2022 Case Updates
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In its recent decision in AGW Sono Partners, LLC v. Downtown Soho, LLC, 343 Conn. 390 (2022), the Connecticut Supreme Court weighed in, for the first time, on the impact of COVID-19 public-safety orders on the enforceability of a restaurant lease. The defendant restaurant asserted that, because of certain of those orders, the legal doctrines of impossibility and frustration of purpose relieved it of its payment obligations. Relying in significant part on the language of the lease, the court concluded otherwise.
The defendant operated a fine-dining restaurant, called Blackstones Bistro, in Norwalk. The defendant’s lease called for it to use the leased premises “for the operation of a restaurant and bar selling food, beverages, and related accessories, together with uses incidental thereto, and for no other purpose….”
Following the issuance of pandemic-related operational and crowd-density orders, the restaurant closed completely between March 11 and May 27, 2020. Although takeout and delivery service were not forbidden either by the government orders or by the lease, the restaurant was unable to conduct such operations profitably, and brought in no income during that timeframe. The restaurant then obtained a permit for outdoor dining, and eventually for limited indoor dining, but operated at a loss. The restaurant made no rental payments after March of 2020, received an eviction notice, and vacated the premises by September 11, 2020.
In November of that year, the landlord re-let the property to another restaurant, called Sono Boil. The new lease had a ten-year term commencing in January of 2021, at rents lower than those that had been charged to the defendant. The landlord then sued the defendant restaurant, as well as its principal, who had signed a guaranty, for damages.
Following a brief courtside trial, the trial court entered judgment for the plaintiff. The court rejected the defendants’ defenses of impossibility and frustration of purpose. The court’s damages award included unpaid rent, use and occupancy through December of 2020, up to the point that the plaintiff’s lease with its replacement tenant took effect.
The trial court credited the plaintiff for mitigating its damages by lining up a new tenant so quickly, but noted an absence of evidence about the lease negotiations, or about the possibility that the landlord could have obtained a better deal. Accordingly, the court did not award damages based on the lower rents to be paid by the replacement tenant.
On appeal, the defendants argued that the trial court had erred in rejecting their special defense of impossibility. The Supreme Court disagreed, noting that the impossibility doctrine applies only in extremely rare cases. “[O]nly in the most exceptional circumstances have courts concluded that a duty is discharged because additional financial burdens make performance less practical than initially contemplated.” Here, “as the trial court found, even under the most restrictive executive orders, use of the premises for restaurant purposes was not rendered factually impossible insofar as restaurants were permitted to provide curbside or takeout service, and the lease agreement did not prohibit curbside or takeout service.” The government restrictions “raised the cost of performance for the defendants in a manner that rendered it perhaps highly burdensome, but not factually impossible.”
Furthermore, to sustain a defense of impossibility, “the event [on] which the obligor relies to excuse his performance cannot be an event that the parties foresaw at the time of the contract. …If an event is foreseeable, a party who makes an unqualified promise to perform necessarily assumes an obligation to perform, even if the occurrence of the event makes performance impracticable.”
Here, “the language of the lease agreement suggests that events of the magnitude of the COVID-19 pandemic were not entirely unforeseeable.” For one thing, the lease lacked a force majeure clause – a provision that, had it been included, typically would “relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.”
But more importantly, the lease’s section 4(d) “squarely tasks the defendants with the obligation of complying with all governmental ‘laws, orders and regulations ….” That section provided, in relevant part, that the defendants, at their “expense, shall comply with all laws, orders and regulations of [f]ederal, [s]tate and municipal authorities and with any direction of any public officer or officers, pursuant to [l]aw, which shall impose any violation, order or duty upon [l]andlord or [t]enant with respect to the use or occupancy thereof by [t]enant…” Accordingly, the trial court had acted properly in rejecting the defendants’ special defense of impossibility.
As for frustration of purpose, the court noted that, similarly to the impossibility doctrine, this defense applies only under rare circumstances. “[T]he establishment of the defense requires convincing proof of a changed situation so severe that it is not fairly regarded as being within the risks assumed under the contract. … The doctrine of frustration of purpose is given a narrow construction so as to preserve the certainty of contracts ….” As applied here:
“Given the narrowness of the frustration of purpose doctrine, we conclude that the purpose of the lease agreement was not frustrated by the pandemic restrictions imposed by the executive orders, even those that barred indoor dining entirely. The language of the lease agreement was not limited to a certain type of dining and … did not preclude the takeout and subsequent outdoor dining that the defendants sought to provide. Put differently, the lease terms did not by themselves render the lease agreement valueless in light of the executive orders.”
Accordingly, the Supreme Court held that the trial court had acted properly in rejecting this defense as well.
The plaintiff cross appealed, claiming that the trial court should have included, as an element of its damages award, “the full difference in value between the defendants’ lease agreement and the new lease that the plaintiff entered into with Sono Boil, the replacement tenant.” More particularly, the plaintiff argued that the court had “improperly charged it with the burden of presenting evidence relating to its negotiations with Sono Boil to show an inability to mitigate its damages by obtaining the same lease or better terms than it had with the defendants, because the defendants, as the breaching party, bear the burden of proof as to failure of mitigation…”
The Supreme Court agreed with the plaintiff that “when a tenant has breached a lease agreement, that tenant bears the burden of proving that the landlord failed to undertake commercially reasonable efforts to mitigate its damages.” Here, the trial court had observed that “no evidence of the negotiations with [Sono Boil] was presented in detail by the plaintiff. The court can only speculate if further negotiations with [Sono Boil] could have resulted in a lease with the same terms the defendants’ lease had.” From this language, it was apparent that “the trial court improperly cast the burden of proof onto the plaintiff.” The Supreme Court reversed this part of the judgment below, and remanded the case for a hearing in damages.
In Town of New Milford v. Standard Demolition Services, Inc., 212 Conn.App. 30 (2022) a construction case, the Appellate Court held that a contract’s liquidated damages clause, although enforceable, did not foreclose the plaintiff from also seeking actual damages for certain types of loss.
The plaintiff had acquired, through a tax lien foreclosure, a vacant brass factory contaminated with polychlorinated biphenyls (PCBs) and asbestos. The plaintiff issued a notice to bidders, inviting bids for demolition of the building. The bid form indicated that the winning bidder would be entitled to keep, for scrap value, any structural steel recovered from the building. The defendant tendered the winning bid.
After commencing work, the defendant claimed that the bidding materials had contained misleading information about the structural steel, which understated the likelihood that the steel was environmentally contaminated and therefore could not be salvaged profitably. The dispute led to the defendant’s demobilization from the site, and the plaintiff’s issuance of a notice of termination. The plaintiff hired a replacement demolition contractor, Costello Dismantling Company, Inc. (Costello), at a bid price about $250,000 more than the bid the plaintiff had previously accepted from the defendant.
In the ensuing litigation, the plaintiff claimed delay damages as well as “three categories of alleged nondelay damages: (1) the difference in the contract price between what the plaintiff agreed to pay the defendant and what it agreed to pay Costello allegedly for similar work; (2) additional costs associated with rebidding the job and the engineering support that went with it after the contract between the defendant and the plaintiff was terminated; and (3) additional costs to complete the job beyond Costello’s accepted bid.”
After a lengthy courtside trial, the trial court rendered judgment for the plaintiff, but ruled that its damages were limited by a liquidated damages provision in section 2.1.1 of the contract. That clause provided, “[f]ailure of the Contractor to meet [the] established timeframe will result in liquidated damages being assessed in the amount of $2,000/day for each and every calendar day beyond the contract time limit.”
On appeal, the plaintiff claimed that the court erred in holding that the liquated damages provision was the exclusive measure for calculating the damages. The Appellate Court agreed.
The court acknowledged the general principle that a party “may not retain a stipulated sum as liquidated damages and also recover actual damages.” But it is also true that “[a] contract will not be construed to limit remedial rights unless there is a clear intention that the enumerated remedies are exclusive.”
Here, the liquidated damages clause, section 2.1.1 of the contract, was immediately followed by section 2.1.2, which provided in relevant part, “[i]n the event the Contractor fails to perform the work in a timely manner due to the Contractor’s poor planning, financial status, errors in construction or any other reason directly attributed to the Contractor’s circumstances, the [plaintiff] may institute default proceedings against the Contractor to recover damages and losses.” (Emphasis added by the court.) The court found this language to be very significant.
“Notably, § 2.1.2 of article 2 does not reference ‘liquidated damages’; instead, it refers to ‘damages and losses.’ Because § 2.1.1 of article 2 of the contract specifically references ‘liquidated damages,’ the fact that § 2.1.2, instead, references ‘damages and losses’ is evidence of a contractual intent to allow for the recovery of nondelay damages and losses, in addition to the liquidated damages due to delays allowed in § 2.1.1. To construe the contract otherwise would render that provision in § 2.1.2 superfluous.”
The court found this contract language to be not inconsistent with the general principle that a party may not recover both liquidated damages and actual damages. “When, as here, a liquidated damages provision is limited in its application to damages resulting from delays and does not expressly provide that liquidated damages are the exclusive remedy, it does not prevent the recovery of actual damages for items to which the liquidated damages provision does not apply, i.e., nondelay damages.”
The Appellate Court reversed the judgment below, and remanded the case for a hearing in damages.
In Bernblum v. Grove Collaborative, LLC, 211 Conn.App. 742 (2022), the Appellate Court considered whether a person who conducted lease negotiations on behalf of a limited liability company that had not yet been formed would have standing, personally, to prosecute claims arising from the failure to consummate the lease.
The plaintiff, Steven Bernblum, who owned a commercial building at 770 Chapel Street in New Haven, conducted extensive negotiations with the defendant, a prospective tenant in the building. The parties exchanged multiple versions of a proposed lease, each of which identified the prospective landlord as 770 Chapel Street, LLC, an entity that Bernblum intended to create. Not until after the negotiations broke down did Bernblum form 770 Chapel Street, LLC, and quitclaim the property to it.
Shortly thereafter, Bernblum brought suit, alleging, among other things, breach of contract and breach of lease. The plaintiff also asserted a claim styled “detrimental reliance,” based on improvements he made to the property allegedly in reliance on the defendant’s promise to lease the space. After a courtside trial, the trial court entered judgment for the plaintiff.
On appeal, the defendant contended that the plaintiff lacked standing individually to prosecute these claims, and that accordingly they should have been dismissed. The Appellate Court agreed. “No contractual relationship between the plaintiff in his individual capacity and the defendants existed or was ever contemplated. The plaintiff was not a named party to the contract with respect to any of the underlying proposed lease agreements, and he was negotiating solely on behalf of his contemplated and soon to be formed limited liability company, 770 Chapel Street, LLC.”
The Appellate Court had previously ruled, in a 2007 case called BRJM, LLC v. Output Systems, Inc., that “contracts entered into by individuals acting on behalf of unformed entities are enforceable.” Here, 770 Chapel Street, LLC, was the real party in interest, and should have been named as the plaintiff. As to the counts at issue, the Appellate Court reversed the trial court, with instructions to enter a judgment of dismissal.
In Electrical Contractors, Inc. v. 50 Morgan Hospitality Group, 212 Conn.App. 724 (2022), the plaintiff, an electrical subcontractor on a commercial construction project, sued the defendant, the general contractor, for nonpayment. The subcontract provided that payment from the property owner to the general contractor was a condition precedent to the defendant’s obligation to pay the plaintiff. Given that contractual language, and undisputed evidence that the owner had not yet paid the general contractor, the trial court entered summary judgment for the defendant.
On appeal, the plaintiff sought to equate the contract language at issue with the “pay when paid” language often found in construction contracts, and argued that a clause of that type “merely postpones a general contractor’s obligation to pay its subcontractors for a reasonable period of time.” But the Appellate Court disagreed, finding the “condition precedent” language clear and unambiguous, and distinguishable from cases involving “pay when paid” clauses. The court affirmed the judgment below.
The Appellate Court’s recent decision in Tolland Meetinghouse Commons, LLC v. CXF Tolland, LLC, 211 Conn.App. 1 (2022), in which the guarantor of a commercial lease appealed a summary judgment rendered against him, illustrated the principle that “[p]arties ordinarily do not insert meaningless provisions in their agreements.”
The plaintiff’s predecessor in interest, as landlord, and the defendant CXF Tolland, LLC d/b/a Cardio Express, as tenant, entered into a lease in 2007. The defendant Peter Rusconi signed a guaranty agreement, which provided in relevant part that his obligations as guarantor “shall terminate at the expiration of the initial five (5) years of the initial Lease term.”
Nine years later, after a default by the tenant, the parties entered into a lease modification, which included the tenant’s agreement to pay a rent arrearage upon an agreed schedule. That agreement, also signed by Rusconi personally, provided at paragraph 5, “[t]he Guarantor hereby reaffirms his obligations in respect to the terms of the Guaranty dated May 10, 2007, which Guaranty shall remain in full force and effect.” When the tenant defaulted in its restructured obligations, the landlord brought suit against both the tenant and Rusconi.
Relying on the five-year sunset provision in the original Guaranty, Rusconi filed a special defense, claiming the guaranty agreement “previously expired on its own terms, and is therefore unenforceable.” The plaintiff countered that at the time of the restructure, “Rusconi reaffirmed his obligations in the second lease agreement as Cardio Express’ guarantor and agreed that the guaranty shall remain in full force and effect.”
Following argument of the parties’ cross-motions for summary judgment, the trial court entered judgment for the landlord. The court noted, “[t]he intention of the parties to a contract is to be determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction.” Here, the circumstances were undisputed: “The arrearages that accumulated prior to the execution of the second amendment began accumulating after the original guaranty expired. They do not constitute obligations that were ever within the scope of the original guaranty agreement.” In order for Rusconi’s reaffirmation of the Guaranty to have any meaning, “it must refer to obligations under the Cardio Express lease as to which Rusconi had no responsibility under the original guaranty agreement, but which are now made subject to the terms of that guaranty.”
The trial court thus concluded, the “only reasonable construction of paragraph 5 [of the second amendment to lease] that gives that provision any practical meaning is that Rusconi agreed to guarantee Cardio Express’ remaining obligations under the lease at the time the second amendment was executed.” Adopting the trial court’s memorandum of decision as its own, the Appellate Court affirmed.
In its recent decision in JPMorgan Chase Bank v. Virgulak, 341 Conn. 750 (2022), the Connecticut Supreme Court affirmed the decision of the Appellate Court in favor of the defendant, Theresa Virgulak, in a residential foreclosure action.
The defendant’s husband, Robert Virgulak, executed a $533,000 note to the plaintiff bank. Theresa did not co-sign the note, nor did she sign a guaranty of the obligation. She did execute a mortgage of residential property that she owned. The mortgage properly recited the date and amount of the loan, but erroneously identified Theresa as maker of the note. The mortgage did not reference Robert. Based on the discrepancy in the loan documents, Theresa denied liability and pled special defenses.
The plaintiff argued that it could foreclose the mortgage as written, or alternatively that the court should order reformation of the note and/or mortgage, and then a judgment of foreclosure. The trial court denied both forms of relief, and entered judgment for the defendant. The Appellate Court affirmed. Following a grant of certification to appeal, the Supreme Court affirmed the judgment below.
As for the bank’s attempt to reform the loan documents to conform to the alleged intent of the parties, this claim was undermined by “gaps in the factual record.”
Principal among those gaps is that the mortgage deed identifies a ‘[n]ote’ but does not explicitly identify the note signed by Robert. In other words, the plaintiff failed to produce clear and convincing evidence of the particular debt obligation that was being secured by the mortgage deed executed by the defendant. Indeed, in its posttrial brief, the plaintiff conceded that the parties never intended the mortgage deed to secure a note signed by the defendant. There was no evidence produced or elicited by the plaintiff that required the trial court to find that the defendant intended the mortgage as security for Robert’s loan.
The court recognized that “the fact the mortgage deed and note have matching dates and refer to matching amounts could have allowed the trial court to infer that the transactions are related.” But the court was not required to draw that inference. The Supreme Court noted “the absence of any direct evidence that either party did intend the mortgage deed to secure a note executed by Robert,” including “any testimony regarding whether JPMorgan Chase itself intended the defendant’s signature on the mortgage deed to secure the note signed by Robert.” The Supreme Court “[could not] conclude that the absence of a finding by the trial court that the parties intended the mortgage deed signed by the defendant to secure Robert’s note was clearly erroneous.”
The court also rejected the bank’s alternative claim that the mortgage could be foreclosed even without a reformation of the loan documents. The court adopted the Appellate Court’s reasoning that “the mortgage [deed], as executed, was a nullity because it secured a nonexistent debt.”
In Wells Fargo Bank, N.A. v. Lorson, 341 Conn. 430 (2022), the Connecticut Supreme Court held that, in an action to foreclose a residential mortgage that is insured by the Federal Housing Administration (FHA), the lender’s compliance with applicable Housing and Urban Development (HUD) regulations is a condition precedent to foreclosure, which the lender has the burden of pleading and proving.
In Lorson, the loan was insured by the FHA, and the note stated on its face, “[t]his [n]ote does not authorize acceleration when not permitted by HUD regulations.” Among the HUD regulations concerning troubled loans are ones that prescribe “conditions of special forbearance,” mortgage modifications, and “a requirement that [c]ollection techniques must be adapted to individual differences in mortgagors and take account of the circumstances peculiar to each mortgage.”
The trial court entered judgment of strict foreclosure. On appeal to the Appellate Court, the defendants asserted that compliance with HUD regulations is a condition precedent to acceleration and foreclosure, and that the plaintiff failed to establish this at trial. The Appellate Court rejected this argument and affirmed the judgment of foreclosure, holding that the defendants had the burden of pleading and proving the lender’s noncompliance with the applicable regulations, as a special defense.
But the Supreme Court reversed, finding that compliance with applicable HUD regulations is a condition precedent to suit, which the plaintiff must affirmatively plead in its complaint. If the defendants deny this allegation, they have “the burden of pleading that the plaintiff has not complied with specific regulations that are applicable. In that event, the burden would then shift back to the plaintiff to prove compliance with the specific regulations alleged by the defendants.” The court remanded the case to the trial court for a new trial limited to the compliance issue.
In Toro Credit Company v. Zeytoonjian, 341 Conn. 316 (2022), the Connecticut Supreme Court affirmed a judgment of foreclosure by sale, as to two parcels encumbered by a blanket mortgage, despite the borrowers’ protest that strict foreclosure as to one of the parcels would have fully satisfied the debt.
The obligation was a commercial note secured by a mortgage on two undeveloped parcels, denominated parcels A and B, in Enfield. The mortgage deed contained a remedies provision, which authorized the plaintiff, following default by the defendants, to exercise state foreclosure procedures, specifically including “the full authority to sell the [p]remises at public auction…”
The loan went into default. The trial court found the debt to be $902,447.12, and ordered foreclosure by sale, with both parcels to be sold, either bundled together or sequentially, at the defendants’ choice. Both sides’ appraisers valued parcel A at $950,000, and the appraisers for the plaintiff and defendants found values of $850,000 and $840,000, respectively, for parcel B.
In ordering foreclosure by sale, the trial court found that “the plaintiff ‘successfully bargained for the right to select [that] remedy.’” Accordingly, the court “rejected the defendants’ request that it order a strict foreclosure as to only parcel A because that would ‘[rob] the plaintiff of a measure of the security which it was granted,’ namely, a mortgage on both properties.” The court “was concerned that strict foreclosure of parcel A would ‘leave the risk of a shortfall entirely’ on the plaintiff after taking title to the property and then selling it.”
The defendants appealed, claiming strict foreclosure of parcel A would have satisfied the debt, foreclosure by sale exposes them to a deficiency judgment if parcel A sells for less than the appraised value, and the court should not have considered the remedies provision in the mortgage. Applying the “abuse of discretion” standard of review, the Supreme Court affirmed.
The court observed, “[t]he plaintiff specifically bargained for, and the defendants agreed to, a blanket mortgage on both parcels and for the remedy of foreclosure by sale. … As a result, although strict foreclosure might technically satisfy the debt if the plaintiff took title to parcel A, it would leave the plaintiff in the position it specifically had bargained not to be in: holding title to real estate.” Furthermore, if the trial court ordered strict foreclosure of only parcel A, “and if the plaintiff is later unsuccessful at selling parcel A at its appraised value, the plaintiff will lose the ability to foreclose as to parcel B.”
The trial court acted properly when it factored the mortgage deed’s “remedies” provision into its decision without deeming that provision binding on the court. “The trial court reasonably considered that it would be inequitable to place the parties in a position they did not contemplate when entering into this agreement.”
The Appellate Court’s recent decision in Stratford v. 500 North Avenue, LLC, 210 Conn.App. 718 (2022), a tax lien foreclosure case, illustrates an important limitation on the doctrine of collateral estoppel.
Shortly before the plaintiff commenced its action against the first named defendant (defendant) and others, the defendant lost title to the subject property, through a separate action to foreclose a mechanic’s lien. The plaintiff in the tax lien foreclosure obtained a judgment of foreclosure by sale, from which the defendant appealed. The plaintiff moved to dismiss the appeal, arguing that because the defendant no longer owned the property, it was not aggrieved by the judgment, and therefore lacked standing to prosecute the appeal.
The defendant countered that it was indeed aggrieved by the judgment of foreclosure, because of the possible collateral consequences that could flow from the judgment. The defendant noted that, pursuant to C.G.S. § 12-161, unpaid and unsatisfied property taxes are in personam obligations of the taxpayer. Accordingly, the defendant argued that the foreclosure judgment “establishes its underlying tax obligations to the plaintiff and could be used by the plaintiff to establish the defendant’s liability in a future, independent action by the plaintiff to collect unpaid taxes not satisfied by a judgment in this case.”
The Appellate Court was not persuaded. The court held, “[b]ecause the defendant was divested of its ownership interest in the property at the time the judgment of foreclosure by sale was rendered, it did not have a specific personal and legal interest in the transfer of title to the property through the foreclosure sale.” (The court noted that, as established in the Connecticut Supreme Court’s decision in Winchester v. Northwest Associates, 255 Conn. 379 (2001), a plaintiff in a tax lien foreclosure cannot seek a deficiency judgment pursuant to C.G.S. § 49-14.)
The defendant’s professed concerns about collateral estoppel were unfounded, and could not provide the grounds for aggrievement. The court noted that in prior caselaw, the Connecticut Supreme Court has “adopted the view expressed in § 28 (1) of the Restatement (Second) of Judgments that, ‘[a]lthough an issue is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, relitigation of the issue in a subsequent action between the parties is not precluded [when the] party against whom preclusion is sought could not, as a matter of law, have obtained review of the judgment in the initial action ….’”
Thus, to establish aggrievement, the court will not, in effect, “work backwards” from the possible collateral estoppel effect of a judgment. The court will address aggrievement on that doctrine’s own merits, which in turn will determine the applicability of collateral estoppel.
In Roach v. Transwaste, Inc., 210 Conn.App. 686 (2022), the plaintiff prevailed in an action for wrongful termination pursuant to C.G.S. § 31-51q, which entitled him to an award of reasonable attorneys’ fees. Under the retention agreement between the plaintiff and his counsel, the law firm was entitled to either one third of the plaintiff’s total recovery, or an award based on the firm’s time records billed at its hourly rates, “whichever is the greater of the two.” The plaintiff sought an award of fees based on the hourly “lodestar” calculation, but the court instead made a lower award equal to one third of the plaintiff’s recovery. On appeal, the plaintiff argued that this was an abuse of discretion.
The Appellate Court agreed, holding that the trial court “failed to apply the provision of the fee agreement under which the plaintiff sought an award of attorney’s fees and failed to consider that such an award may be greater than one based solely on the jury’s award of damages.” The court reversed this element of the judgment below, and remanded the case for a hearing on the plaintiff’s motion for an award of attorneys’ fees, applying the lodestar method.