Practice Alert: The Pennsylvania Superior Court Gives Orphans Courts Greater Cramdown Power than the U.S. Bankruptcy Courts
In the recently-issued decision of In re Estate of Anna Marie Leipold, 2019 Pa. Super. 123, the Pennsylvania Superior Court held that the Orphans Courts, divisions of the Courts of Common Pleas having jurisdiction over decedents’ estates, may order judicial sales of real property notwithstanding challenges by mortgagees that such sales are functionally forced short sales. The deceased mortgagor’s personal representative filed a petition with the Orphans Court seeking leave of Court to sell a home, the primary asset of the estate, in which the proposed sale price was well less than the mortgage debt and approximately 1/5 less than the mortgagee’s last property valuation. For these reasons, the mortgagee filed opposition to the Petition. After several hearings, the Orphans Court denied the Petition.
The estate relied principally on In re Estate of Landis, 85 A.3d 506 (Pa. Super. 2014) in which the Superior Court affirmed the Orphans Court’s grant of a petition to sell real estate where there was no opposition by the mortgagee. In Leipold, the mortgagee took the position that Landis could not apply because Landis involved a no-opposition scenario. Moreover, the mortgagee argued that 20 Pa. C.S.A. §3357(b) requires consent of the mortgagee in order for a judicial sale of real property to occur. Such section states (in pertinent part):
Any sale or exchange by a personal representative pursuant to a decree under section 3353 shall have the effect of a judicial sale, but the court may decree a sale or exchange freed and discharged from the lien of any mortgage otherwise preserved from discharge by existing law, if the holder of such mortgage shall consent by writing filed in the proceeding.
The Superior Court, however, looked to 20 Pa. C.S.A. §3353, which contrasts with §3357(b) and permits the judicial sales “whenever the court shall find such sale, pledge, mortgage, lease, exchange, or option to be desirable for the proper administration and distribution of the estate.” The Superior Court therefore determined that irrespective of a mortgagee’s opposition to a petition to sell real property, the Orphans Court still “has the authority to order the judicial sale, allow the real property to be sold at a fair and reasonable price, and cause mortgagee’s lien to attach to the proceeds of the judicial sale.” Therefore, the Superior Court concluded that even if opposition is filed to a petition for judicial sale on any grounds, the Orphans Court is required to proceed to the next step and analyze whether the sale price is “fair and reasonable.” The practical effect of the Superior Court’s Opinion is that for all such petitions going forward, the Orphans Courts have the extraordinary power to cramdown a first-priority mortgage on any property provided that the sale price is “fair and reasonable” (the U.S. Bankruptcy Courts’ cramdown power, by contrast, is limited to investment properties). While the mortgagee in Leipold argued in its Appellate Brief that a 1/5 reduction is per se unfair and unreasonable, the Superior Court’s Opinion in Leipold unfortunately gave no guidance or parameters for a fair and reasonable sale price. Consequently, and until that precise issue is clarified by Pennsylvania’s Appellate Courts, diverse and varied outcomes at the Orphans Court level should be expected.