HB Agsten & Sons, Inc. v. Huntington Trust & Savings Bank

• Decision Date: 04 December 1967
• Docket Number: No. 11028.,11028.
• Citation: 388 F.2d 156
• Parties: H. B. AGSTEN & SONS, INC., a corporation, Appellee, v. HUNTINGTON TRUST & SAVINGS BANK, a corporation, Appellant, and Bernard L. Boutin, Administrator, Small Business Administration, and Odus R. Kincaid and Delbert E. Williams, Trustees, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

388 F.2d 156 (1967)

H. B. AGSTEN & SONS, INC., a corporation, Appellee, v. HUNTINGTON TRUST & SAVINGS BANK, a corporation, Appellant, and Bernard L. Boutin, Administrator, Small Business Administration, and Odus R. Kincaid and Delbert E. Williams, Trustees, Appellees.

No. 11028.

United States Court of Appeals Fourth Circuit.

Argued April 6, 1967.

Decided December 4, 1967.

Certiorari Denied April 22, 1968.

Selden S. McNeer, Jr., Huntington, W. Va. (Campbell, McNeer, Woods, Bagley & Emerson, Huntington, W. Va., on brief) for appellant.

Howard R. Klostermeyer, Charleston, W.Va. (William B. Maxwell, III, and Spilman, Thomas, Battle & Klostermeyer, Charleston, W. Va., on brief) for appellee H. B. Agsten & Sons, Inc., and John C. Eldridge, Atty., Dept. of Justice (Barefoot Sanders, Asst. Atty. Gen., Morton Hollander and Robert C. McDearmid, Attys., Dept. of Justice, and Milton J. Ferguson, U. S. Atty., on brief) for Administrator and Trustees of Small Business Administration.

Before HAYNSWORTH, Chief Judge, and SOBELOFF and BRYAN, Circuit Judges, and with the consent of the parties submitted to the Court en banc.

Certiorari Denied April 22, 1968. See 88 S.Ct. 1413.

SOBELOFF, Circuit Judge:

With the facts undisputed, the only issue for our determination in this circuity of lien priorities case is the proper distribution of the proceeds from a judicial sale of property.¹ We think that the District Court's disposition satisfactorily accommodates the competing interests of state and federal law and the opposing claims of the three litigants — a mechanic's lienor, a mortgagee bank and the Small Business Administration. Accordingly, we affirm the court's decision to give priority to the bank and the remainder to the SBA, while requiring the bank to satisfy the mechanic's lien in full from its recovery.

On June 1, 1964, plaintiff H. B. Agsten & Son, Inc. began construction of a motel for the West Virginia Industries Development Corporation on a 31-acre tract of land owned by the developer in Mason County, West Virginia. Almost four months thereafter, on September 22, 1964, to help finance the venture, West Virginia Industries borrowed from the Huntington Trust & Savings Bank $400,000.00, secured by a recorded deed of trust conveying the tract to the Bank's trustees. Finding itself in need of more capital one month later, West Virginia Industries executed and on October 30, 1964, recorded a second deed of trust conveying the same property to secure a loan of $1,042,500.00 from the Small Business Administration. This agreement provided:

"This Deed of Trust and warranty of title herein are made subject to and subordinate to a prior deed of trust executed by the grantor herein to secure a loan in the amount of $400,000.00 over the premises herein conveyed, and now of record in the office of the Clerk of the County Court of Mason County, West Virginia."

There can be no doubt, as the Special Master to whom the District Court referred this case found, that this language alluded to the Bank's earlier loan to West Virginia Industries.

After substantially completing the motel in June, 1965, Agsten timely recorded a notice of mechanic's lien in the county clerk's office for $217,098.33, the balance admittedly due the contractor. With its debtor insolvent, Agsten instituted this action in a state court of West Virginia, seeking a determination of the validity and priority of outstanding liens against the property of West Virginia Industries, and requesting a sale to satisfy these liens. SBA, a named defendant, had the case removed to the Federal District Court.

The circuity of lien priorities arises because of an apparent conflict between certain federal and state statutes, whose applicability in this case is undisputed. The Federal Insolvency Statute, 31 U.S.C. § 191, provides:

"Whenever any person indebted to the United States is insolvent * * *, the debts due to the United States shall be first satisfied; and the priority established shall extend * * * to cases in which an act of bankruptcy is committed."

Since the parties do not contest the Special Master's finding that West Virginia Industries was insolvent and had committed the requisite act of bankruptcy, it is clear that the claim of the SBA, a federal agency, is entitled to preference over Agsten's mechanic's lien, which was inchoate when the SBA loan was made. See Small Business Administration v. McClellan, 364 U.S. 446, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960); W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881 (4th Cir. 1963). The Bank, however, enjoys a priority over SBA both because of the explicit language in SBA's deed of trust and because of a judicially-created exception to the insolvency statute in favor of previously executed mortgages. See United States v. State of Texas, 314 U.S. 480, 484, 62 S.Ct. 350, 86 L.Ed. 356 (1941). To complete the circle, Agsten has a claim superior to the Bank's by virtue of the laws of West Virginia.² The resulting paradox is that the Bank is behind the contractor and ahead of the SBA, which is in turn ahead of the contractor.

In resolving this problem, we follow what has been correctly termed the "federal policy"³ in this area. We start with the basic proposition that federal law determines the relative priority of conflicting claims where a federal agency is involved. United States v. Clover Spinning Mills Co., 373 F.2d 274, 276 (4th Cir. 1966). It is by applying federal law that we have determined that SBA's claim is superior to Agsten's but inferior to the Bank's. Federal law demands only that after the payment of the $400,000.00 to which the SBA is subordinated, this federal agency should be recompensed for its loan to the extent possible. At this point, the interest of the federal government terminates, and the ultimate disposition of the $400,000.00 is purely a matter of state concern. United States v. City of New Britain, 347 U.S. 81, 88, 74 S.Ct. 367, 98 L.Ed. 520 (1954). In our case, the State of West Virginia has determined by its statutes that the contractor is to be paid in full before the mortgagee's claim is satisfied.

New Britain is precisely in point here. Applying federal law, the Supreme Court found that certain liens of the United States were superior to a number of municipal liens but inferior to outstanding mortgage and judgment liens. However, under the relevant state law, the mortgage and judgment liens were inferior to the municipal liens. In reversing a disposition similar to one of those contended for by the appellant here, the Court declared:

"The United States is not interested in whether the State receives its taxes and water rents prior to mortgages and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien. (Emphasis added.)

On remand, the state court set aside the amount of the mortgage and judgment liens, ordered the remainder paid to the federal government, and directed payment of the municipal liens from the funds appropriated to the mortgage and judgment liens. Brown v. General Laundry Service, 19 Conn.Supp. 335, 113 A.2d 601 (1955). This is the very method employed by the District Court in the instant case and by a consistent line of federal authorities. See, e. g., In Re Lieb Bros., Inc., 251 F.2d 305 (3rd Cir. 1957); Exchange Bank & Trust Co. v. Tubbs Manufacturing Co., 246 F.2d 141 (5th Cir. 1957); United States v. Lord, 155 F.Supp. 105 (D.N.H.1957). See also Samms v. Chicago Title & Trust Co., 349 Ill.App. 413, 111 N.E.2d 172, 176 (1953). The fact that the lien in New Britain arose under the federal tax laws while in this case the priority emanates from a contractual obligation, is not a legally significant distinction in resolving the issue before us. Although, as we shall show, the substantive scope of the federal tax laws differs from that of the Federal Insolvency Statute, the technique to be utilized in reconciling the divergent interests, once they have been determined, should be the same.

The result we reach here is justified not only by precedent but also by sound policy considerations. Agsten began improving the land in June, 1964, secure in the knowledge that state law accorded it a priority over any subsequent local mortgage. When the bank advanced money to West Virginia Industries nearly four months later, it must be presumed to have been well aware that its repayment would be subordinated to the prior mechanic's lien. The fortuitous appearance of a federal agency one month later should not inure to the Bank's benefit by depriving the contractor of its $217,000. Similarly, it is proper that SBA be paid all of the excess over $400,000, the specific amount by which the law and its agreement purported to subordinate its claim. If the SBA were subordinated not only to previously executed mortgages but also to inchoate mechanic's liens, there is a possibility it would refuse to make such loans, thereby diminishing the effectiveness of the Small Business Act, 15 U.S.C. §§ 631-651. And had the SBA declined to make its million dollar loan, the Bank might on insolvency of the landowner recover less because, as no federal law would be involved, Agsten would come ahead of the Bank in the distribution of a fund not enhanced by the massive federal investment.

Neither of the Bank's suggested alternative solutions achieves a similarly desirable reconciliation of the respective interests. The Bank first posits a theory whereby $217,000 is awarded to Agsten, then the Bank is paid in full, and finally SBA is decreed the remainder. This alternative, which would emasculate the Federal Insolvency Statute, was specifically rejected by the Supreme Court in the New Britian case, supra.

The second approach, which the Bank urges more strenuously, would first set aside the $217,000 owed to Agsten, but pay it to the SBA instead of Agsten, for SBA is...