TD v. The Atrium Condominium Association, Inc. (2011)

RULING ON MOTION TO STRIKE SPECIAL DEFENSES

I

The issue presented in this action on two promissory notes is whether the court should grant the plaintiff's motion to strike the defendant's three special defenses.   For the reasons stated below, the court grants the motion to strike as to all three special defenses.

II. FACTS

On October 9, 2008, the plaintiff, TD Bank, N.A., filed a two-count complaint against the defendant, The Atrium Condominium Association, Inc., seeking to recover debts.   The plaintiff alleges in the first count that the defendant has defaulted on monthly payments for a note that was executed in 2005 and in the second count that the defendant has defaulted on monthly payments for a note that was executed in 2007.   The plaintiff alleges the following facts.   In 2004, the defendant executed a commercial promissory note in favor of Banknorth, N.A. or any subsequent holder in the amount of $145,000.   In 2005, the defendant refinanced the note together with an additional loan, increasing the principal amount to $225,000.   In 2007, the defendant executed a second commercial promissory note in favor of TD Banknorth, N.A. or any subsequent holder in the amount of $75,000.   The plaintiff is the holder of both notes and seeks to recover the outstanding principal as well as interest, charges, fees and costs for both notes.   Copies of the two notes are attached as exhibits A and B to the complaint.

On September 14, 2010, the defendant filed an answer.   The defendant admits, with regard to both counts, “that certain payments were not made” and denies or pleads insufficient knowledge with regard to the remaining allegations.   The defendant also raises three special defenses, in which it alleges the following common facts.   In 2005, a manager “seeking to act on behalf of the association” executed a commercial promissory note in favor of the plaintiff.   This note represented a refinance of an earlier note that was executed in 2004 and incorporated a commercial security agreement “by reference.”   In 2007, the manager executed a second promissory note in favor of the plaintiff which “referenced” an additional commercial security agreement.¹  The two security agreements assign past, present. and future income, including assessments, and waive notice to the association and its unit owners.²

The first special defense further alleges that the notes and security agreements are void and unenforceable pursuant to General Statutes §§ 42a-3-305(a)(1) and 47-244(a)(14) because they were executed by the manager, who was not authorized by the unit owners to assign future income and common expense assessments.   The second special defense further alleges that the notes and security agreements are void and unenforceable because eighty percent of the unit owners did not approve of the encumbering of common elements as required by General Statutes § 47-254.   The third special defense further alleges that the court should exercise its equitable power to void or reduce any alleged debt based on the allegations of the previous special defenses.

On September 23, 2010, the plaintiff filed a motion to strike the special defenses on the ground that they “are not legally sustainable.”   The motion was accompanied by a memorandum of law.   On October 20, 2010, the defendant filed a memorandum of law in opposition to the motion to strike.

III. DISCUSSION

A.

“Whenever any party wishes to contest ․ (5) 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, that party may do so by filing a motion to strike the contested pleading or part thereof.”  Practice Book § 10-39(a).  “[A] plaintiff can [move to strike] a special defense ․” Nowak v. Nowak, 175 Conn. 112, 116, 394 A.2d 716 (1978).  “In ․ ruling on [a] ․ motion to strike, the trial court [recognizes] its obligation to take the facts to be those alleged in the special defenses and to construe the defenses in the manner most favorable to sustaining their legal sufficiency.”   Connecticut National Bank v. Douglas, 221 Conn. 530, 536, 606 A.2d 684 (1992).

“It is well established that a motion to strike must be considered within the confines of the pleadings and not external documents ․” Zirinsky v. Zirinsky, 87 Conn.App. 257, 268 n.9, 865 A.2d 488, cert. denied, 273 Conn. 916, 871 A.2d 372 (2005).  “Each pleading shall contain a plain and concise statement of the material facts on which the pleader relies ․” Practice Book 10-1.  “A motion to strike is properly granted if the [special defense] 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).

B. First Special Defense

In its first special defense, in addition to the facts previously recited, the defendant further alleges that the notes and security agreements are void and unenforceable pursuant to General Statutes § 42a-3-305(a)(1) ³ and General Statutes § 47-244(a)(14).⁴  Specifically, the defendant alleges that the manager who entered into the notes and security agreements was not authorized by the unit owners or the declaration to assign future income and assessments “as required by [General Statutes § 47-244(a)(14) ],” and there is “no other basis” for such authority.   In support of its motion to strike, the plaintiff argues that even if, under § 47-244(a)(14), the manager could not execute the security agreements without express authorization, “the same is not true” of his right to execute the notes.   The plaintiff further contends that General Statutes § 47-244(a)(5) ⁵ authorizes associations to “make contracts and incur liabilities” and that, because the defendant has not alleged that the declaration precludes the manager from such an exercise, the special defense should be stricken.

“[An] association ․ may ․ (5) make contracts and incur liabilities.”   General Statutes § 47-244(a)(5).  “[T]he executive board may act in all instances on behalf of the association.”  General Statutes § 47-245(a).   “The bylaws of the association shall provide for ․ (4) which, if any, of its powers the executive board or officers may delegate to other persons or to a managing agent.”   General Statutes (Rev.2009) § 47-248(a).

As a preliminary matter, it is noted that the plaintiff brings this action based on two promissory notes, but the defendant, by way of its first special defense, raises an issue regarding related security agreements.   The gravamen of the defense is that certain deficiencies fatally invalidate the security agreements, that the security agreements are incorporated into the notes by reference and, accordingly, the notes are invalid as well.   This begs the question of whether invalidation of the security agreements would also invalidate the promissory notes.   In other words, the court must determine whether the defendant's liability on the notes is conditioned on the validity of the referenced security agreements.

“ ‘[N]egotiable instrument’ means an unconditional promise or order to pay a fixed amount of money ․” General Statutes § 42a-3-104(a).  “ ‘Instrument’ means a negotiable instrument.”  General Statutes § 42a-3-104(b).  “An instrument is a ‘note’ if it is a promise ․” General Statutes § 42a-3-104(e).  “[A] negotiable instrument must contain an unconditional promise or order to pay a sum certain ․” (Internal quotation marks omitted.)   Connecticut National Bank v. Douglas, 221 Conn. 530, 542-43, 606 A.2d 684 (1992).  “[A] promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing, or (iii) that rights or obligations with respect to the promise or order are stated in another writing.   A reference to another writing does not of itself make the promise or order conditional. (b) A promise or order is not made conditional (i) by a reference to another writing for a statement of rights with respect to collateral ․” (Emphasis added.)   General Statutes § 42a-3-106.

The first special defense asserts that the notes are void because they referenced security agreements that, in violation of § 47-244(a)(14), make assignments of future income and common expense assessments.   The legal conclusion that the notes are void is not supported, however, by the well-pleaded facts.   In order to demonstrate that any taint impugning the security agreements would reach to the notes at issue, the defendant must plead facts which, if proven, would demonstrate that the notes are conditional.   The defendant, however, alleges only that the 2005 note incorporates a commercial security agreement “by reference” and that the 2007 note “referenced” a second commercial security agreement.   Indeed, the notes, which are made part of the complaint as exhibits;  see Practice Book § 10-29;  both include provisions stating that they are secured by collateral described in separate security agreements.  Section 42a-3-106(b) specifically provides that such reference to another writing for a statement of rights with respect to collateral does not make a promise to pay conditional.   Moreover, the defendant does not allege any facts indicating that the notes themselves state (1) an express condition to payment;  (2) that the promise to pay is subject to or governed by another writing, or (3) that rights or obligations with respect to the promise to pay are stated in another writing.   An examination of the notes attached to the complaint reveals no such provisions.   Because the defendant's unsupported conclusion that the notes are void is unsupported by facts sufficient to establish that the defendant's promise to pay was conditional pursuant to § 42a-3-106, and because the defendant has not pleaded facts that would demonstrate that the manager could not make contracts and incur liabilities on behalf of the association as permitted by § 47-244(a)(5), the plaintiff's motion to strike is granted as to the first special defense.

C. Second Special Defense

In its second special defense, in addition to facts previously recited, the defendant further alleges that the notes and security agreements are void and unenforceable pursuant to General Statutes § 47-254 ⁶ on the ground that the association did not, by approval of a requisite eighty percent of unit owners, approve of encumbering the common elements.   The plaintiff argues that this allegation is “wrong” for two reasons:  the plaintiff has not obtained an encumbrance against the defendants' common elements and, even if the collateral security agreements did provide for an encumbrance without proper authorization, such an error would only taint the security agreements but not the notes.   Both parties refer the court to the aforementioned security agreements in support of their opposing conclusions as to whether common elements have been encumbered.

The court is not permitted to consider the text of these agreements, though, because they are not part of the pleadings.   See note 2 of this memorandum.   Nevertheless, even if the court could consider the agreements, such an exercise would be irrelevant to the present motion because as previously stated with regard to the first special defense, a promissory note's mere reference to a separate security agreement does not make the validity of the security agreement a condition for enforcement of the note.   Thus, even if the alleged security agreements are invalid, the defendant has failed to plead facts sufficient to demonstrate that their invalidity renders the notes unenforceable.   Moreover, the defendant's legal conclusion that such an encumbrance has been obtained is insufficient to support the special defense in the absence of any supporting facts.   Accordingly, the plaintiff's motion to strike is granted as to the second special defense.

D. Third Special Defense

In its third special defense, based on facts previously recited, the defendant seeks “a determination that the alleged debt is void or at least ․ an equitable reduction in the amount claimed due.”   The defendant cites Olean v. Tregalia, 190 Conn. 756, 770, 463 A.2d 242 (1983), for the proposition that “equity may afford relief to a debtor on a note.”   The plaintiff argues that the defense should be stricken because it is based on the first and second special defenses, which are invalid, and because the defendant has not otherwise alleged any wrongdoing to justify a reduction.

“A motion to strike admits all facts well pleaded;  it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings.”   (Emphasis in original;  internal quotation marks omitted.)  Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997).   The defendant alleges it is entitled to a reduction by exercise of the court's equitable powers, but this legal conclusion is not supported by any well-pleaded facts.   The remainder of the allegations have already been determined to be insufficient to state a special defense as set forth above.   Accordingly, the plaintiff's motion to strike is granted as to the third special defense.

CONCLUSION

For the foregoing reasons, the court grants the motion to strike as to all three special defenses.

Frechette, J.

FOOTNOTES

FN1. By the defendant's accounting, the principal amounts of the September 30, 2005 and June 7, 2007 notes were $145,000 and $225,000, respectively, in contrast to the plaintiff's accounting of $225,000 and $75,000, respectively.   This discrepancy, however, has not been raised as an issue by either party..  FN1. By the defendant's accounting, the principal amounts of the September 30, 2005 and June 7, 2007 notes were $145,000 and $225,000, respectively, in contrast to the plaintiff's accounting of $225,000 and $75,000, respectively.   This discrepancy, however, has not been raised as an issue by either party.

FN2. The alleged security agreements, although mentioned in the special defenses, have not been attached or made exhibits thereto.   See Practice Book § 10-29..  FN2. The alleged security agreements, although mentioned in the special defenses, have not been attached or made exhibits thereto.   See Practice Book § 10-29.

FN3. The defendant cites to “ § 42a-3-305(1),” likely referring to § 42a-3-305(a)(1), which provides in relevant part:  “Except as stated ․ the right to enforce the obligation of a party to pay an instrument is subject to the following:  (1)[a]defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings.”.  FN3. The defendant cites to “ § 42a-3-305(1),” likely referring to § 42a-3-305(a)(1), which provides in relevant part:  “Except as stated ․ the right to enforce the obligation of a party to pay an instrument is subject to the following:  (1)[a]defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings.”

FN4. Public Acts 2009, No. 09-225, § 20 amended § 47-244(a)(14) effective July 1, 2010.   The special defense, filed on September 14, 2010, cites to the current enactment of § 47-244(a)(14) but relies on its former language, which prohibited associations from pledging future income unless expressly authorized to do so by their declarations.   General Statutes (Rev. to 2009) § 47-244(a)(14) provides:  “[T]he association ․ may ․ (14)[a]ssign its right to future income, including the right to receive common expense assessments, but only to the extent the declaration expressly so provides.”.  FN4. Public Acts 2009, No. 09-225, § 20 amended § 47-244(a)(14) effective July 1, 2010.   The special defense, filed on September 14, 2010, cites to the current enactment of § 47-244(a)(14) but relies on its former language, which prohibited associations from pledging future income unless expressly authorized to do so by their declarations.   General Statutes (Rev. to 2009) § 47-244(a)(14) provides:  “[T]he association ․ may ․ (14)[a]ssign its right to future income, including the right to receive common expense assessments, but only to the extent the declaration expressly so provides.”

FN5. General Statutes § 47-244(a) provides in relevant part:  “[An] association ․ may ․ (5)[m]ake contracts and incur liabilities.”.  FN5. General Statutes § 47-244(a) provides in relevant part:  “[An] association ․ may ․ (5)[m]ake contracts and incur liabilities.”

FN6. The defendant first cited to General Statutes § 47-454, which does not exist, but corrected the typo in its memorandum in opposition, citing § 47-254 which provides, in relevant part:  “(a) In a condominium or planned community, portions of the common elements may be conveyed or subjected to a security interest by the association if persons entitled to cast at least eighty percent of the votes in the association ․ agree to that action ․ (e) Unless made pursuant to this section, any purported conveyance, encumbrance, judicial sale or other voluntary transfer of common elements ․ is void.”.  FN6. The defendant first cited to General Statutes § 47-454, which does not exist, but corrected the typo in its memorandum in opposition, citing § 47-254 which provides, in relevant part:  “(a) In a condominium or planned community, portions of the common elements may be conveyed or subjected to a security interest by the association if persons entitled to cast at least eighty percent of the votes in the association ․ agree to that action ․ (e) Unless made pursuant to this section, any purported conveyance, encumbrance, judicial sale or other voluntary transfer of common elements ․ is void.”

Frechette, Matthew E., J.