Petition — Parker v. Klochko Equipment Rental Co.

Supreme Court brief1979

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Text

Ot he UJ

MAY 14 1979

MICHAEL RUDAK, JR., CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1978

——-

98-1701

No. ——

———— @ ——_—

ROBERT PARKER, Trustee for

OLYMPIA CONSTRUCTION CO., Bankrupt,

Petitioner,

vs.

KLOCHKO EQUIPMENT RENTAL CO., INC.,

MARIO TRUCKING COMPANY, PRICE

BROTHERS COMPANY, DOUG SCHROEDER, INC.,

Respondents.

——_e——_

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

CROSS, WROCK, MILLER & VIESON

By: WILLIAM A. COUGHLIN, JR.

ANDREW A. PATERSON

CRAIG A. ANDERSON

400 Reraissance Center

Suite 1900

Detroit, Michigan 48243

Phone: (313) 259-1144

Counsel for Petitioner

Interstate Brief & Record Co., Wurlitzer Bldg., 1509 Broadway, Detroit, MI 48226

962-8745 962-8746

TABLE OF CONTENTS

Nee een ewase ace

ee a vik p's ankeescevsess

Statement of Jurisdiction

OES INGE Te

Constitutional and Statutory Provisions and Rules

OMIT Ca Wale aces says cccaceceesecsses

Tg OSS, be

The Ruling Below Erroneously Gives a State

Statute Supremacy Over the Distribution

Scheme of the Bankruptcy Act .............

The Ruling Below Does Not Follow State

Law Which Would Hold the Michigan

Statute of No Effect in the Present Case ...

The Ruling Below Permits One Panel of the

Circuit to Overrule Another Panel of That

Circuit and Thus Conflicts with the Fifth

and Third Circuits’ Interpretation of Rule

35(a) of the Federal Rules of Appellate

Procedure Requiring En Banc Consideration

to Overrule a Previous Decision ...........

ES ge ee

Page

Appendix A:

Order of the Court of Appeals Denying

Rehearing En Banc (February 13, 1979) ....... Al

Opinion of the Court of Appeals Reversing the

Judgment of the District Court (January 11,

BRACES, argue tire testi MP eae naa ine ge A2

Opinion of the Court of Appeals in Selby v. Ford

Motor Company, et al, (Companion case,

PROS ER TIT OP. ack 5 ole vanes Va be kkas beeen Al3

Opinion of the District Court affirming the

decisions of the Bankruptcy Court (July 28,

EPRI Pe ART INN RE LPe irre a A27_

Opinion and Order of the Bankruptcy Court in

Parker v Klochko Equipment Rental Co., Inc.

IEE Sy PF OR Bin ssn e Shain ea des epwadeas A32

Judgment Order of the Bankruptcy Court in

Parker v Mario Trucking Co. (June 24, 1975) .. A47

Judgment Order of the Bankruptcy Court in

Parke v Price Brothers Company (September

Ue DOE Ria Su Ks MERE ANS CRE eee we Wane EE A48

Judgment Order of the Bankruptcy Court in

Parker v Doug Schroeder, Inc. (July 31, 1975) .. A50

Appendix B:

8 Re Gere ee ee peer aria en ris Bl

Fe Rs RED cheb edna th nian n de heh aken Chad Wo B4

ili

TABLE OF AUTHORITIES

Page

Federal Cases:

Chicago Board of Trade v. Johnson, 264 US 1

Rs A rate ris ia ky te alee cen hoe ae ee 13

In re Crosstown Motors, Inc., 272 F2d 224 (7th

Se SON lok hoy whew he eis eatin > cae 10

In re Edward Misch Co’s Estate, 34 F Supp 781

EE STD gis Te liedenet meee caehba nhs 8

Elliot v. Bumb, 356 F2d 749 (9th Cir 1966) ....... 10

Erie R Co. v. Tompkins, 304 US 64 (1938) ....... 13

General Insurance Company v. Lamar Corp., 482

oe ee ea? er ene Pe passim

International Shoe Co. vy. Pinkus, 278 US 261

COPED = Viea RAP SG Seah ee tR ARE ae Ase RONeAeS 9,10

Miller v. San Sebastian Gold Mines, Inc., 540 F2d

Ser Re Sail SET. SF ake ha eben cikead cae’ oe |

N W Day Supply Company v. Valenti, 343 F2d

FE LO EE IRS 2 nin > nic Obs Kip ee ee wr 10

Perez v. Campbell, 402 US 637 (1971) ......... 9,10

The R. C. Mahon Company v. Hallis, 112 F2d

Ws TN SE PUD 2) Secs 0 GR ks 8,11,13

Selby v. Ford Motor Company, 590 F2d 642 (6th

Ee ED aA ae CANE Sea ee eeas Chere passim

United States v. Lewis, 475 F2d 571 (5th Cir 1973) 14

Page

State Cases:

B. F. Farnell Co. v. Monahan, 377 Mich 552, 141

NW2a 58 (1966)... «i ciaccoes cat tose eee 12

Club Holding Co. v. Flint Citizens Loan &

Investment Co., 272 Mich 66, 261 NW 133

(1935) «2. os evens scciteu shaw eee eeeee passim

National Bank of Detroit v. Eames and Brown,

396 Mich 611, 242 NW2d 412 (1976)......... 11,12

United States Constitution:

U.S. Conet. Ast 5, GB Gi @ .. wn .dissesweeeeeeees 3

Federal Statutes and Rules:

11 USC §96(b)....... snebdkep tien eee 4

11 USC $208 ....0s.05s0 knee 4

11 USC 6190la) ...... cde epee eee 4

Federal Rules of Appellate Procedure, Rule

ISla) . ... va0'ns sie we en que nee 5,13,14,15

United States Court of Appeals for the 3rd

Circuit, Internal Operating Procedures, 63

F.R.D. 319 (1976) .....3. tse 14

State Statutes:

MCL $570.151 (1966)... ...<.sccacenun een ene 5

Other Authorities:

37 ALR Fed 276 «so. cccuaccateetanl 14

IN THE

Supreme Court of the United States

OCTOBER TERM, 1978

ROBERT PARKER, Trustee for

OLYMPIA CONSTRUCTION CO., Bankrupt,

Petitioner,

vs.

KLOCHKO EQUIPMENT RENTAL CO., INC.,

MARIO TRUCKING COMPANY, PRICE

BROTHERS COMPANY, DOUG SCHROEDER, INC.,

Respondents.

——_o——_

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Petitioner, ROBERT E. PARKER, Trustee in

Bankruptcy for Olympia Construction Company, prays

that a writ of certiorari issue to the United States Court

of Appeals for the Sixth Circuit to review the decision

entered January 11, 1979 in Case No. 76-1711, entitled

Robert E. Parker, Trustee for Olympia Construction Co.,

Bankrupt, Petitioner v Klochko Equipment Rental Co.,

Inc., Mario Trucking Company, Price Brothers

Company, Doug Schroeder, Inc., Respondents, and the

order of that court denying Petitioner’s Petition for

Rehearing.

OPINIONS BELOW

The order of the Court of Appeals denying rehearing

is unreported, and is printed in the attached Appendix

A at p. Al.

The opinion of the Court of Appeals reversing the

Bankruptcy Court is reported at 590 F2d 649, and is

printed in the attached Appendix A at p. A2.

The opinion of the Court of Appeals in Selby v Ford

Motor Co., a companion case, is reported at 590 F2d 642,

«nd is printed in the attached Appendix A at p. A13.

The opinion of the district court, affirming the

decision of the Bankruptcy Court was delivered from

the bench, and is printed from the transcript of the

session in Appendix A at p. A27.

The opinion and judgment orders of the Bankruptcy

Court are unreported, and are printed in Appendix A at

p. A32.

STATEMENT OF JURISDICTION

The opinion of the Court of Appeals was entered on

January 11, 1979. On February 13, 1979 the order of the

Court of Appeals denying petitioner’s petition for

rehearing en banc was entered. That order is printed in

Appendix A, p. Al. This petition is, therefore, timely.

This Court’s jurisdiction is invoked under 28 USC

§1254(1) and Rule 19 of the Rules of this court.

QUESTIONS PRESENTED

May the Michigan Builders Trust Fund Act be

interpreted by the Court of Appeals to supersede the

distributional scheme of the Bankruptcy Act by

permitting effective preferences'to certain creditors?

May the Court of Appeals refuse to follow a state

Supreme Court’s interpretation of state law contrary to

Erie R. Co. v Tompkins?

Is en banc consideration required under Rule 35(a) of

the Federal Rules of Appellate Procedure to overrule

previous decisions of the same Circuit Court of Appeals

as the 3rd and 5th Circuit have indicated, or may one

panel of the circuit overrule other panels of the circuit

as the Court of Appeals for the Sixth Circuit has

indicated?

CONSTITUTIONAL AND STATUTORY

PROVISIONS AND RULES INVOLVED

U.S. Const., art I, §8, cl. 4:

“The Congress shall have Power

+ + *

To establish an uniform Rule of Natural-

ization, and uniform Laws on the subject of

Bankruptcies throughout the United States .

11 USC §96(b):

“Any such preference may be avoided by the

trustee if the creditor receiving it or to be

benefited thereby or his agent acting with

reference thereto has, at the time when the

transfer is made, reasonable cause to believe that

the debtor is irsolvent. Where the preference is

voidable, the trustee may recover the property

or, if it has been converted, its value from any

perscn who has received or converted such

property, except a bona-fide purchaser from or

lienor of the debtor's transferee for a present fair

equivalent value: Provided, however, That

where such purchaser or lienor has given less

than such value, he shall nevertheless have a lien

upon such property, but only to the extent of the

consideration actually given by him. Where a

preference by way of lien or security title is

voidable, the court may on due notice order such

lien or title to be preserved for the benefit of the

estate, in which event such lien or title shall pass

to the trustee. For the purpose of any recovery or

avoidance under this section, where plenary

proceedings are necessary, any State court which

would have had jurisdiction if bankruptcy had

not intervened and any court of bankruptcy shall

have concurrent jurisdiction.”

11 USC §104:

(See Appendix B for full text of 11 USC §104).

11 USC §110(a):

(See Appendix B for full text of 11 USC §110(a)).

So eR Oe EE et Ce ee

Federal Rule of Appellate Procedure 35(a):

“Determination of Causes by the Court in Banc.

(a) When Hearing or Rehearing in Banc Will

be Ordered. A majority of the circuit judges who

are in regular active service may order that an

appeal or other proceeding be heard or reheard

by the court of appeals in banc. Such a hearing

or rehearing is not favored and ordinarily will

not be ordered except (1) when consideration by

the full court is necessary to secure or maintain

uniformity of its decisions, or (2) when the

proceeding involves a question of exceptional

importance.”

MCL §570.151 (1966):

“Building contract fund; status as a trust fund.

In the building construction industry, the

building contract fund paid by any person to a

contractor, or by such person or contractor to a

subcontractor, shall be considered by this act to

be a trust fund, for the benefit of the person

making the payment, contractors, laborers,

subcontractors or materialmen, and_ the

contractor or subcontractor shall be considered

the trustee of all funds so paid to him for

building construction purposes. As amended

P.A. 1966, No. 104, §1, Eff. Oct. 1.”

STATEMENT OF THE CASE

This case arises under the Bankruptcy Act, specifically

g60(b) (LE USC §96), §70(a) (AT USC §110(a)), and 464 (11

USC 4104).

Olympia Construction Company (‘Bankrupt’) filed

its voluntary Petition in Bankruptey and was adjudged

a bankrupt on December 21, 1973. Bankript was an

underground subcontractor working, in the Southeastern

Michigan area.

Defendant, Price Brothers Company (‘Price

Brothers’), was a supplier of pipe and sewer materials

to Bankrupt for use by it in a public construction job.

Defendant, Doug Schroeder, Inc. (“Doug Schroeder’),

was a supplier of sand and gravel to Bankrupt for use

by it in various construction jobs, both public and

private,

Defendant, Mario Trucking Company (“Mario”) was a

supplier and hauler of sand and gravel to Bankrupt for

use by it in various public construction jobs

Defendant, Klochko Equipment Rental Company, Inc

(‘Klochko”), had rented) various machinery and

equipment to Bankrupt for use by it in various public

construction jobs

Plaintiff-Trustee, Robert E. Parker, sued Defendants

in an adversary proceeding under Part VIL of the

Bankruptcy Rules, claiming that various payments to

each of them constituted preferences under §60(a) of the

Bankruptey Act enabling each Detendant to receive

more than its pro rata share of the monies due it from

the Bankrupt estate,

mae =

Proceedings on Plaintiff’ Trustee's action were held

before the Honorable Harold H. Bobier, Pankruptey

Judge for the Eastern District: of Michigan, Eastern

Division in Flint, Michigan. Judge Bobier, in) written

and oral Opinions and Orders, granted Plaintiff Trustee

judgments in the amounts sought. United States District

Judge for the Eastern District) of Michigan, James

Harvey, on a consolidated appeal from those

judgments, rendered an oral opinion from the bench on

July 28, 1976, affirming the judgments below, and a

written Order and Judgment was entered thereon on

July 28, 1976. Defendants appealed to the United States

Court of Appeals for the Sixth Circuit. The Sixth Circuit

issued its opinion January 11, 1979, reversing the

judgments below. Plaintiff-Trustee filed a Petition for

Rehearing and Suggestion for Rehearing Pn Bane and

the Sixth Circuit on February 13, 1979, issued its Order

denying the Petition for Rehearing,

The Court of . ppeals opinion sets forth the factual

circumstances piving rise to Plaintiff. Trustee's

preference action for monies paid the Defendants

“During the summer of 1973) Olympia‘s

indebtedness grew to the extent that the

materialmen became apprehensive. M & K, the

general contractor on the public jobs, intervened

On September 11, 1973 M & K issued two

checks, one for $25,000) payable jointly to

Olympia and Mario, the other for $6,883.56

payable jointly to Olympia and Price. M & K

issued a similar joint check to Schroeder and

Olympia on October 1. M & K also issued a joint

check for $20,000 to Olympia and Klochko in

settlement of a garnishment proceeding brought

by Klochko. Olympia indorsed all four checks

over to the materialmen

“On the private construction project, the

pattern of events was similar, and on November

1, 1973 the general contractor issued a joint

check for $3,117.32 which Olympia indorsed to

Schroeder.”

The Bankruptcy Court found a reachable (by

Plaintiff-Trustee) “property” interest under §70(a) of the

Bankruptcy Act in the above monies and found present

all other elements of a §60(b) preference, and awarded

Plaintiff-Trustee judgment thereon.

The Court of Appeals applied the holding of the

companion case, Selby v Ford Motor Co, 590 F2d 642 (6th

Cir, 1979) and held that “by virtue of the Michigan

Builders Trust Fund Act, Michigan Comp. Laws Ann.

§570.151 (1966), the funds paid to Schroeder [on the

private construction job] were never Olympia’s

property.’’ The Court also applied the same rationale to

the remaining claims arising out of the public

construction jobs. In so doing, the Court of Appeals

overruled two previous Sixth Circuit decisions: General

Insurance Co v Lamar Corp., 482 F2d 856 (6th Cir, 1973)

and The R C Mahon Company v Hallis, 112 F2d 1007 (6th

Cir, 1940) (adopting the decision of the District Judge

below, In Re Edward Misch Co’s Estate, 34 F Supp 781

(ED Mi 1939)). In addition, the Court of Appeals

decision refused to follow a decision of the Michigan

Supreme Court, Club Holding Co v Flint Citizens Loan and

Investment Co, 272 Mich 66, 261 NW 133 (1935). All of

these previous decisions had held the Michigan

Builders Trust Fund Act not applicable to public

construction jobs.

Plaintiff-Trustee now seeks review of the Court of

Appeals decision of January 11, 1979 and of its order of

February 13, 1979 denying the petition for rehearing

and suggestion for rehearing en banc.

ARGUMENT

THE RULING BELOW ERRONEOUSLY GIVES A STATE

STATUTE SUPREMACY OVER THE DISTRIBUTION

SCHEME OF THE BANKRUPTCY ACT.

The Court of Appeals for the Sixth Circuit in this case

and in the companion case, Selby v Ford Motor

Company, 590 F2d 642 (6th Cir, 1979), undermines the

overriding supremacy of the Bankruptcy Act by finding

that a state (Michigan) statute (MCL §570.151 (1966))

imposes a trust for the benefit of selected creditors

upon certain property of a bankrupt contractor, and

thus defeats an otherwise valid preference claim of the

contractor’s trustee in bankruptcy. These decisions are

contrary to the United States Constitution and this

Court’s decisions in International Shoe Co v Pinkus, 278

US 261 (1929), and Perez v Campbell, 402 US 637 (1971).

By express grant of authority in the Constitution,

Congress has established “uniform laws on the subject

of Bankruptcies.’’ U.S. Const., art I, §8, cl. 4. The

Bankruptcy Act is paramount and “‘necessarily excludes

state regulation.”’ International Shoe Co v Pinkus, supra,

at 265. Thus, a state statute that has as its object or

effect interference with the collection and distribution

schemes of the Bankruptcy Act “frustrates the full

effectiveness of federal law [and] is rendered invalid by

the Supremacy Clause.” Perez v Campbell, supra, at 652.

Section 70(a) of the Bankruptcy Act vests in the

bankruptcy trustee title to the bankrupt’s “property”.

Although the parameters of the definition of property

are left to state law, state statutes cannot, by

definitional power, circumscribe the distribution

scheme of Section 64 of the Bankruptcy Act. Statutorily

or judicially created liens on a bankrupt’s property may

negate an, property interest claimed by the bankrupt’s

trustee, and thereby conflict with and frustrate the

intent of the Bankruptcy Act.

In the present case the Sixth Circuit holds that a

Michigan statute imposes a trust on funds in the

construction industry—a trust for the benefit not of

general creditors, but of the job or construction trade

creditors. The Court concludes that the bankrupt had no

property interest in monies impressed with such a

trust. The decision below creates nothing more than a

poorly disguised state priority. It is contrary to this

Court’s decisions in International Shoe Co v Pinkus and

Perez v Campbell. The decision vitiates the Bankruptcy

Act’s distributional scheme in nearly all construction

industry bankruptcies in Michigan. It is at odds with

decisions in other circuits, decisions recognizing and

upholding the supremacy of the Bankruptcy Act as

against state created liens or trusts; e.g., N W Day

Supply Company v Valenti, 343 F2d 756 (1st Cir, 1965); In

Re Crosstown Motors, Inc, 272 F2d 224 (7th Cir, 1959);

Elliot v Bumb, 356 F2d 749 (9th Cir, 1966).

THE RULING BELOW DOES NOT FOLLOW STATE LAW

WHICH WOULD HOLD THE MICHIGAN STATUTE OF

NO EFFECT IN THE PRESENT CASE.

In giving supremacy to the Michigan statute, the

Court of Appeals did not rely on interpretations of the

act by that State’s Supreme Court. Indeed its decision is

directly contrary to a specific holding of the Michigan

Supreme Court in Club Holding Co. v Flint Citizens Loan

& Investment Co., supra. it is also directly contrary to

BE mee we

earlier decisions of the Sixth Circuit; General Insurance

Company v Lamar Corp., supra and R. C. Mahon Corp. v

Hallis, supra. Furthermore it is directly contrary to the

approval given the Lamar case by the Michigan

Supreme Court in National Bank of Detroit v Eames and

Brown, 396 Mich 611, 242 NW2d 412 (1976).

The bankrupt contractor in this case was working

principally on public construction jobs — a fact

important to an understanding of the Michigan and

Sixth Circuit cases interpreting the Michigan statute.

The earliest Michigan case, Club Holding Co., supra, had

held the Michigan Builders Trust Fund Act of no effect

in the context of a public construction job. That court

said:

“. . . We apprehend that the parties are desirous

of a determination of the applicability of the

[Michigan Builders Trust Fund Act]. . .

** *

‘

‘... The act in question stands alone, without

any reference to another, it is in harmony with

the various provisions of the mechanic’s lien

law, and we cannot presume, in the absence of

explicit language, that it was intended to apply to

the erection of public buildings or to public works.

To do so might have a negatory effect on the

provisions of the 1905 act as amended, and strike

from the books a line of well-understood and

established authorities.”” Club Holding Co. v Flint

Citizens Loan & Investment Co., 272 Mich at 72,

261 NW at 135. (Emphasis added)

The Michigan Supreme Court subsequently held the

Michigan Builders Trust Fund Act did provide a viable

civil remedy to creditors in the context of private

construction jobs; B. F. Farnell Co. v Monahan, 377 Mich

552, 141 NW2d 58 (1966).

In General Insurance Co. v Lamar, supra, the Sixth

Circuit was asked to reconsider the Club Holding Co.

case in light of the later B. F. Farnell case. The Court of

Appeals stated in Lamar:

“This appeal presents primarily the question

whether under the Michigan Building Contract

Fund Act of 1931, M.C.L.A. §§570.151 - 570.153,

money paid to a contractor performing a public

project constitutes a trust fund for the payment

of subcontractors and materialmen for labor and

material furnished on the project. We determine

that it does not and reverse the judgment of the

district court.’’ At p. 856, 857.

The Court then carefully considered the Club Holding

Co. case in light of the B. F. Farnell case and concluded:

‘

‘... the above quotation makes it clear that any

pronouncements in Club Holding that do not

concern the creation of a civil remedy by the Act

remain unaffected. Accordingly, the decision in

B. F. Farnell did not extend the reach of the

statute to ‘the erection of public buildings or to

public works.’ Club Holding, supra, 272 Mich at

72, 261 NW at 135. We must follow the

construction given the Act by the Michigan

Supreme Court, and we therefore hold that the Act

does not make funds puid on public projects a trust

fund in the hands of a contractor.’ At p. 860.

(Emphasis added)

Subsequent to the decision in Lamar, the Michigan

Supreme Court in National Bank of Detroit v Eames and

Brown, supra, quoted verbatim the Sixth Circuit's

discussion in Lamar of the legislative history of the

Michigan Builders Trust Fund Act that had been used

to rationalize its Lamar holding. The Michigan Supreme

Court then said: ‘‘The purpose of the Act is to create a

trust fund for the benefit of materialmen and others

under private construction contracts.” 396 Mich at

p. 622, 242 NW2d at 417. (Emphasis added) Thus, the

Michigan Supreme Court clearly acknowledged its

earlier Club Holding Co. decision as to the

inapplicability of the Michigan Building Trust Fund Act

to public construction jobs.

Despite these clear and recent pronouncements to the

contrary by the Michigan Supreme Court and despite

the Sixth Circuit’s own earlier decisions, the present

decision refuses to follow state law and as a result gives

a state statute supremacy over the Bankruptcy Act. Thus

this decision is not only contrary to the Supremacy

Clause but is also contrary to this Court’s decision in

Erie R. Co. v Tompkins, 304 US 64 (1938), and Chicago

Board of Trade v Johnson, 264 US 1 (1923).

THE RULING BELOW PERMITS ONE PANEL OF THE

CIRCUIT TO OVERRULE ANOTHER PANEL OF THAT

CIRCUIT AND THUS CONFLIC?TS WITH THE FIFTH AND

THIRD CIRCUITS’ INTERPRETATION OF RULE 35(a) OF

THE FEDERAL RULES OF APPELLATE PROCEDURE

REQUIRING EN BANC CONSIDERATION TO OVERRULE

A PREVIOUS DECISION.

In the present case the panel of the Court of Appeals

overruled earlier Sixth Circuit cases by other panels;

General Insurance Co. v Lamar, supra, and The R. C.

Mahon Company v Hallis, supra. Rule 35(a) of the Federal

Rules of Appellate Procedure contemplates an en banc

hearing when ‘necessary to secure Or maintain

uniformity’ of the circuits’ decisions. The Fifth Circuit

has interpreted Rule 35(a) as placing ‘beyond the

province’ of a panel of the circuit the reversal of

another panel of the circuit. Miller v San Sebastian Gold

Mines, Inc., 540 F2d 807 (5th Cir, 1976); United States v

Lewis, 475 F2d 571 (5th Cir, 1973). The Third Circuit has

also taken this view:

“M. Rehearing, Criteria and Practice for Voting

for.

** *

2. Avoiding Inter-Circuit Conflict. It is the

tradition of this Court that internal stability

of its panel decisions be preserved. To

avoid conflicts in panel decisions no

subsequent panel may overrule a published

opinion of a previous panel. Court in banc

consideration is required to overrule a

previous decision of this Court.’’ United

States Court of Appeals for the Third

Circuit, Internal Operating Procedures, 63

F.R.D. 319 (1974).

The decision in the present case thus squarely

conflicts with the Fifth and the Third Circuits’

interpretation of Rule 35(a) and similar views espoused

by other circuits. See also, In Banc Proceedings, 37 ALR

Fed 274, 293 and cases cited therein.

PRUEBAS aie tikes de eo a ee

CONCLUSION

The Court of Appeals has declined to follow decisions

of a state’s highest court and its own prior decisions

construing a state statute and, having done so, ruled

that the state statute as construed by the Court of

Appeals supersedes the priority provisions of the

Federal Bankruptcy Act.

Further, the Court has overruled its own prior

decisions without a hearing en banc, as the Third and

Fifth Circuits have indicated is required by Rule 35(a).

For the reasons stated in the Petition, a writ of

certiorari should be granted.

Respectfully submitted,

CROSS, WROCK, MILLER & VIESON

By: William a. Coughlin, Jr.

Andrew A. Paterson

Craig A. Anderson

Attorneys for Petitioner

400 Renaissance Center,

Suite 1900

Detroit, MI 48243

(313) 259-1144

Dated: May 11, 1979

teat at tote snle.

APPENDIX A

ORDER

(United States Court of Appeals

For the Sixth Circuit)

(Filed February 13, 1979)

ROBERT E. PARKER, Trustee for OLYMPIA

CONSTRUCTION CO., Bankrupt, Plaintiff-Appellee v.

KLOCHKO EQUIPMENT RENTAL CO., INC.,

Defendant-Appellant; MARIO TRUCKING COMPANY,

Defendant-Appellant; PRICE BROTHERS COMPANY,

Defendant-Appellant; DOUG SCHROEDER, INC.,

Defendant-Appellant. No. 76-2395/6/7/8.

Before: WEICK, LIVELY and MERRITT, Circuit Judges.

No judge of the Court having moved for rehearing en

banc, the petition for rehearing has been referred to the

hearing panel for disposition.

Upon consideration, it is ORDERED that the petition

for rehearing be and hereby is denied.

ENTERED BY ORDER OF THE COURT

/s/ John P. Hehman,

Clerk

OPINION

(United States Court of Appeals

For the Sixth Circuit)

(Decided and Filed January 11, 1979)

On Appeal from the United States District Court for

the Eastern District of Michigan.

Before: WEICK, LIVELY and MERRITT,

Circuit Judges.

Merritt, Circuit Judge, delivered the opinion of the

Court, in which WEICK, Circuit Judge, joined. LIVELY,

Circuit Judge, (pp. 8-9) filed a separate dissenting

opinion.

MERRITT, Circuit Judge. The trustee in bankruptcy of

a subcontractor seeks to set aside as preferences

payments made to four materialmen within four months

of the subcontractor’s bankruptcy.' The district court for

the Eastern District of Michigan held that the payments

were preferences and granted judgment to the trustee.

The materialmen appealed. We reverse on the grounds

that the payments were made from funds

' Section 60 of the Bankruptcy Act defines preference as ‘‘a

transfer ... of any of the property of a debtor ... for ... an

antecedent debt, made . . . while insolvent and within four months”

of bankruptcy, the effect of which will enable the ‘creditor to obtain

a greater percentage of his debt than some other creditor of the same

class.” 11 U.S.C. § 96 (1976).

Brnthens ayia Mes Sw

subject to the Michigan Builders Trust Fund Act? which

were not the ‘property’ of the bankrupt under § 70 of

the Bankruptcy Act, 11 U.S.C. § 110 (1976).*

I. FACTS

The subcontractor, Olympia Construction Co., filed

its petition in bankruptcy on December 21, 1973.

During the course of 1973 the four materialmen,

Klochko Equipment Rental Co., Mario Trucking Co.,

Price Brothers Co. and Doug Schroeder, Inc., provided

materials and supplies to Olympia, which was a

subcontractor to Markward & Karafiles (M & K) on

public construction projects in the vicinity of Detroit.

During the same period Doug Schroeder, Inc. was also

a materialman to Olympia in connection with work on a

private project in which Plymouth Construction Co. was

the general contractor. _

During the summer of 1973 Olympia’s indebtedness

grew to the extent that the materialmen became

apprehensive. M & K, the general contractor on the

public jobs, intervened. On September 11, 1973 M & K

issued two checks, one for $25,000 payable jointly to

2 “In the building construction industry, the building contract

fund paid by any person to a contractor, or .. . to a subcontractor,

shall be considered by this act to be a trust fund, for the benefit

of the person making the payments, [and] contractors, laborers,

subcontractors or materialmen ....’° Mich. Comp. Laws Ann.

§ 570.151 (1967).

* Section 70 provides that the trustee in bankruptcy shall be

“vested by operation of law with . . . title’’ to all the “property” of

the bankrupt.

Olympia and Mario, the other for $6,883.56 payable

jointly to Olympia and Price. M & K issued a similar

joint check to Schroeder and Olympia on October 1.

M & K also issued a joint check for $20,000 to Olympia

and Klochko in settlement of a garnishment proceeding

brought by Klochko. Olympia indorsed all four checks

over to the materialmen.

On the private construction project, the pattern of

events was similar, and on November 1, 1973 the

general contractor issued a joint check for $3,117.32

which Olympia indorsed to Schroeder.

Il. THE PRIVATE CONSTRUCTION PROJECT

The issue presented by the payment to Schroeder for

materials supplied to the private construction project is

identical to that in Selby v. Ford Motor Co., No. 76-1711

(6th Cir. 1978). Accordingly, we hold that by virtue of

the Michigan Builders Trust Fund Act, Mich. Comp.

Laws Ann. § 570.151 (1967),4 the funds paid to

Schroeder were never Olympia’s property. Therefore,

Olympia’s trustee in bankruptcy cannot set aside the

payment under § 60 of thé Bankruptcy Act, 11 U.S.C.

§ 96.

II]. THE PUBLIC CONSTRUCTION PROJECTS

In Selby v. Ford Motor Co., supra, we analyzed the

property rights which are created by the Michigan

Builders Trust Fund Act and held that these rights

should be recognized under the Bankruptcy Act. We

found that trust funds due or in the hands of a

* See note 2, supra, for the text of the Act.

OF a

contractor as trustee are not his ‘property’ under § 70

of the Bankruptcy Act and, therefore, payments of such

trust fund may not be set aside as preferential transfers

under § 60.

The instant case and Selby differ in only one respect.

Selby involved a private construction project while this

case involves public projects. Thus, the only new

question raised on this appeal is whether the state

statutory trust, and our holding in Selby, apply to public

as well as private construction projects.

The Michigan act, by its express terms, applies to

“the building contract fund paid by any person to a

contractor or .. . a subcontractor,”” and we would have

no hesitancy or difficulty in applying the act to public

construction projects, except for language that appears

in our opinion in General Insurance Co. of America v.

Lamar Corp., 482 F.2d 856 (6th Cir. 1973). We have

determined, however, that this language was not

necessary to the opinion, narrowly read, and we decline

to follow it.

In the General Insurance case, a general contractor on a

public construction project owed money for prior

unrelated work to a materialman. The general contractor

paid the materialman money received from the owner

on the public construction project. The materialman

applied part of the payment from the contractor to the

pre-existing indebtedness and used the funds for

general business purposes. When the general contractor

defaulted, his surety on the performance bond took

over the work. The surety brought suit against the

materialman for that portion of the payment applied to

the pre-existing indebtedness. Judge McCree, writing

for this Court, reversed a judgment in favor of the

surety on two grounds. His opinion said (1) the

Michigan statutory trust applies only to private

construction projects, not public projects and thus does

not affect the rights of the parties; and (2) “under

Michigan law,” the materialman “was under no duty to

apply the funds to the ... [public project rather than

the prior indebtedness] in the absence of fraud or an

express direction by the [contractor] ... .’’ 482 F.2d at

861.

We believe the second ground for the Court's

decision quoted above is correct and was dispositive of

the case, whether or not the Michigan statutory trust

governed the rights of the parties. Even if the Court

had applied the statutory trust, the materialman in that

case would have been the beneficiary of the trust fund,

not the trustee. After the funds were paid to him and

were used for general business purposes, tracing would

have been impossible. Neither the common law of

Michigan nor the statutory trust imposes a duty on the

materialmen as beneficiaries to apply the payment by

the contractor to current work rather than prior

indebtedness in the absence of any direction to do so. It

would have been the responsibility of the contractor

both as trustee under the statutory trust and as a

contracting party under Michigan common law to direct

the application of the funds.

We believe, therefore, that the language in the

General Insurance opinion stating that the builders trust

statute is inapplicable to public projects was

unnecessary, and we decline to follow it.5 This language

was based on dicta from a prior Michigan case, Club

Holding Co. v. Flint Citizens Loan and Investment Co., 272

Mich. 66, 261 N.W. 133 (1935), which held that

Michigan Builders Trust Fund Act does not create a

private, civil right of action. The Club Holding case was

overruled in B. F. Farnell Co. v. Monahan, 377 Mich.

552, 141 N.W.2d 58 (1966), which established that the

statute does give rise to a private right of action. We do

not believe the Club Holding case is viable authority in

Michigan now, and Michigan courts have not been

called upon to rule upon the question of the

applicability of the statute in the context of a public

construction project.°®

* The dissenting opinion makes the point that according to the

express language of the General Insurance opinion the ‘specific

holding’ of the case is that the Michigan statutory trust does not

apply to public projects. The dissent accurately states that we treat

this “very language’ as dicta, and we find instead that language

which the General Insurance opinion characterized as dicta is in fact

the holding of the case. Our method of analysis, however, is well

within the common law tradition. We believe that the General

Insurance opinion reaches the correct result but that its reasoning is

faulty. The court should have rested its decision on different

grounds.

®* Our dissenting brother correctly states that the Michigan

Supreme Court in National Bank of Detroit v. Eames and Brown, 396

Mich. 611, 622, 242 N.W.2d 412, 417 (1976), a case involving a

private construction project, said that the Act creates a statutory

trust ‘‘under private construction contracts.’’ But we do not read the

opinion as committing the courts of Michigan to a rule that the

statutory trust applies “‘only” to private construction projects, and

not to public projects. The court had no reason to reach that

question in the National Bank of Detroit case and did not discuss it.

The only reason given in the General Insurance case

for not applying the statutory trust to public projects is

not convincing. The opinion states that the statutory

requirement that contractors on public projects provide

a payment bond protects subcontractors and

materialmen and makes the statutory trust unnecessary

for their protection on public projects. 452 F.2d at 860.

But in order for subcontractors and materialmen on

public projects to establish their rights to payment from

the surety under the statutory payment bond, they must

perfect their claims and file notice as if they were

perfecting a mechanic's lien.’ The main purpose of the

Michigan statutory trust, as our opinions in General

Insurance and Selby recognized, was to provide a better

remedy than those provided by the mechanics lien and

similar state laws. We were in error in stating in

General Insurance that, under Michigan law,

subcontractors and- materialmen are better protected

under the statutory payment bond applicable to public

construction projects than under the mechanics lien

laws applicable to private jobs.

” Compare the Michigan mechanics lien law, Mich. Comp. Laws

Ann. § 570.1 (1967) (“Every person . . . who shall furnish any labor

or materials in or for [any building] . .. shall have a lien therefor

upon such [building] ... Provided, That [the materialman] shall

within 90 days after furnishing the first of such material . . . serve

on the owner ... a written notice”) with the public construction

payment bond statute, Mich. Comp. Laws Ann. § 129.207 (“A

claimant not having a direct contractual relationship with the

principal contractor shall not have a right of action upon the

payment bond unless (a) he has within 30 days after furnishing the

first of such material . . . served on the principal contractor a written

notice ... and (b) he has given written notice to the principal

contractor and the governmental unit involved within 90 days from

the date on which the claimant . . . supplied the last of the material

The facts of the instant case undermine the

assumption on which the General Insurance dicta were

based, the assumption that aggrieved materialmen on

public jobs do not need the trust fund remedy because

they can rely on the payment bond statute. Here, the

materialmen have foregone their right to recover on the

payment bond. Confident in their belief that the funds

received from M & K were theirs to keep, the

materialmen had no apparent need to file the

appropriate notices which are conditions precedent to

recovery from the bond. Indeed, Klochko voluntarily

dismissed a garnishment proceeding against M & K

when the direct payment plan was consuramated.

Furthermore, it is clear the Club Holding’s dicta that

the Michigan Trust Fund Act does not apply to public

projects were based on an assumption that any civil

remedy provided by the statute would be in the nature

of a mechanic's lien. 272 Mich. at 72, 261 N.W. at 135.

Since it was, and is, ‘‘well-understood and established”

that it is contrary to public policy to allow private liens

on public property, the Club Holding court declined to

recognize the civil remedy in a public property, the

Club Holding, however, it has become apparent that the

interest created by the Michigan irust statute is not a

lien on property.® Rather it is an equitable interest in

funds paid out by the owner and in no way encumbers

* Selby, supra; National Bank of Detroit v. Eames & Brown, 396

Mich. 611, 242 N.W.2d 412 at 419 (Coleman, J. concurring) (1976);

B. F. Farnell Co. v. Monahan, 377 Mich. 552, 141 N.W.2d 58 (1966).

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the owner’s property. Thus, the policy not to allow

mechanics’ liens on public property, which lay

underneath the Club Holding and General Insurance

dicta, does not apply to the Michigan Builders Trust

Fund Act. Recognition of a civil remedy under the

statute in a public project would in no way threaten to

encumber the public owner’s property. On the contrary,

the trust fund act serves to prevent encumbrances of

any kind because it is an alternative to the lien law.

Accordingly, the building construction funds due the

bankrupt subcontractor in this case on both the private

and public construction projects were subject to the

Michigan Builders Trust Fund Act. The materialmen

owned the equitable interests in the funds. These

equitable interests were therefor not the property of the

bankrupt subcontractor under § 70 of the Bankruptcy

Act, and the payments to the materialmen within four

months of bankruptcy were not preferential transfers

under § 60 of the Bankruptcy Act. Consequently, the

judgment of the district court must be _ reversed.

Appellate costs are taxed against appellee.

LIVELY, Circuit Judge, dissenting. I respectfully

dissent. The majority opinion seeks to avoid the impact

of this court’s decision in General Insurance Company of

America v. Tamar Corporation, 482 F.2d 856 (6th Cir.

1973), by stating that the language in that opinion

which holds the builder’s trust act inapplicable to

public projects was unnecessary to the decision. As I

read General Insurance Company v. Lamar Corporation, its

specific holding is the very language which the majority

opinion treats as unnecessary.

All

The opening paragraph in General Insurance Company

of America v. Lamar Corporution is:

This appeal presents primarily the question

whether under the Michigan Building Contract

Fund Act of 1931, M.C.L.A. §§ 570.151 - 570.153,

money paid to a contractor performing a public

project constitutes a trust fund for the payment

of subcontractors and materialmen for labor and

material furnished on that project. We determine

that it does not and reverse the judgment of the

district court.

482 F.2d at 856-57.

After setting forth the facts of the case and noting that

Michigan law applies, the court stated the issue as

follows:

The principal issue of Michigan law for our

consideration is whether the Michigan Building

Contract Fund Act applies to public as well as to

private projects. 482 F.2d at 858.

The second issue in General Insurance Company

(constructive trust), which the majority now says was

sufficient basis for the decision, was never reached by

this court. Indeed, the court stated, ‘“Appellee does not

press this theory on appeal, with good reason in our

opinion, ....” 482 F.2d 861. This court decided but

one question in General Insurance Company — that the

Michigan builders’ trust act does not apply to public

projects. This decision was based upon a careful

analysis of Michigan law which I consider sound.

Al2

The majority opinion states, ‘“Michigan courts have

not been called upon to rule upon the question of the

applicability of the statute in the context of a public

construction project.’’ This may be literally true.

However, in National Bank of Detroit v. Earnes & Brown,

Inc., 396 Mich. 611, 242 N.W.2d 412 (1976), the Supreme

Court of Michigan quoted Judge McCree’s language

from General Insurance Company in describing the

purpose of the builders’ trust fund act. 396 Mich. at

619-620, 242 N.W.2d at 415-16. The Michigan court,

after summarizing several of its own holdings then

stated:

The purpose of the Act is to create a trust fund

for the benefit of materialmen and others under

private construction contracts.

396 Mich. at 622, 242 N.W.2d at 417 (emphasis

added).

I can perceive no valid reason or authority for

departing from a holding of this court subsequently

approved by the highest court of Michigan in a matter

clearly controlled by Michigan law. | would affirm the

judgment of the district court insofar as it holds that the

Michigan builders’ trust fund act has no application to

public construction projects.

Al3

OPINION

(United States Court of Appeals

For the Sixth Circuit)

(Decided and Filed January 11, 1979)

RALPH I. SELBY, Trustee in Bankruptcy for the

Frimberger Corporation, Plaintiff-Appellant, v. FORD

MOTOR COMPANY, et al., Defendants-Appellees. (No.

76-1711)

On Appeal from the United States District Court for

the Eastern District of Michigan.

Before: Weick, Edwards, and Merritt, Circuit Judges.

MERRITT, Circuit Judge. The trustee in bankruptcy

for a general contractor appeals a decision by District

Judge Joiner declining to set aside as preferences under

§ 60 of the Bankruptcy Act payments made by the

contractor and by the owner of a construction project to

subcontractors within four months of the general

contractor's bankruptcy. The question on appeal

concerns the recognition federal bankruptcy law should

give to state-created property rights under the Michigan

Builders Trust Fund Act.

The Michigan act creates a security device in the form

of a ‘‘trust fund’ for the benefit of the owner and

subcontractors on construction projects:

In the building construction industry, the

building contract fund paid by any person to a

contractor ... shall be considered by this act to

be a trust fund, for the benefit of [(1)] the person

making the payment, [and (2)], contractors,

laborers, subcontractors or materialmen, and the

contractor ... shall be considered the (rustee

of all funds so paid to him tor building

construction purposes.

Mich. Comp. Laws Ann. § 570.151 (1967) [Emphasis

added.]

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The purpose of the statute is to protect the owner and

those whose labor and materials make the performance

of a construction contract possible and give rise to the

owner's obligation to pay.

The trustee in bankruptcy seeks to set aside payments

to the subcontractors as preferential transfers under § 60

of the Bankruptcy Act. He wants to bring the funds into

the bankrupt’s estate to pay the general creditors. The

subcontractors claim that the money paid to them

constitutes the corpus of a trust which escapes the

hands of the trustee. The district court ruled in favor of

the subcontractors. 405 F. Supp. 164 (E.D. Mich. 1975).

We affirm on grounds that a Michigan building

contractor does not have sufficient beneficial interest in

funds impressed with the statutory trust to constitute

his “property” under the Bankruptcy Act. Therefore,

the contractor's trustee in bankruptcy has no right to

appropriate for the benefit of general creditors funds

transferred to subcontractors by the contractor or the

owner within four months of bankruptcy.

On May 24, 1971, Frimberger Corporation filed in the

federal court for the eastern district of Michigan a

voluntary petition for an arrangement under Chapter XI

of the Bankruptcy Act, 11 U.S.C. §§ 722-23 (1976). A

year earlier in the spring of 1970, Frimberger and Ford

Motor Company had agreed in Michigan that

Frimberger would build and install conveyors at a Ford

plant in New Jersey. During the course of construction

in the summer and fall of 1970, Frimberger employed

the sixteen subcontractors who are defendants in this

action. When the work was finished in the fall, Ford

owed Frimberger approximately $355,000. Frimberger,

in turn, owed most of this money to its sixteen

subcontractors

Al5

Instead of waiting to be paid by Ford before paying

the subcontractors, Frimberger decided to authorize

Ford to pay the subcontractors directly and to deduct

this amount from Ford’s indebtedness. Frimberger

executed a series of written authorizations of December

8 and 15, 1970, and January 14 and 27, 1971, permitting

Ford to pay all sixteen contractors directly. By February

11, 1971, Ford had issued checks to fourteen of the

sixteen subcontractors. Frimberger itself paid the other

two. Ford then paid Frimberger the remaining balance

due on the construction contract. All sixteen of the

checks to the subcontractors, both the fourteen drawn

by Ford and the two by Frimberger were issued within

four months of the filing of the petition in bankruptcy

by Frimberger.

The trustee in bankruptcy filed this action against

Ford and the sixteen subcontractors, seeking to recover

the funds as preferential transfers within four months of

bankruptcy under § 60a of the Bankruptcy Act, 11

U.S.C. § 96(a) (1976). The Trustee further claimed that

Ford is liable for conversion of the bankrupt’s proverty.

Ford and the subcontractors denied liability for

numerous reasons, including the claim that the

payments could not be set aside even if preferential

because the subcontractors held title to funds as trust

beneficiaries under the Michigan Builders Trust Fund

Act. The district court granted defendants’ motions for

summary judgment. The trustee in bankruptcy appeals.

II.

Neither the current Bankruptcy Act nor its legislative

history addresses the question of how statutory trust

funds held by a debtor for the benefit of others are to

Al6

be treated for purposes of the Act’s “property,””'

“preference,’’? “‘priority,’’? “statutory lien,’’* or

“discharge’,® provisions. To unravel this question, we

will look to the language and purpose of the Bankruptcy

Act in relationship to property rights created under

state law, the purpose of the Michigan statutory trust,

the practices of the construction industry and_ the

problems of the industry which the statutory trust was

designed to remedy. We will also look to the new

Bankruptcy Act and its legislative history to see if its

treatment of statutory trusts should be used as

persuasive authority.

' Section 70 provides that the trustee in bankruptcy shall be

“vested by operation of law with... title” to the “property” of the

bankrupt. 11 U.S.C. § 110.

? Under § 60 the trustee in bankruptcy may set aside as a

preference ‘‘a transfer... of any of the property of a debtor .. . for

an antecedent debt, made .. . while insolvent and within four

months” of bankruptcy, the effect of which will enable the “creditor

to obtain a greater percentage of his debt than some other creditor

of the same class.” 11 U.S.C. § 96(a)(1) [Emphasis added. ]

' Section 64 establishes the priority of distribution of the assets

of the bankruptcy estate to creditors. For example, the costs of

administration are given first priority. Taxes are second; certain

wages owed to employees are third. 11 U.S.C. § 104,

* Under § 67c(1), ‘statutory liens” (including mechanics liens) on

a debtor's property are “invalid” against the trustee in bankruptcy

unless “perfected” on the date of bankruptcy so that a bona fide

purchaser of the assets subject to the lien could not acquire good

title under state law. 11 U.S.C. § 107(c)(1).

‘s

Section 17 provides that a “discharge in bankruptcy shall

release a bankrupt from all his provable debts ... except such as

(4) were created by his ... misappropriation or defalcation

while acting... in any fiduciary capacity.” 11 U.S.C. § 35.

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Il.

Conceptually, the Michigan builders trust fund

statute can be viewed in any one of three ways: (1) as

imposing a traditional trust on the contractor’s funds for

the benefit of subcontractors, laborers and materialmen;

or (2) as creating a security arrangement in the nature of

a statutory lien; or (3) as creating no security or other

interest recognizable under the Bankruptcy Act.

Viewed as a traditional trust, the beneficial interests

in the trust fund would not be the “property’’ of the

bankrupt contractor or his estate in bankruptcy. The

subcontractors would own the beneficial title to the

trust, and the contractor would simply hold legal title to

the funds as trustee. Although the Bankruptcy Act does

not deal expressly with trusts, the Supreme Court in an

early case under the Bankruptcy Act of 1867 established

that funds held in trust by a bankrupt debtor are

immune from the claims of general creditors so long as

the funds can be traced. Hawkins v. Blake, 108 U.S. 422,

435-36 (1882). This rule has not been changed by the

current Bankruptcy Act, and the courts have continued

to apply it. See Pearlman v. Reliance Insurance Co., 371

U.S. 132 (1962); First National Bank v. Staake, 202 U.S.

141 (1905). |

A statutory lien, on the other hand, is not effective

against the claims of the trustee in bankrupicy unless it

is perfected prior to the -filing of the petition in

bankruptcy. The lien is not perfected if, under state

law, a bona fide purchaser would receive title superior

to the lienholder upon transfer of the assets subject to

the lien. A lien must be perfected by timely filing and

adequate notice, and the time of perfection is defined

by state statutory and case law. Statutory trusts,

Al18

however, arise automatically. No notice or filing is

required, and perfection is beside the point. Under

trust fund theory, a subcontractor’s beneficial interest

arises when the owner pays the building contract fund,

even though a subcontractor cannot bring suit until the

general contractor fails to pay a ‘‘matured” debt. B. F.

Farnell Co. v. Monahan, 377 Mich. 552, 141 N.W.2d 58

(1966).

Although there is authority to the contrary with

respect to statutory tax trusts,° the few cases on the

question characterize other statutory trusts as traditional

trusts for purposes of bankruptcy.? Commentators have

criticized this result, however. They say that statutory

trusts should be treated as statutory liens because

statutory trusts function as a security device, and ‘’the

application of a national bankruptcy statute to legal

interests diversely defined’ by the states requires

® United States v. Randall, 401 U.S. 513 (1971) and England v.

United States, 546 F.2d 821 (9th Cir. 1976), cert. denied, 431 U.S. 974

(1977), appear to hold that tax trusts established by statute in favor

of federal or state taxing authorities are subject to § 64 of the

Bankruptcy Act, the priority section. This section gives tax creditors

second priority after the payment of costs of administration of the

bankrupt’s estate. These cases hold that any attempt to give tax

creditors trust beneficiary status conflicts with the priority scheme of

§ 64. In the instant case, however, there is no legislative indication

that building construction funds held in trust under state law should

be considered a general asset of a bankrupt’s estate. These cases

have apparently been modified or overruled by the new Bankruptcy

Act. See note 18 infra.

’ Carrier Corp. v. J. E. Schecter Corp., 347 F.2d 153 (2d Cir. 1965)

(semble); Wickes Boiler Co., Inc. v. Godfrey-Keeler Co., Inc., 116

F.2d 842 (2d Cir. 1940), mod. on reh. 121 F.2d 415, cert. denied 314

U.S. 686 (1941); Elliott v. Bumb, 356 F.2d 749 (9th Cir. 1966).

Al9

classification ‘‘on the basis of function rather than

nomenclature.’’* But no cases have adopted this

approach, and this criticism overlooks the traditional

role of the states in creating and defining the

underlying property interests and commercial

arrangements to which the Bankruptcy Act applies.”

Though Aquilino v. United States, 363 U.S. 509 (1960),

is not a bankruptcy case, the Court’s reasoning is on

point. Subcontractors under New York’s builders trust

fund statute claimed money paid by the owner to a

general contractor. The United States also claimed the

funds under a perfected federal tax lien. The New York

Court of Appeals ruled in favor of the government,

apparently on the ground that federal tax liens take

“precedence” over statutory trusts as a matter of federal

tax law.

The Supreme Court reversed and remanded. It held

that the question of priority depends upon the ‘‘rights

created under state law” by the statutory trust. Chief

Justice Warren rejected the government's argument that

“the definition of the taxpayer's property interests

should be governed by federal law’’ because that

* Note, The Statutory Trust Fund in Bankruptcy, 50 Yale L.J. 1268,

1271 (1941). See also 4 Collier, Bankruptcy, Paragraph 67.25[2] (14th

ed. 1974) (‘statutory trust is no more than a legislative device to

protect a particular class of creditors” and should be treated as a

statutory lien under § 67).

* Chicago Board of Trade v. Johnson, 264 U.S. 1, 10 (1923)

(“where the bankruptcy law deals with property rights which are

regulated by the state law, the federal courts in bankruptcy will

follow the state courts’); Eaton v. Boston Trust Co., 240 U.S. 427,

429 (1916) (‘the policy of the Bankruptcy Act is to respect state

exemptions’).

A20

argument “ignores the long established role that the

States have played in creating property interests and

places upon the courts the task of attempting to

ascertain a taxpayer’s property rights under an

undefined rule of federal law.” 363 U.S. at 513 n.3.

With these instructions from the Supreme Court, the

New York Court of Appeals, on remand, in an opinion

by Chief Justice Fuld, reversed its previous position. It

found that under state law,

there is no good reason to suppose that the

legislature by declaring payments to a contractor

to be ‘trust funds,’’ did not intend thereby to

avoid the very same possibilities of harm to the

statutory beneficiary as was intended by the rule

against diversion of funds of an express trust

Our conclusion, then, is that ... a

contractor does not have sufficient beneficial

interest in the moneys, due or to become due

from the owner under the contractor, to give him

a property right in them, except insofar as there

is a balance remaining after all subcontractors

and other statutory beneficiaries have been paid.

This being so, it follows that the tax lien herein

asserted by the Government .. . is ineffective to

reach such moneys... .

10 N.Y.2d 271, 279, 176 N.E.2d 826, 831-32 (1961).

We believe that this reasoning applies to the

treatment of statutory builders trusts under the

Bankruptcy Act. Under Michigan law, the Builders

Trust Fund Act creates a private, civil action in favor of

the beneficiaries of the statutory trust, National Bank of

Detroit, v. Eames & Brown, 396 Mich. 611, 242 N.W.2d

412 (1976). Michigan courts have also determined that,

Cee cee re

A21

to the extent state law controls the federal question, the

beneficial interests of subcontractors and materialmen

under the statutory trust are not the ‘property’ of the

bankrupt debtor or his trustee in bankruptcy under § 70

of the Bankruptcy Act. B. F. Farnell Co. v. Monahan, 377

Mich. 552, 141 N.W.2d 58 (1966). We agree with the

Michigan courts and believe that federal bankruptcy law

should recognize and enforce the property rights

created by state law under the Michigan statutory trust.

IV.

There are additional reasons to resolve the federal

question under the Bankruptcy Act in favor of

recognition of these state-created property rights. The

Michigan Builders Trust Fund Act was passed prior to

the restrictions placed on statutory liens under the 1938

revision of the Bankruptcy Act. It was framed for

legitimate reasons of state law and not to undermine

the Bankruptcy Act. We do not believe that the

statutory trust should be construed in substance as

creating a statutory lien or as an evasion of the property

and preferential transfer provisions of §§ 70 and 60 of

the Bankruptcy Act.

The Michigan Builders Trust Fund Act is designed to

remedy problems in the construction industry. Like the

law merchant of an earlier day, the building trades have

gradually created a set of commercial expectations as the

result of the customs and practices of the industry. The

nature of the industry is such that the commercial

expectations of the parties are defeated when a building

contractor or subcontractor does not use accounts paid

to him on a job to pay subcontractors or materialmen.

Unless the parties see that construction funds are

A22

properly applied down the line, the liabilities of the

parties up the line are affected. The unpaid workers

must undertake the lengthy and wasteful process of

filing, perfecting and foreclosing on their mechanics

liens. The owner’s property and the construction

lender’s security are encumbered.!°

The statutory builders trust is not simply special

legislation that the building trades have lobbied

through state legislatures. Its justification is that the

contractor, subcontractor and materialmen cannot

spread their risks in the same way as the grocer or

other merchants with many customers. Large quantities

of labor and materials may go into a single construction

project over a long period of time. A large part of a

tradesman’s capital may be tied up in a small number

of construction projects. There is a substantial risk that

a general contractor who goes bankrupt will pull down

with him some of his subcontractors and materialmen,

as well as cause serious economic loss to the owner.!'!

The construction lender, owner, disbursing agent,

contractor, subcontractor or surety company which

furnishes a payment bond may not have a direct

contractual relationship with a materialman down the

line. But courts and legislatures have increasingly found

'0 For further discussion of the Michigan Act as ‘‘one of a genre

of Depression-era measures intended to afford relief ... in the

construction industry,” see General Ins. Co. v. Lamar Corp., 482

F.2d 856, 869 (6th Cir. 1973); National Bank of Detroit v. Eames &

Brown, 396 Mich. 611, 242 N.W.2d 412, 415-16 (1976).

'! See the General Insurance and National Bank of Detroit cases,

supra note 10; N. Penney & R. Broude, Land Financing 658 (1970).

P y 8

A23

that the parties have an independent legal duty arising

from reasonable commercial expectations to see to the

proper application of construction funds.'? In _ the

absence of statute, courts have declared that

construction funds in the hands of a contractor are held

subject to a constructive trust or an equitable

assignment or an equitable lien.'? Even in the absence

of a state builders trust statute, federal bankruptcy

courts in a variety of situations have refused to apply

the property, preference and statutory liens sections of

the Bankruptcy Act to favor unsecured creditors over

the equitable claims of subcontractors and materialmen

to the proceeds of a construction project in the hands of

a bankrupt contractor. '*

State builders trust statutes simply recognize in

statutory form the principles embodied in these court

decisions. The remedies provided by mechanic's lien

laws are unsatisfactory,'® and state legislatures in a

2 See, e.g., Michigan’s payment bonding statute, Mich. Comp.

Laws Ann. § 129.207 (1967); The Miller Act, 40 U.S.C. § 270a-f

(1976); Jackson v. Flohr, 227 F.2d 607 (9th Cir. 1955), cert. denied 350

U.S. 947 (1956). See generally Annot. 26 A.L.R. Fed. 746 (1976);

Annot. 62 A.L.R.3d 288 (1975).

8 Johnson v. Root Mfg. Co., 241 U.S. 160, (1914); Mikelson v.

Aetna Casualty & Surety Co., 452 F.2d 1219 (8th Cir. 1971); Carrier

Corp. v. J. E. Schecter Corp., supra note 7; American Service Co. v.

Henderson, 120 F.2d 525 (4th Cir. 1941).

'* Keenan Pipe & Supply Co. v. Shields, 241 F.2d 486 (9th Cir.

1956); Mullins v. Roland Co., 406 F.Supp. 206 (N.D. Ga. 1975); Stone

v. Mondie, 157 F.Supp 929 (W.D.Okla. 1957).

'S See General Insurance and National Bank of Detroit, supra

note 10.

A24

number of states, like Michigan, have adopted builders

trust fnd statutes. The property rights created by these

state statutes should be recognized and enforced in the

bankruptcy system. The trustee in bankruptcy should

not be permitted to appropriate the trust of another and

distribute it to the bankrupt’s creditors.

We draw support for our position from the new

Bankruptcy Act, as well. The new Act, signed by the

President on November 6, 1978,'° expressly recognizes

trust interests created under state law. Section 541, the

“property” section of the new law, provides that the

bankruptcy estate shall include “all legal and equitable

interests of the debtor in property.”’ But it limits the

interests of the trustee in bankruptcy to § 541(c)(2), ‘a

restriction on the transfer of a beneficial interest of the

debtor in a trust that is enforceable under applicable

non-bankruptcy law is enforceable in a case’ in

bankruptcy.

In addition, the Senate Report on the new Bankruptcy

Act and the statements of the floor managers of the Act

in both the House and the Senate demonstrate that the

Bankruptcy Act “will not affect various statutory

provisions .. . that create a trust fund for the benefit of

a creditor of the debtor.’’'? The Senate Report and the

'e P.L. 95-598 95th Cong., 2d Sess., set out in the “Statute”

section of the Nov. 14, 1978 edition of Law Week, 47 U.S.L.W. 1.

'7 $.Rep. 989 at 82, 95th Cong., 2d Sess. (1978); 124 Cong. Rec.

$17.413 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini); 129

Cong. Rec. H11,096 (daily ed. Sept. 28, 1978) (remarks of Rep.

Edwards).

A25

floor managers cite several examples of statutory trust

funds. They cite statutes impressing a trust on

withholding and other taxes in the hands of the

employer or person who collects the tax for state or

federal governments.'® They also cite the federal

statutory trust created in favor of farmers who sell

livestock to meat packers under the Packers and

Stockyards Act § 206, 7 U.S.C. § 196 (1976). The

legislative purpose is clear. Statutory trust funds are not

the property of the debtor and are not subject to the

statutory lien (§ 545) and preference (§ 547) provisions

of the new Act.

In view of the fact that the current Bankruptcy Act is

silent on the subject of statutory trusts, we believe that

it is proper to use the new Act as persuasive authority

in interpreting the old. Under both Acts, a state statute

creating a builders trust fund should be given effect in

bankruptcy. The beneficial interests of subcontractors

and materialmen in a building fund should not be

regarded as the property of the bankrupt debtor, at least

so long as the beneficial interests are traceable. In the

'§ According to this legislative history, it appears that § 541 of

the new Act intends to modify or overrule the holdings in the

Randall and England cases, supra note 6. 124 Cong. Rec. $17,436

(daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini); 124 Cong. Rec.

H11,114 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards).

A26

instant case tracing creates no problem. The funds

subject to the statutory trust were paid to the

subcontractor as trust beneficiaries prior to

bankruptcy. '”

Accordingly, the judgment of the District Court is

affirmed. Costs of appeal are taxed against Appellant.

'' There is no claim in this case that Ford and Frimberger

preferred or unfairly advanced trust funds to some subcontractors on

the job at the expense of others. The trustee seeks to recover funds

from the subcontractors for distribution to the unsecured creditors,

not for distribution to unpaid beneficiaries of the statutory trust. We

need not decide in this case what power the trustee has to recover

payments made to favored subcontractors when the building trust

funds have been exhausted and some subcontractors have been left

unpaid. :

A27

OPINION

(United States of America

United States District Court

For the Eastern District of Michigan

Southern Division)

OLYMPIA CONSTRUCTION COMPANY, Appellee,

vs MARIO TRUCKING CO., KLOCHKO EQUIPMENT

CO., PRICE BROTHERS, AND DOUG SCHROEDER,

Appellants. CA No. 74 60440

OPINION RENDERED FROM THE BENCH, in the

above-entitled matter, by the Hon. JAMES HARVEY,

Judge, United States District Court, at Flint, Michigan,

on Wednesday, July 28, 1976.

APPEARANCES: CROSS, WROCK, MILLER &

VIESON, 4200 Penobscot Building, Detroit, Michigan,

48226; BY: ANDREW PATTERSON, ESQ., Appearing,

on behalf of the Trustee.

STEPHEN G. DANKO, ESQ., 12154 Dix-Toledo Road,

Southgate, Mich., 48195, Appearing on behalf of

Appellant Mario Trucking.

LANGS, SCHATZBERG, PATTERSON & LANGS, 2700

Guardian Building, Detroit, Mich., 48226

By: RICHARD LANGS, ESQ., Appearing on behalf of

Appellant Klochko Equipment.

JAMES E. WYSZYNSKI, Official Court Reporter

A28

DAVIS, HAYWARD, HERTLER, JONES & KINGSEPP,

3101 No. Woodward Ave., Suite 300, Royal Oak, Mich.,

48072; By: JON H. KINGSEPP, ESQ., Appearing on

behalf of Appellant Price Brothers

HARRIS, BEN & MARCKS, 2133 Cadillac Towers,

Detroit, Mich., 48226; By: MARYLNN MARCKS, ESQ.,

Appearing on behalf of Appellant Doug Schroeder.

Flint, Michigan

Wednesday, July 28, 1976

* * *

(3) The Court: First, the Court will note for the

record that there are issues of fact and law that are

common to these appeals and for this reason the Court

has consolidated its Opinion and will not present a

separate Opinion for each appellant.

The matter to be decided in each case is whether the

creditor received a preference within the meaning of

Sec. 60(a) of the Bankruptcy Act.

Appellant Doug Schroeder, Inc., raises five issues.

First, whether there was a transfer of the bankrupt’s

property;

Second, whether any transfer of the property was

payment for, or on account for, an antecedent debt;

Third, whether the bankrupt’s estate was depleted by

such a transfer;

Fourth, whether the bankrupt was then insolvent,

and;

Fifth, whether appellant had constructive knowledge

of the bankrupt’s insolvency.

(4) Appellant Mario Trucking Company raises the

same issues.

adie. orn

A29

Appellant Klochko Equipment raises the same issues

but, in addition, claims that any transfer of property

was not within four months of the bankruptcy and

claims that the Referee committed error in the

re-opening of the Trustee’s case. .

Finally, Appellant Price Brothers raises the same

issues but claims, in addition, that it was a secured

creditor because of the Notice it filed with the

contractor.

The Court has carefully considered the record in each

case and finds that the Referee’s findings of fact are not

clearly erroneous. Therefore, the Court will reaffirm the

findings that the payment was on account for an

antecedent debt;

That the payment depleted the bankrupt'’s estate;

That the bankrupt was then insolvent, and;

That the creditor had constructive knowledge of the

insolvency.

The Court also finds from a review of the record in

these cases that there are no procedural errors. The form

of evidence; the credibility of witnesses and the (5)

issues raised by Klochko Equipment regarding the

re-opening of the record, are all matters addressed to

the discretion of the Bankruptcy Court and this Court

finds that that discretion has not been abused.

The central issue in each of these appeals — and let

me say it is an issue of law — is whether the bankrupt

held a property interest in the check issued jointly to it

and a creditor.

It is undisputed that the check in each case

represented funds owed by the bankrupt to the

creditors.

It is also undisputed that the check was paid out of

funds owed by the contractor to the bankrupt.

A30

The Couft finds that such a transfer from a contractor

to a sub-contractor and creditor of the bankrupt

involving work performed on a public project is a

transfer of the bankrupt’s property within the meaning

of Sec. 60(a) of the Bankruptcy Act. The general rule is

that any chosen action of the bankrupt is property of

the bankrupt. The Court cites in that regard its Opinion

in Atlas Concrete Pipe v Rocco Perrera, found at 409 F

Supp, 1364, a 1975 decision.

The same principle applies to these appeals.

The contractor was not holding this money in trust as

appellants would argue, since the Trustee (6) theory in

Michigan, MCLA 507.151, does not apply to public

projects. The Court will cite in that regard the decision

of the Sixth Circuit in General Insurance Co. of America

v. Lamar Corporation, found at 482 F 2d. 856, being a

1973 case and Beiter v. Kuhlman, 59 Mich. App., 54, and

note particularly page 57, a 1975 case. Further, the

decision by this Court in the appeal of Able Rental

Service, in this case.

Since the property being transferred was that of the

bankrupt’s, it makes no difference that the transfer was

completed through a third person. The Court cites in

that regard Steel Structures, Inc. v Star Manufacturing

Co., 466 P 2d, 207, the same being a Sixth Circuit

decision dated 1972.

The next issue raised by the Appellant Price Brothers

is as to whether it was a secured creditor because it had

complied with the statutory notice requirements of

MCLA 129.201, and those sections following.

The Court finds under MCLA 129.207 that the

contractor was not obliged to make payments directly to

the material man so that no security interest was

acquired and the bankrupt at all times retained its

interest in the receivables.

A31

In regard to the Garnishment lein filed by Klochko

Equipment, the Court agrees with the Trustee's

construction of Federal Rule 6(a) when applied to Sec.

60(a) (7) of the Bankruptcy Act, which means that this

lein could also be set aside on the grounds that it was

acquired within four months of the bankruptcy. The

Court also finds that the lein was never perfected and if

it had been, the Court would have had to set the same

aside as being illegal and the Court cites in that regard

Fuentes v. Shevin, 407 U.S., 67, the same being a 1972

case.

For all these reasons, the Court hereby affirms the

respective decisions of the Bankruptcy Court and the

Court will sign individual orders to that effect as they

pertain to each appellant.

This concludes the Court's ruling.

State of Michigan

County of Genesee—ss.

I hereby certify that I reported in stenotypy the

proceedings had in open court in the above-entitled

matter before the Honorable JAMES HARVEY, Judge,

United States District Court, at the time and place

hereinbefore set forth; that the Opinion portion thereof

was thereafter reduced to typewritten form by me or

under my supervision, and that the foregoing transcript

is a full, true and correct transcription of my stenotype

notes.

/s) JAMES E. WYSZYNSKI,

Official Court Reporter

A32

OPINION and ORDER

(United States District Court

(For the Eastern District of Michigan

Southern Division)

(In Bankruptcy)

(Filed )

In the Matter of Olympia Construction Company, a

Michigan Corporatic® Bankrupt, Robert E. Parker,

Trustee in Bankruvt = “laintiff, vs Klochko Equipment

Rental Compan: ee., a Michigan Corporation,

Defendant. No. 74-6v8®*

On September 12, 1974 the trustee, Robert E. Parker,

filed a complaint to recover a preference from the

defendant, bringing the action under Section 60 of the

Bankruptcy Act.

Findings of Fact

Olympia filed a voluntary petition in bankruptcy

December 21, 1973. On September 11, 1973 the

bankrupt transferred the sum of $20,000 by check

(Exhibit #2) to or for the benefit of the defendant, a

creditor, by obtaining from Markward & Karafilis,

hereinafter referred to as M & K, the prime contractor, a

check from M & K drawn on an account owed by M &

K to Olympia. The check from M & K was preceded by

a garnishment filed by the defendant Klochko against

the account owed by M & K to Olympia (Plaintiff's

Exhibit #4). The Writ of Garnishment stated that the

defendant had commenced an action against Olympia

claiming $21,121.68 and was dated August 16, 1973,

plaintiff's attorney being Richard J. Langs.

wNebde

A33

Subsequently, the garhishee defendant, M & K, settled

the garnishment by paying the defendant the sum of

$20,000 for which the defendant agreed to release M &

K and look to the bankrupt for the balance.

The affidavit for the Writ of Garnishment (Exhibit B)

filed by the defendant and signed by Richard J. Langs

states:

“Ana tnis deponent further says that he is justly

apprehensive of the loss of said sum so due to

the said plaintiff from said defendant, unless a

Writ of Garnishment is issued since without it

the defendant may at any time release, claim,

remove, and secret or transfer and dispose of the

aforesaid indebtedness, money, goods, chattels,

credits, negotiable instruments and effects, thus

making it unavailable to the satisfaction of

plaintiff's judgment.”

On September 18, 1973, a Stipulation to Dismiss

Ancillary Garnishment Action and Release Garnishee

Defendant From Liability was filed in the Circuit Court

for the County of Livingston in Civil Action No. 2313 in

which Klochko Equipment Rental Company appears as

plaintiff and Olympia Construction Company appears

as defendant. The stipulation was signed by Richard J.

Langs. An Order of Dismissal, re the above action, was

filed on September 18, 1973 releasing M & K from

further liability in relation to the ancillary garnishment.

(Exhibit D)

On November 30, 1973 Klochko took a default

judgment against Olympia in the amount of $1,121.68

which was the balance owing to Olympia by M & K

after M & K issued its check for $20,000 to the

defendant Klochko and debited its account owing to

Olympia in a like amount. (Bankrupt’s Exhibit #2)

A34

Plaintiff introduced Exhibit #6, an account ledger of

the transactions between the bankrupt and the

defendant. Exhibit #6 shows a first entry dated 11/30/72

which was a charge in the amount of $2,512.26 which

was paid 12/22/72, and from thereon the record indicates

a constantly increasing indebtedness of the bankrupt to

defendant with the last credit being 5/1/73 which

brought the account down to $17,085.67. This was the

last payment made by Olympia on the account except

for July 1973 when a total credit of $3,000 was given for,

as I recall, return of equipment. On June 29, 1973 the

balance on the account owed to the defendant was

$20,859.93 and on July 27, it was $24,121.68 which was

the last transaction of business between the parties.

Billings were made on a 30 day net basis.

The payment made in May of 1973 by Olympia to the

defendant was on account of an invoice dated 2/28/73.

The Affidavit of Richard J. Langs, (Exhibit #7,) states

that on August 16, 1973 Neil Peffer, Office Manager of

Klochko forwarded to him documents evidencing a debt

from Olympia to Klochko and he then prepared and

filed in the Livingston Circuit Court a Complaint

against Olympia (the bankrupt) which he filed in the

Livingston Circuit Court and he personally went to the

office of M & K during the lunch hour on August 20,

1973 and served the Writ on M & K.

The Affidavit further states that before a disclosure

was made he received a call from George Peck, treasurer

of M & K, suggesting that M & K would like to get the

garnishment released and subsequently the parties

agreed upon a total payment of $20,000 to release the

garnishment and hold M & K harmless on any balance.

A35

The Affidavit further states that subsequently he

pursued the balance of Klochko claim against Olympia

to judgment in Livingston County Circuit Court on

November 30, 1973 when a default judgment of

$1,121.68 plus interest of 142% a month from February

of 1973 was entered against Olympia.

Findings of Law

The elements of a preference under Section 60 consist

of the following:

“A debtor (1) making or suffering a transfer of

his property, (2) to or for the benefit of a

creditor, (3) for or on account of an antecedent —

debt, (4) while insolvent, and (5) within four

months of bankruptcy, (6) the effect of which

transfer will be to enable the creditor to obtain a

greater percentage of his debt than some other

creditor of the same class (7) the creditor

receiving or to be benefited by the preference

has reasonable cause to believe that the debtor

was insolvent.’”’ Vol 3, Collier, Sections 60.02,

p. 758-59.

1. As to the First Element

Exhibit #2, a check in the amount of $20,000.00

payable to Olympia Construction Company and

Klochko Equipment Rental Company, was paid by

Markward & Karafilis, Inc. as the result of the

garnishment to Olympia by M & K. Exhibit #2 was

endorsed as follows:

Olympia Construction Co

Michel J. Pricer

Vice President

A36

The payment reduced the assets of Olympia by

$20,000 and paid approximately 95% of the claim that

Klochko had against the bankrupt.

Plaintiff has proved the elements of No. 1.

2. As to the Second Element

The record clearly proves by virtue of Exhibit #2, the

check, Exhibit #1, a letter from Mr. Langs to Mr.

George Peck of M & K dated September 13, 1973,

acknowledging the receipt of the $20,000 check, Exhibit

#7, the Affidavit of Richard J. Langs wherein he agreed

to release the garnishment for an immediate payment of

$20,000 from Mr. Peck and the acknowledgment that the

$20,000 was given to him on September 11, 1973, the

Stipulation to Dismiss the Ancillary Garnishment,

Exhibit C, and the Order of Dismissal of the Ancillary

Garnishment, Exhibit D and the Default Judgment,

Exhibit E, judgment taken November 30 for the balance

of the Klochko claim of $1,121.68, that indeed the

defendant did receive payment in the amount of

$20,000.

Plaintiff has proved element No. 2.

3. As to the Third Element

Exhibit #6 shows that the last charge made by the

defendant against Olympia was dated July 27, 1973. The

date of payment on the account was September 11,

1973. Clearly the debt was an antecedent one in

contemplation of Section 60. Cooper Petroleum Company

379 F2d 777

Clearly the plaintiff has proved element No. 3.

PU: ARS etwas WOE EE ae soe! Set ater Nite ta »

ee ee Oe es a ee

A37

4. As to the Fourth Element

Plaintiffs introduced in evidence the bankruptcy

schedules of the bankrupt which showed on the date of

adjudication the debts to be $416,600.01 and the assets

to be $45,885.00. Plaintiff called as his witness the

bookkeeper of the bankrupt who had been such from

the inception of the business. She testified that she was

thoroughly familiar with the books and records of the

bankrupt and that they were kept under her control,

and that the assets and liabilities as shown on the

schedules of the bankrupt were substantially the same

at a four month period pre-dating the filing of the

bankruptcy. Referring to the Statement of Affairs of the

bankrupt the schedules indicate that no property was

transferred by the bankrupt in the twelve months

preceding bankruptcy. :

Clearly, the plaintiff has proved that on the date of

transfer the bankrupt was insolvent.

5. As to the Fifth Element

Exhibit #2 shows the payment to defendant to be

September 11, 1973, which would be well within the

four month period contemplated by Section 60.

Clearly, the plaintiff has proved that the transfer of

the $20,000 complained of occurred within four months

preceding bankruptcy.

6. As to the Sixth Element

On the date of the transfer, according to the record,

the bankrupt cwed $21,121.68 to the defendant. By

receiving $20,000 of the amount owed the defendant

A38

received approximately 95% of its claim against the

bankrupt. The defendant was a general creditor and the

bankruptcy schedules indicate that the bankrupt owed

general creditors approximately $98,054.00 on the date

of the transfer. If all of the assets could be distributed to

the general creditors on a pro-rata basis, and there were

no secured creditors to deal with, and no expenses of

administration were allowed, the general creditors

would get 20% of their claims against the bankrupt.

Clearly, the plaintiff has proved the 6th element.

7. As to the Seventh Element

Did the defendant have reasonable cause to believe

that the bankrupt was insolvent at the time of transfer?

As might be suspected, a substantial amount of case

law has developed over this troublesome seventh

element. As the author points out in Cowans

Bankruptcy Law and Practice, Section 752, p 401:

“Seldom is any single factor considered

determinating of reasonable cause to believe. It

is thus difficult to point to single factors.

Experienced counsel know that it is seldom an

easy burden to make a case out of the knowledge

or experience of the opposing party.”’

What an incongruous position Congress has imposed

upon creditors who receive payment of antecedent

debts within four months of bankruptcy; an obligation

to return such amounts to the bankrupt’s estate if the

creditor had, at the time of transfer, a reasonable cause

to believe the debtor then insolvent, and if, indeed, the

debtor was insolvent.

- neal

: A39

Section 60 was enacted to carry out the congressional

intent in creating the Bankruptcy Act of providing that

the bankrupt’s property would be paid pro-rata to all

general creditors. In order to prevent raids on the

bankrupt’s property by knowledgeable and informed

creditors, and prevent payment to favored creditors,

Congress provided that any payment on an antecedent

debt within four months of the date of adjudication

would violate the equal distribution of assets theory

and hence should be repaid to the bankrupt’s creditors

through the trustee. That would seem to carry out the

congressional intent in a reasonable manner, but

unfortunately, Congress added that in order to subject a

creditor to the recovery of the funds by the trustee, the

trustee must show that the creditor had reasonable

cause to believe the bankrupt insolvent at the time of’

the transfer.

Presumably, if a creditor were to meet the

requirements of Sec. 60, and he had any indication that

the debtor might be insolvent at the time he was

tendered the amount of the debt by the debtor, he

should either refuse it, which is unthinkable, or make

inquiry as to whether the debtor was indeed insolvent.

If the creditor did find insolvency, then the creditor

should refuse payment, or surrender such to the trustee

if bankruptcy ensured within four months of payment. |

have never heard of such a voluntary return of money

to the trustee. Sec. 60 was enacted to compel such a

legal duty.

As a matier of public policy, to carry out the intent of

Congress for equal distribution, Section 60 relating to

preferences should be liberally construed in favor of

A40

recovery of payments made within four months of

bankruptcy on an antecedent debt. It is quite clear that

the Courts have done this. In the case of C.A. Swanson

and Sons vs Wilie, 237 F2d 16, the court said:

‘The creditor need not have actual knowledge of

debtor’s insolvency.”

In the cases of in re States Printing Co., 238 F755,

McDougal vs Central Union Conference, 110 F2d 939, the

Court said:

“Nor need le actually believe him to be

insolvent.’

In the case of Salter vs Guarity Trust Co., 237 F2d 446,

the court said:

“The creditors action will be taken as evidence

of his beliefs, however.

Few courts will permit a creditor to say that even

though it appears from the facts that he did

believe the debtor to be insolvent, that the Court

should pay no attention to this because he was

acting unreasonably in his beliefs.”

The test is somewhat an objective one in the courts

consideration of the question of fact.

In the case of in re Cox 132 F2d 881, the Court said:

“One has reasonable cause to believe one’s

transferor is insolvent when a reasonable person

in possession of the facts known or evident to

the creditor would believe him insolvent.”’

In the same case the Court held:

“The creditor may not escape the effect of facts

he already knew. If he knew enought to put him

ee ee ee

‘

Deen A he we aie Pact Pile RMBs BP ha et AN Eth pe tas a BR OOO

Sen SS eed

A41

on inquiry as a reasonable man, it was necessary

for him to make the inquiry.”

In the case of Security First National Bank vs Quittner,

176 F2d 997; Marks vs Goodyear 238 F2d 533; Mizell vs

Phillips, 240 F2d 738; Grandeson vs National Bank, 231

F800; Cert. denied. 242 U.S. 644.

“He is responsible for what the inquiry would

have revealed.”

In the case of Gering vs Layda, 186 F 110; McGir vs

Humphreys, 192 F55, the Court held:

“The inquiry required of one in determining

insolvency may not safely be confined to

discussing the matter with the bankrupt who

may be a dubious source of information.”

According to the test applied by the Courts, if the

respondent creditor had grounds exciting his suspicion

as to whether or not the bankrupt was insolvent at the

time of the transfer, the creditor is bound to make an

investigation before accepting the transfer of funds, and

if the creditor does not make the investigation, he is

nonetheless bound by what he might have found if he

had. Exhibit B, the Affidavit of Garnishment executed

by Mr. Langs on behalf of his client Klochko Equipment

Rental Company, sufficiently states an apprehension on

the part of the defendant that without the aid of the

garnishment of the funds held by M & K the creditor

might indeed go unpaid.

The record indicates that on August 16, 1973 the

documents evidencing a debt from the bankrupt to

Kochko were mailed by Mr. Peffer, Office Manager of

the defendant to Mr. Langs and Mr. Langs took

precipitous action. The Affidavit of Garnishment was

A42

sworn to on August 15 and the Garnishment was served

personally by Mr. Langs on August 20. The

garnishment action itself is a rather precipitous and

hard-handed means of dealing with a customer. The

connotation would be that either the debtor refused to

pay the bill or was unable to do so. In this case, the

record indicates from the testimony of Mrs. Voorhies

that there was a willingness to pay but that the

bankrupt could not. The garnishment, of course, under

the circumstances, was justified, and the evident

suspicions of the defendant creditor were also justified.

The substance of Mr. Langs /.ffidavit was undoubtedly

obtained from his client, the defendant. He was

apprehensive that the account would not be paid

because his client undoubtedly advised him to that

affect. His knowledge is imputable to his principle,

Klochko.

Mr. -Peffer, who was called by plaintiff's counsel,

testified that he made telephone calls to the bankrupt

during July and August and then because the bill was

not paid, he turned the account over to Mr. Langs for

garnishment procedures. He testified:

“In the light of conflicting statements from

Olympia and K & M, I decided to send the

account to Mr. Langs.”

He testified further that he had several telephone

conversations with an employee of Olympia by the

name of Mike who promised payment by certain dates

on account and the payments received were not in the

amount as promised. The excuse for this, was that

Olympia was having difficulties collecting from M & K.

He then stated that he talked with someone at M & K

and M & K advised the witness that M & K was making

payments to Olympia and Olympia should have the

money to pay.

A43

The deposition of George Peck, former treasurer of

M & K was read into the record. He testified that he

dealt with Mr. Voorhies at Olympia concerning the

account, and on page 13 of the deposition stated:

“We eventually realized that Olympia had a

financial problem, due to the fact that we were

being contacted by numerous debtors.”

On page 14 stated that:

“I met Voohies, of Olympia, at the M & K offices

several times to talk over the financial situation.’’

On page 15 testified that:

“I became concerned about the ability of

creditors to furnish them equipment and

materials.”

These concerns of the witness and the knowledge that

he has testified to is imputable to his principal, the

defendant.

It is the conclusion of this Court that the record

discloses abundant evidence that the defendant creditor

was apprehensive concerning the ability of the

bankrupt to pay its debt.

Under the authorities cited the defendant is charged

with what it would have determined had it made then

an investigation of the financial condition of the

bankrupt. Within the four month period, the defendant

creditor would have found that the bankrupt was

insolvent and was insolvent at the time the payment

was made to him.

This court will hold that element No. 7 has been

proved by the plaintiff.

A44

Garnishment

The defendant contends that it perfected a lien by

garnishment before the four month period preceding

bankruptcy and hence that Section 60 of the Bankruptcy

Act would have no applicable force.

The record shows that the garnishment was served on

the garnisheed defendant on August 20, 1973 and that

the date of adjudication was December 21, 1973. The

rule for computation time is expressed in U.S. vs Young

376 F. S. 1290, and it is clear that the computation of

time does not begin until the day after the event. The

running of the time of the garnishment would begin on

August 21 and 120 days expiring would bring it on

December 21. This would be within the four months

period prior to bankruptcy.

However, the issue of the effect of the garnishment as

a lien under the circumstances herein has already been

passed upon in the case of Douglas Research and

Chemical, Inc. vs Solomon, a case heard before

Honorable George C. Edwards, Jr., United States Court

of Appeals Judge, the Honorable John Feikens and the

Honorable Charles W. Joiner, United States District

Judges sitting in Detroit, Michigan. The opinion of the

Honorable Charles W. Joiner held that the Michigan

Garnishment law was invalid because it violates due

process as defined in the case of Fuentes vs Shevin, 407

U.S. 67. The Douglas Research and Chemical case is as

yet unreported to my knowledge.

The record in this case would indicate that the

defendant herein resorted to prejudgment garnishment

and hence the claimed lien would be invalid. Other

cases which have ruled on the matter of prejudgment

te Re Me tee

$2 Biddegis naeds

ee eee

A45

garnishment statutes are Sniadach vs Family Finance, 395

U.S. 335, Larson vs Featherstone, 44 Wis. 2d 712, 172

N.W.2d, Jones Press, Inc., vs Motor Travel Service, Inc.,

176 N.W.2d 87; Randon vs Appellate Court of California,

488 P2d 13.

The Michigan Court of Appeals quoting Sniadach and

Fuentes, supra has declared the Michigan replevin

statute unconstitutional for the same principle of law.

Motor Sales vs Judge of the Common Pleas Court, 42 Mich.

Appeal 112.

There being no lien on which the defendant can rely,

the transfer occurred on the date the funds were

delivered to the defendant.

Although the Court does not recall the parties raising

the issue of invalidity of the garnishment for lack of

due process, the Court may support its order on any

ground which the record justifies. In re Loresh 117 F2d

612.

Likewise, the claimed lien would appear to be invalid

under Sec. 67 a(1), and although the defendant argued

that the transfer of the funds through a third person

was property which never became part of the bankrupts

assets, a creditor may not do by indirection what he is

prohibited from doing by direction. Stee! Structures vs

Star Manufacturing 466 F2d 207.

Order

The transfer in the present case meets all the

requirements of Section 60, the preference statute. The

payment was made within four months of bankruptcy

on account of an antecedent debt; the bankrupt was

insolvent at that time; the property transferred belonged

A46

to the bankrupt; the effect of the transfer was to enable

the defendant to obtain a greater percentage of its claim

than other creditors of the same class; the creditor

defendant had a reasonable cause to believe that the

bankrupt was insolvent at the time the transfer was

perfected. The sole purpose of the transaction was to

require Olympia, the bankrupt, to pay Klochko, an

unsecured debt, all the parties to the transaction knew

this to be true. The payment diminished the assets of

Olympia in like proportion, and every general creditor,

in effect, would be an unwilling and unknowing

contributor.

The trustee shall have and does, a judgment against

defendant in the amount of $20,000.

/s) Harold H. Bobier

Bankruptcy Judge

Eastern District of Michigan

Dated: 9/5/1975

JUDGMENT ORDER

(United States District Court

Eastern District of Michigan

Southern Division)

(Filed June 20, 1975)

In re: OLYMPIA CONSTRUCTION COMPANY, a

Michigan corporation, Bankrupt: ROBERT E. PARKER,

Trustee in Bankruptcy, Plaintiff, vs. MARIO

TRUCKING CO., a Michigan Corporation, Defendant.

Bankruptcy No. 74-60440.

iittcie diecast rae

A47

At a session of said Court held in the Federal

Building, Flint, Genesee County, Michigan, on the 24th

day of June, 1975.

PRESENT: HONORABLE HAROLD H. BOBIER,

Bankruptcy Judge.

This matter having come on to be heard and tried by

the Court, and testimony having been taken, argument

having been heard and the Court being fully advised in

the premises, and the Court having rendered its

findings of facts and conclusions of law based thereon.

IT IS HEREBY ORDERED AND ADJUDGED that the

Plaintiff, Robert E. Parker, Trustee of Olympia

Construction Company, be, and hereby is, granted a

Judgment against the Defendant, Mario Trucking Co.,

in the amount of Twenty-five Thousand and 00/100

Dollars ($25,000.00).

/s/ Harold H. Bobier

Judge in Bankruptcy

APPROVED:

CROSS, WROCK, MILLER & VIESON

By /s/ Andrew A. Paterson (P18690)

Attorneys for Trustee

4200 Penobscot Building

Detroit, Michigan 48226

965-8135

's) By ROBERT A. ROSENBERG

Attorney for Bankrupt

9817 East Grand River Avenue

Brighton, Michigan 48116

227-2020

APPROVED AS TO FORM ONLY:

D’AVANZO & DANKO

By /s) STEPHEN G. DANKO (P 12488)

Attorneys for Defendant

12154 Dix-Toledo Rd.

Southgate, Michigan 48195

282-1611

A48

JUDGMENT ORDER

(United States District Court

Eastern District of Michigan Southern Division)

(Filed September 29, 1975)

In re: OLYMPIA CONSTRUCTION COMPANY, a

Michigan corporation, Bankrupt: ROBERT E. PARKER,

Trustee in Bankruptcy, Plaintiff, vs. PRICE BROTHERS

COMPANY, a Michigan corporation, DARREL

PRIESTLY, PRIESTLY CONTRACTING, INC., a

Michigan corporation, Defendants. Bankruptcy No.

74-60440,

At a session of said Court held in the Federal

Building, Flint, Genesee County, Michigan, on the 30th

day of Sept., 1975.

PRESENT: HONORABLE HAROLD H. BOBIER,

Bankruptcy Judge.

This matter having come on to be heard and tried by

the Court, and testimony having been taken, argument

having been heard and the Court being fully advised in

the premises, and the Court having rendered its

findings of facts and conclusions of law based thereon,

IT IS HEREBY ORDERED AND ADJUDGED that the

Plaintiff, Robert E. Parker, Trustee of Olympia

Construction Company, be, and hereby is, granted a

Judgment against Defendants Darrel Priestly and

Priestly Contracting, Inc., jointly and severally, in the

amount of Six Thousand Eight Hundred Eighty-three

and 56/100 Dollars ($6,883.56).

A49

IT Is FURTHER ORDERED AND ADJUDGED that the

Plaintiff, Robert E. Parker, Trustee of Olympia

Construction Company, be, and hereby is, granted a

Judgment against Defendant Price Brothers Company

in the amount of Six Thousand Eight Hundred

Eighty-three and 56/100 Dollars ($6,883.56).

/s) Harold H. Bobier

Bankruptcy Judge

Approved As To Form:

DAVID, HAYWARD, KINGSEPP & HERTLER

By: JON H. KINGSEPP (P15982)

Attorneys for Defendant

Price Brothers Company

622 Washington Square Plaza

Royal Oak, Michigan 48067

548-7007

A50

JUDGMENT ORDER

(United States District Court

Eastern District of Michigan Southern Division)

(Filed September 10, 1975)

In re: OLYMPIA CONSTRUCTION COMPANY, a

Michigan corporation, Bankrupt: ROBERT E. PARKER,

Trustee in Bankruptcy, Plaintiff, vs. DOUG

SCHROEDER, INC., a Michigan’ corporation,

Defendant. Bankruptcy No. 74-60440.

At a session of said Court held in the Federal

Building, Flint, Genesee County, Michigan, on the 31st

day of July, 1975.

PRESENT: HONORABLE HAROLD H. BOBIER,

Bankruptcy Judge

This matter having come on to be heard and tried by

the Court, and testimony having been taken, argument

having been heard and the Court being fully advised in

the premises, and the Court having rendered its

findings of facts and conclusions of law based thereon.

IT Is HEREBY ORDERED AND ADJUDGED that the

Plaintiff, Robert E. Parker, Trustee of Olympia

Construction Company, be, and hereby is, granted a

Judgment against the Defendant, Doug Schroeder, Inc.,

in the amount of Eight Thousand One Hundred

Seventeen and 32/100 Dollars ($8,117.32).

/s) Harold H. Bobier

Bankruptcy Judge

APPENDIX B

11 USC §104. Debts which have priority

(a) The debts to have priority, in advance of the

payment of dividends to creditors, and-to be paid in

full out of bankrupt estates, and the order of payment,

shall be (1) the costs and expenses of administration,

including the actual and necessary costs and expenses of

preserving the estate subsequent to filing the petition;

the fees for the referees’ salary and expense fund; the

filing fees paid by creditors in involuntary cases or by

persons other than the bankrupts in voluntary cases;

where property of the bankrupt, transferred or

concealed by him either before or after the tiling of the

petition, is recovered for the benefit of the estate of the

bankrupt by the efforts and at the cost and expense of

one or more creditors, the reasonable costs and

expenses of such recovery; the trustee’s expenses in

opposing the bankrupt’s discharge or in connection

with the criminal prosecution of an offense punishable

under chapter 9 of Title 18, or an offense concerning the

business or property of the bankrupt punishable under

other laws, Federal or State; the fees and mileage

payable to witnesses as now or hereafter provided by

the laws of the United States and one reasonable

attorney’s fee, for the professional services actually

rendered, irrespective of the number of attorneys

employed, to the bankrupt in voluntary and involuntary

cases, and to the petitioning creditors in involuntary

cases, and if the court adjudges the debtor bankrupt

over the debtor’s objection or pursuant to a voluntary

petition filed by the debtor during the pendency of an

involuntary proceeding, for the reasonable costs and

expenses incurred, or the reasonable disbursements

made, by them, including but not limited to

compensation of accountants and appraisers employed

by them, in such amount as the court may aliow. Where

an order is entered in a proceeding under any chapter

of this title directing that bankruptcy be proceeded

with, the costs and expenses of administration incurred

in the ensuing bankruptcy proceeding, including

expenses necessarily incurred by a debtor in

possession, receiver, or trustee in preparing the

schedule and statement required to be filed by section

638, 778, or 883 of this title, shall have priority in

advance of payment of the unpaid costs and expenses of

administration, including the allowances provided for

in such chapter, incurred in the superseded proceeding

and in the suspended bankruptcy proceeding, if any;

(2) wages and commissions, not to exceed $600 to each

claimant, which have been earned within three months

before the date of the commencement of the

proceeding, due to workmen, servants, clerks, or

traveling, or city salesmen on salary or commission

basis, whole or part time, whether or not selling

exclusively for the bankrupt; and for the purposes of

this clause, the term “traveling or city salesman’ shall

include all such salesmen, whether or not they are

independent contractors selling the products or services

of the bankrupt on a commission basis, with or without

a drawing account or formal contract; (3) where the

confirmation of an arrangement or wage earner plan or

the bankrupt’s discharge has been refused, revoked, or

set aside upon the objection and through the efforts and

at the cost and expense of one or more creditors, or,

where through the efforts and at the cost and expense

of one or more creditors, evidence shall have been

adduced resulting in the conviction ot any person of an

offense under chapter 9 of Title 18, the reasonable costs

and expenses of such creditors in obtaining such

refusal, revocation, or setting aside, or in adducing

such evidence; (4) taxes which became legally due and

owing by the bankrupt to the United States or to any

State or any subdivision thereof which are not released

by a discharge in bankruptcy: Provided, however, That

no priority over general unsecured claims shall pertain

to taxes not included in the foregoing priority: And

provided further, That no order shall be made for the

payment of a tax assessed against any property of the

bankrupt in excess of the value of the interest of the

bankrupt estate herein as determined by the court; and

(5) debts other than for taxes owing to any person,

including the United States, who by the laws of the

United States is entitled to priority, and rent owing to a

landlord who is entitled to priority by applicable State

law or who is entitled to priority by paragraph (2) of

subdivision c of section 107 of this title: Provided,

however, That such priority for rent to a landlord shall

be restricted to the rent which is legally due and owing

for the actual use and occupancy of the premises

affected, and which accrued within three months before

the date of bankruptcy.

11 USC § 110. Title to property

(a) The trustee of the estate of a bankrupt and his

successor or successors, if any, upon his or their

appointment and qualification, shall in turn be vested

by operation of law with the title of the bankrupt as of

the date of the filing of the petition initiating a

proceeding under this title, except insofar as it is to

property which is held to be exempt, to all of the

following kinds of property wherever located (1)

documents relating to his property; (2) interests in

patents, patent rights, copyrights, and trade-marks, and

in applications therefor: Provided, That in case the

trustee, within thirty days after appointment and

qualification, does not notify the applicant for a patent,

application to allowance or rejection, the bankrupt may

apply to the court for an order revesting him with the

title thereto, which petition shall be granted unless for

cause shown by the trustee the court grants further time

to the trustee for making such election; and such

applicant may, in any event, at any time petition the

court to be revested with such title in case the trustee

shall fail to prosecute such application with reasonable

diligence; and the court, upon revesting the bankrupt

with such title, shall direct the trustee to execute proper

instruments of transfer to make the same effective in

law and upon the records; (3) powers which he might

have exercised for his own benefit, but not those which

he might have exercised solely for some other person;

(4) property transferred by him in fraud of his creditors;

(5) property, including rights of action, which prior to

the filing of the petition he could by any means have

transferred or which might have been levied upon and

sold under judicial process against him, or otherwise

Plata ni te ows

seized, impounded, or sequestered: Provided, That

rights of action ex delicto for libel, slander, injuries to

the person of the bankrupt or of a relative, whether or

not resulting in death, seduction, and criminal

conversation shall not vest in the trustee unless by the

law of the State such rights of action are subject to

attachment, execution, garnishment, sequestration, or

other judicial process: And provided further, That when

any bankrupt, who is a natural person, shall have any

insurance policy which has a cash surrender value

payable to himself, his estate, or personal

representatives, he may, within thirty days after the

cash surrender value has been ascertained and stated to

the trustee by the company issuing the same pay or

secure to the trustee the sum so ascertained and stated,

and continue to hold, own, and carry such policy free

from the claims of the creditors participating in the

distribution of his estate under the bankruptcy

proceedings, otherwise the policy shall pass to the

trustee as assets; (6) rights of action arising upon

contracts, or usury, or the unlawful taking or detention

of or injury to his property; (7) contingent remainders,

executory devises and limitations, rights of entry for

condition broken, rights or possibilities of reverter, and

like interests in real property, which were

nonassignable prior to bankruptcy and which, within

six months thereafter, become assignable interests or

estates or give rise to powers in the bankrupt to acquire

assignable interests or estates; and (8) property held by

an assignee for the benefit or creditors appointed under

an assignment which constituted an act of bankruptcy,

which property shall, for the purposes of this title, be

deemed to be held by the assignee as the agent of the

bankrupt and shall be subject to the summary

jurisdiction of the court.

All property, wherever located, except insofar as it is

property which is held to be exempt, which vests in the

bankrupt within six months after bankruptcy by

bequest, devise or inheritance shall vest in the trustee

and his successor or successors, if any, upon his or

thei: appointment and qualification, as of the date

when it vested in the bankrupt, and shall be fiee and

discharged from any transfer made or suffered by the

bankrupt after bankruptcy.

All property, wherever located, except insofar as it is

property which is held to be exempt, in which the

bankrupt has at the date of bankruptcy an estate or

interest by the entirety and which within six months

after bankruptcy becomes transferable in whole or in

part solely by the bankrupt shall, to the extent it

becomes so transferable, vest in the trustee and his

successor or successors, if any, upon his or their

appointment and qualification, as of the date of

bankruptcy.

The title of the trustee shall not be affected by the

prior possession of a receiver or other officer of any

court.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.