Bank of American National Association et al. v. LLC (2010)

MEMORANDUM OF DECISION RE MOTION FOR PAYMENT OF MANAGEMENT FEE (NO. 158)

BACKGROUND

By way of background on or about August 5, 2004, the defendant Groton Estates, LLC (“borrower”) gave to Archon Financial L.P. a promissory note in the principal amount of $22,000,000, plus interest (the “Note”).   To secure its obligations under the Note, the borrower executed a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing, dated August 5, 2004 (the “Mortgage”), upon certain real property located at 320 Shenneccossett Road, Groton, Connecticut (the “Property”).   The borrower also executed an Assignment of Leases and Rents, dated August 5, 2004 (the “Assignment”), which, among other things, grants the assignee the right to enter upon and take control of the property and to collect and possess “rents,” as that term is defined in the Assignment.   In connection with the transaction, borrower and MCR Property Management, Inc. (“MCR”), the property manager of the property that is the subject of this foreclosure action and an entity that is related to the borrower and controlled by the same principal, Michael Belfonti, executed a Manager's Consent and Subordination of Management Agreement on August 5, 2004 (the “Subordination Agreement”).

The applicable provision of the Subordination Agreement, subparagraphs 3(a) and (b), state as follows:

(a) No termination of Management Agreement.   Manager shall not terminate the Management Agreement without first obtaining Mortgagee's written consent.   Notwithstanding the foregoing, Manager shall have the right to terminate the Management Agreement for default by Borrower with respect to nonpayment of the management fee due thereunder or any costs of operating the property in accordance with the Management Agreement by giving mortgagee sixty (60) days' prior written notice of such termination.   In the event mortgagee (or borrower) shall cure such nonpayment default in the aforesaid sixty (60) day period, then any termination notice related to such cause shall be of no further force or effect.

(b) Subordination of Management Agreement to Lien of Mortgage.   The Management Agreement and any and all liens, rights and interests (whether choate or inchoate and including, without limitation, all mechanic's and materialmen's liens under applicable law) owed, claimed or held by Manager in and to the property, are and shall be in all respects subordinate and inferior to the liens and security interests created or to be created for the benefit of mortgagee, its successors and assigns, and securing the repayment of the Note including, without limitation, those created under the Mortgage covering, among other things, the property, and filed or to be filed of record in the public records maintained for the recording of mortgages in the jurisdiction where the property is located and all renewals, extensions, increases, supplements, amendments, modifications and replacements thereof.

Bank of America National Association (“Plaintiff') is the current holder of the Note, the Mortgage, the Assignment, the Subordination Agreement, and all other documents executed in connection with the Note (collectively, the “Loan Documents”).  (Amended Complaint para. 34.)

The borrower is in default of the loan documents according to the plaintiffs because it has failed to make loan payments since May 2009.   As a result, the plaintiff commenced this foreclosure action in October 2009.

DISCUSSION

The defendants, borrower and Constance Belfonti, in her capacity as Executrix of the Estate of Richard Belfonti (collectively, the “defendants”) have moved for an order directing the plaintiff to pay a management fee to MCR. Prior to the filing of said motion, the plaintiff, as a result of the default in payments, filed a motion for the appointment as a receiver on January 14, 2010.   The parties then entered into a stipulation wherein the plaintiff withdrew an application for a receivership.   The parties further agreed that the court should order a lock box for the deposit of income with the expenditures from such funds paid by agreement.   The parties added a third paragraph to said agreement as follows:

3.  In the event that Stipulating Defendants file a motion seeking payment of management fees from funds which are or which may hereafter be deposited to the lock box account, any order which might be entered direct the payment of such fees shall be retroactive so as to include management fees as to which Plaintiff denied approval prior to the date of such order.

The court approved said stipulation on an order of the court on February 24, 2010 (“Lockbox Order”).

MCR, a company owned and controlled by the defendants, had been the management company which managed the property and were paid an agreed upon fee through a management contract executed by the defendant and MCR. The plaintiff continued to pay the management fee to MCR after the lock box order in an approved application for disbursement of funds for March 2010.   The payment was approved on April 15, 2010, by the plaintiff's special servicer.   When the April 2010 invoices were submitted, the special servicer then noticed that the payment for the month of March 2010 was in error and that future payments should not be made due to the provisions of the subordination agreement executed as part of the mortgage loan transaction.

The plaintiff contends that due to the borrower's default in making the monthly mortgage payment, the rights of any management agreement and/or management fee is subordinated to the terms of the mortgage.   The explicit terms of the mortgage state that “the provisions of the management agreement are subordinate to this mortgage and the manager shall atorn to mortgage” (Complaint Exhibit B, para. 1(j).)  The plaintiff, through affidavit of its agent, contends that the March 2010 payment of management fees was in error and should not continue while the loan is in default.

The defendants argue to the contrary.   The defendants, by their pleadings, contend that the loan is not in default and that MCR is entitled to management fees.   The defendants further contend that plaintiff has waived its rights to bar MCR's management and by its conduct was manipulating the proceeding to its advantage, i.e. moving for receivership and then withdrawing the motion.

This court concludes, after reviewing the contractual documents and briefs and arguments of the parties, that the borrower, by failing to pay the mortgage payment when due, permits the plaintiff to invoke its rights under the terms of the mortgage, assignment of rents and leases and the management subordination agreement to take over the management of the subject property.   The dispute is a matter of contract law.   As argued by the plaintiff, it is the duty of the court to enforce-not rewrite-the parties' contractual obligations.  Heyman v. CBS, Inc., 178 Conn. 215, 227 (1979).   The court further concludes that the plaintiff has not waived its right to enforce the provisions by inadvertently allowing the management fees to be paid for March 2010.   The plaintiff did not intentionally relinquish any right and, furthermore, the mortgage contains a nonwaiver clause.  (Complaint, Exhibit B, Mortgage, pp. 39, 25(h).)  AFSCME Council 4 Local 704 v. Dept. of Public Health, 272 Conn. 617, 623 (2005).   The court also finds there was no manipulation of the proceeding by the plaintiff.   The court further finds that the plaintiff permitted the March payments by oversight in light of the affidavits submitted with its brief read together with the loan documents.   The withdrawal of the receivership application was pursuant to a negotiated agreement of the parties.

As stated above, the court concludes that the plaintiff has the right to take over management of the property.   However, the trial court, in presiding over foreclosure cases, must also consider equitable factors making sure that justice has been done.  “As a general matter, we note that it is well established in our jurisprudence that [f]oreclosure is peculiarly an equitable action, and the court may enter such questions as are necessary to be determined in order that complete justice may be done ․ [B]ecause a mortgage foreclosure action is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done.  Monetary v. Pluchino, 87 Conn.App. 401, 405 (2005).

“The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court.”   Connecticut Bank & Trust Co. v. Winters, 225 Conn. 146, 162, 622 A.2d 536 (1993).  “Discretion means a legal discretion, to be exercised in conformity with the spirit of the law and in a manner to subserve and not to impede or defeat the ends of substantial justice.”  Hammerberg v. Leinert, 132 Conn. 596, 604-05, 46 A.2d 420 (1946).  “For that reason, equitable remedies are not bound by formula but are molded to the needs of justice.”  Montanaro Bros. Builders, Inc. v. Snow, 4 Conn.App. 46, 54, 492 A.2d 223 (1985).

The defendant's management as MCR shall be paid for services rendered through October 31, 2010, based upon the fact that these services have been performed without any claim of dereliction of duty by the plaintiff or its agent special servicer.   The rule otherwise would be inequitable.

ORDER

The management company MCR shall be paid pursuant to the terms of the management agreement for its unpaid services through October 31, 2010.   Thereafter, its fees shall not be paid from the lock box.

Devine, J.

Devine, James J., J.