Farmington Savings Bank v. Claude M. Brouillard et al. (2011)

MEMORANDUM OF DECISION

Plaintiff brings this foreclosure action against defendant Claude M. Brouillard and others to foreclose a certain mortgage in favor of the plaintiff on certain property known as 152 Town Farm Road in Farmington, Connecticut.   As to defendants Ravenwood Properties, LLC, the Farmington Equestrian Center, LLC and Elton Apartments, LLC,¹ plaintiff alleges these entities guaranteed the first mortgage note and other notes and plaintiff seeks money damages.   The defendant Brouillard alleges special defenses and counterclaims based upon unclean hands, the breach of the covenant of good faith and fair dealing, negligent and intentional misrepresentation, and a violation of Connecticut's Unfair Trade Practices Act.

The trial of this case was bifurcated by agreement of the parties with the court first to determine liability only as to the foreclosure action and as to defendants' counterclaims.   If the court finds for the plaintiff on the foreclosure count and for the plaintiff on the defendants' counterclaims, then the court will hear evidence as to the amount of the debt, and the value of the subject property, will determine whether the foreclosure judgment will be strict or by sale, and award attorneys fees.   If the court finds for the defendants on the special defenses and on defendants' counterclaims, the court will hear evidence on the issue of defendants' damages.   The underlying facts are as follows:

The subject property, known as the Farmington Polo Grounds, is an operating horse farm and riding facility consisting of approximately 60 acres of land along the Farmington River, together with a 48-stall horse barn, indoor and outdoor riding arenas, paddocks, an open field, and a single home.   In addition to equestrian activities the property hosts outdoor events and is the site of the biennual Farmington Antiques Weekend.   Prior to 2004, the property was owned and operated by a well known equestrian, Hugh Kerrigan, through his corporation, Farmington Valley Recreation Park, Inc. Kerrigan resides and continues to reside in the residence on the property.

In or about 2003, Kerrigan suffered severe health problems leading to his inability to run his horse business.   The Jenkins family from Indiana, who owned and operate the Farmington Antique Weekends at the property, pursuant to a lease with Kerrigan, were approached by Kerrigan to purchase the property.   In or about September 2003, the Jenkins family, through their entity Farmington Showgrounds, LLC, and Kerrigan entered into an agreement dated September 19, 2003, for Jenkins to purchase the property from Kerrigan for $2,250,000.00, with Kerrigan accepting a purchase money mortgage in the amount of $1,000,000.00 and Kerrigan reserving to himself a life interest in the residence on the property and a portion of the riding facility to train and sell horses.   The plaintiff Farmington Savings Bank (now known as Farmington Bank) was approached to provide financing.   In or about March 2004, plaintiff commissioned the appraisal firm of Morrow, Morgan & Smith to prepare an appraisal of the property.   The appraisal, dated March 10, 2004, established a total value of the property at $2,300,000.00.   That appraisal found the value of the Polo Ground real estate to be $1,600,000.00, the value of the Polo Ground personal property to be $1,000.00, and the enterprise value of the Farmington Antiques business to be $600,000.00.   The appraisal noted that most of the land is in a flood plain and “the potential for additional building construction is questionable.”   Based on that appraisal, the plaintiff Farmington Bank on May 5, 2004, gave a mortgage to the Farmington Showgrounds, LLC for $1,100,000.00;  to which mortgage Kerrigan agreed to subordinate his $1,000,000.00 mortgage.   On May 5, 2004, Jenkins signed a promissory note commercial revolving loan agreement under which it promised to pay to the plaintiff on demand the sum of $100,000.00 with interest as provided in the revolving note.   Said note was secured by a second mortgage on the subject property.   The closing was held on May 7, 2004.

By early 2006, Farmington Show Grounds, LLC (hereinafter “Jenkins”) was defaulting on the plaintiff bank mortgage.   Jenkins put the property on the market for $2,950,000.00.   Defendant Claude Brouillard saw that listing and on June 23, 2006, entered into an agreement with Jenkins to purchase the property for the price of $2,800,000.00.   The agreement provided for an initial deposit of $25,000.00 upon signing, an initial sixty-day due diligence period, and an additional $25,000.00 deposit upon expiration of that sixty day period.   During the due diligence period, Brouillard was entitled to make physical inspections and investigative tests as he should require.   He also had the right to inspect the records of the seller and to require copies of any and all monthly operating reports of the businesses conducted on the property.   A condition of the purchase was Brouillard was to apply for and to obtain all necessary permits and approvals to erect and build a 100-stall equestrian facility and to construct an additional single family residence on the property.   If those conditions were not met, Brouillard had the option of terminating the agreement.

Although Brouillard never obtained town approvals, he decided to go forward with the purchase.   At the end of the first due diligence period, he paid Jenkins an additional $25,000.00 deposit.   In August 2006 Jenkins continued to have difficulty paying the bank mortgage, apparently because of mismanagement of the property by Jenkins' son.   Brouillard was advised that the Jenkins loan with Farmington Bank was in default, and the Bank was threatening imminent foreclosure unless the delinquencies are brought current.   Brouillard met with the bank on October 18, 2006 and again with an officer of the bank in November 2006, when the bank provided Brouillard with a copy of the Monroe, Morgan & Smith appraisal of 2004.

On December 12, 2006, defendant agreed with the Bank to make substantial payments to the Bank to pay off the delinquency of Jenkins on the commercial promissory note of $100,000.00.   On December 14, 2006, defendant Brouillard assumed 100% interest in Farmington Showgrounds, LLC. The purchase price was renegotiated from 2.8 million dollars to 2.4 million dollars.   Jenkins, as part of the deal, received free use of the property by Farmington Antiques Weekends for two weekends a year for five years.   Brouillard paid the debt service on the $100,000.00 note from Jenkins to the plaintiff.   The original Kerrigan purchase mortgage note of $1,000,000.00 was reduced to $700,000.00, and amortized over thirty years rather than the original ten years.

To effectuate the closing with Jenkins, defendant Brouillard on August 10, 2007, assumed all the obligations of Jenkins to the Bank under the $1,100,000.00 first mortgage note, and under the $100,000.00 revolving note.   Brouillard further entered into a commercial mortgage note promising to pay the Bank the sum of $300,000.00 with interest payable in installments of $125,000.00 on scheduled dates.   The money was to be used to improve the property.   Pursuant to a mortgage modification agreement dated August 10, 2007, the principal amount of the first mortgage was increased by the sum of $300,000.00.   As additional collateral, Brouillard put up his interest in the Ravenwood Properties, LLC and Elton Apartments, LLC and these entities guaranteed Brouillard's obligation to the plaintiff.

The defendant defaulted in the payment of the $125,000.00 due on the commercial note in August 2008 and by the terms of the agreement between the Bank and Brouillard, that constituted a default on the other debts owed by Brouillard to the Bank. The Bank elected to accelerate these obligations and instituted this foreclosure action.

At the trial plaintiff produced the original term promissory note dated May 5, 2004, by Farmington Showgrounds, LLC to the order of the plaintiff in the original principal sum of $1,100,000.00, together with the original mortgage securing payment of that note.   Plaintiff also presented to the court the original promissory note commercial revolving loan agreement dated May 5, 2004 by Farmington Showgrounds, LLC to the order of the plaintiff in the original principal amount of $100,000.00, together with the second mortgage securing that note.   Plaintiff also submitted into evidence a certain debt assumption and loan modification agreement dated August 10, 2007, under which the defendant Brouillard assumed the obligation of the Farmington Showgrounds, LLC under the term note and the revolving note.   Finally, plaintiff submitted into evidence a certain commercial mortgage note by defendant Brouillard to the order of the plaintiff in the amount of $300,000.00 and also a mortgage modification agreement dated August 10, 2007, under which Brouillard and plaintiff agreed to increase the amount secured by the first mortgage by the amount of $300,000.00.

The plaintiff also submitted into evidence guarantees of Ravenwood Properties, LLC, Farmington Equestrian Center, LLC and Elton Apartments, LLC guaranteeing the aforementioned debts.   The defendant defaulted in August 2008 and plaintiff claims the amounts due of principal, accrued interest and late charges on the term note, the revolving note and the commercial, note, as of May 4, 2010, amounted to $1,530,538.58.

Defendant Brouillard essentially did not contest plaintiff's evidence establishing plaintiff's prima facie case.   However, defendant Brouillard alleges in his answer special defenses that plaintiff breached the implied covenant of good faith and fair dealing, plaintiff is guilty of unclean hands, plaintiff misrepresented the value of the subject property and plaintiff is equitably estopped from enforcing its mortgages and notes.

By way of counterclaims, defendant Brouillard alleges negligent misrepresentation, intentional misrepresentation, aiding and abetting, and a violation of Connecticut Unfair Trade Practices Act.

These special defenses and counterclaims are premised upon the plaintiff in 2006 giving to Brouillard a 2004 appraisal of the property.   Defendant claims the appraisal was false, the plaintiff bank knew the underlying facts were false when it showed the appraisal to Brouillard, Brouillard relied upon the appraisal to purchase the property from Jenkins and to assume Jenkins' debts to the Bank as part of the purchase price, and, therefore, plaintiff cannot foreclose the mortgages securing the underlying notes.

The court finds Brouillard failed to prove any of these allegations.   No evidence was introduced that the 2004 appraisal was false in any way.   The appraisal stated facts obtained from Kerrigan, the then owner of the property, and was based on appropriate standards of appraisal.   It concluded that the real estate had a value of $1,600,000.00, personal property of $100,000.00, and the enterprise value of the Farmington Antique business was $600,000.00, for a total value of $2,300,000.00.   While the Bank knew in 2006 that the income from the Farmington Antiques business was declining, it's important to note that Brouillard wasn't relying on that income because Brouillard gave Jenkins free use of the property to conduct its antique business for five years.

Moreover, Brouillard got actual income and expense figures from Jenkins on the operation of the horse farm from July-December 2004, all of 2005, and January-July 2006.   What is significant about the figures for the full year 2005 is that they show a net income of $146,103.00, not including debt service for the Farmington Bank and Kerrigan notes and mortgages.   The Bank debt service on a principal balance of $1,425,000.00, was $118,146.00, and the debt service on the Kerrigan mortgage, with a principal balance of $700,000.00, was $54,482.00, for a total of $172,628.00.   Thus, Brouillard had figures that showed that the property at the time of his purchase was losing $26,525.00 annually.

It is not credible that Brouillard relied on a bank appraisal of 2004, based upon numbers two years old, when it had actual numbers up to the middle of 2006.   The court finds Brouillard did not rely on that appraisal, but is now using it as a feeble excuse for attempting to defeat the Bank's foreclosure action.   Failure to prove reliance defeats Brouillard's claims of negligent and intentional misrepresentation.

Defendant has failed to prove his defense of unclean hands.   The primary purpose of this doctrine is to protect the court from being involved in assisting a plaintiff to profit when it has acted improperly.   As stated in Monetary Funding Group, Inc. v. Pluchino, 87 Conn.App. 401, 407, “ ‘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 ․ The trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the courts' integrity dictate that the clean hands doctrine be invoked.’  “ (Citation omitted).   Defendant Brouillard claims that the failure of the Bank to inform him that the property was unable to meet its debts constitutes wilful misconduct.   But the facts are that the Bank informed Brouillard that Jenkins was in default, and Brouillard, in fact, paid the delinquencies of Jenkins on the Bank's note.   Therefore, Brouillard failed to prove that the Bank violated the doctrine of unclean hands.

Brouillard's claim of lack of good faith and fair dealing is likewise without foundation.   The law as to this principle is as follows:

[I]t is axiomatic that the ․ duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship ․ To constitute a breach of [the implied covenant of good faith and fair dealing] the acts by which a defendant allegedly impedes the plaintiff's right to received benefits or that he or she reasonably expected to receive under the contract must have been taken in bad faith ․

Bad faith has been defined in our jurisprudence in various ways.   Bad faith in general implies both actual or constructive fraud, or design to mislead or deceive another, or neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties but by some interested or sinister motive ․ Bad faith means more than mere negligence;  it involves a dishonest purpose ․

Keller v. Beckenstein, 117 Conn.App. 550, 563-64, cert. denied, 294 Conn. 913 (2009).

There is no proof in this case that the Bank committed any fraud or acted out of any sinister motive.   It revealed the true state of Jenkins' delinquencies on his mortgages and acted appropriately to collect the debt owed to it.

As to defendant's count of a violation of CUTPA, there is no evidence that the Bank's conduct violated any public policy, as established by statutes or the common law, that it was immoral, unethical, oppressive or unscrupulous, or that it caused injury to the defendant.

Thus, plaintiff proved its cause of action as to liability on its foreclosure case and the defendant failed to prove its special defenses and counterclaims.   Judgment may enter for plaintiff on defendant's counterclaims.   Plaintiff may claim this matter for a hearing to obtain a judgment of foreclosure.

R. Satter, JTR

FOOTNOTES

FN1. Defendant Equine Homes Real Estate, LLC was defaulted for failure to appear and defendants Saddle River Partners I, LLC and CWBM, LLC filed answers to plaintiff's complaint but did not appear at trial or present any defense of this, action..  FN1. Defendant Equine Homes Real Estate, LLC was defaulted for failure to appear and defendants Saddle River Partners I, LLC and CWBM, LLC filed answers to plaintiff's complaint but did not appear at trial or present any defense of this, action.

Satter, Robert, J.T.R.