Lehman, Stern & Co. v. S. Gumbel & Co.

Background

A cotton seller (Lehman, Stern & Company) sold 392 bales to a commercial buyer (Martin & Company). The buyer’s checks bounced, and the seller sued in state court to recover the purchase price and to foreclose a five-day vendor’s lien under Louisiana law. The seller obtained attachment and garnishment writs against goods held by third parties, including a railroad and merchants. The buyer was adjudicated bankrupt and a receiver was appointed, who claimed the cotton and sought to stop the state foreclosure.

Reasoning

The key question was whether the state court could use attachments and garnishments served before bankruptcy to keep the cotton and foreclose the vendor’s lien after the buyer’s bankruptcy. The Louisiana Supreme Court held that under state law the vendor’s lien could be enforced only against property in the court’s possession, and that garnishment did not transfer legal possession to the state court. The U.S. Court accepted that state-law ruling and further held that a provision of the Bankruptcy Act (§67f) dissolved the attachment. Because the state court lacked possession and the attachment was dissolved, the seller could not foreclose in state court and the case belonged in bankruptcy proceedings.

Real world impact

Sellers who seek to seize goods by state garnishment before a buyer’s bankruptcy cannot necessarily keep or foreclose on those goods once bankruptcy is filed. Third parties holding goods will need to treat claims through the bankruptcy process rather than state court attachment remedies. The ruling affirms the Louisiana court’s prohibition and sends disputed claims to the bankruptcy court.

Dissents or concurrances

The Louisiana Supreme Court decision on rehearing had one judge dissenting, but the U.S. Court affirmed the judgment affirming the writ of prohibition.