Chroniak v. Golden Investment Corp. ( 1993 )

January 19, 1993
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 91-2343
PAULINE CHRONIAK and THOMAS PUGLIESE,
Plaintiffs, Appellees,
v.
GOLDEN INVESTMENT CORP. and ARMAND ROBERTS,
Defendants, Appellants.
No. 92-1121
THOMAS PUGLIESE,
Plaintiff, Appellee,
v.
GOLDEN INVESTMENT CORP. and ARMAND ROBERTS,
Defendants, Appellants.
No. 92-1317
THOMAS PUGLIESE,
Plaintiff, Appellant,
v.
GOLDEN INVESTMENT CORP. and ARMAND ROBERTS,
Defendants, Appellees.
No. 92-1318
THOMAS PUGLIESE,
Plaintiff, Appellant,
v.
GOLDEN INVESTMENT CORP. and ARMAND ROBERTS,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Martin F. Loughlin, U.S. District Judge]
Before
Selya, Cyr and Stahl,
Circuit Judges.
Richard F. Johnston with whom Kenna, Johnston, Craighead &
Sharkey, P.A. were on brief for appellants.
Peter S. Wright, Jr. with whom Wright & Cherry were on brief for
appellees.
Cyr, Circuit Judge. Appellants Armand Roberts and
Cyr, Circuit Judge.
Golden Investment Corporation challenge the district court's
interpretation of three New Hampshire statutes regulating lending
and debt collection practices. Appellee Thomas Pugliese cross-
appeals from the district court order disallowing an award of
attorney fees. We affirm the district court judgment and remand
for reconsideration of the application for attorney fees.
I
BACKGROUND
In June 1986, Armand Roberts and Golden Investment
Corporation loaned Pugliese $75,000 with which to arrange his
release on bail. Pugliese and his aunt, Pauline Chroniak,
cosigned a promissory note which stated the dollar amount of the
interest charge ($1,384.61 biweekly), but not the interest rate
by percentage (45% annually). The loan was secured by a first
mortgage on the Chroniak residence. The loan was repaid in full
by June 1988.
In July 1987, appellants loaned Pugliese an additional
$20,000 to buy equipment for his trucking business. Pugliese and
Chroniak executed a promissory note in the amount of $27,000,
which required a payment of $7,000 within ninety days of its
execution.
3
The loan was secured by a second mortgage on the Chroniak home.
In July 1988, Pugliese defaulted on the loan after making
principal payments totalling $18,000. Chroniak made what she
believed was a "final" $2,000 payment on the second mortgage loan
shortly thereafter. Claiming that $27,000 (rather than $20,000)
had been advanced to Pugliese under the second loan, appellants
demanded an additional $32,000 to discharge the second
mortgage.1 Pugliese's counsel notified appellants that both
loans violated New Hampshire law, as the notes did not disclose
the percentage rate of interest. Appellants promptly instituted
foreclosure proceedings on the Chroniak residence.
In November 1988, Pugliese and Chroniak2 brought a
six-count complaint against Roberts and Golden Investment in New
Hampshire federal district court, alleging, inter alia,3 that
the interest and repayment provisions in both promissory notes
violated three New Hampshire statutes.
Relying on the Second Mortgage Home Loan Act, N.H. Rev.
1Because Pugliese made his initial loan payment after the
specified due date, the note provided that interest would there-
after accumulate at the rate of $2,000 per month. By October
1988, as a result of this rapid acceleration in interest accrual,
appellants made claim to an outstanding principal balance of
$16,000, accrued interest of $15,000, and legal fees of $1,000.
2In December 1988, the foreclosure proceedings against the
Chroniak residence were suspended pending resolution of the
present litigation. In October 1991, Chroniak settled her claim
against appellants.
3The original complaint alleged violations of the Racketeer
Influenced and Corrupt Organizations statute. See 18 U.S.C.
1962(c). The RICO claims were dismissed and form no part of
the present appeal.
4
Stat. Ann. 398-A [hereinafter: "SMHLA"], the complaint alleged
that (1) appellants had forfeited their "right to collect
interest" on the notes by failing to state the "rate of
interest," thereby entitling plaintiffs to a "refund" of all
interest payments on the $75,000 note (i.e., $74,768.94) (SMHLA
3),4 (2) appellants' violations of SMHLA, section 3, con-
stituted criminal offenses because they were "willful" (SMHLA
7a), and (3) appellants overstated by $7,000 the amount of the
loan proceeds received by Pugliese on the second note, or
included a $7,000 prepayment penalty in the second note (SMHLA
2 (III, IV)).
Relying on the Consumer Protection Act, N.H. Rev. Stat.
Ann. 358-A [hereinafter: "CPA"], plaintiffs claimed (1) actual
damages because appellants' violations of the SMHLA constituted
"unfair or deceptive act[s] or [trade] practice[s]" (CPA 2),
and (2) double or treble damages because appellants' violation of
section 2 of the CPA was "willful or knowing" (CPA 10).
Finally, relying on the Unfair Collection Practices
Act, N.H. Rev. Stat. Ann. 358-C [hereinafter: "UCPA"], plain-
tiffs claimed that (1) appellants qualified both as "debt collec-
tors"
4The complaint did not demand reimbursement of the interest
paid on the $27,000 note but merely a declaration that the note
had been satisfied by plaintiffs' payments totalling $20,000 in
principal, an issue which the jury resolved adversely to appel-
lants.
5
(UCPA 1) and "creditors" engaged in "consumer credit transac-
tions" in the "ordinary course of business," (2) appellants
attempted to collect interest on the $75,000 note5 "in an
unfair, deceptive, or unreasonable manner," as the interest
charges were not "expressly authorized" by the loan agreement,
hence were not "legally chargeable" to the plaintiffs (UCPA 2
& 3), and (3) appellants' violation of the UCPA simultaneously
violated CPA, section 2, which authorizes awards of double or
treble damages (UCPA 4(IV)).
Appellants initially were granted summary judgment on
the ground that the SMHLA, whose violation formed the bases for
liability under the CPA and the UCPA, exempted appellants from
all liability because (1) Roberts was not licensed under the
SMHLA to conduct "the business of [providing] second mortgage
loans," and (2) both loans were "incidental" to Roberts' real
estate investment business. On appeal, these questions were
certified to the New Hampshire Supreme Court, which determined
that the SMHLA applies both to licensed lenders and to "any
person making a loan secured by a mortgage." Chroniak v. Golden
Inv. Corp., 133 N.H. 346, 349-50, 577 A.2d 1209, 1212-13 (1990).
Acknowledging that loans "incidental" to a real estate investment
business would be exempt under
5Unlike the first note ($75,000), which arguably was
advanced for "personal" purposes (i.e., bail), see UCPA 1
(defining "consumer"), the $27,000 note evidenced a business loan
not actionable under the UCPA as a "consumer credit transaction."
6
the SMHLA, the New Hampshire Supreme Court noted the
"improbability that a loan advanced for purposes of posting bail
or purchasing a boat trailer could ever be considered incidental
to the [real estate investment] business." Id. at 352, 577 A.2d
at 1214. Thereafter, the summary judgment was vacated on appeal
and the case was remanded for trial.
In its final charge to the jury, the district court
read verbatim excerpts from the three New Hampshire statutes.
The jury ultimately responded in the following manner to the
special verdict form and a special interrogatory:
1. The loans extended by Golden Investment
Corporation to Thomas Pugliese were
incidental to the conduct or the opera-
tion of the business of Golden
Investment Corporation. (Question 1)
2. Roberts knew that the $75,000 and
$27,000 notes failed to disclose the
"rate of interest." (Questions 2, 3)
3. The $75,000 and $27,000 loan
transactions were not "strictly private"
in nature and were undertaken in the
"ordinary course of a trade or
business." (Questions 4,5)
4. Pugliese incurred $20,000 in damages.
(Question 6)
5. Pugliese received only $20,000 in the
course of the loan transaction evidenced
by the $27,000 promissory note signed
July 27, 1987. (Special Interrogatory)
On October 24, 1991, the district court entered judgment for
Pugliese in the amount of $20,000, rejecting Pugliese's request
for an award of attorney fees.
7
II
DISCUSSION
A. The Roberts and Golden Investment Appeal6
1. "Technical" Violation
of SMHLA, Section 3
of SMHLA, Section 3
The jury was instructed on five substantive statutory
provisions (SMHLA, 2 & 3, see infra pp. 9, 11; CPA, 2, see
infra p. 13; and UCPA 2 & 3). Appellants concede that the
verdicts may have been based on their failure to state the rate
of interest in the promissory notes, which constituted a
predicate violation of both the CPA and the UCPA. On the other
hand, appellants argue that the jury simply may have bypassed
consideration of the CPA and the UCPA altogether, instead basing
its award solely on appellants' direct "technical" violation of
the disclosure requirements in SMHLA, section 3:
6Although it is undisputed that the jury found that Pugliese
sustained monetary damages as a consequence of appellants'
"knowing" failure to disclose the rate of interest in the promis-
sory notes, three factors hamper our review of appellants'
various challenges to the jury instructions. First, the district
court read verbatim excerpts from the three New Hampshire
statutes, but during its deliberations the jury apparently was
provided with unexcerpted photocopies of the statutes, including
extraneous, uninstructed portions. Second, the jury received
little guidance as to whether (or how) the three statutes might
be interrelated. Finally, the special verdict form did not
require the jury to indicate the statutory provision on which its
award was based. Consequently, we must scrutinize the statutes,
the jury charge, and the special verdict form to ensure that the
jury verdicts were not predicated on any impermissible basis,
including an incorrect application of the statutory law. Brown
v. Trustees of Boston Univ., 891 F.2d 337, 353 (1st Cir. 1989)
("'Our principal focus in reviewing jury instructions is to
determine whether they tended to confuse or mislead the jury on
the controlling issues.'") (quoting Service Merchandise Co. v.
Boyd Corp., 722 F.2d 945, 950 (1st Cir. 1983)), cert. denied, 496
U.S. 937 (1990).
8
If any note secured by a second mortgage and
any such mortgage, in the case of loans other
than open-end loans, does not, among its
provisions, specify as separate items the
principal sums, the rate of interest, the
period of the loan and the periodic due
dates, if any, of principal and interest
. . . then the lender shall have no right to
collect interest.
(Emphasis added.) Appellants further argue that the plain
language of section 3 merely affords the borrower an affirmative
defense in any action initiated by the lender to collect interest
on the note, and unlike other sections of the SMHLA (e.g., 2 &
7), affords the borrower no affirmative right to recover interest
paid to the lender.7
The procedural peregrinations of the present claim
almost daunt description. Appellants raised the claim initially
in their motion for summary judgment, see supra pp. 6-7, but the
district court granted summary judgment on an alternate ground.
On appeal, the summary judgment was vacated. Following remand,
appellants renewed their motion for summary judgment. Pugliese
opposed summary judgment on the ground that a criminal
("willful") violation of SMHLA, section 3, would give rise to a
common-law cause of action for restitution of the interest paid
on the illegal loan. Prior to trial, the district court
purportedly granted appellants' motion to dismiss the "common
7We reject appellants' contention that the complaint did not
allege that SMHLA, 3, created an independent cause of action
for rescission of the loan agreement and refund of the interest
payments. Count one alleged that the $75,000 note was "illegal"
and "[p]laintiffs are entitled to have all interest payments
refunded. . . ."
9
law" claims based on SMHLA, section 3. Thus, the jury was given
no instruction on any "common law" claims based on SMHLA, section
3.
Normally, this would end our inquiry. As previously
suggested, however, two factors aligned to configure a correct
jury instruction on the applicable law. In the course of
defining the predicate conduct that could serve as an "unfair or
deceptive" trade practice under the CPA and the UCPA, sections 2
and 3 of the SMHLA were read, verbatim, to the jury. But the
court did not instruct the jury that it could not return a
verdict based exclusively on the provisions of SMHLA, section 3.
Moreover, the court later denied Pugliese's request for attorney
fees because it could not discern whether the jury had premised
its verdict exclusively on SMHLA, section 3, the only one of the
three statutes presented to the jury which does not authorize fee
shifting. See infra pt. II.B.
We agree with the district court that no mere
"technical" violation of SMHLA, section 3, could give rise to a
common-law cause of action for restitution.8 Nevertheless, we
conclude that the SMHLA, holistically construed, creates a
8Pugliese based this implied private cause of action on
Karamanou v. H.V. Greene Co., 80 N.H. 420, 423, 124 A. 373, 375
(1922), which held that a person who sustains damages under a
prohibited contractual provision may, "after the transaction is
finished and completed [,] . . bring [an] action and defeat the
contract." (Citation omitted). In Karamanou and its progeny,
however, the defendants committed criminal violations of statutes
designed to protect the plaintiffs. Pugliese pursued no such
allegation, nor did he make it the subject of a special inter-
rogatory. See infra note 17.
10
statutory cause of action for so-called "technical" violations of
section 3. First, a jury determination that Roberts violated
SMHLA, section 3, necessarily would entail a concomitant
violation of SMHLA, section 2 (also read to the jury), which
states in pertinent part:
The allowable rate of interest computed on
the unpaid balance that any person may
directly or indirectly charge, take or
receive for a second mortgage loan secured by
property which is occupied in whole or part
at the time said loan is made as a home by
any obligor on the mortgage debt or by any
person granting or releasing any interest
under said mortgage shall be the rate agreed
upon in the note between the borrower and
lender, and following the sixth month of any
period in which a loan has been in continuous
default not more than 1-1/2 percent per month
[18% annual] on any unpaid balances.
(Emphasis added.) The synergism between sections 2 and 3 of the
SMHLA derives from their shared use of the term "rate of
interest." Under section 2, a lender may not compute (hence, may
not receive) interest at a "rate" not "agreed upon in the note."
Thus, a covered lender's receipt of interest charges based on a
note which discloses no rate of interest violates both sections 2
and 3. Furthermore, SMHLA, section 7, provides in pertinent
part:
Any loan made in violation of [section] 398-
A:2 by any person shall be discharged upon
payment or tender by the debtor or any person
succeeding to his interest in such real
estate of the principal sum actually
borrowed. The superior court shall have
jurisdiction of all suits arising under RSA
398-A:2 and if a finding is made that such
loan secured by any such mortgage violates
said section such borrower shall be entitled
as part of his costs to a reasonable fee for
11
the services of his attorney in such suit.
(Emphasis added.) Accordingly, as the New Hampshire Legislature
inarguably afforded borrowers a right of action for restitution
of the interest paid in excess of the interest "agreed upon in
the note,"9 SMHLA, 2, even a jury verdict based exclusively on
a so-called "technical" failure to disclose the rate of interest
would comport with the applicable New Hampshire law as instructed
by the district court.10
2. "Unfair or Deceptive Act or
Practice" Under CPA, Section 2
Appellants contend that it was reversible error to
instruct the jury that the mere omission of the rate of interest
9We ascribe no controlling significance to the jury's
failure to award Pugliese the entire amount of interest paid on
the $75,000 note. A lender who commits a "technical" violation
of a credit disclosure statute may be entitled to set off the
reasonable value of the goods or money advanced while in the
possession of the buyer or borrower. See, e.g., General Motors
Acceptance Corp. v. Kyle, 351 P.2d 768, 774 (Cal. 1960).
10Appellants argue that a "technical" violation of a lending
disclosure statute should not invariably result in the voidance
of a loan contract or in the borrower's right to recover the
interest paid on the note. Cf. DeCato Bros., Inc. v.
Westinghouse Credit Corp., 129 N.H. 504, 529 A.2d 952 (1987)
(analogous case under 399-B); First Fed. Sav. & Loan Ass'n v.
Le Clair, 109 N.H. 339, 253 A.2d 46 (1969) (same); American Home
Improvement, Inc. v. MacIver, 105 N.H. 435, 201 A.2d 886 (1964)
(same). Unlike the SMHLA, however, 339-B explicitly provides
only one statutory remedy criminal penalties. In DeCato, for
example, the court addressed the limited question "whether a
consequence [i.e., restitution of an undisclosed prepayment
remedy] beyond the one prescribed by the statute [i.e., criminal
penalties for the lender] should attach [to the violation]."
DeCato, 129 N.H. at 509, 529 A.2d at 955. These cases form no
basis for the proposition that a "technical" violation of the
SMHLA could not support a jury verdict depriving appellants of
the benefit of their bargain (i.e., the undisclosed interest), a
remedy explicitly authorized in SMHLA, 7.
12
from the notes would constitute an "unfair or deceptive act or
practice in the conduct of any trade or business" within the
meaning of CPA, section 2, which provides, in pertinent part:
It shall be unlawful for any person to use
any unfair method of competition or any
unfair or deceptive act or practice in the
conduct of any trade or commerce within this
state. Such unfair method of competition or
unfair or deceptive act or practice shall
include, but is not limited to, the following
[list of thirteen acts] . . . .
(Emphasis added.) Appellants argue that: (1) the New Hampshire
Legislature has amended several other consumer protection
statutes so as to make their violation a simultaneous violation
of the CPA, section 2, while prior SMHLA amendments contain no
similar cross-referencing provision, and (2) the evidence adduced
at trial was insufficient to entitle Pugliese to such an instruc-
tion, since the jury reasonably could not have inferred that he
was treated unfairly or otherwise deceived by appellants'
omissions.
The current version of section 2 lists thirteen unfair
or deceptive acts or practices, but the listing is expressly made
non-exhaustive. Although the statute provides no further
explication and New Hampshire caselaw is sparse, consultation
with both federal and Massachusetts precedent is encouraged.11
11The CPA itself provides that courts should "be guided by
the interpretation and construction given Section 5(a)(1) of the
Federal Trade Commission Act (15 U.S.C. 45(a)(1)), by the Federal
Trade Commission and the federal courts." N.H. Rev. Stat. Ann.
358-A:13. The New Hampshire courts have invited interpretive
comparisons with the "well developed" caselaw construing the
analogous Massachusetts "unfair and deceptive practices" act,
Mass. Gen. Laws ch. 93A. See Chase v. Dorais, 122 N.H. 600, 602,
13
"[W]hether a party has committed an unfair or deceptive
act, within the meaning of [the consumer protection act], is a
question of fact." Brennan v. Carvel Corp., 929 F.2d 801, 813
(1st Cir. 1991) (citing USM Corp. v. Arthur D. Little Sys., Inc.,
28 Mass. App. Ct. 108, 124, 546 N.E.2d 888, 897 (1989)) (emphasis
added); see also Pan American World Airways, Inc. v. United
States, 371 U.S. 296, 306-07 (1963) (meaning of Federal Trade
Commission Act term "unfair" must be left to case-by-case
determination). A practice is "unfair" if (1) it is "within at
least the penumbra of some common-law, statutory, or other
established concept of unfairness," (2) "it is immoral,
unethical, oppressive, or unscrupulous," or (3) "it causes
substantial injury to consumers." Rizzuto v. Joy Mfg. Co., 834
F.2d 7, 8 (1st Cir. 1987) (quoting Purity Supreme, Inc. v.
Attorney General, 380 Mass. 762, 777, 407 N.E.2d 297, 301
(1980)); see also In re Pfizer, Inc., 81 F.T.C. 23, 61 (1972)
(same standard under Federal Trade Commission Act). "A practice
may be 'deceptive' . . . if it 'could reasonably be found to have
caused a person to act differently from the way he otherwise
would have acted.'" Kazmaier v. Wooten, 761 F.2d 46, 51 (1st
Cir. 1985) (quoting Purity Supreme, 380 Mass. at 777, 407 N.E.2d
at 301). The CPA is a "comprehensive statute designed to
regulate business practices for consumer protection," and its
terms should be "broadly applied." Gilmore v. Bradgate Assocs.,
448 A.2d 390, 391-92 (1982) (applying Massachusetts courts'
definition of statutory term "trade and commerce").
14
Inc., 135 N.H. 234, 235, 604 A.2d 555, 557 (1992) (citation
omitted); see also Nei v. Burley, 388 Mass. 307, 313, 446 N.E.2d
674, 678 (1983) ("Legislature intended the terms 'unfair and
deceptive' to grow and change with the times.").
Given these expansive premises, appellants' arguments
fail. First, even if a technical violation of SMHLA, section 3,
would not afford Pugliese an independent right of recovery, a
proposition we reject, the factfinder nonetheless would have been
free to find that appellants' conduct came within the "penumbra"
of a statute (i.e., SMHLA) designed to protect consumers from
"unfair" lending practices, and that appellants' failure to
disclose the rate of interest in the two notes went against
established concepts of fairness upon which SMHLA is premised.
See, e.g., Schubach v. Household Fin. Corp., 375 Mass. 133, 137,
376 N.E.2d 140, 142 (1978) (though the illegality of the
challenged conduct is a relevant inquiry, even a lawful practice
may be unfair or deceptive in some circumstances); PMP Assocs.
Inc. v. Globe Newspaper Co., 366 Mass. 593, 595, 321 N.E.2d 915,
917 (1975) (common law violation need not be shown under FTCA);
Commonwealth v. De Cotis, 366 Mass. 234, 241, 316 N.E.2d 748, 754
(1974) ("unfair" acts under FTCA not limited to practices
forbidden at common law or by criminal statute).12 If conduct
12Massachusetts caselaw is replete with decisions holding
that a failure to disclose a material fact may constitute an
unfair or deceptive practice. See, e.g., Heller v. Silverbranch
Constr. Corp., 376 Mass. 621, 382 N.E.2d 1065 (1978) (failure to
disclose drainage problem to home buyer); York v. Sullivan, 369
Mass. 157, 338 N.E.2d 341 (1975) (failure to disclose imminent
rental increase).
15
that is not proscribed by any statute may be found "unfair" under
CPA, section 2, conduct squarely within the proscriptive penumbra
of a consumer protection statute surely satisfies the
"unfairness" requirement.
Second, the jury had ample evidence from which to
determine that appellants' failure to disclose the rate of
interest was a "deceptive" practice under CPA, section 2. In
1981, when New Hampshire largely deregulated the mortgage loan
industry and eliminated the usury laws applicable to these
transactions, see, e.g., N.H. Rev. Stat. 218.1, these "full
disclosure" statutes took on increased significance as consumer
protection provisions. Although disclosure of the dollar amount
of interest charged would no doubt put many borrowers on notice
of the rate of interest, the statute presumes that it will be
difficult for the average borrower to calculate the percentage
rate from the dollar figures; accordingly, the statute places the
burden on the lender to express the rate of interest. Cf. DeCato
Bros., 129 N.H. at 508-09, 529 A.2d at 954 (fact that "the rate
of interest . . . could be readily ascertained by simple
comparison of the principal amount financed with the face amount
of the notes . . . does not vitiate noncompliance" with non-
disclosure statute); American Improvement v. MacIver, 105 N.H.
435, 438, 201 A.2d 886, 887 (1964) (noting that analogous lending
disclosure statute, 399-B, was enacted to inform "average
individuals who have neither the capability nor the strength to
calculate the cost of the credit that has been extended to
16
them"). Indeed, SMHLA, section 3, was amended in 1967, even
before deregulation, specifically to eliminate the option
previously allowed the lender to express the interest charge
either by percentage, "or by its equivalent in money." N.H. Rev.
Stat. 258:5.13
We conclude that the appellants' failure to disclose
the percentage interest rate as required under SMHLA, section 3,
was sufficient to form a predicate "unfair or deceptive practice
or act" under CPA, section 2, and that the plaintiff was entitled
to such an instruction.14
3. "Willfulness" Instruction
Appellants argue that the district court misinstructed
13Interestingly, several witnesses made widely divergent
calculations of the percentage rate appellants charged Pugliese
ranging from 36% to 52%. Additionally, Pugliese testified
that he would have "thought about [the loan] a little more," and
was "not sure" he would have agreed to its terms, had he been
informed that the annual interest rate on the $75,000 loan was
45%. See, e.g., Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431,
1435 (9th Cir.) (plaintiff need not prove actual deception, but
only that representation had capacity to mislead), cert. denied,
479 U.S. 828 (1986); Montgomery Ward & Co. v. FTC, 379 F.2d 666,
670 (7th Cir. 1967) (same); Goodman v. FTC, 244 F.2d 584, 602
(9th Cir. 1957) (same).
14Appellants cite Welch v. Fitzgerald-Hicks Dodge, Inc., 121
N.H. 358, 430 A.2d 144 (1981), for the proposition that a
violation of CPA, 2, cannot be established absent a showing of
bad faith on the part of the defendant. In Welch, the court
found no evidence that the defendants "acted in bad faith,
dishonestly, or in any way attempted to take unfair advantage . .
." Id. at 362, 430 A.2d at 147 ("We fail to see how the good
faith attempts of the defendants to comply with the terms of a
standard warranty can be classified as an unfair or deceptive
practice.") In Welch, however, the defendants complied with the
literal requirements of their warranty; in this case, it is
undisputed that appellants did not comply with the interest rate
disclosure requirements of SMHLA, 2 & 3.
17
the jury that appellants' conduct could be determined "willful"
if appellants knew that the rate of interest was not stated in
the notes. Since the complaint alleged a violation of SMHLA,
section 3, and a "willful" violation of section 3 would expose
appellants to criminal penalties, see N.H. Rev. Stat. Ann. 398-
A:7a, see infra p. 19, appellants argue that the court should
have given the jury some sort of mens rea instruction, requiring
that appellants have had specific knowledge that their conduct
violated a statute.
The substantive provisions of the New Hampshire
statutes which were read to the jury (SMHLA 2 & 3, CPA 2 &
10 [first clause] and UCPA 2 & 3) do not state a "willfulness"
requirement. Thus, the court's extraneous instruction defining
"willfulness"15 ultimately imposed a more stringent mens rea
requirement than required by the statutory language. Davet v.
Maccarone, 973 F.2d 22, 26 (1st Cir. 1992) ("harmless error"
standard of review applicable to jury instruction challenge); see
15The court gave the following instruction to the jury:
If you find that either Armand Roberts or Golden
Investment, or [their] Attorney . . . had actual
knowledge or notice of the violations of [the SMHLA]
and of the bar against collecting interest contained in
that law and they went ahead with the foreclosure
anyway in an attempt to collect more interest, then you
should find that they violated [the CPA].
(Emphasis added.) Thus, in the event the jury considered whether
appellants' conduct constituted a criminal violation of the SMHLA
(as opposed to a non-willful "technical" violation), the quoted
instruction insulated the jury charge from appellants' challenge
that a finding of specific intent was required. Veranda Beach
Club Ltd. Partnership v. Western Sur. Co., 936 F.2d 1364, 1384
(1st Cir. 1991) (jury charge to be viewed "as a whole").
18
also, e.g., Smith v. Brady, 390 F.2d 176, 177 (4th Cir. 1968)
(jury instruction on damages which had no effect on verdict held
"harmless").
The gratuitous instruction on willfulness conceivably
could have had relevance to two statutory provisions, SMHLA,
section 7a, and CPA, section 10, neither of which was read to the
jury. The SMHLA provides but two remedies for violations of
SMHLA, section 3. If a lender knowingly16 omits the rate of
interest from a promissory note willfully or otherwise the
borrower may maintain a private cause of action under SMHLA,
sections 2, 3 and 7, to recover any interest received by the
lender in excess of the interest rate "agreed upon in the note."
See supra pt. II.A.1. If the section 3 violation was "willful,"
however, the lender is subject to criminal penalties as well.
SMHLA, section 7a, provides:
Any person who wilfully violates any
provision of this chapter [SMHLA] shall be
guilty of a misdemeanor if a natural person,
or guilty of a felony if any other person,
for each such violation.
(Emphasis added.)
The special verdict form reflects a jury finding that
appellants "knowingly" failed to disclose the rate of interest.
Since the "willfulness" element (i.e., appellants' knowledge or
disregard of the statutory requirement that the rate of interest
16As the notes were prepared by Roberts' attorney, the jury
was asked to determine whether Roberts had notice that the
percentage rates of interest were omitted, and whether these
omissions had the capacity to deceive, within the meaning of CPA,
2.
19
be stated in the note) would be relevant only to the imposition
of a criminal penalty under section 7a (section 7a never having
been read to the jury), the failure to give a "specific intent"
instruction was "harmless" error at most;17 at best, the jury
instruction amounted to beneficial error, as it placed on the
plaintiff a more difficult burden of proof.
The only other statute to which a determination of
"willfulness" would have been relevant is CPA, section 10, which
provides that "[i]f the [factfinder] finds that the use of the
method of competition or the act or practice was a willful and
knowing violation of this chapter, it shall award as much as 3
times, but not less than 2 times, such amount." (Emphasis
added.) Like SMHLA, section 7a, this portion of CPA, section 10,
was never read to the jury.18 The special verdict form did not
request a finding as to whether plaintiff's "damages" should be
doubled or trebled, and the district court did not in fact double
or treble the award. Any error in the "willfulness" instruction
was therefore harmless.
4. "Incidental" Exemption Instruction
SMHLA, section 10(II), exempts from its coverage
"individuals or corporations who make mortgage loans incidental
17In closing argument, plaintiff's counsel never referred to
a "criminal" violation of the SMHLA. Moreover, the jury instruc-
tion simply referred to a "violation" of SMHLA, 3, not a
"criminal violation."
18Prior to the jury charge, plaintiff's counsel disclaimed
double or treble damages.
20
to the conduct or the operation of another business, such as real
estate or construction." (Emphasis added.) The jury was
instructed to determine: (1) whether "the principal activity of
Golden Investment Corporation" was real estate investment and (2)
if so, whether these loans were "incidental" to its real estate
investment business. The district court defined the term
"incidental" to encompass a matter which "inseparably depends on,
pertains to, and is subordinate to the main or principal project
[of the business]."
Appellants argue that the court improperly required a
threshold determination that the principal activity of Golden
Investment was real estate investment, thereby disenfranchising
its defense if the jury found that general investment was Golden
Investment's principal business activity. We disagree.
Section 10 itself restricts the exemption to a limited
category of businesses; namely, those already engaged in real
estate-related activities "such as" real estate construction or
investment. In real estate-related activities, there exists a
greater business need to afford mortgage loan financing to cus-
tomers as an ancillary commercial service. Cf. Moore v. New
Hampshire Ins. Co., 122 N.H. 328, 333, 444 A.2d 543, 546 (1982)
(defining plain meaning of term "incidental"; "'a hardware store
dealing in paint and wallpaper would commonly rent equipment for
removal of wallpaper and a reasonable person . . . would assume
such rental is incidental to the operation of the store.'")
(emphasis added) (citation omitted). The necessary nexus was not
21
lost on the district court; its instruction required the jury to
consider whether the loans "inseparably depend[ed]" on appel-
lants' main business activity.19
Appellants claim that the jury should have been in-
structed that "incidental" means "occurring merely by chance or
without intention or calculation, or being likely to inure as a
minor consequence." To the extent appellants suggest a
definition based on mere fortuity, it clearly does not comport
with the statutory context, or the legislative intent, underlying
the section 10 exemption.20 Moreover, we see no significant
difference between the language utilized in the jury instruction
("subordinate to the main or principal project") and the second
element in the definition proposed by appellants ("minor conse-
quence"), as both require the jury to determine whether the
second mortgage lending activity on which Pugliese's cause of
action is predicated constituted a relatively minor aspect of
appellants' overall business activity. We find further support
for our interpretation of the term "incidental" in the opinion
previously rendered by the New Hampshire Supreme Court in this
case:
19We note further that appellants did not produce sufficient
evidence to support their contention that Golden Investment was
formed to engage in general investment. The two mortgage loans
to Pugliese were the only significant business conducted by
appellants during the entire time period at issue in the case.
20The first element in the proposed definition seems
especially discordant in the present context, as few loans
totalling $95,000 could ever be found to have been made "without
intention or calculation."
22
[L]oans made by a corporation formed to
engage in real estate investment are exempt
from the requirements of RSA chapter 398-A,
assuming they are "incidental" to the conduct
of that business. . . . [W]e do not ignore
the improbability that a loan advanced for
purposes of posting bail or purchasing a boat
trailer could ever be considered incidental
to the business of a corporation formed to
engage in real estate investment.
Chroniak v. Golden Inv. Corp., 133 N.H. 346, 352, 577 A.2d 1209,
1214 (1990) (emphasis added). The evidence not only showed that
these loans were not a subordinate or minor activity of Golden
Investment, the evidence disclosed that Golden Investment's only
significant income-generating activity during the entire relevant
period derived from these two loans to Pugliese.
We conclude that the jury instruction on SMHLA, section
10, did not constitute reversible error.21
21Appellants raise four other unsuccessful claims on appeal,
based generally on their characterization of the jury
instructions as "confusing." First, appellants failed to
preserve their claim that the jury may have been misled when the
district court read CPA, 10, out of sequence (i.e., between its
reading of SMHLA, 3, and SMHLA, 10). When asked by the court
whether the provision of photocopies of these statutes to the
jury in the correct sequential order would satisfy appellants'
objections, defense counsel responded in the affirmative.
Second, appellants maintain that the statutes were
inherently confusing, and should not have been read verbatim to
the jury. We do not conclude that the statutes are inherently
confusing; moreover, even such a conclusion would not benefit
appellants since the jury was guided by the special verdict form,
which described the essential findings required under the three
statutes. See supra p. 7.
Third, appellants argue that the court should have
defined the statutory term "ordinary course of business," a
relevant term under both the CPA and the UCPA. In Chase v.
Dorais, 122 N.H. 600, 448 A.2d 390 (1982), the court held that
the CPA does not apply "'where the transaction is strictly
private in nature, and is in no way undertaken in the ordinary
course of a trade or business.'" Id. at 602, 448 A.2d at 391-92
(quoting Lantner v. Carson, 374 Mass. 606, 610, 373 N.E.2d 97323
B. The Pugliese Cross-appeal
Pugliese claims he was entitled to recover attorney
fees because the jury must have based its award on one of the
three fee shifting statutes (SMHLA, 2 & 7; CPA, 10; UCPA,
4).22 The district court denied an attorney fee award
because it could not exclude the possibility that the jury
verdict was based on a violation of SMHLA, section 3, which does
not authorize attorney fees. As we have determined that a viola-
tion of SMHLA, section 3, would necessarily entail a violation of
SMHLA, section 2, see supra pt. II.A.1, we are able to conclude
that the jury verdict was based on a fee shifting statute, either
SMHLA, 2 & 7, CPA, 2 & 10, or UCPA, 2 & 4. Accordingly,
we remand for reconsideration of the motion for an award of
attorney fees.
(1978)). UCPA, 1, likewise provides in pertinent part:
IV. "Creditor" means a person who in the ordinary
course of business engages in consumer credit
transactions with consumers.
(Emphasis added.) We do not believe the term "ordinary course of
business" was used in any technical sense, or required further
explanation by the court. The special verdict form adequately
formulated the essential distinction raised by appellants'
defense whether appellants were engaged in a "business"
activity when they loaned these funds to Pugliese, or whether the
loans were between "private" individuals.
Finally, appellants incorrectly assert that the district
court did not read the statutory definition of "creditor"
appearing in UCPA, 1(IV). See Tr. at 771-72.
22Pugliese theorized that the jury must have found that the
$27,000 note contained a $7,000 prepayment penalty, which con-
stituted an independent violation of SMHLA, 2. See supra p. 3.
We need not address this issue.
24
The district court judgment is affirmed on the merits
and the case is remanded for reconsideration of the motion for an
award of attorney fees.
25