In re Catalano

643 B.R. 555

IN RE: Joseph F. CATALANO, Debtor.

Case No. 21-17308 (JNP)

United States Bankruptcy Court, D. New Jersey.

Signed July 21, 2022

E. Richard Dressel, Lex Nova Law, LLC, Marlton, NJ, Lex Nova Law, Cherry Hill, NJ, for Debtor.

Andrea Dobin, McManimon Scotland & Baumann, LLC, Trenton, NJ, Trustee, Pro Se.

Joseph R. Zapata, Jr., McManimon Scotland & Baumann, LLC, Trenton, NJ, for Trustee Andrea Dobin.

MEMORANDUM DECISION

JERROLD N. POSLUSNY, JR., U.S. Bankruptcy Judge

South Jersey Farmer's Exchange, Inc. ("SJFE") filed a claim on account of a pre-petition judgment. SJFE asserts that part of the claim is secured as a result of a pre-petition levy on Debtor's personal property. Debtor filed a motion to modify SJFE's claim (the "Motion") arguing that SJFE's claim should be reclassified as unsecured. Alternatively, Debtor argues the lien should be stripped off under section 522(f) of the Bankruptcy Code. SJFE filed opposition (the "Opposition") asserting multiple arguments that it is secured. Farm Credit East ACA ("Farm Credit") filed a joinder to the Motion arguing, inter alia, that SJFE is not properly perfected. Debtor filed a reply essentially adopting Farm Credit's arguments. The Court heard oral argument on May 10, 2022. For the reasons set forth below, the Court grants the Motion.

I. Background

Debtor filed a voluntary Chapter 12 petition on September 17, 2021 (the "Petition Date"), and continues to operate and manage his property as debtor-in-possession. SJFE initially filed a proof of claim in the amount of $455,263.52. SJFE subsequently filed identical amended claims, the final being Proof of Claim 7-3 (the "Claim"), which asserts a total claim in the amount of $455,263.52 arising from a final judgment in the matter of South Jersey Farmer's Exchange vs. Joseph F. Catalano, Jr., Superior Court of New Jersey, Law Division, Salem County, Case No. SLM-L-00200-19 (the "SJFE Judgment"). The Claim asserts SJFE is secured in the amount of $148,951 because the Sheriff of Salem County served a writ of execution upon Debtor on October 30, 2020. The Sheriff's notes related to the levy state "Personal Property Levy served personally. Inventory not completed due to Covid." Sheriff's Report, Claim 7-3 Part 4. Importantly, there is no inventory of any personal property levied.

Debtor disputes that any portion of the Claim is secured and seeks an order reclassifying the Claim as an unsecured claim. Debtor argues that, as a result of senior liens, there is no equity in Debtor's personal property to which the SJFE writ of execution could attach, thereby rendering the Claim unsecured. The purported senior liens include the claims of Farm Credit; the Internal Revenue Service ("IRS"); and the State of New Jersey, Department of Labor, Division of Employer Accounts ("State of NJ"). Debtor asserts these liens total approximately $425,000.

Debtor asserts that Farm Credit's claim for $193,818.93 is secured by mortgages against various of the Debtor's real properties and a security agreement and UCC-1s filed against Debtor's personal property. As of the Petition Date, Debtor's personal property had an estimated fair market value of $148,951, which amount included 2021 crops with an estimated fair market value of $75,000. Pursuant to a cash collateral order, the Court authorized Debtor to harvest the crops and directed the proceeds of the sale to be used to pay certain costs associated with the 2021 harvest; pay costs in preparation of the 2022 growing season; and make an adequate protection payment to Farm Credit on account of its security interest in the harvested crops. Therefore, Debtor no longer possesses the $75,000 worth of crops and asserts that SJFE's alleged secured claim must be reduced accordingly. At the May 10 hearing, SJFE conceded that Debtor's 2021 crops were not subject to SJFE's levy and therefore reduced its asserted secured claim to $73,951.

Debtor alternatively argues that the SJFE Judgment is avoidable pursuant to section 522(f)(1) of the Bankruptcy Code. Specifically, Debtor has exempted or could exempt all or a portion of the assets which make up his personal property. As a result, the S JFE Judgment in the amount of $425,257.16 and SJFE's writ of execution impairs Debtor's exemptions to his personal property. Thus, according to Debtor, the SJFE Judgment is avoidable pursuant to section 522(f)(1) of the Bankruptcy Code.

Farm Credit's joinder argues that, among other things, SJFE's purported levy is not enforceable because its attempted levy did not comply with the requirements of New Jersey law. As noted, Debtor's reply made the same argument.

SJFE argues that the only debt listed on Farm Credit's Proof of Claim is its Judgment of Foreclosure, and therefore the mortgage documents and UCCs attached to Farm Credit's claim serve no purpose. Specifically, SJFE argues that those documents do not grant Farm Credit a security interest in Debtor's personal property. SJFE then argues that the doctrine of marshaling applies to the claims of Farm Credit and the IRS, and therefore Debtor should amend his plan to recognize SJFE's security interest in Debtor's personalty. Under this argument, SJFE asserts it perfected its lien on Debtor's personal property by having the Salem County Sheriff levy on the same.

Next, SJFE asserts that the State of New Jersey claim is wholly unsecured. SJFE claims that the State of New Jersey only holds judgment liens because they did not comply with state law to perfect those liens. As such, SJFE believes the State of New Jersey claim is avoidable under section 544. Lastly, SJFE argues that Debtor's rights under section 522(f) are limited to $18,726, the value of Debtor's claimed exemptions, and therefore SJFE's secured claim amounts to $130,225 (based on SJFE's original position that $148,951 if the Claim is secured). Under this argument, the calculation provided by SJFE assumes there are no higher priority liens on Debtor's personalty.

II. Jurisdiction

The court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (IC).

III. Discussion

A. Scope of Farm Credit's Claim

Preliminarily, the Court must address SJFE's argument that Farm Credit has no claim to Debtor's personal property, and even if it did, the doctrine of marshaling would require Farm Credit to satisfy its claims out of Debtor's assets that are not encumbered by SJFE's asserted security. The Court disagrees. Farm Credit filed UCC-1s to perfect its interest in Debtor's personal property in 2012 and timely filed UCC-3 continuation statements. Therefore, Farm Credit was perfected in Debtor's personal property on the Petition Date. Those documents are attached to Farm Credit's claim. See Proof of Claim 12-3, Part 9. Although Farm Credit did not include Debtor's personal property as a source of security on the proof of claim form, that does not result in Farm Credit waiving its perfected claim against that property. In In re Osuji, 580 B.R. 36 (Bankr. E.D.N.Y. 2018), the court noted that the failure of a secured creditor to file a claim does not result in a loss of its lien rights. See id. at 43. See also In re Kleibrink, 346 B.R. 734 (Bankr. N.D. Tex. 2006). The court concludes that Farm Credit's failure to state all security on the proof of claim form does not result in a loss of its other lien rights, especially when those other rights (i.e., rights to personal property) were included in the attachments to the proof of claim. Thus, Farm Credit's security interest predates SJFE's levy which entitles it to priority over SJFE.

SJFE next argues that the Court should apply the doctrine of marshalling and require Debtor to treat SJFE as a secured creditor as to Debtor's personal property. However, the Court need not consider marshalling in this case, because Debtor prevails on the Motion for at least two other reasons.

B. Avoidance Under Section 544

Debtor and Farm Credit argue SJFE's asserted lien can be avoided under section 544 of the Bankruptcy Code. While avoidance of a lien typically requires an adversary proceeding, see Fed. R. Bankr. P. 7001(2), under the present circumstances, the Court can consider the issue as part of motion practice. In In re Orfa Corn, of Phila., the creditor argued that the debtor's motion was improperly brought before the court as a contested matter rather than an adversary proceeding and therefore should have been dismissed. 170 B.R. 257, 275 (E.D. Pa. 1994). The court concluded this contention was without merit, noting that

in some cases where a matter was improperly initiated by motion as a contested matter, ‘courts have concluded that where the rights of the affected parties have been adequately presented so that no prejudice has arisen, form will not be elevated over substance and the matter will be allowed to proceed on the merits as originally filed.

Id. (quoting In re Command Servs. Corp., 102 B.R. 905, 908 (Bankr. N.D.N.Y. 1989) ). This conclusion has significant support. See In re Vill. Mobile Homes, Inc., 947 F.2d 1282, 1283 (5th Cir. 1991) (compliance with the requisites of an adversary proceeding may be excused by waiver of the parties); In re Vandy, Inc., 189 B.R. 342, 346 (Bankr. E.D. Pa. 1995) (where no party raised the issue, and where no prejudice would result, the bankruptcy court can overlook the error in filing a motion instead of a complaint); In re Little, 220 B.R. 13, 17 (Bankr. D.N.J. 1998) ("Generally speaking, most courts are willing to overlook deficiencies in pleading, including errors in presenting a complaint as a motion and vice versa, so long as the pleading substantially complies with the rules of pleadings.... Such pleading deficiencies are considered harmless error when it can be demonstrated that there exists no prejudice to the non-moving party because the filed pleading provided the non-movant with notice of the nature of the pending...