Butner v. United States, 440 U.S. 48 (1979)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Syllabus

In Chapter XI arrangement proceedings under the Bankruptcy Act, petitioner acquired a second mortgage on certain North Carolina real estate to secure a $360,000 indebtedness but received no express security interest in the rents earned by the property. The bankruptcy judge thereafter appointed an agent to collect the rents and apply them to the payment of taxes, insurance, interest, and principal payments due on the first and second mortgages. The mortgagor was later adjudicated a bankrupt, at which time the first and second mortgages were in default, and the trustee was ordered to collect and retain all rents. The bankrupt’s properties were ultimately sold to petitioner for $174,000, that price being paid by reduction of the estate’s indebtedness to petitioner from $360,000 to $186,000. At the sale date, the trustee had accumulated almost $163,000 in rents which petitioner unsuccessfully sought to have applied to the balance of the second mortgage indebtedness, the bankruptcy judge ruling that the $186,000 balance due petitioner should be treated as a general unsecured claim. The District Court reversed. Though recognizing that, under North Carolina law, a mortgagor is deemed the owner of the land subject to the mortgage, and, during his possession, is entitled to rents and profits, even after default, the court viewed the agent’s appointment during the arrangement proceedings as tantamount to the appointment of a receiver, which satisfied the state law requirement of a change of possession, giving the mortgagee an interest in the rents which no further action after the bankruptcy adjudication was required to preserve. The Court of Appeals reversed, reinstating the disposition of the bankruptcy judge. The appellate court held that the bankruptcy adjudication had terminated the state court receivership status arising out of the appointment of the agent to collect rents, and that, because petitioner had made no request during the bankruptcy for a sequestration of rents or for the appointment of a receiver, petitioner 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.

Held: Apart from certain special provisions, 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 accordingly governs a mortgagee’s right to rents during bankruptcy, and a federal bankruptcy court should take whatever steps are necessary to ensure that a mortgagee is afforded in federal ankruptcy court the same protection he would have under state law had no bankruptcy ensued. Though the general plinciple of the applicability of state law to determine property rights in a bankrupt’s assets was applied by both the District Court and the Court of Appeals (and those courts properly did not follow the minority federal quity rule under which a mortgagee is accorded a secured interest in rent even if state law would not recognize any such interest until after foreclosure), those courts disagreed about the requirements of North Carolina law. Hwever, that state law issue, as such, will not be reviewed by this Court. Pp. 51-58.

566 F.2d 1207, affirmed.

STEVENS, J., delivered the opnion for a unanimous Court.