US SUPREME COURT DECISIONS

The principal asset of a bankrupt estate was an undivided interest in coal lands, operated in part by lessees and producing substantial royalties. More than four months prior to the adjudication in bankruptcy, two creditors had obtained judgments against the bankrupt, which constituted first and second liens on the interest in these lands. Subsequently, a plan suggested by the attorney for the trustee and certain general creditors was adopted whereby, in consideration of the secured creditors' forbearing to press their claims, the estate was divided into two funds: a real estate fund and a general fund including royalties, etc. The first fund was to go to the first judgment creditor, the second fund was to be divided pro rata among all creditors. After the plan had been in operation for more than twelve years, a general creditor whose attorney had proposed the plan petitioned the bankruptcy court for a decree to the effect that the two judgment creditors had waived their liens by sharing in distributions from the general fund.

Held:

l. Upon the particular facts of this case, the liens are declared valid and in existence, notwithstanding the failure to follow the provisions of § 57(h) of the Bankruptcy Act, and notwithstanding the distribution of dividends contrary to § 65(a). Pp. 331 U. S. 35-39. chanrobles.com-red

Page 331 U. S. 29

(a) Whether a secured creditor's participation in distributions from the general assets of a bankrupt estate on the basis of his full claim constitutes a waiver of his lien and an election to be treated as an unsecured creditor depends upon the circumstances surrounding the receipt of the dividends. In exceptional cases, the circumstances may demonstrate the continued vitality of the security, as well as indicate the inequity of declaring the security forfeited. Pp. 331 U. S. 35-36.

(b) In rare cases, where there is a reasonable doubt as to whether a waiver has occurred, a careful examination must be made, in the light of recognized principles of equity, to determine upon what conditions the dividends from the general assets were distributed to the secured creditor. P. 331 U. S. 36.

(c) The judgment lien creditors having received dividends from the general fund in good faith and without intent to waive their liens, there being no equitable reason why the liens should be declared forfeited, the general creditor whose counsel recommended the plan and acquiesced in its operation being equitably estopped to object to the validity of the liens on the basis of the operation of the plan, and there being no evidence that any permanent injury to any general creditor resulted from the operation of the plan, the equities of this case require that the liens be held valid and in existence. Pp. 331 U. S. 36-39.

2. In view of the fact that the bankruptcy proceedings have been unduly prolonged for over twenty years, the bankruptcy court should now take steps to wind up the estate in accordance with the provisions of the Bankruptcy Act. P. 331 U. S. 39.

155 F.2d 755 reversed.

In a proceeding in bankruptcy, a general creditor petitioned for a decree to the effect that two secured creditors had waived their liens by sharing in distributions from the general assets of the bankrupt estate. The District Court granted the petitions, 56 F.Supp. 190, but, on rehearing, denied them, 61 F.Supp. 151. The Circuit Court of Appeals reversed. 155 F.2d 755. This Court granted certiorari. 329 U.S. 699. Reversed and remanded, p. 331 U. S. 39. chanrobles.com-red

Page 331 U. S. 30