AJJ LLP v. Herns Jean–Charles et al. (2014)

I BACKGROUND

This is an action brought by the plaintiff to foreclose a mortgage granted to it by the defendant Jean–Charles on his residential property known generally as 10 Carlin Street.   All defendants have been defaulted except the defendant, Bank of New York Melon as Trustee for Amortizing Residential Collateral Trust, Mortgage Pass–Through Certificates, Series 2002–BC7 (the defendant bank).   The plaintiff alleges, in one count, that the defendant Jean–Charles granted to it a mortgage on 10 Carlin Street to secure a note in the principal amount of $195,000, and that the note is in default.   The complaint further alleges that the various defendants claim an interest in the property which interests, including that of the defendant bank, are subsequent in right to the plaintiff's mortgage.   The defendant bank has filed an answer and seven special defenses to wit:  marshaling of assets, equitable subrogation, unclean hands, failure to mitigate damages, equitable alteration of priorities, equitable estoppel, and unjust enrichment.   Through its special defenses the defendant bank seeks to invoke the court's equitable powers to cause its mortgage to obtain priority over the plaintiff's mortgage despite the fact that the plaintiff's mortgage was recorded prior to the mortgage of the defendant bank.   Moreover, the defendant bank challenges whether the plaintiff has proven that it is owed money from the defendant Jean–Charles pursuant to the promissory note secured by the mortgage it seeks to foreclose.   After a multi-day trial in late October 2013 the parties filed briefs in December 2013.

II FINDINGS OF FACT

A THE UNDERLYING TRANSACTIONS

1) The plaintiff was created in 1997 for the primary purpose of acquiring and holding real estate for investment.   The plaintiff consists of two equal partners, Alfonse Pascarelli Jr. (Pascarelli) and Edward Bartolo (Bartolo).   Pascarelli and Bartolo are lifelong friends who are equal partners in a nonparty entity that for many years has owned and operated a printing business.   2) One of the properties that the plaintiff owned ¹ was known generally as 18 Monroe Street, Norwalk, CT. The plaintiff acquired 18 Monroe Street in 1983.   Pascarelli was much more involved in the details of the acquisition, maintenance and financing of 18 Monroe Street.   Bartolo spent most of his time involved in the day to day operations of the printing business.   3) 18 Monroe Street is a mixed use property located in South Norwalk, CT. It consists of several retail units on the first floor and multiple residential units above the first floor.   4) In 1999 or 2000 the defendant Jean–Charles, who owned a taxi company, approached Pascarelli concerning rental of portions of the retail space at 18 Monroe Street for his business.   The plaintiff and the defendant Jean–Charles reached a rental agreement and the defendant Jean–Charles became a retail tenant of the plaintiff at 18 Monroe Street.   5) For a variety of reasons the plaintiff became interested in selling the 18 Monroe Street property ² and eventually came to an agreement with the defendant Jean–Charles for the sale and purchase of 18 Monroe Street for a price of $675,000, despite the fact that the defendant Jean–Charles had no available cash for a down payment on the property or even for closing costs involved in the sale and purchase transaction.   6) The plaintiff and the defendant Jean–Charles executed a contract for the sale and purchase of 18 Monroe Street in April 2002.   The contract called for a sale price of $675,000.   The obligations of the defendant Jean–Charles under the contract were contingent upon his ability to obtain a mortgage commitment in the amount of $500,000.   Because the defendant Jean–Charles had no cash available to engage in the transaction, the contract called for the balance of the purchase price, $175,000 to be paid by a promissory note from the buyer to the seller with a “blanket mortgage on properties that he owns.”   At the time the defendant Jean–Charles owned 10 Carlin Street.   This promissory note was also to include “actual closing costs to seller.”   The seller/plaintiff paid for all of the costs of the closing including those which would typically be borne by the buyer.   7) The defendant Jean–Charles was able to secure a mortgage commitment from First County Bank in the amount of $500,000, but only if the defendant's debt to First County Bank was guaranteed by Pascarelli and Bartolo.   Nothing in the contract obligated Pascarelli and Bartolo to guarantee the repayment of the mortgage note.   8) Because they wanted to sell the property, Pascarelli and Bartolo agreed to and did guarantee the defendant's $500,000 note to First County Bank, even though they were not obligated to do so by the original contract.   9) The closing of the transaction for the sale and purchase of 18 Monroe Street occurred on May 24, 2002.   The defendant Jean–Charles formed a limited liability company, Jean–Charles Enterprises, LLC (JCE) for the purpose of taking title to 18 Monroe Street.   At the closing a promissory note in the face amount of $195,000 was executed by the defendant Jean–Charles, JCE and Regina F. Jean–Charles (Regina), the defendant Jean–Charles' wife:  The plaintiff/seller paid all of the closing costs at the closing and the amount of the promissory note ($195,000) was consistent with the intent of the contract and the consideration rendered in exchange for the promissory note.   At the time of the execution of the note the defendant Jean–Charles and the other makers became indebted to the plaintiff in the amount of $195,000.   10) The following documents were also executed at the closing on May 24, 2002.

a. A warranty deed from Pascarelli and Bartolo to JCE; ³

b. A promissory note from JCE to First County Bank in the face amount of $500,000;

c. A mortgage from JCE to First County Bank encumbering 18 Monroe Street;

d. A promissory note payable to the plaintiff in the principle amount of $195,000 signed by JCE, the defendant Jean–Charles and Regina;

e.  A mortgage to the plaintiff securing the $195,000 promissory note encumbering 18 Monroe Street signed by JCE;

f. A mortgage to the plaintiff securing the $195,000 note encumbering 10 Carlin Street signed by the defendant Jean–Charles;

g. A quitclaim deed from JCE to the plaintiff conveying 18 Monroe Street to the plaintiff;

h. An escrow agreement which called for the quit claim deed to be held by Attorney Nathaniel Shipp but which was to be delivered to either Pascarelli or Bartolo in the event of default on the $195,000 promissory note.   The quitclaim deed was delivered to Attorney Shipp at the closing and remained in his possession until October 4, 2005.

11) All parties were represented at the closing.   First County Bank, JCE, the defendant Jean–Charles and Regina were all represented by Attorney Nathaniel Shipp.   The plaintiff, Pascarelli, and Bartolo were all represented by the law firm of Modugno, Modugno and Modugno.   12) Just as the contract did not require Pascarelli and Bartolo to guarantee the $500,000 note to First County Bank, nothing in the original contract required the execution of a quitclaim deed and escrow agreement.   It is a reasonable inference that since both arose after the signing of the contract and both were executed at the closing that the quitclaim deed and escrow agreement were additional consideration and security that the sellers required as a result of their willingness to guarantee the $500,000 promissory note and the court so finds.   13) The mortgage from the defendant Jean–Charles to the plaintiff encumbering 10 Carlin Street was duly recorded in the Norwalk land records on May 24, 2002 at 3:54 pm.   The warranty deed from Pascarelli and Bartolo to JCE conveying 18 Monroe Street was duly recorded in the Norwalk land records on May 28, 2002 at 3:49 pm;  the mortgage from JCE to First County Bank encumbering 18 Monroe Street was duly recorded in the Norwalk land records on May 28, 2002 at 3:50 pm and the mortgage from JCE to plaintiff encumbering 18 Monroe Street was duly recorded in the Norwalk land records on May 28, 2002 at 3:51 pm.   14) The mortgage from JCE to the plaintiff encumbering 18 Monroe Street was recorded subsequent to the First County Bank mortgage and was expressly made subordinate to the mortgage to First County Bank. While the plaintiff did not have a title search done on 10 Carlin Street, Pascarelli believed that the mortgage on 10 Carlin Street was a second mortgage.   The promissory note that it encumbers states that it is “secured by a second mortgage on real property known as 18 Monroe Street, Norwalk, CT 06854 and 10 Carlin Street, Norwalk, CT 06851.”   15) In fact at the time the mortgage from the defendant Jean–Charles to the plaintiff was recorded it was subsequent to two mortgages that encumbered 10 Carlin Street, a first mortgage in the face amount of $288,000 and a second mortgage in the face amount of $30,300.   16) Accordingly at the conclusion of the 18 Monroe Street closing record title to 18 Monroe Street was held by JCE encumbered by a first mortgage to First County Bank in the face amount of $500,000 and a second mortgage to the plaintiff in the face amount of $195,000;  record title to 10 Carlin Street was held by the defendant Jean–Charles encumbered by a first mortgage to GMC Mortgage Inc. in the face amount of $288,000, a second mortgage to First Union National Bank in the face amount of $30,300 and, subsequent to these two mortgages, the mortgage from the defendant Jean–Charles to the plaintiff in the amount of $195,000.   17) Around the time that the defendant Jean–Charles was engaged in this transaction with the plaintiff he was also seeking to refinance the first and second mortgage on the 10 Carlin Street property.   On May 16, 2002 counsel for the proposed new lender ordered a title search on 10 Carlin Street which search was done through May 20, 2002 at 10:30 am.   Of course the search revealed only the first and second mortgages on 10 Carlin Street previously described and did not and could not have revealed the third mortgage to the plaintiff because as of May 20, 2002 it had not been executed or recorded.   On or about June 8, 2002 the defendant Jean–Charles closed his refinance with the defendant bank's predecessor in interest, Aeges Mortgage Corp. (Aeges).  Aeges lent the defendant Jean–Charles $348,000.   Those funds were utilized to satisfy the first mortgage on 10 Carlin Street in the amount of $287,922.40 and to satisfy the second mortgage on 10 Carlin Street in the amount of $26,234.09.   The balance of the loan proceeds were utilized to pay transactional costs in the amount of $19,837.40 as well as other creditors of the defendant Jean–Charles which creditors did not encumber the 10 Carlin Street property.   The balance of the proceeds in the amount of $3,614.00 was paid to the defendant Jean–Charles.   The mortgage from the defendant Jean–Charles to Aeges was recorded on June 11, 2002, which of course was subsequent to the recording of the mortgage from the defendant Jean–Charles to the plaintiff.   Though the individual who recorded the mortgage was instructed to search the title of the 10 Carlin Street property from the date of the previous search (May 20, 2002) to the time of the recording of the Aeges mortgage he did not discover the mortgage from the defendant Jean–Charles to the plaintiff encumbering 10 Carlin Street that had been recorded on May 24, 2002.   Since the first and second mortgage which had previously encumbered 10 Carlin Street were satisfied and released the plaintiff's mortgage became the first mortgage in time and the Aeges mortgage became the second mortgage in time.   Through a series of duly executed transactions the defendant bank became the owner of the Aeges mortgage and the holder of the Aeges note which it secured.   The state of record title on 10 Carlin Street was not discovered by either plaintiff or the defendant bank's predecessors until the defendant Jean–Charles fell into default and an action to foreclose the Aeges mortgage was begun.

B THE COLLECTION EFFORTS

The defendant Jean–Charles defaulted on the Aeges note, the First County note and the plaintiff's note.   18) First County commenced a foreclosure of its first mortgage on 18 Monroe Street.   The plaintiff as a subsequent encumbrance was made a defendant in that action.   Pascarelli and Bartolo as guarantors of the First County note were also made defendants in that action and had exposure to First County Bank as a result the guarantees that they had executed when the loan was closed.   19) Aeges Mortgage Company through its nominees began a foreclosure action on 10 Carlin Street by complaint dated March 10, 2004, which complaint named the plaintiff's mortgage as a mortgage which was prior in right to that of the defendant bank's predecessors.   That foreclosure action was withdrawn and two subsequent foreclosure actions were began by the defendant bank's predecessors each of which named the plaintiff herein as the defendant alleging that equitable remedies should be invoked to rearrange the priority of the mortgages between the defendant bank and the plaintiff on 10 Carlin Street.   None of those foreclosures actions were prosecuted to completion.   20) On October 4, 2005 Pascarelli and his attorney went to Attorney Shipp's office to retrieve the quitclaim deed from JCE to the plaintiff pursuant to the escrow agreement which entitled the plaintiff to retrieve the quitclaim deed upon the default of JCE. They successfully retrieved the quitclaim deed and recorded it in the Norwalk land records on the same day.   On October 4, 2005, immediately before they recorded the quitclaim deed, they also recorded an assignment of the mortgage (from JCE to the plaintiff encumbering 18 Monroe Street) from the plaintiff to Pascarelli and Bartolo.   21) Notwithstanding the recording of the quitclaim deed the plaintiff did not initially collect rents from the 18 Monroe Street tenants and did not initially interfere with JCE's possession and control of the 18 Monroe Street property.   22) First County Bank obtained a judgment of foreclosure by sale on the 18 Monroe Street property.   As a part of that judgment the court found the debt from JCE to First County Bank to be $465,896.58.   A sale date was set for August 16, 2008.   23) On August 15, 2008 JCE filed a voluntary petition for relief in the bankruptcy court staying the sale.   24) On October 17, 2008 the plaintiff filed a motion for relief from the automatic stay in the bankruptcy court which motion included a copy of the recorded quitclaim deed and asserted that JCE wrongly included 18 Monroe Street as an asset of the bankruptcy estate since JCE was not the owner of 18 Monroe Street.   The plaintiff in that motion asserted that it was the owner of the 18 Monroe Street property by virtue of the quitclaim deed recorded on October 4, 2005.   The motion included an assertion that the plaintiff “accepted delivery of said deed” and recorded the same on October 4, 2005.   The motion also included the assertion that the plaintiff “is the owner of the premises located at 18 Monroe Street, Norwalk, CT and [JCE] does not have any ownership interests in the premises.”   The motion for relief from stay was granted.   25) On December 29, 2009 Pascarelli and Bartolo formed a new limited liability company J.P. Asset Management, LLC (J.P. Asset).   They were each fifty percent owners of J.P. Asset and J.P. Asset was created for the sole purpose of engaging in a transaction with First County Bank. On December 29, 2009 J.P. Asset paid First County Bank $400,000 in exchange for an assignment of the First County mortgage and an allonge for the First County note.   The $400,000 was borrowed from an institutional lender.   J.P. Asset was substituted as plaintiff in the previously initiated First County foreclosure action.   J.P. Asset obtained a judgment of strict foreclose on the 18 Monroe Street property on August 2, 2010 and title to the 18 Monroe Street property vested in J.P. Asset and title remained in J.P. Asset at least through the trial of the case.   At the time J.P. Asset acquired title through the strict foreclosure process there was approximately $60,000 in property taxes due on the 18 Monroe Street property which amount was prior in right to J.P. Asset's newly acquired interest.

C. THE PLAINTIFF'S DEBT

26) On the day of the sale of the 18 Monroe Street property the defendant Jean–Charles became indebted to the plaintiff in the amount of $195,000 as evidenced by the promissory note executed by the defendant while he was represented by counsel.   Pascarelli's testimony was credible in all respects and particularly with regard to the amount of the original debt and the payments made by the defendant Jean–Charles.   The additional sum above the $175,000 expressly stated in the contract was also expressly contemplated in the contract.   While Pascarelli could not recall or identify the specific closing expenses that the plaintiff paid on behalf of the defendant Jean–Charles the note itself is evidence of that and the amount and is not inconsistent with the closing costs that might be expected to be incurred in a transaction as complicated as the 18 Monroe Street transaction when compared with the closing costs incurred by the defendant Jean–Charles in the Aeges mortgage transaction.   The court also finds generally credible Pascarelli's testimony that the defendant Jean–Charles only made 15 payments, eight of which were in the amount of $800 and seven of which were in the amount of $1,600.   The court also finds that an additional $1,600.00 payment beyond what Pascarelli recalled was made subsequent to the bankruptcy filing.   While it is true the plaintiff's records in this regard are less than perfect the note itself evidences the various charges that would accrue (interest and late charges as well as default interest).   The defendant Jean–Charles's default on this note is consistent with the evidence that he defaulted on other notes.   And the defendant Jean–Charles has been defaulted in this action and has asserted no defense of payment.   The defendant bank itself introduced a document which purported to show the accumulated interest and balance due which document evidences that as of January 1, 2010 the balance due on the $195,000 note was $398,360.22.   Presumably defendant offered the document for the purposes of an entry that evidences a payment on February 1, 2010 extinguishing the balance due and leaving a zero balance on the note.   But there is no credible evidence that the defendant Jean–Charles ever made such a payment.   Mr. Pascarelli flatly denied it and the court finds Mr. Pascarelli's testimony credible in this regard.   The court does not know why the entry of the payment was made but the court does not believe that such a payment was made and it is a part of the court's finding such a payment as indicated on the document was not made.   The promissory note contains provisions for an increased interest rate upon default and late charges upon default and the plaintiff is entitled to all of those amounts under the promissory note.   The court finds that based upon the promissory note and the evidence of payments that the debt due at the time of the trial from the defendant Jean–Charles to the plaintiff was $415,031.04.   The finding of this debt, however, is subject to the significance of the quitclaim deed received and recorded by the plaintiff which will be discussed subsequently.   The court makes the subordinate finding that on October 4, 2005, just before the quitclaim deed was retrieved and recorded the debt from the defendant Jean–Charles to the plaintiff was $241,246.96.   The court finds that on the date of the closing in 2002 the value of the 18 Monroe Street property was $675,000.   Court finds that on October 24, 2008 the value of the property was $668,000.   After a review of the appraisals along with consideration of the evidence of the condition of the property the court finds that on October 4, 2005 the date that the quitclaim deed was recorded the value of the property was $670,000.   The court finds as of June 2010 the value of the property was $480,000.   The dramatic difference in the value between 2008 and 2010 can be accounted for by both a deterioration of the condition of the property as well as the impact on real estate values resulting from the global financial crisis of 2008.   In fact one of the appraisers testified that the financial crisis of 2008 had a significant adverse impact on the applicable real estate property.

III DISCUSSION

In the present action the plaintiff seeks to foreclose its mortgage on the residential property of the defendant Jean–Charles.   With the exception of the defendant bank, all defendants including the defendant homeowner Jean–Charles have been defaulted.   The defendant bank has unsuccessfully sought to attack the credibility of Pascarelli and Bartolo in many ways.   The court finds Pascarelli to be credible.   While Mr. Bartolo by his own admission does not recall the details of the transaction and was not previously involved in the negotiations and implementation of the underlying transaction the court finds him to be honest.   The court's determination of Pascarelli's and Bartolo's credibility is reflected in the court's findings of fact.

The defendant's seven special defenses including its defense of equitable subrogation, essentially seek to invoke the court's equitable powers to alter the priority of the plaintiff's lien and that of the defendant bank so that the lien of the defendant bank becomes prior in right to the lien of the plaintiff's mortgage notwithstanding the fact that it is subsequent in time.   In so requesting the defendant bank seeks to invoke the doctrine of equitable subrogation.   In determining the propriety of its application to the facts at bar a review of the relevant Connecticut case law is in order.

A THE DOCTRINE OF EQUITABLE SUBROGATION

In numerous cases it has been held that one who advances money to discharge a prior lien on real or personal property and takes a new mortgage as security is entitled to be subrogated to the rights under the prior lien against the holder of an intervening lien of which he was ignorant.   Note, 70 A.L.R. 1396.

Homeowner's Loan Corporation v. Sears, Roebuck & Co., 123 Conn. 232, 237 (1937).   Of course the application of the relief and remedy acknowledged and invoked by the Supreme Court in Homeowner's Loan creates a natural tension with the “fundamental principle ․ that a mortgage that is recorded first is entitled to priority over subsequent mortgages provided that every grantee has a reasonable time to get his deed recorded.”  Independence One Mortgage Corp. v. Katsaros, 43 Conn.App. 71, 73 (1996) citing Brown v. General Laundry Service, Inc., 139 Conn. 363, 372 (1952), vacated on other grounds, 347 U.S. 81 (1954) and Beers v. Hawley, 2 Conn. 467, 469 (1818).

The plaintiff argues that under the circumstances presented in this case the doctrine of equitable subrogation has been regularly rejected as a remedy in recent years.   See e.g. Equicredit Corp. of Connecticut v. Kasper, 122 Conn.App. 94 (2010).   An examination of both the Supreme Court and Appellate Court decisions is in order to determine the current state of the law and its appropriate application to the case at bar.⁴  In Lomas & Nettleton Co. v. Isacs, 101 Conn. 614 (1924) the Supreme Court, affirmed in part, the decision of a trial court to reinstate a prior mortgage that had been refinanced by the same lender in order to prevent an intervening lienor from obtaining a position prior in right to the same lender who mistakenly released the original mortgage without actual knowledge of the intervening lien.  “When a new mortgage is substituted in ignorance of an intervening lien, the mortgage released through mistake may be restored in equity and given its original priority as a lien.”  Lomas & Nettleton at 620.   The Lomas & Nettleton holding itself was quite limited.   The facts involved the first mortgagee releasing its prior mortgage while simultaneously recording its new mortgage without actual knowledge of duly recorded second mortgage.   As the court stated

The effect of the transaction was merely to continue the plaintiff's original mortgage.   The release of the old and the execution of the new were practically simultaneous, and constituted not an extinguishment of the old mortgage, but simply a renewal of it.   The plaintiff was not therefore in the position of one taking a new mortgage upon the premises who would be charged with knowledge of all that the record disclosed.

Lomas & Nettleton, supra at 619.

The court held that the intervening mortgagee should not be allowed to take advantage and obtain an “unconscionable advantage” and “the correction of the mistake will leave [the intervening mortgagee] in his original position and deprive him of no right to which he is justly entitled.”  Id. at 621.

It is also important to note that the Lomas & Nettleton court found error in part in the trial court's decision since the trial court not only allowed the new mortgage to obtain the position of the original mortgage but allowed it to do so consistent with the new terms of the new mortgage which included a higher interest rate and the advancement of additional sums.   To this extent the Supreme Court remanded the case with instructions to limit the plaintiff's rights in its new subrogated position to those which it had under the original mortgage both in terms of the balance of the debt and the interest rate so that the intervening lienor would be in no worse position than it would have been under the original mortgage that it knowingly took subject to.   The concept was considerably expanded in Homeowner's Loan Corp., supra.   In Homeowner's Loan Corp. the subject property was encumbered by three mortgages.   The plaintiff, a new lender to the property, agreed to refinance those debts.   However another creditor of the owner obtained an attachment of the property prior to the completion of the refinance transaction.   The plaintiff did not discover the attachment upon its title search.   The plaintiff loaned money and obtained releases of the original three mortgages.   The plaintiff loaned the money for the purpose of paying transactional expenses, back taxes, and certain sums on account of the three original mortgages.   The plaintiff also provided certain bonds to be issued to the original mortgagees.   The plaintiff without actual knowledge of the duly recorded attachment and intending its mortgage to be the first mortgage caused the original mortgages to be released moving the defendant's attachment to a first position.   The defendant at all times knew of the three original mortgages, the pending transaction with the plaintiff and the defendant knew that a mistake had been made.   The Supreme Court rejected the idea that the plaintiff was a “volunteer” (i.e. a person who had no obligation to pay the three original mortgages) and therefore was not entitled to relief.   The court also rejected the concept that subrogation was only available to one who was under an obligation to discharge an existing encumbrance.   In 1937 the court referred to these concepts as representing the “older view.”   Instead it acknowledged that

Subrogation is a doctrine which equity borrowed from the civil law and administered so as to secure justice without regard to form or mere technicality.   It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which in equity and good conscious, should have been discharged by the latter.   It is a legal fiction through which one who, not as a volunteer or in his own wrong and where there are no outstanding in superior equities, pays the debt of another, it is substituted to all the rights and remedies of the other, and the debt is treated in equity as still existing for his benefit.

Homeowner's Loan, supra at 238 (internal quotation marks and citations omitted).

To be sure the court in Homeowner's Loan placed some emphasis on the fact that at all times the intervening lienor's attorney knew of the three mortgages and knew that a mistake had been made.   The Homeowner's Loan court, however, considered the “more serious question” to be the effect of the constructive notice that the plaintiff had by virtue of the duly recorded attachment.   The court held that the plaintiff's negligence in this regard was not a bar to the remedy of subrogation.   Accordingly the doctrine was expanded from the Lomas & Nettleton decision to include the rights of a new lender to the property who had no prior interest in the property.   The court also noted that the debt owed by the plaintiff was less than the total owed under the three released mortgages so no inequity would be visited upon the intervening lienor.   The Homeowner's Loan Corp. limited its holding citing Lewis v. Hinman, 56 Conn. 55, by stating that the remedy of subrogation would not lie against one who had changed its position in reliance upon the land records or one who had actual knowledge of the intervening encumbrance.

In Connecticut National Bank v. Chapman, 153 Conn. 393 (1966) the court again affirmed the doctrine in a situation similar to Lomas & Nettleton where the plaintiff refinanced its own mortgage.   In Chapman the original owner of the property mortgaged the premises to the plaintiff.   The original owner sold the property to the defendants Chapman who assumed and agreed to pay the original mortgage and granted to the original owner/seller a second mortgage.   The Chapmans, having some financial difficulty, applied to the plaintiff to refinance the plaintiff's existing mortgage.   The plaintiff agreed and closed the transaction neglecting the existence of the second mortgage which became prior in time as a result of the refinance transaction.   The Chapman court stated

We have upheld the power of a court of equity to grant relief from the consequences of an innocent mistake, although the mistake was not unmixed with negligence, when the failure to do so would allow one to enrich himself unjustly at the expense of another.  Lomas & Nettleton Co. v. Isacs, supra.   Whether or not a plaintiff will be barred of remedy in equity against the affect of a mistake because of his negligence depends to a large extent upon the circumstances of the particular case.

Connecticut National Bank v. Chapman at 398.

The Chapman case is interesting because the intervening lienor could and did argue that the lender had actual knowledge of the intervening lien by virtue of its receipt of insurance policies that named the intervening lienor as a second mortgagee.   The Chapman court ruled that

To deny relief to the plaintiff would result in the unjust enrichment of the [intervening lienor] through an unexpected and undeserved windfall.   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 conscious for one to retain a benefit which has come to him at the expense of another.

Id. at 399.

The Chapman case has similarities to the case at bar in that the intervening lienor was also the seller of the property and took back the second mortgage in what appeared to be a highly leveraged transaction.   The Chapman court ruled that allowing the seller/lender to obtain a greater priority than what it had negotiated at the expense of an unwitting (and even negligent) lender would constitute unjust enrichment, and the fact that the seller/lender did nothing wrong in obtaining the enhanced position was not a bar to the application of the subrogation principles.

In Independence One Mortgage Corp. v. Katsaros, supra, the Connecticut Appellate Court affirmed a decision of a trial court which rejected the application of equitable subrogation in the following context.   The owner of the subject property had granted a mortgage to the defendant to secure a loan.   The defendant's loan was subsequent to eleven other encumbrances.   Subsequently the owner negotiated with Katsaros for the sale and purchase of the property.   As a part of the purchase and sales transaction eleven mortgages that were prior in right to the mortgage of the defendant were released.   The loan to the defendant was never paid and his mortgage was never released.   The new owner defaulted on his purchase money mortgage to the plaintiff;  the plaintiff foreclosed and sought to utilize the doctrine of equitable subrogation to subordinate the unreleased mortgage to the plaintiff's mortgage by virtue of the fact that the plaintiff's mortgage money was utilized to pay the eleven prior encumbrances.   The Appellate Court affirmed the trial court's rejection of the application of the doctrine and distinguished between utilizing equitable subrogation to give a mortgagee priority over a intervening lien holder as opposed to an existing lien holder.   The plaintiff herein argues that such a distinction is not warranted by the Supreme Court cases and that in fact an intervening lien holder must be an existing lien holder when compared to the new mortgage.   That is to say that in all of these cases the encumbrancer recorded its mortgage or attachment at a time that is subsequent to one lien and prior to another and thus it is always intervening as against the two liens and always existing as against the subsequently recorded lien.   It is possible that a distinction can be drawn between a lender who refinances its own mortgage in which case the lender had an interest in the property before the intervening mortgagee obtained an interest in the property.   Indeed such was the situation in both the Lomas & Nettleton case and the Chapman case, but the distinction does not account for the Supreme Court's decision in Homeowner's Loan Corp. in which the Supreme Court allowed a new lender to the property to take the position of the prior lenders it had caused to be released.   Indeed if the statement in Independence One is taken as an absolute prohibition on the remedy of equitable subrogation if the new lender had no prior interest in the property it would be difficult to reconcile that prohibition with the holding of Homeowner's Loan. However this court considers the more important language in Independence One Mortgage to be the following:

In this foreclosure action, the trial court properly consider the equities of the parties.  “Because a mortgage foreclosure is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done ․ [t]he determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court” (citations omitted;  internal quotation marks omitted.)   Reynolds v. Ramos, 188 Conn. 316, 320 (1982).

Independence One Mortgage Corp. v. Katsaros at 75–76.

In Independence One there had been a sale of the property to an entirely new owner and a lender whose interest was new to the property.   As a part of the sales transaction the parties to the new transaction failed to obtain a release of a relatively small mortgage which went unpaid at the time of sale.   If subrogation had been invoked the small mortgage would have been subrogated to a much larger mortgage.   Additionally, the Appellate Court noted that there was no finding by the trial court that the plaintiff was ignorant (i.e. did not have actual knowledge) of the defendant's mortgage.  Id. at 76 footnote 4. Under all the circumstances the Appellate Court chose not to reverse the trial court's decision not to invoke its equitable powers to rearrange to order of the mortgages.   Finally in Equicredit Corp. of Connecticut v. Kasper, supra, again the trial court refused to invoke its equitable powers to rearrange the priority of the recorded mortgages where the party seeking to invoke the equitable power “had knowledge of the defendant's intervening mortgage.”   Id. at 96.   The Appellate Court once again emphasized that

Our review of a decision rendered in equity is limited.  “The determination of what equity requires in a particular case ․ is a matter for the discretion of the trial court ․ In determining whether the trial court abused its discretion, this court must make every reasonable presumption in favor of [the trial court's] action ․ The manner in which this discretion is exercised will not be disturbed so long as the court could reasonably conclude as it did.”   Internal quotation marks omitted.  Allstate Insurance Co. v. Palumbo, 109 Conn.App. 731, 736–37 (2008), reversed on other grounds, 296 Conn. 253 (2010).

Equicredit Corp. of Connecticut at 96–97.   Effectively, the holding of the Appellate Court is that the trial court did not abuse its discretion in choosing not to invoke its equitable powers when the plaintiff had knowledge of the intervening mortgage.   This court does not read Equicredit Corp. of Connecticut as prohibiting the use of the equitable remedy of subrogation in all cases simply because the intervening lienor did not cause the mistake or had constructive knowledge of the intervening mortgage, as such a holding would be inconsistent with the Supreme Court's language in Connecticut National Bank v. Chapman, supra.

The court must now apply these principles annunciated in the above cases to the facts of the case at bar.   In sum the court must determine whether to exercise its discretion and invoke the court's equitable powers to rearrange the priority of the mortgages on 10 Carlin Street.   The court is mindful that in exercising its discretion it may “consider whatever factors may be relevant to its determination.  ‘Judicial discretion, however, is always a legal discretion, exercised according to the recognized principles of equity ․ Such discretion ․ imports something more than leeway in decision making and should be exercised in conformity with the spirit of the law and should not impede or defeat the ends of substantial justice.’  “ (Citations omitted:  internal quotation marks omitted.)  Burton v. Browd, 258 Conn. 566, 569–70, 783a.2d 457 (2001).”  Dilieto v. County Obstetrics and Gynecology Group.   P.C., 310 Conn. 38, 54–55 (2013).

In the present case the plaintiff chose to sell the 18 Monroe Street property in a highly leveraged transaction.   Knowing the risks involved in such a transaction it negotiated, demanded and received security for the debt due them from the purchaser.   Like the seller in Chapman it took back a second mortgage to secure the debt on the property being sold (18 Monroe Street);  in addition it demanded a quitclaim deed be executed and placed in escrow and it obtained a third mortgage on the buyer's personal residence.   It received back and recorded the quitclaim deed approximately three and a half years after the original transaction on October 4, 2005, when the property had a value of $670,000.   It voluntarily assigned its second mortgage to its principles rather than enforcing it.   Between the quitclaim deed and the assignment of the mortgage the plaintiff received substantial value toward the payment of the debt just as they had contemplated in obtaining those two items of security.

The plaintiff argues that the court should not consider the transactions surrounding the quitclaim deed to be of any value because of Connecticut's public policy against the use of such quitclaim deeds executed at the time of a mortgage transaction to cut off an owner's equitable right of redemption.   See e.g. Pritchard v. Elton, 38 Conn. 434, 435–36 (1871).   While the court does not disagree with the plaintiff's general statement of the public policy against “clogging” the equity of redemption, whether or not that policy would have been invoked to bar the plaintiff's rights under the quitclaim deed in the case at bar, given all of the components of the original transaction, is an issue that is not before this court.   First because it has not been raised by the defendant Jean–Charles or JCE. Second and more importantly because the plaintiff cannot take the position that the court should ignore the quitclaim deed as against public policy when the plaintiff insisted that it be executed, retrieved it pursuant to the escrow agreement, recorded it, and successfully asserted its validity to the Federal Bankruptcy Court receiving relief from the automatic stay of proceedings.   In fact the plaintiff received the benefit of all the security for the debt owed to it by the defendant Jean–Charles and JCE which it had negotiated for when it engaged in the initial transaction for the sale and purchase of 18 Monroe Street.   What the plaintiff did not bargain for was the additional security of a first mortgage on the plaintiff's personal residence.   The plaintiff bargained for and received a mortgage that was subsequent to two duly recorded mortgages.   The fact that the plaintiff never had a title search done on 10 Carlin Street nor had a full appraisal done on 10 Carlin Street is indicative of the fact that this particular component of the security was less important to it as a part of the overall transaction.

The plaintiff is only in its position of being first in time on the 10 Carlin Street property as a result of the mistake of the defendant bank's predecessors who in fact did negotiate and bargain for a first mortgage position on the 10 Carlin Street property and who in fact gave valuable consideration to obtain it.   It would not be equitable to allow the plaintiff to obtain a benefit which it did not bargain for at the expense of the defendant bank under all of these circumstances as a result of a mistake of the defendant bank's predecessors, even a negligent mistake, particularly when the plaintiff had already obtained title to the 18 Monroe Street property and had a duly recorded second mortgage on the 18 Monroe Street property.

Moreover, the value of the 18 Monroe Street property was $670,000 at the time that the plaintiff recorded the quitclaim deed and assigned its second mortgage to its principals.   While the plaintiff argues the value of the 18 Monroe Street property was considerably less in 2005, they introduced no direct appraisal testimony to this affect and the court believes that the lessening of the value of the 18 Monroe Street property occurred substantially after 2005 as a result of its continued deterioration and significant market forces that occurred in late 2008.   The best evidence before the court is that the property had a value of $670,000 in 2005 and that the debt to the first mortgagee was considerable less at the same time.   While neither party has introduced direct evidence of the debt due First County on October 4, 2005 the court takes judicial notice that in foreclosing the First County mortgage in 2008 the debt owed on the First County note was $465,896.58.   In the absence of evidence from which the court can conclude that the debt was either reduced or increased between October 4, 2005 and the judgment in 2008, the court finds that to be the amount of the debt secured by the First County mortgage which the plaintiff took subject to when it recorded the quitclaim deed.

When all is said and done the plaintiff received $500,000 cash (less closing costs) when it sold the property to the defendant Jean–Charles in August 2002 it received the property back in 2005 subject to a mortgage in the face amount of $500,000 at such time when the property was worth approximately $670,000.   The plaintiff could have foreclosed its second mortgage if it was concerned about the legitimacy of the quitclaim deed but chose not to do so.   The principals of the plaintiff ultimately paid $400,000 ⁵ to obtain a assignment of the First County mortgage to their newly organized company J.P. Asset.   J.P. Asset then foreclosed on the property and obtained title by the way of strict foreclosure.   It may well be that the property is now worth substantially less than what it was worth in 2002 or 2005.   The deterioration of the property and the impact of adverse market conditions while the plaintiff pursued collection activity pursuant to the instruments it had negotiated for and received does not justify allowing it to obtain security against 10 Carlin Street which it did not bargain for at the expense of the defendant bank whose predecessors did negotiate and bargain for a first position.   Under these circumstances it would unconscionable to allow the plaintiff to enhance its position at the expense of the defendant bank.

Accordingly the court will exercise its equitable powers to reorder the priority of the mortgages on 10 Carlin Street to the effect that the mortgage owned by the defendant bank shall be prior in right, with limitations as set forth in the subsequent section, to the mortgage of the plaintiff.

B. LIMITATIONS ON THE DEFENDANT BANK'S SUBROGATION RIGHTS.

At the time of the closing of the defendant bank's mortgage 10 Carlin Street was encumbered by two mortgages.   The first mortgage had a face amount of $288,000 but the debt it secured had been reduced to $287,922.40 and the second mortgage had a face amount of $30,000 which secured a debt that had been reduced to $26,234.09.   The defendant bank's predecessors paid $314,156.49 to obtain releases of these mortgages.   At the time of the closing, the property tax obligations of the defendant Jean–Charles on the 10 Carlin Street property were current.   Though the defendant bank's predecessors loaned $348,000 the plaintiff's mortgage at the time of the closing was subject only to mortgages totaling $314,156.49.   The balance of the proceeds+ were used to pay transactional costs, other debts of the defendant Jean–Charles which were not encumbrances on the property plus a disbursement check to the defendant Jean–Charles.   These additional amounts cannot be included in the amount of the defendant bank's debt insofar as the defendant bank obtains a priority position ahead of the plaintiff in accordance with the principles set forth in Lomas & Nettleton.   Accordingly its subrogation rights are limited to $314,156.49 and amounts that may have accrued consistent with the terms of the original two mortgages.

C. THE PLAINTIFF'S DEBT AFTER THE RECORDING OF THE QUIT CLAIM DEED

On October 4, 2005 the debt due the plaintiff from the defendant Jean–Charles was $241,246.96.   On that date the plaintiff effectively executed the self-help security provisions of the escrow agreement and the debt was reduced by the amount of value it received pursuant to that execution.   Given the value of the property, $670,000, and the amount of the debt secured by the prior encumbrance, approximately $465,000, the court finds that the debt had been reduced by $205,000 when the plaintiff retrieved and recorded the quitclaim deed.   Accordingly the debt from the defendant Jean–Charles had been reduced to $36,246.96 on October 4, 2005.⁶  Of course interest and other costs may accrue to the plaintiff in accordance with the terms of the note.   The plaintiff may provide the court with updated evidence of the debt consistent with this opinion in the next phase of this trial.

IV FURTHER PROCEEDINGS

At the outset of the trial the court granted, over the objection of the defendant bank, the plaintiff's motion to bifurcate the trial so that it could introduce evidence concerning the value of 10 Carlin Street subsequent to the establishment of the order of priorities of the plaintiff's mortgage and the defendant bank's mortgage.   Accordingly, the case will be continued and scheduled for further proceedings consistent with this decision.

GENUARIO, J.

FOOTNOTES

FN1. The testimony by the principals of the plaintiff was to the effect that the plaintiff owned 18 Monroe Street.   The courts notes that the grantors on the deed conveying 18 Monroe Street to JCE are Pascarelli and Bartolo.   Whether there was a conveyance from the plaintiff to Pascarelli and Bartolo shortly before the closing or the witnesses were simply mistaken as to who the title holder of 18 Monroe Street was prior to the conveyance to JCE is not clear to the court..  FN1. The testimony by the principals of the plaintiff was to the effect that the plaintiff owned 18 Monroe Street.   The courts notes that the grantors on the deed conveying 18 Monroe Street to JCE are Pascarelli and Bartolo.   Whether there was a conveyance from the plaintiff to Pascarelli and Bartolo shortly before the closing or the witnesses were simply mistaken as to who the title holder of 18 Monroe Street was prior to the conveyance to JCE is not clear to the court.

FN2. Pascarelli testified that among other reasons he was quite interested in selling the property because his elderly father was involved in the maintenance and management of the property and he was concerned about adverse impacts to his father from a continuation of his father's involvement in the property.   This may have given Pascarelli added incentive to sell the property beyond that of a typical seller..  FN2. Pascarelli testified that among other reasons he was quite interested in selling the property because his elderly father was involved in the maintenance and management of the property and he was concerned about adverse impacts to his father from a continuation of his father's involvement in the property.   This may have given Pascarelli added incentive to sell the property beyond that of a typical seller.

FN3. See footnote 1..  FN3. See footnote 1.

FN4. Such an examination was undertaken in a thorough and thoughtful article published in the Connecticut Bar Journal.   See Winiarski, Jr., Equitable Subrogation in the Context of Interest in Real Property:  The Basics and the Areas Needing Authoritative Clarification, 85 Connecticut Bar Journal, # 3 at page 231 et seq.  (September 2011).   While this court does not adopt all of Mr. Winiarski's conclusions he raises multiple issues concerning the current state of the law that are worthy of discussion..  FN4. Such an examination was undertaken in a thorough and thoughtful article published in the Connecticut Bar Journal.   See Winiarski, Jr., Equitable Subrogation in the Context of Interest in Real Property:  The Basics and the Areas Needing Authoritative Clarification, 85 Connecticut Bar Journal, # 3 at page 231 et seq.  (September 2011).   While this court does not adopt all of Mr. Winiarski's conclusions he raises multiple issues concerning the current state of the law that are worthy of discussion.

FN5. No defendant is entitled to any credit or advantage based on the fact that JP Assets purchased a debt worth more than $400,000 for $400,000.   First JP Assets is a separate entity and there has been no evidence from which the court can conclude that a corporate veil should be pierced.   Second the acquisition of the First County debt was based on an arms length transaction and JP Assets was entitled to the full value of the asset it purchased regardless of what it paid for that asset..  FN5. No defendant is entitled to any credit or advantage based on the fact that JP Assets purchased a debt worth more than $400,000 for $400,000.   First JP Assets is a separate entity and there has been no evidence from which the court can conclude that a corporate veil should be pierced.   Second the acquisition of the First County debt was based on an arms length transaction and JP Assets was entitled to the full value of the asset it purchased regardless of what it paid for that asset.

FN6. The plaintiff cannot escape this finding by asserting that the quit claim deed was also subject to a second mortgage that had been assigned to Pascarelli and Bartolo.   Because the mortgage and quit claim deed were both security for the same debt the assignment of the mortgage to its principals was a voluntary relinquishing of that security and an election to proceed with the quit claim deed.   To discount the value of the quit claim deed by the value of the mortgage that its principals still controlled would be to allow a double recovery for the same debt..  FN6. The plaintiff cannot escape this finding by asserting that the quit claim deed was also subject to a second mortgage that had been assigned to Pascarelli and Bartolo.   Because the mortgage and quit claim deed were both security for the same debt the assignment of the mortgage to its principals was a voluntary relinquishing of that security and an election to proceed with the quit claim deed.   To discount the value of the quit claim deed by the value of the mortgage that its principals still controlled would be to allow a double recovery for the same debt.

Genuario, Robert L., J.