Petition — Great National Life Insurance v. Pine Gate Associates, Ltd.

Supreme Court brief1977

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Supreme Court, U. $,

FILED

DEC § 1976

IN THE MICHAEL RODAK, JR., CLERK

Supreme Court of the United States

OCTOBER TERM, 1976

No. ..24.>2#e2

In the Matter of:

PINE GATE ASSOCIATES, LTD.,

Debtor,

GREAT NATIONAL LIFE INSURANCE

CoMPANY, formerly USLIFE

LiFE INSURANCE COMPANY OF TEXAS,

and ALL AMERICAN LIFE AND

CASUALTY COMPANY,

Petitioners,

vs.

PinE GATE ASSOCIATES, LTD.,

Respondent.

MOTION FOR LEAVE TO FILE PETITION FOR

WRIT OF PROHIBITION AND/OR MANDAMUS

AND/OR CERTIORARI TO THE DISTRICT COURT,

NORTHERN DISTRICT OF GEORGIA, ATLANTA

DIVISION.

Jon R. Moss

PAUL S. BERGER

Berger, Berger, Kahn & Shafton

9454 Wilshire Blvd. #410

Beverly Hills, California 90212

(213) 273 8380

ROBERT N. MEALS, JR. M. C. McLAIN

E. PENN NICHOLSON Counsel and Assistant Secretary

Nicholson & Meals Great National Life Insurance

800 Candler Building Company

Atlanta, Georgia 30303 6500 Harry Hines Blvd.

(404) 688 1000 Dallas, Texas 75235

(214) 357 1861

Attorneys for Petitioners

IN THE

Supreme Court of the United States

OcTOBER TERM, 1976

In the Matter of:

Pine GATE ASSOCIATES, LTD.,

Debtor,

GREAT NATIONAL LIFE INSURANCE

COMPANY, formerly USLIFE

LIFE INSURANCE COMPANY OF TEXAS,

and ALL AMERICAN LIFE AND

CASUALTY COMPANY,

Petitioners,

vs.

PinE GATE ASSOCIATES, LTD.,

Respondent.

MOTION FOR LEAVE TO FILE PETITION FOR

WRIT OF PROHIBITION AND/OR MANDAMUS

AND/OR CERTIORARI TO THE DISTRICT COURT,

NORTHERN DISTRICT OF GEORGIA, ATLANTA

DIVISION.

Petitioners GREAT NATIONAL LIFE INSURANCE COM-

PANY and ALL AMERICAN LIFE AND CASUALTY COMPANY

respectfully move this Court for leave to file the annexed

Petition for Writ of Prohibition and/or Mandamus and/or

Certiorari, under Section 1651 of Title 28 of the United

States Code, directed to the United States District Court

for the Northern District of Georgia, Atlanta Division, and

to the Honorable William L. Norton, Jr., Bankruptcy Judge

of the United States District Court for the Northern District

of Georgia, Atlanta Division. In the event 28 U.S.C.

§ 2403 is applicable, Petitioners are serving a copy of the

within Motion on the Solicitor General, Department of

Justice, Washington, D.C. 20530. No Court has made a

certification to the Attorney General pursuant to 28 U.S.C.

§ 2403.

JON R. Moss

PAUL S. BERGER

Berger, Berger, Kahn & Shafton

ROBERT N. MEALS, Jr.

E. PENN NICHOLSON

Nicholson & Meals

M. C. McLAIN

Counsel and Assistant Secretary

Great National Life Insurance

Company

Attorneys for Petitioners

Summary of Reasons for Granting the WYit.................-..-..--ceeeeeeeeeeeees

Boenneens GP GR WoO ccecccccecesiasscnssescrscrscerecssvenscesuusccnsaszases edaaiiind

Il.

IT.

ONLY THIS COURT CAN ANSWER THE QUES-

TION WHETHER THE RULES OF BANKRUPTCY

PROCEDURE PROMULGATED BY THIS COURT

MAY EFFECT AN UNCONSTITUTIONAL TAK-

ING OF A SECURED CREDITOR’S PROPERTY.

BECAUSE OF THE EXTRAORDINARY IM-

PORTANCE OF THE ANSWER TO THE CREDIT

MARKET OF THE NATION, IT IS SINGULARLY

APPROPRIATE THAT THIS COURT GRANT

EXTRAORDINARY RELIEP..................---0cseeseeeeeees

THIS COURT HAS NO CONSTITUTIONAL POW-

ER TO LEGISLATE AND CONGRESS CANNOT

CONSTITUTIONALLY DELEGATE TO IT THE

POWER TO REPEAL ACTS OF CONGRESS............

THE CHAPTER XII RULES ARE UNCONSTITU-

TIONAL BECAUSE THEY DEPRIVE SECURED

CREDITORS OF THEIR PROPERTY WITHOUT

NOTICE OR OPPORTUNITY TO BE HEARD

AND WITHOUT ADEQUATE SAFEGUARDS TO

PROTECT AGAINST A CONTINUOUS TAKING

OF THE SECURED CREDITOR’S PROPERTY

WITHOUT JUST COMPENSATION ..............---...2000+

A. THE AUTOMATIC STAY DEPRIVES SE-

CURED CREDITORS OF PROPERTY WITH-

OUT NOTICE OR OPPORTUNITY TO BE

B. THE AUTOMATIC STAY IS UNCONSTITU-

TIONAL AS APPLIED AGAINST SECURED

CREDITORS BECAUSE ITS EFFECT IS TO

TAKE THEIR PROPERTY WITHOUT ADE-

QUATE SAFEGUARDS FOR JUST COM-

| Ee ere

IV. THE PROPOSED USE OF THE “CRAM DOWN”

PROVISION OF BANKRUPTCY ACT SECTION

461 (11) TO TAKE REAL PROPERTY SECUR-

ING RESPONDENT’S DEBT TO PETITIONERS

IS UNCONSTITUTIONAL. TO BE ADEQUATE-

LY PROTECTED, PETITIONERS MUST EITHER

RECEIVE THE REAL PROPERTY SECURING

THEIR LOAN OR HAVE THE LOAN REPAID

Vv. THE TUCKER ACT PROVIDES THE MEANS

FOR ANY SECURED CREDITOR TO OBTAIN

JUST COMPENSATION FOR PROPERTY TAKEN

IN BANKRUPTCY PROCEEDINGS.......0.......-....000-.

| EEE

Page

APPENDICES

APPENDIX A — Constitutional Provisions, Statutes and

Rules Involved, Constitutional Provisions, Federal Stat-

utes and Rules of Civil Procedure, Bankruptcy Act Provi-

sions, Rules of Bankruptcy Procedure

APPENDIX B— Security Deed Notes

APPENDIX C — Security Deed and Security Agreement

APPENDIX D — Assignment of Leases and Rents

APPENDIX E —- Order of Bankruptcy Judge William L.

Norton denying Petitioners’ motions for security, etc.

APPENDIX F — Order of United States District Court

Judge William C. O’Kelley dated October 19, 1976

affirming Appendix E

APPENDIX G — Statemen: of Affairs

APPENDIX H — Order of Bankruptcy Judge Norton dated

June 30, 1976 denying Petitioners’ relief, etc.

APPENDIX I — Order of the United States District Court

Judge William C. O’Kelley dated November 11, 1976

affirming Appendix H

APPENDIX J — Debtors Proposed Plan of Arrangement

APPENDIX K — Opinion of Bankruptcy Judge Norton

dated October 14, 1976 re Applicability of § 461(11)(c)

APPENDIX L — List of Chapter XII cases filed in the

Northern Division between January 1, 1975 and Novem-

ber 1, 1976

TABLE OF AUTHORITIES

CASES

Page

Ex Parte Abdu, 247 U.S. 27, 38 S. Ct. 447, 62 L.

Ee ee ee Re eS 22

Almota Farmers Elevator & Warehouse Co. v. U.S.,

409 U.S. 470, 93 S. Ct. 791, 35 L. Ed. 2d. 1 (1972) 77

American Trust Co. v. England, 84 F. 2d. 352 (9th

= er SOR A) CN Te Sr Non ERE 63

Armstrong v. U.S., 346 U.S. 40, 80 S. Ct. 1563, 4 L.

ee ee Ne a Siielixiccleiientshsnthanitndeinensiididiiesans 77

B & B Properties, Ltd., N.O. 6a, Atlanta Division,

8 NTE ME re RRS Te ee 40

Baker v. Carr, 369 U.S. 186, 82 S. Ct. 691, 7 L. Ed.

Ss EERE RS ee FA: 69

In re Beverly Hills Bancorp, U.S.D.C. C.D. Cal.

SS EY; 20

Blair v. Pitchess, 5 C. 3d. 258, 96 Cal. Rptr. 42, 486

8S, | Re er ee irae ae 8 43

In re Bermec Corp., 445 F.2d 367 (2d Cir. 1971)... 60

Boddie v. Connecticut, 401 U.S. 371, 91 S. Ct. 780,

Ys %& Fi ft |) eee eae 14, 43

Borchard v. California Bank, 310 U.S. 311, 60 S. Ct.

om | Se Fd ee 72

Clark v. Cagle, 141 Ga. 703, 82 S.E. 21 (1914)...... 65

Ex Parte Crane, 30 U.S. 190, 5 Pet. 190, 8 L. Ed.

Se I icniicnicecccetenadstbeeticuicundadst ciate tietia aee 22

Damon v. Damon, 283 F.2d. 571 (1st Cir. 1960).... 29

DeBeers Consol. Mines v. U.S., 325 U.S. 212, 65 S.

Ct. 1130, 89 L. Ed. 1566 (1945)......................... 13, 21

Denco Development Co. v. Community Savings &

Loan Ass'n, 376 F.2d. 548 (9th Cir. 1967)............ 63

Duckett & Co. v. U.S., 266 U.S. 149, 45 S. Ct. 38,

2 © Fh.) 77

Durand v. NLRB, 296 F. Supp. 1049 (W.D. Ark.

Fuentes v. Shevin, 407 U.S. 67, 92 S. Ct. 1983, 32 L.

Ed. 2d. 556 (1972), reh den 409 U.S. 902, 93 S. Ct.

177, 34 L. Ed. 2d. 165 (1972).......-.------------000-000++ 14, 43

In re Garcia, 396 F. Supp. 578 (C.D. Cal. 1975)..... 30

Goldberg v. Kelley, 397 U.S. 244, 90 S. Ct. 1011,

25 L. Ed. 2d. 287 (1970).........222...22----e000e0- 14, 43, 49, 50

Groves v. Fresno Guarantee Savings & Loan Ass'n.,

373 F.2d 440 (9th Cir. 1967)... ceceeenneeees 63

Hancock v. Hancock, 233 Ga. 481, 156 S.E. 2d.

SE Tee ccccinssnncencianeredicztnntunntiinsiignasisitineshiiammiaent 65

Home Bldg. & Loan Ass'n. v. Blaisdell, 290 U.S. 398,

54 S. Ct. 231, 78 L. Ed. 413 (1934)........................

cavtsitinabaneiaditiaaitbididinaiiinatcetbala 15, 31, 52, 53, 55, 73, 76

In re Hull, 311 F. Supp. 197 (E.D. Cal. 1970........ 63

Hurley v. Kincaid, 285 U.S. 95, 52 S. Ct. 267, 76 L.

BD, GBP (BGI cencceecctensecccscccesescccssccesesovssssesnsoscantng 79

Investors Syndicate v. Smith, 105 F.2d. 611 (9th

Jacobs v. U.S., 290 U.S. 13, 54 S. Ct. 26, 78 L. Ed.

| a ee eee ee 77

Page

In re Jersey Island Packing Co., 138 F. 625, (9th

8 a a ee ee ee 27

John Hancock Mutual Life Ins. Co. v. Bartels, 308

U.S. 180, 59 S. Ct. 794, 83 L. Ed. 1498 (1939)..... 72

In re Kings County Real Estate Corp.,67 F.2d.895

be | EE iene re Ow A 63

Kyser v. MacAdam, 117 F.2d. 232 (2d Cir. 1941).. 69

LaBuy v. Howes Leather Co., 352 U.S. 249, 77 S.

Ct. 309, 1 L. Ed. 2d. 290 (1957), reh den 352 US.

1019, 77 S. Ct. 553, 1 L. Ed. 2d. 560 (1957)........

sensteiesitecaipasciitaipaitanteilitaitciaiieniaaaaebdiin ee eae 12, 13, 22, 29

Laprease v. Raymours Furniture Co., 315 F. Supp.

co | A FE SEE ee ee 43

Los Angeles Brush Mfg. Corp. v. James, 272 U.S.

701, 47 S. Ct. 286, 71 L. Ed. 481 (1927)............

squnpsaecinieeeiagataadaasinihtdiabpiadatiilimmipaiiaitcachiaials caddis Taaes 12, 13, 22, 29

Louisville Joint Stock Land Bank v. Radford, 295

U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935).... 14,

16, 28, 38, 39, 43, 51, 55, 57, 59, 70, 72, 73, 74, 76, 81

Marbury v. Madison, 1 Cranch 137, 5 U.S. 137, 2 L.

es I Se nsciscihciasceestinectcnndediaeshieaesipisuihidbeginniduameal 31, 34

McCullough v. Cosgrave, 309 U.S. 634, 60 S. Ct.

703, 84 L. Bd. 992 (1940) 22.2... -....-.cccccceseeeee 12, 22, 29

Meek v. Centre County Banking Co., 268 U.S. 426,

45 S. Ct. 560, 69 L. Ed. 1028 (1924)... 28

Mellin v. Woolley, 103 Minn. 498, 115 N.W. 654

Fee niticcincsiccicheseicaptiagseibeaileiigateeaaieilaniniiiattaaastiliaehdaaai Re alesse 65

Mills v. Virginia-Carolina Lumber Co., 164 F. 168

Se Cele Ce rntinsiecsiniirensitininnticnenitininsascsitiinaadicinbanientes 63

Mitchell v. W.T. Grant Co., 416 U.S. 600, 94 S. Ct.

1895, 40 L. Ed. 2d. 406 (1974) _.0 14, 43, 51, 76

Ce ate I a eT IE Ae OE eS «ey i eR eS ee ally ale an oc Es me onthe = MTB an

vii

Page

Mortgage Loan Co. v. Livingston, 45 F.2d. 28 (8th

Cir. 1930) cert. den. 290 U.S. 685 (1933).............. 63

Nat'l Levy & Co., 6 F.2d. 970 (2d. Cir. 1925)...... 60

North Georgia Finishing, Inc. v. Di-Chem, Inc., 419

U.S. 601, 95 S. Ct. 719, 42 L. Ed. 2d. 751 (1974)..14, 43

Panama Refining Co. v. Ryan, 293 U.S. 388, 55 S.

Ct. 241, 79 L. Ed. 446 (1935)............22...222.-2..-.000 32, 33

In re Pittsburg-Duquesne Dev. Corp., 482 F.2d. 243

bb? | Se een Se ee 63

Pollack v. Sampsell, 174 F.2d. 415 (9th Cir. 1949)... 63

Preble v. Wentworth, 84 F.2d. 73 (ist Cir. 1936),

cert. den. 299 U.S. 575, 57 S. Ct. 39, 81 L. Ed. 424

(| a ee 16, 67

Rader v. Boyd, 267 F.2d. 911 (10th Cir. 1959)

€ CE vccccibansinesitrsntnecieennntncmnasisaninesinstianmnttitiintaansiatiitis 19, 37

Regional Rail Reorganization Cases, 419 U.S. 102,

95 S. Ct. 335, 42 L. Ed. 2d. 320 (1974)..16, 77, 80, 81

Ex Parte Republic of Peru, 318 U.S. 578, 63 S. Ct.

2 8 EE 12, 16

Roche v. Evaporated Milk Ass’n., 319 U.S. 21, 63

S. Ct. 938, 87 L. Ed. 1185 (1943)........00.........-...... 16

Schecter Corp. v. U.S., 295 U.S. 495, 55 S. Ct. 837,

Ee 32, 33

Schlagenhauf v. Holder, 379 U.S. 104, 85 S. Ct. 234,

eS &€ § 2) eee. 12, 23, 30

Sibbach vy. Wilson Co., Inc., 312 U.S. 1, 61 S. Ct.

RG EE 30

Page

Sniadach v. Family Finance Corp. of Bay View, 395

U.S. 337, 89 S. Ct. 1820, 23 L. Ed. 349 (1969)...

OS, SOS OO eS MA 14, 43, 44, 50, 51, 76

In re State Thread Co., 126 F.2d. 296 (6th Cir.

AAS TEE I ae Rea eS Ge oI Reh 30

Stewart v. Platt, 101 U.S. 731, 25 L. Ed. 816 (1879) 63

Sumida v. Yumen, 409 F.2d. 654 (9th Cir. 1959),

cert. den. 405 U.S. 964, aff'd 444 F.2d. 1281....19, 25, 38

In re Sun Cab Co., 67 F. Supp. 137 (D.C. Colo.

ESE Ln YAR A OY mn ct ee 8.) 60

In re United Cigar Stores Co., 69 F.2d. 513 (2d Cir

Sie eiiibeisninsitescieietdiiatltseinsstehipistiadasieie thea titae, 60

Ex Parte U.S., 287 U.S. 241, 53 S. Ct. 129, 77 L.

8 Er Ve ee 12, 13

U.S. Alkali Export Ass'n v. U.S., 325 U.S. 196, 65

S. Ct. 1120, 89 L. Ed. 1554 (1945)... 13, 21

U.S. v. Causby, 328 U.S. 256, 66 S. Ct. 1062, 90 L.

Be Re ia cca crises iocteaieeichdnntertiinesindinins iain 51, 77, 79

U.S. v. Dickinson, 331 U.S. 745, 67 S. Ct. 1382, 91

Se OB, See Serene ran none am 77

U.S. v. Sherwood, 312 U.S. 584, 61 S. Ct. 767, 85 L.

Ss NR eee a ene mene 30

In re Walker, 93 F.2d. 281 (2d Cir. 1937).............. 27

120 Wall Associates, 266 F.2d. 548 (2d Cir. 159).. 60

In re Wall, 403 F. Supp. 357 (B.D. Ark. 1975)...... 30

Wayman v. Southard, 10 Wheat. 7, 23 U.S. 1, 6 L.

ee Wr Se aiidieiiedenienusentinente tue eee 33

BOAT Wes BAP OE ee ie DP nica Beane.

W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 55 S.

Ct. 555, 79 L. Ed. 1298 (1934).............--2.22--eeeeees 14, 53

West Co. v. Lea, 174 U.S. 590, 19 S. Ct. 836, 43 L.

& ', |, eee 29

Whitehead v. Dillard, 178 Ga. 714, 174 S.E. 244

(| ee 65

In re Whitwer, 44 F. Supp. 466 (O.C. Neb. 1942)..74, 75

In re Williams Estate, 156 F.2d. 934 (9th Cir. 1907) 63

Wolff v. Wells Fargo Bank, 400 F. Supp. 1352 (N.D.

i, Se ccniininissacniiesbiaianntnedttesmeenenaediniaguisnaitiedietesiiiniidin 30

Wright v. Union Central Life Insurance Co., 311

U.S. 273, 61 S. Ct. 196, 85 L. Ed. 184 (1940)

asinctssenietietaneiiaiiaeldiuaidiaandaatdpil ici iiiaataeelaaaiaans 70, 72, 74, 80

Wright v. Vinton Branch of the Mountain Trust

Bank of Roanoke, Va., 300 U.S. 440, 57 S. Ct. 556,

te TS eee 59

In re W.T. Grant Co. (USDC, SDNY) Bankruptcy

eS a SRS ee 20, 45

In re Yale Express System, Inc., 250 F. Supp. 249

(S.D.N.Y., 1966), 370 F.2d. 433 (2d Cir. 1966)

and 384 F.2d. 990 (2d Cir. 1967)..........2.......--.0..++ 60

Yearsley v. W. A. Ross Const. Co., 309 U.S. 18, 60

S. Ct. 413, 84 L. Ed. 554 (1940)... 79

FEDERAL STATUTES

11 U.S.C. §93() (8 57(N)) -cccccccseecceeecseeeceneceeeee 73

Use, 390 000). 17

00. CO OI OE I i sintncthtertesineicrstns 73

Page

iB) et, 6 |} ee lalate 31

SB Eb 8) ARR eave onkeeee o 32

11 U.S.C. § 806(2) (8 40G6(2) ).....ccccccccccccccscescecee 68

11 U.S.C. § 806(5) (§ 406(5))..........00000. ee. 68

11 U.S.C. § 806(9) (§ 406(9))......00 24

Se A ee a mee 24

TR oe cl i CC) ) 24

Rf A 8 ee 24

if: Mo Be | eee .24, 27, 37

Bice. ee ee iis teencteneiccnsitcnincennseaiibneiaii 38

JSR. 8 6 Oe 37, 41

sho A 8 ee 27

EEE RE ener a 25

og EE 25

Ps SO TIEEEE CIE x iniictinnrinnctahiciniieitiedtiitanaiibin 25

SR 8, eee 25

SR) RE 8 CE ernenne enere 73

11 U.S.C. § 861(11) (§ 461(11))......9, 15, 60, 61, 81

18) a 8 |, ee ee 27, 38

Be ss 0b ee iiviicsiniinhicnctenicntncinsiclemenndiabnineianinainaiade 76

RA | ee ee 2,12

2 MS 23, 28

Frazier-Lemke Act, § 75 (a) (3)............c0.......cccceseees 70

STATE STATUTES

Georgia Code Annotated § 81A-165C................... 41, 58

Page

BANKRUPTCY RULES

RRS eh Ne te a A Oe ee 73

NSIS AP ge! en! Eee ea Oe ee 45

a 35

a caida 35

EE EL eA SRE TNT 5 ET ee 26, 27

ee CSE ee datas ee Som CA nee Be oor 27

i 26

pee ein 2 Sa ot fale CE i Ee ee 26, 27

Oats BR ites a SOMES 8S ETAT ol 26

a a 26

OO ee ee 26

aT ae 2, 10, 17, 22, 35, 37, 38, 41

Ne ERNE ney aera tore teem rere 49

19-49¢0).............. PUI sl <5 OOF 16 | ea nae ren 40

OI a iisiecnih tis sedatinliaiies Luitiabiedittadtiadl 30

OTHER SOURCES

UNITED STATES CONSTITUTION

fie Bebe. .c ssksunthBabsdbamdibaaiabeadl 23, 34

itt 6 ON oie clateaconnnmeamaaiiaiied 46

SN TI a < conconiitlllinintcadinsdaniaceniedamubionien 52

SS FEIT ee ae aa nee a onion 34

pi ED i. cid: catsiedgiumanel ines

PEED ALENT ATIC EAS. 34

I Wi vcecovecccsesecsessativtichtnctinintaninactiadtiinndameintetininand 34

ei WE A. caismtimisiealatiiiniadiaaletaas 42

xii

FEDERAL RULES OF CIVIL mame”

SIU ili issssicuisGeciasieciisssckscipsiehesbicclbgeleshatiainchhdiiceaiammtiasainasben mnie 23

I al ad eee 30

Eg | aE ete bani ae eS 41, 58

CONGRESSIONAL REPORTS

Senate Rpt. Preliminary Report, Special Committee

on Investigations of Bankruptcy and Receivership

Proceedings in United States Courts, 73rd Cong.

2nd Session, Report No. 364 (February 20, 1934) 19

Senate Report No. 118, U.S. Code, Cong. & Admin.

News, 85th Cong. 2nd Sess. (1958) ......0000000000.... 32

Act of Aug. 28, 1935, ch. 792, § 6, 49 Stat. 943-45.. 59

TREATISES

4A Collier on Bankruptcy 4 70.16(7)...........00000...... 63

i Tn cattdhensaitnasneiinatendlon 60

5 Collier on Bankruptcy 4 77.17......................2.00- 66, 72

9 Collier on Bankruptcy § 4.06(5)....000000000 25

Uc siiciiccincetietainibiiatinpicinniibies 25

ESTE I aS 38

SERGE Saeco 73

SR 38

1976 Collier Pamphlet Edition, Bankruptcy Act and

Rules, Part 2, Bankruptcy Rules (1976)................. 24

59 Corpus Juris Secundum § 505...............0............ 52

SR INES TRG OD WO cciiccnvsntisicneniinienccanenedehoseateens 65

ARTICLES

Business Week, “Chapter XII Bankruptcy: A Grim

Case in Atlanta,” November 3, 1975....................

Business Week, “Egalitarianism: Threat to a Free

a SE

Business Week, “Egalitarianism: Mechanisms for

Redistributing Income,” December 8, 1975..........

Business Week, “Egalitarianism: The 1. Anaeiell as

Villain,” December 15, 1975...

Countryman, Vern, Code Siaiin® Interests in Bank-

ruptcy, 75 Commercial Law Journal (1970)........

Draper, Daniel C., “Stays of Mortgage Foreclosure

— A Proposal for Reform,” Banking Law Journal,

I, Fir a nccecsiscncesticctiasinisesennitiimiistntmials calaeiedllaiaiaaas

Lifton, Robert K., “Real Estate in Trouble: Lender's

Remedies Need an Overhaul,” The Business

Ff ee ea tereen

Moo, Paul R., “The Secured Creditor in Bank-

ruptcy,” 47 American Bankruptcy Journal 23

( CW Piixsisininiinnectnnicninginedtetinniinelostantininsteamasiall 19, 42, 57

Murphy, Patrick, “Restraint and Reimbursement:

The Secured Creditor in Reorganization and

Arrangement Proceedings,” 30 Business Lawyer

Be Cie ccncinarnsnenincentcihibiactiainnvalinbapadadsiaintinitinpenaiasie

National Association of Real Estate Investment

Trusts, REIT’S Monthly, October, 1976................

Pound, Roscoe, The Developinent of Constitutional

Guarantées of Liberty, Yale University Press, New

Haven and London (1963 )....................ccecseseeesees

xiv

Page

The Wall Street Journal, “FDIC’s Problem List

Lengthens, Includes More Large Banks,” Novem-

a er enn 45

The Wall Street Journal, “Real Estate Slump Helps to

Revive Use of Long-Dormant Bankruptcy Pro-

vision,” September 29, 1976..................-.cc-sesecerses 18

IN THE

Supreme Court of the United States

OCTOBER TERM, 1976

In the Matter of:

PINE GATE ASSOCIATES, LTD.,

Debtor,

GREAT NATIONAL LIFE INSURANCE

ComPANY, formerly USLIFE

LIFE INSURANCE COMPANY OF TEXAS,

and ALL AMERICAN LIFE AND

CASUALTY COMPANY,

Petitioners,

vs.

PINE GATE ASSOCIATES, LTD.,

Respondent.

PETITION FOR WRIT OF PROHIBITION AND/OR

MANDAMUS AND/OR CERTIORARI TO THE

UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF GEORGIA, ATLANTA

DIVISION,

Petitioners pray that Writs of Prohibition and/or

Mandamus and/or Certiorari issue to the United States

District Court for the Northern District of Georgia, Atlanta

Division, to prohibit the taking of their property without

just compensation, to require the provision of adequate

safeguards to protect Petitioners against the uncompensated

taking of their property, and to review the Orders of Bank-

ruptcy Judge William L. Norton, Jr. denying’Petitioners

any form of protection or relief and the Orders of District

Judge William C. O’Kelley, affirming Judge Norton’s

Orders.

ORDERS AND OPINIONS BELOW

The Order of Bankruptcy Judge Norton, denying Peti-

tioners’ motions for security to indemnify them from

damage suffered by reason of the continuance of the auto-

matic stay against lien foreclosure, sequestration for their

benefit of the rents, issues and profits of the Pine Gate

Apartments, and other relief, is annexed hereto as Ap-

pendix E.

A copy of the Order of the United States District Court,

Judge O’Kelley, affirming the above order, is annexed

hereto as Appendix F.

A copy of the Order of Bankruptcy, Judge Norton, dated

June 30, 1976, denying Petitioners any and all relief

requested in their complaint for relief from the injunction

and automatic stay under Bankruptcy Rule 12-43(a) and

to sequester rents, issues and profits is annexed hereto as

Appendix H.

A copy of the Order of the United States District Court,

Judge O’Kelley, affirming the above order, is annexed

hereto as Exhibit I.

A copy of the Order of Bankruptcy, Judge Norton, dated

dated October 14, 1976, allowing the taking of Petitioners’

security without full payment of the debt secured thereby,

directing Petitioners and Respondent to present evidence

as to the value of said security and “to show cause” “what

amount the Debtor must pay” therefore, is annexed hereto

as Appendix A.

JURISDICTION

The jurisdiction of this Court is invoked pursuant to the

provisions of Title 28, United States Code, Section

1651(a), which provides that this Court “may issue all

writs necessary or appropriate” in aid of its jurisdiction

agreeable to the uses and principles of law.

QUESTIONS PRESENTED

1. Are creditors secured by interests in real property

entitled to any protection against damages caused by the

imposition and maintenance of the stay against lien enforce-

ment imposed automatically upon the mere filing of a

petition under Chapter XII of the Bankruptcy Act?

2. Is a secured creditor’s right to due process violated

by the imposition of a stay against lien enforcement where

that stay is imposed without:

a. notice;

b. opportunity to be heard;

c. prior judicial approval or scrutiny; and

d. bond or other form of protection against damages

caused by the stay?

3. May a secured creditor’s interest in real property be

taken, under Section 461(11) of the Bankruptcy Act,

without repaying the debt secured by that property?

4. If so, is the secured creditor adequately protected by

the availability of a claim for damages against the United

States under the Tucker Act?

5. Does a plan which reduces a secured creditor’s debt

in order to pay subordinate creditors accord the secured

creditor equal protection of the law?

6. Is such a plan “in the best interest of creditors” when

the secured creditor is owed more than 90% of the Chapter

XII debtor’s debts?

7. May this Court constitutionally legislate changes in

the Bankruptcy Act under the delegated power to prescribe

rules of Bankruptcy procedure?

CONSTITUTIONAL PROVISIONS, STATUTES Rules of Bankruptcy Procedure

AND RULES INVOLVED | 1. Rules of Bankruptcy Procedure, Rule 12-43(a), (e).

Constitutional Provisions 2. Rules of Bankruptcy Procedure, Rule 12-36.

1. The Fifth Amendment to the Constitution of the 3. Rules of Bankruptcy Procedure, Rule 12-17(b).

United States provides in pertinent part as follows: |

“No person shall . . . be deprived of life, liberty, or

property, without due process of law; nor shall private

property be taken for public use, without just compensa-

tion.”

The following are set out in Appendix A.

2. Article I, Section 1 of the Constitution.

3. Article I, Section 8 of the Constitution.

4. Article III, Section 1 of the Constitution.

Federal Statutes & Rules of Civil Procedure

1. Title 28 U.S.C. § 2075.

2. Federal Rules of Civil Procedure, § 65(1).

3. Tucker Act, 28 U.S.C. § 1491. .

Bankruptcy Act Provisions

1. Bankruptcy Act, Chapter XII, Real Property Ar-

rangements By Persons Other Than Corporations, States

Code, Title 11, Chapter 12, §§ 801-926:

11 U.S.C. § 861(11)(c).

11 U.S.C. § 828. °

11 U.S.C. § 823.

11 U.S.C. § 806(9).

59 nw >

STATEMENT OF THE CASE

This case is a result of the Rules of Bankruptcy Pro-

cedure, promulgated by this Court, which abdicate to pri-

vate individuals the discretion to impose the injunctive

powers of the United States.

In June, 1973, Petitioners loaned a combined total of

$1,380,000 to Respondent Pinegate Associates, Ltd. Pine-

gate is a Georgia limited partnership formed to purchase and

own a 118-unit, two-story apartment complex outside of

Atlanta, Georgia. The loans were evidenced by two Security

Deed Notes,* which were collateralized by a Security Deed

and Security Agreement” encumbering the real property,

together with an Assignment of Leases and Rents.‘

Respondent is what is commonly known as a “tax

shelter”.*

“Appendix B.

>Appendix C.

‘Appendix D.

“The genera! objective of the Partnership is to purchase and own

a 118-unit two-story garden apartment complex presently being com-

pleted by Beaver Ruin Associates Inc. and Mr. W. Daniel Faulk, Jr.,

on Beaver Ruin Road, Norcross, Gwinnett County, Georgia.

The Partnership investment objectives are to provide a return on

investment derived in three principal ways. First, a return is sought

from cash flow generated from rentals, such rentals may be escalated

periodically with the rising inflationary trends. Additional yield is to

be derived from tax losses generated from the operation of the project

and the manner in which investments are made. Such losses may be

substantially in excess of the amount of cash invested and are available

to offset against taxable income of Limited Partners from other

sources for federal income tax purposes, and under certain circum-

stances for state and local income tax purposes as well.

The present mortgages are being amortized and the property appears

to be well located to take advantage of the increasing values occurring

as Atlanta expands further into Gwinnett County. These additional

factors lead to the expectation, though speculative, that the property

can be sold or refinanced in the future at a price greater than the

Partnership cost.” — Proposal for Investment in Pinegate Associates

a a

Respondent defaulted in the performance of its obligations

under the terms of the Security Deed and Security Agree-

ment by failing to make payments of all installments of

principal and interest due August 1, 1975 and thereafter,

and by failing to pay real property taxes for the year 1975.

The Security Deed and Security Agreement grants Peti-

tioners the right to foreclose nonjudicially, in accordance

with the provisions of Georgia law. Petitioners have been

prevented from exercising this remedy at all times since

December 23, 1975, when Respondent filed its petition under

Chapter XII of the Bankruptcy Act* in the District Court

of the Northern District of Georgia, Atlanta Division. Con-

trary to law, but in accordance with the Rules of Bankruptcy

Procedure promulgated by this Court, the petition was not

accompanied by any plan of arrangement.

During the period beginning with Respondent's default

and ending with the petition, Respondent repaid loans to its

General Partner in an amount in excess of $27,000.

Upon the filing of Respondent’s petition, Petitioners were

automatically enjoined from conducting a foreclosure sale.

Under Georgia law, foreclosure sales may be held on the first

Tuesday of any month, the same having been duly advertised

the previous month. But for the automatic stay, Petitioners

would have been able to cause a foreclosure sale to be held

February 3, 1976 and at that sale would have been entitled

to either buy the property or receive the proceeds of a sale

to another bidder, thereby either owning the property for-

merly securing the loan or realizing the market price

available February 3, 1976, to repay their loan.

Respondent has not been required to post any form of

security to protect Petitioners from their losses caused by

the injunction, nor has it been required to pay anything for

11 U.S.C § 801, ef seq.

its use and occupation of the property. Petitioners’ motion

to sequester the rents, issues and profits subject to their

Assignment of Leases and Rents was denied. On appeal to

the District Court, the Order was affirmed.*

The apartment complex subject to Petitioners’ security

interest represents virtually the sole asset of Respondent.

Pinegate’s schedules show the value of its real property to be

slightly more than 99% of its assets."

Conversely, the encumbrances against that property

represented, at filing, practically all the Respondent’s debt'

— and that proportion has continued to increase for nearly

a year.

The essence of the Chapter XII proceeding, therefore,

is a proceeding wherein one party has invoked the powers of

the court to escape its obligations to the other — first by

obtaining the automatic injunction against foreclosure, and

now, as explained below, by attempting to take Petitioners’

property at a Bankruptcy Court-authorized discount.

On January 13, 1976, Petitioners filed a complaint seek-

ing relief from the automatic stay and seeking an order

sequestering the rents, issues and profits. Oral arguments

were heard on February 17, resulting in the Order refusing

‘Bankruptcy Court Order, Appendix E.

District Court Order, Appendix F.

hAppendix G. Pinegate lists assets of $1,999,377.54, of which

$1,981,280 is claimed to be the value of the real property.

iTotal liabilities are listed as $1,601,925.50. Petitioners’ debt is

listed as $1,353,426.15 and unpaid property taxes, prior to Peti-

tioners’ lien, is listed as $21,459.55. The remaining “debt” listed

includes $138,000 owed to another of Respondent’s General Partner’s

enterprises and represents the agreed-upon purchase price of the land

and $6,000 in past due rent. Of the $28,500.36 listed as unsecured

debt, $11,630.84 is owed to the General Partner.

ae ne ee ne ene

to grant any of the relief requested (Appendix E). This

order was appealed to the District Court, where it was

affirmed (Appendix F).

Trial on Petitioners’ complaint was had on April 1, 5

and 20, 1976 and resulted in the order appended hereto as

Appendix H, denying Petitioners any and all relief requested

in their complaint. Without granting hearing, the District

Court made the order, dated November 11, 1976, appended

hereto as Appendix I. This order affirms the Bankruptcy

Court’s order, although the District Court failed to consider

the trial being appealed from, apparently under the impres-

sion that its pretrial order (Appendix F) covered the point.

Respondent, meanwhile, presented its plan of arrange-

ment on May 14, 1976 and a hearing on confirmation was

held May 27, 1976. The proposed plan is appended hereto

as Appendix J. The proposed plan is to pay Class I creditors

(Petitioners) 1.2 million dollars in full satisfaction of their

debts (which are now in excess of 1.5 million dollars);

75% to the second mortgagee; a $120,000 note, payable

from operations of the apartment project to Class III credi-

tors (the General Partner’s other venture); $2,000 each to

members of Class IV; 50% to unsecured creditors (includ-

ing Respondent’s General Partner); and the full amount of

priority claims. Adequate protection is to be provided for

non-assenting classes by “one of the methods” set forth in

§ 461.’ The arrangement is to be executed by selling or

refinancing the project and by utilizing accumulated

operating income.

Petitioners did not approve the plan. The remaining

five classes did.

Respondent has proposed a procedure — purportedly

authorized by § 461(11)(c) — whereby the court may

appraise the value of Petitioners’ security and, upon pay-

ill U.S.C. § 861. See Appendix A.

ment of the amount thus determined, discharge the in-

debtedness, and take Petitioners’ lien. This is commonly

known as the “cram down.”

By his opinion dated October 14, 1976, Bankruptcy

Judge Norton has determined to follow this procedure. The

opinion is appended as Appendix K.

Petitioners have argued below that, absent the protection

of some form of security to compensate them for damages

caused by the stay against lien foreclosure, Rule 12-43(a)

operates to unconstitutionally take their property without

just compensation because Respondent, being insolvent,

cannot be made to be financially responsible. Petitioners

have further argued that the injunction, imposed without

notice or opportunity to be heard, violated their right to

due process.

The threatened imposition of the “cram down” in the

manner stated by the Bankruptcy Court guarantees the

certainty of loss to Petitioners — not only of interest from

August !, 1975, not only of the cost to Petitioners of the

money the Bankruptcy Court has allowed Respondent to

retain and, in effect, finance the Chapter XII proceedings

with — but of part of the loan principal itself!

Real estate construction and finance in.this country is

a multi-billion dollar industry currently in a severely de-

pressed state. One cardinal tenet of the industry is that

secured loans are less risky and may therefore be accept-

able at lower rates of return. The real property stands be-

hind the obligation, and relatively efficient and economical

means, often outside the judicial process, are provided by

state laws to realize upon that security. These assumptions

are severely jeopardized by the abusive use of the injunc-

tive powers of the United States, through the automatic

stay made indiscriminately available in bankruptcy, and

are utterly destroyed by the concept sought to be invoked

herein by Bankruptcy Judge Norton.

The lending community needs to know whether lenders’

property may be taken without just compensation, as Judge

Norton proposes, and whether there is, in short, to be any

such thing as a secured loan in this country (other than

government-insured loans). If not, lenders will have to

re-evaluate their policies, raising the return on loans to the

level generally applicable to unsecured loans, reducing the

loan-to-value ratios (from 75% to perhaps 30-40%),

employing some combination of the two — or, perhaps,

refusing to make mortgage loans entirely. Many lenders,

especially pension funds, Real Estate Investment Trusts,

mutual savings organizations, Life Insurance Companies

and other publicly owned entities, simply cannot tolerate

the inability to underwrite the risk of real estate lending

with which they are now faced.

If their property may constitutionally be taken from

them, as here threatened, they must know. If not, the

bankruptcy lawyers and judges must know.

This matter is of critical importance to the industry and

to the national economy. There are nearly a thousand

Chapter XII proceedings, tying up billions of dollars of

capital, currently pending throughout the country.“

‘Between January 1, 1975 and November 1, 1976, there were

actually 43 Chapter XII proceedings filed in the Northern District

of Georgia, Atlanta Division, including the instant case. Fifteen of

these were filed between July 1, 1976 and November 1, 1976. These

cases are listed in Appendix L. A review of the available information

from these files shows that the average amount of secured creditors’

claims in the proceedings is approximately $6,000,000, including

Colony Square (#B75-3523) in which the claims total in excess of

$80,000,000, and approximately $2,500,000, excluding Colony

Square. If these averages are projected nationally to the over 850

such proceedings referred to by Judge Norton in footnote 12, page 7

of his Opinion (Appendix K), the dollar volume of mortgage loans

currently being directly affected by such proceedings is somewhere

between 3 billion and 6 billion dollars. There may well be an even

greater amount of capital tied up in Chapter XI proceedings.

Petitioners therefore seek extraordinary relief in this

Court to prohibit the taking of their property by means of

the threatened imposition of the “cram down;” to require

that the automatic stay be conditioned upon the provision

of adequate safeguards to protect Petitioners from losses

caused by the stay; and to require the sequestration of the

property’s rents, issues and profits for Petitioners’ benefit

and/or the payment to Petitioners of the reasonable rental

value of the project from August 1, 1975 until such time

as the Chapter XII proceedings are terminated or Petitioners

are able to foreclose.

SUMMARY OF REASONS FOR GRANTING

THE WRIT

This Court has the power to issue the common law writs

of prohibition, mandamus and certiorari, and may do so

directly to the District Court. 28 U.S.C. § 1651(a); Ex

Parte Republic of Peru, 318 U.S. 578, 63 S. Ct. 793, 87 L.

Ed. 1014 (1943); Los Angeles Brush Mfg. Corp. v. James,

272 U.S. 701, 47 S. Ct. 286, 71 L. Ed. 481 (1927); McCul-

lough v. Cosgrave, 309 U.S. 634, 60 S. Ct. 703, 84 L. Ed.

992 (1940); Ex Parte United States, 287 U.S. 241, 53 S.

Ct. 129, 77 L. Ed. 383 (1932).

The question of whether the writ(s) shall issue is directed

to the discretion of the Court. Ex Parte Peru, supra. That

discretion should be exercised where, as here, the following

conditions obtain:

1. Where the constitutionality of Rules promulgated

by this Court must be decided. Los Angeles Brush Mfg.

Corp. v. James, supra; McCullough v. Cosgrave, supra;

LaBuy v. Howes Leather Co., 352 U.S. 249, 77 S. Ct.

309,1 L. Ed. 2d. 290 (1957), reh. den., 352 U.S. 1019,

77 S. Ct. 553, 1 L. Ed. 2d. 560 (1957); Schlagenhauf

v. Holder, 379 U.S. 104, 85 S. Ct. 234, 13 L. Ed. 2d.

152 (1964);

—_ a ee a

2. Where a question of great public importance is

involved. Ex Parte United States, supra; LaBuy vy.

Howes Leather Corp., supra.

3. Where appeal is an inadequate remedy, or there is

no other remedy. Los Angeles Brush Mfg. v. James,

supra; DeBeers Consol. Mines v. U.S., 325 U.S. 212, 65

S. Ct. 1130, 89 L. Ed. 1566 (1945); Ex Parte United

States, supra; United States Alkali Export Ass'n, Inc. v.

U.S., 325 U.S. 196, 65 S. Ct. 1120, 89 L. Ed. 1554

(1945).

Petitioners assert that a// of the above considerations

are present in this case, because it concerns the validity of

the Rules of Bankruptcy Procedure and their effect upon

the credit market of the nation. Petitioners assert that the

Chapter XII Rules, as applied, take their property without

due process or just compensation and that that taking is

a constant erosion, precluding the utilization of the appellate

process as a remedy.

The Chapter XII Rules, substantially changing the

entrance requirements into Chapter XII, have opened the

door to abuse. In making Chapter XII more accessible,

they have handed over the injunctive power of the United

States, since the mere filing of a Chapter XII petition results

in an automatic stay of any action to enforce a lien. The

Rules have transformed Chapter XII from a rigorous, ex-

pedited procedure wherein a debtor and his creditors may

quickly determine whether an acceptable plan is possible

to an instrument of oppression and delay.

While Congress may delegate the power to make rules of

procedure to this Court, Congress has not — and cannot —

delegate the power to drastically alter the Bankruptcy Act.

Rules of Bankruptcy Procedure may not repeal Acts of

Congress.

The automatic stay against lien enforcement operates to

take property from the foreclosing secured creditor with-

out notice, opportunity to be heard, prior judicial approval

or scrutiny, or any form of protection against loss, thus

violating the creditor’s right to due process. Sniadach v.

Family Finance Corp. of Bay View, 395 U.S. 337, 89 S.

Ct. 1820, 23 L. Ed. 349 (1969); Fuentes v. Shevin, 407

U.S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d. 556 (1972) reh.

den. 409 U.S. 902, 93 S. Ct. 177, 34 L. Ed. 2d. 165

(1972): Goldberg v. Kelley, 397 U.S. 244, 90 S. Ct. 1011,

25 L. Ed. 2d. 287 (1970); North Georgia Finishing, Inc.

v. Di-Chem, Inc., 419 U.S. 601, 95 S. Ct. 719, 42 L. Ed.

2d. 751 (1974); Mitchell v. W.T. Grant Co., 416 US.

600, 94 S. Ct. 1895, 40 L. Ed. 2d. 406 (1974); Boddie v.

Connecticut, 401 U.S. 371, 91 S. Ct. 780, 28 L. Ed. 2d.

113 (1971).

The automatic stay operates to take the secured

creditor's property because no protection is provided against

the continuous erosion taking caused by the passage of time

during the period of the injunction. Without any such

protection, there is no source available to pay the interest

and taxes which continue to accrue, since the debtor is

insolvent. The stay permits the debtor to incur new debts

without any responsibility for their payment. Additionally,

many lenders must continue to pay others for funds they

have loaned to the debtor and are precluded from collecting.

There are no safeguards provided to insure just compensa-

tion. The stay, therefore, as applied, violates the Fifth

Amendment. Louisville Joint Stock Land Bank v. Radford,

295 U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935);

W. B. Worthen v. Kavanaugh, 295 U.S. 56, 55 S. Ct. 555,

79 L. Ed. 1298.

Where a moratorium against lien enforcement is justified

by an emergency situation, safeguards must be provided for

the creditor. Radford, supra; see Home Building & Loan

mee ae oo —ee ee

Ass'n v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed.

413 (1934); East New York Bank v. Hahn, 326 U.S. 23,

66 S. Ct. 69, 90 L. Ed. 34 (1945). The latter three cases

resulted from legislative efforts to relieve farmers from the

effects of the depression, where their plight was considered

to comprise a national emergency. No such emergency

exists requiring extraordinary steps to protect tax-shelter

speculative ventures such as that of Respondent herein.

Petitioners have not consented to Respondent’s plan.

The other classes of creditors, comprising less than 10%

of the amount of Respondent’s debts, have approved the

plan. This small minority would get nothing outside the

Bankruptcy Court, but would get from 50% to 100%

under the plan.

The Bankruptcy Court has determined to utilize the

“cram down” provision — § 461(11) —to force Peti-

tioners to take less than the amount owed them by Re-

spondent in satisfaction of the debt. The Court has decided

that the value of the real property is the value of Petitioners’

debt and proposes to hold a hearing to determine that value.

Upon payment of the amount determined, Petitioners’

security will be taken a: J their debt discharged.

Petitioners assert that the plan is not feasible, because

Respondent cannot realize enough, by sale or refinancing

its single asset, to carry out the provisions of the plan.

Petitioners assert that it is not in the interest of the creditors,

because Petitioners’ debt is more than 90% of the total and

it would be inequitable and a denial of equal protection

to allow a small minority to impose a confiscatory scheme

upon Petitioners. Petitioners further contend that the use

of the cram down would be an unconstitutional taking of

their property without just compensation and would convert

the probability of loss by erosion into a certainty.

Petitioners have rights in real property, which is almost

universally regarded as being unique. Petitioners assert

that they have the right either to have their loan paid off

in full or to have the property. That is the essence of a

mortgage. Radford, supra. Appraisal may not be utilized

as a device to divert value to junior creditors. Preble v.

Wentworth, 84 F. 2d. 73 (1st Cir. 1936), cert. den. 299

U.S. 575, 57 S. Ct. 39, 81 L. Ed. 424 (1936).

The Fifth Amendment prohibits a taking without just

compensation. Where the United States has taken property

without bargaining or instituting condemnation proceed-

ings, the Tucker Act has been regarded as providing

adequate safeguards for the collection of just compensation.

This Court has held the Tucker Act available in reorganiza-

tion cases. Regional Rail Reorganization Cases, 419 U.S.

102, 95 S. Ct. 335, 42 L. Ed. 2d. 320 (1974). Between

‘the automatic stay and the cram down, Petitioners will

suffer the same erosion and conveyance takings recognized

by this Court in the Rail Cases.

REASONS FOR GRANTING THE WRIT

I. ONLY THIS COURT CAN ANSWER THE QUES-

TION WHETHER THE RULES OF BANKRUPTCY

PROCEDURE PROMULGATED BY THIS COURT

MAY EFFECT AN UNCONSTITUTIONAL TAK-

ING OF A SECURED CREDITOR’S PROPERTY.

BECAUSE OF THE EXTRAORDINARY IMPOR-

TANCE OF THE ANSWER TO THE CREDIT

MARKETS OF THE NATION, IT IS SINGULARLY

APPROPRIATE THAT THIS COURT GRANT

EXTRAORDINARY RELIEF.

It has long been established that, in exceptional cases,

this court may, in its discretion, grant the relief sought

herein. Ex Parte Republic of Peru, 318 U.S. 578, 63 S. Ct.

793, 87 L. Ed. 1014 (1943); Roche v. Evaporated Milk

Association, 319 U.S. 21, 63 S. Ct. 938, 87 L. Ed. 1185

(1943).

It is peculiarly appropriate in this case that the court

exercise that discretion because:

(a) There is no adequate remedy by appeal;

. (b) This case involves questions of extraordinary

importance to the economy of this country; and

gated by this court.

As explained below, the Chapter XII rules substantially

alter the nature of Chapter XII, making it more accessible

and, therefore, more subject to abuse.

Moreover, Rule 12-43(a), granting an automatic stay

of any action to enforce a lien upon the filing of a petition

is, in reality, a delegation of the judicial powers of the

United States to the private hands of debtors and bank-

ruptcy lawyers.

There is no requirement in Chapter XII that the petition

be judicially scrutinized to determine whether it has been

filed in good faith (Cf. § 141, Ch. X, 11 U.S.C. § 541) nor,

since the Act was amended in 1952, must the presumed

object — an arrangement of debts — be fair and equitable.

The potential for abuse is manifest. In actual practice,

that potential is being ever more fully realized.'

Increasing publicity’, together with the demonstrated in-

difference of the bankruptcy bench to the protection of

‘Judge Norton’s Opinion (Appen’ = K), page 7, in footnote 12,

points out the increasing frequency of Chapter XII filings. Thus, in

the Northern District of Georgia, Chapter XII petitions were filed at

the rate of one every 26 years from 1938 to Spring, 1974, and one

every 2442 days thereafter through June, 1976.

*E.g., “Chapter XII Bankruptcy: A Grim Case in Atlanta,”

Business Week, November 3, 1975, pp. 70-71.

More recently,

“ATLANTA — Nearly 40 years ago, during the depression,

Congress hurriedly passed a hybrid relief bill for some financially

strapped Chicago homeowners who were about to have their mort-

gages foreclosed.

“The bill became Chapter 12 of the federal Bankruptcy Act,

and it worked as intended. But its use was brief, and Chapter 12

sank into obscurity. As recently as three years ago, legal scholars

disdained discussing Chapter 12 because its use was so insignificant.

“Now, all that is changing. In the 12 months ended June 30,

there were 525 Chapter 12 filings in the U.S., up 88% from 280

the year before and 172 the year before that.

“The resurgence comes at a time when real estate is again in the

doldrums. This time, however, it isn’t homeowners who are using

Chapter 12, because they generally find the Chapter 13 wage-

earner’s bankruptcy plan to be quicker and cheaper. Instead, it is

being used by some relatively sophisticated developers of housing

and commercial real-estate ventures.

“Although Chapter 12 was tailored for homeowners in financial

difficulty, it also fits many big operators because it applies to

individuals or partnerships engaged in ventures with debts secured

by property and improvements on it.

Use by Partnerships

“Many big real-estate developments of recent years have been

partnerships because of inherent tax advantages to high-bracket

developers, and many have debts secured by the real estate

involved.

“So while most parts of the bankruptcy act are still used in their

traditional roles (Chapters 1 to 7 are for personal failures, Chapter

8 for farmers in trouble, Chapter 9 for municipalities, Chapter 10

for companies in deep trouble, Chapter 11 for those with less

serious woes and Chapter 13 for wage earners overburdened by

bills), Chapter 12 is coming into unprecedented use. A 1930s set

of ground rules is fitting a 1970s situation.

“Bankruptcy experts say the increase is likely to continue

because millions of dollars are involved in real estate investment

partnerships caught in financial binds. The upsurge in use of

Chapter 12 is ‘one of the most significant things happening’ in

federal bankruptcy courts today, according to Kent Presson, assist-

ant chief of the bankruptcy division of the administrative office

of U.S. courts.”

“Real-Estate Slump Helps to Revive Use of Long-Dormant Bank-

ruptcy Provision.” The Wall Street Journal, September 29, 1976, p.

40.

secured creditors’ once the concept of “rehabilitation” —

however improbable it may be* — has been invoked, has

caused massive damage to the credit markets, together with

substantial loss of faith and confidence in the ability of the

judicial system.’

*“[Ujntil very recently in bankruptcy history, it has been an open

secret that the bankruptcy bar, commercial collection lawyers, referees

in bankruptcy and many bankruptcy judges have been openly or

covertly hostile to secured creditors. Whether this hostility stems

from the traditional reluctance of the law to recognize security

interests in property of a debtor which he retains and uses from the

position accorded by existing law to the secured creditor in bank-

ruptcy and other insolvency proceedings, from the Shylock image

given to all lenders of money or from the self-interest of the hostile

groups in having available the largest possibile pot for fees and allow-

ances to themselves, it is difficult if not impossible to discern. . . .

That lawyers, and particularly judges, could and should do so with-

out regard to the impact of their handiwork on the availability and

costs of credit, to the business community, in particular, is almost in-

comprehensible.” Paul R. Moo, “The Secured Creditor in Bank-

ruptcy,” 47 American Bankruptcy Journal 23, 23-4 (1973).

“Few Chapter XII cases result in published decisions. See, how-

ever, Rader v. Boyd, Sumida v. Yumen, cited infra in point II.

‘This is nothing new. More than forty years ago, the Senate investi-

gated Bankruptcy and Receivership proceedings. Shocked by what

they found, the committee reported: “[H]owever much the course of

action of the courts in handling receiverships has fallen below our

conception of the accepted standards of jurisprudence, it is yet less

reprehensible than has been that conduct of a bankruptcy proceeding

brought to our notice in the course of our investigation, and to which

reference is made elsewhere in this report.

“As we review in perspective the tortuous course of that proceed-

ing, we are led to pause and to wonder how long a system of laws, so

administered, can endure or continue to have or to merit the con-

fidence of the people.” Senate Rpt. Preliminary Report, Special Com-

mittee on Investigations of Bankruptcy and Receivership Proceedings

in United States Courts, 73rd Cong. 2nd Session, Report No. 364

(February 20, 1934), hereinafter referred to as “Senate Investiga-

tion.”

Secured creditors — their hands tied by injunction; their

security deteriorating, both physically and by the continu-

ing accruals of prior encumbrances, such as taxes; their

funds tied up involuntarily (with no return on their invest-

ment® and no opportunity to make alternate use of their

funds ) — have a limited number of options:

(a) fight, hoping they won’t be hurt too badly. (The

“Home Court Advantage” in bankruptcy favors the

debtor );

(b) quit’;

hurt too badly; or :

(d) submit to extortive demands.*

6Consider the secured Real Estate Investment Trust. In order to

operate as an REIT, at least 90% of earnings must be distributed

annually to shareholders. As a practical matter, many REITs distri-

bute 100%. Thus, dollars tied up in futile attempts to rehabilitate

speculative ventures are directly lost by thousands of individuals,

pension funds, etc. nationwide.

7Consider the subordinate lienholders. Over the course of the

Chapter proceeding — which may be measured in terms of years —

the amount of prior encumbrances might increase so much that the

lienholder cannot afford to maintain his position. Whatever value his

equity position might have had at the outset of the proceedings, then,

has been destroyed.

*E.g., in In re Beverly Hills Bancorp, USDC, Central District of

California No. BIC 74-4409, a $15,000,000 first lienholder on an

uncompleted project, in which the debtor had nothing more than a

subordinate interest, had to pay $825,000 to the Trustee in order to

gain leave to foreclose.

And, in a Chapter XI case, In re W. T. Grant Co., USDC, SDNY,

Bankruptcy No. 75 B 1735 W. T. Grant landlords were compelled to

surrender all claims — and, in some instances, pay money to the

estate— in order to recover their own property.

To state the case simply: Chapter XII has become a

license to speculate with others’ money. And if it can be

used as threatened by Bankruptcy Judge Norton’, it be-

comes a license to steal.

Clearly, appeal is no remedy in this situation. The loss

is continuous and, except as to the possible liability of the

United States,’® there is no recourse. Moreover, this matter

involves the validity of Rules promulgated by this court

and it is this court which must make the ultimate decision

as to whether they are in conflict with the Constitution and

whether they are in conflict with the policy of Congress as

embodied in the Bankruptcy Act, so as to exceed Congress’

ability to delegate legislative powers.

In U.S. Alkali Export Assn. v. U.S., 325 U.S. 196, 65

S. Ct. 1120, 89 L. Ed. 1554 (1945), this court issued com-

mon law certiorari because:

“The hardship imposed on petitioners by a long post-

poned appellate review, coupled with the attendant in-

fringement of the asserted Congressional policy of con-

ferring primary jurisdiction on the Commission, together

support the appeal to the discretion of this Court to exer-

cise its power to review the ruling of the district court

in advance of final judgment.” 325 U.S. at 204.

And, in DeBeers Consol. Mines v. U.S., 325 U.S. 212,

65 S. Ct. 1130, 89 L. Ed. 1566 (1945), the situation justi-

fying the writ was the fact that a decision on the merits

could not redress the injury done by the injunction. Unless

it could be reviewed by extraordinary writ, there would be

no remedy.

*Opinion, Appendix K.

‘Infra, Point V.

The analogy to the Rule 12-43(a) situation is persuasive.

It is interesting to note the further parallels with DeBeers:

the restraining order was there obtained without notice or

opportunity to be heard (as here) and the injunction would

have been unobtainable under state law (as here).

Los Angeles Brush Mfg. Corp. v. James, 272 U.S. 701,

47 S. Ct. 286, 71 L. Ed. 481 (1927), involved the Equity

Rules, which gave the petitioner the right to trial in open

court. The District Court judges in the Southern District

of California, however, had agreed to refer all patent cases

to a master. Other than the writ sought in this court, the

petitioners would have had no other remedy for the violation

of their right to trial.

This Court pointed out that normally, the matter would

go through the Ninth Circuit, but

“we think it clear that where the subject concerns

the enforcement of the Equity Rules which by law it is the

duty of this Court to formulate and put in force, and in a

case in which this Court has the ultimate discretion to

review the case on its merits, it may use its power of

mandamus and deal directly with the District Court in

requiring it to conform to them. Ex Parte Abdu, 247

U.S. 27, 28; Ex Parte Crane, 5 Peters 190, 192, 193,

194. . . The question of thus using the writ of manda-

mus would be a matter of discretion in this Court. . .”"

272 US. at 706.

See aisc L.aBuy v. Howes Leather Co., 352 U.S. 249, 77

S. Ct. 309, 1 L. Ed. 2d. 290 (1957), reh. den. 352 U.S.

1019, 77 S. Ct. 553, 1 L. Ed. 2d. 560 (1957), where this

\'Having expressed its opinion, the court was confident that it need

not actually issue the writ. Apparently, it was wrong. McCullough v.

Cosgrave, 309 U.S. 634, 60 S. Ct. 703, 84 L. Ed. 992 (1940) was a

per curiam opinion directed to the same district court vacating the

reference of two patent cases to a master.

eI ste

court granted certiorari because of the importance of the

question in administration of the FRCP and Schlagenhauf v.

Holder, 379 U.S. 104, 85 S. Ct. 234, 13 L. Ed. 2d. 152

(1964), where this court granted certiorari to review

undecided questions concerning the validity and construc-

tion of FRCP 35.

II. THIS COURT HAS NO CONSTITUTIONAL POW-

ER TO LEGISLATE AND CONGRESS CANNOT

CONSTITUTIONALLY DELEGATE TO IT THE

POWER TO REPEAL ACTS OF CONGRESS.

Title 28 U.S.C., § 2075, provides, in relevant part:

“The Supreme Court shall have the power to prescribe

by general rules the forms of process, writs, pleadings

and motions, and the practice and procedure under the

Bankruptcy Act.

“Such rules shall not abridge, enlarge or modify any

substantive right... .

“All laws in conflict with such rules shall be of no

further force or effect after such rules have taken effect.”

Pursuant to this authority, this Court promulgated rules

under Chapter XII, which became effective August 1, 1975.

By the terms of the statute, rules which conflict with those

Bankruptcy Laws previously enacted by Congress and in

effect as of the effective date of the rules repeal those Acts

of Congress.

In view of the clear delineation of powers contained in

the Constitution,” it becomes necessary to inquire, first, as

to the extent to which Congress may delegate its legislative

powers; second, whether the purported delegation was with-

"Article 1, § 1: “All legislative powers herein granted shall be

vested in a Congress of the United States... .”

Article III, § 1: “The judicial power of the United States shall be

vested in one Supreme Court, and in such inferior courts as the

Congress may from time to time ordain and establish.”

in the permissible limits; and third, whether Congress did,

or could, delegate the power to adopt the Chapter XII rules

that became effective August 1, 1975.

The enabling statute calls for the prescription of rules

which “shall not abridge, enlarge or modify any substantive

right.” In order to determine whether the Rules satisfy this

limitation, it is necessary to examine the law as legislated

by Congress compared to the laws as legislated under Con-

gress’ delegation.

Preliminarily, it must be observed that this situation is

unlike others wherein this Court has promulgated rules, for

the reason that the Bankruptcy Acct itself is primarily a pro-

cedural law, containing explicit provisions governing bank-

ruptcy proceedings.”

Proceedings in Chapter XII are commenced by the

debtor's filing a petition.’ The Act defines a petition as “a

petition filed under this chapter proposing an arrangement

by a debtor.” (Emphasis added) It must “state that the

debtor is insolvent or unable to pay his debts as they mature,

and shall set forth the terms of the arrangement proposed by

him.”'® (Emphasis added )

13See. in addition to the Act, the Advisory Committee’s Intro-

ductory Note to the Preliminary Draft:

“Because it has not been necessary heretofore in the drafting of

bankruptcy legislation to distinguish between substantive and

procedural provisions, they are interwoven throughout the Act.”

1976 Collier Pamphlet Edition, Bankruptcy Act and Rules, Part 2,

Bankruptcy Rules, p. 751 (1976).

411 U.S.C. § 821-2.

IS} 1 U.S.C. § 806(9).

11 U.S.C. § 823.

—

After a petition has been filed, the court “shall

promptly call a meeting of creditors, upon at least 10 days’

notice. . . ,”"’ which “shall be accompanied by a copy of the

proposed arrangement . . .”"* At that meeting the court

shall examine the debtor, may allow or disallow proofs of

claim and shall receive and determine the written accept-

ances of creditors on a proposed arrangement.’ Upon

acceptance, the court shall fix times for deposit of the

monies to be distributed and for the application for and

hearing on confirmation of the arrangement.”

The leading commentator points out that these statutory

provisions of Chapter XII “serve to expedite the administra-

tion of the proceeding.” 9 Collier on Bankruptcy 14th

Edition ¢ 5.04, p. 919-20.

Clearly, Chapter XII, as conceived by Congress, was to

provide an expedited procedure,” compared to other chap-

ters of the Bankruptcy Act, whereby a debtor who qualified

for Chapter XII could propose an arrangement with his

creditors and have that arrangement either accepted and

confirmed or rejected. This has been recognized by the

courts (e.g. Sumida v. Yumen, 409 F.2d 654, 660 (9th Cir.

1959), cert. den. 405 U.S. 964, aff'd 444 F.2d 1281: “Thus,

adherence to the normal procedure in Chapter XII cases

should not produce any inordinate delay.” )

11 U.S.C. § 834.

1811 U.S.C. § 835.

1911 U.S.C. § 836.

011 U.S.C. § 837. See also 9 Collier on Bankruptcy, ¢ 5.04.

*\See 9 Collier on Bankruptcy, ¢ 4.06[5], footnote 15:

‘The filing of a plan as a part of the original petition should

avoid much delay. In the absence of such provision, as in present

Section 74, the debtor is often enabled to delay the presentation

of his proposals for an unreasonably long period.’ Analysis of

H.R. 12889, 74th Cong., 2nd Sess. (1936) 100 H.R. 12889 is the

forerunner of the Chandler Act.”

The Rules completely alter the workings of Chapter XII.

Rule 12-36 dispenses with the requirement that the plan be

filed with the petition” and the requirement that the plan

be transmitted along with the notice of the meeting of

creditors” (which need no longer be called promptly, but

must be held between 20 and 40 days after the filing of the

petition, subject to further delays due to various motions

and appeals).**

The application or motion, determination of which may

further delay the meeting of creditors, may initially only be

made by the debtor.”

From this single example, it can be seen that the Rules

change the entire character of Chapter XII. As pointed out

by Bankruptcy Judge Norton,”

“Prior to 1975, perhaps a deterrent to the use of Chap-

ter XII was contained in the provisions then applicable,

which required a plan of arrangement to accompany the

petition upon filing, and that a trustee be appointed

immediately. Naturally, the additional costs and loss of

control resulting from a trustee is abhorrent to a debtor

who desires continued possession and control of the busi-

ness. However, the recently enacted Bankruptcy Rules,

enacted effective August 1975, change both of these

requirements. Bankruptcy Rule 12-17 contemplates con-

tinued possession by the debtor unless there is some

reason for appointment of a trustee. If no trustee is

appointed, § 444 provides that the debtor continues in

22Rule 12-36(a).

23Rule 12-36(d).

Rule 12-24(a)(1).

25Rule 12-41.

26Appendix K, p. 16 (footnote 32).

—_—-* :Raniians tat tn edn id eb hain tasinins .. Malinatdtiaeass

possession of his property and in such status is a trustee

for all practical purposes. See Rule 12-17 and In re

Walker, 93 F.2d 281 (2d Cir. 1937). Also, Bankruptcy

Rule 12-36 offers the debtor more flexibility now than the

restrictive §§ 423 and 534 by providing that the plan

may be filed with the petition “or thereafter” at a time

as approved by the court. And, § 466 allows a creditor or

creditors under certain conditions to file a plan.”

As Judge Norton points out, the other major change

wrought by the Chapter XII Rules is one which allows the

debtor to retain (or regain) control over the property.

Section 432 of the Act (11 U.S.C. § 832) allows the Court

to appoint a trustee upon the application of any party in

interest. Rule 12-17(t), by contrast, requires the appli-

cant to show cause —a difficult task, in the bankruptcy

court. Moreover, if the secured creditor has acted to pro-

tect his security by obtaining the appointment of a receiver

in the state court, Section 507 (11 U.S.C. § 907), together

with Rule 12-17, requires the receiver to return the property

to the debtor. Again, this drastic infringement upon the

creditor’s property rights is automatic upon the mere filing

of a Chapter XII petition.

If it is true, as bankruptcy lawyers and judges are fond

of observing, that:

“ “Everyone who takes a mortgage or a deed of trust

intended as a mortgage, takes it subject to the contin-

gency that proceedings in bankruptcy against his mort-

gagor may deprive him of the specific remedy which is

provided for in his contract.’ In re Jersey Island Packing

Company, 138 F. 625, 627 (9th Cir. 1905),”

then it must be true that Petitioners’ security deeds were

executed, in 1973, in contemplation of the Bankruptcy law

enacted by Congress —i.e., the Bankruptcy Act. If it is

true, as Bankruptcy Judge Norton observes — and the

statistics cited by him?’ seem to indicate that it is — that in

1973, Chapter XII proceedings were difficult and undesir-

able for debtors to commence, then it must have been con-

templated that there was virtually no risk that Petitioners

would become ensnared in a Chapter XII proceeding. After

all, there had only been one in the Atlanta area in 25 years!

If it is true, as this Court stated in Louisville Joint Stock

Land Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854, 79 L.

Ed. 1593 (1935), that legislation cannot deprive peti-

tioners of rights in the specific property securing their

loans, especially when those rights were secured prior to

the legislation, then it is evident that the Chapter XII Rules,

effective August 1, 1975, cannot constitutionally be applied

to take petitioners’ property.

Thus, it is evident that the Rules have wrought sub-

stantive changes in the nature of Chapter XII exceeding

the bounds of 28 U.S.C. § 2075 and, a fortiori, they exceed

the limits of delegable legislative power.

Prior to the enactment of 28 U.S.C. § 2075, Section 30 of

the Bankruptcy Act invested this Court with the authority to

prescribe all necessary rules, forms and orders as to bank-

ruptcy procedure. Pursuant to the authority conferred by

Section 30, this Court promulgated numerous General

Orders and Forms, which it soon became necessary to re-

consider. In Meek v. Centre County Banking Co., 268

U.S. 426, 45 S. Ct. 560, 69 L. Ed. 1028 (1924), for

example, a petition had been filed in accordance with

General Order in Bankruptcy No. 8 and Bankruptcy Form

2, which allowed one or less than all partners to file a

petition against the partnership without the consent of the

remaining partners. By contrast, the Act provided only

two methods for the commencement of a partnership bank-

27Appendix K, p. 5 (footnote 12).

ruptcy proceeding: by voluntary petition (contrasted to the

situation before the Court where the other partners resisted )

and by involuntary petition filed by the partnership’s

creditors.”

Comparing the two, this Court correctly concluded that

General Order No. 8 and Form No. 2

“do not relate to the execution of any of the provisions

of the Act itself; and therefore are without statutory

warrant and of no effect.” 268 U.S. 426, 434.

The point of the Meek case is that authority to make rules

“is plainly limited to provisions for the execution of the Act

itself, and does not authorize additions to its substantive

provisions.””” This point had long since been declared in

West Co. v. Lea, 174 U.S. 590, 19 S. Ct. 836, 43 L. Ed.

1098 (1899), an early case where the rules which had been

promulgated by this court provided for an issue as to

solvency in involuntary bankruptcy cases, whereas the Act

made that issue irrelevant. In holding that a plea of “not

insolvent” was no defense, this Court observed:

“These rules were but intended to execute the act,

and not to add to its provisions by making that which

the statute treats in some cases as immaterial a material

fact in every case.” 174 U.S. 590, 599.

This and other courts have had numerous occasions to

pass upon the validity of Rules promulgated by this Court.

See, for example, Damon v. Damon 283 F.2d 571 (1st Cir.

1960) (General Order 30); Los Angeles Brush Mfg. Co. v.

James, supra; McCullough v. Cosgrove, supra) (Equity

Rules); LaBuy v. Howes Leather Co., supra (FRCP);

28Note the primarily procedural aspects to the pertinent parts of the

Act and the General Order and Form.

29268 U.S. 426, 434.

Schlagenhauf v. Holder, supra and Sibbach v. Wilson Co.,

Inc., 312 U.S. 1, 61 S. Ct. 422, 85 L. Ed. 479 (1941)

(FRCP 35(a)), and In Re State Thread Co., 126 F.2d

296 (6th Cir. 1942).”

The need for this Court to determine the validity of its

own rules is amply demonstrated by the recent District

Court cases of Jn Re Garcia (C.D. Cal. 1975) 396 F. Supp.

578, holding Rule 13-307(d) valid; Wolff v. Wells Fargo

Bank (N.D. Cal. 1975), 400 F. Supp. 1352, holding the

same Rule invalid. In Jn Re Wall, (E.D. Arkansas 1975),

403 F. Supp. 357, the court, reviewing the two California

cases, as well as pre-rule authorities, found a split of author-

ity in the “few cases . . . which even discuss the issue.” This

Court, the District Judge pointed out, has had no occasion

to settle the differing results between and within the circuits.

In concluding the Rule to be valid, the Court utilized “a

strong presumption that the Supreme Court did not abridge

or modify any substantive right by the rules.”** Had this

Court overstepped the authority delegated by Congress, the

Court presumed “such transgressions would have been

noted and the offending rule modified or deleted upon

review.”

Only this Court can determine whether the Wall Court

was correct. Mr. Justice Douglas, dissenting from this

Court’s Orders prescribing the Bankruptcy Rules and

This case illustrates the difficulty, even for members of this Court,

in agreeing whether a rule is procedural or substantive. See also U.S.

v. Sherwood, where this Court found that the Court of Appeals (2d

Cir.) had confused procedure with jurisdiction. 312 U.S. 584, 589,

61 S. Ct. 767, 85 L. Ed 1058 (1941).

31403 F. Supp. 357, 360.

327d.

Official Bankruptcy Forms, and, later, Chapter X Rules,

said:

“The Court is merely the conduit for the Rules. It

does not purport to approve or disapprove. As I have

said on other occasions, it has merely placed its im-

primatur on the Rules without reading, let alone dis-

cussing, these Rules.” 411 US 992, 37 L. Ed. 2d xxxi

(1973).

“As I have said before, ‘I cannot agree to the Court’s

submission of the proposed Bankruptcy Rules to the

Congress’ . . . Because this Court is no more than a

‘rubber stamp’, I think it should not participate in the

rule-making process.” 421 US 1021, 44 L. Ed 2d

Xxxiii (1975).

It may be that the changes made in Chapter XII by the

Rules are changes which Congress might find desirable.

The wisdom of taking such action, of course, is a matter of

policy, which should remain the concern of Congress. Home

Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 54 S. Ct.

231, 78 L. Ed. 413 (1934).

Even if the changes wrought in Chapter XII by the Rules

were determined to be merely procedural, however, that

would not end the question. As pointed out, a large pro-

portion of the Act itself is procedural. To the extent that a

Rule contradicts a portion of the Act, then, that Rule is re-

pealing an Act of Congress.

It is no answer that 28 U.S.C. § 2075 gives this Court

the power to do so. Marbury v. Madison, 1 Cranch [5 U.S.]

137, 2 L. Ed. 60 (1803).

*9Several years ago, Section 323 of the Act (11 U.S.C. § 723) was

amended to relieve the Chapter XI debtor from the obligation of

accompanying his petition with a plan of arrangement — the same

change effected, in the case of the Chapter XII petition, by Rule

Congress cannot abdicate or transfer to others the essen-

tial legislative functions vested in it by the Constitution.

Panama Refining Co. v. Ryan, 293 U.S. 388, 55 S. Ct.

241,79 L. Ed. 446 (1935); Schecter Corp. v. United States,

295 U.S. 495, 55 S. Ct. 837, 79 L. Ed. 1570 (1935).

As this Court pointed out therein, in every case prior to

Panama in which the question had been raised, the Court

had recognized that there are limits of delegation which

there is no constitutional authority to transcend.”

This is not to say that Congress is to be denied that flexi-

bility that a limited delegation would provide. The essen-

12-36. The legislative change was apparently no more than a recog-

nition of the fact that bankruptcy judges were often ignoring the law

in order to help debtors into the protective arms of the bankruptcy

courts.

Prior to enactment of that legislation, Mr. W. Randolph Mont-

gomery, for the National Bankruptcy Conference, had, on May 21,

1958, told a Subcommittee of the Committee on the Judiciary, United

States Senate:

“| . In view of the fact that the act makes the filing of a copy

of arrangement with the petition mandatory, lip service has been

given to that requirement where the requirement has been met at

all. So-called plans of arrangement accompany petitions in those

cases which the debtor himself has no serious expectation of ever

consummating. In other instances the courts, having found that it

is not practical to have a definitive plan of arrangement accompany

the petition, have closed their eyes and ears to the mandatory

requirement of the statute that the arrangement accompany the

petition and have allowed a time for the filing of a plan of arrange-

ment.

“Of course, that is entirely extralegal and there is no authority

for it in the act.”

Senate Report No. 118, U.S. Code, Cong. & Admin. News, 85th

Cong. 2d Sess. 1958.

Chapter XII has no creditors’ committee analogous to the Chapter

XI committee. See Act, § 339 (11 U.S.C. § 739).

4293 U.S. 388, 430.

tial question appears to be whether the delegatee is con-

strained to follow the standards established by Congress, or

whether there is a broader, less fettered discretion. Schecter,

supra; Panama, supra.

“

. The Congress ... may establish primary

standards, devolving upon others the duty to carry out

the declared legislative policy, that is, as Chief Justice

Marshall expressed it, ‘to fill up the details’ under the

general provisions made by the legislature. Wayman v.

Southard, 10 Wheat. 7, 43.” 293 U.S. 388, 426.

The concept behind the Congressional policy — as mani-

fested by the statutory provisions of Chapter XII — is in-

compatible with the concept behind the Rules ostensibly

enacted to execute that Congressional policy. One policy

must prevail and it must be that of Congress.

From the above, it is apparent that this Court cannot be

authorized by Congress to enact Rules which repeal enact-

ments of that Body without first amending the Constitution.

It was not without reason that this came to be. This

country was founded in rebellion against the tyranny of

English colonial government. To preserve their newly won

freedom, the founding fathers deliberately framed a Con-

stitution that would limit the powers of the federal govern-

ment, and provided “checks and balances” within the gov-

ernment as to its exercise of those powers given. The

functions of the three branches were clearly and separately

delineated.** The Constitution was declared to be the

‘SArticle I, Section 1: “All legislative Powers herein granted shall

be vested in a Congress of the United States. . .”

Article II, Section 1: “The executive Power shall be vested in a

President of the United States of America. . .”

Article III, Section 1: “The judicial Powers of the United States

shall be vested in one Supreme Court, and in such inferior courts as

the Congress may from time to time ordain and establish.”

supreme law of the land*® and was insulated from being

changed by the federal government.*’ The Bill of Rights

was added.

The result was a government of laws — not of men.*

It is that Constitution that dictates the powers and func-

tions of this Court and of Congress. Congress cannot, in

contravention of those dictates, either create new powers in

this Court (Marbury v. Madison, supra) or abandon to this

Court its own powers. Thus, a legislative act of Congress

may be declared unconstitutional by this Court (Marbury

v. Madison, supra), but it cannot be repealed by this Court.

Article VI.

s7Article V.

38See the discussion by Dean Roscoe Pound in The Development of

Constitutional Guarantees of Liberty, Yale University Press, New

Haven and London (1963).

“Teachers have been telling us that the separation of powers

was only a fashion of eighteenth-century political thought, derived

from a forecast made by Aristotle, for there was nothing of the

sort in his time, and a mistaken interpretation of the British policy

of his time by Montesquieu. We are told that it is outmoded and

ought to give way to the exigencies of efficient administration. Re-

cently this has spread to at least one of the courts which intimates

that this fundamental principle of our constitutions should not be

taken too seriously under the conditions of the time. Nothing

could be more mistaken. When in the controversies which led to

the Declaration of Independence, hostility to things English led to

finding a philosophical basis for the rights which lawyers had

learned as the rights of Englishmen, natural rights were put as the

ground of what the English had learned from experience. The

separation of powers was no more derived from political philosophy

than the rights secured by the Bill of Rights. It was taken up as

the result of experience and reinforced by reference to Montesquieu.

Whether put as common-law rights, the liberties claimed by genera-

tions of Englishmen and insisted on by the colonists as their birth-

right were seen to be incompatible with unlimited centralized

power.” (Page 95)

To the extent that the Rules repeal the Acts of Congress,

then, they are invalid, being beyond the power of the Court

to enact —- even with the purported blessing of Congress —

because authorization cannot be made by Congress.

If Congress wishes to make radical changes in Chapter

XII, Congress must do so.

Ifl. THE CHAPTER XII RULES ARE UNCONSTITU-

TIONAL BECAUSE THEY DEPRIVE SECURED

CREDITORS OF THEIR PROPERTY WITHOUT

NOTICE OR OPPORTUNITY TO BE HEARD

AND WITHOUT ADEQUATE SAFEGUARDS TO

PROTECT AGAINST A CONTINUOUS TAKING

OF THE SECURED CREDITOR’S PROPERTY

WITHOUT JUST COMPENSATION.

A. THE AUTOMATIC STAY DEPRIVES SECURED

CREDITORS OF PROPERTY WITHOUT NOTICE

OR OPPORTUNITY TO BE HEARD.

Rule 12-43(a) provides:

“(a) Stay of Actions and Lien Enforcement. A

petition filed under Rule 12-6 or 12-7 shall operate as a

stay of the commencement or the continuation of any

court or other proceeding against the debtor, or the en-

forcement of any judgment against him, or of any act

or the commencement or continuation of any court

proceeding to enforce any lien against his property, or

of any court proceeding for the purpose of the rehabilita-

tion of the debtor or the liquidation of his estate.”

This matter is distressingly typical of Chapter X{I pro-

ceedings.” An over-leveraged, undercapitalized debtor, on

See footnote k, supra, and Appendix L.

the eve of foreclosure of its sole asset, invokes the power of

the United States to prevent that foreclosure. No showing

of good faith is required or made, no plan is proposed nor,

in most cases, is any plan feasible.*°

The debtor merely asserts that it intends to propose a

plan.

The foreclosing creditor — often a pension fund, Real

Estate Investment Trust or other publicly-owned entity

— already has a problem loan on its hands before the filing.

It may have millions of dollars tied up in the project. It

may have already spent months trying to work with the

borrower. It may not have received any return on its invest-

ment for an extended period. Apart from the return o-

riginally expected, usually limited in the case of secured

transactions because heretofore they were considered less

risky, the creditor may be faced with the prospect of not

being able to even recoup its loan.

The creditor must make the best of a bad situation. Per-

haps another bidder will be successful, or perhaps the

creditor will purchase the property and then find a buyer.

In either case, it may be able to limit its loss on this loan

and put the money to productive use elsewhere. Perhaps

the debtor was financially unable to complete the project or

to operate it. The creditor, on the other hand, with more

resources available, may, on acquisition, choose to complete

and/or operate the property in order to enhance its value

and increase its chances of losing less.

One principal means of limiting the creditor’s loss is to

deal with the problem quickly, for time is the worst

40(Other than the procedure proposed in this matter to take prop-

erty from the secured creditors to pay the other creditors.) See

point IV, infra, p. 60.

fiat Soin.

enemy. The creditor must ordinarily pay for the money it

has loaned to the debtor.*' The situation would be other-

wise, were the debtor able to make payments on the loan

from the income of the property, or willing (as in the case

of a limited partnership-debtor) to invest some additional

capital to save its own investment. Then the passage of time

would not be so catastrophic to the creditor.

But the debtor is, by definition, insolvent.” By simply

filing a petition -— by writing its own injunction, thanks to

§ 428 and Rule 12-43(a) — it can shift the entire risk to

the creditor!

The debtor, facing foreclosure, has nothing to lose. If

its “impossible dream” miraculously comes true, it wins.

Otherwise, it can walk away no worse for having tried.

And perhaps, along the way, the desperate secured creditor

might be willing to pay “walk-away” money to be relieved

of the injunction.*’

In any event, after filing by a debtor, the game hence-

forth will be played with the creditors’ money. See, for

example, Rader v. Boyd, 267 F.2d 911 (10th Cir. 1959),

a bitter and protracted proceeding that made its way through

the appellate courts at least twice,“* where the Court, re-

calling its characterization of the debtor’s first proposal as

‘IMany REITs are currently obligated to pay as much as 130%

of the bank’s prime lending rate.

“Section 423 (11 U.S.C. § 823).

“It is widely known that creditors, faced with the prospect of in-

terminable delays, often surrender to the coercive economic pressures

imposed upon them by the passage of time and accede to requests

that they pay money to a debtor or trustee in order to gain relief

from the injunction. See Part I Footnote 8.

“See also 252 F.2d 585 (10th Cir. 1958).

“a speculative venture with accrued funds belonging to the

secured creditors,” went on to observe:

“The second proposal is a speculative venture with funds

obtained by the pledge of the property constituting the

security of the creditor Boyd. There is no essential differ-

ence. In each instance the security of the creditor Boyd

is to be used to finance a venture, the outcome of which

is clouded with doubt.”

“we

Or, see Sumida v. Yumen, supra, cit. p. 654:

The proceeding was merely an attempt to delay creditors

in a situation in which there was no possibility that a

Chapter XII proceeding could be successfully com-

pleted. . . . We think the debtors are engaging in an

exercise of futility and appreciate the trial court’s desire

to terminate the proceedings.’ ”

The secured creditor, enjoined from foreclosing by Rule

12-43(a), made to bear the risk of the failure of the debtor

to realize his Chapter XII visions, unable to control the

property** — even if, pursuant to the provisions of the mort-

gage or trust deed and the applicable state law, it had

obtained the appointment of a receiver for the property“* —

must watch the travesty unfold, knowing, all the while, that

it must continue to pay for the money the debtor’s “self-

help” injunction has put out of reach.

In Radford, supra, this Court enumerated several prop-

erty rights possessed by the secured creditor “who has rights

‘SThe scheme of Chapter XII is to provide for a “debtor-in-

possession.” See § 444 (11 U.S.C. § 824). See also 9 Collier on

Bankruptcy, € 6.04, p. 981.

46The receiver is ousted in favor of the “debtor-in-possession”.

See § 507 (11 U.S.C. § 907). 9 Collier on Bankruptcy 4 6.04,

§ 12.02.

in specific property,” contrasting his position to that “of an

unsecured creditor, who has none. . .” 295 U.S. at 588.

The rights enumerated in Radford, as provided by the

law of Kentucky, were:

“1. The right to retain the lien until the indebtedness

thereby secured is paid.

“2. The right to realize upon the security by a judicial

public sale.

“3. The right to determine when such sale shall be held

subject only to the discretion of the court.

“4. The right to protect its interest in the property by

bidding at such sale whenever held, and thus to assure

having the mortgaged property devoted primarily to the

satisfaction of the debt, either through receipt of the

proceeds of a fair competitive sale or by taking the prop-

erty itself.

“5. The right to control meanwhile the property dur-

ing the period of default, subject only to the discretion of

the court, and to have the rents and profits collected by

a receiver for the satisfaction of the debt.” 295 U.S. at

594.

A petition, initiating a Chapter XII proceeding as con-

ceived by Judge Norton, immediately threatens the loss of

all the property rights recognized by this Court in Radford.

How does the secured creditor lose the property rights it

has bargained for?

Automatically.

Without notice, without any opportunity to be heard.

As pointed out previously, there is no judicial review

of the petition prior to filing. The debtor has written his

own injunction.

In Georgia, if a foreclosure sale is prevented, it cannot

be had until the first Tuesday of the following month, and

only then if the Court allows the creditor to immediately

commence advertising; otherwise, it will be impossible to

advertise four consecutive weeks within the same calendar

month, and the minimum delay in foreclosure would be two

months. Although Rule 12-43(e) provides for ex parte

relief, it is rarely, if ever, granted.*’

‘’For example, in a recent case in the same district as the instant

matter, a Chapter XII petition was filed on August 2, 1976, the day

before the second lienholders’ foreclosure sale. The second lien-

holders (two REITs) filed a complaint seeking leave from the stay

and made application under 12-43(e). Their application showed

them to be subordinated to a 6.6 million dollar loan. The monthly

payments on the loan, together with impounds for real property taxes,

amounted to $60,705. The debtor was a tax-shelter limited partner-

ship whose single asset was a medical office building less than 44%

leased, with a cumulative deficit for the first seven months of 1976 of

$508,909.05 (excluding interest on the subordinated loan). More-

over, projected income at 95% occupancy would be insufficient to

service the project’s debt and the debtor’s experience indicated that

it would take approximately a year and one-half to reach 95%. By

its terms, the subordinated loan of approximately 1.2 million dollars

matured on August 30, 1976.

The lienholders sought relief, so they could complete the scheduled

sale or, in the alternative, that the stay be conditioned upon the

debtor’s being required to post security or pay rent to protect the

lienholders against the $60,705 needed monthly to prevent default

on the first lien.

The Bankruptcy Judge denied relief, despite the apparent abuse.

The lienholders sought mandate in the District Court, which issued

an Order to Show Cause. Several days later, the District Court, while

expressing grave doubts as to the constitutionality of the automatic

Stay, vacated his Order to Show Cause on the ground that mandate

was not the appropriate remedy. (B & B Properties, Lid, Northern

District of Georgia, Atlanta Division, B76-2377A. )

Assume a 1.5 million dollar loan, with lender’s cost of

funds at 8 percent. The mere filing of a Chapter XII petition

in Georgia, even if the lienholder is allowed immediately to

commence advertising the sale, will result in a minimum

one month delay. This is, in effect, an involuntary one-

month interest-free loan. And the loss of that month will

cost the lender $10,000 out of pocket.

The longer this situation continues, the worse it be-

comes — the amount of the lender’s loss is a function of

time. In addition, the lender may be forced to make other

payments, such as Petitioners herein did.“

None of the most blatant abuses of Chapter XII could

be accomplished without the injunction and the Bankruptcy

Court has no discretion to refuse it; thus the key to the

debtor’s capacity to do harm is the automatic feature of

the 12-43(a)/§ 428 stay, issued with no judicial scrutiny,

no notice, no opportunity to be heard, no form of pro-

tection (such as would be required in the state court —

see Georgia Code Annotated, § 81A-165C, or the District

Court — see FRCP, § 65(1)) is afforded, and there is no

way to recover damages, the debtor being insolvent.

This is what happens when a petition is filed. It is true

no matter whether the debtor has other assets or funds to

contribute, giving it a reasonable chance to make a plan

feasible, or where it is merely 2 cynical abuse of the judicial

process. The availability of the automatic stay, coupled

with the relative indifference of the bankruptcy courts to

48According to testimony presented in the Bankruptcy Court on

April 1, 1976, Petitioners paid $15,554.98 of their own funds on

December 16, 1975, to pay the debtor’s property tax obligations.

Almost a full year has since expired and taxes must again be paid.

Who should have to pay them?

the secured creditors’ rights,” results, inevitably, in the

wasteful taking of property from lenders for no reason

“Professor Moo observes, “At least until very recently in bank-

ruptcy history, it has been an open secret that the bankruptcy bar,

commercial collection lawyers, referees in bankruptcy and many

bankruptcy judges have been openly or covertly hostile to secured

creditors.” Moo, The Secured Creditor in Bankruptcy, supra, p. 23.

Compare the views of Professor Vern Countryman, former Vice

President of the National Bankruptcy Conference, who characterizes

the secured creditor as a “grabber,” who will selfishly insist on his

rights, even though the result may be “that nothing is left even for the

payment of expenses of administration.” “Hence it is that I have

sought to devise some arguments that may be used to reduce the size of

the grab in bankruptcy proceedings. . . . If these arguments, or others,

do not succeed, there is another alternative. The Bankruptcy Act can

be amended. . .” [Emphasis added] Countryman, Code Security

Interests in Bankruptcy, 75 Commercial Law Journal, p. 269 (1970).

(It appears that another alternative has already been found —

cancel the Act with new Rules.)

Professor Moo, noting Professor Countryman’s concern that the

fees and expenses of bankruptcy be paid, and asserting his faith

that the draftsmen of the Uniform Commercial Code were aware of

Article VI §2 of the Constitution, states:

“The issue is whether or not the Bankruptcy Act is to be misused

as a vehicle for interfering with or prohibiting, in an economic

sense, the creation of security interests by the consumer, farmer

or businessman who wishes to use his property to obtain credit or

to obtain his credit requirements at a lower cost by collateralizing

his obligations. To the extent that the Bankruptcy Act is con-

strued or amended to subordinate or invalidate security interests

permitted by state or other federal laws, it becomes an instrument

of social or governmental policy dictating how and in what respect

or subject to what burdens, the consumer, farmer or businessman

may use his assets to conduct his own affairs. Constitutional issues

aside, the real question is the extent to which Congress, under its

bankruptcy or other powers, should interfere with or burden or

regulate the debtor’s use of his own property to obtain credit or

his use of secured credit in obtaining other property.”

——— ——

ee re, ene cement oa ame

other than the ritual invocation of the “rehabilitation” of

the debtor. It is very easy, having filed a petition for a

debtor, to claim to be in the process of rehabilitation, but

saying so does not make it true — and it seldom is true.

While some may hold that man can accomplish whatever

man can conceive, the record shows an abysmally low

correlation between petitions and rehabilitations.

Does this conflict with the Constitutional guarantee of

Due Process?

It does if the principles recently enunciated by this Court

are still viable. See Sniadach v. Family Finance Corp. of

Bay View, 395 U.S. 337, 89 S. Ct. 1820, 23 L. Ed. 349

(1969); Fuentes v. Shevin, 407 U.S. 67, 92 S. Ct. 1983,

32 L. Ed. 2d. 556 (1972) reh den 409 U.S. 902, 93 S. Ct.

177, 34 L. Ed. 2d. 165 (1972); Goldberg v. Kelley, 397

U.S. 244, 90 S. Ct. 1011, 25 L. Ed. 2d. 287 (1970);

North Georgia Finishing, Inc. v. Di-Chem, Inc., 419 U.S.

601, 95 S. Ct. 719, 42 L. Ed. 2d. 751 (1974); Mitchell v.

W.T. Grant Co., 416 U.S. 600, 94 S. Ct. 1895, 40 L. Ed.

2d. 406 (1974); Boddie v. Connecticut, 401 U.S. 371, 91

S. Ct. 780, 28 L. Ed. 2d 113 (1971).

These cases have been widely followed in the State

Courts. See, e.g., Blair v. Pitchess, SC. 3d 258, 280, 96

Cal. Rptr. 42, 486 P.2d 1242 (1971), Laprease v. Ray-

mours Furniture Company, 315 F. Supp 716 (N.D.N.Y.

1970).

The taking effected by the automatic stay, wholly apart

from the rights recognized by this Court in Radford, supra,

is the use of the Petitioners’ property — expressed either in

terms of its inability to obtain the security for its loan or

in terms of its inability to liquidate it.

The cases above cited establish beyond argument that

the taking of petitioners’ property without notice or oppor-

tunity to be heard —i.e., automatically — violated their

right to due process.

Such a taking, in the case of a prejudgment wage garnish-

ment, was held, in Sniadach, supra, to constitute an uncon-

stitutional “taking of property without that procedural due

process that is required by the 14th Amendment”. 395

US. at p. 339.

Sniadach concerned the prejudgment garnishment of

wages. Under the Wisconsin procedure, the clerk would

issue a summons at the request of the creditors’ lawyer, who

would then serve the garnishee, freezing the debtor’s wages

unless or until the wage earner prevailed on the merits.

This Court, in holding the procedure unconstitutional,

stressed the leverage the creditor may bring to bear upon

the wage earner, pressure that “may as a practical matter

drive a wage-earning family to the wall” (395 U.S. at 341)

and concluded that where the taking was so obvious, it was

easy to say that due process requires notice and a prior

hearing.

In his concurring opinion, Mr. Justice Harlan pointed

out that the property taken was the use of the frozen funds

during the pre-trial period.

The parallel to the Chapter XII secured creditor situation

is striking. Again, one side obtains cachet, without judicial

scrutiny or review, to take the other’s property. Again, it

is done without notice or opportunity to be heard. And the

effect, by shifting the risk to the creditor, is to reverse the

leverage, so that the debtor, now safely hidden behind the

nstnRnteeed ese

Bankruptcy Court’s skirts, is able to make extortionate de-

mands on his ever more desperate creditor.”

Whether the real estate lender may be driven “to the wall”

is not as clear.*' It is certainly not nearly as likely that

becoming ensnared in a single Chapter proceeding will

A prominent recent example is the W.T. Grant Company

Chapter XI proceeding. Grant, a nationwide retailer, closed over a

thousand leased stores. Insulated from its landlords by the injunc-

tion, Grant discontinued paying rent on some of them and refused to

pay use and occupation charges, although it retained its leasehold

estates and declir.ed to exercise its option to limit claims to three years’

rent, pursuant to Rule | 1-53, because to make such a motion would be

“an administrative burden,” (See Affidavit of Theodore Gewertz,

dated February 6, 1976). As the months went by, many landlords

— unable to deal with their own properties, having to pay on their

own mortgages — were forced, by economic realities, to relinquish

their rights to pre-Chapter rent due and unpaid, use and occupation

payments, and damages. Grant tried to market the leases, with the

Bankruptcy Judge conducting auctions in his courtroom. Many

landlords ended up paying their tenant in order to recover their own

property. One landlord paid $925,000. In re W.T. Grant Company,

supra.

‘!There are currently three REITs in Chapter proceedings. They

are Fidelity Mortgage Investors, with real estate investments of some

$205,500,000; Continental Mortgage Investors, with real estate

investments of $621,800,000; and National Mortgage Fund, with

real estate investments of $64,100,000. (See REIT’s Monthly,

October 1976, National Association of Real Estate Investment Trusts,

1101-17th Street, N.W., Washington, D.C.)

Hampered by their non-liquidity, many other REITs are in default

on their obligations to their bank lenders.

The number of “Problem Banks” on the Federal Deposit Insurance

Corp. list is, in turn, growing. See FDIC’s Problem List Lengthens,

Includes More Large Banks, Wall Street Journal, November 4, 1976,

p. 10.

have such effect. It must be borne in mind, however, that

lenders have loans all across the country, and that the

Bankruptcy laws are uniform throughout the United States

(Article I, Section 8(4)).

The current situation is accurately summarized by Mr.

Robert K. Lifton, in the introduction to his article “Real

Estate in Trouble: Lender’s Remedies Need an Overhaul”,

appearing in the Bicentennial issue of The Business Lawyer

(July, 1976), at pages 1927-1930.

Lifton states:

“From one end of the country to the other real estate

is in trouble. Aggressive overbuilding, sharply increased

interest rates and an inflationary rise in the cost of build-

ing materials have hurt new construction. At the same

time, properties generally are suffering from skyrocketing

fuel and utility costs, rapid escalation of real estate taxes

and a recessionary drop in demand for housing, office

and commercial space. Defaults in construction loans

on uncompleted buildings and in permanent mortgages

on newly completed and even on heretofore successful

properties are larger than in any time in our history. The

possibility of massive losses on these loans threatens the

viability of a number of lending institutions and seriously

limits the ability of many others to provide sufficient

credit, particularly for new construction, to fuel a strong

economic recovery.

“The present state of the Real Estate Investment Trusts

(REITs) and their bank lenders reflects the disaster in

construction lending. Over 40 percent of the approxi-

mately $11 billion of construction loans held by the

REITs are not meeting their payments. The REITs

themselves borrowed most of their funds from large com-

mercial banks. The nonearning loans held by REITs

substantially exceed the REIT’s capital and subordinated

debt and represent a good part of the assets supporting

bank loans to the REITs. Estimates of losses to the bank

lenders on these REIT loans range from $600 million

to a shocking $1.8 billion. In addition to their loans to

REITs, the commercial banks are saddled with their own

portfolios of problem construction loans. So, too, are

many savings and loan associations and savings banks.

“

. Faced with problem-ridden properties, both

national and local builders have sought the protection of

the bankruptcy laws and are tying up in protracted bank-

ruptcy proceedings not only failing property but property

that otherwise would be able to meet mortgage payments.

Bankruptcy is also threatened for some of the larger

REITs, many of which are staving off default only by

swapping assets with their lending banks for cash and as

debt repayment.

“If lending institutions are to maintain their stability in

the face of the current real estate debacle, they must have

effective remedies when default occurs that these remedies

would at least permit them to limit their losses to man-

ageable proportions. Lenders facing problems on uncom-

pleted properties must have a speedy and inexpensive

way of foreclosing on the properties and transferring

them from weak hands to those capable of completing

and operating them successfully. Even when a lender is

prepared to inject new money into an unfinished project

to complete it in a “work out” arrangement with the exist-

ing developer and contractors, it must have the leverage

of being able to foreclose quickly so that it can compel a

rapid resolution of the various parties’ claims without

being held up by any of the parties. Delays in work out

or foreclosure of unfinished projects inevitably result in

rapid deterioration of the property and escalating interest

and building costs over those originally estimated. Delay

past completion dates specified in tenant leases may also

permit tenants to walk away from lease commitments on

which loans were predicated.

“When a mortgage on completed property goes into

default, the mortgagee must be able to protect its security

by making sure that whatever cash flow the property

generates is used to pay real estate taxes and other operat-

ing expenses; to maintain the property in good condition;

and to pay interest and amortization on its mortgage. The

property should not be permitted to run down and the

taxes and mortgage go unpaid while the debtor in posses-

sion “milks” the property using the income for his own

purposes. When default continues, the lender in a rea-

sonable time should be able to realize on its security and

replace the existing management by foreclosing its mort-

gage. It can then sell the property to pay off its debt,

place the property with a new mortgagor in whom it has

more confidence or operate the property itself. For the

REITs, the ability to clean up defaults means more viable

properties to swap with their lenders for repayment of

debt and working capital to keep them from the path of

bankruptcy.

“State laws. both statutory and judicial, provide various

remedies for the mortgagee to safeguard its security. But

they also have developed elaborate rules to protect the

defaulting debtor against being unfairly deprived of his

property interest. Since these laws and decisions were

developed in an era when the debtor requiring protection

generally was a single family homeowner or small farmer,

economically unable to stand up to a strong creditor,

they frequently are biased in the debtors’ favor. Although

these particular debtors may still require greater protec-

tion, the bias built into the law is now benefiting com-

mercial mortgagors who do not warrant special treat-

ment. Similarly, the federal bankruptcy laws designed

to provide a refuge for troubled debtors are currently

being abused and offer the potential for even greater

abuse by defaulting mortgagors. As a result of both

state and federal bankruptcy laws, lenders on commercial

and multi-family residential real estate which goes into

default must face unwarranted frustrating and time-

consuming obstacles to the exercise of their remedies

which not only increase their costs, but may destroy their

property interests.

“In the last analysis, the system of real estate lending is

based on confidence that the law will protect the lender’s

right to its security if the borrower defaults. Unless that

confidence can be sustained through these difficult times,

lenders will shy away from real estate loans in the future

or so entrap them with restrictions that the real estate

industry will not be able to operate effectively. The

repercussions of a lagging real estate industry unable to

satisfy housing or commercial needs will have detrimental

social and economic implications for the nation.

“To foster the confidence of real estate lenders, state

and federal legislators and courts should recognize that

in many commercial real estate transactions, the pendu-

lum of protection has swung too far in favor of the debtor.

They should provide the momentum through corrective

legislative and judicial action to start it swinging back

towards the center.” (footnotes omitted) (Emphasis

added )

It is no answer to point out the provision of Rule 12-43

(d) giving priority to trial upon a complaint seeking relief

from the stay, because that trial must obviously be held after

the taking. And this Court has held that the opportunity

for hearing must be “before he is deprived of any significant

property interest,” Goldberg v. Kelley, supra.

If it is unconstitutional for a creditor to sequester the

property of a defaulting debtor, is it “equal protection” to

allow the defaulting debtor to do so to his creditor? In the

words of Congressman Gonzales, quoted by this Court in

Sniadich, supra, “Where is the equity, the common sense, in

such process?” 395 U.S. at 342.

In Goldberg v. Kelley, supra, this Court, in determining

that a welfare recipient was entitled to notice and an oppor-

tunity to be heard before termination of welfare benefits

which were statutory entitlements, weighed the conflicting

interests, principally the fact that termination of aid might

deprive an eligible recipient of the very means by which to

live while he waits, and the important governmental interest

in fostering the dignity and well being of all persons within

its borders, against the countervailing governmental inter-

ests in conserving fiscal and administrative resources.

In the one asset, tax-shelter Chapter XII situation, this

Court should balance the public interest in preserving that

tax shelter and the “public benefit” of its rehabilitation

(discounted by the likelihood of that event) as against the

likelihood and extent of damage to the lender and its share-

holders, policyholders, depositors or beneficiaries, the dis-

ruptive and chilling impact on the credit markets and the

consequent effect on the national economy, and the potential

liability of the United States for the creditors’ loss.”

B. THE AUTOMATIC STAY IS UNCONSTITU-

TIONAL AS APPLIED AGAINST SECURED

CREDITORS, BECAUSE ITS EFFECT IS TO

TAKE THEIR PROPERTY WITHOUT ADE-

QUATE SAFEGUARDS FOR JUST COMPENSA-

TION.

Infra, Point V, p. 75.

As previously discussed, the automatic stay operates as

a taking of the use of Petitioner’s property (Sniadach,

supra; United States v. Causby 328 U.S. 256, 66 S. Ct.

1062, 90 L. Ed. 1206 (1946) ) as well as those property

rights enumerated in Radford, supra.

The threatened manner of imposing the “cram-down”

creates a new dimension— even apart from the direct

taking implicit therein — and that is this: the probability

of loss (of interest, of monies paid out, such as for taxes)

which existed at the outset is converted to a certainty.

It must be pointed out that where this Court has upheld

prejudgment takings against Due Process challenges, it has

done so because in those instances the party suffering the

taking was completely protected. Thus, in Mitchell v. W.

T. Grant, supra, where the Louisiana statute required an

initial showing be made to the judge, a sufficient bond, a

provision for immediate dissolution unless the sequestering

party can prove the grounds upon which the writ was issued,

and a method for recovering the property sequestered by

posting a bond, this Court said:

“Here, the initial hardship to the debtor is limited, the

seller has a strong interest, the process proceeds under

judicial supervision and management and the prevailing

party is protected against all loss.” (Emphasis added)

416 U.S. at 618.

Absent the taking threatened by the “cram-down,” the

argument favoring the validity of the automatic stay is

that it is merely a delay affecting Petitioners’ remedies —

a moratorium, of sorts.

Even if this were true, there is ample precedent against

which to measure the argument, and it fails to measure up.

During the Depression of the 1930's, many states en-

acted mortgage moratorium laws to cope with the financial

emergency then prevailing. Generally, where the mora-

torium operated as the automatic stay does here, it was

invalidated. Where the moratorium was conditioned on

protecting the creditor, it was upheld.

The cases have been summarized in 59 C. J. S. § 505,

p. 808:

“It has been held that a mortgage moratorium statute

providing for an automatic stay of foreclosure without

compensation to the mortgagee is invalid, but that a

statute authorizing the court in its discretion to grant a

continuance in a mortgage foreclosure action, in proper

cases, on conditions protecting the mortgagee’s rights, and

compensating him for the delay is valid, except as applied

to actions pending when the statute is enacted.”

The moratorium laws have fared no different in this

Court. Home Building and Loan Association v. Blaisdell,

supra, was a 5-4 decision wherein this Court, over a vigorous

dissent, upheld the Minnesota Mortgage Moratorium Law,

holding that it was not invalidated by the Contracts Clause

(Article I, Section 10). The two principal reasons why the

statute was upheld were the fact that it was limited to the

duration of the declared emergency and the fact that it

protected the mortgagee.

After reviewing the so-called “rent cases,” this Court

concluded that the Minnesota law was a reasonable exercise

of the police power because:

1. An emergency existed in Minnesota;

2. The statute had a legitimate end;

3. In order to be constitutional, the relief had to be

of a character appropriate to the emergency “and could

be granted only upon reasonable conditions.” (290 U.S.

at 445); and

4. The conditions were not unreasonable. Under the

Statute, the integrity of the mortgage indebtedness was

not impaired; interest continued to run; the right to sell,

obtain title and »btain deficiency judgments was pre-

served; the conditions of redemption were unchanged;

and the mortgagor was required to pay the rental value

of the premises, such to be applied to the carrying of

the property and to interest on the debt.

Compare the moratorium imposed by the automatic stay.

The conditions found to be essential in Blaisdell — or any

sort of equivalent — are nowhere to be found.

Some years after Blaisdell, supra, this Court decided

East New York Bank v. Hahn, 326 U.S. 23, 66 S. Ct. 69,

90 L. Ed. 34 (1945). ;

The State of New York had also enacted a moratorium

law. That legislation, first enacted in 1933, suspended

the right of foreclosure for one year, but obligated the

mortgagor to pay taxes, insurance, and interest. The mora-

torlum was extended annually, (except for a two-year

extension in 1941) but the legislature, responding to chang-

ing economic conditions, imposed the further condition that

the principal be amortized at a rate of 1 percent (1942),

then 2 percent (1944) and 3 percent (1945).

The challenge was based on the Contracts Clause and

this Court, following Blaisdell, supra, rejected it, finding

the protections afforded, and the frequent reconsideration

of them, to constitute legislation at its fairest. The situation

was not, the Court pointed out, like that of W. B. Worthen

Co. v. Kavanaugh, 295 U.S. 56, 55 S. Ct. 555, 79 L. Ed.

1298, 97 A.L.R. 905 (1934).

The present case — particularly in view of the threatened

“cram-down” — is like Worthen, where Arkansas statutes

had so altered mortgagees’ remedies that Mr. Justice

Cardozo was moved to comment:

“Not even changes of the remedy may be pressed so

far as to cut down the security of a mortgage without

moderation or reason or in a spirit of oppression. Even

when the public welfare is invoked as an excuse, these

bounds must be respected. . . . With studied indiffer-

ence to the interests of the mortgagee or to his appro-

priate protection they have taken from the mortgage

the quality of an acceptable investment for a rational

investor.” 295 U.S. at 60.

The Arkansas statute lengthened the time required to

foreclose from approximately 65 days to at least 22 years,

and possibly much longer. It reduced a 20 percent penalty

to 3 percent and took away the mortgagee’s right to collect

costs and attorneys fees and to take possession after the

sale and collect the rents and profits during the four-year

redemption period. In case the mortgagee was displeased

by all of this, the provision for expedited appeals was

repealed.

The mortgagee was thus to be held off a minimum of

642 years, although

“Relief is not conditioned upon payment of interest

and taxes or the rental value of the premises. The case

is One of postponement for a term of many years with

undisturbed possession for the debtor and without a

dollar for the creditors.” 295 U.S. at 61.

It didn’t matter whether one or more of the charges could

be upheld if considered separately, because the underlying

reality was that they had a cumulative significance. “So

viewed,” Mr. Justice Cardozo said, “they are seen to be

an oppressive and unnecessary destruction of nearly all the

incidents that give attractiveness and value to collateral

security.” 295 U.S. at 62.

Mr. Harry H. Peterson, Attorney General of Minnesota,

who had successfully argued in favor of the moratorium law

in Blaisdell, supra, was again on the respondents brief in

Louisville Joint Stock Land Bank v. Radford, supra. The

difference was that Radford involved an Act of Congress —

the Frazier-Lemke Act, an act designed to prevent farmers

from losing their farms during the Depression of the 1930's.

This Court was urged to follow Blaisdell, the argument

being that if the Act was a bankruptcy law “The Fifth

Amendment is inapplicable.” 259 U.S. at 569.

The other principal difference was that the case was

decided on Fifth Amendment, rather than Contract Clause

grounds.

The Fifth Amendment provides that

“No person . . . shall be deprived of life, liberty, or

property without due process of law; nor shall private

property be taken for public use without just compen-

sation.”

Radford held the bankruptcy power of Congress to be

subject to the Fifth Amendment. Mr. Justice Brandeis,

reviewing the history of the effect of bankruptcy and mora-

torium legislation upon mortgagees’ rights, began by

observing:

“This right of the mortgagee to insist upon full pay-

ment before giving up his security has been deemed of

the essence of a mortgage.” 295 U.S. 555, at 580.

No act, prior to Frazier-Lemke, had “sought to compel

the holder of a mortgage to surrender to the bankrupt either

the possession of the mortgaged property or the title, so

long as any part of the debt thereby secured remained un-

paid. . . . No bankruptcy act had undertaken to supply

him capital with which to engage in business in the future.”

Comparing the mortgagees rights under the law of

Kentucky with those substituted by Frazier-Lemke, the

Court found the latter insufficient.** The answer, then, to

the question “whether the Frazier-Lemke Act as applied

here has taken from the Bank without compensation, and

given to Radford, rights in specific property which are of

substantial value.” (295 U.S. at 601) was “yes.” The

Act, accordingly, was unconstitutional.

*3The mortgagee could consent to a sale to the mortgagor at a

so-called appraisal value. There was no down payment or any assur-

ance the deferred payments would be made. Even if they were, the

sale would not be at the appraised value because “the value of money

(even if there were no risk) is obviously more than one percent.” 295

U.S. at 591. And the value of the property was subject to continuing

deterioration due to waste or accruing liens, such as taxes.

If the mortgagee refuses the above option, the mortgagor gets

possession for 5 years with an option to purchase at a reappraised

value at any time within the period (which gave the mortgagor a

5-year option to take advantage of any market softness with no risk —

the mortgagee, meanwhile was precluded from accepting any offers

made while market prices were high).

“The rights taken were:

“1. The right to retain the lien until the indebtedness thereby

secured is paid.

“2. The right to realize upon the security by a judicial public

sale.

“3. The right to determine when such sale shall be held subject

only to the discretion of the Court.

“4. The right to protect its interest in the property at such sale

wherever held, and thus to assure having the mortgaged property

devoted primarily to the satisfaction of the debt, either through

receipt of the proceeds of a fair competitive sale or by taking the

property itself.

“5. The right to control meanwhile the property during the

period of default, subject only to the discretion of the court, and

to have the rents and profits collected by a receiver for the satisfac-

tion of the debt.” 295 U.S. at 594.

Radford is particularly compelling in the present case,

for two reasons:

1. The same rights taken by Frazier-Lemke are being

taken from Petitioners by the combined effect of the

automatic stay and the “cram-down”; and

2. In passing Frazier-Lemke, Congress vas careful

to limit it to existing mortgages, because to make it

applicable to future mortgages would destroy the pos-

sibility of the farmer obtaining mortgage credit.*

The concern expressed by Congress on the latter point is

no less applicable in the present circumstance because, in

the words of Professor Moo,

“There is an old adage in the credit business that

there is never a high enough rate of interest or charge

nor ever enough collateral available to make a bad

loan,” (Emphasis added)

and the automatic stay, coupled with the proposed use of

the “cram-down” makes real estate “secured” loans “bad”

because they encourage default, waste, and dishonesty, by

giving the borrower the ability, decried by this Court in

Radford, of taking advantage of the depressed value of the

property — whether caused by market conditions or the

borrowers own conscious or unconscious efforts — to

53See comments footnoted at 295 U.S. 545:

“Senator Fess: ‘ ... we may be making it impossible for the

farmer in the future to borrow money.’ ”

“Representative Peyser: ‘.. . you are removing from the farmer

the possibility of securing any mortgage assistance in the future.

I believe in the enactment of this law and the sealing down of values

you are going to take away the possibility of help that may be

needed by these farmers in the future.’ ”

56Moo, The Secured Creditor in Bankruptcy, p. 25.

“steal” it for a fraction of the money originally borrowed

for its purchase or construction. Thus the retired mine

worker, whose Pension Fund has invested in mortgages be-

cause of their security, might well suffer a reduction in his

pension check, so that some defaulting borrower’s right to

avoid taxes might be preserved.

Petitioners contend that the automatic stay can only be

constitutionally imposed if coupled with conditions ade-

quate to protect the mortgagees from loss. Had Pinegate

Associates, Ltd., attempted to enjoin Petitioners’ fore-

closure sale in either the state’ or federal Court,* a bond

would have been required.

Absent the sort of protections this Court has historically

required, there is no public policy which justifies imposing

the risk of loss — almost a certainty where, as here, the

debtors one asset is worth less than the debt encumbering

it—— upon the lender in order to nourish the borrower's

dreams of “rehabilitation”.”

571Georgia Code Annotated § 81A-165C.

*F.R.C.P. 65(1).

5“The presumption that ‘time will heal’ is simply not valid where

the debtor has virtually nothing to reorganize except a single mort-

gaged project, especially where, as is the usual case, the rents are

assigned or pledged and such pledges can probably now be made

effective to withstand bankruptcy. Stays against secured creditors of

single-project corporations rarely increase the probability of reorgani-

zation and consequently cannot further any policy aimed at enhancing

all opportunities for success by the debtor.

“The practical price to the public involved in imposition of stays

assumes greater significance when viewed against a general com-

mercial setting. During the period of a stay, which in the case of

mortgage loans may be extensive, creditors usually collect neither

principal nor interest. A number of mortgage loan defaults in a

period of economic stress could substantially interrupt the cash-flow

pattern of the lender and impair its capacity to pay competitive

dividend or interest rates.” Daniel C. Draper, “Stays of Mortgage

Foreclosure-— A Proposal for Reform,” Banking Law Journal,

Spring 1976.

“(T]he Fifth Amendment commands that, however

great the nation’s need, private property shall not be thus

taken even for a wholly public use without just compen-

sation. If the public interest requires, and permits the

taking of property of individual mortgagees in order to

relieve the necessities of individual mortgagors, resort

must be had to proceedings by eminent domain; so that,

through taxation, the burden of the relief afforded to the

public interest may be borne by the public.” Radford,

supra, 295 U.S. at 602.

The purpose of Frazier-Lemke was to protect farmers,

whose plight was considered to be dangerous to the entire

nation. Accordingly, Frazier-Lemke was amended to in-

clude protections for the mortgagee. As amended, it was

upheld. Wright v. Vinton Branch of the Mountain Trust

Bank, 300 U.S. 440, 57 S. Ct. 556, 81 L. Ed. 736 (1937).

The amendment to Frazier-Lemke required any apprais-

als to be at the present fair market value and limited the

duration of the stay to three years. If the debtor failed to

comply with conditions imposed on him at any time, or if

the debtor was unable to refinance himself within three

years, the court could order the property sold. The stay

was conditioned upon the payment of the reasonable rental

value and the court could, in addition, require payments to

be made on the principal and could, to further protect

the creditors from loss, order unexempt personal property

not necessary for the debtors farming operations sold.®

Under the Constitution, if private property is to be

taken, it can only be done with the payment of just com-

pensation. Absent payment, the sine qua non would clearly

seem to be either sufficient protection against all loss, or

eventual liability by the Federal government.

“Act of August 28, 1935, Ch. 792, § 6, 49 Stat. 943-45.

6\Jnfra, point V.

One more analogy should be briefly noted: If the debtor-

mortgagor retaining the property were, instead, a tenant;

and if the mortgagee were his landlord, it is well established

that the debtor would have to pay for the use and occupa-

tion of the premises during the Chapter proceedings. Nat'l

Levy & Co., 6 F.2d 970 (2d Cir. 1925); 120 Wall Associates

v. Schilling, 266 F.2d 548 (2d Cir. 1959); In re United

Cigar Stores Co., 69 F.2d 513 (2d Cir. 1934); 4A Collier

on Bankruptcy 970.44(4). Often, Chapter Petitions are

filed the day before foreclosure — the day before the mort-

gagee, in most cases, would become the owner and the

mortgagor a non-paying “tenant.”

Does the Constitution sublimate form to the extent that

substance must be ignored? A debtor in possession of mort-

gaged property should be required to pay the fair value of

its use no less than a debtor in possession of leased

property.®

IV. THE PROPOSED USE OF THE “CRAM DOWN”

PROVISION OF BANKRUPTCY ACT SECTION

461 (11) TO TAKE REAL PROPERTY SECUR-

®2See, for example, Murphy, Restraint and Reimbursement: The

Secured Creditor in Reorganization and Arrangement Proceedings,

30 Business Lawyer 15 (1974) at pp. 32-38, wherein the author

explores the deficiencies of In Re Yale Express System, Inc. 250

F. Supp. 249 (S.D.N.Y. 1966); 370 F.2d 433 (2d Cir. 1966) and

384 F.2d 990 (2d Cir. 1967), which denied a creditor secured by

the debtors’ trucks any use of rental payments. The article discusses

In Re Bermec Corporation, 445 F.2d 367 (2d Cir. 1971), in which

the secured creditor was paid the economic depreciation of the debtors’

trucks, and several additional cases, including conditional sale cases,

where payment was required. In Jn Re Sun Cab Co., 67 F. Supp. 137

(D.C. Colo. 1946), for example, the Court recognized

“It does not appear equitable to permit the debtor corporation

ue its

ING RESPONDENT’S DEBT TO PETITIONERS

IS UNCONSTITUTIONAL. TO BE ADEQUATE-

LY PROTECTED, PETITIONERS MUST EITHER

RECEIVE THE REAL PROPERTY SECURING

THEIR LOAN OR HAVE THE LOAN REPAID

IN FULL.

Bankruptcy Judge Norton proposes to hold a hearing, at

which he will “determine” the va'ue of the security for

Petitioners’ debt, reasoning that, since Petitioners must look

to the security for repayment, the “value of the debt”, which

must be adequately protected under Section 461(11)®, is

equal to the value of the security. That being done, Peti-

tioners, according to the plan, will be paid the amount so

determined in full satisfaction of their debt and their lien

will be discharged, Pinegate Associates, Ltd. keeping the

property and paying the creditors of the other five classes

(most of whose claims would be worthless outside the bank-

ruptcy court) up to 75% of their debts.

The plan states that this will be accomplished by either

selling or refinancing the partnership’s sole asset and by

using the proceeds from the operation of the project during

the Chapter XII proceedings.

The rents, issues and profits of the property are, how-

ever, subject to Petitioners’ security interest. Any such use

would constitute yet another taking of their property in

derogation of the Fifth Amendment proscription.

$11 U.S.C. § 861(11).

“Bankruptcy Judge Norton’s Opinion, stating petitioners have not

been treated inequitably thus far, points out:

“By order of this Court dated March 20, 1976, the gross rent

receipts less necessary operating expenses are paid to the credi-

tor...” Appendix J, page 28 (footnote 40)

Actually, the order stated, “Plaintiffs’ motion for sequestration of

rents and profits is hereby DENIED.” The debtor was ordered to

invest the funds and hold the income subject to further orders of the

Court. Appendix E, page 8.

This Court should prohibit the attempt to so “cram down”

on Petitioners a repayment of less than the amount owed in

compensation for the taking of their property because the

scheme is obviously unworkable and can only result in

further delay and, with the delay, further damage to

Petitioners.

The scheme is unworkable for many reasons. Among

them:

1. Bankruptcy Judge Norton’s conclusion that the

“value of the debt” is equal to the value of the apartment

building is clearly erroneous;

2. Bankruptcy Judge Norton’s conclusion that the

scheme is feasible and in the best interests of the creditors

is clearly erroneous; and

3. Such a scheme would be in conflict with the guar-

antees of the Fifth Amendment.

FIRST: Bankruptcy Judge Norton stresses that the

Deeds to Secure Debt contain an “exculpatory clause”.®

herefore, he reasons, Petitioners have limited themselves

to looking to the value of their security to satisfy their

debts.” Thus, according to Judge Norton, although Peti-

tioners might be owed nearly 1.5 million dollars, if the real

property is worth less than that, then the value of the debt

is correspondingly less.

The constitutional objections to Bankruptcy Judge Nor-

ton’s conclusions will be discussed in THIRD point, infra,

as if they were true. At this point, however, it must be

pointed out that Petitioners’ security consists not only of the

Deeds to Secure Debt encumbering the apartment project,

*SAppendix K, page 2, 11.

**Appendix K, page 11.

but also a lien on all the rents, income, receipts, revenues,

issues and profits “forever, or for such shorter period as

hereinafter may be indicated.” (none indicated)°

Bankruptcy Judge Norton, in his order denying Peti-

tioners’ motion to sequester rents, stated:

“If, upon a hearing on the merits, the debtor is able to

show that the assignment of leases and rents in this case

is in fact an assignment as ‘additional security’, as

opposed to a present and unconditional assignment, the

*“7Appendix D.

Petitioners’ motion was based on what clearly appears to be the

law — the secured creditor’s right to collect the rents, issues and

profits may be perfected by means of a petition to sequester rents

filed in the Bankruptcy Court. Jn re Kings County Real Estate

Corp., 67 F.2d 895 (2d Cir. 1933); Denco Development Co. v.

Community Savings & Loan Assn., 376 F.2d 548 (9th Cir. 1967);

Groves v. Fresno Guarantee Savings & Loan Assn., 373 F.2d 440

(9th Cir. 1967); Investors Syndicate v. Smith, 105 F.2d 611 (9th

Cir. 1939); Mortgage Loan Co. v. Livingston, 45 F.2d 28 (8th

Cir. 1930), cert. denied, 290 U.S. 685 (1933); 4A Collier on Bank-

ruptcy, § 70.16(7). The sequestration is effective as of the date the

secured creditor files his petition for sequestration. Groves v. Fresno

Guarantee Savings & Loan Assn., supra; American Trust Co. v.

England, 84 F.2d 352 (9th Cir. 1936); Investors Syndicate v. Smith,

supra; 4A Collier on Bankruptcy, 4 70.16(7).

Moreover, the sequestered rents, issues and profits cannot be used

by the debtor for the payment of general expenses of administration.

American Trust Co. v. England, supra; Mortgage Loan v. Livingston,

supra; In re Hull, 311 F. Supp. 197 (E.D. Cal. 1930); Durand v.

NLRB, 296 F. Supp. 1049 (W.D. Ark. 1969); or diverted to other

creditors, In re Pittsburg - Duquesne Dev. Corp., 482 F.2d 243

(3rd Cir. 1973). See also Stewart v. Platt, 101 U.S. 731, 25 L. Ed.

816, (1879); In re Williams Estate, 156 F. 934 (9th Cir. 1907);

Mills v. Virginia- Carolina Lumber Co., 164 F. 168 (4th Cir.

1908); Pollack v. Sampsell, 174 F.2d 415 (9th Cir. 1949).

plaintiffs would not be entitled to any assignment of

rents until they are able to show that the primary secu-

rity, the apartment complex itself, is inadequate to pay

the indebtedness.”

Having denied Petitioners’ motion to sequester the rents,

Bankruptcy Judge Norton now threatens to deny his own

reasoning by allowing the debtor to use those rents to pay

other creditors, even though the apartment complex may be

insufficient to pay the Petitioners’ debt and even though

Petitioners’ debt is secured by those rents “forever.”

If the value of Petitioners’ debt, then, is measured by the

value of the security, the value of the debt must be the total

of the value of the real property plus the value of the income

from that property until the debt is paid in full.

By the bankruptcy court’s own reasoning, Petitioners

must be paid the total amount owed them if their security

is to be taken and the debt discharged!”

In addition, it must be remembered that Petitioners’ debt

is secured by real property — and that real property has

long been regarded as unique. Petitioners’ contractual

limitation (ignoring, as the bankruptcy court does, the lien

on the rents) is not limited to the value of the real property,

but to the real property itself.

Their right is to cause the property to be sold at fore-

closure and to bid at that sale. Asking a court of equity for

leave to foreclose is analogous to asking for specific per-

formance of a contract to purchase land — relief which

is almost universally available in this country, because,

“Appendix E, page 4.

Suppose the real property were the only security. If oil were

discovered on the property prior to the valuation hearing, would the

value of the debt still be defined as the value of the security?

since the exact counterpart of any particular piece of real

estate does not exist anywhere else in the world, damages

are presumed to be an inadequate remedy. That is the law

in Georgia, Hancock v. Hancock, 223 Ga. 481, 156 S.E.

2d 354 (1967); Whitehead v. Dillard, 178 Ga. 714, 174

S.E. 244 (1934); Clark v. Cagle, 141 Ga. 703, 82 S.E. 21

(1914), as well as most other jurisdictions in this country”

— if not “every country inhabited by people of Anglo-

Saxon origin.””

SECOND: Bankruptcy Judge Norton finds the proposed

scheme feasible and in the best interests of creditors despite

his seeming awareness of the practical difficulties involved.

Raising the necessary cash, he points out, is difficult.

“. .. The experience and observation of this Court has

been that the debtor cannot generally come up with the

cash to implement such a plan. Hence, as a practical

matter, the difficulty factor is quite large upon the debtor

to provide in cash the value of the debt under this alter-

native.””

™For example, Minnesota.

“It is elementary that land contracts in particular are specifi-

cally enforced, inter alia, because one who has contracted to pur-

chase a particular tract of land cannot get its exact counterpart

anywhere. *** It is a unique thing, not capable of being duplicated.

It is in consequence as much a matter of course for a court of

equity to decree specific performance (of a valid land contract)

as it is for a court of common law to give damages for breach of

such a contract.’ Eaton, Eg. 527, 528. This reasoning has been

followed. . .” Mellin v. Woolley, 103 Minn. 498, 115 N.W. 654

(1908).

See also 25 Ruling Case Law § 71, for numerous additional

citations.

Clark v. Cagle, supra, at 705.

Appendix K, page 10.

Analysis shows the difficulty to be even greater than the

Bankruptcy Judge imagines. Under the plan, there are two

alternative sources for funds: refinancing or sale. If the

latter method is employed, the property cannot be sold for

more than the amount to be paid to Petitioners (unless sold

for more than the amount owed to Petitioners), or Peti-

tioners have not been adequately protected to the extent

of the value of the property — as is required, even under

the theory of the Bankruptcy Court. But if the entire pro-

ceeds of the sale are paid over to Petitioners, there will be

nothing left to implement the plan.

The refinancing method would be even more difficult,

because it would require the debtor to obtain 100% financ-

ing — a practical impossibility — and still would provide

no means for implementing the plan. Since most lenders

are limited, either by prudence or by statute, to loans of

approximately 75% of value, in order to pay Petitioners

1.2 million dollars (as proposed in the plan), for example,

the value would have to be approximately 1.6 million

dollars. But if the value is 1.6 million dollars, Petitioners

are entitled to be paid in full — even under the Bankruptcy

Court’s theory.”

From the above, it is crystal clear that the procedure

proposed by Bankruptcy Judge Norton can only result in

a failure to protect Petitioners to the full extent of the value

of the property, or in an exercise of futility which will only

increase and prolong the taking of Petitioners’ property.

The whole point of the threatened use of the “cram

down” here appears to be an attempt to force Petitioners,

™In this connection, Collier observes:

“As a matter of practical effect, the cash outlay needed to

appraise out senior lienholders would in most cases be so great

as to prohibit the use of the device towards that end, aside from

questions of fairnes, or constitutionality.” 5 Collier on Bankruptcy,

¢ 77.17, p. 548.

through the device of appraisal, to pay Respondent’s debts

to its other creditors. This was also attempted in Preble v.

Wentworth, (1st Cir. 1936) 84 F.2d 73, cert. den., 299

U.S. 575, 57 S. Ct. 39, 81 L. Ed. 424 (1936), a case under

Bankruptcy Act § 77B, where seven classes of creditors

assented to the debtor’s plan and the first mortgage bond-

holders did not. The debtor then moved for an appraisal of

the value of the non-assenting classes’ interests and securi-

ties, with a view toward paying the appraised value for a

discharge of the debt.

The District Court, in an opinion accepted, in turn, by

the First Circuit and by this Court, refused to allow it. That

opinion is particularly appropriate here:

“* |. to take the property from the mortgagee upon

an appraisal is an attempt to use a supposed or possible

value, over and above the appraisal, for the benefit of

other creditors and stockholders. If there is any surplus

value, it belongs to the first mortgagee up to the amount

of his debt. If there is none, there is nothing to build

on, and there would seem to be no object in having an

appraisal in the absence of a disclosure of a method of

raising the money, unless junior interests are prepared

to advance the money on a chance of increased value in

the future, and there is no information before the court

to that effect. A plan cannot be called either fair or

feasible which discloses no method or probability of being

carried out unless, perchance, the appraisers make a mis-

take in valuation.’” 84 F.2d at 74.

Preble, of course, may be distinguished by pointing out

that Chapter XII no longer™ requires a plan to be “fair and

Appendix K, p. 13, 14 (footnote 27).

While the words “fair and equitable” may have become “words of

art,” still it is unfortunate that the requirement that any judicial

proceeding be fair and equitable should be removed from the law.

equitable.” While this may be true, it hardly seems a

creditable basis to justify Petitioners’ being “ripped off” for

the benefit of junior creditors. The Chapter XII plan must

still be feasible, and the logic of Preble is stili sound.

The Bankruptcy Court recognizes, however, that besides

being feasible, the plan must also be in the best interests of

“creditors.”

Which creditors? The Act defines “creditors” as “holders

of claims”” and “claims” as “all claims of whatsoever char-

acter, against a debtor or his property.””

In the present instance, Petitioners are first lienholders

whose claims constitute well over 90% of the claims against

the debtor or its property. Under the law of Georgia, their

claims are superior to those of most of the Respondent’s

other creditors. In the normal course, absent bankruptcy

proceedings, these other creditors would get nothing.

Upon entering the Kafkaesque world of Chapter XII, as

envisioned by Bankruptcy Judge Norton, however, these

relationships are suddenly turned topsy-turvy. Petitioners’

rights are no longer paramount, but instead are subject to

the desires of the subordinate lienholders and even unse-

cured creditors. This small minority of less than 10%

(including, here, one of Respondent’s general partner’s

other ventures, and his wife) can vote to tax the Petitioners,

in effect forcing them to pay the debtor’s debts to the

others — despite the fact that there is no relationship be-

tween Petitioners and the other creditors.

In the single asset Chapter XII, where the single asset

is worth less than the first lien, the remaining creditors will

Appendix K, p. 13.

™§ 406(5) (11 U.S.C. 806(5)).

§ 406(2) (11 U.S.C. § 806(2)).

always approve a plan designed to take the first lienholder’s

property and give it to them.” As a nation, we have

applauded the concept (in Robin Hood), rejected it (in

Marx and Mao), and prohibited it (in the Fifth Amend-

ment).

The extreme minority-rule concept cannot be justified in

terms of democracy,” but only, in terms of egalitarianism —

a concept that, while increasingly popular,” has never been

imported to the law of secured transactions to disrupt its

established priorities.

This proposition has not escaped judicial comment. See Kyser v.

MacAdam (2d Cir. 1941) 117 F.2d 232, at 238:

“If an arrangement is to be adopted through vote of the un-

secured creditors alone on the theory that the secured creditors are

not affected, since their claims have been devalued to the value of

the security, then control of the arrangement will by this device

be always thrown into the hands of the unsecured creditors.

89Cf. Baker v. Carr, 369 U.S. 186, 82 S. Ct. 691, 7 L. Ed. 2d 633

(1962).

*\See “Egalitarianism: Threat to a Free Market”, Business Week,

December 1, 1975, p. 62; “Egalitarianism: Mechanisms for Re-

distributing Income,” Business Week, December 8, 1975, p. 86;

“Egalitarianism’ The Corporation as Villain,” Business Week,

December 15, 1975, p. 86.

“The egalitarian movement is essentially authoritarian. It is highly

critical of business and contemptuous of laissez-faire economics.

“Business for its part sees the egalitarian push as a threat not just

to its pay scales but to the fundamental principles of a market econ-

omy. It is right. The American economy, based on private property,

uses the market to determine rewards and allocate resources. Differ-

ences in pay and profit are essential to it. At some point, therefore, a

move toward equality would require a shift from capitalism to a

socialist or government-directed state. By all indications, the U.S.

is still a long way from this point. But the inherent contradiction

between a political democracy and a capitalist economy has yet to be

resolved.” Business Week, December 1, 1975, page 62.

The manifest result of validating the procedure threat-

ened by Judge Norton would be to encourage not only

waste, but fraud. Suppose, for example, a debtor borrows

two million dollars to buy or build income-producing

property. Why shouldn’t he “milk” the property, defer

maintenance, siphon off the income, then file Chapter XII,

have the property appraised at its then depressed value —

say $750,000 — and then “steal” it?

THIRD: Bankruptcy Judge Norton’s Opinion relies

upon this Court’s decision in Wright v. Union Central Life

Insurance Co., 311 U.S. 273, 61 S. Ct. 196, 85 L. Ed. 184

(1940) —another Frazier-Lemke case—to avoid the

requirements of Louisville Joint Stock Land Bank v. Rad-

ford, supra.

The Wright opinion modified a judgment ordering the

sale of a farmer-debtor’s property, with the mortgagee

permitted to purchase at the sale and the mortgagor entitled

to redeem at the purchase price plus 5% interest, as pro-

vided by the Act. The modification made that sale subject

to the prior right of the farmer to first have the property

reappraised, then have a reasonable opportunity to redeem

at the appraisal price.

Reviewing the two provisos appended to § 75(a)(3),”

Mr. Justice Douglas found them both to be mandatory,

rather than considering the first qualified by the second.

To reconcile “these seemingly inconsistent remedies,” he

looked to the purpose of the Act — “to effectuate a broad

program of rehabilitation of distressed farmers faced with

- the disaster of forced sales and an oppressive burden of

debt.” (311 U.S. at 278)

“Section 75(a)(3) of the Frazier - Lemke Act provided: “(3)

At the end of three years, or prior thereto, the debtor may pay

into court the amount of the appraisal of the property of which

he retains possession, including the amount of encumbrances on

his exemptions, up to the amount of the appraisal, less the amount

The provision that, if at any time the debtor fails to

comply with the provisions of the section or the orders of

the court, or is unable to refinance within three years, the

court could order a sale, was apparently held to be meaning-

less upon the ground that it was inconsistent with the right

to redeem at the reappraisal value. A confusing passage

states that Congress was provided the above power, but the

Court could not infer that they meant what they said. To

so hold, the opinion states, would be to imply a power

wholly inconsistent with the aim of aiding and protecting

farmer-debtors, and “such an important remedial right

cannot be lost by mere implication.” 311 U.S. at 281

Of course, this fails to take into account the fact that

the language was in the statute and did not need to be

implied, and that it was there for good reason — Congress

was required to amend Frazier-Lemke to provide safe-

id on principal: Provided, That upon request of any secured or

el oie , Or upon request of the debtor, the court shall

cause a reappraisal of the debtor’s property, or in its discretion set

a date for hearing, and after such hearing, fix the value of the

property, in accordance with the evidence submitted, »nd the debtor

shall then pay the value so arrived at into court, less payments

made on the principal, for distribution to all secured and unsecured

creditors, as their interests may appear, and thereupon the court

shall, by an order, turn over full possession and title of said property,

free and clear of encumbrances to the debtor: ee dee oe

request in writing by any secured creditor or court

aa aie as aha upon which such secured creditors have a

lien to be sold at public auction. The debtor shall have ninety

days to redeem any property sold at such sale, by paying the amount

for which any such property was sold, together with 5 per centum

per annum interest, into court, and he may apply for his discharge,

as provided for by this Act. If, however, the debtor at any time

fails to comply with the provisions of this section, or with any orders

of the court made pursuant to this section, or is unable to refinance

himself within three years, the court may order the appointment of

a trustee, and order the property sold or otherwise disposed of as

provided for in this Act.”

guards for secured creditors after this Court found the Act

unconstitutional in Radford, supra.”

Nonetheless, Mr. Justice Douglas, in the passage relied

upon by the bankruptcy court, recalled that, while the Act

was to provide a broad program to aid distressed farmers,

“Safeguards were provided to protect the rights of

secured creditors, throughout the proceedings, to the

extent of the value of the property. John Hancock

Mutual Life Ins. Co. v. Bartels, supra, at pp. 186-187;

Borchard v. California Bank, supra, at p. 317. There is

no constitutional claim of the creditor to more than that.”

311i U.S. at 278

Both of the cases cited in the quoted passage were

decided on procedural grounds. Borchard (310 U.S. 311,

60 S.C. 957, 89 L. Ed. 1222 (1940)) was, essentially,

a case of invited error, wherein the bank had resorted to a

procedure not contemplated by the statute and this court

held the petitioner-debtors entitled to compliance with the

Statutory procedure. John Hancock (308 U.S. 180 59

S. Ct. 794, 83 L. Ed. 1498, (1939)) was a case where the

debtor had followed the statutory procedure, but the Court

had not. (The Court dismissed the petition because there

was no reasonable probability of the debtor’s financial

rehabilitation. The Act provided no procedure for dis-

missal on that ground.) By stipulation, the Bank had

apparently obtained an advantage over the farmer, who

never did get the stay order he was entitled to under the

“Collier suggests that, out of sympathy for the farmer whose

extreme plight was regarded as dangerous to the welfare of the nation

as a whole, the Court in Wright v. Union Central went further than it

would be willing to go in a reorganization case to advance junior

interests. “No such sympathy,” Collier says, “would be present to tip

the balance in a contest between senior and junior interests in reor-

ganization. An authoritative answer, however, remains to be given

on this point. . .” 5 Collier on Bankruptcy, ¢ 77.17, p. 546.

Act. This Court clearly stated that it was only concerned

“with the duty to follow the procedure which the statute

defines and the District Court failed to observe.” 308 U.S.

at 187.

Both cases observed that, in the scheme of the statute,

the priorities and liens of secured creditors were preserved.

They were entitled, therefore, to the “fair and equitable

treatment which has been removed from Chapter X11.

In view of this Court’s previous decisions upholding

emergency-related legislation to protect farmers (cf. Home

Building & Loan Assn. v. Blaisdell, supra), it would be

reasonable to believe that the “that” that the creditor could

constitutionally claim is really “safeguards” rather than “the

value of the property.” Certainly, such interpretation would

harmonize the Wright decision with the other great decisions

of this Court, including Blaisdell, supra, and Radford,

supra.

This conclusion is buttressed by the language of Section

453 of Chapter XII (11 U.S.C. § 853), which provides,

in part:

“For the purposes of the classification [of creditors

according to the nature of their claims], the court shall,

if necessary . . . fix a hearing upon notice to the holders

of secured claims, the debtor, the trustee . . . to deter-

mine summarily the value of the security and classify as

unsecured the amount in excess of such value.”

See, also, § 197 (11 U.S.C. 597) (Chapter X), § 57(h)

(11 U.S.C. § 93(h)) and Rule 306(d>

Under § 453, if the security is worth less than the

debt, the creditor may participate with the unsecured

creditors with regard to the debtor’s other assets, if any.

See 9 Collier on Bankruptcy, 47.03, p. 1013. So even

though the creditor’s constitutionally protected security

may be limited to the property, his claim is not. To dis-

charge the lien and the debt upon payment of the value of

the security would deny the creditor any further claim, even

as an unsecured creditor.

Petitioners suggest that Collier is right: that this Court

extended special protection to farmers in Wright that

would then, and should now, be unavailabie to debtors

such as Respondent herein. Petitioners suggest that the

farmer's plight — as evidenced by the rapidity with which

Congress amended Frazier-Lemke after Radford — caused

Mr. Justice Douglas to seek an interpretation that would

preserve the Act. Thus, the first proviso, which allowed

any secured or unsecured creditor (or the debtor) to re-

quest a reappraisal, protected the parties who might have

claim to the residual value in a situation where the original

appraisal was below market value, but sufficient to pay the

prior encumbrance. The second proviso, which would

seem, simply by its placement, to modify the first in the

same manner that the first modifies the language that pre-

cedes it, gives to secured creditors the right to demand a

public sale. Thus, the Act protects junior creditors where

the original appraisal is sufficient to pay the senior creditor

and protects the senior creditor where the reappraisal is

less than his debt.

Petitioners submit that Wright is anomalous and should

be restricted to the unique historical context in which it

arose.

It is interesting to note that subsequent to the Wright

decisicn, which effectively eliminated the second proviso

of Section 75 (s)(3) as a modification of the first proviso,

an attempt was made to limit the first proviso as a modifi-

cation to Section 75 (s)(2).

In In re Whitwer, 44 F. Supp. 466 (D.C. Neb. 1942), a

farmer debtor — represented by William Lemke, co-author

of the Frazier-Lemke Act — sought to redeem at the orig-

inal appraisal, denying the secured creditor the right to a

reappraisal, as provided in the first proviso. As pointed out

in the Opinion, the same argument had unsuccessfully been

made in Wright following its return from this Court to the

District Court. The Circuit Court, in that case, had pointed

out that it was easy to conceive of a case in that circuit

where oil might be discovered on the property during the

moratorium. In Whitwer, oil had been discovered and the

debtor was insisting on his “right” to redeem property with

a fair market value of Four Hundred Thousand Dollars for

the original appraisal figure of Four Thousand Dollars!

The Court was aghast:

“He is invoking the jurisdiction of this court not as a

shield, but rather as a scourge. The allowance of his

petition under the guise and in the name of the unfor-

tunate would achieve the perversion of the very purposes

of the amendment.” 44 F. Supp. at 472.

The Whitwer case illustrates graphically why, if the

debtor is unable to pay the secured creditor’s debt in full,

no “appraisal value” of that debt can be an adequate sub-

stitute for the real property itself.

The reasoning of the debtor in Whitwer, however, was not

unlike that of Mr. Justice Douglas in Wright.

V. THE TUCKER ACT PROVIDES THE MEANS FOR

ANY SECURED CREDITOR TO OBTAIN JUST

COMPENSATION FOR PROPERTY TAKEN IN

BANKRUPTCY PROCEEDINGS.

The philosophy of the Fifth Ainendment is to protect the

individual against the uncompensated taking of his property

by his government. It does not say that private property

may not be taken, nor has this court so held. It says that

if it is to be taken, just compensation must be paid.

So understood, the principle has been upheld by this Court

from the beginning. Thus, in cases such as Radford, supra,

where property was taken without compensation and with-

out adequate safeguards to insure that compensation would

be available, the statute was held to violate the Fifth Amend-

ment. In the moratorium cases, such as Blaisdell, supra, as

well as the cases upholding the amended Frazier-Lemke

Act, this Court refused to strike down the statutes involved

because adequate safeguards were provided.

The same distinction can be found in the cases measuring

State prejudgment attachment statutes against the Four-

teenth Amendment. Compare, for example, Sniadach,

supra, where there were no protections, with Mitchell vy.

W. T. Grant Co., supra, where this Court found the protec-

tions adequate. In the former case, the statute was struck

down; in the latter, it was upheld.

. The circumstances under which an individual may suffer

his property to be taken by the United States are manifold.

They range froin the Radford situation, where compensa-

tion or protection was practically nonexistent, to the

Opposite extreme such as where the government buys the

property through negotiations or condemnation proceed-

ings.

Between those extremes, a large area has been carved out

wherein actions taken pursuant to statutes which provide

little, if any, safeguards for compensation, have resulted in

the taking of property. This Court has upheld those statutes

by implying the promise to pay for what was taken, thus

making the Tucker Act™ available to allow the individual

damaged by the taking to proceed against the United States

in the Court of Claims.

“28 U.S.C. § 1491. See Appendix A.

United States v. Causby, supra, for example, was a case

where government planes so scared a farmer’s chickens that

they destroyed the value of his property as a commercial

chicken farm. This Court held the taking compensable in

damages. United States v. Dickinson, 331 U.S. 745, 67

S. Ct. 1382, 91 L. Ed. 1789 (1947) and Jacobs v. United

States, 290 U.S. 13, 54 S. Ct. 26, 78 L. Ed. 142 (1933)

involved flooding and eroding of property caused by dams

built by the government pursuant to Congressional author-

ity. In both cases, this court found an implied promise

to pay and, in the Jacobs case, held the just compensation

impliedly promised entitled the owner to the value of the

property taken plus interest from the time of the taking.

In Armstrong v. U.S. 346 U.S. 40, 80 S. Ct. 1563, 4 L. Ed.

2d. 1554 (1960), mechanics’ lien rights were taken when

the United States exercised its contract right to take title

from the prime contractor, making lien enforcement impos-

sible because of sovereign immunity. In Duckett & Co. v.

U.S., 266 U.S. 149, 45 S. Ct. 38, 69 L. Ed. 216 (1924),

possession of a lessee’s leased property was taken pursuant

to a statute authorizing the President to take possession of

any system of transportation. None of the above were cases

where the United States brought formal condemnation pro-

ceedings. (Cf. Almota Farmers Elevator & Warehouse Co.

v. U.S., 409 U.S. 470, 93 S. Ct. 791, 35 L. Ed. 2d. 1 (1972),

where a leasehold was condemned and this Court held the

condemnee also entitled to compensation for improve-

ments). None of them was concerned with the determina-

tion of whether the underlying statute provided adequate

safeguards — instead, the adequate safeguards were found

in the availability of a procedure in the Court of Claims.

The synthesis of the Fifth Amendment prohibition, the

moratorium/reorganization and the implied promise

theories has finally been achieved in the recent Regional Rail

Reorganization Cases, 419 U.S. 102, 95 S. Ct. 335, 42

L. Ed. 2d. 320 (1974). Those cases involved the Regional

Rail Reorganization Act, which required the assets of

several railroads then in reorganization proceedings to be

transferred to a new corporation (Conrail) in return for

Conrail securities and a limited amount of federally guar-

anteed Unived States Railway Association (USRA) obliga-

tions. This was to be accomplished in accordance with a

plan mandated to be formulated by USRA by July 26, 1975.

Until that plan became effective, the railroads were gener-

ally unable to discontinue service or abandon any line which

would become part of the consolidated railway system.

The largest of the eight railroads involved was the Penn

Central Transportation Company (“Penn Central”). Vari-

ous parties with interests in Penn Central attacked the

constitutionality of the Rail Act on the grounds that it would

take Penn Central property without just compensation in

two ways: by conveyance —i.e., the transfer of assets

compelled by the Act would not be adequately compensated

for by the Conrail securities and USRA obligations; and by

erosion resulting from the compulsory operation of money-

losing lines required by the Act.

In an opinion called “a sheer tour de force” in Mr. Justice

Douglas’ dissenting opinion, this Court recognized the two

forms of taking and found the issue of both to be ripe for

determination.

Observing that

“there are clearly grave doubts whether the Rail Act

would be constitutional if a Tucker Act remedy were not

available as compensation for any unconstitutional

erosion not compensated under the Act itself,” (419 U.S.

at 134)

this Court held that the Tucker Act was available to pro-

vide just compensation for the erosion ta

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