Renovator's Supply, Inc. v. Sovereign Bank, 06-P-1938.

CourtAppeals Court of Massachusetts
Citation892 N.E.2d 777,72 Mass. App. Ct. 419
Docket NumberNo. 06-P-1938.,06-P-1938.
Decision Date26 August 2008
892 N.E.2d 777
72 Mass. App. Ct. 419
No. 06-P-1938.
Appeals Court of Massachusetts, Franklin.
Argued November 19, 2007.
Decided August 26, 2008.

[892 N.E.2d 780]

Dennis E. McKenna, Boston, for the defendant.

Joseph H. Skerry, III, Woburn, for the plaintiff.



72 Mass. App. Ct. 420

This appeal presents issues of fair dealing between a lender bank and a commercial customer. The plaintiff, The Renovator's Supply, Inc. ("Renovator" or "the company"), maintained a contractual line of credit with the defendant, Sovereign Bank ("Sovereign" or "the lender" or "the bank"). Since the beginning of a relationship in 1997 with Sovereign's predecessor, Fleet Bank, Renovator had annually renewed its credit arrangement with the lender.

In 2002, Sovereign concluded that Renovator presented a heightened credit risk. At 5:00 P.M. three days after the expiration date of the contract, Sovereign informed Renovator for the first time that it would not renew the line of credit unless Renovator agreed to a one percent interest rate increase and an all business asset lien. Renovator found those terms unsatisfactory, declined to enter into a new loan agreement, and proceeded to operate for an interim without alternate financing. It alleged that Sovereign's failure to provide

892 N.E.2d 781

reasonable notice of the new credit terms inflicted unfair surprise, operating hardship, and a resulting loss of substantial short-term profits.

After a four-day, jury-waived trial, a judge of the Superior Court found and ruled that Sovereign's conduct had violated the standards of equitable estoppel, the implied covenant of good faith and fair dealing, and the prohibition of G.L. c. 93A, §§ 2 and 11, against unfair or deceptive conduct. He found the statutory violation to have been wilful, doubled the compensatory damages, and awarded reasonable attorney's fees. Sovereign has appealed. Upon careful review of the record we affirm the determinations of liability under the principle of equitable estoppel and the standards of G.L. c. 93A. We reverse the determination of liability under the implied warranty of good faith and fair dealing. Finally, we remand the case for a reassessment of damages.

Factual background. We first summarize the material findings of the trial judge's comprehensive memorandum of decision.

72 Mass. App. Ct. 421

They enjoy the ample support of the evidence.1 We supplement them with facts established by undisputed portions of the record. We defer certain important details to appropriate points of legal analysis.

1. The company. Since 1978 Renovator has been a Massachusetts corporation headquartered in the town of Millers Falls. It manufactures and sells hardware, plumbing, lighting, and other supplies and accessories used in the renovation and remodeling of homes. It manufactures some items at an on-site foundry and machine shop; it purchases others as inventory. It markets its products through retail stores, Internet communication, and large-scale mail order catalog distributions.

Each year at sixty-day intervals, it launches six catalog mailings of approximately one million copies each. The catalogs function as solicitation and general advertising. For mailing purposes Renovator pools the names of its customers with those of similar suppliers around the country designated as trade partners. The partners share a fund of about 6.2 million addresses. Renovator divides each mailing into two parts: the "core" mailing to persons who have purchased from Renovator, or who have requested catalogs, or who have made telephone inquiries about products within the previous three years; and the "non-core" mailing to prospects with a history of purchasing from other suppliers but usually not yet from Renovator. The company views the core list addressees as more likely buyers. Each sixty-day mailing requires substantial phased preparation: the printing of the catalog; the selection of addressees; shipment by private carrier of the addressed books to post office centers; and advance payments to the printer, shippers, and post office.

The timing of the final catalog mailing of the calendar year is especially important. Renovator arranges for delivery of the catalog by December 1 so that it can mature in the hands of the

72 Mass. App. Ct. 422

recipient during the first two weeks of December. In Renovator's experience, that lead time is important

892 N.E.2d 782

for holiday purchase decisions by customers and prospects. Orders and sales during the first two weeks of December have greatly exceeded those for the second two weeks. To achieve delivery at the beginning of December, Renovator mails the holiday catalog during the first week of November.

Claude and Donna Jeanloz, husband and wife, founded the company in 1978. Claude served as president and Donna as clerk of the corporation. They held eighty-four percent of the stock and actively managed the business. Donna oversaw the financial department; she examined all invoices, determined accounts payable, and signed all checks. For health reasons, the Jeanlozes were downsizing the scale of business operations as of the late 1990's.

2. The lending relationship. The company had maintained a revolving line of credit with successive banks since 1980. The credit line furnished an even flow of cash throughout the fluctuations of income and expenditures. Between the cycles of income, the company could meet expenses (payroll, materials, inventory, insurance premiums, and catalog distribution) by checks drawn upon credit. Incoming revenues deposited into the revolving account reduced or eliminated the credit balance. Under the arrangement established with Fleet Bank in 1997 and continued with Sovereign (as Fleet Bank's successor institution) in 2000, Renovator's credit limit was $3,000,000. The Jeanlozes guaranteed the line of credit with their personal assets. The bank treated each draw as a loan; it recovered the loan by daily collections ("sweeps") of all deposits to the account above the level of $10,000. The balance owed on the line of credit ranged typically between $500,000 and $800,000. The Jeanlozes' liquid personal assets approximated $2,000,000.

The company and the lender renewed the line of credit by annual agreement. Typically they had not executed the renewal agreement as of the expiration date. During the interim between that date and the execution of the new agreement, the lender maintained the credit line in the terms of the prior agreement. That practice continued between Fleet Bank and Renovator in 1998 (twelve-day interval) and 1999 (nine days); and between

72 Mass. App. Ct. 423

Renovator and Sovereign in 2000 (twenty-two days) and 2001 (two days).

At Sovereign, several officers dealt with the Renovator account. A financial analyst, Jack Wang, examined the annual reports prepared by the company's certified public accountant and the quarterly reports submitted directly by the company's financial officer. Wang assessed credit worthiness and recommended terms for the annual renewal agreement. An account manager, also known as the relationship manager, had responsibility for supervision of the account and direct communication with Renovator. Finally, a team leader made the final decision upon the terms of the renewal agreement. In the summer of 2002, William Andrseicik, an experienced bank officer, became the relationship manager. Penny Garver, also an experienced officer, moved up from the role of account manager to the position of team leader for the Renovator account.

In the summer of 2001, Garver and Wang met with the Jeanlozes at Renovator's offices as part of the annual renewal process. The Jeanlozes reported that they intended to continue to downsize the volume of business. During the early 1990's, annual revenues had approximated $35,000,000. By 2001, they had reduced to about $10,000,000. The discussion included a description of Renovator's catalog process. The bank officers expressed no concerns about Renovator's credit worthiness.

892 N.E.2d 783

Sovereign renewed the line of credit to July 31, 2002.

3. The 2002 renewal. As the July 31 expiration date approached, Renovator's annual financial statement from its certified public accountant was not yet available. By a modification agreement of July 29, the parties extended the expiration date to October 29. Thereafter both parties mistakenly regarded the new deadline as October 31.

During the summer, Andrseicik succeeded Garver as relationship manager of the account. Several factors caused him to regard the line of credit as an increased risk: the general decline of Renovator's gross revenues since the early 1990's; an apparent breach of a covenant of the credit agreement requiring annual profitability of the business; and the lack of security beyond the personal guarantees of the Jeanlozes. He signed the July 29 extension agreement reluctantly.

72 Mass. App. Ct. 424

On October 3, the parties conducted an annual renewal meeting in anticipation of the expiration date at the end of the month. Officers Andrseicik and Wang met with both Jeanlozes and Renovator's chief financial officer at the company offices. Andrseicik asked whether the company would consider provision of some security in addition to the Jeanlozes' personal guarantees. The Jeanlozes rejected the idea. Donna stated that the company would pay off the balance and seek a different lender rather than accept additional collateralization. (She often cited to vendors the unsecured character of Renovator's line of credit as evidence of the company's trustworthiness, and wished to preserve that circumstance.) The bank officers did not pursue the point. They did not mention security or an increased interest rate as conditions of renewal. They did not refer to any concerns about the substance of the annual and quarterly financial reports or about the covenant...

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