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National Community Bank of New Jersey v. Valor Foods


February 23, 2009


On appeal from Superior Court of New Jersey, Law Division, Hudson County, Docket No. W-026113-89.

Per curiam.


Submitted January 7, 2009

Before Judges Axelrad, Parrillo and Lihotz.

We review whether Rule 4:50-2 precludes a request to vacate a seventeen-year old judgment originally entered following defendant's request for bankruptcy relief. We conclude the judgment was entered in violation of the automatic stay making it void ab initio and, therefore, it must be vacated. The trial court's order denying defendant's request for relief is reversed.

On May 22, 1987, plaintiff National Community Bank of New Jersey (NCB) loaned $500,000 to defendants J.V.L. Realty Co., Inc. (JVL) and Valor Foods, Inc. (Valor), pursuant to the terms of a promissory note. Pannullo, the president of both JVL and Valor, executed the note on behalf of the corporate entities. Additionally, Pannullo individually executed an agreement guaranteeing the payment of a loan extended to JVL.

On February 24, 1989, Pannullo filed a voluntary petition for reorganization, pursuant to Chapter 11 of the United States Bankruptcy Code. Pannullo listed NCB as an unsecured creditor with a $125,000 debt on Schedule A, which was filed along with his petition. The bankruptcy Scheduling Order and Notice to Creditors, informing NCB of Pannullo's bankruptcy filing, was sent to NCB. Pannullo's case was converted to a liquidation, pursuant to Chapter 7 of the Bankruptcy Code. U.S.C.A. § 1112. On November 27, 1992, the Bankruptcy Court issued an order of discharge. 11 U.S.C.A. § 727. On April 18, 1996, Pannullo's bankruptcy case was completed and closed.

The corporate entities defaulted on payment of the obligation due to NCB. On September 21, 1989, NCB filed a complaint naming Valor, JVL and Pannullo as defendants. Presumably, as a result of his bankruptcy, Pannullo did not respond. JVL and Valor filed a joint answer, which mentioned Pannullo's bankruptcy filing. On August 3, 1990, an order of final judgment by default was entered in the amount of $583,537.17 in favor of NCB.*fn1

While running an individual judgment search, Pannullo discovered the August 3, 1990 judgment was entered against him, personally. Pannullo filed a motion to vacate, arguing the judgment was willfully entered in violation of the automatic stay, and the debt created by the judgment was discharged in bankruptcy. NCB maintained Pannullo's motion, presented seventeen years after entry of the judgment, was untimely. The motion judge, citing Rule 4:50-2, determined Pannullo did not oppose NCB's request to enter judgment and his motion to vacate was "too late." Pannullo filed for reconsideration, which was also denied. On appeal, Pannullo argues the court's reliance on Rule 4:50-2 was misplaced because the judgment was void when entered and is unenforceable.

The filing of a petition initiates a bankruptcy action and acts as an Order for Relief granting the debtor the protections of the Bankruptcy Code. 11 U.S.C.A. § 301(a) and (b). The most fundamental protection triggered by a bankruptcy filing is the imposition of an automatic stay, which prevents all efforts against the debtor to collect pre-petition obligations. 11 U.S.C.A. § 362(a)(1); Celotex Corp. v. Edwards, 514 U.S. 300, 314, 115 S.Ct. 1493, 1502, 131 L.Ed. 2d 403, 405 (1995); In re Mollo, 196 Fed. Appx. 102, 104 (3rd Cir. 2006).

The automatic stay becomes effective immediately upon the filing of the petition and the broad language of the Code section is designed to prevent a creditor's coercion of a debtor. We emphasize the fact that "the automatic stay is a central concept in bankruptcy law." Borman v. Raymark Indus., Inc., 946 F.2d 1031, 1032 (3d Cir. 1991). The stay is designed to give debtors "a breathing spell" from creditors, "stop[] all collection efforts, all harassment" and allow a debtor "to be relieved of the financial pressures that drove him into bankruptcy" in the first instance. See H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 340 (1977).

Under section 362(a)(1), Pannullo's bankruptcy filing operated to stay the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title[.]

It is without question NCB filed its Law Division complaint to collect a pre-petition unsecured debt following Pannullo's initiation of his Chapter 11 proceeding. The mere filing of the complaint against Pannullo was prohibited by the stay. Further, all evidence supports a finding that NCB had actual notice of Pannullo's bankruptcy action. NCB was listed on the schedules and notified to attend the first meeting of creditors, as required by 11 U.S.C.A. § 341(a). In addition, NCB was informed of Pannullo's bankruptcy filing in the responsive pleading of the corporate defendants. This constructive notice alone was more than adequate to invoke the stay's protective affects and stop NCB's collection action from proceeding against Pannullo. Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3rd Cir. 1991).

NCB asks this court not to disturb the motion judge's finding that because Pannullo knew of the litigation and the entry of the judgment, but took no action, he therefore, remains bound by its terms. We soundly reject NCB's argument, upon which the motion judge relied. These findings have no impact on the issue at hand.

Pannullo had no obligation to defend NCB's attempt to enter judgment or to prove NCB was not granted relief from the stay. Clark v. Pomponio, 397 N.J. Super. 630, 640 (App. Div. 2008), certif. denied, 195 N.J. 420 (2008). The benefits of the stay are automatically invoked by operation of law. Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. 1995). The burden to claim the stay's protection does not rest upon the debtor. On the contrary, it is the creditor who desires to take post-petition collection action who shoulders the burden to prove it was granted relief from the stay by the Bankruptcy Court. 11 U.S.C.A. § 362(d).

Additionally, NCB suggests it may have been permitted to initiate and pursue the state court collection action, but the passage of time has made records scarce. We determine this contention is devoid of factual substance and legal validity.

A party may request stay relief by motion seeking remedies such as "terminating, annulling, modifying, or conditioning such stay." 11 U.S.C.A. § 362(d). Also, the stay may be dissolved upon dismissal of a bankruptcy case prior to its completion.

11 U.S.C.A. § 362(c)(2)(B).

Other than unsubstantiated insinuations, NCB offers nothing to buttress its suggestion that it likely obtained relief from the stay and was permitted to pursue collection of its unsecured debt. The bankruptcy docket entries, obtained from PACER, reveal NCB did not file a motion to vacate the stay. If such an application had been filed, it may have allowed initiation of collection efforts against the primary obligors, JVL and Valor; but no reasonable legal theory permits the stay to be vacated to allow a suit against a guarantor of an unsecured debt prior to the Chapter 11 debtor's submittal of a proposed plan of reorganization. From this record, we conclude NCB violated the provisions of the automatic stay by filing its complaint and pursuing a judgment to collect a pre-petition debt.

"Actions taken in violation of the [automatic] stay are void." In re Myers, 491 F.3d 120, 127 (3rd Cir. 2007). Moreover, "[a] state court judgment entered while the automatic stay is in place renders that judgment void ab initio[,]" or a nullity from the beginning. Bascom Corp. v. Chase Manhattan Bank, 363 N.J. Super. 334, 341 (App. Div. 2003), certif. denied, 178 N.J. 453, cert. denied, 542 U.S. 938, 124 S.Ct. 2911, 159 L.Ed. 2d 813 (2004); Clark, supra, 397 N.J. Super. at 634; Cho Hung Bank v. Ki Sung Kim, 361 N.J. Super. 331, 339 (App. Div. 2003). This results because sole jurisdiction regarding collection of a pre-petition claim rests with the Bankruptcy Court, stripping the state court of all authority on the subject matter.*fn2 In re Siciliano, 13 F.3d 748, 750 (3d Cir.1994).

NCB suggests the judgment is merely voidable. We disagree. In Bascom, supra, a tax foreclosure action was commenced by the plaintiff and a final judgment was entered at the time the homeowner's prior bankruptcy action had been dismissed. 363 N.J. Super. at 339. The plaintiff provided all requisite information and pleadings to the homeowner and the defendant mortgagee. Id. at 337. Prior to issuing the notice of the date, time and place fixed for redemption, the homeowner again filed for bankruptcy relief. Ibid. The defendant received notice of the debtor's bankruptcy, although the plaintiff did not. Id. at 338. The plaintiff issued a notice fixing the equity of redemption and, two days later, the debtor's bankruptcy matter was dismissed. Id. at 339. The defendants asserted "the tax foreclosure judgment was void because the order setting the time and place of redemption had been entered during the period of a bankruptcy court automatic stay." Id. at 338-39 (App. Div. 2003).

This court concluded judgments entered in violation of the automatic stay are void ab initio. However, the final judgment was entered at a time when a stay was not in effect. Id. at 342. "What was void was the order fixing the terms of redemption, the only action in the proceeding that occurred while the stay was in effect." Ibid. That defect did not alter entry of the final judgment. Ibid.

In Clark, supra, the defendant filed a Chapter 13 bankruptcy petition after the plaintiff's commencement of divorce proceedings. 397 N.J. Super. at 633. "While the stay was in effect, the trial court suppressed defendant's answer without prejudice under Rule 4:23-5(a)(1), for failure to provide discovery." Id. at 634. Once the stay was lifted, the trial court dismissed the answer with prejudice and entered default. Ibid. Since, the defendant's answer was dismissed and default was entered, the defendant's proofs were precluded at trial. Ibid. After a proof hearing, the court reviewed all collateral issues, as well as the cause of action for divorce and entered judgment. Ibid.

We reversed the trial court and concluded, "[s]ince the filing of defendant's bankruptcy petition stayed the equitable distribution issues in the case, the suppression of defendant's answer on those issues violated the stay," and the judgment on those issues was void ab initio, requiring a new hearing. Ibid.

NCB's actions in this matter do not fall within a gray area. For inexplicable reasons, the collection action was filed notwithstanding Pannullo's initiation of bankruptcy relief. As to Pannullo, it is certain the automatic stay renders the state proceedings without legal effect. Raymark Indus., Inc. v. Lai, 973 F.2d 1125, 1132 (3rd Cir. 1992). The judgment entered against him is void ab initio and "'amounts to nothing.'" Schwartz v. Battifarano, 2 N.J. 478, 484 (1949) (quoting Second Nat'l Bank of Phila. v. Thompson, 141 N.J. Eq. 188, 198 (Ch. 1947)).

In light of the entry of the defective judgment, the next inquiry is whether Pannullo's significant delay in seeking vacation of the judgment precludes the requested relief. We locate no authority directly resolving this question.

Under State law, a trial judge, guided by principles of equity, has the sound discretion to grant a motion to vacate a judgment. Housing Auth. of Town of Morristown v. Little, 135 N.J. 274, 283 (1994). A final judgment can be set aside if it was void or has been discharged. R. 4:50-1(d) and (e). A motion seeking relief under Rule 4:50-1(d) or (e) generally must be filed "within a reasonable time." R. 4:50-2.

NCB contends the motion judge properly exercised her discretion and determined the unreasonable delay in presenting Pannullo's application hindered its ability to defend Pannullo's motion because it did not maintain all of its records regarding the underlying litigation. NCB also contends the bankruptcy petition, schedules and order of discharge produced by Pannullo do not dispositively satisfy Pannullo's burden under the Rule.

In balancing the equities presented, the issue must not be framed as whether Pannullo knew or should have known the judgment was entered, or even whether his request to vacate the judgment was filed within a reasonable time. By operation of federal law, NCB was not permitted to file its suit or enter its judgment against Pannullo. With this in mind, NCB's cries of inequity due to the passage of time and interference with the administration of justice ring hollow against the "thud" of its actions taken in utter disregard for the provisions of federal law. We conclude the equities do not preponderate in NCB's favor, as to preclude the relief requested by Pannullo.

In summary, the complaint was filed following the initiation of Chapter 11 proceedings. That action was clearly prohibited and subject to sanction by the Bankruptcy Court. 11 U.S.C.A. § 362(k). Continuation of the litigation resulted in a continuing violation of the stay. Finally, the default judgment, entered eleven months after commencement of litigation, occurred at a time when the stay continued to protect Pannullo from such efforts. As a result, that final judgment is void ab initio, has no legal effect and shall be vacated, pursuant to Rule 4:50-1(d).

Also we conclude the request to eliminate the judgment from the public records is not subject to the reasonable-time requisites of Rule 4:50-2, because the defect in the judgment's entry is non-waivable. Bascom Corp., supra, 363 N.J. Super. at 342-43. To apply time constraints on filing a motion to vacate a judgment, entered in violation of the automatic stay would eviscerate the soul of the Bankruptcy Code.

For completeness, we note Pannullo could have filed a motion to cancel and discharge the judgment of record pursuant to N.J.S.A. 2A:16-49.1, which provides in pertinent part:

At any time after 1 year has elapsed, since a bankrupt was discharged from his debts, pursuant to the acts of Congress relating to bankruptcy, he may apply, upon proof of his discharge, to the court in which a judgment was rendered against him . . . for an order directing the judgment to be canceled and discharged of record. If it appears upon the hearing that he has been discharged from the payment of that judgment or the debt upon which such judgment was recovered, an order shall be made directing said judgment to be canceled and discharged of record[.]

By enactment of this statute, the Legislature sought to assure that "'judgments intended to be discharged under federal bankruptcy law would not continue to remain on record, thereby requiring payment at some time in the future.'" Party Parrot, Inc. v. Birthdays & Holidays, Inc., 289 N.J. Super. 167, 173 (App. Div. 1996) (quoting In re Arevalo, 142 B.R. 111, 112 (Bankr. D.N.J. 1992)).

The orders of the Law Division dated March 14 and April 25, 2008 are reversed. We remand for entry of an order vacating the judgment filed on August 3, 1990 in the amount of $585,537.17, as against Pannullo. This opinion has no affect on the judgment as entered against JVL and Valor.


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