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MANLEY v. AMBASE CORPORATION

January 8, 2001

MARSHALL MANLEY, PLAINTIFF,
v.
AMBASE CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Ward, District Judge

    OPINION

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 171.

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:

11. Indemnification.

(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 administrators.

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.

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 ...


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