In re McLean, Bankruptcy No. 88-11567F

CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
Writing for the CourtBRUCE I. FOX
Citation97 BR 789
PartiesIn re Lester McLEAN and Frances McLean, Debtors. Lester McLEAN, Frances McLean, Plaintiffs, v. CITY OF PHILADELPHIA, DEPT. OF REVENUE, Defendant.
Docket NumberBankruptcy No. 88-11567F,Adv. No. 88-2158F.
Decision Date20 March 1989

Eric L. Frank, Community Legal Services, Inc., Philadelphia, Pa., for plaintiffs/debtors, Lester McLean and Frances McLean.

Cynthia E. White, Chief Asst. City Sol., Philadelphia, Pa., for defendant, City of Philadelphia, Dept. of Revenue.

Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.


BRUCE I. FOX, Bankruptcy Judge:

Before me is a consolidated complaint and motion brought by the debtors, Lester and Frances McLean, seeking to avoid the City of Philadelphia's lien on their residential real property for unpaid prepetition water bills.1 Debtors present alternate legal theories for relief: first, that the lien was not perfected as of the date of the bankruptcy petition filing and, therefore, is avoidable through the debtors' use of the trustee's powers under 11 U.S.C. § 544(a)(3) or 545(2); second, that the lien is a judicial lien which impairs the debtors' exemption and consequently is avoidable under section 522(f)(1) of the Bankruptcy Code. The City's position is that the lien was, in the first instance, properly perfected; moreover, it contends that its lien is statutory in nature, not judicial; it further argues that lien avoidance under §§ 544 or 545 is barred by the limiting terms of § 546(b). Finally, the City asserts that its position as a good faith transferee under § 550(d) entitles it to a lien on the subject property for the cost of improvement or preservation of the property.

The record consists of testimony and documents presented at trial along with a stipulation as to certain facts. In their posttrial submissions, the parties agree that the facts may be summarized as follows:


Debtors filed a joint chapter 13 petition in bankruptcy on May 5, 1988; Mr. McLean is the sole owner of their residence at 2058 E. Orleans Street, Philadelphia, where the debtors reside with their children.2 At the time of the bankruptcy filing, the City held a claim for delinquent water bills in excess of $1,000.00. The City asserts that $516.65 is secured by a first lien, as it was filed (in the manner described below) on November 16, 1987 as lien No. 36805, C.P.Philadelphia, November Term, 1987.3

The procedure employed by the City for the filing of the lien with the Prothonotary is as follows: the City's Water Department prepares books setting forth its liens on properties throughout the city ("water lien books"). In these books, the Water Department designates the court term and number assigned to each lien, using "street-related account numbers" from its own computer printouts (Fact Stipulation 6(b)). These books are annually delivered to, and accepted for, docketing by the Prothonotary of Philadelphia County; the lien books are kept in the Prothonotary's Office, Room 262, City Hall, Philadelphia. The names of the property owners in these water lien books are not listed in alphabetical order, as they are in another set of books maintained by the Prothonotary, the judgment index; instead, the liens are listed only by the Water Department's docketing number. Liens contained in these water lien books likewise are not recorded in the judgment index, which is located in Room 268, City Hall, Philadelphia. The water lien book filed November 16, 1987 in the manner described above contains the lien against the subject real property, and was located in Room 262 on May 5, 1988, the date of debtors' bankruptcy filing.

At some point subsequent to the debtors' bankruptcy filing, the Prothonotary posted a sign in the Judgment Index Room (Room 268) advising the public that the "Water/Sewer In Rem Judgment Index," containing water/sewer liens, is located in Room 262 of City Hall (Fact Stipulation No. 8); this sign refers to the water lien books prepared by the Water Department and filed in Room 262 (including the one filed November 16, 1987 containing the subject lien). Further, the water/sewer lien books in Room 262 were labelled, post-petition, "Water/Sewer In Rem Judgment Index."

As of the date debtors' filed their bankruptcy petition, the judgment index in Room 268 did not include an entry under debtors' name; neither did the water lien books filed in Room 262 contain an index of property owners. As of the petition filing date these water lien books were not labeled so as to advise the public that they were a part of the judgment index:

Also maintained in Room 262 is a set of books labeled the "Locality Index." The locality index consists of four sets of books, each set covering a five year period; thus, the locality index spans a total of twenty years. Like the water lien books (see Debtors' Memorandum of Law at 6), this index is organized by the street address of each liened property. It indexes all mechanics' liens as well as certain municipal claims (such as real estate transfer liens and select water liens) for cases in which the City has determined it has a need to record expeditiously the lien for its claim. The locality index generally does not include the city's water liens, and the subject lien was not indexed in the locality index.

Room 262 further contains a set of computer terminals. The terminals are able to access the account records of the City's Water Revenue Bureau and the water accounts of each real property in the City.4 The terminals are available for use by the public. The evidence did not show that, as of the date of the bankruptcy filing, there were notices in either Room 262 or 268 advising the public that the terminals constitute part of either the judgment or locality index.

Finally, the parties stipulate that, if the subject lien is a judicial lien, it impairs an exemption to which debtor Lester McLean would be entitled under 11 U.S.C. § 522(b).


The first issue I shall address is whether the City had perfected its lien against the debtors' property prepetition. If the lien was not so perfected then, pursuant to 11 U.S.C. § 522(g), (h) the debtors may be able to avoid this lien by using the trustee's powers found in §§ 544(a)(3) and 545(2), unless 11 U.S.C. § 546(b) applies. See In re Aikens, 94 B.R. 869 (Bankr.E.D.Pa.1989) (Scholl, B.J.) (Aikens III).

The parties had attempted to structure this litigation so that the only issue before me was whether the lien was a judicial lien or a statutory lien.5 If the lien were classified as statutory, it would not be subject to avoidance under 11 U.S.C. § 522(f)(1). In re Aikens, 87 B.R. 350 (Bankr.E.D.Pa.1988) (Aikens II); In re Townsend, 27 B.R. 22 (Bankr.M.D.Pa.1982). See also In re Donahue, 862 F.2d 259, 266 n. 11 (10th Cir. 1988) (an equitable lien may not be a judicial lien and thus would not be subject to avoidance under § 522(f)(1)).

I appreciate that this classification question may be significant, particularly to the City, but in light of the Third Circuit Court of Appeals recent decision in Ransom v. Marrazzo, 848 F.2d 398 (3d Cir.1988), and in light of the Aikens trilogy which involved the same legal questions as presented here, In re Aikens, 83 B.R. 344 (Bankr. E.D.Pa.1988) (Aikens I); Aikens II; Aikens III, it seemed more appropriate to direct the parties to address the issue of lien perfection. The outcome of this question may obviate any need for a classification decision, as an unperfected lien may be subject to the trustee's strong arm powers. Aikens III. See In re Pierce, 809 F.2d 1356 (8th Cir.1987); Sommers v. International Business Machines, 640 F.2d 686 (5th Cir.1981).6


The Municipal Claims and Lien Act, 53 P.S. §§ 7101 et seq., is a complex state statute that authorizes municipal liens and claims and establishes the procedures by which claims are filed, enforced, collected, or set-off. The Act also describes how judgment may be entered and executed upon, and how liens and claims may be renewed or revived. In short, it is by reference to this state law that the question of perfection shall be answered.

Section 7106(b) of title 53 establishes that any municipal claim7 imposed by Philadelphia, the only city in Pennsylvania 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." 53 P.S. § 7106(b).8 This language, added by Act 1963, Aug. 1, P.L. 439, § 1, is shown by its legislative history to have been passed in order to shorten the time in which a municipal claim in Philadelphia was enforceable.

Prior to 1963, when 53 P.S. § 7106(b) was added, all municipal claims (including those of Philadelphia) made use of the writ of scire facias sur municipal claim. This writ was "used to enforce payment of a municipal claim out of the real estate upon which such claim is a lien." Fox Chapel Sanitary Authority v. Abbott, 34 Pa. Cmwlth 637, 384 A.2d 1012, 1013 n. 1 (1978). See also City of Scranton v. Hurst, 54 Lacka.J. 121 (C.P.1953). Before the writ could issue, the lien claim had to be filed and indexed; the writ would then have to be issued timely, and served properly. The record owner or other interested parties could then file an affidavit of defense which would then be determined before in rem enforcement was permitted. This process could be quite time consuming. See, e.g., Forks Twp. Mun. Sewer Auth. v. American Land, Inc., 6 Pa. Cmwlth. 569, 297 A.2d 185 (1974); Bridgeport Nat'l Bank v. McCausland Motors, Inc., 27 D. & C.2d 589 (C.P.Chest.1961).

The process by which federal tax liens were enforced was considerably simpler. Notice of assessment was issued, followed by the filing of the lien claim with the appropriate county...

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