In re Kovalchick
| Decision Date | 14 December 1994 |
| Docket Number | 91-24183DAS.,Bankruptcy No. 91-24182DAS |
| Citation | 175 BR 863 |
| Parties | In re Peter KOVALCHICK and Donna Lyn Kovalchick, Debtors. In re Michael KOVALCHICK and Cathy Kovalchick, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Joseph A. Torregrossa, Morgan, Lewis & Bockius, Philadelphia, PA, Court-appointed mediator.
David F. Dunn, Allentown, PA, for debtors.
Vincent J. Presto, Geoffrey R. Johnson, Charles J. Hardy, Sprague & Sprague, Philadelphia, PA, for R/S Financial Corp.
William P. Carlucci, Williamsport, PA, for Com. Bank.
Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA.
The posture of the above-captioned individual Chapter 11 cases of two brothers and their respective wives is unusual and is explained by the fact that the matter was reassigned to this judge in the midst of a planconfirmation process which the predecessor judge had apparently determined should occur prior to the court's trying (1) underlying adversary proceedings brought against certain common creditor with a long-standing dispute against several members of the Debtors' family; and (2) objections to that creditor's claims by the Debtors. After a report from a mediator assigned through our court's newly-established mediation process that no global resolution of the parties' difference could be reached at this time, which this court hoped would short-circuit a potentially complex decision-making process, we are compelled to pick up and decide the two motions presently before us. Deciding these motions will settle certain issues between the parties which pervade the aforementioned adversary proceedings and objections to the creditor's claims. Our Order accompanying this decision will also schedule a status hearing on December 22, 1994, to determine the next appropriate steps in the resolution process.
The first two motions before us seek the preemptory disallowance of the ballots which it is anticipated that R/S Financial Corporation ("R/S"), a large judgment creditor of both Debtors, will file rejecting the Debtors' respective plans ("the Ballot Motions"). The second two motions ask us to estimate the claims of R/S in each case for the purposes of plan voting ("the Valuation Motions"). At the heart of all of these motions is the parties' ongoing dispute over the validity of R/S's State Court Judgments against the Debtors ("the Judgments") and ownership of the Debtors' respective residences.
We first consider whether we are bound by the results of very significant fact-determinations made by the State Court in entering the Judgments, under the doctrine of collateral estoppel, and conclude that we are. Given this conclusion, certain issues drop out of these disputes, allowing us to fairly easily dispose of the merits of the motions before us. First, we find that the Debtors have not articulated any grounds which would warrant the disallowance of any votes cast by R/S rejecting the Debtors' plans. Second, we value, for plan voting purposes only, R/S's secured claims in each of the Debtors' bankruptcy cases at amounts close to the most recent and most reliable valuation figures presented at trial, and classify the balances of R/S's total claims of $1,617,564.48 as unsecured. We note that the latter exercise is largely academic, given that both R/S's secured and unsecured claims are separately classified in each of the Debtors' plans, and, therefore, the exact amount of each claim (unless that amount happened to be zero) would not affect in any way the acceptance or rejection of those classes. However, we also recognize that the decision of the issues in question was necessary before the Debtors could realistically formulate plans. Whether the parties want to resume the confirmation process, the mediation process, or complete various litigation proceedings generated in these cases over the years will be determined at the aforementioned status hearing.
The present state of affairs has a much too long and somber history, dating back to 1977. We repeat that history here, at some length, as a necessary backdrop to our decision and to put the other matters remaining before us in proper context. In August 1977, R/S filed a law suit in the Court of Common Pleas for Schuylkill County ("the State Court"), against Anthony, Sr., and Helen Kovalchick, the parents of Peter and Michael Kovalchick ("the Parents"). The basis of this suit was a controversy which arose in conjunction with a sale/lease transaction of certain mining equipment. Although the facts of this dispute have thankfully not been presented to us by any party, the controversy apparently centered around alleged fraudulent misrepresentations of the Parents in selling the mining equipment to R/S, who in turn leased the equipment to a third party ("the Lessee"). Essentially, R/S claimed that the equipment was not in good working order as promised, nor was the contemplated mining operation feasible, despite the Parents' alleged assurances to the contrary. Also, R/S claimed that the Parents, with the aid of the Lessee, inflated the value (and therefore, the sale price) of the mining equipment, and "kicked back" some of the excess sale price to the Lessee. The Parents filed an answer denying the allegations of R/S's complaint, thus beginning long and hotly contested litigation which spawned the instant disputes.
Shortly before R/S filed its law suit against the Parents, but after the controversy erupted, the Parents divided their land located in New Ringgold, Schuylkill County, Pa. ("the Property"), and transferred several of the lots to their children and children-in-law, including Peter Kovalchick ("Peter") and his wife Donna-Lyn (collectively "P & D") and Michael Kovalchick ("Michael") and his wife Cathy ("Cathy", with Michael, "M & C") (together P & C and M & C are referenced as "the Debtors"). The Debtors paid only nominal consideration for their subdivisions of the Property. Each couple constructed a home on their respective lot within a few years after the Property transfer.
On May 20, 1982, a jury verdict in the amount of $1,436,489.49 was entered in favor of R/S and against the Parents. On November 18, 1983, the Property apparently was sold at a sheriff's sale to R/S on a writ of execution arising out of a judgment entered on the verdict. It is clear from the sale advertisement, and the alleged lack of notice to the Debtors, that R/S was unaware of the 1977 transfers of portions of the Property to the Debtors, and sold the entire Property as land belonging to the Parents only. We are unable to determine if either the Parents or the Debtors challenged the sheriff's sale per se. R/S claims to have received a sheriff's deed for the entire Property. We therefore assume that the sale was never successfully challenged.
Apparently learning that the Parents' children were living on the Property, R/S filed, on June 1, 1983, interrogatories in garnishment ("the Interrogatories") addressed to all of the transferees of the Property ("the Garnishees"), including the Debtors. The Debtors have raised a question regarding the sufficiency of service of the Interrogatories. Notwithstanding the alleged defects in service, M & C claim that they did timely file answers to the Interrogatories on June 29, 1983, although these answers do not appear on the State Court docket. On August 26, 1983, default judgments in the amount of $1,436,489.49 were entered against each pair of Debtors for failing to answer the Interrogatories ("the Judgments"). The Superior Court of Pennsylvania, upon review of the verdict against the Parents, reduced it to $1,004,831.65, thus reducing the Judgments to that amount.
On September 9, 1983, the Debtors filed a joint pro se petition to open the Judgments in the State Court ("the First Petition"). It is the Debtors' contention, perhaps arising from misunderstandings due to their pro se status, that the Honorable Donald D. Dolbin of the State Court entered an order opening the Judgments. However, this alleged order does not appear on the State Court's dockets, nor were the Debtors able to produce a copy of it. Instead, we find an order of the Honorable John E. Lavelle of the State Court dated September 28, 1983, directing the parties to proceed on the First Petition in accordance with Pennsylvania Rule of Civil Procedure ("Pa.R.Civ.P.") 209(a). Pa.R.Civ.P. 209(a) requires the petitioner, in this case the Debtors, to proceed by taking depositions on questions of disputed fact once an answer is filed by the respondent. Although the State Court docket reveals that R/S filed an answer to the First Petition on September 27, 1983, we find nothing which suggests that Debtors, whose pro se status undoubtedly rendered comprehension of such a responsibility somewhat problematical, complied with Pa.R.Civ.P. 209(a), or further pressed their First Petition before the State Court in any fashion.
On June 18, 1984, R/S filed a petition in the State Court to fix the amount of its deficiency claim against the Parents and the Garnishees ("the Deficiency Proceeding"). In conjunction therewith, the State Court fixed the aggregate value of the Property at $81,100.00, the value of P & D's portion of the Property at $31,520.00, and the value of M & C's portion of the Property at $20,010.00.
No further activity occurred in the State Court case until May 1988, when R/S sought to revive the Judgments. On July 1, 1988, this time with the aid of counsel, the Debtors filed preliminary objections to the revival which, contrary to applicable state law, attempted to attack the merits of the underlying Judgments, and were, for that reason, overruled by the State Court on November 22, 1988. See, e.g., PNC Bank, N.A. v. Balsamo, 430 Pa.Super. 360, 369, 634 A.2d 645, 649 (1993) (...
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