The opinion of the court was delivered by: SPORKIN
On allegations including aiding and abetting and a conspiracy to defraud and breach of fiduciary duty, Plaintiffs in this case, Jeffrey Scott and Carol K. Ehlen, seek damages against Defendants Sheldon L. Ray, Jr. ("Ray"), William E. Lewis ("Lewis"), and their respective corporations, International Investors, Inc. ("I.I.I.") and Residential Investors Corp. ("R.I.C.").
This case was tried by the Court without a jury commencing on September 8, 1997. The Court finds the following facts:
The events underlying this case began in December 1992 when Defendant Sheldon Ray, a real estate salesman, was interested in selling 3210 Grace Street, a property located in the heart of Washington D.C.'s Georgetown. The reported asking price was in the $ 3,300,000 range. Ray offered the property to Melvin Goodweather ("Goodweather"), Michael Kuse ("Kuse"), and Kuse's brother-in-law, the Plaintiff Jeffrey Scott Ehlen. Although Kuse and Ehlen (who are related by marriage) were joint partners in a real estate holding company ("K & E Holdings"), at these early stages, Ray dealt almost exclusively with Kuse. At some point in April or May of 1993, K & E Holdings dissolved. As part of the split, Ehlen took over the prospective Grace Street acquisition. At this point, Ehlen and Goodweather, with a 99% interest in the partnership that the participants set up to purchase the Grace Street Property, and Ray, with a 1% interest in and as general partner of that partnership, actively pursued the purchase of the property.
After some bargaining, the purchase price agreed on was reduced to approximately $ 3,000,000. The purchase was to be financed primarily through the assumption of the existing $ 2,615,000 mortgage on the property held by Dominion Bank with the balance to be financed by a "take-back" loan by the property owner, the Grace Street Limited Partnership (comprised of general partners Reid A. Dunn and John W. Brady, hereinafter "Dunn & Brady"), with the balance being paid in cash. In early February 1993, Dominion Bank indicated it did not want to continue as the mortgage holder of the property. See Pls.' Ex. 11. The loan was in default at the time.
To save the deal, Defendant Ray managed to find alternate financing-- a mortgage loan from Nations bank for $ 2,250,000, secured by a first deed of trust on the property. See Pls.' Ex. 19. Plaintiffs were required personally to guarantee the loan. See Pls.' Ex. 19. The remainder of the purchase price--$ 750,000 plus additional expenses bringing the total to $ 825,000--was to be made up by a $ 200,000 capital contribution from each of the two limited partners (Goodweather and Ehlen) and a $ 225,000 take-back loan from the sellers secured by a second trust on the property. The balance of around $ 200,000 was to be loaned to the participants by an unidentified mortgage broker known as "the mystery man from Middleburg."
He subsequently turned out to be Defendant Lewis.
Defendant Ray acted in several different capacities. First, he was the broker of the transaction, for which he received the customary real estate brokerage commission.
He also put together the Limited Partnership that was to purchase the Grace Street Property, for which he was to be the general partner and receive a one percent ownership of the partnership. See Pls.' Ex. 25. The breakdown of the interests in the property were: 1% owned by Defendant Ray; 49.5% owned by Plaintiff Scott Ehlen; and 49.5% by the other limited partner Melvin Goodweather.
What Defendant Ray did next is the crux of the case: At some point, Ray, who was masterminding the entire transaction, saw a way to increase his take in the transaction. Because the owners of the property were in default of their obligation to the mortgage holder, it occurred to Ray that possibly the bank would sell its mortgage note for less than its $ 2,615,000 balance. He broached the idea to Lewis, an individual who dabbled in mortgage instruments. According to the proposal made by Ray to Lewis, the plan would be for Lewis to buy the Dominion Bank mortgage note for less than its value, with the difference between the amount paid and the stated value being recouped when the Goodweather/Ehlen partnership completed its purchase of the Grace Street Property for $ 3,000,000. The final piece of the plan was for Ray and Lewis to split the secret profit on some unspecified basis.
Lewis bought into the scheme and immediately started negotiating with Dominion Bank. Through hard bargaining, he was able to purchase the mortgage note for approximately $ 1,900,000, which gave him an anticipated profit of some $ 715,000. This would be realized as soon as the transaction was completed. But the scheme did not end there. The Ehlen/Goodweather partnership was having trouble meeting its end of the bargain. The parties were unable to come up with the cash they were supposed to invest. Again, Ray entered the picture, and along with Lewis and Dunn & Brady, the owner of the property, arranged for a number of bridge loans to place the transaction on course for completion. One wrinkle remained. Lewis did not want to put up any of his own cash for the deal. He wanted it to be risk and cash free.
To implement this scheme, Lewis turned to Frank J. Kroeger ("Kroeger"), an acquaintance who was then the president of Madison Title & Escrow, Inc. ("Madison Title"). Lewis's plan was to have the closings of both his note purchase from Dominion Bank and Plaintiffs' purchase of the Grace Street Property occur on the same day at Kroeger's Madison Title Company. It was Lewis's strategy to effect the transaction simultaneously. In this way, the proceeds from the Grace Street closing would be used to fund the purchase of the Dominion Bank Note. Thus, Lewis would be required to put up none of his own money to reap the windfall profit.
While Defendant Lewis denied on the stand that this was his intent, the circumstantial evidence was overwhelmingly against him. Madison Title was not a well-known title company. It consisted of Kroeger and two partners. The Grace Street transaction was originally scheduled to close at a another title company until Lewis entered the picture and insisted that the closing take place at Madison at approximately the same time as the closing of the purchase of the Dominion Bank mortgage note. See Pls.' Ex. 10.
Because there was a slip-up in the closing of the 3210 Grace Street transaction, it could not close on the designated day. What then occurred was that Kroeger improperly made available the funds to Lewis from his title company's escrow account. See Tr. of Kroeger testimony at 18, 51-57; see also Pls.' Exs. 41, 44.
What is particularly disturbing about Lewis's role is that he prepared documents that were contrary to the facts. Lewis had Kroeger sign an agreement that Kroeger would provide Lewis with $ 2,200,000 in financing. Lewis used the agreement to evidence that his dealings with Kroeger were appropriate in all respects, particularly to show that he, Lewis, had a legitimate source of funds to complete the purchase of the Dominion note. See Pls.' Ex. 17. Kroeger testified that while he signed the agreement, it did not mean anything to him. Specifically, it did not accurately reflect the true nature of the transaction. See Tr. of Kroeger Testimony at 6-11, 15. He said that he was contacted by Lewis, who explained to him he wanted Kroeger to arrange a dual closing. For arranging this, Kroeger was to be paid $ 100,000.
See Pls.' Ex. 17. On probation when he testified, Kroeger had been convicted in an unrelated case for essentially the same activity of dipping into escrow funds. See Pls.' Ex. 87.
When the transaction was finally completed, Defendant Lewis's gross profit on the transaction was approximately $ 715,000, with a net of around $ 420,000. Defendant Ray was not as fortunate. He and Lewis did not have a meeting of the minds as to what his share of the secret profit would be. See Pls.' Exs. 46, 47, 52, 54, 56, 77, 78, 78A, 79, 85. At one point, Defendant Lewis gave Ray an interest bearing note for $ 100,000 as his share. See Pls.' Exs. 57, 70. After making two interest payments of $ 3,875 each on the note, one of which was deposited into the Ehlen/Goodweather partnership, no other funds were received by Ray. See D. Ray's Ex. 31, 34. Ray went even so far as to sue Lewis for $ 245,000, his alleged share of the ill gotten gains. See Pls.' Ex. 86. He later dismissed the action voluntarily.