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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. 603-610.
275 F.2d 454, affirmed.
Stuart E. Hertzberg argued the cause for petitioner. With him on the brief was Herbert N. Weingarten.
Richard D. Rohr argued the cause for respondent. With him on the brief was Henry I. Armstrong, Jr. Louis F. Dahling entered an appearance for respondent.
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 1 with [364 U.S. 603, 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 70c of the Bankruptcy Act, 11 U.S.C. 110 (c), which, so far as material here, reads:
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 70c.
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 ; Zartman v. First National Bank, 216 U.S. 134, 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. 2
The predecessor of the present 70c was 47a (2) of the Bankruptcy Act, as amended by the 1910 Act which provided in relevant part:
In 1938 the relevant provisions of 47a (2) were transferred to 70c with no material change. 3
In 1950 70c was recast to read as follows:
This construction seems to us to fit the scheme of the Act. 7 Section 70e enables the trustee to set aside fraudulent transfers which creditors having provable claims could void. The construction of 70c 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 [364 U.S. 603, 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 67a, 11 U.S.C. 107 (a), as respects the invalidation of judicial liens obtained within four months of bankruptcy when the bankrupt was insolvent. Section 67d, 11 U.S.C. 107 (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. 8 Yet if we construe 70c 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 [364 U.S. 603, 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.
[ Footnote 2 ] See MacLachlan, Bankruptcy (1956), p. 187. The Committee Report concerning the 1910 Amendment said:
[ 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 70c 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:
[ 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., 70e, 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." [364 U.S. 603, 611]
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Citation: 364 U.S. 603
Docket No: No. 94
Argued: December 15, 1960
Decided: January 09, 1961
Court: United States Supreme Court
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