The opinion of the court was delivered by: Cooper, District Judge
Bankruptcy No. 07-11757 (KCF) Adv. Proc. Nos. 07-1616 (KCF) 07-1697 (KCF)
Appellants Joseph Dwek ("Joseph") and Terry Dwek ("Terry" and together with Joseph, the "Dweks") filed a complaint against appellees Sun National Bank ("Sun") and Solomon Dwek ("Solomon") in September 2006 in the Superior Court of New Jersey, Chancery Division, challenging the validity of a 2001 loan transaction (the "Loan") involving a promissory note (the "Note") in the original principal amount of $1,500,000 secured by a mortgage (the "Mortgage") on their property at 234 Runyan Avenue, Deal, New Jersey (the "Property"), in favor of Sun. Sun removed the action to the United States District Court for the District of New Jersey, and the District Court referred the action to the United States Bankruptcy Court for the District of New Jersey ("Bankruptcy Court"). Civil Action No. 07-1975 (FLW) (filed April 26, 2007); Bankr. No. 07-11757 (KCF), dkt. entry no. 329, 4-27-07 Order of Referral; Adv. Proc. No. 07-1616 (KCF), Dwek et al. v. Sun Nat'l Bank. Sun then commenced a separate adversary proceeding against Solomon seeking a determination that to the extent Solomon, the debtor in a Chapter 7 bankruptcy proceeding that was later converted to Chapter 11, might be found liable for any damages to Sun in the removed action, that obligation would be deemed non-dischargeable in Solomon's bankruptcy proceeding. Adv. Proc. No. 07-1697 (KCF), Sun Nat'l Bank v. Solomon Dwek, dkt. entry no. 1, Compl. The Bankruptcy Court consolidated the two adversary proceedings, pursuant to Federal Rule of Bankruptcy Procedure 7042. Bankr. No. 07-11757, dkt. entry no. 1006, 10-11-07 Order at 4.
The Bankruptcy Court tried the consolidated adversary proceedings on October 27, 2009, December 15, 2009, and January 26, 2010. See Adv. Proc. No. 07-1616, dkt. entry no. 55, 10-27-09 Trial Tr.; dkt. entry no. 57, 12-15-09 Trial Tr.; dkt. entry no. 63, 1-26-10 Trial Tr. The Bankruptcy Court issued a written opinion discussing its findings and conclusions on June 1, 2010. (Dkt. entry no. 1, 6-1-10 Mem. Op.) In an Order of Final Judgment dated June 10, 2010, the Bankruptcy Court entered judgment in favor of Sun and against the Dweks as to Sun's counterclaims for breach of contract, and a judgment declaring the Dweks liable to Sun in the amount of $1,845,850.85 on the Loan, Note, and Mortgage. (Dkt. entry no. 1, 6-10-10 Order of Final J.) The Bankruptcy Court dismissed as moot Sun's remaining counterclaims, along with Sun's cross-claim, third-party complaint, and claim against Solomon seeking a claim of nondischargeability in the bankruptcy proceeding. (Id.) The Bankruptcy Court dismissed the Dweks' complaint with prejudice in its entirety. (Id.)
The Dweks now appeal from the 6-10-10 Order of Final Judgment, pursuant to 28 U.S.C. § 158(a). (Dkt. entry no. 1, Not. of Appeal.) For the reasons stated herein, the Court will affirm the 6-10-10 Order of Final Judgment.
The Dweks, husband and wife, jointly own the Property. (Dkt. entry no. 5, Dweks' Br. at 5.) Solomon is their nephew. (Id.) Solomon and Joseph engaged in numerous real estate transactions together from 2000 until April 2006, when it became publicly known that Solomon had defrauded investors, including the Dweks, of millions of dollars. (Id. at 5-6.)
Sun is the successor in interest to the mortgagee of the Property, Community Bank of New Jersey (interchangeably with Sun, the "Bank"). (Id. at 4.) The Note and Mortgage at issue in this case were entered into on December 13, 2001, and the Mortgage was recorded on December 21, 2001. (6-1-10 Mem. Op. at 3-4; Dweks' Br. at 4.) The Dweks alleged that Solomon "forged the signatures of Joseph and Terry on the Note, Mortgage, and related loan documents in [the Bank's] favor in connection with the alleged 2001 Loan." Civil Action No. 07-1975 (FLW), dkt. entry no. 1, Rmv. Not., Ex. A, Compl. at ¶ 8. (See 6-1-10 Mem. Op. at 4.) The signatures on the Mortgage were notarized by Solomon's secretary. (Id.)
It is uncontested that Terry never signed the Note, Mortgage, or any associated loan documents, and the Bankruptcy Court determined that she had never authorized Solomon to do so on her behalf. (Id. at 5-6.) In contrast, the Bankruptcy Court found that Joseph himself had signed the Mortgage. (Id. at 4-7.) The Bankruptcy Court further found that Joseph had authorized Solomon to sign the remainder of the loan documents on his behalf, reasoning that "it would be nonsensical for Joseph to agree to mortgage his property (a form of security) but not agree to the underlying loan." (Id. at 7.)
Joseph argued at trial and continues to contend that he did not know about the Loan and Mortgage until March 2005, when he discovered the existence of the Loan on his personal credit report. (Dweks' Br. at 13.) Joseph called the Bank to inquire about the Loan, and spoke to an employee named Cheryl Hale ("Hale"), who advised that the Loan was associated with the Mortgage on the Property. (Id.) Joseph requested documentation of the Loan, and the Bank sent him a copy of the Mortgage, as well as documentation relating to the servicing of the Loan, in March and April of 2005. (Id.) Joseph contends that he "repudiated the loan by stating 'it was not his'" during the course of his initial conversation with Hale. (Id.) The Bankruptcy Court discredited this representation, finding that the Dweks did not repudiate the Loan until over a year later, when their attorney sent a letter to Sun, dated June 9, 2006. (6-1-10 Mem. Op. at 9.) The Bankruptcy Court found Hale's testimony that Joseph did not repudiate the Loan during their March 2005 conversation "far more credible" than Joseph's testimony that he clearly and unambiguously told Hale that the Loan was not his. (Id. at 10.) The Bankruptcy Court observed that the Dweks' attorney's letter to the Bank of June 9, 2006, did not reference a prior attempt by the Dweks to repudiate the Loan, and concluded that "[t]he absence of any reference to the alleged repudiation in March 2005 is far more suggestive of the actual state of affairs than Joseph Dwek's current attempt to shape the facts." (Id. at 11.)
Joseph continued to do business with Solomon even after discovering the existence of the Note and Mortgage in March 2005, giving Solomon $50 million to invest in real estate. (Id.) The Bankruptcy Court found this conduct to be inconsistent with the Dweks' claims that Joseph had repudiated the $1.5 million Loan and that Solomon lacked authority to enter into the Loan Agreement on their behalf; Joseph testified at trial that after he learned of the Loan in March 2005, he was satisfied to let Solomon "take care of it" by paying off the Loan and obtaining a discharge. (Id. at 11-12.)*fn1 The Bankruptcy Court concluded that Joseph ratified the Loan by failing to timely repudiate it after discovering its existence in March 2005, when he became apprised of all material facts---namely, that the Mortgage had been placed on the Property to secure a $1.5 million Loan. (Id. at 13.) The Bankruptcy Court imputed this ratification to Terry, based on evidence adduced at trial showing that "Terry allowed her husband to act as her agent in financial matters," including signing loan and mortgage documents on her behalf, such that Terry could not "single out this transaction and claim that it was unauthorized." (Id. at 14.)
The Dweks argue that the Bankruptcy Court erred in finding that Solomon was authorized to execute the Note and Loan Documents on Joseph's behalf, and contend that it should not have considered the equitable defense of ratification because the Bank has unclean hands insofar as it failed to comply with certain legal requirements pertaining to the authority of an agent to bind a principal in banking transactions. (Dweks' Br. at 14, 20-22.) They argue that the Bankruptcy Court erred in finding that Joseph ratified the Loan, and imputing that ratification to Terry. (Id. at 25.) The Dweks also appeal from the Bankruptcy Court's ruling that they had failed to prove that the Bank was negligent in "fail[ing] to properly verify the identity of the 'borrowers'" and not demanding a written power of attorney showing that Solomon was authorized to act on behalf of the Dweks. (Id. at 26.) Finally, the Dweks contend that to the extent the Bankruptcy Court found that the Mortgage had been signed by Joseph, it failed to consider the Dweks' contention that the Mortgage is void because his signature was obtained by fraud in the factum. (Id. at 30.)*fn2
Sun contends that the Bankruptcy Court properly found that
(1) Joseph signed the Mortgage and authorized Solomon to execute the remaining Loan documents on his behalf; (2) notwithstanding the foregoing findings, Joseph ratified the Loan by failing to timely repudiate it upon learning of its existence in March 2005;
(3) the ratification could be properly extended to Terry; and (4) the Dweks failed to prove the Bank was negligent. (Dkt. entry no. 6, Sun Br. at 15, 27, 43-44.) Sun further argues that the Dweks' fraud in the factum defense is precluded by the Bankruptcy Court's findings that "Joseph Dwek not only signed the ...