Case involving wrongful foreclosure of commercial mortgage. Obtained a rare injunction stopping foreclosure due to hardball tactics of commercial lender.
Original Title
Opposition to Motion to Dissolve Injunction (King v. Northborough Capital Partners)
Case involving wrongful foreclosure of commercial mortgage. Obtained a rare injunction stopping foreclosure due to hardball tactics of commercial lender.
Case involving wrongful foreclosure of commercial mortgage. Obtained a rare injunction stopping foreclosure due to hardball tactics of commercial lender.
CIVIL ACTION NO. 13-cv-12829 __________________________________________ ) STEVEN A. KING ) ) Plaintiff, ) ) v. ) ) NORTHBOROUGH CAPITAL PARTNERS LLC ) ) ) Defendant. ) __________________________________________)
PLAINTIFFS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS MOTION TO DISSOLVE INJUNCTION
Introduction NCPs position is a classic example of the old saying that you cant have your cake and eat it too. On the one hand, NCP argues that the Notes notice of default provision is permissive and not mandatory. Yet, on the other hand, NCP undisputedly sent King a notice of default asserting that he failed to make monthly mortgage payments and that it would seek to foreclose the subject property. If the notice of default provision was indeed permissive as NCP contends, there would have been no need for NCP to issue any default notice whatsoever. But thats not what happened here. NCP issued a classic default notice, and once it did so, it had to comply with 7(C) of the Note, including providing an opportunity to cure. NCPs default notice is unquestionably defective, and thus, the Massachusetts Superior Court correctly issued an injunction preventing NCP from taking any further steps to foreclose its Mortgage. Nothing material has changed since the Superior Courts ruling, and NCP relies upon the same affidavit Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 1 of 13 2
and pleadings submitted previously in the state court. There are no new circumstances warranting dissolution of the injunction. There is more the ample equity in the subject property to protect NCPs financial interests. By contrast, with the subject property now listed for sale, letting the property go to foreclosure would chill the sale and harm King even more. For all these reason and those which follow, the motion to dissolve should be denied. Factual Background On March 22, 2006, Steven King (King) procured a 5 year adjustable rate mortgage loan in the amount of $390,000 from GreenPoint Mortgage Funding, Inc., executing an Adjustable Rate Note (Note) and Mortgage (Mortgage) (collectively, the Loan), secured by the property located at 93 Pleasant Street, Attleboro, MA (Property). See Verified Complaint Exhibits A and B. The Loan was originally serviced by Capital One Victoria Mortgage then Cohen Financial of Leawood, KS, to whom King made monthly payments. (King Affidavit, filed herewith 4). Northborough Capital Partners (NCP) claims to have purchased the Loan on or about June 24, 2013. (Affidavit of Scott Adams 4). NCP introduced itself to King by having its attorney issue a July 10, 2013 notice of default (July 10 Notice) for nonpayment of monthly mortgage payments and purporting to accelerate the Loan balance. See Verified Complaint Exhibit C. It is undisputed that at no time prior to the July 10 Notice, did any of the holders or servicers of the Loan issue a notice of default to King or otherwise claim that he was in default of the Loan. (Verified Complaint 9; King Affidavit 5). Section 7.(C) of the Note provides as follows: If I am in default, the Note Holder may send me written notice telling me that if I do not pay the overdue balance by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all interest that I owe on that amount. Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 2 of 13 3
The July 10 Notice, sent via certified mail, notified King that: Pursuant to the terms of the Note and Security Documents, the Borrower is in default of its obligations thereunder in that the Borrower has, inter alia, failed to pay the Note as and when due. Since the Maker is currently in default of his obligations under the Note and Security Documents, NCP hereby accelerates the balance due under the Note and demands payment of the full outstanding balance of al principal, accrued interest and any and all accrued and accruing costs, including but not limited to attorneys fees owed to NCP. . . If the Maker fails to make satisfactory arrangements for the liquidation of the above-referenced indebtedness within thirty (30) days from the date of this letter, NCP will exercise upon its assignment of leases and rents set forth in the Mortgage, and consider the various legal options available to it to collect the indebtedness, which may include foreclosure of the above described real estate and/or other legal action. (emphasis supplied).
Shortly after King received the July 10 Notice, he called NCPs principal, Scott Adams, to discuss the letter and schedule a meeting. (Verified Complaint 16). In advance of the meeting, on July 15, 2013, King tendered a payment of $3,678.00 to NCP which accepted same without protest or reservation. See Check # 102, Verified Complaint, Exhibit D. Mr. King and Mr. Adams met at the Property on August 1, 2013, where King provided Mr. Adams with the rent roll for the Property which showed that the net operating income and debt service ratio was well within the Loan guidelines. See Affidavit of Steven King dated October 30, 2013 1, Ex. A. At the meeting, King disputed the amount claimed by NCP as outstanding. (King Aff. 8). NCP claimed that as of July 1, 2013 King was in arrears in the amount of $23,478.82. Upon review of the Loan History provided by NCP, it appears that at least five (5) of King mortgage payments are not accounted for and unapplied to principal. King Aff. 15. Four are listed as being paid but they are unapplied to the mortgage balance. They are for the following amounts: $4,012.00 (4/12/13), $4,012.20 (3/19/13), $4,012.20 (2/15/13) and $3,344.00 (8/13/12). The last payment of $3,344.00 (6/17/13) is listed as being received on June 17, 2013 but not Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 3 of 13 4
applied to reduce the mortgage balance. (Id.). Kings payment of $3,678.00 on July15, 2013 is also not recorded and applied because it was made after the statement date. Accordingly, accounting for these unapplied payments, there is a serious question as to whether King was in default in the amount claimed by NCP. King also contends that Adams agreed to accept a lump sum payment to cure all alleged defaults. (King Aff. 9). Adams has denied this. Regardless, what is undisputed is that in the few weeks following the meeting, King tendered and NCP accepted, without protest or reservation, payments totaling $19,556.00. See cancelled checks, Verified Complaint Exhibit E. After King made these payments, he was shocked that NCP nevertheless claimed that he was still in default under the Loan, and that the only route available to avoid foreclosure would be to agree to an onerous and unreasonable forbearance agreement of $4,400.00/month (exclusive of escrows of approximately $1,500.00 per month) and an additional lump sum payment of $11,034.00. (King Aff. 10). Adams left King a threatening voicemail message for King that it would be unwise for him to hire an attorney and that he would take the Property anyways. (King Aff. 10). On October 3, 2013, NCP commenced a beginning step in a Massachusetts non-judicial foreclosure, a Servicemembers Civil Relief Act proceeding in the Massachusetts Land Court. (Verified Complaint 23). An Order of Notice issued for publication of the foreclosure sale returnable on November 18, 2013. Procedural History King commenced this action in the Middlesex County Superior Court on October 18, 2013, seeking a declaratory judgment that he was not in default under the Loan and injunctive relief stopping NCPs foreclosure. A hearing was held before Justice Paul D. Wilson on October Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 4 of 13 5
30, 2013 who heard arguments from counsel. Judge Wilson issued a written decision and order dated October 31, 2013 granting the requested injunction. Reasoning that notice of a monetary default and an opportunity to cure are important rights for any borrower, Judge Wilson found and ruled that the Notes notice of default provision was mandatory and not permissive as argued by NCP. Opinion at 3. And to the extent that the provision was ambiguous, Judge Wilson ruled, any ambiguity must be construed against the drafter, NCP and in favor of King, the borrower. (Id.). The July 10 th Notice was clearly defective, Judge Wilson found, as it failed to provide an overdue balance upon which King could cure prior to acceleration. With respect to the several non-monetary defaults alleged by NCP, such as providing the rent roll, evidence of insurance and debt ratio, Judge Wilson found that such were not mentioned in the July 10 th Notice, and in any event, proven by King to be without merit. Although Judge Wilson gave NCP the opportunity to dispute the existence of its claimed non-monetary defaults, it never took advantage of that opportunity, opting instead to remove this action to federal court. Lastly, Judge Wilson intimated that NCPs conduct issuing a defective default notice, accepting nearly $20,000 in payments then trying to strong-arm King into submission bordered on unfair and deceptive in violation of Mass. Gen. Laws ch. 93A, but that was an issue for another day. Opinion at 5. Further Factual Developments Since The Injunction Entered Since the injunction entered, King has continued to make monthly payments to NCP of $3,344.00 under the Loan, and NCP has accepted these payments without reservation or protest. See Verified Complaint, Exhibit F; King Aff. Exhibit A. Kings payments to NCP since July 1, 2013 total $49,652.00. King has also paid the insurance premiums and real estate taxes on the Property since NCP has failed to manage the escrow account on the Loan which the servicers Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 5 of 13 6
had previously used to pay the monthly insurance premiums and quarterly real estate taxes. King Aff. 13. King has also listed the Property for sale at a sale price of $499,000 and notified NCP of same. King Aff. 17. In connection therewith, King submitted a payoff request pursuant to Mass. Gen. Laws ch. 183, 54D which sought the principal and interest owed through the date of the statement, the balance of the borrowers escrow account, any claimed late fees and penalties, and a per diem. (Id.). NCPs response to the payoff request is dreadfully inadequate, claiming simply that King owes $378,127.84 as of March 13, 2014 with absolutely no breakdown of this amount, any information regarding the escrow account and late fees and penalties. King Aff. Exhibit C. In any event, assuming the Property is sold for at or near the $499,000 list price, there is more than sufficient equity (over $120,000) in the Property to secure and payoff NCPs claimed indebtedness, even at its inflated claimed amount. Standard of Review For Dissolving a State Court Injunction Where a state court has entered injunctive relief and the defendant removes the case to federal court, the party moving to dissolve the injunction should not use the federal court to second guess the state courts wisdom in granting the injunction where, as here, the state court has made findings of fact and rulings of law. As the First Circuit has held, a decision to vacate an existing preliminary injunction is quite another matter. It is not only a substantial change in the status quo but is the effective equivalent of a denial of a preliminary injunction, an event that unquestionably triggers Rule 52(a)'s requirement of findings. We do not think that it stretches Rule 52(a) unduly to apply it to an order vacating a preliminary injunction. Knapp Shoes, Inc. v. Sylvania Shoe Mfg. Corp., 15 F.3d 1222, 1225 (1 st Cir. 1994). Fed. R. Civ. P. 52 gives Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 6 of 13 7
substantial deference to the trial courts findings of fact. Judge Wilson issued findings of fact and legal rulings interpreting Massachusetts state law which should be given deference in this Court. NCP could have utilized Massachusetts fast-track single justice appeal for injunctions. See Mass. Gen. Laws. ch. 231, 118. Instead, NCP chose to remove this case. NCP should not use this court as an appellate court second-guessing the ruling of a state court judge. There has been no material change in circumstances and in the status quo adverse to NCP since the entry of the injunction. With the pending sale of the Property and sufficient existing equity to secure its mortgage indebtedness, the balance of equities favors King even more than before. NCP will not suffer any harm if the injunction stays in place. King has and will continue to make monthly mortgage payments to NCP, and any dispute regarding the alleged arrearage can be resolved later in the case or during an impleader or arbitration action after the sale of the Property. Legal Argument
A. Regardless of Whether the Notice Provision is Permissive or Mandatory, NCP Did In Fact Issue A Notice of Default, And Once It Did, It Was Required To Provide King With An Opportunity to Cure.
NCPs primary attack on Judge Wilsons ruling is that the Notes notice of default provision is permissive and not mandatory. However, the Court does not have to reach this issue because NCPs July 10 th Letter is clearly a notice of default, and once it sent such a notice, it was bound to comply with the Notes Section 7(C) opportunity to cure requirements, which NCP undisputedly did not. Section 7.(C) of the Note provides as follows: 7.(C). If I am in default, the Note Holder may send me written notice telling me that if I do not pay the overdue balance by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all interest that I owe on that amount. Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 7 of 13 8
It is critical to carefully analyze NCPs July 10 Letter together with the notice provision, Section 7(C) of the Note. The July 10 Letter unmistakably informed Mr. King several times that he was in default under the Loan for non-payment: Pursuant to the terms of the Note and Security Documents, the Borrower is in default of its obligations thereunder in that the Borrower has, inter alia, failed to pay the Note as and when due. Since the Maker is currently in default of his obligations under the Note and Security Documents, NCP hereby accelerates the balance due under the Note and demands payment of the full outstanding balance of al principal, accrued interest and any and all accrued and accruing costs, including but not limited to attorneys fees owed to NCP. . . (emphasis supplied).
Advising a borrower that it is in default under the Note for nonpayment is exactly what is contemplated by the notice provision in the Note If I am in default, the Note Holder may send me written notice... Thus, even accepting NCPs argument that the notice provision is permissive rather than mandatory, the July 10 Letter clearly exercised this remedy by informing King that he was in default for non-payment. According to NCP, it did not have to do that because 7(C) is permissive. But that is exactly what it did here and having taken that action, it was bound to comply with the remainder of the notice requirements giving King the opportunity to pay the overdue amount by a certain date. It is undisputed that the July 10 Letter is defective, as Judge Wilson ruled, because it failed to provide an overdue balance by a certain date which King could pay in order to avoid default and foreclosure. That should be the end of the discussion. 1
Moreover, the July 10 Letter also invokes the lenders default remedy of assignment of leases and rents under the Mortgage, which, without dispute, mandates a notice of default to the borrower. The July 10 Letter states:
1 The only other alternative that it consistent with NCPs argument is for it to have gone straight
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If the Maker fails to make satisfactory arrangements for the liquidation of the above- referenced indebtedness within thirty (30) days from the date of this letter, NCP will exercise upon its assignment of leases and rents set forth in the Mortgage, and consider the various legal options available to it to collect the indebtedness, which may include foreclosure of the above described real estate and/or other legal action.
Under Section F of the Mortgages Commercial Loan Rider, the Lender may exercise its rights under the assignment of rents remedy only [i]f Lender gives notice of default to Borrower. The provision provides: If Lender gives notice of default to Borrower: (i) all Rents received by Borrower shall be held by Borrower as trustee for the benefit of Lender only, to be applied to the sums secured by the Security Instrument; (ii) Lender shall be entitled to collect and receive all of the Rents of the Property (emphasis supplied)
Section F of the Commercial Rider is unambiguous, and requires that a notice of default in compliance with the Loan Documents is required as a prerequisite of exercising the lenders rights under the assignment of rents and leases. The July 10 Letter invokes the assignment of rents remedy, and thus, NCP was contractually required to issue a compliant notice of default, which it failed to do. For this reason alone, King has a substantial likelihood of success on the merits and the injunction should stay in place. B. Judge Wilson Correctly Ruled That Notice of a Monetary Default and an Opportunity to Cure Are Important Rights, And Thus, the Notice Provision Should be Construed as Mandatory.
As the Massachusetts Supreme Judicial Court has recently held, foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it ... Such strict compliance is necessary because Massachusetts both is a title theory State and allows for extrajudicial foreclosure. U.S. Bank v. Ibanez, 458 Mass. 637, 655 (2011) (Cordy, J., concurring). The opportunity to cure a monetary default in a mortgage with a power of foreclosure sale is equally important to any borrower, as Judge Wilson ruled below. This is true regardless of whether the property is a Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 9 of 13 10
residential or commercial all real estate is considered unique under Massachusetts law. See Greenfield Country Estates Tenants Ass'n, Inc. v. Deep, 423 Mass. 81, 89 (1996). Under this backdrop, Judge Wilsons ruling that Section 7(C) of the Note should be read in a mandatory fashion is a reasonable interpretation of the Note and not legally erroneous. Moreover, Judge Wilson correctly ruled that reading Section 7(C) as permissive would render the language surplusage. A fundamental principal of Massachusetts contract law is that courts should avoid construing language in a manner which would render it mere surplusage. See RHI Holdings, Inc. v. Commissioner of Rev., 51 Mass. App. Ct. 681, 689, 748 N.E.2d 964 (2001). And that begs the very question: if the notice of default provision is truly optional, why is it even in the Note in the first place? The doctrine of reasonable expectations also governs here. See Davis v. Allstate Ins. Co., 434 Mass. 174, 186 (2001). It is hard to imagine that any borrower in Kings shoes would believe that he has no opportunity to cure a payment default in order to avoid foreclosure of his valuable commercial property. This is especially true given the extremely important considerations in play here the deprivation of ones property. Lastly, when a Superior Court judge and a borrower disagrees with a lenders interpretation of contractual language, it is safe to conclude that the language can be read two different ways, and is therefore ambiguous. The rule of contra proferentem provides that an ambiguous contract provision should be construed against the drafting party. Chelsea Industries, Inc. v. Accuray Leasing Corp., 699 F.2d 58, 61 (1st Cir.1983). Here, NCPs predecessor (and not King) drafted the Mortgage, and therefore, it should be construed against NCP, as Judge Wilson held. Like the baseball rule, the tie goes to the runner (the borrower) in this case. 2
2 Moreover, it makes no logical sense that the remedy of assignment of leases and rents would require notice of default while the more drastic remedy of foreclosure and forfeiture of the property would not. The Note should be read consistently and in harmony. Case 1:13-cv-12829-RWZ Document 30 Filed 05/13/14 Page 10 of 13 11
C. NCP Has Not Adequately Established Any Default by King. The only factual support offered by NCP is Scott Adams conclusory affidavit executed five months ago in the Superior Court. According to Adams, King was in default under the Loan as of July 1, 2013. By his own admission, NCP acquired the Loan merely one week before this on June 24, 2013. One can easily infer that Adams has no personal knowledge of Kings payment history or alleged defaults occurring before he purchased the Loan which is the basis of NCPs claim that King was in default. Such information could only come from the prior servicers of the loan, either Cohen Financial or Capital One. Neither Cohen Financial nor Capital One have submitted any affidavits in this case. Adams attempts a back door maneuver by attaching to his affidavit unauthenticated and inadmissible loan history print-outs from unknown sources attempting to establish Kings defaults. There is no attempt to properly authenticate these printouts as business records or otherwise, nor explain what they mean. Accordingly, the attachments to Adams affidavit should be stricken and ignored in accordance with Plaintiffs Motion to Strike, filed herewith. See Fed. R. Evid. 801 and 803. Without any admissible evidence based on personal knowledge of Kings defaults, NCP cannot establish any default by King.
The cases cited by NCP are also distinguishable as they deal with state statutes and authority of state agencies or courts, and not with private contracts. Provencal v. Commonwealth Health Ins. Connector Auth., 456 Mass. 506 (2010) considered a state health insurance statute and whether a state agency could waive a requirement based on a state statute which used the language may waive. Wiedmann v. The Bradford Group, Inc., 444 Mass. 698 (2005) considered the Massachusetts wage act statute which provides that that a plaintiff may institute a suit for damages that includes a request for treble damages. (NCP fails to mention that Weidmann has been overruled by statute, St.2008, c. 80, 5 which makes treble damages mandatory. See Melia v. Zenhire, Inc., 462 Mass. 164 (2012)). These cases have no application in this context involving a promissory note, a mortgage and the threat of losing ones property to foreclosure.
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By contrast, King has submitted ample admissible evidence in the form of cancelled checks and statements based on personal knowledge that his mortgage payments were misapplied by the previous servicer, that he was not in payment or performance default, that he remains current on his payments, and that he agreed to an accord and satisfaction with NCP through combined payments of nearly $20,000. D. King Will Suffer Irreparable Harm If The Injunction Is Dissolved.
As Judge Wilson ruled, King will suffer irreparable harm if his property is wrongfully foreclosed. Moreover, with the Property being on the market for sale, dissolving the injunction and enabling NCP to foreclose would cause King equivalent irreparable harm as it would negatively affect his efforts to sell the Property at market price. With a pending foreclosure looming, buyers would simply wait for the foreclosure to bid at a discount. In contrast, NCP will suffer no harm if the injunction remains in force. It has been and are receiving all of their payments due and on time, and there is sufficient equity to secure their debt. They are adequately secured presently. The fact that NCP may have a few more months left to complete foreclosure proceedings does not minimize Kings irreparable harm or decrease the chilling effect a pending foreclosure sale would have on the potential sale of the Property. Lastly, given Kings proof that there are no present defaults under the Loan, its continued payment of mortgage payments, and that there is more than ample equity in the Property to secure the Mortgage, there is no basis for the requested $50,000 bond, as Judge Wilson had previously ruled. Conclusion For the foregoing reasons, the injunction should not be dissolved.
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STEVEN A. KING
By his attorneys, /s/ Richard D. Vetstein Richard D. Vetstein, Esq. (BBO 637681) Vetstein Law Group, P.C. 945 Concord Street Framingham, MA 01701 Phone: (508) 620-5352 Fax: (888) 448-1344 Email: rvetstein@vetsteinlawgroup.com
Dated: May 12, 2014
Certificate Of Service
I hereby certify that a true copy of the above document was served upon (each party appearing pro se and) the attorney of record for each (other) party by filing with the CM/ECF system on May 13, 2014.
___/s/Richard D. Vetstein________ Richard D. Vetstein, Esq.
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In The Matter of Fidelity Tube Corporation, Bankrupt. in Re Borough of East Newark and Raymond J. Otis, As Trustee in Bankruptcy of Fidelity Tube Corporation, 278 F.2d 776, 3rd Cir. (1960)