the first party knows that the second party is acting on
the basis of mistaken knowledge. See Banque Arabe, 57 F.3d at 155;
Brass, 987 F.2d at 150. For the reasons discussed below, none of these
circumstances applies in the present case.
1. Partial or Ambiguous Statement
AmBase argues that Manley had a duty to disclose his alleged right to
indemnification for payments he was to make in settlement of the Finley
Kumble Bankruptcy Actions because he made partial statements in the 1991
AmBase Action and in negotiations leading to the 1993 AmBase Settlement
Agreement. By seeking indemnification for the litigations identified in
paragraph 24 of the complaint in the 1991 AmBase Action, AmBase reasons
that Manley also imposed on himself a duty to disclose his alleged right
to indemnity for the Finley Kumble Bankruptcy Actions.
Regarding the making of a partial or ambiguous statement, the Second
Circuit has stated that "once a party has undertaken to mention a
relevant fact to the other party it cannot give only half of the truth."
Brass, 987 F.2d at 150 (citing Junius Constr. Corp. v. Cohen, 178 N.E. 672,
674 (N.Y. 1931)). By listing the eighteen litigations for which he was
seeking indemnification in the 1991 AmBase Action, Manley did not fail to
disclose any material information to AmBase. At the time, he was not
seeking indemnification in connection with the Finley Kumble Bankruptcy
Actions since he was not required to make the first payment to the
Trustee until four years after the commencement of the 1991 action. In
any event, AmBase was aware that Manley had entered into the 1991 Trustee
Settlement Agreement at the time, or soon after, it was executed. At that
point, AmBase had sufficient knowledge of other indemnity provisions, for
example, its by-laws, the 1987 Employment Agreement, the 1988 Board
resolution, and the 1991 Severance Agreement, to ascertain whether Manley
had a potential claim for indemnification.
During the negotiations leading to the 1993 AmBase Settlement
Agreement, Manley never represented to anyone affiliated with AmBase that
he was only seeking indemnification for the litigations enumerated in
paragraph 24 of the complaint in the 1991 AmBase Action. AmBase never
sought, and Manley never provided, a list of the actions for which he
would seek indemnification. Thus, Manley never made a partial or
ambiguous statement to AmBase which would have required him to provide
2. Fiduciary Relationship
AmBase also argues that Manley owed it a duty to disclose his potential
indemnity claim because he had a fiduciary relationship as a director and
officer of AmBase which continued after he was terminated. It is a
well-established principle of New York law that "directors are bound by
all those rules of conscientious fairness, morality, and honesty in
purpose which the law imposes as the guides for those who are under the
fiduciary obligations and responsibilities. They are held, in official
action, to the extreme measure of candor, unselfishness, and good faith."
Kavanaugh v. Kavanaugh Knitting Co., 123 N.E. 148, 151 (N.Y. 1919).
Generally, such a duty ceases to exist once an officer or director no
longer occupies his or her position or when an officer or director
is not acting in his or her official capacity. See e.g., Keehan v. Keehan,
No. 96 Civ. 2481, 2000 WL 502854, at *4 (S.D.N.Y. April 25, 2000) (stating
that if the facts proved that an individual continued in his role as an
officer or director until a certain date, his fiduciary duty to the
corporation would endure until that date as well, but if he resigned
earlier, his fiduciary duty would have ended on the earlier date); Bensen
v. American Ultramar Ltd., No. 92 Civ. 4420, 1997 WL 66780, at *22-23
(S.D.N.Y. Feb. 14, 1997) (finding that an officer and director was not a
fiduciary thus giving rise to a duty to disclose in a fraud action
where, in the context of the transaction in question, the officer and
director was acting as an individual, not in any of his official
capacities); Nichols-Morris Corp. v. Morris, 174 F. Supp. 691, 698
(S.D.N.Y. 1959) (finding that the duty of loyalty owed by the president
and director of a corporation continued as long as he remained in those
positions and ended when it appeared, unequivocally, that a complete
withdrawal from the corporation had been effected); Commonwealth
Sanitation Co. v. Fox, 107 N.Y.S.2d 935, 938 (Sup.Ct. 1951) (finding that
the fiduciary duty of a director and officer ceased to exist once the
director and officer was summarily dismissed without just cause)*fn6
AmBase argues that Manley had a duty to speak in connection with the 1991
AmBase Action, which was commenced on October 22, 1991, almost nine
months after he was terminated from his position as a director at
AmBase. It also argues that Manley had a duty to speak during the
negotiations leading up to the 1993 AmBase Settlement Agreement.
However, Manley was under no fiduciary duty to AmBase once he was
terminated from his position as a director on January 31, 1991, and
therefore, he had no duty to disclose to AmBase that he had a potential
indemnity claim arising out of the Finley Kumble Bankruptcy Actions.
3. Superior Knowledge
Finally, AmBase argues that Manley had superior knowledge concerning
his potential indemnity claim which was not readily available to AmBase.
In order to establish that Manley had a duty to disclose material
information based on his superior knowledge, AmBase must prove: (1) that
Manley had such superior knowledge; (2) that the information was not
readily available to AmBase; and (3) that Manley knew that AmBase was
acting on the basis of mistaken knowledge. See Banque Arabe, 57 F.3d at
Even assuming that Manley had knowledge of his potential claim for
indemnity arising out of the Finley Kumble Bankruptcy Actions, that
information was readily available to AmBase. Prior to the commencement of
the 1991 AmBase Action, AmBase was aware that Manley had entered into the
1991 Trustee Settlement Agreement. At that point AmBase, having knowledge
of the various indemnity provisions that applied to Manley, for example,
AmBase's by-laws, the 1987 Employment Agreement, the 1988 Board
resolution, and the 1991 Severance Agreement, could have discovered that
Manley might have an indemnity claim for his liability in the Finley
Kumble Bankruptcy Actions. AmBase also had retained counsel and
accountants to represent Manley in the Finley Kumble Bankruptcy Actions.
In sum, AmBase had sufficient information concerning Manley's potential
claim for indemnification.
For the same reasons, AmBase has not proved that Manley knew that
AmBase was acting on the basis of mistaken knowledge
when it entered into
the 1993 AmBase Settlement Agreement. Based on the foregoing discussion
of AmBase's knowledge, Manley could reasonably have assumed that AmBase
was aware of the potential claim for indemnity when it entered into the
1993 AmBase Settlement Agreement. Therefore, the Court finds that AmBase
has not proved the first element of its fraud counterclaim.
B. Manley's Intent or Scienter
In order to satisfy the scienter element of a claim for fraudulent
concealment, a party must show by clear and convincing evidence that the
other party was "`more than negligent in [its] failure to disclose
material facts.'" Caron v. The Travelers Property and Cas. Corp.,
71 F. Supp.2d 269, 275 (S.D.N.Y. 1999) (alteration in the original)
(quoting Allen v. Westpoint-Pepperell, Inc., 11 F. Supp.2d 277, 288
(S.D.N.Y. 1997)). Thus, AmBase must show that Manley either knowingly or
recklessly disregarded the risk of omitting material facts. See Allen,
11 F. Supp.2d at 289. Even assuming that Manley concealed material
information which he had a duty to disclose, the evidence presented at
trial does not establish that Manley acted knowingly or recklessly.
With respect to Manley's omission of the Finley Kumble Bankruptcy
Actions from paragraph 24 of the complaint in the 1991 AmBase Action,
Manley testified that the reason for the omission was that the money due
under the 1991 Trustee Settlement Agreement was not due until years
later. Manley did not assert a claim for attorneys' fees since AmBase was
paying Cravath's bills at the time. Furthermore, the fact that Manley did
not notify anyone at AmBase that he would seek indemnification for the
Finley Kumble Bankruptcy Actions during the negotiations leading up to
the 1993 AmBase Settlement Agreement, does not, by itself, prove that
Manley knowingly or recklessly disregarded the risk of omitting such
C. Reasonable Reliance
AmBase claims that it reasonably relied on Manley's representations
that the 1993 AmBase Settlement Agreement provided indemnification only
for certain previously identified actions. In order to prove reliance,
AmBase was required to demonstrate that it was "induced to `act or [to]
refrain from acting' to [its] detriment by virtue of the alleged
misrepresentation or omission." Shea v. Hambros PLC, 673 N.Y.S.2d 369,
374 (App. Div. 1998) (quoting Megaris Furs. Inc. v. Gimbel Bros., Inc.,
568 N.Y.S.2d 581, 584 (App. Div. 1991)). Furthermore, its reliance must
be reasonable or justifiable. See Bermuda Container Line, 192 F.3d at 258
(citing Banque Arabe, 57 F.3d at 156)
Where sophisticated parties are engaged in arm's length negotiations
and the party claiming reliance had an opportunity to discover the
information allegedly relied upon, New York courts are wary of finding
that such reliance was reasonable. See. e.g., Societe Nationale
D'Exploitation Industrielle Des Tabacs Et Allumettes v. Salomon
Bros. Int'l, 702 N.Y.S.2d 258, 259 (App. Div. 200 0) (finding that a
sophisticated institutional investor cannot claim justifiable reliance on
an allegedly incomplete disclosure where its claim that it could not
acquire the information itself was not supported by the record); Shea,
673 N.Y.S.2d at 374 (finding that where experienced business people were
engaged in "acrimonious" negotiations conducted at arm's length in which
there was dissension among the parties, plaintiff could not credibly
claim that he entered into the agreements "lulled by faith or trust in
the parties across the bargaining table"); Siemens Solar Indus. v.
Atlantic Richfield Co., 673 N.Y.S.2d 674, 674 (App. Div. 1998) (finding
that the reasonable reliance element of a fraud cause of action was not
viable where a sophisticated entity had opportunities to obtain knowledge
of the matters that were subject to the alleged misrepresentations);
Stuart Silver Assocs. v. Baco Dev. Core., 665 N.Y.S.2d 415, 417-18 (App.
Div. 1997) (finding that reliance was not justified where a party had the
means to discover the true nature of the transaction by the exercise of
ordinary intelligence and failed to make use of those means).
AmBase cannot claim reasonable or justifiable reliance. Like the
parties in Shea the parties in the present case were sophisticated
business people, represented by counsel, who had a long history of
contentious litigation leading up to the negotiation of the 1993 AmBase
Settlement Agreement. Based on this history, and because AmBase was aware
of Manley's indemnity rights contained in other documents, AmBase had the
means to discover that Manley might assert a claim for indemnification in
connection with the Finley Kumble Bankruptcy Actions. Therefore, AmBase's
purported reliance on Manley's statement during a telephone conversation,
that he hoped the 1993 AmBase Settlement Agreement would put an end to
all litigation between the parties, was unreasonable. If the parties
truly intended that the 1993 AmBase Settlement Agreement would only cover
certain litigations, they could have identified them in the agreement.
Since AmBase instead consented to an unambiguous and broad indemnity
provision, it has failed to demonstrate that it reasonably relied on any
misrepresentation made by Manley. Inasmuch as the Court has rejected the
first three elements of AmBase's fraudulent concealment claim, it is not
necessary to reach the issue of damages.
For the foregoing reasons, AmBase is not entitled to judgment in its
favor on its counterclaims for reformation and fraud, and the
counterclaims are dismissed with costs.
It is so ordered.