McLean v. City of Philadelphia, Water Revenue Bureau

• Decision Date: 07 December 1989
• Docket Number: Nos. 89-1496,89-1497,s. 89-1496
• Citation: 891 F.2d 474
• Parties: , Bankr. L. Rep. P 73,187 Lester & Frances McLEAN, Debtors-Appellees, v. CITY OF PHILADELPHIA, WATER REVENUE BUREAU, Appellant. Wilson AIKENS, Debtor-Appellee, v. CITY OF PHILADELPHIA, WATER REVENUE BUREAU, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 474

891 F.2d 474

19 Bankr.Ct.Dec. 1783, Bankr. L. Rep. P 73,187

Lester & Frances McLEAN, Debtors-Appellees, v. CITY OF PHILADELPHIA, WATER REVENUE BUREAU, Appellant.

Wilson AIKENS, Debtor-Appellee, v. CITY OF PHILADELPHIA, WATER REVENUE BUREAU, Appellant.

Nos. 89-1496, 89-1497.

United States Court of Appeals Third Circuit.

Argued Oct. 30, 1989.

Decided Dec. 7, 1989.

Seymour Kurland, City Solicitor, Andrew P. Bralow, Chief Deputy City Solicitor, Cynthia E. White (argued), Abby L. Pozefsky, Deputy City Solicitors, Philadelphia, Pa., for appellants.

Eric L. Frank, Community Legal Services, Inc., Philadelphia, Pa., for debtors-appellees Lester & Frances McLean.

Alan M. White (argued), Community Legal Services, Inc., Philadelphia, Pa., for debtor-appellee Wilson Aikens.

Before GIBBONS, Chief Judge, MANSMANN, Circuit Judge, and GERRY, ^* District Judge.

OPINION OF THE COURT

GIBBONS, Chief Judge:

The City of Philadelphia, Water Revenue Bureau, appeals from judgments entered in two separate bankruptcy proceedings; Wilson Aikens, Debtor, Bankruptcy No. 87-00364S and Lester and Frances McLean, Debtors, Bankruptcy No. 88-11567F. In both cases the City filed a proof of claim against the debtors for municipal liens that had arisen under Pennsylvania law against real property of the debtors because they failed to pay their water and sewage bills. In adversary proceedings the debtors sought to avoid those liens, asserting, as authorized by 11 U.S.C.A. § 522(h) (West Supp.1989), the right of a trustee in bankruptcy to avoid liens which would be unperfected against a hypothetical bona fide purchaser at the time the petition was filed. 11 U.S.C.A. §§ 544, 545. The debtors contended that because the City had failed to index the liens in compliance with Pa.Stat.Ann. tit. 53, § 7106 (Purdon 1972), a bona fide purchaser of their properties would be protected, and the liens thus could be avoided. The Bankruptcy Court so ruled, and on appeal to the District Court the orders avoiding the liens were affirmed. The City appeals from the district court judgment in the consolidated cases 100 B.R. 729. We will affirm.

I

The facts are not disputed. The City records most of its liens in a system of books and indices maintained in the Prothonotary's Office, located in Room 262 at City Hall. The Prothonotary maintains two indices: the judgment index and the locality index. The judgment index is the main set of lien books, and is organized alphabetically according to the names of the responsible property owners. The locality index lists most of the City's municipal and mechanic's liens, but is organized according to the street addresses of the properties to which the liens have been attached.

The City does not, however, record its water and sewage liens in either of these two sets of books. Rather, the Prothonotary receives from the Water Department every year a "water lien book" in which the Department lists all obligations that arise under its jurisdiction. The Prothonotary does not transcribe the information contained in these books into the other indices, but instead "dockets" the books merely by accepting them and filing them in the same physical form in which they are received. The information in these books, as in the locality index, is organized not by the name of the property owner, but by the street address of the property encumbered by the lien, as well as by an account number assigned to each lien by the Water Department.

In conducting a water lien search, it is nearly impossible to rely solely on these water lien books. The water lien volumes are organized yearly, so that each volume lists only those properties as to which a lien has been attached within that year. If these books were the only source through which it was possible to discover outstanding liens, one would have to search through potentially many dozens of books in order to conduct a comprehensive and reliable search. For this reason, the Prothonotary makes available to the public a computer terminal that is connected to the accounting records of the Water Revenue Bureau. Through this terminal, it is possible to determine merely by entering the name of the property owner or the property's address whether a particular property is encumbered by a water lien, and if so in what years those liens arose. A searcher aware of the year in which the City attached a particular lien may then refer to the appropriate yearly volume in the water lien books to discover the nature and extent of that lien.

At the time that the debtors filed their bankruptcy petitions, the City apparently thought that this combination of computer terminals and water lien books was sufficient to satisfy the requirement under state law that it identify all of its liens in a "judgment index." Pa.Stat.Ann. tit. 53, § 7106 (Purdon 1972). As a result, the City's liens against the debtors in this case were never recorded in the main "judgment" and "locality" indices maintained by the Prothonotary. Nonetheless, the City at that time had failed to notify the public that it kept records of water liens in the water lien books. The City had also neglected to notify the public of the fact that these books were kept in a separate room than that in which the Prothonotary maintained the "Judgment Index." Finally, no notice had been posted indicating that the computer terminals constituted part of the indexing system.

II

The Bankruptcy Code permits a debtor to stand in the position of a trustee and claim certain protections that trustees are typically empowered to assert. 11 U.S.C.A. § 522(h) (West Supp.1989). Among these protections is a trustee's power to avoid any liens that, according to state law, have not been properly perfected by the time the debtor has commenced the bankruptcy proceeding. This avoidance power is created by 11 U.S.C.A. § 544(a)(3), which reads:

The trustee ... may avoid ... any obligation incurred by the debtor that is voidable by ... a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

Thus the Bankruptcy Code permits a trustee (and, through section 522(h), a debtor) to avoid an obligation if it can be shown that the obligation would not have bound a bona fide purchaser at the time the debtor commenced her bankruptcy action. See In re Washburn & Roberts, Inc., 795 F.2d 870 (9th Cir.1986). The debtors in the Bankruptcy and District Courts have successfully argued that the liens claimed by the City would not have been enforceable against a bona fide purchaser of their property, because the City failed to index the liens in accordance with state law. The central question on appeal, then, is whether the City's system of filing and indexing its water and sewage liens complied with state law standards governing the docketing of municipal liens.

There is no question, of course, that the City is permitted under Pennsylvania law to assess liens against a property when an owner neglects to pay for services the City has rendered. See Pa.Stat.Ann. tit. 53, §§ 7101-7107 (Purdon 1972). Charges for water and sewage services are among those that, if unpaid, may be attached as liens. Id. In order for such liens to take effect in a municipality of the first class, however, the municipality must docket the lien properly. According to section 7106 of the Pennsylvania Municipal Claims and Lien Law:

[A municipal claim] 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.

Pa.Stat.Ann. tit. 53, § 7106(b) (emphasis added).

When a municipality fails to index a lien that has been assessed against a particular property, a bona fide purchaser of that property takes title free and clear of any such unindexed obligation. See, e.g., Apollo v. Clepper, 44 Pa.Super. 396 (1910) (bona fide purchaser not obligated by unregistered liens, where state law clearly requires such liens to be recorded in the locality index). A bona fide purchaser is relieved not only of liens that go entirely unrecorded, but also of liens that have been defectively indexed. See Prouty v. Marshall, 225 Pa. 570, 74 A. 550 (1909) (bona fide purchaser not obligated by lien registered under the wrong first name of the property owner); Arch Street Building & Loan Ass'n. v. Sook, 104 Pa.Super. 269, 158 A. 595 (1931) (bona fide purchaser not obligated by lien where index omitted the property owner's middle initial).

In this case, the question is not whether the City failed to record the liens at all, but whether the system it used to record the liens satisfied the requirement under section 7106 that the liens be docketed in the "judgment index." In the recent case of Ransom v. Marrazzo, 848 F.2d 398 (3d Cir.1988), this court implicitly answered this question. In that case, the City attempted to enforce against various occupants a number of water and sewer liens that arose because the previous occupants had failed to pay their bills. These occupants challenged the City's actions in part because the City's indexing system for water liens did not satisfy section 7106. Although we eventually upheld the validity of the liens, the court clearly indicated that the indexing system was invalid. We, in fact, took for granted that the City's indexing system was insufficient:

As the plaintiffs' affidavit confirms, and the defendants' affidavits do not deny, the liens are not entered in the judgment index of the prothonotary, but rather in a separate lien index.

The question then becomes how the city's failure to perfect the liens, by...