The opinion of the court was delivered by: Bumb, District Judge
This matter comes before the Court upon appeal by Ridings at Brandywine Associates, LP ("Ridings" or "Debtor"), of the Bankruptcy Court's Order, dated April 24, 2008, granting the motion of Citizens Bank ("Citizens") to dismiss Riding's Complaint with prejudice.
The facts in this case are undisputed. On June 24, 2005, Ridings purchased a parcel of land known as the "Ridings at Brandywine" development ("the Property"). The purchase was financed by a mortgage and promissory note in the amount of $10,625,000 which was executed by Ridings and granted to Citizens Bank on June 24, 2005. In connection with the sale, Ridings also executed a Construction Loan Agreement and Note in the amount of $6,098,256. To secure the loans, Ridings delivered to Citizens an Open End Mortgage and Security Agreement encumbering the Property. Ridings recorded its deed on June 29, 2005 but Citizens did not record its mortgage until June 7, 2006, almost a year after the transaction.
On June 10, 2007, Ridings filed a voluntary petition under Chapter 11 of the Bankruptcy Code. As of June 30, 2007, approximately six million dollars was due and owing to Citizens Bank on the two loans.
On November 19, 2007, Ridings (now the "Debtor") filed a two-count adversary complaint seeking to avoid the mortgage on the Property held by Citizens. In Count One, the Debtor sought a declaratory judgment ruling that Citizens' mortgage was null and void pursuant to 21 P.S. § 351 ("§ 351") and/or 21 P.S. § 444 ("§ 444") and reclassifying it as an unsecured claim. Specifically, the Debtor contended that under § 444, all deeds and mortgages must be filed within 90 days of execution or else they are deemed fraudulent and void as to any subsequent bona fide purchaser. Because Citizens recorded its mortgage almost a year after the execution, the Debtor argued that the mortgage was void. In Count Two, the Debtor asserted that under 11 U.S.C. § 544(a)(3) ("§ 544"), it could assume the position of a hypothetical bona fide purchaser of real property for value without notice and, thus, avoid the Citizens mortgage.
On January 18, 2008, Citizens filed a motion to dismiss the Debtor's adversary complaint. Citizens argued that § 351 returned Pennsylvania to a "race-notice" system, thereby repealing the 90 day deadline embodied in § 444. Thus, Citizens concluded that because it recorded the mortgage a year before the Debtor filed the bankruptcy petition, Citizens satisfied § 351. Moreover, Citizens contended, to the extent § 444 still applies, it contains an implicit notice exception, meaning that the 90 day requirement would not apply where the subsequent purchaser had either actual or constructive knowledge of the prior interest. Accordingly, Citizens claimed that the Debtor, even assuming the status of a hypothetical bona fide purchaser without actual knowledge under § 544 of the Bankruptcy Code, had constructive knowledge of Citizens' previously recorded mortgage and, therefore, could not avoid it.
On February 11, 2008, a hearing was held in front of Judge Wizmer of the Bankruptcy Court. On April 24, 2008, Judge Wizmer issued an opinion granting Citizens' motion. Judge Wizmer found that § 351 returned Pennsylvania to a "race-notice" system and, thus, "the Citizens Bank mortgage, recorded before the debtor gained bona fide purchaser status at the time of the bankruptcy filing, has priority over the debtor's claim." (Bankr. Op. at 14). Furthermore, Judge Wizmer explained that "[m]any Pennsylvania cases have found an implicit exception to the section 444 consequence ... where the purchaser has actual or constructive notice of the interest at the time of the purchase." (Id.). Thus, the Bankruptcy Court granted Citizens' motion to dismiss the Debtor's adversary complaint. The Debtor now appeals Judge Wizmer's ruling.
An appellate review of a bankruptcy court's factual findings is performed under a "clearly erroneous" standard. In re F/S Anlease II, Inc., 844 F. 2d 99. 103 (3d Cir. 1988). Findings of fact "shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy judge to judge the credibility of the witnesses." Bankr. Rule 8013. A finding is considered "clearly erroneous" when, "although there is evidence to support it, the viewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." In re Johns Manville Corporation, 68 B.R. 155 (S.D.N.Y. 1986) (quoting U.S. v. U.S. Gypsum Co., 33 U.S. 364, 395 (1948)). As to the issues that relate to the bankruptcy judge's application of the law to undisputed facts, those conclusions are "subject to plenary review." In re Johns Manville, supra, 68 B.R. at 158.
Return to Race Notice Recording System Under §351
To begin, the Court must determine whether the Bankruptcy Court correctly determined that Pennsylvania is governed by a race notice recording system. This requires an examination of the two relevant Pennsylvania recording statutes: § 444 and § 351.
Section 444 was first enacted in 1775 and subsequently amended in 1893 and 1955. The current version provides, in relevant part,
[a]ll deeds ... shall be recorded ... within ninety days after the execution ... and every such deed ... which shall not be proved and recorded as aforesaid, shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valid consideration...
21 P.S. § 444 (emphasis added). Thus, on its face, § 444 institutes a 90 day recording requirement.
Section 351 was enacted in 1925. It provides, in relevant part,
[a]ll deeds ... shall be recorded... Every such deed ... which shall not be ... recorded, as aforesaid, shall be adjudged fraudulent and void as to any subsequent bona fide purchaser ... without actual or constructive notice unless such deed ... shall be recorded, as aforesaid, before the recording of the deed ... under which such subsequent purchaser ... shall claim.
21 P.S. § 351 (emphasis added). Thus, § 351 does not contain a 90 day requirement and, instead, includes a "savings provision" which gives priority to the instrument that is filed first. ...