1995 Decisions

Opinions of the United

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Precedential or Non-Precedential: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.

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1 

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 
2 

 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. 
3 

 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 
4 

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 

 

1The 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. 
5 

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 

 

2Only Miller and Knopfler filed the counterclaim but as a matter 

of convenience we treat the appellants collectively as the 

counterclaimants. See note 1, supra. 
6 

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 
7 

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 
8 

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

 

3Of course, under Pennsylvania law, no deficiency judgment can 

issue from a judgment for mortgage foreclosure. 
9 

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). 
10 

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 
11 

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. 

 

4We note that the Act by its terms is not limited to foreclosure 

cases, though the litigation under it routinely involves 

foreclosure actions. 

5Of 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. 
12 

 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 
13 

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 

 

6A 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. 
14 

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 
15 

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

 

7While 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. 
16 

 

 

 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. 
17