Opinion
No. CV06 401 51 09
November 15, 2007
MEMORANDUM OF DECISION RE MOTION TO STRIKE (#120)
This matter is before the court on the plaintiff's motion to strike the defendants' special defenses and counterclaims. The motion to strike is granted in part and denied in part.
On February 2, 2006, the plaintiff, Southern Connecticut Financial Services commenced this action by service of process on the defendants, Domingos and Maria Carneiro. This action arises out of an action to foreclose on a mortgage granted to the plaintiff by the defendants to secure a promissory note in the amount of $110,000. In the sole count of the complaint the plaintiff alleges that it has a valid promissory note, secured by a mortgage on the defendant's property, that payments have not been made in accordance with the note and, therefore, they have a right to foreclose on the property.
There are several other defendants including the United States of America Department of Internal Revenue Service, Worldwide Asset Management Company and Kaufman Fuel Inc. The only moving party on this motion to strike is Southern Connecticut Financial Services and the only parties that filed an objection were Domingos and Maria Carneiro.
On February 23, 2007, the defendants filed a revised answer, asserted thirteen special defenses and a counterclaim that contained eleven counts. On May 21, 2007, the plaintiff filed a motion to strike each of the special defenses on the grounds that they were legally insufficient because they either failed to show that the plaintiff had no cause of action or that they alleged legal conclusions unsupported by sufficient factual allegations. On May 21, 2007, the plaintiff also moved to strike the counterclaim because it did not arise out of the same transaction as the plaintiff's foreclosure and because it fails to state a legally sufficient claim.
"Whenever any party wishes to contest . . . the legal sufficiency of any answer to any complaint, counterclaim, or cross 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." (Emphasis added; internal quotation marks omitted.) Rizzuto v. Davidson Ladders, Inc., 280 Conn. 225, 256 n. 20, 905 A.2d 1165 (2006). "A motion to strike admits all facts well pleaded; it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Emphasis in original; internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997).
The plaintiff moves to strike the first, second, fifth, sixth, seventh, eighth, tenth and thirteenth special defenses on the grounds that they are legally insufficient because they fail to show that the plaintiff has no cause of action and because they are not valid defenses to this foreclosure action. The plaintiff moves to strike the third, fourth, ninth, eleventh and twelfth special defenses on the ground that they are legally insufficient because they allege legal conclusions unsupported by factual allegations. Finally, the plaintiff moves to strike the counterclaim because it does not arise out of the same transaction as the plaintiff's foreclosure. The defendants counter by arguing that the special defenses and the counterclaim are recognized claims that are sufficiently pleaded and further argue that the counterclaim arises out of the same transaction as the plaintiff's foreclosure.
"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.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, 705, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).
The plaintiff moved to strike the third, fourth, ninth, eleventh and twelfth special defenses on the ground that they were legally insufficient because they alleged legal conclusions that were unsupported by factual allegations. In the third special defense the defendants assert that "[t]he transaction was unconscionable and inequitable in violation Section 42a-2-302 of the Connecticut General Statutes." This special defense does not seek to incorporate facts from any other part of the pleading, nor does it state any factual allegations to support its conclusion. Therefore, the motion to strike the third special defense is granted.
In the fourth special defense, the defendants assert that "[t]he plaintiff is precluded from the equitable remedy of foreclosure by seeking relief from this [c]ourt with unclean 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." (Internal quotation marks omitted.) Monetary Funding Group, Inc. v. Pluchino, 87 Conn.App. 401, 407, 867 A.2d 841 (2005). The defendants do not seek to incorporate any facts from any other part of the pleading, nor do they state any factual allegations to support their conclusion. The defendants have not alleged any wilful misconduct with regard to the matter in litigation and have merely alleged a legal conclusion. Therefore, the motion to strike the fourth special defense is granted.
In the ninth special defense, the defendants allege that "[t]he transaction was procedurally and substantively unconscionable." Once again, they do not seek to incorporate any facts from any other part of the pleading, nor do they state any factual allegations to support their conclusion. Therefore, the motion to strike the ninth special defense is granted.
In the eleventh special defense, the defendants allege that "[t]he transaction violated the Connecticut Unfair Trade Practices Act, Section 42-110a, et seq., of the Connecticut General Statutes." "A party seeking to recover damages under CUTPA must meet two threshold requirements. First, he or she must establish that the conduct at issue constitutes an unfair or deceptive trade practice . . . Second, he must present evidence providing the court with a basis for a reasonable estimate of the damages suffered." (Internal quotation marks omitted.) Robichaud v. Hewlett Packard Co., 82 Conn.App. 848, 853-54, 848 A.2d 495 (2004). The defendants have not alleged facts to support the first threshold question regarding whether there was an unfair or deceptive trade practice. Therefore, the motion to strike the eleventh special defense is granted.
In the twelfth special defense, the defendants allege that "[t]he plaintiff should be equitably estopped from enforcing the note and mortgage." The doctrine of equitable estoppel requires proof that "the party against whom estoppel is claimed must do or say something calculated or intended to induce another party to believe that certain facts exist and to act on that belief; and the other party must change its position in reliance on those facts, thereby incurring some injury." (Internal quotation marks omitted.) Barasso v. Rear Still Hill Road L.L.C., 81 Conn.App. 798, 805, 842 A.2d 1134 (2004). The defendants have not stated any facts and have not alleged that the plaintiff did anything intended to induce the defendants to believe that certain facts existed that would cause them to act to their detriment. Therefore, the motion to strike the twelfth special defense is granted.
The plaintiff has challenged the remaining special defenses on the ground that they are legally insufficient because they are not valid or legal defenses to a foreclosure action because they fail to show that the plaintiff has no cause of action. In the first special defense, the defendants allege that the plaintiff violated General Statutes § 36a-521 because they imposed prepaid finance charges that exceeded 8% in the aggregate of the principal amount of the loan in connection with a secondary mortgage loan transaction. Section 36a-521(b) provides in relevant part: "Any mortgage lender who fails to comply with the provisions of this section shall be liable to the borrower in an amount equal to the sum of: (1) The amount by which the total of all prepaid finance charges exceeds eight per cent of the principal amount of the loan; (2) eight per cent of the principal amount of the loan or two thousand five hundred dollars, whichever is less; and (3) the costs incurred by the borrower in bringing an action under this section . . ." Assuming the factual allegations of the special defense to be true, the defendants have failed to show that the plaintiff has no cause of action because even in the instance of a violation of this statute, foreclosure is not precluded. Since the purpose of a special defense is to show that the plaintiff has no cause of action, and the defendants have failed to do so in their first special defense, the motion to strike the first special defense is granted.
In the second special defense, the defendants allege that the plaintiff violated General Statutes §§ 36a-746a, 36a-746b, 36a-746c and 36a-746e because the plaintiff failed to make necessary disclosures, charged a prepaid finance charge in excess of the statutory limit, made a loan in which the lender did not reasonably believe the borrower would be able to repay, made a loan with an unconscionable interest rate and charged fees for services that were never accomplished. Number 03-259 of the 2003 Public Acts provides in relevant part: "[I]n a case of a violation of sections 36a-746b to 36a-746g, inclusive, the commissioner may order that a civil penalty not exceeding fifteen thousand dollars per violation be imposed upon such person." Therefore, even if the allegations in the second special defense are true, the plaintiff may still foreclose on the property. The defendants have failed to show that the plaintiff has no cause of action and, therefore, the motion to strike the second special defense is granted.
In the fifth special defense, the defendants allege that the plaintiff has breached the terms of its agreements with the defendants in that the plaintiff failed to make payment as required on at least two prior mortgages. "[S]pecial 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 . . ." (Internal quotation marks omitted.) First Connecticut Capital Mortgage Fund v. Lighthouse Homes, L.L.C., Superior Court, judicial district of Fairfield, Docket No. CV 06 5004695 (August 10, 2007, Maiocco, J.T.R.). The plaintiff claims that this defense is not a valid defense to a foreclosure action because it does not attack the making, validity or enforcement of the note. The defendants concede that their special defense is directed at the plaintiff's conduct in promising to pay other mortgages. Since this special defense alleges conduct that is clearly not associated with the making, validity or enforcement of the note that is subject to this litigation, the special defense is not legally sufficient. Therefore, the motion to strike the fifth special defense is granted.
In the sixth special defense, the defendants allege that the plaintiff incorrectly and inconsistently calculated the interest rate. "There is a split of authority in the Superior Courts on the issue of whether a special defense alleging the use of the wrong interest rate in calculating the amount due on a mortgage loan amounts to a valid special defense. Pursuant to equitable considerations, some courts have held that improper calculation of interest is a valid defense in a foreclosure action . . . Other courts have held that special defenses merely alleging errors in calculation of interest do not properly attack the making, validity or enforcement of the note and are therefore invalid. (Citations omitted, internal quotation marks omitted.) Citimortgage, Inc. v. Lovelett, Superior Court, judicial district of Waterbury, Docket No. CV 00 0159430 (February 21, 2001, West, J.). In cases where the courts have held the improper calculation of the interest rate as a valid special defense, they have essentially substituted it as an unconscionable interest rate. See People's Bank v. Perkins, Superior Court, judicial district of Fairfield, Docket No. CV 94 310482 (November 3, 1994, Ballen, J.); Bank of New Haven v. Liner, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 91 034516 (April 2, 1993, Curran, J., aff'd, 41 Conn.App. 908, 675 A.2d 10, cert. denied, 237 Conn. 929, 678 A.2d 484 (1996) (where the plaintiff bank was alleged to have "overcharged and gouged" the interest rate, the court held that the defendant's special defense essentially pleaded that the interest rate was unconscionable). The defendant's third and ninth special defense already pleaded that the transaction was unconscionable, so their concerns over the interest rate are better analyzed under those special defenses. Also, the defendants have failed to allege that the plaintiff "gouged" the interest rate, or did anything similar. Therefore, the motion to strike the sixth special defense is granted.
In the seventh special defense, the defendants allege that the plaintiff failed to provide sufficient notice of the acceleration of the debt. The defendants have failed to plead that notice of acceleration was required by the note or any other applicable authority. "[A]bsent a provision in the mortgage or required by a statute, the general rule is that the mortgagee need not give the mortgagor notice of its election to accelerate the maturity of the debt." Webster Bank v. Lindsey, Superior Court, judicial district of New Haven at Meriden, Docket No. CV 97 0260406 (August 9, 2001, Booth, J.). Since the defendants have failed to plead that the note or a statute required notice and the court is aware of no such authority, the motion to strike the seventh special defense is granted.
In the eighth special defense, the defendants allege that the note and mortgage did not conform to the commitment letter. This special defense is analogous to the fifth special defense in which the defendants allege a breach of a separate promise. Even if the plaintiff has breached the terms of the commitment letter, it would have no effect on the foreclosure proceedings. "The commitment letter is not evidence of any debt, but of the parties' general contemplations at the time it was issued." SKW Real Estate Limited Partnership v. Gallicchio, 49 Conn.App. 563, 573, 716 A.2d 903 (1998). Since the defendants' eighth special defense fails to show that the plaintiff has no cause of action, the motion to strike the eighth special defense is granted.
In the tenth special defense, the defendants allege that the transaction violated the Federal Truth in Lending Act, 15 U.S.C. § 1601 et seq., in that the plaintiff did not provide the disclosures required by the act and the regulations promulgated thereunder. "[A] mortgage holder's failure to comply with state and/or federal truth in lending requirements has been held not to constitute a legally sufficient special defense in mortgage foreclosure actions . . . These courts have reasoned that TILA violations 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; internal quotation marks omitted.) Bank of New York v. Conway, 50 Conn.Sup. 189, 916 A.2d 130 (2006). Even if the allegation in the tenth special defense is taken as true, it still does not show that the plaintiff has no cause of action. The motion to strike the tenth special defense is, therefore, granted.
In the thirteenth special defense the defendants allege that the loan was usurious in violation of General Statues §§ 37-4, 37-5, 37-6 and 37-8. The plaintiff claims that § 37-9 exempts the applicability of the other aforementioned sections because it exempts "any bona fide mortgage for real property for a sum in excess of five thousand dollars." The defendants counter by arguing that this is clearly not a bona fide loan due to all of the statutory violations. "The bona fides of a mortgage, the possible use of a mortgage to evade the usury statutes, were questions of fact and that the creditors demurrer to a defense of usury should therefore have been overruled." (Internal quotation marks omitted.) Webster Trust v. Roly, 64 Conn.App. 233, 242 n. 9, 780 A.2d 142 (2001). Since both parties contest whether this loan is a bona fide loan, the matter is not appropriate for a motion to strike. The motion to strike the thirteenth special defense is denied.
In the defendant's first counterclaim, they allege that the plaintiff breached the terms of the commitment letter when they executed the actual loan agreement. The plaintiff moves to strike this counterclaim on the ground that it does not arise out of the same transaction as the note that is being foreclosed on, while the defendants maintain that this counterclaim directly attacks the validity of the note. Practice Book § 10-10 allows a defendant to file a counter claim provided that the counterclaim "arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint." "The transaction test is one of practicality and rests on whether a duplication of judicial effort and resources would result if the subject of the complaint and counterclaim were tried in separate actions." (Internal quotation marks omitted.) Ceci Bros., Inc., v. Five Twenty-One Corp., 81 Conn.App. 423 n. 3, 840 A.2d 578 (2004). Reading the counterclaim most favorably to the defendants, as is required in a motion to strike, the commitment letter is so closely related that a separate trial on this issue would result in a duplication of judicial resources. Therefore, the motion to strike the first counterclaim is denied.
The defendants, in the second count of the counterclaim, seek recovery under the Connecticut Unfair Trade Practices Act (CUTPA) for alleged violations of General Statutes § 36a-521. The plaintiff claims that the motion to strike this count should be granted because the claim is not legally sufficient. Section 36a-521(b) provides in relevant part: "Any mortgage lender who fails to comply with the provisions of this section shall be liable to the borrower in an amount equal to the sum of: (1) The amount by which the total of all prepaid finance charges exceeds eight per cent of the principal amount of the loan; (2) eight per cent of the principal amount of the loan or two thousand five hundred dollars, whichever is less; and (3) the costs incurred by the borrower in bringing an action under this section . . ." The defendants have alleged facts that are sufficient to sustain a claim under this statute and to sustain a claim under CUTPA. The defendants have alleged facts that could constitute a deceptive or unfair trade practice and allege that they were damaged because of such practice. This count of the counterclaim is also sufficiently close enough to the transaction that is the subject of the foreclosure that it meets the "transaction test" described above. See, Ceci Bros., Inc., v. Five Twenty-One Corp., supra, 423 n. 3. Therefore, the motion to strike the second count of the counterclaim is denied.
In the third count of the counterclaim, the defendants seek recovery under (CUTPA) for alleged violations of General Statutes § 36a-746. The plaintiff claims that the motion to strike this count should be granted because it is not a legally sufficient claim. The defendants allege that the plaintiff violated § 36a-746a because they violated §§ 36a-746b, 36a-746c and 36a-746e. Violations of these statutes are legally sufficient claims, contrary to the plaintiff's assertions. Number 03-259 of the 2003 Public Acts provides in relevant part: "[I]n a case of a violation of sections 36a-746b to 36a-746g, inclusive, the commissioner may order that a civil penalty not exceeding fifteen thousand dollars per violation be imposed upon such person." Therefore, the motion to strike the third counterclaim is denied.
In the fourth and seventh count of the counterclaim, the defendants allege that the transaction was unconscionable. The defendants do not allege anywhere in their counterclaim exactly what part of the transaction was unconscionable. "The purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise . . . The basic test is whether, in 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." (Internal quotation marks omitted.) New England Retail Properties, Inc., v. Maturo, 102 Conn.App. 476, 488, 925 A.2d 1151 (2007). "The question of unconscionability is a matter of law to be decided by the court based on all the facts and circumstances of the case." (Internal quotation marks omitted.) Emigrant Mortgage Corp., v. D'Agostino, 94 Conn.App. 793, 801, 896 A.2d 814 (2005). Interpreting the facts of the counterclaim most favorably towards the defendants, the defendants have alleged facts which could be construed as unconscionable, and therefore the motion to strike the fourth and seventh count of the counterclaim is denied.
In the fifth count of the counterclaim the defendants attempt to prevent the plaintiff from recovering under the doctrine of unclean hands. "Defenses are not counterclaims . . . A counterclaim is an affirmative demand for money damages against a party who it is claimed caused damages to a plaintiff by its actions. In otherwords a counterclaim is pleaded in the same way a complaint is pleaded." First Union National Bank v. Grills, Superior Court, judicial district of New London, Docket No. CV 97 543720 (August 16, 2001, Corradino, J.) ( 30 Conn. L. Rptr. 304). In this particular count the defendants have asserted a defense, not a counterclaim. The fifth count of the counterclaim alleges no affirmative demand for damages, it only seeks to preclude the plaintiff from recovering. The fifth count of the counterclaim is, therefore, a defense and not a claim and the motion to strike this count is granted.
In the sixth count of the counterclaim, the defendants allege that the plaintiff breached the terms of its agreement as set forth in the note and mortgage in that they failed to make payment as required on at least two prior mortgages, utilized an incorrect and inconsistent interest rate, failed to provide sufficient notice of the acceleration of the debt, and that the note and mortgage did not conform to the commitment letter. The plaintiff argues that this attacks conduct after the making of the note and that conduct of the lender after the closing does not relate to the making, validity or enforcement of the note and therefore the motion to strike should be granted. "Simply because the allegations concern events after the execution of the mortgage does not make the claims automatically meritless . . . Indeed, by definition, the `enforcement' of a mortgage may involve conduct occurring after the execution of the mortgage." Ocwen Federal Bank FSB v. Waller, Superior Court, judicial district of Fairfield, Docket No. CV03 0401138 (March 16, 2004, Stevens, J.). Since conduct after the execution of the note can be found to relate to the enforcement of the note, the motion to strike the sixth counterclaim is denied.
In the eighth count of the counterclaim, the defendants allege that the transaction violated the Federal Truth in Lending Act (TILA) in that the plaintiff did not provide certain required disclosures because they did not provide the annual percentage rate. Although TILA violations have been held to be invalid as a matter of law for special defenses, our Supreme Court has upheld their validity in the context of a counterclaim. See Cheshire Mortgage Service, Inc., v. Montes, 223 Conn. 80, 612 A.2d 1130 (1992) (Supreme Court reversing trial court's decision to reject TILA counterclaim and remanding the matter to the trial court for consideration of remedies). Therefore, counterclaims alleging TILA violations relate to the making, validity or enforcement of the note and are not necessarily invalid as a matter of law, as alleged by the plaintiff. The conduct alleged by the defendants relates to the validity or enforcement of the note because the annual interest rate should have been disclosed. Therefore, the motion to strike the eighth counterclaim is denied.
See, Bank of New York v. Conway, 50 Conn.Sup. 189, 916 A.2d 130 (2006).
In the ninth counterclaim, the defendants allege a violation of the Connecticut Unfair Trade Practices Act (CUTPA). "It is well settled that in determining whether a practice violates CUTPA we have adopted the criteria set out in the cigarette rule by the federal trade commission for determining when a practice is unfair: (1) Whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise — in otherwords, it is within at least the penumbra of some common law, statute, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injuries to consumers, competitors or other businesspersons . . . All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three." (Internal quotation marks omitted.) Ventres v. Goodspeed Airport, L.L.C., 275 Conn. 105, 155, 881 A.2d 937 (2005). The defendants are at risk of losing their property through foreclosure and that would certainly qualify as a substantial injury and these alleged practices could lead to other members of the community losing their homes through foreclosure. Since these alleged practices could cause substantial injury to consumers, one of the three parts of the cigarette rule is met, and the motion to strike the ninth count of the counterclaim is denied.
In the tenth count of the counterclaim, the defendants allege that the plaintiff should be equitably estopped from foreclosing on the property based on their past conduct. "Defenses are not counterclaims . . . A counterclaim is an affirmative demand for money damages against a party who it is claimed caused damages to a plaintiff by its actions. In otherwords a counterclaim is pleaded in the same way a complaint is pleaded." First Union National Bank v. Grills, supra, 30 Conn. L. Rptr. 304. The defendants allege no affirmative demand for money damages, they only seek to preclude the plaintiff from recovering. The tenth count of the counterclaim is, therefore, a defense and not a claim and the motion to strike this count is granted.
In the eleventh count of the counterclaim, the defendants allege that the loan was usurious and, therefore, the plaintiff should be prohibited from foreclosing on the mortgage. As with the fifth and tenth counterclaim, the defendants are not seeking affirmative relief or damages but are instead seeking to prohibit the plaintiff from foreclosing on the mortgage. The motion to strike the eleventh count of the counterclaim is, therefore, granted.
In summary, the plaintiff's motion to strike the defendants' special defenses one through twelve is granted. The motion to strike defendants' special defense number thirteen is denied.
Further, the Court denies the plaintiff's motion to strike counterclaims one, two, three, four, six, seven, eight and nine, and grants the plaintiff's motion to strike counterclaims five, ten, and eleven.