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In re FRG Inc.

argued: October 10, 1990.

IN RE FRG, INC., FRP LIMITED PARTNERSHIP A/K/A FRANKLIN REALTY PARTNERS,
v.
BRUCE MANLEY, APPELLANT



On appeal from the United States District Court for the Eastern District of Pennsylvania; Civil Action No. 89-8377.

Higginbotham, Chief Judge, and Greenberg and Hutchinson, Circuit Judges.

Author: Greenberg

Opinion OF THE COURT

GREENBERG, Circuit Judge

Debtors, FRG, Inc. and FRP Limited Partnership a/k/a Franklin Realty Partners, agreed to pay Bruce Manley $100,000 in settlement of a lawsuit brought by Manley against them in the United States District Court for the Eastern District of Pennsylvania, for the recovery of commissions and benefits due him by reason of his former employment with the debtors. The $100,000 debt was evidenced by an installment promissory note which included a confession of judgment clause. After the debtors filed Chapter 11 bankruptcy proceedings, Manley sought relief from the automatic stay of the Bankruptcy Code so that he could pursue the collection of the unpaid debt in proceedings in the Pennsylvania state courts. He alleged that he was a secured creditor, as he had confessed judgment on the note for $80,000 and had attached one of the debtors' bank accounts at Fidelity Bank with sufficient funds to secure the entire debt. He further alleged that the debtors had no interest in the funds. At the conclusion of Manley's case at an evidentiary hearing on his motion, the debtors moved for and obtained a directed verdict. Manley appealed to the district court pursuant to 28 U.S.C. § 158(a), but that court affirmed the bankruptcy court order. Manley then filed this appeal under 28 U.S.C. § 158(d).*fn1 We find that the bankruptcy court and district court erred in concluding that, on the record before the bankruptcy court at the end of Manley's case, he was not entitled to relief. We will therefore reverse the order of the district court and will remand this case to it, so that it may be further remanded to the bankruptcy court to complete the proceedings on Manley's application.

I. BACKGROUND

The basic facts are not in dispute.*fn2 In June, 1987, Manley, a former employee of the debtors, sued them in the underlying district court action. In August, 1988, Manley and the debtors, each represented by counsel, entered into a settlement agreement providing for the debtors to pay Manley $100,000 in six installments.*fn3 The debtors executed a note for the $100,000 which provided that:

Should payment not be received. . .on the tenth day following delivery of the notice [of default], then [FRG and FRP] hereby authorize[ ] irrevocably, the Prothonotary, Clerk of Court, or any Attorney of any Court of Record to appear for [FRG and FRP] in such Court, in term, time, or vacation, at any time before or after maturity and confess a judgment without process in favor of Manley, holder of this Note, with or without the filing of an Averment or Declaration of Default, for the unpaid balance thereon, together with costs and attorney's fees.

App. at 24.

The debtors' counsel specifically agreed to this confession of judgment provision and helped draft it.

The debtors paid the first two installments of $10,000 but did not make a $15,000 payment due on October 16, 1988. After the debtors failed to cure this default, Manley confessed judgment against them in the Court of Common Pleas of Philadelphia County on November 9, 1988, for the remaining $80,000 due on the settlement. Manley then attached FRG's account at Fidelity Bank in Philadelphia and served a Writ of Execution for $80,000.*fn4 At the time of the attachment, there were sufficient funds in the Fidelity account to satisfy the remaining debt.

On November 29, 1988, the debtors filed a motion in the common pleas court to open or strike the judgment and on that day that court entered an order staying Manley from executing on the Fidelity account. By an order of January 13, 1989, the common pleas court opened the confessed judgment but did not strike it. Its opinion stated, in pertinent part:

Pennsylvania law requires that the language of a confession of judgment clause be strictly construed. . . . This Court must narrowly interpret the terms of the subject confession clause, specifically, the ability to make due all future payments.

After careful review of the Note's confession provision, we find that the Note fails to clearly and unequivocally provide for acceleration of all future payments upon default. This Court is persuaded that a strict interpretation of the confession clause ...


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