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Advance Release Opinions - Review and Analysis

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Connecticut Supreme Court Opinions - Analysis and Impact

Advance Release Opinions – August 30

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Connecticut Supreme Court

Maio v. New Haven – Police officer sought indemnification under CGS § 53-39a for economic loss sustained in successfully defending charges of sexual assault and unlawful restraint alleged to have occurred while he was on extra duty at a nightclub. The statute provides indemnification if an officer is acquitted of crimes alleged to have occurred “in the course of his duty.” Trial court borrowed the “course of employment” definition from worker’s compensation law in defining “course of duty.” Trial court excluded the criminal trial testimony of the two complaining witnesses, finding that they were not “unavailable” to testify at the indemnification trial because defendant had not taken their depositions. Verdict for the officer. City appealed, arguing that “course of duty” and “course of employment” were not the same and that the complaining witnesses were indeed unavailable. Supreme Court affirmed as to the “course of duty” definition but reversed as to the unavailability of the complaining witnesses.

Advance Release Opinion – August 17

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Connecticut Supreme Court

Williams v. General Nutrition Centers, Inc. – Supreme Court addressed the question of how to determine the overtime pay rate for retail workers who are paid partly on an hourly basis and partly on a commission basis. In a nutshell, you determine the base rate by dividing the the pay for the given week by the “usual” number of hours worked in a week, not the actual number of hours worked in the given week. You then multiply the base rate by 1.5 to determine the overtime rate.

Supreme Court Reverses Decision Vacating Arbitration Award

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Kellogg v. Middlesex Mutual Assurance Company – Trial court vacated an unrestricted arbitration award because it found the appraisal panel’s valuation to be too low and that the appraisal panel had imposed depreciation when the policy did not. Supreme Court reversed, concluding that neither of these findings warranted vacating the award under CGS § 52-418.

Issuing State’s Law Governs Child Support Duration

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issuing-state-law-governs-child-support-durationThe issuing state’s law governs child support duration where a party seeks to modify the child support order in another state. The Connecticut Supreme Court reached this conclusion in Studer v. Studer to be officially released on February 23, 2016.

In this Connecticut appeal, plaintiff and defendant were divorced in Florida in 2002. The Florida judgment “provided that the defendant would pay child support until the child ‘reaches the age of [eighteen], become[s] emancipated, marries, dies, or otherwise becomes self-supporting’ or ‘until [the] age [of nineteen] or graduation from high school whichever occurs first, if a child reaches the age of [eighteen] and is still in high school and reasonably expected to graduate prior to the age of [nineteen].’ Both parties were aware that the child was autistic at the time of the dissolution and the Florida judgment specifically referenced the child’s condition.”

The parties and the child moved to Connecticut. In 2003, defendant domesticated the Florida judgment in Connecticut and moved to modify child support and alimony. The Connecticut court granted the motion.

In 2010, plaintiff moved for postmajority support, claiming that the child would not graduate from high school until after her 21st birthday because of her autism. “Applying Florida law, the [Connecticut] court granted the plaintiff’s motion for postmajority support and ordered the defendant to continue paying child support until the child’s high school graduation ….”

In 2013, before the child graduated from high school, plaintiff moved to extend child support indefinitely beyond the child’s high school graduation. “The trial court concluded that under General Statutes § 46b-71, Florida law controlled the duration of the defendant’s child support obligation and ordered the defendant to pay child support indefinitely.”

Defendant appealed. The Connecticut Supreme Court affirmed.

Defendant’s Main Argument on Appeal

Florida allows postmajority support in cases like this; Connecticut law does not. Defendant’s main argument was that the 2010 postmajority support order, issued by the Connecticut court, became the operative support order rendering all further support considerations subject to Connecticut law.

Supreme Court Concludes Issuing State’s Law Governs Child Support Duration

The Supreme Court thoroughly discussed all of the arguments and counter-arguments but to me the decision came down to one simple thing: The Uniform Interstate Family Support Act provides that the issuing state’s law governs child support duration. More specifically, one section of the act, CGS §46b-213q(d), “provides in relevant part: ‘In a proceeding to modify a child support order, the law of the state that is determined to have issued the initial controlling order governs the duration of the obligation of support. . . ‘” (Supreme Court’s emphasis).

The term ‘‘initial controlling order’’ is not defined in § 46b-213q, nor is it defined in the provision setting forth the definitions used within the act, General Statutes (Rev. to 2013) § 46b-212a. ‘‘In the absence of a definition of terms in the statute itself, [w]e may presume . . . that the legis- lature intended [a word] to have its ordinary meaning in the English language, as gleaned from the context of its use. . . . Under such circumstances, it is appropriate to look to the common understanding of the term as expressed in a dictionary.’’

The court considered a number of dictionary definitions of “initial.” The court concluded: “Using the definition of ‘initial’ indicates that the legislature and the drafters of the uniform act intended for the first state that issues a child support order to control the duration of the child support obligation.”

Accordingly, because it is undisputed that the Florida judgment was rendered before any of the Connecticut orders, the initial controlling order in the present case is the Florida judgment and, therefore, Florida law governs the duration of the defendant’s child support obligation. Furthermore, the parties in the present case do not dispute that Florida law provides for support for adult disabled children.

In reaching this conclusion, the court quoted a Washington Supreme Court decision, as follows: “Child support orders are frequently modified as children grow older or when circumstances change. . . . If the [uniform act] ceased to apply after the first modification, the reference to the state that issued the initial controlling order would be superfluous.’’

The court also noted that if “initial controlling order” did not refer to the first child support order issued in the case, there would be incentive to forum shop, which is something the Act was intended to prevent.

Other Things to Note

In footnote 8, the court noted that at oral argument plaintiff agreed that the Uniform Interstate Family Support Act applied and CGS § 46b-71 did not. For this reason, the court didn’t consider § 46b-71.

About the Photo

I’ve used it before. Seems appropriate for child support and custody issues.

State Can Charge MERS Higher Recording Fees

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clerk's recordsThe state can charge MERS higher recording fees than other mortgagees according to the Connecticut Supreme Court decision in MERSCORP Holdings, Inc. v. Malloy, to be officially released on February 23, 2016.

In this Connecticut Appeal, MERS attacked the constitutionality of amendments to Connecticut’s recording statutes which require mortgage nominees to pay higher recording fees than other mortgagees. More specifically, mortgage nominees must pay about three times more to record a mortgage, assignment of mortgage or release of mortgage.

In the trial court, MERS claimed that that the statutes as amended “violate the equal protection, due process, and takings provisions of the federal and state constitutions, the federal dormant commerce clause, and the federal prohibition against bills of attainder. The plaintiffs further alleged that enforcement of the statutes violates 42 U.S.C. § 1983.”

The trial court granted the state’s motion for summary judgment on all counts and entered judgment accordingly. MERS appealed. The Supreme Court affirmed.

Genesis of the Amendments Charging MERS Higher Recording Fees

The secondary mortgage market created MERS, or Mortgage Electronic Registration Systems, Inc., to address a costly administrative headache. Generally, a mortgagee records its mortgage to tell the world that it has an interest in the property. When a mortgage loan is sold, the new mortgagee wants to record a mortgage assignment to tell the world that the old mortgagee is out and the new mortgagee is in. When the loan is paid off, the borrower wants the mortgagee to record a release of mortgage to tell the world there is no more mortgage interest in the property. There’s  municipality a recording fee every time anything is recorded.

When mortgage securitizations started gaining popularity in the 1980s, mortgage loans began to change hands frequently and in large quantities. That meant the loan buyers wanted to record an assignment for every loan purchased, which in turn meant a number of things: (i) seller had to sign, with necessary formality to be recorded, an assignment for each loan sold; (ii) buyer had to get the assignment to the proper recording office for each loan purchased; and (iii) someone had to pay the recording fee to record each assignment. When dealing with hundreds or thousands of loans at at time, these things were a pain in the neck administratively, not to mention expensive in both time and money.

Enter MERS. If you’re a member, as most secondary mortgage market participants are, you can record your mortgage in the name of MERS as the nominee for you and your successors and assigns. If you sell the loan to another member, you tell MERS, who keeps track of which member owns which loan. As long as the loan stays with a MERS member, there is no need to record an assignment. In short, MERS is the record mortgagee for every mortgage of every one of its members.

The problem for the state is that it was missing out on recording fees for all those loan transfers between MERS members. So, the legislature raised recording charges for a nominee of a mortgagee to record a mortgage, a mortgage assignment and release of mortgage. In doing so, the legislature defined “nominee of a mortgagee.” MERS is the only entity that meets the definition.

MERS’ Main Arguments on Appeal

MERS claimed that the statutes as amended violated (i) the equal protection clauses of the state and federal constitutions; and (ii) the dormant commerce clause of the federal constitution.

No Equal Protection Violation

The Supreme Court rejected plaintiff’s equal protection arguments. It noted that the parties agreed that the legislature imposed higher fees on MERS “simply to raise additional revenues, either to compensate for fees allegedly lost as a result of the MERS business model or, more generally, to help balance the state’s budget.” Since raising revenue is a quintessential legitimate governmental purpose, the analysis shifted to the question of whether “the legislature had a rational basis for imposing higher recording fees on nominees such as MERS than on other mortgagees.”

The court perceived at least two rational bases for the legislature charging MERS more. First, the legislature reasonably could have  concluded that MERS was in a better position than smaller mortgagees to bear the financial burden of increased fees. Second, the legislature reasonably could  have raised the recording charges for MERS to compensate for the decreased number of recordings MERS engenders.

MERS had four counter-arguments, all of which the court rejected. First, MERS argued that “there is no evidence in the record to support the contention that assignments are recorded less frequently for MERS loans than for other mortgagees’ loans.” The court noted that “under the rational basis test, our review is not limited to theories that the state has documented at trial or that have been subject to judicial fact-finding. Rather, courts may consider—and it is the plaintiffs who must debunk— any rationale that might plausibly have motivated the legislature.” In any event, “it cannot be seriously suggested that the MERS model might not result in fewer recordings in the public land records, with concomitant cost savings to MERS and its users.” The evidence showed that fewer recordings and member cost-savings were paramount considerations for the MERS model.

Second, MERS argued that “there is no legal requirement that assignments be recorded in the public land records[.]” I assume this to mean that, since recording isn’t mandatory, it’s unfair to charge MERS more than others for the same benefit. The court called this argument a “red herring.” MERS’ own literature shows that MERS considered recording a necessity.  As a practical matter, recording is necessary “if the holder is to perfect its security interest and to avoid potentially costly gaps in the chain of title.”

Third, MERS argued that “even if town clerks do perform fewer recording duties with respect to MERS loans than non-MERS loans, there is no reason to compensate town clerks for lost recording revenues because they already save the costs associated with not having to record assignments of MERS loans, or, put differently, clerks are not entitled to payment for services that they do not perform[.]” The court gave three reasons for rejecting this argument: (i) Recording fees cover not only the marginal cost of physically recording a document but also things like the clerk’s salaries, facilities and technological requirements; (ii) “The principal service provided [by the clerk], and the principal value to the recording party” is not the act of recording but the perpetual maintenance of a record of the transaction; and (iii) In addition to compensating the clerk for lost revenue, higher recording charges force MERS to pay for a portion of the benefit its members receive through the MERS system.

Lastly, MERS argued that “even if town clerks have lost recording fees under the MERS system, there is no rational relationship between those losses and the fees imposed under [the amendments].” This argument stems from the fact that the town clerks don’t retain the entirety of the recording charge. The court noted that “the legislature reasonably could have concluded that only a handful of Connecticut towns still hew to the traditional model under which financially independent clerks’ offices retain the recording fees they collect, and that, in most cases, such fees are now paid into a town’s general revenues…. Accordingly, a falloff in recording fees will adversely impact municipal budgets and potentially result in a heightened need for local community support by the state.”

No Dormant Commerce Clause Violation

The court noted that the federal constitution’s commerce clause gives Congress the power to regulate inter-state commerce. “[T]he United States Supreme Court has] consistently held this language to contain a further, negative command, known as the dormant [c]ommerce [c]lause, prohibiting certain state [regulation] even when Congress has failed to legislate on the subject…. [T]he dormant [c]ommerce [c]lause precludes [s]tates from discriminat[ing] between transactions on the basis of some interstate element. . . . This means, among other things, that a [s]tate may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the [s]tate. . . . Nor may a [s]tate impose a tax [that] discriminates against inter- state commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of multiple taxation.”

Even though recording is a purely local activity, MERS has a national membership that participates in a national secondary mortgage market. The court found this sufficient to implicate the dormant commerce clause.

Saving the court from having to decipher a “quagmire” of United States Supreme Court precedent as to the standard to apply, the parties agreed that “their dispute boils down to the question of whether two central criteria … are satisfied. First, a state user fee or tax is presumed to violate the dormant commerce clause if it facially discriminates against interstate commerce…. Second, a fee or tax that is facially neutral nevertheless may offend the dormant commerce clause if it has the practical effect of imposing a burden on interstate commerce that is disproportionate to the legitimate benefits.”

The court concluded that there was no facial discrimination for four reasons: (i) There is no indication that charging MERS higher fees “reflected an invidious discrimination against out-of-state interests, or an effort to favor Connecticut-based financial companies”; (ii) “[T]he legislature’s apparent intent was not to impose higher recording fees on residential mortgage transactions with a national character but, rather, merely to indicate that the higher fees are directed at MERS and any other mortgage nominees that may develop virtual recording systems to facilitate transactions in the secondary mortgage market”; (iii) “[T]he United States Supreme Court has explained that ‘a fundamental element of dormant [c]ommerce [c]lause jurisprudence [is] the principle that any notion of discrimination assumes a comparison of substantially similar entities” and MERS is not substantially similar to any other entity; and (iv) “[E]ven if we believed that the statutes in question discriminated against interstate commerce, we would conclude, for reasons discussed [earlier] in … this opinion, that there is no constitutional violation because such discrimination advances a legitimate local purpose.”

The court also concluded that the statutes placed no undue burden on MERS. Without the increased charges, MERS gets a benefit but doesn’t have to pay for it like other mortgagees. More specifically, MERS members get the protections afforded by recorded mortgage but don’t pay to transfer those protections when the mortgage loan is transferred on the secondary mortgage market because they don’t have to record anything. Non-MERS mortgagees have to pay to record an assignment to continue that protection when they sell, or buy, a mortgage loan on that market.

Next, the court noted that “[t]he United States Supreme Court also has suggested that, in gauging the burdens imposed on interstate commerce, a reviewing court should consider whether, if every state were to adopt the challenged policy, the result would be to ‘place interstate commerce at a disadvantage as compared with commerce intrastate.'” In this regard, the court concluded, as follows:

In the present case, even if every state were to charge $106 extra to record MERS-listed mortgages in its corresponding land records, there is nothing in the record to suggest that those higher fees, taken together, would unduly burden interstate commerce. There is no indication that higher recording fees would so overshadow the benefits of participation in a national electronic registration system that borrowers and lenders would opt not to participate in MERS or that the vitality of the secondary mortgage market would be compromised. The parties have agreed that higher fees have not resulted in a loss of MERS business within this state, and there is no reason to believe the outcome would differ elsewhere, or nationally. Nor is there any evidence of (1) what share of the estimated $5.4 million that the state will receive in additional annual recording fees will be borne by MERS and its members, and how that amount compares to the annual profits on their residential mortgage lending business in Connecticut, (2) what share of the increased fees will be borne by borrowers, and what impact those fees will have on their total closing costs, or (3) what cost savings MERS, its members, and borrowers in MERS-related transactions have achieved as a result of the MERS system. We are mindful in this regard of the United States Supreme Court’s recent guidance that the judiciary is particularly ill-suited to making the sorts of complex predictions and subtle cost-benefit calculations necessary to assess whether a particular tax scheme is unduly burdensome.

Other Things to Note

In footnote 8, the court noted that “plaintiffs also contend that the amendments to [the statutes] were motivated by an impermissible desire to punish MERS for its business model. The trial court rejected this allegation, and we find no support for it in the legislative history. Even if it were true, however, the outcome of our analysis would be no different. As long as the challenged distinction is rationally related to some legitimate public purpose that conceivably may have motivated the legislature, it is irrelevant whether certain legislators also may have been motivated by animus toward the plaintiffs.”

In footnote 13, the court said: “It might also be argued that, insofar as the state’s purpose in imposing higher recording fees on MERS-listed mortgages is to prevent a competitor in the mortgage recording business from free riding on its public recording system, the state acts as a market participant—as well as a regulator— with respect to MERS and, therefore, is immune from challenge under the dormant commerce clause.”

No Zoning Variance Absent Practical Confiscation

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used carsThere can be no zoning variance absent practical confiscation of the property. The Connecticut Supreme Court determined in Caruso v. Zoning Board of Appeals that land use regulations for a regional development zone did not result in a practical confiscation of a property within the zone. The Supreme Court also determined that the Appellate Court’s decision reversing the trial court did not impose a requirement of diminution in value evidence for every practical confiscation claim.

The Meriden zoning regulations permit only six uses within a “Regional Development District.” The six uses are: conference center hotels; executive offices; research and development; medical centers; colleges or universities accredited by the state; and distribution facilities combined with executive offices or research and development.

The developer applied to the board for a variance claiming essentially that limiting its uses to these six things practically confiscated the property. The developer asked for permission to operate a used car lot on it. The board voted to grant the variance.

Plaintiffs appealed to the Superior Court claiming that the developer failed to demonstrate a practical confiscation and that the vote was void because one voting board member had a conflict of interest. Superior Court concluded that there was substantial evidence that the property had been practically confiscated. But, because Superior Court also concluded that the one board member should have disqualified himself from the vote, it remanded the case to the board for further proceedings.

The developer appealed to the Appellate Court, arguing that the vote was proper. Plaintiffs cross-appealed Superior Court’s decision that there was substantial evidence of a practical confiscation. The Appellate Court concluded that there was no substantial evidence of a practical confiscation because the developer “offered no evidence of the current value of the property or its efforts to market, sell, or develop the property for any permitted use within the development district.” The Appellate Court reversed and remanded to Superior Court with a direction to sustain plaintiffs’ appeal.

The Supreme Court affirmed.

Arguments on Appeal

The developer argued that the Appellate Court improperly concluded that there was insufficient evidence supporting the developer’s practical confiscation claim.

The developer also argued that “the Appellate Court improperly required evidence of the property’s diminished value in proving practical confiscation and, in doing so, created a categorical rule that all practical confiscation claims must contain such evidence, contrary to [Supreme Court] precedent.” This, I’m fairly certain, is the reason the Supreme Court took the case.

Supreme Court’s Conclusions

The court noted that “[a] zoning board of appeals is statutorily authorized to grant a variance if two requirements are met: (1) the variance will not ‘affect substantially the comprehensive zoning plan’; and (2) the application of the regulation causes ‘unusual hardship unnecessary to the carrying out of the general purpose of the zoning plan.'” The court continued, “[u]nusual hardship may be shown by demonstrating that the zoning regulation has deprived the property of all reasonable use and value, thereby practically confiscating the property.” There is no practical confiscation where, even as regulated, the property can be reasonably used or still has value.

The court concluded that the developer “failed to prove practical confiscation because it did not demonstrate that the property has been deprived of all reasonable use and value under the regulations.”

As for the purported categorical rule requiring evidence of the property’s diminished value, the Supreme Court concluded that the Appellate Court did not impose any such rule. The Supreme Court explained, as follows (quotes and cites omitted; emphasis original):

[T]he Appellate Court … noted that the defendant presented no evidence that it was unable to sell the property or unable to develop the property for any of the uses permitted in [the development district] …. Additionally, the Appellate Court did not declare that all practical confiscation cases must contain evidence of the property’s diminution in value. The Appellate Court simply held that without such evidence in this case, with no evidence that the property could not reasonably be used as permitted in the development district, there was no reliable evidence on which to form the conclusion that application of the . . . regulations had destroyed the value of the property.

Impact

You don’t necessarily have to show a diminution in value to get a variance based on a practical confiscation, but it helps.

About the Photo

It’s a used car lot, of sorts.

Worker’s Compensation Survivor Benefits

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chemical barrel

No separate claim is required for worker’s compensation survivor benefits, according to a Connecticut Supreme Court opinion to be officially released on February 2, 2016.

In McCullough v. Swan Engraving, Inc., two years after he left the job, the employee was diagnosed with an occupational disease. He timely filed a claim for worker’s compensation benefits. He died from the disease before his claim was accepted or any benefits were paid. The employee’s widow filed a claim for death and survivor’s benefits. The worker’s comp carrier eventually accepted the decedent’s claim for benefits. The worker’s comp commissioner conducted a hearing on the widow’s claim. The carrier argued the claim was untimely, having been filed more than a year after death and more than six years after diagnosis. The widow argued that the timely filing and acceptance of her husband’s claim satisfied the limitations period for all claims. The commissioner agreed with the widow. The carrier appealed to the worker’s compensation board, who concluded that the widow’s claim was untimely. The Supreme Court reversed on the widow’s appeal.

Arguments on Appeal

The widow argued that her claim was not time-barred by CGS § 31-294c because her husband’s timely notice of claim satisfied the statute and there is no requirement that she file a separate claim.

The carrier offered three arguments in opposition: (1) Section 31-294c(a) required the widow to file a separate claim for survivor’s benefits within the time provided in the statute; (2) The court should defer to the board’s “time-tested” approach of interpreting § 31-294c as requiring a separate, timely notice of claim; and (3)  Section 31-294c must be read with CGS § 31-306b, which in the carrier’s view requires a dependent to comply with the one year limitations period in § 31-294c.

Supreme Court’s Conclusions

The Supreme Court concluded that the plain language of § 31-294c rendered it inapplicable to the facts of this case and required only one notice of claim in any event. The court also noted that there was no provision anywhere in the entire act requiring a survivor to file a separate claim, much less providing a limitations period for such a claim.

As to the board’s time-tested approach, the court cited its own precedent: ‘‘Even if time-tested, we will defer to an agency’s interpretation of a statute only if it is ‘reasonable’; that reasonableness is determined by ‘[application of] our established rules of statutory construction.’’’ The court concluded that the board’s interpretation was not reasonable under traditional rules of statutory construction and declined to defer to it.

With respect to § 31-306b, the court noted that the statute provides, as follows: ‘‘The failure of an employer or insurer to comply with the notice requirements . . . shall not excuse a dependent
of a deceased employee from making a claim for compensation within the time limits prescribed by subsection (a) of section 31-294c . . . .’’ The court rejected the carrier’s argument, saying that “the provisions of § 31-306b (c) to apply only in those situations wherein an employee is receiving workers’ compensation benefits from the employer prior to filing an official claim, such as cases where a collective bargaining agreement requires that such benefits be paid immediately.” Since this wasn’t that situation, § 31-306b did not apply.

Impact

The impact will be limited by what seems to me are the factually unique circumstances of the case. The fact that the worker’s compensation carrier accepted and paid the worker’s claim after the worker died seemed to factor heavily into the court’s decision that the widow did not have to file a separate survivor’s claim. I don’t think that happens too often.

About the Photo

The decedent was a photo engraver and his work exposed him to toxins. He developed disabling pulmonary fibrosis from this exposure and it ultimately killed him. The photo is of a rusting chemical barrel.

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.