Opinion
No. TTD CV 04-0084651-S
May 5, 2008
MEMORANDUM OF DECISION RE CERTAIN DEFENSES BY DEFENDANTS AGAINST PLAINTIFF'S MOTION FOR DEFICIENCY JUDGMENT
Pending before the court is a motion by the plaintiff, Webster Bank, for a deficiency judgment pursuant to General Statutes § 49-14(a) following a strict foreclosure. In advance of an evidentiary hearing, the defendants, River Road Antiques, LLC et al., raised certain defenses arguing, inter alia, that no deficiency judgment should be entertained because the pertinent promissory note was lost, and because Webster Bank is not eligible to enforce that lost note under Article 3 of the Uniform Commercial Code. The parties, with the court's approval, agreed to seek a court ruling on that point before proceeding further in the deficiency judgment proceedings. For the following reasons, the court finds that Webster Bank can enforce the lost note. Thus, that defense is rejected, and the matter will proceed to an additional evidentiary hearing on the remaining issues at a hearing to be scheduled by caseflow.
General Statutes § 49-14(a) provides as follows:
At any time within thirty days after the time limited for redemption has expired, any party to a mortgage foreclosure may file a motion seeking a deficiency judgment. Such motion shall be placed on the short calendar for an evidentiary hearing. Such hearing shall be held not less than fifteen days following the filing of the motion, except as the court may otherwise order. At such hearing the court shall hear the evidence, establish a valuation for the mortgaged property and shall render judgment for the plaintiff for the difference, if any, between such valuation and the plaintiff's claim. The plaintiff in any further action upon the debt, note or obligation, shall recover only the amount of such judgment.
I
The essential facts necessary for disposition of the issue before the court were stipulated to, by the parties, in a joint Stipulation of Facts dated February 20, 2008, supplemented by further stipulations during a hearing before the court on March 14, 2008. The parties agreed, and the court permitted, bifurcation of the issues. By agreement, the court would hear and decide the present issue of whether the plaintiff can enforce the lost note, and then proceed to hear any remaining issues at an additional evidentiary hearing.
The essential facts are as follows: On or about June 11, 1999, the defendant, River Road Antiques, LLC ("River Road") and the defendant Richard A. Repko ("Repko") executed a Commercial Mortgage Note in favor of The Equity Bank in the original principal sum of $680,000 (the "$680,000 Note"). As security for the $680,000 Note, on or about June 11, 1999, River Road granted an Open-Ended Mortgage and Security Agreement on real property known as 331, 333 335 River Road. Willington, CT (the "property") in favor of The Equity Bank (the "$680,000 Mortgage"). As additional security for the $680,000 Note, on or about June 11, 1999, the defendant Repko Designs, Inc., ("Repko Designs") granted a Continuing Guaranty Agreement in favor of The Equity Bank (the "$680,000 Guaranty").
On or about June 11, 1999, Repko Designs executed a Note in favor of New England Bank and Trust Company ("NEBT") in the original principal sum of $320,000 (the "$320,000 Note"). As security for the $320,000 Note, on or about June 11, 1999, Repko and River Road granted Unconditional Guaranties in favor of NEBT (the "$320,000 Guarantees"),. As additional security for the $320,000 Note and the $320,000 Guaranties, on or about June 11, 1999, River Road granted on Open-end Mortgage and Security Agreement of the property in favor of NEBT (the "$320,000 Mortgage").
On or about October 15, 2001, Repko Designs executed a Promissory Note in favor of the North American Bank and Trust Company ("NAB") in the original principal sum of $100,000 (the "$100,000 Note"). As security for the $100,000 Note, on or about October 15, 2001, Repko and River Road granted Guaranty Agreements in favor of NAB (the "$100,000 Guaranties"). As additional security for the $100,000 Note and the $100,000 Guaranties, on or about May 13, 2004, River Road granted a Mortgage Deed of the property in favor of Webster Bank (the "$100,000 Mortgage").
On or about December 1, 1999, Webster Bank acquired and merged with both NEBT and The Equity Bank, and, as a result, came into possession of the $680,000 Note, Mortgage and Guaranty, and came into possession of the $320,000 Note, Mortgage and Guaranties.
On or about September 26, 2001, Webster Bank assigned and transferred possession and all of its interests in the $680,000 Note, Mortgage and Guaranty to NAB. Subsequently, NAB lost the $680,000 Note.
On or about November 7, 2003, Webster Bank acquired and merged with NAB. Prior to the merger, NAB did not otherwise transfer its rights associated with the $680,000 Note, Mortgage or Guaranty.
On or about June 2, 2004, Webster Bank commenced a foreclosure action, in the case captioned above, against the defendants, seeking to foreclose its interest in the $680,000 Mortgage, the $320,000 Mortgage and the $100,000 Mortgage. On March 7, 2005, a judgment of strict foreclosure was entered, with the court making the following findings and/or rulings: (a) the debt on the $680,000 Mortgage was $716,513.19; (b) the debt on the $320,000 Mortgage was $188,808.13; (c) the debt on the $100,000 Mortgage was $85,227.70; (d) an appraisal fee of $7,500, a title search fee of $150, attorneys fees of $19,785, a forced place insurance fee of $7,495, and an environmental investigation fee of $1,460 were awarded; (e) the fair market value of the property was $640,000; and (f) the first law day was set for April 4, 2005.
Title to the property vested in Webster Bank after the law days expired. Subsequently, Webster Bank moved for a deficiency judgment. That motion for a deficiency judgment is the matter now pending before the court.
For the purposes of these deficiency judgment proceedings, Webster Bank agrees and stipulates that the property has a value of not less than $640,000, and that this amount exceeds the total mortgage debt if the debt amount attributable to the $680,000 Note is excluded from the mortgage debt. In other words, Webster Bank agrees and stipulates that the value of the property exceeds the indebtedness due under the $320,000 Note and the $100,000 Note, and their related mortgages and guaranties. Webster Bank agrees and stipulates that if the court determines that the amount due under $680,000 cannot be considered in these proceedings, then Webster Bank cannot obtain or enforce a deficiency judgment in this case. However, Webster Bank reserves the right to argue that the court may, nonetheless, consider whether the value of the property can be allocated to the $680,000 Note in some fashion to permit Webster Bank to obtain a deficiency judgment for the indebtedness due under the $320,000 Note and the $100,000 Note, and their related mortgages and guarantees, to the extent that such indebtedness is not satisfied by the value of the property.
Webster Bank further agrees and stipulates that the defendants have reserved any rights, defenses or claims that they may have in connection with the enforceability of the $680,000 Note, Mortgage and Guaranty; the $320,000 Note, Mortgage and Guaranties; and the $100,000 Note, Mortgage and Guarantees, to the present deficiency judgment proceedings, notwithstanding the prior foreclosure judgment. This reservation was approved by the court prior to the foreclosure judgment, by order dated March 7, 2005, on Plaintiff's Motion for Default for Failure to Disclose Defense dated June 23, 2004.
At hearing, the parties further stipulated that a merger statute and a merger regulation pertain to the business activities of Webster Bank under these facts, although the parties disagree as to the legal effect of those laws in the present proceedings. The statute is the merger provision of the Connecticut Business Corporation Act, General Statutes § 33-820(4) which provides as follows.
(4) All property owned by, and every contract right possessed by, each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment.
General Statutes § 33-820(4)
The pertinent regulation is 12 C.F.R. § 552.13(1) of the Federal Banking Regulations, which provides as follows.
(1) Mergers and consolidations: transfer of assets and liabilities to the resulting institution. Upon the effective date of a merger or consolidation under this section, if the resulting institution is a Federal savings association, all assets and property (real, personal and mixed, tangible and intangible, choses in action, rights, and credits) then owned by each constituent institution or which would inure to any of them, shall, immediately by operation of law and without any conveyance, transfer, or further action, become the property of the resulting Federal savings association. The resulting Federal savings association shall be deemed to be a continuation of the entity of each constituent institution, the rights and obligations of which shall succeed to such rights and obligation and the duties and liabilities connected therewith, subject to the Home Owners' Loan Act and other applicable statutes.
12 C.F.R. § 552.13(1).
II
In a deficiency judgment proceeding, a creditor can continue to pursue a debtor after strict foreclosure for the debt still remaining owed after subtracting the value of the property foreclosed upon, pursuant to General Statutes § 49-14. The first issue for the court is whether Webster Bank can enforce the lost $680,000 Note in this deficiency judgment proceeding. If the Note can be enforced, then the matter will proceed to determine the amount of the deficiency, and other issues. If the Note cannot be enforced, then, since the parties have stipulated that the value of the property exceeds the remaining outstanding debt, any deficiency judgment would be prohibited under § 49-14, unless the court agrees to allocate portions of the value of the real estate to the various notes and permits a pro rata deficiency judgment as Webster Bank proposes — an unprecedented proposal. The court need not consider that proposal because, for the following reasons, it concludes that Webster Bank can enforce the $680,000 Note in this deficiency judgment proceeding.
Inasmuch as this issue involves enforcement of a promissory note to a bank, it concerns a negotiable instrument governed by Article 3 of the Uniform Commercial Code. General Statutes § 42a-3-102. The Connecticut version of Article 3 is codified in General Statutes § 42a-3-101 et seq. Section 301 spells out who is entitled to enforce a negotiable instrument. The section provides as follows.
"Person entitled to enforce" an instrument means (I) the holder of the instrument, (ii) a nonholder in possession 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.
General Statutes § 42a-3-103.
Under this rule, Webster Bank is not a holder, nor is it a nonholder in possession, because the $680,000 Note was lost by NAB after Webster Bank transferred the note to NAB. Thus, Webster Bank can enforce the Note only under subsection (iii) of the above rule, if it is eligible to do so at all. See New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745, 760, 680 A.2d 301 (1996) (discussed in dicta); see also D. Caron and G. Milne, Connecticut Foreclosures (4th Ed., 2004) § 5.02A4. The operative rule then becomes Section 309, which provides, in pertinent part, as follows.
Enforcement of lost, destroyed or stolen instrument. (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 instrument 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.
General Statutes § 42a-3-309(a) (emphasis added).
Defendants argue that Webster Bank cannot qualify under this rule because Webster Bank was not in possession of the instrument when it became lost, a clear requirement of the statute in the phrase emphasized above. Indeed, the $680,000 Note became lost while it was in the possession of NAB, not Webster Bank. In this circumstance, Webster Bank does not qualify to enforce the note under Section 309(a). See Cadle Company of Connecticut v. Messick, Superior Court, judicial district of Middlesex, Docket No. CV 00-092983 (June 26, 2001, Gilardi, J.) [ 30 Conn. L. Rptr. 21] citing Dennis Joslin Co. v. Robinson Broadcasting Corp., 977 F.Sup. 491 (D.D.C. 1997). Nevertheless, Webster Bank argues that it can enforce the note because, even though it was not in possession when the note became lost, NAB was in possession when the note become lost, making NAB eligible to enforce the lost note under Section 309, and because Webster Bank acquired NAB's rights to enforce the lost note by operation of law when Webster Bank merged with NAB. The court agrees with Webster Bank on this point.
The merger laws are the key to Webster Bank's enforcement rights. Under the merger provisions of the Connecticut Business Corporation Act, "[a]ll property owned by, and every contract right possessed by, each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment." General Statutes § 33-820(4). If this statute gives NAB's contractual right to enforce the lost note to Webster Bank, then Webster Bank can enforce the lost note in this deficiency judgment proceeding.
In determining the meaning of statutes, first we look at the text. "The meaning of a statute shall, in the first instance, be ascertained from the text of the statute itself and its relationship to other statues. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered." General Statues § 1-2z. The language of this statute is simple and clear. Contract rights vest in the surviving corporation. Thus, the contract rights of NAB vested in Webster Bank after NAB merged with Webster Bank and Webster Bank became the surviving entity. Since NAB had the right to enforce the lost $680,000 Note before the merger, Webster Bank acquired that same right after the merger, under this statute.
This result is consistent with the general rule on the effect of mergers on contract rights. The usual effect of merger statutes is that the new corporation succeeds to the rights, powers, privileges and immunities of each of the original corporations, except insofar as is otherwise provided by the act of merger or other statutory or constitutional provisions respecting mergers or by the limitations of the new corporate charter. 19 C.J.S. Corporations, § 909; 19 Am.Jur.2d Corporation § 2254; 15 Fletcher Cyc. Corp. § 7086 and 7090. Connecticut has long followed the general rule. See All Brand Importers, Inc. v. Dept. of Liquor Control, 213 Conn. 184, 201, 567 A.2d 1156 (1989); Connecticut Children's Aid Society v. Connecticut Bank Trust Co., 147 Conn. 554, 560, 163 A.2d 317 (1960); Mead v. N.Y., Housatonic Northern R. Co., 45 Conn. 199, 220 (1877); Howood House, Inc. v. Trustees of Donations Bequests, 27 Conn.Sup. 176, 189, 233 A.2d 5 (1967); Fruit Industries Ltd. v. Cohen, 3 Conn.Sup. 29 (1935). Thus it has been held that a surviving corporation acquires the same rights as the terminating corporation in a merger, including Article 3 rights regarding a promissory note. See Rosa v. Colonial Bank, 207 Conn. 483, 490-91, 452 A.2d 1112 (1988). Under this general rule, Webster Bank acquired the right to enforce the lost $680,000 Note after the merger, and there is nothing in the facts suggesting that any exceptions to this rule are applicable in this case.
Another resource for ascertaining the meaning of the Connecticut Business Corporation Act is the Official Comments to the Model Business Corporation Act. That is because the language in the Connecticut Act is substantially the same as that in the Model Act. M.J.W. Ford, Conn. Corporation Law Practice (2nd Edition) § 8.09(B). Indeed, the phrasing in General Statutes § 33-820(4) was revised in Public Acts 2003, No. 03-18, and a comparison shows that the language is, in fact, substantially identical that of § 11.07(3) of the Model Act, that was last revised in 1999. The legislative intent, reflected in the legislative debates, is in accord: "[T]his bill deals with several technical amendments to various corporate statutes which are essentially intended to bring Connecticut's business corporation act into conformity with several new provisions of the model business corporation act." Remarks of Senator Andrew J. McDonald, 46 S. Proc. Pt. 5, 2003 Sess., p. 1298. The Official Comments of the Model Act state: "[I]n the case of a merger the survivor and the parties that merge into the survivor become one. The survivor automatically becomes the owner of all real and personal property and becomes subject to all the liabilities, actual or contingent, of each party that is merged into it." Official Comments, Model Business Corporation Act Annotated (4th Ed., 2007) § 11.07. This comment further supports the conclusion that contract rights vest in the surviving corporation, and that, therefore, NAB's right to enforce the lost note under Article 3, Section 309 of the Uniform Commercial Code, passed to Webster Bank in the merger.
With regard to the federal regulation on mergers applicable in this case, it is clear that this regulation, by its plain language, similarly prescribes a conveyance of all property and rights to the surviving corporation following merger, by operation of law. The language is different, and more complex, but the meaning and effect are the same as that employed by the simplified language contained in merger provisions of the Connecticut Business Corporation Act. And, there is nothing in the federal regulation which is inconsistent with the application of the general rule in this case. Thus, Webster Bank can enforce the lost $680,000 Note in this deficiency judgment proceeding.
III
Nevertheless, defendants argue that the result should be different in this case because our General Assembly, in 2003, failed to adopt a proposed change to Section 309 which would have allowed enforcement of a lost note by anyone who "has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred." See H.B. 5098, Sec. 6 (2003). They argue that this event further supports their position that Section 309 cannot be construed to permit enforcement of a lost note by a party that was not in possession of it when it was lost because a bill to include such a right was rejected. Defendants' Brief, p. 12. The point is not persuasive. In 2003, H.B. 5098 was proposed to make the change described, however, the bill died in Committee. See Bill Status Report, An Act Adopting Amendments to Article 3 of the Uniform Commercial Code Concerning Negotiable Instruments, http://wxvxv.cga.ct. gov/asp/cgabillstatus/cgabillstatus.asp?selBillType=Bill bill_num=5098which_year=2003SUBMIT1.x=9SUBMIT1.y=5. It is impossible to discern the intent of the legislature from this event because the matter never reached the floor of the House or Senate for debate, and the remarks at the Committee hearing are not illuminating. See, Conn. Joint Standing Committee Hearings, Judiciary, Pt.2, 2003 Sess., pp. 401, 402-03, 432-35, 535, 537 and 622-39. Moreover, the point is not relevant. The court does not construe Section 309 as allowing enforcement of a lost note by a party that was not in possession when the note was lost. Rather, it concludes that the merger law passes the right to enforce the lost note to the surviving corporation in a merger.
IV
Having concluded that the plaintiff is eligible to enforce the lost $680,000 Note, it is unnecessary for the court to address plaintiff's alternative arguments on whether NAB could transfer and assign its lost note rights to Webster Bank, or whether Webster Bank could obtain a deficiency judgment pro rata.
V
For all of the foregoing reasons, the court finds that Webster Bank can enforce the lost note in these deficiency judgment proceedings. Thus, the defendants' defense on this point is rejected, and the matter will proceed to an additional evidentiary hearing on the remaining issues at a hearing to be scheduled by caseflow.