James A. Lewis, Esquire, Trustee for Joseph M. Eaton Builders, Inc. v. Thomas J. And Linda M. DiethornJames A. Lewis, Esquire, Trustee for Joseph M. Eaton Builders, Inc. v. Thomas J. And Linda M. Diethorn
OPINION OF THE COURT
In this dispute a trustee in bankruptcy has sought to exercise his powers to avoid, as a preferential transfer, the debtor’s payment to settle litigation in Pennsylvania court and so to rеmove a
Us pendens
on certain real estate, for the sale and purchase of which he had entered into a con
I.
Thomas J. and Linda M. Diethorn, the defendants here, entered into a contract with a developer, Joseph M. Eaton Builders, Inc. They paid $3,000 as earnest money into escrow with the real estate agent. By terms of the agreement, the Diethorns were to buy a lot in Allegheny County, Pennsylvania, and a house which Eaton was to build on it. The Diethorns were to pay a total of $182,400, and Eaton was to convey title after building the house. The Diethorns secured a mortgage commitment and in April 1986 they moved into the house. A dispute arose about the cypress wood siding of the house, the Diethorns contending that it was defective and Eaton refusing to alter it. In May 1986 the Diet-horns sued in equity in Pennsylvania state court, seeking specific performance of the Agreement of Sale, and at the same time a lis pendens was indexed. Tbe prospective mortgagee made the mortgage commitmеnt contingent upon Eaton’s putting $15,-000 into escrow for repair of the siding, after the mortgagee’s appraiser reported that it was not of workmanlike quality. Eaton did not escrow thе money, and the Diethorns lost their mortgage commitment. Meantime they had paid $31,500, in round figures, of their own money to Eaton, some of it to reconstruct the siding and some for other permаnent improvements to the house. However, the sales transaction was never consummated, and in July 1986 the Diethorns moved out.
In February 1987 Eaton entered into a settlement agreemеnt with the Diethorns, arranging for the return of their $3,000 earnest money, and paying them an additional $15,500. In return, the Diethorns agreed to discontinue their suit in Pennsylvania state court (a consent order to that effect was entered on February 26, 1987) and to lift the lis pendens on the property. That same month Eaton sold the property to another buyer for $205,000.
On March 3, 1987 Eaton filed for voluntary bankruptcy under chapter 7 of the Bankruptcy Code. When the trustee had been duly appointed, he filed a timely complaint against the Diethorns, to avoid the transfer as preferentiаl under section 547 of the Bankruptcy Code and to recover the $15,500
1
for the bankrupt’s estate, thus commencing this adversary proceeding. The proceeding came to trial in thе Bankruptcy Court on January 26, 1988 and on December 6, 1988 the court entered a memorandum opinion and order of judgment for the trustee.
II.
Section 547 of the Bankruptcy Code specifies when a payment by a bankrupt debtor may be avoided by the trustee.
2
Thus, thе exchange also falls within the statutory exception to the trustee’s avoidance powers as set out in subsection (c)(1), since it was intended by both parties “to be a contemporaneous exchange for new value ... and [was] in fact a substantially contemporaneous exchange.” 11 U.S.C. § 547(c)(1). The trustee may not avoid such transfers. Id.
III.
We are confirmеd in our holding by our finding that even if the transfer had been for an antecedent debt it would have been in satisfaction of an equitable lien, an obligation which would also have defeatеd the trustee’s avoidance power. It would thus have been protected because it would not have been a transfer which “enables such creditor to receive morе than such creditor would receive” in a chapter 7 distribution. 11 U.S.C. § 547(b)(5) (1982). “The trustee in bankruptcy is vested by operation of law only with that title which the bankrupt had in his property as of the date hе filed the petition. That title is subject to the imposition of equitable liens.”
In re Czebotar,
In bankruptcy the existence and power of liens is controlled by state law, unless its apрlication would frustrate a federal policy.
In re Taddeo,
In cases of this kind, the trustee in bankruptcy possesses only those powers of avoidаnce which a hypothetical judgment lien creditor would have under state law on the date the bankruptcy petition was filed. 11 U.S.C. § 544. In Pennsylvania a judgment lien creditor of Eaton on that date could not have defeated the claims of a holder of an equitable lien against the property in Allegheny County.
See Gladowski v. Felczak,
IV.
The judgment will, therefore, be reversed.
Notes
. The complaint also sought recovery of the $3,000 earnest money, which the debtor had arranged to release from escrow, but the trustee later abandoned this claim, conceding that the defendants had not breаched the contract of sale. Also, the docket entry in the Pennsylvania Court of Common Pleas lists the amount of Eaton’s payment to the Diethorns as $15,000, but some pleadings in this bankruptcy case set the amount of the trustee’s remaining claims at $15,500; sometimes the total of those claims and the earnest money is given as $18,500. The Bankruptcy Court used the higher figure and, in its judgment order, gave recovery of $15,500 to the trustee. App. 209a; see also Mem. Op., Dec. 6, 1988, at 4 n. 5; App. 199a.
. The portions of the section pertinent to this litigation read as follows:
§ 547. Preferences
******
(b) Except as provided in subsection (c) of this section, thе trustee may avoid any transfer of property of the debtor&emdash;
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made&emdash;
(A) on or within 90 dаys before the date of the filing of the petition ...; and
(5) that enables such creditor to receive more than such creditor would receive if&emdash;
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
(c) The trustee may not avoid under this section a transfer&emdash;
(1) to the extent that such transfer was&emdash;
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange....
11 U.S.C. § 547(b), (c) (Supp. V 1987).