CUSTOMERS BANK v. OSADCHUK
Filing
10
OPINION. Signed by Judge Noel L. Hillman on 9/24/2018. (dmr)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
CUSTOMERS BANK,
Appellant,
Civil No. 17-08367 (NLH)
OPINION
v.
ROMAN P. OSADCHUK,
Appellee.
APPEARANCES:
REBECCA K. MCDOWELL
ROBERT I. SALDUTTI
SALDUTTI LAW GROUP
800 N KINGS HIGHWAY
SUITE 300
CHERRY HILL, NJ 08034
Attorneys for Appellant
ROMAN P. OSADCHUK
4102 SEABOARD CIRCLE
NORTH WILDWOOD, NJ 08260
Pro Se Defendant/Appellee
HILLMAN, District Judge
This appeal arises from the Bankruptcy Court’s order and
judgment in favor of Appellee Roman P. Osadchuk (“Appellee” or
“Osadchuk”), which rejected Appellant Customers Bank
(“Appellant” or “Customers Bank”) argument that its claim is not
dischargeable under 11 U.S.C. § 532(a).
For the reasons
expressed below, the decision of the Bankruptcy Court will be
affirmed, and the appeal will be dismissed.
BACKGROUND
Appellant, Customers Bank, is the successor in interest to
the underlying obligation at issue in this case, having acquired
InterSTATE Net Bank (“ISN”) via an FDIC receivership.
The
underlying obligation originally held at ISN was a $2,000,000
loan entered into by Seawinds LLC (“Seawinds”) on March 16,
2005.
Seawinds is an entity whose members include Appellee
Roman P. Osadchuk and his business partner Charles Stanfa.
The
loan was intended to finance the development of single family
homes on 37 lots in Wildwood, New Jersey and was to mature,
according to a mortgage note executed on that same day (“Note”),
on March 16, 2007.
The Note was secured by the 37 lots in Wildwood, New
Jersey, which were set to be developed under a contract with K.
Hovnanian, a real estate developer (the “K. Hovnanian
Contract”).
For additional security, Osadchuk and Stanfa also
each executed personal guarantees.
The guaranty agreement (“Guaranty”) executed by Osadchuk
required him to provide annually personal financial statements
and individual tax returns.
The Note matured in March 2007.
some point, the parties engaged in negotiations to extend the
2
At
life of the Note.
As part of that process, Osadchuk submitted
to ISN a Statement of Financial Condition (“SFC”).
This SFC was
prepared by the accounting firm of Capaldi, Reynolds & Pelosi.
A few months later, on October 28, 2007, Seawinds and ISN
executed a Change in Terms Agreement to extend the maturity date
of the Note for another eighteen months (“CIT Agreement”).
The statements contained in the SFC and their effect on ISN
are the subjects of this appeal.
Specifically at issue are two
valuations disclosed in the SFC which contribute to Osadchuk’s,
and his wife Geraldine’s, joint net worth of $6,715,978.00.
First, the SFC valued Osadchuk’s 50% interest in Seawinds at
$1,825,000.
Second, the SFC states that Osadchuk’s former
residence — located at 131 Seaspray Court, North Wildwood, New
Jersey (the “Seaspray Property”) — was valued at $3,500,000.
is undisputed that Osadchuk provided these valuations to his
It
accountant to include in the SFC.
The Note eventually entered default.
On May 22, 2012,
Customers Bank obtained a judgment against Osadchuk in the
amount of $3,081,281.39.
Customers Bank was unable to collect
on this judgment for three years and, on October 28, 2015,
Osadchuk filed the underlying bankruptcy proceeding in the
Bankruptcy Court.
On March 18, 2016, Customers Bank filed an
Adversary Proceeding against Osadchuk to render the debt
nondischargeable by reason of fraud under 11 U.S.C. §
3
523(a)(2)(B).
After almost eighteen months of motion practice, a bench
trial was held before the Bankruptcy Court on August 10, 2017,
September 28, 2017, and October 5, 2017.
Customers Bank
presented testimony from Kathleen Hansen, a representative of
Customers Bank, Robert Reynolds, the accountant that prepared
the SFC, two valuation experts, Mary Fox and Stephen Scherf, who
both opined on the property values stated in the SFC, and
Osadchuk.
verdict.
On October 5, 2017, Osadchuk moved for a directed
Osadchuk did not present a case-in-chief.
After deliberation, the Bankruptcy Court made an oral
ruling on the record granting Osadchuk’s motion.
The Bankruptcy
Court found that Customers Bank had failed to meet its burden on
three of the four required elements under 11 U.S.C. §
523(a)(2)(B) thus failing to prove the debt was not
dischargeable.
This ruling and the corresponding testimony are
both discussed in more detail, infra.
A timely appeal followed.
DISCUSSION
A.
Jurisdiction
This Court has jurisdiction over the appeal from the
Bankruptcy Court’s October 5, 2017 order pursuant to 28 U.S.C. §
158(a), which provides in relevant part: “The district courts of
the United States shall have jurisdiction to hear appeals from
final judgments, orders and decrees . . . of bankruptcy judges
4
entered in cases and proceedings referred to the bankruptcy
judges under section 157 of this title.
An appeal under this
subsection shall be taken only to the district court for the
judicial district in which the bankruptcy judge is serving.”
B.
Standard of Review
In reviewing a determination of the bankruptcy court, the
district courts “review the bankruptcy court's legal
determinations de novo, its factual findings for clear error and
its exercise of discretion for abuse thereof."
Reconstituted
Comm. of Unsecured Creditors of the United Healthcare Sys., Inc.
v. State of N.J. Dep’t of Labor (In re United Healthcare Sys.),
396 F.3d 247, 249 (3d Cir. 2005) (quoting Interface Grp.-Nev. v.
TWA (In re TWA), 145 F.3d 124, 130-31 (3d Cir. 1998)).
C.
Analysis
The case centers on whether the $2,000,000 loan is
dischargeable in bankruptcy or not.
“The overriding purpose of
the Bankruptcy Code is to relieve debtors from the weight of
oppressive indebtedness and provide them with a fresh start.
Exceptions to discharge are strictly construed against creditors
and liberally construed in favor of debtors.”
Insurance Co. of
N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir. 1995).
Thus, to render a debt not dischargeable a creditor must prove
its case by a preponderance of the evidence.
498 U.S. 279, 291 (1991)
5
Grogan v. Garner,
Here, Customers Bank pursued a finding of
nondischargeability under 11 U.S.C. § 523(a)(2)(B), which
generally allows a finding of nondischargeability if credit was
obtained fraudulently.
Customers Bank was therefore required to
prove, by a preponderance of the evidence, that a written
statement — here the statements referenced above that were
contained in the SFC: (i) was “materially false”; (ii) concerned
“the debtor’s . . . financial condition”; (iii) was “reasonably
relied” upon by ISN; and (iv) was submitted by Osadchuk with the
“intent to deceive” ISN.
11 U.S.C. § 523(a)(2)(B)(i)-(iv).
Neither party disputes that the SFC was a written statement
that concerned the “debtor’s . . . financial condition” and the
Bankruptcy Court found in favor of Customers Bank on that
element.
At issue are the other three elements, which the
Bankruptcy Court found Customers Bank had not proven by a
preponderance of the evidence.
This Court examines each element
in turn.
a. Osadchuk’s “Materially False” Statements in his SFC
Customers Bank contends that the Bankruptcy Court
erroneously found that it had not proven the existence of
“materially false” statements in the SFC.
As the statute
suggests, and case law confirms, there are two sub-elements that
must be proven here: (1) falsity of the statement and (2)
materiality of the statement.
Customers Bank relies upon the
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testimony of its two experts, Fox and Scherf, to show both subelements.
First, Customers Bank argues as to materiality.
It asserts
that banks routinely rely on statements, such as the SFC, in
making lending decisions.
It also asserts a Commercial Loan
Presentation prepared by ISN shows that ISN actually did rely
upon the SFC.
Finally, Customers Bank asserts that a reasonable
person would rely upon the statements in the SFC when making the
lending decision at issue.
Second, Customers Bank argues that the statements as to the
valuation of property in the SFC were false.
Fox opined that
the Seaspray Property was worth only $1.25 million at the time
of the SFC, not $3.5 million as stated.
Scherf opined that
Osadchuk’s Seawinds interest was worth between $1.37 and $1.59
million — before discounting — not the $1.825 million stated in
the SFC.
According to Customers Bank, these expert valuations
prove Osadchuk’s valuations as false.
Osadchuk counters by arguing based on the Bankruptcy
Court’s findings.
First, Osadchuk argues that Scherf only
opined on materiality in the accounting context, not the legal
context.
Second, Osadchuk argues that Hansen could not and did
not testify as to ISN’s standard practices with an SFC and
whether it actually relied on the SFC.
A statement is only materially false if it is “an important
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and substantial untruth.”
In re Cohn, 54 F.3d at 1114 (quoting
In re Bogstad, 779 F.2d 370, 375 (7th Cir. 1985)).
To test
materiality, courts have often examined “whether the lender
would have made the loan had he known of the debtor’s true
financial condition.”
375).
Id. (quoting In re Bogstad, 779 F.2d at
There is no requirement of actual reliance under this
element; a material false statement also includes one that “is
so substantial that a reasonable person would have relied upon
it, even if the creditor did not in fact rely upon it in the
case at hand.”
Id.
It is important to note that materiality is not solely a
quantitative standard.
Id. (noting that one way of testing
materiality is whether the false statement “influences a
creditor’s decision to extend credit”).
In other words, just
because a figure is large does not automatically mean it is
material.
This is the distinction that the Bankruptcy Court was
indicating when it stated that legal materiality is “not the
same as materiality for accounting purposes” when discussing
Scherf’s testimony.
Materiality is a question of law and is reviewed de novo.
In re Cohn, 54 F.3d at 1115.
Reviewing the record as a whole,
Customers Bank has given this Court no reason to disagree with
the Bankruptcy Court’s decision.
The decision on materiality is
not made in the abstract, but based upon the factual situation
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presented.
It is important to remember that part of the factual
scenario here is that statements were considered by ISN in
determining whether to extend the maturity date by eighteen
months.
In this factual scenario, there is no reason to believe
that Osadchuk’s allegedly false statements were either
substantial or important.
Customers Bank first asserts that the Commercial Loan
Presentation shows that ISN did actually rely upon Osadchuk’s
allegedly false statements in the SFC.
No testimony was
presented proving by a preponderance of the evidence that this
was the case.
section, infra.
This is discussed in more detail in the next
This argument fails based on the record.
But, Customers Bank is correct, the case law does not
require proof of actual reliance for this element of 11 U.S.C. §
523(a)(2)(B). 1
One way of proving reliance is to show that the
lender would not have made the same decision had it known the
truth about the borrower.
First, while Hansen did testify to
the normal course of conduct for a bank, she did not testify as
to whether, in this situation, a reasonable person would have
been influenced by Osadchuk’s SFC.
Moreover, Osadchuk is
correct to point out that Hansen gave no testimony, whatsoever,
as to whether ISN would have been influenced by the allegedly
1
As discussed infra, it is required for Customers Bank to prove
the element of “reasonable reliance.”
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false statements in Osadchuk’s SFC.
Second, the Commercial Loan Presentation shows that ISN did
not need to rely on Osadchuk’s Seawinds interest or the Seaspray
Property in order to be satisfied that the loan would be repaid.
The Commercial Loan Presentation shows that ISN believed:
•
The contract between K. Hovnanian and Seawinds requiring
quarterly payments of $60,000 was to be committed to loan
payments (A20); and
•
Charles Stanfa’s personal liquidity to be $1,051,470 (A18);
and
•
Roman Osadchuk’s personal liquidity to be $111,508 (A18);
and
•
The contract between K. Hovnanian and Seawinds to be worth
$6,200,000 (A20); and
•
The Seawinds collateral to be worth $4,125,000 (A18).
With all these sources for potential repayment and with ISN
believing “the chances of K. Hovnanian not remaining in the
project [as] minimal,” it is hard to see why the SFC statements
complained of were very important to ISN at the time it extended
the loan maturity date.
There is no testimony showing
otherwise.
Third, the Commercial Loan Presentation shows the ISN was
interested in receiving loan payments for the next eighteen
10
months when considering whether it would extend the maturity
date.
To extend the maturity date, naturally, ISN would have
been interested in whether the current cash flows could have
supported the loan until the proposed project was completed and
it could receive back its principal.
The Commercial Loan
Presentation discusses this, determining that the K. Hovnanian
contract could support payment on the loans, and if that was
discontinued Stanfa’s “sizable financial investment portfolio
would allow him to carry proposed debt service and personal
needs for 2 years without support from K. Hovnanian.”
Osadchuk’s SFC is not even mentioned.
(A25).
This theory of reasonable
reliance has not been proved by a preponderance of the evidence
based upon the record.
Finally, Customers Bank could prove reasonable reliance if
it showed that the false statement was “so substantial” that any
reasonable person would have relied upon it.
Customers Bank has
also failed to present convincing evidence on this point.
Proof
of this is also found in the Commercial Loan Presentation.
In that presentation, ISN stated it would rely first on the
K. Hovnanian quarterly payments to service the loan, second on
the “net discretionary income” of Osadchuk and Stanfa, and third
on liquidation of the collateral. 2
2
Customers Bank does not argue
As discussed infra, the “collateral” mentioned is only the
Seawinds property, not Osadchuk’s Seawinds interest or the
11
that the first or second source of repayment was false.
Just
the liquidity of Osadchuk and Stanfa alone would have satisfied
$1,162,978 of the loan.
The collateral is also more than enough
to satisfy the loan, even without exhausting Osadchuk’s and
Stanfa’s liquid assets or Osadchuk’s other real and personal
property.
The property owned by Seawinds was worth — according
to ISN — $4,125,000 (after discounting by 75%).
This could
cover the loan two times over.
Customers Bank only argues that Osadchuk’s home value 3 and
interest in Seawinds was false.
In light of all of the sources
of repayment discussed above, which would more than cover the
amount of the loan, these false statements are not “so
substantial” that any reasonable person would have relied upon
it.
The Bankruptcy Court did not make a ruling on whether the
statements were false.
This Court declines to make a
determination in the absence of a ruling, as its finding on
materiality moots the legal impact of any determination of the
falsity of the statements for this element.
Based solely on
this holding, this Court may affirm the ruling of the Bankruptcy
Seaspray Property. (A25-26 (naming as collateral only the 37
lots located in Wildwood, which are Seawinds property)).
3 In any event, there is no indication that it was reasonable for
ISN to rely upon Osadchuk’s house as a source of collateral
because it was held jointly between he and his wife and the
personal guarantee only obliged Osadchuk.
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Court and dismiss this appeal.
b. ISN’s Reasonable Reliance on Osadchuk’s Statements
Customers Bank argues that the Bankruptcy Court erroneously
found no reasonable reliance in this case.
two arguments.
reliance.
Customers Bank makes
First, it argues that it did show actual
It relies exclusively on the Commercial Loan
Presentation, repeatedly arguing that the references to
Osadchuk’s SFC show that ISN actually relied upon it.
Second,
it argues that industry practice is to rely on a borrower’s
statement of financial condition.
Osadchuk counters that
Customers Bank did not show that ISN actually relied upon his
SFC.
This element, that the creditor “reasonably relied” on the
debtor’s statement, requires both proof of reliance and that the
reliance was reasonable.
Reliance requires proof that “the
creditor actually rely on the debtor’s statement.”
54 F.3d at 1115 (emphasis in original).
In re Cohn,
Whether reliance is
reasonable is based on an examination of three factors: (1)
ISN’s “standard practices in evaluating credit-worthiness”; (2)
industry “standards or customs . . . in evaluating creditworthiness”; and (3) the “surrounding circumstances existing at
the time” of Osadchuk’s application for credit; in other words,
whether there was any indication that the information in the SFC
was inaccurate.
Id. at 1117 (citing Coston v. Bank of Malvern
13
(In re Coston), 991 F.2d 257, 261 (5th Cir. 1993) (en banc)).
Whether there was actual reliance is a question of fact.
Therefore, the Bankruptcy Court’s finding on this sub-element
may only be reversed if it was clearly erroneous.
It was not.
Customers Bank’s citation to Hansen’s and Scherf’s testimony is
not relevant, as neither had personal knowledge of whether ISN
actually relied upon Osadchuk’s statement.
Courts have
routinely required an individual with personal knowledge of the
transaction to provide testimony.
See, e.g., JP Morgan Chase
Bank v. Tamis, No. 05-CV-737 (JLL), 2005 U.S. Dist. LEXIS 28120,
at *15-20 (D.N.J. Nov. 16, 2005) (affirming Bankruptcy Court
ruling that there was no actual reliance because no person
involved in loan transaction provided testimony on that point
for its motion for summary judgment).
have this personal knowledge.
Hansen and Scherf did not
For this reason alone, this Court
cannot find any clear error committed by the Bankruptcy Court.
The Commercial Loan Presentation does not change this
holding.
As the Bankruptcy Court points out, this presentation
contains “little to show . . . any reliance” by ISN on the
allegedly false statements in the SFC.
Customer Bank does show
that ISN likely read the Osadchuk SFC and it did cite it in the
Commercial Loan Presentation.
But, none of the citations that
Customers Bank points to — whether it was the principals’
experience, good liquidity, or good balance sheets — contains
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explicit reference to the allegedly false statements that would
allow this Court to find the Bankruptcy Court committed clear
error.
The circumstantial evidence in the Commercial Loan
Presentation referenced in the previous section, supra, merely
reinforces this holding.
Of special note here is the collateral summary.
The only
collateral listed in the table is Seawinds property. (A25).
None of Osadchuk’s assets are mentioned.
In fact, when ISN
discusses “PRIMARY/SECONDARY REPAYMENT” on the next page —
concerning the Osadchuk guarantee — it notes that the “tertiary
source of repayment would be the liquidation of the underlying
collateral,” referencing the Seawinds property.
If ISN never
viewed Osadchuk’s residence or interest in Seawinds as a source
of collateral, there is no reason why it would actually rely on
the value Osadchuk placed on those assets.
It did not have to,
because it did not wish to liquidate the asset.
For those reasons, this Court finds that the Bankruptcy
Court did not commit clear error on the issue of actual
reliance.
The Bankruptcy Court did not decide whether reliance
was reasonable, as it found no reliance.
This Court declines to
examine this issue, as this Court’s finding of no clear error on
actual reliance moots Customers Bank’s argument pertaining to
the reasonableness of that reliance.
Based solely on this
holding, this Court may affirm the ruling of the Bankruptcy
15
Court and dismiss this appeal.
c. Osadchuk’s Intent to Deceive ISN
Customers Bank also argues that the Bankruptcy Court
committed clear error when it decided that Osadchuk did not
intend to deceive ISN.
First, Customers Bank argues that the
difference between the tax assessment value of Osadchuk’s
Seaspray property and the value he reported on his SFC is
circumstantial evidence of intent (especially considering that
“he was an experienced real estate broker with decades in the
industry”).
Accompanying this is the discrepancy between the
expert valuation performed by Fox and Osadchuk’s much higher
valuation.
Second, Customers Bank argues that the Bankruptcy
Court erroneously found that Scherf discounted the Seawinds
interest and this could account for the discrepancy.
Third,
Customers Bank argues that Osadchuk’s testimony shows his intent
to deceive, but the Bankruptcy Court erroneously refused to
consider it.
Osadchuk only argues briefly on this element.
Osadchuk
asserts that the only circumstantial evidence of an intent to
deceive was the difference in his valuation in the SFC versus
Fox’s valuation.
He argues that Fox’s valuation may have been
affected by the fact that she never surveyed the interior of the
home.
He describes the difference in valuation as merely a
difference in subjective opinion, not an intent to deceive.
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Intent may be shown either by direct evidence or
circumstantial evidence showing “reckless indifference to, or
reckless disregard of, the accuracy of the information in the
financial statement of the debtor when the totality of the
circumstances supports such an inference.”
In re Cohn, 54 F.3d
at 1118-19.
The Court reviews the Bankruptcy Court’s factual
determinations for clear error.
396 F.3d at 249.
In re United Healthcare Sys.,
Deference to the Bankruptcy Court is
“particularly appropriate on the intent issue” since this
determination “depends largely upon an assessment of the
credibility and demeanor of the debtor.”
JPMorgan Chase Bank,
N.A. v. Pandolfelli, No. 09-18941, Adv. No. 09-2068, 2011 Bankr.
LEXIS 2658, at *9 (Bankr. D.N.J. July 11, 2011) (quoting
Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997)).
Here, the Bankruptcy Court heard the relevant testimony and
assessed credibility and subjective intent.
There is
insufficient evidence in the record to overturn that
determination.
With these standards in mind, this Court will
address each of Customers Bank’s arguments in turn.
First, this Court will address the difference in value
between the tax assessment valuation and Osadchuk’s personal
valuation of the Seaspray property.
The tax appeal documents
reference its value at $1,495,000 while Osadchuk values it at
17
$3,500,000.
This argument is not consonant with other arguments
made by Customers Bank in its brief.
In a separate section,
Customers Bank argues that this difference in valuation — which
ISN was aware of at the time — should not have raised a red flag
at ISN.
Scherf’s testimony reveals that the tax assessment
value is “book value” while Osadchuk’s value is “fair market
value.”
The discrepancy in the price may merely reflect the
difference between these two values, which would not suggest
that Osadchuk intended to deceive ISN.
This argument does not
show that the Bankruptcy Court’s ruling was clearly erroneous.
In addition, Fox’s testimony is similarly unavailing.
Fox
testified that the value of the Seaspray property was only
$1,250,000.
The Bankruptcy Court found her to be a credible
witness, but also found — as supported by the testimony on the
record — that (1) Fox never entered the house, (2) was unable to
take the interior into account in her valuation determination,
and (3) stated that her inability to do so could have affected
her valuation.
Customers Bank argues that the Bankruptcy Court
inserted itself as an expert in discounting Fox’s testimony.
It did not.
Even though Fox’s testimony was the only
testimony on the record concerning the valuation of the Seaspray
property, that does not mean that Customers Bank automatically
meets its burden.
Fox did not go into the house, so the
Bankruptcy Court was not clearly erroneous in discounting her
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testimony.
In fact, it may have inserted itself as an expert if
it did find subjective intent, as that would have required the
Bankruptcy Court to speculate as to the Seaspray property’s
value.
There is no clear error here.
Second, this Court will address the discounting issue
associated with Scherf’s testimony.
Customers Bank’s argument
as to this issue depends upon an interpretation of the
Bankruptcy Court’s words that leaves them devoid of their
original meaning.
The Bankruptcy Court ruled:
I also don’t know that Mr. Scherf’s testimony
regarding the value of Seawinds shows an intent to
deceive because as he noted, a layperson might expect
the best and not have taken any discount from the K.
Hovnanian deal, and that’s exactly what appears to
have happened here.
The Bankruptcy Court did not misconstrue Scherf’s testimony, but
merely stated that it is more likely that Osadchuk had a more
optimistic valuation.
As it appears that this was, in part,
based on the Bankruptcy Court’s credibility determination of
Osadchuk, this Court must be deferential.
Without any other
evidence presented on this point, it cannot find clear error.
Finally, this Court will address Osadchuk’s testimony.
Customers Bank offers no record citations to show why it has an
issue with the Bankruptcy Court’s ruling on Osadchuk’s
testimony.
Regardless, it appears that the Bankruptcy Court
made a determination that it would not consider Osadchuk’s self-
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serving testimony and would instead rely upon its impression of
his credibility and Customers Bank’s witnesses.
Customers Bank
does not point to the record to show why that was inappropriate,
nor does it offer any argument to show clear error.
In the
absence of that, and considering the deferential standard, this
Court will not overturn the ruling of the Bankruptcy Court.
CONCLUSION
This Court, having reviewed the briefs of both parties and
the record presented, finds no legal or factual reason to
disturb the ruling of the Bankruptcy Court.
The Bankruptcy
Court will be affirmed and this appeal will be dismissed.
An appropriate Order will be entered.
Date: September 24, 2018
At Camden, New Jersey
s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.
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