It could be called a tale of two judges. Or, a battle of law versus equity.
The Appellate Court case of Hartford v. McKeever resulted in markedly different results in the trial and appeals court, highlighting the two main strains of the Anglo-American legal process. It contrasts the rigid “black letter” law, and its kinder, gentler counterpart — the principles of equity, which arose 500 years ago as an antidote to the harsh rigidity of the law courts.
At the same time, it illustrates the challenges — and potential liability — cities face in providing loans for urban redevelopment. And it highlights the added complications in these modern financial times when bundled debt is sold as an investment tool.
This case begins in 1983, when Brian McKeever borrowed $143,065 from the city of Hartford to fix up a 12-unit apartment building on Hamilton Street. The money was part of a $10 million, 15-year urban renewal effort administered by the Hartford’s Community Development Corporation (CDC), which sold bonds and approved loans to developers. The actual funds were paid out by State Street Bank of Connecticut. In legal terms, the bank was trustee for the bondholders, and the CDC assigned (or transferred) McKeever’s mortgage and note to the bank as collateral for the loan, along with a third document.
This third piece of collateral, to help insure that the borrowers didn’t default, was an “assignment of rents.” Under it, McKeever’s right to collect rental payments was dependent on his loan payments to the bank being current. If he fell behind, payments from tenants or rent supplement money from the federal government would go directly to the bank to make the mortgage payments.
About five years after taking out the loan, McKeever fell behind and State Street Bank began collecting the rents directly. McKeever wanted to know how close those rent payments were to paying his mortgage. He suspected that enough rent money coming in was enough to cover his loan, but he says he was rebuffed in his attempts to get accountings from the city of Hartford, the CDC or State Street Bank.
In 1998, the 15-year bonding process ended and State Street paid out everything owed to the bondholders. It still had McKeever’s “assignment of rents” document, however, for which it had no further use. It transferred that document to the city of Hartford for $1 in 2001. Hartford, believing it was still owed money on the loan, continued collecting rents form McKeever’s tenants.
In fact, Hartford, thinking it was seriously underpaid, began foreclosure proceedings against the Hamilton Street apartment. Outraged, McKeever retained Bristol attorney Christopher M. Reeves, of Furey, Donovan, Tracy & Daly.
They went on the offensive, firing back with a five-count counterclaim. They said Hartford and State Street had wrongfully seized McKeever’s rents above and beyond what was due on the loan. McKeever sought an accounting, and alleged violations of the state fair debt collection act, unfair trade practice law, and various breaches of contract.
In 2001, then-Hartford Corporation Counsel John Rose hired attorney Edward Taimen, of the Hartford financial litigation boutique Sabia Taimen. Under Taimen’s prodding, a new accounting showed that Hartford had collected $17,000 too much. The city offered to give that money back to McKeever, drop its foreclosure action and call it a day. McKeever, however, wanted the full $195,909 he believed was overcharged by State Street Bank and Hartford for all those years his rents were being diverted. They went to court.
In a non-jury trial before Judge Trial Referee Richard Rittenband, McKeever presented hand-made, poster board charts showing his understanding of the figures. The city ridiculed McKeever’s presentation, and his grasp of accounting procedures. Hartford had supplied a variety of numbers, and in what he called an effort to be fair, McKeever used the figures most favorable to the city.
The judge gave McKeever credit for trying to be fair, but had little regard for the city’s witnesses. “Arthur Greenblatt, the head of the CDC, was arrogantly dismissive of McKeever’s claims,” Rittenband wrote. Hartford was arguing “that this is a simple matter,” the judge noted. “It is not.”
The judge held that McKeever “has proven the overpayment of $195,909. [He] has proven that the City is liable for said overpayments by being an assignee of State Street Bank, which in turn was an assignee of CDC, and the City took the assignment with all of the obligations it and its predecessors had in these transactions.”
Taiman, Hartford’s lawyer at trial, said Rittenband was drawing heavily on traditional principles of equity, focusing on making sure McKeever was treated fairly in this specific case. The judge didn’t let McKeever’s status of being in default keep him from recovering overpayments “because the method of collection was incompetently done.”
Furthermore, Rittenband held, “it would be highly inequitable for the City, CDC and or State Street Bank to be unjustly enriched by monies paid by McKeever that were not in fact due.”
The judge entered judgment for McKeever on the foreclosure action, and awarded him his full counterclaimed amount of $195,909.
McKeever’s lawyer, Reeves, noted that it’s not every day that a defendant goes into court to fight a foreclosure, and walks out instead with a $200,000 judgment, after fighting city hall, bureaucrats and banks.
If this were a Francis Ford Coppola movie, we would fade to black here. But Hartford filed an appeal, contending that Rittenband, while focusing on an equitable solution for McKeever, did so by creating a dangerous precedent for the financial world’s law of assignments.
In October, Appellate Judges Michael Sheldon and Barry Schaller, for the majority, subjected Rittenband’s decision to strict legal analysis. Judge F. Herbert Greundel dissented, primarily on equitable grounds.
Sheldon noted that the decision did not specify which count of McKeever’s counterclaim provided the basis for Rittenband’s $195,909 award, so it could not be upheld. After that, questions of pure law remained. Could Hartford really be held liable for an amount that was more than the face value of the loan? Was Hartford, as the “assignee” of the loan, really liable for overcharges or other mistakes by the CDC and State Street Bank?
In the majority’s opinion, to put it simply, the city of Hartford was responsible only for any errors it made before its Community Development Corporation assigned the loan to the bank, or after the city took it back when the 15-year bonding period ended. In other words, Hartford was liable only for its own mistakes, not those of State Street Bank, and that liability could not exceed the loan amount, as it did in Rittenband’s decision.
To recover excessive payments made while State Street Bank held the mortgage, McKeever would have had to bring a separate action against the bank, the majority held.
In his dissent, Appellate Judge Greundel emphasized the equitable principles of preventing unjust enrichment, and weighing the case’s unique facts with an eye to individual fairness. He urged a more flexible approach that offered protection to governmental bodies or other institutuions that assign loans to others, “while at the same time permitting equitable claims that merit exception therefrom.”
Taiman, who represented Hartford, praised the majority decision. He noted that it’s now common for financial institutions to “bundle” mortgages to form securities and sell them to investors. If a mortgage recipient could be held responsible for misdeeds of the prior holders of the mortgage, the securities “would be impossible to market.”
Catharine H. Freeman, the current assistant corporation counsel for Hartford, said there were other problems at the trial court level. For one thing, she said, McKeever’s reconstruction of the loan history “didn’t take into account how interest was compounded,” and other accounting factors. She said there should have been expert testimony about the accounting, and not simply McKeever’s opinion of what the loans were worth.
Freeman said the Appellate Court decision “clears up the law” in this area. For one thing, it would give cities assurances that they can enter into such mortgage loan programs knowing their liability is limited.
Reeves, who represented McKeever, agreed with judges Rittenband and Greundel that the equities of this individual case deserved careful scrutiny. He also agreed with Taiman’s point that mortgages need to be marketable, and not contain hidden surprises.
But Reeves said this case is not like a financial institution creating bundled mortgage securities and selling them to an unwary investor who had nothing to do with the initial loan. The attorney said the city of Hartford was a central player in this deal all along, along with State Street Bank.
He added: “I don’t think this is over yet,” and that he is considering an potential appeal to the state Supreme Court.•