Burge v. Frey

• Decision Date: 25 August 1982
• Docket Number: No. 79 1572.,79 1572.
• Citation: 545 F. Supp. 1160
• Parties: J. W. BURGE, Plaintiff, v. Dale FREY, Virginia Frey, Mt. Carmel Apartments, Inc., Virdale, Inc., and Frey, Inc., Defendants.
• Court: U.S. District Court — District of Kansas

545 F. Supp. 1160

J. W. BURGE, Plaintiff, v. Dale FREY, Virginia Frey, Mt. Carmel Apartments, Inc., Virdale, Inc., and Frey, Inc., Defendants.

No. 79 1572.

United States District Court, D. Kansas.

August 25, 1982.

COPYRIGHT MATERIAL OMITTED

Robert J. Roth, Hershberger, Patterson, Jones & Roth, Wichita, Kan., for plaintiff.

William C. Farmer, Smith, Shay, Farmer & Wetta, Wichita, Kan., for defendants.

MEMORANDUM AND ORDER

CROW, District Judge.

The plaintiff, J. W. Burge, filed a complaint seeking an accounting and recovery of damages from Dale Frey, Virginia Frey, Mt. Carmel Apartments, Inc., Virdale, Inc., and Frey, Inc. for compensation for services which he contends he performed for the defendants in the promotion and development of an apartment complex called the Mt. Carmel Apartments project. Plaintiff pleads in the alternative breach of contract, breach of fiduciary duty by the individual defendants, conversion and recovery on quantum meruit. Rule 8(e)(2), Fed.R.Civ.P. Plaintiff also alleges shareholder status in the now defunct Mt. Carmel Apartments, Inc. and seeks to bring a shareholders' derivative claim for an accounting against the individual defendants as former directors of Mt. Carmel Apartments, Inc. See Rule 23.1, Fed.R.Civ.P.

This proceeding is between a citizen of Colorado and citizens of Kansas with an amount in controversy in excess of $10,000, therefore, the court's jurisdiction is based on diversity of citizenship pursuant to 28 U.S.C. § 1332 (1966).

Plaintiff claims he rendered services to the defendants and accepted stock in Mt. Carmel Apartments, Inc. as compensation. Defendants deny that plaintiff is a shareholder and join in asserting counterclaims against the plaintiff for breach of contract, for negligence and for misrepresentation.

On January 12, 1982, this case proceeded to trial on all claims before the court sitting without a jury. At the close of plaintiff's evidence, the defendants moved for a directed verdict on behalf of Virginia Frey and Frey, Inc. Rule 50(a), Fed.R.Civ.P. The motions were taken under advisement by the court and will be ruled on in conjunction with this memorandum and order. The court, having heard the testimony and arguments of counsel and having examined the voluminous documentary evidence involved in this case, makes the following findings of fact and conclusions of law pursuant to Rule 52, Fed.R.Civ.P. We accept as proven the stipulations of the parties which appear in the pretrial order and incorporate them herein. See Pretrial Conference Order, Dk. 27.

FINDINGS OF FACT

1. The defendant Dale Frey purchased 33 1/3 acres, referred to as the Mt. Carmel property, on October 21, 1974. The land had an appraised value on May 29, 1974, of $798,000. Trial exhibit 1. The Mt. Carmel property was subsequently transferred to Virdale, Inc., a Kansas corporation wholly owned by Dale and Virginia Frey, husband and wife, on October 25, 1974.

2. Dale Frey authorized the plaintiff, J. W. Burge, a Colorado real estate broker, to find a developer for the Mt. Carmel property. Trial exhibit 5. Burge was to receive a commission if he could locate a lessor or purchaser for the property.

3. During 1975 Burge introduced Dale Frey to Paul Penner, a Denver, Colorado, contractor interested in developing the Mt. Carmel property. Trial exhibits 5 & 6. After a feasibility investigation, during which time the land was committed to Penner, the plans to develop the property were abandoned. See trial exhibit 7.

4. In February of 1976 the plaintiff proposed that he and Dale Frey jointly develop an apartment complex on the Mt. Carmel property. The parties verbally agreed that Dale Frey would contribute the Mt. Carmel property for the project and that plaintiff would act as developer of the project.

5. Neither Burge nor Dale Frey had developed an apartment complex prior to this occasion, although Burge was experienced in buying and developing commercial property and Frey was experienced in real estate investing. See trial exhibits 25 and 33.

6. A commercial loan application signed by Dale Frey and by J. W. Burge was submitted to Fidelity Investment Co., Wichita, Kansas, on or about March 31, 1976. Trial exhibit 22. At the same time, the parties signed a promissory note for $21,500 for the loan commitment fee to Fidelity Investment Co. Trial exhibit 28. J. W. Burge worked out cost estimates for the project. Trial exhibit 26. Fidelity Investment Co., through its property management division, agreed to manage the completed apartment complex. Trial exhibit 32. Although Fidelity Investment Co. declined to provide permanent financing for the project, they assisted Dale Frey and J. W. Burge by preparing and by endorsing a loan application package to present to the real estate financing division of the Metropolitan Life Insurance Co. See trial exhibits 35 & 38.

7. The Mt. Carmel project consisted of a phased-development apartment complex. Phase I was located on a 10-acre tract included within the 33 1/3 acres of the Mt. Carmel property. Phase I development consisted of seven (7) buildings plus a clubhouse. The construction was brick and stucco over wood framing. See trial exhibit 49. The Mt. Carmel property was considered an excellent location for apartments because the existing stands of mature trees created a park-like atmosphere. See trial exhibit 35.

8. At all times pertinent to this litigation, Dale Frey was ready to sell or trade the Mt. Carmel property and had authorized the plaintiff to act as his agent in that regard.

9. The financing of the Mt. Carmel project was to include an interim construction loan and a permanent take-out loan. The terms of the construction loan were for short-term financing secured by the real estate and improvements. The proceeds of the permanent loan were to be used to pay off the construction loan and were to be secured by a mortgage agreement on the completed project. See trial exhibit 47. After phase I was occupied, revenue from the rental units was to be used to finance other phases of the project.

10. In general, the climate of the construction financing industry from 1973 to 1977 was one of caution. Tight money policies by construction lenders and price escalation in construction materials increased the risk of underestimating project costs.

11. Dale Frey and his attorney, Orlin Wagner, met with J. W. Burge and his attorney, Lawrence Loftus, on March 31, 1976, to discuss the terms of the agreement between Dale Frey and J. W. Burge. The terms agreed upon were set out in a letter of April 8, 1976, from Orlin Wagner to J. W. Burge. In his letter, Mr. Wagner states,

Mr. Frey is in agreement with the understanding of the undersigned, as discussed in our last conference in my office, that Mr. Frey, or his designee, shall have 75% of the corporation, that the other 25% going as follows: (a) To you at the ratio of 70/150ths of 25%, (b) With the corporation having the option of requiring Mr. Baker general contractor, or his corporation, to purchase 80/150th of 25%.

Trial exhibit 32. By subsequent agreement of the parties, the share of the plaintiff was adjusted to 12½ percent. The interest in the Mt. Carmel project of J. W. Burge was compensation in lieu of a fee for time and labor spent in project development. In a letter from Fidelity Investment Co. to Metropolitan Life Insurance Co., dated April 28, 1976, the arrangement was described as follows:

Mr. Jess Burge was engaged by Dale Frey to market the 33.3 acres on a regional basis to developers in the Kansas City-Denver areas. Because of the professional time and labor spent by Mr. Burge on Dale Frey's behalf, together with Mr. Burge's construction and cost consulting ability, it was agreed between Mr. Burge and Dale Frey that in lieu of a professional fee, that a 12.5% of the ownership of the subject development, would be allocated to Jess Burge.

Trial exhibit 38. The interest in the Mt. Carmel project of the contractor of 12½ percent was compensation in lieu of a general contractor's fee for construction. See trial exhibits 38 & 39. The proposed issuance of stock as compensation for personal service fees due the plaintiff and the contractor reduced the cash expense requirements of Mt. Carmel Apartments, Inc.

12. The court finds that the plaintiff performed the following services for Dale Frey and Mt. Carmel Apartments, Inc. pursuant to their agreement. Plaintiff consulted with the Denver architects of the project (trial exhibit 23); calculated construction costs for the project (trial exhibit 26); executed a loan application to Fidelity Investment Co. (trial exhibit 22); executed a promissory note to Fidelity Investment Co. (trial exhibit 28); consulted lending institutions regarding financing, including Fidelity Investment Co., Realbanc, Inc. (trial exhibit 44), and Bankamerica (trial exhibit 45) and consulted with prospective contractors for the project (see generally defendant's exhibit D).

13. The Articles of Incorporation of Mt. Carmel Apartments, Inc. were filed with the Kansas Secretary of State on April 6, 1976, and in the office of Register of Deeds of Sedgwick County, Kansas, on April 16, 1976. Trial exhibits 63 & 64. On August 18, 1976, Fidelity Investment Co. obtained a permanent loan commitment from Metropolitan Life Insurance Co. on behalf of Mt. Carmel Apartments, Inc. as the take-out lender for phase I of the project. Trial exhibit 47.

14. The Articles of Incorporation of Mt. Carmel Apartments, Inc. authorized the issuance of 10,000 shares of voting stock with a par value of $100 per share. Trial exhibit 30. On October 1, 1976, the first meeting of the incorporators of Mt. Carmel was held (trial exhibit 63), the bylaws of the corporation were adopted, id., and the first meeting of the Board of Directors was held (trial exhibit 64). Dale Frey was elected President; Virginia Frey was elected Secretary-Treasurer and J. W. Burge was elected Vice President and Director...