In May 2012, the Pennsylvania Superior Court issued its decision in Commerce Bank/Harrisburg, N.A. v. Kessler, effecting fundamental change in the previously understood priority of open-end construction loan mortgages over mechanics liens. At the time of the Kessler decision, the Mechanics Lien Law (“MLL”), 49 P.S. 1101, et seq. provided that, although a mechanics lien for construction of improvements generally has priority as of the date of visible commencement of work, it was subordinate to an open-end mortgage “the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises…”. The Kessler court interpreted the statute to mean that, in order for the exception to priority to be applicable, all of the loan proceeds secured by the open-end mortgage must be used for such “hard costs,” and none of the loan proceeds could be used for other purposes, such as closing costs, satisfaction of an existing mortgage, or payment of other judgments and liens. As a result of the Kessler decision, lenders have sought to structure transactions to allow for title insurance coverage against mechanics liens for construction loans when visible work commenced prior to the mortgage recording date.
A Commonwealth Court ruling earlier this month, in City of Philadelphia v. Manu, 2013 Pa. Commw. LEXIS 363, may have a significant effect on the City’s procedures in tax sales, and the success of owners and lienholders in setting aside or staying such sales if statutory requirements are not followed.
In January 2011, the City filed a petition seeking to sell a rental property owned by Agnes Manu free and clear of all encumbrances, pursuant to the Municipal Claims and Liens Act (the “Act”), 53 P.S. §7101, et seq. The City first alleged the amount of delinquent water and sewer rents was $0.00 and attached to its petition an “amended” claim of $657.54, plus interest and penalties for “City taxes”. In addition to the property owner and other tax lien holders, several mortgagees had an interest in the property. However, the show cause order that issued on the petition was only directed to the property owner. Further, service of the petition and rule was made only by posting on the property.
Every year, the Commonwealth of Pennsylvania State Tax Equalization Board (“STEB”) establishes a common level ratio (“CLR”) of assessed value to market value of real estate for each of Pennsylvania’s 67 counties for the prior calendar year, which are to be issued by the July 1 effective date. In 2012, however, the CLR for Philadelphia was not established until December, and published in early January 2013- prior to that time, the previous year’s CLR of 25.2% was used. The recently published CLR for Philadelphia, effective July 1, 2012 through June 30, 2013, is 30.6%.
The Pennsylvania Supreme Court has agreed to hear an appeal in Osprey Portfolio, LLC v. Izett, on the issue of the applicable statute of limitations for a loan guaranty that is signed under seal. In Osprey, the lender argued that a guaranty is an “instrument” which, if signed under seal, is governed by a 20-year statute of limitations pursuant to 42 Pa. C.S. 5529. The guarantor argued that a guaranty is merely a “contract” which is governed by a four-year statute of limitations pursuant to 42 Pa. C.S. 5525.
In Commerce Bank/Harrisburg, N.A. v. Kessler, 2012 WL 1610139 (Pa. Super. 2012), the Superior Court of Pennsylvania recently ruled on two issues of first impression: whether the amended version of the Mechanics Lien Law (“MLL”), 49 P.S. 1101, et seq., applies to contracts entered into prior to its January 1, 2007 effective date, and when a mechanics lien will have priority over an open-end mortgage.
The first issue addressed by the Court in Kessler applies to a limited number of loans- those for which contracts were entered into and visible commencement of work occurred prior to the January 1, 2007 effective date of the amended MLL, but the lien obtained after January 1, 2007. On this issue, the Court held that the applicable law was the amended MLL, since it was the law in effect at the time the contractors’ lien was filed; the law in place when construction began and the contract was entered into was not applied.