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D ock e t 99-3117

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. e du/thir dc ir c uit_2000/14Filed 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 Distri ct 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 m ade at the outset of this litigation, only two major issue s remain. The principal issue is whether the Solfanellis' sec ured creditor, Meridian Bank ("Meridian"), is barred fro m pursuing a deficiency claim against the Solfanellis as a result of its conduct in connection with its dispos ition of the primary collateral securing the Solfanellis' de bt. The District Court concluded that (1) Meridian's eleven month delay in selling the stock was commercially unreaso nable, and that (2) Meridian's handling of a claim against Keefe,

2Bruyette, and Woods, the broker Meridian retained t o sell

the FEB stock, which claim was based upon Keefe, Bruyette, and Woods' undisclosed purchase of the ma jor portion of the FEB stock and resale two days later at a substantial profit, was also commercially unreasona ble.

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

We agree with the District Court that the Solfanell is' argument is meritorious. We also find that the Dist rict 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, an d Woods without first notifying the Solfanellis, and then a ttempted to disguise the transaction.

We are called upon, also, to consider whether Merid ian violated the Bankruptcy Code's automatic stay in garnishing accounts containing post-petition funds. Meridian contends that it could garnish these accou nts by virtue of the parties' Stipulation and Security Agr eement ("Agreement"). We agree, however, with the District Court, that the automatic stay was violated because the pa rties' 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 pun itive damages in the amount of $10,000 for the violation of the automatic stay. Because this case is already the su bject of two published opinions, each exhaustively setting f orth the procedural and factual background, we will not do s o here, but instead refer interested parties to these prior dispositions.1 We set forth only those facts crucia l 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).

3I.

We have appellate jurisdiction over the District Co urt's decision pursuant to 28 U.S.C. SS158 (d) andS1291. We are, in effect, the second "appellate" court to con sider the bases of the Bankruptcy Court's opinion. In underta king our review, we stand in the shoes of the District C ourt, applying a clearly erroneous standard to the Bankru ptcy Court's findings of fact and a plenary standard to that court's legal conclusions. In re Krystal Cadillac O ldsmobile GMC Truck, 142 F.3d 631, 635, (3rd Cir. 1998); In r e Siciliano, 13 F.3d 748, 750 (3d Cir. 1994) (citatio ns omitted).

The major question we address is whether the Distri ct 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 c ollateral were commercially reasonable under Pennsylvania law : (1)
Meridian's retention of the FEB shares for 11 month s prior to the sale through Keefe, Bruyette, and Woods; and (2) Meridian's handling of the claim against Keefe, Bru yette, and Woods.2 Pennsylvania law provides as follows fo r the disposition of collateral:

(c) Manner of disposition. -- Disposition of the collateral may be by public or private proce edings and may be made by way of one or more contracts. Sale or other disposition may be as a unit or in par cels and at any time and place and on any terms but ever y aspect of the disposition including the method, man ner, time, place and terms must be commercially reasona ble.

13 Pa.Cons.Stat.Ann. S 9504 (emphasis added). We ag ree with the District Court that the test to determine
"commercial reasonableness" should be whether the s ale'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' fav or, we decline to

address
whether Meridian elected strict foreclosure on the collateral. This alternative ground for recovery was fairly presente d to and rejected by
the District Court.

4agree with the District Court that, in liquidating the

collateral, the creditor acts as the debtor's fiduc iary 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. 1 08, 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. Beneficia l Consumer Discount, 503 Pa. 74, 77 (1983). Wefind th at Meridian has not met this burden. Meridian justifie s 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 Agre ement. Moreover, Meridian insists, as the Bankruptcy Court held,
that Mr. Solfanelli's failure to demand a sale of t he 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 c onsent. Moreover, it is undisputed that Mr. Solfanelli did not at any point demand that the shares be sold. Neither of th ese 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 req uest that the stock be held at any point between March 1991 a nd the end of January 1992, from our point of view the cru cial 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 sa le and would not preclude liability if the totality of the
circumstances indicated that the sale was commercia lly

unreasonable.

Ultimately, Meridian's argument regarding the debto r's requests is a red herring. In reality, rather than trying to honor a debtor's request through forbearance, Merid ian focused on the risk that the FEB shares' value migh t fall
below the loan balance. After Meridian focused on t hat, there were repeated days when the stock sold for $1 6 or $17 a share. Meridian neither engaged a broker, nor put in

5place a monitoring scheme or strategy for executing on this

collateral. At trial, Meridian did not offer any cr edible explanation for retaining the stock for eleven mont hs after filing the certificate of default, while the stock continued to deteriorate. While plaintiff's expert, a bank presi dent,
testified that Meridian did not act in a commercial ly 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 dereli ct in its responsibility to move ahead in good faith and to r ealize 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 up on for that proposition, is inapposite here. We agree with the District Court's analysis regarding Caliendo. In th at case, the District Court for the District of New Hampshir e found that where a loan was over-collateralized, clearly not the status in the present case, the secured creditor ha s a duty to preserve the value of the collateral, pursuant t o U.C.C. S 9-207(1), only if the debtor requests that the co llateral be
redeemed. The Court in Caliendo did not address the creditor's duty under S 9-504 to dispose of collate ral in a commercially reasonable manner. The Solfanellis hav e not argued that Meridian had a duty to preserve the val ue 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 Me ridian cannot be relieved of its obligation under S 9-504 to dispose of the collateral in a commercially reasonable mann er, irrespective of a debtor's instruction to sell or t o 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. Para graph 15 of the Agreement provides:

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

6remedy of the Bank, nor shall it be construe d to be a

waiver of any such breach or default thereto fore or thereafter occurring.

Fortunately for debtors such as the Solfanellis, a bank's duty to conduct a commercially reasonable sale is n ot waivable by any such contract terms. Ford Motor Cre dit v. Lototsky, 549 F. Supp. 996, 1001 - 1002 (E.D. Pa. 1 982), 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 fait h and in a commercially reasonable manner. In re Kaplan , 14 3 F.3d 807, 818 (3d Cir. 1998). Thus, we are unimpressed b y Meridian's invocation of 13 Pa.Cons.Stat.Ann. S 950 1 ("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 Agreeme nt is in this manner binding. An Agreement provision attempt ing to expunge a commercial reasonableness requirement is per se "manifestly unreasonable."

In addition, as did the District Court, we will aff irm the Bankruptcy Court's finding that Meridian breached i ts 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. Sol fanelli of its dispute with Keefe, Bruyette, and Woods rega rding the sale or the subsequent negotiations and settlem ent, but
also deceived Mr. Solfanelli when he asked. The Ban kruptcy Court properly found that the potential claim again st Keefe, Bruyette, and Woods for "flipping" the shares was a n integral part of the "disposition" of the collatera l.

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 pri ce substantially satisfied the debt. In addition, Meri dian employed subterfuge regarding its sale of the stock to and dispute with Keefe, Bruyette, and Woods. Because Me ridian failed to sell the collateral in good faith and in a commercially reasonable manner, we presume as a mat ter

7of law that the collateral's value equals the amoun t of the

Solfanellis' indebtedness. Meridian contends that t he record
evidence demonstrates that the FEB stock could not alone satisfy the Solfanellis' debt at any point. That ma y or may not be true, but the FEB stock was not the only col lateral securing the loan. Taking into account all of the a vailable collateral, Meridian's own evidence makes clear tha t had Meridian sold the FEB stock when it was trading at over $16 per share, which it was for at least 30 days af ter the filing of the certificate of default, then the valu e of the
collateral would have exceeded the Solfanellis' tot al indebtedness. Accordingly, Meridian may not seek a deficiency claim. See 13 Pa. Cons. Stat. Ann. S 950 4(c).

II.

The remaining issue is whether Meridian violated th e automatic stay by attaching the Solfanellis' bank a ccounts containing post-petition funds, and if so, whether the Bankruptcy Court reasonably awarded punitive damage s to Mrs. Solfanelli. The Bankruptcy Court found that Me ridian was overzealous and negligent in its willful attach ment of the Solfanellis post-petition funds:

the Certificate of Default . . . terminated the automatic stay. The further garnishment of the account s were, thus, appropriately performed with the excep tion of the [post-petition] funds. While that may have b een a simple oversight if occasioned by an inexper ienced attorney, Bank counsel. . . was exceptionall y knowledgeable of the bankruptcy provisions. That is not to say that said counsel acted malicious ly in pursuing these post-petition funds. On the c ontrary, there is absolutely no evidence that the Ban k was anything but overzealous, though negligent, in sweeping the accounts. Still, such disregard is sufficient to support an award of punitive d amages.

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

Meridian argues that it did not violate the automat ic 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 specifi c assets,

8not including bank accounts or post-petition earnin gs. The

Agreement between the parties permitted the Solfane llis to use cash collateral and provided that upon certific ation of

default

[the] Bank shall be entitled without further notice to relief from the automatic stay of Section 36 2 and shall be allowed to proceed with the exercise of a ll remedies available to it in respect of the Existing I ndebtedness

and Collateral. . . .

(emphasis added). "Collateral" was defined elsewher e in the Agreement and included other enumerated items but n ot 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 agains t the funds by virtue of a prepetition lien. 11 U.S.C.S 5 52(a). Accordingly, we agree with the District Court and Bankruptcy Court that Meridian violated the automat ic stay since it exceeded its rights under the Bankruptcy C ode 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 violati on of a stay provided by this section shall recover actua l 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 i s in accord with our holdings in this area. See In re At lantic 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 inte ntional); See also In re Landsdale Family Restaurants, 977 F. 2d 826, 829 (3d. Cir. 1992) (violation "willful" if credito r knows of stay and takes intentional action violating it, and good faith belief insufficient to escape liability).

9Once the Bankruptcy Court finds a willful violation , it

has discretion to impose punitive damages in "appro priate circumstances." We find that the Bankruptcy Court's award of $10,000 punitive damages is not clearly erroneou s, but rather, appropriate, and we will let it stand.

III.

For all the foregoing reasons, we will affirm the D istrict 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 Solf anelli, on

Count VII.

A True Copy:

Teste:

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

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