# Cheshire Mortgage Service, Inc. v. Montes > Supreme Court of Connecticut · June 30, 1992 · 223 Conn. 80 URL: https://www.frixlaw.com/law-library/cases/7842375 ## Case - **Full name:** Cheshire Mortgage Service, Inc. v. Luis A. Montes - **Court:** Supreme Court of Connecticut - **Decided:** June 30, 1992 - **Citations:** 223 Conn. 80; 612 A.2d 1130; 1992 Conn. LEXIS 232 - **Precedential status:** Published - **Opinion:** Dissent by Berdon - **Judges:** Berdon, Borden - **Cited by:** 277 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/7842375 ## How later opinions describe it (automated extraction) - holding that under Sperry, “[a] practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.” - noting that statute required no intent to deceive or knowledge of falsity, but did require intent that others rely on omissions - holding that failure to include cost of future assignment in finance charge amounts to a material nondisclosure giving the defendants the right to rescind under the federal Truth-in-Lending Act - stating that, under the UCC, "[t]he determination of unconscionability is to be made on a case-by-case basis, taking into account all of the relevant facts and circumstances." - stating that, under the UCC, “[t]he determination of unconseionability is to be made on a case-by-case basis, taking into account all of the relevant facts and circumstances.” ## Opinion text Berdon, J., dissenting in part and concurring in part. We sit as a court of equity in reviewing this appeal from the granting of foreclosure of the defendants’ property. See Reynolds v. Ramos, 188 Conn. 316, 320 , 449 A.2d 182 (1982). A long standing equitable principle requires that “[e]quity will not afford its aid to one who by his conduct or neglect has put the other party in a situation in which it would be inequitable to place him [or her].” Glotzer v. Keyes, 125 Conn. 227, 231-32 , 5 A.2d 1 (1939). Simply put, “[e]quitable power must be exercised equitably.” Hamm v. Taylor, 180 Conn. 491, 497 , 429 A.2d 946 (1980). Since I believe that the cumulative effect of the two loans made by the plaintiff and secured by the mortgages (second mortgage I and II) is unconscionable under established principles of equity, I would not enforce the terms of the note secured by second mortgage II according to its tenor. Id. Instead, the majority allows the equitable powers of this court to be used to the advantage of the plaintiff mortgagee, Cheshire Mortgage Service, Inc., a sophisticated money lender, in the foreclosure of a mortgage on the property of the defendant mortgagors, Luis Montes and Dalila Montes. The defendants are uneducated Hispanic persons who are far from fluent in the English language, 1 and who were not represented by *117 counsel. Compounding these problems, the closing attorney for the plaintiff chose to conduct the closing for second mortgage II out of his vehicle at the parking lot of a restaurant in Branford. In the often cited case of Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-50 (D.C. Cir. 1965), the Court of Appeals for the District of Columbia held that “[u]nconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive . . . practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his [or her] consent, or even an objective manifestation of his [or her] consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.” In the present case, the loan transactions began with a contractor’s attempt to finance the sale of vinyl sid *118 ing to the defendants for their home through the Tolland Bank and now ends in this foreclosure action in which they may lose their home. Unable to obtain conventional financing at the bank for the siding, the contractor took the defendants’ application that was originally completed for the Tolland Bank “down the line” into the hands of the plaintiff. The defendants then completed the two loan transactions with the plaintiff. At the time of entering into the loans, the defendant Luis Montes, who had previously suffered a heart attack, was afflicted with a kidney disease that necessitated dialysis treatment, which left him permanently disabled and unable to work. The defendants had a total monthly income of $1195, including Luis Montes’ social security disability benefits. The trial referee found that the defendants “were not neophytes in the financial world,” but this finding is not supported by the evidence. The trial referee predicated his finding on the fact that when the defendants originally purchased their home for $25,000, it was financed by a first mortgage of $23,700 from People’s Bank that provided for monthly payments of $407, including property taxes. The defendants’ participation in one legitimate transaction with People’s Bank, however, does not support the trial referee’s conclusion that they had the sophistication to understand fully the present transactions and the financial implications. Under the terms of second mortgage II, plus the seven monthly payments previously made under second mortgage I, the defendants would have been required to pay principal, bonus points, 2 interest, attorney’s fees, and other associated costs totaling $70,486.61 3 for less *119 than four years of financing. In return, they only received benefits in cash, payment to other creditors and the vinyl siding, totaling $32,328.62. 4 The result is a net cost of $38,157.99 to the defendants for approximately forty-two months of financing. Equalizing these costs of $38,157.99 over that period (seven months under second mortgage I and thirty-five months under second mortgage II), the cost of the net actual economic benefits of $32,328.62 was $908.52 per month. This amounts to a shocking 33.7 percent per annum costs for the financing, which the plaintiff conceded was fully secured. 5 Furthermore, when second mortgage II was entered into the defendants received an additional benefit of only $10,897.95 (cash of $9628.62 and credit life insurance of $1251.33), for which they not only had to pay interest but also bonus points of $4350 which, put in percentage terms, was a bonus of approximately 40 percent. Although the exorbitant rates on a fully secured loan, under the circumstances of this case, do not shock the conscience of the majority, they do mine. 6 *120 The defendants’ case, however, does not stop there. Equally problematic is that the defendants could never repay either one of the loans that had been secured by the mortgages. Second mortgage I required monthly payments of $806.38 ($407 for the first mortgage and taxes and $399.38 for second mortgage I) from the defendants’ monthly income of $1195, which amounts to 67 percent of their total income. How could they be expected to live on the balance of $388.62, that is—pay for utilities, heat, food, clothing and other necessities, plus any payroll deductions? Second mortgage II called for outrageous payments of $1098.17 per month ($407 for the first mortgage and taxes and $691.17 for second mortgage II) or a whopping 92 percent of the defendants’ gross monthly income. The majority speculates that the defendants had additional income because they were able to live and pay second mortgage I for seven months. When this speculation is applied to second mortgage II, it is obvious that the monthly payments were outrageous because the defendants were unable to make a single payment. Furthermore, the defendants could never be expected to pay the balloon payments—the lump sum payment due at the end of the term of the loan—on second mortgage I in the amount of $26,810.61 and on second mortgage II in the amount of $44,075.03, both of which were in excess of the original principal amounts of the notes secured by the mortgages. 7 As the court in Campbell Soup Co. v. Wentz, 172 F.2d 80, 84 (3d Cir. 1948), stated, the “sum total of its provisions drives too hard a bargain for a court of conscience to assist.” *121 To justify its finding that the loans were not unconscionable, the trial referee and the majority rely on the plaintiff’s claim that it was told that the defendant Luis Montes had some additional income, not shown on the application. There is no evidence to support such a finding. The plaintiff’s president, Richard Coppola, was unable to testify as to the dollar amount of this additional income, there was no documentary evidence to support this claim and there was not even a note in the corporation’s records to verify that he was so advised. 8 *122 “It does not seem too much to say that one who voluntarily extends credit by disregarding a known risk, or risks which could be discovered by a reasonable effort, should bear the loss when loss occurs. If such a standard imposes some brake on the credit boom, it would be a brake wisely applied in the interests of both the consumers and the extenders of credit.” V. Countryman, “Improvident Credit Extension: A New Legal Concept Aborning?” 27 Mex. L. Rev. 1, 23 (1975). It is clear to me that the defendants could neither pay the monthly payments nor pay the balloon payment at the end of the term of the loan. Indeed, the loan secured by second mortgage II was made solely on the *123 basis of the equity that the defendants had in the house. “Many financial experts refer to such mortgage companies as ‘equity skimmers’ because the loans are based not on a person’s ability to repay them, but on the amount of equity in their home. They charge that the companies make these loans with the intention of foreclosing upon the homeowner and reaping a profit through the equity in the home.” J. Morris, “Borrowers Beware,” Manchester, New Hampshire, Sunday News, Feb. 4, 1990, p. A-7. 9 The evidence indicated that at the time of the foreclosure the house had a value of $90,000. The possible practice of equity skimming under the circumstances of this case is unconscionable and this court should hold as much. The defendants concede that they are not entirely without blame; any credit extension that is improvident on the part of the creditors is also improvident on the part of the debtor. Nevertheless, “typically the creditor is better equipped—by education, experience, resources, and the nature of his role—to avoid and distribute the risk of improvidence. Hence, as between the two blameworthy participants in the improvident credit extension, it seems . . . that in most cases the burden of loss should be placed on the improvident creditor by means of a remedy conferred on the improvident debtor.” V. Countryman, supra, 17. Surely, taking into consideration the circumstances of the defendants, this is such a case. “ [Protection must be given to those who do not have the economic sophistication or the awareness possessed by others who may be less concerned about credit; the [Connecticut Unfair Trade Practices Act (CUTPA)] must be applied to protect the unthinking, the unsuspecting and the credulous . . . . *124 Exposition Press, Inc. v. Federal Trade Commission, 295 F.2d 869, 872 (2d Cir. [1961]), cert. denied, 370 U.S. 917 [ 82 S. Ct. 1554 , 8 L. Ed. 2d 497 (1962)]; Progress Tailoring Co. v. Federal Trade Commission, 153 F.2d 103, 105 (7th Cir. [1946]); Aronberg v. Federal Trade Commission, 132 F.2d 165, 167 (7th Cir. [1942]).” Murphy v. McNamara, 36 Conn. Sup. 183, 190 , 416 A.2d 170 (1979). The majority treats this case just as it would a transaction between commercial parties. It relies on such cases as Texaco, Inc. v. Golart, 206 Conn. 454 , 538 A.2d 1017 (1988) (commercial property); Hamm v. Taylor, supra (mortgage on a roadside tavern); Edart Truck Rental Corporation v. B. Swirsky & Co., 23 Conn. App. 137 , 579 A.2d 133 (1990) (rental of truck for paper recycling business); Iamartino v. Avallone, 2 Conn. App. 119, 122 , 477 A.2d 124 , cert. denied, 194 Conn. 802 , 478 A.2d 1025 (1980) (residential property wherein mortgagee was contractor, involved in home improvement business and owned a variety of property, including a shopping center). Instead of reviewing this case through the lens of commercially savvy parties, we must determine whether the loans were unconscionable on the basis of a transaction between a professional mortgage lender and unsophisticated credit consumers who had a total monthly income below the poverty level. Paraphrasing the language of the United States Supreme Court in Hume v. United States, 132 U.S. 406, 411 , 10 S. Ct. 134 , 33 L. Ed. 393 (1889), unconscionability is defined as a transaction that no person in his or her senses and not under delusion would make on the one hand and no honest and fair person would accept on the other. The New York courts have applied the doctrine of unconscionability as follows: “In Frostifresh Corp. v. Reynoso, [ 52 Misc. 2d 26, 27 , 274 N.Y.S.2d 757 (1966), rev’d on other grounds, 54 Misc. 2d 119 , 281 N.Y.S.2d *125 964 (1967)], the court refused to enforce a contract where the Spanish speaking customers had signed an installment contract for a refrigerator, and agreed to pay $1,145.88 for a refrigerator worth $348. The court held that the [defendants were handicapped by a lack of knowledge, both as to the commercial situation and the nature and terms of the contract which was submitted in a language foreign to them. The same situation invalidated a contract in Jones v. Star Credit Corp., [ 59 Misc. 2d 189 , 298 N.Y.S.2d 264 (1969)]. The court there stated its concern for the uneducated and often illiterate individuals who are the victims of the gross inequality of bargaining power and the overreaching by merchants who would take advantage of their ignorance.” (Internal quotation marks omitted.) Blake v. Biscardi, 62 App. Div. 2d 975, 976-77, 403 N.Y.S.2d 544 (1978); see also Community Acceptance Corporation of Denham Springs, Inc. v. Kinchen, 417 So. 2d 22 (La. App. 1982) (unconscionable promissory note made between a finance and loan company and three individuals). Applying this standard, I conclude that the cumulative effect of both loan transactions was unconscionable. Accordingly, I would reverse on this issue and remand the case to the trial court with direction to reduce the finance charges and other associated costs on the loan secured by second mortgage II in order to reflect the legal rate of interest. General Statutes § 37-1 (a). I also disagree with part IV of the majority decision which holds that there was no violation of CUTPA as a result of the loan transaction being unconscionable. I write separately on Part II because I am not certain what the majority means by an “effective” rescission. If the trial court finds that the defendants gave notice of the rescission in accordance with 15 U.S.C. § 1635 (b), which no one disputes, then the defendants were not required to return the consideration to the *126 plaintiff as a condition of the rescission. Section 1635 states the following: “(b) When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it.” Only when the creditor fulfills these obligations, is the obligor required to “tender the property to the creditor.” 15 U.S.C. § 1635 (b). Furthermore, to the extent that the remand of the majority could be interpreted to give the trial court discretion to determine whether the plaintiff is entitled to a foreclosure if there was a rescission, I disagree. Under the circumstances of this case, the rescission would void the mortgage and there can be no remedy of foreclosure. I concur with the majority opinion insofar as it holds in part II that the plaintiff violated the federal Truth in Lending Act, in part III that the plaintiff violated General Statutes § 36-2241 and in part IV that there were other unfair trade practices. Accordingly, I dissent in part and concur in part. One defendant could not read any English and the other a “little bit.” Bonus points are referred to in the majority opinion as the “prepaid finance charge.” The payments that had been made under second mortgage I, and the payments that were to be made under second mortgage II under the terms of the loan transaction were as follows: *119 Seven monthly payments of $399.38 under second mortgage I $2795.66 Amount to pay off balance of note secured by second mortgage I 27,070.05 Closing costs for second mortgage II 2451.33 Bonus points on second mortgage II 4350.00 Cash to the defendants 9628.62 46,295.66 Thirty-five monthly payments of $691.17 24,190.95 $70,486.61 The actual cash and economic benefits derived from the two loan transactions under second mortgage I and II are as follows: Vinyl siding $9902.00 Prior debts paid 12,671.31 Cash from second mortgage I 126.69 Cash from second mortgage II 9628.62 $32,328.62 As a result of substantial payments taken out in advance, the effective rate of interest is higher. A question of unconscionability is a matter of law; Texaco, Inc. v. Golart, 206 Conn. 454, 461 , 538 A.2d 1017 (1988); and, as the majority points outs, it “is subject to a plenary review on appeal.” The note secured by second mortgage I was $26,500, and the note secured by second mortgage II was $43,500. This reminds me of the days of the “company store” that extended credit on a basis that never allowed the employee customer to become debt free. The cross-examination of Richard Coppola, president of Cheshire Mortgage Service, Inc., by the defendants’ attorney, David Welch-Rubin, revealed the following: “[Attorney David Welch-Rubin:] In your file, do you have any other records regarding the income of Mr. and Mrs. Montes, either prior to the November, ’87, or prior to the May, ’88 mortgage? “[Richard Coppola:] No. “Q. You received no other documentation? “A. Documentation, no. It was verbal. I was told that Mr. Montes had some additional income. It was an undisclosed source. “Q. Who reported that to you? “A. It was verbalized to us that Mr. Montes had some additional income, both by the home improvement contractor and by the Monteses when we first made initial contact with them. “Q. Who verbalized that to you? What persons? “A. The contractor. “Q. What was his name? “A. Which would have been Mr. Szyak of Tech Energy, and I believe it was Mrs. Montes. We received the information and started working on the application. “Q. What was the amount of additional income? “A. When this loan was made, this was the no-income verification loan program. “Q. What was the original amount of the income that you’re saying you were told Mr. Montes— “A. I have nothing in the file to give me an exact amount. “Q. So you have no information as to any claimed additional income? “A. It was represented to be a substantial amount, or we certainly wouldn’t have made the loan. “The Court: What was the source? “The Witness: Mr. Montes was apparently in some sort of trade, I don’t know whether he was doing some painting work, or carpentry work, or something of that nature. “The Court: This came from Mrs. Montes is what you’re saying? *122 “The Witness: Right. “BY MR. WELCH-RUBIN: “Q. On the Tolland Bank application, what was listed as the source of Luis Montes’s income? “A. Social Security—no, that’s the wife. Social Security, yes, that's it. “Q. Social Security, and the amount is how much? “A. It shows here $475. “Q. What was the wife’s income listed as? “A. $640.00. “Q. A month? “A. Yes. “Q. For a total of $1,125 a month? “A. Yes. “The Court: The exhibit speaks for itself. Is there any other income other than Social Security on there? “The Witness: Not listed on the application, no. “BY MR. WELCH-RUBIN: “Q. And it was your valuation that out of that listed income and some unknown amount of additional income they had, you thought they had, they could pay a $407.00 first mortgage plus an additional $399 and change to you on the November, ’87 mortgage, so over $800 a month in mortgage payments alone? “A. Yes. “Q. Out of approximately $1,100 in gross income? “A. No, not $1,100 in gross income. We thought there was more and that is the reason we put them in the low income verification program. “Q. You didn’t need any verification of the amount that was more? “A. No, it was unnecessary. If they felt they could make the payments, it would have been the only reason they could have borrowed the money.” We may take judicial notice of this newspaper article. Mahoney v. Lensink, 213 Conn. 548 , 562 n.20, 569 A.2d 518 (1990); Moore v. Moore, 173 Conn. 120 , 123 n.1, 376 A.2d 1085 (1977). --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/7842375. Public record. Not legal advice.