MARINE MIDLAND BANK, Appellee,
v.
SURFBELT, INC., Techni/Lease Financial, Inc. and John H.
Miller, and McKeesport National Bank and
Pittsburgh National Bank, Garnishees.
Appeal of John H. MILLER.
No. 82-5605.
United States Court of Appeals,
Third Circuit.
Argued May 9, 1983.
Decided Oct. 11, 1983.
Charles P. Falk (argued), Baskin & Sears, P.C., Pittsburgh, Pa., for appellee.
Rоbert O. Lampl, Edward A. Olds (argued), Pittsburgh, Pa., for appellants.
Before ADAMS and BECKER, Circuit Judges, and DEBEVOISE,* District Judge.
BECKER, Circuit Judge.
This diversity action requires us to determine the circumstances under which a guarantor may invoke the protections of Pennsylvania's Deficiency Judgment Act, 42 Pa.Cons.Stat.Ann. Sec. 8103 (1982) (the "Act".) Specifically, the question presented is whether a guarantor can successfully invoke the Act where the creditor, after having foreclosed on a mortgage put up by the stockholders of the principal debtor to obtain a delay of the creditor's action against the principal debtor's property that secures the loan, fails to follow the Act's appraisal procedures. We conclude that the district court erred in holding that the Act was not applicable in this situation, and we therefore reverse.
I.
On June 3, 1978, appellee Marine Midland Bank extended a $600,000 line of credit to Surftex, Inc. The line of credit was secured by Surftex's inventory, equipment, and accounts receivable, and was guaranteed by appellant John H. Millеr and two corporations, Surfbelt, Inc. and Techni/Lease Financial Inc.1 After drawing on the line of credit, Surftex defaulted in 1979.
After Surftex defaulted, Marine Midland commenced two separate actions to recover the amount advanced on the line of credit. One was a replevin suit brought in the state court against the cоllateral that secured the line of credit--Surftex's inventory, equipment, and accounts receivable. That suit was settled in June 1979, when Marine Midland entered into a forbearance agreement with Surftex's sole shareholders, George and Joan Karsnak. Pursuant to that agreement, Surftex was permitted to retain possession of its cоllateral for ninety days, and the Karsnaks gave Marine Midland a second mortgage on real property owned by them jointly and personally. The property was Surftex's principal place of business. When Surftex again defaulted, Marine Midland brought an action to foreclose on the mortgage. Following a judgment in its favor, Marinе Midland bought the property for $1,457.63 at a sheriff's sale on July 6, 1981.2 Despite the foreclosure and sale, the Karsnaks refused to surrender possession. When the bank filed an ejectment action, the Karsnaks challenged the validity of the sheriff's sale and contested the bank's title and right to possession. To date, the bank has been unable tо obtain possession of the property.
In the meantime, the bank also brought a diversity suit in the District Court for the Western District of Pennsylvania against Miller and the two corporate guarantors. In 1981, the district court granted summary judgment for the bank against all defendants in the amount of $86,752.02, plus interest, costs, and attorneys' fees. This court affirmed, Marine Midland Bank v. Surfbelt, Inc.,
The motions to dismiss the execution proceeding and to mark the judgment satisfied were heard on a stipulated record. On August 30, 1982, the district court denied the motions. Reasoning that the debt that led to the foreclosure on the Karsnak property was "independent" of Miller's obligation on the guarantee, the court held that the Act did not apply.
II.
The relevant part of the Pennsylvania Deficiency Judgment Act provides:
(a) General Rule.--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.
....
(d) Action in absence of petition.--If the judgment creditor shall fail to present a petition to fix the fair market value оf the real property sold within the time after the sale of such real property provided by section 5522 (relating to six months limitation), the debtor, obligor, guarantor or any other person liable directly or indirectly to the judgment creditor for the payment of the debt, ... may file a petition, as a supplementary proceeding in the matter in which the judgment was entered, in the court having jurisdiction, setting forth the fact of the sale, and that no petition has been filed within the time limited by statute after the sale to fix the fair market value of the property sold, whereupon the court, after notice as provided by general rule, and being satisfied of such facts, shall dirеct the clerk to mark the judgment satisfied, released and discharged.
There is no dispute that Marine Midland did not file a petition to determine the fair market value of the Karsnak property. This failure would warrant judgment for Miller, if the Act applies.
A.
Marine Midland presents several arguments why the Act should not apply. Three of these can be dismissed without extensive discussion. First, the bank argues that the requirements of the Act are procedural, and therefore inapplicable in federal court under Hanna v. Plumer,
Marine Midland also argues that, because of the Karsnak resistance, which has prevented it from taking possession of the property, the six-month period for filing the petition has been tolled. Marine Midland argues that it therefоre does not yet have a duty to comply with the Act.3 The district court offered several reasons, to which we subscribe, for rejecting this argument. First, as we noted in Auerbach, the language of the Act is absolute, admitting of no exceptions.4 Indeed section 8103(e) does not even permit a debtor to waive its protections. If Miller may not waive the provisions of the Act, it would make no sense to allow the actions of the Karsnaks to create a waiver. See Marine Midland Bank v. Surfbelt, Inc., Misc. No. 8536, slip op. at 4 (W.D.Pa. Aug. 30, 1982). In addition, the six-month period for judgment creditors to file petitions to determine value was provided "for the very reason that problems with the title might arise." Id. (citing Shrawder v. Quiggle,
Marine Midland's third argument that the Act is not applicable here is that, because the foreclosure action was an in rеm proceeding, it could not and did not serve as the basis for a personal judgment against Miller, and that therefore the Act does not apply. Although Marine Midland is correct in characterizing the mortgage foreclosure as an in rem proceeding and in admitting that any deficiency resulting from the foreclosure could not itsеlf serve as the basis for securing a personal judgment against Miller, see Meco Realty Co. v. Burns,
A fair interpretation of the Deficiency Judgment Act, particularly in the light of its obvious purpose, is that its protection is applicable to proceedings to collect the balance due with respect to a judgment, even though the property was sold in an in rem proceeding.
National Council of the Junior Order of United American Mechanics of the United States of North America v. Zytnick,
B.
Marine Midland's final argument is based on the contention that the Karsnak mortgage arose out of a transaction sufficiently independent of the original loan to Surftex, which Miller guaranteed, that Miller is not entitled to the protection of the Act in connection with his liability on the guarantee. The district court essentially agreed with Marine Midland's position. It found that the mortgage was given for an independent debt:The Karsnak mortgage was given approximately one year after the Bank's loan to Surftex. This mortgage was given as additional security and in consideration of the Bank's forebearance in replevying its collateral. The timing of and the consideration for the mortgage indicate it secures an indebtedness separate and distinct from that which Miller guaranteed....
Marine Midland, slip op. at 5.
In support of the district court's holding, Marine Midland argues that this case is factually identical to Frеeman v. Greenberg,
The defendant [Greеnberg], who is the appellant, borrowed $7,000 from the bank of which plaintiff [Freeman] afterward became receiver, and delivered his note dated April 27, 1927, for the payment of the loan on demand; the note contained a warrant to confess judgment and recited the delivery, as collateral security, of a bond and mortgаge made by Jacob Zussman in the sum of $8,500. In 1928, the bank foreclosed on the Zussman mortgage and at the sheriff's sale purchased the property for $50, thereafter carrying it as collateral for the loan to defendant.
Id. at 207,
Because Freeman v. Greenberg is not dispositive, resolution of the case requires us to dеcide whether, on the facts of this case, a Pennsylvania court would find any reason for not applying the Deficiency Judgment Act, which is applicable on its face. Unless there is some principle that insulates a transaction such as that entered into between the Karsnaks and the Bank from the strictures of the Act, Miller, by virtue of the Act's literal terms, is relieved of his liability. The district court found such a principle in the notion of a "separate and distinct" transaction, holding that, because the arrangement between the Karsnaks and the Bank was separate and distinct from the original loan and guaranty agreement, the bank's failure to follow the Act's prоcedures was not fatal. To the extent that the application of that principle to this case derives from Freeman v. Greenberg, it is, for the reasons noted above, flawed.
The policy of the Deficiency Judgment Act is to protect debtors against the risk of a mortgagee obtaining a "double recovery." This occurs where a mortgagee purchases the mortgaged property for less than fair market value at the foreclosure sale, and then proceeds against the debtor for the deficiency. See Philip Green & Son, Inc. v. Kimwyd, Inc.,
Accordingly, the judgment of the district court must be reversed. The case will be remanded to the district court with directions to enter a judgment declaring Miller's debt to Marine Midland satisfied.
Notes
Honorable Dickinson R. Debevoise, United States District Judge for the District of New Jersey, sitting by designation
The record is unclear as to whether George Karsnak was also a guarantor
The property was subject to a $48,000 first mortgage
Marine Midland asserts that, because of the рending litigation concerning the property, it may get no value at all from the property, in which case the fair market value of the property is irrelevant
In Auerbach, the bank argued that it was unnecessary to file a petition to determine fair market value when the value was undisputed and the property had already been sold by the Bank, with the amount credited to the original debt. The language of the Act, we held, does not make an exception for such cases.
Marine Midland also contends that its inability to secure possession of the property rendered it incapable of obtaining the appraisal required by the Act. The bank made no apparent effort, however, to invoke judicial process to obtain an appraisal
The facts of Zytnick are actually quite different from those of this case. In Zytnick, the only proceeding that had taken place was a foreclosure. Because there was therefore no outstanding pеrsonal judgment against which the proceeds of the foreclosure could be credited, the court held that a petition to determine fair market value was not yet necessary. The court went on to note, however, that "mortgagees who proceed by way of mortgage foreclosure and who have bought the property would be able to recover a deficiency only if they obtained a personal judgment and petitioned in that proceeding to fix fair value not later than six months after the sale of the property."
Our understanding of the facts in Freeman is illumined and confirmed by an independent inspection of the record in that сase
In addition, the Act was not in force at the time of the foreclosure on the Zussman mortgage. Under the terms of the Act, as enacted in 1941, the appraisal proceeding could have been brought within six months of the enactment. Although the suit against Greenberg had been commenced by that time, and Freeman therefore сould conceivably have asked for an appraisal, the temporal relationship between the suit against Greenberg and the enactment was purely fortuitous. Had the Act been in force when the Zussman mortgage was foreclosed, there would have been no need to seek an appraisal in order to enforce Greenberg's obligation