Opinion
No. CV-10-6001911S
July 11, 2011
RULING ON DEFENDANT'S OBJECTION TO MOTION FOR STRICT FORECLOSURE (#147)
INTRODUCTION
The issue before the court is whether the marshaling doctrine, General Statutes § 52-380i, should be applied in the present case. The court finds that General Statutes § 52-380i is applicable and sustains the defendant's objection to the plaintiff's motion for strict foreclosure.
I FACTS
On December 22, 2009, the plaintiff, First National Bank of Litchfield, obtained a judgment in the matter of First National Bank of Litchfield v. R.V. Noad Construction, Inc., Superior Court, judicial district of Litchfield, Docket No. CV 09 5006692 (December 22, 2009), against R. Vincent Noad, Cindy Noad and R.V. Noad Construction, Inc. in the amount of $409,396.51. The judgment includes the outstanding principal and interest on three commercial term notes from R.V. Noad Construction, Inc. to the plaintiff, which notes were personally guaranteed by defendants, R. Vincent Noad and Cindy Noad (the Noads). The notes upon which the judgment was entered are Commercial Term Note #4949758598 in the original principal amount of $200,000 (Term Note One), Commercial Term Note #4949758613 in the original principal amount of $150,000 (Term Note Two), and Note and Security Agreement #1515160863 (Term Note Three).
The current balance owed on Term Note Three is $25,016.73.
On or about January 4, 2010, the plaintiff recorded a judgment lien against property owned by the Noads, located at 81 5½ Mile Road in Goshen, Connecticut (Goshen property). On February 23, 2010, the plaintiff filed the present action to foreclose the judgment lien against the defendants, the Noads and Noad Enterprises, LLC (Noad Enterprises). Noad Enterprises guaranteed the payment of each and every debt, liability and obligation of R.V. Noad Construction, Inc. to the plaintiff, including debts arising under Term Note One and Term Note Two, by its Guaranties dated October 8, 2008. The Term Note One Guaranty and the Term Note Two Guaranty are secured by mortgages from Noad Enterprises on property known as 2101 Winsted Road, and adjoining lot, in Torrington, Connecticut (Torrington property). The plaintiff currently holds a first and second mortgage on the Torrington property securing Term Note One and Two.
The judgment lien is recorded at Volume 165, page 629 of the Goshen Land Records.
On May 23, 2011, the plaintiff filed a motion for strict foreclosure that was heard on the June 6, 2011 short calendar. During oral argument, the defendants sought an application of the cash value of the Torrington property to the judgment debt on the Goshen property pursuant to General Statutes § 52-380i. The defendants direct the court to their special defense of General Statutes § 52-380i (#126) as well as their motion for application of General Statutes § 52-380i (#128). The plaintiff objects to the application of General Statutes § 52-380i and directs the court to its memorandum in opposition to the defendants' motion for application of General Statutes § 52-380i (#129).
II DISCUSSION
"Judgment liens are placed on the real property to secure the unpaid amount of a money judgment." Lienfactors, LLC v. Crandall, Superior Court, judicial district of New London, Docket No. CV 07 5002929 (October 2, 2008, Martin, J.). "A judgment lien is a sort of statutory mortgage, . . . a perfected and permanent lien unconditional in its nature, unlimited as to time, and subject to no further regulations except as to redemption and foreclosure . . . In an early case, Gushee v. Union Knife Co., 54 Conn. 101, [6 A. 192 (1886)] . . . [t]he holders of the note and mortgage brought suit in the note, attached five parcels of land, obtained judgment, and filed a judgment lien on the land attached. They then sought foreclosure of the mortgage and judgment lien. The defendant argued against allowing foreclosure of both liens, and urged that the mortgage only be foreclosed, and the land subject to the judgment lien be charged only with the balance due. The trial court entered a decree of foreclosure covering all the property. `The plaintiffs have obtained a legal right to the full security which they hold, and they are entitled to hold it until the debt is paid. The question here is wholly one of marshalling securities. The judgment lien stands on as legal ground as that of the mortgage and there is no equitable rule by which we can give one an advantage over the other. If there is a reason for limiting the rights of the creditor under the judgment lien, it should be done by legislation.'" (Citation omitted; internal quotation marks omitted). Vaccaro v. Snyder, Superior Court, judicial district of New Haven, Docket No. CV 90 0235646 (March 15, 1991, Burns, J.) ( 3 Conn. L. Rptr. 339, 340).
"With the obvious purpose of adopting this suggestion of relief to a debtor so situated, the legislature in the following year enacted the original of [General Statutes § 52-380i] . . ." Merchant's Bank Trust Co. v. Pettison, 112 Conn. 652, 655, 153 A. 789 (1931); see Vaccaro v. Snyder, supra, 3 Conn. L. Rptr. 340 ("The statute was amended to its present form in 1887 (with subsequent grammatical corrections)"). The intent of the amendment was to provide the debtor "an opportunity to have the mortgaged property first applied to the payment of the mortgage note, and relieve [the debtor] of the circuity of action, expense and annoyance, and possible serious loss . . ." Merchant's Bank Trust Co. v. Pettison, supra, 112 Conn. 656.
General Statutes § 52-380i provides: "Upon proceedings for the foreclosure of any judgment lien, when the judgment creditor holds a mortgage upon real estate in this state as security for the debt, or any part of it, that has gone into the judgment, which mortgage is a first charge upon the property mortgaged, the court shall, upon the motion of the judgment debtor or any later encumbrancer on the property covered by the judgment lien, order such mortgaged property to be first applied to the debt secured by it, at its cash value, to be ascertained by the court; and a foreclosure of the judgment lien shall be granted only as to the portion of such judgment that remains unsatisfied."
The defendants filed a motion for application of General Statutes § 52-380i requesting that the court apply the cash value of the Torrington property to the judgment debt on the Goshen property and that the plaintiff's judgment lien be granted only as to the portion of the judgment that remains unsatisfied. The defendants did not file a memorandum of law in support of this motion. The plaintiff filed a memorandum in opposition to the application of General Statutes § 52-380i. The plaintiff presents three arguments.
First, the plaintiff contends that the application of General Statutes § 52-380i would be inequitable and would cause great prejudice to the plaintiff. According to the plaintiff, the application of the "cash value" credit is inequitable. The statute prescribes that the amount of the credit to be applied to the judgment lien is equal to the full cash value of the mortgaged property, rather than the value of the creditor's security interest in the property. Therefore, if the value of the mortgaged property exceeds the value of the mortgage, a credit will be applied against the judgment lien which exceeds the value of the creditor's security interest in the mortgaged property. Consequently, the value of the judgment lien could be reduced by an amount greater than the amount to which the creditor is secured in the mortgaged property. If the creditor later forecloses its mortgage, it would only recover an amount equal to its security interest and not the full cash value of the credit which was applied to the judgment lien, potentially leaving a portion of the original judgment unrecoverable.
The plaintiff presents a hypothetical situation based on the actual amount of the judgment lien, $409,396.51, and the actual value of the two mortgages on the Torrington property, $350,000. For purposes of the hypothetical, the plaintiff assumes the value of the Torrington property to be $400,000. If the court were to apply General Statutes § 52-380i, the $400,000 value of the Torrington property would be applied as a credit to the judgment lien. The judgment lien would therefore be reduced to $9,369.51 and the plaintiff would be permitted to foreclose the judgment lien only with respect to $9,369.51. Therefore, to recover the remaining $400,000 balance owed to the plaintiff, it would be forced to foreclose the two mortgages on the Torrington property. However, if it did so it would recover no more than $350,000; General Statutes § 49-1 would then serve to bar any further action on the underlying debt; and therefore, a judgment balance of $50,000 would be unrecoverable by the plaintiff, leaving the defendants with that amount as a windfall.
Moreover, the plaintiff contends that the use of appraisals to determine the value of the Torrington property is inequitable because there is a serious risk of overvaluation of the mortgaged property. According to the plaintiff, if the court overvalues the Torrington property and then applies that credit to the Goshen property, the plaintiff would be prejudiced because it would be left with a property (the Torrington property) that is actually worth less than the credit that was applied to the Goshen property. Therefore, even if the plaintiff pursued a strict foreclosure or a foreclosure by sale of the Torrington property, it would still be unable to recover a portion of its judgment lien.
The plaintiff presents a second hypothetical situation based, again, on the actual amount of the judgment lien, $409,396.51, and the actual value of the two mortgages on the Torrington property, $350,000. If the court were to find the cash value of the Torrington property to be $400,000, and then applied a $400,000 credit to the judgment lien, the judgment lien would be reduced to $9,369.51. Consequently, the plaintiff would only be permitted to foreclose the judgment lien in the amount $9,369.51. The plaintiff would still be owed $400,000, and its only means of recovering that $400,000 would be to foreclose the mortgages on the Torrington property. However, if it were ultimately to be found that the court had overvalued the Torrington property, or if the value of the Torrington property were to decline after the court made its finding, the plaintiff would be prejudiced because it would be left with a property worth less than its judgment debt. Alternatively, if the property were to be valued at a level greater than the plaintiff's judgment debt, e.g. $450,000, a foreclosure by sale would be ordered. If the property then sold at $450,000, the plaintiff would only be entitled to collect an amount equal to its security interest of $350,000, even though it is owed more than $400,000.
Second, the plaintiff contends that the application of General Statutes § 52-380i would place an undue burden on the plaintiff by causing it to proceed to an independent action to foreclose the mortgages on the Torrington property. Specifically, if a credit equal to the cash value of the Torrington property is applied to the judgment lien, the value of the judgment lien will be significantly reduced and the plaintiff will be permitted to foreclose the lien only as to the balance which remains after the credit is applied. No portion of the cash value, however, is recoverable by the plaintiff. If the plaintiff wishes to recover any portion of the credit, it has no option but to foreclose its mortgages on the Torrington property. Furthermore, the value of the plaintiff's security interest in the Torrington property is only $350,000 whereas the amount of the judgment lien is $409,369.51. There is a significant risk that the Torrington property will not provide the plaintiff with a sufficient recovery to satisfy the entire judgment lien. Additionally, the plaintiff argues that the amount it will recover in a foreclosure action on the Torrington property will be further reduced by the amount of tax and sewer liens on the property, which are currently $2,360.84 and could increase significantly at the time a foreclosure judgment is entered.
Finally, the plaintiff argues that the application of General Statutes § 52-380i is not appropriate because the Torrington property and the Goshen property are not owned by a common debtor and marshaling is only available where one creditor has security on two funds of a common debtor. According to the plaintiff, the Torrington property is owned by Noad Enterprises whereas the Goshen property is owned jointly by the Noads. Therefore, the plaintiff does not have a security interest in two funds of a common debtor.
The plaintiff cites several cases in support of its arguments, including Savings Bank of Danbury v. Karam, 119 Conn.App. 847, 989 A.2d 664 (2010), and Greenwich Trust Co. v. Tyson, 129 Conn. 211, 27 A.2d 166 (1942). These cases, however, are based on the common law doctrine of marshaling, not the statutory provision invoked by the defendants, General Statutes § 52-380i. "The prerequisites for common law marshaling are (i) the existence of two secured creditors with a common debtor, (ii) the existence of two funds belonging to the debtor, and (iii) the right of the senior creditor to satisfy its claim from both funds, while the other creditor may resort to only one." In re Borges, 184 B.R. 874, 879 (Bankr. D. Conn. 1995), citing New Haven Bank N.B.A. v. Jackson, 119 Conn. 451, 453, 177 A. 387 (1935). "The basis of [common law] marshalling is that, where one creditor has security on two funds of his debtor, and another creditor has security for his debt on only one of those funds, the latter has a right in equity to compel the former to resort to the other fund, if it is necessary for the satisfaction of both creditors, provided it will not prejudice the rights or interests of the party entitled to the double fund, nor do injustice to the common debtor, nor operate inequitably on the interests of other persons . . . Nor will the doctrine ordinarily be applied where the effect would be to compel one of the creditors to proceed by an independent action, such as for the foreclosure of a mortgage, because that would be to place an additional burden upon the creditor against whom the marshalling is sought." (Citations omitted; internal quotation marks omitted.) Greenwich Trust Co. v. Tyson, supra, 129 Conn. 227-28. It is on the foregoing basis that the plaintiff argues that application of General Statutes § 52-380i would be inequitable. The common law doctrine of marshaling, however, is inapplicable to the facts of the present case and the court must, instead, focus on the language of General Statutes § 52-380i to determine whether marshaling applies.
"The plain language of § 52-380i provides that it applies only where a creditor holds both a judgment lien on property of a debtor and a mortgage as security for the same debt, in which event the debtor could, in the action to foreclose the judgment lien, move the court to require the creditor to enforce its rights under the mortgage before it seeks satisfaction from the judgment lien . . . The statute was enacted to remedy the situation in which a lender obtains a security interest on a borrower's property, the borrower transfers that property to a person who assumes and agrees to pay the security interest, that person subsequently defaults, and the lender obtains a judgment lien applicable to all of the original borrower's property and attempts to proceed against that property prior to foreclosing the security interest . . . The statute was enacted because the common law doctrine of marshaling did not protect the judgment debtor under that specific factual scenario . . . Application of the statute must be limited to the specific inequity it was designed to address." (Citations omitted.) In re Borges, supra, 184 B.R. 878-79. "[T]he purpose of the legislature clearly was to give the defendant lienee the benefit of an appraisal of the mortgaged property and its application to the debt where the mortgage was a first mortgage . . ." Merchant's Bank Trust Co. v. Pettison, supra, 112 Conn. 657.
The plaintiff contends that General Statutes § 52-380i does not apply because the Torrington property and the Goshen property are not owned by a common debtor — the Torrington property is owned by Noad Enterprises whereas the Goshen property is owned jointly by the Noads. General Statutes § 52-380i will apply when the judgment creditor holds a mortgage upon real estate as security for the debt that has gone into the judgment, "which mortgage is a first charge upon the property mortgaged." Id. In other words, General Statutes § 52-380i will apply when the creditor holds both a judgment lien on the property of a debtor and a mortgage as security for the same debt. In the present case, the plaintiff holds a first and second mortgage on the Torrington property as security for the debt owed pursuant to Term Notes One and Two, the debt on which the plaintiff obtained judgment. The plaintiff, thereafter, recorded a judgment lien against the Goshen property. Consequently, this situation falls within the mandates of General Statutes § 52-380i because the plaintiff holds a first mortgage on the Torrington property as security for the debt, evidenced by Term Notes One and Two, that has gone to judgment and the plaintiff holds a judgment lien on the Goshen property.
The plaintiff argues that application of General Statutes § 52-380i would be inequitable and result in prejudice to it because the value of the Torrington property could exceed the value of the mortgage; consequently, the credit applied to the judgment lien could exceed the value of the creditor's security interest in the Torrington property. The plaintiff also contends that application of the statute would place an undue burden on the plaintiff by causing it to proceed to an independent action to foreclose the mortgages on the Torrington property if it wishes to recover any portion of the credit that would be applied to the judgment debt. According to the plaintiff, marshaling, like foreclosure, is an equitable proceeding and the court should not permit marshaling if it will work an injustice, it will prejudice the rights of the creditor, and it will operate inequitably with regard to the creditor.
In the course of considering common law marshaling, our Supreme Court has stated that the doctrine of marshaling will be applied "provided it will not prejudice the rights or interests of the party entitled to the double fund, nor do injustice to the common debtor, nor operate inequitably on the interests of other persons . . . Nor will the doctrine ordinarily be applied where the effect would be to compel one of the creditors to proceed by an independent action, such as for the foreclosure of a mortgage, because that would be to place an additional burden upon the creditor against whom the marshalling is sought." (Citations omitted; internal quotation marks omitted.) Greenwich Trust Co. v. Tyson, supra, 129 Conn. 227-28.
"[I]n a judgment lien foreclosure proceeding . . . [a]n action of foreclosure is an equitable action." (Citation omitted; internal quotation marks omitted.) North Side Savings Bank v. Law, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 90 0109161 (June 14, 1991, Nigro, J.) ( 4 Conn. L. Rptr. 194, 196); see First New Haven National Bank v. Rowan, 2 Conn.App. 114, 118-19, 476 A.2d 1079 (1984). "Because foreclosure is peculiarly an equitable action . . . the court may entertain such questions as are necessary to be determined in order that complete justice may be done . . . In exercising its equitable discretion, however, the court must comply with mandatory statutory provisions . . . It is our adjudicatory responsibility to find the appropriate accommodation between applicable judicial and statutory principles. Just as the legislature is presumed to enact legislation that renders the body of the law coherent and consistent, rather than contradictory and inconsistent . . . [so] courts must discharge their responsibility, in case by case adjudication, to assure that the body of the law — both common and statutory — remains coherent and consistent." (Citations omitted; internal quotation marks omitted.) New Milford Savings Bank v. Jajer, 244 Conn. 251, 256-57, 708 A.2d 1378 (1998).
General Statutes § 52-380i provides that "[u]pon proceedings for the foreclosure of any judgment lien, when the judgment creditor holds a mortgage upon real estate in this state as security for the debt, or any part of it, that has gone into the judgment, which mortgage is a first charge upon the property mortgaged, the court shall, upon the motion of the judgment debtor or any later encumbrancer on the property covered by the judgment lien, order such mortgaged property to be first applied to the debt secured by it, at its cash value, to be ascertained by the court; and a foreclosure of the judgment lien shall be granted only as to the portion of such judgment that remains unsatisfied." (Emphasis added.) "Well established principles of statutory construction govern [the court's] determination of whether [a statute's provisions are] mandatory or directory. [The court's] fundamental objective is to ascertain and give effect to the apparent intent of the legislature . . . While [the court] generally will not look for interpretative guidance beyond the language of the statute when the words of that statute are plain and unambiguous . . . our [Supreme Court's] past decisions have indicated that the use of the word `shall,' though significant, does not invariably create a mandatory duty . . . In order to determine whether a statute's provisions are mandatory we have traditionally looked beyond the use of the word `shall' and examined the statute's essential purpose . . . The test to be applied in determining whether a statute is mandatory or directory is whether the prescribed mode of action is the essence of the thing to be accomplished, or in other words, whether it relates to a matter of substance or a matter of convenience . . . If it is a matter of substance, the statutory provision is mandatory. If, however, the legislative provision is designed to secure order, system and dispatch in the proceedings, it is generally held to be directory, especially where the requirement is stated in affirmative terms unaccompanied by negative words." (Citations omitted; internal quotation marks omitted.) Crest Pontiac Cadillac, Inc. v. Hadley, 239 Conn. 437, 445-46, 685 A.2d 670 (1996).
In the present case, the word "shall" in General Statutes § 52-380i is mandatory — "the court shall, upon the motion of the judgment debtor . . . order such mortgaged property to be first applied to the debt secured by it . . ." The word "shall" in the statute relates to a matter of substance, not a matter of convenience. The text of General Statutes § 52-380i and the purpose it was intended to serve combine to establish that the court is precluded from exercising its equitable discretion in derogation of the statute. The court cannot disregard the statute when confronted with facts that conform to the statutory requirements of General Statutes § 52-380i. Further, the purpose of the statute was to protect the judgment debtor, not the creditor. "[T]he purpose of the legislature clearly was to give the defendant lienee the benefit of an appraisal of the mortgaged property and its application to the debt where the mortgage was a first mortgage . . ." Merchant's Bank Trust Co. v. Pettison, supra, 112 Conn. 657.
Accordingly, the defendants' objection to the motion for strict foreclosure is sustained. General Statutes § 52-380i applies in this case and requires this court to hold a hearing in order to determine the value of the Torrington property.
So ordered.