Horbal v. Moxham National Bank

JOHNSON, Judge.

We are asked to determine whether the Deficiency Judgment Act, originally the Act of July 16,1941, P.L. 400,12 P.S. § 2621.1 et seq., reenacted as the Act of July 9, 1976, P.L. 586, No. 142, § 2, now 42 Pa.C.S. § 8103 et seq., bars the redemption of a certificate of deposit (CD) by an assignee bank, where the assignment secured an antecedent indebtedness also secured by a mortgage upon real estate. We conclude that the Act has no application to the facts presented on this appeal. Moreover, we find that all conditions of the assignment were met and redemption of the CD was in full compliance with the “Uniform Commercial Code” (UCC) then in effect. Accordingly, we affirm the order which granted summary judgment in favor of the assignee bank.

In February 1988, Moxham National Bank (the Bank) loaned $120,000 to John and Anthony Horbal and Elaine Adams, co-partners Va Potomac Associates II (collectively, the debtors). The loan was secured by a mortgage executed that same day on real estate owned by the debtors. Two weeks later, the Horbals, in their individual capacities, assigned a $25,000 CD to the Bank. The assignment secured the “present and unconditional payment and performance when due” of “[a]ny and all indebtedness, obligations and liabilities of [the debtors] to the Bank, now or hereafter existing or arising, due or to become due.” The Horbals also granted the Bank a power of attorney to withdraw all or part of the CD without notice to, or further consent of, the debtors. The assignment could be released only upon complete payment of the debtors’ obligations or the mutual agreement of the Bank and the Hor-bals.

The debtors defaulted on the $120,000 loan obligation, and the Bank initiated foreclosure proceedings. The real property serving as security for the loan was sold by the sheriff and deeded to the Bank. One week later, on January 29,1991, the Bank withdrew the CD and applied the proceeds totaling $26,437 to the remaining loan balance, which at that time was approximately $116,000.

Ten months later, the Horbals assigned to Highland Financial Limited and James R. Walsh (Use Plaintiffs) any rights or causes of action the Horbals might possess by virtue of the Bank’s withdrawal of the CD and application of the proceeds to the loan balance. The Bank rejected the Use Plaintiffs’ demands that it turn over the proceeds realized upon withdrawal of the CD, prompting the present litigation. Upon the closing of the pleadings, both sides filed motions seeking summary judgment. The trial court granted summary judgment in favor of the Bank, leading to this appeal.

Our Supreme Court has set forth the standard of review to be followed when reviewing an appeal from an order granting summary judgment as follows:

Summary judgment is properly granted where “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law.” Pa. R.C.P. 1035(b). “The record must be viewed in the light most favorable to the nonmoving party, and all doubts as to the existence of a genuine issue of material fact must be resolved against the moving party.” Summary judgment may be entered only in those cases where the right is clear and free from doubt.

Pennsylvania State University v. County of Centre, 532 Pa. 142, 144-45, 615 A.2d 303, 304 (1992) (citation omitted); accord Anderson v. Moore, 437 Pa.Super. 642, 646-47, 650 A.2d 1090, 1092 (1994).

As in the trial court, the Use Plaintiffs argue to this Court that (1) the Bank was required to proceed under the Deficiency Judgment Act prior to withdrawing the CD proceeds; (2) collection of the $26,437 without proceeding under the Deficiency Judgment Act constituted the charging and collecting of a usurious rate of interest under 41 P.S. § 502; and (3) by virtue of the Bank’s alleged violation of 41 P.S. § 502, it is liable for costs and attorneys’ fees pursuant to 41 P.S. § 503.

First, the Use Plaintiffs assert that the Bank was required to proceed under the Deficiency Judgment Act prior to redeeming the CD. We disagree. We find no error in the trial court’s rejection of the Use Plaintiffs’ attempt to introduce Deficiency Judgment Act principles into the analysis of the Bank’s right to withdraw the CD proceeds. Given the express terms of the assignment, that Act has no relevance to the Bank’s action in proceeding on its unrelated secured interest. Because the merit of the second and third contentions depends upon the resolution of this first issue, we further conclude that they, too, are without merit.

In their Summary of Argument, the Use Plaintiffs contend that:

after the occurrence of a Sheriff Sale of the mortgaged premises at which the executing creditor is the purchaser, the executing creditor is precluded from taking any action against any additional collateral for the obligation to collect upon any alleged deficiency unless and until it seeks and obtains a Deficiency Judgment under the “Deficiency Judgment Act.”

Brief on Reargument of Appellants at 13-14. We reject this contention.

The Use Plaintiffs do not direct this Court to any language within the Deficiency Judgment Act which would expressly grant them the relief sought. We are mindful that, in ascertaining the intention of the General Assembly, we may presume that our legislature did not intend a result that is either absurd or unreasonable. 1 Pa.C.S. § 1922(1). We further are guided by the command that, when the words of a statute are clear and free from all ambiguity, the letter of the law is not to be disregarded under the pretext of pursuing its spirit. Since negotiation of bank certificates of deposit is not expressly covered by the Act, we first turn to the assignment itself under which the Bank secured its right to redeem the CD.

An examination of that assignment demonstrates that the debtors and their assignees have no valid complaint regarding the Bank’s actions. The assignment provides, in material part, as follows:

ASSIGNMENT OF DEPOSITS

The undersigned, Anthony Horbal and John Horbal (hereinafter called “Assignors”), for and in consideration of good and valuable considerations in hand paid, the receipt and sufficiency of all of which is hereby acknowledged, does 'hereby ASSIGN, TRANSFER and PLEDGE to the Moxham National Bank, a National banking corporation with its principal place of business at 550 Central Avenue, Johns-town, PA 15902, (hereinafter called “Bank”), all of Assignors’ right, title and interest, on Certificate of Deposit Number 2005581, in the principal amount of Twenty Five thousand and 00/100 Dollars ($25,-000.00), payable to the Assignors and issued by the Bank in January 27, 1988 and all sums now or at any time hereafter on deposit therein, and all sums due or to become due on account of said deposit and any and all renewals, reissues or substitutions thereof, whether in respect of interest paid thereon, the value thereof, or otherwise together with interests of every kind of Assignors therein (all of which is hereafter called the “Account”).

This Assignment and security interest is granted to the Bank to secure the prompt and unconditional payment and performance when due of the following (all of which is herein called the “Indebtedness”).

Any and all indebtedness, obligations and liabilities of Potomac Associates II (hereinafter the “Debtors”) to the Bank, now or hereafter existing or arising, due or to become due.

Assignors hereby constitutes and appoints the Bank their true and lawful attorney, with full power of substitution, (i) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all amounts which may be due or become due and payable under the Account, (ii) to execute any and all withdrawal receipts or other orders for the payment of money drawn on the Account, (iii) and/or to withdraw all or part of the Account without notice to or further consent by Assignors.

Upon the complete payment of the Indebtedness or upon the mutual agreement of the Assignors and the Bank, the Bank will release or partially release this Assignment.

‡ ‡ ‡ $

If for any reason any of the Indebtedness is not paid on or before the maturity thereof, or if any representation or warranty of the Assignors or Debtors herein or in any other agreement now or hereafter executed in connection with or as security for any of the indebtedness or in any certificate at any time furnished in connection herewith or therewith, or if any financial statement of Assignors or Debtors shall prove to be incorrect in any material respect, or if Assignor or Debtors shall default in the performance of any covenant or other agreement of this Assignment or of any other agreement now or hereafter executed in connection with or as security for any of the indebtedness, the Bank shall be entitled to receive or withdraw any or all funds in the Account.

The rights and remedies of the Bank under this Assignment and any other instrument or agreement executed in connection with or as security for any of the Indebtedness shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any right or remedy.

******

WITNESS THE EXECUTION HEREOF, this 18th day of February, 1988.

ASSIGNORS:

s/ Anthony Horbal Anthony Horbal

s/ John Horbal John Horbal

By its express terms, the assignment transfers to the Bank all of the Horbals’ right, title and interest in the CD, along with all sums due or to become due on account of the CD. The assignment grants full power to the Bank to collect and receive all amounts which may be due or become due and payable, along with the express power and right to withdraw all or part of the account without notice. The only restriction on the Bank’s ability to act is that, upon complete payment of the indebtedness or upon mutual agreement, the Bank would release or partially release the assignment.

Initially, we note that at all times material to the transactions involved in this appeal, the effective statute was the “Uniform Commercial Code,” Act of Nov. 1, 1979, P.L. 255, No. 86, § 1. All references in this Opinion are to that Code. The 1992 amendments to the Code are not pertinent to this appeal.

The CD, a type of negotiable instrument, 13 Pa.C.S. § 3104(b), meets all prerequisites to negotiability set forth in 13 Pa.C.S. § 3104(a). The CD was payable at an indefinite time, 13 Pa.C.S. § 3109, and payable “to order,” 13 Pa.C.S. § 3110(a). The negotiability of the CD was not affected by the separate mortgage agreement executed between the debtors and the Bank two weeks before assignment of the CD. 13 Pa.C.S. § 3119.

The debtors’ transfer of the CD to the Bank vested in the Bank such rights as the debtors had therein. 13 Pa.C.S. § 3201(a). The Bank took the instrument for value, in good faith, and without notice that it was overdue, had been dishonored or was subject to any claim or defense against it. The Bank, therefore, became a holder in due course, 13 Pa.C.S. § 3302, and was free to transfer or negotiate the CD and to enforce payment in its own name. 13 Pa.C.S. § 3301. That section provides:

The holder of an instrument whether or not he is the owner may transfer or negotiate it and, except as otherwise provided in section 3603 (relating to payment or satisfaction), discharge it or enforce payment in his own name.

13 Pa.C.S. § 3301 (main volume). As a holder in due course, the Bank took the CD free from all claims to it on the part of any person, including the debtors. 13 Pa.C.S. § 3305. As pointed out in the UCC Comment, following 13 Pa.C.S. § 3305, main volume:

2. The language “all claims to it on the part of any person” is substituted for “any defect of title of prior parties” in the original Section 57 in order to make it clear that the holder in due course takes the instrument free not only from any claim of legal title hut also from all liens, equities or claims of any other kind.

(Emphasis added).

Because the CD is a negotiable instrument within the meaning of the UCC provision, and the Bank had an absolute right to enforce payment in its own name, we are unable to find any fault in the Bank’s redemption of the CD on January 29, 1991. Any analysis under the Deficiency Judgment Act depends upon the CD’s status as a “personal asset” of the debtors. Clearly, the CD was no longer a “personal asset” of the debtors because the rights against the obligor/bank on the CD immediately vested in the creditor/bank upon execution of the assignment documents. 13 Pa.C.S. § 3301. Thus, the assignee bank was free to redeem the CD subject only to the terms contained within the assignment itself.

Accordingly, the theory upon which the Use Plaintiffs seek to proceed is without merit. The Deficiency Judgment Act simply is not implicated in proceedings involving the exercise of express rights to withdraw the proceeds of a CD upon default of an underlying obligation.

As the distinguished trial judge, the Honorable Thomas A. Swope, Jr., concluded:

The Assignment is clear and unambiguous, when the loan went into default the Defendant became entitled to the C.D. It is of no moment that Defendant did not liquidate the C.D. until January 29, 1991, after having first pursued remedies under the Mortgage. Defendant’s right to possession of the C.D. proceeds accrued on the date of the default, by operation of the contract, which predated the purchase of the real property at the Sheriff Sale. The right to the C.D. was independent and unrelated to the default judgment. Therefore the Act has no application to the Assignment.

Opinion, Swope, J., June 22, 1993, at 5.

Applying established contract law, the parties well could have provided for contingencies requiring other, additional action by the Bank prior to its exercise of the clear right to liquidate the CD that is contained in the agreement. They did not. When the economic realities of the transaction are considered, it is not surprising that the Bank sought, and obtained, additional security. When the debtors defaulted on the mortgage note, the Bank’s act in liquidating the CD was predictable.

Because we conclude that the Deficiency Judgment Act has no application to the facts presented on this appeal, we affirm the order granting summary judgment to Moxham National Bank.

Order of June 22, 1993 is AFFIRMED.

DEL SOLE, J., files a Dissenting Opinion in which WIEAND, HUDOCK and SAYLOR, JJ., join.