Opinion
No. CV09-502 29 75 S
January 4, 2010
MEMORANDUM OF DECISION RE MOTION TO DETERMINE PRIORITIES (#130)
FACTUAL BACKGROUND
On March 9, 2009, the plaintiff, Brookview Rehab Funding, LLC, filed a complaint against the defendants, SJM Associates, LLC, Virginia Natera, FLT, LLC, 103 Shell Street Land Trust, Jack Amaro and Suburban Electrical Contractors, Inc., in which it alleged the following facts. On April 25, 2007, the defendants executed a secured construction promissory note wherein they promised to pay Brookview the sum of $378,729.24 with interest. To secure this note, the defendant, SJM Associates, LLC mortgaged to the plaintiff the parcel of land known as 103 Shell Street, located in Bridgeport. The note is currently in default, and as a result of this default Brookview has chosen to treat the entire principal sum owed under the note as immediately due and payable. Brookview alleges that the defendant, FLT, LLC, may claim an interest in this property by virtue of a mortgage in the amount of $50,000, which was executed on March 9, 2007, nearly two months earlier than Brookview's mortgage. As of the date the mortgage was executed, however, FLT had only advanced $3500. The remaining balance of $46,500 was transferred on March 16, 2007, and the mortgage was recorded in the Bridgeport land records on March 20, 2007.
In a motion for determination of priorities dated September 1, 2009, Brookview argues that FLT's mortgage is prior to Brookview's mortgage only to the extent of $3,500, because this was the amount advanced at the time of the execution of the mortgage. The motion was accompanied by a supporting memorandum of law. On September 14, 2009, FLT filed a memorandum in opposition to Brookview's motion, arguing that its mortgage takes priority in the amount of $50,000 due to the fact that, upon the date that the promissory note and mortgage deed were delivered and subsequently recorded on the land records, all proceeds had been distributed to the mortgagor. This memorandum was accompanied by the sworn affidavit of Ralph Tarantino, the sole member of FLT, LLC.
Brookview also raised the issue, in its amended complaint, of whether its mortgage is prior in right under the doctrine of equitable subrogation, but the present motion does not address this issue. Rather, Brookview states that it reserves the right to raise the issue at trial or in subsequent evidentiary hearings.
LEGAL DISCUSSION
"`A valid foreclosure of a mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being foreclosed and whose holders are properly joined or notified under applicable law. Foreclosure does not terminate interests in the foreclosed real estate that are senior to the mortgage being foreclosed.' Restatement of Laws 3d Property: Mortgages § 7.1, p. 3388 (2008). Thus in a foreclosure action the court determines who are the `junior' and `senior' encumbrancers, if in dispute." ThyssenKrupp v. Bank of Scotland, Superior Court, complex litigation docket at Waterbury, Docket No. X10 CV 08 5010927 (April 7, 2009, Scholl, J.). Practice Book § 23-17 provides in relevant part: "In any action to foreclose a mortgage or lien, any party seeking a judgment of strict foreclosure shall file, with the motion for judgment, a list indicating the order in which law days should be assigned to the parties to the action. The order of the law days so indicated shall reflect the information contained in the plaintiff's complaint, as that information may have been modified by the pleadings. Objections to the order of law days indicated on said list shall only be considered in the context of a motion for determination of priorities, which motion must be filed prior to the entry of judgment."
In its memorandum of law, Brookview cites Sadd v. Heim, 143 Conn. 582, 124 A.2d 522 (1956) in support of its position that FLT's mortgage is prior in right only to the extent of $3500. Because FLT's mortgage recited an obligation of $50,000, when only $3,500 had been advanced at the time of execution, Brookview argues in its motion for determination of priorities that "FLT Mortgage mischaracterized the obligation it secured [and] has priority . . . in an amount no greater than the amount advanced at the time of its execution — $3500." Brookview contends that only if a mortgage is in compliance with General Statutes § 49-2 or 49-3 would advances subsequent to execution maintain priority. Furthermore, Brookview argues that FLT's mortgage does not meet the requirements of either statute.
FLT, in its memorandum in opposition, argues that it is not the date of the execution of the mortgage but the date of its recording that is relevant for purposes of establishing priority. In the present case, FLT argues that the mortgage was not recorded until March 20, 2007, several days after the remaining balance on the mortgage had been distributed. Thus, FLT argues that the record "properly discloses the true state of the transaction on the date of recording and thereafter," and anyone consulting the land records would therefore find a mortgage securing a debt for $50,000, which is the amount that had in fact been distributed by the recording date.
In Sadd v. Heim, supra, 143 Conn. 582, two homeowners executed and delivered a mortgage note in the amount of $2,500 and recorded the mortgage in the same amount the following day, despite the fact that only $1,250 had been advanced to the homeowners at the time of the delivery and recording of the note. The distribution of the remaining balance was conditioned upon the homeowners completing a building on their property by a certain future date, although the mortgage deed did not mention this condition. Id., 584. Because the delivered and recorded mortgage recited an obligation of $2,500, when the amount of the indebtedness was only $1,250, the amount which had been advanced in cash at the time of delivery, the court held that the mortgage could only take priority over subsequent encumbrances in the amount of $1,250. Id., 587-88. The court explained that "[i]t has always been our law that the title to real estate should appear upon record in order that it may be easily and accurately traced, thus preventing fraud and adding greatly to the security of land titles . . . [t]he real nature of the transaction must, so far as possible, be disclosed by the record with reasonable certainty." (Citation omitted.) Id., 585.
The Sadd court stated that the relevant time to compare the terms of the mortgage with the actual nature of the transaction therefore must be the moment of recording: "[t]he condition in a mortgage deed must be so drawn that, when spread upon the record, it will give reasonable notice of the nature and amount of the incumbrance which the mortgagor intends to place upon the land." (Emphasis added.) Sadd v. Heim, supra, 143 Conn. 585. As Sadd makes clear, the time of recording is the operative moment since the key issue is whether subsequent claimants are on notice of the existence and actual nature of the mortgage. See id. Our Supreme Court has recently reaffirmed this principle, stating that "the recordation of a valid mortgage gives constructive notice to third persons if the record sufficiently discloses the real nature of the transaction so that the third party claimant, exercising common prudence and ordinary diligence, can ascertain the extent of the encumbrance." PNC Bank, N.A. v. Kelepecz, 289 Conn. 692, 701, 960 A.2d 563 (2008).
In the present case, Brookview nonetheless argues that when advances are made subsequent to a mortgage's execution, these advances will not have priority over later encumbrances unless the mortgage complies with General Statutes §§ 49-2 or 49-3, which govern open-end mortgages and future advancements. Brookview argues that FLT's mortgage does not comply with these statutory provisions, and thus the advance made subsequent to the mortgage's execution loses priority to Brookview's encumbrance. The plain language of § 49-2, which governs open-end mortgages, shows that it is applicable only to those funds transferred subsequent to the recording of a mortgage: "Advancements may also be made by a mortgagee under an open-end mortgage to the original mortgagor . . . and any such mortgage debt and future advances shall, from the time such mortgage deed is recorded . . . be a part of the debt due such mortgagee and be secured by such mortgage equally with the debts and obligations secured thereby at the time of recording the mortgage deed and have the same priority over the rights of others who may acquire any rights in, or liens upon, the mortgaged real estate subsequent to the recording of such mortgage deed . . ." (Emphasis added.) General Statutes § 49-2(c). Likewise, § 49-3, which governs mortgages securing future advancements, only applies to those circumstances in which advancements are made after "the time the mortgage was delivered." General Statutes § 49-3(a).
In his affidavit, Tarantino, the sole member of FLT, attests that the mortgage deed was not delivered to FLT until FLT had distributed the remaining balance of $46,500. The parties are in agreement that the mortgage was not recorded until March 20, 2007, four days after the distribution of the balance and delivery of the deed. Therefore, because all of the advances on the mortgage at issue were made prior to the recording and delivery of the mortgage, the statutory requirements of § 49-2 and § 49-3 are inapplicable in the present case. The sole remaining issue presented is whether the sum of $46,500 advanced after the execution, but prior to recording of the mortgage takes priority over later encumbrances. Under existing Connecticut appellate authority, sums advanced before the date of recording will maintain priority, even though they may be advanced later than the date of execution, so long as the record discloses the true nature of the transaction. Here, there is no dispute that sum was distributed four days prior to the recordation of the mortgage, and that the record of FLT's mortgage accurately described the obligation as it existed on March 20, 2007, and thereafter.
Accordingly, the court will find that FLT's mortgage takes priority over the mortgage of Brookview in the amount of $50,000.