Petitioner's bankrupt borrowed money from respondent on November
4, 1957, giving as security a chattel mortgage on an automobile,
which was not recorded until November 8, 1957. Under the law of the
State where the transaction occurred, such a mortgage was void
against one who became a creditor of the mortgagor between the time
of execution and the time of recordation. Over five months after
recordation of the chattel mortgage, the borrower filed a voluntary
petition in bankruptcy. He was adjudicated a bankrupt and
petitioner was named trustee.
Held: under § 70c of the Bankruptcy Act, the chattel
mortgage was not void as against the trustee, since the trustee
acquired the status of a creditor as of the time when the petition
in bankruptcy was filed. Pp.
364 U. S.
603-610.
275 F.2d 454, affirmed.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
The bankrupt borrowed money from respondent on November 4, 1957,
giving as security a chattel mortgage on an automobile. In
Michigan, where the transaction took place, mortgages were void as
against creditors of the mortgagor unless filed with the Register
of Deeds [
Footnote 1] with
Page 364 U. S. 604
a special dispensation to purchase money mortgages if filed
within 14 days of the execution of the mortgage. This mortgage,
however, was not a purchase money mortgage, and, though executed on
November 4, 1957, it was not recorded until November 8, 1957.
Over five months later -- on April 18, 1958 -- the borrower
filed a voluntary petition in bankruptcy and an adjudication of
bankruptcy followed, petitioner being named trustee.
There was no evidence that any creditor had extended credit
between November 4, the date of the execution of the mortgage, and
November 8, the date of its recordation. But since the mortgage had
not been recorded immediately, the referee held that it was void as
against the trustee. The referee relied upon § 70, sub. c of the
Bankruptcy Act, 11 U.S.C. § 110, sub. c, which, so far as material
here, reads:
"The trustee, as to all property, whether or not coming into
possession or control of the court, upon which a creditor of the
bankrupt could have obtained a lien by legal or equitable
proceedings at the date of bankruptcy, shall be deemed vested as of
such date with all the rights, remedies, and powers of a creditor
then holding a lien thereon by such proceedings, whether or not
such a creditor actually exists."
He ruled that § 70, sub. c
"clothes the Trustee with the rights of a creditor who could
have obtained a lien at the date of bankruptcy whether or not such
a creditor exists."
He concluded that, under Michigan law, a creditor could have
taken prior to the mortgage had he extended credit during the
four-day period when the mortgage was "off record," and that
therefore the trustee can claim the same rights, even though there
was no such creditor. The District Court overruled the referee, and
the Court of
Page 364 U. S. 605
Appeals affirmed the District Court. 275 F.2d 454. The case is
here on a petition for a writ of certiorari which we granted
because of a conflict between that decision and
Constance v.
Harvey, 215 F.2d 571, decided by the Court of Appeals for the
Second Circuit and subsequently followed by the same court in
Conti v. Volper, 229 F.2d 317. 363 U.S. 837.
Petitioner's case turns on the words, "upon which a creditor of
the bankrupt could have obtained a lien . . . whether or not such a
creditor actually exists," contained in § 70, sub. c.
Prior to 1910, the trustee had no better title to the property
than the bankrupt had.
See York Mfg. Co. v. Cassell,
201 U. S. 344,
201 U. S. 352;
Zartman v. First National Bank, 216 U.
S. 134,
216 U. S. 138.
The provision with which we are here concerned was written into the
law in 1910 to give the trustee all the rights of an ideal judicial
lien creditor. [
Footnote 2]
The predecessor of the present § 70, sub. c was § 47(a)(2) of
the Bankruptcy Act, as amended by the 1910 Act, which provided in
relevant part:
". . . such trustees, as to all property in the custody or
coming into the custody of the bankruptcy
Page 364 U. S. 606
court, shall be deemed vested with all the rights, remedies, and
powers of a creditor holding a lien by legal or equitable
proceedings thereon; and also, as to all property not in the
custody of the bankruptcy court, shall be deemed vested with all
the rights, remedies, and powers of a judgment creditor holding an
execution duly returned unsatisfied."
36 Stat. 840.
That language was held to give the trustee the status of a
creditor "as of the time when the petition in bankruptcy is filed."
Bailey v. Baker Ice Machine Co., 239 U.
S. 268,
239 U. S.
276.
In 1938, the relevant provisions of § 47(a)(2) were transferred
to § 70, sub. c with no material change. [
Footnote 3]
In 1950, § 70, sub. c was recast to read as follows:
". . . The trustee, as to all property of the bankrupt at the
date of bankruptcy whether or not coming into possession or control
of the court, shall be deemed vested as of the date of bankruptcy
with all the rights, remedies, and powers of a creditor then
holding a lien thereon by legal or equitable proceedings, whether
or not such a creditor actually exists."
64 Stat. 26.
Thus the distinction between property in the possession of the
bankrupt as of the date of bankruptcy and other property was
abolished, and the trustee was given the status of a creditor
holding a lien through legal or equitable proceedings as to both
types of property. This 1950 Amendment, however, created an
anomaly. The
Page 364 U. S. 607
House Report [
Footnote 4]
accompanying a 1952 amendment that cast § 70, sub. c in its present
form states:
". . . it is now recognized that the amendment did not
accurately express what was intended. Since the trustee already has
title to all of the bankrupt's property, it is not proper to say
that he has the rights of a lien creditor upon his own property.
What should be said is that he has the rights of a lien creditor
upon property in which the bankrupt has an interest or as to which
the bankrupt may be the ostensible owner. Accordingly, the language
of section 70c has been revised so as to clarify its meaning and
state more accurately what is intended."
We think that one consistent theory underlies the several
versions of § 70, sub. c which we have set forth,
viz.,
that the rights of creditors -- whether they are existing or
hypothetical -- to which the trustee succeeds are to be ascertained
as of "the date of bankruptcy," [
Footnote 5] not at an anterior point of time. That is to
say, the trustee acquires the status of a creditor as of the time
when the petition in bankruptcy is filed. We read the statutory
words "the rights . . . of a creditor (existing or hypothetical)
then holding a lien" to refer to that date. [
Footnote 6]
Page 364 U. S. 608
This construction seems to us to fit the scheme of the Act.
[
Footnote 7] Section 70, sub.
e, enables the trustee to set aside fraudulent transfers which
creditors having provable claims could void. The construction of §
70, sub. c, which petitioner urges would give the trustee power to
set aside transactions which no creditor could void and which
injured no creditor. That construction would enrich
Page 364 U. S. 609
unsecured creditors at the expense of secured creditors,
creating a windfall merely by reason of the happenstance of
bankruptcy.
It is true that, in some instances, the trustee has rights which
existing creditors may not have. Section 11, 11 U.S.C. § 29, gives
him two years to institute legal proceedings regardless of what
limitations creditors might have been under. Section 60, 11 U.S.C.
§ 96, gives him the right to recover preferential transfers made by
the bankrupt within four months whether or not creditors had that
right by local law. A like power exists under § 67, sub. a, 11
U.S.C. § 107, sub. a, as respects the invalidation of judicial
liens obtained within four months of bankruptcy when the bankrupt
was insolvent. Section 67, sub. d, 11 U.S.C. § 107, sub. d,
carefully defines transactions which may be voided if made "within
one year prior to the filing" of the petition.
Congress, in striking a balance between secured and unsecured
creditors, has provided for specific periods of repose beyond which
transactions of the bankrupt prior to bankruptcy may no longer be
upset -- except and unless existing creditors can set them aside.
[
Footnote 8] Yet, if we
construe § 70, sub. c, as petitioner does, there would be no period
of repose. Security transactions entered into in good faith years
before the bankruptcy could be upset if the trustee were ingenious
enough to conjure up a hypothetical situation in which a
hypothetical creditor might have had such a right. The rule pressed
upon us would deprive a mortgagee of his rights in States like
Michigan, if the mortgage had been executed months or even years
previously
Page 364 U. S. 610
and there had been a delay of a day or two in recording without
any creditor having been injured during the period when the
mortgage was unrecorded.
That is too great a wrench for us to give the bankruptcy system,
absent a plain indication from Congress which is lacking here.
Affirmed.
[
Footnote 1]
Mich.Comp.Laws, 1948, § 566.140, as amended by Pub.Acts 1957,
No. 233. In 1959, by Pub.Acts 1959, No. 110, a 10-day grace period
was given to all mortgagees
vis-a-vis creditors.
[
Footnote 2]
See MacLachlan, Bankruptcy (1956), p. 187. The
Committee Report concerning the 1910 Amendment said:
"It is evident that in the proposed amendment attempt is made to
give effect to two ideas quite distinct: first, that as to the
property in the custody of the bankruptcy court the bankruptcy
trustee shall be considered to have the same title that a creditor
holding an execution or other lien by legal or equitable
proceedings levied upon that property would have under state law,
and second, that, as to property not in the custody of the
bankruptcy court, the trustee should stand in the position of a
judgment creditor holding an execution returned unsatisfied, thus
entitling him to proceed precisely as an individual creditor might
have done to subject assets. In this way, in effect, proceedings in
bankruptcy will give to creditors all the rights that creditors
under the state law might have had had there been no bankruptcy and
from which they are debarred by the bankruptcy -- certainly a very
desirable and eminently fair position to be granted to the
trustee."
H.R.Rep. No. 511, 61st Cong., 2d Sess., p. 7.
[
Footnote 3]
See MacLachlan, Bankruptcy (1956), p. 187; H.R.Rep. No.
1409, 75th Cong., 1st Sess., pp. 4, 34-35.
[
Footnote 4]
H.R.Rep. No. 2320, 82d Cong., 2d Sess., p. 16.
[
Footnote 5]
While § 70, sub. c, speaks of "the date of bankruptcy," that
term is defined as "the date when the petition was filed." Section
1(13), 11 U.S.C. § 1(13).
[
Footnote 6]
After the decision in
Constance v. Harvey, 215 F.2d
571, 575, Congress passed a bill to change its holding. The
President vetoed the bill, stating:
"I have withheld my approval of H.R. 7242, to amend sections 1,
57j, 64a(5), 67b, 67c, and 70c of the Bankruptcy Act, and for other
further purposes."
"I recognize the need for legislation to solve certain problems
regarding the priority of liens in bankruptcy, but this bill is not
a satisfactory solution. It would unduly and unnecessarily
prejudice the sound administration of Federal tax laws. In some
cases, for example, mortgages would be given an unwarranted
priority over Federal tax liens even though the mortgage is
recorded after the filing of the tax lien."
"This and other defects of the bill can, I believe, be corrected
without compromising its primary and commendable purpose."
Cong.Rec., September 16, 1960, p. A7013.
The Committee Report, urging that amendment, made clear the
inequity that might often result if § 70, sub. c, is construed as
Constance v. Harvey, supra, construed it:
"The holding in Constance v. Harvey, by injecting into section
70c the substance of 70e, created the statutorily unwarranted
status of a hypothetical creditor with rights relating back to a
date prior to bankruptcy. While bankruptcy is in effect a general
levy on the property of the bankrupt for the benefit of his
creditors, it is not a license for the trustee, irrespective of
prejudice to creditors, to avoid at will any security given by the
bankrupt which remained imperfected for any period of time prior to
bankruptcy. Yet this is the effect of
Constance v. Harvey.
Under this decision, the only limit to the power of the trustee is
his ability to conceive of some right of a creditor that can be
used as a basis for striking down imperfect transfers. The doctrine
of
Constance v. Harvey presents a very real threat to
security transactions, the validity of which have hitherto not been
subject to challenge under the act. Moreover, this is a threat
which is not required by the policy of the act, since the creditors
who have been prejudiced by the imperfections of a transfer are
normally protected under section 70e."
H.R.Rep. No. 745, 86th Cong., 1st Sess., pp. 8-9.
[
Footnote 7]
See Seligson, Creditors' Rights, Jour. Nat. Assoc.
Referees in Bankruptcy, Oct. 1957, 113, 118; Marsh,
Constance
v. Harvey -- The "Strong-Arm Clause" Re-Evaluated, 43
Cal.L.Rev. 65; Note, 57 Mich.L.Rev. 1227.
[
Footnote 8]
See, e.g., § 70, sub. e, concerning which H.R.Rep. No.
1409, 75th Cong., 1st Sess., p. 32, stated,
". . . under section 70e, the trustee may avoid any transfer
which any creditor might have avoided under applicable State law,
and there is no time limitation in such case."
MR. JUSTICE HARLAN.
As the judge who wrote for the Court of Appeals in
Constance
v. Harvey, 215 F.2d 571, I think it appropriate to say that I
have long since come to the view that the second opinion in
Constance, 215 F.2d 575, was ill considered. I welcome
this opportunity to join in setting the matter right.