after the filing of the petition, the creditors are powerless to pursue and enforce their rights, the trustee is vested with their rights of action with respect to all property of the bankrupt transferred or incumbered by him in fraud of his creditors.122 This subject is further discussed under section 70, post. A trustee is not, however, an innocent purchaser or a lien creditor, but, generally speaking, he takes the bankrupt's property subject to such claims and with such rights as the bankrupt himself had,123 subject, of course, to the powers conferred upon trustees by the amendment of § 47-a (2) by the act of 1910. Where because of the failure to record a mortgage certain equities exist in the property covered by such mortgage in favor of creditors, such equities follow the property into the hands of the trustee.124 Where a bankrupt borrowed money upon collaterals in excess of the debt, the trustee may pay the debt out of the funds of the estate and become subrogated to the rights of the creditor, and upon a sale of the collaterals divide the surplus among the general creditors.125 Other cases in point are referred to in the foot-note.1 b. Is the trustee a "judgment creditor?"-(1) RULE UNDER FORMER ACT.—The majority of cases under the law of 1867 held that,

122. In re Rodgers (C. C. A., 7th Cir.), 11 Am. B. R. 79, 93, 125 Fed. 169, revd. on other grounds, 198 U. S. 280, 14 Am. B. R. 102, 49 L. Ed. 1051, 25 Sup. Ct. 693; Bush v. Export Storage Co. (C. C., Tenn.), 14 Am. B. R. 138, 136 Fed. 918; Mitchell v. Mitchell (D. C., N. C.), 17 Am. B. R. 382, 389, 147 Fed. 280; In re Bement (C. C. A., 7th Cir.), 22 Am. B. R. 616, 172 Fed. 98; In re Burke (D. C., Ga.), 22 Am. B. R. 69, 168 Fed. 994; Reardon v. Rock Island Plow Co. (C. C. A., 7th Cir.), 22 Am. B. R. 26, 168 Fed. 654; Barrett v. Kaigler (Ala. Sup. Ct.), 40 Am. B. R. 161, 76 So. 320; Stewart v. Asbury (Mo. Ct. of App.), 41 Am. B. R. 387, 201 S. W. 949.

123. York Mfg. Co. v. Cassell, 201 U. S. 344, 15 Am. B. R. 633, 50 L. Ed. 782, 26 Sup. Ct. 481; In re Fish Bros. Wagon Co. (C. C. A., 8th Cir.), 21 Am. B. R. 149, 151, 164 Fed. 553; Foerstner v. Citizens' Savings & Trust Co. (C. C. A., 6th Cir.), 26 Am. B. R. 377, 186 Fed. 1; In re Charles Town Light & Power Co. (D. C., W. Va.), 29 Am. B. R. 721, 199 Fed. 846; Matter of

126

Roseboom (D. C., N. Y.), 42 Am.
B. R. 437, 253 Fed. 136.

124. In re Wade (D. C., Mo.), 26 Am. B. R. 169, 185 Fed. 664.

125. Matter of Kessler (C. C. A., 2d Cir.), 37 Am. B. R. 325, 186 Fed. 127.

126. In re Kenney (D. C., N. Y.), 3 Am. B. R. 353, 97 Fed. 554; In re Boston (D. C., Neb.), 3 Am. B. R. 388, 98 Fed. 587; In re Howland (D. C., N. Y.), 6 Am. B. R. 495, 109 Fed. 869; Barnes Mfg. Co. v. Norden (Sup. Ct., N. J.), 7 Am. B. R. 553, 67 N. J. Law 493; Patten v. Carley, 8 Am. B. R. 482, 69 N. Y. App. Div. 423, 74 N. Y. Supp. 993; In re Beede (D. C., N. Y.), 14 Am. B. R. 697, 138 Fed. 441; Receivers of Virginia Iron, etc., Co. v. Staake (C. C. A., 4th Cir.), 13 Am. B. R. 281, 133 Fed. 717; Kobře Assets Corp. v. Baker (N. Y., Sup. Ct.), 39 Am. B. R. 276, 178 App. Div. 62; Robertson v. Schlotzhauer (C. C. A., 7th Cir.), 40 Am. B. R. 237, 243 Fed. 342; Matter of American Paper Co. (D. C., N. J.), 42 Am. B. R. 716, 255 Fed. 121; Matter of Tietje (D. C., N. Y.), 44 Am. B. R. 638, 263 Fed. 917.

since the bankruptcy arrests proceedings in the State courts, the assignee (trustee), as the representative of the whole body of creditors, could bring any of that class of equitable actions where the existence of a judgment and execution returned unsatisfied are necessary elements; i. e., that he was in effect, if not in name, a judgment creditor.1

127

(2) RULE UNDER PRESENT ACT.— Section 47-a (2), as amended by the act of 1910, has substantially modified the rules declared as to the power of a trustee to take advantage of the privileges accorded a judgment creditor, as against a lien which is invalid for want of record. The provisions of that subsection, as so amended, should be construed with subsection b of this section. It is there provided that the trustee "as to all property not in the custody of the bankruptcy court shall be deemed vested with all the rights, remedies and powers of a judgment creditor holding an execution duly returned unsatisfied." The purpose and effect of this amendment has already been considered.128 This amendment effectually disposes of any doubt which may have existed as to the right of a trustee to proceed as a judgment creditor against conveyances invalid for failure to record or file, or because of fraud as against creditors.129 Some of the cases arising under the present act before the amendment of 1910 just mentioned are cited below.130

127. Barker v. Barker's Assignee, Fed. Cas. 986; Beecher v. Clark, Fed. Cas. 1,223; In re Duncan, Fed. Cas. 4,131; In re Metzger, Fed. Cas. 9,510. Contra: In re Collins, Fed. Cas. 3,007; Cook v. Whipple, 55 N. Y. 150. Compare Platt v. Stewart, Fed. Cas. 11,200, as revd. as Stewart v. Platt, 101 U. S. 731, 25 L. Ed. 954.

128. See discussion under section 47 of this work.

129. In re Bazemore (D. C., Ala.), 26 Am. B. R. 494, 189 Fed. 236; In re Calhoun Supply Co. (D. C., Ala.), 26 Am. B. R. 528, 189 Fed. 537; In re Buchner (D. C., Ill.), 29 Am. B. R. 179, 202 Fed. 979; In re Geiver (D. C., So. Dak.), 28 Am. B. R. 413, 193 Fed. 128; Matter of Fitzhugh Hall Amusement Co. (D. C., N. Y.), 36 Am. B. R. 289, 228 Fed. 169, affd. 36 Am. B. R. 493, 230 Fed. 811; Matter of Zeis (D. C., N. Y.), 36 Am. B. R. 581, 229 Fed.

472, revd. on other grounds, 40 Am. B. R. 104, 245 Fed, 737. Lake View State Bank v. Jones (C. C. A., 7th Cir.), 40 Am. B. R. 148, 242 Fed. 821; National Bank of Bakersfield v. Moore (C. C. A., 9th Cir.), 41 Am. B. R. 409, 247 Fed. 913; Matter of McCormick (D. C., Fla.), 47 Am. B. R. 235, 279 Fed. 916.

130. In re McNamara, 2 N. B. N. Rep. 341; In re Harrison, 2 N. B. N. Rep. 541; In re New York Economical Printing Co. (C. C. A., 2d Cir.), 6 Am. B. R. 615, 110 Fed. 514, disapproved in Skilton v. Codington (N. Y. Ct. of App.), 15 Am. B. R. 810, 185 N. Y. 80, 77 N. E. 790; In re Schmitt (D. C., Ohio), 6 Am. B. R. 150, 109 Fed. 267, affd. as In re Shirley (C. C. A., 6th Cir.), 7 Am. B. R. 299, 112 Fed. 301; First Nat. Bank v. Staake, 202 U. S. 141, 15 Am. B. R. 639, 50 L. Ed. 967, 26 Sup. Ct. 580. See Corey v.

IV. VALID LIENS

a. In general.- Subsection d is also declaratory of the law. It is intended to preserve liens created in good faith, "and not in contemplation of a fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice." It is the converse of subsections c, e and f, and is emphasized by subsection b, the saving clause in the body of subsection e and the proviso clause at the end of subsection f. It is much broader than the corresponding clauses of the act of 1867, which protected liens by mortgage only.131 Cancellation of the lien from record may estop the holder from securing the sum represented as against the trustee even though there was no consideration for the cancellation.132

b. Good faith of transaction.-"Good faith, 133 and "not in contemplation of or in fraud upon the bankruptcy act," are of the essence of this subsection without which the liens therein mentioned cannot be upheld even though there be a present consideration for them.134 For instance, where an assignment of accounts due a corpo

Blackwell Lumber Co. (Idaho Sup. Ct.), 31 Am. B. R. 135, 135 Pac. 742. 131. Act of 1867, § 14, R. S., § 5052. 132. Matter of Hitchcock (D. C., Ga.), 48 Am. B. R. 512, 283 Fed. 447. 133. In re Soudans Mfg. Co. (C. C. A., 7th Cir.), 8 Am. B. R. 45, 113 Fed. 804; Matter of Baar (C. C. A., 2d Cir.), 32 Am. B. R. 465, 213 Fed. 628.

Caption of mortgage wrong.-A mortgage executed by a bankrupt in good faith, attested in compliance with the law of Georgia, and, through a mistake, bearing a caption for the wrong county, but recorded in the proper county is valid and entitles the mortgagee to priority of payment. Matter of Williams (D. C., Ga.) 35 Am. B. R. 459, 224 Fed. 984.

Protection of liens.- It is the intention of the bankruptcy act to protect all liens, whether arising by contract or by statute, except only such as are expressly declared annulled or invalidated. It is not intended to avoid a lien secured by the act of labor and preserved and enforced by

legal proceedings especially where such lien attached more than eight months before proceedings in bankruptcy were commenced, and the action to foreclose the lien was commenced long prior thereto. Tube City Mining & Milling Co. v. Otterson (Ariz. Sup. Ct.), 35 Am. B. R. 500, 146 Pac. 203. See also Border Nat. Bank v. Coupland (C. C. A., 5th Cir.), 39 Am. B. R. 165, 240 Fed. 355.

134. Powell v. Gate City Bank (C. C. A., 8th Cir.), 24 Am. B. R. 316, 178 Fed. 609; Hardcastle V. National Clothing Co. (Tenn. Sup. Ct.), 38 Am. B. R. 719, 191 S. W. 524; Matter of Stone (Ref., Mass.), 37 Am. B. R. 138; Lott v. Salsbury (C. C. A., 4th Cir.), 37 Am. B. R. 796, 237 Fed. 191; Mat-` ter of Baar (C. C. A., 2d Cir.), 32 Am. B. R. 465, 213 Fed. 628.

Mortgage within four months' period to secure existing debt; present consideration. A corporation, subsequently bankrupt, borrowed money from a bank in which its officers held office. The amount of the indebted

ration is made by the corporation to its president to secure moneys previously advanced by him to the corporation, he knowing at the time that the corporation was in a precarious condition, there is an absence of good faith which will render the assignment ineffectual as a lien.135

c. Consideration. Want of present consideration or failure to record where record is necessary to impart notice are important. These are often elements of proof on the question of good faith.136 The amendment of 1910 inserted the words "to the extent of such present consideration only," thus preserving the security which a creditor has obtained only so far as the same is based upon the original consideration.137 A mortgage given to secure indorsers upon the bankrupt's notes is for a present consideration under this clause, since such indorsers became creditors contingently at the time of their indorsement.138 As will soon be seen, bona fides is not material

ness was found to be largely in excess of that which, by the statutes of the State, the bank might loan to one corporation. Individual notes were accepted by the bank in place of the corporation's obligations. These being criticised by the bank examiner, the bank's cashier thereafter individually indorsed such notes, and thus became their guarantor, the consideration being founded on the abandonment of complaints on the part of the examiner. Thereafter these notes were taken up by the cashier who assumed the indebtedness of the corporation to the bank and took the note of the corporation to himself, secured by a mortgage which he did not place on record until shortly before the bankruptcy. The officers of the corporation and the cashier knew that it was insolvent.

It became a bankrupt within four months from the giving of the mortgage. Held, that the cashier by indorsing said notes became the creditor of the corporation, and that the unrecorded mortgage was not given by the corporation nor accepted by him in good faith for a present consideration, under 67-d of the bankruptcy act, but was a voidable preference under

860-b thereof. McAtee v. Shade (C. C. A., 8th Cir.), 26 Am. B. R. 151, 185 Fed. 442.

135. In re Richards (Ref., D. C., Sup. Ct.), 28 Am. B. R. 636.

136. Compare subs. 2; In re Soudans Mfg. Co. (C. C. A., 7th Cir.), 8 Am. B. R. 45, 113 Fed. 804; In re Durham (D. C., Md.), 8 Am. B. R. 115, .114 Fed. 750.

137. In re Foster (D. C., Vt.), 25 Am. B. R. 96, 181 Fed. 703.

Present consideration covers interest and principal of note secured by mortgage but not an attorney's fee stipulated for in the note. Matter of Mobile Chair Mfg. Co. (D. C., Ala.), 40 Am. B. R. 134, 245 Fed. 211.

Assignment of fire insurance policy.

Where a fire insurance policy on a stock in trade is made payable to the vendor as his interest may appear in pursuance of the contract of sale, the assignment of the policy is for a present consideration and comes within the protection of this section. Sullivan v. Meyer (Tenn. Sup. Ct.), 39 Am. B. R. 314, 193 S. W. 124.

138. In re Farmers' Supply Co. (D. C., Ohio), 22 Am. B. R. 460, 170 Fed. 502.

where the lien is through legal proceedings. The universal recognition of the rule of law here phrased into the statute results in cases construing it being rare, perhaps unnecessary.

d. Jurisdiction to determine validity of lien. One who, prior to the filing of a petition in bankruptcy, has acquired by other means than the legal proceedings specified in § 67, c and f, a lien upon the property of a party subsequently adjudged bankrupt, is an adverse claimant, and is entitled to the rights and privileges of such claimant, to the same extent as one who has acquired a claim of title to property from such a party.139 A bankruptcy court has no authority or jurisdiction in the absence of lawful possession of the property by its officers to draw to itself and determine in a summary proceeding the adverse claim of one claiming for his own benefit a lien upon or title to property of the bankrupt which was created, or is claimed to have been created, otherwise than by the legal proceeding specified in subsections c and ƒ of this section prior to the filing of the petition in bankruptcy.140 A lienholder may establish his lien in any court having jurisdiction,141 although if the property is in possession of the court the bankruptcy court has jurisdiction, and under certain conditions may proceed summarily as to such property.142

e. Miscellaneous valid liens.-(1) IN GENERAL.- The rule seems to be that where the lien does not contravene the bankruptcy law, and is recognized by the State law, it will be preserved.143 A lien created

139. Set under section 23, ante, subtitle "Possession by lienor."

140. See under section 23, ante, subtitle "Summary jurisdiction of plenary suit."

141. Matter of Hosmer (D. C., Ia.), 37 Am. B. R. 464, 233 Fed. 318; Matter of North Star Ice & Coal Co. (D. C., Tenn.), 42 Am. B. R. 76, 252 Fed. 301, citing Collier on Bankruptcy (11th ed.), 1051.

Waiver of right to proceed in State court.- Nelson Supply Co. v. Leary (Utah Sup. Ct.), 39 Am. B. R. 755, 164 Pac. 1047.

142. See discussion under § 23-b, ante, heading "Summary jurisdiction of plenary suit."

143. Davis v. Billings (Pa. Sup. Ct.), 38 Am. B. R. 957, 99 Atl. 163; Kemp Lumber Co. v. Howard (C. C. A., 8th Cir.), 38 Am. B. R. 608, 237 Fed. 574; Matter of Mossler Co. (C.

C. A., 7th Cir.), 38 Am. B. R. 604; Preetorius v. Anderson (C. C. A., 5th Cir.), 38 Am. B. R. 93; Matter of Cutler & John (D. C., No. Car.), 36 Am. B. R. 420, 228 Fed. 771; Cullen v. Armstrong (D. C., Md.), 33 Am. B. R. 735, 209 Fed. 704; In re Lowensohn (D. C., N. Y.), 4 Am. B. R. 79, 100 Fed. 776; In re Alverson Bros. (Ref., So. Car.), 5 Am. B. R. 855; In re Byrne (D. C., Iowa), 3 Am. B. R. 268, 97 Fed. 762; In re Gerry (D. C., Pa.), 7 Am. B. R. 459, 461, 112 Fed. 957, 959; In re West Norfolk Lumber Co. (D. C., Va.), 7 Am. B. R. 648, 112 Fed. 759; McNair v. McIntyre (C. C. A., 4th Cir.), 7 Am. B. R. 638, 113 Fed. 113; Evans v. Rounsaville (Sup. Ct., Ga.), 8 Am. B. R. 236, 115 Ga. 684; In re Hersey (D. C., Iowa), 22 Am. B. R. 863, 171 Fed. 998; Harvey v. Smith (Sup. Ct., Mass.), 7 Am. B.