Opinion
19-P-1805
11-03-2020
Robert A. GERMINARA & another v. PEOPLE'S COMPREHENSIVE MORTGAGE, LLC, & others.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
The plaintiffs appeal from judgments entered after a jury-waived trial on their claims under the anti-usury statute, G. L. c. 271, § 49, and G. L. c. 93A, § 11, and on People's Comprehensive Mortgage, LLC's (PCM) counterclaims for breach of contract and contractual indemnification. The trial judge made detailed findings of fact and rulings of law in a comprehensive 103-page decision. As pertinent on appeal, the judge concluded that, while the loan at issue was usurious, the proper remedy was reformation, not rescission; the plaintiffs failed to prove a violation of c. 93A; and they were liable to PCM for breach of contract damages and attorney's fees. The plaintiffs challenge each of these rulings. We affirm.
Background. We summarize the judge's factual findings as follows.
PCM is a limited liability company engaged in the business of lending money. Peter Bakis (Peter) often provided the funds for loans made by PCM. Danny Bakis and Nick Bakis (Nick) are Peter's adult sons.
In June 2010 Germinara and Peter were competing bidders at an auction of property located at 1 Kent Street in Newburyport. The property included a building that housed a convenience store and a separate structure containing gasoline pumps. Germinara was the high bidder, with a bid of $281,000. He made a nonrefundable deposit of $28,100, understanding that he would forfeit the deposit if he failed to timely close on the purchase. He later made a second nonrefundable deposit of $15,000 to extend the closing date.
After the auction Germinara sought a loan that would cover, among other things, the purchase price of the property, environmental remediation costs, and the supplies needed to begin operating the gas station and convenience store. He was unable to secure conventional financing, however, despite contacting several lenders. As a result, Germinara negotiated a short-term loan with PCM (2010 loan).
At the closing on the 2010 loan, Germinara, on behalf of Caldwell's Corner, LLC (Caldwell's), executed a promissory note payable to PCM in the principal amount of $450,000. The Bakis parties were the source of funding for the 2010 loan. The note provided for an interest rate of eighteen percent, a term of six months, and a maturity date of March 1, 2011. Caldwell's was also responsible for closing costs, $40,500 in prepaid interest, and an origination fee of $22,500. As security, Germinara granted PCM a mortgage on 1 Kent Street on behalf of Caldwell's, and a second mortgage on another property, 77 Parker Street, on behalf of Seventy Seven Parker Street Realty Trust (Parker Street Realty Trust). Germinara signed deeds in lieu of foreclosure (2010 DILs) and estoppel affidavits for both properties. In addition, Germinara executed a personal guaranty, granting PCM a security interest in personalty owned by him individually, and Uniform Commercial Code Financing Statements on behalf of Caldwell's and Parker Street Realty Trust, granting PCM security interests in personalty owned by each entity.
Germinara created this entity for the purpose of purchasing 1 Kent Street.
Germinara purchased 77 Parker Street in 1998 and was trustee of the Parker Street Realty Trust.
In March 2011, after Germinara told Peter that he would be unable to repay the 2010 loan by the maturity date, PCM agreed to extend the maturity date to August 31, 2011. PCM also made additional loans to Germinara in July 2011 (2011 loans), payable by August 31, 2011. In September 2011, when Germinara still had not made any payments on the loans, PCM's attorney, John Hanna, recorded the 2010 DILs and estoppel affidavits, as modified in 2011, for both 1 Kent Street and 77 Parker Street.
In August 2011 Germinara's attorney, with Germinara's authorization, added missing dates and recording information to the 2010 DILs and estoppel affidavits. The judge referred in his findings to the modified 2010 DILs as the "2011 DILs."
In October 2011 Germinara began leasing 1 Kent Street and 77 Parker Street from PCM and operating the gas station at 1 Kent Street as a tenant. By January 2012 Germinara was having difficulty paying suppliers, leading Nick to set up an entity, Ares Oil NP Corporation (Ares Oil), to operate the gas station. A few months later, however, Ares Oil stopped funding the gas station because Nick did not think that Germinara could be trusted to help with its operations.
In August 2012 Nick noticed that the deposits made by Germinara into Ares Oil's account were being rounded off into whole dollar amounts, which Nick found suspicious. Also, around the same time, Germinara's girlfriend contacted Nick and requested $20,000 to bail Germinara out of jail.
Meanwhile, in April 2012, Hanna provided Peter with revised deeds in lieu of foreclosure (2012 DILs) and revised estoppel affidavits for 1 Kent Street and 77 Parker Street. Hanna asked Peter to take the documents to Germinara for signature before a notary public. Soon thereafter, Peter and Rafael Barruos, a notary whom Peter had known for eighteen years, met with Germinara. Peter saw Germinara sign the 2012 DILs and estoppel affidavits and saw Barruos notarize them. Peter then delivered the signed and notarized documents to Hanna.
By late 2013 and early 2014, 1 Kent Street and 77 Parker Street were both under lease to third parties. At Hanna's direction, the Bakis parties removed some of Germinara's personal property from 1 Kent Street. Hanna also directed the towing of several vehicles owned by Germinara from 77 Parker Street.
In April 2015 PCM sold 77 Parker Street to Plum Island LLC, an entity controlled by the then-lessee of the property, for $435,000. In October 2015 PCM sold 1 Kent Street to Charles Mabardy, a real estate investor, for $132,000. Mabardy also signed a promissory note payable to Ares Oil in the amount of $85,000 for personal property owned by Ares Oil.
The plaintiffs filed this lawsuit in January 2014, raising claims under the anti-usury statute, G. L. c. 271, § 49, and G. L. c. 93A, § 11. PCM answered and asserted several counterclaims, including, as pertinent here, breach of contract for failure to repay the 2010 loan, breach of contract for failure to repay the 2011 loans, and contractual indemnification. After a lengthy jury-waived trial on the claims and counterclaims, the judge made the following rulings of law, among others: the 2010 loan violated the anti-usury statute, but the appropriate remedy was reformation, not rescission; the defendants did not violate G. L. c. 93A; the plaintiffs owed PCM breach of contract damages in the amount of $489,254.95, representing the outstanding principal and interest due on the 2010 and 2011 loans; and PCM was contractually entitled to recover its costs and reasonable attorney's fees. Thereafter, on PCM's motion, the judge ordered the plaintiffs to pay PCM $457,100.24 in attorney's fees and $22,115.62 in costs.
The judge found that the effective interest rate on the 2010 loan was twenty-eight percent, after considering the prepaid interest and origination fee that Caldwell's was required to pay. The defendants do not challenge this ruling.
Discussion. On appeal from a judgment after a jury-waived trial, "we accept [the judge's] findings of fact unless they are clearly erroneous." Anastos v. Sable, 443 Mass. 146, 149 (2004). "A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Building Inspector of Lancaster v. Sanderson, 372 Mass. 157, 160–161 (1977), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948). We review the judge's legal conclusions de novo. See Anastos, supra.
1. Anti-usury statute. The plaintiffs first argue that the judge erred by reforming the 2010 loan, rather than rescinding it. A violation of the anti-usury statute does not, however, "mandate a voiding of the loan." Beach Assocs., Inc. v. Fauser, 9 Mass. App. Ct. 386, 393 (1980). Rather, the statute gives a judge discretion "based upon all the facts, circumstances, and conditions surrounding the loan, to void it, to rescind it, to refund, to credit any excessive interest paid, to reform the contract, or to provide any other relief consistent with equitable principles." Id. at 394. "The appropriate remedy in any particular case is arrived at by balancing a number of factors including the importance of the public policy against usury, whether a refusal to enforce the term will further that policy, the gravity of the misconduct involved, the materiality of the provision to the rest of the contract, and the impact of the remedy on the parties' rights and duties." Begelfer v. Najarian, 381 Mass. 177, 189 (1980).
Here, the judge cited the relevant factors and concluded that rescission was not warranted because the usurious interest rate did not affect the integrity of the 2010 loan. This was a proper exercise of his discretion. See Beach Assocs., Inc., 9 Mass. App. Ct. at 393 ("There is ample authority for the proposition that when the only flaw in a loan is the excessive interest, the amount constituting the excess is to be refunded or credited to the borrower without necessarily voiding the loan"). The judge found that neither PCM nor Peter engaged in misconduct when negotiating and setting the terms of the 2010 loan; that Germinara was a sophisticated businessperson with highly competent counsel; that he understood and appreciated the obligations he undertook when executing the loan documents; that the 2010 loan was high risk from the lender's perspective; and that the promissory note expressly provided for reformation as the remedy if the interest rate were found to be usurious. The judge further observed that there were no recurring violations of the anti-usury statute; rather, the violation resulted from "one-time, relatively small ‘payments’ ... as closing costs and points." Given these findings, which are not clearly erroneous, the judge was well within his discretion in ordering reformation, not rescission. See id. at 389 (anti-usury statute "allows a judge to exercise discretion in granting relief, which can include reformation to reduce the excessive rate charged to one that is legally permissible").
2. General Laws c. 93A. Whether "conduct violates G. L. c. 93A is a legal, not a factual, determination[,] ... [a]lthough whether a particular set of acts, in their factual setting, is unfair or deceptive is a question of fact." Klairmont v. Gainsboro Restaurant, Inc., 465 Mass. 165, 171 (2013), quoting Casavant v. Norwegian Cruise Line Ltd., 460 Mass. 500, 503 (2011). Factors informing whether a business practice is unfair or deceptive include "(1) whether the practice ... is within at least the penumbra of some common-law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; [and] (3) whether it causes substantial injury to consumers (or competitors or other [businesspersons] )." Barron Chiropractic & Rehabilitation, P.C. v. Norfolk & Dedham Group, 469 Mass. 800, 811 (2014), quoting PMP Assocs., Inc. v. Globe Newspaper Co., 366 Mass. 593, 596 (1975).
The plaintiffs argue that the defendants committed several acts that qualify as unfair or deceptive under c. 93A. First, the plaintiffs point to the defendants' violation of the anti-usury statute. The plaintiffs concede, however, that a usurious loan is not a per se violation of c. 93A, but must be assessed on a case-by-case basis to determine whether it is unfair or deceptive. The judge conducted that assessment and determined that -- for substantially the same reasons that reformation, not rescission, of the 2010 loan was appropriate -- the defendants did not violate c. 93A by inducing the plaintiffs to enter into the 2010 loan. We discern no error in this conclusion, which is amply supported by the judge's findings.
The Bakis parties argue that they have no c. 93A liability because they were mere loan "participants" and because the plaintiffs waived their rights to sue them. Because we affirm the judge's c. 93A ruling on the merits, we do not reach these arguments. For convenience, we will refer in our c. 93A analysis to the defendants collectively without differentiating among individual actors.
The plaintiffs next claim that the defendants' recording of the 2010 DILs, as modified in 2011, constituted a wrongful foreclosure and violated c. 93A. Citing Levenson v. Feuer, 60 Mass. App. Ct. 428, 437-438 (2004), the judge concluded that the 2010 DILs must be treated as equitable mortgages and not absolute conveyances. But the judge went on to conclude that the recording of the modified 2010 DILs was not unfair or deceptive, citing the following factors: Germinara was a sophisticated businessperson who executed the 2010 DILs with the advice of counsel; under the circumstances, which involved an "extremely risky loan," the defendants did not act in bad faith in taking the 2010 DILs and recording the modified versions in 2011; the law at the time of recording was not so settled as to put the defendants on notice that the 2010 DILs were invalid; and the taking of DILs as additional collateral was a common practice by "nontraditional" lenders. These findings are not clearly erroneous and support the judge's conclusion that the recording of the modified 2010 DILs did not violate c. 93A.
The defendants argued to the judge that Levenson does not apply in the commercial context, but they do not renew that argument on appeal.
Furthermore, the judge determined, and we agree, that the plaintiffs failed to establish injury stemming from either the anti-usury violation or the recording of the modified 2010 DILs. The anti-usury violation caused the plaintiffs no injury because, as the judge found, the plaintiffs never made a payment of either principal or interest on the 2010 loan and did not have the financial means to pay off the 2010 loan, irrespective of the usurious interest rate. Also, as the judge found, the 2012 DILs cured the deficiencies in the modified 2010 DILs, thereby vitiating any claim of injury based on the recording of the latter. Although the plaintiffs raise numerous challenges to the 2012 DILs -- claiming among other things that they were procured by fraud, failed to recite consideration, and suffered from technical defects -- the judge addressed each of these claims in detail and found that the 2012 DILs were validly executed, intended to be absolute conveyances, and had the effect of legally transferring title to the properties to PCM. These findings are not clearly erroneous.
The plaintiffs further contend that the following acts in the aggregate constituted a violation of c. 93A: the defendants' dispossessing the plaintiffs of their personal property, using a false notary seal on the 2012 DILs, filing a false police report, and manipulating the sales price of 1 Kent Street by diverting $85,000 as a "secret ‘side-deal.’ " The judge also addressed these claims in detail and found, respectively as to each, that the defendants had the legal authority to take possession of the plaintiffs' personal property; that no one associated with the defendants intentionally lied to the police; that Germinara voluntarily executed the 2012 DILs, which were not procured by fraud; and that the $85,000 promissory note executed at the closing on 1 Kent Street was for personal property owned by Ares Oil that came with the purchase of the real estate. Once again, we see no clear error in these findings, which support the judge's conclusion that there was no violation of c. 93A.
3. PCM's counterclaims for breach of contract. The plaintiffs argue in the alternative that, if the 2012 DILs are valid, then PCM took title to 1 Kent Street and 77 Parker Street in full satisfaction of the underlying debt. But as the judge determined, and we agree, the language of the 2012 DILs makes clear that the conveyance of the properties did not extinguish the debt. Rather, the consideration recited in each of the 2012 DILs is "the satisfaction of an existing mortgage," which is confirmed by the respective estoppel affidavits. The judge thus did not err in concluding that PCM was entitled to the deficiency between the value of the two properties and the amount owed on the 2010 and 2011 loans. See Levenson, 60 Mass. App. Ct. at 437 (deed in lieu of foreclosure is given "often, but not exclusively, in exchange for release of the lender's claim to any deficiency between the value of the property and the obligation due under the note" [emphasis added] ); In re Kirchke, U.S. Dist. Ct., No. 10-40010 (D. Mass. June 16, 2010) ("conveyance of [deed in lieu of foreclosure] does not automatically operate to utterly extinguish the underlying debt in its entirety").
The plaintiffs also challenge the judge's factual determination of the deficiency, claiming that the judge erred in valuing the properties. We disagree. The judge based his valuation on uncontested evidence of the gross proceeds from the sale of each property. Although the plaintiffs contend that the judge should have instead relied on hearsay evidence of an appraisal conducted in 2011, it was for the judge to assess the weight and credibility of the evidence. See Picard v. Zoning Bd. of Appeals of Westminster, 474 Mass. 570, 575 (2016). We discern no clear error in his assessment.
4. Attorney's fees. The judge concluded that PCM was entitled to attorney's fees and costs based on a provision in the promissory note that states: "[T]he Note Holder will have the right to be paid back by Borrower for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses shall include, but shall not be limited to, reasonable attorneys' fees." The plaintiffs argue that this was error because the provision speaks only to costs and expenses for "enforcing" the note, not for "defending" it.
The plaintiffs' argument is foreclosed by Penney v. First Nat'l Bank, 385 Mass. 715 (1982). There, the court analyzed a similar provision and held that it encompassed the defendant's expenses for defending against the plaintiff's wrongful repossession and c. 93A claims because the "[d]efense of [those] claims was ... essential to collection on the notes." Id. at 723. We disagree with the plaintiffs' contention that Penney is inapplicable because here the plaintiffs "prevail[ed]" on their claim under the anti-usury statute. While the plaintiffs did succeed in proving that the 2010 loan was usurious, they ultimately did not succeed in obtaining the relief they sought -- rescission of the loan. At most, the plaintiffs would be entitled to a reduction in fees reflecting the time PCM's counsel spent defending the 2010 loan as not usurious, but the plaintiffs did not seek that relief below, nor do they raise such an argument on appeal.
PCM has requested appellate attorney's fees and costs, which it is entitled to under the terms of the promissory note. PCM may therefore submit an application for such fees and costs, with supporting documentation, to this court within fourteen days of the issuance of the rescript. See Fabre v. Walton, 441 Mass. 9, 10-11 (2004). The plaintiffs shall have fourteen days to respond.
Judgments affirmed.