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CHAPTER XXII.

FRAUDULENT LIENS AND TRANSFERS.

Section 1. Statutory provision.

2. Scope and meaning of section.

3. Claims void for want of record. Subs. a.

4. Unfiled chattel mortgages and contracts of conditional sale.

5. Subrogation of trustee to rights of creditor. Subs. b.

6. Valid liens in general. Subs. d.

7. Mechanics' liens.

8. Landlords' liens.

9. Other valid liens.

10. Fraudulent transfers. Subs. e.

11. Scope of subsection.

12. Insolvency not essential.

13. "Within four months prior to filing the petition."

14. "With intent to hinder, delay or defraud."

15. "Except purchasers in good faith and for a present fair consideration.

16. Transfers and incumbrances under State laws.

17. Suits to recover property.

18. Miscellaneous invalid transfers or incumbrances.

19. Mortgages to secure antecedent debts.

20. Chattel mortgages.

21. Voluntary transfers.

22. General assignments for the benefit of creditors.

23. Practice.

24. Liens through legal proceedings. Subs. c and f.

25. Invalid liens by judgment and execution.

26. Invalid liens by attachment.

27. Invalid liens by creditor's bill.

28. Suits to annul liens.

29. Preserving liens.

30. Saving clause.

Section 1. Statutory provision.-The Bankruptcy Act of 1898 provides as follows:

§ 67. Liens.-a Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate.

b When a creditor is prevented from enforcing his rights as

against a lien created, or attempted to be created, by his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to and may enforce such rights of such creditor for the benefit of the estate.

c A lien created by or obtained in or pursuant to any suit or proceeding at law or in equity, including an attachment upon mesne process or judgment by confession, which was begun against a person within four months before the filing of a petition in bankruptcy by or against such person shall be dissolved by the adjudication of such person to be a bankrupt if (1) it appears that said lien was obtained and permitted while the defendant was insolvent and that its existence and enforcement will work a preference, or (2) the party or parties to be benefited thereby had reasonable cause to believe the defendant was insolvent and in contemplation of bankruptcy, or (3) that such lien was sought and permitted in fraud of the provisions of this act; or if the dissolution of such lien would militate against the best interests of the estate of such person the same shall not be dissolved, but the trustee of the estate of such person, for the benefit of the estate, shall be subrogated to the rights of the holder of such lien and empowered to perfect and enforce the same in his name as trustee with like force and effect as such holder might have done had not bankruptcy proceedings intervened.

d Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this

act.

e That all conveyances, transfers, assignments, or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration;

and all property of the debtor conveyed, transferred, assigned, or encumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the law of his domicile be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of his creditors. And all conveyances, transfers, or incumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the State, Territory, or District in which such property is situate, shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.*

f That 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, judg ment, 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 purpose of this section into effect: Provided, that nothing herein contained shall have the effect to destroy or impair

* Amendment of 1903 in italics.

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.

" 3

§ 2. Scope and meaning of section 67.-The Bankruptcy Act, in section 67, recognizes the well settled doctrine that a trustee in bankruptcy takes the bankrupt's property subject to all valid liens,1 and declares what liens are not to be considered as valid, as, in substance, (1) those which are invalid under the laws of a State, and, provided they are less than four months old, (2) those which were not recorded or are invalid" for other reasons,' (3) those which were given with intent to hinder, delay, or defraud creditors, and (4) those which were obtained through legal proceedings;5 with the further proviso that even liens so declared invalid shall not be so as to bona fide purchasers without notice. Fraudulent transfers are also made null and void, if made by an insolvent with intent to hinder, delay, or defraud his creditors and within four months of the filing of the petition in bankruptcy. The section also provides for the subrogation of the trustee of the bankrupt's estate to the rights of the holders of liens; which, because declared void, a mere creditor cannot enforce. As a general rule, liens more than four months before the bankruptcy are, unless fraudulent, not affected; nor are liens acquired after the bankruptcy. On the other hand, while subdivision e is in itself a statute of limitations on fraudulent transfers, if the transfer is also interdicted by the law of the State, it may, under section 70e be attacked within the much longer period

1. See Valid liens, sections 6-9, infra. See also In re Moore, 6 Am. B. R. 175, 107 Fed. 234; Continen. tal Bank v. Katz, 1 Am. B. R. 19; Stewart v. Platt, 101 U. S. 731; Yeatman v. Savings Inst., 95 U. S. 764; Ex parte Christy, 3 How. (U. S.) 292; In re Stuyvesant Bank, 49 How. Pr. (N. Y.) 133.

2. In re Davis, Fed. Cas. No. 3,618; Peck v. Jenness, 7 How. (U.

S.) 612; Donner v. Brackett, 21 Vt. 599.

3. Subd. a.
4. Subd. e.

5. Subds, e and f.

6. In re Dunavant, 3 Am. B. R. 41. 96 Fed. 542; Doe v. Childress, 21 Wall. (U. S.) 642.

7. In re Engle, 5 Am. B. R. 372, 105 Fed. 893; Kinmouth v. Braentigam, 4 Am. B. R. 344.

fixed by the State statute. And while liens through legal proceedings within the four months period are dissolved by bankruptcy, other liens are not, unless the lienor was insolvent at the time and there was "intent to hinder, delay, or defraud" creditors.9 It follows also that a trustee, not being a purchaser for value,10 not only stands in the shoes of the bankrupt as to his property, but, as the representative of the creditors, may sue to avoid the effect of the bankrupt's acts.1 11 But the trustee does not represent creditors who are secured by valid liens, and, therefore, he has no interest in the respective rights of priority of such creditors.12 It has also been held that, where a valid lien is incident to a debt and the debt is discharged, the lien nevertheless remains.1 13 Section 67 is closely connected with both section 60a-b, on voidable preferences, and section 70e, on fraudulent transfers voidable under the State law; somewhat less closely with section 3a(1), section 3a(2), and section 3a (3), where similar transactions are declared acts of bankruptcy; while by section 14b(4) a fraudulent transfer is defined in words almost identical with those of subdivision e, and is made an objection to discharge.14

§ 3. Claims void for want of record; subs. a.-Subdivision a of section 67 of the bankruptcy law provides as follows: "Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate." This subdivision should

8. In re Dunavant, 3 Am. B. R. 41, 96 Fed. 542; In re Adams, 1 Am. B. R. 94.

9. See Fraudulent transfers and liens, sections 10-16, infra.

10. Chattanooga Bank v. Rome Iron Co., 4 Am. B. R. 441, 102 Fed. 755. Contra, In re Booth, 3 Am. B. R. 574, 98 Fed. 975.

11. In re Leigh, 2 Am. B. R. 606, aff'd 96 Fed. 806; In re Legg, 96 Fed.

806. Contra, In re Ohio Co-operative Shear Co., 2 Am. B. R. 775.

12. Goldman v. Smith, 2 Am. B. R. 104; Jerome v. McCarter, 94 U. S. 734.

13. Bank of Commerce v. Elliott, 6 Am. B. R. 409. Compare Bracken v. Johnston, Fed. Cas. 1,761.

14. Collier, Bankr., 6th ed., p. 553. See discussion of the sections referred to in the appropriate sections of this work.

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