FAMM Steel, Inc. v. Sovereign Bank

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-