2000 Decisions

Opinions of the United

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Precedential or Non-Precedential: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
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). 

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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. 

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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). 

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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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