Hamm v. Taylor

• Decision Date: 06 May 1980
• Citation: 429 A.2d 946,180 Conn. 491
• Court: Connecticut Supreme Court
• Parties: Hilton C. HAMM v. Patricia TAYLOR et al.

Page 946

429 A.2d 946

180 Conn. 491

Hilton C. HAMM v. Patricia TAYLOR et al.

Supreme Court of Connecticut.

Argued March 11, 1980.

Decided May 6, 1980.

Laurence M. Wood, Glastonbury, for appellant (plaintiff).

Jeffrey R. Martin, Hartford, with whom on the brief, was Richard C. Robinson, Hartford, for appellee (named defendant).

Morris Apter, Hartford, with whom, on the brief, was Daniel B. Kenney, Hartford, for appellee (defendant Self-Service Sales Company).

Before COTTER, C. J., and BOGDANSKI, PETERS, HEALEY and PARSKEY, JJ.

PETERS, Associate Justice.

This case arises out of the decision by the trial court, in conjunction with an action of foreclosure, to reduce the rate of interest below that stated in a mortgage note. The plaintiff, Hilton C. Hamm, on June 15, 1978, commenced an action of foreclosure pursuant to a mortgage and note executed by the defendant, Patricia Taylor. Also named as defendants were the Self-Service Sales Company, a judgment lienor, Arthur A. Watson & Co., Inc., and the West Hartford Credit Union, both attachment creditors, and the town of Marlborough, which held a demolition lien on the mortgaged property. All defendants appeared by counsel, failed to plead and were defaulted, and a judgment of foreclosure by sale was rendered. That judgment was subsequently opened to correct a clerical error concerning the date of default; this opening is not challenged by any party on this appeal. The plaintiff does appeal from the determination by the trial court, Bieluch, J., in the course of the foreclosure proceedings, to limit the recoverable rate of interest on the mortgage debt to 12 percent.

The facts concerning the execution of the note and the mortgage are undisputed. The defendant Patricia Taylor executed a promissory note in the amount of $20,000 to the plaintiff Hilton C. Hamm on October 19, 1973. The note was secured by a mortgage on property in Marlborough then occupied in part by a roadside tavern. Thereafter the tavern burned to the ground and it has not been rebuilt. The mortgage has been in default since June 5, 1977; no part of the principal amount has ever been repaid. None of the parties contested the propriety of foreclosure by sale.

The sole issue on this appeal is the trial court's conclusion that certain terms of the mortgage were unconscionable and hence unenforceable in an equitable proceeding of foreclosure. The note provided for interest payments at the rate of 15 percent per annum, payable monthly, and for a late charge of 10 percent of said monthly interest payments if payments were overdue. The court found that these two terms, taken in the aggregate, created an effective annual rate of interest of 161/2 percent. Despite the exemption of bona fide mortgages, by virtue of General Statutes § 37-9, ¹ from the 12 percent interest rate ceiling of General Statutes § 37-4, ² the court determined that the interest terms of the mortgage note, although not usurious, were unconscionable and inequitable and hence unenforceable. It therefore reduced the plaintiff's claim for interest out of the proceeds of the foreclosure by sale to an interest rate calculated at 12 percent per annum. The court disallowed entirely the late charges provided in the mortgage note. The plaintiff argues that these conclusions of the trial court lacked a sufficient factual basis and were therefore in error. We agree.

It is important to note the procedural setting that gave rise to the trial court's conclusion that the mortgage note's provisions for interest were unconscionable. In the proceedings that led to the judgment of foreclosure, no defendant had raised any defense whatsoever. A fortiori no one had filed any pleadings raising any issue of usury or illegality or unconscionability. Nor had the court been asked by any party to reform the mortgage or the mortgage note by reason of fraud or duress or mistake. At the foreclosure hearing, the court received the plaintiff's uncontested affidavits of appraisal and of debt; no other evidence was proffered or taken. The court, invited by counsel to consider the possible unenforceability of the contested interest rate terms, invoked its equitable powers and rendered its judgment.

The only facts before the court when it reached its conclusion of unconscionability were the terms of the mortgage note itself. As to these terms, the court knew that the monthly interest rate exceeded that normally permitted for ordinary debts but did not exceed the rate for bona fide mortgages securing a debt in excess of $5000. General Statutes §§ 37-4 and 37-9. There was no evidence that the mortgage was not bona fide. There was no doubt that the mortgage debt, found to be $20,000, exceeded $5000.

Before a court strikes down as unconscionable the terms of a note that the legislature has deemed not to be illegal; Columbus Industrial Bank v. Miller, 125 Conn. 313, 320, 6 A.2d 42 (1939); the court should permit a factual showing of the circumstances that led to the inclusion of the challenged terms in the note or mortgage. The Uniform Commercial Code's provision concerning unconscionability; General Statutes § 42a-2-302; although addressed primarily to contracts for the sale of goods, furnishes a useful guide. See generally Leff, "Unconscionability and the Code The Emperor's New Clause," 115 U.Pa.L.Rev. 485, 546, 550-53 (1967); Ellinghaus, "In Defense of Unconscionability," 78 Yale L.J. 757, 812-14 (1969). Subsection (2) of § 42a-2-302 states: "When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination." Whether interest rates are unconscionable is a question that should not be decided simply by judicial surmise about prevailing prime interest rates. The financial circumstances of the borrower, the increased risk associated with a second mortgage, ³ and the income-producing capacity of the mortgaged property are some of the questions of fact that might appropriately be explored to shed light on whether a designated interest rate is or is not unconscionable. As Official Comment 1 to § 2-302 of the Uniform Commercial Code suggests, "(t)he basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the...