cases. The Belo case, which carries its own refutation in its dissenting opinion, should therefore be overruled. Otherwise we shall be perpetuating and augmenting the unrealities and confusion which have marked the application of the doctrine of that case. See Feldman, "Algebra and the Supreme Court," 40 Ill. L. Rev. 489; "Legality of Wage Readjustment Plans under the Overtime Provision of the Fair Labor Standards Act," 13 U. of Chi. L. Rev. 486; 44 Mich. L. Rev. 866.

UNITED STATES NATIONAL BANK ET AL. v. CHASE NATIONAL BANK ET AL.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.

No. 371. Argued February 7, 1947.-Decided April 14, 1947.

The principal asset of a bankrupt estate was an undivided interest in coal lands, operated in part by lessees and producing substantial royalties. More than four months prior to the adjudication in bankruptcy, two creditors had obtained judgments against the bankrupt, which constituted first and second liens on the interest in these lands. Subsequently, a plan suggested by the attorney for the trustee and certain general creditors was adopted, whereby in consideration of the secured creditors forbearing to press their claims, the estate was divided into two funds: a real estate fund, and a general fund including royalties, etc. The first fund was to go to the first judgment creditor, the second fund was to be divided pro rata among all creditors. After the plan had been in operation for more than twelve years, a general creditor whose attorney had proposed the plan petitioned the bankruptcy court for a decree to the effect that the two judgment creditors had waived their liens by sharing in distributions from the general fund. Held:

1. Upon the particular facts of this case, the liens are declared valid and in existence, notwithstanding the failure to follow the provisions of § 57 (h) of the Bankruptcy Act, and notwithstanding the distribution of dividends contrary to § 65 (a). Pp. 35–39.

28

Counsel for Parties.

(a) Whether a secured creditor's participation in distributions from the general assets of a bankrupt estate on the basis of his full claim constitutes a waiver of his lien and an election to be treated as an unsecured creditor, depends upon the circumstances surrounding the receipt of the dividends. In exceptional cases, the circumstances may demonstrate the continued vitality of the security as well as indicate the inequity of declaring the security forfeited. Pp. 35-36.

(b) In rare cases, where there is a reasonable doubt as to whether a waiver has occurred, a careful examination must be made, in the light of recognized principles of equity, to determine upon what conditions the dividends from the general assets were distributed to the secured creditor. P. 36.

(c) The judgment lien creditors having received dividends from the general fund in good faith and without intent to waive their liens, there being no equitable reason why the liens should be declared forfeited, the general creditor whose counsel recommended the plan and acquiesced in its operation being equitably estopped to object to the validity of the liens on the basis of the operation of the plan, and there being no evidence that any permanent injury to any general creditor resulted from the operation of the plan, the equities of this case require that the liens be held valid and in existence. Pp. 36-39.

2. In view of the fact that the bankruptcy proceedings have been unduly prolonged for over twenty years, the bankruptcy court should now take steps to wind up the estate in accordance with the provisions of the Bankruptcy Act. P. 39. 155 F. 2d 755, reversed.

In a proceeding in bankruptcy, a general creditor petitioned for a decree to the effect that two secured creditors had waived their liens by sharing in distributions from the general assets of the bankrupt estate. The District Court granted the petitions, 56 F. Supp. 190; but, on rehearing, denied them, 61 F. Supp. 151. The Circuit Court of Appeals reversed. 155 F. 2d 755. This Court granted certiorari. 329 U. S. 699. Reversed and remanded, p. 39.

Robert I. Rudolph argued the cause and filed a brief for petitioners.

Opinion of the Court.

331 U. S.

William Dean Embree argued the cause and filed a brief for the Chase National Bank, respondent.

MR. JUSTICE MURPHY delivered the opinion of the Court.

A problem arising under the Bankruptcy Act is presented by the unique facts of this case.

On June 10, 1926, Harvey C. Stineman was adjudicated a bankrupt upon a voluntary petition and the case was referred to a referee. The principal asset of the bankrupt estate was an undivided one-sixth interest in a large acreage of valuable coal lands, a large portion of which was operated by lessees and was producing substantial royalties. The value of the interest of the bankrupt estate in this asset is alleged to have been appraised at $90,000.

More than four months prior to the date when the petition was filed and the adjudication made, the United States National Bank of Johnstown, Pa., and the First National Bank of South Fork, Pa., had procured judgments against Stineman. These two judgments constituted first and second liens, respectively, on Stineman's interest in the coal lands. This interest had no other encumbrances upon it.

On January 8, 1927, the Johnstown bank filed its secured claim in the bankruptcy proceedings in the amount of $10,000, reciting as its security the first lien on the interest in the coal lands. This claim was allowed. Subsequently, in 1932, the Johnstown bank filed an amended claim in the amount of $13,685, interest accruing after bankruptcy having been added to the original claim. The amended claim was allowed in the amount filed and formed the basis for the bank's participation in the dividends from the general fund, mentioned hereinafter. A court order in 1944 reduced this claim to $10,000.

The South Fork bank, on June 29, 1926, filed its secured claim with the referee for $11,290, reciting the second

28

Opinion of the Court.

lien as its security, along with unsecured claims for $7,173.45. Dividends from the general fund were subsequently paid to the bank on the basis of the full amount of all its claims, $18,463.45.

Numerous general, unsecured claims were filed by other creditors, approximating $225,000 in amount. Included among these was the claim of the Chase National Bank of the City of New York, a claim which was allowed in the amount of $55,231.98.

The referee held a meeting of the creditors on December 31, 1929, more than three and a half years after the adjudication. The motive for this meeting appears to have been the fact that the Johnstown and South Fork banks, the judgment lien creditors, were pressing for payment of their secured claims. This meeting was attended by the bankrupt, the trustee in bankruptcy and representatives of the two judgment creditors, the Chase National Bank and certain other general creditors. Apparently not all of the general creditors appeared at this meeting. The consensus of opinion among those present was that the real estate had a value in excess of the liens but that "if the lien creditors foreclosed upon their liens, little, if anything, would be left for general creditors."

One of the attorneys present, P. J. Little, then made a suggestion. Mr. Little at this time was serving as counsel for the trustee, the Chase National Bank and several other general creditors. His suggestion was "that under the law the estate should be divided into two items; one item showing funds arising wholly from real estate which does not include any of the leases or the funds from any of the leases; the other fund should be made up of all royalties, rentals, or dividends on stocks or bonds. The first fund to go to the first judgment creditor, the second fund to be divided pro rata among all the creditors."

Opinion of the Court.

331 U. S.

The parties apparently agreed to this proposal. Although no supporting order of the referee appears in the record, the administration of the bankrupt estate proceeded as if a supporting order had been entered. The two judgment lien creditors assented to this course of events and it is asserted that all the creditors understood that the liens were to remain intact until the underlying claims had been paid in full.

Thereafter, four dividends were declared and distributed from the real estate fund, while seven dividends were declared and distributed from the general fund. The Johnstown bank received at least $1,364.76 from the real estate fund; the South Fork bank appears to have received nothing from that fund. Both of these banks shared with the other creditors in the seven distributions from the general fund, the Johnstown bank receiving $2,435.06 and the South Fork bank, $3,285.35. No exceptions were ever taken to any of the various orders of distributions. In addition, these two banks have carefully revived their judgments during each five-year period, making the trustee in bankruptcy a party to the proceedings.

In October, 1942, the Chase National Bank filed petitions for a decree to the effect that the two banks had waived their liens by sharing in the distributions from the general fund along with the general creditors and that the Johnstown bank should be compelled to return the $1,364.76 it had received from the real estate fund. The referee, however, held that both the Johnstown and South Fork banks were entitled to maintain their positions as lien creditors and at the same time participate in the distributions from the general fund. The District Court reversed the referee's decision, feeling that participation in distributions from both the real estate and general funds was contrary to accepted bankruptcy practice. In re Stineman, 56 F. Supp. 190. On rehearing, the District