By William J. O'Sullivan[1]
In 2021, Connecticut's appellate courts decided numerous cases of interest to business litigators. Following is a summary of the year's most noteworthy decisions.
I. Creditors' Rights
A. Foreclosing bank can seek damages for breach of mortgage provisions, without need for obtaining deficiency judgment
The Appellate Court's decision in LLP Mortgage Ltd. v. Underwood Towers Ltd. Partnership, [2] a commercial foreclosure case involving a large apartment complex, illustrates the difference between a lender enforcing its rights under the mortgage and enforcing its rights under the note secured by the mortgage.
In Underwood Towers, the substitute plaintiff was the assignee of the loan obligation and mortgage, but the promissory note had been lost before the assignment.[3] Accordingly, although the substitute plaintiff retained the right to enforce the mortgage,[4] it was barred from pursuing a deficiency judgment or otherwise enforcing the note.[5]
Aside from seeking foreclosure of its mortgage, the substitute plaintiff sought, in separate counts of its complaint, money damages for the breach of certain mortgage covenants, including an assignment of rents and income. Because the substitute plaintiff lacked the power to seek a deficiency judgment, and because the underlying note had been a nonrecourse obligation,[6] the defendant argued that the substitute plaintiff lacked the right to seek this additional relief.
The trial court rejected this argument, and the Appellate Court agreed. Separate from its rights under the note, "a mortgagee may sue a mortgagor for damages for violation of a covenant or provision in the mortgage."[7] More particularly, "a mortgagee may proceed with an action for money damages based on a debtor's failure to pay rents, despite the existence of a nonrecourse clause in the loan documents."[8] The court rejected the proposition that the substitute plaintiff was, in effect, seeking to convert a nonrecourse loan into a recourse loan. The substitute plaintiff "is not relying on the mere fact that the defendants owe principal plus interest as provided in the note, as it would in a deficiency proceeding. Rather, the plaintiff relies on a separate provision in a separate document - the covenants in the second mortgage concerning rental income - and must assume the higher burden of proving the contract and tort causes of action it has pleaded."[9]
B. Noteholder that did not take assignment of mortgage has standing to foreclose
In Goshen Mortgage, LLC v. Androulidakis, [10] a foreclosure action, the Appellate Court reaffirmed the principle that the holder of the note has standing to foreclose, even if another party holds the mortgage. The original plaintiff, Goshen Mortgage, LLC, had assigned the mortgage to itself, as trustee for a mortgage pool, denominated Goshen Mortgage, LLC, as Separate Trustee for GDBT I Trust 2011-1 (Goshen Trustee), four days before commencing the foreclosure action. The plaintiff then moved to substitute Goshen Trustee as plaintiff. The defendant objected, claiming the original plaintiff had lacked standing to commence suit at the time the case began.
The Appellate Court noted, "whether or not the plaintiff had standing to initiate the action depends on whether it had physical possession of the note" on the date the action was commenced. The court observed that the mortgage assignment predated the suit, but "the note itself never changed hands. Because the plaintiff transferred the note to itself as trustee, the physical possession of the note never changed."[11] Because it is "well established that the holder of a note has standing to enforce a mortgage even if the mortgage is not assigned to that party,"[12] the original plaintiff had had standing to commence suit, and the trial court had acted properly in allowing Goshen Trustee to be substituted as plaintiff and the case to proceed to a judgment of foreclosure.
C. Trial court in foreclosure case erred in rendering judgment for defendant based on unconscionability
In Rockstone Capital, LLC v. Caldwell, [13] a residential foreclosure case, the Appellate Court ruled that the trial court erred when it found that one of the defendants had proven her special defense of unconscionability.
The plaintiff sued the defendant Morgan J. Caldwell, Jr., and his business, Wesconn Automotive Center, LLC, on an unpaid line of credit. To resolve the case, the plaintiff entered into a settlement agreement with Caldwell, Wesconn, and Caldwell's life partner, Vicki A. Ditri, with whom Caldwell co-owned their residence in Norwalk (property). Ditri had no obligation under the line of credit, but mortgaged her interest in the property as part of the settlement. Following default under the settlement agreement, the plaintiff brought a second action, this time to foreclose the mortgage.
Ditri filed a special defense, claiming that, as to her, the settlement agreement was unconscionable and unenforceable. Following a bench trial, the trial court agreed, based on its findings that Ditri "lacked business acumen; the closing was rushed because the defendant was on her lunch break; the defendant was unrepresented at the closing; neither Caldwell nor Caldwell's attorneys explained the settlement agreement, or the mortgage to the defendant; and the documents for the defendant to sign were folded back so that only the signature page was exposed."[14]
Applying plenary review to the legal conclusion of unconscionability, the Appellate Court reversed. The court noted that, for purposes of analyzing a claim of procedural unconscionability, the relevant factors include the contracting party's business acumen, the party's awareness of material preconditions to the contract, whether the party was represented by counsel during the transaction period ... the existence of a language barrier between the contracting parties ... the contracting party's level of education, the party's ability to read and understand the agreement at issue ... the reasonableness of the party's expectation to fulfill the contractual obligations ... [and] the conduct of the parties during the contract's formation, focusing on the process by which the allegedly unconscionable terms found their way into the agreement.[15]
Applying these factors to the trial record, the Appellate Court found that Ditri had failed to prove her defense. The court found her level of education and business sophistication to be "largely immaterial" under the circumstances, given that "her alleged surprise regarding the contractual terms derives from her failure to read the agreement. Where a party does not attempt to understand its contractual obligations before signing, considerations such as education level, business acumen, and complexity of the contractual language becomes less relevant to our analysis."[16]
Furthermore, even if there had been some procedural impropriety, that could not be imputed to the plaintiff, which "was not even present at the time the defendant signed the settlement agreement."[17] Rather, "the alleged rushed nature of the signing, folded pages, and failure to explain the settlement agreement and mortgage each stem from Caldwell, his attorneys, or the defendant's own constraints."[18] There was no showing that Caldwell had somehow acted as an agent for the plaintiff, and "[w]here the claim of unconscionability is directed at the actions and representations of third parties, rather than the plaintiff, we have required that an agency relationship exist between the plaintiff and the third party."[19]
Finally, the Appellate Court found that Ditri had failed to prove not only procedural unconscionability, but substantive unconscionability as well. She argued that she had received "no direct consideration" for mortgaging her interest in the property in connection with the loan workout - a loan for which she was not already an obligor. But under settled law, "the intangible benefit of assisting one's family is sufficient to constitute valuable consideration."[20] Furthermore, "our courts have upheld contractual agreements as enforceable where one party incurs personal liability for a third person's debts in exchange for the other party's offer to forgo pursuing legal action on those debts."[21]
D. Foreclosure court retained equitable jurisdiction to open judgment after running of law days
In U.S. Bank National Association v. Rothermel, [22] the Connecticut Supreme Court revisited the issue of when, notwithstanding the language of General Statutes Section 49-15, our courts have jurisdiction to open a judgment of strict foreclosure after the law days have passed. The statute provides, in relevant part, "no such judgment shall be opened after the title has become absolute in any encumbrancer..."
In previous caselaw, the state Supreme Court and Appellate Court, noting the equitable nature of mortgage foreclosure, have "recognized that trial courts possess inherent powers that support certain limited forms of continuing equitable authority [which] can be exercised in a manner consistent with § 49-15 after the passage of the law days."[23] For example, in Wells Fargo Bank, N.A. v. Melahn, [24] the plaintiff "had falsely certified that it had complied with the terms of a court order requiring it to provide notice to all nonappearing defendants."[25] The Appellate Court ruled that under those circumstances, "[d]espite the constraints imposed by § 49-15 ... the trial court possessed an inherent, continuing, and equitable authority to enforce its previous order," including opening the judgment after title had passed to the foreclosing plaintiff. This authority may be exercised in "rare and exceptional cases."[26]
The defendant in Rothermel filed a motion to open a judgment of strict foreclosure one day after...
