In re Formica

In Re: Frank D. Formica, Debtor.

Case No.: 20-23404-ABA

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

May 12, 2021

NOT FOR PUBLICATION

Chapter: 7

Judge: Andrew B. Altenburg, Jr.

MEMORANDUM DECISION

Frank Formica was selling his former residence. Parke Bank took the position that, in addition to its first mortgage on the property, it had a $1.1M lien resulting from a cross-collateralized commercial loan with Mr. Formica. When asked for a payoff statement, Parke supplied the title company with one that included the commercial loan. When Mr. Formica's attorney objected that the two loans were not cross-collateralized, Parke's attorney offered to settle for $35,000 to $40,000. After substantial back and forth between the attorneys, Mr. Formica finally agreed to pay Parke $10,000 extra. He now contends that by demanding this payment, Parke violated the automatic stay by an act to "recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a)(1).

After review of the briefs filed, the documents submitted in contention therewith, and the audio of hearings held January 26 and March 17, 2021, the court concludes that while Parke had no right to the additional $10,000, because it only communicated with Mr. Formica's attorney and because Mr. Formica consented to the payment, Parke is not liable for violation of the automatic stay. Accordingly, the court will deny the debtor's motion.

JURISDICTION AND VENUE

As will be explained below, the court has jurisdiction over this dispute pursuant to 28 U.S.C. § 157(b)(2)(O), 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984, as amended on September 18, 2012, referring all bankruptcy cases to the bankruptcy court. The following constitutes this court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

PROCEDURAL HISTORY

On February 1, 2021, Mr. Formica filed a Motion for Sanctions for Violation of Automatic Stay, Sanctions Against Parke Bank. Doc. No. 29. Parke filed a response on February 23, 2021, Doc. No. 31, and Mr. Formica filed a response to that on March 1, 2021. Doc. No. 33. The court held a hearing on March 17, 2021. The parties filed further briefs on April 5 and April 15, 2021. This matter is now ripe for disposition.

FINDINGS OF FACT

Mr. Formica entered into a commercial loan (the "Commercial Loan") with Parke Bank on September 20, 2016 and a residential loan (the "Residential Loan") on May 22, 2017.

In the Commercial Loan, Mr. Formica and his wholly-owned company, John Galt, LLC, entered into a Loan and Security Agreement for $1,100,000 on September 20, 2016. Doc. No. 31-3, p. 1. Mr. Formica and John Galt were designated as borrowers, and Mr. Formica, John Galt, LLC, Formica Brothers, LLC, Baker Boys, LLC, and Don Cheech Limited Liability Company (all Formica companies¹) were designated as guarantors, with all borrowers and guarantors also designated as Obligors. Id. A separate Guaranty Agreement of the Commercial Loan executed by Mr. Formica, only, was unsecured. Doc. No. 31-3, p. 25.

The Commercial Loan was secured by six commercial properties in Atlantic City (the "AC Properties"), as well as personal property owned by the mortgagors located on the AC Properties. Doc. No. 31-3, p. 13. The Residential Loan was secured by 153 Glenside Avenue, Linwood, New Jersey (the "Linwood Property"). Doc. No. 31-2, p. 8, ¶ 3.

Parke bases its cross-collateralization on three paragraphs of the Commercial Loan's Mortgage and Security Agreement. Debt is defined as:

"Debt" means the principal sum of One Million One Hundred Thousand Dollars ($1,100,000.00) loaned by Mortgagee to Mortgagors, or which the Mortgagors have guaranteed, with interest thereon at the rate or rates specified in, and represented by a Commercial Mortgage Note, bearing even date herewith, payable to the order of Mortgagee (the "Note") as well as any extensions, modifications and renewals thereof, and all other indebtedness of the Mortgagors to the Mortgagee of any nature whatsoever, whether now existing or hereafter arising[.]

Id., p. 14, ¶ 1.1. Thus, debt under the Commercial Loan would include any of Mr. Formica's future indebtedness to Parke.

Paragraph 24 then provides:

24. Cross Collateral/Cross Default. This Mortgage shall secure, in addition to the Debt evidenced by the Note and secured hereby, all other obligations of Mortgagors, their successors or assigns, whether oral or written, secured or unsecured, and regardless of their nature, and shall also secure any and all such future obligations, when they are incurred. This covenant shall be effective without the execution of any affirmative action by Mortgagors. In the event that the Mortgagors shall default under any other obligation or mortgage held by Mortgagee and made by Mortgagors, such default hereunder and under the Note which the Mortgage secures, shall be immediately due and payable, anything to the contrary herein notwithstanding. In the event that Mortgagors shall default under this Mortgage, such default shall constitute an Event of Default under any and all obligations and mortgages of Mortgagors to Mortgagee, and Mortgagee, at its option, may declare all such obligations and mortgages immediately due and payable.

Doc. No. 31-3, ex. B, p. 19, ¶ 24. Read with the definition of "debt," paragraph 24 makes the collateral of the Commercial Loan also liable for any future debt of Mr. Formica, as well as making any default under any future obligations or mortgages a default under the Commercial Loan, and vice versa.

Finally, paragraph 18 of the same document states:

18. Other Security. If the Debt is secured at any time by a lien on or a security interest in any other real or personal property under any mortgage or security instrument executed and delivered by Mortgagors or any other person (corporate or individual), Mortgagors consent to the Mortgagee's exercising with respect thereto any of the rights herein and therein provided, at Mortgagee's option and without obligation to have the Mortgaged Property and such other real and personal property marshalled. . . .

Doc. No. 31-3, ex. B, p. 18, ¶ 18.

Here, Mr. Formica consented to Parke exercising any of its rights under the Commercial Loan and any future secured loan at Parke's option and without the obligation to have any of the collateral marshalled, i.e., it could execute against any collateral, regardless of the security interests of junior lienholders. This does nothing to make future collateral liable to the Commercial Loan.

That the Commercial Loan only provided that just its collateral (the AC Properties) secured future debt is evident in the provision that:

In addition to any other paragraph of this Mortgage and notwithstanding any term, condition or covenants hereof to the contrary, this Mortgage secures the present obligation of the Mortgagors as well as any other obligations of the Mortgagors to Mortgagee. These obligations shall include present and future obligations, whether direct, indirect, primary, secondary, fixed or contingent.

Doc. No. 13-3, p. 14.

On May 22, 2017, Mr. Formica and his wife, Amy, executed the Residential Loan with Parke for $320,000, secured by the Linwood Property. Doc. No. 31-2, ex. A, p. 2. Parke alleged that the Residential Loan had a cross-default provision, Doc. No. 31-1, p. 3, ¶ 9, but it does not. See Doc. No. 31-2, pp. 11-12, ¶ 24.² As future "debt" for purposes of the Commercial Loan, the Residential Loan was also secured by the AC Properties. But as just explained, nothing in the Residential Loan documents provided for the Linwood Property to be liable for any prior loans.

In May 2020, Amy Formica purchased the couple a new home located at 618 Hays Road, Absecon, New Jersey (the "Absecon Property"),³ and the couple moved there at the end of June 2020. Doc. No. 35, p. 2, ¶ 5. To finance the purchase, Ms. Formica borrowed $150,000 from Nicolette Property Group, getting a bridge loan with a maturity date of May 20, 2021, as she allegedly could not qualify for a conventional mortgage while a mortgagor on the Linwood Property. Id., p. 2, ¶¶ 6-8. In connection with this purchase, Ms. Formica allegedly granted a mortgage on her interest in the Linwood Property. Doc. No. 29-1, p. 2, ¶ 10(c). Mr. Formica did not disclose the purchase price of the Absecon Property or explain why his wife needed to grant the mortgage on the Linwood Property.

The Formicas listed the Linwood Property in June 2020 for $449,000. Doc. No. 35, p. 2, ¶¶ 5, 9. After 40 showings, they accepted the highest offer of $440,000.⁴ Doc. No. 35, pp. 1-2, ¶¶ 3-4; Doc. No. 35-1, p. 1, ¶ 4. That offer fell through when the Formicas declined to make "tens of thousands of dollars of repairs." Doc. No. 35, p. 2, ¶ 4; Doc. No. 35-1, p. 1, ¶ 5.

On December 9, 2020, Mr. Formica filed a no asset chapter 7 case. Doc. No. 1. On December 22, 2020, despite it being property of the chapter 7 estate, Mr. Formica and his wife entered into a Contract of Sale to sell the Linwood Property for $460,000. Doc. No. 12-1, p. 2, ¶ 7; Doc. No. 35, p. 2, ¶ 9. The purchasers certified that their "young family of four" needed to vacate their prior residence by February 13, 2021, having leased their old home beginning on the date. Doc. No. 35-2, p. 1, Doc. No. 35-1, p. 2, ¶ 10. These purchasers were anxious about closing, believing that if closing were delayed, they would have had to secure other housing such as a long-term hotel room, something they did not want to do with a toddler and during a pandemic. Id.

On January 14, 2021, Mr. Formica through counsel filed a Motion to Compel Sale of Real Estate. Doc. No. 12. There he acknowledged a $306,000 mortgage lien of Parke Bank against the Linwood Property but stated that there were no other liens on the property. Thus, he certified that there would be some proceeds...