United States Court of Appeals
For the First Circuit
No. 08-1955
FAMM STEEL, INC.; AUSTIN REALTY, LTD.,
Plaintiffs, Appellants,
ANN GAVIN; PAUL GAVIN,
Plaintiffs,
v.
SOVEREIGN BANK,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lynch, Chief Judge,
Torruella and Lipez, Circuit Judges.
Susan D. Novins with whom Seegel Lipshutz & Wilchins LLP was
on brief for appellants.
Richard E. Gentilli with whom Howard M. Brown, Lauren A.
Solar, and Bartlett Hackett Feinberg P.C. were on brief for
appellee.
June 12, 2009
LYNCH, Chief Judge. This case involves a once-profitable
steel fabricating company, FAMM Steel, Inc. ("FAMM"), that fell on
hard times while trying to expand its business. The company
defaulted on its loans, and it was shut down and had its assets
liquidated in 2004. Thereafter, it brought suit against Sovereign
Bank ("Sovereign"), which provided the loans, claiming that the
bank had caused its demise by forcing it to hire an incompetent
financial manager who mismanaged the company's accounts and then
engaging in a course of action that exacerbated the problem. The
company alleged the bank was liable under a slew of theories,
including an instrumentality theory, breach of the implied covenant
of good faith and fair dealings, breach of fiduciary duty, fraud,
duress, and interference with advantageous business relations.
The district court granted the defendant bank summary
judgment in a careful and well-reasoned opinion. Gavin v.
Sovereign Bank, No. 06-12314, 2008 WL 2622839 (D. Mass. June 30,
2008). We affirm. This is our first occasion to deal with the
"instrumentality" theory of lender liability.
I.
We describe the facts as outlined by plaintiffs. FAMM
was a family-owned steel fabricating company that operated out of
Rindge, New Hampshire. It built projects such as ballparks,
hotels, apartments, and office buildings throughout the Northeast.
FAMM's sales revenue was $1.8 million at the end of 1995 and grew
-2-
to $27 million by the end of 2000. FAMM was run by Ann Gavin, who
served as the company's President and Secretary, and her father
Paul Gavin, who served as its Vice President and Treasurer. Austin
Realty, Ltd. ("Austin") was the record title owner of FAMM's
fabrication facility in Rindge.
In 1998, as its business expanded, FAMM developed a plan
to expand its facility and revamp its operations by purchasing
state-of-the-art equipment. That year, it entered into a banking
relationship with Fleet National Bank, the predecessor-in-interest
to defendant Sovereign; for simplicity we will refer to the bank as
Sovereign throughout. Between 1998 and the end of 2002, Sovereign
extended approximately $6.1 million in credit to the plaintiffs,
which FAMM used to expand its facility and upgrade its equipment.
During that time, Edward Powers, Sovereign's Vice President, was
FAMM's main point of contact with the bank; Powers was the loan
officer in charge of FAMM's account until March 2003.
In the fourth quarter of 2001, FAMM suffered an operating
loss due to an unexpectedly harsh winter and other external adverse
economic factors, along with the continued costs of renovating its
facility. FAMM informed Powers of its financial difficulties.
Around the same time, FAMM's comptroller, Charles
Stearns, informed the company he would be leaving at the end of the
year, and FAMM began searching for a replacement. As the process
dragged on, FAMM sought to hire an accountant from the firm of Paul
-3-
Seelye, who was FAMM's CPA, to oversee its finances on an interim
basis. In January 2002, Ann Gavin discussed this plan with Powers.
Powers stated that he was uncomfortable with this choice because he
did not want someone from the company that did FAMM's auditing
review also to be involved in FAMM's daily operations. He wanted
Gavin to hire someone he had confidence in to oversee FAMM's
accounting until the company could get a handle on its accounting
department. Powers informed Gavin that person would be David Lee,
an outside consultant with whom Powers and the bank had had some
limited experience in the past. Gavin objected because Lee was at
the time providing consulting services to a company owned by a
former business partner of the Gavins with whom the Gavins were not
on good terms, and because Lee did not have experience in the steel
industry. Powers insisted, however, saying it was the bank's
prerogative to have a consultant hired who made the bank feel
secure in its financing. FAMM acquiesced and hired Lee.
FAMM continued to search for a permanent replacement for
Stearns, the comptroller. It received the resume of Keith
Woolford, along with those of several other prospective candidates,
from Seelye; Seelye interviewed Woolford before passing on his
resume to Ann Gavin. Gavin then interviewed Woolford and four
other candidates. She narrowed the field to Woolford and one other
candidate. The two were then interviewed by Ann Gavin, Paul Gavin,
five FAMM managers, and Lee. At some point during the process, Ann
-4-
Gavin sent Powers an email with Woolford's resume attached
indicating that FAMM was very interested in Woolford and was
probably going to make an offer to him. Ann Gavin claims that
Powers wanted Lee to be involved in the interviewing process so, in
essence, FAMM needed Lee's approval to make the decision, although
Powers claims the bank was not involved at all in the process.
Regardless, the Gavins and the group of FAMM managers who conducted
the interviews concluded that they could work with either
candidate, and Lee preferred Woolford, so Woolford was chosen.
Woolford was hired as FAMM's permanent comptroller, and began
working in March 2002. After Woolford was hired, the bank
instructed FAMM to retain Lee to supervise and train Woolford and
to provide general oversight to FAMM's accounting department.
In the meantime, FAMM's financial condition continued to
deteriorate. As a result of its losses in 2001, FAMM became in
default of certain covenants contained in the Sovereign loan
documents no later than February 2002, when Ann Gavin and Lee met
with Powers to discuss the company's ongoing financial problems.1
The losses continued in the first quarter of 2002. FAMM remained
1
There is some dispute over whether FAMM was already in
default in January 2002, when Lee was hired. Plaintiffs conceded
before the district court that FAMM was in default at all times
after FAMM discovered Lee's mismanagement of its accounts, that is,
from the end of 2002 on; but they maintained there was no covenant
default when Sovereign forced FAMM to hire Lee, that is, in January
2002. This issue is immaterial to our analysis.
-5-
in covenant default in 2002 and 2003.2 Sovereign agreed to waive
the 2001 covenant default in mid-2002; it did not waive the
covenant defaults for 2002 and 2003, although plaintiffs claim the
bank indicated such waivers would be forthcoming.
Lee's and Woolford's management did not help matters.
During 2002, Lee and Woolford failed to reconcile FAMM's general
ledger accounts and grossly overstated job revenues for work in
progress. They had also neglected to reconcile FAMM's monthly bank
statements and failed to pay monthly sales taxes. Lee and Woolford
presented FAMM with inaccurate financial data that showed the
company was turning a profit when in fact it was still losing
money. According to Lee's and Woolford's numbers, the company
expected a $300,000 profit that year; in reality, it lost $1.1
million. FAMM relied on these numbers in making business decisions
over the course of the year. Plaintiffs claim that if the company
had known its true financial conditions, it would have booked
additional projects that were available to it, reduced overhead,
withheld bonuses from employees, and avoided perks such as buying
company cars and giving employees extra vacation days.
According to plaintiffs, FAMM did not become aware of
these irregularities until October 31, 2002, when Lee revealed to
Ann Gavin that he had not reviewed or reconciled certain accounts
2
Plaintiffs claim FAMM remained current on all its loan
payments, but FAMM over-borrowed the funds available on its line of
credit on at least one occasion.
-6-
since he started.3 Shortly thereafter, on November 14, 2002, Lee
resigned. On January 3, 2003, FAMM fired Woolford.
In January 2003, after learning the full extent of these
irregularities, Ann Gavin met with Powers to discuss the situation.
Powers instructed Gavin to hire a bank-approved turnaround
consultant, Joe Picano; Powers stated that if FAMM did so, the
company's account would remain with him and would not be moved to
another department. Nonetheless, in March 2003, FAMM's account
with Sovereign was transferred to John Bowen in the Managed Assets
Division.
In the months that followed the revelation of Lee's and
Woolford's alleged misconduct, Sovereign engaged in a series of
actions that plaintiffs claim seriously exacerbated the situation;
according to plaintiffs, Sovereign's "goal was to close FAMM,
minimize [Sovereign's] exposure and maximize the value of its
credit." This theory about Sovereign's purported motive is not
further explained.
In February 2003, Sovereign terminated automatic sweeps
between FAMM's checking account and its line of credit, without
notifying FAMM; this caused the account to be overdrawn. After the
automatic sweeps were stopped, FAMM had to manually manage its
account; however, it was unable for some reason to view its account
3
The record does show that Ann Gavin was aware of the non-
payment of sales taxes as early as August 2002.
-7-
online, and thus could not determine which of its checks had
cleared on a daily basis. Plaintiffs claim that Sovereign also
mishandled FAMM's general disbursement account, causing at least
one check to bounce, and that it failed to reproduce in a timely
manner certain bank statements and checks from 2002 that FAMM had
requested. Sovereign did not respond to inquiries from FAMM's
suppliers, subcontractors, and other third parties. It also failed
to enter into a forbearance agreement with FAMM and did not respond
to various workout or refinancing proposals.
Plaintiffs claim Sovereign committed to issuing a
forbearance agreement and to extending FAMM's line of credit if
FAMM paid down the line. Nonetheless, no forbearance agreement was
issued, and Sovereign terminated FAMM's line of credit on May 31,
2003. In March 2004, Sovereign sold FAMM's loans to a third party
for $1.725 million; after the sale, FAMM's facility was shut down
and its assets were liquidated. Sovereign lost over $4 million.
FAMM, Austin, Ann Gavin, and Paul Gavin brought suit
against Sovereign on December 29, 2006. The complaint raised
twelve claims against the bank: breach of contract (count I);
breach of implied covenant of good faith and fair dealing (counts
II, III, and IV); breach of fiduciary duty (counts V and VI);
aiding and abetting a breach of fiduciary duty (count VII);
liability under an instrumentality theory (count VIII); fraud
(count IX); duress (count X); interference with advantageous
-8-
business relations (count XI); and violation of chapter 93A of the
Massachusetts General Laws (count XII). On November 9, 2007, after
discovery was completed, the Gavins agreed to voluntarily dismiss
their claims against Sovereign, but FAMM's and Austin's claims
remained. Sovereign filed a motion for summary judgment against
the remaining plaintiffs on November 16, 2007.
The district court granted summary judgment to Sovereign
on all claims on June 30, 2008. It found that the level of control
necessary for liability under an instrumentality theory did not
arise in this case. Gavin, 2008 WL 2622839, at *3-5. It rejected
the covenant of good faith and fair dealings claims, which
plaintiffs based on nine separate events. The court found that
seven of these alleged events, even if true, did not involve
dishonesty or an attempt by the bank to injure FAMM purposefully.
See id. at *5-6. As for the other two events -- the allegations
that Sovereign promised and failed to issue a forbearance agreement
and that it similarly promised and failed to extend FAMM's line of
credit if FAMM paid down the line -- the court found plaintiffs had
not provided sufficient support, so there was no genuine issue of
material fact. See id. at *6. The court held that no fiduciary
relationship arose in this case and added that "[a] finding to the
contrary would transform all lenders who exercise oversight of
their financially distressed borrowers into fiduciaries." Id. at
*7. The court rejected the interference with advantageous business
-9-
relations claim on the grounds that, even if Sovereign knew its
actions would prevent FAMM from pursuing certain business
opportunities, there is nothing to suggest its actions were
improper in motive or means. See id. at *7-8. It found there was
no evidence that Sovereign knowingly made misrepresentations or
that it was the constructive author of any false statements
allegedly made by Lee; it also found the circumstances in this case
did not rise to the level of economic duress. See id. at *8.
Finally, the court found that because plaintiffs' common law claims
failed, their claim under Mass. Gen. Laws ch. 93A was necessarily
foreclosed. Id. at *9.
Plaintiffs timely appealed.
II.
Because we affirm the grant of summary judgment on the
merits, we do not resolve whether plaintiffs' tort claims were
barred by Massachusetts's three-year statute of limitations, Mass.
Gen. Laws ch. 260, § 2A.
A. Covenant of Good Faith and Fair Dealing
Plaintiffs claimed in counts I through IV of the
complaint that Sovereign was liable for breach of the state law
implied covenant of good faith and fair dealing.4 Under
4
Count II alleged breach of the implied covenant, and
counts III and IV alleged the same but as a violation of the
Massachusetts Uniform Commercial Code and as a tort respectively.
Count I alleged a breach of contract, but this claim is also based
solely on the same alleged breach of the implied covenant of good
-10-
Massachusetts law, every contract is subject to an implied covenant
of good faith and fair dealing; the purpose of the implied covenant
is to "ensure that neither party interferes with the ability of the
other to enjoy the fruits of the contract" and that "when
performing the obligations of the contract, the parties 'remain
faithful to the intended and agreed expectations' of the contract."
Chokel v. Genzyme Corp., 867 N.E.2d 325, 329 (Mass. 2007) (quoting
Uno Rests., Inc. v. Boston Kenmore Realty Corp., 805 N.E.2d 957,
964 (Mass. 2004)). "[T]he scope of the covenant is only as broad
as the contract that governs the particular relationship." Id.
(quoting Ayash v. Dana-Farber Cancer Inst., 822 N.E.2d 667, 684
(Mass. 2005)) (internal quotation marks omitted). "The covenant
does not supply terms that the parties were free to negotiate, but
did not, nor does it 'create rights and duties not otherwise
provided' for in the contract." Id. (citation omitted) (quoting
Ayash, 822 N.E.2d at 684). In the lender-borrower context, the
implied covenant "would require that the bank be honest in its
dealings with [plaintiffs] and that it not purposefully injure
[their] right to obtain the benefit of the contract." Shawmut
Bank, N.A. v. Wayman, 606 N.E.2d 925, 928 (Mass. App. Ct. 1993);
accord In re Greenberg, 212 B.R. 422, 429 (Bankr. D. Mass. 1997);
Ferris v. Fed. Home Loan Mortgage Corp., 905 F. Supp. 23, 28 (D.
Mass. 1995).
faith and fair dealing.
-11-
Before the district court, plaintiffs based their breach
of implied covenant claim on nine actions taken by Sovereign in the
period after FAMM discovered Lee's mismanagement. These actions
were: (1) terminating in February 2003 the automatic cash sweeps;
(2) failing thereafter to allow FAMM to manage its account online,
thus making it impossible for FAMM to verify on a daily basis which
of its checks had cleared; (3) mishandling FAMM's account and
causing at least one check to bounce; (4) refusing to answer third
party phone calls or inquiries from FAMM's subcontractors,
suppliers, tax collection agencies, and others; (5) failing to
respond to restructuring proposals or offers to purchase; (6)
failing to respond in a timely manner to FAMM's requests for copies
of certain checks and bank statements; (7) failing to waive the
2002 and 2003 covenant defaults; (8) failing to issue a forbearance
agreement despite promises to do so; and (9) failing to extend
FAMM's line of credit despite saying it would do so if FAMM paid
down the line.
As to the first seven allegations, the district court
found that even if true, none of these actions involved dishonesty
and that plaintiffs failed to show that any were purposefully done
to injure FAMM. Gavin, 2008 WL 2622839, at *6. We agree with the
district court's conclusion, and plaintiffs make no attempt to
explain how it was erroneous. Moreover, both before the district
court and on appeal, plaintiffs pointed to no provision in the loan
-12-
agreements that obligated Sovereign to take actions such as
continuing the automatic sweeps, providing the desired online
access, engaging in workout negotiations, or answering third party
questions; certainly there is no evidence the loan agreements
required Sovereign to waive the 2002 or 2003 covenant defaults
(although it could have chosen to do so as it eventually did for
the 2001 default).
Moreover, it is important that at the time all these
events occurred, FAMM was in covenant default. See F.D.I.C. v.
LeBlanc, 85 F.3d 815, 822 (1st Cir. 1996) (finding, under
Massachusetts, law no breach of the implied covenant in a bank's
"hard-nosed" dealings with a borrower where it was undisputed that
the bank did not take any of the adverse actions before the
borrower defaulted). When the borrower is in default, that
necessarily alters the contours of the covenant of good faith and
fair dealing.
As to the final two allegations, the district court found
there was insufficient evidence to support the allegation that
Sovereign misled FAMM by promising to issue a forbearance agreement
and further promising to extend FAMM's line of credit if FAMM paid
down the line. Gavin, 2008 WL 2622839, at *6. We agree. In their
opposition to summary judgment, plaintiffs presented the following
-13-
evidence in support of their claims.5 First, Ann Gavin testified
that "we were told we would have a forbearance agreement by the end
of March [2003], then the end of April, then the end of May, then
the end of June," and that when this did not happen, FAMM decided
to try to engage in workout negotiations. Moreover, she stated,
"we had been told that the line was going to be extended, and
[Bowen] asked us to make some paydowns based on that, which we
did." Second, FAMM's turnaround consultant, Picano, testified that
through August 2003, "no terms of any formal forbearance agreement
had been negotiated." Third, plaintiffs point to a letter Ann
Gavin sent to Bowen after the line was not extended that said: "My
line was shut off in May 2003 -- after you advised Joe Picano and
I that it would be extended. (I made a paydown based on your
commitment.)"
On the other hand, Ann Gavin also admitted that "no
specific discussion of terms" had ever occurred with regards to a
potential forbearance agreement, and that Bowen merely "told me
that he would get it to us." Moreover, in response to the contents
of Gavin's letter to Bowen, Picano testified that he did not
remember Bowen ever "advising us that the line was going to be
5
In their brief on appeal, plaintiffs point to nothing in
the record in support of this claim, but simply assert that "it is
undisputed that Sovereign manipulated FAMM into its using funds to
pay the line of credit down by promising that it would issue an
extension and forbearance agreement." This unsupported assertion
is contrary to the requirements of Fed. R. App. P. 28(a)(9)(A).
-14-
extended," and that he was not surprised when he learned the line
of credit was not going to be extended.
Even taken in the light most favorable to the plaintiffs,
this evidence cannot reasonably support the conclusion that
Sovereign misled FAMM or attempted purposefully to injure it. FAMM
and Sovereign were engaged in negotiations that never yielded an
agreement; in fact, these negotiations never even reached the stage
of discussing specific terms. This does not constitute any breach
of the implied covenant of good faith and fair dealing.
For the first time on appeal, plaintiffs assert that
Sovereign's forcing FAMM to hire Lee, in and of itself, was a
breach of the implied covenant; they claim Powers misrepresented
that he had the authority to demand that FAMM hire Lee. This
argument is waived. Even if it were not, it fails. There is no
evidence that Sovereign acted dishonestly or purposefully to injure
FAMM by insisting that it hire Lee. There is no evidence that
Sovereign or Powers had any indication that Lee would not perform
his job adequately.
Plaintiffs also raise new arguments based on Illinois
law, under which they assert that the implied covenant requires a
bank to exercise its discretion reasonably, see BA Mortgage & Int'l
Realty Corp. v. Am. Nat'l Bank & Trust Co. of Chi., 706 F. Supp.
1364, 1373 (N.D. Ill. 1989). These arguments are also waived, and
regardless, plaintiffs point to no case law suggesting that this
-15-
reading of the implied covenant of good faith and fair dealing is
accepted under Massachusetts law, or to any evidence demonstrating
that Sovereign exercised its discretion in an unreasonable manner.
B. Fiduciary Duty
Plaintiffs claimed in counts V and VI that Sovereign was
liable for breach of fiduciary duty. As plaintiffs wisely concede,
under Massachusetts law, the relationship between a lender and a
borrower, without more, does not establish a fiduciary
relationship. See, e.g., Superior Glass Co. v. First Bristol
County Nat'l Bank, 406 N.E.2d 672, 674 (Mass. 1980); see also In re
Greenberg, 212 B.R. at 428 (collecting cases); 1 Lender Liability:
Law, Practice and Prevention § 5.1 (2009). A fiduciary
relationship may arise in this context where the borrower reposes
its trust and confidence in the lender and the lender knows of and
accepts the borrower's trust. See Superior Glass, 406 N.E.2d at
674; Broomfield v. Kosow, 212 N.E.2d 556, 560 (Mass. 1965) ("[T]he
plaintiff alone, by reposing trust and confidence in the defendant,
cannot thereby transform a business relationship into one which is
fiduciary in nature. The catalyst in such a change is the
defendant's knowledge of the plaintiff's reliance upon him.");
Warsofsky v. Sherman, 93 N.E.2d 612, 615 (Mass. 1950); Blais v.
Warren Five Cents Sav. Bank, 1993 Mass. App. Div. 213 (Mass. Dist
Ct. 1993); see also Pimental v. Wachovia Mortgage Corp., 411 F.
-16-
Supp. 2d 32, 40 (D. Mass. 2006); In re Greenberg, 212 B.R. at 428-
29; 1 Lender Liability: Law, Practice and Prevention, supra, § 5.1.
No fiduciary relationship arose in this case; FAMM's
relationship with Sovereign was an arms-length, lender-borrower
business relationship, not one of trust and confidence. Even if
FAMM had reposed its trust in Sovereign, plaintiffs provided no
evidence that Sovereign was aware of or accepted this trust, a
necessary condition for finding a fiduciary relationship. See
Warsofsky, 93 N.E.2d at 614-16 (finding that where defendant, a
member of the security committee of a cooperative bank, acting
solely in his capacity as an official of the bank, was given
confidential information by plaintiff, an individual seeking to
secure a loan from the bank, and defendant "understood that the
information was given to him in confidence as a director and member
of the security committee of the cooperative bank, and he received
the information in that capacity and solely for the purpose of
enabling himself and other officials of the bank to determine
whether the security warranted the granting of the loan," the
defendant bank officer had "a fiduciary relation toward the
plaintiff with reference to the matters disclosed" and could not
use the information for his personal gain as against either the
plaintiff or the bank); see also Patsos v. First Albany Corp., 741
N.E.2d 841, 851-52 (Mass. 2001) (finding that a jury could
reasonably conclude a fiduciary relationship existed between a
-17-
broker and his customer where the customer lacked sophistication
and experience as an investor, the broker was aware of this
inexperience and encouraged the customer to rely on his expertise
by promising financial benefits, favorable margin treatment, and
private stock sales, the broker told the customer he was conducting
transactions solely for the customer's benefit, the broker was in
complete control of the account and executed transactions without
the prior authorization of the customer, and the broker, when
questioned by the customer, told the him that he need not worry
about his inability to understand the monthly statements or the
terms of the customer agreement). Moreover, the record is that
FAMM did not repose its trust in Sovereign. To the contrary, FAMM
alleges it resisted Powers's recommendation that it hire Lee, and
that it only hired Lee because it was forced to do so, over its
objection.
Plaintiffs argue, in the alternative, that a fiduciary
relationship arose in this case because Sovereign exerted control
over FAMM.6 Massachusetts courts have recognized that, under
certain circumstances, a lender may actively participate in or
exercise control over the business of a borrower to such an extent
that a fiduciary relationship arises. See Shawmut, 606 N.E.2d at
6
Defendant incorrectly argues that plaintiffs waived this
argument by failing to raise it before the district court.
Plaintiffs argued that a fiduciary relationship existed because
Sovereign exerted control over FAMM in their motion in opposition
to summary judgment.
-18-
928; Levesque v. Ojala, No. 20034485, 2005 WL 3721859, at *22-23
(Mass. Super. Ct. Dec. 8, 2005); see also In re Fordham, 130 B.R.
632, 648-49 (Bankr. D. Mass. 1991); 1 Lender Liability: Law,
Practice and Prevention, supra, §§ 5.1, 5.7. Massachusetts courts
have not defined what level of control is sufficient to give rise
to a fiduciary duty under this theory, but have held that
involvement in the debtor's affairs that is not unusual in the
context of a commercial loan is clearly insufficient. Shawmut, 606
N.E.2d at 928 (holding that a bank's "right to receive regular
financial reports and monitor [the debtor's] performance, and even
to limit salaries paid . . . , was not at all unusual in the
context of a commercial loan and [did] not create a fiduciary
relationship"); see also In re Fordham, 130 B.R. at 649 (holding
that a lender's "meeting with consulting engineers, reviewing and
approving construction plans, approving the construction manager,
and reviewing requisitions" was insufficient control to give rise
to a fiduciary duty). In general, "[c]ontrol does not arise unless
the plaintiff can show that the creditor has obtained the power to
direct the day-to-day management of the debtor." 1 Lender
Liability: Law, Practice and Prevention, supra, § 5.8; see also id.
§ 5.7 ("[A] lender may offer advice and use the leverage which its
position gives it vis-a-vis the debtor, without being viewed as
controlling the debtor, so long as the debtor continues to operate,
-19-
and the management of the debtor continues to make its own business
decisions.").
Plaintiffs have not produced facts permitting the
conclusion that Sovereign exerted a level of control over FAMM that
was unusual in the commercial context or that Sovereign was able to
direct FAMM's day-to-day affairs. Even if Sovereign required that
FAMM hire Lee, there is no evidence that Lee acted under
Sovereign's directions. More importantly, Ann and Paul Gavin
remained the President and Vice President of the company, and
plaintiffs do not allege the Gavins did not have final say over the
company's decisions. Beyond this, FAMM hired a permanent
comptroller, Woolford, in March 2002; Lee was to train and oversee
Woolford, and there is no evidence Woolford's decisions were
dictated by Lee or Sovereign. Thus, plaintiffs have not shown
Sovereign controlled FAMM to such an extent that a fiduciary
relationship was created.
Plaintiffs further claim Sovereign aided and abetted a
breach of fiduciary duty on the part of Lee by directing Lee to
suspend FAMM's monthly financial reports, and thus that the
district court erred in granting summary judgment as to count VII
of their complaint. The record shows that after he was hired, Lee
asked Powers for permission not to turn in FAMM's monthly financial
statements until the permanent comptroller was hired, that Powers
agreed, and that by April 2002, just three months later, FAMM
-20-
resumed regular reporting and also submitted the previous months'
reports. Plaintiffs' perfunctory argument does not explain how
this action constituted a breach of fiduciary duty by Lee, much
less one which Sovereign aided and abetted.
C. Instrumentality Theory of Lender Liability
Count VIII of plaintiffs' complaint alleged that
Sovereign was liable on the basis of an instrumentality theory.
Where the theory is recognized, a lender may be held liable under
the common-law instrumentality theory when the lender exerts such
a degree of control over the borrower that the borrower becomes a
mere business conduit for the lender. Krivo Indus. Supply Co. v.
Nat'l Distillers & Chem. Corp., 483 F.2d 1098, 1102-07 (5th Cir.
1973), reh'g denied 490 F.2d 916 (5th Cir. 1974); see also Schwan's
Sales Enters., Inc. v. Commerce Bank & Trust Co., 397 F. Supp. 2d
189, 194 (D. Mass. 2005); F.C. Imports, Inc. v. First Nat'l Bank of
Boston, N.A., 816 F. Supp. 78, 91-92 (D.P.R. 1993); 1 Lender
Liability Law and Litigation § 1.03[4][a] (2009); Lender Liability
and Banking Litigation § 6.02 (2009). At least one Massachusetts
trial court decision has suggested that under certain circumstances
creditors may be held liable under the instrumentality theory. See
Healy v. McGhan Med. Corp., No. CA975320, 2001 WL 717110, at *6
(Mass. Super. Ct. Mar. 29, 2001) (citing F.C. Imports, 816 F. Supp.
at 91-92); see also Schwan's Sales, 397 F. Supp. 2d at 194
(applying the instrumentality theory in a case governed by
-21-
Massachusetts law and citing Healy). But neither the Supreme
Judicial Court nor the Appeals Court, as best we can determine, has
ever adopted the theory.
Even if Massachusetts were to be hospitable to the
instrumentality theory, as utilized in some other states, the
theory would not apply here. First, plaintiffs suggest a radical
alteration to the theory. The instrumentality theory is akin to
the piercing of the corporate veil doctrine, and has generally been
used by third party creditors seeking to hold a lender liable for
the debts of the borrower. See Krivo, 483 F.2d at 1102 (noting, in
a suit brought by third party creditors to recover from another
creditor on the debts of the borrower, that "[o]ne of the most
difficult applications of the rule permitting the corporate form to
be disregarded arises when one corporation is sought to be held
liable for the debts of another corporation . . . [on the grounds
that] it [has] misuse[d] that corporation by treating it, and by
using it, as a mere business conduit for the purposes of the
dominant corporation."); see also F.C. Imports, 816 F. Supp. at 91-
92 (discussing instrumentality theory in suit brought by wholesale
supplier against bank from which a retail seller had borrowed to
recover from the bank on debts owed by the seller to the supplier);
Healy, 2001 WL 717110, at *6 (discussing instrumentality theory in
the context of an attempt by a third party to recover from a
creditor on the basis of debtor's actions). Here, plaintiffs are
-22-
debtors seeking to use the instrumentality theory to recover
damages from their own creditor. They were not in the least misled
as to who their creditor was. Plaintiffs point to no cases that
recognize this novel application of the instrumentality theory, and
there is no indication that such an application would be accepted
by the Massachusetts courts.
Further, the district court correctly found that, even
under the usual theory, the facts alleged by plaintiffs cannot
support the conclusion that Sovereign exercised sufficient control
over FAMM to give rise to liability. Of course, the mere existence
of a creditor-debtor relationship does not by itself give rise to
the level of control necessary for liability under the
instrumentality theory; if it were otherwise, lenders would
rightfully be reluctant to extend credit. Krivo, 483 F.2d at 1104;
accord F.C. Imports, 816 F. Supp. at 91; Healy, 2001 WL 717110, at
*6. Indeed, even when the creditor "tak[es] an active part in the
management of the debtor corporation," this is not by itself
sufficient. Krivo, 483 F.2d at 1105; see also Chi. Mill & Lumber
Co. v. Boatmen's Bank, 234 F. 41, 43-44, 46 (8th Cir. 1916)
(finding insufficient control in a case in which a lending bank
arranged for its employee to become president of the debtor company
in order to protect the bank's interests).
To establish liability under the instrumentality theory,
courts have required "a strong showing that the creditor assumed
-23-
actual, participatory, total control of the debtor"; the facts must
"unmistakably show[] that the subservient corporation was being
used to further the purposes of the dominant corporation and that
the subservient corporation in reality had no separate, independent
existence of its own." Krivo, 483 F.2d at 1105; see also Schwan's
Sales, 397 F. Supp. 2d at 195; 1 Lender Liability Law and
Litigation, supra, § 1.03[4][a] ("[T]he creditor's control and
dominance over the borrower [must be] so substantial as to indicate
that the effective control of the borrower's operations and affairs
rests with the creditor."); Lender Liability and Banking
Litigation, supra, § 6.02[3][b][i] ("[A] bank may properly share
control of, or oversee, a debtor's business so long as it does not
totally dominate the debtor's affairs.").
Here, plaintiffs have failed to make such a showing.
Although Powers and Lee interacted, there is no evidence that
Sovereign directed Lee's actions, or that, even if it did,
Sovereign had assumed actual, participatory, total control over
FAMM's affairs. Indeed, such an inference seems implausible in
light of the losses the bank suffered as a result of Lee's actions.
Moreover, Ann and Paul Gavin continued to serve as President and
Vice President of the company throughout this period, and FAMM had
a permanent comptroller starting in March 2002.
The district court did not err in granting summary
judgment as to plaintiffs' instrumentality theory claim.
-24-
D. Fraud
Plaintiffs further claimed, in count IX of the complaint,
that Sovereign is liable on the basis of fraud. Under
Massachusetts law, plaintiffs were required to show that: (1)
defendant made a false representation with knowledge of its falsity
for the purpose of inducing plaintiffs to act thereon; (2) that
plaintiffs relied upon the representation as true and acted upon it
to their detriment; and (3) that plaintiffs' reliance was
reasonable under the circumstances. Rodi v. S. New Eng. Sch. of
Law, 532 F.3d 11, 15 (1st Cir. 2008).
Before the district court, plaintiffs based their claim
in part on a number of allegedly false representations made by Lee
on which FAMM allegedly relied to its detriment. The district
court rejected this argument, noting that plaintiffs brought the
suit against Sovereign, not against Lee, and that there is no basis
for holding Sovereign liable as the constructive author of any
false statements that Lee allegedly made. Gavin, 2008 WL 2622839,
at *8. We agree with the district court's conclusion, and
plaintiffs do not challenge it.
Plaintiffs also based their fraud claim on Sovereign's
conduct in forcing FAMM to hire Lee. They claim Powers falsely
represented that it was the bank's prerogative to have FAMM hire
someone the bank was comfortable with as the temporary comptroller.
However, plaintiffs point to nothing in the loan agreements to show
-25-
Powers's statement was false. Plaintiffs also claim Sovereign
falsely represented Lee's competency, but as the district court
noted, there is no evidence in the record that Sovereign knew Lee
was not qualified or competent.
Plaintiffs argue for the first time on appeal that
Sovereign committed fraud by saying it would issue a forbearance
agreement and extend FAMM's line of credit if FAMM paid down the
line. This argument is waived, and in any case, for the reasons
discussed in section II.A, supra, the evidence is not sufficient on
this point to support the conclusion that Sovereign knowingly made
any false statements for the purpose of inducing FAMM to act.
E. Duress
Summary judgment was also properly granted as to
plaintiffs' duress claim, which was count X of the complaint. An
economic duress claim requires plaintiffs to establish: "(1) that
one side involuntarily accepted the terms of another; (2) that
circumstances permitted no other alternative; and (3) that said
circumstances were the result of coercive acts of the opposite
party.” Int'l Underwater Contractors, Inc. v. New Eng. Tel. & Tel.
Co., 393 N.E.2d 968, 970 (Mass. App. Ct. 1979) (quoting Urban
Plumbing & Heating Co. v. United States, 408 F.2d 382, 389 (Ct. Cl.
1969)) (internal quotation marks omitted).
Plaintiffs alleged that FAMM hired Lee under duress
because Sovereign threatened to call in its loans if FAMM refused
-26-
to do so and that FAMM had no alternatives as a result of the
bank's demands; thus, plaintiffs argue, Sovereign is liable for the
damages later caused by the person it forced FAMM to hire. Duress
is generally used as an affirmative defense, see 17 Massachusetts
Practice § 2.49 (2008), and it is unclear whether Massachusetts
courts would recognize duress as a tort on which plaintiffs could
recover damages, see Leventhal v. Dockser, 282 N.E.2d 680, 681
(Mass. 1972); see also Augat, Inc. v. Collier, No. 92-12165, 1996
WL 110076, at *35 (D. Mass. Feb. 8, 1996); State Nat'l Bank of El
Paso v. Farah Mfg. Co., 678 S.W.2d 661, 683 (Tex. App. 1984), writ
dismissed by agreement. Plaintiffs offer no cases that show their
use of duress is proper under Massachusetts law.
Even assuming this is a proper cause of action under
Massachusetts law, plaintiffs cannot sustain a claim of duress.
Plaintiffs have pointed to nothing in the record to show that any
action by the bank to pressure FAMM to hire Lee would have been
inappropriate under the loan agreements. If FAMM was placed in a
situation in which it had no choice but to hire Lee, this resulted
only from a contractual business arrangement into which FAMM freely
entered, and not from any coercive acts on the part of Sovereign.
See Int'l Underwater Contractors, 393 N.E.2d at 972.7
7
We need not address the district court's conclusion that
FAMM did not hire Lee under duress because it was in covenant
default at the time.
-27-
F. Interference with Advantageous Business Relations
The district court also properly granted summary judgment
on count XI, in which plaintiffs claimed Sovereign tortiously
interfered with advantageous business relations by: preventing FAMM
from hiring a temporary comptroller from its CPA's firm; failing to
respond timely to buy-out proposals and other refinancing options;
and preventing FAMM from pursuing certain third-party contracts by
refusing to grant FAMM a forbearance or extension after FAMM paid
down part of its outstanding debt. Under Massachusetts law,
plaintiffs were required to show that: "(1) [they] had an
advantageous relationship with a third party . . . ; (2) the
defendant knowingly induced a breaking of the relationship; (3) the
defendant's interference with the relationship, in addition to
being intentional, was improper in motive or means; and (4) the
plaintiff[s] [were] harmed by the defendant's actions." Blackstone
v. Cashman, 860 N.E.2d 7, 12-13 (Mass. 2007).
Even assuming Sovereign by its actions knowingly
interfered with FAMM's advantageous business relations, we agree
with the district court that there is no evidence Sovereign's
actions were improper in motive or means. Plaintiffs alleged
Sovereign was motivated by a desire to "close FAMM, minimize
[Sovereign's] exposure and maximize the value of its credit." But
the record does not establish that Sovereign acted out of any
purpose beyond the "legitimate advancement of its own economic
-28-
interest, [and] that motive is not 'improper' for purposes of
tortious interference."8 Pembroke Country Club, Inc. v. Regency
Sav. Bank, F.S.B., 815 N.E.2d 241, 245-46 (Mass. App. Ct. 2004).
FAMM was in serious financial trouble and was in covenant default
at least as early as February 2002, and Sovereign was attempting to
protect its financial interest. Nor did Sovereign employ improper
means to this end; it was not obligated to grant a forbearance or
an extension or to engage in workout negotiations, and its actions
were permissible under the loan agreements. See id. at 246-47.
That Sovereign's decisions may have proven ill-advised, and
ultimately contributed to significant losses for both FAMM and
Sovereign, does not make Sovereign's actions tortious.
G. Chapter 93A
The final count of plaintiffs' complaint alleged that
Sovereign violated chapter 93A of the Massachusetts General Laws,
which forbids "unfair or deceptive acts or practices in the conduct
of any trade or commerce." Mass. Gen. Laws ch. 93A, § 2(a). A
chapter 93A claim "requires a showing of conduct that (1) falls
within 'the penumbra of some common-law, statutory, or other
established concept of unfairness'; (2) is 'immoral, unethical,
oppressive, or unscrupulous'; and (3) causes 'substantial injury to
8
Plaintiffs also argued for the first time on appeal that
Powers was motivated by personal reasons -- seeking to return a
favor -- in trying to get FAMM to hire Lee. This argument is
waived and in any case finds no support in the record.
-29-
[consumers or other businesspersons].'" Jatsy v. Wright Med.
Tech., Inc., 528 F.3d 28, 37 (1st Cir. 2008) (alteration in
original) (quoting Serpa Corp. v. McWane, Inc., 199 F.3d 6, 15 (1st
Cir. 1999)); accord Heller Fin. v. Ins. Co. of N. Am., 573 N.E.2d
8, 12-13 (Mass. 1991); see also Ahern v. Scholz, 85 F.3d 774, 798
(1st Cir. 1996). Plaintiffs' chapter 93A claim is based wholly on
its common-law claims. Because these underlying claims fail, it is
clear that plaintiffs have not shown the conduct complained of fell
within any common-law, statutory, or other established concept of
unfairness; thus, summary judgment was properly granted as to the
chapter 93A claim. Pembroke Country Club, 815 N.E.2d at 247; see
also Lily Transp. Corp. v. Royal Institutional Servs., Inc., 832
N.E.2d 666, 686 (Mass. App. Ct. 2005) (Laurence, J., concurring in
part and dissenting in part) (collecting cases).
III.
The judgment of the district court is affirmed.
Defendant's March 30, 2009 motion for sanctions under Fed. R. App.
P. 38, which argued that plaintiffs' appeal was frivolous, is
denied. So ordered.
-30-