Connecticut Appeals

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Archives for January 2016

Release of Lis Pendens

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pencil sharpener

A release of lis pendens is not available for the asking.

I know that sounds too obvious to require the Connecticut Appellate Court’s attention but it’s really the only thing worth mentioning about the opinion in Levinson v. Lawrence, to be officially released on January 26, 2016.

Levinson and Lawrence had had an on again, off again relationship since college. Lawrence married, and eventually divorced, someone else. She got her house in the divorce, subject to a short-term mortgage in favor of her ex-husband. When the mortgage matured, Levinson paid it off. Shortly after that, Levinson moved into the house.  He made, and paid for, some renovations.

If you’ve ever watched Judge Judy, you know what happened next. The relationship soured. After some trouble of the usual kind in these circumstances, Levinson moved out. He brought a small claims action seeking to recover some personal property and lost. He started an action in Superior Court and recorded a lis pendens against the house. Superior Court dismissed that action. He started a second Superior Court action and recorded another lis pendens. In the second Superior Court action, Levinson claimed that he paid off the mortgage in exchange for a 50% ownership interest in the house, which should be recognized as a resulting trust. He also claimed compensation for the renovations on an unjust enrichment theory. Lawrence counterclaimed alleging slander of title arising out of Levinson’s lis pendens.

During the litigation, Lawrence sent Levinson at different times two separate notices demanding release of lis pendens. In the first notice, Lawrence claimed that Levinson did not properly serve the first lis pendens. The opinion doesn’t mention Lawrence’s basis for her second notice, which related to the second lis pendens.

Years later, the parties stipulated during the litigation that Levinson would release the lis pendens by a certain date and Lawrence would market the house. Levinson was late with his releases and Lawrence apparently never marketed the property.

The trial court found for Lawrence on Levinson’s complaint and Lawrence’s counterclaim.

Arguments on Appeal

There’s not much to say here. Levinson argued that the evidence showed that there was a resulting trust and that Lawrence had been unjustly enriched by Levinson’s renovations. He also argued that the trial court should not have found for Lawrence on her counterclaim or awarded damages under CGS § 49-8. The statute provides for actual or statutory damages, plus attorney’s fees, if a plaintiff fails to timely release an ineffective or invalid lis pendens.

Appellate Court’s Conclusions

The Connecticut Appellate Court affirmed the trial court as to the rulings for Lawrence on Levinson’s complaint. It reversed the trial court’s decision on Lawrence’s counterclaim.

A resulting trust arises only if that is what the parties intended. There was no evidence that the parties intended for Levinson to have a 50% ownership interest in the house.

There is no “unjust” enrichment if one party officiously confers a benefit on another. There’s enrichment, but it’s not unjust because the recipient did not solicit it. There was no evidence that Lawrence solicited the renovations that Levinson made. Rather, the evidence showed that Levinson did the renovations because he wanted them and Lawrence was more or less indifferent.

As for Lawrence’s counterclaim, § 49-8 provides damages if a plaintiff fails to timely release a lis pendens that “has become of no effect pursuant to section 52-326.” CGS § 52-326 essentially provides that a lis pendens becomes ineffective when the controversy underlying the lis pendens is formally disposed — by a judgment or withdrawal of the action, for example. Neither Lawrence’s notices nor the parties’ stipulation disposed of the action. So, it was improper for the trial court to award damages under § 49-8.

Impact

My takeaway from the opinion is simple: If the litigation remains pending, you don’t have to release a lis pendens simply because the other party claims it’s ineffective or invalid. I think that’s true even if the other party turns out to be right.

About the Photo

My son took it. I like it, and not just because he took it. He’s got more that I like and I will feature them in future posts. You can see some of his work here.

Interpreting Collective Bargaining Agreements

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Snow

Arbitrators have wide latitude in interpreting collective bargaining agreements according to a new Appellate Court opinion to be officially released on January 26, 2016.

In Burr Road Operating Company II, LLC v. New England Health Care Employees Union, District 1199, the parties asked the arbitrator to determine whether an employment discharge was for just cause and, if not, the appropriate remedy. The employer-plaintiff had terminated the grievant (union member) for failing to timely report a claim of abuse of a nursing home patient. The employer had previously issued “final warnings” to the grievant for unrelated conduct. Two other employees were aware of the claim but did not report it. They were not discharged. The grievant grieved her termination and the union took the termination to arbitration pursuant to the collective bargaining agreement.

The arbitrator found there was no just cause because, of the three people that were aware of the claim, only the grievant actually reported it. Though she was late in doing so, the other two employees did not come forward at all. The arbitrator reinstated the grievant.

The employer filed an application to vacate the award and the union filed an application to confirm the award. The trial court denied the employer’s application and granted the union’s. The Appellate Court reversed the reinstatement, finding it contrary to public policy. The Supreme Court reversed and remanded to the Appellate Court to determine whether the trial court improperly denied the employer’s application to vacate the award. The January 26, 2016 decision is the opinion on remand.

Arguments on Appeal

The employer argued that the arbitrator improperly (i) failed to give dispositive weight to the employer’s “final warnings”; and (ii) added a term to the collective bargaining agreement by considering the grievant’s report of the incident a “mitigating factor.”

The employer also had a third argument that the arbitrator improperly added a procedural requirement to the collective bargaining agreement by refusing to consider grievant’s voicemail messages.  The opinion doesn’t really discuss the details. Apparently, the grievant left voicemail messages that the employer claimed contained damaging admissions. The arbitrator declined to consider the messages because the employer didn’t investigate them. The Appellate Court concluded that the third argument involve the same issue as the second argument and did not separately address it.

Appellate Court’s Conclusions

The issue that really was in dispute was whether the arbitrator changed the collective bargaining agreement by interpreting the collective bargaining agreement. The answer, of course, is “no.”

The court noted that the arbitrator was obliged to interpret and apply the agreement, subject to the prohibition on adding, deleting or modifying any of its terms. The court’s review was limited to whether the arbitrator showed “patent infidelity” to his obligation. The court will confirm the award if it “draws its essence” from the agreement.

The agreement permitted termination for “just cause.” But the agreement did not define just cause. Nor did the agreement define “final warning” or require discharge for an employee’s infraction while under a final warning.

Since the agreement didn’t provide the essential definitions, the arbitrator had to provide his own. There was no patent infidelity to the agreement in concluding that it was unjust to discharge an employee for meeting a reporting requirement, albeit untimely, where other employees entirely failed to meet the requirement — and were not discharged. It was not improper for the arbitrator to reject a “final warning” as dispositive because the agreement did not provide for it or make it dispositive.

Impact

If an employer wants a “final warning” to be a dispositive basis for a just cause discharge, it has to be spelled out in the employment agreement.

About the Photo

I finished this post on January 23, 2016, when it was snowing, a lot.

 

Income Capitalization Approach in Deficiency Proceedings

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commercial building

A trial court may properly rely on the income capitalization approach of property valuation in a commercial foreclosure deficiency judgment proceeding, at least sometimes.

The Connecticut Supreme Court considered the issue in J.E. Robert Company, Inc. v. Signature Properties, LLC (officially released January 5, 2016). In the trial court, plaintiff sought a deficiency judgment. To support its claim as to the property value, plaintiff offered evidence from its appraiser, who relied primarily on the income capitalization approach.

What is the Income Capitalization Approach?

The income capitalization approach uses the property’s income to determine the property value. The income is the rent. If the property is leased, the lease determines the rent. If the property is not leased, the appraiser uses market rent. If the property is partially leased, as it was in this case, the appraiser uses the contract rent for the occupied portion and market rent for the unoccupied portion. To derive the property value, you divide the rent by the rate of return. For example, if the rent is $125,000 per year the rate of return is 10%, the property value is $1,250,000 ($125,000 / .10 = $1,250,000).

Doesn’t the Approach Value just the Lease and not the Property?

Yes and No. If an income producing property, like an office building, is vacant, the approach assumes that market rent is the most the landlord could obtain in income. Let’s assume you are looking to buy an office building and hoping for a 10% rate of return. The building is unoccupied and your research shows that the market isn’t going to pay more than $125,000/year in rent. That means you could pay up to $1,250,000 for the building and preserve your hoped-for rate of return.

Now let’s assume that the building is fully occupied with tenants who are paying more than market rent — $140,000. If you buy it, you will have to honor those existing leases. The tenants will too. In this scenario, you could pay up to $1,400,000 and still earn your 10% rate of return. Likewise, if the tenants are paying less than market rent, say $110,000, you could not pay any more than $1,100,000 to preserve your rate of return.

So, when using market rent, the income capitalization approach gives you the value of the fee simple interest, i.e. the property without any leases. When using contract rent, the approach gives you the value of the leased fee interest, which is the fee simple interest encumbered by a lease.

The Appeal

Defendant argued that the deficiency judgment statute, CGS § 49-14, required plaintiff to establish the value of the fee simple interest. Plaintiff’s income capitalization approach valued only the leased fee interest. For this reason, the trial court should not have accepted the income capitalization approach in valuing the property.

The court noted that the market and contract rents were the same in this case. Since the rents were the same, under the income capitalization approach, the values of the fee simple and leased fee interests were the same.

Because the values were the same, the court didn’t decide whether § 49-14 requires proof of the value of the fee simple, as opposed to the leased fee, interest. I wouldn’t expect the issue to go away, at least not where the property is leased and the parties liable on the deficiency judgment have assets. Plaintiffs want to access, and defendants to protect, those assets. If the income capitalization approach yields a “better” deficiency for one party or the other, that party will want the court to use the value of leased fee interest, not the fee simple interest.