Webster Bank, N.A. v. GFI Groton, LLC

157 Conn.App. 409

116 A.3d 376

WEBSTER BANK, N.A.

v.GFI GROTON, LLC, et al.

No. 35575.

Appellate Court of Connecticut.

Argued Jan. 20, 2015.

Decided May 26, 2015.

Jeffery O. McDonald, with whom, on the brief, was Louis N. George, Simsbury, for the appellants (named defendant et al.).

George A. Dagon, Jr., with whom was Eric B. Miller, Hartford, for the appellee (plaintiff).

SHELDON, MULLINS and SCHALLER, Js.

Opinion

MULLINS, J.

In this breach of contract action, the defendants, GFI Groton, LLC (developer), Steven E. Goodman, John DeLiso, GFI Investments V Groton, LLC, and CAT Developers, LLC, appeal from the judgment of the trial court, rendered after a bench trial, in favor of the plaintiff, Webster Bank, N.A. (bank). The defendants claim that the court improperly (1) determined that the bank had complied with its funding obligations under an agreement to finance a building project and (2) concluded that the bank had made reasonable efforts to mitigate its damages. We affirm the judgment of the trial court.

The following facts, which the court reasonably could have found, and procedural history are relevant to our resolution of this appeal. The developer undertook a project to acquire land and develop a condominium and townhouse complex in Groton (project). The project entailed constructing and selling the units of three condominium buildings on a parcel of land (property). The three buildings, respectively, would consist of twelve, sixteen and sixteen condominium units. On or about September 27, 2004, the developer entered into an agreement with the bank to finance the project.

Under the terms of the parties' agreement, the bank agreed to fund the project in the form of two loans: (1) an acquisition and development loan totaling $2,044,500; and (2) a revolving loan totaling $1,600,000 (loans). The acquisition and development loan would be used to purchase the property and perform site work outside of the building construction. The revolving loan would be used to fund the construction of the condominium units. The loans were made pursuant to corresponding loan agreements that set forth the obligations of the developer and the bank with respect to each loan. Additionally, the loans were secured by respective promissory notes executed by the developer (notes), as well as four “Payment and Completion Guaranty Agreements” (guaranties) that separately were executed by Goodman, DeLiso, GFI Investments V Groton, LLC, and CAT Developers, LLC (guarantors). The developer also executed a mortgage on the property in favor of the bank.¹

The notes provided that the developer would initially pay only the monthly interest on the loans. The revolving loan agreement specified an “absorption rate” at which the developer was required to construct and sell a specified number of units every year.² Pursuant to the acquisition and development loan agreement, the developer was to repay the bank $44,450 of that loan upon the sale of each condominium unit and the bank, in turn, was to issue a release of a corresponding portion of the mortgage.

The revolving loan agreement provided a procedure by which the developer was to draw funds for the project as construction progressed. To receive disbursements from the revolving loan, the developer was required to submit to the bank its construction costs, which, in turn, would determine the amount of funding to which the developer was entitled. Specifically, to receive funding under terms of the revolving loan agreement, the developer was required to submit to the bank a letter “requesting the amount of the particular disbursement” along with various supporting documents. Section 4.02(a) of the revolving loan agreement provided that the developer was permitted to draw up to 90 percent “of the actual vertical hard and soft costs of construction,” but not more than $117,000 per condominium unit.³

During the construction of the first building, the developer submitted construction costs to the bank of $85,000 per unit. Pursuant to the terms of the revolving loan agreement, the bank disbursed to the developer $76,500 per unit, which was 90 percent of the developer's submitted construction costs. By May, 2006, the developer had completed construction on the first building, and sold its twelve units. The developer repaid the bank pursuant to the loan agreements for each unit sold in the first building.

In 2005, the developer commenced construction on the second building and increased the construction costs that it submitted to the bank to $113,750 per unit. As a result, the bank disbursed to the developer $102,375 per unit, or 90 percent of its budgeted cost.

In August, 2006, when construction on the second building was underway, the developer and the bank agreed to modify the revolving loan agreement and note because of concerns that the developer was not complying with its required absorption rate. The parties entered into a loan modification agreement and amended the revolving loan agreement (2006 agreement). Under the 2006 agreement, the parties agreed to increase the principal balance of the revolving loan from $1,600,000 to $2,250,000. The 2006 agreement also eliminated the revolving loan's maximum draw restriction of $117,000 per unit. Nonetheless, under the 2006 agreement, the developer still was obligated to submit draw requests to the bank to receive funds, and still was only entitled to draw up to 90 percent “of the actual vertical hard and soft construction costs of each unit....”

After the parties executed the 2006 agreement, the developer continued to submit draw requests for the second building based on construction costs of $113,750 per unit; the bank continued to disburse to the developer $102,375 per unit. When the developer started to construct the third building, it again submitted to the bank construction costs of $113,750 per unit for that building. The bank, thus, continued to disburse funds to the developer for the third building at the rate 90 percent of the submitted construction costs, or $102,375 per unit.

As the September 30, 2007 maturity date on the notes approached, the developer was performing the framing work on the third building. On September 23, 2007, the developer submitted to the bank a draw request from the revolving loan in the amount of $62,400 for labor to install drywall.⁴ The bank fully funded that request. After the notes matured, however, the developer was not permitted under the loan agreements to draw funds until the bank agreed to new maturity dates on the loans.

On November 30, 2007, the bank and the developer executed a second modification agreement (2007 agreement), pursuant to which the maturity date of the acquisition and development loan was extended until September 30, 2009, and the maturity date on the revolving loan was extended until September 30, 2010. In conjunction with the 2007 agreement, the guarantors executed a “Reaffirmation of Guaranty, Consent and Waiver” (reaffirmation). Under the terms of the 2007 agreement and reaffirmation, the parties waived all claims and defenses arising prior to November 30, 2007.

The parties agreed that additional funding would be available to the developer under the 2007 agreement after the developer completed the work for which the bank already had disbursed funds. As a result, the developer recognized that the bank would not fund additional draw requests until after the developer completed the drywall installation.

After receiving the September, 2007 disbursement from the bank for drywall labor, however, the developer never completed installing the drywall in the third building. A representative from the bank visited the third building on a regular basis to monitor progress, and observed that the drywall never was installed.

Additionally, the bank received no further draw requests from the developer. In its oral ruling, the court stated: “The court does not have enough evidence to make a specific finding, but ... the clear inference that the court draws [is] that no draw request was made because no draw request would have been honored since the work for which the developers had already been paid had not been done.”

The developer completed construction on the second building and sold all sixteen of its units. For each of the first fifteen units sold in the second building, the developer repaid the bank $44,450 toward the principal balance on the acquisition and development loan. When the final unit of the second building was sold in April, 2008, however, the bank relinquished its right to receive the final $44,450 payment in order to provide the developer more liquidity. Nonetheless, that same month, the developer ceased making interest payments to the bank on the loans.

On June 5, 2008, the bank notified the defendants by certified letter that the loans were in default. Afterward, the parties entered into negotiations to save the project. The defendants made proposals to the bank, under which the bank would advance additional funds to the developer for construction. The bank rejected these proposals.

In January, 2009, the developer sent documents to the bank that indicated that the developer owed its subcontractors hundreds of thousands of dollars for unpaid work, as a result of which it was facing numerous lawsuits. After receiving this notification, the bank informed the defendants, by way of a second default letter dated March 17, 2009, that the notes were in default and that it was exercising its right to accelerate payment. After the bank sent the second default letter, the defendants made several offers to the bank to purchase the notes for amounts less than the total debt owed. The bank refused those offers. The developer never completed the third building.

On July 21, 2009, the town of Groton (town) filed an action against the developer seeking, inter alia, to foreclose tax liens on the property for unpaid property taxes. On August 24, 2009, the bank filed the present action, in which it initially sought to foreclose...