Lenders Have An Interest In The Post-Judgment Rate

In Pennsylvania, once a mortgage foreclosure claim is reduced to judgment, the legal interest rate of six percent per annum applies unless the loan documents evidence a clear intent to continue the contractual interest rate post-judgment.

Background of the Dispute

In a recent decision, the Philadelphia Court of Common Pleas in Wood v. Peduto discussed whether loan documents allowed co-executors of plaintiffs’ estate to collect interest post-judgment at the contractual rate rather than the legal rate of 6 percent per annum against a terre-tenant party who had a default judgment entered against him after the original judgment was revived.

In the late 1980s, Alfred and Mildred Navarro entered into a loan agreement as lenders with John Peduto as borrower. The loan accrued at an interest rate of 13 percent per annum. The mortgage securing the loan indebtedness did not contain an interest rate in the event of default. For a time, Peduto made payments on the loan, but when a balloon payment came due, he refused to make that payment.

Default Judgment and Revival

The Navarros thereafter instituted a suit against Peduto by filing a complaint in the Philadelphia County Court of Common Pleas. The court subsequently entered a default judgment against Peduto after he failed to timely answer the complaint. The default judgment was subsequently revived in 1996.

Years after the judgment was revived, Peduto was appointed administrator of his father’s estate. Peduto, acting as the estate’s administrator, subsequently sold a property of the estate to Robert Narda.

Challenge to Judgment Enforcement

In 2001, William and Wayne Woods, co-executors of the Navarro estate, joined the suit as plaintiffs. The Woods sought to revive the suit against Peduto individually and named Narda as a terre-tenant party alleging that the property he purchased was personally owned by Peduto and that the property was thus subject to the judgment lien. Since Peduto and Narda failed to timely answer the writ of revival, the court entered a default judgment against both of them.

After Narda’s appeal of the default judgment was denied, he filed a motion to determine the amount needed to satisfy the judgment. The trial court then found the judgment against Narda to be the amount of original judgment against Peduto plus interest accruing at the legal rate of 6 percent per annum from the date of judgment. The Woods then appealed that ruling claiming that they were entitled to interest on the original judgment at a rate of 13 percent per annum, equaling the rate on the underlying mortgage note, not the legal rate of 6 percent per annum.

Trial Court’s Reasoning

Judge Allan Tereshko then issued a written opinion explaining why the court awarded interest to the Woods at the lawful rate of interest, not the contractual rate.

The trial court first attacked the fundamental underpinnings of the default judgment entered against Narda. The court questioned Narda’s status as a terre-tenant party. The court explained that Narda was not a terre-tenant, but instead a bona fide purchaser who took the property in an arms-length transaction without notice of the personal judgment against Peduto.

The court stressed that Narda was not involved in the original dispute over Peduto’s default of the balloon payment due on the loan. The court thus believed that Narda should not be held to an interest rate on a mortgage note where he was not even a party to the loan transaction.

Interpretation of Loan Documents

The stronger reason for limiting the interest rate post-judgment is contained within the later portion of the opinion. The court pointed out that “[u]nder the heading ‘Interest’ of the note, it specifically provide[d] that [t]he Borrower shall pay interest on the unpaid principal at the yearly rate of 13%. The Borrower shall pay interest from the date of this Note until the entire principal has been paid.”

The court cited the Pennsylvania Supreme Court’s holding in Miller v. Reading: “a debtor who defaults... becomes liable for interest... at the legal rate of interest of 6% per annum... irrespective of the rate prescribed in the obligation...”.

Other Judicial Interpretations

Over the years, the results have been mixed for lenders who seek the contractual rate post-judgment. Unlike Woods, the Philadelphia County Court of Common Pleas in Tierney v. Seidmen concluded that the contracting parties agreed to apply an interest rate in excess of the legal rate post-judgment.

In contrast, the United States District Court for the Eastern District of Pennsylvania in Alten v. T.A.E.I., Inc. found that a provision providing for accrual of interest at the contractual rate “until paid in full” did not represent a clear intention to continue that rate following judgment.

In Sicari v. Barua, the Somerset County Court of Common Pleas upheld a stipulated judgment rate of 16.5 percent per annum because it was reached through the bargaining process.

Practical Drafting Advice

These cases illustrate that clauses allowing post-judgment interest at a rate in excess of the legal rate should be carefully worded. From a practical point of view, these clauses should be contained in a separate paragraph of the loan documents. Moreover, I would suggest that these type of clauses be entitled as “post-judgment rate of interest” or like. By making the intent of the parties perfectly clear, the lender should not be foreclosed from collecting interest in excess of the legal rate.

Reprinted with permission from the May 23, 2005 edition of The Legal Intelligencer © 2005 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.

Alan Nochumson