The
following cases present the position of the U.S. Supreme Court and Pennsylvania
courts on certain procedural and substantive due process considerations in
mortgage foreclosure. There is also a
summary of Pennsylvania notice requirements imposed in certain cases by statute
or the Rules of Civil Procedure. The
usual DISCLAIMER applies.
A. FORECLOSURE AND PROCEDURAL DUE PROCESS
CONSIDERATIONS:
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) ("An elemental
and fundamental requirement of due process in any proceeding which is to be
accorded finality is notice reasonably calculated, under all the circumstances,
to apprise interested parties of the pendency of the action and to afford them
an opportunity to present their objections.").
Mennonite Board of Missions v. Adams, 462 U.S. 791 (1984) (mortgagee whose
mortgage would be divested by tax sale entitled to personal notice of sale).
First Pennsylvania Bank v. Lancaster Tax Claim Bureau, 470 A.2d 938 (Pa. 1983) (mortgage not divested by real estate tax
sale where mortgagee could have been, but was not, given notice of sale;
Mennonite Board of Missions v. Adams followed).
In re Upset Sale, Tax Claim Bureau of Berks County (Nolfe v.
Estate of Schumo), 479 A.2d 940 (Pa. 1984) (lien of judgment
not divested by real estate tax sale where judgment creditor could have been,
but was not, given notice of sale; judgment creditors are “no less entitled to
due process protections than mortgagees”).
In re Tax Claim Bureau of Lehigh County 1981 Upset Tax Sale
Properties, 507
A.2d 1294 (Pa. Cmwlth. Ct. 1986)
(failure to give notice of tax sale to mortgagee does not invalidate tax sale, but
mortgage is not discharged by sale).
First Eastern Bank, N.A. v. Campstead, Inc., 637 A.2d 1364 (Pa. Superior Ct.
1994). (Sheriff's sale set aside for
failure to give notice to terre tenant (In Pennsylvania, one who has
acquired title after a a mortgage or judgment lien has been perfected) that
original sale had been continued, even though an officer of terre tenant was
present at continued sale. Officer's
presence at sale was fortuitous and did not satisfy constitutional due process
purpose of notice requirement. Court refused to follow In re Tax Claim
Bureau of Lehigh County, 507 A.2d 1294 (Pa. Cmwlth. Ct. 1987), allocatur
denied, 523 A.2d 346, which held
that taxpayer could not set aside tax sale for lack of formal notice where
taxpayer had actual notice of time and date of postponed sale.)
Deer Park Lumber, Inc. v. Major, 559 A.2d 941 (Pa. Superior Ct. 1989), allocatur denied,
525 A.2d 582 (Pa. 1990) (the cemetery case — defective service of process by publication).
B. MORTGAGE FORECLOSURE AND SUBSTANTIVE DUE
PROCESS CONSIDERATIONS (ADEQUACY OF SALE PRICE):
Scott v. Adal Corp., 509 A.2d 1279 (Pa. Superior Ct. 1986), allocatur denied
523 A.2d 1132 (Pa. 1987) (Pennsylvania
law does not regard inadequacy of price as a sufficient reason to set aside a
sheriff's sale. The court rejected the
Delaware court-made rule that a sale will be set aside where the purchase price
is less than 50% of the fair market value of the property as per se a sale at a
grossly inadequate price; See, e.g., Home Beneficial Life Ins. Co. v. Blue
Rock Shopping Center, 379 A.2d 1147 (Del. Super. 1977).).
Blue Ball National Bank v. Ballmer, 2002 Pa. Super.329, ___ A.2d ____ (2002).
Appellant defaulted on three promissory notes and mortgages held by the Bank on four tracts of land. In Appellant's Chapter 12 bankruptcy, Bank obtained relief from the automatic stay and was permitted to proceed with foreclosure. In its foreclosure action, the Bank obtained a judgment for $1,037,316.97. Shortly before the scheduled sale, Tract 1 was rezoned to permit a more intensive use. Thereafter the Bank received a copy of a sales agreement between Appellant and X for the sale of tract 1 at a purchase price of $1,500,000.00. The Bank refused to postpone the Sheriff's sale and the sale proceeded as scheduled. When the offered for sale as separate tracts, the high bids were too low to satisfy the Bank's debt. Therefore, the Sheriff offered all four tracts for a single price, for which a successful bid of $1,249,000 was entered and accepted.
Appellant sought to set aside the sale alleging that the successful bid was grossly inadequate in view of the $1,500,000.00 offered for tract 1 alone. At on valuation hearing, the parties presented conflicting evidence. The trial court accepted the testimony of the Bank's expert and ruled that the sale purchase price was not grossly inadequate.
On appeal, the Superior Court held that the facts of this case did not show sufficient gross inadequacy to justify setting aside the sale. As to when a sale may be set aside for gross inadequacy of the sale price, the court stated:
“[¶8] . . . The sale may be set aside . . . where ‘upon proper cause shown’ the court deems it ‘just and proper under the circumstances.’ Pa.R.C P. 3132 The burden of proving circumstances warranting the exercise of the courts equable powers is on the petitioner. Courts have entertained petitions and granted relief where the validity of the sale proceedings is challenged, or a deficiency pertaining to the notice of sale exists or where misconduct occurs in the bidding process.
"[¶9] Where the sale is challenged based on the adequacy of the price or courts have frequently said the mere inadequacy of price standing alone is not a sufficient basis for setting aside a Sheriff's sale. However where the ‘gross inadequacy’ in the price is established courts have found proper grants to set aside a Sheriff’s sale. The courts have traditionally looked at each case on its own facts. “It is for this reason that the term ‘grossly inadequate price’ has never been fixed by any court at any given amount or any percentage amount of the sale.” Further, it is presumed that the price received at a duly advertised public sale is the highest and best obtainable. When reviewing a trial court's ruling on a petition to set aside a Sheriff's sale, it is recognized that the court's ruling is a discretionary one under will not be reversed on appeal unless there is a clear abuse of that discretion.” (Citations omitted.)
The trial court did
not abuse its discretion in concluding that a sale price of 76% of the
appraised value was not “grossly inadequate” or “shocking to the conscious
conscience” of the court.
Note: The Blue Ball opinion seems to be
laying the groundwork for a distinction between a sale price that is “merely
inadequate” and one that is “grossly inadequate” in an appropriate case. The
Restatement (Third) of Property —
Mortgages § 8.3 would agree, establishing “grossly inadequate” as the
standard for setting a foreclosure sale, whether a judicial sale or one had
under a power of sale. Comment b
to this section provides, in part:
“Gross inadequacy” cannot be precisely
defined in terms of a specific percentage of fair market value. Generally,
however, a court is warranted in invalidating a sale were the price is less
than 20 percent of fair market value and, absent other foreclosure defects, is
usually not warranted in invalidating a sale that yields in excess of that
amount. While the trial court’s
judgment in matters of price adequacy is entitled to considerable difference,
and extreme cases a price may be so low (typically well under 20% of fair
market value) that it would be an abuse of discretion for the court to refuse
to invalidate it.
You may want to consider this question again when we come to BFP v. Resolution Trust Corp., 511 U.S. 531
(1984), p. 812.
B. PENNSYLVANIA MORTGAGE FORECLOSURE NOTICE
REQUIREMENTS:
Mortgage
foreclosure in Pennsylvania is governed by Pa.R.C.P. Rules 1141-1164 (Actions to Foreclose a Mortgage), 3180-3183
(Judgments in Mortgage Foreclosure), and 8103 et seq. (Deficiency
Judgments).
Pa. R.C.P. 3129.1 to 3129.3 governs notice of the execution (foreclosure) sale be given by
the sheriff by posting and by publication, and be served by the sheriff or any
competent adult on the defendant and the property owner if other than the
defendant), and by regular mail on persons having an interest of record (or any other interests in the
property to be sold of which the plaintiff has knowledge) which may be affected
by the sale. In the case of the
defendant and the property owner, notice may be given by personal service or by
certified mail with a return receipt to be signed by the party or its agent;
all others notice may be given "by ordinary mail" with the sender
obtaining a Proof of Mailing Certificate from the Post Office. A return of notice given by ordinary mail
does not invalidate the sale; but see Tracy & McCarton v. Chester County
Tax Claim Bureau, supra.
In addition
to service of process to make persons parties to proceeding at the institution
of mortgage foreclosure proceedings, notice of the foreclosure sale, and other
notice provisions of Pa. R. Civ. P., two statutes require additional notices to
mortgagees of residential property under certain conditions: (1) The Loan Interest & Protection Law, 41 P.S. § 101 et seq.
(Act 6) and (2) The Homeowners' Emergency Assistance Act, 35 P.S. sec. 1680.401 et seq. (Act 91).
Act No. 6. Act 6 applies only to residential mortgages
in an initial amount of $50,000 or less.
Section 403 requires that the mortgagee use a statutory form of notice continuing means of curing
default before initiating foreclosure proceedings. Notice must be given "by registered or certified
mail." The cure provisions of §
404 may apply if the mortgagee gives an Act 6 notice, even though the mortgage
may not be subject to Act 6.
Act No. 91: See particularly § 403c. Prior to foreclosure of mortgage subject to
Act 91, mortgagee must sent the debtor a notice in a form prepared by the
Pennsylvania Housing Finance Agency by regular mail; notice is deemed received
3 business days after the date of mailing as shown on a U.S. Postal Service
Certificate of Mailing.
Note: The 3rd Circuit has held that the Farmers Home Administration need not comply
with Pennsylvania statutes when it utilizes a federal court to foreclose a
mortgage (equity of redemption) in Pennsylvania . U.S. v. Spears, 859 F.2d 284 (3d Cir. 1988).
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