Britt v. Damson

• Decision Date: 17 August 1964
• Docket Number: No. 18973.,18973.
• Citation: 334 F.2d 896
• Parties: Dennis J. BRITT, Trustee of Frank James Damson, Bankrupt, Appellant, v. Alice J. DAMSON, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

334 F.2d 896 (1964)

Dennis J. BRITT, Trustee of Frank James Damson, Bankrupt, Appellant, v. Alice J. DAMSON, Appellee.

No. 18973.

United States Court of Appeals Ninth Circuit.

July 7, 1964.

Rehearing Denied August 17, 1964.

George S. Lundin, Geraghty, Lundin & Geraghty, Seattle, Wash., for appellant.

Jack M. Whitmore and William J. Powers, Whitmore, Vinton, Powers & Manion, Seattle, Wash., for appellee.

Before CHAMBERS, HAMLEY and HAMLIN, Circuit Judges.

HAMLEY, Circuit Judge.

Dennis J. Britt, trustee of Frank James Damson, bankrupt, brought this suit against the bankrupt's former wife, Alice J. Damson, to obtain title and possession of community property which had been awarded to her in the divorce proceedings. The trustee asked, in the alternative, that such property be declared the subject of an equitable lien in favor of the trustee. Cross motions for summary judgment were made. Summary judgment was entered for Mrs. Damson, and the trustee appeals.

Damson and his wife, residents of the State of Washington, were married on September 7, 1947, and separated on December 28, 1959. On January 10, 1960, she commenced a separate maintenance action against him and, in March, 1961, sued him for divorce. A decree of divorce was entered on June 22, 1961.

During the course of their marriage the Damsons developed a successful and prosperous construction business, leading to the accumulation of substantial community property under the laws of the State of Washington. All of this property was awarded to one or the other of them under the terms of the decree of divorce. Mr. Damson was required to assume and pay all of the community obligations.

All of the property awarded to Mrs. Damson had been acquired during the marriage and prior to the separation. Under the terms of the decree, Damson was required to, and did, execute endorsements, deeds and other documents, and deliver to Mrs. Damson certain documents and instruments to effectuate the award to her. By July 26, 1961, these requirements had been met.

All accounts receivable of the construction business, all of the tools, equipment, supplies and physical assets of that business, and all bank accounts standing in the name of Damson, along with certain other items of property, were awarded to him. Several of the construction projects which had been started during the marriage were in progress during the time the Damsons were separated.

On November 20, 1961, at a time when Damson was unmarried, he filed a petition in bankruptcy and was, on that day, adjudicated a bankrupt. In the schedules annexed to his petition in bankruptcy, Damson listed the accounts receivable from these construction projects, and listed the creditors of the construction business. Dennis J. Britt was thereafter appointed trustee.

In seeking title to and possession of, or at least an equitable lien upon, the community property which had been awarded to Mrs. Damson in the divorce proceedings, the trustee advances three theories, any one of which, if sustainable in fact and law would have entitled him to the requested relief. One of these theories is predicated upon section 70, sub. c of the Bankruptcy Act (Act), 11 U.S.C. § 110, sub. c (1958), vesting in the trustee all the rights, remedies and powers of a creditor then holding a lien upon the property in question. A second theory is that the award of community property was a fraudulent or voidable transfer within the meaning of section 70, sub. e(1) of the Act, 11 U.S.C., § 110, sub. e(1) (1958). The third theory is that the award was fraudulent under section 67, sub. d(2) (a) or (b) of the Act, 11 U.S.C. § 107, sub. d(2) (a) or (b) (1958).

The trial court granted summary judgment for Mrs. Damson on a single ground which, in the view of the court, required rejection of each of these theories. That ground is succinctly stated in the following excerpt from the oral decision of the district court:

"When Frank J. Damson filed his voluntary petition as a single man, the marriage had been terminated. Damson could no longer act as manager or agent of the marital community and had no power to take the property or debts of the former community into bankruptcy with him had he intended to do so, which is by no means clear. Nor did he have the power to subject the separate property of his former wife to the bankruptcy proceedings. It follows that the bankrupt\'s trustee does not represent the interests of creditors of the former community as community creditors whatever their status may be as creditors of Damson individually. The rights and remedies asserted by the Trustee are those of creditors of the former community."

We do not believe that the case may be disposed of on this ground. Under the Bankruptcy Act, as this court said in the recent case of Schultz v. Mastrangelo, 9 Cir., 333 F.2d 278, n. 3, the petition in bankruptcy is not a transfer but a pleading, and the trustee is vested with the bankrupt's title not by act of the parties but "by operation of law." Section 70, sub. a of the Act, 11 U.S.C. § 110; Royal Indem. Co. v. American Bond & Mortgage Co., 289 U.S. 165, 171, 53 S. Ct. 551, 77 L.Ed. 1100.

The question presented is not what authority the debtor had to represent the marital community at the time the bankruptcy petition was filed, or his then intent or power to "take" into bankruptcy what had formerly been community property. The only question is whether, under any of the provisions of the Act relied upon by the trustee, none of which are dependent upon the debtor's intent or authority at the time he went into bankruptcy, the community property awarded to Mrs. Damson under the divorce decree is, by operation of law, subject to the claims of any of the creditors in the bankruptcy proceeding. This calls for an application of the statutes in question to the facts of the case.

If, within the meaning of section 70, sub. c of the Act any of the creditors in the bankruptcy could have obtained a lien upon the property set over to Mrs. Damson, the trustee may foreclose that lien. If the award of community property was a fraudulent transfer within the meaning of sections 70, sub. e(1), 67, sub. d(2) (a), or 67, sub. d(2) (b), the trustee may set aside that transfer to the extent contemplated by the Act.

The judgment could possibly be sustained on the ground relied upon by the district court if, in Washington, a marital community is regarded as an entity separate and apart from the husband and wife. Then it could be at least plausibly argued that the entity having been terminated by divorce, the property thereof is not subject to adjudication in a bankruptcy proceeding in which only the former husband is debtor. But while there was a long period of time when the Washington courts likened a marital community to an entity,¹ this view was abandoned in 1930, with the decision in Bortle v. Osborne, 155 Wash. 585, 589, 285 P. 425, 427, 67 A.L.R. 1152.²

For the reasons indicated the judgment cannot be sustained on the ground relied upon by the district court. But appellee argues, in the alternative, that in any event the correct result was reached when consideration is given to the individual theories relied upon by the trustee. We therefore turn to a consideration of each of these theories.

The first of these is that the creditors of the former marital community who have been scheduled as creditors in the bankruptcy of Mr. Damson could have obtained a lien by legal or equitable proceedings upon the community property which was awarded to Mrs. Damson in the divorce proceeding and therefore, under section 70, sub. c of the Act, the so-called "strong arm" provision, the trustee may foreclose that lien in favor of those creditors.³

As indicated in section 70, sub. c, the property therein referred to need not be property which has come into the possession or control of the bankruptcy court. Nor is the lien therein referred to limited to encumbrances upon property in which the bankrupt has legal title. It extends to all property "* * * upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy * * *." Thus since, under Washington law, those creditors of the bankrupt who were creditors of the former marital community could have obtained a lien by legal or equitable proceedings upon the community property set over to Mrs. Damson,⁴ section 70, sub. c broadly read, would seem to vest similar rights in the trustee.

Recourse to the legislative history of the Act of July 7, 1952, section 23(e) of which clarified section 70, sub. c of the Bankruptcy Act, indicates, however, that the latter section, as amended, should not be read this broadly. See H.R.Rep. No. 2320, 82nd Cong., 2d Sess. 16 (1952), 1952 U.S.Code Cong. and Admin.News, Vol. 2, pages 1960, 1976. According to this House Report, what was intended to be said is that the trustee "* * * has the rights of a lien creditor upon property in which the bankrupt has an interest or as to which the bankrupt may be the ostensible owner." See, also, 4 Collier on Bankruptcy, (14th ed.) § 70.47 4, p. 1396.⁵

So reading section 70, sub. c, which speaks as of the date of bankruptcy and not any prior date, and bearing in mind that when the petition was filed Damson had no interest in, or ostensible ownership of, the community property which had been awarded to Mrs. Damson, we hold that the trustee has come into no rights by virtue of that section of the Act.

There is another reason why we reach the same conclusion. Under section 70, sub. c the trustee does not succeed to rights that run to creditors "personally," as distinguished from their rights as creditors of the bankrupt. See 4 Collier on Bankruptcy (14th ed.), § 70 4, pp. 1398-1399. The liens which creditors of the marital community could assert against the community property awarded to Mrs. Damson are not based upon their claims against the bankrupt. Recovery of judgment by the former...