Opinion
No. KNL-CV-07-5002721S
February 27, 2008
MEMORANDUM OF DECISION
INTRODUCTION
This vigorously contested matter is an action for a foreclosure of the plaintiff's first mortgage on certain commercial property owned by the defendant, 9 Wisconsin Avenue, LLC ("9-WA"), located in Norwich, Connecticut, as well as a foreclosure of the plaintiff's third mortgage on residential property owned by the defendant, Carol Winogradow, in Avon, Connecticut. The mortgages were granted to secure certain indebtedness owed to the plaintiff by the defendants, WIN Holdings International, Inc. ("WIN") and 9-WA, payment of which was further guaranteed by the defendants, Victor Winogradow and Carol Winogradow. (9-WA, WIN and Mr. and Mrs. Winogradow are collectively referred to herein as "the defendants" or "the Obligors.") At the time of trial, Tentech, LLC (Tentech) had been substituted as plaintiff by reason of the assignment of the obligations and mortgages from the New Alliance Bank, the original plaintiff.
The plaintiff alleges in the complaint that the Obligors failed to make timely payments of the periodic installments of principal and interest owed on the subject indebtedness. The Obligors have asserted defenses, contending in their answer that the tax bill for municipal real estate taxes on the commercial property was mailed to the plaintiff's predecessor in interest, New Alliance Bank ("NAB"), which paid it, and then claimed the same as the basis for default. The Obligors allege that they were unaware that the tax bill had been issued. They allege, therefore, that their failure to pay the tax bill should not put them in default because NAB should have forwarded the bill to them. Accordingly, the Obligors claim that NAB's declaration of default was wrongful.
This matter proceeded to trial before this Court on January 10, 2008, at which time the parties agreed to bifurcate the matter into separate hearings, with the first dealing with the issue of liability and with the financial issues deferred for a later hearing, if necessary.
The Court heard the testimony of Gary Danis, a representative of NAB, the original plaintiff in this action, and the defendant, Victor Winogradow. The Court also received into evidence a series of documents, consisting of 18 exhibits submitted on behalf of the plaintiff and two exhibits submitted on behalf of the Obligors. The parties stipulated to the introduction of each of these documents as full exhibits. There was no real disagreement with respect to the documentation, which formed the basis of the obligations. The issue therefore related to the defenses raised by the obligors dealing with the alleged default. The parties each filed briefs advancing their respective claims with respect to the facts proven and the law.
FINDINGS OF FACT
From the evidence, including the reasonable and logical inferences therefrom, and taking into account the Court's evaluation of the credibility of the witnesses, the following findings of fact are made.
Gary Danis ("Danis") has been employed by NAB since the bank was formed in April of 2004. His current title is First Vice President, Special Assets. Prior to that, he worked for the bank's predecessor, New Haven Savings Bank, where he first began his employment in 1991. Before becoming First Vice President, he had held the title of Vice President, Special Assets since 1996. In his current position, Danis is responsible for oversight of the bank's retail and commercial collections, workouts, litigation and asset disposition. His duties in his former position were essentially the same.
NAB acquired all assets of Tolland Bank, including the note and mortgages at issue in this action.
The loan to WIN originated in January of 2000, and was originally for the principal amount of $1.8 million (Exhibit P-1). In August of 2001, additional funds were provided by the bank to WIN, increasing the principal amount to $2,252,550.13 (Exhibit P-2).
When NAB acquired the loan it was in default. The defendant's business was adversely affected by the 9/11 incident in New York. Thereafter, in March of 2005, the loan was further modified to allow WIN to resume regular payments, with a current principal balance of $2,194,462.90 (Exhibit P-5).
WIN granted the bank a mortgage on its commercial property, located at 9 Wisconsin Avenue in Norwich, which consists of an industrial building of approximately 130,000 square feet (Exhibits P-6, P-8 and P-9). That property is claimed by Mr. Winogradow to have a value of between four and one-half and nine million dollars. (TR, p. 72.) Victor and Carol Winogradow also granted the bank a third mortgage on a residence in Avon (Exhibits P-10, P-11 and P-12), to secure the personal guarantees that they had given with respect to the loan (Exhibits P-3 and P-4).
As early as March 2006, NAB was suggesting to Mr. Winogradow that they refinance out of the bank. (TR, p. 81.) This suit was instituted on January 10, 2007. NAB thereafter assigned the loan and mortgages at issue to Tentech, LLC on December 28, 2007 (Exhibits P-16 and P-17).
For business reasons suggested by NAB, the Norwich commercial property was transferred to 9-WA, after the loan was made, 9-WA is a signatory to the loan modification agreement (Exhibit P-12, at p. 9).
At the time of WIN's acquisition of the property, it sought and obtained tax relief from the City of Norwich, in the form of a tax abatement that reduced the annual taxes on the property from approximately $75,000-$80,000 per year to only approximately $16,000 per year. The abatement lasted for five years until the tax year 2005. (Exhibit P-18.)
The mortgage requires the property owner to pay the lender a monthly amount to be held in escrow to pay the taxes on the property. NAB paid the real estate taxes to the City of Norwich through an escrow in accordance with the terms of the mortgage. (Exhibit P-15, TR, p. 59.) Mr. Winogradow expected the bank to increase the escrow to permit the payment of the increase in taxes when the abatement expired. However, the taxes on the list of October 1, 2005, which were billed in arrears in 2006, increased to $86,851.42 (Exhibit P-18, at p. 7). No increase in the escrow had been established by NAB.
At the request of NAB, the 2005 tax bill was sent directly to NAB from the Norwich tax collector, for the installment due in August of 2006. NAB paid the tax bill in July, before the end of the grace period. NAB did not notify the obligors of the receipt of the tax bill. Nor did NAB provide a written demand to the obligors to pay the tax bill before they in fact paid it. (TR, pp. 26, 31.) Nor, as indicated above, did NAB increase the escrow installments for the payment of the increased tax amount. Thereafter, in mid-October of 2006, in the course of monitoring this loan, there were conversations between Mr. Danis and Mr. Winogradow to discuss the situation. The Court does not credit the testimony of Danis about the contents of those discussions. Danis at various times during the trial had to "correct" his testimony. There was never a written demand by NAB to the defendants regarding any obligation to reimburse the bank for the July payment of taxes. (TR, pp. 31, 66, 69.)
No default had been declared at the time of the payment of the taxes by NAB. The obligors continued to make regular monthly payments up to and including December 2006. (Exhibit P-15.) The parties stipulated at the trial that the last payment was made on December 5, 2006. NAB elected to credit that payment to the reimbursement of the taxes it had paid rather than apply it to principal and interest as it had done in the past. In that manner, NAB claimed that the December 2006 payment was in default and accelerated the debt.
It is a reasonable and logical inference from the evidence, as the defendants claim, that NAB was at that time anxious to get itself out of this loan arrangement. The first time Mr. Winogradow learned that NAB had paid the taxes to the City of Norwich in July 2006 was when he was told of the claimed default in December 2006. (TR, p. 79.) Thereafter, the controversy which resulted in this litigation ensued.
Section 1.3 of the open-end mortgage (Exhibit P-6) and the first amended mortgage (Exhibit P-8) provides both that the mortgagor shall pay the taxes " within any applicable grace period" in subsection A and, alternatively in subsection G, that a monthly escrow shall be paid to the bank to permit the bank to pay the taxes in an amount " as estimated by the mortgagee in its sole discretion." As indicated above, NAB never established a new amount to be paid in escrow by reason of the expiration of the abatement of taxes.
NAB actually paid the tax when it received the tax bill before the expiration of the grace period. (Exhibit P-15.) WIN has never repaid NAB any of the taxes that NAB had paid. (TR, p. 21.)
At the time of the assignment of the note and mortgages to Tentech on December 28, 2007, the NAB claimed the balance on the loan was $2,906,510.62, consisting of principal of $2,151,463.37, accrued but unpaid interest of $594,169.99, late charges accruing prior to the acceleration of the note of $32,447.47 and real estate taxes paid by NAB for the 2006 tax year and the first half of the 2007 tax year in the amount of $128,429.78. (TR, pp. 23-24.)
The borrower made an offer to reinstate the loan during discussions held in December of 2007, which was rejected by NAB. NAB insisted that the borrower pay off all existing liens owed to the Norwich Public Utilities Commission. (TR, pp. 32, 39.) The defendants given 30 days notice are and have been ready to reinstate the loan to make all of the past payments, including any taxes that have been paid, provided no default or penalties were applied.
Mr. Winogradow acknowledged the existence of the Norwich Public Utilities Commission's priority lien on the premises, as referenced in a certain forbearance agreement that 9-WA entered into with the Norwich Public Utilities Commission. (Exhibit P-13, p. 1, TR, pp. 75-76.)
Mr. Winogradow acknowledged that the mortgage modification agreement of August 2001 indicates that the lender may declare a default if the borrower fails to have any lien recorded on the mortgaged property (other than a lien for taxes not yet due) discharged within 30 days of its recording. (Exhibit P-8, ¶ 2.1.I, at p. 18, TR, pp. 77-78.) Some of the Norwich Public Utilities Commission liens were acknowledged as being on the records in the original mortgage documents. The complaint in this matter does not allege that the default was caused by reason of the existence of the liens in question. Nor does the complaint allege that the default was caused by the failure to pay taxes to the City of Norwich.
Mr. Winogradow does not have any personal knowledge indicating that the lender consented to Norwich Public Utilities' recording of any lien on the property. (TR, p. 78.)
Mr. Winogradow admitted that the lien of Norwich Public Utilities was not removed within 30 days of its recordation and, in fact, the lien is still encumbering the mortgaged property. (TR, p. 78.)
At the time that the loan was first made, there were already tax liens recorded against the commercial property by Norwich Public Utilities Commission (Amended Complaint, Count One, ¶ 15).
The mortgage agreement states that the lender's decision not to declare a default for any reason does not act as a waiver of its right to declare a default for the same reason in the future. (Exhibit P-6, at p. 23, ¶ 3.8, TR, pp. 42-43.)
The mortgage modification agreement does not contain any provision, conferring a right of reinstatement to the borrower (Exhibit P-8).
Mr. Winogradow admitted that he did not have the funds available to reinstate the loan as of the day of trial, but required about 30 days to accumulate the funds. (TR, p. 73.)
Mr. Winogradow is a college graduate, having earned a bachelor of science degree in marketing from the University of New Haven. He also obtained a master's degree in international business from the American Graduate School of International Management in Phoenix, also known as Thunderbird University. (TR, pp. 46-47.)
Mr. Winogradow considers himself a pretty good businessman and did not claim any disadvantage by reason of lack of education or training. (TR, p. 49.)
Mr. Winogradow signed the original loan documents on behalf of WIN, as well as the modifications, both on behalf of WIN and 9-WA. He was represented by competent counsel, Richard Polivy, at the time that he executed these various documents. (TR, pp. 49-50.)
Mr. Winogradow acknowledged that the loan modification agreement, executed on March 31, 2005 (Exhibit P-9), which he signed twice (once on behalf of WIN and once on behalf of 9-WA), indicates that, unless otherwise provided, all terms and conditions of the prior mortgage modification agreement of August of 2001 (Exhibit P-8) remain in full force and effect. (TR, pp. 51-52.)
Mr. Winogradow acknowledged that the modification agreement of March 31, 2005 (Exhibit P-9) makes no mention of real estate taxes, meaning that the provisions of the earlier modification of August of 2001 (Exhibit P-8) apply in this regard. (TR, p. 52.)
Mr. Winogradow acknowledged that the mortgage modification agreement of August of 2001 (Exhibit P-8, ¶ 1.3.A, at p. 5) indicates that the mortgagor (WIN) was obligated to pay all taxes on the mortgaged property within any applicable grace period. (TR, p. 53.)
Mr. Winogradow further acknowledged that the mortgage modification agreement of August of 2001 confers the right upon the lender to pay the real estate taxes on the mortgaged property, if the borrower fails to do so, and that any such amount paid by the lender will be considered a "mortgagee advance" in accordance with ¶ 3.4 of the mortgage modification agreement. (Exhibit P-8, ¶ 1.3.C, at p. 6, TR, pp. 53-54.)
Mr. Winogradow further acknowledged that the mortgage modification agreement of August of 2001 grants the lender the right to pay, without notice or demand to the borrower, any amount that the borrower is required to pay, including taxes, as required under ¶ 1.3 of the agreement. (Exhibit P-8, ¶ 3.4, at p. 22, TR, p. 54.)
Mr. Winogradow further acknowledged that the mortgage modification agreement of August of 2001 obligates the borrower to pay, in addition to the monthly installments of principal and interest due under the loan, an amount equal to 1/12 of the annual taxes assessed against the mortgaged property. (Exhibit P-B, ¶ 1.3.G, at p. 6, (TR, p. 55.)
Mr. Winogradow never asked the bank for permission to pay the City of Norwich directly for the real estate taxes owed on the property, meaning that the borrower was therefore required to comply with the provisions of ¶ 1.3.G of the mortgage modification agreement of August of 2001 by making escrow payments in amounts determined in the discretion of the mortgagee. (TR, p. 55.) There was no evidence that new increased escrow payment amounts were established to provide for the increase in taxes which were to be due at the termination of the abatement period.
Mr. Winogradow was aware that the City of Norwich bills in arrears for taxes (TR, p. 62), but was mistaken as to when the end of the tax abatement would increase the taxes due.
None of the Obligors has made any payments on the debt since the time of the loan's assignment to Tentech which was after the default was declared. (TR, p. 63.)
LAW
There is no dispute that a legally enforceable contractual relationship was established between NAB and the Obligors, as evidenced by the original notes, mortgages and personal guarantees, as well as the modifications thereto (Exhibits P-1-P-12), nor is there any challenge mounted to Tentech's status as assignee of the rights embodied in those documents (see Exhibits P-16 and P-17). Likewise, there has been no suggestion that any party lacked sufficient legal capacity to enter into the agreement.
Similarly, it is not disputed that the loan agreement, mortgages and guarantees at issue have a legal objective, recite sufficient consideration and indicate a meeting of the minds (i.e. the legal notion of mutual assent), thereby establishing a binding and enforceable agreement. See Quinn v. Gulf and Western Corp., 644 F.2d 89, 93 (2nd Cir. 1981); Donohue v. Picinich, 852 F.Sup. 144, 148 (D.Conn. 1994); Connecticut National Bank v. Voog, 233 Conn. 352, 366, 659 A.2d 172 (1995); Ubysz v. DiPietro, 185 Conn. 47, 51, 440 A.2d 830 (1981); CMG Realty of Connecticut, Inc. v. Colonnade, Ltd., 36 Conn.App. 653, 660-61, 653 A.2d 207 (1995).
Although there are some inconsistencies, the contract found in the various documents contain the requisite level of certainty so as to clearly delineate its subject matter and objectives. Fortier v. Newington Group, Inc., 30 Conn.App. 505, 510, 620 A.2d 1321, cert. denied, 225 Conn. 922, 625 A.2d 823 (1993).
As recently as 2005, our Appellate Court enumerated the recognized defenses to foreclosure actions in Louis Gherlone Excavating, Inc. v. McLean Construction Co., 88 Conn.App. 775, 871 A.2d 1057, cert. granted, 274 Conn. 909, 876 A.2d 1201 (2005) (appeal withdrawn February 3, 2006).
"Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction . . . or, if there had never been a valid lien . . . The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action . . . A valid special defense at law to a foreclosure proceeding must be legally sufficient and address the making, validity or enforcement of the mortgage, the note or both." [(Emphasis in original, internal quotation marks omitted.)] Id., at 781, quoting Fidelity Bank v. Krenisky, 72 Conn.App. 700, 705, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).
However, it is also true that "[a]n action of foreclosure is peculiarly equitable and the court may entertain all questions which are necessary to be determined in order that complete justice may be done between the parties." Glotzer v. Keyes, 125 Conn. 227, 231, A.2d 1 (1939); accord Reynolds v. Ramos, 188 Conn. 316, 320, 449 A.2d 182 (1982); Hartford Federal Savings Loan Assn. v. Lenczyk, 153 Conn. 457, 463, 217 A.2d 694 (1966); see generally, Morgera v. Chiappardi, 74 Conn.App. 442, 456-58, 813 A.2d 89 (2003) (discussing general equitable principles that must be applied in a foreclosure action). "Although equitable power must be exercised equitably . . . [t]he determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court." [(Citation omitted, internal quotation marks omitted.)] Reynolds v. Ramos, supra, 188 Conn. 320 (citation omitted). Based on the underlying equitable nature of a foreclosure action, Connecticut law recognizes that "a trial court in foreclosure proceedings has discretion, on equitable considerations and principles, to withhold foreclosure or to reduce the amount of the stated indebtedness." Hamm v. Taylor, 180 Conn. 491, 497, 429 A.2d 946 (1980). "So, if the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had . . . and this equitable consideration has long been recognized in this [s]tate." Petterson v. Weinstock, 106 Conn. 436, 442, 138 A.433 (1927) (citations omitted); accord Morgera v. Chiappardi, supra, 74 Conn.App. 456-58.
"Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles . . . LaSalle National Bank v. Shook, supra, 67 Conn.App. 96-97. "Our courts have permitted several equitable defenses to a foreclosure action. If the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had . . . Other equitable defenses that our Supreme Court has recognized in foreclosure actions include unconscionability . . . abandonment of security . . . and usury . . . New Haven Savings Bank v. LaPlace, 66 Conn.App. 1, 10, 783 A.2d 1174, cert. denied, 258 Conn. 942, 786 A.2d 426 (2001)." (Internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, LLC, 69 Conn.App. 824, 833-34, 798 A.2d 445 (2002).
The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court. Connecticut Bank Trust Co. v. Winters, 225 Conn. 146, 162, 622 A.2d 536 (1993). "Discretion means a legal discretion, to be exercised in conformity with the spirit of the law and in a manner to subserve and not to impede or defeat the ends of substantial justice . . . Hammerberg v. Leinert, 132 Conn. 596, 604-05, 46 A.2d 420 (1946). For that reason, equitable remedies are not bound by formula but are molded to the needs of justice. Montanaro Bros. Builders, Inc. v. Snow, 4 Conn.App. 46, 54, 492 A.2d 223 (1985)." (Internal quotation marks omitted.) McKeever v. Fiore, 78 Conn.App. 783, 788, 829 A.2d 846 (2003).
"Our Supreme Court has insisted that equity must look to substance and not mere form. Bender v. Bender, 258 Conn. 733, 751, 785 A.2d 197 (2001); Connecticut National Bank v. Chapman, 153 Conn. 393, 397, 216 A.2d 814 (1966). A failure to do equity need not be pleaded by defendant where the pleading on behalf of plaintiff or the proof discloses the inequitable position of plaintiff . . ." 30A C.J.S. 298, Equity § 96 (1992). Id., 789.
"The doctrine of unclean hands holds that one who seeks to prove that he is entitled to the benefit of equity must first come before the court with clean hands. Cohen v. Cohen, 182 Conn. 193, 201, 438 A.2d 55 (1980); Sachs v. Sachs, 22 Conn.App. 410, 416, 578 A.2d 649, cert. denied, 216 Conn. 815, 580 A.2d 60 (1990). It expresses the principle that when a plaintiff seeks equitable relief, he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue. Bauer v. Waste Management of Connecticut, Inc., 239 Conn. 515, 525, 686 A.2d 481 (1996)." (Internal quotation marks omitted.) Id.
Our Appellate Court held in Barasso v. Rear Still Hill Road, LLC, 81 Conn.App. 798, 842 A.2d 1134 (2004), "special defenses and counterclaims alleging a breach of an implied covenant of good faith and fair dealing . . . are not equitable defenses to a mortgage foreclosure." Barasso v. Rear Still Hill Road, LLC, supra, 81 Conn.App. 808, n. 5, quoting Fidelity Bank v. Krenisky, 72 Conn.App. 716-17, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).
A trial court in a foreclosure is not limited to the defenses claimed in the pleadings in considering the application of equitable principals to the issues presented at trial. See Hamm v. Taylor, 180 Conn. 491, 429 A.2d 946 (1980).
The "assignee stands in the shoes of the assignor." (Internal quotation marks omitted.) Wesley v. Schaller Subaru, Inc., 277 Conn. 526, 539 n. 15, 893 A.2d 389 (2006); Rumbia v. Utica Mutual Ins. Co., 254 Conn. 259, 277 (2000).
CONCLUSION
The issues here relate to the defenses to the foreclosure claimed by the defendants. In their special defenses, the defendants have raised several legal or equitable claims.
The defendants have called into play the Court's equitable jurisdiction or discretion to deny the plaintiff the opportunity to pursue foreclosure under the circumstances here.
The plaintiff, on the other hand, argues that a technical reading of the various documents which create the obligations and mortgagee rights permit foreclosure and that the circumstances as they claim to have proven them do not admit of the use of the limited special equitable powers to deprive the plaintiff of their foreclosure.
The Court, having given consideration to the facts found and applied the law cited, considering the arguments of the parties and balancing the equities, is more persuaded by the defendants' claims.
First, notwithstanding the plaintiff's claims to the contrary, there was in fact no evidence of a technical default under the loan documents. While a failure to pay taxes can constitute a default under the terms of the mortgage (Exhibits P-6 P-8) the plaintiff's complaint does not allege that the default was for the nonpayment of taxes. Moreover, the documents require the payment by the mortgagors "within any applicable grace period and before the same become delinquent." But here, there are several factors which are relevant. The bank asked the tax collector to send the bill to the bank, therefore, it must have been expected that the mortgagors might not be made aware of the bill. Next, the bank paid the bill before the expiration of the grace period and without making demand of the mortgagors thereby depriving them of the opportunity to comply with the very term of the mortgage now relied on by the plaintiff.
Also, while Section 1.3.C of the mortgage as amended does allow the bank to pay the taxes, that authority exists, as the defendants contend, only "if the Mortgagor fails to pay any Taxes due pursuant to subsections A. Or B. Above." Here, there was no such failure because it is undisputed that the bank paid those taxes before the end of the grace period. Moreover, the mortgage documents obligate the bank to provide written notice to the defendants when it seeks to obtain reimbursement for the payment of taxes and no such notice was ever provided here.
Second, and more importantly, equitable principles bar any foreclosure. The circumstances here lead the Court to conclude that NAB wanted to extricate itself from this loan which had a stormy history. They took affirmative action to force the default at a time that suited them by paying the taxes without any demand of the defendants to pay it and after depriving the defendants of even receiving the billing from the tax collector. This was done, the evidence shows, even while the obligors were making their regular monthly payments. Then, using the regular ordinary monthly payment to reimburse itself for the tax payment, the bank claimed a default for the alleged failure to make that very same monthly payment.
The Court, having balanced the equities, and being mindful of the constraints upon the discretion vested in the Court under such circumstances, finds that complete justice cannot be done by permitting this foreclosure. It is found that it would be unconscionable to permit the bank to benefit from a default which it contrived to create. As our Supreme Court has said, when one seeks equitable relief "must show that his conduct has been fair, equitable and honest as to the particular controversy in issue." Bauer v. Waste Management of Connecticut, Inc., 239 Conn. 515, 525, 686 A.2d 481 (1996), cited in the foreclosure case of McKeever v. Fiore, supra, 78 Conn.App. 789. The present plaintiff is not in any better position than NAB, its assignor.
Accordingly, the issues as to liability are found in favor of the defendant and judgment may issue for the defendant together with costs.