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ARLINGTON TOWERS LAND CORP. v. JOHN MCSHAIN

February 26, 1957

ARLINGTON TOWERS LAND CORPORATION et al., Plaintiffs,
v.
JOHN McSHAIN, Inc., et al., Defendants



The opinion of the court was delivered by: TAMM

Identity of the Parties.

The plaintiff Arlington Towers Land Corporation is a Virginia corporation formed for the purpose of acquiring title to a tract of land consisting of some 18 acres located in northern Virginia, adjacent to the District of Columbia. It was incorporated on October 15, 1953. Plaintiffs First Arlington Towers Corporation, incorporated on November 15, 1953, Second Arlington Towers Corporation, incorporated on March 3, 1954, Third Arlington Towers Corporation, incorporated on December 23, 1953, and Fourth Arlington Towers Corporation, incorporated on October 4, 1953, are Virginia corporations individually organized for the erection and operation of apartment and commercial buildings upon the tract of land held by the Arlington Towers Land Corporation. All of the issued and outstanding stock of the building corporations is owned by the Land Corporation, while the preferred stock of the building corporations is, or was at the time of the filing of this suit, owned by the Federal Housing Administration. The plaintiffs, Walter P. McFarland, Edward Johnson and John Loughran, are the owners of all of the issued and outstanding stock of the Land Corporation. The plaintiff William J. Kress is, or was at the time of the filing of this action, the secretary of the Land Corporation.

 The defendant John McShain, Inc. is a Delaware corporation engaged in the building and construction business. Defendant John McShain is the president and principal figure in John McShain, Inc. Defendant George F. Shea is an attorney in the District of Columbia who represented John McShain, Inc. as attorney during a part or all of the time involved in the transactions which are the subject of this suit. The defendant, the Pennsylvania Company for Banking and Trusts, although named as a defendant in the action, was not served in this case.

 Factual Background Leading to These Proceedings.

 In 1949, the O'Driscoll Construction Corporation assembled several parcels of land which ultimately became the 18 acre tract acquired by the Arlington Towers Land Corporation. These parcels were assembled by the O'Driscoll corporation to enable it to construct the apartment development known as the Arlington Towers project. The O'Driscoll Corporation took various steps in the interest of this development which led to the filing of applications for insured mortgages with the Federal Housing Administration in 1951. The O'Driscoll group attempted to secure from the Federal Housing Administration insured mortgages which would permit the construction of the project under section 608 of the National Housing Act, 12 U.S.C.A. § 1743.

 In the fall of 1951, the O'Driscoll group abandoned the Arlington Towers project because they were unable to arrange the financing necessary to the project and financing required by the Federal Housing Administration. Because of their accumulated investment in the project, the O'Driscoll group attempted unsuccessfully to sell the project, and in the course of these efforts attempted unsuccessfully to interest the McShain corporation in the project.

 In the summer of 1952, Mr. Paul Hauck, General Superintendent for the McShain corporation in the Washington area, talked to the plaintiff Walter P. McFarland about the Arlington Towers project, told him some of the background of the project, and suggested that McFarland attempt to interest some friends in undertaking the financing of the project which McShain might then build. McFarland, thereafter, consulted the architects who had designed the project for O'Driscoll, consulted the Federal Housing Administration, and initiated a long course of activities which ultimately resulted in the financing of the project. In order to assist in perfecting the financing arrangements, the McShain corporation through John McShain furnished McFarland with letters indicating that McShain had an agreement with McFarland to build the project for $ 18,000,000. McShain agreed further to take other steps, discussed in more detail hereafter, to assist McFarland in acquiring the land from the O'Driscoll group, in securing the necessary financing, and guaranteeing the completion of the project. The negotiations, studies and planning for the project extended from the summer of 1952 -- probably the latter part of June of that year -- until December 17 or 18, 1953, at which time a contract was executed between the Arlington Towers Land Corporation and John McShain, Inc. A copy of this contract is attached hereto and identified as Court Exhibit No. 1. It was supplemented by a letter dated December 21, 1953, also attached hereto and identified as Court Exhibit No. 2, and a further agreement dated December 18, 1953, copy of which is attached hereto and identified as Court Exhibit No. 3.

 As a result of the execution of the contract of December 18, 1953, the Federal Housing Administration issued final commitments for insured mortgages covering the construction of Arlington Towers units Four, Three and One. The Chemical Bank and Trust Company of New York issued 'Over and Above Loan' commitments, the Teachers Insurance and Annuity Association of New York made commitments covering advances on a mortgage covering the ground involved in the project, and other formalities being completed, the McShain corporation undertook the construction of the buildings embraced in these three contracts.

 Some delay occurred in the completion of the formalities relating to the construction of that segment of the project embraced in the agreements relating to Second Arlington Towers Corporation, the reasons for the delay being one of the contested points in the case.

 The McShain group collaterally contended that a commercial building identified hereafter as commercial building 'C' was not embraced in the Master Contract, or other agreements, between the parties. The plaintiff McFarland contends now that in the elimination of commercial building 'C' he understood that he was to receive credit from McShain for the cost of the building. Commercial building 'C' was not built, and its status in the agreements and understandings between the parties is one of the principal issues in the case. Ultimately, the plaintiff McFarland and the plaintiffs, Edward Johnson and John Loughran, executed a further document dated April 28, 1954, which document was also executed by McShain, and which related to the construction of the Second Arlington Towers unit. A copy of this document is attached to this opinion and is identified as Court Exhibit No. 4. Thereafter, the Federal Housing Administration financing and other financing having been completed, the McShain Company undertook the building of the Second Arlington Towers unit with commercial building 'C' eliminated.

 As the construction progressed, a series of disputes arose between the parties, which disputes insofar as they are pertinent to the case are identified hereafter and are treated individually. In general terms, these disputes related to the addition to or deletion from the buildings of items referred to in the basic plans and specifications; to the alleged failure of the workmanship and materials to meet the standards required by the plans and specifications; to delay in the completion of First Arlington Towers; to failure of McShain to complete the units within the time required by the agreements; to the failure of McShain to correct defective work enumerated in a series of 'Punch Lists' drawn up by the plaintiffs, and to refusal on the part of McShain to pay certain sums growing out of mortgage discounts.

 After the present suit was filed, the parties selected an Arbitrator to determine the reasonable value of the additions and deletions; and upon the filing of the arbitration award, the plaintiffs moved to set the award aside on various grounds.

 In the meanwhile, the defendants had filed, on November 28, 1955, in the Eastern District of Virginia, an action seeking to recover the sum of $ 275,000 represented by a note made by the Land Corporation on April 29, 1954. This action was transferred from the Eastern District of Virginia and consolidated with the present case for the purpose of trial.

 During the course of the present trial, the Court, over defendants' objections, permitted the plaintiffs to amend their complaint by adding thereto a claim against the defendant McShain in the amount of $ 154,439.71 representing an assignment to the plaintiffs of a balance due by McShain to E. C. Ernst, Inc. for electrical work installed by that corporation in the Arlington Towers project.

 Contentions of Parties in the Present Suit.

 The plaintiffs filed this action on June 25, 1955.

 The issues to be determined by the Court, as agreed to by counsel in a pretrial order filed on November 15, 1956, are as follows:

 1. Have the four Federal Housing Administration projects been completed?

 2. Was the Supplemental Agreement of April 28, 1954 valid, or is it void by reason of threats and coercion in its procurement, and lack of consideration?

 3. Is the award of the Arbitrator allowing the Land Corporation net credit for changes made during construction to be vacated or modified, and are plaintiffs entitled to additional credit for incomplete work?

 4. Is McShain liable as guarantor for the payment of financing fees in connection with the permanent mortgages of the building corporations?

 6. Are plaintiffs entitled to additional credit for incomplete work?

 7. Do plaintiffs come into Court with unclean hands which disqualify them from equitable relief?

 8. Have plaintiffs defaulted in any of their obligations, and if so, what is the nature of such default in relation to the scope and applicability of the escrow powers given to defendant McShain? Or, have plaintiffs fulfilled their obligations which affect their rights in the escrow powers, and if so, to what extent?

 9. Have any of the individual plaintiffs improperly received loans, advances, payments, free or reduced rentals, or other benefits from any plaintiff corporation, or have they subjected any plaintiff corporation to waste or mismanagement? Plaintiffs challenge the right of defendant to bring this issue into the case.

 10. Could plaintiffs validly have the Land Corporation give its note dated approximately May 22, 1956 to the Chemical Corn Exchange Bank in the amount of $ 290,000; or has the Land Corporation given as collateral to this note other notes due it from the building corporations; or have all plaintiff corporations agreed that money due to the Land Corporation from the building corporations be paid directly by the building corporations to the Chemical Corn Exchange Bank on the $ 290,000 note? The plaintiffs again challenge the right of the defendants to bring this issue into the case.

 11. Are plaintiffs obliged to reimburse McShain in the amount of $ 40,213.73 for obligations of plaintiffs which they requested McShain to pay for them?

 12. Are plaintiffs entitled to damages in the sum of $ 200,000 for delay?

 13. Are plaintiffs entitled to money damage by reason of McShain's failure to pay the $ 412,607.50 as mortgage points?

 The plaintiffs request the following relief of the Court:

 1. That it be adjudged and decreed that the only balance remaining to be paid to McShain under the Master Agreement is the sum of $ 70,571.47, payable three years after such date as the Court may declare to be the date of completion of the project.

 2. That it be adjudged and decreed that the obligation of plaintiffs or any of them to pay McShain represented construction costs of $ 17 million is fully satisfied.

 3. That it be adjudged and decreed that the common stock, minute books, seals and undated resignations of the officers and directors of plaintiff corporations are free and clear of any lien or encumbrance arising out of the obligation of plaintiffs or any of them to pay McShain represented construction costs of $ 17 million.

 4. That plaintiff Land Corporation be ordered and directed to issue to McShain three year note in the sum of $ 412,607.50.

 5. That defendant George F. Shea be ordered and directed to return to plaintiffs minute books, seals and undated resignations of the officers and directors of plaintiff corporations.

 6. That defendant George F. Shea be ordered and directed to deliver to such escrowee as the Court may designate the common stock of plaintiff corporations to be retained by such escrowee only so long as the said three year note remains unpaid.

 7. Plaintiffs further pray that the promissory note in the amount of $ 275,000 and the deed of trust referred to therein which are the subject of C.A. 1072-56 be cancelled, set aside and declared invalid.

 The defendants request the following relief from the Court:

 1. Plaintiffs be ordered to deliver to defendant George F. Shea, as Escrow Agent, all minutes and all corporate seals of each plaintiff corporation which have not heretofore been delivered to defendant George F. Shea.

 a. The certificates of stock endorsed in blank of all plaintiff corporations.

 b. The undated resignations of the officers and directors of all plaintiff corporations.

 c. The minutes and minute books of all plaintiff corporations.

 d. All seals of all plaintiff corporations.

 3. Defendant John McShain, Inc., its agents, employees and representatives be authorized forthwith to take over and manage the affairs of plaintiff corporations, pursuant to the terms of the contracts attached to and made a part of the Complaint, as Exhibits A, B, and C.

 4. The officers, directors and stockholders of plaintiff corporations, and their agents, servants, employees, attorneys, representatives and all other persons that act in active concert or participation with them, be ordered forthwith:

 a. To turn over to defendant John McShain, Inc. all records, books, documents, contracts and other assets of each plaintiff corporation and to perform whatever acts are necessary with banks and others to make possible the immediate management, control and the exercise of such other rights as exist under said Exhibits A, B and C, by defendant John McShain, Inc.

 b. To be restrained from interfering with the management and control by defendant John McShain, Inc. of plaintiff corporations and the exercise of such other rights as exist under said Exhibits A, B and C; and

 c. To be restrained from taking away, interfering with, disposing of, or secreting any assets of any of plaintiff corporations.

 In the event the relief prayed for in the foregoing paragraphs 1-4 inclusive be not granted, then defendants pray for judgment;

 5. Requiring the individual plaintiffs and plaintiff Arlington Towers Land Corporation to pay forthwith to defendant John McShain, Inc. the sum of $ 529,308.50, with interest from February 2, 1956.

 6. Requiring plaintiff, Arlington Towers Land Corporation, to pay forthwith to defendant John McShain, Inc. the sum of $ 580,518.73, with interest from February 2, 1956.

 7. Requiring plaintiff Arlington Towers Land Corporation to deliver forthwith to defendant John McShain, Inc. a 36 month note in the amount of $ 1,000,000, dated February 2, 1956, which note shall be payable in equal installments and shall contain the following provisions:

 $ 166,666 payable seven months after date. $ 166,666 payable one year after date. $ 166,666 payable eighteen months after date. $ 166,666 payable two years after date. $ 166,666 payable thirty months ...


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