Opinion
UWYCV146025743S
10-06-2016
U.S. Bank, National Association v. Jennifer Russo et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION MOTION TO STRIKE
Mark H. Taylor, Judge.
I
BACKGROUND
The plaintiff, U.S. Bank, National Association, moves to strike the defendants Jennifer Russo's and Michael Russo's, counterclaim, special defense of unclean hands based upon facts pleaded in the counterclaim, and special defense of negligent or, " in the alternative, fraudulent misrepresentations regarding the terms of the note and the surrounding circumstances, making it a predatory loan."
In their counterclaim, the defendants make the following allegations, in relevant part: " The underlined mortgage financing was a subprime product that was predatory and issued based on subprime criteria that were asset backed and not dependent on the income of the parties for repayment of the loan on these proper terms . . . There were CUTPA violations and negligent misrepresentations and fraudulent behavior wherein all of the above set forth entities acted in concert with a marketing scheme designed to market predatory loan products to defendants and counterclaimants in this case and thereby defraud the plaintiff's causing them to suffer damages in the accrual of interest on the note, attorneys fees, and the emotional distress of defense. More details will be plead as the expert witness does more comprehensive review after discovery is complete . . . Among other things, plaintiff's filed a prior action that they did not diligently prosecute and that was dismissed . . ." causing damages.
The counterclaim and both special defenses are substantially the same as those the defendants filed on October 14, 2015 and thereafter withdrew without prejudice, similarly asserting that a pending expert review would lead to a more detailed pleading upon completion of discovery.
II
DISCUSSION
A
Motion to Strike
The court will begin with the legal standard applicable to motions to strike. Practice Book § 10-39(a) provides in relevant part: " A motion to strike shall be used 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." " The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003).
When deciding a motion to strike the court must " take the facts to be those alleged . . . [and] construe the [pleading] in the manner most favorable to sustaining its legal sufficiency . . . Moreover . . . [w]hat is necessarily implied [in an allegation] need not be expressly alleged . . . 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 . . . Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically." (Internal quotation marks omitted.) Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252-53, 990 A.2d 206 (2010).
The plaintiff moves the court to strike the defendants' counterclaim and special defenses because they fail to plead a sufficient factual basis or are insufficient as a matter of law. The plaintiff also asserts that any special defense or counterclaim, arising from the alleged conduct of its predecessor in title, is insufficient as a matter of law.
B
Pleading Requirements
Practice Book § 10-26 requires pleadings to be set forth in separate counts: " Where separate and distinct causes of action, as distinguished from separate and distinct claims for relief founded on the same cause of action or transaction, are joined, the statement of the second shall be prefaced by the words Second Count, and so on for the others; and the several paragraphs of each count shall be numbered separately beginning in each count with the number one." (Emphasis in original.)
C
Counterclaim
Generally, counterclaims are limited in foreclosures. The traditional test to be applied is whether the counterclaim relates to the underlying transaction. Practice Book § 10-10 specifically provides that a defendant may file a counterclaim against a 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." It is well established that in Connecticut, defenses and counterclaims in a foreclosure action must relate to the making, validity, or enforcement of the mortgage and note. Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 15, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999).
The purpose of permitting counterclaims related to the underlying transaction is 'judicial economy, avoidance of multiplicity of litigation, and avoidance of piecemeal disposition of what is essentially one action . . ." (Internal quotation marks omitted.) Wallingford v. Glen Valley Associates, Inc., 190 Conn. 158, 161, 459 A.2d 525 (1983). In making such a determination, a court must consider whether a substantial duplication of effort would result if each claim was tried separately. Id.
Counterclaims are further limited when asserted against an assignee of a mortgage note, which is the status of the plaintiff in the present case, where the claim is based upon the assignor's actionable conduct. In Hartford v. McKeever, 314 Conn. 255, 279, 101 A.3d 229 (2014), the Supreme Court affirmed an Appellate Court decision to reverse the trial court's ruling that an assignee is liable for overpayments made to an assignor prior to the assignment. " Although the general rule is that [t]he plaintiff, as assignee of the mortgage, [stands] in the shoes of his assignor, with the same rights . . . unless there has been an express assumption of liability, the assignee is not liable to the debtor for liabilities incurred by the assignor . . . [Nevertheless] the assignee takes the mortgage subject to the state of accounts between the [defendant] and the [assignor] as at the time of the assignment . . . Therefore, an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor . . . but does not take it subject to affirmative claims against the assignor arising from the assignor's prior conduct without express assumption of such liability by the assignee." (Citations omitted; emphasis in original; internal quotation marks omitted.) Hartford v. McKeever, 139 Conn.App. 277, 285-86, 55 A.3d 787 (2012), aff'd, 314 Conn. 255, 101 A.3d 229 (2014).
In both the Appellate and Supreme Court decisions in McKeever, the dissenting opinions expressed apprehension over the bright line rule adopted on appeal from the trial court and, in doing so, the possible elimination of affirmative claims against assignees where equity might demand an exception. In dissenting from the majority decision in the Appellate Court, Judge Gruendel perceived a unity of interest between the assignor and assignee in the case, and that, therefore, an equitable claim against the assignee ought to be allowed, holding it to account for claims against its assignor. Id., 306-08 (Gruendel, J., dissenting).
In response, the majority of the Supreme Court in McKeever concluded that " even if the trial court had relied on the equitable principles that Judge Gruendel cited in his dissenting opinion; see Hartford v. McKeever, supra, 139 Conn.App. 303-05; any conclusion that those principles warrant an exception to the general rule that an assignee does not take an assignment subject to affirmative claims against the assignor would find little, if any, support in the evidence or findings of the trial court. Accordingly, we conclude that the Appellate Court properly determined that the trial court had made no factual findings as to the significance of the relationship between the plaintiff, on the one hand, and the corporation, Colonial Bank and State Street Bank, on the other hand, and that the judgment of the trial court was not based on this relationship or any equitable considerations that flowed from it." Hartford v. McKeever, supra, 314 Conn. 273.
Although the issue of the unity of interest between assignor and assignee was not perfected as an equitable defense in the trial record of McKeever, it may yet remain a potential exception to the rule that an assignee is not responsible for affirmative claims against the assignor, especially where fraud is alleged. In dissenting from the majority decision of the Supreme Court in McKeever, Justice Palmer agreed " with the majority that, as a general matter, an innocent assignee of a note and mortgage does not assume the original responsibilities of the assignor and, therefore, is not liable for affirmative claims against the assignor by the obligor." (Emphasis added.) Id., 279 (Palmer, J., dissenting).
In the present case, the defendants allege in their counterclaim that " CUTPA violations and negligent misrepresentations and fraudulent behavior wherein all of the above set forth entities [including assignors in the chain of title] acted in concert with a marketing scheme designed to market predatory loan products to defendants and counterclaimants in this case and thereby defraud the plaintiff's causing them to suffer damages . . . Although the counterclaim includes a general allegation of fraud by the original lender and a general allegation of collusion between the original lender and the plaintiff as an assignee, as required by McKeever, there are no specific allegations of fact to support these claims. The language of the counterclaim admits as much by the inclusion of the following language: " More details will be plead as the expert witness does more comprehensive review after discovery is complete."
The court concludes that the motion to strike the counterclaim should be granted. First, the counterclaim asserts multiple legal claims. It includes " CUTPA, negligent misrepresentation and fraudulent behavior . . . designed to market predatory loan products." Practice Book § 10-26 requires pleadings to be set forth in separate counts " [for] separate and distinct causes of action . . ."
Even if pleaded in separate counts, each claim asserts insufficient facts to support a cause of action. If properly pleaded, our Appellate Court has recognized CUTPA as a valid counterclaim in foreclosure actions. See Morgan Chase Bank v. Rodrigues, 109 Conn.App. 125, 133, 952 A.2d 56 (2008). " CUTPA provides in relevant part that '[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.' General Statutes § 42-110b(a). Connecticut courts, when determining whether a practice violates CUTPA, will consider (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--whether, in other words, it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers (or competitors or other businessmen) . . . Thus, a violation of CUTPA may be established by showing either an actual deceptive practice . . . or a practice amounting to a violation of public policy . . . Whether a practice is unfair and thus violates CUTPA is an issue of fact . . . The facts found must be viewed within the context of the totality of the circumstances which are uniquely available to the trial court . . . Additionally, our Supreme Court has stated that [a]ll 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 less extent it meets all three." (Internal quotation marks omitted.) Bruno v. Whipple, 138 Conn.App. 496, 516-17, 54 A.3d 184 (2012).
Similarly, negligent misrepresentation may be a considered as a counterclaim if properly pleaded and shown to relate to the mortgage transaction. " Traditionally, an action for negligent misrepresentation requires the plaintiff to establish (1) that the defendant made a misrepresentation of fact (2) that the defendant knew or should have known was false, and (3) that the plaintiff reasonably relied on the misrepresentation, and (4) suffered pecuniary harm as a result." (Internal quotation marks omitted.) Coppola Construction Co. v. Hoffman Enterprises Ltd. Partnership, 134 Conn.App. 203, 208, 38 A.3d 215 (2012), aff'd, 309 Conn. 342, 71 A.3d 480 (2013).
This court has also held that fraud may be brought as a counterclaim to foreclosure, if properly pleaded. Deutsche Bank National Trust Co. v. Ofili, Superior Court, judicial district of Waterbury, Docket No. CV 14-6022822-S, (July 2, 2015, Taylor, J.). " Under the common law . . . it is well settled that the essential elements of fraud are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon that false representation to his injury . . . All of these ingredients must be found to exist." (Internal quotation marks omitted.) Capp Industries, Inc. v. Schoenberg, 104 Conn.App. 101, 116, 932 A.2d 453, cert. denied, 284 Conn. 941, 937 A.2d 697 (2007).
The defendants assert these bundled counterclaims and finally assert that they amount to predatory lending, recently recognized as a special defense by our Appellate Court in Bank of America, N.A. v. Aubut, 167 Conn.App. 347, 382, 143 A.3d 638 (2016). This special defense to foreclosure appears to have been entwined with other recognized equitable defenses, such as the defendants have done in this case, except that they assert a counterclaim instead of an equitable special defense.
In Aubut, the Appellate Court viewed the pleadings broadly and realistically and held that " the allegations set forth in the special defense at issue implicate the equitable defenses on which the defendants rely. Although the defendants did not explicitly characterize their special defense in terms of fraud, unconscionability, unclean hands, or equitable estoppel, their failure to do so is not dispositive in our analysis. The allegations, read broadly and realistically, set forth a general theory that the facts known to the original plaintiff concerning the financial situation of David Aubut were such that, at the time that the parties entered into the subject loan, the original plaintiff knew or should have known that the loan would fail." Id., 381.
The special defense alleged, however, " did not merely rely on a bald assertion that the original plaintiff had engaged in 'predatory lending' practices. Instead, in twenty-seven paragraphs, they set forth allegations in support of that purported special defense . . . Notably, the defendants set forth detailed allegations concerning the financial circumstances of David Aubut at the time of the making of the loan at issue. Among other allegations, the defendants alleged that David Aubut's income, the sole source of income for the defendants? household, was $36,000 per year. His take-home pay was $1,950 per month. He owed $45,000 in credit card debt and $132,000 on an existing mortgage. The defendants alleged, in relevant part, that monthly payments on the new loan were approximately $1400 per month, which comprised more than 70 percent of David Aubut's take-home pay, leaving him approximately $550 per month to pay other expenses. The defendants alleged that '[a]t the time of the subject loan, [David Aubut] was insolvent within the definition of the United States Bankruptcy Code.'" Id., 377-78.
In the present case, predatory lending is asserted as an affirmative claim against an assignee, but it is made without the inclusion of specific allegations of collusion between the assignee and the originator of the loan, as required by McKeever . In addition to being insufficiently pleaded as a violation of CUTPA, negligent misrepresentation, fraud and collusion, predatory lending has only been recognized by our Appellate Court in Aubut as a defense to foreclosure and not as a counterclaim for damages. For these reasons, the motion to strike the counterclaim is granted.
D
Special Defenses
The plaintiff moves to strike the defendants' two special defenses, the first one for " unclean hands for marketing subprime predatory loan products as set forth" in the counterclaim, and the second one for " negligent misrepresentations and/or pleading in the alternative, fraudulent misrepresentations regarding the terms of the note and the surrounding circumstances, making it a predatory loan."
Although the defendants assert in their first special defense that the plaintiff has unclean hands for marketing subprime predatory loans, the facts alleged in the counterclaim, on which this special defense relies and which the defendants admit to be incomplete pending further discovery, are insufficient to establish that special defense. The defense of predatory lending requires the defendant to state facts that amount to the essence of this equitable defense that, " at the time that the parties entered into the subject loan, the original plaintiff knew or should have known that the loan would fail." Id., 381. In the present case, the allegations are not supported by specific facts and are, therefore, conclusory.
The defendants' second special defense appears to be another count of predatory lending, again containing conclusory statements of negligent misrepresentation and, alternatively, " fraudulent misrepresentations regarding the terms of the note and the surrounding circumstances . . ."
To establish the claim of negligent misrepresentation as a defense in foreclosure action, the defendant has to establish " (1) that the [plaintiff] made a misrepresentation of fact (2) that the [plaintiff] knew or should have known was false, and (3) that the [defendant] reasonably relied on the misrepresentation, and (4) suffered pecuniary harm as a result . . . Since the rule of liability . . . is based upon negligence, the [plaintiff] is subject to liability if, but only if, he has failed to exercise the care or competence of a reasonable man in obtaining or communicating the information." Citation omitted; internal quotation marks omitted.) Johnnycake Mountain Associates v. Ochs, 104 Conn.App. 194, 201, 932 A.2d 472, cert. denied, 286 Conn. 906, 944 A.2d 978 (2007).
" The essential elements of a cause of action in [fraudulent misrepresentation] are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." (Internal quotation marks omitted.) Solano v. Calegari, 108 Conn.App. 731, 741, 949 A.2d 1257, cert. denied, 289 Conn. 943, 959 A.2d 1010 (2008). " Because specific acts must be pleaded, the mere allegation that a fraud has been perpetrated is insufficient." Chase Manhattan Mortgage Corp. v. Machado, 83 Conn.App. 183, 188, 850 A.2d 260 (2004). See Wells Fargo Bank v. Lewis, Superior Court, judicial district of Fairfield, Docket No. CV-07-5006088-S, (February 18, 2010, Maiocco, J.T.R.).
The court concludes that this special defense lacks specific allegations of fact that would result in a defense of negligent or fraudulent misrepresentation. The pleading neither claims them as separate defenses, as required by Practice Book § 10-10, nor states facts that amount to the essence of a predatory lending defense, such as in Aubut, showing that, " at the time that the parties entered into the subject loan, the original [lender] knew or should have known that the loan would fail." Bank of America, N.A. v. Aubut, supra, 167 Conn.App. 381.
III
CONCLUSION
For reasons set forth above, the motion to strike the defendant's counterclaim and special defenses is granted.