U.S. v. Landmark Park & Associates

• Decision Date: 18 July 1986
• Docket Number: No. 85-1620,85-1620
• Citation: 795 F.2d 683
• Parties: , Bankr. L. Rep. P 71,254 UNITED STATES of America, Appellant, v. LANDMARK PARK & ASSOCIATES, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 683

795 F.2d 683

55 USLW 2152, Bankr. L. Rep. P 71,254

UNITED STATES of America, Appellant, v. LANDMARK PARK & ASSOCIATES, Appellees.

No. 85-1620.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 14, 1986.

Decided July 18, 1986.

Katherine Savers McGovern, Asst. U.S. Atty., Little Rock, Ark., for appellant.

Thomas H. McLain, Jr., Little Rock, Ark., for appellees.

Before LAY, Chief Judge, BRIGHT, Senior Circuit Judge, and ROSS, Circuit Judge.

ROSS, Circuit Judge.

In this action, which originated in the Bankruptcy Court for the Eastern District of ARkansas, appellant, the United States Department of Housing and Urban Development (HUD) claims a right to rental payments collected by the debtor, Landmark Park & Associates (Landmark) during Landmark's post-petition operation of a mobile home park. In 1973, the parties executed a Regulatory Agreement and Deed of Trust in connection with a $536,000 loan by HUD which Landmark used to purchase the University Hills Mobile Home Park in Starksville, Mississippi. Both loan documents contained a clause assigning all rents, profits and income from the park to HUD as part of the security for the loan.

In early 1983, HUD notified Landmark of its default and moved to foreclose and sell the property. Shortly thereafter, on March 15, 1983, Landmark filed a bankruptcy petition seeking reorganization under Chapter 11 of the Bankruptcy Code. During the bankruptcy proceedings, the debtor continued to operate the park and collect rentals. Landmark also paid the ordinary expenses of operation and maintenance of the park but failed to pay taxes or mortgage payments to HUD.

The bankruptcy and district courts denied HUD's claim to post-petition rentals generated by the park on the ground that HUD had failed to perfect its interest in rents and profits under applicable nonbankruptcy law. If unperfected, HUD's security interest in rents and profits is subordinate to that of the debtor-in-possession on behalf of the unsecured creditors of the estate by virtue of 11 U.S.C. Sec. 544(a), the "strong-arm clause."

11 U.S.C. Sec. 552(b) indicates that a secured party's right to rents, profits and other products or proceeds acquired by the estate after the commencement of bankruptcy depends upon the provisions of the security agreement and "applicable nonbankruptcy law" (except the court has discretion to deviate from such provisions based on the equities of the case). The central issue of this appeal is whether state or federal law is the "applicable nonbankruptcy law" governing perfection of the security interest in rents and profits created by the Regulatory Agreement and Deed of Trust in favor of HUD, a nationwide federal mortgage lender.

We conclude that federal rather than state law controls the manner in which HUD could perfect its interest in the rental income and that HUD's interest was perfected as of the date of the debtor's default, at least no later than March 15, 1983. Accordingly, we reverse. ¹

Concerning whether state or federal law applies to this controversy, Landmark relies on Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Construing the Bankruptcy Act of 1898, the Supreme Court in Butner held that "[u]nless some federal interest requires a different result," id. at 55, 99 S.Ct. at 918, state law determines whether a mortgagee has an enforceable interest in rents collected between the commencement of bankruptcy and the foreclosure sale of the mortgaged property. The Fifth Circuit in Wolters Village, Ltd. v. Village Properties, Ltd. (In re Village Properties, Ltd.), 723 F.2d 441, 443 (5th Cir.), cert. denied, 466 U.S. 974, 104 S.Ct. 2350, 80 L.Ed.2d 823 (1984) concluded that Butner "is still good law under the Bankruptcy Code of 1978." The district court interpreted Arkansas law to require a mortgagee to take actual possession of the mortgaged property in order to perfect a security interest in rents. The bankruptcy court considered that HUD should have sought appointment of a receiver, apparently in a state court, in order to perfect the assignment of rents. However, HUD considered itself precluded by the automatic stay, 11 U.S.C. Sec. 362, from taking either course of action.

On the other hand, neither Butner nor Village Properties dealt with a federal lender. In United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979), decided within weeks after Butner, the Supreme Court directed that federal law must govern the rights of the United States in the context of federal nationwide lending programs. Under the doctrine of Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), ² when federal agencies lend funds by the authority of federal legislation, their rights as lenders also derive from and warrant the protection of federal law. Kimbell, supra, 440 U.S. at 726-27, 99 S.Ct. at 1457. ³

The presumption expressed in Kimbell in favor of federal law when a federal creditor's rights are at stake is consistent with the views expressed by our circuit and others in related contexts. See, e.g., United States v. Victory Highway Village, Inc., 662 F.2d 488, 497 (8th Cir.1981) (federal law governs "the rights and liabilities of the parties [regarding] remedies available upon default of a federally held or insured loan," and a state statutory right of redemption "limiting the effectiveness of the remedies available to the United States" cannot be adopted); United States v. Scholnick, 606 F.2d 160, 164, 166-67 (6th Cir.1979) (federal law controls the rights of junior lienors when HUD as first mortgagee agrees to a consent decree of foreclosure); Clark Investment Co. v. United States, 364 F.2d 7, 9-10 (9th Cir.1966) (federal law governs the application of net rents collected during the redemption period upon foreclosure of a Federal Housing Administration mortgage loan); United States v. Chester Park Apartments, Inc., 332 F.2d 1, 3-5 (8th Cir.), cert. denied, 379 U.S. 901, 85 S.Ct. 191, 13 L.Ed.2d 176 (1964) (federal law controls appointment of a receiver to collect rents pending foreclosure of a HUD mortgage).

As we have previously recognized, the application of federal law to the rights and remedies of the United States upon default of federally held or insured loans is warranted by the " 'overriding federal interest in protecting the funds of the United States and in securing federal investments' ". United States v. Victory Highway Village, Inc., supra, 662 F.2d at 497 (citation omitted). Protection of the federal treasury and the purposes and integrity of nationwide federal lending programs is thus a "federal interest" of the kind referred to in Butner which requires a different result from the general rule of resort to state law.

As for the content of the applicable federal law, we understand Kimbell to indicate that "state law [can] be adopted as the federal rule of decision so long as a national rule [is] not needed to protect the federal interests underlying the [federal lending] program." United States v. Missouri Farmers Association, Inc., 764 F.2d 488, 489 (8th Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1281, 89 L.Ed.2d 588 (1986) (concluding that federal interests would be prejudiced by adoption of state law regarding acts effecting release of a Farmers Home Administration crop lien). See also United States v. Farmers Cooperative Co., 708 F.2d 352, 353 n. 2 (8th Cir.1983) (rejecting application of state law concerning waiver of a Farmers Home Administration security interest in crops and farm products).

We have incorporated state law as the federal rule of decision when the state law is derived from a uniform statute such as the Uniform Commercial Code and to do so would therefore not hinder the "federal interest in uniformity of the law." United States v. Kukowski, 735 F.2d 1057, 1058 (8th Cir.1984). There is, however, no such uniformity in state law concerning perfection of a mortgagee's entitlement to rents. See, e.g., Exchange National Bank v. Gotta (In re Gotta), 47 B.R. 198, 202 n.4 (Bankr.W.D.Wis.1985); Eastern Savings Bank v. Epco Newport News Associates (In re Epco Newport News Associates), 14 B.R. 990, 995 (Bankr.S.D.N.Y.1981); August v. Michigan Avenue National Bank (In re Michigan Avenue National Bank), 2 B.R. 171, 184-85 (Bankr.N.D.Ill.1980).

Moreover, there exists considerable difference of opinion concerning permissible methods by which an interest in rents may be perfected while the automatic stay of 11 U.S.C. Sec. 362 is in effect. See, e.g., Consolidated Capital Income Trust v. Colter, Inc., 47 B.R. 1008, 1011 (D.Colo.1985) (the beneficiary of a deed of trust with an assignment of rents is perfected as to rents accruing after filing a notice of perfection under 11 U.S.C. Sec. 546(b)); Exchange National Bank v. Gotta (In re Gotta), supra, 47 B.R. at 202 (a section 546(b) notice is not effective to perfect an assignment of rents); In re Engstrom, 33 B.R. 369, 373-74 (Bankr.D.S.D.1983) (until a creditor obtains relief from the automatic stay and actual possession of the realty or the trustee abandons the property, the creditor cannot perfect its security interest in rents); Santa Fe Federal Savings & Loan Association v. Oak Glen R-Vee (In re Oak Glen R-Vee), 8 B.R. 213, 216 (Bankr.C.D.Cal.1981) (complaint by a creditor equivalent to motion for sequestration of rents is an acceptable substitute method for perfection of a rent assignment in lieu of actual possession or appointment of receiver).

In the circumstances of this case, HUD was unable to obtain a hearing in the bankruptcy court for eight months after moving for relief from the automatic stay. In light of the idiosyncrasies of state law and bankruptcy practice, we conclude that a uniform federal rule is necessary to clarify the means by which a federal lender may enforce an assignment of rents.

Two district courts have held that no affirmative acts of any...