Opinion
HHDCV075007994S
12-13-2018
LPP MORTGAGE, INC. v. UNDERWOOD TOWERS LIMITED PARTNERSHIP et al.
UNPUBLISHED OPINION
OPINION
Carl J. Schuman, Superior Court Judge.
In this commercial foreclosure case, plaintiff LPP Mortgage, Inc., the mortgagee, moves for partial summary judgment on the first count of the original complaint (complaint), which was filed on December 22, 2006, and for summary judgment on the first, second, fourth, fifth, sixth, ninth, and tenth special defenses. Defendants Underwood Towers Limited Partnership (Underwood), the mortgagor, and CDC Management Company (CDC) (collectively, the defendants) move for summary judgment on counts two through ten of the complaint as well as a ruling in limine excluding certain portions of the plaintiff’s evidence.
The parties filed these motions on September 28, 2018. On October 15, 2018, the court granted leave to the plaintiff to file a First Amended Complaint (Dkt. # s 587.00, 589.86.) On October 16, 2018, the plaintiff filed a Second Amended Complaint without objection. (Dkt. # 610.00.) On November 29, 2018, the plaintiff filed a revised second amended complaint in response to the court’s ruling on the objections to the defendants’ request to revise. (Dkt. # 647.00.) These subsequent complaints are similar, though not identical, to the original complaint. Thus, although the present summary judgment motions technically focus on the original, and now superseded, complaint, the court’s ruling on these motions should readily apply to whatever complaint becomes the operative one for trial. To the extent that the operative complaint raises any new issues that this ruling does not address, the defendants can raise them at trial.
I
This case has a long and tortuous history. The court will only summarize it here. The undisputed facts begin in 1985 with the formation of Underwood as the owner of and landlord for a 451-unit residential apartment complex in Hartford (the Project). The funding for the construction of the Project came from a $35 million first mortgage loan given to Underwood by Connecticut National Bank. The mortgage was insured by the United States Department of Housing and Urban Development (HUD). To obtain the mortgage insurance, Underwood entered into a Regulatory Agreement with HUD (Regulatory Agreement) that governed the management of the Project and its revenue.
The Project is also apparently known as Park Place Towers.
In 1990, following a payment default, Underwood executed a second mortgage and a second mortgage note, known as Note A, in favor of HUD. Underwood defaulted again in 1996 and executed an additional mortgage note with HUD, known as Note B, and agreed to modifications to the second mortgage. The combined original principal amount of the two promissory notes exceeded $30 million.
HUD sold the second mortgage to PAMI MidAtlantic, LLC in 2002, which assigned it back to HUD in 2005. In the 2002 assignment, HUD filed a lost note affidavit with respect to Note B. HUD sold the mortgage to Beal Bank (Beal) in 2005. The sale was documented by, among other papers, a Loan Sale Agreement. The plaintiff acquired the second mortgage in January 2006 from Beal.
The plaintiff declared a default on Note B in March 2006. In May 2006, Underwood filed suit against Beal and the plaintiff seeking a declaration of the rights of the parties in the first count and liability and damages in two additional counts. See Underwood Towers, Ltd. v. Beal Bank, Docket No. HHD-CV06-5004189S. That case remains informally stayed pending the outcome of the present case.
The plaintiff filed the present action for foreclosure and damages in 2007. The parties tried the case to the court, Miller, J., beginning in February 2009. Testimony proceeded intermittently and did not end until January 2011. There were then extensive briefs and delays that postponed full submission of the case until January 2017. Unfortunately, Judge Miller then sought numerous extensions of the 120-day decisional period. By June 1, 2018, the defendants declined to consent to further extensions and instead moved for a mistrial. On July 25, 2018, the court, Pittman, J.T.R., granted the motion for a mistrial.
A retrial of the case will start in January 2019. In the meantime, both parties have filed motions for partial summary judgment and/or rulings in limine. The plaintiff claimed at oral argument that the value of the property at the previous trial was approximately $28 million and that the current total indebtedness on Note A was approximately $70 million and on Note B was approximately $30 million. Because Note B is senior in priority to Note A, this case, in the first instance, addresses issues involving Note B.
II
The court applies the accepted standards governing summary judgment motions. "Practice Book § [17-49] requires that judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. A material fact is a fact that will make a difference in the result of the case ... The facts at issue are those alleged in the pleadings ...
"In seeking summary judgment, it is the movant who has the burden of showing the nonexistence of any issue of fact. The courts are in entire agreement that the moving party for summary judgment has the burden of showing the absence of any genuine issue as to all the material facts, which, under applicable principles of substantive law, entitle him to a judgment as a matter of law. The courts hold the movant to a strict standard. To satisfy his burden the movant must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact ... As the burden of proof is on the movant, the evidence must be viewed in the light most favorable to the opponent ...
"The party opposing a motion for summary judgment must present evidence that demonstrates the existence of some disputed factual issue ... The movant has the burden of showing the nonexistence of such issues but the evidence thus presented, if otherwise sufficient, is not rebutted by the bald statement that an issue of fact does exist ... To oppose a motion for summary judgment successfully, the nonmovant must recite specific facts ... which contradict those stated in the movant’s affidavits and documents ... The opposing party to a motion for summary judgment must substantiate its adverse claim by showing that there is a genuine issue of material fact together with the evidence disclosing the existence of such an issue ... The existence of the genuine issue of material fact must be demonstrated by counteraffidavits and concrete evidence ..." (Citations omitted; internal quotation marks omitted.) Morrissey-Manter v. Saint Francis Hospital & Medical Center, 166 Conn.App. 510, 517-18, 142 A.3d 363, cert. denied, 323 Conn. 924, 149 A.3d 962 (2016).
THE PLAINTIFF’S SUMMARY JUDGMENT MOTION
I
The plaintiff’s motion for summary judgment (Dkt. # 602.00) first requests "partial summary judgment with respect to the First Count of its Complaint ...", a count that seeks foreclosure of the mortgage. The court denies this portion of the motion for two reasons. The first reason is that it is not properly briefed. Although the introduction to the plaintiff’s memorandum in support of its summary judgment motion does state that the plaintiff moves for "partial summary judgment on Count I," in the argument portion of its brief the plaintiff states that it seeks: "(i) a determination that it is the owner of the loans and the mortgage under the Second Mortgage; (ii) a determination that Underwood is in default under the subject loan documents; and (iii) a judgment in favor of LPP on Defendants’ First, Second, Fourth, Fifth, Sixth, Ninth, and Tenth Special Defenses." (Memorandum in Support of Plaintiff’s Partial Motion for Summary Judgment (Dkt. # 603.00) (Pl. Mem.) pp. 1, 11).) (See also Pl. Mem., p. 15: "LPP seeks a determination that Underwood is in default under the loan documents based on three categories of default ...") The conclusion similarly seeks these "determinations" without requesting any sort of partial summary judgment on the first count. (Pl. Mem., p. 35.) The plaintiff’s principal brief also fails to quote or cite the standard for granting summary judgment on liability in a foreclosure case.
See GMAC Mortgage, LLC v. Ford, 144 Conn.App. 165, 176, 73 A.3d 742 (2013) ("In order to establish a prima facie case in a mortgage foreclosure action, the plaintiff must prove by a preponderance of the evidence that it is the owner of the note and mortgage, that the defendant mortgagor has defaulted on the note and that any conditions precedent to foreclosure, as established by the note and mortgage, have been satisfied ... Thus, a court may properly grant summary judgment as to liability in a foreclosure action if the complaint and supporting affidavits establish an undisputed prima facie case and the defendant fails to assert any legally sufficient special defense"). The plaintiff does summarize this standard in its reply brief. (Reply to Defendants’ Objection to Motion for Partial Summary Judgment (Dkt. # 632.00) (Pl. Reply), p. 1 n.1, p. 3.)
The "determinations" that the plaintiff seeks are more appropriate in a declaratory judgment action and are not equivalent to making the case for summary judgment of liability. Therefore, because the plaintiff does not properly seek partial summary judgment on the foreclosure count, the court cannot grant such relief.
The second reason for the denial of summary judgment of liability on the foreclosure count is that the matter ultimately involves triable issues of fact. The plaintiff identifies three reasons for default: the defendants made monthly payments to CDC that exceeded the $8,000 fixed payment allowed under the loan documents; the defendants allowed a partner to reside in a penthouse apartment without paying rent; and the defendants used rents to pay more than $250,000 to their attorneys to fund their litigation strategy. Although many of the historical facts concerning these three reasons seem undisputed, the defendants have raised various equitable considerations such as the reasons for the actions taken, the relative size of the alleged defaults compared to the value of the property, and the hardship to the defendants and their tenants that would result from foreclosure. These equitable considerations are important because "[a]n action of foreclosure is peculiarly equitable and ... the court exercises discretion in ensuring that justice [is] done ..." National City Real Estate Services, LLC v. Tuttle, 155 Conn.App. 290, 295, 109 A.3d 932 (2015). "Furthermore, if the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had ..." (Internal citations omitted; internal quotation marks omitted.) LaSalle National Bank v. Shook, 67 Conn.App. 93, 97, 787 A.2d 32 (2001). The court cannot resolve these equitable issues without hearing all the facts and seeing the witnesses. Accordingly, the court denies the plaintiff’s motion for summary judgment on liability for the foreclosure count.
The defendants also contend that the plaintiff’s motion on count one should fail because the plaintiff has not moved for summary judgment on the third, seventh, and eight special defenses. See Nationstar Mortgage, LLC v. Mollo, 180 Conn.App. 782, 796, 185 A.3d 643 (2018) ("In the present case, the court lacked authority to render summary judgment as to liability in favor of the plaintiff with respect to the factual or legal viability of the defendant’s special defenses because the issues relating to the special defenses remained outside the scope of the plaintiff’s motion for summary judgment"); Aurora Loan Services, LLC v. Decormier, No. CV096001681, 2017 WL 6997246, at *2 (Conn.Super.Ct. Dec. 13, 2017) ("[A movant’s] motion for summary judgment should be denied when any defense presents significant fact issues that should be tried"). (Internal quotation marks omitted.) The court believes, however, that the better rule in foreclosure cases is that the plaintiff makes its prima facie case by presenting evidence of ownership of the mortgage and default by the defendants, thus leaving to the defendant the burden of going forward on its special defenses. See U.S. Bank, National Ass’n v. Cabot Addison 1, LLC, No. X04HHDCV136047462S, 2015 WL 9310709, at *9 (Conn.Super.Ct. Nov. 24, 2015) ("If a plaintiff in a foreclosure action has shown that it is entitled to foreclose, then the burden is on the defendant to produce evidence supporting its special defenses in order to create a genuine issue of material fact; valid, legally sufficient special defenses alone do not"). (Internal quotation marks omitted.)
The plaintiff claims that its motion for summary judgment of liability on the foreclosure count also encompasses the defendants’ fifth special defense. That defense alleges that "[t]he plaintiff lacks standing to pursue said action, in that the plaintiff is not the owner of the subject notes and mortgage and does not have the right to enforce same." (Second Amended Answer and Special Defenses (Dkt. # 281.00) (Answer), p. 7.) It is not immediately clear why the defendants have chosen to accept the burden of proving that the plaintiff does not own the notes and the mortgage-a matter that the plaintiff normally has the burden of proving-and why the plaintiff would desire to preclude the defendant from doing so. In any event, the issue of whether the plaintiff can "enforce" the note and the mortgage, particularly with regard to its claim for rents, is one that the court addresses separately in connection with the defendants’ summary judgment motion. For the reasons stated there, the court grants the plaintiff’s motion on the fifth special defense.
The court focuses on the Answer to the original complaint. The court would anticipate that any answer to the amended complaints would raise similar special defenses. To the extent they do not, the plaintiff may contest them at trial. See note 1 supra.
II
In response to the remainder of the plaintiff’s motion, the defendants initially suggest that the plaintiff cannot move for summary judgment on individual special defenses. However, Practice Book § 17-44 provides that "[i]n any action, including administrative appeals which are enumerated in Section 14-7(c), any party may move for a summary judgment as to any claim or defense as a matter of right at any time if no scheduling order exists and the case has not been assigned for trial." (Emphasis added.) The Appellate Court has recently noted: "Practice Book (2014) § 17-44 was amended in 2013 to provide that summary judgment is available for defenses, which rendered prior decisional law to the contrary moot." Nationstar Mortgage, LLC v. Mollo, 180 Conn.App. 782, 791 n.12, 185 A.3d 643 (2018). Accordingly, the plaintiff may move for summary judgment on individual special defenses.
The first special defense alleges that "[t]he plaintiff’s claims and rights pursuant to the obligations which it purports to own are limited by the terms of the purchase and sale agreement between the plaintiff’s predecessor, Beal Bank, and the seller or assignor of said notes and obligations to Beal Bank." (Answer, p. 6.) In their brief in opposition, the defendants refer to their own summary judgment motion in which they explain that this special defense raises the argument that the plaintiff is precluded from enforcing any violations of the Regulatory Agreement occurring before March 2005 because of provisions in the Loan Sale Agreement between HUD and Beal.
It is not immediately clear whether this matter is more than academic. Neither party cites any specific violations of the Regulatory Agreement that are at issue. The plaintiff claims more generally that the Regulatory Agreement and other HUD documents "restrict the owners’ use of project funds" and are "instructive and relevant to the interpretation of the loan documents ..." (Pl. Opposition to Defendants’ Motion for Summary Judgment and/or Motion in Limine (Pl. Opp.) (Dkt. # 613.00), pp. 24, 27.) See In re Tobacco Row Phase IA Development, L.P., 338 B.R. 684, 691 (Banks.E.D.Va. 2005) ("It does not follow that regulated parties can disregard an agency handbook as no more than a collection of suggestions. In the instant case, the [HUD] handbook can at the very least inform the court of what constitutes an operating expense, which the second note allows debtor to charge to operations, and what constitutes a management expense that debtor may not charge to operations"). The court nonetheless addresses the matter in the event that it becomes relevant.
The defendants rely principally on §§ 2.01.A and 12.04.B of the Loan Sale Agreement and claim that, under these provisions, HUD terminated the Regulatory Agreement with the assignment of its interest in the second mortgage to Beal. Section 2.01.A(i) provides in part that: "[e]xcept as is specifically set forth in a Release of Regulatory Agreement that effects only a partial release of the Regulatory Agreement, HUD shall not be construed to have sold, assigned or transferred to Purchaser under or pursuant to the terms of this Agreement any of HUD’s rights under the Regulatory Agreement." Section 12.04.B states: "From and after the Closing Date, the Regulatory Agreement relating to each Mortgage Loan shall be released and terminated ..." (Plaintiff’s Exhibit (Pl. Ex.) 26.)
The plaintiff disclaims asserting any free-standing claim based on violations of the Regulatory Agreement or that it is pursuing anything akin to a private right of action based on HUD rules. The plaintiff instead asserts that, in establishing the plaintiff’s other causes of action, the defendants are not entitled to any exemption from the provisions of the HUD Regulatory Agreement, the HUD Handbook, or HUD regulations. The plaintiff contends that the HUD Regulatory Agreement is incorporated by reference into the second mortgage and that, under these circumstances, the governing statute, the case law, and the Loan Sale Agreement itself establish that the mortgagee retains its rights under the mortgage to enforce the Regulatory Agreement in this case.
The court agrees with the plaintiff. To begin with, paragraph 3 of the second mortgage provides that the grantor-here Underwood-covenants "[t]hat the Regulatory Agreement, if any, executed by the Grantor and the Federal Housing Commissioner, which was previously recorded, is incorporated in and made a part of the Mortgage." (Pl. Ex. 6.) Further, paragraph 4 of the mortgage provides that rents are assigned to the Grantee for the purpose of discharging the debt and that: "Permission is hereby given to Grantor so long as no default exists hereunder, to collect rents, profits and income for use in accordance with the provisions of the Regulatory Agreement." (Pl. Ex. 6.) Thus, the mortgage in this case explicitly provides for continuing reliance on the Regulatory Agreement. Given these incorporations of the Regulatory Agreement into the mortgage, "they become enforceable by the parties to the loan documents." In re Silveira, No. 11-44812-MSH , 2013 WL 1867472, at *13 (Bankr.D.Mass. May 3, 2013).
The court, however, concurs with the defendants’ preliminary contentions that this special defense is a proper one, as one relating to the enforcement of the mortgage, and that the defendants, as parties potentially injured by its enforcement, have standing to challenge it.
Further, other authorities establish that it would be typical for HUD to reserve the right to pursue its remedies as a regulator and assign to Beal all of its rights as mortgagee. Courts have recognized that, under 12 U.S.C. § 1715z-4a, HUD has a separate role in enforcing regulatory agreements in order "to provide the government with a greater deterrent by affording it an additional remedy beyond the traditional remedies of foreclosure and suit for breach of contract." (Emphasis added; internal quotation marks omitted.) United States v. Livecchi, 711 F.3d 345, 352 (2d Cir.), cert. denied, 571 U.S. 887 (2013). Thus, HUD, as regulator, can bring an action for damages even after a foreclosure action by a private party has begun. See, e.g., United States v. Coleman, 200 F.Supp.2d 561, 564-65 (E.D. N.C. 2002) (HUD regulatory action after private lender began foreclosure action); United States v. Schlesinger, 88 F.Supp.2d 431, 457 n.21 (D.Md. 2000) ("HUD’s decision to institute foreclosure proceedings, or avail itself of any other remedy, is wholly discretionary").
Section 1715z-4a, 12 U.S.C., is commonly known as the "equity skimming" statute. United States v. Livecchi, No. 03-CV-6451P, 2005 WL 2420350, at *1 (W.D.N.Y. Sept. 30, 2005), aff’d, 711 F.3d 345 (2d Cir.), cert. denied, 571 U.S. 887 (2013).
In this case, the same paragraph of the Loan Sale Agreement relied upon by the defendants to demonstrate that HUD has retained its regulatory authority also provides: "Subject to the terms and conditions set forth in this Agreement, on the Closing Date, HUD shall sell, assign and transfer to Purchaser, and Purchaser shall purchase, assume and acquire from HUD, all of HUD’s right, title and interest, as mortgagee, in and to the Mortgage Loans ..." (Emphasis added.) (Pl. Ex. 26, § 2.01.A.) Similarly, § 12.17.B of the Agreement provides that HUD reserved only its own right to pursue remedies under the statute: "HUD shall terminate the Regulatory Agreement with respect to each Mortgage Loan, but HUD hereby reserves all rights to pursue violations thereof that occurred prior to the Closing Date. After the Closing Date, HUD may pursue claims against any person that caused a pre-Closing Date violation of a Regulatory Agreement or that received a benefit therefrom. Any funds recovered in satisfaction or settlement of any claim that is or could be subject to an action under 12 U.S.C. Sections 1715z-4a or 1715z-19 shall be retained by HUD." (Pl’s Ex. 26.) There is no suggestion in this language that HUD’s right to rely on the Regulatory Agreement is exclusive.
Hence, while HUD reserved the right to pursue violations of the Regulatory Agreement under the statute, it conveyed to Beal (which later assigned its rights to the plaintiff) all rights as a mortgagee. Those rights, as evidenced by the mortgage contract, include reliance on the Regulatory Agreement. Accordingly, the court grants the motion for summary judgment on the first special defense.
Of course, this ruling means that the defendants may rely on HUD rules and regulations as well. See In re Silveira, supra, 2013 WL 1867472 ("While these [HUD] regulations do not provide a mortgagor with a private right of action ... if they are incorporated into the various loan documents, as they were in this case, they become enforceable by the parties to the loan documents").
III
The plaintiff next moves for summary judgment on the second, fourth, sixth, ninth, and tenth special defenses. The plaintiff suggests characterizing these defenses as raising the issues of "waiver, estoppel, or ‘course of dealings.’" (Pl. Mem., p. 28.) The plaintiff alleges that all these defenses are "premised on the notion that HUD somehow waived the right to claim a default under the Loan Documents and that LPP, as the current mortgagee, is now precluded from asserting the claims in this action." (Pl. Mem., p. 28.) The defendants’ response is that these defenses "assert various equitable bases upon which judgment should not be entered for the Plaintiff" and that, because a foreclosure action is peculiarly equitable, the court should not decide the validity of these defenses on summary judgment. (Defendants’ Objection to Motion for Partial Summary Judgment (Def. Opp.) (Dkt. # 615.00), p. 30.)
To the extent that these defenses do in fact raise equitable defenses against the foreclosure sought in the first count, the court will consider them at trial in conjunction with any other equitable arguments against foreclosure, as stated above. The defendants do not explain, however, how these equitable doctrines can provide a defense to the actions at law alleged in counts two through ten. The court will nonetheless construe these defenses to raise claims of waiver and estoppel, which generally can constitute defenses in actions at law, and proceed to assess whether these defenses can withstand summary judgment on counts two through ten.
As for waiver, the defendants must initially confront the existence of nonwaiver clauses in both the note and the mortgage. The defendants cite only the nonwaiver clause in the note. They argue that this clause is limited to waivers based on failure to accelerate after an uncured default and that their evidence goes beyond that type of waiver. The defendants do not address at all the much broader waiver found in the mortgage. This waiver clause provides: "That no waiver of any covenant herein or of the Note secured hereby shall at any time thereafter be held to be a waiver of the terms hereof or of the Note secured hereby ..." (Pl. Ex. 6, para. 17.) Given the all-encompassing language of this nonwaiver clause, and the defendants’ failure to challenge it, the court holds that this clause bars any special defense of waiver. See Christensen v. Cutaia, 211 Conn. 613, 619-20, 560 A.2d 456 (1989) (on summary judgment, nonwaiver provision barred claim of waiver based on acceptance of late payments).
The nonwaiver clause in Note B provides: "Failure to exercise [acceleration] shall not constitute a waiver of the right to exercise such option in the event of any subsequent default." (Pl. Ex. 10, paragraph (para.) E.)
As for estoppel, the recognized elements are as follows: "the 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 otherwise would not have done. Estoppel rests on the misleading conduct of one party to the prejudice of the other. In the absence of prejudice, estoppel does not exist." (Internal quotations marks omitted.) SKW Real Estate Limited Partnership v. Mitsubishi Motor Sales of America, Inc., 56 Conn.App. 1, 8, 741 A.2d 4 (1999), cert. denied, 252 Conn. 931, 746 A.2d 793 (2000). The defendants do not cite to any exhibits or other evidence to try to establish a prima facie case on these elements. Rather, they merely assert without citation the proposition that "HUD having not declared a default based on Underwood’s payments of Net Cash during the time Note B was administered by HUD, the non-waiver provision does not allow Plaintiff to retroactively declare that payments that occurred during such time period constituted defaults." (Def. Opp., pp. 33-34.) As stated above, however, it is the defendants’ burden on summary judgment to present evidence supporting their special defenses. See also Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 20, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999) (summary judgment properly granted when "the defendants fail to offer evidence of either element of estoppel"). Because they have failed to do so with respect to estoppel, the defendants cannot maintain the estoppel special defenses. Accordingly, the court grants summary judgment as to the second, fourth, sixth, ninth, and tenth special defenses insofar as they are directed to counts two through ten.
The same is true for the defendants’ waiver defense.
Note B contains a long definition of "Net Cash" that essentially describes it as the difference between net operating income and certain expenses. Instead of requiring the defendants to make a fixed monthly payment, Note B provides that installments of principal and interest shall be due and payable "to the extent of Net Cash ..." (Pl. Ex. 10, pp. 2-3.)
THE DEFENDANTS’ SUMMARY JUDGMENT MOTION
I
The court now turns to the defendants’ motion for summary judgment on counts two through ten. The defendants’ principal argument is that the plaintiff lacks authority to enforce Note B because the plaintiff was not in possession of the original of Note B at the time it was lost. The plaintiff relies initially on General Statutes § 42a-3-309 in the Uniform Commercial Code (UCC), which provides: "(a) A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred ..." The defendants additionally claim that counts two through ten, although labeled actions for "damages," are in reality attempts to collect the deficiency under Note B and that the plaintiff is barred from doing so, not only by the UCC, but also by the exculpatory or nonrecourse clause in the note. The defendants state that the plaintiff’s remedies, if any, are limited to foreclosure of the mortgage as alleged in count one.
Although the defendants brief the nonrecourse issues separately from the lost note issues, the court combines them here because they overlap. The nonrecourse provision in Note B states: "Neither the Maker nor any of its general or limited partners, from time to time, shall have any personal liability for the payment of the indebtedness evidenced by this Note B or for the performance of the obligations herein or in the other Second Loan Documents, except as expressly set forth in the Second Mortgage." (Pl. Ex. 10, para. K.)
The plaintiff does not dispute that the original of Note B was lost at the time it became an assignee of the mortgage and therefore that it was not a person "in possession of the instrument ... when loss of possession occurred ..." The plaintiff denies, however, that counts two through ten are actions to "enforce the [Note or] instrument" under the UCC or that it is attempting to collect a deficiency on the approximately $100 million indebtedness under the two notes. Instead, the plaintiff claims that it is enforcing the following provision of the mortgage agreement: "That all rents, profits, and income for the property covered by this Mortgage are hereby assigned to Grantee for the purpose of discharging the debt hereby secured. Permission is hereby given to Grantor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement." (Pl. Ex. 6, p. 322, para. 4.) Relying on this provision, the plaintiff asserts that it seeks "damages based on the wrongful conduct of the Defendants, including the misappropriation of rents that were assigned to LPP" and is suing "to recover damages from Underwood and CDC for their misuse of the rents and assets of the Project, all of which serve as collateral for the subject loans." (Pl. Opp., pp. 1, 9.)
Stated differently, the plaintiff claims that it is attempting to foreclose not only on the real property securing the debt but also to collect the rental payments that provide security. Unlike some other cases, the rental payments are not readily available in an escrow fund or elsewhere. Cf. 7800 W. Outer Rd. Holdings, L.L.C. v. College Park Partners, L.L.C., No. 303182, 2012 WL 2402010, at *1, 4 (Mich.Ct.App. June 26, 2012), app. denied, 493 Mich. 967, 829 N.W.2d 218 (2013) (despite nonrecourse law in Michigan, mortgagee could attempt to enforce additional security agreements, such as an assignment of rents, and sue to obtain rents apparently collected by receiver). Further, it appears undisputed that there is no equity in the real property so that foreclosure upon it will not yield any surplus that would be available to satisfy the rental obligation. Rather, the only way that the plaintiff can obtain the outstanding rental payment collateral is to sue the defendants personally and characterize these suits as "actions for damages."
The defendants did, however, begin to pay rental payments into the court’s escrow account beginning November 2009. Because the trial in January 2019 addresses only events before January 1, 2009, that escrow fund is not available to satisfy the plaintiff’s claims.
Thus, the issue becomes one of whether a mortgagee can maintain a separate contract or tort action for damages against the mortgagor to obtain its collateral when it cannot sue the mortgagor on the mortgage note. There is no Connecticut appellate authority directly on point. There are, nevertheless several important state decisions worthy of discussion. In New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745, 680 A.2d 301 (1996), our Supreme Court held that a mortgagee could obtain a judgment of strict foreclosure despite the fact that it never possessed the lost note in question because the mortgagee had "chosen to pursue the equitable action of foreclosure of the mortgage, rather than a legal action on the note ..." and had not "sought a deficiency judgment." Id., 759-60. The Court added: "A note and a mortgage given to secure it are separate instruments, executed for different purposes and in this State action for foreclosure of the mortgage and upon the note are regarded and treated, in practice, as separate and distinct causes of action, although both may be pursued in a foreclosure suit." (Internal quotation marks omitted.) Id., 759. See also Ankerman v. Mancuso, 271 Conn. 772, 778, 860 A.2d 244 (2004) ("[a] promissory note and a mortgage securing the note ... give rise to separate causes of action").
For similar reasons, the plaintiff cannot draw full support from New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745, 760, 680 A.2d 301 (1996). There our Supreme Court stated: "Thus, whatever restrictions §§ 42a-3-301 and 42a-3-309 might put upon the enforcement of personal liability based solely upon a lost note, they do not prohibit GI-IR from pursuing an action of foreclosure to enforce the terms of the mortgage." In our case, counts two through ten go beyond foreclosure of the mortgage and instead constitute actions at law against the mortgagor. Century Mortgage Co. v. George, 35 Conn.App. 326, 646 A.2d 226, cert. denied, 231 Conn. 915, 648 A.2d 150 (1994), relied upon by the defendants, is readily distinguishable. In that case, a count separate from the foreclosure count sought "money damages on the note." Id., 329. The Appellate Court held that, because the plaintiff was not in possession of the original note, a separate provision of the UCC prevented the plaintiff from enforcing it. Id., 329-31. Although the court did not focus on this issue, its decision suggests that a plaintiff cannot simply conceal an effort to obtain a prohibited deficiency judgment by renaming it action for "money damages on the note." In the present case, in contrast, the plaintiff does not seek a deficiency judgment or money damages on the note, but rather hopes to recover its collateral and thus has filed suit for damages based at least in part on documents other than the note.
The Bedford Realty Court did not have to address the question of whether a mortgagee could sue to enforce a lost note. The Appellate Court, however, recently decided that question in Seven Oaks Enterprises, L.P. v. DeVito, 185 Conn.App. 534 (2018). There the Appellate Court held that, under the UCC, an assignee may not pursue an action on a lost note it never possessed. Id., 542-54. The Court discussed competing public policies. On the one hand, "if only the person who lost the note is entitled to enforce the note, the debtor is better protected against the prospect of paying twice." Id., 552. On the other hand, "if it is possible to enforce a note to which the right to enforce the note, but not the physical note, has been assigned, then fairness is promoted because unjust enrichment is prevented." Id. Ultimately, however, the Court relied on the plain language of § 42a-3-309 to conclude that "the only person who can enforce the note is the person in possession of the note when it was lost." Id.
The Judicial Branch web site reveals that, on December 5, 2018, the Connecticut Supreme Court denied a petition for certification in the case. The Connecticut Law Journal has not yet published the order.
The plaintiff, as suggested, does not dispute that, in view of Seven Oaks and other authorities, it cannot sue to enforce Note B. It contends that, while it may make reference to Note B, it is not suing solely based on Note B. As stated, the plaintiff claims that it sues due to the diversion of or the failure to pay over rental payments that the mortgage contract identifies as security for the debt.
With two exceptions, the complaint supports the theory that the plaintiff is not suing solely on Note B. The first exception is count six, which alleges unjust enrichment. Count six merely alleges that "Underwood unjustly did not pay the Net Cash that was due under Note B" and that Underwood was thereby enriched. Even in its amended form, count six does not refer to any other loan document or to the assignment of rents. The second exception is count eight, which alleges that Underwood made fraudulent conveyances to CDC "that exceeded the amount permitted by Note B." Accordingly, because counts six and eight appear to sue based solely on Note B, the court grants the defendants’ motion for summary judgment on those counts.
Paragraphs 1-25 of count six do purport to incorporate by reference the first twenty-five paragraphs of count one. Paragraph 16 of count one alleges that Underwood assigned to the plaintiff all rents from the project that constituted Net Cash in order to secure Underwood’s obligations under the loan documents. However, without any additional, specific reference to that allegation in count six, it is not clear that the plaintiff relies on it for that count. For many of the other counts, the plaintiff amended its complaint to make specific reference to the assignment of rents. See Second Amended Complaint, count five, para. 51. ("By virtue of the assignment of rents, Plaintiff is the title owner of all rents, profits and income received from the Premises.") The plaintiff made no such amendment to count six.
The original complaint alleged that these conveyances also "exceeded the amount due under the management agreement between CDC and Underwood." (Complaint, count eight, para. 26.) In the amended complaints, the plaintiff deleted this language. Although that language might have insulated the count from attack, it makes no sense to withhold summary judgment at this point by relying on superseded language. Count eight also incorporates boilerplate language from the first count, but does not rely on it. For the reasons noted above, this incorporation does not rescue count eight. See note 17 supra.
No other count in the complaint alleges liability based solely on failure to comply with the terms of Note B. Count two, alleging breach of contract, comes the closest, but even that count alleges that Underwood breached the terms of the "Note and the Second Mortgage by, among other things, failing to pay all Net Cash ..." (Emphasis added.) (Complaint, count two, para. 27.) Although count two makes no reference to rental payments, it does refer to the second mortgage which, as discussed, provides for an assignment of rents to the plaintiff. Similarly, count three alleges that Underwood "injured Plaintiff’s right to receive the benefits under Note B and the other Loan Documents ..." (Emphasis added.)
The complaint defines "Loan Documents" as "together, the Notes, Second Mortgage, and these other documents, agreements and instruments ..." (Complaint, count one, para. 12.)
In all the other counts, the plaintiff claims some form of wrongdoing by the defendants based on the provisions of other loan documents and generally relating to the diversion of rental payments. Counts four and five allege that Underwood engaged in conversion and statutory theft, respectively, by "expending rents, profits and income for unauthorized purposes" (count four, para. 27) or in that it "took these rents, profits and income from the Project for itself by using them for unauthorized purposes ..." (Count five, para. 27.) Count seven sues CDC for unjust enrichment in that CDC "received ... payments ... from funds that had been assigned to Plaintiff ..." (Count seven, paras. 26, 27.) Count nine, entitled "Fraud," alleges that Underwood made false representations that its payments "constituted Net Cash under Note B and that Underwood had otherwise complied with its requirements under the Loan Documents." (Emphasis added.) (Count nine, para. 26.) Count ten alleges violations of the Connecticut Unfair Trade Practices (CUTPA). It claims, among other things, that the defendants "[diverted] the gross revenues from the Project, which had been assigned to Plaintiff, for unauthorized purposes ..." (Count ten, paragraph 30.) Thus, these counts of the complaint do not rely solely on Note B.
In the amended complaints, the plaintiff adds that "[u]nder the loan documents, Underwood is prohibited from using the Project rents for anything other than operating and maintenance expenses of the Project ..." (Second Amended Complaint, count seven, para. 51.)
The amended complaints allege that these revenues had been assigned to Plaintiff "through the assignment of rents." (Second Amended Complaint, count ten, para. 55.)
In analyzing whether the plaintiff can sue on the mortgage document even though it cannot sue on the note, the first step is to recognize that, under Connecticut law, a mortgage is a contract. See Cook v. Bartholomew, 60 Conn. 24, 25, 22 A. 444 (1891) ("A mortgage is a contract of sale executed, with power to redeem") (internal quotation marks omitted); Glass v. Bank of America, N.A., No. UWYCV 156027170S, 2016 WL 8669868, at *2 (Conn.Super.Ct. Nov. 10, 2016) ("There is a contractual relationship between the borrowers and the mortgage holder"). There is no reason why a mortgage contract, like any other contract, cannot or should not be enforced. In this case, Underwood has signed the mortgage as "Grantor," thus agreeing to a provision stating: "Whereas the said Grantor for itself and its successors and assigns, in order more fully to protect the security of this Mortgage, does hereby covenant and agree as follows ..." One of the following provisions is the rental obligation. (Pl. Ex. 6, pp. 322, 326.) The plaintiff should have a remedy for the breach of this contractual obligation, as courts in other jurisdictions have recognized with regard to other obligations in mortgage contracts. See Dollens v. Wells Fargo Bank, N.A., 356 P.3d 531, 543 (N.M.Ct.App. 2015) (In suit by borrower against lender Wells Fargo, appellate court affirmed trial court’s conclusion that Wells Fargo "breached the terms of the mortgage by charging unreasonable property inspection and preservation fees ..."); Brayton v. Pappas, 52 A.D.2d 187, 383 N.Y.S.2d 723, 725 (1976) (Although plaintiff mortgagee could not foreclose because it improperly accelerated debt, "[i]f defendants Pappas demolished the four-room residence on the property and did not first obtain permission to do so, they were in breach of an express condition of the mortgage agreement and plaintiff should be entitled to damages, if any, as a consequence of their diminution of his security").
As mentioned, that provision states: "That all rents, profits, and income for the property covered by this Mortgage are hereby assigned to Grantee for the purpose of discharging the debt hereby secured. Permission is hereby given to Grantor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement." (Pl. Ex. 6, p. 322, para. 4.)
A possible obstacle to enforcement of a mortgage contractual provision is a nonrecourse or exculpatory clause. But various courts have held that a mortgagee may proceed with an action for money damages based on a debtor’s failure to pay rents, despite the existence of a nonrecourse clause in the loan documents. See Federal Home Loan Mortgage Corp. v. Dutch Lane Associates, 775 F.Supp. 133, 140 n.4 (S.D.N.Y. 1991) ("The non-recourse provision does not bar recovery of rents from defendants [because] ... it is inapplicable to the Defendants’ absolute and independent assignment of rents obligations"); 7800 W. Outer Rd. Holdings, L.L.C. v. College Park Partners, L.L.C., supra, 2012 WL 2402010, at *1 (Mich.Ct.App.) ("[w]hile the lender may not attempt to collect a deficiency, the lender may enforce additional security agreements, such [as] an assignment of rents"); International Business Machines Corp. v. Axinn, 290 N.J.Super. 564, 568, 676 A.2d 552 (App.Div. 1996). ("We also think it plain that entry of judgment against Axinn for rents collected by him but to which Mutual Benefit was entitled does not constitute a deficiency judgment in violation of the non-recourse provision of the promissory note.") Moreover, in the present case, the nonrecourse clause is not absolute but contains an exception for "personal liability ... as expressly set forth in the Second Mortgage." See note 13 supra.
The defendants also argue in opposition that, under Seven Oaks, the plaintiff, while suing primarily on the mortgage, improperly cites to Note B for the definition of "Net Cash" and other matters. The defendants essentially advance a type of erasure theory under which Note B simply loses all legal significance once the original is lost. There are several problems with this theory. The first is that Seven Oaks does not support it. In Seven Oaks, the plaintiff sued both on the lost note and on a separate contract to manage a company that the defendant sought to purchase. The management contract provided that the defendant could not remove the manager until the defendant had paid the underlying debt to the plaintiff The defendant nonetheless removed the manager and failed to pay anything on the note. Seven Oaks Enterprises, L.P. v. DeVito, supra, 185 Conn.App. 537-39, 555-56. The jury rendered a verdict for the plaintiff on both counts. The Appellate Court, while reversing the judgment for the plaintiff to the extent it rested on the lost note, upheld the jury’s verdict for the plaintiff on the management contract. Id., 537, 559. The Court could not have done so, however, without reference to the lost note and the fact that the defendant had not fully paid it. Thus, in Seven Oaks the loss of the note did not extinguish either the plaintiff’s right to enforce claims arising out of an agreement related to, but different than, the lost note, or prohibit all reference to the terms of the note to determine whether it had been paid. The plaintiff essentially seeks to do the same here.
There are several other reasons in this case why the plaintiff can rely on the terms of the note in suing at law for damages. First, the mortgage incorporates the note by reference. The mortgage provides: "Said Note and all of its terms are incorporated by reference and this conveyance shall secure any and all extensions thereof, however evidenced." (Pl. Ex. 6, p. 322.)
Second, even in a simple foreclosure case, loss of the original note does not preclude the lender from relying on a fair and accurate copy. In Bedford Realty our Supreme Court stated: "A bill or note is not a debt; it is only primary evidence of a debt; and where this is lost, impaired or destroyed bona fide, it may be supplied by secondary evidence ... The loss of a bill or note alters not the rights of the owner, but merely renders secondary evidence necessary and proper ... GHR or its assignee is free to present reliable evidence other than the original promissory note to establish the amount of the debt." (Citations omitted; internal quotation marks omitted.) New England Savings Bank v. Bedford Realty Corp., supra, 238 Conn. 760. In this case, the defendants have admitted in discovery that the document that the plaintiff purports to be a copy of Note B is in fact a "genuine and complete copy of the Second Mortgage Note (Note B), dated February 28, 1996 from Underwood in favor of HUD, in the original principal amount of $13,919,109.58 that was signed by Underwood." (Pl. Ex. Tab E, Underwood’s Responses to Requests to Admit 01.30.08, para. 4.)
Indeed, the defendants’ theory would simply paralyze foreclosure proceedings in cases of a lost note. Under the defendants’ approach, when the note is lost, the mortgagee could not look at a fair and accurate copy of the note to determine whether the borrower has complied with the terms of payment, whether the borrower has defaulted, or whether to accelerate the debt. The mortgagee, in that situation, simply could not institute foreclosure proceedings. Such a result is completely contrary to the holding in Bedford Realty. The court concludes, for all these reasons, that the plaintiff may sue the defendants, in the counts indicated, for breach of the mortgage’s contractual rental obligations and may rely on the terms in the note to the extent necessary.
II
The defendants’ next contention is that the plaintiff lacks authority to enforce violations of HUD rules because: 1) HUD released its Regulatory Agreement from the second mortgage and from Notes A and B when HUD assigned its interests in these matters; and 2) private parties lack authority to enforce HUD rules and regulations. The defendants seek either summary judgment or an order in limine providing that, to the extent that the plaintiff has any authority to recover damages beyond foreclosure of the real property, the issue of whether Underwood breached its obligations or committed torts must be decided based on general legal principles rather than HUD rules and regulations. Because this issue relies on the same provisions of the Loan Sale Agreement and in all other respects is the same as that discussed in connection with the plaintiff’s summary judgment motion on the defendants’ first special defense, the court adopts the reasoning expressed therein and rejects the defendants’ argument here. Accordingly, the court denies this part of the defendants’ summary judgment motion and motion in limine.
IV
The defendants’ final claim is that, even if the plaintiff has the authority in theory to enforce HUD rules, the plaintiff lacks authority in this case to enforce any violations that occurred before March 22, 2005. The defendants reason that, when HUD assigned its rights in Note B to Beal on that date, HUD reserved all of its rights to pursue violations of the Regulatory Agreement that had previously occurred. The defendants rely on § 12.17.B of the Loan Sale Agreement, which the court has quoted previously. Thus, the defendants seek summary judgment on any claims based on violations of the Regulatory Agreement prior to March 22, 2005 or, in the alternative, an order in limine precluding the plaintiff from presenting evidence of pre-March 22, 2005 violations.
The court rejects the defendants’ arguments for the same reasons it did in the previous section. Section 12.17.B serves to define HUD’s role as a regulator. HUD has limited its own rights to enforce the Regulatory Agreement to violations that occurred before March 22, 2005. However, the Loan Sale Agreement does not make HUD’s authority to enforce the Regulatory Agreement exclusive. Rather, the Agreement specifically confers on the plaintiff’s predecessor "all of HUD’s right, title and interest, as mortgagee, in and to the Mortgage Loans ..." (Pl. Ex. 26, § 2.01.A.) In addition, § 2.01.D states that the purchaser or mortgagee in the sale by HUD acquires the mortgage "regardless of whether any or all such defaults have been cured on or before the Closing Date," thus confirming that the plaintiff was not acquiring loans that were default-free. (Pl. Ex. 26.) For these reasons, the court denies the defendants’ motion in limine to exclude evidence regarding defaults under the second mortgage that may have occurred before March 22, 2005.
In full, § 2.01.D provides: "Purchaser acknowledges and agrees that any and all defaults by the Mortgagor under any of the Mortgage Loans (including without limitation any monetary default) may (but need not) be cured at any time on or before the closing date, and that Purchaser shall remain bound by all terms and conditions of this Agreement, including its obligation to acquire the Mortgage Loans on the Closing Date, regardless of whether any or all such defaults have been cured on or before the Closing Date." (Pl. Ex. 26, § 2.01.D.)
CONCLUSION
The court grants the plaintiff’s summary judgment motion as to the first, second, fourth, fifth, sixth, ninth, and tenth special defenses and denies the remainder of the motion. The court grants the defendants’ summary judgment motion and motion in limine on counts six and eight and denies the remainder of the motion.
It is so ordered.