Graves, In re, 93-1709

• Decision Date: 19 August 1994
• Docket Number: No. 93-1709,93-1709
• Citation: 33 F.3d 242
• Parties: In re Shirley GRAVES, Debtor, FLEET CONSUMER DISCOUNT CO. v. Shirley GRAVES Edward Sparkman, Esquire, Chapter 13 Trustee Fleet Consumer Discount Company, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 242

33 F.3d 242

In re Shirley GRAVES, Debtor FLEET CONSUMER DISCOUNT CO. v. Shirley GRAVES Edward Sparkman, Esquire, Chapter 13 Trustee Fleet Consumer Discount Company, Appellant.

No. 93-1709.

United States Court of Appeals Third Circuit.

Argued Feb. 28, 1994.

Decided Aug. 19, 1994.

Robert J. Wilson (Argued), Lipman, Freiberg, Comroe & Hing, Philadelphia, PA, for appellant, Fleet Consumer Discount Co.

F. Lee Jones (Argued), Jones & Harrison, Philadelphia, PA, for appellee, Shirley Graves.

Before: STAPLETON and SCIRICA, Circuit Judges and SMITH, District Judge. ^*

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is an appeal from a judgment of the district court sitting as an appellate court in bankruptcy. At issue is whether, under Pennsylvania law, a non-record interest holder in real property is entitled to personal service before a foreclosure sale even though notice was mailed to the record owners and was posted on the property; and whether a junior secured creditor can be a bona fide purchaser for value without notice, if at the time of sale it knew, or should have known, of the unrecorded interest.

The bankruptcy court found that Pennsylvania law requires personal service to non-record interest holders and that the purchaser's knowledge of the non-record interest prevented it from being a bona fide purchaser. In re Graves, 142 B.R. 115 (Bankr.E.D.Pa.1992). The district court affirmed, holding that Pennsylvania's Rules of Civil Procedure required the judgment creditor to give personal notice to all interest holders and that the purchaser's knowledge of the non-record interest prevented it from being a bona fide purchaser. In re Graves, 156 B.R. 949 (E.D.Pa.1993). We hold that, on these facts, Pennsylvania law does not require personal

service, but that the purchaser was not a bona fide purchaser because of its actual knowledge of the unrecorded interest. We will affirm.

I. FACTS and PROCEDURE

A. Background

On October 12, 1983 Thomas Bacon and his grandson, Duane Bacon, ¹ purchased a house at 6133 Nassau Road, Philadelphia as tenants in common, each owning a one-half interest. They paid $39,000.00, after obtaining a $24,000.00 mortgage from Liberty Savings Bank. Thomas Bacon lived at 6133 Nassau Road with his wife, three of his children, and Duane until he died intestate on January 7, 1986. At the time, no one probated his estate or notified Liberty Savings Bank of his death. ² Thomas Bacon's wife died in September, 1990. One son moved away before her death and Duane moved away shortly thereafter. In October, 1990, the house was occupied by two of Thomas Bacon's children, his daughter, Shirley Graves, and a son, Andrew Bacon.

B. State Proceedings

In November, 1990, Liberty Savings Bank began foreclosure proceedings against Thomas and Duane Bacon in Philadelphia Common Pleas Court. ³ Liberty's attempts to serve notice on Thomas and Duane Bacon personally were unsuccessful, so on March 4, 1991, after a petition by Liberty, the court permitted service by regular mail and by posting notice on the property. A return of service, signed by a deputy sheriff, recited that a copy of the complaint was posted on the house on March 16, 1991. ⁴ On May 3, 1991, after Thomas and Duane Bacon failed to answer Liberty's complaint, the Common Pleas Court entered a default judgment, and ordered that notice of the judgment be sent to Duane and Thomas Bacon at the house. Liberty then sent Thomas and Duane Bacon notice of a sheriff's sale by certified mail. It also sent notice to all junior creditors, including Fleet Consumer Discount Company. ⁵ On September 6, 1991 notice was posted at the house pursuant to the Common Pleas Court's order, as evidenced by a deputy sheriff's return of service.

At the sheriff's sale on October 7, 1991, Fleet purchased the property for $42,000.00. Fleet attempted to sell the house to Graves, but after negotiations failed, Fleet filed an eviction action on November 8, 1991. Graves was served on November 16, 1991, but did not file an answer. ⁶ The court entered default judgment on January 15, 1992.

On April 9, 1992, Graves filed a "Motion to Set Aside Sheriff's Sale and/or Set Aside Default," and an "Emergency Petition to Stay Eviction" in Common Pleas Court. The court denied the petition to stay the eviction without opinion on April 14, 1992. It then denied her motion to set aside the sheriff's sale on May 14, 1992, and filed an opinion on August 17, 1992 holding that the motion was not promptly filed and that Graves did not have a meritorious defense to the claim. ⁷

C. Bankruptcy Proceedings

On April 22, 1992 Graves filed for bankruptcy. Fleet filed a motion seeking relief from the automatic stay. At a bankruptcy court hearing on June 9, 1992, testimony was given by Graves and Heather Thompson, the Assistant President of Fleet's Upper Darby branch. There was a subsequent hearing on June 18, 1992, when the court permitted Fleet to admit certified copies of the affidavits of service. ⁸

On June 25, 1992, the bankruptcy court denied Fleet's motion for relief from the automatic stay. The court found the sheriff's sale invalid on three independent grounds: (1) as the holder of an interest in the property Graves was entitled, under Pennsylvania law, to personal service, (2) Graves' continuous possession of the property put Liberty on constructive notice that Graves had an interest in the house which Liberty should have investigated before the sale, and (3) Fleet's knowledge of Graves' interest in the house prior to the sheriff's sale precluded Fleet from being a bona fide purchaser for value without notice. Graves, 142 B.R. at 117.

Fleet appealed to the district court, which affirmed, holding that Graves was entitled to personal notice under Pennsylvania law. The district court then upheld the bankruptcy court's factual findings that Graves had no prior notice of the sheriff's sale, Liberty had knowledge of Graves' interest, and Fleet was not a bona fide purchaser. This timely appeal followed. ⁹

In an appeal from a judgment of a bankruptcy court, we review factual findings for clear error and apply plenary review to questions of law. "In that sense, our review duplicates that of the district court and we view the bankruptcy court decision unfettered by the district court's determination." In re Brown, 951 F.2d 564, 567 (3d Cir.1991).

II. DISCUSSION

A. Issue Preclusion

Under Pennsylvania law, real property cannot be sold at sheriff's sale until the interest holders have received notice of the sale. See Pa.R.Civ.P. 3129.1(a) (Supp.1994). The Bankruptcy court invalidated the sheriff's sale, in part, because it believed Liberty failed to give Graves the required notice. Before this case reached the bankruptcy court, however, the Philadelphia Common Pleas Court had already entered default judgments in the ejectment and foreclosure actions, and had denied Graves' motion to open the default judgments. Fleet contends that in issuing these rulings the state court found that Graves received valid notice. Thus, throughout the federal litigation, Fleet has maintained the state court rulings preclude Graves from raising the notice issue under the doctrine of issue preclusion.

The bankruptcy court rejected Fleet's argument because it believed applying issue preclusion under these circumstances would violate Graves' right to due process. 142 B.R. at 122. The district court held default judgments do not have preclusive effect in subsequent litigation. We agree issue preclusion does not apply here, but we do not reach the due process issue. ¹⁰

Issue preclusion prevents the relitigation of facts adjudicated in a prior action. See Edmundson v. Borough of Kennett Square, 4 F.3d 186, 189 (3d Cir.1993); Bradley v. Pittsburgh Bd. of Educ., 913 F.2d 1064, 1073-74 (3d Cir.1990). Federal courts must give the same preclusive effect to state court factual findings as would the courts of that state. See 28 U.S.C. Sec. 1738 (1988); Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed.2d 274 (1985); Grimes v. Vitalink Communications Corp., 17 F.3d 1553, 1562 (3d Cir.1994), petition for cert. filed, 63 U.S.L.W. 3010 (U.S. June 29, 1994) (No. 93-2098). Thus, to decide whether issue preclusion applies here we must first determine whether Pennsylvania courts would permit litigation of the notice issue even though default judgments had been entered. We believe they would.

In Muhammad v. Strassburger, McKenna, Messer, Shilobod, & Gutnick, 526 Pa. 541, 587 A.2d 1346 cert. denied, --- U.S. ----, 112 S.Ct. 196, 116 L.Ed.2d 156 (1991), the Pennsylvania Supreme Court stated:

In order to grant a demurrer pursuant to [issue preclusion], the objecting party must show that "the fact or facts at issue in both instances were identical; [and] that these facts were essential to the first judgment and were actually litigated in the first cause." We have also required that the party against whom a plea of [issue preclusion] is asserted must have had a full and fair opportunity to litigate the issue in question in a prior action.

587 A.2d at 1348 (citations omitted); see also GPU Indus. Intervenors v. Pennsylvania Pub. Util. Comm'n, 156 Pa.Cmwlth. 626, 628 A.2d 1187, 1192-93 (1993) (same). Fleet claims those requirements are met here; we cannot agree.

1.

Fleet contests the bankruptcy court's ability to adjudicate the validity of the notice Graves received, in part, because Graves raised the notice issue before the Common Pleas Court in connection with her motion to open the default judgments. According to Fleet, that court's refusal to open the default judgments constituted a judgment on the merits which precluded relitigation of the issue before the bankruptcy court. We disagree.

Even though Graves raised the notice issue in connection with her motion to open the default judgments, it was not "essential" to the judgment. See Muhammad, 587 A.2d at 1348. The Common...