1. To invalidate the lien of a judgment under § 67f of the
Bankruptcy Act, he who challenges it must show not only that the
judgment was recovered within four months prior to the filing of
the petition in bankruptcy, but also, by pleading and proof, that
the judgment debtor was insolvent when the lien was obtained. P.
265 U. S.
368.
2. Assuming (but not deciding) that an adjudication of the
bankruptcy of a partnership necessarily adjudges the partners, as
individuals, bankrupt, it raises no presumption that they were
insolvent for any period before the petition in bankruptcy was
filed. P.
265 U. S.
370.
3. Nor does the fact that sales of the property of the
partnership and partners, made some months later by the trustee in
bankruptcy, did not realize enough to pay for the partnership or
individual debts establish that the partners were insolvent at a
time anterior to the filing of the bankruptcy petition.
Id.
285 F. 703 reversed.
Certiorari to a decree of the circuit court of appeals which
reversed a decree of the district court allowing the claims of the
above named bank as secured claims in bankruptcy.
Page 265 U. S. 366
MR. JUSTICE SANFORD delivered the opinion of the Court.
This case, which arises in proceedings in bankruptcy, involves
claims by a judgment creditor to liens upon the real estate of the
bankrupts.
On July 20, 1920, the Liberty National Bank recovered a judgment
in a Virginia court against the Roanoke Provision Co., a
partnership composed of the two Beckers, and against the Beckers
individually. This judgment, which was duly docketed in the
Judgment Lien Book and on which execution was issued -- was, under
the laws of Virginia, a lien upon the real estate of the judgment
debtors. Code of 1919, § 6470.
Thereafter, on August 6, an involuntary petition in bankruptcy
was filed in the federal district court against the company, as a
partnership composed of the two Beckers, alleging that it had
committed an act of bankruptcy on August 4 by executing a general
assignment for the benefit of creditors, and that it was insolvent.
There was no allegation that the Beckers were individually
insolvent or had committed acts of bankruptcy, and no prayer that
they be adjudged bankrupt individually. They filed a joint answer
admitting the allegations of the petition. On August 20, the
company, as a partnership composed of the two Beckers, was adjudged
bankrupt by the district judge; but they were not adjudged bankrupt
as individuals. Thereafter, pursuant to an order of the referee,
the company and the Beckers filed schedules of their respective
assets and liabilities.
In April, 1921, more than nine months after the recovery of the
judgment, the Beckers filed separate voluntary petitions in
bankruptcy, and each was adjudged bankrupt as an individual. Bear,
the trustee in the partnership proceeding, was appointed trustee of
their individual estates.
Page 265 U. S. 367
Thereafter, the Bank filed proofs of claim on its judgment
against the separate estates of the Beckers, alleging that it
constituted a lien upon their individual real estate and was
entitled to priority as such. The trustee filed objections to the
allowance of these prior claims on the ground, among others, that,
by virtue of the proceedings against the company, he had been
vested with title to the property of the individual partners, as
well as that of the partnership, as of the date of the filing of
the petition in bankruptcy against the partnership, and that, as
the judgment against the individual partners had been recovered
within four months prior to the filing of that petition, it could
not, under the provisions of the Bankruptcy Act, be enforced as a
lien upon their separate estates. He did not aver, however, that
either the company or the Beckers were insolvent at the time the
judgment was recovered.
The referee, holding that the liens created by the judgment upon
the separate properties of the Beckers had been "annulled" by the
proceedings under the petition against the partnership, disallowed
the claims of the Bank, as secured claims and allowed them as
unsecured claims merely. [
Footnote
1] This order of the referee was reversed by the district judge
on the ground that, as the order of adjudication had merely
adjudged the bankruptcy of the company, and not the bankruptcy of
the Beckers individually, the lien of the judgment upon their
separate estates had not been "nullified." The trustee was
thereupon granted an appeal to the circuit court of appeals. The
Bank moved to dismiss this appeal upon the ground, among others,
that the trustee had not alleged, either in his objections to the
allowance of its claims or elsewhere, that the Beckers were
insolvent at the time the judgment was
Page 265 U. S. 368
recovered, nor had such insolvency been proven, and that
allegation and proof of their insolvency at the time the lien of
the judgment attached was "absolutely essential." The circuit court
of appeals, without ruling on this motion, reversed the decree of
the district court upon the ground that the
"adjudication of the partnership was necessarily an adjudication
of the bankruptcy of the individuals composing it, and that . . .
the lien of a judgment obtained within four months of the filing of
the petition against the partnership was lost by the
adjudication."
285 F. 703. This decision was apparently based upon Section 67f
of the Bankruptcy Act, upon which the trustee had relied at the
hearing before the referee [
Footnote 2], although no reference to it is made in the
opinion, it being evidently assumed by the court that, under that
section, a judgment lien obtained within four months prior to the
filing of a petition in bankruptcy is dissolved by the subsequent
adjudication of the bankruptcy of the judgment debtor, without
reference to his solvency or insolvency at the time the lien was
obtained. [
Footnote 3] This
writ of certiorari was then granted. 261 U.S. 612.
Upon the question whether the adjudication of the bankruptcy of
a partnership involves an adjudication of the bankruptcy of the
individual partners, there appears to have been a diversity of
opinion in the lower federal courts. The decision in
Francis v.
McNeal, 228 U. S. 695,
upon which the circuit court of appeals chiefly relied, did not
involve a determination of this direct question. And we do not find
it necessary to determine it now, since, even if the adjudication
of the bankruptcy
Page 265 U. S. 369
of the company operated as an adjudication of the bankruptcy of
the Beckers individually, which we do not intimate, nevertheless,
in the absence of either pleading or proof as to their insolvency
when the Bank recovered its judgment, there is no ground under
§ 67f of the Act for annulling the lien thereby acquired upon
their property. [
Footnote
4]
This section provides:
"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. . . ."
It applies only to liens obtained in legal proceedings against a
person who was "insolvent" when the lien was acquired. If the
debtor was then solvent, the lien is not invalidated, although it
was obtained within four months prior to the filing of the petition
in bankruptcy.
Taubel-Scott-Kitzmiller Co. v. Fox,
264 U. S. 426. To
invalidate the lien, the person challenging it must show that the
debtor was insolvent when it was obtained.
Stone-Ordean-Wells
Co. v. Mark, 227 F. 975, 978;
Martin v. Oliver, 260
F. 89, 93;
Simpson v. Van Etten, 108 F. 199, 201;
Keystone Brew'g Co. v. Schermer, 241 Pa. 361, 365;
Jackson v. Valley Tie Co., 108 Va. 714, 718;
Newberry
Shoe Co. v. Collier, 111 Va. 288, 290;
Severin v.
Robinson, 27 Ind.App. 55, 61.
And see In re Richards,
96 F. 935;
In re Chappell, 113 F. 545;
In re Community
Stores, 282 F. 328. Such
Page 265 U. S. 370
insolvency must be both alleged and proved.
Stone-Ordean-Wells Co. v. Mark, supra, p. 978.
In the present case, the trustee neither alleged the insolvency
of the Beckers at the time the judgment was recovered and became a
lien on their properties nor proved such insolvency. If the
admission in their joint answer to the petition filed against the
partnership that the company was insolvent was intended as an
admission of their individual insolvency, it was, at the most, an
admission of such insolvency on August 6, when the petition in
bankruptcy was filed [
Footnote
5] -- a very different thing from insolvency at the time the
judgment was recovered -- and, in any event, would not have been
binding on the Bank, which was not then a party to the bankruptcy
proceeding. So if the adjudication of the partnership as a bankrupt
can be regarded as adjudging the insolvency of the individual
partners at the date the petition in bankruptcy was filed -- which
we do not determine -- such an adjudication, for like reason, would
not be binding upon the Bank.
Gratiot State Bank v.
Johnson, 249 U. S. 246.
And, generally, an adjudication in bankruptcy in no way determines
whether or not the debtor was insolvent at the time a lien was
obtained through legal proceedings against him, there being no
presumption arising from the adjudication that he was insolvent for
any period before the petition in bankruptcy was filed.
Keystone Brew'g Co. v. Schermer, supra, p. 365;
Jackson v. Valley Tie Co., supra, p. 719;
Newberry
Shoe Co. v. Collier, supra, p. 291. Nor does the fact that the
sales of the partnership and individual properties made some months
later by the trustee did
Page 265 U. S. 371
not realize enough to pay either the debts of the partnership or
the debts of the individual partners, respectively, establish the
insolvency of the partners at the time the lien was obtained.
There being neither allegation nor proof by the trustee of the
insolvency of the Beckers when the Bank recovered its judgment and
fastened its liens upon their real estate, the decree of the
circuit court of appeals is reversed, and the cause remanded to the
district court for further proceedings not inconsistent with this
opinion.
Reversed and remanded.
[
Footnote 1]
The referee at the same time disallowed another claim of the
Bank to a lien upon the real estate of the partnership, but no
steps were taken by the Bank to review his order in this
respect.
[
Footnote 2]
This appears from a statement in the opinion of the referee.
[
Footnote 3]
The Court said:
"The insolvency of the partnership at the date of the judgment
seems to have been assumed in the court below. At any rate, no
issue of solvency or insolvency at the date of the judgment appears
to have been made. We express no opinion as to the existence of
such insolvency or its effect."
P. 706.
[
Footnote 4]
There is neither averment nor proof bringing the case within
§ 67c or any other provision of the act relating to the
annulment of prior liens.
[
Footnote 5]
The act of bankruptcy alleged -- namely, the making of a general
assignment on August 4 -- did not involve a question of the
insolvency of the partnership at that date, the making of a general
assignment being an act of bankruptcy without reference to the
solvency or insolvency of the debtor. Bankruptcy Act, §
3a(4).