Connecticut has a distinctive mortgage foreclosure process, which is fully judicial. While there are many judicial foreclosure states, Connecticut’s relatively unique procedures and types of judgments are often confusing, especially to those familiar with the process in other jurisdictions. Of equal import, since foreclosure in Connecticut is inherently an equitable proceeding, there is wide discretion given to a trial court to fashion remedies it deems fit to achieve the interests of justice.
For all intents and purposes, Connecticut has two types of foreclosure, strict foreclosure and foreclosure by sale (i.e., auction). A third, foreclosure by market sale (combining aspects of short sale with strict foreclosure), is on the books but seldom utilized. Strict foreclosure, usually considered the default method, is generally utilized when there is no equity in the property and the United States is not a party to the foreclosure proceedings. Foreclosure by sale, in turn, is utilized in the case of a property with equity or when the United States is a party. With limited exceptions (e.g., required notices and mandatory mediations in certain residential foreclosure cases), the process for commercial and residential foreclosures is largely identical.
Up until the point at which a court enters judgment, the foreclosure process is also the same for strict foreclosure and foreclosure by sale. A lender commences a foreclosure case by filing a notice on the applicable land records (known as a lis pendens), serves all impacted parties (including naming subordinate encumbrancers to be foreclosed out as defendants), and files a legal action with the court. Foreclosure cases are, with some notable exceptions, very similar to other civil proceedings. The borrower can raise defenses and counterclaims, with all of the tools of discovery, pleadings, and occasional trials available to the litigants, resulting in the process often running much longer than in many other states. Given the equitable considerations that abound in these cases, all of these tools are often employed.
Once the court prepares to enter judgment, either by default, summary judgment, or trial, it analyzes the available equity in the property, generally by comparing an affidavit of debt from the foreclosing lender and an independent appraisal obtained by the foreclosing lender. The borrower can, and frequently does, challenge the value of the property (often referred to as “the battle of the appraisers”) and the amount of the debt. The court makes a determination as to the amount of the debt and the value of the property at the time it enters judgment. If that comparison reveals sufficient equity or if the United States is a party to the proceedings, the court orders a foreclosure by sale; if not, the court defaults to strict foreclosure.
Strict Foreclosure
If the court renders a judgment of strict foreclosure, it establishes a series of consecutive dates, called law days, for each junior encumbrancer and, finally, the borrower.1 On its assigned law day, each junior encumbrancer or the borrower must “redeem” the property by paying the debt in full. If a party fails to redeem on or before its assigned law day, it forever loses its interest in the property. If no party redeems, title passes or “vests” to the foreclosing lender once all law days have expired.
While a lender files a certificate of foreclosure on the land records (there is no deed) to evidence the fact that it has taken title, the title change itself occurs as soon as title vests. Under this method, there are no sales, bids, or auctions. The lender’s acquisition of legal title to the property “passes” by virtue of nothing more than a court order and the turning of the pages of a calendar.
Deficiency
Connecticut permits the pursuit of deficiency judgments. The two types of foreclosure yield different results in this regard as well. In the case of strict foreclosure, a deficiency motion must be filed within 30 days of title vesting in the foreclosing lender. A fresh appraisal of the property is required from the foreclosing lender as of the time that title vested in the foreclosing lender, and another battle of the appraisals may ensue. The amount of the deficiency is the difference between the property value determined by the court and the debt as of that date. If the lender ultimately sells the property for less than that value, the lender cannot recover the shortfall.
Foreclosure by Sale
Foreclosure by sale is utilized in the case of a property with equity or when the United States has a lien on the property. Any party may file a motion seeking foreclosure by sale (and the court can order it on its own). If the foreclosing lender files the motion, however, it forfeits a portion of its deficiency. The court will generally order foreclosure by sale if it determines there is equity in the property. The foreclosing lender does not have an absolute right to foreclosure by sale (i.e., an auction).
A court ordering a foreclosure by sale sets a foreclosure sale date (generally a Saturday within about two months from the date of judgment), along with appointing a “committee” (i.e., a Connecticut attorney) to handle the logistics of advertising and conducting the sale. The committee obtains a new appraisal of the property (and, under certain circumstances, the property owner can also order an appraisal).
The committee then conducts a public sale (i.e., auction), including accepting bids and receiving (typically) a 10 percent deposit, a requirement usually excused for the foreclosing plaintiff (who is also generally permitted to credit bid its debt). After the sale, the committee moves for approval of the sale (barring irregularities or a sale amount drastically inconsistent with the valuation of the committee appraisal) with the court and, once approved, schedules a closing with the winning bidder within 30 days. The proceeds of the sale, after payment of expenses, are paid to the foreclosing lender to be applied to the loan.
Deficiency
In the case of foreclosure by sale, there is no defined time period in which the deficiency motion must be filed (although it is not open ended and cannot prejudice the foreclosure defendant). In a foreclosure by sale scenario, however, if the property sells for less than its appraised value, in addition to the sales price received by the foreclosing lender, the lender must also credit the loan for half of the difference between the sale price and the appraised value. This means the loan will not end up being paid in full, occasionally resulting in the deficiency being eradicated entirely.
Appeal
Connecticut’s appellate rules can also have significant impacts on foreclosure litigation. If an appeal is filed, there is an automatic appellate stay, no automatic requirement to post a bond, and prolonged briefing and argument periods. A foreclosure defendant’s mere filing of an appeal may easily increase the length of the foreclosure process by a year or more. While foreclosing plaintiffs do, of course, have tools available to combat this delay (e.g., motions to dismiss frivolous appeals and motions to terminate appellate stays in the interests of justice), there is often institutional resistance to preemptively curtailing appellate rights. Thus, an already extended foreclosure process can be further drawn out as a result of filing an appeal.
The Connecticut foreclosure process is complicated, unique, and subject to the equitable discretion employed by trial judges on an almost-daily basis. While there will continue to be no shortage of issues facing litigants in this area, knowledge of the framework is critical in navigating these idiosyncrasies.
The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Brian Rich, partner, at brich@barclaydamon.com; Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practices Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com; or Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com.
1The first law day may be as soon as 21 days (to account for Connecticut’s 20-day appeal period), but is generally between 45 and 90 days, from the date of judgment.