Butler v. Lomas and Nettleton Co.

• Decision Date: 07 December 1988
• Docket Number: No. 88-1033,88-1033
• Citation: 18 BCD 1039,19 C.B.C.2d 1373,862 F.2d 1015
• Parties: 19 Collier Bankr.Cas.2d 1373, 18 Bankr.Ct.Dec. 1039, Bankr. L. Rep. P 72,543 BUTLER, Bernard, Butler, Mary v. LOMAS AND NETTLETON COMPANY, The Secretary of Housing and Urban Development, Appeal of LOMAS AND NETTLETON COMPANY.
• Court: U.S. Court of Appeals — Third Circuit

Page 1015

862 F.2d 1015

19 Collier Bankr.Cas.2d 1373, 18 Bankr.Ct.Dec. 1039,

Bankr. L. Rep. P 72,543

BUTLER, Bernard, Butler, Mary v. LOMAS AND NETTLETON COMPANY, The Secretary of Housing and Urban Development, Appeal of LOMAS AND NETTLETON COMPANY.

No. 88-1033.

United States Court of Appeals Third Circuit.

Argued June 24, 1988.

Decided Dec. 7, 1988.

David B. Comroe, Robert J. Wilson (argued), Maureen E. Laflin, Robinson, Greenberg and Lipman, Philadelphia, Pa., for appellant.

Henry J. Sommer (argued), Community Legal Services, Inc., Philadelphia, Pa., for appellees.

Before GIBBONS, Chief Judge, and HIGGINBOTHAM, Circuit Judge, and ROTH, District Judge. ^*

OPINION OF THE COURT

ROTH, District Judge:

I. INTRODUCTION

This is an appeal from an order of the district court, affirming the judgment of the bankruptcy court in In re Butler, 75 B.R. 528 (Bankr.E.D.Pa.1987). Appellees, the Butlers, filed a Chapter 13 bankruptcy petition on June 17, 1986, and thereafter sought to have the bankruptcy court avoid a sheriff's sale of their residence which had taken place on May 6, 1985. To that end, debtors relied upon 11 U.S.C. Sec. 548 of the federal bankruptcy law, which section allows a bankruptcy trustee to avoid constructively fraudulent transfers of the debtors' property made within one year prior to the filing of a bankruptcy petition. A debated issue, unresolved to date by this court, is whether a mortgage foreclosure may ever be considered a constructively fraudulent transfer as defined in section 548. ¹ We are not required here to decide that issue for we find that, even assuming section 548 may be applied to foreclosures, ² in this case the transfer did not take place within one year of the Butlers' bankruptcy petition. Because the transfer did not take place within the one-year window, we reverse the decision of the lower courts to set aside the sheriff's sale.

Moreover, because our decision on the timing of the transfer is dispositive of this appeal, we need not review here the finding of the lower courts that less than reasonably equivalent value was paid by the purchaser at the Sheriff's sale.

Jurisdiction for appeal to this court is founded on 28 U.S.C. Sec. 158(d), which allows for appeals from the final orders of the district courts. As this appeal presents a question of law, review is de novo. 1 Collier on Bankruptcy p 3.03.

II. BACKGROUND

In 1969, Bernard and Mary Butler purchased a home in Philadelphia with financing provided by the Lomas and Nettleton Company, the appellant (hereinafter "Lomas"). The Butlers have not made any mortgage payments to Lomas since April 1, 1983, but to date remain in the home. In December, 1984, Lomas instituted an action in mortgage foreclosure. The complaint alleged a principal debt of $7,871.06, and a total amount due of $9,122.82.

Lomas obtained a judgment of foreclosure, and a Sheriff's sale of the premises was conducted on May 6, 1985. No bids were made. The premises were sold to Lomas for the sum of $2,664.90, an amount representing the taxes and costs toward the Sheriff's sale. On June 24, 1985, the Sheriff of Philadelphia County signed the deed to consummate the Sheriff's sale, and the deed was recorded that day.

a) Section 548

On June 17, 1986, the Butlers filed a petition in bankruptcy under Chapter 13 of the federal Bankruptcy Code. 11 U.S.C. Secs. 1301, et. seq. The Butlers then brought the instant action to set aside the sale as a fraudulent conveyance under section 548. ³

Section 548 empowers the trustee to avoid conveyances made with fraudulent intent, i.e., actually fraudulent (Sec. 548(a)(1)) as well as constructively fraudulent conveyances (Sec. 548(a)(2)). A conveyance is constructively fraudulent if: 1) the debtor was insolvent on the date of transfer (Sec. 548(a)(2)); 2) the debtor received less than "a reasonably equivalent value" in exchange for the transfer (Sec. 548(a)(2)(A)); and 3) the transfer is made within one year prior to filing the bankruptcy petition (Sec. 548(a)).

b) The Bankruptcy Court Opinion

The bankruptcy court found the foreclosure sale to be constructively fraudulent under the three-part test set out above. First, the parties agreed that the Butlers were insolvent at all relevant times. Appendix 4a. Second, the bankruptcy court found that the property was transferred for less than its reasonably equivalent value. Relying on an appraisal of the property offered by the Butlers' expert witness, the court found that property was worth $18,000. 75 B.R. at 531 & n. 3. Given this appraisal, the court found that the debtors realized through the sale 57.3% of the value of the premises, i.e., the mortgage balance of $7,871.06 plus the $2,644.90 paid by Lomas to cover the taxes and costs of the sale for the sum of $10,515.96. Id. at 531. Based on two cases in which the court found inadequate value had been received, the bankruptcy court concluded that the Butlers had not received reasonably equivalent value. Id. at 531-32 (citing In re Jones, 20 B.R. 988, 993-94 (Bankr.E.D.Pa.1982) (between 48.5 to 58 percent of premises' value is not reasonably equivalent value); Durrett v. Washington National Insurance Co., 621 F.2d 201, 203-04 (5th Cir.1980) (57.7% of premises' value is not reasonably equivalent value).

Turning to the third prong of the test for constructive fraud, the bankruptcy court found that the transfer, i.e., the foreclosure sale, took place within one year of the filing of the bankruptcy petition by the Butlers. The lower court conceded, however, that determining the time of transfer presented a "close question." Id. at 532; that is, did the transfer occur on May 6, 1985, the date of the sheriff's sale, or on June 24, 1985, the date on which the deed was delivered by the Sheriff of Philadelphia County and recorded? The bankruptcy court found the latter date, June 24, 1985, to be the time of the transfer and so concluded that the sale took place within one year prior to the June 17, 1986, filing of the bankruptcy petition.

In reaching this decision the court relied primarily on case law which establishes the general proposition that transfers are effected on the dates of perfection by recording, not on the dates of sale. Id. at 532 (citing In re MacQuown, 717 F.2d 859, 862-63 (3d Cir.1983); In re Jacobs, 60 B.R. 811, 815-16 (M.D.Pa.1985); In re Rouse, 48 B.R. 236, 240 (Bankr.E.D.Pa.1985)). The court further found that certain policy and equitable concerns weighed in favor of the Butlers. Specifically, the court noted certain case law and legislative action in Pennsylvania which it found comprised a trend in Pennsylvania to protect the rights of mortgagors. Id. at 533. ⁴ The court further reasoned that the Butlers had lived in the house for sixteen years and Lomas could retain a lien for the amount it was due. Finally, the court speculated that Lomas would lose little, if anything, if the Butlers were allowed to remain in the house and cure the mortgage delinquencies. Id.

III. ANALYSIS

The bankruptcy court did not analyze or even refer to section 548(d)(1), the operative section for determining the time of a fraudulent transfer. Our analysis begins with an examination of this section, which provides:

For purposes of this section, a transfer is made when such transfer becomes so far perfected that a bona fide purchaser from the debtor against whom such transfer is made cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee....

11 U.S.C. Sec. 548(d)(1). State law governs when a transfer is perfected against bona fide purchasers. 4 Colliers on Bankruptcy p 548.08 (15th ed. 1987). We must then look to the law of bona fide purchasers in Pennsylvania and answer this specific question: if the Butlers sold their residence immediately after Lomas purchased the property at a Sheriff's sale, could the subsequent purchaser assert a claim to the property superior to that of Lomas? The Butlers argue that Lomas could not obtain priority until the deed to the property was acknowledged and delivered by the sheriff (June 24, 1985). Appellee contends that it acquired an interest in the property superior to any bona fide purchaser at the completion of the sheriff's sale (May 6, 1985). Under the Butlers' theory, the transfer took place within one year of the filing of the bankruptcy petition on June 17, 1986, and could be avoided under section 548. Under the appellant's theory, the transfer would not have taken place within the requisite time frame.

In Pennsylvania, a bona fide purchaser is protected if he purchases without notice of prior interests, ⁵ including equitable interests. Long John Silver's, Inc. v. Fiore, 255 Pa.Super. 183, 386 A.2d 569, 573 (1978). Notice may be actual or constructive. Id.; see also 28 Pennsylvania Law Encyclopedia, Notice Sec. 3 (1960). Constructive notice of a deed or a mortgage is given through recording. Malamed v. Sedelsky, 367 Pa. 353, 80 A.2d 853, 856 (1951); see also 24 Pennsylvania Law Encyclopedia, Mortgages Sec. 67 (1960). Thus, a mortgagee may protect its rights against third persons by recording. In re MacQuown, 717 F.2d 859, 863 (3d Cir.1983) (under Pennsylvania law, a transfer of real property is good as against a subsequent bona fide purchaser, mortgagee or judgment holder when the deed is recorded). Owens v. Peters, 126 Pa.Super. 501, 191 A. 399, 401 (1937) (the recording of a mortgage is notice to all persons who are visited with the duty of examining the records for conveyances and liens thereafter).

The complaint in mortgage foreclosure in this case reveals that the Lomas mortgage was originally delivered by the Butlers to the United States through the Secretary of Housing and Urban Development on May 24, 1979. Appendix 2a at p 3. The mortgage was properly recorded that same day. Id. On February 22, 1984, the mortgage was assigned to Lomas. Id. at p 4. The assignment was properly recorded on May 16, 1984. Id....