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G.H.MCSHANE CO. v. MCFADDEN

March 15, 1976

G.H. McSHANE CO., INC., Plaintiff,
v.
Warren A. McFADDEN, Defendant



The opinion of the court was delivered by: SNYDER

 This is a diversity action tried to the Court in which the Plaintiff Real Estate Agency seeks a commission from Warren A. McFadden for the efforts it expended in connection with McFadden's acquisition of two properties in the Pittsburgh area. Judgment will be entered in favor of the Defendant.

 I. HISTORY.

 The Methodist Church Union (MCU) is a non-profit Pennsylvania corporation which carries out charitable activities in the Pittsburgh area under the auspices of the Methodist Church. In 1969, MCU decided to raze one of its church buildings, located at the corner of Smithfield Street and Seventh Avenue in the City of Pittsburgh, and to erect in its place a large office building in the hope that proceeds from such an operation would support further philanthropic activities.

 G. H. McShane, the President and principal stockholder in G. H. McShane Company, Inc., a Pennsylvania corporation engaged in the real estate brokerage business, voluntarily sought out the D. D. Davis Construction Company of Youngstown, Ohio (Davis) and MCU thereafter engaged Davis to construct the building, secure the necessary financing, and look after the leasing of the building. Davis was successful in arranging for a construction loan through Mellon Bank, N.A., and in making arrangements with Prudential Insurance Company for a mortgage to take over the permanent financing if the building was completed by September 30, 1971.

 MCU repeatedly encountered financial problems during the course of construction, so that it was unable to meet its commitments to the contractor as they fell due. There also developed a serious construction problem requiring extensive reworking of some of the structural steel when it was found that the building was sixteen inches shorter than called for in the plans. Thus by the summer of 1971, it became apparent that Davis would not be able to complete construction within the time limitations set forth in the Prudential Take-Out Agreement. It was also apparent that a sufficient number of tenants had not been secured to provide adequate rent to meet the carrying charges of the building.

 MCU recognized the danger that Prudential might not be bound by its commitment, and that MCU's investment in the property would be jeopardized if foreclosure of the construction mortgage occurred. MCU thus began to exert considerable efforts to sell Smithfield Plaza at a price which would allow it to recoup its equity in the property; such efforts, however, proved unsuccessful.

 At this point, Dr. Allan J. Howes, Executive Director of MCU, proposed combining Smithfield Plaza with an undeveloped tract of approximately 360 acres (Epworth Woods) located some distance from the City of Pittsburgh, which was capable of conversion into a housing development. He envisioned the production of sufficient cash from Epworth Woods to sustain Smithfield Plaza until it would become self-financing. This idea was communicated to many real estate people, including G. H. McShane.

 In September of 1971, G. H. McShane telephoned Warren A. McFadden, a real estate investor and developer in Fort Lauderdale, Florida with whom McShane had become acquainted in an earlier real estate transaction. He told McFadden about the Smithfield Plaza and Epworth Woods properties in some detail and explained the financial problems MCU had encountered in attempting to complete the development of Smithfield Plaza. McShane further informed McFadden that under the circumstances, MCU would probably accept substantially less than they already had invested in Smithfield Plaza but that as a result, MCU should not be expected to pay any real estate commission. In addition, McShane told McFadden of the various offers made for Smithfield Plaza, including one by the United Steel Workers of America to purchase for six million dollars. (There was also pending an offer for Epworth Woods for one million dollars.) McShane at this point told McFadden that a real estate commission of $282,000 would normally be payable on these two sales, but if McFadden were to acquire the properties, McShane would be willing to bring about the transaction for a $150,000 commission. McFadden agreed that this was a reasonable amount in view of the selling price of the properties (which at the time were not producing any monies) but suggested that payment of the commission should be deferred until such time as either property yielded "sufficient revenue", to insure that such payment would not be a deterrent to the proposed transaction.

 On October 4, 1971, McFadden and McShane had another discussion and McFadden decided to come to Pittsburgh to personally inspect the properties. McFadden arrived on October 5, 1971 and toured both properties in company with Dr. Howes, G. H. McShane and his brother, Hugh McShane, who was also employed by the McShane Agency. Later at dinner, McFadden outlined a rough proposal for the acquisition of both properties under a long term lease with options to purchase at various times during the term of the lease. In response to Dr. Howes' stated concern that MCU could not afford to pay any commission on the transaction, McFadden assured him that he (McFadden) and McShane "had an arrangement". At that time, McFadden also stated to Hugh McShane that he (McFadden) would be the one who would be paying the real estate commission.

 MCU's Executive Committee on October 19, 1971, received McFadden's proposal to take a ninety-nine year lease on Smithfield Plaza and to pay MCU rentals, to be determined after deducting expenses from rents received. The proposal also included the purchase of Epworth Woods for one million dollars, which sum would be applied to the upkeep and maintenance of Smithfield Plaza until it became self-sustaining; and options to purchase Smithfield Plaza. When the Executive Committee expressed interest, McFadden presented a formal written proposal embodying the above terms on October 21, 1971, and following its presentation, when McFadden was not in the room, Dr. Howes informed the Committee that the proposal did not provide for payment of a real estate commission by MCU, as none was to be payable by them.

 Between October and December of 1971, McFadden frequently visited Pittsburgh and Hugh McShane continued to perform many services for him. G. H. McShane, who at this time was living in Sarasota, Florida, also made many trips to Pittsburgh in connection with this transaction. On December 28, 1971, Prudential bought out the Mellon construction loan and McFadden took over Smithfield Plaza under the lease. On August 25, 1972, McFadden acquired title to Epworth Woods for the purchase price of one million dollars, payable on or before December 31, 1972. At this same time, MCU transferred the Smithfield Plaza land to McFadden's nominee, Con-Dev Dairy Corporation, for no additional consideration under an option to purchase for two and a half million dollars during the first twenty-five years of the ninety-nine year lease.

 Not long afterward, on November 4, 1972, McFadden obtained a loan of $2,300,000.00 from Great American Mortgage Investors (GAMI) for the development of Epworth Woods. Of that loan, $1,000,000.00 was used to pay the purchase price of Epworth Woods; $594,300.00 was used to replenish McFadden's line of credit at the Chase Manhattan Bank in New York City; $118,000.00 went for a small piece of land and dwelling adjacent to Epworth Woods (the Dessecker property); $109,371.72 was placed in a bank account entitled, "Warren A. McFadden, Escrow Account Epworth Woods"; and the remaining $478,328.28 was used to pay interest on the GAMI loan, or was not accounted for. Interest on the GAMI loan was paid through April of 1974, and the unpaid interest thereon from May 1, 1974 through November 30, 1975 (the Hearing date) amounted to $543,087.08.

 Con-Dev received formal title to Smithfield Plaza, land and building, on April 19, 1973, and on May 8 and 9, 1974, McFadden transferred title to Epworth Woods to Schriber Deed Security, Incorporated, as there was an option agreement between McFadden and a third party to purchase approximately one-third of Epworth Woods. These transfers were made without the knowledge of G. H. McShane, and when he became aware of them he called McFadden to request payment of his commission. McFadden denied there was any agreement regarding a real estate commission, refused to discuss the matter, and directed McShane to his lawyer. Shortly thereafter this action was brought.

 It is noted that Epworth Woods at the time of Hearing had produced no income, except for about $3,000 rental from the Dessecker Property. Smithfield Plaza sustained a net deficit in expenses over income through August 31, 1975 of $3,590,816.25, so that on September 8, 1975, Prudential foreclosed on its mortgage on Smithfield Plaza and purchased the premises.

 II. DISCUSSION.

 There is little dispute that McShane brought together a willing buyer and a willing seller, and that no commission was to be paid by MCU. Nor is it controverted that G. H. McShane Co., Inc., through G. H. McShane and Hugh McShane, was the moving force in finding a buyer who had previously known nothing about the properties and who purchased them under terms and conditions which were satisfactory to MCU. But McFadden denies the existence of an enforceable contract.

 During his first trip to Pittsburgh on October 5, 1971, McFadden assured Dr. Howes that MCU would not be responsible for payment of any commission by making it clear that there was an "arrangement" for the commission with McShane. This was reiterated by his statement to Hugh McShane that he (McFadden) "would pay Mickey's (G. H. McShane) commission". On December 20, 1971, G. H. McShane presented McFadden with a letter which set forth the terms of the commission agreement as follows:

 
Mr. Warren McFadden
 
512 Intra Coastal Drive
 
Ft. Lauderdale, Fla. ...

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