# Conrad Shipyard, LLC v. Franco Marine 1, LLC

> District Court, E.D. Louisiana · February 2, 2023

URL: https://www.frixlaw.com/law-library/cases/10188894

## Case

- **Court:** District Court, E.D. Louisiana
- **Decided:** February 2, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10188894

## How later opinions describe it (automated extraction)

- 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

## Opinion text

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.
15

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10188894. Public record. Not legal advice.