Conrad Shipyard, LLC v. Franco Marine 1, LLC

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

CONRAD SHIPYARD, L.L.C. CIVIL ACTION

VERSUS NO: 19-10864

FRANCO MARINE 1, LLC, ET AL.

SECTION: “J” (1)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This case involves a breach of contract claim brought by Conrad Shipyard,

LLC, located in Morgan City, Louisiana, against Harley Marine Services (HMS), a

marine transportation company located in the State of Washington. Conrad alleged

that it built two offshore vessels for HMS, which then refused to pay, resulting in

Conrad having to sell the vessels to another party at a financial loss.

Harley Franco is the founder of HMS and, until March 2019, was its Chairman,

President, and CEO. In 2017, Harley Franco wished to build two new vessels to

service a marine transportation contract with an existing customer, Phillips 66. By

that time, the HMS board did not want the additional cost of two new vessels on its

balance sheet because it was in the process of negotiating securitization. After

discussions, Harley Franco formed two LLCs, Franco Marine 1 (“FM1”) and Franco

Marine 2 (“FM2”), in July 2017 for the sole purpose of being the contracting parties

for the construction of the two vessels by Conrad. Harley Franco, on behalf of FM1,

FM2, and HMS, executed the Vessel Construction Contracts on September 12, 2017,

for a total amount of $19,652,000.00.

When the HMS/Franco Parties (Harley Franco, FM1, and FM2) ceased making

required payments, Conrad was forced to sell the vessels to another party at a

reduced price. Conrad then commenced the present action against the Franco LLCs

and HMS for breach of contract, under the single business enterprise theory. Conrad

also brought a detrimental reliance claim against HMS. HMS counterclaimed for

conversion1 against Conrad, brought a cross-claim for indemnity against FM1 and

FM2, and brought a third-party indemnity claim against Harley Franco. FM1 and

FM2 filed cross-claims against HMS seeking reimbursement of the $2 million that

FM1 paid to Conrad for the Vessels, and Franco filed a counterclaim against HMS

seeking indemnification.

A jury trial took place from December 12, 2022 to December 16, 2022. At the

close of the trial, the jury rendered a verdict, answering eleven of fourteen questions

on the verdict form. The jury was unable to agree on answers to questions 6

(regarding the single business enterprise theory), 12, and 13 (regarding the Franco

LLCs’ detrimental reliance claims against HMS). However, the Court found that the

jury’s answers sufficiently resolved the claims in the trial, excluding the

indemnification issues that the parties had previously reserved for the Court’s

determination. The jury found in favor of Conrad and against HMS, awarding the

full $7,494,930.00 sought for breach of contract based on two theories: first, that the

1 HMS dismissed their conversion claim at trial. HMS had alleged that Conrad converted two tow winches that

belonged to HMS because Conrad sold the tow winches after it did not receive payment for the vessels.

Franco Parties had actual or apparent authority to transact with Conrad as HMS’s

agents and, second, that Conrad detrimentally relied on promises made by HMS

employees when making its decision to build the two vessels.2

As to the Franco Parties’ claims, the jury found that the Franco Parties’ $2

million down payment and expenses related to the Conrad vessels were incurred

within the scope of their authority as HMS’s agents, but that HMS did not agree,

implicitly or explicitly, to reimburse them for the $2 million.3 Finally, the jury found

that HMS owes no damages to the Franco LLCs related to down payments to Conrad

for construction of the vessels.

Shortly before trial began, the Franco Parties and HMS agreed that the Court,

rather than the jury, should decide all indemnification issues after the jury’s verdict.

At the close of trial, the Court ordered the parties to submit briefing on the remaining

indemnity issues between HMS and the Franco Parties.

On January 17, 2023, the Franco Parties moved for indemnification, arguing

that HMS’s implied indemnification claims should be dismissed, and that the Court

should rule in Franco’s favor on his own indemnification claim. (Rec. Doc. 146).

HMS also moved for indemnification, arguing that the Court should enter judgment

in HMS’s favor on its indemnification claims against the Franco Parties for

$7,464,930 and dismiss Franco’s claim for indemnification under HMS’s by-laws.

2 At trial, HMS also moved for a directed verdict on the single business enterprise issue. The jury was unable to

resolve whether HMS and the Franco LLCs operated as a single business enterprise. After the jury rendered the

verdict for Conrad, HMS re-urged the motion, and the Court granted it, dismissing the single business enterprise

claim.

3 The jury was also unable to determine the outcome of the Franco Parties’ detrimental reliance claim. The Court

determined that this claim did not affect the completeness of the jury verdict, so the Court accepted the jury verdict.

(Rec. Doc. 148). In essence, HMS acknowledges its liability to Conrad on the breach

of contract claim based on the jury’s findings that FM1 and FM2, in signing the

contracts with Conrad, were acting pursuant to actual or apparent authority as fully

disclosed agents of HMS. However, HMS contends that it is only constructively or

vicariously liable to Conrad because the Franco parties breached their obligations to

HMS and exceeded the authority given to them by HMS. HMS seeks indemnification

from the Franco entities for the full amount of the judgment in favor of Conrad. At

the same time, the Franco entities seek reimbursement or indemnification from HMS

for the expenditures made as agents for HMS, and for attorney’s fees in defending

the claims by HMS.

DISCUSSION:

I. REIMBURSEMENT OF THE $2 MILLION DOWN PAYMENT

The Franco Parties assert that HMS must reimburse them for the $2 million

down payment for the vessels because the jury found that FM1 and FM2 were acting

within the scope of their authority as agents when they made the down payment.

(Rec. Doc. 145-1, at 2-3). In response, HMS argues that the Franco parties failed to

timely object to the verdict form,4 which indicates that HMS is not required

reimburse the Franco LLCs and also that the Franco Parties were not entitled to

damages based on the verdict form and jury instructions on agency. (Rec. Doc. 147)

4 HMS contends that the Franco Parties failed to object to alleged inconsistencies between a general verdict and

answers to verdict questions, thus waiving the arguments in their motion. (Rec. Doc. 147, at 5). The Court disagrees

with HMS’s framing that the Franco Parties’ motion for an interim judgment (Rec. Doc. 145) is an objection to

inconsistencies in the verdict form. In fact, the Franco Parties’ motion contends the opposite: that the jury’s answers

are both internally consistent and consistent with agency law. Thus, the Court finds that the Franco Parties did not

waive their argument by not objecting at the time the verdict was read.

An agency relationship is formed when a person, the principal, confers

authority on another person, the agent (or mandatary in Louisiana law), to transact

affairs for the principal. La. Civ. Code art. 2989; Restatement (Third) Of Agency §§

1.01–03 (2006). An agent who contracts in the name of a disclosed principal within

the limits of his authority does not bind himself personally for the performance of the

contract. La. Civ. Code art. 3016; Restatement (Third) Of Agency § 6.01 (2006). An

agent may disclose the principal’s identity in actual written or verbal communication

to the party with whom the agent is dealing, or if the circumstances surrounding the

transaction and knowledge of the contracting party put them on notice of the agency

relationship. J.T. Doiron, Inc. v. Lundin, 385 So.2d 450, 452–453 (La. App. 1st Cir.

1980). A principal is bound to reimburse an agent for the expenses the agent incurs

in performance of their duties as an agent, plus interest from the date of the

expenditure. La. Civ. Code. art. 3012-14; Restatement (Third) Of Agency § 8.14 (2006)

(“A principal has a duty to indemnify an agent in accordance with the terms of any

contract between them and unless otherwise agreed when the agent makes a

payment. . . or when the agent suffers a loss that fairly should be borne by the

principal in light of their relationship.”).

As the Court provided in its legal instructions to the jury, if FM1 and FM2

were acting within the scope of their actual or apparent authority to bind HMS when

they contracted with Conrad to build the vessels, then HMS is bound by those

contracts. (Rec. Doc. 133, at 11). Further, the LLCs are not liable for any contracts

with Conrad that the LLCs made within the limits of their authority on behalf of a

fully disclosed principal, such as HMS.5 Id. at 12. Finally, if FM1 and FM2 were

acting as HMS’s agents in executing the contract with Conrad and those contracts

and related payments were within the scope of their authority as agents, then HMS

has a duty to reimburse them. Id. at 13.

The jury found that FM1 and FM2 were HMS’s agents and, with respect to

their dealings with Conrad, were acting within the scope of their actual or apparent

authority. The jury also found that Conrad was aware of the principal/agent

relationship between HMS and FM1 and FM2. Finally, the jury found that FM1 and

FM2 paid the $2 million down payment to Conrad within the scope of their authority

as agents of HMS. (Rec. Doc. 135).

Because the jury answered “yes” to question 11, that that FM1 and FM2’s $2

million down payment and the expenses were within the scope of their authority as

agents of HMS, the Franco Parties argue that, as a matter of law, they are entitled

to recover those amounts. (Rec. Doc. 145-1, at 3). In response, HMS argues that the

jury’s answer to Question 11 simply means the Franco LLCs were authorized to make

the down payment, but that the “NONE” answer to Question 14 indicates a finding

that LLCs were entering the contract without any expectation that HMS would

reimburse them for that payment, based on the Vessel Investment Agreement. (Rec.

Doc. 147, at 3-4).

5 The parties do not dispute whether or not the Franco LLCs disclosed the principal-agent relationship with HMS,

and the jury answered “YES” to the question of whether Conrad was aware of the agency relationship between HMS

and the Franco LLCs. (Rec. Doc. 135, at 2).

HMS contends that the Vessel Investment Agreement (“VIA”) between Harley

Franco and HMS not only shifted to Franco the financial risks when building a vessel

in his individual capacity, but also formed the basis of the agency relationship

between the Franco LLCs and HMS. Harley Franco and HMS entered into the VIA

in January 2014 and subsequently amended and restated the agreement in June 2015

and again in May 2017. (Rec. Doc. 138-9, at 2). The purpose of the VIA, as outlined in

the contract, is to:

(i) establish a preference among all of the parties for all capital investments

to be completed through HMS;

(ii) limit management distractions;

(iii) institute a process by which proposals for new vessel acquisitions by the

Company are presented to the Company’s Board of Managers for

approval, or if not approved, a process by which Franco may, subject to

the limitations set forth herein, move forward with such proposals at his

own risk outside HMS; and

(iv) establish procedures by which HMS shall have the exclusive right to

purchase vessels from Franco.

Id. at 3. The “Proposal Process” in the VIA requires, first, HMS management to

present proposals for new vessel construction or acquisition to HMS’s board of

managers. Id. Second, the HMS board submits the proposal to each member of the

company, and upon unanimous approval, the Board can vote on the proposal. Id. at

4. The VIA also provides that if the members of HMS do not approve the proposal,

Harley Franco may fund the project at his own risk as long as the total amount of

vessels he owns outside HMS does not exceed $15 million. Id. It also explains that

HMS has the right, but not the obligation, to purchase vessels from Franco at any

time for an amount equal to his costs plus 18% or enter an operating lease for the

vessel along with Franco. Id.

However, HMS’s singular focus on the Vessel Investment Agreement is

misguided. As outlined above and in the Court’s jury instructions, an agency

relationship allows a principal to authorize an agent to perform services for the

principal, and the agent shall be reimbursed for their expenses in performing those

services. The VIA, however, is a contract inapposite for creating an agency

relationship; the VIA was essentially an option contract allowing HMS the right, but

not the obligation, to purchase or lease a vessel from Harley Franco after he

undertook a vessel construction opportunity. (Rec. Doc. 147, at 9). It does not provide

an authorization for Franco to act on behalf of HMS as its agent. HMS argues that,

simply because none of the parties objected to its closing argument that the VIA

controlled the entire circumstances of Franco’s dealings with Conrad, the VIA would

preempt an agency relationship (along with its incumbent reimbursement

requirements). Id. at 11. HMS further contends that “the jury’s finding that the

Franco Entities acted within the scope of their agency when making the down

payment is entirely consistent with a finding that they did so at their own risk.” Id.

at 12.

The Court is not persuaded that the VIA created the agency relationship

between HMS and Franco or FM1 and FM2. HMS’s argument, that the VIA both

created an agency with Harley Franco and only allowed him to contract at his own

risk, is contradictory. Instead, as the evidence at trial showed, the agency

relationship found by the jury was created over time through the parties’ course of

dealings with Conrad. Evidence presented during the trial established that HMS was

actively and directly involved in all of its and its agents’ dealings with Conrad. First,

HMS contracted directly with a marine architect to design the vessels and negotiated

with financers by communicating that the vessels were HMS’s. (Rec. Docs. 138-7, 138-

14). Second, in connection with the sale, HMS paid directly to Conrad $491,300 in

cash and $1.1 million worth of tow winches, in addition to credits it had accrued with

Conrad. (Rec. Docs. 138-28; 140-32; 153-5, at 6-8). Third, HMS employees also

negotiated the contracts and communicated directly with Conrad, and HMS had its

own company representative physically present at the Conrad Shipyard to oversee

the construction of the vessels. (Rec. Docs. 138-5, 138-6, 138-20, 138-30). Moreover,

evidence at trial showed that the use of the two Franco LLCs as signatories to the

construction contracts was consistent with the manner in which HMS and Conrad

had done business for a number of other vessels over a number of years. See (Rec.

Docs. 138-1, 138-9, 138-46).

HMS intended the new Conrad vessels to be supplied to its customer, Phillips

66, which had requested new tugs as a condition to extending its contract. However,

HMS lost another large customer, Tesoro/Marathon, who returned approximately 15

vessels to HMS. Once HMS was able to provide two of the Tesoro tugs to Phillips 66,

it apparently then decided that it no longer wanted the new Conrad vessels. (Rec.

Doc. 139-32)

In addition to the apparent authority Conrad understood the Franco LLCs to

have, the jury also found against HMS on Conrad’s detrimental reliance claims. (Rec.

Doc. 135, at 2). Specifically, the jury found that HMS made promises to Conrad that

Conrad justifiably relied upon when deciding to build the vessels, resulting in

damages to Conrad. Id. This jury finding, that HMS made affirmative statements to

Conrad regarding the status of the vessel construction, undermines HMS’s argument

that the VIA governed the extent of the Franco LLCs authority. Instead, the LLCs’

authority was governed by principles of agency law. Thus, as a matter of law, HMS

is responsible for reimbursing its agents’ expenses including the $2 million down

payment plus interest from the time of payment.

Finally, the parties disagree on the jury’s reasoning for answering “NONE” for

Question 14. On first impression, saying that HMS owes no damages related to down

payments may contradict the finding that HMS owes $2 million in reimbursement.

However, Question 14 refers to the damages for both of the Franco Parties’ theories:

(1) detrimental reliance and (2) reimbursement of agent expenses. (Rec. Doc. 135, at

3-4). A logical reading of the verdict form indicates that the “damages” referred to in

Question 14 are those related to the $2 million down payment, outside of or in

addition to the reimbursement of expenses. The Court is not persuaded by HMS’s

dissection of the jury’s understanding of agency law buttressed by the VIA nor by

their argument that Franco’s agency is comparable to a lawyer representing a client

on a contingent-fee basis. (Rec. Doc. 147, at 12-13). Therefore, the most reasonable

reconciliation of the jury’s responses is that HMS owes the Franco LLCs

reimbursement for their down payment as agents, but no additional damages

resulting from the detrimental reliance theory.

II. HMS’S IMPLIED INDEMNIFICATION CLAIMS

HMS’s implied indemnity claims allege that the Franco Parties are liable to

HMS for the damages it owes Conrad, reasoning that HMS has been found vicariously

liable to Conrad because the Franco Parties breached their obligations to HMS and

exceeded the authority HMS granted them. (Rec. Doc. 148, at 11). The Franco Parties

argue that HMS’s claim for indemnity against FM1 and FM2 fails because (1) even if

HMS were only vicariously liable for the breach of contract, the jury found that HMS

is actually at fault for harming Conrad under a theory of detrimental reliance, and

(2) because the jury found the Franco Parties to be agents of HMS, HMS alone was

bound to the contracts with Conrad. (Rec. Doc. 146-1, at 2). In response, HMS argues

that the Franco Parties had apparent authority to enter the contracts, but only had

actual authority under the VIA to enter the contracts at their own risk, plus make

down payments and secure financing. (Rec. Doc. 152, at 3). That distinction in

authority, HMS argues, confirms its entitlement to indemnification because the jury

must have understood that Conrad’s detrimental reliance was based only on the

Franco Parties’ apparent authority to enter the contracts on behalf of the HMS, but

not actual authority, which would necessitate HMS’s liability. Id. at 5-7.

HMS claims that, to the extent HMS is found liable to Conrad, Harley Franco

should indemnify HMS because he committed HMS to agreements in defiance of

directions from HMS’s board of directors. (Rec. Doc. 146-1, at 2). The Franco Parties

respond that this claim for indemnity also fails because the jury found HMS to be at

fault for detrimental reliance and breach of contract and because HMS failed to offer

evidence at trial of Franco’s breach of fiduciary duty to justify the tort-based

indemnification claim. Id. at 3. In reply, HMS reiterates its position that Harley

Franco breached duties he owed to Conrad by failing to obtain financing, and that its

entitlement to indemnification does not depend on whether Harley Franco breached

his fiduciary duties to HMS. (Rec. Doc. 152, at 7-8).

“It has long been held in Louisiana that a party not actually at fault, whose

liability results from the faults of others, may recover by way of indemnity from such

others.” Martco Ltd. P'ship v. Bruks Inc., 430 F. App'x 332, 335 (5th Cir. 2011)

(quoting Bewley Furniture Co. v. Maryland Cas. Co., 285 So.2d 216, 219 (La.1973)).

The obligation to indemnify can be contractual or implied, even in the absence of an

indemnity agreement. Nassif v. Sunrise Homes, Inc., 739 So.2d 183, 185 (La.1999).

Because there is no indemnity agreement between HMS and the Franco Parties,

HMS’s indemnity claims are for implied indemnification.

Implied indemnity claims are equitable claims that arise only where “the

liability of the person seeking indemnification is solely constructive or derivative and

only against one who, because of his act, has caused such constructive liability to be

imposed.” Martco, 430 F. App'x at 335; see also Nassif, 739 So. 2d at 186 (holding that

equitable principle of restitution applies in indemnity action to allow defendant to

recover from the party actually at fault, even in absence of s contract of

indemnification). Thus, a party who is actually negligent or at fault cannot recover

implied indemnity. Martco, 430 F. App'x at 335 (citing Hamway v. Braud, 838 So.2d

803, 806 (La. App. 1st Cir. 2002)).

As explained above, the Court concludes that the VIA did not create the agency

relationship between HMS and the Franco Parties. Further, the jury’s finding that

HMS itself was at fault for Conrad’s detrimental reliance undercuts HMS’s argument

that it was without fault for breaching the contracts with Conrad—a requirement for

implied indemnification. As the Court explained in its instructions to the jury, to

prevail on a detrimental reliance claim, Conrad must prove that HMS made

representations by conduct or word that Conrad justifiably relied upon, and that

Conrad changed its position to its detriment. (Rec. Doc. 133, at 16). The jury, tasked

with considering the evidence presented at trial, found that HMS, through its

employees and representatives, made promises to Conrad that Conrad justifiably

relied upon when deciding to build the vessels, and the reliance resulted in damages

to Conrad. (Rec. Doc. 135, at 2). The jury’s finding, that HMS’s promises to Conrad

caused damage to Conrad, necessarily demonstrates that HMS was actually at fault

in forming and then breaching the contracts with Conrad. Thus, the jury findings

demonstrate that HMS was not merely technically or constructively liable for

Conrad’s loss. HMS was actually at fault for the breach of contract and cannot recover

implied indemnity from the Franco LLCs or from Harley Franco.

III. HARLEY FRANCO’S CLAIM FOR INDEMNIFICATION

The Franco Parties argue that, because HMS’s indemnification claim cannot

succeed, Harley Franco is entitled to mandatory indemnification pursuant to

Washington statute and HMS’s governing documents. (Rec. Doc. 146-1, at 2). HMS

contends that Franco is barred from obtaining indemnification because of its

entitlement to a judgment against Franco. (Rec. Doc. 152, at 9).

Washington’s Business Corporation Act states that, “unless limited by its

articles of incorporation, a corporation shall indemnify a director who was wholly

successful, on the merits or otherwise, in the defense of any proceeding to which the

director was a party because of being a director of the corporation against reasonable

expenses incurred by the director in connection with the proceeding.” Wash. Rev.

Code Ann. § 23B.08.520. HMS’s bylaws and articles of incorporation state that the

corporation shall indemnify its directors and officers to the full extent permitted by

the Washington Business Corporation Act, except in the case of (1) a final

adjudication of intentional misconduct or knowing violation of the law, (2) a final

adjudication related to unlawful distributions, or (3) a final adjudication that the

director or officer personally received money, property, or services to which they were

not legally entitled. (Rec. Doc. 146-1, at 24).

Because the Court concludes that HMS’s claim against Harley Franco fails,

HMS is obligated to indemnify Mr. Franco as a director of the corporation defending

this proceeding because of his status as a director, unless one of the three exceptions

in HMS’s governing documents applies. HMS argues that the first and third

exceptions apply because Harley Franco engaged in intentional misconduct and

engaged in transactions from which he received a personal benefit to which he was

not entitled. (Rec. Docs. 148, at 25, 152, at 9). However, the exceptions outlined in

HMS’s bylaws and articles of incorporation require “final adjudication” of that

misconduct, which did not occur in this case. Therefore, HMS must indemnify Harley

Franco for his costs in connection with defending HMS’s indemnification claim

against him.

CONCLUSION

To summarize the Court’s findings and conclusions on the indemnity issues

that were reserved to the court:

1. HMS must reimburse FM1 for the $2 million down payment to Conrad;

2. HMS is not entitled to indemnification from the Franco Parties (Harley

Franco, FM1 or FM2); and

3. Harley Franco is entitled to indemnity from HMS for his successful defense of

the third-party claim by HMS.

A final judgment will be issued on all claims in this case based upon the jury’s verdict

and the court’s findings and conclusions on the indemnity issues.®

New Orleans, Louisiana, this 2nd day of February, 2023.

0 Sah

/ / VL

AMA, CG

CARL J. BARBIE

UNITED|SVATES DISTRICT JUDGE

6 Tn light of these findings and the final judgment being issued,

IT IS HEREBY ORDERED that the Franco Parties’ Motion for Indemnification (Rec. Doc. 146) is

GRANTED.

IT IS FURTHER ORDERED that HMS’s Memorandum of Law Regarding Indemnification Claims (Rec.

Doc. 148), which the court construes as a motion for indemnification, is DENIED.

IT IS FURTHER ORDERED that Conrad’s Motion for Entry of Judgment under Rule 54(b) (Rec. Doc.

136) is DENIED as moot.

IT IS FURTHER ORDERED that the Franco Parties’ Motion for Entry of Interim Judgment (Rec. Doc.

145) is DENIED as moot.

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