Petition for Writ of Certiorari — Small Business Administration v. McClellan

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an the Supreme Goart of the Winited States

Octoper TERM, 1959

SMALL Business ADMINISTRATION, PETITIONER

-G. M. Syrcpae TRUSTEE

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

' . COURT OF APPEALS ‘FOR THE TENTH CIROUIT

J. LEE RANKIN,

Solicitor General,

- GEORGE COCHRAN DOUB, - °

Assistant Attorney General,

MORTON HOLLANDER, :

“MARK R. TOMAGS, . .

Attorneys,

Department of Justice; Washington 25, D.C.

titiiniae

. INDEX

Page

Opinions Ss cin stebos ciao d se daecuws dadeusertevaaks 1

IS ogee sea ene. ee eS es ia dae 1

I i gccncsuiuhdnakoosesarkuawesecewes

SUUPNINNE HIV ONNOG. «5... 8. cement Stcccccccecesese 2

a ay me gE EE eae ORION ate TEP AEN 3

iedwihewet otmedih week aati -g

Besa ceeded oe coUe aca eee ee 22

Dcugceiwedscakuadidadelbas ae deideorewe 23 |

| CITATIONS

Cases: °

Bramwell v. U.S. Fidelity Co., 269 U.S. 483..-...--.- a

* Nathanson v. National Labor Relations Board, 344

MEU So cekuticiepecssascressuawkencene dt 9, 10, , 12

Price v. United States, 260 U.S. 402. ..........-.-- - 10

United States*v. Emory, 314 U.S. 423.---..----- eas 10

United States v. Marzen, 307 U.S. 200-_-...--------- 7,10

United States v. State Bank of North Carolina, 6 Pet. 29- 10

Statutes:

_ Bankruptcy Act, Section 64, as amended, 11 USS. ©.

Defense Production Act of 1950, 64 Stat. 798, as

amended, 50 U.S.C. App. 2061, et seq.:: aes

-Section 301 (50 U.S.C. App. 2091). -..---- Se ae 18, 19°

. Section 302 (50 U.S.C. App. 2092). .....------- —

Revised Statutes, Section 3466, 31 U.S.C. 191_...-_- 2,

Mepeeeae £ 3, 6, 7,9, 10, 11

Small Business Act of 1953, 67 Stat. 232:

ee Re eaaR Dt aa Lanhnewaasautos 13

DG isch dcactdnauitudpeeunnadgeeuin tes 13

Sn nn hs ocean ddan ananae an ahenes 13, 14

BE Pi wcnpinswcvoenes ieenewaeas ‘4

Small Businews Act, 72. Stat. 384, 15 U.S.C. 631, *

8eq.:

15 U.S.C. 631 odeeddmenssesbedanuscneeeunegs 13

eee eae oleae o ee ae ae 13

541160—60— ()

——een

‘Statutes—Continued | ' ee

. _ Small Business Act—Continued _ - . Page

15 U.S.C. 636(a)..... .-....-. sichap ead isla Wie .. 14

OD ee GE oct buiSen cen ene chan

Miscellaneous: Brenton Sg ~

FF CPE, 190.4-0(0)(1)G)...----.- 2-2 = «47

E.O. 10480 (18 Fed. Reg. 4939) -___- is tnsarena alas 18

H. Rept. No. 494, 83d Cong., Ist sess_-__-__:_--__. 14

Report of the Attorney General Pursuant to Section 708(e)

of the Defense Production. Act of 1950, as amended,

o Me ec - 49

S. Rept. No. 604, 83d Cong., Ist A Ea _ 14

\ . é

, \

: * \

“Gn the Supreme Court of the Wnited States

-, OctToBeR TERM, 1959 es

SMALL BUSINESS ADMINISTRATION, PETITIONER

: ° v. . : _

G. M. es. AN, TRUSTEE

eee

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEAL& FOR THE TENTH CIRCUIT

The Solicitor General, on behalf of the Small Busi-

ness Administration and the United States, prays that

a-writ of certiorari issue to review the judgment of

the United States Court of Appeals for the Tenth Cir-

cuit entered in this ease on November 6, 1959.

OPINIONS BELOW’. Y

The opinion of the United States District Court for

the District of Kansas (R.'40)' is reported at 168 F.

Supp. 483. The opinion of the court of appeals (App.,;

infra, pp. 23-28) is reported at 272 F.2d 143.

JURISDICTION aN

The judgment of the court of appeals was entered

on November 6, 1959 (App., infra, p. 29). On Jan- |

.* TAR ‘record references are to the pages of the “T ranscript of

Record” printed for the use of the court of iii: and filed

hete pursuant to Rule 21 of this Court.

(1)

ceca rene neal

uary 25, 1960, Mr. Justice Whittaker extended the

time to file a petition for a writ. of certiorari to and

including February 24, 1960.. The jurisdiction of this

Court is invoked under 28 U.S.C. 1254(1).

QUESTION ae Says -

pr ncmeg with a 2 privsits financial isiatituition in

making a loan, the agency must be denied the debt

priority granted the United’ States by RS. § 3466

_ . Solely because, by virtue of the participation agree-

ment between the two, the financial. institution. will

share ratably in ary amounts recovered on the loan

by the Government agency.”

_ STATUTES INVOLVED

1. Section 64 of the Bankruptcy Act, as amended,

11 U.S.C. 104, provides in pertinent part:

§ 104. Debts which have priority.

(a) The debts to have priority, in advance

' of the payment of dividends to credjtors, and

to be paid in full out .of bankrupt estates, and -

the order of payment, shall be * * * (5) debts

. owitig to” any- person, including. the United .

?In the event that certiorari should be granted, the Govern-

ment would ask the Court to decide, in addition to the question

presented in this petition, the other important issues expressly

left undecided hy,the court below (App., infra, pp. 23-28) / (1) .

- whether debts due to.the Small Business Administration are

“debts due to the United States” within the meaning of R.S:

§ 3466, and (2) whether, by virtue of its immediate. participa- ©

tion in the loan, the S.B.A. became beneficial owner. of a 75

a rene 2 eerie |

bankruptcy. ae ie

gn

7

a ie a ar Oe aaa ds ee

3

States, who by the laws of the United States ,

i{s] entitled to priority * * *..

2. Section 3466 of the Revised Statutes, 31 US 3.C.

191, provides :

§ 191. Priorit y established.

Whenever any person indebted to the United

- States is insolvent, or whenever the estate of any

deceased debtor, in the hands of the executors

or administrators, is insufficient to pay all the

debts due from the deceased, the debts due to

the United States shall be ‘first satisfied; and

the priority established shall extend as well to

cases in which a debtor, not having sufficient

property to pay all his debts, makes a. volun-

tary assignment thereof, or in which the estate

‘and effects of an absconding, concealed, or ab-

sent debtor are attached by process of law, as

_to: cases in which an act of bankruptcy is

ore :

_ STATEMENT -

o

This suit was brought by. the Small Business Ad-

ministration, on behalf. of the United States, to re-

view the order of a referee in bankruptcy denying

the Small Buginess Administration’s claim to priority

on a debt ‘owing from the bankrupt.

On October 8, .1956, S.: H. Byquist submitted an

application for a $20,000 Joan to the Brookville State °

Bank of Brookville, Kansas (R. 17-26). The applica-

tion was on a Small Business Administration form

and was‘ directed primarily to the Small Business

Administration (“S.B.A.’”) (R. 17). . The bank en-

dorsed Byquist’s application, indicating that it would

make the loan — ‘but e aeiy on condition that

4

the S.B.A. participate in the loan immediately to the

extent of 75 percent, that is, $15,000 (R. 26). a

"On November 2, 1956, the S.B.A. approved the loan

and agreed to participate in, it immediately (R. 27-.

28). A ‘‘Partieipation Agreement” was, entered into

by the S.B. A. and.the Brookville State Bank which

provided, inter alia, that the 'S.B.A. would, upon writ-

' ten demand by the bank, purchase from the bank a ©

75 percent participation of each. disbursement »made

to Byquist (R. 6).- It was also provided that the

bank would hold the note, but that if the S.B.A.

should make’ a written demand therefor, the bank

would transfer the note to the S.B.A. within five’ days

- (R. 9). In addition, the agreement’ contained the fol-

- lowing provisions (R-9-10) : hee

a ‘Administration of. Loan.—The tochtioe of

the Note shall receive all payments on account

of principal of, or interest on, the Loan and —

promptly remit to the other party its pro rata-

share thereof determined according to their re-

spective interests in the Loan * * *,

2 * , * & oe,

14. Liability and Representations-—* * *

neither party shall be liable to the other for

any loss, not due to its own gross negligence,

but such loss, shall be:borne ratably by S.B.A.

and Bank in accordance with. their respective

interests in the Loan. +

“ In compliance with this agreement and upon de-

mand of the bank, the S. B. A. sent a check for $15, 000,

dated November 23,. 1956, and drawn on the Treasurer —

of the United States, to the bank for purchase of a

n

od

5

75 percent interest in the loan to Byquist (R. 16, 30).’

' The bank then loaned Byquist $20,000 (R. 33-34, 42).

This loan was evidenced by a‘ note,‘ dated November

16, 1956, to the order of the bank (R. 10-14).

An involuntary “petition in bankruptcy: was filed

with respect to Byquist on August 17, 1957, and he

was adjudged a bankrupt on September 5, 1957 (R.

40). ° On October 22, 1957, a trustee was appointed

_(R. 40). He proceeded with the liquidation of the

estate and holds a sum somewhat in excess of $19,000

(R. 34, 40). Claims totaling $43,682.07 have been filed

‘Upon receipt of the Government check, the bank executed

_and delivered ‘to the S.B.A. a participation certificate as evi-

dence of the purchase by the S.B.A. of its interest in the loan.

While the executed “Participation Certificate” (S.B.A. form

_ 152) was not ‘in the record before the district court, its execi-

tion by the hahk is not questioned. The text of the certificate

is as follows:

PARTICIPATION’ CERTIFICATE

Bavvk VILLE Sratt Banx (hereinafter called “Bank” ), hereby

_ certifies that. Small Business Administration ‘(hereinafter called

“SBA2’) has purchased: from Bank a: ‘participation of 75% \ of

$20,000.00, representing the amount of the disbursement, or the

aggregate amount of: the disbursements (as the case may be)

made by Bank on the 23rd day of November 1956, and remain-

ing unpaid on the date of such purchase, on account of a loan

by Bank to S. H, Byquist, d/b/a Western. Distributors, Salina,

Kansas, in an amount not exceeding $20,000.00, such purchase

having been made pursuant to a Participation Agreement dated

November 19, 1956, between SBA and Bank.

Dated : November 23, 1956 .

By. [s] Brookville State Bank’ (Bank)

R. D. -Powers. -

Cashier (Title)

° Brookville, Kansas (Address)

‘This note is on ahotlles S.B.A. form which is ed

“Note (For Limited Loan Participation Only)” (R. / .

. . 7 h fy) :

6

~ and the cost of administration has been estimated at

$6,500.00 by the trustee (R. 34).

Subsequent to the date of Byquist’s bankruptcy,

the bank assigned his’ ‘note to the S.B.A. (R..34).

The S.B.A., on behalf of the United States, filed a

priority. Giles in the bankruptcy proceedings under

" Section 64 of the, Bankruptcy: Act, 11 U.S.C. 104,

supra, .p. 2, which provides. that. “debts owing to any

_+ person, including the United States, who by the laws —

of the United States, i[s] entitled to priority” are ac- ns

corded fifth priority in bankruptey. The S.B.A.

claimed. suck priority “‘by the laws of the United:

- States’? over the other unsecured’ creditors by virtue

of R.S. § 3466, 31 U.S.C. 191, supra, p. 3, “which

establishes that ‘‘debts due to the United States shall-

be first satisfied’ out of the estate of an insolvent

debtor. The §.B.A. filed a claim for the sum of |

$16,788.42, representing the entire amount still un-"~

paid on the note, with interest through October 15,

1957 (R.°4). Recognizing, however, that 25 percent

of this claim represents an amount owed by the bank-

rupt to the bank, the Gov ernment has, throughout

these proceedings, in fact claimed priority only for

- $12,266.77, its 75 percent interest in the debt Ue

36). F ,

* The $12,266. 7 ‘Sought by the S.B.A., and for which ‘pri-

ority is here asserted, represents. the extent to which -the

S.B.A.’s $15,000 participation in the. loan remains unpaid. *

Since the bank’s 25 percent interest in the debt was assigned

to the S.B.A. subsequent to the date of bankruptcy, this por-

tion of the debt: remained, for bankruptey purposes, a claim of

the bank. While the court of appeals’ opinion does not. indi-

cate” that the Government’s pr‘ority claim was for only

arate the amount due ~ and not for the $16,788.42 owing

‘ ? 7

‘The referee in besikruptey « denied the S.B.A.’s

claim to priority on the ground that the S.B.A. is not:

entitled to the debt prierity accorded to the United

- States by R.S. § 3466, 31 U.S.C. 191 (R. 35-38).

The claim was allowed only. as an unsecured claim.

(R. 38). On review, the United States District Court |

for the District of Kansas rejected the referee’s con-

clusion that the S. B. A. could not claim the debt

priority accorded to the United States, but, neverthe-

less, affirmed the: referee’s order on the ground. that.

there was no debt due the S.B.A. when the. petition |

in bankruptey was filed. (R. 43-45). In support of

its decision, the court pointed out, inter alia, that.

the note executed by the bankrupt was made payable

to the bank only, that the S.B.A. paid its $15,000 share

of the loan to the bank, and that the _bank paid the

full amount.of the’ loan to the | bankrupt (R. 45).

Accordingly, the court held that, since under Unitéd

States v. Marzen, 307 U.S. 200,* the status of a claim _

against a bankrupt’s estate is-determined on ‘the date

the petition is filed, and since an assignment after

that date cannot give an assignee any greatér rights

than those of his assignor, ‘the’ S.B.A.’ s claim to

_ priority must be denied (R. 45-46).

_ on the entire loan, this fact was made clear by the Govern-_ :

ment throughout the proceedings. . The court of appeals failed

. to make this plain in its opinion presumably. because, in view

of its reasoning, the amount for which the S.B.A.' ‘was Lenin

priority was irrelevant.

' ©The district court ignored the Goverisinent'’s cuntention that

unlike Matcen, the, Government became beneficial owner of

* its interest in the claim prior to the petition in bankruptey—

tliat is, at the time the federal payment was made to the bank,

more than nine months before the a -was filed. See pp.

4-5, supra. ;

341160—60-——2

Fy

} . “=

| . 8 |

On appeal by the United States, the Court of Ap-

peals for the Tenth Circuit affirmed, but on still an-

other ground. The court assumed, arguendo, that the

Small Business Administration is entitled to the stat-

utory priority granted the United States (App., infra,

p. 25). Further, it assumed, arguendo, that, by virtue

of its immediate participation in-the Ioan, the Smail -

_ Business Administration became beneficial owner of:

- a 75 percent interest in the debt prior. to the filing of

the petition in bankruptcy, thus rendering unimper-

tant the post-bankruptey assignment of the ‘note .

tApp., infra, p. 26). The court ruled that, in any

event, the S. B.A. could not assert a priority for the.

amount owing to it becar'se, in its participation agree- |

ment with the bank, it had agreed to share ratably

the proceeds and losses resulting from the transaction

with the borrower. The court stated (APP. infra,

_pp. 27-28) :

In Nethonvon v. National Kuiek Relations

Board, 344 U.S. 25, 28, it was said that § 3466

may not be extended to create a priority for a

claim which, the United States is collecting for —

_ a private party. This principle would be vio-

lated if the claim of the United States were

__here given priority. |

The United’ States is bound by its writien

-eontract to account to the Bank for the Bank’s

25% share of any collection made under the

note. Hence, the Bank would share fo that

extent. in any proceeds. resulting from the - ©

‘award of a priority to the United States. * * *

See * . 7 . *

9 :

see [The United States] may not assert a

priority which will produce a recovery that by.

contract musi be divided with a private entity.

' REASONS FOR GRANTING THE WRIT

“The holding of the court of appeals i is, in effect, that

whenever an agency of the United States participates’

with a private financial institution in making a loan,

and thé participation contract between the two pro-

vides for the pro ‘rata sharing: of the.gains and losses

on the transaction, the Government agency must be

.denied, in toto, the debt priority accorded the United

States by statute. We submit that this holding mis- .

_ interprets this Court’s decision in Nathanson v. Na-

tional Labor Relations Board, 344 U:S. 25, and erro-

neously confines within narrow limits the scope of. R.S.

' § 3466, an’ important: statute. designed to protect fed-

eral funds. Since the decision ‘below will have far-

reaching and severe detrimental effects on extensive

‘Government lending activities, — by this Court

__ is warranted.

The’ decision has placéd not only the ‘SBA. but

also other Government agencies administering similar

programs, in a critical dilemma’ with’ respect to -

whether or not to alter the nature of their participa-

tion lending activities. ‘Any modification hy them of

their participation agreements so as to avoid the im->

" pact of the decision, below would tend to make private

lending institutions unwilling to take part in the Gov-.

ernment programs. These extensive and important |

participation lending programs, explicitly authorized

and fostered by Congress, would thus be defeated.

we

e

10

‘The alternative—letting the participation agreements,

remain unmodified—would, under the ruling of the

Tenth Cireuit, “result in leaving the vast sums of ~_

money which are disbursed by the Government in con-

nection with these programs completely unprotected

by any priority right. And, even if all the agencies,

e@cerned should modify their future contracts (a .

course of ‘action which,:as indicated above, would be

yi -.highly undesirable), the Government would still lose —

its priority right, under the ruling. below, with respect . -

to the hundreds of millions of. dollars by which it has —

committed itself pursuant to ies as nore

already in effect. 7 |

. 1. B.S. § 3466, granting the United States a priority

- .with respect to debts, was enacted “in order to secure an

adequate revenue to sustain the public burdens * * *.’’

United States v. State Bank of North Carolina, 6 Pet.

29, 35; Price v. United States, 269 U.S. 492, 500;

United States v. Emory, 314 US. 423, 426. Accord-

ingly, this Court has repeatedly stated that the statute

must be given. a liberal construction which will ef-

fectuate this purpose. United States v. State Bank of: .

North Carolina, supra; Price v. United States, supra;

. United States v. Emory, supra; Bramwell v. U.S.

Fidelity Co., 269 U.S. 483; United States v. Marzen,

307 U.S. 200.

In Nathanson v. National a Relations Board,

344 U.S. 25, the Board had ordered an‘ employer. to

pay certain employees back wages which they had lost

because of an unfair labor practice committed by the

employer: When the employer went into bankruptcy,

the Board asserted priority under R.S. § 3466 for the

11

amounts due the employees. This Court held tliat the —

back-pay claim was not one entitled to priority under

R.S. § 3466 since (344 U.S. at 27-28): |

; . The priority granted . by that statute was de-

signed “to secure an adequate revenue to sus-

tain the public burthens and discharge the .

public debts.”” See United States v. State

Bank, 6 Pet. 29, 35. There is no function here

of assuring the public revenue. The benefi-

_ ciaries of the claims are private persons * * *.

_ * * * We cannot extend that reasoning so as

to. give priority to a claim which the United

States is collecting for the benefit of a private

party.

We believe it clear that the reasoning of ‘this Court

in Nathanson is: inapplicable to the completely differ- :

ent situation involved in the instant case.’ In the

present case, the United States is not asserting its

priority so as to collect any amounts owed to private

parties, but is merely seeking. to recover the precise —

sum- which the transaction with the bankrupt caused

to be disbursed from the. Treasury and “which is still

outstanding. Furthermore, i in contrast to the Na-

thanson case, 75 percent of the amount recovered here

hy the United States will actually be returned to the

Treasury,’ thus effectuating the purpose of the prior-

ity statute. And, although the remaining 25 percent

of the amount recovered by the United States from

‘The district ‘court agreed with .the Government that’ the

Nathanson case is inapplicable here, rejecting the contention of

the trustee which ultimately becande the ground of decision of

the court of appeals (R. 44).

SIn Nuthanson, ‘of course, 100 percent of the back pay aw ard

was to go to the private employees.

12.

the bankrupt will be remitted to the Brookville State

Bank, this payment to the bank will oceurby virtue

of an ‘independent contractual obligation undertaken

by the United States. and not, as in Nathanson, be-

cause the sum is owed by the bankrupt directly to the.

private party. Yet, despite thesé crucial distinctions, |

the court below,: relying on the Nathanson decision,

has ruled that the claim of the United States: for

‘ priority in this case must be denied in its entirety.

The view of the court of appeals that granting the

S.B.A. a priority here would give the private bank

an undue advantage over the other private creditors

is untenable. The bank will recover the same propor-

tion of its claim in the bankruptey proceeding as the

other private creditors. Any additional amounts that. .

it may recover from its advance to the bankrupt will

be solely by virtife and because of its agreement with

the S.B.A., which. is entirely independent of the’ bank-

ruptey proceeding. This independent agreement be- -

tween the S.B.A. and the bank, providing for the

‘sharing of proceeds and losses, cannot properly be

considered with respect to the question of w rhether the

S.B.A.’s claim is entitled to statutory prior ity in the

bankruptcy proceeding. . ;

- The crucial consideration, we believe, is that, quite

apart from its dealings with the bank; the S.B.A, is °

owed by the bankrupt the $12,266.77 here, claimed, an

amount which has, in: fact, been advanced from the

Treasury. Since the S.B.A. is claiming an amount no

greater than-that owéd directly to it, it ean be no con-

cern of the private creditors what the, S.B.A. does

with the sum after collecting it, or what contractual

13

arrangements it may have with respect to it. These

creditors are ii no worse position and collect no_less if

‘the S.B.A. remits part of its recovery to the bank

than would be the case if there were no contract pro-

viding therefor and the S.B.A, retained its entire re-

covery. It is difficult to see, then, by what reasoning

the trustee in bankruptcy can he’ permitted to seize on

an independent contractual undertaking of the United

¢ States to defeat- the U nited States’ claim for priority

With respect to’a sum to which it is admittedly en-

titled, The Tenth Cireuit’s decision produces this

paradoxical and erroneous result.

2. In 1953, Congress enacted the Small isusiness

Act, 67 Stat. 232, to implement its.view that the se-

curity and economie well-bei ‘ing of the Nation requites

the development and encouragement of small business

enterprises. “Sec. 202, 67 Stat. 232;. see 72 Stat. 384,

15 U.S.C. 631." The Act created the Small Business

_ Administration, ari unincorporated federal agency suh-

ject to the direction and supervision of the President

and financed by funds originating from congressional.

appropriations, to carry out the Congressional policies,

Sec. 204, 67 State 233; see 15 U.S.C. 633: Among the

powers which Congress has granted the 8.B.A. was

that of making loans to small business. concerns,

“either diréctly or in cooperation with_hanksorother

lending institutions through agreements to participate »

on an immediate or deferred basis.” See. 207(a), 67

* After several amendments, the Act was reenacted in 1958.

72 Stat. 384, 15 U.S.C. 631-651. All the ‘sections of the 1953

-Act which are cited in this petition have been reenacted in

virtually identical form in the 1958 Act.

a

~ ‘Stat. “236; 15: USC. ‘636(a).. With respect ‘to such

loans, the statute prescribed | specifically - (Section

207(a) (1), 67 Stat: 236; 15 U.S.C. 636(a) (2)):

[N]e. immediate participation may be pur-

chased unless it. is shown that a deferred par-

- . ticipation is not: availabie; and no loan may

* be made unless it is shown that a participation —

is not available * * *. |

These restrictions on the S.B.A.’s lending activities

were imposed by Congress to effectuate its policy that

_ private lending institutions, and not the Government,

should continue to be the principal source of credit for

small business. See. S. Rep. No. 604, 83d Cong., Ist

Sess, 2-3; H. Rep. No. 494, 83d Cong., Ist Sess, 6.

- Thus, under the statutory scheme participations are

preferred to 100% Governinent loans in order to in-

suré that private loan aid is enlisted. to whatever

_ extent it is available. | ;

(a). In view of the statutory mandate, most of the

business loans advanced by the 8S.B.A. have been, and

will continue to be, made ‘in’ participation With a

private, lending institution. .As of: October 31, 1959,

64.3% of the’ business loans approved by the S.B.A. °

When participation is immediate .(as in this case), the

S.B.A. pays the bank the amount by which. it has obligated

itself simultaneously with the bank's advancing the loan funds

to the borrgwer. In a deferred participation, the S.B.A, makes

disburseinent at a later date, but only if and when the bank

so .requests. Since the distinction between the two types of

participation is only with respect to the time when the Gov-

ernment ‘funds are advanced, it is not. relevant for our purposes. ~

Both’ immediate and deferred participation agreements < -N-

tain a clause providing for the pro rata sharing of gains and

losses on the loan transaction.

15

had been of the participation type, fotalling $446,-

302,000." On that same date, the S.B.A. had 7,201

participation loans outstanding, in’ whicli the S.B.A.’s .

participation amounted. to $216,410,000. In addition

to business loans, the S.B.A. is also empowered to

make, either directly or in partic ipation, disaster loans

which it determines to be nécessary or a ropriate

because of floods or other catastrophes.—Sec. 207(b),

67 Stat. 236; 15 U.S.C. 636(b). Some 11.5% of such -

loans have been. imade in participation (the statute

does not prescribe a preference for participation loans |

_in this’ regard), and the S.B.A.’s interest in such

disaster participation loans outstanding on October

31, 1959, was $7,353,000. ;

Since the provision relating to the sharing of profits

and losses is in all the currently outstanding par tiei-

pation agreements of the S.B.A.,; the rule enunciated

“by the ‘court below would have the effect of denying

the S.B.A. a right to priority with respect to .the

$223,763,000 to which it has currently committed itsei!

in participation loans. And the question of priority

is of partictilar. significance, since S.B.A. business

loans, because of statutory prerequisites as ‘to their

availability, are primarily extended to concerns whose

insolvency is not unlikely. Thus, the risk of loss by

the Gov ernment on this sum of #223, 763,000 is inde ed

substantial,

()). As for all of its future loans, the only prac-

ticable way for the S.B.A. to avoid the impact of the

This statistical infarmation, as well as the other detailed

information concerning the activities of the Small Business Ad-

ministration contained in this petition, was furnished by the

General Counsel's Office of the S.B-A.

,

oO

16

decision below would bt for it to revise its participa-_

tion agreement forms so as to include a provision

- declaring that the participating bank will not be en-

titiéd to share in any recovery obtained by the S.B.A.

by reason of its right to pfierity. Such an arrange-

ment would be highly unattractive to prospective bank

participants—on whose willingness to take part the

success or failure of a participation program wholly -

depends. The possibility of being: indemnified, at

least.in part, by the United States, which is more

likely to collect its debts hecause of its right of prior-

ity, provides a strong incentive for hanks to partici-

pate in the S.B.A.’s progranf. Furthermore, the banks

~ .would be often unable to share in the recovery of the

S.B.A., while forced to divide their collections with.

the S.B.A. Thus, the Small Business Administration,

- in-response to an inquiry as. to whether modification

of its participation agreements would be feasible, has |

replied : eae ; ae a

* * * the inclusion of such a provision would,

in our op! nion, substantially. defeat the purposes -

of. the bank participation program. - It is un-

* likely” that many lending institutiens would: be

willing to participate in a loan,:or make a loan

in participation with this Agency, if the lending .

institution was obligated to share with this

Agency any-and all collections it made, but this

Agency was ‘not obligated to. share with the

lending institution any collections it received by

. reason of its right to priority of payment. * *.*

2 Letter of December 10,-1959, to the Department. of Justice,

from the Small Business Administration. °

|

|

g

17

-The decision below thus poses for the S.B.A. the

dilemma of having either to lose its right of priority

with respect to all its future participation loans, or

else to. amend_ its participation arrangement, and

thereby risk’ frnstration and failure of the participa-

tion lending prpgram which Congress has prescribed

for aiding the small businessman. ahs

(c). The decision below may produce other unde:

sirable and far-reaching consequences. .Since it,

effect, denies the 8.B.A. a right of priority on all sums

advanced by it under: its present participation pro-

gram, the ruling of the Tenth Circuit may well have

* the effect of making a small business’s creditors eager

to push the business into bankruptey haumediately after

it receives an S.B.A. participation loan in order to

reap a benefit from the loan funds. On that basis,

instead of aiding ‘and encouraging the continued op-

eration of a small business, the ‘S.B.A. ‘loan would

hasten its demise. On the other hand, if the S.B.A.

were allowed’ priority on. its advances, creditors would

have nothing to gain from an immediaté bankruptcy,

- and the loan’ s purpese—to stimulate confidence in the

business and to enable it to continue functioning—

would more. likely be served. Similarly, under the

Tenth Circuit’s view, creditors will- be tempted to in-

duce small businesses to obtain S.B.A.. participation

loans merely for the: creditors’ benefit in the event of

bankruptcy. Sucha purpose in securing a loan would

not fulfill and of the en of the Act and, indeed,

|

fo

SN Mii nk oes ie

is adits to- the S. B.A.’ S regulations. . 13 C.F.R.

120.4-2(d) (1) (i).”

‘3. Soon after the outbreak of the Kenan conflict,

Congress enacted the Defense Production Act of 1950,

64 Stat. 798, 50 U.S.C. App. 2061, to provide, inter

alia, a wide variety of incentives to increase produc-

tive capacity and the supply of materials and services |

needed for defense. -Section 301 of the Act empow-.—

ered the President to authorize various procurement

agencies of the United States to guarantee loans made

by public. or private financing institutions, “for the

purpose of financing any contractor, subcontractor, or

other person in connection with the performance of

any contract or other operation deemed by the guar-

anteeing agency. to be necessary to expedite production

‘and deliveries or services under Government contracts

for the procurement of materials or the performance

of services for the national defense.”’ 64 Stat. 800, as

amended, 50 U.S.C. App.*2091(a)." The agencies so

** Furthermore, in many situations it will be obviously unjust

to deny the S.B.A. prierity on its debt claim in bankruptcy be-

cause the proceeds of the S.B.A.’s‘loan funds will comprise the

bulk of thé bankruptcy. © S.B.A. participation loans,.by neces-

sity, go to small besiddebes that are not wholly prosperous and

that cannot get credit from other.sources. When such a busi-

ness goes into bankruptcy, its remaining—funds will often be

traceable to the S.B.A. loan. Thus, it is hardly a coincidence

that, in the case at bar, a $20,000 participation loan was ex-

tended, and $19,000 is the amount in the trustee's hands—par-

ticularly since the involuntary petition. in bankruptcy w was filed *

less than a year after the loan was made.

“Under the 1953. amendment to the Act, such loans may also

be guaranteed in connection ‘with the termination, in. the Gov-

ernment’s interest, of defense contracts, and small businesses are

made eligible for guaranteed loans despite the availability of

_ alternative sources of supply. 67 Stat. 129, 50 U.S.C. App.

2091(a).

-— =

—

19

med have heen the Departments of the Army, Navy,

d Air Force, the Atomic Energy Commission, the .

sneral Services Administration, and the Depart-

ents of Commerce, Interior, and wea E.0.

480, 18 F. R. 4939.

Under this program, known as the “V- loan” pro

am, a defense contractor first approaches a private

nk, and the bank then asks one of the above-named

yvernment agencies to guarantee the loan in whole .

in part. If the agency approves the loan, the Fed-

al Reserve Bank, acting . as fiscal agent of the

ency, will enter into the guarantee agreement with

e lender. . This agreement between the. private —

stitution and the Federal Reserve Bank is really

e of deferred participation by the United States,

ther than of guarantee, because the standard V-loan

reement provides that the Government agency is

ligated to purchase a stated percentage of the loan

| demand of the lending bank, and that all collec-

yns and losses on the loan are to be shared ratably

tween the bank and the Government agency.”

nee, therefore, the V-loan program is, in all rele-

nt respects, similar to the S.B.A. participation

ogram, the adverse effect of the decision below

yuld\apply to it with equal force.

Fromthe ineeption of the V: -loan program in 1950,

rough April 1958, the Government agencies admin-

SSee Report of the Attorney General Pursuant to Section

§(e) of the. Defense Production Act. of 1950, as amended,

igust 8, 1958, pp. 18-21. :

“Section: 301 of the Act, 64 Stat. 800, 50 U.S.C. App.

l(a), suggests that V-loan guarantees be accomplished by

yreement to share losses * * *.” . ~

| 20

_ istering the V-loan program have guaranteed in the

above manner $2.4 billion in’ loans. Report of the

Attorney General, supra, p. 28. As of. December, 31,

1959, ninety-five V-loans were outstanding.” Of

these, in only five does the Government guarantee

extend to 100%. The Government’s interest in the

_ remaining ninety loans—in all of which the guaran-

tee agreements provide for the atlas of gains and

losses—is $252,000,000. \

With regard. to. the future, | lias of the

V-loan agreement would carry with it much the same .

objections as those presented above with reference to

modification of the S.B.A. participation program. In

this connection, Mr. Merritt Sherman, Secretary of,

’ the Board of Governors of the» ‘Federal Reserve

System, states: “ oe

The present V-loan program, like the similar

wartime program, is designed to encourage

participation by private financing institutions

‘in the making of loans to contractors engaged

_ in production or services deemed nécessary for

the national defense, especially where, because

of ordinary credit rules, such financing would

“In addition, Section 302 of the Defense Production Act

of 1950, 64 Stat. 801, 50 U.S.C. App: 2092, empowers the -

President to make provision for loans, including participations,

to business enterprises to aid defense production. In making

- loans pursuant to this section, the Treasury Department. has

favored participation loans rather than direct joans. Report

of the Attorney General, supra, pp. 14-15. Since the partici- .

pation agreements in this program also provide for the sharing

_of-gains and losses, this program would also be directly and

- adversely affected by the ‘lecision below.

* Letter of January 20, 1960, to the Department of Justice

from the Board of Governors of the Federal Reserve System.

21

‘not be forthcoming without a certain ‘degree

of Government protection. - Consequently, the

agreement, of the guaranteeing Goveynment

agency to share losses according to the re-

spective interests of the guaranteeing agency.

and the financing institution has constituted an

essential’ element of the V-loan program since’

its inception in 1942.

4. In sum, Congfess and the Exec utive: ate viewed

the joint participation of private lending firms and

Government agencies in lending programs as an ap-

propriate and desirable method’ of encouraging: busi-

ness concerns which, in the absence of Government

participation, would be unable to borrow capital. In

particular, the participation loan program admins;

istered by the Small’ Business Administration was,

devised by Congress as an effective means to sustain

- the small business. concerns regarded by it as essential

‘to.the economic well-being of the Nation. The V-loan

program, similarly, was devised to assure that defense

production would not be impeded because of an un-

availability of capital. The erroneous decision below,

. if allowed to stand, will seriousiy undermine these

participation programs by forcing the administering

agencies to alter them and thereby risk their impair-

ment, or else to forego the right of priority accorded

by statute to debts owing the United States. And.

even if the- participation programs were to be

. amended, the view taken by the Tenth Circuit would

result in the denial to the United States of a right of

‘priority with respect to the almost haif billion dollars

in government participations currently outstanding.

32

CONCLUSION -.

For the foregoing reasons, it is. respectfully sub-

“mitted that this petition for a writ of certiorari should _ |

be er

rd LEE Nise ;

Solicitor. General.

GeoreE CocHraNn Dovs,

‘Advistant Attorney General.

iy _Morton HoLuanDER, ~

‘ - Mark R. JoELsON, —

3 pet Attorneys::

--Fesrvary 1960.

=

| APPENDIX

United States Court of Appeals for the Tenth Circuit

_ No, 6117—September Term, 1959

SMALL BUusINEsSS ADMINISTRATION, APPELLANT,

- |

G. M. ‘McCLELLAN, TRUSTEE, APPELLEE. —

Appeal from the United States District Court’ for

the District of Kansas.

In the matter of S. H. Byquist, an individual, do- |

- ing business as Western Distributors, Bankrupt.

Morton Hollander, pee eit of Justice

(George Cochran Doub, Assistant Attorney General,

Wilbur G. Leonard, United States Attorney, and

Samuel D. Slade and Peter H. Schiff, Attorneys; De-

partment of J ustice, were on the brief) for Appellant.

J ohn. Q. Royce for’ Appellee.

Before Brartoy, Lewis and BREITENSTEIY, ‘Cixeuit

Judges.”

BREITENSTEIN, Circuit J udge.

In this Giannis proceeding the court below af-

_ firmed a referee’s order allowing a claim of. Small .

Business Administration as an unsecured claim and’

denying- it any priority. The only question on ap-

(28)

| 24

peal is the right to priority: over other unsecured

creditors.

' The facts are not in dispute. Byquist, the bank-

rupt, applied on a Small Business Administration '

form, entitled ‘‘Limited Loan Participation Appliea-

tion for Loan,’ té the Brookville State Bank -of

Brookville, Kansas, for a $20,000 loan. On October -

30, 1956, the Bank endorsed the application to show

that it was willing to make the loan upon the par-

ticipation of SBA therein to the extent of 75%.

SBA agreed and on Nevember 19, 1956, entered into

a ee Agreement”’ with the Bank. _ There-

in it was provided that upon written demand by: the

Bank SBA would purchase a 75% interest; that.the

Bank would hold the note and on five days written

demand would transfer it to SBA; that the holder

_ of the note would service it and remit promptly to.

the other party its pro rata share; and that SBA

and. the Bank .were to bear any Joss ‘incurred ratably

- according to their respective interests in the loan.

__-On November 21, 1956, SBA sent the Bank its

check in the amount of $15,000 for the sole*purpose

of purchasing a 75% interest in the loan. The Bank |

then loaned $20,000 to Byquist who executed and de-

livered a note payable to the Bank and made out on

- an SBA form in which he agreed to use the loan

proceeds solely for the purposes set out in the SBA

- loan authorization and to reimburse the ‘‘Holder”’

and SBA for expenses incurred by them in, connec- »

tion with the loan.

After the filing of an involuntary petition in bank-

ruptey, Byquist was_adjudicated a bankrupt on

September 5,.1957, and a trustee was -duly appointed.

' The estate is valued at approximately $19,000 and the |

claims filed exceed $43,000

1 Hereinafter referred to as SBA.

25

Subsequent to the date of bankruptcy, the Bank

assigned the note to SBA which on October 15, 1957,

. filed a claim for the unpaid balance. amounting to_

$16,788.42 and claimed priority therefor.

. At the outset we have conténtion of the trustee

that SBA is not an agency of the United States and

hence is not entitled to any priority given the United

States. In view of the disposition which we make of |

this case it is not necessary to consider that point.

For the purposes hereof we assume that the claim —

belongs to and is made by the United States subject,

. only to its ‘agreement to share the Joan proceeds and

' losses ratably with the Bank.

The issue is> whether, at the date of bankruptcy,

there was a debt which. was due the United States:

within the meaning of R.S. § 3466*.and which. was

for that reason entitled to a Priority: ‘under § 64(a) (5)

of the Bankruptey Act.’

The note was made payable a the Bank = was

-held by the Bank on the date of bankruptcy. In

- United States v. Marxen, 307 U.S. 200, it was deter-

mined that the United States was not entitled to

priority on a claim based on a mote which had been

assigned after bankruptcy upon the payment by the

Federal Housing Administrator of a loss under an

insurance policy issued pursuant to the National

Housing Act. This decision was followed in In re’

Miller, 2 Cir., 105 F. 2d 926-928, wherein it appeared

that the bankrupt obligor had agreed to indemnify

the United States for any loss it might sustain by

731 U.S.C. $191, which provides in part that “debts due to

the United States shall be first satisfied” out of the estate of

an insolvent debtor.

$11 ULS.C. § 104(a) (5), which allows a fifth priority to

“debts owing to any person, including the, United States, who

by the laws of the United States. i{s] entitled to priority.”

26 .

reason of its insurance of the credit. Basically, the

rights of the United States in each case were those

of a subrogee whereas here the United States par-

ticipated in the loan. Such participation is said to

result in beneficial ownership of a part of the debt on

the date of bankruptcy and, hence, to render un-

important the fact of post-bankruptcy assignment.

Qn the facts of the case at bar we deem it unneces-

.sary to devide whether the- United States has any

_ greater rights as a participant in a loan pursuant to

' the Small Business Act of 1953‘ than it had as a

subrogee under an.insurance policy issued ‘by it under —

the National Housing Act. The claim of the United

States rests on the premise that it is asserting a debt

covered by § 3466 and recognized by § 64(a)(5) of

the Bankruptcy Act. While § 3466 must be construed

liberally to effectuate its purpose to protect the public

finances,° the Court said in Marxen that: *

* * * this principle of construction is sub-

ject to the limitation that the generality of the

language of the section is restricted by the pur-

pose to grant priority to the United States,

only, and by legislative intention, as shown by

other statutes.

: a the Small Business Act of 1953, Congress -de-

- clared the policy that the government should aid the

interests of small business concerns-+‘to preserve

free competitive enterprise.’”’’ To attain that end

the administrator of the. act is empowered, among

other things, to make loans to small business con-

-cerns é¢ither directly or ‘‘in cooperation with banks,

415 U.S.C. §§ 631-647.

‘8 United States v. Emory, 314 U.S. 493, 426. Cf. United

States v. Johnson, 10 Cir., 87 F. 2d 155, 161.

° 307 U.S. 206.

715 U.S.C. § 631(a).

27

eee through agreements to participate hain aks

Thus, the United States went to the financial aid of

small business by the genéral extension of credit

which otherwise would have been available only frorn

private lending institutions, The United States en-

tered upon a commercial venture which supplemented

the activities of private business.

The argument is advanced -that by so deind, the

United States intended to forego the applicability of

§ 3466 because the assertion of the priority provided

thereby would not benefit small business but would

‘handicap it in its efforts to operate with private

financing. The situation is said to be analogous to

that considered in United States v. Guaranty Trust

Company of New York, 280 U.S. 478, where debts in-

curred under the Transportation ‘Act of 1920 were -

held to have no priority under § 3466, and distinguish-

ahle from United States v. Emory, 341 U.S. 423, where

§ 3466 was applied to certain transactions under the

National Housing Act, the purpose of which was held

to be not the strengthening of the general credit.of

property owners but the stimulation of the business

_ trades. Here again the intriguing arguments pre-

sented need not be resolved,

The determining fact is that S.B.A. has by written .

contract with the Bank agreed to share ratably the

proceeds and losses resulting from the transaction

with Byquist. |

_ Marzen holds -that absent controlling Lantiiatiain.

which is not present here, § 3466 grants priority only

_ to the United States. In Nathanson v. National Labor *

Relations Board, 344 U.S. 25, 28, it was. said that

§ 3466 may not be extended to create a priority for

a claim which the United States. is collecting for a

*15 USC, § 636(a). es

. 28

private party. This principle would be violated if the ©

claim of the United States were here givén priority.

The United States is bound by its written contract

to account to the Bank for the Bank’s 25% share of

any collection made under the note. Hence, the Bank-

would share to that extent in any proceeds resulting

from the award of a priority to the United States.

No such priority 3 in a private creditor is provided by

§ 3466.

The ich: Act is intended to bring about an

equitable distribution of the bankrupt’s estate among

creditors holding just demands.’ The use of § 3466 to

prefer the Bank over the othe ‘r private creditors

would defeat that intent.

~ The United States has aiiaaie in a commercial .

enterprise and made no effort to safeguard its rights

under § 3466. In a contract made on its own forms

it has agreed to share ratably proceeds and losses. It

may not assert a. priority which will produce a re-

covery that by contract must be divided with a private

entity...

" Affirmed.

nv v. B.C. Taylor ney 280 Us S. 224, 227.

a

JUDGMENT

Thirty-eighth Day, September Term, Friday,

“November 6th, 1959 - |

- Before Honorable Sam GG. Brar TON, Honorable

Davin T. Le Wis and Honorable Jr ANS. BRFITENSTEIN,

—Cireuit J udges.

This eause came on. to be heard on the t ‘anseript of -

the record from the United States District Court for

the District of Kansas and w as ‘argued by counsel,

On consideration whe reof, it is ordered and ad-

judged by this court that the judgment. of the said

district court in this” cause he and the same is hereby

affirmed. ;

“US GOVERNMENT PRINTING OFFICE I960