                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


1-31-2000

Solfanelli v. Core States Bank
Precedential or Non-Precedential:

Docket 99-3117




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Recommended Citation
"Solfanelli v. Core States Bank" (2000). 2000 Decisions. Paper 14.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/14


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Filed January 31, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-3117

JOSEPH R. SOLFANELLI;
NATALIE G. SOLFANELLI

v.

CORESTATES BANK N.A., successor by
merger to Meridian Bank;
STEVENS & LEE

MERIDIAN BANK,

Appellant

Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civ. No. 97-cv-00160)
District Judge: Honorable Thomas I. Vanaskie

Argued September 13, 1999

Before: MANSMANN, McKEE and STAPLETON,
Circuit Judges.

(Filed: January 31, 2000)
       Edward F. Mannino, Esquire
        (Argued)
       David L. Comerford, Esquire
       Akin, Gump, Strauss, Hauer & Feld
       2005 Market Street
       Suite 2110
       Philadelphia, PA 19103

        COUNSEL FOR APPELLEE
        JOSEPH SOLFANELLI

       John H. Doran, Esquire
       Doran & Nowalis
       69 Public Square
       700 Northeastern Bank Building
       Wilkes-Barre, PA 18701

        COUNSEL FOR APPELLEE
        NATALIE G. SOLFANELLI

       David T. Sykes, Esquire (Argued)
       Duane, Morris & Heckscher
       4200 One Liberty Place
       Philadelphia, PA 19103-7396

        COUNSEL FOR APPELLANT

OPINION OF THE COURT

MANSMANN, Circuit Judge.

This case appeal arises from an order of the District
Court entered January 22, 1999 in connection with a
Chapter 11 bankruptcy on behalf of debtors Joseph R. and
Natalie G. Solfanelli. Of the numerous assertions made at
the outset of this litigation, only two major issues remain.
The principal issue is whether the Solfanellis' secured
creditor, Meridian Bank ("Meridian"), is barred from
pursuing a deficiency claim against the Solfanellis as a
result of its conduct in connection with its disposition of
the primary collateral securing the Solfanellis' debt. The
District Court concluded that (1) Meridian's eleven month
delay in selling the stock was commercially unreasonable,
and that (2) Meridian's handling of a claim against Keefe,

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Bruyette, and Woods, the broker Meridian retained to sell
the FEB stock, which claim was based upon Keefe,
Bruyette, and Woods' undisclosed purchase of the major
portion of the FEB stock and resale two days later at a
substantial profit, was also commercially unreasonable.

Meridian challenges this decision, arguing that the
Solfanellis did not have any cognizable interest in the Keefe,
Bruyette, and Woods settlement. The Solfanellis argue that
their indebtedness to Meridian should be deemed satisfied
on the grounds that the delay in selling the stock was
commercially unreasonable.

We agree with the District Court that the Solfanellis'
argument is meritorious. We also find that the District
Court did not err in finding that Meridian acted in a
commercially unreasonable manner when it negotiated a
resolution of its claim against Keefe, Bruyette, and Woods
without first notifying the Solfanellis, and then attempted to
disguise the transaction.

We are called upon, also, to consider whether Meridian
violated the Bankruptcy Code's automatic stay in
garnishing accounts containing post-petition funds.
Meridian contends that it could garnish these accounts by
virtue of the parties' Stipulation and Security Agreement
("Agreement"). We agree, however, with the District Court,
that the automatic stay was violated because the parties'
Agreement did not authorize the attachment of post-petition
funds. Furthermore, we find that the District Court
properly upheld the award to the Solfanellis of punitive
damages in the amount of $10,000 for the violation of the
automatic stay. Because this case is already the subject of
two published opinions, each exhaustively setting forth the
procedural and factual background, we will not do so here,
but instead refer interested parties to these prior
dispositions.1 We set forth only those facts crucial to a
resolution of the disputes here.
_________________________________________________________________

1. The District Court's ruling is reported at 230 B.R. 54 (M.D.Pa. 1999);
the Bankruptcy Court's ruling is reported at 206 B.R. 699 (Bankr.
M.D.Pa. 1996).

                               3
I.

We have appellate jurisdiction over the District Court's
decision pursuant to 28 U.S.C. SS158 (d) andS1291. We
are, in effect, the second "appellate" court to consider the
bases of the Bankruptcy Court's opinion. In undertaking
our review, we stand in the shoes of the District Court,
applying a clearly erroneous standard to the Bankruptcy
Court's findings of fact and a plenary standard to that
court's legal conclusions. In re Krystal Cadillac Oldsmobile
GMC Truck, 142 F.3d 631, 635, (3rd Cir. 1998); In re
Siciliano, 13 F.3d 748, 750 (3d Cir. 1994) (citations
omitted).

The major question we address is whether the District
Court erred in holding that Meridian's sale of the FEB
shares was improperly conducted. Its outcome hinges on
whether two aspects of Meridian's handling of the collateral
were commercially reasonable under Pennsylvania law: (1)
Meridian's retention of the FEB shares for 11 months prior
to the sale through Keefe, Bruyette, and Woods; and (2)
Meridian's handling of the claim against Keefe, Bruyette,
and Woods.2 Pennsylvania law provides as follows for the
disposition of collateral:

       (c) Manner of disposition. -- Disposition of the
       collateral may be by public or private proceedings and
       may be made by way of one or more contracts. Sale or
       other disposition may be as a unit or in parcels and at
       any time and place and on any terms but every aspect
       of the disposition including the method, manner, time,
       place and terms must be commercially reasonable.

13 Pa.Cons.Stat.Ann. S 9504 (emphasis added). We agree
with the District Court that the test to determine
"commercial reasonableness" should be whether the sale's
every aspect is characterized by: (1) good faith, (2)
avoidance of loss, and (3) an effective realization. United
States v. Willis, 593 F.2d 247, 259 (6th Cir. 1979). We also
_________________________________________________________________

2. In light of our decision in the Solfanellis' favor, we decline to
address
whether Meridian elected strict foreclosure on the collateral. This
alternative ground for recovery was fairly presented to and rejected by
the District Court.

                               4
agree with the District Court that, in liquidating the
collateral, the creditor acts as the debtor's fiduciary and
has a corresponding good faith duty to maximize the
proceeds of the collateral's sale. United States ex rel. Small
Bus. Admin. v. Chatlins Dep't Store, 506 F. Supp. 108, 111
(E.D. Pa. 1980).

Here, the Solfanellis question the commercial
reasonableness of the sale, and the burden falls to Meridian
to show the sales' commercial reasonableness under the
"totality of the circumstances." Savoy v. Beneficial
Consumer Discount, 503 Pa. 74, 77 (1983). Wefind that
Meridian has not met this burden. Meridian justifies its
failure to sell the stock upon (1) Mr. Solfanelli's refusal to
consent to the sale of the stock by Meridian, and (2) the
terms of the parties' Stipulation and Security Agreement.
Moreover, Meridian insists, as the Bankruptcy Court held,
that Mr. Solfanelli's failure to demand a sale of the stock
precludes any claim based upon the untimeliness of the
sale.

When Meridian sought Mr. Solfanelli's agreement to sell
the shares in early 1991, he declined to give his consent.
Moreover, it is undisputed that Mr. Solfanelli did not at any
point demand that the shares be sold. Neither of these
facts, however, has the significance that Meridian would
attribute to it. First, we note that the undisputed record
evidence indicates that the Solfanellis made no request that
the stock be held at any point between March 1991 and the
end of January 1992, from our point of view the crucial
period for present purposes. Moreover, even if such a
request had been made, it would be only one factor in
determining the commercial reasonableness of the sale and
would not preclude liability if the totality of the
circumstances indicated that the sale was commercially
unreasonable.

Ultimately, Meridian's argument regarding the debtor's
requests is a red herring. In reality, rather than trying to
honor a debtor's request through forbearance, Meridian
focused on the risk that the FEB shares' value might fall
below the loan balance. After Meridian focused on that,
there were repeated days when the stock sold for $16 or
$17 a share. Meridian neither engaged a broker, nor put in

                               5
place a monitoring scheme or strategy for executing on this
collateral. At trial, Meridian did not offer any credible
explanation for retaining the stock for eleven months after
filing the certificate of default, while the stock continued to
deteriorate. While plaintiff's expert, a bank president,
testified that Meridian did not act in a commercially
reasonable manner in holding the stock, Meridian's expert
declined to give an opinion on the matter, one way or the
other. It is evident to us that Meridian was derelict in its
responsibility to move ahead in good faith and to realize as
much as possible for the Solfanellis' benefit.

Nor can we accept the proposition that a demand for a
sale of the collateral is a prerequisite in these
circumstances for a claim based on a commercially
unreasonable delay. FDIC v. Caliendo, 802 F. Supp. 575
(D.N.H. 1992), which the Bankruptcy Court relied upon for
that proposition, is inapposite here. We agree with the
District Court's analysis regarding Caliendo. In that case,
the District Court for the District of New Hampshire found
that where a loan was over-collateralized, clearly not the
status in the present case, the secured creditor has a duty
to preserve the value of the collateral, pursuant to U.C.C.
S 9-207(1), only if the debtor requests that the collateral be
redeemed. The Court in Caliendo did not address the
creditor's duty under S 9-504 to dispose of collateral in a
commercially reasonable manner. The Solfanellis have not
argued that Meridian had a duty to preserve the value of
the FEB stock, and thus we agree with the District Court
that Caliendo does not bear on this case. Even if S 9-207
were applicable, however, we think it clear that Meridian
cannot be relieved of its obligation under S 9-504 to dispose
of the collateral in a commercially reasonable manner,
irrespective of a debtor's instruction to sell or to hold.

Similarly unavailing is Meridian's claim that it is
immunized from an "unreasonable delay" claim by the
Solfanellis based upon the terms of the Stipulation and
Security Agreement signed in December of 1990. Paragraph
15 of the Agreement provides:

       No delay or omission in exercising any right, power, or
       remedy accruing to the Bank upon breach or default
       by Debtors. . . shall impair any such right, power, or

                               6
       remedy of the Bank, nor shall it be construed to be a
       waiver of any such breach or default theretofore or
       thereafter occurring.

Fortunately for debtors such as the Solfanellis, a bank's
duty to conduct a commercially reasonable sale is not
waivable by any such contract terms. Ford Motor Credit v.
Lototsky, 549 F. Supp. 996, 1001 - 1002 (E.D. Pa. 1982),
Willis, 593 F.2d 247 (6th Cir. 1979). In particular, we have
held previously that despite agreements between the
parties, securities must be liquidated in good faith and in
a commercially reasonable manner. In re Kaplan , 143 F.3d
807, 818 (3d Cir. 1998). Thus, we are unimpressed by
Meridian's invocation of 13 Pa.Cons.Stat.Ann. S 9501 ("the
parties may by agreement determine the standards by
which the fulfillment of these rights and duties is to be
measured if such standards are not manifestly
unreasonable") for the proposition that the Agreement is in
this manner binding. An Agreement provision attempting to
expunge a commercial reasonableness requirement is per
se "manifestly unreasonable."

In addition, as did the District Court, we will affirm the
Bankruptcy Court's finding that Meridian breached its duty
of good faith in making blatantly false statements with an
intention to deceive Mr. Solfanelli. The Bankruptcy Court
found not only that Meridian never informed Mr. Solfanelli
of its dispute with Keefe, Bruyette, and Woods regarding
the sale or the subsequent negotiations and settlement, but
also deceived Mr. Solfanelli when he asked. The Bankruptcy
Court properly found that the potential claim against Keefe,
Bruyette, and Woods for "flipping" the shares was an
integral part of the "disposition" of the collateral.

In sum, we agree with the Solfanellis that Meridian
unreasonably "sat" on this stock for 11 months, i.e., from
March, 1991, when Meridian first declared a default, until
February, 1992, when the stock was sold. The stock should
have been sold at those points in time when its price
substantially satisfied the debt. In addition, Meridian
employed subterfuge regarding its sale of the stock to and
dispute with Keefe, Bruyette, and Woods. Because Meridian
failed to sell the collateral in good faith and in a
commercially reasonable manner, we presume as a matter

                               7
of law that the collateral's value equals the amount of the
Solfanellis' indebtedness. Meridian contends that the record
evidence demonstrates that the FEB stock could not alone
satisfy the Solfanellis' debt at any point. That may or may
not be true, but the FEB stock was not the only collateral
securing the loan. Taking into account all of the available
collateral, Meridian's own evidence makes clear that had
Meridian sold the FEB stock when it was trading at over
$16 per share, which it was for at least 30 days after the
filing of the certificate of default, then the value of the
collateral would have exceeded the Solfanellis' total
indebtedness. Accordingly, Meridian may not seek a
deficiency claim. See 13 Pa. Cons. Stat. Ann. S 9504(c).

II.

The remaining issue is whether Meridian violated the
automatic stay by attaching the Solfanellis' bank accounts
containing post-petition funds, and if so, whether the
Bankruptcy Court reasonably awarded punitive damages to
Mrs. Solfanelli. The Bankruptcy Court found that Meridian
was overzealous and negligent in its willful attachment of
the Solfanellis post-petition funds:

       the Certificate of Default . . . terminated the automatic
       stay. The further garnishment of the accounts were,
       thus, appropriately performed with the exception of the
       [post-petition] funds. While that may have been a
       simple oversight if occasioned by an inexperienced
       attorney, Bank counsel. . . was exceptionally
       knowledgeable of the bankruptcy provisions. That is
       not to say that said counsel acted maliciously in
       pursuing these post-petition funds. On the contrary,
       there is absolutely no evidence that the Bank was
       anything but overzealous, though negligent, in
       sweeping the accounts. Still, such disregard is
       sufficient to support an award of punitive damages.

In re Solfanelli, 206 B.R. at 705.

Meridian argues that it did not violate the automatic stay
by this seizure because the stay was not in effect. We agree
that Meridian was granted some relief from the stay.
However, this relief was only granted as to specific assets,

                                8
not including bank accounts or post-petition earnings. The
Agreement between the parties permitted the Solfanellis to
use cash collateral and provided that upon certification of
default

       [the] Bank shall be entitled without further notice to
       relief from the automatic stay of Section 362 and shall
       be allowed to proceed with the exercise of all remedies
       available to it in respect of the Existing Indebtedness
       and Collateral. . . .

(emphasis added). "Collateral" was defined elsewhere in the
Agreement and included other enumerated items but not
the post-petition funds. We agree with the District Court
that Meridian was permitted only to execute against
"Collateral" and that the post-petition funds were not
"Collateral." Finally, Meridian did not procure a
replacement lien and did not have any rights against the
funds by virtue of a prepetition lien. 11 U.S.C.S 552(a).
Accordingly, we agree with the District Court and
Bankruptcy Court that Meridian violated the automatic stay
since it exceeded its rights under the Bankruptcy Code and
the Agreement.

The Bankruptcy Court may award punitive damages for
a stay violation pursuant to 11 U.S.C. S 362(h):

       An individual injured by any willful violation of a stay
       provided by this section shall recover actual damages,
       including costs and attorneys fees, and, in appropriate
       circumstances, may recover punitive damages.

The Bankruptcy Court, to which we give deference in its
factual findings, reasonably found that Meridian's violation
was willful; Meridian was aware of the stay and
intentionally garnished the accounts containing
postpetition funds. The Bankruptcy Court's ruling is in
accord with our holdings in this area. See In re Atlantic
Bus. and Community Corp., 901 F.2d 325, 328 (3d Cir.
1990) ("willful violation" requires that defendant knew of
stay and that actions which violated stay were intentional);
See also In re Landsdale Family Restaurants, 977 F.2d 826,
829 (3d. Cir. 1992) (violation "willful" if creditor knows of
stay and takes intentional action violating it, and good faith
belief insufficient to escape liability).

                               9
Once the Bankruptcy Court finds a willful violation, it
has discretion to impose punitive damages in "appropriate
circumstances." We find that the Bankruptcy Court's award
of $10,000 punitive damages is not clearly erroneous, but
rather, appropriate, and we will let it stand.

III.

For all the foregoing reasons, we will affirm the District
Court's judgment. We remand to the Bankruptcy Court to
enter judgment in favor of Meridian on Count II and in
favor of Natalie Solfanelli, as well as Joseph Solfanelli, on
Count VII.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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