On Appeal From the United States District Court For the District of New Jersey. (D.C. Civ. No. 92-02663).
Before: Becker, Alito, and Roth, Circuit Judges.
This is an appeal from an order of the district court affirming an order of the bankruptcy court. Both courts rejected the claim of appellant Midlantic National Bank ("Midlantic") that, notwithstanding Midlantic's failure to record a refinanced real estate mortgage prior to the bankruptcy of the mortgagor, it must prevail over the bankruptcy trustee because Midlantic's unrecorded mortgage stands in the shoes of its prior recorded mortgage under the doctrine of equitable subrogation. We conclude that under New Jersey law, which we find applicable to the controversy, the trustee's "strong arm" powers as a hypothetical bona fide purchaser, see 11 U.S.C. § 544(a)(3), entitle the trustee to avoid the equitable lien of the unrecorded mortgage, and hence we will affirm.
The underlying facts are not in dispute. On March 31, 1987, the debtor, Frank Bridge, obtained a $260,000 mortgage loan from Midlantic to finance the construction of improvements on his property at 94 South Main Street in Ocean Grove, Monmouth County, New Jersey. The mortgage was recorded on April 3, 1987, in the Monmouth County Clerk's Office. In 1988, Bridge and Midlantic agreed to refinance the loan and, on October 18, 1988, Bridge secured another mortgage on the Ocean Grove property for $260,000. Bridge used the proceeds from the note underlying this mortgage to discharge the debt from the original mortgage.
Throughout these transactions with Midlantic, Bridge was represented by counsel who also acted as the settlement agent for the October 18, 1988 transaction, and, as such, was required by Midlantic to record the new mortgage. Bridge's counsel subsequently certified that the mortgage had been sent for filing and was now the primary lien on the Ocean Grove property. Unbeknownst to Midlantic and Bridge, however, the October 18, 1988 mortgage was not recorded, although on July 13, 1990, the original mortgage was marked satisfied. Moreover, a judgment against Bridge entered on February 8, 1990, in favor of James J. Desmond, became a lien against the property.
On August 15, 1990, Bridge filed a voluntary petition under Chapter 7 of the Bankruptcy Code in the Bankruptcy Court for the District of New Jersey. As of this time, the new mortgage was unrecorded and remained so until September 12, 1990, when Midlantic ultimately recorded it.
In December of 1991, Midlantic initiated an adversary proceeding in the bankruptcy court. Although it conceded that in view of the failure to record the mortgage, the New Jersey recording statute appeared to favor the trustee, see N.J.S.A. 46:22-1 (1989),*fn1 Midlantic argued that it retained an equitable lien on the Ocean Grove property, which was superior to all other interests in the property because the doctrine of equitable subrogation operated to place it in the position of its discharged first mortgage. Midlantic moved for summary judgment on this issue, which the bankruptcy court denied. Instead, the bankruptcy court granted the trustee's cross-motion for summary judgment,*fn2 holding that the trustee's "strong arm" powers under 11 U.S.C. § 544(a)(1)-(3) operated to avoid Midlantic's interest in the Ocean Grove property.
Midlantic appealed to the district court, which affirmed the bankruptcy court's rulings. The district court noted that, although Midlantic had argued that it should prevail over the trustee's strong-arm powers based on the doctrine of equitable subrogation, Midlantic had cited no relevant New Jersey authority. The court concluded that the power conferred upon the trustee as a bona fide purchaser under § 544(a)(3) authorizes the trustee to avoid such an equitable interest in real property. This appeal followed. We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. As the bankruptcy and district courts' holdings rested on an analysis of § 544(a) of the Bankruptcy Code, we exercise plenary review. Sapos v. Provident Institution for Savings, 967 F.2d 918, 922 (3d Cir. 1992).
Title 11, section 544(a) of the Bankruptcy Code, the "strong arm" clause, defines the trustee's powers over rival creditors. It provides:
(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 such 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 ...