The Appellate Court attempted to resolve an issue that divided Superior Courts around the state. The issue was whether an assignee of a mortgage note could be liable for the assignor’s wrongful conduct. In opting for a bright line approach, the court has regrettably instructed lenders on how to avoid the consequences of wrongful conduct toward the mortgagor and even worse, burdened the wronged mortgagor with multiple lawsuits in order to obtain justice. Fortunately, the Connecticut Supreme Court has granted certiorari in the case.
The case involved a 12-unit rental property. The mortgagor obtained two mortgages from the Connecticut Development Corporation (CDC), which assigned both of them to a bank on the day of the closing. In addition to the mortgages, the CDC obtained two collateral assignments of leases and rentals that were also assigned to the bank on the day of the closing. CDC continued to act as the servicer in collecting the mortgage payments and administering the mortgage — not very well as it turns out.
The bank eventually assigned the notes to another bank which assigned them to the City of Hartford. At that point, one of the mortgages had been paid. The city, believing that the mortgagor defaulted on the payments, started a foreclosure. The mortgagor-defendant filed counterclaims and special defenses alleging that the city and its predecessor note holders had collected $195,000 in rents using the collateral assignment of leases and rentals over and above what was owed on the note. The city forthrightly admitted to about $17,000 in overpayments while it was the note holder, offered to repay that amount and withdrew the foreclosure action. The mortgagor, apparently hopping mad at that point, elected to proceed on his counterclaim and was awarded judgment for the $195,000.
On appeal, the Appellate Court noted the various Superior Court decisions divided on the issue. It then chose a side, deciding that while an assignee takes the note subject to the defenses to it, it does not take the note subject to any affirmative claims against the assignor unless the assignee agrees to be responsible for those claims. So, the mortgagor who had $195,000 lifted from him through the Laurel and Hardy routine that passed for mortgage servicing could not obtain relief from the party currently holding the note.
In a dissent, Judge F. Herbert Gruendel saw this case in its proper context: Connecticut foreclosures are equitable proceedings in which claims based on unjust enrichment and restitution are properly brought. Further, he noted the trial court’s findings and the city’s admissions that it was involved with the execution of the notes and documents from the very beginning, and as the basis for the logical conclusion that actions of the assignors ought to be attributed to the assignee.
Whatever one thinks of the outcome of this particular case, the Court has provided cover for lender-servicers who have securitized mortgages to avoid the consequences of their wrongful actions and slammed the door on wronged mortgagors. Just as in this case, the originating lender typically assigns the mortgage on the day of closing or shortly thereafter while retaining the servicing. No matter how badly the servicer then administers the mortgage, including actions that violate statutes for the protection of the mortgagor pursuant to which the mortgagor is entitled to redress, the assignee of the mortgage avoids the financial consequences of those actions and forces the wronged mortgagor to bear the burden of a separate action to obtain financial relief.
Worse, with the largest mortgage lenders in the country having tens of thousands of subsidiaries, one can wager that every banking seminar is going to contain a section on assigning the bank’s most goofed-up loans to subsidiaries to conduct the foreclosure. Oddly, the only lenders who are still on the hook for problem servicing are those lenders, primarily small community banks, who keep their mortgages in their own portfolios. Size does matter.
Judge Gruendel got it right. Modern lending practices dictate that mortgagors should be able to raise counterclaims based in equity in the context of a mortgage foreclosure, and the courts should be able to take the closeness of the relationship between the assignor and the assignee into account in order to provide justice to mortgagors who have been harmed by wrongful servicing practices. Hopefully, our Supreme Court will agree.•