The opinion of the court was delivered by: Adair, District Judge.
This cause before this Court on petition to review an order of
the referee in bankruptcy directing Ralph Van Beuning, former
trustee in the bankrupt estate of Claude R. Prather d/b/a Prather
Electric Company, to make suitable arrangements with the United
States of America to extinguish the lien of the United States of
America on property so sold by the former trustee.
Question presented is whether or not the former trustee is
liable to the United States of America for his failure to pay the
United States of America the amount of a secured lien held by the
United States of America against certain real estate sold by the
former trustee belonging to the bankrupt.
There is no question that the United States of America secured
a default judgment against the bankrupt Claude R. Prather in the
District Court of Peoria, Illinois, on January 14, 1946 in the
sum of $357.76, plus interest and costs; and that execution was
issued on the date of default judgment.
The bankrupt owned on March 17, 1950, the following described
property, to wit:
Lot Seven (7) in Pettett's Subdivision of Block Thirty-nine
(39) in Moffitt's and Holman's Addition to Chillicothe; situated
in the County of Peoria and State of Illinois.
On March 17, 1950, the former trustee filed his petition to
sell the above described real estate "free and clear of all liens
with any liens to be transferred to the proceeds of sale
The former trustee had constructive notice of the lien of the
United States of America, which was on file in the office of the
Clerk of this Court, but that the former trustee failed to notify
either the Federal Housing Administration or the United States
Attorney of the proposed sale of real estate owned by the
An order for sale of real estate in question was entered on
April 3, 1950, said order reading in part: "and the liens on real
estate, if any, attach to the proceeds of said property in the
hands of said trustee instead of to the real estate."
On April 24, 1950, former trustee filed his report of sale of
real estate, said report reading in part, as follows: "He struck
off to and sold to said Charles L. Sturm the premises, subject to
approval of the Court, free and clear of all liens thereon,
except the taxes for the year 1949, the liens or claims on said
premises to attach to the proceeds of the sale in the hands of
said trustee instead of to said property."
The United States of America having obtained its judgment and
recorded it in the office of the Clerk of the Court, as
aforesaid, was required to take no other action to constitute it
a lien on all the real estate of the bankrupt located in the same
county as the Court. The law is well settled that a lien claimant
may rely on his security and not appear to press his claim in the
The question before the Court is whether or not the former
trustee had the duty of affirmatively ascertaining the existence
of the judgment in order to make certain that he would notify all
necessary parties. Under the facts of this case, I feel that he
did. Judgment being properly recorded under the statute was
notice to all the world of its existence. It was on file in the
same court and with the same Clerk as was the bankruptcy itself
in the same county where the land was located and where the
bankrupt, the former trustee and his attorneys all reside and
have their place of business. It would surely involve no great
hardship for former trustee under these circumstances to
ascertain whether there were any judgments on file against the
real estate that he was selling free and clear of liens, and it
is the opinion of the Court that he had a definite duty to do so.
It is the further opinion of this Court that the former trustee's
failure to comply with that duty under the circumstances of this
case amounted under the law to negligence.
General Order 17(1), 11 U.S.C.A. following section 53, makes it
a duty of a trustee to "prepare a complete inventory of all the
property of the bankrupt or debtor that comes into his
possession." A complete inventory must, of course, set forth
whether the bankrupt's title to a piece of property is clear or
merely in equity subject to encumbrance. Section 70, sub. f of
the Act, 11 U.S.C.A. § 110, sub. f, requires that the bankrupt's
property be appraised and obviously a correct appraisal of the
bankrupt's interest is impossible without knowing whether his
title is encumbered.
The United States of America had a lien which was duly
recorded. The former trustee's sale "free and clear of liens"
produced more than enough to pay all liens then outstanding but
the lien of the United States of America was ignored. The United
States of America's failure to receive its lawful share of the
sales proceeds was a direct result of the former trustee's
disregard of his duty under the general ...