First Jersey Nat. Bank v. Brown

• Decision Date: 11 April 1991
• Docket Number: Civ. No. 90-371 (CSF).
• Citation: 127 BR 108
• Parties: FIRST JERSEY NATIONAL BANK, Plaintiff, v. Rosemary BROWN, Defendant. (In re Rosemary BROWN, Debtor).
• Court: U.S. District Court — District of New Jersey

127 B.R. 108 (1991)

FIRST JERSEY NATIONAL BANK, Plaintiff, v. Rosemary BROWN, Defendant (In re Rosemary BROWN, Debtor).

Civ. No. 90-371 (CSF).

United States District Court, D. New Jersey.

April 11, 1991.

Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime by Peter R. Sarasohn, Bruce Buechler, Roseland, N.J., for plaintiff.

Ross & Hardies by Helen Davis Chaitman, Somerset, N.J., for defendant.

OPINION

CLARKSON S. FISHER, District Judge.

Before the court is an appeal on the merits from the December 11, 1989 order of the bankruptcy court brought by First Jersey National Bank ("FJNB"). For the reasons set forth below, the order of the bankruptcy court is reversed and this matter is remanded with instructions to dismiss the petition of the debtor.

FACTS AND PROCEDURAL HISTORY

The debtor, Rosemary Brown, is a housewife; together with her husband, Gary Brown, she is the co-owner of three parcels of real property. The properties include their residence, a home in Moorestown, New Jersey, and income-producing properties located in Ocean City, New Jersey, and New Smyrna Beach, Florida.

The Browns were the principals of Repro Supply Corporation ("Repro"). In 1985, Repro obtained a line of credit with FJNB, but by October 1986, Repro apparently exceeded its credit limit, prompting FJNB to withhold further advances. On November 13, 1986, Repro filed a chapter 11 proceeding in the United States Bankruptcy Court for the District of New Jersey. Thereafter, Repro remained in business as a debtor in possession. Repro needed additional financing, and FJNB agreed to supply that financing on the condition that it be given mortgages on the three properties personally owned by the Browns. On November 21, 1986, on Repro's application, the bankruptcy court entered a cash collateral order authorizing the advances on the security of the three properties and the mortgages were subsequently executed and delivered. The attempt at reorganization of Repro failed, and on September 16, 1987, the bankruptcy court ordered FJNB to liquidate Repro's assets.

This liquidation did not satisfy Repro's debt to FJNB. Consequently, FJNB brought an action in the Superior Court of New Jersey against the Browns to foreclose the mortgages on the New Jersey properties. Though the foreclosure was contested, on February 6, 1989, FJNB obtained an order for summary judgment striking the Browns' pleadings and permitting the action to proceed as though uncontested. On application of the Browns, the Superior Court reconsidered its order but in a letter opinion dated July 27, 1989, permitted its order granting FJNB's motion for summary judgment to stand.

On September 25, 1989, the Browns requested a hearing in the Superior Court to determine the amount due on the mortgage. However, on October 10, 1989, before the hearing was held, Rosemary Brown filed a voluntary petition for reorganization pursuant to chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey.

In the petition, Rosemary Brown identified the first mortgage holders and FJNB as secured creditors for each of the properties. Rosemary Brown listed the claim with FJNB for $1,154,298.48 as disputed. The debtor also identified three unsecured creditors, having claims totaling $17,010.00.

On November 14, 1989, FJNB filed a motion to dismiss the petition pursuant to section 1112(b) of the Bankruptcy Code on the ground that the debtor had filed the petition in bad faith. In support of its motion, FJNB cited the following facts as evidence of the debtor's improper use of the bankruptcy process:

1. The debtor\'s petition was filed shortly after summary judgment was granted in favor of FJNB;

2. Other than the collateral which served as security for the FJNB collateral mortgages, the debtor had few assets;

3. The debtor was an individual, and not a business;

4. The debtor had no persons in her employ;

5. The impetus behind the debtor\'s filing was her dispute with FJNB, and

6. The debtor\'s husband, Gary Brown, who was a co-debtor on all the obligations listed in the debtor\'s petition, did not file for bankruptcy, raising the spectre of serial filings and unnecessary delays.

On December 11, 1989, the bankruptcy court entered an order denying FJNB's motion to dismiss, and on the same day FJNB filed a notice of appeal to this court. On April 16, 1990, this court entered an order denying FJNB's appeal on the ground that the bankruptcy court's December 11, 1989, order was not a final order and, therefore, was not appealable as a matter of right under 28 U.S.C. § 158(a). This court treated FJNB's notice of appeal as a motion for leave to appeal pursuant to Bankruptcy Rule 8003(c), and denied it. FJNB filed a notice of appeal to the Court of Appeals for the Third Circuit.

On October 18, 1990, the Court of Appeals for the Third Circuit reversed this court on the ground that the order of the bankruptcy court was final within 28 U.S.C. § 158(a) 916 F.2d 120. By an October 24, 1990, order amending the slip opinion, the Third Circuit remanded the case to this court for adjudication on the merits.

THE DECISION OF THE BANKRUPTCY COURT

On December 11, 1989, the bankruptcy court denied FJNB's motion to dismiss Rosemary Brown's chapter 11 case. After considering each of the factors raised by the bank, the bankruptcy court found that those factors did not support a finding of bad faith.

The bankruptcy court concluded that the pendency of foreclosure proceedings at the time of the filing of the debtor's chapter 11 petition did not indicate a lack of good faith. The debtor's lack of substantial assets other than the secured property did not indicate bad faith, the bankruptcy court concluded. The lower court also held that it was not necessary for the debtor to be engaged in business in order to qualify for relief under chapter 11.

The bankruptcy court did not consider the debtor's lack of substantial and unsecured creditors to be evidence of bad faith. The bankruptcy court noted that, although there were unsecured creditors, that factor would not be dispositive.

The bankruptcy court determined that, as of the time of its ruling on FJNB's motion to dismiss, it was impossible to conclude that the debtor did not have a reasonable prospect for a successful reorganization. In this regard, the bankruptcy court noted that the debtor had represented an intention to attempt to work out a plan of reorganization.

The bankruptcy court noted that as of the time it was reviewing FJNB's motion to dismiss Rosemary Brown's petition on the ground of bad faith, Gary Brown had not filed a bankruptcy petition. Although it expressed concern over this failure, the bankruptcy court decided this factor did not warrant dismissal of Rosemary Brown's bankruptcy petition.

The bankruptcy court next reviewed the decision of the state court granting summary judgment in favor of FJNB, and commented:

I find it surprising, if not amazing, that the Superior Court Judge decided there were not genuine issues of material fact here. . . .

The fact that this—that the matters at issue arose from a Chapter 11 bankruptcy proceeding make this Court more cognizant, potentially cognizant, of the nuances and subtleties which could conceivably, with all due respect to the Superior Court, slip by it; and I\'m — I have decided that this matter is going to be adjudicated here.

Tr. at 41-42 (Dec. 11, 1989); see also id. at 37-38.

Finally, the bankruptcy court, recognizing that final judgment of foreclosure had not been entered in the state court, held that the principles of res judicata and collateral estoppel were inapplicable and would not bar the bankruptcy court from adjudicating Rosemary Brown's rights and obligations.

STANDARD OF REVIEW

The findings of fact of the bankruptcy court will not be set aside unless clearly erroneous. Fed.R.Civ.P. 52(a); In re Sharon Steel Corp., 871 F.2d 1217, 1222-23 (3d Cir.1989). The finding of the bankruptcy court that the filing of the petition was made in good faith is subject to the clearly erroneous standard. Carolin Corp. v. Miller, 886 F.2d 693, 702 (4th Cir.1989); In re Holi-Penn, Inc., 535 F.2d 841, 844-45 (3d Cir.1976). This court will decide legal issues de novo. Sharon Steel Corp., 871 F.2d at 1222-23.

ANALYSIS

Before the bankruptcy court, FJNB asserted that dismissal of Rosemary Brown's case under section 1112(b) was justified on the grounds that the debtor filed its petition in bad faith and the debtor could not effectuate a reorganization plan pursuant to 11 U.S.C. § 1112(b)(2).

Section 1112(b) of the Bankruptcy Code provides:

(b) Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including—

(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;

(2) inability to effectuate a plan;

(3) unreasonable delay by the debtor that is prejudicial to creditors;

(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;

(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;

(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;

(7) inability to effectuate substantial consummation of a confirmed plan;

(8) material default by the debtor with respect to a confirmed plan;

(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or

(10) nonpayment of any fees or charges required under chapter 123 of title 28.

11 U.S.C.A. § 1112(b) (West...