In re Topcroft, Inc.
| Decision Date | 12 December 1991 |
| Docket Number | Adv. No. 90-2012.,Bankruptcy No. 89-20505,Civ. A. No. 91-905(HAA) |
| Citation | 136 BR 99 |
| Parties | In re TOPCROFT, INC., Debtor. DnC AMERICA BANKING CORPORATION, Plaintiff-Appellant, v. TOPCROFT, INC., et al., Defendants-Respondents. |
| Court | U.S. District Court — District of New Jersey |
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Jeffrey Walter Herrmann, Cohn & Lifland, Saddlebrook, N.J., for appellant.
Howard Gary Schlesinger, Jaffe & Schlesinger, Springfield, N.J., for appellees.
Jeffrey S. Feld, Cole, Schotz, Bernstein, Meisel & Forman, Hackensack, N.J., for trustee.
This matter comes before the court on an appeal by the plaintiff-appellant, DnC America Banking Corporation ("DnC"), of two orders of the United States Bankruptcy Court. The first granted the defendant-respondent, Topcroft's motion to dismiss and for partial summary judgment and invalidated DnC's mortgage lien. The second denied DnC's motion for relief from the automatic stay. I have jurisdiction to entertain this appeal under 28 U.S.C. § 158, "the district courts of the United States shall have jurisdiction to hear the appeals from final judgments, orders, and decrees, and with leave of the court, from interlocutory orders and decrees of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges . . ." 28 U.S.C. § 158(a). I decide this motion without oral argument pursuant to Federal Rules of Civil Procedure 78.
The bankruptcy court based its decision to invalidate the mortgage on DnC's failure to comply with three New Jersey statutes: the Banking Act, N.J.S.A. 17:9A-1 et seq., the Investment Company Act, N.J.S.A. 17:16A-1 et seq., and the Business Corporation Act, N.J.S.A. 14A:13-1 et seq. DnC contends that it is a "foreign bank" and as such New Jersey statutory law does not require that DnC register under any of these statutes in order to be able to enforce the mortgage in issue. The plaintiff further contends that even if registration were required under the New Jersey statutory scheme failure to do so could not result in the voiding of its mortgage. Finally, plaintiff contends that as its mortgage is valid and enforcable and the debtor has no equity relief from the automatic stay is proper.
The defendant-respondent, Topcroft, Inc., contends that the Bankruptcy Court's decision should be affirmed. Topcroft argues that the findings of the bankruptcy court are fully supported by the record and applicable law and should be upheld. Specifically defendant argues that this Court should affirm Judge Tuohey's conclusions that 1) DnC was estopped from asserting that it qualified as a foreign bank under the New Jersey Banking Act; and 2) the mortgage lien obtained by DnC against the Debtor, having been obtained in absence of compliance with valid and enforcable state regulations, is the tainted fruit of an illegal contract, and therefore not enforcable in bankruptcy court by the plaintiff.
The Chapter 11 Trustee, Sanford I. Feld, though he did not participate in the adversary proceeding below, also submitted a brief on this appeal. He contends that the case should be remanded to the bankruptcy court for further findings of fact and conclusions of law concerning whether DnC is a foreign investment company doing business in New Jersey, and to give the plaintiff an opportunity to comply with New Jersey corporate law. The Trustee further contends that DnC is not entitled to relief from the automatic stay and that the case should be remanded to the bankruptcy court for further findings on the extent, validity, and priority of the mortgage lien and for findings concerning Topcroft's counterclaims.
In May of 1987 DnC agreed to lend the defendant, Topcroft, $8,500,000.00, and received as collateral a mortgage on certain property owned by Topcroft in Franklin, New Jersey. The loan as well as the documents, including the mortgage were negotiated at DnC's office in New York.
On or about November 6, 1989, the plaintiff, DnC, filed a complaint against the debtor in the New Jersey Superior Court, alleging that Topcroft had failed to make monthly payments as required by the mortgage and seeking to foreclose on the mortgage it received from the defendant, Topcroft, to secure a $8,500,000.00 loan made by DnC in May of 1987. Topcroft answered the complaint on December 4, 1987, and on December 5, 1989 filed a voluntary petition under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of New Jersey. On December 14, 1989, Topcroft removed the foreclosure action to this Court and on January 1, 1990, this Court referred the foreclosure action to the Bankruptcy Court.
On January 12, 1990, Topcroft moved for the entry of an Order (1) dismissing the foreclosure complaint on the grounds that DnC had failed to register to do business pursuant to N.J.S.A. 17:9A-318, and (2) declaring the mortgage lien to be null and void as the fruit of an illegal transaction under New Jersey law. Subsequently, on April 25, 1990, DnC moved to modify the automatic stay and for summary judgment on the removed foreclosure complaint. The Bankruptcy Court heard oral argument on the cross-motions on May 21, 1990, adjourned the motions without prejudice and directed counsel to expedite discovery. On September 24, 1990, the Honorable William F. Tuohey entered an order directing the appointment of a Chapter 11 Trustee and Sanford I. Feld accepted the appointment on October 2, 1990.
On October 31, 1990, the Bankruptcy Court heard the oral argument of counsel and on December 13, 1990, rendered an opinion invalidating the mortgage lien of DnC and denying DnC relief from the automatic stay. 122 B.R. 235. The bankruptcy court found that DnC was not a "foreign bank" within the meaning of the New Jersey Banking Act, N.J.S.A. 17:9A-1 et seq., but rather "more like an investment company as such is defined in N.J.S.A. 17:16A-1". See Bankruptcy Opinion ( ) 122 B.R. at 238. The Court found that DnC violated New Jersey law by failing to register as a foreign corporation as required by the statute regulating investment companies, N.J.S.A. 17:16A-1, -6, and that these regulations do not violate the Commerce Clause of the United States Constitution. Id. at 239, 240. Judge Tuohey found that the mortgage is unenforcable because it was made in violation of the New Jersey statutory scheme. Finally, the Bankruptcy Court found that as the loan transaction was illegal, the mortgage is void and consequently DnC is a general unsecured creditor who may not get relief from the stay. Id. at 240.
Bankruptcy Rule 8013 sets forth the standard of review for appeals from Orders of a Bankruptcy Court. Findings of fact will be upheld "unless clearly erroneous". See Bankruptcy Rule 8013; Resyn Corp. v. United States, 851 F.2d 660, 664 (3rd Cir. 1988). In defining the term "clearly erroneous" the United States Supreme Court has stated that "a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conclusion that a mistake has been committed." United States v. Gypsum Co., 333 U.S. 364, 365, 68 S.Ct. 525, 527, 92 L.Ed. 746 (1948). Legal conclusions are subject to plenary review. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3rd Cir.1988).1
Initially I note that under all three statutory schemes cited by the Bankruptcy Court, the Banking Act, N.J.S.A. 17:9A-1 et seq., the Investment Company Act, N.J.S.A. 17:16A-1 et seq., and the Corporations Act, N.J.S.A. 14A:13-11, the prohibitions against an unregistered foreign corporation maintaining an action in New Jersey will only come into play if the foreign corporation has engaged in intrastate business within the state of New Jersey. This is true based both on the plain language of the statutes and under the Commerce Clause of the United States Constitution.
The penalty section of the New Jersey Banking Act precludes foreign banks from bringing suits arising from the transaction of business within New Jersey without a certificate. Section 17:9A-330 provides in pertinent part:
A. A foreign bank shall not be entitled to maintain any action in any court of this State on any cause of action arising out of its transaction of business in this state in violation of the provisions of this article.
N.J.S.A. 17:9A-330 (emphasis added). Similarly, the Investment Company Act only precludes doing business within the state of New Jersey without a certificate:
Prohibition to do business. No investment company as defined in this chapter shall undertake the transaction of an investment business in this State until it shall have complied with the applicable requirements of this chapter and shall have received the certificate of authority of the Commissioner of Insurance . . .
N.J.S.A. 17:16A-2 (emphasis added). Finally, the Corporations Act states:
The language of these statutes is reinforced by the Supreme Court's jurisprudence on the Commerce Clause of the United States Constitution. This clause reads in pertinent part:
United States Constitution, Article I, § 8. In 1910, the Supreme Court first recognized the right of access to state courts in order to enforce an interstate contract. The Court held that a statute preventing a foreign corporation from bringing suit in another state's courts was tantamount to requiring a license and that when the corporation was engaged in interstate business such a prohibition violated...
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