In re Leonetti, Bankruptcy No. 81-00772K
| Decision Date | 06 April 1983 |
| Docket Number | Bankruptcy No. 81-00772K,Civ. A. No. 83-162. |
| Citation | 28 BR 1003 |
| Parties | In re Alfred J. LEONETTI, Jr. and Lois R. Leonetti, Debtors. EARL REALTY, INC., Appellant, v. Alfred J. LEONETTI, Jr., Lois R. Leonetti, Brigantine Coast Realty, Inc. and Commercial Mortgage Co. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Alison Douglas Knox, Philadelphia, Pa., for appellant.
Leonard Goldberger, Philadelphia, Pa., for Brigantine Coast Realty.
Gilbert Newman, Philadelphia, Pa., for Commercial Mortgage Co.
Edward J. DiDonato, Philadelphia, Pa., for trustee.
In this action, the appellant, Earl Realty, Inc., ("Earl"), a creditor and holder of judgment liens against Alfred J. Leonetti, Jr. and Lois R. Leonetti ("Leonetti"), (debtors in Bankruptcy Action No. 81-00772K), filed a complaint in the bankruptcy court to subordinate a purchase-money mortgage lien held by defendant Commercial Mortgage Company ("Commercial Mortgage") as a secured claim upon the principal asset of the Leonetti estate in bankruptcy (a house in Brigantine, New Jersey). Specifically, Earl alleged that the mortgage underlying the lien was not obtained through normal arms-length business dealings but was a sham designed to provide Leonetti with needed cash on the eve of the bankruptcy while giving Commercial Mortgage secured creditor status and priority against any bankruptcy estate that might result.
A trial on this issue was held before the bankruptcy court on September 22 and 23, 1982. The bankruptcy judge ruled in favor of Commercial Mortgage and pursuant to Fed.R. Bankruptcy Procedure 741, which incorporates Fed.R.Civ.P. 41(b), dismissed Count II of Earl Realty's complaint and entered judgment in favor of Commercial Mortgage. The bankruptcy court's order was not accompanied by an opinion. In effect, the bankruptcy judge's order held that the mortgage obtained from Commercial Mortgage by Leonetti was in fact a valid purchase-money mortgage that was the product of arms-length dealings between Leonetti and Commercial Mortgage in that plaintiff had not carried its burden of persuasion to show otherwise. Both parties agree that the mortgage, if it is a legitimate purchase-money mortgage, takes priority over the unsecured judgment lien claims of Earl Realty in the distribution of the assets of the Leonetti estate in bankruptcy. Earl Realty subsequently filed a motion for reconsideration with the bankruptcy judge. When this motion was denied, Earl filed a notice of appeal requesting that this Court grant them a new trial due to alleged procedural errors committed at the trial. For the reasons hereinafter set forth, the Court will, pursuant to Interim Bankruptcy Rule 8004, exercise its discretion and decide Earl's appeal of the bankruptcy court's order as an interlocutory order, affirm the dismissal of Count II of Earl Realty's complaint, and direct that the parties and the bankruptcy court adhere to the stipulation of June 17, 1982 until the appeals in this matter are concluded.
In Northern Pipeline Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) ("Marathon"), the United States Supreme Court held that the broad grant of jurisdiction to Article I bankruptcy judges contained in the Bankruptcy Reform Act of 1978 ("The 1978 Act") was unconstitutional insofar as it conferred upon the bankruptcy courts jurisdiction over cases that, in the absence of a bankruptcy petition, could have been brought in federal or state trial courts. The Supreme Court stayed its holding until October 4, 1982 and then extended the stay until December 24, 1982 in order to provide Congress an opportunity to amend the 1978 law. Congress did not act. On December 25, 1982, the Marathon holding took effect. To enable itself to continue to conduct bankruptcy proceedings, this Court, on December 21, 1982 adopted an Emergency Interim Bankruptcy Rule for the Administration of the Bankruptcy System. The Emergency Interim Rule became effective on December 25, 1982. The Rule provides that it shall remain in effect until "Congress enacts appropriate remedial legislation in response to the Supreme Court's decision in Northern Pipeline Marathon or until March 31, 1984, whichever first occurs".
Regarding the continued activity of the bankruptcy court for the Eastern District in the wake of Marathon, the Emergency Interim Rule provides that "the bankruptcy court constituted by § 404 of Public Law 95-598 the 1978 Act shall continue to be known as the United States Bankruptcy Court for this district" and that "all cases under Title 11 and all civil proceedings under Title 11 or arising in or related to cases under Title 11 are referred to the bankruptcy judges of this district." The Emergency Interim Rule further provides:
Courts of bankruptcy and procedure in bankruptcy shall continue to be governed by Title IV of Public Law 95-598 as amended and by the bankruptcy rules prescribed by the Supreme Court of the United States pursuant to 28 U.S.C. § 2075 and limited by SEC. 405(d) of the Act, to the extent that such Title and Rules are not inconsistent with the holding of Northern Pipeline Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).
The Emergency Interim Rule has been held to be a constitutional exercise of the judiciary's power to regulate the cases coming before it and has been held to be consistent with the Marathon decision. See Prudential Insurance Company v. Stouffer Corporation, 26 B.R. 1019 (D.C.E.D.Mich. 1983).
Both defendants, Leonetti and Brigantine Coast Realty, Inc. ("Brigantine Coast"), filed petitions for Chapter 11 bankruptcy reorganization in 1981. (Leonetti is the debtor in Bankruptcy No. 81-00772K and Brigantine Coast is the debtor in Bankruptcy No. 81-00899K.) During the course of proceedings in bankruptcy court, the Leonetti bankruptcy was converted from Chapter 11 reorganization bankruptcy to Chapter 7 liquidation bankruptcy. Earl Realty is a creditor and holder of judgment liens against both Leonetti and against Brigantine Coast Realty. On November 12, 1981, Earl filed an amended complaint against the debtors. Count I of the complaint sought to determine the dischargeability of the debts of Leonetti and Brigantine Coast pursuant to Section 523 of the 1978 Act (11 U.S.C. § 523). In particular, Count I alleged that Leonetti owed $484,138.62 to Earl, which is the assignee of a claim against Leonetti in that amount plus interest and costs. The judgment against Leonetti, originally held by Speer Brothers, Inc., resulted from a judgment entered against Leonetti in the Court of Common Pleas of Chester County upon counts of fraud, conversion and misappropriation of sums of money lent to Leonetti by Speer Brothers and for loss of value in the stock of Speer Brothers as a result of misappropriation and mismanagement of the corporation's affairs by Leonetti. Brigantine Coast is a corporation that is 99% owned by Leonetti. Earl alleges that they conducted the business of Brigantine Coast without regard to the corporate form and that Brigantine Coast is jointly liable for the aforesaid financial obligations of Leonetti. Thus, in Count I of its complaint filed in bankruptcy court, Earl Realty asked that the judgment debt to Speer Brothers, of which Earl is the assignee, be determined to be nondischargeable pursuant to Section 523(a)(2), (4), and (6) of the 1978 Act. (11 U.S.C. § 523).
Count I, however, is not before this court. It is the Court's understanding that Count I is in the process of being litigated before the bankruptcy court. By stipulation of the parties entered into on January 28, 1982, it was agreed that Count I and Count II of Earl Realty's complaint would be severed and that Count II would be tried first while Earl Realty filed a motion for summary judgment in connection with Count I. As heretofore noted, Earl Realty's allegations in Count II of the complaint were tried before the bankruptcy court in September, 1982. The bankruptcy judge found in favor of Commercial Mortgage and against Earl Realty. Earl moved for reconsideration. On October 27, 1982, the bankruptcy court affirmed its earlier decision by order without opinion. It is this decision on Count II of the complaint from which Earl Realty appeals, requesting a new trial on Count II as a result of errors allegedly committed at the trial.
Specifically, in Count II of the complaint, Earl seeks to subordinate the purchase-money mortgage lien of defendant Commercial Mortgage as a secured claim upon the principal asset of the Leonetti estate in bankruptcy—so that the mortgage lien is not given priority over the judgment lien which Earl Realty holds as assignee of Speer Brothers in any distribution of the Leonetti estate that subsequently results pursuant to the liquidation and dischargeability provisions of Chapter 7 of the 1978 Act.
If Commercial Mortgage's mortgage lien is the result of a valid purchase-money mortgage, it will probably take priority over the lien held by Earl Realty in the disbursement of the assets of the Leonetti estate. However, if the mortgage is not a valid purchase-money mortgage, then the mortgage lien would probably not automatically take priority over the judgment lien held by Earl Realty. It is alleged by Earl Realty that the mortgage was not the result of normal, arms-length business dealings between the parties but resulted from the collusion of Leonetti and Mr. and Mrs. Cappelli, the parents of Mrs. Leonetti, and that Commercial Mortgage was or should have been aware that the mortgage only refinanced the house that was already effectively owned by Leonetti. If Earl Realty had carried its burden of proving that the purchase-money mortgage was the result of inequitable dealing, the distribution of the Leonetti estate in bankruptcy would be determined by ...
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