In re Zinchiak

• Decision Date: 28 April 2005
• Docket Number: No. 03-4509.,03-4509.
• Citation: 406 F.3d 214
• Parties: In re Kenneth ZINCHIAK, d/b/a Zinchiak Manufacturing Co., Debtor, Kenneth A. Zinchiak & Kathleen K. Zinchiak, husband and wife, Appellants, v. CIT Small Business Lending Corporation, as successor to Newcourt Small Business Lending Corporation f/k/a AT & T Small Business Lending Corporation.
• Court: U.S. Court of Appeals — Third Circuit

406 F.3d 214

In re Kenneth ZINCHIAK, d/b/a Zinchiak Manufacturing Co., Debtor Kenneth A. Zinchiak & Kathleen K. Zinchiak, husband and wife, Appellants, v. CIT Small Business Lending Corporation, as successor to Newcourt Small Business Lending Corporation f/k/a AT & T Small Business Lending Corporation.

No. 03-4509.

United States Court of Appeals, Third Circuit.

Argued February 8, 2005.

Filed: April 28, 2005.

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P. Raymond Bartholomew (Argued), Bartholomew & Wish, Hermitage, PA, for Appellants.

Dennis J. Roman (Argued), Grogan Graffman, P.C., Pittsburgh, PA, for Appellee.

Before: BARRY, FUENTES, and BECKER, Circuit Judges.

OPINION OF THE COURT

FUENTES, Circuit Judge.

In this appeal, we must determine whether the Bankruptcy Court abused its discretion in reopening the bankruptcy case of appellant Kenneth A. Zinchiak ("Zinchiak" or "Debtor") to permit the appellee Newcourt Small Business Lending Corporation ("Newcourt")¹ to file a petition to fix the fair market value of certain real estate under Pennsylvania's Deficiency Judgment Act ("DJA"), 42 Pa. Const. Stat. Ann. § 8103, and, if not, whether the Bankruptcy Court properly interpreted the interplay between the DJA and the jurisdictional and automatic stay provisions of the U.S. Bankruptcy Code ("Code"). The District Court affirmed the decision of the Bankruptcy Court to reopen the case as well as its treatment of the merits of Newcourt's deficiency petition under the DJA. The Debtor-appellant Zinchiak and his wife now appeal from these decisions. For the following reasons, we will affirm.

I. Background

A. Bankruptcy Proceedings

The essential facts are not in dispute. Zinchiak filed a voluntary Chapter 11 petition in the Bankruptcy Court for the Western District of Pennsylvania on January 29, 1999. With the debtor's consent, the case was converted to a Chapter 7 proceeding on April 22, 1999, and a trustee was appointed.

Zinchiak owned commercial real estate located in Crawford County, Pennsylvania ("business property") as well as certain personal property used in his business operation ("personal property," and together with business property, the "business assets"). Zinchiak and his wife, Kathleen Zinchiak, also owned residential real estate in Mercer County, Pennsylvania ("residential property"). Each parcel of property was encumbered as follows. Newcourt held a first mortgage lien against the business property, as well as a first security lien on most of the personal property associated with the business operations. PNC Mortgage Corporation ("PNC"), as successor to Marine Bank, held a first mortgage lien against the residential property. Newcourt held a second mortgage lien on the residential property. The Money Store, n/k/a Alegis Group, Inc., held a third mortgage lien against the residential property.

On April 8, 1999, several months after Zinchiak's initial filing for bankruptcy, Newcourt filed a motion seeking relief from the automatic stay. See 11 U.S.C. § 362.² Specifically, Newcourt sought relief from the automatic stay to pursue its interests in the business property, personal property, and the residential property. Zinchiak and the trustee subsequently filed responses to Newcourt's motion. Zinchiak argued that the value in the business property was more than sufficient to satisfy Newcourt's claim on its business loan and thus there was no need to look to the residential property except in the event of a deficiency after liquidation of the business assets. Based on Zinchiak's assertions of value, the trustee requested that the automatic stay remain in effect until it was determined whether the administration of the estate might result in equity for the benefit of unsecured creditors. At a hearing on May 3, 1999 to consider the motion, Newcourt agreed to continue its motion to permit the trustee an opportunity to determine whether the Debtor's property could be marketed for a price which would render a benefit for the estate.

Thereafter, at a subsequent hearing on September 7, 1999, Newcourt presented recent appraisals of the Debtor's business property. Based on these appraisals, the trustee concluded that there was no equity for the benefit of unsecured creditors and therefore consented to the entry of an order granting Newcourt's motion for relief from the automatic stay. Nonetheless, although Zinchiak did not oppose the granting of relief from the automatic stay as to the business assets, he continued to oppose relief as to the residential property on the grounds that Newcourt could be paid in full, or nearly in full, from liquidation of the business assets. Accordingly, Zinchiak argued that there was no need to grant relief with respect to the residential property until it became evident from liquidation of the business assets that a deficiency remained on Newcourt's claim.

After the hearing, the Bankruptcy Court entered an order dated September 29, 1999 granting the Debtor's request. The order contemplated essentially a "step-by-step" approach in which Newcourt would proceed first to liquidate the business assets but wait to pursue its interests in the residential property until it became clear that a deficiency existed on its claim. Accordingly, the order lifted the automatic stay as to the business assets "so that Newcourt Financial may exercise its right to the above property under non-bankruptcy law." However, the order specifically stated that the motion "is deferred as to the [residential property]."³

With the automatic stay partially lifted, Newcourt proceeded to liquidate its interests in the business assets. In particular, at a sheriff's sale of the business property in June 2000, Newcourt was the successful purchaser for a bid of costs and taxes. After Newcourt commenced efforts to market the business property, it became clear, however, that liquidation of the business property would not satisfy Newcourt's claim and thus Newcourt would have to look to the residential property for full satisfaction. In light of this new information, Zinchiak was forced to concede for the first time, at a status conference held on October 2, 2000, that no equity remained in the residential property for the benefit of himself or any unsecured creditors.

Accordingly, on November 1, 2000, the Bankruptcy Court issued a memorandum opinion addressing the outstanding motions for relief from the automatic stay filed by PNC, Newcourt, and the Money Store. After reviewing the information submitted by the parties regarding the amount of the secured creditors' claims and the value of the residential property, the Bankruptcy Court found that under no scenario would there be any equity in the residential property for the benefit of the Debtor or unsecured creditors.⁴ Consequently, the Bankruptcy Court concluded that "[t]here appears to be no reason to further delay the [secured creditors] from proceeding against their collateral." In re Zinchiak, 280 B.R. 117, 124 (Bankr. W.D.Pa.2002). An order was entered on January 9, 2001 lifting the automatic stay and permitting PNC, Newcourt, and the Money Store to pursue "state court remedies" against the residential property.

An order of discharge was entered on March 28, 2001, and a final decree was entered on the same date closing the bankruptcy case.

B. Post-Bankruptcy Proceedings

On or about April 20, 2001, the Money Store filed a quiet title action in the Court of Common Pleas of Mercer County seeking to have Newcourt's mortgage against the residential property declared discharged and marked satisfied based on Newcourt's purported failure to comply with the requirements of the DJA.⁵ In particular, the Money Store alleged that Newcourt had failed to file a timely petition to fix the fair market value of the business property within the applicable six-month limitation period under the DJA or within 30 days of the lifting of the automatic stay. Newcourt filed preliminary objections to the Money Store's action on June 27, 2001. In addition, Newcourt filed a motion with the Bankruptcy Court to reopen the Debtor's bankruptcy proceeding, pursuant to Federal Rule of Bankruptcy Procedure 5010 and 11 U.S.C. § 350(b), in order to file the deficiency petition. Newcourt filed a similar petition to fix the market value of the business property in the Court of Common Pleas of Crawford County, although Newcourt insisted that this parallel state court filing was purely precautionary and that the Bankruptcy Court, which it contended shared concurrent jurisdiction with the state court to hear the petition, was the most suitable forum to hear the matter. In addition, Zinchiak and his non-debtor spouse filed a petition to mark Newcourt's foreclosure judgment satisfied, released, and discharged in the Court of Common Pleas of Crawford County. Thus, when the Bankruptcy Court ruled on the motion to reopen, at least three proceedings relating to Newcourt's deficiency petition were pending in state court.⁶

The Bankruptcy Court addressed the matters raised in Newcourt's motion to reopen in an opinion issued on July 3, 2002. See In re Zinchiak, 280 B.R. at 117. The Bankruptcy Court determined that cause existed to reopen the closed case and proceeded to adjudicate the merits of Newcourt's deficiency petition under the DJA. Thereafter, the Bankruptcy Court entered a separate consent order dated November 20, 2002, fixing the fair market value of the business property at $172,500. Having complied with the requirements of the DJA, Newcourt was now free to satisfy the deficiency on its claim from the residential property under applicable state law.

Zinchiak, his wife, and the Money Store filed an appeal to the District Court for the Western District of Pennsylvania. In a thorough and persuasive opinion, the District Court affirmed the Bankruptcy Court's decision to reopen the bankruptcy case as well as its resolution of the merits of Newcourt's...