Opinion
No. CV 07-5008995
June 12, 2009
MEMORANDUM OF DECISION
Plaintiff, Connecticut Housing Finance Authority (CHFA) brings this action against defendant, Eno Farms Limited Partnership (Partnership), and Eno Farms Cooperative Association, Inc. (Association) for a judgment foreclosing a first and second mortgage and for an order terminating the Association and enjoining it from interfering with the management of the subject property. Defendant Partnership, the mortgagor, offers no defense to the foreclosure action. Defendant Association interposes the special defense of a conspiracy on the part of the plaintiff, the Partnership and their attorneys to commit fraud and other criminal offenses. The court finds no substance to this defense, enters a judgment of strict foreclosure and issues an order terminating the Association.
I. Foreclosure Counts
The facts relating to the foreclosure counts are as follows.
This action concerns an affordable housing project in Simsbury, Connecticut called Eno Farms. In 1883, Mr. Amos Eno conveyed to the Town of Simsbury a 140-acre parcel of land with the requirement that the parcel be "used for the occupation, maintenance and support of the Town poor and for no other purpose." In 1991, the Town set aside a portion of the Amos Eno parcel, located at 1602 Hopmeadow Street, Simsbury, Connecticut, to be used for low and moderate income housing. On June 28, 1991, the Town leased the parcel to CIL Housing, Incorporated for the term of ninety-nine years, with a rental fee of $1.00 for the first ten years, and commencing with eleventh year, a fee in an amount equal to the real estate taxes. The lease provided the land would be used only for residential purposes and "only for occupancy by Low and Moderate Income Residents," pursuant to a Plan of Development submitted by CIL of fifty housing units. CIL created defendant Eno Farms Limited Partnership, an entity comprised of CIL's subsidiaries, CIL Housing and CIL Simsbury. CIL then assigned the ground lease to the Partnership.
Before development, the Partnership qualified the project as a low income housing project, pursuant to Internal Revenue Service Code, Section 42 in order to utilize Low Income Housing Tax Credits. The Partnership sold these tax credits to outside investors, realizing $1,218,809.
On March 9, 1993, the Partnership executed a promissory note in favor of plaintiff CHFA in the amount of $1,495,000 secured by a mortgage on the lease between the Town of Simsbury and CIL Housing, Inc. On that day, the Partnership also executed a promissory note, payable to the State of Connecticut acting herein by the Commissioner of Housing in the amount of $2,782,000, secured by a second mortgage on the same lease. The second mortgage was assigned to CHFA by an assignment dated July 1, 2003, by virtue of Conn. Gen. Stat. § 8-33uu providing for the transfer of the housing loan portfolio of the Department of Economic and Community Development to CHFA, and also by virtue of an Agreement Regarding Transfer of Resources Between the Authority and the State of Connecticut Department of Economic and Community Development, dated April 9, 2003.
On March 9, 1993, the Partnership entered into a Declaration and Agreement of Restrictive Covenants among the State of Connecticut, acting by the Commissioner of Housing, and CHFA relating to the second mortgage. The restrictions were that the partnership would rent the units to the general public in order to qualify for tax credits, pursuant to Section 42 of the IRS Code. Specifically, the partnership agreed that a minimum of forty percent of the units would be occupied by individuals whose annual income did not exceed sixty percent of the area median gross income, and that the rent not exceed thirty percent of the computed income limitations for such units in accordance with Section 42(g) of the Code. After a unit had been occupied by an individual or family meeting the applicable income limitation, such individual or family had the right to continue to occupy moderate income units as long as their income did not exceed regional median income.
Annually the Partnership was required to determine whether the income of an individual or family residing in the unit exceeded the applicable income limit, and to certify compliance with the Low and Moderate Income Restriction to the FHA and the Secretary of the Treasury. These restrictions and the Declaration and Agreement of Restrictive Covenants were incorporated by reference into each of the two mortgages.
The essence of these restrictions is that the moderate income units could never be occupied by tenants whose income exceeds the regional median income. In order for the investor to receive the tax credit, the financing documents under the federal law ( 26 U S. C Section 42) mandated a minimum fifteen-year "compliance period" during which the Partnership was required to verify that the income levels of the Eno Farms residents met the low and moderate income requirements.
Pursuant to its obligation to maintain Eno Farms as a Low Income Housing Project and as a requirement of financing the project, CHFA required the Partnership to execute two Management and Fair Housing Agreements. Those agreements were to ensure that the correct ratio of units in Eno Farms were leased to occupants who met the income restrictions stated in the restrictive covenants. The agreement also provided that the project be professionally managed.
The management agreement required that the tenants' rental payments be paid into a specific bailment operating account. That account was carried in the name of the Partnership's management agent.
The first note and mortgage in favor of CHFA, as mortgagee, are in default as a consequence of non-payment of the principal and interest due. The plaintiff has exercised its option to declare the entire balance of that note due and payable. It sent a notice of default on the first mortgage on April 18, 2006. The second note and mortgage are in default by virtue of nonpayment of the principal and interest due and the plaintiff has exercised its option to declare the entire balance of the second note due and payable.
The first and second notes and mortgages are further in default by virtue of the Partnership failing to pay taxes due and owing to the Town of Simsbury and to maintain insurance; by virtue of the Partnership's breach of the Declaration and Agreement of Restrictive Covenants and the Collateral Assignment of Leases and Rent Security Agreement; by virtue of the Partnership's failure annually to provide to the state and/or to the CHFA certification of compliance with low and moderate tenant income limitations; the Partnership's failure to maintain the mortgaged property and its failure to continue to have the project professionally managed.
Although the plaintiff did not present the original first and second mortgage note at the trial, there was testimony that those original notes and mortgages were delivered to plaintiff's counsel and he returned them to CHFA. The testimony was that thereafter CHFA could not locate the original notes and mortgages after making a diligent search. Counsel for CHFA testified that the original notes have not been negotiated, assigned, pledged or hypothecated. He also testified that CHFA is the owner and holder of those notes. The court believes that testimony and concludes that CHFA is the owner and holder of the notes and the mortgagee of the first mortgage and the assignee of the second mortgage.
On the first note, the unpaid principal amount is $1,299,621.04. Late charges due total $18,080.40. The interest due as of June 1, 2009 is $411,863.52. On the second note, the unpaid principal balance is $2,782,000. The interest due on the second mortgage as of June 1, 2009 is $409,877.04. Total owed on both mortgages is $4,921,442.
CHFA also paid taxes to the Town of Simsbury in the amount of $100,837.04 and paid property insurance premiums in the amount of $36,868. Appraiser's fee for two reports, inspection and testimony at trial is $10,000. Title Search fee is $1,062. The fair market value of the property is $2,300,000.
In order to make out a prima facie case for foreclosure of a mortgage, the plaintiff must prove by a preponderance of the evidence that it is the owner of the note and mortgage and that the mortgagor has defaulted on the note. Webster Bank v. Flanagan, 51 Conn.App. 733, 750-51 (1999). Here, the plaintiff has proven that it is the owner of the notes. Although it could not present to the court the original notes, it proved by testimony of competent witnesses that the notes bad been misplaced, the plaintiff made a diligent effort to locate them, and that the notes have not been pledged, negotiated or hypothecated. Caron Milne, Connecticut Foreclosure, 4th Ed., Section 5.02A3, p. 128. The evidence is also overwhelming that the partnership defaulted on the notes by not making the payments due, by failing to pay the taxes and insurance, to keep the property in good repair, and breached other covenants of the mortgage. Thus, CHFA proved its counts for foreclosure of the mortgages.
The most common defense to a foreclosure action challenges the making, validity or enforcement of the note or mortgage. Southbridge Associates, LLC v. Garafalo, 53 Conn.App. 11 (1999). However, a number of defenses, legal and equitable, have also been allowed. These include payment, duress, release, lack of consideration for the note, fraud, unlicensed lender, the clean hands doctrine, breach of implied covenant of good faith and fair dealing, unconscionability, and equitable estoppel. See Caron Milne, supra at pp. 603-15.
The Association's special defense is that the CHFA and the Partnership (and possibly their respective attorneys) entered into a conspiracy to (1) larcenously deprive the Association and its members of the IRS Code Section 42 tax credits to which the Association and its members were entitled to as owners of Eno Farms; (2) embezzle rents paid to the Association by diverting them into the account of the Partnership; and (3) deprive the Association and the residents of ownership of the property by this foreclosure proceeding.
The Association makes two contradictory claims in its defense: (1) the conspirators, in particular CHFA and the Partnership, never intended to give ownership of the project to the residents and the Association; and (2) the residents and the Association are the owners of the project, and the conspirators criminally deprived them of certain rights of ownership.
In an attempt to understand the Association's defense, the court asks its attorney at oral argument these questions:
THE COURT: Now, if I understand what your defense is, as you just attempted to tell me, it is that CHFA, the plaintiff here, conspired with the Eno Farms Limited Partners, and some others to deprive your clients of home ownership, is that — is that
ATTY GIULIETTI: That's a correct statement, yes.
THE COURT: You think — and I just want to be sure that I understand you. You say —
ATTY GIULIETTI: I think —
THE COURT: that if CHFA never had the intention to permit home ownership by the occupants of the units on the farm, that that justifies, and it is a defense to the failure of the limited partnership to pay the mortgage? Is that your defense?
ATTY GIULIETTI: That's my defense. I say that's fraud and inducement. That's the whole idea.
The court finds the Association has not proven a conspiracy by CHFA and the Partnership, and certainly not a conspiracy to do any wrongful acts. Their only common purpose as to Eno Farms was to provide affordable rental housing to low and moderate income people and to assure that Eno Farms complied with the IRS Code as to tax credits sold to investors by restricting residency to persons of limited income and rents to a prescribed level.
Clearly the tax credits purchased by the investors belong to them and under no conceivable circumstances could belong to the Association or its members.
Clearly the Partnership did not embezzle rents that were to be paid into the Partnership's account in order to pay the mortgages. CHFA never embezzled anything because it did not even receive those rents as payments on its mortgages.
One of the Association's claims of ownership of Eno Farms is based on the provision in the tax code that after a fifteen-year compliance period, ownership of the project would be made available to the Association. This action started before that period expired. The Association failed to properly manage the property, resulting in the default of the subject mortgages during the compliance period, and as a result, lost that opportunity.
Another of its claim of ownership is that CHFA violated its statutory obligation under § 8-250(28). That subsection states that a purpose of the Authority shall be:
(28) To establish a program to finance the construction . . . of housing designed for condominium or cooperative ownership, to convert existing housing however financed to such form of ownership, and to finance the ownership of individual shares of or membership in cooperative housing . . . to assist and advise tenants during a period of conversion to cooperative or condominium ownership, . . .
That statutory objective however, does not translate into automatic ownership of Eno Farms to the Association.
The Association further contends that the Partnership and CHFA never "intended" to permit Eno Farms to be converted to home ownership and this constitutes some form of fraud. Martin Legault, president of CIL, parent company of the Partnership, testified that CIL never intended to give home ownership to the residents but did intend to convey the improvements on the land to the Association at the end of the compliance period. The residents, as members of the Association, would thereby acquire an interest in the property. As stated above, the Association caused the defaults in the mortgages and so it lost that opportunity. CHFA itself, never promised home ownership to the Association or residents of Eno Farms nor was there evidence of reliance upon a nonexistent promise.
Finally, the evidence is that no conveyance by deed or otherwise conferred ownership of Eno Farms upon the Association.
Even assuming the Association had a right to ownership of Eno Farms, which it did not, that ownership would still be subject to the two mortgages now in default. The right could not be a defense to this foreclosure action. As a consequence, the court concludes that Association's special defense to the foreclosure counts has not been factually proven and is legally invalid.
2. Termination of the Association and the Common Interest Community
The facts relating to the second count of the complaint requesting termination of the Association are as follows: The ground lease between the Town of Simsbury and the Partnership's predecessor provided that the lessee owns the improvements on the land and further provides that the improvements would be transferred to a "Limited Equity Cooperative to be created by lessee which shall be comprised of Low and Moderate Income Residents." The Association is a non-stock Connecticut corporation created by Declaration of the Partnership. The Association is also a limited equity leasehold cooperative pursuant to Connecticut General Statutes § 47-242(a), 47-225 and 8-214b(a). The Association and the Declaration are explicitly subject to all the requirements of the first and second mortgages.
By Declaration, dated December 28, 1993, the Partnership submitted the real property described in the ground lease to the provisions of the Common Interest Ownership Act, Chapter 828 of the Connecticut General Statutes for the purpose of creating the Association. Section 47-237 provides that common interest community can be terminated by foreclosure of a security interest that has priority over the Declaration. The Declaration further provides that the Partnership may terminate the common interest community during the period of declared ownership. The Declaration provides that the period of declared ownership is "a minimum of fifteen (15) years during which the Declarant [the Partnership] would continue to own the Units and Improvements, subject to the lease of the improvements." During the period of declared ownership, the Common Interest Community was required to remain in compliance with the tax credit requirements of Section 42 of the Internal Revenue Code and the regulations promulgated pursuant thereto. The Declaration provides for a limitation on the income of residents of the property as aforesaid and also required each occupant to supply to the Association a financial statement each year which the Association was required to deliver to the Partnership.
On December 28, 1993, the ground lease was subleased by the Partnership to the Association. That sublease provided that the basic rent due from the Association to the Partnership was "the amount necessary for the lessor to meet its debts service requirements on the first and second mortgages and an amount equal to the Association's income over expenses for the operation of the leased premises." The sublease specifically provides that it is subordinate to the existing first and second mortgages on the premises. In the event the Association breached the covenants of the lease, the Partnership had the option to terminate the lease and the Association was required to quit and surrender the premises.
For about a decade Eno Farms project ran successfully and the Partnership made its mortgage payment to CHFA. On or about 2004, tenants, who were also officers of the Association, became upset that rents payable to the Association were being deposited in the Partnership's operating account. The Association contacted the bank and the bank froze the bailment account set up for the project. The Association then opened its own bank account in the Association's name, deposited Eno Farms tenants rent payments into that account. Some tenants continued to pay rent to the Partnership's professional management company. Some tenants stopped paying rent altogether. The Association members began managing certain aspects of the project while the professional management company also attempted to continue managing the property. Much of the funds deposited in the Association's account was used to pay its attorney for cases brought in the Federal Court and in this court.
Raffi Kahn, the Association's President, assumed a chief management role and received as a management fee his monthly rent. He also took a fee for providing legal assistance to the Association's attorney and for other services. He testified he felt no obligation to render income statements.
After the Association members stopped paying rent to the management company, the Partnership defaulted on its payment to CHFA, failed to pay property taxes and insurance premiums and failed to make necessary repairs. Association members stopped providing income certifications required pursuant to the financing documents and the Low Income Tax Credit Program.
As a result of the Association collecting rents from the residents and not turning it over to the Partnership and as a result of the Association assuming "ownership" of Eno Farms, the value of the property decreased and the security of the plaintiff was seriously jeopardized. The Partnership moved for a receivership of the rents, and this court appointed a receiver on April 4, 2007.
Plaintiff seeks in this action to terminate the Association, and the Common Interest Community. It does so because the Association so interfered with the management and operation of Eno Farms as to frustrate the purpose of Eno Farms as a low and moderate income housing project and to reduce substantially its value.
This is the first case in Connecticut seeking a termination of a low income limited equity leasehold cooperative. The cooperative was created in accordance with the Common Interest Ownership Act, General Statutes § 47-200, et seq. The Act is a comprehensive legislative scheme regulating all forms of common interest ownership. The Act contemplates the termination of a common interest community through foreclosure. Section 47-237(a) provides: "Except in the case of a taking of all units by eminent domain or in the case of foreclosure against an entire cooperative of a security interest that has a priority over the declaration, a common interest community may be terminated only by agreement of unit owners . . ." (Italics added). The Act provides at Section 47-238(b): "A lender who has extended credit to an association secured by an assignment of income or an encumbrance on the common elements may enforce its security agreement in accordance with its terms, subject to the requirements of this chapter and other law." CHFA is enforcing its rights in accordance with its agreements and the law.
There is no case law in Connecticut relating to the termination of a low income housing cooperative by a foreclosure. New York however, is replete with relevant case law holding that a foreclosure dissolves the cooperative. These cases mostly arise in the context of a mortgage foreclosure on the property of a cooperative, and the issue is whether after the foreclosure, the units are subject to the New York rent control law. The New York courts hold they are, but underlying that holding is the ruling that the foreclosure dissolves the corporation. As stated in Bergman on New York Mortgage Foreclosures (2008), § 37.09, Foreclosure of the Underlying Co-Op Mortgage, "Foreclosure dissolves a corporative and once it is no longer a cooperative, entitlement to an exemption from rent laws evaporates." The New York Court of Appeals in Federal Home Loan Corporation v. New York State Div. of Housing Community Renewal, 37 N.Y.2d 325, 330 (1995), 662 N.E.2d 273, said, "In other words, a dissolved cooperative is not a cooperative . . ." See also DeSantis v. White Rose Assoc., 578 N.Y.2d 363 (1991); Federal Home Loan Mortgage Corp. v. New York Div. of Housing Community Renewal, 854 Fed.Sup. 151 (E.D.N.Y. 1994), aff'd. 83 Fed.3d 45 (2nd Cir. 1996).
Moreover, the Declaration creating the Association provides at Section 17.1: "Termination of the common interest community may only be accomplished pursuant to Section 47-237 of the Act and (a) during the period of declarant ownership by consent of the declarant [Partnership]." The Partnership sent notices to the Association on February 23, 2004 and on February 16, 2005, terminating the Association. These notices effectively terminated the Association pursuant to the Declaration and in accordance with § 47-225, which contemplates the termination of the leasehold common interest community when the lease is terminated. CHFA's mortgages and notes, and all the rights it has in the Declaration and Agreement of Restrictive Covenant and under other related documents, are prior in right to the Declaration creating the Association and the sublease.
Consequently, by virtue of this foreclosure and the terms of the Declaration, the court terminates the Association and the Common Interest Community.
The court enters judgment as follows:
1. Fair market value of the subject property being foreclosed: $2,300,000.00
2. The total owed on the mortgages: 4,921,442.00
3. Appraisal fee: 10,000.00
4. Title search fee: 1,062.00
5. Attorneys fees: TBD
6. A judgment of strict foreclosure shall enter in favor of the plaintiff, the Connecticut Housing Finance Authority, on 1602 Hopmeadow Street, Simsbury, Connecticut.
7. Law Days shall be as follows:
First Law Day: August 10, 2009, Defendant Eno Farms Limited Partnership; Second Law Day: August 11, 2009, Defendant Eno Farms Corporation Association, Inc.
Although the Association is terminated by this judgment, since it is named as a defendant and had a leasehold interest, the better part of wisdom is to give it a law day.
8. The order of this court appointing a receiver is hereby dissolved.
9. The plaintiff is entitled to immediate possession of the real and personal property comprising the Mortgage Premises, subject to the Ground Lease in favor of the Town of Simsbury;
10. The Eno Farms Cooperative Association, Inc. is terminated as a cooperative and common interest community;
11. The defendants, their agents or employees are ordered to turn over all security deposits, sweat equity fees, membership fees, membership balances, maintenance fees, all keys to units and common areas of Eno Farms, security codes, tenant rules and regulations, blueprints, maintenance records and contracts, lease agreements, books, records, papers, bills, invoices, accounts receivable, accounts payable, letters, memoranda and written communications with tenants/occupants.
12. The Association is ordered to turn over to the plaintiff written evidence of its receipt of the payment of its Members' equity and/or performance of sweat equity payments to which a member may claim entitlement, as well as any monies that the Association is holding for its members' equity.
13. After receipt from the Association of proof of payment of a member's equity or performance of sweat equity, the plaintiff shall ensure that all former Association members receive all equity and/or sweat equity payments to which they are entitled, after deducting any past due rental payments, charges, debts or other obligations of the Association.
14. The defendants, their agents or employees, are enjoined from interfering with the collection of rents or charges from tenants of Eno Farms and any other profits thereof;
15. The defendants, their agents or employees are ordered to turn over to the plaintiff an accounting of all funds collected and any rents or carrying charges collected from any tenants/occupants of Eno Farms.
16. The defendants, their agents or employees are ordered to turn over to the plaintiff any documentation relating to Eno Farms, including any records pertaining to any unit either defendant has purported to lease out, any documentation relating to any rents or carrying charges collected from any tenants/occupants of Eno Farms, and any records for receipts and expenses, including taxes, utilities, maintenance, and management.
17. A hearing shall be scheduled regarding plaintiff's attorneys fees and costs after the plaintiff files a Motion for Attorneys Fees, which motion shall be filed with the Court within twenty (20) days of receipt of this judgment.