Opinion
1784 CV 0113-BLS 1 137992
08-04-2017
Vinod Patel v. Vincent Dammai et al
Filed August 7, 2017
ORDER ON CROSS MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Edward P. Leibensperger, Justice
In this action on a promissory note the parties seek a ruling by the court on two issues: (1) what should be the interest rate on the promissory note when the interest rate stated in the note is unlawful under the usury statute, and (2) what amount of attorneys fees are recoverable by the lender under the terms of the note. This action was commenced by plaintiff, the lender, against defendant, a person individually liable under the note, on January 12, 2017. As a result of this lawsuit and collection efforts by plaintiff, the principal sum of the note ($400,000) was repaid to plaintiff on May 31, 2017. On April 20, 2017, in anticipation of the imminent payment of the principal amount, the parties submitted a Joint Proposal for Procedure and Schedule that was accepted and ordered by the court. In the Joint Proposal, the parties stated " [a]ll parties believe that these two issues can likely be resolved without discovery, on cross motions for summary judgment. All parties further believe that if these two issues are resolved by the Court, then that will likely facilitate a final resolution of the case . . ."
The Interest Rate
The following facts regarding the promissory note and the interest rate are submitted as undisputed in the parties' Consolidated Statement of Undisputed Material Facts.
In May 2016, the parties met to discuss a business venture proposed by defendant, Vincent Dammai. Dammai intended to form a company called Biosimilars & Biologics to distribute and/or manufacture generic pharmaceutical drugs. Plaintiff, Vinod Patel, agreed to become employed by company and to receive a 4% equity interest in the company.
Before the company could be organized it was recognized that the company needed money to get off the ground. Patel agreed to loan the not-yet-organized company $400,000. It was anticipated that the loan would be for a short time period because Dammai anticipated a major investment from the government of Brazil. On July 1, 2016, a promissory note was executed by Dammai, Patel and a third person, Venkat Reddy. The relevant terms of the promissory note are the following.
The " Borrower" is a " new business" designated as " NewCo." It is recited that NewCo consists of three " Owners, " Dammai, Patel and Reddy. NewCo and the Owners " individually and severally" promise to pay Patel the sum of $400,000, plus interest on or before September 1, 2016. The promissory note states that the " loan is intended to be used [as] an advance to fund the start-up of a new business . . . to be named and formed in the next two weeks (called 'Biosimilar & Biologics')."
The promissory note further provides that the interest rate on the note is 15% bimonthly. Accordingly, the amount owed under the note on the date due, September 1, 2016, is $460,000.
The note provides that the Borrower shall pay reasonable attorneys fees and disbursements incurred in connection with the collection of the note.
On July 1, 2016, Patel wired $200,000 to a bank account for another entity controlled by Dammai because the anticipated NewCo had not been formed. On July 5, 2016, Patel wired another $200,000 to Dammai.
On August 5, 2016, Patel and Reddy informed Dammai that they no longer wanted to participate in the anticipated new business to be called Biosimilars & Biologics. On August 15, 2016, Dammai incorporated Biosimilars & Biologics IBC as a Bahamas corporation, with Dammai as majority shareholder. Patel and Reddy have never been shareholders, officers, directors or employees of this company.
Dammai admits in his answer that in May and June 2016, when the parties discussed the short-term loan, Dammai offered and proposed to pay Patel between 10% and 20% interest for the two-month period. Patel chose the mid-point: 15%. Neither Dammai nor Patel knew that the rate of interest violated the Massachusetts usury statute. Patel obtained the form of the note from his neighbor, an attorney, with the interest rate left blank. Patel inserted the 15% rate without consulting an attorney. Dammai had no objection to the 15% interest rate. Indeed, he happily remarked in an email about his willingness to pay the 15% interest for two months.
The promissory note is, by its terms, governed by Massachusetts law.
The loan was not repaid on September 1, 2016. Patel attempted to collect the debt by informal communications. The debt was not paid in response. In October 2016, Patel engaged counsel to help him collect the debt. Patel and his counsel proposed a new note to replace the original note but the proposal was rejected. In December 2016, Dammai, through counsel, disputed liability under the note. Patel filed this lawsuit on January 12, 2017. As mentioned above, as a result of litigation efforts by Patel, Patel received repayment of the principal amount of the loan ($400,000) on May 31, 2017.
Reasonable Attorneys' Fees
The parties agree, as confirmed at oral argument, that I may review the submission of Patel in support of his request for an award of attorneys fees and expenses, including the affidavit of counsel and the contemporaneous time records, along with the submission of Dammai, including his objections to the award of fees for certain activities and his analysis of the fees and tasks, to determine an award of fees. No evidentiary hearing on the award of fees is requested.
DISCUSSION
Interest Rate
The parties agree that the interest rate of 15% for every two months (90% per annum) is unlawful as a usurious rate under G.L.c. 271, § 49. The maximum interest rate allowed under that statute is 20% per annum. Patel seeks to have the court reform the promissory note to make the applicable interest rate the 20% maximum allowed by law. Dammai, on the other hand, argues that the consequence of the usurious rate in the promissory note is that the note is deemed to have no agreement on an interest rate and, therefore, pursuant to G.L.c. 107, § 3, the rate is 6%. Dammai concedes, however, that if there is no interest rate in the note, the prejudgment interest rate of 12% would apply from the date of breach or demand pursuant to G.L.c. 231, § 6C.
The Massachusetts usury statute, G.L.c. 271, § 49 prohibits an interest rate of more than 20% per year. In subsection (c) of the statute, the court is empowered, but not required, to declare a loan with an usurious interest rate void. The Supreme Judicial Court has held that " the permissive language of 49(c) is properly read to empower a court to utilize its full range of equitable powers, including cancellation, in order to reach an appropriate result in each case." Begelfer v. Najarian, 381 Mass. 177, 187, 409 N.E.2d 167 (1980).
One equitable remedy available to the court is to reform the promissory note to insert a non-usurious interest rate. Beach Associates, Inc, v. Fauser, 9 Mass.App.Ct. 386, 389, 401 N.E.2d 858 (1980). In Beach Associates, the Appeals Court affirmed the lower court's reformation of the terms of a loan with an usurious interest rate to the maximum (20% per annum) allowed by law. Id. at 395. The guiding principle cited in the decision was that the " parties freely entered into this transaction at arms-length in the mistaken belief that the interest rate was proper." Id. Therefore, equity required that the lender receive the maximum interest rate allowed by law.
For similar reasons, I find that the parties' promissory note should be reformed. I select the maximum interest rate allowed by law because the record demonstrates that the borrower freely and willingly agreed to pay a very high interest rate (10% to 20% for every two months) because it was anticipated that the loan would be short term (two months). The lender simply agreed to the interest rate proposed by the borrower. Neither the borrower nor the lender knew the interest rate stated in the promissory note was unlawful. In order to reasonably effectuate the parties' bargain, and in the exercise of my equitable discretion, I reform the promissory note to provide for an interest rate of 20% per annum.
Dammai's argument to apply G.L.C. 107, § 3 to provide the interest rate is inapposite. That statute provides for a 6% interest rate when " there is no agreement or provision of law for a different rate." As a result of the reformation of the promissory note by the court reasonably to achieve the parties' intent at the time of the loan, there is an interest rate (20% per annum) that reflects the parties' agreement. Likewise, prejudgment interest under G.L.C. 231, § 6C is to be calculated at the " contract rate." The contract rate is the 20% per annum as provided by the now-reformed promissory note.
Attorneys Fees and Expenses
The promissory note provides for the lender to recover reasonable attorneys fees and expenses " incurred in connection with the collection and/or enforcement" of the note. Patel argues that he should recover $99,191.48 under that provision. The parties submit the reasonableness of the requested award of fees and expenses to me for resolution. In that regard, I have reviewed the parties' detailed filings. The Second Affidavit of Brian S. Kaplan (counsel for Patel), dated June 26, 2017, attaches contemporaneous time records detailing tasks per day and the time expended for the tasks. Counsel for defendant provided a spreadsheet categorizing each time entry into a substantive area, and a helpful pie chart illustrating the amount of the total charges by category. In addition, the parties' memoranda describe the collection efforts undertaken by counsel for Patel.
Defendant does not contest the hourly rate charged by Patel's counsel. That rate for Mr. Kaplan is $400. I find that the hourly rate is reasonable given the nature of the representation and the experience and reputation of counsel. Also, defendant does not contest the expenses incurred by Patel. Those expenses are detailed in the bills sent to Patel and amount to $1,091.48.
Some of the work was performed by an associate of Mr. Kaplan at an hourly rate of $300. Again, defendant does not contest the hourly rates.
In general, I find that the time spent by Patel's counsel in efforts to collect the loan was engagement, counsel obtained full payment of the principal amount of the loan. This outstanding result was obtained notwithstanding defendant's denial of liability, refusal to provide information regarding the whereabouts of the loan proceeds, and the alleged misuse of the proceeds. Counsel for Patel obtained trustee process to freeze approximately $145,000 belonging to defendant and engaged in discovery from third parties to trace the proceeds.
On March 21, 2017, defendant finally admitted that he did not contest liability for the loan. Also on that date, defendant asked permission from the court to pay the $400,000 loan principal into court. Additional legal fees were incurred to negotiate and effect the payment from court directly to Patel.
I find that the legal fees incurred by Patel through March 22, 2017, were reasonable. I reject defendant's nitpicking of the tasks required because (a) the tasks appear reasonable, and (b) defendant could have avoided the obligation to reimburse Patel for legal fees if he had come forward and paid the principal when first demanded. The amount of legal fees incurred through March 22, 2017, was $58,240.
The remaining $39,860 sought by Patel ($98,100-$58,240) represents fees incurred in the time period from March 22, 2017 to May 15, 2017. The bulk of those fees were incurred in connection with resolving the parties' dispute over the interest rate that should be applied to the principal. This dispute resulted in the cross motions for partial summary judgment. From the descriptions in the time sheets, defendant calculates that $27,200 of fees were incurred by Patel on this issue. My review of the time records reduces the amount that defendant says was incurred solely on the interest rate issue because some of the time entries reference and include court appearances and preparation of the motion for fees. These latter two items are compensable. Accordingly, I find that the fees incurred by Patel in connection with litigating the interest rate issue amount to $22,000.
The dispute over the interest rate was a problem of both parties' making. As referenced above, neither side knew that the stated interest rate was usurious when the promissory note was executed. They mutually agreed to the usurious interest rate. This mutual mistake required, ultimately, that the court determine the interest rate as an equitable matter. In my view, the resolution of the interest rate issue was not a collection cost reimbursable under the provision of the promissory note but, instead, a mutual request for a declaratory judgment regarding the appropriate interest rate. Consequently, I deny recovery by Patel of $22,000 of the attorneys fees requested.
The analysis above leaves undecided the recovery of $17,860 of fees incurred by Patel after March 22, 2017 ($39,860-$22,000). I reviewed the time records for that period. The time spent by Patel's counsel included further efforts directed to holding Dammai's wife liable for dissipation of the loan proceeds, including the defense of the wife's motion to dismiss. Also included are miscellaneous charges for time spent on reviewing records and considering defenses raised by defendant in his answer. At this time, although agreements were in effect regarding the payment of principal, Patel still could reasonably believe that he would be litigating over collection of whatever interest rate could be awarded by the court. I find that the time spent by Patel's counsel during this period is, however, at least partially excessive given the payment of the principal. A reasonable resolution of what fees are recoverable for this period of time is to award 50% of the remaining $17,860 of fees sought, or $8,930.
In sum, I find that Patel is entitled to recover $67,170 as reimbursement for attorneys fees, plus $1,091.48 in expenses, for a total of $68,261.48. The award of attorneys fees is calculated, as described, above, by the combination of $58,240 of fees incurred through March 22, 2017, and $8,930 for fees incurred after that date.
CONCLUSION
Plaintiff's motion for partial summary judgment (Paper No. 42) is ALLOWED to the extent that judgment on the promissory note shall be calculated to reflect the interest rate of 20% per year, and plaintiff is entitled to recover $68,261.48 for attorneys fees and expenses recoverable under the promissory note. Defendant's cross motion for partial summary judgment is DENIED.