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Foreclosing Plaintiff Had Standing

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commercial buildingA foreclosing plaintiff had standing to foreclose because it was the holder of the note and defendant failed to rebut the resulting presumption of ownership. Also, defendant failed to preserve an appellate challenge to the existence of an agency relationship between the loan servicer and plaintiff because defendant didn’t object or otherwise raise the issue during the servicer’s testimony.

The Connecticut Appellate Court made these determinations in AS Peleus, LLC v. Success, Inc., which will be officially released on February 2, 2016.

Standing is one of my pet issues. What the court didn’t say about standing in this case is more interesting to me than what it did say. I will explain that in the “Impact” section. For now, I note that plaintiff apparently plead that it was the owner and holder of the note. Defendant left plaintiff to its burden of proof on that allegation. At trial, plaintiff introduced the original note which “contained” six allonges ending with a special endorsement to plaintiff. Plaintiff also introduced testimony from a representative of plaintiff’s loan servicer.

Defendant did not offer any evidence at the trial. Nor did defendant object to the competence of the servicer representative to testify about the existence of an agency relationship between itself as agent and plaintiff as principal. Defendant instead made a tactical decision to raise that issue in its post-trial brief.

The trial court found that plaintiff was the owner and holder of the note and had established the other elements of its foreclosure claim.

The Appellate Court affirmed.

Arguments on Appeal

Defendant argued that the trial court erred in determining that plaintiff was the owner and holder of the note. I can’t give you any specifics of why defendant thought the trial court erred in this regard because the Appellate Court didn’t give any specifics in the opinion. If I had to guess, I would say it had something to do with the allonges because the Appellate Court said the note “contained” the allonges, rather than the allonges were attached to the note. It also dropped a footnote defining “allonge” and explaining that an allonge is considered part of the note. Without digressing too much, an allonge isn’t an allonge unless it’s physically attached to the note, which means that an allonge isn’t part of the note unless it’s attached to the note. In short, I don’t think the court used “containing” accidentally.

Defendant also argued that the trial court erred in accepting the servicer representative’s testimony absent proof that he was plaintiff’s agent.

Appellate Court’s Conclusions

The court concluded that the note and allonges established plaintiff’s holder status, which gave rise to the rebuttable presumption of ownership. Defendant, who didn’t offer any evidence at trial, failed to rebut the presumption. Thus, the trial court properly determined that the foreclosing plaintiff had standing as the owner and holder of the note.

As to defendant’s agency argument, the court concluded that defendant had not preserved it for appeal because defendant did not object to any of the servicer representative’s testimony, including his testimony that he was authorized to speak for plaintiff. Defendant’s decision to raise the issue for the first time in its post-trial brief was inconsistent with the preservation requirement. It also effectively ambushed plaintiff, who was deprived of the opportunity to supply curative evidence.

Impact

Defendant left plaintiff to its proof on the owner and holder issue. “Leaving plaintiff to its proof” of an allegation is like a denial, with one big difference: Defendant does not get to controvert the allegation as it would with an outright denial. So, all plaintiff has to do is offer some evidence to support the allegation, which establishes it as fact, prima facie. Since defendant can’t controvert it, the weakness of plaintiff’s evidence is irrelevant. That would make you think that a defendant who leaves a plaintiff to its proof of the owner/holder allegation forgoes the right to rebut the presumption. The court didn’t say that defendant lost the right to rebut the presumption. It said that plaintiff didn’t attempt to rebut the presumption.

On the other hand, standing is an aspect of subject matter jurisdiction, which can’t be created by waiver or consent. This might mean that borrower can’t lose the right to attempt to rebut the presumption.

The case leaves these issues open. I think the better course of action for a borrower is to deny the owner/holder allegation. That way, there can be no question of forfeiting the right to attempt to rebut the ownership presumption.

About the Photo

I used this picture in my first post, which was about another foreclosure case. It might become my go to pic for this category of cases.

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.