# Petition — Great National Life Insurance v. Pine Gate Associates, Ltd. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0944%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1977 - **Citation:** 429 U.S. 1071 ## Text 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 oo 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 ee Summary of Reasons for Granting the WYit.................-..-..--ceeeeeeeeeeeees Boenneens GP GR WoO ccecccccecesiasscnssescrscrscerecssvenscesuusccnsaszases edaaiiind I. 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 iv 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 eo 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 x 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 58 46 ( 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 45 34 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. 2 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. 3 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? 4 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 > 6 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 7 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 9 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. 10 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. ll 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. 12 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 13 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. 14 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 15 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 16 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). 17 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 (c) This case involves the validity of Rules promul- 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 18 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. 19 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.” 20 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’; (c) finance the proceedings, hoping they won't be 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. 21 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 23 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.” 24 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. ee — 25 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.” 26 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 27 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 28 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). 29 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. 30 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. 31 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 32 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. 33 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.” 34 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) 35 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. 36 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. 37 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). 38 “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. 39 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. 40 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. ) 4l 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? 42 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 43 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. +4 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 45 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. 46 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 47 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 48 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- 49 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. 50 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. Sl 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 52 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 53 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 54 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. 55 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.” 56 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. 57 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. 58 “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 pr [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0944%3A1. Public record. Not legal advice.