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In re Stendardo

filed: April 9, 1993; As amended June 21, 1993.

ANTHONY STENDARDO, DEBTOR LORETTA STENDARDO, DEBTOR ANTHONY STENDARDO; LORETTA STENDARDO
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION FEDERAL NATIONAL MORTGAGE ASSOCIATION C/O SOVRAN MORTGAGE CORPORATION, APPELLANT EDWARD SPARKMAN, TRUSTEE



Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil Action No. 90-06526).

Present: Mansmann, Hutchinson and Garth, Circuit Judges.

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge.

The Federal National Mortgage Association ("FNMA") appeals a decision of the United States District Court for the Eastern District of Pennsylvania in favor of appellees Anthony and Loretta Stendardo (the "Debtors"). In re Stendardo, 139 Bankr. 128 (E.D. Pa. 1992) ("Stendardo II "). The Debtors owned property subject to a mortgage assigned to FNMA. They later filed for bankruptcy. The bankruptcy court held that FNMA was entitled to include in its proof of claim real estate taxes and insurance premiums it paid after filing a mortgage foreclosure and obtaining a default judgment against the Debtors' property. See In re Stendardo, 117 Bankr. 833 (Bankr. E.D. Pa. 1990) ("Stendardo I "). The Debtors appealed to the district court, which reversed, reasoning that the debtor's obligations under the mortgage were merged into the judgment obtained in the foreclosure action. We will affirm.

The bankruptcy court exercised subject matter jurisdiction under 28 U.S.C.A. §§ 157(b), 1334(b). The district court exercised appellate jurisdiction under 28 U.S.C.A. § 158(a). This Court exercises appellate jurisdiction under 28 U.S.C.A. § 158(d). See Allegheny Int'l, Inc. v. Allegheny Ludlum Steel Corp., 920 F.2d 1127, 1131-1132 (3d Cir. 1990).

I. Factual & Procedural History

Pasquale and Kathryn Stendardo owned property located at 2716 East Birch Street in Philadelphia (the "Property") as trustees for appellee Anthony Stendardo. On October 26, 1970, Pasquale and Kathryn obtained a mortgage loan in the amount of $7,250.00 payable over twenty years at an interest rate of 8.5% from Bogley, Harting, Mahoney and Lebling, Inc. ("Bogley Harting"). A promissory note dated October 26, 1970 memorialized this loan (the "Note"). A first mortgage against the Property, also dated October 26, 1970 (the "Mortgage"), secured the loan. On November 17, 1970, Bogley Harting assigned the Note and the Mortgage to FNMA.

The Mortgage provides in pertinent part:

2. That in order more fully to protect the security of this mortgage, the Mortgagor, together with, and in addition to, the monthly payments of principal and interest payable under the terms of the note secured hereby, covenants to pay to the Mortgagee, on the first day of each month until the said note is fully paid, the following sums:

(a) An amount sufficient to provide the holder hereof with funds to pay the next mortgage insurance premium . . . .

(b) A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other hazard insurance covering the premises secured hereby, plus taxes and assessments next due on the premises covered hereby (all as estimated by the Mortgagee) . . .; and

(c) All payments mentioned in the two preceding subsections of this paragraph and all payments to be made under the note secured hereby shall be added together and the aggregate amount thereof shall be paid by the Mortgagor each month in a single payment . . . .

Any deficiency in the amount of such aggregate monthly payment shall, unless made good by the Mortgagor prior to the due date of the next such payment, constitute an event of default under this mortgage, and the entire mortgage shall become due at the option of the holder hereof . . . .

5. That the Mortgagor will not suffer any lien superior to the lien hereby created to attach to or to be enforced against the premises . . . .

6. That the Mortgagor will pay all ground rents, taxes, assessments, water rates, and other governmental or municipal charges, fines or impositions, for which provision has not been made hereinbefore and that he will promptly deliver the official receipts therefor to the Mortgagee, and in default thereof the Mortgagee shall have the right to pay same. The Mortgagee shall have the right to make any payment which the Mortgagor should have made, and the Mortgagee may also pay any other sum that is necessary to protect the security of this instrument. All such sums, as well as all costs, paid by the Mortgagee pursuant to this instrument, shall be secured hereby and shall bear interest at the rate set forth in the note secured hereby from the date when such sums are paid.

AND PROVIDED ALSO, that when as soon as the principal debt and sum hereby secured shall become due and payable as aforesaid, or in case default shall be made in the payment of any installment of principal and interest, or any monthly payment hereinabove provided for, . . ., it shall and may be lawful for said Mortgagee forthwith to bring an Action of Mortgage Foreclosure, . . . or to institute other foreclosure proceedings upon this mortgage, and to proceed to judgment and execution for recovery of said principal debt, all interest thereon, all sums advanced for payment for any ground rent, taxes, water rents, charges, claims or insurance premiums as aforesaid . . . .

Appellant's Appendix (App.) at 59-60. Pasquale and Kathryn Stendardo transferred ownership of the Property to the Debtors by deed on June 7, 1972, under and subject to the Note and Mortgage. On May 30, 1985, the Debtors filed their first voluntary Chapter 13 petition in bankruptcy (the "First Bankruptcy"). FNMA filed a proof of claim and later obtained relief from the automatic stay in order to prosecute a mortgage foreclosure action. The First Bankruptcy was voluntarily converted to a Chapter 7 liquidating bankruptcy on October 16, 1986. FNMA filed a mortgage foreclosure action and obtained a default judgment against the Debtors on February 11, 1987 in the amount of $6,391.09 (the "Judgment").

In order to protect its security interest in the property, FNMA paid insurance premiums and real estate taxes levied against the Property when the Debtors failed to pay them after the Judgment was entered (the "Post-Judgment Expenses"). Between February 18, 1987 and June 14, 1990, FNMA paid $1,804.25 in real estate taxes, $23.37 in Federal Housing Administration ("FHA") insurance premiums, and $2,323.00 in hazard insurance premiums. These payments were necessary in order for FNMA to maintain FHA mortgage insurance on the loan. The Debtors did not request FNMA to make any of these payments. Stendardo I, 117 Bankr. at 835.

The Debtors obtained a discharge in the First Bankruptcy on January 10, 1989. They filed their presently pending Chapter 13 bankruptcy one month later on February 10, 1989 (the "Second Bankruptcy"). See In re Stendardo, Ch. 13 Case No. 10581S (Bankr. E.D. Pa.).*fn1 FNMA filed a proof of claim in the Second Bankruptcy on January 10, 1990. This proof of claim, which included amounts representing both the Judgment and the Post-Judgment Expenses, as well as attorney's fees and costs, totaled $14,026.64.

The Debtors filed an adversary proceeding attacking FNMA's proof of claim on May 10, 1990 in the bankruptcy court. Although the parties resolved by stipulation many of the Debtors' objections to FNMA's proof of claim,*fn2 they were unable to resolve their objection to inclusion of the Post-Judgment Expenses. Stendardo I, 117 Bankr. at 834. The parties submitted this controversy to the bankruptcy court for resolution on the pleadings, briefs, and factual stipulations.

By order dated August 29, 1990, the bankruptcy court held that FNMA was entitled to include the Post-Judgment Expenses in its proof of claim. Id. at 834. The court first held that "although a mortgage merges into a judgment, the lien created by the mortgage remains despite the presence of the judgment." Id. at 838. Accordingly, the bankruptcy court concluded that the doctrine of merger did not render null and void the mortgage terms imposing on the Debtors the obligation to pay insurance premiums and real estate taxes. As a result, FNMA was allowed to add the Post-Judgment Expenses to the amount of its secured claim. Id. at 838-39. In the alternative, the bankruptcy court held that even if such a merger occurred, FNMA could include the Post-Judgment Expenses in its secured claim under a theory of unjust enrichment because FNMA's payments clearly conferred benefits upon the Debtors who retained an independent legal obligation to pay these costs. Id. at 840-41.

The district court vacated and remanded. In order for mortgage terms to survive merger into a foreclosure judgment, it decided that the language of the mortgage must clearly indicate that a term or clause in an agreement will remain operative after a judgment is obtained. Stendardo II, 139 Bankr. at 131 (citing In re Presque Isle Apartments, 112 Bankr. 744, 747 (Bankr. W.D. Pa. 1990)). The language in the Mortgage here only mentions the Debtors' obligation to pay the relevant taxes and insurance premiums while the Mortgage is in effect. It does not provide that this obligation is to continue after a judgment is obtained. Based on this reasoning, the district court concluded that the Mortgage is unambiguous as a matter of law and not reasonably susceptible to the bankruptcy court's interpretation that the Debtors's obligation to pay the expenses at issue extends beyond the date of judgment. Id.

The district court then addressed the bankruptcy court's alternative holding. Id. It first factually distinguished the cases upon which the bankruptcy court relied in determining that the Debtors had a legal obligation, independent of the Mortgage, to make the expenditures at issue. These cases, opined the district court, are inapposite because they involve pre-foreclosure obligations of a debtor who is a party to an installment land sale contract. Id. at 131-32 (citing In re Rowe, 110 Bankr. 712, 714-15 (Bankr. E.D. Pa. 1990); In re Capodanno, 83 Bankr. 285, 286-88 (Bankr. E.D. Pa. 1988); In re Fox, 83 Bankr. 290, 290-91 (Bankr. E.D. Pa. 1988)).

The district court also held that FNMA could not rely on the doctrine of unjust enrichment to recover the Post-Judgment Expenses because no evidence in the record established either that the Debtors benefitted from FNMA's payments or that the Debtors had notice that FNMA was making the payments and that it expected to be reimbursed. Id. at 132. Accordingly, the district court refused to allow FNMA to include in its secured proof of claim the Post-Judgment Expenses.*fn3 Id.

The district court denied FNMA's motion for reconsideration on April 22, 1992. FNMA filed its notice ...


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