WT Jones and Company v. Foodco Realty, Inc., 8824.

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Citation318 F.2d 881
Docket NumberNo. 8824.,8824.
PartiesW. T. JONES AND COMPANY, Incorporated, and Noland Company, Inc., and Marvin Moseley, Appellants, v. FOODCO REALTY, INC., et al., and United States of America, Appellees.
Decision Date21 May 1963

Arthur B. Davies, III, Lynchburg, Va. (Hickson & Davies and Joseph L. Lyle, Jr., Lynchburg, Va., on brief), for appellants.

Lawrence C. Musgrove, Asst. U. S. Atty. (Robert Kaplan, Preston L. Campbell and William E. Nelson, Attys., Dept. of Justice, on brief), for appellee United States.

Before SOBELOFF, Chief Judge, and BOREMAN and J. SPENCER BELL, Circuit Judges.

SOBELOFF, Chief Judge.

When the Small Business Administration has joined a private bank in making a construction loan secured by a recorded deed of trust and the borrower becomes insolvent, is the SBA's interest in the unpaid balance of the loan subordinate to mechanic's liens accorded priority over deeds of trust by state law? Under the circumstances of this case we think that the mechanic's liens are not entitled to priority over the Government's claim.

The facts are undisputed. Since these are set forth in meticulous detail in the District Court's opinion, 206 F.Supp. 878, only those which are pertinent to this appeal will be repeated here.

In August of 1959, Foodco Realty, Inc., a newly-organized corporate owner of land situated in Campbell County, Virginia, sought a construction loan of $85,000 from the Campbell County Bank in order to finance plant and warehouse improvements. The bank was unwilling to enter into the transaction by itself and called in the Small Business Administration, an agency of the United States vested with broad power to join private lenders in making loans to small business concerns otherwise unable to obtain necessary funds for capital improvements.1 The SBA formally agreed to put up 90% of the loan, the maximum percentage authorized by Congress, and the bank assumed the balance. Foodco promptly executed a note which, though payable to the bank alone, on its face disclosed participation by the SBA. The note was secured by a deed of trust on Foodco's property, which was recorded on August 13, 1959. Construction began eight days later but by the time the work was finally completed the following April, Foodco was insolvent in the sense that its debts exceeded its assets.

Appellants, who had furnished labor and materials, filed proper mechanic's liens within the sixty-day period required by Code of Va. § 43-4. On November 10, 1960, one of the appellants, W. T. Jones and Company, initiated proceedings in the Circuit Court of Campbell County to enforce its mechanic's lien. While the suit was pending, several judgments were entered against Foodco in favor of other, non-lien creditors, all of which remain unsatisfied. Meanwhile the bank assigned to the United States its 10% fractional interest in the note secured by the deed of trust in consideration for a promise by the United States to turn over 10% of any recovery upon the note. Thereupon the United States, on its motion, was permitted to intervene as a party defendant in the state lien enforcement action and to remove it to the United States District Court for the Western District of Virginia. That court in turn referred the case to a special master.

The master found that the deed of trust securing the SBA's interest in the loan was prior in time to appellants' mechanic's liens and therefore entitled to priority to the extent that it encumbered Foodco's property as it existed before the improvements were added by the mechanics.2 However, the master was also of the opinion that since the SBA was claiming under a Virginia deed of trust which incorporated by reference certain provisions of state law3 and which secured a loan to be applied exclusively to building improvements, the SBA's claim to preference would be governed by the Virginia mechanic's lien priority statute.4 By operation of this statute the SBA would take a first lien on the land but only a second lien, inferior to that of the mechanics, on the buildings.5 Thus the master accorded priority to the appellants to the extent of the value of the structural improvements placed by them upon the debtor's property after recordation of the deed of trust.

On objections filed by the United States, the District Court reviewed and overruled the special master's report. The court did not question the master's interpretation of the Virginia lien priority statute6 but held that "federal common law," by which "the first in time is the first in right," prevails over state law in matters affecting the priority of claims of the United States; therefore, the claim of the SBA having originated first in point of time, enforcement of the mechanic's liens would be postponed, notwithstanding their preferred status under Virginia law, until the entire unpaid balance of the loan had been satisfied out of the debtor's assets.

The court also ruled in the alternative that even if "federal common law" was inapplicable, the debt owing to the United States would be in any event paramount to the mechanic's liens by virtue of the federal insolvency statute,7 but that on that theory the SBA's priority would not extend to the portion of the debt assigned to it by the participating bank. The court's order, however, awarded the SBA full priority on the "federal common law" theory. From this order the appellant mechanics appeal.8


Turning first to the federal insolvency statute, 31 U.S.C.A. § 191 (Rev.Stat. § 3466), we agree with the District Court that its provisions squarely apply to the instant case. The following language is here relevant: "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."

The manifest purpose of the statute, in force since 1797 without significant modifications,9 "is simply to protect the interest of the Government in collecting money due to it" where the property of an insolvent debtor is involved. Small Business Administration v. McClellan, 364 U.S. 446, 451-452, 81 S.Ct. 191, 195-196, 5 L.Ed.2d 200 (1960). Its command is that the United States shall be accorded an absolute priority over the claims of all general lienholders, Massachusetts v. United States, 333 U.S. 611, 625-627, 68 S.Ct. 747, 92 L.Ed. 968 (1948), even though its own lien is general and notice thereof has not been properly filed and recorded. United States v. City of New Britain, 347 U.S. 81, 84-85, 74 S.Ct. 367, 98 L.Ed. 520 (1954); United States v. Gilbert Associates, Inc., 345 U.S. 361, 366, 73 S.Ct. 701, 97 L.Ed. 1071 (1953); United States v. Texas, 314 U.S. 480, 488, 62 S.Ct. 350, 86 L.Ed. 356 (1941); United States v. Emory, 314 U.S. 423, 427-429, 62 S.Ct. 317, 86 L.Ed. 315 (1941).10 As applied to the present facts, it would seem immaterial that the deed of trust is silent as to the SBA's lien interest, inasmuch as beneficial ownership of nine-tenths of the debt so secured concededly accrued to the United States11 immediately upon execution of the note evidencing the joint loan. Cf. Small Business Administration v. McClellan, 364 U.S. 446, 450, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960); United States v. Emory, 314 U.S. 423, 430, 62 S.Ct. 317, 86 L.Ed. 315 (1941). Nor is any question raised as to the special master's express finding that Foodco is insolvent and that its insolvency arose while construction was in progress and before the mechanic's liens were filed.

But, as appellants correctly point out, the mere inability of the debtor to pay his debts has never been regarded as sufficient to bring the United States within the protection of section 191. See United States v. Oklahoma, 261 U.S. 253, 260, 43 S.Ct. 295, 67 L.Ed. 638 (1923), and authorities cited therein. This brings us to the question whether Foodco has committed an "act of bankruptcy," as that term is defined by section 3, sub. a of the Bankruptcy Act (11 U.S.C.A. § 21, sub. a). Reference thereto discloses that this requirement is satisfied by the debtor's having "suffered or permitted, while insolvent, any creditor to obtain a lien upon any of his property through legal proceedings or distraint and not having vacated or discharged such lien within thirty days from the date thereof * * *." 11 U.S.C.A. § 21(a) (3). The record shows conclusively that, as early as November 29, 1960, and while insolvent, Foodco suffered a judgment against it in favor of one of its creditors pursuant to legal proceedings in the Circuit Court of Campbell County. This, as well as later judgments recovered by other creditors in January and May, 1961, was duly docketed and constituted a lien on its property. Code of Va. §§ 8-386, 390 (1960 amend.). See Fooshee v. Snavely, 58 F.2d 772, 773 (W.D.Va.1931). Since each of these judgment liens was allowed to stand for more than thirty days, an act of bankruptcy was committed. In re Airmont Knitting & Undergarment Co., Inc., 182 F.2d 740, 741 (2d Cir., 1950); United States v. Williams, 139 F.Supp. 94, 97-98 (M.D.N.C.1956); 1 Collier on Bankruptcy, § 3.301 et seq.12 Consequently, section 191 must be given controlling effect and the SBA's priority upheld.

Appellants resist this conclusion, contending that their mechanic's liens were duly perfected as a matter of state law and that section 191 does not operate against private liens which are specific and choate. The Supreme Court, however, has never actually held that specific and choate liens asserted by a private claimant are impliedly exempted from the operation of section 191. See United States v. Gilbert Associates, Inc., 345 U.S. 361, 365, 73 S.Ct. 701, 97 L.Ed. 1071 (1953); Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 370, 67 S.Ct. 340, 91 L.Ed. 348 (1946); United States v. Waddill,...

To continue reading

Request your trial
34 cases
  • In re Berretta's Estate
    • United States
    • United States State Supreme Court of Pennsylvania
    • March 13, 1981
    ...... Company and had established a commercial line of credit ... United States v. Kimbell Foods, Inc., 440 U.S. 715,. 99 S.Ct. 1448, 59 L.Ed.2d 711 ... 70 L.Ed. 368 (1926). See also W. T. Jones & Co. v. Foodco. Realty, Inc., 318 F.2d 881 ......
  • C.D. Barnes Associates v. Grand Haven Hideaway, 1:04-CV-850.
    • United States
    • United States District Courts. 6th Circuit. United States District Court (Western District Michigan)
    • December 23, 2005
    ...... C.D. BARNES ASSOCIATES, INC. Plaintiff/Counter-Defendant, . v. . GRAND HAVEN ...QTC Company is the current general partner, and M.J. Benzer ...Jones & Co. v. Foodco . Page 810 . Realty, Inc., 318 ......
  • US v. Vertac Chemical Corp., LR-C-80-109
    • United States
    • United States District Courts. 8th Circuit. United States State District Court of Eastern District of Arkansas
    • September 9, 1987
    ...368 (1926). See also United States v. Moore, 423 U.S. 77, 84, 96 S.Ct. 310, 314, 46 L.Ed.2d 219 (1975); W.T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881, 885 (4th Cir.1963); Lakeshore Apartments, Inc. v. United States, 351 F.2d 349, 353 (9th Cir.1965). An "act of bankruptcy" within the......
  • Berretta's Estate, In re, WILKES-BARR
    • United States
    • United States State Supreme Court of Pennsylvania
    • March 13, 1981
    ...Bramwell v. United States Fidelity & Guarantee Co., 269 U.S. 483, 46 S.Ct. 176, 70 L.Ed. 368 (1926). See also W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881 (4th Cir. 1963). This definition of insolvency is hardly all-encompassing. The Uniform Commercial Code, whose provisions as to......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT