Fed Home v. Arrott Assoc

• Court: Court of Appeals for the Third Circuit
• Decided: August 1, 1995
• Docket: 94-2119
• Status: Unknown

Opinion

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Fed Home v Arrott Assoc Precedential or Non-Precedential: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

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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 University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. 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