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FEDERAL NATIONAL MORTGAGE ASSOCIATION v.
BRIDGEPORT PORTFOLIO, LLC, ET AL.
(AC 35466)
Gruendel, Alvord and Norcott, Js.
Argued March 17—officially released June 3, 2014
(Appeal from Superior Court, judicial district of
Fairfield, Hartmere, J. [motion for summary judgment];
Tyma, J. [strict foreclosure judgment].)
Richard P. Weinstein, for the appellants (named
defendant et al.).
Peter A. Ventre, for the appellee (plaintiff).
Opinion
ALVORD, J. The defendants, Bridgeport Portfolio,
LLC, and Wilfredo Santos, appeal from the judgment
of strict foreclosure rendered by the trial court in favor
of the plaintiff, Federal National Mortgage Association.1
On appeal, the defendants claim that the trial court
erred by including both default interest and a pre-
payment premium in its calculation of the mortgage
debt. We disagree and affirm the judgment of the
trial court.
The court’s memorandum of decision and the record
reveal the following facts and procedural history. On
May 27, 2009, Bridgeport Portfolio, LLC, executed a
multifamily, open-end mortgage in favor of Arbor Com-
mercial Funding, LLC, on four commercial properties
in Bridgeport to secure the payment of a promissory
note in the amount of $7,780,000. Santos allegedly exe-
cuted a guaranty as further security for this commercial
transaction.2 Arbor Commercial Funding, LLC, assigned
the subject note, mortgage and related loan documents
to the plaintiff by assignment dated May 27, 2009. The
plaintiff commenced the present foreclosure action
when payments due on May 1, 2010, and thereafter were
not made as required by the terms of the loan doc-
uments.
The plaintiff’s revised amended two count complaint
was filed on January 6, 2011. Count one of the complaint
sought a judgment of foreclosure; count two of the
complaint sought a money judgment against both defen-
dants for the amounts due under the promissory note
and the guaranty of the promissory note On March 2,
2011, the defendants filed an answer with one special
defense that alleged: ‘‘Any claim of prepayment pre-
mium is precluded or void as against public policy; as
a forfeiture and/or penalty which is repugnant to the
law; and is not a voluntary payment being made by the
defendant herein, and is otherwise unenforceable in
that it is not readily computed under the document.’’
On August 18, 2011, the plaintiff filed a motion for
summary judgment as to liability with respect to both
counts of the complaint. In the memorandum of law
in support of its motion, the plaintiff argued that the
defendants’ special defense was insufficient to defeat
the motion because the special defense did not address
the issue of liability. As stated by the plaintiff: ‘‘The
defendants’ sole special defense challenges the imposi-
tion of a prepayment premium—provided for by the
loan documents—as well as the manner in which the
prepayment premium is calculated. Thus, it goes exclu-
sively to the issue of the plaintiff’s damages. By contrast,
the instant motion seeks summary judgment as to liabil-
ity only. Accordingly, any dispute over the amount of
the debt is beyond the scope of the judgment sought,
and it does not raise a genuine issue of material fact
sufficient to defeat summary judgment as to liability.’’
In the defendants’ response to the plaintiff’s motion
for summary judgment, they argued that the plaintiff
was not entitled to summary judgment with respect to
the second count of the complaint. With respect to the
first count, however, the defendants represented that
they did not contest the granting of the plaintiff’s
motion. The defendants agreed that their special
defense went to the determination of the amount of the
debt only, and not to the issue of their liability under
the loan documents. The defendants qualified their
statement by noting that they meant to ‘‘defer and
reserve the opportunity to challenge any claim for pre-
payment premium, default interest, or other charges
that the plaintiff may ultimately seek until such time
as the plaintiff asks the court to determine an amount
to be included in any judgment of foreclosure or judg-
ment of liability.’’
On March 8, 2012, the court, Hartmere, J., issued its
order, which granted by agreement the plaintiff’s
motion for summary judgment as to liability only with
respect to count one. The court denied the plaintiff’s
motion with respect to count two, concluding that the
papers submitted demonstrated the existence of genu-
ine issues of material fact. By motion dated May 24,
2012, the plaintiff requested that the court bifurcate
count one and count two of the complaint so that each
count could be separately resolved. Although the defen-
dants objected to bifurcation, Judge Hartmere granted
the plaintiff’s motion on June 20, 2012. The plaintiff
then filed a motion for a judgment of strict foreclosure
on September 7, 2012.
On November 15, 2012, the plaintiff filed an affidavit
of debt, which added, inter alia, default interest and
a prepayment premium to the outstanding principal
balance. The defendants filed an objection to the affida-
vit of debt on November 29, 2012, claiming that the
inclusion of a prepayment premium and default interest
in the judgment would ‘‘penalize the defendant bor-
rower for the same contractual breach, in violation of
public policy.’’ The defendants argued that the plaintiff
was ‘‘attempting to collect two amounts as liquidated
damages for the same purported injury to the plaintiff’’
and that it was ‘‘seeking an amount that is dispropor-
tionate to any anticipated loss.’’ The court scheduled a
hearing to provide the defendants with an opportunity
to contest the calculation of damages and to offer con-
trary evidence.
On December 19, 2012, a hearing was held on the
motion for strict foreclosure and the objection to the
affidavit of debt. At that time, Paul Taylor, a senior risk
manager employed by Arbor Commercial Funding, LLC,
testified that his employer originated multifamily mort-
gages, closed the loans and then sold them to the plain-
tiff. Arbor Commercial Funding, LLC, retained the
servicing rights for the term of the loan. Taylor testified
that the subject loan was in default and that the acceler-
ation date was July 29, 2010. Taylor, in explaining the
amounts set forth in the affidavit of debt, testified that
the default interest rate, found at paragraph 8 of the
note, compensated the plaintiff for the additional cost
incurred in servicing a loan that has defaulted and for
the higher degree of risk of collection.3 He then
explained how the default interest was calculated for
the subject loan.
Taylor also testified that the prepayment premium,
referenced in paragraph 10 of the note, applied to both
voluntary and involuntary prepayment.4 He testified
that the purpose of such a premium was to ensure that
the lender was made whole in the event a borrower
prepaid the note, so that the lender would get the same
return as it would have had if the note had been paid as
contractually agreed. Taylor stated: ‘‘[T]he prepayment
premium represents loss of future earnings and the
default rate compensates the lender for the loss of cur-
rent earnings.’’ He then explained how the prepayment
premium for this loan was calculated. Taylor was the
only witness to testify at the December 19, 2012 hearing.
After Taylor’s testimony, counsel for the parties stated
that they would rely on the arguments contained in
their briefs, which already had been filed with the court.
On February 20, 2013, the court issued its memoran-
dum of decision. The court quoted provisions in the
promissory note that provided for the collection of
default interest and a prepayment premium upon the
acceleration of a loan in default. The court determined
that the defendants had agreed to these provisions and
that there were no legal or equitable reasons for pre-
cluding the inclusion of such amounts in the calculation
of the debt. The court found: ‘‘This was a sophisticated
commercial transaction between two limited liability
companies. It appears from the documents that the
parties were represented by counsel, as one would
expect in a complex transaction involving a multi-mil-
lion dollar commercial loan.’’ The court determined that
‘‘the default rate and prepayment premium provisions
of the note are valid and enforceable against the defen-
dants.’’ The court concluded by finding that the plaintiff
had proved the debt as set forth in the affidavit of
debt and rendered a judgment of strict foreclosure. This
appeal followed.
The first issue that we must address is the plaintiff’s
claim that Santos’ appeal should be dismissed because
he is not aggrieved by the judgment of strict foreclosure.
The plaintiff argues: ‘‘Santos is not a proper party to
the appeal as judgment directly against him as a guaran-
tor has not been entered, specifically as to the bifur-
cated second count. . . . [T]here is no basis for an
appeal by . . . Santos, and no judgment has entered
against him individually on count two; hence, he is
not aggrieved.’’
‘‘[A] party must have standing to assert a claim in
order for the court to have subject matter jurisdiction
over the claim. . . . Standing is the legal right to set
judicial machinery in motion. One cannot rightfully
invoke the jurisdiction of the court unless he has, in
an individual or representative capacity, some real
interest in the cause of action, or a legal or equitable
right, title or interest in the subject matter of the contro-
versy.’’ (Internal quotation marks omitted.) Emerick v.
Glastonbury, 145 Conn. App. 122, 127, 74 A.3d 512
(2013), cert. denied, 311 Conn. 901, 83 A.3d 348 (2014).
The deficiency judgment procedure, set forth in Gen-
eral Statutes § 49-14, presumes the amount of the debt
as established by the foreclosure judgment. See First
Bank v. Simpson, 199 Conn. 368, 373, 507 A.2d 997
(1986). The plaintiff’s position throughout these pro-
ceedings is that Santos, as guarantor, will be conclu-
sively bound by the trial court’s determination of the
mortgage debt. Clearly Santos has a ‘‘real interest’’ in
the judgment of strict foreclosure because the court
determined that both default interest and the pre-
payment premium were to be included as part of the
outstanding debt. Santos claims that those amounts are
penalties and that it is against public policy to award
them for breach of contract damages. If Santos is found
liable as a guarantor under the terms of the loan docu-
ments, the deficiency assessed against him will include
those disputed amounts.
Moreover, the court’s memorandum of decision
expressly stated that the challenged provisions in the
note were ‘‘valid and enforceable against the defen-
dants.’’ Significantly, the plaintiff, in its memorandum
of law in support of its motion to bifurcate counts one
and two of the complaint for separate proceedings,
represented: ‘‘Bridgeport Portfolio, LLC, and Wilfredo
Santos are the defendants in both counts of the com-
plaint. . . . The defendants have conceded that they
are in default, and that they are liable on count one.
Fairness dictates that [the plaintiff] is allowed to prove
its damages and move expeditiously to full judgment
on that count.’’ Accordingly, we find the argument that
Santos has no ‘‘real interest’’ in the judgment of strict
foreclosure to be without merit.
We now address the defendants’ claim on appeal that
the court improperly included both default interest and
a prepayment premium in its calculation of the mort-
gage debt.5 They argue that ‘‘the combined assessment
of such levies . . . is invalid as contrary to well-estab-
lished Connecticut public policy governing the assess-
ment of damages for breach of contract.’’ Although they
concede that a provision in a mortgage loan contract
for default interest ‘‘is proper under appropriate circum-
stances’’6 and that a provision for a prepayment pre-
mium in such a contract ‘‘is proper under appropriate
circumstances,’’7 they claim that the ‘‘combination of
these two levies’’ is ‘‘objectionable’’ because it
‘‘impose[s] a penalty upon the defendants and grant[s]
a concomitant windfall to the plaintiff.’’8
The defendants cite no relevant case law that sup-
ports this argument. As found by the trial court, the
defendants, as sophisticated parties, agreed to the terms
in the promissory note and related loan documents. ‘‘A
promissory note is a written contract for the payment
of money, and, as such, contract law applies.’’ Antonino
v. Johnson, 113 Conn. App. 72, 75, 966 A.2d 261 (2009).
‘‘The standard of review for the issue of contract inter-
pretation is well established. When, as here, there is
definitive contract language, the determination of what
the parties intended by their contractual commitments
is a question of law. . . . Accordingly, our review is
plenary. . . . The reviewing court must decide
whether [the trial court’s] conclusions are legally and
logically correct and find support in the facts that
appear in the record.’’ (Citation omitted; internal quota-
tion marks omitted.) Genua v. Logan, 118 Conn. App.
270, 273–74, 982 A.2d 1125 (2009).
In the present case, the defendants do not claim that
the default interest and prepayment premium provi-
sions are unclear or that the calculation of the amounts
made pursuant to those provisions was erroneous.
Instead, the defendants claim that the court should not
have enforced both provisions because the combination
resulted in a penalty rather than reasonable liquidated
damages. ‘‘We long have held that contracting parties
may decide on a specified monetary remedy for the
failure to perform a contractual obligation.’’ Bellemare
v. Wachovia Mortgage Corp., 284 Conn. 193, 203, 931
A.2d 916 (2007). A provision in a contract calling for
the imposition of a penalty for the breach of the contract
is contrary to public policy and invalid, but a liquidated
damages provision that fixes the amount of damages
to be paid in the event of a breach is enforceable if it
satisfies certain conditions. Id.
‘‘A contractual provision for a penalty is one the prime
purpose of which is to prevent a breach of the contract
by holding over the head of a contracting party the
threat of punishment for a breach. . . . A provision for
liquidated damages, on the other hand, is one the real
purpose of which is to fix fair compensation to the
injured party for a breach of the contract. In determin-
ing whether any particular provision is for liquidated
damages or for a penalty, the courts are not controlled
by the fact that the phrase liquidated damages or the
word penalty is used. Rather, that which is determina-
tive of the question is the intention of the parties to the
contract. Accordingly, such a provision is ordinarily to
be construed as one for liquidated damages if three
conditions are satisfied: (1) The damage which was to
be expected as a result of a breach of the contract was
uncertain in amount or difficult to prove; (2) there was
an intent on the part of the parties to liquidate damages
in advance; and (3) the amount stipulated was reason-
able in the sense that it was not greatly disproportionate
to the amount of the damage which, as the parties
looked forward, seemed to be the presumable loss
which would be sustained by the contractee in the event
of a breach of the contract.’’ (Internal quotation marks
omitted.) American Car Rental, Inc. v. Commissioner
of Consumer Protection, 273 Conn. 296, 306–307, 869
A.2d 1198 (2005).
The defendants have not claimed that the damage to
be expected as a result of a default could easily be
determined, or that the parties had not intended to
liquidate damages in advance. Instead, they claim that
the court awarded ‘‘inconsistent and . . . excessive
damages.’’ They also claim that the award violates ‘‘[t]he
prohibition against double recovery.’’
‘‘A breaching party seeking to nullify a contract clause
that fixes an amount as damages for the breach bears
the burden of proving that the agreed upon amount so
far exceeds any actual damages as to be in the nature
of a penalty.’’ American Car Rental, Inc. v. Commis-
sioner of Consumer Protection, supra, 273 Conn. 314.
Under the circumstances of this case, the liquidated
damages provisions were entitled to the presumption
of validity as bargained for terms in the contract. That
presumption was rebuttable. The defendants, however,
failed in their attempt to challenge those provisions
because they failed to present any evidence that the
default interest and prepayment premium damages
were greatly disproportionate to the actual losses sus-
tained by the plaintiff as the result of the defendants’
default. See id., 313–14.
Contrary to the defendants’ assertions, there was no
evidence presented that the award of default interest
and a prepayment premium resulted in a double recov-
ery or a windfall to the plaintiff. As the provisions in the
note expressly provided, and the testimony of Taylor at
the hearing confirmed, the damages contemplated by
each provision reflected different economic realities
and were not duplicative. Further, the provisions were
but one part of a complex commercial transaction
between financially experienced and sophisticated par-
ties. Moreover, the defendants did not claim fraud,
duress, or other unconscionable acts by the plaintiff,
nor did they claim that they misunderstood the liqui-
dated damages provisions. Finally, there was no claim
or evidence that the provisions were at odds with com-
mon practice in the commercial lending industry or that
the default rate was outside of commercially accept-
able rates.
We see no reason to relieve the defendants from
compliance with the terms of a contract that was
entered into freely, particularly when the terms were
clear and unambiguous.9 The prepayment premium pro-
vision expressly provided that the other terms of the
loan were more favorable to the defendants because
they had agreed to the inclusion of the prepayment
premium provision. The certainty of the remedies pro-
vided by the default interest provision and the pre-
payment premium provision affected the pricing of the
loan. If we deem those provisions unenforceable, we
would be providing the defendants with a better con-
tract than they were able to negotiate for themselves.
We decline to remake the contract between the parties.
For the foregoing reasons, we conclude that the trial
court did not improperly include both default interest
and a prepayment premium in its calculation of the
mortgage debt. We do not find that it is against the
public policy of the state to enforce both provisions of
the promissory note when the sophisticated parties,
represented by counsel, entered into this loan contract
with knowledge of its terms.10
The judgment is affirmed.
In this opinion the other judges concurred.
1
A subsequent encumbrancer, Mac-Gray Services, Inc., also was named
as a defendant in this action, but it is not a party to this appeal. We therefore
refer in this opinion to Bridgeport Portfolio, LLC, and Wilfredo Santos as
the defendants.
The appeal in this case was originally filed with the caption Fannie Mae
v. Bridgeport Portfolio, LLC. The caption has been changed to reflect that
Federal National Mortgage Association is the proper name of the plaintiff.
We note that the microfiche version of the Appellate Court Record and
Briefs in this case will be found under the original caption.
2
The claim against Santos as guarantor is set forth in count two of the
plaintiff’s operative complaint and has not yet been adjudicated.
3
Paragraph 8 of the promissory note provides in relevant part: ‘‘So long
as any monthly installment or any other payment due under this Note remains
past due for 30 days or more, interest under this Note shall accrue on the
unpaid principal balance from the earlier of the due date of the first unpaid
monthly installment or other payment due, as applicable, at the Default
Rate. . . . Borrower also acknowledges that its failure to make timely pay-
ments will cause Lender to incur additional expenses in servicing and pro-
cessing the Loan, that, during the time that any monthly installment or
payment under this Note is delinquent for more than 30 days, Lender will
incur additional costs and expenses arising from its loss of the use of the
money due and from the adverse impact on Lender’s ability to meet its
other obligations and to take advantage of other investment opportunities,
and that it is extremely difficult and impractical to determine those additional
costs and expenses. Borrower also acknowledges that, during the time that
any monthly installment or other payment due under this Note is delinquent
for more than 30 days, Lender’s risk of nonpayment of this Note will be
materially increased and Lender is entitled to be compensated for such
increased risk. Borrower agrees that the increase in the rate of interest
payable under this Note to the Default Rate represents a fair and reasonable
estimate, taking into account all circumstances existing on the date of this
Note, of the additional costs and expenses Lender will incur by reason of
the Borrower’s delinquent payment and the additional compensation Lender
is entitled to receive for the increased risks of nonpayment associated with
a delinquent loan.’’
The term ‘‘Default Rate’’ is defined in paragraph 1 of the note to mean:
‘‘A rate equal to the lesser of 4 percentage points above the Interest Rate
or the maximum interest rate which may be collected from Borrower under
applicable law.’’
4
Paragraph 10 of the promissory note is titled: ‘‘Voluntary and Involuntary
Prepayments.’’ Paragraph 10 (e) provides: ‘‘Borrower recognizes that any
prepayment of the unpaid principal balance of this Note, whether voluntary
or involuntary or resulting from a default by Borrower, will result in Lender’s
incurring loss, including reinvestment loss, additional expense and frustra-
tion or impairment of Lender’s ability to meet its commitments to third
parties. Borrower agrees to pay to Lender upon demand damages for the
detriment caused by any prepayment, and agrees that it is extremely difficult
and impractical to ascertain the extent of such damages. Borrower therefore
acknowledges and agrees that the formula for calculating prepayment premi-
ums set forth on Schedule A represents a reasonable estimate of the damages
Lender will incur because of a prepayment.’’
Paragraph 10 (f) provides: ‘‘Borrower further acknowledges that the pre-
payment premium provisions of this Note are a material part of the consider-
ation for the loan evidenced by this Note, and acknowledges that the terms
of this Note are in other respects more favorable to Borrower as a result
of the Borrower’s voluntary agreement to the prepayment premium pro-
visions.’’
5
The plaintiff claims that the defendants waived their right to raise this
issue because it was determined at the time the court ruled on the motion
for summary judgment as to liability only, and the defendants did not appeal
from that ruling. Because damages were not determined until the rendering
of the judgment of strict foreclosure, the defendants could not have appealed
from the ruling on a motion for summary judgment as to liability only. See
Essex Savings Bank v. Frimberger, 26 Conn. App. 80, 80–81, 597 A.2d 1289
(1991). Furthermore, given the plaintiff’s representations to the court in its
memorandum of law in support of that motion, as quoted earlier in this
opinion, the plaintiff’s argument as to waiver warrants no further discussion.
6
‘‘[W]e [have] recognized the lawfulness of a default interest rate as a
way to compensate lenders for a borrower’s delinquency.’’ Cadle Co. v.
D’Addario, 131 Conn. App. 223, 249, 26 A.3d 682 (2011).
7
There is no appellate case law that directly addresses the issue of the
validity of a prepayment premium. We, however, find persuasive the reason-
ing of the court, Hon. Robert Satter, judge trial referee, in the Superior
Court decision of Eastern Savings Bank, FSB v. Munson, 50 Conn. Supp.
374, 382, 932 A.2d 1079 (2007). Judge Satter, after reviewing relevant case
law in several other jurisdictions, concluded that a prepayment premium
provision is enforceable in a foreclosure proceeding.
8
Paragraph 6 of the promissory note provides for the collection of both
amounts if the borrower is in default and the lender exercises its option to
accelerate the loan indebtedness: ‘‘If an Event of Default has occurred and
is continuing, the entire unpaid principal balance, any accrued interest, the
prepayment premium payable under Paragraph 10, if any, and all other
amounts payable under this Note and any other Loan Document shall at
once become due and payable, at the option of Lender, without any prior
notice to Borrower. Lender may exercise this option to accelerate regardless
of any prior forbearance.’’
9
‘‘We decline to abandon the basic principle of contract law that we
construe contract language by reference to the words chosen by the parties.
Especially in the context of commercial contracts, we assume that definite
contract language is the best indication of the result anticipated by the
parties in their contractual arrangements.’’ Tallmadge Bros., Inc. v. Iroquois
Gas Transmission System, L.P., 252 Conn. 479, 500, 746 A.2d 1277 (2000).
10
‘‘The principle that agreements contrary to public policy are void should
be applied with caution and only in cases plainly within the reasons on
which that doctrine rests; and it is the general rule . . . that competent
persons shall have the utmost liberty of contracting and that their agreements
voluntarily and fairly made shall be held valid and enforced in the courts.
. . . The impropriety injurious to the interests of society which will relieve
a party from the obligation he has assumed must be clear and certain before
the contract will be found void and unenforceable.’’ (Citations omitted;
internal quotation marks omitted.) Collins v. Sears, Roebuck & Co., 164
Conn. 369, 376–77, 321 A.2d 444 (1973).