Opinion
No. FST CV 07 5004758 S
October 13, 2009
MEMORANDUM OF DECISION
This foreclosure action involves a short-term ninety-day commercial note secured by a purchase money first mortgage on commercial property in Norwalk, Connecticut. The plaintiff represented that its case would take no more than one-half day to try. The trial took forty-two days.
The original three-count complaint was reduced to one count; foreclosure of the purchase money first mortgage. See Revised Complaint #125.00. The defendants filed nine Special Defenses and a four-count Counterclaim in which both defendants seek compensatory damages, rescission, restitution of all money paid, punitive damages and attorney fees under the Connecticut Unfair Trade Practices Act (#187.00). The plaintiff denied each of the nine Special Defenses (#188.10). To the four-count Counterclaim the plaintiff asserted eight Special Defenses (#188.10). The defendants denied each of the eight Special Defenses and asserted two Matters in Avoidance (#195.00). The plaintiff denied the two Matters in Avoidance (#199.10).
The pleadings were closed on the twelfth day of trial.
The court makes the following findings of facts and legal conclusions.
The plaintiff, North Water, LLC, is a Connecticut limited liability company doing business in Norwalk, Connecticut. It was the owner of a former factory building located at 20 North Water Street, Norwalk, Connecticut in the Washington Street Design District. The defendant, North Water Street Tarragon, LLC, is a Connecticut limited liability company with offices in New York City and is referred to in the plaintiff's complaint as Borrower. The second defendant, Tarragon Development Corporation, is a publically traded Nevada corporation with offices in New York City and is referred to in the plaintiff's complaint as Guarantor. A Purchase and Sale Agreement was signed between North Water, LLC as Seller and Tarragon Development Corporation as Buyer in August 2005 for a purchase price of $15,500,000.00. Ex. 15. Paragraph 16 of the Purchase and Sale Agreement made the purchase contingent upon the Seller obtaining approvals in order to obtain building permits for a mixed-use development, "which approvals shall be in form and substance reasonably satisfactory to Buyer in all respects." Even though Ex. 15 is entitled a Purchase and Sale Agreement and was the subject of four amendments, the court finds that the basic transaction between the parties was that the Seller intended to grant to the Buyer an option to purchase the property. Bayer v. Showmotion, Inc., 292 Conn. 381, 409 (2009). The Buyer could terminate the purchase agreement if it found that the approvals failed to "be in form and substance reasonably satisfactory to Buyer in all respects." No standards for "reasonably satisfactory" were contained in the purchase agreements. The court concludes the Buyer could refuse to purchase for any reason. The Purchase and Sale Agreement and its four amendments were assigned to North Water Street Tarragon, LLC, a Connecticut limited liability company formed by Tarragon Development Corporation for the purpose of taking title to this property. Ex. 32.
On April 30, 2007, the plaintiff, North Water, LLC, sold and conveyed title to the property at 20 North Water Street, Norwalk, Connecticut to North Water Street Tarragon, LLC, for $14,820,000 plus adjustments. Ex. 1. On April 30, 2007, the plaintiff, North Water, LLC, loaned the defendant, North Water Street Tarragon, LLC $7,410,000.00 and North Water Street Tarragon, LLC signed a Commercial Mortgage Note dated April 30, 2007. Ex. 2. North Water, LLC is the holder of this note. The $7,410,000.00 promissory note was due on July 29, 2007. This note was secured by a mortgage deed dated April 30, 2007. Ex. 3. Ex. 3 is a first mortgage. At the April 30, 2007 closing the defendant, Tarragon Development Corporation, executed a Guaranty to the plaintiff. Ex. 5. Other closing documents were signed by North Water, LLC and North Water Street Tarragon, LLC. The mortgage and security documents were duly recorded in the Norwalk Land Records.
The promissory note for $7,410,000.00 required that two payments of interest be made prior to its July 29, 2007 maturity date. Those two payments of interest were made on or about June 1, 2007 and on or about July 1, 2007. Those two interest payments were timely and fully made. The principal sum of $7,410,000.00 together with accrued interest was not paid pursuant to the Commercial Mortgage Note at the maturity date. The plaintiff caused an August 2, 2007 letter to be sent by North Water, LLC's attorney to North Water Street Tarragon, LLC and Tarragon Development Corporation. Ex. 6. The August 2, 2002 letter made the following demand: "payment in full is received no later than Monday, August 6, 2007." No payments of any amounts have been made by either defendant after the above mentioned two payments of interest on June 1, 2007 and July 1, 2007.
This foreclosure law suit was filed by the plaintiff, North Water, LLC, against North Water Street Tarragon, LLC and Tarragon Development Corporation as the defendants returnable August 28, 2007. The First Count sought foreclosure against North Water Street Tarragon, LLC. The Second Count against North Water Street Tarragon, LLC for foreclosure of collateral under a Security Agreement dated April 30, 2007 has since been withdrawn by the plaintiff. The Third Count against Tarragon Development Corporation for breach of guaranty has since been withdrawn by the plaintiff. The plaintiff is proceeding on the First Count of its December 19, 2007 Revised Complaint (#125.00).
The plaintiff is claiming that the defendant, North Water Street Tarragon, LLC, owes it the following sums: $7,410,000 principal, 8.0% interest from July 1, 2007 until default on the $7,410,000 loan, 18.0% default interest after default until payment and a 5.0% late fee pursuant to the loan documents. Ex. 7. The plaintiff is also seeking attorneys fees, disbursements and costs as provided for in the note and mortgage. The plaintiff's claim now exceeds $10,500,000.
The defendants filed nine Special Defenses to the plaintiff's December 19, 2007 Revised Complaint as follows:
1. Misrepresentations in regard to the transaction and therefore the note, mortgage and guaranty are void and unenforceable.
2. Unclean hands.
3. Breach of the implied covenant of good faith and fair dealing.
4. Inequitable conduct preventing the enforcement of the note, mortgage and guaranty.
5. As a consequence of the plaintiff's misrepresentations, the defendants were prevented from fulfilling the conditions of the note, mortgage and guaranty and the defendants were prevented from fulfilling the conditions of the purchase and financing of the property.
6. Equitable estoppel.
7. By reason of the plaintiff's conduct, the defendants are discharged from any duties to the plaintiff under the note, mortgage and guaranty.
8. The plaintiff failed and neglected to give the legally and contractually requisite written notice of default and acceleration after the expiration of the applicable grace period under the Mortgage.
9. The provisions for late fees and an 18.0% default interest rate are unconscionable and both are inequitable penalties.
The defendants' four Counterclaims seek: (1) Compensatory damages; (2) Rescission of the note, mortgage and guaranty; (3) Restitution of all moneys paid by the defendants to the plaintiff in connection with the purchase of the property and the plaintiff's financing; (4) Punitive damages under CUTPA and (5) Attorneys fees and costs under CUTPA. The First Counterclaim essentially alleges that the defendants have been damaged by the plaintiff's conduct and North Water Street Tarragon, LLC was falsely induced to part with $7,410,000.00. "As a consequence of the Plaintiff's conduct, as aforesaid the Defendant, North Water Street Tarragon, has been unable to proceed with the Project, all to its financial loss and injury, including the loss of anticipated profits, income and revenues reasonably expected to be derived from the Project." The defendants further claim damages in that the value of the project has been diminished. The Second Counterclaim is seeking damages under the Connecticut Unfair Trade Practices Act, Gen. Stat. § 42-110b et seq. The Third Counterclaim alleges breach of the duty of good faith and fair dealing. The Fourth Counterclaim seeks to rescind the purchase of the property and the execution and delivery of the note, mortgage and guaranty seeking thereby the restitution of the moneys paid to the plaintiff.
The plaintiff has denied each of the above nine Special Defenses and denied the essential allegations of the four counts of the Counterclaims alleging fraud, CUTPA, breach of the implied covenant of good faith and rescission.
To those four Counterclaims the plaintiff has alleged eight Special Defenses. (1) Ratification; (2) Waiver; (3) Latches; (4) Statute of Frauds, under Gen. Stat. § 52-550(4)-(5); (5) The defendants' Counterclaims are barred by the integration clauses and other applicable contractual provisions in the note, mortgage and guaranty; (6) Waiver pursuant to an option agreement; (7) Any claimed damages suffered by the defendant was as a result of defendant's own business judgments and/or negligence; and (8) Any damages suffered by the defendant's were caused by the actions or inactions of third persons including Norwalk municipal officials for which the plaintiff is not responsible.
The defendants denied all eight Special Defenses and pleaded two Matters in Avoidance. The First Matter in Avoidance states: "Pursuant to Connecticut Practice Book § 10-7, the Plaintiff has waived a dismissal of the Defendant's Special Defenses and Counterclaims." The Second Matter in Avoidance states: "To the extent the Defendants acted in a manner consistent with the purchase of the Property as variously alleged in the Plaintiff's Special Defenses to Counterclaims inter alia, the conduct of the Defendants was in the prevention of loss, the protection of investment, and the mitigation of damages under threat of the litigation occasioned by Plaintiff's fraudulent conduct." On November 26, 2008 the plaintiff replied to the two Matters of Avoidance by a general denial. The pleadings were closed on November 26, 2008.
DISCUSSION OF LAW
"In a mortgage foreclosure action, to make out its prima facie case, the foreclosing party has to prove by a preponderance of the evidence that it was the owner of the note and mortgage and that the mortgagor has defaulted on the note." Franklin Credit Management Corp. v. Nicholas, 73 Conn.App. 830, 838 (2002). Furthermore, the foreclosing party must demonstrate that all conditions precedent to foreclosure as mandated by the note and mortgage have been satisfied. Bank of America, FSB v. Hanlon, 65 Conn.App. 577, 582 (2001).
Two essential defenses being offered by the defendants are: (1) Failure to comply with the notice provisions of the loan and mortgage documents; and (2) Fraud and misrepresentation. This court will discuss each allegation of the Revised Complaint, Special Defenses, Counterclaims, Special Defenses to the Counterclaims and the two Matters of Avoidance in later sections of this Memorandum of Decision.
"Where the terms of the note and mortgage require notice of default, proper notice is a condition precedent to an action for foreclosure." Fidelity Bank v. Krenisky, 72 Conn.App. 700, 707 (2002); Bank of America, FSB v. Hanlon, supra, 65 Conn.App. 582. "Notices of default and acceleration are controlled by the mortgage documents. Construction of a mortgage deed is governed by the same rules of interpretation that apply to written instruments or contracts generally, and to deeds particularly. The primary rule of construction is to ascertain the intention of the parties." Webster Bank v. Oakley, 265 Conn. 539, 547 (2003).
The court notes that the defendant's Special Defenses relating to deficiencies in default, notice and acceleration arise only out of the language of the mortgage deed. "A promissory note and a mortgage deed are deemed parts of one transaction and must be construed together as such . . ." Emigrant Mortgage Corporation v. D'Agostino, 94 Conn.App. 793, 799 (2006). The court must examine all the loan documents, principally the Commercial Mortgage Note and mortgage deed, to determine default, notice and acceleration requirements. In this case these documents are Ex. 2 and 3. This court has examined these documents in detail and will reference their language in the decision portion of this memorandum.
"Notice provisions in mortgage documents usually require default notices to contain specific information, which serves a very clear and specific purpose; it informs mortgagors of their rights so that they may act to protect them. Therefore, when the terms of the note or mortgage require notice of default, proper notice is a condition precedent to an action for foreclosure." Id. 799-800.
Even if the notices of demand, default and/or acceleration did not technically meet the condition precedent language of the mortgage note and mortgage deed, case law holds that if the defendants had actual notice of their right to reinstate the mortgage after the debt had been accelerated and actual notice of the event of default, such actual notice is sufficient to comply with the condition precedent requirements of Connecticut law. Fidelity Bank v. Krenisky, supra, 72 Conn.App. 712. "We nonetheless conclude that literal enforcement of the relevant notice provision would serve no purpose because the defendants had actual notice of their right to reinstate the mortgage after acceleration. Further, the plaintiff's deficient written notice caused no harm to the defendants . . . Literal enforcement of notice provisions when there is no prejudice is no more appropriate than literal enforcement of liquidated damages clauses when there are no damages. Moreover, the plaintiff's failure to provide sufficient written notice does not frustrate the purpose of the notice provision because the defendants had actual notice of their right to reinstate and acted to protect that right, as demonstrated before the court." Id. 712; Aetna Casualty and Surety v. Murphy, 206 Conn. 409, 418 (1988).
The defendants are claiming that there were two acts of fraud or misrepresentation, both made by the plaintiff's negotiating and closing attorney, David Fite Waters, and both were confirmed and/or restated later by the actions of other agents or employees of the plaintiff. It is claimed that Attorney Waters made a representation that certain approvals had been obtained from the Norwalk municipal authorities. Secondly, it is claimed that Attorney Waters made a representation that the property at 50 Connecticut Avenue, Norwalk, Connecticut contained thirteen (13) existing affordable units, broken down into nine (9) one-bedroom units and four (4) two-bedroom units sufficient to satisfy Condition #4 of the November 16, 2006 Norwalk Zoning approval. Ex. 21. The defendants claim that those two representations were false, in that after November 16, 2006 further approvals for affordable housing had to be obtained from various Norwalk agencies and 50 Connecticut Avenue did not contain any existing two-bedroom units.
"The essential elements of a cause of action in fraudulent misrepresentation are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." Solano v. Calegari, 108 Conn.App. 731, 741 (2008); Cadle Co. v. Ginsberg, 70 Conn.App. 748, 769 (2002). "Connecticut law has firmly established that fraud must be proven by a standard more exacting than that of a fair preponderance of evidence . . . The standard of proof for some cases such as those involving the acquisition of title by adverse possession, the termination of parental rights, libel, fraud or reformation of a deed or contract is that of clear and convincing proof, a standard greater than proof by a fair preponderance of the evidence but less than proof beyond a reasonable doubt." Kavarco v. T.J.E., Inc., 2 Conn.App. 294, 296 (1984).
"Rescission of a contract is an appropriate remedy if there has been a material misrepresentation of fact upon which a party relied and which caused it to enter the contract . . . The material misrepresentation, when made in connection with the sale of land, may be an innocent misrepresentation . . . At the option of the defrauded party, where there has been fraud in the inducement of the contract, the contract is voidable or subjects the defrauding party to a suit for damages . . . The party defrauded has the option of electing either to rescind the contract or to claim damages for the breach of the contract . . . To seek rescission is to waive any claim for damages arising from the breach of the contract." Kavarco v. T.J.E., Inc., supra, 2 Conn.App. 298-99. Rescission is an equitable remedy. Brett v. Cooney, 75 Conn. 338, 341-42 (1902). "The recent weight of authority is that the right to rescind a contract for the sale of land, or a contract for the sale of a business, or a lease, is not necessarily destroyed because the buyer failed to make an independent investigation which would have revealed that the representation upon which he relied was false." Kavarco v. T.J.E., Inc., supra, 2 Conn.App. 301; Pacelli Brothers Transportation, Inc. v. Pacelli, 189 Conn. 401, 409 (1983). "Under certain circumstances, there may be as much fraud in a person's silence in a false statement . . . Mere nondisclosure, however, does not ordinarily amount to fraud." Egan v. Hudson Nut Products, Inc., 142 Conn. 344, 347 (1955).
The defendants are claiming that the imposition of a 5.0% late fee and the 18.0% default interest are penalties and are illegal. "It is settled law that a contract provision which imposes a penalty for a breach of the contract is contrary to public policy and is invalid, but a contractual provision which fixes liquidated damages for a breach of the contract is enforceable if it satisfies certain conditions . . . The conditions which will justify an agreement for liquidated damages are: (1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract." Norwalk Door Closer Co. v. Eagle Lock and Screw Co., 153 Conn. 681, 686 (1966). The late fee was applied after the date of maturity, July 29, 2007. "The trial court should not have assessed late fees against them after the notes were accelerated." Federal Deposit Insurance Corporation v. Napert-Boyer Partners, 40 Conn.App. 434, 443 (1996). "If the late charges are allowed to continue after demand for payment in full upon default, it would, in effect, become a penalty since the plaintiff is being compensated for the default by the higher interest rate." Id. 444. Both FDIC v. Napert-Boyer and Norwalk Door Closer Co. v. Eagle Lock and Screw Co. were followed by a trial court decision in 2003. "While 4% of a monthly installment payment may reflect costs incurred by the defendant as a consequence of a late payment, 4% of the balloon payment is exorbitant." Velenchik v. First Union National Bank, Superior Court, judicial district of Fairfield at Bridgeport, Docket Number CV 00 0372515 S (May 7, 2003, Wolven, J.). The defendants argue that the plaintiff's imposition of a 5.0% late fee after the July 29, 2007 maturity is a penalty and is void. The defendants are also claiming that the 18.0% default interest rate is a penalty and is void.
An action of foreclosure is an equitable proceeding and the court exercises its discretion in ensuring that justice is done. First Connecticut Capital, LLC v. Homes of Westport, LLC, 112 Conn.App. 750, 763 (2009); Beach v. Ives, 105 Conn. 169, 176 (1926); Franklin Credit Management Corp. v. Nicholas, supra, 73 Conn.App. 838.
DISCUSSION OF ISSUES
The pleadings have established the following facts by judicial admission. On April 30, 2007 the plaintiff, North Water, LLC, sold to the defendant, North Water Street Tarragon, LLC, a parcel of real property located at 20 North Water Street, Norwalk, Connecticut. In that sale the plaintiff loaned to the defendant the sum of $7,410,000 and the plaintiff took back a purchase money first mortgage for $7,410,000 on 20 North Water Street. The Commercial Mortgage Note dated April 30, 2007 was attached to the complaint and marked in evidence as Ex. 2. The Mortgage Deed dated April 30, 2007 was attached to the complaint and marked in evidence as Ex. 3. The plaintiff's demand letter dated August 2, 2007 was attached to the complaint and marked in evidence as Ex. 6. The defendant's Answer admitted Ex. 2, Ex. 3 and Ex. 6 but answered further that the document "speaks for itself." (#211.00, First Count Answer paragraphs 6, 7, 9 and 11.)
When confronted at trial with this language of their answer, the defendants would not amend their answer. The plaintiff did not file any pleadings that objected to this phrase being included within the answer. The court found only limited authority for the phrase "speaks for itself." It is commonly found in discussion of the tort concept, res ipsa loquitur. Schiesel v. Pol. Realty Co., 108 Conn. 115, 121 (1928). The phrase has also been used as a tool in legislative interpretation of an ambiguous statute. Passini v. Decker, 39 Conn.Sup. 20, 22 (1983). Neither of those uses appear relevant in this foreclosure case.
In a suit on a promissory note, "The defendant, in his answer, admitted that he had executed the promissory note in favor of the bank and stated that he neither admits nor denies the remaining allegations in the complaint as the `document speaks for itself.'" The trial court held that this response constituted an admission. Judgment for the plaintiff was affirmed on appeal. Cadle Co. v. Errato, 71 Conn.App. 447, 467, fn.4 (2002). The defendant, North Water Street Tarragon, LLC, has admitted the completeness and accuracy of the note, mortgage deed and the August 2, 2007 demand letter did not offer in evidence any another version of these documents. Exhibits 2, 3 and 6 were admitted without objection. Both defendants are relying on certain language of the documents to claim notice deficiencies. The court finds that by using in its answer that a document "speaks for itself," the defendants have judicially admitted the note, mortgage deed and August 2, 2007 demand letter.
The note was due in ninety (90) days and the defendants did not pay the principal on the note when due nor make any payments of principal and interest thereafter. The plaintiff continues to be the holder of the Commercial Mortgage Note and title owner of the mortgage deed. The note is secured by a first mortgage deed on the real property of 20 North Water Street. Ex. 3. The plaintiffs have established a prima facie case and now need to demonstrate compliance with the notice requirements. Bank of America, FSB v. Hanlon, supra, 65 Conn.App. 582; Northeast Savings, F.A. v. Scherban, 47 Conn.App. 225, 228 (1997).
The defendants' Eighth Special Defense states: "In commencing this action in the nature of a mortgage foreclosure, the Plaintiff failed and neglected to give the legally and contractually requisite, written notice of default and acceleration after the expiration of the applicable grace period under the Mortgage." To support that Eighth Special Defense the defendant makes six arguments: (1) the notice was given before the date the money was due; (2) the required notice date was August 7, 2007 and the August 2, 2007 notice requiring payment on August 6, 2007 was not in compliance with the mortgage documents; (3) the plaintiff's demand required payments to be made on the wrong date; (4) the plaintiff's notice demanded a sum that was not due; (5) the plaintiff's notice demanded illegal late fees and illegal default interest, and (6) the Event of Default language of the mortgage deed was not complied with. The court will discuss each of these claims.
The plaintiff sold 20 North Water Street, Norwalk, Connecticut, to the defendant, North Water Street Tarragon, LLC, for $14,700,000 plus $120,000 in interest for a gross sales price of $14,820,000. At the April 30, 2007 closing the plaintiff took back a $7,410,000 purchase money first mortgage. The Commercial Mortgage Note for $7,410,000 required three payments to be made by the defendant; June 1, 2007 8.0% interest only on the outstanding principal balance of $7,410,000 July 1, 2007 8.0% interest only on the outstanding principal balance of $7,410,000 and the entire principal balance of $7,410,000 together with accrued 8.0% interest on July 29, 2007 ("the Maturity Date"). Ex. 2. The two interest only payments due June 1, 2007 and July 1, 2007 were paid. Neither defendant has made any further payments to the plaintiff of any sum whatsoever after July 1, 2007. By a letter to both defendants dated August 2, 2007 acting by counsel, the plaintiff demanded payment as follows; ". . . unless payment in full is received by no later than Monday, August 6, 2007." Ex. 6. The Maturity Date of the note, July 29, 2007, fell on a Sunday. The note states: "Whenever any payment to be made under this Note shall be stated to be due on a Saturday, Sunday or a public holiday, or the equivalent for banks generally under the laws of the State of Connecticut, such payment shall be made on the next succeeding business day, and such extension of time shall be included in the computation of the payment of interest." Ex. 2. Paragraph (1) on page 3 of the note states: "the maker fails to pay within five (5) days after the date due any principal and/or interest payment under this Note." The plaintiff claims that this is the only grace period in the mortgage documents; "within five (5) days."
The plaintiff claims that both the August 2, 2007 date of demand and the requirement for principal and interest to be paid in full by Monday, August 6, 2007 comply with the terms of the note. The defendants claim that the payment due date should be Tuesday, August 7, 2007 and therefore the notice was invalid as being one day too early. The court agrees with the plaintiff. The July 29, 2007 Maturity Date was Sunday and therefore no payment would be due until the next succeeding business day, Monday, July 30, 2007. There were no public holidays between July 29, 2007 and August 7, 2007. Gen. Stat. § 1-4.
There are four recognized methods of counting elapsed days: (1) Exclude both terminal days; (2) Exclude only one terminal day; (3) Include both terminal days and; (4) Count only certain designated days such as "business days." The mortgage documents do not prevent the counting of specific days such as "business days" in computing any grace period. This fourth method of counting is not relevant to this timeliness of notice issue.
"At common law, when the terminal day for filing legal papers fell on a holiday or Sunday, the plaintiff was able to make performance on the following day." Brennan v. Fairheld, 255 Conn. 693, 698 (2001). "Where the last day of a period within which an act may be done, which may not be done Sunday, falls upon such day, performance may be made on the following day." Sommers v. Adelman, 90 Conn. 713, 714 (1916). This has been rule since the first official reporting of Connecticut decisions. Avery v. Stewart, 2 Conn. 69, 71 (1816) (citing only English common law cases). The language of this Commercial Mortgage Note follows this common law precedent and only public holidays, Saturdays and Sundays are excluded if the date of payment falls on one of those days. Such is the case here. In conformity with common law and the language of the note, the required payment of the $7,410,000 principal and accrued interest was to be made on Monday, July 30, 2007, although the "Maturity Date" set forth in the note was July 29, 2007.
The interim days are Tuesday, July 31, 2007; Wednesday, August 1, 2007; Thursday, August 2, 2007; Friday, August 3, 2007, Saturday, August 4, 2007 and Sunday, August 5, 2007. The plaintiff claims that the defendants had all of the fifth day to make the payment of principal and interest. Since that fifth day was Saturday, August 4, 2007 "such payment shall be made on the next succeeding business day." That "next succeeding business day" was Monday, August 6, 2007. The defendants, according to these terms of the note, had all of Monday, August 6, 2007 to pay which is the exact demand made of the defendants by the August 2, 2007 demand letter.
The defendants argue that the correct payment due date was Tuesday, August 7, 2007. The three remaining methods of counting are: exclude both terminal days, exclude one terminal day and include both terminal days. Each method produces a different day. "When so many days `at least' are given to do an act, or `not less than,' so many days must intervene, both the terminal days are excluded." Treat v. Town Plan and Zoning Commission, 145 Conn. 136, 139 (1958). (Gen. Stat. § 8-7d requires publication of a notice of a zoning hearing, "at least" "not less than" and "not more than" and thus both terminal days are excluded in determining the timeliness of the publication notice.) Excluding both terminal days in this case would exclude Tuesday, July 31, 2007, the first terminal day. The next five days would be counted; Wednesday, Thursday, Friday, Saturday and Sunday, August 5, 2007. The last terminal day of Sunday, August 5, 2007 would also be excluded. Therefore, excluding both terminal days Monday, August 6, 2007 is the payment due date. The court finds that the August 2, 2007 notice letter complies with this counting rule. The court further finds that this rule excluding both terminal days is not the proper counting formula since the note, Ex. 2, uses the phrase "within five (5) days" not the trigger words of "not less than" or "at least." Brennan v. Fairfield, supra. 255 Conn. 698, fn.3. (The statute required written notice to be given "within sixty days.")
The second method of counting excludes one terminal day. This is the usual method of counting and was the method used by the plaintiff. Using that method, the first terminal day of Tuesday, July 31, 2007 is not counted but the last terminal day is counted, or visa versa. This results in the five-day grace period running on Wednesday, Thursday, Friday, Saturday and Sunday August 5, 2007. The first terminal day of Tuesday, July 31, 2007 is excluded and the last terminal day of Sunday, August 5, 2007 is included. The last day for the defendant to pay is Sunday, August 5, 2007. Since that day falls on a "Saturday, Sunday or public holiday" the note and common law requires performance on the next business day, Monday, August 6, 2007, the exact day provided by the plaintiff's August 2, 2007 demand letter.
If the two terminal days are included, the third method of counting, the performance day is Saturday, August 3, 2007, which grants the defendants all day Monday, August 6, 2007 to make payment. Therefore under each of the three common methods of counting, Monday, August 6, 2007 is the correct payment due date. Brennan v. Fairfield, supra, 255 Conn. 701 (90-day rule under Stat. § 13a-149 was complied with when the town clerk's office was closed on the ninetieth and ninety-first day and notice was delivered to the town clerk's office on the next business day, the ninety-second day).
The defendants also argue that both terminal dates must be excluded as required by the grace period term. The defendants count as follows: Maturity Date, July 29, 2009 falls on a Sunday. The next day Monday, July 30, 2009 is the first day for counting. Five days must occur excluding both terminal dates. The next five days are Tuesday, July 31, 2009, Wednesday, August 1, 2007, Thursday, August 2, 2007, Friday, August 3, 2007 and Saturday August 4, 2007. Since Saturday and Sunday are not business days the last day of the grace period must be Monday, August 6, 2007. Monday, August 6, 2007 is the last terminal day and must be excluded. The defendants argue that the five-day grace period had not expired by Monday, August 6, 2007 and thus the demand date should have been Tuesday, August 7, 2007. This method of counting only business days as part of the grace period finds no support in either the note or mortgage deed. If the grace period was only to consist of business days, the documents should have so stated. The defendants provided no legal authority for its position that the five-day grace period must mean five business days.
The court finds that the August 2, 2007 demand letter complies with the notice requirement under the loan documents and that the defendants had all of Monday, August 6, 2007 to pay in full or else they would be in default. No matter which of the three methods of counting terminal days are used, the due date of Monday, August 6, 2007 complies with each of the methods.
The defendants next claim that an additional five-day grace period is granted pursuant to Section 2.01 of the Mortgage deed. Section 2.01 discusses "Events of Default and Remedies" and Subsection 2.01(a) is claimed by the defendant to be the operative provision: "If (i) default shall be made in the payment of any Obligations and/or any amounts due under the Note and/or this Mortgage, in any such case, when and as the same shall become due and payable, whether at maturity or by acceleration or as part of any payment or prepayment or otherwise, or (ii) default shall be made in the payment of any tax required by Section 1.07 to be paid and said default shall have continued for a period of five (5) days after any such due date." "Obligations" as defined in the Mortgage on page 2 is "all sums loaned or advanced by Mortgagee to or on behalf of Mortgagor or due and payable by Mortgager to Mortgagee . . ." "Obligations" contains no additional grace period. One of the Obligations is the principal and interest due. The defendant claims that subsection 2.01(a)(i) contains an additional five (5) day grace period over and above the five-day grace period in paragraph (1) on page 3 of the Note. The court disagrees. The five-day grace period in Section 2.01(a) relates only to the non-payment of taxes under subsection 2.01(a)(ii). Here the defendants' default is in Section 2.01(a)(i) the non-payment of "Obligations" and section (i) contains no additional grace period.
If the defendant is correct, then arguably no principal would ever be due since the note's five-day grace period and this Section 2.01 additional five-day grace period would run in perpetuity. In addition, if the parties intended a ten-day grace period, they could have made such a provision in the note.
The defendants next claim that the Mortgage Deed requires notice of default despite the terms contained in the Commercial Mortgage Note. Section 2.01 of the Mortgage Deed starting on page 9 states: "If one or more of the following Events of Default shall happen, that is to say: . . ." Thereafter subsections (a) through (q) are set forth. After the last subsection (q) the following appears; "then and in every such case." Then paragraph roman numeral 1. follows, which states:
"During the continuance of any such Event of Default, Mortgagee, by notice given to Mortgagor, may declare any and all Obligations, and/or the entire principal of the Note then outstanding (if not then due and payable), and all accrued and unpaid interest thereon (as well as any other amounts due thereunder), to be due and payable immediately, and upon such declaration of any and all Obligations and/or the entire principal of the Note and said accrued and unpaid interest (as well as any other amounts due thereunder) shall become and be immediately due and payable, anything in the Note or in this Mortgage to the contrary notwithstanding."
The defendants then argue that `"Events of Default' means the events and circumstances described as such in Section 2.01 hereof." Ex. 3, page 1. "Obligations" are defined in the Mortgage Deed, Ex. 3, page 2, ". . . all sums loaned or advanced by Mortgagee to or on behalf of Mortgagor or due or payable by Mortgagor to Mortgagee, including, but not limited to, all sums loaned, advanced, due or owing pursuant to the terms of the Note . . ."
The defendants argue that these clauses taken together are a notice provision that requires the plaintiff to furnish notice of default. The plaintiff argues that the continuance of any such "Event of Default" relates only to acceleration, if acceleration is required. The plaintiff further notes that there is no additional grace period contained in these provisions. The court agrees with both of the plaintiff's arguments. This cited language contains no notice provision since no acceleration is required at the Maturity Date.
There was no acceleration notice required since by the Commercial Mortgage Note's terms the entire principal and accrued interest was due on the Maturity Date, July 29, 2007. Ex. 2. The court finds that there was no need for acceleration under the Mortgage Deed since no payments were to be made after the Maturity Date, July 29, 2009. Ex. 3, Section 2.01(a).
The plaintiff argues that the defendants waived notice of default pursuant to the explicit terms of the note and therefore no notice of default is needed and further argues that if the August 2, 2007 letter is found not to be a valid notice of default, it is of no import since notice was waived. There are four sections of the Commercial Mortgage Note where waiver of notice language appears: (1) Page 2, last paragraph: "The Maker hereby expressly waives presentment, demand, dishonor, protest, diligence in collection, notice of protest, notice of non-payment, notice of acceptance, notice of maturity, notice of default, notice of demand, notice of dishonor, and notice of any renewals, extensions or modifications of this Note . . ."; (2) Page 3, first full paragraph: "This Note (and any and all amounts due hereunder) and all Maker's other indebtedness to the Holder shall became immediately due and payable at the option of the Holder, without any notice or demand of any kind whatsoever, if: (1) the Maker fails to pay within five (5) days after due date any principal and/or interest payment under this Note; . . ."; (3) Page 4, fifth paragraph: "Without limiting the generality of the foregoing or any other document or instrument, the Maker is obligated to make any and all payments or other amounts due under this Note or any other document, agreement or instrument executed in connection therewith, without any notice or demand of any kind whatsoever . . ."; and (4) Page 2, first full paragraph: ". . . the Maker promises and agrees to pay the Holder the entire unpaid principal amount of this Note, together with any and all accrued interest and any and all other amounts of any kind whatsoever due or payable under or in connection with this Note, on July 29, 2007 (the `Maturity Date')." The court finds that the defendants explicitly waived notice of default in the note.
The Mortgage Deed contains provisions for notice and demand only under certain limited circumstances; Section 1.10(a), Violation of covenants in Section 1.01, 1.03, 1.07, 1.08, 1.09 or 1.12 and failure to pay funds advanced by Mortgager for failure to perform covenants in Section 1.10(a). The Mortgage Deed contains no notice provisions as to non-payment of principal or interest. Both loan documents clearly differentiate between monetary and non-monetary default. The court finds that notice of non-payment of principal and interest was waived. Antonino v. Johnson, 113 Conn.App. 72, 77 (2009); Alco Standard Corp. v. Charnas, 56 Conn.App. 568, 572 (2000).
The defendants next argue that Section 2.03 on page 13 of the Mortgage Deed supports its position that the notice in the August 2, 2007 letter demanding payment by Monday, August 7, 2007 was premature. Section 2.03(a) states: "In case an Event of Default described in clause (a) of Section 2.01 hereof shall have happened and be continuing, then, upon written demand of Mortgagee, Mortgagor will pay to Mortgagee the whole amount which then shall have become due and payable on the Note, and after the happening of said Event of Default will also pay to Mortgagee interest at the Default Rate on the then unpaid principal of the Note, and the sums required to be paid by Mortgagor pursuant to any provision of this Mortgage, and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including any expenses incurred by, or on behalf of, Mortgagee hereunder." The defendants fail to articulate exactly why Monday, August 6, 2007 is premature and is not the proper demand due date taking into consideration the five-day grace period as set forth in the Commercial Mortgage Note. The court finds that there is nothing inconsistent in this Section 2.03 with the fact that notice and demand has been waived by the note. In addition the court has found that the plaintiff has complied with the five-day grace period.
The plaintiff further claims that the defendants had actual notice of the Maturity Date, there is no need for acceleration, notice or demand and any claimed deficiency in the notice a default is of no legal significance since the defendants had actual knowledge of the Maturity Date. The defendant, Tarragon Development Corporation, is a publicly traded corporation organized and existing in the State of Nevada and has extensive real estate holdings throughout the United States. It is a nationally recognized builder and developer of commercial property: retail and residential units for rent and sale. The defendant, North Water Street Tarragon, LLC, was an entity created by Tarragon Development Corporation to close this transaction. Tarragon Development Corporation is a sophisticated business corporation. The original Purchase and Sale Agreement did not provide for the plaintiff as seller taking back a purchase money mortgage. That event only occurred toward the end of the proceedings when defendants' lender, Fremont Investment and Loan, could not close as of the scheduled closing date of April 30, 2007. The parties entered into a Fourth Amendment to the Purchase and Sale Agreement on March 14, 2007 providing for a $7,410,000 purchase money first mortgage to be taken back by plaintiff but only for a very short period of time ninety (90) days. Ex. 31. "The Closing Date shall occur on April 30, 2007, time of the essence." The closing occurred on April 30, 2007 and the ninetieth day from the closing was July 29, 2007, referred to in the Commercial Mortgage Notes as the Maturity Date. There is no evidence to show that the defendants as sophisticated real estate investors suddenly forgot after April 30, 2007 that ninety days hence a balloon payment of $7,410,000 plus accrued interest at 8.0% from July 1, 2007 would be due.
On July 11, 2007 Attorney Waters, on behalf of the plaintiff, contacted the defendants by e-mail stating: "Attached please find the payoff statement for the purchase money mortgage, calculated as of the maturity date of July 29, 2007, for your convenience. If you desire to pay this obligation prior to that date, please let me know in advance so that we can notify the bank to expect the payment. I would also appreciate an update as to the status of your financing when you have the opportunity." Ex. 91.
This Ex. 91 e-mail was circulated among the defendants' officers and employees on July 20, 2007 as follows: "Do you wish for Todd. S. (as I understood he has a relationship with the seller) to approach David Fite with the Websters term sheet in hand and request a 90 day extension? The loan matures Monday, July 30 (29th is Sunday)." Ex. 91.
The principles of both parties also were in direct contact with each other about an extension of the Maturity Date. As a result of that contact, the plaintiff instructed Attorney Waters to write a letter to both defendants on July 18, 2007 that no extensions will be granted. The requested forty-five (45) to sixty-day (60) extension was denied and the plaintiff expected payment in full pursuant to the note. Ex. 11. Despite the clarity of the July 18, 2007 letter, the defendants requested the plaintiff by a letter dated July 25, 2007 a "60-day extension of the loan." Ex. 12. The plaintiff rejected that request in a July 26, 2007 letter which stated: ". . . we still expect that the loan will be paid in accordance with its terms and we are not willing to grant the extension requested." Ex. 13. Furthermore, the parties met on August 2, 2007. The parties discussed at that August 2, 2007 meeting that the maturity date of July 29, 2007 had just passed but the five-day grace period had not yet run. At that August 2, 2007 meeting the plaintiff reasserted its demand to the defendants that the plaintiff be paid in full in accordance with the note.
From all of these facts this court concludes that the defendants knew that the entire principal and interest was due on July 29, 2007 and despite the defendants' best efforts to obtain an extension the plaintiff would not agree to any extension whatsoever. The defendants knew that if a maturity date of July 29, 2007 passed without payment being made in full then the defendants would be in default. The defendants have failed to offer any evidence that they suffered harm from any claimed defective notice. The court therefore finds that the defendants had actual notice of the July 29, 2007 Maturity Date, that there would be no need for any notice or demand under those circumstances; that the defendants did not suffer any harm in enforcing the Maturity Date provisions of the note and that if there were any deficiencies in the notice and demand given, those deficiencies were waived by the fact that the defendants had actual notice. Fidelity Bank v. Krenisky, 72 Conn.App. 700, 712 (2002); Mortgage Electronic Reg. Systems v. Goduto, 110 Conn.App. 367, 375 (2008).
The court finds that the plaintiff has sustained its burden of proof that all conditions precedent to foreclosure as mandated by the note and mortgage have been satisfied. Bank of America, FSB v. Hanlon, supra, 65 Conn.App. 582. The defendants have claimed otherwise in their Eighth Special Defense and the six arguments they make in support of the Eighth Special Defense. See pages 13-14 of this Memorandum of Decision. For the reasons outlined in the preceding portions of this Memorandum of Decision, the defendants have failed to sustain their burden of proof. All six arguments have not been proven by the defendants. The court will discuss the defendants' fifth argument as to illegal late fees and illegal default interest later in this Decision, but the court finds the issues on the notice portion of the defendants' fifth argument for the plaintiff. The defendants raised illegal late fees and illegal default interest only in the Ninth Special Defense. The issues on the Eighth Special Defense are found for the plaintiffs.
At oral argument, the defendants argued for the first time in this forty plus day trial that the plaintiff failed to prove its debt. The defendants claim that Exhibit 7, a detailed calculation of the principal, 8.0% interest, late fees, and 18.0% default interest, offered early on in this trial was insufficient to sustain the plaintiff's burden of proof as to the amount of the debt. The defendants claim that: The exact mathematical calculation of the complete debt must be offered by the plaintiff. The debt must be calculated exactly to the judgment date, the date the court renders its decision in a contested foreclosure action; The court cannot do any calculation, despite the fact that in a contested foreclosure, the court has 120 days to render a decision; The court cannot find any debt other than that last offered by a plaintiff's affidavit of debt or other written calculation; The court has no authority to bring the debt current by adding per diem interest; The plaintiff failed to re-open its case in chief by offering an updated debt calculation; and; The plaintiff committed a few mathematical calculations in Exhibit 7 which were not corrected in writing by properly filed documents.
Faced with this claim raised for the first time at oral argument, the court asked for legal authority. On the next trial date the defendants offered some Connecticut cases. The citations offered by the defendants do not support any of the above claims. If the defendants are correct then in a multi-day contested foreclosure trial, the court must allow the plaintiff to open its case in chief and submit a new affidavit of debt with supporting testimony subjected to cross-examination as the last proceeding in the trial. Thereafter, the trial court must render a decision on the very day the trial concludes. In effect, if the defendants arguments are correct, the trial court is deprived of the one hundred twenty (120) days to render a decision under Gen. Stat. § 51-183b.
The defendants spent many trial days on the issue of notice, demand, grace period and acceleration, essentially asking each witness to quote extensively from the note and mortgage deed. The defendants, at the end of the forty-two day trial, after the testimony had been presented, in the midst of oral argument raised for the first time this issue of the plaintiff's failure to prove the debt. This case involved no calculation of principal due since the loan documents required no principal payment until maturity. The $7,410,000 was the loan amount and the $7,410,000 was the principal due. The interest rate was a fixed 8.0%. There was no variable rate and no index rate of interest. Simple multiplication and addition using the due date set forth in the note would produce the debt due. No expert testimony was needed. No party needed a computer or abacus to perform these calculations. It is true that the plaintiff made an error in calculating a day or two of interest in Exhibit 7, which was pointed out on the record early in the trial.
Court clerks regularly calculate interest due in default judgments by bringing the affidavit of debt current. P.B. 17-25(b); P.B. 17-27. Trial courts do calculations necessary to determine the amount of attorney fees due in contested cases and often the attorney fees are the largest component of the damages. Smith v. Snyder, 267 Conn. 456, 479 (2004). The Appellate Court has corrected math errors on its own. Amwax Corporation v. Chadwick, 28 Conn.App. 739, 745, fn.1 (1992). The Supreme Court on its own has changed judgments in the millions of dollars due to a mathematical error that was discovered by the Supreme Court. Certain Underwriters of Lloyds of London v. Cooperman, Inc., 289 Conn. 383, 411, fn.21 (2008). It is a well known rule of law that the court has the inherent power to correct a clerical or mathematical error. Milazzo v. Schwartz, 88 Conn.App. 592, 595-96 (2005). The defendants claim at oral argument that the trial court cannot perform simple calculations based on the evidence presented is an unwarranted and unsupported attack on this rule of law.
The court will now determine the debt due from the judicially admitted facts, the note and the defendants failure to offer any proof of payment other than the June 1, 2007 and July 1, 2007 interest payments.
The plaintiff is claiming that the principal amount due is $7,410,000 principal together with eight (8.0%) percent unpaid interest from July 1, 2007 until default, eighteen (18.0%) percent default interest thereafter, a five (5.0%) percent late fee and attorneys fees. The claims for attorney fees, if any, will be heard post-judgment in accordance with PB. § 11-21. Exhibit 7 contains the plaintiff's calculations except for the claim of attorney fees. Plaintiff is claiming that the total debt as of October 31, 2008 is $9,614,884.28 including principal, fixed interest of 8.0%, 18.0% default interest, and a 5.0% late fee. Ex. 7. The court notes a typographical error in the TOTAL DUE line wherein "2007" should read "2008." In addition, the plaintiff is claiming per diem interest of $3,919.64 after October 31, 2008. The plaintiff calculated the per diem interest of $3,919.64 using the 18.0% default interest, a 360 day year and the balance due of $7,839,286.00, which was the product of adding $7,410,000 principal, 8.0% interest to August 3, 2007 and a 5.0% late fee of $373,299.33. According to Exhibit 7 the total debt to June 30, 2009 would be $10,563,437.16 using the $3,919.64 per diem interest from November 1, 2008 through and including June 30, 2009. In the examination of Attorney David Fite Waters as the first witness in this trial, a number of mathematical calculation issues arose concerning this debt calculation. The defendants at final argument claim that those mathematical calculation issues prevent this court from finding the debt. The court will now discuss each of the issues raised by the defendants.
(1) Is the 360 day method under Conn. Gen. Stat. § 37-1 being used to calculate interest?
(2) Does the note set forth a method of interest calculation using 360 days as a year?
(3) Was the interest paid in arrears?
(4) On what date was interest paid through when the June 1, 2007 and July 1, 2007 interest only payments were made?
(5) On what date does the 8.0% interest end; July 29, July 30, August 2 or August 6, 2007?
(6) On what date does the 18.0% default interest start?
(7) On what sum is the 18.0% default interest charged?
(8) Does the note language in Ex. 2, page 4: "lower of (i) eighteen percent (18.00%) per annum or (ii) the highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut" require the use of 18.0% default interest?
(9) Was any evidence produced by the parties concerning "the highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut?
(10) Can late fees be calculated based on 8.0% interest due?
(11) Can late fees be charged when the loan has matured and there are no further periodic payments due?
The court will now comment on each of these eleven issues:
(1) Gen. Stat. § 37-1(a) states: ". . . in computing interest, three hundred and sixty days may be considered to be a year." This statute was not used in calculating interest since the note contained its own terms using a 360 day year.
(2) The first paragraph of the note ends with the following sentence: "All interest due or payable under or in connection with this Note shall be calculated on the basis of a three hundred sixty (360) day year counting the actual number of days elapsed." This method of calculating interest was used by the plaintiff in Exhibit 7 and was used by this court in this Memorandum of Decision.
(3) According to the note interest is paid in arrears. Ex, 2 first paragraph, subparagraph (i). The first payment of interest was on June 1, 2007. No prepaid interest was paid or charged on the $7,410,000 principal at the April 30, 2007 closing. Ex. 7.
(4) The court finds that no payment of the $7,410,000 principal has been made at any time. The court finds that the principal due is $7,410,000. The court finds that $7,410,000 principal times 8.0% interest is $592,800 per year interest, which sum when divided by the 360 days set forth in the note calculates to a per diem interest of $1,646.66. The court finds that the defendant made a first payment of interest only on June 1, 2007 in the amount of $52,693.33. That is thirty-two (32) days of interest without any rounding off. The court finds, therefore, that the defendants have paid interest on and from the closing date of April 30, 2007 up to and including the 32nd day, May 31, 2007. The court finds that no interest was paid for June 1, 2007, when the June 1, 2007 interest only payment was made.
The court finds that the July 1, 2007 interest and payment was made by the defendants in the amount of $49,400. That is thirty (30) days of interest at $1,646.66 per diem. That $49,400 paid all interest due from and including June 1, 2007 through and including June 30, 2007. The court finds that the defendants have not paid interest starting on July 1, 2007 to date. No interest was paid by the defendants at any time after June 30, 2007. The defendants therefore owe interest from and after July 1, 2007.
(5) The next question is what rate of interest accrues during the five-day grace period? There are two paragraphs of the note that answer that question. Ex. 3, page 4, the second paragraph states "If any payment of principal and/or interest is not paid in full within five (5) days after any such payment is due and payable . . ." The next sentence states: "In addition, after the occurrence and during the continuance of any default hereunder beyond applicable grace periods . . ." The court concludes from that language that interest will continue at the eight percent (8.0%) rate throughout the entire grace period. Since the end of the grace period ended either on a Saturday or Sunday, the defendants had all of Monday, August 6, 2007 to make the payment. This court concludes that interest at the rate of 8.0% accrues from and on July 1, 2007 and continues through all of Monday, August 6, 2007, a period of thirty-seven (37) days. The per diem interest at 8.0% on the unpaid principal of $7,410,000 is $1,646.66 times thirty-seven (37) days. The eight percent (8.0%) interest is due to the plaintiff from July 1, 2007 through and including Monday, August 6, 2007 in the amount of $60,926.00. (The court has rounded off the cents to the lowest dollar amount.)
(6) The eighteen percent (18.0%) default interest commences on Tuesday, August 7, 2007.
(7) Exhibit 7 shows that the plaintiff did calculate 18.0% default interest on the underlying 8.0% interest that was due from July 1, 2007 until the date of default as well as the $7,410,000 principal and late fee. The court finds that this compounding of interest (interest on interest) is not permitted under any term of the note, mortgage or Connecticut law. According to the language of the note, 18.0% interest accrues after default; "the per annum interest rate of this Note shall increase . . ." The court finds that the default interest accrues only on the outstanding principal due, which is $7,410,000.
(8) The plaintiff argues that the default interest rate is 18.0% since there is no "highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut." The plaintiff argues that this last phrase would become effective only in the event that there was a cap of interest imposed on commercial mortgage loans that would be less than the 18.0%. For example, if the commercial loan cap by Connecticut statute was 13%, the 13% would then be the default rate of interest since 13% is the lower of those two numbers. If there is no cap, the plaintiff claims the default interest rate is 18.0%. The defendants naturally disagree and claim that the entirety of the 18.0% default interest is a penalty. Assuming for the limited purpose of this issue that the 18.0% default interest is not a penalty, the court finds that there is no "highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut." This transaction is a "bona fide mortgage of real property in excess of five thousand dollars." Gen. Stat. § 37-9(3). Thus, assuming that default interest is permitted as established by the Commercial Mortgage Note, the court finds that the default rate of interest is 18.0% per annum.
(9) No legal authority was furnished to this court as to any cap on the interest rate for commercial loans within the State of Connecticut established by statute or case law. This is a bona fide mortgage in excess of $5,000. Gen. Stat. §§ 37-4, 37-9(3). The court agrees with the plaintiff's argument and finds that if default interest is to be charged, that rate has been established in the note in the amount of 18.0% after default.
(10) The plaintiff calculated the late fees by adding the unpaid 8.0% interest to the $7,410,000.00 principal and then multiplying the total by 5.0%.
Exhibit 7 credited the two interest payments and notes that the total amount due as of June 30, 2007 was the $7,410,000 principal. The court finds that all interest had been paid through and including June 30, 2007. The Maturity Date was July 29, 2007. If the note was paid in full on July 29, 2007, that payment would have been $7,457,753.34, which is the $7,410,000 principal plus twenty-nine (29) days of 8.0% interest at $1,646.66 per diem. This figure of $7,457,753.34 is shown in Exhibit 7 on the line "7/29/07 Maturity," The note states: "If any payment of principal and/or interest is not paid in full within five (5) days after any such payment is due and payable, the Maker shall pay to the Holder a late fee on such unpaid amount equal to five percent (5%) of such late payment." Ex. 3, page 4, first paragraph. The plaintiff added to the $7,457,753.34 in the "July 29, 2007 Maturity" line of Exhibit 7 five days of 8.0% interest being $8,233.33 to obtain a total of $7,465,986.67. The plaintiff multiplied the $7,465,986.67 times 5.0% to obtain a late fee of $373,299.33. The court finds that these calculations are in accordance with the terms of the Commercial Mortgage Note. The court will discuss the propriety of late fees being charged at maturity, not on unpaid periodic payments, in the next paragraph (11).
(11) Can late fees be charged where the loan has matured and there are no further periodic payments due? The plaintiff claims in Exhibit 7 a late fee of $373,299.33. The late fee was based on the defendants failure to pay at the "Maturity Date." Ex. 6.
Only two periodic payments were required by the Commercial Mortgage Note and both were interest only. The first was interest at the rate of 8.0% due from April 30, 2007, the closing date, to June 1, 2007 and the second interest of 8.0% due on July 1, 2007. Both of those interest only payments were timely and fully made. No late fee is being charged on any periodic payment. The note itself called for a Maturity Date of July 29, 2007 when the principal of $7,410,000 plus accrued interest at 8.0% from July 1, 2007 would then be due. The last payment on the Maturity Date is not a periodic payment. It is payment in full of the principal. Late fees are permitted only on late periodic payments and only until the event of default. FDIC v. Napert-Boyer, supra, 40 Conn.App. 443-44. This court finds that no late fee is due the plaintiff as a matter of law. The issues in the defendants' Eighth Special Defense as to the propriety of late fees are found for the defendants.
This concludes the discussion of the eleven issues set forth on pages 28-29 hereof.
The defendants also claim in their Ninth Special Defense that "a default rate of eighteen percent (18.0%) per annum . . . are unconscionable and inequitable penalties under the facts of this case." The defendants claim 18.0% default interest is void under Connecticut law. Page 4 of the promissory note contains the 18.0% default rate. "In addition, after the occurrence and during the continuance of any default hereunder beyond applicable grace periods or after accelleration (sic) or maturity hereunder, the per annum interest rate of this Note shall increase, at Holder's sole option and without notice, to a rate equal to the lower of (i) eighteen percent (18.00%) per annum or (ii) the highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut. Interest accruing after demand, maturity or accelleration shall be payable on demand." Page 1 of the note contains the provisions for the eight percent (8.0%) interest "together with (i) interest in arrears on any and all principal amounts remaining unpaid hereunder from time to time from the date of this Note until payment in full, at a fixed interest rate per annum equal to eight percent (8%), . . ." The court has already found that there is no "highest rate of interest then lawfully allowed for similar commercial loans within the State of Connecticut." Therefore the interest rate that must be tested by the Ninth Special Defense is eighteen percent (18.0%) per annum.
The issue is whether an eighteen percent (18.0%) default interest rate on a ninety (90) day note that contains eight percent (8.0%) fixed rate interest secured by a first mortgage of no more than fifty percent (50.0%) equity is unconscionable as a matter of law and void as a penalty. The agreed upon interest rate was 8.0% per annum and the default interest rate was 18.0%. The difference is higher than the original rate of interest. The difference is more than double the agreed rate of interest. The difference is an additional 10% interest per annum. The default interest is 125% higher than the agreed rate of interest. The default interest rate exceeds the 12% statutory usury rate by 50%. Gen. Stat. § 37-4.
"The law is well established in this jurisdiction, as well as elsewhere, that a term in a contract calling for the imposition of a penalty for the breach of the contract is contrary to public policy and invalid, but a contractual provision fixing the amount of damages to be paid in the event of a breach is enforceable if it satisfies certain conditions." Berger v. Shanahan, 142 Conn. 726, 731 (1955).
"A contractual provision for a penalty is one the prime purpose of which is to prevent a breach of the contract by holding over the head of a contracting party the threat of punishment for a breach . . . A provision for liquidated damages, on the other hand, is one the real purpose of which is to fix fair compensation to the injured party for a breach of the contract." American Car Rental, Inc. v. Commission of Consumer Protection, 273 Conn. 296, 306 (2005).
Our Supreme Court has set forth a test for determining whether a contract provision calls for the payment of an impermissable penalty. "In determining whether any particular provision is for liquidated damages or for a penalty . . . that which is determinative of the question is the intention of the parties to the contract. Accordingly, such a provision is ordinarily to be construed as one for liquidated damages if three conditions are satisfied: (1) The damage which was to be expected as a result of a breach of contract was uncertain in an amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage, which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of contract." Id. 306-07; Bellemare v. Wachovia Mortgage Corporation, 284 Conn. 193, 203 (2007).
In a 2005 commercial mortgage foreclosure case the defense of unconscionability prevailed. The $25,000 note was for ninety (90) days with 15% interest, a $3,000 origination fee, $932.50 pre-paid interest, a $400 processing fee, attorneys fees, and a courier fee, all of which was paid by the defendant at the closing. The plaintiff commenced foreclosure after the defendant refused to refinance at the end of the ninety (90) days. Monetary Funding Group Inc. v. Pluchino, 87 Conn.App. 401, 411-12 (2005). The court found the interest and fees in Pluchino to be unconscionable and denied the foreclosure on equitable grounds. "As a general matter, we note that it is well established in our jurisprudence that "[f]oreclosure is peculiarly an equitable action, and the court may entertain such questions as are necessary to be determined in order that complete justice may be done . . . [B]ecause a mortgage foreclosure action is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done." (Citations omitted; emphasis in original; internal quotation marks omitted.) Morgera v. Chiappardi, 74 Conn.App. 442, 456-57, 813 A.2d 89 (2003); see also Northeast Savings, F.A. v. Hintlian, 241 Conn. 269, 275, 696 A.2d 315 (1997); Moasser v. Becker, 78 Conn.App. 305, 324, 828 A.2d 116, cert. denied, 266 Conn. 910, 832 A.2d 70 (2003). Foreclosure may be withheld by the court on the grounds of equitable considerations and principles. LaSalle National Bank v. Freshfield Meadows, LLC, 69 Conn.App. 824, 833, 798 A.2d 445 (2002)." Monetary Funding Group Inc. v. Pluchino, supra, 87 Conn.App. 405.
Our first consideration is the standard of review for a claim of unconscionability. [T]he question of unconscionability is a matter of law to be decided by the court based on all the facts and circumstances of the case . . . Our review on appeal is not limited to determining whether there has been clear error . . . [T]he ultimate determination of whether a transaction is unconscionable is a question of law, not a question of fact, and . . . the trial court's determination on that issue is subject to a plenary review on appeal. It also means, however, that the factual findings of the trial court that underlie that determination are entitled to the same deference on appeal that other factual findings command. Thus, those findings must stand unless they are clearly erroneous . . .
The purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise . . . As applied to real estate mortgages, the doctrine of unconscionability draws heavily on its counterpart in the Uniform Commercial Code which, although formally limited to transactions involving personal property, furnishes a useful guide for real property transactions . . . As Official Comment 1 to § 2-302 of the Uniform Commercial Code suggests, [t]he basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract . . . Unconscionability is determined on a case-by-case basis, taking into account all of the relevant facts and circumstances," (Citations omitted; emphasis added; internal quotation marks omitted.) Family Financial Services, Inc. v. Spencer, 41 Conn.App. 754, 762-63, 677 A.2d 479 (1996); see also Cheshire Mortgage Service, Inc. v. Montes, 223 Conn. 80, 87-89, 612 A.2d 1130 (1992).
Monetary Funding Group Inc. v. Pluchino, supra, 87 Conn.App. 411-12.
In a 2006 case the defendant failed to sustain his burden of proof to show that the 18% interest was unconscionable. "In the present case, the court expressly held that the defendant had failed to prove any of his special defenses and correctly noted that the defendant did not cite any authority to support his special defense that a default interest rate of 18.0 percent was unconscionable. Moreover, the defendant did not provide any expert testimony on this point, and it was uncontested at trial the defendant had the advice of counsel when he agreed to the default interest rate. Consequently, because the party claiming unconscionability bears the burden of proof . . . the defendant's bald assertion of unconscionability, without more, was insufficient to establish that the default interest rate of 18 percent was unconscionable." Emigrant Mortgage Corporation v. D'Agostino, 94 Conn.App. 793, 802-03 (2006).
It is useful to review Connecticut's statutory interest scheme. Gen. Stat. § 37-1a states: "On any loan in excess of ten thousand dollars made to any person, corporation, partnership or association engaged in commercial, manufacturing, industrial or nonconsumer pursuits the loan agreement may provide for the interest to be either paid currently or to accrue, and, if such interest is to accrue, such accrued interest may be added to the principal of the debt on which interest may be charged and collected." Gen. Stat. § 37-1a provides for no maximum interest rate on such commercial loans. Gen Stat. § 37-4 states: "No person and no firm or corporation or agent thereof, other than a pawn broker as provided in section 21-44, shall, as guarantor or otherwise, directly or indirectly, loan money to any person and, directly or indirectly, charge, demand, accept or make any agreement to receive therefor interest at a rate greater than twelve per cent per annum." This is Connecticut's usury statute. There is a statutory exception to Gen. Stat. § 37-4 found in Gen. Stat. § 37-9(3) for: "any bona fide mortgage of real property for a sum in excess of five thousand dollars." The court finds that this transaction is a bona fide commercial mortgage of real property between business corporations for a sum in excess of five thousand dollars. The twelve percent (12.0%) usury rate under § 37-4 does not apply. Gen. Stat. § 37-1 is entitled "Legal rate" and states in subsection (a): "The compensation for forebearance of property loaned at a fixed valuation, or for money, shall in the absence of any agreement to the contrary, be at the rate of eight percent a year . . ." Connecticut's so-called statutory rate of interest, is contained in Gen. Stat. § 37-3a(a): ". . . interest at the rate of ten percent a year, and no more, may be recovered and allowed in civil action or arbitration proceedings under chapter 909, including actions to recover money loaned at a greater rate, as damages for the detention of money after it becomes payable." Prior to October 1, 1979, Gen. Stat. § 37-3a(a) contained a rate of 6.0%. In P.A. 79-364, S. 2, the rate was increased to 8.0%. In P.A. 83-267 the rate was increased from 8.0% to the current 10.0%. It is important to note that the 10.0% is a cap since the statute states: "interest at the rate of ten percent a year; and no more, . . ." Therefore, Connecticut has no official numerical statutory rate of interest. The rate of interest so imposed cannot exceed 10 percent (10%) per annum. Sears Roebuck and Company v. Board of Tax Review, 241 Conn. 749, 766 (1997).
Our statutes contain civil damage penalty provisions for violations of certain statutes. Most of these statutes limit damages to no more than double the compensatory damage. Double damages are contained in the following statutes: Gen. Stat. § 31-72, failure to pay wages; Gen. Stat. § 31-48, failure to pay minimum wages; Gen. Stat § 52-568, vexation litigation, and Gen. Stat § 47a-56, entry and detainer.
Although neither party is a bank insured under the Federal Deposit Insurance Act (FDIA) as real estate investors each no doubt has borrowed mortgage funds from FDIC insured institutions. The FDIA contains a cap on interest rates: "interest at a rate of not more than 1 per cent in excess of the discount rate on ninety-day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district where such State bank . . . is located . . ." 12 U.S.C. 1831d(a) Sec. 27a Connecticut is in the New York Federal Reserve district. Their discount rates are published and historical records of their discount rates are maintained. www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html. In addition, the Federal Reserve publishes historical rate records including for all of 2007 www.federalreserve.gov/releases/h15/data.htm. An examination of these records indicates two discount rates on ninety-day (90) commercial paper; financial commercial paper and non-financial commercial paper. For all of 2007 these rates were far less than 18.0%. The FDIA does permit state banks to lend to the maximum permitted in the State in which they operate and as stated, Connecticut has no interest rate cap on bona fide mortgages. The federal trend is the discouragement of interest rates that are punitive.
The latest case in Connecticut discussing interest as an unenforceable penalty is Dougan v. Dougan, 114 Conn.App. 379 (2009). Dougan involved 10% interest on a $7,500,000 lump sum payment to be made one year after the date of the dissolution of the marriage. The defendant, an extremely wealthy and financially sophisticated investor, agreed to pay his soon to be ex-wife two lump sum payments in the court approved Separation Agreement incorporated by reference in the decree of dissolution. The defendant inadvertently was twelve days late on the second payment of $7,500,000. He paid that $7,500,000 lump sum together with 10% interest for these twelve days. The ex-wife claimed that interest pursuant to the terms of the Separation Agreement ran from the date of the dissolution if the $7,500,000 second payment was late. This additional interest was over $750,000. Although case turned on a separate issue, all three Judges of the Appellate Court considered whether the 10% interest to accrue from the date of the Separation Agreement in a commercial context would be a penalty and would be void.
The Dougan court discussed the general rules of penalties in Connecticut. "The purpose of contract damages is to put the parties in the position they would have occupied had the contract been performed according to its terms . . . The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promissor for having broken his promise has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on the grounds of public policy . . . Ordinarily, when a court concludes that there has been a breach of contract, it enforces the broken promise by protecting the expectation that the injured party had when he made the contract. It does this by attempting to put him in as good a position as he would have been had the contract been performed, that is, there had been no breach . . . It is sometimes said to give the injured party the `benefit of the bargain' . . . It is axiomatic that the sum of damages awarded as compensation in a breach of contract action `should place the injured party in the same position as he would have been had the contract been performed' . . . The injured party, however, is entitled to retain nothing in excess of that sum which compensates him for the loss of his bargain . . . Guarding against excessive compensation, the law of contract damages limits the injured party `to damages based upon his actual loss caused by the breach' . . ." Id. 402-03 (Internal citations omitted.)
The Dougan Separation Agreement stated: "In the event payment is not made when due, interest at ten percent per annum shall accrue from the day hereof until fully paid . . ." The "day hereof" was the date of the Separation Agreement, one year prior. The dissent found that this is a penalty in a commercial setting. It also appeared that all three Judges of the Appellate Court would call this a commercial penalty. "If this were a purely commercial case, I would be compelled to agree that the provision at issue constitutes a penalty, rather than a liquidated damages clause, and would be unenforceable as a matter of public policy." Id. 395. (Concurring opinion.) The dissent stated: "The provision at issue cannot be characterized as anything but a penalty . . . Id. 397. "That provision is the very epitome of a penalty. In the words of American Car Rental, Inc., it is a contractual provision . . . the prime purpose of which is to prevent a breach of the contract by holding over the head of a contracting party the threat of punishment for a breach." Id. 406. (Dissenting Opinion); American Car Rental, Inc. v. Commissioner of Consumer Protection, supra, 273 Conn. 306.
Dougan v. Dougan, 114 Conn.App. 379 (2009), was granted Certification by the Supreme Court on July 29, 2009 limited to the following issue: "Did the Appellate Court properly determine that the trial court incorrectly concluded that the provision in a stipulated judgment of dissolution requiring payment of interest upon default was invalid as against public policy." Dougan v. Dougan, 292 Conn. 920 (2009).
The United States Supreme Court has issued a series of decisions that have severely limited punitive damage awards. The court finds these decisions instructive on the issue of whether the 18.0% default interest is punitive, unconscionable and void.
In general, these Supreme Court cases have held in a tort context that the Due Process Clause of the Fourteenth Amendment to the United States Constitution prohibits the imposition of grossly excessive or arbitrary punishments. Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 433-34, 121 S.Ct. 1618 (2001). The trend is towards lower punitive damages. The court will review the cases establishing that trend.
In BMW of North America, Inc. v. Gore, 517 U.S. 559, 574, 116 S.Ct. 1589 (1996), the Supreme Court addressed a $2,000,000 punitive damages award. The underlying lawsuit involved the improper painting of Mr. Gore's BMW automobile. The trial court found $4,000 compensatory damages. The Alabama Supreme Court's $2,000,000 punitive damage award was overturned on the basis of the ratio between those two numbers. The United States Supreme Court held the five hundred to one ratio was "grossly excessive." Id. 514. BMW established three guideposts for future due process review of punitive awards: Degree of responsibility, ratio and sanctions for comparable misconduct. The ratio analysis has been followed in later cases.
In 2003, the Supreme Court considered a compensatory damage judgment from Utah in the amount of $2,600,000 and compared it with a $145,000,000 punitive damage award. Applying the ratio analysis, the court noted that this ratio of fifty-six to one was far less than BMW's ratio of five hundred to one. The trial court reduced the jury verdict to $1,000,000 compensatory and $25,000,000 punitive damages, a ration of twenty-five to one. The Utah Supreme Court reinstated the $145,000,000 punitive damages and kept the trial court's $1,000,000 compensatory award thus establishing a one hundred forty-five to one ratio. This ratio of 145 to 1 was at issue before the Supreme Court. The court held that ratio, even though there it was less than BMW v. Gore still violated the Due Process Clause. "We have been reluctant to identify concrete constitutional limits as the ratio between harm, or potential harm, to the plaintiff and the punitive damages award." State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408, 424, 123 S.Ct. 1513 (2003), held: "We decline again to impose a bright-line ratio which a punitive damages award cannot exceed. Our jurisprudence and the principles it has now established demonstrate, however, that in practice, few awards exceeding a single digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Id. 425. State Farm cited language in favor of a four to one ratio. "The Court further referenced a long legislative history, dating back over 700 years and going forward to today, providing for sanctions of double, treble or quadruple damages to deter and punish . . . While these ratios are not binding, they are instructive. They demonstrate what should be obvious: single-digit multiplers are more likely to comport with due process, while still achieving the State's goal of deterrence and retribution, than awards with ratios in the range of 500 to 1 . . . or in this case of 145 to 1." Id. 425. "In sum, courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered." Id. 426. State Farm did not involve personal injury. "The harm arose from a transaction in the economic realm." Id. 426.
In 1989, the supertanker, Exxon Valdez, ran aground off the coast of Alaska spilling millions of gallons of crude oil into the Prince William Sound, an ecological sanctuary. After multiple proceedings, both criminal and civil, the civil punitive damages award was before the Supreme Court. Exxon Shipping Co. v. Baker, 554 U.S. 128 S.Ct. 2605, 171 Ed.2d. 570 (2008). The previous punitive damages cases were reviewed and the roots of punitive damages awards back to the Middle Ages and beyond to the Code of Hammurabi were considered. There were multiple plaintiffs who received a compensatory damage award of $507,000,000. The jury's punitive damage award of $5,000,000,000 against Exxon was reduced by the Ninth Circuit Court of Appeals to $2,500,000,000. The ratio that was presented to the Supreme Court between compensatory and punitive damages was forty-nine to one. The Supreme Court held that the punitive damage award against Exxon was excessive as a matter of maritime common law. "A punitive-to-compensatory ratio of 1:1 thus yields maximum punitive damages in that amount." Id. 599. "The award should be linked to an amount equal to compensatory damages." Id. 575. The Supreme Court rejected a hard dollar cap on awards of punitive damages while noting that some states have imposed such a cap. The Court noted: "Although some studies show the dollar amounts of punitive damage awards growing over time, even in real terms, by most accounts the median ratio of punitive to compensatory awards remain less than 1:1." Id.
Although Exxon was based on maritime law, it was maritime common law. The studies relied on in Exxon were not maritime cases but general punitive damage awards in the United States. Exxon limits such punitive damages to a ratio of 1:1, using the following rationale:
The more promising alternative is to peg punitive awards to compensatory damages using a ratio or maximum multiple. This is the model in many States and in analogous federal statutes allowing multiple damages. The question is what ratio is most appropriate. An acceptable standard can be found in the studies showing the median ratio of punitive to compensatory awards. Those studies reflect the judgments of juries and judges in thousands of cases as to what punitive awards were appropriate in circumstances reflecting the most down to the least blameworthy conduct, from malice and avarice to recklessness to gross negligence. The data in question put the median ratio for the entire gamut at less than 1:1, meaning that the compensatory award exceeds the punitive award in most cases. In a well-functioning system, awards at or below the median would roughly express jurors' sense of reasonable penalties in cases like this one that have no earmarks of exceptional blameworthiness. Accordingly, the court finds that a 1:1 ratio is a fair upper limit in such maritime cases.
Exxon Shipping Co. v. Baker, supra, 544 U.S. Summary in June 25, 2008 Slip Opinion.
Applying this standard to the present case, the Court takes for granted the District Court's calculation of the total relevant compensatory damages at $507.5 million. A punitive-to-compensatory ratio of 1:1 thus yields maximum punitive damages in that amount.
Exxon Shipping Co. v. Baker, supra, 554 U.S. Summary in June 28, 2008 Slip Opinions.
In this case both parties were represented by counsel. The plaintiff is a well known successful developer of commercial and residential property in Connecticut with offices in Norwalk. The defendant, Tarragon Development Corporation, is a nationally known corporation publicly traded and engaged in the same business. Both are sophisticated consumers who presumably had knowledge of the cost of money and cost of doing business. The parties agreed to an interest rate of 8.0% in the promissary note. That establishes the current fair market interest rate for a commercial first mortgage in April of 2007. Connecticut holds that usury commences interest rates higher than 12%. This 12% usury cap is 150% higher than the agreed upon commercially reasonable rate of 8.0%. Though it is true the defendants did not offer any evidence of unconscionability, cite authority for a commercial interest cap on Connecticut bona fide mortgages or offer expert testimony on unconscionability, Connecticut case and statutory authority give this court sufficient guidance.
The plaintiff offered no evidence on its post Maturity Date damages. The court on the record gave the plaintiff the opportunity to offer evidence as to default interest. The plaintiff did not accept the court's many invitations. The note and deed are silent on the reasons why that 8.0% was increased to 18.0% upon default. There may be reasons why a party needs a higher rate of interest after the Maturity Date, such as investing in another project, the need for cash at a specific point in time related to the Maturity Date, the possible sale of assets to pay obligations when the expected cash due on the note was not paid by the Maturity Date and a higher rate of return on an alternative investment contemplated to be made with the loan payoff proceeds. No evidence of any kind was offered by the plaintiff on the fiscal impact to the plaintiff in excess of the 8.0% interest at the defendant's failure to pay the loan when due.
If the plaintiff meets all three conditions, the 18.0% default interest will be a valid liquidated damage clause and not void as a penalty. (1) The plaintiff failed to offer any proof that the damage that was to be expected as a result of the non-payment of the note was uncertain in an amount or difficult to prove. The plaintiff's proof was silent as to its projected use of the $7,410,000 principal after the July 29, 2009 maturity date. The note used an 8.0% interest rate, a rate deemed commercially reasonable by the parties for a well secured short term first mortgage on real property that had substantial equity. The note and mortgage deed were silent on the reasons why a default rate far in excess of the 8.0% was selected. The plaintiff has not satisfied the first condition of the liquidated damage rule. (2) The plaintiff has satisfied the second condition since the agreement, the note, was signed by both parties establishing in advance an interest rate on all unpaid principal after default of 18.0%; (3) There was no evidence introduced at trial for the court to determine that the 18.0% default interest rate "was reasonable in the sense that it was not greatly disproportionate to the amount of the damage, which as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of contract." This court repeatedly, sometimes on a daily basis, inquired of the plaintiff if it was going to offer evidence on the subject of default interest. The plaintiff refused the court's invitation and argued that since there is no statutory cap on commercial loans secured by a bona fide mortgage in Connecticut, the parties were bound by the 18.0% default interest rate established by the note. The plaintiff has failed to satisfy this third condition of liquidated damages.
Exxon v. Baker holds that punitive damages are limited to one times the compensatory damages under maritime common law. Using the Exxon formula 16.0% is the highest default interest permitted. It is recognized that the Exxon v. Baker 1:1 ratio is applicable in maritime cases. Regardless, the trend is toward single digit punitive awards. Connecticut has participated in that trend by enacting a series of statutes that limit damages to double the 16% rate. Dougan v. Dougan cried commercial penalty at a 10% interest rate; the exact difference in this case. The plaintiff has not proven two of the three elements of a liquidated damage claim and is merely relying on the default rate of interest stated in a note signed by defendants. The eighteen percent (18.0%) default interest rate exceeds by more than double the commercially agreed upon interest rate.
The court finds that the general commercial background at issue between the parties was a real estate sale of a mixed use residential and retail former factory building with a ninety (90) day loan for 50% of the fair market value of the real property secured by a first mortgage with both parties expecting that new third party financing will be available to the defendants within three (3) months in order to pay off entirely the first mortgage. The parties had agreed that the fair market value for borrowing such short term money was the agreed upon 8.0% interest rate. The note, mortgage deed, exhibits and testimony were silent on why the 18.0% default interest rate was agreed on and contained in the note. There was no evidence of the future commercial needs of the plaintiff after the July 29, 2007 maturity date. Based on the evidence in this case, the case law and statutes cited, this court finds that the eighteen percent (18.0%) default interest rate is unconscionable and punitive. The default rate of interest under the facts of this case is void. The plaintiff is therefore entitled to eight percent (8.0%) interest on the unpaid principal both before and after default.
Defendants allege that they are entitled to a judgment in its favor in the plaintiff's foreclosure complaint, a judgment in its favor in its Counterclaim for rescission money damages, CUTPA punitive damages and CUTPA attorneys fees, all on the basis that there have been false statements and/or misrepresentations made to the defendants by the plaintiff. These two claims of fraud and/or misrepresentation are stated on page 9 of this Memorandum of Decision.
The elements of fraud or misrepresentations are as follows: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon that false representation to his injury. The plaintiff must prove each of these elements by clear and convincing evidence, a burden of proof higher than the fair preponderance of the evidence. Kavarco v. T.J.E. Inc., supra, 2 Conn.App. 295-96.
The parties considered this transaction to be in the nature of an option. The defendants had the sole unrestricted option to purchase the property. There was no cost to the defendant for this option in the original Purchase and Sale Agreement. Ex. 15. The plaintiff had the obligation to obtain the necessary permits for the purpose of obtaining a building permit in accordance with a Purchase and Sale Agreement on or before August 1, 2006 (the "Zoning Contingency Date"). Paragraph 16 of Exhibit 15 is entitled Land Use Approvals and states as follows:
(a) Buyer's obligation to purchase the Premises is contingent (the "Zoning Contingency") upon Seller obtaining final approvals, (i.e., not appealed or subject to appeal, following expiration of all applicable appeals periods or, if any such appeal is taken, following the withdrawal thereof with prejudice or a final determination in the Seller's favor) from the Norwalk Zoning Commission and any other state, federal, municipal agency required in order to obtain building permits for the construction, maintenance and use of a mixed use development of not less than one hundred and twenty (120) residential units and twenty-five thousand (25,000) square feet of retail space, and related amenities including but not limited to common areas and parking (the "Project") proposed by Seller, which approvals shall be in form and substance reasonably satisfactory to Buyer in all respects. (Said final approvals are herein referred to as the "Approvals.") Seller agrees to keep Buyer apprised and advised of the status of each of the applications made by Seller, and to inform Buyer at the earliest reasonable time of the date upon which the Seller anticipates receiving each of said Approvals. Seller shall make no submission without first consulting with, and receiving the approval of, Buyer, not to be reasonably withheld or delayed. Buyer shall be informed of all meetings and hearings as far in advance thereof as reasonably practicable, and shall be allowed to attend and participate at same.
The plaintiff owned this commercial property at 20 North Water Street, a former factory now abandoned in the Washington Street Design District. The factory's building facade would be retained and the interior would be redesigned to facilitate the combined residential, commercial and retail use with certain public amenities such as parking, an open plaza and a water fountain. The plaintiff's intention was to develop the property itself since they were the owners of the property and had experience as a large scale developer in Fairfield County. The plaintiff's principal office was in Norwalk. The Purchase and Sale Agreement of August 25, 2005 was an open-ended option that gave the buyer, the defendant, Tarragon Development Corporation, the sole right to exercise the option to purchase the property for the agreed upon price of $15,500,000. The defendant paid no money for the option. The $250,000 deposit was to be refunded to the defendant if the option was not exercised. Later amendments to the Purchase and Sale Agreement reduced the purchase price to $14,820,000. The Third Agreement dated January 7, 2007 required that the deposit be non-refundable and reduced the purchase price to $14,700,000. Ex. 25. The defendant, Tarragon Development Corporation, exercised its option and through a wholly-owned subsidiary, the defendant, North Water Street Tarragon, LLC, and acquired the property on April 30, 2007.
This transaction was unusual in a number of regards: Although Exhibit 15 was labeled a Purchase and Sale Agreement, it was an option. The plaintiff planned to develop the project for its own account and therefore submitted plans for governmental approval that suited the plaintiff's own purposes, even though the plaintiff had to convey title if the defendants exercised their option. The plaintiff was obligated to obtain the necessary governmental approvals to develop the property for its own account in the event the defendants did not exercise their option. The plaintiff was also obligated to obtain the necessary governmental approvals to satisfy the defendants so the defendants could exercise its option. In the approval process, therefore, the plaintiff was serving two masters. There was no mortgage contingency. The Purchase and Sale Agreement contained only a rough outline of the project of a "mixed use development of not less than one hundred and twenty (120) residential units and twenty-five thousand (25,000) square feet of retail space, and related amenities, including but not limited to common areas and parking (The `Project')." This rough outline was called a schematic by the parties. No amendment to the Purchase and Sale Agreement contained any further details of the "Project." It was highly unusual that the defendants, as Buyers, would allow the plaintiff, as Seller, to obtain the Buyer's governmental permits. There was no calendar date established for the closing, which was to occur thirty (30) days after the "Approvals were obtained. The "Approvals" had a contingency date of August 1, 2006. The August 1, 2006 "Zoning Contingency Date," was later extended by the parties for one hundred twenty (120) days to November 29, 2006. Ex. 20.
On November 16, 2006 zoning approval was obtained for the property by the plaintiff from the Norwalk Zoning Commission, which zoning appeal contained a condition 4; "That the rent and sale price restrictions as shown on a certain document entitled "Affordable Housing Plan North Water LLC" revised to October 27, 2006 and related documents showing 9 one-bedroom units and 4 two-bedroom units, for a total of 13 affordable units, be made a part of this approval." Ex. 22.
Attached to Ex. 22 was the "Affordable Housing Plan North Water LLC." This Affordable Housing Plan North Water LLC was prepared by Attorney David Fite Waters, the attorney for the plaintiff. This Affordable Housing Plan contained three numbered paragraphs. Paragraph 1. states: " Number of Units: Type of Units. The subject proposal contemplates a total of one hundred twenty-eight (128) residential units, of which eighty-seven (87) or sixty-eight (68%) percent are one-bedroom units and forty-one (41) or thirty-two (32%) percent are two-bedroom units. Therefore, ten (10%) percent of the total units within the project is thirteen (13) units, and applying the appropriate percentage of unit types to this total results in nine (9) one-bedroom units and four (4) two-bedroom units. This is the number and breakdown by type of the affordable units that will be provided." Paragraph 2. states: " Location. The units shall be located at 50 Connecticut Avenue, Norwalk, Connecticut. These units currently exist and are part of a residential apartment complex. Specific units will be designated as the affordable housing units at such time as the designation is required, i.e. as residential units at 20 North Water Street are completed and are ready for occupancy, and the proportionate share of specific size units will be dedicated as affordable to the same degree that those size units at 20 North Water Street are completed and ready for occupancy. It is proposed that a condition of approval by the Zoning Commission will be that a certificate of zoning compliance, necessary to obtain a certificate of occupancy, shall not be issued until the requisite off-site units have been encumbered by a Declaration of Restrictions, as hereinafter defined." Ex. 23.
The plaintiff must prove each of the four elements of fraudulent misrepresentation by clear and convincing evidence. The two claimed fraudulent misrepresentations were alleged to have been made by the plaintiff's contract preparation, closing and zoning attorney, Attorney David Fite Waters, to the defendants', contract preparation and closing attorney, Attorney Charles Rubenstein. The first was in two telephone conversations and one e-mail in December 2007 in which it is claimed Attorney Waters stated: "all approvals have been obtained." The second was in a document Attorney Waters filed with the Norwalk Zoning Commission that the defendants characterized as stating: "There are existing two-bedroom units at 50 Connecticut Avenue." Both of these statements were allegedly confirmed and restated by other employees, agents and attorneys of the plaintiff by resending the same documents at later periods to representatives of the defendants, or by the plaintiff failing to later furnish all the true facts.
The defendants have failed to prove either of its two claims of fraudulent misrepresentation by clear and convincing evidence. There are a number of facts that demonstrate this failure of proof.
(1) The defendants closed on April 30, 2007 and did not elect to rescind the transaction until June 20, 2008. Ex. 40.
(2) The June 20, 2008 recision letter only states one reason for recision: "The number of available two-bedroom units at 50 Connecticut Avenue, Norwalk, CT.
(3) Attorney Rubenstein issued an opinion letter at the April 30, 2007 closing that stated he knew of no facts that would prevent the enforceability and validity of the $7,410,000 Commercial Mortgage Note and mortgage deed. Ex. 76.
(4) The defendant did not exercise its Option Agreement for 50 Connecticut Avenue, so that the plaintiffs could convert some of the existing one-bedroom units to the required four two-bedroom units.
(5) After the alleged fraudulent misrepresentations the defendants elected to terminate the contract on December 7, 2006 and reinstated the contract on January 9, 2007 after the defendants independently determined that the proper approvals had been obtained.
(6) The defendants hired a zoning expert in December 2007, after the alleged fraudulent misrepresentations were made, and this zoning expert verified the completeness of the zoning approvals.
(7) The defendants hired another zoning expert after the April 30, 2007 closing and changed the configuration of the residential units on-site and off-site to suit the defendants own development purposes. The defendants obtained all necessary governmental approvals for these modifications well before for the attempted June 2008 recision.
The real issue is that the defendants failed to obtain the necessary financing to develop the project and the defendants closed without that financing in place. The defense of fraudulent misrepresentation is a last ditch effort to cover up the defendants' essential problem: lack of funding.
The court will now discuss certain factual findings and legal conclusions reached by this court that support the court's finding that the defendants have failed to prove either claim of fraudulent misrepresentation by clear and convincing evidence.
According to the Purchase and Sale Agreement the defendants did not have to purchase the premises unless, "`Approvals' shall be in form and substance reasonably satisfactory to Buyer in all respects." Ex. 15. The Purchase and Sale Agreement and all later amendments were silent as to the standards, "reasonably satisfactory." Thus, the defendants had an open ended option because they could terminate the Purchase and Sale Agreement for any reason. The zoning contingency date in the Purchase and Sale Agreement was August 1, 2006, a period of approximately one year hence. The August 1, 2006 zoning contingency date was extended for one hundred twenty (120) days beyond August 1, 2006. Ex. 20. As of August 1, 2006 the defendants knew the exact status of the various site plans, coastal site plans and the amendments necessary to obtain the approvals required under the parties' contract.
The Purchase and Sale Agreement gave the defendants the right to be "apprised and advised of the status of each of the applications" and the plaintiff was to "make no submission without first consulting with, and receiving the approval of, Buyer." The defendants had the right to "be allowed to attend and participate at" all agency meetings held on the plaintiff's application. The original proposal set forth in the Purchase and Sale Agreement called for an application of one hundred fifty (150) residential units, a minimum requirement of one hundred twenty (120) residential units and a $75,000 increase in this purchase price for each residential unit in excess of 120. On November 15, 2006 the plaintiff obtained zoning approval for one hundred twenty-eight (128) residential units.
The Purchase and Sale Agreement was silent as to how the ten percent (10%) affordable housing component was to be met and in fact made no mention of affordable housing either on-site or off-site and did not mention 50 Connecticut Avenue. Although the Purchase and Sale Agreement was silent on affordable housing requirements, both parties were aware that the project was required to dedicate ten percent (10.0%) of the units as affordable housing units either at 20 North Water Street (on-site) or at some other location in Norwalk, CT (off-site). Ex. 42. Neither the Purchase and Sale Agreement nor any of the Amendments required the plaintiff to obtain governmental approval for off-site affordable housing. As of the November 15, 2006 zoning approval the parties were bound by Ex. 15, the First Amendment, Ex. 17, and the Second Amendment, Ex. 19, all of which were silent as to 50 Connecticut Avenue on-site affordable housing and off-site affordable housing.
The "Urban Renewal Plan — Washington South Main Street Improvement Area II" required review and approval by various agencies only if: (1) less than ten percent (10.0%) of the residential units were dedicated to affordable housing, or (2) if the affordable housing units were to be located off-site. The project at 20 North Water Street was located within the Urban Renewal Plan — Washington South Main Street Improvement Area II. The Urban Renewal Plan provided for no further review or approvals if the ten percent (10%) affordable units were all to be located on-site. Ex. 97, Ex. 130. No further governmental approvals were needed by any agency whatsoever after November 16, 2006 for the project at 20 North Water Street if the affordable units were to be located on-site at 20 North Water Street. As of November 16, 2006 the parties' agreement did not contemplate nor provide that any of the affordable housing units would be located at any location other than on-site at 20 North Water Street. The parties at all times knew that Attorney David Fite Waters, attorney for the plaintiff, was going to file a text amendment to the Washington Street Design District regulations which permitted increased building rights known as an Amenity Incentive, which would permit the existing facade to continue but also contained the obligation to dedicate ten percent (10%) of the residential units as affordable. Ex. 22.
There is no evidence that the Chief Building Inspector for the City of Norwalk would not issue a building permit based on the November 16, 2006 Norwalk Zoning Commission approval if the thirteen (13) units of affordable housing were located on-site of 20 North Water Street. Ex. 125. Thirteen (13) units of affordable housing on-site satisfied the ten percent (10.0%) affordable housing component of the zoning approval of the one hundred twenty-eight (128) residential units.
Attorney David Fite Waters for the plaintiff and Attorney Charles Rubenstein for the defendants did not have contact with each other except when the Amendments to the Purchase and Sale Agreement and the closing documents were being prepared. Although Attorney Waters was the zoning lawyer for the plaintiff he never reported to Attorney Rubenstein or any employee, agent or officer of the defendants as to the status of the zoning. Nancy Bisgaier and the principals of the plaintiff had contact with the defendants, but not with Attorney Rubenstein. Generally, Candace Schafer and Newton Brainard were the zoning contact persons for the defendants. There was no need for Attorney Rubenstein to make an informal inquiry of Attorney Waters about the status of the Approvals. The defendants already knew of the administrative procedures to obtain approval of this project with the 10% affordable units on-site. Ex. 43.
Attorney Waters never communicated to the defendants, the Norwalk Zoning Commission or the Norwalk Redevelopment Agency that 50 Connecticut Avenue did contain any existing two-bedroom units. Attorney Waters knew that the plaintiff could provide two-bedroom units at 50 Connecticut Avenue and the fact that they did not then exist was not an issue. Attorney Waters knew the plaintiffs had done an analysis and knew that the plaintiffs could convert units at 50 Connecticut Avenue into the required four (4) two-bedroom units. The Norwalk Zoning Commission approval of November 16, 2006 did not require that the affordable housing units must be off-site at 50 Connecticut Avenue. That approval did require that the rental and sale price restrictions of the attached "Affordable Housing Plan North Water LLC" be adopted no matter where the affordable units were to be located. The Norwalk Zoning Commission approval of November 16, 2006 was complete and no further approvals would be needed if the thirteen (13) affordable housing units were located on-site at 20 North Water Street. Ex. 98. The affordable housing units could be satisfied according to the amended Washington Street Design District regulations by either on-site or off-site housing units. Ex. 104, Ex. 105.
On October 25, 2006, Dorothy Wilson, staff member of the Norwalk Zoning Commission, requested Attorney Waters to "revise the Affordability Plan to provide a specific off-site location." Ex. 113. Attorney Waters then modified the Affordable Housing Plan North Water by adding the off-site location of 50 Connecticut Avenue. Ex. 115. That gave the plaintiff the flexibility of providing the affordable units either on-site at 20 North Water Street or off-site at 50 Connecticut Avenue if the defendants elected not to exercise their option to purchase 20 North Water Street. If the affordable units were to be placed on-site no further approval was needed from any agency including but not limited to the Norwalk Zoning Commission, Norwalk Common Council or the Planning Committee of the Norwalk Common Council. If all or a part of the affordable units were to be placed off-site at 50 Connecticut Avenue, further approvals would be needed from the above three agencies. The Affordable Housing Plan is not a statement made by the plaintiff to the defendants. The Affordable Housing Plan is not a statement made by the plaintiff to the defendants that the actual existing configuration of the apartments at 50 Connecticut Avenue contain two-bedroom units.
The Norwalk Zoning Commission did not require the Affordable Housing Plan to identify the site if affordable housing units were to be placed on-site. The November 16, 2006 approval was sufficient to issue a building permit if the then owner of 20 North Water Street intended to place all thirteen (13) affordable housing units on-site. The legal notice published for the application approved by the Norwalk Zoning Commission only referred to 20 North Water Street and did not refer to 50 Connecticut Avenue. Ex. 113. Only the off-site component of the affordable housing required Norwalk Common Council approval. The on-site component at 20 North Water Street did not need Norwalk Common Council approval. Ex. 122.
The "Affordable Housing Plan" referred to real property at 50 Connecticut Avenue, Norwalk with thirteen (13) units; nine (9) one-bedroom, and four (4) two-bedroom units and that these units currently exist. The "Affordable Housing Plan" did not state that the units existed in the exact bedroom configuration. The "Affordable Housing Plan" contains an obligation, if the units are to be off-site, that the developer convert the units at 50 Connecticut Avenue to affordable units with nine (9) being one-bedroom units and four (4) being two-bedroom units. That fact is consistent with the position of the plaintiff that they could conform with that requirement. If this was a statement, then that statement was and is true.
The defendants read the Norwalk Hour newspaper article dated November 16, 2006 on November 16, 2006 about the zoning approval and kept a copy of the newspaper on file in the defendants' file. The article stated "Commission approved Wednesday night the site plan and a zoning regulation change allowing the fifth story to be built. In exchange for the added story, North Water LLC will preserve the facade, provide 13 affordable housing units, 10 public parking spaces beyond what's required, a fountain (sic) and an interior plaza for the public." ". . . the affordable housing component, which will be provided by adding deed restrictions to 13 units in an existing apartment building at 50 Connecticut Avenue." "Because the affordable housing is to be located off-site, the Common Council must approve that aspect of the development." The defendants are charged with knowledge of these facts as of November 16, 2006. In addition, the defendants, prior to December 7, 2006, had available to it the Norwalk Zoning Commission letter of November 16, 2006 and the attached Affordable Housing Plan.
After the November 16, 2006 Zoning Commission approval, the defendants knew that the thirteen (13) affordable housing units, if located off-site at 50 Connecticut Avenue, needed further governmental agency approvals. This is why the parties negotiated the Third Amendment signed on January 9, 2007 and why the Option Agreement was agreed to granting the defendants the option to deed restrict and dedicate for affordable housing purposes thirteen (13) units at 50 Connecticut Avenue. Ex. 9, 25, 73.
The defendants appointed Candace Schafer as the project manager for this project. She kept in close contact with the principals of the plaintiff, Carl Kuehner, Clayton Fowler and Paul Kuehner, as well as the plaintiff's zoning attorney, Attorney Waters, all throughout the zoning application process. The plaintiff's zoning application only involved the premises at 20 North Water Street. No plans, application, studies or information were furnished to the Norwalk Zoning Commission for 50 Connecticut Avenue, Norwalk, Connecticut.
Nancy Bisgaier represented the plaintiff throughout the zoning process and was in contact with the defendants reporting the status of the zoning application process. Exhibits 44-61, 63, 68, 106. These twenty-one (21) written notices were from October 28, 2005 to September 15, 2007. Saul Spitz, Candace Schafer and Newton Brainard were the representatives of the defendants that were updated on the status of the application process, not Attorney Charles Rubenstein. The defendants were kept apprised by the plaintiff throughout the zoning application process. Ex. 42. Newton Brainard and Nancy Bisgaier spoke about the affordable housing units on a number of occasions before the November 16, 2006 Zoning Commission approval. The plaintiff provided to Newton Brainard copies of all Connecticut Statutes and regulations related to sale and rental of affordable housing units on November 29, 2006. Ex. 85.
The first time the parties entered into any negotiations to provide the ten percent (10%) affordable housing component off-site was in November-December 2006 when the parties agreed that the defendants would have an Option Agreement granting the defendants the right to place the thirteen (13) affordable housing units off-site. Ex. 9, 25, 73. All prior agreements were silent as to the affordable housing units being placed off-site. Thus, the parties contemplated from the beginning of their business relationship to have the affordable housing units on-site at 20 North Water Street. Ex. 9, 15, 25, 73.
Newton Brainard knew of the status of the need for further agency approval if the units were to be placed off-site. That knowledge is attributable to the defendants. Ex. 26. The defendants knew that further governmental agency approvals were needed for off-site affordable housing units well before the April 30, 2007 closing. Ex. 29. Newton Brainard performed detailed financial studies of the alternatives of providing the affordable housing component of the project either off-site or on-site. Mr. Brainard started this analysis well before the defendants terminated the Agreement on December 7, 2006. Mr. Brainard also performed affordable housing cost studies for various off-site locations in Norwalk, Connecticut selected by the defendants other than 50 Connecticut Avenue. The defendant knew that the off-site location of the affordable housing needed further Norwalk approvals . . . "Obviously this has to be to the satisfaction of the City." Ex. 67.
Newton Brainard was assigned to study the feasibility, cost and location of the affordable housing component of the project in the fall of 2006. He discussed his findings with William Friedman, Chairman, and Attorney Charles Rubenstein, closing attorney, just before November 3, 2006. Ex. 69. Newton Brainard did a complete study of the project at 20 North Water Street before November 16, 2006 including determining the proposed sales and rental prices of the residential units, the rental or sale of parking spaces, construction costs, calculation of the affordable rentals and calculation of the affordable sales prices both under Connecticut regulations and statutes. Ex. 69, Ex. 82, Ex. 84, Ex. 132, last two pages.
Prior to the closing, the defendants were contemplating various scenarios of providing the affordable housing component at various locations. Ex. 86, 87. At all times, the defendants maintained a file that contained extensive documents prepared and submitted by North Water LLC for the governmental approval process. Ex. 119. The defendants considered a number of locations for the off-site affordable housing units other than 50 Connecticut Avenue and 80 Fair Street, both sites controlled by an affiliate of the North Water, LLC. Ex. 132. During this transaction the defendants had considered various options for meeting the ten percent (10.0%) affordable housing requirement; on-site, off-site, seller to obtain off-site approvals, Buyer to obtain off-site approvals, the defendants constructing its own affordable housing units, making a payment to the City of Norwalk of $200,000 per affordable housing unit, donation using IRS Code 501(c)(3) and use of Tarragon's corporate tax credits. Ex. 83. The defendants did not rely on any representation made or claimed to be made by the plaintiff, its agents, attorney or employees.
Attorney Rubenstein learned of the zoning approvals from employees of the defendant before December 15, 2006. He had seen the November 16, 2006 zoning approval documents before December 15, 2006. Attorney Rubenstein first learned of the November 15, 2006 zoning approvals not from Attorney Waters but from other officers and employees of the defendant. Attorney Rubenstein testified: "The defendant wanted to review the approvals or to determine if they were satisfactory."
The defendants elected to terminate the transaction on December 7, 2006. Ex. 24. The defendants had the right to so terminate based on the Purchase and Sale Agreement. The defendants were considering reinstating the Purchase and Sale Agreement after the December 7, 2006 termination. After the December 7, 2006 termination the parties negotiated based on the one hundred twenty-eight (128) resident units already approved by the Norwalk Zoning Commission on November 16, 2006. In December 2006 Attorney Rubenstein telephoned asking Attorney Waters to send him the Approvals package of documents. Ex. 73. By e-mail attachment Attorney Waters sent to Attorney Rubenstein the Approval documents now in evidence as Exhibit 21 and stated: "Per my phone message to you yesterday, attached are the approval documents for your review." Ex. 74. Attorney Waters e-mailed to Attorney Rubenstein documents consisting of the November 16, 2006 Norwalk Zoning Commission approvals for site plan, coastal site plan and text amendments along with a copy of the Affordable Housing Plan and other documents. Ex. 21. Attorney Waters followed it up with an e-mail to Attorney Rubenstein on December 21, 2007 stating: "In my prior e-mail I sent you the approvals, and as I set forth in my phone message I hope that since they are fairly straightforward we could clean up the amendment to the P S by deleting the review period." Ex. 67.
In Attorney Rubenstein's version of the second December 2006 telephone call he had with Attorney Waters was that Attorney Rubenstein asked whether these approvals were sufficient to obtain a building permit for 20 North Water Street. Attorney Waters said; "Yes." Attorney Rubenstein had a copy of the Ex. 21 zoning permission documents as well as the Affordable Housing Plan when he asked the question. These two telephone conversations and these two e-mails, formed the basis of the claim of a fraudulent misrepresentations that "All approvals have been obtained." Attorney Waters believed that statement about the approvals to be sufficient to obtain a building permit to be true when made.
Attorney Water's and Attorney Rubenstein's testimony conflicted as to the two December 2007 telephone conversations. When Attorney Rubenstein first testified about his first December 2007 telephone conversation with Attorney Waters on whether approvals had been obtained, Attorney Rubenstein was vague on the exact wording of the conversation other than the fact that Attorney Waters told Attorney Rubenstein that the approvals had been obtained. He thought the first telephone call was on December 20, 2007. This first telephone conversation took place after the defendant terminated the contract on December 7, 2006. Ex. 24.
Attorney Rubenstein could not recall the exact words Attorney Waters used in each of the two December 2006 telephone calls. Attorney Charles Rubenstein was confused as to the dates of the telephone calls but was sure that one immediately preceded the December 21, 2006 e-mail, in which Attorney Waters forwarded the approval documents. Mr. Rubenstein did not recall on direct whether the first telephone call occurred before the defendants' December 7, 2006 termination letter. On cross-examination Attorney Rubenstein changed his testimony about the contents of the telephone conversations. Attorney Rubenstein was not sure of how long each telephone call lasted. He did not make any notes about the call nor notify anybody in writing of the subject of these telephone calls. Attorney Rubenstein claimed on direct examination that the second telephone call involved his question to Attorney Waters after he had seen the approvals: "Are these all the approvals necessary for this project? Attorney Waters then answered: "These are all the approvals." On cross-examination Attorney Rubenstein stated that the answer Attorney Waters gave to the same question was: "These are all the approvals that are required." Mr. Rubenstein's testimony on the two telephone conversations he had with Mr. Waters in December 2006 is not credible.
Attorney Waters was sure of the date of the two phone calls: the first on or about December 15, 2006 and the second on December 21, 2006. Attorney Waters recalls that Attorney Rubenstein called him around December 15, 2006 looking to reinstate the transaction. Attorney Waters said that Attorney Rubenstein wanted to know what approvals were necessary to obtain a building permit. He said the defendants were interested in reinstating the contract. Attorney Waters informed Attorney Rubenstein that a building permit could be obtained under the November 16, 2006 approvals once the defendants provided detailed building plans to the Norwalk Building Department. The court finds the above facts to be true.
According to Attorney Waters after the approvals were sent to Attorney Rubenstein on December 21, 2006, Attorney Rubenstein again called Attorney Waters on December 21, 2006. Attorney Rubenstein asked Attorney Waters for the name of local zoning counsel to review the approval documents. Attorney Waters gave to Mr. Rubenstein the names of three attorneys experienced in Norwalk zoning including Attorney Frank N. Zullo. Attorney Rubenstein then ended the second telephone conversation stating that the defendants would examine the documents received and determine if they wished to reinstate the agreement. Attorney Waters did make a statement to Attorney Rubenstein in December 2006 that the approvals necessary to obtain a building permit had been obtained. That statement was true when made and is true today. Attorney Rubenstein nor anyone else from the defendant questioned Attorney Waters about whether the Ex. 22 approvals obtained from the Norwalk Zoning Commission were complete and satisfied paragraph 16 of the Purchase and Sale Agreement.
Attorney Rubenstein responded by e-mail to Attorney Waters on December 21, 2006: "Thanks for the approvals documents and the Option Agreement we will go through them. We have an attorney at Robinson and Cole looking at the approvals and I hope he can get this to them quickly." "I understand it your client prefers that we sign off on the approvals and sign the amendment without that contingency." Ex. 67. This December 21, 2006 e-mail occurred after Attorney Rubenstein had received the alleged fraudulent misrepresentation from Attorney Waters, that all approvals had been obtained. The defendants did not rely on Attorney Waters representations but conducted their own review by its staff of expert real estate developers as well as hiring the law firm of Robinson and Cole to render an opinion that the approvals of November 16, 2006 were sufficient to obtain a building permit.
In a follow up e-mail also on December 21, 2006 Attorney Waters informed Attorney Rubenstein: "Per my prior e-mail, attached is a draft of the option agreement for your review . . . In my prior e-mail I sent you the approvals, and as I set forth in my phone message I would hope that since they are fairly straight forward we could clean up the amendment to the PS by deleting the review period." Ex. 67. This e-mail requested the reinstatement of the agreement and the elimination of any zoning contingency, terms that were agreed to by the parties on January 9, 2007 in the Third Amendment.
In neither of the two December 2006 telephone conversations, was 50 Connecticut Avenue or the existence of any two-bedroom units at 50 Connecticut Avenue discussed. The December 21, 2006 e-mail is silent as to 50 Connecticut Avenue except for the Affordable Housing Plan. In neither December 2006 telephone calls by Attorney Rubenstein did Attorney Waters discuss the existence of two-bedroom units at 50 Connecticut Avenue. The subject did not come up in either of Attorney Waters' two telephone conversations with Attorney Rubenstein.
The defendants did not hire any of these three attorneys to review the approvals but hired Attorney Peter S. Olsen of Robinson and Cole to do so. Immediately thereafter Attorney Rubenstein sent these approval documents to Attorney Olsen, who was the zoning and land use expert hired by the defendants to review and opine on the status of the "Approvals" under paragraph 16 of the Purchase and Sale Agreement. Ex. 75. Attorney Rubenstein requested Attorney Olsen to determine if there are "any other approvals necessary in order to pull a building permit." Ex. 67 Attorney Rubenstein charged Attorney Olsen as follows in the December 21, 2006 e-mail: "Please give me or Newt a call to let us know when you think you can give us your advice as to whether or not the approvals are all that we need to pull building permits." Ex. 75, Ex. 78.
The defendants obtained a zoning approval status review by their zoning expert, Attorney Olsen, before signing the Third Amendment on January 7, 2007. Prior to signing the Third Amendment to the Purchase and Sale Agreement on January 7, 2007, the defendants had its zoning expert, Attorney Olsen perform due diligence to determine if the "Approvals" were obtained in accordance with the paragraph 16 of the Purchase and Sale Agreement. Attorney Olsen did perform that due diligence. The defendants relied on Robinson and Cole and the defendants own expertise to determine if all Approvals had been obtained. The defendants did not rely on Attorney Water's two December 2006 phone calls and two e-mails. The defendants knew that the off-site location of the affordable housing needed further Norwalk approvals; ". . . obviously this has to be to the satisfaction of the City." Ex. 67. The defendants were satisfied that the Approvals had been obtained and agreed to the Third Amendment, which eliminated the zoning contingency. Ex. 30.
Attorney Rubenstein had drafted another contingency in his December 15, 2006 draft of the Third Amendment giving the Buyer the right to determine such "approvals are reasonably satisfactory to Buyer in all respects." Ex. 73. The parties eliminated this contingency clause in the final version of the Third Amendment.
Attorney Olsen informally gave his approval on December 27, 2006 to the defendants after he received the December 21, 2006 documents and after he examined the documents and records on file with the City of Norwalk. "Norm: I had a chance to look at the file this morning, and everything looks good to me." Ex. 101. Attorney Olsen reviewed the entire file at the Norwalk Zoning Commission Office including the Site Plan Review Application. Ex. 110. That application stated: "The location of this housing has not been finalized and will be the object of a separate submission to the Commission when it has been determined." This knowledge is imputed to the defendants. Attorney Olsen furnished the defendants a summary opinion letter on January 3, 2007. Ex. 96. As a result of the defendants' own knowledge of the approval process and Attorney Olsen's opinion letter, the defendants entered into a binding contract; the Third Amendment on January 9, 2007.
Attorney Rubenstein informed Attorney Waters on January 2, 2007 that: "They went over the package and are okay with the approvals, but are doing a little further research into the affordable component." "They" was a reference to Robinson and Cole. Ex. 69. The parties contemplated signing a document that terminated any contingencies that existed in the Purchase and Sale Agreement after the November 16, 2006 Norwalk Zoning Commission approval.
As of the Third Amendment on January 9, 2007, the zoning contingency had expired and the defendant, Tarragon Development Corporation, was contractually obligated to purchase 20 North Water Street for $14,700,000 with a March 14, 2007 time is of the essence closing. The defendants were not induced to sign the Third Amendment by any representations made by Attorney Waters or the plaintiff. As of January 9, 2007 the defendants knew the status of the November 16, 2006 zoning approvals.
As of the Third Amendment signed on January 9, 2007 the transaction no longer was an option but a binding contract which: reduced the purchase price from $15,500,000 to $14,700,000, established the exact number of residential units ("for the 128 residential units for which Approvals have been obtained"), eliminated any bonus for additional units contained in the original Purchase and Sale Agreement; eliminated any contingency including the zoning contingency in paragraph 16 of Ex. 15, required the payment of an additional $500,000 deposit; added a stipulation that all deposits were now non-refundable and established a calendar date for the closing with the March 14, 2007 closing to be time is of the essence. Further, the parties' transaction contained an option granted to the defendants to have the thirteen (13) units of affordable housing to be located off-site at 50 Connecticut Avenue upon the payment of a $800,000 option price pursuant to a separate Option Agreement to be executed at the closing, which Option Agreement was attached to the Third Amendment. Ex. 25.
The negotiation of the January 9, 2007 Third Amendment produced the Option Agreement which provided for the affordables to be off-site at 50 Connecticut Avenue, if the defendant later chose to execute that Option. Ex. 67. As of January 9, 2007 the defendants knew of the administrative procedures that were necessary to obtain approval of the project with ten percent (10.0%) affordable units off-site. Ex. 43. The defendants reinstated the agreement in the Third Amendment on January 7, 2007 for "the 128 residential units for which Approvals have been obtained." The defendants agreed to a new closing date of "March 14, 2007 time of the essence." The Third Amendment terminated any zoning contingencies of the original Purchase and Sale Agreement. As of January 7, 2007 the defendants knew that fact from Attorney Olsen's review of the Norwalk Zoning records, the knowledge of its project manager, Candace Schafer, and the defendant's willingness to provide the affordable on-site under the November 16, 2006 zoning approval letter.
The Third Amendment gave the defendants the same option that the plaintiff had possessed as of November 16, 2006: to obtain an immediate building permit for the project if the thirteen (13) affordable housing units were to be on-site at 20 North Water Street or to file further applications for governmental agency approvals if the affordable housing units were to be off-site. If the defendants elected off-site, as of January 9, 2007, the defendants could have used 50 Connecticut Avenue off-site for the payment of an additional $800,000 or the defendants could have obtained another off-site location in Norwalk other than 50 Connecticut Avenue. After the Third Amendment dated January 9, 2007, the plaintiff proceeded on the additional approvals needed from the Norwalk Common Council and/or the Planning Committee of the Norwalk Common Council to get off-site approval for the thirteen (13) affordable housing units at 50 Connecticut Avenue.
Once this transaction changed from an option to a firm contract, the plaintiff had to be ready to perform the Option Agreement if the defendants chose to exercise the Option for 50 Connecticut Avenue. Consistent with that position, the plaintiff made further governmental applications on January 11, 2007 in order to obtain the further approvals needed to place the thirteen (13) affordable units off-site. Ex. 80. If the defendants closed, they had the option of either accepting the existing November 16, 2006 Zoning approval, which required no further agency approval if all thirteen (13) of the affordable units were to be located at 20 North Water Street or to provide some or all of the affordable units off-site with the obligation of the defendants, post-closing, to obtain all necessary government approvals for these off-site affordable housing units at the defendants' own cost and obligation.
The Third Amendment divided the original $15,500,000 purchase price into two components: $14,700,000 for 20 North Water Street and $800,000 for the right to dedicate thirteen (13) affordable units at 50 Connecticut Avenue. The defendants could choose not to exercise its option to place the thirteen (13) units off-site, thus saving $800,000 or they could place the units off-site at a location other than 50 Connecticut Avenue at its own cost, thus not paying the $800,000 option price. The choice was defendants. The defendants could elect to have some units on-site, some units off-site on another location and some units off-site at 50 Connecticut Avenue. The defendants could do that by going back to the governmental agencies and obtaining agency approval after the closing. In fact that is exactly what the defendants did.
The defendants did not enter into a binding contract on January 9, 2007 based on the defendants reliance on any of the two alleged fraudulent misrepresentations: "Approvals have been obtained" and "50 Connecticut Avenue."
50 Connecticut Avenue Norwalk, Connecticut is an existing apartment housing complex in three buildings with a total of twenty-nine (29) existing units. None of those twenty-nine (29) units are two-bedroom apartments. Ex. 80. 50 Connecticut Avenue is owned by Fifty Connecticut Avenue, LLC, an affiliate of North Water LLC. North Water, LLC controls 50 Connecticut Avenue, LLC having members in common. Sixteen (16) apartments were one-bedroom at seven hundred (700) square feet, eight (8) one-bedroom at five hundred (500) square feet and five (5) studios at three hundred seventy-five (375) square feet. Ex. 88.
If all of the affordable units were to be off-site at 50 Connecticut Avenue, nine (9) units were to be one-bedroom units and four (4) units were to be two-bedroom units according to the November 16, 2006 zoning approval. 50 Connecticut Avenue, LLC granted to the defendant, North Water Street Tarragon, LLC, an Option to declare and dedicate thirteen (13) units at 50 Connecticut Avenue, Norwalk, CT as affordable housing units in full satisfaction of Condition 4 of the November 16, 2006 Norwalk Zoning Commission approvals. Ex. 9. The Option Agreement was signed at the April 30, 2007 closing. 50 Connecticut Avenue, LLC never signed the Purchase and Sale Agreement nor any of its amendments. The Fourth Amendment dated March 14, 2007, for the first time mentioned the property at 50 Connecticut Avenue, Norwalk, CT. Ex. 31.
The defendants in early March 2007 were having trouble obtaining its financing necessary to close on the March 14, 2007 time is of the essence closing date, Ex. 31. After the Fourth Amendment was signed on March 14, 2007 a new closing date was established: April 30, 2007 time is of the essence. The defendant's continued to have problems obtaining financing for the transaction. Ex. 34. As a result the defendants exercised its option to require the plaintiff to lend to the defendants $7,410,000 at the April 30, 2007 closing. Ex. 34. The defendants attempted to reinstate the zoning contingency at the now time is of the essence closing date of March 14, 2007. Ex. 29. Due to the defendants difficulty in obtaining closing financing the parties entered into the Fourth Amendment on March 14, 2007. This added a number of provisions: an additional $300,000 non-refundable deposit, a new time is of the essence closing date of April 30, 2007, an increase in the purchase price of $120,000 representing interest lost after the March 14, 2007 scheduled closing, an adjustment to the $800,000 Option Agreement for 50 Connecticut Avenue based on future Norwalk Common Council approval of certain number of units, affirmation that defendants wanted to satisfy the affordable component off-site and finally the inclusion of an option for the defendants to exercise so that the plaintiffs would take back a ninety (90) day first mortgage of $7,410,000.
Although the defendants could have examined and inspected the units of 50 Connecticut Avenue prior to the April 30, 2007 closing, they did not. Once the defendants found out that there were no existing two-bedroom units at 50 Connecticut Avenue, Newton Brainard asked in a May 22, 2007 e-mail the plaintiff: "The unit mix you provided for 50 CT Avenue does not include any 2-bedroom units. If that correct, and if so, how were you planning on dealing with the requirement that the affordable mix mirrors the market rate mix? Could I get a copy of the floor plans and basic operating expenses." Ex. 90. The defendants failed to take any affirmative action immediately after May 22, 2007 despite their knowledge that none of the apartments at 50 Connecticut Avenue were configured as two-bedroom units.
Despite these alleged two fraudulent misrepresentations made to Attorney Rubenstein, he e-mailed and submitted an Opinion letter at the April 30, 2007 closing in which he stated: "The Borrower Loan Documents create valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms." Ex. 76. The Opinion letter ends with the following: ". . . during the course of my representation of the Guarantor, no information that would give current actual knowledge of the inaccuracy of such statements has come to my attention." Ex. 76. Either the defense in this case is invalid or his opinion letter was an untrue statement by Attorney Rubenstein when issued. The fraud and misrepresentation claims raised by the defendants in this trial are contrary to Attorney Charles Rubenstein's April 30, 2007 Opinion letter. The defenses raised by the defendants in this trial are contrary to Mr. Rubenstein's April 30, 2007 opinion letter.
Attorney Waters never told any representative of the defendants that the units at 50 Connecticut Avenue were configured as two-bedroom units. The plaintiff, at all times, were ready, willing and able to comply with the Option Agreement acting by 50 Connecticut Avenue, LLC by eliminating two (2) existing one-bedroom units at 50 Connecticut Avenue and adding those rooms to adjacent one-bedroom units to create four (4) two-bedroom units and nine (9) one-bedroom units. There was no proof offered that the plaintiff could not comply with the Option Agreement and the physical layout of 50 Connecticut Avenue to contain nine (9) one-bedroom units or four (4) two-bedroom units. The plaintiff was willing to make that conversion and comply with the Option Agreement executed at the closing. At the closing the defendants paid the $14,700,000 purchase price but did not pay the $800,000 50 Connecticut Avenue option. Ex. 35.
The plaintiff was at all times willing to make this conversion and dedicate those thirteen (13) units as "affordable housing units" after the April 30, 2007 closing. The defendants never exercised their option nor requested the plaintiffs to make those conversions or dedications. The defendants never paid 50 Connecticut, LLC the $800,000 set forth in the April 30, 2007 Option Agreement. The phrase in the Affordable Housing Plan: "These units currently exist and are part of a residential complex" is true. There were more than sufficient existing apartments at 50 Connecticut Avenue that two (2) one-bedroom units could be eliminated, adding the rooms from the two (2) eliminated one-bedroom units to the adjacent one-bedroom units by interior redesign and thus create four (4) two-bedroom units.
Attorney Waters did not make a statement to the defendants that 50 Connecticut Avenue contained existing two-bedroom units. The mention of 50 Connecticut Avenue in the second paragraph of the Affordable Housing Plan is not and was not a statement made to the defendants. Ex. 21. The court finds that the units at 50 Connecticut Avenue did exist. There was no representation in the Affordable Housing Plan that the units existed in a two-bedroom capacity. There was no representation in the plan that the existing one-bedroom units could not be converted into the four (4) two-bedroom units.
The defendant had already acknowledged that it was at fault for not closing on March 14, 2007 by paying $120,000 in interest on the purchase price from March 14, 2007 to April 30, 2007 and by actually closing the transaction. Ex. 35.
After the April 30, 2007 closing the defendants hired Attorney Frank N. Zullo, an experienced zoning attorney, to represent them in future applications. On July 9, 2007, the defendants proposed to increase the total number of residential units at 20 North Water from one hundred twenty-eight (128) to one hundred thirty-three (133) and at the same time increase the affordable units from thirteen (13) to fifteen (15) with three (3) on-site and twelve (12) affordable units at 6-8 Hyatt Avenue, Norwalk, Connecticut. Ex. 132. The defendants issued a press release July 27, 2007 for publication in the New York Times that stated: "Tarragon is committed to providing the affordable housing required by zoning." Ex. 120. On August 15, 2007, Attorney Zullo filed a request with the Norwalk Zoning Commission to obtain a one-year extension of the November 16, 2006 approvals. This extension would expire on November 24, 2008. Ex. 124.
During the spring and summer of 2007, Attorney Zullo represented the defendants in an application before the Planning Committee of the Norwalk Common Council and other agencies to modify the location of the off-site affordable housing units. Ex. 124.
On August 15, 2007, the defendants intended to file with the Norwalk Zoning Commission a modification of the November 16, 2006 approvals including increasing the number of residential units from 128 to 133. Ex. 124. The Norwalk Zoning Commission approved the defendants' application to increase the residential units at 20 North Water Street from one hundred twenty-eight (128) to one hundred thirty-three (133) with the assistance of Attorney Zullo. On August 14, 2007 the defendants obtained approvals from the Norwalk Common Council and the Planning Committee of the Norwalk Common Council to locate the affordable housing units in the following manner: Seven (7) one-bedroom units at 50 Connecticut Avenue, two (2) studio units on-site at 20 North Water Street, two (2) one-bedroom units on-site at 20 North Water Street and six (6) two-bedroom units off-site at a site yet to be determined but within three miles of 20 North Water Street. Ex. 124, Ex. 126.
As of August 2007, the defendants had improved their economic position by obtaining the additional necessary off-site approvals and increasing the number of residential units at the 20 North Water Street site by five (5) residential units. Thus the defendants increased the unit makeup from the November 16, 2006 approvals of one hundred twenty-eight (128) total units with thirteen (13) affordable on-site to one hundred thirty-three (133) total units with only four (4) on-site and thirteen (13) off-site. Ex. 124. This was an economic improvement to the defendants in the project of one (1) more residential unit with nine (9) less affordable units to be located on-site. A residential unit on-site is more valuable than a residential unit off-site. Ex. 124. The defendant only elected to rescind the closing on June 20, 2008, well over a year after the closing and for only one of the two alleged misrepresentations. Ex. 40. Despite the fact the defendants waited for over a year to attempt to rescind the closing on June 20, 2008, the defendants did not claim rescission on the basis of the claimed misrepresentation that "all approvals had been obtained." The only reason for rescission cited was "in connection with the number of available two-bedroom units at 50 Connecticut Avenue, Norwalk, CT . . ." Ex. 40. Although the defendants know as of May 22, 2007 that 50 Connecticut Avenue did not contain any two-bedroom units, they did not attempt to rescind until over a year later in June 2008. Instead, they continued on with the development and Attorney Zullo's efforts to obtain governmental agency approvals.
The defendants, North Water Street Tarragon, LLC, never exercised the Option Agreement granted to it by 50 Connecticut Avenue, LLC for the thirteen (13) off-site affordable housing units. Ex. 9. The defendant did not have to pay any money to obtain this Option but the defendants would have to pay $800,000 in order to satisfy any off-site component of the affordable housing requirement at the time of exercising the Option.
The plaintiff, after the closing, was still willing to accommodate the defendants in their goal of developing the 20 North Water Street project to its maximum by offering another off-site project at 80 Fair Street, Norwalk, Connecticut and changing the terms of the Option. Ex. 38. This occurred on August 2, 2007 before the default date but after the Maturity Date. The defendants never responded to the plaintiff's counter-offer made at the August 2, 2007 meeting and confirmed by the plaintiff's e-mail despite the defendants' promise: "We will review and get back to you. Ex. 39.
The entire claims of fraud and misrepresentation made by the defendants are manufactured and taken out of context as a cover up for the two real issues the defendant had: failure to obtain its financing for the project and the defendant's desire to improve the approvals already obtained for the project by increasing the number of residential units at 20 North Water Street, locating most or all the affordable housing units off-site and locating the affordable housing units at a location other than 50 Connecticut Avenue thereby saving the $800,000 option price. The defendants' internal correspondence demonstrates that the defendants did not rely on either alleged false misrepresentation and the principle issue the defendants had was obtaining their own financing in order to pay off the $7,410,000 first mortgage. Ex. 92.
The defendants, North Water Street Tarragon, LLC and Tarragon Development Corporation, filed nine special defenses. On the Special Defenses and Counterclaims alleging misrepresentation and fraud, for the reasons already stated, the defendants have failed to sustain their burden of proof. The allegations of the First Special Defense and the First Counterclaim are nearly identical. The issues on the First Special Defense and the First Counterclaim are found for the plaintiff.
The defendants' Second Special Defense alleges unclean hands and in effect restates the misrepresentations and fraud of the First Special Defense. For the reasons stated, the defendants have failed to sustain their burden of proof. As to the Second Special Defense the issues are found for the plaintiff.
The Third Special Defense alleges breach of the implied covenant of good faith and fair dealing, the Fourth Special Defense inequitable conduct, the Fifth Special Defense failure of certain conditions as a consequence of the plaintiff's misrepresentations, the Sixth Special Defense equitable estoppel and the Seventh Special Defense "by reason of the plaintiff's conduct as aforesaid, the defendants are discharged from any duty." The issues raised in these five Special Defenses all arise out of the same facts as the fraud and misrepresentation allegations. The issues on the Third, Fourth, Fifth, Sixth and Seventh Special Defenses are all found for the plaintiff.
The court has already addressed the Eighth Special Defenses as to notice, demand and acceleration. The issues on the Eighth Special Defense are found for the plaintiff.
The defendants have prevailed on their Ninth Special Defense because the court has found that late fees at maturity are not provided for under Connecticut law and the 18.0% default rate of interest is void. Since the issues of the Ninth Special Defense have been found for the defendants, the reduction of the debt found by this court is adequate compensation to the defendants for their prevailing on the Ninth Special Defense.
The twenty-two paragraphs of the First Counterclaim are incorporated in the remaining three Counterclaims and allege fraudulent misrepresentation. The issues having been found the plaintiff as to the defendants' allegation of fraudulent misrepresentation, the issues on the First Counterclaim are found for the plaintiff. The remaining three Counterclaims restate the same two claims of fraud and misrepresentation.
The issues on the Second Counterclaim seeking CUTPA relief are found for the plaintiff.
The Defendant's Third Counterclaim is a claim for "unfair, dishonest, inequitable and in bad faith" conduct in violation of the obligations of good faith, and fair dealing. This Third Counterclaim is nothing more than an allegation of the duty of good faith and fair dealing as alleged in the Third Special Defense and the fraud and/or misrepresentation alleged in the First Counterclaim and First Special Defense. The issues on the Third Counterclaim are therefore found for the plaintiff.
The Fourth Counterclaim seeks rescission of the note and mortgage deed, security agreement and guaranty incorporating the twenty-two paragraphs of the First Counterclaim alleging fraud and/or misrepresentation. This court has already found that the defendants have failed to sustain in their burden of proof on the First Counterclaim. The issues therefore are found for the plaintiff on the Fourth Counterclaim.
Since the issues on all four Counterclaims have been found for the plaintiff, there is no need to address the plaintiff's Nine Special Defenses and the two Matters in Avoidance.
The court finds that the plaintiff has sustained it's burden of proof for foreclosure as against the defendant, North Water Street Tarragon, LLC, as alleged in its First Count of the complaint.
ORDERS
Neither defendant paid the $7,410,000 principal and accrued interest on or before August 6, 2007, nor have they made any payments thereafter. The court finds the defendant, North Water Street Tarragon, LLC, is in default of the Commercial Mortgage Note. The court finds that the debt is the $7,410,000 principal plus 8.0% interest commencing on July 1, 2007. That 8.0% interest through and including June 30, 2009 is $1,185,600. The total debt through and including June 30, 2009 excluding attorneys fees is $8,595,600. Per diem interest at 8.0% after June 30, 2009 is $1,646.66.
Attorneys fees will be determined at a later evidentiary hearing to be held after the plaintiff files a motion in accordance with P.B. § 11-21. The note provides for attorney fees.
The court further finds that there is substantial equity in the property. There is no evidence of any other liens or encumbrances on the property. The court finds the fair market value of the property at the time of trial far exceeds that of the indebtedness found today. Further hearings may be needed as to the current fair market value of the real property and the existence of any other encumbrances, mortgages or liens on the real property.
The defendants have filed a Motion for Strict Foreclosure. The court is inclined to order a strict foreclosure. In order for strict foreclosure to enter the court must establish a law day. The court cannot establish a law day without making an additional finding as to the amount of the attorney fees, which will be added to the debt already found. Interest will therefore accrue. This matter is assigned for an immediate hearing on the issue of plaintiff's attorneys fees in accordance with P.B. § 11-21.
The Second Count of the plaintiff's complaint seeking foreclosure of collateral under the Security Agreement has been withdrawn. The court need not decide that count.
The Third Count of the plaintiff's complaint filed against the defendant, Tarragon Development Corporation, for breach of the guaranty agreement having been withdrawn, the court need not decide that count.
Costs are to be taxed by the Clerk of the Superior Court.
The matter is assigned for an immediate hearing before the undersigned on attorney fees and, if requested by one of the parties, an immediate hearing in order to credit the defendants with any payments made after the close of evidence, updating the debt, determining the fair market value of the real property, determining the status of other mortgages, liens or encumbrances on the real property and whether or not a foreclosure by sale or strict foreclosure will enter. Other matters routinely considered in any real property foreclosure will be assigned for that hearing.