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July 31, 1984

MORTON A. BENDER, Individually and d/b/a MICHAEL MURRAY ASSOCIATES, et al., Defendants

The opinion of the court was delivered by: GREEN

 This is an action by Greyhound Lines, Inc. ("Greyhound" or "GLI"), against Morton A. Bender ("Bender" or "MAB"), individually and doing business as Michael Murray Associates, Michael Murray, doing business as Michael Murray Associates, and Julian Scheer, doing business as Michael Murray Associates, for breach of contract and fraudulent misrepresentation. Greyhound seeks compensatory damages for breach of contract and fraudulent misrepresentation, restitution, and punitive damages for fraudulent misrepresentation. Defendants have asserted affirmative defenses and counterclaims for breach of contract, fraud in the inducement, and misrepresentation. Defendants seek rescission and reimbursement, as well as compensatory and punitive damages. Originally, both parties also sought specific performance but they withdrew these claims at the pretrial conference, shortly before trial.

 In a thirteen-day trial to the Court, the Court heard testimony from the following witnesses: Armen Ervanian, Vice President of Real Estate at the Greyhound Corporation; Earl E. Shew, Executive Vice President for GLI until he retired, effective November 1982; John P. Kyle, a salesman for Coldwell Banker; John T. Nygren, Assistant General Counsel at the Greyhound Corporation; Susan Mann, an attorney in the Greyhound Corporation Law Department; Robert W. Wening, Jr., an architect in the firm of Mills, Clagett & Wening; Warren C. Marggraf, Vice President of the Architectural Engineering and Property Department at GLI; William T. Duncan, Senior Vice President for Real Estate at the American Security Bank; Frank L. Nageotte, Chief Executive Officer and President of Greyhound Corporation and Chairman of the Board of GLI; James B. Fagan, Director of Property in the Architectural Engineering and Property Department at GLI; William J. Hallinan, Executive Director of Taxes at Greyhound Corporation; Richard L. Patch of bR.L. Patch, Inc., a construction cost engineer who estimates cost of construction; Marvin Stein, general contractor and President of Edmar Construction Company, Inc. ("Edmar"); William Benson, Vice President in charge of new construction at Edmar; Michael Murray, partner with Morton Bender and Julian Scheer in Michael Murray Associates who brought the principals in this transaction together; Victor Samuel Schneibolk of SB Construction Company; Donald Urquhart, real estate appraiser; Leon Weiner, builder and developer; Richard H. Rubin, real estate developer; and Morton Bender, developer and general contractor.

 Deposition testimony also was introduced of the following individuals: F. Edward Lake, Vice President and Treasurer of Greyhound Corporation; James Mizes, Financial Analyst at Greyhound Corporation; Richard C. Stephan, Vice President and Controller at Greyhound Corporation; Bruce Thomas, Vice President of Greyhound Corporation; William F. Tritton, Vice President and Controller at GLI; Frederick P. Dunikoski, President and Chief Operation Officer of GLI; Robert O. Lowe, Vice President and Assistant Controller at Greyhound Corporation; John G. Keller, Director of Tax Administration and Planning at Greyhound Corporation; Carroll Bumpers, Vice President and Financial Advisor to the Chief Executive Officer of the Greyhound Corporation; as well as Susan Mann; Armen Ervanian; and James B. Fagan.


 Plaintiff GLI is a subsidiary of the Greyhound Corporation. It is a corporation organized under the laws of the State of California and has its principal place of business in Phoenix, Arizona.

 Defendant Bender is a resident of the District of Columbia and a citizen of the United States. Defendant Michael Murray ("Murray") is a resident of the State of Maryland and a citizen of the United States. Defendant Julian Scheer ("Scheer") is a resident of the Commonwealth of Virginia and is a citizen of the United States. All three defendants transact business in the District of Columbia. Michael Murray Associates is a general partnership organized and doing business in the District of Columbia. Mr. Bender holds a ninety percent interest in Michael Murray Associates and defendants Murray and Scheer each hold a five percent interest in the partnership.

 Greyhound currently owns and operates a bus terminal at 1110 New York Avenue, N.W., Washington, D.C. ("the old terminal"). The value of this property had been rising for a number of years as a result of an increased demand for office space, as well as the proposed construction of the D.C. Convention Center across the street. To take advantage of the increase in real estate values, Greyhound decided to sell the old terminal and build a modern facility. During 1980 and early 1981, Greyhound looked at possible sites for the new terminal.

 On February 5, 1981, the Greyhound Corporation approved "Project Concept 81-5" which authorized, inter alia, the expenditure of $75,000 to obtain an option to purchase land at 90 K Street, N.E., near Union Station in Washington, D.C., at a price of $8,310,240. Armen Ervanian, Vice President for Real Estate at the Greyhound Corporation, suggested that this project concept be approved. He handles real estate matters for all of the subsidiary companies of Greyhound Corporation, including GLI, and was the Greyhound official who was in charge of the new terminal project.

 On February 17, 1981, Greyhound purchased an option for this land which would be the site of Greyhound's new terminal ("the new terminal site"). The option was to expire on June 17, 1981.

 As contemplated by Greyhound, a developer would purchase this property, pursuant to the option Greyhound had obtained, and would build a new terminal to Greyhound's specifications. In a "tax-free exchange," Greyhound would then trade the old terminal to the developer in exchange for the new terminal property and cash representing any difference between the value of the old terminal and the cost of developing the new terminal.

 In January 1981, defendant Murray learned that Mr. Bender was interested in purchasing the old terminal property on New York Avenue. He told Mr. Ervanian about Mr. Bender's interest and Mr. Ervanian asked that Mr. Bender write to him. On January 26, 1981, Mr. Bender wrote to Mr. Ervanian expressing his interest in this property. On March 4, 1981, they met and discussed Greyhound's proposal for a tax-free exchange, the price of the old terminal and development of the new terminal site.

 Between March 4, 1981, and March 30, 1981, the parties negotiated the price at which the old and new properties would be exchanged. The parties eventually agreed to a price of $21 million, or about $650 per square foot, for the old terminal property.

 On April 17, 1981, Greyhound and Mr. Bender executed the "Greyhound-Bender Agreement for Exchange of Real Properties" (the "Exchange Agreement"). See Appendix A attached hereto.

 Under the terms of the Exchange Agreement, Greyhound assigned to Mr. Bender the option it held to purchase the tract of land located at 90 K Street, N.E., in the District of Columbia, for the sum of $8,310,240. Exchange Agreement, paras. 1.03, 2.1, 3.1. Bender agreed to exercise the option, purchase the K Street property, and construct upon it a new bus terminal.

 On or about October 14, 1981, Mr. Bender was to submit to Greyhound for its review and approval or disapproval, final plans and specifications prepared by the architectural firm of Mills, Clagett & Wening, A.I.A. [American Institute of Architects]. Id. at P 5.1. Greyhound then had twenty days to approve or disapprove the plans and specifications. Id. at P 5.2. If Greyhound failed to do either, it would be deemed to have approved the plans and specifications. Id. Within 120 days of Greyhound's approval, Mr. Bender was to submit the "Construction Documents" to Greyhound for its review and approval or disapproval, including the total guaranteed project budget, a "guaranteed cost" construction contract, a performance and payment bond, documents evidencing specified insurance coverage, and an architect's contract. Id. at P 5.3. Upon Greyhound's approval of these Construction Documents, Mr. Bender was to obtain the requisite building permits, variances, or similar authorizations, and complete construction of the terminal within eighteen months from the issuance of the building permits. Id. at P 5.4. The estimated cost of construction of the terminal building was $3,400,000. Id. at P 5.1.

 Upon completion of the new terminal, Mr. Bender was to exchange the new terminal for Greyhound's existing terminal located at New York Avenue and 11th Street, N.W., in the District of Columbia. The exchange price of the old terminal site was to be $21 million, and the exchange price of the new terminal site acquired by Mr. Bender ("the Bender property") was to be the sum of the actual purchase price of $8,310,240 paid by Mr. Bender, less GLI's option cost plus the actual direct costs and expenses paid by Mr. Bender in connection with the acquisition, development, and exchange of the Bender property. Id. at P 7.1. Mr. Bender agreed to maintain accurate books and records sufficient to substantiate such costs and expenses. Id. The agreement further provided:

If the exchange price of the GLI Property [old terminal] is less than the exchange price of the MAB Property [new terminal], GLI shall pay the difference between the two exchange prices to MAB on the day of closing.. . . If the exchange price of the MAB Property is less than the exchange price of the GLI Property, MAB shall pay the difference between the two exchange prices to GLI on the Closing.

 Id. See also id. at P 13.1 ("Any difference in the exchange price of the [Bender] Property and the GLI Property shall be paid by the applicable party.")

 For the Exchange Agreement to be effective, approval by Greyhound's Board of Directors was needed by May 13, 1981. Greyhound had a formal in-house procedure for the approval of capital expenditures such as were contemplated by the Exchange Agreement. A formal "Investment Proposal", defining the scope and financial consideration of the proposed transaction, had to be submitted to the Greyhound "Investment Committee" which would then review it and make recommendations for approval or disapproval to the Board of Directors.

 This memorandum requested authorization to enter into a tax-free exchange agreement with Mr. Bender, "generally in accordance with the following terms:"

1. Morton Bender (MB) will build a new terminal to GLI's specifications on the 103,878 sq.ft. parcel [at 90 K St., N.E.]. . . .
2. The total cost of the new facility should not exceed $16 million. . . .
3. Upon its completion, MB will exchange the new terminal for the existing GLI terminal . . . containing 32,788 sq.ft. for a value of $21 million or $640.48/sq.ft.
4. Upon completion of the exchange transaction, GLI will receive the $5 million "boot" difference from MB in cash. . . .

 Id. Mr. Ervanian also indicated that "full cooperation will be extended to MB in an effort to have him complete the exchange facility in less than two years and for less than the $16 million maximum figure." Id. at 16th page of Exhibit (emphasis added). The Court notes that contrary to Mr. Ervanian's representations in this memorandum to Mr. Nageotte, the Exchange Agreement does not indicate that "the total cost of the new facility should not exceed $16 million" or that GLI would "receive the $5 million 'boot difference' from MB in cash" when the transaction was completed. Id. at 14th page of Exhibit.

 An Investment Proposal to enter into the tax-free exchange agreement with Mr. Bender was then submitted on April 24, 1981. It states in pertinent part:

The difference between the proposed exchange facility and land cost estimated to be $16 million and the $21 million sale price, or approximately $5 million depending on an actual final cost of exchange facility, will be paid to Greyhound Lines, Inc. in the form of a cash "boot".
* * * *
Authorization is also requested to consider receiving the estimated $5 million cash "boot" over a three year period on an installment basis at an interest rate equal to the interim financing rate charged on development of the exchange facility, provided the note is satisfactorily secured.

 Id. at 9th page of Exhibit.

 The Investment Committee recommended approval of the Investment Proposal on May 1, 1981. Id. at 5th page of Exhibit. Greyhound's Board of Directors approved the agreement on May 12, 1981. The Court notes that if the actual cost of the project exceeded the Investment Proposal estimate by more than ten percent, approval of the increased cost would have to be sought from the Board of Directors. Mr. Bender was not aware of this corporate policy nor was he aware of the estimates quoted in the Investment Proposal. Mr. Bender was informed in a letter from Mr. Ervanian, dated May 12, 1981, that the Exchange Agreement had been approved by the Board. Defendants' Exhibit 55.

 After the Exchange Agreement was signed, Mr. Bender assigned his rights under the Exchange Agreement to Michael Murray Associates. See discussion supra slip op. p. 4. On June 15, 1981, Greyhound approved assignment and delegation of Mr. Bender's rights and duties under the Exchange Agreement to Michael Murray Associates. Defendants' Exhibit 69.

 In April 1981, at Greyhound's direction, Mr. Bender hired the architectural firm of Mills, Clagett & Wening to begin preparation of the construction plans and specifications for the new terminal. Greyhound had already interviewed Robert Wening of that firm and told Mr. Bender that it wanted Mr. Wening to be retained as the architect on the project. Messrs. Bender and Wening agreed upon a fee of $210,000 for all architectural and engineering services that were to be performed pursuant to the Exchange Agreement. See Plaintiff's Exhibit 176. *fn1"

 In May 1981, Mr. Bender spoke to W. Thomas Duncan of the American Security Bank to arrange financing for the development of the new terminal. He submitted to the bank an estimated development budget of $21 million. On June 15, 1981, Mr. Bender executed a promissory note to the American Security Bank for a $10 million loan, which was enough to cover his purchase of the new terminal property at K Street, as well as the architects' costs and carrying charges. The promissory note provided that Mr. Bender would pay interest at the rate of two percentage points above the prime rate. *fn2"

 On June 15, 1981, Mr. Bender exercised the option which had been assigned to him by GLI and, in accordance with the Exchange Agreement, bought the land for the new terminal, at a price of $8,310,240.

 Shortly after Mr. Wening and his firm were retained, they began to work closely with Greyhound's architects assigned to this project, Warren C. Marggraf and James B. Fagan. During the next seven months, numerous and substantial changes to the design and specifications for the new terminal were made, at the request of Greyhound. See Defendants' Exhibit 104. These changes included increasing the width of the waiting area by ten feet, relocating the restaurant/gift shop, the HVAC [heating, ventilation, and air conditioning] units, dump zones, and stairs to the mezzanine, increasing the number of ticket booths, enlarging the terminal manager's office, reducing the size of the operations office, and providing a sound insulated wall between the drivers' room and the office and locker areas. Id.

 Preliminary drawings and specifications were sent to Greyhound on November 11, 1981. Defendants' Exhibit 106. Final drawings, specifications, and proposal letters to bidders were sent to Greyhound on December 7, 1981. Id. These documents were received by GLI on or about December 9, 1981. The bid letter indicated that the bids would be opened in private and that a bid bond in the amount of five percent of the base bid was required. The letter also indicated that the owner, i.e., Mr. Bender, reserved the right not only to waive irregularities in bids and bidding but also to reject any or all bids. Id. Mr. Bender reserved the right to waive irregularities such as a bidder's failure to fill out the bid form completely. An Addendum to Specifications and Drawings was sent to GLI on December 21, 1981. Defendants' Exhibit 113A. A Second Addendum was dated January 5, 1982, and received by GLI on January 11, 1982. Defendants' Exhibit 114.

 The Second Addendum contained the following liquidated damages clause:

The Owner will suffer financial loss if the Project is not Substantially Completed within the time specified on the Bid Form. The Contractor (the Contractor's Surety) shall be liable for and pay to the Owner the sums hereinafter stipulated and fixed, agreed and liquidated damages for each calendar day of delay until the Work is Substantially Completed: Fifteen Thousand Dollars ($15,000.00).

 Id. at Addendum to Specifications. The Exchange Agreement called for completion of construction within eighteen months of issuance of the building permit. Exchange Agreement, para. 5.4. The amount of the liquidated damages was equal to Mr. Bender's projected interest carrying costs, per day, on the project.

 All of the drawings, specifications, and addenda were received without comment by Greyhound. Therefore, pursuant to paragraph 5.2 of the Exchange Agreement, the plans and specifications were deemed approved by Greyhound on or about December 29, 1981, i.e., twenty days after Greyhound received the plans and specifications. Exchange Agreement, para. 5.2. The plans and specifications, as amended, were let out for bids in late December 1981 and early January 1982. Bids were due on January 12, 1982.

 Messrs. Bender and Wening had selected eight contractors as potential bidders on this project. See Plaintiff's Exhibit 223. Of these eight, only two submitted bids, S.B. Construction Company and Edmar. Mr. Wening testified that after the second addendum was issued, which included the $15,000 per day liquidated damages clause, most of the bidders lost interest in bidding on the Greyhound project. Mr. Wening also testified that this liquidated damages clause was very high. Before the close of the bid on January 12, 1982, Mr. Wening told Mr. Bender that many of the bidders had decided not to bid on the project. Mr. Bender indicated, however, that receipt of two or three bids on the project would be enough.

 On January 12, 1982, Mr. Bender opened the bids privately. Edmar's bid of $5,990,000 was the lowest. S.B. Construction Company submitted a bid of $6,015,000. Defendants' Exhibit 116. Although the specifications required that bids be accompanied by a bid bond, Edmar failed to provide one. Marvin Stein, President of Edmar, testified that he never applied for a performance bond on the Greyhound project because Greyhound had not approved the contract. The Court notes that S.B. Construction Company's bid does contain a bid bond. Id.3

 During the week following January 12, 1982, Mr. Bender notified Messrs. Marggraf and Ervanian that Edmar was the successful bidder and that the amount of the bid was $5,990,000. When he informed them of the amounts of the bids, neither had any noticeable reaction. A few weeks later, however, in February 1982, Mr. Ervanian did voice an objection, indicating that he thought the bids were too high by about $1 million.

 On February 18, 1982, Mr. Wening applied for a building permit which was expected to take from three to six months to issue. See Defendants' Exhibit 184.

 On March 1, 1982, Greyhound officials met to discuss alternatives to Greyhound's performing the Exchange Agreement. This meeting is significant because it took place before Greyhound had even received Mr. Bender's preliminary development budget of $26.4 million, which was sent on March 8, 1982. See Defendants' Exhibit 137.

 Although Mr. Ervanian denied that there was a meeting on March 1, 1982, and Mr. Fagan "just [drew] a blank" as to whether there was a meeting, after examining all of the evidence in this case, the Court finds than an internal Greyhound meeting did take place on March 1, 1982.

 Most significantly, Mr. Marggraf admitted that he attended a meeting with Mr. Ervanian on March 1, 1982. During the trial, the following colloquy occurred between Mr. Marggraf and plaintiff's counsel:

Q: Mr. Marggraf, after the bid price was made known to you, do you recall whether you had any discussions at Greyhound with respect to rebidding the project?
Q (by Court): When was this, if you can tell us?
A: It was March 1, as I recall.

 Trial Transcript at pp. 19-20 (Nov. 8, 1983).

 Moreover, Mr. Fagan took notes of a meeting dated March 1, 1982. These notes list the names "E. E. Shew, W. Tritton, WCM, Debra, Jack, J. F., Ervanian, Jack, and Bill Hallinan." Defendants' Exhibits 128, 128A. "E. E. Shew" refers to Earl E. Shew, Executive Vice President for GLI at that time. "W. Tritton" refers to William F. Tritton, Vice President and Controller at GLI. "WCM" refers to Warren C. Marggraf, Mr. Fagan's superior, who admitted that he attended this meeting on March 1, 1982. "Debra" refers to Debra Livermore, an assistant in Greyhound Corporation's real estate department. The two "Jacks" refer to the only two persons named "Jack" who were working on the project, Jack Nygren, a Greyhound Corporation lawyer, and Jack Keller, a Greyhound Corporation tax accountant. "J.F." refers to Mr. Fagan and "Bill Hallinan" refers to William J. Hallinan, a tax attorney and Executive Director of Taxes at Greyhound Corporation.

 Although Mr. Fagan did not deny that these notes were his or that they were dated March 1, 1982, he did deny any recollection of this meeting. This lack of recollection is in sharp contrast to Mr. Fagan's ability to recall the March 10, 17, and 31, 1982 meetings.

 Three of the individuals listed in Mr. Fagan's notes also have notes dated either March 1, 1982, or bearing computations identical to those in Mr. Fagan's notes. Mr. Marggraf identified his notes which are dated "3/1/82" and contain the same figures which appear in Mr. Fagan's March 1, 1982 notes.

 At his deposition, Mr. Keller also identified his notes. Although these notes are undated, they contain the same computations as those of Messrs. Fagan and Marggraf. Defendants' Exhibit 270c. Mr. Keller, however, was unable to recall anything about the March 1, 1982 meeting or even that it took place.

 Finally, Mr. Hallinan also has a set of notes dated March 1, 1982. Defendants' Exhibits 284, 285. Although Mr. Hallinan does not recall the meeting, he did recall attending a meeting where "undoing the deal" was discussed. His notes of March 1, 1982, clearly state that "Armen [Ervanian] is thinking about 'undoing' exchange contract." Defendants' Exhibit 284. Moreover, Mr. Hallinan admitted that, although he was not completely sure of the dates of the meetings he attended in early March 1982, he was sure that Mr. Marggraf was at the meetings he attended. As indicated above, Mr. Marggraf attended the meeting on March 1, 1982, but did not attend the meeting on March 10, 1982. Mr. Fagan attended the March 10, 1982 meeting in place of Mr. Marggraf.

 Throughout his testimony, Mr. Ervanian denied that a meeting took place on March 1, 1982, and denied that a meeting took place before March 10, 1982. On March 10, 1982, however, prior to the meeting concerning this project, he sent a confidential memo to the following six individuals, all of whom were listed in Mr. Fagan's March 1, 1982 notes as attending the March 1, 1982 meeting: W. J. Hallinan; W. C. Marggraf; J. T. Nygren; E. E. Shew; R. C. Stephan; and W. F. Tritton. Defendants' Exhibit 144. The memo states in pertinent part:

In accordance with our recent meeting on the subject of Washington, D.C., Morton Bender will be in here on Thursday afternoon, March 11th, and Friday as well.
* * * *
Between the bid, architect fees and demolition being $2.4 million over the IP [Investment Proposal] amount and "soft costs" mounting very rapidly, I would like to suggest that we promptly undertake an analysis to consider the effects of Greyhound Lines doing a taxable transaction vs. a tax-free exchange, which would require "undoing" the exchange agreement.

 Id. (emphasis added).

 When asked at trial what "recent meeting" he was referring to in his memo, Mr. Ervanian stated that, "I was wrong, there was no 'recent meeting.'" The Court does not find this response credible.

 Moreover, in contrast to Mr. Ervanian, Mr. Stephan, Vice President and Controller of Greyhound Corporation, testified at his deposition *fn4" that he was sure that there were two meetings in early March 1982. Deposition of Richard Stephan at 33.

 Mr. Marggraf's testimony, the notes of Messrs. Fagan, Marggraf, Keller, and Hallinan, Mr. Stephan's deposition testimony, and Mr. Ervanian's confidential memo of March 10, 1982, referring to a "recent meeting" about the Washington, D.C. project, confirm to the Court that a meeting did take place on March 1, 1982.

 It was at this meeting that Greyhound first began seriously to consider "undoing" the Exchange Agreement, and, instead, began to consider doing the project itself. See Defendants' Exhibits 128, 128A, 284. As of mid-January 1982, Greyhound knew that the low construction bid was $5.9 million. In his confidential March 10, 1982 memo, Mr. Ervanian also indicated that:

With the November, 1981 change in tax laws allowing 15-year straight line depreciation and the likelihood of excess tax credits against a potentially large capital gain in the event of a taxable transaction, we may be better served to do the project ourselves. This would also permit Greyhound Lines to consider rebidding the project or entering into a negotiated price contract in view of the $5,990,000 low bid.

 Defendants' Exhibit 144 (emphasis added).

 The fact that Greyhound was seriously considering "undoing" the agreement also is reinforced by Mr. Wening's testimony that, on March 3, 1982, Mr. Marggraf called and inquired about the contract being rebid, with Greyhound as owner.

 Meanwhile, on March 1, 1982, in Washington, D.C., Mr. Bender signed a construction contract with Edmar, the lower bidder, without first obtaining approval from GLI. Plaintiff's Exhibit 234; see Exchange Agreement, para. 5.3(b) ("The General Contractor must be acceptable to GLI."). Mr. Wening testified that the construction contract was prepared in his office on or about March 1, 1982. His recollection was that "we were getting very close to the termination of the bid guarantee period, so it was done to beat that deadline." Trial ...

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