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October 16, 1980

Bennett LEVIN
Howard N. GARFINKLE, Barbara Garfinkle, Asher Fensterheim, Cyrus West, K. B. Weissman, Edward Breger, Norman Septimus, Jack Deutschmann, Huckleberry Farm, Inc., HAW Corporation, TAFU Corporation, Czar Realty Corporation

The opinion of the court was delivered by: LUONGO

The following opinion constitutes my findings of fact and conclusions of law under Rule 52(a), F.R.Civ.P.

 I. Garfinkle's Breach of Fiduciary Duty

 At trial, the evidence revealed that in the course of negotiations over the Chatham Square Apartments in Charlotte, the purchasers offered to Levin, through Garfinkle, a wraparound mortgage on the property. The wraparound mortgage to be given to Levin was in addition to a $ 612,000 purchase money mortgage given to Levin as part of the consideration for the purchase. The purchaser, Investors Economic Systems (IES), was a real estate syndication firm acquiring the property for immediate syndication to investors. Because of Pennsylvania Securities Commission regulations, IES could not both syndicate the property for a fee and hold the wraparound mortgage. It was essential, however, that IES structure the transaction with a wraparound mortgage, because members of the restricted class of potential investors whom it serviced were seeking the kind of immediate tax deductions and deferred return on investment which the wraparound provided. Accordingly, IES offered the wraparound to Levin, without any investment by him.

 Garfinkle negotiated with George David of IES over the terms of the wraparound mortgage. Several times Garfinkle agreed to accept it, only later to withdraw his acceptance. Because of strict Pennsylvania Securities Commission regulations, IES was required to prepare detailed offering documents which it could not complete without coming to terms on the wraparound mortgage. Garfinkle was aware of these requirements, and of time deadlines pressuring IES, but refused to give a definite answer with the result that IES offered the wraparound to another party, a fact of which Levin was unaware until he attended the closing. See Findings 168-182, 492 F. Supp. 781, 797.

 Garfinkle's explanation of his reasons for refusing the wraparound mortgage was unpersuasive. I concluded that Garfinkle breached his fiduciary duty to Levin because, while acting in his capacity as Levin's agent, he refused, without good cause and without consulting Levin, to acquire an asset of apparent value to Levin. See 492 F. Supp. pp. 811-812.

 Although I cautioned counsel that the evidentiary hearing was limited to establishing the value of the wraparound, counsel for defendants have implicitly suggested that since the wraparound has little or no value, Garfinkle could not have breached his fiduciary duty by failing to accept it. Specifically, defendants contend that under the November 8, 1976 agreement between the parties, Garfinkle had the right to approve all mortgages taken back at the sale of the Charlotte properties. This was to prevent Levin from accepting inflated mortgages as a means of rapidly reducing his indebtedness to Garfinkle without corresponding value to Garfinkle. Garfinkle, defendants now contend, rejected the wraparound because it had no value, and it was his right to reject it under the agreement.

 At this stage in the case, this contention has little credibility. At trial, defendants did not refer to the clause granting Garfinkle complete discretion during negotiations as an "approval" clause. If, in fact, Garfinkle was exercising a contractual right to reject the wraparound mortgage when he refused it, he had the opportunity to so testify, both at his deposition (T. 1012-1016, 1/18/80), and at trial. Rather, his testimony was to the effect that the mortgage was a "tax scam," and that Levin himself made the decision to reject it. Id. Finally, the defendants' contention that Garfinkle had the right to reject the wraparound mortgage is also unpersuasive in light of my finding that the wraparound was not a purchase money mortgage subject to the terms of the November 8 agreement, *fn2" and therefore the approval clause in that agreement was not applicable. See discussion infra.

 Defendants have also reiterated their contention at trial that Garfinkle was justified in rejecting the wraparound because of potential problems with the Internal Revenue Service and the Pennsylvania Securities Commission. However, inasmuch as Levin was a party to the transaction even without taking the wraparound, to a certain extent he was already incurring the risk of an investigation of the transaction. (T. 155, 7/28/80). Indeed, the offering memorandum for the syndication of the property specifically disclosed Levin's involvement and his obligations to the investors, see exhibit P-252, and therefore at the very least Levin would have been required to explain his involvement in the syndication even without the wraparound. There is no suggestion in the record that Levin had any ongoing difficulties with the IRS or the Pennsylvania Securities Commission which would have mandated excessive caution on his part before becoming involved in a complex real estate deal of this kind. The record makes it abundantly clear, however, that it would be in Garfinkle's interest, because of his controversial past, to avoid drawing attention to himself by participating in transactions where the parties were taking an "aggressive" stance with respect to tax deductions. In any event, if Garfinkle perceived risks to Levin, certainly it was incumbent upon Garfinkle to give Levin the opportunity to evaluate such risks for himself.

 In short, I reject defendants' suggestion that evidence developed at the hearing held on the value of the wraparound undercuts my original conclusion that Garfinkle breached his fiduciary duty.

 II. The Terms of the Wraparound Mortgage

 The proposed wraparound which IES offered to Levin was never reduced to writing because of Garfinkle's refusal to come to final terms. This necessarily raises some problems of proof with respect to evaluating the wraparound. Defendants contend that since the wraparound was never reduced to writing, Levin cannot recover damages for its loss, because its terms are too uncertain, and his damages too speculative. To adopt defendants' position would in effect reward Garfinkle's conduct, because it was due to his breach of fiduciary duty that the terms were not reduced to writing. More importantly, a wraparound mortgage was ultimately placed on the property, and plaintiff's witness George David, who negotiated both the wraparound proposed to Garfinkle and the wraparound actually created, was able to testify to the terms of the proposed Levin wraparound by referring to the instrument which was created.

 The net face value of the wraparound, (value in excess of underlying mortgages) was $ 1,200,030. The rate of interest was 7.25%, resulting in a net cash flow of $ 5,407,000, *fn3" over the thirty-year life of the mortgage. The holder of the wraparound was to receive payments from the mortgagors on the basis of the aggregate indebtedness on the property, and he in turn would make payments to the holders of the underlying mortgages. For the first ten years of the wraparound, payments on the underlying mortgages would be such that the wraparound holder would have a negative cash flow-i. e., the income generated by the wraparound would not be sufficient to meet payments on the underlying mortgages, with the result that the wraparound holder would be required to tap another source of funds in order to make payments on the underlying mortgages. Beginning in the eleventh year, the wraparound would yield a positive cash flow of $ 54,865, increasing to $ 396,809 in the twentieth year, and in each of the remaining ten years.

 The wraparound also contained certain other significant provisions which had an effect on its value. There was a provision that during the first three years of the wraparound mortgage, the holder could not foreclose if gross ...

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