decided: February 2, 1976.
CANTER, ET UX., APPELLANTS
Appeal from order of Court of Common Pleas of Bucks County, May T., 1970, Nos. 3114, 3115, and 3116, in case of Norman M. Canter v. Morton L. Canter and Sylvia F. Canter.
Sue N. Lang, with her Williams, Glantz & Schildt, for appellants.
Harry C. Liebman, Herman N. Silver, and Nathan Lavine, submitted a brief for appellee.
Watkins, P. J., Jacobs, Hoffman, Cercone, Price, Van der Voort, and Spaeth, JJ. Opinion by Cercone, J. Concurring and Dissenting Opinion by Spaeth, J. Watkins, P.j., joins in this opinion.
[ 238 Pa. Super. Page 348]
This appeal arises from the lower court's denial of appellants' petition to open three judgments based upon judgment notes executed in favor of their son, Norman, for $5,000 each. Although Norman was nominally the respondent to the petition to open, in fact his trustee in
[ 238 Pa. Super. Page 349]
bankruptcy was the substituted plaintiff on the judgments. The facts giving rise to this appeal, based upon the pleadings and the depositions of appellants, Morton and Sylvia Canter, are as follows:
In May or June of 1970, the business of Morton and Sylvia Canter, Canterbury Fabrics, Inc., was insolvent and apparently headed for bankruptcy. The Canters were also personally liable for some $34,000 to $44,000 of the business debts. At that time they backdated and executed simultaneously the three judgment notes in question in favor of their son, Norman. These notes bore no provision for attorney's collection fees, and the provisions for interest were stricken. Each note (dated October 15, 1965, November 2, 1966, and December 23, 1968, respectively) was formally witnessed by a different employee of Canterbury Fabrics. On July 14, 1970, appellants placed Canterbury Fabrics, Inc. in a Chapter 11 proceeding in bankruptcy. On August 3, 1970, the judgment notes were entered, by confession, with the Prothonotary of Bucks County by Sylvia Canter, who signed her son's name to the praecipes and affidavits of nonmilitary service. In September of 1970, Canterbury Fabrics, Inc. was adjudicated a bankrupt. The debts of the business for which the Canters were also liable have not been discharged, and the judgments based upon the notes from them to their son have remained on record.
In October of 1971, Norman Canter, the son, also filed a voluntary petition in personal bankruptcy; and, on May 9, 1973, a suggestion was entered in the instant actions noting the appointment of a trustee for the bankrupt estate of Norman Canter and notifying appellants of the trustee's appearance in the instant cases. On July 16, 1973, appellants filed their petition to open the judgments, almost three years after they were originally filed with the prothonotary. Although the trustee's answer alleged several grounds for denying the motion to open (including laches and "unclean hands"), the court below
[ 238 Pa. Super. Page 350]
rested its decision upon the fact that appellants' petition and motions to open were not timely filed given the circumstances of this case.*fn1
It is apparently conceded by all that the $15,000, the amount of the three notes given to their son, upon which the judgments rest, was never received by Morton and Sylvia Canter, so that their propounded defense, "failure of consideration," is sound from that standpoint. However, the trustee contended before the lower court (apparently persuasively, from the tenor of the lower court's opinion) that the transaction involving the judgment notes was an attempt by the Canters to defraud the creditors of their business to whom they were also personally liable.
The Canters' incredible explanation was that the transaction was carried out at the behest of their son, who allegedly was acting on their behalf in negotiations with an anonymous lender. This anonymous person indicated a willingness to loan the Canters $15,000 (ostensibly interest free) if they complied with certain of his requests, which included the preparation, backdating and recording of the notes on behalf of their son. The Canters further claimed that the deal fell through when it was learned that their existing creditors would only agree to postpone the collection of their debts if they were indemnified by any new investor. Since, the Canters allege, the anonymous lender was not willing to make the loan on those conditions, the money was not forthcoming. Thereafter they allege that their son tore up the notes in his possession, and they believed nothing further remained to be done to absolve them of their obligation under the notes. Believing that, they failed to have the judgments removed from the record.
[ 238 Pa. Super. Page 351]
In order to succeed in opening a judgment by confession, it is necessary to act promptly and allege a meritorious defense. Cheltenham Nat'l. Bank v. Snelling, 230 Pa. Superior Ct. 498, 504 (1974); Ritchey v. Mars, 227 Pa. Superior Ct. 33 (1974). Furthermore, petitions to open judgments lie within the equitable powers of the court. Wenger v. Ziegler, 424 Pa. 268 (1967); Kilgallen v. Kutna, 226 Pa. Superior Ct. 323 (1973); Bucks County Bank & Trust Co. v. De Groot, 226 Pa. Superior Ct. 419 (1973). Hence, the determination of the hearing court may not be reversed on appeal unless a clear abuse of discretion is shown. Ritchey v. Mars, supra.
In the instant case, we are not persuaded that the court abused its discretion when it found that the appellants had failed to act promptly in waiting nearly three years before filing their petition to open. Although appellants cite cases where the granting of motions to open judgments were affirmed on appeal, despite delays of more than three years,*fn2 those cases differ markedly on their facts, and certainly involve situations more likely to appeal to the conscience of the court. In any event, those cases do not stand for the proposition that had the lower court therein refused to open judgment, its decision would have been reversed on appeal. But see Funds for Business Growth, Inc. v. Maraldo, 443 Pa. 281 (1971).
In this case, the judgments were entered upon praecipe by Sylvia Canter, with the consent of her husband, and at the behest of her son. The judgment notes were prepared in favor of their son, and without consideration, at a time when the Canters' business was insolvent and on the brink of bankruptcy. Any one of these circumstances alone would presumptively indicate a fraudulent conveyance to preserve their property from execution by
[ 238 Pa. Super. Page 352]
their creditors. See 10 Standard Pennsylvania Practice §§ 235-37 (Rev. ed. 1963), and the cases cited therein. Together, they virtually compel that conclusion, especially in light of the Canters' backdating the notes and their patently incredible explanation of the reasons for their so doing. It has long been established that, when such indications of fraud appear, the parties to the fraud are not entitled to relief inter se. Dillen v. Dillen, 221 Pa. 435 (1908); Blystone v. Blystone, 51 Pa. 373 (1865). Furthermore, "[a] long delay after knowledge of all the facts casts doubt upon the good faith of the defense and gives weight and probability to the evidence adduced to rebut it." 7 Standard Pennsylvania Practice § 79 (Rev. ed. 1961). In this context, and coupled with the fact that creditors of the bankrupt, Norman Canter, may also have been misled by the existence of $15,000 worth of judgments in his favor, we cannot find that the lower court abused its discretion in refusing to open these judgments after three years.*fn3
Order is affirmed.
[ 238 Pa. Super. Page 353]
Concurring and Dissenting Opinion by Spaeth, J.:
I agree with the majority that appellants should not be permitted first to confess judgment fraudulently against themselves and then, three years later, to petition successfully to open the judgment. Nevertheless, I am troubled by the majority's disposition of this case. Appellee participated equally with appellants in the execution of the three backdated judgment notes and is as much a party to the fraud committed against appellants' creditors as are appellants. The majority, however, awards appellee's bankrupt estate an asset to which appellee has no right, and does so at the expense of the creditors who were the intended victims of the fraudulent conveyance. In my view, the better disposition of this case would be to reverse the order of the lower court, grant the petition to open the judgment, and proceed to trial. This would permit appellants' creditors to intervene
[ 238 Pa. Super. Page 354]
in the proceeding to have their claims adjudicated with those of appellants and appellee.
I do not question the majority's conclusion that the circumstances surrounding appellants' transaction with appellee indicate an attempt to defraud appellants' business creditors by concealing personal assets from those creditors. Nor do I question the traditional reluctance of our courts to provide relief to a judgment debtor who has fraudulently confessed a judgment. "A court of equity will not come to the aid of one who, in the practice of one fraud, has become the victim of another, but will, as was said in Blystone v. Blystone, 51 Pa. 373, regard one who has been cheated by his own machinery as having cheated himself." Metzger v. Metzger, 338 Pa. 564, 571, 14 A.2d 285, 289 (1940). See also Dillen v. Dillen, 221 Pa. 435, 70 A. 806 (1908). Here, the three judgment notes were prepared and backdated at a time when appellants' business was insolvent and when appellants were personally liable for over $34,000.00 in business debts. Appellee paid no consideration for the notes and, as appellants' son, enjoyed their confidence. As the majority says, "[a]ny one of these circumstances alone would presumptively indicate a fraudulent conveyance to preserve their property from execution by their creditors. . . . Together, they virtually compel that conclusion. . . ." Majority opinion at 351-352.*fn1 See also First National Bank of Marietta v. Hoffines, 429 Pa. 109, 239 A.2d 458 (1968); Smith v. Arrell, 388 Pa. 117, 130 A.2d 167 (1957); Toff v. Vlahakis, 380 Pa. 512, 112 A.2d 340 (1955).
[ 238 Pa. Super. Page 355]
Had appellee not filed a voluntary petition in bankruptcy, I would have agreed with the majority that we should be guided by the equitable principles expressed in Metzger v. Metzger, supra, and affirm the order of the lower court.*fn2 I would have done this because, without the petition in bankruptcy, appellants' creditors might
[ 238 Pa. Super. Page 356]
have availed themselves of one of a number of alternative remedies.
First, if the creditors had had notice of appellants' petition to open the judgments, they might have filed for leave to intervene during the pendency of the action as provided for in Pa. R. C. P. 2327.*fn3 See generally Admiral Homes, Inc. v. Floto Management Corp., 397 Pa. 509, 156 A.2d 326 (1959); Howell v. Franke, 393 Pa. 440, 143 A.2d 10 (1958). I cannot tell from the briefs and record whether the creditors ever received such notice, or whether they decided for other reasons not to press their claims at this time.*fn4 It does appear that they did
[ 238 Pa. Super. Page 357]
not attempt to intervene. Second, the creditors might have petitioned to have the judgment set aside and its execution stayed, as provided in 12 P.S. § 911.*fn5 And third, they might have proceeded under Section 9 of the Uniform Fraudulent Conveyances Act, Act of May 21, 1921, P.L. 1045, No. 379, 39 P.S. § 359. Under that section, a creditor may either file a bill in equity to have the conveyance invalidated, or may disregard the conveyance entirely and proceed directly to execution.*fn6 See Simon v. Sorrentino, 145 Pa. Superior Ct. 364, 20 A.2d 805 (1941).
I assume that it is one of these remedies, or, perhaps, a suit in the district court by appellants' creditors against appellee's trustee in bankruptcy, that the majority has in mind when it states, Majority Opinion at 352, n.3, that "[t]he decision in this case does not rest upon whether the judgments are voidable, but rather on whether they are now voidable by the Canters."
[ 238 Pa. Super. Page 358]
Here, however, appellee has filed a voluntary petition in bankruptcy and the trustee in bankruptcy has appeared. Because of the peculiar status of a trustee in bankruptcy, the remedies available to appellants' creditors may not be effective if the trustee is awarded the assets represented by the three judgment notes.
Section 70 (c) of the Bankruptcy Act, 11 U.S.C. § 110(c), vests the trustee in bankruptcy with all the rights of a judgment or lien creditor of the bankrupt party.*fn7 Federal decisions under the bankruptcy laws have held that the rights of the trustee as a judgment creditor of the bankrupt, with regard to the rights of other creditors, are to be determined by applying state law. See In Re Rosenberg Iron and Metal Co., 343 F. 2d 527 (7th Cir. 1965); In Re Dee's, Inc., 311 F. 2d 619 (3d Cir. 1962); City of New York v. Johnson, 137 F. 2d 163 (2d Cir. 1943); In Re Regal Petroleum Products Co., 287 F. Supp. 458 (E.D. Pa. 1968), aff'd, 413 F. 2d 299 (3d Cir. 1969) Factors such as the type of creditor and the nature of his claim affect the setting of priorities as between the trustee and other creditors claiming against the bankrupt's estate.
[ 238 Pa. Super. Page 359]
In Pennsylvania, the courts have followed the long-established rule that a bona fide purchaser for value will be protected even though he takes from a fraudulent grantee. See Cancilla v. Bondy, 353 Pa. 249, 44 A.2d 586 (1945); Lasser v. Philadelphia National Bank, 321 Pa. 189, 183 A. 791 (1936); Boyer v. Weimer, 204 Pa. 295, 54 A. 21 (1902); Keating v. Craig, 13 D. & C. 2d 663, 106 P.L.J. 43 (1959). See also Section 9 of the Uniform Fraudulent Conveyances Act, supra, 39 P.S. § 359, which limits the rights of creditors against those of a "purchaser for fair consideration." The issue presented, therefore, is whether, under state law, the trustee in bankruptcy, as a judgment creditor of the bankrupt appellee's estate, is to be considered a "purchaser for fair consideration", or indeed, is to be awarded priority against competing creditors on other grounds. In In Re Dee's, Inc., supra, which was a proceeding in which both the trustee of the transferor and the trustee of the transferee claimed certain assets, the court said:
"A subsequent transferee for value without notice of an outstanding equity or a defect in the title of the transferor, will take the transferred property free of any outstanding claim or equity. Dee's trustee is in the position of such a transferee." 311 F. 2d at 622.
See also City of New York v. Johnson, supra; In Re Regal Petroleum Products Co., supra.*fn8
It appears to me, therefore, that if the judgments remain unopened, then under the applicable state law as it has been applied within the third circuit, appellants' creditors will probably have little success if they choose to litigate their claims in a federal forum, as they may
[ 238 Pa. Super. Page 360]
do under the Bankruptcy Act. Thus, although the majority says that "[w]e do not in any way conceive that the decision in this case affects the priorities of the creditors of Norman Canter vis a vis the creditors of Morton and Sylvia Canter with respect to the property of the latter . . .", Majority Opinion, at 352, n.3, in fact, I submit, by refusing to open the judgments, the majority's decision may affect those priorities. I cannot agree that appellants' creditors' rights should be determined in so summary a manner. By opening the judgments so that the case might be tried, as I would provide, the issues touched upon in this opinion might be raised by the real parties in interest and resolved on the merits.
I recognize that at the time of the inception of this action, the standard of review in confession of judgment cases was narrowly circumscribed.*fn9 Our courts have said that a petition to open judgment is addressed to the discretion
[ 238 Pa. Super. Page 361]
of the lower court, and is an appeal to the court's equitable powers. Wenger v. Ziegler, 424 Pa. 268, 278, 226 A.2d 653, 655 (1967); Bucks County Bank and Trust Co. v. De Groot, 226 Pa. Superior Ct. 419, 422, 313 A.2d 357, 359 (1973). Nevertheless, the lower court may be reversed for abuse of that discretion. Ritchey v. Mars, 227 Pa. Superior Ct. 33, 324 A.2d 513 (1974). "Generally, an appellate court will limit review of proceedings to open a judgment entered by confession . . . to ascertain whether the discretion of the court below was properly exercised and will reverse only if an abuse of discretion or manifest error is shown." Funds for Business Growth, Inc. v. Maraldo, 443 Pa. 281, 285, 278 A.2d 922, 924 (1971). Here, however, by denying the petition to open the confessed judgments, the lower court not only ratified the fraud perpetrated by appellee and appellants, but also failed to consider the effect of its decision upon the ability of appellants' creditors to recover, in any subsequent action, the substantial sums owed them. In my view, this was manifest error.
I would therefore reverse, open the judgments, and permit the case to be tried as Pa. R. C. P. 2960 provides. I would do so, however, with the proviso that appellants' creditors be notified of the impending proceedings so that they might petition to intervene. Should the creditors choose not to intervene after having been notified, I would permit the lower court to reinstate the
[ 238 Pa. Super. Page 362]
confessed judgments so that the trustee might proceed to execution on those judgments. A court may alter its own judgment to agree with the facts and to conform the judgment to its true intent. Davis v. Commonwealth Trust Co., 335 Pa. 387, 390-391, 7 A.2d 3, 5 (1939). This disposition would undo the dishonesty of the original transaction, while still requiring appellants to bear the consequences of their fraud.