This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.
The trustee takes title to the property owned by the bankrupt at the time the petition in bankruptcy is filed.
The trustee in bankruptcy takes title to all the property of the bankrupt which might have been seized by his creditors for the payment of his debts, and which was owned by him when the petition in bankruptcy was filed. The line of cleavage in respect to the property which is subject to division among the bankrupt's creditors, passes through the day the petition is filed.105 It is on that day, so to speak, that the bankrupt begins a new life. The property he has theretofore owned goes to his trustee for division among creditors; the property he thereafter acquires becomes his own.
Even if he acquires property prior to the adjudication but after the petition is filed, it belongs to him, and does not pass to the trustee. Creditors can get no advantage of it.106
A very interesting illustration of this rule arose in a recent case.107 A debtor owed $4,300 on a note held by a bank. His mother was ninety-eight years of age and had provided a legacy for him in her will amounting to $20,000. The debtor filed a petition in bankruptcy.
105. Jones v. Springer, 226 U. S. 143.
106. Sibley v. Nason, 196 Mass. 125.
107. Bank of Elberton v. Swift, (C. C. A. 5th Cir.) 268 Fed. 305.
Shortly thereafter his mother died and he became entitled to the legacy. The bank filed a petition to set aside the adjudication alleging the filing of the proceedings was a fraud on the bank. But the court held that the bankruptcy act gave one a legal right to file a petition in bankruptcy with the effect of discharging then existing claims out of the division of his then existing property. Property acquired after the filing of the petition did not pass to the trustee. Even though the will then provided for the legacy, it was not then his. Of course the bankruptcy law, as the court remarked, was not intended for situations of the sort in question. And a debtor who would so use it to evade an honest debt under such circumstances may well deserve our censure. But the hardship of a particular case does not justify the court in overriding the plain provisions of the law. But it is not necessary, however, that the bankrupt have possession or right of possession in order that the trustee may take. It is simply necessary that the bankrupt, at the time of filing the petition, have a vested interest. Thus if he were the owner of property subject to a life estate of some one else, he would have property that he could sell and which his creditors could seize. Clearly it would be an asset, possibly a very valuable one, for the trustee in bankruptcy. This principle is very strongly shown by the following case :108 A debtor was an insurance solicitor. He sold a considerable amount of insurance upon which he became entitled to commissions upon future premiums. A petition in bankruptcy was filed. Held: that as these commissions were already earned although not yet payable, and although contingent upon the premiums being payable, they constituted property belonging to the bankrupt upon the filing of his petition and passed to the trustees in bankruptcy.
108. Matter of Wright, 19 A. B. R. 54.
The trustee when elected gets title to the property owned by the bankrupt when the petition is filed. Where is the title in the meantime? The Supreme Court has said: "While for many purposes the filing of the petition operates in the nature of an attachment upon choses in action and other property of the bankrupt, yet his title is not thereby divested. He is still the owner, though holding in trust, until the appointment and qualification of the trustee. * * * Until such election, the bankrupt has title, - defeasible, but sufficient to authorize the institution and maintenance of a suit or any cause of action otherwise possessed by him."109
A receiver may be appointed to take charge of such property pending the election of the trustee where necessary to the preservation of the estate.
A trustee becomes clothed with "all the rights, remedies and powers of a creditor holding a lien by legal or equitable proceedings" and also "shall be deemed vested with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied." 110
Under the law as originally drafted, a strict construction thereof by the courts led to the conclusion that the trustee merely succeeded to the title of the bankrupt, and represented the creditors only to assert rights that they could have asserted in the then condition of their
109. Johnson v. Collier, 222 U. S. 538. 110. SEC. 47a 2 as amended in 1910.
claims. To be more specific, suppose a general creditor had to obtain a lien of a judgment or attachment before he could attack unrecorded chattel mortgages or other liens. The filing of the petition in bankruptcy gave the trustee no better right than the creditor then had as general creditor, unless in fact at that time he were a judgment or attaching creditor. This construction of the act was highly unfortunate. Clearly a creditor ought not to be deprived of a position he could have taken had there been no proceedings. For instance, suppose A was a general creditor of X, and B had an unrecorded chattel mortgage on property in X's possession. B by recording this mortgage before A obtained judgment can have precedence over A even if B's debt is later than A's because A has been content to be a general creditor, while B has obtained a lien. But if A gets a judgment before B files his lien or before B takes possession of the property, A has a prior lien. But suppose that A instead of getting judgment joins in a petition in bankruptcy, or other creditors file a petition, or X files the petition himself. A ought not in that event to have an inferior position than he would have had. As the creditors rights are fixed by the filing of the petition as of the date thereof, the trustee ought in all justice to be able to assert as of that date all rights which the creditors might have placed themselves in a position to secure on that date. And by the amendment of 1910, such is now the law. The filing of the petition puts the trustee in the position of a judgment creditor with the superior advantages of such, even though none of the creditors are judgment creditors.
For example under the law of Kansas a contract of conditional sale is valid between the parties, whether filed for record or not, but is void as against a creditor of the vendee who fastens a lien upon the property by execution, attachment or like legal process before the contract is filed for record. If bankruptcy proceedings intervened prior to its being filed for record, the conditional sale would thereby become void as to the trustee. If the conditional sale were filed prior to the filing of the petition and prior to any creditor getting a judgment or other legal process, the rights of the conditional vendor to re-assert his title upon breach of the condition would be made effective. And this even if the filing was immediately prior to filing the petition. It would not be void as a preference because it would not be a preference. 111