Opinion
No. CV08-5005966 S
May 22, 2009
MEMORANDUM OF DECISION Re Motion to Compel Arbitration #102.00
INTRODUCTION AND BACKGROUND
This is an action for foreclosure in which the plaintiff, Georgetown Mill Residential, L.P., seeks judgment on a promissory note issued by Georgetown Land Development Co., LLC ("GLDC") and to enforce its rights to foreclose the mortgage in which the plaintiff is the mortgagee and defendant GLDC is the mortgagor. Pursuant to Connecticut General Statutes § 52-409, the defendant, GLDC, has moved to compel arbitration of the dispute concerning its liability for the debt alleged in the complaint filed by plaintiff, Georgetown Mill Residential, L.P. Georgetown Mill Residential, L.P. objected to the motion to compel arbitration (January 5, 2009) and GLDC filed a reply to said objection, January 22, 2009.
By way of background, seller Georgetown Land Development Company, LLC ("GLDC") and purchaser TRC Northeast Land Acquisition Limited Partnership (TRC), plaintiff's predecessor in interest, executed a Purchase Agreement ("Agreement") with an effective date of August 23, 2005. The Agreement set forth the rights and responsibilities of the parties with respect to a civic, commercial and residential mixed use development of the former Gilbert Bennett property, a twenty-two (22) acre site located in the Georgetown section of Redding, Connecticut ("Property"). Because the parties anticipated development of the Property in six separately identified parcels in stages, they agreed that the purchase and sale of the Property would be conducted in three (3) separate closings which would occur as the parcels were developed. The following sections of the Agreement are pertinent to the decision herein:
Section 2(b-g) of the Agreement states the total purchase price of $50,750,000 in increments payable at the time of closing section 2(h-i). Pursuant to section 2(i), TCR delivered three (3) $500,000 deposits (collectively referenced as "Deposit") to the Title Company, the third of which was payable the fifth business day after the effective date of the Agreement (August 30, 2005).
The price of parcels N7 and N3/N2 was subject to adjustment not relevant to this proceeding.
Sections 2(j) and (k) state in pertinent part: (j) The Deposits shall be invested in an interest bearing account in an institution selected by the Purchaser and reasonably acceptable to the Seller, and the Deposits shall be held in accordance with the terms of Section 13 below. All interest earned on the Deposits shall be added to and become part of the Deposits. The disposition of the Deposits shall be governed by the terms and conditions of this Agreement . . . (k)(i) Seller shall have the right to request that the Title Company deliver the Deposits to Seller, and the Title Company shall deliver the Deposits to Seller, provided Seller delivers to Purchaser either an irrevocable letter of credit or a mortgage or deed of trust (a "Mortgage") in favor of Purchaser securing an amount not less than the deposits and a promissory note in the same amount (the "Note") . . . such Mortgage shall encumber those certain Parcels B, C and D as shown on Exhibit C . . . and shall be duly recorded among the Land Records of the Town. The Title company shall insure the lien thereof in an amount not less than the Deposits . . . the Mortgage shall provide to Purchaser all rights and remedies granted to secured creditors under applicable rules, laws, and regulations and shall further provide that if Purchaser has properly terminated this Agreement and is entitled to refund of the Deposits, . . . any conveyance of Seller's right, title and interest in and to any one of Parcels B, C and D . . . shall be an immediate event of default under the Mortgage unless Seller satisfies all of its obligations to Purchaser under the Mortgage and the Note simultaneously with any such conveyance.
Pursuant to the terms of the Agreement, TCR tendered the $1.5 million Deposit in escrow to the defendant, and as collateral for the deposit, the defendant executed a promissory note (Note) and a mortgage on Parcels B, C and D in favor of TCR on September 14, 2005. TCR subsequently assigned its rights under the Agreement, Note and Mortgage to the plaintiff, Georgetown Mill Residential, L.P.
Section 7(e) of the Agreement sets forth conditions precedent which the Seller was required to satisfy by the earlier of December 31, 2007, or expiration of the Master Plan in order for the closing to occur. The plaintiff has alleged that GLDC did not meet all the conditions precedent by December 31, 2007 required for the closing under the Agreement, as a result of which section 7(e) of the Agreement entitled the plaintiff, as the purchaser, to terminate its obligation to purchase the Property. Section 7(e) states in relevant part:
CT Page 8625
"If the conditions precedent applicable to any Parcel have not been satisfied by the earlier of December 31, 2007 or the date that the Master Plan expires by its terms, then the [plaintiff] shall have the right to terminate its obligation to purchase such Parcel by giving written notice of such election to [the defendant] at any time on or after such date. Upon any such termination, the Deposits . . . shall be refunded to [the plaintiff] and both parties shall be released from all duties and obligations created herein (except as otherwise expressly set forth in this Agreement.)"
The plaintiff further has alleged that GLDC, after receiving proper written notice of termination, refused to return the deposit, which the plaintiff now seeks to recover. Count one of the complaint is an action to foreclose the mortgage on the Property that serves as collateral to the deposit, and count two alleges a breach of the promissory note for failure to return the deposit.
Citing to Connecticut General Statutes § 52-409, on December 22, 2008, the defendant GLDC filed a motion to compel arbitration and stay the action. GLDC argues that the dispute underlying both counts of the plaintiff's complaint is whether it violated the Agreement by not fulfilling the conditions precedent to the closing. Consequently, GLDC contends that the arbitration provision set forth in section 22 of the Agreement ("arbitration clause") is controlling.
THE AGREEMENT
Section 22 of the Agreement, which is printed entirely in capital letters, states in relevant part:
Except as provided in this section 22 and with respect to any action initiated by [the plaintiff] pursuant to section 12(B) above, any dispute between [the plaintiff] and (the defendant] related to this agreement, or the Property, or the transactions contemplated by this agreement will be resolved by arbitration governed by the federal arbitration act . . . Notwithstanding the foregoing, nothing shall preclude [the plaintiff] from filing a lis pendens against the Property and/or pursuing an action in court pursuant to section 12(B) above for specific performance or for damages in excess of three million . . . dollars . . . If [the plaintiff] is not entitled pursuant to section 12(B) above to make a claim for damages in excess of three million . . . dollars . . . then such claim for arbitration shall be resolved by arbitration pursuant to this section 22.
Section 12(b), in turn, states in relevant part:
If [the defendant] defaults in its obligations pursuant to this Agreement and such default continues for five (5) days after receipt of notice thereof from [the plaintiff], or if any Closing fails to occur due to a default on the part of [the defendant], then, at the option of [the plaintiff: (i) [the plaintiff] may terminate this Agreement and the Deposits . . . shall be returned to [the plaintiff; or (ii) [the plaintiff] may maintain an action for specific performance and damages; provided, however, that if [the defendant's] default is 1) other than a willful failure to Close; or 2) other than a transfer of the Property or Parcels to any entity other than a TCR-controlled or affiliated entity; or 3) other than a default pursuant to Section 6(a)(xi) above, then [the plaintiff's] damages shall not exceed Three Million . . . Dollars . . ." (Emphasis in original.)
Section 12(c) states: "The provisions of this Section 12 shall survive the termination of this Agreement, if this Agreement is terminated, or each Closing, if any Closing occurs."
According to the defendant's interpretation of this provision, the plaintiff's lawsuit is subject to arbitration because it is not an action under section 12(b) in excess of three million dollars. In its memorandum in opposition filed on January 6, 2009, the plaintiff contends, inter alia, that the Agreement does not prevent it from proceeding with the instant foreclosure action because the subsequent Note and Mortgage have more specific contractual provisions ("court clauses") that entitle the plaintiff to file an action in court. The Note states in bold-face type: "[The defendant] and [the plaintiff] irrevocably agree that any suit, action or other legal proceeding arising out of this Note shall be brought in the courts of record . . . in the State of Connecticut; consent to the jurisdiction of each such court . . . waive any objection that [the defendant] or [the plaintiff] may have to the laying of venue . . . and waive the right to a trial by jury in any litigation in connection with this Note.
Similarly, paragraph 10 in the mortgage, which is entitled "Remedies," states: "Upon the occurrence of an Event of Default, [the plaintiff] may at any time, at its option and in its sole discretion, (i) bring an action in any court of competent jurisdiction to foreclose the lien of this Mortgage or to enforce the covenants hereof, (ii) exercise any or all of the remedies available to a secured party under the UCC, and (iii) exercise any or all of its other rights and remedies under this Mortgage, the Note and applicable law." (Emphasis added.) The plaintiff contends that interpreting the arbitration clause as the defendant suggests directly conflicts with the foregoing provisions in the Note and Mortgage and would render them superfluous. Also, the plaintiff argues that the court clauses are more specific contract terms that take precedence over the general arbitration clause.
Additionally, the plaintiff suggests that the Agreement can be read harmoniously with the Note and Mortgage. Purportedly, the Agreement explicitly dictates what provisions should be included in a subsequent mortgage and note. As set forth above, section 2(k)(i) of the Agreement states that the mortgage "was to provide to [the plaintiff] all rights and remedies granted to secured creditors under applicable laws, rules and regulations . . ." The plaintiff interprets this provision as authorizing the court clauses under the Note and Mortgage.
In its reply dated January 22, 2009, GLDC also argues that the Agreement, Note and Mortgage can be harmonized, but in a manner that gives effect to the arbitration clause. The defendant, citing paragraphs one and two of the Note, claims that the Note expressly incorporates by reference the Agreement and its arbitration clause. Reading the Note and the mortgage together, the defendant suggests that the court clauses apply only after an arbitrator determines whether the [the defendant] must repay the deposit under the Agreement. If the arbitrator determines that the defendant is obligated to repay the deposits, then a debt exists under the note, and the plaintiff could seek a court judgment under the Note or a judgment of foreclosure on the mortgage pursuant to the court clauses.
MOTION TO COMPEL ARBITRATION AND STAY LITIGATION
"[A]rbitration is a creature of contract . . . It is designed to avoid litigation and secure prompt settlement of disputes . . . [A] person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which, he has agreed so to do . . . No one can be forced to arbitrate a contract dispute who has not previously agreed to do so . . . The issue of whether the parties to a contract have agreed to arbitration is controlled by their intention . . . The parties' intent is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction . . . [T]he intent of the parties is to be ascertained by a fair and reasonable construction of the written words . . . the language used must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract. (Citations omitted; internal quotation marks omitted.) State v. Philip Morris, Inc., 279 Conn. 785, 796, 905 A.2d 42 (2006)." In determining the intent of the parties, it is clear that the court should interpret the Mortgage and Note together: "A promissory note and a mortgage deed are deemed parts of one transaction and must be construed together as such." Citicorp Mortgage, Inc. v. Porto, 41 Conn.App. 598, 602, 677 A.2d 10 (1996).
Whether this court can interpret the Note and Mortgage in light of the Agreement depends on the extent to which the Agreement, Note and Mortgage were interrelated. "[W]hen there are multiple writings regarding the same transaction, the writings should be considered together in construing the contract." (Internal quotation marks omitted.) United Illuminating Co. v. Wisvest-Connecticut, LLC, 259 Conn. 665, 671, 791 A.2d 546 (2002). Construing multiple agreements together may be appropriate when the contracts are "connected by reference and subject-matter . . ." Massaro v. Savoy Estates Realty Co., 110 Conn. 452, 459, 148 A. 342 (1930); see also Frantz v. Romaine, 93 Conn.App. 385, 396, 889 A.2d 865 (2006) (construing a note, mortgage, purchase option, and restrictive covenant together because they cross-referenced each other, they were executed by the same parties on the same day, and they involved the same real estate and same loan).
Nevertheless, "[i]t is important to note that even though several instruments relating to the same subject and executed at the same time should be construed together in order to ascertain the intention of the parties, it does not necessarily follow that those instruments constitute one contract or that one contract was accordingly merged in or unified with another so that every provision in one becomes a part of every other." 11 S. Williston, Contracts (4th Ed. 1990) § 30:26, p. 247; see also Franklin Federal Savings Bank v. United States, 431 F.3d 1360, 1371 n. 8 (Fed. Cir. 2005); Lawrence v. United States, 378 F.2d 452, 461 (5th Cir. 1967); Positype Corp. v. Mahin, 32 F.2d 202, 204, cert. denied, 280 U.S. 575, 50 S.Ct. 30, 74 L.Ed. 626 (1929).
In this case, the Agreement, the Note and the Mortgage should be construed together because they are extensively connected by reference and subject matter. Though they were not executed on the same date, all three agreements involved the same parties, and each agreement dealt with the disposition of the deposit.
The remainder of this decision will only focus on the Agreement and the note. Regarding the mortgage, it is sufficient to acknowledge that it explicitly states that a default under the Note is also to be considered a default under the mortgage.
The Agreement provides the circumstances under which the Seller may utilize a Note and Mortgage to obtain possession of the $1.5 million deposit. In section 2(j), the Agreement states that the plaintiff's deposit shall be placed in an escrow account with the title insurance company. Section 2(k)(i) states that the defendant has the right to take possession of the deposit if it delivers to the plaintiff either an irrevocable letter of credit or a note and a mortgage in the amount of the deposit.
Section 2(k)(i) stipulates: "The Mortgage shall provide to [the plaintiff] all rights and remedies granted to secured creditors under applicable laws, rules and regulations, and shall further provide that if [the plaintiff] has properly terminated this Agreement and is entitled to a refund of the Deposits . . . any conveyance of [the defendant's] right, title and interest in and to any [of the parcels securing the mortgage] . . . shall be an immediate event of default under the Mortgage unless [the defendant] satisfies all of its obligations to [the plaintiff] under the Mortgage and the Note simultaneously with any such conveyance." Apart from these provisions and several other subparagraphs relating to the substitution or subdivision of parcels, the Agreement states: "The form and substance of either the letter of credit or the Mortgage and Note shall be acceptable to [the plaintiff] and [the defendant] in the exercise of each of its reasonable discretion."
The Note, in turn, significantly references and expressly incorporates certain provisions of the Agreement relating to the parties' rights and obligations with respect to the Deposit. The second paragraph of the Note states: "This Note evidences [the defendant's] obligation to repay to [the plaintiff], when, if and to the extent required by the terms of the Agreement, the Deposits paid by [the plaintiff] and released to [the defendant] pursuant to the Agreement. Capitalized terms used but not defined in this Note shall have the meanings given thereto in the Agreement."
Furthermore, the third paragraph of the Note ("acceleration clause") incorporates by reference several provisions of the Agreement. The acceleration clause states in relevant part: "This Note shall become immediately due and payable upon [the plaintiff] properly terminating the Agreement upon the earlier to occur of the following . . . (c) a condemnation pursuant to Section 11 of the Agreement; or (d) a default by [the defendant] pursuant to Section 12(b) of the Agreement. [The defendant] shall return to [the plaintiff] all of the Deposits or, if applicable, any portion of the Deposits not credited toward a Closing purchase price pursuant to Section 9(a)(ii) of the Agreement . . ."
Given the significant interrelationship between the Agreement, the Note and the Mortgage, this court may construe them together, but not as a single agreement as the defendant suggests. In its reply, the defendant asserts that the first and second paragraphs of the Note expressly incorporate the entire Agreement by reference and concludes that they should be interpreted as a single agreement. The first paragraph states in relevant part: "[The plaintiff] . . . promises to pay to the order of [the defendant] . . . one million five hundred thousand [dollars] . . . that [the defendant] is obligated to return to [the plaintiff] under that certain Purchase Agreement . . ." This paragraph simply acknowledges that the defendant is required to return the Deposit under the Agreement, but it does not expressly incorporate the entire Agreement or the arbitration clause.
Regarding the second paragraph, which is quoted above, the first sentence is merely a recital and does not create any substantive obligations under the Note. "[R]ecitals in a contract, such as `whereas' clauses, are merely explanations of the circumstances surrounding the execution of the contract, and are not binding obligations unless referred to in the operative provisions of the contract." (Internal quotation marks omitted.) DeMorais v. Wisniowski, 81 Conn.App. 595, 610-11, 841 A.2d 226, cert. denied, 268 Conn. 923, 848 A.2d 472 (2004). Even if it was not a recital, the words "when, if and to the extent required" by the Agreement does not speak to whether a court or an arbitrator should determine "when, if and to the extent required." The second sentence does incorporate by reference certain definitions from the Agreement but is silent as to the arbitration clause.
Accordingly, the court will treat the agreements as separate contracts though it will consider all three to determine the intent of the parties. "Where . . . the signatories execute a contract which refers to another instrument in such a manner as to establish that they intended to make the terms and conditions of that other instrument a part of their understanding, the two may be interpreted together as the agreement of the parties." (Citations omitted; internal quotation marks omitted.) Allstate Life Ins. Co. v. BFA Ltd. Partnership, 287 Conn. 307, 315, 948 A.2d 318 (2008). "[I]n order to know which terms to consider, [the court] first must interpret the language of the [later agreement] to determine whether it incorporated the [prior] agreement, and, if so, to what extent . . . [The] determination of the extent to which the [prior] agreement was incorporated, if at all, depends upon whether the . . . terms of the two agreements are in conflict with one another." (Citation omitted.) Id., 314-15.
Construing these agreements together, this court finds that parties did not intend the arbitration clause to apply to actions pursuant to the Note and the mortgage which were limited by these terms and those of section 2 of the Agreement to the parties' rights to the Deposit. Therefore, the plaintiff's lawsuit is properly before this court. Although the terms of the Agreement gave the Seller the option to execute an irrevocable letter of credit or mortgage deed and note, neither was a requirement under the terms of the Agreement. In accordance with section 2(j), the Agreement required the plaintiff to place the Deposit in escrow. A Note and Mortgage would be executed only if, at a later point in time, the defendant wanted to take possession of the Deposit as stipulated in section 2(k). Essentially, the Note and the Mortgage were a separate consideration in exchange for the release of the Deposit to the defendant.
Moreover, the Agreement did not stipulate terms of any mortgage, deed and note, rather it allowed the parties considerable freedom in drafting the terms of the Note and Mortgage. The Agreement under section 2(k)(i) expressly required only two terms in the Note and Mortgage: (1) the provision in the mortgage regarding the rights and remedies of secured creditors; and (2) the provision making the defendant's sale of the collateral properties, under certain circumstances, a default under the Mortgage. Apart from those terms, the parties could exercise their discretion in drafting the Note and Mortgage. According to section 2(k)(i), "[t]he form and substance . . . of the Mortgage and Note shall be acceptable to [the plaintiff] and [the defendant] in the exercise of each of its reasonable discretion." Notably, the Agreement did not expressly require the arbitration clause to be incorporated into the Note and the Mortgage.
When the parties drafted the Note, they went well beyond what was required by the Agreement in defining what would be a default under the Note and Mortgage. Significantly, the acceleration clause states, inter alia, that the Note would be "immediately due and payable" upon a "default by [the defendant] pursuant to Section 12(b) of the [purchase agreement] . . ." Given that section 12(b) applies to any default by the defendant in its obligations under the Agreement, the Note significantly expands the range of liability that was required by the Agreement. The provision that the Note would be immediately due and payable upon default supports the plaintiff's position that the parties contended the Note and Mortgage to be enforced in a court of law, not by arbitration. Moreover, the Note does not expressly incorporate the arbitration clause of the Agreement, but contains a provision that the plaintiff contends is in conflict with the arbitration clause, namely, that "[the defendant] and [the plaintiff] irrevocably agree that any suit, action or other legal proceeding arising out of this Note shall be brought in the courts of record . . . in the State of Connecticut . . ."
Against this background, it is evident that section 12(b) is the critical provision in understanding the relationship between the arbitration clause and the court clauses as they apply to the plaintiff's complaint. The plaintiff has alleged a violation of section 12(b) because it claims that the defendant did not meet the conditions precedent to closing under the Agreement, which by virtue of the acceleration clause, is also a cause of action under the Note and Mortgage.
Under section 12(b), the plaintiff has two options when confronted with a default by the defendant: (1) terminate the purchase agreement and receive a refund of the deposit; or (2) "maintain an action for specific performance and damages . . ." Under the Agreement, each option is subject to arbitration unless the action for specific performance and damages is in excess of $3 million.
Pursuant to the acceleration clause in the Note, the plaintiff is entitled to bring an action pursuant to section 12(b) only if it first "properly terminat[es]" the Agreement. Consequently, the terms of the Note forces the plaintiff to choose the first option under section 12(b) in order to recover under the Note. This requirement makes sense because the Note and Mortgage only secure the amount of the deposit, and therefore, the Note requires the plaintiff to foreclose its right to pursue an action for damages under the contract. To this extent, the parties intended the terms of the Note to work together with the Agreement.
The requirement of termination under the Note also underscores why the arbitration clause is in some ways inapplicable to the Note and Mortgage. The arbitration clause distinguishes between an action for damages in excess of three million dollars, which could be brought in court, and an action for three million dollars or less, which would be subject to arbitration. Because the Note is for the deposit only, this part of the arbitration clause is irrelevant.
In the present case, the plaintiff has chosen the first option; it has terminated the agreement and is suing in court under the Note and the mortgage. Consequently, the court clauses apply, and the arbitration clause is inapplicable to both counts of the plaintiff's complaint.
Defendant GLDC's various arguments to the contrary are unavailing. GLDC claims that giving effect to the court clause would render a portion of the arbitration clause in the Agreement superfluous. Specifically, GLDC argues that the arbitration clause applies to "[a]ny dispute between [the plaintiff] and [the defendant] . . . related to . . . the transactions contemplated by this agreement will be resolved by arbitration . . ." Because the Note and the Mortgage were "transactions contemplated by this agreement," the arbitration clause, according to the defendant, is controlling.
While it is true that "the law of contract interpretation . . . militates against interpreting a contract in a way that renders a provision superfluous"; Honulik v. Greenwich, 290 Conn. 421, 432-33, 963 A.2d 979 (2009); it is also true that "[a] contract containing a term inconsistent with a term of an earlier contract between the same parties is interpreted as including an agreement to rescind the inconsistent term in the earlier contract." 2 Restatement, Contracts § 408, p. 770 (1932), cited in Allstate Life Ins. Co. v. BFA Limited Partnership, supra, 287 Conn. 319.
By drafting the court clauses, the parties intended to forgo arbitration for "transactions contemplated by" the Agreement. As this court has determined previously, the Note and the Mortgage were separate contracts drafted later in time than the Agreement. The Note extensively incorporated by reference other provisions of the Agreement. Not only did the parties fail to incorporate the arbitration clause in the Note, they chose to include a court clause in both the Note and the Mortgage. Since the Agreement allowed the parties significant freedom in drafting the Note and Mortgage, their decision to supplant the arbitration clause is not inconsistent with the intent of the Agreement.
GLDC also argues that the arbitration clause and the contract clauses can be harmonized in a manner which gives effect to the arbitration clause. It reasons that the arbitration clause applies to the threshold issue of whether a default existed under the Agreement, and if the arbitrator found for the plaintiff, the plaintiff could proceed to judgment in state court under the terms of the Note and the Mortgage.
Such an interpretation is not only contrary to the analysis above, but it would also render the court clause under the Note superfluous. If the plaintiff received an award from the arbitrator, then it would only need to confirm that award in state court if the defendant refused to refund the deposit. The plaintiff would have no reason at all to proceed under the Note.
Though neither party raises the issue, the court is aware that the terms of the Note and the Mortgage do not extinguish the plaintiff's right to seek a refund of the deposit under the Agreement. If the plaintiff had chosen to sue for the deposit under the Agreement rather than the Note and Mortgage, then the action would be subject to the arbitration clause. The fact that the plaintiff had a choice of remedies, and therefore a choice of whether the matter would proceed to arbitration, does not create an inconsistency or a conflict between the August 23, 2005 Agreements, and the September 14, 2005 Note and Mortgage. In view of the fact that the Note and the Mortgage were the plaintiff's consideration for the release of the deposit to the defendant, it is entirely reasonable for the parties to intend for the plaintiff to have that choice.
For the foregoing reasons, the defendant's motion to stay and compel arbitration is denied. The court need not reach the other arguments raised by the parties.