Court Opinion

ID: 6903510
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:57:24.732026+00
Date Added: 2024-06-11T16:06:15.227258
License: Public Domain

PHILLIPS, Chief Judge
(concurring).
I agree that the application of either Federal law or the law of Kansas requires an affirmance but I deem it appropriate to state my views with respect to the applicable law.
The question is whether under the facts the appellants had an equitable lien on the assets of the bankrupt when they passed into the hands of the trustee in bankruptcy.1
Whether the appellants had an equitable lien upon the assets of Culver immediately prior to the inception of bankruptcy was a question of state law. If they did not have such a lien under state law, the event *69of bankruptcy certainly would not create such a lien. Accordingly, it is my conclusion, which is supported by authority, that whether a creditor of a bankrupt has an equitable lien on the assets of the bankrupt estate which pass into the hands of the trustee must be determined by local law.2
However, although as between the claimant and the bankrupt, the claim is valid under state law, the court of bankruptcy under its equity powers in distributing the assets of the bankrupt estate may subordinate such claim to the claims of other creditors, where the claimant has been guilty of inequitable conduct, justifying such subordination.3
Here, the appellants traced the trust funds into the general bank account of Culver Aircraft Corporation, the bankrupt. The proof showed that all of the trust funds so traced into the general bank account of Culver and a large amount of additional funds deposited in such general bank account were checked out so that the account was overdrawn prior to bankruptcy, but the proof wholly failed to show that such funds were employed to purchase assets which came into the hands of the trustee, either in their original or converted form. For aught that appears, all of the trust funds may have been disbursed in payment of debts of Culver or in paying current expenses of Culver prior to bankruptcy. The trust funds might have been checked out immediately in payment of debts of Culver. Indeed, the reasonable inference is that they were. And the fact that tax claims were afterwards paid and refunded did not establish that the trust funds were used to pay the tax claims. That disbursement of the trust funds in payment of the debts of Culver or in payment of the current expenses of Culver did not constitute augmentation or betterment of the assets which passed into1 the hands of the trustee is settled law in Kansas.4
The burden of proof was upon the appellants to show augmentation in order to-establish their liens.5 That, they failed to do. It follows that they had no lien under the law of Kansas and bankruptcy ensued. Ensuing bankruptcy did not enlarge their rights.
For the additional reasons stated above, I concur.

 McCallum v. Anderson, 10 Cir., 147 F.2d 811, 814; Restatement of the Law, Restitution, § 210.

 In re Robert Jenkins Corporation, 1 Cir., 17 F.2d 555, 556; Beacon Trust Co. v. Dolan, 1 Cir., 27 F.2d 247, 248; In re Goodhue Motor Co., D.C.Md., 28 F.2d 402, 404; In re Hagin, D.C.La., 21 F.2d 433, 434; In re McAusland, D.C.N.J., 235 F. 173, 179; Remington on Bankruptcy, 5th Ed., Vol. 4A, § 1725. Cf. Mitchell v. Bowman, 10 Cir., 123 F.2d 445.

 Prudence Realization Corporation v. Geist, 316 U.S. 89, 93, 62 S.Ct. 978, 86 L.Ed. 1293; Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669; Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281.

 Arnold Investment Co. v. Citizens’ State Bank, 98 Kan. 412, 158 P. 68, 70, L.R.A.1916F, 822; Cheney v. Johnson, 135 Kan. 521, 11 P.2d 709, 711; Secrest v. Ladd, 112 Kan. 23, 209 P. 824, 825; Snodgrass v. Johnson, 141 Kan. 204, 40 P.2d 383, 384.

 Schuyler v. Littlefield, 232 U.S. 707, 712, 34 S.Ct. 466, 58 L.Ed. 806; Blumenfeld v. Union Nat. Bank, 10 Cir., 38 F.2d 455, 456.