Liberty Nat. Bank of Roanoke v. Bear

Background

A bank obtained a judgment on July 20, 1920, against a Virginia partnership and against the two partners personally, and that judgment was recorded as a lien on their real estate. On August 6 an involuntary bankruptcy petition named the partnership, which was adjudged bankrupt on August 20. Months later the two partners filed voluntary bankruptcy petitions and were adjudged bankrupt individually. The bank filed claims treating its recorded judgment as a secured lien on the partners’ separate estates, and the partnership trustee objected under a provision of the Bankruptcy Act that can annul recent liens.

Reasoning

The Court addressed whether a judgment lien obtained within four months before a bankruptcy is void under §67f of the Bankruptcy Act. It explained that §67f applies only when the person was insolvent when the lien was obtained, and that insolvency must be both alleged and proved. The Court declined to decide whether a partnership’s bankruptcy automatically adjudicates the individual partners’ bankruptcy. Because the trustee never alleged or proved the partners’ insolvency at the time the judgment was entered, the Court found no basis to annul the liens and reversed the lower court.

Real world impact

Trustees cannot strip recent judgment liens from individual property without specifically alleging and proving the debtor was insolvent when the lien attached. Creditors who recorded judgment liens within four months before a bankruptcy will keep those liens unless insolvency is shown. The question whether a partnership bankruptcy automatically binds the partners individually remains open for later cases.