Graffen v. City of Philadelphia, 92-1418

• Decision Date: 28 December 1992
• Docket Number: No. 92-1418,92-1418
• Citation: 984 F.2d 91
• Parties: , 23 Bankr.Ct.Dec. 1419, Bankr. L. Rep. P 75,053 Jay GRAFFEN; Cass Graffen v. CITY OF PHILADELPHIA, Jay & Cass Graffen, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 91

984 F.2d 91

139 P.U.R.4th 587, 23 Bankr.Ct.Dec. 1419,

Bankr. L. Rep. P 75,053

Jay GRAFFEN; Cass Graffen v. CITY OF PHILADELPHIA, Jay & Cass Graffen, Appellants.

No. 92-1418.

United States Court of Appeals, Third Circuit.

Argued Dec. 3, 1992.

Decided Dec. 28, 1992.

Cynthia E. White (argued), Divisional Deputy City Sol., Philadelphia, PA, for appellee.

Alan M. White (argued), Community Legal Services, Philadelphia, PA, for appellants.

Before: SLOVITER, Chief Judge, and GREENBERG and SEITZ, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. BACKGROUND

Jay Graffen and Kathleen Graffen appeal from an order entered in the district court on May 12, 1992, 149 B.R. 90, on an appeal from the bankruptcy court in this adversary proceeding. We have jurisdiction under 28 U.S.C. § 158(d). Inasmuch as we are deciding this appeal through the application of legal precepts we exercise plenary review. Lerman v. Commissioner, 939 F.2d 44, 46 (3d Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 590, 116 L.Ed.2d 615 (1991).

The case is a sequel to McLean v. City of Philadelphia, 891 F.2d 474 (3d Cir.1989). In McLean, we held that when the City filed water liens solely in the water lien books, it did not comply with Pa.Stat.Ann. tit. 53, § 7106(b) (1972) ("section 7106(b)"), which required such liens to be docketed in the judgment index, as the water lien books were not part of that index. Accordingly, we held that a trustee acting under 11 U.S.C. § 544(a)(3), and thus the debtors in McLean acting under 11 U.S.C. § 522(h), could avoid liens filed only in the water lien books because they had not been perfected before the commencement of the bankruptcy proceedings.

While we acknowledged that the City might have thought that the water lien books were part of the judgment index, this made no difference because "at the time the debtors commenced their bankruptcy actions, a reasonably intelligent searcher would have had little chance of discovering any of the water liens involved." 891 F.2d at 478. We reached this conclusion because the Philadelphia prothonotary maintains two indices at the City Hall in which most City liens are recorded, the judgment index itself, which is the main set of lien books, and a locality index which lists most of the City's liens. 891 F.2d at 475-76. ¹ See, e.g., In re McLean 97 B.R. 789, 791 (Bankr.E.D.Pa.1989). Nevertheless, the City had not posted a notice that the water and sewerage liens would not be found in either of those two indices. McLean, 891 F.2d at 478. We also observed that the City had not posted a notice that a computer terminal, which was available for use by the public and was connected to the accounting records of the Water Revenue Bureau, was part of the indexing system. This was significant because those records gave access to the water lien information. Id. Yet our holding, though granting the debtors relief, was quite narrow for we recognized that the problems were simply mechanical; thus, we observed "the defect in the indexing system is one which appears to be easily remediable by the Prothonotary." 891 F.2d at 480.

The proceedings now before us demonstrate that even before December 7, 1989, when we filed our opinion in McLean, the prothonotary had remedied the defect in the lien perfection process identified in McLean. When the Graffens filed their Chapter 13 petition on July 26, 1988, they owned a property at 3249 Potter Street, Philadelphia, against which the City had filed a lien for delinquent water charges of $560.48. In addition, the City had an unsecured claim against the Graffens for water bills of $324.76. The water lien was filed in a water lien book kept in Room 262 in the City Hall which, prior to the filing of the Graffens' Chapter 13 petition, but after the filing of the petitions by the debtors in McLean, had been labeled the "Water/Sewer in Rem Judgment Index." The locality index was also kept in Room 262 and there was a sign above the door of that room reciting "Liens." The computer terminals connected to the Water Revenue Bureau continued to be in Room 262 as they were when the debtors in McLean filed their bankruptcy petitions.

By the time the Graffens filed their petition, in addition to the labeling of the water lien books described above, there was another difference in the lien perfection system from when the debtors in McLean filed their petitions. In that interval the prothonotary had posted a sign in Room 268, where the judgment index is kept, indicating that the Water/Sewer In Rem Judgment Index containing water/sewer liens is in Room 262. Thus, it is undisputed that when the Graffens filed their Chapter 13 petition the City's lien was on file in a book in Room 262 labeled "Water/Sewer In Rem Judgment Index" and that a sign in Room 268, where the judgment index is kept, referred searchers to that index for water liens. ²

Notwithstanding the changes in the prothonotary's office procedures, the Graffens brought this adversary proceeding in the bankruptcy court seeking to avoid the City's lien. The Graffens urged, as had other debtors who petitioned in bankruptcy before the prothonotary made the changes we have described, that the City's lien was not perfected. In addition, the Graffens contended that the City's lien is a judicial lien which they may avoid under 11 U.S.C. § 522(f). The bankruptcy court ruled in the Graffens' favor, primarily on the authority of its opinion in In re Aikens, 94 B.R. 869 (Bankr.E.D.Pa.), aff'd, 100 B.R. 729 (E.D.Pa.), aff'd sub nom. McLean v. City of Philadelphia, 891 F.2d 474 (3d Cir.1989), which stated that the City's action in posting the sign had not validated the water liens. ³

The City appealed to the district court which reversed the bankruptcy court's order. The district court held that the City's lien was statutory. ⁴ Furthermore, it indicated that the Graffens were not in the position of bona fide purchasers for they had actual knowledge of the City's claim as they had been billed for water and sewer service for which they had not paid. The court also held that in view of the changes in the prothonotary's office which we have described, the filing system gave adequate notice of the City's lien.

The Graffens have appealed to this court, raising two issues. First, they contend that they may avoid the City's water lien under 11 U.S.C. §§ 544(a)(3) and 545(2) because a bona fide purchaser would not be bound by the filing as the lien was not perfected under Pennsylvania law. Second, they contend that the lien can be avoided as a judicial lien under 11 U.S.C. § 522(f). We will affirm the order of the district court.

II. DISCUSSION

1. The City's lien is perfected.

Assuming for the moment that the City's water lien is statutory, rather than judicial, the Graffens may not avoid the lien if it was perfected to the extent that it could have been enforced against a bona fide purchaser when the Graffens filed their petition under Chapter 13. 11 U.S.C. §§ 544(a)(3), 545(2), and 522(h). We determine if the lien was so perfected by reference to state law. McLean v. City of Philadelphia, 891 F.2d at 476. Thus, unlike the district court, we will not predicate our result on the Graffens' actual knowledge of the City's claim for we do not doubt that the debtors in McLean had similar knowledge, and yet we held that they could avoid the lien.

We hold that the lien was perfected so that when the Graffens filed their petition under Chapter 13 it would have been enforceable against a bona fide purchaser. At that time ⁵ section 7106(b), applicable to Philadelphia as a city of the first class, provided:

With the exception of those claims which have been assigned, any municipal claim, including interest, penalty and costs, imposed by a city of the first class, shall be a lien only against the said property after the lien has been docketed by the prothonotary. The docketing of the lien shall be given the effect of a judgment against the said property only with respect to which the claim is filed as a lien. The prothonotary shall enter the claim in the judgment index.

While we will accept the Graffens' contention that there must be strict compliance with the procedures in section 7106(b) for the perfection of a lien, there was strict compliance here. When the Graffens filed their petition under Chapter 13, nothing in section 7106(b) required the prothonotary to arrange the judgment index so that it would be composed of volumes containing all the items noted in the index in integrated lists. Furthermore, our research has not disclosed any other provision of Pennsylvania law compelling such an integration, nor have the Graffens directed our attention to any such provision. Though it would be reasonable to hold that each part of a divided index must be labeled as a "judgment index," or the equivalent, so that a searcher would recognize when he was dealing with that index, this was the situation here as the water lien books had been labeled the "Water/Sewer in Rem Judgment Index." Indeed, in principle it is difficult to distinguish for purposes of determining the prothonotary's authority between a division of the judgment index on the basis of the type of lien involved and a division predicated on the time of filing. Yet, we do not think that it would be contended seriously that a prothonotary could not break down an index chronologically. In the circumstances, we see no reason to conclude that Pennsylvania law requires the judgment index to be a single massive tome inclusive of everything which it could embrace.

We note that the prothonotary, by posting a sign in Room 268 reciting that the Water/Sewer In Rem Judgment Index containing water/sewer liens was in Room 262, took pains to ensure that a searcher would not be misled by the divided judgment index. Thus, we cannot fairly hold that as of the time of the Graffens' petition a reasonably intelligent searcher would have had little chance of discovering...