PMB LP v. LLC (2013)

MEMORANDUM OF DECISION RE MOTION FOR DEFICIENCY JUDGMENT

Pursuant to General Statutes § 49–14, the substituted plaintiff, 4 Gosses, LLC, seeks a deficiency judgment against the primary debtor, Abigail in Colchester, LLC, and the guarantors of the underlying obligation, Hemraj and Hemlata Khona (hereinafter “Khonas”).   The Khonas' guarantees were secured by mortgages on properties they own personally.   There is a third guarantor, Joseph Giuttari.   The plaintiff asserts that the value of the Colchester real estate, which was held in the name of Abigail in Colchester, LLC, was $550,000.00 and that the judgment debt calculated as of the date of vesting was $835,634.34.   Further, at the time the title vested in the plaintiff, the value was decreased by the taxes that had been owed but unpaid to the Town of Colchester in the amount of $89,002.57.   The Khonas contest this deficiency and assert that the plaintiff is not entitled to a deficiency judgment because of a failure to comply with the Practice Book and, further, they contest the valuation of the property offered by the plaintiff and the calculation of the claimed deficiency.

Litigation History

This long pending foreclosure action was commenced on February 2, 2010, against the named defendant and the guarantors.   Property held by the named defendant was located on Bulkeley Hill Road, Colchester, Connecticut.   It consists of approximately 130 acres of which approximately 31 acres were an approved 12 lot subdivision.   The remaining acreage was available for additional development.   The development of the approved subdivision would require construction of a 2,000 foot new road.   The bond required for the construction of the road was more than $700,000.00.   At the time of the foreclosure, neither the road nor the lots had been developed.

The court entered a judgment of strict foreclosure on December 6, 2010.   At that time, the court found the debt to be $791,654.91.   The court further awarded attorneys fees in the amount of $3,750.00, and appraiser's fee of $1,550.00 and a title search fee of $250.00.   The court determined that the fair market value of the subject property was $550,000.00.   This judgment was reopened and reset and the first law day to run was May 24, 2011.   The law days expired without the plaintiff or any of the subsequent encumbrancers exercising their right of redemption.   On May 26, 2011 a motion was filed to open the judgment and to substitute 4 Gosses, LLC as the plaintiff in lieu of PMB Mortgages, LP. This motion was granted by the court on May 27, 2011 and on May 28, 2011, title vested in the substituted plaintiff.   The plaintiff filed a motion for deficiency on June 11, 2011, but never claimed that motion for a hearing.   An objection to the motion for deficiency judgment was filed by the defendants, Khonas, on April 4, 2013.   The objection indicates that the Khonas intended to call Adam Hardej.   On September 16, 2013, the court held a hearing on the plaintiff's motion for a deficiency judgment.   During the hearing it received testimony from the plaintiff's appraiser, James B. Blair of the Riess Appraisal Company.   The defendants, Khonas, offered testimony from Adam J. Hardej.

A.

The Khonas challenge the right of the plaintiff to pursue this motion because the plaintiff has failed to comply with the disclosure requirements of Practice Book 23–19(c).  This Practice Book section states “(n)ot less than fifteen days prior to the hearing on the motion for deficiency judgment, the party claiming the deficiency judgment shall file with the clerk of the court and serve on each appearing party, ․ a preliminary computation of the debt, the name of any expert on whose opinion the party will rely to prove the value of the property on the date of vesting, and a statement of the party's claims as to the value.”   Specifically the Khonas assert that they were not provided with the name of the plaintiff's expert, a statement of the claim of value.   They note that the motion for a deficiency judgment is a statutory remedy that did not exist at common law and should be strictly construed.

The plaintiff's motion for deficiency judgment does not contain a computation of the debt, the name of the valuation expert or the statement of the claimed fair market value on the date that title vested in the plaintiff.

The plaintiff, acknowledging the deficiencies in their motion for a deficiency judgment note that Practice Book section 1–8 provides that the rules “will be interpreted liberally in any case where it shall be manifest that a strict adherence to them will work surprise or injustice.”   The plaintiff further notes that Connecticut jurisprudence prefers a resolution on the merits after trial or hearing rather than procedural default.   Finally the plaintiff notes that the appraisal relied upon by the plaintiff had been filed with the court prior to the entry of the judgment of strict foreclosure and therefore had been available to the Khonas for almost three years prior to the hearing date.   They claim that the appraised value at the time of judgment remained the same as the date on which title vested with the plaintiff.   Indeed the appraisal of the subject property, undeveloped land, remained consistent in the opinion of the Riess Appraisal Company from April 6, 2010 to November 22, 2010 to May 28, 2011.   Finally the plaintiff notes that it never claimed its motion for a deficiency judgment for a hearing until after the defendants filed their objection.   The plaintiff concludes in this context that the defendant has not been prejudiced by its failure to strictly comply with the required Practice Book disclosures.

The statutory language authorizing a party to seek a deficiency does not contain the detailed time frame and disclosure requirements articulated in the Practice Book. In FDIC v. Hillcrest Associates, 233 Conn. 153, 173 (1995), the Supreme Court discussed the remedy of deficiency judgment.   It rejected the argument that the 30–day time limit for the claiming of a deficiency contained in the statute created an issue of subject matter jurisdiction.   The court noted that the deficiency judgment procedure is simply a part of the foreclosure process over the court is already exercising jurisdiction.  “It would be cutting the notion of subject matter jurisdiction too finely to apply it, not to a separate statutory cause of action, but to a statutory procedure that is part of, and complementary to, the traditional and equitable common law action of strict foreclosure.”  Supra 172.  “This conclusion, that the thirty day time limitation ․ is not subject matter jurisdictional, does not mean, however, that it can be ignored with impunity ․ it would be improper for the court to render such a judgment unless the mortgagor had, either expressly or by its conduct, consented thereto.”  Supra, 173.

The court is presented with a timely filed motion for a deficiency judgment and a failure of the plaintiff to comply with prehearing disclosure requirements stated in the Practice Book. The defendant Khonas objected to the court proceeding to hear the motion.   The court took the testimony from the plaintiff's appraiser and the defendant's appraiser who were present in court.   The court reserved the issue of whether the plaintiff had waived its claim to a deficiency because of its failure to comply with the Practice Book. The court afforded the parties an opportunity to file briefs on the issues raised.

The court finds that failure of the plaintiff to strictly comply with the requirements of Practice Book has not been waived by the defendant.   Nonetheless, it would exalt procedure over substance in this case to bar the plaintiff from pursuing this motion.   The defendants have not shown they have been prejudiced.   The defendant was aware of the judgment debt before the motion for a deficiency was filed.   Further the plaintiff filed an appraisal of the property when it filed its motion for strict foreclosure.   It is not seeking to modify that fair market value as of the date of vesting.   Further the defendants must have been aware of the failure to pay the municipal taxes due on the property.   The only number not precisely known for the calculation of the deficiency judgment as of the date of vesting was the claimed interest accruing between December 7, 2010 through May 28, 2011.   The prejudice that the defendants have identified and claimed is that the plaintiff's failure to diligently prosecute the motion for a deficiency judgment has caused an accrual interest.   The court agrees with this claim of prejudice and will decline to allow interest to accrue for the period of July 28, 2011 to the present.   The court will also address an equitable rate of postjudgment interest.

B.

Having determined that it is appropriate to consider the merits of the plaintiff's motion for a deficiency judgment, the court now turns to the determination of the value of the subject property on the date that title vested in the plaintiff, May 28, 2011.   The plaintiff offered the testimony of James B. Blair, of the Reiss Appraisal Company, to support their position that the parcel's value is $550,000.00.   The Khonas offered the testimony of Adam A. Hardej, Jr., appraiser for BAAR Realty Advisors, who provided testimony that in his opinion the value of this property on May 28, 2011, was $1,000,000.00.

Each of the appraiser submitted a detailed report which described their assumptions, their analytic method was to support their conclusions.

The fair market value of the property means, “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming that the price is not effected by undue stimulus.”

The subject property is located at 22 Bulkeley Hill Road, Colchester, Connecticut.   The parcel is approximately 130 acres in size and contains approximately 23 acres of wetlands, 18 acres of steep slopes and about 89 acres of land that are suitable for development.   This property is zoned residential and 31 acres of the parcel have been approved for a 12–lot subdivision which contains lots sizes ranging from 1.38 to 6.72 acres.   Subdivision approval requires the construction of a road of approximately 2,100 feet in length and a bond in excess of $700.000.00 has been posted with regard to the construction of the road.

Both appraisers, as a part of their analysis to determine the market value of the subject property looked at the market conditions that prevailed in the Town of Colchester, the County of New London and the State of Connecticut in May 2011.   Each of the appraisers concluded in slightly differing terms that the real estate market for undeveloped land or subdivided lots was distressed.   While Colchester is an attractive portion of the County of New London because of its direct access to Hartford, it was effected as was all of Connecticut by the general state of economic decline.   The defendant's appraiser noted that “local brokers could not indicate demand for new construction, as there has been minimal recent development.”  (Page 11 of the Supplemental Addendum prepared by Adam J. Hardej.)   The plaintiff's appraiser concluded that the demand for the lots in the approved subdivision portion of the property was “almost nonexistent.”

The defendants' appraiser concluded on the basis of his detailed analysis that the valuation of the subject property is 1.1 million dollars.   He assigned a value of $6,500.00 per acre for the 99 acres that were not a part of the approved subdivision.   The defendants' appraiser conducted a different analysis on that area of the subject property that was part of the approved subdivision.   The defendants' appraiser assumed that the actual cost of the subdivision road would be substantially less than the cost of the bond for the construction of the road and further made assumptions that the bulk of the building lots could be sold or absorbed into the market within a two-year period.   Then applying certain calculations for what an investor would be looking to pay for the property the defendant's appraiser concluded that the parcels would have a current value of $450,000.00.

The plaintiff's appraiser's analysis of the valuation of this property differs substantially to the extent that he does not believe that the developer would undertake the subdivision improvements necessary to start selling lots in the current market environment and that there would only be a limited enhancement to the value of the parcel of land based upon the subdivision approval.   Essentially, the plaintiff's appraiser felt that the buyer, who would be interested in this parcel, would be a buyer who would hold the parcel for future development when market conditions were better.   Plaintiff's appraiser assigned a market value of $4,000.00 per acre for all 130 acres of the site and also allowed that the engineering and approvals obtained for the 12–lot subdivision would add a value of $2,500.00 per approved lot or a total of $30,000.00.

The court has reviewed the sales data contained in the appraisal reports.   The court concludes and agrees with the plaintiff's appraiser that the market conditions for a subdivision with high development costs per lot for the construction of the road would significantly depress the value of the parcel as a whole.   The court does not find that in the immediate development of the subdivided portion of the property was likely and the market defined by the plaintiff's appraiser is a far more realistic one for determining the fair market value on the date that the title vested in the plaintiff.   Having concluded that the property is most fairly appraised as raw land the court must determine what a fair price per acre should be assigned for the parcel.

The court has reviewed the analysis of each of the appraisers and the adjustments that each appraiser has used to reach their opinion as to a fair market value.   The court concludes that on the date of vesting the subject parcel had a market value of $5,000.00 per acre with the additional adjustment of $2,500.00 per lot on the engineering of the approved subdivision.   For the purposes of this motion, the court finds that the fair market value of the property is $680,000.00.

C.

Calculation of the Deficiency Judgment

1. Judgment Debt $791,654.91

2. Attorneys fees and costs at time of judgment $5,535.00

3. Interest from 12/7/10 through 5/28/2011

at 4 percent (88.58 per diem) $15,324.34

4. Total $812,514.25

5. Fair Market Value on May 28, 2011 $650,000.00

6. Municipal taxes paid post judgment but prior

to vesting (subtracted from FMV) $89,002.57

7. Net Fair Market Value on May 28, 2011 $560,997.43

8. Deficiency Judgment (4–7) $251,516.82

A deficiency judgment may enter in favor of the plaintiff against the defendants and guarantors in the amount of $251,516.82.   The court declines to award any additional appraisal fees or attorneys fees because of the plaintiff's failure to comply with the requirements of the Practice Book. The court further declines to award interest from date that title vested in the plaintiff until the date this decision.   The court awards postjudgment interest on the deficiency judgment at the rate of 4 percent per annum commencing as of the date of this decision.

Cosgrove, J.

Cosgrove, Emmet L., J.