In yet another blow to the city of Philadelphia’s attempt to collect upon its substantial real estate tax delinquencies, the Commonwealth Court in City of Philadelphia v. Manu, 2013 Pa. Commw. LEXIS 363, issued a strongly worded opinion in stripping the city of its ability to sell a property under Pennsylvania’s Municipal Claims and Tax Liens Act, 53 P.S. § 7101 et seq. The ramifications of this opinion may forever change how the city forecloses upon real estate tax delinquencies.

In Manu, the city filed a petition seeking authorization to sell a rental property situated in Philadelphia.  In the petition, the city alleged that a lien was entered on the property for unpaid water and sewer rents in the amount of $0 (yes, $0) in 1987 and that additional delinquencies may have subsequently accrued.  As part of the petition, the city attached an amended claim of $657, plus interest and penalties, for unpaid real estate taxes due on account of the property for 1986.

The trial court issued a rule upon the property owner to show cause why an order permitting a sale of her property should not be entered.  In the rule, the trial court directed that service of the petition and the rule be made in the manner of service of writs of scire facias under the act.

The following month, the city filed the sheriff of Philadelphia County’s return of service containing a notation that the property was posted.  The property owner, Agnes Manu, eventually filed a motion with the trial court to extend the time in which to file an answer to the rule to show cause, alleging that she just became aware of the filing of the petition.  The trial court granted the motion and directed her to file an affidavit of defense.  Instead of doing so, Manu filed a motion to stay the proceeding, alleging that she had not received tax assessment notices since 1998 and was filing tax assessment appeals nunc pro tunc with the city’s Board of Revision of Taxes.

The trial court then issued two separate orders.  The first trial court order stated that, after a hearing, the trial court denied the stay.  The second trial court order authorized the city to sell the property at a tax sale.  The trial court stated that it was satisfied that service of the rule to show cause was properly made and that no answer had been filed to the petition.

Manu filed a motion for clarification with the trial court, indicating that she was unclear whether the city was seeking to collect delinquent water and sewer rents or delinquent real estate taxes and that the trial court, in authorizing the tax sale of the property, did not specify the amount she owed to the city.

Manu also filed a motion to strike or vacate the trial court order authorizing the tax sale of the property.  In that motion, the property owner argued that the trial court was deprived of jurisdiction to grant the petition due to defective service of the petition and the rule to show cause, and that the trial court order authorizing the tax sale of the property, therefore, was void ab initio.

After the trial court denied the motion to strike or vacate as well as the motion for clarification, Manu appealed the denial of the motion to strike or vacate to the Commonwealth Court.  The Commonwealth Court ultimately concluded that the city should not have been granted the permission to sell the property at a tax sale.

In reaching its conclusion, the Commonwealth Court initially emphasized that the city had the burden of proving strict compliance with the requirements of the act.  In reviewing each of these mandatory steps, the Commonwealth Court believed that it “[wa]s apparent that there was not even substantial, let alone strict, compliance.

The Commonwealth Court pointed out that “the petition neither listed ‘all tax and municipal claims’ nor gave any sense of their magnitude.”  Rather, according to the Commonwealth Court, “the only claim listed in the petition is a lien for unpaid water and sewer rents in the amount of $0” and “an amended claim for unpaid taxes in the amount of $657.54.”

The Commonwealth Court was especially concerned that the city, despite the allegations contained in the petition, asserted that its actual lien was for $14,702 and, presumably, expected to collect at least that amount from the tax sale if the sale proceeds were sufficient.

This portion of the Commonwealth Court’s ruling to me is rather damning.  I have handled many petitions over the years to set aside a tax sale and it is common practice for the city to only set forth the initial municipal delinquency in the petition.  It seems to me that the city must now specify with greater particularity the municipal obligations it is attempting to collect or risk the invalidation of future tax sales.

Next, the Commonwealth Court chastised the city for failing to properly serve Manu with the petition seeking the authorization to sell the property at a tax sale and the subsequently issued rule.

In the rule, the trial court only required the city to serve Manu in the manner for service of writs of scire facias to obtain judgments upon tax and municipal claims under the act.

“Section 18 of the act, 53 P.S. § 7186, providing for service of writs of scire facias, requires personal service of all persons named in the writ, and any other persons found in possession of the property. If no one is found in possession of the property, it is to be posted,” the opinion said.  In strict conformance of the trial court order, the city directed the sheriff of Philadelphia County to post the property.

What confused the Commonwealth Court is why the trial court did not comply with the plain language of the act, which provides that notice of a rule to show cause is to be made by posting the property as well as by serving the property owner via certified and first-class mail.

Before granting a petition for sale of a property under the act, the Commonwealth Court cautioned that the trial court must make an “independent inquiry” as to whether the city strictly complied with the act’s service requirements.

According to the Commonwealth Court, “proper service of a petition for tax sale and a rule to show cause is a prerequisite to a court acquiring personal jurisdiction over a defendant” and the “failure to strictly comply with the service requirement deprives the court of jurisdiction to authorize a sheriff’s sale.”

The Commonwealth Court noted that “the record is devoid of evidence of publication and the city does not even assert that there was any.”  At the hearing where the petition and rule was presented by the city, the Commonwealth Court stated that “no mention was made of service of the petition and rule” and “no evidence was presented to establish the truth of the facts in the petition.”

In the opinion, the trial court was reprimanded by the Commonwealth Court for issuing a decree allowing for the tax sale to occur without making any inquiry about service of the petition and rule.

In the appeal, the city argued that it filed an affidavit of service after the decree was issued averring that it indeed made service of the petition and rule by certified and first-class mail.  The Commonwealth Court was not swayed by this filing since the affidavit of service did not exist at the time the trial court issued the decree allowing for the tax sale of the property.

In the end, the Commonwealth Court cautioned that, in order to comply with the act, the trial court must “hold a hearing to determine that service of the rule to show cause was made … and that the facts stated in the petition are true.”

LESSONS LEARNED

The Commonwealth Court’s ruling in Manu is clearly devastating for the city.  In many ways, unless this ruling is overturned on appeal to our Supreme Court, the city and the trial court in Philadelphia will now be forced to alter the way delinquent real estate taxes are foreclosed upon in Philadelphia.

Reprinted with permission from the September 17, 2013 edition of The Legal Intelligencer © 2013 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

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Alan Nochumson has become a member of the Temple American Inn of Court.

As a member of the Temple American Inn of Court, Nochumson will interact with sitting judges, practicing attorneys, law professors and students on a regular basis to discuss and debate issues relating to legal ethics and professionalism.

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One of the most oppressive tools available to commercial landlords and lenders alike is what is called a warrant of attorney. Most loan and lease agreements contain a provision known as a warrant of attorney that allows such lenders and landlords the ability to enter a judgment of record against their tenants and borrowers, as the case may be, by simply filing a complaint alleging a default under the applicable loan or lease agreement and then demanding a confessed judgment of an amount certain.

A confessed judgment allows lenders and landlords to have a judgment of record entered in their favor against an allegedly defaulting borrower or tenant before the borrower or tenant even knows what happened.

All is not lost, however, when a confessed judgment is entered.  After the complaint is filed and the judgment is entered of record, the borrower or tenant may then file a petition with the trial court seeking to strike or open the confessed judgment.

As illustrated by a recent trial court ruling in Republic First Bank v. Marke E. 14th St. LLC, the chances of success when filing such a petition are rather small in most cases.

In Marke, the bank and the principal of the defendant corporate entity had a longstanding relationship that began in approximately 2006, the opinion said.  According to the opinion, several years into their relationship, the bank approached the principal of the defendant corporate entity about the possibility of two loans that the bank had with another borrower of the bank.

The first loan dealt with the financing of a commercial building consisting of an office and industrial flex space, while the second loan involved the financing for the acquisition of and construction of an apartment complex, the opinion said.

The defendant corporate entity was formed for the sole purpose of purchasing these loans.  To fund most of the acquisition of these loans, the parties entered into a loan arrangement where the defendant corporate entity was the borrower and the defendant principal of the corporate entity was the personal guarantor of the loan, the opinion said.

According to the defendants in Marke, almost immediately after the closing of the loan took place, “it became apparent that the bank had made a series of false or misleading statements or otherwise concealed certain pertinent facts” in the process.  The defendants alleged the bank “made false representations and failed to disclose material facts to its principal concerning these loans to coerce him into buying the loans,” which included inflating the value of the properties, providing false and incomplete due diligence that falsely depicted the status of the rents and rent collection, falsely representing the construction progress to [one of the] propert[ies], and failing to disclose existing code violations.”

Despite the bank’s alleged misrepresentations, the defendants were able to stay current with the debt service obligation arising from the new construction project by using the cash generated from the income-producing commercial property to fund the debt service.  However, according to the defendants, this came to a halt when the bank forced the defendant corporate entity to sell the income-producing commercial property in order to satisfy the indebtedness due on that loan.

Unable to service the debt on the loan for the new construction project, the defendants attempted to work out an arrangement to purchase the property being developed and then sell that property in order to satisfy the remaining indebtedness due to the bank.  According to the defendants, the bank initially agreed to lend the money for the property acquisition but eventually refused to do so.

According to the defendants, after the property acquisition fell through, they ceased making the loan payments.  After that happened, the bank sent a written notice of default to the attorney representing the defendants, advising the attorney of the loan defaults and declaring the loan due.  The bank then filed a complaint for confession of judgment against the defendants with the Philadelphia Court of Common Pleas.  The defendants thereafter filed a petition to strike or open the confessed judgment.

The trial court denied the defendants’ attempt to strike the confessed judgment, concluding there were no fatal defects or irregularities on the face of the confessed judgment.

In Pennsylvania, “a petition to strike a judgment operates as a demurrer to the record and may only be granted when an apparent defect on the face of the record exists. In considering the merits of a petition to strike, the court is limited to reviewing the record as filed by the party in whose favor the warrant is given, the complaint and the documents which contain confession of judgment clauses.  A court’s order that strikes the judgment annuls the original judgment and the parties are left as if no judgment had been entered.”

In Marke, the defendants pointed to a multitude of alleged defects and irregularities with the complaint confessing judgment, such as the bank failing to properly aver a default or a condition precedent, the bank failing to aver that the judgment was not being entered against a natural person in connection with a consumer credit transaction, the bank failing to verify its pleading, the bank failing to provide an itemized computation and the basis for seeking to recover certain components of its damages claimed, and the bank’s calculation and attempt to recover attorney fees as being erroneous and otherwise inconsistent and irreconcilable with its loan documents.

In the end, the trial court did not believe these grounds warranted the striking of the confessed judgment.  In doing so, the trial court either indicated that such grounds did not exist or that even where there were defects and irregularities in how the complaint was drafted or filed, these defects and irregular were minor in nature and did not rise to the level of fatal ones that would require the trial court to strike the confessed judgment.

In particular, the trial court was dismissive of the defendants’ contention that the written notice of default was not served properly on them because the bank sent it to their attorney rather than to them directly.  The trial court noted that no facts existed that the defendants were not made aware of the default notice and, more importantly, the warrant of attorney contained in the loan documents did not require that the written notice be provided to the defendants before the bank exercised its right under the warrant.

The trial court next denied the petition to open the confessed judgment because the defendants failed to demonstrate the existence of a meritorious defense or produced clear, direct, precise and believable evidence of said defense.

Unlike a petition to strike a confessed judgment, a petition to open a confessed judgment “looks beyond the confession of judgment documents and includes testimony, depositions, admissions, and other evidence” and “a petition to open is granted when the petitioner acts promptly, alleges a meritorious defense, and provides sufficient evidence to require submission of the issue to a jury.”

The trial court summarily shot down the defendants’ attempt to open the confessed judgment, concluding that they “neither demonstrated the existence of a meritorious defense, nor produced clear, direct, precise or believable evidence sufficient to warrant the opening of the confessed judgment.”

In the petition, the defendants relied upon the defenses of fraudulent inducement and economic duress as their “meritorious defenses.”

As for the defense of fraudulent inducement, the trial court emphasized that, even if the bank made fraudulent misrepresentations to the defendants concerning the profitability of the loans and the value and condition of the properties, the defendants ratified the loan documents by performing under the loan documents for years after the alleged inducement occurred.

The defendants’ defense of economic duress suffered the same fate.  The trial court pointed out that the defendants failed to show that the bank placed the defendants in the position that prevented them from exercising their free will.  Rather, according to the trial court, the defendants were represented by counsel during the loan transactions, are sophisticated in business, and have had prior arm’s-length dealings with the bank.

LESSONS LEARNED

The underlying factual circumstances in Marke really highlight the reason why a plaintiff should exercise his or her right under a warrant of attorney whenever possible.  From the outset, the burden is placed upon the defendant. A judgment of record has been entered and the defendant is forced to try to convince the trial court that the judgment should either be stricken or opened.

Even if the confessed judgment is stricken or opened, the plaintiff can still elect to proceed onward through the more traditional means of litigation (i.e., pleadings, discovery and ultimately trial).  Many defendants lose sight of the fact that the complaint may be defective on its face and should be stricken or the confessed judgment should be opened because there is some plausible defense that needs to be fleshed out through full-blown litigation.  However, the ultimate issue is whether the defendant owes any money to the plaintiff.  Striking or opening a confessed judgment does not answer that question; instead, it merely levels the playing field going forward.

Reprinted with permission from the August 20, 2013 edition of The Legal Intelligencer © 2013 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

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Even if you do not deal with contractors in your practice, depending upon how handy and busy you are, many of us who own homes engage contractors to perform projects around the house ranging from menial tasks to complete home renovations.

Not all contractors are created equal, and that is why, several years ago, Pennsylvania enacted the Home Improvement Consumer Protection Act (HICPA), 73 Pa. Stat. Ann. § 517.1, et seq.

This statute requires individuals who and companies that perform home contracting services to not only register with the state as a “contractor,” but also mandates the type of terms and conditions that must be contained within any valid and enforceable home improvement contract.

In Shafer Electric and Construction v. Mantia, 2013 PA Super 111 (May 10, 2013), the Superior Court of Pennsylvania decided whether a contractor could recover payment from homeowners for work performed by the contractor under a quasi-contract theory if the home improvement contract is deemed invalid and unenforceable under the HICPA.

In Mantia, the contractor, Shafer Electric and Construction, and the homeowners, Raymond and Donna Mantia, entered into an agreement for the contractor to erect an addition to the homeowners’ garage, the opinion said. The contractor completed almost $38,000 of the home improvement work. A dispute soon ensued between the parties and the homeowners refused to pay the contractor for the work performed, the opinion said.

Shafer then filed a mechanic’s lien against the property and, thereafter, filed a complaint against the Mantias. In the complaint, Shafer pled for relief under theories of breach of contract as well as quantum meruit.

After being served with the complaint, the Mantiasfiled preliminary objections to the complaint, arguing that the mechanic’s lien should be stricken because the agreement entered into by the parties was invalid and unenforceable under the HICPA. In making their argument, the Mantias indicated that, while Shaferwas licensed as a contractor in its principal place of business in West Virginia, it was not registered to do so in Pennsylvania under the HICPA.

Furthermore, in their preliminary objections, the Mantias argued that the agreement entered into by the parties did not conform to Section 517.7 of the HICPA.

Subsection (a) of Section 517.7 sets forth that, in order for a home improvement contract to be considered valid and enforceable against a homeowner in Pennsylvania, the home improvement contract must: be in writing, containing the home improvement contractor’s Pennsylvania-issued registration number; be signed by all parties; contain the entire agreement between the homeowner and the contractor; contain the date of the transaction; contain the name, address and telephone number of the contractor; contain the approximate starting date and completion date of the home improvement project; include a description of the work to be performed, the materials to be used and a set of specifications that cannot be changed without a written change order signed by the homeowner and the contractor; include the total sales price under the contract; include the amount of any down payment plus any amount advanced for the purchase of special order materials; include the names, addresses and telephone numbers of all subcontractors on the project known at the date of signing of the contract; indicate that the contractor maintains liability insurance in an amount not less than $50,000; and include a notice of the right of the homeowner to rescind the contract.

Subsection (g) of Section 517.7 also allows a contractor to recover under the theory of quantum meruit if that contractor has complied with Subsection (a) of Section 517.7. As such, a court may award “payment for work performed based upon the reasonable value of services which were requested by the [home]owner” if “it would be inequitable to deny such a recovery.”

The trial court in Mantia sustained the preliminary objections to the complaint and struck the mechanic’s lien, concluding that the agreement entered into by the parties was, indeed, invalid and unenforceable under Section 517.7(a) of the HICPA, the opinion said. It is unclear from the opinion why the trial court determined the agreement in Mantia was invalid and unenforceable.

In one portion of the opinion, it is implied that a written agreement exists between the parties, and, in another portion of the opinion, it is stated that no such written agreement is in existence.

The trial court may have concluded that Shafer did not comply with Section 517.7(a) merely because it was not registered as a contractor in Pennsylvania and, thus, any written agreement between the parties was invalid and unenforceable for that reason alone.

Why the contract was deemed invalid and unenforceable under the HICPA is not of great importance as the trial court barred Shafer from seeking recovery based upon a theory of quantum meruit as well. Since the agreement entered into by the parties did not meet the statutory requirements of Section 517.7(a), the trial court held that Shafer was not permitted under Section 517.7(g) to recover payment from the homeowners.

Shafer appealed the trial court’s ruling to the Superior Court.

On appeal, the Superior Court focused its attention on whether Shafer was barred from seeking recovery from the Mantias based upon a theory of quantum meruit because the contract did not comply with the HICPA.

The Superior Court ultimately found error with the trial court’s ruling, holding that the HICPA was silent as to actions in quasi-contract, such as unjust enrichment and quantum meruit, which, by definition, implicated the fact that, for whatever reason, no written contract existed between the parties.

The Superior Court noted that “a plain reading of the HICPA as written serves only to impermissibly limit its true purpose in a manner that makes quantum meruit recovery under Subsection (g) impossible, and subverts what we believe to be the [legislature]’s obvious intention in providing for a quasi-contract theory of recovery in situations where no valid written contract exists.”

According to the Superior Court, it was obvious that the purpose of the inclusion of Section 517.7(g) “was to provide for an equitable remedy in situations where there was no valid and enforceable written contract under Section 517.7(a)” and “to conclude otherwise renders the type of recovery contemplated by legislature in Subsection (g) impossible.”

The Superior Court emphasized that the HICPA was not drafted to yield “an absurd result of providing contractors with an equitable means of recovery under quasi-contract theory, but only when a written contract exists such that quantum meruit recovery is not needed nor allowed by law.”

In doing so, the Superior Court approvingly cited to a section of Shafer’s brief filed on appeal in Mantia where Shafer noted that “if this were the intent of the drafters of the HICPA, to require the contractor to comport with all of the requirements of Section 517.7(a) to recover in quantum meruit, then the contractor does not need to recover on a quantum meruit theory, for the value of his services, because he would have a valid and enforceable contract on which to rely.”

This is not the first time the Superior Court has allowed a contractor to seek recovery of payment for home improvement work performed under a theory of quantum meruit when the parties did not enter into a valid and enforceable contract under the HICPA.

Last year, in Durst v. Milroy General Contracting, 52 A.3d 357 (Pa. Super. Ct. 2012), the Superior Court faced a situation where a contractor brought a quantum meruit claim against homeowners after they failed to pay the contractor pursuant to an oral contract for improvements made to their home.

In Durst, a panel of the Superior Court addressed whether the plain language of the HICPA precludes lawsuits where home improvement work was conducted, but no valid contract exists and the contractor is seeking to recover under a theory of quantum meruit.

Based upon the same reasoning employed by the Superior Court in Mantia, the panel of the Superior Court in Durst held that quasi-contract theories of recovery survive the HICPA.

LESSONS LEARNED

While the contractor in Mantia was allowed to pursue payment against the homeowners for the home improvements so made, the contractor’s failure to comply with the HICPA should not be taken lightly. At trial, Shafer will be required to establish the “reasonable” value for the home improvement work. If Shafer had simply complied with the HICPA, the value of the home improvement work would not have been at issue and, instead, the trial court would have taken the agreed amount charged under contract, less the value of the incomplete work established by the homeowners, at face value.

This is why it is so important for contractors in Pennsylvania to ensure they, along with their home improvement contracts, are in compliance with the HICPA before commencing any work for homeowners.

Reprinted with permission from the July 16, 2013 edition of The Legal Intelligencer © 2013 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

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As the city of Philadelphia continues to generate negative publicity in the media about its inability to collect upon delinquent taxpayers, it only seems to make sense that it will make a concerted effort to improve upon its tax collection efforts.

One of the areas where the city will probably increase a lot of its focus is in the realm of real estate. There are many properties in Philadelphia where the city has not collected real estate taxes in over a generation. With the real estate market slowly but surely improving, there are a whole slew of real estate investors hoping that the city subjects some of these properties through the tax foreclosure process.

Unlike a mortgage foreclosure, a tax foreclosure in Philadelphia is not governed by the Pennsylvania Rules of Civil Procedure. Rather, the city is required to strictly follow the regime created by Pennsylvania’s Municipal Claims and Tax Lien Act, 53 P.S. 7101, et seq., prior to selling a tax delinquent property at a sheriff’s sale.

In City of Philadelphia v. Schaffer, 974 A.2d 509 (2009), the Commonwealth Court of Pennsylvania characterized the “mandatory procedural requirements,” as set forth under the act, as “enacted by the General Assembly as a safeguard to ensure that a city has taken all of the appropriate steps prior to depriving a person of his/her right to real property.”

Under the act, the city initiates the tax foreclosure process by filing a petition in the Court of Common Pleas seeking a decree from the trial court to permit the city to list the property at a sheriff’s sale. Upon receiving the petition, the trial court issues a rule returnable, whereby the property owner is asked by the trial court as to why the petition should not be granted.

The city is then obligated under the act to serve the property owner with the petition by posting the petition and the rule returnable upon the most public part of the property and by sending the petition and the rule returnable to the property owner via certified and regular mail.

As a matter of practice, the city, through its law department, mails the petition and rule returnable to the property owner while the sheriff of Philadelphia County posts the petition and rule returnable upon the property.

After service is effectuated, under the act, the city is then obligated to file affidavits of service with the trial court averring that service has so been made. Again, as a matter of practice, the city, through its law department, files the affidavit of service as to the mailing of the petition and rule returnable while the sheriff of Philadelphia County files the affidavit of service as to the posting of the petition and rule returnable.

Only after all of the affidavits of services have been filed should the trial court schedule the petition for a hearing upon the merits.

On many occasions, the property owner fails to file a written response to the petition and a hearing is scheduled without the property owner’s involvement.

The act specifically conditions the issuance of the decree scheduling the tax foreclosure sale upon the filing of the affidavits of service beforehand. This is a part of the process where I have personally witnessed the city and the trial court running afoul of the tenets of the act.

At the hearing, the city should present evidence establishing how the city complied with the notice requirements under the act. Many times, the city simply introduces the affidavits of service that were filed with the trial court into evidence as establishing its statutory compliance.

More should be required of the city. At the very least, the city should be directed to provide the trial court with the acknowledging receipt signed “green card” acknowledging receipt by the property owner of the petition and rule returnable via certified mail, as well as a certificate of mailing from the U.S. Postal Service evidencing that the petition and rule returnable were mailed to the property owner as well.

As for the posting requirement, many times the affidavit of service is too vague to establish when and where the petition and rule returnable were posted. The trial court should scrutinize if services were properly made and not take the affidavit of service at face value.

After the decree has been issued by the trial court, the city is then obligated under the act to serve the decree upon the property owner via certified and regular mail prior to the sheriff’s sale taking place. Additionally, the city must then file an affidavit of service with the trial court, prior to the sheriff’s sale taking place, averring that service was so made.

Under the act, the sheriff’s sale should not take place unless and until the decree is served upon the property owner and the city files an affidavit of service with the trial court. This is another part of the tax foreclosure process where the city and the sheriff of Philadelphia County seem to run afoul of the act. The sheriff of Philadelphia County should not allow a property to be subjected to a sheriff’s sale unless and until it receives the already-filed affidavit of service evidencing that the decree was served upon the property owner by the city.

If the city runs afoul of the act, the property owner has three months from the date the sheriff’s deed is acknowledged to challenge the legality of the sheriff’s sale by way of the filing of a petition to set aside the sheriff’s sale.

Furthermore, even if the city followed the strict mandates of the act, the property owner still has a right to redeem the property if it is the property owner’s primary residence. The property owner must file a petition with the trial court exercising the property owner’s right of redemption within nine months from the acknowledgement of the sheriff’s deed.

In all, while the city may become more vigilant in collecting its unpaid real estate taxes, it must do so within the mandatory procedural requirements of the act. If the city fails to strictly adhere to the act, there will be plenty of litigation in this area of the law for years to come.

Reprinted with permission from the June 18, 2013 edition of The Legal Intelligencer © 2013 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

In these distressed economic times, it is not uncommon for a commercial tenant to discontinue its business operations and relinquish possession of the premises even if there are years left on the lease term. At that point, the landlord has a decision to make — keep the premises empty and attempt to collect rent from the tenant or mitigate his or her damages by leasing the premises to another tenant.

In Ferrick v. Bianchini, No. 3244 (Pa. Super. Ct. 2013), the Superior Court of Pennsylvania recently answered the question of whether a commercial landlord can accelerate the rent due for the remainder of the lease term against a tenant that abandoned the premises, and then lease the premises to another tenant and collect rent from the new tenant at the same time.

In Ferrick, a tenant who had planned on operating a restaurant-and-bar establishment in Center City Philadelphia fell in arrears on his rent and other charges due under the 10-year lease entered into by the parties.

There was a dispute between the parties as to how the tenant, Edward Bianchini, lost possession of the premises. While Bianchini indicated that the landlord, 12th Street Property LLC, changed the locks to the premises, thus denying him possession of the premises, the landlord noted that Bianchini abandoned the premises by ceasing his operations and removing fixtures from the premises, according to the opinion.

After Bianchini no longer possessed the premises, the landlord found a replacement tenant and re-let the premises.

The landlord thereafter filed a complaint in confession of judgment for money against the tenant, alleging that Bianchini was in default under their lease agreement for failing to pay rent, taxes, insurance and utilities and for vacating and abandoning the leased premises prior to the expiration of the lease term. In the complaint, the landlord sought both past-due rent and charges totaling more than $80,000, together with accelerated rent and fees for the remaining years of the lease term, for a total judgment in excess of $1.5 million.

Upon the filing of the complaint, the confessed judgment was simultaneously entered against Bianchini in the amount sought in the complaint. Bianchini then filed a petition seeking to strike or, in the alternative, to open the confessed judgment.

After the trial court denied the petition, Bianchini appealed that ruling to the Superior Court of Pennsylvania.

While Bianchini raised several grounds on appeal, one of the more interesting ones dealt with whether a landlord in Pennsylvania may obtain a judgment based upon the acceleration of rent due under a commercial lease and then re-let the premises afterwards.

On appeal, Bianchini argued that the trial court abused its discretion in refusing to open the confessed judgment because it entitled the landlord to both possession of the premises and fully accelerated rent for an eight-year period. Since the landlord re-let the premises to a replacement tenant, Bianchini claimed that the landlord was improperly seeking a double recovery by way of the entry of the confessed judgment against him as well as collecting rent from the replacement tenant for this overlapping period of time.

In making this argument, Bianchini relied upon the Superior Court’s previous rulings in Homart Development v. Sgrenci, 662 A.2d 1092 (1995), and H.A. Steen Industries v. Richer Communications, 314 A.2d 319, 322 (Pa. Super. 1973), for “the proposition that allowing a landlord to obtain both accelerated rent and possession amounts to a double recovery for a single wrong.”

The Superior Court in Ferrick, however, concluded that the cited cases do not apply because the landlord in Ferrick did not confess judgment for both possession of the premises and accelerated rent. As such, the Superior Court in Ferrick emphasized that “the issue, properly framed, is whether the landlord can confess judgment for accelerated rent when it was in possession of the property.”

The Superior Court believed that the record established that the tenant abandoned the premises when, after ceasing operation, he removed fixtures and equipment from the premises.

By agreeing with the trial court’s conclusion that Bianchini abandoned the premises, the Superior Court had to deal with the ramifications of the landlord renting the premises to a replacement tenant because a significant portion of the confessed judgment included accelerated rent for a period of time in which the landlord was also generating rental income from the replacement tenant.

The Superior Court first acknowledged the Supreme Court of Pennsylvania’s ruling in Stonehedge Square Limited Partnership v. Movie Merchants, 715 A.2d 1082 (Pa. 1998).

In Stonehedge, the Supreme Court held that “where a tenant abandons property, a non-breaching landlord has no duty to mitigate damages.” In other words, when a tenant abandons the premises, “the landlord may either choose to allow the property to stand idle and hold the tenant liable for the entire rent, or he may re-lease it and hold the tenant liable for the difference, if any.”

While the Superior Court indicated that the Supreme Court’s ruling in Stonehedge “does not disturb the general principle that a landlord must choose between taking possession of the property and collecting future rents,” the Superior Court reiterated that, “where a commercial tenant vacates the leasehold, the landlord may seek accelerated rent if the lease so provides, and re-let the premises” so long as the landlord credits the tenant at execution for sums paid by the replacement tenant.

According to the Superior Court, “the Restatement (Second) of Property similarly treats such situations where a landlord seeks both accelerated rent and possession.” In Ferrick, the Superior Court pointed out that, “if the landlord collects accelerated rent and receives possession of the property by abandonment, the landlord may keep the accelerated rent, but is required to account to the tenant for rent received from a new tenant.”

Since the landlord in Ferrick conceded that the tenant would be entitled to a credit against the judgment amount at execution if the landlord was to collect rent from the replacement tenant, the Superior Court refused to open the confessed judgment for the accelerated rent.

LESSONS LEARNED

The Superior Court’s ruling in Ferrick illustrates the difference between a commercial tenant abandoning the premises and being evicted by way of judicial proceedings. If the tenant in Ferrick had remained in the premises, the landlord would have had to make the difficult decision of either keeping the premises vacant while accelerating the rent or taking possession of the premises and leasing it to another tenant. Most commercial landlords, especially ones with storefronts, do not wish to keep the premises vacant for a multitude of reasons and instead elect to mitigate their damages by renting the premises to another tenant.

By abandoning the premises, as both the trial court and Superior Court concluded, the tenant in Ferrick allowed the landlord to have the best of both worlds — the landlord has a judgment of record against the tenant that includes the accelerated amount due under the lease and the landlord can lease the premises to another tenant at the same time.

Reprinted with permission from the May 21, 2013 edition of The Legal Intelligencer © 2013 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

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For 2013, Alan Nochumson has been included in the list of Rising Stars – the top-up-and-coming attorneys in the Commonwealth of Pennsylvania – in the field of real estate law.

Each year, only 2.5% of attorneys practicing law in the Commonwealth of Pennsylvania receive the Rising Star honor.

The selections for this list are made by the research team at Super Lawyers, which is a service of the Thomson Reuters, Legal. Each year, the research team at Super Lawyers undertakes a selection process that includes a statewide survey of lawyers, independent evaluation of candidates by the attorney-led research staff, a peer review of candidates by practice area, and a good-standing and disciplinary check.

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While most of the public attention nowadays is focused squarely upon property owners losing their homes through foreclosure proceedings, property owners may also forfeit their homes if they are involved in drug-related crimes.

Under the Controlled Substances Forfeiture Act (CSFA), property used to facilitate any violation of the Controlled Substance, Drug, Device and Cosmetic Act may lawfully be seized. Included under the forfeiture act is real property. The CSFA permits seizure of real property “used or intended to be used to facilitate any violation of the Controlled Substance, Drug, Device and Cosmetic Act, including structures or other improvements thereon, and including any right, title and interest in the whole or any lot or tract of land and any appurtenances or improvements, which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of the Controlled Substance, Drug, Device and Cosmetic Act, and things growing on, affixed to and found in the land.”

While this may seem like a drastic penalty, there are safeguards in place available to property owners involved in forfeiture proceedings, as illustrated by a ruling recently handed down by the Pennsylvania Commonwealth Court in Commonwealth v. Real Property and Improvements at 2338 N. Beechwood St.

According to the opinion, an officer met with a confidential informant who was given $20 to purchase crack cocaine at a residential property located in Philadelphia. The officer returned to the property the next day to conduct surveillance where multiple drug deals were observed, the opinion said. Later in the day, the officer executed a search warrant and confiscated multiple items of drug paraphernalia from the property, the opinion said.

Even though none of the drug deals involved the property owner, the state filed a petition under the CSFA, petitioning the trial court to obtain the property by way of forfeiture. The property owner appeared pro se at the hearing.

At the conclusion of the hearing, the trial court ordered for the property to be forfeited.

After obtaining legal counsel, on appeal, the property owner raised several issues to the commonwealth of Pennsylvania. In particular, the property owner argued that her due process rights were violated when she was not informed of her right to a jury trial.

In its ruling, the trial court in 2338 N. Beechwood St. reasoned that the Pennsylvania Rules of Civil Procedure apply to forfeiture proceedings under the CSFA, including the court rules regarding the selection of a jury trial.

As the trial court pointed out, in civil proceedings, unlike criminal proceedings, a trial court is not required to ensure that a party is aware of the right to a jury trial or that waiver is knowing and intelligent. Rather, the trial court noted that, in civil proceedings, the party must affirmatively demand for a jury trial to occur, while, in criminal proceedings, there is a presumption that a defendant will proceed with a jury trial that can only be rebutted if both the defendant and the commonwealth agree to waive this right and if the waiver is knowing and intelligent.

Subsequent to the trial court’s ruling, however, the Commonwealth Court issued a plurality opinion in Commonwealth v. All That Certain Lot or Parcel of Land Located at 605 University Drive, announcing that “forfeiture proceedings, while civil in nature, involve constitutional rights normally only involved in criminal proceedings.”

In 605 University Drive, a majority of the Commonwealth Court agreed that there could be no summary judgment in a forfeiture case and that the civil rules on summary judgment did not apply to forfeiture proceedings. In doing so, the Commonwealth Court in 605 University Drive relied upon rulings made by the U.S. Supreme Court holding that the Fourth and Fifth amendment protections in criminal proceedings are applicable in forfeiture proceedings.

In 2338 N. Beechwood St., the Commonwealth Court reiterated that the court rules pertaining to criminal proceedings apply to a forfeiture action.

Since the property owner was not afforded a jury trial or knowingly or intelligently waived her right to one, the Commonwealth Court vacated the forfeiture order and remanded the case back down to the trial court for a new hearing with a jury trial.

2338 N. Beechwood St. also contains a concurring opinion where some judges of the Commonwealth Court also emphasized that “there are other rights that a person whose property is being forfeited must be informed of either prior to or at the required hearing on forfeiture.” In the concurring opinion, these judges reference that a person whose property is being subjected to forfeiture has a constitutional right against self-incrimination, imposition of excessive fines, and the right to interpose the “innocent owner defense,” in addition to the due process of law.

LESSONS LEARNED

The Commonwealth Court in 2338 N. Beechwood St. removed any doubt that the criminal rules, not the civil rules, of procedure apply in forfeiture actions. Local governments throughout the state will, thus, be well advised to change the way they have been doing business in forfeiture actions if they have not already since 605 University Drive.

Reprinted with permission from the April 16, 2013 edition of The Legal Intelligencer © 2013 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

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When a tenant breaches a lease agreement, many times the landlord rushes to the courthouse to file a complaint seeking to evict the tenant from the leased premises, only later to find out that the tenant may “pay to stay” in the leased premises if the complaint is based solely upon the nonpayment of rent due under the lease agreement.

In Johnson v. Bullock-Freeman, the Superior Court of Pennsylvania recently delved into what constitutes the appropriate amount to “pay to stay,” involving a monetary lease dispute between a landlord and tenant in Philadelphia County.

In Johnson, the tenants, who resided in a single-family home owned by the landlords, failed to pay all of the rent due under the lease agreement entered into by the parties, the opinion said. The landlords then filed a complaint in the Philadelphia Municipal Court. Thereafter, a judgment for possession was rendered in favor of the landlords and against the tenants solely for nonpayment of rent.

The tenants then appealed the Philadelphia Municipal Court’s ruling to the trial court and obtained a supersedeas on the condition that they make timely installment payments against the past-due rent, the opinion said. After the tenants failed to make an agreed upon payment, the trial court terminated the supersedeas and the landlords filed a writ of possession in the Philadelphia Municipal Court.

To prevent an eviction from taking place, the tenants attempted to pay the amount designated on the writ, the opinion said. However, the landlords declined to accept the payment from the tenants upon the grounds that, by the time of the attempted execution, additional sums had become due under the lease agreement. When the tenants refused to pay beyond the amount set forth in the writ, the landlords elected to proceed forward with the eviction, the opinion said.

The tenants responded with a petition to satisfy the judgment based upon their attempt to pay the writ amount. After the Philadelphia Municipal Court denied that petition, the tenants appealed that ruling to the trial court.

Subsequently, the tenants filed an emergency motion to pay the judgment amount and, thus, stay in the lease premises, but, following a hearing, the trial court denied both the petition to satisfy the judgment for possession and the “pay and stay” motion.

The tenants then appealed the trial court’s ruling to the Superior Court of Pennsylvania.

On appeal, the Superior Court first compared the statutory language of the Landlord and Tenant Act with that of the Rules of Civil Procedure for Magisterial District Judges.

Section 250.503 of the Landlord and Tenant Act provides that a writ of possession issued solely for nonpayment of rent will be rendered of no effect upon payment of “the rent actually in arrears and costs.”

The Superior Court pointed out that the rules substantially track the language of the act in providing for writs of possession to be superseded by payment of back rent they also define the pivotal term “rent actually in arrears.”

In comparison, Rule 518 of the Rules of Civil Procedure for Magisterial District Judges, which allows for the practice known as “pay and stay,” provides that “at any time before actual delivery of the real property is made in execution of the order for possession, the defendant may, in a case for the recovery of possession solely because of failure to pay rent, satisfy the order for possession by paying to the executing officer the rent actually in arrears and the costs of the proceedings.”

According to the Superior Court, the rules committee’s explanatory comment to Rule 518 “clarifies the amount of money required to satisfy rent in arrears and the costs of landlord-tenant proceedings as the sum set forth on the order for possession” and “since tenants are often confused regarding the amount of monies to be paid to satisfy a judgment, especially when additional rent may have accrued between the time of the judgment and the scheduled eviction, Rule [518] specifies that rent in arrears includes only those sums set forth on the order for possession.”

After concluding that the meaning ascribed to the term “the rent actually in arrears and costs” in Rule 518 should equally apply to those in the Landlord and Tenant Act, the Superior Court next addressed whether the trial court abused its discretion by ruling that “Philadelphia County has its own local court rules, and for that reason, any Magisterial District Justice [sic] Rules of Civil Procedure are not relevant to this action.”

The Superior Court stated that the trial “courts analysis of this point is inadequate.”

While acknowledging that the rules are not directly applicable to proceedings in Philadelphia Municipal Court, the Superior Court emphasized that “the analogous Philadelphia rule does not vary in substance from the statewide rule and does not distinguish Philadelphia practice from that applied elsewhere.”

According to the Superior Court, Philadelphia Municipal Court Rule 126 directs that execution and revival of judgments (including service of writs of possession) must be conducted in conformity with practice followed in the Court of Common Pleas and prescribed in the rules for magisterial district judges.

As such, the Superior Court posited that “inasmuch as the language of Municipal Court Rule 126 does not track the language of Rule 518, [its] holding … establishes a bridge by which conformity can be achieved” and “until the Philadelphia Municipal Court rules are amended in language that clarifies the current ambiguity and halts the practice we have addressed here, the protections of [Rule] 518 shall apply fully to the residents of the city of Philadelphia.”

LESSONS LEARNED

In Johnson, the tenants did not pay any rent to the landlords after the judgment for possession was entered. Based upon the Superior Court’s ruling, however, the tenants in Johnson are now allowed to stay in possession of the leased premises by merely paying the rent due through the date of the judgment for possession. In other words, the landlords in Johnson will now have to file a separate complaint for the rent due after the date the judgment was entered. This game of possum could continue to play out until the term of the lease agreement expires under the “pay to stay” doctrine.

While there may not have been any nonmonetary breaches of the lease agreement in Johnson, attorneys representing landlords in the state should look long and hard if any such nonmonetary breaches do exist, simply because the “pay to stay” doctrine does not apply where the judgment for possession is partly based upon non-monetary breaches of the lease agreement.

Reprinted with permission from the March 19, 2013 edition of The Legal Intelligencer © 2013 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

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Alan Nochumson served as a faculty speaker for the Continuing Legal Education (CLE) seminar entitled Real Estate Purchase and Sale Transactions which was sponsored by Sterling Education Services, Inc.

During the seminar, Nochumson spoke both about how to responsibly enter into an agreement of sale as well as the special issues sellers and purchasers alike must confront with respect to condominiums, planned communities, and homeowners’ associations.

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