In re Road Patch Services, Inc.
| Decision Date | 10 June 1993 |
| Docket Number | Adv. No. 93-0189S.,Bankruptcy No. 92-17055S |
| Citation | 154 BR 869 |
| Parties | In re ROAD PATCH SERVICES, INC., Debtor. ROAD PATCH SERVICES, INC., Plaintiff, v. Frank CARAPICO, A. Joseph D'Ambrosio, and Cordine Scartozzi, individually and trading as CDS Investment Company, a Pennsylvania general partnership, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Michael D. Sehl, Southeastern, PA, for debtor.
Guy A. Donatelli, West Chester, PA, for defendants.
Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA, U.S. Trustee.
Resolution of the instant proceeding requires this court to address the efficacy of a landlord's attempt to rationalize his apparent execution upon property of a third party non-tenant who is a debtor in bankruptcy following execution on a confessed judgment against the tenant as a distraint, and then to utilize distraint as a legal basis to retain that property. Finding alternatively that (1) the landlord was not actually utilizing distraint; and (2) if it were, any use of distraint is unconstitutional and the instant distraint effected by a sheriff is clearly unconstitutional, we will order that the landlord release all of the property in issue except one item removed from consideration to the Debtor, since the remaining items are property of the Debtor's bankruptcy estate.
ROAD PATCH SERVICES, INC. ("the Debtor") filed a voluntary Chapter 11 bankruptcy case on November 16, 1992. By Order of April 1, 1993, the Debtor was directed to file a plan of reorganization and an accompanying disclosure statement by July 1, 1993, and list the propriety of the disclosure statement for a hearing on July 28, 1993. The resolution of this proceeding should spur compliance with those directives.
On March 10, 1993, the Debtor filed the Complaint in this instant proceeding against FRANK CARAPICO, A. JOSEPH D'AMBROSIO, AND CORDINE SCARTOZZI, individually and as partners of CDS INVESTMENT COMPANY (collectively referred to as "CDS"), seeking the turnover of certain personal property ("the Property") apparently in a premises owned by CDS which is located at 891 East Lincoln Highway, Exton, Pennsylvania 19341 ("the Premises"). The Premises was leased from CDS by Ruth E. Turk and Charles L. Johnson, Jr. ("Johnson"), jointly and severally and trading as Pipe Maintenance Service, Inc. ("PMS"), under a lease dated May, 1986 ("the Lease").
In its Complaint, the Debtor sought recovery of certain business records and trucks, trailers, tools, and other equipment utilized by the Debtor in its business of repairing roads and highways for the state and various municipalities. No monetary damages or counsel fees were requested, allegedly because the Debtor wanted to concentrate on getting its property returned.1
A trial of the proceeding was scheduled on May 5, 1993. The parties stipulated, at its outset, that the Debtor was neither a tenant nor a subtenant at the Premises and that there was property on the Premises the return of which the Debtor had unsuccessfully attempted to procure from CDS. Following the hearing, we entered an Order giving the Debtor an opportunity to file a Brief by May 19, 1993, and CDS to file a Reply Brief by May 26, 1993.
The only witness at the trial was Johnson, the president, original incorporator, and sole shareholder of the Debtor since its formation in 1987. Johnson stated that he is also the president and fifty (50%) percent shareholder of PMS. He further testified that, as president of the Debtor, he had never entered into any contracts with CDS, although he had permitted the Debtor, in his capacity as president of PMS, to store its property and other materials and to have free access to the Premises. The business relationship between the Debtor and PMS was described as informal, in that each entity used property of the other without payment or documentation supporting same. The Debtor, PMS, and Jet Equipment Co. ("Jet"), another entity of which Johnson is a principal, also share a master insurance policy. Thus, the insurance financial responsibility identification card for a road patching truck at the Premises, although leased by the Debtor, listed the Debtor, PMS, and Jet as insured parties.
Johnson testified that the Debtor's primary place of business is located in Mountain Home, Monroe County, Pennsylvania. The Debtor utilized, for its filing, an address in Coatesville, Pennsylvania, where PMS presently has an office and the Debtor's remaining trucks are frequently repaired. The Debtor continues to remain in business and bid on projects because it had the majority of its equipment at its main office in Mountain Home and "on the road" when the seizure of the Property in issue occurred. However, Johnson claimed that, if his records and the Property were not promptly returned, he would be compelled to convert this case to a Chapter 7 case. At the conclusion of the trial, CDS agreed to forthwith return the Debtor's business records to it, and presumably this has been done, although we have included a reference to the records in our Order.
On October 9, 1992, CDS confessed a judgment in ejectment against PMS in the Chester County Court of Common Pleas, pursuant to a confession of judgment clause in the Lease, and evicted PMS from the Premises. The Complaint avers and the Answer also affirmatively states that "the sheriff levied" upon the disputed Property, presumably pursuant to the confessed judgment. However, in what appears to be a revisionist theory of its justification for the seizure, CDS now argues that the Property was subject to distraint, apparently pursuant to 68 P.S. § 250.302. See Luria Bros. & Co. v. Allen, 672 F.2d 347, 354 (3rd Cir.1982); Santiago v. McElroy, 319 F.Supp. 284, 286-88 (E.D.Pa.1970) (three-judge court); and Allegheny Clarklift, Inc. v. Woodline Indus. of PA, Inc., 356 Pa.Super. 269, 270 n. 1, 514 A.2d 606, 606 n. 1 (1986) ().
The only evidence in the record as to what physically occurred when the Debtor's Property was seized was the testimony of Johnson that, on October 14, 1992, a sheriff appeared at the Premises and informed him that he had "ten minutes to grab what he could and walk out the door." Since that date, the Property has remained on the Premises. Prior to commencing this Proceeding, Johnson prepared a list of the Property, which was entered into evidence at trial as Exhibit "D-1." However, he stated that the list was incomplete because it was prepared from memory without an opportunity to view the Premises or his records remaining therein.
Without restating the list in its entirety, we note that it included a tank truck, a van, a street sweeper and a trailer titled to the Debtor; a road patcher truck titled in the name of Community Patching Service ("Community"), which Johnson testified had been leased by the Debtor from Community; a motor home owned by him personally which he allegedly utilized in part on behalf of the Debtor; computer equipment owned by Valerie Steely, an employee of the Debtor, which was allegedly used by the Debtor in its business; a time clock which Johnson stated was owned by the Debtor but was "used" by PMS; and various pieces of equipment, materials, and other items used in the Debtor's business.
During the trial, the claim to recover the motor home on behalf of the Debtor was withdrawn. Johnson claimed that the retention of the Property had resulted in over $700,000 in lost business opportunities between October 14, 1992, and the time of trial. Although reiterating the absence of a damage claim, the Debtor's counsel was permitted to present this testimony as evidence of the Debtor's compelling need to recover the Property.
The post-trial Briefs of the parties reflect an important area of agreement. They concur, we believe correctly, that CDS could not execute upon property of the Debtor to satisfy its judgment for rent against PMS. See Werbsa v. Seiler, 263 F.Supp. 838, 843 (E.D.Pa.1967), aff'd, 393 F.2d 937 (3rd Cir.1968), citing Fidelity Trust Co. v. Union National Bank, 313 Pa. 467, 169 A. 209 (1933); and National Cash Register Co. v. Sorto, 106 Pa.Super. 106, 161 A. 766 (1932). See also Pennsylvania Rules of Civil Procedure 3201-16 ().
The pleadings in this proceeding and the testimony of Johnson at trial strongly suggest that the retention of the Debtor's Property by CDS was in fact under color of CDS' execution on its confessed judgment against PMS. Perhaps in recognition of this fact, CDS saw fit to devote a portion of its Brief to addressing the issue of whether its confessed judgment against PMS was constitutional and hence valid. This court held, in In re Souders, 75 B.R. 427, 433-38 (Bankr.E.D.Pa.1987), that any use of confessed judgments in Pennsylvania was unconstitutional. However, the Third Circuit Court of Appeals, in In re FRG, Inc., 919 F.2d 850, 856-57 (3rd Cir.1990), expressly rejected the reasoning, if not the result, of Souders.2
The FRG court held that, where a confessed judgment was utilized between "sophisticated principals, knowledgeable in business matters" and "was negotiated and specifically agreed upon in a commercial context in settlement of major litigation between parties represented by counsel," id. at 857, the entry of a confessed judgment was constitutionally permissible. However, the FRG court, id. at 856, approved the result in Souders, holding that the use of a confessed judgment was impermissible there because the debtor "did not understand the wording or significance of...
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