Massachusetts Appeals court affirms decision that while loan made by Lender was usurious, the correct remedy was reformation and not rescission. Lender’s recording of deeds in lieu of foreclose and taking foreclosed property were also not unfair or deceptive trade practice as the Borrower was a sophisticated businessperson, represented by counsel and the taking of such collateral is common practice among non-traditional lenders. Germinara v. People’s Comprehensive Mortgage, LLC, 98 Mass.App.Ct. 1117 (2020).
Robert Germinara (the “Borrower”), through an LLC owned by him, executed a promissory note payable to People’s Comprehensive Mortgage (the “Lender”), in 2010 for the purchase of a convenience store and gas station. The note was for a term of six months, with an interest rate of 18 percent with additional closing fees to paid by the Borrower. The note was secured by a mortgage on the property, as well as a second mortgage on another property owned by the Borrower. He also granted the Lender a security interest in property owned by him personally, as well by other entities he controlled.
The Borrower advised the Lender that he would be unable to repay the loan by the maturity date and the Lender agreed to extend the due date, as well as to make additional loans. After the extended due date had passed, the Lender recorded previously executed deeds in lieu of foreclosure and estoppel affidavits after having been updated by Borrower’s attorney (with the Borrower’s permission) for both mortgaged properties.
The Borrower, who never made any loan payments, began leasing both properties from the Lender and continued to operate the gas station and store, but eventually both properties were under lease to third parties. During this time, the Lender had removed some of the Borrower’s property from both locations and later sold both properties. During this time the Borrower initiated suit under the anti-usury statute, G.L. c. 271 § 49 and G.L. c. 93A, § 11 and Lender filed counterclaims for breach of contract for the value of the deficiency between the sale price and debt owed, as well and attorney’s fees and costs. The lower court ruled in favor of the Lender and the Borrower appealed.
The Appeals court began by stating that voiding a loan is not mandated by a violation of the anti-usury statute. The statute allows for the judge to, based on all the facts and circumstances, void, rescind, refund, credit excessive interest paid, reform or any other relief consistent with equitable principles. In considering an appropriate remedy, a number of factors must be balanced such “as the public policy against usury, whether refusal to enforce the term will further that policy, the gravity of the misconduct involved, the materiality of the provision to rest of the contract, and the impact of the remedy on the parties’ rights and duties.”. Given these facts, the court hold that the lower court was well within its discretion to order a reformation of the loan and not a rescission.
The court noted that the Borrower was represented by counsel and was knowledgeable in business, he understood the loan documents, the loan was high risk and the note itself provided for reformation as a remedy if the interest rate was found to be usurious. It was also noted that the usurious rate resulted from factoring in closing costs and points vs. the interest rate alone.
In regard to the Borrower’s claim of the Lender’s violation G.L. c. 93A, § 11, it was a similar analysis. Factors determining whether a practice is unfair or deceptive is whether the practice “is within at least he penumbra of some…established concept of unfairness”, whether it is considered immoral, unethical, or oppressive, and whether it causes substantial injury. In this case, beginning with the fact that a usurious loan is not a per se violation of the statute, the court again stated the fact that the Borrower was represented by counsel, was an experienced businessperson, and that the loan was a high risk loan. The Borrower had also claimed that the recording of the deeds in lieu of foreclosure was unfair and deceptive, as was the taking of his personal property was but the court pointed again to the Borrower being knowledgeable, represented by counsel, and the fact that these types of collateral were common among higher risk lenders and that the Lender had legal authority for all of the actions taken. Finally, the court found that Borrower suffered no injury from the alleged deceptive trade practices or usurious loan because he made no payments and did not have the means to pay off the loan in any case.
Finally, with regard to the counterclaims, the Borrower argued that if the deeds in lieu of foreclosure were valid, then the Borrower’s debt should’ve been extinguished and the Lender isn’t entitled to any deficiency. While the court acknowledges that a deed in lieu of foreclosure is often given in exchange for a lender’s claim to any deficiency in value of the property and the amount owed under the note, it is not always done so. In this case, the deeds in lieu of foreclosure and affidavits clearly stated that they were in exchange for “the satisfaction of an existing mortgage” and not the debt itself.
The court therefore held for the Lender on all counts and affirmed the judgements of the lower court.
Courtesy of Kevin Braun (Morgan Lewis & Bockius LLP)