Fed. Deposit Ins. Corp. v. Deglau

• Decision Date: 05 November 1999
• Docket Number: No. 98-1113,98-1113
• Citation: 207 F.3d 153
• Parties: (3rd Cir. 2000) FEDERAL DEPOSIT INSURANCE CORPORATION, EXCLUSIVE MANAGER OF RESOLUTION TRUST CORPORATION, AS CONSERVATOR FOR HORIZON FINANCIAL, F.A. v. LOUIS DEGLAU AND MARGARET DEGLAU, H/W LOUIS DEGLAU AND MARGARET DEGLAU, APPELLANTS ARGUED:
• Court: U.S. Court of Appeals — Third Circuit

Page 153

207 F.3d 153 (3rd Cir. 2000)

FEDERAL DEPOSIT INSURANCE CORPORATION, EXCLUSIVE MANAGER OF RESOLUTION TRUST CORPORATION, AS CONSERVATOR FOR HORIZON FINANCIAL, F.A. v. LOUIS DEGLAU AND MARGARET DEGLAU, H/W LOUIS DEGLAU AND MARGARET DEGLAU, APPELLANTS

No. 98-1113

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

ARGUED: November 5, 1999

Filed March 13, 2000

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 90-3594) District Judge: Honorable Robert F. Kelly, Jr. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Maurice A. Nernberg, Jr., Esquire (Argued) Marc Mellett, Esquire Maurice A. Nernberg & Associates 301 Smithfield St. Pittsburgh, Pa 15222 Attorneys for Appellants

Michael K. Coran, Esquire (Argued) Klehr, Harrison, Harvey, Branzburg & Ellers

L.L.P. 260 S. Broad St. Philadelphia, PA 19102 Attorney for Appellee

Before: Becker, Chief Judge, and Greenberg and Cudahy,^* Circuit Judges

OPINION OF THE COURT

Cudahy, Circuit Judge

In 1983, Louis Deglau wanted to get into the business of reclaiming coal from "gob piles." He presented his idea to Gregor F. Meyer, an attorney and a member of the board of Horizon Financial, F.A., (Horizon) a federally chartered savings and loan association based in Bucks County, Pennsylvania. Horizon expressed interest in becoming the venture capital backer of the plan. Deglau formed Kelt, Inc. to carry on the business, and issued one hundred shares of stock to himself as sole shareholder. In March 1985, Kelt obtained from Horizon a loan of $1.15 million to finance early operations. Kelt was to repay Horizon with interest, and Horizon was to receive half of Kelt's profits. Deglau was to get an annual salary of $80,000. Kelt's stock and all of its assets were pledged as security for this loan. The Loan Agreement was negotiated by Deglau's lawyer, Maurice Nernberg, and Horizon's lawyer, board member Meyer. The terms of the loan agreement are disputed, and will be discussed below.

By November 1985, Kelt needed additional operating capital. Horizon balked at a second loan to the corporation, but eventually agreed to provide an additional $50,000 line of credit if it was personally guaranteed by Deglau and his wife. Louis agreed, but contends he conditioned the arrangement on the bank's agreement to credit Kelt's repayments first to his personal obligations. Having struck a deal, Horizon officials gave Louis and Margaret Deglau several documents to sign, some in blank. The note itself was signed in blank. Louis contends he understood it would be completed to reflect a $50,000 loan, but it was eventually filled out to reflect a $200,000 loan. Deglau also contends that "unbeknownst to [him]," the Guaranty accompanying the note included a "spreader clause," which purported to hold the Deglaus personally liable for all of Kelt's obligations to the bank. R.249a.¹ The Guaranty also contained a warrant of attorney clause allowing the bank to confess judgment against the Deglaus for their personal loans and the loans to Kelt. See R.308a-310a. The promissory notes for the November 1985 loan, and for a July 1986 loan also included warrant of attorney clauses, each typed out on separate sheets of paper, then attached to the notes. See R.303a-04a; R.312a-14a.

Over the next year, Louis drew up to the $200,000 provided for in the second note, and borrowed an additional $100,000. The bank eventually told him that under the Guaranty, he was personally liable for the additional $100,000; he objected, and he tells us he was assured verbally that the Guaranty would apply only to the $200,000 drawn against the note. At no time, Deglau states, did bank officials say that the Guaranty made him personally liable for the initial $1.15 million advance to Kelt. By November 1986, Kelt had repaid Horizon $168,000. However, by February 1987, Kelt needed another infusion of cash. Horizon suggested increasing the personal line of credit by $160,000. Louis agreed.

While struggling with the gob pile endeavor, Louis had hatched another business idea -- precious metal reclamation. He mentioned his idea to Horizon board member Meyer. Meyer proposed that Louis pursue the idea with Horizon's backing. He suggested that Louis sell Kelt and use the proceeds to reduce his outstanding obligations at Horizon. Louis contends that Meyer told him to conceal from his attorney the negotiations to sell Kelt, and to allow the Meyer & Flaherty firm to represent Louis and Kelt. Louis obliged. Some time thereafter Louis sold Kelt to a company known as G, K & G.

Deglau apparently missed payments to Horizon on the outstanding loans over the next several years. At the same time, Horizon was experiencing financial turmoil, and was eventually taken over by the Resolution Trust Corporation (RTC) and later by the Federal Deposit Insurance Corporation (FDIC).² In 1990, the FDIC advised Deglau that he was in default on the 1985 Kelt note for about $1.3 million; the 1986 personal note for about $320,000; the 1987 note for about $262,000; and a 1988 note for about $32,000. Acting on this belief, and on the warrant of attorney provision in the guaranty, the FDIC confessed judgment against the Deglaus for $2,416,986.47 in the United States District Court for the Eastern District of Pennsylvania.

A familiarity with judgment by confession as undertaken in Pennsylvania is essential to the decision of this case.

Judgment by confession is a product of state law, having no analog in the federal rules. In Pennsylvania, the state's Rules of Civil Procedure prescribe the procedures and filing prerequisites for obtaining confessed judgments and, in effect, affirm the validity of contractual waivers of prejudgment procedures in Pennsylvania. Pennsylvania's rules of procedure also prescribe how a confessed judgment may be successfully attacked. By motion to open the judgment, a defendant may assert defenses going to the merits of the alleged default. If the defendant presents evidence in support of a meritorious defense sufficient to create a triable issue of fact, the judgment will be opened. Execution on the judgment will then be stayed until the court can resolve the disputed claims, but the judgment remains in effect as a judicial lien.

A motion to strike, on the other hand, tests the sufficiency of the record upon which the confessed judgment was entered. The court takes all the plaintiff 's allegations as true and will grant the motion only to remedy a "fatal defect or irregularity appear[ing] on the face of the record or judgment."

Antipas v. 2102, Inc., No. CIV.A. 98-1145, 1998 WL 306537, at *1-*2 (E.D. Pa. June 9, 1998).

I) Disposition Below

After the FDIC confessed judgment, the Deglaus filed in the Eastern District of Pennsylvania a motion to open or strike the judgment. The Deglaus did not file a supplemental brief at that time, but incorporated by reference an earlier, unsuccessful complaint they had filed in the Western District of Pennsylvania seeking an injunction to prevent the FDIC from confessing judgment. See R.42a-61a (Motion, FDIC v. Deglau, CIV.A. No. 90-3594 (incorporating by reference Complaint, Deglau v. RTC, No. 90-881 (W.D. Pa. 1990)). The district court issued on the FDIC a rule to show cause why the judgment should not be struck or opened. At that time, the court set a discovery deadline that was later extended. During the discovery period, the Deglaus made two discovery requests of the FDIC; it responded to neither and the Deglaus did not move to compel a response. In 1992, two years after the judge ruled it to show cause, the FDIC filed its response. At no time did the Deglaus attempt to depose any bank officials or other persons involved in the case. In 1994, after the case had lain dormant for two additional years, and without any renewed prompting by either party, the district court without explanation issued an order denying the motion to open or strike. R.181a (Order of Aug. 22, 1994).

In response, the Deglaus then filed a motion to vacate or reconsider, which the district court denied. The Deglaus appealed the 1994 order denying their motion to open or strike the judgment, and we vacated and remanded in an unpublished order. See FDIC v. Deglau, 107 F.3d 861 (3d Cir. 1997). On remand, in 1997, the district court explained its initial denial of the motion:

It was my feeling at the time that the long periods of inactivity in this matter, and the failure of the [Deglaus] to submit a brief with their original motion, indicated that the Deglaus were not sincere in their pursuit of their equitable claims. More recently, I have reviewed the entire file in this matter and it is my feeling that the ends of justice require that the order entered by this Court [denying the motion] be vacated. R.212a. (Mem. of Sept. 20, 1997).

The judge then ordered the Deglaus to file a brief in support of their motion.

In 1998, after the Deglaus filed the required brief, the court again denied the Deglaus' motion to open or strike. The trial court denied the motion to strike the judgment because "[t]he Deglaus have not identified any `fatal defects or irregularities' on the face of the record." R.503a (Mem. of Jan. 16, 1998) [hereinafter Mem.] (citing Manor Bldg. Corp. v. Manor Complex Ass'n, 645 A.2d 843 (Pa. Super. Ct. 1994)). The court denied the motion to open the judgment because the Deglaus had "made no effort to present evidence of meritorious defenses [to the confessed judgment] to this Court before the date of the FDIC's response, and failed to do so for more than two-and-a-half years thereafter." R.503a (Mem. at 9) (emphasis added). Further, it noted that the Deglaus initially "fail[ed] to file a brief in support of their motion." Id. Finally, the district court stated that in their motion and supplemental brief, the Deglaus failed to raise meritorious defenses to the entry of judgment. See Mem. at 10. The court went...