Filed: Aug. 01, 1995
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 8-1-1995 Fed Home v Arrott Assoc Precedential or Non-Precedential: Docket 94-2119 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Fed Home v Arrott Assoc" (1995). 1995 Decisions. Paper 204. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/204 This decision is brought to you for free and open access by the Opinions of the United States C
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 8-1-1995 Fed Home v Arrott Assoc Precedential or Non-Precedential: Docket 94-2119 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Fed Home v Arrott Assoc" (1995). 1995 Decisions. Paper 204. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/204 This decision is brought to you for free and open access by the Opinions of the United States Co..
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Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-1-1995
Fed Home v Arrott Assoc
Precedential or Non-Precedential:
Docket 94-2119
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"Fed Home v Arrott Assoc" (1995). 1995 Decisions. Paper 204.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/204
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-2119
FEDERAL HOME LOAN MORTGAGE CORPORATION
v.
ARROTT ASSOCIATES, LTD.,
A PENNSYLVANIA LIMITED PARTNERSHIP;
BERNARD MILLER; MARC KNOPFLER,
Appellants
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 91-04461)
Argued June 27, 1995
BEFORE: MANSMANN, GREENBERG, and SAROKIN, Circuit Judges
(Filed: August 1, 1995)
Marvin Neiman (argued)
Neiman, Ginsburg & Mairanz
39 Broadway
25th Floor
New York, NY 10006
Attorneys for Appellants
Raymond A. Quaglia (argued)
Ballard, Spahr, Andrews &
Ingersoll
1735 Market Street
51st Floor
1
Philadelphia, PA 19103
Attorneys for Appellee
OPINION OF THE COURT
GREENBERG, Circuit Judge.
Arrott Associates, Ltd., Bernard Miller, and Marc
Knopfler appeal from an order entered on October 14, 1994, fixing
the value of a foreclosed and judicially sold property previously
owned by Arrott at $1,000,000, and dismissing Miller's and
Knopfler's counterclaim seeking an order marking as satisfied a
personal judgment entered against them in the foreclosure
proceedings. The appeal is only from the dismissal of the
counterclaim. The case raises issues which seem to be of first
impression under the Pennsylvania Deficiency Judgment Act, 42 Pa.
Cons. Stat. Ann. § 8103 (1982) (the "Act").
I. FACTUAL AND PROCEDURAL HISTORY
The action arises in the aftermath of a mortgage
foreclosure on a property in Philadelphia, Pennsylvania. The
plaintiff is the Federal Home Loan Mortgage Corporation
("FHLMC"), successor to the original mortgagee, and the
defendants are the appellants, successors to the original
mortgagor. Appellant Arrott Associates, Ltd., is a limited
partnership in which Miller and Knopfler are the general
partners. Arrott defaulted on the payments on the mortgage note,
and consequently FHLMC instituted the foreclosure action in 1990.
2
FHLMC obtained a foreclosure judgment on April 3, 1992,
in the district court authorizing a judicial sale of the
mortgaged property and providing as follows:
From the monies arising from the sale of the
mortgaged premises, FHLMC is to be paid the
sum of $2,494,991.51, together with per diem
interest and default interest accrued from
February 3, 1992, to the date of this
Judgment, and any further costs and expenses
incurred between January 27, 1992 and the
date this Judgment is satisfied.
In an accompanying second judgment, which we shall call the
personal judgment, the district court ordered the following:
It is hereby ORDERED and DECREED that of the
$2,494,991.51 referred to in the Judgment in
Foreclosure, defendants, Arrott Associates, Ltd.,
Bernard Miller and Marc Knopfler are jointly and
severally liable to the Federal Home Loan Mortgage
Corporation for the sum of $223,288.33, together with
per diem default interest accruing from February 3,
1992, to the date of this Judgment, and any further
costs and expenses incurred between January 27, 1992
and the date this Judgment is satisfied.
The court entered the personal judgment because the mortgage
secured a debt which was largely but not entirely nonrecourse.
Thus, the personal judgment reflected the court's determination
of the extent of appellants' personal liability.
At the foreclosure sale on March 1, 1994, FHLMC
purchased the property for $800,000. Then on March 25, 1994, it
moved in the district court for confirmation of the sale. While
the appellants did not object to the motion for confirmation,
they moved under the Act for an order compelling FHLMC to deliver
a satisfaction of the foreclosure and personal judgments.
On June 24, 1994, the district court entered a
memorandum and order confirming the sale and denying the
3
appellants' motion. The court stated that under the mortgage and
the note it secured, FHLMC could not have recourse against the
appellants for the principal and interest, but that the
appellants were personally liable for "default interest, late
charges, attorney fees, real estate taxes, water/sewer rents paid
by FHLMC, and operating expenses, totalling $223,288.33."1 In
ruling that the sale had not satisfied the personal judgment, the
court relied on the following paragraph of the mortgage:
Notwithstanding the existence of any other
security interests in the Property held by
Lender or by any other party, Lender shall
have the right to determine the order in
which any or all of the Property shall be
subjected to the remedies provided herein.
Lender shall have the right to determine the
order in which any or all portions of the
indebtedness secured hereby are satisfied
from the proceeds realized upon the exercise
of the remedies provided herein. (Emphasis
added by district court.)
The court held that this paragraph allowed FHLMC to apply the
proceeds from the sale of the property to the nonrecourse portion
of the foreclosure judgment rather than to the personal judgment.
In addition, the court explained that under the Act a
1
The court focused on the liability of Miller and Knopfler,
apparently because as a practical matter Arrott's liability was
not important. However, inasmuch as the personal judgment was
against all three appellants we will deal with them as a group.
4
judgment creditor who purchases real property at a price less
than the amount of the judgment must petition the court within
six months of the sale to fix the fair market value of the
property sold before it can collect the balance of the judgment
over such value. If the judgment creditor does not file the
petition, the debtor is discharged from personal liability. By
June 24, 1994, when the court rendered its opinion, FHLMC had not
petitioned the court to fix the fair market value of the property
sold but the appellants had not been discharged from personal
liability as the six months had not expired. Furthermore, the
court reasoned that to offset the purchase price of the property
against the personal judgment would defeat the purpose of the Act
and "would encourage a judgment creditor to bid only a nominal
price for the property so as to avoid offsetting any of the
judgment."
On August 24, 1994, FHLMC petitioned the district court
under the Act to fix the fair market value of the property sold
at $1,000,000. The appellants answered that a valuation hearing
was unnecessary because FHLMC would not be entitled to a
deficiency judgment inasmuch as its valuation of the property far
exceeded their liability on the personal judgment and the balance
of the debt reflected in the foreclosure judgment was
nonrecourse. At the same time, the appellants counterclaimed for
delivery of a satisfaction of the personal judgment.2 On October
2
Only Miller and Knopfler filed the counterclaim but as a matter
of convenience we treat the appellants collectively as the
counterclaimants. See note 1, supra.
5
14, 1994, the district court entered an order fixing the fair
market value of the property at $1,000,000 for deficiency
judgment purposes and dismissing the counterclaim. The district
court did not render an opinion explaining the reason for the
October 14, 1994 order, as it evidently relied on its June 24,
1994 opinion which allowed FHLMC to determine the order in which
the portions of the secured debt would be satisfied by the
proceeds obtained through the exercise of its foreclosure
remedies. The appellants then appealed from the October 14, 1994
order.
The district court had jurisdiction pursuant to 12
U.S.C. § 1452(f), and we have jurisdiction pursuant to 28 U.S.C.
§ 1291. Inasmuch as no facts are in dispute and the appeal
involves only questions of law, our review is plenary. Leo v.
Kerr-McGee Chem. Corp., 37 F.3d 96, 99 (3d Cir. 1994). We apply
Pennsylvania law, which the parties agree governs.
II. DISCUSSION
We regard this appeal as involving nothing more than a
straightforward application of the Act. With respect to the
merits, we first point out that the personal judgment was not
final upon its entry in the sense that FHLMC could execute on it.
Rather, the personal judgment merely determined the extent to
which FHLMC eventually could have recourse individually against
the appellants for payment of the debt secured by the mortgage.
Thus, the personal judgment indicated that the $223,288.33 for
which the appellants were liable was a portion of the foreclosure
6
judgment of $2,494,991.51. Accordingly, FHLMC has recognized
that to obtain an enforceable judgment against the appellants it
was obliged, as the district court indicated in its June 24, 1994
opinion, to follow the procedure in the Act.
Subsection (a) of the Act establishes what is called
the "general rule" in deficiency judgment cases and reads as
follows:
Whenever any real property is sold, directly
or indirectly, to the judgment creditor in
execution proceedings and the price for which
such property has been sold is not sufficient
to satisfy the amount of the judgment,
interest and costs and the judgment creditor
seeks to collect the balance due on said
judgment, interest and costs, the judgment
creditor shall petition the court having
jurisdiction to fix the fair market value of
the real property sold. The petition shall
be filed as a supplementary proceeding in the
matter in which the judgment was entered.
Subsection (b) deals with failure to notify the debtor of the
valuation proceedings and is not material here. Subsection (c)
initially sets forth the procedure for establishing the fair
market value of the property sold which we need not describe as
the parties have agreed on a value of $1,000,000. Subsection (c)
then concludes as follows:
After the hearing and the determination by
the court of the fair market value of the
property sold, the debtor, obligor, guarantor
and any other person liable directly or
indirectly to the judgment creditor for the
payment of the debt shall be released and
discharged of such liability to the judgment
7
creditor to the extent of the fair market
value of said property as previously agreed
to by the judgment creditor or determined by
the court, less the amount of all prior
liens, costs, taxes and municipal claims not
discharged by the sale, and also less the
amount of any such items paid at the
distribution on the sale, and shall also be
released and discharged of such liability to
the extent of any amount by which the sale
price, less such prior liens, costs, taxes
and municipal claims, exceeds the fair market
value as agreed to by the judgment creditor
or fixed and determined by the court as
provided in this subsection, and thereupon
the judgment creditor may proceed by
appropriate proceedings to collect the
balance of the debt. (Emphasis added.)
It seems to us that the plain language of subsection
(c) requires the appellants' release and discharge from liability
under the personal judgment. They are, after all, liable to the
judgment creditor, FHLMC, for the payment of a debt set forth in
the foreclosure judgment, as the $223,288.33 personal judgment
partially duplicates the liability in the foreclosure judgment.3
3
Of course, under Pennsylvania law, no deficiency judgment can
issue from a judgment for mortgage foreclosure.
8
Furthermore, the $1,000,000 fair market value for the property
sold far exceeds $223,288.33. Finally, FHLMC does not contend
that the $1,000,000 must be reduced by "the amount of all prior
liens, costs, taxes and municipal claims not discharged by the
sale" or by the other deductions provided in subsection (c).
What considerations, then, could cause us to reject the
above result? There is, of course, the provision of the mortgage
we already have quoted allowing FHLMC to determine the "order in
which any or all portions of the indebtedness secured [by the
mortgage] are satisfied from the proceeds realized upon the
exercise of the remedies provided [in the mortgage]." This
provision, however, is plainly inapplicable because a credit
against personal liability for the fair market value of the
The sole purpose of the judgment obtained
through an action of mortgage foreclosure is
to effect a judicial sale of the mortgaged
property. Once the foreclosure sale has
taken place, the purpose of the judgment has
been fulfilled and it is rendered functus
officio. Useless resort to the Deficiency
Judgment Act of 1941 to establish fair market
value and thus the net amount of the
deficiency can in no way change the nature of
the judgment from a judgment de terris to one
in personam.
Meco Realty Co. v. Burns, 200 A.2d 869, 871 (Pa. 1964); see also
First Seneca Bank v. Greenville Distrib. Co.,
533 A.2d 157, 161
(Pa. Super. Ct. 1987); Kretschman v. Stoll,
352 A.2d 439, 441
(Pa. Super. Ct. 1975). If, however, the mortgage was security
for a loan that was evidenced by a note or bond and was created
with recourse to other assets of the debtor, the creditor may
recover the deficiency by obtaining a personal judgment on the
note or bond and petitioning in that in personam proceeding for a
fair value determination under the Act. First Seneca Bank v.
Greenville Distrib.
Co., 533 A.2d at 161; National Council of
Junior Order of United Am. Mechanics v. Zytnick,
293 A.2d 112,
114 (Pa. Super. Ct. 1972).
9
property sold is simply not an allocation of the "proceeds
realized upon" the exercise of any remedy under the mortgage.
This conclusion is obvious because if a property is sold for a
nominal amount so that there are no proceeds to allocate, an
obligor nevertheless must be released and discharged from
liability to the extent of the fair market value of the property
sold. Furthermore, even if we regarded the allocation of
proceeds provision of the mortgage as applying to the credit for
the fair market value of the property sold, it could not override
subsection (c) so as to deny the appellants the release and
discharge provided in that subsection because subsection (e) of
the Act provides:
Any agreement made by any debtor, obligor,
surety or guarantor at any time, either
before or after or at the time of incurring
any obligation, to waive the benefits of this
section or to release any obligee from
compliance with the provisions hereof shall
be void.
See also Marine Midland Bank v. Surfbelt, Inc., 718 F.2d 611, 614
(3d Cir. 1983). The credit for the fair market value of the
property sold is thus an unwaivable benefit.
A second possible reason for deviating from a
straightforward application of subsection (c) is that arguably
our result does not further the legislature's intention in
adopting the Act. We have recognized that the policy of the Act
"is to protect debtors against the risk of a mortgagee obtaining
a 'double recovery'" by purchasing the property for less then
fair market value and pursuing the debtor for the deficiency,
thereby recovering more than the debt amount. Marine Midland
10
Bank v. Surfbelt, Inc., 718 F.2d at 615-16.4 See also Cheltenham
Fed. Sav. and Loan Ass'n v. Pocono Sky Enter., Inc.,
451 A.2d
744, 748 (Pa. Super. Ct. 1982). In this case even if the
appellants are not released and discharged from liability to the
extent of the fair market value of the property sold and so
remain liable for the full amount of the personal judgment, FHLMC
cannot make a double recovery of the debt. The $1,000,000 fair
market value, when added to the personal judgment of $223,288.33,
is far less then the foreclosure judgment of $2,494,991.51. In
fact, FHLMC seems destined to suffer a large loss in this case
which our result will deepen.5
The arguably anomalous outcome flowing from application
of the Act in this case is attributable to the note and mortgage
providing for personal liability for less than the full amount of
the debt secured by the mortgage. Thus, if the appellants had
been liable for the entire debt secured by the mortgage, a
deficiency judgment (with adjustments which we need not detail)
of $2,494,991.51 less $l,000,000, or $1,494,991.51 net, could
have been entered against them. If they then paid the deficiency
judgment, FHLMC would be made whole, as the appellants' payment
when added to the value of the property would equal the amount of
the foreclosure judgment.
4
We note that the Act by its terms is not limited to foreclosure
cases, though the litigation under it routinely involves
foreclosure actions.
5
Of course, if we focus solely on the appellants' personal
liability and if the policy of the Act is to preclude a creditor
from making a double recovery with respect to a debt for which
there is personal liability, then our result is in harmony with
the policy of the Act.
11
In this case we could avoid our result, which arguably
does not further the Act's purposes, by reading "debt" in the
phrase "person liable . . . for payment of the debt" in
subsection (c) to mean the entire debt. Under this construction,
appellants would not be released and discharged to the extent of
the fair market value of the property sold.
There are, however, several reasons why we will not
read "debt" in subsection (c) to mean "entire debt." To start
with, in ordinary parlance it would be thought that a person
liable for payment of a portion of a debt is liable, in the words
of the Act, for "payment of the debt." Second, FHLMC has not
suggested in its brief or by its actions that a judgment debtor
can obtain a release or discharge of the judgment to the extent
of the fair market value of the property sold only if the debtor
is liable for the entire debt secured by the mortgage. In fact,
FHLMC's actions demonstrate that it believes exactly the
opposite. If FHLMC thought that appellants could not obtain the
benefit of the Act, then it would have been filing what it should
have regarded as a useless petition when it asked the court to
determine the fair market value of the property sold, as the
court determines that value to ascertain the credit to be given a
debtor against the judgment. Yet, as the district court
indicated in its June 24, 1994 opinion, FHLMC "acknowledges that
it cannot obtain a deficiency judgment against the defendants
without first petitioning the court to set the fair market value
of the property." Indeed, FHLMC concedes that it would not
contend that if the value of the property sold exceeded the
12
amount of the foreclosure judgment that the appellants would be
liable on the personal judgment. To the contrary, in its brief
it indicates that if the "fair market value of the [p]roperty
exceeded the amount of the judgment in [f]oreclosure" there would
not be a deficiency "as a practical matter." Brief at 7.
There is a third reason why we will not read "debt" in
subsection (c) to mean "entire debt." It is true that in this
case, if appellants do not obtain a release and discharge to the
extent of the fair market value of the property sold, FHLMC
nevertheless will not make a double recovery of the entire amount
due on the foreclosure judgment. But in another case, denial to
a judgment debtor of a release and discharge to the extent of the
fair market value of the property sold when the debtor is liable
for only a portion of the debt, could enable a creditor to secure
a double recovery. For example, a debtor might be personally
liable for 90% of a debt secured by a foreclosed mortgage. Then
at a judicial sale the creditor might obtain title for a nominal
bid to a property equal or almost equal in value to the amount of
the debt for which there was personal liability. In that
situation the creditor nevertheless could execute on a personal
judgment against the judgment debtor for 90% of the debt unless
it was required to release and discharge the debtor for an amount
equal to the fair market value of the property sold.6 The Act
6
A foreclosing creditor may be the only bidder at a sale, as it
can bid up to the value of its judgment by using its judgment in
place of cash. See Pa. R. Civ. P. 1149, 3133, and 3181. Thus, a
foreclosing judgment creditor may be able to obtain title at a
judicial sale for a nominal bid, as other potential bidders will
recognize the futility of bidding against the creditor.
13
was intended to preclude that result. Consequently, a reading
that "debt" means "entire debt" would in some cases frustrate the
purpose of the Act.
There is a final rationale which could be advanced to
avoid the literal application of the Act and to deny the
appellants a release and discharge from the personal judgment.
When appellants were seeking a discharge by reason of the
$800,000 sale price prior to the district court fixing the
valuation, the court in rejecting their application indicated
that if the purchase price of the property was offset
automatically against a personal liability, a judgment creditor
would be encouraged "to bid only a nominal price for the property
so as to avoid offsetting any of the judgment." FHLMC relies on
this point on this appeal. The problem with this rationale to
avoid the literal application of the Act is that under the Act
the release and discharge of personal liability to the extent of
the fair market value of the property sold is not dependent on
the purchase price at a judicial sale. Thus, under the Act, the
purchase price becomes germane only "to the extent" that, with
certain adjustments, it exceeds the judicially-determined fair
market value.
Consequently, the fact that a judgment creditor
acquired the property for a nominal bid would not preclude a
judgment debtor from being released and discharged from liability
to the extent of the fair market value of the property sold.
Accordingly, although a judgment creditor might make a nominal
bid for the property, it would have little incentive to do so to
14
preserve its claim for personal liability against an obligor on
the debt. Indeed, at most our opinion will discourage a judgment
creditor from bidding more than the fair market value for a
property, a possibility we do not regard as likely, as we think
that, with or without our opinion, a judgment creditor would not
be so foolish as to bid more for a property than its value. See
Pleasant Summit Land Corp. v. Comm'r, 863 F.2d 263, 273-77 (3d
Cir. 1988), cert. denied,
493 U.S. 901,
110 S. Ct. 260 (1989).
Thus, we adhere to the plain language of the Act and conclude
that the appellants are released and discharged from the personal
judgment.
In view of the aforesaid conclusions, we will reverse
the order of October 14, 1994, to the extent that it dismissed
the counterclaim, and will remand the case to the district court
for entry of an order marking the personal judgment against
Miller and Knopfler satisfied.7
7
While as a matter of convenience we have written this opinion
referring to all three defendants as the appellants, which they
are, see note 1, supra, we direct the personal judgment to be
marked satisfied only as to Miller and Knopfler. Arrott, though
originally seeking to have both the judgments against it marked
satisfied, did not join in the later counterclaim seeking that
relief and the appeal is from the dismissal of the counterclaim.
In their reply brief, appellants additionally request
that the foreclosure judgment be marked satisfied because they
believe that FHLMC is asserting on this appeal that they are
personally liable under that judgment. We will not consider this
request as it was not raised in the district court and, in any
event, we are unaware of how a judgment creditor could assert
that a defendant is personally liable on a foreclosure judgment.
See note 3, supra. Of course, we do not intend by our opinion to
preclude the appellants from making any contentions they deem
appropriate if FHLMC attempts to enforce personal liability
against them under the foreclosure judgment.
15
FHLMC contends that the counterclaim was procedurally
improper because the only issue before the district court when it
filed its petition was the fair market value of the property and
because the district court in its June 24, 1994 order already had
rejected appellants' claim for satisfaction of the personal
judgment. We reject these contentions, as we see no valid reason
why the appellants should have been required to institute a
separate proceeding to obtain relief. See Fed. R. Civ. P.
60(b)(5). Furthermore, the fair market value had not been set in
June so that the appellants could not have relied on that
valuation to obtain the release and discharge from liability when
they made their initial application.
16
17
