RIVERVIEW APARTMENTS LLC v. CITY NATIONAL BANK (2020)

MEMORANDUM AND ORDER PURSUANT TO RULE 23.0

The plaintiff, Riverview Apartments, LLC (Riverview), owned three apartment buildings (properties) consisting of sixty-four residential units in the city of Springfield (city). After Riverview defaulted on its mortgage on the properties, City National Bank (CNB), the mortgagee, took possession and CRE Management, LLC (CRE Management), managed the properties. The buildings deteriorated, tenants were lost, and the properties became unproductive. Ultimately, the city condemned the buildings, ordered their demolition, and commenced tax foreclosure proceedings. Just prior to the entry of a final judgment in the tax foreclosure case, Riverview brought this action seeking an accounting and damages for alleged mismanagement and waste of the properties and damages under G. L. c. 93A, § 11. The accounting and waste claims were dismissed, and the c. 93A claim was tried in December 2017, before a judge of the Superior Court. Upon a motion of the defendants at the close of Riverview's case, the judge dismissed the c. 93A claim pursuant to Mass. R. Civ. P. 41 (b) (2), 365 Mass. 803 (1974), on the ground that Riverview had failed to show that it had suffered a loss of money or property. For the reasons that follow, we vacate the judgment and remand for further proceedings.

Background. We take the following facts from the judge's findings. See Cavadi v. DeYeso, 458 Mass. 615, 624 (2011); Mattoon v. Pittsfield, 56 Mass. App. Ct. 124, 139 (2002).

Riverview purchased the properties in 2005 for $2.4 million, of which $1.92 million was financed through a first mortgage loan from LaSalle Bank. LaSalle Bank subsequently assigned the mortgage to Imperial Capital Bank (Imperial). Riverview defaulted on the mortgage in July 2009, and Imperial exercised its right to take possession and collect rent beginning on November 1, 2009. At that time, Imperial retained CRE Management to manage the properties on its behalf. An initial inspection of the properties conducted when Imperial took possession disclosed that the buildings were already in disrepair. Then, within a few weeks, a heating oil delivery resulted in an oil spill in the basement of one of the buildings, triggering a response order by the Massachusetts Department of Environmental Protection. CRE Management complied with the order on behalf of Imperial.

On November 9, 2009, Imperial issued a notice of sale of the property pursuant to a power of sale contained in the mortgage. An auction was conducted on December 10, 2009, at which Imperial was the high bidder with a $1.2 million credit bid, but no actual foreclosure sale ever took place. Shortly thereafter, Imperial failed and, by mid-December 2009, CNB acquired the mortgage through a purchase and assumption agreement with the Federal Deposit Insurance Corporation and became the mortgagee in possession. CRE Management continued as property manager on behalf of CNB.

When CNB became the mortgagee in possession, it had the properties appraised. An appraisal report dated April 2, 2010, which the judge described as “extensive and detailed,” indicated that as of March 23, 2010, the “as is” combined market value of the properties was $1,265,000. However, the properties continued to deteriorate. One of the buildings was damaged by fire in April 2010, and all the tenants of the building had to be relocated. The city condemned the property the following day, and the building eventually was demolished by order of the city's building commissioner. Most of the tenants of the other two buildings also left or failed to pay their rent during this period. Significant portions of these buildings were boarded up and vandalized. By the summer of 2010, these buildings too had deteriorated such that the city condemned them as well. In addition, CNB had stopped paying real estate taxes on the properties. The city commenced tax foreclosure proceedings that resulted in a tax foreclosure on March 13, 2013. As a result, Riverview's only remaining interest, the right to redemption, and CNB's interest in the properties were extinguished.

After taking control of the properties, CNB commenced an action against Riverview to collect on the mortgage note. A final judgment on the mortgage debt was entered on December 31, 2010, in the amount of $1,901,856.84, together with a per diem of $152.37 from November 1, 2009, attorney's fees in the amount of $26,000, and court costs.

On August 20, 2012, prior to the entry of final judgment in the city's tax foreclosure action, Riverview commenced this action against CNB and CRE Management seeking an accounting and damages for mismanagement and waste of the properties. It also asserted a claim under c. 93A that is the subject of this appeal. On July 24, 2013, a judge of the Superior Court allowed the defendants' motions for judgment on the pleadings, and Riverview appealed. A panel of this court affirmed so much of the judgment that dismissed Riverview's claims for waste and an accounting, and reversed that portion of the judgment that dismissed the c. 93A claim. See Riverview Apartments, LLC v. City Nat'l Bank, 87 Mass. App. Ct. 1138 (2015). The panel's memorandum and order stated:

“Where, as here, a bank has taken control of a mortgagor's property to collect rents and presumably to foreclose by sale, advertises but fails to complete the sale, and during its continued admitted possession, arguably in violation of its duty to treat the property as an ordinary prudent owner would, allows the property to deteriorate to the extent it is condemned and demolished by the city, we cannot say Riverview has failed to make a claim for relief pursuant to c. 93A.”

Id.

Following remand to the Superior Court, CNB and CRE Management moved for summary judgment on the c. 93A claim, arguing, among other things, that Riverview could not prove that it suffered a “loss of money or property” as required by G. L. c. 93A, § 11, because it owed more on the note than the properties were worth. The motion was denied and the case proceeded to trial. At the close of Riverview's evidence, CNB and CRE Management moved to dismiss pursuant to Mass. R. Civ. P. 41 (b) (2), asserting that Riverview had failed to prove several elements of its claim. The defendants argued that Riverview had (1) failed to present any evidence of actual loss of money or property, (2) failed to establish unfair and deceptive conduct on the part of the defendants, and (3) failed to introduce sufficient evidence of causation. The judge allowed the motions.

In a written memorandum of decision, the judge first noted that “Riverview failed to prove that it had any interest of value in the properties at the time CNB took possession.” The judge further noted that “the only evidence that [Riverview] presented on the issue of market value of the properties was a 1.2 million dollar appraisal as of the date when CNB took possession” and that “[Riverview's] secured indebtedness on the mortgage note was 1.9 million dollars, resulting in a negative equity of $700,000.”³ The judge rejected Riverview's argument that, had CNB and CRE Management acted properly to preserve the value of the properties, Riverview's ultimate liability on its debt would have been reduced, and ruled as a matter of law that Riverview's negative equity was fatal to its c. 93A claim. The judge did not address the other arguments that the defendants had presented in their motions.

Discussion. 1. Standard of review. “The standard of review relating to a jury-waived proceeding is well established -- [t]he findings of fact of the judge are accepted unless they are clearly erroneous” (quotation omitted). Cavadi, 458 Mass. at 624. See Mattoon, 56 Mass. App. Ct. at 139. The judge's legal conclusions, however, are reviewed de novo. See Cavadi, supra.

2. Chapter 93A claim. To prevail on its claim under G. L. c. 93A, § 11, Riverview was required to demonstrate that it “suffer[ed] ․ loss of money or property, real or personal, as a result of ․ an unfair method of competition or an unfair or deceptive act or practice.” Id. Our case law defines “loss of money or property” as follows: “ ‘money’ means money, not time, and ․ ‘property’ means the kind of property that is purchased or leased, not such intangibles as a right to a sense of security, to peace of mind, or to personal liberty.” Baldassari v. Public Fin. Trust, 369 Mass. 33, 45 (1975). Riverview contends that, despite the fact that it had negative equity in the properties when it surrendered possession, it suffered a loss because it had an equitable interest in the properties as collateral for the mortgage debt. That interest was substantially diminished and ultimately rendered worthless during the three-year period when the defendants had control of the property. We agree.

Put simply, when a mortgagee takes possession of the property, it assumes certain responsibilities, including the duty to manage the property as a reasonably prudent owner would. See Altobelli v. Montesi, 300 Mass. 396, 400 (1938), quoting Miller v. Lincoln, 6 Gray 556, 557 (1856) (“[A] mortgagee, by taking possession for the purpose of foreclosure, imposes upon himself the duty of a provident owner”). See also Fletcher v. Bass River Sav. Bank, 182 Mass. 5, 7 (1902) (mortgagee, while in possession, bound to use reasonable means to preserve estate from loss or injury). This duty includes the responsibility to pay real estate taxes on the property. See Sibley v. Garland, 239 Mass. 20, 30 (1921).

Our cases involving secured parties in possession of collateral are instructive here. These cases recognize that when a secured creditor's wrongful conduct reduces the value of collateral securing a loan, the debtor is discharged to the extent of the reduction. See Rose v. Homsey, 347 Mass. 259, 261 (1964) (“It is well established that when a payee on a note, without the consent of the surety, impairs the collateral given to him as security by the maker, the surety is discharged to the extent that the security is impaired”); Atlas Fin. Corp. v. Trocchi, 302 Mass. 477, 482 (1939) (“If [a secured creditor in control of collateral] relinquishes the property ․ without the consent of the sureties, he loses his claim against them to the amount of the property given up”); Durfee v. Kelly, 228 Mass. 571, 573 (1917) (“[T]he payee ․ having voluntarily relinquished without the consent or knowledge of the sureties a part of the security, the defendant even if not thereby entirely discharged would be exonerated to the extent to which he had been injured”). In such circumstances, the injury to the debtor is the reduction in the value of the collateral and the corresponding increase in the debtor's unsecured liability on the debt. When such an injury is the result of the creditor's wrongful conduct, the debtor may be “compensated” in the form of discharge of that portion of the debt that the collateral, had its value not been reduced, would have covered.

Furthermore, in the context of c. 93A claims, our cases recognize that a plaintiff suffers a loss of money when it incurs a debt or expense or when it suffers depreciation of property. Cf. Smith v. Caggiano, 12 Mass. App. Ct. 41, 44-45 (1981) (observing that unpaid judgment, unpaid medical bills, or depreciation of property on note may constitute loss of money). As the Supreme Judicial Court acknowledged in Baldassari, the principal case relied on by Riverview, a plaintiff asserting a c. 93A claim may establish a “loss of money or property” by showing that, as a result of the defendant's conduct, “the plaintiff[ ] paid debts [it] did not owe ․ or suffered expense.”³ Baldassari, 369 Mass. at 45. Similar to our cases in the financing context, these cases demonstrate that an increase in a debtor's unsecured indebtedness constitutes an economic injury and thus a “loss of money or property” within the meaning of G. L. c. 93A, § 11.

As the judge found based on the evidence before her, when CNB took possession of the properties, their fair market value was approximately $1.2 million. At that time, Riverview's total debt was approximately $1.9 million, leaving Riverview with $700,000 of unsecured debt. The judge found that, while under CNB's ownership, the properties deteriorated to the point where they were condemned and ultimately demolished. Finally, because property taxes had gone unpaid, the city foreclosed on its tax liens, extinguishing Riverview's interest in the properties and reducing their value as collateral to zero. With the value of its collateral destroyed, Riverview's unsecured liability on the debt increased from $700,000 to the full amount of the debt, $1.9 million. Thus, Riverview introduced sufficient evidence to show that it suffered a “loss of money or property” within the meaning of G. L. c. 93A, § 11.⁴

Accordingly, the judge's conclusion that Riverview's negative equity in the properties was fatal to its claim was incorrect,⁵ and it was error for the judge to dismiss Riverview's c. 93A claim on that basis. However, that is not the end of the matter. The judge did not address the defendants' other arguments, namely whether Riverview presented evidence of any unfair or deceptive conduct by the defendants and whether such alleged conduct caused Riverview harm. It may be, as the defendants maintain, that they acted as reasonably prudent owners would have in similar circumstances, but we cannot make that determination in the absence of findings on the issue.

The judgment is vacated, and the case is remanded to the Superior Court for further proceedings consistent with this memorandum and order.

So ordered

Vacated and remanded.

FOOTNOTES

3.   As we have noted, the actual dollar appraisal was $1,265,000.

3.   Although Baldassari involved a claim under G. L. c. 93A, § 9, the pertinent language concerning loss of “money or property” was identical to that in § 11 when the decision was written.

4.   In reaching our conclusion, we do not express any opinion as to the amount of Riverview's loss. In addition, nothing we say here should be interpreted as indicating that the existence of negative equity can never be fatal to a claim under c. 93A. Our conclusion is based on the specific facts of this case.

5.   The judge relied on an interlocutory decisional memorandum and order issued in a Middlesex Superior Court case, Mass Printing & Forms, Inc. vs. RKS Health Ventures Corp., Mass. Super. Ct. No. 9881CV00489 (May 23, 2000), in reaching her conclusion that Riverview's c. 93A claim failed because Riverview had “no reasonable expectation of proving ․ [the] assets had a positive value.” The c. 93A claim at issue in Mass Printing, however, was related to the plaintiff's fraudulent conveyance theory under G. L. c. 109A, § 9 (b), which allows recovery only where the asset transferred had positive value. See G. L. c. 109A, § 9 (b) (liability “for the value of the asset transferred ․ or the amount necessary to satisfy the creditor's claim, whichever is less”). See also G. L. c. 109A, § 2 (defining “asset” to exclude property “to the extent it is encumbered by a valid lien”). In Mass Printing, the judge granted summary judgment on the plaintiff's c. 109A claim because the plaintiff could not prove that the transferred asset had positive value, and held that summary judgment therefore was appropriate on the c. 93A claim as well. See id. (“any Chapter 93A claim premised on a fraudulent conveyance theory cannot survive summary judgment because Mass Printing has no reasonable expectation of proving that the transferred assets had a positive value” [emphasis added]). That logic does not apply in this case.