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JPMorgan Chase Bank, N. A. v. Essaghof

Court of Appeals of Connecticut

October 10, 2017

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
v.
ROGER ESSAGHOF ET AL.

          Argued April 26, 2017

          Ridgely Whitmore Brown, with whom, on the brief, was Benjamin Gershberg, for the appellants (named defendant et al.).

          Brian D. Rich, with whom, on the brief, was Peter R. Meggers, for the appellee (plaintiff).

          Lavine, Mullins and Mihalakos, Js.

         Syllabus

         The plaintiff bank sought to foreclose a mortgage on certain of the defendants' real property after they had defaulted on a loan that had been modified by agreement. The original adjustable interest rate loan was signed by the defendants in favor of W Co. and provided that the interest rate would be recalculated monthly on the basis of the interest rates listed in a certain monthly yield index. After making one payment, the defendants' monthly payments were insufficient to cover the interest accruing, which increased the principal balance of the loan and resulted in negative amortization. One of the defendants, R, a highly experienced real estate investor, met with W Co. about potentially modifying the terms of the original loan. W Co. represented that, because interest rates were rising, it would be in the defendants' best interest to modify the loan so as to set a fixed interest rate. The defendants executed the modification agreement to set a fixed interest rate, but thereafter defaulted on the loan by failing to make the monthly payments. After the plaintiff acquired W Co. and all of its assets, including the defendants' loan, it commenced this foreclosure action, seeking a judgment of strict foreclosure. The defendants filed special defenses of, inter alia, fraud in the inducement and unclean hands, alleging that W Co. had induced them into executing the modification agreement by making false representations, concealed that its true motivation for encouraging the defendants to sign the modification agreement was to benefit itself financially by reducing its number of negative amortization loans, and insisted that they sign the modification agreement without an attorney present. The trial court rendered judgment of strict foreclosure, from which the defendants appealed to this court. While the appeal was pending, the trial court granted the plaintiff's motion for equitable relief and ordered the defendants to reimburse the plaintiff for the property taxes and homeowner's insurance premiums that the plaintiff paid during the pending appeal, and the defendants filed an amended appeal.

         Held:

1. The trial court's finding that the defendants were not fraudulently induced into executing the modification agreement was not clearly erroneous: the record provided ample support for the court's finding that W Co.'s representations were not false, as that court correctly found that, on the basis of the monthly yield index, rates had risen during the four month period in which W Co. had told R that they were increasing, and, therefore, notwithstanding the fact that interest rates were in an overall period of decline, W Co.'s representations about rising interest rates were not false; moreover, the record supported the court's finding that the defendants had failed to prove that W Co. was motivated by a policy to convert negative amortization loans, and this court would not disturb the trial court's finding that the defendants' were not pressured into signing the modification agreement, as it was based on that court's determination that R's testimony was not credible given his experience as a real estate investor.
2. The trial court did not abuse its discretion in declining to apply the doctrine of unclean hands to the present case; the defendants' special defense of unclean hands was predicated on the same alleged misconduct on which the defendants relied to establish their fraudulent inducement special defense, which this court already rejected and found did not amount to misconduct, and the trial court properly found that the defendants had failed to establish a factual predicate for a defense of unclean hands.
3. The trial court did not abuse its discretion in determining that a balancing of the equities justified ordering the defendants to pay the real estate taxes during the pending appeal; the defendants would have been required to pay the taxes regardless of the outcome of the appeal, and that court was understandably concerned that the defendants would experience a windfall if they were allowed to live on the property for free until the conclusion of the foreclosure proceedings.

         Procedural History

         Action to foreclose a mortgage on certain real property owned by the named defendant et al., and for other relief, brought to the Superior Court in the judicial district of Stamford-Norwalk, where the defendant JPMorgan Chase Bank, National Association, was defaulted for failure to appear; thereafter, the matter was tried to the court, Hon. Kevin Tierney, judge trial referee; judgment of strict foreclosure, from which the named defendant et al. appealed to this court; subsequently, the court, Hon. Kevin Tierney, judge trial referee, granted the plaintiff's motion for reimbursement of property taxes and insurance payments, and the named defendant et al. filed an amended appeal. Affirmed.

          OPINION

          MULLINS, J.

         In this foreclosure action, the defendants Roger Essaghof and Katherine Marr-Essaghof[1]appeal from the judgment of strict foreclosure, rendered after a trial to the court, in favor of the plaintiff, JPMorgan Chase Bank, National Association, and from the court's entry of a posttrial financial order. The defendants claim that the court (1) erred in rejecting their special defenses of fraudulent inducement and unclean hands, and (2) abused its discretion in ordering them to reimburse the plaintiff for property taxes paid by the plaintiff during the pendency of this appeal. We affirm the judgment of the trial court.

         The following facts, as found by the court in its November 27, 2015 memorandum of decision, [2] and procedural history are relevant to this appeal. On May 11, 2006, the defendants executed an adjustable rate promissory note (original note) in favor of Washington Mutual Bank, F.A. (Washington Mutual) in exchange for a loan in the amount of $1, 920, 000. The original note was secured by a mortgage on the defendants' property located at 19 Bernhard Drive in Weston.

         The original note required monthly payments of $7736.90 and provided that, from the date the note was executed until June 1, 2006, any unpaid principal would be subject to a yearly interest rate of 8.856 percent. During the month of June, 2006, the yearly interest rate would be 2.65 percent. On July 1, 2006, and on the first day of every month thereafter (change date), the interest rate would be recalculated to conform to the current interest rates set forth in an index published by Federal Reserve Board entitled ‘‘Selected Interest Rates (H.15)'' (monthly yield index). On each of these change dates, the new interest rate would be calculated by adding 4.713 percentage points to the applicable rate set forth in the monthly yield index. The original note also provided that on July 1, 2007, and on that date every year thereafter (payment change date), the defendants' monthly payment would be recalculated to reflect the amount necessary to pay the balance of the loan in full by the maturity date-June 1, 2036-at the interest rate that was in effect forty five days prior to the payment change date. The monthly payments, however, could not increase or decrease on any payment change date by more than 7.5 percent.

         Given the interest rates, the defendants' first monthly payment of $7736.90 on June 1, 2006, reduced the principal balance by a few thousand dollars. Every month thereafter, however, their payments of $7736.90 were insufficient to cover the interest, causing the principal balance to increase at a compounding rate.[3] To account for this negative amortization, the original note provided that the defendants' ‘‘unpaid principal can never exceed a maximum amount equal to110 [percent] of the principal amount [of $1, 920, 000] original[ly] borrowed.'' Once the defendants' principal balance reached the cap, which was $2, 112, 000, their monthly payments would increase to the amount necessary to pay the balance in full by the June 1, 2036 maturity date even if that required their payments to increase by more than 7.5 percent.

         In early 2008, Roger Essaghof, a highly experienced real estate investor who had negotiated numerous residential and commercial mortgages, began meeting with Washington Mutual on a regular basis about potentially modifying the terms of the original note. During those meetings, Washington Mutual represented that modifying the note to a fixed interest rate was in his best interest because interest rates were rising. The defendants executed a modification on June 24, 2008 (modification agreement), which provided that, as of May, 2008, the principal balance on the original note was $2, 043, 190.89. It also changed the loan from an adjustable interest rate to a fixed annual rate of 6.625 percent. The modification also required monthly payments of $11, 280.12, which were sufficient to cover the accrued interest but not any principal.

         Had the defendants' loan remained subject to the adjustable interest rates as required by the terms of the original note, their principal balance would have reached the $2, 112, 000 cap no later than August 1, 2009. Once that occurred, their monthly payments would have almost doubled from $7736.90 to $14, 061.60-the amount needed to pay the loan in full by the June 1, 2036 maturity ...


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