Ambase Corp. v. City Investing Co. Liquidating

• Decision Date: 03 April 2003
• Docket Number: Docket No. 02-7230.
• Citation: 326 F.3d 63
• Parties: AMBASE CORPORATION, A Delaware Corporation, Plaintiff-Appellant, v. CITY INVESTING COMPANY LIQUIDATING TRUST, as successor to City Investing Company, a dissolved Delaware Corporation, John J. Quirk, Trustee of City Investing Company Liquidating Trust, and Marion Scharffenberger, Executrix of the Estate of George T. Scharffenberger, Eben W. Pyne, Individually and as Trustee of the City Investing Company Liquidating Trust, Lester J. Mantell, Individually and as Trustee of the City Investing Company Liquidating Trust, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

326 F.3d 63

AMBASE CORPORATION, A Delaware Corporation, Plaintiff-Appellant, v. CITY INVESTING COMPANY LIQUIDATING TRUST, as successor to City Investing Company, a dissolved Delaware Corporation, John J. Quirk, Trustee of City Investing Company Liquidating Trust, and Marion Scharffenberger, Executrix of the Estate of George T. Scharffenberger, Eben W. Pyne, Individually and as Trustee of the City Investing Company Liquidating Trust, Lester J. Mantell, Individually and as Trustee of the City Investing Company Liquidating Trust, Defendants-Appellees.

Docket No. 02-7230.

United States Court of Appeals, Second Circuit.

Argued: November 7, 2002.

Decided: April 3, 2003.

Mark R. Kravitz, Wiggin & Dana LLP, New Haven, CT (Victor A. Bolden, Wiggin & Dana, LLP, New Haven, CT, Philip Halpern, Collier, Halpern, Newberg, Nolletti & Bock, LLP, White Plains, NY, on the briefs), for Plaintiff-Appellant.

Paul M. Dodyk, Cravath, Swaine & Moore, New York, NY, for Defendants-Appellees.

Before: WALKER, Chief Judge, and OAKES and MINER, Circuit Judges.

MINER, Circuit Judge.

This is an appeal from a final judgment entered in the United States District Court for the Southern District of New York (Stanton, J.), dismissing on the pleadings a diversity action brought by plaintiff-appellant AmBase Corporation ("AmBase") against defendants-appellees for indemnification of legal expenses incurred in a tax dispute with the Internal Revenue Service ("IRS"). This dispute concerned certain tax liabilities that allegedly were assumed by the predecessor corporation of defendant-appellee City Investing Company Liquidating Trust (the "Trust"). The District Court dismissed the complaint upon a finding that the express contractual indemnification claim pleaded therein failed to state a claim upon which relief could be granted and that the restitution, unjust enrichment, implied contract, and breach of fiduciary duty claims were time barred by New York's statute of limitations. The District Court further denied AmBase leave to amend its complaint because the breach of contract and breach of third-party beneficiary contract claims AmBase sought to add in its amended complaint were also time barred.

This is AmBase's second bite at the litigation apple, its first bite having been taken in an action filed in the Delaware Chancery Court, see AmBase Corp. v. City Inv. Co. Liquidating Trust, 2001 WL 167698, CA No. 18207-NC (Del. Ch.2001) ("Delaware Action"), which was dismissed as time barred by Delaware's shorter statute of limitations. For the reasons that follow, we conclude that AmBase's claims are barred as a matter of law by the doctrine of res judicata. Accordingly, we affirm the judgment of the District Court without reaching the merits of whether AmBase's various claims either fail to state a claim upon which relief can be granted or are time barred.

BACKGROUND

I. The Parties

City Investing Company ("City") was a publicly-held Delaware holding company that was dissolved and liquidated in 1985. Before its dissolution and liquidation, City was the holding company for a multinational conglomerate with subsidiaries in the manufacturing, housing, and insurance industries. AmBase Corp. v. Comm'r, 81 T.C.M. (CCH) 1657, 1657, 2001 WL 543223 (2001). One of City's wholly-owned subsidiaries was the Home Group, Inc., which changed its name to AmBase in 1989.¹ AmBase owned several operating subsidiaries, including the Home Insurance Company, and in the mid 1980s held assets in excess of $5 billion. AmBase, 81 T.C.M. at 1658.

In 1985, as part of its dissolution and liquidation, City consummated a transaction pursuant to which it distributed out its assets and liabilities. The relevant detail of this transaction was that City distributed the outstanding shares of AmBase to City's common stockholders. At the same time, the Trust was formed to, "among other things, assume all of the claims, liabilities, and obligations" of City that were "not otherwise provided for." The Trust was initially funded with assets having an aggregate estimated value of approximately $200 million. City's shareholders were the beneficiaries of the Trust and received ownership units in it. Between 1985 and 1990, the Trust distributed over $280 million in cash and assets to the former stockholders of City.

Certain directors and officers of City ("Trustee Defendants") occupied certain fiduciary positions with both AmBase and the Trust. Defendant-appellee George Scharffenberger² was a Trustee of the Trust since its creation and served as Chairman of the Board of Directors of AmBase from prior to 1985 until January 1993, and as AmBase's Chief Executive Officer from March 1990 until May 1991. Defendant-appellee Eben Pyne has been a Trustee of the Trust since its creation and was a member of the AmBase Board from prior to 1985 until January 1993. And defendant-appellee Lester Mantell has served as a Trustee of the Trust since its creation, had been a senior City officer before the AmBase spin-off, and served in several officer positions (including Treasurer and Chief Financial Officer) at AmBase from prior to 1985 until December 1996. While at AmBase, Mantell (a tax attorney) had significant responsibility for AmBase's tax matters.

II. The Assignment of Certain Liabilities From City to AmBase

Pursuant to an August 1985 Assignment Agreement, AmBase assumed certain liabilities of City in consideration for City's payment of $178,767,000 and the unwinding of certain debits and credits relating to intercorporate transactions. Among those liabilities were City's obligations for federal income taxes as the common parent of City's corporate affiliates. In addition, AmBase assumed certain other liabilities and obligations of City, provided that AmBase would be only secondarily liable for the payment of those liabilities.

Shortly after the Assignment Agreement was executed, City and the Trustees entered into a Trust Agreement. AmBase was not a party to the Trust Agreement. Among other things, the Trust Agreement provided that the Trustees were to "assume all the claims, liabilities, and obligations (including unascertained or contingent liabilities in expenses) of [City]" listed on Schedule I of the Trust Agreement. Schedule I listed among the liabilities assumed "any cost, expense or liability associated with any claim asserted against City with respect to any act or omission attributable to its operations or affairs which has not been discharged in full or adequately provided for." In addition, Schedule I included, as a liability of the Trust, the costs and liabilities incurred in the defense of any litigation arising after September 25, 1985, in which City Investing was a defendant. Tax liabilities were not expressly mentioned in Schedule I.

III. Tax Dispute

During the latter half of the 1970s, City sought access to the Eurobond market to obtain long-term financing at a fixed rate of interest and to reduce the amount of indebtedness it had borrowed from its American bankers under a revolving credit agreement. AmBase, 81 T.C.M. (CCH) at 1658. At this time, "[t]he practice in the Eurobond market was for issuers of securities to provide indemnification for withholding taxes to foreign investors." Id.³ Without such indemnification, "[f]oreign investors would not have purchased Eurobond obligations ... because the imposition of withholding taxes would decrease their [rate of] return on the Eurobond obligations." Id.

During this time, American companies looking to raise money in the Eurobond market often formed a wholly-owned subsidiary in the Netherlands Antilles, which would issue debt securities in the Eurobond market that were guaranteed by the American parent corporation. Id. The Netherlands Antilles subsidiary would then lend the Eurobond offering proceeds to the U.S. parent or one its affiliates. Id. In certain circumstances, the American parent company's payment of interest on its indebtedness to the Netherlands Antilles subsidiary would be exempt from American withholding taxes "by reason of the application of the U.S.-Netherlands Income Tax Convention, as extended by protocol to the Netherlands Antilles." Id.

In 1974, City formed a wholly-owned subsidiary in the Netherlands Antilles. In 1977 and 1979, City raised $30 million and $50 million, respectively, from the Eurobond market through its Netherlands Antilles subsidiary. Id. at 1659. "The payment of principal and interest on these notes was unconditionally guaranteed by City." Id. Furthermore, the notes provided that the issuer would indemnify the holders with respect to any American withholding taxes that might be imposed. Id. City's Netherlands Antilles subsidiary immediately lent the proceeds from the Eurobond offering to City. Id. In May 1984, the 1977 notes were repaid in full. Id. at 1661. In September 1985, City liquidated and dissolved its Netherlands Antilles subsidiary, and the remaining debt on the 1979 notes was "upstreamed" to City. Id.

In or about March 1986, the IRS issued a Revenue Agent's Report to City contending that City had failed properly to withhold taxes during tax years 1979 and 1980 for the interest payments it made to the foreign holders of the Eurobonds. The IRS claimed that this subsidiary did not meet the requirements for exemption from United States withholding taxes.⁴ The IRS later extended that claim to the period covering tax years 1981 through 1985. The amount of the withholding at issue was almost $21 million. As of March 1986, the accrued interest on that sum was about $10 million.

In 1986, AmBase did not pay the taxes alleged to have been owed.⁵ Moreover, AmBase did not demand that the Trust pay the taxes allegedly owing, nor did it demand that the Trust assume the defense against the IRS. On or about May 11, 1995, the IRS issued a Notice of Deficiency to AmBase, claiming entitlement to the funds that it alleged should have been withheld.

On or about June 29, 1995, AmBase filed a...