On June 9, 1952, Sadie Rogal was adjudicated a bankrupt on a voluntary petition. On the same day, three of her sisters with whom she had been associated in the conduct of a partnership known as Summit Furniture Manufacturing Co., (also adjudicated a bankrupt on a voluntary petition dated April 14, 1952), were adjudicated bankrupts. The petitions and the schedules listed the ownership by each of the four sisters of an undivided one-fourth interest in certain improved business property in the City of Los Angeles, subject to certain encumbrances. The claim of one of the sisters to another residential property (known as the Oakwood Street property), will be referred to later on in the discussion.

In the petition of one of the sisters, Elizabeth Rogal, the following legend is attached to the description of the business property:

On July 9, 1952, Martus Rogal, the father, filed a petition to impress a trust on both pieces of real property. He alleged that on August 31, 1951, he executed a deed to the four daughters as joint tenants for his own benefit. He amplified that, suffering from what is known as Parkinson’s disease, and relying trust and confidence in the daughters, and to relieve him of the cares and problems incident to the management of the property, he and the daughters orally agreed that they would manage, operate, and maintain and assist in the managing of the property, and that he would, at all times, remain the beneficial owner of the property and its income. The trusteeship was terminable at will, and they agreed that, when requested, they would, at any time, reconvey or quitclaim to him on demand any and all rights conveyed to them or the income or proceeds from it. Such net income as they received from the property was to be applied towards the support and maintenance of the petitioner and the payment of his medical bills.

The Question Involved In The Review

The petition alleged that on March 28, 1952, the bankrupts repudiated and violated the trust and executed and delivered to Pacific Factors Corporation (to be referred to as Pacific) an unacknowledged deed of trust upon the property, naming California Trust Company as trustee and Pacific as beneficiary to secure a pre-existing purported indebtedness from the partnership bankrupt to Pacific in the sum of $25,000.00.

Other allegations dealing with the coercive methods used against the sisters by Pacific to secure the execution of the instrument need not concern us, because the hearing on the petition was confined to the existence of the trust and did not concern itself to any extent with the validity of the encumbrances which the bankrupt-sisters placed on the property.

Somewhat similar allegations were made as to a residential property located at 4007 Oakwood Avenue, Los Angeles, California, which the petition alleged was purchased on April 1, 1947, and caused to be placed in the name of Elizabeth Rogal, one of the individual bankrupts, and another daughter, Lee Rogal Copeland, as joint tenants. As to it, it was alleged that the petitioner was to remain the beneficiary, and that the grant was made in trust for his use and benefit. Violation was alleged by Elizabeth Rogal through execution of a deed of trust to Pacific on March 28, 1952. Elizabeth Rogal, in her schedules, listed the one-half interest in the residential property, subject to a deed of trust in favor of the Bank of America and homestead rights claimed by her.

The Facts Before The Referee

The Referee issued an Order to Show Cause. The trustee appeared. His Answer denied the allegations of the petitioner. A hearing was had before the Referee.

The hearing disclosed that both properties were paid for by the petitioner. In addition to the listing of the properties as assets of the individual bankrupts, there was offered in evidence the fact that the bankrupts, through their manager, Sidney Weiss, in statements to Dun & Bradstreet, made for credit rating purposes which Dun & Bradstreet issued to the trade under dates of October 19, 1951, and February 26, 1952, listed the commercial building at a value of $40,000.00 and encumbered by $12,000.00.

Following a request for additional credit by Tropical and Western Lumber Company, (to be referred to as Tropical), through their credit manager, John C. Walsh, the four sisters signed a letter dated February 22, 1952, which listed the business property as owned by the four partners and its value at the time of purchase as $30,000.00, with a mortgage in the sum of $15,293.66. The Oakwood Street property was listed as owned by Elizabeth Rogal and Lee Rogal Copeland, who is not involved in the bankruptcy. Its value at the time of purchase was given as $17,500.00, with a mortgage on which there was due as of February 4, 1952, the sum of $7,553.46. The credit manager stated that, as a result of this investigation and this representation, he extended the credit to an amount of $7,337.99, which is an unpaid claim in the estate.

The petitioner testified at the hearing and stated, in substance, that he had purchased the properties and, because of his ill health, put them in the name of his daughters in trust for his benefit.

It was stipulated that, before extending credit, Tropical did not search the title to the property. Walsh testified that he had no knowledge of the deeds, but that he relied on the written representation contained in the Dun & Bradstreet reports, which he had seen, and in the letter signed by the four daughters.

This, in substance, is all the evidence the Referee allowed. The petitioner offered to prove that he did not, at any time, know that the sisters had claimed the property as their own, or that they had obtained credit on that basis. To the offers to prove these and other allegations of trust relationship, which have been summarized above, objection was sustained by the Referee upon the ground that the creditors had the right to rely on the public record. He stated, in sustaining the obj ection:

In the Memorandum Opinion filed in the case on November 17th, 1952, he placed his decision on the representation made in the letter. The brief memorandum, omitting the direction for findings at the end, reads :

On November 26, 1952, the Referee signed a formal Order denying the petition. The Findings recite that the property was purchased by the petitioner. But they declare that the representation made by the sisters to Tropical, to Dun & Bradstreet by their manager, and the later representation by the sisters in the letter to Walsh, and their reliance on them caused them to act to their detriment, and that the petitioner, having recorded the deeds, without a declaration of the existence of a trust in them, and having permitted his daughters to hold out the real property as their own, is estopped from asserting a trust in either property as against Tropical and the trustee in bankruptcy. Elizabeth Rogal’s homestead rights to the residence were recognized.

Ill

Resulting Trusts In California

This extensive outline presents a simple question:

Was the Referee right in denying to the petitioner the right to prove the existence of the trust and that the trust was recognized through continuous use of the income from it and payment by the petitioner of taxes and cost of upkeep, and that he did not authorize the daughters to claim and did not know, at any time, that they claimed the property and secured credit on the basis of such claim ?

We dispose at the outset of the question whether, assuming the Findings to be correct, the property should be held for the benefit of all the creditors, or impressed with a lien in favor of Tropical only.

Ever since Moore v. Bay, 1931, 284 U.S. 4 , 52 S.Ct. 3 , 76 L.Ed. 133 , was decided, the recognized rule in bankruptcy has been that, if a conveyance of property is declared invalid in a suit of the trustee at the behest of one creditor, the benefit inures to all. The meaning of Moore v. Bay, supra, was summed up by Mr. Justice Cardozo in a later case, Buffum v. Peter Barceloux Co., 1933, 289 U.S. 227, 234 , 53 S.Ct. 539, 542 , 77 L.Ed. 1140 , in one sentence:

Commentators agree that this is a correct and logical application of the principle that the trustee, when he brings or retains in the estate property at the behest of one of the creditors, the other unpaid creditors share in the event that the property exceeds the claim of the particular creditor. Collier on Bankruptcy, 14th Ed., Vol. 4, Sec. 70.95. In this respect, the Referee was right in holding that the trustee could retain the property for the benefit of other creditors than Tropical. But the Referee was wrong in his premise in holding that the placing of title in the name of the daughters and their representation of it as their own were sufficient to bind the petitioner. He was also wrong in not allowing the petitioner to prove his acts subsequent to the making of the deeds in order to show a continuous exercise of dominion over the property and its income. Under the Bankruptcy Act, the Trustee

As we are dealing with real property situated in California, rights of the parties to it must be determined, not according to general principles, but by the rules laid down by California courts in determining such rights. Section 853 of the California Civil Code reads:

Section 2224 of the California Civil Code reads:

California courts, in giving effect to these sections, have, for a period of over three-quarters of a century, held that a person may place the legal title in another in trust for himself, and that the legal owners will be compelled by the courts to restore title to the property, if they repudiate the trust. These principles have been applied with great uniformity to dealings between persons standing in fiduciary relationships, such as (1) husband and wife, Brison v. Brison, 1891, 90 Cal. 323 , 27 P. 186 ; Allen v. Meyers, 1936, 5 Cal.2d 311 , 54 P.2d 450 ; Lyttle v. Fickling, 1945, 72 Cal.App.2d 383 , 164 P.2d 842 ; Hu ber v. Huber, 1946, 27 Cal.2d 784, 790 , 167 P.2d 708 ; (2) parent and child, Mead v. Mead, 1919, 41 Cal.App. 280 , 182 P. 761 ; Edwards v. Edwards, 1949, 90 Cal.App.2d 33 , 202 P.2d 589 ; Svistunoff v. Svistunoff, 1949, 94 Cal.App.2d 651 , 211 P.2d 352 ; (3) uncle and nephew, Steinberger v. Steinberger, 1943, 60 Cal.App.2d 116 , 140 P.2d 31 ; (4) brother and brother, Logan v. Ryan, 1924, 68 Cal.App. 448 , 229 P. 993 ; (5) brother and sister, Tench v. McMeekan, 1911, 17 Cal.App. 14 , 118 P. 476 ; and see, Abbott v. Miller, 1950, 98 Cal.App.2d 595 , 220 P.2d 570 ; Orella v. Johnson, 1952, 38 Cal.2d 693 , 242 P.2d 5 ; Beck v. West Coast Life Ins. Co., 1952, 38 Cal.2d 643 , 241 P.2d 544 , 26 A.L.R.2d 979 .

The only deviation from the principle established by these cases arises in the case, of a bona fide purchaser for value without notice. As to him, the California Civil Code specifically provides as to both resulting and express trusts:

California courts have held that an attachment or judgment creditor is not a bona fide purchaser for value. Burns v. Peters, 1936, 5 Cal.2d 619, 625 , 55 P.2d 1182 ; McGee v. Allen, 1936, 7 Cal.2d 468, 473 , 60 P.2d 1026 ; Haupt v. Charlie’s Kosher Market, 1941, 17 Cal.2d 843, 846 , 112 P.2d 627 ; Boye v. Boerner, 1940, 38 Cal.App.2d 567, 569-570 , 101 P.2d 757 . Both Collier and Remington state emphatically that the trustee does not take title as a bona fide purchaser for value without notice of. equities. Collier on Bankruptcy, 14th Ed., Vol. 4., Sec. 70.62; Remington on Bankruptcy, 5th Ed., Vol. 5, Sec. 1412. See, In re Toms, 6 Cir., 1939, 101 F.2d 617, 619 .

The Court of Appeals for the Fifth Circuit has summed up the rule and the reason for it in a brief opinion which reads:

In Pacific State Bank v. Coats, 9 Cir., 1913, 205 F. 618 , the trustee in bankruptcy challenged the validity of a mortgage claiming that it was invalid as to the creditors, and, consequently, as to him. The Court, finding that the mortgage, although not acknowledged, was considered a lien on the property under the law of Washington, held that the lien was good against the trustee, saying:

And see, Mason v. Citizens’ Nat. Trust & Savings Bank, 9 Cir., 1934, 71 F.2d 246 , in which the ruling was followed. It will thus be seen that the courts, in determining the title of the trustee to the property,, apply consistently the law of the situs, the law of the State in which the property is located and in which the adjudication is made. As said in United States v. Sampsell, 9 Cir., 1946, 153 F.2d 731 , 735:

Absence of Knowledge

The trustee seems to think that the ruling in Moore v. Bay, 1931, 284 U.S. 4 , 52 S.Ct. 3 , 76 L.Ed. 133 , sustains the action of the Referee. The argument overlooks the fact that the rights of the trustee in bankruptcy to property must be determined according to the law of the State in which the property is located and the adjudication made. This is the rule, especially since the decision in Erie Railroad Co. v. Tompkins, 1938, 304 U.S. 64 , 58 S.Ct. 817 , 82 L.Ed. 1188 , and is evident from the many cases discussed in the preceding section (III).

In the Moore case, the court, finding that a chattel mortgage on automobiles and showroom equipment was invalid under the law of California, held that, because of such invalidity, title to the property vested in the trustee for the benefit of all the creditors. But here we are dealing with an attempt to prove a resulting trust valid under the laws of California. Only two exceptions to the rule of validity expounded in Part II of this Opinion are allowed. One is in favor of a bona fide purchaser for value. The other exists where, in addition to mere placing of title in the name of another, the court finds that the person causing the property to be placed in the name of another knew, after the transfer, that the holder of the legal title was claiming the property to be his own in order to obtain credit. Such knowledge cannot be implied from mere recordation or representation by holder of the legal title.

As said in Breeze v. Brooks, 1892, 97 Cal. 72, 76-77 , 31 P. 742, 743 , 22 L.R.A. 257 :

Several matters are apparent from a reading of these cases: (1) The creditors of the holder of the record title cannot subject the property to the payment of his debts merely because the title stands in his name. - Before they can do so, they must show, in addition to record title, (2) knowledge on the part of the beneficiary that the holder of the legal title is claiming the property as his own; and (3) a creditor must have relied upon the trustee’s claim of title and been induced by such claim to extend credit. Only when all these conditions are present do the elements to estoppel exist.

In Williams v. Levy, 9 Cir., 1931, 54 F.2d 18 , as here, the Referee had ruled that property for which the consideration had been paid by another which stood on record in the name of the bankrupt was property of the estate. The Order was set aside by the District Court on review. In re Meyerfeld, 46 F.2d 665 . On appeal, the Court of Appeals, the late Judge William P. James of this district writing the Opinion, summed up the situation in these words:

The Referee did not allow the petitioner to go into the details of the arrangement between him and his daughters and his subsequent relation to the property. As already appears, he also sustained an objection to an offer to prove that the petitioner did not authorize either Weiss or the daughters to represent themselves as the owners, and that he had no knowledge that they were representing this property as their own or that they were obtaining credit on the basis of the claim of ownership. In addition to lengthy and formal offers to prove all the allegations contained in the petition, which were amplified, the Referee sustained objections to-every question directed by the-petitioner’s counsel to witnesses for the trustee aiming to show lack of authority and knowledge of the petitioner that the properties were being represented as those of the bankrupts.

To all such offers the Referee’s answer, —expressed, it should. be admitted, “regretfully”, — was : “The Petitioner cannot give a deed and then hide behind a secret agreement.” In this, the Referee disregarded the law declared in the cases just cited which rule that the mere placing on record of property in the name of another does not create estoppel. As said in Murphy v. Clayton, 1896, 113 Cal. 153, 162 , 45 P. 267 , 269:

In short, there must be brought home to the beneficiary the knowledge that the holders to the legal title are claiming the property as their own and securing credit on that basis.

As the record here does not show that the daughters engaged in any business requiring credit rating before the deeds were executed, and as the petitioner was old, infirm and suffering from a dreaded disease, it is likely that he may not have known of their activity so as to be charged with knowledge. At any rate, he should not be charged with such knowledge without a full hearing.

The matter is remanded to the Referee with direction to set aside the Order of November 26, 1952, and to hold further hearings allowing the petitioner to offer testimony in support of the allegations of his petition, and then to determine anew the trustee’s rights to the property involved and- the claim of the petitioner in accordance with the views here expressed.

. This case has been cited and quoted from with approval by the Court of Appeals for the Second Circuit in Lockhart v. Garden City Bank & Trust Co., 2 Cir., 1940, 116 F.2d 658, 661 , and is cited by the Supreme Court in Mangus v. Miller, 1942, 317 U.S. 178, 187 , 63 S.Ct. 182 , 87 L.Ed. 169 . In this Circuit, it is rec ognized that the trustee takes the property subject to all claims and liens valid by state law. See, Mason v. Citizens’ Nat. Trust & Savings Bank, 9 Cir., 1934, 71 F.2d 246, 248 ; In re Knox-Powell-Stockton Co., 9 Cir., 1939, 100 F.2d 979, 982 ; United States v. Sampsell, 1946, 9 Cir., 153 F.2d 731, 735 . . Similar rulings as to real property were made in American National Bank of Sapulpa v. Harris, 10 Cir., 1936, 84 F.2d 181 , under the law of Oklahoma, Mulhern v. Albin, 8 Cir., 1947, 163 F.2d 41 , under the law of Iowa, and as to personal property, in Lochner v. Moreland, 5 Cir., 1951, 192 F.2d 985 , under the law of Maryland. . This was a reassertion of the same principle declared in a prior appeal in the same case, Breeze v. Brooks, 1886, 71 Cal. 169, 181 , 9 P. 670 , 11 P. 885. The .principle here declared has been followed consistently in the following cases: Murphy v. Clayton, 1896, 113 Cal. 153, 160-162 , 45 P. 267 ; Phelps v. Davies, 1932, 126 Cal.App. 419, 424 , 14 P.2d 922 ; Nishi v. Downing, 1937, 21 Cal.App.2d 1, 3 , 67 P.2d 1057 ; Owings v. Laugharn, 1942, 53 Cal.App.2d 789, 791-792 , 128 P.2d 114 , (in which a resulting trust was sustained against the claim of a trustee in bankruptcy); McGee v. Allen, 1936, 7 Cal.2d 468, 473 , 60 P.2d 1026 ; McNeil v. Dow, 1948, 89 Cal.App.2d 370, 375 , 200 P.2d 859 ; Svistunoff v. Svistunoff, 1949, 94 Cal.App.2d 651 , 211 P.2d 352 . . A similar statement is found in Bank of Cottonwood v. Henriques, 1928, 91 Cal.App. 88, 96 , 206 P. 836 , 839: “It was necessary for the appellant, in order for it to prevail in this action, to show that Frank It. Henriques was in some way privy to William It. Henriques’ obtaining credit from the. bank, or that, gaining such credit, the hank relied upon, some affirmative statement or act of Frank R. Henriques, other than his per mitting the title to stand of record in the name of William R. Henriques, and the mere faot that Frank R. Henriques allowed the title to the land to stand of record in the name of William R. Henriques is unavailing to appellant, unless it established to the satisfaction of the court that they , relied theréon as an inducement to give credit to William. R. Henriques”.. (Einpliasis added.)