TD v. LLC (2011)

MEMORANDUM OF DECISION RE MOTION TO STRIKE (# 117)

Facts and Procedural History

The present motion arises from a foreclosure action brought by the plaintiff, TD Bank, N.A., against the defendants, M.J. Holdings LLC, PJL Realty LLC, Mountain Top LLC, and Debra and Pierce Hall. The plaintiff seeks to foreclose on two construction mortgages guaranteed by the defendants.   In the first promissory note, dated April 5, 2004, M.J. Holdings promised to pay the plaintiff the principal sum of $970,000.   To secure the note, M.J. Holdings, by its April 5, 2004 mortgage deed and security agreement, mortgaged its interest in property located at 125, 139, 141 and 143 Shaw Street, New London, Connecticut, to the plaintiff.   In the second promissory note, dated April 27, 2005, Mountain Top promised to pay the plaintiff a principal sum of $920,000.   To secure the note, Mountain Top, by its April 27, 2005 mortgage deed and security agreement, mortgaged its interest in property located at 156 Summit Street and 106 Summit Street rear in Norwich, Connecticut, to the plaintiff.   Additional facts will be set forth as needed.

The plaintiff's revised complaint, filed June 11, 2010, is the operative complaint.   In its complaint, the plaintiff alleges that the defendants have defaulted on both mortgages.   On August 4, 2010, the defendants filed an answer to the plaintiff's revised complaint, which includes several special defenses and counterclaims.   In response, the plaintiff filed a motion to strike the defendants' special defenses and counterclaims on August 19, 2010.¹  The defendants filed their objection on September 20, 2010.

Discussion

“The purpose of a motion to strike is to contest ․ the legal sufficiency of the allegations of any complaint ․ 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).  “In ruling on a motion to strike, the court is limited to the facts alleged in the complaint.”   (Internal quotation marks omitted.)  Faulkner v. United Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997).  “If any facts provable under the express and implied allegations in the plaintiff's complaint support a cause of action ․ the complaint is not vulnerable to a motion to strike.”  Bouchard v. People's Bank, 219 Conn. 465, 471, 594 A.2d 1 (1991).   The plaintiff argues that the defendants' special defenses and counterclaims should be stricken because they do not address the creation, validity or enforcement of the note and mortgage being foreclosed.

In Bank of America, N.A. v. Groton Estates, LLC, Superior Court, judicial district of New London, Docket No. CV 09 6001697 (July 13, 2010, Devine, J.), this court addressed the plaintiff lender's argument that the special defenses and counterclaims of the defendants borrowers, failed as a matter of law because they did not go to the making, validity or enforcement of the note or the mortgage.   Although this court ultimately granted the plaintiff's motion to strike in its entirety, it acknowledged the following.  “[A]llowing a defendant to craft a defense that is based on facts associated with the mortgagee's post-execution behavior is not inimical to the requirement that a special defense in a foreclosure action relate to the making, validity or enforcement of the note or mortgage.   Such behavior of the mortgagee throughout the course of the relationship may be directly related to the enforcement of the note or mortgage.   That is, given an appropriate factual predicate, the court may conclude that it would be inequitable to allow enforcement in light of the mortgagee's behavior.”  (Emphasis added;  internal quotation marks omitted.)   Id. In light of this principle, the court will specifically address the legal sufficiency of each of the defendants' special defenses and counterclaims.

First Special Defense Lack of Consideration

The defendants' first special defense states that:  “The subject guaranties fail due to the absence of adequate consideration.”   This court has previously acknowledged that lack of consideration is a recognized defense to a foreclosure action.   While, “[l]ack of consideration is on its face a valid defense in a foreclosure action ․ a special defense must plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action.”  (Citations omitted;  internal quotation marks omitted.)   PHH Mortgage Corp. v. Traylor, Superior Court, judicial district of New London, Docket No. CV 07 5004315 (November 13, 2008, Martin, J.).   Moreover, “[a] complaint includes all exhibits attached thereto.”  (Internal quotation marks omitted.)  Tracy v. New Milford Public Schools, 101 Conn.App. 560, 566, 922 A.2d 280, cert. denied, 284 Conn. 910, 931 A.2d 935 (2007).

The court notes that the defendants have previously raised this exact special defense in the matter of TD Bank, N.A. v. J & M Holdings, LLC, Superior Court, judicial district of Windham, Docket No. CV 10 6001479 (November 29, 2010, Potter, J.T.R.).   In that case, the plaintiff similarly argued that the special defense alleging lack of consideration was legally insufficient because it was inconsistent with the allegations of the complaint.   The plaintiff contended that the consideration the defendants received for the guarantees was specifically set forth in the revised amended complaint, as well as in the guarantees attached to the complaint.

The court, in striking the special defense, agreed with the plaintiff that the loan documents attached to and incorporated by the complaint demonstrated that the defendants signed the guarantee agreements to induce the plaintiff to make the construction mortgage loans.   The court reasoned “because such a defense alleges facts that differ from those contained in the plaintiff's complaint, it is more properly raised as a special denial rather than as a special defense ․ Furthermore, this special defense is conclusory, and does not demonstrate that the plaintiff has no cause of action.”  (Citation omitted;  internal quotation marks omitted.)  Id.

Likewise, in the present case, the defendants' allegations are in direct conflict with the plaintiff's complaint.   Attached to and specifically incorporated into the plaintiff's complaint are the promissory notes, mortgage deeds, and security agreements executed by the parties.   The promissory note states:  “For value received, the undersigned, M.J. Holdings LLC ․ does hereby promise to pay to the order of Banknorth, N.A.² ․ the principal sum of $970,000 ․” The payment and completion guaranty agreements, executed by Debra and Pierce Hall, respectively, state:  “The undersigned ․ is executing this payment and completion guaranty agreement to induce Banknorth ․ to make a mortgage loan in the amount of $970,000 ․ to M.J. Holdings LLC ․” ³ In light of these documents, the court concludes that the defendants' first special defense should be stricken.

Second & Fourth Special Defenses Equitable Estoppel

The defendants' second special defense states that:  “On or about July 17, 2009, the defendant M.J. Holdings ․ sold certain property located at 125 Shaw Street, New London, Connecticut to an entity known as PJL Realty, LLC for the sum of $800,000 ․ It was the belief of M.J. and the other defendants that in July 2009 the value of the New London property was well in excess of $800,000.   However, M.J. agreed to sell the New London property based upon the promise of the plaintiff that if the sale were allowed to proceed and the plaintiff was provided with all of the net proceeds, it would modify certain of the defendants' loans, including those made on the basis of the current foreclosure.   The defendants were all beneficiaries of the promised loan modifications ․ Specifically, the plaintiff agreed to modify the loans to interest only, which would have reduced the defendants' monthly debt and allowed it to remain current on all its loan obligations ․ M.J. only agreed to the sale at the reduced price based on the benefit it and other defendants were to receive in the form of loan modifications ․ The sale was conducted on July 17, 2009, and the full amount of the sale proceeds, $687,637.17, was forwarded to, and accepted by the plaintiff ․ The plaintiff thereafter breached its agreement with M.J. and failed and refused to restructure or modify the loans ․ The court should use its equitable power to prevent the plaintiff from foreclosing as a result of its actions.”

The defendants' fourth special defense incorporates the allegations of the second special defense and states:  “Due to its actions, the plaintiff should be equitably estopped from foreclosing on this property.”   As the second and fourth special defenses appear to raise equitable estoppel as a defense to this foreclosure action, the court will address them together.⁴

“The standards governing the application of equitable estoppel are well established.   There are two essential elements to an estoppel-the party must do or say something that is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief and the other party, influenced thereby, must actually change his position or do some act to his injury which he otherwise would not have done ․ As a general rule ․ a representation or assurance, in order to furnish the basis of an estoppel, must relate to some present or past fact or state of things, as distinguished from mere promises or statements as to the future.   The misrepresentation must be one of fact and not of intention to support equitable estoppel.”  (Citation omitted;  internal quotation marks omitted.)  Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697.

In Liberty Bank v. New London Limited Partnership, Superior Court, judicial district of New London, Docket No. 4005236 (May 1, 2007, Devine, J.) (43 Conn. L. Rptr. 326, 328-29), this court found that there was a genuine issue of material fact in regard to the defendant's equitable estoppel defense.  “The plaintiff's consistent pattern of accepting late payments without protest, combined with the surrounding circumstances, provided evidence of conduct that may have induced the defendants to believe in the existence of certain facts, i.e., that the plaintiff would continue its collection of the debt in accordance with established past practice.   In other words, based on the course of the relationship, the defendants may have reasonably been led to believe that, absent some type of notice to the contrary, the plaintiff would continue to be satisfied with accepting a late payment along with a late fee.”  Id., 329.

In Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697, however, this court struck the defendants' equitable estoppel defense because they failed to allege that the plaintiff intended or calculated to induce them to believe in certain facts.   The defendants alleged that the plaintiff's agent misrepresented that a work-out of the outstanding debt service could be attained and advised Groton Estates to hold funds until further instructions, which were never given.   This court found these allegations distinguishable from those before this court in Liberty Bank, where lender engaged in a pattern of behavior, acceptance of late payments, upon which the defendants reasonably relied to their detriment.   This court reasoned:  “At best, the defendants here allege that the plaintiff made a future promise to work out the outstanding debt with them.   This allegation is legally insufficient as it constitutes a mere promise regarding the plaintiff's actions at a future time, which is an insufficient basis for an equitable estoppel defense.”  Id.

Similarly, in the present case, the defendants allege that they agreed to sell the New London property “based upon the promise of the plaintiff that if the sale were allowed to proceed and the plaintiff was provided with all of the net proceeds, it would modify certain of the defendants' loans, including those made on the basis of the current foreclosure.”   The plaintiff's alleged promise to modify the loan is legally insufficient because it constitutes a mere promise regarding the plaintiff's actions at a future time, which is an insufficient basis for an equitable estoppel defense.   As such, the court grants the plaintiff's motion as to the defendants' second and fourth special defenses.

Third Special Defense Breach of Covenant of Good Faith and Fair Dealing

The third special defense incorporates the allegations of the second special defense and states that:  “The actions of the plaintiff ․ constitutes a breach of the implied covenant of good faith and fair dealings made a part of all contracts in Connecticut.”   In Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697, this court struck the defendants' claims of breach of fiduciary duty and breach of the duty of good faith and fair dealing.   This court concluded that “[t]he plaintiff's refusal ․ to negotiate a loan modification with the defendants and instead, proceed with this foreclosure action, does not rise to the level of breach of these duties.”   Id.

In doing so, this court looked to the Appellate Court's decision in Southbridge Associates v. Garofalo, 53 Conn.App. 11, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999).   In that decision, the court stated:  “The implied covenant of good faith and fair dealing requires faithfulness to an agreed common purpose and consistency with the justified expectation of the other party in the performance of every contract ․ Essentially, it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended.   The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy ․ The loan documents do not contain a provision requiring a holder of the notes and mortgages to negotiate with or sell the notes to [the defendants] prior to enforcing its foreclosure rights.   Moreover, the defendants do not cite nor can we find any authority requiring a holder of a note and mortgage to sell them at a discount to the mortgagor under an implied covenant of good faith and fair dealing when the mortgagor defaults.”   (Citations omitted;  internal quotation marks omitted.)  Id., 16-17.

In reliance upon Southbridge Associates v. Garofalo and several Superior Court decisions, this court concluded that:  “It is not a breach of the implied covenant of good faith and fair dealing, nor is it unconscionable, for a plaintiff to insist upon a legal or equitable remedy by resorting to the judicial process ․ In the absence of a restructure agreement in the loan documents, a failure by the [lender] to attempt to negotiate or restructure the terms of the loan after default, and then seeking foreclosure, does not constitute a breach of the implied covenant of good faith and fair dealing.”   (Internal quotation marks omitted.)  Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697.   Similarly, in the present case, the court is satisfied that the defendants' third special defense should be stricken.   The plaintiff's alleged breach of a promise to modify the terms of the mortgage does not rise to the level of breach of the duty of good faith and fair dealing.

First Counterclaim Damages

In its first counterclaim, the defendants recite the allegations contained in its special defenses and claim that “[a]s a result of TD's breach ․ [they] have sustained damages.”   In Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697, this court stated:  “In a foreclosure action, a counterclaim must relate to the making, validity or enforcement of the mortgage note in order to be joined with the complaint ․ This requirement ․ is nothing more than an application of Practice Book § 10-10 ․ [Section] 10-10 provides that [i]n any action for legal or equitable relief, any defendant may file counterclaims against any plaintiff ․ provided that each such counterclaim ․ arises out of the transaction or one of the transactions which is the subject of the plaintiffs complaint ․ In a foreclosure action, the relevant factors for a court to consider in determining whether the [aforementioned] ‘transaction test’ has been met by the counterclaim includes:  (1) whether the counterclaim is based on factors outside of the note or mortgage;  (2) whether different issues of fact and law are presented by the complaint and counterclaim;  and (3) whether separate trials would involve a substantial duplication of effort.”  (Citation omitted;  internal quotation marks omitted).  Id.

“[S]ection [10-10] is a common-sense rule designed to permit the joinder of closely related claims where such joinder is in the best interests of judicial economy.”  (Internal quotation marks omitted.)   JP Morgan Chase Bank Trustee v. Rodrigues, 109 Conn.App. 125, 131, 952 A.2d 56 (2008).  “Conduct on the part of the party seeking foreclosure that occurred after the loan documents were executed and not necessarily directly related solely to enforcement of the note ․ properly has been found not to arise out of the same transaction as the complaint.”  Id., 134-35.

Here, the defendants' counterclaim is based on an alleged promise made by the plaintiff that was separate from the subject matter of the plaintiff's complaint, which is the rights and obligations of the parties under the note and mortgage.   As such, the court strikes the defendants' first counterclaim.

Second Counterclaim Violation of CUTPA

In their second counterclaim, the defendants incorporate the allegations of the first counterclaim and allege:  “The actions of TD ․ constitute a violation of the Connecticut Unfair Trade Practices Act (“CUTPA”) ․ in that TD's actions are morally unscrupulous, coercive, offend public policy and are unfair ․” “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 federal trade commission 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 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 [competitors or other businessmen] ․ 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 ․ 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 ․ Furthermore, a party need not prove an intent to deceive to prevail under CUTPA.”  (Internal quotation marks omitted.)  Id.

This court, Devine, J., previously held that “[a] simple breach of contract does not offend traditional notions of fairness and, standing alone, does not offend public policy so as to invoke CUTPA.   A CUTPA claim lies where the facts alleged support a claim for more than a mere breach of contract ․ That generally is so when the aggravating factors present constitute more than a failure to deliver on a promise.”  (Citation omitted.)  Greene v. Orsini, 50 Conn.Sup. 312, 315, 926 A.2d 708 (2007).   Moreover, in Bank of America, N.A. v. Groton Estates, LLC, supra, Docket No. CV 09 6001697, this court struck the defendants' counterclaim alleging violation of CUTPA finding that:  “[T]he plaintiff's conduct, in refusing to negotiate with the defendants and proceeding to foreclosure, simply does not rise to the level of a violation of CUTPA.”

Because the defendants claim only that the plaintiff breached an alleged promise to modify their loan, the court strikes the defendants' second counterclaim.   The court is satisfied that this allegation constitutes no more than a failure to deliver on a promise.   Additionally, the plaintiff's alleged refusal to negotiate with the defendants simply does not rise to the level of a CUTPA violation.

Order

For all of the foregoing reasons, it is hereby ordered that the plaintiff's motion to strike is granted in its entirety.

Devine, J.

FOOTNOTES

FN1. On August 31, 2010, the plaintiff filed a supplemental motion to strike because one of the defendants, Mountain Top, was excluded in its August 19, 2010 motion..  FN1. On August 31, 2010, the plaintiff filed a supplemental motion to strike because one of the defendants, Mountain Top, was excluded in its August 19, 2010 motion.

FN2. Banknorth is the plaintiff's predecessor in interest..  FN2. Banknorth is the plaintiff's predecessor in interest.

FN3. The Windham action also quoted the guarantees signed by Debra and Pierce Hall, which stated:  “The undersigned ․ is executing this Payment and Completion Guaranty Agreement to induce TD Banknorth, N.A (‘Lender’) to make a construction mortgage loan ․” The court notes that the language of the guarantees in both actions is identical..  FN3. The Windham action also quoted the guarantees signed by Debra and Pierce Hall, which stated:  “The undersigned ․ is executing this Payment and Completion Guaranty Agreement to induce TD Banknorth, N.A (‘Lender’) to make a construction mortgage loan ․” The court notes that the language of the guarantees in both actions is identical.

FN4. The court notes that in TD Bank, N.A. v. J & M Holdings, LLC, supra, Docket No. CV 10 6001479, the defendants raised a special defense based on the same set of facts as is alleged in this action.   Specifically, the court reiterated the following allegations of the defendants.  “On or about July 17, 2009, [they] sold certain property located at 125 Shaw Street, New London, Connecticut to an entity known as PJL Realty, LLC for the sum of $800,000 ․ The defendants ․ believed the property was worth well in excess of $800,000 but agreed to the sale, based on the plaintiff's promise to modify the loans to interest only which would have ․ allowed them to remain current on all loan obligations.   The plaintiff accepted the sale proceeds of $687,637.17, and thereafter, breached its agreement ․ and failed and refused to restructure or modify the loans, to the detriment of ․ the defendants.”  Id. The court addressed the special defense as one of “modification” and ultimately, struck it..  FN4. The court notes that in TD Bank, N.A. v. J & M Holdings, LLC, supra, Docket No. CV 10 6001479, the defendants raised a special defense based on the same set of facts as is alleged in this action.   Specifically, the court reiterated the following allegations of the defendants.  “On or about July 17, 2009, [they] sold certain property located at 125 Shaw Street, New London, Connecticut to an entity known as PJL Realty, LLC for the sum of $800,000 ․ The defendants ․ believed the property was worth well in excess of $800,000 but agreed to the sale, based on the plaintiff's promise to modify the loans to interest only which would have ․ allowed them to remain current on all loan obligations.   The plaintiff accepted the sale proceeds of $687,637.17, and thereafter, breached its agreement ․ and failed and refused to restructure or modify the loans, to the detriment of ․ the defendants.”  Id. The court addressed the special defense as one of “modification” and ultimately, struck it.

Devine, James J., J.