Seppala & Aho Const. Co., Inc. v. Petersen

• Citation: 367 N.E.2d 613,373 Mass. 316
• Court: United States State Supreme Judicial Court of Massachusetts
• Decision Date: 14 September 1977
• Parties: SEPPALA & AHO CONSTRUCTION CO., INC. v. Howard C. PETERSEN et al., Trustees. 1

Page 613

367 N.E.2d 613

373 Mass. 316

SEPPALA & AHO CONSTRUCTION CO., INC. v. Howard C. PETERSEN et al., Trustees. ¹

Supreme Judicial Court of Massachusetts, Worcester.

Argued Jan. 3, 1977.

Decided Sept. 14, 1977.

William J. LeDoux, Worcester, for defendants.

Alphonse P. San Clemente, Worcester, for plaintiff.

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

QUIRICO, Justice.

The plaintiff Seppala & Aho Construction Co., Inc. (Seppala & Aho), junior creditor of the mortgagor, Ronrino Realty Trust (Ronrino), brought a bill in equity in the Superior Court against the first mortgagee, the trustees of Fidelco Growth Investors (Fidelco). The bill alleged that Fidelco had violated a duty owed to the plaintiff to exercise due diligence to commence proceedings to foreclose a mortgage on real estate in Leominster, and that as a result of Fidelco's delay Seppala & Aho lost its lien on the mortgagor's equity in the property. The trial judge found for the plaintiff, and awarded damages of $85,000, with interest. Fidelco's appeal was entered in the Appeals Court, and we transferred the case here. G.L. c. 211A, § 10(A). There is before us the judge's report of material facts and a transcript of the evidence. We reverse because in the circumstances of this case Fidelco was under no obligation to commence foreclosure proceedings promptly after Ronrino's default.

We summarize the facts. In November, 1970, Irvin Freedman and Albert Zimmerman, the trustees of Ronrino, entered into a construction contract with Seppala & Aho to construct two industrial buildings on land in Jytek Industrial Park in Leominster, for $750,000, to be completed by May 2, 1971.

Seppala & Aho commenced construction despite Ronrino's inability to obtain a construction loan. In February, 1971, Seppala & Aho notified Ronrino that construction would stop if no payment was forthcoming. By March, 1971, Seppala & Aho had nearly completed the buildings, and was owed approximately $500,000. Indeed, it appears that at that time Ronrino had not yet purchased the land on which the buildings were constructed.

In March, Fidelco committed $965,000 in first mortgage funds to the project. Further negotiations ensued, particularly regarding Seppala & Aho's reluctance to finish construction unless it was compensated. Under the agreements that were reached, Fidelco disbursed $800,000 at the loan closing. This sum was applied as follows: Seppala & Aho received $515,000 immediately, $150,000 was deposited in an escrow account which was released to Seppala & Aho in three periodic payments of $50,000 each as construction progressed, and the remaining $135,000 was paid for the land, title insurance costs, legal costs, and closing costs. The balance of $85,000 due to Seppala & Aho on its $750,000 contract was to be paid on completion of the buildings. This transaction was documented by (1) a mortgage to Fidelco from Ronrino, (2) an escrow agreement, and (3) a modification of the original construction contract between Seppala & Aho and Ronrino whereby no mortgage monies above $800,000 were to be distributed to Ronrino by Fidelco until Seppala & Aho was paid, and whereby Seppala & Aho could require Ronrino to convey its equity to it if Ronrino defaulted in the required mortgage payments. Fidelco was not a party to the modification agreement.

Ronrino soon defaulted on the mortgage, and in May, 1971, Seppala & Aho agreed to cover the default with funds from the second payment of $50,000 from the escrow account. Ronrino did not make the June or July mortgage payments and Seppala & Aho then brought suit against Ronrino and attached the mortgaged property. On July 20, 1971, Fidelco formally advised Seppala & Aho of the default. The buildings were substantially completed by July, and were certified for occupancy in August. There remained a dispute about the installation of the fire alarm system in the larger building, which delayed the issuance of an unconditional certificate of occupancy on that building until February, 1972.

In November, 1971, Fidelco learned that the trustees of Ronrino had moved to Florida. At some point the smaller building was occupied under a lease given by Ronrino and assigned to Fidelco who received the rents, but the larger building remained unoccupied.

In December, 1971, Seppala & Aho expressed concern to Fidelco that the larger building had not been winterized, the heat had not been turned on, pipes had burst, floors had cracked, and vandalism had occurred. Seppala & Aho asked Fidelco to foreclose the mortgage at that time.

In January, 1972, representatives of Seppala & Aho and Fidelco met on the premises. Fidelco authorized Seppala & Aho to winterize the building and install a fire alarm system, and later paid for this work.

Throughout the winter Fidelco, with the assistance of Seppala & Aho, sought a purchaser for the buildings. Negotiations with at least one potential buyer terminated without agreement. Seppala & Aho considered taking a deed in lieu of foreclosure, and assuming the mortgage, but rejected the idea because Ronrino demanded $75,000 above the outstanding indebtedness to Fidelco. On July 13, 1972, Fidelco notified Ronrino of its intention to foreclose the mortgage. On November 27, 1972, Fidelco purchased the property at the foreclosure sale for $990,000, which equaled the total amount of Ronrino's indebtedness. There had been $800,000 advanced, and $190,000 in charges had accrued in sixteen months after default in July, 171.

Fidelco sold the large building on March 5, 1973, for $841,000, and the small building on May 18, 1973, for $235,000, a total of $1,076,000.

The judge concluded that as of January, 1972, ² when Fidelco authorized Seppala & Aho to winterize the unoccupied building, "(f)or all practical purposes Fidelco had taken actual physical possession of the premises under the powers granted to them in the mortgage." He further found that Fidelco "did not complete the foreclosure with reasonable diligence, . . . that there was no bad faith on their part in that they attempted to deliberately wipe out . . . (Seppala & Aho's) interest; namely, the $85,000 remaining to be paid upon the construction contract . . . (and) that there was no fraud or collusion on the part of Fidelco with Ronrino or anyone to deprive Seppala and Aho of the balance due on the contract." He also found that the fair market value of the property was $1,000,000 in August, 1971, and that the property "was sold at the foreclosure sale for less than its fair market value, as evidenced by the private sale after the foreclosure sale by Fidelco."

From the default by Ronrino in June, 1971, until the foreclosure sale in November, 1972, Ronrino's debt to Fidelco rose from $800,000, to $990,000, by reason of the addition of unpaid interest and other charges. Seppala & Aho claims that had Fidelco foreclosed earlier, the debt would have been smaller less interest would have accrued and some equity in the property would have remained to pay Seppala & Aho.

We have frequently stated that the basic rule of law applicable to the foreclosure of real estate mortgages is that "a mortgagee in exercising a power of sale in a mortgage must act in good faith and must use reasonable diligence to protect the interests of the mortgagor." West-Roxbury Co-op. Bank v. Bowser, 324 Mass. 489, 492, 87 N.E.2d 113, 115 (1949). Manoog v. Miele, 350 Mass. 204, 206, 213 N.E.2d 917 (1966). Union Mkt. Nat'l Bank v. Derderian, 318 Mass. 578, 581-582, 62 N.E.2d 661 (1945). Sandler v. Silk, 292 Mass. 493, 496, 198 N.E. 749 (1935). Cambridge Sav. Bank v. Cronin, 289 Mass. 379, 382, 194 N.E. 289 (1935). "This duty and obligation is available for the protection not only of the mortgagor but of those claiming in his right, including those holding junior encumbrances or liens," Sher v. South Shore Nat'l Bank, 360 Mass. 400, 401, 274 N.E.2d 792 (1971), and thus including Seppala & Aho's attachment. Sandler v. Silk, 292 Mass. 493, 496, 198 N.E. 749, 794 (1935).

The precise question before us is whether Fidelco, by reason of its failure or refusal to foreclose the Ronrino mortgage promptly after the latter's default, violated any duty owed to Seppala & Aho under the rule stated above.

The judge expressly found that Fidelco was not guilty of any bad faith nor of any attempt deliberately to wipe out Seppala & Aho's interest, and that there was no fraud or collusion on the part of Fidelco with Ronrino or anyone else to deprive Seppala & Aho of the balance due on the contract. Yet he found in favor of Seppala & Aho in the amount of $85,000. He did so on the basis of findings stated in his decision that (a) Fidelco "did not complete the foreclosure with reasonable diligence," and (b) "(t)he property in question was sold at the foreclosure sale for less than its fair market value." We now examine separately these two grounds for the decision.

1. Reasonable Diligence in Foreclosing Mortgage. As a preliminary question we must determine by what events the timeliness of Fidelco's prosecution of the foreclosure is to be measured. The judge appears to have considered the date of Ronrino's default, and to have assumed that Fidelco's meeting with Seppala & Aho on the mortgaged premises on January, 1972, was an entry into possession for the purpose of foreclosing the mortgage. ³ This conclusion is in conflict with the applicable statutes and a number of our decisions which recognize that not every entry by a mortgagee on the mortgaged premises is an entry into possession for the purpose of foreclosure.

By G.L. c. 244, § 1, "(a) mortgagee may, after breach of condition of a mortgage of land, recover possession of the land mortgaged by an open and peaceable entry thereon . . . ; and possession so obtained, if continued peaceably for three years, shall forever foreclose the right of redemption." This entry must be accompanied by the prompt recording of a memorandum or...