Opinion
FSTCV146023398S
10-05-2017
Benjamin Barton v. Jose Vasquez
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Kenneth B. Povodator, J.
Background
This is a claim based on a promissory note. The case presents issues relating to the interpretation of the terms of the agreement. There is a lack of precise agreement as to when payments were made and how much was paid (although, as discussed below, the parties eventually stipulated to the amount paid). Ultimately, the dispositive issue is the applicability of a relatively recent Supreme Court decision.
The note in question was executed in 2003. It was executed in an attorney's office, and the attorney and a member of his support staff were witnesses, but the attorney testified (via deposition) that he had no recollection of the transaction and thought it highly unlikely that he had any role in preparing the instrument. In that latter regard, he stated that he typically used word-processor-generated forms for that purpose and in any event was unfamiliar with the company that apparently had created the form actually used (based on pre-printed information at the bottom).
The note recited a principal of $145,000 and provided for 5 years of interest-only payments at an annual rate of 18%. Payments not made within five days of the due date were subject to a 5% late fee. Payments were to be credited against interest first, then principal, with a provision that " [a]ll prepayments shall be applied in reverse order of maturity."
The parties generated their own records concerning payments, which could not be totally reconciled. There was an approximate $15,000 differential between records kept by the defendant and those kept by (and on behalf of) the plaintiff. As noted above, the parties reached an agreement that the total of payments made by the defendant to the plaintiff was $345,500. As recited in the report generated by the plaintiff's expert, that figure was " approximately $5,000 higher than Mr. Barton's Ledger and $10,636 lower than the amounts reported in the Vasquez Ledger."
Discussion
Each party retained an expert to calculate the amount that remains outstanding, if anything, on the note from 2003--with the plaintiff's expert determining that more than $180,000 remains due and owing. The defendant's expert concluded that there was a modest overpayment by the defendant. While the plaintiff's expert provided a detailed analysis in a report that provided various perspectives on the proper analysis of the information provided, as discussed below, the court found that the defendant's expert's analysis more accurately reflects the present financial relationship of the parties.
If the court had to reach them, the court would have a number of issues with the plaintiff's expert's opinions. The expert treated late payment fees as additions to principal, upon which interest would be calculated, rather than as charges that were accumulating separately. On a number of occasions, the expert attempted to apply the " in reverse order of maturity" provision without regard to whether it could even possibly apply to a situation in which there was no expectation of amortization of principal over the five years of payments, i.e., only a single principal payment was expected. With a single payment of principal contemplated under the agreement, and all other payments towards principal being treated as prepayments, there seems to have been no " order" of maturity that could allow prepayments of principal to be applied in " reverse order of maturity." The plaintiff's expert never satisfactorily explained how or why that provision could apply to a single-principal-payment scenario.
In American First Federal, Inc. v. Gordon, discussed below, the court noted that the parties presumably could have agreed to capitalize interest; by analogy, the parties here presumably could have agreed to capitalize late charges. There is nothing in the note/agreement that explicitly authorizes such treatment of late charges, and the court declines to find that it was necessarily implied. To the extent that the plaintiff effectively drafted the agreement (there is no suggestion of any input from the defendant, except perhaps as to interest rate and principal amount), and to the extent that there was no proffered evidence as to intent in this regard, the agreement must be construed against the plaintiff as the drafting party.
Seemingly related, the plaintiff's expert appears to have treated the initial monthly payment of $2,175 as a required payment for every month (or at least the first five years), such that the expert rejected the defendant's calculation of the payment due as being based on a declining balance, for purposes of determining the late fee (5% of the payment due). The problem is that that specific sum is not recited anywhere in the note--there is nothing in the note that requires equal payments of $2,175 or any other amount. The note's only relevant requirement is that interest be paid " at the rate of 18% per annum on the unpaid balance" where " payments of interest only" were required for 60 consecutive months. If the principal was being repaid early--and again, there were no monthly required payments towards principal such that there was no choice as to which principal payment should be credited--the note effectively was being rewritten by the expert, based on the opinions as set forth in the report.
The court notes that it was not presented with anything in the nature of primary documentation (the ledgers themselves)--rather, the plaintiff's expert and the defendant's expert each provided an analysis based on purportedly the same information. Aside from the previously-mentioned difference of approximately $15,000 with respect to payments made, there also is a significant issue concerning late payments. The plaintiff relies upon an analysis that includes a claimed late payment for most months (153 months out of 159(?)), and recites that the defendant's records also reflect a large number of late payments (113); the defendant's expert provided an analysis that includes what appeared to be nine instances of late payments, over a period extending more than 10 years. Absent the actual ledgers or other primary or raw data, the court cannot determine which presentation is correct, when they vary to such an extent. (The court notes, however, that on the first page of his post-hearing brief, the plaintiff states that " [t]he Defendant made interest payments only as outlined in the plaintiff's expert's report in a timely fashion with one or two exceptions up until November 5th, 2008 " (emphasis added), notwithstanding the expert's tabulation listing about 50 late payment charges in that same period of time).
Ultimately, the key issue in this case is the applicability of a 2015 decision of the Connecticut Supreme Court. In Sikorsky Financial Credit Union, Inc. v. Butts, 315 Conn. 433, 444-45, 108 A.3d 228, 234-35 (2015), the court determined that it was necessary to explain the manner in which General Statutes § 37-1 properly is applied. With respect to the post-maturity rate of interest applicable in a loan situation, such as the current one, the court recognized three possible scenarios--no specific reference to a post-maturity rate of interest; an agreed post-maturity rate of interest; or an agreement that there is to be no post-maturity interest. In Sikorsky,
The parties' contract did not enumerate a specific postmaturity interest rate but, instead, used the phrase " highest lawful rate . . ." This reference falls short of adopting a specific postmaturity interest rate. Because the parties did not disclaim postmaturity interest, but also did not agree to a specific postmaturity interest rate, the legal rate in § 37-1 applies, and the plaintiff is entitled to interest at the legal rate of 8 percent from the date of maturity until the deficiency is paid in full.
Here, there is no waiver of post-maturity interest, and there is no explicit recitation of a post-maturity rate of interest. Therefore, the third option is the one that applies, i.e. 8% per annum as provided by statute.
In his post-trial brief, the plaintiff attempts to argue that the note in this case is sufficient to bring the postjudgment interest claim into the category of agreed post-maturity interest rate cases, which in this case would be 18%. Thus, the plaintiff argues:
In examining the promissory note, which is a full exhibit in this case, the front lower paragraph states " no modification or indulgence by any holder hereof shall be binding unless in writing . . ." The language is formidable, and leaves no doubt that the parties intended that the 18% interest rate would continue until the loan was fully paid.
The plaintiff then goes on to note that no one, including the defendant's expert, has claimed that there is any written document purporting to change the interest rate from the 18% rate stated in the note. He further argues that because the 18% rate is the only stated rate, and is impliedly applicable until the loan is paid in full, it satisfies the Sikorsky requirement.
The court disagrees. The plaintiff seems to place the burden on the defendant to demonstrate an election of a rate other than 18%; Sikorsky requires an affirmative showing that the parties agreed to a rate other than 8%, in the post-maturity context. Sikorsky requires that there be an explicit designation of a post-maturity rate, for something other than the statutory-8% post-maturity rate to be applicable, and that general references to an interest rate prior to maturity cannot suffice. To satisfy this requirement, the stated rate may be a fixed number, or it may be a variable-rate analogous to pre-maturity interest rates that are not fixed but readily subject to calculation--but there must be a clear linkage of a stated rate and post-maturity status, for the rate to apply in a post-maturity context.
On page 4 of his brief, the plaintiff states: " The question is really was there an agreement not was there a specific post-maturity agreement." The court reads Sikorsky as standing for the opposite proposition, requiring that there be a specific post-maturity agreement. Simply stating that there must be some agreement without any required reference to post-maturity would limit Sikorsky to application only in instances where there is some vague or non-specific (and therefore unenforceable) reference to post-maturity (or a specific waiver of post-maturity interest), such that an open-ended reference to pre-maturity interest would be presumed to carry into the post-maturity time-frame. (Absent any indication that the pre-maturity interest rate in Sikorsky was illegal, why did that rate not carry forward as a maximum legally permissible rate?)
The court rejects arguments made at page 5 relating to equity, since absent a claim of unconstitutionality of § 37-1, the legislative determination of a maximum or default rate must be enforced.
This approach is consistent with the limited number of trial court decisions that have addressed this issue, since the Supreme Court decision in Sikorsky . Thus, in Cadle Co. v. Ouellette, J.D. Hartford, No. HHDCV136046871S, 2017 WL 1429825, at *3 (Conn.Super.Ct. Mar. 31, 2017) [64 Conn. L. Rptr. 247, ] the court stated:
In researching trial court cases referencing Sikorsky, care must be taken to make sure that the reference is to the Supreme Court decision. The Supreme Court reversed a decision by the Appellate Court, and in preparation of this decision, the court came across at least one trial court decision that had relied upon the (since-reversed) Appellate Court opinion.
Here, as in Sikorsky, the parties' contract did not adopt a specific post-maturity interest rate . Because the parties did not disclaim post-maturity interest, but also did not agree to a specific post-maturity interest rate, the legal rate in § 37-1 applies, and the plaintiff is entitled to interest at the legal rate of 8 percent from the date of maturity until the deficiency is paid in full. (Internal quotation marks and citations, omitted.)
In his brief (at page 6), the plaintiff suggests that the court should be comparing the note in this case to the note in Sikorsky . The Sikorsky decision itself quotes the appropriate language (" highest lawful rate"); however, the note is available online as an attachment to the motion for judgment on default and the court may take judicial notice of other court files. Upon review of the note, there does not appear to be anything pertinent other than the language cited by the Connecticut Supreme Court.
http://civilinquiryjud.ct.gov/DocumentInquiry/DocumentInquiry.aspx?DocumentNo=4694912
The court has engaged in a similar exercise with respect to Cadle Co. v. Ouellette. In that case, summary judgment had been entered, and the motion for summary judgment (#117.00 in that case) included a copy of the note, which provided that interest was payable at a variable rate (an initial rate subject to change) " on unpaid principal until the full amount of principal has been paid." The note further stated that the specified rate applied both before and after default. Nonetheless, that was held to be insufficient to satisfy the Sikorsky requirement of an explicitly-stated post-maturity rate.
This should be contrasted with D.A.N. Joint Venture, L.P. v. Coady, No. HHDCV116022683, 2015 WL 5893966, at *2 (Conn.Super.Ct. Sept. 3, 2015), where there was specific reference to a post-maturity rate: " On default or after maturity, the unpaid principal balance shall bear interest at a rate which is two (2) percentage points per annum greater than that which would otherwise be applicable." (For other reasons discussed in the opinion, the court ultimately applied the 8% rate set forth in the statute, anyway.)
Similarly, in American First Federal, Inc. v. Gordon, No. X08FSTCV116009881S, 2015 WL 5712785, at *1 (Conn.Super.Ct. Aug. 25, 2015) [61 Conn. L. Rptr. 21, ], aff'd, 173 Conn.App. 573, 164 A.3d 776 (2017), the court stated:
Those documents expressly set forth how the variable interest rate on the note will be calculated using a specified index, a pre-default/pre-maturity margin above that specified index and a post-default post-[maturity] increase in that interest rate as set forth in the operative documents of five percent.
The court notes that in the body of this decision and an earlier decision, the trial court referred to separate calculation of principal, interest, and accumulated late fees and other costs--seemingly consistent with this court's reservations about the propriety (and lack of authority in the note) to add the late fees to principal.
These cases support this court's interpretation of Sikorsky as requiring more than simply a recitation of an interest rate payable until the principal is paid in full; it requires a specific reference to post-maturity interest.
The court need not concern itself with resolving the issues identified earlier, relating to the plaintiff's expert's opinions--the plaintiff's expert never proffered an opinion as to the balance (if any) still due if the post-maturity rate were 8% (or any figure other than a continuation of the 18% recited in the note). The defendant's expert did calculate the amount (if any) due, based on an 18% rate applicable prior to maturity, and after five years, when the principal was due and payable, a rate of 8% until paid in full. This is consistent with the requirements of Sikorsky .
The defendant's expert also kept a separate running total for late payments, calculated to total $1,002.54. This is at substantial variance with the plaintiff's expert's opinion relating to late fees, putting aside the question of whether late fees should be added to the principal. The plaintiff's expert calculated total late fees as somewhere between $12,733 (claimed to be using the defendant's ledger, as adjusted) and $15,821 (based on the plaintiff's records).
The parties each testified, and the plaintiff specifically addressed this topic. Quite simply, the plaintiff's testimony reflected a lack of reliability in reporting. At one point, the plaintiff testified that he did not recall any payments being made after November 5, 2008, clearly at odds with the tables prepared by his own expert, indicating more than 70 payments having been made after that date. Similarly, when asked if he had any recollection or record of total payments, he had difficulty providing even an approximation, eventually offering a ballpark estimate that he had received over $100,000. This was followed, only minutes later, by the recitation of a stipulation that he had been paid $345,386, further demonstrating the disconnect between the plaintiff's testimony and actual events. Therefore, the court cannot credit his testimony that a substantial percentage of the payments made by the defendant were late.
The court notes in this regard that both sides could have provided primary or raw data, such that the court would have had a better sense of what the true situation was with respect to late payments. For purposes of the plaintiff's claim, the court has little hesitation in finding that the plaintiff did not prove his case in this respect. Somewhat closer is whether the court has a basis to accept the defendant's version, as reflected in the table/chart provided by the defendant's expert. Although there was no underlying raw or primary evidence, the defendant's expert's calculation/tabulation was admitted as a full exhibit (Exhibit C) and the court has relied upon its recitation of only a limited number of late payments as more accurate.
As implied above, the court finds the defendant's expert's analysis to be more persuasive on a number of levels. While not directly affecting the outcome in a substantial manner, the court agrees that the late fees should not have been added to principal (absent authority to do so). The court also believes it to have been appropriate to base an interest-only payment--with no fixed/specified required monthly payment--on the actual principal, such that reductions in the principal should have lowered the nominally-required monthly payment which, in turn, should have reduced the late payment chargeable if the payment were not made in a timely manner (5% of whatever payment was actually due). To the extent that the plaintiff's expert attempted to articulate reasons for the treatment given in these respects, they were insufficiently clear or persuasive.
Both sides characterized the calculations of the experts as amortization schedules or tables, but it seems questionable as to whether that is an appropriate designation. The dictionary definition of amortize reflects a gradual payoff or lessening over time, but in an interest-only payment situation, nothing is actually being amortized (paid off or decreasing). After five years, the full principal, to the extent not prepaid, becomes due, and the initial expectation was that the full initial principal would be due at that time. (The " loan amortization per note" included in the plaintiff's expert's report (as Exhibit 1) shows an unchanging principal until the end of the term, at which time the full $145,000 was expected to be paid.) The court recognizes that as among accountants and similar professionals, the concept of amortization may not be limited in this definitional sense, but the lack of an amortization in this regard does play a role, as discussed in this opinion (including footnote 6, immediately below).
The court especially appreciates the attempt to explain what " reverse order of maturity" means, but there was an insufficient explanation of how it might possibly apply. The court suspects that the expert--reasonably--assumed that there was a purpose to the provision (since it was in the note), whereas the court thinks it more likely that it was a term in a form that neither party understood and that neither party intended to have any application. Regardless of intent, the court relies upon the inapplicability of a provision relating to an order of maturity involving only a single payment of principal, such that there can be no meaningful " order" to maturity, forwards or reverse.
The court finds that the analysis of the defendant's expert appropriately treated the information available, and while there are some areas of dispute as to underlying facts, the modest burden of proof--preponderance of the evidence--has been satisfied. The court finds that the defendant did, in fact, overpay, in the net amount of $13,600.60. The plaintiff has been unjustly enriched, and as an equitable matter, the defendant is entitled to have the excess payments refunded to him.
In his brief, the defendant has attempted to refute any possible claim of applicability of General Statutes § 37-2. The plaintiff has not invoked that statute in any defense to the defendant's counterclaim, and the plaintiff does not discuss the statute in his post-hearing brief. The court notes that the statute appears to be directed to efforts to recover amounts that might have been paid as interest, voluntarily, under an agreement that seemingly violated an applicable usury law; see, Bizzoco v. Chinitz, 193 Conn. 304, 309, 476 A.2d 572 (1984).
Conclusion
In litigation, timing sometimes proves to be fortuitous. When this lawsuit was started, the Appellate Court decision in Sikorsky had been issued, but the Supreme Court reversal of that decision was several months into the future. Prior to that Supreme Court decision, it is far from clear whether the issue of proper interpretation and application of General Statutes § 37-1 would have been raised or would have been applied in the manner now required. The potential for uncertainty as to the law prior to Sikorsky, and the actual effect of that decision, provide a measure of the need for an equitable return of excess funds paid. The inability of the parties to reconcile their ledgers with respect to the aggregate amount paid by the defendant--with a difference that exceeds the unjust enrichment award--emphasizes the need for judicial resolution.
The plaintiff has not proven, by the required preponderance of the evidence, that he was not paid in full with respect to the defendant's obligations under the subject note. To the contrary, the defendant has proven that he modestly overpaid. Consistent with the calculation set forth in Exhibit C, the court finds that the defendant overpaid the plaintiff $13,600.60, reflecting overpayments of $14,603.14 without regard to the late fees, less the accumulated balance of late fees in the amount of $1,002.54, yielding the indicated net figure.
This is not a consumer contract, such that the attorney fee provision in favor of the plaintiff is not applicable to the defendant as prevailing party (General Statutes § 42-150bb).
Judgment enters in favor of the defendant on the plaintiff's complaint; judgment also enters in favor of the defendant on the defendant's counterclaim (unjust enrichment) in the amount of $13,600.60.
Costs will be taxed by the clerk.