Opinion
No. HHB CV030524226 S
January 18, 2006
MEMORANDUM OF DECISION
The plaintiff has brought a claim against the defendants seeking to foreclose a purchase money mortgage secured by the premises at 206 Johnnycake Mountain Rd., Burlington, Connecticut. Subsequent to the initiation of this action, Linda Michalek (hereinafter "plaintiff") became the holder in due course of the promissory note and mortgage and was substituted as the plaintiff. Defendants have responded by filing four special defenses to the foreclosure action alleging the following. First, that the execution of both the note and mortgage by the defendants were induced by the fraudulent (intentional) misrepresentations of the plaintiff. Second, that the plaintiff made negligent misrepresentations to the defendants which lead to the execution of the note and mortgage. Third, that given the actions of the plaintiff in inducing the defendants to execute the note and mortgage, the plaintiff should be estopped from enforcing them. Finally, that the plaintiff's actions constituted a violation of General Statute § 36b-1 et seq., the Connecticut Uniform Securities Act.
I. FACTS
In 2003, plaintiff was the owner of two adjoining parcels of property in Burlington, Connecticut located at 198 Johnnycake Mountain Rd. and 206 Johnnycake Mountain Rd. The defendants, who lived approximately a mile from the properties, became aware of the plaintiff's interest in selling them through a real estate advertisement which described the properties as a horse farm. In pursuing their interest in the property the defendants made numerous visits to the site and held several meetings with the plaintiff. The parties originally executed one contract for the sale of both parcels, but later restructured the transaction so that there were separate contracts for the sale of each property. (Plaintiff's Exhibits 3, 4 and 5.) This was done, in part, because of the defendants' request to allocate a sufficient portion of the purchase price to 206 Johnnycake Mountain Rd. ("Lot 48") to facilitate the securing of financing for the purchase of that lot. It was also done to assist the plaintiff in her effort to complete the purchase of property in Vermont where she intended to move to. The defendants completed the purchase of Lot 48 on January 31, 2003 at the price of $430,000.00. Due in part to delays in obtaining commercial financing for Lot 48, the parties agreed to have the seller (plaintiff) provide financing for the transfer in the form of a purchase money mortgage in the amount of $350,000.00. At the closing, the defendants executed a note which called for six monthly payments of $2,098.43 followed by a final balloon payment of $349,622.51. The note was secured by a mortgage against the premises which was properly recorded on the Burlington Land Records. On the same date, the defendants also purchased from the plaintiff the adjoining parcel known as 198 Johnnycake Mountain Rd. ("Lot 49"). The financing for that purchase was through a commercial lender. The purchase price was $615,000.00 and consisted of a residential house on approximately six acres of land. By comparison, Lot 48 consisted of approximately eleven acres and had several structures on it including a fourteen-stall barn and both indoor and outdoor riding arenas. The plaintiff had used the property for approximately nine years for the purpose of training and housing horses, giving riding lessons, etc. During her period of ownership of the property building permits were issued by the Town of Burlington between August 1999 and November 2001 for the barn, its addition and the indoor riding arena. The structures were located within 100 feet of the property line between Lots 48 and 49. In issuing the building permits, Charles Kirchofer, the Zoning Enforcement Officer for the Town of Burlington informed the plaintiff that because she owned the adjoining property (Lot 49), he did not consider there to be a violation of the town zoning regulations by constructing the improvements less than 100 feet from the boundary line. He suggested to the plaintiff that she could have a survey done changing the location of the lot line, or combine the properties into one, to address any potential issue that might exist regarding the location of the structures relative to the lot line. Ultimately the plaintiff did have a map prepared altering the adjoining lot line so that the structures were more than 100 feet away, however, the map was never recorded on the land records.
No certificates of occupancy, certificates of use, or special use permits were ever issued for any structures on Lot 48. Through the time of trial, the Town had no record of any complaints of zoning non-compliance ever being lodged relative to the property. Likewise, no notices of violation or any cease and desist orders had ever been issued by the Town regarding the structures on, or the usage of, the property.
Collectively, the two lots were known as "Foxberry Farm" and the plaintiff had made clear to real estate agents and interested parties that it was important to her that the property be sold to someone who would "carry on the business." The defendant Lana Ochs was motivated to purchase the property with her husband to realize a long-held desire to own property that would allow her to raise and train horses. During the course of the trial the property was referred to alternatively as a "working horse farm," "riding stable," or a "riding academy." (The definition of the usage of the property was contested by the parties.) Following the closing, at which both parties were represented by the same counsel, the defendants took occupancy of the two adjoining lots and continued to house and train horses there as before. However, sometime after the closing, a dispute arose between the parties which caused the plaintiff to remove her horses from the property and to discontinue offering any assistance to the defendants in the operation of the horse farm as had been previously agreed.
Nonetheless, the defendants continued to seek commercial financing of Lot 48 for the purpose of paying off the seller financed mortgage. Upon inquiry from the potential lender regarding the zoning of the property, the defendants spoke with Mr. Kirchofer as the Zoning Enforcement Officer of the Town of Burlington and then with a private attorney to inquire about the issue of zoning compliance. Up to that time the defendants had continued to make payment of the monthly installments due under the note. However, prior to the last two monthly payments and the balloon payment coming due, the defendants received advice from the attorney with whom they had consulted that some or all of the structures located on Lot 48 were within 100 feet of the property line adjoining Lot 49 and therefore were in violation of the zoning regulations of the Town both as to setback requirements and the requirements relative to the housing and training of the horses on the property. As a result, the defendants elected to stop making the mortgage payments after the June 2003 payment, and in fact made no further payments due under the note. They advised the plaintiff they ceased making payments because the plaintiff had failed to make them aware or disclose to them, prior to the purchase, that the location of the structures on Lot 48 were within 100 feet of the property line. In November 2003 the defendants ceased using the property relative to the housing and training of horses owned by others because of their belief that the location of the structures to be a violation of the zoning regulations of the Town of Burlington. They did, however, continue thereafter to house their own horses on the property.
Other relevant facts will be recited as necessary.
II. STATEMENT OF LAW
"[A]n action for strict foreclosure is brought by a mortgagee who, holding legal title, seeks . . . to foreclose an equity of redemption unless the mortgagor satisfies the debt on or before his law day." Barclays Bank of New York v. Ivler, 20 Conn.App. 163, 166, 565 A.2d 252, cert. denied, 213 Conn. 809, 568 A.2d 792 (1989). However, in considering such an action it is to be remembered that "[f]oreclosure is peculiarly an equitable action, and the court may entertain such questions as are necessary to be determined in order that complete justice may be done." City of Danbury v. Dana Inv. Corporation/Lot No. GO8065, 249 Conn. 1, 730 A.2d 1128 (1999). Therefore, where the plaintiff's conduct is inequitable, "a trial court in foreclosure proceedings has discretion, on equitable considerations and principles, to withhold foreclosure or to reduce the amount of stated indebtedness." Hamm v. Taylor, 180 Conn. 491, 497, 429 A.2d 946 (1980). Defendants have raised several special defenses to the foreclosure action. Only equitable defenses which address the making and enforcement of the note and mortgage may be considered. "Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction . . . or, if there had never been a valid lien . . . 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 . . . A valid special defense at law to a foreclosure proceeding must be legally sufficient and address the making, validity or enforcement of the mortgage, the note or both . . . [O]ur courts have permitted several equitable defenses to a foreclosure action. [I]f the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had . . . Other equitable defenses that our Supreme Court has recognized in foreclosure actions include unconscionability . . . abandonment of security . . . and usury." (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, CT Page 2988 705-6 (2002).
Defendants have raised in their first special defense a claim of fraudulent misrepresentation on the part of the plaintiff. The essential elements of an action for fraud are: (1) a false representation was made as a statement of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other party to act on it; and (4) that the latter did so act on it to his (or her) detriment. Kilduff v. Adams, Inc., 219 Conn. 314, 329, 593 A.2d 478 (1991); Miller v. Applebee, 183 Conn. 51, 54-55, 438 A.2d 811 (1981). The standard of proof for any claim of fraudulent misrepresentation is that of clear and convincing evidence. Kavaraco v. T.J.E, Inc., 2 Conn.App. 294, 327-8, 478 A.2d 257 (1984). Where the claim of fraud is based on nondisclosure of material information, it must be noted that a mere nondisclosure does not normally amount to fraud. There must be "a failure to disclose known facts and, in addition thereto, a request or an occasion or circumstance which imposes a duty to speak . . . Such a duty is imposed on a party insofar as he voluntarily makes disclosure. A party who assumes to speak must make full and fair disclosure as to the matters about which he assumes to speak." (Citations omitted; internal quotation marks omitted.) Duksa v. Middletown, 173 Conn. 124, 127, 376 A.2d 1099 (1977). See also Egan v. Hudson Nut Products, Inc., 142 Conn. 344, 347, 114 A.2d 213 (1955).
As a second special defense, defendants have alleged that the plaintiff made negligent misrepresentations which induced the defendants to sign the promissory note. For the defendants to establish a defense of negligent misrepresentation, they must prove that the plaintiff (1) made a misrepresentation, and (2) that the defendants relied on that misrepresentation. Savings Bank of Manchester v. Ralion Financial Services, Inc., 91 Conn.App. 386, 390; 881 A.2d 1035 (2005). "Whether evidence supports a claim of . . . negligent misrepresentation is a question of fact." Id., 390. Unlike a claim of fraudulent misrepresentation, the standard of proof for a negligent misrepresentation claim is that of a preponderance of the evidence. Rego v. Connecticut Ins. Placement Facility, 22 Conn.App. 428, 430, 577 A.2d 1105 (1990), rev'd on other grounds, 219 Conn. 339, 593 A.2d 491 (1991).
As a third special defense, the defendants claim that the plaintiff should be equitably estopped from enforcing the note and mortgage because of her misrepresentations to them. Any claim of estoppel is predicated on proof of two essential elements: the party against whom estoppel is claimed must do or say something calculated or intended to induce another party to believe certain facts exist and to act on that belief; and the other party must change its position in reliance on those facts, thereby incurring some injury. Union Carbide Corp. v. City of Danbury, 257 Conn. 865, 778 A.2d 204 (2001). Such a claim is to be judged by the same preponderance of evidence standard applicable to most civil actions.
As to their fourth special defense, the defendants allege that the plaintiff's actions were in violation of the Connecticut Uniform Securities Act ("Act"), General Statutes § 36b-1 et seq. The purpose of the Act is the regulation of securities trading. State v. Andreson, 256 A.2d 313, 773 A.2d 328 (2001). The court notes that the defendants have failed to brief their claim as to this special defense and therefore deem it abandoned. Moreover, the defendants presented no testimony or evidence during the course of the trial on the issue that the plaintiff failed to comply with, or was not exempt from, the provisions of the Act. As a result, the court will not consider this defense.
III. DISCUSSION
As noted above, this is an action for foreclosure of the note and mortgage on Lot 48. The defendant's first three special defenses are intended to address the making, enforcement and validity of the note and mortgage. Defendants allege that the plaintiff represented the property was a "working horse farm" and could be used as such by the defendants. They further allege that the plaintiff failed to disclose to them that the "working horse farm" violated the zoning regulations of the Town of Burlington in that the location of the improvements on the property were well within the 100-foot setback requirements, and, that no certificate of occupancy had been obtained for the improvements. Finally, misrepresentations are claimed as to the income and expense information provided to the defendants regarding the operation of the farm prior to the sale. The defendants argue that they would not have agreed to purchase the property, and thereby enter into a note and mortgage, but for the misrepresentations and omissions of the plaintiff.
While issues of zoning compliance do not generally involve the making, enforcement and validity of a note and mortgage, the defendants' allegations of misrepresentations and omission s by the plaintiff regarding compliance raises a nexus between the (non)actions of the plaintiff and the defendants' decision to go forward with the underlying purchase of the property. That purchase involved the execution of a note and mortgage relative to Lot 48 and therefore there exists a sufficient nexus to the making, enforcement and validity of the note to enable the court to balance the equities in this matter.
Much of defendants' testimony and evidence, as well as their brief, focused on their claims that (1) the location of the improvements on Lot 48 were in violation of a 100-foot setback from the roadway and property lines, and (2) the plaintiff failed to secure certificates of occupancy for the improvements on the property. Although this case does not involve an appeal from a municipal zoning agency ruling, the court must necessarily review the Town of Burlington Zoning Regulations ("Regulations") to determine their relevancy to the claims of the defendants. Specifically, if it is found that the plaintiff was in compliance with the Regulations, then there would be no misrepresentations on her part in this regard. If it is found that the plaintiff was not in compliance, then the court must determine whether any of her misrepresentations or omissions were intentional, negligent, or innocent.
Defendant has alleged in its special defenses that the plaintiff had a "working horse farm." This is consistent with the plaintiff's description of the property and as embodied in the real estate advertisements marketing the property as a "working horse farm." (Defendant's Exhibit I.) Section III.D.2 of the Regulations makes clear that farming is a permitted use in any zone provided that buildings for the purpose of housing livestock "shall be located at least 100 feet from any street or lot line." This restriction is repeated in Section III.D.3 for any building customarily used as part of a farm. The definition of "livestock" is found in the regulations in Section II.C: "Animals (other than dogs and cats) kept for use or profit." Such a definition encompasses horses. Moreover, Section IV.A.2.b of the Regulations allows farms and fanning as a permitted principal use in a residential zone. Under Section IV.A.3.f, in a residential zone accessory uses or buildings for the keeping of livestock for the exclusive use of the occupants is allowed provided that no such structure may be located within 100 feet from any street or lot line.
The Burlington Zoning Regulations were amended effective January 1, 2002. The references herein to the regulations are to the amended regulations unless otherwise noted. In general, there are no significant substantive changes to the regulations relevant to this matter. Section III.D.2: FARMING USES OR BUILDINGS. Farming provided that buildings for the purpose of growing plants, housing livestock, or housing more than 20 poultry shall be located at least 100 feet from any street or lot line. Its predecessor, Section 4-01.1 also called for any buildings on a farm to be no less than 100 feet back from any street or lot line.
Section III.D.3: FARM ACCESSORY USES OR BUILDINGS. For Farms in any Zone, the following uses will be considered as accessory uses: a. All buildings which are customarily a part of the farm use such as barns, sheds, silos, greenhouses, stables, chicken houses garages for motor vehicle and farm machinery provided that any buildings used for the housing of any livestock or any poultry in excess of twenty birds shall be located at least 100 feet or the measure provided in the Public Health Code whichever is greater, from any street line, lot line, water supply or swimming pool. b. Warehouses, processing plants refrigeration plants and other secondary uses frequently a part of the primary agricultural use; and c. Roadside stands. Its predecessor under the prior regulations was substantially the same.
Section IV.A.2.b: PERMITTED PRINCIPAL USES. The following uses, or additions thereto, are permitted:
. . . b. Farms and farming.
The evidence presented through both parties, the witnesses, and exhibits (e.g., Defendant's D-1, D-2, D-3, D-4) all confirmed that the structures on Lot 48 for the housing of the horses on the farm operated by the plaintiff were within 100 feet of the lot line dividing Lots 48 and 49. As noted previously, the structures included a barn (with an addition) and an indoor riding ring. Mr. Kirchofer, the Zoning Enforcement Officer, testified that no certificate of occupancy was required for those structures. However, Section X.B.4.a of the Regulations provide in part that: "[n]o building or structure or any addition or alteration thereto . . . shall be occupied or used, in whole or in part, for any purpose until a Certificate of Occupancy shall have been issued by the Building Official." The significance of this provision is that under Section X.B.4 no Certificate of Occupancy could be issued unless a Certificate of Zoning Compliance has been issued. The effect of these provisions in light of the testimony and evidence presented by the parties is that location of the structures on Lot 48 appears to be in violation of the Regulations.
In that, as noted previously, this matter is not an appeal from a municipal zoning agency, any finding by this court that the location of the structures constitute noncompliance with the zoning regulations is limited to this proceeding only and may not be used as a judicial finding before any administrative agency empowered to consider issues of compliance with its own regulations.
Having found that the plaintiff was not in compliance with the Regulations at the time of the transfer of the property, the court must now turn to the issues raised in the first three special defenses of the defendants. They will be addressed independently and in order.
A. FRAUDULENT MISREPRESENTATION
Defendants contend that the plaintiff made several intentional misrepresentations to induce them to go forward with the purchase of Lot 48 thereby necessitating the execution of the note and mortgage to complete the transaction. In part, they point specifically to title insurance documents completed by the plaintiff at the real estate closing on Lot 48. The "Owner's Special Title and Survey Report" issued by the Connecticut Attorneys Title Insurance Company asks the seller of the property to make various representations regarding the property. Specifically, question 7 on the form asked: "Do you know or have reason to believe that any building or other structure on your Property (including patios, porches, stoops, etc.) extends over any public or private building or set back line or that your Property is not in conformance with applicable zoning or other land use laws (such as inland wetlands and coastal management designations)?" To this question the plaintiff answered "no." Also, the plaintiff executed under oath the "Owner's Affidavit" form which stated: "(F) PERMITS: I/we have no knowledge of the construction of any building or addition on this property that was performed without obtaining a building permit and, if applicable, a certificate of occupancy." (Defendant's Exhibit H.) These documents were executed for the purpose of having the title insurance company issue an owner's title insurance policy to the defendants relative to Lot 48. The documents were submitted to the attorney at the closing as an agent for the title insurance company. Both documents specifically referenced that they would be relied upon by the company in issuing the policy.
As to the Owners Affidavit: "I/we understand that CONNECTICUT ATTORNEYS TITLE INSURANCE COMPANY will rely upon the truth of the statements made in this affidavit when it issues its policy or policies of title insurance insuring the title to this property and that I/we may be liable for damages for misrepresentations made in completing this form." As to the Special Title and Survey Report: "I/we have completed this Special Title and Survey Report with the knowledge and understanding that the information that has been given herein will be relied upon by Connecticut Attorneys Title Insurance Company in issuing its title insurance policy without taking an exception in the policy for such state of facts as an accurate survey and a reasonable inspection of the premises would reveal. The answers to the above questions are true to the best knowledge and information of the undersigned."
A review of these documents makes clear that the representations contained therein were for the benefit of the title insurance company and not directed to the defendants. Such representations, directed to a third party, may have been relevant to the question of whether or not an owner's title insurance policy should be issued, but they are not directly related to the making, enforcement and validity of the note and mortgage. The issuance of an owner's policy was not a condition of the plaintiff (as lender) for the granting of a mortgage and there is no evidence that a mortgagee title insurance policy was ever required by the plaintiff. It is also noteworthy that the purchase contract between the parties placed no obligation on the seller (plaintiff) to provide an owner's affidavit or title report to the purchaser (defendants) at the time of closing. Further, no evidence was presented to establish that these forms were reviewed by the attorney with the defendants at the time of closing. It cannot be said the defendants were induced to act to their detriment through the representations in these documents as they were not directed to them.
Moreover, in determining whether a fraudulent misrepresentation was made by the plaintiff, the discussions between the plaintiff and the Town's Zoning Enforcement Officer, are highly relevant. Mr. Kirchofer credibly testified that as to the three structures on Lot 48, he had been on the premises several times at different stages of construction and building permits had been issued as to all three even though it was learned and known that one or more of the structures were within 100 feet of the adjoining property line of Lot 49. He told the plaintiff that the location of the structures within 100 feet of the lot line did not pose a problem because of her ownership of the adjoining property. Through his testimony, it is clear he lead the plaintiff to believe that her common ownership of the two parcels obviated the need for compliance with the set back requirements. Consistent with this is his testimony that even though the structures were within the 100-foot set back, no cease and desist order was ever issued because she owned the adjoining property. He further specifically testified that a certificate of occupancy was not needed as to the barn on the premises, and that the 100-foot set back would not apply to the accessory building (riding arena) because horses were not housed there. At no time, despite his personal knowledge of the physical premises and its usage, did he indicate to the plaintiff that she was in violation of any of the Regulations. Neither he, nor any other town official, ever stated to her that she could not use the premises for the housing and breeding of horses or to continue the use of the property as a horse farm. No complaints regarding the usage of the property or the location of the structures were ever received by the Town.
Despite this, he did advise the plaintiff that she should consider moving the lot line so that the structures were outside of the 100-foot set back. The testimony of the plaintiff made clear the purpose of this suggestion was to address a potential zoning issue where she might sell the two adjoining parcels to different individuals rather than one common owner. To this end plaintiff did prepare a map altering the property line between Lots 48 and 49 to place the structures on Lot 48 beyond the 100-foot set back line. (Plaintiff's Exhibit 2.) However, the map was never recorded or the lot line change otherwise effectuated because the proposed transaction with the defendants called for them to acquire title to both parcels and to continue using the property as it had been in the past thereby retaining the status quo (as to zoning). Based on both the statements and actions of the Zoning Enforcement Officer, plaintiff could understandably presume that not only was she was not in violation of the Regulations so long as she sold both parcels to the same person(s), but that the buyer(s) acquiring the parcels also would not be in violation. While the defendants at trial took issue with the accuracy of the Zoning Enforcement Officer's interpretation of the Regulations, it does not alter the fact that the plaintiff relied on his statements and acted upon them accordingly.
The defendants point to the failure of the plaintiff to disclose to them the existence of this map as another example of the fraudulent misrepresentation foisted upon them by the plaintiff to induce the execution of the note and mortgage. The court finds that the plaintiff failed to disclose this map to the defendants whether it be at or prior to the closing. Defendants' counsel testified that he did not recall any discussion at the closing regarding violation of set back lines, or, of property lines being changed. He further stated that had he known of any such issues the closing would not have gone forward. Certainly had the map been presented, it is likely that questions would have been raised regarding the purpose of the map and the underlying issue regarding the location of the structures within 100 feet of the adjoining property line.
Atty. Richard Witt was originally retained by the defendants to represent them at the closing shortly before it took place. A signed agreement was entered into (but not placed into evidence) that allowed Atty. Witt to also represent the plaintiff. Atty. Witt was unavailable for the closing and therefore Atty. Theodore Poulos stood in for Atty. Witt. He further testified that had he known of any issue regarding the violation of zoning regulations, or had seen the map, he may not have proceeded with the closing. Unclear from this statement though is whose interests Atty. Poulos was advancing in that he was representing both parties. The parties clearly had divergent interests.
As noted above, the essential elements of an action for fraud are: (1) a false representation was made as a statement of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other party to act on it; and (4) that the latter did so act on it to his (or her) detriment. Kilduff v. Adams, Inc., supra, 219 Conn. 329; Miller v. Applebee, supra, 183 Conn. 54-55. Here, as to the Owner's Affidavit and the Owner's Special Title and Survey Report, the representations of the plaintiff were based on her good faith belief that the information provided to her by the Zoning Enforcement Officer was accurate. Specifically as to the Owner's Affidavit, her representation that building permits had been issued was factually accurate. A permit was issued for each of the three structures on Lot 48. The representation that no building or addition was put up without obtaining a certificate of occupancy (if applicable) cannot be said to have been fraudulent as the Zoning Enforcement Officer testified that he did not believe a certificate of occupancy was needed for the structures. There was no credible evidence presented that the plaintiff herself held the knowledge or opinion that a certificate of occupancy was needed for the structures. It therefore cannot be said that the plaintiff made a false representation known by her to be untrue. Further, the statement was given at the request of, and for the purpose of, inducing the title insurance company to act upon it, not the defendants. Similarly, the plaintiff's response to question 7 on the Owner's Special Title and Survey Report relied upon the information provided by the Zoning Enforcement Officer which led the plaintiff to the good faith belief that she was not in violation of any regulations.
The nondisclosure of the map showing the proposed boundary line change also fails to rise to the level of a false misrepresentation as the nondisclosure was not an affirmative attempt by the plaintiff to induce the defendants to act to their detriment.
With regard to these claims, the defendants have failed to meet the high standard of clear and convincing evidence required to establish a claim of fraudulent misrepresentation. Kavaraco v. T.J.E, Inc., supra, 2 Conn.App. 327-8.
Defendants also claim that they purchased Lot 48 in reliance on income and expense projections provided by the plaintiff and that these projections were misrepresented due to the failure of the horse farm to comply with the Regulations. Plaintiff had provided to defendants a document described as a "boarding agreement" and a written statement entitled "Farm Potential Income." (Plaintiff's Exhibits 7 and 8, respectively.) Both documents reference a monthly rental rate of $500.00 per horse for boarding and care, a figure which the plaintiff also testified to. Defendants were also advised by the realtor of the monthly rent rate of $500.00. The projected income was based on full occupancy. At the time of the closing approximately 10-11 of the 14 stalls were occupied. The plaintiff had operated the horse farm continuously and without interruption, or any threat thereof, up through the date of closing. Following the closing on January 31, 2003, the defendants continued to use the property to operate the horse farm until November 2003 at which time they ceased housing any horses other than their own.
As to defendants' claim of fraudulent misrepresentation relative to the financial information (or lack thereof) provided by the plaintiff, there was no evidence to indicate that the financial figures as to both income and expenses provided by the plaintiff were inaccurate or untrue. As previously described, plaintiff had a good faith belief that there was no zoning issue to prevent the operation of the horse farm as long as Lots 48 and 49 were sold to a common owner. The decision to execute the note and mortgage based on the financial information provided as of the date of the closing was due more to a lack of due diligence on the part of the defendants as opposed to any intentional misrepresentation on the part of the plaintiff.
Under our law, the principle of caveat emptor would not save a seller from a fraudulent misrepresentation in connection with a contract for the sale of land, a business, or the execution of a lease. The remedies available to a defrauded purchaser would not be lost simply ". . . because the buyer failed to make an independent investigation which would have revealed that the representation upon which he relied was false." Kavarco v. T.J.E., Inc., supra, 2 Conn.App. 301. In the instant case however, there was no intent to defraud and therefore no false representation.
As to the overall claim of fraudulent misrepresentation, it is noted that the defendants continued to operate the horse farm for a period of ten months following the closing at which time they unilaterally ceased its operation other than to house their own horses. They did so upon the advice of their counsel on the assumption that there was a zoning violation. There was no evidence presented that the defendants were prevented from continuing to operate the horse farm by any action other than their own. Defendants cite at length Morgera v. Chaippardi, Superior Court, judicial district of Stamford-Norwalk at Norwalk, Docket No. CV 99 0172388 (October 28, 2003, D'Andrea, J.T.R.), aff'd, 87 Conn.App. 903, 864 A.2d 885 (2005), for the proposition that where zoning violations have not been disclosed to a purchaser on an underlying real estate transaction, the remedy of foreclosure may be withheld. However, Morgera is distinguishable from the present case in that the seller was fully aware of multiple notices of zoning violations that had been issued in writing by the municipality dating back to 1994 up to shortly before the sale of the property. One of the letters in that case was even issued to the realtor marketing the property and specifically advised her to disclose to any potential purchasers that there existed zoning violations and that anyone acquiring the property might be subject to legal action and fines. Id., 2 and n. 5. In the instant case, not only were there no notices of zoning violations, cease and desist orders, or other municipal action taken to prevent the operation of the horse farm, the plaintiff was led to believe by the municipal official with the authority over enforcement of the Regulations that she could continue to do so so long as she did not sell the two lots to separate owners.
Defendants have failed to establish by clear and convincing evidence that the plaintiff intentionally withheld material information or made fraudulent misrepresentations that ultimately induced them to execute the note and mortgage for the purchase of Lot 48.
B. NEGLIGENT MISREPRESENTATION
Clearly the plaintiff, prior to and up through the time of sale of Lot 48, represented to the defendants that they could operate a working horse farm on the premises. As noted above, it has been found by the court that such representations were made in good faith. The issue between the parties regarding the zoning status of the property did not become a cause of concern until well after the sale had been completed. In order to address the special defense of negligent misrepresentation, the following additional facts, as well as the facts found above, are relevant. First, the court finds that the plaintiff did orally disclose to the defendants prior to the closing that there was an issue with the structures on Lot 48 being too close to the lot line. Second, that this was not a concern for either party prior to and at closing because of the information provided to the plaintiff (and actions taken) by the Zoning Enforcement Officer which led the plaintiff to her good faith belief there was no impediment to the operation of a horse farm and to so represent to the defendants. Third, that the plaintiff failed to adequately disclose to the defendants the complete extent and nature of her conversations and interaction with the Zoning Enforcement Officer regarding the location of the structures relative to the lot line and the usage of the property.
It is more likely than not that such information would have been reasonably relied upon by the defendants in electing whether or not to execute the note and mortgage for the premises. Put another way, the defendants were induced to execute the note and mortgage through plaintiff's failure to disclose the potential zoning problem in the underlying real estate transaction. Although the issue had not ripened into formal action by the Town, the plaintiff having spoken about the issue, should have fully disclosed to any subsequent purchaser of the property, even a common owner of both lots, the extent of the discussions between herself and the Zoning Enforcement Officer regarding the structures being within the 100-foot set back line and the usage of the property.
The present case is analogous to Foley v. Huntington Co., 42 Conn.App. 712, 682 A.2d 1026, cert. denied, 239 Conn. 931, 683 A.2d 397 (1996) wherein the seller of property made an innocent misrepresentation to the buyer that the number of acres being sold was sufficient to allow the operation of a nursing home. Subsequent to the sale it was found that the number of acres the nursing home would occupy would be in violation of the town's zoning regulations. Although the misrepresentation was innocent and therefore not fraudulent, it was sufficient to uphold a finding of negligent misrepresentation. Although the plaintiff in the instant case did not deliberately mislead the defendants, her discussions with the Zoning Enforcement Officer relative to the location of the structures on Lot 48 as well as the suggestion of moving the lot line certainly raised enough "red flags" regarding possible zoning violations to justify full disclosure of those conversations and issues with any potential buyer. Therefore, her mentioning to the defendants that the structures on the property were too close to the lot line should have included the full substance of her discussions with the Zoning Enforcement Officer. Liability can be placed on an individual where there has been "a failure to disclose known facts and, in addition thereto, a request or an occasion or a circumstance which imposes a duty to speak . . . Such a duty is imposed on a party insofar as he voluntarily makes disclosure. A party who assumes to speak must make full and fair disclosure as to the matters about which he assumes to speak." (Citations omitted; internal quotation marks omitted.) Duksa v. Middletown, supra, 173 Conn. 127; Dockter v. Slowik, 91 Conn.App. 448, 881 A.2d 479, cert. denied, 276 Conn. 919 (2005).
While both the Duksa and Dockter courts found that a fraudulent misrepresentation had been made, the circumstances in the instant case support only a finding of negligent misrepresentation, However, the principle behind full and fair disclosure remains the same whether the misrepresentation or nondisclosure is fraudulent or negligent.
It is noteworthy that our courts have even addressed situations involving innocent misrepresentations as opposed to negligent misrepresentations. "[E]ven an innocent misrepresentation of fact may be actionable if the declarant has the means of knowing, ought to know or has the duty of knowing the truth . . ." (Internal quotation marks omitted.) Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 575, 657 A.2d 212 (1995). "A person is subject to liability for an innocent misrepresentation if in a sale, rental or exchange transaction with another, [he or she] makes a representation of a material fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it . . . even though it is not made fraudulently or negligently." (Internal quotation marks omitted.) Gibson v. Capano, 241 Conn. 725, 730, 699 A.2d 68 (1997).
Unlike fraudulent misrepresentation, the standard of proof for a claim of negligent misrepresentation is a preponderance of the evidence. Rego v. Connecticut Ins. Placement Facility, supra, 22 Conn.App. 430. The court finds that the plaintiff failed to disclose to the defendants the full extent of her discussions with the Zoning Enforcement Officer. Although there was no intent to deceive the defendants, in so doing her limited statements to the defendants constitute a negligent misrepresentation on her part. "A claim for negligent misrepresentation may be based on a defendant's failure to speak when he has a duty to do so." (Citations omitted.) Gershbeg v. Kean, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 99 0174316 (June 10, 2002, D'Andrea, J.T.R.) ( 32 Conn. L. Rptr. 305). The plaintiff made a misrepresentation and the defendants reasonably relied on it. Savings Bank of Manchester v. Ralion Financial Services, Inc., supra, 91 Conn.App. 390; Johnson v. Healy, 176 Conn. 97, 100, 405 A.2d 54 (1978).
In that case, the plaintiff had alleged a "negligent nondisclosure" as the basis of one of its counts against the defendants. In addressing a summary judgment motion, the court clarified that "the plaintiff's fifth count regarding negligent nondisclosure amounts to a negligent misrepresentation claim based on the defendant's failure to speak." Gershberg v. Kean, supra. The nondisclosure in the instant matter is treated similarly to that in Gershberg and is therefore considered a negligetn misrepresentation claim.
Plaintiff's conduct was much like a 1970s Cleveland Indians roster and performance: not intentionally bad, but it nonetheless should have been better. The defendants were induced by the limited oral statements of the plaintiff to proceed with the underlying real estate transaction which led to the execution of the note and mortgage for Lot 48. Whether the representations are characterized as negligent or innocent, the defendants have established by a preponderance of the evidence the elements of this special defense.
C. EQUITABLE ESTOPPEL
Defendants' third special defense alleges that based on plaintiff's conduct, the principles of equitable estoppel should bar her from foreclosing the mortgage against the property. The standard referenced in Union Carbide Corp., supra, was expounded upon again relatively recently by the Appellate Court. In order to engage the doctrine of equitable estoppel, "a party must do or say something which is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief; and the other party, influenced thereby, must actually change his position or do something to his injury which he would otherwise not have done. Estoppel rests on the misleading conduct of one party to the prejudice of the other." (Internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, LLC, 69 Conn.App. 824, 838, 798 A.2d 445 (2002); Morgera v. Chiappardi, supra.
From the language of these pronouncements it is clear that the invocation of equitable estoppel is based upon a party's intentional or calculated statement, or, their misleading conduct. As discussed in Section IIIA above, the plaintiff was not found to have made any intentional misrepresentations to the defendants. Given that her only liability is based upon negligent misrepresentations, the court cannot say from the evidence before it that the plaintiff had intended or calculated to mislead the defendants.
Defendants have failed to establish by a preponderance of the evidence that the facts of this case justify the withholding of foreclosure on equitable principles. Even if one were to read Union Carbide Corp. and LaSalle National Bank as not requiring an element of intent, the court finds that equitable estoppel would remain an inappropriate remedy in this matter.
IV. DAMAGES/REMEDIES
The defendants, having proven their second special defense, have requested that foreclosure be withheld and that the remedy of rescission be granted relative to the note and mortgage. The Court declines to do so. Rather, to achieve a more equitable remedy under the factual setting of this case, the Court will exercise its discretion to address the issue of whether the amount of the stated indebtedness should be reduced. Hamm v. Taylor, supra, 180 Conn. 497 (1980).
The plaintiff has presented the Court with an affidavit claiming a mortgage debt of $411,383.86 through August 29, 2005 with a per diem of $57.30. (Plaintiff's Exhibit 13.) The mortgage amount was $350,000.00 which was the amount of the original proposed purchase price. (Plaintiff's Exhibits 10 and 4, respectively.) Subsequent to the execution of the contract of sale, the parties amended the contract to modify the purchase price to $430,000.00. (Plaintiff's Exhibit 6.) In her affidavit the plaintiff has indicated the debt is allocated as follows: principal of $348,595.80, interest of $45,097.09 and late fees of $17,690.97 for a total of $411,383.86. Attorneys fees of $27,985.00 through the date of the affidavit are also claimed. The debt reflects the four monthly payments of $2,098.43 made by the defendants. The promissory note calls for interest at a rate of six percent (6%) and a late fee of five percent (5%) as to any monthly charges not paid after ten (10) calendar days. (Plaintiff's Exhibit 9.) Defendants do not appear to dispute the amount claimed as to principal and interest but do challenge the late fee assessment.
As previously discussed, the parties had agreed for their mutual benefit to allocate this figure to Lot 48 relative to the overall cost of purchasing both lots. In doing so, the plaintiff benefitted by having funds made available for the purchase of other property in Vermont and the defendants benefitted by making the property more attractive to potential lenders for purposes of obtaining commercial financing following the closing.
The amount of the late fees as calculated by the plaintiff includes a five percent (5%) charge on the two missed monthly payments and the balloon payment of $349,622.54. (Plaintiff's Exhibit 13 and Defendant's Post-Trial Brief, p. 6.) The total late charges relative to the two monthly payments would be $209.84. The late charge for the balloon payment would be $17,481.12. The promissory note specifically calls for the late fees to be charged to monthly payments. The obligation for payment as stated in the note is for " equal monthly installments of $2,098.43 commencing March 1, 2003, and on the 1st day of each month thereafter for six (6) equal installments with the remaining balance to become due and payable on the seventh (7th) payment (balloon payment) as more fully described in an amortization schedule attached hereto and incorporated as Schedule A." (Italics added; Plaintiff's Exhibit 9.) By the plain terms of its language, the note does not consider the balloon payment to be a monthly installment. Such a fee, if allowed, would constitute an unenforceable penalty in that it is both exorbitant, and, disproportionate to any damage suffered by the plaintiff. "It is well settled that a contract provision which imposes a penalty for a breach of the contract is contrary to public policy and is invalid, but a contractual provision which fixes liquidated damages for a breach of the contract is enforceable if it satisfies certain conditions." Norwalk Door Closer Co. v. Eagle Lock Screw Co., 153 Conn. 681, 686, 220 A.2d 263 (1966). In Velenchik v. First Union National Bank, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 00 0372515 (May 7, 2003, Wolven, J.) ( 34 Conn. L. Rptr. 576), the court found a four percent (4%) late fee on a balloon payment unenforceable particularly in light of the addition of a default interest rate being charged against the balance due. Although no default interest rate provision is part of the note in the instant matter, the court nonetheless finds the late fee unenforceable both on a contractual analysis and on a public policy basis. Id. As a result, the late fee charge is not applicable to the balloon payment and is disallowed.
Prior to addressing the issue of the valuation of the property, the court notes that compliance with the set back regulations could likely be resolved by altering the property line between Lots 48 and 49. If done, the value of both Lots 48 and 49 would be enhanced thereby minimizing and/or negating any effect of the plaintiff's negligent misrepresentation. However, the defendants would need the consent of the holder of the mortgage encumbering Lot 49 in order to effectuate such a change. Even if the consent were obtained, it would alter the valuation of Lot 49 although that lot is not involved in this action. Although moving the lot line is a possible way to address the issue between the parties, such remedy cannot be ordered by this Court as part of the foreclosure action on Lot 48.
A second way of possibly resolving the issue between the parties would be to merge the lots into one thereby eliminating any set back issues. As noted in the appraisal, this would positively impact the valuation of the properties as a whole, in fact increasing the value beyond the sum of their parts. However, this remedy can only be effectuated through the defendant's own actions and cannot be done by the Court.
The court turns now to the valuation of the property. Plaintiff offered evidence both through a written appraisal and the oral testimony of the appraiser that the value of Lot 48 was $230,000.00. Defendants, as owners of the property, offered lay testimony that the property's value was approximately $150,000.00. The court finds the more credible testimony with respect to valuation to be that offered by the plaintiff and therefore finds the property to be valued at $230,000.00. The appraisal notes that the highest and best use of the property (Lot 48) would be as a single residential lot. However, if combined with Lot 49 the value of the property as a whole would be substantially increased and greater than the sum of its parts. (Plaintiff's Exhibit 1, pp. 16, 17.) It further notes that the barn and riding arena are within the 100-foot set back, but that "[t]his 100-foot setback requirement is not an issue if the subject 11.2 acre lot is combined with the adjacent 6±-acre parcel (198 Johnnycake Mountain Rd)." (Plaintiff's Exhibit 1, referencing December 16, 2004 letter to Linda Michalek.) The property was found to be conducive to a horse farm or residential usage. (Plaintiff's Exhibit 1, pp. 3, 5.)
From the information presented in the appraisal it appears the barn can be used for other purposes (e.g., garage/storage) even if the property is considered as a residential lot, provided it is outside the 100-foot set back. This would necessitate the movement of the existing barn or construction of a new barn. The value of the barn is placed at $55,000.00 for uses other than as a stable, and at $73,000.00 for continued use as a stable. The estimated replacement cost of the barn is $81,130.00. The riding arena does not have any alternate use available to it on a residential lot. The estimated cost of removing the riding arena from the premises is $15,000.00. (Plaintiff's Exhibit 1, pp. 14-15.) Given these figures, the court believes that under the circumstances of this case, it would be equitable to allow to the defendants a reduction in the mortgage debt in the amount of $96,130.00. This would consist of the cost of the removal of the riding arena and the replacement cost of the barn. While site preparation costs would also be involved in the reconstruction of the barn at a site outside the 100-foot set back, the court has exercised its discretion not to reduce the mortgage debt beyond those amounts already allowed.
It is noteworthy that during the course of this dispute the defendants unilaterally elected to cease using the property for its intended purpose. Although they did so on the advice of counsel, there was insufficient evidence presented to the court to support their argument that they were prohibited from continuing to use the property as a horse farm. The evidence did show the following: that the plaintiff had consistently used the property for that purpose for a number of years, there were no complaints received by the Town of Burlington regarding the location of the buildings or their usage, no notices of zoning violations or any cease and desist orders had ever been issued or contemplated by the Town; and, that the location of the buildings and usage of the property as a horse farm was with the knowledge and implied consent of the Town's Zoning Enforcement Officer. Further, there was no documentary evidence provided that the defendants' attempt(s) to refinance the property were rejected by a lender for failure to provide evidence of zoning compliance. The defendants testified that through their own choice they did not use the property to house other horses (for income purposes) from November 2003 up through the time of trial. In light of this the court believes, under the principles of equity, that any further reduction in the amount of the indebtedness would be inappropriate in this action.
The Court takes judicial notice of the matter of Ochs v. Michalek where the defendants herein have brought an action against the plaintiff herein for damages stemming from the factual scenario of this case. See Ochs v. Michalek, judicial district of New Britian, Docket No. CV 04 0524853. The defendants herein attempted to file in the instant action a counterclaim for damages including loss of income. That request to file a counterclaim was rejected by the Court in part on the reasoning that the losses claimed were not the nature of those to be considered in a foreclosure action, but rather were best addressed in the action filed by the Ochs.
The following is a summary of the amounts due and reductions allowed as referenced above:
Mortgage debt claimed due (as of August 28, 2005): $411,383.86
Less reductions/adjustments: $113,611.12
1. unenforceable late fee on balloon payment: $17,481.12
2. cost of removal of riding arena: $15,000.00
3. replacement cost of barn: $81,130.00
TOTAL DUE: $297,772.74
Further, a per diem of $57.30 continues to accrue on the balance due. Although attorneys fees were claimed separately in the plaintiff's affidavit, the reasonableness of such fees (including any fees claimed related to trial and post-trial matters) shall be the subject of a further hearing by the court at which time it will also accept evidence as to costs incurred by the plaintiff customary to a foreclosure action. Any other orders necessary to a foreclosure, whether it be strict or by sale, shall be issued at or following that hearing.
Shortly before trial, and then again at trial, the plaintiff requested that a prejudgment attachment be ordered by the court for the purpose of securing any potential judgment/deficiency. The request for such an order is denied.
IV. CONCLUSION
Judgment shall enter for the plaintiff relative to the First, Third and Fourth Special Defenses raised by the defendants. Judgment shall enter in favor of the defendant relative to the Second Special Defense and a reduction in the mortgage debt as outlined above is ordered.
Further proceedings are ordered relative to the issue of plaintiff's attorneys fees, customary costs relative to a foreclosure action, and any other orders incidental to the action. So ordered.