J-A24005-15
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
NOTE ACQUISITION, LLC IN THE SUPERIOR COURT OF
PENNSYLVANIA
v.
SCOTT MORRISON,
Appellant No. 3430 EDA 2014
Appeal from the Order Entered November 26, 2014
In the Court of Common Pleas of Delaware County
Civil Division at No(s): No. 2014-00817
BEFORE: PANELLA, J., WECHT, J., and STRASSBURGER, J.*
MEMORANDUM BY PANELLA, J. FILED NOVEMBER 06, 2015
Appellant, Scott Morrison, appeals from the order denying his petition
to open or strike the confessed judgment on a note entered against him by
Appellee, Note Acquisition, LLC. Morrison contends that the trial court erred
when it failed to treat Note Acquisition as an alter ego of its sole member,
Michael Wei, who happens to be a co-debtor on the note and therefore
jointly and severally liable on the note with Morrison. We conclude that
Morrison has failed to establish that Note Acquisition’s involvement as a
party in this matter has increased Morrison’s financial exposure under the
note. We therefore affirm.
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*
Retired Senior Judge assigned to the Superior Court.
J-A24005-15
The relevant factual background of this case is largely undisputed.
The questions before the trial court and those on appeal are primarily legal
in nature, and concern the legal consequences that flow from the actions
taken by Wei and Note Acquisition.
Morrison and Wei were partners in a venture to create a high-end
restaurant. To this end, Morrison and Wei were members and co-managers
of several business entities, including 789 Lancaster Associates, LLC (“the
Borrower”). In May 2007, the Borrower borrowed $1,500,000 from
Wilmington Trust of Pennsylvania (“Wilmington”). Morrison, his wife, and
Wei all executed guaranties of repayment of the loan in their personal
capacities. Later that year, Wilmington assigned the loan and guaranties to
TriState Capital Bank (“TriState”). Morrison and Wei expressly consented to
the assignments.
After the Borrower defaulted on the loan, the parties entered into a
forbearance agreement in June 2009. Under the forbearance agreement,
TriState agreed to refrain from pursuing its remedies for default under the
note upon two conditions. First, that the Morrisons and Wei personally
reduce the outstanding balance on the note to $1,000,000. After this, the
Morrisons and Wei would execute a new note (“New Note”) under which
they, in their personal capacities, and not the Borrower, would be the
primary obligors for the $1,000,000 balance. Shortly thereafter, the parties
executed an allonge that modified the repayment terms, but preserved all
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other aspects of the New Note. The subject restaurant failed later that same
year.
In 2013, Wei formed Note Acquisition as its sole owner and managing
member. Wei then transferred personal funds to Note Acquisition, which the
company then used to purchase the New Note from TriState. On January
28, 2014, Note Acquisition confessed judgment on the New Note against
Morrison. Morrison subsequently filed petitions to open or strike the
confessed judgment. Discovery ensued, and a hearing was held on
November 3, 2014. Shortly thereafter, the trial court entered an order
denying the petitions. This timely appeal followed.
On appeal, Morrison raises three issues for our review.
1. Did the trial court commit legal error in refusing to open
the judgment confessed against Morrison by Note Acquisition, a
single purpose entity wholly owned and controlled by Wei
(Morrison’s business partner and a co-maker on the note), where
Note Acquisition purchased the note by paying the bank in full,
thus extinguishing the debt owed on the note by both Morrison
and Wei as co-makers, and leaving Wei (and his entity) with only
a common law claim for equitable contribution to recover
Morrison’s proportional share?
2. Did the trial court commit legal error in refusing to strike
off the judgment because the parties modified the promissory
note after executing the original version containing the warrant
of attorney, but failed to restate the warrant of attorney in the
loan modification documents?
3. Did the trial court commit legal error in refusing to open
the judgment because the assignment of the promissory note
from the bank to the single purpose entity wholly owned by
Morrison’s co-maker Wei materially changed the nature of the
Morrison’s obligations as between himself and Wei, rendering the
assignment invalid?
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Appellant’s Brief, at 3.
Morrison’s first and third issues are challenges to the trial court’s
refusal to open the judgment. His second issue, in contrast, is a challenge
to the trial court’s refusal to strike the judgment. Striking a judgment and
opening a judgment are distinct remedies, and have distinct standards of
review on appeal. Regarding Morrison’s second issue premised upon his
petition to strike, our standard of review is set forth in Knickerbocker
Russell Co., Inc. v. Crawford, 936 A.2d 1145 (Pa. Super. 2007). There,
we explained that
[a] petition to strike a judgment is a common law proceeding
which operates as a demurrer to the record. A petition to strike a
judgment may be granted only for a fatal defect or irregularity
appearing on the face of the record.... An order of the court
striking a judgment annuls the original judgment and the parties
are left as if no judgment had been entered.
In determining whether fatal defects exist on the face of the
record for the purpose of striking a judgment, a court may look
only at what was in the record when the judgment was entered.
We review a trial court’s refusal to strike a judgment for an
abuse of discretion or an error of law.
Id., at 1146-1147 (citations omitted).
Similarly, Morrison’s first and third issues, challenging the order
denying his petition to open the confessed judgment, are reviewed for an
abuse of discretion. See PNC Bank, Nat. Ass’n v. Bluestream
Technology, Inc., 14 A.3d 831, 835 (Pa. Super. 2010). A petition to open
judgment is an appeal to the equitable powers of the court. See PNC Bank
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v. Kerr, 802 A.2d 634, 638 (Pa. Super.2002). As such, it is committed to
the sound discretion of the hearing court and will not be disturbed absent a
manifest abuse of discretion. See Bluestream Technology, Inc., 14 A.3d
at 835. A “petition to open rests within the discretion of the trial court, and
may be granted if the petitioner (1) acts promptly, (2) alleges a meritorious
defense, and (3) can produce sufficient evidence to require submission of
the case to a jury.” Id., at 836 (citation omitted).
In his first issue on appeal, Morrison argues that the trial court erred in
refusing to open the judgment, as Morrison asserts that Note Acquisition was
merely a façade that should be disregarded. Morrison contends that as a
result, Note Acquisition’s purchase of the New Note should be treated as Wei
satisfying the new note, leaving Wei only with the right to pursue a common
law contribution action against Morrison.
While there is a dearth of recent, relevant, Pennsylvania case law on
the issue, we agree with Morrison that had Wei purchased the note from
TriState in his personal capacity, the obligations and rights under the note
would have been discharged. See 13 Pa.C.S.A. § 3602(a) (“[A]n instrument
is paid to the extent payment is made by or on behalf of a party obliged to
pay the instrument and to a person entitled to enforce the instrument.”);
see also Hess v. Gower, 11 A.2d 787, 789-90 (Pa. Super. 1940) (opining
that under the since repealed Uniform Negotiable Instruments Act a maker
who acquired a note from his creditor discharged the note). Thus, under
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this scenario, Wei would not have the right to enforce the confessed
judgment provisions of the New Note, but would only have right of
contribution against Morrison. See id., at 790.
However, Wei apparently understood this consequence as well, since
he did not purchase the New Note from TriState in his personal capacity.
Rather, Wei formed an LLC, Note Acquisition, which purchased the New Note
from TriState in its own, separate capacity. Morrison concedes that, at first
impression, Pennsylvania law treats Note Acquisition as a separate and
distinct legal entity from Wei. See Appellant’s Brief, at 16. Morrison argues,
however, that this facial treatment can be “disregarded whenever justice or
public policy demand.” Id. (quoting Ashley v. Ashley, 393 A.2d 637, 641
(Pa. 1978)). Obviously, Morrison believes, and argues forcefully, that justice
demands that Note Acquisition’s separate legal identity should be
disregarded in this case.
Morrison argues that Wei utilized Note Acquisition to subvert legal
processes to provide Wei with greater rights than those to which he was
entitled. Specifically, Morrison contends that Wei’s use of the right to a
confessed judgment under the New Note constitutes a perversion of justice
that the court system should not countenance. In support, Morrison draws
our attention to Good v. Holstein, 787 A.2d 426 (Pa. Super. 2001).
In Good, the defendants, the Holsteins, had taken out a first mortgage
on their property, and personally guaranteed the first mortgage. The
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Holsteins subsequently took out a second mortgage from Good Transport
Ltd., the plaintiff, Ethan Good’s, corporation, but they did not personally
guarantee the second mortgage. The Holsteins ultimately defaulted under
both mortgages.
Good Transport obtained a judgment on the second mortgage. Ethan
Good then purchased, in his personal capacity, the first mortgage from the
original mortgagee, Eggo. Ethan Good then filed a confessed judgment
against the defendants, in their personal capacity, on the surety agreement
for the first mortgage. Thereafter, Good Transport purchased the property
for approximately $2,000 at a sheriff’s sale on the judgment for the second
mortgage, and subsequently transferred title to Ethan Good. After
determining a fair market value for the property, the court found a
deficiency of approximately $325,000 on the second mortgage.
Ethan Good then proceeded to trial against the Holsteins on their
suretyship of the first mortgage. For reasons unclear from the opinion, the
trial court calculated the Holsteins’ liability under the first mortgage by
subtracting the deficiency on the second mortgage from the fair market
value on the property, and applied the result as a credit against the
outstanding balance of the first mortgage. Thus, the trial court found the
Holsteins personally liable to the Ethan Good in the amount of approximately
$315,000. The Holsteins appealed from this judgment.
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On appeal, this Court reversed the trial court’s decision, first by
determining that the separate corporate identity of Good Transport should
be disregarded under the facts of the case.1 As a result, the panel concluded
that Ethan Good was, in fact, the holder of both mortgages at the time he
obtained a deficiency judgment on the second mortgage. Therefore,
[o]nce [Ethan Good] purchased the property at the sheriff’s sale,
he had a duty to [the Holsteins], as sureties on the senior lien,
to satisfy the senior mortgage first. However, by suing on the
junior lien first, [Ethan Good] impaired the sureties[’] collateral,
exposing them to greater liability than they could have
reasonably anticipated. [Ethan Good] cannot subordinate the
senior lien by virtue of his possession of both liens. Thus, the
surety on the first mortgage was satisfied when the property was
attributed a fair market value sufficient to cover the entire
amount of the surety agreement. The fact that [Ethan Good]
proceeded against the junior lien before he obtained the senior
lien does not absolve his duty to the surety of the senior lien to
discharge the liens in order of their priority.
787 A.2d at 432 (citations omitted) (emphasis supplied).
Thus, the panel based their decision on two circumstances. First, that
the Holsteins, in signing the surety agreement, could not have reasonably
anticipated that they would not have the benefit of the fair market value of
the property as a credit to reduce their liability under the suretyship.
Second, the panel found that Ethan Good, as holder of the first mortgage,
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1
The opinion does not explicitly address the nature of the suretyship. Thus,
it is unclear from the opinion whether this was necessary, considering Eggo’s
and Good Transport’s failure to preserve their security interest for the
benefit of the Holsteins as sureties. See, e.g., First National Consumer
Discount Company v. McCrossan, 486 A.2d 396, 399-400 (Pa. Super.
1984).
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had violated a duty he owed to Holsteins as sureties on the first mortgage.
Based upon these two circumstances, the panel reversed the judgment.
Here, Morrison argues that Wei has similarly perverted the legal
process by using Note Acquisition to preserve the remedy of confessed
judgment where it should have been extinguished. Morrison contends that
he could not have reasonably foreseen that Wei would be able to exercise
the right to confessed judgment, and therefore Good provides that the
courts should ignore the separate corporate identity of Note Acquisition.
While Morrison has provided thorough advocacy and argument on this
theory, we disagree. First, it was not that the Holsteins could not reasonably
foresee who would sue them under the suretyship, but rather that they
could not foresee the amount of the financial exposure they faced given
Ethan Good’s legal maneuvering. This is a significant distinction. It is clear
that the note and mortgage in Good were assignable, just as they are in the
present case. Thus, in both cases, the debtors were aware that it could be
an assignee that sought to enforce the note. What is different is that
Morrison cannot cogently argue that his financial exposure has been
increased through Wei’s maneuverings.
Morrison does argue that his exposure was increased from half of the
balance to the entirety. However, this is not true. He was always on notice
that he could be held accountable for the entirety of the debt, as he and Wei
were jointly and severally liable on the note. Furthermore, Morrison retained
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a right to contribution from Wei under the UCC or the common law. See 13
Pa.C.S.A. § 3116; Goldberg v. Altman, 154 A.2d 279, 282 (Pa. Super.
1959).
Second, as noted above, the Good court also premised its decision on
the existence of a duty from Ethan Good to the Holsteins by dint of their
status of sureties on a mortgage he held. In the present matter, Wei holds
no such duty to Morrison. Thus, Morrison has failed to establish that Wei
accomplished anything improper through the use of Note Acquisition, and
Morrison’s first argument on appeal merits no relief.
In his second argument on appeal, Morrison asserts that the confessed
judgment should be stricken, as the confession of judgment clause was not
explicitly restated in the first allonge, which modified the New Note. The
first allonge2 to the New Note modified the payment terms and maturity date
contained the New Note. Initially, section 2(a) of the New Note provided
that Wei and Morrison would make 60 monthly payments in the amount of
approximately $19,000 on their arrears, with a final maturity date of May
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2
We use the nomenclature used by the parties when they executed the
document. However, the document does not appear to qualify as an allonge
under a strict definition of the term. An allonge is “[a] slip of paper
sometimes attached to a negotiable instrument for the purpose of receiving
further indorsements when the original paper is filled with indorsements.”
JP Morgan Chase Bank, NA v. Murray, 63 A.3d 1258, 1259 n.2 (Pa.
Super. 2013) (citation omitted). Both parties to this appeal concede that
the first allonge effected a modification of the New Note. See Appellant’s
Brief, at 24; Appellee’s Brief, at 46.
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31, 2014. In contrast, the first allonge modified section 2(a) to provide for
58 consecutive monthly payments of approximately $17,000, with a final
maturity date of May 31, 2014.
Due to the drastic loss of due process rights inherent in confessed
judgments, Pennsylvania courts require that such clauses be explicit and be
strictly construed. See, e.g., Ferrick v. Bianchini, 69 A.3d 642, 651 (Pa.
Super. 2013). Furthermore, we have long held that the law will not presume
an intent to preserve a confessed judgment clause when the parties modify
a contract. See Egyptian Sands Real Estate, Inc. v. Polony, 294 A.2d
799, 803 (Pa. Super. 1972).
[A] warrant of attorney to confess judgment must be self-
sustaining; the warrant must be in writing and signed by the
person to be bound by it; and the requisite signature must bear
a direct relation to the warrant and may not be implied
extrinsically nor imputed from assignment of the instrument
containing the warrant.
Ferrick, 69 A.3d at 651. The mere general reference to the effect of
preserving all other provisions in an agreement, contained in a modification
to the agreement, is not sufficient to preserve the confessed judgment
clause pursuant to the modified agreement. See Scott v. 1523 Walnut
Corp., 447 A.2d 951, 956-957 (Pa. Super. 1982).
Here, the first allonge contains only a mere general reference to the
other provisions of the new note: “All other terms of the Note remain the
same except those affected by the decrease in the Principal amount.” Thus,
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it would appear, as Morrison urges, that the confessed judgment clause was
not preserved.
However, “[a]n immaterial change in the wording of a judgment note
does not prevent the entry of judgment by confession.” Duque v.
D’Angelis, 568 A.2d 231, 232 (Pa. Super. 1990) (citation omitted). In
Duque, the creditor struck the signature of one co-debtor from the note
after the defendant, D’Angelis, had signed it. After the creditor entered a
confessed judgment on the note, D’Angelis petitioned to open the judgment,
on the grounds that the modification defeated the entry of confessed
judgment. The trial court denied the petition, and this Court affirmed. The
panel noted that even under the note as it existed when D’Angelis signed it,
D’Angelis was jointly and severally liable to the creditor. As such, the
creditor was entitled to hold D’Angelis liable for the entire amount of the
debt with or without the other co-debtor’s signature. “Consequently, the
deletion of Allison’s name does not affect appellant’s liability to appellee or
the amount of judgment.” Id., at 233.
In the present matter, as shown above, the first allonge reflected an
acknowledgment that Morrison’s and Wei’s first two payments on arrearages
were significantly more than what was required under the New Note. Thus,
the remaining 58 monthly payments were reduced in amount, while the
maturity date stayed the same. We conclude that this modification was
merely an explicit acknowledgment of the decreased balance, and did not
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affect Morrison’s liability under the note or the amount of judgment. Thus,
we conclude that Morrison’s second issue on appeal merits no relief.
In his third and final issue on appeal, Morrison argues that the
assignment of the New Note to Note Acquisition materially altered his
obligations under the New Note, and therefore was invalid. As discussed
above however, Morrison was always jointly and severally liable under the
New Note. Thus, it was always within reason to foresee that he might be
called upon to satisfy the entirety of the obligation under the New Note, and
be forced to pursue a contribution action against Wei. The assignment of
the New Note to Note Acquisition did not modify Morrison’s potential
exposure under the New Note. Morrison still had the right to pursue a
contribution action against Wei once Note Acquisition sought to hold
Morrison liable for the entirety of the debt. Therefore, Morrison’s final
argument merits no relief.
Judgment affirmed. Jurisdiction relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 11/6/2015
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Note Acquisition v. Morrison, S.
Combined Opinion