Sovereign Bank v. Channel Technologies, Inc., 082678BLS2

• Decision Date: 08 January 2009
• Docket Number: 082678BLS2
• Citation: Sovereign Bank v. Channel Technologies, Inc., 9 MBAR 73, 082678BLS2 (Mass. Super. Jan 08, 2009)
• Parties: Sovereign Bank v. Channel Technologies, Inc. et al.
• Court: Massachusetts Superior Court

09-MBAR-0073

Sovereign Bank v. Channel Technologies, Inc. et al.

No. 082678BLS2

Superior Court of Massachusetts

January 8, 2009

OpinionNo.: 106400

Docket Numbers:

As-is Docket Number: 08-2678-BLS2

Venue Suffolk

File Date: January 12, 2009

Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Neel, Stephen E., J.

Opinion Title: MEMORANDUM AND ORDER ON DEFENDANTCHANNEL TECHNOLOGIES, INC.'S EMERGENCY MOTION FOR PRELIMINARY INJUNCTION

DefendantChannel Technologies, Inc.(Channel) seeks an order enjoining plaintiff Sovereign Bank (Sovereign) from foreclosing on property under a mortgage from Channel securing a $5.2 million loan from Sovereign.After hearing, and review of the materials submitted, the Court concludes as follows.

Determination of likelihood of success on the merits turns primarily on whether Sovereign had a duty to act reasonably when, in the exercise its otherwise unconditional contractual right of consent thereto,^[1] Sovereign declined to consent to the May 23, 2008 sale of the assets of guarantor Harris Acoustic Products, Corp.(Harris).If Sovereign had no such duty, then under the note the sale was an event of default which failing payment, triggered the right of foreclosure under the mortgage.^[2]

Channel has cited no Massachusetts appellate decision holding that a commercial loan agreement or similar contract granting one party a right of consent in that party's "sole discretion" nevertheless contains an implied covenant that such consent will be exercised reasonably.Rather, such contracts under Massachusetts law routinely contain additional language to the effect that consent "shall not be unreasonably withheld," if that is what the parties have negotiated.Cf.Worcester-Tatnuck Square CVS, Inc. v. Kaplan, 33 Mass.App.Ct. 499(1992)("The lease provided that CVS had the right to sublet all or part of the premises so long as Kaplan consented in writing.Kaplan, however, could not unreasonably withhold his consent.Compare21 Merchants Row Corp. v. Merchants Row Inc., 412 Mass. 204(1992)").

Indeed Sovereign relies on 21 Merchants Row Corp., wherein the commercial lease at issue provided that "[n]otwithstanding any other provisions of this lease Tenant covenants and agrees that it will not assign this lease or sublet... without in each instance having first received the express written consent of the Landlord."The lease did not expressly limit the landlord's discretion in consenting.Id. at 205.The court framed the issue, and decided it, as follows:

At issue... is whether, in a commercial lease, the requirement that the tenant must obtain the landlord's consent before assigning the lease implies, as a matter of law, an obligation on the landlord's part to act reasonably in withholding consent.We conclude that a landlord is not so obligated.

In Slavin v. Rent Control Bd. of Brookline, 406 Mass. 458(1990), we held that a reasonableness requirement would not be implied in the assignment clause of a residential lease.We noted there that "[a] majority of jurisdictions subscribe to the rule that a lease provision requiring the landlord's consent to an assignment or sublease permits the landlord to refuse arbitrarily or unreasonably."Id. at 461.Practitioners and authors have assumed this to be the rule in Massachusetts.SeeE.L. Schwartz, Lease Drafting in Massachusetts§9.3 n.1 at 413(1961)("The lessor may, of course, arbitrarily refuse consent")...We see no sound reason to depart from this rule and to grant greater protection in this regard to commercial tenants than that afforded to residential tenants, especially since we and other jurisdictions see no rational distinction between residential and commercial leases in this regard...

Since the bargaining power of commercial tenants at the lease drafting stage is ordinarily greater than that of residential tenants, logic would indicate that, if we were to differentiate between residential and commercial leases, we would do so in favor of residential rather than commercial tenants.As we said in Slavin, "[t]he question is one of public policy, which, of course, the Legislature is free to address."Slavin v. Rent Control Bd. of Brookline, supra,406 Mass. at 463.

(Citations omitted.)

The Court sees no principled distinction between the commercial loan agreement at issue in this case, and the commercial lease in 21 Merchants Row Corp., with regard to analysis of a "sole discretion" provision.The commercial context is similar, the parties are sophisticated, and it was open to Channel and Harris either to seek a reasonableness requirement in the consent clause, or reject the deal with Sovereign.

Channel argues in the alternative that Sovereign's demand that in exchange for its consent, (1) 50% of the net proceeds of the sale be applied to the outstanding principal of the loan, (2) the loan's maturity date be shortened, and (3) the interest rate on the loan be increased, presents the same kind of conduct which the Supreme Judicial Court found violated the covenant of good faith and fair dealing in Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451(1991).In that case, the parties had contracted for HBC's acquisition and development of Fan Pier.The court concluded that Anthony's withheld its approval of plans necessary to permits required for the project

in an attempt to force HBC to sweeten the deal.Anthony's use of a discretionary right under the agreements as a pretext justifies the judge's ruling that Anthony's breached the covenant of good faith and fair dealing.SeeNorthern Heel Corp. v. Compo Indust., Inc., 851 F.2d 456, 471(1st Cir.1988)(applying Massachusetts

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