LLC v. PRA LLC (2013)

MEMORANDUM OF DECISION

I. INTRODUCTION

These cases arise out of two failed hotel construction projects on which the plaintiff, Eastern Energy Services, LLC (“Eastern”), provided services for which it never received full payment.   Originally, these actions sought to foreclose the plaintiff's mechanic's liens that it had filed on the subject properties.   The plaintiff also brought other legal and equitable claims against the owners of the properties, PRA Wallingford, LLC and PRA at Norwich, LLC, the general contractor for both projects, PRA Development & Management Corporation (“PRA Development”), with which the plaintiff contracted (collectively “the PRA entities”), and the principal of all of the PRA entities, Joseph Pacitti.

At the same time those claims were pending, the holder of the first mortgage on each property, CT Wallingford, LLC and CT Norwich, LLC ¹ (collectively the “CT entities”) had foreclosure actions pending seeking to foreclose out all other interests in the properties, including Eastern's mechanic's liens.   In those foreclosure actions, Eastern asserted a number of equitable special defenses that claimed, due to the Bank's conduct during the construction process, the Bank's and its successors' rights should be subordinated to Eastern's liens.   There is no dispute that absent some equitable subordination the Bank's lien is prior in right to Eastern's.

In order to complete its foreclosure actions, CT Wallingford and CT Norwich each filed in their respective action, pursuant to Conn. Gen.Stat. § 49–37, a motion to dissolve Eastern's mechanic's lien and substitute a bond in its place.   The court granted those motions.   CT Wallingford posted a bond of $93,973.02.   CT Norwich posted a bond of $326,225.00.

The plaintiffs then amended their complaints in these actions to assert claims against the CT entities in an effort to establish the priority of Eastern's mechanic's liens over CT Wallingford's and CT Norwich's mortgages, which priority would allow Eastern to collect on the bonds that had been posted when Eastern's mechanic's liens were dissolved.   In particular, the first counts of the amended complaints allege that the CT entities, by virtue of the Bank's actions, are de facto owners of the property, and, as such, are liable in contract to pay the amounts owed to Eastern.   The second counts assert claims of equitable estoppel against the CT entities.   The third counts, also against the CT entities, claim unjust enrichment.   The fourth counts assert a claim for a return of retainage under Conn. Gen.Stat. § 42–158p.

The amended complaints also allege similar causes of action against the PRA entities and Pacitti in the fifth (breach of contract as to PRA Development), sixth (unjust enrichment as to PRA Wallingford, PRA at Norwich, PRA Development, and Pacitti), and seventh (violation of Conn. Gen.Stat. § 42–158j as to PRA Wallingford, PRA at Norwich, and PRA Development) counts.   Prior to trial, Eastern withdrew its claims against Pacitti.   PRA Wallingford, PRA at Norwich and PRA Development were defaulted for failure to plead.

Consequently, the trial went forward on liability and damages as to Eastern's claims against the CT entities and as to damages as to the defaulted PRA entities.   The court heard the live testimony of Eastern's two principals, Debra Stout and Sean Hixson, Joseph Pacitti, Patrick Boatman, counsel for the PRA entities and Pacitti during the construction of the projects, and Wayne Pack, who was hired by the PRA entities to be the superintendent on both projects.   The court also received several deposition transcripts including those of Bradley Rock, Jr., former Senior Vice President of the Bank, Paul Clark, former Vice President of the Bank, and John Casson and Robert Spatny of EMJ Construction Consultants, NA, Inc. (“EMJ”), the Bank's construction consultant on both projects.   The court also received numerous exhibits submitted by both the plaintiff and defendants.   Following the trial, the parties submitted extensive briefs.

II. FINDINGS OF FACT

Having considered all of the evidence and the credibility of the witnesses, the court finds the following facts.   On or about July 18, 2007, PRA at Norwich entered into a building loan agreement which would allow it to borrow up to $10,500,000 from the Bank to fund the building of a hotel on property located at 154 Salem Turnpike in Norwich, Connecticut.   Ex. 7. The loan was evidenced by a note and was secured by a mortgage on that property, which was properly recorded on the Norwich land records.   The note and mortgage were sold to CT Norwich on March 31, 2011.

On or about December 18, 2007, PRA Wallingford entered into a similar building loan agreement which would allow it to borrow up to $14,000,000 from the Bank to fund the building of a hotel on property located at 1181 Barnes Road in Wallingford, Connecticut.   Ex. 9. The loan was evidenced by a note and was secured by a mortgage on that property, which was properly recorded on the Wallingford land records.   The note and mortgage were sold to CT Wallingford on March 31, 2011.

At the time it made the loans, the Bank knew that both PRA at Norwich and PRA Wallingford were “special purpose entities” in that the only asset each company owned was the mortgaged land on which its hotel was to be built.   Joseph Pacitti signed all of the loan documents on behalf of those entities as their “Manager.”   Pacitti also personally guaranteed both loans.   Before agreeing to provide the loans, the Bank required the submission of construction budgets, architectural and engineering plans and other construction and design documents to its construction consultant, EMJ, for review.   EMJ's services were provided pursuant to identical Construction Loan Monitoring Services agreements that EMJ entered into with the Bank on both projects.   Exs. 10, 45.

Those agreements provided that EMJ would give the Bank a written report following a pre-construction plan and cost review “to determine whether the working plans and specifications conform with generally accepted construction practices and that construction from them should produce the proposed project.”  Id. EMJ provided such reports to the Bank. For example, on December 17, 2007, EMJ provided its report on the Wallingford project.   Ex. 32.   In its Summary and Conclusion, EMJ told that Bank that the plans were “suitable for successful construction by an experienced General Contractor” and that the hard cost budget should be suitable.  Id., p. 15.   EMJ did note though that “[s]ince we have no control over the cost of labor and materials or competitive bidding, we cannot guarantee the accuracy of any statement or estimate of the probable construction costs.”  Id.

EMJ's agreements also set forth the construction phase services that EMJ would provide on both projects.   Specifically, EMJ would conduct periodic site observations as required by the Bank, generally monthly, to evaluate the progress of construction and whether the projects were proceeding in substantial compliance with the plans and specifications.   Following such site visits, EMJ would provide a written report to the Bank. Such reports would assist the Bank in determining whether to release funds in connection with draw requests made by PRA at Norwich and PRA Wallingford pursuant to the loan agreements.

The evidence established, and the court finds, that EMJ did the regular site visits called for by their agreements with the Bank. Whenever PRA at Norwich or PRA Wallingford requested a disbursement of loan proceeds for work that had been completed on the project EMJ would visit the site, inspect the work, and provide a report to the Bank. Based on EMJ's report, the Bank would decide whether to disburse the funds requested.   The Bank though did not expect EMJ to report on quality issues or concerns.   Nor did EMJ's site inspections focus on the quality of the work, a fact confirmed by Wayne Pack who was the building superintendent on both projects.   Nor was the Bank or EMJ concerned with the means and methods of construction.   Neither the Bank nor EMJ ever told PRA at Norwich or PRA Wallingford how to construct the projects.

Overall, the evidence established and the court finds that the Bank's use of EMJ on these projects and EMJ's role in the construction process were typical for a building loan of this size.   In particular, Pacitti testified that the draw procedure and site inspection process used on these projects were the same as those on other similar projects he has developed.   Similarly, Clark testified that the Bank regularly used EMJ's services on loans of this size.   Finally, Pack, who has been working in the construction industry for 54 years, credibly testified that every job on which he has ever worked, including multi-million dollar hotel projects, involved inspectors hired by the lender to do exactly what EMJ did here.   In fact, the plaintiff offered no credible evidence to the contrary.

The party responsible for the means, method and quality of construction was PRA Development, the General Contractor on both projects.   PRA Development, like the other PRA entities, was owned and controlled by Pacitti.   In its role as general contractor, PRA Development entered into two subcontracts with Eastern, one for each project, for Eastern to provide plumbing and HVAC services.   Exs. 11, 12.   On the Norwich project, Eastern was to receive a total contract sum of $1,325,000.00.   Ex. 11.   On the Wallingford project, the total contract sum was $1,450,000.00.   Those subcontracts provided for monthly progress payments from PRA Development based on the percentage of work completed each month.   The subcontracts provided that the amounts due Eastern would be paid by the 20th day of the month following when an invoice was submitted, “less 7 1/2% retainage.”   Ex. 12, p. 3.² All of Eastern's communications about its work on the projects and getting paid were with PRA Development, principally Pacitti.   Nobody from Eastern ever had any communication with the Bank or EMJ.

Eastern started working on the Norwich project in December 2007.   It started working on the Wallingford project in March 2008.   Almost from the outset, Eastern experienced difficulty in receiving payment for its work from PRA Development.   For example, although Eastern submitted its first draw request on the Wallingford project to PRA Development on December 26, 2007, it did not receive payment, less retainage, until February 20, 2008.   Ex. 13.   Eastern experienced similar regular delays on the Norwich project.   Ex. 14.   By late 2008, PRA Development had stopped making payments to Eastern on the Wallingford project.   It similarly stopped making payments to Eastern on the Norwich project in early 2009.   As a result, Eastern began sending regular correspondence to PRA Development inquiring about its outstanding invoices.   By the end of February 2009, PRA Development owed Eastern, not including amounts retained pursuant to the subcontracts, approximately $175,000 on the Wallingford project and over $400,000 on the Norwich project.   Exs. 13, 14.

Given the situation, Eastern took two actions to protect itself.   First, on April 17, 2009 it filed certificates of mechanic's liens on both projects in the amounts of $470,099.81 on the Norwich project and $180,543.73 on the Wallingford project.   Exs. 81, 82.   In the Norwich mechanic's lien, the names of the parties against whom the lien was filed were PRA at Norwich and PRA Development.   On Wallingford, the lien was filed against PRA Wallingford and PRA Development.   Second, Eastern pulled all of its workers off of both projects.   Around this same time, other subcontractors were taking similar actions because PRA Development had not paid them for work done on the projects.

The filing of mechanic's liens by the subcontractors constituted an event of default under the loan agreements with the Bank. The Bank was also concerned because the PRA entities were not keeping current with interest payments.   With the loans in a state of default, the Bank, although not providing formal notice of default, ceased most disbursements under the loan agreements to PRA at Norwich and PRA Wallingford.

Recognizing that he was in trouble and without sufficient funds to complete the projects, in February 2009, Pacitti wrote to a broker, Cooper Horowitz, requesting that it seek a loan modification and additional funding from the Bank. Ex. 25.   Pacitti also met with the subcontractors to try to convince them that they should continue to work on the projects, despite the fact that they were not getting paid.   At this meeting, Pacitti told them that he expected to get additional financing.

In or around the beginning of May 2009, the attorney for PRA Wallingford, Patrick Boatman, began working with the Bank to resume disbursements on the loans in order to get the subcontractors to release their liens.   In a letter to Clark on May 1, 2009, Boatman identified three liens, none of them Eastern's, he proposed to satisfy with additional funds from the Bank. Ex. 34.³  While Eastern was not addressed in Boatman's letter, the evidence proved that on May 4, 2009 Eastern received a check for $159,811.25 in payment of its outstanding invoices, less retainage, on the Wallingford project.   Ex. 14.   As a result, on May 5, 2009, Eastern released its lien on the Wallingford project.   Ex. 82.

Through the summer of 2009, similar discussions took place regarding the Norwich project.   As a result of those discussions, the Bank agreed, despite PRA at Norwich's default, to disburse funds to various subcontractors in exchange for a release of their mechanic's liens.   In addition to talking to the Bank, Pacitti also spoke to subcontractors.   On August 5, 2009, Pacitti spoke with Eastern's Debra Stout.   He told her that the Bank was going to disburse funds for liens.   He also told her that additional financing was moving forward.   Pacitti also acknowledged that it was in his best interest that the projects move forward because he was “personally on the hook for [the] two loans.”   Ex. 99.   While the court finds that by late August the Bank agreed to disburse additional funds to secure releases of mechanic's liens, there is no evidence that the Bank had committed to any additional financing at that time, or that it authorized or encouraged Pacitti to make such representations to the subcontractors.   The court finds that Pacitti exaggerated the Bank's level of commitment in an effort to keep the subcontractors working on the projects in order to protect his personal interests.

The Bank's actions show that it was taking a much more cautious approach.   The Bank, wanting to ensure that the money it was disbursing to release mechanic's liens went for that purpose, insisted on sending the money directly to the subcontractors and not through the PRA entities, as Pacitti had requested.

On September 1, 2009, the Bank sent a check for $183,874.81 made out to Eastern to Boatman in exchange for Eastern's release of its lien.   Ex. 29.   On September 2, 2009, one of Eastern's principals, Sean Hixson, picked up the check from Boatman.   When he did so, Boatman told him that as a result of the payment and lien release, the project should be going forward.   However, Boatman made no promises to Hixson.   Hixson signed the release of lien in Boatman's presence, Ex. 90, in consideration for the payment Eastern received that day.   Hixson also executed a mechanic's lien subordination certificate agreeing that any lien Eastern “may have, or may hereafter have” would be subordinate to the Bank's mortgage.   Ex. 91.   Hixson specifically testified that he was not under duress when he signed the release and subordination certificate, had discussed them with Eastern's other principal, Debra Stout, before going to Boatman's office, and executed both documents to get money Eastern was owed by Pacitti and his companies.   As of September 1, 2009, Hixson did not know that the Bank had provided the financing for the projects.

After receiving the payment in May 2009, Eastern went back to work on the Wallingford project.   It submitted invoices in June and July 2009 which were paid by PRA Development.   However, invoices submitted in October and November 2009 totaling, less 7 1/2% retainage, $66,461.25 were not paid.   In addition, Eastern has never received $27,511.77 in retainage for the work it performed on the Wallingford project.   Pacitti admitted that on both projects Eastern properly performed all of the work it claimed to perform and is due the amounts claimed.   The court heard no evidence to the contrary.   Consequently, the court finds that these amounts are due Eastern from PRA Development.   Eastern provided no work on the Wallingford project after November 30, 2009.   Ex. 14.

On the Norwich project, Eastern provided no services for which it sought compensation after February 2009.   Ex. 13.   While Hixson and Pack testified that Eastern returned to the project in February 2010, at Pack's request to fix a leak, there is no evidence that Eastern ever submitted an invoice for such work.   In fact, Eastern has made no claim for any work it did after February 2009.   Ex. 13.   For its work through February 2009, Eastern is due from PRA Development $219,999.99 for unpaid invoices and $66,225.01 in withheld retainage.

By the end of 2009, Pacitti had not yet given up on the projects.   While he was in default to the Bank and owed multiple subcontractors large amount of money, making them reluctant to do any additional work on the projects, Pacitti continued discussions with everyone in an effort to secure new financing from the Bank and to convince the subcontractors to keep working.   As a result of Pacitti's discussions with the Bank, on December 11, 2009, the Bank sent PRA Wallingford a Building Loan Term Sheet to provide an additional $1,600,000 of financing for the Wallingford project.   Ex. 49.   A similar term sheet was sent the same day to PRA at Norwich for an additional $2,000,000 for the Norwich project.   Ex. 55.   Although PRA at Norwich and PRA Wallingford never signed the term sheets, the evidence proved that the Bank and Pacitti continued to work on new loan documents after December 11, 2009.   Ex. 54.   Nevertheless, the Bank's counsel made clear to Boatman that the Bank was evaluating the loans one step at a time and was not committing to do either the loans being discussed or additional financing Pacitti was requesting for furniture, fixtures and equipment once construction was completed.   Ex. 62.

While his discussions with the Bank on new loans was ongoing, Pacitti and Boatman told the subcontractors that additional financing was forthcoming and the projects would continue.   For example, on December 23, 2009, Boatman sent a letter to the attorney for Dufford Construction Co., Inc. requesting that Dufford execute a subordinated lien waiver on the Wallingford project.   Ex. 86.   In that letter, Boatman represented that the new loan with the Bank for $1.6 million would “be closing next week.”  Id. Boatman admitted during trial that this was “aspirational,” not guaranteed.   There was also no evidence that the Bank had committed to such a closing or authorized or requested that Boatman make such a representation to the subcontractors.

In January 2010, Pacitti, Boatman and Pack met with several subcontractors at the Homewood Suites in Glastonbury to discuss the status of the two projects.   Stout and Hixson attended that meeting on behalf of Eastern.   At the meeting, Pacitti assured the subcontractors that additional financing was in place and that the projects were moving forward.   To support his statements, Pacitti handed out copies of the December 11, 2009 term sheets.   Exs. 49, 55.   Pacitti told the subcontractors that the loans would close in 30 to 45 days.   Following the meeting, Stout spoke privately with Pacitti.   When Stout pushed on whether the projects were really going to continue, Pacitti provided Stout with a copy of an e-mail string between the Bank, its counsel and Boatman about scheduling a closing date.   Ex. 53.

Based on the information she received at the meeting, Stout felt comfortable keeping Eastern on the projects.   While Eastern had no workers on the projects at that time, it still had permits in place to do the work and had storage containers and equipment still on site.

The court finds that the Bank never authorized or asked Pacitti to tell the subcontractors about the December 2009 loan negotiations.   Pacitti was not acting as the Bank's agent when he made his statements at the Homewood Suites meeting.   He did so solely to benefit himself and his companies.   Similarly, Boatman was not acting as an agent for the Bank in any of his communications with the subcontractors.   In fact, he testified emphatically and credibly that in all of his dealings with the subcontractors the only parties he represented were Pacitti and the PRA entities.   He further testified that whenever he negotiated releases of mechanic's liens with subcontractors he did so on behalf of the PRA entities and was not representing the Bank. The court heard no evidence to the contrary.⁴

The new loans from the Bank did not close as Pacitti told the subcontractors they would.   As a result, and to protect its lien rights, on February 19, 2010, Eastern filed a mechanic's lien on the Wallingford project and against PRA Wallingford and PRA Development for $93,973.02, the amount, including retainage, due for work through November 2009.   Exs. 84, 14.⁵  On February 22, 2010, Eastern filed a mechanic's lien on the Norwich project and against PRA at Norwich and PRA Development for $286,225.00, the amount, including retainage due for work through February 2009.   Shortly thereafter, the Bank informed PRA at Norwich and PRA Wallingford that it would not be providing any new financing on the Projects.   The Bank instead issued notices of default and foreclosure proceedings on the Bank's mortgages were commenced later in 2010.

Additional facts will be discussed as necessary.

III. DISCUSSION

Eastern acknowledges that under Connecticut law the Bank's mortgages are prior in right to its mechanic's liens unless it can prove and prevail on one of its claims set forth in the first through fourth counts of its amended complaints.   Consequently, the court will address each of those claims in turn.   Thereafter, the court will address Eastern's damages claims as to the remaining defendants.

A. First Count—Breach of Contract as a De Facto Owner

In the first counts of its amended complaints, Eastern alleges that the Bank, through its control of the construction process, became the de facto owner of the Wallingford and Norwich properties, and thereby became liable to Eastern on its subcontract with PRA Development.   It further argues that CT Norwich and CT Wallingford, as successors-in–interest to the Bank, are liable for the Bank's breach of the subcontracts by not paying Eastern for the work it performed.

There are a number of problems, both procedurally and substantively, with Eastern's claim.   First, Eastern barely addressed this claim in its post-trial briefs.   Following the conclusion of evidence, the court specifically asked Eastern to address in its post-trial brief what facts support its claim of de facto ownership by the Bank. It did not do so.   Furthermore, while CT Wallingford and CT Norwich, in their post-trial brief, addressed the de facto ownership claim, Eastern's reply brief is all but silent on the subject.⁶  Thus, it appears to the court that Eastern has, for all practical purposes, abandoned its breach of contract claim based on its allegation that the Bank became a de facto owner of the properties.

Second, the owners of the properties, PRA at Norwich and PRA Wallingford, did not have a contract with Eastern.   Eastern's contracts were with the general contractor, PRA Development.   Exs. 11, 12.   It, not the owners of the property, whether legal or de facto, is liable under the Eastern subcontracts.   The evidence in no way supports a conclusion that the Bank in some way assumed or took over PRA Development's general contractor role.   To the contrary, the Bank never had any communications with Eastern and never had any input into the means or methods of construction.

Third, the concept of de facto ownership has never been recognized in Connecticut.   To the contrary, as the CT entities point out, our Supreme Court has held that ordinarily the owner of real property in Connecticut is recognized to be the mortgagor, not the mortgagee.  Red Rooster Const.   Co. v. River Associates, Inc., 224 Conn. 563, 569, 620 A.2d 118 (1993).   While Eastern, in its pre-trial brief, cited to bankruptcy cases from other jurisdictions that have adopted such a theory, it makes no attempt to reconcile those cases with Red Rooster, nor does it find some support for this theory in the reasoning of any other Connecticut precedent.

Fourth, even assuming that such a theory were adopted in Connecticut, the facts proved would not support a finding that the Bank became a de facto owner of the properties.   The Bank's involvement with both projects was no different than that of the typical commercial lender.   Before entering into the loan agreements, the Bank did its due diligence to determine that the plans and budgets were reasonable.   One would expect nothing less of a party lending almost $25,000,000 on two construction projects.   Similarly, before actually disbursing progress payments, the bank engaged in appropriate due diligence to make sure the work claimed to be done had in fact been completed.   Pacitti testified that this procedure was followed on other projects he built.   Pack testified that it happened on every construction project he worked on over a 54–year career.

Contrary to what Eastern suggests, the fact that the Bank retained EMJ to do the initial plan review and subsequent site inspections is irrelevant to this conclusion.   The Bank was entitled to use whatever resources it wanted to satisfy itself that the loans made sense and that the borrowers were meeting their obligations before funds were disbursed.   Furthermore, the evidence established that EMJ was not, as Eastern claims, intimately involved in the design and construction of the projects.   EMJ only reviewed the plans and budgets “to determine whether the working plans and specifications conform with generally accepted construction practices and that construction from them should produce the proposed project.”   Exs. 10, 45.   EMJ did not undertake to modify the plans and budgets, suggest changes to them, or comment on them in any other way.   Similarly, EMJ's site inspections were done merely to confirm the progress of the projects.   EMJ never commented on the quality of the work being performed or on the means or methods of construction.   In fact, although Eastern claims that EMJ's presence on the projects was pervasive, nobody from Eastern ever met with or talked to anyone from EMJ. Furthermore, Eastern presented no evidence that EMJ ever interacted with any other subcontractors.

Eastern's reliance on the Bank's handling of the release of mechanic's liens as evidence of control and ownership of the properties is also misplaced.   With the loans in default, the Bank had no obligation to provide additional disbursements to PRA at Norwich and PRA Wallingford.   When those entities asked that the Bank do so, the Bank agreed as long as the subcontractors released the liens as to which the payments were being made.   Again, there is nothing surprising or overreaching about such a request.   It was as expected as was Eastern's demand that it receive payment before releasing its lien.   This is not a case where the Bank induced Eastern to release its liens not with current money, but with a promise of future funding for the projects.   The Bank, as a lender, agreed to release to Eastern hundreds of thousands of dollars of additional money on defaulted loans in exchange for releases of its mechanic's liens.   Doing so did not turn it into an owner of the properties.

The same is true of the Bank's loan negotiations with PRA at Norwich and PRA Wallingford in late 2009/early 2010.   Those entities asked the Bank to consider providing additional money needed to complete the projects.   The Bank engaged in good faith negotiations with Pacitti and Boatman for that purpose.   The Bank never communicated with Eastern or any other subcontractor about those negotiations.   Nor did it authorize, ask, or encourage Pacitti or Boatman to tell the subcontractors about those discussions.   There is simply no evidence that the Bank sought to induce Eastern and other subcontractors to continue working by engaging in perfunctory refinancing discussions with Pacitti and Boatman.

For all of the foregoing reasons, judgment shall enter for the CT entities on the first counts of Eastern's amended complaints.

B. Second Count—Equitable Estoppel

In the second counts of its amended complaints, Eastern claims that the CT entities should be estopped from asserting the priority of their mortgages due to the Bank's inequitable conduct.  “Equitable estoppel is a doctrine that operates in many contexts to bar a party from asserting a right that it otherwise would have but for its own conduct.”  Glazer v. Dress Barn, Inc., 274 Conn. 33, 60, 873 A.2d 929 (2005).   Equitable estoppel has two elements:  “(1) the party against whom estoppel is claimed must be shown to have done or said something calculated or intended to induce another party to believe that certain facts exist and to act on that belief, and (2) the other party must be shown to have changed its position in reliance of those facts, thereby incurring some injury ․ An estoppel is predicated on proof of misleading conduct resulting in prejudice to the other party ․ The party claiming estoppel has the burden of proof, and whether it has met that burden of proof in a particular case is an issue of fact.”  (Citations omitted;  internal quotation marks omitted.)  Newman & Partners v. CFC Construction Limited Partnership, 236 Conn. 750, 768, 674 A.2d 1313 (1996).   Enforcement and foreclosure of mortgages and mechanic's liens are equitable proceedings.   Hence, the holder of a prior mortgage can be estopped from asserting its priority over a subsequent encumbrance if the holder of the prior mortgage engaged in “some concealment or misrepresentation, some act or declaration upon which [the subsequent lienholder] relied and by which they were induced to act differently from [how] they would have otherwise acted.”  Bridgeport People's Savings Bank v. Joseph Palaia, 115 Conn. 357, 364, 161 A. 526 (1932).

Eastern claims that the Bank concealed material facts and made misrepresentations to Eastern in that it:  1) failed to tell the subcontractors in early 2009 that the PRA entities did not have sufficient funds to complete the projects;  2) failed to tell the subcontractors that the PRA entities were seeking additional funding throughout 2009;  3) delayed declaring a default of the loans and actively represented through Pacitti and Boatman that additional funding was forthcoming.   Eastern claims that the Bank did so to induce Eastern and the other subcontractors to continue working in order to reduce the Bank's exposure and increase the value of its collateral.

The court is not persuaded.   Connecticut law does not impose any duty on a lender to inform subcontractors of the general contractor's financial condition.   Nor was the Bank required to inform the subcontractors of borrower's request for additional funding.   Nor did the Bank owe a duty to the subcontractors to declare a default of the loans at any particular time.   The law in Connecticut is clear that absent bad faith a lender owes no duty to a junior lienholder.  Connecticut Bank and Trust Co. v. Carriage Lane Associates, 219 Conn. 772, 783, 595 A.2d 334 (1991).   As the Court explained, “[t]he rationale for refusing to impose on a first mortgagee a duty, other than one of good faith, in the absence of an express agreement, is that it is within the power of the subordinator to refuse to subordinate if the terms of the subordination are not acceptable to him ․ To find the existence of a legal duty where none is expressed in the contract has the same effect as judicially rewriting the contract for the parties.”  Id.

Eastern failed to prove any bad faith on the part of the Bank.⁷ To the contrary, if anything, the Bank decreased Eastern's financial exposure at its own expense by making hundreds of thousands of dollars of additional disbursements to Eastern, when it was not required to do so in light of PRA Wallingford's and PRA at Norwich's defaults under the loan agreements.   Had the Bank in May 2009 declared the loans in default, told the subcontractors about the problems facing the PRA entities, and refused to make any further disbursements, as was its right, Eastern would be much worse off than it is today.   It is hard to see how the Bank's conduct could in anyway be viewed as bad faith.⁸

Eastern claims that the Bank acted in bad faith at the end of 2009 into 2010 when it represented to the subcontractors, through Pacitti and Boatman, that the Bank was going to provide additional funding to complete the projects.   The problem with this argument is that the evidence does not support Eastern's underlying premise that Pacitti and Boatman were acting as the Bank's agents when they told subcontractors that the Bank was going to provide additional funding.   To the contrary.   Boatman testified that he was at all times acting only for his clients, the PRA entities.   Pacitti never testified that the Bank authorized him or asked him to disclose the Bank's loan negotiations with him.   Furthermore, the evidence established that Pacitti made such disclosures to serve his own purposes.   He had personally guaranteed the loans, and if the projects failed he faced enormous personal exposure.   Consequently, he attempted to convince the subcontractors (and himself) that all was well, not because the Bank told him to do so, but because he needed to do so to protect himself.

Based on all of the above, the court concludes that Eastern has failed to prove the first element of an equitable estoppel claim.   It has failed to prove any concealment or misrepresentation calculated or intended to induce Eastern to act on a belief of facts that were not true.

In addition, Eastern has failed to prove any detrimental reliance on anything the Bank said or did.   The evidence established that Eastern released its liens in May and September 2009 because it was receiving hundreds of thousands of dollars to release those liens.   In fact, when it released its lien on the Wallingford project in May 2009 it was fully paid, less retainage, all monies owed it at that time.   While Eastern only received a partial payment in September 2009 to release its lien on the Norwich project, Hixson and Stout fully discussed the pros and cons of releasing Eastern's lien.   They made a calculated business decision to take a portion of the amount Eastern was owed rather than risk that they would later receive nothing.   There was no evidence that Eastern made either decision to release their liens in reliance on a representation by the Bank that future financing would be coming.   In fact, such reliance would have been impossible because nobody from Eastern ever spoke to anyone from the Bank.

Even if one assumes that Pacitti and Boatman were acting as agents for the Bank in January 2010 (which they were not) when they met with Eastern and the other subcontractors and Pacitti provided Eastern with the Bank's term sheets and his e-mail communications with the Bank about closing additional loans, Eastern has failed to prove any reliance on this information.   All of the work upon which the mechanic's liens at issue in this case are based was performed by Eastern before the meeting ever took place.   Exs. 13, 14.   While Eastern claims that it relied to its detriment on the information it received from Pacitti in that it continued to be “mobilized” on the projects, Eastern makes no claim for the costs of such mobilization.   Consequently, it is irrelevant to any claim made in these actions.

For all of the foregoing reasons, the court concludes that Eastern's equitable estoppel claims are meritless.   Judgment on the second counts of the amended complaints shall enter for the CT entities.

C. Third Count—Unjust Enrichment

“A right of recovery under the doctrine of unjust enrichment is essentially equitable, its basis being that in a given situation it is contrary to equity and good conscience for one to retain a benefit which has come to him at the expense of another ․ With no other test than what, under a given set of circumstances, is just or unjust, equitable or inequitable, conscionable or unconscionable, it becomes necessary in any case where the benefit of the doctrine is claimed, to examine the circumstances and the conduct of the parties and apply this standard ․ Unjust enrichment is, consistent with the principles of equity, a broad and flexible remedy ․ Plaintiffs seeking recovery for unjust enrichment must prove (1) that the defendants were benefitted, (2) that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the failure of payment was to the plaintiffs' detriment.”  (Citations omitted;  internal quotation marks omitted.)   Trenwick America Reinsurance Corp. v. W.R. Berkley Corp., 138 Conn.App. 741, 753–54, 54 A.3d 209 (2012).

Eastern claims that it is unjust for the Bank and its successors to keep the value of Eastern's work without paying for it.   To avoid this result, Eastern claims that the mortgages of the CT entities must be subordinated to Eastern's mechanic's lien.   Only in this way can Eastern be properly compensated while the CT entities are disgorged of a wrongfully derived benefit.

There is little question that the Bank benefitted from Eastern's work in that it did increase the value of the Bank's collateral.   There is also no question that the Bank's or its successor's failure to pay for the work is to Eastern's detriment.   What is at issue is whether the Bank's failure to pay was unjust.

The court finds that it was not.   The situation in which Eastern finds itself is the same as any mechanic's lien holder whose lien is subsequent in right to a first mortgage.   Connecticut courts do not change the priority of the liens merely because the mortgagee will get the benefit of the lien holder's work.   If they did, first mortgages would always have to be subordinated to mechanic's liens.   That is clearly not the law.

In addition, in this case the court finds that there is nothing unjust in maintaining the Bank's priority over Eastern's lien.   After filing mechanic's liens, Eastern freely released them in exchange for money disbursed to it by the Bank. Furthermore, Eastern agreed to subordinate to the Bank's mortgage any present and future liens it might have on the Norwich project.   The fact that the Bank was not willing to disburse sufficient funds to totally satisfy Eastern's balance on the Norwich project or pay it the “retainage” on both projects does not change the result.   Eastern could have demanded more before releasing its liens and agreeing to subordinate future liens.   Instead, it chose to accept what was offered.   There is nothing unjust about holding Eastern to its bargain.

Similarly, Eastern made its own decision to provide additional work on the Wallingford project after its mechanic's lien was released.   As discussed above, the Bank did nothing to induce Eastern to perform work on the Wallingford project after May 2009.   All of Eastern's dealings were with PRA Wallingford and Pacitti.   To the extent Eastern felt comfortable in providing additional services after releasing its lien, that comfort did not come from the Bank. Given Eastern's experience on the Wallingford project that resulted in the filing of its first mechanic's lien, Eastern knew that there was risk in continuing to work on the project.   It made the decision to undertake that risk.   There is nothing unjust about requiring it to bear the loss that resulted therefrom.

For these reasons, judgment shall enter for the CT entities on the third counts of the amended complaints.

D. Fourth Count—Violation of Conn. Gen.Stat. § 42–158p

General Statutes § 42–158p sets forth rules for the establishment, maintenance and release of retainage escrow accounts in connection with construction contracts.   In its fourth counts, Eastern claims that the amount of its mechanic's liens related to the retainage not paid to it is entitled to priority over the CT entities' mortgages because the Bank failed to comply with § 42–158p.

Eastern's claim under § 42–158p fails for at least two reasons.   First, by its very terms, § 42–158p does not apply to the CT entities or the Bank. The statute sets forth escrow account requirements for an “owner,” as defined in § 42–158i.   According to that section:  “ ‘Owner’ means any individual, corporation, nonprofit corporation, partnership, limited partnership, limited liability company or other business entity that is the owner of record or lessee of real property upon which construction, renovation or rehabilitation is to be or is being performed pursuant to a construction contract regarding such real property.”  Id. The owners here for purposes of § 42–158p are PRA at Norwich and PRA Wallingford.   At the time Eastern was doing work on the projects, these entities were the owners of record.   This conclusion is also consistent with longstanding Connecticut law which, as noted above, holds that a mortgagee, like the Bank, is not considered an owner of the property.  Red Rooster Construction Co., supra, 224 Conn. 569.   For this reason, the Bank had no duty to comply with § 42–158p.⁹

Second, the court agrees with the CT entities that Eastern has misconstrued the Bank's actions under the loan agreements.   Except for those instances when the Bank paid the subcontractors directly after securing releases of their mechanic's liens, the Bank disbursed money to the PRA entities based on disbursement requests made by them.   Pursuant to the terms of the loan agreement, the Bank subtracted from any advances it made “Retainage” as that term was defined in the loan agreements.   Ex. 7, p. 6. These subtracted amounts were never added to the loan balances.   They were simply not funded.   The agreements defined Retainage as the greater of:  “(a) ten percent (10%) of any Loan allocated to hard costs advance, or (b) that amount actually retained by the Borrower from payments made or to be made to the General Contractor, any subcontractors, mechanics, materialmen, vendors, or any other person, firm, corporation or entity supplying goods, services, material or labor to the Premises with respect to any Building Loan advance.”  Id. The definition of Retainage makes clear that it was the Borrowers, PRA at Norwich and PRA Wallingford, that were responsible for actually maintaining the retainage due the subcontractors like Eastern.   The fact that the Bank may have similarly reduced the amount of its advances to the Borrowers does not relieve the PRA entities of their legal responsibility to the subcontractors.   Nor does it transfer that legal responsibility to the Bank. How the Bank and the PRA entities agreed to fund the loan is separate and distinct from any obligations the PRA entities had to the subcontractors under § 42–158p.

Eastern argues that even if § 42–158p does not apply to the Bank and its successors, the court should nonetheless grant it relief as to the amount of the retainage because it would be inequitable to allow the CT entities to keep the value of the work Eastern completed.   The court has already addressed the equities in connection with Eastern's equitable estoppel and unjust enrichment claims.   Eastern has failed to prove any inequitable conduct by the Bank. In addition, the position in which Eastern finds itself is a result of agreements it freely negotiated and risks it chose to assume.

At the end of the day, Eastern's situation is no different than that of the other subcontractors on these projects or that of subcontractors on any other project that has failed and where there is a first mortgage.   While Eastern is understandably unhappy that it did not get paid for the work it performed, it is not entitled to recover from a party that has no legal or equitable responsibility for its loss.   Judgment on the fourth count shall enter for the CT entities.

E. Fifth through Seventh Counts—Claims against the PRA Entities

As noted above, PRA at Norwich, PRA Wallingford, and PRA Development were all defaulted as to the claims asserted against them.   In the fifth counts of the amended complaints, Eastern seeks damages for PRA Development's breach of the subcontract agreements.   Not only is liability deemed admitted by virtue of the defaults having entered, Pacitti admitted during trial that Eastern performed all of the work for which it billed and is due the amounts claimed.   Consequently, judgment shall enter for Eastern and against PRA Development on the fifth counts.   On the Norwich project, the court awards breach of contract damages of $286,225.00.   The court also awards prejudgment interest at the rate of 10% per year from the date on which PRA Development was obligated to pay Eastern.   The total interest through the date of the judgment is $117,287.69.   Consequently, the court enters judgment on the fifth count in the Norwich matter in the total amount of $403,512.69

On the Wallingford project, the court awards breach of contract damages of $63,973.02.   The court also awards prejudgment interest at the rate of 10% per year from the date on which PRA Development was obligated to pay Eastern.   The total interest through the date of the judgment is $29,681.47.   Consequently, the court enters judgment on the fifth count in the Wallingford matter in the total amount of $93,654.49.

On the sixth counts for unjust enrichment, the court finds that PRA Wallingford and PRA at Norwich were each unjustly enriched by the value of the work performed by Eastern, for which neither they nor PRA Development paid.   Consequently, judgment shall enter against PRA Wallingford in the amount of $63,973.02.   Judgment shall enter against PRA Norwich in the amount of $286,225.00.   Because the court has already awarded contract damages to Eastern and against PRA Development it awards no damages for unjust enrichment.   Because PRA Development must pay the contract damages it has not been unjustly enriched.   Consequently, judgment shall enter for PRA Development on sixth counts of the amended complaints.

On the seventh counts, the court finds that Eastern is entitled to judgment in the amount of the retainage withheld plus additional interest on the unpaid retainage at the rate of one percent per month pursuant to Conn. Gen.Stat. § 42–158j(c)(4).   On the Norwich project, the amount of retainage was $66,225.01.   Statutory interest on this amount through July 15, 2013 is $22,717.13.   The statute also allows the court to award punitive damages if it finds that the owner acted in bad faith.   Eastern presented no such evidence here.   For this reason, the court declines to award any punitive damages.   Therefore, the court enters judgment on the sixth count in the Norwich matter for Eastern and against PRA Norwich and PRA Development in the amount of $88,942.14.   Eastern is also entitled to an award of attorneys fees under the statute and may make application for such fees.

On the Wallingford project, the amount of retainage was $27,511.77.   Statutory interest on this amount through July 15, 2013 is $9,743.73.   The statute also allows the court to award punitive damages if it finds that the owner acted in bad faith.   Eastern presented no such evidence here.   For this reason, the court declines to award any punitive damages.   Therefore, the court enters judgment on the sixth count in the Wallingford matter for Eastern and against PRA Wallingford and PRA Development in the amount of $37,255.50.   Eastern is also entitled to an award of attorneys fees under the statute and may make application for such fees.

IV. CONCLUSION

For all the reasons set forth above, in the Norwich matter, Docket No. HHD–CV–11–6024725, judgment shall enter for CT Norwich and against Eastern on the first through fourth counts.   On the fifth through seventh counts, judgment shall enter for Eastern as set forth above.

In the Wallingford matter, Docket No. HHD–CV–11–6024823, judgment shall enter for CT Wallingford and against Eastern on the first through fourth counts.   On the fifth through seventh counts, judgment shall enter for Eastern as set forth above.

Bright, J.

FOOTNOTES

FN1. CT Wallingford and CT Norwich are the successors in interest to Bank of Smithtown, (the “Bank”) which made the original mortgage loans to PRA Wallingford and PRA at Norwich.   Bank of Smithtown was later purchased by People's United Bank, who assigned its rights under the loans and mortgages to CT Wallingford and CT Norwich..  FN1. CT Wallingford and CT Norwich are the successors in interest to Bank of Smithtown, (the “Bank”) which made the original mortgage loans to PRA Wallingford and PRA at Norwich.   Bank of Smithtown was later purchased by People's United Bank, who assigned its rights under the loans and mortgages to CT Wallingford and CT Norwich.

FN2. Page 3 is missing from Ex. 11.   Nevertheless, Eastern and PRA Development both operated as if the same language from page 3 in Ex. 12 was in Ex. 11..  FN2. Page 3 is missing from Ex. 11.   Nevertheless, Eastern and PRA Development both operated as if the same language from page 3 in Ex. 12 was in Ex. 11.

FN3. While his letter made reference to “the apparent restructure of the construction loan,” Boatman testified that he could not recall what he was referring to.   He testified though that the reference was not to either an extension of the maturity date of the loan or a potential second loan..  FN3. While his letter made reference to “the apparent restructure of the construction loan,” Boatman testified that he could not recall what he was referring to.   He testified though that the reference was not to either an extension of the maturity date of the loan or a potential second loan.

FN4. While it may be true that the Bank had a similar interest in seeing the mechanic's liens released, that does not mean that Boatman was acting for the Bank. The evidence established and the court finds that the Bank demanded the releases if it was going to disburse additional funds on loans that were already in default.   Unlike Pacitti and the PRA entities, who had much to gain and little to lose by the Bank disbursing additional funds, the Bank increased its financial risk with each additional disbursement.   Consequently, in dealing with the subcontractors Boatman was acting solely for the PRA entities in trying to satisfy the conditions the lender put on the release of money.   That he was able to satisfy those conditions by securing the mechanic's liens releases in no way makes him the Bank's attorney or agent..  FN4. While it may be true that the Bank had a similar interest in seeing the mechanic's liens released, that does not mean that Boatman was acting for the Bank. The evidence established and the court finds that the Bank demanded the releases if it was going to disburse additional funds on loans that were already in default.   Unlike Pacitti and the PRA entities, who had much to gain and little to lose by the Bank disbursing additional funds, the Bank increased its financial risk with each additional disbursement.   Consequently, in dealing with the subcontractors Boatman was acting solely for the PRA entities in trying to satisfy the conditions the lender put on the release of money.   That he was able to satisfy those conditions by securing the mechanic's liens releases in no way makes him the Bank's attorney or agent.

FN5. In its post-trial brief, Eastern acknowledges that its damages must be reduced by a $30,000 “Credit for ISN Partial Release.”   Exhibit A to post-trial brief..  FN5. In its post-trial brief, Eastern acknowledges that its damages must be reduced by a $30,000 “Credit for ISN Partial Release.”   Exhibit A to post-trial brief.

FN6. In a footnote in its reply brief, Eastern asserts that it has a breach of contract claim on a de facto ownership theory and refers the court to the law cited in its pre-trial memorandum.   As factual support for its claim, Eastern provides a list of exhibits that it believes supports its claim.   Nevertheless, Eastern never addressed the specific issue raised by the court after the close of evidence:  how was the Bank's conduct here different than that of any other lender in similar circumstances?.  FN6. In a footnote in its reply brief, Eastern asserts that it has a breach of contract claim on a de facto ownership theory and refers the court to the law cited in its pre-trial memorandum.   As factual support for its claim, Eastern provides a list of exhibits that it believes supports its claim.   Nevertheless, Eastern never addressed the specific issue raised by the court after the close of evidence:  how was the Bank's conduct here different than that of any other lender in similar circumstances?

FN7. Eastern argued in its post-trial brief that the Bank acted in bad faith by underfunding the progress payments requested by the PRA entities.   The only evidence relied upon by Eastern for this claim is a comparison of the payment requests as verified by EMJ with the amounts the Bank actually disbursed.   According to Eastern, by the time the Bank had stopped funding the projects, it had underfunded Norwich by more than $2,000,000 and Wallingford by almost $2,000,000.   This evidence, without more, is a far cry from proof of bad faith.   It may constitute mismanagement of the loans, or even, as Eastern suggests, gross negligence.   However, such facts are insufficient to impose liability on the Bank (or its successor) or undo the priority of its mortgage.   Furthermore, this theory of bad faith appears to be nothing more than an afterthought as it is not even pled in the amended complaints..  FN7. Eastern argued in its post-trial brief that the Bank acted in bad faith by underfunding the progress payments requested by the PRA entities.   The only evidence relied upon by Eastern for this claim is a comparison of the payment requests as verified by EMJ with the amounts the Bank actually disbursed.   According to Eastern, by the time the Bank had stopped funding the projects, it had underfunded Norwich by more than $2,000,000 and Wallingford by almost $2,000,000.   This evidence, without more, is a far cry from proof of bad faith.   It may constitute mismanagement of the loans, or even, as Eastern suggests, gross negligence.   However, such facts are insufficient to impose liability on the Bank (or its successor) or undo the priority of its mortgage.   Furthermore, this theory of bad faith appears to be nothing more than an afterthought as it is not even pled in the amended complaints.

FN8. Eastern relies heavily on decisions from other jurisdictions where the court held that the first mortgagee's knowledge of construction on the project and its involvement with the construction resulted in the mechanic's liens of those doing the work having priority over the first mortgage.  In re Exec Tech Partners, 107 F.3d 677, 680–81 (8th Cir.1997);  Dave Kolb Grading, Inc. v. Lieberman Corp., 837 S.W.2d 924, 935 (Mo.App.1992).   Such reliance is misplaced.   Neither case dealt with a claim of equitable estoppel.   The cases addressed a claim of waiver under Kansas and Missouri law, respectively.   In those states, if a first mortgagee lends money knowing that it is going to be used for construction on the mortgaged property, it is deemed to have waived its priority over any mechanic's liens related to the construction.   Eastern does not make a similar waiver argument here, and for good reason.   Connecticut has never recognized such a principle..  FN8. Eastern relies heavily on decisions from other jurisdictions where the court held that the first mortgagee's knowledge of construction on the project and its involvement with the construction resulted in the mechanic's liens of those doing the work having priority over the first mortgage.  In re Exec Tech Partners, 107 F.3d 677, 680–81 (8th Cir.1997);  Dave Kolb Grading, Inc. v. Lieberman Corp., 837 S.W.2d 924, 935 (Mo.App.1992).   Such reliance is misplaced.   Neither case dealt with a claim of equitable estoppel.   The cases addressed a claim of waiver under Kansas and Missouri law, respectively.   In those states, if a first mortgagee lends money knowing that it is going to be used for construction on the mortgaged property, it is deemed to have waived its priority over any mechanic's liens related to the construction.   Eastern does not make a similar waiver argument here, and for good reason.   Connecticut has never recognized such a principle.

FN9. Eastern argues that the Bank was responsible for the retainage escrow as a de facto owner of the property.   For the reasons set forth above, the court finds such a claim to be legally and factually without merit..  FN9. Eastern argues that the Bank was responsible for the retainage escrow as a de facto owner of the property.   For the reasons set forth above, the court finds such a claim to be legally and factually without merit.

Bright, William H., J.