Source: https://openjurist.org/364/us/603
Timestamp: 2019-04-20 00:39:29+00:00

Document:
MANUFACTURERS NATIONAL BANK OF DETROIT.
The bankrupt borrowed money from respondent on November 4, 1957, giving as security a chattel mortgage on an automobile. In Michigan, where the transaction took place, mortgages were void as against creditors of the mortgagor unless filed with the Register of Deeds1 with a special dispensation to purchasemoney mortgages if filed within 14 days of the execution of the mortgage. This mortgage, however, was not a purchasemoney mortgage; and though executed on November 4, 1957, it was not recorded until November 8, 1957.
Over five months later—on April 18, 1958—the borrower filed a voluntary petition in bankruptcy and an adjudication of bankruptcy followed, petitioner being named trustee.
This construction seems to us to fit the scheme of the Act.7 Section 70, sub. e enables the trustee to set aside fraudulent transfers which creditors having provable claims could void. The construction of § 70, sub. c which petitioner urges would give the trustee power to set aside transactions which no creditor could void and which injured no creditor. That construction would enrich unsecured creditors at the expense of secured creditors, creating a windfall merely by reason of the happenstance of bankruptcy.
It is true that in some instances the trustee has rights which existing creditors may not have. Section 11, 11 U.S.C. § 29, 11 U.S.C.A. § 29, gives him two years to institute legal proceedings regardless of what limitations creditors might have been under. Section 60, 11 U.S.C. § 96, 11 U.S.C.A. § 96, gives him the right to recover preferential transfers made by the bankrupt within four months whether or not creditors had that right by local law. A like power exists under § 67, sub. a, 11 U.S.C. § 107, sub. a, 11 U.S.C.A. § 107, sub. a, as respects the invalidation of judicial liens obtained within four months of bankruptcy when the bankrupt was insolvent. Section 67, sub. d, 11 U.S.C. § 107, sub. d, 11 U.S.C.A. § 107, sub. d, carefully defines transactions which may be voided if made 'within one year prior to the filing' of the petition.
Congress in striking a balance between secured and unsecured creditors has provided for specific periods of repose beyond which transactions of the bankrupt prior to bankruptcy may no longer be upset—except and unless existing creditors can set them aside.8 Yet if we construe § 70, sub. c as petitioner does, there would be no period of repose. Security transactions entered into in good faith years before the bankruptcy could be upset if the trustee were ingenious enough to conjure up a hypothetical situation in which a hypothetical creditor might have had such a right. The rule pressed upon us would deprive a mortgagee of his rights in States like Michigan, if the mortgage had been executed months or even years previously and there had been a delay of a day or two in recording without any creditor having been injured during the period when the mortgage was unrecorded.
'It is evident that in the proposed amendment attempt is made to give effect to two ideas quite distinct: First, that as to the property in the custody of the bankruptcy court the bankruptcy trustee shall be considered to have the same title that a creditor holding an execution or other lien by legal or equitable proceedings levied upon that property would have under state law: and, second, that as to property not in the custody of the bankruptcy court the trustee should stand in the position of a judgment creditor holding an execution returned unsatisfied, thus entitling him to proceed precisely as an individual creditor might have done to subject assets. In this way, in effect, proceedings in bankruptcy will give to creditors all the rights that creditors under the state law might have had had there been no bankruptcy and from which they are debarred by the bankruptcy—certainly a very desirable and eminently fair position to be granted to the trustee.' H.R.Rep. No. 511, 61st Cong., 2d Sess., p. 7.
See MacLachlan, Bankruptcy (1956), p. 187; H.R.Rep. No. 1409, 75th Cong., 1st Sess., pp. 4, 34—35.
While § 70, sub. c speaks of 'the date of bankruptcy,' that term is defined as 'the date when the petition was filed.' Section 1(13), 11 U.S.C. § 1(13), 11 U.S.C.A. § 1(13).
'The holding in Constance v. Harvey, by injecting into section 70c the substance of 70e, created the statutorily unwarranted status of a hypothetical creditor with rights relating back to a date prior to bankruptcy. While bankruptcy is in effect a general levy on the property of the bankrupt for the benefit of his creditors, it is not a license for the trustee, irrespective of prejudice to creditors, to avoid at will any security given by the bankrupt which remained imperfected for any period of time prior to bankruptcy. Yet this is the effect of Constance v. Harvey. Under this decision the only limit to the power of the trustee is his ability to conceive of some right of a creditor that can be used as a basis for striking down imperfect transfers. The doctrine of Constance v. Harvey presents a very real threat to security transactions, the validity of which have hitherto not been subject to challenge under the act. Moreover, this is a threat which is not required by the policy of the act, since the creditors who have been prejudiced by the imperfections of a transfer are normally protected under section 70e.' H.R.Rep. No. 745, 86th Cong., 1st Sess., pp. 8—9.
See Seligson, Creditors' Rights, Jour. Nat. Assoc. Referees in Bankruptcy, Oct. 1957, 113, 118; Marsh, Constance v. Harvey—The 'Strong-Arm Clause' Re-Evaluated, 43 Cal.L.Rev. 65; Note, 57 Mich.L.Rev. 1227.

References: § 70
 § 29
 § 29
 § 96
 § 96
 § 67
 § 107
 § 107
 § 107
 § 107
 § 70
 § 70
 § 1
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