Pennsylvania's second-highest court delivered a Christmas present to the state's banks last month, lifting a heavy burden that bankers had assumed could be eased only legislatively.
In a surprise decision in late December, the state's Commonwealth Court reversed the results of a 1993 decision by a three-judge panel that has cost the state's bankers millions of dollars in foreclosure fees paid to county sheriffs.
The court ruled in favor of Jersey Shore State Bank, saying fees assessed for conducting a sheriff's sale, called poundage, must be based only on the winning bid at the sale rather than the total amount owed by the debtor, as the earlier decision said.
The ruling is expected to save bankers thousands of dollars on each sale when the banks buy the properties back, since the winning bids in those cases are usually equal to a few hundred dollars in simple costs to the sheriffs. The exact percentage levied varies slightly among the counties.
"The sheriffs are not entitled to windfalls and that's what the original court decision amounted to, and we're very happy that the Commonwealth Court is interpreting the law as it reads," said Theodore H. Reich, president and chief executive of $238 million-asset Jersey Shore. In the case that prompted the lawsuit, Jersey Shore had been charged more than $9,300 by the county sheriff on a sale, even though it only bid $3,970 to reclaim three properties.
The court did not indicate, however, whether its decision would be retroactive.
"We're obviously pleased that this thing was resolved, because you're talking about a lot of money here," said Edward J. Molnar, president and chief executive of Harleysville Savings Bank. "For some of these companies, it becomes a big money item."
"The court decision was somewhat of a windfall in that it put things back to where they were originally and alleviates the need for legislative action," said Dennis S. Marlo, president and chief executive of MLF Bancorp, in Villanova.
Last month's decision also hurts the state's 67 county governments, which have already allotted millions into local budgets based on the higher fees. The state's county commissioners and sheriffs are planning to appeal the ruling to the state Supreme Court.
The Commonwealth Court's December ruling was a surprise reversal of a 1993 case involving York Federal Savings and Loan Association, in which the court reinterpreted state law, increasing the amount counties could collect.
"We believe the York decision was correct and we would like to get back close to that," said Douglas E. Hill, executive director of the County Commissioners Association of Pennsylvania.
The reversal stunned bankers and county officials alike, especially since the Commonwealth Court wasn't expected to hear the case.
"We're absolutely astonished," said Eric S. Gorrell, lobbyist for the Pennsylvania Association of Community Bankers. "We were shocked that the Commonwealth Court would reverse itself."
In fact, the Pennsylvania Bankers Association and the community bankers' trade group have been pushing legislation to correct what they claim was a costly misinterpretation of state law. But the bill, now moot, was stalled in the state legislature because of strenuous opposition from county officials, who didn't want to give up a significant revenue stream.
"They've gotten used to having this excess money," Mr. Gorrell said. "They were making thousands of dollars on these sheriff's sales and it was killing us." Besides increasing fees exponentially, the York case had produced secondary consequences, explained Eric A. Schaffer, a partner at Reed Smith Shaw & McClay in Pittsburgh. Many banks asked courts to reduce the judgment against a debtor to the value of the property in order to limit poundage.
This put banks in a quandary, forcing them to choose between taking direct title to properties through an agreement with the borrower and paying off any junior liens, or going through a friendly foreclosure sale and paying high poundage.
The decision also meant banks with second mortgages could find themselves paying fees based on first mortgages as well.
As a result, lenders were forced to factor in potential foreclosure costs when deciding whether to make a loan or how much to charge.
"You can't shell out those costs and expenses without factoring them into your rate calculations available to the public," said York chairman Robert Pullo.