BA MTG. CO., INC. v. Unisal Development, Inc., Civ. A. No. 75-W-1287.

• Decision Date: 07 May 1979
• Docket Number: Civ. A. No. 75-W-1287.
• Citation: 469 F. Supp. 1258
• Parties: BA MORTGAGE COMPANY, INC., a Delaware Corporation, Plaintiff, v. UNISAL DEVELOPMENT, INC., a Wisconsin Corporation, Defendant.
• Court: U.S. District Court — District of Colorado

469 F. Supp. 1258

BA MORTGAGE COMPANY, INC., a Delaware Corporation, Plaintiff, v. UNISAL DEVELOPMENT, INC., a Wisconsin Corporation, Defendant.

Civ. A. No. 75-W-1287.

United States District Court, D. Colorado.

May 7, 1979.

Gorsuch, Kirgis, Campbell, Walker & Grover by John S. Pfeiffer and Stephen Klein, Denver, Colo., for plaintiff.

Wood, Ris & Hames by William K. Ris, Denver, Colo., for defendant.

MEMORANDUM OPINION

WINNER, Chief Judge.

After long pretrial skirmishing, and to almost the date of trial, plaintiff asserted both a contract claim and a fraud claim against defendant. Just before trial, the fraud claim was dismissed by plaintiff's trial counsel who had just entered their appearance. In fairness to defendant, there was not a scintilla of evidence of fraud in this case, and I have never before had occasion to try a case in which I was so convinced that experienced businessmen testifying on both sides of a case were testifying to their honest beliefs as to what had been agreed upon, albeit those beliefs were diametric. As always, when reckless charges of fraud are made, discussions ended with the filing of the complaint, and a bitter lawsuit which might have been avoided ensued.

The case is almost unbelievable when the amount of money involved is compared with the haste in which the underlying deal was entered into. There was a cash-out-of-pocket loan of $2,100,000.00, and plaintiff wants damages of $3,390,374.00, but, although there were pages and pages of boilerplate typed up to be hurriedly signed by the parties, there was never any meaningful discussion between representatives of the contracting companies concerning their supposed agreement, although both plaintiff and defendant are experienced in the lending business. Plaintiff, a Delaware corporation, is a wholly owned subsidiary of Bank of America, and defendant, a Wisconsin corporation, is no pygmy in the lending business, but both jumped into this transaction without any real analysis of the crucial agreement, and that's what makes for lawsuits.

The facts leading up to the parting of ways are all too familiar to Colorado natives. People from out of the state think that every mountain in Colorado is destined to be another Aspen or another Vail, and the seasonal nature of most mountain resorts is overlooked. Here, Jack Butz, a Tulsa architect, joined by Charles Burris, a Tulsa developer, decided that a Ramada Inn should be built in Estes Park, Colorado, and they ignored the sad fact of life that there is almost no fall, winter or spring season in Estes Park. Butz was the owner, architect and contractor of the job, and these triple roles eliminated the checks and balances governing most construction jobs. Burris was pretty much a silent partner, and all aspects of the project were under the control of Butz. Defendant's interest in financing the building was brought about by Butz acting through Wiggins, a loan broker, and the two of them obtained an appraisal of the proposed project. The appraisal was made by one Speckman, an MAI, and with the aid of hindsight, it can be said with certainty that he erroneously appraised the worth of the completed building at $2,278,000, to justify the desired loan for $2,100,000. The appraisal was mostly keyed to an income approach, and it greatly overestimated off-season demands for rooms. The Speckman appraisal was sent along to Unisal, and defendant indicated a willingness to make a $2.1 million loan subject to 17 conditions. Butz was also trying other sources to obtain the loan, and ultimately BA Mortgage made a construction loan commitment for the $2.1 million. It is evident that plaintiff too relied on the Speckman appraisal, and, in arranging for the takeout agreement which is the basis for this lawsuit, BA knew that Unisal was relying on the appraisal and on the claim of Butz and Burris that they had a net worth of $6-million or $7 million, which, of course, they didn't have. Although plaintiff questioned the validity of the Speckman appraisal, and although plaintiff knew Unisal was relying on it, no hint was given to Unisal as to plaintiff's concerns.

Plaintiff structured the transaction to have Chicago Title Insurance Company act under the Colorado Disbursing Statute C.R.S. '73 § 38-22-126. BA's construction loan agreement was to make $2.1 million available with interest at 3% above prime and with the building to be ready for occupancy by December 15, 1974. In an agreement which referred to BA as "the company", it was said that "this commitment shall be null and void if its conditions have not been met and the first disbursement is not made on or before January 15, 1974, unless such date is extended by the company at its sole option." This extension, everyone admits, was entirely at the option of the lender, but as we shall see presently, when the shoe is on the other foot, BA says that extension of the agreement for a takeout loan should be at the option of the borrower. Originally, the loan was to be secured by all furniture and equipment, but by an amendment to the commitment not disclosed to Unisal, BA Mortgage and Butz agreed that the furniture and equipment could be leased by the owner, an agreement which substantially lessened the security which would support the permanent loan.

January 31, 1974, counsel for plaintiff prepared a "Buy-Sell Agreement" which was an agreement between owner, plaintiff and defendant, and which incorporated numerous exhibits, including the construction loan agreement with its amendment, the original Unisal letter to Wiggins with an amendment, the note, security agreement, financing statements and many more related documents. The Buy-Sell Agreement made provision for effective incorporation by reference of an agreement called the "Building Loan Agreement", but the "Building Loan Agreement" omitted any reference to the fact that Butz was acting as owner-architect-contractor, a novel situation of conflict of interest known to BA Mortgage and not disclosed to Unisal.

As originally contemplated by Unisal, the loan was to be a typical mortgage loan, and it was BA Mortgage which structured the transaction to have Unisal agree to stand by for a possible takeout to be accomplished by a purchase of a note made payable to BA Mortgage — a note which on its face gave the borrower every incentive to seek financing somewhere else and which permitted the borrower to do just that. Absolutely no penalty was imposed on the borrower if he obtained more favorable financing, and, had the deal been a good one, the borrower could have walked away from Unisal which had to stand ready to make the loan during the takeout agreement's term, and I suppose that this would be true during an extended term.

The mass of paper was prepared by the Colorado lawyer for BA Mortgage, and it was only at the last minute that Unisal had a Colorado lawyer look over the documents to "approve them as to form." Before I come to the confusion of paragraph 3 of the Buy-Sell Agreement which is the paragraph on which the parties so enthusiastically disagree, mention should be made of internal contradictions in the numerous boilerplate agreements counsel for BA Mortgage submitted. The loan agreement made no provision for extension of time, but the whole case revolves around the meaning of paragraph 3 of the Buy-Sell Agreement which supposedly provides for extensions of time. There was no provision for an extension of the completion date in any agreement; the promissory note required payment of interest through December 1, 1974, and it required that principal payments start on January 1, 1975. The Buy-Sell Agreement was by its terms tied to the Construction Loan Agreement, and defendant's obligations were conditioned upon there being no default under the note or security documents. If there was no proper completion, default followed as night follows day. As I shall discuss presently, the lawsuit boils itself down to a question of whether paragraph 3 of the Buy-Sell Agreement gave the borrower a unilateral option to extend the commitment, but if this be the meaning of that paragraph, there are multitudinous other internal contradictions which I do not take time to discuss.

The borrowers' option to buy the land expired on January 1, 1973, and, as that date approached, time pressures increased. It was only a few days before the time closing of the land purchase had to be accomplished that the Buy-Sell Agreement and its many exhibits were mailed to Unisal. After making one correction in the name of the borrower, paragraph 3 of the Buy-Sell Agreement was interlineated, and the interlineation was made between two semicolons, one of which was a typographical error, but perhaps the stenographic mistake was prescient. I am about to quote paragraph 3 of the Buy-Sell Agreement with the interlineated material in script to indicate the handwritten material, but to show the two semicolons before the pen and ink interlineation, paragraph 3 as originally typed read:

"3. Extension Purchase Date — Permanent Lender hereby agrees that if completion of construction is delayed or hindered by reason of strikes, lockouts, weather, acts of God, riots, insurrection or war, Permanent Lender will extend the date for such completion and the date for the purchase of the Promissory Note for the period of the delay not to exceed six months;; and further agrees that said completion and purchase date may be extended in any event for successive periods of six months upon payment to Permanent Lender for an extension fee of $21,000 for each such six-month extension."

Interlineated, and with the use of "will" and "may" highlighted by capitalization, the agreement as signed was changed to read:

"3. Extension Purchase Date — Permanent Lender hereby agrees that if completion of construction is delayed or hindered by reason of strikes, lockouts, weather, acts of God, riots, insurrection or war, Permanent Lender WILL extend the date for such

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