Article courtesy of Kevin P. Braun of Morgan, Lewis & Bockius LLP
CT Court Holds that, under Doctrine of Substantial Performance, a Lender’s Mechanistic Compliance With Notice of Default Provision of a Note Was Not Required Where Borrowers Had Actual Notice of the Default and Noncompliance by Lender Did Not Result in Prejudice to the Borrowers.
Onthank v. Onthank, 206 Conn. App. 54 (2021)
In connection with a $300,000 loan from the plaintiff, John Onthank (the “Lender”), to the defendants, Pierce Onthank and Susan Onthank (together, the “Borrowers”), the Borrowers executed a loan agreement and a promissory note (the “Note”). Although the Borrowers made partial payment on the Note, the Borrowers failed to pay the total amount due at maturity. In an email from the Borrowers to the Lender, the Borrowers acknowledged the amount still owed on the Note and asked the Lender to “move forward and send the certified letter.” The Lender then sent the Borrowers a default letter, stating that the Lender was exercising his rights under the parties’ agreement and declaring the loan in “Default” under the terms of the Note, as the Note was not “being met or upheld in the spirit of the parties’ agreement.”
The Lender subsequently sued the Borrowers for breach of contract and sought recovery for the loan amount, plus interest. The Borrowers argued in their special defense to the Lender’s breach of contract claim that the Lender failed to strictly comply with a condition precedent to enforcement of the Note by not providing the Borrowers with a notice of default sent “by certified mail, postage prepaid or personal delivery” in accordance with the terms of the Note. The Borrowers did not contest that they had actually received the Lender’s default letter. In the court’s analysis of the Borrowers’ special defense, the court explained that when determining whether the substantial performance of a contract obligation has been met, the question is whether or not a contractual breach is a material breach. Further, the court described that “a technical breach of the terms of a contact [may be] excused, not because compliance with the terms is objectively impossible, but because actual performance is so similar to the required performance that any breach that may have been committed is immaterial.” With respect to a contractual notice, the court reasoned that it would not require “mechanistic compliance” with the notice provision of a contract if under the particular circumstances, “the actual notice received resulted in no prejudice and fairly apprised the noticed party of its contractual rights.”
Accordingly, the court found that the Borrowers’ actual receipt of the default letter, albeit by noncertified mail, satisfied the phrase “personal delivery” and constituted substantial compliance with the notice provision of the Note. The court concluded that even if the Lender’s method of delivery of the default letter did not mechanistically comply with the notice provision of the Note, literal enforcement of the notice provision “would serve no purpose” given that the Borrowers actually received the default letter and were not prejudiced by any noncompliance by the Lender. Therefore, the court held that the Lender substantially complied with the notice provision of the Note and upheld the judgment of the trial court rejecting the Borrowers’ special defense.