Stendardo Revisited: The Importance of Specifying Obligations in a Mortgage that Continue in Force after a Foreclosure Judgment

In a recent 2015 case, EMC Mortgage, LLC v. Biddle, 114 A.3d 1057, the Pennsylvania Superior Court applied the holding, Stendardo v. First National Mortgage Association, 991 F.2d 1089 (3d Cir.1993), to a case where a mortgage lender moved to amend a default judgment for mortgage foreclosure to add fees, costs and interest that had not been included in the judgment. In Stendardo, the Third Circuit Court of Appeals, applying the doctrine of merger of judgments as in effect in Pennsylvania, held that the "terms of a mortgage are merged into a judgment and thereafter no longer provide the basis for determining the obligations of the parties," except that "parties to a mortgage may rely upon a particular provision post-judgment if the mortgage clearly evidences their intent to preserve the effectiveness of that provision post-judgment." Both parties agreed to the application of Stendardo, so the Biddle case did not actually hold that Stendardo correctly interpreted Pennsylvania law. However there is nothing in the opinion that would indicate that the Superior Court disagreed with Stendardo.

Biddle adds color to the Stendardo holding by addressing the survival of monetary obligations not included in a foreclosure judgment and holding that a court has the inherent power to amend a judgment until the judgment is discharged or satisfied.

The mortgage provided that EMC was "entitled to collect all expenses incurred in pursuing the remedies [of a foreclosure action], including, but not limited to, attorney's fees and costs of title evidence." The court agreed with the trial court that this language clearly evidenced the parties' intent that attorneys' fees and title costs should survive the default judgment. However, the court ruled that other expenses such as late charges, property inspection fees, mortgage insurance premiums and escrow deficits did not survive the judgment, because the mortgage did not expressly provide that they did.

The court also held that EMC was entitled to collect post-judgment interest at the rate provided by the mortgage note based on the express language in the mortgage stating that "the interest rate payable after judgment is entered on the note or in an action of mortgage foreclosure shall be the rate payable from time to time under the note." Absent this language, the interest rate payable to EMC post-judgment would have been the statutory judgment rate of six percent and not the rate negotiated by EMC and mortgagor for the note. Although the interest rate set forth on the note survived judgment, the court held that the record did not support the interest awarded by the lower court because the note, which was the only contractual document that specified the rate, was not included in the record, and the record did not reflect how the interest claimed by EMC was calculated.

Finally, the court held that “an evidentiary hearing is necessary in order to develop a record that supports any additional damages that are to be awarded to EMC.” Accordingly, the court vacated the lower court's order and remanded the case for an evidentiary hearing in accordance with its opinion.

Protecting the Recovery of Post-Judgment Damages: Practical Steps for Lenders

The Biddle case, as did the Stendardo case before it, provides guidance as to how mortgage lenders can protect their interest in recovering expenses incurred after the entry of a foreclosure judgment and cause a judgment to bear interest at a rate in excess of the statutory six percent rate. Mortgage lenders should consult with legal counsel as to language which would help achieve these results in particular transactions. The following drafting pointers should be considered.

Specific Language in Mortgage.

A mortgage should state as specifically as possible what obligations provided for in the mortgage or other loan documents survive the entry of a foreclosure judgment. A provision such as the following, revised to fit the particular mortgage, could be used:

Obligations Survive Judgment. The Secured Obligations of Mortgagor and the rights and remedies of the Mortgagee hereunder and under the Credit Agreement and other Loan Documents shall continue after and survive the entry of judgment for foreclosure of this Mortgage and/or judgment for the Secured Obligations which this Mortgage secures; it being the intention of the parties hereto that such rights, remedies and obligations, including, but not limited, to the obligations of Mortgagor to perform any covenants contained in this Mortgage (including, without limitation, the Mortgagor's covenants to: (i) pay the premiums in respect of all required insurance policies hereunder or under the Credit Agreement, (ii) pay Charges, (iii) make repairs, (iv) discharge Liens or (v) pay or perform any obligations of the Mortgagor under any Mortgaged Property) and to reimburse Mortgagee to the extent Mortgagee may expend funds for such purposes or for the purpose of remedying any breach of any warranty of Mortgagor contained in this Mortgage shall not merge into or be extinguished by any such judgment but shall continue until all Secured Obligations have been paid in full.

Language such as the following could be used with respect to interest on a judgment:

Default Interest. Interest at a rate equal to the Default Rate shall accrue on any judgment obtained by Mortgagee, whether such judgment is for foreclosure of this Mortgage or is a judgment in personam based on the Secured Obligations, from the date of judgment until actual payment is made of the full amount of the judgment.

Pleading Entitlement to Default Rate in the Complaint and Liquidating it in the Judgment.

In the Biddle case, the issue regarding the interest could probably have been avoided if: (a) a copy of the note had been attached to the complaint,¹ (b) the complaint had (i) specified the rate at which interest was accruing, (ii) calculated amount of interest that was due when the complaint was filed and shown how that amount was calculated, e.g. "Interest on the unpaid principal balance of $100,000 from September 1, 2014 through August 30, 2015 at the rate of 12% per annum, $12,000", (iii) demanded a judgment in a total amount which included that amount and other items then due, plus interest on the unpaid principal balance at the rate provided for by the note from the date through which interest was calculated, e.g. "together with interest on the unpaid principal balance of $100,000 from August 30, 2015 at the rate of 12% per annum", (iv) and demanded that the judgment bear interest at the rate provided for by the note, e.g. "with the judgment to bear interest at the rate of 12% per annum" and (c) the praecipe for default judgment had included interest at the rate demanded by the complaint through the date of judgment and also specified that interest on the judgment should accrue at that rate.

Making a Record for Reassessment of Damages.

If a motion for reassessment of damages is contested, a mortgage lender should be prepared to introduce evidence at a hearing supporting its entitlement to expenses incurred by it after the entry of judgment.

Read the advisory as published in Law360 - "Carefully Crafted Mortgages in Pa. Foreclosure Cases" Subscription required.