Lavery v. Kearns

• Decision Date: 30 April 1992
• Docket Number: Civ. No. 90-0028 P-C.
• Parties: Linda M. LAVERY and Gerard D. Lavery, Plaintiffs, v. Mark A. KEARNS and First NH Banks, Defendants.
• Court: U.S. District Court — District of Maine

792 F. Supp. 847

Linda M. LAVERY and Gerard D. Lavery, Plaintiffs, v. Mark A. KEARNS and First NH Banks, Defendants.

Civ. No. 90-0028 P-C.

United States District Court, D. Maine.

April 30, 1992.

Jeffrey Rosenblatt, Berman & Simmons, Lewiston, Me., for plaintiffs.

Mark A. Kearns, Wells, Me., for defendants.

Gregory A. Tselikis, Bernstein, Shur, Sawyer & Nelson, Portland, Me., for First NH Banks.

OPINION AND ORDER

GENE CARTER, Chief Judge.

Plaintiffs here seek recovery for losses they suffered after buying a condominium sold to them by Defendant Kearns and financed by Defendant First NH Banks. Plaintiffs have alleged violations of both federal and state securities laws, 15 U.S.C. § 77l(1) and (2); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 32 M.R.S.A. § 10101 et seq.; N.H.Rev.Stat.Ann. § 421-B:1 et seq.; Mass.Gen.Laws Ann. ch. 110A, and the Racketeer Influenced and Corrupt Organizations Act RICO, 18 U.S.C. § 1962(c). They also allege common law actions for fraud, negligence, breach of fiduciary duty and breach of contract. A jury trial was commenced on November 8, 1991. Following the Court's denial of a motion for a mistrial after four days of testimony, the jury was discharged, and the trial continued, by agreement of the parties, before the Court alone. The Court makes the following findings of fact and conclusions of law.

I. GENERAL FINDINGS OF FACT

Plaintiffs Linda and Gerard Lavery are residents of Tyngsboro, Massachusetts. Mr. Lavery is a firefighter and Mrs. Lavery an elementary school teacher. Defendant Kearns is a resident of Kennebunk, Maine. Although trained as a lawyer, in the mid 1980's he became a real estate developer in partnership with James Waterman. Waterman was initially a Defendant in this suit, but after he filed a Chapter 7 bankruptcy petition, proceedings against him were stayed. Defendant First NH Banks is a New Hampshire bank corporation which acquired Granite State National Bank of Rochester, New Hampshire in the early 1980's.

In 1985 Defendant Kearns, Waterman and James Ackroyd formed a corporation to buy the Bellevue Inn near Wells Beach in Maine. They planned to buy the motel, improve it, convert it to condominiums, and sell the individual units. The purchase and improvements were financed with a loan of $550,000 from Granite State National Bank. In 1986 Plaintiffs bought unit B-15 at the Bellevue for $54,900 to use as a vacation home and as an income-producing property. Plaintiffs borrowed the full purchase price of the condominium from a Massachusetts bank using the equity in their Massachusetts home as collateral for the mortgage. In order to rent the Bellevue unit when they were not using it, Plaintiffs entered into a management contract with Roger Sibley. They received about $3000 annually in rental income and paid about 35% to 40% of the gross income received on the unit to Sibley in the period from 1986 to 1987.

Around the same time, Kearns and Waterman were also developing a number of other projects. These included the Shawmut Inn, the Inn at Goose Rocks and Ocean 18, a development planned around a golf course. These developments were financed with numerous loans, letters of credit, mortgages and other financing devices provided primarily by Granite State and First NH Mortgage Company, a separate lending entity that is a subsidiary of First NH Banks.

In November 1987 Plaintiffs were invited by Atlantic Hospitality Co., a Kearns and Waterman enterprise established to manage their hotels, condominiums and restaurants, to attend a presentation at the Shawmut Inn concerning conversion of the Bellevue condominium units to "quarter shares". The condominium market had slowed on the southern coast of Maine, and Kearns and Waterman saw quartersharing, a system which they had read about and viewed an example of in South Carolina, as a way of stimulating sales of the remaining unsold units.

Plaintiffs attended the meeting with a number of other Bellevue owners. No one from Defendant First NH was present. During the presentation Plaintiffs learned about the quarter share concept, under which a condominium is divided into four equal fee simple estates, which are then sold separately. Each quarter share owner has use of the unit for thirteen weeks on a revolving schedule. Plaintiffs also learned about a similar project at another Kearns and Waterman development, the Inn at Goose Rocks. Plaintiffs were told that for quartersharing to be available at the Bellevue, all of the members of the Bellevue Condominium Association would have to consent to amendment of the condominium declaration. Ultimately, the Laverys and all but one of the other owners agreed to the amendment, and full consent was achieved after Waterman and Kearns bought out the one dissenting owner.

A number of possible management plans for the developments were described at the meeting by Kearns and Waterman. The one that has become pivotal in this suit provided an opportunity for condominium purchasers to lease the units back to Atlantic Hospitality and to sell the units back to Kearns and Waterman at the end of a fixed period for a fixed price.¹ It was plain from the presentation and from the written materials provided to Plaintiffs that the lease/buyback management plan was optional.

At the presentation Plaintiffs also received a booklet entitled "Quarter Share Analysis", prepared by real estate analyst John Lane. The analysis made various projections concerning the profits to be achieved through sales of quarter shares and purchase of the units under the lease/buyback option. Under one scenario, after a twenty percent down payment, there would be no out-of-pocket expenses associated with the purchase of the condominium because the lease payments would cover all costs. At the time of the buy-back, purchasers could sell the unit for a price representing the purchase price plus a return of 15% of the downpayment per year.²

As a result of the presentation by Waterman and Kearns, Plaintiffs decided in November 1987 to purchase an additional unit at the Bellevue, B-23, to convert their original unit to quarter shares, and to buy a unit at the Inn at Goose Rocks. They chose to enter into lease agreements on all three units and buybacks on the two new units. There is no dispute that Plaintiffs, who owned both a home and a condominium for their retirement in Massachusetts, purchased Bellevue unit B-23 and the Goose Rocks unit for investment purposes.

In January 1988, the Laverys received a letter from James Kavanagh, a salesperson for Waterman and Kearns, introducing Ocean Sales, Inc., another Kearns and Waterman development project. The letter mentioned "the substantial return on your initial investment" available as a result of the lease/buyback agreements and indicated that in-house closings and completion of loan applications and related documentation would be available for purchasers of condominiums. James Kavanagh suggested that the Laverys apply for a loan from Peoples Heritage Bank, and he sent them an application form for that bank. The Laverys filled out the Peoples Heritage application and signed a blank application form for Granite State National Bank,³ Defendant's predecessor. Despite the suggestions and assistance of Kavanagh, the Laverys knew that they could seek financing at whatever bank they might choose. The loan request was ultimately sent to and processed by Granite State. At the time Plaintiffs had a good credit rating and a net worth of $227,630, and the loan application was approved.

Sometime before the closing, Plaintiffs saw at the Bellevue a First NH publication, the "First Report" which featured an article about the ongoing enterprises and development plans of the Bank's customers Kearns and Waterman. The "First Report" was also observed by the Laverys to be available in the lobby of the Bank on April 8, 1988, the day Plaintiffs closed their mortgage loan.

Before the closing Mrs. Lavery had prepared a list of questions concerning the transaction into which they were entering. She asked the questions of Dorothy Ward, the loan officer who represented the Bank at the closing, and testified that the questions were answered satisfactorily. There is dispute about what was asked and what the replies were.

At the April 8 closing, Plaintiffs borrowed a total of $158,000 to purchase unit B-23 at the Bellevue and unit 5 at the Inn at Goose Rocks. The Bellevue unit, which is the subject of this suit, cost $58,000. Plaintiffs gave the Bank a first mortgage on their B-15 unit at the Bellevue as well as on the two new units. The loan documents were prepared by the Bank, and the mortgage rate was in excess of that generally available for residential property. The lease and buyback agreements, which Plaintiffs also signed at the closing, were prepared by Waterman and Kearns.

At the time of the closing, Waterman and Kearns had substantial loans outstanding to both Granite State and the First NH mortgage company. They were current on their loans, however, and paid them according to their terms. In March of 1988, Kearns and Waterman discussed with Granite State officials the possibility of developing a ten or twelve million dollar project at Moosehead Lake. The Bank declined to finance the project finding it not to "make sense" for either Kearns and Waterman or for itself. Tr. V, at 315. Although the Bank was concerned about the debt to be incurred, a bank official testified that it was more concerned about the likelihood that from a managerial standpoint Kearns and Waterman would spread themselves too thin if the project were approved. Tr. VI, at 553. The Bank did loan more money to Kearns and Waterman on April 11, 1988 for purchase of land at Lands End. In November 1988, seven months after Plaintiffs bought their new units, Kearns defaulted on the lease payments. In order to make mortgage payments to the Bank during the following year, Plaintiffs borrowed money from Mr. Lavery's ICMA...