TD Bank, N.A. v. J & M Holdings, LLC, 33857.

• Decision Date: 18 June 2013
• Docket Number: No. 33857.,33857.
• Citation: 70 A.3d 156,143 Conn.App. 340
• Parties: TD BANK, N.A. v. J AND M HOLDINGS, LLC, et al.
• Court: Connecticut Court of Appeals

143 Conn.App. 340

70 A.3d 156

TD BANK, N.A.

v.J AND M HOLDINGS, LLC, et al.

No. 33857.

Appellate Court of Connecticut.

Argued Jan. 14, 2013.

Decided June 18, 2013.

James R. Winkel, Milford, for the appellants (named defendant et al.).

Patrick M. Fryer, New Haven, for the appellee (plaintiff).

DiPENTIMA, C.J., and BEACH and BEAR, Js.

BEACH, J.

The defendants, J & M Holdings, LLC (J & M Holdings), Debra Schlachter Hall and Pierce Hall, appeal from the judgment of foreclosure by sale rendered by the trial court in favor of the plaintiff, TD Bank, N.A. The defendants claim that the court erred in (1) striking certain special defenses and (2) granting the plaintiff's motion for summary judgment. We reverse the judgment of the trial court.

The plaintiff commenced this action in March, 2010. In June, 2010, the plaintiff filed the operative complaint in which it sought to foreclose on certain commercial property of J & M Holdings and sought judgment against Hall and Schlachter Hall, as guarantors of the notes, for failing to pay the balance due. The operative complaint alleged the following relevant facts. By way of a “construction mortgage note,” dated August 31, 2005, J & M Holdings promised to pay to the plaintiff $2.7 million.¹ To secure the note, J & M Holdings mortgaged to the plaintiff its property at 20 Excalibur Boulevard in Plainfield (Plainfield property) by executing an “open-end construction mortgage deed” and security agreement. J & M Holdings executed a second “construction mortgage note” dated August 31, 2005, by which it promised to pay the plaintiff the principal sum of $600,000. To secure this note, J & M Holdings executed a second “open-end construction mortgage deed” and security agreement in which J & M Holdings mortgaged the Plainfield property. The plaintiff alleged in its complaint that J & M Holdings defaulted under the terms of both notes and failed to pay the balance due on each.²

In August, 2010, the defendants filed an answer and seven special defenses.³ The plaintiff filed a motion to strike all of the defendants' special defenses, which the court granted. The plaintiff filed a motion for summary judgment as to liability only, which the court granted. The plaintiff filed a motion for judgment of strict foreclosure, and in August, 2011, the court entered a judgment of foreclosure by sale.

“The standard of review in an appeal challenging a trial court's granting of a motion to strike is well established. A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court. As a result, our review of the court's ruling is plenary.... We take the facts to be those alleged in the [pleading] that has been stricken and we construe the [pleading] in the manner most favorable to sustaining its legal sufficiency.” (Internal quotation marks omitted.) Ugrin v. Cheshire, 307 Conn. 364, 373, 54 A.3d 532 (2012).

“The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action.... A valid special defense at law to a foreclosure proceeding must be legally sufficient and address the making, validity or enforcement of the mortgage, the note or both.” (Internal quotation marks omitted.) Mortgage Electronic Registration Systems v. Goduto, 110 Conn.App. 367, 369 n. 2, 955 A.2d 544, cert. denied, 289 Conn. 956, 961 A.2d 420 (2008). “[O]ur courts have permitted several equitable defenses to a foreclosure action. [I]f the mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had.... Other equitable defenses that our Supreme Court has recognized in foreclosure actions include unconscionability ... abandonment of security ... and usury.” (Internal quotation marks omitted.) Fidelity Bank v. Krenisky, 72 Conn.App. 700, 705–706, 807 A.2d 968, cert. denied, 262 Conn. 915, 811 A.2d 1291 (2002).

I

The defendants claim that the court erred in granting the plaintiff's motion to strike their second, third, fourth, fifth, sixth and seventh special defenses.⁴ We agree as to the fifth special defense and disagree as to the remaining special defenses.

In their second special defense, the defendants alleged that the plaintiff refused to facilitate a favorable sale of the Plainfield property to a third party because it refused to waive a prepayment penalty. The defendants argue that Superior Court decisions have found the defense of refusal to agree to a favorable sale to a third party to be a valid special defense to a foreclosure action. They contend that the actions of the plaintiff clearly harmed the defendants and the special defense is valid because it relates to the ability of the plaintiff to enforce the Plainfield note and mortgage.

Even if we were to assume that a mortgagee's refusal to agree to a favorable sale can in some instances be a valid defense in a foreclosure proceeding, the defendants have not set forth a legally sufficient defense in this instance. They allege that the plaintiff refused to waive a prepayment penalty and thus refused to facilitate the sale. The defendants made no allegation that the prepayment penalty was unenforceable or that the plaintiff was legally obligated to waive the prepayment penalty. We know of no binding authority, and the defendants have not directed us to any, requiring a mortgagee not to enforce an otherwise valid contractual provision. Accordingly, the second special defense was not legally sufficient and is not a valid defense to a foreclosure action; it was properly stricken by the trial court.

The defendants' third and fourth special defenses, which alleged breach of the covenant of good faith and fair dealing and equitable estoppel, respectively, were premised on the same factual allegations that were made in the second special defense. Because the factual allegations set forth in the second special defense were not legally sufficient, the third and fourth special defenses likewise are insufficient.⁵

In the fifth special defense, the defendants allege modification and set forth the following factual allegations. In July, 2009, an entity “related” ⁶ to the defendant J & M Holdings called M & J Holdings, LLC (related entity), sold certain property in New London (New London property) to PJL Realty, LLC, for the sum of $800,000, even though the New London property was worth well in excess of $800,000.⁷ The defendants and the related entity agreed to the sale because of the plaintiff's promise to modify the loans at issue in the present foreclosure proceeding if the related entity sold the New London property and provided the plaintiff with all of the net proceeds. The plaintiff accepted the full amount of the net proceeds from the sale of the New London property, $687,637.17, but did not modify the loans secured by the mortgage on the Plainfield property at issue in this case. The special defense also alleged that the defendants were beneficiaries of the agreement between the plaintiff and the related entity.

The defendants argue that their defense of modification is a legally sufficient defense in a foreclosure proceeding and is a valid defense in this case because they alleged that they were third party beneficiaries to the modification agreement.⁸ The plaintiff argues that modification is not a valid defense in this case because the modification agreement was a separate transaction and does not have a sufficient link to the execution of the Plainfield note and mortgage under consideration here.

The alleged resulting modification of the loan agreement relates to the validity and enforcement of the mortgage and/or note and, thus, is a facially valid special defense. See Forte v. Citicorp Mortgage, Inc., 66 Conn.App. 475, 784 A.2d 1024 (2001); see also BAC Home Loans Servicing, L.P. v. Presutti, Superior Court, judicial district of Hartford, Docket No. CV–09–5029746, 2010 WL 1883681 (April 8, 2010) (49 Conn. L. Rptr. 609) (allegations of modification directly attack validity or enforcement of original note or mortgage); ALI, Inc. v. Veronneau, Superior Court, judicial district of Waterbury, Docket No. CV 126431, 1996 WL 600772 (October 11, 1996) (17 Conn. L. Rptr. 677) (modification valid special defense in foreclosure action); Home Savings of America v. Santilli, Superior Court, judicial district of Stamford–Norwalk, Docket No. CV–93–0130634, 1995 WL 94639 (March 2, 1995) (same). If a valid subsequent agreement purporting to modify the original loan agreement was, in fact, entered into, then the original loan agreement may no longer be enforceable to the extent that it was contractually modified. This scenario affects the validity and enforcement of the original loan agreement.

According to the defendants' factual allegations in the fifth special defense, the plaintiff promised to modify the Plainfield note if a related entity performed a certain act, and that entity performed. Contrary to the plaintiff's claim, the alleged loan modification agreement was not made by parties with no connection to the Plainfield note; rather it was entered into by the plaintiff and an entity related to the defendant J & M Holdings. In this special defense, the defendants assert a connection with the subject matter of the present foreclosure action: the modification agreement,to which the plaintiff was a party and which was performed by the related entity, altered the original loan documents with respect to the Plainfield property, which in turn were sought to be enforced in this action. Thus, the alleged modification could affect the enforceability and current validity of the Plainfield loan documents. Because the fifth special defense alleges a legally sufficient defense, the court erred in granting the motion to strike this special defense.

The defendants' sixth and seventh special defenses were premised on the factual...