Mechanics and Farmers Sav. Bank, FSB v. Delco Development Co., Inc.

• Decision Date: 30 August 1993
• Docket Number: No. 303743,303743
• Citation: 656 A.2d 1075,43 Conn.Supp. 408
• Court: Connecticut Superior Court
• Parties: MECHANICS AND FARMERS SAVINGS BANK, FSB v. DELCO DEVELOPMENT COMPANY, INC., et al. Judicial District of New Haven

Page 1075

656 A.2d 1075

43 Conn.Supp. 408

MECHANICS AND FARMERS SAVINGS BANK, FSB v. DELCO DEVELOPMENT COMPANY, INC., et al.

No. 303743.

Superior Court of Connecticut,

Judicial District of New Haven.

Aug. 30, 1993.

Diserio, Martin, O'Connor & Castiglioni, Stamford, for plaintiff.

Green & Gross, Bridgeport, for named defendant.

Weinstein, Weiner & Shapiro, Bridgeport, for defendant Gary R. Ginsberg.

Paul M. Kaplan, Orange, for defendant Robert A. Ginsburg.

Gager & Henry, Waterbury, for defendant Great Country Bank.

Rogin, Nassau, Caplan, Lassman & Hirtle, Hartford, for defendant Dennis P. Nicotra.

LAGER, Judge.

This action on a note, mortgage and certain guaranties was brought against the defendant Delco Development Company, Inc. (Delco), as principal and Robert A. Ginsburg, Gary R. Ginsberg and Dennis Nicotra as guarantors. The plaintiff seeks, among other things, strict foreclosure of a mortgage on certain undeveloped land located in Hamden. Nicotra was defaulted on December 9, 1991, for failure to disclose a defense. Great Country Bank, a defendant by virtue of a subordinate lien on the mortgaged property, was also defaulted for failure to disclose a defense on December 9, 1991. Delco and Robert Ginsburg and Gary Ginsberg (the defendants) answered and pleaded certain identical special defenses.

This action was originally brought by the Mechanics and Farmers Savings Bank, FSB (the bank). The Federal Deposit Insurance Corporation (FDIC) was substituted as the plaintiff by the court, Celotto, J., on March 9, 1992, after it became the receiver of the bank's assets following the bank's failure on August 9, 1991.

The present case was tried before the court on July 20, 21, and 22, and on August 6, 1993. The following facts were either admitted ¹ or proved by a preponderance of the evidence. On May 17, 1988, Delco borrowed $3,500,000 from the bank executing a variable rate promissory note due on June 1, 1989, secured by a mortgage deed on certain real property known as 249 Putnam Avenue, Hamden. The defendants Robert Ginsburg, Gary Ginsberg and Nicotra, who were shareholders in Delco at the time, each executed an unconditional guaranty to the bank of the principal amount of Delco's note. Each guaranty provided, among other things, for the extension or renewal of the note or its rate of interest without "affecting or releasing the liability of the Guarantor."

On February 21, 1990, the bank agreed to renew what it described as the "Delco Development Company, Inc. Loan # 16109," which is the same loan that was the subject of the May 17, 1988 transaction. The renewal was subject to the following conditions: the term of the loan was extended for five years, the interest rate was modified and the repayment terms changed, one point was charged for renewal and outstanding interest through closing had to be paid. On the same date, Delco entered into a modification agreement with the bank that modified and extended the loan evidenced by the note of May 17, 1988, and secured by the mortgage of the same date. Neither a new note nor a new mortgage deed was executed. Each guarantor, however, executed written consents to the modification which stated, among other things: "Guarantor does hereby guaranty to MECHANICS AND FARMERS SAVINGS BANK FSB, or the holder of the Note, the prompt payment when due at maturity, by acceleration or otherwise, of the principal amount evidenced by the Note, as so modified or such portion thereof as shall be outstanding, together with interest, reasonable attorney's fees and reasonable costs of collection of said amount, to the same effect as if said Guaranty dated May 17, 1988 had referred to the Note as modified." The modification agreement was recorded on the land records of the town of Hamden on March 1, 1990. Delco has made no payments on the modified loan since April 1, 1990. For the purposes of this decision, the 1988 and 1990 transactions will be referred to collectively as the loan transaction.

The defendants have raised five identical special defenses. ² The first four special defenses rely on the same facts and allege, respectively, that the loan transaction was ultra vires and unenforceable; that the bank violated the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq. (CUTPA), and breached its duty of good faith and fair dealing; that the bank was an equity partner or joint venturer with Delco; and that the bank had unclean hands. These defenses are premised on the defendants' claim that the loan transaction was in violation of federal regulation and, therefore, illegal. The fifth special defense alleges that the debt was paid and satisfied. This claim is premised on certain agreements entered into between Nicotra and his creditors, including the bank.

The FDIC has denied the special defenses and claims that they are, in large measure, barred under the doctrine of D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942) (hereafter D'Oench ), and its progeny, as well as under 12 U.S.C. § 1823(e). While D'Oench and 12 U.S.C. § 1823(e) create substantial barriers to the successful assertion of defenses in a foreclosure action maintained by the FDIC, as a preliminary matter, the defendants' assertion that the loan transaction was unlawful must be addressed.

The contention at the heart of the first four special defenses is that the bank failed to comply with the requirements of certain federal regulations concerning appraisals and loan to value ratios. Specifically, the defendants claim that the bank did not have a signed appraisal submitted by an appropriately designated appraiser before the 1988 closing in violation of 12 C.F.R. § 545.32(b)(1) ³ and that the 1990 modification was in excess of authorized loan to value ratios based on the most current appraisal available to the bank in violation of 12 C.F.R. § 545.32(d). ⁴

Given these claims, it is necessary to put the circumstances of the loan transaction into context. The law firm of Ginsberg, Ginsburg and Alderman represented Delco in both 1988 and 1990. The firm had also previously represented Delco in a 1987 closing with the bank of a note and mortgage on the same property.

By 1988, Robert Ginsburg and Gary Ginsberg were Delco stockholders and also had acquired a half interest in a subordinate $1,500,000 mortgage on the Delco property. Robert Ginsburg, according to his testimony, actively participated in the 1988 loan closing, in the negotiations leading up to the 1990 modification agreement, and in the closing of the modification agreement representing both Delco and his own interests. Robert Ginsburg is a commercial attorney who has practiced in Connecticut since 1967 and has been involved in many loan transactions.

With respect to the 1988 closing, Robert Ginsburg testified that although he understood that the bank was waiving an appraisal, he believed at the time that the transaction was in violation of federal law, assumedly 12 C.F.R. § 545.32(b), and not enforceable. Nonetheless, his law firm issued an opinion letter to the bank after deletion of any language indicating that the loan documents conformed to federal law.

Five documents involving appraisals of the subject property were located in the files of the bank and its successor, the Consolidated Asset Recovery Corporation (the corporation). The parties stipulated that the following were in the files: (1) an appraisal dated December 10, 1986, from Estrada & Associates (Estrada); (2) an appraisal as of July 1, 1988, dated July 20, 1988, also from Estrada; (3) a letter dated October 27, 1989, from Estrada updating the July 1, 1988 appraisal (Estrada letter); (4) an appraisal dated September 30, 1989, from New England Real Estate Analysts; and (5) an appraisal dated September 8, 1992, prepared by Timothy Girian.

With respect to the 1990 modification, Robert Ginsburg testified that he had participated in discussions with officials of the bank concerning the value of the mortgaged property. He stated that based on an appraisal that the bank had obtained in the fall of 1989, the bank was seeking a significant paydown or to call the loan. In response, Nicotra indicated that he would obtain an updated appraisal but that he was only able to procure a letter from Arthur Estrada, who had previously appraised the property. Robert Ginsburg presented this letter to the bank after it agreed to accept it. According to Scott Smith, a representative of the corporation who was familiar with the loan transaction, the value stated in this document supports a loan to value ratio of seventy-three percent at the time of the modification which would be within the limits of 12 C.F.R. § 545.32(d).

Assuming, arguendo, that 12 C.F.R. §§ 545.32(b)(1) and (d) apply to the loan transaction between the bank and the defendants, ⁵ the defendants' great reliance on the alleged regulatory violation is misplaced. The principle that a bank's violation of regulatory provisions in making a loan neither precludes recovery on the loan nor provides a defense, unless specifically provided by statute, has been established for well over 100 years. See e.g., Gold-Mining Co. v. National Bank, 96 U.S. 640, 642, 24 L.Ed. 648 (1877); annot., 125 A.L.R. 1512 (1940). Indeed, as the Supreme Court stated in 1892, "it has been held repeatedly by this court that where the provisions of the national banking act prohibit certain acts by banks or their officers, without imposing any penalty or forfeiture applicable to particular transactions which have been executed, their validity can be questioned only by the United States and not by private parties. [Union ] National Bank v. Matthews, 98 U.S. 621 [25 L.Ed. 188 (1878) ]; National Bank v. Whitney, 103 U.S. 99 [26 L.Ed. 443 (1880) ]; National Bank of Xenia v. Stewart, 107 U.S. 676 [2 S.Ct. 778, 27 L.Ed. 592 (1882) ]." Thompson v. Saint Nicholas National Bank, 146 U.S. 240, 251, 13 S.Ct. 66,...