Cheshire Mortg. Service, Inc. v. Montes

• Citation: 612 A.2d 1130,223 Conn. 80
• Decision Date: 30 June 1992
• Docket Number: No. 14304,14304
• Court: Supreme Court of Connecticut
• Parties: CHESHIRE MORTGAGE SERVICE, INC. v. Luis A. MONTES, et al.

Page 1130

612 A.2d 1130

223 Conn. 80

CHESHIRE MORTGAGE SERVICE, INC. v. Luis A. MONTES, et al.

No. 14304.

Supreme Court of Connecticut.

Argued Feb. 20, 1992.

Decided June 30, 1992.

Berdon, J., dissented in part, concurred in part, and filed opinion.

Lori Welch-Rubin, North Haven, with whom were David Welch-Rubin and Frank B. Cochran, New Haven, for appellants (named defendant et al.).

William H. Cashman, New Haven, with whom, on the brief, was Tara L. Knight, Orange, for appellee (plaintiff).

Richard Blumenthal, Atty. Gen., and Neil G. Fishman, Asst. Atty. Gen., filed a brief for the State of Connecticut as amicus curiae.

Before SHEA, CALLAHAN, GLASS, BORDEN and BERDON, JJ.

BORDEN, Associate Justice.

The defendants Luis A. Montes and Dalila Montes ¹ (defendants) appeal ² from the judgment of strict foreclosure by the trial court rendered in favor of the plaintiff, Cheshire Mortgage Service, Inc., on the plaintiff's complaint, and from the judgment rendered in favor of the plaintiff on the defendants' counterclaims. The defendants claim that the trial court's decision was improper because: (1) the terms and conditions of two second mortgage loan transactions were unconscionable; (2) the plaintiff violated the federal Truth in Lending Act (TILA) by its failure accurately to disclose and include, in the finance charge, a fee that it charged the defendants for recording a future assignment of the second mortgage; (3) the plaintiff violated General Statutes § 36-224l ³ by charging the defendants a prepaid finance charge that exceeded 10 percent of the principal amount of the loan; and (4) based on the defendants' first three claims, ⁴ the plaintiff violated the Connecticut Unfair Trade Practices Act (CUTPA), codified in General Statutes § 42-110a et seq. ⁵ We reverse and remand the case to the trial court for further proceedings.

The relevant facts are as follows. The defendants were a married couple from Puerto Rico who had been living on the mainland of the United States for more than twenty years. In February, 1984, the defendants purchased a home in New Haven for $25,000. ⁶ They financed the purchase with a down payment of $3000 and a $23,700 mortgage loan from People's Bank, with monthly mortgage payments of $407. In July, 1987, Tech Energy, a Connecticut home repair and improvement company, contacted Dalila Montes and offered to provide vinyl siding for the defendants' home at a cost of approximately $10,000. The defendants agreed to purchase the siding, and thereafter Tech Energy submitted a loan application of the defendants to the Tolland Bank in order to finance the cost of the siding. The loan application stated that the defendants had a monthly income of $1195. Tolland Bank denied the application.

Tech Energy then submitted the same Tolland Bank loan application to the plaintiff in order to obtain a second mortgage loan. The plaintiff approved the loan based upon the following factors, in addition to the information contained in the loan application. The plaintiff had obtained a credit report indicating that the defendants had been regularly paying their first mortgage loan to People's Bank. The plaintiff also took into consideration the fact that there was "good loan equity in this case" and that the funds were going to be used to improve the property and, thus, the security for the loan. Furthermore, Dalila Montes stated to the plaintiff's president that, in addition to the income listed on the application form, Luis Montes "had some additional income" from work in "some sort of trade." Neither the plaintiff nor the defendants documented the amount of this additional income or its specific source. On the basis of the foregoing information, the plaintiff approved the loan and placed the defendants in a "no-income verification loan program." Under the "no-[223 Conn. 85] verification loan program" the plaintiff did not require the defendants to verify the amount of Luis A. Montes' additional income.

The loan closing was held on November 16, 1987. The defendants were required to grant to the plaintiff a second mortgage on their residence in order to secure the loan. In order for the plaintiff to obtain a second mortgage position, however, it was necessary to pay off three prior liens on the defendants' residence--a lien held by the state for child support in the amount of $8950, a lien held by the city of New Haven welfare department in the amount of $1290.31 and a judgment lien for a medical bill in the amount of $2431. These prior liens on the residence totaled $12,671.31. Therefore, the principal amount of the loan, as stated in the note and the loan closing statement, was $26,500, ⁷ which included the payment of the prior liens, $9902 for the cost of the siding, ⁸ $1300 in closing costs, ⁹ a $2500 prepaid finance charge and $126.69 paid directly to the defendants. The annual interest rate was 18 percent. The promissory note provided that the defendants were to make thirty-five monthly payments of $399.38, and a final "balloon" payment of $26,810.61.

Approximately seven months later, after they had made seven timely mortgage payments, the defendants sought another loan for approximately $9000 from the plaintiff to be used for additional improvements to their home in order for them to sell it within one year. On the basis of a new credit report indicating that the defendants had continued to pay their first mortgage and had made every payment on the plaintiff's second mortgage, the plaintiff approved the new loan. The loan closing was held on May 26, 1988. ¹⁰ The principal amount of the new loan, as stated in the note and the loan closing statement, was $43,500, ¹¹ which included $27,070.05 to pay off the November, 1987 loan, $2451.33 in closing costs, ¹² a $4350 prepaid finance charge and $9628.62 paid directly to the defendants. The annual interest rate was 19 percent. The promissory note provided that the defendants were to make thirty-five monthly payments of $691.17, and a final "balloon" payment of $44,075.03. The defendants made no payments on this mortgage loan. ¹³

The plaintiff thereafter filed this foreclosure action. The defendants proffered special defenses, alleging failure to release the November, 1987 mortgage, an unconscionable contract and a violation of General Statutes § 36- 224l. The defendants also filed counterclaims alleging violations of CUTPA, TILA and § 36-224l. The trial court rejected the defendants' special defenses and counterclaims and rendered a judgment of strict foreclosure. The defendants appealed to the Appellate Court and we transferred the appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c).

I

The defendants' first claim is that the trial court improperly concluded that the terms of the two second mortgage loan transactions were not unconscionable and thus were enforceable. The defendants argue that the loan transactions were procedurally unconscionable, due to the defendants' "lack of knowledge and lack of voluntariness," and that the transactions were substantively unconscionable due to the "oppressive character of the contract terms." ¹⁴ We conclude, however, from the facts as found by the trial court and as supported by sufficient evidence in the record, that the mortgage transactions in question were not unconscionable.

We first consider our standard of review of a claim of unconscionability. "The question of unconscionability is a matter of law to be decided by the court based on all the facts and circumstances of the case. Iamartino v. Avallone, 2 Conn.App. 119, 125, 477 A.2d 124 (1984); see Hamm v. Taylor, 180 Conn. 491, 493, 429 A.2d 946 (1980). Fairfield Lease Corporation v. Romano's Auto Service, 4 Conn.App. 495, 498, 495 A.2d 286 (1985). Thus, our review on appeal is unlimited by the clearly erroneous standard. Iamartino v. Avallone, supra." (Internal quotation marks omitted.) Texaco, Inc. v. Golart, 206 Conn. 454, 461, 538 A.2d 1017 (1988). This means that the ultimate determination of whether a transaction is unconscionable is a question of law, not a question of fact, and that the trial court's determination on that issue is subject to a plenary review on appeal. It also means, however, that the factual findings of the trial court that underlie that determination are entitled to the same deference on appeal that other factual findings command. Thus, those findings must stand unless they are clearly erroneous. Pandolphe's Auto Parts, Inc. v. Manchester, 181 Conn. 217, 221-22, 435 A.2d 24 (1980). This is particularly apt in a case such as this, where the factual claims involve the extent of the defendants' lack of commercial acumen, their unfamiliarity with the English language resulting in their inability to comprehend the terms of the mortgage that they signed, and their unfamiliarity with the ordinary incidents of mortgage loans. The trial court is in a unique position to assess such factual questions.

"The purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise. J. Calamari & J. Perillo, Contracts (3d Ed.) § 9-40." Edart Truck Rental Corporation v. B. Swirsky & Co., 23 Conn.App. 137, 142, 579 A.2d 133 (1990). "As applied to real estate mortgages, the doctrine of unconscionability draws heavily on its counterpart in the Uniform Commercial Code which, although formally limited to transactions involving personal property, furnishes a useful guide for real property transactions. Olean v. Treglia, 190 Conn. 756, 762, 463 A.2d 242 (1983); Hamm v. Taylor, [supra, 180 Conn. at 495, 429 A.2d 946]." Iamartino v. Avallone, supra, 2 Conn.App. at 125, 477 A.2d 124; see generally Leff, "Unconscionability and the Code--The Emperor's New Clause," 115 U.Pa.L.Rev. 485, 546, 550-53 (1967); M. Ellinghaus, "In Defense of Unconscionability," 78 Yale L.J. 757, 812-14 (1969). "As Official Comment 1 to § 2-302 of the Uniform Commercial Code suggests, [t]he basic test is...