Summary
In Ulster Savings Bank v. 28 Brynwood Lane, Ltd, (Superior Court, Docket No. X08 CV 05 4007323, January 11, 2010, Jennings, J.T.R.), the court noted that: "there have been many and varied interpretations of the `making, validity and enforcement' requirement by Connecticut Superior Court decisions.
Summary of this case from Rockville Bank v. Southington Hosp.Opinion
No. X-08 CV05-4007323S
January 11, 2010
Procedural / Factual Background
This is a foreclosure action commenced by Ulster Savings Bank as the holder of an October 4, 2002 promissory note (the "Note") and first mortgage relating to a $3,000,000 loan for new home construction at the premises at 28 Brynwood Lane in Greenwich. (The "Property.") The original lender was Ulster Home Mortgage, Inc., which assigned the note and mortgage to plaintiff, Ulster Savings Bank on the date of closing. The borrowers and co-makers of the Note were the builder, the defendant Robert Chipley ("Chipley") and 28 Brynwood Lane, Ltd., ("28 Brynwood") a corporation formed by Chipley to take title to the Property. The mortgagor was 28 Brynwood as owner of the property. The defendants are 28 Brynwood, Chipley, Victoria Koch ("Koch") the holder of a $1.6 million "Purchase Money Mortgage Deed" on the Property subsequent to the plaintiff's mortgage, and other subsequent lienholders who are not involved in the pending motions.
The Note calls for monthly payments of interest only commencing November 1, 2002 at the annual rate of 9.75% on the outstanding balance of principal advanced pursuant to the terms of a Building Loan Agreement between the parties. The full amount of principal and unpaid interest is due on "April 4, 2004 or until the principal sum of this note has been fully advanced pursuant to the Building Loan Contract, whichever comes sooner." The Note Rider provides for a default rate of interest "equal to 2% above the highest Prime Rate published in the Wall Street Journal which is in effect on the last day of the preceding month," but in no event less than the Note rate of 9.75%.
The complaint alleges that the plaintiff is the owner and holder of the Note and mortgage, that the Note has matured without repayment, and the "plaintiff has declared said Note to be due in full," and seeks a judgment of foreclosure of the mortgage and deficiency judgments against 28 Brynwood and Chipley as obligors on the Note. Defendants 28 Brynwood and Chipley in their answer admit the execution of the Note and mortgage and the recording of the mortgage on the Greenwich land records, but deny that the Note has matured. Defendant Koch's answer mirrors that of 28 Brynwood and Chipley. All three of these defendants have filed multiple special defenses, and counterclaims against the plaintiff. In addition they both have been granted permission of the court to cite in the original lender Ulster Home Mortgage, Inc. ("UHM") as a counterclaim defendant and have filed multi-count counterclaims against UHM. The special defenses and counterclaims (to be detailed, infra,) as defendant Koch concedes in her memorandum of law "all derive from the same factual background" which is not in material dispute which the court will summarize.
"Both" refers to the fact that 28 Brynwood and Chipley have filed their answer, special defenses and counterclaims jointly through their (former) common counsel. Koch has filed separately.
Prior to October 4, 2002 Victoria Koch had been the owner of the Property. In 2002 she and her husband retained the services of defendant Chipley to build a new home on the Property. To accomplish this plan, Koch entered into agreement with Chipley pursuant to which Chipley purchased the Property from Koch for $2.5 million, with title to be taken in the name of 28 Brynwood, a corporation to be formed by Chipley for that purpose. Chipley and 28 Brynwood successfully applied to UHM for this $3 million construction loan, the proceeds of which were used, in part, to purchase the Property from Koch. Also as part consideration for that transfer, 28 Brynwood executed and delivered a $1.6 million Purchase Money Promissory Note to Koch, secured by the Purchase Money Mortgage deed on the property, subsequent in interest to plaintiff's mortgage. Koch simultaneously entered into a "Re-Purchase Agreement with Chipley and 28 Brynwood to buy back the Property upon completion of the construction for $5,829,000. That repurchase has not taken place and 28 Brynwood is still the owner of the Property. Three letters (two from the plaintiff bank and one from UHM) to 28 Brynwood and/or Chipley are largely the factual basis of all the special defenses and counterclaims.
The first letter is from the plaintiff bank dated January 6, 2004 and reminds 28 Brynwood that the loan would be maturing on April 4, 2004, and that the Building and Loan Agreement requires the loan to be completely satisfied or converted to a permanent mortgage within eighteen months. The letter then states:
Should your loan become mature before it is paid off or converted to a permanent mortgage it will be considered in default. Upon maturity, Ulster Savings Bank will review your mortgage file to determine whether you should refinance your construction loan for a new construction term. If a refinance is found to be necessary, you will incur all additional closing costs.
If we determine that refinancing of your loan will not be necessary the following will occur. The interest rate on your construction loan will become variable on maturity. The rate will be the higher of your current interest rate or the Prime Rate plus 2%. This variable rate structure will remain in effect until the loan is converted to a permanent mortgage or is paid off in full. This will be reflected in your monthly interest billing statements following the date of maturity.
The second letter was written by the bank on May 25, 2005, almost 17 months after the first letter and 14 months after the April 4, 2004 maturity date of the loan. The letter recites that the loan had matured without being satisfied or converted to a permanent loan and consequently was in default, and that banking regulations required the loan either to be paid off or modified into a non-matured loan. The bank offered to extend and modify the construction loan so that it would not be in default. The bank offered a one-year extension "at a monthly fluctuating rate equal to 3.5% above the highest prime rate published in the Wall Street Journal." and that the extension and modification would be "without title costs, recording charges, and/or bank documentation and settlement fees" if closed within 30 days of the letter. The letter concluded by reminding the borrower that the loan must be "fully discharged" if the borrower did not wish to take advantage of the offered modification and extension.
The third letter is from UHM to 28 Brynwood and Chipley, dated August 16, 2005 and is entitled "Locked Interest Rate Commitment." It informs of approval of a mortgage application submitted to UHM for a $3 million 12 month construction loan at a fixed rate of 10% with no points, with monthly payment of interest only until maturity.
The identical factual allegations of the special defenses and counterclaims of both defendants, then fill in by allegation the gaps between the letters. These allegations include claims that:
On information and belief the Bank determined that refinancing of the Construction Loan on maturity would not be necessary, and elected to adopt the variable rate option set forth in the 1/6/04 letter. (Chipley/Brynwood counterclaim, First Count ¶ 12.)
After the Construction Loan matured on April 4, 2004, the Bank continued to send monthly billing statements to the Borrowers. According to these billing statements, the bank continued to apply the original interest rate of 9.75% to the outstanding balance. On information and belief, the original interest of 9.75% was higher than the Prime rate plus 2%. These billing statements were paid (and payment was accepted by the Bank) from the maturity date through at least October 2005. (¶ 13.)
Thus, and consistent with the terms of the 1/6/04 letter, the bank expressly agreed with the Borrowers to change the interest rate on the Construction Loan to a variable rate structure and maintain the variable rate structure in effect "until the loan is converted to a permanent mortgage or paid off in full." (¶ 14.)
In May 2005, the Bank determined and agreed with the Borrowers that it would extend the Construction Loan for an additional year. The Bank later determined that, consistent with the terms of the 1/6/04 letter, it would refinance and pay off the Construction Loan. (¶ 15.)
The Bank determined that the Construction Loan would be refinanced through a new loan from its affiliate, UHM. The parties understood that, upon closing, UHM would assign the refinanced loan to the Bank. (¶ 17.)
During the summer of 2005 the bank continued to send out billing statements to the Borrowers reflecting interest at the original rate, and continued to accept payments from Victoria Koch on behalf of the Borrower on those statements. (¶ 18.)
The closing on the refinanced loan was scheduled for September 15, 2005. The Koches understood that Victoria Koch's second mortgage would be subordinated to the refinanced loan. (¶ 19.)
The allegations then claim that on the day of the scheduled closing Mr. Koch was contacted by an attorney representing both UHM and the bank who insisted that the refinance could not go forward unless Victoria Koch was a co-maker or guarantor of the loan and unless a detailed time line for completion of construction was provided and approved by UHM and the bank — neither of which conditions had been previously discussed or mentioned as conditions to the refinance. It is also alleged that the closing documentation provided by UHM included an "Accounts Receivable Fee" of $11,709.10 which was inconsistent with the Bank's commitment to close on a "no cost" basis and constituted a material change in the terms of the parties' agreement with respect to the refinancing. The defendants allege that that they were ready, willing, and able to close the refinanced loan upon the agreed terms, but the closing never occurred because the bank and UHM refused to close on the agreed terms, and instead the bank "wrongfully commenced this foreclosure action one month later."(¶ 25.)
This alleged factual background, in whole or at least in part, forms the basis of the special defenses and counterclaim counts the plaintiff now moves to strike, which will be briefly reviewed.
Special Defenses: The first four special defenses are alleged in identical language by both defendants. First Special Defense: waiver of the right to declare a default or pursue any remedies; Second Special Defense: estoppel based on reliance on promises in the 1/6/04 and 5/25/05 letters and the commitment to maintain the variable rate structure in effect until full payoff or a conversion to a permanent mortgage, or to extend or refinance the loan. Third Special Defense: Unclean Hands — plaintiff is barred from declaring a default or pursuing any remedies; Fourth Special Defense: Breach of implied covenant of good faith and fair dealing. The Fifth Special defense is pleaded only by defendant Koch: Breach of the covenant of good faith and fair dealing owed by senior mortgagee to junior mortgagee.
Counterclaim Counts: Both defendants have filed amended counterclaims against both the plaintiff Ulster Savings Bank ("The Bank") and the cited-in counterclaim defendant UHM. The first nineteen counts are identical as filed by both defendants:
FIRST COUNT (The Bank: Breach of Contract — The 1/6/04 Letter)
SECOND COUNT (The Bank: Breach of the Covenant of Good Faith and Fair Dealing The 1/6/04 Letter)
THIRD COUNT (The Bank — Breach of Implied Contract)
FOURTH COUNT (The Bank: Breach of the Covenant of Good Faith and Fair Dealing — implied Contract)
FIFTH COUNT (The Bank: Breach of Contract — the 5/25/05 Letter)
SIXTH COUNT (The Bank: Breach of the Covenant of Good Faith and Fair Dealing — the 5/25/05 Letter)
SEVENTH COUNT (UHM: Breach of Contract — the Commitment)
EIGHTH COUNT (UHM: Breach of the Covenant of Good Faith and Fair Dealing — the Commitment)
NINTH COUNT (The Bank: Breach of Implied Covenant of Good Faith and Fair Dealing — the Construction Loan)
TENTH COUNT (UHM: Fraud)
ELEVENTH COUNT (The Bank and UHM: Conspiracy to Defraud)
TWELFTH COUNT (UHM: Intentional Interference with Contractual Relations — the 1/6/04 Letter [Express Contract])
THIRTEENTH COUNT (UHM: Intentional Interference with Contractual Relations — the 1/6/04 Agreement [Implied Contract])
FOURTEENTH COUNT (UHM: Intentional Interference with Contractual Relations — the 5/25/05 Agreement)
FIFTEENTH COUNT (UHM: Intentional Interference with Contractual Relations — the Re-Purchase Agreement)
SIXTEENTH COUNT (The Bank: Intentional Interference with Contractual Relations — the Re-Purchase Agreement)
SEVENTEENTH COUNT (UHM: CUTPA)
EIGHTEENTH COUNT (The Bank: CUTPA)
NINETEENTH COUNT (The Bank and UHM: Conspiracy [CUTPA])
Thereafter the counterclaims of 28 Brynwood/ Chipley differ from those of Victoria Koch.
KOCH TWENTIETH COUNT (The Bank: Breach of Duty of Good Faith)
28 BRYNWOOD/CHIPLEY TWENTIETH COUNT (The Bank: Promissory Estoppel — the 1/6/04 Letter)
28 BRYNWOOD/CHIPLEY TWENTY-FIRST COUNT (The Bank: Promissory Estoppel — the 5/25/05 Letter)
28 BRYNWOOD/CHIPLEY TWENTY-SECOND COUNT UHM: Promissory Estoppel — the Commitment)
The plaintiff and UHM have each moved to strike all of the special defenses filed by both defendants and all of the counterclaim counts directed to the plaintiff bank and/or to UHM respectively. The plaintiff bank's motion (No. 252.10) specifies thirteen reasons why the special defenses and counterclaim counts should be stricken as insufficient including: that the special defenses are legal conclusions that fail to show that the plaintiff has no cause of action, and do not address the making, validity and enforcement of the note and mortgage; that the counterclaim counts do not address, the making, validity and enforcement of the note and mortgage and does not arise out of the same transaction as the complaint; that allegations of purported HMC actions are not binding on the plaintiff bank; that the special defenses of Victoria Koch do not apply to the present foreclosure action and fail to plead sufficient or required facts; that Victoria Koch has failed to allege the required allegations to support her claims of breach of duty of good faith owed by the senior encumbrancer to a junior mortgagee; that the special defenses of 28 Brynwood and Chipley fail to state recognized or accepted defenses to a foreclosure action and fail to plead sufficient or required facts and are not part of the same transaction as plaintiff's note and mortgage; that the defendant Koch fails to properly allege facts or required facts to support her claim as a third party beneficiary; and that the defendants' counterclaim counts fail to allege a final integrated contract among the parties other than the note and mortgage subject to plaintiff's foreclosure action. UHM's motion to strike (No. 252.50) specifies seven reasons, all of which are included among the above reasons specified by the plaintiff. Each party has filed extensive briefs and the court has heard oral argument.
Discussion and Conclusions of Law A. Legal Standard Applicable to a Motion to Strike
"Whenever any party wishes to contest (1) the legal sufficiency of the allegations of any complaint . . . or of any one or more counts thereof, to state a claim upon which relief can be granted, or (2) the legal sufficiency of any prayer for relief in any such complaint . . . that party may do so by filing a motion to strike the contested pleading or part thereof." Practice Book § 10-39(a). "The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498 (2003). "It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Asylum Hill Problem Solving Revitalization Ass'n. v. King, 277 Conn. 238, 246 (2006). "Moreover . . . [w]hat is necessarily implied [in an allegation] need not be expressly alleged." (Internal quotation marks omitted.) Id. "[I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Greco v. United Technologies Corp., 277 Conn. 337, 347 (2006). "A motion to strike admits all facts well pleaded; it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings. Faulkner v. United Technologies Corp., 240 Conn. 676, 588 (1997). A motion to strike may be used to challenge the legal sufficiency of a special defense. "In . . . ruling on the . . . motion to strike, the trial court recognizes its obligation to take the facts to be those alleged in the special defenses and to construe the defenses in the manner most favorable to sustaining their legal sufficiency." Connecticut National Bank v. Douglas, 221 Conn. 530, 536 (1992). A motion to strike may also be used to challenge the legal sufficiency of a counterclaim. Nowak v. Nowak, 175 Conn. 112, 116 (1978).
B. Adequacy of Reasons as Stated in Motions to Strike
The defendants have challenged the adequacy of the two motions to strike to give notice of the reasons of claimed insufficiency of the challenged special defenses and counterclaim counts under the rule of Stuart v. Frieberg, 102 Conn.App. 857, 861 (2007). In Stuart the Appellate Court, citing Practice Book § 10-41 held that "Simply stating that all the counts `are legally insufficient' and that they "fail to allege any facts that would indicate [that the] defendant is liable to [the plaintiffs] cannot be considered compliance with Practice Book § 10-41." Id., 862. But here the plaintiff and the counterclaim defendant have done much more that. They have stated thirteen and seven reasons, respectively, of claimed insufficiency. Just as the defendants have gathered their factual allegations in one place (first special defense and first count of the counterclaim) and then incorporated those facts or some of them into subsequent special defenses and counts of the counterclaims, to avoid needless repetition over and over of the same facts, so also was it not inappropriate for the plaintiff and the counterclaim defendant to state their reasons of insufficiency is a consolidated fashion directed at the defendants consolidated factual allegations without repeating the same reasons over and over for five special defenses and some 23 counterclaim counts. As noted by the Stuart court at footnote 3: "A motion to strike that lacks specificity but which adequately submits the material issue to the court is sufficient to comply with Practice book § 10-41." Id. 863. The plaintiff and counterclaim defendant in this case have met that test of adequately submitting the material issues in their motions to strike.
C. Special Defenses of the Defendant Victoria Koch
As previously mentioned Victoria Koch is a named defendant in this foreclosure case strictly in her capacity as the holder of a $1.6 million second mortgage. (The previously mentioned Purchase Money Mortgage.) The plaintiff bank alleges in paragraph 4 of the complaint that it is owner and holder by assignment of the mortgage being foreclosed, which was recorded on October 04, 2002 in Volume 3982 at Page 144 of the Greenwich Land Records. The plaintiff further alleges in paragraph 7 of the complaint that "The following liens or encumbrances claim to have an interest in the Property which liens or encumbrances are subsequent in right to the Mortgage herein: . . . b. The defendant, Victoria R. Koch claims an interest in the Property by virtue of a mortgage in the amount of $1,600,000.00 dated October 04, 2002 and recorded on October 04, 2002 in Volume 3982 at Page 167 of the Greenwich Land Records." In her Amended Answer defendant Koch admits the portions of paragraph 4 that allege the execution and delivery of the plaintiff's mortgage deed dated October 04, 2002 by 28 Brynwood and its recording on that date in Volume 3982, page 144 of the Greenwich Land Records. She also admits the allegation of paragraph 7 that she claims an interest in the Property by virtue of a mortgage in the amount of $1,600,000 dated October 4, 2002 recorded on October 4, 2002 in Volume 3982 at Page 167 of the Greenwich Land Records. So far as the foreclosure complaint goes, there is no issue between the foreclosing plaintiff and Victoria Koch as the holder of a subsequent lien on the premises. Her claimed interest is a required allegation in a foreclosure complaint under Practice Book § 10-69 and she admits her claimed interest and admits that it was recorded subsequent to the plaintiff's mortgage. Facts which are consistent with the plaintiff's allegations but show, notwithstanding, that the plaintiff has no cause of action, must be specially alleged. Practice Book § 10-50. There is nothing pleaded in defendant Victoria Koch's First, Second, Third, or Fourth Special Defenses which would prevent the plaintiff from foreclosing as the holder of a lien prior in right to her lien. She would get a law day in the event of a strict foreclosure and she would share in the proceeds of sale, if any, available to a lienholder of her priority. There is no cause of action pleaded against her nor is the plaintiff claiming any remedy against her. See Connecticut Bank Trust Company v. Carriage Lane Associates, 219 Conn. 772, 784-85 (1991) (Summary judgment for foreclosing senior mortgagee affirmed over junior mortgagee's special defense that plaintiff had violated the terms of its own agreement with the borrower with respect to disbursement of construction loan proceeds). Defendant Koch's First, Second, Third, and Fourth Special Defenses are therefore stricken. The Fifth Special Defense of defendant Victoria Koch will be discussed separately below under the heading of the covenant of good faith and fair dealing.
D. The Transaction Test: Making, Validity or Enforcement of the Loan and Mortgage
The plaintiff and the counterclaim defendant ask the court to strike the special defenses and counterclaim counts because they do not address the making, validity, and enforcement of the plaintiff's mortgage and/or the note, and because they do not arise out of the same transaction as the plaintiff's complaint.
Practice Book § 10-10 provides that a counterclaim must "arise out of the transaction or one of the transactions which is the subject of the plaintiff's complaint. The Appellate Court has stated that "[i]n a foreclosure action, a counterclaim must relate to the making, validity or enforcement of a mortgage note in order properly to be joined to the complaint." J.P. Morgan Chase Bank Trustee v. Rodrigues, 109 Conn.App. 125, 133 (2008) (citations omitted); accord, New Haven Savings Bank v. LaPlace, 66 Conn.App. 1, 9, cert. denied, 258 Conn. 942 (2001) (affirming trial court's decision granting summary judgment against defendant because his counterclaims were not related to the making, validity, or enforcement of the note.) It has likewise been held that a special defense to a foreclosure action cannot be upheld unless it attacks the making, validity or enforcement of the note or mortgage. Southbridge Associates v. Garofalo, 53 Conn.App. 11, 17, (1999): Fidelity Bank v. Kremsky, 72 Conn.App. 700, 705 (2002) (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.") "While courts have recognized equitable defenses in foreclosure actions, they have generally only been considered proper when they attack the making, validity or enforcement of the lien, rather than some act or procedure of the lienholder." WM Specialty Mortgage, LLC v Brandt, Superior Court, Judicial District of Ansonia-Milford at Milford, Docket No. CVO9-5001157S (February 10, 2009, Moran, J.T.R.), 2009 Ct.Sup. 3007, 3009-10.
There have been many and varied interpretations of the "making, validity and enforcement" requirement by Connecticut Superior Court decisions. Plaintiff/counterclaim defendant cites that line of cases which interprets the phrase very strictly to mean the execution and delivery of an enforceable instrument, and not the occurrences that may arise between the parties during the course of their loan relationship. See, Federal National Mortgage v. Mallozzi, 1999 Conn.Super. LEXIS, 341, Superior Court, Judicial District of Stamford/Norwalk at Stamford, Docket No. 165698 (February 10, 1999, Hickey, J.), and Ocwen Federal Bank FSB v. Weinberg, 1999 Conn.Super. LEXIS 2204, Superior Court, Judicial District of New London at New London, Docket No. 547629 (August 11, 1999, Mihalakos, J.). Plaintiff argues from these cases that special defenses and counterclaims which attack the conduct of the plaintiff lender subsequent to the execution of the note and mortgage (such as those pleaded by defendants in this case) are always insufficient because they do not address the making, validity or enforcement of the note and/or mortgage. See, Ocwen Federal, supra. Defendants, on the other hand rely on Superior Court cases which interpret the "making, validity, and enforcement" requirement less rigidly. See, e.g. Liberty Bank v. New London Limited Partnership, 2007 WL 1416944, Superior Court, Judicial District of New London, Docket No. 4005236 (May 1, 2007, Devine, J.) [ 43 Conn. L. Rptr. 326] ("Simply because the allegations concern events after the execution of the mortgage does not make the claims automatically meritless. Indeed by definition the `enforcement' of a mortgage may involve conduct occurring after the execution of the mortgage'); and Ocwen Federal Bank FSB, v. Rivas, 2002 WL 442099, Superior Court, Docket No CV99-90268135S (February 21, 2002, Stevens, J.) (Recognizing that post-execution workout or forbearance arrangement would "appear" to impact a mortgagee's ability to "enforce its rights under a mortgage.)
This court does not subscribe to the literal, chronological test of "making, validity and enforcement urged by the plaintiff and the counterclaim defendant. Like Judge Devine in Liberty Bank, supra, I believe that post-execution actions or positions of a lender can relate to the "enforcement" of a note and mortgage. Each counterclaim or special defense therefore requires a case-by-case analysis, by the court acting as a court of equity, to assess the extent to which the facts alleged relate to the original transaction and not to any different or subsequent transaction. In this case, the court has conducted that examination initially with reference to the note and mortgage and the three letters of the bank and UHM which are pleaded by the defendants. The court concludes that the letter of January 6, 2004 from the bank to the borrower does relate to the enforcement of the note and is part of the same transaction as the note and mortgage. It was written by the noteholder to the borrower at a time when the note was in good standing, some three months before the maturity date. It reminds the borrower that the maturity date is coming up and outlines the provisions of the note relating to maturity and payoff. The suggestion of possibly having to pay a variable rather than a fixed rate of interest is nothing new to the transaction. It is a summary of the default interest provision contained within the note. The bank's letter of May 25, 2005 and UHM's "commitment" letter of August 16, 2005 and the allegations concerning the failure of that refinancing to loan to close, on the other hand are more than an "enforcement" of the original note and mortgage, which by then were in default. In each case new and different terms of financing are discussed or proposed. They are not part of the same transaction as the note and mortgage being foreclosed in this action.
Based on that analysis, the court has reviewed each special defense and counterclaim count and the factual underpinnings of each as alleged by the defendants, and, construing those allegations most favorably to the defendants, the court nonetheless concludes that the following counterclaim counts are exclusively or primarily grounded in the May 25, 2005 and August 16, 2005 letters and subsequent events, and should be stricken (the five special defenses of 28 Brynwood and Chipley will be separately discussed, below): Brynwood Koch Fifth Counts; Brynwood Koch Sixth Counts; Brynwood and Koch Seventh Counts; Brynwood and Koch Eighth Counts; Brynwood Koch Tenth Counts; Brynwood Koch Eleventh Counts; Brynwood Koch Twelfth Counts; Brynwood Koch Thirteenth Counts; Brynwood Koch Fourteenth Counts; Brynwood Koch Fifteenth Counts; Brynwood Koch Sixteenth Counts; Brynwood Koch Seventeenth Counts; Brynwood Koch Eighteenth Counts; Brynwood Koch Nineteenth Counts; Brynwood Twenty-First Count; and Brynwood Twenty-Second Count.
In this enumeration the designation "Brynwood" will refer to the amended special defenses of April 14, 2008 jointly filed by 28 Brynwood and Chipley.
E. The Covenant of Good Faith and Fair Dealing
It is firmly established Connecticut law that an alleged breach of the covenant of good faith and fair dealing is not a valid foreclosure defense or a valid counterclaim to a foreclosure complaint because such claims do not attack the making, validity or enforcement of the note or mortgage. Southbridge Associates v. Garofalo, supra, 53 Conn.App. at 16; New Haven Savings Bank v. LaPlace, supra, 66 Conn.App. at 10; Fidelity Bank v. Kremsky, supra, 72 Conn.App. at 716-17 ("We recently stated that 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 . . ."). Therefore the following special defenses and counterclaim counts based on alleged violations of the covenant of good faith and fair dealing must be stricken: Brynwood Koch Fourth Special Defenses; Koch Fifth Special Defense; Brynwood Koch Second Counts; Brynwood Koch Fourth Counts; Brynwood Koch Sixth Counts; Brynwood Koch Eighth Counts; Brynwood Koch Ninth Counts; and Koch Twentieth Count.
F. Sufficiency of Remaining Special Defenses
The remaining special defenses are the Brynwood Koch First Special Defenses (Waiver by the Bank), the Brynwood Koch Second Special Defenses (Estoppel of the Bank); and the Brynwood Koch Third Special Defenses (Unclean Hands of the Bank). The plaintiff bank challenges the legal sufficiency of these special defenses as pleaded.
FIRST SPECIAL DEFENSE: WAIVER BY THE BANK.
After reciting all its factual allegations relating to all of their special defenses, 28 Brynwood and Chipley allege in ¶ 28 that "By its conduct, as set forth above, the bank has waived any right it may have to declare a default or pursue any remedies under the terms of the Ulster Note and Mortgage." The only allegation that seems to specifically relate to this conclusory claim is ¶ 11:
After the construction loan matured on April 4, 2004, the Bank continued to send monthly billing statements to the Borrowers. According to these billing statements the bank continued to apply the original interest rate of 9.75% to the outstanding balance. On information and belief, the original interest rate of 9.75% was higher than the Prime Rate plus 2%. These billing statements were paid (and payment was accepted by the Bank) from the maturity date through at least October 2005.
In their memorandum of law, the defendants also rely on the January 6, 2004 letter which they characterize as an offer by the Bank to extend the loan and "change the interest rate" from a fixed rate to a variable rate. As previously indicated, the court does not agree with that characterization, even construing it most favorably to the defendants. The reference to the variable rate after maturity was a recitation of the default interest provision of the 2002 promissory note.
Waiver can be a valid defense to a foreclosure action. Southbridge Associates, supra, at 20. Waiver is the intentional abandonment of a known right . . . Waiver is the voluntary relinquishment of a known right. It involves the idea of assent, and assent is an act of understanding . . . Intention to relinquish must appear, but acts and conduct inconsistent with intention to relinquish must appear." Id.
There is no fact pleaded indicative of an intention by the bank to relinquish its right to declare a default or pursue default remedies under the provisions of the note and mortgage. The January 6, 2004 letter is primarily a reminder to the borrower that the maturity date is not far off and that the borrowers will be in default if they do not either pay off the construction loan, or convert it to permanent financing. The special defense of waiver is insufficiently pleaded. This conclusion is fortified by the fact that both the note and the mortgage contain nonwaiver provisions:
Even if, at a time when I am in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time.
Note, ¶ 6D
Borrower Not Released; Forbearance by Lender Not a Waiver. Extension of the time for payment or modification of amortization . . . shall not operate to release the liability of the Borrower . . . Lender shall not be required to commence proceedings against any Successor in Interest of Borrower or to refuse to extend time for payment or otherwise or otherwise modify amortization of the sums secured by this Security Instrument by reason of any demand made by the original Borrower or any Successor in Interest of Borrower. Any forbearance by Lender in exercising any right or remedy including, without limitation, Lender's acceptance of payments . . . or in amounts less than the amount then due, shall not be a waiver of, or preclude the exercise of any right or remedy.
Mortgage, ¶ 12
The insertion of a nonwaiver clause in the Note or Mortgage shall negate any inference that the plaintiff has waived its right to foreclosure. Christiansen v. Cutaia, 211 Conn. 613, 619-20 (1989).
The First Special Defense of 28 Brynwood and Chipley is therefore stricken.
SECOND SPECIAL DEFENSE: ESTOPPEL [BY THE BANK].
To the extent that the Second Special Defense of estoppel relies on the January 6, 2004 letter, (the other letters having been held to be outside the scope of the note and mortgage transaction) it alleges that the defendants ". . . reasonably and detrimentally relied upon the bank's representations and promises that it would (a) change the interest rate on the Construction Loan to a variable rate structure and maintain the variable rate structure in effect until the loan was converted to a permanent mortgage or paid off in full . . . As a result of their reasonable and detrimental reliance on these representations the Borrowers and Victoria Koch did not seek alternative sources of financing to refinance the Construction Loan." (¶ 28.)
Equitable estoppel requires that a party "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." O'Connor v. Waterbury, 286 Conn. 732, 757 (2008). Defendants maintain that their Second Special Defense satisfies this standard. The plaintiff disagrees. Although this court, as indicated previously, does not agree that the January 6, 2004 letter "changed" the interest rate provisions of the note, that letter does state [if the variable interest rate does come into effect at maturity] "This variable rate structure will remain in effect until the loan is converted to a permanent mortgage or paid off in full." The defendants seem to be saying that they construed this statement and relied upon it to mean that, if they could not pay off the loan by maturity and could not reach agreement with the Bank for an extension of the construction loan or for conversion to permanent financing, then they could just continue in perpetuity to make the monthly payments on the defaulted construction loan at Prime plus 2 without ever repaying the principal. This construction extends the language of the letter to absurdity. It is fundamental that a person who claims an estoppel must show that he has exercised due diligence to know the truth, and that he not only did not know the true state of things, but also lacked any reasonably available means of acquiring knowledge. Connecticut National Bank v. Voog, 233 Conn. 352, 366-67 (1995). "There must generally be some intended deception in the conduct or declarations of the party to be estopped, or such gross negligence on his part as amounts to constructive fraud, by which another party has been misled to his injury." Campbell v. Plymouth, 74 Conn. 67, 84 (2002). The defendants' allegations fail to satisfy these requirements. The defendants' own allegation that they accepted the Banks' commitment to refinance in 2005 and "were ready willing and able to close" on those terms (¶ 24) belies their claimed reliance on the construction they allegedly put on the 1/6/04 letter. The conclusory allegations that they were misled to their detriment are insufficient. The Second Special defense is therefore stricken.
THIRD SPECIAL DEFENSE: UNCLEAN HANDS [OF THE BANK]
In their third special defense the defendants incorporate all the allegations of the First Special Defense and add: "By its conduct, as set forth above, the Bank has unclean hands and is barred from declaring a default or pursuing any remedies under the terms of the Ulster Note and Mortgage" (¶ 29).
Application of the doctrine of clean hands, which requires a weighing of facts, rests within the sound discretion of the trial court. Thompson v. Orcutt, 257 Conn. 301, 308 (2001).
It is a fundamental principle of equity jurisprudence that for a complainant to show that he is entitled to the benefit of equity, he must establish that he comes into court with clean hands . . . The clean hands doctrine is applied not for the protection of the parties but for the protection of the court . . . It is applied not only by way of punishment but on considerations that make for the advancement of right and justice . . . 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 . . . Unless the plaintiff's conduct is of such a character as to be condemned and pronounced wrongful by honest and fair-minded people, the doctrine of unclean hands does not apply. (Citations and internal quotation marks omitted). Id. 310.
It is also established that "the party seeking to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in wilful misconduct with regard to the matter in litigation." Monetary Funding Group, Inc. v. Pluchino, 87 Conn.App. 401, 407 2005.
Defendant's position that it has sufficiently pleaded a defense of unclean hands seems to center on the allegations surrounding the August 16, 2005 commitment letter from UHM and the allegations that the attorney for UHM and the Bank thereafter insisted on adding certain terms and provisions to the loan documentation which had not been previously discussed or specified in the commitment. But the court has already ruled that the 2005 commitment to refinance and the dispute over closing documentation does not address the making, validity, or enforcement of the Bank's note or mortgage, and does not relate to the same transaction as alleged in plaintiffs' complaint. The only allegations that would properly be considered as a defense in this case would be the aforementioned statement in the January 6, 2004 that the variable rate of interest mentioned therein (the default rate under the note) would "remain in effect until the loan is converted to a permanent mortgage or paid off in full." (¶ 9.) For the reasons previously discussed, that statement is totally inadequate to amount to an allegation of wilful misconduct. Even if the 2005 letters and the circumstances leading to the failure to close on the refinance were to be considered, the court does not agree that there would be an adequate pleading of wilful misconduct or dishonesty. There is no claim that the Bank attempted to deceive the defendants about its position on the closing documents. It is alleged that the attorney made known prior to the closing exactly what changes he wanted, and the closing was delayed to give the defendants a chance to consider his requests. Construing this most favorably to the defendants it might amount to a breach of the commitment agreement, but it does amount to dishonesty or wilful misconduct. The same is true of the claims relating to UHM and the Bank's charging the defendants with closing costs in October 2005. The May 25, 2005 letter which offered a closing without costs, was expressly conditioned on the condition that "you must close the transaction with the bank on or before 30 days from the date of this letter."
The defendants also allege in ¶ 27 that "The Bank's breach of its agreements set forth in the 1/6/04 letter, the 5/25/05 letter and the Commitment was motivated by a dishonest and improper purpose in that the bank sought to obtain thereby the following additional concessions from Victoria Koch that it was not otherwise entitled to: a. her agreement to sign the new note as a co-maker or to guarantee the refinanced loan; and b. a detailed timeline for the completion of the construction project, which would be subject to the bank's approval." Despite the reference to the 1/6/04 letter in ¶ 27, the court finds no connection whatsoever between the alleged "dishonest and improper purposes" and the 1/6/04 letter. That letter made no mention of Victoria Koch or any new guarantor or co-maker or any construction timeline. Those terms did not come until some eighteen or more months later in 2005 just before the scheduled closing of the refinance proposed in the August 16, 2005 Commitment letter.
The allegations of the Third Special Defense are therefore inadequate to express the dishonesty or wilful misconduct necessary to plead the equitable defense of unclean hands, and that special defense is also stricken.
G. Sufficiency of Remaining Counterclaim Counts.
FIRST COUNT: BREACH OF AGREEMENT (THE 1/6/04 LETTER)
The defendants 28 Brynwood and Chipley claim, after alleging in the First Count, all their factual allegations applicable to all 22 of their counterclaim counts: "As a result of the Bank's breach of its agreement set forth in the 1/6/04 letter, the Borrowers have incurred and will incur the following damages: a. for lost profits and losses, in the construction and sale of the Property; for damages to the Borrowers' creditworthiness." (¶ 27.) The court has already discussed the 1/6/04 letter in detail. Suffice it to say that it falls far short of being an express contract or even an offer to enter into an express contract. "The elements of a breach of contract action are formation of an agreement, performance by one party, breach of the agreement by the other party and damages. American Express Centurion Bank v. Head, 115 Conn.App. 10, 15-16 (2009). In order n form a binding and enforceable contract, there must be an offer and acceptance based upon a mutual understanding by the parties. Steinberg v. Reding, 24 Conn.App. 212, 214 (1991). Here, even assuming that the 1/6/04 letter was an offer to enter into a contract (which it was not) there is absolutely no allegation that the defendants accepted that offer or even responded at all in any fashion, verbal or written to the letter. Furthermore, in order for an agreement to be an enforceable contract, it must be supported by consideration. Consideration may take the form of a promise to do or give something of value. The essence of consideration is a benefit or detriment that has been bargained for and exchanged for the promise. State National Bank v. Dick, 164 Conn. 523, 529 (1973). Past consideration is not sufficient to support an additional promise. Marcus v. DuPery, 223 Conn. 484, 487 (1992). There is no allegation whatsoever of any new consideration to support the alleged promises of the Bank made in the 1/6/04 letter. The First Count therefore totally fails to properly allege a claim for beach of contract, and it is stricken.
THIRD COUNT: (THE BANK: BREACH OF IMPLIED CONTRACT)
The Third Count incorporates the allegations of the First Count except that it describes the alleged contract as an "implied contract," and in support thereof, alleges that:
Thus, as manifested by the words and conduct of the parties, an implied-in-fact contract existed between the Bank and the Borrowers pursuant to the terms of which the Bank agreed to change the interest rate on the Construction Loan to a variable rate structure and maintain the variable rate structure in effect "until the loan was converted to a permanent mortgage or paid off in full." (¶ 14.)
The allegations refer only to the 1/6/04 letter plus the allegations of ¶ 13 that after the April 4, 2004 maturity date the Bank continued to send monthly statements to the Borrower reflecting the original 9.75% note rate (which the defendants presume to have been higher than the Prime plus 2% variable rate specified in the letter) (The letter, reflecting the default interest provision of the note had warned of a rate after maturity which would be "the higher of your current interest rate or the Prime Rate plus 2%").
An implied contract can exist when there is no express contract. It is one which is inferred from the conduct of the parties, although not expressed in words. It is not fatal to the finding of an implied contract that there were no express manifestations of mutual assent if the parties, by their conduct, recognized the existence of contractual obligations. Janusauskas v. Fichman, 264 Conn. 796, 804-05 (2003). Here, the conduct alleged is not all indicative of any "change" to the original 2002 loan agreement as evidenced by the note. The allegations show simply that after the April 4, 2004 maturity date the Bank applied and enforced the default rate of interest as specified in the note. These allegations are inadequate to support the claim of an implied agreement somehow to "change" the deal. Also, just as with the claim of express contract, there is no allegation of any consideration to support the alleged implied contract. The Third Count is therefore stricken.
28 BRYNWOOD/CHIPLEY TWENTIETH COUNT: (THE BANK: PROMISSORY ESTOPPEL — THE 1/6/04 LETTER
The allegations of this count are virtually identical to the second Special Defense of promissory estoppel, which has been stricken. The Court grants the motion to strike this count of the counterclaim for the same reasons expressed above with reference to the special defense.
ORDER
For the foregoing reasons the motions of the plaintiff Ulster Savings Bank and the counterclaim defendant Ulster Home Mortgage, Inc. to strike defenses and counterclaim counts are granted.