Liberty National Bank v. Bear

a lien upon the real estate of the judgment debtors.^[1] In August an involuntary petition in bankruptcy was filed in the Federal District Court against the Provision Company, as a partnership composed of the two Beckers; alleging that it had committed an act of bankruptcy by executing a general assignment for the benefit of creditors, and was insolvent. There was no allegation that the Beckers were individually insolvent, or had executed general assignments of their individual properties or committed any acts of bankruptcy; and there was no prayer that they be adjudged bankrupt individually. They filed a joint answer admitting the allegations of the petition; and the Company, as a partnership composed of the two Beckers, was adjudged a bankrupt by the District Judge, but without adjudging the bankruptcy of the Beckers as individuals.

In April, 1921 — more than eight months after the partnership had been adjudged a bankrupt — the Beckers filed separate voluntary petitions in bankruptcy; and each was adjudged a bankrupt. The respondent Bear was then elected trustee for the partnership estate by the partnership creditors, and trustee for the individual estates by the individual creditors.

Thereafter the Bank filed proofs of claim on the 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 on the ground that 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 Company in August, 1920; and contended that as the judgment had been recovered within four months prior to the filing of that petition, the lien upon the individual properties was annulled by

§ 67f of the Bankruptcy Act.^[2] The referee disallowed the claims of the Bank as secured claims, and allowed them as unsecured claims merely.^[3] This order was reversed by the District Judge, on the ground that as the order adjudging the bankruptcy of the Company had not adjudged the bankruptcy of the Beckers individually, the lien of the judgment upon their individual properties had not been nullified. The Circuit Court of Appeals reversed this decree 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 Fed. 703 . This Court — without determining whether the adjudication of the bankruptcy of the Company operated as an adjudication of the bankruptcy of the Beckers individually — held that as there was no pleading or proof as to the insolvency of the Beckers when the Bank recovered its judgment, there was no ground under § 67f of the Bankruptcy Act for annulling the lien thereby acquired upon their individual properties, and reversed the decree of the Circuit Court of Appeals ,and remanded the cause to the District Court for further proceedings not inconsistent with the opinion. Liberty Natl. Bank v. Bear, supra, 368 .

The trustee, by leave of the District Court, then amended his objections to the claims of the Bank by alleging that the Beckers were insolvent when the judgment was recovered, and that if enforced as a secured claim against the individual estates the judgment would result

in preferences;^[4] and contended that the lien upon the individual properties was also annulled by § 67c of the Bankruptcy Act. It was then stipulated that the Beckers were insolvent when the judgment was obtained, and that the enforcement of the judgment as a secured claim against the individual properties would enable the Bank to obtain a greater percentage of its debt from such assets than other individual creditors, — there being no surplus from individual assets to be applied to partnership debts, and none from partnership assets to be applied to individual debts. The referee again disallowed the claims of the Bank as secured claims against the individual estates of the Beckers. This was affirmed by the District Court, without opinion, and by the Circuit Court of Appeals, which adhered to its original ruling as to the effect of the order adjudicating the bankruptcy of the partnership. 18 F. (2d.) 281.

The controversy here is solely between the Bank and the trustee as the representative of the other individual creditors of the Beckers; the partnership creditors having no interest therein as there is no surplus of the individual estates to be applied to partnership debts.

The trustee relies upon both §§ 67c and 67f of the Bankruptcy Act. Sec. 67c provides that: “A lien created by or obtained in or pursuant to any suit . . which was begun against a person within jour 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 . . it appears that said lien was obtained and permitted while the defendant was insolvent and that its existence and enforcement will work a preference . . .” Sec. 67f provides: “ That all levies, judg

ments, 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,^[5] shall be deemed null and void ip. case he is adjudged a bankrupt, and the property affected by the . . 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 is indisputable that under these provisions the judgment liens upon the real estate of the Beckers cannot be annulled unless they were adjudged bankrupts under petitions in bankruptcy filed within four months after the suit against them was commenced, § 67c, or the judgment liens obtained, § 67f. This being unquestioned, the trus- ‘ tee does not claim that the liens were annulled under the voluntary petitions of the Beckers which were filed after the expiration of the prescribed periods. His sole contention is that they were annulled by the proceedings under the involuntary petition filed against the Provision Company within such periods. As to this he insists that — although the petition was filed against the partnership alone and the partnership alone was adjudged a bankrupt — the petition was, in effect, a petition against the individual partners, as well as the partnership, and the adjudication was, in effect, an adjudication that the individual partners as well as the partnership were bankrupts; that is, that the adjudication that the partnership was a bankrupt necessarily imported an adjudication that the individual partners were also bankrupts.

This contention disregards entirely the principle established by the Bankruptcy Act that a partnership may be adjudged a bankrupt as a separate entity without refer

ence to the bankruptcy of the partners as individuals. In this respect the Act makes a complete change from the earlier Bankrupt Law of 1867, which did not permit the partnership entity to be adjudged a bankrupt, but merely provided that when two or more persons who were partners in trade were adjudged bankrupt, the property of the partnership, as well as that of the partners, should be taken over by the bankruptcy court for administration.^[6] The present Act not only omits this provision of the Law of 1867, but — after providing generally that the word “ persons ” when used in the Act shall include “ partnerships,” § 1 (19), and that a petition in bankruptcy may be filed against a “ person ” who is insolvent and has-committed an act of bankruptcy, § 3 (b) — specifically declares in § 5a that: “A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt.”^[7] Under this provision, as was

Fed. 655 , 658; In re Stein & Co. (C. C. A.), 127 Fed. 547 , 549; Dickas v. Barnes (C. C. A.), 140 Fed. 849 , 851; In re Bertenshaw (C. C. A.), 157 Fed. 363 , 368; Mills v. Fisher & Co. (C. C. A.), 159 Fed. 897 , 899; Francis v. McNeal (C. C. A.), 186 Fed. 481 , 483; In re Samuels (C. C. A.), 215 Fed. 845 , 847; Armstrong v. Fisher (C. C. A.), 224 Fed. 97 , 99; Carter v. Whisler (C. C. A.), 275 Fed. 743 , 746; In re Dunnigan (D. C.), 95 Fed. 428 , 429; In re Duguid (D. C.), 100 Fed. 274 , 278; In re Barden (D. C.), 101 Fed. 553 , 555; Strause v. Hooper (D. C.), 105 Fed. 590 , 592; In re Stokes (D. C.), 106 Fed. 312 , 313; In re Hale (D. C.), 107 Fed. 432 , 433; In re Farley (D. C.), 115 Fed. 359 , 360; In re Pincus (D. C.), 147 Fed. 621 , 625; In re Solomon & Carvel (D. C.), 163 Fed. 140 , 141; In re Everybody’s G. & M. Market (D. C.), 173 Fed. 492 , 493; In re Lattimer (D. C.), 174 Fed. 824 , 826; In re Perlhefter (D. C.), 177 Fed. 299 , 305; In re Lenoir-Cross & Co. (D. C.), 226 Fed. 227 , 229.^[8] This rule has been applied not only where the petition in bankruptcy sought merely the adjudication of the partnership as a bankrupt, but where the adjudication of the individual partners was also sought. Thus in some cases the partnership was adjudged a bankrupt, although the court refused to adjudge the bankruptcy of the individual partners, either because they had not committed individual acts of bankruptcy, or because, being wage earners or tillers of the soil, they were exempt from

involuntary bankruptcy, or because they were insane, or minors.^[9]

This rule, often announced, is based upon the plain words of the Bankruptcy Act. The specific provision in § 5a that a partnership — a person within the meaning of the Act — “ may be adjudged a bankrupt,” distinctly implies that it may be adjudged a bankrupt as a separate entity without reference to the bankruptcy of the individual partners. This implication is strengthened by the fact that there is no requirement in § 5 that the partners shall be joined as defendants in a petition filed against the partnership, and nu provision that the partners shall be adjudged to be bankrupts under such a petition or that such individual adjudications shall be a prerequisite to the adjudication of the bankruptcy of the partnership; as well as by the fact that while § 5 of the Act incorporated most of the administrative provisions in the corresponding section of the Bankrupt Law of 1867, it omitted the provision for granting discharges to the individual partners. That is, the adjudication of the bankruptcy of the individual partners was left solely to the general provisions of the Act, under which no person could be adjudged a bankrupt in involuntary bankruptcy unless he was not only insolvent but had committed an act of bankruptcy, and not even then if he were a wage earner or tiller of the soil, § 3a, b; § 4b.

We cannot believe that Congress intended to limit and weaken the broad provision of § 5a permitting a partnership to be adjudged a bankrupt, by making it essential to

such an adjudication that the partners should also be adjudged bankrupt individually. So to hold would make it impossible, in an involuntary proceeding, to adjudge bankrupt a partnership as a separate entity, although it was insolvent and had committed an act of bankruptcy, if any of the partners could not be adjudged a bankrupt because he had not committed an individual act of bankruptcy or was a person exempt from such an adjudication, or for other adequate reason.^[10]

The conclusion stated is not in conflict with the decision in Francis v. McNeal, 228 U. S. 695 , upon which the trustee relies. That decision, as we have heretofore pointed out in Liberty Natl. Bank v. Bear, supra, 368 , and Meek v. Centre County Banking Co., supra, 432, did not involve the question whether an adjudication of the bankruptcy of a partnership involved the adjudication of the bankruptcy of the partners, but merely involved the question whether a bankruptcy court in which an insolvent partnership had been adjudged a bankrupt might under the administrative provisions of § 5 require a partner who had not been adjudged a bankrupt to surrender his individual property to the trustee of the partnership estate for the purpose of paying the partnership debts. There was no claim or suggestion that the adjudication of the bankruptcy of the partnership had involved an adjudication of the bankruptcy of the partner as an individual, or that under that adjudication he could be deemed a bankrupt individually or a trustee could be appointed of his individual estate for the purpose of administering it as that of a bankrupt.