Opinion
No. CV-09-6004536-S
July 8, 2010
MEMORANDUM OF DECISION ON MOTION TO STRIKE SPECIAL DEFENSES
The plaintiffs, Kenneth Gerstenfeld and Norma Oberlander, have moved to strike the special defenses of the defendant, Bradley Court, LLC ("Bradley").
This case is a foreclosure action brought by the plaintiffs against Bradley, an entity that owns a 146-unit rental apartment complex located in Windsor Locks, Connecticut (the "Property"). In their Complaint, the plaintiffs allege that Bradley is in default on a note secured by a second mortgage on the Property.
On February 15, 2007, the plaintiffs loaned Bradley the principal sum of One Million Dollars ($1,000,000), evidenced by a Promissory Note (the "Note"). Complaint ¶ 9. The Note is in default for nonpayment and for breach of certain covenants, including failure to timely pay utility bills and municipal sewer fees. In addition, the loan is in default due to the transfer of the ownership and control of Bradley without the plaintiffs' consent. Complaint ¶¶ 14-17. The new owners of Bradley are now attempting to attack the bona fides of the plaintiffs' mortgage because of a dispute they have with their predecessors, defendants Shalom Segelman ("Segelman") and David Merenstein ("Merenstein").
The Complaint also alleges that Segelman and Merenstein guaranteed Bradley's obligations. Complaint ¶¶ 28-30, 35-37. Since Bradley has failed to make payments as required by the Note and failed to meet its obligations under the Mortgage, both guarantors are liable for the full amount of Bradley's indebtedness under the Note, plus costs and expenses. Complaint ¶¶ 30-32, 37-39. Defaults have been entered against both of the guarantors.
Bradley filed its Answer and Special Defenses on October 23, 2009. The Special Defenses fault the plaintiffs for "enabling" Segelman and Merenstein to defraud the Bradley. Bradley has not filed any cross claims for fraud or mismanagement against Segelman or Merenstein.
The Revised Special Defenses allege that the plaintiffs' claims are barred by the doctrine of unclean hands and by a lack of good faith.
The function of a motion to strike is to test the legal sufficiency of a pleading. Practice Book § 10-39; Ferryman v. Groton, 212 Conn. 138, 142, 561 A.2d 432 (1989); Mingachos v. CBS, Inc., 196 Conn. 91, 108, 491 A.2d 368 (1985). In deciding a motion to strike the trial court must consider as true the factual allegations, but not the legal conclusions set forth in the complaint. Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990); Blancato v. Feldspar Corp., 203 Conn. 34, 36, 522 A.2d 1235 (1987).
A special defense is proper only where it asserts "[f]acts which are consistent with [plaintiff's statements of fact] but show, notwithstanding, that the plaintiff has no cause of action." Practice Book § 10-50. In order to survive a motion to strike, the defendant's pleading must allege facts that, if proven, would support its special defenses. "Explicit in [§ 10-50] is that a party pleading a special defense must plead facts, consistent with the special defense they are alleging." Senise v. Merritt Seven Venture, LLC, CV02-0397413-S, 2006 WL 538227, at *2 (Conn.Super.Ct. Feb. 17, 2006) [ 40 Conn. L. Rptr. 770] (emphasis in original); see also Conn. Nat'l Bank, 221 Conn. at 536.
Bradley makes the conclusory allegation that "Plaintiffs are barred from collecting on their purported note and mortgage by the doctrine of Unclean Hands." Revised Answer, First Special Defense ¶ 1. The facts Bradley has alleged do not support this defense.
To state a special defense based on "unclean hands," a party must allege facts "that, if admitted, would rise to the level of unclean hands so as to preclude the court from rendering . . . relief." Bauer v. Waste Mgmt. of Conn., Inc., 239 Conn. 515, 526-27 (1996) (denying motion to amend answer to include unclean hands special defense). "The party seeking to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in willful misconduct with regard to the matter in litigation." Monetary Funding Group, Inc. v. Pluchino, 87 Conn.App. 401, 407, 867 A.2d 841 (Conn.App. 2005) (internal citations and quotation omitted) (emphasis added). No willful misconduct by plaintiffs is alleged with regard to the matter in litigation. Bradley alleges only that the plaintiffs acted negligently and, as a result, they failed to protect their own financial interests in the transactions that gave rise to this action. Bradley alleges that the plaintiffs may have acted carelessly in other transactions as well, but such facts cannot support a defense of unclean hands in this matter.
A successful unclean hands defense to a foreclosure action may be asserted in situations where a lender takes advantage of an unsophisticated borrower, unrepresented by counsel, such as by charging significant fees or an arbitrarily high interest rate. Monetary Funding Group, Inc., supra, 87 Conn.App. at 407-08. Similarly, where a lender misleads an unsophisticated borrower, a foreclosure of the note held by the lender may be barred by unclean hands. Id. The lender's misdeeds must, however, arise to "intentional misconduct with respect to the various transactions" and be undertaken to gain some improper advantage, such as generating "excessive fees and costs" for the lender. Id., at 410.
Bradley does not allege that it was an unsophisticated borrower, unrepresented by counsel, or that the plaintiffs, individual lenders, engaged in sharp lending practices, such as charging excessive fees. Rather, Bradley alleges, essentially, that the plaintiffs did not conduct ordinary due diligence for their own protection. The failure to obtain a copy of the operating agreement or an opinion of counsel with respect to authority of Bradley and its principals to enter the transaction may constitute an imprudent lending practice, but it is not "willful misconduct."
Bradley does not allege that the plaintiffs gained any advantage or benefit in this transaction from the other transactions described in the special defenses. It does not allege that the terms of the plaintiffs' loan were unfair. Bradley does allege that its previous managers, defendants Segelman and Merenstein, defrauded or otherwise took advantage of Bradley's "investors," but it does not allege that the plaintiffs acted willfully or intentionally to in any way assist in such alleged fraud.
Bradley has not alleged any facts that support a finding that the plaintiffs engaged in willful or intentional misconduct in order to gain some improper advantage in their dealings with Bradley. On the contrary, Bradley alleges that the plaintiffs' Note constituted a default by Bradley under its first mortgage. Revised Answer, First Special Defense ¶¶ 2, 8. These allegations show that Bradley and its agents acted willfully and intentionally in violation of their contractual covenants with their first mortgagee, but not that the plaintiffs did anything wrong. Bradley's allegation that the plaintiffs' loan violated the senior mortgage means only that the plaintiffs may have been careless in protecting their own interests, not that they acted inequitably to gain an unfair advantage over Bradley. To the extent that the plaintiffs' loan violates the terms of the senior loan, that is a breach of the contract between Bradley and its senior lender and not an issue in this case.
Bradley also alleges that the plaintiffs failed to record an unrelated mortgage in a timely manner. Revised Answer, First Special Defense ¶ 3. This allegation is irrelevant to any issue in this case and certainly does not establish that the plaintiffs gained any unfair advantage in this case. The same is true for the allegations that Plaintiffs advanced the loan funds to Bradley on the day prior to closing, and not in accordance with customary closing practices. Revised Answer, First Special Defense ¶¶ 6-7. The purpose of such customary closing practices is to assure the lender that a borrower is effectively bound by the obligations undertaken in the note and mortgage. A lender who fails to observe these customs does so at its own peril, but it has certainly not gained any unfair advantage over the borrower, nor engaged in any misdeeds which prejudice the borrower.
Bradley makes other allegations which also fail to support their unclean hands defense. For example, Bradley alleges that the plaintiffs required it to enter into a Cross Default Agreement. Revised Answer, First Special Defense ¶ 3. The mere existence of such a standard commercial loan agreement does not in any way establish that the plaintiffs have unclean hands. The plaintiffs have commenced this action based on Bradley's failure to pay and other defaults under the plaintiffs' Note and Mortgage on the Property. The Complaint alleges no default on any other loan and, therefore, no other loan is relevant here.
No interpretation of the facts alleged in the unclean hands defense supports a conclusion that the plaintiffs acted willfully and in a manner calculated to unfairly benefit themselves at Bradley's expense. Bradley's allegations fail to set forth facts upon which there could be a finding that the plaintiffs' claims are barred by the doctrine of unclean hands. The First Special Defense is ordered stricken.
"Every contract creates an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement. Gaudio v. Griffin Health Servs. Corp., 249 Conn. 523, 564, 733 A.2d 197 (1999) (Callahan, C.J., dissenting). "Bad faith means more than mere negligence; it involves a dishonest purpose . . . Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive." Cadle Co. v. Ginsberg, 70 Conn.App. 748, 768, 802 A.2d 137 (2002) (internal citations and quotation marks omitted).
The courts have held that breach of a contract may constitute breach of the covenant of good faith and fair dealing, see Hudson United Bank v. Cinnamon Ridge Corp., 81 Conn.App. 557, 577, 845 A.2d 417 (2004). However, Bradley does not allege that the plaintiffs have breached the contracts in question. Rather, Bradley claims only that its "outside investors," who are not parties to this action, were the victims of the alleged fraud perpetrated by defendants Segelman and Merenstein. Revised Answer, Second Special Defense ¶ 3. Bradley does not tie that allegation to any issue relevant here. As set forth above, Bradley has not cross claimed against these co-defendants to redress their alleged misdeeds, yet it seeks Bradley does not allege that the plaintiffs participated in the alleged fraud or that they benefitted from it.
Bradley relies on the same facts pertinent to the special defense of unclean hands, to support its contention that the plaintiffs have breached the duty of good faith and fair dealing. However, Bradley has not alleged that the plaintiffs misled, deceived, or were dishonest in their dealings with Bradley or any of its principals, past or present. Revised Answer, Second Special Defense ¶ 2. The facts alleged show only that the plaintiffs may have been careless or failed to do everything they could have done to protect their own financial interests, not that the plaintiffs acted with some "dishonest purpose" or that they were motivated by some "interested or sinister motive." For the foregoing reasons, the Second Special Defense is hereby ordered stricken.