Opinion
FBTCV176061517S
03-26-2018
J.P. MORGAN CHASE BANK, N.A. v. Michael V. MONTANARO, Executor et al.
UNPUBLISHED OPINION
Alfred J. Jennings, Judge
Procedural Background
This is a foreclosure action brought by the plaintiff as holder of a $300,000 Promissory Note and a Mortgage of premises known as 5 Morning Glory Drive, Easton Connecticut (" Property" ). The plaintiff filed its Revised Complaint on October 16, 2017 (No. 125) pleading in six Counts: Mortgage Foreclosure (Count One); Reformation of Mortgage (Count Two); Equitable Subrogation (Count Three); Equitable Subordination (Count Four); Unjust Enrichment (Count Five); and Fraud (Count Six). Now before the court is the defendants’ Motion to Strike Counts Three and Four of the Revised Complaint, filed on November 26, 2017 by defendants Michael V. Montanaro, Richard Montanaro, and Good Sell Associates, LLC (" Good Sell" ). The Motion to Strike is accompanied by defendants’ Memorandum of Law in Support of Defendants’ Motion to Strike. (No. 131). Plaintiff has filed its Objection to Defendants’ Motion to Strike (No. 133), and Defendants have filed their Reply to Plaintiff’s Objection to Motion to Strike (136). The Motion to Strike and the Objection to Motion to Strike were argued at short calendar on January 16, 2018. For reasons to be stated herein Defendant’s Motion to Strike is granted and Plaintiff’s Objection to Motion to Strike is overruled.
Discussion
Connecticut Practice Book § 10-39 provides, in part: " A motion to strike shall be used whenever any party wishes to contest: ... (1) the legal sufficiency of the allegations of any complaint, counterclaim or cross claim, or of any one or more counts thereof to state a claim upon which relief can be granted." It is well settled that:
[T]he purpose of a motion to strike is to contest ... the legal sufficiency of the allegations of any complaint ... to state a claim on which relief can be granted ... In ruling on a motion to strike, the court is limited to the facts alleged in the complaint. The court must construe the facts in the complaint most favorably to the plaintiff ... If facts provable in the complaint would support a cause of action, the motion to strike must be denied. Faulkner v. United Technologies Corp., 240 Conn. 576, 580 (1997), citing Waters v. Autuori, 236 Conn. 820, 825-26 (1996).
In ruling on a motion to strike the trial court has an " obligation to take the facts to be those alleged in the challenged pleading or part thereof] and to construe [them] in the manner most favorable to sustaining their legal sufficiency." Connecticut National Bank v. Douglas, 221 Conn. 530, 536 (1992). " We take the facts to be those alleged in the complaint ... and we construe the complaint in the manner most favorable to sustaining its legal sufficiency." Commissioner of Labor v. C.J.M. Services, Inc., 268 Conn. 283, 292 (2004). " A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court." Loricco Towers Condo Ass’n v. Pantani, 90 Conn.App. 43, 50 (2005). " Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically." Violano v. Fernandez, 280 Conn. 310, 318 (2006).
Timeliness of Motion to Strike
Plaintiff initially challenges the Motion to Strike as filed untimely under Practice Book Section 10-8 which provides that:
Commencing on the return day of the writ, summons and complaint in civil actions, pleadings, including motions and requests addressed to the pleadings, shall advance within thirty days from the return day, and any subsequent pleadings, motions and requests shall advance at least one step within each successive period of thirty days from the preceding pleading or the filing of the decision of the judicial authority thereon if one is required, except that in summary process actions the time period shall be three days and in actions to foreclose a mortgage on real estate the time period shall be fifteen days.
In this action for foreclosure of a mortgage on real estate the plaintiff’s Revised Complaint was filed on October 16, 2017. A responsive pleading was due fifteen days later on October 31, 2017. Defendant’s Motion to Strike was filed on November 27, 2017, some 27 days late. On that ground, without any citation of authority other than the text of Section 10-8 quoted above, plaintiff asks that the motion to strike Counts Three and Four be summarily denied. Defendant responds that the Motion to Strike was not untimely because the plaintiff had filed a Motion for Default for Failure to Plead pursuant to Practice Book § 17-32 (No. 129) on November 22, 2017 (when the responsive pleading was 24 days overdue). Pursuant to Section 17-32(a) the Clerk did not immediately place the motion for default on the short calendar. During that interval the defendants filed their Motion to Strike Counts Three and Four on November 27, 2017 which resulted in the Clerk’s Order of November 29, 2017 (No. 129.10) denying the Motion for Default for Failure to Plead for the reason that " A responsive pleading has been filed on behalf of the Defendant, dated 11/27/2017 (# 130- Motion to Strike)." Under those circumstances the court finds that the Motion to Strike was not untimely. The defendant was not limited to filing only an answer under Section 17-32(b) because the Motion for Default had not been granted. Section 17-32(b) only applies " if a party ... has been defaulted under this section." It has been held by the Appellate Court that Section 17-32(a)’s seven-day holding period by the clerk does not prevent the court from entering a default for failure to plead within the Section 10-8 time limits. Deutsche Bank National Trust Company, Trustee, v. Bertrand, 140 Conn.App. 646, 657, cert. denied, 309 Conn. 905 (2013):
Practice Book § 17-32 provides, in relevant part: " (a) Where a defendant is in default for failure to plead pursuant to Section 10-8, the plaintiff may file a written motion for default which shall be acted on by the clerk not less than seven days from the filing of the motion, without placement on the short calendar. (b) if a party who has been defaulted under this section files an answer before judgment after default has been rendered by the judicial authority, the default shall automatically be set aside by operation of law unless a claim for a hearing in damages or a motion for judgment has been filed. If a claim for a hearing in damages or a motion for judgment has been filed, the default may be set aside only by the judicial authority ..."
Nothing in the plain language of Practice Book § 17-32, however, exposes any intent to limit the authority of the court to render a default in accordance with § 52-119 and Practice Book § 10-18, or to impose upon a judge of the Superior Court any of the procedural restrictions contained in Practice Book § 17-32, which are expressly directed toward defaults entered by the clerk of the court pursuant to Practice Book § 17-32.
Conn. Gen. Stat. § 52-119 provides: " Parties failing to plead according to the rules and orders of the court may be non-suited or defaulted as the case may be." Practice Book § 10-18 is identical except that the word " court" is replaced by the words " judicial authority."
It is therefore evident that this court could have granted plaintiff’s Motion for Default for Failure to Plead as soon as it was filed on November 22, 2017, but that did not happen and the clerk’s " procedural restriction" of Practice Book § 17-32(a) went into effect and was not countermanded by the court. The defendants filed their responsive pleading to the complaint (Motion to Strike Counts Three and Four) within the safe harbor of § 17-32(a) and the pleading was therefore not untimely.
Count Three: Equitable Subrogation
Count Three of the Revised Complaint sounding in Equitable Subrogation incorporates Paragraphs 1-11 of Count One which allege:
On February 17, 2004 Michael V. Montanaro and Emily Montanaro (the " Montanaros" ) after representing themselves to be the owners of legal title to the Property, executed and delivered to the Bank a $300,000 note and secured that note by a mortgage encumbering the Property. (Para. 3 & 4).
At the time the Montanaros granted the mortgage to the Bank, despite affirmative representations made by the Montanaros to the contrary, title to the Property was vested in the Trustees for the Emily Montanaro Trust dated July 30, 1998 and the Michael Montanaro [Trust] dated July 30, 1998. (Para. 8).
Michael V. Montanaro died on October 28, 2012 and Emily Montanaro died on June 18, 2014. (Para. 5)
On December 9, 2008, Good Sell acquired title to the Property by way of a trustee’s deed. (Para. 5)
Count Three then alleges further that:
12. The funds advanced by the [Bank] pursuant to the mortgage transaction set forth in the First Count herein were utilized to the benefit of the titleholders to the Property who enjoyed the benefits of the proceeds of the loan and were, in fact, interrelated with the Montanaros.
13. Any interests of the Trusts and/or Good Sell must be equitably subrogated to those of the foreclosing [Bank] given the interrelationship of those entities with the Montanaros together with the receipt of the closing proceeds.
The defendants argue that the foregoing allegations of Count Three are legally insufficient to state a cause of action for equitable subrogation in that (1) The Bank does not allege that it paid any debt that one or more of the defendants owed to another person who has a prior lien on the Property; and (2) The Bank does not allege that it was ignorant of the interests of Good Sell or any other defendant had in the property that were prior in right to the plaintiff’s mortgage. Plaintiffs argue that the allegations of Count Three are legally sufficient to state a cause of action for equitable subrogation, whereby the interests of Good Sell whose title derives from the Montanaro Trustees and the interests of the Montanaro Trustees, must be subordinated to the interests of the plaintiff mortgagee: First, because plaintiff has alleged an obvious mistake that would result in unjust enrichment to Defendants in that the Montanaros falsely represented that they owned the Property at the time of the loan transaction; Second, because it has alleged that it proffered monies on behalf of the Decedents as part of the loan transaction; and Third, because all three parties (The Montanaro decedents, the Trusts; and Good Sell) are alleged to be related and jointly benefitted from the proceeds of the loan transaction as well as the use and enjoyment of the property.
The doctrine of equitable subrogation " generally provides that one who advances money to discharge a prior lien on real ... property and takes a new mortgage as security is entitled to be subrogated to the rights under the prior lien against the holders of an intervening lien of which he was ignorant." Equicredit Corp. of Connecticut v. Kasper, 122 Conn.App. 94, 96-97, cert. denied, 298 Conn. 916 (2010), quoting Reynolds v. Ramos, 188 Conn. 316, 320 (1982). The Appellate Court has noted that " ... courts apply equitable subrogation sparingly" Deutsche Bank National Trust Company v. DelMastro, 133 Conn.App. 669, 674 (2012) and that:
The law relating to priority of interests has its roots in early Connecticut jurisprudence. A fundamental principle is that a mortgage that is recorded first is entitled to priority over subsequently recorded mortgages provided that every grantee has a reasonable time to get his deed recorded. The doctrine of equitable subrogation provides an exception to the first in time, first in right rule and has been applied in certain limited circumstances to rearrange the priority of parties in a case. Id.
In AJJ Enterprises, LLC v. Herns, 160 Conn.App. 375 (2015), the Appellate Court affirmed a Superior Court application of the doctrine of equitable subrogation to reorder the priorities of recorded mortgages. In so ruling the Herns court, quoting from Home Owners’ Loan Corp v. Sears Roebuck & Co., 123 Conn. 232, 238 (1937), applied the rule of equitable subrogation stated as follows:
Subrogation is a doctrine which equity borrowed from the civil law and administers so as to secure justice without regard to form or mere technicality ... It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience should have been discharged by the latter. It is a legal fiction through which one who, not as a volunteer or through his own wrong and where there are no outstanding and superior equities, pays the debt of another, is substituted to all the rights and remedies of the other, and the debt is treated in equity as still existing for his benefit. 160 Conn.App. at 396-97.
The Court further relied on The Restatement (Third) Property, Mortgages § 7.6 (1997) which provides in subsection (a):
One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment, even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee. Id.
Although the Connecticut statement of the rule is described as " broad enough" it is clearly limited to situations where the party invoking the benefit of the doctrine has paid a debt owed by another, and therefore gets to step into the shoes of the satisfied creditor. Even construing the allegations of the Third Count most favorably toward the position of the plaintiff, there is no allegation that plaintiff paid off or satisfied or disbursed loan proceeds to any mortgagee or lienholder or other secured creditor of the Montanaro defendants or the trustee of their Trusts. There is no lien or encumbrance on the land records which JP Morgan could take control of, which would cure the fact that the $300,000 mortgage executed by the Montanaro defendants in favor of plaintiff on February 17, 2004 was granted outside the chain of fee title to the Property. The proceeds of that mortgage loan did not go to the holder of any prior interest on the land records. Plaintiff itself alleges in paragraph 12 of Count Three that: " The funds advanced by the plaintiffs pursuant to the mortgage transaction ... were utilized to the benefit of the titleholders to the Property, who enjoyed the benefits of the proceeds of the loan ..." The court construes this as saying that the plaintiff disbursed the loan proceeds to its borrowers Michael and Emily Montanaro in the ordinary course of banking business and the proceeds were used by them as they pleased, which may have included home maintenance or improvement, and any remaining proceeds went at their deaths to the trusts they had established for their sons. There is no allegation of disbursing funds to pay off or retire any senior encumbrancer.
Defendants have attached to their Reply a copy of a February 12, 2004 Rider to Commitment Letter from the plaintiff to the Montanaros which conditions the commitment to make this loan as " subject to payoff and termination of mortgage held by Chase in the original amount of $200,000 dated 4/15/93." Plaintiff has not alleged that the payoff of the 1993 mortgage from proceeds of this loan ever took place, and the Revised Complaint alleges in Count One, para. 9(b) that the $200,000 Mortgage dated April 15, 1993 held by Chase Manhattan Bank of Connecticut was still outstanding as a prior encumbrance on the Property when this action was commenced in 2017. The Amendment to Commitment Letter is not properly before the court on this motion to strike and has not played any role in this decision. The plaintiff’s failure to allege in Count Three payment (from the loan proceeds or otherwise) of any obligation of the Montanaros is before the court.
Plaintiff stresses the allegations of material misrepresentation by the Montanaros (which are alleged in Count Six to be fraudulent misrepresentations) as to ownership of the Property as of February 17, 2004 and the " unjust enrichment" which will result if the current state of the record title remains in place. The cases on equitable subrogation do state that one of the purposes of the doctrine is to avoid unjust enrichment. See, e.g. AJJ Enterprises v. Herns, supra, 160 Conn.App. at 401. But plaintiff has cited no authority that every situation causing unjust enrichment is suitable for application of the doctrine of equitable subrogation, which is a concept of limited application subject to a specific set of prerequisites, one of which- payment or discharge by the plaintiff of a superior lien or encumbrance- has not been pleaded. The Herns court cautioned that " The Restatement is careful to emphasize that the court considering equitable subrogation must be convinced that no injustice will result to the intervening lien holder before applying the doctrine." Since the " intervening lien holder" whose position plaintiff asks to be subrogated to would apparently be the Trustees for the Emily Montanaro Trust and the Michael Montanaro Trust each dated July 30, 1998 (Count Three, para. 8) which would vest fee simple title in the plaintiff by subrogation without the equitable protections and redemption rights of a foreclosure judgment, the application of the equitable subrogation doctrine in this case would seem to cause an injustice. The court also notes that Count Five of the Revised Complaint states a monetary claim based on unjust enrichment.
The Motion to Strike Count Three of the Complaint seeking equitable subrogation is granted.
Count Four: Equitable Subordination
Count Four sounding in Equitable Subordination incorporates all eleven paragraphs of Count One (summarized above at page 5 of this Memorandum of Decision) and alleges additionally:
12. The Montanaros, the Trusts, and Good Sell, which were parties closely affiliated with each other, entered into a series of conveyances and financing transactions, including affidavits attesting as to ownership which were later shown to be untrue, which had the result of misleading the Plaintiff as to the proper ownership of said property.
13. As a result, the interest of Defendant Good Sell in the Property should be equitably subordinated to the interest of the Plaintiff herein.
14. The Plaintiff is without an adequate remedy at law herein.
Defendants’ Memorandum of Law in Support of Motion to Strike Count Four is based entirely on its legal claim that " Equitable subordination is not available in foreclosure proceedings; that doctrine is limited to bankruptcy proceedings.," citing one case, People’s United Bank v. Wetherill Associates, Superior Court, Judicial District of Hartford, Docket No. HHD CV09-6005763 (January 4, 2011, Robaina, J.), 51 Conn.L.Rptr. 377, 2011 WL 383740. Plaintiff’s Objection to Motion to Strike Count Four does not dispute that Judge Robaina in Wetherill struck a special defense of equitable subordination from a Superior Court action by People’s United Bank asking for a declaratory judgment seeking to establish that its security positions on the assets of a company known as Reliance Automotive were superior to the security positions of the defendant Wetherill Associates by holding that the theory of equitable subordination was exclusive to federal bankruptcy law. Defendant’s response is that this court sits as a court of equity in this foreclosure case, and " ... [E]quitable subordination is a remedy based in equity, and it is left [to] the court’s discretion whether to apply the doctrine. Here, plaintiff clearly alleges the requisite elements of a claim of equitable subordination." (Objection, p. 6.)
Priority of encumbrances on real property is not categorically off limits to a Connecticut Superior Court adjudicating a foreclosure case. In the case of a strict foreclosure, the court must assign law days in reverse order of priority. In the case of a foreclosure by sale where the proceeds of sale have been turned over to the court by the Committee the court’s supplemental judgment must distribute those funds to encumbrancers in the order of their priority. In the case of a claim of equitable subrogation, as just discussed herein, the court, upon a finding of all the prerequisites of that doctrine, has the power in equity to reorder the priority of liens or mortgages as an exception to the " first in time; first in right" scheme of the recording statutes. But plaintiff in this case is not invoking any of those scenarios in asking the court to subordinate the fee simple ownership of the defendant Good Sell to plaintiff’s mortgagee position under the 2004 mortgage from Michael and Emily Montanaro which is the subject of this case on the ground that the Montanaros had misrepresented their ownership of the Property in 2004 when that mortgage was granted. The three-pronged test of equitable subordination upon which plaintiff relies is strictly a bankruptcy-related concept. The only case cited by plaintiff is In re Mr. R.’s Prepared Foods, Inc., 251 B.R. 24, 28-19 (Bankr., D.Conn 2000). The three prongs of the Bankruptcy Court case for equitable subordination of a claim in bankruptcy are (1) inequitable conduct by the creditor whose claim is to be subordinated (2) resulting in unfair advantage to the malefactor and/or harm to the debtor or its other creditors, and (3) that equitable subordination would not be inconsistent with other aspects of the Bankruptcy Code. That test, which has been codified at 11 U.S.C. § 510(c), is the same test that Judge Robaina was being asked to apply in the People’s United Bank declaratory judgment action. It must be pointed out, however, that the bankruptcy priority test does not go to reordering of encumbrances recorded on the land records. It is grounded on the equitable power of the Bankruptcy Court in dealing with claims filed against a debtor’s bankruptcy estate to protect creditors against fraud and breach of fiduciary duty by debtors, and " derives from the Bankruptcy Court’s role as administrator of the debtor’s estate for the equal benefit of all creditors." Wetherill, supra, at *6, citing HBE Leasing Corp. v. Frank, 48 F.3d 623, 634 (2d Cir, 2005).
Judge Robaina addressed the issue whether or not the doctrine of equity subordination as delineated in In re Mr. R’s Prepared Foods, Inc., supra, may be used outside of bankruptcy proceedings, described as an issue of first impression in Connecticut. Following a thorough review of all cases throughout the country on that precise issue, Judge Robaina concluded that " The court is persuaded by the reasoning of courts that have declined to use equitable subordination outside of a bankruptcy context." Id., *7. The cases so holding (being a majority of the cases considered) included holdings of federal District Courts, Bankruptcy Courts. Appellate courts in Illinois and Indiana, a decision of the Massachusetts Superior Court affirmed by the Massachusetts Supreme Court, and a decision of the United States Courts of Appeals for the Second Circuit, being HBE Leasing Corp. v. Frank, supra (" Equitable subordination is distinctly a power of federal bankruptcy courts, as courts of equity, to subordinate the claims of one creditor to those of others" ).
This court is persuaded by the thorough, well-reasoned ruling in Peoples United Bank v. Wetherill Associates, which is the only relevant Connecticut authority on the issue of non-bankruptcy application, and will apply that ruling to the Fourth Count of Plaintiff’s Revised Complaint. The only theory of equitable subordination advanced by plaintiff is the three-part theory of the Bankruptcy Court for the District of Connecticut in In re Mr. R.’s Prepared Foods, Inc. which Congress has codified as part of the Bankruptcy Code. That theory, for the reasons stated, does not apply to this foreclosure case in the Superior Court, and the Court accordingly grants the Defendants’ Motion to Strike the Fourth Count of the Revised Complaint.
Order
For the reasons stated herein the Defendants’ Motion to Strike the Third and Fourth Counts of the Revised Complaint is granted; and the Plaintiff’s Objection to Defendants’ Motion to Strike the Third and Fourth Counts of the Revised Complaint is overruled.