Opinion
No. CV-09-6004927
December 22, 2010
RULING ON MOTION TO STRIKE DEFENDANTS' REVISED COUNTERCLAIMS AND SPECIAL DEFENSES (#153)
The plaintiff, Wells Fargo Bank, N.A., as Trustee for the Registered Holder of GMAC Commercial Securities, Inc., Commercial Pass-Through Certificates, Series, 2004-C3, has moved to strike the Revised Counterclaims and Special Defenses dated August 10, 2010 on the grounds that the counterclaims are identical to those which this court has already stricken and the special defenses mirror the allegations of the previously stricken counterclaims.
Allegations of the Counterclaims
The counterclaims allege that in August 2004 the defendant, Riverview East Windsor, LLC ("Riverview") purchased the property which is the subject of this action, an apartment complex located at 225-226 South Water Street, East Windsor (the "Property"). In order to finance the purchase of the Property, Riverview gave a promissory note and mortgage to Deutsch Bank. The note and mortgage were ultimately assigned to the plaintiff. At the end of May 2009, Riverview informed the master servicer of the loan that Riverview would no longer be able to make payments on the note as of June 1, 2009 "because of financial concerns that had arisen with respect to the Subject Property, in significant part due to the historically difficult economic times." Counterclaim ¶ 6. Riverview alleges that it was current on its loan payments through May 2009. However, it does not allege that it has made any payments on the loan since that time.
The allegations of the counterclaim pertain to the conduct of the plaintiff's assignor, CW Capital Asset Management LLC with respect to failure to negotiate a workout of the loan. It also alleges that CW Capital Asset Management LLC failed to negotiate a workout "in good faith" because it improperly considered the involvement of a principal of the defendant, Michael Belfonti, in other loans on unrelated properties. The four counterclaims are all based on the plaintiff's alleged refusal to negotiate a loan modification and its decision to proceed with the foreclosure action. None of the counterclaims pertain to the making, validity or enforcement of the note and mortgage at issue.
On April 8, 2010, the defendant filed Revised Counterclaims which contained four counts: (1) vicarious liability of CWCapital Asset Management LLC and other CWCapital entities which the defendant alleges are entities related to the plaintiff; (2) breach of the covenant of good faith and fair dealing; (3) breach of fiduciary duty; and (4) CUTPA. The plaintiff moved to strike those counterclaims on April 28, 2010. On August 11, 2010, this court granted the Motion to Strike the Counterclaims.
On August 10, 2010, the defendant filed an Answer, Special Defenses and Revised Counterclaims. The Revised Counterclaims are identical to those previously stricken. The Special Defenses are: (1) failure to state a claim on which relief can be granted; (2)receipt of TARP funds; (3) equitable estoppel; (4) CUTPA (5) breach of covenant of good faith and fair dealing; (6) vicarious liability for CWCapital; (7) failure to mitigate damages; and (8) unclean hands.
Discussion of the Law and Ruling
As the Counterclaims filed on August 10, 2010 are identical to those already stricken by the court, they are again ordered stricken for the reasons stated by the undersigned in the Memorandum of Decision dated August 11, 2010.
Like the Counterclaims, the Special Defenses all related to the plaintiffs alleged failure to negotiate a loan modification. Those Special Defenses are identical to the special defenses filed by the defendants in Bank of America, N.A., Trustee v. Groton Estates, LLC et al., 2010 Ct.Sup. 14672 (July 13, 2010, Devine, J.). As the plaintiff has done in this case, the plaintiff in that case also moved to strike all but one of the special defense and the court granted the motion, stating:
At the end of May 2009, Groton Estates informed the master servicer of the loan that it would no longer be able to service the loan as of June 1, 2009. As a result, Groton Estates made no mortgage payments in June through September of 2009 . . . The defendants filed an answer to the revised complaint on April 9, 2010, in which they assert nine special defenses and four counterclaims based upon the plaintiff's alleged refusal to negotiate a loan modification and its decision to proceed with this foreclosure action.
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The plaintiff argues that the gravamen of the defendants' special defenses and counterclaims is that a lender has an obligation to negotiate and execute a loan modification following a borrower's default, waiving the lender's right to foreclose under the mortgage contract. As a result, the plaintiff argues that the defendants' special defenses and counterclaims fail as a matter of law because they do not go to the making, validity or enforcement of the note or the mortgage. The defendants counter that they have alleged that the plaintiff and/or its agents took affirmative steps to ensure Groton Estates' inability to fully service the debt and make necessary repairs and in fact, engaged in a pattern of retribution against them.
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There is no dispute that the defendants' special defenses relate to the plaintiff's conduct after execution of the note and mortgage.
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The defendants' second special defense is that the subject debt has been paid by reason of plaintiff's efforts to receive funds from the Troubled Assets Relief Program (TARP"). The defendants characterize this special defense as "payment," which is a well established defense to a foreclosure action. There is no Connecticut law addressing TARP and significantly, federal and out of state law do not support the use of TARP as a special defense to a foreclosure action. See Pantoja v. Countrywide Home Loans, Inc., 640 F.Sup.2d 1177, 1185 (N.D.Cal. 2009) (holding that there is no implied private right to sue fund recipients under TARP); Henry Builders, Inc. v. U.S., United States District Court, Docket No. 1:09-cv-0288-ENV-JMA (E.D.N.Y. January 26, 2009) (New York corporations and resident homeowners did not have standing to sue government because they did not and could not plead that they were in any way particularly harmed by TARP or affected in any way more concretely by it, than any American); Bayview Loan Services, LLC v. Avery Enterprises, Inc., Supreme Court of New York, 2010 NY Slip Op 50336 (U) (N.Y.Sup.Ct. March 8, 2010) (granting summary judgment in favor of lender, rejecting defendants' affirmative defense, which alleged they "have been left to hold the ashes left from this international economic tragedy" and that lender is the "beneficiary of an unconstitutional Act of Congress, [TARP]"). As a result, the court strikes the defendants' second special defense.
The defendants' third special defense asserts the doctrine of equitable estoppel. "`The standards governing the application of equitable estoppel are well established. There are two essential elements to an estoppel — the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief and the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done.' (Emphasis added; internal quotation marks omitted.) O'Connor v. Waterbury, 286 Conn. 732, 757, 945 A.2d 936 (2008). `As a general rule . . . a representation or assurance, in order to furnish the basis of an estoppel, must relate to some present or past fact or state of things, as distinguished from mere promises or statements as to the future. The misrepresentation must be one of fact and not of intention to support equitable estoppel.' 28 Am.Jur.2d 479, Estoppel and Waiver § 51 (1999)." Banknorth, N.A. v. Blackrock Realty, Superior Court, judicial district of Fairfield, Docket No. CV 09 6002566 (April 14, 2010, Hartmere, J.).
In Liberty Bank v. New London Limited Partnership, supra, 43 Conn. L. Rptr. 328-29, this court found that there was a genuine issue of material fact in regard to the defendant's equitable estoppel defense. "The plaintiff's consistent pattern of accepting late payments without protest, combined with the surrounding circumstances, provided evidence of conduct that may have induced the defendants to believe in the existence of certain facts, i.e., that the plaintiff would continue its collection of the debt in accordance with established past practice. In other words, based on the course of the relationship, the defendants may have reasonably been led to believe that, absent some type of notice to the contrary, the plaintiff would continue to be satisfied with accepting a late payment along with a late fee." Id., 329.
Here, the defendants assert that the plaintiff's agent, CW Capital, "misrepresented that a work-out of the outstanding debt service could be attained and advised Groton Estates to hold funds until further instructions, which were never given." These allegations are clearly distinguishable from those before this court in Liberty Bank, where lender engaged in a pattern of behavior, acceptance of late payments, upon which the defendants reasonably relied to their detriment. At best, the defendants here allege that the plaintiff made a future promise to work out the outstanding debt with them. This allegation is legally insufficient as it constitutes a mere promise regarding the plaintiff's actions at a future time, which is an insufficient basis for an equitable estoppel defense. Accordingly, because the defendants have not alleged that the plaintiff intended or calculated to induce them to believe in certain facts, the court will grant the plaintiff's motion to strike the third special defense.
The defendants' fourth special defense asserts: "Plaintiff's claims are barred for violation of CUTPA as set forth more fully below in the revised counterclaims, which are incorporated herein." There appears to be a split of authority amongst Superior Court decisions as to whether a violation of CUTPA provides a legally sufficient special defense to a foreclosure action. This court, however, agrees with the line of Superior Court decisions holding that an alleged violation of CUTPA is properly brought as a counterclaim to foreclosure actions, rather than as a special defense. See LaSalle Bank National Association v. Bardales, Superior Court, judicial district of New London, Docket No. CV 08 5007137 (April 14, 2009, Devine, J.) (addressing plaintiff's alleged violation of CUTPA as a counterclaim); Wells Fargo Bank N.A. v. Skoglund, Superior Court, judicial district of New London, Docket No. 4004580 (April 13, 2006, Devine, J.) (same).
"[S]ince CUTPA claims by their very nature constitute claims for damages, they are properly brought as counterclaims rather than special defenses . . . CUTPA is a sword rather than a shield." (Internal quotation marks omitted.) U.S. Bank National Association v. Ascenzia, Superior Court, judicial district of New Haven, Docket No. CV 08 5022527 (July 30, 2009, Abrams, J.) ( 48 Conn. L. Rptr. 345, 347). Therefore, the court strikes the defendants' fourth special defense. Whether the defendants' allegations as to the plaintiff's violation of CUTPA are legally sufficient as a counterclaim to this foreclosure action will be addressed later in this decision.
In their fifth and sixth special defenses, the defendants assert the following: "Plaintiff's claims are barred by reason of its breach of its fiduciary duties owed to Defendants as set forth more fully below in the revised counterclaims, which are incorporated herein . . . Plaintiff's claims are barred by reason of its breach of the covenant of good faith and fair dealing owed to the Defendants as set forth more fully below in the revised counterclaims, which are incorporated herein." In their second and third counterclaims, the defendants specifically allege, in relevant part, that the plaintiff breached these duties by: "(a) refusing to timely respond to the good faith letter sent on [May 26, 2009] with instructions as to how to allocated funds between debt service and repairs; (b) instructing Mr. Belfonti to hold funds until there was further instructions, which were not given; (c) refusing to negotiate in good faith as it pertains to the contents of the proposal provided by Mr. Belfonti thereby ensuring that the foreclosure would continue to the detriment of Mr. Belfonti . . . (e) permitting CW Capital to further its retaliation by proceeding with foreclosure instead of attempting to negotiate and (f) seeking the removal of MCR Property Management, Inc . . . as property manger despite there being no claim that MCR has mismanaged subject property.
The Appellate Court held that special defenses to a foreclosure action, including breach of fiduciary duty and breach of implied covenant of good faith and fair dealing, cannot be upheld unless they attack the making, validity or enforcement of the note or mortgage. See Southbridge Associates v. Garofalo, 53 Conn.App. 11, 17-19, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999); see also Fidelity Bank v. Kremsky, 72 Conn.App. 700, 705-06, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002). Moreover, counterclaims to a foreclosure action must relate to the making, validity or enforcement of a mortgage note in order properly to be joined to the complaint. See J.P. Morgan Chase Bank Trustee v. Rodrigues, 109 Conn.App. 125, 133, 952 A.2d 56 (2008); New Haven Savings Bank v. LaPlace, 66 Conn.App. 1, 9, 783 A.2d 1174, cert. denied, 258 Conn. 942, 786 A.2d 426 (2001).
In Ulster Savings Bank v. 28 Brynwood Lane, Ltd., Superior Court, complex litigation docket at Stamford, Docket No. X08 CV 054007323 (January 11, 2010, Jennings, J.T.R.), the court noted that: "There have been many and varied interpretations of the `making, validity and enforcement' requirement by Connecticut Superior Court decisions." There is a line of cases which interprets the phrase very strictly to mean the execution and delivery of an enforceable instrument, and not the occurrences that may arise between the parties during the course of their loan relationship." Id.; see Federal National Mortgage v. Mallozzi, Superior Court, judicial district of Stamford/Norwalk at Stamford, Docket No. 165698 (February 10, 1999, Hickey, J.); Ocwen Federal Bank FSB v. Weinberg, Superior Court, Judicial District of New London, Docket No. 547629 (August 11, 1999, Mihalakos, J.). A second line of cases, however, interprets the "making, validity, and enforcement" requirement less rigidly. See Liberty Bank v. New London Limited Partnership, supra, 43 Conn. L. Rptr. 326; Ocwen Federal Bank FSB, v. Rivas, Superior Court, judicial district of Fairfield, Docket No CV 99 90268135 (February 21, 2002, Stevens, J.). "This court does not subscribe to the literal, chronological test of making, validity and enforcement . . . Like Judge Devine in Liberty Bank, supra, I believe that post-execution actions or positions of a lender can relate to the enforcement of a note and mortgage. Each counterclaim or special defense therefore requires a case-by-case analysis, by the court acting as a court of equity, to assess the extent to which the facts alleged relate to the original transaction and not to any different or subsequent transaction." Ulster Savings Bank v. 28 Brynwood Lane, Ltd., supra, Superior Court, Docket No. X08 CV 05 4007323.
Although this court subscribes to the line of cases that interpret the making, validity and enforcement limitation less rigidly, in the present case, the defendants' allegations as to breach of fiduciary duty and breach of the duty of good faith and fair dealing are legally insufficient. The plaintiff's refusal to respond to the defendants' letter and its refusal to negotiate a loan modification with the defendants and instead, proceed with this foreclosure action, does not rise to the level of breach of these duties. In Southbridge Associates v. Garofalo, supra, 53 Conn.App. 16-17, the Appellate Court affirmed the trial court's granting of summary judgment as to the defendants' special defense of breach of the implied covenant of good faith and fair dealing. In doing so, the court stated: "The implied covenant of good faith and fair dealing requires faithfulness to an agreed common purpose and consistency with the justified expectation of the other party in the performance of every contract . . . Essentially, it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended. The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy . . . The loan documents do not contain a provision requiring a holder of the notes and mortgages to negotiate with or sell the notes to [the defendants] prior to enforcing its foreclosure rights. Moreover, the defendants do not cite nor can we find any authority requiring a holder of a note and mortgage to sell them at a discount to the mortgagor under an implied covenant of good faith and fair dealing when the mortgagor defaults." (Citations omitted; internal quotation marks omitted.) Id.
Additionally, the Appellate Court affirmed the trial court's granting of summary judgment as to the defendants' special defense of breach of fiduciary duty. "Connecticut courts have specifically refused to define a fiduciary relationship in precise detail and in such a manner as to exclude new situations . . . Instead, a fiduciary relationship exists where there is a justifiable trust confided on one side and a resulting superiority and influence on the other . . . A fiduciary relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interest of the other . . . The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him . . . A bank, as a mortgagee lender, may be the fiduciary of the mortgagor borrower when the bank becomes the borrower's financial advisor." (Citations omitted; internal quotation marks omitted.) Id., 18.
In the present case, the defendants allege that the plaintiff's refusal to negotiate with them forms the sole basis of their special defenses/counterclaims for breach of the duty of good faith and fair dealing and breach of fiduciary duty. Moreover, the defendants do not allege that the plaintiff served as their financial advisor. "It is not a breach of the implied covenant of good faith and fair dealing, nor is it unconscionable, for a plaintiff to insist upon a legal or equitable remedy by resorting to the judicial process . . . In the absence of a restructure agreement in the loan documents, a failure by the defendant to attempt to negotiate or restructure the terms of the loan after default, and then seeking foreclosure, does not constitute a breach of the implied covenant of good faith and fair dealing." (Citation omitted.) Great Country Bank v. Kiely, Superior Court, judicial district of Ansonia/Milford, Docket No. CV 94 047460 (January 19, 1995, Curran, J.); see also Equicredit Corp. of America v. Pelizari, Superior Court, judicial district of Tolland, Docket No. CV 02 0077555 (April 4, 2003, Scholl, J.) (striking special defenses/counterclaims because defendant did not allege that there was any provisions in the loan documents which require that plaintiff attempt to cure defendant's arrearage and reinstate the loan instead of proceeding with a foreclosure action); Security Pacific National Trust Co. v. Rolny, Superior Court, judicial district of Litchfield, Docket No. CV 94 0065267 (July 28, 1995, Pickett, J.) (striking defenses concerning defendant's attempts to refinance their mortgage and reach a workout agreement reasoning that these special defenses concerned the business judgment of plaintiff and are not proper special defenses in a foreclosure action).
Therefore, despite this court's lenient application of the making, validity and enforcement limitation, the defendants' special defenses/counterclaims alleging breach of the duty of good faith and fair dealing and breach of fiduciary duty must be stricken.3
The defendants' seventh special defense asserts: "Plaintiff's claims are barred as a result of its vicarious liability for the actions of its agent, CW Capital, whose conduct caused, in significant part, the very default it alleges supposedly warrants a foreclosure of the subject property and/or any claimed damages." The allegations against CW Capital include, as previously mentioned in this decision, its refusal to respond to the May 26, 2009 letter and its refusal to negotiate a loan modification with the defendants. The court strikes this special defense and counterclaim. As previously discussed, the alleged conduct of the plaintiff and its agent, CW Capital, is legally insufficient to support any of the special defenses and counterclaims asserted against the plaintiff. As a result, there defendants' vicarious liability claim similarly fails as it is not an independent cause of action and must be predicated on an actionable claim. See Alvarez v. New Haven Register, Inc., 249 Conn. 709, 720-21, 735 A.2d 306 (1999) (discussing principles of vicarious liability).
The defendants' eighth special defense asserts: "Plaintiff's recovery is barred in whole, or in part, by its failure to mitigate its damages." In First Trust National Association v. Hatt, 36 Conn.App. 171, 173 n. 2, 649 A.2d 798 (1994), mitigation of damages was included in the list of the defendant's special defenses to a mortgage foreclosure action. Although, mitigation of damages may be considered as a special defense as a matter of law, it is not applicable to the present case. "[T]he concept of mitigation of damages is inapplicable to a mortgage foreclosure action where the damages consist of a sum certain, the repayment of which has been agreed to by the defendant maker of a promissory note." Fleet Bank, N.A. v. Barlas, Superior Court, judicial district of Hartford, Docket No. CV 92 0518205 (June 28, 1994, Aurigemma, J.) [ 12 Conn. L. Rptr. 32]. Here, the plaintiff mitigated its damages by promptly starting a foreclosure action and proceeding in a reasonably expeditious fashion after the defendants' default. See Tuthill Finance v. Greenlaw, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 91 0115439 (May 4, 1998, Lewis, J.), rev'd on other grounds, 61 Conn.App. 1, 762 A.2d 494 (2000). As such, this special defense is also stricken.
The defendants' ninth special defense asserts: "Plaintiff's recovery is barred by the doctrine of unclean hands as plaintiff, through its agent, CW Capital . . . caused, in significant part, the very default it alleges supposedly warrants a foreclosure of the subject property and/or any claimed damages." This court in LaSalle Bank National Association v. Bardales, supra, Superior Court, Docket No. CV 08 5007137, recognized unclean hands as a valid special defense in mortgage foreclosure actions.
"It is a fundamental principle of equity jurisprudence that for a complainant to show that he is entitled to the benefit of equity he must establish that he comes into court with clean hands . . . The clean hands doctrine is applied not for the protection of the parties but for the protection of the court . . . It is applied not by way of punishment but on considerations that make for the advancement of right and justice . . . The doctrine of unclean hands expresses the principle that where a plaintiff seeks equitable relief, he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue . . . Unless the plaintiff's conduct is of such a character as to be condemned and pronounced wrongful by honest and fair-minded people, the doctrine of unclean hands does not apply . . . [A] defense of unclean hands is proper in a mortgage case when the plaintiff . . . require[s] the aid of the illegal transaction to make out his case . . . In other words, the unclean hands defense is proper if the plaintiff would not be able to bring the action but for its improper conduct." (Citations omitted; internal quotation marks omitted.) Id., quoting Thompson v. Orcutt, 257 Conn. 301, 310, 777 A.2d 670 (2001).
The court strikes the defendants' special defense of unclean hands. As previously discussed, the plaintiff has no duty to negotiate a loan modification with the defendants. As a result, this foreclosure action is properly before this court without the aid of any improper conduct on behalf of the plaintiff. Defendants' Remaining Counterclaim: Violation of CUTPA.
"In a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order to be joined with the complaint." JP Morgan Chase Bank, Trustee v. Rodrigues, supra, 109 Conn.App. 133. "This requirement . . . is nothing more than an application of Practice Book § 10-10 . . . [Section] 10-10 provides that [i]n any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff . . . provided that each such counterclaim . . . arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint . . . In a foreclosure action, the relevant factors for a court to consider in determining whether the [aforementioned] `transaction test' has been met by the counterclaim includes: (1) whether the counterclaim is based on factors outside of the note or mortgage; (2) whether different issues of fact and law are presented by the complaint and counterclaim; and (3) whether separate trials would involve a substantial duplication of effort." (Citations omitted; internal quotation marks omitted.) Eastern Federal Bank v. Krondes, Superior Court, judicial district of New London, Docket No. CV 07 5007447 (September 23, 2008, Martin, J.).
Furthermore, "[i]t is well settled that in determining whether a practice violates CUTPA we have adopted the criteria set out in the cigarette rule by the federal trade commission for determining when a practice is unfair: (1) [W]hether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise whether, in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers [competitors or other businessmen] . . . All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three . . . Thus a violation of CUTPA may be established by showing either an actual deceptive practice . . . or a practice amounting to a violation of public policy . . . Furthermore, a party need not prove an intent to deceive to prevail under CUTPA." (Internal quotation marks omitted.) Eller v. Beckenstein, 117 Conn.App. 550, 565-66, 979 A.2d 1055, cert. denied, 294 Conn. 913, 983 A.2d 274 (2009).
Here, the defendant's allegations are legally insufficient to state a claim for violation of CUTPA. This court has previously recognized that violation of CUTPA may be a proper counterclaim to a foreclosure action. See LaSalle Bank National Association v. Bardales, supra, Superior Court, Docket No. CV 08 5007137; Mortgage Electronics Registration Systems, Inc. v. Venditto, Superior Court, judicial district of New London, Docket No. 4002228 (October 28, 2005, Devine, J.) ( 40 Conn. L. Rptr. 209). Here, the plaintiff's conduct, in refusing to negotiate with the defendants and proceeding to foreclosure, simply does not rise to the level of a violation of CUTPA.
This court adopts the reasoning of the court in Bank of America, N.A., Trustee v. Groton Estates, LLC et al., supra, and strikes all of the special defenses.