LLC v. Value Property Management, Inc. et al. (2011)

MEMORANDUM OF DECISION

This is an action for declaratory judgment and foreclosure.   The matter was tried to the court on February 8, 2011, and post-hearing briefs were submitted thereafter.   The parties also agreed to the following stipulated facts;

STIPULATED FACTS

“The parties;  general background

1. The original lender was Robert J. Lapidus, founder of the Bob's Stores retail chain (the clothing stores, not the furniture stores).   Robert Lapidus died in May 2007.

2. Maple Falls is a Connecticut limited liability company owned by the Lapidus family and managed by David Lapidus, a son of the late Robert Lapidus.   Maple Falls is the owner and holder of the loan documents at issue in this case.   Documents evidencing the transfer of title of certain of the loan documents from Robert Lapidus to Maple Falls are Exhibit P–20.

3. VPM is a closely-held Connecticut corporation owned 50–50 by the defendants Kroeber and Marc Lapidus.

4. Kroeber was a long-time employee of Bob's Stores.   Marc Lapidus is a son of the late Robert Lapidus.

5. Marc Lapidus has not entered an appearance in this case.

The 1997 Demand Note

6. Robert Lapidus loaned the sum of $125,000.00 to Kroeber in 1997.   The debt is evidenced by a demand note dated February 26, 1997 (the “$125k Demand Note”;  Exhibit P–1).   This note provides for monthly payments of interest-only in the amount of $937.50.

The 2004 Transactions

7. On December 9, 2004, VPM owned the following twenty-eight (28) units in the Paddock Village Condominiums at 158 Paddock Avenue in Meriden, Connecticut (“Condo Units”):  102;  103;  104;  106;  202;  205;  206;  301;  303;  304;  305;  306;  502;  503;  504;  506;  602;  604;  1802;  1902;  1903;  1904;  1905;  2001;  2004;  2101;  2102;  and 2104.

8. On that date, Robert Lapidus made three (3) loans (collectively, the “Mortgage Loans”) to VPM and its principals, secured by mortgages on the Condo Units.

9. The first Mortgage Loan is evidenced by a Commercial Promissory Note from VPM, dated December 9, 2004, in the amount of $1,150,000.00 (“First Mortgage Note”;  Exhibit P–2).   The First Mortgage Note provides for monthly installment payments in the amount of $5,958.66.

10. VPM secured the First Mortgage Note with a first-position mortgage (“First Mortgage”;  Exhibit P–3) on the Condo Units.

11. The First Mortgage provides, at section 1.7, that upon the sale of a Condo Unit, VPM shall pay the sum of $41,072.00 toward the principal balance of the First Mortgage Note, and the mortgagee shall provide a partial release of the First Mortgage.

12. To further secure the debt evidenced by the First Mortgage Note, VPM executed a Security Agreement (“VPM Security Agreement”) in favor of Robert Lapidus, and thereby granted Robert Lapidus a security interest in the personal properties and fixtures contained in and attached to the condominium units among the VPM Original Mortgaged Property.   Robert Lapidus perfected his security interest in said personal properties and fixtures by a UCC–1 financing statement recorded in Volume 3465 at Page 062 of the Meriden Land Records (“VPM Financing Statement”).   Copies of the VPM Security Agreement and VPM Financing Statement collectively are Exhibit P–21.

13. The second Mortgage Loan is evidenced by a Commercial Promissory Note from Marc Lapidus, dated December 9, 2004, in the amount of $681,000.00 (“$681k Lapidus Note”;  Exhibit P–4).   The $681k Lapidus Note provides for monthly installment payments in the amount of $3,528.56.

14. VPM endorsed the $681k Lapidus Note as guarantor, and secured the guaranty with a second-position mortgage (“Second Mortgage”;  Exhibit P–5) on the Condo Units.

15. The Second Mortgage provides, at section 1.7, that upon the sale of a Condo Unit, VPM shall pay the sum of $24,322.00 toward the principal balance of the $681k Lapidus Note, and the mortgagee shall provide a partial release of the Second Mortgage.

16. To further secure the debt evidenced by the $681k Lapidus Note, Marc Lapidus executed a Security Agreement (the “Marc Lapidus Security Agreement”), dated December 9, 2004, and thereby granted Robert Lapidus a security interest in Marc Lapidus's ownership of 500 shares of the common stock of VPM (“Marc Lapidus VPM Stock”).   Robert Lapidus perfected his security interest in the Marc Lapidus VPM Stock by a UCC–1 financing statement (“Marc Lapidus Financing Statement”) recorded in the office of the Connecticut Secretary of the State.   Copies of the Marc Lapidus Security Agreement and Marc Lapidus Financing Statement collectively are Exhibit P–22.

17. The third Mortgage Loan is evidenced by a Commercial Promissory Note from Kroeber, dated December 9, 2004, in the amount of $681,000.00 (“$681k Kroeber Note”;  Exhibit P–6).   The $681k Kroeber Note provides for monthly installment payments in the amount of $3,528.56.

18. VPM endorsed the $681k Kroeber Note as guarantor, and secured the guaranty with a third-position mortgage (“Third Mortgage”;  Exhibit P–7) on the Condo Units.

19. The Third Mortgage provides, at section 1.7, that upon the sale of a Condo Unit, VPM shall pay the sum of $24,322.00 toward the principal balance of the $681k Kroeber Note, and the mortgagee shall provide a partial release of the Third Mortgage.

20. To further secure the debt evidenced by the $681,000.00 Kroeber Note, Kroeber executed a Security Agreement (the “Kroeber Security Agreement”), dated December 9, 2004, and thereby granted Robert Lapidus a security interest in Kroeber's ownership of 500 shares of the common stock of VPM (“Kroeber VPM Stock”).   Robert Lapidus perfected his security interest in the Kroeber VPM Stock by a UCC–1 financing statement (“Kroeber Financing Statement”) recorded in the office of the Connecticut Secretary of the State.   Copies of the Kroeber Security Agreement and Kroeber Financing Statement collectively are Exhibit P–23.

Kroeber's purchase of two of the Condo Units;  Release Payments go to Kroeber

21. On or about December 28, 2005, Kroeber purchased two of the Condo Units:  unit # 205 and unit # 2004 (the “Kroeber Condo Units”).

22. Robert Lapidus provided partial releases of the mortgages on units # 205 and # 2004 in exchange for the release payments (“Release Payments”) of $41,072.00, $24,322.00 and $24,322.00 set forth therein, and credited these Release Payments toward the respective loan balances.   However, he authorized the Release Payments for those two units to then be paid over to Kroeber.   A letter from Robert Lapidus dated December 28, 2005 (the “Kroeber Pay-over Letter”), authorizing this is Exhibit P–8.

The sale of Unit 104;  Release Payments go to VPM

23. On or about August 16, 2006, VPM sold Condo Unit # 104 to a third party.

24. Robert Lapidus provided partial releases of the mortgages on unit # 104 in exchange for the Release Payments, which were credited toward the respective loan balances.

However, he authorized the Release Payments for that unit to be paid over to VPM. A letter from Robert Lapidus dated August 17, 2006 (the “VPM Pay-over Letter”), authorizing this is Exhibit P–9.

Subsequent unit sales in late 2006

25. Condo Unit # 303 was sold in September 2006, unit # 301 in November 2006, and units # 202 and # 305 in December 2006, all of which generated Release Payments that were applied to the respective mortgage notes.   There is no controversy in connection with these transactions.

The sale of unit # 503

26. On or about February 5, 2007, VPM sold Condo Unit # 503 to a third party.

27. As of the closing date for unit # 503, VPM and its principals had not yet remitted the monthly installment payments for the three Mortgage Loans for the months of June 2006, January 2007, and February 2007.   The total dollar amount for three months of installment payments is $39,047.34.

28. As of the closing date for unit # 503, Kroeber had not yet remitted the monthly interest payment in the amount of $937.50 for his $125k Demand Note.

29. On February 1, 2007, David Lapidus, on behalf of Maple Falls, transmitted an email to Marc Lapidus, on behalf of VPM, copied to Joseph Coppola (counsel to VPM) and Mark LaFontaine (counsel to Maple Falls), stating $129,700.84 as “Total Due at Closing,” consisting of the following:  $39,047.34 for “3 Paddock loans June 06, Jan 07, Feb 07”;  $937.50 for “Tom's Demand Note Feb 07”;  and $89,716.00 for “Due at Closing for Debt paydown.”   A copy of that e-mail is Exhibit P–10.

30. The Closing Statement for the sale of unit # 503 shows a disbursal to Maple Falls in the amount of $129,700.84.   A copy of the Closing Statement is Exhibit P–11.

31. In their respective bookkeeping, the parties differ in the application of the $39,047.34.

Subsequent unit sales in the spring of 2007

32. From March through June 2007, an additional seven (7) Condo Units were sold to third parties:  unit # 1903, # 102, # 106, # 304, # 604, # 103, and # 306.   All of these sales generated Release Payments that were applied to the respective mortgage notes.   There is no controversy with respect to these payments.

Documents signed in July 2007

33. On or about July 24, 2007, VPM and Kroeber furnished the following documents to Maple Falls:

(a) Demand note from Kroeber in the amount of $179,432.00, dated as of December 28, 2005 (the “179k Demand Note”;  Exhibit P–12), corresponding with the date and dollar amount (2 x $89,716.00) set forth in the Kroeber Pay-over Letter;

(b) Demand note from VPM in the amount of $89,716.00, dated as of August 16, 2006 (the “$89k Demand Note”;  Exhibit P–13), corresponding with the date (within one day) and dollar amount set forth in the VPM Pay-over Letter;

(c) Mortgage deed from Kroeber (Exhibit P–14), encumbering the two Kroeber Condo Units, to secure the $125k Demand Note and $179k Demand Note;  and

(d) Stock Pledge Agreement from Kroeber (Exhibit P–15), by which he pledged his interest in VPM to provide additional security for the $125k Demand Note and $179k Demand Note.

Demand;  commencement of foreclosure

34. By a letter dated August 20, 2007 (Exhibit P–16), Maple Falls made demand upon VPM, Kroeber and Marc Lapidus for immediate payment of the three demand notes (the $125k, $179k, and $89k Demand Notes), and, invoking cross-default provisions in the three Mortgage Notes, advised them that Maple Falls was accelerating the latter obligations as well.

35. On or about August 22, 2007, Maple Falls commenced this action for foreclosure and collection of the obligations described herein.   As of that date, VPM owned thirteen (13) remaining Condo Units:  unit numbers 206, 502, 504, 506, 602, 1802, 1902, 1904, 1905, 2001, 2101, 2102, and 2104.

36. At the time it commenced this action, Maple Falls recorded a certificate of attachment against the remaining 13 Condo Units, to secure the $89k Demand Note.

Sales of Condo Units after commencement of this action

37. Since commencement of this action, VPM has sold ten (10) additional Condo Units to third parties, which transactions are described below.   In each instance, VPM paid certain closing proceeds to Maple Falls, and Maple Falls provided VPM with partial releases of its mortgages, certificate of attachment, and lis pendens.   In each instance, counsel for Maple Falls and counsel for VPM/Kroeber communicated regarding how the closing proceeds should be applied, and in each instance, the parties now dispute how the proceeds should have been applied.   Following is a list of those closings:

Closing # 1 Unit # 1902, August 2007.

Closing # 2, Unit # 2104, September 2007.

Closing # 3, Unit # 602, November 2007.

Closing # 4, Unit # 2102, December 2007.

Closing # 5, Unit # 502, February 2008.

Closing # 6, Unit # 504, February 2008.

Closing # 7, Unit # 1905, July 2008.

Closing # 8, Unit # 2101, December 2008.

Closing # 9, Unit # 2001, December 2008.

Closing # 10, Unit # 1904, March 2009.

38. Counsel for Maple Falls is holding in an escrow account $136,460.13 in proceeds from the last-mentioned unit sale, unit # 1904, together with accrued interest, pending an order by this court or agreement of the parties.

39. Three Condo Units—# 206, # 506 and # 1802—remain owned by VPM.

Bankruptcy of Kroeber;  relief from stay

40. On August 4, 2009, Kroeber filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. His case is in the U.S. Bankruptcy Court for the District of Connecticut (New Haven), and is captioned In re Kroeber, 09–32125(LMW).

41. On March 24, 2010, Maples Falls obtained an order in the bankruptcy court granting relief from the automatic stay, thus permitting the present action, including the present motion, to proceed.   A copy of the order is Exhibit P–17.

Operative pleadings

Second Amended Complaint, September 21, 2010 (124.00).

Answer and Special Defenses, October 19, 2010 (127.00).

Reply to Special Defenses, October 25, 2010 (129.00).”

DISCUSSION

The plaintiff argues that the closing agreements were valid and fully performed and that its allocation of the funds should remain untouched.   The upshot of the plaintiff's argument is that the three remaining condo units remain subject to the Third Mortgage Note and, therefore, the plaintiff can foreclose on that mortgage.   The plaintiff also asks for attorneys fees and costs.

The defendants argue that the plaintiff manipulated the allocation of payments to satisfy the unsecured debts first and that the plaintiff “must follow the language of the various Mortgage Deeds, Commercial Promissory Notes and the common law.”   The defendants claim that, if the plaintiff had done so, the only debt left unsatisfied would be the unsecured debt of VPM, which is not subject to foreclosure.   The defendants also argue that the assets of VPM could not be used to pay off the obligations of Kroeber and, further, that there is no evidence that VPM's officers authorized such an allocation.

“[A] foreclosure action constitutes an equitable proceeding ․ In an equitable proceeding, the trial court may examine all relevant factors to ensure that complete justice is done ․ 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.”  (Internal quotation marks omitted.)   Danzig v. PDPA, Inc., 125 Conn.App. 254, 262–63, 9 A.3d 382 (2010), cert. denied, 300 Conn. 920, 14 A.3d 1005 (2011).

Before going further, it is useful to note what is not at issue in this case.   First, with respect to the actions of Robert Lapidus in returning the monies to VPM and Kroeber,¹ there is no claim that Robert Lapidus did not have the right to act as he did or that the defendants acted improperly, nor has there been any claim that the monies were a gift.   Second, neither Kroeber nor VPM have pleaded or alleged that they were forced or mislead into signing the documents in July 2007.²  Third, there is no claim that the plaintiff did not have the right to demand immediate repayment of the “demand notes” that were signed in July 2007.³  Finally, there is no claim that the agreements regarding the allocation of proceeds from the sales of the condos ⁴ are unenforceable due to the statute of frauds.

In addition to the stipulated facts, the court makes the following findings of fact.   The court finds Kroeber to be a credible witness and one who has attempted to do the morally correct thing during the course of this litigation.   The court finds that VPM and Kroeber were represented by counsel on July 24, 2007, when the $179,000 demand note, the $89,000 VPM demand note, the mortgage deed to secure the $125,000 demand note, the $179,000 demand note and the stock pledge agreement from Kroeber were signed.   The court finds that VPM and Kroeber were also represented by counsel during the sales of the ten condo units from August 2007 until March 2009, and, until the sale of the tenth unit, agreed to the plaintiff's requests as to the allocation of funds of the various sales.   The court finds that the parties, therefore voluntarily created nine substitute contracts that superseded the terms of the previous agreements concerning the sale proceeds of the condos.   See, e.g., Bushnell Plaza Development Corp. v. Fazzano, 38 Conn.Sup. 683, 460 A.2d 1311 (1983).   These contracts were created by the agreements of the parties and ratified by partial, indeed, complete performance.   See Ubysz v. DiPietro, 185 Conn 47, 53–55, 440 A.2d 830 (1981).⁵  The court finds that no new contract was created for the sale of the tenth condo unit.

By the time of trial, and as a result of these substitute contracts and the allocations of funds as set forth in these contracts, the $89,000 demand note was paid in full, the $179,000 demand note was paid in full, the $125,000 demand note was paid in full, the first mortgage note was paid in full and the second mortgage note was paid in full.   The “third mortgage loan,” which is referenced in paragraph seventeen of the stipulated facts, was not paid in full but retained a balance of $210,805.45 with interest in the amount of $38,719.12.   As stipulated, this was the “$681,000 Kroeber note” which was endorsed by VPM and it carried a monthly installment payment of $3,528.56.   It also provided that, upon the sale of a condo unit, VPM would pay the sum of $24,322 toward the principal balance of the $681,000 Kroeber note and would result in a partial release of the third mortgage.

The court finds that the “third mortgage loan” is not in default due to any non-payment of monies due under the terms of the original loan.   The court further finds that monies due pursuant to the default triggered by the acceleration of the 2007 demand notes have been satisfied and, therefore, the “third mortgage loan” is not in default because of nonpayment of the demand notes.   The court also finds that, at the time of trial, VPM retained three condo units that remain unsold and that there was $136,400.13, which the parties held in escrow.

The court enters the following judgments on the plaintiff's amended complaint:

Count one:  The court finds that all sums due under the $125,000 demand note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count two:  The court finds that all sums due under the $1,150,000 note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count three:  The court finds that all sums due under the $1,150,000 note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count four:  The court finds that all of the sums due under the $681,000 Kroeber note have been paid except for $210,805.45 with interest in the amount of $38,719.12.   The court finds that there remains $136,400.13 in the escrow account.   The court finds that those funds should be disbursed in accordance with the terms of the Third Mortgage and that the funds should also be used to pay any outstanding interest payments.   The court finds that the mortgage is not in default and, therefore, on this count judgment should enter in favor of the defendant.

Count five:  The court finds that all sums due under the $179,432 Kroeber demand note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count six:  The court has already found that all sums due under the $179,432 Kroeber demand note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count seven:  The court finds that all sums due under the $89,716 demand note have been fully and properly paid pursuant to the terms of the substitute contract.   Therefore, this count is dismissed as moot.

Count eight:  As to the $136,000 in proceeds held in escrow by the parties, this court holds that, as noted in its decision in count four, that $24,432 should be paid to the plaintiff pursuant to the terms of the original loans, that any outstanding interest payments should be paid to the plaintiff, and that the remainder, if any, should be paid to VPM.

The court orders that a hearing should be scheduled, at which time the parties will be heard on the issue of attorneys fees.

BY THE COURT

Jack W. Fischer, Judge

FOOTNOTES

FN1. See paragraphs twenty-one through twenty-four of the stipulated facts..  FN1. See paragraphs twenty-one through twenty-four of the stipulated facts.

FN2. See paragraph thirty-three of the stipulated facts..  FN2. See paragraph thirty-three of the stipulated facts.

FN3. A demand note is a “note which expressly states that it is payable on demand, on presentation or at sight;  a note in which no time for payment is expressed.”   Black's Law Dictionary (5th Ed.1979);  see also General Statutes § 42a–3–104(2)..  FN3. A demand note is a “note which expressly states that it is payable on demand, on presentation or at sight;  a note in which no time for payment is expressed.”   Black's Law Dictionary (5th Ed.1979);  see also General Statutes § 42a–3–104(2).

FN4. See paragraph thirty-seven of the stipulated facts..  FN4. See paragraph thirty-seven of the stipulated facts.

FN5. The court notes that none of these substitute contracts contained any language regarding attorneys fees or costs.   The court further notes that, absent contractual or statutory authority, each party is responsible for its own attorneys fees.  Doe v. State, 216 Conn. 85, 106, 579 A.2d 37 (1990);  Chrysler Corp. v. Maiocco, 209 Conn. 579, 590, 552 A.2d 1207 (1989)..  FN5. The court notes that none of these substitute contracts contained any language regarding attorneys fees or costs.   The court further notes that, absent contractual or statutory authority, each party is responsible for its own attorneys fees.  Doe v. State, 216 Conn. 85, 106, 579 A.2d 37 (1990);  Chrysler Corp. v. Maiocco, 209 Conn. 579, 590, 552 A.2d 1207 (1989).

Fischer, Jack W., J.