Opinion
18-P-244
09-17-2019
PHOENIX REO, LLC v. Nayan C. PATEL.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
The defendant, Nayan C. Patel, appeals from a final judgment, including an award of attorney's fees, entered after summary judgment was granted in favor of the plaintiff, Phoenix REO, LLC (REO), and third-party defendants, Phoenix NPL, LLC (NPL) and Capital Crossing Servicing Company, Inc. (Capital Crossing) on count one of REO's verified amended complaint, and Patel's three third-party claims. On appeal, Patel contends that (1) the judge erred in granting summary judgment against him on his counterclaim and third-party claims; and, (2) the attorney's fee award was excessive. For its part, REO requests appellate attorney's fees. We vacate the portions of the final judgment as to Patel's counterclaim seeking a declaratory judgment, and the award of attorney's fees. The remainder of the judgment is affirmed.
Background. Patel is a manager of Hanish, LLC (Hanish), a New Hampshire limited liability company that manages a hotel in Hookset, New Hampshire. On October 5, 2007, Patel executed a construction loan agreement on Hanish's behalf for a loan in the amount of $5.9 million (first loan) from the National Republic Bank of Chicago (NRBC). The NRBC secured this loan with a mortgage on the hotel and a personal guaranty from Patel (the guaranty).
On March 6, 2009, Patel signed, as manager of Hanish, another loan agreement with the NRBC on behalf of Hanish, this time borrowing $450,000 (second loan). The NRBC secured this loan with only a mortgage on the hotel. Patel never personally guaranteed the second loan.
The NRBC failed in early 2015 and the Federal Deposit Insurance Corporation transferred both loans to NPL. Hanish struggled to repay the first loan, and Hanish and NPL entered into negotiations. These negotiations eventually fell through. When the negotiations ended, NPL transferred the loans to REO, and REO sued Patel to enforce his guaranty on the first loan. Patel counterclaimed against REO and sued NPL and Capital Crossing as third-party defendants for the following: (1) violation of G. L. c. 93A, § 9 (REO and Capital Crossing); (2) breach of the implied covenant of good faith and fair dealing (REO and NPL); and (3) declaratory judgment regarding the parties' rights under the guaranty (REO and Capital Crossing). REO and the third-party defendants moved for summary judgment on all claims, and the judge ruled in their favor, granting summary judgment on count one of REO's amended complaint and each of Patel's counterclaims. REO was awarded $7,323,570.49 on count one of its amended complaint, which included requested attorney's fees pursuant to the guaranty. This appeal followed.
Discussion. 1. Summary judgment on Patel's claims. Summary judgment for REO and the third-party defendants was appropriate only if they could " ‘show[ ] that there is no genuine issue as to any material fact and that [they are] entitled to a judgment as a matter of law’ based on the undisputed facts." Premier Capital, LLC v. KMZ, Inc., 464 Mass. 467, 474, 984 N.E.2d 286 (2013), quoting Mass. R. Civ. P. 56 (c), as amended, 436 Mass. 1404 (2002). "In reviewing the grant of a motion for summary judgment, we conduct a de novo examination of the evidence in the summary judgment record, and view the evidence in the light most favorable to the part[y] opposing summary judgment" (citation omitted). LeBlanc v. Logan Hilton Joint Venture, 463 Mass. 316, 318, 974 N.E.2d 34 (2012).
a. Chapter 93A. Patel contends that the judge should not have granted summary judgment on his claim that REO and Capital Crossing violated G. L. c. 93A by planning to foreclose on the hotel and apply the proceeds to the second loan first, thus unfairly expanding his liability under the guaranty. We disagree.
Here, Patel pleaded this claim under G. L. c. 93A, § 9, which pertains to consumer transactions, rather than § 11, which, relevant here, pertains to commercial transactions in business contexts. Gargano & Assoc., P.C. v. John Swider & Assoc., 55 Mass. App. Ct. 256, 262, 770 N.E.2d 506 (2002). In any event, Patel would fare no better even if we were to consider his claim under § 11. To prevail on a § 11 claim, Patel would have had to demonstrate a "loss of money or property, real or personal, as a result of the use or employment ... of an unfair method of competition or an unfair or deceptive act or practice." G. L. c. 93A, § 11, first par. Because there is no indication that REO or Capital Crossing foreclosed on the hotel and applied the proceeds to the second loan first, Patel is unable to make that showing on this record. Accordingly, summary judgment properly entered for REO and Capital Crossing on this claim.
b. Implied covenant of good faith and fair dealing. Patel also challenges the entry of summary judgment on his implied covenant of good faith and fair dealing claim. He asserts that REO and NPL violated this covenant by negotiating with him while simultaneously planning to expand his liability under the guaranty. We again disagree.
Under Illinois law, which is applicable here, "[i]n order to plead a breach of the covenant of good faith and fair dealing, a plaintiff must plead existence of contractual discretion." Mid-West Energy Consultants, Inc. v. Covenant Home, Inc., 352 Ill. App. 3d 160, 165, 287 Ill.Dec. 267, 815 N.E.2d 911 (2004). Here, Patel has not shown any contractual discretion that REO or NPL abused. Furthermore, because nothing in the record indicates that REO or NPL had expanded Patel's liability under the guaranty, his claim for damages are speculative. See Feldstein v. Guinan, 148 Ill. App. 3d 610, 613, 101 Ill.Dec. 947, 499 N.E.2d 535 (1986) (Illinois law does not allow contract breach suits for mere speculative damages). We conclude, therefore, that the judge properly entered judgment in favor of REO and NPL on this claim as well.
Because the guaranty does not state which State's law should apply, we utilize the functional choice of law analysis adopted in Bushkin Assoc., Inc. v. Raytheon Co., 393 Mass. 622, 631-636, 473 N.E.2d 662 (1985), and are guided by principles of the Restatement (Second) of Conflict of Laws (1971). Whether analyzed in terms of the Restatement provision pertaining to surety contracts, § 194, or more global Restatement provisions, such as § 188, pertaining generally to contracts, and § 6, setting forth overarching choice-of-law principles, it is plain that Illinois -- the State where the first loan and the NRBC were located, where payment was made, and whose laws govern the loan agreement -- has the most significant relationship to the guaranty.
c. Declaratory judgment. In this last challenge to the entry of summary judgment, Patel asserts that the judge erred in granting summary judgment to REO and Capital Crossing on his prayer for declaratory relief, which if answered in his favor, would prohibit REO and Capital Crossing from applying foreclosure proceeds to the second loan before applying those proceeds to the first loan.
Declaratory judgment may enter "either before or after a breach or violation [of a right, duty, status, or other legal relation] has occurred in any case in which an actual controversy has arisen and is specifically set forth in the pleadings." G. L. c. 231A, § 1. Declaratory judgment is especially appropriate "where the circumstances ... indicate that, unless a determination is had, subsequent litigation as to the identical subject matter will ensue." Hogan v. Hogan, 320 Mass. 658, 662, 70 N.E.2d 821 (1947).
Here, an actual controversy exists as to whether the guaranty grants REO and Capital Crossing the ability to apply foreclosure proceeds to the second loan before applying them to the first loan. See Nissenberg v. Felleman, 339 Mass. 717, 725-726, 162 N.E.2d 304 (1959) (declaring obligations of principal and coguarantors is appropriate use of declaratory judgment). If, in the absence of a judicial declaration, REO and Capital Crossing applies the foreclosure proceeds to the second loan before applying them to the first, it is likely that identical litigation will ensue. Accordingly, in our view, these circumstances are ripe for declaratory judgment.
Furthermore, Patel's contention that Illinois law prohibits REO and Capital Crossing from first applying foreclosure proceeds to the second loan has some heft to it. Under Illinois law, a guarantor's liability "cannot be varied or extended beyond the precise terms of the guaranty," and "any doubts relative to the language of a guaranty ... must be resolved in favor of the guarantor." Emrick v. First Nat'l Bank, 324 Ill. App. 3d 1109, 1114, 258 Ill.Dec. 640, 756 N.E.2d 914 (2001). Patel only personally guaranteed the amount of the first loan; he made no such personal assurances with regard to the second loan. If REO or Capital Crossing were to apply foreclosure proceedings to the second loan before applying them to the first loan, Patel's guarantor liability would increase without his consent by the outstanding balance of the second loan. This outcome is impermissible under Illinois law. See id. at 1115, 258 Ill.Dec. 640, 756 N.E.2d 914 (impermissible to expand guarantor's liability by applying collateral proceeds first to subsequent loan that guarantor did not guarantee). Accordingly, we agree that the judge erred in entering summary judgment on Patel's claim for declaratory judgment.
REO and Capital Crossing contend that the guaranty grants them the authority to apply foreclosure proceeds to the second loan first. This is not so. The guaranty allows REO and Capital Crossing to apply available moneys to the first loan balance "in such manner and in such amounts and at such time or times and in such order and priority as [they] see fit," but does not grant authority to credit a subsequent loan first. The guaranty also states that REO and Capital Crossing do not need to foreclose on the hotel loan before enforcing the guaranty, but does not address the use of such proceeds if they do foreclose.
2. Attorney's fees award. Finally, Patel contends that the judge's award of attorney's fees and expenses sought in REO's motion for an assessment of damages was excessive. He bases this claim on the absence of findings as to how the judge arrived at the judgment amount, which was only slightly less than the amount requested by REO. Patel correctly asserts that any fees related to REO's defense against Patel's claims would not be "in connection ... with the enforcement of th[e] [g]uaranty," and therefore not recoverable under a strict application of the guaranty.
The guaranty contains a fee-shifting provision in which Patel promised to pay "for all expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by [l]ender in connection with the collection of the [d]ebt or any portion thereof with the enforcement of this [g]uaranty." Illinois law strictly construes such fee-shifting provisions. Bright Horizons Children's Ctrs., LLC v. Riverway Midwest II, LLC, 403 Ill. App. 3d 234, 254, 341 Ill.Dec. 883, 931 N.E.2d 780 (2010). Here, Patel's claim of a breach of the implied covenant of good faith and fair dealing was premised on REO's (and NPL's) conduct in negotiations after Hanish did not repay the first loan, and REO's alleged undisclosed assignment of the loan to another entity. His claims under c. 93A and for declaratory judgment were also premised on REO's (and Capital Crossing's) use of foreclosure proceeds. Neither of these claims pertained to the strict enforcement of the fee-shifting provision. See Housing Auth. of Champaign County v. Lyles, 395 Ill. App. 3d 1036, 1039-1040, 335 Ill.Dec. 463, 918 N.E.2d 1276 (2009) (lease provision allowing recovery of "all costs and reasonable attorney[ ] fees incurred in enforcing" lease does not cover attorney's fees tenant incurred defending against claim of breach of lease).
Because the judge did not explain his calculation of the attorney's fees award, it is unclear whether he properly awarded REO only the attorney's fees and expenses it incurred to enforce the guaranty, and not those incurred in defense of Patel's other claims. Therefore, we vacate and remand the award of attorney's fees. See T. Butera Auburn, LLC v. Williams, 83 Mass. App. Ct. 496, 504, 986 N.E.2d 404 (2013) (trial judge's failure to state reasons for fee award requires remand for judge to supply such reasoning). On remand, the judge must reduce the attorney's fee award by any amount expended in defense of these other claims unless the work was so interwoven with enforcement of the guaranty that separation is futile. See Hanover Ins. Co. v. Sutton, 46 Mass. App. Ct. 153, 176-77, 705 N.E.2d 279 (1999). We also note that the best practice in reaching a proper fee award is for the parties to submit, and the judge to review, detailed billing records. See Brady v. Citizens Union Sav. Bank, 91 Mass. App. Ct. 160, 161-162 & n.8, 71 N.E.3d 925 (2017).
REO and Capital Crossing have requested appellate attorney's fees. That request is allowed to the extent that the requests relate to the enforcement of the guaranty. Accordingly, REO and Capital Crossing may submit a petition for attorney's fees and costs, together with supporting materials, within fourteen days of the date of the rescript of this memorandum and order. See Fabre v. Walton, 441 Mass. 9, 10-11, 802 N.E.2d 1030 (2004). Patel shall have fourteen days thereafter to respond.
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Conclusion. We vacate so much of the final judgment dated November 16, 2017, as it pertains to Patel's prayer for declaratory relief, and the assessment and award of REO's attorney's fees. The remainder of the final judgment is affirmed. We remand the case for further proceedings consistent with this memorandum and order.
So ordered.
affirmed in part vacated in part