Opinion
No. FST CV 08 5006907 S
January 10, 2011
MEMORANDUM OF DECISION RE MOTION TO STRIKE #132
Before the court is the plaintiff's motion to strike the defendants' special defenses and request for a setoff on the following grounds: (1) the special defenses are inapplicable against the plaintiff, because the plaintiff is an assignee and holder in due course of the note and mortgage; (2) the special defenses are legally insufficient because they are not factually plead and fail to implicate the making or validity of the note or mortgage; (3) the defendant Carmen Medina lacks privity to raise any defenses to this action because she is not a signatory party to the note or mortgage; and (4) the defendants do not have a right to a setoff because no legal setoffs have been alleged under General Statutes § 52-139.
On March 26, 2005, the plaintiff, Deutsche Bank National Trust Company as Trustee for Soundview Home Loan Trust 2005-4, filed a complaint against the defendants, Frank Medina and Carmen Medina, alleging the following facts: On or about April 22, 2005, Frank Medina executed and delivered a note for a loan of $692,500 to Novastar Mortgage, Inc. In order to secure the note, Frank Medina executed and delivered a mortgage for the property at 30 Curt Terrace, Greenwich, Connecticut, to Mortgage Electronic Systems, Inc. as nominee for Novastar Mortgage, Inc. The mortgage was dated April 22, 2005 and recorded April 29, 2005. The mortgage "was assigned to [the plaintiff] by virtue of an Assignment of Mortgage to be recorded on the Greenwich Land Records." The plaintiff "is the holder of said Note and Mortgage." On January 16, 2007, Frank Medina recorded a quit claim deed that transferred ownership of the property from solely himself to himself and his wife, Carmen Medina. The defendants are the owners of the equity of redemption of the property.
Frank Medina and Carmen Medina will herein be referred to as the "defendants."
The plaintiff further alleges that the note is in default and that as the holder of the note it has elected to accelerate the balance due on the note, to declare the note to be due in full and to foreclose the mortgage securing the note. The plaintiff has provided written notice of the default in accordance with the note and mortgage to the defendants, but they have failed to cure the default.
On September 24, 2009, the defendants filed an answer, special defenses, request for a setoff and counterclaims in response to the plaintiff's complaint. The first special defense alleges that the plaintiff's action is barred because the defendants were fraudulently induced to enter into the loan transaction by the predatory lending practices of the "Plaintiff and/or its predecessors." The first special defense specifically alleges that the plaintiff and/or its predecessors: (1) failed to make legal disclosures to the defendants required by the Real Estate Settlement Procedures Act ("RESPA") and the Truth in Lending Act ("TILA") concerning the terms of the loan transaction, including "the overall cost and financing and carrying charges to be paid by the defendants . . ." (2) materially changed the terms of the loan transaction "without prior reasonable notice," after the defendants' loan application had already been approved and the defendants had paid approximately $70,000 as a deposit towards the purchase of the property, by altering the terms of the loan transaction on the day of the closing "from a conventional 80/20 mortgage product with conventional fixed interest rates to a subprime, adjustable rate, 6-month mortgage"; and (3) extended the loan to the defendants knowing they would not be able to repay the debt under the terms of the loan, "but in reliance on the fact that the foreclosure value of the property was sufficient to satisfy the debt when the Defendants inevitably defaulted." The second special defense alleges that the plaintiff's action is barred by the doctrine of equitable estoppel because the "Plaintiff and/or its predecessors engaged in predatory lending practices intended to induce the defendants to enter into loan under unfavorable terms," and the defendants did in fact rely on the plaintiff's actions to their detriment. The third special defense alleges that plaintiff's action is barred by the plaintiff's unclean hands. The fourth special defense alleges that plaintiff's action is barred because enforcement of the loan under the proffered terms would result in unjust enrichment of the plaintiff. The fifth special defense alleges that the plaintiff's action is barred because "the subject loan transaction is an illegal transaction in contravention of public policy in that the Plaintiff and/or its predecessors violated RESPA, TILA and the Connecticut Unfair Trade Practices Act ("CUTPA")." The sixth special defense alleges that plaintiff's action should be barred because based on the conduct of the "Plaintiff and/or its predecessors, the Defendants unknowingly entered into a loan transaction the true terms of which were unconscionable." Each special defense incorporates all the preceding special defenses.
The defendants further assert that they are entitled to a setoff against the debt claimed by the plaintiff based on the damages they incurred due to the actions of the plaintiff and/or its predecessors.
On November 12, 2009, the plaintiff filed a motion to strike the defendants' special defenses, request for a setoff and counterclaims, and a memorandum of law in support of the motion. On June 10, 2010, the defendants filed an objection to the plaintiff's motion to strike. On June 17, 2010, the defendants filed a memorandum of law in opposition to the plaintiff's motion to strike. On June 28, 2010, the plaintiff filed a reply memorandum in response to the defendants' memorandum of law in opposition. On July 13, 2010, the defendants filed a memorandum of law in response to the plaintiff's reply memorandum.
In a June 28, 2010 order, Judge Sommers granted the plaintiff's motion to strike the defendants' counterclaims, thus the defendants' counterclaims and the plaintiff's motion to strike the counterclaims will not be addressed herein.
"[A] motion to strike challenges the legal sufficiency of a pleading and, consequently, requires no factual findings by the trial court . . ." (Internal quotation marks omitted.) Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252 (2010). "Whenever any party wishes to contest . . . the legal sufficiency of any answer to any complaint . . . or any part of that answer including any special defense contained therein, that party may do so by filing a motion to strike the contested pleading or part thereof." Practice Book § 10-39(a)(5). "[A] plaintiff can [move to strike] a special defense . . ." Nowak v. Nowak, 175 Conn. 112, 116 (1978); see also Connecticut National Bank v. Voog, 233 Conn. 352, 354-55 (1995). "In . . . ruling on the . . . motion to strike, the trial court recognized 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). "[T]he total absence of any factual allegations specific to [the] dispute . . . renders [the special defense] legally insufficient . . ." U.S. Bank National Assn. as Trustee v. Ascenzia, Superior Court, judicial district of New Haven, Docket No. CV 08 5022527 (July 30, 2009, Abrams, J.) ( 48 Conn. L. Rptr. 345, 346).
"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." (Emphasis in original; internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588 (1997). "[I]f facts provable in the [pleading] would support a [special defense], the motion to strike must be denied." (Internal quotation marks omitted.) American Progressive Life Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 120 (2009). "Moreover . . . [w]hat is necessarily implied [in a pleading] need not be expressly alleged . . . It is fundamental that in determining the sufficiency of a [pleading] challenged by [an adverse party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the [pleadings] are taken as admitted . . . Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically." (Internal quotation marks omitted.) Violano v. Fernandez, 280 Conn. 310, 318 (2006).
"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 . . . Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles." (Internal quotation marks omitted.) Chase Manhattan Mortgage Corp. v. Machado, 83 Conn.App. 183, 188 (2004). "In recognition that a foreclosure action is an equitable proceeding, courts have allowed mistake, accident, fraud, equitable estoppel, CUTPA, laches, breach of the implied covenant of good faith and fair dealing, tender of deed in lieu of foreclosure and a refusal to agree to a favorable sale to a third party to be pleaded as special defenses . . ." These special defenses have been recognized as valid special defenses where they were legally sufficient and addressed the making, validity or enforcement of the mortgage and/or note. The rationale behind this is that . . . special defenses which are not limited to the making, validity or enforcement of the note or mortgage fail to assert any connection with the subject matter of the foreclosure action and as such do not arise out of the same transaction as the foreclosure action . . . Further, based on the same rationale, the defenses . . . cannot attack some act or procedure of the lienholder." Patriot National Bank v. Bobbi, Inc., Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. 08 5009026 (June 9, 2009, Mintz, J.) ( 47 Conn L. Rptr. 851, 851-52).
The plaintiff argues that the court should grant the motion to strike the defendants' special defenses because the defenses are inapplicable against the plaintiff as an assignee and holder in due course of the note and mortgage. The plaintiff argues that all of the actions in the special defenses allege that its predecessor, the original lender, engaged in the conduct relevant to the special defenses, but that none of those allegations apply to the plaintiff due to its status as an assignee and holder in due course.
The party that originally entered into the loan and mortgage with the defendants will herein be referred to as "the original lender."
The plaintiff further argues that the defendants' special defenses are not legally sufficient because they fail to factually allege any element of fraud relevant to the making or validity of the note or mortgage and are not supported by allegations of specific fact as to any actions by the plaintiff itself. In the absence of any factual pleadings that allege specific action or conduct by the plaintiff, and not merely the conduct of the original lender, the defendants' special defenses fail to allege any defenses that are applicable to the plaintiff. The plaintiff argues that the defendants do not have a right to a setoff because the plaintiff is not legally indebted to the defendants and, therefore, there are no mutual debts to be set off under General Statutes § 52-139. The plaintiff argues that Carmen Medina lacks standing because she is not a signatory party to the note or mortgage and, therefore, lacks privity to raise any defenses in this action.
The defendants counter that the plaintiff's motion to strike the special defenses should be denied because the pleadings make factual allegations that, if provable, are legally sufficient to sustain the special defenses. The defendants argue that the plaintiff cannot establish that the special defenses are insufficient as a matter of law because the plaintiff has yet to factually prove its status as a holder in due course. The defendants argue that the plaintiff has the evidentiary burden of proving holder in due course status, and that the plaintiff's contention that it is a holder in due course is only a legal conclusion. The defendants argue that as long as there are sufficient factual allegations to assert special defenses against the original lender, then the motion to strike should be denied because it is a question of fact whether the plaintiff is a holder in due course.
The defendants further argue that even if the plaintiff is found to be a holder in due course the plaintiff is still subject to the special defenses based on the original lender's alleged misconduct in inducing the defendants to enter into the loan and mortgage agreement. The defendants contend that the special defenses make specific factual allegations that the original lender induced the defendants to enter into the loan and mortgage through violations of TILA that misrepresented terms of the transaction, and that the TILA defense addresses the making, validity and enforcement of the note and mortgage. The defendants argue that it is a question of fact whether the plaintiff is subject to the TILA defense and, therefore, the motion to strike should be denied.
The defendants further argue that they are entitled to a setoff because an action to foreclose on a mortgage is not governed by General Statutes § 52-139, but a party may still be entitled to an equitable setoff when the statutes governing legal setoff do not apply. The defendants argue that Carmen Medina has a right to assert special defenses and a request for setoff because she owns the property that the plaintiff is trying to foreclose and privity is not a prerequisite to standing in an action involving equitable right and interests.
"A promissory note is nothing more than a written contract for the payment of money, and, as such, contract law applies." (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, 707, cert. denied, 262 Conn. 915 (2002). "Ordinarily an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor." Fairfield Credit Corp. v. Donnelly, 158 Conn. 543, 548 (1969). "The plaintiff, as assignee of the mortgage, [stands] in the shoes of his assignor, with the same rights." (Internal quotation marks omitted.) Reynolds v. Ramos, 188 Conn. 316, 319-20 n. 5 (1982).
The plaintiff argues that the defendants' special defenses should be stricken because the plaintiff is an assignee, and "[a]n assignee is not liable for the alleged actions of the assignor absent specific consent to be held responsible and liable for such actions." The plaintiff argues that the special defenses allege only that the original lender/assignor engaged in improper conduct and, therefore, the defenses are inapplicable against the plaintiff as an assignee.
A split of authority has developed in the Connecticut Superior Courts regarding whether an assignee is liable for the conduct of an assignor. The court in Deutsche Bank National v. Lobaton, Superior Court, judicial district of New London, Docket No. 09 5009907 (May 5, 2010, J. Devine) ( 49 Conn. L. Rptr. 779), addressed a factual situation similar to the present case in which a plaintiff attempting to foreclose a property asserted that the defendants' special defenses were inapplicable because the plaintiff was merely an assignee of the note and mortgage. The court in Deutsche Bank National v. Lobaton undertook a comprehensive analysis of the case law addressing assignee-assignor liability: "Our Appellate Courts have not yet directly addressed whether the plaintiff, as assignee, may be held liable for the alleged fraudulent conduct of an assignor occurring prior to the assignment. Several Superior Court cases have found that to be liable for the assignor's nonperformance of duties under a contract, the assignee must have expressly assumed liability for the prior breaches . . . Moreover, [i]n the absence of an express provision, an assignee is not required to assume the original responsibilities of the assignor . . . This is true both for claims of breach of contract . . . and for claims that the assignor committed fraud, or misrepresentation . . .
"Other Superior Court cases have found to the contrary, indicating that [a]lthough many of the facts alleged concern the acts or omissions of the loan originator, the defenses and a counterclaim can be asserted against the plaintiff despite the fact that the plaintiff is an assignee of the note and the mortgage because the plaintiff stands in the shoes of the assignor and because the defendant's allegations are sufficient to show the existence of agency relationship between the loan originator and . . . the assignor . . .
"This second line of decisions relies primarily on Connecticut Supreme Court case law indicating that [o]rdinarily an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor . . . and generally, [t]he plaintiff, as assignee of the mortgage, [stands] in the shoes of his assignor, with the same rights . . . [A]n assignee has no greater rights or immunities than the assignor would have had if there had been no assignment." (Citations omitted; emphasis added; internal quotation marks omitted.) Deutsche Bank National v. Lobaton, supra, 49 Conn. L. Rptr. 781-82.
In the present case, the plaintiff argues that the court should follow the line of cases which rule that an assignee cannot be held liable for acts of the assignor and cites the cases Deutsche Bank National Trust Co. v. Ganci, Superior Court, judicial district of Hartford, Docket No. 05 4017440 (April 5, 2006, J.T.R. Satter), and CT Page 2539 LaSalle Bank National Assn. v. Bardales, Superior Court, judicial district of New London, Docket No. 08 5007137 (April 14, 2009, J. Devine). There is a distinction, however, between these cases and the present case because they addressed instances where liability was being attributed to assignees through counterclaims, whereas in the present instance the dispute arises over the defendants' right to assert special defenses against the assignee-plaintiff. In Deutsche Bank National v. Lobaton the court recognized that there is a distinction between a party asserting in a counterclaim that an assignee should be liable for the actions of an assignor, and a party having the right to assert defenses against an assignee where the assignee is the plaintiff initiating the suit: "In the present case . . . the defendant's claim of fraudulent conduct is asserted as a defense to the assignee's action." Deutsche Bank National v. Lobaton, supra, 49 Conn. L. Rptr. 782.
In the present action, the defendants' counterclaims have already been stricken. The defendants' special defenses do not allege that the plaintiff is liable for the actions of the original lender, but rather assert that, based on facts regarding the origination of the note and mortgage, the defendants should be permitted to assert any defenses against the assignee that they would be able to assert against the original lender/assignor of the note and mortgage. "[B]ecause the defendant's claims, if borne out, would vitiate the mortgage at its very [root], special defenses that attack its very validity may be asserted against either the original lender, or its assignee, as defenses against foreclosure." Deutsche Bank National v. Lobaton, supra, 49 Conn. L. Rptr. 781. The plaintiff's assignee status should not preclude the defendants from asserting valid special defenses that would be applicable if asserted against the original lender/assignor. The court rules that the plaintiff's motion to strike the defendants' special defenses on the ground that the plaintiff is an assignee is denied.
See supra note 2.
General Statute § 42a-3-302(a)(2) states in pertinent part that the holder of an instrument is a "holder in due course" if "[t]he holder took the instrument (I) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in section 42a-3-306, and (vi) without notice that any party has a defense or claim in recoupment described in section 42a-3-305(a)."
The plaintiff argues that the special defenses are not applicable to it as a holder in due course. The plaintiff argues that it made the factual allegation in its complaint that it is a holder in due course of the subject loan and mortgage, but that the defendants' special defenses rely upon denying that the plaintiff is a holder in due course, and that the defendants are, therefore, improperly contesting a well-plead fact from the complaint in the special defenses. The plaintiff argues that, for the purposes of a special defense, the defendants are obligated to accept the plaintiff's holder in due course status as a well-plead fact. The defendant counters that the plaintiff merely stating it is a holder in due course is not sufficient to establish this statement as a well-plead fact. The court must determine whether the complaint makes sufficient factual allegations to establish that it is a well-plead fact that the plaintiff is a holder in due course.
Paragraph three of the complaint states that Frank Medina executed and delivered a note for a loan in the amount of $692,500.00 to Novastar. Paragraph four of the complaint states that Frank Medina executed and delivered a mortgage on the property to Mortgage Electronic Registration Systems, Inc. as Nominee for Novastar. Paragraph four then goes on to state that "[s]aid mortgage was assigned to [the plaintiff] by virtue of an Assignment of Mortgage . . . The Plaintiff . . . is the holder of said Note and Mortgage." This is the only statement in the complaint that explains how the plaintiff came to be the holder of the mortgage. Nowhere in the complaint does the plaintiff actually use the term "holder in due course." No factual statements are made in the complaint regarding whether the plaintiff took the instrument in compliance with the requirements of General Statute § 42a-3-302(a)(2). There are no factual statements addressing whether the plaintiff took the mortgage: "for value"; "without notice that the instrument is overdue or has been dishonored"; or "without notice that any party has a defense or claim in recoupment described in section 42a-3-305(a)." The plaintiff fails to allege sufficient facts in its complaint to support the argument that it is a well-plead fact that the plaintiff is a holder in due course. The complaint simply does not contain sufficient facts to establish that the plaintiff is a holder in due course because the complaint contains no factual allegations regarding the elements required under General Statute § 42a-3-302(a)(2).
The plaintiff argues that the decision in Cadle Co. v. Ginsburg, 51 Conn.App. 392 (1998), cert. denied, 247 Conn. 963 (1999), supports its position because in that case a plaintiff that purchased a pool of loans, including the note in dispute, was found to be a holder in due course. In Cadle Co. v. Ginsburg, supra, 51 Conn.App. 397, the Appellate Court ruled that the trial court had correctly determined "that the plaintiff sustained its burden by adducing overwhelming evidence that it was a holder in due course." Id. That ruling is distinguishable from the present case, however, because in Cadle Co. v. Ginsburg, supra, 397, the plaintiff provided evidence at trial establishing the elements necessary to prove holder in due course status under General Statute § 42a-3-302(a)(2), whereas in the present case the plaintiff's complaint does not allege facts that, if provable, would establish the elements necessary to prove holder in due course status. It is only necessary to look at the "for value" element under General Statute § 42a-3-302(a)(2) to see how the present case differs from the decision in Cadle Co. v. Ginsburg.
In Cadle Co. v. Ginsburg the defendant challenged the trial court's determination that the plaintiff obtained the note "for value" in compliance with General Statute. § 42a-3-302(a)(2)(I), because the plaintiff purchased the note as part of a pool of loans and could not specify how much it paid for the individual note. The trial court ruled, and the appellate court affirmed, that "[t]his hardly means that the note was not taken for value. The note was still transferred in return for payment, and thus was transferred for value . . ." (Internal quotation marks omitted.) Cadle Co. v. Ginsburg, supra, 51 Conn.App. 398. The fact that the plaintiff could not specify an exact price paid for the note was not determinative because the plaintiff did provide evidence concerning the payment made for the pool of loans as a whole, which was sufficient to establish that the note, as part of that pool, was taken for value.
In the present case, however, the complaint does not provide any information regarding a payment, or any other value, provided in exchange for the note and mortgage. The plaintiff's argument in its memorandum of law in support of the motion to strike suggests that the situation in the present case is similar to Cadle Co. v. Ginsburg, and, therefore, the defendants' special defenses should be stricken because the plaintiff is a holder in due course, but this argument glosses over the fact that the plaintiff's complaint has failed to allege the factual elements necessary to prove holder in due course status under General Statute § 42a-3-302(a)(2). The complaint fails to allege sufficient facts to support the plaintiff's argument that it is a well-plead fact that the plaintiff is a holder in due course. The court rules that the plaintiff's motion to strike the special defenses on the ground that the plaintiff is a holder in due course is denied.
The plaintiff further argues that the defendants' special defenses should be stricken as legally insufficient for not being factually plead because the special defenses (1) fail to allege any specific actions taken by the plaintiff, and (2) fail to implicate the making or validity of the note or mortgage. The plaintiff bases this argument primarily on the fact that the defendants' pleadings do not allege specific conduct taken by the plaintiff itself, but instead implicate the plaintiff by repeatedly stating that the "Plaintiff and/or its predecessors" engaged in improper actions. The plaintiff contends that the special defenses are not applicable against it because the defendants only allege facts that speak to actions taken by the original lender and not the actions of the plaintiff itself. This argument, however, is based on the already rejected assertion that the plaintiff is not subject to the defendants' special defenses based on its assignee and holder in due course status. The plaintiff's assignee status has already been found to be an insufficient basis for the plaintiff not to be subject to the defendants' special defenses, and the plaintiff has failed to allege sufficient facts to support its assertion that it is a holder in due course. The factual allegations in the defendants' special defenses that allege improper conduct by the original lender are, therefore, applicable to the plaintiff.
The court now turns to each special defense to analyze whether the defendants have plead facts that establish the legal sufficiency of each special defense, and whether the special defenses address the making, validity or enforcement of the note and mortgage. The first special defense alleges that the original lender engaged in predatory lending practices to fraudulently induce the defendants to enter into the subject loan transaction. "Fraud involves deception practiced in order to induce another to act to her detriment, and which causes that detrimental action . . . The four essential elements of fraud are (1) that a false representation of fact was made; (2) that the party making the representation knew it to be false; (3) that the representation was made to induce action by the other party; and (4) that the other party did so act to her detriment." (Internal quotation marks omitted.) Chase Manhattan Mortgage Corp. v. Machado, 83 Conn.App. 183, 188 (2004).
The defendants allege that the original lender made a false representation of fact (1) by not disclosing the true terms of the loan as required under RESPA and TILA, and (2) by "materially chang[ing] the terms of the subject loan transaction without prior reasonable notice" on the day of the closing, after the defendants' loan application had already been approved and after the defendants had already paid approximately $70,000 as a deposit towards the purchase of the property. It is not clear from the special defenses whether the defendants were given the opportunity to accept or decline the changes made to the loan transaction, or whether the significance of the change was explained to them at the time by the original lender. Use of the words "without prior reasonable notice" suggest that the defendants were either made aware of the alterations, or had the opportunity to learn of them, before the final agreement was executed.
The allegations do, however, set forth that the changes to the loan transaction were made on the closing day, and thus were made very late in the process of purchasing the property. This late change was made at a point where it would be very difficult for the defendants not to accept the changes proposed by the original lender without potentially losing the opportunity to purchase the property and the money they had already invested. Read in the light most favorable to the defendants, the allegations assert that the original lender offered the defendants a conventional loan and mortgage product in order to induce them to proceed with the purchase of the property and then switched to a subprime loan and mortgage product at a point when the defendants' bargaining position was significantly eroded. As set forth by the defendants, these facts are sufficient to support the allegation that the original lender made a false representation of fact, that it knew the representation was false, that the representation was made to induce action by the defendants, and that the defendants did in fact act to their detriment. The defendants have alleged facts that are sufficient to establish the elements of fraud; since the defendants may assert special defenses against the plaintiff based on the actions of the original lender, the defendants have, therefore, made factual allegations sufficient to provide a basis for the first special defense of fraud. The court denies the motion to strike the first special defense.
The second special defense alleges that the plaintiff's action is barred by the doctrine of equitable estoppel because the original lender engaged in predatory lending practices in order to induce the defendants to enter into the loan transaction. "The doctrine of equitable estoppel is well established. [W]here one, by his words or actions, intentionally causes another to believe in the existence of a certain state of things, and thereby induces him to act on that belief, so as injuriously to affect his previous position, he is concluded from averring a different state of things as existing at the time . . . Our Supreme Court . . . stated, in the context of an equitable estoppel claim, that [t]here are two essential elements to an estoppel: the party must do or say something which is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief, and the other party, influenced thereby, must actually change his position or do something to his injury which he otherwise would not have done. Estoppel rests on the misleading conduct of one party to the prejudice of the other . . . Broadly speaking, the essential elements of an equitable estoppel . . . as related to the party to be estopped, are: (1) conduct which amounts to a false representation or concealment of material facts, or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) the intention, or at least the expectation, that such conduct shall be acted upon by, or influence, the other party or other persons; and (3) knowledge, actual or constructive, of the real facts." (Citations omitted; internal quotation marks omitted.) Johnnycake Mountain Associates v. Ochs, 104 Conn.App. 194, 208-09 (2007), cert. denied, 286 Conn. 906 (2008).
Read in the light most favorable to the defendants, the second special defense alleges the following: (1) the original lender made false representations or concealed material facts by not disclosing the true terms of the loan as required under RESPA and TILA and by representing to the defendants that the loan would be a conventional mortgage before materially altering the terms of the loan to a subprime mortgage; (2) this conduct was intended to induce the defendants to enter into the loan and mortgage transaction; and (3) the defendants agreed to the terms of the loan and mortgage based on these misrepresentations and omissions. The defendants have alleged facts that are sufficient to establish the elements of equitable estoppel. The court denies the motion to strike the second special defense.
The defendants' third special defense alleges that the plaintiff's action is barred by virtue of the plaintiff's unclean hands. "The doctrine of unclean hands expresses the principle that where a plaintiff seeks equitable relief, he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue . . . [F]or 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 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 . . . The trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the courts' integrity dictate that the clean hands doctrine be invoked . . .
"This doctrine has been asserted successfully in foreclosure actions where the wrong related to the subject matter of the litigation." (Citations omitted; internal quotation marks omitted.) Thompson v. Orcutt, 59 Conn.App. 201, 205 (2000), rev'd on other grounds, 257 Conn. 301 (2001). Read in the light most favorable to the defendants, the special defenses allege that the original lender engaged in a pattern of misrepresenting and altering the terms of the loan in order to induce the defendants to enter into the loan transaction at terms that were less favorable than the defendants were led to believe they would be receiving. The third special defense, therefore, alleges the type of intentional or wilful misconduct necessary to plead the equitable defense of unclean hands. The court denies the motion to strike the third special defense.
The fourth special defense alleges that the plaintiff's action is barred because enforcement of the terms sought by the plaintiff would result in unjust enrichment of the plaintiff. "[Defendants] seeking recovery for unjust enrichment must prove (1) that the [plaintiffs] were benefitted, (2) that the [plaintiffs] unjustly did not pay the [defendants] for the benefits, and (3) that the failure of payment was to the [defendants'] detriment." (Internal quotation marks omitted.) Rossman v. Morasco, 115 Conn.App. 234, 248, cert. denied, 293 Conn. 923 (2009). In the present case, the defendants have not set forth any facts that allege the plaintiff received any benefit beyond those specified in the loan and mortgage instruments themselves. Although the defendants are challenging the making and validity of the loan and mortgage, they are not claiming that they did not receive the money for purchase of the property as set forth in the loan and mortgage agreement. In order to assert a valid claim of unjust enrichment the defendants would have to allege facts that the original lender or the plaintiff received money or some other benefit beyond that contemplated by the loan instruments or that the original lender did not fulfill its obligation to provide the money specified under the agreement. Under the facts alleged, the original lender did pay for the benefit it received. The fourth special defense, therefore, does not allege facts necessary to support a special defense of unjust enrichment. The court grants the motion to strike the fourth special defense.
The fifth special defense alleges that the plaintiff's action is barred because the loan transaction is an illegal transaction in contravention of public policy in that it violated TILA, RESPA and CUTPA. Although the special defenses allege that the plaintiff failed to make required legal disclosures under TILA and RESPA, the assertion that the "loan transaction is an illegal transaction in contravention of public policy" is a legal conclusion that does not set forth facts that, if provable, would support a special defense. Additionally, even if the court infers that the fifth special defense is intended to simply claim violations of TILA, RESPA and CUTPA as special defenses, these violations would have to address the making, validity or enforcement of the note or mortgage in order to be valid special defenses.
As to TILA violations as a special defense, a series of Superior Court cases "have held that a mortgage holder's failure to comply with truth-in-lending requirements is not a valid special defense to a mortgage foreclosure action . . .
"Indeed, the truth in lending laws were designed to `promote the informed use of consumer credit by requiring disclosures about its terms and cost.' 12 C.F.R. § 226.1(b) . . . By its express terms, it is aimed at regulating the conduct of the lender . . . Therefore, violations of the truth in lending laws do not present a legal attack on the validity of the note or mortgage, but rather relate to the conduct of the lienholder." (Citations omitted.) Eastern Savings Bank, FSB v. Mara, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. 05 4006305 (June 5, 2006, Dooley, J.). Courts have ruled similarly regarding violations of RESPA as a special defense. "[A] violation of RESPA is not a valid defense to mortgage foreclosure . . . A violation of RESPA, by the terms of the act, does not discharge the debt or invalidate the note and mortgage and, therefore, does not provide a defense to foreclosure." (Citations omitted.) Webster Bank v. Linsley, Superior Court, judicial district of New Haven at Meriden, Docket No. 97 0260406 (August 9, 2001, Booth, J.). In the present case, allegations that the plaintiff violated TILA and RESPA requirements do not, standing alone, present a legal attack on the validity of the note or mortgage and, therefore, the allegations are not valid special defenses.
The plaintiff argues that because TILA and RESPA violations are not valid special defenses, all the special defenses should be stricken to the extent that they rely on allegations that the original lender committed violations of TILA and RESPA. For the sake of clarity, although TILA and RESPA violations are, standing alone, not valid special defenses, this does not mean that the allegations that the original lender failed to make disclosures required under TILA and RESPA cannot be considered as factual allegations in support of other special defenses.
As to the defendants' CUTPA special defense, "there is limited appellate authority addressing whether CUTPA can be pleaded as a special defense." JP Morgan Chase v. McPhaden, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. 09 5009848 (Sep. 14, 2010, Mintz, J.) [ 50 Conn. L. Rptr. 658] "[T]here appears to be a split of authority amongst Superior Court decisions as to whether a violation of CUTPA provides a legally sufficient special defense to a foreclosure action. This court, however, agrees with the line of Superior Court decisions holding that an alleged violation of CUTPA is properly brought as a counterclaim to foreclosure actions, rather than as a special defense . . .
"[S]ince CUTPA claims by their very nature constitute claims for damages, they are properly brought as counterclaims rather than special defenses . . . CUTPA is a sword rather than a shield." (Internal quotation marks omitted.) Discovery Bank v. Kollars, Superior Court, judicial district of Tolland at Rockville, Docket No. 09 5005293 (October 15, 2010, Bright, J). Therefore, the court finds the defendants' assertion of CUTPA violations are not valid as a special defense and the court grants the motion to strike the fifth special defense.
The sixth special defense alleges that the plaintiff's action is barred because the defendants unknowingly entered into a loan transaction with unconscionable terms as a result of the conduct of the original lender. "The purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise . . . As applied to real estate mortgages, the doctrine of unconscionability draws heavily on its counterpart in the Uniform Commercial Code which . . . furnishes a useful guide for real property transactions . . . Official Comment 1 to § 2-302 of the Uniform Commercial Code suggests, [t]he basic test [of unconscionability] is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract." (Citations omitted; internal quotation marks omitted.) Family Financial Services, Inc. v. Spencer, 41 Conn.App. 754, 763 (1996). "The classic definition of an unconscionable contract is one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other . . . In practice, we have come to divide this definition into two aspects of unconscionability, one procedural and the other substantive, the first intended to prevent unfair surprise and the other intended to prevent oppression." (Citations omitted; internal quotation marks omitted.) Smith v. Mitsubishi Motors Credit of America, Inc., 247 Conn. 342, 349 (1998). "The element of unfair surprise has frequently been termed by commentators and courts as `procedural unconscionability' and is implicated by bargaining improprieties in the contract formation process." Emlee Equipment Leasing Corp. v. Waterbury Transmission, 31 Conn.App. 455, 463 n. 12 (1993).
The facts in the special defenses allege that the plaintiff materially changed the terms of the loan transaction from a conventional mortgage product to a subprime mortgage product on the day of the closing, after the defendants had already been approved for a traditional mortgage product and paid a $70,000 deposit on the subject property. These facts imply that the changes made to the terms of the loan transaction by the plaintiff were made at a point when it would be difficult for the defendants to contest the changes without risking the loss of the subject property or the deposit paid towards the property. Read in a light most favorable to the defendants, the facts allege that there were "bargaining improprieties in the contract formation process" and that the defendants were subject to unfair surprise that constitutes procedural unconscionability. The sixth special defense alleges facts that support a special defense of unconscionability. The court denies the motion to strike the sixth special defense.
"Insofar as [a] motion to strike is directed [to] the entire complaint, it must . . . fail if any of the . . . claims are legally sufficient." (Internal quotation marks omitted.) Whelan v. Whelan, 41 Conn.Sup. 519, 520 [ 3 Conn. L. Rptr. 135] (1991). "[A] motion to strike is not the proper vehicle for elimination of irrelevant, immaterial or otherwise improper allegations. The proper vehicle would be a request to revise . . . [T]he proper way to cure any confusion [regarding the complaint] is to file a [request] to revise, not a motion to strike . . ." (Internal quotation marks omitted.) Vanstean-Holland v. Lavigne, Superior Court, judicial district of New London, Docket No. CV 08 5007959 (September 2, 2009, Martin, J.).
In the present case the plaintiff moves to strike all of the defendants' special defenses because Carmen Medina is not a signatory to the note and mortgage and, therefore, lacks privity to raise any defense to the action. There is no dispute, however, that Frank Medina has the requisite privity to raise valid special defenses based on being a signatory to the note and mortgage. The court cannot grant a motion to strike all of the defendants' special defenses where Frank Medina has privity to raise valid special defenses and where some of the special defenses have been found to be legally sufficient. The proper vehicle to address Carmen Medina's alleged lack of privity would have been a request to revise to separate the special defenses asserted by Carmen and Frank Medina. If the plaintiff had requested that the defendants' special defenses be separated, the plaintiff could have then moved to strike the special defenses raised by Carmen Medina. Since Frank Medina does not lack the privity necessary to assert the special defenses, and the court has already determined that four of the defendants' special defenses are legally sufficient, the court cannot grant the motion to strike all of the special defenses on the ground that Carmen Medina lacks privity. The court rules that the plaintiff's motion to strike all of the defendants' special defenses on the ground that Carmen Medina lacks privity is denied.
The final issue that must be addressed by the court is whether to grant the plaintiff's motion to strike the defendants' request for a setoff on the ground that no legal setoffs have been alleged under General Statutes § 52-139. "The concept of setoff allows [parties] that owe each other money to apply their mutual debts against each other, thus avoiding the absurdity of making A pay B when B in fact owes A." (Internal quotation marks omitted.) Shapero v. Mercede, 77 Conn.App. 497, 509 (2003). "In Connecticut, a setoff may be legal or equitable in nature . . . Legal setoff is governed by General Statutes § 52-129 et seq. . . .
"When the statutes governing legal setoff do not apply, a party may be entitled to equitable setoff, nonetheless, only to enforce the simple but clear natural equity in a given case . . .
"An action to foreclose on a mortgage . . . is an equitable proceeding . . . and as such, does not implicate the statutes governing setoff." (Citations omitted; internal quotation marks omitted.) OCI Mortgage Corp. v. Marchese, 255 Conn. 448, 463-64 (2001). Practice Book § 10-41 provides that a motion to strike raising a claim of insufficiency "shall separately set forth each such claim of insufficiency and shall distinctly specify the reason or reasons for each such claimed insufficiency." "Motions to strike that do not specify the grounds of insufficiency are `fatally defective' and, absent a waiver by the party opposing the motion, should not be granted . . . Our Supreme Court has stated that a motion to strike that does not specify the grounds of insufficiency is fatally defective." (Citations omitted; internal quotation marks omitted.) Barasso v. Rear Still Hill Road, LLC, 64 Conn.App. 9, 13 (2001).
In the present case, the defendants assert that they are entitled to a setoff against the amount of debt claimed by the plaintiff, based on the amount of damages they suffered as a result of the conduct of the plaintiff and/or the original lender. The plaintiff moved to strike the defendants' request for a setoff on the following ground: "No legal setoffs have been alleged under [General Statutes § ]52-139(a)"; and "The claimed set-off fails by operation of law as a result of [General Statutes § ]52-139(b)." The defendants argue that the motion to strike the setoff request should be denied because a foreclosure action on a mortgage is an equitable proceeding, thus the request for a setoff is not a legal setoff governed by § 52-139; therefore the plaintiff fails to raise a specific ground of legal insufficiency upon which the court may grant the motion to strike by only arguing that the setoff does not meet the statutory requirements of § 52-139. Since the plaintiff only specified one ground upon which to strike the setoff, and the defendants have objected that the motion is defective because the ground stated is not a sufficient basis, the court is limited to deciding the motion to strike the setoff based only on the single ground asserted by the plaintiff.
This issue usually arises where a party's motion to strike fails to state specific reasons of insufficiency in the adverse party's pleading, but the accompanying memorandum of law contains such specific reasons. In those instances, if the non-moving party fails to object the court may consider the reasons stated in the memorandum of law in support of the motion to strike. Bouchard v People's Bank, 219 Conn. 465, 468 n. 4 (1991). In the present case, the motion to strike and the memorandum of law are consistent, but the defendants have objected in order to limit the court to considering only the single ground set forth by the plaintiff.
The plaintiff's motion to strike the setoff was based on the ground that the defendants did not allege facts that supported a request for legal setoff under § 52-139. A setoff may, however, be legal or equitable in nature, and a foreclosure is an equitable proceeding. The plaintiff's motion to strike the setoff request fails to specify reasons that the defendants' request for a setoff is insufficient based on equitable grounds. The court is, therefore, limited to determining whether the motion to strike the setoff request should be granted for being insufficient under § 52-139, and cannot address whether the defendants' request for a setoff is insufficient based on equitable grounds. The court denies the plaintiff's motion to strike the defendants' request for a setoff because the plaintiff has failed to state a ground upon which the court may strike the motion.
For all of the reasons stated above, the court denies the plaintiff's motion to strike the defendants' first, second, third and sixth special defenses and grants the motion to strike the defendants' fourth and fifth special defenses. The court, also, denies the plaintiff's motion to strike the defendants' request for a setoff on the ground that no legal setoffs have been alleged under General Statutes § 52-139.