Laches Defense Cannot Be Raised at Deficiency Judgment Hearing in Connecticut

By:  Adam Swanson

The Connecticut Appellate Court recently held that the limited purpose of a deficiency judgment hearing in a mortgage foreclosure action precludes re-litigating the underlying debt.  TD Bank, N.A. v. Doran, No. 37001, 2016 WL 116449 (Conn. App. Ct. Jan. 19, 2016).  Thus, borrowers were precluded from raising the defense of laches to prevent entry of a deficiency judgment.  In TD Bank, the foreclosing plaintiff obtained judgment of strict foreclosure fifteen months after commencing its action, even though the lawsuit was uncontested.  Title to the property vested with plaintiff on October 8, 2013.  Two years after commencement and eight months after title vested, plaintiff proceeded to a hearing on its motion for deficiency judgment.  Evidence showed a $150,000 decline in the value of the collateral in the sixteen-month period between commencement and the vesting of title with plaintiff.  At the hearing for deficiency judgment, borrowers argued that no deficiency judgment should enter because plaintiff was guilty of laches, a defense borrowers had raised in pleadings, but not litigated in the liability phase.  Borrowers argued that they were prejudiced by a $150,000 decline in property value and that had plaintiff not delayed, likely no deficiency judgment would have entered.  The Connecticut Appellate Court rejected borrowers’ argument, and held that the limited purpose of the deficiency judgment hearing is to fix the value of the property as of the date title vests with the foreclosing plaintiff to determine the deficiency.  Further, the Appellate Court explained that “defenses, such as laches, that ‘could have been raised during the foreclosure proceedings may not be raised in the deficiency hearing.’”  TD Bank, N.A. v. Doran, No. 37001, 2016 WL 116449, at *4 (Conn. App. Ct. Jan. 19, 2016).  Thus, it was proper to enter a $167,022.23 deficiency judgment, including accrued interest and up to $150,000 for the reduction in value of the collateral over the sixteen-month period.

This decision recognizes significant protections for servicers conducting business in Connecticut.  However, the Appellate Court did not preclude laches from tolling interest for unreasonable delays in foreclosure proceedings altogether and limited that defense to being raised at the time a foreclosure judgment enters.  Accordingly, servicers should remain vigilant to prevent unreasonable delays in Connecticut foreclosure proceedings.

Mortgage Lenders’ and Servicers’ Catch 22 in Connecticut

By: Jonathan M. Robbin and Adam M. Swanson

Ambiguities in Connecticut Public Act 2013-156, and the courts construing them, have created a Catch-22 for lenders and servicers. Connecticut Public Act 2013-156 and recent Court decisions allow condo associations to pursue serial foreclosures stripping more of the scant equity securing a first mortgage and shifting all of the associations’ losses. As a result, lenders and servicers are left with a difficult decision: Continue to pay associations and their fees and lose more equity in properties – many of which are underwater – or take title and risk affirmative claims by borrowers and/or regulatory scrutiny.

The attached article examines the Connecticut Act and the effect it has recently had on lenders and servicers.

Second Circuit Holds that Liens Incident to Property Ownership are not “Debt” Under the FDCPA

By: Shane Biffar

A recent Second Circuit Court of Appeals decision ruled that mandatory water and sewer charges are not subject to the Fair Debt Collection Practices Act (“FDCPA”). In Boyd v. J.E. Robert Co., Inc., 2014 U.S. App. LEXIS 16620 (2d Cir. Aug. 27, 2014), the Second Circuit affirmed a New York district court’s holding that liens for mandatory water and sewer charges, which are imposed as an incident to property ownership, do not involve a “debt” as that term is defined in the FDCPA and therefore are not subject to the statute.

In Boyd, the defendants purchased water and sewer lien certificates from the City of New York before commencing foreclosure actions on the plaintiffs’ properties. The putative class action plaintiffs were property owners who alleged that the defendants violated the FDCPA by obtaining unauthorized attorneys’ fees and costs in connection with the foreclosure actions. The district court granted summary judgment for defendants and dismissed the FDCPA claims on the basis that, inter alia, the liens did not involve a “debt” as defined by the FDCPA.

On appeal, the plaintiffs argued that the district court erred in dismissing their FDCPA claims. The Second Circuit rejected plaintiffs’ argument and denied FDCPA recovery, noting that any violation of the FDCPA must occur in connection with the collection of a “debt,” which is defined as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which [] the subject of the transaction [is] primarily for personal, family, or household purposes . . . .” (emphasis added).

In its analysis, the Second Circuit cited its prior decision in Beggs v. Rossi, 145 F.3d 511 (2d Cir. 1998), which held that “municipal taxes levied automatically in connection with ownership of personal property do not involve a ‘transaction’ as that term is understood under the FDCPA and, accordingly, are not “debt” for purposes of the FDCPA.” Applying this reasoning, the Court similarly concluded that water and sewer charges, like property taxes, “are levied, in some amount, as an incident to property ownership in New York” and therefore “do not involve ‘debt’ under the FDCPA.”

Further, the Second Circuit distinguished the Third Circuit’s holding in Piper v. Portnoff Law Assoc., Ltd., 396 F.3d 227 (3d Cir. 2005), which held that certain water and municipal charges are subject to the FDCPA. Specifically, the Second Circuit highlighted that the water and sewer services in Piper were first requested by the property owner before they could be charged by the City. Accordingly, the payment obligation in Piper arguably arose out of the “transaction” of requesting water services and therefore constituted “debt” within the meaning of the FDCPA.