Before BIGGS, Chief Judge, and GOODRICH and KALODNER, Circuit Judges.
The plaintiff, James D. Mooney, a New York citizen, brought suit in the court below against Willys-Overland Motors, Inc., a Delaware corporation, claiming $11,586.63 under a contract which provided for the reimbursement of Mooney for litigation expenses incurred in two previous law suits in which Mooney, at the time the contract was made, was named as a defendant. Jurisdiction in the instant case is based on diversity of citizenship and the amount in controversy. The complaint at bar set out the pertinent section of the contract*fn1 and alleged a breach by the defendant. The defendant's answer admitted the making of the contract but denied that anything was due under its provisions. The complaint also asked for costs, expenses and counsel fees of $5,000, alleging that this last amount must be considered as further litigation expense arising out of the two litigations in which Mooney had been named as a defendant. The court below gave judgment for Mooney for the principal amount claimed under the contract less $267.32 conceded by Mooney to be due the defendant on a counterclaim, but denied the $5,000 counsel fee in this action. D.C., 106 F.Supp. 253. On reargument, costs and interest were also awarded the plaintiff in the amount of $2,005.40.*fn2 Willys appeals from the orders of the court below. Mooney has filed no cross appeal and the denial of the additional counsel fee is not before us.
The relevant facts are complex. We will present them chronologically.
On August 30, 1948, Krinsky, a minority stockholder of Willys-Overland Motors, Inc.,*fn3 commenced an action in the Chancery Court of Delaware naming as defendants that corporation itself, two other corporations - Empire Securities, Inc. and Willys Real Estate Realization Corporation - and certain individuals identified as directors and officers of Willys. Mooney at that time was both president and a director of Willys; he was among those named in Krinsky's complaint. On November 12, 1948, an identical complaint was filed by Krinsky in the United States District Court for the District of Delaware.
The Krinsky complaints charged that from January 1946, to date all of the outstanding stock of Empire Securities, Inc. had been owned, directly or indirectly, by Mooney and two others, Canaday and Ritter who were also named as defendants. That during the same period Empire in turn owned all the stock of Willys Real Estate Realization Corporation and of Willys Overland Branches, Inc. That through Realization and Branches, Empire owned approximately 31% of the common stock of Willys-Overland Motors, Inc. That Mooney, Canaday and Ritter thus controlled "the board of directors and the officers of Willys in such manner that the other members of the Board were subservient to their wishes without regard to the best interests of the Corporation." That Mooney, Canaday and Ritter, in conspiracy with the directors of Willys, committed the following wrongs, thereby wasting Willys' assets:
(1) The 1945 purchase by Willys from the Wilson Foundry & Machine Company, a wholly owned subsidiary of Realization, of unnecessary tools and equipment at an excessive price;
(2) The 1946 purchase by Willys from Realization of all the stock of Wilson at an excessive price, thereby acquiring for Willys useless plant and equipment;
(3) The 1946 purchase by Willys from Realization of certain unnecessary real estate at an excessive price; and
(4) The 1944 employment of Charles E. Sorensen as president of Willys for 10 years at a salary of $1000 a week with extremely favorable stock option privileges, followed by the continuation, after rightfully causing Sorensen to resign as president in 1946, of the same salary and privileges.
The Krinsky complaint further alleged the futility of a demand that Willys bring the action, because of the domination of the board by Mooney, Canaday and Ritter. Krinsky demanded judgment "requiring the defendants herein jointly and severally to account to Willys for the profits, proceeds and emoluments derived and received by them or any of them, and for the losses sustained by Willys, directly and indirectly, by reason of the transactions herein alleged." He also sought to rescind Sorensen's contract and to enjoin further payments or the issuing of stock under it, and such other relief as might be just and proper under the circumstances.
On August 31, 1948, immediately after the filing of Krinsky's complaint in the Delaware Chancery Court, Mooney engaged Mr. James B. Alley of New York to represent him. Although Mooney had not been served with process in Krinsky's action, it was his purpose to enter an appearance and to defend on the merits in order to protect his reputation in the business world. With this purpose in mind Alley prepared the case for trial. Part of this work was performed independently of and part in cooperation with counsel for the other defendants, both corporate and individual. Like Mooney, the other individual defendants were not served with process. At least two of them, Love and Sorensen, also engaged counsel.
Willys and Realization then filed answers to Krinsky's complaint in the Delaware Chancery Court, denying the charges and stating broadly that the directors' actions were at all times taken voluntarily and in the best interests of Willys. In December, 1948, Krinsky amended his complaint to allege conspiracy between Mooney, Canaday, Ritter, Empire, Realization and the then directors of Willys in committing the wrongs complained of, and to change the date of the alleged wrongful purchase of tools and equipment from Wilson from 1945 to 1946. In March, 1949, Krinsky rewrote his complaint completely. This amended complaint was substantially the same as the original complaint except that the cause of action based on Sorensen's contract was withdrawn.*fn4
On May 20, 1949, Mooney and Willys entered into the contract upon which the plaintiff relies, at least in part, in the instant case. This contract terminated Mooney's employment with Willys and purported to settle various differences between Mooney and Willys. Mooney agreed to resign all his offices and to regard as satisfied all his claims against Willys "except sums payable pursuant to the terms of this agreement." Willys agreed to purchase Mooney's home in Toledo, Ohio, to pay Mooney's expenses in moving his furniture from Toledo to New York, to pay Mooney's salary until January 15, 1950, to pay certain other expenses incurred by Mooney at the time of his employment by Willys, and to pay a previous lawyer's bill (Alley's) rendered to Willys and to compensate Alley for services in connection with the May 20th settlement. Paragraph 7 of the contract of settlement provided: "Willys-Overland agrees to indemnify Mooney in accordance with the provisions of Article XXIII of the By-Laws in connection with expenses incurred by him arising out of suits now pending in ...