ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (Civil Nos. 89-1547; 89-3026).
Gibbons, Chief Judge, Mansmann, Circuit Judge, and Gerry,*fn* District 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. § 522(h), 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. §§ 544, 545. The debtors contended that because the City had failed to index the liens in compliance with Pa.Stat.Ann. tit. 53, § 7106, 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. We will affirm.
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 Burau. 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. 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.
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. 522(h). 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. § 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 from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser 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, ...