Opinion
No. FST CV 08 5007937 S
March 26, 2009
MEMORANDUM OF DECISION
The plaintiff, Housing Development Fund, LLC (HDF), initiated this action by service of writ, summons and complaint on the defendants, 130 Main Street Development, LLC (130 Main Street), Simona Tudor, Nicolae Tudor, Mark Rosetti, Ronald Gugliota, Steven Rainey, and SVM Construction Services, LLC (SVM). The plaintiff alleges in its complaint: that the defendant, 130 Main Street, promised to pay to the order of HDF the sum of $4,925,000 payable with interest as evidenced in a promissory note dated July 28, 2005. On said date, Simona Tudor and Nicolae Tudor executed and delivered to and in favor of HDF a Guaranty by which they jointly and severally guaranteed payment to HDF of all amounts owing under the note. To secure the note, 130 Main Street mortgaged to HDF a parcel of land known as 130-134 Main Street, Norwalk (the premises). The mortgage was recorded in Volume 5903 at Page 274 of the Norwalk land records in the original principal amount of $4,925,000. On October 11, 2006, the parties entered into a "note modification agreement." The agreement modified the terms of the note and mortgage, namely increasing the loan amount set forth in the loan agreement, note and mortgage to $5,175,500, and adding as guarantors, Mark Rosetti, Ronald Gugliota, Steven Rainey, and SVM Construction Services, LLC (SVM). The agreement was recorded in Volume 6431 at Page 193 of the Norwalk land records. On October 31, 2007, the parties entered into a second modification agreement extending the construction term to December 31, 2007. HDF alleges that the defendants, Simona Tudor, Nicolae Tudor, Mark Rossetti, Ronald Gugliota, and Steven Rainey, are liable in their individual capacity, and SVM is liable in its corporate capacity, to HDF for the entire outstanding balance on the note, as evidenced by the terms of the Guaranty. Further, HDF alleges that the defendants, Simona Tudor, Nicolae Tudor, Mark Rossetti, Ronald Gugliota, Steven Rainey, and SVM, are jointly and severally liable to HDF for the full amount of any deficiency judgment following any foreclosure of the mortgage.
HDF further alleges that the note, mortgage, guaranty, first and second modifications are in default as a result of the nonpayment of the amount due on the due date and the entire amount due thereunder is now past due. As of June 22, 2008, the amount due is $4,835,334.71, consisting of a principal balance of $4,731,584.28, interest of $97,928.58, late charges of $2,439.35, other charges of $3,382.50, and a per diem thereafter of $648.16.
On November 18, 2008, the defendants filed an answer, special defenses and counterclaims. The defendants assert the special defenses of setoff and payment and counterclaims alleging breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, and tortious interference with a business opportunity. On December 3, 2008, the plaintiff moved, pursuant to Practice Book § 10-39 et seq., to strike the defendants' special defenses and counterclaims. On January 9, 2009, the defendants, Simona Tudor and Nicolae Tudor, filed an objection to the motion to strike which was accompanied by a memorandum of law. Additionally, on January 9, 2009, the defendants, 130 Main Street, Mark Rosetti, Ronald Gugliota, Steven Rainey, and SVM, filed an objection to the HDF's motion to strike, incorporating by reference the objections detailed in the pleadings filed by the defendants, Simona Tudor and Nicolae Tudor.
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Gazo v. Stamford, 255 Conn. 245, 260, 765 A.2d 505 (2001). "A motion to strike is the proper vehicle by which to contest the legal sufficiency of any special defense contained in an answer to the complaint." Doran v. Waterbury Parking Authority, 35 Conn.Sup. 280, 281, 408 A.2d 277 (1979).
"In ruling on the motion to strike, the trial court [has an] obligation to take the facts to be those alleged in the special defenses and to construe the defenses in the manner most favorable to sustaining their legal sufficiency . . . The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate nonetheless, that the plaintiff has no cause of action . . . The traditional defenses available in a foreclosure action are payment, discharge, release, satisfaction or invalidity of a lien . . . In recognition that a foreclosure action is an equitable proceeding, courts have allowed mistake, accident, fraud, equitable estoppel, CUTPA, laches, breach of the implied covenant of good faith and fair dealing, tender of deed in lieu of foreclosure and a refusal to agree to a favorable sale to a third party to be pleaded as special defenses . . . Other defenses which have been recognized are usury, unconscionability of interest rate, duress, coercion, material alteration, and lack of consideration . . .
"Additionally, under certain circumstances, inconsistent conduct on the part of the mortgagee may be deemed as a waiver of a right to accelerate the debt . . . These special defenses have been recognized as valid special defenses where they were legally sufficient and addressed the making, validity or enforcement of the mortgage and/or note. The rationale behind this is that . . . special defenses which are not limited to the making, validity or enforcement of the note or mortgage fail to assert any connection with the subject matter of the foreclosure action and as such do not arise out of the same transaction as the foreclosure action . . . Further, based on the same rationale, the defenses . . . cannot attack some act or procedure of the lienholder . . ." (Citations omitted; internal quotation marks omitted.) GMAC Mortgage Corp. v. Nieves, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 980164925 (January 29, 1999, Tobin, J.).
Our Supreme Court, however, has held that, "because a mortgage foreclosure action is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done." Reynolds v. Ramos, 188 Conn. 316, 320, 449 A.2d 182 (1982). Further, "although equitable power must be exercised equitably . . . [t]he determination of what equity requires in a particular case, the balancing of the equities, is a matter of discretion of the trial court." (Citation omitted.) Raimo v. Quakerford, Superior Court, judicial district of Waterbury, Docket No. CV 08 5008959 (January 22, 2009, Brunetti, J.).
HDF moves to strike the defendants' special defenses on the ground that they are legally insufficient. Specifically, HDF argues that both special defenses fail to attack the making, validity or enforcement of the note or mortgage. With respect to the first special defense, alleging equitable setoff, HDF maintains that the defendants' claim is legally insufficient as they fail to allege the necessary elements of an equitable setoff. Namely, that the defendants fail to allege that the setoff arises out of the same transaction as the note, a requirement for any claim for equitable setoff. With respect to the second special defense, alleging payment, HDF maintains that the special defense improperly attacks the procedures of the HDF and that the defendants fail to allege facts that are consistent with the allegations of the complaint, but demonstrate nonetheless that the plaintiff has no cause of action.
In response, the defendants argue that the requirement that special defenses to a foreclosure action address the making, validity or enforcement of the mortgage or note is limited to special defenses made "at law" and not in equity. The defendants maintain that, "consistent with the equitable nature of foreclosure actions, Connecticut courts have repeatedly allowed a wide variety of equitable defenses unrelated to the making, validity or enforcement of the mortgage or promissory note." (Defendants' Memorandum in Opposition, p. 6.) The defendants correctly note that "a trial court in foreclosure proceedings has discretion, on equitable considerations and principles, to withhold foreclosure or to reduce the amount of the stated indebtedness." (Defendants' Memorandum in Opposition, p. 8.)
The defendants' first special defense of equitable setoff is predicated on the defendants' counterclaims, incorporating by reference the allegations made therein. "A set-off is made where the defendant has a debt against the plaintiff . . . and desires to avail himself of that debt, in the existing suit, either to reduce the plaintiff's recovery, or to defeat it altogether, and, as the case may be, to recover a judgment in his own favor for a balance . . . Claims for [s]etoffs can be based either in law or in equity." (Citations omitted; internal quotation marks omitted.) Security Pacific National Trust Co., Trustee v. Dubinsky, Superior Court, judicial district of Hartford, Docket No. CV 99 0593792 (March 14, 2000, Stengel, J.). "Equitable setoff applies to cases where, because of the nature of the claim or the situation of the parties, justice cannot be obtained by a separate action." (Internal quotation marks omitted.) Lord Corp. v. Widewaters New Castle, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 03 0083912 (July 1, 2005, Moran, J.).
As the defendants' first special defense of setoff is predicated on the defendants' counterclaims, the court will assess its legal sufficiency when it addresses the legal sufficiency of the defendants' counterclaims.
The defendants' second special defense alleges payment. Specifically, the defendants allege that HDF received a payment from the defendant, 130 Main Street, in the amount of $448,556.84 on or about March 24, 2008, and failed to apply this payment to the amounts due. Rather than apply the payment to monies due, the defendants allege that HDF placed the funds in an escrow account. The defendants maintain that if payment was properly applied upon receipt, the defendants would not be in default under the operative loan documents.
HDF argues that the defendants' defense of payment is insufficient as a matter of law because the defendants do not allege facts that support their claim, and further, they improperly attacks the action or procedures of HDF, rather than the making, validity or enforcement of the note and mortgage. HDF maintains that, at most, the defendants' allegations might establish that HDF improperly applied payments and therefore, improperly calculated the defendants' debt.
While the Appellate Courts have not adopted parameters regarding the extent of the "making, validity or enforcement" limitation on special defenses, the issue has been addressed by the Superior Court. Some Superior Court judges have construed the limitation to bar special defenses or counterclaims relying on "acts or procedures" of the mortgagee, "behavior of the mortgagee," and events developing post-execution and throughout "the course of the relationship" between the mortgagor and mortgagee. See Mortgage Electronics Registration Systems, Inc. v. Venditto, Superior Court, judicial district of New London, Docket No. 4002228 (October 28, 2005, Devine, J.) ( 40 Conn. L. Rptr. 209); Morgan Guaranty Trust Co. v. Davis, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 94 0141885 (November 1, 1995, Nadeau, J.).
In this line of cases, the Superior Court judges have reasoned that "allegations of refused or misapplied payments address the administration of the account by the plaintiff subsequent to the execution of the note and mortgage, but prior to the enforcement of the note and mortgage in a foreclosure proceeding." Fleet National Bank v. Estate of Young, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 03 0196191 (May 20, 2004, Tobin, J.); see United States Dept of Agriculture v. Vieaux, Superior Court, judicial district of New London, Docket No. 561215 (March 23, 2004, Martin, J.); First National Bank v. Woermer, Superior Court, judicial district of Waterbury, Docket No. CV 00 0159515 (March 26, 2002, West, J.); Citicorp Mortgage, Inc. v. Gibson, Superior Court, judicial district of Waterbury, Docket No. CV 99 0152248 (April 27, 2000, West, J.) ( 27 Conn. L. Rptr. 119, 120) (holding that the failure to accept payment did not relate to the making, validity or enforcement of the note); OCWEN Federal Bank FSB v. Weinberg, Superior Court, judicial district of New London, Docket No. CV 547629 (August 11, 1999, Mihalakos, J.) (failure to accept payment and misapplication of payment are improper special defenses to foreclosure actions because they attack the conduct of the lender rather than the making, validity or enforcement of the note); Greenpoint Mortgage Corp. v. Ruisi, Superior Court, judicial district of Danbury, Docket No. 333106 (June 1, 1999, Moraghan, J.) (failure to apply timely payments is a special defense that primarily claims a breach of contract, and it is improper in a foreclosure action).
Some Superior Court judges, however, have rejected the above interpretation of the `making, validity or enforcement' limitation on special defenses that prevents a court from considering post-execution conduct of the mortgagee. See OCWEN Federal Bank FSB v. Waller, Superior Court, judicial district of Fairfield, Docket No. CV 03 0401138 (March 16, 2004, Stevens, J.) (stating that "the `enforcement' of a mortgage may involve conduct occurring after the execution of the mortgage"); Fleet National Bank v. Squillacote, Superior Court, judicial district of New Britain, Docket No. CV 99 0497487 (October 30, 2003, Cohn, J.) ( 36 Conn. L. Rptr. 270, 273) ("the manner of collection of [the] note in default does impact the enforcement of the note, and [the court] will proceed to consider the equitable defenses on their merits").
These alternative cases reason that allegations that the mortgagee refused properly tendered payment are legally sufficient, as they attack the enforcement of the mortgage or note. See Homecomings Financial Network Inc. v. Starbala, 85 Conn.App. 284, 289, 857 A.2d 366 (2004) (holding that the defendants' special defense alleging that they tendered timely payment of the mortgage to the previous note holder, and that such payment was refused, was sufficient to allege the special defense of payment); Fleet Mortgage Corp. v. Bruno, Superior Court, judicial district of Windham, Docket No. 063054 (March 8, 2001, Foley, J.) (holding that allegations of timely payment attack the enforcement of the note and are legally sufficient); Atlantic Mortgage Corp. v. Linsley, supra, Superior Court, Docket No. CV 97 0260406; Bankers Trust Co. v. Mednick, Superior Court, judicial district of New Haven at Meriden, Docket No. 254012 (November 2, 1998, Beach, J.) (denying motion to strike special defense alleging that the defendants attempted to make proper payments but the plaintiff refused to accept); Farmers Mechanics Bank v. Santangelo, Superior Court, judicial district of Middlesex, Docket No. 067481 (December 8, 1995, Stanley, J.) (holding that the defendants' allegation that they were not in default because the plaintiff refused to apply their payments to the note were sufficient).
Although "Superior Court decisions vary in their treatment of the various forms of payment defense in the context of a motion to strike"; Atlantic Mortgage Corp. v. Linsley, supra, Superior Court, Docket No. CV 97 0260406; "[i]t appears . . . that, notwithstanding the language used by some Superior Court decisions, a court may consider the mortgagee's conduct throughout the course of the parties' relationship. The basis of this conclusion is three-fold. First, due consideration must be given to the broad equitable powers of the trial court. An action of foreclosure is peculiarly an equitable action . . . Hence, the court may consider all relevant circumstances to ensure that complete justice is done . . . The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court . . . Discretion means a legal discretion, to be exercised in conformity with the spirit of the law and in a manner to subserve and not to impede or defeat the ends of substantial justice . . . For that reason, equitable remedies are not bound by formula but are molded to the needs of justice . . . Second, by definition, some recognized special defenses necessarily involve post-execution behavior of the mortgagee . . . Third, our Supreme Court and Appellate Court have clearly taken into consideration post-execution conduct of the parties when evaluating defenses to a foreclosure action . . . Simply stated, allowing a defendant to craft a defense that is based on facts associated with the mortgagee's post-execution behavior is not inimical to the requirement that a special defense in a foreclosure action relate to the "making, validity or enforcement" of the note or mortgage. Such behavior of the mortgagee throughout the course of the relationship may be directly related to the `enforcement' of the note or mortgage. That is, given an appropriate factual predicate, the court may conclude that it would be inequitable to allow enforcement in light of the mortgagee's behavior." (Citations omitted; emphasis added.) Liberty Bank v. New London, LP, Superior Court, judicial district of New London, Docket No. CV 4005236 (May 1, 2007, Devine, J.) ( 43 Conn. L. Rptr. 326, 328).
In Atlantic Mortgage Corp. v. Linsley, supra, Superior Court, Docket No. CV 97 0260406, the court held that "it is a sufficient defense of payment, for purposes of a motion to strike, that the mortgagee refused to accept properly tendered payment, that is, full and timely payment of the amount due, before declaring default. Such a conclusion finds support in the statements of law presented in American Jurisprudence and Corpus Juris Secundum. It has been held that the mortgagee must unconditionally accept the amount due when properly tendered, and that a good and sufficient tender on the day when payment is due will relieve the property from the lien of the mortgage, except where the refusal was not unreasonable or arbitrary, but grounded on an honest belief that the tender was insufficient. 59 C.J.S. 554, Mortgages § 462 (1998); see also 55 Am.Jur.2d, Mortgages §§ 424 and 426 (1971) . . . The mortgagee should be estopped from declaring default and denied foreclosure if its refusal to accept properly tendered payments is the cause of nonpayment by the mortgagor."
In OCWEN Federal Bank FSB v. Waller, supra, Superior Court, Docket No. CV 03 0401138, the court, in denying the plaintiff's motion to strike the defendants' defenses, ruled that the defendants' allegations that the plaintiff's failure to accept timely payments, and to credit payments properly contributed to or caused the default, were legally sufficient. The court stated: "Simply because the allegations concern events after the execution of the mortgage does not make the claims automatically meritless . . . Indeed, by definition, the `enforcement' of a mortgage may involve conduct occurring after the execution of the mortgage . . . Whether such claims may be raised through a simple denial or a special defense depends on the specific circumstances of the case and the nature of the claims." Id.
In the present matter, the second special defense alleges that HDF received a payment from the defendant in the amount of $448,556.84 on or about March 24, 2008, and failed to apply this payment to the amounts due. The defendants' allege that, but for this failure, they would not be in default under the terms of the note at the time HDF declared a default. This court finds that the facts alleged, when viewed in the manner most favorable to sustaining their legal sufficiency, relate to the enforcement of the note and mortgage, and thus, the second special defense is proper.
Accordingly, HDF's motion to strike the defendants' second special defense is denied.
Counterclaims
HDF moves to strike the defendants' counterclaims on the ground that they are legally insufficient as a matter of law. Specifically, the plaintiff argues that the alleged facts giving rise to the defendants' counterclaims do not arise out of the same transaction that is the subject of the complaint, and, therefore, fail to meet the requirements of Practice Book § 10-10. Section 10-10 provides in relevant part: "In any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff . . . provided that each such counterclaim . . . arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint."
As HDF only moves to strike the defendants' counterclaims on the ground that they do not relate to the making, validity or enforcement of the note and mortgage, the court need not address whether the defendants sufficiently pleaded the legal elements necessary for each claim.
The defendants' counterclaim, dated December 18, 2008, alleges the following facts. On July 2, 2007, the defendant, 130 Main Street, and HDF entered into the Home Ownership Program Agreement (Agreement) pursuant to which HDF agreed to partner with the defendant, 130 Main Street, in the marketing and sale of the affordable housing unit developed in conjunction with the project. Pursuant to the agreement, HDF agreed to market the availability of affordable units to its existing and prospective clients, refer mortgage ready and income eligible applications to 130 Main Street until a mutually agreed upon cut-off date, and assist the applicants in securing a first mortgage as well as their downpayment assistance loans where applicable. The defendants further allege that HDF failed to perform its obligations under the agreement. Specifically, that HDF failed to refer any mortgage ready and income eligible applicants to the defendant, 130 Main Street, and failed to help developers identify and qualify buyers for the affordable units.
The defendants' counterclaim contains four counts and sounds in: (1) breach of contract; (2) breach of fiduciary duty; (3) breach of good faith and fair dealing; and (4) tortious interference with a business opportunity. Counts one through three all arise out of the alleged breach of the agreement dated July 2, 2007. Count four is predicated on HDF's failure to apply properly tendered payment, which allegedly resulted in the defendants' failure to complete the project. As a result of this failure, the defendants allege that they lost certain business opportunities.
"It is well established that in a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order to be joined with the complaint." JP Morgan Chase Bank, Trustee v. Rodrigues, 109 Conn.App. 125, 133, 952 A.2d 56 (2008). "This requirement . . . is nothing more than an application of Practice Book § 10-10 . . . [Section] 10-10 provides that [i]n any action for legal or equitable relief any defendant may file counterclaims against any plaintiff . . . provided that each such counterclaim . . . arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint . . . In a foreclosure action, the relevant factors for a court to consider in determining whether the [aforementioned] `transaction test' has been met by the counterclaim includes: (1) whether the counterclaim is based on factors outside of the note or mortgage; (2) whether different issues of fact and law are presented by the complaint and counterclaim; and (3) whether separate trials would involve a substantial duplication of' effort . . . Furthermore, our Appellate Court has specifically held that [c]onduct on the part of the party seeking foreclosure that occurred after the loan documents were executed and not necessarily directly related solely to enforcement of the note . . . [does] not . . . arise out of the same transaction as the complaint." (Citations omitted; internal quotation marks omitted.) Eastern Federal Bank v. Krondes, Superior Court, judicial district of New London, Docket No. CV 07 5007447 (September 23, 2008, Martin, J.).
Counts one through three of the defendants' counterclaim are predicated on the alleged agreement entered into in July 2007, two years after the defendants executed the note and mortgage in July 2005. As these counterclaims attack an agreement entered into by the parties subsequent to the execution of the note and mortgage and the defendants fail to assert any connection with the subject of the foreclosure action, it cannot be said that they relate to the making, validity or enforcement of the mortgage note.
Accordingly, HDF's motion to strike counts one through three of the defendants' counterclaim, as well as the special defense of equitable setoff as it relates to these counterclaims, is granted. The special defense, together with the counterclaims upon which it is predicated clearly involve factual and legal issues not arising from or related to the making, validity or enforcement of the subject note and mortgage and cannot be said to arise from the same transaction.
With respect to count four, the defendants incorporate the allegations of count one and further allege that HDF failed to apply a payment, in the amount of $448,556.84, to the amounts due and owing from the defendant under the financing agreement. As a result of this failure, the defendants allege that they were hindered in their ability to complete construction of the project. The defendants allege that the delays caused by HDF's failure to properly accept and apply payments resulted in lost opportunities to sell project units.
As previously stated, "[s]imply because the allegations concern events after the execution of the mortgage does not make the claims automatically meritless . . . Indeed, by definition, the `enforcement' of a mortgage may involve conduct occurring after the execution of the mortgage." OCWEN Federal Bank FSB v. Waller, supra, Superior Court, Docket No. CV 03 0401138. As count four is predicated on HDF's alleged failure to properly accept and apply timely payment and those allegations, when viewed in the manner most favorable to sustaining their legal sufficiency, can be said to relate to the enforcement of the note and mortgage, this court finds that the defendants' fourth counterclaim arises out of the same transaction as the subject of the complaint.
Accordingly, HDF's motion to strike the defendants' fourth counterclaim, as well as the special defense of setoff as it relates to the fourth counterclaim, is denied. The special defense, together with the counterclaim upon which it is predicated, clearly involve factual and legal issues arising from or relating to the enforcement of the subject note and mortgage.