Connecticut Bank and Trust Co. v. Carriage Lane Associates

• Decision Date: 30 July 1991
• Docket Number: No. 14232,14232
• Citation: 595 A.2d 334,219 Conn. 772
• Court: Connecticut Supreme Court
• Parties: , 13 A.L.R.5th 1091 CONNECTICUT BANK AND TRUST COMPANY v. CARRIAGE LANE ASSOCIATES et al.

Page 334

595 A.2d 334

219 Conn. 772, 13 A.L.R.5th 1091

CONNECTICUT BANK AND TRUST COMPANY v. CARRIAGE LANE ASSOCIATES et al.

No. 14232.

Supreme Court of Connecticut.

Argued June 4, 1991.

Decided July 30, 1991.

Robert P. Hanahan, with whom was Brian A. Barnes, Middlebury, for appellant (defendant John F. Hychko).

James J. Tancredi, with whom were Rhoda L. Rudnick and, on the brief, Katherine A. Burroughs, Hartford, for appellees (plaintiff and F.P., Inc.).

Before PETERS, C.J., and GLASS, COVELLO, BORDEN and FRANCIS X. HENNESSY, JJ.

PETERS, Chief Justice.

The primary issue in this appeal is whether, in the absence of an express agreement or a showing of bad faith, a senior mortgagee owes a duty to a junior mortgagee to advance the proceeds of a loan to the mortgagor in accordance with the terms of the senior mortgage. The named plaintiff, Connecticut Bank and Trust Company, N.A. (CBT), initiated this action to foreclose on a mortgage that it held on real property owned by the named defendant, Carriage Lane Associates (Carriage Lane). Another defendant, John Hychko, who held a purchase money mortgage on the property, filed an answer, special defense and counterclaim against CBT. Subsequently, F.P., Inc. (F.P.), which had been substituted as party plaintiff after taking an assignment of the mortgage and note held by CBT, moved for partial summary judgment on its foreclosure complaint. CBT, which remained the defendant on Hychko's counterclaim, also moved for summary judgment thereon. The trial court, McWeeny J., granted the motions in favor of F.P. and CBT. Thereafter the trial court, Byrne, J., granted F.P.'s motion for strict foreclosure and rendered judgment thereon. Hychko took a timely appeal from that judgment to the Appellate Court, and we transferred the appeal to this court pursuant to Practice Book § 4023. We affirm the judgment of the trial court.

I

The record discloses the following facts. On September 17, 1987, Carriage Lane entered into two financial arrangements. In order to finance the construction of a condominium development in Waterbury, Carriage Lane gave CBT a first mortgage in the form of a $6,500,000 commercial revolving credit mortgage note secured by an open-end mortgage and security agreement. ¹ In order to finance the acquisition of the Waterbury property from its owner, John Hychko, Carriage Lane gave Hychko a second mortgage in the form of a purchase money mortgage and note securing $2,340,000. Both mortgages were recorded the following day.

Prior to the formal execution of these documents, Hychko had originally agreed with Carriage Lane that his loan would be secured by a first mortgage. When he subsequently learned, however, that CBT would only provide construction financing for Carriage Lane if CBT's mortgage had first priority, he acquiesced in that arrangement. Hychko sought, however, to have the purchase money mortgage provide: "The Seller agrees that he shall subordinate this mortgage to a 'Construction Type' mortgage to be obtained by the Buyer providing the Seller is assured that the funds obtained from the construction mortgage shall be applied to the construction of the condominium unit[s] contemplated by this agreement." Because CBT refused to finalize its financing arrangement with Carriage Lane if this language were included as part of Hychko's agreement with Carriage Lane, the language was excluded.

Faced with CBT's refusal to agree to the subordination clause, Hychko nonetheless agreed to proceed with the sale of his property to Carriage Lane and to accept junior mortgagee status. He did so at least in part in reliance on the assurances of Carriage Lane's counsel that CBT's construction mortgage with Carriage Lane would specify that its proceeds would, in fact, go into the development project. The construction mortgage did provide, in relevant part, that CBT would "make the balance from time to time of the loan herein described to [Carriage Lane] in installments as the work progresses, provided the Mortgagor is not in default hereunder...." The agreement also provided, however, that "the time and amount of each advancement [would] be at the sole discretion and upon the estimate of the Mortgagee...." Hychko was not a party to CBT's construction mortgage with Carriage Lane.

Carriage Lane began construction of the condominium development in timely fashion. By the late summer of 1989, however, although one hundred sixty-two condominium units had been approved, only thirty-two had actually been constructed. In August and September, 1989, Carriage Lane defaulted on interest and principal payments required under its agreement with CBT. By that time, CBT had advanced approximately $5,000,000 against only $2,000,000 of actual construction.

CBT opted to declare the entire balance on the Carriage Lane note due and payable, and to foreclose its mortgage. In addition to naming Carriage Lane as a defendant in the foreclosure suit, CBT also named as defendants all junior encumbrancers on the development. Of these, only Hychko filed responsive pleadings. In his pleadings, Hychko raised a special defense that CBT had violated the terms of its agreement with Carriage Lane by advancing money to Carriage Lane in excess of the amount due in view of the amount of construction that had actually been completed at the construction site. Consequently, Hychko asserted, CBT should be estopped from claiming any debt in excess of the amount that would have been paid out to Carriage Lane had CBT advanced money in accordance with that agreement. In a counterclaim, Hychko further alleged that he had relied upon CBT "to act in a commercially reasonable manner and to abide by the terms and conditions of its own loan documents" and, also, that in violating the terms of its agreement with Carriage Lane, CBT "knew or should have known that it would impair the security of [Hychko's] mortgage from Carriage Lane Associates." ² CBT denied Hychko's special defense and counterclaim.

Subsequent to CBT's initiation of this litigation, CBT assigned its interest in the note, agreement and mortgage with Carriage Lane to F.P., its wholly owned subsidiary. Accordingly, CBT moved to substitute F.P. as the party plaintiff in its foreclosure action. The trial court, Santos, J., granted this motion on March 26, 1990. ³

On May 11, 1990, F.P. moved for partial summary judgment on its foreclosure complaint. ⁴ On that same date, CBT moved for summary judgment against Hychko on his counterclaim. ⁵ Both motions were filed with supporting affidavits and legal memoranda. Hychko, in turn, filed both affidavits and a memorandum of law in opposition to CBT's motion. In these and subsequent memoranda, Hychko reiterated his claim that CBT owed him a duty to advance loan proceeds to Carriage Lane only in accordance with the terms of CBT's agreement with Carriage Lane and that CBT had violated the terms of that agreement by overadvancing approximately $3,000,000. For the purposes of its summary judgment motion on Hychko's counterclaim, CBT conceded that it had overadvanced funds but denied the existence under Connecticut law of any duty to Hychko, absent an express agreement between the senior and junior mortgagees or collusion between the senior mortgagee and the mortgagor. Hychko then asserted in a subsequent memorandum, without any supporting affidavits, that CBT had colluded with Carriage Lane in overadvancing the loan proceeds.

On July 27, 1990, the trial court, McWeeny, J., issued a memorandum of decision granting F.P.'s motion for partial summary judgment and CBT's motion for summary judgment on Hychko's counterclaim. Focusing on the counterclaim, the court ruled that, absent bad faith, collusion with Carriage Lane, or an express agreement with Hychko, CBT had no legal duty to Hychko, a stranger to its construction mortgage, to police the manner in which it advanced loan proceeds to Carriage Lane. The court noted that Hychko's pleadings did not allege any of the preconditions that might have been sufficient to impose such a duty. Although Hychko, despite the absence of an appropriate pleading, had raised the issue of collusion in his memorandum of law, the court held that the allegation was wholly unsupported and would not, therefore, raise a genuine issue of material fact capable of defeating CBT's motion. Without further discussion, the court also granted F.P.'s motion for summary judgment.

Hychko then unsuccessfully sought a further articulation of the court's decision and was denied permission to revise his counterclaim. Hychko has appealed the judgment rendered by the court on F.P.'s motion for strict foreclosure.

II

Hychko's main argument on appeal is that the trial court improperly granted F.P.'s motion for partial summary judgment because it incorrectly concluded that CBT was under no duty to Hychko to advance funds to Carriage Lane in accordance with its agreement with Carriage Lane. ⁶ He contends that Connecticut imposes such a legal duty on a first mortgagee and, further, that an allegation of breach of that duty raised a question of fact, which cannot appropriately be resolved by a summary judgment. F.P. counters that the trial court correctly decided the duty issue. We agree with F.P.

A

Before discussing the merits of Hychko's argument as a matter of state law, we first consider, as F.P. now argues for the first time on appeal, whether federal law bars Hychko's assertion of his special defense. ⁷ This argument arises out of the recent appointment of the Federal Deposit Insurance Corporation (FDIC) as receiver of CBT. This appointment followed the determination by the Comptroller of the Currency of the United States, on January 6, 1991, that CBT had become insolvent. On that date, the FDIC as receiver established The New Connecticut Bank and Trust Company, National Association (New CBT) as a bridge bank. New CBT purchased certain assets and assumed certain liabilities of the insolvent...