Judicial Sale Doesn’t Stifle Mortgage’s Priority Lien Interest
Written by: Alan Nochumson
What almost happened in In re Estate of Landis, 2014 Pa. Super. LEXIS 9 (Jan. 15, 2014), before the Pennsylvania Superior Court intervened is a cautionary tale as to why every attorney who practices law should “paper the file,” so to speak, in order to ensure that a straightforward matter does not escalate into something much more and different than anticipated.
In 2004, Charles S. Landis obtained a mortgage loan of $138,450 on his residence located in Souderton, Montgomery County, Pa., and the mortgage was duly recorded with the Montgomery County Recorder of Deeds office, the opinion said.
According to the opinion, in 2011, after Landis died, his will was probated. At the time of his death, PNC Bank N.A. held the mortgage encumbering the residential property and that mortgage was the first and only secured lien on the property, the opinion said.
Soon thereafter, Landis’ executrix filed a petition, seeking leave from the Orphans’ Court to sell the mortgaged property, pursuant to 20 Pa. C.S. § 3353, the opinion said. In the petition, the executrix estimated that the debts of the estate, including the balance then due on the residential mortgage, well exceeded its assets, thus, making the estate insolvent, the opinion said. In the petition, the executrix alleged that the balance of the mortgage loan was $117,320, the opinion said.
When PNC filed no objections to the petition or the sale, the Orphans’ Court issued a decree, granting the petition, the opinion said. In its decree, the Orphans’ Court authorized a “judicial sale” under 20 Pa. C.S. § 3353 and discharged all liens on the residential property, so it could be transferred with a clear title, the opinion said.
In 2012, the sale on the real property closed and the net sale proceeds of the sale was $120,761, the opinion said.
The executrix then filed an accounting of the estate that included a proposed distribution of the estate, in which the estate would first pay the costs of estate administration, the executrix’s commission, the estate’s attorney and accountant’s fees, as well as outstanding funeral and medical expenses, and then pay PNC as an unsecured creditor of the estate, the opinion said.
After the accounting was filed, PNC filed a petition for distribution of the sale proceeds, arguing its entitlement to all of the sale proceeds, as the amount then due under the mortgage lien was $123,237, more than the sale proceeds being held by the estate, the opinion said.
PNC also filed objections to the executrix’s accounting and proposed distribution of the estate’s assets, the opinion said.
Afterward, the executrix filed a petition for adjudication, including the executrix’s proposed schedule of distribution, the opinion said. In the proposed schedule of distribution, the executrix again listed PNC as an unsecured creditor, indicated its subordinated position in the distribution scheme to the claims of several unsecured creditors of the estate, and proposed an allocation of $18,223 or 99.6 percent of the remainder of the estate to PNC, the opinion said.
The Orphans’ Court subsequently dismissed PNC’s petition for distribution as unnecessary in light of its filed objections to the executrix’s accounting and proposed schedule of distribution.
The Orphans’ Court then entered an order confirming the executrix’s accounting and ordered distribution of the estate per the executrix’s proposal. In doing so, the Orphans’ Court determined that the judicial sale extinguished PNC’s lien outright, along with its right of first priority to distribution of the net sale proceeds.
PNC appealed the Orphans’ Court’s ruling to the Pennsylvania Superior Court.
The appeal essentially involved the intersection of several statutory provisions.
In Pennsylvania, 42 Pa. C.S. § 8152 specifically provides that judicial sales of real property do not generally impair prior mortgage liens.
However, under Section 8152(b), a judicial sale may divest a mortgage lien if the Orphans’ Court authorizes such divestiture under two sections of the Probate, Estates and Fiduciaries Code (PEF), 20 Pa. C.S. § 3353 and 20 Pa. C.S. § 3357.
Section 3353, which is titled “order of court,” does not deal with the distribution of sale proceeds and provides only that the Orphans’ Court may authorize a judicial sale if it finds the sale is necessary for the proper administration and distribution of the estate, while Section 3357, which is titled “title of purchaser,” allows a court to discharge mortgage liens pursuant to a judicial sale only with the lienholder’s written consent. Section 3392, which is titled “classification and order of payment,” establishes an order of priority only for unsecured creditors against insolvent estates, while Section 3381, which is titled, “liens and charges existing at death impaired,” provides that “nothing in this code shall be construed as impairing any lien or charge on real or personal estate of the decedent which existed at his death.”
On appeal, PNC argued that the Orphans’ Court erred in interpreting 42 Pa. C.S. § 8152 and the related PEF Code provisions to extinguish its mortgage lien by virtue of the judicial sale and to subordinate its claim against the estate to those of other unsecured creditors in the distribution of the sale proceeds.
The Superior Court first addressed whether the Orphans’ Court erred in determining that the judicial sale extinguished PNC’s priority lien interest in the real property.
Citing to Section 3357 of the PEF Code, the Superior Court concluded that the Orphans’ Court may discharge existing mortgage liens upon the sale of the encumbered property if the mortgagee files its written consent with the Orphans’ Court.
As the Superior Court observed, PNC did not consent in writing to allow the judicial sale to divest the real property of its lien. Although PNC allowed the judicial sale to take place, the Superior Court refused to interpret PNC’s non-opposition to the judicial sale as consent required under Section 3357. Rather, according to the Superior Court, following the judicial sale, the lien previously encumbering the real property attached to the sale proceeds, because the judicial sale occurred so that the estate could, among other things, use the sale proceeds to satisfy the secured lien against the previously mortgaged property.
As such, the Superior Court reasoned that PNC consented to the judicial sale but not to the extinction of its lien when it came to its right to collect the sale proceeds.
The Superior Court next discussed PNC’s lien priority status to the sale proceeds as compared to the estate’s unsecured creditors, such as the executrix and the estate’s attorneys and accountants, to name a few.
The Superior Court believed that the executrix’s reliance upon Section 3392 of the PEF Code was misguided. In its view, Section 3392 “determines only the relative rights of unsecured creditors” and “does not affect the ultimate priority of secured claims, such as mortgage liens and judgment liens properly recorded before the decedent’s death, which have first priority in an estate’s distribution.”
Relying upon Section 3381 of the PEF Code, the Superior Court concluded that the provisions of the PEF Code pertaining to unsecured claims upon an estate had no effect on the priority of PNC’s secured claim.
In a nutshell, the Superior Court recognized that PNC had a superior claim to the distribution of the sale proceeds as compared to any of the unsecured claims being made against the estate.
LESSONS LEARNED
The Superior Court’s ruling in Landis highlights the necessity of strictly following the rules and procedures of our courts. While PNC did not object to the real property being disposed of at a judicial sale, it would have been more prudent if it had filed a formal response to the petition, setting forth in writing its lack of opposition to the judicial sale but its insistence that it maintain its priority lien interest as to the sale proceeds.
It seems to me that PNC’s lack of formal response to the petition prior to the Orphans’ Court issuing an order allowing the judicial sale to take place left open the door to some of the estate’s unsecured creditors who were attempting to take advantage of the situation.
Reprinted with permission from the February 18, 2014 edition of The Legal Intelligencer © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
