U.S. Court of Appeals for the Third Circuit

PHILADELPHIA – According to a federal appellate judge, an attempt to seek avoiding an equitable lien as a preferential transfer in a bankruptcy court action has not succeeded.

Judge Theodore A. McKee decided Thursday to rule in line with the U.S. District Court for the Eastern District of Pennsylvania, in dismissing Count Nine of James Albert D’Angelo Sr. and Carolyn Marie D’Angelo’s amended complaint with prejudice.

McKee said. “The District Court affirmed the Bankruptcy Court’s dismissal of the D’Angelos’ attempt to invalidate their note and mortgage pursuant to 11 U.S.C. Section 544(a) and (b). The District Court also held that the Bankruptcy Court had properly concluded that the Rooker-Feldman doctrine barred review of the state court’s equitable lien order.”

While the Section 544 appeal was pending, the D’Angelos commenced another proceeding, seeking to avoid as a preferential transfer the equitable lien against the property in question pursuant to 11 U.S.C. Section 547. In that separate proceeding, the amended complaint filed by the D’Angelos contained a total of nine counts.

The Bankruptcy Court initially dismissed all counts in the filing except for Count Nine, which sought to avoid the equitable lien as a preferential transfer.

“In reviewing Count Nine, the Bankruptcy Court concluded that the equitable interest acquired by JP Morgan Chase Bank (JPM) through the equitable lien was an interest assigned to JPM in 2006, when JPM succeeded to the interests previously held by the prior mortgagee of the property,” McKee stated.

The Bankruptcy Court characterized the equitable lien as “subrogation”, with no interest of the D’Angelos being transferred to JPM during the preference period as required by Section 547(b). This appeal followed.

McKee said the decision made by the Bankruptcy Court would not be changed without “a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact.”

“The primary issue before us is whether the Bankruptcy Court correctly found that the D’Angelos could not establish that the 2011 equitable lien order imposed by the state court transferred a property interest to JPM, such that it was a voidable transfer under 11 U.S.C. Section 547(b),” McKee said. “This provision allows a bankruptcy trustee to recover certain transfers of interests in property made by a debtor within 90 days prior to filing a petition in bankruptcy.”

Though the D’Angelos pled the equitable lien involved a transfer of interest in their home was unlawful as a matter of law, McKee overruled the appellants and agreed with the original decision made by the Bankruptcy Court.

“As the Bankruptcy Court succinctly and correctly explained, the equitable lien given to JPM consisted of nothing more than the equitable lienholder’s right of subrogation to the rights of the prior lienholder,” McKee said. “It did not constitute an assignment of an interest of the D’Angelos. The Bankruptcy Court correctly reasoned that, since Section 547(b) requires an actual transfer of an interest in property, the assignment between the lenders fell outside of the scope of Section 547(b).”

McKee upheld the District Court’s verdict and dismissed the D’Angelos’ appeal, citing the provision of the Rooker-Feldman doctrine. The doctrine states “a federal court does not have jurisdiction to review decisions of state courts or claims inextricably intertwined with an earlier state-court judgment.”

“To the extent that the D’Angelos argue the equitable lien transferred an interest of theirs where none existed before – allegedly as a result of JPM’s fraud – the District Court concluded that it was deprived of jurisdiction pursuant to the Rooker-Feldman doctrine,” McKee said. “That conclusion was correct because summary judgment was entered against the D’Angelos in state court before they filed for bankruptcy in federal court.”

The appellants are represented by David A. Scholl in Philadelphia and John L. Walfish in Norristown.

The appellees are represented by Anne Marie Aaronson of Dilworth Paxson, also in Philadelphia.

U.S. Court of Appeals for Third Circuit case 15-1972

U.S. District Court for the Eastern District of Pennsylvania case 2:14-cv-02084

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com

More News