Opinion
No. FST CV 07 5004436 S
February 23, 2010
MEMORANDUM OF DECISION
I.
This case was consolidated with an interpleader case, Bove Milici v. James Brown, Nancy Brown, William G. McCoy and Karen S. McCoy, Docket Number CV07-5004323. The Bove Milici interpleader acted as the stimulus for the present litigation between the McCoys and the Browns, involving the entitlement to the sum of $127,500 paid by the McCoys to the Browns as a deposit on the purchase of a residential house in Darien, Connecticut. In response to the interpleader plaintiff's Motion for Interlocutory Judgment for Interpleader, dated January 27, 2007, the court granted the Motion and the plaintiff escrow agent turned the deposit funds over to the Clerk of the Superior Court in this district, at Stamford, less the sum of $639.06 for disbursements. Thus the amount given to the Clerk, and still held by her, is $126,860.94.
It is the instant case, McCoy v. Brown, Docket Number CV 075004436, which the court tried in August 2009, and concerning which it finds the following facts.
The plaintiff, Mr. McCoy, is a 1995 graduate of the Wharton School at the University of Pennsylvania where he received an MBA. He spent much of his working life in the banking and financial industries, and being employed by Credit Suisse for some eight years.
Mr. McCoy's wife is also a plaintiff, but the court, when referring to "the plaintiff," will mean Mr. McCoy.
He and his family had originally lived in Darien from 2001 to 2006 and then, having left Credit Suisse and taken a job with ADP Brokerage Services (ADP), moved to Setauket, New York, on Long Island. The plaintiff stayed at ADP a short time, then left his employment (through no fault of his own) and was given a severance agreement as of January 31, 2007. The agreement on his termination date basically consisted of eight months of salary, commencing February 1, 2007 through September 30, 2007 and also provided for several other monetary and financial benefits for the plaintiff.
While living in Darien in the early 2000s, the plaintiff befriended his neighbor, Christopher Raia and his family. After the termination from ADP, the plaintiff was jobless. In discussions with Raia at that time the plaintiff chose among a few options as to where to live. The choice was to move back to Darien. The McCoys contacted their previous broker in Darien and were shown several houses, including that owned by the defendants at 15 Little Brook Road North, in Darien. In February the house was listed at a sales price of $1,375,000. The McCoys made an offer on the property and submitted to the Browns, through the Browns' broker, a signed memorandum of purchase offering $1,325,000 for the property. The memorandum indicated the sale would be contingent on mortgage approval. The McCoys also submitted at the same time a pre-approval letter from Connecticut Home Mortgage, Inc. advising them that they had been "pre-approved" for a loan of $1,000,000 for a $1,325,000 purchase.
During the course of negotiations, the purchase price was reduced twice at the request of the plaintiff and for different reasons, to $1,275,000. A third request for a reduction was denied by the defendants. A contract was prepared by the defendants' attorney and signed by the plaintiffs on April 20, 2007, and on April 25, 2007 by the defendants. Since some changes had been made, the plaintiffs resigned it on May 1, 2007.
In March or April 2007, McCoy asked Raia for a consulting agreement with Raia's company, Provation LLC, of which Raia was the sole member and employee. By late April, Raia agreed to offer such a consulting arrangement to the plaintiff. On April 16, 2007 the plaintiff met with the defendant Mrs. Brown in order to inspect the home after a flood in the basement the day before. At that meeting Mrs. Brown asked the plaintiff where he worked, and he replied "New York and Stamford." At that time the plaintiff was unemployed or at best had an offer of self-employment as a consultant with Raia's company.
The plaintiff had retained Ladd Financial Services as a mortgage broker and the owner of the firm, Tom Sickenger, advised McCoy as to available mortgages. In essence, Sickenger advised the plaintiff that, without a salaried job, he might have to accept a less favorable interest rate on his mortgage. The plaintiff insisted with Sickenger that he wanted only the "best rate." All this time, the contract the plaintiff had signed first on April 20, 2007 and then again on May 1, 2007 contained the following mortgage contingency clause:
5. MORTGAGE CONTINGENCY: This Contract is conditioned upon Buyer's securing a commitment for a first mortgage loan on the Premises from any Bank in minimum limits of $1,020,000.00 amortized over a term of not less than thirty years with interest at the prevailing rate and containing no conditions beyond Buyer's reasonable ability to satisfy. Buyer agrees to make application forthwith and pursue the same diligently. In the event said lender imposes or requires the Buyer to pay any costs, fees and/or charges in connection with said loan, said application and/or commitment, including, but not limited to, application fee, origination fee, processing fees, commitment fee, "points," credit report charge, appraisal fee, title insurance charge, and/or the like of any or all of the foregoing, the imposition, requirement and/or payment of any or all of same shall not entitle Buyer to assert that all terms of this entire Paragraph have not been satisfied. In the event Buyer shall fail to secure said mortgage commitment and has demonstrated due diligence, on or before May 11, 2007, he shall have the option of terminating this Contract and all deposit monies paid hereunder shall forthwith be refunded to the Buyer except the sum of $200.00 for the cost of preparing this contract of sale, and all rights and obligations of the parties hereto shall be forever terminated. Buyer, to take advantage of this contingency, must cause written notice of Buyer's inability to obtain such a commitment to be given to Attorney John J. Bove, Bove Milici, 96 East Avenue, Norwalk, CT 06851. Receipt of such notice by Attorney John J. Bove shall constitute receipt by Seller of such notice. If Attorney John J. Bove does not receive such notice prior to 5 p.m. on said date, this Agreement shall remain in full force and effect as if this paragraph had not been included herein.
The obligation of the Buyer to purchase this property is not contingent upon the sale of any other property. If the Buyer's mortgage commitment is conditioned or contingent upon the sale of any other property or the ability of the Buyer to provide a contract of sale for any other property, or if the buyer's mortgage application is rejected for any reason relating to the sale of any other property, the mortgage contingency is conclusively deemed satisfied.
In late April, Raia granted the plaintiff's request to become a full-time salaried employee of Provation LLC, and the plaintiff, knowing that to get "preferred rates" of mortgage interest, he needed a job wherein W-2 forms were issued, amended his mortgage application to Astoria Federal (the Bank), to which he had applied for a mortgage, to reflect Raia's job offer. The Bank issued a commitment letter on May 4, 2007, satisfactory to the plaintiff, at 6 1/2 percent interest for 30 years, but requiring before closing of the loan verbal verification that McCoy had started employment at Provation, LLC. At about the same time, Raia told the plaintiff that he had changed his mind about the employment of him as a salaried employee, but still was interested in him as a consultant, independent contractor or collaborative partner at the same level of compensation. To that end, Raia wrote a letter to the plaintiff dated May 14, 2007 withdrawing the offer of employment, effective as of May 10, 2007. The mortgage contingency date was May 11, 2007. The evidence demonstrates that Raia actually communicated his decision to the plaintiff on May 4 or 5, 2007. None of the information about Raia's continued interest in the plaintiff was ever communicated by the plaintiff to Ladd or to the Bank.
The plaintiff was clear that he would not accept any mortgage commitment but one which offered him his preferred terms and that he had a right to do so. The issue, then, is whether the plaintiff's position is legally justifiable, given the terms of the contract's mortgage contingency clause.
By letter dated May 11, 2007, attorneys for the plaintiff notified the attorney for the defendants of their client's "inability to obtain a mortgage commitment containing . . . no conditions beyond Buyer's reasonable ability to satisfy," and demanding "the immediate return of our client's deposit funds in the amount of $127,500.00." Plaintiff's Exhibit 5.
The plaintiff's complaint is in three counts. The defendants filed a counterclaim in three counts as well. The First Count of the plaintiff's complaint sounds in breach of contract for the defendants' failure to return the plaintiff's deposit in accordance with paragraph 5, the mortgage contingency clause in the contract. In the Second Count, the plaintiff alleges statutory theft pursuant to Conn. Gen. Stat. § 52-564; the Third Count alleges conversion.
The plaintiff's breach of contract argument is based upon the theory that the defendants violated the contract of sale when they failed to return the deposit after the plaintiff was unable to obtain a mortgage. Under paragraph 5 of the contract of sale, the mortgage contingency clause, the buyer was obligated to use due diligence to secure a mortgage commitment for a first mortgage from any bank in minimum limits of $1,020,000 amortized over a period of thirty years with interest at the "prevailing rate," and containing no conditions beyond the buyer's reasonable ability to satisfy. The plaintiff argues in his brief that "prevailing rate" means "prime rates offered by lending institutions," without offering any authority for that proposition. To the court, "prevailing rate" means that rate of interest a certain bank is willing to charge in view of all of the circumstances surrounding the loan application under consideration. These might include credit history, assets and liabilities, employment status, etc. Thus, for persons unemployed, or self-employed, or employed at a fixed salary, the prevailing interest rates might well be different. In this case the plaintiff was unwilling to deal with any mortgage commitment except one which carried the terms he wanted and were what he believed were the best terms he could get. He took this position, even though he knew when he first signed the sales contract on April 20, 2007 that he had no employment, and after minor changes, resigned the contract on May 1. He had asked Raia to offer him a fixed salary job to improve his chances of getting better terms on his mortgage. He argues that "if the Browns wanted the McCoys to be obligated to take a subprime mortgage with significantly higher rates than a conventional, prime mortgage, they should have negotiated that in the contract itself." Plaintiff's brief (p. 23). On the contrary, the Browns were not concerned with the type of mortgage the McCoys received. It was the plaintiff, not the defendants, who insisted that he would only accept a preferred mortgage rate, and it was he who should have negotiated a cap on interest rates in the contract of sale.
No party has raised an issue with the fact the mortgage commitment from the bank was for $956,250 rather than $1,020,000.
Again, plaintiff does not define what "subprime mortgage" means in this case, or even a "conventional mortgage." Further, there was nothing in the evidence or in plaintiff's brief as to the exact meaning of "significantly higher" rates.
The plaintiff cites Aubin v. Miller, 64 Conn.App. 781, 781 A.2d 396 (2001) and Luttinger v. Rosen, 164 Conn. 45, 316 A.2d 757 (1972) for the proposition that if a buyer is unable to obtain a mortgage pursuant to a mortgage contingency clause he is entitled to the return of the deposit made on the sales contract. Both cases are distinguishable from the case before us. In Aubin, supra, 64 Conn.App. 781, the plaintiff was employed by Reader's Digest at the time of his application for a mortgage, and his employer verified the same in writing. Five days later, Reader's Digest fired the plaintiff, and he was unable to obtain a mortgage. That court found that he was entitled to the return of the deposit. In the present case, there were other mortgage options available to the plaintiff, which he declined to consider. He would have qualified for a no income verification loan, for example, and there is nothing in the mortgage contingency clause which excludes the same if it carries the prevailing rate for such a loan at the Bank.
In Luttinger, supra, 164 Conn. 45, the mortgage contingency clause placed a cap on the interest rate the buyer was obligated to accept, much as the clause in this case which the plaintiff might have negotiated, but did not.
The court relies heavily on Phillipe v. Thomas, 3 Conn.App. 471, 489 A.2nd 1056 (1985) for the position that the purchaser will, in exercising due diligence to obtain the mortgage described in the contract, exert reasonable efforts to obtain a mortgage. Id., 473. In that case there was evidence that the plaintiff could have obtained a MGIC mortgage commitment at the prevailing rates for such a mortgage, with an interest rate higher than initially sought by the applicant. Id., 477, fn.5.
For instance, there was testimony from a mortgage officer at the bank that the plaintiff could have obtained a MGIC mortgage commitment of $84,000 at the prevailing rates for such a mortgage, with an interest rate one quarter of one percent higher and an insurance rate one half of one percent higher than the mortgage initially sought. The language of the mortgage contingency clause does not limit the type of mortgage the plaintiff might obtain to a conventional mortgage; its broad language is certainly susceptible of a reading allowing a MGIC mortgage commitment to fulfill the condition. The failure of the plaintiff to pursue this option might, therefore, be seen as unreasonable.
Each parties' counsel claims fees and expenses from the opposing party in excess of $100,000, a substantial sum in a case wherein the claim of $127,500 was initially involved. However, with treble damages, prejudgment interest, costs and legal fees at issue, the stakes are much higher. Both law firms carry excellent reputations and have put very substantial time and work into the preparation and trial of the many factual and legal issues involved. The court finds both affidavits claim reasonable attorneys fees and expenses. The respective hourly rates for the partners of the firm trying this case, range from $375 to $425 per hour, with associates' and paralegals' being lower, all in line with current practice. Neither side objected to the fees of the other.
Phillipe v. Thomas, 3 Conn.App. 471, 477 fn.5.
Mr. McCoy failed to exercise due diligence and was unreasonable in his decision not to consider another form of mortgage which may have carried a higher rate of interest. He was not entitled to pick and choose among the commitments he would accept, but pursuant to the terms of the contract, was obliged to secure a mortgage at the prevailing rates offered for persons in his circumstances. These "circumstances" were known to the plaintiff at virtually all times in the mortgage application process. He engineered his job employment offers from his friend and neighbor to try to obtain the rates he wanted and none other. The court believes he hoped all the pieces would fall together before the mortgage contingency clause expired. If not, he could opt to get out of the deal. These hopes have turned out to be factually and legally false. The Bank never rejected the plaintiff's mortgage application; it was withdrawn after McCoy failed to pursue it further.
In the plaintiff's Reply Brief, dated November 3, 2009 he dismisses any reliance on Phillipe, supra, 3 Conn.App. 471, claiming that the relevant language in footnote 5 in that case was simply dicta, and not binding on the court, citing the recent case of Hanulic v. Town of Greenwich, 293 Conn. 641, 980 A.2d 845 (2009). That case was released on October 13, 2009. On December 22, 2009, the Supreme Court decided Cruz v. Montanez, 294 Conn. 357 (2009), wherein it states:
That footnote discussed the fact that evidence in the case contained testimony that the plaintiff could have obtained a MGIC mortgage, at the prevailing rate for such a mortgage, with a higher interest rate. The plaintiff failed to pursue that option, which the court stated might have been seen as unreasonable.
Dictum includes those discussions that are merely passing commentary . . . those that go beyond the facts at issue . . . and those that are unnecessary to the holding in the case . . . [I]t is not dictum [however] when a court . . . intentionally takes up, discusses, and decides a question germane to, though not necessarily decisive of, the controversy . . . Rather, such action constitutes an act of the court [that] it will thereafter recognize as a binding decision.
(Citations omitted.) (Internal quotation marks omitted.) Cruz v. Montanez, supra, 294 Conn. 376, 377. In Phillipe the court intentionally took up, discussed, and decided a question which was germane to, though not necessarily decisive of, the controversy. Footnote 5 decided that evidence of the mortgage applicant's failure to pursue an alternate loan option might be considered unreasonable. That was not only germane to the "good faith v. reasonable efforts" controversy in Phillipe but is the dispositive issue in the present case. But dicta or not, the court adopts the reasoning of the Phillipe footnote, and finds that the plaintiff's efforts to obtain a mortgage lacked due diligence and were unreasonable. The plaintiff has failed to prove that he could not obtain a mortgage containing conditions beyond his reasonable ability to satisfy. Therefore, the court finds in favor of the defendant on the First Count of the plaintiff's complaint because the defendants' failure to return the deposit was not a violation of the mortgage contingency clause or of the contract.
For the same reason, the defendants must prevail on the Second and Third Counts of the plaintiff's complaint, statutory theft (C.G.S. § 52-564) and conversion, respectively.
II.
The defendants' counterclaim is in three counts. The First Count alleges breach of contract by the plaintiff; the Second Count a breach of the covenant of good faith and fair dealing; the third Count alleges fraud.
For the reasons thoroughly discussed in Part I of this decision, the court finds the plaintiff breached the contract with the defendants by not exercising due diligence and reasonable care in his decisions regarding the acceptance of a mortgage as required by the broad mortgage contingency clause contained in the contract. Thus, the court finds in the defendants' favor on their first count.
In respect to the allegation of the plaintiff's breach of the implied duty of good faith and fair dealing, the doctrine requires a finding of bad faith amounting to dishonesty. Habetz v. Condon, 224 Conn. 231, 237, 681 A.2d 501 (1992). Plaintiff's statements and conduct in his attempts to get a mortgage are not necessarily inconsistent with the false, unrealistically optimistic, if not naive, notion referred in Part I hereof, that the pieces of his job picture would fall together in time. They do not descend to the level of bad faith and dishonesty. Id.
The defendants next claim that the plaintiff fraudulently represented to Mrs. Brown in answer to her question, "where do you work," that he worked in Stamford and New York. At that point in time, McCoy was unemployed or at best had received an offer of self-employment with Raia's firm.
The essential elements of an action in fraud are "(1) that a false representation was made as a statement of fact, (2) that it was untrue and known to be untrue by the party making it, (3) that it was made to induce the other party to act on it, and (4) that the latter did so act on it to his injury." Maturo v. Gerard, 196 Conn. 584, 587, 494 A.2d 1199 (1985). In a case of fraudulent misrepresentation, the first three elements must be proven by clear and convincing evidence; evidence that is clear, precise and unequivocal. Wallenta v. Moscuwitz, 81 Conn.App. 213 (2004). The fourth element requires only the standard of proof of the preponderance of the evidence.
Under either standard of proof, the defendants have failed to prove the fourth element, that they relied on the statement by the plaintiff. At the same time that McCoy answered Mrs. Brown's question about employment, he gave her a copy of a factual document that said he had been pre-approved for a $1,000,000 for a $1,375,000 purchase. What the defendants relied on is unclear. The only evidence that they would not have signed the contract if they believed the plaintiff was jobless, was Mrs. Brown's trial testimony to that effect. In any event, before they executed the contract, the defendants were aware the mortgage contingency clause therein required due diligence on the plaintiff's part, contained no caps on interest rates, and no reference to jobs or employment status of any kind. The Browns, more likely than not, assumed that McCoy was capable of obtaining some mortgage at some bank. (Correctly so, it turns out.) Therefore, the defendants have failed to prove all four elements of fraudulent misrepresentation set forth in their counterclaim.
Claims for relief under the defendants' counterclaim include (1) a decree declaring all payments made under the contract be forfeited to the defendants, (2) reasonable attorneys fees, and (3) prejudgment interest.
Before the final day of trial, counsel for the parties exchanged affidavits setting forth their respective counsel fees and expenses. It was understood there would be additional fees set forth in supplemental affidavits after the trial, and also that if either party wished an evidentiary hearing it would request it, and the court would grant the same. To the date of this Memorandum, neither party has challenged the fees and expenses of the other. The contract provides for the non-prevailing party to pay the reasonable attorneys fees and costs of the other. Contract of sale, paragraph 23.fn5
The defendants also asked for prejudgment interest pursuant to Conn. Gen. Stat. § 37-3a(a) for money wrongfully withheld.
CONCLUSION
The court rules:
(1) in favor of the defendants on the plaintiffs' complaint; and orders judgment rendered in favor of the defendants and against the plaintiff on all three counts thereof.
(2) In favor of the defendants on the First Count only of their counterclaim (breach of contract). Pursuant to paragraph 7 of the contract between the parties, the money paid as a deposit represents liquidated damages.
The court further orders:
(1) a declaratory judgment declaring all monies held by the Chief Clerk of the Judicial District of Stamford/Norwalk at Stamford relevant to this case, shall be paid to the defendants, James A. Brown and Nancy F. Brown, representing the liquidated damages awarded herein.
(2) Reasonable attorneys fees and expenses to be paid by the plaintiffs to the defendants in the amount $100,000.
(3) Costs to be taxed in favor of the defendants.
(4) That no prejudgment interest be awarded to the defendants on their counterclaim. "It is clear that Connecticut case law establishes that prejudgment interest is to be awarded if, in the discretion of the trier of fact, equitable considerations deem that it is warranted." (Citations omitted.) Hoye v. DeWolfe, Co., 61 Conn.App. 558, 564, 764 A.2d 1269 (2001). In the present case, equitable considerations do not warrant prejudgment interest because the plaintiff, although his interpretation of the legal consequences of the mortgage contingency clause was incorrect, sought the return of his deposit in good faith, with the advice of counsel, and responded to the order of interpleader to determine to whom the deposit rightfully belonged.
So Ordered.