## Facts

- Sassard & Kimball, Inc., an automobile dealer, executed a chattel mortgage to Bay covering automobiles and business equipment.
- The mortgage did not comply with California Civil Code § 3440 and was conceded invalid against creditors existing at execution and those arising before the mortgage was recorded.
- After the mortgage was recorded, additional creditors extended credit to the debtor (later creditors).
- Following bankruptcy, the trustee sought to invalidate the mortgage in administering the estate, including as against later creditors.

## Issues

1. Whether a bankruptcy trustee who can avoid a lien under state law as to some creditors may set it aside for the benefit of the entire estate, including creditors who could not have avoided it under state law.
2. Whether an unperfected (or otherwise state-law-invalid) lien that is avoidable as to any creditor can remain effective in bankruptcy against a subset of unsecured creditors (such as later creditors).

## Decision

- The Supreme Court reversed the judgment that had upheld the mortgage against later creditors.
- The Court held that if a lien is avoidable under state law as to any creditor, the trustee may avoid it in bankruptcy for the benefit of the estate as a whole.
- Once avoided, the lien is not preserved to defeat distribution to later unsecured creditors; the recovered value is administered and distributed under the Bankruptcy Act’s equal-distribution scheme.

## Legal Principles

- Under the Bankruptcy Act, the effect of an avoidable lien in bankruptcy is determined by federal bankruptcy law, not state priority distinctions.
- A trustee’s avoidance right acquired by subrogation to a qualifying creditor is exercised for the benefit of the entire estate, not solely for the class of creditors who could have avoided the lien outside bankruptcy.
- A lien that would not be valid against the claims of creditors for want of record or other defects is not a lien against the bankruptcy estate.
- Property recovered or freed from an avoidable lien is distributed pro rata among allowed unsecured claims, except those with statutory priority or valid security.

## Conclusion

The Court held that because the chattel mortgage was invalid under state law as to some creditors, the bankruptcy trustee could avoid it for estate-wide benefit, preventing the mortgagee from retaining priority over any unsecured creditors in the bankruptcy distribution.


Moore v. Bay, 284 U.S. 4 (1931)