May 14, 2015
EMC Mortgage, LLC v. Biddle, 2015 PA. Super. 79, ___ A.3d ___ (2015), involved the foreclosure of a FNMA form of residential mortgage. After it had obtained a default judgment, the foreclosing lender sought to reassess damages to recover the following additional damages: post-judgment interest, late charges, property inspections, escrow deficiency for taxes and insurance, cost of suit and title, legal fees and mortgage insurance premiums. The defendant filed an answer to the petition, which had not been verified, but the court of common pleas granted the petition.
The mortgagor appealed from the reassessment of damages. On appeal, the Superior Court held that certain of the additional damages were not recoverable, and that the lower court was required to hold a hearing to determine the appropriateness of the remaining items.
The key to the court's decision was that once the judgment was obtained, the mortgage "merged" into the judgment and ceased to exist. Therefore, items that the mortgagor were required to pay during the life of the mortgage were no longer obligations of the mortgagor unless the mortgage clearly stated that the obligations were intended to survive the judgment of mortgage foreclosure.
Looking first to the provisions of the mortgage that survived the judgment, the court focused on this language:
"[Lender] shall be entitled to collect all expenses incurred in pursuing the remedies provided in this paragraph 18, including, but not limited to, attorney's fees and costs of title evidence."
Accordingly, attorney's fees and title report fees were approved, although because this was a residential mortgage subject to Act 6, 41 P.A. §206, before approving these amounts, the court had to determine if they were reasonable, and with respect to attorney fees, the court was required to provide a "lodestar" analysis of the rate and services actually provided.
As for other post-judgment expenditures, such as late charges, property inspections, mortgage insurance premiums, and escrow deficits, the court precluded recovery because they were not specifically listed as surviving judgment, unless the mortgagee could demonstrate "how its pursuit of a foreclosure remedy necessitated those outlays."
Late fees, post judgment outlays for taxes and insurance were specifically disallowed as not surviving the judgment. Because the note had not been attached to either the original complaint or the petition to reassess damages, the court did not consider whether the disallowed items were recoverable apart from the promises contained in the mortgage itself.
Finally, post judgment interest was allowed, but because counsel had neither attached the note to the original complaint nor the petition, and the petition failed to disclose how the post judgment interest had been computed (principal balance, applicable rate and time period), the lower court was required to augment the record in this regard as well.
The outcome of this case leads to a number of recommendations to be sure that most, if not all, of a mortgagee's losses are recovered if a loan goes into default.
First, as to commercial loans, revisit the language of the notes, mortgages and other loan documents to specify exactly which cash outlays will survive the entry of a judgment, and to provide that all expenses actually incurred in connection with the recovery of the loan balance, including post judgment appraisals, inspections, title reports, title insurance premiums, tax payments, insurance premiums, and perhaps the expenses of managing and selling the collateral, are all recoverable.
Second, although a residential lender is probably committed to approved FNMA/FHLMC loan forms for residential loans subject to Act 6, when a foreclosing lender reviews complaints or petitions prior to verification, it should be sure that the note is attached to the complaint and/or any petition to reassess damages, that the court documents spell out the computation of interest, late charges and prepayment premiums, if any, and that evidence exists to justify other recoverable expenses. Much of the difficulty in Biddle could have been avoided if counsel had been more careful in drafting the petition to reassess damages, and had attached actual receipts or invoices for the claimed expenses.
We would be happy to review commercial loan documentation to ensure maximum compliance with Biddle.
Finally, on a related note, during 2014, the General Assembly passed a comprehensive overhaul of the statutory law governing powers of attorney, effective prospectively beginning January 1, 2015. Earlier this year, the thought arose that these new requirements might apply to confessions of judgment/warrants of attorney contained in loan or lease documents entered into since January 1, 2015, and that the Act could invalidate these provisions. We understand that a corrective bill has been introduced, but to our knowledge, it has not yet been adopted. We recommend that you do not attempt to exercise these remedies until it is clear that the legislature has corrected this situation, and has done so retroactively until January 1, 2015. Future commercial loans and non-residential leases containing warrants of attorney should specifically waive those provisions of the 2014 amandments that impose duties of loyalty on attorneys-in-fact in this context.
