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McFarland v. Gregory

July 5, 1963


Author: Waterman

Before LUMBARD, Chief Judge, and WATERMAN and MOORE, Circuit Judges.

WATERMAN, Circuit Judge.

Plaintiffs below were the developers of a real estate project outside Washington, D.C., known as "Arlington Towers." The project consists of an 18-acre tract of land in Virginia, four multi-story apartment buildings, and a shopping center. In April 1957, plaintiffs were required, because of financial difficulties, to sell all the issued outstanding stock and debentures of the corporation developing the project to persons known as the Kaufman Group. As part of the sales agreement, plaintiffs were given, at an agreed price, a call on the securities or an option to repurchase them within one year.

Thereafter, plaintiffs entered into two agreements with defendants below, the Gregory group. The first, or main, agreement provided for the transfer of the call to, and its exercise by, the defendants, in return for which plaintiff McFarland was to receive $250,000 in two installments. That agreement is not involved on this appeal.

The second, or memorandum, agreement provided for certain rights of the parties after defendants' acquisition of the Arlington securities. For present purposes, the most important provision of this agreement gave plaintiff McFarland the right to receive a share of the profits from the resale of the project if McFarland could find a buyer for the properties, at an agreed price, within 39 months of April 15, 1957.

The history of the parties' relationship under these agreements has been one of continuing dispute, both as to the nature of their obligations and as to their respective performances. In July 1957, when McFarland had approximately 36 months within which to find a buyer, defendants claimed that plaintiffs had breached certain warranties and representations concerning the value of the Arlington properties. Thereupon defendants withheld their further performance under the agreements, including payment of a $150,000 balance on the $250,000 due McFarland. In September 1957, plaintiffs, citizens of the Common-wealth of Virginia, commenced this diversity action against defendants, New York State residents and others, in the United States District Court for the Southern District of New York, seeking reformation of the agreements and, when reformed, their specific performance. Defendants counterclaimed, alleging damages for breach of warranty.

After a trial below, Judge Dimock ruled, on June 30, 1961, that plaintiffs were entitled to specific performance and held that no warranties or representations in the sale of the Arlington properties had been breached. The judgment and decree of specific performance, entered on October 11, 1961, also provided that McFarland's time to find a buyer for the Arlington properties should be extended from July 15, 1960, the original expiration date under the contract, to June 30, 1964. Defendants did not appeal from this portion of the decree which was framed, as Judge Dimock stated in his opinion of June 30, 1961, to provide plaintiffs "a period sufficiently long to give McFarland time for performance equal to that which was still available to him on July 25, 1957, under the terms of the agreement."

During the spring of 1962, new disagreements arose between the parties concerning McFarland's rights under the agreements and the decree of specific performance. McFarland contended, and defendants denied, that as an implied condition precedent to his right to find a buyer for an individual building, or some of the buildings, in the Arlington complex, defendants should promptly separate, or obtain commitments to separate, the project mortgages and ground lease as between various units of the project. McFarland also demanded that defendants promptly discharge, or obtain commitments to discharge, all liens and encumbrances on the apartment buildings.

On March 2, 1962, defendants made a motion before Judge Dimock for further relief at the foot of the original decree to dispose of the newly-arisen disputes indicated above. In his answering papers, plaintiff McFarland requested construction of various additional provisions of the agreements, including a provision relieving defendants of any obligation to sell,

"unless it has been determined to the satisfaction of the counsel of the Gregory Group that profits realized in connection with the sale would, upon distribution thereof to the individual stockholders of Arlington, be taxable to them * * * as capital gain and not as ordinary income."

In an opinion dated June 19, 1962, Judge Dimock ruled with defendants and rejected plaintiff McFarland's interpretation of the agreement relative to the separation of the mortgages and lease and the discharge of all liens and encumbrances. The court further ruled, however, that defendants should forthwith seek and furnish the required tax opinion rather than delaying until a buyer for the Arlington properties had been produced by McFarland. The supplemental judgment and decree, entered November 14, 1962, further provided that McFarland's rights to find a buyer for the Arlington properties and to share in the profits of the sale should be extended for an additional period equal to the number of days,

"(i) in the period from March 2, 1962, the date of defendants' motion herein, to the date of the furnishing of an opinion of tax counsel * * *; and

"(ii) if an appeal is taken from this judgment and decree, in the period between the date of this Judgment and Decree and the date of the final disposition of such appeal, or, if no such opinion is furnished until thereafter, the date of the furnishing of such opinion."

Defendants prosecute this appeal from the provision of the supplemental decree just quoted which extends the time of McFarland's rights under the agreements. They contend that the extension was a gross abuse of discretion and that it granted to McFarland rights different in kind and quality from those provided by the contract of the parties. We ...

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