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In re Thornhill Way I

UNITED STATES COURT OF APPEALS, SEVENTH CIRCUIT


decided: December 29, 1980.

IN THE MATTER OF: THORNHILL WAY I, DEBTOR-APPELLANT

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 77 B 3676 -- Joel M. Flaum, Judge.

Before Fairchild, Chief Judge, and Sprecher and Bauer, Circuit Judges.

Author: Sprecher

This appeal from the dismissal of a Chapter XII bankruptcy proceeding raises the question of whether Section 517 of the Bankruptcy Act, 11 U.S.C. § 917, requires dismissal because the only real property owned by the debtor is subject to a mortgage insured pursuant to the National Housing Act, 12 U.S.C. § 1701 et seq., which mortgage is now held by the Secretary of Housing and Urban Development.

I

The debtor is an Illinois general partnership which is the "owner" of a 285-unit apartment complex with recreational facilities, located in Carol Stream, Illinois.*fn1 The property was encumbered on February 1, 1971 with a mortgage in the amount of $4,023,500, held by Draper and Kramer, Inc., which mortgage was assigned on September 14, 1973, to the American Federation of Labor and Congress of Industrial Organizations Mortgage Investment Trust (Mortgage Investment Trust). From the time of its execution, the mortgage was insured pursuant to the National Housing Act. The debtor defaulted in making the mortgage payments.

On February 3, 1975, the Mortgage Investment Trust assigned to the Secretary of Housing and Urban Development (HUD) "all rights and interest arising under the mortgage and credit instrument so in default, and all claims against the mortgagor, or others, arising out of the mortgage transaction." The insurance benefits were paid to the Mortgage Investment Trust in accordance with 12 U.S.C. § 1713(g).*fn2

On June 8, 1976, the United States, on behalf of HUD, commenced an action in the district court to foreclose the mortgage. On February 10, 1977, the United States through the Secretary of HUD, was placed in possession of the real estate.

On May 16, 1977, the debtor filed its Chapter XII Petition for a Real Property Arrangement. On January 19, 1978, the bankruptcy court dismissed the petition and proceeding on the basis of Section 517 of the Bankruptcy Act, upon finding that the United States, through HUD, "is the only secured creditor holding a security interest in the real estate which is the subject matter of the Chapter XII petition ...."

The debtor appealed to the district court which on December 19, 1979, affirmed the bankruptcy court on the basis of Section 517. The debtor then appealed to this court, arguing that Section 517 does not apply.

II

A

Section 517 of the Bankruptcy Act*fn3 provides that "(n)othing contained in this chapter (Chapter XII, Real Property Arrangements) shall be deemed to affect or apply to the creditors of any debtor under a mortgage insured pursuant to the National Housing Act and Acts amendatory thereof and supplementary thereto ...."

HUD is a creditor of the debtor in this Chapter XII proceeding.*fn4 "Creditors" under Chapter XII means "holders of claims," and "claims" includes "all claims of whatever character, against a debtor or his property, whether or not such claims are provable ... and whether secured or unsecured, liquidated or unliquidated, fixed or contingent." 11 U.S.C. § 806(2) and (5). A mortgage is a claim against a debtor or his property*fn5 and the insurer of a mortgage has a fixed or contingent claim from the time of the assumption of the obligation to insure. American Surety Co. v. Marotta, 287 U.S. 513, 518, 52 S. Ct. 260, 262, 77 L. Ed. 466 (1933).

On February 1, 1971, the mortgage was insured pursuant to the National Housing Act. The same mortgage and the underlying credit instrument are now held by HUD through assignment. Thus, HUD falls within the exemptive language of Section 517 by qualifying as the creditor of a debtor under a mortgage insured pursuant to the National Housing Act.

If HUD were not exempt, a Chapter XII petition would not be subject to dismissal and HUD's foreclosure proceeding would be stayed.*fn6 The debtor has argued that once the private mortgagee has been paid by HUD, the mortgage is no longer insured and Section 517 no longer applies. This argument ignores the fact that the private mortgagee assigned all rights and interest arising under an insured mortgage to HUD.*fn7 The argument is almost tantamount to an argument that since the private mortgagee has been paid, the mortgage has been satisfied and the mortgagor should be released from its obligations. Here the debtor does not actually seek a release from the mortgage obligations, which of course would be absurd, but does seek a stay of the mortgage obligations, which Section 517, as we interpret it, prevents.

If Congress intended to limit Section 517 to private holders of insured mortgages it could have done so in many ways. Whereas the first clause of Section 517 refers broadly to creditors under an insured mortgage, the second clause*fn8 applies only to an obligation held by specific entities. Congress did not elect to limit the first clause to private holders of insured mortgages. Also the first clause is not limited by its terms to the time period "while such insurance on the mortgage remains outstanding," as Congress carefully limited another section of the National Housing Act 12 U.S.C. § 1731b(a). See, Rodeway Inns of America, Inc. v. Frank, 541 F.2d 759 (8th Cir. 1976), cert. denied, 430 U.S. 945, 97 S. Ct. 1580, 51 L. Ed. 2d 792 (1977).

Furthermore, a paragraph within the same section under which HUD paid the insurance proceeds and took assignment of the mortgage clearly refers to a mortgage after payment and assignment as a "mortgage insured" and an "insured mortgage."*fn9

The plain language of the statute supports the position that Section 517 applies to the United States and HUD.*fn10

B

The debtor, relying upon legislative history, has argued that the primary purpose of the National Housing Act "was to provide housing for the American people through private investment and to encourage private investors, especially insurance companies, to finance such housing." Appellant's Brief, p. 12 (emphasis in original). The debtor has then contended that the legislative history of Section 77B(n), the predecessor to Section 517, indicates that the Congressional purpose was to protect private lenders only.

The only support given for this conclusion is the statement before the Senate Judiciary Committee of Abner H. Ferguson, the Assistant General Counsel of the Federal Housing Administration, the predecessor of HUD, wherein he simply refers to the fact that in 1935 the financing of low-cost housing could only be expected to come from large life insurance companies, and that they were unwilling to do so as long as the debtors could enjoin foreclosure by seeking Section 77B bankruptcy relief.*fn11 Although this may reveal an interest in protecting private mortgagees, it has no direct bearing on the question of whether the United States should be excluded from the same protection when it becomes the mortgagee by assignment. In fact, in the absence of contrary expression, it may be presumed that Mr. Ferguson, as a government representative, had no intent to exclude the government from that protection.

Much more pertinent is Mr. Ferguson's prefatory statement that the "purpose of this amendment is to take from within the operation and effect of the (bankruptcy) act the securities and the holders of securities ...." He went on to explain the "reasons we have for feeling that these securities should not be under Section 77B ...."*fn12 The clear intent was to exempt the "securities" and the "holders of securities," not only private holders of those securities. In this case the same security was involved when it was held by Draper & Kramer, Inc., by the Mortgage Investment Trust, and by HUD.

Finally, on the question of Congressional policy, although private lenders as well as any holders of insured mortgages are beneficiaries, and perhaps the prime beneficiaries, of many provisions of the National Housing Act, the occupants of the housing so provided are also beneficiaries.*fn13 Delaying foreclosure through bankruptcy petitions often delays occupancy or adds burdens of uncertainty to occupants. An interpretation of Section 517 which includes HUD as a "creditor ... under a mortgage insured pursuant to the National Housing Act" furthers the policies of the National Housing Act. In United States v. View Crest Garden Apts., Inc., 268 F.2d 380, 383 (9th Cir. 1959), cert. denied, 361 U.S. 884, 80 S. Ct. 156, 4 L. Ed. 2d 120 (1959), the court said:*fn14

A different set of factors come into play when the planning stage and the working stages of the agreement have been terminated. After a default the sole situation presented is one of remedies. Commercial convenience in utilizing local forms and recording devices familiar to the community is no longer a significant factor. Now the federal policy to protect the treasury and to promote the security of federal investment which in turn promotes the prime purpose of the Act to facilitate the building of homes by the use of federal credit becomes predominant.

In regard to these policy considerations, the court in United States v. Bristol Hills Apartments, 461 F. Supp. 1179, 1181 (E.D.Mich.1978), in holding that Section 517 includes HUD, said:

Not only is this the most reasonable way to read the section concerned, but it is also a good rule. If the law were otherwise, a private mortgagee would have the power, by either assigning or refusing to assign its rights under the mortgage to the government, to determine whether the benefits of Chapter 12 will be available to the mortgagor. What would undoubtedly happen if this were the law is that the government would make sure not to accept assignments until foreclosure proceedings had already been effectuated. This would force some investors to hesitate to finance needed projects for fear of being a party to foreclosure proceedings because the government would not let them out by accepting an assignment.

C

The debtor has argued that Section 517 is totally inconsistent with Section 455 of the Bankruptcy Act, 11 U.S.C. § 855,*fn15 which manifests a Congressional intent to make all claims of the United States subject to Chapter XII. Section 455 provides that "(i)f the United States is a secured or unsecured creditor of a debtor, the claim thereof shall be deemed to be affected by an arrangement under this chapter (XII) ...."

Where there are two provisions in a statute, one of which is general and designed to apply to cases generally, and the other is particular and relates to only one case or subject within the scope of the general provision, then the particular provision must prevail; and if both cannot apply, the particular provision will be treated as an exception to the general provision.

In D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208, 52 S. Ct. 322, 323, 76 L. Ed. 704 (1932), the Supreme Court said:

General language of a statutory provision, although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment. United States v. Chase, 135 U.S. 255, 260 (10 S. Ct. 756, 757, 34 L. Ed. 117). Specific terms prevail over the general in the same or another statute which otherwise might be controlling. Kepner v. United States, 195 U.S. 100, 125 (24 S. Ct. 797, 802, 49 L. Ed. 114). In re Hassenbusch (C.C.A.) 108 Fed. (35) 38, United States v. Peters, (D.C.) 166 Fed. 613, 615. The construction contended for would violate the cardinal rule that, if possible, effect shall be given to every clause and part of a statute. Market Co. v. Hoffman, 101 U.S. 112, 115 (25 L. Ed. 782). Ex Parte Public National Bank, 278 U.S. 101, 104 (49 S. Ct. 43, 44, 73 L. Ed. 202).

In Monte Vista Lodge v. Guardian Life Ins. Co., 384 F.2d 126 (9th Cir. 1967), cert. denied, 390 U.S. 950, 88 S. Ct. 1041, 19 L. Ed. 2d 1142 (1968), the Court was asked to apply general provisions of Chapter X (corporate reorganizations) as against Section 263*fn16 of the Bankruptcy Act, which is virtually identical to Section 517. In upholding the application of Section 263, the Court noted that "fundamental maxims of statutory construction require that a specific section be found to qualify a general section." 384 F.2d at 129.

There is no substance to the debtor's argument. It is clear that Section 517 applies despite the presence of Section 455.

III

Inasmuch as a Chapter XII arrangement means "any plan which has for its primary purpose the alteration or modification of the rights of creditors ... holding debts secured by real property ... of which the debtor is the ... owner," 11 U.S.C. § 806(1), and inasmuch as HUD, which we hold exempt under Section 517, is the only creditor holding a security interest in the real estate owned by the debtor, we affirm the judgment of dismissal from which the debtor appeals.*fn17


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