Worcester. Bill in equity filed in the Superior Court on January 22, 1972. The suit was heard by Meagher, J. After review was sought in the Appeals Court, the Supreme Judicial Court, on its own initiative, ordered direct appellate review.
Hennessey, C.j., Quirico, Kaplan, Wilkins, & Liacos, JJ.
Mortgage, Of real estate: foreclosure.
The opinion of the court was delivered by: Quirico
Mere authorization by a mortgagee of premises to a contractor, who had erected two industrial buildings and was owed large sums by the mortgagor and had attached the mortgaged property, to winterize and to make repairs to the larger of the two buildings, as requested by the contractor on meeting the mortgagee on the premises, in the circumstances did not constitute an "effectual" entry for the purposes of foreclosure under G. L. c. 244, § 2; it was held that upon a claim by the contractor of lack of reasonable diligence by the mortgagee in completing the foreclosure and of loss to the contractor of its lien on the mortgagor's equity, the timeliness of the mortgagee's completion of foreclosure proceedings must be measured from the time, six months after the authorization to winterize and repair, when the mortgagee sent notice to the mortgagor and the contractor of intent to foreclose and filed a petition for authority to enter and exercise the power of sale, and that the evidence did not warrant a finding that the foreclosure, by sale four months after commencement of the proceedings, was not completed within a reasonable time. [321-327]
Even if the price at which a mortgagee sold the premises after he had purchased it at the mortgage foreclosure sale indicated that the foreclosure price was less than the fair market value of the premises at the time of the foreclosure sale, the circumstances disclosed no basis of liability by the mortgagee to a creditor of the mortgagor who had attached the mortgaged premises. [327-328]
The plaintiff Seppala & Aho Construction Co., Inc. (Seppala & Aho), junior creditor of the mortgagor, Ronrino Realty Trust (Ronrino), brought a bill in equity in the Superior Court against the first mortgagee, the trustees of Fidelco Growth Investors (Fidelco). The bill alleged that Fidelco had violated a duty owed to the plaintiff to exercise due diligence to commence proceedings to foreclose a mortgage on real estate in Leominster, and that as a result of Fidelco's delay Seppala & Aho lost its lien on the mortgagor's equity in the property. The trial Judge found for the plaintiff, and awarded damages of $85,000, with interest. Fidelco's appeal was entered in the Appeals Court, and we transferred the case here. G. L. c. 211A, § 10 (A). There is before us the Judge's report of material facts and a transcript of the evidence. We reverse because in the circumstances of this case Fidelco was under no obligation to commence foreclosure proceedings promptly after Ronrino's default.
We summarize the facts. In November, 1970, Irvin Freedman and Albert Zimmerman, the trustees of Ronrino, entered into a construction contract with Seppala & Aho to construct two industrial buildings on land in Jytek Industrial Park in Leominster, for $750,000, to be completed by May 2, 1971.
Seppala & Aho commenced construction despite Ronrino's inability to obtain a construction loan. In February, 1971, Seppala & Aho notified Ronrino that construction would stop if no payment was forthcoming. By March, 1971, Seppala & Aho had nearly completed the buildings, and was owed approximately $500,000. Indeed, it appears that at that time Ronrino had not yet purchased the land on which the buildings were constructed.
In March, Fidelco committed $965,000 in first mortgage funds to the project. Further negotiations ensued, particularly regarding Seppala & Aho's reluctance to finish construction unless it was compensated. Under the agreements that were reached, Fidelco disbursed $800,000 at the loan closing. This sum was applied as follows: Seppala & Aho received $515,000 immediately, $150,000 was deposited in an escrow account which was released to Seppala & Aho in three periodic payments of $50,000 each as construction progressed, and the remaining $135,000 was paid for the land, title insurance costs, legal costs, and closing costs. The balance of $85,000 due to Seppala & Aho on its $750,000 contract was to be paid on completion of the buildings. This transaction was documented by (1) a mortgage to Fidelco from Ronrino, (2) an escrow agreement, and (3) a modification of the original construction contract between Seppala & Aho and Ronrino whereby no mortgage monies above $800,000 were to be distributed to Ronrino by Fidelco until Seppala & Aho was paid, and whereby Seppala & Aho could require Ronrino to convey its equity to it if Ronrino defaulted in the required mortgage payments. Fidelco was not a party to the modification agreement.
Ronrino soon defaulted on the mortgage, and in May, 1971, Seppala & Aho agreed to cover the default with funds from the second payment of $50,000 from the escrow account. Ronrino did not make the June or July mortgage payments and Seppala & Aho then brought suit against Ronrino and attached the mortgaged property. On July 20, 1971, Fidelco formally advised Seppala & Aho of the default. The buildings were substantially completed by July, and were certified for occupancy in August. There remained a dispute about the installation of the fire alarm system in the larger building, which delayed the issuance of an unconditional certificate of occupancy on that building until February, 1972.
In November, 1971, Fidelco learned that the trustees of Ronrino had moved to Florida. At some point the smaller building was occupied under a lease given by Ronrino and assigned to Fidelco who received the rents, but the larger building remained unoccupied.
In December, 1971, Seppala & Aho expressed concern to Fidelco that the larger building had not been winterized, the heat had not been turned on, pipes had burst, floors had cracked, and vandalism had occurred. Seppala & Aho asked Fidelco to foreclose the mortgage at that time.
In January, 1972, representatives of Seppala & Aho and Fidelco met on the premises. Fidelco authorized Seppala & Aho to winterize the building and install a fire ...