LEWIS v. MANUFACTURERS NAT. BANK
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Stuart E. Hertzberg
Chief Justice Earl Warren: Number 94, William G. Lewis, Trustee, Petitioner versus Manufacturers National Bank of Detroit.
Mr. Stuart E. Hertzberg: Mr. Chief Justice, may it please the Court.
This matter arises on a writ of certiorari to the Sixth Circuit Court of Appeals.
And the crucial issue involving this matter is the proper interpretation of Section 70c of the Bankruptcy Act, the so-called "Strong-Arm Clause", thus the trustee in bankruptcy for the rights of a lien creditor at the date of bankruptcy whether or not such a creditor actually exist.
The trustee in the case at bar attempted to invalidate a Michigan chattel mortgage which had been belatedly recorded but recorded prior to the date of bankruptcy.
There was no proof of the existence of a simple contract creditor who had extended credit between the date of execution and the date of recording of this mortgage.
This was the type of creditor who was protected under Michigan law.
The referee in bankruptcy invalidated this mortgage under Section 70c and was reversed by the District Court which was then affirmed by the Sixth Circuit Court of Appeals.
The Second Circuit Court of Appeals in the now famous case of Constance versus Harvey with a similar set of facts arrived in a directly contrary conclusion.
In that case, they had involved a New York chattel mortgage --
Justice John M. Harlan: More accurately, we have reached two conclusions.
Mr. Stuart E. Hertzberg: A sua sponte opinion, Your Honor --
Justice John M. Harlan: That's the way I narrowed (Voice Overlap) --
Mr. Stuart E. Hertzberg: -- took a different position.
I arrived at a different conclusion in a sua sponte opinion.
In that case, a New York chattel mortgage had been recorded prior to bankruptcy but not within a reasonable time as required under New York law.
Again, there was no proof of the existence of a simple contract creditor who extended credit between the date of execution and the date of the recording of this mortgage.
This was the type of creditor who was protected under New York law.
The referee in the District Court took the position, that even though there was no actual creditor who could have invalidated this mortgage without the intervention of bankruptcy, that the trustee was a lien creditor at the date of bankruptcy and that necessarily included within these rights were the rights of a lessor creditor, namely an interim creditor under New York law and invalidated this mortgage.
The Second Circuit, in a sua sponte opinion, affirmed the position of the District Court.
We feel that the decision in the Second Circuit Court of Appeals arrived at the correct conclusion and we are seeking an affirmation by this Court of the decision in Constance versus Harvey.
Now, the trustee's rights under the Bankruptcy Act are not derivative.
He is an independent creature whose rights arise, rights and powers arise by act of Congress.
And there are many instances where his rights and powers are in excess of the actual rights and powers of a natural creditor under state law.
And we feel that Constance versus Harvey is just another instance where you find the rights of the trustee in bankruptcy by reference to the language of the Bankruptcy Act and not by reference to the rights of any actual questionable creditor under state law.
There are many other examples in the Bankruptcy Act where these rights are in excessive creditor's rights under state law.
Section 60 allows the trustee to invalidate preference obtained within four months of bankruptcy.
Many States including Michigan do not give creditors this right under any consideration.Section 67a (1) allows the trustee in bankruptcy to invalidate judicial liens obtained within four months of bankruptcy where there is insolvency.
We are not aware of any State in the union which allows creditors to accomplish this fact.
And finally, we come to Section 70e of the Bankruptcy Act which is that section where the trustee's rights in fact are derivative.
The trustee under Section 70e has placed in the shoes of an actual flesh and blood creditor under the various state registration laws, under the famous case of Moore versus Bay which was decided by the United States Supreme Court in 1931.
The decision in that case was rendered by Justice Holmes.
The Supreme Court allowed the trustee in bankruptcy to invalidate a California chattel mortgage for the benefit of all creditors of the State even though without the intervention of bankruptcy, this creditor could only have invalidated the mortgage to the extent of his own obligation.
Therefore, in essence, a $10 mortgage -- a $10 obligation could invalidate a million dollar mortgage.
This decision was criticized as unsound, inequitable and erroneous.
Yet in 1938, Congress codified this particular section in Section 70e (2), so that where in actual creditor under state law could only invalidate the mortgage the extent of his obligation, the Supreme Court held that the trustee had rights which were in excessively creditor under state law and it could have validated in toto.
Now, the respondent's charge at the Second Circuit in Constance versus Harvey, wrenched the word, and I quote, "Could have obtained a lien out of the Section 70c of the Bankruptcy Act and gave them an affect which was contrary to its true meaning and the legislative intent."
And we say this just isn't so.
Constance versus Harvey or the doctrine said forth therein was the law prior to this decision in 1954 and was the law prior to the amendment to the Bankruptcy Act in 1952 which inserted the words "could have obtained a lien".
The predecessor to Section 70c was Section 47a (2) which was passed in 1910 and which vested the trustee with the rights of a lien creditor at the date of bankruptcy.
It did not use the words "whether or not such a creditor actually exist".
And one of the first cases, decided under this law with In re Calhoun which was a District Court case of Alabama in 1911.
In that case, we have an unrecorded conditional sales contract.
Alabama law protected a creditor who extended credit between the date of execution and the date of recording of a conditional sales contract.
There was no evidence of the existence of such a creditor.
And the Court held that since Section 47a (2), that's the trustee where the rights of a lien creditor that necessarily included within these rights where the rights of the most favored class of creditors under state law and under Alabama law, this was a creditor who would obtain a judgement between execution and recording.
And on page 16 of our brief, I'd like to refer to two very vital paragraphs in this opinion.
"The purpose of Congress," and I'm quoting, "was to embrace within these words every class of creditors with liens by legal or equitable proceedings favored by the bearing registration laws of each of the State.
The registration laws of some of the States include but one of many classes of such creditors.
In that case, the purpose of Congress is not to be frustrated as to the included class because other classes included within the amendment were not included also in the Registration Act of that particular State."
And in the third paragraph which is very vital, "The test is whether there exist a class properly within the language of the amendment and that of the Alabama Registration Act.
It is conceded that a judgement creditor holding a lien by execution is such a class.
The trustee, therefore, is vested with the right by the amendment and the Registration Act of that class to avoid unrecorded conditional sales contracts."
And this had to be their position because in the 50 States, you have 50 bearing registration laws.
Some protect creditors who extend credit in the interim between executions and recordings.
Some protect judgment creditors.
Some protect lien creditors.
Some of the statutes require immediate recording, others allow reasonable time to record.
And as a result, the Bankruptcy Act has to be applied uniformly.
And this Court held, in effect, that if there is a class of protected creditors under the State Registration Act, then the trustee is a member of the most favored class plus a lien at the date of bankruptcy.
Further evidence of the application of the doctrine of Constance verus Harvey prior to this decision were two very interesting cases which arose out of the Seventh Circuit and the Fifth Circuit respectively.
One was In re Urban which involve a Michigan chattel mortgage and the other was McKay versus Trusco Finance Company of Montgomery, Alabama which involved an Alabama chattel mortgage.
In both cases, the chattel mortgage was not recorded prior to the date of bankruptcy.Both States protect an interim creditor who extends credit between the date of execution and the date of the recording of the chattel mortgage.
It's important to know that in both of these cases, there was no evidence of the existence of a simple contract creditor who extend a credit between the date of execution and the date of recording.
This being the type of creditor protected.
And as a result, the trustee could not use Section 70e.
In both cases, the courts allowed the trustee to invalidate these mortgages under Section 70c and it's important to note that if a lien was obtained between the date of execution and the date of recording of these mortgages, that these particular instruments could not have been invalidated.
So the Court held in effect that the trustee is a lien creditor at the date of bankruptcy, and the Urban case used this language.
And that necessarily included within his status of a lien creditor at the date of bankruptcy is the status of a lessor creditor who was a member of the most favored class under state law.
Now, the critiques of Constance versus Harvey claim that if the interpretation of the Second Circuit of Section 70c is correct, then it makes Section 70e superposed and then why didn't Congress just repeal this Section?
And again, we say this just isn't so.
The States have divided into two main groups as to the class of protect -- creditors who are protected under the state registration laws.
The minority group of States which include the big commercial States of New York, California, Illinois, Michigan state that a simple contract creditor who extends credit between execution and recording is the protected class of creditors under their state laws, thus, if a lien is obtained between execution and recording, it does not protect the creditor in those States.
In the majority of the States including those who follow the Uniform Commercial Code, a creditor who fastens a lien between the date of execution and the date of the recording of the mortgage is the type of creditor who is protected under their Registration Act regardless of when credit is extended.
Now, let's apply Constance versus Harvey to these two separate sets of groups of States.
If the chattel mortgage, if the chattel mortgage is not recorded prior to bankruptcy, then both groups of States have held that the trustee may use the Section 70c to invalidate this chattel mortgages and respondents admit this in their brief.
Now, the trustee is a lien creditor to hold this in both group of States especially in the interim contract creditor State, you would have to say that included within his status of a lien creditor is a simple contract creditor.
If the chattel mortgage was recorded prior to bankruptcy, then Constance versus Harvey recognizes this distinction.
In those States that only require a simple contract creditor who extends credit between the date of execution and the date of recording, the trustee could use Section 70c to invalidate these chattel mortgages.
In those States which require a lien creditor who is -- who must fasten a lien between the date of execution and the date of recording, Constance versus Harvey in it's interpretation, could not possibly apply because this distinction is recognized by that decision, that the lien is a lien at the date of bankruptcy and does not relate back as charged by the Sixth Circuit Court of Appeals and by the respondents.
This lien does not relate back.
And as a result in those States, unless you could find an actual flesh and blood creditor under Section 70e of the Act, the trustee could not invalidate a chattel mortgage.
Now, the Sixth Circuit and the respondents fail to --
Justice Potter Stewart: But New York -- New York and --
Mr. Stuart E. Hertzberg: Pardon?
Justice Potter Stewart: -- Michigan, New York and Michigan belong to the same family States, don't they?
Mr. Stuart E. Hertzberg: That is right, Justice Stewart.
New York, Michigan, California, Illinois and some of the other important commercial States belong to this particular category.
Justice Potter Stewart: They -- they provide that a creditor who extends credit between the time of the execution of the chattel mortgage and its recording or filing is protected against mortgage (Inaudible).
Mr. Stuart E. Hertzberg: That's right.
They do diverge however from this stand point.
New York provides for a reasonable time to record their chattel mortgages.
Justice Potter Stewart: And Michigan provides that it must be done forthwith or at least did at the time of this (Voice Overlap) --
Mr. Stuart E. Hertzberg: That's right, immediately.
However, they have now amended their Act to provide for a 10-day period of registration, so they diverge there.
Justice Potter Stewart: Yes.
Mr. Stuart E. Hertzberg: Now, the Sixth Circuit and the respondents failed to see this particular distinction that I have pointed out in Constance versus Harvey because the Sixth Circuit cited Holt versus Crucible Steel which was decided by the Supreme Court of the United States and In re American Textile Printers Society as refusing to follow Constance versus Harvey.
And the respondents in their brief state that In re American Textile Printers, which is a District Court case from New Jersey, was an evasion of Constance versus Harvey.
And then they say -- they cite Bailey versus Baker Ice Machine Company, which was decided by this Supreme Court in 1915, as further evidence of a rejection of the interpretation of Section 70c.
In all three cases, it involved the conditional sales contract in all three States, the type of creditors protected were lien creditors who fasten their liens between the date of execution and the date of recording of these conditional sales instruments.
All of them have been recorded prior to the date of bankruptcy.
And as a result, the decision was proper.
They recognized the distinction and it is perfectly consistent with the interpretation in Constance versus Harvey.
Now, the reception of Constance verus Harvey has been buried.
The Second Circuit Court of Appeals considered this decision again in Conti against Volper.
And with an entirely different panel sitting on this particular case, they stated, "It's difficult to see how such plain language could be disregarded."
And this was a case where both sides have written briefs in opposition to the interpretation of Section 70c of the Bankruptcy Act.
And then the losing lawyer in Conti versus Volper, then it is frustration on the legal profession and he wrote a legal article for the Fordham Law Review and is now cited as an authority in the brief of the respondents.
Now, the Ninth Circuit in Miller versus Sellmeyer (ph) have indicated emphatically that they will follow Constance versus Harvey, that this Circuit with two different panels have indicated that they're going both ways.
Brookhaven Bank & Trust Company versus Gwin indicated that it would follow Constance versus Harvey and a different panel in Blackford versus Commercial Credit Company have said to the contrary.
There are only two courts who have actually ruled in opposition of Constance versus Harvey.
One is the Sixth Circuit and the other is In re Billings which is a case arising out of the District Court of Missouri plus a case which -- which has just come down from the Supreme Court of the State of Michigan.
In conclusion, it is our contention that the construction of Section 70c of the Bankruptcy Act by the Second Circuit Court of Appeals was a correct conclusion that the trustee is a lien creditor at the date of bankruptcy and that necessarily included within his status is the rights and powers of the most favored class of creditors under state law.
In New York, in Michigan, it was a simple contract creditor who extended credit between the date of execution and the date of the recording of the mortgage.
If the results of this construction are harsh, as respondent has stated in their brief, then it is up to Congress to amend the Bankruptcy Act to change the situation or the various States to correct their state registration laws because the Bankruptcy Act must be applied uniformly and Michigan has amended their Registration Act now on three occasions since the decision in Constance versus Harvey.
And they finally now provide that you shall have a 10-day period to record.
And as respondents said in their brief, an opposition to our writ of certiorari, a reasonably diligent chattel mortgagee can now protect themselves in spite of Constance versus Harvey in New York, Michigan, California, Illinois, Missouri and the other minority States.
We, therefore, respectfully submit that the judgment of the Sixth Circuit be reversed and that the chattel mortgage involved in this case be set aside under Section 70c of the Bankruptcy Act.
I'd like to reserve any time, Mr. Chief Justice, for rebuttal.
Chief Justice Earl Warren: You may.
Mr. Stuart E. Hertzberg: Thank you.
Chief Justice Earl Warren: Mr. Rohr.
Argument of Richard D. Rohr
Mr. Richard D. Rohr: Mr. Chief Justice, may it please the Court.
Counsel for the petitioner, my friend and office neighbor in Detroit has well stated the facts in the case before us.
There has never been a dispute as to this.
As he has indicated a narrow legal issue confronts us here, namely two interpretations of Section 70c.
I think it would be useful at the outset to attempt to refine this issue a bit by saying that the interpretation, which I urge upon this Court and the interpretation adopted by the Sixth Circuit, is simply this, in determining a trustee's status potency rights as a lien creditor under Section 70c, the date of bankruptcy is the origin and the fixing date for such status for all purposes including the hypothetical time when such creditor extended a credit.
Justice John M. Harlan: Constance against Harvey didn't say anything contrary to that, did it?
Mr. Richard D. Rohr: It held contrary to that.
Justice John M. Harlan: Did it?
Mr. Richard D. Rohr: I will attempt to show that, Justice Harlan.
The second rule which is the Constance rule is that Section 70c invest the trustee with a lien creditor status at date of bankruptcy but necessarily involved in the holding in Constance is the notion that the trustee has some kind of spiritual -- simple creditor status during the period prior to bankruptcy which permits him to rummage an indefinite task in search of advantage.
It suggests some preincarnate life.
I think this is the issue and I'd like to say to eliminate, perhaps, some side considerations that there is no dispute.
We have no dispute with petitioner's statement that the source of these trustee's rights are Section 70c and not state law.
We have no dispute with the notion in the cases.
He has cited that the trustee has an ideal creditor status at date of bankruptcy in the sense that he is deemed to accomplish to -- or to have accomplished all of those things necessary to perfect his status as a lien creditor under state law whether that's recording and notice of entry of judgment or other procedural rules.
We do say that the fixing of the point of time when the trustee assumes a juridical personality is the date of bankruptcy.
Now, I think it would be useful at this juncture to look at 70c itself as amended in 1952 because there are two separate creditors referred to and I think this may be a source of some of the difficulties.
The language says now, "The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy."
Now, starting here, this creditor here referred to is what we might call a property defining creditor.
This is a test used to define the property to which the trustee's rights -- upon which the trustee's rights may fasten.
Proceeding, we say that the trustee has two such property so defined "shall be deemed vested as of such date," the date of bankruptcy, "with all the rights, remedies and powers of a creditor then holding a lien thereon, then holding lien thereon at date of bankruptcy, whether or not such a creditor," a creditor then holding a lien thereon at the date of bankruptcy, "exists".
Now, I will attempt to show as the argument develops that this property defining creditor first referred to is a different concept, has a different function in the law, a different history than the hypothetical creditor that we tend to think of as having existed for many years in the bankruptcy statute.
History may help us here.
An appropriate starting point is the case Bailey versus Baker Ice Machine in 1915 where this Court considered the operation of the statutory predecessor Section 47a (2).
Now, it's interesting that at that time, the statute contain no date fixing, no careful time fixing language and the Court was left to reason, logic and the -- to look at the whole Bankruptcy Act pattern.
And the Court said some interesting things in that opinion.
It said, first of all, "We have no guidance in the statute of such," but they say some point in time must have been intended by Congress.
Now, they were -- they seem to negate the ambulatory concept that is -- is essential in the view announcement urged by petitioner.
Secondly, they say that an appropriate time and the appropriate time, if not otherwise specified, is to determine the rights, remedies and powers of this trustee and "with reference to the conditions existing when the petition is filed".
In choosing this state of bankruptcy, they noted that such view seems reasonable, absent of contrary intent of Congress and such view accords with other provisions in the Act.
Now, subsequently, Congress confirmed or -- or it codified the Bailey notion.
We find in the Chandler Act in 1938, the beginning of this very careful language where they refer in two occasions there to the fact that he is vested, as of the date of bankruptcies, with the rights, remedies and powers of creditors then holding a lien whether or not such a creditor exists.
Again, in 1950, we have the same language.
Substantially, we have it in 1952 in the present statute.
Now, the property defining creditor has a different history in that -- in the Chandler Act of 1938.
The Court will recall that there were distinctions as to the creditors, as to the trustee's rights depending upon whether the property was in the possession or control of the bankruptcy court.
In the instance where it was, he was a lien creditor, as to other property, he was a judgment creditor holding an execution duly returned unsatisfied.
This distinction was abandoned in 1950 and Congress revamped the language to give the trustee the status of a lien creditor whether as to all property, whether or not coming into possession or control of the Court.
Trouble the language seemed rather anomalous because it conferred upon the trustee a lien upon property to which he had title under other sections of the Act.
And Congress noted this in the 1952 amendment.
And the 1952 amendment which first brought into the Act this language upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings was expressly designed to eliminate the anomaly of 1950 not to enlarge any previous notion as to the trustee's status.
Now, Congress has more contemporaneously spoken and it is spoken directly to the point to the question raised by Constance v. Harvey.
After the decision in 1954 of Constance v. Harvey, a -- bills were introduced in Congress to correct what was believed to be the error of that Court.
In 1959, the House Committee on the judiciary favorably recorded out H. R. 7242 and this bill and in their report, they specifically considered Constance v. Harvey and referred to it as "statutorily unwarranted" and went on to say "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.
They concluded that the doctrine of Constance v. Harvey presents a very real threat to security transactions, the validity of which have hindered to not been subject to challenge under the Act.
Justice Potter Stewart: Is that the Committee Reports you're reading from?
Mr. Richard D. Rohr: This is the Report of the House Committee on the judiciary favorably reporting out H. R. 7242.
This bill passed Congress, passed both Houses of Congress in the recent short session.
It was vetoed by the President, however, because the bill also contained certain provisions changing the dignity and priority of federal tax liens.
The President's vetoed message is quite explicit on that and the Court -- as the Court may have been aware that Treasury had difficulties with efforts to rationalize this federal tax lien area.
The President, in -- in his vetoed message, says that the bill, which included this amendment to Section 7c, would -- and many other amendment said that it would unduly, unnecessarily prejudice to sound administration of federal tax laws.
I think that was the only reason, perhaps, where this case is now for the Court instead of having been settled by Congress.
So it seems to me that the Sixth Circuit decision is clearly --
Justice William O. Douglas: After the vetoed liaison, the bill wasn't -- the -- the legislation didn't pass over the veto.
Mr. Richard D. Rohr: No, sir --
Justice William O. Douglas: What?
Mr. Richard D. Rohr: -- it -- it --
Justice William O. Douglas: Nothing was done in the -- in subsequent Congress?
Mr. Richard D. Rohr: This was --
Justice William O. Douglas: (Voice Overlap) --
Mr. Richard D. Rohr: -- in the very recent short session after the nominations just last September.
There has been no further --
Justice William O. Douglas: I see.
Mr. Richard D. Rohr: -- congressional return or returning the bill.
But the -- the President's veto, I -- I think, was clearly prompted by the Treasury concern about other candidate.
Justice Felix Frankfurter: Is there any -- was there a Senate Committee Report that made any reference to this?
Mr. Richard D. Rohr: If there was, sir, I'm not aware of it.
The House -- I believe, only the House reported.
It's quite a complete report and it's a unanimous report.
There is not a great deal of partisan or -- or policy's difference here.
Now, it seems to me that the Lewis rule is, thus, clearly in accord with congressional intention, contemporaneously expressed not only in word but by act, and that there is very little doubt as to what Congress has in mind.
It seems to me this might be dispositive -- dispositive of the case here.
It's significant that counsel for the petitioner has made no reference to what Congress might have had in mind in this area.
Now, also, it should be noted that the Lewis rule that the trustee has the status of extending credit of being a creditor at date of bankruptcy also fits with other portions of the Act.
It fits with the general policy of repose you see in the bankruptcy law.
For example, in the Constance case, if Mr. Constance had taken a preference in that case, there would have been no basis for the trustee on to settle it.
If at that time that the transaction successfully challenged had entered into, he had entered into a fraudulent transaction with the bankrupt, the time limit had run.
Here, however, under the Constance theory, the trustee is a (Inaudible) fellow roaming back, unsettling arrangement years prior to bankruptcy.
There is no time limit.
It indicates the wisdom of the notion in Bailey that some time must be fixed here.
Again, the presence of Section 70e in the Act is at least an indication that Congress intends that the very strong rights granted there required a presence of a flesh and blood creditor.
The interpretation placed by Constance on this present Section 70c leaves to give most of the rights to 70e.
Counsel has attempted to dull the force of the extravagant results of -- of Constance by referring us to Moore against Bay.
I think if this case was before the Court again, it might be recognized that Moore against Bay -- Bay has produced some inequities.
Unfortunately, that is completely academic because Moore against Bay has been codified by Congress as part of 70e (2).
So it would be useless to say that its results are extravagant, they are the intention of Congress.
I say, in this area, the results are extravagant and clearly not the intention of Congress.
Now, what purpose does the Constance doctrine advance?
The Lewis interpretation defeats all secret liens.
It accords with the policy of repose in the Act.
It does not put a man, like Constance, who entered into a bona fide sale of his property and took a purchase-money mortgage back, it does not put him in a worse position than if he were conspiring to defraud the creditors the bankrupt it fits.
All things consist under the Lewis interpretation.
Now, the Constance theory is a rather interesting one with all due respect to the Second Circuit.
I think it's fair to say and -- and from an examination of the briefs and records in the Second Circuit and the certain brief filed by Constance here that the problem they were considering was not fully argued by counsel.
And I think it's also fair to say that the opinion in Constance is not completely satisfying in exposing what the real rationale of the Court was.
The Court in Constance cited one case, Hoffman v. Cream-O-Products.
This is clearly a Lewis case in the sense that in Hoffman, the conditional sale contract has never been recorded prior the date of bankruptcy.
It offered no support to the Constance theory.
But what's they seem to consider is this language and they say that since a creditor could have obtained a lien and they seem to be mixing up the property defining language in 70c with the rights fixing language at the end of 70c.
Conti against Volper which is the second decision by the Second Circuit in 1956 is one paragraph and it says, it seems to admit the results produced are inequitable and then it again recounts this language that since a creditor, this is property upon which a creditor could have obtained a lien, ergo, the trustee has priority.
I think that the Constance doctrine, as developed by the Second Circuit, is based on a literal reading of the statute and in contrast, petitioner has developed a super structure for it in these terms, terms which the Court in the Second Circuit has never announced.
The -- the theory is this, "We have an ideal creditor status."
He refers to In re Calhoun.
The trustee at date of bankruptcy is in the most favored class of creditors.
The unfortunate thing about this theory is that we are not limited to logic chopping in trying to reach a result here.
It does not accord with congressional intent.
It has no warrant in the case law and it produces a serious amount of mischief.
First of all, consider the statute of limitations problem under the ideal creditor theory of the Constance theory.
Where does this thing end?
At what point can a court restrain the unsettling of relationships before bankruptcy?
I will give you this case under Michigan law as an example.
It is a case in which I am involved there in the bankruptcy court.
The bank took a mortgage and a car many months before bankruptcy.
The bankrupt at that time, he defaulted in his payments.
The car was repossessed and sold over five months before bankruptcy.
Normally, the transaction would be closed then.
The bank has disposed of the car and has recovered the proceeds.
Chap (ph) filed in bankruptcy as I say over five months after this occurred.
The trustee is suing us for the proceeds of the sale of that car.
Now, this is relatively current time before bankruptcy but it could be four years before bankruptcy.
Under Michigan law, if Constance were applied in 1955, if the bank had entered into this chattel mortgage transaction and if 1956, it had sold the car, repossessed and sold the car, I see no logical limit.
There is nothing self limiting about the Constance doctrine which would prevent a trustee in 1960 from proceeding to unsettle this relationship.
Again, we have bulk sales and bulk mortgage statutes in our State as to many States.
These statutes require notices to actual creditors.
If we can posit the existence of -- of an interim creditor at any convenient time in the past, then we have a case where our bulk sales law which requires notice to creditors is not satisfied if the seller goes into bankruptcy five years later for reasons entirely extraneous to the sale or the purpose and policy of the Act.
The -- the mischief indicated here is just based upon some examples in Michigan.
California has this problem very seriously.
Many other States do.
And the whole concept of an interim creditor at large roaming an undefined period prior to bankruptcy is difficult to see what limits might be drawn by the Court.
Now, counsel for petitioner has reviewed the case law attempting defined a pedigree for the Constance notion, prior to Constance.
A great number of cases have been cited in both briefs and I think we have both (Inaudible) the briefs.
There were many more cases below.
But to cut through these cases, I think a fair review of the history of them prior to Constance would show, and this applies In re Calhoun upon which he so greatly relies, that in all of these cases, the same result obtains if we conceive of the trustee as extending credit at the date of bankruptcy, which by the way was Professor McLachlan suggestion in Harvard as -- and was the language used by Congress in the recent amendment that he is the creditor extending credit at the date of bankruptcy.
Most of the cases --
Justice Felix Frankfurter: (Voice Overlap) --
Mr. Richard D. Rohr: Pardon.
Justice Felix Frankfurter: Have you -- have you -- your brief with reference to that article by Professor McLachlan?
Mr. Richard D. Rohr: No, sir.
Justice Felix Frankfurter: Because I -- it was -- I had read it at a time but forgot where it was.
Mr. Richard D. Rohr: I -- I -- to keep the brief short, I referred to a Michigan Law Review which collects almost everything and I'm sure the citation is in there, sir.
Justice Felix Frankfurter: He used some strong language.
Mr. Richard D. Rohr: He does.
Justice Felix Frankfurter: (Inaudible) use some strong language.
Mr. Richard D. Rohr: So most cases may be harmonized with the view as the Calhoun case.
And there, the conditional sales contract was never recorded.
So it -- it offers no comfort here.
And the other cases are those -- and we have one in our District where the Court made some uncritical references to Section 70c but, in each of those cases, there were some existing flesh and blood creditors, there was a 70e basis to reach the result.
A good example of this is in the Ninth Circuit Miller v. Sellmeyer (ph) which was referred to by counsel for the petitioner.
This decision, the Court is somewhat critique about it but I checked the briefs and records here and it seems quite clear that there were $9000 of credit due by the bankrupt to actual creditors at date of bankruptcy and the entire case turns upon Moore against Bay.
So, in reviewing the case law and -- and the many comments thereon, it seems to me that they yield to both of these rules.
They are either a rule where an extension of credit at date of bankruptcy admits the result from the Court or a Section 70e case with some uncritical language to references to Section 70c.
To summarize, it occurs to me that a careful reading of the statute and a careful review of its history indicate a consistent congressional intent to fix this right, this creditor status at the date of bankruptcy.
You see, the difficulties with the ideal notion of the rummaging, roaming, (Inaudible) creditor of the trustee, it -- it has no limit and it ignores the fact that when Congress fixed the status, they admit -- they fixed a lien creditors status at date of bankruptcy, the term "creditor" is just a component of that status and why that should be broken out of the molecular structure in roaming at large.
Why that somehow has no fixed date has never been explained.
So, it does accord with this congressional intent.
With the congressional language, it accords to the case law and above all, it permits similar pose in arrangements long prior to bankruptcy.
It permits a consistent interpretation with other portions of the Bankruptcy Act and it permits some planning in security law which is most important for the benefit of all members of our society.
This case, as the Court knows, involves a 1953 automobile.
I wouldn't be here if it didn't also involved hundreds of millions of dollars where the consumer paper in Michigan and all our commercial loans have been troubled by this problem.
Prior to the ameliorating act in which was effective this March, counsel in Michigan were hard put to give an opinion that any chattel mortgage was valid.
It seems to me that these consequences alone dictate a -- a serious review of Constance in terms of its rationale and resolved and its rejection by this Court.
Chief Justice Earl Warren: Mr. Hertzberg.
Rebuttal of Stuart E. Hertzberg
Mr. Stuart E. Hertzberg: I have no rebuttal before (Inaudible).
Chief Justice Earl Warren: Would you mind just to responding a moment to -- to Mr. -- counsel's statement that there's no time limitation on the doctrine of Constance.
What -- what is your brief in regard to that?
Mr. Stuart E. Hertzberg: Certainly, if -- if the Court please, certainly, the time limitation would be the individual statute of limitations of the various States.
And added to this is this factor that chattel mortgages and conditional sales contracts are short term securities.
So as a practical matter, they would be governed by the duration of the security device itself.
And I -- I don't know if that thoroughly answers the question but I would say we clearly be covered by, I think, the statute of limitations of the State.
Also, as to bulk sales contracts and bulk mortgages, the difference between the cases that we have cited here today and respondents have cited and the bulk sales cases are that if you properly complied with the Bulk Sales Act by giving notice to all creditors, there has been a compliance with the Act which is all that is required under the Act.
Whereas, in every one of this chattel mortgage and conditional sales contracts situations that we have cited, there has been a failure in some way to comply with the Act.
And I think that's a definite distinction between the two types of cases in Constance versus Harvey could not possibly apply to a bulk sales or a bulk mortgage situation where a list of creditors has been presented to a purchaser and notices has been properly sent out in compliance with the Act.
Justice Felix Frankfurter: What do you say to the -- about the abortive legislature passage of the Act of the Congress?
Mr. Stuart E. Hertzberg: Well, my comment is this, Justice Frankfurter.
They criticized Moore versus Bay as being inequitable and erroneous.
Tremendous criticism followed the decision of the Supreme Court of the United States in Corn Exchange versus Klauder where they said that this decision wouldn't destroy the entire non-notification accounts receivable financing in this country.
Justice Felix Frankfurter: You mean in District Court, they -- they made all these criticisms?
Mr. Stuart E. Hertzberg: No, I'm -- I'm saying that the --
Justice Felix Frankfurter: (Voice Overlap) --
Mr. Stuart E. Hertzberg: Pardon?
Justice Felix Frankfurter: You mean at the time Moore --
Mr. Stuart E. Hertzberg: At the time of the various decisions --
Justice Felix Frankfurter: Yes.
Mr. Stuart E. Hertzberg: -- these charges were made.
Justice Felix Frankfurter: But in those -- as to Moore and Bay the legislation actually passed --
Mr. Stuart E. Hertzberg: In Moore versus Bay, legislation was not passed until eight years after the decision.
In Corn Exchange versus Klauder, in spite of the criticism, the Supreme Court ruled that this was a clear construction of Section 60 of the Bankruptcy Act and it would be up to Congress to amend Section 60 which Congress then did immediately following the decision in Corn Exchange versus Klauder.
And I say this, that the decision in Constance versus Harvey is not dependent upon the 1952 amendment because Constance versus Harvey has been the law since 1910.
And therefore, congressional intent in 1959 and congressional intent in 1952 certainly cannot apply as to what Congress had in mind in 1910 and the 1938 at the time of the amendment of the Chandler Act.
Justice Felix Frankfurter: I -- I don't think that's the significant of what I understood to be the legislative history of the last session of Congress, significant that I find -- I'm not saying it's controlling because that's -- there's no thing that raises a great question as to what significance you attached to the latest congressional attitude that does not actually take the form of a measure on the statute.
But if (Inaudible) here by right to understood, I know nothing more than what I've heard.
Then here, Congress actually pass legislation undoing the result no matter what the basis of -- for it was of the Constance case, is that right?
Mr. Stuart E. Hertzberg: That is correct.
After six years following the Constance case.
Justice Felix Frankfurter: Well, all I'm saying is that here, we've got a rather unusual situation of both on the Congress agreeing on a bill which spelled by the President's veto unrelated to that separate measure.
I just wonder to what kind of guidance you would suggest as to -- of the -- what significance should be attached by -- by a court assuming -- assuming criticism I think Constance was right to decide it.
I can assure you I have no such view because I don't know enough about this part.
Mr. Stuart E. Hertzberg: Then it is --
Justice Felix Frankfurter: But suppose I start with that, what -- to what extent should that be displaced at that agreement with the opinion because you got actually an enactment so it fail, as I said, because of the President's veto (Inaudible) unrelated grounds.
Mr. Stuart E. Hertzberg: My personal opinion, Justice Frankfurter, would be the Court should take the same position that it took in Corn Exchange versus Klauder where it was anticipated that the Registration Acts or Congress was going to immediately amend after the results of that decision anyway.
This is a judicial construction of a section of the Bankruptcy Act.
And as a result, if Congress sees fit at a future date to amend this particular section after the results of the decision of the Supreme Court, then that is for Congress of that particular period of time.
But I don't think it should affect a judicial construction of a section of the Act.
Justice Felix Frankfurter: But we have to make a -- we have to make an originating construction so far as this Court is concerned --
Mr. Stuart E. Hertzberg: That is correct.
Justice Felix Frankfurter: -- is it not?
Because this question hasn't been yield the fact that they put.
Mr. Stuart E. Hertzberg: That is right.
Justice Felix Frankfurter: So, it didn't merely saying in the First or the Second Circuit because whenever we make privately take (Inaudible) between the Second and the Sixth, can we?
Mr. Stuart E. Hertzberg: No, Your Honor.
But I say it's clearly a construction for the Supreme Court if Congress wants to amend the Act later.
That is the prerogative of the Congress.
Chief Justice Earl Warren: Very Well.