Opinion
No. CV02 0279718-S
July 22, 2003
MEMORANDUM OF DECISION MOTION TO STRIKE #118
I
PROCEDURAL HISTORY
This is a foreclosure action brought by the plaintiff, Ameriquest Mortgage Company, against the defendants, James C. McCorkle and American Express Travel Related Services. Ameriquest filed a complaint on February 8, 2002, in which it alleges that it loaned McCorkle $307,800.00. It is further alleged that in order to secure this loan McCorkle mortgaged to Ameriquest property located at 588 Country Club Road, Cheshire, Connecticut. Finally, it is alleged that McCorkle is in default of this loan and Ameriquest seeks a foreclosure of the mortgage.
American Express was made a defendant to this action because of a judgment lien it held on the mortgaged property. American Express has no CT Page 8453-fs judgment in the matter now before the court.
In response to the complaint, McCorkle filed an answer, four special defenses and a four-count counterclaim on August 26, 2002. An amended answer, special defenses and counterclaim were filed on December 13, 2002. McCorkle alleges in his counterclaim and special defenses that Ameriquest knew that his financial situation was such that he could not reasonably be expected to pay according to the terms of the note, that documents regarding his financial situation were falsified in order to make the loan appear reasonable, and that Ameriquest instructed a real estate appraiser that the property had to be appraised at a sufficiently high figure in order to make the loan appear reasonable. Also, McCorkle alleges that Ameriquest failed to pay off his pre-existing creditors, particularly American Express, as was promised as part of the loan transaction. On the basis of these allegations, McCorkle claims that the loan transaction was procedurally and substantively unconscionable, that Ameriquest's complaint is barred by the doctrine of unclean hands, that Ameriquest's complaint is barred by the doctrine of equitable estoppel, that Ameriquest breached the covenant of good faith and fair dealing, that Ameriquest's conduct is a violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq., and that CT Page 8453-fm Ameriquest breached express and implied contracts between the parties.
McCorkle has withdrawn the third special defense, sounding in equitable estoppel.
On February 24, 2003, Ameriquest filed a motion to strike the amended counterclaim and special defenses in their entirety. Ameriquest argues that the special defenses and each count of the counterclaim are legally insufficient to state a claim upon which relief can be granted. McCorkle filed a memorandum of law in opposition to the motion to strike on March 12, 2003.
II DISCUSSION
"The purpose of a motion to strike is to contest the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Peter-Michael, Inc. v. Sea Shell Associates, 244 Conn. 269, 270, 709 A.2d 558 (1998). "[F]or the purpose of a motion to strike, the moving party admits all facts well pleaded." RK Constructors, Inc. v. Fusco Corp., 231 Conn. 381, 383 n. 2, 650 A.2d 153 (1994). "[A] counterclaim is a cause of action existing in favor of the defendant against the plaintiff and on which the defendant might have secured affirmative relief had he sued the plaintiff in a separate action . . . A motion to strike tests the legal sufficiency of a cause of action and may properly be used to challenge the sufficiency of a counterclaim." (Citation omitted; internal quotation marks omitted.) Fairfield Lease Corp. v. Romano's Auto Service, 4 Conn. App. 495, 496, 495 A.2d 286 (1985). "A party wanting to contest the legal sufficiency of a special defense may do so by filing a motion to strike." Barasso v. Rear Still Hill Road, LLC, 64 Conn. App. 9, 13, 779 A.2d 198 (2001).
"[A] foreclosure action constitutes an equitable proceeding . . . In an equitable proceeding, the trial court may examine all relevant factors to ensure that complete justice is done . . . The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court . . ." (Internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, LLC, 69 Conn. App. 824, 833, 798 A.2d 445 (2002).
"[B]ecause the [defendant] [has] asserted various special defenses, we set forth the legal principles regarding defenses to foreclosure actions. Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction . . . or, if there had never been a valid lien . . . The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but CT Page 8453-fn demonstrate, nonetheless, that the plaintiff has no cause of action . . . A valid special defense at law to a foreclosure proceeding must be legally sufficient and address the making, validity or enforcement of the mortgage, the note or both . . . Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles . . . [O]ur courts have permitted several equitable defenses to a foreclosure action. [I]f the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had . . . Other equitable defenses that our Supreme Court has recognized in foreclosure actions include unconscionability . . . abandonment of security . . . and usury." (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn. App. 700, 705-06, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002). Also, "[i]n recognition that a foreclosure action is an equitable proceeding, courts have allowed . . . CUTPA . . . to be pleaded as a special [defense]." (Internal quotation marks omitted.) Homestead Funding Corp. v. Welch, Superior Court, judicial district of Windham at Putnam, Docket No. 067260 (August 28, 2002, Foley, J.).
First Special Defense — Unconscionability
In the first special defense, McCorkle asserts that the loan transaction entered into with Ameriquest was procedurally and substantively unconscionable. Ameriquest argues that the underlying factual allegations are insufficient to support this claim because McCorkle has not alleged that he was owed a fiduciary duty relative to the loan transaction, nor does one exist. Furthermore, Ameriquest argues that the allegations are legally insufficient because they fail to attack the note itself, but rather relate to McCorkle's ability to pay.
"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." (Emphasis in original; internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, LLC, supra, 69 Conn. App. 837. In Family Financial Services, Inc. v. Spencer, 41 Conn. App. 754, 677 A.2d 479 CT Page 8453-fo (1996), a mortgage loan transaction was found to be unconscionable where, inter alia, the mortgagor was uneducated and it was apparent that she would not be able to repay the loan.
Similar to Family Financial Services, it has been alleged in the present case that Ameriquest was aware McCorkle's financial situation was such that he would be unable to repay the loan. McCorkle has also alleged that Aneriquest prepared "grossly inaccurate" documents in order to make the loan appear reasonable. Such allegations, if proven, would establish that there were improprieties in the formation of the contract and that the terms of the contract were overly favorable to one of the parties. These allegations relate to the making of the loan, as well as the terms of the loan, and are sufficient to support a cause of action for procedural and substantive unconscionability. The motion to strike the first special defense is denied.
Second Special Defense — Unclean Hands
The second special defense sounds in unclean hands. As to this special defense, Ameriquest relies on the arguments made in response to the first special defense.
The unclean hands doctrine may be asserted as a special defense in a foreclosure action. Thompson v. Orcutt, 257 Conn. 301, 777 A.2d 670 (2001). "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." (Internal quotation marks omitted.) Id., 310. "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." (Internal quotation marks omitted.) Id. "The party seeking to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in wilful misconduct with regard to the matter in litigation . . . The trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the courts' integrity dictate that the clean hands doctrine be invoked." (Internal quotation marks omitted.) Ridgefield v. Eppoliti Realty Co., 71 Conn. App. 321, 335, 801 A.2d 902, cert. denied, 261 Conn. 933, 806 A.2d 1070 (2002).
In the present case, McCorkle has alleged that Ameriquest forged documents in order to make the loan appear reasonable. It has also been alleged that the real estate appraiser was instructed by Ameriquest that CT Page 8453-fp the appraisal prepared in connection with the loan transaction must be sufficiently high in order to make the loan appear reasonable. These allegations go to the making and subsequent validity of the mortgage and loan. Also, these are allegations of wrongful acts which, if proven, may be sufficient for a court of equity to determine that Ameriquest had unclean hands. Therefore, the motion to strike the second special defense is denied.
Fourth Special Defense — Breach of the Covenant of Good Faith and Fair Dealing
The fourth special defense alleges that Ameriquest's actions in connection with the loan transaction constituted a breach of the covenant of good faith and fair dealing. Ameriquest once again relies on the arguments made with regard to the first special defense.
"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 constriction 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." (Internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, supra, 69 Conn. App. 834.
"[S]pecial defenses and counterclaims alleging a breach of an implied covenant of good faith and fair dealing . . . are not equitable defenses to a mortgage foreclosure." Fidelity Bank v. Krenisky, supra, 72 Conn. App. 716. See also LaSalle National Bank v. Freshfield Meadows, LLC, supra, 69 Conn. App. 835; New Haven Savings Bank v. LaPlace, 66 Conn. App. 1, 10, 783 A.2d 1174, cert. denied, 258 Conn. 942, 786 A.2d 426 (2001). Because the breach of an implied covenant of good faith and fair dealing is not a recognized defense to a foreclosure action, Ameriquest's motion to strike the fourth special defense must be granted.
First Count of Counterclaim — Unconscionability
Count one of the counterclaim provides that the loan transaction was procedurally and substantively unconscionable. Because the motion to strike the special defense of unconscionability was denied, it is similarly denied as to this count of the counterclaim. Ameriquest's motion to strike the first count of the counterclaim is denied. CT Page 8453-fq
Second Count of Counterclaim — CUTPA
The second count of the counterclaim alleges that Ameriquest's conduct with regard to the loan transaction is a violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq., (CUTPA). Ameriquest argues that the factual allegations of the counterclaim lack substantive merit and that McCorkle has failed to allege the elements of a CUTPA claim.
General Statutes § 42-110b (a) states: "No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." "It 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]." (Internal quotation marks omitted.) Journal Publishing Co. v. Hartford Courant Co., 261 Conn. 673, 695, 804 A.2d 823 (2002). "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." Id., 695-96.
In the present case, although many of the terms used in the CUTPA statute have not been used in the counterclaim, it nonetheless contains sufficient factual allegations to support a CUTPA cause of action. McCorkle has alleged that Ameriquest prepared "grossly inaccurate" documents in order to make the loan appear reasonable. It could be found that such behavior is unfair and deceptive and that it causes injury to consumers. See Home American Credit, Inc. v. Weiss, Superior Court, judicial district of Hartford, Docket No. CV 99 0591183 (March 16, 2000, Beach, J.). Furthermore, such behavior is related to the making of the loan. For the reasons stated, the motion to strike the second count of the counterclaim is denied.
Third Count of Counterclaim — Breach of Express and Implied Contracts
The third count of the counterclaim alleges that Ameriquest's failure CT Page 8453-fr "to pay American Express Travel Related Services out of the proceeds of the loan breached the express and implied contracts between the parties that it do so." Ameriquest argues that this count refers to factors outside of the note and mortgage because there are no provisions within either document requiring it to pay off McCorkle's pre-existing creditors. Because of this, Ameriquest argues, the third count does not properly formulate the basis for a counterclaim.
"The judges of the Superior Court have repeatedly held that in foreclosure actions, allegations dealing with breach of contract are invalid when they do not relate to the making, validity or enforcement of the note." Homestead Funding Corp. v. Welch, supra, Superior Court, Docket No. 067260. In the present case, the complaint alleges that Ameriquest's promise to pay pre-existing creditors from the loan proceeds was "[i]n connection with the loan transaction" at issue. As such, and construing the complaint in a light most favorable to the pleader; RK Constructors, Inc. v. Fusco, Corp., supra, 231 Conn. 384; the allegations relate to the making of the note and mortgage. Therefore, the motion to strike the third count of the counterclaim is denied.
Fourth Count of Counterclaim — Breach of the Covenant of Good Faith and Fair Dealing
Count four of the counterclaim alleges that Ameriquest's conduct breached the covenant of good faith and fair dealing. Because the motion to strike McCorkle's fourth special defense on this ground was granted, it is similarly granted as to this count of the counterclaim. Ameriquest's motion to strike the fourth count of the counterclaim is granted.
CONCLUSION
Ameriquest's motion to strike is denied as to the first and second special defenses and granted as to the fourth special defense. Ameriquest's motion to strike is denied as to the first, second and third counterclaim and granted as to the fourth counterclaim.
BY THE COURT
Peter Emmett Wiese, Judge.
July 17, 2003