UNITED STATES DISTRICT COURT

FOR THE 

MIDDLE DISTRICT OF PENNSYLVANIA

IN RE: : Case No. 1-03-01663

:

GALEN R. REICHLEY and : Chapter 13

ALLEN L. REICHLEY, t/a :

REICHLEY BROTHERS, :

:

Debtors :

______________________________________________________________________

GORDON BROTHERS RETAIL PARTNERS, LLC, :

CLEARBID, INC., and AGRICAPITAL : No. 4:CV-05-1667

CORPORATION, as successors-in-interest :

to AGWAY, INC., :

:

Appellants, : (Judge Muir)

:

v. :

:

MANUFACTURERS AND TRUST COMPANY, as :

successor-in-interest to KEYSTONE :

FINANCIAL BANK, N.A., :

:

Appellee :

ORDER #2 of

December 28, 2005

THE BACKGROUND OF THIS ORDER IS AS FOLLOWS:

On March 21, 2003, Galen R. Reichley, his brother Allen L.

Reichley, and their business Reichley Brothers filed bankruptcy

petitions pursuant to Chapter 13 of the Bankruptcy Code. We

hereinafter collectively refer to the Reichleys and Reichley Brothers

as “the Debtors.” Although the Debtors filed separate bankruptcy

petitions in the bankruptcy court, that court consolidated them into

one action on July 18, 2003.

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The Debtors owned and operated poultry and dairy farms on various

parcels of land in Union County, Pennsylvania. The Debtors used two

of their tracts as security in connection with mortgages which they

obtained from Agway, Inc., and Keystone Financial Bank, N.A.

(Hereinafter “Keystone Financial”). The Agway mortgage was recorded

on March 26, 1999, and the Keystone Financial mortgages were recorded

on September 24, 1999. In the course of the bankruptcy proceedings, a

dispute arose with respect to the priority of Agway, Inc.’s mortgage

vis-a-vis Keystone Financial’s mortgages.

Gordon Brothers Retail Partners, LLC; Clearbid, Inc.; and

Agricapital Corporation (hereinafter collectively “Gordon Brothers”)

are successors in interest to Agway, Inc. Manufacturers and Traders

Trust Company (hereinafter “M & T”) is the successor in interest to

Keystone Financial. 

On September 27, 2004, Gordon Brothers initiated an adversary

proceeding in the bankruptcy court by filing a complaint against M & T

in which Gordon Brothers sought a judgment declaring that “the Agway

Mortgage is senior in priority to the Keystone Mortgage ....”

(Complaint, p. 5, ¶29) The parties filed cross-motions for summary

judgment and on July 5, 2005, the Honorable Mary D. France issued an

order and opinion in which she concluded that although the Agway

mortgage was recorded first the Keystone Financial mortgages were

entitled to priority because the liens at issue arose from future

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advances and the Agway mortgage did not on its face state that it

secured such loans.

On August 16, 2005, Gordon Brothers appealed Judge France’s

decision to this court. On August 29, 2005, we issued an order

setting forth the briefing schedule. The parties’ briefs were timely

filed. 

M & T filed a sur-reply brief on October 24, 2005. On November

1, 2005, Gordon Brothers filed a motion to strike the sur-reply brief. 

In our order number 1 of this date we granted the motion to strike the

sur-reply brief.

On December 1, 2005, we issued an order in which we allowed any

party to seek our recusal because of the undersigned’s connection with

Manufacturers and trust Company. The time allowed for the parties to

seek our recusal expired on December 23, 2005, and to this date no

such election has been filed. This matter is ripe for disposition.

In considering the substantive merits of Gordon Brothers’s

appeal, we will apply 

a clearly erroneous standard to findings of fact, [conduct]

plenary review of conclusions of law, and ... break down mixed

questions of law and fact, applying the appropriate standard to

each component. See, e.g., Resyn Corp. v. United States, 851 F.2d

660, 664 (3d Cir.1988); In re Jersey City Medical Center, 817

F.2d 1055, 1059 (3d Cir.1987); Ram Constr. Co., Inc., 749 F.2d at

1052-53; Universal Minerals, Inc., 669 F.2d at 101- 02.

In re Sharon Steel, 871 F.2d 1217, 1223 (3d Cir. 1989). We further

observe that “we are not barred from considering any issue presented

by the record, even though it was not discussed by ... the bankruptcy

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judge ....” In re Gilchrist Company, 410 F. Supp. 1070, 1074 (E.D. Pa.

1976)(Green, J.).

This appeal requires us to revisit the parties’ cross-motions for

summary judgment. Summary judgment is appropriate only when there is

no genuine issue of material fact which is unresolved and the moving

party is entitled to a judgment as a matter of law. Fed. R. Civ. P.

56(c). Initially, the moving party has a burden of demonstrating the

absence of a genuine issue of material fact. Celotex Corporation vs.

Catrett, 477 U.S. 317, 323 (1986). This may be met by the moving

party pointing out to the court that there is an absence of evidence

to support an essential element as to which the non-moving party will

bear the burden of proof at trial. Id. at 325. We also note that Rule

56 “mandates the entry of summary judgment ... against a party who

fails to make a showing sufficient to establish the existence of an

element essential to that party’s case, and on which that party will

bear the burden of proof at trial.” Id. at 323.

Rule 56 provides that, where such a motion is made and properly

supported, the adverse party must show by affidavits, pleadings,

depositions, answers to interrogatories, and admissions on file that

there is a genuine issue for trial. Fed. R. Civ. P. 56(e). The United

States Supreme Court has commented that this requirement is tantamount

to the non-moving party making a sufficient showing as to the

essential elements of their case that a reasonable jury could find in

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1. In the brief supporting its appeal, Gordon Brothers states that

“[t]he facts are straightforward and not in dispute.” (Appellant’s

Brief, p. 4)

2. In addition to the facts set forth in Judge France’s Opinion,

we rely upon a small number of undisputed facts relating to

Keystone Financial’s understanding of the status of Agway’s

mortgage when Keystone Financial finalized its mortgages with the

Debtors. Those facts have been presented by way of the

declaration made under penalty of perjury by Pat Hartzell, and

they are discussed in detail below.

5

their favor. Celotex Corporation vs. Catrett, 477 U.S. 317, 322-23

(1986). 

The same standard governs cross-motions for summary judgment.

Continental Ins. Co. vs. Kubek, 86 F. Supp. 2d 503, 505 n.2 (E.D. Pa.

2000)(Katz, J.)(citing Appelmans vs. Philadelphia, 826 F.2d 214, 216

(3d Cir. 1987)). When considering such cross-motions “each motion

must be considered separately, and each side must still establish a

lack of genuine issues of material fact and that it is entitled to

judgment as a matter of law.” Nolen v. Paul Revere Life Ins. Co., 32

F. Supp. 2d 211, 213 (E.D. Pa. 1998)(Robreno, J.).

With those standards in mind we turn to the material facts of

this case, all of which are undisputed.1 The vast majority of the

material facts upon which we rely in ruling on this case are those set

forth in Judge France’s opinion and order.2 The undisputed background

facts set forth in Judge France’s opinion are as follows:

 Debtors are brothers who owned and operated poultry and dairy

farms in Union County, Pennsylvania[,] under the trade name

“Reichley Brothers.” The farms included two parcels of land, one

consisting of 96 acres (Tract I”) and the other consisting of 99

acres (“Tract II”). On March 16, 1998, Debtors and other members

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of the Reichley family executed a document entitled “Continuing

Unlimited Guaranty of Payment” (“Guaranty”) requiring “the full

and prompt payment of any indebtedness and obligation of

[Guarantors] ... whether such indebtedness or obligation now

exists, or is incurred hereafter, and in whatever form it may be

evidenced.” The Guaranty executed in favor of Agway was not

recorded, and Debtors did not commence making purchases from

Agway under the Guaranty until April 2002. On December 30, 1998,

the parties on the Guaranty executed a mortgage (“the Agway

Mortgage”) as security for the Guaranty. This mortgage attached

to both Tracts I and II, as well as two much smaller properties

(Tracts III and IV). Agway recorded its mortgage with the Union

County prothonotary on March 26, 1999.

 On the same date the Agway Mortgage was signed, Debtors also

executed a “Commercial Line of Credit Note” (“Note”) in favor of

Agway in an amount not to exceed $500,000.00. As security for

the Note, Debtors executed a “Pledge of Collateral” (“Pledge”) in

which they authorized Agway to hold certain property, including

real estate, as security for all debts “now or subsequently

owed.” The Note was not recorded, nor was it referenced in the

Agway mortgage.

 On August 17, 1999, Debtors borrowed $172,800.00 from Keystone

through two loan transactions secured by mortgages recorded on

August 24, 1999[,] against Tracts III and IV. On August 26,

1999, Agway executed two mortgage subordinations in which it

agreed to subordinate its lien on Tracts III and IV to Keystone’s

lien. The subordinations were recorded with the Union County

prothonotary’s office on August 31, 1999. On September 23, 1999,

Keystone extended an additional loan to Debtors in an amount of

$607,000.00 secured by mortgages recorded on September 29,

1999[,] against Tracts I, II, III, and IV (collectively “the

Keystone Mortgages”). Keystone did not provide actual notice of

the recording of the mortgages.

 On March 21, 2003, Debtors filed the instant petitions in

Chapter 13. Agway’s claim was listed in the Debtor’s schedules

as an unsecured nonpriority claim of $761,741.51. Approximately

one year after the debtors filed for relief, Keystone requested

Agway to subordinate its mortgage against tract II to Keystone’s

mortgage. Agway declined the request and, in the same month,

assigned its rights in the mortgage to Gordon.

 On April 22, 2004, Debtors filed a motion to sell Tract I for

$295,000.00 free and clear of both the Agway and the Keystone

mortgages. Agway agreed to allow the sale to go forward if the

sale proceeds were escrowed until the Court could resolve the

dispute as to the priority of the competing claims. An order to

that effect was entered on May 25, 2004, and the sale was

consummated thereafter.

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 On September 27, 2004, Gordon filed the instant adversary

complaint seeking a declaratory judgment that the Agway mortgage

is senior to the Keystone mortgage against tract I and an order

directing that the sale proceeds be distributed to Gordon. On

October 8, 2004, Debtors sought authority from the Court to sell

Tract II for $475,000.00 free and clear of liens. The Court

approved the sale of Tract II under the same conditions as set

forth in the Order approving the sale of Tract I. Thereafter,

the sale of Tract II was consummated and the proceeds placed in

escrow. Gordon amended its complaint to include Tract II in its

request for entry of declaratory judgment in its favor. M & T

filed an answer and counterclaim requesting the Court to

determine that its mortgages enjoyed priority over Gordon’s

mortgage and that the sale proceeds should be paid to M & T.

(Opinion of the Bankruptcy Court, pp. 2-4) After considering those

facts, Judge France granted M & T’s motion for summary judgment on its

counterclaim, denied Gordon Brothers’s motion for summary judgment as

to its claim, and directed the entry of judgment in favor of M & T

with respect to the sale proceeds at issue. 

The foundation of Judge France’s opinion is her determination

that the Agway mortgage, as a matter of Pennsylvania law, does not

secure the subsequent loans (or “future advances”) made by Agway to

the Debtors after the parties entered into the Agway mortgage. Judge

France based that determination on the holding in Western Pennsylvania

National Bank v. Peoples Union Bank and Trust Company, 439 Pa. 304

(1970).

Gordon Brothers now contends that Judge France’s determination is

based on a misapprehension of that case and the governing Pennsylvania

law. The two issues presented to us in Gordon Brothers’s brief

supporting its appeal are

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1. Whether the Bankruptcy Court erred in holding that the

mortgage held by Agway (the “Agway Mortgage”) in certain

real property (the “Subject Properties”) owned by Galen

Reichley and Allen Reichley (the Debtors) did not secure

future advances?

2. Whether the Bankruptcy Court erred by denying the Appellants

[sic] [Summary Judgment] Motion and determining that the

lien of Appellee in the Subject Properties (the “Keystone

Mortgage”) was senior in priority to the lien of the

Appellant in the Subject Properties?

(Appellants’ Brief, p. 2) Gordon Brothers argues that 

 [t]he Western Pennsylvania decision, which requires a future

advance mortgage to contain the requisite future advance

language, by its terms, only applied to bona fide lien holders

and, as stated above, Keystone was admittedly not one. 

Therefore, the Bankruptcy Court should have applied the common

law and held that the Agway Mortgage did secure future advances

subsequent to the recording of the Keystone Mortgages.

(Id., p. 16)

The fundamental issue for us to resolve in this appeal is simply

whether the holding of the Supreme Court of Pennsylvania in Western

Pennsylvania National Bank applies to the facts of this case. Our

analysis begins with the issue addressed by that court. Justice

Roberts wrote the opinion, noting that

[t]he only question on this appeal is whether a mortgagee whose

mortgage contains no provision with respect to future advances

has a prior lien on the mortgaged property with respect to future

advances as against a bona fide lienholder whose lien attaches

after the future advances are made.

Western Pennsylvania National Bank v. Peoples Union Bank and Trust

Company, 439 Pa. 304, 307 (1970)(Emphasis added). That court’s

holding was expressed as follows in equally clear terms: 

We hold that a mortgage which does not specifically indicate that

it covers future advances gives the mortgagee no lien on the

Case 4:05-cv-01667-MM Document 19 Filed 12/28/05 Page 8 of 13
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mortgaged property other than for the unpaid portion of the

original advance, together with any incidental charges properly

provided for in the mortgage.

Id., at 308. 

In the bankruptcy appeal currently before us, it is undisputed

that the liens at issue, and for which Gordon Brothers seeks to

recover the sale proceeds, arose from loans made by Agway to the

Debtors, long after both the Agway mortgage and Keystone mortgages had

been recorded. The debts at issue in this case stem from future

advances.

As noted above, Gordon Brothers argues that Western Pennsylvania

National Bank does not apply to the facts of this case because M & T’s

predecessor, Keystone Financial, was not a bona fide lienholder.

Gordon Brothers specifically contends that “it is absolutely clear

that Keystone had notice that Agway was asserting a future advance

mortgage.” (Appellants’ Brief, p. 18) The only evidence of record

cited by Gordon Brothers in support of that contention is a statement

by Pat Hartzell, who was the settlement officer for the loan

transaction between Keystone Financial and the Debtors. 

M & T filed Hartzell’s unsworn declaration in support of M & T’s

brief opposing Gordon Brothers’s summary judgment motion. In a

portion of her statement, Hartzell declares that “[i]f Ms. Heiser[,

who was an employee of Agway,] had advised [Hartzell] that Agway would

not agree to subordinate the Agway mortgage, the refinance closing

would not have been completed.” (Hartzell Unsworn Declaration, p. 2,

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¶6) Gordon Brothers points to that statement as proof that M & T was

aware of Agway’s mortgage and therefore is not entitled to the status

of a “bona fide” lienholder. 

Although Judge France did not cite, and does not appear to have

relied upon, Hartzell’s unsworn declaration, Agway concedes that the

representations in the declaration may be accepted as true for the

purposes of ruling on the parties’ summary judgment motions.

(Appellants’ “Memorandum of Law in Further Support of Their Motion for

Summary Judgment and in Opposition to Defendants [sic] Cross-Motion

for Summary Judgment,” p. 4 (commenting that Hartzell’s statements

“[e]ven if true (which one must assume for the purposes of summary

judgement ...”)) In addition to the statement set forth above, in her

declaration Hartzell further represents the following:

4. In connection with the refinance transaction, I spoke with

Stephne Heiser, an employee of Agway regarding the need for a

subordination of a mortgage held by Agway in connection with the

$607,000 Keystone mortgage. Ms. Heiser had previously spoken

with Kim Grow of our office regarding the subordination.

5. Ms. Heiser specifically informed me that Agway would agree to

subordinate the lien of its mortgage to the financing being

provided by Keystone. Furthermore, Ms. Heiser advised me that

Agway would record the subordinations and provide copies to me.

6. In reliance upon representations made to me by Ms. Heiser, I

completed the closing on the refinance transaction and marked up

the title insurance commitment indicating that the Agway mortgage

would be subordinated. ...

(Hartzell Unsworn Declaration, pp. 1-2, ¶¶4-6) We have considered

those facts in ruling on the parties’ cross-motions for summary

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judgment because the facts relate to the material issue of whether

Keystone Financial qualifies as a bona fide lienholder.

Gordon Brothers further contends that whatever belief or beliefs

Keystone Financial developed as a result of Ms. Heiser’s statements

are irrelevant because Agway never entered into any written

subordination agreement. Gordon Brothers takes the position that 

the only material fact as to the issue of subordination is the

existence of a written subordination of the Agway Mortgage. 

Since M & T admits no such written agreement exists, this

argument [based on Agway’s representations that such an agreement

would be entered into] must fail.

(Appellants’ “Memorandum of Law in Further Support of Their Motion for

Summary Judgment and in Opposition to Defendants [sic] Cross-Motion

for Summary Judgment,” p. 4)(Emphasis in original) 

The flaw in Gordon Brothers’s argument is that it fails to

consider the manner in which the statements made by Ms. Heiser relate

to the issue of whether Keystone Financial qualifies as a bona fide

lienholder.

As noted by Judge France in footnote 4 of her opinion,

[i]n a legal context, the term bona fide looks almost exclusively

to subjective good faith. For example, a bona fide purchaser, a

bona fide holder for value, a bona fide mortgagee or a bona fide

possessor of property may be party to illegal transactions yet

exempt from liability because the action was taken in subjective

good faith irrespective of another’s prior or superior claim of

right to the property.

(Opinion of the Bankruptcy Court, p. 9, n.4 (quoting Slatkey v. Amoco

Oil Company, 830 F.2d 476, 489 (3d Cir. 1987))

Case 4:05-cv-01667-MM Document 19 Filed 12/28/05 Page 11 of 13
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The undisputed facts of this case establish that, before Keystone

Financial finalized its mortgage with the Debtors, Agway had

represented to Keystone Financial that Agway would “subordinate the

lien of its mortgage to the financing being provided by Keystone.” 

Agway failed to fulfill its promises. There is no contention that it

was unreasonable for Keystone Financial to have relied upon Ms.

Heiser’s statements. 

We are of the view that those statements by Heiser, and Keystone

Financial’s reliance thereon, qualify Keystone Financial as a bona

fide mortgagee because they provided a valid basis for Keystone

Financial to believe that its mortgage would have priority over

Agway’s mortgage. In other words, Keystone Financial proceeded in

good faith when it decided to consummate the refinancing with the

Debtors because it was relying on Agway’s statements by Heiser

concerning subordination of the Agway mortgage to the Keystone

Financial mortgages. In light of the statements made by Heiser, it

would be patently unfair to deny Keystone Financial status as a bona

fide lienholder simply because Agway failed to follow-through with the

written subordination agreement which had been promised by it.

Because Keystone Financial was a bona fide lienholder, this case

is governed by the Supreme Court of Pennsylvania’s holding in Western

Pennsylvania National Bank. Judge France properly granted the

Appellee’s motion for summary judgment and denied the Appellants

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motion for that same relief.

NOW, THEREFORE, IT IS ORDERED THAT:

1. Gordon Brothers’s appeal of the Opinion and Order of the

Bankruptcy Court dated July 5, 2005, is without merit.

2. The Opinion and Order of the Bankruptcy Court dated July 5,

2005, is affirmed.

 s/Malcolm Muir 

 MUIR, U.S. District Judge

MM:ga

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