Adams and Becker, Circuit Judges, and Debevoise,*fn* District Judge.
This diversity action requires us to determine the circumstances under which a guarantor may invoke the protections of Pennsylvania's Deficiency Judgement Act, 42 Pa. Cons.Stat.Ann. § 8103 (1982) (the "Act".) Specifically, the question presented is whether a guarantor can successfully invoke the Act where the creditor, after having foreclosed on a mortgage put up by the stockholders of the principal debtor to obtain a delay of the creditor's action against the principal debtor's property that secures the loan, fails to follow the Act's appraisal procedures. We conclude that the district court erred in holding that the Act was not applicable in this situation, and we therefore reverse.
On June 3, 1978, appellee Marine Midland Bank extended a $600,000 line of credit to Surftex, Inc. The line of credit was secured by Surftex's inventory, equipment, and accounts receivable, and was guaranteed by appellant John H. Miller and two corporations, Surfbelt, Inc. and Techni/Lease Financial Inc.*fn1 After drawing on the line of credit, Surftex defaulted in 1979.
After Surftex defaulted, Marine Midland commenced two separate actions to recover the amount advanced on the line of credit. One was a replevin suit brought in the state court against the collateral that secured the line of credit -- Surftex's inventory, equipment, and accounts receivable. That suit was settled in June 1979, when Marine Midland entered into a forbearance agreement with Surftex's sole shareholders, George and Joan Karsnak. Pursuant to that agreement, Surftex was permitted to retain possession of its collateral for ninety days, and the Karsnaks gave Marine Midland a second mortgage on real property owned by them jointly and personally. The property was Surftex's principal place of business. When Surftex again defaulted, Marine Midland brought an action to foreclose on the mortgage. Following a judgment in its favor, Marine Midland bought the property for $1,457.63 at a sheriff's sale on July 6, 1981.*fn2 Despite the foreclosure and sale, the Karsnaks refused to surrender possession. When the bank filed an ejectment action, the Karsnaks challenged the validity of the sheriff's sale and contested the bank's title and right to possession. To date, the bank has been unable to obtain possession of the property.
In the meantime, the bank also brought a diversity suit in the District Court for the Western District of Pennsylvania against Miller and the two corporate guarantors. In 1981, the district court granted summary judgment for the bank against all defendants in the amount of $86,752.02, plus interest, costs, and attorneys' fees. This court affirmed, Marine Midland Bank v. Surfbelt, Inc., 681 F.2d 807 (3rd Cir.1982). The bank then instituted proceedings in the district court to execute on its judgment against Miller. Miller, however, filed motions to dismiss the execution proceeding and to declare the judgment against him satisfied. He argued that, because Marine Midland had failed to comply with the Deficiency Judgment Act's requirement that the bank file a petition to determine the fair market value of the Karsnak property within six months of its foreclosure purchase, the bank could not collect from him on the balance due on the Surftex line of credit.
The motions to dismiss the execution proceeding and to mark the judgment satisfied were heard on a stipulated record. On August 30, 1982, the district court denied the motion. Reasoning that the debt that led to the foreclosure on the Karsnak property was "independent" of Miller's obligation on the guarantee, the court held that the Act did not apply.
The relevant part of the Pennsylvania Deficiency Judgment Act provides:
(a) General Rule. -- Whenever any real property is sold, directly or indirectly, to the judgment creditor in execution proceedings and the price for which such property has been sold is not sufficient to satisfy the amount of the judgment, interest and costs and the judgment creditor seeks to collect the balance due on said judgment, interest and costs, the judgment creditor shall petition the court having jurisdiction to fix the fair market value of the real property sold. The petition shall be filed as a supplementary proceeding in the matter in which the judgment was entered.
(d) Action in absence of petition. -- If the judgment creditor shall fail to present a petition to fix the fair market value of the real property sold within the time after the sale of such real property provided by section 5522 (relating to six months limitation), the debtor, obligor, guarantor or any other person liable directly or indirectly to the judgment creditor for the payment of the debt, . . . may file a petition, as a supplementary proceeding in the matter in which the judgment was entered, in the court having jurisdiction, setting forth the fact of the sale, and that no petition has been filed within the time limited by statute after the sale to fix the fair market value of the property sold, whereupon the court, after notice as provided by general rule, and being satisfied of such facts, shall direct the clerk to mark the judgment satisfied, released and discharged.
There is no dispute that Marine Midland did not file a petition to determine the fair market value of the Karsnak property. This failure would warrant ...