In re Ricca

• Decision Date: 26 February 2021
• Docket Number: Bky. No. 18-17880 PMM
• Citation: 626 B.R. 406
• Parties: IN RE: Daniel and Georgina RICCA, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

626 B.R. 406

IN RE: Daniel and Georgina RICCA, Debtors.

Bky. No. 18-17880 PMM

United States Bankruptcy Court, E.D. Pennsylvania.

Signed February 26, 2021

Michael D. Recchiuti, Kolb, Vasiliadis, Florenz & Recchiuti, LLC, Bethlehem, PA, for Debtors.

OPINION

PATRICIA M. MAYER, U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

Prior to filing for chapter 7 bankruptcy protection, Debtors Daniel and Georgina Ricca (the "Debtors")¹ financed various business ventures by borrowing money from D&P Private Lending, LLC ("D&P"). The Debtors defaulted on these loans, which resulted in a consensual modification of the lending agreements between the Debtors and D&P. A key component of the modification – and the heart of the controversy before the Court – is the Debtor Husband's pledge of a security interest in an inheritance from his father. The parties signed a contract to this effect, but D&P took no further steps to perfect the asserted security interest in the inheritance.

The modified agreements between the parties were executed prior to filing of the Debtors' bankruptcy petition. In addition, the Debtor Husband's father, Michael Ricca ("Michael") died before the filing, advancing the issue of who exactly is entitled to the proceeds from Michael's estate, i.e., the chapter 7 trustee (for distribution to unsecured creditors) or D&P (for satisfaction of its alleged security interest). The Debtor Husband's portion of the inheritance was paid to the chapter 7 trustee (the "Trustee") post-petition. The Trustee remains in possession of the funds and asserts that he is entitled to administer them as part of the chapter 7 liquidation process. D&P, seeking to collect, disagrees.

D&P asserts both that it is a secured creditor, its debt having been automatically perfected by a promised interest in the inheritance and, additionally, that because its security interest was never property of the bankruptcy estate, the lender is entitled to immediate payment of the amount owed (prior to the administration of the bankruptcy estate). The Trustee counters that D&P is not a secured creditor because the agreements between the Debtors and D&P failed effectively to create a perfected security interest pursuant to New Jersey's version of the Uniform Commercial Code (the "UCC").²

D&P filed two claims (claims no. 3 and 4, collectively, the "Claims"), as well as a Motion to Require the Trustee to Dispose of Certain Funds (the "Motion").³ The Trustee objected to both Claims (the "Objections") and filed a Response to the Motion.

Upon consideration of the unusual facts and seldomly used law, and for reasons discussed below, I hold that the modified agreements entered into by the Debtors and D&P created a valid perfected security interest in the expected inheritance. I further hold that while the Debtor Husband's interest in the inheritance is property of the estate (an asset to be administered by the Trustee), it is subject to the security interest of D&P. Accordingly, only the balance remaining after deducting the secured claims of D&P and the Debtor Husband's exemption may be administered by the Trustee. D&P should receive immediate payment on its Claims. Therefore, the Objections will be overruled and the Motion will be granted.

II. PROCEDURAL HISTORY

Events in the Bankruptcy

This chapter 7 bankruptcy case was filed on November 30, 2018. Michael H. Kaliner is the acting chapter 7 Trustee.

D&P is listed as a secured creditor on Schedule D, holding two (2) debts: one in the amount of $19,208.44 and one in the amount of $92,789.76. On Amended Schedule A/B, the Debtors lists the "Potential Inheritance" of $40,000.00 from his father as being "[s]ecured by Promissory Note to D&P Private Lending, LLC." Doc. # 14 at 7. The Debtor Husband claimed an exemption of $2,774.00 pursuant to 11 U.S.C. § 522(d)(5). Amended Schedule C, doc. # 26.

The Debtors received a discharge on April 4, 2019. Doc. # 20. On April 22, 2019, the Trustee filed a Notice of change from no-asset to asset and requested a claims bar date. Doc. # 22.

On March 3, 2020, D&P filed the "Motion to Require Trustee to Dispose of Certain Funds." Doc. #'s 34 and 36.

Proofs of Claim

D&P filed two proofs of claim in this bankruptcy and amended each claim twice.

Claim Number 3, originally filed on July 2, 2019, states a secured claim in the amount of $92,789.76 (described below as the "First Modified Loan").⁴ Claim Number 4 was also filed on July 2, 2019 as a secured claim in the amount of $19,208.40 (described below as the "Second Modified Loan").

The Claims were amended on August 6, 2019 asserting unsecured claims and both Claims were subsequently amended on September 17, 2019 to re-state the claims (in the same amounts) as secured claims.⁵ The second amended, secured claims will be referred to, respectively, as "Claim 3" and "Claim 4."

On March 19, 2020, the Trustee objected to Claim 3 and Claim 4. Doc. # 41.

A hearing was held on the Motion and the Objections on September 29, 2020. Following the hearing, the parties filed legal briefs. The matter is now ripe for disposition.

III. FACTS

The facts in this contested matter are essentially undisputed and are taken from the Joint Pre-Hearing Statement and the Debtors' schedules and statements.⁶

At the time of the bankruptcy filing, the Debtor Husband earned approximately $71,000.00 as a computer technician for United Parcel Service.⁷ However, in calendar year 2016 prior to filing, the Debtor Husband and his spouse earned a total of $121,765.00 from a combination of wages and the operation of a business. See Statement of Financial Affairs (doc. # 1 at 43).⁸ The Debtors also own Property Seller, LLC ("Property Seller"), a real estate holding company. See Schedule A/B at 5, Statement of Financial Affairs at 6.

Prior to the Petition Date, D&P and its affiliates,⁹ financed two (2) commercial loans to the Debtors and Property Seller.

First, on or about August 2, 2016, the Debtors borrowed $872,000.00 (the "First Loan"), in order to improve property located at 30 Dorann Ave., Princeton, New Jersey ("the Princeton Property"). The First Loan was secured by a mortgage on the Princeton Property and a second mortgage on property located at 150 Mountaintop Road in Bridgewater, New Jersey ("the Bridgewater Property"). See Doc. # 59 at 8; Tr. Ex. 5A. On August 17, 2018, D&P and the Debtors modified the First Loan (the "Modified First Loan"). The Debtors owe $92,789.76 on the Modified First Loan, which is the balance on the loan following sale of the property. Id. D&P released its second mortgage on the Bridgewater Property as part of the Modified First Loan. See Tr. Ex. 5A at 2.

Second, on or about August 24, 2017, the Debtors and Property Sellers borrowed $570,000.00 from D&P in order to improve the Bridgewater Property (the "Second Loan"). The Second Loan was secured by a primary mortgage on the Bridgewater Property. Following the Debtors' default, the Second Loan was modified by agreement on August 17, 2018, the same day that the First Loan was modified (the "Modified Second Loan"). The Second Modified Loan clarified that the Debtors were only "personally responsible for ... $19,208.44," which is the balance due following the sale of the property. Doc. # 59 at 7, 10. As part of the Modified Second Loan, D&P released its primary mortgage on the Bridgewater Property. See Tr. Ex. 7 at 2.

Both the Modified First Loan and the Modified Second Loan contain the following provision:

Borrower's Promise to Pay Principal and Interest . Borrower promises to pay [principal amount] with interest... Borrower is responsible for only this debt and is not responsible [sic] the debt of any other member of Property Sellers, LLC. The Debt is partially guaranteed by a Security Interest in inheritance in the estate of Michael L. Ricca .

Tr. Ex. 5A at 2; Tr. Ex. 7 at 2 (emphasis added). The First and Second Modified Loans (collectively, the "Modified Agreements") were executed on or about August 21, 2018, after the Debtor Husband informed D&P that he was entitled to an inheritance and was willing to secure the debts with this interest. Doc. # 59 at 9. D&P did not file a UCC financing statement or otherwise record its purported security interest in the Inheritance after execution of the Modified Agreements. Doc. # 59 at 8.

Michael died testate on April 15, 2017 (after the First and Second Loans were executed but prior to the issuance of the Modified Agreements). Michael's will split his assets evenly between his two (2) adult children, Todd Ricca and the Debtor Husband. Tr. Ex. 13. Michael's will was probated in New Jersey on May 23, 2017. Id.

Following the completion of probate, on October 8, 2019, $146,272.41 of the Debtor Husband's inheritance (the "Inheritance") was paid directly to the Trustee. See D&P Ex. 3; Tr. Ex. 1. This amount reflects a net inheritance from Michael's estate of $149,046.41 minus the $2,774.00 paid to the Debtor Husband for his personal exemption. Tr. Ex. 1 at 2.

IV. THE PARTIES' ARGUMENTS

The Trustee maintains that the Claims are unsecured because the security interest that D&P asserts was created by the Modified Agreements is not "self-sustaining," i.e., the omission

of an "assignment agreement, a statement of assignment, or any other adequate prima facie pleading evidencing the assignment of Mr. Ricca's beneficial interest as an heir, legatee, devisee or otherwise" is fatal. Objection, doc. # 41 at 7. See also Trustee Brief at 18 (arguing D&P needs "something more," namely an assignment "as opposed to a mere pledge").

D&P, conversely, insists that the Debtors effectively and conclusively conveyed a security interest to it upon execution of the Modified Agreements. D&P disputes the Trustee's contention that "something more" is needed in order for the language employed to create a valid and enforceable security interest in the Inheritance and its proceeds. According to D&P, all necessary elements were met.

The parties agree that New Jersey law applies¹⁰ and that the New Jersey UCC governs this...