Opinion
No. CV 99-0497487 S
October 30, 2003
MEMORANDUM OF DECISION
This is a collection action brought by the plaintiff, Fleet National Bank, against the guarantors of a promissory note, Joseph Squillacote and Robert DiDonna (hereinafter "defendants"). The defendants denied liability, claimed that plaintiff failed to prove the allegations in the complaint, and raised the general defenses of unclean hands and equitable estoppel, and the following six special defenses: (1) a violation of the Connecticut Unfair Trade Practices Act (CUTPA) (General Statutes § 43a-110a, et seq.), (2) a breach of the obligation of good faith and fair dealing under the Uniform Commercial Code (UCC) (General Statutes § 42a-1-203), (3) laches, (4) waiver, (5) estoppel, and (6) election of remedies. The court conducted a bench trial of this matter on May 23, 2003.
The general defense of equitable estoppel will be resolved in the discussion of the special defense of estoppel.
The defendants also brought a two-count counterclaim against the plaintiff. The first count alleged a violation of CUTPA and the second alleged a violation of good faith under the UCC. While the CUTPA claim is more appropriately brought only as a counterclaim, the court will resolve both counterclaims in the discussion of the defendants' special defenses. See Monetary Funding Grp., Inc. v. Pluchino, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV01-0382851 (September 3, 2003, Stevens, J.) (rejecting use of CUTPA as a special defense).
The following facts arc found: Prior to February 1992, DS Realty Associates, a company in which the defendants are officers, had two outstanding promissory notes with Connecticut National Bank (CNB), a predecessor to the plaintiff, one dated September 7, 1988 in the amount of $175,000 and the other dated December 13, 1988 for $5,000. To secure the notes, defendants gave CNB a mortgage on commercial and rental property in New Britain.
A fire occurred on the premises in January 1992. CNB asked DS Realty to enter into an arrangement whereby a new note and mortgage would be issued in the amount of $180,000. This amount would pay off the balance of the two original notes. Subsequently, proceeds from DS Realty's fire insurance policy would be applied to reduce the new debt amount.
On February 5, 1992, DS Realty signed the new promissory note with a two-year term and a principal amount of $180,000. Concurrently, the defendants executed agreements to guarantee the note to CNB. In addition, a mortgage on the same premises as the original loan was given to CNB. Shortly thereafter, the $125,000 from the fire insurance policy was applied in part to the loan reducing the outstanding balance to $67,500. Further payments were made by DS Realty between February 1992 and January 1994 which reduced the outstanding balance to $63,466.04.
The other portion of the proceeds were paid toward city taxes and bank fees.
Shawmut Bank, which had merged with CNB during this time period and became its successor in interest, made demand for payment when the note came due in February 1994. At this time, the outstanding balance including interest and late charges totaled $68,412.56. Three attempts were made by the defendants' attorney to settle with Shawmut Bank in May 1994 by presenting an appraisal of the mortgaged premises in the amount of $75,000. However, Shawmut Bank never responded. Shawmut Bank instituted a foreclosure action in August 1994, but withdrew it prior to a hearing. In February 1996, the city of New Britain instituted a successful tax foreclosure by sale against the property mortgaged in conjunction with the note.
The merger was effective January 11, 1993.
Shawmut Bank at this time had appraisals for the premises of $58,000 and $60,000.
On December 1, 1995, Shawmut Bank merged with Fleet National Bank of Connecticut, the plaintiff, who became the holder of the note and the defendants' guarantee. In 1997 or 1998, DS Realty was dissolved. The plaintiff, in a complaint returnable on September 14, 1999, instituted the current action to recover against the defendants as guarantors on the promissory note. The balance due on the note at the date of trial, including interest and late charges, was $144,364.31.
The merged bank operates under the title of Fleet National Bank.
The defendants do not deny that on these facts the note in question is in default and that the plaintiff is now the holder of the note pursuant to duly recorded assignments. However, the defendants claim that the plaintiff has failed to prove the allegations in the complaint by not making adequate demand for payment on the note. The defendants first claim that plaintiff failed to demand payment in full on the balance due of said note. Furthermore, the defendants allege that plaintiff's withdrawal of the foreclosure action against the defendants wipes the "slate clean" requiring plaintiff to demand payment again after the withdrawal.
The court notes that "[t]o prevail in an action to enforce a negotiable instrument, the plaintiff must be a holder of the instrument or a nonholder with the rights of a holder. See General Statutes § 42a-3-301 . . ." Ninth RMA Partners, L.P. v. Krass, 57 Conn. App. 1, 6 (2000).
Section four (§ 4) of the promissory note states that the Borrower and "all guarantors, endorsers, and pledgors" expressly waive the requirement of "presentment, demand, protest or other notice of any kind" prior to the note becoming due and payable. This waiver becomes muddled by conflicting treatment in the Guaranty Agreement. In one part, the agreement states that the guarantor waives "demand of payment [or] presentment of any instrument." However, in two other parts the agreement states that guarantor's payment will be required upon demand.
The opacity of the conflicting agreements is made moot by the actions of plaintiff's predecessor, Shawmut Bank. The February 1994 letter sent by Shawmut Bank addressed to both defendants and DS Realty stated, "[d]emand is made herein for payment of that Note in full." The letter went on to reference the Guaranty Agreements and stated "[n]otice of the . . . default and demand for payment is herein made on each of you by separate copy of this letter." Therefore, regardless of the interpretation of the promissory note and Guaranty Agreement, demand was made on both DS Realty as the borrower and the defendants as the guarantors.
The defendants allege that since Shawmut Bank sent the demand letter, the plaintiff had never sent a demand letter itself. However, Connecticut courts do not require the assignee of a note and mortgage to send a new notice of intent to foreclose prior to foreclosing, when the original notice was sent by the assignor. See Ameriquest Mortgage Co. v. Sevigny, Superior Court, judicial district of New London, Docket No. CV02-05633295 (July 15, 2003, Martin, J.) (allowing foreclosure proceeding where the notice of default was sent nearly a year before the note and mortgage was assigned to plaintiff). Therefore, there is no need for the plaintiff to send a new demand letter to collect on the note.
Turning now to the defendants' claim that the plaintiff's August 1994 withdrawal of the foreclosure action nullified the February 1994 demand letter, the defendants analogize the withdrawal of a foreclosure action and notice of demand to a withdrawal of a summary process complaint and notice to quit. The court in Amresco Residential Corp. v. Jones, Superior Court, judicial district of Hartford-New Britain at Hartford, Docket No. SPH 96230 (March 25, 1998, Beach, J.) ( 22 Conn. L. Rptr. 148), held that under the authority of East Hartford Housing Authority v. Hird, 13 Conn. App. 150 (1988), withdrawal of a summary process nullifies the notice to quit on which the complaint was based. Likewise, the defendants' claim that withdrawal of the foreclosure action nullifies the earlier demand, requiring the plaintiff to issue a new demand prior to instituting this action.
However, the defendants' analogy is not appropriate because the Appellate Court rejected applying the same logic to a foreclosure action. In Fidelity Bank v. Krenisky, 72 Conn. App. 700, 706-09 (2002), the court held that a mortgage's requirement to give borrower notice prior to the acceleration of debt did not require the plaintiff to issue a second notice of default after a prior foreclosure action had been dismissed. Id. at 708. The court reasoned that the earlier dismissal did not wipe the slate clean because the borrower was notified of default and the debt had already been accelerated. Id. The court stated to rule otherwise would nullify the effect of the acceleration clause. Id. at 709.
The collection action here more closely resembles a foreclosure than a summary eviction proceeding, therefore Fidelity Bank controls. Further, the factual scenario surrounding this action makes an even more compelling case to reject the Amresco logic than Fidelity Bank. First, language exists in both the promissory note and Guaranty Agreement waving the demand requirement. Second, the default at issue results from failure to pay the balance upon maturity rather than a breach of a condition prior to maturity where the court might have been concerned with the borrower being sufficiently notified. Therefore, the court holds that the earlier withdrawal does not wipe the slate clean and demand was properly made upon the defendants.
Before turning to defendants' special defenses, the court must address the defendants' claim that plaintiff's recovery should be barred by the doctrine of unclean hands. "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.' " Pappas v. Pappas, 164 Conn. 242, 245-46 (1973). The application of this doctrine lays in the discretion of the trial court. Cohen v. Cohen, 182 Conn. 193, 204 (1982). The "doctrine is not one of absolutes . . . and is not a judicial straightjacket." Id. The court should consider the result achieved by barring equitable relief. Id.
In Pappas, the lone case cited by the defendants, the court rejected the plaintiff's request for specific performance of a contract that was undertaken for the express purposes of fraud and perjury. Pappas, 164 Conn. at 247. However, the court in Cohen, distinguished Pappas, because the plaintiff did not commit a fraud upon the court or perjury. 182 Conn. at 205. See also Thompson v. Orcutt, 257 Conn. 301, 316 (allowing unclean hands to bar plaintiff in foreclosure proceeding due to prior fraud). In this case, there has been no similar allegation of fraud or like behavior that would require the court to bar the plaintiff's recovery. Furthermore, barring the plaintiff's recovery of principal and interest arising out a note made in good faith would be wholly inequitable.
The defendants' six special defenses, as listed above, claim that the court is required to find in their favor on both the outstanding principal and the interest and late charges sought by the plaintiff. These defenses are now considered in turn.
A preliminary issue is whether the defendants can properly raise these six special defenses in the current action. Laches, CUTPA, breach of good faith and fair dealing, and equitable estoppel have been traditionally recognized defenses in the equitable action of foreclosure. Chemical Mtg, Co. v. Carbone, Superior Court, judicial district of Ansonia-Milford at Milford, Docket No. CV97-059462 (December 16, 1998, Curran, J.). Connecticut courts have treated foreclosure actions and those upon a note as "separate and distinct causes of action." Commercial Capital Corp. v. Manor Collection, LLC, Superior Court, judicial district of Middlesex at Middletown, Docket No. CV99-0089645 (May 4, 2000, Gordon, J.) ( 27 Conn. L. Rptr. 267). Courts consider foreclosure actions to be in equity while collection actions are at law. Wendell Corp. Trustee v. Thurston, 239 Conn. 109, 116 (1996) (quoting Mechanics' Bank v. Johnson, 104 Conn. 696, 701 (1926)). However, the Connecticut Supreme Court has allowed equitable defenses to be raised in an action at law. Kerin v. Udolf, 165 Conn. 264, 269 (1973) (citing Hubley Mfg. Supply Co. v. Ives, 81 Conn. 244, 246 (1908)). This view was adopted in Cadle Co. v. MGMR Assoc., stating that it is a "sound principle that in a foreclosure case, equitable relief can be accorded even when the action is solely to collect the mortgage note." Cadle Co. v. MGMR Assoc., Superior Court, judicial district of Hartford-New Britain at Hartford, Docket No. CV95-0553581 (October 12, 1999, Wagner, J.) (allowing the defense of breach of obligation of good faith and fair dealing). Accord Commercial Capital, supra, Superior Court, Docket No. CV99-0089645 (allowing good faith and fair dealing defense against action to collect on a note). Accordingly, the court will consider the equitable defenses valid in a foreclosure action to be valid as well in this collection action.
The next issue is whether the defenses should be limited only to the making, validity or enforcement of the note or mortgage. GE Capital Mtg Services, Inc. v. McCormick, Superior Court, judicial district of Hartford-New Britain at New Britain, Docket No. CV97-0478284S, (August 20, 1998, Leheny, J.). The reason for the limitation is that any defense not having to do with the making, validity or enforcement of the note or mortgage does not arise out of the same action as the foreclosure. Id.
The courts have been inconsistent in their treatment of equitable defenses based, on the creditor-plaintiff's acts after the note is in default. In GE Capital, the court rejected a CUTPA defense because it considered the plaintiff's harassment in attempting to collect on the note not to impact the making, validity or enforcement of it. Id. However, a number of cases take the opposing view and proceed to evaluate equitable defenses on their merits even when the underlying allegations involve the plaintiff's actions after the note is in default. See e.g. Washington Mutual v. Delbuono, Superior Court, judicial district of Ansonia-Milford, Docket No. CV03-0081479S (July 29, 2003, Curran, J.) (CUTPA); FDIC v. Voll, 38 Conn. App. 198, 210-11 (1995) (laches); Commercial Capital, supra, Superior Court, Docket No. CV99-0089645 (obligation of good faith and fair dealing).
In the present case, the allegation supporting all of the equitable defenses is the same. The defendants allege that the lack of communication from the plaintiff over the five and a half years between the default and the institution of this action should bar the plaintiff's claim on the note. See Trial Transcript (Tr. Trans.), at p. 123-24. The court concludes that the manner of collection of this note in default does impact the enforcement of the note, and it will proceed to consider the equitable defenses on their merits.
Considering first the defense of laches, the Connecticut courts have created a two-part test for such a defense.
First, there must have been a delay that was inexcusable, and, second, that delay must have prejudiced the defendant . . . Lapse of time, alone, does not constitute laches. It must result in prejudice to the defendant as where, for example, the defendant is led to change his position with respect to the matter in question . . . or the delay works a disadvantage to another.
LaSalle National Bank v. Shook, 67 Conn. App. 93, 98-99 (2001). This defense has been considered valid in the equitable proceedings of a foreclosure action. LLP Mortgage, Ltd. v. FR, LLC, Superior Court, judicial district of New London, Docket No. 558476 (Jan 30, 2002, Martin, J.) (citing BayBank Connecticut, N.A. v. Thumlert, 222 Conn. 784, 791-92, (1992)). Accordingly, it will be considered in an action to collect on a promissory note.
The first part of this test was met in FDIC v. Voll, where the defendant claimed that laches barred the plaintiff's foreclosure action due to a three-year delay between filing the complaint and making a motion for strict foreclosure. 38 Conn. App. 198, 210 (1995). The court rejected this defense because while the delay could have been minimized, it was reasonable. Id. at 211. During the three-year period in question the plaintiff went into two federal receiverships and there was a bankruptcy proceeding against one of the defendants. Id.
The defendant in LaSalle failed to satisfy both parts of the test. The defendant claimed that laches barred plaintiff's recovery of the note's default interest and late fees, because they did not bring the action to recover on the note for over one and a half years after the default. Lasalle, 67 Conn. App. at 95, 97. The court rejected this defense because the defendant failed to show that the delay was either inexcusable or that it substantially prejudiced him. Lasalle, 67 Conn. App. at 98. See also LLP Mortgage, supra, Superior Court, Docket No. 558476 (rejecting laches defense because defendants did not show they changed their position or that they were disadvantaged and that delay alone is insufficient).
Even assuming that the defendants satisfy the second part of the test by showing that they were disadvantaged by the accumulation of interest and late charges due to the plaintiff's delay, the defendants fail to satisfy the first part of the test. The bank's delay in bringing the action was caused primarily by the 1996 merger of Shawmut Bank into Fleet National Bank. It was testified at the trial that it typically takes the plaintiff two to five years to process and review distressed loans after a merger. Tr. Trans., at pp. 94-97. Absent evidence that the two-to five-year processing period was aberrational in the industry to process distressed loans, taking into consideration a merger of this size, the court concludes that the delay was excusable. As was the case in Voll, the suit might have been commenced sooner, but the delay was reasonable because of factors beyond the plaintiff's control, namely the merger. Cf. Voll, 38 Conn. App. at 211 (delay caused by plaintiff's receivership and bankruptcy proceeding against a defendant).
An additional factor in the delay was plaintiff's withdrawal of the foreclosure action due to environmental problems and an accumulation of unpaid property taxes on the mortgaged property. Plaintiff's Pretrial Brief, at p. 2.
The next consideration is the special defense of waiver. Connecticut courts have defined waiver as the "intentional relinquishment of a known right." National Casualty Ins. Co., v. Stella, 26 Conn. App. 462, 464 (1992) (quoting Jenkins v. Indemnity Ins. Co., 152 Conn. 249, 257 (1964)). However, the waiving party must have known of the existence of the right and had the intention to waive it. Id. (quoting Breen v. Aetna Casualty Surety Co., 153 Conn. 633, 645 (1966)). Waiver can be express or may be implied from acts or conduct. Id. (quoting Andover v. Hartford Accident Indem. Co., 153 Conn. 439, 445 (1966)). However, it may be inferred from the circumstances only where it is reasonable to do so. Loda v. H.K. Sargeant Assoc., Inc., 188 Conn. 69, 76 (1982). It is unreasonable to infer waiver if the agreement in question contains a non-waiver clause. Christensen v. Cutaia, 211 Conn. 613, 619-20 (1989); Chase Manhattan Bank v. Holmberg, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV01-384648S (July 22, 2002, Thim, J.). It is the purpose of the party inserting such a clause to prevent inconsistent conduct from being deemed a waiver of a known right. Christensen, 211 Conn. at 619-20.
The existence of a non-waiver clause was fatal to the defendant in Christensen. In that case, the plaintiff brought an action to collect on a series of notes executed by the defendant. 211 Conn. at 614. The notes' non-waiver clause specified, "that the plaintiff's failure to assert a right would not amount to a waiver and require[d] any waiver to be in writing." Id. at 616. The defendant alleged that it can be reasonably inferred from plaintiff's past acceptance and cashing of late payments that he waived the agreement's acceleration clause, which made the outstanding debt of all the notes due upon a single late payment. The court held this defense to be untenable based on the non-waiver clause requiring any waiver to be in writing. Accord Chase Manhattan, supra, Superior Court, Docket No. CV01-384648S (holding that it was unreasonable to infer waiver based on oral representation that defendant should pay lower monthly payments when agreement contained a non-waiver clause).
The promissory note here contains two references restricting waiver of the plaintiff's rights. The first reference appears in section four (§ 4) stating that if an Event of Default occurs, "so long as any such Event of Default shall not have been remedied or waived in writing by the Bank all amounts owing with respect to this Note shall . . . be forthwith matured and become immediately due . . ." In addition, section twelve (§ 12) of the agreement states that performance of the Borrower may be waived "but only with, the written consent of the Borrower and the written consent of the Bank." The section then requires that any obligation waived must be done expressly. Finally, the section states that "[n]o . . . delay or omission in the exercise of any right, remedy, power or privilege . . . on the part of the Bank shall impair, prejudice or constitute waiver of any such right, remedy, power or privilege or otherwise be prejudicial to."
More complete reference to section twelve of agreement reads: "This note may be amended, and the performance or observance by the Borrower of any terms of this Note or any other instrument relating hereto or the continuance of any Default or Event of Default may be waived . . . but only with, the written consent of the Borrower and the written consent of the Bank. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission in the exercise of any right, remedy, power or privilege hereunder on the part of the Bank shall impair, prejudice or constitute waiver of any such right, remedy, power or privilege or otherwise be prejudicial to."
The note's various non-waiver provisions, quoted above, are essentially equivalent to those in Christensen, which prohibited waiver without explicit written agreement. 211 Conn. at 616, n. 5. Thus, the plaintiff's case is even more persuasive since its note explicitly states that delay shall not act as a waiver. Therefore, as in Christensen and Chase Manhattan, this defense must be rejected because the inference of waiver is unreasonable.
The next defense raised is estoppel. Estoppel occurs when the misleading conduct of one party prejudices the other. Novella v. Hartford Accident and Indem. Co., 163 Conn. 552, 563 (1972). There are two essential elements:
[First,] 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 [second,] the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done.
Novella, 163 Conn. at 563 (quoting Facade v. New Haven Organ Co., 47 Conn. 224, 227 (1879)). However, estoppel cannot be used "in favor of one whose own omissions or inadvertence has contributed to the problem at hand" Id. at 565. The person claiming estoppel must have "exercised due diligence to know the truth and that he not only did not know the true state of things but also lacked any reasonably available means of acquiring knowledge." Id.; State v. Am. News Co., 152 Conn. 101, 114 (1964); Spear-Newman, Inc. v. Modern Floors Corp., 149 Conn. 88, 91-92 (1961).
In Am. News, the defendant claimed that plaintiff's failure to transmit two reports to him estopped the plaintiff from enforcing the contract at issue. 152 Conn. at 113. The court rejected this defense because the defendant did not exercise due diligence in gaining access to the information contained in those reports. Id. at 114. The court noted that the information in the reports was readily available by making "inquiries of the highway commissioner." Id. See also Spear-Newman, 149 Conn. at 91-92 (rejecting estoppel defense based on plaintiff's silence after receiving a check, because the defendant could have exercised due diligence by ascertaining whether plaintiff's acceptance of the check constituted acceptance of the settlement).
The defendants have not exhibited the due diligence to know the status of their account while means to acquire this knowledge was readily available. They made no attempt to verify whether plaintiff intended to relinquish rights to the outstanding debt after the failed negotiation in May 1994. Furthermore, contacting the plaintiff at any point over the ensuing five-year period and asking for a written confirmation of release from the agreement was readily achievable. Failure to make a similar inquiry was fatal in both Am. News and Spear-Newman. See Am. News, 152 Conn. at 114 (suggesting inquiring with highway commissioner); Spear-Newman, 149 Conn. at 92 (suggesting ascertaining opposing parties' disposition on the issue). In addition, the note explicitly states that delay does not constitute a waiver of plaintiff's rights. Therefore, the defense of estoppel does not apply.
With regard to the special defense of prior election of remedies, two theories may be pursued. First, Section 49-1 of the General Statutes creates a statutory bar to suits on the underlying note after foreclosure of the mortgage. The second is a common-law bar to recovering more than the outstanding debt by bringing both a foreclosure action and a collection action.
Under the first theory, Section 49-1 bars action upon the "mortgage debt, note or obligation" after foreclosure of a mortgage. General Statutes § 49-1 (2002). Courts have interpreted this bar to extinguish all rights of the foreclosing mortgagee after a judgment of strict foreclosure. First Bank v. Simpson, 199 Conn. 368, 370 (1986). However, this bar only applies to the plaintiff who initiated the foreclosure action and does not bar those who were merely joined as a party to the foreclosure proceedings. Id. at 372.
The court in First Bank allowed the second mortgagee to bring an action on the underlying note even after the first mortgagee foreclosed the mortgage. The second mortgagee was allowed to collect on the note even though they were party to the original foreclosure proceedings, because they did not initiate it and were not the foreclosing plaintiff. Id. at 372-73.
The plaintiff's collection action is not barred by Section 49-1 due to either being party to the tax foreclosure by the city of New Britain or withdrawing the earlier foreclosure action against defendants. When the plaintiff was made party to the New Britain tax foreclosure they stood in identical shoes of the plaintiff in First Bank. In both cases, the plaintiff did not initiate the foreclosure proceeding and was not the foreclosing plaintiff. Therefore, as in First Bank, Section 49-1 does not bar collection on the note.
Nor does Section 49-1 bar the plaintiff based on the withdrawal of a foreclosure action. As stated by First Bank, the Section 49-1 bar only extinguishes rights of the mortgagee after a judgment of strict foreclosure. Id. at 370. The withdrawal here came prior to any hearing on the merits, and therefore prior to final judgment on that case, making the Section 49-1 bar inapplicable. See Tr. Trans., at p. 164 (testifying that plaintiff's foreclosure action never reached a final judgment). Cf. Ameriquest v. Hutwohl, Superior Court, judicial district of Danbury at Danbury, Docket No. CV01-0344530S (April 17, 2003, Downey, J.) (allowing institution of a suit on a note while suit on the foreclosure was pending).
The defendants primarily rely on the second theory. Connecticut courts allow a plaintiff "to pursue its remedy at law on the notes, or to pursue its remedy in equity upon the mortgage, or to pursue both." Wendell Corp. Trustee v. Thurston, 239 Conn. 109, 116 (1996) (quoting Mechanics' Bank v. Johnson, 104 Conn. 696, 701 (1926)). However, if an owner of the note is able to secure full payment of the debt on an action on the note his right is extinguished as to the mortgage. Id. at 117. If a creditor was only able to secure partial payment then he "can enforce the mortgage only to secure payment of the balance." Id. The underlying rule remains that the creditor should not be allowed to recover an amount in excess of the debt. Id.; Ameriquest, supra, Superior Court, Docket No. CV01-0344530S.
Under this rule, the plaintiff in Ameriquest was allowed to institute an action to recover on the note while the earlier foreclosure action was pending. Id. The court rejected defendant's claim that the plaintiff's election of remedies barred the action on the note because the defendant did not show evidence that they had made full or partial payment. Id. Without such evidence there was no potential double recovery. See also Wendell, 239 Conn. at 117-18 (allowing plaintiff to sue on note and seek a collective trust on property owned by the beneficiary of the trust that was in default, but noting that trial court maintains sufficient discretion to avoid a double recovery).
There was no recovery via the foreclosure prior to this collection case because the plaintiff withdrew its action prior to final judgment. See Tr. Trans., at p. 164 (testifying that plaintiff's foreclosure action withdrawn prior to judgment). In the foreclosure proceeding that reached final judgment, the city of New Britain was the foreclosing plaintiff. The defendants have not offered evidence that they made payment in full or in part of the outstanding debt, or that the plaintiff will, if successful in this action, recover in excess of the debt. Therefore, as was held in the Ameriquest case, the plaintiff is not barred from bringing suit on the note, because there is no risk of recovery in excess of the outstanding debt.
Assuming, as defendants argue, plaintiff's original action was both to foreclose and collect on the note, the conclusion is the same because the suit never reached final judgment and no payment was made against the outstanding debt.
Turning to the CUTPA defense, it prohibits "unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110b(a) (2002). This prohibition has been extended to banks, but limited to its consumer-oriented activities. Bank of New Haven v. Liner, Superior Court, judicial district of Ansonia-Milford at Milford, Docket No. CV91-034516S (Apr. 1, 1993, Curran, J.).
CUTPA identifies three types of prohibited behavior: unfair competition, unfair practices, or deceptive practices. General Statutes § 42-110b(a). The defendants have alleged that the plaintiff's collection practices were unfair. Connecticut courts have adopted the Federal Trade Commission's `cigarette rule' to test whether a practice is unfair. Hartford Elec. Supply Co. v. Allen-Bradley Co., Inc., 250 Conn. 334, 367-68 (1999) (quoting Willow Springs Condominium Assn., Inc. v. Seventh BRT Development Corp., 245 Conn. 1, 43 (1999)). The cigarette rule evaluates the practice against three criteria:
Defendants claim that the plaintiff engaged in unfair methods of competition and unfair or deceptive practices, yet limit their discussion to the `cigarette rule' criteria which is the test for only unfair practices under CUTPA. Defendant's Trial Memorandum ("Def. Tr. Mem."), at p. 6. Therefore, the court's discussion will be limited to "unfair practices."
(1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise — 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 business persons] . . .
Hartford Elec. at 368. It is unnecessary to satisfy all three criteria for a practice to be unfair. Id. A practice may be unfair because of the degree to which it meets one of the criteria or because it meets all three criteria to a lesser extent. Id. The defendants first claim that the plaintiff's debt collection practice offends public policy.
Courts have held that a practice contravenes public policy if it violates a statute or constitutes an actionable wrong. See Tillquist v. Ford Motor Credit Co., 714 F. Sup. 607, 616 (D.Conn. 1989) (holding that a violation of banking regulations is a violation of public policy under the cigarette rule). However, courts do not restrict proof to violations of statutes and actionable wrongs. Hartford Elec., 250 Conn. at 368-69 (holding that termination of a franchise without good cause violates the public policy of fairness among business as articulated by the franchise act).
The defendants have not asserted that plaintiff has violated a specific statute. The statute most likely to be applicable to the collection of a debt reveals no explicit violation. The Connecticut Creditor Collection Practices Act (CCCPA) prohibits creditors from using "any abusive, harassing, fraudulent, deceptive or misleading representation, device or practice to collect or attempt to collect any debt." General Statutes § 36a-646 (2002). However, plaintiff's actions do not fall within the plain meaning of any of the CCCPA's prohibited practices.
This is reinforced by the lack of similarity between plaintiff's actions and the examples provided in the CCCPA's federal counterpart the Fair Debt Collection Practices Act. See 15 U.S.C. § 1692d (examples include: use or threat of use of violence, use of obscene or profane language, or publication of list of debtors); § 1692e (examples include: false representation of amount or status of debt, false representation that one is an attorney, implication that nonpayment will result in arrest); § 1692f (examples include: collection of amount beyond what was in agreement creating the debt, solicitation for a post-dated check, or communicating with debtor via post card).
The defendants have not identified how the plaintiff committed an "actionable wrong."
The defendants, without citing any supporting case law, assert that plaintiff's failure to adhere to bank practices and policies offends public policy. Defendants' Brief at 29. The defendants refer to testimony stating that it is customary to file suit ninety to one hundred twenty days after sending a demand letter and claims that plaintiff egregiously violated such custom. Id. However, the bank policy and procedures do not define public policy and defendants did not identify such standards embodied in a public policy statement. Cf. Hartford Elec., 250 Conn. at 368-69 (identifying the public policy of fairness among business articulated in franchise act). Even if one were to use these standards to evaluate plaintiff's behavior, they must be tempered to reflect the circumstances, namely a merger in process. Furthermore, there was uncontested testimony that it typically takes plaintiff two to five years to process distressed loans after a merger. Accordingly, plaintiff brought suit within four years from the point that it came to control the loan, bringing it squarely within the testified-to practice and policy of the bank.
Under the second criterion of the `cigarette rule,' defendants allege that plaintiff's oppressively abused their authority in delaying institution of the collection action during which the outstanding debt increased substantially. However, defendants' claim is wholly conclusory and does not cite any case law to support the proposition that a delay in bringing a collection action is considered to be oppressive, immoral, unethical, or unscrupulous under the Connecticut court's interpretation of this criterion. Nor is plaintiff's conduct in line with the type of creditor practices that Connecticut courts have held to violate this criterion. In Monetary Funding, the court held that a creditor violated CUTPA by engaging in predatory loaning practices. Monetary Funding, supra, Superior Court, Docket No. CV01-0382851 (charged borrower arbitrarily high fees, mislead them as to the interest rate, issued the loan with knowledge that borrower could not comply with the payment terms, and structured a loan in a way to ensure higher fees). The defendant's allegation is not equivalent conduct and is insufficient to meet this criterion.
Next, Connecticut courts have developed a three-part test to determine whether the third prong — "substantial injury" — has been satisfied. The test evaluates a defendant's injury requiring that: "(1) it must be substantial; (2) it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and (3) it must be an injury that consumers themselves could not reasonably have avoided." Web Press Services Corp. v. New London Motors, Inc., 205 Conn. 479, 484 (1987); Hartford Elec., 250 Conn. at 368.
In Hartford Elec., the court upheld the trial court's determination that the defendant's action violated CUTPA because a substantial injury would result to "consumers, competitors, or other business persons . . . because the termination of the [franchise] agreement would force the plaintiff out of business." 250 Conn. at 369. However, in Web Press, the court rejected plaintiff's allegation that CUTPA was violated because an injury that constituted only three percent ($300) of the cost of the item purchased (vehicle) was not substantial. 205 Conn. at 484. Additionally, the court held that the defendant, auto dealer, made every attempt to fix plaintiff's vehicle promptly and without charge. Id.
Here the defendants allege that plaintiff's delay resulted in a substantial injury in the form of increased interest and late charges. On February 2, 1994, when plaintiff first contacted the defendants regarding the defaulted note, the total debt was $68,412.56. The balance due at the time of trial was $144,364.31. The defendants allege that the delay caused an injury to them due to the accrual of interest and late charges totaling $75,951.75. Based on dollar value and proportion to the amount of the original note this injury is sufficient to satisfy the first part of the substantial interest test. Cf. Web Press, 250 Conn. at 484 (holding injury of only $300 or 3% of total vehicle cost was insufficient).
This consisted of: $63,466.04 in principal, $1725.19 in interest and $3,221.33 in late charges.
The defendants, on the third point, however, have not shown that they could have reasonably avoided this injury. The defendants' only correspondence with the plaintiff after the default was three letters sent in May 1994. There was no further communication between the defendants and the plaintiff. The court is not convinced that sending three letters over a one-month period after the default was everything the defendants could have reasonably done to avoid the subsequent five-and-a-half-year delay. The fault for lack of communication between the parties is a "two-way street" and the defendants were not encumbered by the administrative burden of processing a merger. Furthermore, barring recovery would create an incentive for debtors to avoid communication with their creditor to avoid having to pay their debt.
Turning to the defense of good faith and fair dealing, Section 42a-1-203 of the General Statutes incorporates the Uniform Commercial Code's (UCC's) obligation of good faith and fair dealing, which states that "[e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement." General Statutes § 42a-1-203.
In cases involving the delay to recover collateral or a money judgment, courts have allowed a good faith and fair dealing defense if the defendants can show that the delay has injured their rights to receive the benefit of the agreement. Commercial Capital, supra, Superior Court, Docket No. CV99-0089645; Cadle, supra, Superior Court, Docket No. CV95-0553581. However, these courts have limited defendant to recover only excessive interest, late charges and other costs. Commercial Capital, supra, Superior Court, Docket No. CV99-0089645; Cadle, supra, Superior Court, Docket No. CV95-0553581. (limiting recovery to six months of interest at a stipulated interest rate); Citicorp Mortgage, Inc. v. Upton, 42 Conn. Sup. 302, 305, 7 Conn. L. Rptr. 273 (1992) (allowing recovery of interest and late charges up until the point that plaintiff could have taken title).
In Commercial Capital, the defendant claimed that the obligation of good faith and fair dealing was breached by plaintiff's eighteen-month delay in securing available collateral and instituting a collection action. Commercial Capital, supra, Superior Court, Docket No. CV99-0089645. The defendant claimed that during the delay cash flow generated by defendant's business dissipated and interest accrued on the outstanding debt. Id. While the court concluded that the delay injured the defendant's right to receive a benefit under the agreement, it could not sustain the defense because the allegations were not made in the special defense. Id.
No such pleading error stopped the court in Citicorp, from holding that plaintiff's refusal to reply in a timely fashion to defendant's request to take title breached the obligation of good faith and fair dealing. 42 Conn. Sup. at 303-05. The defendant over a ten-month period attempted at least ten times to contact the plaintiff to tell them they could no longer pay the mortgage and wanted to surrender title to avoid further interest charges, penalties and costs. Id. The court limited plaintiff's recovery by not allowing interest and late charges to accrue beyond when plaintiff could have taken title. Id. Accord Cadle, supra, Superior Court, Docket No. CV95-0553581 (limiting plaintiff to six-months of interest because two-year delay to respond to defendant's offer to surrender title in lieu of foreclosure caused the defendant injury through reduced value of property and accumulating interest costs violating the obligation of good faith and fair dealing).
The present case falls squarely in line with Cadle, Commercial Capital, and Citicorp. It was the reasonable expectation of both parties that the loan and accumulated interest was to be repaid by the defendants. However, defendants could not expect that plaintiff would undergo a merger delaying collection for five and a half years and causing interest and late charges to accrue to $75,951.75, which is over 40 percent of the original loan amount. The magnitude of the delay and subsequent injury is in line with that suffered in Cadle, Commercial Capital, and Citicorp. Cf. Cadle, supra, Superior Court, Docket No. CV95-0553581 (delay of two years and increase in debt of $225,399.12, which was more than half the original loan amount of $430,000); Commercial Capital, supra, Superior Court, Docket No. CV99-0089645 (delay of eighteen months); Citicorp, 42 Conn. Sup. at 303-04 (delay of approximately eighteen months).
In conclusion, plaintiff's five-and-a-half-year delay led to a sizeable increase in interest and late charges that injured defendant's rights to receive the benefit of the loan agreement. However, barring the plaintiff's entire recovery would be even more inequitable. Following Cadle and Citicorp, the court bars the plaintiff from collecting excessive interest and late charges. In this case, "excessive" will be determined by the length of time that defendants could have reasonably expected the debt to accrue under these circumstances before a collection action was instituted. The upper bound of such reasonable expectation is the, testified to, range of time for plaintiff to process distressed loans measured from plaintiff's first access to the distressed loan — the date of the Shawmut-Fleet, December 1, 1995 merger. Therefore, interest and late charges will be limited to those accrued up to the five-year anniversary of the merger of Shawmut Bank with the plaintiff.
To conclude, the plaintiff has successfully shown that the note executed by defendants in February 1992 has been in default since February 1994. However, the five-and-a-half-year delay in bringing the instant collection action violates the implied obligation of good faith and fair dealing. Violation of good faith and fair dealing only bars the plaintiff from recovering interest and late charges that are excessive. The court concludes that interest and late charges accruing five years after the merger of the plaintiff and Shawmut Bank to be excessive. Accordingly, the court orders the defendants to pay the plaintiff the principal, interest and late charges accruable up to that date (December 1, 2000), together with reasonable attorney fees and expenses. The plaintiff may submit a judgment file based upon this ruling.
So ordered.
HENRY S. COHN, JUDGE.