HELLER FINANCIAL vs. INSURANCE COMPANY OF NORTH AMERICA and GUARANTY BANK AND TRUST COMPANY.

After an appeal by Insurance Company of North America ("INA") and Heller Financial ("Heller") from a decision made by me the Supreme Judicial Court held that INA'S mortgage was subordinated improperly to the mortgage held by Heller in the judgment in Land Court Miscellaneous Case No. 114154 dated August 29, 1989 (see Heller Financial v. Insurance Company of North America, 410 Mass. 400 (1991). The matter was remanded to this Court to decide whether Guaranty Bank and Trust Company ("GBT") misrepresented the facts when it stated in the "estoppel letter" that "[t]he mortgagor under the first mortgage [NERCO] is not in default and has committed no act or admission [sic] which would constitute a default". Chief Justice Liacos continued at pages 408-409, "The judge found sub silentio that there was no violation G.L. c. 93A. We note, however, that Donald Vigliatura, the GBT assistant vice president who signed the letter, testified that as of November 12, 1981, the day on which the letter was signed, NERCO's payment history card showed that NERCO had not made any payments on its loan to GBT for the months of July, August, September, and October, 1981. Vigliatura testified that it was 'possible' that NERCO was delinquent on its loan when the letter was signed. We find it necessary, therefore, to remand this matter for a specific determination whether GBT misrepresented the truth when it signed the letter, and if so, whether Heller was injured as a result of the misrepresentation. We note that, while Heller need not show actual reliance on the misrepresentation, the evidence must warrant a finding that a causal relationship existed between the misrepresentation and the injury. International Fidelity Ins. Co. v. Wilson, 387 Mass. 841 , 850 (1983). See Shane v. Winter Hill Sav. & Loan Ass'n, 397 Mass. 479 , 487 (1986)."

A hearing was held with counsel on August 21, 1991 as to the proper method of implementing the Supreme Judicial Court's remand order. At the hearing Federal Deposit Insurance Corporation as receiver of Bank of New England, N.A., successor to Guaranty Bank and Trust Company, was granted leave to intervene. At the hearing I ruled that my decision on the remand would be made on the basis of the existing record unless additional evidence proved necessary after review. I find and rule that having reviewed the record no additional evidence is required nor was it contemplated by the remand. The parties have each assisted the Court by filing briefs in which the estoppel letter is analyzed in the light of Chapter 93A. The estoppel letter is set forth in full in footnote 6 to the opinion of the Supreme Judicial Court on pages 406 and 407. Heller argues that in addition to the language specifically referred to in the opinion as to NERCO's default the estoppel letter also was violated by GBT in that immediately after the Heller closing it amended or modified the note in violation of paragraph 1 of the estoppel letter. The estoppel letter further provided that the loan was current and in good standing and then set forth the balance which indeed was correct. GBT in the letter further agreed that any additional advances after the date of the cloing would be subordinated to the Heller obligations.

On all the evidence I find and rule as follows:

1. The estoppel letter as drafted was inartistic in that it refers in the introduction to financing to be extended by Heller to New England Roofing Co., Inc. and then discusses the existing first mortgage held by GBT which in fact was from N.E.R. Realty Trust ("Realty"). However, it is clear from the evidence at the trial that the parties understood the relationships between the various Klein companies and the lenders and that no confusion existed between them as to Heller's loan to NERCO (which was to be secured in part by a mortgage from Realty) and the first mortgage loan to the latter entity made by GBT.

2. It was argued at the trial that the officer who acted on behalf of GBT at the closing saw only the second page of the estoppel letter where his signature appears. I discounted this argument in my original decision, and I do so again. Mr. Vigliatura's testimony suggested that he believed the role of an estoppel letter was to fix the amount of the debt owed to the party with priority and to limit its recovery as against the junior lienor. Those figures appear on the first page of the estoppel letter, and it is inconceivable that he did not see the entire agreement at the time he signed it.

3. I already have found that if Vigliatura did not have actual authority to sign the estoppel letter, he at least had apparent authority. He also testified, and I so find, that he would not have signed the letter without authorization from the senior bank officer under whose direction he was working.

4. The closing of the major part of the Heller financing had taken place prior to the closing between Heller, Klein and GBT which took place in GBT's main banking office in Worcester on November 12, 1981. At this time a discharge of the 1979 GBT mortgage and the estoppel letter were delivered and as against Heller's funds which were disbursed to GBT in the amount of $525,000 and to NERCO in the amount of $25,000.

5. The estoppel letter had been forwarded to counsel for George Klein and was brought by him to the closing. It's unclear whether counsel discussed the estoppel letter with senior officers of GBT or not. The execution of the estoppel letter, however, would appear to have been a necessary ingredient in a loan where Heller was in second position, and there seems to be little doubt that any closing without it would have required approval from the home offices of Heller in Chicago. There was no direct testimony, nonetheless, that it was a sine qua non.

6. The mortgage note dated April 21, 1981 (Exhibit No. 3) from Realty to GBT in the principal amount of $720,000 provided as follows:

This NOTE shall become immediately due and payable without notice of [sic] demand upon the occurrence of any of the following events of default: (a) failure to pay any installment when due or within 15 days thereof, or to perform or comply with any obligation or provision provided herein or in a mortgage given by the undersigned, or any one or more of them to secure this note. . . .

7. At the time of the Heller closing the payments due on the note in June, July, August and September had not been paid. The bank had not given notice of acceleration or even of the default in writing to the maker of the note, but the loan had been placed on a watch basis. It is clear that the note was in default and that the estoppel letter contained a misrepresentation.

8. Heller's loan proceeds were used to cure the default, and immediately thereafter the note was not in default.

Counsel for GBT and FDIC argued that there was no default under the note until the bank had so notified the borrower. Secondly, they argue that the estoppel letter spoke at the conclusion of the closing and that once Heller's monies had been applied, there was no default. I reject out of hand the latter argument since it is clear that one of the purposes of an estoppel letter is to speak as to the situation prior to the advancement of the second mortgage funds, not afterwards. While GBT and FDIC argue that Heller should have known that the Klein interests were having tough sledding since they were willing to borrow at a 22% rate, the bank rate at that time in history was not noticeably less. Heller knew, of course, that borrowers which resort to it may have difficulty in obtaining conventional financing; nevertheless, Heller was entitled to have the estoppel letter set forth the facts accurately. Heller then would have been in a position to make an informed judgment.

I also cannot accept GBT's argument that there was no default under the note until the bank so notified the maker since it is clear from the terms of the note that that is not in fact the case.

The more interesting aspect of this case is the question as to whether a causal relationship existed between the misrepresentation and the injury. GBT and FDIC argue that this fact pattern does not fall within the umbrella of International Fidelity Ins. Co. v. Wilson, 387 Mass. 841 , 850 (1983) but rather that it was not foreseeable that the misrepresentation would affect NERCO's ultimate ability to pay Heller or Heller's ability to realize on its collateral. Reliance is placed on Section 548A of the Restatement (Second) of Torts which provides that "misrepresentation is a legal cause only of those pecuniary losses that are within the foreseeable risk of harm that it creates".

As to the factual context with which I am faced, however, it seems to me that Wilson and Shane v. Winter Hill Sav. & Loan Ass'n, supra, both are controlling. It is not Heller's reliance on the execution and delivery of the estoppel letter which is controlling here but whether a breach of GBT's obligations thereunder ultimately led to Heller's loss. While Heller may still have completed the financing even if it had known about the serious state of GBT's loans including the watch list and the existing defaults, the monitoring of the loan doubtless would have followed a very different pattern. It is impossible now to say whether Heller's losses would have been avoided if we assume that the loan in any event would have been made. The monies which Heller advanced did nothing more than bring New England Realty Trust current on its obligations to GBT. There was no money left for working capital. Thus there was a causal relationship between the deception and the loss, and the loss was foreseeable. Accordingly I find and rule that the misrepresentations set forth in the estoppel letter are actionable under Chapter 93A.

Under Section 11 of said chapter Heller is entitled to "the amount of actual damages; or up to three, but not less than two times such amount if the court finds that the use or employment of the method of competition or the act or practice was a willful or knowing violation of said Section two". It may well be that Vigliatura concentrated only on the amount of the first mortgage debt in executing the estoppel letter. However, it is clear that there was a knowing violation in making the false misrepresentation. Datacom Interface, Inc. v. Computer World, Inc., 396 Mass. 763 , 778 (1986). Justice Grant explained clearly in Shaw v. Rodman Ford Trucks Center, Inc., 19 Mass. App. Ct. 709 (1985) the difference between knowing or willful violations of the statute. In Shaw he relied heavily on Justice Keaton's decision in a 1983 federal court case. The evidence clearly establishes that Mr. Vigliatura knew that the borrower was in default at the time he signed the estoppel letter. I further find and rule that either he did not appreciate the impact of the other representations set forth in the letter or that he did not read the letter in its entirety. I find, however, that he knew or should have known the meaning of the estoppel letter. Accordingly I find that Heller is entitled to twice its damages together with reasonable attorneys' fees on this aspect of the case. I do not now have before me sufficient information as to the amount of Heller's damages to determine the amount of its recovery. It is clear that the Heller's note has been paid down appreciably either from payments in the usual course made by NERCO or INA or from the application of the proceeds of other security, but the amount of Heller's recovery is not in the record.

The parties may elect either to have a final hearing on damages at this time or may postpone that hearing until after any further appeals are exhausted.

Judgment accordingly.