Opinion
No. WWM CV10-6001479S
November 29, 2010
MEMORANDUM OF DECISION RE PLAINTIFF'S MOTION TO STRIKE
On March 12, 2010, the plaintiff, TD Bank, N.A, filed a three-count complaint bringing a foreclosure action against J M Holdings, LLC (J M), TD Bank, N.A., Debra Schlachter Hall and Pierce Hall. Subsequently, the plaintiff filed a revised amended complaint on June 11, 2010, in which it alleges the following facts. J M executed a "mortgage construction note," dated August 31, 2005, promising to pay the principal amount of $2.7 million to the order of TD Banknorth, N.A. (TD Banknorth). To secure the note, J M mortgaged their property at 20 Excalibur Boulevard, Plainfield, Connecticut, to the plaintiff, by executing an "open-end construction mortgage deed" and security agreement. To further secure the note, J M also granted to the plaintiff a written assignment of leases, rents income and profits, as well as a UCC-1 financing statement.
TD Bank, N.A., has not filed an appearance with the court as a defendant. In this memorandum, J M Holdings, LLC, Debra Schlachter Hall and Pierce Hall, will therefore be referred to collectively as "the defendant."
The plaintiff, in the revised amended complaint, states that on May 31, 2008, TD Banknorth, National Association changed its name to TD Bank, National Association.
`The plaintiff further alleges in court two that J M executed a second "construction mortgage note," dated August 31, 2005, in which it promised to pay to the order of TD Banknorth the principal sum of $600,000. To secure this note, J M also executed a second "open-end construction mortgage deed" and security agreement, in which J M mortgaged their property at 20 Excalibur Boulevard, Plainfield, Connecticut, to the plaintiff. J M subsequently defaulted under the terms of both notes and despite demand, has failed to pay the balance due on each.
In the third count of the amended revised complaint, the plaintiff alleges that Debra Schlachter Hall and Pierce Hall, personally guaranteed payment of both notes by executing separate "payment and completion guaranty agreements," dated August 31, 2005. Both guarantees contained a recitation of the agreed consideration received by Debra Schlachter and Pierce Hall. Thereafter, the plaintiff as a holder in due course of the notes, declared the entire balance due and payable. Debra Schlachter Hall and Pierce Hall, despite demand, have failed to pay the balance due on both notes. As a result, the plaintiff filed the present foreclosure action.
On August 4, 2010, the defendants filed an answer, seven special defenses and a two-count counterclaim to the plaintiff's complaint. On August 20, 2010, the plaintiff filed a motion to strike all of the defendants' special defenses and counterclaims. The plaintiff's motion is accompanied by a memorandum of law. The defendants filed an objection to the plaintiff's motion to strike on September 20, 2010. Oral arguments were heard regarding the motion at short calendar on September 27, 2010.
"[A] party may challenge the legal sufficiency of an adverse party's claim by filing a motion to strike." Vertex, Inc. v. Waterbury, 278 Conn. 557, 564, 898 A.2d 178 (2006). Practice Book § 10-39(a) states in relevant part: "Whenever any party wishes to contest (1) the legal sufficiency of the allegations of any . . . counterclaim . . . or of any one or more counts thereof, to state a claim upon which relief can be granted . . . or (5) 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."
"It is fundamental that in determining the sufficiency of a [pleading] challenged by a . . . motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted . . ." (Internal quotation marks omitted.) Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252-53, 990 A.2d 206 (2010). In ruling on a motion to strike, the court must "construe the [pleading] in the manner most favorable to sustaining its legal sufficiency . . . Thus, [i]f facts provable in the [pleading] would support a cause of action, the motion to strike must be denied . . ." (Internal quotation marks omitted.) Id., 252. Nevertheless, "[a] motion to strike is properly granted if the [pleading] alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003).
The plaintiff in the present case moves to strike all the defendants' special defenses on the ground that they are legally insufficient. Specifically, the plaintiff argues that the special defenses are not consistent with the allegations in the amended revised complaint and fail to address the creation, validity or enforcement of the notes or mortgage being foreclosed. The defendants respond that their special defenses set forth validly recognized defenses to the present foreclosure action.
The plaintiff, on the face of its motion to strike, moves the court to strike the defendants' "first, second, third, fourth, fifth and sixth special defenses and counts one and two of the defendants' counterclaim to the plaintiff's amended revised complaint." The plaintiff, however, argues throughout its motion and memorandum of law to strike all seven of the defendant's special defenses and submits to the court that the entire seven should be stricken. The defendants have not objected on the face of their objection to the motion to strike, and therefore, the court will address the merits of all seven special defenses.
"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." (Internal quotation marks omitted.) Mortgage Electronic Registration Systems, Inc. v. Goduto, 110 Conn.App. 367, 369 n. 2, 955 A.2d 544 (2008).
"Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction . . . or, if there had never been a valid lien . . . Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles . . ." LoRico Towers Condominium Assn. v. Pantani, 90 Conn.App. 43, 51, 876 A.2d 1211 (2005). "[O]ur courts have permitted several equitable defenses to a foreclosure action." (Internal quotation marks omitted.) Chase Manhattan Mortgage Corp. v. MacHado, 83 Conn. App. 183, 188, 850 A.2d 260 (2004). "[I]f the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had . . . Other equitable defenses that our Supreme Court has recognized in foreclosure actions include unconscionability . . . abandonment of security . . . and usury." (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, 706, 807 A.2d 968 (2002).
In its first special defense the defendants assert the defense of lack of consideration and simply state, "the subject guarantees fail due to the absence of adequate consideration." The plaintiff argues that the first special defense is legally insufficient because it is inconsistent with the allegations of the complaint. The plaintiff explains that the consideration the defendants received for the guarantees is specifically set forth in the revised amended complaint, as well as in the guarantees themselves that are attached to the complaint. The defendant responds that the defense of lack of consideration has been recognized by the Superior Court as a valid special defense because if proven it would affect the validity of the guarantees.
"Lack of consideration is on its face a valid defense in a foreclosure action." (Internal quotation marks omitted.) PHH Mortgage Corp. v. Traylor, Superior Court, judicial district of New London, Docket No. CV 07 5004315 (November 13, 2008, Martin, J.). "However, a special defense must plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action." (Internal quotation marks omitted.) Id.; see also Mortgage Electronic Registration Systems, Inc. v. Goduto, supra, 110 Conn.App. 369 n. 2.
The plaintiff alleges in count three of its revised amended complaint that the guarantees signed by Debra Schlachter Hall and Pierce Hall both state in relevant part: "The undersigned . . . is executing this Payment and Completion Guaranty Agreement to induce TD Banknorth, N.A (`Lender') to make a construction mortgage loan in the amount of $2,700,000.00 and a construction mortgage loan in the amount of $600,000.00 . . . to J M Holdings, LLC (`Borrower') and to enter into an Interest Rate Swap Agreement . . ." The plaintiff further alleges that the guarantees state: "Guarantor is desirous that Lender make the Loan to Borrower, will benefit directly from such Loan and is willing to enter into this Guaranty in order to enhance the qualifications of Borrower for the Loan and as an inducement to and to fulfill the requirements of Lender for making the Loan." The defendants' assertion of a lack of consideration is therefore inconsistent with the plaintiff's allegations in the revised amended complaint that the defendants signed the guarantee agreements to induce the plaintiff to make the construction mortgage loans. As a result, "because such a defense alleges facts that differ from those contained in the plaintiff's complaint, it is more properly raised as' a special denial rather than as a special defense." LoRico Towers Condominium Assn. v. Pantani, supra, 90 Conn.App. 51. Furthermore, this special defense is conclusory, and does not demonstrate that the plaintiff has no cause of action. The defendants' first special defense is stricken.
In the second, third and fourth special defenses, the defendants allege that they "had the opportunity to sell the property located on Excalibur Boulevard, Plainfield, Connecticut, to a third party for an amount that would have allowed [them] to pay the [p]laintiff substantially all that it was owed," arid the plaintiff "unreasonably prevented the [d]efendants from consummating the sale as it refused to waive the pre-payment penalty." Based on these facts, the defendants allege the special defenses of refusal to agree to a favorable sale to a third party, breach of the implied covenant of good faith and fair dealings and equitable estoppel.
The plaintiff argues that the second, third and fourth special defenses do not address the making, validity or enforcement of the notes or mortgages at issue because they "rely on an alleged transaction between the defendant(s) and an unidentified third party." The defendants contend, however, that "a plethora" of Superior Court decisions have acknowledged that, inter alia, "breach of the implied covenant of good faith and fair dealing, equitable estoppel and refusal to agree to a favorable sale to a third party are accepted equitable defenses to a foreclosure action."
The defendant in the second special defense raises the defense that the plaintiff refused to agree to a favorable sale to a third party. "Prepayment penalties commonly appear in mortgage notes." Bankers Trust Company v. Ellis, Superior Court, judicial district of Hartford, Docket No. CV 01 0811511 (May 22, 2002, Satter, J.T.R.). "Our courts have recognized the legal validity of prepayment penalties in mortgages. They are not against public policy . . . or in violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq." (Citations omitted.) Eastern Savings Bank, FSB v. Munson, 50 Conn.Sup. 374, 376, 932 A.2d 1079 [ 43 Conn. L. Rptr. 354] (2007). "A number of cases confirm the justification of prepayment penalties to compensate lenders for the loss of the bargain if the loan is paid before a specified period of time." Id., 377. "There are limitations, however, on the right to receive a prepayment penalty. The penalty will not be enforced if it is unconscionable." Id.
Although, the plaintiff's "refusal to agree to a favorable sale to a third party," may be a valid equitable special defense to a foreclosure action, in the present case, the defendants fail to allege how the plaintiff's conduct was inequitable or unconscionable. The defendants merely state, "the plaintiff unreasonably prevented . . . [us] from consummating the sale as it refused to waive a pre-payment penalty." Furthermore, the defendant's allegations do not go to the making, validity, or enforcement of the note or mortgage. The defendants, therefore, have' not shown that the facts alleged would support their special defense and that the plaintiff has no cause of action. For these reasons, the defendant's second defense is stricken.
In their third special defense, the defendants allege that the plaintiff's actions constitute a breach of the implied covenant of good faith and fair dealings. The plaintiff, however, contends that the Appellate Court recently reaffirmed in Barasso v. Rear Still Road, LLC, 81 Conn.App. 798, 807, 842 A.2d 1134 (2004), that a violation of the implied covenant of good faith and fair dealings is not a recognized special defense to a foreclosure action and therefore seeks to strike the defendants' third special defense on this basis. The defendants counter that the facts of Barasso are distinguishable from the facts of the present case and the breach of the implied covenant of good faith and fair dealing constitutes a valid special defense.
The Appellate Court has stated "that special defenses and counterclaims alleging a breach of an implied covenant of good faith and fair dealing . . . are not equitable defenses to a mortgage foreclosure . . ." (Internal quotation marks omitted.) Barasso, supra, 81 Conn.App. 807 n. 5; Fidelity Bank v. Krenesky, 72 Conn.App. 700, 716-17, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002); LaSalle National Bank v. Freshfield Meadows, 69 Conn.App. 824, 835, 798 A.2d 445 (2002); and New Haven Bank v. LaPlace, 66 Conn.App. 1, 10, 783 A.2d 1174 (2001). Some recent decisions of the Superior Court, however, have considered the appellate authority in this area and concluded that the special defense of a breach of the implied covenant of good faith and fair dealing is not automatically barred in a foreclosure action. See Wells Fargo Bank v. Lewis, Superior Court, judicial district of Fairfield, Docket No. CV 07 5006088 (February 18, 2010, Maiocco, J.T.R.). See also Robinson v. Robinson, Superior Court, judicial district of Tolland, Docket No. CV 08 5003041 (January 23, 2009, Sferrazza, J.) (questioning the underpinnings of the holding in Fidelity and concluding that "a breach of the covenant of good faith and fair dealing may be a valid specific defense . . . in a foreclosure case but only if the specific breach asserted goes to the making, validity, or enforcement of the note and/or mortgage"); see also U.S. National Bank Ass'n. v. Ascenzia, Superior Court, judicial district of New Haven, Docket No. CV 08 5022527 (July 30, 2009, Abrams, J.) ( 48 Conn. L. Rptr. 345, 347); Patriot National Bank v. Bobbi, Inc., Superior Court, judicial district of Stamford Norwalk at Stamford, Docket No. CV 08 5009026S (June 9, 2009, Mintz, J.) ( 47 Conn. L. Rptr. 851, 854-55).
This court recently addressed the issue and held that absent further appellate review, "the rule appears to remain that . . . a breach of an implied covenant of good faith and fair dealing . . . are not equitable defenses to mortgage foreclosure." Deutsche Bank v. Gregory-Boutot, Superior Court, judicial district of Windham, Docket No. CV 08 5003138 (July 15, 2009, Potter, J.T.R.). As a result, the defendants' third special defense is legally insufficient and is stricken.
The defendants allege in the fourth special defense that "the plaintiff should be equitably estopped from foreclosing on this property." For the same reasons stated above, the fourth special defense is also legally insufficient and is stricken.
In the fifth special defense, the defendants allege the following. "On or about July 17, 2009, the M J Holdings, LLC (M J), a related entity to the [d]efendants, sold certain property located at 125 Shaw Street, New London, Connecticut to an entity known as PJL Realty, LLC for the sum of $800,000." The defendants and M J believed the property was worth "well in excess of $800,000" but agreed to the sale, based on the plaintiff's promise "to modify the loans to interest only which would have . . . allowed them to remain current on all loan obligations." The plaintiff accepted the sale proceeds of $687,637.17, and thereafter, "breached its agreement with [M J] and failed and refused to restructure or modify the loans, to the detriment of [M J] and the [d]efendants." As a result, the defendants raise the special defense of modification.
The plaintiff argues that this special defense alleges the existence of a separate agreement with a nonparty, and therefore is inconsistent with the allegations of the complaint and does not attack the making, validity or enforcement of the notes and/or mortgage. The defendants argue, however, that a loan modification is a valid special defense to a foreclosure action because it addresses the making and enforcement of the notes and mortgage.
"[A]llegations of modification directly attack the validity or enforcement of the original note or mortgage[,] thus, a special defense alleging modification is properly raised in a foreclosure proceeding." (Internal quotation marks omitted.) BAC Home Loans Servicing, L.P. v. Presutti, Superior Court, judicial district of Hartford, Docket No. CV 09 5029746 (April 8, 2010, Scholl, J.) [ 49 Conn. L. Rptr. 609]. Modification is therefore a "valid special defense in a foreclosure action." ALI, Inc. v. Veronneau, Superior Court, judicial district of Waterbury, Docket No. 126431 (October 11, 1996, Kulawiz, J.) ( 17 Conn. L. Rptr. 677).
The defendants in the present case claim that "the plaintiff agreed to modify the loans to interest only . . ." While modification may be valid special defense, the alleged agreement was between the plaintiff and M J, not with the defendants, and based on a separate transaction that is not the subject of this foreclosure action. Thus, the court grants the plaintiff's motion to strike the defendants' fifth special defense.
The sixth and seventh special defenses are based on the same facts and allege that the plaintiff's actions violate the implied covenant of good faith and fair dealings and that the plaintiff should be "equitably estopped from foreclosing on [the] property." As stated above, because the breach of the implied covenant of good faith and fair dealing is not a valid equitable defense to foreclosure, the defendants' sixth and seventh special defenses are legally insufficient and are stricken.
The defendants have also filed a two-count counterclaim. In the first count, the defendants repeat the allegations of the fifth, sixth, and seventh special defenses and allege as a result of the plaintiff's breach of the loan modification agreement, they have "sustained damages." The second count is based on the same and alleges that the plaintiff's actions "constitute a violation of the Connecticut Unfair Trade Practices Act (CUTPA) General Statutes § 42-170(b) et seq. in that [the plaintiff's] actions were morally unscrupulous, coercive, offended public policy and were unfair to [the defendants]."
"[A] motion to strike [is] the proper procedural vehicle to test the sufficiency of the defendants' counterclaim." JP Morgan Chase Bank, Trustee v. Rodrigues, 109 Conn.App. 125, 131, 952 A.2d 56 (2008). "[A] counterclaim is a cause of action existing in favor of the defendant against the plaintiff and on which the defendant might have secured affirmative relief had he sued the plaintiff in a separate action . . . A motion to strike tests the legal sufficiency of a cause of action and may properly be used to challenge the sufficiency of a counterclaim." (Internal quotation marks omitted.) Ameriquest Mortg. Co. v. Lax, 113 Conn.App. 646, 649-50, 969 A.2d 177 (2009).
The plaintiff in the present case moves to strike the defendant's counterclaims on the basis that they "are based on "an alleged agreement [that] arose out of a separate transaction than the [n]otes and [m]ortgages at issue in this case." The defendants respond that the "underlying allegations address the propriety of the [p]laintiff being able to enforce the subject notes and mortgages. As such they certainly arise out of the same transaction as the [p]laintiff's complaint." "Practice Book § 10-10 provides in relevant part that `[i]n any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff . . . provided that each such counterclaim . . . arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint.' . . . This section is a common-sense rule designed to permit the joinder of closely related claims where such joinder is in the best interests of judicial economy." (Internal quotation marks omitted.) JP Morgan Chase Bank Trustee v. Rodrigues, supra, 109 Conn.App. 131. "In a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order properly to be joined with the complaint." Id., at 133. "Conduct on the part of the party seeking foreclosure that occurred after the loan documents were executed and not necessarily directly related solely to enforcement of the note, however, properly has been found not to arise out of the same transaction as the complaint." Id., at 134-35. "The court may properly strike counterclaims filed in a foreclosure action that do not relate to the making, validity or enforcement of the note." Chase Home Finance, LLC v. Fequiere, Superior Court, judicial district of Fairfield, Docket No. CV 09 6004786 (July 15, 2008, Hartmere, J.).
In the present case, both counts of the defendant's counterclaim relate to the conduct of the plaintiff that occurred after the execution of the mortgage note. Further, the plaintiff's alleged actions do not relate solely to the enforcement of the note and mortgage, but rather an entirely separate transaction with a nonparty. Both counts of the defendants' counterclaim are stricken on the ground that they do not relate to the making, enforcement or validity of the note at issue.