In re Buchholz
| Decision Date | 03 August 1998 |
| Docket Number | Bankruptcy No. 90-35482. |
| Citation | 224 BR 13 |
| Parties | In re David BUCHHOLZ, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Carol L. Knowlton, Teich, Groh and Frost, Trenton, NJ, Walter Wronka, Walter Wronka, P.C., Belle Mead, NJ, for Debtor.
Bari Gambacorta, Farr, Burke, Gambacorta & Wright, Bellmawr, NJ, for Empire Mortgage Corp.
This matter comes before the court as a motion by debtor, David Buchholz ("debtor"), to expunge the secured claim of creditor Empire Mortgage Corp. ("Empire"). Debtor contests the underlying validity of a mortgage held by Empire, alleging procedural and substantive deficiencies surrounding the transaction. Empire counters that the transactions surrounding the debt were proper and valid, and that debtor is bound by principles of collateral estoppel, entire controversy doctrine, and by his confirmed reorganization plan pursuant to 11 U.S.C. § 1227(a). Empire also argues that debtor is prohibited from modifying the claim pursuant to 11 U.S.C. § 1229(b)(1).
This court heard the matter on August 13, 1997 and reserved decision. The court permitted the parties to file post-trial briefs. Empire submitted its brief on September 8, 1997; debtor filed its post-trial brief on August 13, 1997. Debtor submitted additional letters to the court concerning procedural objections to the materials filed by Empire. After reviewing the materials submitted by the parties and considering the legal arguments set forth in the post-trial briefs, this court found it necessary to reopen the record on January 13, 1998. The court requested that the parties address the effects of confirmation of the chapter 12 plan on the ability of the debtor to contest the underlying validity of Empire's debt. A conference was held in chambers on January 21, 1998 concerning those confirmation issues. Additional materials were submitted by the debtor to the court on February 10, 1998.
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. §§ 157(b)(2)(A), (B), (L) and (O).
Debtor, David Buchholz, borrowed $200,000 from Empire's predecessor-in-interest, Hunterdon National Bank ("Hunterdon"), on September 21, 1987 and executed mortgages on a forty-five acre farm and a twenty acre parcel of undeveloped property located at lots 6 and 10, block 21, Alexandria Township, Hunterdon County, New Jersey (the "properties") which were recorded October 14, 1987.
Prior to such loan, Debtor had established a long-term relationship with Hunterdon, which was in existence at the time a certain Mr. Benner became president of the institution. The relationship continued with the new president and Debtor met regularly with him. Transactions between the debtor and the bank were approved directly by Mr. Benner with little or no consultation with other lending officers. No evidence was adduced at trial that Mr. Buchholz was recognizable or generally known to any other officer or employee of the bank.
Pursuant to this personal relationship, debtor sought and obtained a line of credit from Hunterdon for purposes of consolidating debtor's personal credit card debt, eliminating a United States Internal Revenue Service ("IRS") claim against Mr. Buchholz personally for $60,000 of corporate taxes owing from corporations in which he held ownership interests, to purchase property in Pennsylvania where he intended to move his residence and business, and to enable him to make a contribution to the capital of his business, a nursery. Hunterdon approved a line of credit of up to $200,000 to be secured by a lien upon debtor's residence and adjacent property. Some of the tracts subject to Hunterdon's lien were then under contracts for sale.
Anticipated proceeds from the sale of these properties were earmarked toward the satisfaction of debtor's outstanding obligation with Hunterdon. Upon approval of the line of credit, debtor immediately took advantage of the funds made available, withdrawing the full $200,000 on September 27, 1987. At the time of the loan, Mr. Benner directed the debtor to another bank officer, Mr. Brown, in order to document the loan in accordance with state law. Debtor testified, without contradiction, that he had never met Mr. Brown before, and that he was unknown to Mr. Brown.
In so consummating the loan, the bank officer, Mr. Brown, documented the loan as a series of business loans. Mr. Brown failed to provide debtor with any disclosures, or afford Mr. Buchholz with any notice of his right to rescind or provide him with plain language documentation. He also failed to provide the debtor with a certified true copy of the mortgage. Of most importance, this court finds that Mr. Brown took the signed mortgage to be acknowledged by a staff notary, Francis Hagan, outside the presence of the debtor. This testimony was corroborated by a sworn affidavit executed by Ms. Carol Kucheruck, the secretary to Mr. Brown who prepared the mortgage. Under oath, she swore that she specifically recalled the mortgage and the day that the mortgage was executed. She recalled that Mr. Buchholz met with Mr. Brown to sign the mortgage and that Mr. Hagan was not present. She also recalled that sometime later, Mr. Hagan was presented with the mortgage without the debtor being present.
During trial, Mr. Hagan was questioned at length concerning his acknowledgment of the debtor's signature on the mortgage. The officer failed to testify affirmatively to this court, nor did he provide other evidence that the document was signed in his presence. Mr. Hagan could not state that he was of such familiarity with the debtor and his handwriting at the time of the acknowledgment, that he could recognize the handwriting on the mortgage.
Significantly, Mr. Hagan testified that it was common practice at the bank to notarize documents outside the presence of the signer. During the testimony, after observance of the demeanor and credibility of the witness, it appeared to this court, that the witness displayed a cavalier attitude toward the duties charged him as a notary public in insuring that documents are properly and accurately acknowledged. It further appeared that it was the culture of the bank, and this individual to execute acknowledgments regularly in this slip-shod manner.
Despite the fact that the acknowledgment was not taken in the presence of the debtor, nor effectuated by a notary familiar with the debtor's signature, it is not in dispute that the signature verified by the acknowledgment was indeed the signature of David Buchholz. Thereafter, Hunterdon recorded the mortgage in the office of the County Clerk of Hunterdon County on October 14, 1987.
The debtor's financial distress began to mount when the various parties contracted to purchase the properties, reneged on their obligations. As a result of their breaches, debtor was unable to liquidate the debt owed to Hunterdon. In July of 1988, Hunterdon unilaterally altered the loan transaction by requiring debtor to execute additional documents, including a new business note. Again, Hunterdon failed to provide debtor with any required disclosures or notices.
Despite debtor's continued effort to market the properties, he was unable to do so, resulting in a default on the loan. This prompted Empire to commence foreclosure proceedings in the Superior Court of New Jersey, Hunterdon County, on January 8, 1990, Case No. F-00254-90. The proceeding was sent to the Chancery Division as a contested matter. Debtor defended the action by raising an affirmative defense in his answer that he was not liable on either the note or the mortgage. On August 17, 1990, the Chancery Judge, Hon. Wilfred P. Diana, entered an order striking debtor's answer and transferring the foreclosure action to the Office of Foreclosure and the proceeding on the note to the Law Division. The August 17, 1990 order also states, in paragraph 4, that the record failed to demonstrate whether the loan was solely for business purposes. Accordingly, the order ruled, any action for damages had to await a determination of the amount recovered on the property. On November 9, 1990, an application by Hunterdon for reasonable attorneys fees and costs was granted in the amount of $15,188.35.1 That order awarding fees was entered by the state court on December 6, 1990.
Thereafter, before entry of any final judgment by either the Office of Foreclosure on the foreclosure causes of action, or by the Law Division on the action on the note, debtor filed a petition for relief pursuant to Chapter 12 ("Chapter 12") of Title 11 of the United States Code (the "Bankruptcy Code") on December 5, 1990. As a result, the state foreclosure action was held in abeyance. As of the date the petition was filed, debtor owed Hunterdon $286,499.99 in principal and interest. Hunterdon did not obtain relief from the automatic stay; thus as a consequence, the foreclosure action remains frozen.
In response to debtor's petition, on July 22, 1991, Hunterdon moved to dismiss the case for, inter alia, debtor's failure to file a timely plan of reorganization pursuant to 11 U.S.C. § 1221. A little over a week after Hunterdon filed its motion to dismiss, on August 1, 1991, debtor filed its original Chapter 12 reorganization plan. As a result of this filing, Hunterdon withdrew its motion to dismiss on August 26, 1991. In October 1991, Hunterdon changed its name to Highland Community Bank ("Highland").
On March 20, 1992, debtor filed a modified plan of reorganization. Highland objected to this plan on April 3, 1992. Confirmation hearings were held in July and August 1992. On August 4, 1992, this court specifically took up Highland's motion to dismiss the case, and its objections to confirmation. At this hearing, Highland argued that the debtor had filed the Modified Plan in an untimely fashion and that Highland had been prejudiced by this delay. This court rejected this...
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