Court: Massachusetts Appeals Court; May 7, 1999; Massachusetts; State Appellate Court
Commerce Bank and Trust Company filed a lawsuit against George N. Hayeck to recover the balance on a promissory note for which Hayeck was a comaker with Edward Bryson. The Superior Court judge ruled in favor of Hayeck, finding him not liable due to reliance on misrepresentations made by Bryson and a Commerce officer, as well as unjust impairment of collateral by Commerce. Commerce appealed, arguing insufficient evidence supported the judge's findings. Hayeck's coexecutors also appealed the dismissal of his counterclaim under G. L. c. 93A, challenging the judge's determination that negligent misrepresentation is not actionable under that statute.
The judge's findings indicated that in late 1991, Bryson, president of Northeast National Mortgage Corporation (NEN-MCO), sought a $65,000 loan from Commerce to satisfy HUD's net worth requirements and needed a comaker, which Hayeck agreed to after Bryson assured him of minimal risk based on the loan being secured by a certificate of deposit and NEN-MCO stock. Commerce's loan documents confirmed that the loan proceeds would be deposited into a CD at Commerce, intended solely for meeting net worth requirements. However, the signed note referenced only the stock as collateral, omitting the promised CD.
Hayeck, experienced in business but not having read the note prior to signing, was misled into believing that the funds would remain secured in the account at Commerce. The loan proceeds were eventually disbursed to Bryson and Hayeck, deposited into an account for NEN-MCO, which already had existing accounts at Commerce.
On January 7, 1992, Bryson withdrew $50,000 from a new account without Hayeck's knowledge. A note from NENMCO to Commerce came due on June 2, 1992, prompting Bryson to request a six-month renewal due to delays in receiving commission income from HUD. On June 3, 1992, both Bryson and Hayeck signed a renewal note due December 30, 1992. The renewal note referenced a pledge agreement and NENMCO stock as collateral but omitted mention of a certificate of deposit. Hayeck, prior to signing, received assurances from Commerce's senior loan officer, James Gennaro, that the stocks and certificate were secured. Hayeck relied on these assurances despite not reading the renewal note. Bryson passed away on September 10, 1992, and in November, Commerce sought payment from both Bryson’s estate and Hayeck. After failed negotiations, Commerce sued Hayeck alone on January 7, 1993, without pursuing action under the pledge agreement or against Bryson’s estate.
On January 22, 1993, Commerce closed the NENMCO account with remaining loan proceeds and transferred $32,956.96 to NENMCO at Bryson's widow's request. The judge found that Commerce unjustifiably impaired the collateral by allowing the $50,000 withdrawal and failing to act on the pledge agreement, leading to Hayeck's discharge from the note under G. L. c. 106. 3-606(l). The judge noted that both Bryson and Gennaro assured Hayeck that the collateral would remain intact. Hayeck's third-party complaint against Bryson's estate was dismissed, and he did not appeal that judgment but did appeal the dismissal of his counterclaim. Commerce contended that the judge's findings regarding the NENMCO account's security were inconsistent with the integrated nature of the notes and that the judge should not have considered parol evidence. Commerce's failure to file a motion to alter or amend the judgment resulted in a waiver of this issue for appeal.
Commerce contests the sufficiency of evidence supporting the trial judge's finding that the parties' agreement differed from what was documented in the notes. The interpretation of an integrated agreement is a legal issue, not bound by the trial judge’s conclusions unless affected by factual findings. The notes clearly stated that collateral consisted of 5,900 shares of NENMCO under a pledge agreement, and all parties agreed that Commerce could release any collateral. Introducing evidence of prior agreements that contradict these terms breached the parol evidence rule. The judge erred by concluding that a $65,000 certificate of deposit served as collateral and that it would remain on deposit, which deviated from the notes' explicit terms. The notes are deemed integrated due to their clear and complete language, and it is undisputed that all parties consented to Commerce’s right to release collateral. Hayeck could not claim that Commerce unjustifiably impaired collateral by releasing the NENMCO funds, nor was Commerce obligated to apply collateral to the debt prior to suing Hayeck, as the security agreement did not mandate this.
Furthermore, Commerce argues against the judge's finding that Hayeck was fraudulently induced into signing the notes, pointing out that such factual findings are only overturned if clearly erroneous. Evidence sufficiency is a legal question for appellate review. A contract cannot be enforced against someone whose signature was obtained through fraud that led them to believe the agreement differed from reality. To prove fraud in inducement and negate the notes' effect, Hayeck must show common law deceit elements, including a material misrepresentation that induced action and reasonable reliance. The parol evidence rule does not apply when fraud is alleged. The judge found that Bryson informed Hayeck that the funds would remain on deposit as security when the note was signed, and Hayeck acknowledged understanding this arrangement, with no evidence contradicting these statements.
Hayeck could not claim he was induced to sign the note due to misrepresentation by Bryson, as no such misrepresentation regarding the note's terms occurred. There was no evidence that Bryson misrepresented his intention to secure the note with a certificate of deposit, nor was there indication that Hayeck relied on any false representation about the collateral related to Commerce. Hayeck testified that Bryson only mentioned securing the note with a certificate of deposit and a pledge of NENMCO's stock, without evidence of Bryson’s intentions at that time. Furthermore, Hayeck did not interact with anyone from Commerce, and thus there was no evidence that Commerce was aware of any misrepresentation by Bryson. Consequently, Hayeck was bound by the terms of the note he signed without reading.
Regarding the renewal note, the judge found that Gennaro misled Hayeck into believing that a $65,000 account existed at Commerce for loan repayment. While there was support for the claim that Hayeck reasonably relied on Gennaro's misrepresentation, it was determined that Hayeck did not demonstrate any harm from this misrepresentation. Even if Gennaro's actions constituted fraud, Hayeck's liability on the original note remained unchanged, and he would not have been in a better position had he learned of any misrepresentation before signing the renewal. The evidence also showed that Hayeck had an indemnity agreement with Bryson’s administratrix related to Commerce's claim, which he structured in exchange for his assistance with Bryson's HUD loans.
Counsel for Commerce did not make a judicial admission regarding the status of the second note in relation to the original note, keeping the issue open for determination. The classification of a note as either payment or renewal of an existing obligation is a factual question, unless there is a clear agreement between the parties. Hayeck's case was based on the premise that the renewal note extended the original note, a finding supported by evidence such as Commerce retaining the original note without marking it as paid. The argument that Hayeck is not liable because the original note was discharged by the renewal note was not raised by the coexecutors and thus is not considered. Even in cases of fraud involving a renewal note, a creditor can still enforce the original valid obligation.
Hayeck asserted that there was an agreement for the loan proceeds to be held in trust by Commerce, which was violated when Bryson transferred funds. However, this argument was introduced for the first time on appeal, diverging from the original trial theory, and thus was not considered due to potential prejudice to Commerce. The judge found that depositing the loan proceeds in a noncustodial account met the agreement between Bryson and Commerce.
Additionally, Hayeck contested the dismissal of his Chapter 93A counterclaim, arguing that the judge improperly relied on a finding of negligence instead of willful misconduct. He cited a legal precedent regarding misrepresentation of collateral status to support his claim of error.
Hayeck's counterclaim, asserting that Commerce acted unfairly under G. L. c. 93A by allowing Bryson to wrongfully divert funds, was deemed inaccurate in its representation of both the counterclaim and the judge's ruling. Hayeck based his claim on Bryson withdrawing $50,000 from the NENMCO account, citing the case of Dahlborg v. Middleborough Trust Co. to support his theory of liability, which requires proof of the other party's knowledge of the wrongful act. Although the judge accepted Hayeck's liability theory, he concluded that Commerce lacked knowledge of Bryson’s actions, resulting in no error in the ruling. The appellate scenario presented did not occur, leading to a reversal of the judgment in favor of Hayeck on Commerce’s complaint, with a new judgment entered for Commerce for the balance due on the renewal note, including interest and costs. The dismissal of Hayeck’s counterclaim was affirmed. Additionally, the pledge agreement dated December 5, 1991, was linked to a promissory note of the same date, with Hayeck testifying he signed a note around December 2, 1991, but had to sign a substitute note later due to issues with the original. The judge noted no discrepancy in the signing date. General Laws c. 406. 3-606 addresses the discharge of a party to an instrument if the holder unjustifiably impairs collateral without consent.
