LOUISVILLE JOINT STOCK LAND BANK V. RADFORD

Decision Date27 May 1935
Citation295 U. S. 555
CourtU.S. Supreme Court

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Syllabus

1. The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment. P. 589.

2. Under the bankruptcy power, Congress may discharge the debtor's personal obligation because, unlike the States, it is not prohibited from impairing the obligation of contracts; but it cannot take for the benefit of the debtor rights in specific property acquired by the creditor prior to the Act. P. 589.

3. The Fifth Amendment commands that, however great the Nation's need, private property shall not be taken even for a wholly public use without just compensation. P. 602.

4. If the public interest requires, and permits the taking of property of individual mortgagees in order to relieve the necessities of individual mortgagors, resort must be had to proceedings by eminent domain, so that, through taxation, the burden of the relief afforded in the public interest may be borne by the public. P P. 598, 295 U. S. 602.

5. The provisions added to § 75 of the Bankruptcy Act by the Act of June 28, 1934, known as the Frazier-Lemke Act, operate, as applied in this case, to take valuable rights in specific property from one person and give them to another, in violation of the Constitution. P. 601.

Page 295 U. S. 556

6. The controlling purpose of this Act is to preserve to the mortgagor the ownership and enjoyment of his farm property. Its avowed object is to take from the mortgagee rights in the specific property held as security, and to that end to scale down the indebtedness to the present value of the property. P. 594.

7. Examination of the measures of relief extended to necessitous mortgagors by courts of equity and by statute, prior to the Frazier-Lemke Act, reveals no instance which the mortgagee was compelled to relinquish the property to the mortgagor free of the lien unless the debt was paid in full. P. 579.

8. The right of the mortgagee to insist upon full payment before giving up his security has been deemed the essence of the mortgage. To protect this right, he is allowed to bid at the judicial sale on foreclosure. Practically all the measures adopted in the States for the mortgagor's relief, including moratorium legislation in the present depression, resulted primarily in a stay, and the relief rested upon the assumption that no substantive right of the mortgagee was being impaired, since payment of the debt with interest would fully compensate him. Cf. Home Bldg. & Loan Assn. v. Blaisdell, 290 U. S. 398. P. 580.

9. Although each of our national bankruptcy Acts followed a major or minor depression, none had, prior to the Frazier-Lemke Act, sought to compel a mortgagee to surrender to the bankrupt either the possession of the mortgaged property or the title, so long as any part of the debt remained unpaid, or to supply the bankrupt with capital with which to engage in business in the future, or to disturb even a mortgage of exempt property. P. 581.

10. No other bankruptcy act has undertaken to modify in the interest of the debtor or of other creditors any substantive right of the holder of any mortgage valid under the federal law. P. 583.

11. In the exercise of the power to marshal liens, sell the property free, and transfer the lienors' rights to the proceeds of sale, there has been no suggestion that the sale could be made to the prejudice of the lienor, in the interest of the debtor or other creditors. P. 584.

12. A sale free from liens in no way impairs any substantive right of the mortgagor, and such a sale is not analogous to the sale to the bankrupt provided for by Paragraph 7 of the Frazier-Lemke Act. P. 585.

13. The provisions of prior bankruptcy acts concerning compositions afford no analogy to Paragraph 7 of the Frazier-Lemke Act.

Page 295 U. S. 557

Never, so far as appears, has a composition affected a secured claim held by a single creditor. P. 585.

14. Although the original purpose of the bankruptcy acts was the equal distribution of the debtor's property among his creditors, the power is not so limited, and its exercise has broadened so that the discharge of the debtor has come to be an object of no less concern than the distribution of his property. P. 587.

15. The Court has no occasion in this case to decide whether the bankruptcy clause confers upon Congress, generally, the power to abridge a mortgagee's rights in specific property, since the Frazier-Lemke Act deals only with mortgages preexisting. P. 589.

16. A bank which ten years previously had made a long-time loan of ,000, interest at 6%, secured by mortgages on a Kentucky farm then worth presumably twice that sum, was obliged by defaults to foreclose in a state court. The mortgagor refused the bank's offer to take the farm in satisfaction of the debt, and, before a judicial sale was ordered, he took advantage of the Frazier-Lemke Act, meanwhile enacted, and was adjudged a bankrupt. The bank offered to pay into the bankruptcy court for the property over ,000, which, if accepted, would have been returned to the bank in satisfaction of the debt; but this was refused. The property was appraised at ,445. Upon the bank's refusing its assent to a "sale" of the property at that price by the trustee to the bankrupt, upon the terms specified in Paragraph 3 of the Act, the court, proceeding under Paragraph 7, ordered that, for a period of five years, all proceedings to enforce the mortgages be stayed, and that the possession of the property remain in the bankrupt, "under control of the court," subject only to the payment of an annual rental to be fixed by the court. The rental for the first year was fixed at 5, but no other provision was made for taxes, insurance, and administrative charges.

Held:

(1) That the Act as applied had taken from the bank the following property rights recognized under the law of Kentucky governing mortgages, viz.: (a) the right to retain the lien until the indebtedness thereby secured was paid; (b) the right to realize upon the security by a judicial public sale; (c) the right to determine when such sale shall be held, subject only to the discretion of the court; (d) the right to protect its interest in the property by bidding at such sale whenever held, and thus to assure having the mortgaged property devoted primarily to the satisfaction of the debt, either through receipt of the proceeds of a fair

Page 295 U. S. 558

competitive sale or by taking the property itself; (e) the right to control meanwhile the property during the period of default, subject only to the discretion of the court, and to have the rents and profits collected by a receiver for the satisfaction of the debt. P P. 590, 295 U. S. 594.

(2) No substitute for these rights is to be found in Paragraph 3 of the Act, which provides that, at the request of the bankrupt, with the assent of the mortgagee, the trustee may make a " sale " of the property to the bankrupt at its so-called appraised value, in consideration of the bankrupt's implied agreement to pay 2 1/2% within two years, 2 1/2% within three years, 5% within five years, and the balance within six, with interest on deferred payments at only 1% per annum. P. 591.

(3) No substitute for the rights taken is to be found in Paragraph 7. That section gives the bankrupt, without the mortgagee's consent, full possession for five years, with no monetary obligation beyond paying a reasonable rental fixed by the court. No other provision is made for insurance or taxes, and, during the extension, the bankrupt has the option of buying the property free at any time at its appraised or reappraised value, but he need not buy at all. The mortgagee is not only compelled to submit to the sale to the bankrupt, but to a sale made at such time as the latter may choose. He cannot require a reappraisal when, in his judgment, the time comes to sell; he may ask for a reappraisal only if and when the bankrupt requests a sale. P. 592.

(4) While Paragraph 7 declares that the bankrupt's possession is "under the control of the court," this clause gives merely a supervisory power, which leaves the court powerless to terminate the bankrupt's option unless there has been the commission of waste or failure to pay the prescribed rent. P. 593.

74 F.2d 576 reversed.

Certiorari, 294 U.S. 702, to review a judgment affirming orders of the District Court in proceedings taken by Radford under the amendment of June 28, 1934, to § 75 of the Bankruptcy Act.

Page 295 U. S. 572

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

This case presents for decision the question whether subsection (s) added to § 75 of the Bankruptcy Act [Footnote 1] by

Page 295 U. S. 573

the Frazier-Lemke Act, June 28, 1934, c. 869, 48 Stat. 1289, is consistent with the Federal Constitution. The federal court for Western Kentucky, 8 F.Supp. 489, and the Circuit Court of Appeals for the Sixth Circuit, 74 F.2d 576, held it valid in this case, and it has been sustained elsewhere. [Footnote 2] In view of the novelty and importance of the question, we granted certiorari.

In 1922 (and in 1924), Radford mortgaged to the Louisville Joint Stock Land Bank a farm in Christian County, Kentucky, comprising 170 acres, then presumably of the appraised value of at least ,000. [Footnote 3] The mortgages were given to secure loans aggregating ,000, to be repaid in installments over the period of 34 years with interest at the rate of 6 percent. Radford's wife joined in the mortgages and the notes. In 1931 and subsequent years, the Radfords made default in their covenant to pay the taxes. In 1932 and 1933, they made default in their promise to pay the installments of interest and principal. In 1933,

Page 295 U. S. 574

they made default also in their covenant to keep the buildings insured. The Bank urged the Radfords to endeavor to refinance the indebtedness pursuant to the...

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