Beal v. Krock

• Court: Court of Appeals for the First Circuit
• Decided: September 3, 1998
• Docket: 97-2241
• Status: Unpublished

Opinion

[NOT FOR PUBLICATION--NOT TO BE CITED AS PRECEDENT] United States Court of Appeals For the First Circuit

No. 97-2241

BEAL BANK S.S.B. F/K/A BEAL BANC S.A.,

Plaintiff, Appellant,

v.

RICHARD H. KROCK,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Edward F. Harrington, U.S. District Judge]

Before

Lynch, Circuit Judge,

Campbell and Bownes, Senior Circuit Judges.

David D. Pavek, with whom James R. Everson, Messner, Pavek & Reeves, LLC., William V. Sopp, John F. Tocci, and Finnegan, Hickey, Dinsmoor & Johnson, P.C., were on brief for appellant. Alan M. Spiro, with whom Edwards & Angell were on brief for appellee.

September 3, 1998

BOWNES, Senior Circuit Judge. In this debt collection case, the plaintiff, Beal Bank S.S.B. ("Beal Bank"), seeks to collect on a note that was part of a written settlement agreement containing a clause that precluded oral modifications. The debtor, Richard H. Krock, interposes what he claims was a subsequent oral modification of the contract. The district court, after trial, found that the oral modification was in fact agreed upon and was an enforceable contract under Massachusetts law. The court concluded therefore that the debtor was not liable to the bank. Holding that the district court's findings of fact were not clearly erroneous, and applying the law of Massachusetts in this diversity action, we affirm the court's conclusion that the oral modification was enforceable. We remand nevertheless for recalculation of the amount owed. Facts In 1991, Pier 37 Associates Limited Partnership ("Pier 37") executed a promissory note in the amount of $3.6 million to First Mutual Bank for Savings. This note was secured in part by a mortgage on a marina located in Falmouth, Massachusetts. In addition, defendant Richard H. Krock, who was a general partner of Pier 37, gave a personal guarantee of the note, limited to $1,600,000. When First Mutual Bank became insolvent, the Federal Deposit Insurance Corporation ("FDIC") took over its assets. The FDIC sued Pier 37, Krock, and others, to collect on the note. While the case was pending, the FDIC assigned its interest in the note to BSB Mortgage, Inc. ("BSB"), an affiliate of Beal Bank, for approximately $1,000,000. In turn, BSB assigned its interest to Beal Bank. In 1993, Beal Bank foreclosed on the property. The parties to the litigation, after substantial negotiations, entered into a settlement agreement whereby Krock paid Beal Bank $150,000 in cash and executed a $350,000 promissory note, payable over ten years in annual installments. The agreement contained a clause stating that it was complete and integrated, and that no subsequent modifications could be made to the agreement except in writing. Krock testified that he negotiated an oral side agreement in which Beal Bank would, if the property sold for over $900,000, reduce Krock's debt by two-thirds of the amount by which the sale price exceeded $900,000. Krock first discussed this side agreement with Will Balthrope, then a vice president of Beal Bank, prior to the execution of the settlement agreement. Krock testified that Balthrope once again agreed to the offset plan after execution but before Beal Bank sold the marina in 1995 for $1,505,000. The excess of the sale price over $900,000 was $605,000, so, under Krock's interpretation of the side agreement, his obligation would be reduced by two-thirds of that, or $403,333. Because this reduction exceeds the face amount of Krock's note to Beal Bank, Krock asserts he owes Beal Bank nothing. The district court, after a bench trial, ruled that the side agreement did exist, implicitly found it valid under Massachusetts law, and applied the agreement to reduce Krock's debt to zero. The court's decision turned on its finding that Krock was entirely credible in his testimony regarding the side agreement. The court also noted that Balthrope, who was the only other person besides Krock with personal knowledge of whether or not there was a subsequent oral modification, and who therefore could have supported the Bank's position that Krock's oral agreement claim was untrue, was inexplicably not called to the stand nor was his testimony preserved, although he had been a bank employee up until two months before trial. Beal Bank appealed the district court's decision. Discussion Two issues control the outcome of this case. One is factual: was there a side agreement made between Krock and Balthrope, and was it made after the execution of the written settlement agreement? The unrebutted testimony of Krock, accepted as credible by the district court, plays a major role in answering this question. The second issue is legal: even if Krock's testimony is taken as 100% true as to the existence and timing of the side agreement, would such an oral side agreement be enforceable under Massachusetts law to modify the terms of the written and completely integrated settlement agreement? We begin our analysis with the pertinent Massachusetts law. We have previously summarized the relevant aspects of Massachusetts contract law as follows: Evidence of prior or contemporaneous oral agreements cannot be admitted to vary or modify the terms of an unambiguous written contract. New England Fin. Resources, Inc. v. Coulouras, 566 N.E.2d 1136, 1139 (Mass. App. Ct. 1991) (parol evidence rule precludes use of oral evidence to modify integrated agreement); Aerostatic Eng'g Corp. v. Szczawinski, 294 N.E.2d 521, 522 (Mass. App. Ct. 1973) (oral agreement cannot modify payment terms unambiguously expressed in written contract). Instead, "parties are bound by the plain terms of their contract." Hiller v. Submarine Signal Co., 91 N.E.2d 667, 669 (1950) (restrictive agreement between industrial park developer and park tenant interpreted according to meaning of unambiguous written agreement).

Fairfield 274-278 Clarendon Trust v. Dwek, 970 F.2d 990, 993-94 (1st Cir. 1992). Thus, if Krock's side agreement with Balthrope was made before the execution of the written settlement agreement, then the written agreement supersedes it and the side agreement is barred by the parol evidence rule. See id. In the present case, Beal Bank devoted a great deal of its opening brief to its assertion that the parol evidence rule bars testimony about an oral modification made prior to the execution of the settlement agreement. Yet at trial the district court sustained each and every objection that was properly made under the parol evidence rule. Krock's brief pointed this out, and made clear that Krock was not relying on the pre-execution negotiations to modify the written instrument. Rather, he rested his defense on the contention that he and Balthrope agreed to a subsequent modification of the settlement agreement. Under Massachusetts law, if a subsequent agreement is made, after the execution of a written contract, it may be enforceable. See New England Factors v. Genstil, 76 N.E.2d 151, 154 (Mass. 1947) (holding that the parol evidence rule does not apply "where the terms of a written agreement have been modified by subsequent oral agreement"). As a leading authority has put it: Because the parol evidence rule applies only to precontractual negotiations, it does not bar evidence of subsequent negotiations to show modification of the contract. Even a completely integrated agreement can therefore be modified or rescinded orally.

E. Allan Farnsworth, Contracts 7.6 (2d ed. 1990). Thus, "[t]he parol evidence rule has no application to the situation . . . where it could be found that a new oral contract was entered into between the parties which superseded the original contract." L.W. Severance & Sons, Inc. v. Angley, 125 N.E.2d 415, 420 (Mass. 1955). Even a fully integrated contract i.e., a written contract containing a clause stating that subsequent modifications must be in writing may, under appropriate circumstances and with appropriate proof, be modified by a subsequent oral agreement. SeeCambridgeport Sav. Bank v. Boersner, 597 N.E.2d 1017, 1022 (Mass. 1992) ("[A] provision that an agreement may not be amended orally but only by a written instrument does not necessarily bar oral modification of the contract."); cf. Farnsworth, supra, 7.6 ("Can the parties, by inserting a no-oral-modification clause, effectively permit only written modifications? The common-law answer has been that they cannot."); Wagner v. Graziano Const. Co., 136 A.2d 82, 83 (Pa. 1957) ("The most ironclad written contract can always be cut into by the acetylene torch of parol modification supported by adequate proof. . . . The hand that pens a writing may not gag the mouths of the assenting parties."). Massachusetts does, however, impose a heavy burden on the party seeking to modify an integrated written contract by a subsequent oral agreement: "The evidence of a subsequent oral modification must be of sufficient force to overcome the presumption that the integrated and complete agreement, which requires written consent to modification, expresses the intent of the parties," at least as of that time, that the written agreement rather than any alleged subsequent oral modification should govern. Boersner, 597 N.E.2d at 1022 n.10. Whether the intent of the parties has changed is, of course, a question of fact to be determined by the trier of fact. Krock testified that he had a conversation with Balthrope after execution of the written agreement, and that Balthrope stated a new commitment to reduce Krock's debt obligation by two-thirds of any amount by which the sale price of the Pier 37 property exceeded $900,000. The district court found Krock's testimony to be credible: [T]he sole disputed factual issue pending before the Court is the credibility of the witness Defendant Krock regarding the existence of the Side Agreement. I believe his testimony, as it was forthright and consistent and his demeanor while under intense cross-examination displayed the attitude of an individual who was telling the truth with conviction.

Not only did the district court find Krock's testimony wholly believable, but it was essentially unrebutted. In contrast with Krock's testimony as to the existence of the side agreement, the court noted that the only other witness to the Side Agreement was Mr. Balthrope who was not called to testify on behalf of [Beal Bank]. Although Mr. Balthrope was listed as a prospective witness by the [Bank] in its pretrial filings and left the employment of the bank only in July [approximately two months before the trial], for some inexplicable reason, he was not called to the stand nor was his testimony preserved by way of deposition. Therefore, the credible testimony of the Defendant Krock stands unrebutted and I accept it.

The court was entitled to draw an adverse inference against Beal Bank because of the absence of any testimony from Balthrope. Balthrope was the only person, other than Krock, who had personal knowledge as to whether there was indeed a subsequent side agreement, and what such an agreement may have included. Moreover, for years prior to the trial, up until two months before trial, Balthrope was an employee of the Bank and under its control. Even Balthrope's termination, pursuant to a layoff, was within the Bank's control. The bank had included Balthrope on its witness list up until the Friday before trial began. Yet the Bank failed to present Balthrope's testimony to the court (through subpoena or otherwise) and failed to preserve his testimony through deposition. In light of all these circumstances surrounding the Bank's "missing witness," the court was entitled to draw an adverse inference against the Bank that Balthrope was not produced because his testimony would have been damaging, i.e., it would not have contradicted Krock's on the question of the subsequent oral modification. See, e.g., Bath Iron Works Corp. v. United States, 34 Fed. Cl. 218, 340-41 (1995), aff'd, 98 F.3d 1357 (Fed. Cir. 1996). Nor did the bank attempt to rebut this inference by providing a legitimate explanation for its failure, such as might be the case if the witness had suddenly and unexpectedly died. The Bank did produce one witness in an effort to contradict Krock's testimony regarding the subsequent side agreement: Steven D. Harper, a commercial loan officer at the bank for one year, who had taken over the Krock file from Balthrope. The district court considered Harper's demeanor under direct- and cross-examination, re-direct, re-cross, re-re-direct, and re-re- cross, and declined to rely on Harper's evidence to undercut Krock's testimony. Harper's initial testimony was that he had had conversations with Balthrope "regarding the documentation on the Krock promissory note." Harper had asked Balthrope whether there were any documents in the bank's files that would bear upon Krock's allegation that there was a subsequent side agreement. Balthrope had told Harper that there were no such documents and that he "did not know of any agreement as such." Harper's original testimony did not mention any discussion with Balthrope other than about written documentation. There was nothing one way or the other about a possible oral modification, in Harper's direct, cross, re- direct, or re-cross examinations. The only testimony by Harper on oral modification was on re-re-direct. The district court was entitled to discount Harper's testimony on re-re-direct, based upon lack of credibility, regarding anything Balthrope told him other than about the existence or absence of documents in the files. We find no clear error in the district court's decision to accept Krock's "unrebutted" testimony. In addition to the unrebutted credible testimony of Krock, the court, in determining intent, was entitled to consider the conduct of the parties. "Mutual agreement on modification of the requirement of a writing may . . . be inferred from the conduct of the parties and from the attendant circumstances of the [particular] case." Boersner, 597 N.E.2d at 1022 (internal quotation marks omitted); see Schinkel v. Maxi-Holding, Inc., 565 N.E.2d 1219, 1223 (Mass. App. Ct.), rev. denied, 409 Mass. 1104 (1991). Here, the parties acted in a way that was consistent with Krock's testimony that there was a subsequent oral modification. When Krock's first payment was due under the settlement agreement, on November 1, 1994, he had no funds and did not pay it. The property had not yet been sold by the Bank; the sale did not take place until June 1, 1995. Yet the Bank took no action against Krock in November 1994 nor in early 1995; indeed, it did not file suit against Krock until December 1995, more than six months after the sale of the Pier 37 property. Krock testified as to a conversation he had with Balthrope after his default but before the sale. According to Krock's unrebutted testimony, Balthrope told him the Bank "wouldn't do anything, he [Balthrope] wouldn't do anything until such time as the sale took place and . . . the reduction, if any, in the note could be quantified, and then the whole thing would be restructured based upon the reduced amount of the note and the reduced payment." Consistent with this conversation, Krock waited until the sale took place; he did not pay any part of his $40,000 payment that was due on November 1, 1994, nor in early 1995. Likewise, the Bank took no action against him prior to its June 1, 1995 sale of the property. After the sale but before suit was filed against him, Krock had another conversation with Balthrope. Krock told Balthrope that, in light of the high price received for the property, their oral agreement should wipe out his debt on the note. Krock testified that Balthrope did not dispute the validity of the subsequent oral modification or Krock's interpretation of it; instead, he responded by saying "they're not going to pursue it anyway because the financials show that there is no ability to pay." Although the Bank eventually did pursue Krock by filing suit in December 1995, the Bank's actions (or non-action) prior to that time is consistent with Krock's version of events. We conclude that the district court's acceptance of Krock's version of events was not clearly erroneous, even applying the requirement under Massachusetts law that Krock has to meet a heavier burden of proof in order for an oral modification to be effective against a written contract. As part of that heavier burden, Massachusetts courts typically require "'ample evidence,'" demonstrating that "the party denying the existence of a modification had . . . 'unequivocally' expressed [its] approval 'of the many pertinent details' of the new agreement." Boersner, 597 N.E.2d at 1022 (quoting First Pa. Mortgage Trust v. Dorchester Sav. Bank, 481 N.E.2d 1132, 1139 (Mass. 1985)). We think the above- described evidence is "ample," and the only "pertinent detail[]" of the new agreement was the offset by two-thirds of the sale price's excess over $900,000. According to Krock's credible testimony, Balthrope agreed to this detail "unequivocally." We hold therefore that the district court did not clearly err in concluding that Krock's version of events was credible, nor did it err in its legal conclusion that the subsequent modification that Krock described is enforceable. We turn briefly to the Bank's other arguments on appeal. The Bank contends that the alleged subsequent modification agreement fails because no consideration was given by Krock in exchange for the Bank's willingness to modify the amount of Krock's debt based on the sale price of the Pier 37 property. The Bank acknowledges that, "under appropriate proof, an oral modification may be found," but if so, "the new contract created by the subsequent modification must be supported by consideration." Bank Br. at 15 (citing Siegel v. Knott, 55 N.E.2d 889, 890 (Mass. 1944) ("The mode of performance required by a written contract may be varied by a subsequent oral agreement based upon a valid consideration.")). The Bank points out that Krock did not take any "action in reliance on the alleged reaffirmation of the prior agreement other than to continue to fail to make the payments he agreed to make under the Note." Id. The Bank also relies heavily on 3 Richard A. Lord, Williston on Contracts 1826 (4th ed. 1992), as quoted in De Blois v. Boylston & Tremont Corp., 183 N.E. 823, 827 (Mass. 1933): [A] subsequent contract completely covering the same subject-matter and made by the same parties as an earlier agreement, but containing terms inconsistent with the former contract, so that the two cannot stand together, rescinds, substitutes and is substituted for the earlier contract and becomes the only agreement of the parties on the subject. But the subsequent agreement must have sufficient consideration. Therefore if the undertaking by one party is simply to perform the whole or part of what he promised in the original contract, it will not support a promise by the other party to perform what he previously agreed and something more.

The Bank asserts that this is still good law in Massachusetts. As Krock points out, however, the Bank never made this consideration argument below. Although Krock stated in his opposition to the Bank's motion in limine that consideration is not required for an oral modification to be effective against a written contract under Massachusetts law, the Bank did not respond in its pretrial motion papers, conferences, or at trial. Moreover, after the district court ruled against it, the Bank failed to file any motion for a new trial or to alter or amend judgment within the ten-day period set forth in Rule 59 of the Federal Rules of Civil Procedure Rule. And in the motion for reconsideration that the Bank filed on the twentieth day, the Bank again failed to mention lack of consideration as a defect in Krock's case. As we have said on numerous occasions, we will not consider on appeal issues that could have been, but were not, raised in the trial court. See Sullivan v. National Football League, 34 F.3d 1091, 1097 n.1 (1st Cir. 1994); Desjardins v. Van Buren Community Hosp., 969 F.2d 1280, 1282 (1st Cir. 1992). "An appeal is not an opportunity to conjure new arguments not raised before the district court." Brown v. Hot, Sexy and Safer Productions, Inc., 68 F.3d 525, 530 (1st Cir. 1995); see NASCO, Inc. v. Public Storage, Inc., 29 F.3d 28, 31 n.4 (1st Cir. 1994) (holding that theory not presented to district court and raised for the first time on appeal is deemed waived). In particular, having failed to object below (or to raise the issue at all), it is too late for the Bank to object that there was no evidence on which the court could find consideration to support the contract modification. See Johnston v. Holiday Inns, Inc., 565 F.2d 790, 795 n.6 (1st Cir. 1977). The argument has been waived. See Howellv. FDIC, 986 F.2d 569, 572 (1st Cir. 1993). Even if we were to reach the merits of the Bank's consideration argument, it would not change our result. The doctrine of consideration does not necessarily bar enforcement of a subsequent oral contract modification. "Modifications . . . have long been recognized in law as valid, without additional consideration, even when based on oral agreements modifying executory written contracts." Roddy & McNulty Ins. Agency, Inc. v. A.A. Proctor & Co., 452 N.E.2d 308, 314 (Mass. App. Ct.), rev. denied, 454 N.E.2d 1276 (1983). "The contract, when modified by the subsequent oral agreement, is substituted for the contract as originally made, and the original consideration attaches to and supports the modified contract." Thomas v. Barnes, 31 N.E. 683, 684 (Mass. 1892). It remains, of course, a factual question whether a party intends to relinquish her contractual rights by entering into a subsequent agreement. See Roddy & McNulty, 452 N.E.2d at 314. In the instant case, as discussed supra, the district court assessed the evidence, in particular, Krock's credibility in recounting his description of events, the lack of credibility and of personal knowledge on the part of the Bank's witness, Harper, and the unexplained absence of the Bank's former vice president, Balthrope, who was the only person besides Krock who was privy to the actual conversations in dispute. On the basis of its assessment of the evidence, the district court determined that a subsequent modification was indeed agreed upon by the parties and was enforceable. The court's decision was not clearly erroneous. Beal Bank's final argument is that, even if the district court was correct that the subsequent oral modification was enforceable as testified to by Krock, the court erred in applying that modified agreement. The district court calculated the amount by which the sale price of the Pier 37 property ($1,505,000) exceeded $900,000, i.e., $605,000, and multiplied it by two-thirds, for an offset of $403,333. The court then applied this offset to the principal amount of Krock's obligation to the bank, $350,000. The court therefore determined that the offset totally extinguished Krock's debt. Beal Bank argues that the $403,333 reduction should instead be applied against the gross amount of the obligation including accrued interest, late charges, and legal fees calculated as of the time of trial. So calculated, Krock would still owe the bank over $100,000. Krock points out that Beal Bank failed to raise this offset argument at the district court level, including in its motion for reconsideration, where it made an entirely different argument. Krock argues that the Bank has therefore waived its offset argument; it cannot be raised for the first time on appeal. See Brown, 68 F.3d at 530. But prior to receiving Judge Harrington's ruling, Beal Bank did not know what offset terms he would hold were contained in the oral modification. (The Bank did not even know whether Judge Harrington would find that the parties had agreed to an oral modification.) Thus the Bank could not have raised its offset argument below, except through a post-trial motion, and such a motion is not a prerequisite for perfecting its appeal of the district court's judgment. We turn therefore to the merits of the Bank's calculation argument. We agree with Krock that the Bank's argument does not make sense as to how to apply the offset. We have found that the district court properly accepted Krock's testimony as to the nature and terms of the side agreement. Thus, the proper calculation under the side agreement would apply two-thirds of the amount by which the sale price exceeded $900,000 against Krock's debt at the time the property was sold. If this had been done at that time, Krock's debt would have been substantially reduced; there would be no basis for the Bank to have continued charging him interest and collection charges against the extinguished portion of the debt. Much of the debt as calculated by the Bank would have been erased. Therefore, we reject the Bank's position that interest and late charges should have continued to accrue on Krock's entire debt through the time of trial, before applying the orally agreed-upon offset. But we also think Krock's contention that the offset entirely canceled his obligation is exaggerated. Krock argues on appeal that the premium should be applied against the $350,000 face amount of the note. His testimony at trial was simply that it would be applied against "my debt." The words "my debt" would seem, on their face, to include both the principal on the note and any interest that had accrued up until the time the offset kicked in. When the Pier 37 property was sold, on or about June 1, 1995, there was at least some interest that had accrued since the date of the note in November 1993. Krock points out that, as of November 8, 1995, the Bank was claiming that his debt was $449,010.86. Thus, as of June 1, more than five months earlier, Krock's debt would have been somewhat less than that amount, including both principal and interest, but clearly more than the $350,000 face amount of the note that the district court used. It appears that the total debt would have been more than the $403,333.33 offset that should have been applied against it, leaving some smaller amount still due. And the Bank would now be entitled to interest that has subsequently accrued on that smaller amount, between the June 1, 1995 date of offset and the present. We do not, however, think it fair for the Bank to charge Krock for its attorneys' fees for this litigation, because it is not at all clear that any litigation would have been necessary if the Bank had simply sought to collect the smaller amount that we now hold it was due as of June 1, 1995, as opposed to denying the offset and seeking to collect the much larger amount that it claimed in this action (including an additional three years' worth of interest on $403,333). We therefore remand for a calculation of the proper amount owed, accepting Krock's testimony as to what exactly was contained in the subsequently agreed-upon modification of the original contract. That is, the court should apply the offset as of the date of sale of the Pier 37 property, and apply it to Krock's accumulated total debt as of that date. The district court should then calculate the interest that would have accrued on that reduced amount of debt, from that offset date through the present. Affirmed as to the existence of the oral modification and as to its terms; remanded for calculation of the amount owed under the modified contract.