The United States District Court for the Eastern District of Pennsylvania, in a memorandum opinion denying a bank’s request to dismiss a complaint, found that a bank violated the Deficiency Judgment Act when it received payment from the sale of a residential property on which it held a second mortgage as payment towards an earlier deficiency judgment obtained after it foreclosed on the debtor’s commercial property. Munoz v. Sovereign Bank, 06-2876 (September 18, 2006).
The Munoz’s borrowed money from Sovereign Bank to purchase a commercial property and business but they subsequently defaulted on the loan. The bank foreclosed and obtained a judgment for $1.14 million. It then executed on the property and purchased it at Sheriff’s sale for $31,000. The Munoz’s residential property was then sold pursuant to a judicial sale. Sovereign bank, which also held a second mortgage on the residential property, received $587,000 toward the satisfaction of its judgment obtained relative to the commercial property. The Munoz’s sued claiming that the bank failed to comply with Pennsylvania’s Deficiency Judgment Act, 42 Pa. C.S. § 8103.
The Deficiency Judgment Act prevents creditors from purchasing a debtor’s real property, often below fair market value, and continuing to execute on the debtor’s other property to satisfy the judgment without first considering the fair market value of the property it executed on. In other words, the bank must determine the balance due on the judgment by subtracting the property’s fair market value, not the price it paid to purchase the property, from the amount of the deficiency judgment. A creditor has six months to petition the court to fix the fair market value. If the creditor fails to do so, the court, upon petition of the debtor, may mark the entire judgment satisfied.
The bank argued that it had not violated the statute because, among other things, it did not execute against the residential property and the time in which it was required to fix the fair market value of the commercial property had not expired. The district court disagreed. It stated that the Deficiency Judgment Act requires the creditor to fix the fair market value by petitioning the court before “seeking to collect the balance due . . .” not before executing against the second property. Thus, Sovereign Bank’s obligations under the statute arose at the time it received the deed to the commercial property and it violated the act when it continued to collect the debt on the commercial property without first having determined the property’s fair market value. The district court also stated that the sixth month period in which a creditor has to fix the fair market value does not give a creditor a six month window in which to undermine the protection that the Deficiency Judgment Act gives the debtor.