Middlebury Equity Partners v. MWJ Siam, No. S0391-0 4 CnC (Katz, J.,

Feb. 15, 2005)

[The text of this Vermont trial court opinion is un official. It has been reformatted from the original. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.]

STATE OF VERMONT SUPERIOR COURT Chittenden County, ss.: Docket No. S0391-04 CnC

MIDDLEBURY EQUITY PARTNERS, LLC

v.

MWJ SIAM, INC.

ENTRY

This foreclosure action involving a Burlington res taurant raised a number of estoppel and fraud counterclaims asserted by the mortgagorrestaurant owner. Mortgagees dispute that their ac ts constitute

misrepresentations, seek to dismiss the counterclai ms, and advance foreclosure proceedings.

There are several tangentially related business t ransactions that provide context to the current dispute. Wanvadi Jo tikasthira and Manatat Waiwong formed a partnership, PJ Associates, and a corporation, MWJ Siam, Inc, to start a Thai restaurant in Burlington . In 1994, the two obtained a bank loan to purchase a building and equ ipment for the restaurant through Banknorth. For security, the bu siness gave the bank a mortgage to the property. Waiwong and Jotikasthira also gave their own personal obligations. The restaurant was a success ful business, but a series of disputes arose between Jotikasthira and Waiwong that led to litigation and dissolution of their partnership. To keep the restaurant going, Jotikasthira bought Waiwong out and convinced the b ank to release Waiwong from the mortgage in 2002.

After this, Jotikasthira, through MWJ Siam, re-ope ned the business but struggled, as borrower, to make mortgage paymen ts. By early 2003, the borrower had fallen behind in payments, accumulatin g $30,000 in past due amounts. In March, however, the borrower worked to bring its outstanding balance down and made several substantial payments. By the summer of 2003, the amount past due had shrunk significantly, but not completely, and was beginning to grow again. Around this time, the bank chose to accelerate the mortgage and sell the note to a thir d party. On June 24, 2003, the bank’s attorneys sent a letter to the bor rower notifying it that because the mortgage was past due, the bank had ele cted to accelerate the loan. This, explained the letter, meant that the t otal outstanding amount of the loan, $223,000, was due, and that the bank inte nded to proceed with

foreclosure. The letter also stated:At the sole option of the Noteholder , partial payments may be accepted to reduce the amount owed, but only a writ ten agreement between the Noteholder and the Borrower shall alter the demands made in this letter. Acceptance by Noteholder of a ny payment in an amount less than the total payoff after the date of this letter shall not operate to extend the time of payment of any am ount then remaining unpaid or constitute a waiver of any of i ts rights.

In July, the borrower received a computer generate d past due notice from the bank stating that the borrower had a past due amount of $8,800. MWJ Siam sent a check for $2,000 to the bank to red uce this amount. The bank returned the money with a note for the borrowe r to contact the loan officer. In August, the borrower contacted the ban k by e-mail. A representative of the bank wrote that the mortgage was being sold and that payments should be held as the new owner would bill the borrower directly but would also retain all rights previously held by the bank. Meanwhile, the bank continued to send computer generated state ments showing the steadily growing amount past due. The borrower rec eived such monthly statements from July through November. In November , Middlebury Equity purchased the mortgage from the bank and soon there after initiated this

action for foreclosure.

Foreclosure on a mortgage is an action in equity p ermitting a mortgagee to enforce its right to the property, to satisfy the debt owed, and thereby extinguish the debtor–mortgagor’s rights to the property. See, e.g., New Eng. Educ. Training Serv. v. Silver St. P’ship , 156 Vt. 604 (1991); see generally Am. Jur. 2d Mortgages §§ 512–516. Such an action must be predicated on a failure of the mortgagor to perform the mortgage agreement. 4 J. Backman, Powell on Real Property § 37.37[3] (1999). Defaulting on a payment or part of a payment is jus t such a breach. SeeMerchant’s Bank v. Lambert , 151 Vt. 204, 206 (1989) (discussing bank’s

role in party’s default and resulting foreclosure). In this case, the bank’s original note included an acceleration clause, a co ndition long standard in mortgage documents. Cf. Freedley’s Admx. v. Manche ster Marble Co. , 99 Vt. 25, 35 (1925) (noting that acceleration of paym ents was separate from a foreclosure action). This clause permitted the ban k to accelerate the mortgage if the borrower defaulted on an installmen t payment so that the entire principal sum becomes due. Once a mortgage is so “accelerated,” the total amount is due, and the mortgagor can avoid fo reclosure only by paying the total outstanding mortgage. 4 Backman, § 37.37[3] (citing to sample cases); Am. Jur. 2d Mortgages § 488 (“The proposition is accepted without dispute that a stipulation in a mortgage pr oviding that the whole debt . . . is to become due and payable upon the fa ilure of the mortgagor to pay the interest or any installment of principal . . . is a legal, valid, and enforceable stipulation.”).

Thus, when the bank gave the borrower notice of ac celeration and its intent to foreclose on the mortgage, it ended the b orrower’s right to satisfy the debt by installment payments, and the borrower’ s outstanding debt went from the past amount due to the entire remaining ba lance. The borrower does not challenge the bank’s right to accelerate p ayments on the mortgage. Indeed, the borrower’s default status and the langu age of the mortgage agreement’s acceleration clause gave the bank every right to accelerate. Likewise, the borrower does not challenge Middlebur y Equity’s assigned right to accelerate and foreclose based on the cont ract.

What the borrower argues is that the computer stat ements issued

after the notice of acceleration and intent to for eclose represented a kind of “workout offer” or equitable equivalent, under whic h the bank backed offits prior right to acceleration and reverted to an installment payment

program. See 4 Backman, at § 37.35 (describing a “ workout” wherein a mortgagee agrees to a new payment schedule in lieu of foreclosure with the defaulted mortgagor). This then induced the borrow er to rely on the old installment payment plan and not prepare for an imm inent foreclosure. The argument is one of promissory estoppel. This doctr ine states that a court will enforce a promise if the promisor reasonably e xpects to and actually does induce action or forebearance in the promisee. Foote v. Simmonds

Precision Prods. Co. , 158 Vt. 566, 573 (1992) (quoting from the Restatement (Second) of Contracts § 90.

The problem with applying this argument is that it ignores the plain language of the bank’s notice of acceleration quote d above. The acceleration letter makes clear that any type of re structuring or “workout” that would renew installment payments would have to be the result of a written agreement between the mortgagor and mortgag ee. Cf. Standard

Chartered Bank v. Red Rock Commodities Ltd. , 151 F.R.D. 261, 263 (S.D.N.Y. 1993) (noting that an alleged promise ext ending financing was

not meritorious where the loan document stated it c ould only be modified in writing). This is consistent with the general func tion of workouts as agreements between parties to restructure loans to avoid foreclosure. 4 Backman, at § 37.35 (noting that the form workouts take are endless and limited only by the “imagination and nerve of the p arties”). Here the bank

made clear that it did not intend to alter its acce leration and foreclosure actions, and to the extent it reserved its right to do so, nothing short of a written agreement between the parties would suffice

.

Why, then, would the bank, after its clearly state d intent to limit renegotiation, suddenly revert to the old installme nt schedule withoutnotice, consideration, or explanation? The borrow er argues that a

computer-generated, automatic notice created a kind of unilateral alternative offer. But this interpretation flies i n the face of a cardinal rule of contract interpretation that requires courts to int erpret such offers within the

context of their circumstances. Isbrandtsen v. Nor th Branch Corp. , 150 Vt. 575, 578 (1988). Any subjective beliefs that borro wer formed upon receiving regular monthly computer statements are i rrelevant. Quenneville v. Buttolph , 2003 VT 82, at ¶ 15. Those statements lack any s ignal of intent that would reasonably suggest that they repr esented such offers or waivers of its clear acceleration. Furthermore, th e bank displayed no such

intent as to make such statements suffice as even u nilateral offers. See Starr Farm Beach Campowners Ass’n v. Boylan , 174 Vt. 503, 505 (2002) (mem.) (“An enforceable contract must demonstrate a meeting of the minds of the parties: an offer by one of them and an acce ptance of such offer by the other.”).

The bank’s August e-mail communications do nothing to undermine these conclusions. While they do not state the ban k’s position with the same clarity as the June acceleration letter, they do not mislead about the state of the mortgage; they do not back off acceler ation. For example, one of the borrower’s inquiries was about the bank’s re fusal to accept installment payments in July. The bank responded t hat it was no longer accepting payments because it was selling the loan, as its default status was too high a risk. This fact is undisputed. Further , the bank suggested that the borrower save the payments for the purchaser, w ho the corresponding bank employee seemed to believe would offer the bor rower some kind of workout. When Middlebury Equity chose instead to e nforce the acceleration clause and commence this foreclosure, the borrower may have been disappointed, but that cannot be attributed to a promise or falsestatement in the bank’s e-mails because the employe e’s statements merely

suggest the possibility but do nothing to promise i t. It is important to keep in mind that proper interpretation of this correspo ndence is an objective question, not driven by the subjective reaction of the debtor. Green Mt. Inv. Corp. v. Flaim , 174 Vt. 495, 497–98 (2002) (noting that the relia nce must be reasonable, that a promise is enforced only if injustice can be avoided and emphasizing the latter as a question of law).

This leaves us with the question of whether the Ju ly-throughNovember, computer generated bank statements repres ent a type of promise which fairly induced some kind of reliance in the borrower. As an equitable doctrine, promissory estoppel’s applicati on is dependent on justice, fairness, and reasonableness. E.g., Remes v. Nordic Group, Inc.

, 169 Vt. 37, 40–41 (1999) (discussing promissory est oppel’s principles in the context of damages). Given the context in whic h the borrower received the statements—where the borrower was rebuilding an d believed themselves to be on the road to solvency—there is a n argument to be made that the bank statements were confusing. Any such confusion, however, should have been more than adequately cured by a re -reading of the

acceleration notice and the bank’s consistent refus al to either accept installment payments or re-negotiate their reinstat ement. In other words, the bank statements do not represent a promise to t he borrower contrary to

the acceleration notice. To read otherwise would e levate a confusing gesture above the bank’s additional actions and sta tements which contradict the borrower’s proffered interpretation. To furthe r conclude that these computerized bank statements represented a unilater al promise to return to the original defaulted installment plan would be un just to the bank and its rights under the mortgage agreement.Beyond this, it is also unclear what reliance was induced by the

bank’s computer statements. The borrower argues th at it relied on the bank statements to its detriment but has some difficulty identifying the detriment. To the extent that the borrower is arguing that its reliance prevented it from obtaining the entire mortgage amount, there is no d etriment as the borrower has been and is still able to do exactly that. The statutes of redemption allow a mortgagor to redeem its rights in the prope rty up to six months after foreclosure. 12 V.S.A. § 4528. As this right to r edeem still continues, borrower fails to show a detriment. Instead, it ar gues that if it had known that foreclosure was looming, it would have scraped the past amount due together and would have brought its balance current , before the sale to Middlebury Equity. This is something the borrower was already obliged to do, foreclosure notwithstanding, and the bank state ments did not prevent it from doing so. The fact that the bank refused to a ccept even partial payment goes to the larger point that the bank had accelerated the mortgage

on June 24th and that made the whole amount due. T hus, even if the borrower had raised the $12,000 it had past due and the bank had accepted it, this would not have cancelled the acceleration. Cf. 4 Backman, at § 37.37[3] n. 15–17 (citing to states with statues th at do allow for mortgagors to cancel accelerations in this manner). The remai ning $211,000 would still have been due and Middlebury Equity’s right t o foreclose would be the same. The loss of an opportunity in this sense is not actionable under law or equity. Ragosta v. Wilder , 156 Vt. 390, 396 (1991) (action or inaction

taken in reliance must be “of a definite and substa ntial character”). Moreover, even had borrower overcome the accelerati on issue, it has made no factual showing to support her conclusory implic ation of detriment merely from having “arranged” for the loans.

We therefore conclude that borrower has failed to establish theelements necessary for a promissory estoppel claim. As well, this

discussion also demonstrates the failure of borrowe r to establish the evidence of negligent misrepresentation. Hedges v. Durrance , 2003 VT 63 (negligent misrepresentation requires the tortfeaso r to supply false information that another party relies upon). Here, none of the information that the bank provided was false. While the comput er-generated statements were misleading, their damage was more than adequat ely corrected by their context and by the lack of reliance by borrower. Borrower claims that the computer-generated state ments breached the implied covenant of good faith and fair dealing Carmichael v. Adirondack Bottled Gas Corp. , 161 Vt. 200, 208–09 (1993) (quoting the Restatement (Second) of Contracts § 205 cmt. d to d efine bad faith as “harassing demands for assurances of performance, r ejection of performance for unstated reasons, willful failure t o mitigate damages, and abuse of a power to determine compliance or to term inate the contract”). We do not see, as a matter of law, that the compute r-generated bank statements are the factual equivalents of harassing behavior or willful failures, which would violate the clause of good fa ith and fair dealing. At worst these statements are the product of a lack of oversight by the bank—a note of confusion dropped into a tense business sit uation—but they lack the purposefulness of Adirondack Gas . Id . at 210–11 (company’s harassing demands, short deadlines, and ambiguous prior deali ngs created a question of good faith and fair dealing for the jury). Ther e simply is no evidence of harassing behavior, exploited ambiguities, or rejec tion of borrower’s advances for unexplained or unjustified reasons.

This leaves us with borrower’s sole remaining clai m of consumer fraud. The claim is essentially that the borrower relied on the bank statements to form a misrepresentation that the ban k had silently rescindedthe acceleration and foreclosure. Assuming for the moment that the

borrower did rely on such bank statements, since th ere is no evidence that the borrower was damaged, Russell v. Atkins , 165 Vt. 176, 181 (1996) (parties must have either relied on or been damaged by the misrepresentation), there is no reason to conclude that the bank statements had the capacity to deceive or that the borrower’s interpretation of the statements was reasonable. Carter v. Gugliuzzi , 168 Vt. 48, 56 (1998) (“Deception is measured by an objective standard, l ooking to whether the representation or omission had the ‘capacity or ten dency to deceive’ a reasonable consumer.”). Despite the borrower’s cha racterizations, the bank statements can best be described as having the capa city to confuse. Any confusion, however, is greatly lessened when put in the context of the

situation.

Despite its efforts to cure default, the borrower owed past due amounts on its mortgage. In June, it received a le tter from the bank accelerating the mortgage—bringing the total amount due—and notifying

of its intention to foreclose. The letter also tel ls the borrower that this situation would not be modified by any act short of a written agreement between the two parties. For the next few months, borrower receives computer-generated bank statements akin to the kind it had received prior to the acceleration letter, but this time when it t ries to make partial payments, the bank refuses to accept them and notif ies borrower that it is selling the mortgage to another party who may accep t the payments but who has the same rights (including foreclosure) tha t the bank has. From this borrower suggests it was perfectly reasonable for it to believe that the bank had stopped the acceleration and returned to i ts prior installment system. This is simply not a reasonable conclusion

.Given the vast array of contradictory facts, borro wer’s alleged

subjective belief that the computer statements cons tituted a rescission of acceleration were more of a hope, which at best exa ggerated some potential confusion latent in the computer statements. Apart from this subjective interpretation, the statements simply do not have a n objective capacity to deceive, nor did give a reasonable misrepresentatio n within the context of the bank’s legitimate acceleration and foreclosure. In the context of the bank’s original acceleration letter and latter e-ma ils, the only objective reading must be that acceleration remained the stat us of the debt.

We are further troubled by the concept of a consum er fraud claim arising out of a commercial loan. The borrower cit es to several out-of-state cases and one Vermont superior court decision to su pport the idea that a

loan is a “service” within the definition of 9 V.S. A. § 2451a (b). With one exception, the cases cited by the borrower deal wit h consumer loans— either credit cards or home mortgages. The sole ex ception comes from a federal case interpreting a South Carolina statute with different terminology than Vermont’s. Compare McTeer v. Provident Life a nd Acc. Ins. , 712 F. Supp. 512, 515 (D.S.C. 1989) (defining terms “trade ” and “commerce”), with 9 V.S.A. § 2451a (b) (defining the equivalent terms “goods” and “services”). The conclusion that mortgages are a “ service” is far from universally accepted. D. Zupanec, Annot., Scope an d Exemptions of State Deceptive Trade Practice and Consumer Protection Ac ts , 89 A.L.R.3d 399, at § 9 [f] (1979, 2004 Supp.); M. Evans, Annot., W ho Is a “Consumer” Entitled to Protection of State Deceptive Trade Pra ctice and Consumer

Protection Acts , 63 A.L.R.5th 1, at § 7 (1998).

The fact that some courts have interpreted their p articular state’s

variation of consumer fraud law to allow individual claims against a bank isnot an open-ended proposition for all banks and all possible consumers.

Consumer fraud acts were designed “to prevent fraud and deception in

consumer transactions.” 89 A.L.R.3d at 399. In Ve rmont, the statutory language favors claims against discrete transaction s where something is bought, such as a tangible object, or sold, such as a discrete service. See, e.g., Carter , 168 Vt. at 52–53. Mortgages do not easily fit un der this umbrella concept of “services” as it is at once a b roader “service” and involves the exchange of intangible property “right s” defined by statute. 12 V.S.A. §§ 4528–4533. Commercial loans are even mor e difficult as they involve business-to-business transactions, which su ggests more sophisticated parties, greater leverage for negotia tion, and more complex

terms and transactions. Notwithstanding the liberal nature of the Consumer Fraud Act, this case simply does not support an action where the ac tivities complained of were, at best, irregularities, isolated elements of a larger, straightforward relationship. See Bloomberg v. Farm Bureau Life In s. Co. of Michigan

, 438 N.E.2d 1247, 1250 (Ill. 1982) (rejecting consum er fraud claim against mortgagee for isolated breaches of contract and “fa rfetched” theories of “deviant behavior”). We decline for this reason as well to apply the Consumer Fraud Act to the bank’s failure to stop se nding computer statements of the borrower’s lapsed installment pay ment plan.

Based on the foregoing, Middlebury Equity and Bank north’s motions to dismiss are granted. MWJ Siam’s counter claims are dismissed.

Dated at Burlington, Vermont________________, 2005

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