ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Before Gibbons and Hunter, Circuit Judges, and Gerry, District Judge.*fn*
Among the provisions of the Bankruptcy Reform Act of 1978, 11 U.S.C. § 101 et seq. (Supp. III 1979) (the Code), that require reference to state law is the "strong arm clause" of Section 544. This section grants the trustee the state law defined rights and powers of certain creditors and transferees of property. In this case, both the bankruptcy and district courts interpreted the language of the Code to permit a trustee to avoid an equitable interest in real property (arising from a purchase agreement) of a person whose possession of that property provided constructive notice of her rights under state law. Concluding that Section 544 does not contemplate such a result, we reverse.
On March 19, 1973, Miriam H. McCannon entered into an agreement with a partnership doing business as The Drake Hotel (the debtor) for the sale of a condominium apartment and of a certain percentage of the common areas in that hotel. The agreement contained a contingency that the hotel, located in Philadelphia, be declared a valid condominium according to the terms of the then applicable Unit Property Act, Pa.Stat.Ann. tit. 68, § 700.101 et seq. (Purdon 1965) (repealed). That contingency was satisfied later in 1973.
Pursuant to the agreement, McCannon paid a deposit of $500 toward the purchase price of $17,988. She began residence in the apartment in April of 1975 and resides there presently. The bankruptcy court found, however, that "(f)or a variety of reasons, settlement on the property has never taken place." In re Hotel Associates, Inc., 10 B.R. 668, 669 (Bkrtcy.E.D.Pa.1981). McCannon never recorded her agreement for sale.
In November of 1979, the debtor filed a petition under Chapter 11 of the Code, 11 U.S.C. § 1101 et seq. McCannon filed a complaint in February of 1981 seeking relief from the automatic stay imposed by Section 362 of the Code and requesting specific performance of the agreement to purchase the apartment. Holding that the trustee, as a bona fide purchaser without regard to any knowledge on his part, may avoid McCannon's interest in the property pursuant to Pennsylvania law and to Section 544(a)(3) of the Code, the bankruptcy court granted the trustee's motion for judgment at the close of the plaintiff's case. In re Hotel Associates, Inc., supra. The district court affirmed the bankruptcy court's judgment, employing the same interpretation of Section 544 and concluding that Section 365(i) did not apply. McCannon v. Marston, No. 81-1451 (E.D.Pa. Aug. 1, 1981). This appeal followed.
Trustee as lien creditor and as successor to certain creditors and purchasers
(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-
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied ...