PLC v. LLC (2011)

MEMORANDUM OF DECISION ON MOTION TO DISMISS AND MOTION TO STRIKE

The plaintiff, Royal Bank of Scotland, PLC (“RBS”) has moved to dismiss, and, alternatively, to strike the counterclaims and has moved to strike the special defenses in this commercial foreclosure action.

Factual and Procedural Background.

By complaint dated January 19, 2010 RBS has alleged that the defendant, Lexham Farmington I, LLC (Lexham), a Delaware limited liability company with an address at 274 Riverside Avenue, Westport, Connecticut, executed a Promissory Note dated January 3, 2008, in the original principal amount of $16,250,000 in favor of Greenwich Capital Financial Products, Inc. (“Greenwich”), the plaintiff's assignor.   The complaint further alleges that Lexham and Greenwich entered into a Loan Agreement dated January 3, 2008, which is appended to the complaint as Exhibit 2. Lexham has admitted the foregoing allegations.

Lexham has also admitted that as partial security for repayment of the Note, it executed an Open–End Mortgage, Assignment of Leases and Rents and Security Agreement dated January 3, 2008 on certain improved real property:  10–50 Stanford Drive, 195 Farmington Avenue and 2 Batterson Park Road, all in Farmington, Connecticut (“Mortgaged Property”).

The complaint further alleges that Lexham has defaulted on its obligations under the Note, Mortgage, Loan Agreement and other loan documents by, inter alia, failing to pay monthly interest, failing to make deposits into the Tax and Insurance Subaccount, Capital Reserve Subaccount, Rollover Reserve Subaccount, Operating Expense Subaccount and by failing to pay Security Deposits upon the Lender's request.   Lexham has denied the allegations of default.

On September 17, 2010, Lexham filed an answer, special defenses and counterclaims.   In the counterclaims Lexham alleges that it raised $6,500,000 from investors and $500,000 of its own funds to invest in the Mortgaged Property.   It further alleges that on January 2, 2008 Lexham and Greenwich executed a side letter which allowed Greenwich to increase the interest rate on the loan on or before September 1, 2008.   Lexham further alleges that on May 16, 2008, Greenwich assigned its right, title and interest in the loan to plaintiff RBS. On October 27, 2008, RBS attempted to increase the interest rate on the loan.

The counterclaim alleges that Lexham challenged the attempt by RBS to increase the interest rate on the loan by filing suit against RBS in the Supreme Court of the State of New York. The New York Court ruled that RBS had not timely exercised its rights to increase the interest rate of the loan and “warned RBS that if it exercise its rights under the lock box agreement and swept the income from the subject real property that it would essentially wrongfully put the defendant out of business.”   Counterclaim ¶ 11.   The counterclaim further alleges that RBS exercised its rights under the lock box agreement to control all funds generated by the mortgaged properties and effective February 13, 2009, RBS controlled the use and disposition of all rents, revenues and income from the Mortgaged Property.

The first count of the counterclaim seeks a declaratory judgment that the plaintiff has failed to properly apply the lock box sums, an accounting and an injunction.   The second count of the counterclaim alleges that the RBS conduct with respect to the lock box agreement and application of the income constitutes tortious interference with Lexham's contracts with its tenants.   The third count of the counterclaim alleges a breach of the covenant of good faith and fair dealing.   The fourth count alleges a violation of CUTPA.

The Loan Agreement between Greenwich and Lexham includes the following language, which pertains to the motion to dismiss and the motion to strike under consideration:

10.6 Governing Law

(a) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK AND THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS CREATED PURSUANT TO THE LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE VALIDITY AND THE ENFORCE ABILITY OF ALL LOAN DOCUMENTS AND THE DEBT. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO § 5–1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

(b) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED IN ANY FEDERAL OR SATE COURT IN NEW YORK COUNTY, NEW YORK AND BORROWER WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING ․

10.15 Offsets, Counterclaims and Defenses.   Borrower hereby waives the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents, including Servicer, or otherwise offset any obligations to make payments required under the Loan Documents.   Any assignee of Lender's interest in and to the Loan Documents shall take the same free and clear of all offsets, counterclaims or defense which Borrower may otherwise have against any assignor of such documents, and not such offset counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents, and any such right to interpose or assert any such offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower ․

Emphasis added.

Discussion of the Law and Ruling

The plaintiff argues that the counterclaims should be dismissed because Lexham unequivocally agreed to the mandatory Forum Selection Clause establishing state or federal courts of New York as the exclusive forum for litigation of any dispute arising out of or related to the Loan Agreement.   That language is set forth above (10.6(b) Governing Law), and states:

ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN NEW YORK COUNTY, NEW YORK.

Under Practice Book § 10–31(a)(3) a motion to dismiss “shall be used to assert ․ improper venue.”  “[I]n ruling upon whether a complaint survives a motion to dismiss, a court must take the facts to be those alleged in the complaint including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader.”  Lawrence Brunoli v. Branford, 247 Conn. 407, 410–11, 722 A.2d 271 (1999).

Connecticut law is clear the “courts will uphold an agreement of the parties to the jurisdiction of a particular tribunal.”  Phoenix Leasing, Inc. v. Koskinski, 47 Conn.App. 650, 653, 707 A.2d 314 (1998), citing Fairfield Lease Corp. v. Romano's Auto Service, 4 Conn.App. 495, 498, 495 A.2d 286 (1985).   The Connecticut Supreme Court has adopted the holding of the United States Supreme Court that forum selection clauses are valid unless the party seeking to preclude enforcement can meet the heavy burden of showing that its enforcement would be unreasonable, unfair, or unjust.  Reiner, Reiner and Bendett, P.C. v. The Cadle Company, 278 Conn. 92, 101–02, 897 A.2d 58 (2006), citing Bremen v. Zapata Off–Shore Co., 407 U.S. 1 (1972).

The Court in Bremen elaborated on that heavy burden by enumerating “several factors that could result in a clause being held unenforceable, including fraud or overreaching in the contract negotiations, serious inconvenience from litigating in the selected forum, or the contravention of a strong public policy in the forum in which suit is brought if the clause is enforced.”   Reiner, Reiner and Bendett, P.C., supra at 102, n.8.

The Forum Selection Clause in the Loan Agreement was set forth in all capital letters.   The general allegations of the counterclaim allege that the defendant had negotiated the terms of the loan documents.   There has been no claim of disproportionate bargaining power or sophistication.   Since Lexham, itself, has previously instituted an action against the plaintiff in New York, it can hardly claim that a New York venue is inconvenient.

Lexham argues that the plaintiff has waived the Forum Selection Clause by bringing the foreclosure action in Connecticut.   However, the Loan Agreement has an express carve-out for actions to foreclose the mortgage securing the loan to Lexham:  “EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS CREATED PURSUANT TO THE LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROPERTY IS LOCATED ․”

A foreclosure action must be brought in the state in which the real property at issue is located 55 Am.Jur.2d Mortgages, § 582 (2010).   This principle is based on the “local action rule,” which provides that a “court may not exercise jurisdiction over any ‘local’ action involving real property unless the property at issue is found within the territorial boundaries of the state where the court is sitting.”  Corriveau v. Tier Technologies, Inc, 2002 WL 1603136, at 4* (D.Conn. July 12, 2002) (quoting Bigio v. Coca–Cola Co., 239 F.3d 440 (2d Cir.2001)).   The Connecticut Supreme Court has held that Connecticut is the only forum that can determine title to land in Connecticut.  Zartolas v. Nisenfeld, 184 Conn. 471, 475, 440 A.2d 179 (1981).

Lexham argues that the plaintiff could have brought the foreclosure action in a New York Court where the court would have applied Connecticut law.   It further argues that the plaintiff's commencement of the foreclosure action in Connecticut constitutes a waiver of the Forum Selection Clause requirement with respect to actions being brought in New York. The court cannot accept this argument.   The plaintiff had to commence the foreclosure in a Connecticut court because the Mortgaged Property is in Connecticut.   Moreover, the exception language in the forum selection clause specifically contemplates the foreclosure occurring in Connecticut (“pursuant to the law of the jurisdiction in which such property is located”).   Under Lexham's interpretation, that exception would be rendered a nullity.   A court should not adopt an interpretation which will operate to leave a provision of the contract without force and effect.  Laba v. Carey, 29 N.Y.2d 302, 308 (1971).   A contract should be construed so as to give full meaning and effect to all of its provisions.  William Raveis Real Estate, Inc. v. Newtown Group Properties Ltd. Partnership, 95 Conn.App. 772, 779, 898 A.2d 265 (2006).

When the language of Section 10.6 of the Loan Agreement is read logically it requires that all disputes be resolved in the court of New York, except as to actions against property securing the Loan, which must be brought in Connecticut, the location of the Mortgaged Property.

Lexham also argues that the Forum Selection Clause applies only where “a party to the contract has ‘instituted’ [a] ‘legal suit, action or proceeding’ “ and the filing of a counterclaim does not institute any legal proceeding.   Both the Connecticut and New York Courts characterize counterclaims as independent actions.  Valentine v. LaBow, 95 Conn.App. 436, 447 n.10, 897 A.2d 624, cert. denied, 280 Conn. 933, 909 A.2d 963 (2006);  Chase Manhattan Bank v. Douglas, 61 A.D.3d 1135, 1137, 2009 N.Y. Slip Op 02697, 877 N.Y.S.2d 488 [3d Dept 2009];  Maglich v. Saxe, Bacon, 97 A.D.2d 19, 24, 468 N.Y.S.2d 618 [1st Dept 1983].   When Lexham filed its counterclaims, therefore, it “instituted” an action against the plaintiff.   It agreed in the Loan Agreement that only the New York Courts had jurisdiction of such actions and has waived its rights to object to such jurisdiction.   See Loan Agreement § 10.6(b).

For the foregoing reasons, the Motion to Dismiss the counterclaims is granted.

The plaintiff has also moved to strike the special defenses on various grounds including the ground that Lexham has waived its rights to assert special defenses under Section 10.15 of the Loan Agreement set forth above.  “Under Connecticut law, a party to a contract may waive any defenses or rights it has against the other party to the contract, and such a waiver will be enforced it is clear and unambiguous.”  Albany Insurance Co. v. United Alarm Services, Inc., 194 F.Sup.2d 87, 91 (D.Conn.2002).   Clear and definitive contract language can establish waiver as a matter of law.  Connecticut National Bank v. Douglas, 221 Conn. 530, 545, 606 A.2d 684 (1992);  Red Tulip v. Neiva, 44 A.D.3d 204, 205, 2007 N.Y. Slip Op 06340, 842 N.Y.S.2d 1 [1st Dept 2007].

Lexham has clearly waived its rights to assert defenses to the foreclosure action and, therefore, the special defenses are ordered stricken.

By the court,

Aurigemma, J.

Aurigemma, Julia L., J.