Marques et al v. Great Plains Capital Corporation et al

UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 7
:
ANTHONY J. MARQUES and 	: 	Bankruptcy No. 05-31854DWS
ELENA M. MARQUES, 	:
:
Debtors. 	:
ANTHONY J. MARQUES, 	: 	Adversary No. 07-0207
ELENA M. MARQUES, 	:
:
Plaintiffs/Counter-Defendants, 	:
:
v. 	:
:
BANK OF AMERICA, N.A., successor-in-interest 	:
by merger to Fleet National Bank, and successor-in- 	:
interest by merger to Progress Bank [dsm’d on 8/22/07],:
:
Defendant, 	:
:
GREAT PLAINS CAPITAL CORPORATION, 	:
Assignee to Bank of America, N.A., 	:
:
Defendants/Counter-Claimant. 	:
MEMORANDUM OPINION
BY: 	DIANE WEISS SIGMUND, United States Bankruptcy Judge
Before the Court is the Amended Complaint (the “Complaint”) of the debtors
Anthony J. Marques (“Anthony”) and Elena M. Marques (“Elena” and together with
Anthony, 	“the 	Marques”) 	against 	Great 	Plains 	Capital 	Corporation 	(the 	“GPCC”).
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1 Also by stipulation dated August 15, 2007, Bank of America, N.A. (“B of A”) was
voluntarily dismissed. Doc. No. 8. As noted below, GPCC is the current holder of the loans at issue
but the migration began before B of A became involved.
2 Metro, a utility construction business, ceased operations in May 2005 and was the cause
of the Marques’ financial problems. Elena was not involved in Metro’s operations.
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By agreement Bonnie B. Finkel, the Chapter 7 trustee (the “Trustee” and together with
Marques, “Plaintiffs”) was added as a named plaintiff to the extent of the estate’s interest in
the Debtors’ claims.1 In the Complaint, Plaintiffs seek a determination of the validity,
priority and extent of GPCC’s lien or security interest on the Marques’ residential real estate
pursuant to § 506(a) and Bankruptcy Rules 3012 and 7001. However, because the mortgage
at issue was marked satisfied during the pendency of the adversary proceeding, GPCC sought
and was granted leave to amend its answer and file a counterclaim to determine the validity
of the mortgage and to set aside the satisfaction piece as erroneously recorded.
After trial of the adversary proceeding and submission of briefs by the parties,
the matter is ripe for adjudication.
BACKGROUND
At issue in this adversary proceeding are three secured loans made to Metro UTC,
LTC (“Metro”), a defunct corporation of which Anthony was principal.2 The first loan in
the amount of $375,000 is evidenced by a promissory note (“Note I”) issued by Progress
Bank (“Progress”) and dated July 11, 2003. Exhibit P-2. The proceeds of this loan were
used to satisfy Metro’s indebtedness in the amount of $346,634.80 to Penn Business
Credit, Inc. that had been the factor for Metro’s receivables, Exhibits P-3 and P-4, and
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3 After the satisfaction of Penn Business Credit, there was $28,365.20 of undisbursed funds
apparently available to draw upon.
4 This was the same collateral which had been provided to Penn Business Credit which
upon payment from the proceeds of Note I, released its interests in the Residence and Securities.
5 Both Anthony and Elena initialed that part of the document to acknowledge the Cross-
Collateralization.
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to provide a line of credit for its business operations.3 Anthony contemporaneously executed
and delivered a Commercial Guaranty which was unlimited in amount and continuing.
Exhibit 	P-7. 	Also 	contemporaneously, 	the 	Marques 	executed 	and 	delivered
(1) a Commercial Pledge and Security Agreement (the “Pledge Agreement”) whereby they
assigned their interest in a certain Merrill Lynch Brokerage Account (the “Securities”) and
(2) an Open-End Mortgage relating to the Marques’ residence at 1600 Shepard Drive, Maple
Glen, PA (the “Residence”) as security for the repayment of Note I4 as well as additional
future advances given to Metro. Exhibit P-10. Notably the Open-End Mortgage contains the
following clause (the “Cross-Collateralization”) upon which GPCC relies:
CROSS-COLLATERALIZATION. In addition to the Note, this Mortgage secures
all obligations, debts and liabilities, plus interest thereon, of Borrower to Lender,
or any one or more of them, as well as all claims by Lender against Borrower or any
one or more of the, whether now existing or hereafter arising, whether related or
unrelated to the purpose of the Note, whether voluntary or otherwise, whether due
or not due, direct or indirect, determined or undetermined, absolute or contingent,
liquidated or unliquidated whether Borrower or Grantor may be liable individually
or jointly with others, whether obligated as guarantor, surety, accommodation party
or otherwise, and whether recovery upon such amounts may be or hereafter may
become barred by any stature of limitations, and whether the obligation to repay such
amounts may be or hereafter may become otherwise unenforceable.
Id.5 The Cross-Collateralization is broad and general befitting its characterization as a
dragnet clause. However, it is supplemented by the following language in bold:
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REVOLVING LINE OF CREDIT. 	Specifically, in addition to the
amounts specified in the Indebtedness definition, and without limitation,
this Mortgage secures a revolving line of credit, which obligates lender to
make advances to Borrower unless Borrower fails to comply with all the
terms of the Note.
....
Indebtedness. 	The word “Indebtedness” means all principal, interest, and
other amounts, costs and expenses payable under the Note or Related
Documents, together with all renewals of, extensions of, modifications of,
consolidations of and substitutions for the Note or related documents and any
amounts expended or advanced by Lender to discharge Grantor’s obligations
or expenses incurred by Lender to enforce Grantor’s obligations under this
Mortgage....
Exhibit P-10 (Emphasis in original). The Pledge Agreement executed with respect to the
Securities contains the precise cross-collateralization language quoted above, also initialed
by the parties, but omits the reference to the Revolving Line of Credit and contains a more
limited definition of “Indebtedness.” Exhibit P-5.
The second loan in the amount of $650,000 is evidenced by Progress Bank
Business Loan Agreement and SBA Promissory Note (“Note II”). 	Exhibit P-15 and 16.
While the documents are unsigned and undated, the parties agree that they evidence the
second loan made to Metro on or about September 9, 2003. 	Joint Pretrial Statement,
Uncontested Facts (“Uncontested Facts”) ¶ 5. 	Metro provided a Commercial Security
Agreement to secure Note II, Exhibit P-17, but no new security documents were provided
by the Marques. Nor is there specific reference in any of the documents memorializing the
loan evidenced by Note II to any previous grant of personal collateral by the Marques.
The second loan was guaranteed by the Small Business Association which authorized the
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6 While the mortgage was not made part of the record, the parties do not dispute this
secured transaction. I take judicial notice that B of A, as successor to Fleet, filed a motion for relief
from stay to exercise its state law remedies with respect to this mortgage lien which was not opposed
by Debtor. An Order for relief was entered on June 5, 2006 to allow B of A to exercise its state law
remedies against the Residence in connection with this consumer loan. Doc. No. 46. No reference
to any subsequent state law action was made at the trial.
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proceeds to be used for the purchase of equipment ($307,651.06) and working capital
($328,844.44) and reimbursement of fees ($13,504.50). Exhibits P- 13 and 14.
On or about June 23, 2004, Metro executed and delivered to Fleet National Bank
(“Fleet”), the successor by merger to Progress, a line of credit promissory note (“Note III”)
in the maximum principal amount of $375,000. Exhibit P-30. The Line of Credit Agreement
(the “Note III Agreement”), Exhibit P-31, accompanying Note III, recites that Note III is
also secured by “Pledge Agreement in the name of Anthony & Elena Marques” but is silent
with respect to the previously mortgaged Residence. Id. ¶ VI. While there is no evidence
of the contemporaneous execution by the Marques of a pledge agreement hypothecating
their securities, they have stipulated that such a document was executed and delivered to
Fleet on or about June 23, 2004. Uncontested Facts ¶ 8. It is undisputed that the proceeds
of Note III were used to satisfy the outstanding obligations under Note I.
On November 15, 2004 Fleet granted Anthony and Elena a $200,000 home equity line
of credit secured by a mortgage on the Residence. Exhibit P-34.6
On July 8, 2005 B of A issued two demand notices. The first stated the amount of the
“Indebtedness” as $471,997.49 and recited the security therefore “as described on Exhibit A
attached thereto.” Attached to the document was a UCC Financing Statement evidencing its
interest in Metro’s equipment to secure Note II. Exhibit P-36. The second letter stated the
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7 After Metro ceased business, its machinery and equipment was liquidated but the proceeds
did not fully repay Notes II and III. B of A sought and was granted, upon consent of the Debtor,
relief from stay to liquidate the securities to pay down Note II and Note III. 	The record is not
explicit as to how the proceeds were applied as to each note. GPCC now seeks to foreclose on the
Residence and apply the proceeds to the remaining indebtedness.
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Indebtedness amount as $367,559.48 and recited as security the Pledge Agreement regarding
the Securities and the Open-End Mortgage. Exhibit P-35. Anthony cooperated with B of A
to auction off Metro’s equipment, and the Marques consented to relief from stay in the
bankruptcy case to allow liquidation of the Securities.7 After application of these proceeds
to the outstanding indebtedness, there are amounts remaining outstanding on both loans
evidenced by Notes II and III.
The Marques filed this Complaint on June 12, 2007 to secure a judicial determination
that the Open-End Mortgage was satisfied when Note I was paid off by the proceeds of
Note III and thus the Residence does not stand as collateral security for the remaining
obligations under Notes II and III. They contend that while the Residence was pledged to
secure Note I, no such agreement was made with respect to Note II which was solely secured
by the business assets or Note III which was secured by the business assets and the
Securities.
Unbeknown to the Marques and their counsel and to GPCC and its counsel until
discovery commenced in this proceeding, on August 23, 2006 a satisfaction piece with
respect to the mortgage on the Residence had been recorded by the Law Offices of Gregory
Javardian at the direction of Thomas McMahon, a Vice President of B of A. Uncontested
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8 While identified as a witness for trial, MacMahon was never called. His Affidavit attached
to GPCC’s Answer and Counterclaim is not part of this record. Thus, there is only speculation as
to why MacMahon directed counsel to satisfy the Open-End Mortgage.
9 At trial Marquez counsel also argued that the Mortgage was unenforceable against Elena
because she had not signed a note or guaranty. 	Believing that to be a misstatement of the law,
I directed Marques” counsel to brief the point. Instead he has abandoned the argument.
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Facts ¶ 9. On October 24, 2006 B of A sold the Metro loans to GPCC and assigned its loan
documents, including the Open-End Mortgage which, of course, had been marked satisfied
at that juncture. In an amended answer and counterclaim, GPCC seeks to have the resulting
release of lien undone as a mistake, and to obtain a judicial determination that it secures
Notes II and III based on the cross collateralization provisions of the aforementioned
Open-End Mortgage. While GPCC asserts that recordation of the satisfaction piece was a
mistake, Plaintiffs contend it was intentional, evidencing B of A’s conclusion that with the
liquidation of the Securities, it had no more collateral. The record is silent as to the reason
this step was taken. 8
Finally the Marques contend that even if I find that the Open-End Mortgage does
collateralize Notes II and III, it cannot be enforced against Elena because she did not receive
adequate consideration for the lien she granted.9 Since under Pennsylvania law, married
persons own property as tenants by entireties, both spouses would have to grant the mortgage
for GPCC to exercise the remedy of foreclosure. E.g. In re Carnes, 331 B.R. 229, 232-33
(Bankr. W.D. Pa. 2005).
At the trial of this matter, testimony was elicited from Anthony as well as Joseph
Campbell (“Campbell”), presently employed by B of A and formerly by Fleet and Progress,
about the various loans.
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10 There is no dispute over the applicability of Pennsylvania law to the questions presented.
11 There is no contention that any third parties would be affected by the granting of this
relief.
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DISCUSSION
I. Satisfaction of Mortgage
I begin with the question of whether the satisfaction of the Open-End Mortgage
can be set aside on the grounds of mistake. If the Open-End Mortgage cannot be reinstated,
it will not be necessary to consider whether the Cross-Collateralization therein evidences a
lien granted to secure future advances under Note II and Note III nor whether Elena can be
relieved from her conveyance of a lien on her interest in the Residence based on the Debtor’s
failure of consideration theory.
GPCC, 	in 	its 	Post-Trial 	Memorandum, 	cites 	to 	the 	well-established 	law 	of
Pennsylvania 10 that a satisfaction and release of mortgage entered by mistake may be set
aside and the mortgage reinstated provided that the rights of third parties are not impaired.11
St. Clement’s Building & Loan Ass’n v. McCann, 126 Pa. Super. 20, 22 (1937). The Court
reasoned that:
there is nothing so sacrosanct about the satisfaction of a mortgage that stops
the truth from being shown. All that is incumbent upon the part of the plaintiff
to attain the relief it seeks is to prove that the defendants were not entitled to
have the mortgage satisfied. The rule is well recognized that equity will afford
relief where an encumbrance has been discharged through a mistake.
Id. 	Plaintiffs’ response is that the satisfaction of the Open-End Mortgage was no mistake
but an intentional act by B of A based on its conclusion that the debt for which it was
security, i.e., Note I, had been discharged.
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12 The trial court had based its conclusion on the following erroneous reasoning:
[Appellant] at no time offered testimony or even a scintilla of evidence as to how or
why a Satisfaction Piece was or would have been entered by error. There was not a
scintilla of evidence from a representative of [Appellant] as to how much of the
money due to [Appellant] had been received and therefore how much remained.
[Appellant] made no effort at all to explain why it took over two years to notice that
the mortgage had been satisfied. No testimony was offered as to whether payments
were received in the interim period between the satisfying and a much later date.
Id. at 1182.
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As noted above, there is no evidence to establish why B of A directed its counsel to
satisfy the Open-End Mortgage. The sole evidence on this issue was Campbell’s testimony,
corroborated by Anthony, that there had never been a demand to satisfy the Open-End
Mortgage; indeed the parties did not address that security when Note III was executed or
anytime thereafter. Thus, the satisfaction was a unilateral act never communicated to the
Marques by B of A.
In Alliance Funding Company v. Stahl, 829 A.2d 1179 (Pa. Super. 2003), the Court
concluded that the equitable principles underlying the relief sought by GPCC apply
even where the exact nature of the mistake is not disclosed. It held that the lower court
had misfocused on the appellant’s failure to explain how it had mistakenly entered the
mortgage satisfaction piece.12 It, however, looked to the established fact that the mortgage
debt had not been paid over one year after the satisfaction piece was executed, and found that
such evidence demonstrated that the satisfaction was entered in error and, subject to rights
of third parties, appellant was entitled to strike it. See also In re Burkett, 295 B.R. 776, 781
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(Bankr. W.D. Pa. 2003) (recording of satisfaction piece was erroneous as the obligation
had not been paid in full).
The parties have stipulated that debt under Notes II and III is outstanding. GPCC is
thus entitled to the relief it seeks on its Counterclaim if the Cross-Collateralization of the
Open-End Mortgage secures that debt. I shall turn to that issue next.
II. Determination of Secured Status
A.
In a proceeding to determine secured status under § 506, the debtor must first
overcome the presumed validity of the creditor’s secured claim. 	Allegheny-Ludlum
Brackenridge Federal Credit Union v. Fassinger (In re Fassinger), 246 B.R. 513, 520 (Bankr.
W.D. Pa. 2000) (citing cases). The Debtor’s burden was met here when he established that
there was no mortgage executed when the loans evidenced by Notes II and III were made and
the security for those transactions recited. Indeed as to Note II, previously granted security
under a cross-collateralization clause in the Pledge Agreement was referenced but no
mention was made of a previously granted mortgage on the Residence. Once the debtor
satisfies this initial burden, the ultimate burden of persuasion resides with the creditor to
demonstrate by a preponderance of the evidence the extent of its lien. Id. at 519-20(citing
cases). GPCC seeks to meet that burden by establishing the applicability of the Open-End
Mortgages to the future advances made pursuant to Notes II and III.
The parties have correctly stated the law applicable to the enforceability of what is
commonly referred to as a “dragnet clause,” i.e., one that allows a lender to secure future
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13 Potomac Coal dealt with security interests in personal property, holding that pre-Uniform
Commercial Code (“UCC”) law regarding dragnet clauses was still viable after the adoption of
the UCC. Gilmore’s language was embraced by the bankruptcy court in Gibson, a real estate case,
in which the bankruptcy judge followed his own decision in In re Shapiro, 109 B.R. 127, 134
(Bankr. E.D. Pa. 1990) wherein he fashioned a four factor test to measure relatedness as follows:
(1) whether the indebtedness allegedly covered by the mortgage containing the dragnet clause is
specifically expressed therein; (2) whether the other indebtedness allegedly covered is of the same
class as the debt referenced in the mortgage; (3) whether the other indebtedness was intended to be
separately secured; and (4) whether the mortgagee relied on the clause in making further advances.
Gibson, 249 B.R. at 655. These factors were drawn from an ALR Annotation analyzing the general
law of American jurisdictions on this subject and while applied by one other Pennsylvania
bankruptcy court, the test has not been adopted by any Pennsylvania state court. See In re Fassinger,
246 B.R. 513 (Bankr. W.D. Pa. 2000).
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advances with previously-pledged collateral. Such clauses are disfavored, especially with
respect to real estate because they operate as secret liens and cloud title. 	However they
are enforceable in Pennsylvania if the advances provided are related to the purpose of
the original loan. Potomac Coal Company v. $81,961.13 In the Hands of an Escrow Agent,
679 A.2d 800, 804 (Pa. Super. 1996). See also In re Gibson, 249 B.R. 645, 655 (Bankr. E.D.
Pa. 2000) (citing cases). 	The relatedness rule is intended to protect against overreaching
lenders who seek to bring under their collateral grants debts that are unrelated to the
financing that gave rise to the security. Fassinger, 246 B.R. at 520-21 (quoting Kittmitto v.
First Pennsylvania Bank N.A., 518 F.Supp. 297, 301 (E.D. Pa. 1981)). “[N]o matter how the
clause is drafted, the future advances to be covered must ‘be of the same class as the primary
obligation ... and so related to it that the consent of the Debtor to its inclusion may be
inferred.’” 	Potomac Coal, 679 A.2d. at 804 (quoting 2 G. GILMORE, SECURITY
INTERESTS IN PERSONAL PROPERTY, § 3513, at 932 (1965)). 13
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14 Based on the record made, I was not even sure that Note II was at issue. However, the
Complaint and briefs clarified the point.
15 Progress issued one-year renewable notes. Note I which matured on April 30, 2004, is,
according to Campbell, for a ten month period to harmonize with Metro’s fiscal year. 	It was
extended to June 29, 2004 by Fleet. Exhibit P-29.
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B. Note III
I begin my discussion with the financing that was the focus at trial. 14 The advances
under Note III provided a revolving line of credit to Metro in the same principal amount as
existed under Note I. The Open-End Mortgage expressly contemplates that it would continue
to secure all amounts payable under Note I “together with all renewals of, extensions of,
modifications of, consolidations of and substitutions” for Note I. 	GPCC contends that is
precisely what Note III represents. Debtor, on the contrary, argues that Note III evidences
a new loan because the proceeds of Note III were applied to satisfy Note I.
The testimony established that while there was no new loan application, a complete
new set of documents, i.e., promissory note, line of credit agreement, corporate authority,
disclosure for confession of judgment, were executed. However, Campbell testified that the
new documents were necessitated after the merger of Progress into Fleet by Fleet’s internal
policy regarding employment of its form loan documentation. Thus, Note III reflects Fleet’s
use of a demand note while Note I evidences Progress’ practice to employ a hard maturity
note.15 According to Campbell, although demand in nature, Note III was most likely rolled
over for another year and it was viewed as a renewal. While Campbell views Note III as
a renewal of Note I and Plaintiff contends that the satisfaction of Note I precludes that
characterization, I conclude that the precise label to be affixed to Note III is not dispositive
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16 Note I paid off Metro’s indebtedness under a factoring arrangement with Penn Business
Credit, Inc. that provided the same maximum amount of funding for operations and was secured by
a mortgage on the Residence. Exhibit P-3.
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here where it is clear that by the additional language contained in the Open-End Mortgage,
the partes intended that the lender’s obligation to advance under a revolving line of credit
continue to be secured by the Residence.
In any event whether Note III represents a new loan, a renewal of or substitution for
the loan evidenced by Note I, there is no doubt that both Notes reflect indebtedness of the
same purpose and class, i.e., a line of credit issued to Metro. Note III incorporates a Line of
Credit Agreement of even date which evidences a line of credit for Metro’s short term
borrowing needs with a credit limit not to exceed $375,000, the same amount of the
indebtedness under the line of credit memorialized by Note I. 	Exhibits P-30 and P-31.
The Marques had always provided a mortgage on their Residence to secure Metro’s line of
credit,16 and there was no request or discussion of releasing it at the time Note III was
executed.
The thrust of Plaintiffs’ case is the omission of a reference to the Open-End Mortgage
in the Line of Credit Agreement executed with Note III. The express terms of the Line of
Credit Agreement recite the security for the loan which supplements the business collateral.
Contrary to the Business Loan Agreement accompanying Note I which identifies as security
the Collateral Pledge Agreement and Open-End Mortgage, the Line of Credit Agreement
references only the Pledge Agreement. Compare Exhibit P-1 at 4 with Exhibit P-31, ¶ VI.
While Campbell testified that he would not have recommended the loan without the
real estate collateral given the nature of Metro’s receivables and the company’s leveraged
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17 Thus, GPCC’s incomplete record on this point is not fatal. If the parties’ intentions at
the time of future advances were relevant to establish the enforceability of a dragnet clause,
GPCC would have had the burden since it must prove the extent of its security interest.
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assets, he does not explain why the Line of Credit Agreement expressly recites additional
security provided by the Pledge Agreement and not the Open-End Mortgage. The omission
suggests an intention to continue to hold the Securities as collateral but not the Residence.
Plaintiffs bolster their argument by the recent satisfaction of the Open-End Mortgage by
B of A. Since GPCC did not offer any evidence as to why another officer at B of A directed
counsel to mark the Open-End Mortgage satisfied, Plaintiffs’ inference that B of A did not
view it to secure the other loans is certainly possible although undermined to some extent by
by the demand letter B of A sent to Metro on July 8, 2005 in which it recites the security for
Note III to include the Securities and Residence as evidenced by the Pledge Agreement and
Open-End Mortgage, respectively. Exhibit P-35. This document suggests that B of A did
not consider the satisfaction of the debt under Note I to have extinguished the lien of
the Open-End Mortgage when it previously satisfied Note I and documented Note III.
Fortunately, given this inconclusive record, my decision does not turn on whether
Fleet intended that the Open-End Mortgage continue to secure Note III since it is the parties’
intention when the collateral was granted that controls. 17 As stated by the Court in Marine
National Bank v. Airco, 389 F.Supp. 231, 234 (W.D. Pa. 1975):
[i]t is the intent of the parties to the security agreement that controls: was the
indebtedness reasonably within the contemplation of the parties; and, are the
transactions reasonably related?
Id. 	I have concluded that the replacement nature of the loan evidenced by Note III supports
the conclusion that the parties to the Open-End Mortgage intended that such a loan would
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18 I therefore reject that part of the Gibson four-factor test that looks to whether the
mortgagee relied on the clause in making further advances. See note 14 supra.
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continue to be secured by the Open-End Mortgage, just as it had previously secured the Penn
Business Credit line of credit which Note I replaced. The parties to the Open-End Mortgage
were Progress, Anthony and Elena. There is no evidence that a satisfaction of the mortgage
was requested by Plaintiffs; indeed no one seems to have discussed or even focused on the
mortgage when Note III and the other documents were prepared. 	The fact that Fleet’s
documentation omitted reference to the Open-End Mortgage may be, like the recent
satisfaction, intentional or an oversight. 	However, it is clear to me that the parties to the
mortgage reasonably contemplated it would attach to the loan indebtedness created by the
repayment of the prior line of credit. Given the existence of a valid mortgage lien to cover
these new advances, the fact that Fleet did not know or did not document the existence of
its continuing mortgage is not dispositive. 	Absent documentation sufficient to create a
release of collateral, of which there is no evidence, the omission of a reference to the
Open-End Mortgage in the new loan agreement does not defeat a validly created lien.18
C. Note II
As far as Note II is concerned, other than the broad dragnet language, no case can be
made that there is any specific or even oblique reference to it in the Open-End Mortgage.
GPCC refers to the definition of Related Loans in the Open-End Mortgage which broadly
embraces all promissory notes and loan agreements, whether now or existing, executed in
connection with the Indebtedness. 	Indebtedness, as noted, refers to all amounts payable
under the Note or Related Documents, a circularity of drafting that does nothing to enhance
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the generality of the Cross-Collateralization Clause of the Open-End Mortgage. 	On the
contrary, as noted above, the Open-End Mortgage clearly contemplates securing a revolving
line of credit, the debt memorialized by Note III. Since SBA authorization for the guarantee
of the Note II was obtained within one month of the closing on Note III, Exhibit P-12,
one would expect some reference in the documentation that evidenced the parties’
contemplated inclusion other than the broad and general language quoted by GPCC,
that the Open-Mortgage secure Note II.
Aside from the relatively contemporaneous nature of the two transactions, Note II
and the other documents memorializing the $650,000 term loan establish that it was intended
to be a separate and unrelated course of financing from the line of credit evidenced by Note I
and then Note III. Fassinger, 246 B.R. at 525 (notwithstanding that all loans were consumer
transactions, where they were consummated by separate loan documents with separate
repayment schedules and intended to purchase discreet items of personal property, loans were
unrelated). Note II is actually a Small Business Administration note as to which Progress
was the lender and SBA, the guarantor of 75% of the debt. 	Exhibit P-12. 	The purpose
of the second loan was to refinance Metro’s equipment and provide some additional
working capital. Note II requires payments of principal and interest to amortize the Note
in contemplation of a ten year maturity. 	Exhibit P-16. 	The SBA authorization of the
guaranteed loan has a totally unique set of contingencies imposed upon Progress including
compliance with all SBA’s standard operating procedures and making all disbursements
within one year. 	It requires a first perfected security interest in Metro’s equipment to be
appraised at a fair market value of $1.3 million and a guarantee by Anthony and the Trust
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19 This agreement was prepared for signature by Anthony in his corporate capacity.
Since the version placed into evidence is unsigned, I do not know whether the Cross-
Collateralization Clause therein was initialed as contemplated. Exhibit P-17. In any event, it does
not cross-collateralize to the Open-End Mortgage. Indeed all documents relating to the SBA loan
are unsigned. As there was no objection by any party to their inclusion in the record, I will assume
they are final and authentic.
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that owns Metro. While Progress supplemented the SBA documents with its own Business
Loan Agreement, 19 it is silent about any personal collateral or undertaking by Elena in her
personal capacity.
In Potomac Coal, the Pennsylvania Superior court reasoned that “[n]ormally, loans
are considered related if the loans have been secured to provide working capital for the same
business.” 451 Pa. at 299. In making this statement, Potomac Coal relied on Marine National
Bank v. Airco, 389 F.Supp. 231, 234 (D. C. Pa. 1875), which found that a loan consolidating
and extending a prior loan was of the same class since both were intended to provide working
capital. In Potomac a 1988 term loan was found to be related to a 1984 line of credit. In both
cases, the cross collateralization spread to include business assets for business debts which
were reasonably contemplated to be included. While the loans evidenced by Note I and
Note II share the same general purpose, i.e., to provide a business loan, I believe that the
“normal” rule articulated in Potomac Coal should not be applied because even if the class of
debt is broadly the same, the financing arrangement which relies on an SBA guarantee is
quite different.
In order that future advances be covered, they must not only be of the same class but
so related that consent can be inferred. 	Here GPCC seeks to reach the Residence for a
business debt that, unlike the line of credit, had never been secured by personal collateral.
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A primary purpose of the loan was to refinance equipment which presumably was and
continues to be the collateral relied upon to secure this obligation. I am unable to conclude
that Anthony, and especially Elena, ever intended that their Residence would stand as
additional security for the SBA Note. The close timing of Note I and Note II as separate
transactions and the SBA guarantee of Note II negate drawing an inference of consent.
Nor is there any evidence that Progress intended to secure Note II with the Residence.
In contrast to Campbell’s testimony that the line of credit Note III would not have been
granted without the security of the Residence, he was not even questioned about Progress’
intentions regarding the securing of Note II.
For the foregoing reasons, I find that the Open-End Mortgage secures Note III but not
Note II. Accordingly, I will turn to Plaintiff’s alternate theories regarding the enforcement
of the mortgage lien as to Elena.
D. Enforceability of Open-End Mortgage as to Elena
Plaintiffs contends that the Open-End Mortgage is not valid because Elena received no
consideration for the debt secured thereby. The burden is on the party attacking the mortgage
to prove lack of consideration. In re Dolata, 306 B.R. 97, 119-20 (Bankr. W.D. Pa. 2004).
It is undisputed that the advances made by Fleet were to provide financing to Metro
and that Elena was not a party to any of the loan documents or a guarantor of either Note.
Her sole commitment was to grant the security interest and mortgage in the Securities and
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20 While all the shares of Metro are held by the Elena M. Marques Trust, she is neither the
trustee nor a beneficiary. Exhibits P-40, P-41.
21 Yet they then strangely argue, citing the Uniform Commercial Code, that to create a
security interest value must be given and as neither Marques were debtors at the time Note III was
issued, there was no value. 	They also argue, again citing inapposite case law, that no security
interest can attach to property where the debtor does not have an interest. As there is no dispute that
Elena has an interest in the Residence, I fail to understand this argument.
22 Plaintiffs have not challenged the lien on the Securities but rather allowed this property
of Elena to be liquidated to pay the business debt.
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Residence which she and Anthony own as tenants by the entireties.20 It is also undisputed
that Anthony was a guarantor of the corporate loans. Exhibit P-7 and P-19.
Plaintiffs acknowledge that under Pennsylvania law, a mortgagor need not be bound
on a note to create a valid mortgage. Plaintiffs’ Post-Trial Memorandum of Law at 6-7 (citing
Farris v. Jefferson Bank, 194 B.R. 931- 940-41 (Bankr. E.D. Pa. 1996)).21 Thus, the absence
of Elena’s signature to Note II and III or her failure to act as a guarantor is not relevant.
Plaintiffs provide no evidence that Elena received no consideration for her undertaking to
encumber her interests in the Securities22 and Residence nor any legal authority to establish
the quantum of consideration they view as required to support a spousal mortgage. On the
other hand, Pennsylvania law has long been that a married woman may mortgage her real
estate as security for a debt of her husband. 	Hanover Trust Co. V. Keagy, 6 A.2d 786
(Pa. 1939); Cooper v. Lucas, 33 A.2d 466, 467 (Pa. Super. 1943) (citing cases). Indeed, that
Pennsylvania law allows a mortgage to be created “‘without any accompanying personal
obligation or evidence of indebtedness of the mortgagor,’” Farris, 194 B.R. at 939 (quoting
In re Morrison, 69 B.R. 586, 590 (Bankr.E.D.Pa.1987)), belies Plaintiffs’ unsupported
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assertion that consideration for Elena is even required. In any case, the burden is theirs on
this issue and they have failed to meet it.
CONCLUSION
Having granted GPCC’s demand for reinstatement of the Open-End Mortgage and
finding no merit to Plaintiff’s lack of consideration theory, the mortgage lien against the
Residence is enforceable to secure the outstanding indebtedness evidenced by Note III but
not Note II. A judgment order shall be entered so providing.
DIANE WEISS SIGMUND
United States Bankruptcy Judge
Dated: 	September 16, 2008
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