Opinion
X04HHDCV136047462S
11-24-2015
U.S. Bank, National Association as Trustee v. Cabot Addison 1, LLC et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION RE PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (#240)
David M. Sheridan, J.
This is an action seeking foreclosure of a mortgage and enforcement of certain loan guarantees given in connection with a commercial property located in Windsor, Connecticut, known as the Addison Corporate Center. The action was commenced by service of process on November 27, 2013. The complaint alleges that the substitute plaintiff, M-III Addison, LLC (" M-III"), is the present holder of the note (July 3, 2014 Revised Amended Complaint [#172], P67) and that the note and mortgage are in default due to, among other things: (1) the failure to make monthly debt service payments as required by the loan documents; (2) the entry of judgment in a separate proceeding against Cabot Addison Lease Co., LLC, the " Master Tenant" for the project; and (3) failure to perform obligations under various other loan documents. (Revised Amended Complaint, P79.)
The defendants filed an answer in which they admitted being the owner in possession of the premises (November 21, 2014 Answer, Special Defenses and Counterclaim [#201], P86), but pled no knowledge as to execution and delivery of the note (Answer, P66), no knowledge as to plaintiff's status as holder of the note (Answer, P67) and no knowledge as to the existence of any default under the note (Answer, P69). The defendants also asserted sixteen special defenses and a counterclaim sounding in ten counts.
M-III filed the present motion for summary judgment on June 4, 2015, seeking partial summary judgment as to liability only on the foreclosure cause of action set forth in Count 1. The motion was accompanied by the affidavits of Terry Anderson and Kevin Thompson, as well as copies of the note, mortgage and other relevant loan documents, and copies of the various mortgage assignments.
The defendants filed their memorandum in opposition on August 3, 2015, arguing that there were genuine issues of material fact as to the existence of a default under the loan documents and issues of fact as to whether the plaintiff has satisfied all the conditions precedent to foreclosure. The defendants also assert that conduct of the plaintiff's predecessors and agents, as alleged in the special defenses, precludes the entry of summary judgment. The opposition memorandum was accompanied by the affidavits of W. Major Chance and Peter Oettinger, CPA, as well as copies of deposition transcripts, pleadings in other cases, financial records, and other documents.
M-III filed its reply brief on August 14, 2015. The court heard the parties in oral argument on August 26, 2015. This matter is scheduled for trial on December 7, 2015.
I. STANDARD OF REVIEW
The court begins by recognizing the well-known concept that " summary judgment is a method of resolving litigation when 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 . . . The motion for summary judgment is designed to eliminate the delay and expense of litigating an issue when there is no real issue to be tried. However, since litigants ordinarily have a constitutional right to have issues of fact decided by a jury . . . the moving party for summary judgment is held to a strict standard . . . of demonstrating his entitlement to summary judgment." (Citations omitted; internal quotation marks omitted.) Grenier v. Commissioner of Transportation, 306 Conn. 523, 534-35, 51 A.3d 367 (2012).
" The party moving 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 . . . 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." Ramirez v. Health Net of the Northeast, Inc., 285 Conn. 1, 11, 938 A.2d 576 (2008). In reviewing the evidence offered, the court must " view the evidence in the light most favorable to the nonmoving party." (Internal quotation marks omitted.) Johnson v. Atkinson, 283 Conn. 243, 253, 926 A.2d 656 (2007).
" In ruling on a motion for summary judgment, the court's function is not to decide issues of material fact . . . but rather to determine whether any such issues exist." RMS Residential Properties, LLC v. Miller, 303 Conn. 224, 233, 32 A.3d 307 (2011). A material fact is one that would alter the outcome of the case. Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 14, 728 A.2d 1114 (1999) (citing Hammer v. Lumberman's Mutual Casualty Co., 214 Conn. 573, 578, 573 A.2d 699 (1990)).
II. FACTS AS TO WHICH THERE IS NO GENUINE DISPUTE
The substitute plaintiff, M-III Addison, LLC, is a Delaware limited liability company and is the current holder and owner of the note and mortgage which are the subject of this foreclosure action.
The property being foreclosed is an office/industrial complex known as the Addison Corporate Center, consisting of two buildings with approximately 585, 000 square feet of rentable space, situated on a 75-acre site in Windsor, Connecticut. The property was originally purchased by Cabot Investment Properties, LLC, which then sold tenant-in-common interests to thirty-two special purpose entities organized as separate Delaware limited liability companies under the names Cabot Addison 1, LLC through Cabot Addison 33, LLC (hereinafter, those 32 entities are referred to collectively as " defendant-borrowers").
The defendant-borrowers leased the entire Addison Corporate Center property to an affiliate of Cabot Investment Properties, LLC, an entity known as Cabot Addison Lease Co., LLC (hereinafter referred to as the " Master Tenant"), pursuant to the terms of a master lease. The Master Tenant was then responsible for operating, managing and maintaining the Addison Corporate Center property during the term of the master lease, including sub-leasing the rentable space, ensuring the collection of rents and the payment of all leasing and capital expenses. The purpose of this arrangement was to avoid any need for defendant-borrowers to be involved in leasing activities.
On October 19, 2006, the defendant-borrowers obtained a loan in the original principal amount of $53,110,720.00 from Wachovia Bank, National Association for the purpose of acquiring their tenant-in-common interests in the Addison Corporate Center. The loan was evidenced by a promissory note dated October 19, 2006, and signed on behalf of each of the defendant-borrowers by Timothy Kroll in his capacity as Chief Operating Officer of Cabot Investment Properties, LLC, in its capacity as Manager/Member of Cabot Addison Acquisition, LLC, in its capacity as Vice President of each of the defendant-borrowers (hereinafter referred to as " the Note"). To secure the Note, the defendant-borrowers executed an open-end mortgage deed (hereinafter referred to as " the Mortgage"), security agreement and fixture filing, granting a first priority lien on and security interest in the commercial property pledged as collateral for the loan.
The defendant-borrowers suggest that there is a genuine issue of material fact as to whether the defendant-borrowers, the 32 special purpose entities (Cabot Addison 1, LLC through Cabot Addison 33, LLC) that are expressly named as borrowers on the note, are in fact the makers of the note. This contention is based upon the fact that the plaintiff has not offered evidence to establish that Kroll was authorized to sign the loan documents for the borrower-defendants, and thus a prima facie case has not been made out that the borrower-defendants are actually bound by the loan documents. The court rejects this argument and finds that a prima facie case has been made that the defendant-borrowers are bound by the terms of the note. Moreover, the defendants have provided no evidentiary support as to their claim of the existence of a genuine issue of material fact as to Kroll's authority to execute the note. The party opposing summary judgment must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact. Suarez v. Dickmont Plastics Corp., 229 Conn. 99, 105, 639 A.2d 507 (1994). The existence of a genuine issue of material fact must be demonstrated by counter-affidavits and concrete evidence. Pion v. Southern New England Telephone Co., 44 Conn.App. 657, 663, 691 A.2d 1107 (1997). It is not enough for the opposing party merely to assert the existence of a disputed issue. Daily v. New Britain Machine Co., 200 Conn. 562, 569, 512 A.2d 893 (1986).
The defendant-borrowers also executed a " Cash Management Agreement" wherein they agreed to certain procedures for collecting, depositing, and disbursing monies from the rental property. They specifically agreed that all rents and profits received or collected from the property would be deposited directly into a designated " lockbox" bank account. The Cash Management Agreement specifically directs that the defendant-borrowers
. . . shall, or shall cause Master Tenant to, immediately notify and advise each Tenant under each lease with respect to the Property (whether such lease is presently effective or executed after the date hereof), to send directly to the Lockbox Address, promptly when due, all payments, whether in the form of checks, cash, drafts, money orders or any other type of payment whatsoever of rent or any other item payable to Master Tenant, as landlord under such Leases.(Cash Management Agreement at § 7(b).)
The defendant-borrowers suggest that their obligations under the Cash Management Agreement end once they comply with the requirement to " notify and advise" each tenant to deposit rent payments directly to the lockbox account, and " no provision exists in the Cash Management Agreement" requiring them to cause all rents to be deposited into the lock box account. This argument ignores the plain language of the agreement. Under Section 7(a) of the Cash Management Agreement, defendant-borrowers and the Master Tenant are obligated to hold any lease rents and profits they receive in trust for Lender and deposit them in the lock box within two days of receipt. Under Section 7(c) of the Cash Management Agreement, defendant-borrowers and Master Tenant are prohibited from " directing or causing" tenants to pay rents in any manner other than directly into the lock box account. (" Without prior written consent of lender, neither Borrower nor Master Tenant shall . . . direct or cause the payment of any amount in any manner other than provided specifically in the related Payment Direction Letter.") There is no material dispute of fact as to the nature and extent of the defendant-borrower's obligations with respect to the Cash Management Agreement.
The Cash Management Agreement contains a comprehensive " waterfall" provision strictly controlling distributions of the rental income from the lockbox account prior to any default. Once the monthly expenses have been paid out of the lockbox, all remaining funds are swept to the Master Tenant. (See § 4(b)(vi).) After a default has been declared, the lender has the right to apply available lockbox funds to satisfy loan obligations " in any order and in such manner as Lender may determine in its sole discretion." (Cash Management Agreement, § 8(b).)
Relying on Cash Management Agreement § 8(a), the defendant-borrowers dispute the plaintiff's claim of " sole discretion" over the disposition of lockbox funds. They argue that discretion to apply the lockbox funds in a manner inconsistent with the Cash Management Agreement cannot be had until notice under § 8(a) is properly given and, in this case, there is a question of fact as to whether notice was properly given. Section 8(a) of the Cash Management Agreement states: " Upon an Event of Default, the parties agree that Deposit Bank shall pay over the Lender all amount deposited in any account maintained hereunder on demand, without notice to Borrower or Master Tenant, provided, that in making such demand, Lender gives notice, in writing, signed by Lender or an authorized agent thereof, that an event of Default has occurred and is continuing." The court finds that there is no genuine dispute of fact as to compliance with the notice provisions of § 8(a). Section 12 of the Cash Management Agreement states that any notices under the Cash Management Agreement are to be given in accordance with the notice provisions contained in the Mortgage. The notice provisions of the Mortgage were complied with.
Article IV of the Mortgage specifies many " Events of Default." Among those, the most pertinent to the current dispute are the following:
Failure to make payments of rent, or payments to reserves, when due, which failure is not cured within any applicable grace period (P4.1(a));
Failure to perform (or cause the Master Tenant to perform) any covenant of the mortgage, which failure-if susceptible of cure-is not cured within any applicable cure period (P4.1(c));
A default under any other Loan Document which has not been cured within any applicable grace period or cure period (P4.1(f));
If a lawsuit is filed against defendant-borrowers or Master Tenant seeking to have an order for relief entered against it as debtor and it is not dismissed within sixty (60) days after being commenced (P4.1(h)); and
An event of default by defendant-borrowers or Master Tenant under the Master Lease beyond any applicable notice and cure period contained in the Master Lease (P4.1(q)).
Without setting forth all of the details, there does not appear to be any genuine dispute that sometime in 2011, if not earlier, the Master Tenant began systematically misappropriating or diverting substantial amounts of rental income and profits that should have been deposited into the lockbox account. It is suspected that several sizeable monthly rental payments made by tenants were re-directed to other accounts held by Master Tenant and never deposited into the lockbox account. (See Defendants Counterclaim, P86.) At one point it was estimated that only $400,000 per month was being deposited in the lockbox account when, based on the current leases, nearly $700,000 per month should have been received from tenants.
Not surprisingly, this income shortfall resulted in the Master Tenant having insufficient funds in the lockbox account to pay certain bills and expenses when they came due, which resulted in a flurry of litigation. In August of 2012 the defendant-borrowers filed suit against the Master Tenant and other affiliated entities alleging that approximately $2.6 million in rental income from the Addison Corporate Center property had been diverted " for personal use and/or use by other entities owned and/or controlled, " by the Cabot Investment Properties LLC and its management team. The suit alleged that the Master Tenant had failed to pay over $1 Million in outstanding commissions to real estate brokers in connection with the subletting of the property and had failed to pay at least $220,000 in utility charges for the property, causing the unpaid utility companies threaten a shut off of service to the property. (Cabot Addison 1, LLC et al. v. Cabot Addison Lease Co. et al., Superior Court, Judicial District of Hartford, Docket No. CV 12-6035088.)
On December 14, 2011, Compass Group USA, Inc. filed suit against the Master Tenant for outstanding real estate commissions. The Master Tenant failed to enter an appearance and the Court entered a default judgment against the Master Tenant in the amount of $81,828.17. (Compass Group USA v. Cabot Addison Lease Co., Superior Court, Judicial District of Hartford, Docket No. CV1l-6027651.)
The Master Tenant also failed to pay real estate commissions to Sentry Commercial Real Estate Services, Inc. and Grubb & Ellis Company. They filed an action against the Master Tenant seeking payment of their outstanding commissions. The Master Tenant failed to enter an appearance. On July 23, 2012, the Court entered an Order permitting Grubb & Ellis to attach to the value of $393,563.10 and Sentry Commercial to attach to the value of $168,669.90 the realty and assets of the Master Tenant. (Sentry Commercial Real Estate v. Cabot Addison Lease Co., Superior Court, Judicial District of Hartford, Docket No. CV12-5036282.)
Sentry Commercial also filed another action against the Master Tenant for money damages. On August 9, 2012, the court entered an order permitting Sentry Commercial to: (1) attach all real property owned and/or leased by the Master Tenant; (2) attach and/or garnish all bank accounts owned by the Master Tenant; and (3) attach and/or garnish all assets and other credits of the Master Tenant. (Sentry Commercial Real Estate Services, Inc. v. Cabot Addison Lease Co., Superior Court, Judicial District of Hartford, Docket No. CV 12-5036314.)
In addition, monthly payments of principal and interest, together with certain monthly escrow payments, were not made as required by the note. Beginning in April 2012 and continuing through December of 2013, the defendant-borrowers failed to remit the monthly payments of principal, interest, and escrow amounts when required under the terms of the note. (Promissory Note, § 1.2.)
The defendant-borrowers suggest there is a genuine issue of material fact as to whether there truly has been a default of payment. That claim is discussed at length elsewhere in this opinion. However, there does not appear to be any genuine dispute as to the fact that monthly installment payments of principal and interest were not made beginning in April of2012. Indeed, this is the logical foundation of the defendant-borrowers' claim that the decision by M-III's predecessors-in-interest not to apply certain funds that it was holding to payment of principal and interest was the cause of the " alleged default." See, e.g., Counterclaim, P132. The Note expressly obligates the defendant-borrowers to make payments to the lender. Although arrangements were made in the Cash Management Agreement to facilitate those payments, the failure of those arrangements did not relieve the defendant-borrowers of the obligation to make monthly payments. Had monthly debt service payments been made by the defendant-borrowers or the Master Tenant on a timely basis there would have been no " alleged default" and no need for the loan servicer to re-allocate funds to cover that debt service.
The plaintiff's predecessor-in-interest provided defendant-borrowers with notice of default by letter dated July 10, 2012 (the " Notice of Default"). The Notice of Default specifically listed the following defaults:
. . . (i) an Event of Default under Section 4.1(a) of the Mortgage for the failure to pay any payments due under the Note on the date when the same is due and payable, and (ii) an Event of Default under Section 4.1(h) of the Mortgage as a result of the Judgment [against the Master Tenant] . . . a default for failure to provide Lender with those certain financial statements and information with respect to the Property as required pursuant to Section 2.14 of the Mortgage and . . . a default for the failure to comply with all of the terms and conditions of that certain Cash Management Agreement . . .
Pursuant to Section 6.5 of the Mortgage, the Notice of Default was sent to defendant-borrowers via the Master Tenant on July 10, 2012. Defendant-borrowers failed or refused to cure the defaults set forth in the Notice of Default. On December 16, 2013, U.S. Bank, in its capacity as Trustee, initiated this lawsuit to foreclose on the Mortgage and to recover on certain Guaranties. On January 7, 2014, during the pendency of this litigation, U.S. Bank sold the loan to M-III Addison, LLC and on March 3, 2014, M-III was substituted as plaintiff in this action. (Docket Entry #114.) M-III is the current owner and holder of the note and mortgage.
III. ANALYSIS
A. Elements of a Foreclosure Cause of Action
" 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." (Internal quotation marks omitted.) Wells Fargo Bank, N.A. v. Strong, 149 Conn.App. 384, 392, 89 A.3d 392, cert. denied, 312 Conn. 923, 94 A.3d 1202 (2014). See also, New England Savings Bank v. Bedford Realty Corp., 246 Conn. 594, 717 A.2d 713 (1998) (when the plaintiff establishes its ownership of the note and satisfies the court of a defendant's failure to make payments according to the note, the plaintiff establishes its right to avail itself of such security as the mortgage affords).
Thus, the plaintiff has the burden of establishing the absence of a genuine issue of material fact as to the existence of the underlying note and mortgage, ownership of the note and mortgage, the defendant's default in payment, and that all conditions precedent to foreclosure, as established by the note and mortgage, have been satisfied. Upon such a showing, the burden shifts to the defendant to produce evidence in admissible form-as to either the elements of the foreclosure cause of action or any legally sufficient special defense-sufficient to raise a material issue of fact requiring a trial.
B. Ownership of the Note
The court begins its analysis by noting that the defendant-borrowers do not appear to challenge one element of the plaintiff's prima facie case: the plaintiff M-III's ownership of the note and mortgage. The defendant-borrowers only contest the plaintiff's claim of a default under the note and mortgage, and that all conditions precedent to foreclosure, as established by the note and mortgage, have been satisfied.
C. Default on the Note
The plaintiff alleges that the defendant-borrowers defaulted under the Note and Mortgage due to, among other things: 1) the failure to make the required monthly payments; 2) the failure to comply with the Cash Management Agreement and the diversion of rents; 3) the failure to pay leasing commissions; 4) the failure to pay operating expenses; and 5) the entry of judgments against the Master Tenant. Any one of these defaults, if incurable or if not cured within the applicable cure period, is sufficient to support a prima facie case for foreclosure. The court will discuss each in turn.
1. Failure to Make Monthly Payments of Principal and Interest
The plaintiff has offered credible evidence establishing that the defendant-borrowers failed to remit the monthly payments of principal, interest, and escrow amounts when required under the terms of the Note for the months of April through December of 2012, and January through December of 2013, and each such failure of payment constituted an Event of Default as defined in the Note.
In opposition, the defendant-borrowers state that the funds in the lockbox account " including the reserve amounts" were " available to Lender" and conclude that, because the " Mortgage permitted the Lender to invade reserve accounts to service the debt, " it should have done so at that time to avoid payment default. (Memorandum in Opposition [#246], p. 5.) Thus, the defendant-borrowers make the obscure argument that " [p]ayments were in fact current as of July 6, 2012." (Memorandum in Opposition [#246], p. 5.) However, they put forward no competent evidence that they were not in payment default when the Notice of Default was issued on July 10, 2012. They only offer a calculation to support their hypothetical argument that, since the lender was holding funds equal to or exceeding the past due payments, the loan was current.
At the outset, the defendant-borrowers' argument that reserve funds should have been applied to prevent a default in monthly payments of principal and interest is logically inconsistent with their position that there is a genuine dispute of fact as to whether there was a default in monthly payments of principal and interest. Secondly, until a default actually occurs, the lender has no discretion to reapply funds and is strictly bound by the terms of the Cash Management Agreement; the lender could not have reapplied funds to prevent a default, since it has no authority to reapply funds unless there is a default. Third, although the Mortgage permits lender to apply funds from reserve accounts in the event of a default, it in no way requires Lender to use reserve funds to help defendant-borrowers make a required monthly payment of principal and interest, and it in no way prevents the lender from declaring a default even though it may have access to borrower funds held for other purposes which might be applied to cover payments of principal and interest.
The defendant-borrowers' hypothetical argument that payments could have been made is not sufficient to create a genuine issue of material fact as to the lender's evidence of a default in payment. In order to rebut M-III's evidence, the defendant-borrowers were obligated to put forth concrete, competent evidence, such as dates and amounts of payments that were actually made when due and payable. See Great Country Bank v. Pastore, 241 Conn. 423, 435-36, 696 A.2d 1254, 1261-62 (1997) (" a party opposing 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 defendant-borrowers have failed completely to offer any such evidence. There is no genuine issue of fact as to the default in payment.
2. Failure to Comply with the Cash Management Agreement/Diversion of Rents
Section 7(b) of the Cash Management Agreement required the defendant-borrowers to cause all rents from the property to be deposited into the designated lockbox account. It is not disputed that the Master Tenant stole the funds intended for the lockbox by improperly directing certain tenants to pay their rent to accounts other than the lockbox. This unauthorized diversion of rents from the lockbox was in breach of the Section 7(c) of the Cash Management Agreement and was an incurable Event of Default under Section 4.1(f) of the Mortgage.
The borrower-defendants argue that the actions of Master Tenant cannot be the cause of a default under the Mortgage, because the " Master Tenant was not the defendant-borrowers' agent with respect to the wrongful acts." (Memorandum in Opposition, [#246], p. 18.) Once again, this argument ignores the clear language of the loan documents. Section 4.1(c) of the Mortgage provides for a default if " Borrower fails to (and fails to cause Master Tenant to) perform" any other obligations under the Mortgage. Similarly, Section 4.1(q) of the Mortgage provides that a default by Master Tenant under its Master Lease with defendant-borrowers beyond any cure period therein would also be an Event of Default under the Mortgage.
3. Failure to Pay Leasing Commissions
It is not disputed that the Master Tenant failed to pay leasing commissions totaling $1.196 million, despite obtaining disbursements from the reserves from Lender for this purpose. This constitutes a breach of the Master Lease and therefore is an event of default under the Mortgage. (P4.1(q).)
4. Failure to Pay Operating Expenses
It is not disputed that the Master Tenant regularly failed to pay operating expenses despite receiving funds from the lockbox for this purpose. This constitutes a breach of the Master Lease and therefore is an event of default under the Mortgage. (P4.1(q).)
5. Entry of Judgment Against Master Tenant
It is not disputed that several lawsuits were commenced against the Master Tenant relating to unpaid real estate commissions and unpaid utility expenses. The Master Tenant failed to appear and defend those lawsuits, and judgment entered. This constitutes an event of default under the Mortgage. (P4.1(q).)
D. All Conditions Precedent to Foreclosure, as Established by the Note and Mortgage, Have Been Satisfied
" It is well established that the exercise of an acceleration clause is proper upon an event of default as provided for and controlled by the terms of the note and the mortgage deed . . ." Bank of America, FSB v. Hanlon, 65 Conn.App. 577, 581-82, 783 A.2d 88 (2001).
In Sec. 3.2 of the Note, the defendant-borrowers waived " [p]resentment for payment, demand, protest, and notice of demand, protest and nonpayment and all other notices . . ." Nonetheless, it is undisputed that a notice of default was sent to defendant-borrowers care of the Master Tenant on July 10, 2012. Any applicable cure period under the loan documents expired, without any satisfactory cure, prior to the commencement of foreclosure proceedings on December 16, 2013.
Paragraph 6.5 of the Mortgage, titled " Notices" states: " Each entity comprising Borrower, as the case may be, recognizes and acknowledges that any notice given to Master Tenant hereunder shall be deemed effective notice to each and every entity comprising Borrower."
The Mortgage provides that upon a default under the note, the holder of the mortgage is entitled to demand immediate payment of all sums due and owing under the note, commence an action to foreclose the mortgage, or commence a lawsuit to enforce the payment of the debt and to collect all expenses incurred in pursuing its remedy. (Mortgage § § 5.1(a) through (g).)
In their opposition, the defendant-borrowers contend that the plaintiff has failed to satisfy its evidentiary burden to show that it has fulfilled all conditions precedent to foreclosure, because the plaintiff and its assignors have not demonstrated that they performed all of their obligations under the terms of the loan documents. Specifically, the defendant-borrowers contend that the lender, acting through the deposit bank, did not provide monthly account statements for the lockbox account directly to the 32 special purpose entities (Cabot Addison 1, LLC through Cabot Addison 33, LLC) as required by Section 3(b) of the Cash Management Agreement. Also, the defendant-borrowers contend that the lender failed to give notice directly to the 32 special purpose entities (Cabot Addison 1, LLC through Cabot Addison 33, LLC) prior to demanding that funds in the lockbox account be turned over to the lender, as required by Section 8(a) of the Cash Management Agreement.
Of course, these arguments are logically inconsistent with the defendant-borrowers' argument that there is an issue of fact as to whether the 32 special purpose entities (Cabot Addison 1, LLC through Cabot Addison 33, LLC) were the actual " makers" of the note, see fn.1, infra.
Accepting the defendant-borrower's arguments requires disregarding the plain and straightforward notice provisions of the loan documents. The Cash Management Agreement and Mortgage require that all communication related to the Loan be routed through the Master Tenant instead of directly to defendant-borrowers. Specifically, paragraph 6.5 of the Mortgage, titled " Notices" states:
Each entity comprising Borrower, as the case may be, recognizes and acknowledges that any notice given to Master Tenant hereunder shall be deemed effective notice to each and every entity comprising Borrower.
Section 12 of the Cash Management Agreement in turn directs that all notices shall be served in the manner required by the Mortgage:
Section 12. Notices. Notices to the parties hereto shall be addressed and delivered in the manner set forth in the Security Instrument. [ ]Unless otherwise expressly provided herein, all such notices, to be effective, shall be in writing (including by facsimile), and shall be deemed to have been duly given or made (a) when delivered by hand or by nationally recognized overnight carrier, (b) upon receipt after being deposited in the mail, certified mail and postage prepaid, or (c) in the case of facsimile notice, when sent and electronically confirmed, addressed as set forth above with a confirmatory copy to follow by regular mail.
In addition, Paragraph 24.28 of the lease between the defendant-borrowers (as " Landlord") and the Master Tenant (as " Tenant") expressly designates the Master Tenant as the defendant-borrowers' agent to receive all notices from the lender, stating:
Notices and Service of Process. Landlord, including each Tenant in Common that hereafter becomes a Landlord, hereby designates [Master] Tenant as the party to receive all notices including but not limited to service of process) on behalf of Landlord pursuant to any documentation entered into with respect to the Premises in accordance with this Lease, including all notices from the Lender pursuant to the terms of the Permitted Mortgage.
The Cash Management Agreement requires that the Deposit Bank provide monthly account statements for the lockbox account and states that all notices " shall be addressed and delivered in the manner set forth in the [Mortgage]." Accordingly, pursuant to the Mortgage's explicit designation of the Master Tenant as the agent to receive all notices on behalf of defendant-borrowers, the deposit bank was required to deliver the monthly account statements to the Master Tenant. There is no dispute that the monthly account statements were so delivered. The defendant-borrowers have offered no other evidence to create an issue of fact as to whether the plaintiff has performed all of its obligations under the provisions of the loan agreements.
Therefore, for the reasons stated, the court finds that there is not genuine issue of material fact regarding the plaintiff's satisfaction of all conditions precedent to foreclosure, as set forth in the Note and Mortgage.
E. Are There Any Legally Sufficient Special Defenses Precluding Foreclosure?
The defendants have raised sixteen special defenses, which the court must analyze to determine whether there are genuine issues of material fact that would preclude the entry of summary judgment. " Only one of the defendants' special defenses needs to be valid in order to overcome the motion for summary judgment." Union Trust Co. v. Jackson, 42 Conn.App. 413, 417, 679 A.2d 421 (1996).
Where a complaint and supporting affidavits establish an undisputed prima facie case in a foreclosure action, the court must then determine whether any special defense is legally sufficient before granting summary judgment. " 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 . . . Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles . . . [O]ur courts have permitted several equitable defenses to a foreclosure action." (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, 705-06, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002). " 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." WM Specialty Mortgage, LLC v. Brandt, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 09 5001157 (February 10, 2009, Moran, J.).
" As a general rule, facts must be pleaded as a special defense when they are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action." (Emphasis added; internal quotation marks omitted.) Mitchell v. Guardian Systems, Inc., 72 Conn.App. 158, 166, 804 A.2d 1004, cert. denied, 262 Conn. 903, 810 A.2d 269 (2002); see Practice Book § 10-50.
The traditional special defenses available in a foreclosure action are payment, discharge, release, satisfaction and invalidity of a lien. See Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 15-16, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999). In recognition that a foreclosure action is an equitable proceeding, courts also have recognized defenses based on mistake, accident, fraud, CUTPA, laches, tender of deed in lieu of foreclosure and a refusal to agree to a favorable sale to a third party, usury, unconscionability of interest rate, duress, coercion, material alteration and lack of consideration to be pleaded as Special Defenses. See Fidelity Bank v. Krenisky, 72 Conn.App. 700, 807 A.2d 968 (2002); Knights of Columbus Federal Credit Union v. Salisbury, 3 Conn.App. 201, 208-09, 486 A.2d 649 (1985).
In the present case, the First through Third Special Defenses, and the Fifth through Fourteenth Special Defenses all claim that wrongful conduct of the original lender and its " successors, assignors, and assignees of the Note and Mortgage and their agents" caused the " alleged default" under the note and mortgage. As a result, the defendant-borrowers claim, the plaintiff M-III " as assignee of the note and mortgage" is precluded from recovery under Count 1. None of the special defenses allege conduct specific to M-III, and none allege conduct occurring after the note and mortgage were assigned to M-III.
The Fourth Special Defense (CUTPA) was struck by the court and has not been re-pled. [#207.86.]
See First Special Defense (Breach of Implied Covenant of Good Faith and Fair Dealing), P105; Second Special Defense (Estoppel), P112; Third Special Defense (Unclean Hands), P119; Fifth Special Defense (Breach of Fiduciary Duty), P138; Sixth Special Defense (Breach of Contract), P150; Seventh Special Defense (Payment), P157; Eighth Special Defense (Failure to Mitigate Damages), P164; Ninth Special Defense (Unconscionability), P173; Tenth Special Defense (Failure to Preserve Security), P176; Eleventh Special Defense (Negligence), P181; Twelfth Special Defense (Recklessness), P188; Thirteenth Special Defense (Negligent Employing, Retention and/or Supervision), P193.
To the extent these special defenses are based upon the conduct of plaintiff's assignor, under Connecticut law, " the assignee takes the mortgage subject to the state of accounts between the [defendant] and the [assignor] as at the time of the assignment . . . Therefore, an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor." (Citations omitted; emphasis in original; internal quotation marks omitted.) City of Hartford v. McKeever, 139 Conn.App. 277, 285-86, 55 A.3d 787, aff'd on other grounds by 314 Conn. 255, 101 A.3d 229 (2012).
1. First Special Defense: Breach of Implied Covenant of Good Faith and Fair Dealing
In their first special defense, the defendants plead: " a breach of the covenant of good faith and fair dealing in the CMA and Note." (P104.) Factually, the defendants allege that the " prior successors, assignors, and assignees of the Note and Mortgage" allowed the diversion of funds from the lockbox " that injured the Defendants' right to timely and full payment of obligations under the Note." (P103.)
This special defense is legally insufficient as a matter of law in a mortgage foreclosure action. " The defense of breach of implied covenant fail[s] to attack the making, validity or enforcement of the notes and mortgages." Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 16-17, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999). Therefore, " special defenses alleging a breach of an implied covenant of good faith and fair dealing . . . are not equitable defenses to a mortgage foreclosure."
In this case, even if a breach of the implied covenant of good faith and fair dealing were an equitable defense to a mortgage foreclosure, neither the clear language of the note and cash management agreement nor the evidence produced is sufficient to create a genuine issue of material fact as to the defendants' claim that the plaintiff breached the implied covenant by " allowing" the Master Tenant to divert the funds from the lockbox account. Nothing in the loan documents, express or implied, creates a " right" in the defendant to payment of obligations under the note and the evidence demonstrates that the plaintiff has acted in accordance with its rights as set forth in those documents." See Fidelity Bank v. Krenisky, supra, 72 Conn.App. 716-17.
The first special defense therefore raises no genuine issue of material fact that could defeat the present motion.
2. Second Special Defense: Estoppel
The defendant-borrowers assert that the remedy of foreclosure is precluded by the doctrine of equitable estoppel. The only conduct that the defendants have identified in the pleadings as the basis for this special defense is the lender and its assigns failing to provide monthly reports on deposits into lockbox and failure to properly proper monitor and manage the lockbox to ensure " the timely and full payment of obligations under the Note through monies deposited into the Hard Lockbox." (P108.) " Plaintiff is estopped from foreclosure due to its predecessor's representations and conduct that led the defendant-borrowers to believe that debt service would be met through rents put into the Hard Lockbox, pursuant to the Cash Management Agreement." (Memorandum in Opposition [#246], p. 19.)
" Equitable estoppel is a valid special defense in a foreclosure action . . . Equitable estoppel is a doctrine that operates in many contexts to bar a party from asserting a right that it otherwise would have but for its own conduct . . . In its general application, we have recognized that [t]here are two essential elements to an estoppel--the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon that other belief, and the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done." (Internal quotation marks omitted.) GMAC Mortgage, LLC v. Tufano, Superior Court, judicial district of New London, Docket No. CV 09 5010580 (July 13, 2010, Devine, J.).
The evidence put forth by the defendant-borrowers is insufficient to create an issue of material fact as to the two " essential elements" of estoppel: " the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief, and the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done." (Internal quotation marks omitted.) See TD Bank, N.A. v. M.J. Holdings, LLC, 143 Conn.App. 322, 339, 71 A.3d 541 (2013).
In addition to the loan documents themselves, the factual basis for the claim of equitable estoppel offered by the defendant-borrowers is the plaintiff's assignor and its agent failing to inform them of litigation in Ohio involving an entity related to Master Tenant and alleging " malfeasance" and " missing rents." Noticeably absent from the defendant-borrower's proof is evidence of " representations and inducements" and " statements of past or present fact" by the plaintiff or its assignors that are the crucial equitable underpinning of the defense of estoppel. See TD Bank, N.A. v. M.J. Holdings, LLC, supra, 143 Conn.App. 340.
Equitable estoppel also requires that the injured party act on the other party's representations and alter his position to his detriment. The affidavit of Major Chance offered in support of the Second Special Defense does not create a material issue of fact as to elements of equitable estoppel. Mr. Chance makes vague averments of reliance upon certain provisions of the loan documents in deciding to make his investment and then " trusting" in the entities involved rather than putting in place " extraordinary, additional safeguards to ensure that debt service would be made." (Affidavit P18.) Mr. Chance avers that " had he known" of the Ohio lawsuit he would have terminated or better monitored the Master Tenant to prevent the diversion of funds that led to the eventual default. (Affidavit P21.) It is clear that Mr. Chance's lack of vigilance was not a consequence of any " representations and inducements" made by the plaintiff or its assignors. Rather it was the result of his personal assessment of the risk associated with this particular investment opportunity and the degree of " active" or " passive" oversight required.
The Second Special Defense therefore raises no genuine issue of material fact that could defeat the present motion.
3. Third Special Defense: Unclean Hands
The third special defense incorporates the factual allegations of the special defenses and counterclaims and alleges that the " assignors, and assignees of the Note and their agents are guilty of unclean hands." (P118.)
" [F]oreclosure is an equitable action. Our jurisprudence has recognized that those seeking equitable redress in our courts must come with clean hands. The doctrine of unclean hands expresses the principle that where a plaintiff seeks equitable relief he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue . . . The party seeking to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in wilful misconduct in regard to the matter in litigation." (Emphasis added; internal quotation marks omitted.) Monetary Funding Group, Inc. v. Pluchino, 87 Conn.App. 401, 407, 867 A.2d 841 (2005). " Our Supreme Court defines wilful misconduct as intentional conduct with the design to injure either actually entertained or to be implied from the conduct and circumstances . . . Not only the action producing the injury but the resulting injury must also be intentional." Witczak v. Gerald, 69 Conn.App. 106, 116, 793 A.2d 1193 (2002).
In the present case, the defendant-borrowers have not offered any direct proof that (nor can any inferences reasonably be drawn from the facts presented that would support a conclusion that) the plaintiff engaged in willful misconduct with the design, desire or intent to injure the defendant-borrowers. Thus, the defendant-borrowers have failed to meet their burden to show a genuine issue of material fact that the plaintiff is barred from seeking the equitable remedy of foreclosure because it enters this litigation with unclean hands.
4. Fifth Special Defense: Breach of Fiduciary Duty
The Fifth Special Defense alleges that the " assignors and assignees of the Note and Mortgage and their agents negligently and/or recklessly breached their obligations in administering the Hard Lockbox and thus breached their fiduciary duty to Defendants." (P135.) This special defense is legally insufficient because, as a matter of law no fiduciary relationship existed in the present case.
" A lender is under no duty to represent its customer's interest and there generally is no fiduciary relationship between a bank and a customer simply because a borrower relationship is established." Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 19, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999). " A lender has the right to further its own interest in a mortgage transaction." Id. Our courts have stressed that the steps a lender takes in determining whether to make a loan are made in order to protect the lender's interest and that it is the borrower's responsibility to take the steps necessary to protect their own interests. See, Dubinsky v. Citicorp Mortg., 48 Conn.App. 52, 708 A.2d 226 (1998); Forte v. Citicorp Mortgage, Inc., 66 Conn.App. 475, 784 A.2d 1024 (2001).
In the present case, the Mortgage and the Cash Management Agreement explicitly disclaim any enhanced or fiduciary duty among the parties. The Mortgage provides:
Relationship of the Parties. The relationship between Borrower and Lender is that of a borrower and lender only and neither of those parties is, nor shall it hold itself out to be, the agent, employee, joint venture or partner of the other party.(Ex. B to Anderson Aff. at § 6.13.)
The Cash Management Agreement similarly provides:
Nothing in this Agreement shall create any agency, fiduciary, joint venture or partnership relationship between Deposit Bank and Borrower, Master Tenant or Lender. Except as specifically required under this Agreement, the Deposit Agreement or applicable law, Deposit Bank has no duty whatsoever to lender, Borrower or Master Tenant.
(Ex. E to Anderson Aff. at § 9(c).)
The Fifth Special Defense therefore raises no genuine issue of material fact that could defeat the present motion because, as a matter of law no fiduciary relationship existed.
5. Sixth Special Defense: Breach of Contract
The Sixth Special Defense alleges that " assignors and assignees to the Note and Mortgage and [Cash Management Agreement] breached said obligations under Section 2(h) to exercise sole dominion or control over the Hard Lockbox, allowing the Master Tenant . . . to divert significant funds from the Hard Lockbox . . . (P145.) It also alleges that " assignors, and assignees of the Note, Mortgage, and [Cash Management Agreement] also breached obligations under the CMA to provide monthly deposit reports to the Defendants." (P147.)
Section 2(h) provides: " In order to further secure the performance by Borrower of the Obligations and as a material inducement for Lender to make the Loan in accordance with the terms of the Loan Documents, Borrower and Master Tenant hereby (i) request that the Cash Collateral Account and the Impound Account be established on its behalf at the Deposit Bank in the names set forth above, and (ii) acknowledges that (A) the Cash Collateral Account and the Impound Account will be subject to the sole dominion, control and discretion of Lender (which may be exercised through Servicer), subject to the terms, covenants and conditions of this Agreement and the Security Instrument ; (B) Lender shall have the sole right to make withdrawals or transfers of funds from the Cash Collateral Account, and the Impound Account; (C) neither Borrower, Master Tenant nor any other Person claiming on behalf of or through Borrower or Master Tenant shall have any right or authority, whether express or implied, to make use of, or withdraw any funds, investments or other properties from, the Cash Collateral Account or the Impound Account, or to give any instructions with respect to the Cash Collateral Account or the Impound Account." (Emphasis added.)
Section 3(b) provides: " Items deposited with the Deposit Bank which are returned for insufficient or uncollected funds will be re-deposited the first time, Items returned unpaid the second time for whatever reason shall be debited to the Cash Collateral Account under advice and returned to Master Tenant. Master Tenant and Borrower shall be liable to the Deposit Bank for the amount of any exchange or collection charges incurred by the Deposit Bank. Return Item (as hereinafter defined) fees will be charged directly to the Cash Collateral Account. The Deposit Bank shall send a monthly report to Master Tenant, Borrower and Lender, which monthly report shall specify the amount deposited into the Cash Collateral Account with respect to the Property for the previous month ." (Emphasis added.)
As to the first claim, the court does not interpret the provision of Section 2(h) of the Cash Management Agreement as requiring the lender to police the activities of the Master Tenant in connection with the lockbox account. " The words in an agreement must be given their ordinary and plain meaning." Montoya v. Montoya, 91 Conn.App. 407, 416, 881 A.2d 319 (2005), rev'd on other grounds, 280 Conn. 605, 909 A.2d 947 (2006). The agreement grants the lender " sole dominion, control and discretion" over the funds in the lockbox account " subject to the terms, covenants and conditions of this Agreement and [the Mortgage]." " Dominion and control" over the funds in its ordinary use means only possession and title in the funds, and complete, unfettered control over the disposition of the funds (subject to the terms of the agreement). Nothing in the language of Section 2(h) creates a contractual obligation or duty to superintend persons or entities charged with the responsibility of depositing funds into the lockbox account, and that cannot be implied from the circumstances of the transaction. Nor have the defendant-borrowers pointed to any other provision of any of the various loan agreements that would create such a contractual obligation. There is no genuine material dispute of fact as to that claim for breach of contract.
As to the second claim, Section 6.5 of Mortgage deals with " notices, demands, requests or other communications to be sent by one party to the other." In that Section, each of the defendant-borrowers explicitly " recognizes and acknowledges that any notice given to Master Tenant hereunder shall be deemed effective notice to each and every entity comprising Borrower." Section 12 of the Cash Management Agreement states that any notices under the Cash Management Agreement are to be given in accordance with the notice provisions contained in the Mortgage. The defendant-borrowers have offered no competent evidence to controvert the plaintiff's evidence that the deposit bank delivered the monthly account statements to the Master Tenant. There is no genuine material dispute of fact as to that claim for breach of contract.
The Sixth Special Defense raises no genuine issue of material fact as to a breach of contract that would preclude the remedy of foreclosure.
6. Seventh Special Defense: Payment
The Seventh Special Defense alleges that " sufficient monies were deposited into the Hard Lockbox to timely meet payment obligations under the Note" and therefore the defendant-borrowers " paid sufficient monies to lender and its successor and assigns to timely meet payment obligations under the Note." (PP155-56.)
Generally, " [p]ayment is a valid special defense in a foreclosure action." Homecomings Financial Network, Inc. v. Starbala, 85 Conn.App. 284, 289, 857 A.2d 366 (2004). The burden of pleading and proving the special defense of payment rests on the defendant. Atlantic National Trust v. Van Eck, 89 Conn.App. 200, 873 A.2d 179 (2005). There is little if any law on the substantive elements of the defense of payment in a foreclosure action. Logic dictates that in order for the defense to preclude a remedy of foreclosure, the defendant must allege and prove either; 1) that payments were timely and properly made; 2) that the debt has been paid in full; or 3) that the lender has agreed to accept some amount less than the full amount of the debt in complete satisfaction of the debt, and that amount has been paid. If any one of those three circumstances were proven, there is no default of payment or the underlying debt has been satisfied and discharged, and the remedy of foreclosure no longer pertains. Examining the allegations and proof offered by the defendant-borrowers, it is clear they do not allege payment in full or an agreement to accept a lesser amount in satisfaction of the debt. Instead, they contend that monies held in the lockbox account (as reserves or escrow or to cover expenses), equaled or exceeded the amount required to cover payments of principal and interest. Therefore, they argue, " payments" were made. As discussed elsewhere in this decision, the court does not agree with that analysis. Under the terms of the Note and Mortgage, availability of funds in the lockbox account cannot factually or legally support a special defense of " payment."
The Seventh Special Defense raises no genuine issue of material fact as to a breach of contract that would preclude the remedy of foreclosure.
7. Eighth Special Defense: Failure to Mitigate Damages
The Eighth Special Defense alleges that the plaintiff and its assignors " have refused to apply the significant amounts of cash received towards payment of the debt evidenced by the Note" and therefore have failed to mitigate their damages. (PP162-63.)
" Defendants regularly plead a failure to mitigate damages as a special defense . . . Nevertheless, our appellate courts have never squarely addressed whether a failure to mitigate damages may be stricken because it is not an appropriate special defense." THCI Co., LLC v. Dickstein, Superior Court, judicial district of Tolland, Docket No. CV-13-5005827-S (June 9, 2014, Bright, J.). Under such a defense, when the defendant is in breach of contract, the plaintiff has " a duty to exercise reasonable conduct to minimize the damages occasioned by the defendant's breach . . . and the court will measure damages as though [it] had acted reasonably." (Citations omitted; internal quotation marks omitted.) West Haven Sound Development Corp. v. West Haven, 201 Conn. 305, 332, 514 A.2d 734 (1986). In the context of an action for foreclosure, proof of this defense would not preclude the remedy of foreclosure, although it might affect the manner in which the remedy is applied (i.e., strict foreclosure vs. foreclosure by sale). Since the present motion seeks summary judgment as to liability only, measurement of damages is not presently before the court and the defense is therefore inapplicable.
The Eighth Special Defense raises no genuine issue of material fact or question of law that would preclude the remedy of foreclosure.
8. Ninth Special Defense: Unconscionability
The Ninth Special Defense alleges that certain provisions of the Note, Mortgage, and Cash Management Agreement are " so one sided, in favor of the original lender, its successors and assigns, as to be unduly oppressive to Defendants and are unconscionable." (P172.) The special defense alleges substantive (as opposed to procedural) unconscionability " Substantive unconscionability is indicated by contract terms so one-sided as to 'shock the conscience' . . . [I]t is important that courts not be thrust in the paternalistic role of intervening to change contractual terms that the parties have agreed to merely because the court believes the terms are unreasonable. The terms must shock the conscience . . . Alternatively, [s]ubstantive unconscionability consists of an allocation of risks or costs which is overly harsh or one-sided and is not justified by the circumstances in which the contract was made." (Citation omitted; internal quotation marks omitted.) Van Voorhies v. Land/Home Financial Services, Superior Court, judicial district of New Haven, Docket No. CV 09 5031713 (September 3, 2010, Alexander, J.) .
" The purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise . . . As applied to real estate mortgages, the doctrine of unconscionability draws heavily on its counterpart in the Uniform Commercial Code which, although formally limited to transactions involving personal property, furnishes a useful guide for real property transactions . . . As Official Comment 1 to § 2-302 of the Uniform Commercial Code suggests, [t]he basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract . . . Unconscionability is determined on a case-by-case basis, taking into account all of the relevant facts and circumstances." (Internal quotation marks omitted.) Emigrant Mortgage Co., Inc. v. D'Agostino, 94 Conn.App. 793, 802, 896 A.2d 814, cert. denied, 278 Conn. 919, 901 A.2d 43 (2006).
In the present case the defendant-borrowers have not provided evidence that would inform the trier of fact as to how the contract clauses are overly harsh or unjustifiably favor the lender. The defendant-borrowers, having agreed to a system for collecting rents and applying them to payment of the Note, have been disadvantaged not by any especially onerous term of the agreements implementing that arrangement, but by the fact that the arrangement was misused to dishonest purpose by an untrustworthy third party. That does not render the agreement " unconscionable." Similarly, having granted the lender discretion to apply funds as it chose in the event of a default, the defendant-borrowers are now disadvantaged because the lender has chosen to apply the funds in a manner best suited to the lender's interests rather than the interests of the defendant-borrowers. The provisions of the agreements giving that unfettered discretion to the lender in the event of default are not, in light of the circumstances, excessively harsh. It is common in a commercial lending transaction that, in the event of a default, the lender is granted access to a broad array of rights and remedies to move quickly and easily to secure and dispose of cash, rents, property and other collateral in the possession of the borrower, subject to the terms of the agreement. Taking into account all of the relevant facts and circumstances of this transaction, the court finds that the borrower-defendants have failed to offer evidence sufficient to raise a genuine issue of material fact as to their defense of unconscionability.
9. Tenth Special Defense: Failure to Preserve Security
The Tenth Special Defense alleges that the plaintiff and its assignors " failed to fulfill their contractual and equitable duties . . . thereby hindering the security for the Note and impairing the collateral therefore." These acts, it is claimed " constitute an abandonment of their right to seek a deficiency or to enforce the Note, or the personal guarantees under Conn. Gen. Stat. § 42a-3-605(e) and/or (f)." (P175.)
Conn. Gen. Stat. § 42a-3-605(e) and (f) provide as follows:
(e) If the obligation of a party to pay an instrument is secured by an interest in collateral and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of an endorser or accommodation party having a right of recourse against the obligor is discharged to the extent of the impairment. The value of an interest in collateral is impaired to the extent (i) the value of the interest is reduced to an amount less than the amount of the right of recourse of the party asserting discharge, or (ii) the reduction in value of the interest causes an increase in the amount by which the amount of the right of recourse exceeds the value of the interest. The burden of proving impairment is on the party asserting discharge. (f) If the obligation of a party is secured by an interest in collateral not provided by an accommodation party and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of any party who is jointly and severally liable with respect to the secured obligation is discharged to the extent the impairment causes the party asserting discharge to pay more than that party would have been obliged to pay, taking into account rights of contribution, if impairment had not occurred. If the party asserting discharge is an accommodation party not entitled to discharge under subsection (e), the party is deemed to have a right to contribution based on joint and several liability rather than a right to reimbursement. The burden of proving impairment is on the party asserting discharge.
The plaintiff has offered no evidence whatsoever to support its allegation that any collateral relating to the Note was in any way impaired without the parties' consent. There is no material issue of fact as to the borrower-defendants' Tenth Special Defense that precludes the entry of summary judgment as to liability on Count One.
10. Eleventh Special Defense: Negligence
The Eleventh Special Defense alleges that the plaintiff and its assignors were negligent " in connection with the Property, the servicing of the loan and the administration of the Lockbox." (P179.)
" 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 . . . [I]f the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had." Fidelity Bank v. Krenisky, 72 Conn.App. 700, 705-06, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).
The allegations contained in the Eleventh Special Defense do not attack the making, validity or enforcement of the mortgage; rather, the allegations refer to the conduct of the plaintiff and its assignors during the course of the relationship. Nonetheless a special defense to a foreclosure action that alleges conduct after the execution of the note and mortgage may be legally sufficient if it alleges conduct that violates an express term of the agreement between the parties or some other legal duty such that " the mortgagor is prevented . . . from fulfilling a condition of the mortgage."
The question is whether the defendant-borrowers have put forth evidence which is legally sufficient to create a genuine issue of material fact as to whether the plaintiff and its assignors were " negligent" in the handling of the lockbox. Most importantly, the defendant-borrowers have failed to present facts from which this court can find the existence of a " duty, " either arising out of the contract or from common law, that has been breached with respect to the administration of the lockbox account. As previously discussed, the contractual provisions impose no obligation upon the lender to police the lockbox account; and neither the contract nor the common law afford a basis for finding that a fiduciary duty is owed by the lender to the defendant-borrowers with respect to the account. " The existence of a duty is a question of law and only if such a duty is found to exist does the trier of fact then determine whether the defendant violated that duty in the particular situation at hand." (Internal quotation marks omitted.) Sic v. Nunan, 307 Conn. 399, 407, 54 A.3d 553 (2012).
Based on the facts presented, the court does not find the existence of a duty owed by the lender to the borrower-defendants, such that a claim of negligence is legally cognizable. Taking into account all of the evidence offered, the court finds that the borrower-defendants have failed to present a legally sufficient claim as to their defense of negligence.
11. Twelfth Special Defense: Recklessness
The Twelfth Special Defense alleges that the conduct of the plaintiff and its assignors " was highly unreasonable and involved an extreme departure from ordinary care in circumstances where a reasonable person would understand a high degree of danger and harm to be apparent." (P187.) While a special defense to foreclosure may be conceivable based upon principles of negligence, it is extremely doubtful that " recklessness" is a valid special defense to an action for foreclosure. Regardless, the defendant-borrowers have offered no evidence that would create a genuine issue of fact as to any of the elements traditionally required to prove reckless conduct, and it would be unreasonable to infer recklessness from the proof presented. They offer no evidence as to the plaintiff's acting with knowledge of " extreme danger" or conscious disregard of the potential for injury; the facts and circumstances suggest a commercial entity exercising its perceived rights under written loan agreements, and nothing more.
The Twelfth Special Defense raises no genuine issue of material fact that would preclude the remedy of foreclosure.
12. Thirteenth Special Defense: Negligent Employing, Retention and/or Supervision
The Thirteenth Special Defense alleges that the plaintiff and its assignors were negligent in employing, retaining and/or failing to supervise their agents, including but not limited to, the Servicer, the Master Servicer, and the financial institution administering the " Hard Lockbox, " whom the prior successors, assignors and assignees of the Note and Mortgage knew, or should have known, would cause harm to the Defendants, by, among other things, failing to monitor deposits to the Hard Lockbox, failing to learn of defalcation of deposits to the Hard Lockbox by the third-party depositor, and failing to timely and fully pay the obligations under the Note.
The defendant-borrowers offered no evidence to support the Tenth Special Defense. There is nothing in the record detailing the " hiring" of the various entities involved at different stages of this relationship, and no factual basis from which the court could conclude that negligent hiring of any of those entities was a cause of the defendant-borrower's inability to fulfill their obligations under the Note and Mortgage.
The Thirteenth Special Defense raises no genuine issue of material fact that would preclude the remedy of foreclosure.
13. Fourteenth Special Defense: Lender's Lack of Standing to Sue in this Matter
The Fourteenth Special Defense alleges that " the Plaintiff is not the owner, holder, or in rightful possession of the Note or Mortgage in this matter and therefore lacks capacity and standing to bring and/or maintain suit in this matter." (P195.)
In connection with the plaintiff's case-in-chief, the court has already concluded that the plaintiff has established a prima facie case for foreclosure. The borrower-defendants did not contest M-III's evidence indicating that it is the holder of the Note and Mortgage.
The Fourteenth Special Defense raises no genuine issue of material fact that would preclude the remedy of foreclosure.
14. Fifteenth Special Defense: Lack of Consideration
The Fifteenth Special Defense alleges that " the Plaintiff's claims against the Defendants, and specifically the Guarantors, are precluded because said alleged guaranties lacked consideration." (P198.)
In connection with Count One, the defendant-borrowers offered no evidence to support a finding of lack of consideration, and there is much evidence to suggest there was adequate consideration. As to the guaranties which are the subject of Count Two, those are not at issue in this motion
The Fifteenth Special Defense raises no genuine issue of material fact that would preclude the remedy of foreclosure.
15. Sixteenth Special Defense: Failure to Meet all Conditions Precedent (to filing suit)
The Sixteenth Special Defense alleges that the plaintiff and its assignors " failed to meet all conditions precedent prior to instituting this action." (P202.) The court has already concluded that, based on the undisputed facts, the plaintiff has established a prima facie case for foreclosure, which includes satisfying all conditions precedent to commencing suit.
The Sixteenth Special Defense raises no genuine issue of material fact that would preclude the remedy of foreclosure.
IV. CONCLUSION
The court finds that the plaintiff has shown the absence of genuine issues of material fact--and the defendants have not provided an evidentiary foundation to demonstrate the existence of genuine issues of material fact--as to the existence of the underlying note and mortgage, ownership of the note and mortgage, the defendant-borrowers' default in payment, and the fulfillment of all conditions precedent to foreclosure as established by the note and mortgage. The plaintiff has thus established a prima facie case for mortgage foreclosure, and the court finds that the defendants' special defenses either lack factual support or are inadequate as a matter of law; as a result they do not preclude the remedy of foreclosure. Accordingly, the plaintiff's motion for partial summary judgment as to liability only is granted.
Judgment as to liability only shall enter in favor of the plaintiff as to the First Count of the Complaint.