Property exempted under the laws of the state of the bankrupt
cannot be garnisheed in another state where similar property is not
exempted under a judgment obtained within four months of the filing
of the petition, and, after notice of the bankruptcy proceedings,
the garnishee is not protected in paying over under the judgment by
the full faith and credit provision of the federal
Constitution.
A state law relating to debts which is contrary to the
provisions of the federal Bankruptcy Act is nullified thereby, and,
when so nullified, is not entitled to full faith and credit in the
courts of other states under the federal Constitution.
While title to property exempted under § 70f does not vest
in the trustee, it does pass to him as part of the bankrupt's
estate for the purposes named elsewhere in the statute, including
the duty of segregation, identification, and appraisal.
Section 67f does not defeat rights in exempt property acquired
by contract or waiver of exemption; but where, as in this case,
there has been no waiver, no rights can be acquired.
Lockwood
v. Exchange Bank, 190 U. S. 29,
distinguished.
The decisions of the state and lower federal courts in regard to
annulment of liens on exempt property have been conflicting, and
this Court now holds that § 67f annuls all such liens obtained
within four months of the filing of the petition, both as against
the property which the trustee takes for benefit of creditors and
that which may be set aside to the bankrupt as exempt.
In re
Forbes, 186 F. 76, approved.
88 Neb. 20 affirmed.
Hall, a resident of Douglas County, Nebraska, was employed by
the railroad as switchman in its yards in Omaha. His wages were
exempt from garnishment by the laws of Nebraska. In July, 1907, he
was insolvent, and
Page 229 U. S. 512
in that month, while temporarily in the State of Iowa, two
proceedings were instituted against him in which he was personally
served, and the railroad, which owed him $122 as wages, was
garnisheed. In one of these cases, Rawles sued on an open account
for $54.20, the railroad being required to answer on August 10th.
In the other, Torrey, holding a judgment for $22.40, rendered in
1894, served a summons of garnishment on the railroad, requiring it
to answer on August 27, 1907.
While these proceedings were pending in the Iowa courts, Hall
returned to Nebraska, and, on August 7, 1907, he was, on his own
application, adjudged a bankrupt, his wages being claimed as
exempt, and the two Iowa plaintiffs included in his list of
creditors. Notice of the bankruptcy proceeding was given to them
and to the railroad.
Thereafter, on August 10th, the railroad answered in the Rawles
suit, admitting that it owed Hall $122, and a judgment was
accordingly entered against the railroad as garnishee for $61.60.
On August 27, it answered in the Torrey suit, and the court entered
judgment against it as garnishee for $56.91. Hall, in the
bankruptcy proceedings, had asked that, as allowed by the laws of
Nebraska, his wages be set apart as exempt, and filed a petition
praying that the railroad should be summarily ordered to pay him
the amount due for work done in June and July, 1907. The
application was resisted by the railroad and was denied by the
court, which held, on the authority of
Ingram v. Wilson,
125 F. 913, that the bankruptcy court could determine that the
property was exempt, but had no jurisdiction to compel its
payment.
In view of that ruling, Hall made a further application to have
the $122 set off to him as exempt. An order to that effect was
passed by the referee. Hall was discharged as a bankrupt in April,
1908, and then sued the railroad and recovered a judgment, which
was affirmed
Page 229 U. S. 513
by the Supreme Court (88 Neb. 20), and the case was brought
here.
MR. JUSTICE LAMAR, after making the foregoing statement of
facts, delivered the opinion of the Court.
Hall, a married man, head of a family, and insolvent, worked as
a switchman for the railroad company in Nebraska, his wages being
exempt from garnishment by the laws of that state. While
temporarily absent in Iowa, two suits were there brought against
him, summons of garnishment being served upon the railroad's agent
in Iowa, where it had been held that the Nebraska exemption statute
had no extraterritorial effect.
While these two suits were pending in Iowa, Hall returned to
Nebraska, was adjudged a bankrupt, and claimed his wages as exempt.
No defense was made to the Iowa suits, and in both cases judgment
was entered against the railroad as garnishee. For this reason, it
refused to pay Hall when he demanded the money, which had been set
apart to him as exempt by the referee. He then sued the company and
recovered a judgment, which was affirmed by the Supreme Court of
Nebraska. The railroad sued out a writ of error to test its
liability in this class of cases, which it insists are constantly
arising because of the employment of many persons on its lines,
extending into different states with varying garnishment laws. It
contends that the laws of Iowa do not recognize the Nebraska
exemption of wages from garnishment, that Hall was personally
served in the Iowa suits, and that the judgments therein entered
against the railroad as garnishee
Page 229 U. S. 514
are unreversed and binding; that to compel it to pay Hall and
these Iowa plaintiffs also is to impose upon it a double liability
and to deny to the judgments of the Iowa courts the full faith and
credit to which they are entitled under the federal
Constitution.
But if they were nullified by 67f of the Bankruptcy Act, they
are entitled to no faith and no credit. That they were so nullified
is Hall's contention, for he insists that, if there was a lien
against his wages, it was obtained by garnishment served within
four months of his bankruptcy, and discharged by virtue of the
provisions of 67f, which declares that
"all . . . 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."
The railroad, on the other hand, contends that, under § 70,
the trustee acquires no title "to property which is exempt," and
that liens thereon are not discharged by 67f, since that section
has reference only to liens on property which can "pass to the
trustee as a part of the estate of the bankrupt."
On this question, there is a difference of opinion, some state
and federal courts holding that the Bankruptcy Act was intended to
protect the creditors' trust fund, and not the bankrupt's own
property, and that therefore liens against the exempt property were
not annulled even though obtained by legal proceedings within four
months of filing the petition.
In re Driggs, 171 F. 897;
In re Durham, 104 F. 231. On the other hand,
In re
Tune, 115 F. 906;
In re Forbes, 186 F. 79, holds that
67f annuls all such liens, both as against the
Page 229 U. S. 515
property which the trustee takes and that which may be set aside
to the bankrupt as exempt.
This view, we think, is supported both by the language of the
section and the general policy of the act, which was intended not
only to secure equality among creditors, but for the benefit of the
debtor in discharging him from his liabilities and enabling him to
start afresh with the property set apart to him as exempt. Both of
these objects would be defeated if judgments like this present were
not annulled, for otherwise the two Iowa plaintiffs would not only
obtain a preference over other creditors, but would take property
which it was the purpose of the Bankruptcy Act to secure to the
debtor.
Barring exceptional cases, which are specially provided for, the
policy of the act is to fix a four months' period in which a
creditor cannot obtain an advantage over other creditors nor a lien
against the debtor's property. "All liens obtained by legal
proceedings" within that period are declared to be null and void.
That universal language is not restricted by the later provision
that "the property affected by the . . . lien shall be released
from the same, and pass to the trustee as a part of the estate of
the bankrupt." It is true that title to exempt property does not
vest in the trustee, and cannot be administered by him for the
benefit of the creditors. But it can "pass to the trustee as a part
of the estate of the bankrupt," for the purposes named elsewhere in
the statute, included in which is the duty to segregate, identify,
and appraise what is claimed to be exempt. He must make a report
"of the articles set off to the bankrupt, with the estimated value
of each article," and creditors have twenty days in which to except
to the trustee's report. Sec. 47(11) and General Orders in
Bankruptcy 17. In other words, the property is not automatically
exempted, but must "pass to the trustee as a part of the estate" --
not to be administered for the benefit of creditors, but to enable
him to perform
Page 229 U. S. 516
the duties incident to setting apart to the bankrupt what, after
a hearing, may be found to be exempt. Custody and possession may be
necessary to carry out these duties, and all levies, seizures, and
liens obtained by legal proceedings within the four months, that
may or do interfere with that possession, are annulled not only for
the purpose of preventing the property passing to the trustee as a
part of the estate, but for all purposes, including that of
preventing their subsequent use against property that may
ultimately be set aside to the bankrupt. This property is withdrawn
from the possession of the trustee not for the purpose of being
subjected to such liens, but on the supposition that it needed no
protection, inasmuch as they had been nullified.
The liens rendered void by 67f are those obtained by legal
proceedings within four months. The section does not, however,
defeat rights in the exempt property acquired by contract or by
waiver of the exemption. These may be enforced or foreclosed by
judgments obtained even after the petition in bankruptcy was filed,
under the principle declared in
Lockwood v. Exchange Bank,
190 U. S. 294. But
Hall did not waive his exemption in favor of the Iowa plaintiffs,
and they had no right against his wages except that which was
obtained by a legal proceeding within four months of the
bankruptcy. Those liens, having been annulled by 67f of the
Bankruptcy Act, furnished no defense to the railroad when sued by
Hall for his wages, earned in Nebraska, exempt by the laws of that
state, and duly set apart to him by the referee in bankruptcy. The
judgment of the Supreme Court of Nebraska is
Affirmed.
