BUTNER V. UNITED STATES 440 U.S. 48 (1979) CASE BRIEF

BUTNER V. UNITED STATES

440 U.S. 48 (1979)

NATURE OF THE CASE: Butner (P) appealed a reversal of a district court's decision where the Appeals court reinstated a disposition in which the bankruptcy court denied a second mortgagee's motion to have funds that bankruptcy trustee collected on the mortgaged property applied to the balance due on the second mortgage.

FACTS: Golden Enterprises, Inc. (Golden), filed a petition under Chapter XI. The bankruptcy judge approved a plan consolidating various liens on North Carolina real estate owned by Golden. P acquired a second mortgage securing an indebtedness of $360,000 but did not receive any express security interest in the rents earned by the property. The bankruptcy judge provided that the rent money should be applied to tax obligations, payments on the first mortgage, fire insurance premiums, and interest and principal on the second mortgage. The plan was never confirmed. Golden was adjudicated a bankrupt, and the trustee in bankruptcy was appointed. Both the first and second mortgages were in default. The trustee was ordered to collect and retain all rents to be subject to court order as to disposition. The properties were ultimately sold to P to P for $174,000. The estate's indebtedness to P was reduced from $360,000 to $186,000. The sum of $162,971.32 had been accumulated by the trustee on the collection of rents. P filed a motion claiming a security interest in this fund and seeking to have it applied to the balance of the second mortgage indebtedness. The court denied the motion in that the $186,000 balance due should be treated as a general unsecured claim. The District Court reversed. Under North Carolina law, a mortgagor is deemed the owner of the land subject to the mortgage and is entitled to rents and profits, even after default, so long as he retains possession. The court viewed the appointment of an agent to collect rents during the arrangement proceedings as tantamount to the appointment of a receiver. This satisfied the state-law requirement of a change of possession giving the mortgagee an interest in the rents; no further action after the adjudication in bankruptcy was required to secure or preserve this interest. The Court of Appeals reversed, reinstating the bankruptcy judge. It held that the bankruptcy had terminated the state-court receivership status arising out of the appointment of the agent to collect rents. Since P had made no request during bankruptcy for a sequestration of rents or for the appointment of a receiver, P had not taken the kind of action North Carolina law required to give a mortgagee a security interest in the rents collected after the bankruptcy adjudication. The Bankruptcy Act generally leaves the determination of property rights in the assets of a bankrupt's estate to state law. The law of the State where the property is located governs a mortgagee's right to rents during bankruptcy. A federal bankruptcy court should take whatever steps are necessary to ensure that a mortgagee is afforded in federal bankruptcy court the same protection he would have under state law had no bankruptcy ensued. P appealed.

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