Case Name: Beaver County Building and Loan Association, Appellant, v. Winowich. et ux.
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1936-10-05
Citations: 323 Pa. 483
Docket Number: Appeal, No. 117
Parties: Beaver County Building and Loan Association, Appellant, v. Winowich. et ux.
Judges: Before Kephart, C. J., Schaffer, Maxey, Linn, Stern and Barnes, JJ.
Reporter: Pennsylvania State Reports
Volume: 323
Pages: 483–522

Head Matter:
Beaver County Building and Loan Association, Appellant, v. Winowich. et ux.
Argued April 8, 1936; reargued May 25, 1936.
Before Kephart, C. J., Schaffer, Maxey, Linn, Stern and Barnes, JJ.
Charles McC. Barrickman, with him Thomas C. Buchanan, of Buchanan & Barrickman, Charles H. Kennedy and Ralph E. Smith, for appellant.
M. E. Rowley, with him W. D. Craig, H. E. Craig, of Craig & Rowley, for appellees, defendants below.
Edward Friedman, Deputy Attorney General, with him Charles J. Margiotti, Attorney General, and George W. Keitel, Assistant Deputy Attorney General, for Commonwealth, intervenor.
Homer H. Swaney, for amicus curise.
October 5, 1936:

Opinion:
Opinion by
Mr. Justice Stern,
The question presented in this case is the constitutionality of the Act of January 17, 1934 (Spec. Sess.), P. L. 243, commonly known as the Mortgage Deficiency Judgment Act, as applied to mortgages contracted before its enactment.
In every serious financial crisis in the history of our country there has been a legislative recognition of the need of relief for debtors. In the periods of industrial depression which have intermittently retarded our economic progress statutes were passed by various states to facilitate the liquidation of burdensome obligations, especially those arising from mortgages. Sometimes this legislation consisted of moratory laws, delaying proceedings for foreclosure or extending the period of redemption. Sometimes it aimed at the abolition or reduction of deficiency judgments, either by fixing a minimum price for the sale on execution or by providing that the "reasonable" or "fair" value of the property should be allowed as a credit on the debt irrespective of the amount realized. Sometimes courts of equity sought to give relief, in cases in which an adequate price had not been obtained, by refusing confirmation of the sale, or by granting it only on condition that a fair credit be given on the obligation secured by the mortgage. In the re cent depression resort has been had to practically all of these measures, and acts similar to the one before us have been passed in several states.
On July 14, 1931, defendants borrowed from plaintiffs $12,300, and to secure its repayment executed their judgment bond conditioned for the payment of the loan on or before July 1, 1941, with interest, dues and premiums as therein stipulated. Accompanying the bond was a mortgage covering certain real estate in the Borough of Aliquippa, Beaver County. Because of a default plaintiff on December 27, 1933, caused judgment to be entered on the bond, the real debt being $14,099.93, and on the same day issued a writ of execution under which the mortgaged premises were sold to plaintiff at sheriff's sale on February 5, 1934, for $962.94. Plaintiff failing to ask the court to determine the fair value of the property and to fix the amount of the deficiency judgment, defendants on December 12, 1934, petitioned that the judgment be marked satisfied in accordance with the provisions of the Act of January 17, 1934 (Spec. Sess.) P. L. 243, and the prothonotary thereupon entered satisfaction. On July 22, 1935, plaintiff filed a petition on which the court granted a rule on defendants to show cause why the satisfaction should not be stricken from the record. On October 11, 1935, the court dismissed this petition, from which order plaintiff appeals.
The basis of plaintiff's petition was the alleged unconstitutionality of the Mortgage Deficiency Judgment Act. That act, which is entitled "An Act To protect the owners of mortgaged property during the present emergency by limiting the amount of deficiency judgments during a certain period," provides "That whenever any real property is sold on any execution on the foreclosure of any mortgage, or on a judgment entered on any obligations secured by mortgage, and the sum for which such property was sold is not sufficient to satisfy the debt, interest and costs, the plaintiff or use plaintiff shall, within six months after such sale, petition the court out of which such writ of execution issued to fix the fair value of the property sold. . . . Such petition shall be heard by a judge of such court sitting without a jury, or may . be referred to a master for hearing and determination, subject to confirmation by the court: . . .
"At all such hearings any party in interest may introduce in evidence testimony of the fair value of the premises sold at the time of the sale. In the event that the fair value so determined is greater than the price for which the property was sold, the amount of such fair value shall be deducted from the amount of the judgment, interest and costs, and a deficiency judgment entered for the balance.
"If the plaintiff or use plaintiff shall fail to present such petition within six months after such sale, the prothonotary shall, upon application of the defendant or other party in interest, enter satisfaction of such judgment. Such satisfaction shall have the effect of terminating as well the liability of all persons bound by any obligation securing the payment of such mortgage debt."
The act mates provision for notice of the presentation of the petition, and also provides for a jury trial to determine the fair value if either party so desires. By its terms it was to become effective immediately upon its enactment, and remain in force until July 1, 1935.
Plaintiff contends that the act is unconstitutional on the grounds (1) that, as applied to mortgages previously executed, it violates Article I, section 10, of the Constitution of the United States, which provides that "No State shall . . . pass any . . . law impairing the Obligation of Contracts, ." and Article I, section 17, of the Constitution of Pennsylvania, that "No . . . law impairing the obligation of contracts, . . . shall be passed"; (2) that it violates the fourteenth amendment to the Constitution of the United States, forbidding any state to deprive a person of property without due process of law; (3) that it violates Article III, section 7, of the Constitution of Pennsylvania, which pro vides that "The General Assembly shall not pass any local or special law: Authorizing the . . . impairing of liens; . or providing or changing methods for the collection of debts, or the enforcing of judgments, or prescribing the effect of judicial sales of real estate"; (4) that it violates Article III, section 3, of the Constitution of Pennsylvania, requiring the subject of an act to be clearly expressed in its title. In view of our opinion as to the first of the reasons thus assigned, it will not be necessary, for purposes of the present case, to consider any of the others.
In determining what constitutes the obligation of a contract, no principle is more firmly established than that the laws which were in force at the time and place of the making of the contract enter into its obligation with the same effect as if expressly incorporated in its terms: McCracken v. Hayward, 2 How. 608, 613; Von Hoffman v. City of Quincy, 4 Wall. 535, 550; Walker v. Whitehead, 16 Wall. 314, 317; Edward v. Kearzey, 96 U. S. 595, 607; Barnitz v. Beverly, 163 U. S. 118, 127; Hooker v. Burr, 194 U. S. 415, 420; W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, 60.
What, then, were the rights of a mortgagee under the law of Pennsylvania prior to the passage of the Mortgage Deficiency Judgment Act?
The theory in our state has always been that a mortgage is merely collateral for the payment of some primary obligation, usually a bond: Tubb's Appeal, 161 Pa. 252, 254; White's Estate, 322 Pa. 85, 89. As between the parties, both at law and in equity, it is a conveyance only so far as necessary to render the instrument effective as a security: Presbyterian Corporation v. Wallace, 3 Rawle 109, 130; Wilson v. Shoenberger's Executors, 31 Pa. 295; Harper v. Consolidated Rubber Co., 284 Pa. 444, 451; Bulger v. Wilderman & Pleet, 101 Pa. Superior Ct. 168, 171; Artisti-Kote Co. v. Benefactor Building & Loan Association, 64 Fed. Rep. (2nd) 407, 408. The obligee could proceed either in personam or in rem. If in personam he could resort to all the property of the debtor not protected by exemption laws, and for this purpose could issue one execution after another until the full amount of the debt was realized. If the obligee chose to proceed by foreclosure of the mortgage, the sum realized at the sale on execution was credited against the indebtedness, and the mortgagee could then pursue his debtor on the bond for the balance. It was immaterial to the mortgagee's rights whether he himself or some third person became the purchaser of the mortgaged property at the sheriff's sale: White's Estate, 322 Pa. 85, 89. As such purchaser the mortgagee obtained a new status in no way dependent upon his previous relationship to the mortgagor, and of the same legal attributes as that of any other purchaser of real estate at a judicial sale. As between the parties themselves, however hard the consequences might sometimes be, the amount realized at the sale was conclusive as to the value of the property: Wolfe's Appeal, 110 Pa. 126, 130; Lomison v. Faust, 145 Pa. 8; Reutschlin's Estate, 245 Pa. 473, 478; White's Estate, 322 Pa. 85, 89; Mollenauer v. Smith, 51 Pa. Superior Ct. 517, 523; Bugh's Estate, 95 Pa. Superior Ct. 29; Artisti-Kote Co. v. Benefactor Building & Loan Association, 64 Fed. Rep. (2nd) 407. Therefore the deficiency judgment to which a mortgagee was entitled was the amount of the judgment, interest and costs, less the net proceeds received by him from the sale of the mortgaged property on foreclosure. The extent to which the debtor was released from personal liability was measured by the sale price, irrespective of the "fair" value, the "market" value, the "reasonable" value, or the "actual" value, of the property.
From this summary of the Pennsylvania law which governed the bond and mortgage in the present case when those instruments were executed, it is obvious that defendants' obligation was changed materially by the Mortgage Deficiency Judgment Act. Instead of their covenant in the bond to pay "the sum of twelve thousand three hundred dollars, lawful money of the United States of America" on or before July 1, 1941, plaintiff now was obliged to accept part payment of the debt in cash and part in real estate at a valuation appraised by a judge or jury, or, if such appraisement should fix the "fair value" of the property at an amount equal to or greater than the indebtedness on the bond, plaintiff must be content with receiving only real estate and no "lawful money" whatever. Of course, there is no assurance of a mortgagee being able to realize from the property the amount of a valuation placed upon it in accordance with the provisions of the act. The sale price is no longer conclusive between the parties as to the credit to be allowed on the debt, and the amount of the deficiency judgment to which the mortgagee was previously entitled is thus altered to a substantial and, it may be, drastic degree.
New clauses of the federal constitution have been the subject of more interpretation by the Supreme Court of the United States than that which forbids a state from impairing the obligation of contracts. At first there was confusion arising from a somewhat shadowy distinction between the contract itself and the remedies to enforce it, but the decisions have gradually clarified this difficulty, so that the governing principles are now reasonably well defined. Stating them in broad outline, to the extent to which they are here pertinent, they may be summarized as follows:
1. Any law which enlarges, abridges, or in any manner changes the intention of the parties as evidenced by their contract, imposing conditions not expressed therein or dispensing with the performance of those which are a part of it, impairs its obligation, whether the law affects the validity, construction, duration, or enforcement of the contract: Story's Commentaries on the Constitution, Book 3, ch. 34, sec. 1379.
"In the case at bar, the defendant has given his promissory note to pay the plaintiff a sum of money on or before a certain day. The contract binds him to pay that sum on that day; and this is its obligation. Any law which releases a part of this obligation, must, in the literal sense of the word, impair it." Chief Justice Marshall in Sturges v. Crowninshield, 4 Wheat. 122, 197.
2. A mortgage is a contract within the protection of the constitutional provisions against impairment: Breitenbach v. Bush, 44 Pa. 313, 320; Philadelphia Trust Co. v. Northumberland County Traction Co., 258 Pa. 152, 165, 167; W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56.
3. A judgment for the amount due under a contract remains an obligation of the contract, and it may not be affected by legislation which would impair the antecedent obligation of the contract upon which it is founded. If, therefore, the subsequent law, instead of directly abrogating the contract, unreasonably restricts or oppressively burdens the enforcement of a judgment rendered thereon, it is none the less obnoxious to the constitutional prohibition: W. B. Worthen Co. v. Thomas, 292 U. S. 426, 432.
4. The amount of impairment of the substantive obligation of a contract is immaterial. Any deviation from its terms, however slight, falls within the meaning of the constitution: Greene v. Biddle, 8 Wheat. 1, 84; Ogden v. Saunders, 12 Wheat. 213, 256; Walker v. Whitehead, 16 Wall. 314, 318.
"One of the tests that a contract has been impaired is that its value has by legislation been diminished. It is not, by the constitution, to be impaired at all. This is not a question of degree or manner or cause, but of encroaching in any respect on its obligations, dispensing with any part of its force." Planters' Bank of Mississippi v. Sharp, 6 How. 301, 327. (Italics supplied.)
5. The remedy, or means of enforcing a contract, is a part of its obligation which the constitution protects. The legislature has the power to formulate, alter and suspend modes of procedure, even as to pre-existing contracts, provided that, under the guise of a procedural statute, it does not deprive a party of any substantial right under the contract: Breitenbach v. Bush, 44 Pa. 313, 318, 320; Penrose v. Erie Canal Co., 56 Pa. 46, 48; West Arch Building & Loan Association v. Nichols, 303 Pa. 434. Any change in procedure which does not supply an alternative remedy, equally adequate and efficacious, in place of that which existed when the contract was made, is violative of the constitutional prohibition. The ideas of right and remedy are inseparable: Greene v. Biddle, 8 Wheat. 1, 17; Walker v. Whitehead, 16 Wall. 314, 317; Edwards v. Kearzey, 96 U. S. 595, 600; McGahey v. Virginia, 135 U. S. 662, 693; Barnitz v. Beverly, 163 U. S. 118, 127; Oshkosh Waterworks Co. v. Oshkosh, 187 U. S. 437, 439.
When we read the decisions in order to study their application of these principles and to determine the question of the validity of the present act as measured by their mandates, we must always bear in mind the distinction between legislation which merely postpones the legal vindication of rights and that which curtails or injuriously affects the rights themselves or the efficacy of the remedies provided for their enforcement. Generally speaking, the trend of authority is one of judicial support of a statute the purpose of which is merely to delay redress or shorten periods of limitation in which legal action must be taken, — always provided that the stays granted and limitations imposed are reasonable and definite in duration and that the act safeguards the rights of the party affected during the period in which he is compelled to forego the pursuit of his remedies. A recent authority establishing the constitutionality of this type of legislation is Home Building Loan Association v. Blaisdell, 290 U. S. 398, involving a moratorium law of Minnesota. There the Supreme Court of the United States sustained the validity of an act which provided for postponement of execution sales in foreclosure proceedings, for an extension of the period of redemption during the continuance of the emergency but in no event beyond May 1, 1935, and for a suspension of actions for deficiency judgments until the extended period of redemption had expired. Relief could be granted only on application to the court, and provision was made for the continuing payment by the mortgagor of the income or rental value on account of the carrying charges. Chief Justice Hughes said, p. 439: "It cannot be maintained that the constitutional prohibition should be so construed as to prevent limited and temporary interpositions with respect to the enforcement of contracts if made necessary by a great public calamity ." The Chief Justice (p. 445) emphasized the fact that: "As already noted, the integrity of the mortgage indebtedness is not impaired; interest continues to run; the validity of the sale and the right of a mortgagee-purchaser to title or to obtain a deficiency judgment, if the mortgagor fails to redeem within the extended period, are maintained; and the conditions of redemption, if redemption there be, stand as they were under the prior law." (Italics supplied.)
The still later case of W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, is illustrative of the fact that even moratory legislation will not be judicially sanctioned unless buttressed by adequate protection of the mortgagee during the period of enforced inaction. In that case Mr. Justice Caedozo said, pp. 61, 62, in reference to an act of Arkansas: "A minimum of six and a half years is thus the total period during which the bolder of the mortgage is without an effective remedy. There is no enforcible obligation in the interval to pay installments of the principal or even the accruing coupons. The case is not one in which the Chancellor has intervened, either with or without the permission of a statute, to halt the oppressive enforcement of a mortgage by putting off the day of sale or entry for a reasonable time upon compliance by the debtor with reasonable conditions. . . . There is not even a requirement that the debtor shall satisfy the court of bis inability to pay. . .A state is free to regulate the procedure in its courts even with reference to contracts already made (Bronson v. Kinzie, 1 How. 311), and moderate extensions of the time for pleading or for trial will ordinarily fall within the power so reserved. A different situation is presented when extensions are so piled up as to make the remedy a shadow. . So viewed they [the changes of remedy prescribed by the act] are seen to be an oppressive and unnecessary destruction of nearly all the incidents that give attractiveness and value to collateral security."
Stay laws have been passed at various times in Pennsylvania, and, where reasonable in their terms, have been upheld by this court. In Chadwick v. Moore, 8 W. & S. 49, the act involved was that of July 16, 1842, P. L. 407, which provided that lands taken in execution should be appraised by an inquest, and if they could not be sold at public sale for at least two-thirds of such valuation the sheriff should not make the sale, and all proceedings should thereupon be stayed for a year from the return day of the writ. The act was sustained on the ground that the temporary restraint of the remedy did not unreasonably impair the mortgagee's rights. So, in Breitenbach v. Bush, 44 Pa. 313, and in Coxe's Executor v. Martin, 44 Pa. 322, the Act of April 18, 1861, P. L. 408, staying civil process against persons mustered into the military service for the term of their enlistment, was upheld as constitutional.
Throughout the states generally, moratory legislation has been sustained or invalidated according to the reasonableness of the statute in regard to the period of extension granted by it and the interim protection of the creditor.
Turning from cases dealing with a temporary suspension of remedies to decisions concerned with impairment of the creditor's substantive or remedial rights, those in the Supreme Court of the United States are, of course, conclusive as to the construction of the federal constitution. Bronson v. Kinzie, 1 How. 311, and McCracken v. Hayward, 2 How. 608, dealt with statutes of Illinois which provided for an extension of the period of redemption, and further that, when execution was levied on any property, an inquest should be held as to valuation, and the sale should not be consummated unless at least two-thirds of the appraisement was bid for the property. These statutes were held unconstitutional when applied to existing mortgages or judgments. In the McCracken case the court said, p. 613: "If the defendant had made such an agreement as to authorize a sale of his property, which should be levied on by the sheriff, for such price as should be bid for it at a fair public sale on reasonable notice, it would have conferred a right on the plaintiff, which the constitution made inviolable; and it can make no difference whether such right is conferred by the terms or law of the contract. Any subsequent law which denies, obstructs, or impairs this right, by superadding a condition that there shall be no sale for any sum less than the value of the property levied on, to be ascertained by appraisement, or any other mode of valuation than a public sale, affects the obligation of the contract, as much in the one case as the other, for it can be enforced only by a sale of the defendant's property, and the prevention of such sale is the denial of a right." (Italics supplied.)
In Gantly's Lessee v. Ewing, 3 How. 707, 716, an act of Indiana provided that no real estate should be sold on execution for less than half its appraised value. It was declared to be unconstitutional as applied to pre-existing mortgages.
Howard v. Bugbee, 24 How. 461, was a case in which an. Alabama statute authorized a redemption of mortgaged property in two years after the foreclosure sale. It was held invalid as to sales made under mortgages executed prior to the date of its enactment.
In Gunn v. Barry, 15 Wall. 610, a creditor obtained a judgment lien on his debtor's property at a time when the law of Georgia allowed to debtors only a small exemption of land owned by them. The state adopted a new constitution which provided for a larger exemption. It was declared, as to this creditor, to be an impairment of his contractual rights.
Barnitz v. Beverly, 163 U. S. 118, involved a law of Kansas which extended the period of redemption after a mortgage foreclosure sale to eighteen months, during which time the mortgagor was to remain in possession and receive rents and profits, except as necessary for repairs. The redemption money was to consist, not of the amount of the mortgage debt, interest and costs, but of the sum paid by the purchaser at the sale, with interest, costs and taxes. The court held the statute unconstitutional as applied to a sale under a mortgage executed before its passage, saying, p. 130: "Obviously this scheme of foreclosure renders it necessary for the mortgagee to himself bid, or procure others to bid, the entire amount of the mortgage debt, and thus, in effect, release the debtor from his personal obligation. . . . But it seems impossible to resist the conviction that such a change in the law is not merely the substitution of one remedy for another, but is a substantial impairment of the rights of the mortgagee as expressed in the contract." (Italics supplied.)
In Bradley v. Lightcap, 195 U. S. 1, before the passage of the Illinois statute there under consideration, when a mortgagee at a foreclosure sale bid in the mortgaged property at less than the amount due, and the mortgagor did not redeem, failure by the mortgagee to take out a deed had no effect on the original title of the mortgagee as against the mortgagor. By the statute it was provided that if the mortgagee being in possession, bid in the mortgaged premises at foreclosure sale at less than the amount found due on the mortgage, and the mortgagor did not redeem, the legal title of the mortgagee and his right of possession should be forfeited to the mortgagor by failure to obtain a deed within a certain prescribed time, although the mortgagor had not in fact paid anything in extinguishment of the mortgage debt. It was held that the act was invalid as to a mortgage executed and possession taken by the mortgagee prior to its enactment.
The situation in W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, was that certain bonds had been issued by a municipal improvement district, secured by a mortgage of benefit assessments. After the execution of the mortgage Arkansas enacted a statute which changed the method of enforcing the payment of assessments; the time for foreclosure and sale of the land on default was substantially extended, the penalty for non-payment drastically reduced, the periods for the various stages of legal procedure lengthened, the time for redemption increased, and the interim occupancy of the delinquent owner protected. The act was held invalid. The court distinguished the Minnesota moratorium case, and said, p. 60: "A catalogue of the changes imposed upon this mortgage must lead to the conviction that the framers of the amendments have put restraint aside. With studied indifference to the interests of the mortgagee or to his appropriate protection they have taken from the mortgage the quality of an acceptable investment for a rational investor."
In Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555, the Frazier-Lemke Amendment of June 28, 1934, c. 869, 48 Stat. 1289, adding sub-section (s) to section 75 of the Bankruptcy Act, was held to be unconstitutional. The amendment provided that a farmer who had failed to obtain the consents requisite to a composition might, upon being adjudged a bankrupt, acquire alternative options in respect to mortgaged property, either purchasing it on the installment plan, if the mortgagee assented, at its then appraised value, or, if the mortgagee refused such assent, obtaining a stay of all proceedings for a period of five years, meanwhile remaining in possession and paying a reasonable rental, and at the end of such period obtaining full title by paying the appraised price of the property. The amendment applied only to existing debts. The court declared .that, while Congress, unlike the states, was not prohibited from impairing the obligation of contracts, the effect of the act was to take away valuable rights in property which had been acquired by the mortgagee. In the course of his opinion Mr. Justice Brande is said, pp. 579, 580, 581: "No instance has been found, except under the Frazier-Lemke Act, of either a statute or decision compelling the mortgagee to relinquish the property to the mortgagor free of the lien unless the debt was paid in full. . . . His position in this respect was not changed when foreclosure by public sale superseded strict foreclosure. . In many states other statutory changes were made in the form and detail of foreclosure and redemption. But practically always the measures adopted for the mortgagor's relief, including moratorium legislation enacted by the several states during the present depression, resulted primarily in a stay; and the relief afforded rested, as theretofore, upon the assumption that no substantive right of the mortgagee was being impaired, since payment in full of the debt with interest would fully compensate him.
"Statutes for the relief of mortgagors, when applied to pre-existing mortgages, have given rise, from time to, time, to serious constitutional questions. The statutes were sustained by this court when, as in Home Building & Loan Association v. Blaisdell, 290 U. S. 398, they were found to preserve substantially the right of the mortgagee to obtain, through application of the security, payment of the indebtedness. They were stricken down, as in W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, when it appeared that this substantive right was substantially abridged."
While it is true that none of the cases thus summarized is wholly analogous to the present one, they lead fairly to the conviction that a statute which compels a mortgagee to accept real estate at an appraised valuation, in place of money, as a part liquidation of the mortgagor's obligation on the bond, must, as applied to pre-existing mortgages, be held to be unconstitutional if the obvious trend of these decisions in the Supreme Court of the United States is to be followed. This conclusion is strengthened by the almost complete unanimity of state courts in striking down recent legislation curtailing the rights of mortgagees, — some of it practically identical with the act now under consideration.
A statute in Arkansas provided that in foreclosure proceedings the mortgaged property should be consid ered to be of the value of the loan, irrespective of the amount which might be realized at the sale, thus in effect abolishing deficiency judgments. It also undertook to change the rule that a court will not refuse to confirm a judicial sale merely because of inadequacy of price. It was held to violate the obligations of pre-existing mortgage contracts: Adams v. Spillyards, 61 S. W. (2nd) 686, 187 Ark. 641.
A statute in California limited recovery to the difference between the amount of the debt and the fair market value of the real estate at the time of the sale. The act was declared to be unconstitutional: Bennett v. Superior Court of Los Angeles County, 42 Pac. (2nd) 80, 5 Cal. App. Rep. (2nd) 13. An act of the same state precluding the right to a deficiency judgment on a mortgage obligation unless notice of breach and an election to sell was recorded one year before the sale, was held invalid if retroactively applied: Brown v. Ferdon, 54 Pac. (2nd) 712, 5 Cal. (2nd) 226.
An act of New Jersey which provided for the deduction of the fair market value from the debt, was invalidated, as to pre-existing contracts, in Vanderbilt v. Brunton Piano Co., 169 Atl. 177, 111 N. J. Law 596. The court said, p. 178 (pp. 598, 599) : "There can be no doubt that the amendment substitutes the 'fair market value' determined in the subsequent action on the bond in place of the proceeds of the sale in foreclosure as the credit to be allowed the debtor in reduction of the debt. It is apparent that when an obligee on a bond has, as an incident to his contract, the right to recover a liquidated sum, first by receiving the proceeds from the sale of the pledged property and supplementarily by a personal action, and a statute is thereafter passed, the direct effect of which is to provide an opportunity to the debtor for reducing the sum recoverable, his contract is impaired. It might well happen in a given case that under the questioned statute the entire right sued upon in the law action would dissolve, . . . There is no legal obligation upon a mortgagee either to hid up, or to bid in, the property at the foreclosure sale, and the impairment of his contract is the more obvious when the property is struck off to a third person at a figure less than that subsequently fixed in the action on the bond as the 'fair market value.' In such a posture the mortgagee . is compelled to forfeit a part of the debt which his contract, valid and enforceable when made, gave him; at least his remedy for enforcing the contract has been taken away. . . . The statutory setting up of fair market value, standing stark and alone, as a self-sufficient, resistless fact in reduction of an otherwise collectible debt is such a restriction and limitation upon the mortgagee's right of recovery as to be an impairment of a preexisting contract, ." A later act provided for similar relief to mortgagors, but limited its operation to July 1, 1938, and declared that a serious public emergency existed. Nevertheless it also was held to be invalid in Sayre v. Duffy, 179 Atl. 459, 13 N. J. Misc. 458.
A statute in Texas provided that where the mortgagor could show that the property was sold on foreclosure for less than its actual value there should be allowed on the deficiency judgment a credit of the difference between the actual value and the sale price. The court declared it unconstitutional: Langever v. Miller, 76 S. W. (2nd) 1025, 1029, 124 Tex. 80, 88, saying: "It seems to us that the act before us does in fact operate upon and impair the 'obligation' of the contract, in that it nullifies that portion of the contract, read in the light of the then existing statute, which entitled the mortgagee to a deficiency judgment. But, if the statute be regarded as one which merely operates upon the remedy or remedies for the enforcement of the contract, it is obvious that it abridges the rights of the mortgagee resulting from the stipulations in the agreement in such manner as to make the contract less valuable, and denies him lawful remedies which existed when the instrument was executed without substituting therefor others equally valuable and equally effective."
Georgia enacted a law precluding the entry of a deficiency judgment unless the foreclosure sale was confirmed on a finding that the property brought its true market value. As to mortgages executed before its passage it was held invalid in Atlantic Loan Co. v. Peterson, 182 S. E. 15, 181 Ga. 266.
An act of Arizona took away the right to a deficiency judgment unless the mortgagee was able to prove that the value of the property when the mortgage was executed was not in excess of the amount remaining due on the debt after the foreclosure sale, or that the depreciation in value was caused by some act of the mortgagor; if he established such proof he could recover a deficiency judgment for the difference between the value of the property when the mortgage was given and the amount due on the debt. This act was declared unconstitutional in Kresos v. White, Superintendent of Banks, 54 Pac. (2nd) 800.
New York is apparently the only state which has sustained the validity of a mortgage deficiency judgment act similar to the Pennsylvania statute. The act temporarily stayed foreclosures and suits to recover the mortgage indebtedness if interest and taxes were paid. It also provided for a deficiency judgment to be fixed at the time of confirmation of the sale, allowing a credit for the market value of the property as determined by the court, or the sale price, whichever might be the higher. In actions to recover the indebtedness secured by the mortgage the debtor was to be allowed to set off the "fair and reasonable market value" of the property. In a brief opinion on the question of constitutionality, unsupported by any citation of authorities, the court upheld the act: Klinke v. Samuels, 190 N. E. 324, 264 N. Y. 144.
The change wrought by the Pennsylvania Mortgage Deficiency Judgment Act is one not merely of remedy but of substance. Whereas before its enactment the mortgagee after a sale on foreclosure had the important right to a judgment measured by the difference between the debt and the net proceeds realized from the sale, by the terms of the act this judgment is reduced by substituting the "fair value" of the property for the price obtained at the sale as the amount of the credit to be allowed. Incidentally it may be noted that in the use of the term "fair value" there is introduced an indefinite and to some extent meaningless standard. The amount of the credit can be measured only in terms of money into which the property may presumably be converted, and to fix a realizable money value, as distinguished from a use or rental value, is practically impossible unless the phrase "fair value" be held to be synonymous with fair market value. It was so construed in Market Street National Bank v. Huff, 319 Pa. 286, where it was said, pp. 287, 288: "Any other [value] would not be fair, but speculative." But the act says that the "fair value" is to be determined as of "the time of the sale," and yet the very raison d'etre of the act was the fact that the depression had caused the disappearance of a market for real estate and therefore of market values, for where there is no market there can be no market value. That this statement of the inherent weakness of the act is not merely academic or hypercritical is shown by the experience of the courts in hearings to establish deficiency judgments, where real estate experts, instead of testify ing to their opinions of value based on recent market sales of neighboring properties, are obliged, in the absence of such sales and of any actual market standard, to make a theoretical and arbitrary appraisement of the property as representing the "fair" value.
The facts in the present case do not call for a discussion of a further obviously untenable feature of the act, —that apparently the mortgagee must allow the "fair value" credit on his judgment even if he does not himself purchase the property at the foreclosure sale. In that event the mortgagee receives no consideration, either in money or real estate, for the enforced credit given by him to the mortgagor as representing a part payment which has no basis whatever in fact.
It has been argued that the Mortgage Deficiency Judgment Act provides merely for a new method of appraising the value of the mortgaged property; that formerly this was accomplished by a sheriff's sale, but, since that instrumentality has been rendered worthless for the purpose by reason of the emergency conditions, some other system had to be adopted; that therefore the change is merely an innocuous one of remedy. This argument, however, is not founded upon fact, because it was never true that the object of a sheriff's sale was to fix a valuation of the property; its only purpose was to execute a writ of sale in order that the mortgagee might, through the agency of a public official, convert the collateral security held by him into cash and thus realize whole or partial payment of the debt.
It is contended that it is unfair to allow a mortgagee, under existing conditions, to bid in the mortgaged property for a nominal sum, thereby unjustly enriching himself by acquiring the security and at the same time retaining the right to collect what might amount to almost the entire debt from other property of the mortgagor. It may be questioned whether mortgagees in many cases have been able to realize more from both acquisition of the property and collection on the bond than the amount of the debt, interest and costs. Even if, however, as a bidder at the foreclosure sale, a mortgagee obtains the property at a cheap price, he accomplishes this, as already stated, in an independent capacity and not as mortgagee; as a purchaser he obtains the same title as might have been acquired by any member of the general public in competitive bidding. Moreover, if the system of foreclosures in use does bring about undesirable results, it may be corrected by the parties originally contracting to adopt the appraisement method (assuming that an investor could be induced to loan money on the security of a mortgage with such a provision), or, as to future mortgages, by appropriate legislation. But as to existing mortgages the constitutions of nation and state alike prohibit any such impairment of the mortgagee's rights.
Defendants argue that plaintiff cannot question the constitutionality of the provision of the act that the fair value is to be allowed as a credit, because plaintiff's judgment was not actually subjected to such reduction; plaintiff having allowed a period exceeding six months to elapse without petitioning the court to fix the fair value, the judgment was marked satisfied in accordance with another provision of the act. It is claimed, therefore, that it is only of the latter that plaintiff can complain, but that such provision is merely equivalent to a statute of limitations and as such is constitutional. This contention is specious, for it overlooks the fact that plaintiff could not prevent the time limitation from obliterating its judgment except by submitting to the unconstitutional alternative of petitioning for the fixing of a reduced deficiency indebtedness. The penalty for refusing to accept a partial loss of a contractual right was thus the deprivation of the right altogether.
It is urged that the act gains validity by reason of its being limited in duration. But while the temporary suspension of a right may be justified under certain conditions, the Mortgage Deficiency Judgment Act during its period of operation acts permanently and finally upon the rights of the mortgagees affected by it. A statute which, though in operation only for a brief period, compels a creditor during that time to accept less than the amount due, or in a different kind of payment, is, as to him, as definitive in its effect as if it were permanently in force. So, under the present act, a mortgagee whose judgment is marked satisfied, or improperly reduced in amount, has no possibility of relief thereafter, and profits nothing by the shortness of time to which the act is limited. His contractual rights are irrevocably impaired. The real test is not the duration of the act, but whether the result which it brings about in a given case is permanent or temporary.
Nor is there greater merit in the argument that the act is nothing more than a moratory law, because a mortgagee was not obliged to foreclose while it was in force and thereby to subject himself to its illegal provisions. Even if it were to be admitted that a stay of foreclosure sales for eighteen months (the period of duration of the act) without any qualifications or conditions imposed upon mortgagor or terre-tenant, would not be invalid, the act does not in terms provide for such a stay nor purport to delay action in any manner. There is no indication of an intention of the legislature to compel mortgagees to postpone or abstain from foreclosures or evictions. The act seeks only to control the amounts of deficiency judgments in personam. It would be unprecedented legal doctrine to hold that, although its provisions are unenforceable, the only recourse of a creditor is to wait until the objectionable act expires. Being un constitutional in its requirement of the crediting of the "fair value" on the judgment, it cannot gain the attribute of validity by providing for its own limitation. There is an obvious difference between an act the purpose and express provision of which is the prescription of a reasonable and safeguarded stay, and one which attempts to accomplish an illegal deprivation of the substantive rights of a creditor, even if its invalid operation is only for a temporary period. To sanction a contrary view would be to permit the legislature to enact legislation by the device of a continuity of statutes which, if fused into one, would admittedly be prohibited by the constitution. In this very case a statute was enacted on July 1, 1935, P. L. 503, the date of expiration of the original act, which in substance renews the provisions of the Act of January 17, 1934, placing still greater restrictions upon recovery of the mortgage indebtedness, and effective until June 30, 1937; it provides in section 11 that "This act shall be deemed and shall be construed to be a continuation of the provisions of the act, approved the seventeenth day of January, 1934, . . . and all rights vested, or duties or obligations imposed, or rights forfeited under the provisions of said act, shall be deemed continued, so vested, imposed or forfeited under this act and enforceable under this act, notwithstanding the expiration of said act of January seventeenth, 1934, by its own limitation."
A plea of justification as emergency legislation is invoked in defense of the statute. It is urged that the exigencies of the times require a certain degree of obliviousness to the mandates of the constitution and to the decisions which have construed them. Under our constitutional system, however, emergency cannot create a power nor diminish restrictions: Ex Parte Milligan, 4 Wall. 2, 120, 121; Wilson v. New, 243 U. S. 332, 348; Home Building & Loan Association v. Blaisdell, 290 U. S. 398, 425, 426; A. L. A. Schechter Poultry Cory. v. United States, 295 U. S. 495, 528, 529. A necessity that is higher than the constitution can have no place in American jurisprudence; it can be met only by constitutional amendment. "No doctrine," said the court in Ex Parte Milligan, 4 Wall. 2, 121, "involving more pernicious consequences, was ever invented by the wit of man than that any of its [the constitution's] provisions can be suspended during any of the great exigencies of government. Such a doctrine leads directly to anarchy or despotism ."
Finally, it is claimed that this act is an exercise of the police power and as such overrides all barriers that otherwise might be sufficient to invalidate it. It is true, generally speaking, that the obligations of contracts cannot be allowed to impede the exercise of the police power, which is always paramount: Manigault v. Springs, 199 U. S. 473, 480; Marcus Brown Co. v. Feldman, 256 U. S. 170, 198; Home Building & Loan Association v. Blaisdell, 290 U. S. 398, 434, 435; Commonwealth v. Widovich, 295 Pa. 311, 318; 6 R. C. L. 199, § 195. It is also true that the original conception of the police power, which confined it to the protection of public health, safety and morals, has broadened so as to include many phases of the general welfare which, in earlier periods of constitutional history, would not have been deemed to be within its scope: Manigault v. Springs, 199 U. S. 473, 481. But there nevertheless remain boundaries which can be mapped with some degree of definiteness. To reduce the obligations of debtors on judgments in personam cannot be said to be an exercise of the police power. The Mortgage Deficiency Judgment Act does not prevent foreclosures or the taking of possession by mortgagees; it does not affect physical living conditions. It is not in any sense, therefore, analogous to the legislation involved in the rent cases, which dealt with the housing shortage immediately following the world war. Where large portions of the population are deprived of habitations the public health may well be endangered. But the Mortgage Deficiency Judgment Act does not fall into such a category. As a matter of fact instances are not likely to be numerous in which a debtor suffers mortgaged property to be bid in at a nominal price if he is financially responsible and the amount of a deficiency judgment against him is therefore a matter of practical concern. Indeed the bidding in of property at sheriff's sales for a trifling sum is not a practice of recent origin. The real evil created by the depression has not been the actual or potential enforcement by mortgagees of deficiency judgments, but the increased number of foreclosures due to inability of mortgagors to meet the terms of their indebtedness.
If it seem harsh in a period of economic adversity to deny to the state the power to give relief to debtors even though to some extent contractual obligations may thereby be impaired, it must be remembered that the chief purpose of the constitutional prohibition was to protect the integrity of contracts especially in those times when the temptation to yield to a policy of repudiation might be intensified by an era of financial depression. A careful reading of American history covering the period of the articles of confederation reveals the fact that it was the practice by the states, at that time of grave economic distress, of enacting repudiatory legislation, — in some instances treating creditors as veritable outlaws, — that led to the insertion in the constitution of the clause against the impairment of contracts. That clause did much to restore public and private confidence and reinvigorate commercial intercourse.
While a court faced with the task of interpreting the constitution should do so in the broad spirit appropriate to the generality and permanency of that instrument, and while it should also be realistic in facing current conditions, it would be recreant to its duty if it sanctioned the whittling away of constitutional restrictions because of a belief, however well-founded, in the temporary desirability of such action. Whatever validity the Mortgage Deficiency Judgment Act of 1934 may have as to mortgages executed after its passage, it is violative both of the federal and state constitutions when applied to the contractual rights of plaintiff in the present case.
The order of the court below dismissing plaintiff's petition to strike off the satisfaction entered upon its judgment against defendants is reversed; the rule is reinstated and is herewith made absolute.
In Market Street National Bank v. Huff, 319 Pa. 286, 288, it was said of this act: "We have not considered the constitutionality of the act before us, as that question was not raised."
Federal Title & Mortgage Guaranty Co. v. Lowenstein, 166 Atl. 538, 113 N. J. Eq. 200; Suring State Bank v. Giese, 246 N. W. 556, 210 Wis. 489; Monaghan v. May, 273 N. Y. Supp. 475 (disapproved in Emigrant Industrial Savings Bank v. Van Bokkelen, 199 N. E. 23, 269 N. Y. 110). Contra: Kenly v. Huntingdon Building Association, 170 Atl. 526; 166 Md. 182.
The rule is not necessarily applicable as between the mortgagee and other creditors of the mortgagor, or as between the mortgagee and third persons generally. See Bugh's Estate, 95 Pa. Superior Ct. 29, 34; Weightman v. Union Trust Co., 208 Pa. 449. The rule in bankruptcy, unlike the general equity rule, is that proof of a claim is limited to the difference between the amount of the debt and the value of the security held or sold by the creditor: In re Davis, 174 Fed. Rep. 556; In re Dix, 176 Fed. Rep. 582; In re McAusland, 235 Fed. Rep. 173, 189; In re Soltmann, 238 Fed. Rep. 241, 244; In re Thompson, 276 Fed. Rep. 313; In re Morgan, 39 Fed. Rep. (2nd) 489, 491; Bankruptcy Act of 1898, sec. 57h. The federal bankruptcy rule was adopted in Pennsylvania, in United Security Trust Co. Case, 321 Pa. 276, in insolvency proceedings under the administration of the secretary of banking. It is to be noted, however, that in bankruptcy, and in insolvency proceedings generally, the problem is not one between debtor and creditor, but among creditors inter se. See Merrill v. National Bank of Jacksonville, 173 U. S. 131.
In Palairet's Appeal, 67 Pa. 479, Chief Justice Sharswood said, p. 493: "No one has ever supposed that an Act of Assembly could authorize, in the case of a lawful existing contract, one of the parties to tender a collateral thing in satisfaction or extinguishment of it, whatever the value of that thing might be as compared with the damage sustained by the breach. Yet, in effect, that is just what is done by this act. The covenant is to pay an annual rent forever; a jury are authorized to say what principal sum shall be a satisfaction and extinguishment of that covenant; a collateral thing not provided for in the contract, and which might as well be anything else than money."
See W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, 60.
If the parties expressly make a certain remedy an integral part of their contract, they place it beyond the power of the legislature to alter it so far as their rights thereto are affected, as, for example, in the case of a debtor's waiver of exemption or stay of execution: Billmeyer v. Evans & Rodenbaugh, 40 Pa. 324, 327; Breitenbach v. Bush, 44 Pa. 313, 318; Lewis v. Lewis, 47 Pa. 127; White v. Crawford, 84 Pa. 433, 437; Weist v. Wuller, 210 Pa. 143, 145; Coley v. Guffey, 248 Pa. 523, 528; Philadelphia Trust Co. v. Northumberland County Traction Co., 258 Pa. 152, 165.
The Act of June 16, 1836, P. L. 755, sec. 3, stayed executions against freeholders in certain cases for a period ranging from six to twelve months. The Act of July 16, 1842, P. L. 407, stayed judicial sales of real property for one year when less than two-thirds of the appraised value was bid. The Act of October 13, 1857, P. L. of 1858, 611, stayed executions against freeholders for a maximum period of one year. So did the Act of May 21, 1861, P. L. 770; it also stayed execution against a debtor if the creditors holding at least two-thirds of the claims against him so agredd. The Acts of April 18, 1861, P. L. 408, April 11, 1862, P. L. 484, April 28, 1899, P. L. 133, sec. 59, and April 9, 1915, P. L. 80, sec. 60, granted moratory relief to persons in military service. The Act of March 23, 1877, P. L. 29, granted a stay of execution sales of real estate, if the land could not be sold for a minimum of two-thirds of its appraised value. The Act of May 18, 1933, P. L. 826, which expired March 31, 1935, but was re-enacted by the Act of March 27, 1935, P. L. 7, and continued in force until March 31, 1937, conferred on the court the power to stay any writ of execution against dwellings for such period and on such terms as it might deem proper, if the conditions in the case seemed to warrant such relief because of the economic emergency working serious inequity.
Where, however, the term of service was indefinite, as "for the term of the war," the stay under the act, being uncertain and unascertained, was stricken down: Clark v. Martin, 49 Pa. 299. The same fate met the Act of May 21, 1861, P. L. 770, which provided for a stay, which might be unlimited, upon agreement to that effect of creditors whose claims exceeded two-thirds of the indebtedness: Bunn, Raiguel & Co. v. Gorgas, 41 Pa. 441.
Constitutional: Reiman v. Rawle, 68 S. W. (2nd) 470, 188 Ark. 983; Des Moines Joint Stock Land Bank of Des Moines v. Nordholm, 253 N. W. 701, 217 Iowa 1319 (extending period of redemption) ; Metropolitan Life Ins. Co. v. Morris, 159 So. 388, 181 La. 277; Russell v. Battle Creek Lumber Co., 252 N. W. 561, 265 Mich. 649; Wilson Banking Co. Liquidating Corp. v. Colvard, 161 So. 123, 172 Miss. 804; Klinke v. Samuels, 190 N. E. 324, 264 N. Y. 144;
Unconstitutional: Alliance Trust Co., Ltd., v. Hall, 5 Fed. Supp. 285 (D. Ct. D. Idaho); State ex rel. Cleverings v. Klein, 249 N. W. 118, 63 N. Dak. 514 (extending period of redemption); State ex rel. Roth v. Waterfield, 29 Pac. (2nd) 24, 167 Okla. 209; Travelers' Ins. Co. v. Marshall, 76 S. W. (2nd) 1007, 124 Tex. 45; Hanauer v. Republic Building Co., 255 N. W. 136, 216 Wis. 49.
In Chadwick v. Moore, 8 W. & S. 49, 50, Chief Justice Gibson distinguished the Pennsylvania Act of 1842 from the Illinois statute involved in McCracken v. Hayward by stating that in the former the stay of execution was for a year if the land did not bring the stipulated minimum, and the creditor could then proceed as if the execution had not been suspended, but "The statute of Illinois had no such limitation. Its denial of execution was perpetual, except on terms not originally contemplated; and it not merely impeded the remedy, but changed the conditions of the right. The statute of Pennsylvania suspends the remedy only; ."
To the same effect Edwards v. Kearzey, 96 U. S. 595. See also W. B. Worthen Co. v. Thomas, 292 U. S. 426; Penrose v. Erie Canal Co., 56 Pa. 46.
The Frazier-Lemke Act was amended on August 28, 1935, by reducing the time for stay of proceedings from five to three years, and authorizing the court to shorten the period of delay still more if the emergency ceased to exist in the particular locality. Nevertheless this second Frazier-Lemke Act also was declared unconstitutional in U. S. National Bank of Omaha v. Pamp, 83 Fed. (2nd) (C. C. A. 8) 493; In re Lowmon, 79 Fed. (2nd) (C. C. A. 7) 887; In re Young, 12 Fed. Supp. (D. C. S. D. Ill.) 30; In re Sherman, 12 Fed. Supp. (D. C. W. D. Va.) 297; In re Lindsay, 12 Fed. Supp. (D. C. N. D. Iowa) 625; In re Tschoepe, 13 Fed. Supp. (D. C. S. D. Texas) 371; In re Schoenleber, 13 Fed. Supp. (D. C. D. Nebr.) 375. Contra: In re Bennett, 13 Fed. Supp. (D. C. W. D. Mo.) 353.
This decision was restricted in its application in subsequent cases: Feiber Realty Corp. v. Abel, 191 N. E. 847, 265 N. Y. 94; Weisel v. Hagdahl Realty Co., 271 N. Y. Supp. 629; Emigrant Industrial Savings Bank v. Van Bokkelen, 269 N. Y. 110; Provident Savings Bank & Trust Co. v. Steinmetz, 270 N. Y. 129. It was also questioned to some extent in New York Life Ins. Co. v. H. & J. Gattag Corp., 192 N. E. 481, 265 N. Y. 292. But it was applied, without further discussion of the question of constitutionality, in City Bank Farmers Trust Co. v. Ardlea Corp., 196 N. E. 34, 267 N. Y. 224; and Clarke v. Schumann, 269 N, Y. 60.
In Connecticut Mutual Life Ins. Co. v. Cushman, 108 U. S. 51, 64, and Hocker v. Burr, 194 U. S. 415, the distinction is pointed out between mortgagee and purchaser at the foreclosure sale in regard to the impairment of contractual obligation. It is the mortgagee's rights as such, not as purchaser, that are determined by the mortgage contract and the law governing it at the time of its execution.
Block v. Hirsh, 256 U. S. 135; Marcus Brown Co. v. Feldman, 256 U. S. 170; Edgar A. Levy Leasing Co. v. Siegel, 258 U. S. 242; Chastleton Corp. v. Sinclair, 264 U. S. 543.
Neither, for the same reason, is it similar to the Acts of May 18, 1933, P. L. 826, and March 27, 1935, P. L. 7, which were designed to stay evictions from dwelling houses.
Fisher Ames, "Eulogy on Washington," Works, ed. of 1809, p. 120.
See opinion of Mr. Justice Swayne in Edwards v. Kearzey, 96 U. S. 595, 604 et seq., and dissenting opinion of Mr. Justice Sutherland in Home Building & Loan Association v. Blaisdell, 290 U. S. 398, 453 et seq.