LPP Mortgage Ltd. v. Underwood Towers Ltd. Partnertship
AC43542, AC43575 Appendix
| Conn. App. Ct. | Jul 20, 2021Background
- Underwood Towers LP owned Park Place Towers, secured by a HUD‑insured first mortgage and two subordinate notes (Note A and Note B); Note B (1996) is a "net cash" nonrecourse note requiring monthly payments out of project net cash.
- HUD and successor entities made assignments and lost‑note affidavits; HUD sold the second mortgage to Beal (2005) and LPP Mortgage (plaintiff) acquired the second mortgage in 2006; the original Note B was lost.
- Plaintiff accelerated Note B in 2006 and sued in 2006 (foreclosure + nine damage counts); retrial occurred in 2019 after lengthy earlier proceedings.
- Plaintiff alleged defendants diverted project revenues (management/front‑line fees, insider salaries, rent‑free unit to a partner, capital outlays, legal fees) reducing net cash by $1,674,415 during 2000–2008.
- Court found plaintiff had standing and proved ownership of the underlying debt despite the lost note, concluded multiple improper uses of project funds (management front‑line charges, Scobie compensation, rent‑free apartment, legal fees), allowed foreclosure, and awarded damages: Underwood $1,766,057 and CDC $408,588; judgment of strict foreclosure entered.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Standing & enforcement with a lost Note B | LPP (assignee) can foreclose the mortgage and enforce the debt even though original Note B is lost; HUD/assignments and lost‑note affidavits establish chain. | Defendants: LPP never possessed Note B so lacks UCC standing; plaintiff must prove lost‑note ownership to enforce debt. | Court: Bedford Realty controls — lost note does not bar foreclosure; lost‑note affidavits, assignments, payments history and records establish ownership of the underlying debt; motion to dismiss denied. |
| 2) Whether excess management/front‑line charges breached Note B | Plaintiff: CDC billed front‑line costs to project in excess of the $8,000/month cap in Note B, improperly reducing net cash and causing default. | Defendants: HUD Handbook permits front‑line charges; HUD awareness/ course of dealing constitutes approval; Note B allows $8,000 unless excess net cash exists. | Court: Historical deal to cap management fee at $8,000 did not contemplate front‑line charges; HUD never approved the deviation; $517,400 in front‑line charges were improper and constitute default. |
| 3) Insider payments, rent‑free unit, legal fees as improper distributions/defaults | Plaintiff: Salary payments to Scobie (partner‑related), rent‑free apartment to limited partner Carbone, and project payment of legal fees to sue/defend against lenders were not reasonable operating expenses and breached mortgage/regulatory agreement. | Defendants: Payments were reasonable, disclosed or reflected in practice; HUD course of dealing and necessity for capital repairs justify some expenditures; legal fees served project interests. | Court: Scobie salary ($805,663) violated HUD rules and the mortgage (improper distribution / not reasonable); Carbone rent‑free unit was a concealed distribution — damages awarded $97,050; $254,302 in legal fees to pursue/defend lender claims were improper — all constitute defaults. |
| 4) Availability and scope of monetary claims besides foreclosure (conversion, breach, unjust enrichment, CUTPA, statutory theft, fraud) | Plaintiff: May recover net‑cash diversions and related damages under contract (mortgage covenants), conversion, unjust enrichment, and tort/statutory theories in addition to foreclosure. | Defendants: Nonrecourse loan / acceleration and foreclosure bar monetary relief beyond foreclosure; economic‑loss rules and lack of intent defeat tort/statutory claims; some claims time‑barred or waived. | Court: Mortgage covenants support contract damages; awarded breach/ covenant damages ($1,669,007 after excluding permissible capital/bonus items) and unjust enrichment against CDC ($408,588); conversion award overlaps so not added; fraud, CUTPA, and statutory theft (intent) denied. |
Key Cases Cited
- New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745 (1996) (lost promissory note by mortgagee does not bar foreclosure of the mortgage)
- GMAC Mortgage, LLC v. Ford, 144 Conn. App. 165 (2013) (elements plaintiff must prove in foreclosure: ownership of debt/mortgage, default, conditions precedent)
- U.S. Bank, N.A. v. Schaeffer, 160 Conn. App. 138 (2015) (discusses holder/owner presumptions and requirements to enforce note through foreclosure)
- Yanow v. Teal Industries, Inc., 178 Conn. 262 (1979) (standing must be maintained continuously through litigation)
- SKW Real Estate Ltd. Partnership v. Gallicchio, 49 Conn. App. 563 (1998) (payments made to assignee and possession or acceptance of payments can support enforcement even without endorsement)
- Fidelity Bank v. Krenisky, 72 Conn. App. 700 (2002) (scope of special defenses and equitable defenses in foreclosure actions)