Opposition — Butner v. United States

Supreme Court, Us §

FILED |

JUN 4 1978

| MICHAEL pOoak IR., CLERK

In the Supreme Court of the United States

OcTOBER TERM, 1977

No. 77-1410

IN THE MATTER OF GOLDEN ENTERPRISES, INC.,

BANKRUPT, WILLIAM E. BUTNEP PETITIONER

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

Wapbe H. McCree, 'R..

Solicitor General,

M. CARR FERGUSON,

Assistant Attorney General,

Crombie J. D. GARRETT,

CARLETON D. POWELL,

Attorneys,

Depariment of Justice,

Washington, D.C. 20530.

INDEX

Page

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SPINEL: sslincGelicecsiniissimniihigmentunesnntnsimiieatsaatttacmatat ie ie 2

TE LS ECON REND aT HR 4

ay aE Tee Ea TE ea 10

CITATIONS

Cases:

Brose, In re, 254 Fed. 664 ooocccccccccccccccccccccccccceceee. 5

Cigar Stores Realty Holdings, In re. 69

FORESTER 6,9

Fidelity Bankers Life Insurance v.

Williams, 506 F. 2d 1242 covceccccccccccccccccccccceceees 5

Freedman’s Savings Co. v. Shepherd.

| Eee ero TOT SET 5

Gregg v. Williamson, 246 N.C. 356. 98 SF

SEP CTUE salildinideitiebieittiiiatbablictoamnasiiidiahdoeey. cninmmmsbcisbtiennin is 5

Hotel St. James Co., In re, 65 F. 2d 82 ............ 5

Kistler vy. Development Co., 205 N.C. 755.

TU I ii 5

Pittsburgh- Duquesne Development Co..

is NE ke I eiietieiinteiniinmeentemiietnieniennaain 6

Stellwagen v. Clum, 245 U.S. 605 ....................... 7

Thompson v. Magnolia Co., 309 U.S. 478 ......... 7

Page

Cases — continued:

Tower Grove Bank & Trust Co. vy.

Weinstein, 119 F. 2d 120 ...........c ccc cece cece ccc ceee. 5

3s fn bo ee Cee eee 6

Constitution and statutes:

United States Constitution. Article I.

Tl Ie RE A, 5 a DS Ie a, 6-7

Bankruptcy Act, 30 Stat. 544. us amended,

I! U.S.C. 1 et seq.:

section 64, 11 U.S.C. 106 occccccccccccoccoccee..... 4

Sections 301-399 (Chapter XI) I!

8 * sea ps ARETE eet I Rake ees 2

Miscellaneous:

4A Collier on Bankruptcy (14th ed. 1976) ..... 5, 6

In the Supreme Court of the United States

OCTOBER TERM, 1977

No. 77-1410

IN THE MATTER OF GOLDEN ENTERPRISES. INC..

BANKRUPT, WILLIAM E. BUTNER. PETITIONER

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

OPINIONS BELOW

The opinions of the bankruptcy court (Pet. App. 2a-

20a) and the district court (Pet. App. 2la-30a) are

unreported. The opinion of the court of appeals (Pet.

App. 3la-42a) is reported at 566 F. 2d 1207.

JURISDICTION

The judgment of the court of appeals was entered on-

December 8, 1977 (Pet. App. 3la) and a petition for

rehearing was denied on January 6, 1978 (Pet. App. 43a).

The petition for a writ of certiorari was filed on April 4,

1978. The jurisdiction of this Court is invoked under |!

U.S.C. 47(c) and 28 U.S.C. 12541).

(1)

2

QUESTION PRESENTED

Whether the mortgagee of real property is entitled to

rents accruing during the period from the initiation of

liquidation proceedings to the foreclosure sale of such

property, where the mortgage does not provide for an

assignment of the rents. the mortgagee does not seek to

have the rents sequestered for his benefit, and the

mortgagee has no equitable basis for his claim.

STATEMENT

On May 4, 1973, Golden Enterprises, Inc. (Golden)

filed a petition in bankruptcy for an arrangement under

Chapter XI of the Bankruptcy Act. as added. Sections

301-399, 52 Stat. 905, and amended (11 U.S.C. 701-799).

Golden owned several parcels of income-producing real

estate located in North Carolina. These parcels were

subject to several first mortgages held by various financial

institutions and a second mortgage held by petitioner

William E. Butner and others in the amount of $360,000.

The second mortgage did not provide for any security

interest in, or an assignment of, the rents in event of

default. During the arrangement proceedings, an agent

Was appointed to collect the rents and to apply them to

the payment of taxes. insurance and amounts due on the

mortgages (Pet. App. 2a. Ila-I2a. R. 394-395)!

Golden operated as a debtor-in-possession but the plan

for an arrangement was never confirmed. On February

14, 1975, the arrangement was converted into a li-

quidating bankruptcy and a_ trustee was appointed.

Petitioner thereafter acquired all of the interests in the

second mortgage. During the ensuing liquidating

bankruptcy, the trustee collected the rents but by

“R.” refers to the separately bound appendix filed with the court

ol appeals.

3

instruction of the bankruptcy court made no payments to

petitioner. Petitioner took no steps to appeal these

instructions or otherwise move to have the rents

sequestered for his benefit, although the mortgage was in

default. At the initial meeting of creditors, petitioner

requested that the property be abandoned to him, subject

to the first mortgages. While not directly opposing the

abandonment, the trustee Suggested a foreclosure sale of

the property. The district court accepted the trustee's

Suggestion and the real estate. subject to the first

mortgages, was sold. Petitioner bid in the property for

$174,000 and paid for it by applying part of the debt

due him, leaving a balance of $186,000 due on his

mortgage note. The deed from the trustee specifically

provided that “(t]he accrued rents * * * from [the subject

property] are hereby expressly not conveyed, but are

reserved to the [trustee]” (Pet. App. 33a). Petitioner

accepted the deed (Pet. App. 32a-33a). In an uncon-

tradicted affidavit, the trustee alleged that, while the face

amount of petitioner's mortgage was $360,000, his

investment was $272,200 and that the value of the

property he received in the sale was substantially greater

than the $174,000 bid price (R. 365-367).

From the inception of the liquidation proceedings until

the foreclosure sale, the trustee collected the rents from

the property. After the payment of certain uncontested

expenses, the trustee had a fund of $162,971 (Pet. App.

32a). At the final meeting of creditors. petitioner claimed

the fund remaining in the hands of the trustee on the basis

of the $350,000 second mortgage note. The _ bank-

ruptcy judge noted that petitioner had been allowed

"There were actually two sales of the property. At the first sale,

Petitioner was not allowed to bid the Property in on his mortgage

debt. On petitioner's appeal, the district court vacated the confirma-

tion of the sale and ordered the property resold (Pet. App. 22a. 33a).

4

to bid in the property for $174,000 and that “none of the

funds in the hands of the Trustee were derived from the

sale of the collateral.” He therefore held that “the balance

of this claim is disallowed as a secured claim” (Pet. App.

l6a-17a). However, the bankruptcy judge accorded

unsecured claim status to the $186,000 difference between

the mortgage note ($360,000) and the bid price (Pet. App.

17a). The bankruptcy judge also allowed certain un-

contested fees and expenses of administration to be paid

out of the fund. The balance of the fund was determined

to be available for distribution for debts and expenses

under Section 64 of the Bankruptcy Act (11 U.S.C. 104)!

(Pet. App. 17a-19a),.

The district court reversed the order of the bankruptcy

judge and found that petitioner's “secured status extended

to the rents and profits derived from the property during

the administration of the bankrupt’s estate” (Pet. App.

29a). The court of appeals reversed and remanded the

case for reinstatement of the bankruptcy judge's order. In

its view, petitioner was not entitled to the rents that

accrued during the bankruptcy proceeding because he did

not request the bankruptcy court to sequester the rents for

his benefit or to appoint a receiver on his behalf (Pet.

App. 36a-37a).

ARGUMENT

|. The court of appeals correctly concluded that

petitioner, a second mortgagee of real property, was not

entitled to the rents arising from the property during the

period from the initiation of liquidation proceedings to

the foreclosure sale of the property.

‘The government filed its proot of claim as a creditor for unpaid

lederal taxes of approximately $50,000 (Pet. App. 34a).

~~

5

As the court properly observed (Pet. App. 34a-35a), the

question of a secured creditor's right to income, generated

by the secured Property during bankruptcy, has produced

a conflict in the circuits. However, as the discussion that

follows demonstrates, this case is an inappropriate vehicle

for the resolution of the conflict because petitioner cannot

prevail under either line of authority.

a. In accord with the decision below, the Second,

Eighth and Ninth Circuits have held that the mortgagee

has no right to the rents once the bankruptcy court

assumes control of the property, unless he petitions the

bankruptcy judge for a sequestration order, obtains the

appointment of a receiver to collect the rents, or secures

the bankruptcy judge's consent to foreclose. See In re

Brose, 254 Fed. 664 (C.A. 2): Tower Grove Bank & Trust

Co. v. Weinstein, 119 F. 2d 120 (C.A. 8); In re Hotel St.

James Co., 65 F. 2d 82(C.A. 9). See also Fidelity Bankers

Life Insurance v. Williams, 506 F. 2d 1242, 1243(C.A. 4),

This approach generally follows state law in determining

the entitlement of a mortgagee to rents. For example,

where, as here, the law of the state in whicn ihe property

is located (North Carolina) provides that the mortgagee is

not entitled to the rents until he either takes possession of

the property or has a receiver appointed to collect the

rents for his benefit. These circuits require that the

mortgagee take affirmative action to cause the rents to be

sequestered for his benefit. See 4A Collier on Bankruptcy

$70.16 (14th ed. 1976). Under the view oj the Second,

Eighth, and Ninth Circuits, and the court below, the

primary focus is on the nature of the mortgagee’s interest

in rents under state law, the terms of the mortgage and

the acts of the parties. See 4A Collier, supra. See also

Freedman's Savings Co. vy. Shepherd, 127 U.S. 494, 502.

‘See Gregg v. Williamson, 246 N.C 356, 98 S_E. 2d 481: Aissler vy.

Development Co., 205 N.C. 755. 172 S.E. 2d 413.

6

b. The contrary line of authority is in the Third and

Seventh Circuits. See /n re Pittsburgh- Duquesne Develop-

ment Co., 482 F. 2d 243(C.A. 3): In re Wakey, 50 F. 2d

869 (C.A. 7). Those courts have held that the mortgagee

may recover the rents if he can establish an equitable basis

for his claim. The rationale for these decisions is that the

rights of the creditors are fixed at the adjudication of

bankruptcy and the bankruptcy divests the mortgagor's

Possession of the realty. Therefore. the rents arising

thereafter belong to the mortgagee and should not be

diverted to general creditors. See 4A Collier, supra, at

$70.16. Under these decisions. however, the mortgagee

cannot recover the rents arising during bankruptcy unless

he establishes that “the mortgaged property was worth

less than the mortgage indebtedness.” In re Cigar Stores

Realty Holdings, 69 F. 2d 823. 824 (C.A. 2). In those

circumstances, the Third and Seventh Circuits regard the

rents as belonging to the mortgagee as a matter of equity

as part of the agreed security “to vindicate its own right of

Property.” In re Pittshurgh- Duquesne Development Co..

supra, 482 F. 2d at 246.

2. Petitioner argues (Pet. 11-15) that this Court should

resolve the conflict of decisions as to the extent of a

mortgagee’s rights to rents arising during the bankruptcy

of the owner of real property. But petitioner would not be

entitled to the rents under either the decisions followed by

the court below or the rule of the Third and Seventh

Circuits.

a. Under the former line of authority, the mortgagee is

entitled to the rents only if he seeks to have them

sequestered for his benefit so as to establish possession

under state law.’ Petitioner concedes (see Pet. 17-18)

‘Petitioner suggests (Pet. 1-13) that reference to state law in

determining his claim to the rents as a secured creditor violates

Article 1, Section 8 of the Constitution. which provides that “{t}he

7

that his interest in the rents did not have a secured status

under state law. He nevertheless contends (Pet. 16-21)

that he took the necessary action in the bankruptcy court

to ensure that the rents would be sequestered for his

benefit. But the court of appeals correctly concluded that

petitioner did not take necessary action to ensure that the

rents be sequestered for his benefit (Pet. App. 37a). While

a receiver was appointed to collect the rents during the

Chapter XI proceeding, petitioner himself recognizes (Pet.

8) that they were not held specifically for his benefit as

additional security for his debt. Indeed, after the

arrangement was converted into a liquidating bankruptcy,

the bankruptcy judge specifically ordered the trustee not

to pay any rents to the mortgagees (Pet. App. 32a).

Petitioner did not appeal or even protest this order.

Nor do petitioner's actions taken during the liquidating

bankruptcy provide any basis for concluding that the

rents were collected for his benefit. As the court of

appeals stated (Pet. App. 37a):

He [petitioner] had * * * made several informal

requests that the property be abandoned, but when

they were not granted he pursued the matter no

further. Indeed, he made such a request of the

bankruptcy judge at a time after the adjudication,

Congress shall have Power * * * To establish * * * uniform Laws on

the subject of Bankruptcies throughout the United States.” In his

View, the decision below violates this uniformity requirement because

“the anomalies contained in the Property law of the individual states

should not be allowed to create differences in application of the

bankruptcy laws” (Pet. 12). But it has long been recognized that

reference to state law under the bankruptcy laws is not only

appropriate, but required. See Stellwagen v. Clum, 245 U.S. 605, 613:

Thompson vy. Magnolia Co., #9 US. 478, 483-484.

8

when approximately $50,000 in rents had been

collected by the trustee; but at that time he stated

[that] he would waive any claim to the accrued rents.

When the trustee formally requested authority to sell

the property, *** [Petitioner] was made an

adversary party to the request. He filed no answer.

although he could have requested abandonment,

permission tor him to foreclose under state law. or a

determination of the priority of his lien on the rents.

Moreover, after the sale, petitioner accepted the

trustee's deed which specifically reserved the rents to the

trustee (Pet. App. 33a). As we have pointed out (supra,

p. 3), petitioner did not assert a security interest in the

rents until the final meeting of creditors. Thus. petitioner

cannot be deemed to have taken any timely action to

ensure that the rents would be held for his benefit® under

the line of authorities followed by the decision below.

b. Nor can petitioner prevail under the rule of the

Third and Seventh Circuits. As we have noted (p. 6,

supra), those courts employ equitable considerations in

determining a mortgagee’s entitlement to rents accruing

during bankruptcy. Here, however. there are no special

equities in favor of petitioner's claim. While the district

court stated (Pet. App. 28a) that it found “no difficulty in

determining that equity requires that rents collected”

‘Petitioner argues (Pet. 19) that the decision of the court of ap-

peals was based on the fact that his acts “were not performed ‘dur-

ing bankruptcy’ and that the court did not consider the events

which took place in the Chapter XI proceedings (see Pet. 23-24). But

it is clear that the court considered all of Petitioner's actions both

before and after the Proceedings were converted into a liquidating

bankruptcy. Of primary importance, however, was the fact that the

bankruptcy court rescinded its Chapter XI order. and specifically

ordered the trustee not to pay the rents of the mortgagee (Pet. App.

36a). Petitioner made no objection to this order.

—

a

9

belonged to petitioner, the court of appeals properly

observed that (Pet. App. 37a) “the district court failed to

articulate the equitable considerations that it thought

required the result that it reached.” Indeed, petitioner

made no showing that the rents were necessary to make

him whole. While petitioner bid in the property for less

than the amount of his $360,000 mortgage note, the

record also indicates that the property was worth

substantially more than the bid-in price indicated and that

petitioner “profited from [the] ultimate disposition of the

property” (Pet. App. 37a).’ Compare /n re Cigar Stores

Realty Holdings, supra. \n these circumstances, the court

of appeals correctly concluded (Pet. App. 38a) that even

“[i]f equity has a part in the resolution of a question of

this type * * * equity does not supply the answer here.”

In sum, petitioner is not entitled to the rents accruing

during bankruptcy under either the sequestration rule

adopted by the decision below or the equity rule

Petitioner asserts (Pet. 21-23) that he suffered an economic loss of

$57,774.55. This analysis is based on the fact that while he sold a

portion of the property for a profit of $165,000, he was deprived of

interest on his note for ten months.

But petitioner ignores the fact that he received property at least

equal to his investment in the note. The record establishes that the

deed from the trustee was recorded on November 20, 1975 (R. 310).

In an affidavit, filed with the district court, the trustee stated that

shortly after the foreclosure sale. Petitioner sold portions of the real

estate and refinanced other portions. Assuming conservatively that

the value of the refinanced real estate was only equal to the

refinanced debt. petitioner received approximately $293,000 in cash

and retained unencumbered property appraised at $50,000, for a total

of $343,000. Moreover. the trustee pointed out that petitioner's

investment in the note was $272,200 rather than the face value of

$360,000 (R. 365-367). These facts were never contested.

10

employed by the Third and Seventh Circuits. Accord-

ingly, the facts of this case are not appropriate for the

resolution of the conflict between these two lines of

decisions.

CONCLUSION

The petition for a writ of certiorart should be denied.

Respectfully submitted.

WADE H. McCree. JR..,

Solicitor General

M. CARR FERGUSON.

Assistant Attorney General.

CROMBIE J. D. GARRETT.

CARLETON D. POWELL.

Attorneys.

May 1978.

DOJ.1978-05