Appendix — Wisconsin Avenue Associates, Inc. v. 2720 Wisconsin Avenue Cooperative Ass'n

INDEX

Page

Opinion of the D.C. Court of Appeals .................. la

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a AEN Oe ciptia's Uuibins oy Che vb ePOeReGhs oe cwtce cis’

Memorandum Opinion of D.C. Superior Court (trial on dam-

SEER Wok She Cdb en elee asm nwhe uree UE s <p on ove et 62a

Order Amending Memorandum Opinion ................ 79a

Memorandum Opinion of D.C. Superior Court (final judg-

ee PTS TELETIUASY LR LIP a TERE Ce 80a

Judgment of the D.C. Court of Appeals ................ 90a

Order of D.C. Court of Appeals denying rehearing and rehear-

DT .cAickatectalse boss 06 vsdoescecevuers 92a

Text of Statutes Involved ... 2... 2... cc cece eee ee eees 94a

Excerpts from lower-court papers ... 2... 6. ees 96a

PEE. oo ch eh chek cudeeWaedecccvccesecias 99a

EE a Di hcidn dns p Ue aubes cos be wisnecesceteds Ola

Assignment of Purchase Agreement .................... 103a

Mutual Ownership Contract ... 2... ene 105a

Nullified Clauses in Deed of Trust ...... 2... 6.6.6.6 655. lila

DISTRICT OF COLUMBIA COURT OF APPEALS

Nos. 79-631 and 79-1103

WISCONSIN AVENUE ASSOCIATES, INC., et al., APPELLANTS,

Vv.

2720 WISCONSIN AVENUE COOPERATIVE ASSOCIATION, INC.,

et al., APPELLEES.

No. 79-1102

GoLp DEPOSITORY AND LOAN COMPANY, INC.,

APPELLANT,

Vv

2720 WISCONSIN AVENUE COOPERATIVE ASSOCIATION, INC.,

et al., APPELLEES.

Appeals from the Superior Court of the

District of Columbia

(Hon. William E. Stewart, Jr., Trial Judge)

(Argued June 17, 1981 Decided February 2, 1982)

E. Leo Backus for appellants in Nos. 79-631 and 79-

1103.

John H. MacVey for appellant in No. 79-1102.

Richard A. Hibey, with whom Robert B. Wallace was

on the briefs, for appellees.

Before HARRIS, MACK, and Pryor, Associate Judges.

[174]

Court charging appellants, former officers and/or direc-

tors of the cooperative and various related corporate en-

tities, with breach of fiduciary duty and breach of

cooperative apartments in violation

finding that he was in civil contempt for noncompliance

with the April 27, 1979, final judgment. We affirm the

trial court’s final judgments and order and its issuance

of the injunction prohibiting the sale of apartment units

by GDLC. That portion of the appeal which is directed

to the civil contempt citation is moot.

' The action in the trial court was brought by 2720 Wiscon-

sin Avenue Cooperative Association, Inc., and» 25 members

of the cooperative. For purposes of these appeals, we refer

to the plaintiffs collectively as “Cooperative.” We refer to

Wisconsin Avenue Associates, Inc. (Associates), Aleksandrs

V. Laurins, and the following individuals and corporations

collectively as “defendants”: VAL Manaye:nent Company,

Inc., Metropolitan Mortgage Bankers, Inc., James G. Norman,

Charlene Baden, Carol A. Tompkins, Wayne A. Chasen, Real

Estate Equity Management, Inc., Scenic Travel, Inc., Real

Inc., Conference

Development Management, ™

Group, Inc., and Security National Bank.

+ [175]

|

3a

I

In November of 1974, A. V. Laurins & Company, Inc.,

entered into a sales contract with Marjory J. Jawish and

Henry Jawish for the purchase of the building at 2720

Wisconsin Avenue, N.W. The

payment of $75,000, the assumption of two existing

gages, and the issuance of a third mortgage.

On December 1, 1974, 2720 Limited Partnership (an

entity controlled by defendant Laurins) agreed to pur-

chase a $945,000 note to be executed by the yet-to-be-

Inc. (Cooperative), in favor of the yet-to-be-formed

Wisconsin Avenue Associates, Inc. (Associates) .?

assigned to Cooperative its right to purchase the Jawish

property in exchange for a “wrap-around” mortgage in

the amount of $945,000 executed by Cooperative in favor

of Associates. The sales agreement prepared by defend-

ants stated that the entire corporate indebtedness was

$945,000. The settlement sheets also reflected a pur-

chase price of $945,000. The assignment of purchase

agreement further provided that Associates would ad-

vance all cash required to acquire title to the property.

2 The $945,000 note in favor of Associates was negotiated

to 2720 Limited Partnership om December 13, 1974, to Real

Development Management, Inc., on December 17, 1974, and

to Co-op Mortgage Investors Limited Partnership (CMI) on

December 20, 1974. All of these entities were owned or con-

trolled by defendant Laurins. In August of 1978, the note

was transferred without consideration to Co-op Investment

Bankers (CIB). The trial court found that CIB was a mere

continuation of CMI.

[176]

4a

On the same date, Cooperative and Associates entered

into two additional written agreements. First, Coopera-

tive agreed to assign to Associates 100 percent of the

by Laurins and attested to by Baden. Laurins recognized

that he owed a fiduciary duty to Cooperative as of that

date.

On December 16, 1974, Cooperative executed another

note in favor of Associates in the amount of $100,000. An

additional note was executed in favor of Associates on

=

Sa

was alluded to in a footnote to the 1974-75 budget; how-

ever, there the loan was listed as being in the amount

of $84,366 and no interest rate was stated.

Two items of non-recurring income were included in

the 1975 maintenance budget as “Estimated Income

Items”: $9,200 in membership fees and $6,900 in first-

year principal payments.‘ These items were used to

defray the maintenance expenses for the first year.

Largely as a result of the non-recurring nature of these

income items, the maintenance budget for the following

year increased by 37 percent. Additionally, VAL Man-

agement Company, the Laurins-controiled property man-

agement organization, was late in preparing the 1976

budget and released the budget in the form of a notice

of increase in fees.

On March 18, 1976, Cooperative brought suit in

Superior Court charging defendants with breach of

fiduciary duty and breach of contract. The trial court

ordered that the nonjury trial be bifurcated on the issues

of liability and damages.

On October 6, 1976, Associates executed 12 promis-

sory notes in favor of 2720 Limited Partnership. Those

notes were secured by the pledge of 11 mutual ownership

contracts. Later, the notes were assigned to Co-op Mort-

gage Investors Limited Partnership (CMI), a Laurins-

controlled partnership.* On January 5, 1978, Associates

executed another promissory note in favor of

ment Services Group, Inc., another Laurins-controlled

* Principal payments began November 1, 1975. No principal

payments were required in the first year.

5 Real Estate Equity Management, a named defendant in

Se ee ee

[178]

6a

corporation. That note was secured by the pledge of

nine mutual ownership contracts.

On June 27, 1978, the trial judge issued his memoran-

dum opinion on the liabi’ity issue. The court found that

the promoters had breached their fiduciary duty by fail-

ing to advise cooperative members of the extent of the

financial obligation they were undertaking. Although the

court found the disclosure of the $945,000 note to be

sufficient, it found that defendants failed to disclose

adequately the existence of the $100,000 and $5,700 notes

and to sustain their burden of showing the fairness of

those transactions to Cooperative. Additionally, the

court found that the terms of the $100,000 note were

altered significantly to the detriment of Cooperative, and,

consequently, that their inclusion constituted an over-

reaching. See note 3, supra. The court held that Coopera-

tive would be obligated on those notes only to the ex-

tent that it received value. A further breach of fiduciary

duty was found in Laurins’ failure to disclose the antici-

pated increase in the 1976 maintenance budget. The

court, however, found that the breach of fiduciary duty

did not rise to the level of fraud.

The court invalidated four provisions of the deed of

trust as oppressive and contrary to public policy. First,

the court found that the provision which held Associates

harmless from attorneys’ fees or costs incurred regard-

less of the outcome of litigation violated the general rule

that each party must bear its own costs of litigation.

Second, the court struck down the paragraph which

provided that the entire debt would be accelerated if a

purchaser attempted to resell his unit as an unreasonable

restraint on alienation. Next, the court found that the

paragraph which provided that Cooperative’s members

could not prepay the participating financing without de-

fendants consent was unenforceable as a severe impair-

[179]

7a

ment of the marketability of the units. Finally, the court

declared void the provision that the $945,000 note would

become due in full if the deed of trust were adjudicated

null and void by a court.

The trial court also concluded that Associates breached

its contractual duty to convey the units to purchasers

Because of Associates’ breach of fiduciary duty, the court

awarded attorneys’ fees to Cooperative.

In addition to the individual defendants, the court

held liable a number of corporate entities controlled by

Laurins that had served as conduits for the various notes

executed by Cooperative. The court dismissed defendants’

counterclaims for tortious interference with defendants’

contractual relations with tenants, damage to reputation,

breach of contract, and negligent performance of contract.

On August 8, 1978, between the issuance of the trial

court’s liability and damage opinions, Co-op Investment

Bankers (CIB) was formed. During August of 1978, the

$945,000 note was transferred to CIB. At that time,

the October 6, 1976, promissory notes also were endorsed

over to CIB by CMI. On August 23, 1978, the October

6, 1976, notes were transferred to Gold Depository and

Loan Company, Inc. (GDLC), a wholly-owned subsidiary

of CIB. The January 1978 promissory note also was

transferred to GDLC.

On December 18, 1978, the trial court issued its

memorandum opinion on the damages issue. On the

maintenance fee issue, the court concluded that although

plaintiffs had established defendants’ liability, they had

failed to meet their burden of proof on damages. Ac-

[180]

cordingly, the court awarded nominal damages in the

amount of $1 per plaintiff.

The court rescinded the contractual rights and obliga-

tions which the mutual ownership contracts for the 11

unsold apartment units sought to confer on defendants

and ordered the defendants to turn over to plaintiffs

all rents collected on those units plus the reasonable

rental value of the units occupied by defendants.*

Because of the breach of fiduciary duty relating to

the $100,000 note, the court awarded $30,700 in punitive

damages to plaintiffs. For the misrepresentation of the

maintenance budget, punitive damages of $500 per pur-

chaser were awarded. Punitive damages for the four

unconscionable provisions of the deed of trust were

denied.

The court awarded plaintiffs $124,245.16 in attor-

neys’ fees and $9,974.48 in general costs. Finally, de-

fendants were allowed $21,334.10 in renovation costs and

$9,365.90 in closing costs relating to the cancellation of

$105,700 of indebtedness.

On January 23, 1979, Associates filed a Chapter XI

petition in Bankruptcy Court. On March 27, 1979, that

petition was dismissed on the basis that it had been filed

“in bad faith and for the sole purpose of thwarting plain-

tiffs’ rights within the pending lawsuit in D.C. Superior

Court.” Three days later, appellants filed a Chapter VII

petition with the Bankruptcy Court. On April 27, 1979,

the Superior Court entered its order and final judgments.

Appellants invoked the automatic stay provision of the

bankruptcy laws. The stay, however, was lifted on

* Associates received credit for the maintenance fees that

it had paid on those 11 units.

[181]

9a

June 14, 1979, by Judge Whelan of the

Court, who noted that the petition. had been filed “for the

purpose of delaying and otherwise thwarting the Plain-

tiffs in the Superior Court proceeding and not with any

eye toward any legitimate relief under the Bankruptcy

Act.”

On July 10, 1979, GDLC demanded payment from

Associates on the January 1978 promissory note. On

that date, GDLC also sent default letters to Associates

concerning the October 6, 1976, promissory notes. The

letters stated that failure to make payment by July 16,

1979, would result in the public sale of the 11 apartment

units. On July 12, 1979, Cooperative received copies of

the default letters issued by GDLC. On July 13, the

court issued an order to show cause why GDLC and de-

fendants should not be found in contempt of that portion

of the court’s final judgment which expressly prohibited

the further sale or leasing of the apartment units in

question. On August 10, 1979, the court found Laurins in

civil contempt of court and enjoined GDLC from selling

the apartment units. On October 30, 1979, following the

delivery of the mutual ownership contracts to Cooperative

in compliance with the August 10, 1979, order, Laurins

was purged of contempt.

II

The trial court issued four comprehensive memoran-

dum opinions in this case. When a case is tried without

a jury, we may review both as to the facts and the law,

but we may not set aside a judgment except for errors

of law unless the judgment is plainly wrong or unsup-

ported by the evidence. See D.C. Code 1981, § 17-305

(a). That presumption as to the validity of the trial

court’s findings properly exists, inasmuch as the trial

court heard the witnesses’ testimony and evaluated their

credibility. See, e.g., Edmund J. Flynn Co. v. LaVay,

[182]

10a

D.C.App., 431 A.2d 543, 546 (1981); In re A.B.H., D.C.

App., 343 A.2d 578, 575 (1975); Johnson & Jenkins

Funeral Home, Inc. v. District of Columbia, D.C.App.,

318 A.2d 596, 597 (1974) ; Lee Washington, Inc. v. Wash-

ington Motor Truck Trensportation Employees Health

and Welfare Trust, D.C.App., 310 A.2d 604, 606 (1973).

Recognizing that limitation on our review function, we

proceed to a consideration of the merits.

Ill

Officers and directors of a corporation owe a fiduciary

duty to the corporation and to its shareholders, which

requires them to act in good faith in managing the

affairs of the corporation. See, e.g., United States v.

Byrum, 408 U.S. 125, 142 (1972); SEC v. Chenery

Corp., 318 U.S. 80, 85 (1943) ; McKay v. Wahlenmaier,

96 U.S.App.D.C. 313, 322, 296 F.2d 35, 44 (1955);

Johnson v. American General Insurance Co., 296 F.

Supp. 802, 809 (D.D.C. 1969). Courts particularly scru-

tinize transactions between corporations with interlock-

ing directorates, a situation in which two corporations

have a majority of their boards of directors in common.

Transactions resulting from actions of the common di-

rectors taken on behalf of both corporations must be

deemed presumptively fraudulent. Geddes v. Anaconda

Copper Mining Co., 254 U.S. 590, 599 (1921) ; Corsicana

National Bank v. Johnson, 251 U.S. 68, 90 (1919);

Mayflower Hotel Stockholders Protective Committee v.

Mayflower Hotel Corp., 84 U.S.App.D.C. 275, 277-282,

178 F.2d 416, 418-423 (1949).

Similarly, promoters of a corporation stand in a fidu-

ciary relation to both the corporation and its stockhold-

ers, which requires them to act with the utmost good

faith and to disclose fully all material facts to both the

corporation and its stockholders. McCandless, Receiver

[183]

v. Furlaud, 296 U.S. 140, 156-57 (1985) Dickerman v.

Northern Trust Co., 176 U.S. 181, 203-04 (1900) ; Post

v. United States, 182 U.S.App.D.C. 189, 198, 407 F.2d

$19, 328 (1968), cert. denied, 3938 U.S. 1092 (1969);

Bailes v. Colonial Press, Inc., 444 F.2d 1241, 1244 (5th

Cir. 1971) ; Earle R. Hanson & Associates v. Farmers Co-

operative Creamery Co., 403 F.2d 65, 70 (8th Cir. 1968).

The fiduciary concept is not limited to stock corporations

but applies to membership organizations as well. Post v.

United States, supra, 1382 U.S.App.D.C. at 199, 407 F.2d

at 329.

Like promoters or directors of a corporation, devel-

opers of a housing cooperative occupy a fiduciary position

with respect to the individual members of the coopera-

tive. The promoter of a cooperative apartment building

must disclose completely the terms of the apartment

sales and the extent of the financial obligation to be

undertaken by the prospective apartment purchasers.

Northridge Cooperative Section No. 1 v. 32nd Avenue

Construction Corporation, 2 N.Y.2d 514, ——, 141 N.E.

2d 802, 808, 161 N.Y.S.2d 404, ——, (1957) (North-

ridge).

On December 6, 1974, when the various agreements

between Associates and Cooperative were executed, the

corporations shared a common majority of their boards

of directors—defendants Laurins, Norman, and Baden.

The trial court found that the promoter, defendant Lau-

rins, dominated the boards of directors and that the

other board members viewed themselves as employees

of Laurin and had no concept of their roles as

officers and directors of the respective corporate en-

tities. Laurins prepared and executed the documents

relating to the sale of the apartment building on behalf

of both Cooperative and Associates. Defendants, as de-

(184)

12a

velopers and directors of the cooperative, clearly owed

fiduciary duties to its members.

The trial court found that those fiduciary duties com-

menced on December 1, 1974, the date on which it be-

came clear that Laurins intended to sell his rights in the

apartment building to Cooperative. Laurins testified

that he recognized his fiduciary obligation as of Decem-

ber 6, 1974, the date on which Cooperative was incor-

porated and on which the various agreements between

Associates and Cooperative were executed. Laurins and

his codefendant Norman testified that they discharged

their fiduciary obligations to Cooperative by “play-act-

ing,” a role-playing technique in which one defendant

played the part of Cooperative and the other purported

to represent the interests of Associates. The trial court,

however, found that the play-acting “fail[ed] to rise to

any acceptable level of performance of a fiduciary in

behalf of his corporation” and characterized the play-

acting as a means of determining just how far the de-

velopers could go. The trial court did not err in con-

cluding that Associates failed to discharge its fiduciary

duty to Cooperative.

IV

Appellants challenge the trial court’s finding that de-

fendants had not disclosed adequately the existence of

two notes in favor of Associates totaling $105,700 and

had not sustained the burden of showing the fairness

of those transactions to Cooperative. As fiduciaries, de-

fendants were required to disclose the extent of the

financial undertakings to the members of Cooperative.

See Northridge, supra, 2 N.Y.2d at ——, 141 N.E.2d at

808, 161 N.Y.S.2d at ——. The sales agreerrent signed

by the members indicated that the total corporate in-

debtedness was limited to $945,000. Under the terms of

the assignment of purchase agreement, Associates agreed

(185)

Not only did the trial court find that defendants failed

to disclose the existence of the two notes, but it also

found that the terms of the notes had been significantly

men .

record amply supports those findings. The trial court’s

an overreaching was not erroneous.

Vv

Defendants also failed to disclose the substantial in-

crease in Cooperative’s maintenance fees anticipated

after its first year of operation. Defendant Laurins tes-

tified that by March 1975, he was aware of the expected

increase in fees for the following years, but he failed

to notify prospective purchasers of the increase. Con-

sequently, Cooperative members were misled by the main-

tenance figure appearing in the 1975 budget. Two items

of non-recurring income improperly were included in the

7 The trial court permitted a recovery in the amount of

$30,700—$9,365.90 in closing costs and $21,334.10 in renova-

tion expenses. The court did not err in refusing to reimburse

Associates for the $75,000 down payment made to the Jawishes

for the property. Although Associates agreed to make a cash

down payment of $75,000 as part of the purchase price of

$750,000 from the Jawishes, the total purchase price agreed

upon for the sale from Associates to Cooperative was $945,-

000, not $945,000 plus the $75,000 cash down payment.

[186]

I4a

year principal payments.* The trial court heard uncon-

tradicted expert testimony that the inclusion of these

items in income violated sound accounting principles.

Additionally, the trial court found that the maintenance

1975 maintenance budget: membership fees and first

court concluded that in failing adequately to inform

the cooperative members of the extent of their main-

tenance obligations, defendants breached their fiduciary

duties to Cooperative. We find no error in that conclu-

sion.

VI

Although courts properly are reluctant to interfere

with the freedom to contract, it may become necessary

to refuse to enforce contractual provisions which operate

contrary to public policy. In particular, careful scrutiny

must be given to contractual provisions in situations in

which one of the contracting parties acts as a fiduciary

to the other party. Contracts which tend to encourage

promoters to disregard the best interests of the corpora-

tion must be invalidated.

The trial court invalidated four provisions of the deed

of trust which it found to be unconscionable and viola-

tive of public policy. First, the court held that the para-

graph of the deed of trust which held Associates harm-

less from attorneys’ fees was unenforceable.’ Such provi-

® See note 4 and accompanying text, supra.

* That paragraph provided:

Grantor shall save Beneficiary and Trustees harmless

from all costs and expenses, including reasonable attor-

neys’ fees, and costs of a title search, continuation of

abstract and preparation of survey, incurred by reason

[187]

Sa

sions are common in deeds of trust in the District of

Columbia. See In re Wolman, 314 F. Supp. 703, 705

(D.Md. 1970). These provisions generally are enforced

in most jurisdictions, including this one. Manchester

Gardens, Inc. v. Great West Life Assurance Co., 92 U.S.

App.D.C. 320, 325, 205 F.2d 872, 877 (1953). Courts

do, however, have discretion to refuse to enforce such

provisions in cases in which it would be inequitable to do

so. In Manchester Gardens, the court stated:

[W]here the merit or necessity of the credi-

tor’s claim or defense is successfully challenged,

courts may decline to enforce attorney’s fee pro-

visions. * * * In no event should the sum al-

lowed be so large as to amount to an undue

penalty for taking one’s grievance to the courts.

[Id., at 326, 205 F.2d at 878 (footnote omitted) .]

The trial court found that the challenged provision vio-

lated the general rule that each’party is to bear its own

costs of litigation. Although contracting parties gener-

outcome of any litigation. Such a provision is imper-

missibly broad in that it permits “a party who breaches

a contract to rely on the same contract to reimburse it

for expenses, such as attorney’s fees, which arose out of

the breach.” First Atlantic Building Corp. v. Neubauer

Construction Co., 352 So.2d 103, 106 (Fla. Dist. Ct. App.

1977). Thus, we see no error in the trial court’s con-

clusion that this contract clause, which served to foster

and to insulate breaches of fiduciary duty by Associates,

is illegal and void.

The trial court also voided the provision of the deed

of trust which permitted Associates to accelerate the en-

tire debt upon the sale or transfer of an apartment

[189]

7a

unit.” This clause, commonly referred to as a “due-on-

sale” clause, provided that any refinancing by the new

purchaser with Associates be made at the highest pre-

vailing legal rate of interest. The trial court found no

legitimate justification for the overreaching provisions

of the clause and concluded that it constituted an un-

reasonable restraint on alienation.

Although a due-on-sale clause may appear unexcep-

tionable, it can severely restrict the mortgagor’s ability

to alienate his property freely. During inflationary

periods, a purchaser’s ability to assume the existing

mortgage on a piece of property may determine whether

he is willing and financially able to make the purchase.

If he is forced to refinance the mortgage at a higher

interest rate, the price that he is willing to pay for the

property will decrease correspondingly. See Note, Judi-

%” That clause, in its entirety, stated:

In the event of the sale, conveyance, or transfer of all

or any part of the Premises by the Grantor, Beneficiary

may accelerate the entire principal due on the Note. In

the event of a sale, conveyance, or transfer of an interest

in the Grantor which includes the right of possession

to a part of the Premises, Beneficiary may accelerate that

portion of the total indebtedness secured hereby which

said owner of an interest in Grantor has secured by

executing his promissory note to Grantor pursuant to

the provisions of paragraph 27 herein. Beneficiary may

at his sole option elect to refinance said portion of this

indebtedness for the Grantor if the sale of said interest

is made to a person whom the Beneficiary, in its sole

judgment, believes to be financially capable of supporting

- the portion of the indebtedness he will be responsible for.

Said refinancing may be made at the highest prevailing

legal rate of interest. The primary responsibility of re-

paying the refinanced portion or portions of the total

indebtedness secured by this Deed of Trust shall remain

with Grantor.

[190]

ability, 27 Stan. L. Rev. 1109, 1113 (1975). This

due-on-sale clause not only permitted the mortgagee

to accelerate the debt upon transfer or sale of the

gagee’s legitimate interests in protecting his loan to

determine whether the restraint is reasonable. See gen-

erally, Annot., 69 A.L.R.3d 713, 734 (1976). The mort-

gagee has a legitimate interest in protecting against the

impairment of his security and the risk of default.

When these interests are jeopardized by

ica, 21 Cal.38d 943, 950-51, 582 P.2d 970, 975, 148 Cal.

Rptr. 379, 384 (1978); Tucker v. Lassen Savings and

Loan Association, 12 Cal.3d 629, 638-39, 526 P.2d 1169,

1175, 116 Cal.Rptr. 633, 639 (1974); Nichols v. Ann

Arbor Federal Savings & Loan Association, 73 Mich.App.

163, ——, 250 N.W.2d 804, 807 (1977). At trial, Asso-

ciates claimed that the due-on-sale clause was a neces-

sary control device to prevent “undesirables” from enter-

ing the cooperative. The trial court did not err in con-

cluding that this interest was protected adequately by

admission procedures established by the by-laws and the

rules and regulations of Cooperative.

Associates argues that the due-on-sale clause was nec-

essary to protect its interest in maintaining its loan at

current interest rates. A lender’s desire to maintain its

[191]

19a

loan at current interest rates is not sufficient justifica-

tion for enforcement of a due-on-sale clause. Wellen-

kamp v. Bank of America, supra, 21 Cal.3d at 952, 582

P.2d at 976, 148 Cal.Rptr. at 385; Tucker v. Lassen

Savings and Loan Association, supra, 12 Cal.3d at 639

n.10, 526 P.2d at 1175 n.10, 116 Cal.Rptr. at 639 n.10;

Nichols v. Ann Arbor Federal Savings & Loan Associa-

tion, supra, 73 Mich.App. at ——, 250 N.W.2d at 809.

We find no legitimate interests of Associates which jus-

tify the restraint on alienation of the apartment units

resulting from the inclusion of the due-on-sale clause in

the deed of trust.

Defendant Laurins structured the clause in his best

interests as the lender rather than in the best interests

of Cooperative, with respect to which he was a fidu-

ciary. The due-on-sale clause protected his interest as a

lender in maximizing his income from the loan and

ignored Cooperative’s interest in preserving the market-

ability of apartment units. Although we do not reach

the general validity of due-on-sale clauses in deeds of

trust in the District of Columbia, we agree with the trial

court that in light of the fiduciary duty owed by Asso-

ciates to Cooperative, this particular clause constituted

an overreaching by Associates and is void as an unrea-

sonable restraint on the alienation of the apartment

units.

The trial court also invalidated the paragraph of the

deed of trust which provided that Cooperative could not

prepay the participating financing without Associates’

written consent."' Any attempt to prepay the underlying

" That paragraph provided :

Grantor covenants and agrees not to exercise any right

or privilege of prepayment of the Participating Financing

and further covenants and agrees not to enter into any

agreement with the holder of the Participating Financing

[192]

|

20a .

financing would accelerate the entire indebtedness. Asso-

ciates argues that the clause was necessary to prevent

Cooperative from refinancing the debt when interest rates

fell and denying defendants the benefit of their bargain.

This argument must be considered in conjunction with

defendants’ position on the due-on-sale clause.

On the one hand, the due-on-sale clause permitted As-

sociates to take advantage of higher interest rates dur-

ing times of inflation, while on the other hand, the pro-

hibition against prepayment prevented Cooperative from

refinancing its mortgage during times of lower interest

rates. We conclude that this clause, like the due-on-sale

clause, was included in the deed of trust without con-

sideration of the best interests of Cooperative. The trial

court did not err in finding that the prepayment clause

modifying or amending any of the provisions dealing

with payment of principal or interest thereunder without

the prior written consent of the Beneficiary. In consid-

eration of the financing provided by Beneficiary under

the provisions of this Deed of Trust, Beneficiary is ir-

revocably constituted sole and exclusive agent and attor-

ney in fact for Grantor to arrange, at Beneficiary’s sole

discretion to refinance any or all of the Participating

Financing or debt due under the terms of this Deed of

Trust if such action is desired by Beneficiary. Such

agency shall include the authorization of Grantor for

Beneficiary to execute on Grantor’s behalf all documents

required by any lender to accomplish said refinancing.

In the event the Grantor shall not have the power to

delegate to Beneficiary the performance of any act re-

quired to effect said refinancing, Grantor agrees to exe-

cute any documents and provide any such affidavits or

representations required of a lender to effect said re-

financing. Failure of Grantor to cooperate in all respects

with the refinancing of the Participating Interests or

debt due hereunder shall be deemed a ¢ofault under the

terms and provisions of this Deed of Trust.

[193]

2la

was unenforceable because it unreasonably impaired the

marketability of the apartment units.

Finally, the trial court refused to uphold that portion

of the deed of trust which gave Associates the power to

the $945,000 note due in full in ten days if the

of trust were declared unenforceable by a court.”

court concluded that the provision “operated wholly

to the benefit of the defendants at the time that they

owed plaintiffs a duty of loyalty which included a prohi-

bition against overreaching.” Like the attorneys’ fees

clause, this paragraph deprived Cooperative of its right

of redress in court for violations of the fiduciary duty

'? That paragraph provided :

Nothing herein cont: ined nor any transaction related

hereto shall be construed or shall so operate either pre-

sently or prospectively, (a) to require Grantor to pay

interest at a rate greater than is now lawful in such

case to contract for, but shall require payment of in-

terest only to the extent of such lawful rate, or (b) to

require Grantor to make any payment or do any act

contrary to law; but if any clause and provision herein

contained shall otherwise so operate to invalidate this

Deed of Trust in whole or in part, then such clauses and

for naught as though not

Trust shall remain operative and in full force and effect.

court decree prohibits the

obligation undertaken herein by

the Grantor, or provides that any amount to be paid

by the Grantor must be credited against the Grantor's

right, on ten (10) days prior notice to the Grantor, to

require payment in full of the entire indebtedness secured

hereby.

2

é

z

t

22a

vil

The trial court found that Associates failed to per-

form two of its contractual duties: to convey the units

to purchasers and to perform its apartment preparation

duties. Title to the apartment units was assigned to As-

sociates for the sole purpose of selling those units to the

public. Associates pledged 11 mutual ownership con-

tracts as collateral for the October 6, 1976, and Janu-

ary 1978 promissory notes in clear violation of the as-

signment agreement. We are unpersuaded by defend-

ants’ argument that their actions in pledging the mutual

ownership contracts were necessitated by mounting legal

fees in the suit brought by Cooperative. The record am-

ply supports the trial court’s conclusion that “since the

instigation of this litigation, Associates has maintained

the unsold units for every purpose but that which is spe-

cified by the agreement.”

The trial court partially rescinded the assignment

agreement between the two parties and ordered defend-

ants to reconvey title to the 11 unsold units to Coopera-

tive. Appellants claim that the proper remedy would

have been to rescind the agreement completely by return-

ing the building to Associates and by cancelling Coopera-

tive’s indebtedness. We conclude, however, that in light

of the oppressive actions by defendants, the court did not

abuse its discretion in fashioning an equitable remedy.

Vill

Appellants also challenge the award of attorneys’ fees

to Cooperative. Attorneys’ fees generally are not awarded

to either party in a lawsuit. The award of attor-

neys’ fees is appropriate, however, “where a party

brings or maintains ar unfounded suit or withholds ac-

tion to which the opposing party is patently entitled, as

by virtue of a judgment or because of a fiduciary rela-

[195]

23a

tionship, and does so in bad faith, vexatiously, wantonly,

or for oppressive reasons.” 1901 Wyoming Avenue Coop-

erative Association v. Lee, D.C.App., 345 A.2d 456, 464-

65 (1975) ; accord, AFSCME v. Ball, D.C.App.,——— _ A.2d

—— (No. 80-1309, Dec. 30, 1981) , Diygs v. Stewart, D.C.

App., 418 A.2d 1069, 1071 n.7 (1980); Bay General In-

dustries, Inc. v. Johnson, D.C.App., 418 A.2d 1050, 1057

n.20 (1980); Trilon Plaza Co. v. Allstate Leasing Corp.,

D.C.App., 399 A.2d 34, 37 (1979); Wisconsin Avenue

Associates, Inc. v. 2720 Wisconsin Avenue C i

Association, Inc., D.C.App., 385 A.2d 20, 24 (1978);

F. W. Berens Sales Co. v. McKinney, D.C.App., 310 A.2d

601, 602 (1973); Continental Insurance Co. v. Lynham,

D.C.App., 293 A.2d 481, 483-84 (1972). After an exami-

nation of the voluminous record (nearly 5,000 pages) in

this overlitigated case (the full history of which could

not feasibly be set forth in this opinion), we conclude

that the trial court did not abuse its discretion in award-

ing attorneys’ fees to Cooperative.

IX

Appellant Gold Depository and Loan Company chal-

lenges the post-judgment issuance of an injunction barring

the public sale of the 11 apartment units which it held as

security for the October 6, 1976, and January 5, 1978,

promissory notes which had been issued by Associates.

GDLC claims that the prohibition on the sale of the

remaining unsold apartment units did not apply to the

lien which it held on the units. It argues that in fore-

closing on the promissory notes (which were in default),

it was not acting in concert with the defendants named

in the injunction, but merely was protecting its own

security interest.”

%8 Appellant GDLC asserts several other grounds of error

which we find to be without merit.

[196]

24a

The pledge of the 11 mutual ownership contracts as

collateral for the promissory notes by Associates clearly

contravened the purpose of the assignment agreement.

See Part VII, supra. The promissory notes then were

transferred to a series of Laurins-controlled entities. See

supra. The trial court found that CIB (one of

last holders) was a continuation of CMI, a named

the

def

sole general partner, Real Estate Equity Management.

See notes 1 and 2, supra. CIB then transferred the pro-

missory notes to GDLC, its wholly-owned subsidiary and

was in privity with defendant Laurins and, therefore,

was bound by the court’s order. The attempted foreclosure

by GDLC was an effort by defendants to circumvent the

court’s order enjoining defendants and all parties in

active concert from selling or leasing the apartments

in question. The trial court did not err in prohibiting the

public sale of the 11 units by GDLC.

x

Also challenged is the trial court’s finding that defend-

ant Laurins was in civil contempt of the court’s final

order for his refusal] to turn over title to the 11 apart-

ment units to Cooperative. However, Laurins purged him-

self of contempt by returning the mutual ownership con-

tracts to Cooperative. On October 18, 1979, the trial court

set aside the contempt order. The appeal of the contempt

citation accordingly is moot. Marshall v. Whittaker

Corp., Berwick Forge & Fabricating Co., 610 F.2d 1141,

1145 (8d Cir. 1979); 15A CYCLOPEDIA OF FEDERAL PrRo-

CEDURE § 87.104 (3d ed. Supp. 1981).

[197]

liability and damages. We also affirm the issuance of an

injunction barring the sale of apartment units by GDLC.

The appeal of defendant Laurins’ civil contempt citation

is moot.

[198]

26a

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

Civil Division

Civil Action No. 2583-76

Civil 1 — Judge Stewart

2720 WISCONSIN AVENUE

COOPERATIVE ASSOCIATION, INC., ef al.,

Plaintiffs,

Vv.

WISCONSIN AVENUE ASSOCIATES, INC., ef al.,

Defendants.

MEMORANDUM OPINION

Findings Of Fact And Conclusions Of Law

This is an action by a District of Columbia cooperative

housing association and by individual plaintiffs who are mem-

bers of the cooperative against certain individuals who were

formerly officers and/or directors of plaintiff-cooperative and

various entities controlled by these defendants, each of whom

had dealings with the cooperative and its members. Such deal-

ings cover the period of time in which the real property involved

was acquired and sold to the cooperative, the promotion of the

cooperative and the sale of certain of its units and also the

management and control of the cooperative from its inception to

the present date.

The Complaint (amended) is a multiple count pleading set-

ting forth alleged causes of action for declaratory judgments,

accounting, breach of contract, breach of fiduciary duty and

unjust enrichment, injunctive relief and fraud and deceit. The

defendants have denied the existence of any valid causes of

action and filed multiple counterclaims secking to recover for

damages to reputation, for tortious interference with business

27a

contracts, for debts due under two notes and for loss of profits

and lastly for attorney’s fees under terms of certain of the

documents executed by the parties. The defendants also seek to

recover damages against one of the individual plaintiffs for her

alleged breach of employment contract and/or her negligent

performance of her employment duties.

This litigation was commenced on the 18th day of March,

1976 and shortly thereafter the parties appeared before the court

for a hearing on a perliminary injunction. Thereafter, the case

was placed on a Civil-I calendar and assigned to the Honorable

James Belson, who handled all matters thereafter arising until

the | Ith day of April, 1978, when the case was certified for trial

to this court (order of Chief Judge Greene). The matters,

pretrial, were numerous. The complexity of the litigation was

such that Judge Belson, in an effort to assist the parties and

counsel, made certain rulings, in limine.

On ther morning of the date of trial, April 17, 1978, the

parties announced their withdrawal of a jury demand and the

case then proceeded to trial as a non-jury trial. The trial con-

sumed twelve days, in which the court heard testimony of

thirty-five witnesses (three by deposition) and received in evi-

dence over 1200 exhibits.

Obviously the withdrawal of the jury demand was in part an

effort to cut down on the time required for trial (estimated at 5-6

weeks) and the same subject afforded the basis for the court

ordering, pretriai, that the issues of liability and damages would

be bifurcated. Consequently, with the first phase of the trial

concluded and counsel now having had the opportunity to

submit proposed Findings of Fact and Conclusions of Law, the

court addresses the determination of issues of liability on the

Complaint and Counterclaims.

28a

The substantial majority of plaintiff-purchasers were well

educated persons of means who were gainfully employed at the

time of purchase. Of the 25 individual plaintiffs, only 3 have

not had some college education or some formal education

beyond high school and of those, Mrs. Bell and Mrs. Scott have

had significant experience in real estate and/or financial mat-

ters.

A substantial number of the plaintiff-purchasers had other

investments in real property at the time of purchase, including

Mr. Coler, Mr. Hassan, Mr. Rogers and Mrs. Scott, who

owned interests in other condominiums and/or cooperatives.

Some plaintiff-purchasers looked at condominiums in the

area prior to purchase.

All plaintiff-purchasers visited the subject property at least

once before signing their Cooperative Apartment Sales Agree-

ments.

Some plaintiffs sought the advice of legal counsel in connec-

tion with their purchases.

The defendant Laurins is first a lawyer and also a shrewd and

experienced businessman quite at home in negotiating and

transacting business through multicorporation type transac-

tions. Norman is a lawyer but his experience is no match for that

of Laurins and though in certain areas it was obvious that he

participated in discussions and even lent advice and was the

author of the wrap-around deed of trust, his role was minor to

employees of Laurins who recognized that to be their status and

obviously had no concept of their functions as officers and/or

members of the Board of Directors of the corporate entities

involved in dealings with or on behalf of a cooperative.

Just prior to trial, the parties, through their counsel, agreed

upon and executed a “Joint Statement of. Undisputed Facts”

29a

which is marked as Exhibit-A to this memorandum opinion and

attached hereto as a part of same.

At several stages prior to trial, the Honorable James Belson

entered in limine rulings. Such rulings are marked as Exhibits B

and C and are attached. This court treats these as if the law of the

case and thus proposes to follow the same with a single excep-

tion and that being in the instance of the treatment of the

elements of and defense to the tort of interference with the

contractual rights of the defendants as asserted in one of the

counterclaims. As to that claim, this court is of the view that a

more recent decision of the District of Columbia Court of

Appeals clarified the law and permits plaintiffs, in opposing the

counterclaim, to assert that the actious taken were justified

and/or privileged.

On November 13, 1976, A.V. Laurins & Co., Inc. executed

a sales contract to purchase the building 2720 Wisconsin Ave-

nue w.th the record title holders, Marjorie J. and Henry Jawish.

At the time of the purchase, Laurins was contemplating several

possibilities, primarily a cooperative but also the possibility of a

nursing home or even the sale of the contract. However, his

purpose and intent became clear on December |, 1974 and

within five days thereafter settkement proceedings were held

and numerous documents were executed.

On December 6, 1974, 2720 Wisconsin Avenue Cooperative

Association, Inc. (hereinafter Cooperative) and Wisconsin

Avenue Associates, Inc. (hereinafter Associates) signed a

document captioned “Assignment of Purchase Agreement” to

2720 Wisconsin Avenue, N.W. By this instrument Associates

assigned to Cooperative its right to obtain fee simple title in the

property in exchange for Cooperative executing a wrap-around

mortgage in the amount of $945 ,000.00 secured by the property

in favor of Associates. Additional terms provided that Associ-

ates should advance all! cash required by Cooperative to enable

30a

it to acquire title to the property and it was to be repaid over a

23-year period at a delineated interest rate.

The defendants caused Cooperative to execute a note and

deed of trust in favor of defendant Wisconsin Avenue Associ-

ates, Inc. in the amount of $945,000.00. This deed of trust is a

“wrap-around” instrument under which defendant Associates,

or its assignee, collects mortgage payments, keeps a percentage

for itself and forwards the remainder to the beneficiaries of the

three pre-existing deeds of trust. In addition to certain other

provisions of the $945 ,000.00 deed of trust which the plaintiffs

claim are oppressive, a provision requires Cooperative to obtain

the personal liability of each person who becomes a member of

Cooperative with respect to the pro-rata or percentage share of

the $945,000.00 note allocable to each person's interest.

Cooperative and Associates entered into a written agree-

ment, drafted by the defendant Norman and signed on behalf of

Cooperative by the defendant Laurins, to assign to Associates

100% of all the membership interests in Cooperative for the sole

purpose of Associates selling membership interests to in-

dividual purchasers. This transfer agreement, defendants’

Exhibit-11, also provides that Associates, not Cooperative,

shall be totally responsible for all costs involved in promoting

the venture.

In conjunction with this, Cooperative and Associates then

entered into a Mutual Ownership Contract for each apartment

unit in the building (49 units). The agreement gave Associates

the ability to transfer by way of sale or lease-option the right to

perpetual use and enjoyment of the individual apartments to

members of the public.

At the time of settlement on December 6, 1974, the docu-

‘ments executed included four settlement sheets: |) defendants’

Exhibit-13, settlement for 2720 Wisconsin Avenue Coopera-

tive Association; 2) defense Exhibit-14, settlement sheet for

2 ie

4

3la

Marjory D. Jawish and Henry Jawish; 3) defense Exhibit-15,

settlement sheet for A. V. Laurins & Co., Inc.; 4) defense

Exhibit-16, settlement sheet for Wisconsin Avenue Associates.

The purchase price of the property upon which Laurins and

the Jawishes agreed was $750,000.00 but in the transfer of title

from the Jawishes directly to the cooperative, the latter was

caused to execute a wrap-around deed of trust in the amount of

$945 ,000.00 and thus the promoter-developer immediately had

a paper profit of $195,000.00. At the time of the agreement to

purchase, there were two existent deeds of trust on this property

and as part of the purchase contract the sellers agreed to take a

third trust and thus, at the time of the acquisition of the property

by Covoperative, there were three deeds of trust totalling

$675,000.00. The difference between the aggregate amount of

these trusts and the purchase price consisted of $75,000.00 paid

by Laurins in toto as of the time of settlement on December 6,

1974.

Though the evidence reflects that the property was evaluated

by Laurins himself as having only a value of $550,000.00 prior

to his purchase for $750,000.00, it is obvious that this evalua-

tion was based upon the use of the building as one of apartment

rentals. Reasonable projections for use as a cooperative after

the conversion demonstrated a value of $1 ,300,000.00 or more.

The plaintiffs attack at the outset the cost of acquisition of this

building to the cooperative but offer no evidence of any sub-

stance to support a claim that the building was over-priced to

Cooperative and in fact, the evidence which the court accepts,

as offered by the defendants, clearly demonstrates the worth of

the purchase price. The principal evidence upon which the

plaintiffs rely in their questioning of the value of this building is

in fact predicated upon the existence of restrictive clauses

contained in the wrap-around deed of trust executed by Cooper-

ative. Those specific clauses will be treated hereinafter Suffice

it to say that the purchase price of $945,000.00 is supported by

32a

the defendants’ evidence even where scrutinized under the

defendants’ obligations to deal fairly with Cooperative.

On December 6, 1974, Laurins and his associates and em-

ployees were the officers and members of the Board of Direc-

tors of the several corporations involved in these transactions,

including Cooperative. There is no question but that in the

accomplishment of certain acts and the execution of documents

ihat they were obliged individually and collectively to Coopera-

tive and to the members of the public who would subsequently

purchase units to disclose their dealings, the existence of possi-

ble conflicts because of their status and to act in a manner which

would constitute fair dealing.

It is a well settled principle of corporate law that promoters

are fiduciaries cf a yet to be formed corporation, just as officers

and directors are of their corporation. See McCandless v.

Furland, 296 U.S. 140, 56 §.Ct. 41 (1935); Post v. U.S., 132

U.S.App.D.C. 189, 407 F.2d 319 (1968).

Thus, the first crucial factual determination for the court to

resolve is at what point did the defendants become cloaked with

their fiduciary responsibilities. The right to purchase the build-

ing at 2720 Wisconsin Avenue arose in part from a sales

contract dated November 13, 1974 and entered into by the prior

legal record title holders, Marjory J. and Henry Jawish and

A. V. Laurins & Co., Inc. A. V. Laurins & Co., Inc., as

contract purchaser, was acting on behalf of both 2720 Limited

Partnership and Associates. The next significant date is Decem-

ber 6, 1974, when Associates assigned its right to purchase the

property to Cooperative , pursuant to written agreements. It was

also at this time that Cooperative purchased the building in

exchange for executing a wrap-around deed of trust note to

Associates in the amount of $945,000.00, as well as an agree-

ment to assign to Associates all right, title and ownership to the

Mutual Ownership Contracts for the purpose of Associates

selling those contracts to members of the public. Furthermore,

33a

it was on December 6, 1974 that the Articles of Incorporation

for Cooperative were accepted by the District of Columbia,

which articles designated the defendants Laurins, Norman,

Baden, Thompkins and Chasen as the initial Board of Direc-

tors.

The plaintiffs urge the court to find that the fiduciary duty

arose as early as the signing of the contract for sale on Novem-

ber 13, 1974, or in the alternative, certainly before December 6,

1974. On the other hand, the defendant Laurins testified that he

recognized his fiduciary obligations as of December 6, 1974,

but no earlier. The court finds and so holds that the defendants’

fiduciary duties commenced on December |, 1974 when 2720

Limited Partnership (an entity owned or controlled by the

defendant Laurins) agreed to purchase the $945,000.00 note to

be executed by the yet-to-be formed cooperative in favor of

Associates. In so doing, the court is following the reasoning of

Bigelow v. Old Dominion Copper Mining & Smelting Co., 203

Mass. 159, 89 N.E. 193 (1909), which limits the time of

disclosure to a point at which the promoter made some overt act

relating to the formulation of the corporation in order to be

charged as a fiduciary. The court uccepts the testimony of

Laurins that he considered the option of converting the building

to a nursing home or other use. Clearly, if the right offer came

along, he could have just sold his rights in the building. On

December | , 1974, his intentions to convert 2720 to a coopera-

tive form of housing were manifest and the overt act necessary

to initiate his fiduciary responsibility had occurred.

In accepting the temporal analysis of the commencement of

the fiduciary relationship, the court is not unmindful of the risk

theory also postulated by the plaintiffs. See Measure of Recove-

ry Against Promoter Who Sells Property to a Corporation in

Breach of Fiduciary Duty, 1939-1940, U. Chi. L.Rev. 534, at

541-542. This analysis involves an evaluation of the risks the

promoter took in selling the property to the corporation. The

34a

plaintiffs argue that Laurins assumed no risk and therefore is

entitled to no benefit. It is true that Laurins’ utilization cf the

corporate form has minimized his likelihood of incurring per-

sonal liability. However, this simply does not mean that there

has been absolutely no risk both to Laurins and his various

entities involved in this transaction. Indeed, this method inured

partially to the benefit of Cooperative because transfer of title

directly to Cooperative served to avoid duplicate transfer tax

expenses.

With the establishment of the duty as of December |, 1974,

the next questions are to whom is the duty owed and what is the

extent of the obligation.

The defendants have somewhat half-heartedly raised the

issue that the individual plaintiffs lack standing to pray for relief

of a fiduciary breach, the contention being that Cooperative is

the only proper party. The court has dealt with this question in

its in limine ruling of October 27, 1977. In its answer to

Question #8, the court found that there was a duty of disclosure

owed to individual plaintiffs. Similarly, in Question #19, the

court determined that a finding of violation of a duty may be

based upon acts performed prior to a particular plaintiff's pur-

chase. See 85 A.L.R. 1262. In its order dated October 8, 1976,

the court stated:

“Though defendants initially controlled C ive,

undisputed facts appear to preclude a finding that their

holding of 100% of the membership interests negated the

existence of any fiduciary duty toward future sharehol-

ders. The Mutual Ownership Contract states that the mem-

bership of Wisconsin Avenue Associates was ‘only for

convenience of the transfer of this mutual ownership con-

tract to an owner for occupancy by way of sale or lease

om es does not appear that Associates actually pur-

units.”

Since the duty is owed to all members of Cooperative, what

then is the extent of that duty as a matter of law? The court holds

35a

that what is essential in a cooperutive apartment sales transac-

tion of this kind is for the promoter/fiduciary to advise purchas-

ers of the financial obligation they are undertaking in their

purchase agreement. Northridge Cooperative Section No. | v.

32nd Avenue Construction Corporation, 2 N.Y .2d 514, 141

N.E.2d 802, 161 N.Y.S.2d 404 (1957). The plaintiffs have in

effect asked the court to hold that individuals who purchase an

apartment building are required to tell prospective apartment

purchasers not only what they paid but also the total profit they

expect to reap from it. The court is of the view that this may well

be the result of some future legislation but that it is not the

dictates of current law.

The construction and applicability of the District of Col-

umbia Cooperative Association Act, D.C. Code 1973 § 29-801

et seg. has been the subject of in limine rulings by the court.

Specifically, the legal significance of the 5% limitation on

“promotion expense” imposed by § 29-838 has been partially

treated therein. After further evaluation, the court has not been

able to find any reported judicial opinions which construe or

apply § 29-838 nor have the parties pointed to any. The legisla-

tive history of the Act is unealightening. '

It is clear to the court that Congress did not draft the D.C.

Cooperative Association Act with housing cooperatives in

mind but rather contemplated the formation of other types of

consumer cooperatives under the Act. The proscriptions im-

posed by § 29-838 therefore do not apply and the court finds as

a matter of fact that no portion of Cooperative’s $945,000.00

'S. Rep. No. 1637, 76th Congr... 3d Sess. (1940); H.R. Rep. No. 2411,

76th Congr., 3d Sess. (1940); Hearings before a subcommittee of the

Committee on the District of Columbia on S. 2013, 76th Congr. , 3d Sess.

(April 16, 18 & 19, 1940); 86th Congr. Rec. 7082-86 (May 29, 1940)

(Senate debate); 86th Congr. Rec. 7863-73 (June 10, 1940) (House debate).

There is only one reference to the relevant section of the Act in all of the

legislative history. Hearings, supra, at 20 (statement of James E. Curry,

April 16, 1970).

36a

indebtedness was incurred as a promotion expense.’ The law

entitles the cooperative shareholder to protection from actual

fraud and entitles him to disclosure of the obligations he

assumes. Northridge, i.d.. Therefore, the court beliéves that

the crux of this case is the adequacy of the disclosure by the

defendants of the obligations assumed by the plaintiffs.

The court finds as a matter of fact and law that the disclosure

of the $945 ,000.00 indebtedness of Cooperative was sufficient.

Each and every plaintiff signed a cooperative apartment sales

agreement which not only made specific reference to an

assumption of corporate indebtedness in the amount of

$945,000.00 but also affirmatively asserted that they had hac

an opportunity to read and expressly stated they understood the

documents referred to, including the $945,000.00 note. This

amount is further reflected in the various settlement sheets

executed on December 6, 1974. Additionally, each of the

plaintiffs signed individual notes which constituted a pro rata

share of the total $945,000.00 indebtedness.

? Ordinarily , “promotion” of a business corporation consists of discover-

ing the business opportunity; investigating its economic feasibility, assembI-

ing the necessary personnel, property and money and incorporating the

venture. | Fletcher, Cyclopedia of Corporations, § 189, Henn, Handbook

on the Law of Corporations § 102 (2d.Ed. 1970). “In a comprehensive sense

‘promoter’ includes those who undertake to form a corporation and to

procure for it the rights, instrumentalities and capital by which it is to carry

out the purposes set forth in its charter, and to establish it as fully able to do

its business.” Old Dominion Copper Mining & Smelting Co. v. Bigelow,

203 Mass. 159, 177, 89 N.E. 193 (1909). In light of § 29-838, however,

“promotion” of a housing cooperative cannot be considered to be such a

comprehensive activity. If the acquisition of capital assets were part of the

“promotion” of a housing cooperative, then “promotion expenses” would

include the costs of acquiring or constructing the common dwelling and the

five per cent limitation of § 29-838 would apply. This would lead to an

intolerable result. No housing cooperative could be organized under the

D.C. Cooperative Associations Act because § 29-838 would effectively

stand as a bar to acquiring the most expensive and principal asset of the

cooperative, the common dwelling itself.

37a

It is appropriate to note at this juncture that a good deal of the

trial testimony concerned a dispute over just which documents

were or were not made available to plaintiff purchasers. In

general, the majority of the individual plaintiffs claim to have

never seen a copy of the Deed of Trust or balance sheet and

those few who requested the same claim to have been denied

them or at least their delivery was delayed for some reason

proffered by the defendants. At the outset the defendants stren-

uously objected to this line of testimony on the basis of the parol

evidence rule. The defendants reiterated that each piaintif€ had

signed a contract which stated they had had an opportunity to

read all of the documents and further point out that most were

well educated, had previous experience with real estate con-

tracts, etc., as noted above. There is no question that the law

holds that one who signs a contract has a duty to read it and is

obligated according to its terms. Hollywood Credit Clothing

Co. v. Gibson, 188 A.2d 348 (D.C.App., 1963). However, the

court was of the view that in light of the allegations of fraud in

this case, as well as breach of fiduciary duty, where disclosure

is a crucial element, that the plaintiffs’ testimony should be

received. In light of this ruling, the defendants put on evidence

which asserted that all of these documents were made available

to prospective purchasers and that their sales personnel were

under explicit instructions to affirmatively respond to requests

for any of the documents. The court is of the opinion that it is

not necessary to make a specific finding of fact as to which

particular document was or was not made available to each

individual plaintiff. Rather, it suffices 'o find that wit! «gard to

the $945,000.00 indebtedness, there was adequate a.. i suffi-

cient disclosure.

In ruling on cross-motions for summary judgment, the court

decided that plaintiffs’ claims of loss would be measured

against the market value of what they received, i.e., the mem-

bership interests in Cooperative, the apartment building and the

grounds deeded to Cooperative. Old Dominion Copper &

38a

Smelting Co. v. Bigelow, 188 Mass. 315, 74 N.E. 653 (1905).

Therefore, while this stage of the proceeding concerned only

the issue of liability, the court made it known to the parties that

the proof that the defendants breached their fiduciary duty was

contingent upon the plaintiffs’ showing that they did not receive

value. Sankin v. 5410 Connecticut Ave. Corp., 281 F.Supp.

524, 547, 564-67 (D.D.C.); aff'd. per curiam sub nom., Benn

v. Sankin, 133 U.S.App.D.C. 261, 410 F.2d 1060 (1969).

As stated previously, the plaintiffs attack « *< outset the

cost of the acquisition of this building to Cooperative and

include in their complaint the contention that the defendants

have reaped excess profits by reason of a so-called interest

bulge. This assertion is predicated upon a showing that the

interest obligation under the pre-existing trusts, underlyi®< the

wrap-around mortgage amounts to 6.8% whereas the wrap-

around mortgage requires payment of 8%. The evidence

adduced satisfied the court that under the totality of the circum-

stances an 8% interest rate was fair and reasonable. Though the

court recognizes the difference in interest rates constitutes a

profit to the defendants, it is part of the previously found

reasonable cost to Cooperative ($945,000.00 at 8%) of the

property. Thus again this court concludes the initial transaction,

tested by requirements of law, fell within reasonable business

dealings and was fair to Cooperative.

Since the property was acquired before the defendant/

promoter stood in a fiduciary relationship to Cooperative, Co-

operative may only recover his secret profits in excess of the fair

market value of the property at the time of transfer. 7, U.Chi.

L.Rev. 534 (1940), Henn, Handbook of the Law of Corpora-

tions, § 104 (1970). The court finds no such excess profits with

regard to the $945,000.00 indebtedness. It is also pertinent to

note that the 8% interest rate was a favorable rate in the market

at that time.

“a

~

4

39a

However, the $945,000.00 Deed of Trust note was not the

only obligation incurred by Cooperative. On December 16,

1974 Cooperative executed a note in favor of Associates in the

amount of $100,000.00 and on September | , 1975 Cooperative

executed a note in favor of Associates in the amount of

$5,700.00. The court finds that as far as these notes are con-

cerned, the defendants have neither fully disclosed their ex-

istence nor sustained their burden of showing the fairness of the

transaction.

It is well settled in the District of Columbia that transactions

which are the product of interlocking relationships raise the

rebuttable presumption of impropriety and will be carefully

scrutinized by the court. Mayflower Hotel Stockholders Protec-

tive Comm. v. Mayflower Hotel Corp., 84U.S.App.D.C. 275,

173 F.2d 416 (1956). The burden is upon the defendants to

show these transactions were fair. Indeed, this is so where there

is only one director common to both Boards. Geddes v. Ana-

conda Copper Mining Co., 254 U.S. 590, 599. 41 S.Ct. 209,

212 (1921). In the instant case, the undisputed facts reveal that

the original members of the Board of Directors of Cooperative

were the defendants Laurins, Norman, Baden, Chasen and

Thompkins and the original members of the Board of Directors

for Associates were Laurins, Norman and Baden. Both the

$100,000.00 note and the $5,700.00 note are signed by Laurins

and attested to by Baden. In Corsicana Natl. Bank v. Johnson,

251 U.S. 68, 40 S.Ct. 82 (1919), the Supreme Court stated:

“That two corporations have a majority or even the

whole membership of their boards of directors in common

does not necessarily render transactions between them

void; but transactions een coe the same agency of

officers or directors acting at the same time for both must

be deemed presumptively fraudulent unless expressly au-

thorized or ratified by the stockholders. 251 U.S. 68, 90,

40 S.Ct. 82, 91.”

4a

The court's previous description of the individual defendants as

mere employees of Laurins is significant in this context. The mem-

bers of the Board of Directors of the defendants herein did not possess

among themselves a divergence of interests which could be said to

provide a minimal inhibition on the course of action that Cooperative

would take respecting incurring additional indebtedness.

Initially, the defendants asserted that the directorate interlock was

obvious to prospective purchasers. The members of the Board of

Directors were in the respective articles of incorporation and access-

ible to the public. Also, the administrative offices of Associates and

Cooperative were at one and the same place, but as most of the

plaintiffs testified, it simply did not register that the developer and the

president of Cooperative might have a duality of interests. It is no

defense to say that the evidence existed in public documentation, i.e.

the Articles of Incorporation. See Clearview Gordens v. Weisman,

N.Y.L.J., August 26, 1957 (N.Y.Sup.Ct., 1957).

The defendants next asserted that they have adequately disclosed

the existence of the $100,000.00 obligation. The origin of this note is

best described in a three-step process. Firstly, in an Assignment of

Purchase Agreement dated December 6, 1974, Associates agreed to

advance all cash required by Cooperative and the terms of the loan

were delineated therein. Next, the note itself, which is dated ten days

later, December 16, 1974, depicts Cooperative’s additional obliga-

tion but the terms of the loan are now somewhat different. The chart

below graphically shows the differences.

Agreement (D’s 10)

12/6/74 $100,000.00 Note (D’s 29)

8.5% interest 8.0% interest

Interest to accrue Interest to accrue

from 12/6/74 from 12/16/74

No interest payable No interest payable

first year first year

Interest only payable No interest payable

second year second year

¥ Ce ine

4

Principal and interest Interest only payable

third year third year

payable for 4-23 years payable 4-13 years

Thirdly, an obligation of Cooperative ts alluded to in a footnote to the

1974-75 budget. The defendants assert that all of the plaintiffs re-

ceived a copy of the budget and that this constitutes a full disclosure of

the outstanding indebtedness. However, the loan referred to in this

document is only for the amount of $84,366.00 and there is no

specified interest rate. Even if the individual plaintiffs had been fully

cognizant of this footnote they could not have determined the extent

of the obligation assumed. Furthermore, it would have been logical

for the purchaser to assume that the $100,000.00 was included in his

purchase price because the Cooperative Sales Agreement spoke of

“the corporate indebtedness (as evidenced by a Deed of Trust dated

December 6, 1974 in the amount of $945,000.00),” and in terms of a

“total price” and “total monthly payment.” The court thus finds as a

matter of fact and law, that the disclosure of the $100,000.00 note

was not sufficient. The court further finds that the negotiation of said

note evidences a breach of fiduciary duty on the part of the defen-

dants. As depicted above, the terms of the note have been significant-

ly altered to the detriment of Cooperative. The payout has been

reduced from 23 years to |3 years, with a drastic balloon payment due

at the end of 13 years. The transaction, negotiated by Laurins as

President of Cooperative and Normcn as President of Associates does

not withstand the close scrutiny of the law. Mayflower, supra. The

terms of the note do not reflect, nor does the defendants’ evidence

demonstrate that Cooperative'’s interests were represented in this

transaction. The methodology of fulfilling his fiduciary responsibili-

ties, as described by Laurins, was to interact with Norman through

“play acting.” Each would assume the role o: one of the parties and

then think through the various alternatives. But, as Mr. Justice

Branddeis wrote in 1914, in Other People's Money:”

42a

“The practice of interlocking directorates is the root of many

evils . . It tends to disloyalty and the fundamental notion that

no man can serve two masters.”

Indeed, Laurins admits that at times in these mini-dramas, he would

assume the role of the developer. Although the $100,000.00 note was

executed on December 16, 1974, the money was not immediately

credited to the account of Cooperative where it could accrue interest

before drawing down on the funds. Norman agreed in trial this was

not in the best interests of Cooperative. The court finds that this

play-acting fails to rise to any acceptable level of performance of a

fiduciary in behalf of his corporation. Rather, the scenario, ten days

after the consummation of the deal on December 6, 1974, was not

what should be done but how far could the developers go. Thus, the

$100,000.00 note was not only not fully disclosed but constituted an

over-reaching. The court holds that Cooperative will be obligated on

this note to Associates only to the extent of its legitimate closing

costs, as reflected on their settlement sheet.

There has been considerably less evidence proffered as to the

$5,700.00 note executed on September |, 1975. However, as to this

transaction, the court similarly finds that the defendants have not

fulfilled their duty to disclose this obligation assumed by the plaintiff

purchasers. The note apparently was utilized to facilitate repairs to

the roof of the building. Cooperative will therefore be liable only to

the extent that it received value for this note, evidence of which will

be considered in the damages segment of this trial.

There is yet another aspect, of the 1975 maintenance budget

mentioned above, that involves a failure to fully disclose the obliga-

tion assumed. Two items of non-recurring income were included in

this budget: $9,200.00 in membership fees and $6,900.00 in first

year payment of principal; items which total $16,100.00 and reduce

the total budget from $59, 150.00 to $43,050.00. This meant that the

1976 maintenance budget in 1976 had to go up 37%, exclusive of

normal rises due to inflation. The defendants contend that the fact that

the items were included in the budget. which in turn was purportedly

available to all purchasers, was a sufficient disclosure. In other

words, anyone looking at the budget should have known it had to go

up that amount. However, the items are innocuously listed under the

43a

caption “Estimated Income Items” and not depicted as non-recurring.

The court also had uncontradicted expert testimony that the inclusion

of these items violated sound accounting principles. It is not obvious

to the court, nor was it to the plaintiffs. the impact which the inclusion

of these items would have on the following year’s budget. “The auty

of disclosure is not performed by the making of a statement which

does not disclose the facts but merely contains something, which. if

followed up by further investigation, will enable the inquirer to

ascertain the facts, but does not point to them.” Fletcher. Cyclopedia

of Corporations, Vol. 1, § 194 (1974).

The maintenance fee situation was further compounded by the fact

that on January | , 1975, Cooperative entered into a property manage-

ment contract with VAL Management Co., Inc. VAL is another

company owned or controlled by defendant Laurins (its name being

his initials scrambled) and thus again the transaction is subject to

close scrutiny, Mayflower, supra. The decision to retain VAL,

plausible on its face, was based on Laurins’ previously unseccessful

experiences with out-of-house management companies. One of

VAL’s primary contractual duties was to prepare by October |, 1975

the budget for the coming year. However, the budget was not pre-

sented to Cooperative until January 16, 1976 and then it was in the

form of a notice of increase in fees. By October |. 1975, only 18 of

the 39 units now sold had gone to settlement. Laurins explained that

VAL’s failure to prepare the budget timely was the product of

“everyone” being too busy. The court finds this explanation un-

acceptable. The fact is that “everyone” is the same and the excuse

offered simply shows they spread themselves too thin. VAL’s failure

to perform was a material breach of its contract. Furthermore.

Laurins’ own knowledge strikes right at the heart of the disclosure

issue. It makes no difference that the defendants, through Ms. de

Rochefort, made no promises that the fees would not increase, or that

only a few of the plaintiffs inquired about the fees and utility rates.

What is significant is that Laurins, as President of Cooperative. knew

early on that the fees would perforce substantially increase. The

minutes of the Board of Directors dated January 15, 1975 recount a

discussion of the non-recurring items; Laurins testified that he knew

as early as March, 1975 the fees would increase by approximately

“a 6 Cs

$20-$20 and that he told Mr. Crane, a plaintiff, who was then an

employee, of that fact; and Laurins must also be held to recognize that

the plaintiff purchasers were indeed not reading all of the doeuments

but were instead primarily concerned with their monthly costs. The

court finds that Laurins’ failure to disclose this information con-

stitutes a breach of his fiduciary duty owned to Cooperative.

The plaintiffs have argued with some degree of persuasion that

several of the provisions of the Deed of Trust are oppressive and

contrary to public policy and were not negotiated in good faith by the

defendant Laurins acting in his capacity as President of the fledgling

corporation.

Paragraph | 1, of the Deed of Trust, provides that Cooperative will

hold Associates harmless from any costs or attorneys’ fees incurred

for any reason and without regard to the outcome of the litigation.

Paragraph |1 states in its entirety:

Grantor shall save Beneficiary and Trustees harmless from all

costs and expenses, including reasonable attorney's fees and

costs of a title search, continuation of abstract and preparation of

survey, incurred by reason of any action, suit, proceeding,

hearing, motion or application before any court or administra-

tive body in and to which Beneficiary or Trustees may be or

become a party by reason of this Deed of Trust, including but not

Sedied te cahnageion. gay sag and administration pro-

ceedings, as well as any other of the foregoing wherein proof of

claims is by law required to be filed or in which it becomes

necessary to defend or uphold the terms of the Deed of Trust. and

all money paid or expended by Beneficiary or Trustees in that

regard, together with interest thereon from day of such payment

at the rate provided in the note, shall be secured hereby and shall

be payable by Grantor to Beneficiary or Trustees. as the case

may be, within five (5) days after demand.

In the “play-acting™ discussion of this provision, Norman. the Presi-

dent of Associates and also a director of Cooperative , testified that he

raised a question as to its reasonableness and he and Laurins con-

cluded that it was a reasonable provision. Laurins testified that all

lenders insist upon such a provision in order to avoid “nuisance

claims.” He stated that the intent was to make sure there was an 8%

interest “net” recoverable at all times.

45a

The court finds that this particular provision violates the general

American rule that in litigation, each party shali bear its own costs.

Instead, it operates to penalize the Cooperative for taking any legal

action in the form of an attack on che Deed of Trust even and

especially a successful one since Cooperative must pay legal fees of

Associates even if Cooperative prevails in the court action. The court

has found no case which has ever upheld such a provision and is

confident that none exists. Normal attorneys’ fee provisions exist in

foreclosure clauses and in brokerage contracts and are triggered only

if the lender or broker prevails in court. This provision has gone far

beyond established norms and as such is unconscionable and viola-

tive of public policy and is therefore void. If the provision were to be

rigidly enforced, it would effectively close the court house doors.

Additionally, and in the alternative, it is void as an equitable matter

because in negotiating this provision, Laurins did not act fairly

toward Cooperative to whom he owed a fiduciary duty of loyalty and

honest dealing.

Paragraph 17 of the Deed of Trust provides that a purchaser has no

right of resale of his unit; that upon an attempt to do so, his entire debt

is accelerated; and that any new purchaser must deal with defendant

Associates to finance the acquisition of the interest at the highest

acceptable interest rate. At trial, Laurins testified that when he

discussed this provision with Norman there was no conflict between

them concerning it. He said it was considered a good control mechan-

ism and that it protected against undesirable entering Cooperative at a

later date. This reason is not a valid rationale for the inclusion of this

provision in the Deed of Trust since protection against undesirables is

governed by established admissions procedures set forth in the By-

laws and Rules and Regulations of Cooperative. In addition, the

borrower, in this case Cooperative, has the incentive not to include

undesirables as they create a risk to Cooperative and its members

affecting its continuing ability to service the corporate debt. The court

further accepts the expert testimony proffered by the plaintiffs that

this provision unnecessarily restrains the alienability of the units,

detrimentally affecting the market value of the individual units and

the building. See also Mortgages — Due on Saie Clause: Restraint on

Alienation — Enforceability, 28 Case Western Res. L.Rev., 493

46a

(1978); Judicial Treatment of the Due on Sale Clause: The Case for

Adopting Standards of Reasonableness and Unconscionability, 27

Stan.L.Rev. 1109 (1975). Typically, the lender is not involved in the

resale of units since his security is the entire building. In the case of

resale of individual interests in Cooperative, the obligation on Coop-

erative’s note — that is the corporate debt — remains unchanged,

even if the membership is changed. The member's right to resell his

interest in no way affects the corporation's indebtedness to Associ-

ates. This right of resale by the member is not a resale of the building,

a refinancing of the corporate debt or a transfer of title on the real

estate. Since these are not affected, no valid reason justifies the

overreaching provisions of paragraph |7. Laurins, as President and a

fiduciary of Cooperative, violated his duties of loyalty to Cooperative

in negotiating paragraph 17 of this Deed of Trust. Therefore, on the

basis of this violation and because the due-on-sale clause constitutes

an unreasonable restraint on alienation, see Nichols v. Ann Arbor

Federal Svgs. & Ln. Ass'n., 73 Mich.App. 163, 250 N.W.2d 804,

Tucker v. Lassen Svgs. & Ln. Ass'n., 12 Cal.2d 629, 526 P.2d 1169,

116 Cal.Rptr. 633 (1974), paragraph 17 is unenforceable.

Paragraph 34 of the Deed of Trust provides that members of

Cooperative cannot prepay on participating financing without the

written consent of the defendants and grants to the defendants the

right to renegotiate the financing on the building. Any failure by

Cooperative to cooperate in this regard is treated as a default which

would immediately accelerate the entire debt. Laurins testified that as

a fiduciary he asked Norman how this provision would affect Cooper-

ative in future actions and it was decided it would benefit Cooperative

in future actions and its members. Laurins’ justification for this

provision was that it barred unsophisticated owners who might do

something silly and prepay the underlying first, second and third

mortgages. He stated that this was a very important proviso for the

lender. The court accepts the concession of the defendants at trial and

rules that prepayment is permitted by virtue of the provisions of the

individual coliateral notes. The court alternatively holds that the

individual notes, regardless of the concession of the defendants,

constituted written permission to prepay. Thus, the court holds that

the plaintiffs are not and cannot be subject to any dual liability. The

47a

court also finds that paragraph 34 severely and unreasonably impairs

the marketability of any unit interest in Cooperative and is therefore

unenforceable.

Paragraph 46 of the Deed of Trust provides that the $445,000.00

Deed of Trust note is due and payable at the option of Associates ten

days after an adjudication by a court of law that the Deed of Trust is

unforceable or null and void. This paragraph was the focus of the

longest discussion that Laurins and Norman had, the resolution of

which was that it was a reasonable attempt to protect the lender in case

a court of law decides the Deed of Trust is illegal. The court finds that

paragraph 46, like paragraph 34, severly impairs the marketability of

members’ interests in Cooperative because of the onerous and one-

sided nature of its provisions. In short, this paragraph deprives

Cooperative and its members of their right of redress in the courts for

resolution of issues arising out of their relationship with the defen-

dants. Under paragraph 46, if Cooperative or its members should

prevail in this action, defendants retain the right to call the

$945 000.00 Deed of Trust Note. No judicial authority can uphold

such a provision.

While Mr. Laurins conceded that this provision of the Deed of

Trust could be scrutinized and interpreted, the court concludes that

the negotiation of such a provision operated wholly to the benefit of

the defendants at the time that they owed plaintiffs a duty of loyalty

which included a prohibition against overreaching. This duty and its

attendant obligation having been breached, paragraph 46 is void as a

matter of law. Although holding certain portions of the Deed of Trust

void or unenforceable, this court, as a court of equity, need not void

the entire document. Thus the court finds the total instrument other-

wise valid.

This court has previously held in its in limine rulings that defendant

Associates did not exist within the meaning of the Business Corpor--

tions Act of the District of Columbia in December of 1974 since its

Certificate of Incorporation was not issued until the 6th of January,

1975. Robertson v. Levy, 197 A.2d 443 (DCCA, 1964). Plaintiffs

have urged that since Associates did not exist as a corporation at the

time of executing the Deed of Trust. the Assignment Agreement and

the $100,000.00 promissory note, each is void. Defendants have

48a

countered that following its formal incorporation, Associates adopted

and approved all prior acts of the organizers and agents of the

corporation. They point out that a contract entered into by a promoter

in the name of or on behalf of a corporation prior to issuance of its

Certificate of Incorporation can be adopted by the corporation after it

comes into existence. Real Estate Central, Inc. v. Kramer, 254 M.

290, 255 A.2d 81 (1969); Rosenberg v. Rolling Inn, Inc., 212 Md.

532, 129 A.2d 924 (1957); | Fletcher, Cyclopedia of Corporations,

207, 208, 214. Moreover, the corporation's adoption of such a

contract may be express or it may be implied from the corporation's

acceptance of the benefits and its fulfillment of the burdens of the

contract. Rosenberg v. Rolling inn, lnc., supra. The court finds from

the facts that Associates had impliedly adepted the acts prior to its

incorporation; it has accepted the benefits therefrom and substantially

complied with iis burdens. Th: case of Accurate Construction Co. v.

Washington, 378 A.2d 681 D C.App., 1977). cited by the plaintiffs

is inappticable and distinguisnable on its facts. Hence, the obligations

of Cooperative, entered into prior to Associates’ incorporation, are

binding to the extent they have not been modified by the court herein.

The court also finds that Cooperative itself has impliedly adopted the

acts of December 6, 1974, having accepted the benefits and fulfilled

the burdens of its contracts and its Board of Directors now being

properly constituted under Title 29, D.C. Code, § 813, et seq.

With respect to the adoption of Associates, however, the court

finds that Associates has failed to fully perform two of its contractual

obligations. The language of one of the agreements dated December

6, 1974 (D's 11) is: “Cooperative agrees to assign to Associates all

right, title and ownership to the said Mutual Ownership Contracts

representing 100% ownership for the sole purpose of Associates

selling these contracts to others who may wish to buy them.” (Empha-

sis added). fn the individual mutual ownership contracts, it is pro-

vided: “The Association acknowledges that the membership of Wis-

consin Avenue Associates, Inc. is only for the convenience of the

transfer of this mutual ownership contract to an owner for occupancy

by way of sale or lease option . . .” (Emphasis added). The court

finds that Associates has failed to fully perform its duties under the

agreement to convey all of the units at 2720 Wisconsin Avenue for the

49a

benefit of Cooperative. Rather, since the instigation of this litigation,

Associates has maintained the unsold units for every purpe ¢ bur that

which is specified by the agreement. The primary objective

undoubtedly has been to wield leverage over the plaintiffs, which in

and of itself is not untenable. But, by a series of acts which have

demonstrated a blatant disregard for the Rules and Regulations, was

well as the maintenance of the property, Associates has caused

turmoil in the building. The court therefore enjoins Associates and

thereby orders it to cease and desist any and all efforts to sell or lease

the remaining unsold units. The court further finds from the uncontra-

dicted evidence that Associates failed to fully perform its obligations

as warranted by an “apartment preparation” sheet (D°s 33). The court

accepts plaintiffs’ Attachment B to their Proposed Findings of Fact.

which is a list of the work not performed, as the extent of liability on

this issue, subject to proof of damages.

The court is not persuaded that the plaintiffs’ evidence has risen to

the level of proving fraud in this case. Fraud requires proof of

misrepresentation of a material fact made with knowledge of its

falsity and with intent to deceive. Quoting from Post v. U.S., a case

heavily relied upon by plaintiffs: “Mere breach of fiduciary obliga-

tion does not itself constitute active fraud; there musi be a specific

intent to defraud.” 132 U.S.App. 189 at 199 (1968). While the court

has found a breach of fiduciary duty, it cannot conclude that there was

a specific intent to defraud on the part of the defendants.

Plaintiffs also seek an award of attorney's fees for prevailing in this

action. Such an award, while an exception to the general American

rule that each party to an action must bear his own costs, can be

awarded where the action involves: a) a breach of fiduciary duty, b)

mismanagement by a trustee, c) the tak ng of secret profits, d)

overriding considerations of justice that compel it, or e) activity that

justifies an award of attorneys’ fees by way of punitive damages. See

Wolff v. Calla, 288 F.Supp. 891 (E.D. Pa., 1960), Wilmington Trust

Co. v. Coulter, Del., Ch., 208 A.2d 677 (1965); In Re Bausch’ s

Estate, 208 App. Div. 482, 115 N.Y.S.2d 278 (1952); Fleischman

Distilling Corp. v. Maier Brewing «0. , 386 U.S. 714 (1967); Alves-

ka Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975).

The courts of the District of Columbia recently recognized the

50a

appropriateness of an award of attorneys’ fees to prevailing litigants

in Belmar Realty Co. v. Bownan, 106 Wash. L.Rptr., p. 673

(D.C.Sup.Ct., Feb. 24, 1978). There the court acknowledged the

numerous cases of this jurisdiction allowing fees as an exception to

the general rule, e.g., /90/ Wyoming Avenue Cooperative Ass'n. v.

Lee, 345 A.2d 456(D.C.C.A. 1975), F. W. Berens Sales Co., inc.v.

McKinney, 310 A.2d 601 (D.C.C.A. 1973), and Continental In-

surance Co. v. Lynham, 293 A.2d 481 (D.C.A. 1972). In /90/

Wyoming Avenue Cooperative Ass'n., supra, the court stated, at

464-465:

“There are, of course, exceptions. The relevant ones in this

action are that where a party brings or maintains an unfounded

suit or withholds action to which the opposing party is patently

entitled, as by virtue of a judgment or because of a fiduciary

relationship, and does so in bad faith, vexatiously, wantonly, or

for oppressive reasons, reasonable attorneys’ fees may be al-

lowed. F. W. Berens Sales Co. v. McKinney, 310 A.2d at 603.”

(Emphasis added).

The court has found herein a breach of fiduciary duty that has

certainly contained an element of bad faith in the overreaching

connected with the $100,000.00 note and the type of oppressive

reasons described in the case law in the defendants’ misstatements of

the budget. For these reasons the court will receive testimony respect-

ing the reasonable value of attorneys’ fees. However. it is important

to note that this finding of bad faith is not extant throughout the entire

dealings of defendants with the plaintiffs. In its most recent opinion in

this area, Altman v. Central Georgia Railway Co. (decided May 19,

1978), the United States Court of Appeals stated: “The crucial ques-

tion in determining the amount of the fees to be awarded to appellants

was what portion of their work could properly be deemed productive

of that benefit [to the plaintiffs]. the creation of which was the basis of

their being awarded a fee.”

The corporate defendants, Associates, Metropolitan Mortgage

Bankers, Inc., Real Estate Equity Management. Inc., Scenic Travel,

Inc., Real Development Management, Inc. and Conference Manage-

ment Group, Inc., are owned or controlled by the defendant Laurins

and at one time or another served as conduits for the various notes

Sia

executed for Cooperative by him, i.e., the $945,000.00,

$100,000.00, $5,700.00 and the individual collateral notes. The

court deems these entities liable because of their claim to ownership,

possession or control of these instruments or the proceeds thereof.

The participation by these corporate entities through and as directed

by Mr. Laurins was of necessity knowledgeable and subjected them

to the liability, as declared above, of Laurins individually. The

defendant corporation VAL Management's liability is predicated

upon its contract for maintenance and the effect of its failure to

perform as found above.

The liability of the individual defendants Laurins and Norman is

specified above. As to the remaining individual defendants, Ms.

Chasen, Ms. Thompkins and Mr. Baden, originally officers or direc-

tors of Cooperative . the court finds that their failure to act on behalf of

their corporation evidences a breach of fiduciary duty. However, the

court reiterates that these defendants were mere employees of Mr.

Laurins and as such their participation in this scheme is essentially of

a passive nature.

Therefore, as to Count | of the Amended Complaint, which seeks

several declaratory judgments, the body of this opinion resolves all of

these with the exception of those which relate to damages and costs

whict must of necessity be deferred until the second stage of this trial.

Count II was the subject of a directed verdict by consent. Count III

of the Amended Complaint requests an accounting for all indebted-

ness incurred by Cooperative. This litigation itself has resulted in a

substantial accounting by the defendants. If the additional evidence

elicited at trial as to damages raises further problems which need to be

the subject of an accounting, the court will so order.

As to Count IV, Breach of Contract, the court renders its verdict in

favor of the plaintiffs.

Count V is duplicitous and treated in the court's finding as to Count

IV.

As to Count VI, alleging a breach of fiduciary duty and unjust

enrichment, the court's verdict is in favor of the plaintiffs with the

body of the opinion resolving the outstanding issues.

52a

Count VII is similarly dealt with and expounded upon in the body

of the opinion, the court's verdict being in favor of the plaintiffs.

Count VIII, which sought an injunction, was the subject of a

directed verdict by consent.

As to Count IX, alleging fraud and deceit. the court finds in favor

of the defendants.

The court similarly finds in favor of the defendants on Count X,

which seeks a declaratory judgment.

As to Count XI, seeking a declaratory judgment, cancellation and

reformation based on District of Columbia Cooperative Association

Act, the court finds in favor of the defendants.

Count XII, alleging fraud and deceit was dismissed by the court at

the close of the plaintiffs’ evidence.

Defendants have a counterclaim against the plaintiffs for tortious

interference with the defendants’ contractual relations with their

tenants and the alleged right of the defendants to sell apartment

interests in the building under the assignment. The factual basis for

this counterclaim is primarily the posting of a notice in the lobby of

the building, which notice essentially informed prospective purchas-

ers of the existence of this lawsuit, as well as some sporadic oral

communication along those lines between individual plaintiffs and

prospective purchasers. The plaintiffs also distributed a so-called

“notice to quit” on the advice of counsel, which was also essentially a

description of the pending litigation. As stated by the District of

* Columbia Court of Appeals in the recent case of Alfred Altimont, Inc.

v. Chatelain, Samperton & Nolan, 374 A.2d 284, 288 (D.C.C.A.,

1977):

“In order to recover for inducement of breach of contract, four

things must be proven: |) existence of a contract, 2) know

of the contract, 3) intentional procurement of its breach by the’

mr up and 4) damages resulting from the breach. Hunter

Co. v. D.C. Vending Ce., Inc., 345 A.2d 142, 143

DCCA, 1975). Once a prima facie case has been established

liability may still be avoided if the defendant can establish that

his conduct was legally justified or privileged. Deoudes v.G. B.

53a

Macke Corp., 153 A.2d 309(D.C. Mun. App. , 1959); Mever v.

Washington Times Co., 64 App.D.C. 218, 76 F.2d 988, Pros-

ser, Torts, § 129 (4th Ed., 1971).”

Prosser, § 129 defines a privileged interference, in part. as

follows:

“Where the defendant acts to further his own advantage, other

distinctions have been made. If he has a present, existing eco-

nomic interest to protect, such as the ownership or condition of

property. or a prior contract of his own, or a financial interest in

the affairs of the person persuaded, he is privileged to prevent

performance of the contract of another which threatens it, and

for obvious reasons of policy he is likewise privileged to assert

an honest claim, or bring or threaten a suit in good faith, to

exercise the right of petition to public authorities, or to settle his

own case out of court. /d at 944-945.

In this case, Cooperative 's notices to prospective and existing tenants

of Associates were prompted by Associates’ refusal to pay mainte-

nance fees and to participate in the necessary upkeep of the building,

thereby placing a severe burden on Cooperative. The court finds that

Cooperative's actions were legally justified. privileged and reason-

able under the circumstances. Associates’ claims against plaintiffs

for interference with Associates’ contract are therefore denied on the

merits.

Defendants’ Counterclaim III asserts that the existence of this

litigation has injured the reputation of defendants Laurins and Wis-

consin Avenue Associates. Defendants put on only one witness, Mr.

Nussdorf, to discuss Mr. Laurins’ reputation and the effect of this

lawsuit. Mr. Nussdorf, however. supplied no information of Mr.

Laurins’ general reputation but did state that his decision not to invest

in Mr. Laurins’ projects was in part predicated upon the instant

lawsuit. Mr. Nussdorf also testified that he ad no knowledge of the

fifteen lawsuits recited by plaintiffs’ counsel during cross-

examination, all of which predated this action and named Mr. Laurins

or Laurins’ controlled entities as defendants, one of which involved a

judgment against Laurins personally for approximately

$4,000,000.00. Mr. Nussdorf testified that if he had been aware of

those lawsuits, they most assuredly would have affected his decision

to terminate his investment with Mr. Laurins. The remainder of the

54a

defendants’ evidence in this regard consisted of Laurins’ own testi-

mony of a rather general nature that his reputation had been harmed

and the fact, brought out on cross-examination, that a number of

individual plaintiffs had communicated their involvement in the

instant suit ‘o relatives and associates. The defendants’ evidence does

not establish either the fact of injury or the existence of reputation and

defendants have, therefore failed to carry their burden of establishing

injury to reputation. Even if the lawsuit had been shown to somehow

have affected Mr. Laurins’ reputation, the existence of the lawsuit is a

privileged communication that could have been made directly to one

of Mr. Laurins’ investors by the plaintiffs without liability. See

Altimont, supra, at 290, Restatement of Torts, § 596. The court finds

no evidence that the plaintiffs abused their privilege. This Counter-

claim is likewise denied on the merits.

Defendants’ Counterclaims X and XI charge Cecile de Rochefort

with breach of her employment contract with defendants and negli-

gent performance of her employment contract with defendants and

negligent performance of her employment contract by her alleged

failure to carry out certain oral instructions and orders from agents of

defendant Associates. Ms. de Rochefort was the primary sales

representative of the defendants at the Cooperative location. She

personally dealt with most if not all of the individual plaintiffs by

showing them their units and supplying the relevant documents

discussed herein. The defendants urge that if some of these docu-

ments, such as the Deed of Trust, budget or most recent balance

sheet, were not provided purchasers. it was the fault of Ms. de

Rochefort and not ascribable to them. The court finds that Ms. de

Rochefort did exactly what the defendants expected of her and there-

fore fulfilled her contractual obligations. She was employed as a mere

“front,” a public relations figure whose duties were to meet the public

and display the units. If there were any substantive questions or

difficulties, her instructions were to refer them to the defendant Mr.

Norman and she did so. Ms. de Rochefort knew no more nor less than

the defendants desired. The court's finding that the $945,000.00

indebtedness was adequately disclosed essentially eliminates the

other grounds on which these two counterclaims were based.

5Sa

The remaining two counterclaims concern the nonpayment on the

$100,000.00 and $5,700.00 notes. The court has dealt with and

modified these obligations of Cooperative above and thus. as to these

countercizims the court finds in favor of the defendants. subject to

proof of specific amounts of entitlement and recovery pursuant to this

Thus, as to Counterclaim |. tortious interference with contract.

Counterclaim III, damage to reputation and Counterclaims X and X1,

for breach of contract and negligent performance. the court finds that

defendants have failed to establish by a fair preponderance of the

evidence their entitlement to recover and thus the court's verdict is in

favor of the plaintiffs. As a measure of equitable relief as to which

plaintiffs have established their entitlement, the court hereby enjoins

the defendants. each and all of them, from performing any act

designed to accomplish the sale or further leasing of the eleven (11)

unsold units pending final adjudication of this case.

June 27, 1978 William E. Stewart, Jr.

Judge

ce: Ricwarp A. Hisey, Eso.

Ropert B. Watiace, Eso.

Atterneys for Plaintiffs

GLENN D. Simpson, Eso.

Attorney for Defendants

Soa

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

Civil Division

Civil Action No. 2583-76

Civil | — Judge Belson

2720 WiscoNsIN AVENUE

Cooperative Association, Inc.. ef al..

Plaintiffs.

v.

WISCONSIN AVENUE Associates, INC... ef al.,

Defendants.

JOINT STATEMENT OF UNDISPUTED FACTS

1. On December 6, 1974, the Articles of Incorporation for

2720 Wisconsin Avenue Cooperative Association, Inc. (“Coopera-

tive”) were accepted by the District of Columbia for filing pursuant to

the Cooperative Association Act of the District of Columbia, 29 D.C.

Code § 801, ef seq.

2. The Articles of Incorporation of Cooperative designated

Laurins, Norman, Baden, Tompkins and Chasen as the initial Board

of Directors of Cooperative.

3. Atall times material hereto Norman. Baden and Tompkins

have been employees, officers or directors or companies controlled

by Laurins and owned by Janis Laurins and Kimberly Laurins.

4. Throughout December 1974 and until approximately

March 1975, Chasen was an employee. officer or director of com-

panies owned or controlled by Laurins.

5. Norman is an attorney-at-law licensed to practice in the

District of Columbia since 1970.

6. Laurins is an attorney-at-law and a member of the District of

Columbia Bar.

. cs

bi ES i

Siva

7. The Articies of Incorporation of Wisconsin Avenue Associ-

ates, Inc. (“Associates”) were stamped by the District of Columbia

Government as received January 6, 1975 under the Business

Corporation Act of the District of Columbia, 29 D.C. Code § 901. et

seq.

8. The Articles of Incorporation of Associates designated

Laurins, Baden and Norman as the initial Board of Directors of

Associates .

9. The purchase price of the building located at 2720 Wiscon-

sin Avenue, N.W., Washington. D.C. included the assumption of

two pre-existing deeds of trust on the property in the aggregate sum of

$243,815.

10. On December 6, 1974, a third deed of trust in favor of the

Jawishes in the amount of approximately $431,000 was executed by

Laurins on behalf of the Cooperative.

11. On December 6, 1974, a fourth deed of trust, mortgaging

the property at 2720 Wisconsin Avenue, N.W., Washington, D.C..,

and a deed of trust note in the amount of $945,000 secured thereby,

were executed in the name of Cooperative by Laurins and attested to

by Baden in favor of Associates.

12. Atall times material hereto, the general partner of Co-Op

Mortgage Investors L/P (hereinafter “Co-Op 1/P") has been a

corporation controlled by Laurins and owned by Kimberly Laurins

and Janis Laurins.

13. At all times material hereto, Metropolitan Mortgage

Bankers, Inc. (“Metropolitan”). an entity controlled by Laurins,

acted as the collection agent of Co-Op L/P for payments on the

$945 ,000 deed of trust note made by individual members of plaintiff

Cooperative.

14. At the time of the transfer of the $100,000 note to Co-Op

L/P, the general partner of that entity was Real Estate Equity Manage-

ment, Inc., a corporation controlled by Laurins and owned by

15. On December 6, 1974, Cooperative and Associajes en-

tered into 49 Mutual Ownership Contracts. These documents were

executed by Norman on behalf of Associates, and by Laurins on

behalf of Cooperative, and attested by Tompkins in her capacity as

Secretary of Associates, and by Baden in her capacity as Secretary of

Cooperative.

16. Atsettiement, each individual purchaser was given a copy

of the Mutual Ownership Contract. to which was appended a docu-

ment entitled “Transfer Agreement,” by its terms transferring to the

purchaser at one and the same time. personal liability on a pro rata

portion of the $945,000 deed of trust note and the “rights and

privileges” of a member of the Cooperative.

17. The Transfer Agreement and copy of the Mutual Own-

ership Contract t. which it was attached purported to evidence the

purchaser’s membership in the Cooperative; ownership of their prop-

ortionate share and the right to perpetual use of their share of the

Cooperative.

18. The downpayment notes, entitled “Cooperative Apart-

ment Collateral Notes” (hereinafter “downpayment collateral notes”)

varied in amount from purchaser to purchaser. but ranged typically

from $1,500 to $3,000.

19. Each downpayment collateral note was secured by a

pledge of the Mutual Ownership Contract of the individual purchaser.

20." The marketing of the mutual ownership contracts in the

Cooperative involved, in part. ied. Sn gana Settling, and

“all that is required to sell the apartment units .

21. The apartment units were sold “as is.“

22. As of the time this suit was instituted, Associates has sold

approximately 38 of the total 49 units.

23. The amount of money or indebtedness representing the

difference between the actual price paid for each mutual ownership

contract and the pro rata share of the $945 .000 iniebtedness attribut-

able to that mutual ownership contract went to Associates, from

which Associates paid some of its business expenses.

59a

24. The average price of the mutual ownership contracts was

approximately $23,000 each.

25. The differential between the face amount of the $945,000

note and the $675,000 aggregate amount of the underlying deeds of

trust was $270,000. The cash difference between the aggregate

amount of the underlying deeds of trust and the $750,000 paid to the

Jawishes was $75,000.

26. One element of consideration given to Cooperative by

Associates in exchange for the $945,000 deed of trust and deed of

trust note was the assignment to the Cooperative of a “right” to

purchase the Wuilding.

27. The “right” to purchase the building arose in part from a

sales contract entered intc by the prior legal record title holders, who

were Marjory and Henry Jawish, and an entity known as A. V.

Laurins & co., Inc.

28. The nominee role of A. V. Laurins & co., Inc. was evi-

denced in part by a written nominee, or agency, agreement.

29. At the time of the execution of the sales contract of

November 13, 1974, and at the time of settlement and closing on the

property , the legal record title holders of the property were Marjory J.

and Henry Jawish.

30. Some other elements of consideration given tu the Cooper-

ative, according to the testimony of defendant Norman, were the

following:

(a) An agreement to advance monies that might be required to

renovate the building and put the common areas in such a

position that it could be sold;

(b) The provision of “credit checks” for prospective purch-

asers;

(c) The ision of services to obtain a zoning variance

Se ivmnn iota dead on

(d) The provision of a “full-time” employee on the property

for “emergency situations” during 1975.

60a

31. the “employee” maintained on the premises for emergency

purposes was Mr. Artur Alexander. husband of Mrs. Aleye Alexan-

32. During 1975, Mrs. Aleye Alexander was remunerated at

the rate of $275 per month gross pay by checks drawn on the

Cooperative’s funds.

33. The $945,000 deed of trust and deed of trust note were

drafted by Laurins and Norman.

34. Norman participated in the drafting of both the Assign-

ment of Purchase Agreement (plaintiffs’ deposition exhibit 34) and

the Agreement dated December 6, 1974 (plaintiffs’ deposition ex-

hibit 50).

35. On December 6, 1974, Cooperative and Associates en-

tered into a written agreement drafted by Norman to assign to Associ-

ates 100% of all the membership interests in the Cooperative for the

purpose of Associates selling membership interests to individual

purchasers.

36. By the terms of the Mutual ( vnership Contracts between

Cooperative and Associates, the partie agreed that “all the rights and

privileges of membership” were extended to Associates only so that

Associates could extend the same to individual purchasers.

37. On January |, 1975, Cooperative entered into a property

management contract with VAL Management Co.. Inc. for $450.00

per month. Such contractual arrangements ceased on April |, 1976.

38. No payments have been made by the Cooperative or on its

behalf on either the $100,000 or $5,700 unsecured promissory notes,

which first payments were by the terms of the instruments due

December |, 1976.

Respectfully submitted.

/s/ RicHarD A. Hipey

Richard A. Hibey

Unified Bar No. 74823

6la

/s/ Ropert B. WALLACE

Robert B. Wallace

Unified Bar No. 108571

SurRReY. KARASIK AND Morse

1156 Fifteenth Street, N.W.

Washington, D.C. 20005

Telephone: (202) 331-4000

Attorneys for Plaintiffs

/s/ GLENN D. Simpson

Glenn D. Simpson

Unified Bar No. 190546

8401 Connecticut Avenue

Suite 700

Chevy Chase, Maryland 20015

Telephone: (301) 652-2996

Attorney for Defendants

October 3, 1977.

[ATTACHMENTS TO OPINION, EX. B AND EX. C OMITTED]

62a

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

Civil Division

Civil Action No. 2583-76

Civil | — Judge Stewart

2720 WISCONSIN AVENUE

COOPERATIVE ASSOCIATION, INC., ef al.,

Plaintiffs,

We

WISCONSIN AVENUE AssoctaTes, INC., ef al.,

Defendants.

MEMORANDUM OPINION

Findings Of Fact And Conclusions of Law

(Issues Of Damage)

Having conducted the first phase of a bifurcated trial on the issue of

liability and having resolved those issues by Memorandum Opinion

dated June 27, 1978, 106 WLR 1417 (August 8, 1978), the court

received evidence on the issues of damages relevant to the various

claims asserted by the parties, as well as counterclaims. These claims

are numerous and stem from the promotion, sale and maintenance of a

cooperative apartment complex.

This court's prior opinion established that a basis existed for the

recovery of money dmages by both plaintiffs and defendants (coun-

terclaimants) and the parties approached and participated in the

second phase of this trial with the same animosity and hostility that

had been exhibited in the original proceedings on the issue of liability.

Though the court has had the benefit of submissions of Proposed

Findings o1 Fact and Conclusions of Law and oral argument in accord

with a time table as requested by counsel, neither has been as helpful

as hoped for to assist the court in the resolution of unique and complex

problems.

Plaintiffs in this action consist of a District of Columbia coopera-

tive housing association and 25 of its members in their individual

63a

capacity. They sought, and have been awarded, declaratory relief

with regard to onerous and confiscatory provisions of a deed of trust

prepared and executed by defendants Laurins and Norman. ' Plain-

tiffs also requested, and have been awarded, injunctive relief against

defendants which enjoins the sale or further leasing of the eleven

unsold apartment units in the complex pending final adjudication of

the dispute. They now seek an award of money damages for breaches

of fiduciary and contractual duties, attorneys’ fees and litigation costs

and punitive damages.

Having concluded that plaintiffs were entitled to the cancellation of

two outstanding notes executed in favor of defendants. the court

permitted defendants to amend their counterclaim to assert a quantum

meruit claim for recovery of settlement costs and renovation expenses

incurred by defendants. Defendants also contest plaintiffs’ claim for

damages asserting that plaintiffs received value far in excess of the

purchase price of the complex. Thus. they conclude that any award of

compensatory damages should be offset or eliminated by the moneta-

ry benefit allegedly conferred to plaintiffs.

From the outset, however, it is important to note that the court's

view on defendants’ “value received” defense is that it is miscon-

ceived. Defendants have attempted to invoke the defense as a com-

plete bar to all allegations of misconduct in all of the transactions

between the parties. Their view, essentially, is that plaintiff-

cooperative received such a great bargain on the purchase of the

building that defendants could, in any subsequent transactions, deal

unfairly with plaintiffs as long as there was no net loss to plaintiffs.

However, defendants’ duty to deal fairly with plaintiffs, which arises

from the fiduciary relationship of the parties must apply to each

separate transaction. Common sense and rational thinking can lead to

no other conclusion. If it were otherwise the court would be sanction-

ing the breach of fiduciary duties, at the will of the fiduciary, every

time that hindsight shows that a party received a favorable deal in a

' The relationships between the various individual defendants and corpo-

rate defendants is discussed in the Court's Memorandum Opinion on liabil-

ity and as incorporated herein by reference.

64a

transaction with the fiduciary. He will forever attempt to even the

score with the persons that have placed their faith and trust with him.

Considering the fact that the instant action involves interlocking

directorates and self-dealing transactions, the adoption of such a

theory, especially in this context, would lead to a totally unacceptable

result. Thus, the court will consider the defense only as it relates to

individual transactions.

Under the $945,000.00 Deed of Trust note, the court has already

concluded that value was received. (Memo. Op. at p. 8-9). This, of

course, does not affect the court's ruling on the unenforceability of

the four provisions of the Deed of Trust or the court's finding that

defendants’ conduct was oppressive and in bad faith. The court,

however, has also concluded that plaintiff-cooperative did not re-

ceive value for the $100,000.00 note obligation. Thus it has been

cancelled and a finding of fiduciary breach has been entered. The

court has similarly treated the obligation of the Cooperative under the

terms of the $5700.00 note but as to each has ruled that the defendants

may offer proof on a quantum meruit basis as to both notes though

such proof as to the $100,000.00 note is limited to its legitimate

closing costs and as to actual value received on the $5700.00 note.

The value received defense as it applies to the misrepresentation on

the maintenance budget will be considered below.

I. Maintenance Budget Misrepresentations.

The court has found that defendant Laurins. acting through defen-

dants VAL Management and 2720 Wisconsin Avenue Associates and

as president of plaintiff Cooperative breached his fiduciary duty to the

individual unit puschasers by misrepresenting certain items in the

maintenance budget prepared for plaintiffs. including his failure to

declare known facts. The net effect of the misrepresentations gave .

plaintiffs an unrealistic tadication of the amount of the maintenance

fees to be paid to VAL Management in future years (Memo. Op. p.

20).

During the damage phase of the trial, plaintiffs have asserted that

they should be awarded what has been termed “benefit of the bargain”

damag’s. Under this theory of recovery, plaintiffs essentially con-

6Sa

clude that since they each bargained for a unit with a certain mainte-

nance fee obligation which, of necessity, rose dramatically in the

following year as a result of the misrepresentation in the budget of the

previous year, that they are entitled to damages equivalent to the

difference bwtween what the maintenance fees would have been had

the budget been accurate and the maintenance fees actually paid.

projected over the useful life of the building (30 years). This amount,

after being discounted to present value. is approximately

($481,000.00 if fees for all of the units are combined.

The court is of the view. however. that the benefit of the bargain

theory has noi been adopted in the District of Columbia. Even in cases

where fraud was alleged and proven. * the more conventional “out of

pocket” measure of damages has continually received enforsement.

Espaillat v. Berlitz School of Languages of America, D.C.App.. 217

A.2d 655, 657 (1966) (measure of damages in fraud action was

amount lost by deception, not what might have been gained if

misrepresentation had been true), Horning v. Ferguson, D.C. App..

52 A.2d 116, 119 (1947) (damages in action for fraud is difference

between purchase price and fair market value, not “loss of the

bargain” damages), Sigafus v. Porter, 179 U.S., 116, 125, 21 S.Ct.

34, 37, 45 L.Ed. 113 (1900) (same), Smith v. Bowles, 132 U.S. 125,

129-30, 10 S.Ct. 39, 40-41, 33 L.Ed. 279 (1899) (same). In fact,

plaintiffs cite no case that supports their position.

Under the proper theory. the permissible damage computation is

the difference between the fair market value and the purchase price.

Horning v. Ferguson, supra, 52 A.2d at 119. Should be fair market

value exceed the purchase price, plaintiffs have not been injured in a

legal sense regardless of the egregious nature of the misrepresenta-

tion. Furthermore, even if the purchase price exceeds the fair market

value, there must be a causal connection between the misrepresenta-

tion and the discrepancy in price and value. Smith v. Bowles, supra,

132 U.S. at 129-30.

? In its Memorandum Opinion (p. 27-28), the court concluded that plain-

tiffs’ proof did not rise to the level of fraud, although a finding of bad faith

was entered as to certain claims asserted by plaintiffs.

66a

Assuming the plaintiffs have shown causation in that the

misrepresentation resulted in plaintiffs’ willingness to pay a higher

price plaintiffs have not sustained their burden of showing that any of

the purchase prices exceeded fair market value.

Plaintiffs vigorously attacked defendants’ evidence on fair market

value. The pointed to numerous flaws in the appraisal report pre-

sented by defendants’ expert, Mr. Conner and presented their own

expert. Dr. Seldin, to rebut Mr. Conner’s testimony. The court, in

fact, agrees with plaintiffs that defendants appraisal is deficient in

many respects and does not fairly represent true fair market values of

the units involved. However, plaintiffs presented no testimony to

affirmatively establish what the fair market value of each unit was at

the time of the respective purchases so that the court could measure

the damages, if any, suffered by the individual plaintiffs. Even if the

court concluded that purchase prices exceeded fair market value to

some extent, without the required proof, any award of compensatory

damages on this claim would be sheer speculation as even an

approximation of the proper values would be impossible. However,

an award of nominal damages in the amount of $1.00 per plaintiff will

be entered against defendants and in favor of the individual

plaintiffs. ‘ This award is made on the basis that plaintiffs have proven

the liability of defendants but have failed to meet their burden of proof

on damages. Chesapeake & Potomac Tel. Co. v. Clay, 90 U.S.App.

D.C. 206, 208, 194 F.2d 888 (1952).

Il. Cost of Repairs.

Plaintiffs also seek an award of compensatory damages against

defendant Associates for its failure to comply with its contractual

duty to make certain repairs to units within the cooperative. Under

this claim plaintiffs allege damage in the amount of $6.154.66. To

support their claim, plaintiffs produced the testimony of two experts

in the area of renovation. While the court has no reason to doubt any

of the proffered testimony, plaintiffs’ claim on this issue must fail.

The estimate submitted by Mr. Samperton was prepared after an

‘The particular group of plaintiffs entitled to this award and defendants

liable for the award is discussed infra on p. 14.

67a

inspection on August 8, 1978, some 2-1/2 years after the date of the

breach. Thus, the court is unable to determine what the cost of repairs

would have been on the date of the breach and because there is no

proof that the conditions of the units has not materially changed since

the date of the breach, there is no way for the court to conclude that the

repairs listed by the Samperton estimate are related solely to the

condition of the unit at that time. Thus, a judgment in favor of the

defendants and against plaintiffs will be entered on this issue.

Ill. Mutual Ownership Contract.

As noted in the court's Memorandum Opinion (p. 27) on the

liability phase of the trial, defendant Associates obtained title to all of

the units in the building from plaintiff Cooperative for the sole

purpose of transfer to individual purchasers by way of sale or lease

option. The transfer of title to Associates was accomplished through

the Mutual Ownership Contract which recited certain duties that

Associates was to perform in return for the right to collect all profits in

excess of the pro-rata obligation for each individual unit which was

sold. Of the total number of units in the building, eight remain unsold.

These units are now occupied, however, under lease-options.

Thus, facially, defendant Associates has performed fully its con-

tractual obligations to transfer by sale or lease-option all of the units in

the building. However, a closer look at the transactions leads the

court to conclude that Associates’ conduct, acting through its agents

and officers who were also officers and thus fiduciaries of plaintiff

Cooperative, breached not only contractual obligations but fiduciary

obligations as well as to the eight unsold units and three units

purchased by defendant Laurins. *

Article 3, Section 4, of the by-laws of plaintiff Cooperative and

paragraph 9 of the Mutual Ownership Contract make it abundantly

*One of the units purchased by defendant Laurins was transferred in the

name of his daughter, Kimberly Ann Laurins. Because this method was

used, at least in part, to avoid the District of Columbia rental regulations, the

purchase of this unit will be treated in a similar fashion to that of the two units

purchased by defendant Laurins in his own name for purposes of awarding

equitable relief.

68a

clear that before any unit can be sold or lease-optioned, an application

for such action must be approved by the Cooperative. For the eleven

units mentioned above, consent was not obtained. In fact, the transxc-

tions were explicitly objected to by plaintiff Cooperative. This

restriction on the sale or lease of the nits is essential to the efficient

operation of any cooperative because of its unique financial arrange-

ment. The failure to obtain the consent is thus a clear and material

breach of contractual duty. * Furthermore, because the officers of

defendant Associates were also officers of plaintiff Cooperative, they

held the fiduciary obligation to deal fairly with Cooperative. Thus,

their failure to obtain consent was a fiduciary breach as well.

Although it is uncontested that all of the questioned transactions took

place at a point in time which was after defendants were voted out of

office of the Cooperative, it cannot be concluded, in this context, that

their fiduciary obligations ceased at that point. It is abundantly clear

that the interlocking directorate arrangement between Cooperative

and Associates was the main reason that the Mutual Ownership

Contract was negotiated in the first place. In essence, Associates

received an opportunity to make substantial profits as the result of the

interlocking directorate situation, thus it is totally inequitable to

conclude that Associates can use the advantageous position obtained

while its officers were fiduciaries to plaintiffs over the rightful objec-

tion of plaintiffs, even though they no longer held office in the

Cooperative.

In fashioning a remedy, the court will rescind the rights and

obligations conferred upon the parties by the Mutual Ownership

Contract as to each of the eleven units involved. The court is not of the

view, as defendants contend, that it must rescind the sale of all of the

units in the building. This is not the situation in which a party seeks to

partially rescind an indivisible contract. See Ward v. Deavers, 92

U.S. App.D.C. 167, 170, 203 F.2d 72 (1953). Although the transfer

of titles to Associates involved a single agreement between the

parties, the sale of each individual unit involved a clearly divisible

* Although no specific allegations are made in plaintiffs’ Amended Com-

plaint under the contract breach theory, the court will permit the relief to

conform to the evidence presented during the trial. SCR-Civil Rule Sc).

69a

portion of the total performance required of Associates. Furthermore,

defendants’ theory. even if correct in the contract breach context,

does not put in the question the court's authority to fashion this type of

equitable relief in the fiduciary breach context.

To accomplish the rescission, the court will impose the following

formula: |) defendant Associates will not be obligated to pay any

outstanding maintenance fees for the eleven units involved, 2) defen-

dant Associates will receive « credit for all maintenance fees actually

paid for the eleven units involved, 3) defendant Associates will pay

over to Cooperative all monies received (rent and option payments)

from the eight unsold units, 4) defendant Associates will pay a

reasonable rental value to Cooperative for the three units purchased

by Lurins* and 5) title to the eleven units will be transferred back to

Cooperative. This formula is imposed so as to protect the interest of

third parties holding lease-options° and to return the parties to the

position they would have held had there never been a Mutual Own-

ership Contract as to the eleven units. The court will give the parties

30 days to arrive at a monetary figure under the formula above by

consent, otherwise, the matter will be referred to the Auditor-Master.

IV. Punitive Damages.

Plaintiffs also seek an award of punitive damages on the issues in

which the court has found bad faith or oppressive conduct on the part

of defendants. First Nat'l. Realty Co. v. Weathers, D.C. App., 154

A.2d 548, 550 (1959), Brown v. Coates, 102 U.S.App.D.C. 300,

303-05, 253 F.2d 36, 39-40 (1958). The court in Brown, (id.),

discussed the appropriateness of a punitive award in a case very

similar to the instant action. In Brown, the defendant stood in a

fiducary relationship to nlaintiffs and engaged in conduct which

breached his fiduciary duty with the intention of reaping secret profits

* Plaintiffs’ counsel conceded in oral argument that they do not seek to

dispossess any current tenants or affect their ability to exercise their lease-

options.

*Defendant Associates and/or Laurins will also receive credit for monies,

if any, paid for their proportionate share obligations under the $945,000.00

note for the 1! units involved.

70a

from plaintiffs. The court first noted the “broad public interest” in the

performance of fiduciary duties and then concluded that, even though

common law fraud had not been proven, that defendant's conduct

was sufficiently culpable to sustain a punitive award. The court

placed emphasis on the willfulness of the misconduct and the societal

interest in deterring similar conduct. See, First Nat'l. Realty Co. v.

Weathers, supra, 154 A.2d at 550 (taking of property without legal

process was malicious, thus punitive award upheld) with Mendes v.

Johnson, D.C. App.. _— A.2d —__. , ____ (No. 10279, June 13,

1978) (en banc) (taking of property without legal process was, at

most, an innocent mistake, thus punitive award set aside).

The same public policy considerations are applicable to the instant

action. In two separate instances the individual defendants, while

cloaked with their fiduciary obligations, breached their duty so that

they or their corporate entities would reap a direct benefit at the

expense of those to whom their duty was owned.

The court has concluded that the $100,000.00 note which was

payable to defendant Associates was wholly without consideration.

Defendants Laurins and Norman negotiated the note essentially as an

afterthought, concluding that the purchase price of $945,000.00 was

sufficiently low that the additional $100,000.00 could be tacked on.

Such conduct was in direct conflict with their duty to plaintiff Cooper-

ative as at the time the note was negotiated defendants were officers of

both of the corporate entities involved in the transaction.

The court has considered the liability of defendants Chasen, Baden

and Thompkins in regard to the award of punitive damages. While it

is certainly true that those defendants breached their fiduciary duty

the court does not find that their breach was aggravated by bad faith as

was that of defendants Laurins and Norman. These defendants

breached their duty by omission, not intention. They were essentially

bystanders to the transactions complained of in this litigation and

thus, the court will not hold them liable for the punitive award.

Defendant Associates, however, as beneficiary of the note and acting

through its officers, Laurins and Norman, is liable. See Woodward v.

City Stores Cc., D.C. App., 334 A.2d 189, 191 (1975).

Tla

Therefore, for the bad faith, self-dealing brach of fiduciary duty in

reference to the $100,000.00 note, an award of punitive damages will

be entered in favor of plaintiff Cooperative against defendants

Laurins, Norman and Associates in the amount of $30,700.00.

The court also concluded that defendants Laurins, Norman,

Chasen, Baden and Thompkins ’ breached their duty to the individual

plaintiffs by misrepresenting the 1975 maintenance budget. Although

the court has concluded that plaintiffs have failed to prove their

entitlement to a compensatory award on this issue, an award of

nominal damages has been entered and thus, an award of punitive

damages is appropriate. First Nat'l. Realty Co. v. Weathers,

D.C.App., 154 A.2d 548, 550 (1959), Wardman-Justine Motors,

Inc. v. Petrie, 59 U.S.App.D.C. 262, 265-66, 39 F.2d 512 (1930).

Plaintiffs were induced by the misrepresentation, at least in part, to

purchase their respective units. Defendants directly benefited from

each of these sales as defendant Associates reaped all profits above

the pro-rata obligation that each purchaser had under the Deed of

Trust note. The court as concluded that although the level of proof did

not rise to fraud, defendants’ conduct was in bad faith (Memorandum

Opinion p. 27-28). The court is of the view, however, that a punitive

award or this issue should accrue only to those plaintiffs who entered

into purchase contracts for their units before January 16, 1976. It was

on that date that the increase in maintenance fees was disclosed. It is,

of course, true that punitive damages are awarded to punish and deter

defendants but the corollary to that theory is that the beneficiaries of

the award should have a close relationship to the wrong committed.

Woodward v. City Stores Co., supra, 334 A.2d at 191.

Thus, for the misrepresentation of the 1975 maintenance budget, a

punitive award shall be entered in favor of those plaintiffs that entered

into purchase contracts before January 16, 1976 and against defen-

dants VAL Management and Associates, acting through their officers

’ The lack of culpability of defendants Baden, Chasen and Thompkins

with regard to the award of punitive damages is discussed above and applies

to the award of punitive damages under this issue as well. However, the

award of nominal damages under the maintenance budget misrepresentation

72a

and defendants Laurins and Norman in the amount of $500.00 per

purchaser.

The court i:as also considered a punitive award for the defendants’

conduct in reference to the four provisions of the Deed of Trust which

the court has held unenforceable due to their unconsionable and

oppressive nature. The court, as factfinder, has concluded however

that even considering the effect that the provisions had on the marke-

tability of the units, plaintiffs still received value for the $945 ,000.00

note obligation. Thus, although the court may have the authority to

award punitive damages where there is a finding that plaintiffs suf-

fered no ecot smic loss, see, Wardman-Justine Motors, Inc. v. Pet-

rie, supra, 59 U.S.App.D.C. at 262, the court will exercise its

discretion, Davis v. Schuchat, 165 U.S.App.D.C. 351, 358 n. 7, 510

F.2d 731, 738 n. 7 (1975) and deny the request for a punitive award

on this issue. The court is of the view that there is an important

distinction between a failure to prove damages, as in the budget

misrepresentation issue and a finding by a court that no damage was

done. In the former instance, where it is likely that damages existed

but plaintiffs have failed to meet their burden of proof, it can be

inferred that defendants’ state of mind was sufficiently culpable to

support a punitive award. However, in the latter instance, where a

finding that no monetary damage existed at all. the inference of the

culpable mind does not apply. *

V. Attorneys’ Fees.

Finally, plaintiffs’ request an award of attorneys’ fees and costs as

to that portion of counsels’ efforts that was directed toward issues in

duty in bad faith. It is, of course. the American rule that attorneys’

fees are to be borne by the respective parties regardless of the outcome

of the litigation. Alveska Pipeline Co. v. Wilderness Society, 421

U.S. 240 (1975); Fleischman Distilling Corp. v. Maier Brewing Co..,

* Plaintiffs’ claim for a punitive award for defendants’ conduct in regard to

the sale of the three units to defendant Laurins and the leasing of the eight

unsold units is materially incorporated into the equitable relief fashioned by

the court under that claim.

73a

386 U.S. 714, 717 (1967). However, as the court has already in-

dicated in its Memorandum Opinion on the liability phase of the trial.

an exception to the rule applies to this case. Siegei v. William E.

Bookhultz & Sons, Inc., 176 U.S.App.D.C. 138, 141-42, 419 F.2d

720 (1969), Wolf v. Cohen, 126 U.S.App.D.C. 423, 426, 379 F.2d

477 (1967): see 1901 Wyoming Avenue Cooperative Ass'n. v. Lee,

D.C. App.. 345 A.2d 456, 464-65 (1975): F. W. Berens Sales Co. v.

McKinney, D.C.App.. 310 A.2d 610, 612 (1973): Continental In-

surance Co. v. Lynham, D.C.App.. 293 A.2d 431, 483 (1972).

An awarc of attorneys’ fees in a case in which a bad-faith breach of

fiduciary duty is alleged and proven serves separate societal interests.

which sets this type of case apart from the vast majority of civil

litigation. First, the award serves as punishment against a defendant

for his conduct which constituted bad-faith and a deterrence to others

with similar intentions and second, the award serves as an induce-

ment to counsel to institute similar litigation in an effort to expose

conduct which breaches fiduciary obligations. It is of course true that

the first consideration is amply provided for in the court's award of

punitive damages. However, when the second consideration is

added, the societal interest in protecting the unwary from unscrupu-

lous fiduciaries is of such overriding magnitude that a separate award

is appropriate. °

The award amounts, at least in part. to a recognition of the inherent

conflict in the American system which on the one hand attempts to

calculate damages in an effort to make the prevailing party whole and

on the other hand denies an award sometimes amounts to the prevail-

ing party's most substantial element of expense — attorneys’ fees.

For good and sufficient reasons, courts, including the Supreme

Court, Alyeska Pipeline Co. v. Wilderness Society, Supra, 42\ U.S.

at 240, have continually reiterated their preference to the American

rule that faiis to consider legal fees as an element of compensation;

but they have also recognized exceptions. Thus, the issue is one of

balancing. Without question, the balance is very heavily weighted

against an award of legal fees but where a case such as the instant

* The court has specifically excluded the cost of attorneys’ fees to plain-

tiffs in its effort to determine the appropriate punitive damage award.

74a

action is presented, an award is justified. Justice Frankfurter, writing

for the Court in Sprague v. Ticonic Nat'l. Bank, 307 U.S. 161, 167,

59 S.Ct. 777, 83 L.Ed. 1184 (1939) stated:

. Plainly the foundation of the historic practice of —

siaedaamtemag tat te Gate of Reames cher an

ventional taxable costs is part of the original authority of the

chancellor to do equity in a particular situation . . . As in much

else that pertains to equi jurisdiction, individualization in

the exercise of a discretionary power will alone retain equity as a

living system and save it from sterility.”

Some of the issues litigated, however, did not involve the requisite

bad-faith fiduciary breach. Thus, the court is of the view that only

fees attributable to time expended on issues in which the court has

made the requisite finding are to be taxed against defendants.

Plaintiffs’ chief counsel, Richard A. Hibey, has supplied the court

with a detailed affidavit which sets forth the total number of hours

expended, "’ the number of hours expended on issues in which the

plaintiffs allege that they are entitled to recover '' and the hourly rates

charged by each of the four attorneys who worked on the case. '’ The

"4,403.5 hours from February, 1976 to July 31, 1978.

2,205 hours.

'? Four attorneys worked on plaintiffs’ case. Their requests for fees are

computed as follows:

Attorney Hours Hourly Rate

1) Richard A. Hibey 882.9 $ 75.00 Prior to 1/1/77

80.00 Prior to 2/1/78

90.00 From 2/1/78

2) Jay L. Westbrook 182.8 $ 75.00 Prior to 1/1/77

80.00 Prior to 2/1/78

90.00 From 2/1/78

3) Robert B. Wallace 573.9 $ 60.00 Prior to 4/1/77

65.06 From 4/1/77

4) David C. Roseman 479.7 $ 35.00 Pricr to 4/13/77

40.00 Prior to 4/1/77

45.00 Prior to 2/1/78

55.00 From 2/1/78

75a

affidavit also sets forth the costs and expenses of the litigation. '' The

court agrees with plaintiffs that the average rate of $67.4 per hour is

fair and reasonable considering the complexity of the case and the

experience and talent of the attorneys involved. See Evans v. Sher-

aton Park Hotel. 164 U.S.App.D.C. 86, 503 F.2d 177 (1974);

compare Altman v. Central of Ga. Rlwy. Co., __— U.S.App.D.C.

— »—_—. n. I (No. 77-1301, May 19, 1978) ($100 per hour is

often held a reasonable rate) with Copeland v. Marshall, — —

U.S.App.D.C. —_. . ____ (No. 77-1351, October 30, 1978) (actual

costs plus reasonable margin of profit is proper formula for award).

Defendant Laurins cross-examined Hibey with regard to the affidavit

in an extensive manner but failed to disclose any significant dis-

crepancies. “*

Under the six areas which plaintiffs contend that fees are award-

able, a total of 2,059.3 hours was expended, amounting to a request

of $138,745.25, which is approximately one-half of the total fees that

plaintiffs’ counsel have documented if ail of the issues litigated are

considered. As a threshhold matter, the court is of the view that only

five of the six areas listed involve the requisite finding of both

bad-faith and fiduciary breach. The court did not enter the requisite

finding with regard to the defense of counterclaims, thus, 215.9 hours

spent on this issue will be eliminated from the tota! hours requested.

Of the 1,843.4 hours that remain under the other five areas, the

question of reasonableness still exists. The mere fact that the court file

in this case totals approximately 55 volumes of court jackets is a

strong indication of its over-litigation. Plaintiffs counsel are not

solely responsible, however, as defendants proved to be exceptional-

ly recalcitrant. The only thing of substance that plaintiffs’ counsel

and defendant Laurins agreed to was that they disagreed on everyth-

ing. However it is important to note that the court is awarding less

'’ Plaintiff’ s counsel have itemized costs amounting to $73,417.92, which

includes fees for expert witness and paralegals. Of this total plaintiffs

request an award of $45,358.07. The computation of the court's award for

costs is discussed infra, p. 20.

'* Defendant Laurins defended himself and all other defendants during the

damage phase of the trial.

76a

than one-half of all the counsel fees incurred by plaintiffs in this

action. The court's authority to award the entire amount is, at least, an

open question as there appears to be little, if any, precedent on this

issue. Thus, the over-litigation factor was given adequate considera-

tion in the court's decision to award fees only under the specified

categories involving bad-faith fiduciary breaches. Thus, an award of

$124,245.16 for attorneys’ fees will be entered in favor of plaintiff

Cooperative against defendants Laurins, Norman and Associates and

VAL Mangement.

In addition to the award of attorneys’ fees, plaintiffs also request an

award of costs, including paralegal and expert witness fees. The court

will award $9,974.48 in general costs. The award was computed by

first dividing the total attorneys’ fees awarded by the total attorneys’

fees incurred. That ratio was then applied to the total costs incurred.

Althoughthe methodology lacks complete precision, it does represent

a fair approximation of costs incurred on the issues which the court

has determined that attorneys’ fees are properly awardable

The court is not convinced, however. that a sufficient evidentiary

basis exists for the award of expert witness fees. Plaintiffs seek an

award of $22,400.00 for the services of two experts, however, no

testimony of affidavit has been elicited to detail what the request for

costs is. It is thus impossible for the court to determine if the request is

reasonable as the court has no idea what rate per hour was charged or

how many hours were expended.

Finally, plaintiffs’ request for an award of approximately

$11,000.00 in paralegal fees is likewise void of sufficient evidentiary

support. The court has not been informed as to the services actually

rendered by the paralegals or their necessity. Furthermore. the cost of

paralegals was considered by the court in its determination that the

hourly rate charged by the attorneys was reasonable.

VI. Counterclaims of Defendants.

In its Memorandum Opinion on liability, the court announced that

it would hear further evidence on defendant Associates’ counterclaim

on a quantum meruit basis for the costs of certain renovation rendered

to Cooperative and the costs of closing the sale of Cooperative.

77a

Plaintiffs agree that Associates is entitled to $30,700.00, which

represents $21,334.10 in renovation costs and $9,365.90 in closing

costs. Defendant Associates, however, alleges that it is entitled to

costs of overhead and a margin of profit for the renovation work

which was completed. The court views these additional requests as an

effort by Associates to obtain a windfall. The measure of damages

under a quantum meruit theory is the reasonable value of the services

rendered, as it is based upon equitable principles. See H. G. Smithy

Co. v. Washington Medical Cir., D.C.App.. 374 A.2d 891, 893

(1977), Bloomgarden v. Cover, 156 U.S.App.D.C. 189, 479 F.2d

201 (1973). In the instant case, the court concludes that the reason-

able value of the renovation services rendered is the value which

Associates placed upon the services before this litigation was

brought. That value is fully represented in the agreed upon figure.

Thus, the court will enter an award of $30,700.00 on defnendant

Associates’ counterclaim against plaintiff Cooperative.

Though the court believes its conclusions and the relief afforded to

be abundantly clear in this opinion, it is recognized that finality at this

point is not possible. To preclude either dilemma or prejudice to

either party in seeking appellaie review of this opinion, the court

reiterates, of necessity, that this is not a final judgment because of the

obvious necessity of determining by stipulation or reference to the

Auditor-Master of the court the acconting required to ascertain: |) the

amount of credit, if any to be given to defendants Associates and

Laurins for any maintenance fees paid and also monies, if any, paid

by Associates ana Laurins as their proportionate share of the in-

debtedness under the $945,000.00 First Deed of Trust; 2) all monies

received (rent and option to purchase payments) from the 8 unsold

units; 3) the establishment of a reasonable rental value of the 3 units

purportedly purchased by Laurins.

Since this litigation has been expensive and protracted, the court

feels it appropriate to offer the parties the opportunity to stipulate in

regard to these relatively simple matters, which would be followed by

entry of final judgments. Most of the information required is within

the possession of the defendants and the court would contemplate a

statement of such figures from those records being furnished to the

plaintiffs with the opportunity afforded io plaintiffs’ counsel to verify

78a

the figures from the records of the defendants. Failure of the parties to

arrive at a stipulation will result, thirty days hereafter, in reference to

these issues, to the Auditor-Master of the court. The parties must

anticipate some delay and costs associated therewith.

If the parties do stipulate re the above-described issues, which

stipulation should be in writing and submitted to the court within

thirty days of this opinion, then counsel for the plaintiffs will, within

five days thereafter, submit 2n order encompassing all judgments and

the defendants shall have five days thereafter to submit their proposed

order. Execution of one or the other, or a combination of such, will

become the final order of the court. Necessity for referral of this

matter to the Auditor-Master will obviously alter this time table.

/s/ Wiuiam E. Stewart, Jr.

December 18, 1978 William E. Stewart, Jr.

Judge

ce: Richard A. Hibey, Esq.

Robert B. Wallace. Esq.

Attorneys for Plaintiffs

Aleksandrs V. Laurins, Esq.

Attorney for Defendants

79a

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

Civil Action No. 2583-76

2720 WisCONSIN AVENUE COOPERATIVE

ASSOCIATION, INC., a corporation, ef al.,

Plaintiffs,

Vv.

WISCONSIN AVENUE ASSOCIATES, INC.,

A District of Columbia Corporation, ef al.,

Defendants.

ORDER AMENDING MEMORANDUM OPINION AND ORDER

OF REFERENCE TO AUDITOR-MASTER

The Court, sua sponte, pursuant to SCR-Civil Rule 60(a), hereby

amends the following portions of its Memorandum Opinion dated

December 18, 1978 to reflect a change in the number of unsold units

in the cooperative complex from eight to nine and the number of units

sold to Defendant Laurins from three to two:

1) p. 9, line 30;

2) p. 10, line 8; n.4, line 5;

3) p. 12, line, 2, 3;

4) p. 15, n. 8, line 2;

5) p. 21, line 22, 23.

The nine unsold units involved are units numbered 103, 104, 106,

107, 204, 207, 501, 703, 805. The two units purportedly sold to

Defendant Laurins include unit 302 sold to Defendant Laurins in his

own name and unit 801/802 sold to Defendant Laurins and placed in

his daughter's name.

And it is further ordered, pursuant to SCR-Civil Rule 53, that this

matter be and hereby is referred to the Auditor-Master of this Court to

conduct proceedings in accordance with the Court's Memorandum

Opinion of December 18, 1978 as amended. (See pages 11, !2 and 21

of Memorandum Opinion in particular) and to furnish to the Court the

report of the Auditor-Master within ninety (90) days of the date of this

Order.

January 19, 1979 William E. Stewart, Jr.

Judge

80a

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

Civil Division

Civil Action No. 2583-76

Civil | — Judge Stewart

2720 WISCONSIN AVENUE

COOPERATIVE ASSOCIATION, INC., ef al.,

Plaintiffs,

_

WISCONSIN AVENUE ASSOCIATES, INC... ef al.,

Defendants.

MEMORANDUM OPINION

ORDER

AND

FINAL JUDGMENTS

This court has previously filed Memorandum Opinions dated June

27, 1978 and December 18, 1978 following bifurcated trials of the

instant case. The former Opinion treated the subject of liability and

latter the issues of damages, leaving for resolution the final amounts

of judgments dependent upon an accounting to be supplied by stipula-

tion of the parties or, failing in that, by reference to the Auditor-

Master of the court.

When the stipulation was not forthcoming within the allotted

30-day period, this court filed its Order of January 19, 1979 amending

Memorandum Opinion of December 18, 1978 and referring this

matter to the Auditor-Master of the court to conduct proceedings in

accordance with the court's Memorandum Opinion of December 18,

1978 and to furnish a report to the court within 90 days.

Though the Auditor-Master promptly proceeding to schedule hear-

ings the same were delayed by reason of the fact that the defendant,

Wisconsin Avenue Associates, Inc., filed, on January 23, 1979, a

petition in the United States District Court Bankruptcy No. 79-

00012, under Chapter XI of the Bankruptcy Act and also filed in this

court a Suggestion of Lack of Jurisdiction to Proceed against defen-

dant, Wisconsin Avenue Associates, contending that the filing of the

petition in the Bankruptcy effected an automatic stay upon further

proceedings in this court. The plaintiffs countered by filing. under

date of February 16, 1979. a Motion for Entry of Judgment pursuant

to Rule 54(b) of the Civil Rules of the Superior Court. On March 27.

1979 the Honorable Roger M. Whelan, Bankruptcy Judge. United

States District Court for the District of Columbia, found that the

petition of Wisconsin Avenue Associates, Inc. under Chapter XI of

the Bankruptcy Act was not filed in good faith and dismissed the case.

(Copy of said Order and Memorandum of Law is attached as Exhibit-

A). Under date of March 29, 1979, this court denied the motion of the

plaintiffs for Entry of Judgment (pursuant to Rule 54(b).

The report of the Auditor-Master was filed on April 16, 1979 but it

was hand delivered to counsel! on April 13, 1979 at the time of their

execution of a stipulation attached to the report and forming a part

thereof. (Attached as Exhibit-B).

The report of the Auditor-Master is accepted and approved.

In executing the stipulation made a part of the Auditor-Master’s

report, the parties agreed to submit the following questions to the

court:

(a) Q. Whether defendant may claim a credit for advertising

expense, repairs, renovation and overhead, among other things, in

connection with the actual leasing. care and supervision of the apart-

ment units in question. Defendant claims the amount of such ex-

penses is $57,000 or thereabouts.

A. No, see pages 20, 21, Memorandum Opinion of De-

cember 18, 1978.

(b) Q. Whether defendant is entitled to a credit for principal

and interest payments made on a second mortgage to The Gold

Depository and Loan Company, Inc. Defendant claims this mortgage

was made to secure borrowings upon the respective units in question

on October 6, 1976 and the total of principal and interest payments

amounts to $28,749.90.

82a

A. No. This claim was nw even litigated.

(c) Q. Whether defendant is obligated to pay the “reasonable

rental value” upon apartment unit 801/802 for the period from Janu-

ary |, 1978 to the present date.

A. The defendants in effect, elaborate upon this question

in a pleading filed April 20, 1979 entitled Defendants’ Request for

Further Clarification of the Court's Formula for Recission, where it is

Stated in part:

“Whether, in regard to apartment 801/802, defendant is obli-

gated to make an accounting for the period from January |, 1978

to present date, where it s that no monies were received by

defendant during the said period, and the tenant, one Marjorie

Jawish, has refused to pay any rental whatsoever, contending

that title to the premises has been transferred from Kimberly A.

Laurins to 2720 Wisconsin Avenue C ive Association,

Inc , and citing in support thereof this Court's Memorandum

Opinion of December 18, 1978. (See copy of complaint filed in

D.C. Superior Court against Mrs. Jawish, and her Motion for

Summary Judgment, attached hereto).”

The Memorandum Opinion of this court, dated Decembr 18, 1978

(Pgs. 11, 12) as mended by the Memorandum Opinion of January 19,

1979, clearly reflects the obligation of defendants to pay the reason-

able rental value of 801/802 to the Cooperative. The lease to Jawish,

its aftermath and status during the period in question is irrelevant to

the obligation as found by the court of the defendants to the Coopera-

tive.

(d) Q. Whether defendants Wisconsin Avenue Associates,

Inc. and/or A. V. Laurins are obligated to pay the “reasonable rental

value” of apartment unit 805 during the period of the latter's occupan-

cy as aforesaid. The Court's formula for rescission (P. 12 of Damage

Opinion) does not include unit 805 among those designated for

payment of reasonable rental value

A. Yes; see stipulation as to occupancy and as this is

implied under the formula for rescission.

THEREFORE, in accordance with the several Memorandum

Opinions of the court dated June 27, 1978, Decembr 18, 1978 and

_—. .

83a

January 19, 1979 and this Memorandum Opinion, it is by the court

this 27th day of April, 1979 hereby adjudged, ordered and decreed as

follows:

JUDGMENTS

tis HEREBY ADJUDGED,. ORDERED AND DECREED THAT

pursuant to SCR Civil Rule 54(e) as to:

1. Count | of the Amended Complaint. seeking several

declaratory judgments, judgment is hereby entered consistent with

the Court's decisions.

2. Count II was subject of a directed verdict by consent and

judgment is hereby entered in favor of the defendants.

3. Count Ill, seeking an accounting. in effect has been granted

in light of evidence at both the liability and damage trials and the

proceedings before the Auditor-Master.

4. Count IV, breach of contract against VAL Management

Company, Inc., plaintiffs recover nothing upon the finding of liabil-

ity against this defendant because of lack of proof as to damages and

judgment is therefore entered in favor of the defendants.

5. Count V is duplicitous of Count IV and judgment is there-

fore entered in favor of defendants.

6. Count VI, breach of fiduciary duty and unjust enrichment

having been found by its verdict in favor of the plaintiffs, judgment is

hereby entered in favor of the plaintiffs as follows:

(a) The $945,000 deed of trust dated December 6, 1974 is

valid and in force and effect, EXCEPT that Paragraphs | 1.

17, 34 and 46 are NULL AND VOID.

(b) The $945,000 deed of trust note dated December 6, 1974 is

valid and enforceabie.

(c) The $100,000 note dated December 16, 1974 is NULL

AND VOID AND CANCELLED.

(d) The $5,700 note dated 1, 1975 is NULL AND

VOID AND CA

84a

(e) The plaintiff/Cooperative recover of the defendants

Laurins, Norman, Wisconsin Avenue Associates, Inc.,

Metropolitan Bankers, Inc., Real Estate Equity

Management, Inc., ic Travel, inc., Real Develop-

ment Management, Inc. and Conference

Group, Inc. ' Bg moa damages in the amount of

$30,700.00, with interest thereon at the rate provided

District of Columbia law (see offset provision ay seme |

17 of this Order and Judgment).

7. Count VII is duplicitous, in part, of Count VI; the Court

having entered its verdict in favor of plaintiffs hereon, in combination

with its treatment of Count VI, hereby enters judgment in favor of the

plaintiffs.

8. Count VIII was the subject of a directed verdict by consent

and judgment is hereby entered in favor of the defendants.

9. Count IX, insofar as it alleges fraud and deceit. resulted in a

verdict for the defendants and judgment is entered thereon, however,

(a) ee Sees te ee en ee

Wisconsin Avenue Associates.

Inc., > dambiee Eee. Norman, Baden,

Tompkins and Chasen. who breached their fiduciary duty

to plaintiffs, misrepresented the 1975 maintenance .

the plaintiffs recover of defendants VAL

Company, Inc., Laurins, Norman, Baden, T ins and

Chasen nominal damages in the amount of $26. ($1.00

plaintiff). with interest thereon at the rate provided by

ict of Columbia law; and

(b) The plaintiffs recover of the defendants Laurins. Norman/

Wisconsin Avenue Associates. Inc. and VAL Manage-

Inc. puniive damages in the amount of

$12. $12,500 (£505.00 per plaintiff-purchaser. 25 plaintiff-

=. with interest thereon at the rate provided by

of Columbia law.

' The Corporate defendants, Wisconsin Avenue Associates. Inc... Metro-

cod see g hg ee Inc., Real Estate Equity Management, Inc.,

Scenic Travel, Inc., Real Development Management, Inc. and Conference

Management Group, Inc . are liable in every respect that Laurins himself is

liable. See Liability Opinion of June 27, 1978 at p. 29.

85a

10. Count X, the Court having found in favor of the defen-

dants, judgment is hereby entered in favor of defendants.

11. Count X1, the Court hav

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