Prudential Ins. Co. of America v. Executive Estates, Inc.

• Decision Date: 30 November 1977
• Docket Number: No. 2-1074A256,2-1074A256
• Citation: 174 Ind.App. 674,369 N.E.2d 1117
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant (Plaintiff and Counterclaim Defendant below), v. EXECUTIVE ESTATES, INC. (Defendant and Counterclaim Plaintiff below), and Doyle Cofer Excavating & Engineering Co., Inc. (Defendant below), Appellees.
• Court: Indiana Appellate Court

Page 1117

369 N.E.2d 1117

174 Ind.App. 674

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant (Plaintiff and Counterclaim Defendant below), v. EXECUTIVE ESTATES, INC. (Defendant and Counterclaim Plaintiff below) and Doyle Cofer Excavating & Engineering Co., Inc. (Defendant below), Appellees.

No. 2-1074A256.

Court of Appeals of Indiana, Second District.

Nov. 30, 1977.

Thomas M. Scanlon, Alan W. Boyd, Barnes, Hickam, Pantzer & Boyd, Francis M. Hughes, Hughes & Hughes, Indianapolis, Tom R. White, Christian, Waltz, White & Klotz, Noblesville, for appellant

Robert W. McNevin, Indianapolis, Paul G. Smith, Smith, Pearce & Barr, Noblesville, for appellees.

BUCHANAN, Judge.

CASE SUMMARY

Prudential Insurance Company (Prudential) appeals an Eight Hundred Fifty Thousand ($850,000.00) Dollar judgment in favor of Executive Estates, Inc. (Executive), claiming that as mortgagee it had no duty in disbursing the loan proceeds to protect the interest of the mortgagor (Executive) from liens or encumbrances and that the damages awarded by the jury were excessive.

We affirm in part and reverse in part.

FACTS

The facts and evidence most favorable to the trial court's judgment are:

Robert McCain (McCain) was an attorney practicing law in Fort Wayne, Indiana, with Harold Korn (Korn).

In late 1965 or early 1966, McCain was contacted at his Fort Wayne law office by his brother-in-law Charles Harvey (Harvey) about investing in a real estate venture. Harvey was an employee in the Production Office of Prudential in Indianapolis.

Harvey related that one Paul Verderosa (Verderosa) had filed a mortgage application with Prudential for funds to be used in acquiring a tract of land near Carmel, Indiana, for residential development. As Verderosa's two co-principals had decided to withdraw from the venture, Harvey asked McCain if he would be interested in taking their place.

Korn then joined the discussions with McCain and Verderosa, and the three formed a corporation Executive Estates, Inc. on January 11, 1966, with McCain ultimately becoming President.

To secure funds to acquire the Hamilton County land on which Verderosa held an option to purchase, Executive, with Harvey's assistance, filed a mortgage loan application To perform the site work Executive needed additional money and a contractor. As McCain and Korn were not familiar with Indianapolis construction firms, Harvey held an Indianapolis meeting in the early part of August, 1966, and supplied them with several names of local firms, including that of Doyle Cofer (Cofer).

with Prudential. Executive was granted a first-mortgage loan from Prudential in June of 1966 in the amount of One Hundred Fifty Thousand ($150,000.00) Dollars.

Cofer expressed interest in the project. Another application was then made to Prudential for additional funds to cover site development costs.

On August 3, 1966, D. L. Goggins (Goggins), a mortgage manager for Prudential, wrote Cofer informing him that Goggins was willing to recommend approval of an additional Two Hundred Thousand ($200,000.00) Dollar loan for this development when the improvements were completed.

Later in August, after Cofer had submitted the lowest bid for site work, Harvey brought Cofer together with McCain and Korn. Subsequently, a no lien contract for the site work was executed on August 29, 1966, with Cofer who promised completion by January of 1967.

Harvey and Goggins conducted a study of the development project and issued a report on November 9, 1966, projecting a gross valuation of Six Hundred Twelve Thousand ($612,000.00) Dollars and recommended a development mortgage loan of Three Hundred Twenty-five Thousand ($325,000.00) Dollars.

This development mortgage loan was ultimately authorized in a letter of January 23, 1967, from Goggins to Executive; however, the amount was subsequently reduced twice: first to Three Hundred Ten Thousand ($310,000.00) Dollars because the lots in Executive Estates would have to be sold without city water, and then to Three Hundred Six Thousand Four Hundred ($306,400.00) Dollars as one lot in the subdivision was being used by Executive for speculative purposes and would not be available for sale.

By January of 1967, despite the site work contract calling for completion by that date, Cofer's work remained unfinished. Also, Executive was not satisfied with the work . . . both problems being brought to Harvey's attention by his frequent visits to the development site.

On March 9, 1967, Goggins wrote a letter to Cofer explaining, among other things, that Prudential would be unable to guarantee payment of Executive's existing indebtedness to Cofer at the time of closing and recommending Cofer either write a letter requesting that Prudential clear the matter with Cofer prior to closing or file some form of lien on the developed tract which would be picked up at the time Executive's mortgage loan funds were finally disbursed.

In August of 1967 McCain and Korn met with Verderosa, Cofer, and Harvey to protest the poor quality of Cofer's workmanship and his failure to meet his deadlines. Cofer in turn promised to finish his work by the end of August or the first of September.

Executive subsequently received several loan commitment extensions from Prudential, the last being to November 28, 1967.

Upon being advised by Cofer in September that he had completed the site work, Executive expressed dissatisfaction with the quality of workmanship. After negotiations extending through September and October, Executive and Cofer orally settled the original contract between them, calling for Two Hundred Two Thousand ($202,000.00) Dollars, for the sum of One Hundred Thirty-five Thousand ($135,000.00) Dollars, Cofer agreeing to "take the lesser amount."

McCain testified that this agreement was not put into writing because Executive was relying on the closing to secure mechanic's lien releases and waivers on separate forms or on the back of the disbursement checks.

A week later Harvey informed McCain and Korn that Cofer had become undecided as to his course of action in accepting this When Harvey advised Executive that he was prepared to set the matter for closing, McCain requested that he (McCain) be paid the money so he could handle the closing personally because Executive did not trust Cofer. Harvey explained that Prudential had its own closing agent and did not use other agents for dispensing money but advised McCain to call Chicago for an official policy statement.

lesser amount; however, Harvey subsequently assured them Cofer had agreed to accept the One Hundred Thirty-five Thousand ($135,000.00) Dollar settlement.

McCain did so and received the same answer from Prudential's legal department. McCain advised Harvey that, as he could not handle the closing personally and dispense the money, he wanted to be present at the closing to make sure it was handled properly.

On the 21st or 22nd of November, 1967, Harvey brought several closing documents to Fort Wayne to be signed by McCain and Korn a mortgage, a promissory note secured by the mortgage, a closing affidavit, an owner's affidavit, and a guaranty and indemnity agreement, all being instruments designed to protect the mortgagee's interest.

At that time Harvey, McCain, and Korn knew that several mechanic's liens had already been filed by sub-contractors. McCain and Korn expressed concern about these liens and the unreleased performance bond with the town of Carmel ¹ all of which were reflected in the documents shown them. Harvey reassured them, however, that any liens or encumbrances "would be taken care of" at the closing and advised them to sign these five documents at this meeting. Upon these assurances, McCain and Korn signed the documents to be effective November 28, 1967, the date of closing.

On that date McCain went to the closing at the law offices of Barney & Hughes in Indianapolis, that firm being Prudential's agent for disbursing the mortgage funds. Arriving immediately after lunch, McCain gave the receptionist his card and advised her that he was there for the Executive Estates closing.

However, McCain was never seen by Hughes until after the closing was concluded. Harvey was not present at the closing, and apparently Hughes was not informed by either Harvey or Prudential's office that McCain was to be in attendance.

Hughes had received his closing instructions in a transmittal letter from Prudential's Chicago office, dated November 17, 1967. This letter contained no instructions as to securing full releases from all potential lienholders, nor did Harvey instruct Hughes of Executive's problems with Cofer when he delivered the closing documents to Hughes (signed by Executive several days earlier).

In addition to the transmittal letter of instructions and the closing documents, Hughes also received a check for the mortgage loan proceeds from Prudential, which Executive had yet to indorse.

At the closing, Hughes distributed firm escrow account checks to Cofer's sub-contractors for the amount due each of them in exchange for complete releases, and then delivered to Cofer a check for the difference between the amount paid his sub-contractors and One Hundred Thirty-five Thousand ($135,000.00) Dollars.

No release was obtained from Cofer. Hughes went over each item with Cofer and received Cofer's oral acknowledgment that the One Hundred Thirty-five Thousand ($135,000.00) Dollars was the full gross sum due him.

Following the closing (McCain had been waiting approximately thirty to forty-five minutes), Hughes appeared, introduced himself, informed McCain that the mortgage money had been disbursed, and handed him a copy of the note and mortgage.

McCain testified he had "no reason to believe it (his exclusion from the closing) was an intended act."

Learning that the performance bond with Carmel had not been released, McCain informed Hughes he would not approve disbursement of the loan proceeds until this release was...