Under § 67
j of the Bankruptcy Law of 1898, attachments
obtained within four months of filing the petition on property
which, in the absence of the attachments, would pass to other
persons, and to which the bankrupt has only a bare legal title, may
be preserved for the general benefit of the estate, and whatever
the trustee realizes thereon may be distributed among the body of
the creditors. The lien is valid, but it loses its preferential
character in favor of the attaching creditor by the institution of
the bankruptcy proceedings.
The extent to which the bankruptcy court shall recognize the
rights obtained by creditors upon property attached as property of
the bankrupt, but which has been conveyed by unrecorded contract,
and the extent to which liens obtained by prior judicial
proceedings shall be recognized are wholly within the discretion of
Congress.
Page 202 U. S. 142
This writ of certiorari was allowed to review an order of the
circuit court of appeals affirming a decree of the district court
in favor of Staake, as trustee in bankruptcy of the estate of
Chester R. Baird, bankrupt, subrogating him to the rights of
certain creditors and authorizing him to enforce their attachment
liens with like force and effect as the attaching creditors -- one
of which was the First National Bank of Baltimore -- might have
done had not the bankruptcy proceedings intervened.
The facts of the case are substantially as follows: Chester R.
Baird, doing business under the name of C. R. Baird & Company,
and owning certain real estate in Virginia known as the West End
Furnace Company, sold the same, December 7, 1899, to the Roanoke
Furnace Company, subject to certain encumbrances, executed a
contract in writing, and received from the furnace company the
entire consideration, namely, $500,000, in the capital stock of the
furnace company. Under this contract of sale, the furnace company
took immediate possession, but no deed to the company was made
until November 5, 1900, when a deed was executed and recorded.
Meantime, however, and on October 26, 1900, nine different
attachments, among them one by the petitioning bank, were sued out
of the Hustings Court for the City of Roanoke, amounting to over
$40,000, against Baird as a nonresident, and were levied upon the
furnace property. Under the provisions of the law of Virginia, the
attachments, having been levied before the deed of the furnace
property had been executed and recorded, the attaching creditors
acquired, as against Baird and the furnace company, a lien on the
properties attached.
Within four months after the levy of the attachments -- namely,
December 24, 1900 -- Baird was adjudicated a bankrupt in the
District Court for the Eastern District of Pennsylvania, and on
January 2, 1901, the District Court for the Western District of
Virginia assumed ancillary jurisdiction of such property as was
located in Virginia. On December 29, 1900, the Roanoke Furnace
Company was also adjudicated a
Page 202 U. S. 143
bankrupt. On March 26, 1901, Staake was appointed trustee of
Baird's estate, and on June 29, 1901, John M. N. Shimer was
appointed trustee of the Roanoke Furnace Company.
It was further agreed that the deed of November 5, 1900, from
Baird to the Roanoke Furnace Company, was a valid conveyance to a
purchaser in good faith for a then fair consideration, and was not
affected by the bankruptcy proceedings.
The proceedings in question here were instituted by a petition
filed by Staake, entitled both in the cases of Chester R. Baird and
the Roanoke Furnace Company, averring that, under the laws of
Virginia, the rights of the attaching creditors were superior to
those of the furnace company, and that, as to them, the property
attached was the property of Baird; but that, by reason of his
insolvency and of the fact that these attachments had been levied
within four months preceding the filing of the petition in
bankruptcy, such attachments were null and void, unless the court
should order them preserved for the benefit of the estate. He
therefore prayed that they be decreed null and void as regards
plaintiffs, but that they be preserved for the benefit of
petitioner.
The bank demurred to this petition, and also answered, denying
that its attachment was null and void, and also denying the right
of the court to enter an order preserving the attachment for the
benefit of the petitioner, and alleging that respondent is entitled
to the benefit of the attachment, said property when sold by an
interlocutory order having realized enough to pay said attachment,
as well as all prior liens.
Shimer, trustee for the Roanoke Furnace Company, also answered,
praying that, if the attachment be continued for the trustee of
Baird, the petitioner should be required to abate a large claim
which he filed against the estate of the Roanoke company, by the
amount of said attachments.
Upon a hearing before the district court, that court overruled
the demurrer to Staake's petition, and authorized him to enforce
the attachment liens for the benefit of the estate.
Page 202 U. S. 144
126 F. 845. The court of appeals affirmed this action (133 F.
717), and the bank petitioned this Court for a writ of certiorari,
which was granted.
MR. JUSTICE BROWN delivered the opinion of the Court.
At the time these attachments were levied, the title to the
property in question stood in the name of Baird, and the attaching
creditors, by their levies, secured a preferential lien upon the
property, not only as against Baird, but also as against the
furnace company, which received a deed to the property November 5,
1900, after the attachments had been levied. These attachments,
however, were annulled by the filing of a petition in bankruptcy
against Baird within four months after the attachments were levied,
and if the case stood upon this fact alone there could be no doubt
that the property would pass to the trustee of the furnace company,
discharged of the lien of the attachments. We are not concerned
here with any conflicting rights of the two trustees, Staake and
Shimer, since they were both appointed receivers of the Roanoke
Furnace Company, and the only claim made by Shimer now is that, if
the attachments be continued, the petitioner Staake be required to
abate his claim against the
Page 202 U. S. 145
estate of the furnace company by the amount of these
attachments. It is therefore unnecessary to consider whether, if
the attachments were annulled, the property would pass unencumbered
to the trustee of the furnace company, since, as stated by the
district judge, the demurrer to the petition is intended merely to
raise the question whether the trustee of Baird's estate or the
attaching creditors shall have the benefit of the attachments.
This depends upon the peculiar terms of § 67 of the Bankrupt
Act, which provides as follows:
"SEC. 67
f. That all levies, judgments, attachments, or
other liens obtained through legal proceedings against a person who
is insolvent at any time within four months prior to the filing of
a petition in bankruptcy against him, shall be deemed null and void
in case he is adjudged a bankrupt, and the property affected by the
levy, judgment, attachment, or other lien shall be deemed wholly
discharged and released from the same, and shall pass to the
trustee as a part of the estate of the bankrupt
unless the
court shall, on due notice, order that the right under such levy,
judgment, attachment, or other lien shall be preserved for the
benefit of the estate, and thereupon the same may pass to and
shall be preserved by the trustee for the benefit of the estate as
aforesaid. And the court may order such conveyance as shall be
necessary to carry the purposes of this section into effect:
Provided, That nothing herein contained shall have the effect to
destroy or impair the title obtained by such levy, judgment,
attachment, or other lien, of a
bona fide purchaser for
value who shall have acquired the same without notice or reasonable
cause for inquiry."
Section 67
c, which also treats of liens created by
attachments on mesne process, and provides for their dissolution,
in the last clause declares that
"if the dissolution of such lien would militate against the best
interests of the estate of such person, the same shall not be
dissolved, but the trustee of the estate of such person, for the
benefit of the state, shall be subrogated to the rights of the
Page 202 U. S. 146
holder of such lien, and empowered to perfect and enforce the
same in his name as trustee, with like force and effect as such
holder might have done had not bankruptcy proceedings
intervened."
This § (67
f) makes two distinct provisions for the
disposition of the property of an insolvent attached within four
months prior to the filing of a petition in bankruptcy against him.
First, such attachments shall be declared null and void, and the
property affected shall be deemed released, and shall pass to the
trustee of the estate of the bankrupt; or second, the court may
order that the right acquired by the attachment shall be preserved
for the benefit of the estate. In the first case, the whole
property passes free from the attachment. In the second, so much of
the value of the property attached as is represented by the
attachments passes to the trustee for the benefit of the entire
body of creditors -- that is, "for the benefit of the estate" -- in
other words, the statute recognizes the lien of the attachment, but
distributes the lien among the whole body of creditors.
The first provision contemplates the attachment of property to
which the bankrupt has the complete, legal, and equitable title,
which, as soon as the attachment is dissolved, passes at once to
the bankrupt's trustee as part of his estate. The second provision
evidently does not apply to this, as there is no object in
preserving the lien of the attachment for the benefit of the
estate, since, under the first clause, the entire value of the
property attached passes to the trustee free from the attachment.
The second clause contemplates property in which the bankrupt has
an interest which has been secured to attaching creditors by the
levy of the writ, but which might have passed to another person,
as, for instance, a purchaser under an unrecorded deed, but for the
fact that the attaching creditors had acquired a prior lien
thereon. In such case, the statute recognizes the validity of the
lien, but preserves it for the benefit of the entire body of
creditors by reason of the fact that the attachment was dissolved
as a preferential lien
Page 202 U. S. 147
in favor of the attaching creditors by the institution of
proceedings in bankruptcy.
In the present case, Baird had contracted to convey the property
to the Roanoke Furnace Company, possession had been taken, and the
consideration paid, but the deed was not actually executed and
recorded until after the attachment had been levied. Hence, under
the Virginia statute, the validity of which is not questioned, the
lien of the attachment took precedence of the deed, and would have
remained a prior lien, had it not been for the institution of the
bankruptcy proceedings within four months. This dissolved the
attachment, and, had the case rested here, the property would have
apparently passed to the furnace company, or to its trustee in
bankruptcy, Shimer; but at this point, the court, under the second
proviso of § 67
f, interposed and recognized the lien of
the attachment; not, however solely for the benefit of the
attaching creditors, but for the benefit of Baird's estate. Shimer
made no objection, and the court declined to express an opinion as
to his rights.
This is one of the very contingencies provided for by the second
clause of the section, which apparently vests in the court a
certain discretion with regard to the preservation of the right
acquired under the attachment or other lien. In this case, the
court recognized the validity of the lien, the trustee of the
furnace company making no objection to this; but the attaching
creditors insist that, as the lien was acquired for their own
benefit, they should not be required to share with the general
creditors of Baird's estate.
Their argument is based upon the theory that the second clause
was not intended to apply to liens acquired upon the estate of
third parties, but to property which would have passed to Baird's
trustee had the attachment not been levied. In other words, that
the bankruptcy court has nothing to do with the property, since it
really did not belong to the bankrupt, and would have passed to his
vendee if the attachments had not been levied upon it. Indeed, the
opinion especially
Page 202 U. S. 148
finds that "had valid attachments not been levied, the property
would have passed to the trustee of the Roanoke Furnace
Company."
To what extent liens obtained by prior judicial proceedings
shall be recognized is a matter wholly within the discretion of
Congress. It might have validated all such liens, even though
obtained the day before proceedings were instituted. It might
probably have invalidated all such liens whenever obtained. It took
a middle course, and invalidated all liens obtained through legal
proceedings within four months prior to the filing of the petition,
but at the same time preserved to the general body of creditors, as
against third parties (such as purchasers under an unrecorded
deed), such liens as attaching creditors had secured upon property
which would have passed to the subsequent purchaser in case the
attachment had not been levied. It is true that the attaching
creditors are thereby deprived of the fruits of their diligence,
but the same thing would have happened had the attachment been
levied upon property to which the bankrupt had the whole and
undisputed title, or of which he had made a fraudulent conveyance.
As remarked by the district judge,
"In cases where the bankrupt makes a valid conveyance, or where
his fraudulent vendee makes a valid conveyance, the purpose of the
law is worked out by preserving and enforcing the liens of the
attaching creditors for the
pro rata benefit of all the
creditors."
Section 67
f is merely carrying out the general purposes
of the act, of securing to the creditors the entire property of the
bankrupt, reckoning as part of such property liens obtained by
attaching creditors against real estate which had been transferred
to another, though no deed had been actually executed and
recorded.
The argument that § 67
f in question here refers only to
liens upon property which, if such liens were annulled, would pass
to the trustee of the bankrupt, we think is unsound, since that
contingency is amply provided for by the prior clause of the
section annuling all such liens and providing
Page 202 U. S. 149
that property affected thereby shall pass to the trustee as a
part of the estate. Under the argument of the attaching creditors
in this case, the subsequent clause would be entirely unnecessary.
This clause evidently contemplates that attaching creditors may
acquire liens upon property which would not pass to the bankrupt if
the liens were absolutely annulled, and therefore recognizes such
liens, but extends their operation to the general creditors. Had no
proceedings in bankruptcy been taken, doubtless this property would
have been sold for the benefit of the attaching creditors.
The general rule relied upon by the bank in this case, that the
words "property of the bankrupt" mean only the property to which
the bankrupt is beneficially entitled, and do not include property
to which he has only a bare legal title, is perhaps justified by
our decision in
Hewit v. Berlin Machine Works,
194 U. S. 296. But
the extent to which the bankruptcy court shall recognize the rights
obtained by creditors upon property attached as the property of the
bankrupt, though in fact such property had been conveyed by an
unrecorded contract, is a matter solely within the discretion of
Congress. The liens acquired in this case were liens upon property
which, as to attaching creditors, was the property of the bankrupt,
and Congress may lawfully insist that it shall be reckoned as a
part of his estate, and pass to the trustee. As remarked by the
court of appeals:
"The rule that the trustee takes the estate of the bankrupt in
the same plight as the bankrupt held it is not applicable to liens
which, although valid as to the bankrupt, are invalid as to
creditors."
If the interest of Baird in this property were sold solely for
the benefit of the attaching creditors, it would obviously result
in a preference to those creditors over the general creditors of
his estate, and in fraud of the Bankruptcy Act, which is designed
to secure equality among all creditors.
The judgment of the court of appeals is
Affirmed.
