Mechanics Nat. Bank of Worcester v. Killeen

• Decision Date: 17 January 1979
• Parties: , 25 UCC Rep.Serv. 891 The MECHANICS NATIONAL BANK OF WORCESTER v. Thomas F. KILLEEN et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1231

384 N.E.2d 1231

377 Mass. 100, 25 UCC Rep.Serv. 891

The MECHANICS NATIONAL BANK OF WORCESTER v. Thomas F. KILLEEN et al. ¹

Supreme Judicial Court of Massachusetts, Worcester.

Argued Oct. 5, 1978.

Decided Jan. 17, 1979.

James F. Queenan, Jr., Worcester, for plaintiff.

Michael B. Keating, Boston (Peter M. Rosenblum and Theodore P. Seto, Boston, with him), for defendants.

Before HENNESSEY, C. J., and QUIRICO, KAPLAN, WILKINS and ABRAMS, JJ.

WILKINS, Justice.

The principal issues in this care are (a) whether The Mechanics National Bank of Worcester (bank) violated its contractual obligations to Thomas F. Killeen (Killeen) when, on June 25, 1974, it foreclosed on 28,500 shares of stock (stock) in Certain-Teed Products Corporation (company) pledged by Killeen as security for certain loans from the bank, and (b) if the bank wrongfully foreclosed on the stock, what the proper measure of damages is. We conclude that the bank wrongfully foreclosed on the stock and that Killeen is entitled to damages measured by the highest price at which shares of stock in the company sold on the New York Stock Exchange on June 25, 1974.

We must also decide the validity of a mortgage on the Killeens home, given to the bank as additional security by Killeen and his wife (Killeens) on June 19, 1974. The Killeens argue that the bank violated G.L. c. 93A and G.L. c. 140C in the course of obtaining that mortgage. We agree with the judge below that the Killeens are not entitled to relief under either G.L. c. 93A or G.L. c. 140C.

The Facts

The basic facts found by the judge are as follows. On June 25, 1974, Killeen, who had borrowed funds from the bank over the previous fifteen years, was indebted to the bank on three notes, each of which was a renewal of an earlier note. The first note, in the principal amount of $10,630.29 and bearing interest at the rate of 9.5% A year, was given on February 19, 1974, and due on August 19, 1974. The second note, in the principal amount of $176,770.92, with interest at the rate of 10.5% A year, was given on April 30, 1974, and due on July 30, 1974. The third note, given on June 5, 1974, was in the principal amount of $152,974.82, bore interest at the rate of 11.5% A year, and was due on December 5, 1974. The total obligation on these three notes at their respective maturities was approximately $355,000. Each of these notes was secured by the stock and by other shares of stock, having a relatively low value, in another company. ² All three of the notes were executed on identical forms, which had been printed for the bank. The borrower agreed to deliver additional security or make payments on account to the bank's satisfaction, if the bank should deem the security already given to be insufficient because of a decline in its market value. Each note further provided that Killeen's obligations under it "shall, at the option of (the) Bank, become immediately due and payable upon . . . (IV) (the) Bank deeming itself insecure."

Shares of stock in the company had been selling on the New York Stock Exchange at more than $15 a share at the end of April, 1974, and the collateral pledged by Killeen was then worth more than $500,000. In the early part of June, 1974, however, the market price of the company's stock had fallen to just over $11 a share and the value of the collateral was less than.$390,000. During the middle of June, the company's stock was selling at approximately $9 a share.

A day or two before the execution of the renewal note of June 5, 1974, Killeen had a conversation with a Mr. Kettell (Kettell), a vice president of the bank, who was in charge of the bank's loans to Killeen. He told Killeen that the bank was concerned by the declining market value of the stock. The bank, however, did renew an earlier loan on June 5, 1974 (third note).

Kettell had a further conversation with Killeen on June 10, 1974, at which time the value of all the security pledged to the bank was less than the obligations at maturity of the three notes. Kettell stated that the bank was feeling insecure with respect to the pledged collateral. He demanded additional security and said the bank would need a mortgage on the Killeens' home. Killeen pleaded for a ten-day delay, which was granted. There was no discussion of the sale of the pledged collateral.

On June 14, 1974, Kettell telephoned Killeen and pressed him for a mortgage on the Killeens' home. Kettell gave Killeen no assurance that the collateral would not be sold but rather indicated that a sale was a possibility. The Killeens executed a mortgage on their home on June 19, 1974. The property was unencumbered and had a value of at least $60,000. Two copies of a notice required under the Truth-in-Lending Act, G.L. c. 140C, were given to the Killeens. The Killeens' right to rescind the mortgage on their home, according to the Truth-in-Lending Act (see G.L. c. 140C, § 8), expired at midnight on June 24, a Monday.

On June 24, 1974, the bank's loan committee decided to sell the stock. The judge found that the bank "was feeling insecure." On June 25, 1975, Kettell advised the Killeens that the bank was selling all the stock. On June 24 and 25, the stock was selling at a slightly higher price than on June 19, the day the mortgage was given. Kettell did not tell Killeen that the bank had accelerated the due dates of the notes. He did not tell Killeen that the notes had become due and payable. He did not demand payment of the notes. During the afternoon of June 25, 1974, the bank placed an order with a broker to sell the 28,500 pledged shares. These securities were sold, as the judge ruled, in a commercially reasonable manner, in various blocks during June 25, 26, 27, and 28, yielding net proceeds of approximately $238,000. The highest price at which the company's stock sold on June 25, 1974, was $10 a share, and the lowest was $93/8 a share. The highest price per share paid for any share sold for the bank was $95/8, obtained on the first sale of 100 shares in the afternoon of June 25. The bank applied the proceeds first toward the satisfaction of all obligations then alleged to be due under the third note, the one with the highest interest rate, and then toward the principal obligation under the second note.

Proceedings Below

The dispute between the bank and the Killeens came to litigation in the following fashion. On July 17, 1974, the Killeens wrote the bank purporting to cancel the mortgage. On July 22, 1974, counsel for the Killeens sent the bank a demand letter under G.L. c. 93A, demanding rescission of the mortgage and damages for the wrongful sale of the stock. Four days later, the bank filed a complaint for declaratory relief in the Superior Court, seeking a determination that the Killeens had no right on July 17, 1974, to rescind the mortgage and that the mortgage remained in full force and effect. The Killeens counterclaimed, alleging violations of G.L. c. 93A and G.L. c. 140C, and seeking damages for the wrongful sale of the stock, rescission of the mortgage, and other relief. The bank then counterclaimed for the balance due on the first and second notes.

The judge ruled that the bank violated its contract with the Killeens by selling the stock as it did. He assessed damages based on the fair market value of the stock determined by the price per share (95/8) at which the first block of shares was sold on June 25, 1974. He ordered the entry of judgment for the bank based on the balance of Killeen's obligations to the bank reduced by (a) the value of the shares of stock on June 25, 1974, as determined by him, ³ and (b) the proceeds of the sale of the pledged life insurance policies. The judge ruled that the mortgage was valid and enforceable as to any debt owed to the bank by Killeen. He ruled that there was no violation of G.L. c. 93A or G.L. c. 140C. The Killeens and the bank have appealed from a judgment which was entered in accordance with the judge's ruling.

The Bank's Right of Foreclosure

Killeen argues that the bank exceeded its rights in foreclosing on the stock on June 25, 1974. He challenges the judge's implied finding that the bank in good faith deemed itself insecure. He argues further that the maturity dates of the notes were not accelerated, and that, in any event, he was not in default on any obligation because he had no reasonable opportunity to make any payment to the bank. The judge ruled that Killeen was not in default on the notes when the bank foreclosed on the stock. We agree with that conclusion.

By the terms of the notes, Killeen's obligations were not accelerated automatically when the bank deemed itself insecure. See Grozier v. Post Publishing Co., 342 Mass. 97, 105-107, 172 N.E.2d 266 (1961). The bank had to perform some positive act if it wished to accelerate those obligations. See Wilshire Enterprises, Inc. v. Taunton Pearl Works, Inc., 356 Mass. 675, 678, 255 N.E.2d 375 (1970). The bank asserts that it satisfied this requirement by telling Killeen that it was going to sell the stock and by foreclosing on it. In the view we take of this case, we need not decide whether the bank properly accelerated the maturity dates of the notes. Nor do we have to determine whether acceleration of the due dates of the notes could be effective only on notice to Killeen or whether the statement that the stock was to be sold was somehow adequate notice of acceleration. ⁴

Even if we assume that the bank in good faith deemed itself insecure and that it accelerated the maturity dates of the notes, the bank had the right to foreclose on the stock only in the event of a default by Killeen. See G.L. c. 106, §§ 9-501, 9-504(1). The essential question is whether, on June 25, 1974, when the bank foreclosed on the stock, Killeen was in default on his obligations to the bank. Cases relied on by the bank concerning the right of a creditor to proceed against collateral without notice or demand after there has been a default have no...