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Nicholas v. Hofmann

Superior Court of Pennsylvania

March 24, 2017

JOHN T. NICHOLAS AND BRETT STROTHERS, T/A NICHOLAS AND STROTHERS, A PARTNERSHIP Appellants
v.
DREW M. HOFMANN, INDIVIDUALLY; THE ESTATE OF CONRAD J. HOFMANN, DREW M. HOFMANN, EXECUTOR; CONRAD G. HOFMANN, JR., INDIVIDUALLY AND KEEHOF BAR, INC.

         Appeal from the Judgment Entered October 6, 2015 In the Court of Common Pleas of Philadelphia County Civil Division at No(s): September Term, 2013 No. 02154

          BEFORE: BOWES, J., OTT, J., and SOLANO, J.

          OPINION

          SOLANO, J.

         Plaintiff Nicholas and Strothers ("N&S"), a Pennsylvania partnership formed by John T. Nicholas (deceased) and Brett Strothers, appeals from a judgment, following a bench trial, that was entered in favor of the defendants in its mortgage foreclosure action and that voided a deed that transferred real estate to N&S. After careful review, we vacate the judgment and remand for further proceedings.

         This case presents a complex set of facts that has been made more complex by a series of factual and legal errors made by the parties prior to and throughout these proceedings. Adding to the confusion is the fact that principals to the underlying transaction, Mr. Nicholas and Conrad J. Hofmann, are deceased, and those available to testify at trial displayed a woeful lack of personal knowledge about the facts. The evidence left the trial judge to conclude that there is such a lack of agreement about the facts that there is no viable mortgage contract to enforce. We conclude that, because of errors in the trial court's analysis, it is necessary for the trial court to reexamine the validity and enforceability of the mortgage. We also conclude that our rules of procedure did not permit the trial court to entertain an action to void the deed.

         Conrad J. Hofmann owned the real property at issue, which is located at 551 East Cambria Street in Philadelphia. He also owned all of the stock of Keehof Bar, Inc., a Pennsylvania corporation which operated a bar and restaurant on that property. Trial Ct. Op., 1/4/16, at 3.

         Conrad J. Hofmann had two sons: Drew M. Hofmann and Conrad G. Hofmann. Tr. Ct. Op. at 3. In the trial court, the parties referred to Conrad J. Hofmann as "Conrad J. Hofmann, Sr." and to Conrad G. Hofmann as "Conrad G. Hofmann, Jr." For ease of reference, this opinion refers to that father and son as "Conrad Sr." and "Conrad Jr."

         On May 10, 2010, Drew Hofmann, acting as agent for his father, executed a first mortgage on the Cambria Street property to secure a $32, 000 loan from John H. Marg. Trial Ct. Op. at 3.

         On July 26, 2010, Conrad Sr. died. Trial Ct. Op. at 3. In his Last Will and Testament, he bequeathed the Cambria Street property and all shares of Keehof Bar to his sons, giving Drew 51% of the real estate and stock and giving Conrad Jr. 49%. Id. at 3-4; Last Will and Testament ("Will"), Ex. P-2, § IV. The Will named Drew as Executor of the estate[1] and gave him and any successor executors broad general fiduciary powers, including the power to compromise claims and, "[s]ubject to the other provisions of this [W]ill, to alter, repair, improve, sell, mortgage, lease, exchange, or otherwise develop, operate, or dispose of any real or personal property at any time for such prices and on such terms and in private or public transactions as they deem appropriate, without any liability on the purchasers to see to the application of the purchase money." Will § VI(C), (D). The Will listed some outstanding debts of the decedent, id. § I, [2] and contained a protective provision regarding claims against the estate, id. § VII. [3]

         On November 8, 2010, Drew executed a promissory note and mortgage on the Cambria Street property, and this note and mortgage are the principal sources of the issues in this action. The promissory note documented a debt owed to N&S. It stated that "the Estate of Conrad J. Hofmann, Drew M. Hofmann, executor" promised to pay N&S $195, 000 plus interest. Mortgage Note, Ex. P-5. In capital letters, the note added:

THIS IS A COMMERCIAL LOAN FOR COMMERCIAL PURPOSES. THE LOAN IS A FIRST LIEN ON THE PROPERTY. THE SUM OF $140, 000 WAS ADVANCED DURING THE LIFETIME OF CONRAD HOFMANN MAINLY TO FINANCE CON HOF MUSIC, LLC, ROSELANE MUSIC, LLC WHICH OPERATED OUT OF WILDWOOD, NEW JERSEY. SOME OF THE MONEY WAS USED TO MAKE MORTGAGE PAYMENTS ON THE HOUSE OWNED BY CONRAD HOFMANN AT 6210 SEAVIEW AVENUE WILDWOOD, NEW JERSEY, AND ALSO TO PAY OBLIGATIONS FOR KEEHOF BAR, INC., IN PHILADELPHIA. THE PARTIES AGREE THAT JOHN T. NICHOLAS ADVANCED $140, 000.00 ON THE DATE OF THIS NOTE INCLUDING ACCRUED INTEREST, IF ANY. BRETT STROTHERS ADVANCED $55, 000.

Id. The note was due and payable on December 1, 2012, and interest was due in monthly installments during the term of the note. The note stated it was "JOINED BY KEEHOF BAR, INC. . . . as a guarantor, " and it authorized N&S to file a financing statement against the stock of the bar. Id. The signature block on the note read:

         Intending to be legally bound, the party hereto has affixed her [sic] hand and seal the day and year first above written.

Estate of Conrad Hofmann, deceased
Drew M. Hofmann, Executor
Drew M. Hofmann
KEEHOF BAR, INC., a
Pennsylvania business Corporation
Drew M. Hofmann President and sole shareholder

Id.

         Like the note, the mortgage also was between the "Estate of Conrad J. Hofmann, Drew M. Hofmann, executor" and N&S. Mortgage, Ex. P-4. It provided:

Whereas, mortgagor has executed and delivered to mortgagee a certain mortgage note of even date herewith, payable to the order of mortgagee in the principal sum of One hundred, Ninety Five Thousand Dollars ($195, 000.00[)] and has provided therein for payment of any additional moneys loaned or advanced thereunder by mortgagee, together with interest thereon at the rate provided in the note, in the manner and at the times therein set forth, and containing certain other terms and conditions all of which are specifically incorporated herein by reference; THIS MORTGAGE SHALL BE DUE AND PAYABLE IN FULL WITHOUT FURTHER DEMAND FOR PAYMENT OF SAME ON DECEMBER 1ST, 2012. Interest only shall be due on this mortgage until the due date of December 1st, 2012.
Now therefore, mortgagor, in consideration of the debt or principal sum and as security for the payment of the same and interest as aforesaid, together with all other sums payable hereunder or under the terms of the note, grants and conveys to mortgagee, its successors and assigns all the lots or pieces of ground situated in Carbon County [sic], Pennsylvania, more specifically described as follows:

Id. The mortgage then proceeded to describe the Cambria Street property in Philadelphia, including an address, metes and bounds description, tax assessment number, and title history. See id.[4] The mortgage was signed by Drew M. Hofmann as Executor for the Estate of Conrad Hofmann, and, unlike the note, it provided for Drew to sign the document only once. Id. The mortgage contained an acceleration clause and a clause permitting N&S to confess judgment against the estate. Id. At the same time as the parties entered into this mortgage, N&S fully satisfied the earlier mortgage on the property with a payment to John Marg. Trial Ct. Op. at 4, ¶ 8; N.T. at 38, 53-54, 87.

         In addition to the mortgage, Drew, again as executor of his father's estate, signed an "Irrevocable Stock Power" which transferred to N&S 100 shares of Keehof Bar stock. The bar had issued a certificate for those shares a few weeks earlier. See Trial Ct. Op. at 4-5; Certificate, Ex. P-8.

         Drew tried to use the N&S loan proceeds to reopen Keehof Bar and make it profitable, but was unsuccessful. After a few months, the Hofmann Estate failed to make the monthly interest payments required by the note, and on September 27, 2011, N&S confessed judgment against Drew Hofmann in the Court of Common Pleas of Carbon County. Trial Ct. Op. at 6. The court struck the confessed judgment in July of 2012. Id.

         On January 25, 2012, Conrad Jr., "as heir of the Estate of Conrad J. Hofmann, deceased, " executed a deed conveying "ONE HALF INTEREST" in the Cambria Street property to N&S for $5, 000. Trial Ct. Op. at 6; Deed, Ex. P-3.[5] The deed explained that Conrad Sr. had died and left a Will providing that his residuary estate would be divided equally between Drew and Conrad Jr., so that "both have been vested with a 50% interest in the real estate described herein by operation of law." Trial Ct. Op. at 6; Deed, Ex. P-3 (quoting Will § V). In citing the Will's provision for an equal disposition of the estate's residue to Drew and Conrad, the deed overlooked the fact that a different provision of Conrad Sr.'s Will, Section IV, stated that Conrad Sr. gave Conrad Jr. only 49% of the Cambria Street property.[6]

         N&S filed a complaint to foreclose on the mortgage on September 19, 2013. Trial Ct. Op. at 6. As amended, the complaint named as defendants: Drew M. Hofmann, individually; Drew M. Hofmann, as Executor of the Estate of Conrad J. Hofmann, deceased; Conrad G. Hofmann, Jr., individually; and Keehof Bar, Inc. Trial Ct. Op. at 1; see Am. Compl., 6/9/14.

         On November 6, 2014, a default judgment was entered in favor of N&S and against Conrad Jr. for failure to file an answer within the required time. Trial Ct. Op. at 1-2. Three days later, Nicholas died, and on November 20, 2014, N&S filed a Suggestion of Death to alert the court that Strothers would be continuing the action on behalf of the partnership. Suggestion of Death at 1-2.[7]

         On December 26, 2014, the remaining defendants filed an Answer and Counterclaim to Quiet Title, citing Pa.R.C.P. 1061(b)(3). Trial Ct. Op. at 2; Answer to Second Amended Compl. with Countercl. to Quiet Title and Affirmative Defenses, 12/26/14. The defendants claimed that the mortgage was procured by fraudulent inducement and was void and invalid because Drew never registered as an executor in Pennsylvania and therefore lacked authority to enter into it. Id. at ¶ 33. In addition to alleging fraud, the counterclaim averred that N&S was dissolved as a partnership by operation of law upon Nicholas' death and therefore could not maintain the mortgage foreclosure action, and that Conrad Jr.'s deed of one-half of the property was "defective and invalid." Id. at ¶¶ 32, 33, 41. In an answer to the counterclaim, N&S averred that the counterclaim was invalid under Rule 1148 of the Rules of Civil Procedure "as [the] claim does not relate to the origination of the mortgage." Pl.'s Ans. To Def.'s New Matter and Affirmative Defenses, 1/14/15, at ¶ 32.

         On July 13, 2015, the trial court held a non-jury trial. Trial Ct. Op. at 3. A major focus of the trial was on the meaning of the terms of the note and mortgage, including, in particular, the $195, 000 amount of the loan and the capitalized paragraph in the note regarding the $140, 000 portion of the loan that was an advance. In this respect, each side presented conflicting evidence, including extrinsic evidence, regarding the documents. N&S presented the testimony of Attorney Anthony Roberti, Esquire, and Brett Strothers. Id. at 2. Defendants presented the testimony of Drew Hofmann. Id.

         Roberti, who had previously represented Nicholas in other matters, testified that he drafted the note and mortgage on November 8, 2010, at a meeting in his office where Nicholas, Drew Hofmann, and William Gaffney[8] were present. Tr. Ct. Op. at 4; N.T., 7/13/15, at 9-11.[9] Roberti testified that Drew was not represented by counsel, but that in the middle of the meeting Drew called and spoke with his attorney for fifteen minutes. Id. at 11, 47.

         Roberti testified that $140, 000 had been loaned by Nicholas to either Conrad Sr. or to Drew Hofmann while Conrad Sr. was alive. N.T., 7/13/15, at 32-26, 41, 43-44. Roberti did not know how that money was used. Roberti said some of the $140, 000 was used to pay residential mortgages, but believed it was a small amount. Id. at 32-36, 42. He was not sure whether the money was used to make payments on a house owned by Conrad Sr. or Conrad Jr. Id. at 33. Roberti believed that all or most of the $140, 000 had been given directly to Drew. Id. at 36, 43-44. He could not provide evidence substantiating the $140, 000 debt, and he testified he was never given a detailed itemization of it. Id. at 32-37, 44-45, 48.[10]

         According to Roberti, the remaining $55, 000 of the $195, 000 loan amount was advanced by Strothers and distributed on the date of the note's execution, November 8, 2010. N.T. at 35. He claimed that some of that money went to paying off the $29, 500 balance due on the first mortgage, as well as gas bills, water bills, and real estate taxes on the property. Id. at 35, 38-39, 53-54. Roberti testified that he distributed $34, 754 on the day of the mortgage, but also said it was "more than that. Something like $50, 000." Id. at 38, 48. He did not bring to court the records of the checks he issued that day. Id. at 61-62.[11]

         Roberti stated that he included in the note whatever language the parties instructed him to include, in order to make the note as detailed as possible. N.T. at 31, 34. Roberti testified that he read both the mortgage and note aloud in Drew's presence. Id. at 46; see also id. at 33.

         Plaintiff Strothers testified that -

Nicholas brought the matter to me, the opportunity that he had a family friend that he had advanced money to previously, and he had just passed away, and there was a looming foreclosure[12] coming over a business asset that the family had, and he had some outstanding debt, and to prevent trying - to kill two birds with one stone, to prevent a foreclosure on the bar and also secure his debt, I came on board by buying out a previous mortgage that was about to foreclose and also provided additional funds to get the bar up and running again that had previously been closed so he could provide income for Mr. Hofmann, Drew.
The purpose of the mortgage [for $195, 000] was that most of this money was advanced to Drew and his businesses with the credit history of Drew's father who was still alive at the time. Once he passed away, John Nicholas was worried he would not be able to collect based on history and wanted to secure his debt in some form or another.

Id. at 69-74.

         Strothers testified that the $140, 000 was comprised entirely of loans to Drew based on his father's credit backing. N.T. at 73-74, 76, 88-89, 91. He had seen checks written from Drew and Drew's businesses to Nicholas in repayment for loans, but Strothers said that Nicholas would not cash the checks because they would bounce. Id. at 77, 89-90. The parties to the mortgage finally agreed on the amount of $140, 000 following days of negotiations. Id. at 73, 79. Strothers testified that part of the $55, 000 that he provided was used to pay off the first mortgage, but he did not specify how the rest of the $55, 000 was allocated. Id. at 80, 86-87.[13]

         Defendant Drew Hofmann testified that the intention behind the mortgage at issue was to obtain funds to reopen the bar and then pay back the mortgage loan with the bar profits. N.T. at 152-53, 156. When asked about the $140, 000 debt, Drew said that "there really wasn't an understanding." Id. at 153-54. He said he never received the $140, 000 loan and that in the past Nicholas had lent him $30, 000 at most. Id. at 166.

         Regarding the $55, 000, Drew admitted that he "signed" for it, and that the $55, 000 "given to him" was "a loan to open the bar." N.T. at 153. He said that of the $55, 000, approximately $17, 000 was "given towards the builders" and "given to other people to open the bar, get the bar open, and the difference to John Marg." Id. at 156. At the same time, Drew testified that he personally received $5, 000, and that he believed that was all he was "signing for." Id. at 153-54, 156.

         Drew testified that he read and signed the mortgage, and that he understood that if he failed to make payments he would be in default. N.T. at 175-78. He admitted that he made only two payments under the mortgage. Id. at 176-78. He also testified that N&S promised him additional funds to help open the bar, but that agreements regarding the additional funds were not included in the written mortgage documents. Id. at 156-59; 175-76. The additional funds were never provided, which was why Drew was unsuccessful at reopening the bar and turning a profit early enough to repay the mortgage as planned. Id.

         At the conclusion of N&S' case, the defendants moved for a directed verdict on behalf of Defendants Keehof Bar and Drew Hofmann, individually. Trial Ct. Op. at 2. The Court granted the motion with respect to Keehof Bar only. Id.

         The day following the trial, the trial court issued an order which struck both the mortgage and deed as void, quieted title on the property in favor of Defendants, and barred N&S from making any future claims on the property. Order, 7/14/15. The full text of the trial court's order reads:

AND NOW, this 14th day of July, 2015, upon consideration of the pleadings and after a non-jury trial in this Foreclosure action, it is hereby ORDERED and DECREED as follows:
1) Judgment is entered in favor of Defendants, Drew M. Hofmann, Conrad G. Hofmann, Jr., and [Keehof] Bar, Inc., and against Plaintiffs, John T. Nicholas, Brett Strothers, t/a Nicholas and Strothers, a Pennsylvania partnership;
2) The Mortgage dated November 8, 2010, executed by Drew M. Hofmann, Executor of the Estate of Conrad J. Hofmann, Sr., and recorded on November 16, 2010 in the Department of Records of Philadelphia County under Document No. 52282705, and assigned to John T. Nicholas and Brett Strothers, a Pennsylvania partnership known as Nicholas and Strothers by Assignment recorded November 16, 2010 in the Department of Records of Philadelphia under Assignment No. 36N6-105, for the Property 551 East Cambria Street, Philadelphia, Pennsylvania 19134, described more fully in Exhibit "A" attached hereto ("Property") is unenforceable and is hereby marked VOID and CANCELLED[14];
3) Plaintiffs, John T. Nicholas, Brett Strothers, and the partnership known as Nicholas and Strothers, his/its successors and assigns, and/or anyone claiming under, by or through him/it, are forever barred from asserting any right, lien, mortgage, title or interest in the Property 551 East Cambria Street, Philadelphia, Pennsylvania 19134;
4) The Commissioner of the Department of Records of Philadelphia County is directed to record a certified copy of this Order and to void the Mortgage to properly acknowledge that the Mortgage dated November 8, 2010, and recorded in Philadelphia, Pennsylvania under Document No. 52282705, and assigned to John T. Nicholas and Brett Strothers, a Pennsylvania partnership known as Nicholas and Strothers by Assignment recorded November 16, 2010 in the Department of Records of Philadelphia under Assignment No. 36N6-105, is removed from record;
5) The Deed dated January 25, 2012, purporting to transfer title of the Property located at 551 East Cambria Street, Philadelphia, Pennsylvania 19134, from Conrad G. Hofmann, as heir of the Estate of Conrad J. Hofmann, to John T. Nicholas and Brett Strothers, a Pennsylvania partnership known as Nicholas and Strothers recorded in Philadelphia Recorder of Deeds on January 27, 2012 under Document No. 52439964, described more fully in Exhibit "B" attached hereto ("Deed"), is declared VOID and CANCELLED as of record;
6) Plaintiffs, John T. Nicholas, Brett Strothers, and the partnership known as Nicholas and Strothers, and all persons claiming under him and/or it, are forever barred from asserting any right, lien, title or interest in the Property identified as 551 East Cambria Street, Philadelphia, Pennsylvania 19134, and title to the Property is hereby QUIETED in favor of Defendants, Drew M. Hofmann and Conrad G. Hofmann, Jr., as Tenants in Common (Fifty-One percent ...

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