Appeal from the United States District Court for the District of New Jersey (Trenton), D.C. Civil Action No. 86-2804.
Higginbotham, Mansmann, and Rosenn, Circuit Judges.
This is an appeal from a district court's affirmance of a bankruptcy court's judgment voiding a creditor's execution lien upon realty. We must resolve two closely related questions: first, the proper construction of a New Jersey statute requiring levy and execution upon a debtor's personalty, even of little value, before realty; and second, whether, if a creditor has not complied with the statute, certain conduct of the debtor may be held to constitute a waiver or forfeit of the right to raise the noncompliance as a defense to the creditor's lien upon realty. Because we conclude that, although the appellant creditor did not comply with the New Jersey statute, the appellee debtor could and did waive the right to insist upon the statutory requirement, we reverse the district court's judgment.
Appellant Modular Instructures, Inc. (Modular) supplied labor and materials for a building for appellee Evcco Leasing Corp. (Evcco), a trucking firm. On February 28, 1984, Modular obtained a default judgment for $28,691.95 plus costs against Evcco in the Superior Court of New Jersey for Hunterdon County.
Modular obtained an order for discovery in aid of execution requiring Evcco's president, Charles Orlando, a public accountant, to give information under oath as to Evcco's assets. The supplementary proceeding took place on May 1, 1984, in Orlando's counsel's office. Orlando was not placed under oath and was not asked to respond in writing to interrogatories, nor was any official recording made. Orlando gave Modular's counsel, Arthur S. Mott, Jr., a depreciation schedule from Evcco's 1983 tax return and a then-current financial statement. The financial statement showed a bank account balance of $56.18 and a $8,600 debt owed to Evcco by Orlando's mother, a corporate officer. Orlando apparently stated to Mott that Evcco's rolling stock was fully liened, and that Evcco's realty was its only meaningful asset. Mott did not otherwise question Orlando specifically about Evcco's potential future earnings, bank accounts, outstanding debts to Evcco, or the value of its equipment other than vehicles. At the end of the supplementary proceeding, Mott stated that he saw no alternative but to levy upon the realty. Orlando and his counsel agreed and told him they understood "you have to do what you have to do."
Modular obtained a writ of execution and pursuant thereto directed a levy upon Evcco's realty, which the Hunterdon County Undersheriff carried out on May 25, 1984.*fn1 Modular took no action on the levy for nearly a year, however, in order to allow Evcco as long an opportunity as possible to resolve its financial problems. The writ required the sheriff to turn the writ unsatisfied if a sale was not initiated by May 25, 1985, however, and Modular therefore began advertising on May 8, 1985, for a sheriff's sale on June 3, 1985. The sale was twice postponed at Evcco's request upon its representations that the property either had been sold or was to be sold privately and that Evcco would pay Modular from the proceeds. Evcco did not consummate the sale.
Prior to Modular's sale of the property under the writ of execution, Evcco filed a Chapter 11 petition in bankruptcy on July 10, 1985.*fn2 On August 7, 1985, Evcco, as debtor-in-possession, filed an adversary complaint that called upon all creditors to prove their liens. The bankruptcy court ruled that Modular's lien, then twenty months old, was void for failure to comply with a New Jersey statute providing for order of levy. N.J. Stat. Ann. § 2A:17-1 (West 1986).*fn3 The bankruptcy court denied Modular's application for reconsideration and entered an order reconfirming its prior ruling. On appeal, the district court affirmed the judgment of the bankruptcy court. Modular thus became only a general creditor and therefore appealed to this court.
We first must determine whether the bankruptcy and district courts erred in holding that Modular failed to comply with § 2A:17-1. If so, we must next determine whether Evcco somehow waived the protection of § 2A:17-1. If it did not, we must decide whether Evcco is estopped from invoking the statute's protection by its representations at the supplementary proceedings. As we are required to consider only question of law, our review is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir. 1982). Because this is a bankruptcy action brought in New Jersey, we must interpret the relevant state laws as we believe the New Jersey courts would.
The only two cases prior to the district court's decision construing § 2A:17-1 have both read the statute to require literal compliance with the requirement that there must be a good faith attempt to locate, levy, and execute on personalty before executing against realty. In re Silverman, 6 Bankr. 991, 995-96 (D.N.J. 1980); Raniere v. I & M Investments Inc., 159 N.J. Super. 329, 387 A.2d 1254 (Ch. Div. 1978), aff'd. 172 N.J. Super. 206, 411 A.2d 719 (App. Div.), cert. denied, 84 N.J. 473, 420 A.2d 1298 (1980). Compare Ark. Stat. Ann. § 30-401 (1947), construed in United States v. Weir, 235 F. Supp. 306, 309-10 (E.D. Ark. 1963).
In Raniere, the plaintiffs' daughter defaulted on a bank loan the plaintiffs had guaranteed, and the bank obtained a judgment of $1,370.33. The bank directed the sheriff to levy on the Ranieres' realty described therein. The writ instructed the sheriff to move first against personalty and to satisfy the judgment out of realty only if sufficient personal property could not be found. The sheriff, however, levied upon the realty immediately, without any investigation of personalty. The bank held no supplementary proceedings to ascertain the nature and value of any personalty. 159 N.J. Super. at 332-33, 337, 387 A.2d at 1255-56, 1258. The realty was sold at execution sale for $1,410.07, the total sum due the bank, with interest and costs. The realty was assessed at $40,000 and subject to an $8,000 mortgage and a financial statement of $1,915.60; the family home was therefore sacrificed for a debt worth less than one-twentieth of its equity value.
The Raniere court reviewed the history of § 2A:17-1, stating that it "clearly and unequivocally expresses the legislative mandate that before the real property of a debtor may be seized and sold, the sheriff shall first levy upon the debtor's goods and chattels." Id. at 335, 387 A.2d at 1257. Noting that the statute reads that the sheriff shall be commanded to do this and that the statute is in contravention of common law, the court concluded:
The statutory language employed in N.J.S.A. 2A:17-1 leaves no room for equivocation. The statute mandates that the sheriff exhaust all personalty of the debtor that can be located within the county before levying and executing the debtor's realty.
Our statute, N.J.S.A. 2A:17-1, is compulsory, not directory, in language. It mandates that the sheriff exhaust locatable personalty within the county before executing on realty.
Id. at 336-37, 387 A.2d at 1258.
The court emphasized, however, that the creditor bank in Raniere made no effort whatever to locate personalty: the bank directed the sheriff to proceed against the realty, and he did so within an hour. The court was also troubled by ...