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

• Decision Date: 18 June 2013
• Docket Number: No. 33777.,33777.
• Parties: TD BANK, N.A. v. M.J. HOLDINGS, LLC, et al.
• Court: Connecticut Court of Appeals

143 Conn.App. 322

71 A.3d 541

TD BANK, N.A.

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

No. 33777.

Appellate Court of Connecticut.

Argued Sept. 20, 2012.

Decided June 18, 2013.

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

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

ALVORD, SHELDON and WEST, Js.

WEST, J.

The defendants, M.J. Holdings, LLC (M.J. Holdings), Mountain Top, LLC (Mountain Top), Debra Schlachter Hall, and Pierce Hall, appeal from the trial court's judgment of foreclosure by sale rendered in favor of the plaintiff, TD Bank, N.A.¹ On appeal, the defendants claim that the court improperly granted the plaintiff's motions (1) to strike their special defenses and (2) for summary judgment. We reverse the judgment of the court.

The following facts and procedural history are relevant to our resolution of this appeal. M.J. Holdings executed a promissory note, dated April 5, 2004, in which it promised to pay the plaintiff the principal sum of $970,000. To secure the note, M.J. Holdings mortgaged to the plaintiff its interest in properties located at 125, 139, 141 and 143 Shaw Street in New London. Mountain Top executed a promissory note, dated April 27, 2005, in which it promised to pay the plaintiff the principal sum of $920,000. To secure the note, Mountain Top mortgaged to the plaintiff its interest in properties located at 106 and 156 Summit Street in Norwich. Debra Schlachter Hall and Pierce Hall each guaranteed the amounts due and payable under both notes by guaranty agreements, dated April 5, 2004, and April 27, 2005.

In March, 2010, the plaintiff commenced this action to foreclose the mortgages on the subject properties. In its revised complaint, dated June 11, 2010, the plaintiff alleged that M.J. Holdings and Mountain Top defaulted under the terms of their respective notes and mortgages, and that the plaintiff exercised its option to declare the entirety of the balances due but, despite due demand, the defendants failed to pay the balances due and owing. On August 4, 2010, the defendants filed an answer and four special defenses. On August 19, 2010, the plaintiff filed a motion to strike the defendants' special defenses, which was granted by the court on February 17, 2011.² On March 8, 2011, the plaintiff filed a motion for summary judgment as to liability only, which was granted by the court on July 1, 2011. Thereafter, the court rendered a judgment of foreclosure by sale. This appeal followed.

I

The defendants first claim that the court improperly granted the plaintiff's motion to strike their second, third and fourth special defenses. We agree in part.

The defendants alleged the following facts, which are germane to these defenses. M.J. Holdings agreed to sell its property located at 125 Shaw Street in New London “based upon the promise of the [p]laintiff that if the sale were allowed to proceed, and the [p]laintiff was provided with all of the net proceeds, it would modify certain of the [d]efendants' loans, including those made the basis of the current foreclosure. The [d]efendants were all beneficiaries of the promised loan modifications.... Specifically, the [p]laintiff agreed to modify the loans to interest only which would have reduced the [d]efendants' monthly debt and allowed them to remain current on all their loan obligations.... [M.J. Holdings] only agreed to the sale ... based on the benefit it and the other [d]efendants were to receive in the form of the loan modifications.... The sale was conducted on July 17, 2009 and the full amount of the sale proceeds, $687,637.17, was forwarded to, and accepted by the [p]laintiff.... The [p]laintiff thereafter breached its agreement with [M.J. Holdings] and failed and refused to restructure or modify the loans.”

“Our standard of review is undisputed. Because a motion to strike challenges the legal sufficiency of a pleading and, consequently, requires no factual findings by the trial court, our review of the court's ruling on [a motion to strike] is plenary.... A party wanting to contest the legal sufficiency of a special defense may do so by filing a motion to strike. 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.... In ruling on a motion to strike, the court must accept as true the facts alleged in the special defenses and construe them in the manner most favorable to sustaining their legal sufficiency.” (Citations omitted; internal quotation marks omitted.) Barasso v. Rear Still Hill Road, LLC, 64 Conn.App. 9, 12–13, 779 A.2d 198 (2001).

At the outset we note that “[b]ecause a mortgage foreclosure action is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done.... The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court.... Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles.” (Citations omitted; internal quotation marks omitted.) Southbridge Associates, LLC v. Garofalo, 53 Conn.App. 11, 15, 728 A.2d 1114, cert. denied, 249 Conn. 919, 733 A.2d 229 (1999).

We further note that “[e]quitable remedies are not bound by formula but are molded to the needs of justice.... Our Supreme Court has endorsed the principle that [a] court of equity does full and equal justice to all having an interest in the subject-matter by tersely expressing that [e]quity never does anything by halves.... The principle of [this] maxim embraces the well-established doctrine ... that when equity once acquires jurisdiction it will retain it so as to afford complete relief....

“Moreover, it is necessary to keep in mind ... that equity looks to substance and not mere form.... In speaking about the meaning and effect of the equitable concept of substance rather than form, Pomeroy ... opines that it is one of great practical importance, [which] pervades and affects to a greater or less degree the entire system of equity jurisprudence.... Equity always attempts to get at the substance of things, and to ascertain, uphold, and enforce rights and duties which spring from the real relations of parties. It will never suffer the mere appearance and external form to conceal the true purposes, objects, and consequences of a transaction.” (Citations omitted; emphasis in original; internal quotation marks omitted.) Morgera v. Chiappardi, 74 Conn.App. 442, 457–58, 813 A.2d 89 (2003), quoting 2 J. Pomeroy, Equity Jurisprudence (5th Ed. 1941) § 378, pp. 40–41.

“Historically, defenses to a foreclosure action have been limited to payment, discharge, release or satisfaction ... or, if there had never been a valid lien.... 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.... [O]ur courts have permitted severalequitable 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).

Practically speaking, however, neither this court nor our Supreme Court has ever expressed a finite list of equitable defenses available in a foreclosure action. Typically, “[t]he assertion of equitable defenses to a mortgage foreclosure requires that the defenses [also] challenge the making, validity and enforcement of the loan note and mortgage. This principle was ... considered to include events leading up to the execution of the loan documents, exclusive of issues involving administration of the loan, such as misapplication of payments.” D. Caron & G. Milne, Connecticut Foreclosures (4th Ed. 2004) § 28.05A, p. 612. Nevertheless, given the equitable nature of a foreclosure action, events subsequent to the execution of the loan documents also have been considered. See, e.g., Thompson v. Orcutt, 257 Conn. 301, 311–14, 777 A.2d 670 (2001).

In Thompson, our Supreme Court considered actions by the plaintiff subsequent to the execution of the note and mortgage—in particular, fraudulent conduct in a bankruptcy proceeding—to be “directly and inseparably connected” to the foreclosure action to support the defendants' equitable defense of unclean hands. (Internal quotation marks omitted.) Id., at 313, 777 A.2d 670. In doing so, our Supreme Court found that “[t]he original transaction creating the ... mortgage was not tainted with fraud, but the plaintiff's ability to foreclose on the defendants' property ... depended upon his fraudulent conduct in the bankruptcy proceeding. If the ... mortgage had been administered as an asset of the bankruptcy estate, the plaintiff would have had no means of bringing this foreclosure action.... The plaintiff perpetrated the fraud in the bankruptcy court in order to retain title to the ... mortgage; he would have had no cause to foreclose on the ... mortgage without the fraud.” (Citations omitted.) Id., at 313–14, 777 A.2d 670. Thus, although the actions constituting unclean hands occurred after the execution of the original loan documents, those actions directly impacted the enforceability of those loan documents. Id. With these principles in mind, we turn to the defendants' special defenses.

A

In their second special defense, the defendants specifically alleged that “[t]he [c]ourt should use its equitable power to prevent the [p]laintiff from foreclosing as a result of its actions.” The court indicated that the second special defense appeared to raise equitable estoppel...