A hypertechnical distinction can rear its ugly head at any given time, even when a litigant has been prudent throughout, successfully navigating the confession of judgment rules for instance.

The Home Savings v. Irongate decision, handed down by the Pennsylvania Superior Court on April 8, is a stark reminder that judgment creditors must strictly adhere to every statutory mandate during the course of judgment enforcement, no matter how technical some of these requirements can be. Mortgagees and mortgagors alike would be remiss not to pay close attention to the analysis applied and the derived outcome in Irongate .

Superficially at least, the facts detailed in the Irongate opinion appear relatively straightforward. A default on commercial loans results in multiple confessions of judgment followed by foreclosure actions. Ultimately, the judgment creditor is left with no alternative but to pursue deficiencies vis-à-vis the Deficiency Judgment Act, 42 Pa. C. S. A. Sec. 8103 (DJA).

However, it is the evolution of the DJA and its historical context that reinforces the result and is worthy of consideration. Does a petition to fix the fair market value in pursuit of such a judgment have to be docketed with the underlying foreclosure action or will it suffice to be docketed in a related action, stemming from default? Just how significant is the timing of such an action?

Before the passage of the DJA, “the price at which the mortgaged property [was] sold by the sheriff, even when purchased by the mortgagee for a nominal bid … [was] conclusive as to the value of the mortgaged property,” according to the June 9, 1941, edition of Pennsylvania Legislative Journal — House . The Pennsylvania General Assembly recognized that during the Great Depression, prices realized at forced sales on foreclosed property were often much less than the price at which the property would be sold to a willing buyer by a willing seller. This trend brought “intensified public dissatisfaction” with the common law rule, to which our legislature responded with the Mortgage Deficiency Judgment Act in 1934.

Although Pennsylvania’s highest court would go on to s trike the DJA as an unconstitutional impairment on the obligation of contracts, in 1941 the state legislature would revisit the relevance of the DJA and enunciate the provisions that would go on to enjoy vitality for decades to follow, albeit in various incarnations.

According to the Irongate opinion, the corporate defendants defaulted on commercial loans extended by the lender, Home Savings. The loans were personally guaranteed and secured by real estate owned by the individual defendants, which is not an atypical fact pattern. As a consequence of default, Home Savings opted first to file several complaints in confession of judgment, to secure money judgments against all defendants in June 2007. It was not until March 2008 that Home Savings would file the complaints in mortgage foreclosure; these resulted in obtaining title to the property on April 23, 2009, pursuant to a sheriff’s sale held on April 9, 2009. Unsurprisingly, as Home Savings did not have its claim satisfied by the sale proceeds, it remained entitled to recoup any losses pursuant to the DJA. Hence, it filed two petitions to fix fair market value of property sold at the sheriff’s sale and for deficiency judgment (referred to as FMV petitions) on Sept. 18, 2009.

At first blush, it would appear that Home Savings filed its FMV petitions well within the six-month statutory window; this window commences from the execution and delivery of the sheriff’s deed pursuant to DJA Section 8103 (b-2). Critically, the FMV petitions were filed in the confession of judgment docket and not the mortgage foreclosure docket, the opinion said. And for the trial court, as these papers were docketed in that fashion, the judgment creditor waived its right to proceed under the DJA. Predictably, such a draconian result became fodder for an appeal by the disenchanted and undercompensated mortgagee.

Section 8103(d) of the DJA permits the debtor to petition the common pleas court and “direct the clerk to mark the judgment satisfied, released and discharged” if the court determines that the creditor failed to file an FMV petition within the six-month time limit established by 42 Pa. C. S. Section 5522(b) (2). On Nov. 25, 2009, well after the six months had expired, the corporate defendants and individual guarantors did precisely that; mainly, file a petition to mark the judgments satisfied and discharged. Home Savings’ preliminary objections fell upon deaf ears, as did their contention that the lower court should simply transfer the FMV petitions over to the foreclosure dockets. At the end of the day, it was directed that the judgments be marked satisfied, released and discharged.

On appeal, the lender argued that the filing of the FMV petitions in the confession of judgment dockets preserved any deficiency claims, and, furthermore, rather than resting on such a procedural nuance, as a matter of public policy, the Pennsylvania Rules of Civil Procedure should be construed in a manner that favors disposing of controversies on their merits (Pa. R.C.P. 126). Interestingly however, the appellate court gave short shrift to the lender’s plea for leniency. The plain language of the DJA, not to mention the Superior Court’s pronouncement in a 2000 decision, First Federal Savings & Loan v. Keisling , proved too formidable foes for Home Savings.

The DJA is to be liberally interpreted in favor of judgment debtors. Additionally, the judgment creditor has the burden of proof on matters of compliance. Succinctly put, an FMV petition must be filed as a supplementary proceeding in the docket in which the judgment was entered. Of course, this could not possibly be said to apply to the confession of judgment dockets.

Section 8103(g) of the DJA critically defines the term “judgment” as the “judgment” that was enforced by the execution proceeding referred to in 8103(a). Here, it was the foreclosure proceeding where the execution took place. Such language is mandatory, and an abuse of discretion did not occur when the lower court denied the request to simply transfer the FMV petition from one docket to another. It should be noted that footnote No. 3 in Irongate is a reminder that the Superior Court’s 2010 holding in Commonwealth v. Neiman , which declared the 2004 amendments to the DJA unconstitutional, has been stayed, pending Pennsylvania Supreme Court review.

Neiman contained a challenge to the constitutionality of Megan’s Law. The Megan’s Law bill, as passed in 2004, also contained an amendment to the DJA; Megan’s Law survived the challenge. However, the Neiman court held the DJA amendment violated the “single subject rule” of Article III of the Pennsylvania Constitution. The amendments to the DJA, constituting 12 percent of the total bill, were stricken as extraneous.

Despite this interesting side note, the lessons gleaned from this case retain their value as the amendments do not address the supplemental proceeding issue germane to Irongate .

Harper J. Dimmerman is an adjunct professor at Temple University’s Fox School of Business and co-chair of the law practice management committee
of the Philadelphia Bar Association. He represents clients in general litigation, various land use, residential, commercial real estate and criminal law matters. His fi rm also provides approved attorney title insurance services and real estate consulting statewide. He can be reached via e-mail at harper@hjdlaw.net or telephone at 215-545-0600. His blog is landdweller.com

James M. Lammendola is an instructor at Fox School of Business who was in private practice for 20 years. He may be reached via e-mail at
james.lammendola@temple.edu or telephone 267-254-332
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