On July 6, the Massachusetts Appeals Court reversed a lower court’s grant of summary judgment to a lender, holding that the lender breached a “Capital Event” provision of a promissory note when it recorded a new mortgage on the property without notifying a private noteholder, and that the breach constituted an event of default under the corresponding mortgage. According to the court, the plaintiff lent money to a borrower in 2005 under a note and mortgage that were subordinate to a separate, larger mortgage held by a bank, and the note included a provision requiring mandatory prepayment to the plaintiff if the borrower or its parent obtained additional debt or equity financing exceeding $8.82 million, defined as a “Capital Event.” The lender later acquired the senior mortgage and, after eventually taking title to the property, granted a $5 million mortgage to a third party in 2017 to fund demolition work without notifying the plaintiff or repaying the plaintiff’s note, and that mortgage was later converted to equity in 2019. The plaintiff sued in 2021 after discovering the new mortgage, and the lower court granted summary judgment for the lender, reasoning that no capital event occurred because the 2017 financing fell below the $8.82 million threshold, and that no event of default arose because the plaintiff failed to provide written notice of breach before the mortgage was discharged.

On appeal, the court found the capital event provision ambiguous and, after considering extrinsic evidence, concluded that it barred any additional debt or equity financing beyond the amount originally borrowed from the senior lender, rather than permitting a further $8.82 million in new financing as the lower court held. The court rejected the lender’s arguments that a 2011 settlement agreement superseded the capital event provision and that the plaintiff suffered no injury because the underlying debt was later paid off after the city in which it is located took the property by eminent domain, asserting that the delay in payment deprived the plaintiff of the use of his capital for years. The court held that the 2017 mortgage breached the capital event provision, and because that provision qualified as a security document under the mortgage, its breach constituted an event of default that made the full amount owed to the plaintiff due and payable, without any notice-and-cure requirement. The court remanded the case for entry of a new judgment in the plaintiff’s favor.