Daily Development for
Friday, January 22, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; DEFICIENCIES; “FAIR VALUE LIMITATION” STATUTES: Under Pennsylvania’s Deficiency Judgment Act, mortgagee has right to seek deficiency from limited guarantor after sale of mortgaged property at execution sale if court sets a deficiency amount after a “fair value” hearing, even though fair market value of property exceeds the amount of the guaranty.

Confederation Life v. Morrisville Properties, LP, 715 A.2d 1147 (Pa. Super. 1998).

Guarantor guaranteed $2.7 million debt up to a maximum of $675,000. After borrower defaulted, mortgagee foreclosed on the real estate and later sought a deficiency judgment from the guarantor. Citing Federal Home Loan Mortgage Corp. v. Arrott Associates, 60 F.3d 1037 (3rd Cir. 1995), the guarantor argued that since the fair market value of the property exceeded the amount of its guaranty. the state statute precluded any further recovery from the guarantor. Arrott had held that the state Deficiency Judgment Act requires the release of all partial guarantors from their entire liability for a debt whenever their portion of the liability is less than the fair market value of the property.

The court agreed that if the court were to follow Arrot, the guarantor would be discharged in this matter. The court concluded, however, that the Third Circuit misconstrued the Deficiency Judgment Act, and adopted a different interpretation of the statute.

The court pointed out that the statute's purpose is to preclude double recovery by a mortgagee but still to allow the mortgagee to recover the balance of its debt without a loss. The result of the Arrott case would allow complete discharge of all debtors whose liability did not exceed the fair market value even though the creditor would have suffered a substantial loss. For example, where multiple debtors are liable for portions of a large debt, the possibility exists that the creditor could not recover the deficiency between the fair market value and the total debt from any of the debtors because their individual debts did not exceed the fair market value of the property.

Comment: The case appears indisputably correct on the policy. Mortgagees typically look to guarantors to provide additional protection if the security proves inadequate. If a guarantor believes that some other understanding exists, it ought to be the guarantor’s responsbility to see to it that the documents expressly reflect that understanding. There is nothing in Pennsylvania’s “fair value” limitation that is inconsistent with a rule that guarantors should stand liable to deficiencies that are set by a court after taking fair value into account. In fact, some courts have concluded that anti-deficiency statutes ought not to protect guarantors at all. (Pennsylvania has not gone that far here.)

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