Lewis v. Manufacturers National Bank of Detroit/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 with a special dispensation to purchasemoney mortgages if filed within 14 days of the execution of the mortgage. This mortgage, however, was not a purchasemoney 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, 11 U.S.C.A. § 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 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, 80 S.Ct. 1613, 4 L.Ed.2d 1724.

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, 352, 26 S.Ct. 481, 484, 50 L.Ed. 782; Zartman v. First National Bank, 216 U.S. 134, 138, 30 S.Ct. 368, 369, 54 L.Ed. 418. 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.

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 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, 276, 36 S.Ct. 50, 54, 60 L.Ed. 275.

In 1938 the relevant provisions of § 47(a)(2) were transferred to § 70, sub. c with no material change.

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 House Report 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 trsutee     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,' 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.

This construction seems to us to fit the scheme of the Act. 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 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, 11 U.S.C.A. § 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, 11 U.S.C.A. § 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, 11 U.S.C.A. § 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, 11 U.S.C.A. § 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. 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 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.

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.