Charles St. African Methodist Episcopal Church of Bos. v. Oneunited Bank (In re Charles St. African Methodist Episcopal Church of Bos.)

574 B.R. 402

IN RE CHARLES STREET AFRICAN METHODIST EPISCOPAL CHURCH OF BOSTON, Debtor

Charles Street African Methodist Episcopal Church of Boston, Plaintiff-in-Counterclaim

v.OneUnited Bank, Defendant-in-Counterclaim

Case No. 12–12292–FJB

Adversary Proceeding No. 14–1138

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed July 19, 2017

David B. Madoff, Madoff & Khoury LLP, Foxborough, MA, D. Ross Martin, Ropes and Gray LLP, James Addison Wright, III, K & L Gates LLP, Boston, MA, for Plaintiff.

Meg McKenzie Feist, Douglas R. Gooding, Choate, Hall & Stewart LLP, Boston, MA, Kevin J. Handly, Office of Kevin J. Handly LLC, Jamaica Plain, MA, for Defendant.

MEMORANDUM OF DECISION ON REMAND

Frank J. Bailey, United States Bankruptcy Judge

Background

On November 2, 2016, this Court entered judgment in the above-captioned adversary proceeding, overruling the objections of plaintiff and chapter 11 debtor Charles Street African Methodist Episcopal Church of Boston ("the Church") to the proof of claim of OneUnited Bank ("the Bank") and dismissing the Church's counterclaim against the Bank on its merits. The Church appealed from the judgment to the United States District Court. For reasons it set forth in a Memorandum and Order of May 19, 2017 ("Memorandum and Order"), the District Court has now vacated in part the order overruling the Church's objection to OneUnited's proof of claim and remanded the matter to this Court for the limited purpose of explaining the relationship of the Court's findings to one of two theories underlying the Church's wrongful underwriting count: that the Bank's underwriting of the Construction Loan was unfair under MASS. GEN. LAWS ch. 93A, § 2(a) because the Bank made the loan in reckless disregard of facts showing that the loan would or was likely to fail.¹ In its Memorandum and Order, the District Court articulated, to an extent, the standard for making this determination and then charged this Court as follows: "[O]n remand, the Bankruptcy Court need only apply the standard articulated above to determine whether OneUnited acted unfairly by making this loan with reckless disregard for facts which made it likely that the loan would fail. It can do so, in part, by clarifying the relationship between its detailed historical findings and the reckless disregard standard." Memorandum and Order, p. 22. And the Court may make "any additional factual findings it deems necessary." Id.

The District Court has indicated that it is assuming without deciding (i) that section 9 of Chapter 93A governs and (ii) that the Supreme Judicial Court would, in an appropriate case, extend Fremont² to lending transactions outside the home mortgage context. Memorandum and Order, p. 13. I understand that, for purposes of the above charge on remand, this Court too may, at least initially, proceed on the basis of these assumptions. On remand, the Court is required to address these issues—that is, determine whether the conduct in question is subject to section 9 and not section 11 of Chapter 93A, and determine whether the Supreme Judicial Court would extend the rule of Fremont beyond the residential mortgage context—only if it concludes that the Church has made out a claim under the reckless disregard theory. Memorandum and Order, p. 22 fn. 10.

Regarding the standard to be applied, the District Court made the following observations. First, Fremont and its successor cases establish that Chapter 93A prohibits "the origination of a home mortgage loan that the lender should recognize at the outset that the borrower is not likely to be able to repay." Drakopoulos v. U.S. Bank Nat'l Ass'n , 465 Mass. 775, 786, 991 N.E.2d 1086 (2013) quoting Fremont , 452 Mass. at 749, 897 N.E.2d 548 ; see also Frappier v. Countrywide Home Loans, Inc. , 645 F.3d 51, 56 (1st Cir. 2011) ("The holding of Fremont was that Chapter 93A prohibits ‘the origination of a home mortgage loan that the lender should recognize at the outset the borrower is not likely to be able to repay.’ "). Second, loans of this sort fall within the penumbra of the concept of unfairness established in the Massachusetts Predatory Home Loan Practices Act because of their fundamentally predatory nature. See Fremont , 452 Mass. at 748–749, 897 N.E.2d 548.

Third, "Chapter 93A usually requires a level of fault going beyond mere negligence." Frappier , 645 F.3d at 59 ; see, e.g., Darviris v. Petros , 442 Mass. 274, 278, 812 N.E.2d 1188 (2004) ("[A] violation of Ch. 93A requires, at the very least, more than a finding of mere negligence ...."). Fremont and Drakopoulos evince no departure from this background principle, and the Church adopted it at trial. Although the Massachusetts courts have not defined recklessness in the Chapter 93A context, it suffices for these purposes to emphasize that reckless conduct embodies a "substantially greater" degree of culpability than mere negligence. Boyd v. Nat'l R.R. Passenger Corp. , 446 Mass. 540, 546, 845 N.E.2d 356 (2006), quoting Restatement (Second) of Torts, § 500.

Fourth, under Massachusetts law, "[a] ruling that conduct violates [Chapter] 93A is a legal, not a factual, determination." Klairmont v. Gainsboro Rest., Inc. , 465 Mass. 165, 171, 987 N.E.2d 1247 (2013), quoting Casavant v. Norwegian Cruise Line Ltd. , 460 Mass. 500, 503, 952 N.E.2d 908 (2011). At the same time, "whether a particular set of acts, in their factual setting, is unfair or deceptive is a question of fact." Klairmont , 465 Mass. at 171, 987 N.E.2d 1247, quoting Casavant , 460 Mass. at 503, 952 N.E.2d 908 ("Although whether a particular set of acts, in their factual setting, is unfair or deceptive is a question of fact ... the boundaries of what may qualify for consideration as a [G.L.] c. 93A violation is a question of law ..."). Even receiving a loan with the four "presumptively unfair" characteristics present in Fremont does not relieve a borrower of the obligation to prove that the loan was unfair or deceptive in the specific circumstances in which it was made. Fremont , 452 Mass. at 740–741, 752, 897 N.E.2d 548. This factual inquiry is made with reference to "the circumstances of each case." Klairmont , 465 Mass. at 174, 987 N.E.2d 1247, quoting Kattar v. Demoulas , 433 Mass. 1, 14, 739 N.E.2d 246 (2000).

And fifth, the factfinder is permitted to take into account the borrower's representations to the lender as part of the mosaic of facts in determining whether this particular loan was unfair. See Klairmont , 465 Mass. at 174, 987 N.E.2d 1247. In the specific context of fundraising in the present case, the Bankruptcy Court may consider the Church's one-sided knowledge of its underperforming but crucial fundraising campaign, created in part by the incomplete answer it gave when OneUnited inquired about the progress of that campaign, just as it may consider OneUnited's failure to further delve into the details.

Discussion

a. Reckless Disregard in Massachusetts Law

Using these observations as a point of departure, this Court is charged with specifying the relationship between its already-articulated findings, as supplemented by any further findings I may deem necessary, and "the reckless disregard standard." The reckless disregard standard is relevant here not only because it is the focus of the charge that the District Court has fashioned on remand, but, more fundamentally, (i) because it was one of two standards (the other being knowledge that the loan would or was likely to fail) by which the Church itself asked, both in its pretrial memorandum and in its proposed findings and conclusions, that its wrongful underwriting count be adjudicated³ and (ii) because, as the Court of Appeals pointed out in Frappier , "Chapter 93A usually requires a level of fault going beyond mere negligence." 645 F.3d at 59. In Fremont , Frappier , and Drakopoulos , one searches in vain for the words "reckless disregard," or even just "reckless," much less indications of what they require to make out a Fremont -type claim. The Church conceded in its post-trial brief that something more than mere negligence was required. Though it argued that it should prevail because the Bank recklessly disregarded that the loan was likely to fail, the Church did not address precisely how much more than negligence was required or specify what "reckless disregard" requires.

The question presented is one of Massachusetts law. The Massachusetts Supreme Judicial Court (SJC) has addressed the meaning of reckless disregard in numerous cases, most thoroughly and recently in Boyd v. Nat'l R.R. Passenger Corp. , 446 Mass. 540, 546, 845 N.E.2d 356 (2006) (" Boyd "). See also Sandler v. Commonwealth , 419 Mass. 334, 336, 644 N.E.2d 641 (1995) and Montes v. Massachusetts Bay Transp. Auth. , 446 Mass. 181, 185, 843 N.E.2d 611 (2006). In each, the risk in question was of death or grave bodily harm, but the relevant considerations are just as applicable where, as here, the harm is financial in nature.⁴

In Boyd , the father of a bicyclist who was struck by a train at a railroad crossing had sued the railroad for her wrongful death, and the lower court had granted summary judgment for the railroad, saying the evidence did not create a genuine issue of material fact as to the requisite "reckless" conduct on the part of the railroad. On appeal, the SJC reversed and, in doing so, addressed at some length the meaning of reckless disregard in Massachusetts law.

The court began by noting that in the civil context, it has adopted the definition of "reckless disregard of safety" set forth in Restatement (Second) of Torts § 500 (1965). Boyd , 446 Mass. at 546, 845 N.E.2d 356, and cases cited. Section 500 of the Restatement (Second) states:

The actor's conduct is in reckless disregard of the safety of another if he does an act or intentionally fails to do an act which it is his duty to the other to do, knowing or having reason to know of facts which would lead a reasonable man to realize, not only that his conduct

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