LPP Mortgage Ltd. v. Underwood Towers Ltd. Partnertship ( 2021 )

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APPENDIX
LPP MORTGAGE LTD. v. UNDERWOOD TOWERS
LIMITED PARTNERSHIP ET AL.*
Superior Court, Judicial District of Hartford,
Complex Litigation Docket
File No. X03-CV-XX-XXXXXXX-S
Memorandum filed July 16, 2019
Proceedings
Memorandum of decision in commercial foreclosure
action. Judgment for plaintiff in part.
Thomas W. Witherington, Nicholas P. Vegliante, John
G. McJunkin, pro hac vice, and J. David Folds, pro hac
vice, for the plaintiff.
Richard P. Weinstein, for the named defendant et al.
Opinion
TABLE OF CONTENTS
Page
I. HISTORY AND BACKGROUND . . . . . . . 775
II. NOTE B . . . . . . . . . . . . . . . . . . . . . 779
III. DEFENDANTS’ MOTION TO DISMISS FOR
LACK OF STANDING . . . . . . . . . . . . . 781
A. Claim that Plaintiff Never Had Posses-
sion of Note B . . . . . . . . . . . . . . 782
B. Claim that Plaintiff Did Not Prove that
Note B is lost and that Plaintiff is the
Owner of the Debt . . . . . . . . . . . . 786
1. Proof that Note B was Lost . . . . . 786
2. Proof that Plaintiff is the Owner of
the Debt . . . . . . . . . . . . . . . . 788
IV. COUNT ONE: FORECLOSURE . . . . . . . . 789
A. Ownership . . . . . . . . . . . . . . . . . 789
B. Default . . . . . . . . . . . . . . . . . . . 791
1. Kaye Skinner’s Services. . . . . . . . 795
2. Management Fees . . . . . . . . . . . 798
3. John Scobie’s Compensation. . . . . 801
a. Violation of the HUD Handbook 803
b. Improper Distribution to a Part-
ner Under the Second Mortgage 804
c. The Salary Was Not a Reason-
able and Necessary Operating
Expense . . . . . . . . . . . . . . 806
4. Nicholas Carbone’s Apartment. . . . 807
5. Capital Assets . . . . . . . . . . . . . 811
6. Legal Fees . . . . . . . . . . . . . . . 817
C. Conditions Precedent . . . . . . . . . . 819
D. Special Defenses . . . . . . . . . . . . . 820
E. Foreclosure Conclusion . . . . . . . . . 822
V. COUNTS TWO THROUGH TEN . . . . . . . 823
A. Count Two: Breach of Contract . . . . 828
B. Count Three: Breach of Covenant of
Good Faith and Fair Dealing . . . . . . 829
C. Count Four: Conversion . . . . . . . . . 830
D. Count Five: Statutory Theft . . . . . . . 832
E. Count Seven: Unjust Enrichment. . . . 833
F. Count Nine: Fraud . . . . . . . . . . . . 834
G. Count Ten: Connecticut Unfair Trade
Practices Act (CUTPA), General Stat-
utes § 42-110a et seq.. . . . . . . . . . . 835
VI. CONCLUSION . . . . . . . . . . . . . . . . . 836
SCHUMAN, J. The substitute plaintiff, LPP Mortgage,
Inc. (plaintiff), has filed a ten count, Second Amended
Complaint (complaint) (Docket Entry (Entry) #562.00)
seeking foreclosure in the first count and money dam-
ages for various breaches in the remaining counts. The
principal defendants are Underwood Towers Limited
Partnership (Underwood) and its management agent,
CDC Management Company (CDC) (collectively, defen-
dants).1 The court granted the defendants’ motion for
summary judgment on counts six and eight of the com-
plaint. (Entry #662.00, p. 19.) The defendants have filed
a second amended answer, denying the plaintiff’s claims
and raising twenty-two special defenses. (Entry
#715.00.) A court trial of these claims took place over
eighteen days in January, February, and March, 2019.
The parties completed the filing of briefs on June 5,
2019. This memorandum constitutes the decision in
the case.
I
HISTORY AND BACKGROUND
Unfortunately, this case has a long and tortuous history.
The court finds the following facts based on the undis-
puted parts of the record and on the testimony and the
exhibits that it credits.
Underwood is a limited partnership, whose sole asset
is the subject property—Park Place Towers. In 1985,
Underwood leased 6.34 acres of property owned by the
defendant city of Hartford in order to construct a high-
rise apartment complex in the Frog Hollow neighbor-
hood southwest of downtown Hartford. (Exhibit (Ex.)
1137, p. 32.) The ground lease called for an annual rental
fee of $1 for ninety-nine years. Once built, Park Place
Towers (Park Place) constituted two high-rise buildings,
each containing twenty-five stories. There were a total
of 451 apartments, consisting of 153 one-bedroom, 287
two-bedroom, and 11 three-bedroom units. The apart-
ments were generally of the market rate nature with only
a limited amount of low-income housing. (Scobie, 03/
18/09, pp. 57–58.)2 There was also a commercial space
on the ground floor of one of the apartments.
The funding for the construction of the project came
from a $35 million first mortgage loan given to Under-
wood by Connecticut National Bank. The mortgage was
insured by the United States Department of Housing
and Urban Development (HUD). To obtain the mortgage
insurance, Underwood entered into a Regulatory Agree-
ment with HUD (regulatory agreement) that governed
the management of the project and its revenue. (Ex. 1.)
In 1990, the mortgage and note were assigned to the
defendant Greystone Servicing Corporation, Inc. (Grey-
stone). Shortly thereafter, Underwood defaulted. HUD
then paid approximately $18.5 million to Greystone as
a partial payment of the claim (PPC),3 and Underwood
executed a second mortgage and a second mortgage
note, known as Note A, in favor of HUD.4 Underwood
defaulted again on the first mortgage beginning in 1993
because of the bad economy and sluggish rental market.
(Scobie, 3/18/09, p. 72; Ex. 36, pp. 2–3.) In an effort to
forestall foreclosure, Underwood, in 1995, applied for
a second PPC, whereby HUD would make a payment
of approximately $13.9 million to the first mortgagee
to reduce (although not eliminate) the unpaid balance.
(Scobie, 3/18/09, p. 73; 3/19/09, p. 8; Ex. 36, p. 4.) HUD
accepted and, in 1996, Underwood executed an addi-
tional mortgage note with HUD, known as Note B, for
the $13.9 million and agreed to modifications to the
second mortgage. (Exs. 10, 37.) The combined original
principal amounts of Note A and Note B exceeded $30
million.
HUD sold the second mortgage to PAMI MidAtlantic,
LLC (PAMI), in 2002, and, instead of providing the origi-
nal Note B, provided a lost note affidavit. PAMI assigned
the mortgage back to HUD in 2005 and returned the
lost note affidavit (Ryan, 09/21/09, pp. 18–19, 107.)5 HUD
then sold the mortgage, including both Notes A and B,
to Beal Bank (Beal) in 2005 for approximately $3.6
million. (Odean, 2/17/09, p. 141; 12/20/09, pp. 19–20.)
The sale was documented by, among other papers, a
Loan Sale Agreement. Beal never had possession of the
original Note B. (Odean, 2/19/09, p. 81.) The plaintiff
acquired the second mortgage in January, 2006, from
Beal, although Beal continued to service the loan until
2008. (Odean, 2/6/09, pp. 48–50; Ex. 30.)
Beginning in August, 2005, Beal sent Underwood letters
requesting additional information about Underwood’s
allocation of rental income. In January and February,
2006, Beal wrote Underwood to request payment of
$419,246 that Underwood had allegedly diverted improp-
erly. The plaintiff declared a default on Note B by letters
dated March 28 and May 2, 2006, and demanded pay-
ment of $419,246 and $1,146,245.98, respectively, which
it claimed represented the amount of ‘‘Net Cash’’ the
defendants had failed to pay. (Exs. 67, 68, 70, 73, 75,
77, 79, 85.) By letter dated June 14, 2006, the plaintiff
also gave notice that, because Underwood had not
cured the default, the plaintiff had accelerated the debt.
The plaintiff at that time demanded payment of the
entire principal amounts on Notes A and B, together
with accrued interest, which totaled approximately $68
million. (Ex. 87.)
Meanwhile, on May 30, 2006, Underwood filed suit
against Beal and the plaintiff, seeking a declaration of
the rights of the parties in the first count, and liability
and damages in two additional counts. See Underwood
Towers, Ltd. Partnership v. Beal Bank, Superior Court,
judicial district of Hartford, Docket No. CV-XX-XXXXXXX-
S. That case remains informally stayed pending the out-
come of the present case.
The plaintiff filed the present action for foreclosure
and damages in December, 2006. The parties tried the
case to the court, Miller, J., beginning in February, 2009.
Testimony proceeded intermittently and did not end
until January, 2011. There were then extensive briefs
and delays that postponed full submission of the case
until January, 2017. Judge Miller then sought numerous
extensions of the 120 day decisional period. By June
1, 2018, the defendants declined to consent to further
extensions and instead moved for a mistrial. On July
25, 2018, the court, Hon. Patty Jenkins Pittman, judge
trial referee, granted the motion for a mistrial. The case
was at that time reassigned to the undersigned.
Prior to retrial, the court filed an extensive ruling
granting and denying in part various summary judgment
motions and motions in limine filed by the parties.
(Entry #662.00.) A retrial of the case before the court
took place over eighteen trial days in January, February,
and March, 2019. The trial addressed the plaintiff’s claim
of damages for the period from January 1, 2000 through
December 31, 2008, which the court will refer to as the
‘‘trial period.’’ The plaintiff claims that, as of December
1, 2018, the total indebtedness on Note A, including
unpaid principal and accrued interest, is approximately
$65.7 million and on Note B is approximately $36.7
million. (Ex. 1121.) Because Note B is senior in priority
to Note A, this case, in the first instance, addresses
issues involving Note B. (Odean, 2/6/09, p. 80.)6
II
NOTE B
In Note B, Underwood promised to pay the Secretary
of HUD or ‘‘his successors and assigns’’ the principal
sum of $13,919,109.58 with interest at the annual rate
of 6.74 percent. (Ex. 10, p. 1.) Note B creates what is
known as a ‘‘net cash’’ mortgage between the plaintiff
and Underwood. Instead of making periodic, defined
payments of principal and interest, Underwood must
pay its monthly ‘‘net cash’’ to the lender. Note B states:
‘‘Net cash shall be calculated monthly and any payments
to be made hereunder out of Net Cash shall be payable
on the first (1st) day of the month.’’ (Ex. 10, p. 2.)
To determine the formula for ‘‘net cash,’’ one must
start with Note B’s concept of ‘‘Net Operating Income.’’
As defined by Note B, ‘‘Net Operating Income’’ is ‘‘the
amount remaining after subtracting from the gross reve-
nue derived from the Project during such calendar year
the operating and maintenance expenses of the Project,7
exclusive of debt service payments due under the First
Note,8 the Additional Note A Payments (as defined in
Note A), the Additional Note B Payments . . .9 and all
required Base [payments in lieu of taxes (PILOT)]
PILOT Payments.’’ (Footnotes added.) (Ex. 10, p. 2.)
‘‘Net cash’’ is then calculated by subtracting from the
‘‘Net Operating Income’’ the sum of the following five
items: ‘‘(i) all contributions, if any, to the Project’s
reserve for replacements account; (ii) debt service on
the First Note . . . (iii) the Minimum Note B payments
. . .10 (iv) all semi-annual payments required to be made
by the Maker to the City of Hartford, Connecticut (the
‘City’) equaling [sic] in the aggregate $36,144 per annum
(the ‘Base PILOT Payments’) . . . and (v) escrow
deposits for real estate taxes and/or payments in lieu
of taxes, hazard insurance premiums and mortgage
insurance premiums due hereunder.’’ (Footnote added.)
(Ex. 10, pp. 2–3.)
Thus, a fair formula for the determination of net cash
might look as follows:
Gross Revenue
− Operating and Maintenance Expenses
= Net Operating Income
− Reserve replacement contributions, debt service
on the first note, minimum Note B payments, PILOT
payments to Hartford, escrow deposits for taxes and
insurance
= Net Cash.
Note B contains the following nonrecourse clause:
‘‘Neither the Maker nor any of its general or limited
partners, from time to time, shall have any personal
liability for the payment of the indebtedness evidenced
by this Note B or for the performance of the obligations
herein or in the other Second Loan Documents, except
as expressly set forth in the Second Mortgage.’’ (Ex.
10, para. K.) In this case, the plaintiff is not seeking a
deficiency judgment or other personal liability against
Underwood for the indebtedness under Note B. Rather,
the plaintiff seeks the equitable remedy of foreclosure
and the legal remedy of damages, the latter purportedly
based on alleged violations of provisions in the second
mortgage and the other loan documents.
III
DEFENDANTS’ MOTION TO DISMISS
FOR LACK OF STANDING
The defendants initially move to dismiss on the
ground that the plaintiff lacks standing to enforce Note
B because it never had possession of that note. In the
alternative, the defendants assert that the plaintiff lacks
standing because it has not proven that Note B is lost
and that the plaintiff was the owner of the underlying
debt. This motion is timely because standing relates to
subject matter jurisdiction and thus can be raised at
any time; see U.S. Bank, National Assn. v. Schaeffer,
160 Conn. App. 138, 145, 125 A.3d 262 (2015); Practice
Book § 10-33; and also because the defendants repeat-
edly raised this issue during the trial but, with court
permission, have deferred briefing it until the conclu-
sion of the case.
A
Claim that Plaintiff Never Had
Possession of Note B
The defendants’ first argument is that the plaintiff
lacks standing because it never had possession of Note
B. As mentioned, when HUD sold the loans to PAMI in
2002, HUD provided PAMI a lost note affidavit, and the
note apparently was not found at the time that HUD
resold the loan to Beal in 2005. Exhibit 10 is a true and
accurate copy of the original Note B. (Hubbard direct;
Ex. 1159A.)
Both sides debate the applicability of New England
Savings Bank v. Bedford Realty Corp., 238 Conn. 745,
680 A.2d 301 (1996) (Bedford Realty). In Bedford Realty,
the mortgagor, Bedford Realty Corporation, relied on
the Uniform Commercial Code (UCC) to argue that, ‘‘if
the promissory note is lost, a mortgagee can foreclose
only if it satisfies the conditions set forth in [General
Statutes] § 42a-3-309, which require the party seeking
to enforce a lost note to show that he or she was in
possession of the note at the time it was lost.’’ Id., 759.11
The Supreme Court rejected that argument. It initially
observed that, ‘‘[i]t is well established [however] that
the [mortgagee] is entitled to pursue its remedy at law
on the notes, or to pursue its remedy in equity upon
the mortgage, or to pursue both. A note and a mortgage
given to secure it are separate instruments, executed
for different purposes and in this [s]tate action for fore-
closure of the mortgage and upon the note are regarded
and treated, in practice, as separate and distinct causes
of action, although both may be pursued in a foreclosure
suit.’’ (Internal quotation marks omitted.) Id. The court
then applied this rule to the situation before it: ‘‘Because
[mortgagee GHR D.C., Inc. (GHR)] has chosen to pursue
the equitable action of foreclosure of the mortgage,
rather than a legal action on the note, the fact that GHR
never possessed the lost promissory note is not fatal
to its foreclosure of the mortgage. Moreover, GHR has
not sought a deficiency judgment. Thus, whatever
restrictions [General Statutes] §§ 42a-3-301 and 42a-3-
309 might put upon the enforcement of personal liability
based solely upon a lost note, they do not prohibit GHR
from pursuing an action of foreclosure to enforce the
terms of the mortgage.’’ Id., 759–60.12
The situation here is similar because, in count one,
the plaintiff is seeking foreclosure of the mortgage
rather than suing on Note B or for a deficiency based
on the note. The defendants nonetheless attempt to
distinguish Bedford Realty on two grounds. First, the
defendants note that, in Bedford Realty, the original
mortgagee who lost possession of the note commenced
the action and thereafter assigned the debt to the ulti-
mate plaintiff (GHR) whereas in the present action, the
original plaintiff—LPP—never had possession of the
note. The defendants contend that this distinction con-
forms Bedford Realty to Appellate Court case law stat-
ing that, ‘‘[g]enerally, in order to have standing to bring
a foreclosure action the plaintiff must, at the time the
action is commenced, be entitled to enforce the promis-
sory note that is secured by the property.’’ (Internal
quotation marks omitted.) Deutsche Bank National
Trust Co. v. Bliss, 159 Conn. App. 483, 488, 124 A.3d
890, cert. denied, 320 Conn. 903, 127 A.3d 186 (2015),
cert. denied, U.S. , 136 S. Ct. 2466, 195 L. Ed.
2d 801 (2016).13 The defendants’ theory rests on the
assumption that § 42a-3-309 and the UCC apply to a
party seeking foreclosure, and, that, therefore, the origi-
nal plaintiff must have had possession of the note before
it became lost. However, the language of Bedford Realty
strongly suggests that the UCC simply does not apply
to a plaintiff seeking only foreclosure and not seeking
a remedy under the note. See New England Savings
Bank v. Bedford Realty Corp., supra, 238 Conn. 760(‘‘whatever restrictions §§ 42a-3-301 and 42a-3-309
might put upon the enforcement of personal liability
based solely upon a lost note, they do not prohibit GHR
from pursuing an action of foreclosure to enforce the
terms of the mortgage’’). A further response to the
defendants’ first basis for distinguishing Bedford Realty
stems from the rule that the plaintiff in a foreclosure
case must maintain standing throughout the case. See
Yanow v. Teal Industries, Inc., 178 Conn. 262, 286, 422
A.2d 311 (1979) (plaintiff in derivative suit required to
maintain shareholder status ‘‘continuously and uninter-
ruptedly until after the judgment in the case was ren-
dered’’); Salem Five Mortgage Co., LLC v. Afsary, Supe-
rior Court, judicial district of Stamford-Norwalk, Docket
No. CV-XX-XXXXXXX-S (June 26, 2014) (58 Conn. L. Rptr.
484, 490) (in foreclosure action in which substituted
plaintiff replaced original plaintiff, ‘‘[s]tanding was
therefore maintained throughout the case, from com-
mencement until judgment’’). Thus, in ruling that plain-
tiff GHR could pursue a foreclosure action despite the
fact that it never possessed the note, the Supreme Court
at least implicitly acknowledged that GHR had standing.
The same is true here for the plaintiff.
The defendants also attempt to distinguish Bedford
Realty on the ground that it did not address General
Statutes § 42a-3-310 (b) (4) of the UCC. The applicable
portion of that section provides: ‘‘If the obligee is the
person entitled to enforce the instrument but no longer
has possession of it because it was lost, stolen, or
destroyed, the obligation may not be enforced to the
extent of the amount payable on the instrument, and
to that extent the obligee’s rights against the obligor
are limited to enforcement of the instrument.’’14 The
defendants claim that under this provision the plaintiff
cannot enforce the ‘‘amount payable on the instru-
ment,’’ which is the underlying debt. However, the pro-
vision expressly applies only to a ‘‘person entitled to
enforce the instrument,’’ a category that would exclude
the plaintiff in the first place under § 42a-3-309 because
it never had possession of the lost note. See Seven Oaks
Enterprises, L.P. v. DeVito, 185 Conn. App. 534, 552,
198 A.3d 88 (under § 42a-3-309, the ‘‘only person who
can enforce the note is the person in possession of the
note when it was lost’’), cert. denied, 330 Conn. 953,
197 A.3d 893 (2018). Thus, § 42a-3-310 (b) (4) simply
does not apply in this case. Rather, Bedford Realty
controls and affirms that the plaintiff has standing to
bring this foreclosure action.
The defendants also express concern that Bedford
Realty is contrary to public policy because it creates a
risk of double recovery if a person or entity later recov-
ers the lost note and attempts to sue Underwood. This
court, of course, is bound by the decisions of our state
Supreme Court and cannot decline to follow them on
the ground that there may exist contrary public policy
concerns. See Jolly, Inc. v. Zoning Board of Appeals,
237 Conn. 184, 195, 676 A.2d 831 (1996). In any event,
there is no meaningful risk of double recovery here. As
the court has stated and the defendants emphasize,
Note B is a nonrecourse note and therefore a party
cannot properly sue Underwood individually for liabil-
ity or a deficiency on the note. Accordingly, the court
holds that, under Bedford Realty, the fact that the note
is lost does not deprive the plaintiff of standing to main-
tain this foreclosure action.15
B
Claim that Plaintiff Did Not Prove that Note B
is Lost and that Plaintiff is the Owner
of the Debt
1
Proof that Note B was Lost
In the alternative, the defendants assert that the plain-
tiff did not prove that Note B was lost and that the plain-
tiff received ownership interests in the underlying debt
from HUD and Beal. There is no merit to the initial
claim that the plaintiff did not prove that Note B was
lost. First, the defendants admitted in court that the
note was lost.16 Second, a HUD representative executed
an Assignment and Lost Note Affidavit on February 5,
2003, at the time of the assignment to PAMI, stating
that Note B was believed to be in a fireproof safe at
HUD, that a diligent search failed to locate the note,
and that HUD did not assign the note to anyone else.
(Ex. 22.) In 2005, following the sale of the loans back
to HUD, a HUD representative executed an assignment
to Beal and incorporated a similar lost note affidavit.
(Ex. 29.) Beal’s Vice President then submitted a lost
note affidavit at the time of the assignment of the loan
to the plaintiff. (Ex. 32.) Although the defendants chal-
lenge these documents as hearsay and unreliable, the
court finds them admissible and trustworthy in that the
HUD documents are public records and all the docu-
ments are under oath. See Conn. Code Evid. §§ 8-3 (7)
and 8-9. Further, given that the loss of Note B makes
the plaintiff’s proof more difficult in this case, the lost
note affidavits essentially constitute admissions against
civil interest, which bear added credibility. See Conn.
Code Evid. § 8-6 (3). Based on these factors, the plaintiff
sufficiently proved that Note B was lost.
2
Proof that Plaintiff is the Owner of the Debt
The defendants also contest the chain of passage of
the mortgage and the debt from HUD to the plaintiff.
As for the second mortgage, the record contains a com-
plete chain of recorded assignments from HUD to PAMI
in December, 2002 (Ex. 21), from PAMI to HUD in
January, 2005 (Ex. 23), from HUD to Beal in March,
2005 (Ex. 28), and from Beal to the plaintiff in February,
2006. (Ex. 31.)
With regard to the debt, exhibits 21 and 23 recite the
endorsement of Note A from HUD to PAMI and PAMI
to HUD. (Exs. 21, 23.) In addition, the plaintiff presented
in court the original Note A, which contained endorse-
ments from HUD to Beal and Beal to the plaintiff (2/5/
19, p. 18.) Thus, there is a complete chain of title for
Note A.
As for the loan evidenced by Note B, exhibit 22 recites
its assignment from HUD to PAMI in February, 2003.
HUD’s lost note affidavit recites the assignment of Note
B from HUD to Beal in 2005. (Ex. 29.) Beal’s lost note
affidavit documents Beal’s assignment of Note B to the
plaintiff in 2006. (Ex. 32.)
There is no one document establishing the transfer of
Note B from PAMI back to HUD in 2005. However, the
evidence clearly establishes that this transfer took place.
First, it is inconceivable that HUD would have transferred
the interest in Note B to Beal in March, 2005, if HUD had
not received the rights to Note B from PAMI several
months earlier. Second, Ann Ryan, an attorney for PAMI,
testified by deposition that she transferred the original
lost note affidavit for Note B, along with all the other
loan documents, back to HUD beginning in late 2004 for
the sum of approximately $10.5 million. (Ryan, 9/21/09,
pp. 18, 32–33, 39–42, 58, 70–71.) Third, Underwood’s own
financial statements from 2005 to 2008 contain the follow-
ing admission: ‘‘The second mortgage, held by Beal Ser-
vice Corporation (‘Beal’) secures two notes. (Notes ‘A’
and ‘B.’) At the beginning of 2005, the second mortgage
was held by TriMont Advisors, Inc. (‘Trimont’). It was
bought by HUD and subsequently resold to Beal.’’ (Exs.
222–24, p. 12; Ex. 820, p. 9.) Given that Trimont was the
servicer for PAMI; (Ryan, 9/21/09, p. 14); this statement
essentially acknowledges that ownership of the Note B
debt passed from PAMI back to HUD before its resale to
Beal. Finally, during the entire trial period, Underwood
made regular monthly payments of net cash to HUD,
PAMI, Beal, and the plaintiff, successively. (Witt, 1/17/19,
pp. 76–78.) Because these payments, as stated, served to
reduce the interest on Note B, the payments essentially
constitute a waiver of any challenge to the plaintiff’s own-
ership of the Note B debt. See SKW Real Estate Ltd.
Partnership v. Gallicchio, 49 Conn. App. 563, 571, 716
A.2d 903 (‘‘[h]ere, even without endorsement, when the
plaintiff had lawful possession of the note and mortgage,
and the defendants made payments according to the terms
of the note to the plaintiff for nineteen months, the plaintiff
was entitled to enforce the note’’), cert. denied, 247 Conn.
926, 719 A.2d 1169 (1998). For all these reasons, the court
concludes that the plaintiff proved a complete chain of
title for its ownership of the debt underlying Note B.17
The court accordingly denies the motion to dismiss.
IV
COUNT ONE: FORECLOSURE
A
Ownership
Our courts have stated that, ‘‘[i]n order to establish a
prima facie case in a mortgage foreclosure action, the
plaintiff must prove by a preponderance of the evidence
that it is the owner of the note and mortgage, that the
defendant mortgagor has defaulted on the note and that
any conditions precedent to foreclosure, as established
by the note and mortgage, have been satisfied.’’ GMAC
Mortgage, LLC v. Ford, 144 Conn. App. 165, 176, 73 A.3d
742 (2013). In contrast to stating that the first element
involves ownership of the ‘‘note and mortgage,’’ the plain-
tiff’s brief makes the somewhat different statement that
the plaintiff must prove that it owned the ‘‘debt and the
mortgage.’’ (Pl. Br., p. 16.) The court nonetheless believes
that the plaintiff’s statement is an acceptable summary
of the law. As stated in Bedford Realty: ‘‘A bill or note is
not a debt; it is only primary evidence of a debt; and
where this is lost, impaired or destroyed bona fide, it may
be supplied by secondary evidence. . . . The loss of a
bill or note alters not the rights of the owner, but merely
renders secondary evidence necessary and proper. . . .
GHR or its assignee is free to present reliable evidence
other than the original promissory note to establish the
amount of the debt.’’ (Citations omitted; internal quotation
marks omitted.) New England Savings Bank v. Bedford
Realty Corp., supra, 238 Conn. 760. Thus, the key in a
mortgage foreclosure case such as the present one, in
which the plaintiff seeks the equitable remedy of foreclo-
sure and not recovery on the note or a deficiency judg-
ment, is ownership of the underlying debt. See also U.S.
Bank, National Assn. v. Schaeffer, supra, 160 Conn. App.
146–47 (‘‘to seek enforcement of a note through foreclo-
sure, a holder must be able to demonstrate it is the owner
of the underlying debt . . . [and] a holder of a note is
presumed to be the rightful owner of the underlying debt’’
(emphasis omitted)).
The defendants’ argument that the plaintiff did not
prove the first element—that the plaintiff owned the debt
and the mortgage—is entirely encompassed within the
various arguments advanced by the defendants in support
of their motion to dismiss. Having rejected those argu-
ments, the court finds that the plaintiff, through its proof
of ownership of the mortgage and of the debt underlying
Note B, has proven the first element of its foreclosure
count. Therefore, the court turns to a discussion of the
other two elements.
B
Default
Note B does not directly define what constitutes a
default. It does, however, contain an acceleration clause
that provides that, ‘‘[i]f default be made in the payment
of any installment under this Note B and if such default
is not cured prior to the due date of the next installment,
the entire principal sum and accrued interest due hereun-
der shall at once be due and payable, without notice, at
the option of the holder hereof.’’ (Ex. 10, p. 4.) In turn,
the concept of an ‘‘installment’’ or ‘‘Installment Payments’’
on Note B has two components, as explained previously.
The first, entitled ‘‘Minimum Note B Payments,’’ consists
of a monthly ‘‘service charge’’ of one-half of 1 percent of
the unpaid principal balance on the note. (Ex. 10, p. 3.) The
second part, labeled the ‘‘Additional Note B Payments,’’
consists of monthly ‘‘installments of principal and interest
[that are] due and payable to the extent of Net Cash
. . . .’’ (Ex. 10, p. 3.) This case primarily addresses issues
concerning this second part.
Note B also defines the concept of a ‘‘Material Viola-
tion.’’ A ‘‘material violation’’ applies to breaches of ‘‘any of
the Second Loan Documents, or any regulatory provisions
governing [the] Loan or the operation of the Project
. . . .’’ (Ex. 10, p. 4.) A ‘‘Material Violation’’ includes the
‘‘unauthorized use of Project assets for other than reason-
able and necessary Project operating expenses.’’18
Although the note does not explicitly state that a material
violation constitutes a default, it does provide that a mate-
rial violation can result in an increase in the interest rate
to 8.875 percent. (Ex. 10, p. 4.)
Our Supreme Court has accepted a general definition
of default as an ‘‘omission of that which ought to be done,’’
or, alternatively, ‘‘neglect or failure of any party to take
step[s] required of him in [the] progress of [a] cause.’’
(Internal quotation marks omitted.) Steve Viglione Sheet
Metal Co. v. Sakonchick, 190 Conn. 707, 710 n.4, 462 A.2d
1037 (1983), quoting Black’s Law Dictionary (4th Ed.
1968). Under these circumstances, it is fair to conclude
that the use of project revenues for purposes other than
reasonable and necessary project expenses constitutes
not only a material violation but also a default.
Using a similar approach, the plaintiff advances six cate-
gories of improper expenditures that it claims, in each
case, constitutes a default.19 As a general matter, the
defendants do not dispute the fact that they used
operating revenues for these expenditures but, rather,
contest the alleged impropriety of doing so. The defen-
dants also make four preliminary objections: first, that
the plaintiff has no right to enforce the regulatory agree-
ment, HUD regulations, or the HUD handbook; second,
that the plaintiff has no right to enforce representations
made in negotiations during the second default restruc-
turing or PPC; third, that the plaintiff cannot rely on
defaults that arose before it became the assignee; and
fourth, that HUD’s acceptance of the defendants’
alleged defaults constitutes a waiver of or creates an
estoppel against the plaintiff’s assertion of them now.
The court addresses these preliminary objections
before discussing the alleged substantive violations.20
In its summary judgment ruling, the court addressed
and rejected the defendants’ claims that the regulatory
agreement and HUD rules and handbooks do not apply
in this case. (Entry #662.00, pp. 8–12.) Among other
grounds, the court cited the fact that the second mort-
gage—which the plaintiff indisputably holds—incorpo-
rates the regulatory agreement on several occasions
and specifically provides that Underwood may collect
rents for ‘‘use in accordance with the provisions of
the Regulatory Agreement.’’ If the regulatory agreement
were no longer in effect, this important constraint on
the defendants’ use of the plaintiff’s rental income
would not exist, and the defendants might be free to
misuse project funds. In addition, as the trial revealed,
the defendants are still paying the first mortgage to
Greystone, which HUD continues to insure. (Odean, 2/
17/09, p. 15; 2/18/09, p. 122; 2/19/09, p. 90.) John Scobie,
the general manager of Underwood, and Irwin Witt,
the chief financial officer of CDC, in fact testified that
Underwood maintained compliance with the regulatory
agreement because of HUD’s continuing role in insuring
the first mortgage. (Scobie, redirect; Witt direct.) Fur-
ther, as the court will discuss, the defendants them-
selves occasionally rely on provisions of the HUD hand-
book to support their contention that, substantively, no
default occurred in this case. For all these reasons, the
court adheres to its ruling that the regulatory agreement
and HUD rules and handbooks apply to this case.
The defendants’ second preliminary objection is to the
use of the plaintiff’s theory that the defendants ‘‘bargained
away’’ their rights in representations they made in 1995
at the time of the second PPC. The court need not dwell
on this objection because, as will be seen, it rejects the
plaintiff’s principal use of this theory with regard to the
use of project revenues to pay capital expenses. The
court does, however, believe it important to examine
the past practice of the parties to help determine what
the parties accepted as reasonable and ordinary
operating expenses.
The defendants next object to the plaintiff’s reliance
on defaults that took place before the assignment of
the mortgage and note to the plaintiff in January, 2006.
The fact of the matter, however, is that, in all six catego-
ries, the defaults began before the assignment and con-
tinued after the assignment. There does not appear to
be a valid policy basis for barring reliance on defaults
that essentially represent continuing violations.
Although there is no Connecticut appellate authority
precisely on point, in LPP Mortgage, Ltd. v. Lynch, 122
Conn. App. 686, 1 A.3d 157 (2010), the court did uphold
an award to a mortgagee of prejudgment interest based
on defaults and the ‘‘ ‘wrongful detention’ ’’ of money
that began before the mortgagee’s acquisition of the
debt. Id., 689, 695. The court accordingly overrules this
objection.
The defendants’ final preliminary argument against
default is that HUD’s acceptance of the defendants’
alleged defaults constitutes a waiver of or creates an
estoppel against the plaintiff’s assertion of them now.
Because the defendants did not raise this argument in
their opening brief and instead assert it for the first
time in their reply brief, the court considers it aban-
doned. See State v. Devalda, 306 Conn. 494, 519 n.26,
50 A.3d 882 (2012). The defendants aggravate the proce-
dural default by simply mentioning the concept of estop-
pel in their subsection caption but not briefing it, even
in their reply brief. (Def. Reply Br., pp. 6–7.) Moreover,
the court already rejected this argument in its summary
judgment ruling. There, the court observed that the
mortgage contains the following all-encompassing non-
waiver clause: ‘‘That no waiver of any covenant herein
or of the Note secured hereby shall at any time there-
after be held to be a waiver of the terms hereof or of
the Note secured hereby . . . .’’ (Pl. Ex. 6, ¶ 17.) Based
on this broad nonwaiver provision, the court again finds
that any acceptance of the defendants’ alleged defaults
by HUD does not bar the plaintiff from relying on
them now.
As part of the same objection, the defendants assert
that HUD’s ‘‘course of dealing’’ with the defendants
gives the most reliable evidence of what the parties
understood the mortgage contract to require. This
assertion is not so much an objection to a declaration
of default as it is a rule of interpretation of what consti-
tutes a default. The court does not disagree that HUD’s
interpretation of the mortgage and its dealings with the
defendants is relevant to the determination of default,
and, as stated, the court will consider the past practice
of the parties in determining what the parties accepted
as reasonable and ordinary operating expenses.
The court now turns to the specific grounds for default
alleged by the plaintiff.
1
Kaye Skinner’s Services
The first default alleged in the complaint is that ‘‘Under-
wood used the revenues from the Project to make unau-
thorized payments to a ‘management consultant’ . . .
[and] allowed a consultant to live at the Project without
paying rent.’’ (Complaint, ¶ 31.) These allegations refer
to Kaye Skinner. Skinner has been the facilities manager
at Park Place from approximately 1993 to the present
time. Through 2007, Underwood characterized her in its
financial reports as a consultant, a status that Skinner
requested because of other consulting work she hoped
to do. For 2008, she requested that Underwood change
her status to employee because of tax concerns.
Underwood did so.
For 2000 and 2001, Skinner received a bonus of $7500
and $9000, respectively. For the years 2002 through
2007, Skinner received annual compensation of approx-
imately $46,000 plus a bonus growing progressively
from $9000 in 2002 to $25,000 in 2007. (Ex. 338.) Skinner
received a rent-free apartment at Park Place throughout
this time period but no other benefits. In 2008, when
Skinner became an employee, she continued to receive
the rent-free apartment and the same financial remuner-
ation but also began to receive health insurance and
other employee benefits. (Scobie, 3/19/09, p. 41.) She
testified that her financial package in 2008 was better,
because of these additional benefits, than the one she
received in 2007.
The plaintiff initially claims that the defendants improp-
erly concealed Skinner’s status as an independent con-
tractor and that its invoices for bonuses did not reveal
the true nature of the payments. However, Skinner
received a 1099 tax form that reflects her monetary
compensation. Various annual financial statements dis-
close the fact that the defendants were paying con-
sulting fees and granting the use of an administrative
rent-free apartment. (Odean, 2/17/09, p. 96 (agreeing
that the consulting fees were ‘‘set forth in the finan-
cials’’); Adams, 6/26/08, pp. 174–77; Exs. 217–25, p. 19;
Exs. 226, 288, 417–19.)
The plaintiff’s more important objection is that the
bonus and the rent-free apartment should not have
counted as reasonable operating expenses and thus
reduced the amount of net cash.21 Initially, however,
the plaintiff points to no specific prohibition in the HUD
handbook or any of the loan documents on paying
bonuses or providing rent-free apartments to consultants.
The plaintiff argues instead that the bonus and apart-
ment were not ‘‘reasonable and necessary Project oper-
ating expenses’’ within the meaning of Note B and the
other loan documents. The court disagrees. It is true
that Skinner was not really a consultant in the tradi-
tional sense. Indeed, she was much more than that.
Skinner provided a virtually invaluable service to Park
Place. Her primary responsibility was the physical plant
of the buildings. As a practical matter, however, she was
the first responder for any problem. These problems
included tenant issues, property repairs, security depos-
its, signing leases, paying small bills, placing ads to hire
workers, and scheduling interviews. Others regularly
referred to Skinner as ‘‘property manager,’’ and she occa-
sionally signed as such. This characterization reflects
her service as a utility player for Underwood.
Treating Skinner as a consultant was a convenient
arrangement for both Underwood and her. It did not
prejudice the plaintiff in any way. Skinner, as men-
tioned, sought to remain as a consultant so that she
could pursue consulting work on other matters. For
Underwood, Skinner’s status as a consultant meant that
it would not have to pay her benefits. If Underwood
did not contract with her as a consultant, it would
have had to hire someone else as an employee and pay
benefits, resulting in a greater total cost, as it undoubt-
edly realized in 2008 when Skinner became an
employee. (Scobie, direct; Scobie, 4/8/09, pp. 120–21;
Barsky, direct; Witt, cross-examination.) Skinner’s total
compensation package peaked in 2007, when she
received approximately $71,000. This sum is rather
modest given the never-ending challenge of managing
the facilities in two high-rise apartment buildings con-
taining 451 apartments. The need to have her available
on the premises on short notice justified the additional
benefit of providing her a rent-free apartment, which
Underwood valued at approximately $11,000 per year.
(Exs. 217–25, p. 19.) HUD in fact allowed Underwood
to provide at least one ‘‘Manager’s or Superintendent’s
Rent-Free Unit.’’ (Witt, direct and redirect; Exs. 217–25,
p. 19; Ex. 406, pp. 56, 80.) The benefits provided to Skinner
were therefore a ‘‘reasonable and necessary Project
operating [expense]’’ under Note B and an appropriate
reduction of net cash. (Ex. 10, p. 4.) Indeed, Skinner’s
services were essential to Underwood’s desire to main-
tain its property in the best possible condition and to
survive in a competitive housing market.22
2
Management Fees
The plaintiff’s next claim is that Underwood has ‘‘paid
and continues to pay [management fees] in excess of
$8000 per month to CDC . . . .’’ (Complaint, ¶ 32.) The
history of this claim is important. In April, 1995, prior
to the declaration of its second default, Underwood
began negotiations with HUD to have it make a second
partial payment to Greystone. As part of those negotia-
tions, Underwood proposed to ‘‘[a]mend the Project’s
existing Management Agreement to reduce the manage-
ment fee from 4% of gross collections to a flat fee of
$8000 per month.’’ (Ex. 36, p. 4.)23 Underwood projected
that the savings from this reduction in management
fees would ‘‘total more than $803,000 over the 13-year
term of the proposed Second PPC.’’ (Ex. 36, p. 4.) At
the time, Underwood was not paying any ‘‘front line
expenses,’’ which are overhead expenses of the man-
agement company from all its projects, such as the cost
of accounting or computer services, that are allocated
on a proportional basis to each of its projects. (Scobie,
4/8/09, pp. 38–39; Hubbard direct; Witt, redirect; Grub-
man, direct.)24 Underwood’s projections of income and
expenses did not include any reference to front line
expenses. (Scobie, 3/18/09, pp. 87–90; 4/8/09, p. 39; Ex.
36, p. 15.)
Note B incorporated this fixed fee by providing that
all ‘‘monthly management fees due and payable to the
Management Agent shall not exceed the sum of $8,000,
unless and until such time as there is sufficient excess
Net Cash to pay such additional amount.’’ (Ex. 10, p. 5.)25
There is no reference to ‘‘front line expenses’’ in Note B.
Underwood began paying its share of CDC’s front line
expenses in 1999 or 2000. (Scobie, cross-examination;
Scobie, 3/18/09, pp. 143–44.) In September, 2000, Under-
wood wrote HUD that ‘‘[i]ncreasing overhead costs now
require that we seek HUD’s approval to restore the
original management fee of four percent (4%) of gross
income . . . .’’ (Ex. 39.) HUD replied in July, 2001, with
its observation that ‘‘the monthly accounting reports
for the past year show a check for $12,200 each month
to CDC Management.’’ It then added: ‘‘Before we deter-
mine if any increase above the $8000 per month is
justified, please explain what the $12,200 covers and
provide documentation for that amount.’’ (Ex. 43.) In
reply, Underwood wrote in August, 2001, that ‘‘the addi-
tional amounts in question represent reimbursement of
‘front-line costs’ in accordance with paragraph 6.38 of
the HUD Management Agent Handbook . . . . By far,
the largest portion of this amount represents the cost
of personnel providing property-specific accounting
services and pro-rated costs for our central computer-
ized accounting system including hardware, software,
and technical support.’’ (Ex. 44.) HUD did not respond
or otherwise object to this response, but the defendants
admit that HUD never approved Underwood’s requested
increase in its management fee. (Hubbard, cross-exami-
nation; Ex. 1159, p. 3, No. 132.)
Although, as discussed, the defendants challenged the
continued applicability of the HUD Handbook at sum-
mary judgment, the defendants now urge conformance
with ‘‘HUD regulations’’—a synonym for the Hand-
book—to explain the payments to CDC that exceeded
$8000 per month. (Def. Reply Br., p. 8.) Section 6.37
of HUD Handbook 4381.5, Revision 2, provides: ‘‘HUD
allows owners to charge certain management costs to
the project’s operating account. However, other man-
agement costs may be paid only out of the management
fee.’’ Section 6.38.a (1) states: ‘‘Reasonable expenses
incurred for front-line management activities may be
charged to the project operating account.’’ (Ex. 407,
pp. 61–62.)
Notwithstanding the fact that HUD rules thus permit
the use of operating revenues to pay for front-line
expenses, in the present case the court finds the history
of the issue to be controlling. That history reveals that
HUD made the second partial payment of claim in 1996
based in part on a representation by Underwood that
it would reduce its management fee to $8000 per month.
Underwood made no mention of front-line expenses,
and it was not paying any at the time. Thus, HUD did
not have an occasion to pass on the issue of front-line
expenses. Although, unfortunately, HUD simply did not
respond to Underwood’s notification in 2001 that it had
begun paying front-line expenses, one cannot read its
silence as approval when it had previously approved
an arrangement that did not include front-line expenses.
Hence, HUD has never approved any deviation from or
addition to Note B’s express language. In view of this
history, the court concludes that the use of operating
revenues to pay front-line expenses of CDC improperly
exceeded the management fee provided for in Note B.
The financial statements clearly reveal these pay-
ments. (Exs. 217–25, p. 16, Note 5; Ex. 820, p. 13, Note
5.) The plaintiff’s expert, Stewart A. Grubman, correctly
calculated them to total $517,400 through 2008. (Ex.
1160.)26
3
John Scobie’s Compensation
Paragraphs 33 and 34 of the complaint allege that,
between 2000 and 2008, Underwood paid Scobie at least
$800,000 in salary and benefits that constitute a ‘‘[distri-
bution] to [a] general or limited [partner]’’ prohibited
by the terms of the second mortgage and a ‘‘payment
default under the Loan Documents.’’ (Complaint, ¶¶ 33,
34.) The court substantially agrees with this claim.
Since 1995, Scobie has been general manager of
Underwood and a 1 percent limited partner in First
Hartford Partners I (First Hartford), which is the gen-
eral partner of Underwood Towers Limited Partnership.
Scobie has, at times, also been identified or identified
himself as ‘‘chief management officer,’’ ‘‘property man-
ager’’ or ‘‘regional property manager.’’ (Scobie, 3/19/09,
pp. 22–24; Hubbard, direct; Ex. 243; Ex. 246, p. 1.) Since
1996, Scobie has also been the chief executive officer
of CDC, the management agent for Underwood, with a
6 percent ownership interest therein. (Scobie, 3/18/09,
pp. 1–20.) According to William N. Hubbard, the manag-
ing partner and 36 percent owner of First Hartford as
well as president of CDC, Scobie had an ‘‘identity of
interest’’ with the Underwood Towers project given that
he was also an officer in CDC. (Hubbard, direct.)
Starting in 1995, Scobie began to work half-time at
Underwood with a salary of $60,000 or $65,000. (Scobie,
3/18/09, pp. 25, 35.) For a period of time in the early
2000s, Scobie worked on-site for one to two days a
week. From the mid-2000s on, Scobie generally worked
on-site one day a week. (Scobie direct, cross-examina-
tion; Scobie, 3/19/09, p. 21.) A 2007 Park Place employee
list identified Scobie as ‘‘part-time.’’ (Ex. 297.)
Note 5 in the 2000 annual financial statement pro-
vided: ‘‘In addition, a partner in First Hartford Partners
I is an employee of the Project who provided services
in 2000 for approximately $92,000.’’ (Ex. 217, p. 16.)
The financial statements for 2001, 2002, and 2003 read
similarly, listing respective salaries of $91,651, $91,800,
and $91,606. (Exs. 218–20, p. 16.)
Beginning in August, 2005, Beal and the plaintiff
wrote several letters requesting the identity of and fur-
ther information about this unnamed partner and
employee. (Exs. 67, p. 2; 70, p. 2; 82, p. 2, ¶ 11.) Although
Hubbard testified that he believed the banks knew the
identity of the partner, the defendants did not respond
in writing to these inquiries. (Hubbard, direct.) Scobie
ultimately admitted in 2009 that these statements refer
to him as the undisclosed ‘‘partner in First Hartford
Partners I’’ and that he also received some fringe bene-
fits from Underwood in addition to pay. (Scobie, 3/18/
09, p. 40; 3/19/09, pp. 25–26.)
From 2004 on, the financial statements no longer
included this note; (Hubbard, redirect; Exs. 221–24, p.
16; Ex. 820, p. 13); although Scobie continued to draw
salaries from Underwood of approximately $90,000 in
2004 and 2005, and approximately $64,000 in 2006, 2007,
and 2008. (Scobie cross-examination; Scobie, 4/8/09, pp.
43–44; Ex. 327, pp. 10, 20, 25; Ex. 1160.) Scobie testified
that the deletion of this note was inadvertent. In any
event, the annual financial statements also did not dis-
close that Scobie was both an employee of Underwood
and chief executive officer of CDC, receiving a CDC
salary ranging from approximately $141,000 in 2000 to
$440,000 in 2008, plus benefits. (Scobie, 03/18/09, p. 45;
3/19/09, pp. 27–29; 4/8/09, p. 64, 128; Ex. 331.)27 Further,
Underwood failed to include Scobie’s Underwood sal-
ary under ‘‘Management or Superintendent Salaries’’ in
its 2000–2008 annual financial statements. (Exs. 217–25,
p. 19; Ex. 820, p. 16.)28
a
Violation of the HUD Handbook
Scobie’s salary from Underwood constituted an
improper diversion of net cash under three separate
theories. The first is that it was a violation of the HUD
Handbook. Section 6.38 (a) (3) of the Handbook pro-
vides: ‘‘The salaries of the agent’s supervisory personnel
may not be charged to project accounts, with the excep-
tion of supervisory staff providing oversight for central-
ized accounting and computer services for the project.’’
(Ex. 407, p. 65.) Similarly, § 2.9d (1) (c) notes: ‘‘Salaries
of management agent supervisory staff not assigned to
the project must be paid from the management fee.
Only full-time, front-line supervisors may be paid from
the project account.’’ (Ex. 407, p. 19.) There is little
question that Scobie, as chief executive officer of CDC,
was one of its supervisory personnel and that he was not
primarily involved in providing oversight for centralized
accounting and computer services for the project.
(Grubman, direct; Witt, direct.)29 Although there is no
evidence that Scobie’s CDC salary was charged directly
to the project account as opposed to coming from CDC’s
management fee, by having Underwood’s project account
supply funds to pay Scobie a supplemental salary as an
Underwood manager—a salary in itself more than that
of almost any other Underwood employee, despite the
part-time nature of Scobie’s work (Witt, direct)—the
defendants accomplished indirectly what they could
not do directly. Further, Underwood’s failure to note
in its financial statements from 2004 on that a partner
of First Hartford was also an employee of the project
(or identify Scobie as the partner in question in the
earlier financial statements) and failure to include Sco-
bie’s salary under ‘‘Management or Superintendent Sala-
ries’’ in its 2000–2008 annual financial statements collec-
tively suggest an attempt to conceal an improper charge
to operations. (Grubman, direct; Exs. 217–24, p. 19.) In
short, the defendants circumvented the HUD prohibi-
tion on supervisors of the management agency receiving
part or all of their salary from project revenues. See In
re Tobacco Row Phase IA Development, L.P., 338 B.R.
684, 691 (Bankr. E.D. Va. 2005) (‘‘[t]he court does not
consider the salary, even a portion of the salary, of a
supervisor with oversight of many projects along the
East Coast to constitute ‘operating and maintenance
expenses’ of debtor’’).
b
Improper Distribution to a Partner
Under the Second Mortgage
The second basis for finding the salary Underwood
paid to Scobie improper is the second mortgage itself.
The rider to the original second mortgage provides:
‘‘Mortgagor hereby agrees not to make any distributions
to its general or limited partners until (i) this Second
Mortgage has been recast as set forth in the Second
Mortgage Note and is fully amortizing and (ii) the First
Mortgage is fully amortizing.’’ (Ex. 6, § 26.)
Although the meaning of the amortization conditions
is unclear, there seems to be no dispute that the defen-
dants have not satisfied them. (Witt, direct.) Thus, the
question posed is whether the salary paid by
Underwood to Scobie is a ‘‘[distribution] to [a] general
or limited [partner].’’30 With regard to the threshold
question of whether Scobie’s salary was a ‘‘distribu-
tion,’’ the HUD Inspector General has stated: ‘‘Under
HUD guidelines, owner salaries other than approved
management fees are considered distributions that can
only be paid out of surplus cash.’’ (Ex., 484, pp. 3–4.)31
Thus, assuming Scobie was an owner, his salary would
constitute a distribution.
The more difficult issue is whether Scobie was a
‘‘general or limited partner’’ of the mortgagor within
the meaning of the second mortgage. To be sure, as a
technical matter, Scobie was not a direct partner or
owner of Underwood but, instead, was a limited partner
of Underwood’s general partner. The court does not
wish to disregard lightly the importance and legitimacy
of corporate form. On the other hand, even the defen-
dants’ expert, Jeffrey Barsky, conceded that, in sub-
stance, Scobie was a minority owner of Underwood.
(Barsky, cross-examination.) Grubman concurred.
(Grubman, cross-examination.) As noted, Hubbard tes-
tified that Scobie had an ‘‘identity of interest’’ with the
Underwood Towers project given that he was also an
officer in CDC. The court credits all of this testimony
and concludes that, for purposes of interpreting the
second mortgage, Scobie was a general or limited part-
ner of Underwood and that his salary was an improper
distribution.
c
The Salary Was Not a Reasonable and
Necessary Operating Expense
As discussed, both Note B and the regulatory agree-
ment require that the defendants use project revenues
only for reasonable and necessary expenses.32 From
2000 to 2005, Scobie received $90,000 per year to work
one or two days a week at Park Place. From 2006 to
2008, Scobie received approximately $65,000 per year
for similar part-time work. During this same time
period, Scobie received six-figure salaries of up to
$440,000 from CDC. While the court does not question
the quality of Scobie’s work, for a project that was
struggling to make mortgage payments to its lender,
Scobie’s additional $65,000 to $90,000 salary from Under-
wood for part-time work goes outside the boundaries
of a reasonable and necessary expense. As mentioned,
the history of the defendants’ failure to disclose com-
pletely Scobie’s identity as the recipient of this salary
suggests a consciousness of this impropriety. For these
reasons, the court concludes that the salaries paid to
Scobie constitute a violation of the loan documents and
an additional basis for default.
The total of Scobie’s unauthorized annual salaries,
including benefits, from 2000 to 2008 is $805,663. (Ex.
1160.)33
4
Nicholas Carbone’s Apartment
The next basis for default alleged in the Complaint
concerns Nicholas Carbone’s apartment. (Complaint,
¶ 36.) Carbone was a limited partner in Underwood.
(Carbone, 12/22/08, p. 18.) In the late 1980s, Carbone
entered into an arrangement with Hubbard whereby
Carbone, for several years, made available to Under-
wood, while its garage underwent construction, an adja-
cent parking lot owned by the Capitol Assets Associ-
ates, of which Carbone was a principal owner. In
exchange, Hubbard offered Carbone a rent-free apart-
ment until he was seventy-five years old. (Hubbard,
direct; Scobie, 4/8/09, pp. 66–67; Carbone, 12/22/08, pp.
23–39, 84–85; Ex. 357A, p. 284; Ex. 1159, p. 6, No. 17.)34
Carbone moved into Park Place in 1993. (Scobie, 4/
8/09, p. 72.) From 2000 to 2004, Carbone lived in an
apartment that normally rented for $8700 per year (or
$725 per month). In 2005, Carbone moved to a pent-
house unit on the twenty-third floor that normally
rented for $13,800 per year (or $1150 per month) and
remained there throughout the trial period. (Scobie,
cross-examination; Ex. 274.) Carbone paid no rent
through 2004. He testified at his deposition, which was
admitted as a trial exhibit, that he paid the rent differen-
tial, which would have been $425 per month, after he
moved. However, Scobie, Underwood’s general man-
ager, reported that Carbone did not make these pay-
ments. (Carbone, 12/22/08, pp. 42–43; Scobie, 4/22/09,
p. 57.)
Indeed, the evidence reveals that, not until February,
2008, did the defendants collect any rent from Carbone.
At that time, CDC began paying Carbone $1000 per
month for consulting, which Carbone turned over to
the project along with $150 of his own funds, for a total
of $1150 monthly. (Ex. 357A, p. 282; Ex. 780; Scobie
direct; Scobie, 3/19/09, p. 20; Witt, direct.) The defen-
dants do not dispute that, prior to that time, they did
not disclose Carbone’s essentially rent-free apartment
to their auditors, to HUD, or to any other lender.35
The plaintiff initially asserts that the arrangement
constituted an improper distribution to a partner. In
that regard, the plaintiff again relies on paragraph 26
in the rider to the original second mortgage which, as
discussed, provides: ‘‘Mortgagor hereby agrees not to
make any distributions to its general or limited partners
until (i) this Second Mortgage has been recast as set
forth in the Second Mortgage Note and is fully amortiz-
ing, and (ii) the First Mortgage is fully amortizing.’’ (Ex.
6, para. 26.) The plaintiff has established the compo-
nents of this prohibition. Under the HUD Handbook, a
‘‘distribution’’ is ‘‘any withdrawal or taking of cash or
any assets of the project other than for the payment of
reasonable expenses necessary to the operation and
maintenance of the project.’’ (Ex. 406, p. 17.)36 The
receipt of a rent-free apartment would certainly qualify
as the taking of an ‘‘[asset] of the project.’’ (Grubman,
direct.) Next, it is undisputed that Carbone is a limited
partner of Underwood. Finally, as stated, although the
meaning of the two conditions stated in subparagraphs
(i) and (ii) is not completely clear, there seems to be
no dispute that the mortgages are not fully amortizing
and that the defendants have not satisfied these condi-
tions. Thus, the court agrees that the rent-free apart-
ment provided to Carbone represents a prohibited dis-
tribution.
The plaintiff also contends that Carbone’s arrange-
ment artificially reduced rent revenues and thereby
deprived it of net cash. The defendants’ first response
is that the plaintiff received a benefit in the form of a
free parking lot valued at well over $100,000 and that
that benefit exceeds the nine year loss of rent revenues,
which the plaintiff’s damage calculations reveal to be
$98,700. (Carbone, 12/22/08, pp. 27–28; Ex. 390; Scobie,
direct.)37 The evidence also reveals that Carbone pro-
vided other cost-free services to Underwood such as
contacting the city of Hartford, HUD, and our congres-
sional delegation, with whom he had contacts, concern-
ing the development of the project and the restructuring
of its debt. (Carbone, 12/22/08, pp. 73–81; Ex. 357A, pp.
289–90.)
The initial difficulty with this argument is that neither
the plaintiff nor any other lender or auditor ever knew
about the Hubbard-Carbone deal or sanctioned it. (Sco-
bie, 4/8/09, pp. 74, 76–77.) Had HUD or the plaintiff
known about the arrangement, it might not have
approved it. The lender might well have found that the
value of the rent-free apartment over approximately
twenty years greatly exceeded the value of the tempo-
rary use of the parking lot for several years in the late
1980s or early 1990s. Indeed, the fact that, after this
issue came to light in 2008, CDC attempted to provide
Carbone a rent check for $1000 per month in exchange
for ‘‘consulting’’ suggests that the defendants did not
seriously believe that Carbone’s loan of his parking
lot was still sufficient consideration for his rent-free
apartment. Nor is there any evidence of what consulting
work Carbone was actually doing in 2008. Had the lend-
ers known about these arrangements they might also
have found that an inside deal with a limited partner
created bad optics and set the wrong example for the
other tenants in an urban high-rise. Even Scobie admit-
ted that the consideration given to Carbone prior to the
time he paid market rent for the apartment was not
a reasonable and necessary operating expense of the
project. (Scobie, Ex. 357A, p. 368.)
The defendants’ other response is that the plaintiff
cannot prove damages without showing that it would
have rented Carbone’s apartment to someone else at
full value. While it is true that there were usually vacanc-
ies at Park Place, it is also true that the project had
451 apartments and an annual turnover rate of almost
50 percent. Thus, tenants were always moving in and
out at Park Place. Moreover, the fact that there were
vacancies in a 451-apartment project with a variety of
apartment types does not establish that there was no
demand for the specific type of two-bedroom apartment
that Carbone occupied. Further, on the whole, occu-
pancy was high, generally above 90 percent, particularly
in the early years of the trial period. (Exs. 123–204, line
9; Scobie, direct; Scobie, 3/18/09, p. 78.) Thus, it is more
likely than not that the plaintiff would have leased Car-
bone’s apartment to someone who actually paid rent
and contributed to the project’s revenues. Under these
circumstances, the Carbone arrangement resulted in a
loss of net cash to the plaintiff in addition to represent-
ing a breach of the loan documents. The plaintiff is
therefore entitled to damages of $97,050 on this claim,
as calculated in footnote 37 of this opinion.38
5
Capital Assets
The plaintiff next claims that the defendants improp-
erly used $3,470,857 in operating revenues—which
came mostly from rents—to pay for capital or fixed
assets such as a new roof, new windows, or major
repairs. (Complaint, ¶ 41; Ex. 1160.)39 Analysis of this
claim begins with definitions. The HUD handbook
defines ‘‘Expenditure’’ as ‘‘[a]n outflow of assets or
increase in liability in connection with the acquisition
of assets or expenses; includes both expenses and pur-
chases of fixed assets.’’ An ‘‘Expense,’’ in turn, is ‘‘[t]he
outflow of assets or increases in liabilities that takes
place in connection with the products or services pro-
vided during an accounting period.’’ ‘‘Expensed’’ means
‘‘[t]he process of having charged an expenditure against
operations, such expenditure having been considered
to benefit a current accounting period (as opposed to
a future accounting period). It is the opposite of ‘capi-
talizing’ an expenditure.’’ (Ex. 406, p. 45.) The Hand-
book defines ‘‘Capitalize’’ as, ‘‘[t]o set up an expenditure
as an asset or to increase the recorded value of an
asset so that the expenditure can be charged off as
depreciation expense during future accounting periods.
It is the opposite of ‘expensing’ an expenditure.’’ (Ex.
406, p. 43.) In other words, as explained by Grubman,
an expenditure can be either ‘‘expensed,’’ particularly
if it benefits the current accounting period, or ‘‘capital-
ized,’’ particularly if it benefits future accounting peri-
ods. As noted, if expenditures are capitalized, they
appear as additions to fixed assets in Underwood’s
financial statements. (Scobie, 3/18/09, p. 141.)
Note B does not directly address the issue of whether
a project can use its operating revenues to fund capital
improvements. However, as explained previously, Note
B does provide that ‘‘Net Cash’’ is calculated by sub-
tracting various expenses, such as PILOT payments,
from ‘‘Net Operating Income.’’ ‘‘Net Operating Income,’’
in turn, means the difference between gross revenue
and ‘‘the operating and maintenance expenses of the
Project.’’ (Emphasis added.) (Ex. 10, p. 2.) The plaintiff
relies initially on the presence of the term ‘‘expenses’’
to argue, in accordance with the HUD Handbook defini-
tions, that items that can be ‘‘expensed’’ can properly
form part of ‘‘net operating and maintenance expenses’’
but that capital ‘‘expenditures,’’ which are capitalized
but not ‘‘expensed,’’ are not part of ‘‘net operating and
maintenance expenses.’’40
This approach is overly formalistic. The evidence
established that lawyers rather than accountants
drafted Note B (Barsky, cross-examination.) It is
unlikely that the drafter or drafters contemplated the
technical, accounting distinction between ‘‘expense’’
and ‘‘expenditure.’’ Indeed, Underwood’s accountant
for several years, Arthur Adams, testified that he uses
the plain language definition of ‘‘expense’’ to mean
‘‘expenditures’’ or ‘‘use of cash’’ and that the term
‘‘operating expenses’’ encompasses both expenses and
capital items. (Adams, 6/26/08, pp. 183–88, 193–98.) The
defendants’ expert, Barsky, testified credibly that the
language of Note B was unfortunate but that it clearly
did not foreclose using operating revenues to make
expenditures for capital projects. (Barsky, cross-exami-
nation.)
The plaintiff does not challenge any of the defendants’
decisions as to whether to expense or capitalize any
expenditure in this case. Generally, the defendants capi-
talized expenditures costing more than $500,000. (Sco-
bie, recross.) Instead, the plaintiff contests the defen-
dants’ use of operating revenues to pay for capital
expenditures. The plaintiff claims that, at the time of
the 1995 PPC, the defendants ‘‘bargained away’’ their
right to use operating funds for capital projects and,
going forward, should have exhausted the funds in the
replacement reserve fund before considering the use
of operating revenues.
Scobie testified clearly that, at the time of the second
PPC, Underwood was using operating revenues to fund
capital improvements. (Scobie, direct.) However, the
defendants’ application letter for a second PPC, written
in 1995, simply does not address the issue of how to
fund capital expenditures. The defendants did attach
to the letter a graph containing a thirteen year operating
projection in which the defendants predicted that they
would deposit $45,100 per year (or $1000 per unit) into
the replacement reserve account. Ultimately, at HUD’s
request, Underwood deposited $12,300 per month, or
approximately $148,000 per year into the reserve
account. (Scobie, 3/18/09, p. 139; 4/9/09, pp. 5-7; Ex.
36, p. 11; Ex. 38, p. 1.) Subsequently, the defendants’
financial statements fully revealed that they were using
operating revenues to fund capital improvements. (Grub-
man, cross-examination.) HUD never objected to the
defendants’ decisions to use operating revenues for
these purposes. (Scobie, direct.)41
In March, 2003, Underwood’s decision to use operating
revenues and net cash to pay for capital expenditures
above the amount in the reserve replacement account
did come under question from PAMI. (Scobie, 4/8/09,
pp. 136–37; Ex. 45.) Underwood replied to PAMI in
April, 2003, that HUD’s practice was that ‘‘project funds
must be used first to maintain the project to ensure the
health and safety of the residents prior to payment of
any subordinate debt.’’ Underwood also reminded PAMI
that, while HUD held the notes, HUD never objected
to expenditures of operating revenues for capital improve-
ments. (Ex. 46, p. 3.) PAMI wrote the defendants in
May, 2003, that it would accept their payments ‘‘without
prejudice to any and all of our rights under the applica-
ble loan documents,’’ but PAMI did not specifically refer
to the defendants’ April letter or to the issue of capital
expenditures. (Ex. 47.)
Based on this history, the plaintiff advances the the-
ory that Underwood ‘‘bargained away’’ its right to use
operating revenues for capital expenditures in the 1995
PPC. (Grubman, direct.) The court disagrees. In fact,
as noted previously, the PPC is silent on this precise
issue. Although PAMI questioned the defendants’ pol-
icy, the use of operating revenues for capital improve-
ments was essentially an established practice from the
time of the second PPC. Because the defendants were
transparent about this practice, HUD was undoubtedly
aware of it and did not question or prohibit it. If any-
thing, this record reveals HUD’s tacit acceptance of the
defendants’ policy. It certainly does not demonstrate
that the defendants entered into an agreement that
ceded or otherwise bargained away their right to use
operating revenues for capital expenditures.
The HUD Handbook provides that ‘‘[t]he Reserve
Fund for Replacements will not always be adequate to
meet the future capital needs of a project nor is it
expected to do so. There are other sources of capital
available to projects.’’ The handbook then lists as exam-
ples of funding sources some thirteen items such as
‘‘Owner Contributions in the form of equity,’’ ‘‘Energy
loans,’’ and ‘‘Loans or grants from other governmental
agencies or private foundations.’’ The last item listed
is ‘‘Cash flows from operations.’’ (Ex. 405, p. 52.) Thus,
as noted by the defendants, HUD rules explicitly autho-
rize the use of operating revenue as a permissible source
of funding for capital improvements. (Def. Reply Br.,
p. 8.)
Underwood had a strong need to do capital repairs.
Underwood had an obligation under its lease from Hart-
ford to ‘‘maintain a high quality urban environment.’’
(Ex. 601, p. 20.) HUD required the owners to ‘‘maintain
[the project] in good physical and financial condition,’’
and to ‘‘[assure] safe, sanitary, and decent housing for
those the housing was constructed to serve.’’ (Ex. 405,
pp. 15, 16.) The project also existed in a very competitive
market for large apartment complexes and thus had to
maintain its quality and reputation. (Scobie, direct.)
Underwood did use approximately $1.75 million over
eight years from the reserve replacement account (Ex.
1160.)42 It also spent an additional $3.47 million of
operating project revenues. (Ex. 1160.) Given that the
plaintiff does not challenge the defendants’ decisions
to spend for capital assets, the fact that Underwood
spent the additional $3.47 million establishes that
Underwood had valid capital needs that exceeded the
funds that it felt it could safely remove from the reserve
replacement account. Although the defendants had
$846,213 remaining in the reserve account at the end of
2007, presumably this money would fund future capital
needs, which might grow as the project ages. (Ex. 824.)
Given the long history of Underwood using operating
revenues with HUD’s acquiescence, along with the fact
that the HUD handbook expressly permitted their use,
the court concludes that it was permissible and appro-
priate to use operating revenues to pay for these addi-
tional capital needs.43
6
Legal Fees
The final category of alleged misuse of project rents
concerns legal fees paid to lawyers for the defendants
to defend this foreclosure and damages action and to
file suit against the plaintiff. (Complaint, ¶¶ 42–45.)
The plaintiff filed the complaint in the present case on
December 22, 2006. As stated previously, on May 30,
2006, some seven months earlier, Underwood filed a
three count complaint in Hartford Superior Court
against Beal and the other lienholders. Underwood
Towers Ltd. Partnership v. Beal Bank, supra, Superior
Court, Docket No. CV-XX-XXXXXXX-S. Count one of this
complaint sought a declaratory judgment concerning
Underwood’s reporting obligations and the basis of its
alleged defaults.44 Count two alleged a breach of con-
tract and of the implied covenant of good faith and
fair dealing by Beal. Count three charged Beal with
violations of the Connecticut Unfair Trade Practices
Act (CUTPA), General Statutes § 42-110a et seq., and
alleged, among other things, that ‘‘Beal has systemati-
cally sought to artificially create a pretext to . . .
extort funds from the plaintiff . . . .’’ (Id., Complaint,
¶ 13.) Underwood sought compensatory and punitive
damages.
The evidence established that the defendants used
$254,302 in project funds to pay two law firms—Weinstein
& Wisser, P.C., in Hartford and Nixon Peabody, LLP, in
New York—to defend and prosecute these two lawsuits
(Ex. 384.) The question presented is whether the use
of project funds was proper for these purposes.
The use of project revenues to defend a foreclosure
action is straightforward. Section 10-17 of HUD Hand-
book Number 4350.1, Revision 1, provides: ‘‘USE OF
PROJECT FUNDS. An owner may not use project funds
to pay an attorney, agents, or representatives to develop
a workout proposal for HUD to consider and/or to advo-
cate that HUD approve the plan. Further, project funds
may not be used to defend a foreclosure action or to
pay for a bankruptcy action.’’ (Ex. 405, p. 68.) Thus,
the HUD Handbook specifically prohibits the use of
project funds to pay legal fees to defend a foreclosure
action.45
Whether the use of project rents to pay for a declara-
tory judgment and damages action against the lender
constitutes a default is not as straightforward because
the HUD Handbook does not specifically address such
a possibility. However, a chart of accounts in the Hand-
book does define ‘‘Legal Expense’’ as ‘‘legal fees or
services incurred on behalf of the project (as distin-
guished from the mortgagor entity). For example,
agents charge legal fees for eviction procedures to this
account.’’ (Ex. 406, pp. 52, 80.) Under this definition, the
defendants’ declaratory judgment and damages action
would not qualify as a proper expense because its pri-
mary purpose was to benefit the mortgagor rather than
the project itself.
On August 14, 2007, the court, Langenbach, J., found
that the legal fees ‘‘are not necessary operating
expenses’’ and granted an injunction—albeit a tempo-
rary one—prohibiting the defendants from using project
funds to pay them. (Ex. 817.)46 Several courts, while
not addressing the unique type of lawsuit filed by the
defendants here, have condemned the use of project
funds for litigation that does not benefit the project,
even without reliance on the HUD handbook. See
United States v. Frank, 587 F.2d 924, 927 (8th Cir. 1978)
(District Court properly determined that use of project
funds by borrower for lawsuit to enjoin foreclosure was
‘‘not incidental to the operation or maintenance of the
project but [was] related to the personal investment
interests of the mortgagor partnerships’’); United States
v. Berk & Berk, 767 F. Supp. 593, 598 (D.N.J. 1991) (use
of project funds for legal expenses to litigate foreclo-
sure action constituted improper use of project funds
‘‘for the benefit of the owner, not the project, in violation
of the regulatory agreement’’); United States v. West
Street Associates Ltd. Partnership, No. CIV.A.3:96-CV-
01864, 1998 WL 34193430, *4 (D. Conn. July 20, 1998)
(use of project funds for legal fees improper because
they were not expended to ‘‘collect rent, evict tenants,
or defend lawsuits growing out of the operation of the
project’’ (internal quotation marks omitted)). Although
the defendants attempt to distinguish these cases on
the ground that the United States—and essentially
HUD—was the mortgagee, the reasoning of the cases
extends fully to the present case. As a logical matter,
it would seem almost self-evident that a borrower
should not use rental funds that ultimately belong to
the lender to file suit against the same lender for com-
pensatory and punitive damages. Indeed, no reasonable
business would consent to financing a lawsuit against
itself. For all these reasons, the defendants’ use of
$254,302 in project assets to pay for legal fees consti-
tuted an improper use of those assets and a mortgage
default.
C
Conditions Precedent
The third element of a foreclosure case is whether
the mortgagee has satisfied any conditions precedent.
See GMAC Mortgage, LLC v. Ford, supra, 144 Conn.
App. 176. In this case, there are none that apply. Neither
the second mortgage nor Note B requires a formal
notice of default or opportunity to cure prior to initia-
tion of a foreclosure action. (Ex. 6, p. 3, ¶ 16; Ex. 10,
¶ E.) Indeed, the second mortgage expressly states that
‘‘in the event of default . . . at the option of said
Grantee, without notice or demand, suit at law or in
equity, may be prosecuted as if all moneys secured
hereby had matured prior to its institution.’’ (Ex. 6, p.
3, ¶ 16.)47 Although, as discussed earlier and noted
below, the plaintiff did provide Underwood notice of
default and possible foreclosure, in the absence of any
requirement to do so the plaintiff is not precluded from
pursuing foreclosure based on defaults not identified
in those notices. Nor, as discussed in the introduction
to part IV B of this opinion, is there any time limitation
as to when the default must have occurred. In short,
the plaintiff has satisfied the third element of a prima
facie foreclosure case.
D
Special Defenses
The defendants have alleged numerous special
defenses to the foreclosure count. ‘‘Historically,
defenses to a foreclosure action have been limited to
payment, discharge, release or satisfaction . . . or, if
there had never been a valid lien. . . . 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. . . . Where the plaintiff’s conduct is ineq-
uitable, a court may withhold foreclosure on equitable
considerations and principles. . . . [O]ur courts have
permitted several equitable defenses to a foreclosure
action. [I]f the mortgagor is prevented by accident, mis-
take 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).
The court has already addressed, both in this opinion
and in the court’s summary judgment decision, many
of the special defenses to the foreclosure count, such
as those defenses dealing with the lost note, the applica-
bility of the HUD handbook and regulatory agreement,
and the issues of waiver and estoppel. (Entry #662.00,
pp. 8–12.) The only other special defense to foreclosure
that the defendants mention in their brief is one alleging
that the plaintiff failed to mitigate its damages by exer-
cising its rights to a receivership to collect rents. How-
ever, the defendants’ brief provides no legal analysis,
only three sentences of argument, and does not even
cite the clause in the second mortgage authorizing the
appointment of a receiver. (Def. Br., p. 47; Ex. 6, p. 2,
¶ 5.) Under these circumstances, the court considers
the argument abandoned due to inadequate briefing.
See Raynor v. Commissioner of Correction, 117 Conn.
App. 788, 796–97, 981 A.2d 517 (2009) (‘‘[R]eviewing
courts are not required to review issues that have been
improperly presented to th[e] court through an inade-
quate brief. . . . These same principles apply to claims
raised in the trial court.’’ (Emphasis omitted; internal
quotation marks omitted.)), cert. denied, 294 Conn. 926,
986 A.2d 1053 (2010). In any event, for the reasons
discussed subsequently in weighing the equities, the
plaintiff’s decision not to invoke a receivership does
not rise to the level of unconscionability or otherwise
represent a valid special defense.
E
Foreclosure Conclusion
The plaintiff correctly recognizes that foreclosure is
an equitable action and that the court ‘‘exercises discre-
tion in ensuring that justice [is] done.’’ (Internal quota-
tion marks omitted.) National City Real Estate Ser-
vices, LLC v. Tuttle, 155 Conn. App. 290, 295, 109 A.3d
932 (2015). The defendants present valid arguments that
they have run Park Place since its inception without
serious criticism from HUD. They also have a difficult
task in maintaining an aging, urban high-rise apartment
complex as a safe and decent housing environment
for all.
On the other hand, the defendants have had their
chances to avoid foreclosure. They defaulted twice in
the 1990s. HUD’s two partial payments of the claim
prevented foreclosure on those occasions. The defen-
dants first received notice of default from the plaintiff
in March, 2006. The plaintiff agreed to a ‘‘no litigation’’
period through May 30, 2006. (Ex. 83.) The defendants
responded in part at the end of that period by suing
the plaintiff for compensatory and punitive damages.
The defendants have not reduced the principal on Note
B at all and have not made any payments of any kind
to Beal or the plaintiff on Note A. (Ex. 1159, p. 5, ¶¶
155, 156.) The court has now found that the defendants
diverted a total of $1,674,415 in net cash from the plain-
tiff and its predecessors.48 Under these circumstances,
the court has no difficulty in concluding that the plaintiff
is entitled to foreclosure.
The parties have stipulated, based on a December 14,
2018 appraisal, that the value of the property is
$30,550,000. (Ex. 1155.) The debt, as noted previously,
totaled over $102,100,000 as of December, 2018. Subject
to a presentation by either party of evidence of a radical
change in these numbers, the court orders the entry of
a judgment of strict foreclosure in favor of the plaintiff.
The court will set law days after conferring with the par-
ties.
V
COUNTS TWO THROUGH TEN
The plaintiff seeks $5,350,564 in compensatory dam-
ages, plus other enhanced damages and costs, in addi-
tion to its recovery in the foreclosure count.49 In its
summary judgment ruling, the court set out the reason-
ing and authority supporting the plaintiff’s right to sue
under the mortgage contract (but not Note B) for dam-
ages in addition to seeking foreclosure. (Entry #662, pp.
15–24.) The court will summarize that discussion here.
Of primary importance is the language of the second
mortgage document. This document not only conveys
a property interest from the borrower to the lender, as
would a simple residential mortgage, but it also contains
various covenants, or contractual promises, made by
Underwood to the plaintiff. See Emigrant Mortgage
Co. v. D’Agostino, 94 Conn. App. 793, 799, 896 A.2d 814(‘‘[c]onstruction of a mortgage deed is governed by
the same rules of interpretation that apply to written
instruments or contracts generally, and to deeds partic-
ularly’’ (internal quotation marks omitted)), cert.
denied, 278 Conn. 919, 901 A.2d 43 (2006). Paragraph
four of the second mortgage provides that ‘‘the Grantor
[Underwood] . . . does hereby covenant and agree as
follows . . . 4. [t]hat all rents, profits and income from
the property covered by this Mortgage are hereby
assigned to the Grantee for the purpose of discharging
the debt hereby secured. Permission is hereby given to
Grantor so long as no default exists hereunder, to col-
lect such rents, profits and income for use in accor-
dance with the provisions of the Regulatory Agreement
. . . .’’ (Ex. 6, p. 2, ¶ 4.)50 Paragraph sixteen then pro-
vides: ‘‘That in the event of default in making any
monthly payment provided for herein or in the Note
secured hereby . . . suit at law or in equity, may be
prosecuted . . . .’’ (Ex. 6, p. 3, ¶ 16.) Thus, the language
of the mortgage creates an obligation or duty of
Underwood to the plaintiff that the plaintiff may enforce
by an action in equity or at law. Count one of the com-
plaint, alleging foreclosure, represents a suit in equity.
Counts two through ten constitute actions in law.
Wholly apart from paragraph sixteen of the mortgage,
there is ample case law supporting the proposition that
a mortgagee may sue a mortgagor for damages for viola-
tion of a covenant or provision in the mortgage. See
First Connecticut Small Business Investment Co. v.
Shillea, Superior Court, judicial district of Fairfield,
Docket No. CV XX-XXXXXXX-S (February 20, 1991) (3
Conn. L. Rptr. 295, 296) (In a lawsuit by a lender against
a borrower for breach of a covenant in a mortgage deed
warranting against encumbrances, the court stated that
‘‘[i]t is clear that any action for damages on the debt
or note is barred by the [prior] foreclosure [pursuant
to General Statutes § 49-1]. However, there is nothing
in the language of the statute nor in the cases to indicate
a bar for damages for breach of the covenant against
encumbrances in the deed itself . . . .’’);51 Brayton v.
Pappas, 52 App. Div. 2d 187, 189, 383 N.Y.S.2d 723(1976) ([a]lthough plaintiff mortgagee could not fore-
close because it improperly accelerated debt, ‘‘[i]f [the]
defendants . . . demolished the four-room residence
on the property and did not first obtain permission to
do so, they were in breach of an express condition of
the mortgage agreement and [the] plaintiff should be
entitled to damages, if any, as a consequence of their
diminution of his security’’). Although a possible obsta-
cle to enforcement of a mortgage contractual provision
is a nonrecourse or exculpatory clause, such as the
one in Note B here, various courts have held that a
mortgagee may proceed with an action for money dam-
ages based on a debtor’s failure to pay rents, despite
the existence of a nonrecourse clause in the loan docu-
ments. See Federal Home Loan Mortgage Corp. v. Dutch
Lane Associates, 775 F. Supp. 133, 140 n.4 (S.D.N.Y.
1991) (‘‘[t]he [nonrecourse] provision does not bar
recovery of rents from defendants [because] . . . it is
inapplicable to the [d]efendants’ absolute and indepen-
dent assignment of rents obligations’’); 7800 W. Outer
Road Holdings, L.L.C. v. College Park Partners, L.L.C.,
Docket No. 303182, 2012 WL 2402010, *1 (Mich. App.
June 26, 2012) (‘‘[w]hile the lender may not attempt to
collect a deficiency, the lender may enforce additional
security agreements, such [as] an assignment of rents’’),
appeal denied, 493 Mich. 967, 829 N.W.2d 218 (2013);
International Business Machines Corp. v. Axinn, 290
N.J. Super. 564, 568, 676 A.2d 552 (App. Div. 1996).
(‘‘[w]e also think it plain that entry of judgment against
[the defendant] for rents collected by him but to which
[the mortgagee] was entitled does not constitute a defi-
ciency judgment in violation of the [nonrecourse] provi-
sion of the promissory note’’).
It is true, in the present case, that the damages sought
by the plaintiff, which essentially constitute net cash
payments that the defendants failed to make, represent
part of the principal and interest that the plaintiff would
recover if it were to obtain a deficiency judgment. For
this reason, the defendants argue that the plaintiff is
‘‘striving to convert what are nonrecourse loans into
recourse loans . . . .’’ (Def. Br., p. 43.) However, the
plaintiff is not relying on the mere fact that the defen-
dants owe principal plus interest as provided in the
note, as it would in a deficiency proceeding. Rather,
the plaintiff relies on a separate provision in a separate
document—the covenants in the second mortgage con-
cerning rental income—and must assume the higher
burden of proving the contract and tort causes of action
it has pleaded. Further, the plaintiff’s claim of $5,350,564
in damages is far less than the probable deficiency here
of approximately $70 million. A final distinction is that
several counts seek damages from CDC, which would
not be possible in a deficiency proceeding. Thus, the
damages counts rest on their own sound and indepen-
dent reasoning and authority.
The court granted summary judgment to the defen-
dants on counts six and eight, which were based solely
on Note B. (Entry # 662.00, p. 19.) The remaining counts
allege the following causes of action:
Count Two: Breach of Contract (as to Underwood
only).
Count Three: Breach of Covenant of Good Faith and
Fair Dealing (as to Underwood only).
Count Four: Conversion (as to Underwood only).
Count Five: Civil Theft (General Statutes § 52-564)
(as to Underwood only).
Count Seven: Unjust Enrichment (as to CDC only).
Count Nine: Fraud (as to both defendants).
Count Ten: CUTPA (as to both defendants).
The court will now discuss each of these remaining
counts.52
A
Count Two: Breach of Contract
In count two, the plaintiff seeks $5,350,564 in dam-
ages for breach of contract by Underwood. This count
focuses on paragraph four of the second mortgage,
which, as noted, provides that ‘‘the Grantor
[Underwood] . . . does hereby covenant and agree as
follows . . . 4. [t]hat all rents, profits and income from
the property covered by this Mortgage are hereby
assigned to the Grantee for the purpose of discharging
the debt hereby secured. Permission is hereby given to
Grantor so long as no default exists hereunder, to col-
lect such rents, profits and income for use in accor-
dance with the provisions of the Regulatory Agree-
ment.’’ (Ex. 6, p. 2, ¶ 4.) The regulatory agreement, in
turn, states: ‘‘Owners shall not without the prior written
approval of the Secretary . . . [a]ssign, transfer, dis-
pose of, or encumber any personal property of the proj-
ect including rents, or pay out any funds except from
surplus cash, except for reasonable operating expenses
and necessary repairs . . . .’’ (Ex. 1, p. 2, ¶ 6 (b).)
The court concludes that Underwood breached these
provisions by failing to turn over rental income that the
defendants expended for matters other than reasonable
and necessary expenses. These matters consisted of
front-line CDC expenses, Scobie’s salary from
Underwood, and legal fees for defending and prosecut-
ing the pending cases.
The claimed amount of $5,350,564 includes moneys
diverted for Skinner’s bonus and expenditures for capi-
tal projects. The court has concluded that these expen-
ditures, to the extent they affected rental income, were
reasonable and necessary. Deducting these expendi-
tures, along with the losses related to Carbone’s apart-
ment, which the court discusses in the next section,
the damages proven on count two amount to $1,669,007.
B
Count Three: Breach of Covenant
of Good Faith and Fair Dealing
Under our law, ‘‘every contract carries an implied duty
requiring that neither party do anything that will injure
the right of the other to receive the benefits of the
agreement. . . . The covenant of good faith and fair
dealing presupposes that the terms and purpose of the
contract are agreed upon by the parties and that what
is in dispute is a party’s discretionary application or
interpretation of a contract term. . . . To constitute a
breach of [the implied covenant of good faith and fair
dealing], the acts by which a defendant allegedly
impedes the plaintiff’s right to receive benefits that he or
she reasonably expected to receive under the contract
must have been taken in bad faith.’’ (Emphasis omitted;
internal quotation marks omitted.) Landry v. Spitz, 102
Conn. App. 34, 42, 925 A.2d 334 (2007). ‘‘[T]he notion
of bad faith encompasses a wide range of dishonest
behavior, including evasion of the spirit of the bargain.
[W]hen one party performs the contract in a manner
that is unfaithful to the purpose of the contract and the
justified expectations of the other party are thus denied,
there is a breach of the covenant of good faith and fair
dealing, and hence, a breach of contract, for which
damages may be recovered . . . .’’ (Internal quotation
marks omitted.) Id., 44–45.
The court recognizes the defendants’ objection that
the right of action for breach of the implied covenant
of good faith and fair dealing is not just an additional
basis for contract liability when a party acted in bad
faith. (Def. Reply Br., p. 17.) Nevertheless, the free
apartment given to Carbone fits well within the core of
this cause of action. Although the Carbone transaction
might not technically qualify as a breach of paragraph
four of the second mortgage because it did not involve
an affirmative misuse of rental income, it most certainly
did ‘‘injure the right of the other to receive the benefits
of the agreement.’’ (Internal quotation marks omitted.)
Id., 42. Providing a free apartment to Carbone resulted
in a loss of rental income to the project, which was a
benefit for which the plaintiff had bargained. Further,
the defendants’ concealment of this deal from every-
one—including their own accountant—along with their
rather transparent effort to justify the deal by paying
for ‘‘consulting’’ services that the defendants did not
identify—all evinces bad faith. Accordingly, the court
awards the plaintiff $97,050 in damages from
Underwood on count three. See footnote 37 of this
opinion.
C
Count Four: Conversion
Generally, ‘‘[c]onversion is an unauthorized assump-
tion and exercise of the right of ownership over goods
belonging to another, to the exclusion of the owner’s
rights.’’ (Internal quotation marks omitted.) Miller v.
Guimaraes, 78 Conn. App. 760, 778, 829 A.2d 422 (2003).
As the defendants point out, ‘‘[a]n action for conversion
of funds may not be maintained to satisfy a mere obliga-
tion to pay money. . . . It must be shown that the
money claimed, or its equivalent, at all times belonged
to the plaintiff and that the defendant converted it to
his own use.’’ (Internal quotation marks omitted.) Dem-
ing v. Nationwide Mutual Ins. Co., 279 Conn. 745, 772,
905 A.2d 623 (2006). Thus, ‘‘[t]he requirement that the
money be identified as a specific chattel does not permit
as a subject of conversion an indebtedness which may
be discharged by the payment of money generally. . . .
A mere obligation to pay money may not be enforced
by a conversion action . . . and an action in tort is
inappropriate where the basis of the suit is a contract,
either express or implied.’’ (Internal quotation marks
omitted.) Id.Although the defendants may have permissibly inter-
mingled rental income, including net cash, in their
operating account with other moneys to which the
plaintiff did not have a right, the language of paragraph
four of the second mortgage makes clear that rental
income was at all times the property of the plaintiff
and essentially held in trust by the defendants.53 Rental
income and net cash were not just assets that might
satisfy a general obligation to pay money. The defen-
dants cannot claim immunity from conversion because
they chose to intermingle rental income belonging to
the plaintiff with other funds belonging to them. The
evidence establishes that Underwood took rental
income that, according to paragraph four, was the prop-
erty of the plaintiff and failed to pay it over to the
plaintiff as part of Underwood’s obligation to make
monthly payments of net cash. Based on this evidence,
the plaintiff has proven a case of conversion.
In a passing sentence, the defendants suggest that
the economic loss doctrine constitutes a special defense
that bars the plaintiff’s ‘‘tort claims,’’ including, appar-
ently, conversion. (Def. Br., p. 46.) Correctly stated,
the economic loss doctrine bars ‘‘negligence claims for
commercial losses arising out of the defective perfor-
mance of contracts . . . .’’ (Emphasis added; internal
quotation marks omitted.) Ulbrich v. Groth, 310 Conn.
375, 390 n.14, 78 A.3d 76 (2013). The economic loss
doctrine does not bar all tort claims or, for that matter,
CUTPA claims. Id., 408–13. Indeed, application of the
economic loss doctrine would eliminate the tort of con-
version, since the heart of conversion is, in fact, eco-
nomic loss. The court rejects the defendants’ theory.
The plaintiff seeks conversion damages of $1,592,554
from the time it acquired the loan in 2006. From that
amount, the court must deduct $951,929, which is the
claim of damages for improper capital expenditures
from 2006 to 2008, with which the court disagrees. (Pl.
Br., p. 48; Ex. 1160.)54 The net damages for this count
is $685,758.
D
Count Five: Statutory Theft
The fifth count alleges statutory theft. ‘‘[S]tatutory
theft under . . . § 52-564 is synonymous with larceny
[as provided in] General Statutes § 53a-119. . . . Pur-
suant to § 53a-119, [a] person commits larceny when,
with intent to deprive another of property or to appro-
priate the same to himself or a third person, he wrong-
fully takes, obtains or [withholds] such property from
[the] owner.’’ (Internal quotation marks omitted.) Hi-
Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20,
44, 761 A.2d 1268 (2000). ‘‘[S]tatutory theft requires a
plaintiff to prove the additional element of intent over
and above what he or she must demonstrate to prove
conversion.’’ (Internal quotation marks omitted.)
Suarez-Negrete v. Trotta, 47 Conn. App. 517, 521, 705
A.2d 215 (1998).
The court does not find the requisite intent to steal.
The payment of a salary to Scobie and the use of project
funds to pay for front-line expenses stemmed from erro-
neous and perhaps negligent reading of the loan docu-
ments and applicable authorities. The use of project
revenue to pay legal fees for lawsuits involving the lender
was primarily the result of excessive zeal by the defen-
dants rather than a desire to steal the lender’s money.
The closest case is the provision of a rent-free apart-
ment to Carbone. The court has found that the defen-
dants took this action in bad faith. However, the court,
having heard the evidence, finds that the primary moti-
vation was to confer an under-the-table benefit on Car-
bone. In doing so, the defendants recklessly disregarded
their net cash obligations to the lender, but they did
not act with the specific intent of stealing money.
The plaintiff relies on various statements made by CDC
employees to the effect that they should ‘‘use up the
cash.’’ (Pl. Br., pp. 1, 43–44.) According to the plaintiff,
these statements reveal the defendants’ intent to shelter
net cash from the plaintiff’s reach. The court does not
interpret these statements in the same sinister way.
Rather, these comments merely show that a delay in
the processing of invoices made it difficult for CDC
employees to reconcile their monthly statements for
Underwood.
In general, the court credits the testimony of Hubbard,
Scobie, and CDC Chief Financial Officer Witt that they
never consciously sought to reduce net cash and never
discussed doing so with anyone else or directed anyone
else to do so. (Hubbard, cross-examination; Scobie,
direct; Witt, cross-examination.) Although the owners
received the benefit of tax losses that allowed them to
defer taxation of their other income, the owners never
made any profit on their investment. (Hubbard, direct
and cross-examination; Scobie, cross-examination;
Witt, cross-examination; Scobie, 3/19/09, pp. 74–75.) For
all these reasons, the court denies liability on count five.
E
Count Seven: Unjust Enrichment
In count seven, the plaintiff alleges unjust enrichment
against CDC based on its collection of front-line expenses
in excess of the management fee and on Underwood’s
provision of a salary to Scobie that supplemented his
CDC salary. ‘‘Unjust enrichment is, consistent with the
principles of equity, a broad and flexible remedy. . . .
Plaintiffs seeking recovery for unjust enrichment must
prove (1) that the defendants were benefited, (2) that
the defendants unjustly did not pay the plaintiffs for
the benefits, and (3) that the failure of payment was
to the plaintiffs’ detriment.’’ (Internal quotation marks
omitted.) Vertex, Inc. v. Waterbury, 278 Conn. 557, 573,
898 A.2d 178 (2006).
CDC’s liability under this theory for the front-line
expenses is clear, as CDC received payments from proj-
ect funds that otherwise should have gone to the plain-
tiff. The salary paid to Scobie by Underwood is not as
clear because it is not immediately obvious how CDC
benefited. The plaintiff argues, however, that this action
freed up other funds to pay substantial salaries to CDC’s
principals. (Pl. Br., p. 48.) That theory gains support
from the fact that Hubbard received an annual CDC
salary of over $500,000 in 2008. Further, Scobie did
testify that CDC ultimately bore responsibility if Sco-
bie’s $400,000 CDC compensation was excessive and
that CDC should instead have hired the proper staff at
the proper salary. (Scobie, redirect.) Accordingly, the
court finds that the plaintiff has proven its full unjust
enrichment claim by a preponderance of the evidence.
The plaintiff claims $408,588 in damages, which
appears to represent the total amount of front-line
expenses paid to CDC and salary paid to Scobie by
Underwood for the years 2006 to 2008. (Ex. 1160.) The
court imposes damages in that amount on CDC on
count seven.
F
Count Nine: Fraud
In the ninth count, the plaintiff alleges fraud against
both Underwood and CDC based on alleged misrepre-
sentations made by these defendants in their financial
statements and reports about Scobie’s salary, Carbone’s
apartment, and the various other categories of pur-
ported misuse of project revenues. The court finds no
liability on this count.
The essential elements of a cause of action in fraudu-
lent misrepresentation are: (1) a false representation
was made as a statement of fact; (2) it was untrue and
known to be untrue by the party making it; (3) it was
made to induce the other party to act upon it; and (4)
the other party did so act upon the false representation
to his injury. Centimark Corp. v. Village Manor Associ-
ates Ltd. Partnership, 113 Conn. App. 509, 522, 967
A.2d 550, cert. denied, 292 Conn. 907, 973 A.2d 103(2009). The plaintiff must prove its case by the higher
standard of clear and convincing evidence. See Foley
v. Huntington Co., 42 Conn. App. 712, 732 n.7, 682 A.2d
1026, cert. denied, 239 Conn. 931, 683 A.2d 397 (1996).
Even assuming that the plaintiff has proven the first
three elements by this higher burden, its case falters
on the fourth element, which essentially requires detri-
mental reliance. The only specific basis mentioned in
the plaintiff’s brief for proof of the fourth element is
the fact that it agreed to a ‘‘litigation hold’’ between April
28 and May 30, 2006. (Pl. Br., p. 49; Ex. 83.) However,
it is unclear precisely what damages, if any, the plaintiff
suffered during this brief litigation hold. It is also
unclear how the plaintiff would have incurred less dam-
ages without the litigation hold, especially given that it
did not institute suit until December, 2006, and, as the
court has established, the defendants continued to vio-
late the net cash rules even after the filing of the lawsuit.
Given that the plaintiff has thus failed to prove detri-
mental reliance, the court denies liability on this count.
G
Count Ten: Connecticut Unfair Trade Practices Act
(CUTPA), General Statutes § 42-110a et seq.
In the tenth and final count, the plaintiff sues Under-
wood and CDC under CUTPA. To determine whether
a party’s conduct violates CUTPA, the court must con-
sider the following criteria: ‘‘(1) [W]hether the practice,
without necessarily having been previously considered
unlawful, offends public policy as it has been estab-
lished by statutes, the common law, or otherwise—in
other words, it is within at least the penumbra of some
[common-law], statutory, or other established concept
of unfairness; (2) whether it is immoral, unethical,
oppressive, or unscrupulous; (3) whether it causes sub-
stantial injury to consumers, [competitors or other busi-
nesspersons].’’ (Internal quotation marks omitted.)
Votto v. American Car Rental, Inc., 273 Conn. 478, 484,
871 A.2d 981 (2005). Although all three criteria do not
need to be satisfied to support a finding of unfairness;
id.; a key element of CUTPA is that the conduct involve
some level of aggravated behavior. See Soto v. Bush-
master Firearms International, LLC, 331 Conn. 53,
123, 202 A.3d 262 (2019) (‘‘CUTPA, for example, has
long been construed to incorporate the [United States
Federal Trade Commission’s] traditional cigarette rule,
which prohibits as unfair advertising that is, among
other things, immoral, unethical, oppressive and
unscrupulous.’’(internal quotation marks omitted)). In
this case, for the reasons stated previously, the court
finds that the defendants’ conduct, while occasionally
in bad faith or reckless, did not rise to the level of
being immoral, unethical, oppressive or unscrupulous.
Accordingly, the court denies liability on the CUTPA
count.
VI
CONCLUSION
Based on the analysis presented previously, the court
denies the motion to dismiss and enters a judgment of
strict foreclosure in favor of the plaintiff. In addition,
the court finds Underwood liable to the plaintiff in the
amount of $1,766,057 (in addition to the proceeds of
the foreclosure), which represents the total damages
for breach of contract and breach of the covenant of
good faith. The damages for conversion overlap with
the damages under these other theories, and, therefore,
the court does not add them to the total. The court
finds CDC liable to the plaintiff in the amount of
$408,588 under the unjust enrichment count.
It is so ordered.
* Affirmed. LPP Mortgage, Ltd. v. Underwood Towers Ltd. Partnership,
205 Conn. App. 763, A.3d (2021).
1
The other appearing defendants are Greystone Servicing Corporation,
Inc., the city of Hartford, and United Way of the Capital Area, Inc. These
defendants may become involved in posttrial proceedings.
2
Whenever possible, the court will provide a citation that includes the
name of the person who testified on the point in question and either the
date of his or her prerecorded testimony and the page in the transcript, or
the portion of his or her live testimony (direct, cross-examination, redirect,
recross) in which the testimony in question occurred.
The exhibits containing the transcripts of the out-of-court testimony of
the witnesses are as follows:
Arthur Adams Ex. 349A
Nicholas Carbone Ex. 350
Ann Ryan Ex. 486A
Gregory Odean Ex. 1150A
John Scobie Exs. 357A, 1158
3
‘‘Partial payment of claim,’’ or ‘‘PPC,’’ is a phrase used in these cases to
refer to a situation in which HUD, as guarantor, makes payment on a mort-
gage in default.
4
John Scobie, the general manager of Underwood, testified that the first
default occurred because of a loss in occupancy resulting from construction
problems with the parking garage. (Scobie, 3/18/09, p. 72.)
5
The court discusses this transfer in greater detail in part III B 2 of
this opinion.
6
Payments by the defendants have not fully covered the interest accruing
on Note B, so those payments have not reduced the principal on Note B or
the interest on Note A. (Odean, 2/11/09, pp. 54, 59–60; Ex. 1159, p. 5, ¶ 155.)
Payments of net cash to Beal Bank and the plaintiff typically have amounted
to $200,000 per year. (Scobie, 3/18/09, pp. 85, 127.) Note B is also senior in
priority to Underwood’s obligation to make payments in lieu of taxes
(PILOTs) to the city of Hartford. But the PILOTs, which total approximately
$426,310 per year and are in arrearage of approximately $3.5 million, have
seniority over Note A, which creates another reason why the plaintiff, as a
practical matter, cannot enforce Note A at this point. (Scobie, 2/6/19 p.m.,
pp. 48–49; Witt, 1/16/19 p.m., p. 33; Exs. 16, 601.)
7
Almost all of the project’s gross revenue comes from rents paid by ten-
ants.
8
The ‘‘First Note’’ refers to the 1985 first mortgage note in the original
principal amount of $35 million ultimately assigned to Greystone. (Ex. 10,
p. 1.)
9
‘‘Additional Note B Payments’’ refer to the monthly net cash payments.
(Ex. 10, p. 3.)
10
‘‘Minimum Note B payments’’ refer to a service charge consisting of
monthly payments equaling 0.5% of the unpaid principal balance on the
debt. (Ex. 10, p. 3.)
11
In pertinent part, General Statutes § 42a-3-309 provides: ‘‘(a) A person
not in possession of an instrument is entitled to enforce the instrument if
(i) the person was in possession of the instrument and entitled to enforce
it when loss of possession occurred, (ii) the loss of possession was not the
result of a transfer by the person or a lawful seizure, and (iii) the person
cannot reasonably obtain possession of the instrument because the instru-
ment was destroyed, its whereabouts cannot be determined, or it is in the
wrongful possession of an unknown person or a person that cannot be
found or is not amenable to service of process. . . .’’
12
General Statutes § 42-3-301 provides: ‘‘ ‘Person entitled to enforce’ an
instrument means (i) the holder of the instrument, (ii) a nonholder in posses-
sion of the instrument who has the rights of a holder, or (iii) a person not
in possession of the instrument who is entitled to enforce the instrument
pursuant to section 42a-3-309 or 42a-3-418 (d). A person may be a person
entitled to enforce the instrument even though the person is not the owner
of the instrument or is in wrongful possession of the instrument.’’
13
Deutsche Bank National Trust Co. v. Bliss, supra, 159 Conn. App. 489,
cited to U.S. Bank, N.A. v. Ugrin, 150 Conn. App. 393, 401, 91 A.3d 924(2014). The latter case noted at least one exception to what Deutsche Bank
National Trust Co. held: the case of a loan servicer entitled to enforce a
note pursuant to rights acquired under a pooling and servicing agreement.
See U.S. Bank, N.A. v. Ugrin, supra, 401, citing J.E. Robert Co. v. Signature
Properties, LLC, 309 Conn. 307, 318, 71 A.3d 492 (2013). There is also
Appellate Court case law contrary to Deutsche Bank National Trust Co.
See Bankers Trust of California, N.A. v. Neal, 64 Conn. App. 154, 157, 779
A.2d 813 (2001), citing Bedford Realty in foreclosure case for proposition
that ‘‘[t]he law is clear that it is unnecessary for a plaintiff to possess a note
at the time it was lost.’’
14
In full, General Statutes § 42a-3-310 (b) (4) provides: ‘‘Unless otherwise
agreed and except as provided in subsection (a), if a note or an uncertified
check is taken for an obligation, the obligation is suspended to the same
extent the obligation would be discharged if an amount of money equal to
the amount of the instrument were taken, and the following rules apply . . .
‘‘If the person entitled to enforce the instrument taken for an obligation
is a person other than the obligee, the obligee may not enforce the obligation
to the extent the obligation is suspended. If the obligee is the person entitled
to enforce the instrument but no longer has possession of it because it was
lost, stolen, or destroyed, the obligation may not be enforced to the extent
of the amount payable on the instrument, and to that extent the obligee’s
rights against the obligor are limited to enforcement of the instrument.’’
15
In its summary judgment ruling, the court determined that § 42a-3-309
does not operate as an erasure statute that prevents reliance on the terms
of Note B. (Entry #662.00, pp. 22–24.) The court reaffirms that aspect of
the ruling. As stated there, the mortgage incorporates the note by reference.
Further, the terms of the note are not in dispute, as the defendants have
admitted that exhibit 10 is a fair and accurate copy of the original note. See
New England Savings Bank v. Bedford Realty Corp., supra, 238 Conn. 760(‘‘A bill or note is not a debt; it is only primary evidence of a debt; and
where this is lost, impaired or destroyed bona fide, it may be supplied by
secondary evidence. . . . The loss of a bill or note alters not the rights of
the owner, but merely renders secondary evidence necessary and proper.
. . . GHR or its assignee is free to present reliable evidence other than the
original promissory note to establish the amount of the debt.’’ (Citations
omitted; internal quotation marks omitted.)).
16
The following is questioning by the defendants’ counsel of William N.
Hubbard, the managing partner of Underwood’s general partner and presi-
dent of CDC:
‘‘Q. When did you first become aware of the fact that Note B, in regard
to Underwood, was lost?
‘‘A. Several years ago, but I couldn’t tell you the exact date.’’ (1/10/19
p.m., p. 42.)
17
The defendants separately brief their concerns about the transaction
between HUD and Beal. The assignments, endorsements, and affidavits
discussed previously concerning this transaction, along with Underwood’s
admissions in its financial statements and its monthly payments to Beal,
collectively establish the validity of the transfer of the mortgage and the
debt from HUD to Beal.
18
The regulatory agreement similarly provides: ‘‘Owners shall not without
the prior written approval of the Secretary . . . [a]ssign, transfer, dispose
of, or encumber any personal property of the project, including rents, or
pay out any funds except from surplus cash, except for reasonable operating
expenses and necessary repairs.’’ (Ex. 1, p. 2, ¶ 6 (b).)
19
The defendants’ brief addresses a seventh category involving alleged
failures to comply with reporting requirements. However, the plaintiff no
longer claims this category as a basis for default. The court therefore will
not consider it further in that context.
20
Although the plaintiff briefs the arguments that acceleration was proper
based on monthly—rather than annual—defaults in installment payments
and that the loan documents do not require a notice of default, the defendants
do not contest these arguments in either their opening or their reply brief.
(Pl. Br., pp. 12–14.)
21
As suggested, the plaintiff does not challenge the characterization of
Skinner’s basic compensation as a consultant, which approximated $46,000
from 2002 to 2007, as a reasonable operating expense. (Odean, 2/17/2009,
p. 83.)
22
Nonetheless, Underwood should have complied with HUD contracting
guidelines that require the solicitation of written contract bids. (Grubman,
direct; Ex. 407, p. 75, ¶ 6.50.) Further, if the defendants sought to treat
Skinner as a contractor, they should have drawn up a written contract
with a bonus provision so that the auditors could properly review her
compensation package.
23
Scobie testified that a written management agreement existed but that
that he can no longer find it (Scobie, 3/19/09, p. 18.)
24
Unless otherwise noted, citations to Stewart A. Grubman’s testimony
refer to his testimony in the plaintiff’s case-in-chief rather than his rebuttal
testimony.
25
Stewart A. Grubman and Witt testified without contradiction that the
project never had ‘‘excess Net Cash.’’ (Grubman, cross-examination; Witt,
redirect.)
26
The plaintiff’s brief cites exhibit 1160 to support its claim for $577,593
in management fees, but the exhibit clearly indicates that the total is
$517,400. (Pl. Br., p. 33.)
27
Scobie’s CDC salary also compensated him for work on other projects
managed by CDC. (Scobie, 4/22/09, p. 50.) Hubbard also drew a salary from
CDC of more than $500,000. (Hubbard, redirect; Ex. 327, p. 23.)
28
The financial statements instead included Scobie’s salary under the
separate category of ‘‘Office Salaries.’’ (Witt, direct; Grubman, direct; Hub-
bard, redirect.)
29
Grubman testified credibly that other exceptions in the Handbook also
do not apply. (Ex. 407, p. 69, § 6.39 (c).)
30
Similarly, the 1985 regulatory agreement between Underwood and HUD,
which both the 1990 second mortgage and the 1996 modification incorporate
by reference, provides as follows: ‘‘Owners shall not without the prior written
approval of the Secretary . . . [m]ake, or receive or retain, any distribution
of assets or any income of any kind of the project except surplus cash
. . . .’’ (Ex. 1, p. 2, ¶ 6 (e); Ex. 6, p. 2, ¶ 3; Ex. 17, p. 1, ¶ D.) The provision
includes some additional exceptions that do not apply here. The regulatory
agreement defines ‘‘distribution’’ as ‘‘any withdrawal or taking of cash or
any assets of the project . . . and excluding payment for reasonable
expenses incident to the operation and maintenance of the project.’’ (Ex.
1, p. 5, 11a.) The HUD Handbook states that a ‘‘distribution’’ for purposes
of the regulatory agreement includes ‘‘supervisory fees paid to general part-
ners and any salaries or other fees paid to the sponsor or mortgagor, unless
those salaries or fees have been approved by HUD as essential to the project
. . . .’’ (Ex. 406, p. 17, § 4370.2.) The HUD Handbook also provides: ‘‘There
will be no distributions to any type owner until the second mortgage is
brought current.’’ (Ex. 405, p. 70, § 10-20 (B).) In view of the court’s decision
that the salary provided to Scobie violated the second mortgage itself, it is
unnecessary to consider these additional prohibitions on distributions.
31
Grubman testified that project rents are not part of ‘‘surplus cash.’’
(Grubman, direct.)
32
As noted, the second mortgage provides that the defendants can only
use project rents ‘‘in accordance with the provisions of the Regulatory
Agreement.’’ (Ex. 6, p. 2, ¶ 4.)
33
The defendants argued at trial that the plaintiff has failed to consider
the replacement cost if Scobie did not do work for Underwood. However,
because the court is ruling that Scobie’s salary from Underwood is not a
reasonable and necessary use of project assets and that his CDC salary of
up to $440,000 adequately compensated him for his work for both entities,
there was no need for a replacement and no replacement cost. (Grubman,
redirect; Grubman, rebuttal redirect.)
34
Carbone was approximately seventy-two at the end of the trial period
in this case. He died before the retrial of this case.
35
Both the defendants’ auditor and their expert accountant testified that
the defendants should have disclosed this information, either as a ‘‘related
party transaction’’ because Carbone was a limited partner of Underwood
or at least as a long-term obligation of the project. (Adams, 6/26/08, pp. 121,
137–38; Barsky, cross-examination.)
36
As noted, the 1985 regulatory agreement between Underwood and HUD,
which both the 1990 second mortgage and the 1996 modification incorporate
by reference, contains a similar prohibition. See footnote 30 of this opinion.
In view of the court’s decision that the apartment provided to Carbone
violated the second mortgage itself, it is unnecessary to consider this addi-
tional prohibition on distributions.
37
The plaintiff’s damages calculation appears based correctly on the
assumption that Carbone’s rent should have been $725 per month from 2000
to 2004 and $1150 per month from 2005 through 2008. Assuming, however,
that Carbone paid $150 per month from February to December, 2008, or a
total of $1650, the total rent loss would be $97,050.
38
The defendants suggest that the additional revenue from the rental of
Carbone’s apartment might have gone only to reduce outstanding payables
rather than add to net cash. As Grubman testified, however, paying more
bills in one month would have meant having to pay fewer the next month,
which would eventually have increased net cash. (Grubman, initial ques-
tioning by the court.)
39
For the purposes of the present case, capital assets are the same as
fixed assets. The evidence established that, when Underwood decided to
‘‘capitalize’’ an item, it included it in a schedule of additions to fixed assets.
(Adams, 6/26/08, pp. 79–80; Scobie, 3/19/09, p. 4; Grubman, direct.)
40
Both expert accountants testified in this case that ‘‘capitalizing’’ as
opposed to ‘‘expensing’’ an expenditure means that an accountant would
depreciate the expenditure over time rather than deduct all of it in the year
of expenditure. The experts also agreed that, assuming the revenue in both
cases came from project funds, the decision whether to capitalize or expense
the expenditure would have no impact on net cash.
41
The plaintiff’s reply brief states that, ‘‘in the second PPC, [Underwood]
sought permission to use Project rents to pay for capital improvements,
and HUD denied that request.’’ (Pl. Reply Br., p. 14.) This statement is
misleading. The defendants never made an explicit request in the second
PPC to use operating revenues, as a general matter, for capital improvements.
Without saying so expressly, the plaintiff’s reply brief apparently refers to
a footnote in its opening brief in which it states that the defendants proposed
to use $255,000 in net cash generated between April 14 and August 1, 1995,
to pay for an energy savings plan. (Pl. Br., pp. 31–32 n.17; Ex. 36, p. 6.)
Instead of denying this request outright, HUD responded by stating that the
defendants could use $125,000 in net cash funds that were currently being
held in their operating account and would have to provide the remaining
financing on their own. (Ex. 38, p. 1, ¶ 5.) Thus, to some extent, HUD
actually granted permission to use operating revenues for a capital project. In
any event, HUD’s reasoning is unclear, and its decision does not necessarily
dictate that HUD disapproved the defendants’ use of operating revenues to
fund other capital projects. (Scobie, 3/19/09, pp. 6–16; Grubman, direct.)
42
Scobie testified that it was his decision as to whether to make an
application to HUD for permission to use funds in the reserve replacement
account or to use operating revenues and that HUD never denied his requests
to use the reserve account. (Scobie, 3/18/19, pp. 140, 142; 4/9/09, p. 12.)
43
The defendants’ expert accountant, Barsky, testified that the defendants
could use operating revenues to fund capital projects as long as the latter
did not change the footprint of the building. (Barsky, direct.) There is no
evidence or claim in this case that the capital improvements in question
changed the project’s footprint.
44
The court has taken judicial notice of the complaint in that matter.
45
Although a provision of the HUD handbook authorizes HUD to provide
written waivers of handbook directives in certain situations, there is no
evidence that HUD actually provided a waiver, written or otherwise, for
attorney’s fees in this case. (Ex. 407, § 1.10.a (3).)
46
The defendants failed to report this injunction to their auditor, Weiser,
LLP. An accountant with Weiser testified that, had the defendants reported
this information, the auditor would have had to make a ‘‘Finding’’ and
possibly taken corrective action such as notifying HUD. (Adams, 6/26/08,
pp. 154–61.)
47
The defendants cite language in the regulatory agreement that provides:
‘‘Upon a violation of any of the above provisions of this Agreement by
Owners, the Secretary may give written notice, thereof, to Owners . . . [i]f
such violation is not corrected to the satisfaction of the Secretary within
thirty (30) days . . . without further notice the Secretary may declare a
default under this Agreement . . . .’’ (Ex. 1, p. 4, ¶ 11; Def. Br., p. 44.) Even
assuming that this provision applies, the plaintiff, as stated, did provide the
defendants notice of violations as early as January, 2006.
48
The total net cash diverted stems from the addition of the following
components:
$517,400 Management fees
$805,663 John Scobie compensation
$97,050 Nicholas Carbone apartment
+ $254,302 Legal fees
$1,674,415
49
Presumably, however, if the foreclosure action recovered the full unpaid
principal and accrued interest, the plaintiff would not seek additional dam-
ages, as the damages represent diversions of principal and interest payments
that the defendant should have made. (Odean, 2/17/09, p. 33.)
50
Although HUD was the original ‘‘Grantee’’ under the 1990 mortgage,
Underwood gave the mortgage to the ‘‘Grantee, its successors and assigns.’’
(Ex. 6, p. 1.) The third category—‘‘assigns’’—clearly encompasses the plain-
tiff. The 1996 modification made this point clearer by defining ‘‘Grantee’’
to refer to the ‘‘Secretary of Housing and Urban Development, his successors
and assigns . . . .’’ (Ex. 17, p. 1.) Thus, the mortgage, as assigned, gives
ownership of the rents to the plaintiff here.
51
General Statutes § 49-1 provides: ‘‘The foreclosure of a mortgage is a
bar to any further action upon the mortgage debt, note or obligation against
the person or persons who are liable for the payment thereof who are made
parties to the foreclosure and also against any person or persons upon
whom service of process to constitute an action in personam could have
been made within this state at the commencement of the foreclosure; but
the foreclosure is not a bar to any further action upon the mortgage debt,
note or obligation as to any person liable for the payment thereof upon
whom service of process to constitute an action in personam could not
have been made within this state at the commencement of the foreclosure.
The judgment in each such case shall state the names of all persons upon
whom service of process has been made as herein provided.’’ The court in
Shillea added that § 49-1 ‘‘[does] not bar this independent action for damages
for breach of the covenant against encumbrances in the deed.’’ First Con-
necticut Small Business Investment Co. v. Shillea, supra, 3 Conn. L. Rptr.
296. While § 49-1 does bar deficiency judgments, except for those pursued
under procedures set out in General Statutes § 49-14; see First Bank v.
Simpson, 199 Conn. 368, 370–71, 507 A.2d 997 (1986); the plaintiff here, as
explained throughout this decision, is not seeking a deficiency judgment.
52
The only two special defenses mentioned in the defendants’ brief that
purport to apply to all seven remaining counts are statute of limitations and
waiver. (Def. Br., pp. 47–48.) However, because the defendants supply no
analysis of these defenses, the court considers them abandoned. See Raynor
v. Commissioner of Correction, supra, 117 Conn. App. 796–97.
53
Again, paragraph four of the second mortgage provides: ‘‘That all rents,
profits and income from the property covered by this Mortgage are hereby
assigned to the Grantee for the purpose of discharging the debt hereby
secured. Permission is hereby given to Grantor so long as no default exists
hereunder, to collect such rents, profits and income for use in accordance
with the provisions of the Regulatory Agreement.’’
54
Although the court also disagrees with the plaintiff’s claims stemming
from Skinner’s work as a consultant, the plaintiff’s proposed conversion
damages apparently do not include that claim. (Ex. 392.) Therefore, the
court does not have to deduct that amount from the total.