HomeMy WebLinkAbout2008-7307 Civil
SOVEREIGN BANK, : IN THE COURT OF COMMON PLEAS OF
Plaintiff/Respondent : CUMBERLAND COUNTY, PENNSYLVANIA
:
vs. : CIVIL ACTION – LAW
: NO. 08-7307 CIVIL
STEWARTSTOWN :
CORNERSTONE, LP; SAMUEL :
JUFFE; CORNERSTONE :
DEVELOPMENT GROUP, INC.; :
JOHN M. HUENKE; AND :
BRUCE W. WILT, :
Defendants/Petitioners :
IN RE: DEFENDANTS’ PETITION TO OPEN JUDGMENT
BEFORE HESS, J.
OPINION AND ORDER
At issue is a confession of judgment arising from a real estate development loan between
Stewartstown Cornerstone, LP (“Stewartstown”) and Sovereign Bank (“Sovereign”). Defendant
Samuel Juffe (“Juffe”), defendant John M. Huenke (“Huenke”), defendant Bruce W. Wilt
(“Wilt”), and defendant corporation Cornerstone Development Group, Inc. (“Cornerstone”)
signed as additional guarantors for Stewartstown (collectively, “Petitioners”). Relevant
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background is as follows.
Juffe, president of Cornerstone and a partner in Stewartstown, testified that he and his
business entities have done business with Sovereign and its predecessor banks for about fourteen
years, with an estimated total of $65 million borrowed over that time period. (R. at 4:9-5:11.)
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The parties stipulated to the use of the record in Sovereign Bank v. Bridgeview Investments, L.P., Bailey Springs
Corp., Cornerstone Development Group, Inc., John M. Huenke, Bruce W. Wilt and Samuel Juffe, No. 2008-NO-
006211-Y30 a duplicate proceeding in York County in the instant case.
NO. 08-7307 CIVIL
Typically, the construction loans used by Petitioners had terms ranging from 18 to 24 months,
but the nature of real estate development dictated the need for extensions. (R. at 5:12-21.)
Because of the almost certain need for extensions of the due dates for these loans, Petitioners
were careful to do business only with banks willing to renew these loans, provided that interest
was paid and the Petitioners’ financial credentials remained strong. (R. at 5:21-25.) This
business reality and borrowing strategy was echoed by Huenke, who is also a partner in
Stewartstown and is a vice president of Cornerstone. (R. at 49:11-12.)
In 2005, Mac McConnell (“McConnell”), a Sovereign employee, visited Juffe at his
office in New Jersey to discuss expanding the relationship between Juffe, his partners, and
Sovereign. (R. at 6:13-24.) During this discussion, Juffe shared with McConnell his desire for
flexibility on the part of the bank: “[A]s long as we’re financially solvent, we’re paying our
interest, that the loans would not be called because of the nature of business. These loans are
short term, and the time periods to achieve what you want usually are longer than the terms of
the loans.” (R. at 7:7-12.) Juffee testified that McConnell assured him that Sovereign was “in
here for the long haul” and that “they understood the real estate business.” (R. at 7:1-4.)
McConnell’s assurances of flexibility on the part of Sovereign were also echoed by
Stephen Goodrich (“Goodrich”), the loan officer managing the loan at issue from 2007 to 2008.
(R. at 30:25-31:6.) Specifically, Goodrich testified that in January 2008, he told Juffe that as
long as the interest on the loan was current, they need not be concerned about maturity dates and
renewals. (R. at 31:11-16.) At the same time, however, Goodrich testified that he never
represented to Petitioners that the maturity date would be extended “ab infinitum.” (R. at 36:25-
37:3.)
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NO. 08-7307 CIVIL
On October 6, 2005, Stewartstown and Sovereign executed a promissory note to finance
a real estate development project. The original maturity date of the note was October 6, 2007.
The parties executed four modification agreements, and each extended the maturity date by three
months. The fourth and final modification agreement, executed on July 16, 2008, set a maturity
date of August 6, 2008. However, in the case of each of the modification agreements, the bank
did not take immediate action upon the coming of the loan’s maturity date; instead, at least a
month would pass prior to the drafting and execution of a new modification agreement. (R. at
45:19-47:4.)
The previously amicable relationship between Petitioners and Sovereign began to sour in
August 2008, in the midst of a sharp downturn in the real estate market. On August 6, the
maturity date under the fourth modification agreement, the parties met to discuss the possibility
of an additional modification. At that meeting, Goodrich and other representatives of Sovereign
indicated to Petitioners that the appraisal on the collateral for the existing loan reflected a
substantial decrease in value. (R. at 62:16-21.) As a result, the loans were now
undercollateralized, as per Sovereign’s lending requirements. To remedy this new deficiency,
Sovereign requested that Petitioners offer additional collateral and provide Sovereign with
additional financial information. (R. at 39:11-19.)
In October 2008, Sovereign made the internal decision to get out of the real estate
development business. (R. at 12:14-17, 31:25-32:5, 45:2-5.) Next, at the end of October 2008,
Goodrich indicated that he had received neither additional collateral nor the requested financial
information from Petitioners. Huenke, a vice president of Cornerstone and partner in
Stewartstown, indicated that during the August meeting, several scenarios regarding additional
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NO. 08-7307 CIVIL
collateral were discussed, but no formal proposal was ever made. (R. at 50:23-51:6.)
Additionally, Huenke testified that he had provided the majority of the requested financial
information in a “huge, onerous spreadsheet.” (R. at 49:17-50:1.) Sovereign informed Huenke
that they required the information provided in a specific format, which Huenke said
Cornerstone’s controller was “chipping away at” at the time judgment was confessed. (R. at
50:2-6.)
In November 2008, Juffe sent Sovereign a letter indicating his willingness to work with
Sovereign’s representatives to reach a solution favorable to all involved parties. Prior to the end
of November, counsel for Sovereign wrote Petitioners indicating that Sovereign intended to call
Petitioners’ loans with Sovereign, including the one at issue here. (R. at 11:7-9.) After receiving
this letter, a meeting was scheduled for December 5, 2008. On December 1, 2008, Sovereign
entered Judgment by Confession against Petitioners in a loan not at issue here. At that meeting,
Petitioners learned from Sovereign’s counsel that the action was taken to “get their attention.”
(R. at 12:2-4.) Sovereign entered Judgment by Confession against Petitioners in the loan at issue
in the instant case on December 15, 2008.
DISCUSSION
Rule 2959 sets forth the procedures used by courts in determining whether to open a
previously confessed judgment. A judgment taken by confession will be opened only if the
petitioner acts promptly, alleges a meritorious defense and presents sufficient evidence of that
defense to require submission of the issues to the jury. Rittenhouse v. Barclay White Inc., 425
Pa.Super. 501, 505, 625 A.2d 1208, 1210 (1993). The evidence proffered should be viewed in
the light most favorable to the petitioner. Id. At bottom, the standard is identical to that of a
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directed verdict: “viewing all the evidence in the light most favorable to the petitioner and
accepting as true all evidence and proper inferences therefrom supporting the defense while
rejecting adverse allegations of the party obtaining the judgment.” See, e.g., Suburban
Mechanical Contractors, Inc. v. Leo, 348 Pa.Super. 324, 327, 502 A.2d 230, 232 (1985). Since
its promulgation in 1973, Rule 2959 has been interpreted as prohibiting courts from weighing the
sufficiency of evidence presented by the petitioning party. See, e.g., First Pennsylvania Bank,
N.A. v. Lehr, 293 Pa.Super. 189, 193, 438 A.2d 600, 602-03 (1980).
In the case sub judice, Petitioners have met timeliness requirement of Rule 2959(a)(3).
The primary issue here is the question of whether sufficient evidence exists to demonstrate the
existence of a meritorious defense. Petitioners contend that such evidence does in fact exist,
averring that it has several defenses: (1) that the contracts between Petitioners and Sovereign
were modified orally, (2) that Sovereign breached its contractual duty of good faith and fair
dealing, and (3) that the doctrine of equitable estoppel should prevent Sovereign from entering
judgment by confession against Petitioners.
First, Petitioners claim that oral modification of each of its contracts with Sovereign has
taken place. Generally, a contract may be modified by words, conduct, or both. See, e.g.,
Trombetta v. Raymond James Financial Services, Inc., 907 A.2d 550, 558 (Pa.Super. 2006).
Unless a contract is for the sale of goods, a contract can be modified orally although it provides
that it can be modified only in writing. Universal Builders, Inc. v. Moon Motor Lodge, Inc., 430
Pa. 550, 557, 244 A.2d 10, 15 (1968). As the Pennsylvania Supreme Court stated, “The most
ironclad written contract can always be cut into by the acetylene torch of parol modification
supported by adequate proof…. The hand that pens a writing may not gag the mouths of the
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assenting parties.” Wagner v. Graziano Const. Co., 390 Pa. 445,448, 136 A.2d 82, 83-84 (1957).
To support a finding of a modification, there must be a new meeting of the minds.
Matevish v. School Dist. of Borough of Ramey, 167 Pa.Super 313, 318, 74 A.2d 797, 800 (1950).
A valid modification does not displace a prior valid contract; rather, it only substitutes for the
original contract to the extent that it alters it. See, e.g., Knight v. Gulf Refining Co., 311 Pa. 357,
360, 166 A. 880, 881 (1933).
The facts in the case sub judice demonstrate that there is merit to Petitioners’ claims that
the contracts at issue have been modified. The verbal communications between the parties and
the conduct of the parties in performing the contracts at issue point in the opposite direction of
the language of the contracts themselves. On one hand are the discussions between Petitioners
and McConnell in 2005 and discussions between Petitioners and Goodrich in 2008, where
McConnell and Goodrich both indicated to Petitioners that current payment of interest on the
loan would result in modification of the loan with a new maturity date. On the other hand is the
relevant contract language. The promissory note reads:
All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan or release any party, partner,
or guarantor or collateral; or impair, fail to realize upon or perfect
Lender’s security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or
notice to anyone.
(R. at Ex. B, Item 6.) Each of the four promissory note modification agreements executed
between the parties includes the following language:
All terms of the Note will continue to be fully effective, except to
the extent that any of them are expressly changed by this
Agreement. The undersigned Borrower and Guarantors hereby
confirm and acknowledge that they have no defense, counterclaim
or setoff, which could affect the enforceability of the note, and
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NO. 08-7307 CIVIL
other Loan Documents and hereby reaffirm the validity of the note
and all other Loan Documents.
(R. at Ex. B, Items 7-10.) These clauses, read together, support the conclusion that only a
written modification has any effect between the parties.
Notwithstanding, Petitioners have presented sufficient evidence to give rise to a jury
question regarding whether the contracts at issue were modified. This modification comes in the
form of Sovereign’s promise to modify and extend the maturity date in exchange for Petitioners’
promise to pay interest on time. Additional evidence of the alleged modification comes in the
form of Sovereign’s failure to declare Petitioner’s loan in default at not one of the four original
maturity dates.
This course of conduct can be explained by the following promissory note language:
“Lender may delay or forgo enforcing any of its rights or remedies under this Note without
losing them.” Id. Another reasonable explanation, however, is that this jibes with the oral
assurances of McConnell and Goodrich, that Petitioners’ timely payment of interest would result
in modification and extension of the loan’s maturity date.
Next, Petitioners assert that Sovereign breached its duty of good faith and fair dealing.
We question the application of such a duty in this case. In Creeger Brick and Bldg. Supply Inc.
v. Mid-State Bank and Trust Co., 385 Pa.Super. 30, 560 A.2d 151 (1989), the Superior Court
addressed the applicability of the duty of good faith and fair dealing to lending institutions. The
plaintiff borrower appealed the demurrer of its suit alleging that the defendant bank failed to deal
with the plaintiff in good faith, although it never violated any of the terms of its loan agreement.
Creeger Brick, 385 Pa.Super. at 32, 560 A.2d at 152. The court noted that Section 205 of the
Restatement (Second) of Contracts “suggests that ‘[e]very contract imposes upon each party a
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NO. 08-7307 CIVIL
duty of good faith and fair dealing in its performance and its enforcement.’” Creeger Brick, 385
Pa.Super. at 35, 560 A.2d at 153 (quoting Restatement (Second) Contracts§ 205).
The court stated that aside from contracts governed by the Uniform Commercial Code,
the duty of good faith and fair dealing has been imposed in a limited number of circumstances,
including franchise agreements and insurance contracts. Creeger Brick, 385 Pa.Super. at 35, 560
A.2d at 153-54 (internal citations omitted). The Creeger Brick court went on to note that the
refused
Pennsylvania Supreme Court has explicitly to impose a duty of good faith where it
would modify or defeat the legal rights of a creditor. Creeger Brick, 385 Pa.Super at 36, 560
A.2d at 154 (citing Heights v. Citizens Nat’l Bank, 463 Pa. 48, 342 A.2d 738 (1975)). The court
concluded its discussion by noting:
It seems reasonably clear from the decided cases that a lending
institution does not violate a separate duty of good faith by
adhering to its agreement with the borrower or by enforcing its
legal and contractual rights as a creditor. The duty of good faith
imposed upon contracting parties does not compel a lender to
surrender rights which it has been given by statute or by the terms
of its contract.
Creeger Brick, 385 Pa.Super. at 36-37, 560 A.2d at 154.
Finally, Petitioners assert that they also possess a valid equitable estoppel defense.
Equitable estoppel is a valid defense for the purpose of a petition to open a confessed judgment.
Allied Bldg. Products Corp. v. Delco Roofing Co., Inc., 951 F.Supp. 1183, 1193 (E.D.Pa. 1996)
(applying Pennsylvania law). See also, Lengyal v. Heidelberg Sports Enter., Inc., 412 Pa.512,
518, 194 A.2d 869, 873 (1963). The Pennsylvania Supreme Court has summarized equitable
estoppel as follows:
When a party by his acts, representations, or admissions, or by his
silence when he ought to speak out, intentionally or through
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culpable negligence induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief, so that he
will be prejudiced if the former is permitted to deny the existence
of such facts . . . the person inducing the belief in the existence of a
certain state of facts is estopped to deny that the state of facts does
in truth exist, aver a different or contrary state of facts as existing
at the same time, or deny or repudiate his acts, conduct, or
statements.
Blofsen v. Cutaiar, 460 Pa. 411, 417, 333 A.2d 841, 843-844 (1975) (internal quotation marks
and citations omitted). Equitable estoppel protects the reasonable expectations of one who relies
upon the conduct or representations of another. Doppler v. Doppler, 393 Pa.Super. 600, 608,
574 A.2d 1101, 1105 (1990). The essential elements of an equitable estoppel defense are
inducement and justifiable reliance on that inducement. See, e.g., Novelty Knitting Mills, Inc. v.
Siskind, 500 Pa. 432, 436, 457 A.2d 502, 503-04 (1983). Additionally, “There can be no
equitable estoppel where the complainant's act appears to be rather the result of his own will or
judgment than the product of what defendant did or represented.” In re Tallarico’s Estate, 425
Pa. 280, 288, 228 A.2d 736, 741 (1967).
It is also important to note that, a party seeking to assert an equitable estoppel defense
must come before the court with clean hands. See, e.g., Lucey v. W.C.A.B. (Vy-Cal Plastics PMA
Group), 557 Pa. 272, 279, 732 A.2d 1201, 1204 (1999) (“[The doctrine of unclean hands] is a
self-imposed ordinance that closes the doors of a court of equity to one tainted with iniquity or
bad faith relative to the matter in which he seeks relief. … Thus, while equity does not demand
that its suitors shall have led blameless lives as to other matters, it does require that they shall
have acted fairly and without fraud or deceit as to the controversy in issue”).
Petitioners point to assurances of not one, but two agents of Sovereign: McConnell and
Goodrich. Both assured Petitioners that so long as they remained current on their interest
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payments, the loan would be extended. As discussed in the context of modification, Petitioners
were given assurances that directly contradicted the promissory note and subsequent
modification agreements as written. Undoubtedly, these assurances were made prior to the
downturn in the real estate market, and they represent a seemingly genuine assurance of
flexibility on the part of Sovereign, necessary to fostering a successful long-term relationship
between the parties. These assurances are not limited to those of McConnell and Goodrich, but
they also extend to the inaction of Sovereign when the loan’s maturity date came and passed,
with a time gap between the old maturity date and the execution of a new note modification
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agreement, not once or twice, but times. This conduct on the part of Sovereign gives
credibility to the verbal assurances of McConnell and Goodrich, that so long as Petitioners
remained current on interest payments, the maturity date of the note would be extended as
needed.
As the maturity date set by the fourth note modification agreement came and went,
Petitioners, based on the representations of Sovereign and its agents, conducted themselves as
they had when the maturity date came and passed the three previous times: they paid their
interest and met with Sovereign’s representatives to move toward executing a new modification
agreement. Unbeknownst to Petitioners, Sovereign had made the internal decision to phase out
real estate development lending in October 2008. Then, in December 2008, well past the final
maturity date of the promissory note, Sovereign entered judgment by confession, a crippling
financial blow to Petitioners. While this action may have reflected Sovereign’s desire to both get
out of real estate development and protect its best individual interests, Petitioners have at least
made out a prima facie defense of equitable estoppel sufficient to warrant opening judgment.
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NO. 08-7307 CIVIL
ORDER
th
AND NOW, this 30 day of July, 2009, it is ordered that the Defendants’ Petition to
Open Judgment is hereby GRANTED.
BY THE COURT,
_______________________________
Kevin A. Hess, J.
Daniel D. Haggerty, Esquire
For the Plaintiff
Albert G. Blakey, Esquire
For the Defendants
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SOVEREIGN BANK, : IN THE COURT OF COMMON PLEAS OF
Plaintiff/Respondent : CUMBERLAND COUNTY, PENNSYLVANIA
:
vs. : CIVIL ACTION – LAW
: NO. 08-7307 CIVIL
STEWARTSTOWN :
CORNERSTONE, LP; SAMUEL :
JUFFE; CORNERSTONE :
DEVELOPMENT GROUP, INC.; :
JOHN M. HUENKE; AND :
BRUCE W. WILT, :
Defendants/Petitioners :
IN RE: DEFENDANTS’ PETITION TO OPEN JUDGMENT
BEFORE HESS, J.
ORDER
th
AND NOW, this 30 day of July, 2009, it is ordered that the Defendants’ Petition to
Open Judgment is hereby GRANTED.
BY THE COURT,
_______________________________
Kevin A. Hess, J.
Daniel D. Haggerty, Esquire
For the Plaintiff
Albert G. Blakey, Esquire
For the Defendants
:rlm