In re Drg Funding Corporation, Case No. 94-00417 (Bankr. D.C. 7/5/2007), Case No. 94-00417.

CourtUnited States Bankruptcy Courts. District of Columbia Circuit
Writing for the CourtS. Teel Jr.
PartiesIn re DRG FUNDING CORPORATION, Chapter 7, Debtor.
Docket NumberCase No. 94-00417.
Decision Date05 July 2007

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In re DRG FUNDING CORPORATION, Chapter 7, Debtor.
Case No. 94-00417.
United States Bankruptcy Court, District of Columbia.
July 5, 2007.
MEMORANDUM DECISION RE TRUSTEE'S MOTION FOR AUTHORITY TO ASSIGN JUDGMENT

S. TEEL JR., Bankruptcy Judge.


Wendell Webster, the chapter 7 trustee,1 has filed a motion for authority to assign a judgment, by which he proposes to assign a pre-petition judgment (the "Judgment") in favor of the debtor, DRG Funding Corporation, against the U.S. Department of Housing and Urban Development ("HUD"), to New England Phoenix Company, Inc. ("NEPCO"), a creditor in this bankruptcy case. HUD objects on the grounds that the proposed assignment violates the Anti-Assignment of Claims Act, 31 U.S.C. § 3727, which prohibits the assignment of certain claims against the United States. The Anti-Assignment of Claims Act does not apply to a court-approved

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assignment made of a claim against the United States by a bankruptcy trustee and the court will approve the proposed assignment accordingly.

I
BACKGROUND

What follows is a summary of the dispute that gave rise to the Judgment that the trustee now seeks to assign.

In the 1980s, DRG participated in two HUD programs: a coinsurance program and a mortgage-backed securities program operated by the Government National Mortgage Association (GNMA). In connection with DRG's participation in these two programs, DRG initiated litigation challenging HUD's interpretation of the rules surrounding default by mortgagors, claims to HUD for coinsurance proceeds in the form of debentures and the timing of HUD's issuance of debentures, and the date from which the interest on the debentures begins to accrue. DRG Funding Corp. v. Sec'y of Hous. and Urban Dev., 1988 WL 90197 (D.D.C. 1988). DRG prevailed on appeal. DRG Funding Corp. v. Sec'y of Hous. and Urban Dev., 898 F.2d 205 (D.C. Cir. 1990). The case was remanded to the District Court. On remand, HUD filed a motion for entry of judgment in the amount of $4,379,745.13. Judgment was entered in favor of DRG in the amount of $4,379,745.13 together with post-judgment interest on June 12, 1991 (DRG Funding v. Sec'y of Hous. and Urban Dev., 88-cv-02202(JHG))(DE No. 86). On July 2,

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1991, a second judgment was entered providing for an additional $ 653,169.58 in pre-judgment interest (DE No. 87).2 As part of the motion for entry of judgment, HUD requested that the District Court issue an order that would not preclude an administrative offset of a portion of the final judgment. The court declined to address the propriety of an administrative offset.

On August 3, 1990, prior to the District Court's entry of final judgment in favor of DRG, HUD informed DRG of its intent to collect $3,709,926.55 by administrative offset. On July 17, 1991, after the District Court's entry of final judgment in favor of DRG, HUD notified DRG that it had collected this amount from DRG by prior offset. On February 12, 1992, HUD purports to have collected an additional $687,515.96 from DRG by way of administrative offset.

DRG challenged HUD's jurisdiction to collect the offsets before a HUD Administrative Law Judge (ALJ). The ALJ ruled in HUD's favor and DRG sought an immediate appeal to the Secretary of HUD pursuant to 24 C.F.R. § 26.26, which permitted interlocutory appeals. The designee of the Secretary heard the appeal, and she issued her decision in March 1992, upholding the

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ALJ's order.3 The Initial Trustee sought mandamus relief in the U.S. District Court for the District of Columbia in an effort to compel HUD to dismiss the offsets. The District Court case was dismissed without prejudice on the grounds that HUD had not completed its administrative process. The U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the Initial Trustee's mandamus action. DRG Funding Corp. v. Sec'y of Hous. and Urban Dev., 76 F.3d 1212 (D.C. Cir. 1996).

II
THE ANTI-ASSIGNMENT OF CLAIMS ACT DOES NOT APPLY TO COURT-APPROVED ASSIGNMENTS IN BANKRUPTCY

The Anti-Assignment of Claims Act, 31 U.S.C. § 3727, provides that "a transfer or assignment of any part of a claim against the United States Government or of an interest in the claim . . . may be made only after a claim is allowed, the amount of the claim is decided, and a warrant for payment of the claim has been issued." Notwithstanding the broad language of the Act, application of the rule "was very early relaxed in cases which

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were thought not to be productive of the evils which the statute was designed to obviate," United States v. Aetna Cas. & Sur. Co., 338 U.S. 366, 373 (1949), and it is now widely recognized that although the Anti-Assignment Act "generally prohibits the voluntary assignment of demands against the government, [it] does not prohibit assignments or transfers of claims against the United States that occur involuntarily by operation of law." Saint John Marine Co. v. United States, 92 F.3d 39, 48 (2d Cir. 1996) (internal quotations and citations omitted).4 Accordingly, claims against the United States held by a debtor on the commencement of a bankruptcy case pass to the bankruptcy trustee without offending the Act. See Erwin v. United States, 97 U.S. 392 (1878) (the Act "applies only to cases of voluntary assignment of demands against the government. It does not embrace cases where there has been a transfer of title by operation of law. The passing of claims to heirs, devisees, or assignees in bankruptcy is not within the evil at which the statute aimed . . . ."). Indeed, the "operation of law" exception goes even further, and applies as well to the

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disposition of such a claim pursuant to court process. See Western Pac. R.R. v. United States, 268 U.S. 271, 273 (1925) (upholding assignment of claim through a judicial sale in a railroad receivership, and permitting the assignee to sue on the claim).5 The holding of Western Pac. R.R. logically applies to bankruptcy court orders just as well as receivership court orders, and it has been so held. In re Pottasch Bros. Co., 11 F. Supp. 275, 277 (S.D.N.Y.) (citations omitted), aff'd, 79 F.2d 613 (2d Cir. 1935) (stating, 79 F.2d at 615, that a transfer by court order "would be a transfer wholly `by operation of law' and

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therefore valid," notwithstanding the Anti-Assignment Act).6

Thus, although a bankruptcy trustee's assignment of a claim against the United States is voluntary in the sense that it is accomplished through an elective and deliberate act, for purposes

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of the Anti-Assignment of Claims Act, such assignment is deemed to occur "by operation of law" and is not prohibited.

III
THE PROPOSED ASSIGNMENT DOES NOT OFFEND THE PURPOSES OF THE ACT

The Supreme Court made it clear "[f]rom the earliest days of the Act . . . that the plain language of the Anti-Assignment Act is not controlling . . . . [and] that courts should [instead] consider whether the assignment in question implicates the purposes of the Act." Centers v. United States, 71 Fed. Cl. 529 (2006). The Act's primary purpose is "to prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the government, and . . . [a] second purpose [is] to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant." United States v. Shannon, 342 U.S. 288, 291 (1952) (quoting United States v. Aetna Cas. and Sur. Co., 338 U.S. 366 (1949)). Additionally, the statute is intended to "save to the United States defenses which it has to claims by an assignor by way of set-off, counter claim, etc., which might not be applicable to an assignee." Id. (quoting Grace v. United States, 76 F. Supp. 174 (D.C. 1948)).

The Supreme Court, however, has held that assignments occurring by operation of law are always exempt from the

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prohibition of the Anti-Assignment Act, without regard to whether such an assignment might contravene the purposes of the Act. Aetna Cas. & Sur. Co., 338 U.S. at 375. The supporting rationale is that, unlike voluntary assignments, when an assignment occurs by operation of law "there can be no purpose in such cases to harass the government by multiplying the number of persons with whom it has to deal, nor any danger of enlisting improper influences in advocacy of the claim, and that the exigencies of the party who held it justified and required the transfer that was made." Goodman v. Niblack, 102 U.S. at 560, quoted in Aetna Cas. & Sur., 338 U.S. at 376.

Unless and until this court approves the proposed assignment, however, there is no assignment occurring "by operation of law" to speak of. Accordingly, it arguably remains within this court's discretion to consider the purposes of the Act before approving the assignment. For the reasons stated below, the court is satisfied that, based on NEPCO and the trustee having agreed to clarify the language of the assignment, the proposed assignment does not offend the purposes of the Act.

First, there is no allegation that NEPCO is buying up claims in an effort to improperly influence the government. NEPCO is merely a creditor of the estate seeking to maximize recovery on its claim. Thus, the primary purpose of the Act, as articulated in United States v. Shannon, 342 U.S. 288 (1952), is not offended

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by the proposed assignment.

A second stated purpose of the Act is "to prevent possible multiple payment of claims, to make unnecessary the investigation of alleged assignments, and to enable the Government to deal only with the original claimant." Id. Given HUD's participation in and the overall visibility of the instant proceedings, the proposed assignment does not pose a legitimate risk of inadvertent double payment by the government, nor does it put HUD to the task of investigating whether or not its claim has or has not been assigned.

HUD contends that the proposed...

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