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June 4, 1936, the respondent petitioned the United States District Court for confirmation of the sale of the property made to the respondent by the assignee for the benefit of creditors on January 21, 1935. The trustee in bankruptcy objected, but subsequently withdrew his objections and the referee made an order confirming the sale. The assignee then paid to the trustee the consideration received by him from the respondent as purchaser at the assignee's sale. It does not appear that the petitioner had notice of the application or was present at the hearing
June 10, 1936, the sheriff delivered a deed to the petitioner as purchaser at the execution sale.
Both petition and answer allege that the respondent was in possession of the property at the time suit was brought, and we may assume that the petitioner never was in possession.
The Supreme Court held that entry of the Commission's award in the State Court made it a judgment of that court; that such judgment did not constitute a lien on the property of Geraldine Oil Company in question; and that no lien was acquired until the levy of execution on September 17, 1935, about a month prior to the adjudication of the company as a bankrupt.
The respondent asserted that, as the judgment in favor of Rainbolt was not a lien when Geraldine Oil Company assigned for the benefit of creditors, or when the assignee sold the property to the respondent, its title must prevail; and, in the alternative, that the same result must follow from the fact that since the lien of the levy was obtained less than four months prior to the filing of the petition in bankruptcy, it was voided by $ 67 (f).
The Supreme Court stated that, if either of these contentions were sound, the petitioner could not prevail. It expressly declined to consider the efficacy of the sale by the assignee for the benefit of creditors to pass title
Opinion of the Court.
to the respondent clear of the lien of the subsequent levy, and rested its decision upon its view of the effect of $ 67 (f). Since the judgment is based exclusively upon a federal ground, we have jurisdiction.
Section 67 (f) provides:
“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."
The court held that the section, proprio vigore, nullified the lien of the levy so that the property passed to the trustee discharged thereof, and concluded that, since, at the time of the sheriff's sale, the property was discharged of the lien, the sale, and the deed delivered pursuant to it, were void; and, as a trustee's sale would pass title clear of the lien, the same result would follow from the bankruptcy court's validation, with the trustee's consent, of the assignee's sale previously made.
Opinion of the Court.
The question is whether the state court was right in holding that, by force of § 67 (f), the adjudication in bankruptcy automatically discharged the lien of the levy, irrespective of any action on the part of the trustee. Expressions supporting this view may be found in cases decided by federal courts,' and statements squinting in the same direction have been made by this court." In none of these instances, however, was the litigation between third parties, or between the lienor or one claiming title under an execution sale, and an opponent deriving title from the trustee in bankruptcy. In all of them a bankruptcy receiver or trustee instituted action in the bankruptcy court or some other court, or became a party to the proceeding in which the lien was acquired, to avoid the lien, or the bankrupt brought suit to avoid the lien as to property set apart to him as exempt in the bankruptcy case.
Some state courts have definitely held that the adjudication operates automatically to nullify the lien, which must be treated as void whenever and wherever drawn into question, either in a direct or a collateral proceeding, and whether the trustee in bankruptcy has taken the property into his possession or abandoned it.
*In re Tune, 115 F. 906; In re Beals, 116 F. 530; In re Federal Biscuit Co., 214 F. 221, 224.
* Clarke v. Larremore, 188 U. S. 486, 488; Chicago, B. & Q. R. Co. v. Hall, 229 U. S. 511, 514; Lehman Stern & Co. v. S. Gumbel & Co., 236 U. S. 448, 454.
Mohr & Sons v. Mattox, 120 Ga. 962; 48 S. E. 410; Hobbs v. Thompson, 160 Ala. 360; 49 So. 787; Finney v. Knapp Co., 145 Ga. 400; 89 S. E. 413; Greenberger v. Schwartz, 261 Pa. 265; 104 A. 573; Archenhold Co. v. Schaefer, 205 S. W. 139 (Tex. Civ. App.); Morris Fertilizer Co. v. Jackson, 27 Ga. App. 567; 110 S. E. 219; Mack v. Reliance Ins. Co., 52 R. I. 402; 161 A. 134; Whittaker v. Bacon, 17 Tenn. App. 97; 65 S. W. 2d 1083; Bank of Garrison v. Malley, 103 Tex. 562; 131 S. W. 1064. Compare, Kellogg-Mackay-Cameron Co. v. Schmidt Baking Co., 101 Ill. App. 209; Keystone Brewing Co. v.
Opinion of the Court.
On the other hand, it was said in Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426, 429: "For the statute does not, as a matter of substantive law, declare void every lien obtained through legal proceedings within four months of the filing of the petition in bankruptcy.” The court there pointed out that a number of issues of fact must be resolved before it can be determined that the lien is void. And, in Pigg & Son v. United States, 81 F. 2d 334, 337, it was held that liens obtained in judicial proceedings within four months of the filing of the petition are not void, but voidable in a proper suit, and that the property affected by the lien does not automatically pass to the trustee, discharged of the lien.
In Connell v. Walker, 291 U. S. 1, 3, this court indicated that the operation of § 67 (f) is not automatic, since the trustee in bankruptcy has an election either to avoid the lien, or to be subrogated to it for the benefit of the bankrupt estate.
A number of state courts have held, and we think rightly, that the section is intended for the benefit of creditors of the bankrupt and, therefore, does not avoid liens as against all the world but only as against the trustee and those claiming under him." It is settled, however, that not only may the trustee avoid the lien (Taubel-Scott-Kitzmiller Co. v. Fox, supra; Connell v. Walker, supra), but that the bankrupt may assert its invalidity as respects property set apart to him as exempt in the bankruptcy proceeding. Chicago, B. & Q. R. Co. v. Hall, 229 U. S. 511. But the lien is not avoided for the
Schermer, 241 Pa. 361; 88 A. 657; Lamb v. Kelley, 97 W. Va. 409; 125 S. E. 102.
Frazee v. Nelson, 179 Mass. 456; 61 N. E. 40; Swaney v. Hasara, 164 Minn. 416; 205 N. W. 274; Hutchins v. Cantu, 66 S. W. 138 (Tex. Civ. App.); Equitable Credit Co. v. Miller, 164 Ga. 49; 137 S. E. 771; Neugent Garment Co. v. U. S. Fidelity & G. Co., 202 Wis. 93; 230 N. W. 69.
Opinion of the Court.
benefit of the bankrupt save as to his exempt property or nullified as respects other lienors or third parties.
Although $ 67 (f) unequivocally declares that the lien shall be deemed null and void, and the property affected by it shall be deemed wholly discharged and released, the section makes it clear that this is so only under specified conditions. At the date of creation of the lien the bankrupt must have been insolvent; the lien must have been acquired within four months of the filing of the petition in bankruptcy; and the property affected must not have been sold to a bona fide purchaser. Furthermore, the lien is preserved if the trustee elects to enforce it for the benefit of the estate. These conditions create issues of fact which, as between the trustee, or one claiming under him, and the lienor, or one claiming by virtue of the lien, the parties are entitled to have determined judicially. The courses open to the trustee under the Bankruptcy Act of 1898 were to proceed to have the lien declared void, by plenary suit,' or by intervention in the court where it was obtained,10 or by applying, in the bankruptcy cause, to restrain enforcement," as might be appropriate in the circumstances.
In the instant case the trustee intervened in the state court and opposed the confirmation of the execution sale
See the cases in Note 7, supra, and JcCarty v. Light, 155 App. Div. 36; 139 N. Y. S. 853; Travis v. Bizler Co., 20 Cal. App. 2d 279; 66 P. 2d 1263; Danby Millinery Co. v. Dogan, 47 Tex. Civ. App. 323; 105 S. W. 337; Smith v. First National Bank, 76 Colo. 34; 227 P. 826; Taylor v. Buser, 167 N. Y. Supp. 887.
See Taubel-Scott-Kitzmiller Co. v. Fox, supra.
10 11 U. S. C. § 29 (b). See Lehman Stern & Co. v. S. Gumbel & Co., 236 U. S. 448; Isaacs v. Hobbs Tie & Timber Co., 282 U. S. 734.
" Clarke v. Larremore, 188 U. S. 486. The Chandler Act, $ 67a (4), 52 Stat. 876, vests summary jurisdiction in the bankruptcy court to hear and determine, after notice to the parties in interest, all questions affecting the validity of the lien.