Fairlake Capital, LLC v. Lathouris

210 Conn.App. 801

271 A.3d 689

FAIRLAKE CAPITAL, LLC

v.Peter LATHOURIS et al.

AC 43872

Appellate Court of Connecticut.

Argued November 17, 2021

Officially released March 1, 2022

Todd R. Michaels, with whom, on the brief, were Ann H. Rubin, Waterbury, and Drew J. Cunningham, New Haven, for the appellants (defendants).

Yan Margolin, pro hac vice, with whom was Patrick McCabe, Stamford, for the appellee (plaintiff).

Bright, C. J., and Cradle and DiPentima, Js.

DiPENTIMA, J.

The defendants, Peter Lathouris and Patricia Spanos Lathouris,¹ appeal from the judgment of the trial court denying their motion for summary judgment against the plaintiff, Fairlake Capital, LLC. The defendants claim that the trial court erred in denying their motion for summary judgment because the plaintiff's breach of guaranty claims against them are barred by the doctrine of res judicata. We disagree and, accordingly, affirm the judgment of the trial court.

The following facts, viewed in the light most favorable to the plaintiff, and procedural history are relevant to this appeal. The plaintiff commenced the underlying action on April 26, 2017. The plaintiff filed its second amended complaint, which is the operative complaint, on June 26, 2018. Counts one and two of that complaint allege claims of breach of guaranty against Peter and Patricia, respectively, and count three alleges a claim of unjust enrichment against both defendants.

In its memorandum of decision denying the defendants' motion for summary judgment, the trial court summarized the allegations of the operative complaint as follows: "[O]n or about July 7, 2006, [Patricia] executed a statutory short form power of attorney appointing her husband, [Peter], her attorney-in-fact. On August 1, 2006, Carlyle Financial, LLC (Carlyle) extended a loan to Lagoon Development Corporation (Lagoon) in the amount of $1,500,000, evidenced by a note executed on behalf of Lagoon by [Peter], acting as attorney-in-fact for [Patricia], [the] president of Lagoon. The note was secured by and made subject to the terms of a commercial mortgage on real property located in Bronx, New York. Additionally, [Peter], individually and as attorney-in-fact for [Patricia], executed a guaranty agreement, guaranteeing the debt under the note. Pursuant to the note, Lagoon was required to make monthly interest payments commencing on September 1, 2006, with the entire principal balance and all interest due and payable in full on February 1, 2007. Lagoon defaulted on its payments, and Carlyle accelerated the entire debt. On or about October 9, 2009, Carlyle commenced an action in the Supreme Court of the State of New York for Bronx County to foreclose on the mortgaged property.

"The plaintiff further alleges that on or about October 31, 2013, [before the foreclosure case went to judgment], Lagoon filed for Chapter 11 protection in [the] Bankruptcy Court. In an assignment of claim, dated February 12, 2016 ... Carlyle assigned its claims against Lagoon in the bankruptcy action, as well as the mortgage and guaranty agreement to the plaintiff. The assignment was recorded in Bronx County. The Bankruptcy Court approved the sale of the mortgaged property for $5,000,000, said sale being consummated on December 20, 2016. At the time of the sale, Lagoon owed the plaintiff $4,160,850, yet the plaintiff only received $1,862,631.54 from the sale of the property, resulting in a shortfall of $2,167,604.57. The plaintiff alleges that the defendants are liable under the guaranty for all amounts due and owing under the note on account of Lagoon's failure to make the payments when they became due."²

On October 31, 2018, the defendants filed a motion for summary judgment in which they argued that "[t]here [was] no genuine issue as to any material fact," and that they were entitled to judgment as a matter of law because, among other things, "[the] plaintiff's claims in counts one and two are barred by the doctrine of res judicata and New York Real Property Actions and Proceedings Law § 1371 ...."³ Specifically, the defendants contended that the plaintiff had an opportunity to raise a claim for a deficiency judgment in the foreclosure or bankruptcy proceedings but failed to do so. In support of the motion, the defendants filed a memorandum of law, various exhibits and the signed and sworn affidavit of Peter. On February 15, 2019, the plaintiff filed an objection to the defendants' motion along with various exhibits. On March 8, 2019, the defendants filed a reply memorandum.

In their memorandum of law, the defendants first argued that New York law applied to the plaintiff's claims, and that § 1371⁴ required the plaintiff to obtain a deficiency judgment. Because the plaintiff did not move for a deficiency judgment in accordance with § 1371, they argued, the proceeds from the sale of the property constituted a full satisfaction of Lagoon's debt to the plaintiff, and the plaintiff was barred from seeking recovery under the guaranty. The defendants further argued that the plaintiff's breach of guaranty claims in counts one and two of the operative complaint were barred by res judicata because the issue of "whether any amount is owed by Lagoon under the note" could have been litigated in the foreclosure action or the bankruptcy proceedings. In making this argument, the defendants again relied on § 1371, stating that "New York law requires that [a] deficiency judgment be sought in the same action as the foreclosure (or in the bankruptcy) within ninety days of the sale."⁵

On April 8, 2019, the trial court held a hearing on the defendants' motion for summary judgment. On August 13, 2019, the trial court issued a memorandum of decision, denying the motion in its entirety. Before reaching the defendants' res judicata argument, the trial court addressed their argument that it was necessary for the plaintiff to obtain a deficiency judgment pursuant to § 1371. The trial court stated in relevant part: "[A]lthough Carlyle did foreclose on the mortgage, there was no foreclosure sale, either in the foreclosure action or in the bankruptcy proceeding. Instead, the property was sold pursuant to 11 U.S.C. § 363, as provided for in the approved bankruptcy plan. ... The terms of the [New York Real Property Actions and Proceedings Law], therefore, do not apply because the property was not sold in a New York foreclosure action pursuant to New York law." The trial court concluded that, "[b]ecause the property was not sold pursuant to a foreclosure action, § 1371 is inapplicable and the plaintiff was not required to seek a deficiency judgment." The trial court, relying on that conclusion, denied the defendants' motion for summary judgment, concluding that the breach of guaranty claims against them were not barred by res judicata.

On September 3, 2019, the defendants filed a "motion to reargue/reconsider summary judgment." On January 10, 2020, the trial court denied that motion in all respects relevant to this appeal. On January 29, 2020, the defendants appealed to this court.

On March 18, 2020, the defendants filed a motion for articulation with the trial court "so that [they] and the Appellate Court [could] understand the basis of the trial court's decision denying [their] motion for summary judgment on res judicata grounds." On September 8, 2020, the trial court issued an articulation in which it stated in relevant part: "[T]he court held that [§] 1371 was inapplicable because the defendants removed the proceedings to Bankruptcy Court. As a result, there was no foreclosure sale, which is a condition precedent to an application for a deficiency judgment under New York law .... The failure to apply for a deficiency judgment in the [§] 1371 proceeding cannot support a res judicata finding because it was not only an unnecessary component of the proceeding, it was precluded by the defendants' removal to Bankruptcy Court. The defendants cannot have it both ways. They cannot derail the foreclosure proceeding by removal, and then escape liability because the plaintiff did not obtain a foreclosure sale." Additional facts and procedural history will be set forth as necessary.

The defendants claim that the trial court erred in denying their motion for summary judgment because the plaintiff's breach of guaranty claims against them are barred by res judicata. We disagree.

We begin by setting forth the applicable legal principles and standard of review governing this claim. An interlocutory appeal may be taken from the denial of a motion for summary judgment based on res judicata or collateral estoppel. Deutsche Bank AG v. Sebastian Holdings, Inc. , 331 Conn. 379, 383 n.3, 204 A.3d 664 (2019). "The doctrine of res judicata holds that an existing final judgment rendered [on] the merits without fraud or collusion, by a court of competent jurisdiction, is conclusive of causes of action and of facts or issues thereby litigated as to the parties and their privies in all other actions in the same or any other judicial tribunal of concurrent jurisdiction.... If the same cause of action is again sued on, the judgment is a bar with respect to any claims relating to the cause of action [that] were actually made or [that] might have been made....

"The applicability of the [doctrine] of ... res judicata presents a question of law that we review de novo.... Because [the doctrine is a] judicially created [rule] of reason that [is] enforced on public policy grounds ... we have observed that whether to apply [the] doctrine in any particular case should be made based [on] a consideration of the doctrine's underlying policies, namely, the interests of the defendant and of the courts in bringing litigation to a close ... and the competing interest of the plaintiff in the vindication of a just claim.... These [underlying] purposes are generally identified as being (1) to promote judicial economy by minimizing repetitive litigation; (2) to prevent inconsistent judgments [that] undermine the...