Brief for the Small Business Administration — Small Business Administration v. McClellan

Supreme Court brief1960

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Text

No. 42

In the Supreme dour of the wrided States

OcroBER. TERM, 1960

SMALL Puennies ADMINISTRATION, PETITIONER

@. M. McCLELLAN, TRUSTEE: 3

UN WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPRALS: FOR TRE TENTH CIRCUIT :

BRIEF FOR THE SMALL BUSINESS ADMINISTRATION

J. LEE RANKIN, :

Solicitor General,

GEORGE COCHRAN DOUB,

Assistant Attorney General,

3* MORTON HOLLANDER,

+ MARK R. JOELSON, |

Attorneys,

: Desortment of hes a8 ital aa D.C.

INDEX

Opinions below _ _-

, Sealliotiom.. oo eevee eeecccclece ee,

Questions presented... --. 5-8

Statutes involved.__...._{....----_--._--___..-

ES ae Ee oer aaa

Summary of Argument. -_. awe kacgie deme ce

an, « hE AT R I A ere a Pes pem as oo

I. The priority of the debt due the S.B.A. is —

\ not affected by the agreement between

_the S.B.A. and the participating bank —

to share the proceeds and losses on their

respective interests in the loan______-

A. The sole claim for which priority is .

asserted is a debt beneficially owned

by the S8.B.A., the nature of which

is not affected’ by the cae

I hs es a tec ne cea

B. The policies underlying the Small

Business Act require that ~ the

8.B.A.’s claim be accordeé@ priority -

C. If allowing the Bank to share the

. proceeds of the priority would be

inconsistent with. the purposes of

R.S. § 3466, the appropriate remedy

would be for an appropriate Court

to deny. the Bank’s participation

rather than to disallow the S. B. A.’s

; priority in its entirety_...._...-_-

II. A 75%.interest in the debt was owned by

the S.B.A. before bankruptey__..+____-

III. Debts due the S.B.A. are ‘debts due to the .

United States” within the meaning of

oe RR Seren Sie

5$1472—60—-1 by

' * hin Dadi

IV. The Small Business’ Act neither weeny

nor impliedly excepts loans made under

it from ‘the priority granted, by RS.

* ee Page

§ 266.222 fc keel foes 37

IS cnncals Gaccseierens es iota -

CITATIONS

—— | eon 4

Beaston v. Farmers’ Bank, 12 Pet. 10%._:.--- 13,

Bramwell v. U.S. Fidelity Co., 269 U.S. 483___ 13,

Cogan v. Conover Mfg. Co., 69 NJ. ‘Eq. 809, 64 ;

y' & . ae ee AN ec Sia er en 32.

Cook County National Bank v. United States, .

OF I Oi mee chive na donne raceneaccs 37

Delatour v. Prudence Realization Corp. “ 167 F.

ene 8

__ Guarantee Title & Trust Co. v. Title Saaveniy me

& Surety Co., 224 U.S. 152.:.-.._________ a > >

-Hawley Down-Draft Furnace Co., 238 F. 122_- 32

Illinois v. United States, 328 U. S, aN pee 37

Korman v. Federal Musing Administrator, 113

3k; _ ah ace OIG Re aE rela 2 35, 36

. United States, 92 U. eee 34

Massachusetis v. United States, 333 U.S. 611... 37

Medion v. Michigan Trust Co., 271 U.S, 236- - 37

Nathanson v. NLRB, 344 US. 25__ 15, 16, 17, 20, 33

Price v. United States, 269 U.S. 492......... 13,34 —

Prudence Co., In re, 89 F.2d 689. -.__.----- 32

_ Prudence Bonds Corp., In re; 79 F. 2d 212..:. 32. 2°

. Reconstruction Finance Corporation v. River-

_ view State Bank, 217 F. 2d 455_-_-_______- 35

Rohr Aircraft Corp. v. County of San Diego,

"Ro nn ea CEES

. Temple, In ve 174 F. 2d 145° oki EOS Ss 40

5, + . eit

Cases—Continued - Page

United States v. Emory, 314 v. S. 423_.- 2.15. 18,

ae * 35, 37, 38, 39

United States vy. Sarai cv Co., 280 US. —

478 os - eevee eke swans Menudc msec. S "37

United States v. em, 307 US. 200 Seite 9, 29, 34

United States v. Remund, 330 U.S. 539__33, 35, 37; 39

United States v. State Bank of North "Carolina,

th tte Bsr Ra ea a 13

Westover, Inc., In re, 82. F.. 2d __, Sane 32

Wilson, In re, 23 yer. Cee ne - 36

"Statutes: |

_ Act of May 25, 1948, 62 Stat. 261... __ 40

Act of July 30, 1953, 67 Stat. 230... __ 40.

‘Bankruptcy Act, Section 64, as amended, 11

WO OO 2,7, 10,13

Revised Statutes, Section 3466, 31US.C.191. 2,

3, 7, 8, 10, 12, 13, 14, 15, 16, 19. =" 27,

28, 33, 35, 37, 38, 39, 40, 41.

Small Business Act of 1958, 67 Stat. 232:

. Section 202_.:..... PE Marcon Rip a ree 21

* Section 204... ___ ee nae eae ee 36

Section eo 22

Section 207 | Sana en aa i 22

Small Business Act of 195§;, 72 Stat. 384, 15°

u U.8.C. Ee 21, 41

15'U.S.C. 681(a)__._... 7 Pees Mt vias 40

Re a a ee ne 36

5 OA, Gee)... .5..-.--.. 36

15 U.S.C. 683(c).------. kt ‘ 36

15 U.S.C. 684(b) (1) - iesuscunelu to 36

15 U.S.C. 636(a).. 22-2 22

15 U.S.C. 696(a) (2). cm narra we or 22

BvsecCea.....:... lace

Miscellaneous: —

13 C.F.R. 120. £-2(8)(90):. ee dace eS ae ts _7 24

3 Collier, Bankruptcy, {64.502 (14th ed., 1956). 13.

104 Cong. Ree: 2470____- Seca ceiwen> | oe

4 Corbin, Contracts, i See amie cae . 32

Hearing before the Subcommittee on Small

Business of the Senate Committée on Banking |

and Currency with respect to the Credit Needs

of Small Business, 85th Cong. ., 2d Sess.,

ce Re ene eae eee Aacuwaat 4]

S. 3319, 85th Cong., ay Br A a ee eC ae

. S. Rep. No. 1714, 85th Cong., 2d Sess_.:-... - 42.

108 U. Pa. L. Rev. 909 (1960).....-.----- 23, 32, 42

. e .

. . *

4 :

. . . 2

e .

= Jn the Supreme Court of the United States

it . “Octonn’ Term, 1960 |

'.. No. 42°

SMALL . BUSINEss - ADMINISTRATION, PETITIONER |

*.e a, . J v. |

G. M. McCLenian, TRUSTEE

‘ON WRIT OF CERTIORARI TO THE UNITED &TATES COURT OP

APPEALS FOR THE TENTH CIRCUIT

” . ,

. : Be > :

OPINIONS BELOW

The opinion of the’ United States District Court -

for the District of Kansas (R. 38-43) is reported

at 168 F. Supp. 483. The opinion of the United

States Court of Appeals for the Tenth. Circuit (R.

45-49) is reported at 272 F. 2d 143.

| JURISDICTION

The judgment of the court of appeals was entered

_ om November 6, 1959 (R. 50), On January 25, 1960,

Mr. Justice Whittaker entered an order extending the

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

. including February 24, 1960 (R. 50). The petition

_ for certiorari was filed on February, 24, 1960, and

| ates (1) . .

ae a a 4

’ granted’ on -April . 18, 1960 (R. 51), 362..U.S. 947..

The os ea of this Court rests upon 28 U.S.C,

1254(1).:

ewer PRESENTED

|X Whether, where an agency of the United States .

participates | with a private financial institution in

making a loan, the agency must be denied the debt

priority granted the United States by RS. § 3466, 31

U.S.C. 191, solety because, by virtue of the participa-

tion agreement between the two, the private institu-

tion will share ratably in any amounts recovered on

the loan by the Government agency.

a Whether, by purchasing a 75% ‘‘participation”

in a joan made by-a bank to a borrower, the Small

"Business Administration became the owner of a 75%

interest in the debt, so that there was then a debt

due to the Administration from the borrower. |

3. Whether debts due to the: Small Business Ad- .

ministration are “debts due to the United States”

within the meaning of R.S. § 3466.

4. Whether the Small Business Act excepted loans

made under it- from the priority granted by. R. 8.

§ 3466.

_ STATUTES INVOLVED

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

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

§ 104. Debts which have priority.

(a) The debts to have priority, in advancs

of the payment of dividends to creditors, and

to be paid in full out of bankrupt estates, and

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

’ owing to any person, including the United

| States, who by the laws of the United States.

i[s] entitled to priority * * *,

2. Section 3466 of the Revised Statutes, 31 U.S.C.

i91, provides:

§ 191. Priority 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 voluntary assignment thereof, or in

which the estate and effects of an abscond- .

_ ing, concealed, or absent debtor are attached

_ by process of law, as to cases in which an act

of es is. committed.

STATEMENT

This suit was brought «by the Small. Business

_ Administration, a non-incorporated agency of the

United States, to review the order of a referee in

bankruptcy denying the S.B.A.’s claim to priority

on a debt owing from the bankrupt.

1. On October 8, 1956, S. H. Byquist submitted

an application for a $20,000 loan to the Brookville

State Bank (hereafter “Bank’’) of. Brookville, Kan-

sas (R. 15-24). The: application was made on an

S.B.A. form headed “Limited Loan Participation

Application for Loan” (R. 15), and. contained two

ese,

credit, reports labeled ‘‘For Use of Small Business

Administration only” (R. 19-22). In the applica-

ae as

tion the borrower ‘agreed that ‘In consideration

_of the making by SBA to applicant of all or any,

part of the. loan. applied for in this application,

applicant hereby agrees with SBA that applicant

will not, for a period of two years after. Samana

ment by SBA to ‘applicant-ef—said_loan,’* employ __{-

any person who worked for S.B.A. on the date of

disbursement or within one year prior to that date

(R. 22). The application also stated that “All infor-

mation contained [in the application is] submitted

_ for the purpose of inducing SBA to grant a loan,

or to participate in a loan by a bank or other lend-

ing institution, to applicant”’ (R. 23). On Octo-

* ber 30, 1956, the Bank endorsed Byquist’s application,

indicating that it would make the loan requested,

but ‘only on condition that the S.B.A. participate

in the loan immediately to the extent of 75 Peres, ;

that is, $15,000 (R. 24).

On November 2, 1956, the Adsniniatrator authorised

_ the §.B.A. to enter into a “Participation Agreement” .

‘swith the Bank forthe purchase from the Bank of

an immediate 75 perceht participation in the loan

to be made to Byquist (R. 24-26). The same day,.

‘Byquist was advised that the S.B.A. had approved"

hjs application for an immediate participation’ loan

(R..29). The Participation Agreement was signed by

the’ Bank and sent.to the S.B.A. on November 16, .

1956, and was signed and dated by . the S.B.A, on

November 19, 1956 (R. 27-28). The Agreement ‘pro-

vided, inter alia, that the 8.B.A. would, upon written

demand by the Bank, purchase from the Bank a 75

— ee of gach cone made to

¢ ‘

the borrower (R. 4); that the Bank would hoid the

note, but that it would transfer the note to S.B.A,

within five days if S.B.A. should make a written

demand‘ therefor (R. 8); aid that neither party to

the agreement could, without the prior consent of the

other, make or consent to any. alteration in the _terms_.

of the note or sue upon. the note (R. 8).

In addition, the Agreement contained the follow-

ing provisions (R: 8-9) :

12, ADMINISTRATION OF Loanx.—The holder

of the Note shall receive all payments on ac-

count of principal of, or interest on, the Loan

and promptly remit to the other party its pro

- rata share thereof, determined according to

their respective interests in the Loan * * *,

4 GG * * -" #

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 the agreement and upon demand

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 the sole purpose of

purchasing: a 75 percent interest in the loan to Byquist

(R. 15, 28). The Bank’s right to accept and negotiate

the check was. expressly conditioned on the Bank’s

execution and delivery to S.B.A. of a Participation

Certificate (S.B.A. Form 152) as evidence of the

purchase by S.B.A. of its interest in the loan (R. 28).

561472602

v\ .

The Bank then disbursed the loan of $20,000 to

- Byquist (R. 31, 39) and executed and delivered to

the S.B.A. the required Participation Certificate.’

The loan was evidenced by a note, dated N ovember —

+16, 1956, to the order of the Bank-{R.--9-13). The

note was on another S:B.A. form and was -headed

“NOTE (For Limited Loan Participation Only)”

(R. 9). Jn the note, the borrower covenanted, tnter

- alia, to use the proceeds of the loan solely for the

purposes set. forth in the S.B.A.’s loan authorization, °

and to reimburse “Holder and S.B.A., respectively,”

for expenses incurred-by them 4m connection with this

Joan (R. 11).

The executed Participation Certificate (S.B.A. Form 152) -

is not in the. record, but its execution by the Bank is not |

questioned. For the sake of completeness, the text of the cer-

tificate is printed below: ; , |

PARTICIPATION CERTIFICATE

Brooxvittze State Bank (hereinafter “called “Bank”), -

hereby certifies that Small Business Administration (here-

inafter called: “SBA”) has purchased from Bank -a par-

ticipation of 75% of $20,000.00, representing the amount of *

the disbursement, or the aggregate amount of the disburse-

_ ments (as the case may be) made by Bank on the 23rd day

of November 1956, and remaining 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 eceeding $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] Brooxvuue Stare Bank (Bank)

. RD. Powzm

Cashier (Title) _. ’

Brookville, Kansas (Address

‘i

2. An involuntary petition in bankruptey was filed

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

adjudged a bankrupt on September 5, 1957-(R. 38).

On October 22;-1957, a trustee was appointed (R. 38).

He proceeded with the liquidation of .the-estate and

holds a sum somewhat in excess of $19,000 (R: 32, 38).

Claims totaling $43,682.07 have been filed, and. the cost

of administration has been. estimated at $6,500.00 by.

the trustee (R. 22). ‘°

After the filing jae petition | in hankruptey, the

___Bank transferred Byquist’s note to the S.B.A. (R.

- 32).- The S.B.A., on behalf of the United States,

filed a priority dike 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. prior-

ity’ -are accorded a fifth priority in bankruptcy.

The S.B.A. claimed such 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 provides that ‘debts due to the United States

shall be first satisfied’’ out, of the estate of an insol-

- vent debtor. The S. B.A. filed a claim for the sum of

$16,355.69 * representing the, entire amount still un-—

paid on the note, with interest through October 15, |

1957 (R. 2-3).- Recognizing, however, that 25 percent

of that. claim represents an amount owed by .the -

-bankrupt to the Bank, the Government has, through-

2 As originally filed, the claim was for: $16,788.42, but it

was later stipulated that the correct t figure, after all credits,

was $16,355.69 (R. 34).

out these proceedings, m= fact claimed priority .only

for $12,266.77, ‘its 75 perefut interest ‘in the debt

Zsa . =

On objections. by the trustee (respondent here) to”

the claimed priority, the referee in bankruptcy denied

priority to the S.B.A.’s claim on the ground that the

S.B.A, is an independent agency not entitled to the

debt priority accerded to the United States by R.S.

§.3466 (R. 33-36). The claim was thus allowed only

as a non-priority, unsecured claim (R. 35-36).

‘3. After denial of its claim for priority, the S.B.A. -

filed a petition for review in the United States Dis-

- trict Court for the District of Kansas. The district

- eourt rejected the. referee’s conclusion that the S.B.A.

could not: claim the debt priority accorded to the

United States, but, nevertheless, affirmed the referee's

order on the ground that there was'no debt running

from the bankrupt to the S.B.A. until assignment of

the: note to the S.B.A.,.subsequent to: the date of

bankruptey (R. 38-43). In support of its decision,

the cdurt pointed out, inter alia, that the note executed

: The $12,266.77 sought by the $.B.A.,,sind- for which priority

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, that portion of

the debt remained, for bankruptcy purposes, a claim of the ©

- Bank. While the court of appeals’ opinion does not indicate

that the Government’s priority claim was for only $12,266.77,

the amount due it, and not for the $16,355.49 owing on the

entire loan, this fact was made clear by the Government

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 claim- ~

_ing prigrity was irrelevant.

\ ee

Pay ee eee

hy the bankrupt was made pay ‘able 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 Joan to the- bankrupt (R. 42). Accordingly, the

court held that, since under United States Vv. Marren, .

' 307.:‘U.S. 200, the status of a claim against 4 bank-

rupt’s. estate is determined on the date. the petition

is filed, and since an assignment after that date « ‘annot

give an assignee any greater rights than those of his ¥

_assignor, the.S.B.A.’s claim to priority must: be denied

_(R. 42-43).

On appeal by the S8.B.A., the: Court of Appeals for

the Tenth Circuit affirmed, inst on still another ground

~ (R. 4549). The court assumed, arguendo, both that.

. the Small Business Administration is entitled to the

statutory priority granted the United States (R. 47),

and that, by virtue of its immédiate participation in

the loan, the Small Business Administration became

beneficial owner of a 75 percent interest in the debt

prior to. the filing of the petition in bankruptcy ( R.

. 47-48). The court held, however,‘ that the S.B.A.

could not assert, a priority for the aniount owing to it

because, in its participation agreement with the bank,

it had agreed to share’ ratably the proceeds and losses

resulting from. the transaction with the borrower.

The court stated (R. 49): , |

In Nathanson vy. National Labor. Relations

Board, 344 U.S. 25, 28, it «:.s said that § 3466

° aay not be extended. to create a priority for a

e'aim 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 written

contract to account to the Bank for the Bank's ~— .

259 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. ° st hi

* ad . f * & +

* * * (The United States] may not assert. a

priority which will produce a recovery that by

contract must be divided with a private entity.

SUMMARY OF ARGUMENT )

The basic question in this case is whether the claim

- of the United States which was filed by the S.B.A.

in the bankruptey proceeding -is entitled to priority _— |

over the claims of other unsecured creditors. Under

Section. 64 of the Bankruptey Act, 11 U.S.C. 104,° |

supra, “debts owing to any person, including the

United States, who by laws of the United States, i{s] |

entitled to priority’? are accorded a fifth priority.

If the S.B.A. wege given that priority here, its claim ~

would take precedence over the claims of the other

unsecured creditors. It is our contention that the ©

S.B.A. is entitled to such priority under R.S. § 3466, |

which provides that ‘‘debts due to the United States

shall be first satisfied’’ out of the estate of an insol-

‘vent debtor. ;

. 4 . ,

‘The court below erred in holding that the S.B.A.

‘cannot claim a debt priority here with respect to the

amount owed to it by the bankrupt because, by con-

tract, it is bound to ‘remit to the participating bank

- the latter’s pro rata share of all amounts collected

on the debt.. While it is settled that the United

States may not invoke. its priority right so as to col-

lect a debt ‘owing to a private party, this principle is

inappliéable in the present case because the S.B.A.

is asserting priority for a.claim owned by it alone. |

What the S.B.A. has contracted. to do with its pri-

ority recovery is not properly relevant to the ques-

tion of whether it issentitled to a priority. The

'S.B.A.’s outside contractual arrangements cannot af-

fect the bankruptey rights of the other creditors and:

do not interfere with the scheme of distribution of the

‘Bankruptey Act. ;

In addition, important’ policy considerations per-

taining specifically to the objectives of the Small

Business Act strongly favor allowance of the: priority

sought here by, theS.BAL

The claim. for which the S, BA. asserts priority

constituted a debt due the United States on the date

of the filing of the petition in bankruptey. While -

the note evidencing the debt was payable to the

order of the participating bank and was formally as-

' signed to the S.B.A. only after the bankruptcy, the

' S.B.A. was beneficial owner of a 75% interest in the .

debt from the time that it purchased a. 75% “nartici-

pation” in: the “loan, long ‘befote bas date of.

bankruptcy.

In response to the Bank? 8. written demand, the

S.B.A. sent. the Bank a Treasury check for the sole:

purpose of purchasing an undivided 75°; share in the

loan to ‘the bankrupt. The Bank saccepted the

' . e ‘

e . ; ‘ : ‘ ‘

S.B.A.’s check; disbursed the loan, and sent the °

S.B.A. a Participation Certificate certifying that the

S.B.A. had purchased a portion of the loan. Nothing

more was needed to make the S.B.A. the owner of

75% of the debt from the bankrupt.. The promissory

note tendered by the bankrupt could have’ been de-

manded at any time by S.B.A. The note, in any

event, constituted merely the evidence of the debt

‘since its transfer to one or the other of the partici-

pating parties could not alter their respective in-

terests in the actual debt. | f

Itl

Debts due the S.B.A. are clearly “debts due to

the United States”’ within the meaning of.R.S. § 3466. +

The S.B.A. is an unincorporated agency of the United . |!

States Government which, in carrying on its statutory |

operations, administers and lends funds originating

from Congressional appropriations. ‘It is settled that

such an agency must be regarded as:the United States

for the purposes of R.S. § 3466.

ow ot rattan mete sane he

There is no language in the Small Business Act —

which expressly denies the S.B.A. the priority granted

by R.S. § 3466, nor is the S.B.A.’s assertion of the |

priority right basically inconsistent with the objec- !

' tives sought to be achieved by the Small Business Act. © |

Indeed, the legislative history of the 1958 amendments

ow oh aman ows wee

Pee EE Nh

bp acerens

(130

to the Small Business Act of 1953 shows ‘full Con-

gressional : acceptance-of the*view that the S8.B.A.

entitled to the betefits of R.S. 4 3466.

‘ARGUMENT

The preference, in the public good, of debts due the

United States over private debts is a policy dating

‘back to tne beginning of the nation * and one to which

this Court, repeatedly reminding the lower courts that

R.S. (3466 must be liberally construed,’ has given full

effect. The several decisions helow, each seizing upon

a different technical ground to defeat the 8.B.A.’s

priority, are, we believe, inconsistent with that policy

and unsupportable even on a strict construction. of

R.S. § 3466. |

Dealing first with the ground of the court of ap- -

peals’ decision, we will show that the S.B.A.’s con-

*The statute is derived from early statutes enacted for the

collection of taxes, and. its provisions have been in force since

1797 without significant modification. See Price v. United

States, 269 U.S. 492, 500-501 ; United States v. ei mory, 314 U.S

423, 428.

In bankruptey proceedings, of course, while: R.S. § 3466. is

the source of the priority, it is § 64 of the Bankruptey Act that

governs its relative rank. Under that section, claims given .

priority by R.S. § 3466 are in the fifth priority rank. See

Guarantee Title & Trust Co. v. Title Guaranty & Surety Co., —

224 U.S..152; 3 Collier, Bankruptcy, §.64.502 (14th ed. 1956).

*See ¢.g., 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 U.S, 423, 426; Bramwell v. US. Fidelity

C'o., 269 U.S. 483, 487; Beaston v. Farmers’ Bank, 12 Pet. 102,

134. °

561472—60-——3

tractual undertaking to share proe eeds and losses with

‘the Bank is irrelevant to, and cannot affect, the pri-

ority to which the debt due the 5. B.A. is otherwise en-

titled (Point I). We will then show that, contrary to

the decision of : the. district court, the debt to the —

S.B.A. arose prior to bankruptcy (Point IT) and

that, contrary to the referee’s decision, debts. due the —

S.B.A. are “debts due-to the United States” within ~

the meaning of R.S. §3466 (Point III). We will ,

‘eal fina)'y with the one remaining contention of re-—

spondent that has not ‘een adopted by any of the

tribunals below and show that the Sinall Business Act — .

neither expressly nor impliedly excepts loans made -

under it from the priority granted by R.S. § 3466

7 cere: | :

THE PRIORITY OF THE DEBT DUE. THE S.B.A. IS NOT AF-

FECTED BY THE AGREEMENT BETWEEN THE S.B.A. AND ©

THE PARTICIPATING BANK TO SHARE THE PROCEEDS AND

LOSSES ON THEIR RESPECTIVE INTERESTS IN THE LOAN 7

The court’ of appeals held that, even if the S.B.A.

were otherwise entitled to priority on its $12,000 share

of the total outstanding loan of $16,000,* it lost that

right to priority when it entered into a contract with

"the Bank to share pro rata the proceeds and losses on

their respective interests in the loan. The court rea-

soned that no priority could ‘be allowed because the

* The figures are rounded off for slemtbelay. T he amount ac-.”

tually remaining unpaid was $16,355.69, of which the S.B.A.’s

75% share was — 77 (R. 34). :

Bank, by virtue of the contract, would share in its

proceeds and, under Nathanson v. NLRB, 344 U.S. 25, —

_ the priority statute “may. not be extended to create a

priority for a claim which the United States i is collect-

ing for a private party”’ (R. 49). ;

We will show that priority has not in fact been

_ asserted for any .claim due a private party and that

the nature of the claim for which priority is as-

serted—a debt beneficially. owned by the United

States—is not affected by the agreement between the

S.B.A. and the Bank to pool the proceeds and losses

on their respective claims; that the. policies of the

Small Business Act require that priority be given the

S.B.A.’s share of participation loans; and, finally,

_ that even if allowing the Bank to share in the pro-

céeds of the S.B.A.’s priority would be inconsistent

- with the purposes of R.S. § 3466, total disallowance of .

-the S. B.A.’s priority would not be the apgee

remedy.

4. THE SOLE CLAIM FOR WHICH PRIORITY 18 ASSERTED 18 A DEBT

BENEFICIALLY OWNED BY THE 8.B.4., THE NATURE OF WHICH I8

NOT AFFECTED BY THE PARTICIPATION AGREEMENT

‘1. The nature of the claim for which priority is

asserted here is totally different from that involved

in Nathanson, and the’principle of that case is inap-

plicable. In that case, the National Labor Relations

Board, to remedy an unfair labor practice committed

by an employer, had ordered the employer to rein-

state” certain employees with back pay. When the

employer went into bankruptcy, the Board filed a. .

claim for the back pay due the employe Cs. or

eye a

upholding the Board’ s vada, because of its exclusive

power to enforce its ‘own orders, to enforce the claim

for back pay, this Court held that the claim was not |

entitled to priority under R.S. § 3466, stating (344

U.S. at 27-28) : |

We do not, however, agree with the lower |

court that this claim, enfore ‘eable by the Board,

is a debt: due the United States within the

meaning of R.S. § 3466 * * *. The priority.

granted by that statute’ was designed “*to .se-

‘eure an adequate revenue to sustain the public

burthens :and discharge the public debts.” |

*** There is no function here of assuring

the public revenue. The beneficiaries of the

claims are private persons * * *.

* 7 7 * . ’

rr =

It is true'that * * * [because of the status of ;

Indians as wards of the United States, priority *

has been given to claims by the United States

for Indian moneys]. We cannot extend that

reasoning so as to give priority to a claim which a

the United States is collecting for the benefit of 1

“a private party.. |

The basis for. the decision, in short, was that the

United States had no beneficial interest in the claim

and was acting solely as an " enforceiaent agency to

collect debts beneficially — owing alti to private

parties.

The complete answer to the eourt’s reliance on

‘Nathanson is that here the only claim ‘‘which the

United States is collecting: for the benefit of a private

party”? is the $4,000 share of the loan that is bene-

ficially owned by the Bank, and for ‘that claim no

priority has in fact been asserted. Giving full effect

we seen eT

= NE *

to Nathanson, the S.B:A. limited its claim of priority

to the $12 ,000 actually advanced by and not yet repaid —

to it;.and that part of the debt admittedly is bene-

. ficially owing to the United States. The difference

between Nathanson and this case, in-short, is that in

Nathanson the United States was not the beneficial =~

owner of the debt for- which priority was claimed

while ix this ease it is. | ~

2. It is true that’ if the S.B.A. reéovers the

$12,000 owing to it and the Bank fails to recover the

$4,000 owing to it, the S.B.A. will be required, by

virtue of its contract with : the Bank, to share its

"proceeds with the Bank and thus absorb a ‘part of

the Bank’s loss. If so, however, the S.B.A.’s eon-

tribution to the Bank will be at its own expense and

not at the expense of other ereditors, for to the

same extent that the S.B.A. pays over a part ofits

proceéds to the Bank its own claim against the hank-

rupt will remain unsatisfied: The crucial fact is that

there is a-debt beneficially owing to the United States

in the full amount of the claimed priority, and the

way in which the S.B.A. and the Bank-have agreed

to account to each other for the proceeds of their

respective claims against the bankrupt is a matter

of concern only to the S.B.A. and the Bank.

The court of appeals suggests that to allow the

priority here would be “to prefer the Bank over the

other private creditors’? (R. 49), but patently that is

not so, The other creditors are in no way prejudiced

or even affected by the contract between the S.B.A.

and the Bank. The S itself advanced, and is

admittedly entitled er on its own behalf, the

—_. ———

full $12,000 for which priority is asserted. But for

_ the. coincidental agreement with the Bank, the $12,- —

000 would admittedly be a prior claim against_the

—estate, and the agreement has in no way increased or

affected the amount of the claimed priority. The

other creditors will receive precisely the same ‘dis-

‘ tribution they would have ‘received had there been no

such agréement. So also the Bank, on its $4,000

interest in the debt, will receive as a distribution

‘from the estate precisely the same proportion of its

claim as the other private creditors. Anything else —

the Bank realizes on its loan transaction it will re-

ceive, not as a claimant in the bankruptcy proceed-

ings, but solely by virtue of its independent agreement

with the United States and out of the United States’

own recovery. The agreement, in short, may give the

Bank an advantage over the United States that it

would not otherwise have, but it gives it no advantage

over, or at the expense. of, the other. creditors.

Lea

: In terms of any “preference” given one common’ ,

creditor over another, the case here is, in fact, no dif-

ferent from one in which one creditor of a bankrupt

agrees with another—in order, for example, to induce

the second to extend credit—that any recovery on the

two claims will go first to the second creditor until

his claim had been paid in full. Clearly that inde-

pendent agreement between the: two creditors would.

afford no basis for disallowing the first ereditor’s

claim on the ground that to allow it would be to

prefer, the second. So long as the second creditor’s

advantage is solely at the expense of the first creditor

and the azreement between them does not prejudice”

the other creditors, their private arrangements for

sharing the proceeds of their claims_is of no concern |

___to the bankruptcy court. ;

3. We may note, finally, that even if the contractual

arrangements between the S.B.A. arid the Bank were

.. to be taken into account in determining the priority

to be allowed, the result would “not necessarily be, as -

respondent assumes, to reduce the allowable priority

to zero. Starting with a debt due the S.B.A., and |

presumptively. entitled to“ priority, of $12,000, re-

spondent argues that, ‘since’ $3,000 of that would have

to be paid over to the Bank, only_thé $9,000 that

would remain with the S.B.A. should be entitled to .

priority. As. Fespondent points -oyt, however, that

would not solve the problem, for 25% of a $9,000

distribution would in turn have to be paid over to the

Bank, leaving the S.B.A.. with only $6,750, and so

‘on ad infinitum, from which respondent concludes

that the only solution is to disallow the. S.B.A.’s

priority in'toto (Br. in Opp. 10-11).

it can be said with equal plausibility, however, that

| the progression works the other way, for. with each

payment over to the Bank there remains a “debt due

to‘the United States’’.which has not yet been satisfied

and which, presumably, is therefore entitled to

priority. ‘There is initially a debt due the United

States of $12,000, which R.S. § 3466 requires ‘shali

he first satisfied” before other debts are paid. If the

participation agreement is taken into account, how-

ever, it is clear that a distribution of only $12,000

would, after payment of 25% ‘to the Bank, stilt leave

an “unsatisfied” debt due the United States of $3,000.

— 20

If debts due the United States are to be “first satis-

fied”, a further distribution ‘of. $8,060 would be re-

quired, which in turn would still leave unsatisfied a

debt of $750, and so on ad infinitum. The solution

to that problem, of course, would be to give the S.B.A.

a priority for the full $16,000 loan to begin with, so

- that its $12,000 debt will be fully “satisfied ” before

payment of other creditors.

The point is that, if, as respondent insists, the-

participation agreement must be taken into account,

it can lead as readily to a conclusion that a $16,000

priority should be allowed as to a conclusion that no

priority should be allowed. There is no more reason,

a priori, to deny the 8.B.A.’s priority altogether to

make sure the Bank gets nothing than there is to .

give’ a $16,000 priority to make sure that the S.B.A._

gets its full $12,000. The proper answer we think is

that what the §.B.A. and the Bank have agreed -be-, ”

tween themselves to do with their recoveries can:

neither augment nor diminish their rights against the

estate, which turn instead solely upon the debts owe d

te them individua}ly by the bankrupt.

- In sum, the t ching: of the Nathanson ease is that

the United States may not.invoke its priority right

so as to gain priority for a claim actually owned by a

private person. -That teaching is inapplicable here

because the S.B.A,’s assertion of priority is solely for

a elaim entirely its own, a elaim whieh arose from a

loan made by the S.B.A. to the bankrupt. What the

S.B.A; has contracted to do with its recovery from the

hankruptey proée eding is irrelevant to the determina-

tion of rights in that procee ding, just as are the out-

Le _

a ” 21

side contractual obligations of the other bankruptey

creditors. Nor can allow nee .of the priority claim

here in any way interfere with the policy of equitable

distribution of the Bankruptey Act, since the other

- hankruptey ereditors would be entitled to recover no

more if the S.BLA. had no contractual arrangement

with: the Bank. We submit, therefore; that there is

nothing in the participation agreement justifying an.

exception to ‘‘the operation of so clear a command as

that of § 3466." United States v. Emory, 314 US

423, 433. |

B. PHE POLICIES UNDERLYING THE SMALL eveaiiins ACT REQTIRG

“THAT THE S.BA.'8 CLAIM. BE ACCORDED PRIORITY

As already note d, it is cur bavie position that the

S.B.A. is entitled to priority on its share of the loan

under the settled principles traditionally applied by.

this Court in interpreting R.S. °§ 34662 In addition,

however, we believe there are inportz at policy con-

siderations which ‘reenforce ‘the conelusion that the

S.B.A. is entitled to priority here. Indeed, if the

purposes of the Small Business Act are to be achieved

Jully, it is essential that the -S.B.A. have a right of

priority to aid it in recovering the funds disbursed by

it-in participation loans. o

In enacting the Small Business Act of 1953, Con-

LTESS expressly noted that the security: and economie -

Well-being of the Nation depended on the development _

and. encouragement of small business enterprises,

Sce, 202, 67 Stat. 232: 15 U.S.C. 631. * o that end,

arenes

"After several amendments, the Act was reenacted in 1958,

72 Stat. 384, 15 USNC. 631-651. All the sections of the 1953 .

Act cited in-this brief have been reenac ected In-Virtually iden-

P 22

Gongress created the Small Business Administration

and authorized it. to make loans, with fun's derived

from\Congressional. appropriations, to small business

concerns, ‘“‘cither directly or in ‘coopération’ with

| other Tending: institutions through agree-

. me ae saalisigution may be

- pur d unless it is shown that a ‘deferred

participation is not available ; and no loun may

be made unless it is shown that a ee

private loan ai is to be enlisted by the S.B.A. to-

whatever extent\ it is available, loans made by the

tion with private institutions have

Ik of the S.B.A.’s business loan

program, and will continue to do so.” The success.

of s tion program depends entirely,

of course, on the willingness of private lending insti- \

tutions to join in, the\program offered by the Gov-

‘ernment agency and to\ assume thereby a portion

of the attendant risks.’ \The possibility of being \.

indemnified, at least .in part, by the United States, \

for convenience giver to the 1958 edition of the Code.

* See statistics in Petition fof a Writ of Certiorari, pp. 14-15.

.* These risks are, of course, not insubstantial. In view of

statutory prerequisites as to their availability, S.B.A. loans

are often extended to concerns whose insolvency is not

unlikely.

ae form in the 1958 Act, r all U.S. Code references are

_ — =

I a ie a ee rey

eB OTe tte TR

which is more likely to collect its debts because of

its right of priority, has- provided a vital incentive

for banks to take these risks and participate in the

S.B.A.’s_ program. Recognition of the S.B.A.’s

right to claim a debt priority (but, of course, solely

with respect to that portion of the loan actually

disbursed by it) and to then remit, pursuant to

eentract, a‘share of that priority recovery to -the

participating bank, is, we believe, essential to safe-

guard this incentive feature of the Congressionall¥

devised participation program -and, by the same

token, vital to the program’s success. _ |

In contrast, the view adopted by the court below

would seriously impair the S.B.A. program by ren-

_ dering it far less attractive to prospective bank

participants. Under that decision, the S.B.A.

_ would be required, in order to avoid forfeiting its

right of priority for moneys advanced by it, to.

revise its participation agreements to limit te

sharing provisions to non-priority proceeds. There

are, we think, few lenders who would be willing to

participate on such terms—namely, heing full part-

ners in advancing the money but not in sharing the

proceeds.” That, we submit, is a strong reason for

allowing the priority here, for the ‘established rule

of liberal construction requires that the priority

act be applied having regard to the public good it

See also Petition for a Writ of Certiorari, p. 16; 108

\ U. Pa. L. Rev. 909, 914 (1960). |

\, As we pointed out in our petition for certiorari, the con- .

fractual provision relating ‘to the pro rata sharing of gains

and losses is also in common use in various other Government .

participation loan programs.

was intended to advance.”’ Bramwell v. U.S. Fidelity

Co., 269 U.S. 483, 492. Se

Another important factor is that the decision below, —

by denying the 8.B.A. a right of priority on all sums

advanced by it under its present participation pro-

gram, may well. have the effect of making a small

business’s creditors eager to force the business into

batkruptey immediately after it receives an S.B.A. —

loan in order to reap a benefit from the loan funds..

To that extent, instead of aiding and encouraging the _

_ éontinued operation of a small business, the S.B.A.

Joan would hasten its demise." On the other hand, if

the S.B.A: were allowed: priority on its advances,

ereditors would have nothing to gain from an immedi-

ate bankruptcy, and the loan’s purpose —to stimulate

eonfidence in the business and to enable it to continue

funetioning—would more likely be served. ‘Similarly,

‘under the Tenth Circuit’s view, ereditors -will be

‘tempted to induce small businesses to obtain S.B.A.

participation loans merely for the creditors’ benefit in

the event of bankruptey. Such a purpose in securing :

a loan would not fulfill any of the objectives of the

Act and, indeed, is contrary to the S.B.A.’s regula-

tions. 13 C.F.R. 120:4-2(d) (1) (@).”

4 These consequences: of -a holding that the 5.B.A. cannot

claim priority, on its participation loans would be harmful to

the S.B.A.’s program under any circumstances. However, in

times of economic depression they would be particularly grave.

S.B.A. loans would be :the only source of credit available to

many small businesses, but the making of an S.B.A. loan would

serve primarily as an incentive to the’ business’s private creditors

to recover what funds they could by an immediate bankruptcy

proceeding.

2 Furthermore, in many situations it will be obviously ur just

. 5

Cc. IF ALLOWING THE BANK TO SHARE THE PROCEEDS OF THLE PRIORIFY

WOULD BE INCONSISTENT. WITH THE PURPOSES OF R.Ss, S$ 3466, THE

APPROPRIATE REMEDY, WOULD BE FOR AN APPROPRIATE COURT TO

DENY THE BANK &® PARTICIPATION RATHER THAN TO DISALLOW THE

S.B.A. 8 PRIORITY IN ITS ENTIRETY :

We have thus far sought to show that what the

S.B.A. proposes, or has obligated itself, to do with the

proceeds of its priority are of no concern in deter-

mining its rights to the priority. ‘ We. will- now show,

however, that even accepting the court of appeals’

view that no priority can be allowed which would .

résult in a benefit to the Bank, it would not follow

that the proper remedy is to disallow the priority -in

its ertirety. Rather, we submit, the proper remedy a

in that ¢ase would be for an appropriate court to. deny

enforcement of the Bank’s right té.share in the pro-

ceeds attributable to the priority. |

The court of appeals, having concluded: that it

‘would be inconsistent-with the purposes of Tt.S. § 3466 -

to allow a priority which would benefit the Bank,

apparently believed that it was faced with a dilemma. |

If it allowed the priority, the Bank would be bene-

fitted, thereby violating the assumed limitation on R.S.

§ 3466. If it denied the priority, the United States

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

because the proceeds of the S.B.A.'s loan funds will comprise

the bulk of the bankruptcy estate. S.B.A; participation loans,

by necessity, go to small businesses that cannot get credit. from .

other sources. When such a business goes into bankruptcy, its.

remaining funds will often be traceable to the §.B.A. loan.

Thus, it may not be a coincidence that, in the cas ai bar, a .

$20,000 participation loan was extended, and $19,000 is.the

amount in the trustee’s. hands—particulariy since the involun-

tary petition in bankruptcy was filed less than.a year after the —

Joan was made.

——a

. oe ie

would nwt be assured payment of the debt admittedly

' due it, thereby frustrating the primary purpose of

R.S. § 3466. -Faced with that choice, the court pre-

“sumably concluded that the policy of precluding a.

: private benefit was more compelling ‘than that of

assuring ‘the public benefit, and so held that the

'§.B.A.’s right to prior payment must be sacrificed to

_ > prevent. any benefit accruing to the Bank.

Even accepting : the-court’s view on the merits, it

was not, we think, forced to that choice, for there

was another remedy that would avoid .both the as-

sumed evil-of allowing the Bank to participate and

the frustration of R.S. § 3466 by denying the S.B.A.

its priority—namgly, granting the 8.B.A. priority on

its claim but recognizing that é¢nforcement of the,

- sharing agreement to the extent that. it. purports to

apply to -priority proceeds would. be subject to attack

‘in an appropriate proceeding. The result of the court .

of appeals’ view is that the agreement to share, priority

proceeds is itself invalid, or at least impossible of

performance, and if that is so it is difficult to see why

denying enforcement of that agreement would not be

a fully appropriate remedy. That remedy would be

no more burdensome to the Bank than disallowing the

priority entirely,” would avoid the collateral con-

13 One slight adjustment might be required to avoid prejudic-

ing the Bank—namely, requiring the United States to pay over

to the Bank out of its recovery the amount by which the Bank's .

participation in the estate as a common creditor would have

been augmented by a disallowance of the S.B.A.’s_ priority.

Even assuming that the Bank is not entitled to the benefit of

the S.B.A.’s priority, it would seem at least to be entitled by

its agreement not to be injured by it—ie., not to have its

participation in the estate diminished by the &.B.A.’s assertion

of priority. With that adjustment, however, not even the .

a —

en ee)

sequence of depriving the United States of the :

priority which it- was the very purpose of R.S. § 3466

to give it; and would cause no disadvantage to the

other creditors beyond that dictated by R.S. § 3466

itself. es oes :

The court of appeals’ decision, on the other hand,

produces drastic consequences wholly unrelated-to the

evil sought to be remedied. In authorizing participa-

tion agreements of the kind here involved, the Ad-

ministrator clearly did not intend to waive the United

States” right to priority (if, indeed, he was authorized.

to do so), and the effect of the decision below is, to

impose a forfeiture of the Government’s’ priority

rights on all the loans outstanding under such agree-

ments merely because of a mistake of law by the Ad-

ministrator in considering such agreements to be

proper. In this case, for example, because the Ad-

ministrator improperly (in the court’s view) agreed

to pay $3,000 of the priority. proceeds over to the

Bank, the United States is to be denied substantially

all of its recovery on a $12,000 debt—a recovery that

it was the very purpose of R.S. 43466 to assure.

Such a result might be justified if the other creditors

had in some way been prejudiced by the sharing

Bank could object to limiting the remedy to rejeetion of its

participation rather than disallowing the S.B.A.’s priority in

its entirety, for the result to it would be the same..:

The effect of that adjustment, it may be noted, would be not

to allow the Bank to participate in the priority but only to

deny to the S.B.A. any priority vis-a-vis the Bank. That

__ limitation on the S.B.A.’s priority is justified by the Bank’s

reliance upon its agreement of equal treatment in lending the

money, and the other creditors would not. be prejudiced since

the adjustment would come out of the S.B.A.’s recovery. .

agreement, but as we have shown above they have in

no way been affected by the agreement: and will re- |

ceive the same distribution they would have received

had the agreement not been made. ‘Thus the’ result

of the decision below is simply to give sto the other

éreditors, at the expense of the United States, a wind-

fall over what it could otherwise have expected to

receive.

If, as RS. § 3466 wisi, the. public interest y

requires that debts due the United States be first

satisfied, there can, we submit, be no justification for

forfeiting that protection of the public interest in its

entirety, mer¢ly heeause a public official erroneously—

though in good faith and without prejudice to, other

- ereditors—agreed to share a part of the proceeds of :

that priority with a private party. Particularly is

that so: where, as here, the result of so subordinafing

the public interest is not to compensate persons in-

jured by the alleged error but simply to produce a

windfall for persons in no way affected by it. We

-! submit, accordingly, that if allowing the Bank to par- (°

ticipate in the proceeds of the §.B.A.’s priority would

offend. the policy of RS. § 3466 (which we deny), ~ |

tthe. appropriate remedy would be simply to test out — - |

the Bank’s right to that participation 1 in an appropri- “

ate case. There is no need at the same time to frus-

trate thé. primary purpose of that very statute by’

denying the United States priority on the debt due it.

We are of course aware that if that be the proper

remedy, the objection of the trustee and the other

ereditors to the Bank’s contractual participation in

the proceeds of. the S.B.A. ’s claim, even if upheld, , |

Ye RE tse te

would avail them nothing. That, however, goes only

to emphasize our primary point that the agreement

between the S.B.A. and the Bank to pool their pro-

_ ceeds and losses on the loan transaction does not affect

the rights of, and is of no concern to, the other créd-

itors and ought to be irrelevant to this proceeding. ;

pil |

A 757% INTEREST IN THE DEBT WAS OWNED RY THE S.B.A.

ae BEFORE BANKRUPTCY =

Although the court of appeals did not reach the

question, the district court held that no debt was due

' the S.B.A. from the bankrupt until the Bank trans-

ferred the note to the S.B.A. after the bankruptey

petition hadebeen filed, and hence that the S.B.A. was

not entitled to priority (R. 42-43). We do not ques-

tion that the rights are to be determined as of the date

on which the petition in bankruptcy was filed (United

States v. Marzen, 307 U.S. 200), but in our view it is

clear that the S.B.A. acquired full ownership of 75%

of the debt upon the initial purchase of its par-

ticipation and. that the possession of the note was

immaterial. ay aS

1. The participation agreement entered into by the

S.B.A. and the Bank before the loan was made pro-

. Vided that (par. 2, R. 4):

- SBA, upon written demand by Bank, will

purchase from Bank a participation of 75 per

cent of each disbursement made by Bank to

Borrower on account of the Loan, immediately

after such disbursement, for an amount of

money equal to the-amount of said participa-

—_—

tion. Immediately upon each such purchase,

Bank will execute and deliver to SBA a Par-

ticipation Certificate on SBA Form 152 evi- — |

dencing the interest in the Loan so purchased. ~

It was further provided that any security held by the

Bank or the ‘8.B.A. “shall secure the interests of both

Bank and SBA in the Loan’”’ (par. 6, R. 5); that

neither: party would “assign * * * its interest in the

Loan” without the consent of the other (par. 7, R. 6) ;

that the Bank would hold.the note but upon written

demand from the S.B.A. would “transfer” the note

within five ° "ays to the S.B.A., receiving back a ‘‘Cer- i

. tifieate of Interest”’ saiiceind the Bank’s retained

. interest (par.\11, R: 8); that the holder 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 respective interests in the Loan”

(par. 12, R. 8); and that neither, party made any

“warranty”? of the loan or assumed any liability to |

the other “‘for any loss, not due to its own gross |

_ negligence, but such loss, shall be borne ratably by

SBA and Bank in accordance with their —. |

interests in the Loan’”’ (par. 14, R, 9).

Pursuant to that agreement, the Bank promptly

made demand on the 8.B.A. to purchase a 75% par-

ticipation in the $20,000 loan, the S.B.A.. paid the |

Bank $15,000, and the Bank executed and delivered to

the S.B.A. the required participation certificate recit-

ing that the S.B.A. “has purchased from Bank a par-

“31

ticipation of 75% of” the loan pursuant to the partici- .

“pation agreement (see Statement, su pra, ‘p. 6). |

From the terms of the participation agreement gov-

erning the purchase and its consequences, it is evident

that what the S.B.A. “purchased”’ for its $15,000 was

neither more nor. less than an- undivided ownership’

thereby. becoming tenants-in-common of the debt. ‘All

rights and liabilities of the parties thereafter were to

be determined strictiy “in accordance with their -re-

spective interests in the Loan’ and any independent

| warranties or other liabilities from one to the other

were expressly disavowed. The only rights that

either party thereafter possessed were the rights aris-

ing out of its ownership of an interest in the loan—

namely, to have the other party account to it, in ac-

cordance with its interest, for any proceeds of the

loan.” The participation agreement, indeed, seems to

have done no more than to make express the usual

’ ‘While it seems.to us unimportant, it may also be noted that

the bankrupt was fully aware of the S.B.A.’s proposed par-

ticipation in the loan from the outset. The loan application.

itself was made on an S.B.A. form and was, indeed, directed

' primarily to the. $.B.A. (R. 15-24). So also, although it seems

to us irrelevant whether the S.B.A.’s participation was pur-

chased before or after disbursement of the loan, it may —

le noted that the participation agreement contemplated the

5.B.A.’s immediate purchase of a 75% participation and that

the loan was in fact not disbursed until after demand had been

made on the S.B.A. and the S.B.A. had forwarded its check -

: (though the check was not to be negotiated until the loan was

actually disbursed) (see Statement, supra, pp. 3-6).

incidents of ownership that would arise upon the as-

signment by one party of an undivided interest in a

debt to another. And, since the Bank undertook no

independent obligations to the 8.B.A., it is difficult to

‘gee what the S.B.A. did acquire if it was not an

ownership interest in the debt. |

We are unable to understand, then, how it can be

said that the 8.B.A. was not, after its purchase, the

‘owner’? of 75% of the debt.” It is true that the

parties agreed that the Bank should hold the note

and collect the payments unless and until the 8.B.A. |

- requested transfer of the note to it. That, however,

. was not at all inconsistent with joint ownership, and

the effect was simply to make the Bank the collection

agent for the tenants-in-common until the S.B.A.

-should direct otherwise.. Obviously the ownership

rights obtained by an assignee of a claim are unaf-

_ fected by his designation (here, in fact, a revocable

designation) of the assignor as the collecting agent.

See, e.g., Hawley. Down-Draft Furnace Co., 238 Fed.

122 (C.A. 3); Cogan v. Conover Mfg. Co., 69 N.J.

Eq. 809, 64 Atl. 973; 4 Corbin, Contracts, p. 522. Cf.

Rohr Aircraft Corp. v. County of San Diego, 362 U.S.

ee 7 Je

' 15See In re Westover, Inc., 82 °F. 2d 177 (C.A. 2); Jn re.

Prudence Bonds Corp. 79 -F’ 2d 212 (C.A. 2); Delatour v.

Prudence Realization Corp:, 167 F. 2d 621 (C.A. 2); In re

Prudence Co., 89. F. 2d 689 (C.A. 2), holding that. the hold-

ers of participation certificates issued by a mortgagee evidenc- |

ing participating interests in the mortgage and bond are credi- —

tors of the mortgagor, not of the mortgagee,. so that their

rights are not affected by the bankruptcy of the mortgagee.

See also 108 Pa. L. Rev. 909, 913 (1960), commenting on

this case. . : mat

)

Moreover, since, Upon requesting transfer of the

note to it, the S.B.A. was required to give the Bank

"Ce rtificate of Interest’? evidenci ‘ing its retained in-

terest in the debt and thereafter account to the. Bank

: -in the same way the Bank had accounted to-it, it is

_ clear that the transfer .of the note itself had no effect

upon the respective interests in the debtand amounted _

to no more than a mere transfer of possession and of

the duty to act as the servicing agent. Clearly, there-

fore, the assignment to the. S.B. A. of a 75% initerest *

in the debt occurred, if it occurred at all, when it

purchased that interest, evidenced by the participa-

tion certificate, and. not when, after -bankruptey, the

hote was formally transferred to’it. The note was

simply the evidence of the whole debt which the Bank

' and the S.B.A. owned ‘in-common and was to be held

by ene party or the other as suited their conveniencé,

the possession of the note having no effect-on their

underlying interests.

Whether or not the’S. B.A, otal lie: maintained .

a suit on the debt in its own name without first ob-

taining possession of. the note—apparently thought

erucial by the district court (R. 42)—seems to us

irrelevant. The right to priority under R.8. § 3466

turns, not on the agency through whom collections are

made, but solely on the beneficial ownership of the

debt—a proposition, which — respondent would have

been the first to endorse had the note been transferred -

to the-S.B.A. before bankruptcy and the S.B.A. were

hereeclaiming priority for the Bank’s interest in the

debt as well as its own. See Nathanson v..NLRB,

344 U.S, 25; United States v. Remund, 330 U S. 539,

542.° In any event, since the S.B.A. had the right

at any time to require the Bank to transfer the note

_ to it on five days’ notice, there was in fact no possible

obstacle to the S.B.A.’s enforeing the debt at any time

it chose. —

2. The district court’s decision is in no way sup-

. ported by United States v. Marzen, 307 U.S. 200, upon

which it reties. In. that case, the Federal Housing

Administration had insured a loan on which the bor-

rower defaulted prior to bankruptcy, thereby precipi-

tating the F.H.A.’s obligation to make payment of its

guaranty. The guaranty was not in fact paid, how-

ever, until after bankruptcy. This Court held that

the F.H.A. had not become subrogated to the bank’s

claim against the bankrupt until actual payment of

the: guaranty, and hence that there was no existing

- debt due the F.H.A. from the bankrupt at the date

of bankruptcy. That decision, it seems to us, is of

no help to respondent here since the S.B.A. had in

fact made payment and received an ownership inter-

est in the debt long before bankruptcy. ,

Mor? in point is the decision-of -the-Tenth Circuit —

in Reconstruction Finance Corp. v. Riverview State

1¢ See also Price v. United States, 269 U.S. 492, 500 (“[The

purpose of R.S. § 3466] is not to be defeated hy unnecessarily

restricting the application of the word ‘debts’ within @ narrow

- or technical meaning.”); Lewis v. United States, 92 US. 618,

621 (“A valid indebtedness is as effectual in one form as

another. No discrimination is made by the statute.”) ; Beaston

- y. Farmers’ Bank, 12 Pet. 1%, 134 (“All debtors to the United

States, whatever their character, and by whatever mode bound,

may be fairly included within the [statutory] language”).

| fo Sa

Bank, 217 F. 2d 455, which invotved-an immediate )

participation agreement entered into by the R.F.C..

almost identical to’ that involved here. The court

_—held there that the ownership interest of the R.F.C.

came into existence, for bankruptcy purposes,. when

‘the R.F.C. became legally committed to buy an im- —

mediate participation in the loan, éven though. actual -

payment was hot. made until after bankruptey: This

case is, of course, a fortiori to that, since both actual

. payment and delivery of the participation certificate

took place before bankruptcy.

DEBTS DUE THE 8.B,A. ARE “DEBTS DUE TO THE UNITED

STATES’ WITHIN THE MEANING OF B.S. § 3466

Although the referee held that the S.B. A. was not

e “United States’? within the meaning of RS. -

oie (R. 35), that argument (though not reached

by the court of appeals) was fully answered by the -

district court (R. 40-42) and need be only briefly

considered here.

It-is now firmly- established that a non- ‘incorporated

agency. of the ‘United States. must be regarded as the:

‘United States for the’ purposes of R.S. § 3466. See

United States v. Remund, 330 U.S. 539; United States

v. Emory, 314 U.S. 423; and Senn’ v. Federal

Housing Administrator, 113 F. 2d. 743 (C.A.D.C.),

holding that the Farm Credit Administration and the

Federal Housing Administration were entitled to the

priorities . of the United States. Cf. United States

v. M saul 356 U.S. 595, 598. Structurally, the

S.B.A., like those agencies, is a non-incorporated fed-.

eral agency created by Congress. 67 Stat. 233, as }

aménded, 15 U.S.C. 633. The Administrator is ap-

pointed by the President with the advice and consent

of the Senate, and the ,powers of the agency are

vested in him. 15 U.S.C. 633(b). The agency is °

charged with the ‘administration and execution of

various small business programs, and the monies upon-

which those operations are based have their origin:

in Congressional appropriations. 15 U.S.C. 633(e). -

The S.B.A., in short, is as much an agency of’ the

‘United States as any other non-incorporated execu-

tive agency. | ,

That. status is not altered by the fact that, the Ad-

ministrator’ in carrying out,- his statutory duties is

authorized in his official capacity to ‘sue and be sued

in any court of record of a State having general juris-_

"diction, or in any United States district court, * 7's

15 US.C. 634(b) (1). Corporate status, whatever dif-

ference that might make, was not conferred thereby.

- The sole effect of the “sue and be sued”’ provision was

to preclude the assertion of sovereign immunity in

suits against the agency, and, as a matter of con-

venience, to permit the ‘Administrator to appear in his

official capacity to press the claims of the agency. Cf.

Korman Vv. Federal Housing Administrator, 113 F. 2d

143. (C.A. D.C.) ; In re Wilson, 23. F. Supp. 236, 240

(N.D. Tex.).

Sega id aa

a —

- |

THE SMALL BUSINESS ACT NEITHER\ EXPRESSLY NOR IM-

_ PLIEDLY EXCEPTS LOANS MADE UNDER IT FROM THE |

PRIORITY GRANTED BY R.S. § 3466

There remains for consideration a final‘ contention

pressed by respondent throughout these proceedings,

but which none of the tribunals below has adopted and

the district court expressly rejected (R. 42)—namely,

. that even if R.S. § 3466 would in terms grant priority,

to the debt, the Small Business: Act should be con-

.. strued as excepting loans made under it from that

priority. ;

The conclusion of the district court that there is _

nothing in the Small .Business Act to indicate that

Congress intended the S.B.A: to be treated differently —

from other administrative agen¢ies which have been

accorded priority is fully supported. This Court has

repeatedly emphasized, in answer to similar argu-

ments, that “Only the plainest inconsistency would

warrant .our finding an implied exception to the opera-

. tion of-so clear a eommand-as that of § 3466.” United

States v. Emory, 314 U.S. 423, 433; United States v

Remund, 330 U.S. 539, 544-545; Illinois v: United

- States, $28 U.S. 8, 12; Massachusetts v. United States, —

333 U.S. 611, 634. Accordingly, only in the presence

of express language (Mellon v. Michigan Trust Co., °

271 U.S. 236) or of a basic inconsistency with the

avowed purpose of a particular statute (Cook County |

National Bank v. United States, 107 U.S. 445; United

States v. Guaranty Trust Co., 280 U.S. 478) a this

Court found a legislative intent to waive the priority

Rieti sin: i

conferred on the United States and its agencies by

R.S. § 3466. : |

There is of course nothing in the Small. Business

Act expressly denying priority to loans made under

it, and respondent’s argument must rest solely on its

assertion that affording priority on such loans would

be inconsistent with a claimed objective of the Small

Business Act to enhance the general credit standing

of small businesses, which credit would be impaired

by the anticipation that, in the event of insolvency,

the S.B.A.’s claim would be given priority. An

identical argument was made to this Court in United

States v. Emory, 314 U.S. 423, as a reason for not

granting priority to a loan made pursuant to the

National Housing Act.. The Court found no-evidence ,

of a specific purpose to build up the general credit

_ standing of the borrowers (Pp. 433), as distinguished

from the simple and direct purpose of providigg-the

funds needed for construction and thereby “to stimu-

late the building trades and to increase employment”’

(p. 430), and concluded (p. 431) :-

* Consequently, the argument against ‘the ap-

plication of § 3466 is reduced to this: Private

persons .in general are reluctant to extend

credit when they know that in the event ‘of the

borrower’s insolvency the claims of the United

States will receive priority, and. this circum-

stance is particularly undesirable in: times of

economic stress. In the first place, whatever

may be the merits of. the contention, it should

be addressed to Congress and not to this Court.

In the second place, the argument proves too

- nae 7

ET ad

_ aclaim of the United States; it is equally sound

-as applied % all claims as to which the United’

States asserts priority under § 3466,

The argument was again rejected in United States

_v. Remund, 330 U.S. 539, involving emergency feed

and crop loans made by the Farm Credit Administra-

tion. Although the loans were in fact givén to farm-

ers whose credit was impaired, their purpose, the

Court observed *(p. 543), was not to restore the farm-

ers’, credit status as such but simply to provide them

with the money needed ‘‘to purchase feed and to ‘plant

crops’? and which they were unable to obtain from —

other sources. Since giving priority to the loans

“could in no way impair the aid which the farmers

sought through these loans”’ (p. 544), the Court found

no such basic: inconsistency of purpose as would ‘be

necessary to find-an implied exception to R.S. § 3466.

Like the Federal Housing Act and the farm cred't

statutes, the Small Business Act is. primarily con-

cerned, not with building up the credit status of par-

ticular businesses as such (i.e., to make them attractive

as investments to other lenders), but simply to supply

the. funds immediately needed by ‘them for the con-

_ duet of their business and which are not avuilable ~

from other. sources—a purpose necessarily implicit in

the requirement that private sources of loans be -_

utilized to the extent they are available. That is, it

_Was the immediate financial needs of small businesses,

not the protection of their creditors, with which Con-

gress was concerned. And just as in Emory the ulti-

mate purpose was to bolster the national economy, so

the preamble of the Small Busines$ Act (15 S.C. »

. 40 ° |

“631 (a)) makes clear that that was the ultimate pur-

pose of granting economic aid to smal! businesses. In

short, we submit, giving priority to such loans in the

event of bankruptey in no way impairs the value of

. the loan’ ta a sma]] business needing. funds for its

immediate operations (here, as working capital)

which it cannot, otherwise obtain, and thus in no way

frustrates the purpose of the Small Business Act.

The essence of this Court’ s repeated” view that ex-

ceptions to R.S. § 3466 are toshe inferred only on a

showing of irreconcilable conflict between that statute

and another is that.the judgment whether. other pur-

poses will be so seriously impaired as to justify a

waiver of priority is one for Congress to make rather

than the courts. Congress, in turn, has been fully

aware of its responsibility and on occasion, when the

matter has been presented to it and it has found the

claims’ justified, has expressly waived the right of

priority. It did so, for example, by an amendment

to the Reconstruction Finance Corporation Act when,

_ after loans under it had been held entitled to priority,

it was found that giving priority to such loans was

unduly prejudicial to other crediters. Act.of May

25, 1948, 62 Stat. 261; see In re Temple, 174 F. 2d 145 |

(C.A. 7). That express waiver ef priority for loans

made by the R.F.C. is particularly significant here,

since the ve y Act that created the S.B.A- also pro-

‘vided for the liquidation of the R.F.C. Act- of July

IB> 1953, 67 Stat. 230. Had Congress, having’ ex-

pressly and only recently denied priority to the

_R.F.C., intended similarly to deny priority to. the "

S.B.A., it presumably would have said sO,

fe ———_

—

Finally, any doubt that Congress did not intend to

deny priority to loans under the Small Business Act:

is, we submit, removed by the legislative history of

the 1958 amendments to that’ Act. Act of July 18,

1958, 72 Stat. 384. One of the proposed amendments

considered in the Senate hearings was a proposal by

Senator Payne that vo’ debt due the 8.B.A. should be

entitled to the priority available to the United States

under R.S. § 3466. See S. 3319, 85th Cong., 2d Sess.

When. introducing that bill, Senator Payne indicated

that its purpose was to prevent claims of 8.B.A. from

"taking precedence over state and local tax debts. 104

Cong. Rec. 2470. While the S.B.A. agreed that it:

should not be entitled to such priority over state and

local ‘tax liens, it opposed S. 3319 because it believed

that the bill would prevent the S.B.A. from claiming:

priority even over non-governmental claims, as here.

See Hearing before the Subcommittee on Small Busi-

‘ness of the Senate Committee on Banking and Cur-

rency with respect to the Credit Needs of Small Busi-

ness, 85th Cong., 2d Sess., pt. 2, p. 553. ° In deference

to the views of the 8.B.A., an amenament was adopted

- Which provided only that any -interest.the S.B.A. held

as see urity for a loan, was to be subordinated to

state and local tax liens to the same extent that it

would be under state law if a private party held

that. inferest. 72 Stat. 396, 15 U.S.C. 646. Sig-

nificantly, the broad proposai to deny all prierity

to the S.B.A: was not adopted. Those actions dem-:

onstrate conctusively Congressional acceptance of the

administrative view. that the S.B.A. was entitled to

R. S. § 3466 priority under’ the Small Business Act as

passed in 1953., See S.’Rep. No, 1714, 85th Cong., |

2d Sess., p. 10." ‘Tees

| CONCLUSION

For the foregoing reasons, we respectfully - submit

that the judgment of the court of appeals should be

reversed.

J. Las RANKIN,

. Solicitor General. x

GrorcE CocHRAN Dovs,

Assistant Attorney General.

Morton HOLLANDER,

‘Mark R. JOELson,

Attorneys.

Avaust 1960. :

* See also 108 U. Pa. L. Rev. 909, 912 (1960).

U.S SGOVECRMENT PRINTine Offer ‘sec

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