LLC v. LLC (2013)

MEMORANDUM OF DECISION RE MOTION TO STRIKE (# 130)

The present motion to strike in this foreclosure action centers primarily on the issue of whether claims and defenses pertaining to the conduct of an original mortgagee also can be asserted against a subsequent assignee of the mortgage attempting to foreclose on the property.   The subject property in this case is located at 269 North Frontage Road in New London, Connecticut (the property).   It is owned and possessed by the defendant Heritage New London, LLC (Heritage), and it is currently being operated as a Clarion Inn hotel.

The plaintiff, Wells Fargo Bank, N.A. through its attorney in fact Hudson Americas, LLC (Wells Fargo),¹ filed the two-count complaint in this foreclosure action on April 2, 2012, seeking to foreclose on the property and to collect on a guarantee made by the other defendant, Sunil Nayak.   In the complaint, Wells Fargo alleges the following relevant facts.   On March 28, 2010 Heritage delivered to Wells Fargo's predecessor in interest, Irish Bank Resolution Corporation Limited (Irish Bank), a promissory note (the note) in the original principal amount of $8,535,000.   The note was executed in conjunction with a loan agreement between Heritage and Irish Bank. As security for the note, Heritage granted Irish Bank and its successors all of Heritage's interest in the property at 269 North Frontage Road. Also on that date, Nayak entered into a limited guaranty agreement (the guaranty), by which he gave his guarantee of full payment for every obligation of Heritage up to the sum of $250,000, if Heritage were to default on its obligation.   On October 25, 2011, Irish Bank assigned all of its rights, title, and interest in the loan and loan documents, including the note and mortgage, to LSREF2 Clover, LLC, which subsequently assigned the same to Wells Fargo on the same day.   Wells Fargo is now the holder and owner of the note, mortgage, and other loan documents.

Wells Fargo further alleges that Heritage defaulted on the loan because, among other things, it failed to make payments when due.   The outstanding balance of the note, alleged to stand at over $9.2 million, was then accelerated and Heritage has failed to pay the amount owed.   Nayak has also failed to pay the amount agreed to in the guaranty.   As a result, the complaint asserts two claims:  in count one, that Wells Fargo is entitled to foreclose on the property due to Heritage defaulting on the loan, and, in count two, that Nayak has breached the guaranty by failing to meet his payment obligation following Heritage's default.

On August 1, 2012, Heritage and Nayak (the defendants) filed an answer and, following a request to revise, filed an amended answer on January 3, 2013.   Along with the amended answer, the defendants also asserted six special defenses and three counterclaims.   In the first defense, the defendants allege that Wells Fargo has failed to provide evidence that it is the lawful holder of the note.   The second defense alleges that the note does not contain a discernable interest rate and is not enforceable without reformation.   The defenses at issue in this motion—defenses three, four, five and six—are based on an identical set of facts.   Collectively, they allege that, prior to execution of the note, Irish Bank assured the defendants that it would provide additional funding that was necessary to complete the rehabilitation of the hotel facility in order to maintain the Holiday Inn designation on the hotel.   Without those assurances, the defendants allege that they would not have entered into the note and mortgage with Irish Bank. The defendants further allege that Irish Bank failed to timely provide that additional funding and subsequently Heritage lost the Holiday Inn designation “causing substantial damages which resulted in the very default of which [Wells Fargo] complains.”   Based on those facts, in their third defense the defendants allege that Irish Bank breached its contractual obligations to them, in the fourth defense they allege that Irish Bank breached the covenant of good faith and fair dealing, in the fifth defense they allege that Irish Bank was guilty of inequitable conduct and unclean hands, and in the sixth defense they allege that Wells Fargo is estopped from enforcing the note as a result of the conduct and representations of its predecessor, Irish Bank.

The defendants also asserted three counterclaims against Wells Fargo, all based on the conduct of Irish Bank. Due to Irish Bank's conduct, which the defendants allege led to the hotel's loss of the Holiday Inn designation, the defendants claim breach of contract in count one of the counterclaim, breach of the implied covenant of good faith and fair dealing in count two, and violation of the Connecticut Unfair Trade Practices Act in count three.

On January 24, 2013, Wells Fargo filed this motion to strike the defendants' special defenses three through six and their three counterclaims, on the grounds that those defenses and claims do not relate to the making, validity, or enforcement of the note and, moreover, they only apply against Irish Bank and are legally insufficient to be asserted against Wells Fargo.   Wells Fargo submitted a memorandum of law in support of its motion and, on February 26, 2013, the defendants filed a memorandum in opposition to the motion.   The court took this matter on the papers on March 11, 2013.

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).   Special defenses and counterclaims are proper subjects of a motion to strike.  Practice Book § 10–39(a)(5).  “It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted ․ Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically.”  (Internal quotation marks omitted.)   Violano v. Fernandez, 280 Conn 310, 318, 907 A.2d 1188 (2006).   The challenged pleading must be construed “in the manner most favorable to sustaining its legal sufficiency.”  (Internal quotation marks omitted.)  New London County Mutual Ins. Co. v. Nantes, 303 Conn. 737, 747, 36 A.3d 224 (2012).   If facts provable in the pleading would support the challenged claim or defense, the motion to strike must be denied.   See Batte–Holmgren v. Commissioner of Public Health, 281 Conn 277, 294, 914 A.2d 996 (2007).

Wells Fargo's motion to strike is grounded on the argument that the defendants' third through sixth special defenses and their three counterclaims are legally insufficient.   First, Wells Fargo argues that the special defenses are legally insufficient because they do not relate to the making, validity or enforcement of the note or mortgage that is the subject of its complaint.   Alternatively, it claims that the special defenses are legally insufficient because they relate to the alleged conduct of its predecessor, Irish Bank, for which it cannot be held liable.   As to the counterclaims, Wells Fargo also claims that they are legally insufficient because they relate to the alleged conduct of Irish Bank, for which it cannot be held liable.

In their opposition memorandum, the defendants begin by conceding that their counterclaims should be stricken.   The defendants make this concession properly with reliance on the Appellate Court's recent decision in Hartford v. McKeever, 139 Conn.App. 277, 284–86, 55 A.3d 787 (2012), cert. granted, 307 Conn. 956, 59 A.3d 1191 (2013), which held that an assignee of a contract is not subject to counterclaims that are based on prior conduct of the assignor.   Id., 286.   Therefore, the motion to strike must be granted as to all three of the defendants' counterclaims.

Nevertheless, the defendants do argue that the challenged special defenses are legally sufficient, because they relate to the making, validity or enforcement of the note and, furthermore, the defendants are entitled to raise defenses based on the conduct of Wells Fargo's predecessor.²  This court addresses each argument in turn and, for the reasons set forth below, concludes that the defendants' third through sixth special defenses are legally sufficient to survive this motion to strike.

I

MAKING, VALIDITY OR ENFORCEMENT OF THE NOTE

“A valid special defense at law to a foreclosure proceeding must be legally sufficient and address the making, validity or enforcement of the mortgage, the note or both.”  (Internal quotation marks omitted.)  Emigrant Mortgage Co v. D'Agostino, 94 Conn.App. 793, 802, 896 A.2d 814, cert. denied, 278 Conn. 919, 901 A.2d 43 (2006).   Wells Fargo argues that the defendants' special defenses are not related to the making, validity or enforcement of the mortgage or note.   This court disagrees.

The thrust of the defendants' special defenses are that Irish Bank committed various wrongs against it, all stemming from the bank's promise to provide future funding in addition to the loan at issue here.   The defenses allege that Irish Bank's promise was made prior to the execution of the note and that the defendants would not have entered into the note without that assurance of future additional funding.   If a representation made by a mortgagee induces a mortgagor to enter into a mortgage agreement, that action can relate to the making of the note.   See Morgera v. Chiappardi, 74 Conn.App. 442, 450–52, 813 A.2d 89 (2003).   In Morgera, the court determined that the plaintiff's fraudulent misrepresentations that induced the defendant to enter into a note and mortgage were related to the making of the agreements, and to their validity and enforcement.  Id. The same rationale applies here because the defendants allege that, but for the assurance of additional funding, they would not have entered into the note.³  Therefore, taking the defendants' allegations as true for the purposes of this motion, the defendants have sufficiently pleaded conduct that relates at least to the making of the note, if not also to its validity and enforcement.

II

DEFENSES BASED ON PREDECESSOR'S CONDUCT

Wells Fargo further contends that the defendants' special defenses should be stricken because the allegations in the defenses arise only out of conduct by Irish Bank, for which Wells Fargo cannot be held liable.   At the outset, it should be noted that Wells Fargo has not provided individual analysis of the four special defenses that it is challenging;  instead, it has simply made a broad and generalized argument that the defenses are all legally insufficient because they apply to the conduct of its predecessor.   Thus, the court will only address this broad argument and need not consider if the four specific claims asserted in the special defense are legally sufficient.   See Meredith v. Police Commission, 182 Conn 138, 140, 438 A.2d 27 (1980) (“[i]n ruling on a motion to strike the trial court is limited to considering the grounds specified in the motion”).

“A promissory note is nothing more than a written contract for the payment of money, and, as such, contract law applies.”  (Internal quotation marks omitted.)  Fidelity Bank v. Krenisky, 72 Conn.App. 700, 707, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).  “Ordinarily an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor.”  Fairfield Credit Corp. v. Donnelly, 158 Conn. 543, 548, 264 A.2d 547 (1969).  “Although the general rule is that [t]he plaintiff, as assignee of the mortgage, [stands] in the shoes of his assignor, with the same rights ․ unless there has been an express assumption of liability, the assignee is not liable to the debtor for liabilities incurred by the assignor ․ [Nevertheless] the assignee takes the mortgage subject to the state of accounts between the [defendant] and the [assignor] as at the time of the assignment ․ Therefore, an assignee of a contract takes it subject to all defenses which might have been asserted against the assignor ․ but does not take it subject to affirmative claims against the assignor arising from the assignor's prior conduct without express assumption of such liability by the assignee.”  (Citations omitted;  emphasis in original;  internal quotation marks omitted.)  Hartford v. McKeever, supra, 139 Conn.App. 285–86.   McKeever resolved a long standing split of authority in the Superior Court regarding whether an assignee of a mortgage takes it subject to the liabilities of the original lender.   It is now clear that a mortgage assignee takes subject to a defendant's special defenses, but not counterclaims.   As a result, the defendants properly conceded that their counterclaims should be stricken, but correctly argue that their defenses should withstand this motion.   Pursuant to McKeever, the defendants' special defenses pertaining to Irish Bank's conduct are legally sufficient as applied to its successor, the plaintiff Wells Fargo.

This conclusion is further supported by Deutsche Bank National Trust Co v. Medina, Superior Court, judicial district of Stamford, Docket No. CV 08 5006907 (January 10, 2011, Mintz, J.) (51 Conn. L. Rptr. 270), a case that closely mirrors the facts and issues of the present case.   Medina was a foreclosure case involving a plaintiff bank's motion to strike the defendants' special defenses on the ground that the plaintiff was an assignee of the mortgage and the defenses were based on its predecessor's conduct.   The court ruled that the defenses could withstand a motion to strike, because “special defenses that attack [a mortgage's] very validity may be asserted against either the original lender, or its assignee, as defenses against foreclosure.”  (Internal quotation marks omitted.)  Id. In accordance with that principle, which has since become clear binding precedent pursuant to McKeever, the court denied the motion, concluding that the plaintiff's assignee status was “an insufficient basis for the plaintiff not to be subject to the defendants' special defenses.”  (Emphasis in original.)  Id. Medina is directly on point with the present case and, being that Medina conforms with the recent appellate authority on the issues, this court finds it to be well reasoned and persuasive support for the decision to deny the present motion to strike.

Accordingly, Wells Fargo's assignee status does not preclude the defendants' special defenses, nor has Wells Fargo pleaded any other sufficient basis for barring the defenses, such as holder in due course status.   Therefore, the defendants' third through sixth special defenses, challenged collectively, are legally sufficient as to the grounds argued by Wells Fargo, and the motion to strike those defenses must be denied.

CONCLUSION

For the foregoing reasons, Wells Fargo's motion to strike is granted as to the defendants' counterclaims and denied as to the defendants' third through sixth special defenses.

Cosgrove, J.

FOOTNOTES

FN1. Hudson Americas, LLC acts as the special servicer to Wells Fargo Bank. N.A. with regard to the loan at issue, and brings this action on behalf of Wells Fargo Bank, N.A. pursuant to a limited power of attorney dated October 20, 2011..  FN1. Hudson Americas, LLC acts as the special servicer to Wells Fargo Bank. N.A. with regard to the loan at issue, and brings this action on behalf of Wells Fargo Bank, N.A. pursuant to a limited power of attorney dated October 20, 2011.

FN2. In addition, the defendants argue at length that they are entitled to raise the defenses because they have alleged in each defense that Wells Fargo is not a holder in due course of the note.   The defendants' third through sixth defenses each conclude with the following statement:  “[Wells Fargo] is not a holder in due course and hence the defendant maintains that the defenses that could have been asserted to the plaintiff's predecessor, [Irish Bank], can be asserted against [Wells Fargo].”   See General Statutes § 42a–3–305(b).  “[E]vidence of the existence of a person defense ․ shift[s] to the holder of the instrument the burden of proving his due course status.”  Cadle Co. v. Ginsburg, 51 Conn.App. 392, 396–97, 721 A.2d 1246 (1998), cert. denied, 247 Conn. 963, 724 A.2d 1125 (1999).   The defendants have pleaded the existence of personal defenses, and thus the burden has shifted to Wells Fargo to prove its holder in due course status..  FN2. In addition, the defendants argue at length that they are entitled to raise the defenses because they have alleged in each defense that Wells Fargo is not a holder in due course of the note.   The defendants' third through sixth defenses each conclude with the following statement:  “[Wells Fargo] is not a holder in due course and hence the defendant maintains that the defenses that could have been asserted to the plaintiff's predecessor, [Irish Bank], can be asserted against [Wells Fargo].”   See General Statutes § 42a–3–305(b).  “[E]vidence of the existence of a person defense ․ shift[s] to the holder of the instrument the burden of proving his due course status.”  Cadle Co. v. Ginsburg, 51 Conn.App. 392, 396–97, 721 A.2d 1246 (1998), cert. denied, 247 Conn. 963, 724 A.2d 1125 (1999).   The defendants have pleaded the existence of personal defenses, and thus the burden has shifted to Wells Fargo to prove its holder in due course status.

FN3. Unlike Morgera, the defendants in this case do not claim that Irish Bank's assurances of additional funding amounted to fraud.   Nonetheless, the key fact is that the representation induced the defendants into “making” the note, which occurred both here and in Morgera..  FN3. Unlike Morgera, the defendants in this case do not claim that Irish Bank's assurances of additional funding amounted to fraud.   Nonetheless, the key fact is that the representation induced the defendants into “making” the note, which occurred both here and in Morgera.

Cosgrove, Emmet L., J.