In re Carretta

• Decision Date: 06 February 1998
• Docket Number: CIV.A. No. 97-4727 AJL.
• Citation: 220 BR 203
• Parties: In re Joseph F. CARRETTA, Debtor.
• Court: U.S. District Court — District of New Jersey

220 B.R. 203 (1998)

In re Joseph F. CARRETTA, Debtor.

CIV.A. No. 97-4727 AJL.

United States District Court, D. New Jersey.

February 6, 1998.

George R. Hirsch, Bressler, Amery & Ross, P.C., Morristown, NJ, for Appellant.

Paul S. Hollander, Okin, Hollander & DeLuca, L.L.P., Fort Lee, NJ, for Appellee.

OPINION

LECHNER, District Judge.

This is an appeal by Allstate Financial Corporation ("AFC") of a final order entered on 25 July 1997 (the "25 July 1997 Order") of the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").¹ AFC appeals the 25 July 1997 Order of the Bankruptcy Court which denied AFC's Motion for "Order Enforcing Absolute Assignment of Rents and Leases and for Other Relief" (the "Motion to Enforce Assignment of Rents").² Appellate jurisdiction exists pursuant to 28 U.S.C. § 158(a). For the reasons set forth below, the 25 July 1997 Order of the Bankruptcy Court is reversed. Facts

A. Background

Carretta is the owner of property located at South 160 Route 17, Paramus, New Jersey (the "Paramus Property"). See Carretta Aff., ¶ 1. The Paramus Property consists of 6.7 acres of land and is improved with a 21,920 square foot major repair shop and 19,554 square feet of office space. See id. at ¶ 2. Prior to December of 1994, the Paramus Property had been the corporate headquarters of Carretta Trucking, Inc. See id. At various times in the past, the Paramus Property has also been occupied by Load to Ride, Inc. ("LTRI"), Carretta LTR, Inc. ("CLI") and Carretta Transportation Logistics, Inc. ("CTLI") (collectively the "Operating Companies"). See id. The Operating Companies are wholly owned subsidiaries of National Transportation Services, Inc. ("NTSI"). See id. Carretta owns seventy percent of the equity interest in NTSI. See id.

On or about 27 August 1996, AFC provided funding to LTRI, CLI, CTLI and NTSI (collectively the "Corporations"). See Gardner Decl., ¶ 2.

On 25 July 1996, in connection with the funding which AFC provided to the Corporations, Carretta provided to AFC an individual guaranty agreement (the "Guaranty"), which guaranteed the payment of any indebtedness of the Corporations to AFC. See Gardner Decl., ¶ 3; Guaranty attached as Exh. A to Gardner Decl. The Guaranty and related indebtedness were secured, inter alia, by an "Open-End Mortgage, Absolute Assignment of Leases and Rents and Security Agreement"³ in third priority with regard to the Paramus Property (the "First AFC Mortgage") and a second "Open-end Mortgage, Absolute Assignment of Lease and Rents and Security Agreement" in seventh priority with regard to the Paramus Property (the "Second AFC Mortgage").⁴See Gardner Aff., ¶ 4. The AFC Mortgages were executed on 27 August 1996. Also, on 27 August 1996, Carretta provided CoreStates Bank ("CoreStates"), a previous creditor, with a mortgage (the "CoreStates Mortgage") and with an assignment of rents (the "CoreStates Assignment of Rents") on the Paramus Property. See Carretta Aff., ¶ 10.

Before obtaining financing from AFC which was secured by the AFC Mortgages on the Paramus Property, Carretta was required to obtain the consent of CoreStates to further encumber the Paramus Property. See Opposition Brief at 6. The consent of CoreStates was necessary because in November of 1992 Carretta executed and delivered to CoreStates an instrument entitled "Covenant not to Convey or Encumber by Joseph Carretta in Favor of CoreStates, N.A." (the "Covenant Not to Encumber"). See Covenant Not to Encumber attached as Exh. C to Carretta Aff. The Covenant Not to Encumber was amended in August 1993 (the "Amended Covenant Not to Encumber"). See Amended Covenant Not to Encumber attached as Exh. D to Carretta Aff. Pursuant to the Amended Covenant Not to Encumber, Carretta could not further encumber the Paramus Property without first obtaining the consent of CoreStates. See id.

CoreStates consented to the AFC Mortgages pursuant to the terms and conditions of a subordination and irrevocable consent agreement (the "Intercreditor Agreement"), dated 26 August 1996. See Intercreditor Agreement attached as Exh. E to Carretta Aff. CoreStates, AFC and Carretta signed the Intercreditor Agreement. See id.

In the Intercreditor Agreement, CoreStates agreed the Amended Covenant Not to Encumber would not apply to the AFC Mortgages. See Intercreditor Agreement attached as Exh. E to Carretta Aff., ¶ K. The Intercreditor Agreement also reflected Carretta agreed to grant CoreStates a mortgage on the Paramus Property in the amount of $2,200,500.000, and that CoreStates had agreed to subordinate that mortgage to a mortgage in favor of AFC, up to $1,200,000. See id., ¶¶ J, K, 3, 4.

Each of the AFC Mortgages⁵ contained the following provision (the "AFC Assignment of Rents"):⁶

32. ABSOLUTE ASSIGNMENT OF LEASES AND RENTS

(a) As further security for the payment of the indebtedness and performance of the obligations, the Mortgagor hereby absolutely and unconditionally assigns to the Mortgagee, effective irrespective of any event of default hereunder, the rents, income and profits, including use and occupancy payments, and any payments realized from indemnifications running for the benefit of the Mortgagor, from the Paramus Property and all leases now or hereafter affecting the Paramus Property, together with any security deposits by tenants thereunder, if any, provided, however, that, except for proceeds received pursuant to indemnification where there is physical damage to or a lien upon the Paramus Property or where title is otherwise affected or burdened, until the occurrence of an event of default hereunder, the Mortgagor may collect and apply all rents and other such payments, and the Mortgagee hereby appoints the Mortgagor its attorney-in-fact for such purpose. The Mortgagee shall have the right forthwith after any event of default hereunder, with or without notice or demand, with or without the commencement of any action to foreclose this Mortgage and without the appointment of a receiver, to enter upon the Paramus Property, let the same collect all rents therefrom and apply the rents, after payment of all charges and expenses, on account of the indebtedness secured hereby, whether they matured or not, and the Mortgagor hereby irrevocably appoints the Mortgagee his attorney-in-fact to institute summary proceedings against any tenant of the Paramus Property who fails to comply with any lease provisions.

Id.

A security agreement is present in the AFC Mortgages as well. Paragraph 21 of the Mortgage Document states:

This Mortgage creates a security interest in the personal property and fixtures included in the Paramus Property and constitutes a security agreement under the New Jersey Uniform Commercial Code. Security interest is granted in all of the following, whether now owned or hereafter acquired:

. . . .

(c) all rents, issues and profits of the Paramus Property accruing after an event of default as defined in the Mortgage from Mortgagor to Mortgagee covering the Paraums Property, whether such leases or tenancies are now existing or are hereafter created.

Mortgage Document attached as Exh. J to Carretta Aff., Paragraph 21.

Moreover, paragraph 14 ("Paragraph 14") of the AFC Mortgages, in pertinent part, states:

MORTGAGEE\'S RIGHTS CUMULATIVE; MATTERS OF CONSTRUCTION

The rights and remedies of Mortgagee hereunder shall be in addition to every other right and remedy now and hereafter provided by law or equity or any other obligation document; the rights and remedies of Mortgagee shall be cumulative and not exclusive one of the other; Mortgagee may exercise the same at such times, in such order, to such extent, and as often as Mortgagee deems advisable, and without regard to whether the exercise of one precedes, concurs with, or succeeds the exercise of another. . . .

If any of the rights, remedies, powers or other provisions contained in this Mortgage . . . are inconsistent with or contrary to one another, all such rights, remedies, powers and other provisions shall at all times be construed so as (a) to maximize the Mortgagee\'s rights, remedies and powers under all circumstances, (b) to minimize (or eliminate) any and all constraints or limitations . . . on Mortgagee\'s ability to exercise and enforce such rights, remedies and powers and (c) to minimize (or eliminate) Mortgagor\'s and the Corporations\' defenses thereto, subject in all cases to mandatory, non-waivable requirements of applicable law (preceding clauses (i), (ii) and (iii), collectively the "Stated Enforcement Goals"). In any specific instance, those provisions of this Mortgage . . . which do not best achieve the Stated Enforcement Goals shall, in such specific instance, be deemed to be superseded by those provisions which best achieve the Stated Enforcement Goals, but only to the extent necessary in such specific instance to best achieve the Stated Enforcement Goals. Mortgagor acknowledges and agrees that Mortgagee shall be entitled to determine (in its sole and absolute discretion) in all instances which provisions of this Mortgage . . . best achieve the Stated Enforcement Goals.

Id.

B. Procedural History

It appears Carretta and the Corporations defaulted under their obligations to AFC beginning in October 1996. See Gardner Aff., ¶ 6B. Thereafter, on 16 January 1997, Carretta filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. As of 18 April 1997, AFC alleges Carretta owes at least $3,346,542.35 under the Guaranty. See id. ¶¶ 6-7.

On 3 June 1997, AFC filed the Motion to Enforce Assignment of Rents in the Bankruptcy Court. AFC sought the following remedies:

(1) A declaration that all rents, income, profits and leases with respect to the Paramus Property are the property of AFC and not Carretta or his estate;

(2) An accounting and other documentation concerning the rents, income and profits from the Paramus Property;

(3) Relief from the automatic stay provisions of the Bankruptcy

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