First National Bank v. Richard Kleinberg (2010)

MEMORANDUM OF DECISION

This case involves the foreclosure of a mortgage from the defendant, Richard Kleinberg to the plaintiff, The First National Bank of Litchfield.   Before the court is the reargument of the plaintiff's motion for summary judgment as to liability.   For the reasons stated below, the defendant's fourth special defense is found to involve genuine issues of material fact, which, if proven, would provide the defendant with an equitable defense to this foreclosure.   For this reason, the motion for summary judgment must be denied.

Procedural History

The procedural history must be discussed first.   On May 12, 2009 the defendant appeared, pro se, and filed an answer to the complaint together with a special defense and a counterclaim.   The plaintiff filed a request to revise the answer and special defense to which the defendant objected.   The defendant's objections were overruled and, on August 7, 2009, the defendant filed a revised answer and eight special defenses.   The defendant filed a motion to strike the special defenses which was granted.   On August 10, 2009, the plaintiff asked the defendant to admit the genuineness of the loan documents including the promissory note and mortgage.

On October 8, 2009, the defendant filed six revised special defenses (# 118).   Oh December 31, 2009 the plaintiff filed a motion for summary judgment (# 120) as to liability on its complaint.   The motion was accompanied with a memorandum and extensive documentation.   The defendant did not respond to the motion.   On January 19, 2010 the court granted the motion for summary judgment.   On January 22, 2010 the plaintiff filed a motion for judgment of strict foreclosure.

On January 28, 2010, the defendant appeared by counsel and moved to reargue the motion for summary judgment (# 124).   The court granted the motion to reargue.   On March 19, 2010 the defendant filed his memorandum in opposition to the motion for summary judgment.   Reargument was scheduled for April 12, 2010.   On April 7, 2010 the plaintiff filed a reply brief.   On April 8, 2010, the defendant filed a request for leave to amend his pleadings by changing his first special defense to a counterclaim, renumbering the second through sixth special defenses as first through fifth special defenses, and by adding a sixth special defense.   On April 9, 2010, the defendant filed a supplemental reply brief.   On April 12, 2010 the parties appeared for reargument of the motion for summary judgment.   Following oral argument, the plaintiff was given additional time to file a supplemental reply to the defendant's last brief.   On April 22, 2010, the plaintiff filed a timely objection to the defendant's request for leave to amend.   This objection has not appeared on the calender for decision.

Because of this procedural history, the plaintiff's motion for summary judgment must be based upon the defendant's amended answer of August 7, 2009 (# 113) and the amended special defenses of October 8, 2009 (# 118).   The defendant's proposed amendments to the special defenses and the proposed counterclaims cannot be considered because the plaintiff's objection to these amendments have not been resolved.

Legal Standard

“A summary judgment, interlocutory in character, may be rendered on the issue of liability alone ․” Practice Book § 17-50.  “Practice Book [§ 17-49] provides that summary judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law ․ In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party ․ The party seeking summary judgment has the burden of showing the absence of any genuine issue [of] material facts, which under applicable principles of substantive law, entitle him to a judgment as a matter of law ․ and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact.”  (Internal quotation marks omitted.)  American Progressive Life & Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 119, 971 A.2d 17 (2009).

“A material fact has been defined adequately and simply as a fact which will make a difference in the result of a case.”  (Internal quotation marks omitted.)  Buell Industries, Inc. v. Greater New York Mutual Ins. Co., 259 Conn. 527, 556, 791 A.2d 489 (2002).  “It is not enough, however, for the opposing party merely to assert the existence of a disputed issue.   Mere assertions of fact ․ are insufficient to establish the existence of a material fact and, therefore, cannot refute evidence properly presented to the court under Practice Book § [17-45].”  (Internal quotation marks omitted.)   Zielinski v. Kotsoris, 279 Conn. 312, 319, 901 A.2d 1207 (2006).   The court may not decide issues of material fact on a summary judgment motion, but only determine whether such genuine issues exist.  Nolan v. Borkowski, 206 Conn. 495, 500, 538 A.2d 1031 (1998).

Facts

The undisputed facts establish that on January 25, 2005 the defendant borrowed $950,000 from the plaintiff as evidenced by a promissory note of that date.   The note provided that interest was to be paid monthly beginning on March 1, 2005, and that the principal was due in full on or before February 1, 2006.   The defendant used $850,000 of the note proceeds to purchase property at 164 West Shore Road, in Washington, Connecticut.   This property abuts the defendant's personal residence at 145-59 West Shore Road. In order to secure the payment of the loan, the defendant executed a mortgage deed to the plaintiff covering four pieces of property including 164 West Shore Road and another piece of property in the same area known as 181 West Shore Road. The defendant paid the interest on the note as required but did not pay the principal balance of the note on or before February 1, 2006.

On February 24, 2006 the plaintiff and the defendant executed a written agreement extending the maturity date of the promissory note until February 1, 2007.   The defendant continued to make timely payment of the interest on the note.   The defendant did not pay the principal balance of the loan on February 1, 2007.   On March 26, 2007 the parties executed a written agreement extending the maturity date of the promissory note until February 1, 2008.   The defendant continued to make timely payment of the interest on the note.   The defendant did not pay the principal balance of the loan on February 1, 2008.   The plaintiff commenced this action to foreclose on the mortgage by process dated January 20, 2009.

There are disputed facts contained in the defendant's affidavit which the court must consider for purposes of determining if there are any genuine issues of fact.   During 2004 the defendant was interested in purchasing the property at 164 West Shore Road which abuts his residence.   His neighbor was willing to sell his property to the defendant for $850,000 but the defendant did not have a way to finance this purchase.   During the second half of 2004 the defendant received a telephone call from Edgar Auchincloss who said he was an officer and loan officer at the plaintiff bank.   Mr. Auchincloss was calling upon the recommendation of a local realtor and wanted to interest the defendant in taking a loan to purchase the neighboring property.   The defendant told Mr. Auchincloss that he did not currently have the means to repay such a loan other than the sale of other property.   In January 2005 Mr. Auchincloss advised the defendant that the plaintiff had agreed to loan the defendant $950,000 to purchase the neighboring property and to use the excess funds to pay the interest.   Mr. Auchincloss also said that the plaintiff had agreed that it would extend the terms of the loan as long as necessary for the defendant to sell other property and apply the net proceeds against the loan obligation.   In accordance with this agreement, shortly after the expiration of the term of the original note, Mr. Auchincloss contacted the defendant and presented him with papers which extended the original term of the note to February 1, 2007.

The Plaintiff's Complaint

The plaintiff's motion for summary judgment (# 120) is straightforward.   It provides supporting evidence that the defendant is in default on a one-year commercial balloon note whereby the defendant borrowed $950,000 secured by a blanket mortgage on four investment properties on Lake Waramaug in Washington, Connecticut.   A portion of the note provides:  “PAYMENTS:  I agree to pay this note as follows:  Principal:  I agree to pay the Principal on or before 02/01/2006.”   Paragraph twenty-four of the mortgage deed states:  “[t]his Security Instrument is complete and fully integrated.   This Security Instrument may not be amended or modified by oral agreement.”

In opposition to the motion, the defendant does not question that he signed the note and mortgage, or that he failed to pay the note when it came due on February 1, 2008.   Instead, the defendant relies upon his special defenses.   The plaintiff argues that none of the defendant's six special defenses constitute valid defenses to a foreclosure action.

“Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction ․ or, there had never been a valid lien ․ 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 note or both ․ Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles ․ [O]ur courts have permitted several equitable defenses to a foreclosure action.  [I] 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.”  (Citations omitted.)  Fidelity Bank v. Krensky, 72 Conn.App. 700, 705-06 (2002).

Each of these defenses will be examined to see if they fall within the categories set forth above.

First Special Defense

In the first special defense, the defendant alleges that the loan in question is a personal loan on residential property and that the plaintiff is using “a pattern of misrepresentations and omissions” to claim that it is a commercial loan.   The defendant asserts that this pattern constitutes a failure to follow the requirements of Regulation Z of the Federal Truth in Lending Act (“TILA”).

In its motion for summary judgment, the plaintiff cites several Superior Court cases which have held that violations of TILA do not relate to the making, validity or enforcement of the mortgage and as such are legally insufficient to withstand a plaintiff's motion for summary judgment.   See, e.g., Bank of New York v. Conway, 50 Conn.Sup. 189, 201-03 (2007).   The defendant has not provided any contrary authority.   For this reason, the defendant's first special defense is not a viable defense.   The motion for summary judgment is granted as to the first special defense.

Second Defense

In the second special defense, the defendant alleges that, not withstanding the terms of the loan documents, a loan officer at the plaintiff bank told him that the loan was to be paid from the sale of one of the four mortgaged properties, 181 West Shore Road, New Preston, Connecticut.   The plaintiff alleges:  “The sale of 181 West Shore Property was acknowledged by the Bank to be the only available source of repayment of this loan.”   The plaintiff claims that this defense is “nonsense.”   It argues that the terms of the loan and mortgage are controlled by the written loan documents themselves and cannot be contradicted by parol evidence.   The mortgage specifically states that it may not be amended by oral agreement.

“The parol evidence rule is not a rule of evidence but a rule of substantive law, defining the limits of a contract issue.   The fundamental question is one of the intent of the parties.   If they intended to make a writing the repository of their final understanding upon the particular matter of agreement, then such evidence must be excluded ․ Exceptions to the parol evidence rule, such as the existence of a separate oral agreement, are permitted as to any matter upon which the document is silent and which is not inconsistent with its terms, it from the circumstances of the case, the court infers that the parties did not intend the document to be a complete and final statement of the whole transaction between them.”  (Citations omitted;  internal quotation marks omitted.)  Connecticut Savings Bank v. Central Builders' Supply Co., 4 Conn.App. 332, 333-34 (1985).

“In order for the bar against the introduction of extrinsic evidence to apply, the writing must be integrated, that is, it must have been intended by the parties to contain the whole agreement;  and be a final expression of one or more terms of the agreement.   Tallmadge Bros., Inc. v. Iroqois Gas Transmission System, L.P., (Citations omitted;  Internal quotation marks omitted.)  252 Conn. 479, 503 (2000).

The mortgage in this case contains a merger clause which states that the mortgage is complete and fully integrated and that it may not be amended or modified by oral agreement.   Although the general rule of contract law is that a merger clause is likely to conclude the issue of whether the agreement is completely integrated, “it is well settled that when the subject matter of a prior agreement is separate and distinct from the subject matter of an integrated agreement and does not vary or contradict its terms, the prior agreement is not discharged.”  Perricone v. Perricone, 292 Conn. 187, 193 n.5.

There is no doubt that the agreement alleged in the second count contradicts the loan documents.   The allegation that 181 West Shore Road would be the only available source of payment for the loan contradicts the mortgage deed itself which covers four separate properties.   For this reason, proof of the alleged agreement set forth in the second count would violate the parole evidence rule.   Summary judgment must be granted as to the second special defense.

Third Special Defense

The agreement alleged by the defendant in the third special defense is that, if the defendant had made all the interest payments upon the loan, the plaintiff would extend the date upon which the principal would have to be paid.   The defendant has submitted an affidavit which supports this allegation.   Viewed most favorably to the defendant, this amounts to an agreement to permit the defendant to renew the loan for another year if he is current in his payments.   The issue for the court is whether this agreement amounts to proof of a collateral oral agreement which does not vary the terms of the writing.

“[l]n determining whether a matter falls within the collateral agreement exception, the court must consider the inherent probability that parties contracting under such circumstances would or would not make the [integrated] agreement in writing and also the alleged [collateral] agreement ․ In deciding upon this intent, the chief and most satisfactory index for the judge is found in the circumstance whether or not the particular element of the alleged extrinsic [agreement] is dealt with at all in the [integrated] writing.   If it is mentioned, covered, or dealt with in [that] writing, then presumably the writing was meant to represent all of the transactions on that element;  if it is not, then probably the writing was not intended to embody that element of the negotiation.  (Citations omitted;  internal quotation marks omitted.).  Id., 195-96.

The promissory note has a one-year maturity date.   It is “inherently probable” that, if the parties had an agreement to continue renewing the loan every year, this agreement would have been put in writing and made a part of the loan documents.   Based upon the guidance provided in the Perricone case, the court determines that the loan documents were intended to represent the entire transaction between the parties.   For this reason, the defendant's second and third special defenses are precluded by the parol evidence rule.   The plaintiff's motion for summary judgment as to the second and third special defenses is granted.

Fourth Special Defense

The defendant's fourth special defense is that the plaintiff has violated the Connecticut Unfair Trade Practices Act (“CUTPA”).   The specific allegations of this special defense are:  “1. To induce me to enter into the loan, the loan officer represented to me that all of the material terms that we had agreed upon, including that so long as I made all payments of interest upon the loan, the bank would continue to extend the date upon which the principal was to be paid, notwithstanding the terms of the documents effecting such continuance, had been presented to and approved by its appropriate loan and/or credit committee(s). 2. I entered into the loan agreement and all modifications thereof in reliance upon these representations. 3. The Bank's action, based on the assertion that it had no obligation to extend the maturity date until the bridged property (181 West Shore Road) was sold, contradicts its representations during the solicitation of the transaction, such that the prosecution of this action constitutes a violation of the Connecticut Unfair Trade Practices Act.” The affidavit of the defendant generally supports these allegations.   These allegations have not been refuted by the affidavits supplied by the plaintiff.

“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 [F]ederal [T]rade [C]ommission for determining when a practice is unfair:  (1)[W]hether 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 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;  whether it causes substantial injury to consumers ․ 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.)  Edmands v. CUNO, Inc., 277 Conn. 425, 451 n. 16, 892 A.2d 938 (2006).  “A practice is deceptive if it is a materially misleading representation, omission, or other practice that a consumer reasonably interpreted under the circumstances.  Southington Savings Bank v. Rodgers, 40 Conn.App. 23, 28, 668 A.2d 733 (1995), cert. denied, 236 Conn. 908, 670 A.2d 1307 (1996).”  Walsh v. Seaboard Surety Co., 94 F.Sup.2d 205, 213 (2000).   Although the parties have not cited any appellate authority, there is Superior Court authority for the proposition that a CUTPA violation can be an equitable defense to a foreclosure action.   See, e.g., LLP Mortgage, LTD v. F & R, LLC, Superior Court, judicial district of New London, Docket No. CV 01 0558476 (January 31, 2002).

The affidavit of the plaintiff presents facts which can be viewed as unethical, oppressive or unscrupulous.   Edgar Auchincloss, a loan officer at the plaintiff bank solicited the defendant as a customer to provide funding so that the plaintiff could purchase neighboring property.   Mr. Auchincloss knew that the defendant did not have the means to repay a loan of $950,000.   But, Mr. Auchincloss advised the defendant that the plaintiff bank had agreed to loan the defendant $950,000 so that the defendant could purchase the neighboring property for $850,000 and use the excess money to pay the interest on the loan as long as necessary for the defendant to sell other property and apply the net proceeds against the loan obligation.

The parol evidence rule prevents the plaintiff's testimony from contradicting the terms of the note and mortgage.   But it can form the basis of a CUTPA defense that the defendant engaged in materially misleading representations.¹  The plaintiff extended the loan after the first year and again after the second year, but refused to extend it again even though the defendant was still making the interest payments faithfully.   The statements attributed to Mr. Auchincloss were false;  the plaintiff did not intend to renew the loan until the defendant could sell other property and pay it off.   The statements of Mr. Auchincloss involve the making, validity or enforcement of the lien, and could be found to be unethical, oppressive or unscrupulous so as to be a violation of CUTPA.   For this reason, the motion for summary judgment as to the fourth special defense is denied.

Fifth and Sixth Special Defenses

The fifth and sixth special defenses will be considered together because they both allege equitable estoppel.   In the fifth special defense, the defendant alleges that the plaintiff failed to give “timely notice” of its intention to demand payment of the principal before the bringing of this action ruined his credit and “precluded my ability to overcome the Bank's unilateral attempt to rescind our agreement.”   In the sixth special defense, the defendant alleges that the plaintiff violated a duty to deal in good faith by filing to give “timely notice” of its decision to demand payment of the principal, thereby precluding the defendant from arranging alternative loan funding “before the impact of the 2008 credit market crisis” made it impossible.   To both of these defenses the plaintiff says that they contain insufficient facts to prove equitable estoppel:

The plaintiff concedes that equitable estoppel can be the basis of a special defense to a foreclosure action, but only when sufficient facts are alleged which shows that it relates to the making, validity or enforcement of the lien.  “[A]ny claim of estoppel is predicated on proof of two essential elements:  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 act on that belief, and the other party must change its position on reliance on those acts, thereby incurring some injury.”  Connecticut Nat'l Bank v. Voog, 233 Conn. 352, 366 (1995).   The plaintiff claims that the defendant has not set forth facts in either the fifth or sixth special defense to support equitable estoppel.

Both special defenses rely upon an allegation that the plaintiff failed to give “timely notice.”   There is no provision in the loan documents for any notice prior to demand.   The defendant's affidavit filed in opposition to this motion does not address this issue.   Without further facts, the court has no way of knowing what “timely notice” means.   The court agrees with the plaintiff that there is no issue of material fact concerning these two special defenses.   The motion for summary judgment must be granted as to both.

BY THE COURT,

John W. Pickard

FOOTNOTES

FN1. The parol evidence rule rendering parol evidence or extrinsic evidence inadmissible to contradict or vary the terms of a written contract, valid on its face, is inapplicable where the issue is whether the contract was procured by fraud because the parol evidence rule cannot be used as a shield to prevent the proof of fraud.   37 Am.Jur.2d Fraud and Deceit Sec. 480 (2001)..  FN1. The parol evidence rule rendering parol evidence or extrinsic evidence inadmissible to contradict or vary the terms of a written contract, valid on its face, is inapplicable where the issue is whether the contract was procured by fraud because the parol evidence rule cannot be used as a shield to prevent the proof of fraud.   37 Am.Jur.2d Fraud and Deceit Sec. 480 (2001).

Pickard, John W., J.