In an opinion filed on Feb. 13, the Pennsylvania Superior Court strictly upheld the general commonwealth rule that a purchaser of real property is not bound to look for judgments beyond the local judgment index. The decision is also noteworthy because it is the first appellate decision to apply Rule 3023 of the Pennsylvania Rules of Civil Procedure to determine the priority of liens arising from confession of judgment.

Although the result of this case is ultimately not surprising in light of its specific facts, the matter does present an interesting series of “what if” questions, in part because the slow pace of two competing claims — each apparently proceeding in ignorance of the other — serves to highlight the many opportunities for a party to lose its rights through either the failure to move with diligence, or because of bureaucratic delays in the courts.

Finally, on a most basic level, the case strikingly highlights the need for practitioners to ensure that a properly marked-up title insurance commitment is obtained at closing, to ensure that a property that is bought remains bought, once the dust has settled.

Like many real estate controversies, resolution of this case, Shipley Fuels Marketing v. Medrow , turned largely on questions of chronology. The facts detailed in the opinion were as follows:

On Nov. 16, 2009, Andrew Johnson and Dona Saporosa (the Johnsons) closed on the purchase of a residential property located in West Chester, Pa. The sellers were Michael P. Medrow and Anne F. Medrow (the Medrows). The deed to the property was not recorded in the county recorder’s office until Dec. 4, 2009, 18 days later. (This gap is what highlights the “mark-up” issue, discussed further below.)

On Nov. 30, 2009, (in between the Johnsons’ closing and the recording of their deed), Shipley Fuels Marketing confessed judgment on a personal guarantee given by the Medrows for a debt of $116,207, arising in connection with fuel deliveries to a business they owned. The confessed judgment was listed in the prothonotary’s docket on that date (four days before the Johnsons’ deed was recorded), but the judgment was not entered into the judgment index until Dec. 30, 2009, three weeks later.

In May 2010, Shipley filed an action based upon its assertion of a lien on the Johnsons’ property. The Johnsons responded that their purchase and the recording of their deed had preceded the filing of Shipley’s judgment on the judgment index. Shipley argued that the existence of its judgment on the prothonotary’s docket provided clear public notice of the existence of its claim, so as to prevent the transfer of the property free of its lien.

It is a fundamental principle under Pennsylvania’s recording statute (21 P.S. Section 351) that the Johnsons’ interest in the Medrow property was not fully protected against third parties — even new third-party claims — simply by reason of its closing and payment of the purchase price. Only the act of recording the deed could fully protect that interest. If, prior to the recording of the Johnsons’ deed, a third-party purchaser or judgment creditor without knowledge of the Johnsons’ position should perfect its own interest, that third party would be deemed to have a superior claim to the property.

In this case, it appears that neither the Johnsons nor Shipley were aware of each others’ actions and interests until after each had gone through all the steps needed to vest those claims. At that point, Shipley was faced with a situation where its judgment had attached — or not — to a property whose ownership had changed while it was in the process of pursuing its remedies.

Which brings us to the critically important step of obtaining a properly marked-up title commitment at closing. At the Johnsons’ closing, they should have — and presumably did — receive a title commitment mark-up. This manual “marking up” of a title commitment converts the commitment into the buyer’s title insurance policy; it stands in for the policy until the deed is recorded and the actual policy can be issued. Aside from the main event, the treatment of various title exceptions, a proper mark-up will be both signed and dated. The date (which will ultimately be the date of the policy), on the mark-up should always read “later of (in this case) Nov. 16, 2009, or date of recording.” The emphasized language “covers the gap” and is intended to protect the insured from events that may occur during the time between closing and the date upon which the title company gets around to recording the deed. It should be remembered that a title policy, unlike most insurance products, protects the insured against things that may have occurred prior to the date of the policy, so the later the date, the better, and a proper policy protects the interest of the buyer up to the date of recording, at which point the recording statutes can protect those interests.

It is obviously in everyone’s interest that the title company record the deed as quickly as possible since, as illustrated by this case, things can happen during the gap that may serve to prime the buyer. From the buyers’ perspective, though, provided they obtain a proper mark-up, they are protected from such events. The title company bears the risk of matters arising after closing and up to the date it records the deed.

Returning to the case: The Johnsons argued that, although Shipley had filed its confession of judgment prior to the recording of their deed, Rule 3023 of the Pennsylvania Rules of Civil Procedure, promulgated in 2003, explicitly lays down the rule that a judgment lien attaches to real property “when entered into the judgment index.” Further, such lien is only effective as to property “title to which at the time of entry [of the judgment] is recorded in the name of the person against whom the verdict or order is rendered.” In other words, since the Medrows did not own the property at the time the judgment was entered, the judgment could not attach to the property.

Shipley countered that the docketing of its confession of judgment provided the Johnsons with adequate notice of its claim, thus priming the transfer. Shipley pointed to the ease by which the Johnsons could have become aware of its claim, noting that “the [county docketing system] allows abstractors to access both the general index and the judgment index from the same computer home screen,” so that checking one is quite as easy as checking both: “Since the general index in Chester County … is searchable by last name exactly as the judgment index, there would have been absolutely no additional burden on an abstractor to locate information on the Shipley judgment against Medrow by typing ‘Medrow’ into the general index screen.”

The court rejected this argument, holding that Rule 3023 compelled acceptance of the Johnsons’ position “in clear and unambiguous language.” Aside from the straightforward language of the statute, the court noted that the rule specifically suspended a provision of the Judicial Code by which the legislature had attempted to establish the rule that a judgment’s lien priority was determined as of the date of entry on the general docket.

The court noted that it could find no appellate decisions applying Rule 3023 to liens arising from confession, but reported that “the plain language restricts the lien priority of all judgments … such that they may not assume lien status until entered into the judgment index.”

In summary, the court held, although Pennsylvania law had undergone some twists and turns in recent years, it has now returned to the “time honored rule: … ‘that a purchaser is not bound to look for judgments beyond the judgment index, and if his search discloses the existence of no liens there, he may properly assume that no such lien exists.’”

The court therefore rejected the contention that the Johnsons had a duty of further inquiry before recording and gave no weight to the filing in the Chester County docket. The entry of Shipley’s judgment into the county docketing system was held irrelevant, and knowledge of that filing was not imputed to the Johnsons.

The case illustrates a number of other interesting points. First, there is no doubt that the title company dodged a bullet. The Pennsylvania rules specifically require that the prothonotary “immediately enter into the judgment index … a judgment.” In this case, the title company took over two weeks to record the deed, but still had time to record before entry of the judgment, simply because it was so delayed. Given its lack of diligence, the title company would have been hard pressed to claim the moral high ground had the judgment obtained priority. The rules directing the prothonotary to act “immediately” are clearly intended to avoid these sorts of intervening situations, but as things passed, nearly a month passed before the judgment was entered, dooming Shipley’s claim.

Second, the element of knowledge plays an interesting part in this case. It would appear that, as the first actor in all respects, any knowledge obtained by the Johnsons regarding the status of the Shipley claim can have no impact on its position — as far as the Johnsons go, it is simply a “race to the courthouse.”

But, as the subsequent actor, Shipley’s position can apparently be dramatically affected by knowledge it obtains during the course of events, even after it secures its judgment. Taking the Pennsylvania recording statute and Rule 3023 together, if Shipley obtains its judgment and the judgment is entered, all without knowledge of the Johnson transfer and before the Johnson deed was recorded, Shipley wins. If however, just before the judgment is entered, Shipley learns of the Johnson purchase (e.g., driving by, Shipley sees the “Sold” sign), Shipley loses, even though it has simply been waiting for the prothonotary to enter its judgment. This may seem arbitrary, but it has the merit of ensuring that Shipley only prevails if it is a demonstrably innocent party, which does not act with the intention of disadvantaging the Johnsons.

The Johnsons, on the other hand, can urge their title company to “hurry it up” if they get wind of the judgment, without prejudicing their position. That is because the recording statute is set up to penalize the “first actor” who allows an innocent subsequent purchaser to act without notice, and conversely to reward the diligent first actor.

It is not readily apparent what part knowledge of a pre-existing (but unentered) judgment on the part of the Johnsons might have played. It seems likely that, notwithstanding Rule 3023, a court would not uphold the rights of a purchaser who closes with actual knowledge of a pre-existing judgment, regardless of whether that judgment has been entered.

What results, however, if the purchaser discovers such a judgment after it closes but before the deed is recorded? The Pennsylvania recording statute would seem to imply the purchaser loses, a result at odds with Rule 3023. This would be especially troubling if the prothonotary acts as in the Shipley case, with a significant delay in entering the judgment; in such a case, the equities are not so clearly in favor of either party.

In the end, if both the Johnsons and Shipley truly operated in ignorance of each other (and the case does not suggest otherwise), the equities would seem to favor the Johnsons, as they closed before the judgment, and recorded before its entry. Also, Shipley still had the opportunity to proceed against the Medrows personally.

A final note: As mentioned above, if the Johnsons had lost this litigation because of the title company’s lack of diligence, it should be kept in mind that their protection would have been against economic loss only. Title insurance is an indemnity against loss, not a guaranty of title. For this reason, it actually does matter to use a title agent in whom you have some confidence, because there is no question that the Johnsons wanted a home, not a check. •

Martin J. Doyle is a partner in Saul Ewing’s real estate department in the Philadelphia office. He is experienced in all aspects of real estate financing, sales and leasing. Doyle received his J.D., cum laude, from the University of Pennsylvania Law School.

Ross E. Bruch is an associate in Saul Ewing’s real estate department in the Philadelphia office. Bruch is experienced in many aspects of transactional real estate including sales and leasing. He received his J.D. from the University of Pennsylvania Law School.