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.
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.
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.
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 ...