August 1, 2018

by Robert Wichowski
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

and James Pocklington
McCalla Raymer Leibert Pierce, LLC
USFN Member (Connecticut, Florida, Georgia, Illinois)

The Connecticut Supreme Court has dramatically expanded the exposure of foreclosing lenders to the attorneys’ fees incurred by borrowers. With the recent decision in Connecticut Housing Finance Authority v. Alfaro (Conn. Jan. 26, 2018), foreclosure borrowers are now allowed to seek award of their attorneys’ fees upon a plaintiff’s withdrawal or voluntary dismissal of a foreclosure action. The Court was required to reconcile two statutes, Conn. Gen. Stat. sections 52-80 and 42-150bb:

• 52-80 states that a plaintiff may withdraw its action, by right, before a hearing on the merits has commenced;
• 42-150bb is Connecticut’s reciprocal fee statute. It provides that when a consumer and a commercial party enter into a contract that provides for an award of attorneys’ fees in favor of the commercial party, if the consumer successfully prosecutes a counterclaim or successfully defends an action on the contract, the consumer will be entitled to attorneys’ fees.

Background
In Alfaro, the plaintiff brought a foreclosure action. The defendant filed an answer with two defenses, both alleging lack of standing. In response, the plaintiff filed a motion for summary judgment (an interlocutory motion, the granting of which establishes liability on the plaintiff’s complaint without need for trial). Before a hearing on the summary judgment motion, the plaintiff withdrew its motion; and, shortly thereafter, withdrew the entire action pursuant to 52-80. The defendant then filed a motion for counsel fees, asserting that he successfully defended the action. The plaintiff objected and the court denied the motion, holding that if the defendant’s claim were accepted, lenders would unreasonably be exposed to claims for attorneys’ fees every time a lender withdrew a foreclosure action. The defendant appealed.

The Connecticut Appellate Court affirmed the judgment, holding that whether the defendant “successfully defended” was a factual determination, which is due deference and should only be overturned in cases of clear error.

The defendant further appealed to the Connecticut Supreme Court, claiming that the plaintiff’s withdrawal of the action was prompted by the defendant’s defense. Surprisingly, the Supreme Court agreed.

Supreme Court’s Analysis
In deciding the case, the Connecticut Supreme Court was required to interpret the phrase “successfully defends” (which is not defined anywhere in the general statutes). The plaintiff contended that in order to successfully defend an action, a party must prevail on the merits of the action. This position was supported by lower court Connecticut case law — and even several decisions from the U.S. District Court for the District of Connecticut. While the Court stated the position was plausible, they eventually found that it did not carry the day.

In making their decision, the Court in Alfaro looked to Black’s Law Dictionary and determined that what is included in the appropriate definition is any resolution of the matter in which the party obtains the desired result of warding off an attack made by the action — regardless of whether there was a resolution on the merits. The Court also looked deeply into the legislative history for 42-150bb (enacted in 1979) and found that it was passed for the purpose of bringing parity between a commercial party and a consumer who successfully defends an action on a contract that was prepared by the commercial party.

The Court held that it would be incongruous with the design of 42-150bb to allow a commercial party to avoid paying attorneys’ fees simply by withdrawing their action under 52-80. The opinion created a burden-shifting schema wherein a consumer filing a motion for counsel fees, who is able to show that the commercial party withdrew the action, is allowed a rebuttable presumption of entitlement to the payment of their attorneys’ fees. The burden of proof then shifts to the commercial party to demonstrate that the withdrawal was unrelated to the actions of the consumer.

In Closing: Some Cautionary Observations
The language used in the Alfaro opinion is especially troubling because the Supreme Court did not restrict the award of attorneys’ fees to withdrawal based on an actual defense of the action. Instead, the Court held that the fees would be awarded if the withdrawal is attributable to any action by the consumer or their attorney. A defendant might assert that if his attorney submits a loss mitigation package and such loss mitigation is approved, that is an action that could arguably entitle the defendant to the payment of attorneys’ fees. Of particular concern in this regard is Connecticut’s Foreclosure Mediation Program, which provides for multiple meetings among court staff, defendants and their attorneys, and the plaintiff’s counsel. It is not uncommon for foreclosing plaintiffs to request attorneys’ fees at judgment for work performed during the (unsuccessful) mediation process. Conversely, upon the successful mediation of a file, Alfaro’s burden-shifting and reciprocity could expose foreclosing plaintiffs to payment of attorneys’ fees to the defendants.

Likewise, a defendant’s attorneys’ fees could potentially be awarded in cases where the court dismisses actions for failure to prosecute (most commonly due to defendant delays through loss mitigation, bankruptcy, etc.). Alfaro also generates a cautionary note regarding loan servicing transfers and release. While most of the industry follows consistent standards regarding attorney invoicing and billing during a service release from servicer’s counsel, it is possible that defendants’ counsel may request and be awarded fees for work done during the tenure of a prior servicer.

Prior to Alfaro, matters in Connecticut were routinely withdrawn, generally with no concern of penalty or exposure to the withdrawing party. This practice has now become significantly more risky and, potentially, more costly in the future.

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