**Exhibit No. 10.2**

 

**EMPLOYMENT AGREEMENT**

 

THISEMPLOYMENT AGREEMENT (this “**Agreement**”),dated as of August 4, 2010 (the “**Effective Date**”),is entered into by and among Sunstone Hotel Investors, Inc., a Marylandcorporation (“**Sunstone**”),****SunstoneHotel Partnership, LLC, a Delaware limited liability company (the “**Operating Partnership**”),****and Kenneth E.Cruse (the “**Executive**”).

 

WHEREAS,Sunstone and the Operating Partnership (collectively, the “**Company**”)desire to employ the Executive and to enter into an agreement embodying theterms of such employment; and

 

WHEREAS,the Executive desires to accept employment with the Company, subject to theterms and conditions of this Agreement.

 

NOW,THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

 

1.                                       EmploymentPeriod. Subject to the provisions for earlier termination hereinafterprovided, the Executive’s employment hereunder shall be for a term (the “**Employment Period**”) commencing on the Effective Date andending on the third anniversary of the Effective Date (the “**Initial****Termination Date**”);provided, however, that this Agreement shall be automaticallyextended for three additional years on the Initial Termination Date and on eachsubsequent third anniversary of the Initial Termination Date, unless either theExecutive or the Company elects not to so extend the term of the Agreement bynotifying the other party, in writing, of such election not less than ninety(90) days prior to the last day of the term as then in effect.  For the avoidance of doubt, non-renewal ofthe Agreement pursuant to the proviso contained in the preceding sentence shallnot constitute a termination without Cause or for Good Reason (each as definedbelow).

 

2.                                       Terms ofEmployment.

 

(a)                                  Position andDuties.

 

(i)                                     During theEmployment Period, the Executive shall serve as Executive Vice President andChief Financial Officer of Sunstone and the Operating Partnership and shallperform such employment duties as are usual and customary for such positionsand such other duties as the Company shall from time to time reasonably assignto the Executive.  The Executive shallreport directly to the Chief Executive Officer of the Company.

 

(ii)                                  During theEmployment Period, and excluding any periods of vacation and sick leave towhich the Executive is entitled, the Executive agrees to devote substantiallyall of his business time, energy, skill and best efforts to the performance ofhis duties hereunder in a manner that will faithfully and diligently furtherthe business and interests of the Company. Notwithstanding the foregoing, during the Employment Period it shall notbe a violation of this Agreement for the Executive to (A) serve oncorporate, civic or charitable boards or committees consistent with the Company’sconflicts of interests policies and corporate governance guidelines in effectfrom time to time and, with respect to service with a for-profit entity, withthe written consent of the Company’s Chief Executive Officer, (B) deliverlectures or fulfill speaking engagements or (C) manage his personalinvestments, so long as such activities do not interfere with the performanceof the Executive’s responsibilities as an executive officer of the Company.

 

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(iii)                               The Executiveagrees that he will not take personal advantage of any business opportunitythat arises during his employment by the Company and which may be of benefit tothe Company.

 

(b)                                 Compensation.

 

(i)                                     Base Salary.  During the Employment Period, the Executiveshall receive a base salary (the “**Base Salary**”)of Three Hundred Fifty Thousand Dollars ($350,000) per annum.  The Base Salary shall be paid in installmentsat such intervals as the Company pays executive salaries generally, but notless often than monthly.  During theEmployment Period, the Base Salary shall be reviewed at least annually forpossible increase (but not decrease) in the Company’s sole discretion, asdetermined by the compensation committee (the “**CompensationCommittee**”) of the Board of Directors of the Company (the “**Board**”).  The term “BaseSalary” as utilized in this Agreement shall refer to Base Salary as soadjusted.  Any increase in Base Salaryshall not serve to limit or reduce any other obligation to the Executive underthis Agreement.

 

(ii)                                  Annual Bonus.  In addition to the Base Salary, the Executiveshall be eligible to earn, for each calendar year ending during the EmploymentPeriod, an annual cash performance bonus (an “**Annual Bonus**”)under the Company’s bonus plan or plans applicable to senior executives.  The amount of any Annual Bonus and theperformance goals applicable to such Annual Bonus for the relevant year shallbe determined in accordance with the terms and conditions of said bonus plan asin effect from time to time with the following targets: (1) thresholdtarget equal to 50% of Base Salary; (2) mid-point target equal to 75% ofBase Salary ( “**Target Annual Bonus**”);(3) high target equal to 125% of Base Salary; and (4) superior(maximum) target equal to 150% of Base Salary; provided, however,that no minimum bonus is guaranteed and any bonus may equal zero in any givenyear.  The Annual Bonus payable, if any,in respect of any calendar year performance period shall be paid no later thanthe March 15 immediately following such calendar year performanceperiod.  The terms and conditions of anysuch bonus plan shall be determined by the Compensation Committee in its solediscretion.

 

(iii)                               Equity Awards. During theEmployment Period, the Executive shall be eligible to earn equity awards underthe Company’s long-term incentive plan, subject to vesting and other conditionsdetermined by the Compensation Committee, in its sole discretion.  The form, amount and terms of equity awards,if any, shall be determined by the Compensation Committee in accordance withthe terms and conditions of plans as in effect from time to time with thefollowing targets: (1) threshold target equal to 100% of Base Salary;(2) mid-point target equal to 150% of Base Salary; (3) high targetequal to 200% of Base Salary; and (4) superior (maximum) target equal to250% of Base Salary; provided, however, that no minimum equityaward is guaranteed and any award may equal zero in any given year.

 

(iv)                              Incentive,Savings and Retirement Plans.  During the Employment Period, the Executiveshall be eligible to participate in all other incentive plans, practices, policiesand programs, and all savings and retirement plans, policies and programs, ineach case that are applicable generally to senior executives of the Company.

 

(v)                                 Welfare BenefitPlans.  During the Employment Period,the Executive and the Executive’s eligible family members shall be eligible forparticipation in the welfare benefit plans, practices, policies and programs(including, if applicable, medical, dental, 

 

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vision, disability, employeelife, group life and accidental death insurance plans and programs) maintainedby the Company for its senior executives.

 

(vi)                              BusinessExpenses.  During theEmployment Period, the Executive shall be entitled to receive promptreimbursement for all reasonable business expenses incurred by the Executive inaccordance with the policies, practices and procedures of the Company providedto senior executives of the Company.

 

(vii)                           Fringe Benefits.  During the Employment Period, the Executiveshall be entitled to such fringe benefits and perquisites as are provided bythe Company to its senior executives from time to time, in accordance with thepolicies, practices and procedures of the Company.

 

(viii)                        Vacation.  During the Employment Period, the Executiveshall be entitled to paid vacation in accordance with the plans, policies,programs and practices of the Company applicable to its senior executives.

 

3.                                       Termination ofEmployment.

 

(a)                                  Death orDisability.  TheExecutive’s employment shall terminate upon the Executive’s death or Disabilityduring the Employment Period.  Forpurposes of this Agreement, “**Disability**”means the Executive’s inability by reason of permanent physical or mentalillness to fulfill his obligations hereunder for 120 consecutive days or on a totalof 180 days in any 12-month period which, in the reasonable opinion of anindependent physician selected by the Company or its insurers and reasonablyacceptable to the Executive or the Executive’s legal representative, rendersthe Executive unable to perform the essential functions of his job, even afterreasonable accommodations are made by the Company.  The Company is not, however, required to makeunreasonable accommodations for the Executive or accommodations that wouldcreate an undue hardship on the Company. For purposes of clarity, this provision is not intended to, and doesnot, alter or affect any and all rights the Executive has to avail himself ofleaves of absence in accordance with Company policies applicable to seniorexecutives and/or his rights under applicable disability and leave of absenceslaws, including, without limitation, the Americans with Disabilities Act, theFamily and Medical Leave Act, the California Fair Employment and Housing Act,and the California Family Rights Act.

 

(b)                                 Cause.  The Company may terminate the Executive’semployment during the Employment Period for Cause or without Cause.  For purposes of this Agreement, “**Cause**” shall mean the occurrence of one or more of thefollowing events:

 

(i)                                     The Executive’scontinued and willful failure to perform or gross negligence in performing hisduties owed to the Company, which is not cured within fifteen (15) daysfollowing a written notice being delivered to the Executive, which noticespecifies such failure or negligence;

 

(ii)                                  The Executive’swillful commission of an act of fraud or material dishonesty in the performanceof his duties, the nature of which, and the support for which, shall beprovided to the Executive in writing;

 

(iii)                               The indictmentof the Executive, conviction of the Executive, or entry by the Executive of aguilty or no contest plea to any felony or any other felony or misdemeanorinvolving moral turpitude;

 

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(iv)                              Any materialbreach by the Executive of his fiduciary duty or duty of loyalty to theCompany; or

 

(v)                                 The Executive’smaterial breach of any of the provisions of this Agreement, or any otherwritten agreement between the Executive and the Company, which is not curedwithin fifteen (15) days following written notice thereof from the Company.

 

(c)                                  Good Reason.  The Executive’s employment may be terminatedby the Executive for Good Reason or by the Executive without Good Reason.  For purposes of this Agreement, “**Good Reason**” shall mean the occurrence of any one or more ofthe following events without the Executive’s prior written consent:

 

(i)                                     A materialreduction in the Executive’s title, duties, authority, responsibilities,reporting relationships, or the assignment to the Executive of any duties materiallyinconsistent with the Executive’s position, title, authority, duties, orresponsibilities;

 

(ii)                                  The Company’sreduction of the Executive’s annual Base Salary, bonus opportunity, or equityaward opportunity as in effect or as may be increased from time to time;

 

(iii)                               The relocationof the Company’s headquarters to a location more than thirty five (35) milesfrom the Company’s current headquarters in San Clemente, California; provided,however, if the Company moves to Aliso Viejo, California, within 12 months fromthe Effective Date, then such relocation of the Company’s headquarters must bemore than thirty five (35) miles from such location in Aliso Viejo, California,in order to constitute Good Reason; or

 

(iv)                              The Company’smaterial breach of its obligations under this Agreement.

 

Forpurposes of this Agreement, a termination of employment by the Executive shallnot be deemed to be for Good Reason unless (A) the Executive gives theCompany written notice describing the event or events which are the basis forsuch termination within 90 days after the event or events occur, (B) suchgrounds for termination (if susceptible to correction) are not corrected by theCompany within 30 days of the Company’s receipt of such notice, and (C) theExecutive terminates his employment no later than 30 days after the Executiveprovides notice to the Company in accordance with clause (A) of thisparagraph.

 

(d)                                 Notice ofTermination.  Anytermination other than due to death shall be communicated by Notice of Terminationto the other parties hereto given in accordance with Section 10(c) ofthis Agreement.  For purposes of thisAgreement, a “**Notice of Termination**” means awritten notice which (i) indicates the specific termination provision inthis Agreement relied upon, (ii) to the extent applicable, sets forth inreasonable detail the facts and circumstances claimed to provide a basis fortermination of the Executive’s employment under the provision so indicated, and(iii) if the Date of Termination (as defined below) is other than the dateof receipt of such notice, specifies the termination date (which date shall benot more than thirty (30) days after the giving of such notice).  The failure by the Executive or the Companyto set forth in the Notice of Termination any fact or circumstance whichcontributes to a showing of Good Reason or Cause shall not waive any right ofthe Executive or the Company, respectively, hereunder or preclude the Executiveor the Company, respectively, from asserting such fact or circumstance inenforcing the Executive’s or the Company’s rights hereunder.

 

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(e)                                  Date ofTermination.  “**Date of Termination**” means (i) if the Executive’semployment is terminated by the Company other than due to the Executive’s deathor Disability, the date of receipt of the Notice of Termination or any laterdate specified therein (which date shall not be more than thirty (30) daysafter the giving of such notice), as the case may be, (ii) if theExecutive’s employment is terminated by the Executive other than due to theExecutive’s death or Disability, the Date of Termination shall be the thirtiethday after the date on which the Executive notifies the Company of suchtermination, unless otherwise agreed by the Company and the Executive, and (iii) ifthe Executive’s employment is terminated by reason of death or Disability, theDate of Termination shall be the date of death or Disability of the Executiveis determined as described in Section 3(a) of this Agreement, as thecase may be.  Notwithstanding theforegoing, with respect to any payments that become payable to the Executive inconnection with his termination of employment with the Company, includingwithout limitation any Severance Payments, Date of Termination means the dateon which the Executive experiences a “separation from service” within themeaning of Section 409A (as defined below).

 

4.                                       Obligations ofthe Company Upon Termination.

 

(a)                                  Without Causeor For Good Reason.  If, duringthe Employment Period, the Company shall terminate the Executive’s employmentwithout Cause or the Executive shall terminate his employment for Good Reason(whether or not in connection with a Change in Control (as defined below)):

 

(i)                                     The Executiveshall be paid in two lump sum payments the amounts set forth in (A) and (B) below(other than vested benefits, which shall be paid as and when due under theterms of the applicable plan or program) and outstanding equity awards shallvest as set forth in (C) below: (A) the Executive’s earned but unpaidBase Salary, accrued but unpaid vacation pay through the Date of Termination,any vested amounts due to the Executive under any plan, program or policy ofthe Company and any Annual Bonus required to be paid to the Executive pursuant toSection 2(b)(ii) above for any fiscal year of the Company that endson or before the Date of Termination, to the extent not previously paid (ifany), plus an amount equal to a pro rata share of the Target Annual Bonusdetermined by multiplying the Target Annual Bonus by a fraction the numeratorof which is the number of days elapsed in the year through the Date ofTermination and the denominator of which is 365 (together, the “**Accrued Obligations**”), (B) an amount (the “**Severance Amount**”) equal to two (2) times the sum of (x) theBase Salary in effect on the Date of Termination (but in no event less than theBase Salary set forth in Section 2(b)(i) above) plus (y) thegreater of (xx) the Target Annual Bonus and (yy) the actual Annual Bonuspaid to the Executive in respect of the last full calendar year immediatelypreceding the Date of Termination, and (C) all outstanding stock options,restricted stock units and other equity awards granted to the Executive underany of the Company’s equity incentive plans (or awards substituted thereforcovering the securities of a successor company) shall become immediately vestedand, as applicable, exercisable in full (the “**VestingAcceleration**”). The Accrued Obligations shall be paid when due underapplicable law and, subject to Section 10(e) below, theSeverance Amount shall be paid on the sixtieth (60th) day after the Date of Termination (or, if not abusiness day, on the first business day following such sixtieth (60th) day).

 

(ii)                                  For a period ofeighteen (18) months following the Termination Date, the Company shall, at theCompany’s sole expense, continue to provide the Executive and the Executive’seligible family members with group health insurance coverage at least equal tothat which would have been provided to them if the Executive’s employment 

 

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had not been terminated,based on the Executive’s applicable elections in effect on the Termination Date(or at the Company’s election, pay the applicable COBRA premium for suchcoverage) (the “**Continuation Benefits**”); provided,however, that if the Executive becomes re-employed with another employerand is eligible to receive group health insurance coverage under anotheremployer’s plans, the Company’s obligations under this Section 4(a)(ii) shallbe reduced to the extent comparable coverage is actually available to theExecutive and the Executive’s eligible family members, and any such eligibilityshall be reported promptly by the Executive to the Company, but in any eventwithin fifteen (15) days after such eligibility begins.  Notwithstanding the foregoing, if during theperiod of Continuation Benefits, any plan pursuant to which such benefits areto be provided ceases to be exempt from the application of Section 409A underTreasury Regulation Section 1.409A-1(a)(5), then an amount equal to eachsuch remaining premium shall thereafter be paid to the Executive as currentlytaxable compensation in substantially equal monthly installments over theremainder of the Continuation Benefits period.

 

(iii)                               Notwithstandinganything herein to the contrary, it shall be a condition to the Executive’sright to receive any of the Severance Amount, the Vesting Acceleration and/orthe Continuation Benefits that the Executive timely execute, deliver to theCompany and not revoke a release of claims in substantially the form attachedhereto as Exhibit A.

 

(b)                                 Death orDisability. If the Executive’s employment is terminated byreason of the Executive’s death or Disability during the Employment Period:

 

(i) The Accrued Obligations shall be paid tothe Executive’s estate or beneficiaries or to the Executive, as applicable, incash within 30 days of the Date of Termination;

 

(ii) 100% of the Executive’s annual BaseSalary, as in effect on the Date of Termination, shall be paid to the Executive’sestate or beneficiaries or to the Executive, as applicable, in cash within 30days of the Date of Termination;

 

(iii) Notwithstanding anything to the contraryin any award agreement, outstanding stock options, restricted stock units andother equity awards granted to the Executive under any of the Company’s equityincentive plans (or awards substituted therefor covering the securities of asuccessor company) shall immediately vest, but only to the extent suchoutstanding awards were scheduled to vest within the twelve (12) month periodimmediately following the Date of Termination; and

 

(iv) For a period of eighteen (18) monthsfollowing the Date of Termination, the Executive and the Executive’s eligiblefamily members shall continue to be provided, at the Company’s sole expense,with group health insurance coverage at least equal to that which would havebeen provided to them if the Executive’s employment had not been terminated (orat the Company’s election, pay the applicable COBRA premium for such coverage);provided, however, that if the Executive becomes re-employed withanother employer and is eligible to receive group health insurance coverageunder another employer’s plans, the Company’s obligations under this Section 4(c)(iv) shallbe reduced to the extent comparable coverage is actually available to theExecutive and the Executive’s eligible family members, and any such coverageshall be reported by the Executive to the Company.

 

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(c)                                  Other Terminations.  If the Executive’s employment with theCompany terminates for any reason other than those described in Sections 4(a) and(b) above, the Company shall pay to the Executive the AccruedObligations in accordance with Section 4(a) above and shallhave no further obligations to the Executive under this Agreement.

 

5.                                       Change inControl.  For purposes of thisAgreement, “**Change in Control**” shall mean theoccurrence of any of the following events:

 

(i)                                     Any transactionor event resulting in the beneficial ownership of voting securities, directlyor indirectly, by any “person” or “group” (as those terms are defined in Sections3(a)(9), 13(d), and 14(d) of the Securities Exchange Actof 1934 (“**Exchange Act**”) and the rules thereunder)having “beneficial ownership “ (as determined pursuant to Rule 13d-3 underthe Exchange Act) of securities entitled to vote generally in the election ofdirectors (“**voting securities**”) of Sunstonethat represent greater than 50% of the combined voting power of Sunstone’s thenoutstanding voting securities (unless the Executive has beneficial ownership ofat least 50% of such voting securities), other than any transaction or eventresulting in the beneficial ownership of securities:

 

(A)                              By a trustee orother fiduciary holding securities under any employee benefit plan (or relatedtrust) sponsored or maintained by Sunstone or any person controlled by Sunstoneor by any employee benefit plan (or related trust) sponsored or maintained by Sunstoneor any person controlled by Sunstone, or

 

(B)                                By Sunstone ora corporation owned, directly or indirectly, by the stockholders of Sunstone insubstantially the same proportions as their ownership of the stock of Sunstone,or

 

(C)                                Pursuant to atransaction described in clause (iii) below that would not be a Change inControl under clause (iii);

 

(ii)                                  Individualswho, as of the Effective Date, constitute the Board (the “**IncumbentBoard**”) cease for any reason to constitute at least a majority ofthe Board; provided, however, that any individual becoming adirector subsequent to the date hereof whose election by Sunstone’sstockholders, or nomination for election by the Board, was approved by a voteof at least a majority of the directors then comprising the Incumbent Boardshall be considered as though such individual were a member of the IncumbentBoard, but excluding, for this purpose, any such individual whose initialassumption of office occurs as a result of an election contest with respect tothe election or removal of directors or other solicitation of proxies orconsents by or on behalf of a person other than the Board;

 

(iii)                               Theconsummation by Sunstone (whether directly involving Sunstone or indirectlyinvolving Sunstone through one or more intermediaries) of (x) a merger,consolidation, reorganization, or business combination or (y) a sale orother disposition of all or substantially all of Sunstone’s assets or (z) theacquisition of assets or stock of another entity, in each case, other than a transaction,

 

(A)                              which resultsin Sunstone’s voting securities outstanding immediately before the transactioncontinuing to represent (either by remaining outstanding or by being convertedinto voting securities of Sunstone or the person that, as a result of thetransaction, controls, directly or indirectly, 

 

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Sunstone or owns, directlyor indirectly, all or substantially all of Sunstone’s assets or otherwisesucceeds to the business of Sunstone (Sunstone or such person, the “**Successor Entity**”)) directly or indirectly, greater than 50%of the combined voting power of the Successor Entity’s outstanding votingsecurities immediately after the transaction, and

 

(B)                                after which noperson or group beneficially owns voting securities representing greater than50% of the combined voting power of the Successor Entity; provided, however,that no person or group shall be treated for purposes of this clause (B) asbeneficially owning greater than 50% of the combined voting power of theSuccessor Entity solely as a result of the voting power held in Sunstone priorto the consummation of the transaction; or

 

(iv)                              The approval bySunstone’s stockholders of a liquidation or dissolution of Sunstone.

 

Forpurposes of clause (i) above, the calculation of voting power shall bemade as if the date of the acquisition were a record date for a vote ofSunstone’s stockholders, and for purposes of clause (iii) above, thecalculation of voting power shall be made as if the date of the consummation ofthe transaction were a record date for a vote of Sunstone’s stockholders.

 

6.                                       Full Settlement.  The Company’s obligation to make the paymentsprovided for in this Agreement and otherwise to perform its obligationshereunder shall not be affected by any set-off, counterclaim, recoupment,defense or other claim, right or action which the Company may have against theExecutive or others.  In no event shallthe Executive be obligated to seek other employment or take any other action byway of mitigation of the amounts payable to the Executive under any of theprovisions of this Agreement and except as expressly provided, such amountsshall not be reduced whether or not the Executive obtains otheremployment.  If any party to thisAgreement institutes any action, suit, counterclaim, appeal, arbitration ormediation for any relief against another party, declaratory or otherwise(collectively, an “**Action**”), toenforce the terms hereof or to declare rights hereunder, then the PrevailingParty in such Action shall be entitled to recover from the other party allcosts and expenses of the Action, including reasonable attorneys’ fees andcosts (at the Prevailing Party’s attorneys’ then-prevailing rates) incurred inbringing and prosecuting or defending such Action and/or enforcing anyjudgment, order, ruling or award (collectively, a “**Decision**”)granted therein, all of which shall be deemed to have accrued on thecommencement of such Action and shall be paid whether or not such Action isprosecuted to a Decision.  Any Decisionentered in such Action shall contain a specific provision providing for therecovery of attorneys’ fees and costs incurred in enforcing such Decision.  A court or arbitrator shall fix the amount ofreasonable attorneys’ fees and costs upon the request of either party.  Any judgment or order entered in any finaljudgment shall contain a specific provision providing for the recovery of allcosts and expenses of suit, including reasonable attorneys’ fees and expertfees and costs incurred in enforcing, perfecting and executing suchjudgment.  For the purposes of thisparagraph, costs shall include, without limitation, in addition to costsincurred in prosecution or defense of the underlying action, reasonableattorneys’ fees, costs, expenses and expert fees and costs incurred in thefollowing:  (a) post-judgmentmotions and collection actions; (b) contempt proceedings; (c) garnishment,levy, debtor and third party examinations; (d) discovery; (e) bankruptcylitigation; and (f) appeals of any order or judgment.  “**Prevailing Party**”within the meaning of this Section includes, without limitation, a partywho agrees to dismiss an Action (excluding an Action instituted incontravention of the requirements of Section 10(b) below) inconsideration for the other party’s payment of the amounts allegedly due orperformance of the covenants allegedly breached, or obtains substantially therelief sought by such party.  If theExecutive is the Prevailing Party, the 

 

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Company shall provide payment of such costs andexpenses to the Executive by December 31 of the year in which the right topayment is established.

 

7.                                       Successors.

 

(a)                                  This Agreementis personal to the Executive and without the prior written consent of theCompany shall not be assignable by the Executive otherwise than by will or thelaws of descent and distribution.  ThisAgreement shall inure to the benefit of and be enforceable by the Executive’slegal representatives.

 

(b)                                 This Agreementshall inure to the benefit of and be binding upon the Company and itssuccessors and assigns.

 

(c)                                  The Companywill require any successor (whether direct or indirect, by purchase merger,consolidation or otherwise) to all or substantially all of the business and/orassets of the Company to assume and agree to perform this Agreement in the samemanner and to the same extent that the Company would be required to perform itif no such succession had taken place. As used in this Agreement, “Company” shall mean the Company ashereinbefore defined and any successor to its business and/or assets asaforesaid which assumes and agrees to perform this Agreement by operation oflaw, or otherwise.

 

8.                                       Payment ofFinancial Obligations.  Thepayment or provision to the Executive by the Company of any remuneration,benefits or other financial obligations pursuant to this Agreement shall beallocated to the Operating Partnership, Sunstone, Sunstone Hotel TRS Lessee, Inc.and, if applicable, any of their respective subsidiaries and/or affiliates inaccordance with any employee sharing and expense allocation agreement, by andbetween Sunstone and the Operating Partnership, as in effect from time to time.

 

9.                                       IndemnificationAgreement.  The Companyand the Executive agree to execute, concurrently herewith, the IndemnificationAgreement attached hereto as Exhibit B (the “**IndemnificationAgreement**).  The partiesacknowledge and agree that the Indemnification Agreement shall supersede in itsentirety and replace the Indemnification Agreement previously entered intobetween the Executive and the Company, dated as of December, 2006.

 

10.                                 Miscellaneous.

 

(a)                                  Governing Law.  This Agreement shall be governed by andconstrued in accordance with the laws of the State of California, without referenceto principles of conflict of laws.  Thecaptions of this Agreement are not part of the provisions hereof and shall haveno force or effect.  This Agreement maynot be amended or modified otherwise than by a written agreement executed bythe parties hereto or their respective successors and legal representatives.

 

(b)                                 Arbitration.  To the fullest extent allowed by law, anycontroversy, claim or dispute between the Executive and the Company (and/or anyof its owners, directors, officers, employees, affiliates, or agents) relatingto or arising out of the Executive’s employment or the cessation of thatemployment will be submitted to final and binding arbitration in the county inwhich the Executive worked for determination by one arbitrator with hotel industryexperience in accordance with the American Arbitration Association’s (“**AAA**”) National Rules for the Resolution of EmploymentDisputes, as the exclusive remedy for such controversy, claim or dispute.  In any such arbitration, the parties mayconduct discovery in accordance with the applicable rules of thearbitration forum, except that the arbitrator shall have the authority to 

 

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order and permit discovery as the arbitrator maydeem necessary and appropriate in accordance with applicable state or federaldiscovery statutes.  The arbitrator shallissue a reasoned, written decision, and shall have full authority to award allremedies which would be available in court. The parties shall share the filing fees required for the arbitration,provided that the Executive shall not be required to pay an amount in excess ofthe lesser of the filing fees required by a federal or state court withjurisdiction.  The Company shall pay thearbitrator’s fees and any AAA administrative expenses.  Any judgment upon the award rendered by thearbitrator(s) may be entered in any court having jurisdictionthereof.  Possible disputes covered bythe above include (but are not limited to) unpaid wages, breach of contract,torts, violation of public policy, discrimination, harassment, or any otheremployment-related claims under laws including but not limited to, Title VII ofthe Civil Rights Act of 1964, the Americans With Disabilities Act, the AgeDiscrimination in Employment Act, the California Fair Employment and HousingAct, the California Labor Code, and any other statutes or laws relating to anemployee’s relationship with his/her employer, regardless of whether suchdispute is initiated by the Executive or the Company.  Thus, this bilateral arbitration agreementapplies to any and all claims that the Company may have against the Executive,including but not limited to, claims for misappropriation of Company property,disclosure of proprietary information or trade secrets, interference withcontract, trade libel, gross negligence, or any other claim for allegedwrongful conduct or breach of the duty of loyalty by the Executive.  However, notwithstanding anything to thecontrary contained herein, Company and the Executive shall have theirrespective rights to seek and obtain injunctive relief with respect to anycontroversy, claim or dispute to the extent permitted by law.  Claims for workers’ compensation benefits andunemployment insurance (or any other claims where mandatory arbitration isprohibited by law) are not covered by this arbitration agreement, and suchclaims may be presented by either the Executive or the Company to theappropriate court or government agency. BY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH THE EXECUTIVEAND THE COMPANY GIVE UP ALL RIGHTS TO TRIAL BY JURY.  This arbitration agreement is to be construedas broadly as is permissible under applicable law.

 

(c)                                  Notices.  All notices and other communicationshereunder shall be in writing and shall be given by hand delivery to the otherparty or by registered or certified mail, return receipt requested, postageprepaid, addressed as follows:

 

Ifto the Executive:  at theExecutive’s most recent address on the records of the Company.

 

Ifto Sunstone or the Operating Partnership:

 

SunstoneHotel Investors, Inc.903 Calle Amanecer, Suite 100San Clemente, CA 92673Attn:  Corporate Secretary

 

witha copy to:

 

Latham &Watkins335 South Grand Ave.Los Angeles, California 90071Attn:  Steven Stokdyk, Esq.

 

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orto such other address as either party shall have furnished to the other inwriting in accordance herewith.  Noticeand communications shall be effective when actually received by the addressee.

 

(d)           Sarbanes-Oxley Act of 2002.  Notwithstanding anything herein to thecontrary, if the Company determines, in its good faith judgment, that anytransfer or deemed transfer of funds hereunder is likely to be construed as apersonal loan prohibited by Section 13(k) of the Exchange Act and therules and regulations promulgated thereunder, then such transfer or deemedtransfer shall not be made to the extent necessary or appropriate so as not toviolate the Exchange Act and the rules and regulations promulgatedthereunder.

 

(e)           Section 409A. The parties agree that this Agreement is intended to comply with therequirements of Section 409A of the Code and the regulations promulgatedthereunder (“**Section 409A**”) or anexemption from Section 409A.  In theevent that after execution of this Agreement, the Company or the Executivedetermines that any compensation or benefits provided hereunder may not beexempt from or compliant with Section 409A, such party shall promptlynotify the other party of the basis for its determination.  The parties agree to renegotiate in good faiththe terms of this Agreement if it is mutually determined that this Agreement asstructured would have adverse tax consequences to the Executive.  For purposes of this Agreement, each amountto be paid or benefit to be provided hereunder shall be construed as a separateidentified payment for purposes of Section 409A.  With respect to any reimbursement of expensesof, or any provision of in-kind benefits to, the Executive, as specified underthis Agreement, such reimbursement of expenses or provision of in-kind benefitsshall be subject to the following conditions: (i) the expenses eligible for reimbursement or the amount ofin-kind benefits provided in one taxable year shall not affect the expenseseligible for reimbursement or the amount of in-kind benefits provided in anyother taxable year, except for any medical reimbursement arrangement providingfor the reimbursement of expenses referred to in Section 105(b) ofthe Code; (ii) the reimbursement of an eligible expense shall be made nolater than the end of the year after the year in which such expense wasincurred; and (iii) the right to reimbursement or in-kind benefits shallnot be subject to liquidation or exchange for another benefit.  Notwithstanding anything to the contrary inthis Agreement,  no compensation orbenefits payable in connection with a “separation from service” (within themeaning of Section 409A), including without limitation any Severance  Payments, shall be paid to the Executiveduring the 6-month period following his “separation from service” to the extentthat the Company reasonably determines that the Executive is a “specifiedemployee” at the time of such “separation from service” and that paying suchamounts at the time or times indicated in this Agreement would be a prohibiteddistribution under Internal Revenue Code Section 409A(a)(2)(b)(i).  If the payment of any such amounts is delayedas a result of the previous sentence, then on the first business day followingthe end of such 6-month period (or such earlier date upon which such amount canbe paid under Section 409A without being subject to such additional taxes,including as a result of the Executive’s death), the Company shall pay to theExecutive a lump-sum amount equal to the cumulative amount that would haveotherwise been payable to the Executive during such 6-month period, withoutinterest thereon.

 

(f)            Severability. The invalidity or unenforceability of any provision of this Agreementshall not affect the validity or enforceability of any other provision of thisAgreement.  If any provision or termhereof is deemed to have exceeded applicable legal authority or shall be inconflict with applicable legal limitations, such provision shall be reformedand rewritten as necessary to achieve consistency with such applicable law.

 

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(g)           Withholding. The Company may withhold from any amounts payable under this Agreementsuch federal, state, local or foreign taxes as shall be required to be withheldpursuant to any applicable law or regulation.

 

(h)           No Waiver.  The Executive’s or the Company’s failure toinsist upon strict compliance with any provision of this Agreement or thefailure to assert any right the Executive or the Company may have hereundershall not be deemed to be a waiver of such provision or right or any otherprovision or right of this Agreement.

 

(i)            Employment At-Will.  The Executive acknowledges that hisemployment with the Company is “at-will” for all purposes and, subject to thetermination and severance obligations contained in Sections 3 and 4 above, theExecutive hereby agrees that the Company may dismiss him and terminate hisemployment with the Company at any time, with or without Cause.  Inclusion under any benefit plan orcompensation arrangement will not give the Executive any right or claim to anybenefit hereunder except to the extent such right has become fixed under theexpress terms of this Agreement.

 

(j)            EntireAgreement.  As of the Effective Date,this Agreement, together with the Indemnification Agreement, constitutes thefinal, complete and exclusive agreement between the Executive and the Companywith respect to the subject matter hereof and replaces and supersedes any andall other agreements, offers or promises, whether oral or written, made to theExecutive by the Company, including without limitation, the Change in ControlAgreement by and among Sunstone Hotel Investors, Inc. and the Executive,dated February 15, 2007.

 

(k)           Representationsand Warranties.  The Executiverepresents and warrants to the Company that (i) this Agreement is validand binding upon and enforceable against him in accordance with its terms, (ii) theExecutive is not bound by or subject to any contractual or other obligationthat would be violated by his execution or performance of this Agreement,including, but not limited to, any non-competition agreement presently ineffect, and (iii) the Executive is not subject to any pending or, to theExecutive’s knowledge, threatened claim, action, judgment, order, or investigationthat could adversely affect his ability to perform his obligations under thisAgreement or the business reputation of the Company.  The Executive has not entered into, andagrees that he will not enter into, any agreement either written or oral inconflict herewith.

 

(l)            Consultationwith Counsel.  The Executiveacknowledges that he has had a full and complete opportunity to consult withcounsel and other advisors of his own choosing concerning the terms,enforceability and implications of this Agreement, and that the Company has notmade any representations or warranties to the Executive concerning the terms,enforceability or implications of this Agreement other than as reflected inthis Agreement.

 

(m)          Counterparts.  This Agreement may be executed simultaneouslyin two counterparts, each of which shall be deemed an original but whichtogether shall constitute one and the same instrument.

 

***[signatures follow next page]***

 

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INWITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and,pursuant to the authorization from the Board, the Company has caused thesepresents to be executed in its name on its behalf, all as of the day and yearfirst above written.

 

 
| **EXECUTIVE****:**   | ** ** | **SUNSTONE  HOTEL INVESTORS, INC.**,  

a  Maryland corporation |
|----------------------|------------|---------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                | ** ** |
| /s/ Kenneth E. Cruse |       | By:                                                                       | /s/  Arthur L. Buser, Jr. |
| Kenneth E. Cruse     |       |                                                                      | Name: | Arthur  L. Buser, Jr. |
|                 |       |                                                                      | Its: | President  and CEO |
|                 |       |                                                                      |   |
| ** **           | ** ** | **SUNSTONE  HOTEL PARTNERSHIP, LLC**,                                     |
| ** **           | ** ** | a  Delaware limited liability company                                     |
|                 |       |                                                                      |   |
|                 |       | By:                                                                       | **Sunstone  Hotel Investors, Inc.** |
|                 |       |                                                                      | Its:  Managing Member |
|                 |       |                                                                      |   |   |
|                 |       |                                                                      | By: | /s/  Arthur L. Buser, Jr. |
|                 |       |                                                                      |   | Name: | Arthur  L. Buser, Jr. |
|                 |       |                                                                      |   | Its: | President  and CEO |

 

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**EXHIBIT A**

 

**TO EMPLOYMENT AGREEMENT**

 

**GENERAL RELEASE**

 

Fora valuable consideration, the receipt and adequacy of which are herebyacknowledged, the undersigned does hereby release and forever discharge the “**Releasees**” hereunder, consisting of Sunstone Hotel Investors, Inc.,a Maryland corporation, Sunstone Operating Partnership, LLC, a Delaware limitedliability company and each of their partners, subsidiaries, associates,affiliates, successors, heirs, assigns, agents, directors, officers, employees,representatives, lawyers, insurers, and all persons acting by, through, underor in concert with them, or any of them, of and from any and all manner ofaction or actions, cause or causes of action, in law or in equity, suits,debts, liens, contracts, agreements, promises, liability, claims, demands,damages, losses, costs, attorneys’ fees or expenses, of any nature whatsoever,known or unknown, fixed or contingent (hereinafter called “**Claims**”),which the undersigned now has or may have against the Releasees, or any ofthem, by reason of any matter, cause, or thing whatsoever from the beginning oftime to the date hereof.  The Claimsreleased herein include, without limiting the generality of the foregoing, anyClaims in any way arising out of, based upon, or related to the employment ortermination of employment of the undersigned by the Releasees, or any of them;any alleged breach of any express or implied contract of employment; anyalleged torts or other alleged legal restrictions on Releasee’s right toterminate the employment of the undersigned; and any alleged violation of anyfederal, state or local statute or ordinance including, without limitation,Title VII of the Civil Rights Act of 1964, the Age Discrimination In EmploymentAct, the Americans With Disabilities Act, and the California Fair Employmentand Housing Act.

 

THEUNDERSIGNED ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY LEGAL COUNSEL AND ISFAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542*,*WHICH PROVIDES AS FOLLOWS:

 

“AGENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW ORSUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE,WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HERSETTLEMENT WITH THE DEBTOR.”

 

THEUNDERSIGNED, BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANYRIGHTS HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES ORCOMMON LAW PRINCIPLES OF SIMILAR EFFECT.

 

INACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, THEUNDERSIGNED IS HEREBY ADVISED AS FOLLOWS:

 

(A)          HEHAS THE RIGHT TO CONSULT WITH AN ATTORNEY BEFORE SIGNING THIS RELEASE;

 

(B)           HEHAS TWENTY-ONE (21) DAYS TO CONSIDER THIS RELEASE BEFORE SIGNING IT; AND

 

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(C)           HEHAS SEVEN (7) DAYS AFTER SIGNING THIS RELEASE TO REVOKE THIS RELEASE, ANDTHIS RELEASE WILL BECOME EFFECTIVE UPON THE EXPIRATION OF THAT REVOCATIONPERIOD.

 

Theundersigned represents and warrants that there has been no assignment or othertransfer of any interest in any Claim which he may have against Releasees, orany of them, and the undersigned agrees to indemnify and hold Releasees, andeach of them, harmless from any liability, Claims, demands, damages, costs,expenses and attorneys’ fees incurred by Releasees, or any of them, as theresult of any such assignment or transfer or any rights or Claims under anysuch assignment or transfer.  It is theintention of the parties that this indemnity does not require payment as acondition precedent to recovery by the Releasees against the undersigned underthis indemnity.

 

Theundersigned agrees that if he hereafter commences any suit arising out of,based upon, or relating to any of the Claims released hereunder or in anymanner asserts against Releasees, or any of them, any of the Claims releasedhereunder, then the undersigned agrees to pay to Releasees, and each of them,in addition to any other damages caused to Releasees thereby, all attorneys’fees incurred by Releasees in defending or otherwise responding to said suit orClaim.

 

Theundersigned further understands and agrees that neither the payment of any sumof money nor the execution of this Release shall constitute or be construed asan admission of any liability whatsoever by the Releasees, or any of them, whohave consistently taken the position that they have no liability whatsoever tothe undersigned.

 

INWITNESS WHEREOF, the undersigned has executed this Release this 4th day of August, 2010.

 

 
|       |       | **/s/  Kenneth E. Cruse** |
|------------|------------|---------------------------|
| ** ** | ** ** | **Kenneth  E. Cruse**     |

 

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** **

**EXHIBIT B**

 

**INDEMNIFICATION AGREEMENT**

 

THISINDEMNIFICATION AGREEMENT is made and entered into this 4th day of August, 2010 (the “Agreement”),by and between Sunstone Hotel Investors, Inc., a Maryland corporation (the“Company”), and Kenneth E. Cruse (“Indemnitee”).

 

WHEREAS,at the request of the Company, Indemnitee currently serves as an officerof the Company and may, therefore, be subjected to claims, suits or proceedingsarising as a result of his service; and

 

WHEREAS,as an inducement to Indemnitee to continue to serve as an officer, the Companyhas agreed to indemnify and to advance expenses and costs incurred byIndemnitee in connection with any such claims, suits or proceedings, to themaximum extent permitted by law; and

 

WHEREAS,the parties by this Agreement desire to set forth their agreement regardingindemnification and advance of expenses;

 

NOW,THEREFORE, in consideration of the premises and the covenants contained herein,the Company and Indemnitee do hereby covenant and agree as follows:

 

Section 1.Definitions. For purposes of this Agreement:

 

(a)                                  “Change in Control”means a Change in Control as defined in the Employment Agreement attached tothis Agreement.

 

(b)                                 “Corporate Status”means the status of a person who is or was a director, trustee, officer,employee or agent of the Company or of any other corporation, partnership,joint venture, trust, employee benefit plan or other enterprise (each, an “Enterprise”)for which such person is or was serving at the request of the Company.

 

(c)                                  “Disinterested Director”means a director of the Company who is not and was not a party to theProceeding in respect of which indemnification or advance of Expenses is soughtby Indemnitee.

 

(d)                                 “Effective Date”means the date set forth in the first paragraph of this Agreement.

 

(e)                                  “Expenses” shallinclude all reasonable and out-of-pocket attorneys’ fees, retainers, courtcosts, transcript costs, fees of experts, witness fees, travel expenses,duplicating costs, printing and binding costs, telephone charges, postage,delivery service fees, and all other disbursements or expenses of the typescustomarily incurred in connection with prosecuting, defending, preparing toprosecute or defend, investigating, or being or preparing to be a witness in a  Proceeding. Expenses shall also includeExpenses incurred in connection with any appeal resulting from any Proceeding,including without limitation the premiums, security for, and other costsrelating to any cost bond, supersede as bond or other appeal bond or itsequivalent.

 

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(f)                                    “Independent Counsel”means a law firm, or a member of a law firm, that is experienced in matters ofcorporation law and neither is, nor in the past five years has been, retainedto represent: (i) the Company or Indemnitee in any matter material toeither such party (other than with respect to matters concerning Indemniteeunder this Agreement or of other indemnitees under similar agreements), or(ii) any other party to or witness in the Proceeding giving rise to aclaim for indemnification hereunder. Notwithstanding the foregoing, the term “IndependentCounsel” shall not include any person who, under the applicable standards ofprofessional conduct then prevailing, would have a conflict of interest inrepresenting either the Company or Indemnitee in an action to determineIndemnitee’s rights under this Agreement. If a Change of Control has notoccurred, Independent Counsel shall be selected by the Board of Directors,with the approval of Indemnitee, which approval will not be unreasonablywithheld. If a Change of Control has occurred, Independent Counsel shallbe selected by Indemnitee.

 

(g)                                 “Proceeding” includesany threatened, pending or completed action, suit, arbitration, alternatedispute resolution mechanism, investigation, administrative hearing or anyother proceeding, whether civil, criminal, administrative or investigative(including on appeal), except one pending or completed on or before theEffective Date, unless otherwise specifically agreed in writing by the Companyand Indemnitee.

 

(h)                                 Reference to “fines” shallinclude any excise tax assessed with respect to any employee benefit plan(other than excise taxes imposed under Internal Revenue Code Section 4999);references to “serving at the request of the Company” shall include any serviceas an officer, director, committee member or official which imposes duties on,or involves services by, such officer, with respect to an employee benefitplan, its participants or beneficiaries; and action taken or omitted to betaken by Indemnitee with respect to an employer benefit plan in the performanceof Indemnitee’s duties for a purpose reasonably believed to be in the bestinterests of the participants and beneficiaries of an employee benefit planshall be deemed to be a purpose that is” “not opposed to the best interests ofthe Company” as referred to in this Agreement.

 

Section 2.Services by Indemnitee. Indemnitee will serve as an officer of theCompany. However, this Agreement shall not impose any obligation on Indemniteeor the Company to continue Indemnitee’s service to the Company beyond anyperiod otherwise required by law or by other agreements or commitments of theparties, if any, provided that this Agreement shall continue in force aftersuch time as Indemnitee has ceased to serve as an officer of the Company andIndemnitee will retain all rights provided under this Agreement after suchtime.

 

Section 3.Indemnification - General. The Company shall indemnify, and advanceExpenses to, Indemnitee (a) as provided in this Agreement and(b) otherwise to the maximum extent permitted by Maryland law in effect onthe date hereof and as amended from time to time; provided, however, that nochange in Maryland law shall have the effect of reducing the benefits availableto Indemnitee hereunder based on Maryland law as in effect on the date hereof.The rights of Indemnitee provided in this Section 3 shall include, withoutlimitation, the rights set forth in the other sections of this Agreement,including any additional indemnification permitted by Section 2-418 of theMaryland General Corporation Law (“MGCL”), the charter or bylaws of theCompany, a resolution of stockholders or directors, another agreement orotherwise.

 

Section 4.Proceedings Other Than Proceedings by or in the Right of the Company.Indemnitee shall be entitled to the rights of indemnification provided in thisSection 4 if, by reason of his Corporate Status, he is, or is threatenedto be, made a party to or a witness in any threatened, 

 

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pending,or completed Proceeding, other than a Proceeding by or in the right of theCompany. Pursuant to this Section 4, Indemnitee shall be indemnifiedagainst all judgments, penalties, fines and amounts paid in settlement and allExpenses actually and reasonably incurred by him or on his behalf in connectionwith a Proceeding by reason of his Corporate Status unless it is establishedthat (i) the act or omission of Indemnitee was material to the mattergiving rise to the Proceeding and (a) was committed in bad faith or(b) was the result of active and deliberate dishonesty,(ii) Indemnitee actually received an improper personal benefit in money,property or services, or (iii) in the case of any criminal Proceeding, Indemniteehad reasonable cause to believe that his conduct was unlawful.

 

Section 5.Proceedings by or in the Right of the Company. Indemnitee shall beentitled to the rights of indemnification provided in this Section 5 if,by reason of his Corporate Status, he is, or is threatened to be, made a partyto or a witness in any threatened, pending or completed Proceeding brought byor in the right of the Company to procure a judgment in its favor. Pursuant tothis Section 5, Indemnitee shall be indemnified against all amountspaid in settlement and all Expenses actually and reasonably incurred by him oron his behalf in connection with such Proceeding unless it is established that(i) the act or omission of Indemnitee was material to the matter givingrise to such a Proceeding and (a) was committed in bad faith or(b) was the result of active and deliberate dishonesty or(ii) Indemnitee actually received an improper personal benefit in money,property or services.

 

Section 6.Court-Ordered Indemnification. Notwithstanding any other provision ofthis Agreement, a court of appropriate jurisdiction, upon application ofIndemnitee and such notice as the court shall require, may orderindemnification in the following circumstances:

 

(a)                                  if it determines Indemniteeis entitled to reimbursement under Section 2-418(d)(1) of the MGCL,the court shall order indemnification, in which case Indemnitee shall beentitled to recover the expenses of securing such reimbursement; or

 

(b)                                 if it determines thatIndemnitee is fairly and reasonably entitled to indemnification in view of allthe relevant circumstances, whether or not Indemnitee (i) has met thestandards of conduct set forth in Section 2-418(b) of the MGCL or(ii) has been adjudged liable for receipt of an improper personal benefitunder Section 2-418(c) of the MGCL, the court may order suchindemnification as the court shall deem proper. However, indemnification withrespect to any Proceeding by or in the right of the Company or in whichliability shall have been adjudged in the circumstances described inSection 2-418(c) of the MGCL shall be limited to Expenses actuallyand reasonably incurred by him or on his behalf in connection with aProceeding.

 

Section 7.Indemnification for Expenses of a Party Who is Wholly or Partly Successful.Notwithstanding any other provision of this Agreement, and without limiting anysuch provision, to the extent that Indemnitee is, by reason of his CorporateStatus, made a party to and is successful, on the merits or otherwise, in thedefense of any Proceeding, he shall be indemnified for all Expenses actuallyand reasonably incurred by him or on his behalf in connection therewith. IfIndemnitee is not wholly successful in such Proceeding but is successful, onthe merits or otherwise, as to one or more but less than all claims, issues ormatters in such Proceeding, the Company shall indemnify Indemnitee under thisSection 7 for all Expenses actually and reasonably incurred by him or onhis behalf in connection with each successfully resolved claim, issue ormatter, allocated on a reasonable and proportionate basis. For purposes of thisSection and without limitation, the termination of any claim, issue ormatter 

 

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insuch a Proceeding by dismissal, with or without prejudice, shall be deemed tobe a successful result as to such claim, issue or matter.

 

Section 8.Advance of Expenses. Notwithstanding any provision herein to thecontrary, the Company shall advance all Expenses actually and reasonablyincurred by or on behalf of Indemnitee in connection with any Proceeding (otherthan a Proceeding brought to enforce indemnification under this Agreement,applicable law, the Charter or Bylaws of the Company, any agreement or aresolution of the stockholders entitled to vote generally in the election ofdirectors or of the Board of Directors) to which Indemnitee is, or isthreatened to be, made a party or a witness, within ten days after the receiptby the Company of a statement or statements from Indemnitee requesting suchadvance or advances from time to time, whether prior to or after finaldisposition of such Proceeding. Such statement or statements shall reasonablyevidence the Expenses incurred by Indemnitee and shall include or be precededor accompanied by a written affirmation by Indemnitee of Indemnitee’s goodfaith belief that the standard of conduct necessary for indemnification by theCompany as authorized by law and by this Agreement has been met and a writtenundertaking by or on behalf of Indemnitee, in substantially the form attachedhereto as Exhibit B-1 or in such form as may be required underapplicable law as in effect at the time of the execution thereof, to reimbursethe portion of any Expenses advanced to Indemnitee relating to claims, issuesor matters in the Proceeding as to which it shall ultimately be establishedthat the standard of conduct has not been met. To the extent that Expensesadvanced to Indemnitee do not relate to a specific claim, issue or matter inthe Proceeding, such Expenses shall be allocated on a reasonable and  proportionate basis. The undertaking requiredby this Section 8 shall be an unlimited general obligation by or on behalfof Indemnitee and shall be accepted without reference to Indemnitee’s financialability to repay such advanced Expenses and without any requirement to postsecurity therefor. Advances shall be unsecured and interest free.

 

Section 9.Procedure for Determination of Entitlement to Indemnification.

 

(a)                                  To obtain indemnificationunder this Agreement, Indemnitee shall submit to the Company a writtenrequest, including therein or therewith such documentation and information asis reasonably available to Indemnitee and is reasonably necessary to determinewhether and to what extent Indemnitee is entitled to indemnification. Theomission to notify the Company will not relieve the Company from any liabilitythat it may have to Indemnitee other than under this Agreement. The Secretaryof the Company shall, promptly upon receipt of such a request forindemnification, advise the Board of Directors in writing that Indemnitee hasrequested indemnification.

 

(b)                                 Upon written request byIndemnitee for indemnification pursuant to the first sentence of Section 9(a) hereof,a determination, if required by applicable law, with respect to Indemnitee’sentitlement thereto shall promptly be made in the specific case: (i) if aChange in Control shall have occurred, by Independent Counsel in a writtenopinion to the Board of Directors, a copy of which shall be delivered toIndemnitee; or (ii) if a Change of Control shall not have occurred,(A) by the Board of Directors (or a duly authorized committee thereof) bya majority vote of a quorum consisting of Disinterested Directors (as hereindefined), or (B) if a quorum of the Board of Directors consisting ofDisinterested Directors is not obtainable or, even if obtainable, such quorumof Disinterested Directors so directs, by Independent Counsel in a writtenopinion to the Board of Directors, a copy of which shall be delivered toIndemnitee, or (C) if so directed by a majority of the members of theBoard of Directors, by the stockholders of the Company. If it is so determinedthat Indemnitee is entitled to indemnification, payment to 

 

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Indemniteeshall be made within ten days after such determination. Indemnitee shallcooperate with the person, persons or entity making such determination withrespect to Indemnitee’s entitlement to indemnification, including providing tosuch person, persons or entity upon reasonable advance request anydocumentation or information which is not privileged or otherwise protectedfrom disclosure and which is reasonably available to Indemnitee and reasonablynecessary to such determination in the discretion of the Board of Directors orIndependent Counsel if retained pursuant to clause (ii)(B) of thisSection 9. Any Expenses actually and reasonably incurred by Indemnitee inso cooperating with the person, persons or entity making such determinationshall be borne by the Company (irrespective of the determination as toIndemnitee’s entitlement to indemnification) and the Company shall indemnifyand hold Indemnitee harmless therefrom.

 

Section 10.Presumptions and Effect of Certain Proceedings.

 

(a)                                  In making a determinationwith respect to entitlement to indemnification hereunder, the person or personsor entity making such determination shall presume that Indemnitee is entitledto indemnification under this Agreement if Indemnitee has submitted a requestfor indemnification in accordance with Section 9(a) of thisAgreement, and the Company shall have the burden of proof to overcome thatpresumption in connection with the making of any determination contrary to thatpresumption. Neither the failure of the Company (including by its directors orindependent legal counsel) to have made a determination prior to thecommencement of any action pursuant to this Agreement that indemnification isproper in the circumstances because Indemnitee has met the applicable standardof conduct, nor an actual determination by the Company (including by itsdirectors or independent legal counsel) that Indemnitee has not met suchapplicable standard of conduct, shall be a defense to the action or create apresumption that Indemnitee has not met the applicable standard of conduct.

 

(b)                                 The termination of anyProceeding by judgment, order, settlement, conviction, a plea of nolocontendereor its equivalent, or an entry of an order of probation prior to judgment, doesnot create a presumption that Indemnitee did not meet the requisite standard ofconduct described herein for indemnification.

 

(c)                                  Unless Indemnitee has reasonto believe otherwise, for purposes of any determination of good faith, Indemniteeshall be deemed to have acted in good faith if Indemnitee’s action is based onthe records or books of account of the Enterprise, including financialstatements, or on information supplied to Indemnitee by the officers of theEnterprise in the course of their duties, or on the advice of legal counsel forthe Enterprise or on information or records given or reports made to theEnterprise by an independent certified public accountant or by an appraiser orother expert selected with reasonable care by the Enterprise. The provisions ofthis Section 10(d) shall not be deemed to be exclusive or to limit inany way the other circumstances in which the Indemnitee may be deemed to havemet the applicable standard of conduct set forth in this Agreement.

 

(d)                                 The knowledge and/oractions, or failure to act, of any director, officer, agent or employee of theEnterprise, excluding the Indemnitee, shall not be imputed to Indemnitee forpurposes of determining the right to indemnification under this Agreement.

 

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Section 11.Remedies of Indemnitee.

 

(a)                                  If (i) a determinationis made pursuant to Section 9 of this Agreement that Indemnitee is notentitled to indemnification under this Agreement, (ii) advance of Expensesis not timely made pursuant to Section 8 of this Agreement, (iii) nodetermination of entitlement to indemnification shall have been made pursuantto Section 9(b) of this Agreement within 30 days after receipt by theCompany of the request for indemnification, (iv) payment ofindemnification is not made pursuant to Section 7 of this Agreement withinten days after receipt by the Company of a written request therefor, or(v) payment of indemnification is not made within ten days after adetermination has been made that Indemnitee is entitled to indemnification, Indemniteeshall be entitled to an adjudication in an appropriate court located in theState of Maryland, or in any other court of competent jurisdiction, of hisentitlement to such indemnification or advance of Expenses. Alternatively, Indemnitee,at his option, may seek an award in arbitration to be conducted by a singlearbitrator pursuant to the commercial Arbitration Rules of the AmericanArbitration Association. Indemnitee shall commence such proceeding seeking anadjudication or an award in arbitration within 180 days following the date onwhich Indemnitee first has the right to commence such proceeding pursuant tothis Section 11(a); provided, however, that the foregoing clause shall notapply to a proceeding brought by Indemnitee to enforce his rights underSection 7 of this Agreement.

 

(b)                                 In any judicial proceedingor arbitration commenced pursuant to this Section 11 the Company shallhave the burden of proving that Indemnitee is not entitled to indemnificationor advance of Expenses, as the case may be.

 

(c)                                  If a determination shallhave been made pursuant to Section 9(b) of this Agreement thatIndemnitee is entitled to indemnification, the Company shall be bound by suchdetermination in any judicial proceeding or arbitration commenced pursuant tothis Section 11, absent a misstatement by Indemnitee of a material fact,or an omission of a material fact necessary to make Indemnitee’s statement notmaterially misleading, in connection with the request for indemnification.

 

(d)                                 In the event thatIndemnitee, pursuant to this Section 11, seeks a judicial adjudication ofor an award in arbitration to enforce his rights under, or to recover damagesfor breach of, this Agreement, Indemnitee shall be entitled to recoverfrom the Company, and shall be indemnified by the Company for, any and allExpenses actually and reasonably incurred by him in such judicial adjudicationor arbitration. If it shall be determined in such judicial adjudication orarbitration that Indemnitee is entitled to receive part but not all of theindemnification or advance of Expenses sought, the Expenses incurred byIndemnitee in connection with such judicial adjudication or arbitration shallbe appropriately prorated.

 

Section 12.Defense of the Underlying Proceeding.

 

(a)                                  Indemnitee shall notify theCompany promptly upon being served with or receiving any summons, citation,subpoena, complaint, indictment, information, notice, request or other documentrelating to any Proceeding which may result in the right to indemnification orthe advance of Expenses hereunder; provided, however, that the failure to giveany such notice shall not disqualify Indemnitee from the right, or otherwiseaffect in any manner any right of Indemnitee, to indemnification or the advanceof 

 

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Expensesunder this Agreement unless the  Company’sability to defend in such Proceeding or to obtain proceeds under any insurancepolicy is materially and adversely prejudiced thereby, and then only to theextent the Company is thereby actually so prejudiced.

 

(b)                                 Subject to the provisions ofthe last sentence of this Section 12(b) and of Section 12(c) below,the Company shall have the right to defend Indemnitee in any Proceeding whichmay give rise to indemnification hereunder; provided, however, that the Companyshall notify Indemnitee of any such decision to defend within 15 calendar daysfollowing receipt of notice of any such Proceeding under Section 12(a) above.The Company shall not, without the prior written consent of Indemnitee, whichshall not be unreasonably withheld or delayed, consent to the entry of anyjudgment against Indemnitee or enter into any settlement or compromise which(i) includes an admission of fault of Indemnitee or (ii) does notinclude, as an unconditional term thereof, the full release of Indemnitee fromall liability in respect of such Proceeding, which release shall be in form andsubstance reasonably satisfactory to Indemnitee. This Section 12(b) shallnot apply to a Proceeding brought by Indemnitee under Section 11 above orSection 18 below.

 

(c)                                  Notwithstanding theprovisions of Section 12(b) above, if in a Proceeding to whichIndemnitee is a party by reason of Indemnitee’s Corporate Status,(i) Indemnitee reasonably concludes, based upon an opinion of counsel toIndemnitee, that he may have separate defenses or counterclaims to assert withrespect to any issue which may not be consistent with other defendants in suchProceeding, (ii) Indemnitee reasonably concludes, based upon an opinion ofcounsel to Indemnitee, that an actual or apparent conflict of interest orpotential conflict of interest exists between Indemnitee and the Company, or(iii) if the Company fails to assume the defense of such Proceeding in atimely manner, Indemnitee shall be entitled to be represented by separatelegal counsel of Indemnitee’s choice, at the expense of the Company. Inaddition, if the Company fails to comply with any of its obligations under thisAgreement or in the event that the Company or any other person takes any actionto declare this Agreement void or unenforceable, or institutes any Proceedingto deny or to recover from Indemnitee the benefits intended to be provided toIndemnitee hereunder, Indemnitee shall have the right to retain counsel ofIndemnitee’s choice, at the expense of the Company (subject toSection 11(d)), to represent Indemnitee in connection with any suchmatter.

 

Section 13.Non-Exclusivity; Survival of Rights; Subrogation; Insurance.

 

(a)                                  The rights ofindemnification and advance of Expenses as provided by this Agreement shall notbe deemed exclusive of any other rights to which Indemnitee may at any time beentitled under applicable law, the Charter or Bylaws of the Company, anyagreement or a resolution of the stockholders entitled to vote generally in theelection of directors or of the Board of Directors, or otherwise. No amendment,alteration or repeal of this Agreement or of any provision hereof shall limitor restrict any right of Indemnitee under this Agreement in respect of anyaction taken or omitted by such Indemnitee in his Corporate Status prior tosuch amendment, alteration or repeal. To the extent that a change in Marylandlaw, whether by statute or judicial decision, permits greater indemnificationor advancement of Expenses than would be afforded currently under the Company’scharter or bylaws or this Agreement, except with respect to suits against theCompany relating to this Agreement, it is the intent of the parties hereto thatIndemnitee shall enjoy by this Agreement the greater benefits so afforded bysuch change. No right or remedy herein conferred is intended to be exclusive ofany other right or remedy, and 

 

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everyother right and remedy shall be cumulative and in addition to every other rightand remedy given hereunder or now or hereafter existing at law or in equity orotherwise. The assertion or employment of any right or remedy hereunder, orotherwise, shall not prevent the concurrent assertion or employment of anyother right or remedy.

 

(b)                                 In the event of any paymentunder this Agreement, the Company shall be subrogated to the extent of suchpayment to all of the rights of recovery of Indemnitee, who shall execute allpapers required and take all action necessary to secure such rights, includingexecution of such documents as are necessary to enable the Company to bringsuit to enforce such rights.

 

(c)                                  The Company shall not beliable under this Agreement to make any payment of amounts otherwise indemnifiableor payable or reimbursable as Expenses hereunder if and to the extent thatIndemnitee has otherwise actually received such payment under any insurancepolicy, contract, agreement or otherwise.

 

(d)                                 Notwithstanding any otherprovision of this Agreement to the contrary, the Company shall not be liablefor indemnification or advance of Expenses in connection with any settlement orjudgment for insider trading or for disgorgement of profits pursuant toSection 16(b) of the Securities Exchange Act of 1934.

 

Section 14.Insurance. The Company will use its reasonable best efforts to acquiredirectors and officers liability insurance, on terms and conditions deemedappropriate by the Board of Directors of the Company, with the advice ofcounsel, covering Indemnitee or any claim made against Indemnitee for serviceas a director or officer of the Company and covering the Company for anyindemnification or advance of Expenses made by the Company to Indemnitee forany claims made against Indemnitee for service as a director or officer of theCompany. Without in any way limiting any other obligation under this Agreement,the Company shall indemnify Indemnitee for any payment by Indemnitee arisingout of the amount of any deductible or retention and the amount of any excessof the aggregate of all judgments, penalties, fines, settlements and reasonableExpenses actually and reasonably incurred by Indemnitee in connection with aProceeding over the coverage of any insurance referred to in the previoussentence.

 

Section 15.Indemnification for Expenses of a Witness. Notwithstanding any otherprovision of this Agreement, to the extent that Indemnitee is or may be, byreason of his Corporate Status, a witness in any Proceeding, whether institutedby the Company or any other party, and to which Indemnitee is not a party butin which the Indemnitee receives a subpoena to testify, he shall be advancedall reasonable Expenses and indemnified against all Expenses actually andreasonably incurred by him or on his behalf in connection therewith.

 

Section 16.Duration of Agreement; Binding Effect.

 

(a)                                  This Agreement shallcontinue until and terminate ten years after the date that Indemnitee’sCorporate Status shall have ceased; provided, that the rights of Indemniteehereunder shall continue until the final termination of any Proceeding thenpending in respect of which Indemnitee is granted rights of indemnification oradvance of Expenses hereunder and of any proceeding commenced by Indemniteepursuant to Section 11 of this Agreement relating thereto.

 

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(b)                                 The indemnification andadvance of Expenses provided by, or granted pursuant to, this Agreement shallbe binding upon and be enforceable by the parties hereto and their respectivesuccessors and assigns (including any direct or indirect successor by purchase,merger, consolidation or otherwise to all or substantially all of the businessor assets of the Company), shall continue as to an Indemnitee who has ceased tobe a director, trustee, officer, employee or agent of the Company or of anyother corporation, partnership, joint venture, trust, employee benefit plan orother enterprise which such person is or was serving at the written request ofthe Company, and shall inure to the benefit of Indemnitee and his spouse,assigns, heirs, devisees, executors and administrators and other legalrepresentatives.

 

(c)                                  The Company shall requireand cause any successor (whether direct or indirect by purchase, merger,consolidation or otherwise) to all, substantially all or a substantial part, ofthe business and/or assets of the Company, by written agreement in form andsubstance satisfactory to Indemnitee, expressly to assume and agree to performthis Agreement in the same manner and to the same extent that the Company wouldbe required to perform if no such succession had taken place.

 

Section 17.Severability. If any provision or provisions of this Agreement shall beheld to be invalid, illegal or unenforceable for any reason whatsoever:(a) the validity, legality and enforceability of the remaining provisionsof this Agreement (including, without limitation, each portion of any sectionof this Agreement containing any such provision held to be invalid, illegal orunenforceable that is not itself invalid, illegal or unenforceable) shall notin any way be affected or impaired thereby; and (b) to the fullest extentpossible, the provisions of this Agreement (including, without limitation, eachportion of any section of this Agreement containing any such provision held tobe invalid, illegal or unenforceable, that is not itself invalid, illegal orunenforceable) shall be construed so as to give effect to the intent manifestedthereby.

 

Section 18.Exception to Right of Indemnification or Advance of Expenses.Notwithstanding any other provision of this Agreement, Indemnitee shallnot be entitled to indemnification or advance of Expenses under this Agreementwith respect to any Proceeding brought by Indemnitee, unless (a) theProceeding is brought to enforce indemnification under this Agreement, and thenonly to the extent in accordance with and as authorized by Sections 8 and 11 ofthis Agreement, or (b) the Company’s Bylaws, as amended, the Charter, aresolution of the stockholders entitled to vote generally in the election ofdirectors or of the Board of Directors or an agreement approved by the Board ofDirectors to which the Company is a party expressly provide otherwise.

 

Section 19.Identical Counterparts. This Agreement may be executed in one or morecounterparts, each of which shall for all purposes be deemed to be an originalbut all of which together shall constitute one and the same Agreement. One suchcounterpart signed by the party against whom enforceability is sought shall besufficient to evidence the existence of this Agreement.

 

Section 20.Headings. The headings of the paragraphs of this Agreement are insertedfor convenience only and shall not be deemed to constitute part of thisAgreement or to affect the construction thereof.

 

Section 21.Modification and Waiver. No supplement, modification or amendment ofthis Agreement shall be binding unless executed in writing by both of theparties hereto. No waiver of any of the provisions of this Agreement shall bedeemed or shall constitute a waiver of any 

 

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otherprovisions hereof (whether or not similar) nor shall such waiver constitute acontinuing waiver.

 

Section 22.Notices. All notices, requests, demands and other communicationshereunder shall be in writing and shall be deemed to have been duly given if(i) delivered by hand and receipted for by the party to whom said noticeor other communication shall have been directed, or (ii) mailed bycertified or registered mail with postage prepaid, on the third business dayafter the date on which it is so mailed:

 

(a)                                  If to Indemnitee, to: TheIndemnitee’s address on the books and records of the Company.

 

(b)                                 If to the Company, to:

 

SunstoneHotel Investors, Inc. 903 Calle Amanecer, Suite 100 San Clemente, California 92673 Attn: Secretary

 

orto such other address as may have been furnished to Indemnitee by the Companyor to the Company by Indemnitee, as the case may be.

 

Section 23.Governing Law. The parties agree that this Agreement shall be governedby, and construed and enforced in accordance with, the laws of the State ofMaryland, without regard to its conflicts of laws rules.

 

Section 24.Miscellaneous. Use of the masculine pronoun shall be deemed to includeusage of the feminine pronoun where appropriate.

 

[SIGNATURE PAGE FOLLOWS]

 

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INWITNESS WHEREOF, the parties hereto have executed this Agreement on the day andyear first above written.

 
| ATTEST:             |   | SUNSTONE  HOTEL INVESTORS, INC. | (SEAL) |
|---------------------|--------|--------------------------------------|--------|
|                |   |                                 |   |
| /s/  David R. Sloan |   | /s/  Arthur L. Buser, Jr.       |   |
|                |   | Name:  Arthur L. Buser, Jr.     |   |
|                |   | Title:  President and CEO            |   |
|                |   |                                 |   |
|                |   |                                 |   |
| WITNESS:            |   | INDEMNITEE                           |   |
|                |   |                                 |   |
| /s/  Kristen Hoover |   | /s/ Kenneth E. Cruse                 |   |
|                |   | Name: Kenneth E. Cruse               |   |

 

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