IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE:

RAY A. JOHNSTON, : Bankruptcy No. 05-70016 BM

:

:

Debtor : Chapter 7

*******************************

LISA M. SWOPE, ESQUIRE, TRUSTEE :

OF THE BANKRUPTCY ESTATE OF :

RAY A. JOHNSTON, :

:

Plaintiff :

:

v. : Adversary No. 05-7008 BM

:

WASHINGTON MUTUAL HOME : Complaint To Determine Secured

LOANS, INC., CSB BANK, and : Status

JANET L. JOHNSON, :

:

Defendants :

Appearances: Lisa M. Swope, Esq., Plaintiff Trustee

Peter J. Mulcahy, Esq., for Defendant Washington Mutual Homes Loans

Andrew P. Gates, Esq., for Defendant CSB Bank

MEMORANDUM OPINION

The chapter 7 trustee asserts that a mortgage debtor granted against real

property which he owned at the time with his wife as tenants by the entirety is not “valid”

and that, as a hypothetical bona fide purchaser of the property, she consequently may

avoid the mortgage in accordance with § 544(a)(3) of the Bankruptcy Code.

Washington Mutual Home Loans, Inc (hereinafter WMHL), assignee of the

mortgage, opposes the relief sought by the trustee.

We conclude for reasons set forth in this memorandum opinion that the mortgage

presently is not enforceable. The trustee does not, however, qualify as bona fide

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1. Debtor also executed a second mortgage that same day in favor of CSB Bank in the

amount of $19,152.45. That mortgage is no longer at issue in the present proceeding. 

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purchaser and therefore may not avoid the mortgage on that basis in accordance with

§544(a)(3).

– FACTS –

A tract of land situated in Clearfield County, Pennsylvania, was conveyed to

debtor and his wife as tenants by the entirety on August 29, 1994. The deed conveying

the property was duly recorded in the office of the Recorder of Deeds of Clearfield County

on September 21, 1994. 

Debtor granted a mortgage against the property in favor of CSB Bank1 on June

14, 2001. The purpose of the mortgage was to secure payment of a promissory note in

the amount of $84,000 debtor had executed that same day. Debtor’s wife, however,

executed neither the note nor the mortgage. The mortgage was duly recorded in the

office of the Recorder of Deeds of Clearfield County on June 19, 2001.

CSB Bank assigned the mortgage to WMHL on July 2, 2001. The assignment was

duly recorded in the office of the Recorder of Deeds of Clearfield County on July 9, 2001.

Debtor’s wife had commenced a divorce proceeding against debtor in the Court

of Common Pleas of Cameron County, Pennsylvania prior to October 6, 2001. Precisely

when the action commenced is not indicated in the record.

Debtor and his wife executed a property settlement agreement in connection with

the divorce proceeding on October 6, 2001. They agreed, among other things, that debtor

would become the sole owner of the above property. More precisely, debtor agreed to

refinance two mortgages against the property in favor of First Financial Bank and CSB Bank

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and to have his wife’s name “removed from the same”. He further agreed to pay her the

additional sum of $40,000 “to compensate her for the equitable distribution accomplished

herein”. Debtor’s wife in turn agreed to convey her interest in the property as a tenant

by the entirety to debtor once her name was “removed” from the prior mortgages. In the

event debtor was not able to refinance the mortgages, it was agreed that the property

would be sold and that debtor’s wife would receive $40,000 from the sale proceeds.

The Court of Common Pleas of Cameron County issued a divorce decree on

October 16, 2001, which incorporated the above property settlement agreement into the

decree. The divorce decree was filed in Cameron County but not in Clearfield County,

where the above real property is located.

No deed conveying the above property from debtor and his wife as tenants by

the entirety to debtor individually is of public record in the office of the Recorder of Deeds

of Clearfield County. The most recent deed of record is the above deed dated August 29,

1994, conveying the property to debtor and his wife as tenants by the entirety.

At some unspecified time, debtor’s wife executed an undated document

captioned “Spousal Waiver Certificate”, wherein she certified that she had no ownership

in the above real property. There is no indication that the document was filed in the office

of the Recorder of Deeds of Clearfield County, where the deed dated August 29, 1994, the

mortgage of June 21, 2001, and the July 2, 2001, assignment of the mortgage were duly

recorded.

On October 27, 2001, debtor’s wife also executed a document captioned

“Relinquishment of Marital Interest”, wherein she relinquished any right, title or interest

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2. Debtor’s former wife did not answer the complaint and has not participated at all in this

adversary action. We infer from her inaction that she “has no dog in this fight” and is

indifferent as to its ultimate outcome.

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she had in the above property under the Pennsylvania Divorce Code by virtue of her

marriage to debtor. There is no indication that this document was ever filed in the office

of the Recorder of Deeds of Clearfield County.

Debtor filed a voluntary chapter petition on January 7, 2005. A chapter 7 trustee

was appointed shortly thereafter. The above real property is listed as an asset of debtor’s

bankruptcy estate with a declared value of $112,000. WMHL is identified as holding a

mortgage against the property in the amount of $81,249.

The trustee commenced this adversary action against WMHL and debtor’s former

wife “to determine secured status”. Count I of the complaint asserts that the mortgage

in favor of WMHL is not “valid” and may be avoided by the trustee pursuant to § 544(a)(3)

of the Bankruptcy Code. Count II asserts that debtor’s former wife has no interest in the

above property because debtor has complied with the obligations imposed upon him in the

above property settlement agreement. 

The trustee and WMHL stipulated at a pre-trial conference that this matter could

be decided on a case-stated basis and that a trial was not necessary. They were directed

to submit a stipulation of facts and briefs within a specified period of time.2

The chapter 7 trustee and WMHL submitted a stipulation of facts within the

prescribed period of time. Only the trustee, however, bothered to submit a brief stating

her case. WMHL did not do so even after court personnel telephoned WMHL’s counsel well

after the deadline had passed and inquired whether a brief stating WMHL’s case would be

forthcoming. Counsel was non-committal. WMHL’s inaction indicates that it no longer

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cares to be heard in this adversary action and is indifferent as to its outcome. We can only

speculate as to what WMHL’s legal argument would be had it stated its case.

DISCUSSION

The trustee asserts that the mortgage debtor granted is “invalid” because the

property subject to the mortgage was jointly owned by debtor and his wife as tenants by

the entirety when debtor granted the mortgage and was never conveyed to debtor

individually. Because the mortgage is “invalid”, the trustee further asserts that she may

avoid the mortgage as a hypothetical bona fide purchaser of the property from debtor in

accordance with § 544(a)(3) of the Bankruptcy Code. 

We shall address these assertions seriately.

Is The Mortgage Held By WMHL “Invalid”?

It is not disputed that when debtor granted the above mortgage now held by

WMHL, the property subject thereto was owned by debtor and his wife as tenants by the

entirety. The deed dated August 29, 1994, expressly conveyed the property to them as

tenants by the entirety. As of June 14, 2001, when debtor granted the mortgage at issue

in this adversary action, no deed of record existed whereby debtor and his wife had

conveyed the property as tenants by the entirety to debtor individually.

Husband and wife are treated under the law for most purposes as separate and

distinct individuals. Each is sui juris and is entitled to own property individually. When

they own property jointly, however, they presumably do so as tenants by the entirety.

Even though they are separate and distinct individuals, their interests in the property are

indivisible. Sterett v. Sterett, 401 Pa. 583, 585, 166 A.2d 1, 2 (1960).

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Tenancy by the entirety is a type of joint tenancy which is modified by the

common-law fiction that husband and wife are but a single person. Frederick v. Southwick,

165 Pa. Super. 78, 83, 67 A.2d 802, 805 (1949). Husband and wife are treated as though

they are a corporate entity. C.I.T. Corporation v. Flint, 333 Pa. 350, 354, 5 A.2d 126, 129

(1939). Each spouse is seised during the marriage per tout et non my – i.e., of the whole

or entirety – as opposed to a share, moiety or divisible part. Estate of Bullotta, 798 A.2d

771, 774 (Pa. Super. 2002), aff’d, 575 Pa. 587, 838 A.2d 594 (2003). This type of

ownership is reserved exclusively for married couples. First Federal Savings & Loan

Association of Greene County v. Porter, 408 Pa. 236, 242, 183 A.2d 318, 322 (1962).

In addition to right of survivorship, a tenancy by the entirety is characterized by

the unities of interest, title, time and possession. Estate of Maljovec, 412 Pa. Super. 80,

84, 602 A.2d 1317, 1319 (1991). Until the marriage ends, whether by divorce or the death

of one of the spouses, neither spouse may compel partition of entireties property or sever

it by unilateral conveyance nor may affect in any way the survivorship interest of the other

spouse. Napotnik v. Equibank and Parkvale Savings Association, 679 F.2d 316, 319 (3d Cir.

1982). 

A judgment creditor may execute on entireties property only when both spouses

are judgment debtors. Klebach v. Mellon Bank, 388 Pa. Super. 203, 208, 565 A.2d 448,

450 (1989). Entireties property is immune from process, execution or forced sale by a

judgment creditor of only one of the spouses. Id. Enforcement of process in such instance

would permit the taking of the interest of one spouse to satisfy a liability of the other

spouse. Biehl v. Martin, 236 Pa. 519, 523, 84 A. 953, 954 (1912).

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In an estate by the entirety, each spouse has a contingent expectancy of

individual ownership which arises out of the right of survivorship, and which “fastens upon”

the property only if the expectancy is actualized. C.I.T. Corp., 333 Pa. at 355, 5 A.2d at

128. A creditor’s lien on the expectant interest of one spouse becomes enforceable only

if and when the expectancy “ripens into a realized fact”. At that point, execution by a

judgment creditor is not upon a mere expectancy, but instead is upon an actual estate.

Biehl, 236 Pa. at 528, 84 A. at 957.

Applying the law concerning tenancy by the entirety to the scant facts stipulated

to by the trustee and WMHL, we conclude that debtor’s expectant interest of sole

ownership of the above real property did not “ripen” and that WMHL therefore would not

be able to execute on the property subject to its mortgage in the event debtor defaulted

on his obligation to it.

Unless it provides otherwise, a divorce decree which absolutely terminates the

bonds of matrimony also terminates all property rights which depend on the marriage. 23

Pa. C. S. A. § 3503. Divorced individuals generally hold marital property as tenants in

common with equal one-half interests. 23 Pa. C.S.A. § 3507(a). There is unity of

possession in a tenancy in common, but separate and distinct titles. Sale of Property of

Dalessio, 657 A.2d 1386, 1387 n.1 (Pa. Cmwlth. 1995).

Instead of unequivocally terminating all property rights arising from the marriage

of debtor and his wife, the divorce decree incorporated the terms and provisions of the

property settlement agreement arrived at on October 6, 2001. Debtor’s wife agreed in

one of those provisions to convey her interest in the above property to debtor individually

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after debtor obtained financing and satisfied the previous mortgages against the property

and also paid her the sum of $40,000. 

What little information the parties have provided in our estimation does not

warrant a determination that debtor obtained financing and had his wife’s name “removed”

from prior mortgages and also paid her an additional $40,000. While it is true that debtor

executed a promissory note in the amount of $84,000 and granted a mortgage against the

property, the mortgage preceded the settlement agreement in time by nearly four months.

We are reluctant to infer from the stipulated facts presented by the trustee and

WMHL that the mortgage debtor granted in June of 2001 was intended to satisfy a

provision in a property settlement agreement that was not entered into until several

months later in October of 2001. Had the parties provided more information concerning

this, whether by stipulation or by proceeding to trial, we might have been in a position to

conclude with some measure of confidence that debtor satisfied his end of the bargain

when he granted the above mortgage.

In addition, we have no basis for concluding that debtor’s wife upheld her end

of the bargain and conveyed her interest in the property as a tenant by the entirety to

debtor. More precisely, there is nothing of record indicating that she and debtor conveyed

their interest in the property as tenants by the entirety to debtor individually. We know

of no deed, for instance, whereby this was accomplished.

Debtor’s wife did, however, execute an undated document captioned “Spousal

Waiver Certificate” and another document dated October 27, 2001, captioned

“Relinquishment of Marital Interest”. The legal effect of these documents on the

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enforceability of the mortgage lien of WMHL is not clear. Apparently choosing to proceed

in this case “on the cheap”, WMHL submitted no brief stating its case, which presumably

would have attempted to explain the significance of these documents. WMHL, in other

words, left the court to fend for itself on this question. 

We conclude in light of the foregoing that debtor’s expectant interest in the

property subject to the mortgage lien held by WMHL did not “ripen” into sole ownership

thereof by debtor. Had debtor defaulted on his obligation to it, WMHL could not have

executed on the property as of the time debtor commenced this bankruptcy case. 

Can The Trustee Avoid The Mortgage As A Hypothetical Bona Fide Purchaser?

Our inquiry does not end with the determination that WMHL could not have

executed on the property by the time debtor commenced his bankruptcy case. We also

must determine whether the chapter 7 trustee because of this may avoid WMHL’s

mortgage as a hypothetical bona fide purchaser in accordance with § 544(a)(3) of the

Bankruptcy Code.

Section 544 of the Bankruptcy Code, the so-called “strong-arm provision”,

provides in part as follows:

(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 –

....

(3) 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 .... 

11 U.S.C. § 544(a)(3).

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3. Although Pennsylvania law considers a mortgage to be a conveyance, in some contexts and a

security interest in others, a mortgage is treated as a conveyance for purposes of actions involving

Pennsylvania recording statues. Pines v. Farrell, 577 Pa. 564, 574, 848 A.2d 100 (2004).

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This provision empowers a trustee in bankruptcy to avoid an obligation of the

debtor if the obligation would not have bound a bona fide purchaser at the time debtor

commenced his bankruptcy case. McLean v. City of Philadelphia Water Service Bureau, 891

F.2d 474, 476 (3d Cir. 1989).

Although the trustee’s strong-arm powers are created by federal law, their scope

depends on the substantive law of the state in which the property is located at the time

of the bankruptcy filing. MidAtlantic National Bank v. Bridge (In re Bridge), 18 F.3d 195,

199 (3d Cir. 1994). If a bona fide purchaser would prevail with respect to a previous

transfer, lien, encumbrance or the like, the trustee likewise will prevail and can avoid it.

Id., 18 F.3d at 200.

A bona fide purchaser that purchases real property without actual or constructive

notice of a prior interest in the property is protected under Pennsylvania law. Butler v.

Lomas & Nettleton Company, 862 F. 2d 1015, 1018 (3d Cir. 1988). This principle is

codified in the Pennsylvania Recording Statute, which provides in part as follows:

All deeds, conveyances3, contracts, and other instruments of writing

wherein it shall be the intention of the parties executing the same to

grant, bargain, sell and convey any lands ... situate in this

Commonwealth ... shall be recorded in the office for the recording of

deeds in the county where such lands ... are situate. Every such deed,

conveyance, contract, or other instrument of writing which shall not be

... recorded, as aforesaid, shall be adjudged fraudulent and void as to

any subsequent bona fide purchaser or mortgagee or holder of any

judgment duly entered in the prothonotary’s office of the county in

which the lands ... are situate, without actual or constructive notice,

unless such deed, conveyance contract or instrument of writing shall

be recorded, as aforesaid, before the recording of the deed or

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conveyance or the entry of the judgment under which such subsequent

purchaser, mortgagee, or judgment creditor shall claim ....

21 P.S. § 351.

A subsequent purchaser of real property having actual or constructive notice of the

prior rights of another in the property is disqualified from obtaining the status of a bona

fide purchaser. Long John Silver’s, Inc. v. Fiore, 255 Pa. Super. 183, 189, 386 A.2d 569,

573 (1978). An innocent purchaser of such property for value without such notice of the

right or interest of a third party, however, acquires the property free and clear of such

secret right or interest. Lund v. Heinrich, 410 Pa. 341, 346, 189 A.2d 581, 584 (1963).

Where one of two innocent parties must suffer, the one whose neglect makes the injury

possible must bear the responsibility. Puharic v. Novy, 317 Pa. 199, 203, 176 A. 233, 234

(1934).

The purpose of this principle is to discourage secret liens against or secret equities

in real property where the holder of the secret interest or lien may record it to secure its

permanent record and place it in a position from which those who deal with the property

thereafter may learn that the owner of the property does not hold perfect title to the land.

Id. Puharic v. Novy, 317 Pa. at 202-03, 176 A. at 234. 

One has constructive notice of another’s interest in real property if one could have

inquired of a person in possession of the property or could have inquired of another whom

they had reason to believe had knowledge of facts which might affect title to the property.

Constructive notice also is provided by what appears in the appropriate indexes of the

office of the Recorder of Deeds in the county where the property is located. Lund, 410 Pa.

at 346, 189 A.2d at 584.

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We conclude in light of the facts stipulated to by the parties that a hypothetical

bona fide purchaser of the above property from debtor for value would have constructive

notice of the mortgage held by WMHL. As a consequence, the trustee does not qualify as

a hypothetical bona fide purchaser for purposes of § 544(a)(3). 

We so conclude because the mortgage debtor initially granted to CSB Bank on June

14, 2001, was duly recorded in the office of the Recorder of Deeds of Clearfield County on

June 19, 2001. The subsequent assignment of the mortgage to WMHL on July 2, 2001,

also was duly recorded on July 9, 2001. As a result of their recording, any subsequent

purchaser of the property would, at the very least, have constructive notice of the

mortgage presently held by WMHL. Said bona fide purchaser would at the very least have

a duty to inquire and if inquiry is made, said bona fide purchaser would learn of the

blemish on the title.

The chapter 7 trustee, as a bona fide purchaser, therefore may not avoid the

mortgage lien held by WMHL. We so conclude notwithstanding our previous determination

that WMHL would not have been able to execute on the property as of the commencement

of this bankruptcy case had debtor defaulted on his obligations to WMHL.

The trustee probably would not find this conclusion surprising in light of the

stipulation that the above mortgage and assignment thereof had been duly recorded. The

trustee appears instead to seek to attack and avoid the mortgage held by WMHL on the

ground that the public record contains no indication that debtor and wife ever conveyed

their interest in the property as tenants by the entirety to debtor individually. No deed to

that effect was recorded in the office of the Recorder of Deeds of Clearfield County. For

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that matter, neither were the documents captioned “Spousal Waiver Certificate” and

“Relinquishment of Marital Interest”.

The trustee has cited to no authority for the proposition that, as a hypothetical bona

fide purchaser, she can avoid a duly recorded mortgage on the theory that the public

record does not indicate that the mortgagor who granted the mortgage in the first place

was not in a position to do so. As we understand the law in Pennsylvania, a purchaser

seeking to avoid a mortgage against property he or she has purchased does not qualify as

a bona fide purchaser if the targeted mortgage was duly recorded. 

Should there be a legal theory according to which the trustee can avoid a duly

recorded mortgage against property of the bankruptcy estate because the mortgagor was

not in a position to grant the mortgage, we are not prepared to sally forth on our own and

articulate that theory on behalf of the trustee.

We conclude in light of the foregoing that the chapter 7 trustee does not qualify as

a hypothetical bona fide purchaser for purposes of § 544(a)(3) of the Bankruptcy Code and

therefore may not avoid the mortgage held by WMHL.

An appropriate order shall issue.

 /s/ 

BERNARD MARKOVITZ

U.S. Bankruptcy Judge

Dated: November 9, 2005

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE:

RAY A. JOHNSTON, : Bankruptcy No. 05-70016 BM

:

:

Debtor : Chapter 7

*******************************

LISA M. SWOPE, ESQUIRE, TRUSTEE :

OF THE BANKRUPTCY ESTATE OF :

RAY A. JOHNSTON, :

:

Plaintiff :

:

v. : Adversary No. 05-7008 BM

:

WASHINGTON MUTUAL HOME : Complaint To Determine Secured

LOANS, INC., CSB BANK, and : Status

JANET L. JOHNSON, :

:

Defendants :

ORDER OF COURT

AND NOW, this 9th day of November, 2005, for reasons set forth in the

preceding memorandum opinion, it hereby is ORDERED, ADJUDGED and DECREED that

the mortgage held by Washington Mutual Home Loans, Inc. is NOT AVOIDED by the

chapter 7 trustee.

It is SO ORDERED.

 /s/ 

BERNARD MARKOVITZ

U.S. Bankruptcy Judge

cm: Service to be made by Case Administrator on the following parties:

Lisa M. Swope, Esq.

Peter J. Mulcahy, Esq.

Andrew P. Gates, Esq.

Office of United States Trustee

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