TD BANK, N.A v. 1928 HIGHWAY 35 L.L.C

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2834-10T1

TD BANK, N.A., (SUCCESSOR BY

MERGER WITH COMMERCE BANK, N.A.),

Plaintiff-Respondent,

v.

1 928 HIGHWAY 35, L.L.C.,

DOUGLAS B. HANNA, ESQ., P.C.,

DOUGLAS B. HANNA, personally,

and HANNA & ANDERSON,

Defendants-Appellants.

_______________________________________

October 25, 2011

Submitted September 27, 2011 Decided

Before Judges Messano and Yannotti.

On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-668-09.

Douglas B. Hanna, appellant pro se, and attorney for appellants.

Giordano, Halleran & Ciesla, attorneys for respondent (Donald F. Campbell, Jr., of counsel; Jaclyn B. Kass, on the brief).

PER CURIAM

Defendants 1 928 Highway 35, L.L.C. (1928), Douglas B. Hanna, Esq., P.C. (Hanna P.C.), Douglas B. Hanna (Hanna), and Hanna and Anderson (H & A) appeal from an order entered by the Law Division on January 21, 2011, denying their motion to vacate the default judgment entered against them. We affirm the judgment as to 1928, Hanna P.C. and Hanna, reverse the judgment as to H & A, and remand the matter to the trial court for further proceedings.

On February 6, 2009, plaintiff TD Bank, N.A. filed a four-count complaint against defendants. In count one, plaintiff alleged that on March 31, 2006, 1928 delivered a promissory note to plaintiff in the principal amount of $850,000, which provided a rate of interest of 7.125% per annum on the unpaid balance. Plaintiff asserted that Hanna P.C. and Hanna executed documents in which they guaranteed payment of any monies due on the note. Plaintiff claimed that 1928 defaulted on the note and $828,518.90 was due and owing, which amount included accelerated principal, late fees and accrued interest. Plaintiff alleged that 1928, Hanna P.C. and Hanna were liable for that sum, plus additional interest, attorneys' fees, other legal expenses and costs of suit.

In count two of the complaint, plaintiff alleged that Hanna P.C. delivered to plaintiff a credit agreement in the amount of $10,000, which provided for interest at a rate of 14% per annum on the unpaid balance, with principal and interest to be paid on a monthly basis. Plaintiff asserted that Hanna had executed a document in which he personally guaranteed payment of the amounts due under the agreement. According to the complaint, plaintiff subsequently increased the amount of the credit agreement to $20,000. Plaintiff alleged that Hanna P.C. defaulted on the agreement, and $20,945.28 was due and owing, which amount consisted of accelerated principal of $20,000, plus late fees and accrued interest. Plaintiff sought judgment against Hanna P.C. and Hanna personally for that sum, plus additional interest, attorneys' fees, other legal expenses and costs of suit.

In addition, in count three, plaintiff asserted that Hanna and Robert Anderson had formed H & A, and Hanna had ceased operations of Hanna P.C. Plaintiff alleged, among other things, that H & A continued the business of Hanna P.C. and assumed its liabilities. Plaintiff claimed that Hanna and Hanna P.C. transferred the assets of Hanna P.C. to H & A "with the actual intent to hinder, delay or defraud [p]laintiff" and "without receiving reasonably equivalent value" for the transfers. Plaintiff asserted that H & A was liable for the amounts due under the note and credit agreement, totaling $849,464.18, plus additional interest, attorneys' fees, other legal expenses and costs of suit.

In count four of the complaint, plaintiff alleged that the aforementioned transfers from Hanna and Hanna P.C. to H & A violated the Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20 to -34. Plaintiff sought an order voiding the transfers, as well as an award of attorneys' fees, interest, costs of suit, and such other relief as the court deemed just and equitable.

It appears that initially the complaint was not served upon defendants. Accordingly, on August 21, 2009, the court entered an order dismissing the complaint for failure to prosecute. On October 30, 2009, the court entered a consent order reinstating the complaint and vacating the previously entered dismissal order.

The consent order provided that defendants would have thirty five days within which to file an answer or otherwise respond to the complaint. The consent order was signed by the attorneys for the parties. Defendants did not file an answer to the complaint within the time required by the consent order and on January 19, 2010, plaintiff requested entry of default.

On July 23, 2010, plaintiff filed a motion for entry of a default judgment against defendants, which was returnable on August 27, 2010. In support of the motion, plaintiff submitted a certification by George Guarino (Guarino), one of plaintiff's vice-presidents. In his certification, Guarino stated that plaintiff loaned 1928 $850,000 pursuant to the note, and Hanna and Hanna P.C. had guaranteed payment of the amounts due thereunder, along with the costs of collection.

Guarino said that 1928 failed to make the payment due in September 2008, resulting in the acceleration of all amounts due under the note. Guarino said that the total amount due and owing on the note as of July 22, 2010, was $1,041,214.86, plus additional interest and the cost of collection. Copies of the note and related guarantees were appended to Guarino's certification.

In addition, Guarino asserted that in October 2002, plaintiff entered into the credit agreement with Hanna P.C. in the amount of $10,000, which amount had thereafter been increased to $20,000. Guarino said that Hanna had guaranteed payment of monies due under the agreement, along with the costs of collection. Guarino stated that, excluding legal fees, $25,979.16, plus costs and interest were due from Hanna P.C. and Hanna, plus additional interest accruing after July 22, 2010. Copies of the credit agreement and related guarantees also were attached to Guarino's certification.

In further support of its motion for entry of a default judgment, plaintiff submitted an affidavit of Donald F. Campbell, Jr. (Campbell), plaintiff's attorney, in which he stated that plaintiff was entitled to reimbursement for the legal fees and costs incurred in enforcing the note, credit agreement and guarantees. Campbell asserted that, as of June 30, 2010, plaintiff had incurred legal fees and costs in the amount of $8,149.73.

The court entered a default judgment dated August 27, 2010, against 1928 for the total amount of $1,041,214.86, with costs; against Hanna P.C. (d/b/a H & A) and Hanna personally, in the amount of $1,067,194.02, with costs. The order indicated that the motion had been unopposed.1

On November 17, 2010, defendants filed a motion to vacate the default judgment. In support of that motion, defendants filed a statement of facts, which was signed by Hanna. In that statement, Hanna asserted that the note and credit agreement had been entered into with Commerce Bank, N.A. (Commerce) and plaintiff had never explained or proven by way of affidavit or certification that it had the right "to proceed against" defendants based on those documents.

Hanna also asserted that he had "been on disability since July 2009, and had not practiced law except to deal with this and certain other "personal matters." Hanna said that in October 2010, he first became aware of "irregularities and improper document preparation" on the part of certain mortgage banks. He stated that some banks had put foreclosures "on hold" in twenty three states throughout the country "because of concerns [that] the court documents submitted were improperly prepared."

In addition, Hanna stated that he was asking the court to vacate the default judgment because he first became aware of the "insufficiency" of plaintiff's proofs after reading a newspaper account of problems in the foreclosure cases. He said that it was only then that he realized that the pleading in this case was inadequate to state a cause of action and plaintiff had not submitted the proofs required for entry of the judgment.

In response to defendants' motion, plaintiff submitted a certification by Guarino, in which he asserted that on May 31, 2008, Commerce merged with plaintiff. Attached to his certification were various documents supporting his assertion, including a statement published by the New Jersey Department of Banking listing bank mergers in this State as of November 17, 2010. The list includes the May 31, 2008 merger of Commerce with plaintiff, with plaintiff identified as the surviving bank.

Plaintiff also submitted a certification from Campbell, who stated that, after the default judgment was entered, he received a phone call from defendants' attorney, Eugene Roth (Roth), who advised him that his clients were willing to consent to the entry of the final judgment so long as plaintiff agreed to withdraw the fourth count of the complaint, which alleged the fraudulent transfer of Hanna P.C.'s assets.

Campbell said that he told Roth plaintiff would agree to entry of a consent order withdrawing count four and entry of a judgment against 1928 in the amount of $1,041,214.86 plus costs, and against Hanna P.C. (d/b/a H & A) and Hanna personally in the sum of $1,067,194.02. Campbell prepared the consent order and provided it to Roth but he never responded.

The trial court considered the motion on January 21, 2011, and after hearing the argument from Hanna and counsel for plaintiff, placed its decision on the record. The court found that defendants did not establish that their failure to answer the complaint was due to excusable neglect. The court further found that defendants had not shown that they had a meritorious defense to the action because, as surviving bank in the merger with Commerce, plaintiff had standing to pursue the claims based on the note, credit agreement and related guarantees.

The court additionally found that there were no exceptional circumstances justifying relief from the judgment. The court stated that Hanna had claimed "that his attorney [did not] do what he was supposed to do[.]" The court concluded, however, that this was not "an exceptional situation." The court noted that defendants had not challenged the validity of the note, credit agreement or guarantees. The court said that defendants had notice of the complaint and the motion for entry of the default judgment but "did nothing" until they filed the motion to vacate the judgment.

The court accordingly entered an order dated January 21, 2011, denying defendants' motion. This appeal followed.

Defendants first argue that the trial court erred by refusing to set aside the default judgment because the complaint did not allege that plaintiff had the right to proceed on documents "allegedly" executed for Commerce and because the application for entry of the judgment failed to include proofs that plaintiff was standing in Commerce's "shoes."

We note initially that the caption to plaintiff's complaint stated that plaintiff was "successor by merger" with Commerce. The trial court found that, as a result of the merger between plaintiff and Commerce, all of Commerce's claims were transferred to plaintiff by operation of law as the surviving bank pursuant to 12 U.S.C.A. 215(a) without the need of any assignment or transfer. We are satisfied that the trial court correctly determined that plaintiff had standing to assert the claims set forth in the complaint.

Next, defendants argue that the court erred in denying its motion for relief from the default judgment under Rule 4:50-1. They argue that the judgment should be set aside as to all defendants pursuant to subsections (a) and (f) of the rule.

A court should view a motion to set aside a default judgment "'with great liberality' and should tolerate 'every reasonable ground for indulgence . . . [so] that a just result is reached.'" Mancini v. EDS, 132 N.J. 330, 334 (1993) (quoting Marder v. Realty Constr. Co., 84 N.J. Super. 313, 319 (App. Div.), aff'd, 43 N.J. 508 (1964)). "The decision whether to grant such a motion is left to the sound discretion of the trial court, and will not be disturbed absent an abuse of discretion." Ibid. (citing Court Inv. Co. v. Perillo, 48 N.J. 334, 341 (1966)).

Defendants maintain that the court erred by failing to grant them relief pursuant to Rule 4:50-1(a), which allows the court to set aside a judgment for "mistake, inadvertence, surprise or excusable neglect. To obtain relief under this section of the rule, the defendant "'must show that the neglect to answer was excusable under the circumstances and that he has a meritorious defense.'" Id. at 334 (quoting Morales v. Santiago, 217 N.J. Super. 496, 501) (App. Div. 1987)). "Carelessness may be excusable when 'attributable to an honest mistake that is compatible with due diligence or reasonable prudence.'" Id. at 335.

Here, the trial court correctly found that defendants did not show that their failure to answer was excusable. The record shows that initially plaintiff's complaint was dismissed for failure to prosecute. However, defendants' attorney agreed to the entry of a consent order that allowed the complaint to be reinstated and required the filing of an answer within thirty-five days. It is undisputed that defendants did not file an answer within the time required by the consent order. Defendants have not shown that the failure to answer was due to "an honest mistake that is compatible with due diligence or reasonable prudence." Id. at 335.

Hanna asserts, however, that defendants retained Roth to represent them in this case and he assumed that Roth was going to file an answer after the consent order was entered. Hanna states that his belief was due to the fact that he was admitted for medical treatment in Florida for the month of August 2009, and during February and March 2010. He says that both admissions were followed by "lengthy out-patient stays in Florida."

These assertions are unavailing. As we stated previously, the consent order of October 30, 2009 required defendants to file their answer within thirty-five days. Hanna's admission for medical treatment in August 2009 was well before that date, and the February 2010 admission was well after. Hanna has not explained how his "out-patient stays in Florida" precluded him from making a reasonable inquiry into Roth's handling of the case. We are convinced that, under the circumstances, the trial court correctly found that defendants' failure to answer was not excusable.

Defendants also contend that they established that they had a meritorious defense to the claim. However, as we stated previously, defendants' contention that plaintiff did not have standing to assert the claims in the complaint is without merit. Moreover, defendants have not challenged the validity of the note, credit agreement or related guarantees. They do not dispute the amounts due and owing. We are satisfied that defendants failed to establish grounds for relief under Rule 4:50-1(a).

Defendants additionally argue that the court erred by failing to grant them relief pursuant to Rule 4:50-1(f), which provides that the court may grant relief from a judgment for "any other reasons[.]" "[T]he very essence of [this section] of the rule is its capacity for relief in exceptional situations." DEG, L.L.C. v. Township of Fairfield, 198 N.J. 242, 270 (2009). We are satisfied for the reasons previously stated that the trial court correctly determined that 1928, Hanna P.C. and Hanna did not establish any basis for relief under Rule 4:50-1(f).

We reach a different conclusion as to H & A. Here, plaintiff asserted that as of July 22, 2010, $1,041,214.86 was due on the note, and $25,979.16 was due on the credit agreement. A judgment was entered against 1928 for $1,041,214.86, plus costs; and a judgment was entered against Hanna P.C. (d/b/a H & A) and Hanna personally for $1,067,194.02, plus costs.

As we have explained, the only counts in which plaintiff sought recovery from H & A were counts three and four. In count three of the complaint, plaintiff alleged that Hanna P.C. transferred its assets to H & A in a merger and consolidation and the transfer was made with the "intent to hinder, delay or defraud [p]laintiff." In count four, plaintiff asserted that the transfer of assets from Hanna P.C. to H & A was a fraudulent transfer that should be voided.

Plaintiff sought entry of the default judgment but, in doing so, did not present any factual basis for the relief on the claims asserted in counts three or four. When defendants' motion to vacate the default judgment was argued in the trial court, Campbell told the court, "Frankly, Your Honor, we don't care about Counts 3 and 4." In any event, by entering judgment against Hanna P.C. (d/b/a H & A), the court essentially granted relief against H & A on the claims in counts three and four.

We are convinced that the court should have granted H & A relief from the judgment pursuant to Rule 4:50-1(f). While it may be appropriate to enter default against H & A due to its failure to answer the complaint, a default judgment should not have been entered against it without sufficient proof to support the claims asserted in counts three and four.

We remand the matter to the trial court for further proceedings on the claims against H & A. If plaintiff has no interest in pursuing the claims, it may agree to the dismissal of counts three and four.2 However, if plaintiff wishes to obtain a default judgment against H & A, it must present sufficient evidence to the court to warrant entry of the judgment. If plaintiff elects to do so, the court should conduct a proof hearing pursuant to Rule 4:43-2(b).

Affirmed in part, reversed in part and remanded to the trial court for further proceedings in conformity with this opinion. We do not retain jurisdiction.

1 We note that defendants have included in their appendix an unsigned and undated certification by Hanna, in which he stated that he was seeking an adjournment of the return date of the motion, and that plaintiff's motion failed to include certain exhibits. It appears that this certification was never filed with the trial court.

2 We note that dismissal of counts three and four would not affect the judgment as to 1928, Hanna P.C. and Hanna, which is premised on the claims in counts one and two.