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Pennsylvania Superior Court Decision Affects Residential Mortgage Foreclosures

A three-judge panel of the Pennsylvania Superior Court recently issued a decision which could have serious ramifications for many pending and completed residential foreclosures in Pennsylvania. On January 30, 2012, a Superior Court panel affirmed a decision of the Court of Common Pleas of Allegheny County dismissing a complaint in mortgage foreclosure, striking the judgment entered on the complaint, and setting aside a real estate execution sale due to a defect in the Act 91 notice sent to the mortgagor prior to foreclosure.

In Beneficial Consumer Discount Company v. Vukmam, 2012 Pa. Super. 18 (Pa. Super. Ct. 2012) ("Beneficial"), the Superior Court panel upheld a trial court decision that it lacked subject matter jurisdiction over a mortgage foreclosure action because the plaintiff lender had failed to strictly comply with the notice requirements of the Homeowner's Emergency Mortgage Assistance Act, 35 P.S. §§ 1680.401c et seq. ("Act 91"). The specific defect in the notice sent by the lender informed the mortgagor that she had 30 days to hold a face-to-face meeting with an approved credit counseling agency regarding her mortgage default, but the notice failed to advise her of her right to hold the meeting with the lender.

When Act 91 was in effect, Section 1680.402c (b)(1) of the Act required that the pre-foreclosure notice inform the mortgagor "that such mortgagor has thirty (30) days to have a face-to-face meeting with the mortgagee who sent the notice or a consumer credit counseling agency to attempt to resolve the delinquency or default by restructuring the loan payment schedule or otherwise (emphasis added)." However, the official notice promulgated by the Pennsylvania Housing Finance Agency ("PHFA") from May, 1999 through September, 2008 informed the mortgagor only that the mortgagor must meet with a consumer credit counseling agency; the official notice omitted the option of meeting with the mortgagee. (The Act was amended on September 8, 2008 to eliminate the option of meeting with the lender.)

Because the Act 91 notice sent to the mortgagor in the Beneficial case failed to inform her that she could meet with the lender, the trial court in Beneficial concluded that the Act 91 notice was deficient and that the court thus lacked subject matter jurisdiction to entertain the foreclosure action. Consequently, the trial court set aside the sheriff's sale and the judgment and then dismissed the lender's complaint without prejudice to file a similar action, presumably after the defect is cured.

On appeal, the Superior Court reaffirmed prior decisions holding that the notice requirements pertaining to foreclosure proceedings in Pennsylvania are jurisdictional, and the failure to comply with those requirements can deprive a court of jurisdiction to act. Beneficial argued that it was entitled to rely on the notice promulgated by the PHFA, and that the Pennsylvania Legislature had properly given the agency the discretion to decide whether mortgagors should be given the option of meeting face-to-face with the mortgagee or a consumer credit counseling agency. Beneficial also argued that the mortgagor was not prejudiced by the deficiency in the Act 91 notice because she had, in fact, met with Beneficial after receiving the Act 91 notice and ultimately entered into an agreement to cure the mortgage default.

The Superior Court panel rejected all of Beneficial's arguments. The panel distinguished an earlier decision by the Superior Court, Wells Fargo Bank v. Monroe, 966 A.2d 1140 (Pa. Super. Ct. 2009), which held that a different defect in an Act 91 notice did not rob the court of subject matter jurisdiction because the mortgagors there had not been prejudiced by the defect in the notice. In refusing to follow the Wells Fargo decision, the Superior Court held in Beneficial that there was no requirement in the language of Act 91 that the mortgagor be prejudiced in order to find the Act 91 notice invalid. Beneficial, 2012 Pa. Super. at 18.

The Beneficial decision held that the mortgagor need not show prejudice to prevail on her argument, but the Court's refusal to follow its earlier decision in Wells Fargo seems to be a distinction without a difference. The Superior Court in Beneficial provided no meaningful discussion of the difference between the two decisions, other than to say "We find Wells Fargo Bank to be sufficiently distinguishable from [Beneficial], such that the decision in Wells Fargo Bank has no impact on our decision in this case." Beneficial, 2012 Pa. Super. at 18.

The mortgagor in Beneficial moved to set aside the sheriff's sale before the sheriff's deed was delivered to the lender, as required by Rule 3132 of the Pennsylvania Rules of Civil Procedure. Failure to have timely attacked an execution sale, however, may not insulate mortgagees on concluded sales because the lack of subject matter jurisdiction results in the completed foreclosure being rendered void from the time the action was commenced. Pending foreclosures which have involved the defective Act 91 notice will certainly be impacted by the Beneficial decision. Further, the Beneficial decision may create a cloud on the title to foreclosed properties.

The alleged defect in the Act 91 notice which led to the Beneficial decision is present in all Act 91 notices generated by the PFHA from May, 1999 through September 8, 2008 and used by lenders across the Commonwealth. If the Beneficial decision is denied re-hearing or is affirmed on appeal to the Pennsylvania Supreme Court, the result will be that any foreclosure based on the defective PFHA-generated Act 91 notice will be invalid, due to the lack of subject matter jurisdiction by the court presiding over the foreclosure action.

Beneficial has requested reargument, and the Superior Court will decide on April 13 whether the request will be granted. Considering the far-reaching and severe impact this decision will have on residential foreclosures in Pennsylvania, this writer anticipates that either the Superior Court on reargument, or the Pennsylvania Supreme Court on appeal, will modify or overturn the Beneficial decision so as to confer subject matter jurisdiction on lower courts which have presided over concluded foreclosures and currently pending cases. In the meantime, residential mortgage lenders should be cognizant of the potential for concluded and currently pending foreclosures to be attacked on a similar basis, where the defective PHFA-generated Act 91 notice was sent prior to foreclosure.

What action should be taken by foreclosing lenders in light of the Beneficial decision? Since this is a recent decision, no case law has developed which provides a remedy for a foreclosing lender. Although quiet title actions or other procedures could be pursued to obtain confirmation from a lower court that implicated foreclosures were valid and good title has been or will be conveyed, it is logical that any subsequent action based upon a potentially invalid foreclosure will be invalid as well. It may be prudent to wait for further judicial developments prior to commencing any further foreclosures in which the defective Act 91 was issued.

We will continue to monitor the progress of the Beneficial decision through the courts and keep you advised of the ultimate outcome. If you have any questions regarding the Beneficial decision in particular, residential or commercial mortgage foreclosure in Pennsylvania in general, or any creditor/debtor matters, please contact Susan Reiter at (814) 870-7760 or sreiter@mijb.com.