Harris v. Howard University, Inc., Civ.A. 96-0404(RCL).

• Decision Date: 13 October 1998
• Docket Number: No. Civ.A. 96-0404(RCL).,Civ.A. 96-0404(RCL).
• Citation: 28 F.Supp.2d 1
• Parties: Caspa L. HARRIS, Jr., Plaintiff, v. HOWARD UNIVERSITY, INC. d/b/a Howard University, Defendant.
• Court: U.S. District Court — District of Columbia

Page 1

28 F.Supp.2d 1

Caspa L. HARRIS, Jr., Plaintiff, v. HOWARD UNIVERSITY, INC. d/b/a Howard University, Defendant.

No. Civ.A. 96-0404(RCL).

United States District Court, District of Columbia.

October 13, 1998.

COPYRIGHT MATERIAL OMITTED

Thomas Dann, Hewes, Gelbrand, Lambert & Dann, PC, Washington, DC, for plaintiff.

Michael Wasserman, Sidley & Austin, U.S. Attorney's Office, Washington, DC, Daniel I. Trywes, Pepper Hamilton LLP, Washington, DC, for defendant.

MEMORANDUM OPINION

LAMBERTH, District Judge.

This case involves a claim for indemnification by plaintiff Caspa L. Harris, Jr., against his former employer, defendant Howard University, for:

(1) the costs of defending claims against Harris by the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver for Madison National Bank; for the legal fees incurred by Harris in responding to a 1993 investigation by the Office of the Comptroller of Currency (OCC), and for legal fees incurred in seeking indemnification from Howard University;

(2) $80,000 that Harris paid in settlement of certain of the FDIC claims; and

(3) compensatory and punitive damages against Howard University on the ground that Howard's refusal to indemnify him was in bad faith.

The court conducted a bench trial in May 1998. The court now states its findings of fact and conclusions of law.

I. BACKGROUND

The FDIC's claims against Harris, as well as the OCC investigation, arose out of the alleged acts and omissions of Harris as a director of United National Bank (UNB) of Washington, D.C. The details of Harris's service on the UNB Board, and of the challenged activities, will be discussed in greater detail later.

During certain periods relevant to this case, the Bylaws of the Howard University Board of Trustees required the University to indemnify and "provide counsel" to an officer or managing agent of the University against claims arising out of service by that individual as a director of another corporation if he served on that other corporation's Board at the "request" of the University. However, the Bylaws only extended indemnification under those circumstances "to the extent permitted by law," and only if the officer or managing agent "acted in good faith for a purpose which [he] reasonably believed to be in the best interest" of the University.

Harris claims that, in his capacity as Vice President for Business and Fiscal Affairs and Treasurer of Howard University, and later as a managing agent of the University, he served on UNB at the request of the University's president, Dr. James Cheek, to represent the University's interests as a major depositor and stockholder in UNB, and to implement the University's policy of supporting banks in the minority community. The University's position is that Harris did not serve on the UNB Board at the request of the University, and was not an officer or managing agent of Howard University after June 30, 1987. The University also argues that Harris does not qualify for indemnification because he failed to satisfy the standard of care required by the Bylaws.

In March 1991, UNB was forced by the OCC to merge into Madison National Bank (MNB), an affiliate of UNB under the common ownership of James Madison Limited (JML). On May 10, 1991, the OCC declared MNB insolvent and appointed the FDIC as receiver.

In January 1993, the OCC wrote to Harris indicating that it was considering assessing civil money penalties against him for purported regulatory violations by UNB in 1990. After Harris responded, the OCC decided in September 1993 not to proceed against him. Harris never informed the University of the OCC investigation until Harris commenced this suit and made demand for indemnification for his legal fees incurred in successfully resolving the OCC matter. The University subsequently declined to indemnify Harris for any legal expenses incurred in responding to the OCC investigation. See Joint Pretrial Statement at 3.

In April 1994, the FDIC threatened claims against Harris arising from performance of his duties as a director of UNB. The FDIC's threatened claims arose from: (1) losses incurred on eighteen loan participations purchased by UNB, primarily from MNB (Loan Participation Claims), and (2) losses incurred by UNB in 1986 and early 1987 in connection with an indirect automobile loan program conducted through APA Leasing & Sales, Inc. (APA Leasing Claim).

Harris sought indemnification from the University relating to the FDIC's threatened claims. The University declined to indemnify Harris for the FDIC claims and related costs of defense. On December 19, 1995, Harris entered into an agreement with the FDIC whereby Harris admitted no wrongdoing but agreed to pay the FDIC $80,000 in settlement of the claims involving the Loan Participation Claims. The FDIC and Harris agreed to a tolling of the statute of limitations on the FDIC's remaining APA Leasing Claim.

The University declined to indemnify Harris because it contends that (1) Harris was not requested by the University to serve on the UNB Board during any relevant periods; (2) Harris was not an officer, employee, or other managing agent of the University after June 30, 1987, and is not entitled to indemnification for claims arising in whole or in part from events after that date; and (3) Harris did not act as a UNB director in "good faith" for a "purpose" that he "reasonably" believed to be in the University's "best interest."

Harris claims that the University acted in bad faith by refusing to honor its obligations to defend and indemnify him, because the University had dropped errors-and-omissions insurance coverage for officers and managing agents otherwise indemnified under the Bylaws for serving as directors of for-profit corporations.

Plaintiff seeks (1) a judgment awarding damages of $80,000, plus the costs of his defense to date in connection with the OCC investigation, the FDIC Loan Participation Claims, and the APA Leasing Claim; (2) a declaratory judgment that, with respect to the APA Leasing Claim, the University is obligated to indemnify him for future costs of defense, including reasonable attorney's fees; and (3) his attorney's fees and costs incurred in seeking to enforce the University's indemnification obligation. Plaintiff also seeks to recover compensatory and punitive damages arising from the defendant's alleged tortious breach of the duty of good faith and fair dealing, with respect to the University's obligation to defend and indemnify.

II. THE INDEMNIFICATION CLAIM

A. Was Harris Covered Under the Terms of the Bylaws?

1. Background Concerning Caspa Harris's Service on the United National Bank Board of Directors

Howard University is a federally chartered, private, nonprofit university located within the District of Columbia. Harris was employed by Howard from July 1, 1962 until June 30, 1987. From July 1, 1971 until the date of his retirement, he served as Vice President for Business and Fiscal Affairs, and also as Treasurer. After leaving Howard, Harris served as Executive Vice President, and then President, of the National Association of College and University Business Officers. He ended his employment with the latter organization in 1995.

In 1971, James Cheek, president of Howard University during most of the period relevant to this case, was contacted by officials of the Nixon Administration, who indicated that as part of President Nixon's policy of assisting minority-controlled banks, Howard University should seek one or more local financial institutions in which to deposit funds. On September 17, 1971, Howard's Board of Trustees authorized the use of United National Bank, one of the District of Columbia's two minority-controlled banks, as a depository bank for Howard University funds, and approved the location of a UNB branch on the Howard campus.

On or about October 13, 1971, both Cheek and Harris were elected to the UNB Board. However, Cheek withdrew from the Board shortly thereafter because he was already a director of another national bank. It is stipulated that Harris accepted the UNB position in 1971 without obtaining any prior written approval from the Howard University Board of Trustees, and that, in 1971, Cheek did not make any written communication to Harris requesting that Harris serve on UNB's Board as a Howard representative. (Stips.17, 18.)

The banking relationship between Howard and UNB quickly became controversial. On April 28, 1973, the Howard Board of Trustees had a "lengthy and detailed discussion" concerning "the question of possible conflict of interest." (Stip.20.) This debate within the Howard University Board occurred shortly after the filing of a class-action lawsuit alleging that Sibley Hospital trustees had invested hospital funds at unfavorable terms at the banks where they were employed as banking executives. See Stern v. Lucy Webb Hayes Nat. Training Sch., 367 F.Supp. 536, 537 (D.D.C.1973). Harris thereafter submitted his resignation to UNB by letter (on personal letterhead) dated March 13, 1974. (Ex. 254.) In that letter, he stated that his resignation was "due to recent court actions concerning possible conflict of interest or appearance of conflict of interest." Harris did attend two UNB Board of Director's meetings after his resignation: one on May 14, 1974, and one on July 17, 1974. (Stip.22.)

The waters become somewhat murkier at this point, as the circumstances culminating in Harris's rejoining the UNB Board present a central dispute in this litigation. What is certain is that on July 1, 1975, Harris wrote to Cheek (on University letterhead), advising him that he had been officially offered a director's seat on the UNB Board effective July 1, 1975. (Stip.24.) The letter asked Cheek to sign the memorandum, which he did, by stamp. (Stip.24.) On September 22, 1975, the Budget and Finance Committee of the Howard Board of Trustees recommended that Harris be permitted to accept the appointment...