Chapter 13

MEMORANDUM

ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

In this adversary proceeding, the chapter 13 debtor seeks to avoid a mortgage on real property by invoking the chapter 13 trustee's status as a hypothetical bona fide purchaser and avoidance power under 11 U.S.C. § 544(a)(3). The debtor asserts that a bona fide purchaser may avoid the subject mortgage because the original mortgagee assigned the mortgage and the assignee did not record the assignment in the public record. The debtor also asserts a claim for equitable subordination of the mortgage.

Presently before the court is a motion to dismiss the amended complaint under Fed. R. Civ. P. 12(b)(6). For the reasons explained below, I will grant the motion and dismiss the complaint with prejudice.

II. PROCEDURAL HISTORY

Craig O. Atkins ("the Debtor") filed a chapter 13 bankruptcy case in this court on June 10, 2014. (Bky. No. 14-14696). He commenced this adversary proceeding by filing a complaint against Defendant Gelt Properties, LLC ("Gelt") on July 23, 2014.1

The Complaint included three (3) counts:

On September 15, 2014, Gelt filed a Motion to Dismiss Debtor's Complaint, or in the Alternative for Summary Judgment, (Doc. #4), to which the Debtor responded on October 22, 2014.

By order dated October 23, 2014, the court granted Gelt's Motion and dismissed the Complaint. The court dismissed Count III with prejudice, but granted the Debtor leave to file an amended complaint with respect to Counts I and II.

The Debtor filed an Amended Complaint on November 7, 2014. (Doc. #15). In the Amended Complaint, the Debtor added three (3) additional parties: Federal Deposit Insurance Corporation ("FDIC"), National Penn Bank ("NPB") and Capital Bank, N.A. ("Capital").2 The Amended Complaint again requested declaratory relief and asserted an avoidance claim under 11 U.S.C. § 544(a)(3). It also asserted a new claim, for either the equitable subordination or the "striking" of the subject mortgage.

On December 8, 2014, Gelt again filed a Motion to Dismiss Debtor's Amended Complaint, or in the Alternative for Summary Judgment ("the Motion") (Doc. #17). The Debtor filed his response to the Motion on January 8, 2015. (Doc. #30). None of the new Defendants have responded to the Amended Complaint.3

III. APPLICABLE LEGAL STANDARD — RULE 12(b)(6)

The purpose of a motion to dismiss a case under Fed. R. Civ. P. 12(b)(6) (incorporated by Fed. R. Bankr. P. 7012) is to test the legal sufficiency of the factual allegations of a complaint, see Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993), and to determine whether a plaintiff is "entitled to offer evidence to support the claims," Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 n. 8, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)).

A defendant is entitled to dismissal of a complaint only if the plaintiff has not pled "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 547, 127 S.Ct. 1955. A claim is facially plausible where the facts set forth in the complaint allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In evaluating the plausibility of the plaintiff's claim, the court conducts a context-specific evaluation of the complaint, drawing from its judicial experience and common sense. See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir.2009); In re Universal Marketing, Inc., 460 B.R. 828, 834 (Bankr.E.D.Pa.2011) (citing authorities); In re Olick, 2011 WL 2565665, at *1-2 (Bankr.E.D.Pa. June 28, 2011).4

In deciding a motion to dismiss a complaint under Rule 12(b)(6), the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, viewing them in the light most favorable to the plaintiff. See, e.g., Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Taliaferro v. Darby Township Zoning Board, 458 F.3d 181, 188 (3d Cir.2006). However, a court is not "bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955).

Finally, in assessing a Rule 12(b)(6) motion, the court may "consider the allegations in the complaint, exhibits attached to the complaint and matters of public record... [as well as,] `undisputedly authentic documents' where the plaintiff's claims are based on the documents and the defendant has attached a copy of the document to the motion to dismiss." Unite Nat'l Ret. Fund v. Rosal Sportswear, Inc., 2007 WL 2713051, at *4 (M.D.Pa. Sept. 14, 2007) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993)); see also In re Angulo, 2010 WL 1727999, at *12 n.1 (Bankr. E.D.Pa. Apr. 23, 2010).5

IV. STATEMENT OF FACTS

For purposes of deciding the Motion, I accept the following facts as true based on the allegations in the Amended Complaint and the admitted or indisputably authentic documents attached to the Motion.

The Loans, Mortgage Documents, Assignments and Recordations

1. On September 23, 2003, the Debtor, along with Andrew Duren and Joel Davenport (collectively, "the Purchasers"),6 purchased the real property located at 223-25 High Street, Phoenixville, PA ("the Property") for the sum of $400,000.00. (See Am. Compl., Ex. A).

2. The Purchasers financed the transaction through two (2) mortgage loans:

3. On September 18, 2003, Erb recorded a mortgage against the Property on account of the Erb Mortgage Loan in the office of the Chester County Recorder of Deeds. (Am.Compl., Ex. C).

4. On September 18, 2003, GBC recorded a mortgage ("the Mortgage") against the Property on account of the GBC Mortgage Loan in the office of the Chester County Recorder of Deeds. (Am.Compl., Ex. B).7

5. In connection with the GBC Mortgage Loan Transaction, the Purchasers also granted GBC an Assignment of Rents, Leases and Agreements of Sale ("the Assignment of Rents"), which was recorded September 18, 2003.

6. The GBC loan was "table funded."8

7. On September 18, 2003, Defendant NPB recorded a Collateral Assignment of Mortgage which stated:

8. Public did not record any document reflecting the assignment of GBC's interest in the GBC Mortgage Loan to Public.

9. On or about September 28, 2007, Public executed an Assignment of Mortgage, reassigning "all of its right, title and interest" in the Mortgage back to GBC. (See Am. Compl., Ex. F).9

The Relationship of the Gelt Entities

10. On September 11, 2006, GBC merged into Gelt Financial Corporation ("GFC").10

11. On January 29, 2014, Gelt Financial Corporation merged into Gelt.

12. On August 11, 2011, Public Savings Bank was "taken over" by Defendant FDIC and all of its assets subsequently sold to Defendant Capital. (Am.Compl. ¶¶ 34-35).

State Court Foreclosure Proceeding

13. On January 17, 2011, GFC (by then, GBC's successor-in-interest)11 filed a foreclosure action ("the C.P. Action") against the Debtor and the co-owners of the Property in the Court of Common Pleas, Chester County ("the C.P. Court").

14. On October 21, 2013, following the non-jury trial, the C.P. Court entered a decision in favor of GFC in the amount of $381,491.77 ("the C.P. Court Decision"). (Am.Compl., Ex. G).

15. On or before December 5, 2013, the C.P. Court docketed the C.P. Court Decision on the count judgment index. (Am.Compl. ¶ 28).

16. On November 18, 2013, the Debtor appealed the C.P. Court Decision to the Pennsylvania Superior Court.

17. On January 27, 2014, the appeal was quashed by the Superior Court because it was taken before the entry of judgment in the C.P. Action.12 (Am. Compl., Ex. H).

18. The Superior Court order quashing the appeal was entered on the docket in the C.P. Action on March 20, 2014.

19. The C.P. Court Decision of October 21, 2013 has not been entered as a judgment in the C.P. Action.

State Court Receivership Petition

20. On July 24, 2013, prior to trial of its foreclosure claim, GFC filed a Petition for Appointment of a Receiver with respect to the Property in the pending foreclosure action in the C.P. Court. (Am.Compl., Ex. G).13

21. The C.P. Court did not act on the Petition for Appointment of Receiver until after the foreclosure trial. By order dated May 10, 2014, the C.P. Court granted GFC's receivership petition and appointed GFC as a receiver of the Property, "with all powers available to a receiver at law and equity," including the right to take possession of the Property and collect all rents, issues and profits ("the Receivership Order"). (Id.; Motion, Ex. F).

22. On June 4, 2014, (six (6) days before commencing this bankruptcy case), the Debtor appealed the Receivership Order to the Pennsylvania Superior Court.

Recordation

23. Other than the mortgage recorded by GBC and the NPB Collateral Assignment of Mortgage, see Statement of Facts Nos. 4 and 7, supra, no other mortgages or assignment of mortgages were recorded by any of the parties in this adversary proceeding, i.e., GFC, Gelt, FDIC or Capital Bank.

V. THE DEBTOR'S § 544(a)(3) CLAIM

A.

In Counts I and II, the Debtor seeks to avoid the Mortgage and the interest of all the Defendants who were assigned an interest therein as referenced in the Statement of Facts.14 In doing so, he invokes two (2) statutory provisions: 11 U.S.C. § 544(a) and 21 P.S. § 351.

11 U.S.C § 544(a) provides:

Section § 544(a)(3) grants the trustee the powers under applicable nonbankruptcylaw that a bona fide purchaser for value would have to avoid a transfer of an interest in real property. Succinctly put, § 544(a)(3) "allow[s] the bankruptcy trustee to invalidate unperfected or improperly perfected prepetition liens, including statutory liens, by asserting the rights of a hypothetical bona fide purchaser." In re McLean, 97 B.R. 789, 794 (Bankr.E.D.Pa.), aff'd 891 F.2d 474 (3d Cir.1989).

A cardinal principle in the application of the trustee's § 544(a)(3) avoidance power is that "[a]lthough federal bankruptcy law establishes the bona fide purchaser status of the trustee, the trustee's rights in that capacity are fixed by relevant state law." E.g., In re Best, 417 B.R. 259, 281 (Bankr.E.D.Pa.2009) (citing McCannon v. Marston, 679 F.2d 13, 15-16 (3d Cir.1982)). This principle leads the analysis to the second statutory provision cited by the Debtor, 21 P.S. § 351.

Section 351 provides, in pertinent part:

(emphasis added).

It is a venerable, incontrovertible principle in Pennsylvania that the purpose of recording statutes, such as 21 P.S. § 351, "is to give public notice in whom the title resides; so that no one may be defrauded by deceptious appearance of title." Salter v. Reed, 15 Pa. 260, 263 (1850); see also In re Fisher, 320 B.R. 52, 63 (E.D.Pa. 2005). Consistent with that purpose, the Third Circuit Court of Appeals has held that under the relevant state statute, 21 P.S. § 351, subsequent purchasers have priority over the rights of prior purchasers only if they are bona fide purchasers for value without notice. "Record notice defeats the claims of a subsequent purchaser." McCannon, 679 F.2d at 15; accord In re Aulicino, 400 B.R. 175, 185 (Bankr. E.D.Pa.2008) ("Under Pennsylvania law, a bona fide purchaser may only prevail against an unrecorded interest, such as the one Movant holds, if he has no actual or constructive notice of the interest").15

Thus, assuming the Debtor may invoke the trustee's avoidance powers, but see Part C.1, infra, his claim has merit only if there was no record notice of the interest in property that he intends to avoid.

B.

The Debtor advances a four (4) step argument in support of his § 544(a)(3) claim.

First, he asserts that "as a debtor in possession," he may exercise the trustee's avoidance rights under 11 U.S.C. § 544(a)(3) and therefore, should be considered to hold the rights of a bona fide purchaser for value under Pennsylvania law. (Am.Compl. ¶ 38).

Next, citing Montgomery County, Pa. v. MERSCORP, Inc., 16 F.Supp.3d 542, 557 (E.D.Pa.2014), leave to file interlocutory appeal granted and appeal pending, Nos. 14-8117, 14-4315 (3d Cir.), he argues that the mortgage assignments from GBC to Public and from Public back to GBC are conveyances that must be recorded under 21 P.S. § 315.

Third, the Debtor contends that a review of the Chester County land records would not have provided "notice of any interest of" GFC, Gelt, Public, FDIC or Capital. (Am.Compl. ¶ 41).

Finally, as a result of the non-recordation of the mortgage assignments, the Debtor asserts that the interest in the Property of GFC (through whom Gelt makes its claim) "is inferior to the claim of the Debtor as a hypothetical bona fide purchaser for value." (Id. ¶ 42).

C.

The Debtor's argument in support of the merits of his § 544(a)(3) claim fails for at least three (3) independent reasons.

1.

The Debtor's initial premise — that he is a debtor-in-possession with the powers of a trustee — is erroneous.

A chapter 13 debtor is not a "debtor in possession." In a chapter 11 case, the debtor serves as "debtor in possession" with the powers of a trustee. See 11 U.S.C. § 1101(1), 1107. Chapter 13 lacks a statutory analogue to §§ 1101(1) and 1107. Instead, in a chapter 13 case, there is a separate trustee, see 11 U.S.C. § 1302, and the debtor is given certain powers of the trustee, see 11 U.S.C. § 1303. The trustee's avoidance powers under 11 U.S.C. §§ 544-549 are not among those powers. See 11 U.S.C. § 1303.

There is a statutory vehicle through which a chapter 13 debtor may exercise the trustee's avoidance powers: 11 U.S.C. § 522(g) and (h).16 However, § 522(g)(1) requires that the property that the debtor seeks to recover: (1) must be property that the debtor could have exempted had it not been transferred and (2) that the transfer to be avoided was involuntary. Ultimately, the Debtor seeks to avoid the mortgage he granted to GBC. But, nothing in the Amended Complaint suggests that the Debtor's transaction with GBC was involuntary.

I acknowledge that there is legal authority supporting the proposition that a chapter 13 debtor may exercise the trustee's avoidance powers without satisfying the requirements of § 522(g) and (h). See e.g., In re Cohen, 305 B.R. 886, 895-900 (9th Cir. BAP 2004). Cohen is grounded in a purported "holistic" construction of the Bankruptcy Code. But I already have declined to follow Cohen, see In re Funches, 381 B.R. 471, 495-96 (Bankr.E.D.Pa. 2008), and I adhere to my holding in Funches. In my view, the cogent policy arguments expressed in Cohen do not justify a departure from the application of the unambiguous statutory text, which provides that a chapter 13 debtor may exercise the chapter 13 trustee's avoidance powers only if the debtor can satisfy the requirements of § 522(g) and (h). In this adversary proceeding, where the Amended Complaint lacks any factual allegations that would support the requisite findings under § 522(g) and (h), the Debtor's § 544(a)(3) claim must fail.17

2.

The voluntariness of the original transfer — the Debtor's grant of the Mortgage to GBC — highlights another flaw in the Debtor's theory.

Section 544(a)(3) permits a bankruptcy trustee to set aside transfers of the debtor. In this matter, there was only one (1) transfer made by the Debtor: the original grant of the Mortgage to GBC.

The critical point here is that the Debtor acknowledges that the initial transfer was properly recorded in the Chester County Department of Records. (Am.Compl. ¶ 15). That recordation provided notice sufficient to defeat the claim of any subsequent purchaser, including a bankruptcy trustee acting as a hypothetical bona fide purchaser for value under § 544(a)(3). See, e.g., McCannon, 679 F.2d at 15. Thus, the Amended Complaint fails to state a plausible claim that the Debtor's initial grant of the Mortgage to GBC is avoidable under § 544(a)(3).

To the extent the Debtor complains about the lack of recordation and notice to bona fide purchasers, that complaint relates exclusively to the transfers made by the initial transferee (GBC) to a subsequent transferees (Public and then back again to GBC). However, those transfers were not transfers of "property of the Debtor" and therefore, they cannot be avoided under § 544(a)(3). Once the debtor has his or her interest in property to the initial transferee, the subsequent transfer of that interest by assignment to a subsequent transferee does not involve a transfer of the debtor's property, a necessary element of a § 544(a)(3) claim.18 Such subsequent transfers may be recoverable under 11 U.S.C. § 550, but § 550 provides only a "secondary cause of action" after the trustee has established an entitlement to avoid a transfer under one of the other Code avoidance provisions. See In re Resource, Recycling & Remediation, Inc., 314 B.R. 62, 69 (Bankr.W.D.Pa. 2004).19

In short, all of the other transactions described in the Amended Complaint that lacked public recordation were, at best, subsequent transfers of the Debtor's initially transferred property interest and all of the other entities identified in the Amended Complaint are, at best, subsequent transferees. If the Debtor (employing the trustee's powers) cannot avoid the initial transfer of his property under the § 544(a)(3) — and it is obvious that he cannot — then he may not follow the property and recover from subsequent transferees under § 550.20

3.

There is an additional, independent reason why the Debtor's § 544(a)(3) lacks merit.

In the Amended Complaint, the Debtor candidly acknowledges that the C.P. Court Decision, while not reduced to judgment, was indexed in the county judgment index on December 5, 2013 maintained by the Prothonotary, (see Am. Compl. ¶¶ 27-28) and, once so indexed, the C.P. Court Decision imposed a lien on the Property pursuant to Pa. R. Civ. P. 3021(a)(1) and 3022(a).

This fact alone defeats the Debtor's claim. The indexing of the C.P. Court decision, which determined that GFC was entitled to foreclose on a mortgage based on a debt of $381,491.77, gave notice to the world, prior to the bankruptcy filing, of the existence of GFC's mortgage lien position. Thus, the bankruptcy trustee, as a hypothetical purchaser for value as of the commencement of the Debtor's bankruptcy case on June 10, 2014, had notice of GFC's lien position. That notice "defeats the claims of [the] subsequent purchaser." McCannon, 679 F.2d at 15. Even if the Debtor may exercise the trustee's avoidance powers, he cannot obtain priority over GFC's lien position or over the lien position of its undisputed successor-in-interest, Gelt.

4.

I make two (2) final points regarding the Debtor's § 544(a)(3) claim.

First, I am dismissing Counts I and II as to all Defendants, even though Gelt is the only Defendant who appeared. Based on the allegations in the Amended Complaint and my analysis above, there is no plausible theory by which the Debtor can set aside any mortgage interest that any of the other Defendants may have in the Property. Further, litigation of the issue based on the Amended Complaint would be futile.

Second, the Debtor's initial Complaint was dismissed for failure to state a claim, but with leave to amend. Having determined the Amended Complaint to be legally insufficient, I perceive no other factual matter that the Debtor could allege which would cure the inadequacies in the pleading. Therefore, I find it appropriate to dismiss the Debtor's § 544(a)(3) claim (Counts I and II) with prejudice.

VI. THE DEBTOR'S EQUITABLE SUBORDINATION CLAIM

In Count III of the Amended Complaint, the Debtor requests that Gelt's claim be equitably subordinated or stricken entirely.

In neither the Amended Complaint, nor his response to the Motion, has the Debtor identified the source of legal authority for the relief requested.

I am not aware of any legal authority permitting a bankruptcy court to strike, disallow or avoid an interest in property, such as a mortgage, based solely on "inequitable conduct." A bankruptcy court is not a "roving commission" with the power "to do equity" as it pleases. In re Combustion Engineering, Inc., 391 F.3d 190, 236 (3d Cir.2004). Therefore, with respect to the Debtor's request that the Mortgage be stricken, Count III will be dismissed without further discussion.

There is, however, statutory authority for the subordination of claims. 11 U.S.C. § 510(c) provides:

Most courts have held that there are three (3) elements to an equitable subordination claim:

See In re SubMicron Systems Corp., 432 F.3d 448, 461-62 (3d Cir.2006); Citicorp Venture Capital, Ltd. v. Comm. of Unsecured Creditors, 160 F.3d 982, 986-87 (3d Cir.1998).21

In support of the relief sought in Count III, paragraphs 55-57 of the Amended Complaint refer to the following conduct:

The allegations, individually and collectively, fail to state a plausible claim for relief under § 510(c)(2).

First, the allegation regarding noticing of foreclosure actions to creditors is incomprehensible. The Debtor neither identified the "order" referenced in Paragraph 55 of the Amended Complaint nor offered any explanation (in the Amended Complaint or his response to the Motion) as to why the bankruptcy court would issue an order regulating state court foreclosure practice. Further, the Debtor neglected to describe any harm he or the bankruptcy estate suffered as a result of the asserted notice defect.

Second, to the extent that the failure to record the mortgage assignments has any legal significance beyond its role in the Debtor's (failed) § 544(a)(3) claim, the Debtor has not described any harm that he or the estate has suffered, much less harm severe enough to warrant the equitable relief requested.

Finally, I know of no legal authority, and the Debtor has not cited any, supporting the proposition that a failure to accurately credit an obligor for all of the payments made on account of a mortgage loan account, by itself, states a claim for equitable subordination of the mortgage or avoidance of the mortgage. A dispute regarding the crediting of payments certainly is relevant in determining the amount of an allowed claim in a contested matter arising from an objection to a proof of claim. But, without some additional facts indicating that the Debtor or the bankruptcy estate was harmed in some fashion, other than by the need to object to a proof of claim, the Debtor has not stated a claim. The mere failure to give full credit for all payments does not support the relief requested.

Just as I am dismissing Counts I and II with prejudice, I also will dismiss Count III with prejudice. The Debtor has been given ample opportunity to plead facts supporting the claims asserted. His failure to do so in the Amended Complaint warrants a dismissal with prejudice.

VII. CONCLUSION

For the reasons set forth above, the Motion will be granted and Counts II and III of the Amended Complaint will be dismissed with prejudice. Count I will be dismissed without prejudice.22 An appropriate order follows.

ORDER

AND NOW, upon consideration of Defendant Gelt Properties, LLC's Motion to Dismiss Debtor's Amended Complaint, or in the Alternative for Summary Judgment ("the Motion") (Doc. # 17) and the Debtor's Answer in response thereto, and for the reasons set forth in the accompanying Memorandum,

It is hereby ORDERED that:

1. The Motion is GRANTED.

2. Count I of the Amended Complaint is DISMISSED WITH PREJUDICE, except that the dismissal is without prejudice to the Debtor right to seek a determination of the amount of National Penn Bank's claim in an appropriate contested matter.

3. Counts II and III of the Amended Complaint are DISMISSED WITH PREJUDICE.