461 F.2d 158 (D.C. Cir. 1971), 24116, In re Parkwood, Inc.

Docket Nº:24116-24118.
Citation:461 F.2d 158
Party Name:In re PARKWOOD, INC. v. EQUITABLE LIFE INSURANCE CO. In re PARKWOOD, INC. AMERICAN SECURITY AND TRUST CO., TRUSTEE IN REORGANIZATION OF PARKWOOD, INC., Appellant AMERICAN SECURITY AND TRUST CO., TRUSTEE IN REORGANIZATION OF PARKWOOD, INC., Appellant v. MANUFACTURERS LIFE INSURANCE CO. In re ADAMS PROPERTIES, INC. AMERICAN SECURITY AND TRUST CO., TR
Case Date:November 10, 1971
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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461 F.2d 158 (D.C. Cir. 1971)

In re PARKWOOD, INC.

AMERICAN SECURITY AND TRUST CO., TRUSTEE IN REORGANIZATION OF PARKWOOD, INC., Appellant

v.

EQUITABLE LIFE INSURANCE CO. In re PARKWOOD, INC.

AMERICAN SECURITY AND TRUST CO., TRUSTEE IN REORGANIZATION OF PARKWOOD, INC., Appellant

v.

MANUFACTURERS LIFE INSURANCE CO.

In re ADAMS PROPERTIES, INC.

AMERICAN SECURITY AND TRUST CO., TRUSTEE IN REORGANIZATION OF ADAMS PROPERTIES, INC., Appellant

v.

HARTFORD LIFE INSURANCE CO.

Nos. 24116-24118.

United States Court of Appeals, District of Columbia Circuit.

November 10, 1971.

Argued Feb. 1, 1971.

Rehearing En Banc Denied March 3, 1972.

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Mr. John S. Hoff, Washington, D. C., with whom Mr. Alexander B. Hawes, Washington, D. C., was on the brief, for appellant.

Mr. Benjamin W. Dulany, Washington, D. C., with whom Mr. Andrew T. Altmann, Washington, D. C., was on the brief, for appellee Equitable Life Insurance Company.

Mr. Jo V. Morgan, Jr., Washington, D. C., for appellee Manufacturers Life Insurance Company.

Mr. Daniel Webster Coon, Washington, D. C., with whom Mr. James P. Parker, Washington, D. C., was on the brief, for appellee Hartford Life Insurance Company.

Before BAZELON, Chief Judge, and WILKEY, Circuit Judge, and VAN PELT, [*] Senior United States District Judge for the District of Nebraska.

WILKEY, Circuit Judge.

American Security and Trust Company, as Trustee in Reorganization for Parkwood, Inc., and Adams Properties, Inc., appeals from a denial of its objections to and the allowance of the secured claims of the three appellees, first by the Referee in Bankruptcy and then by the United States District Court. For the reasons set forth herein we affirm the District Court's rulings as to appellee Manufacturers, reverse as to appellee Hartford, and remand for further proceedings as to appellee Equitable.

I. Procedural and Common Factual Background

In May and July 1966 petitions were filed in the District Court under Chapter X of the Bankruptcy Act for reorganization of Parkwood, Inc., and Adams Properties, Inc. (wholly owned subsidiary of Parkwood). In October 1966 Equitable Life Insurance Company filed a proof of claim as a secured creditor of Parkwood in the principal amount of $226, 654.10; Manufacturers Life Insurance Company did likewise in the principal amount of $562, 963.62; and Hartford Life Insurance Company filed as a secured creditor of Adams Properties, Inc., in the principal amount of $78, 803.31. All claims were evidenced by a note or notes and a deed of trust.

On 1 May 1968 the Trustee objected to all three claims. By order of 26 March 1969 the Referee in Bankruptcy denied the Trustee's objections and allowed all three claims.

On petition for review of this order, after hearing argument the District Court, by order of 4 February 1970, denied the Trustee's petition for review, ratified the order of the Referee, and confirmed and adopted the Referee's memorandum and his findings of fact and conclusions of law.

While there are important differences, the facts common to the three assertedly secured creditors are these. In each instance the original borrower obtained a loan from a corporation allegedly engaged in the business of lending money in the District of Columbia, executing a note or notes therefor and securing the indebtedness by a deed of trust on property located in the State of Maryland. Each original note bore interest in excess of 6%, thus running afoul of the District of Columbia Loan Shark Law, 1 if such law applies to the transaction. Thereafter, in the instance of Equitable, the original debtor sold the property to Parkwood, which took the property subject to

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the deed of trust but did not assume the note. In the instance of Manufacturers, the original loan was made by Manufacturers through a mortgage loan correspondent in the District of Columbia, and thereafter the original debtor sold the property to Parkwood, who took the property subject to the deeds of trust but did not assume the two notes. In the instance of Hartford, the original debtor sold the property to Adams, who likewise took the property subject to the deed of trust but did not assume the note.

The issues involve principally the standing of the Trustee to attack the validity of the deeds of trust held by the secured claimants; the applicability of § 601 of the District of Columbia Loan Shark Law to loans by insurance companies; whether the real estate brokermortgage banker, the original maker of the loan held by Hartford, is exempt under § 610 of that law; and, even if the above issues be decided in favor of the Trustee, whether certain facts peculiar to each individual claim would enable the secured claimant to maintain its position.

II. Standing of the Trustee to Attack the Validity of the Deeds of Trust

Of all the complex legal issues we have to determine in this case, perhaps this is the simplest to resolve. It will aid in clarity of analysis to keep in mind these facts: that the Trustee here is not acting on behalf of Parkwood and Adams, the debtor corporations, but on behalf of all creditors, particularly the unsecured creditors; that none of the notes secured by the deeds of trust was assumed by either Parkwood or Adams, and therefore the claims against the bankrupt estate rest entirely and only on the deeds of trust covering the particular pieces of realty involved. Two of the principal grounds relied upon by the Referee, and approved by the District Court, were that the Trustee was "estopped" from attacking the validity of the deeds of trust and therefore could not set them aside by asserting rights under §§ 70(c) and (e) of the Bankruptcy Act, and that somehow it was inequitable or would be a windfall to Parkwood and Adams to have these deeds of trust set aside. We think these two bases of decision by the Referee and the District Court were unsound.

In the first instance, what is equitable in a bankruptcy proceeding-and bankruptcy is part of the equity jurisdiction of the District Court-has been rather specifically spelled out in the Bankruptcy Act itself. In the second place, those provisions equally specifically give the Trustee here a right to set aside invalid deeds of trust.

Under § 70(c) of the Bankruptcy Act 2 the trustee possesses the rights of any hypothetical lien creditor of the debtor. The trustee's rights do not depend on the existence of any such creditor, but it has the status of "the ideal creditor, irreproachable and without notice, armed cap-a-pie with every right and power which is conferred by the law of the state upon its most favorite creditor who has acquired a lien by legal or equitable proceedings." 3

It follows that in the exercise of such rights the trustee cannot be affected by any so-called estoppel which may be attributable to the debtor. The whole purpose of § 70(c) was to give the trustee defenses which the trustee might otherwise

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not have if he were confined to the position of the bankrupt, who may very frequently have engaged in various acts which would estop him to deny the validity of his security obligations. The bankrupt may have engaged in chicanery or favoritism of certain creditors or other acts that "are in derogation of the Bankruptcy Act's paramount purpose: equality of distribution among all creditors. . . . The trustee would be sorely handicapped if he were not accorded some superior status, attaching as of the date of bankruptcy, that would enable him to challenge the validity of such transactions. This, then, is the purpose of the second sentence of § 70(c). It has been justly and characteristically termed 'the strong-arm clause."' 4

As of the date the petition for reorganization was filed the Trustee here gained the rights and powers of a lien creditor who had perfected his lien on the property of the debtor, irrespective of whether such a creditor actually exists, so says § 70(c). Among other powers of a lien creditor is the right to set aside an invalid deed of trust on the property. 5

In addition to the trustee's rights under § 70(c), which apply versus all three mortgagees here, under § 70(e) 6 of the Bankruptcy Act the trustee can assert the rights of any existing creditor who could move to set aside the deed of trust held by Equitable. In contrast to § 70 (c), § 70(e) requires the existence of a real creditor having that power. Potomac Cooperators, Inc., holds a second deed of trust on the same property on which Equitable holds a first deed of trust, and has filed proof of claim in the bankruptcy proceeding as a secured creditor. The Trustee himself, for the same reason that Potomac Cooperators could move to set aside the allegedly invalid deed of trust held by Equitable, moved to void the deed of trust under § 70(e). Furthermore, the directive in § 47(a) (8) of the Bankruptcy Act 7 to "examine all proofs of claim and object to the allowance of such claims as may be improper" requires the trustee to object to all invalid security instruments. In so doing, the trustee is acting for the benefit of all creditors and not, as the Referee and the court seemed to think, to create a "windfall" for the reorganized corporations whose affairs are being administered. 8

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We conclude that the Trustee had standing to attack the validity of the deeds of trust held by the claimant insurance companies under§§ 70(c) and 70(e) of the Bankruptcy Act, and that the District Court erred in holding to the contrary.

III. The Applicability of the District of Columbia Loan Shark Act to Loans Made by Insurance Companies

Section 26-601 of the District of Columbia...

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