In re Brantz, Bankruptcy No. 89-11791S.
| Decision Date | 02 October 1989 |
| Docket Number | Bankruptcy No. 89-11791S. |
| Citation | 106 BR 62 |
| Parties | In re Douglas G. BRANTZ, Aleta Brantz, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Jonathan H. Ganz, Philadelphia, Pa., for debtors.
Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.
David E. Stern, Leona Mogavero, Blue Bell, Pa., for Meritor Financial Services, Inc.
James J. O'Connell, Philadelphia, Pa., U.S. Trustee.
On June 16, 1989, the joint Debtors in this Chapter 13 bankruptcy case, DOUGLAS G. BRANTZ and ALETA BRANTZ (hereinafter "the Debtors"), commenced on May 25, 1989, filed a motion pursuant to 11 U.S.C. § 522(f)(1) seeking to avoid a judicial lien1 in the amount of $28,441.17 obtained against their residential real estate at 2103 Friendship Street, Philadelphia, Pennsylvania 19149, held by Meritor Financial Services, Inc. (hereinafter "Meritor"). Meritor opposed the motion, principally by filing a motion seeking permission to institute an adversary proceeding to attack an apparently prior Mortgage in favor of Philip and Sondra Schley, the parents of the Wife-Debtor (hereinafter "the Schleys").
After two continuances of the Debtors' motion, we scheduled it for a hearing on a must-be-tried basis on September 14, 1989, per an Order of August 14, 1989. A Stipulation between Meritor and the Debtors to continue the hearing on the Debtors' motion until after Meritor's motion had been decided, brought to our attention after our Order of August 14, 1989, was entered, resulted in our also scheduling the hearing on Meritor's motion on September 14, 1989. The parties thoughtfully simplified the potential procedural logjam created by these motions and orders by appearing on September 14, 1989, and agreeing substantially as follows: (1) Meritor had standing and therefore could proceed to attack the Schleys' Mortgage. Accord, In re Morrison, 69 B.R. 586, 589-90 (Bankr.E.D.Pa. 1987); (2) Meritor's ability to defend the Debtors' motion depended entirely on its ability to avoid the Schleys' Mortgage; and (3) The parties were prepared to try the issue of whether Meritor could avoid the Schleys' Mortgage, pursuant to 11 U.S.C. §§ 547 or 548, on that date. Meritor then called Philip Schley and both Debtors as its witnesses as of cross-examination and adduced brief additional testimony from its work-out specialist assigned to the account, Michael Karp, in support of its position.
The Meritor judgment was based upon the Debtors' default in payments of a Promissory Note of February 3, 1983, in the amount of $40,000, the proceeds of which were utilized in a business of the Husband-Debtor the failure of which had led to the Debtors' bankruptcy filing. In July, 1988, Mr. Karp met with the Husband-Debtor and Mr. Schley at the business to attempt to work out a resolution for curing the defaults in payment of the then-delinquent loan. On August 9, 1988, no resolution having been reached, Meritor's counsel wrote a letter to the business, copied to the Debtors and Mr. Karp, accelerating the indebtedness and indicating that a collection suit would be filed forthwith. On August 11, 1988, apparently having filed suit in the interim and having had a telephone conversation with the Husband-Debtor which Meritor's counsel believed had resulted in an agreement, counsel forwarded a draft of a Stipulation promising forbearance as long as the Debtor paid according to the terms set forth therein.
The Stipulation was never executed by the Debtors, and payments thereto were not made. Instead, on August 16, 1988, a Mortgage on the Debtors' home in favor of the Schleys in the amount of $40,000 was recorded. Meritor subsequently obtained a judgment against the Debtors, but this bankruptcy ensued before it could collect on same. However, the Schleys' Mortgage was prior to Meritor's subsequent judicial lien against the Debtor's home. The parties stipulated that the Debtors' home was worth $65,000 and was subject to other unavoidable mortgages in the total amount of $38,000. Whether the Debtors had any equity in the premises in excess of the $15,800 claimed exemptions in the premises, which have not been challenged,2 was agreed to be dependent upon whether the Schleys' Mortgage could be avoided. See In re Magosin, 75 B.R. 545, 547 (Bankr.E. D.Pa.1987).
Mr. Schley testified that he was very close to all of his five (5) children, including the Wife-Debtor3 and very generous in assisting them financially. He stated that, since 1978, he had "made loans" to the Husband-Debtor's business, in a total amount of about $140,000. Repayments of $50 weekly were made on an irregular basis.
All of these "loans" were undocumented except by bank records showing withdrawals and deposits from the Schleys' bank accounts for about ten (10) years. However, Mr. Schley testified that he had openheart surgery for the third time in January, 1988, at which time he was informed that a further heart attack would be fatal. Having no retirement benefits to protect his wife, he stated that he decided to ask the Debtors to sign the Mortgage to protect his wife's future financial security. The parties agreed on the $40,000 figure as their best estimate of the balance of the Debtors' present indebtedness to the Schleys, and a Mortgage was prepared and dated February 1, 1988. However, it was not recorded at that time because, according to Mr. Schley, he suffered another heart attack in March, 1988;4 was hospitalized until May, 1988; was so sick thereafter that he had to have a cousin take it to City Hall to record it;5 and this was not done until August, 1988. He claimed, despite his closeness to the Debtors, that he was unaware of the letters of August 9, 1988, and August 11, 1988, from Meritor's counsel which immediately preceded the filing of the Mortgage.
Mr. Schley also stated that he had loaned an additional $18,000 to the Debtors subsequent to August, 1988. While originally stating that he had loaned them $9,000 in the past few weeks, he attempted to retract that statement when the court expressed concern that the Debtors had received an undisclosed post-petition loan from him. Mr. Schley also contended that the Debtors have continued to date to repay him $50 weekly on the $40,000 indebtedness reflected by the Mortgage. He attempted to retract this statement in part by claiming that his wife made part of the $50 payments for the Debtors when the court expressed a concern that potentially-avoidable post-petition payments were being made to him. These attempted retractions weighed against his credibility, as did his overstatements.
The Husband-Debtor's testimony was marked by his "inability to recall" the dates of any significant events, including those of his post-petition loans from and payments to his parents-in-law or that of his signing of the Schleys' Mortgage. He did recall the letters from Meritor's counsel. However, apparently perceiving the need to place the signing of the Mortgage before receipt of the letters to legitimize his actions, he stated that the signing occurred in "spring, 1988." He also conceded that his liabilities exceeded his assets by $60,000 to $70,000 as of August, 1988. The Wife-Debtor, agreeing with her husband's statement of the couple's asset-picture, but disagreeing with her husband regarding the date of the signing of the Mortgage, placed the signing in August, 1988, just before the recordation of the Mortgage.
At the close of the testimony, we engaged in an extended colloquy with counsel. Meritor first asserted that the transfer could be avoided pursuant to 11 U.S.C. § 547. We opined that the elements of §§ 547(b)(1), (b)(2), (b)(3), and (b)(4)(B) were clearly present.6 Meritor was permitted to reopen the record to admit a copy of the Debtors' proposed Chapter 13 Plan, contemplating a ten (10%) percent dividend to unsecured creditors, thereby clearly satisfying the element of § 547(b)(5). In response, the Debtors asserted a § 547(c)(4) affirmative defense in the amount of $18,000, arising from Mr. Schley's alleged advances to the Debtors after the execution of the Mortgage.
Meritor also relied on both 11 U.S.C. § 548(a)(1) () and 11 U.S.C. §§ 548(a)(2)(A) and (a)(2)(B)(i) () as bases for avoidance of the Schleys' Mortgage.7 The Debtors argued that the Schleys had received consideration for the transfers in the form of the extensive prior loans and that there were insufficient "badges of fraud" present in the transaction, see In re Pinto Trucking Service, Inc., 93 B.R. 379, 386 (Bankr.E.D.Pa.1988), to offset their denials of fraudulent intent.
Meritor's counsel also argued that a mortgage, like the Schleys' Mortgage, which lies unaccompanied by another writing evidencing the underlying debt secured by it was invalid. At its request, we allowed it (and the Debtors as well) until September 20, 1989, to submit any writings to us in the form of post-hearing argument, particularly on this latter point, which was unfamiliar to us. The sum total of the responses was a one-page letter of September 19, 1989, from Meritor's counsel, arguing that the Schleys' lack of compliance with Act 6 of 1974, 41 P.S. § 101, et seq. (hereinafter "Act 6"), and the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (hereinafter "TILA"), justified striking the Mortgage. This is a curious and totally spurious argument.8
Our decision flows directly from our conclusion that the recording of the Schleys' Mortgage was a calculated, direct, and immediate response to one predominant external factor: Meritor's threat to sue the Debtors on its Note. We refuse to find it purely coincidental that a Mortgage, in the same amount as Meritor's Note, would be recorded by the Schleys a few days after Meritor's demands.
Mr. Schley, given his obvious overstatements, see page 64, nn. 3, 4, 5 supra, was not generally a credible witness. His...
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