In re Jones, Bankruptcy No. 80-00175G

• Decision Date: 21 June 1982
• Docket Number: 81-0734G.,Adv. No. 81-0339G,Bankruptcy No. 80-00175G
• Citation: 20 BR 988
• Parties: In re Robert Lee JONES, Debtor. HOME LIFE INSURANCE CO., Plaintiff, v. Robert Lee JONES and Margaret Graham, Trustee, Defendants. Robert Lee JONES, Plaintiff, v. HOME LIFE INSURANCE COMPANY, Administrator, Veterans Administration and Joseph A. Sullivan, Sheriff, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

20 B.R. 988 (1982)

In re Robert Lee JONES, Debtor.

HOME LIFE INSURANCE CO., Plaintiff, v. Robert Lee JONES and Margaret Graham, Trustee, Defendants.

Robert Lee JONES, Plaintiff, v. HOME LIFE INSURANCE COMPANY, Administrator, Veterans Administration and Joseph A. Sullivan, Sheriff, Defendants.

Bankruptcy No. 80-00175G, Adv. Nos. 81-0339G, 81-0734G.

United States Bankruptcy Court, E.D. Pennsylvania.

June 21, 1982.

Werner H. Von Rosenstiel, Philadelphia, Pa., for Home Life Ins. Co.

Eileen A. Beckett, Irwin Trauss, Community Legal Services, Philadelphia, Pa., for Robert Lee Jones.

Margaret Graham, Philadelphia, Pa., Former Standing Trustee under Chapter 13.

James J. O'Connell, Philadelphia, Pa., Present Standing Trustee under Chapter 13.

OPINION

EMIL F. GOLDHABER, Bankruptcy Judge:

The issues presented in these related cases are (1) whether the debtor had any interest, at the time he filed his petition under chapter 13 of the Bankruptcy Code ("the Code"), in property that had been sold at sheriff's sale so as to make the automatic stay provisions of the Code applicable to that property and (2) whether the debtor could avoid certain actions taken by the sheriff and mortgagee pursuant to the avoidance powers of the debtor under the Code. We conclude that, because the sheriff's deed had not been issued and presented for recording before the debtor filed his petition under the Code, the debtor still retained an interest in the property which was, therefore, protected by the automatic stay provisions of the Code. Consequently, we determine that the actions taken by the sheriff and mortgagee after the debtor's filing are void as a violation of the automatic stay and of § 549 of the Code. We further conclude that the sheriff's sale which occurred before the debtor's filing under the Code is not avoidable pursuant to § 544(a)(3) of the Code but is avoidable pursuant to § 548(a)(2) of the Code.

The facts of the instant case are as follows:¹ In January, 1963, Robert Lee Jones ("the debtor") executed a mortgage in the amount of $8,000 on property owned by him and located at 634 South 54th Street, Philadelphia, Pennsylvania. That mortgage was guaranteed by the Veterans' Administration ("the VA") and was, thereafter, assigned to Home Life Insurance Company ("Home Life"). In 1978, the debtor defaulted on said mortgage by failing to make the required monthly payments, whereupon Home Life began mortgage foreclosure proceedings in the state court. Pursuant thereto, a sheriff's sale was held on September 10, 1979, at which time the property was sold to Home Life's attorney. Home Life thereafter assigned its bid to the VA and took steps to perfect its title in the property. However, on October 5, 1979, before the sheriff had issued a deed for that property, the debtor filed a petition in the state court to open the judgment and to set aside the sheriff's sale thereby staying any further actions against the property.

On January 24, 1980, the debtor filed a petition for an adjustment of his debts under chapter 13 of the Code. Thereafter, on March 6, 1980, Judge Lederer of the Court of Common Pleas of Philadelphia County issued an order (1) dismissing the debtor's petition to open the judgment in mortgage foreclosure and to set aside the sheriff's sale, (2) affirming the judgment in mortgage foreclosure and the sheriff's sale and (3) authorizing the issuance of a deed transferring title to the property to the VA. Pursuant to that order, the sheriff issued a deed to the property to the VA. However, the VA notified Home Life that, because the debtor had filed a petition under chapter 13 in the interim, Home Life would have to litigate the issue of who had title to the property.

Accordingly, Home Life filed a complaint in this court seeking relief from the automatic stay on three grounds: (1) that title to the property had already passed from the debtor to Home Life by virtue of the sheriff's sale, (2) that the debtor had no equity in the property because the secured debt thereon exceeded the fair market value of the property and (3) that the debtor has acted in bad faith in the filing of his chapter 13 petition with the sole intent to hinder and delay the mortgage foreclosure proceedings. At the trial thereon it was agreed that we would initially address only the legal issue presented by Home Life's first ground.

In the meantime, the debtor filed a separate complaint against Home Life, the VA and the sheriff seeking (1) sanctions against the defendants for the actions taken by them in violation of the automatic stay and (2) avoidance of the transfer of any of the debtor's interests in the property pursuant to §§ 544(a)(3), 548(a)(2) and 549 of the Code. Because the issues raised by the debtor's complaint were the same as those raised by the debtor in his answer to Home Life's complaint, the parties agreed to have the two complaints decided together.

I. THE APPLICABILITY OF THE AUTOMATIC STAY.

With respect to the first issue of whether the automatic stay is applicable to the property in question, we conclude that it is because the debtor still retained an interest in that property at the time he filed his petition for relief. As of the date of the debtor's filing in this case, the sheriff's sale of the property had been held but no deed had been issued. We have recently held that, without the issuance, acknowledgment and presentation for recording of the sheriff's deed, the debtor still retains, under Pennsylvania law, certain legal and equitable interests in the property which are protected by the automatic stay provisions of the Code.² Consequently, any actions taken against that property after the debtor's filing are a violation of the automatic stay provisions of the Code,³ as well as a violation of § 549(a) which prohibits postpetition transfers.⁴ In this case, the sheriff's deed was not issued to Home Life until after the debtor's filing and, thus, the issuance of that deed is void as a violation of §§ 362(a) and 549(a) of the Code.⁵

Accordingly, we conclude that sanctions for that violation are appropriate, at least as to Home Life. Home Life had knowledge of the debtor's filing under chapter 13 of the Code and yet persisted in its actions.⁶ However, we find that the VA is not liable for any violation of the stay since it took no action against the debtor or his property after the debtor's filing and, in fact, the VA refused to accept the deed from Home Life because it felt that the automatic stay prohibited it from doing so.⁷

II. THE APPLICABILITY OF § 544(a)(3) OF THE CODE.⁸

With respect to the debtor's contention that the sheriff's sale and other actions taken in furtherance thereof before the debtor's filing under the Code are avoidable pursuant to the Code, we conclude that the debtor's reliance on § 544(a)(3) is without merit. That section provides that:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

. . . . .

(3) a bona fide purchaser of real property from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists.⁹

The debtor asserts that, because the sheriff's deed had not been recorded as of the date the debtor filed under the Code, the interest acquired by Home Life at the sheriff's sale was avoidable by a bona fide purchaser as of the commencement of the case and was, thus, avoidable by the debtor pursuant to § 544(a)(3). We disagree. Under Pennsylvania law, a subsequent purchaser of real property has priority over the rights of prior purchasers if the subsequent purchaser is a bona fide purchaser without actual or constructive notice of the rights of the prior purchasers.¹⁰ The United States Court of Appeals for the Third Circuit has recently interpreted § 544(a)(3) of the Code as giving the trustee (or the debtor) the position of a bona fide purchaser without any actual notice of the interests of any prior purchasers.¹¹ However, the Court of Appeals held that the language of that section which states that the trustee takes such a position "without regard to any knowledge of the trustee or of any creditor" does not go so far as to provide that the trustee (or the debtor) is without any constructive notice of the rights of a prior purchaser.¹² Thus, the Court of Appeals held that, where a prior purchaser had given constructive notice to all the world of its interest in property prior to the filing of the debtor's petition for relief, then the trustee (or the debtor) could not avoid the interest of that purchaser pursuant to § 544(a)(3) because the trustee would take the position of a bona fide purchaser who had constructive notice of the prior purchaser's interest and, under Pennsylvania law, such a bona fide purchaser does not take priority over the prior purchaser.¹³

Applying that decision to the instant case, we conclude that the debtor herein may not avoid the interest which Home Life acquired in the debtor's property by virtue of the sheriff's sale pursuant to § 544(a)(3) because there was constructive notice to all the world of Home Life's interest prior to the debtor's filing under the Code. Home Life had obtained a judgment on its complaint in mortgage foreclosure. The docketing of such a judgment is constructive notice to all of what that judgment contains¹⁴ and requires a prospective purchaser to inquire as to the result of that action.¹⁵ Since any such inquiry would have revealed that the property in question was sold at the sheriff's sale, a subsequent purchaser is deemed to have constructive notice of that fact.¹⁶ Thus, we conclude that, because there was constructive notice, as of the date of the debtor's...