Beach Associates, Inc. v. Fauser

• Decision Date: 18 March 1980
• Citation: 9 Mass.App.Ct. 386,401 N.E.2d 858
• Parties: BEACH ASSOCIATES, INC. et al. 1 v. Peter J. FAUSER et al. 2
• Court: Appeals Court of Massachusetts

Page 858

401 N.E.2d 858

9 Mass.App.Ct. 386

BEACH ASSOCIATES, INC. et al. ¹ v. Peter J. FAUSER et al. ²

Appeals Court of Massachusetts, Berkshire.

Argued Nov. 19, 1979.

Decided March 18, 1980.

Roland E. Shaine, Boston, for plaintiffs.

William A. Darrin, Jr., Pittsfield, for defendants.

David O. Burbank, Pittsfield, for Albert S. Silverman, intervener.

Before ARMSTRONG, ROSE and PERRETTA, JJ.

PERRETTA, Justice.

The plaintiff borrowers brought an action in the Superior Court pursuant to G.L. c. 271, § 49(c ), requesting that the judge declare void a loan which they obtained from the defendant lenders. The defendants extended this loan at a rate of interest which exceeded the limit established by G.L. c. 271, § 49(a ). The judge declined to void the loan and entered a judgment reforming the mortgage note by reducing the stated interest rate to the maximum permissible limit. The plaintiffs argue that the loan was void and that the judge was powerless to reform the mortgage note. We affirm the judgment.

The parties do not challenge the judge's findings of fact which she made pursuant to Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974); further, "(e)verything which was presented to the trial judge is in the record before us, and we decide the case on this record without regard to (her) rulings." Pilch v. Ware, --- Mass.App. ---, --- ^a, 397 N.E.2d 1123, 1124 (1979). The plaintiff, Beach Associates, Inc. (Beach), is a South Carolina corporation with five stockholders or "partners," three of whom are the individual plaintiffs. Its business is real estate development, and it has an office in New York. The defendants are residents of New York, and they invest in real estate dealings similar to the one involved here. In 1973, Beach desired to purchase land in Pittsfield and Charlton as sites for apartments it intended to build. The plaintiffs entered into negotiations with the defendants, from whom they wished to borrow $100,000 for "bridge" financing with which to purchase the sites and start construction prior to securing long-term financing. The parties agreed that the defendants would lend the money to Beach and that the plaintiffs would pay one and one-half percent per month interest, plus a finder's fee of one-half percent per month. The term of the note was three years. The defendants placed the money in escrow pending their receipt of legal advice concerning the propriety of the interest rate. Most of their business dealings have been in New York, where the permissible rate was twenty-five percent per annum (N.Y.Penal Law § 190.40 (McKinney 1975)), and they had never entered into a loan in Massachusetts. The defendant Fauser retained a Massachusetts lawyer and asked him to review the mortgage note and mortgage to insure that it was not in violation of the Massachusetts usury provisions. Fauser's counsel advised him that the documents were in compliance with the law. ³ Thereafter, the plaintiffs executed the note and the mortgages on the Pittsfield and Charlton properties and delivered the documents to Fauser, who recorded the mortgages. The money was then released from escrow and delivered to the plaintiffs. The plaintiffs performed their obligations under the note until eight months later, when they were unable to secure long-term financing for their project and stopped making payments. This triggered two events which, while relevant, are not part of this action: the mortgages were foreclosed (although there is an action pending to set aside the foreclosure sales), and Fauser sued his former attorney because of the advice concerning the legality of the rate of interest charged on the loan. ⁴

The loan is within the scope of G.L. c. 271, § 49, as amended by St.1971, c. 368. The interest and expenses charged exceed the permissible limit established by § 49(a ), which provides in pertinent part: "(W)hoever in exchange for either a loan of money or other property knowingly contracts for . . . interest and expenses the aggregate of which exceeds an amount greater than twenty per centum per annum . . . shall be guilty of criminal usury . . . ." Because the parties did not advise the Attorney General of their intention to enter into the transaction, G.L. c. 271, § 49(d ), and because the interest rate charged on this loan is not otherwise statutorily regulated, G.L. c. 271, § 49(e ), the legal limit of interest allowed on the loan was twenty percent. The statute, in addition to imposing criminal penalties upon the lender pursuant to § 49(a ), also provides equitable remedies to the borrower under § 49(c ). That paragraph provides that "(a)ny loan at a rate of interest proscribed under the provisions of paragraph (a) may be declared void by the . . . superior court in equity upon petition by the person to whom the loan was made." There is nothing in the record which indicates that criminal proceedings were brought against the defendants, and our sole concern is with the extent of relief available to the plaintiffs in a civil proceeding commenced under § 49(c ). We hold that this equitable remedy, statutorily expressed in permissive terms, allows a judge to exercise discretion in granting relief, which can include reformation to reduce the excessive rate charged to one that is legally permissible.

The plaintiffs' main contention is that when the legislative purpose of § 49 is considered, ⁵ as well as other statutes regulating loans, the permissive language of § 49(c ), specifically, "may be declared void," must be construed as mandatory and as meaning "shall be declared void." In effect, they argue that when a borrower establishes that the parties to the loan have not complied with § 49(d ), and the interest rate exceeds twenty percent per year, the judge has no choice but to void the transaction in its entirety. However, we can construe permissive language of a statute as mandatory only if it appears that the Legislature intended such an interpretation. See Brennan v. Election Commrs. of Boston, 310 Mass. 784, 786, 39 N.E.2d 636 (1942); Young's Court, Inc. v. Outdoor Advertising Bd., 4 Mass.App. 130, 134, 343 N.E.2d 424 (1976). The plaintiffs claim that such an intention is apparent when § 49(c ), is examined with comparable legislation, specifically § 103 of the small loans act, G.L. c. 140, §§ 96-114. They have read cases interpreting the small loans act as construing the permissive phrase contained in § 103, "may be declared void," to be mandatory. Thus, they conclude that § 49(c ) must also be deemed the equivalent of a mandate so "that there may be a harmonious and consistent body of law," Randall's Case, 331 Mass. 383, 386, 119 N.E.2d 189, 190 (1954), on the subject of relief available from usurious loans. It is proper to look to other statutes concerning a similar subject in order to discern whether statutory language is intended to be construed as permissive or mandatory. See Sands, Sutherland Statutory Construction § 57.06 at 421 and § 69.08 at 289 (4th ed. 1973). Our review of the comparable § 103, however, brings us to a conclusion opposite to that reached by the plaintiffs.

The small loans act, G.L. c. 140, §§ 96-114, inclusive, has three purposes: "to prohibit the unlicensed business of making small loans," "to prevent an excessive rate of interest on such loans," Cuneo v. Bornstein, 269 Mass. 232, 236, 168 N.E. 810, 811 (1929), and "to 'afford those engaged in such business a fair and reasonable return upon the assets.' " Greenleaf Fin. Co. v. Small Loans Regulatory Bd., --- Mass. ---, --- ^b, 385 N.E.2d 1364, 1367 (1979). In implementing these goals, § 96 prohibits any person from engaging in the business of making small loans without first obtaining a license, if the amount of the interest and expenses charged exceeds twelve percent per year or the rate established by the Small Loans Regulatory Board under § 100. Section 103, as appearing in St.1962, c. 351, § 1, provides in pertinent part that "(a)ny loan made by any person so licensed . . . may be declared void by the . . . superior court in equity upon petition by the person to whom the loan was made." In contrast, § 110, as amended by St.1967, c. 196, states, in pertinent part, that "(a)ny loan made . . . by an unlicensed person . . . shall be void." Both of those sections impose criminal sanctions upon violating lenders in addition to the relief provided to the borrower; the sanctions contained in § 110 are more severe than those set out in § 103, just as the borrower's civil relief is broader in § 110 than it may be in § 103. The distinction between the relief available to a borrower from an unlicensed lender and one who is licensed is consistent with the previously cited purposes of small loans regulation. Where the loan is by an unlicensed lender, the loan itself, and not merely the excessive interest offends the statute in respect to its goal "to prohibit the unlicensed business of making small loans." The loan is invalid because the lender was precluded by law from making it. Such a lender cannot profit by his criminal conduct, and he is entitled to no return on his asset. Where, however, the loan is by a licensed lender, the act has been violated only in respect to its intention "to prevent an excessive rate of interest" on the small loan. Section 103 allows the court to uphold the basic validity of the loan where the loan itself is inoffensive, and to grant the borrower relief commensurate with his injury. ⁶

Our understanding of these provisions is not in contradiction of those cases cited by the plaintiffs in support of their proposition that § 103 has been judicially construed as being mandatory. All those cases concern unlicensed lenders in the business of making small loans, and the holdings that the loans were void and not voidable are squarely based upon the express mandatory provision of § 110. Thomas v. Burnce, 223 Mass. 311, 312, 111 N.E. 871 (1916). Cuneo v. Bornstein, 269 Mass. at 236-237, 168 N.E. 810 (1929)....