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In re Smith

filed as amended april 14 1989.: January 12, 1989.


Appeal from the United States District Court for the Eastern District of Pennsylvania, Civil No. 86-3033.

Gibbons, Chief Judge, Becker, and Rosenn, Circuit Judges.

Author: Rosenn


ROSENN, Circuit Judge.

This case raises the issue of whether the foreclosure of residential property without either giving the required notice of intention to foreclose until a few days before the sheriff's sale or timely serving the foreclosure complaint constitutes injuries cognizable under the Pennsylvania "unfair or deceptive practices act" (UDAP) or under the Pennsylvania Loan Interest and Protection Law (Act 6). Both the district court and the bankruptcy court concluded that the UDAP did not extend to such injuries. Neither court, however, addressed the claim under Act 6. The plaintiff, Johnnie Mae Smith, appealed, and we reverse.


Smith purchased a parcel of real estate at 1356 East Rittenhouse Street, Philadelphia, Pennsylvania in 1963 and mortgaged the property to Buffalo Savings Bank (the Bank). The mortgage was insured by the Federal Housing Administration (HUD) and serviced by Fidelity Bond and Mortgage Company of Philadelphia (Fidelity).

Because of health reasons, Smith joined her family in Germany. Prior to her departure she had arranged for her property to be managed by a third-party whose duties included collection of the rents and payment of the mortgage from those rents. Her agent, however, failed to collect the rents and to pay the mortgage. As a result, Smith became delinquent on the mortgage on which she had made monthly payments for approximately seventeen years.

On June 19, 1980, Smith sent Fidelity a notarized letter stating that she was residing in Germany for an indefinite period of time and asking Fidelity to send her an accounting there of the payments due. On July 1, 1980, Fidelity sent the requested information by certified mail to Smith in Germany. At that time, the sum needed to satisy the delinquency amounted to $1,095.79.

Before the month's end, however, Fidelity instituted mortgage foreclosure proceedings by filing a complaint in the Court of Common Pleas of Philadelphia. The following month the sheriff attempted to effect service of the complaint by delivering a copy to an individual residing on the mortgaged property. Although, as both the bankruptcy court and district court found, Fidelity knew that Smith did not reside at the property,*fn1 service was neither made on her personally nor at her residence.

The court entered default judgment on the foreclosure complaint in favor of Fidelity on September 4, 1980. Shortly thereafter, Fidelity mailed a "HUD tenant letter" to the occupants of the property. Notably, no such letter was sent to Smith.

Smith did not learn of the foreclosure proceedings until three weeks after entry of the default judgment. She immediately communicated with Fidelity and learned of the impending sheriff's sale of the property on October 6, 1980. Smith requested that the sale be postponed and Fidelity complied by rescheduling the sale for November 3.

With hope of reinstating the mortgage, Smith flew from Germany to Philadelphia and offered Fidelity $1,300. Fidelity declined and stated that the outstanding deficiency now amounted to $1,997.88, consisting of $1,199.38 in delinquent monthly payments and late charges, $774.50 in attorneys' fees, and $24.00 in foreclosure inspection costs.

The sheriff sold the mortgaged property at public sale on November 3 to Commercial Banking Corporation (Commercial), the second lienholder, for $4,600. Smith then leased the property from Commercial.

On October 13, 1981, Smith filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Shortly thereafter, she commenced an adversary proceeding against Buffalo, Fidelity, Commercial, and the bankruptcy trustee,*fn2 requesting the bankruptcy court to set aside the foreclosure of the property. Commercial settled out of the litigation by selling the property back to Smith for $8,000, of which $7,000 was to be paid pursuant to a ten year mortgage at the rate of 14 percent per annum. After settling with Commercial, Smith sought monetary damages against Buffalo and Fidelity for violations of (1) UDAP, and (2) Act 6.

The bankruptcy court heard plaintiff's case regarding the UDAP and Act 6 claims on June 17, 1985. Prior to the court's disposition of the case, Smith converted the Chapter 13 proceeding into a Chapter 7 case, and received a Chapter 7 discharge from the bankruptcy court in December 1985. On April 11, 1986, the court entered an order denying Smith any relief under UDAP or Act 6. Smith filed a timely appeal to the United States District Court for the Eastern District of Pennsylvania which entered an order on May 23, 1988, affirming the judgment of the bankruptcy court. The plaintiff timely appealed to this court.

The only claims remaining before this court are the claims arising under Pennsylvania law which Smith contends are properly before this court as related to the original bankruptcy claim under 28 U.S.C. ยง 157.*fn3 Although the bankruptcy court found that Fidelity failed to make proper service of the foreclosure complaint upon Smith, it concluded, without discussion, that plaintiff had no action for Fidelity's conduct under the UDAP. 59 B.R. 298, 301 (E.D. Pa. 1986). The district court, on appeal, agreed with the bankruptcy court that improper service of the complaint did not constitute an injury cognizable under the UDAP, concluding that "[e]ven if the failure to give notice ...

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