CITY OF LOCKPORT, NEW YORK, ET AL. V. UNITED STATES OF AMERICA

   No. 90-1192

   In The Supreme Court Of The United States

   October Term, 1990

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Third Circuit

   Brief For The United States In Opposition

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-21a) is reported
at 916 F.2d 890.  The opinion of the district court (Pet. App.
24a-37a) is reported at 111 Bankr. 107.  The opinion of the bankruptcy
court (Pet. App. 38a-50a) is reported at 95 Bankr. 370.

                             JURISDICTION

   The judgment of the court of appeals was entered on October 19,
1990.  The petition for certiorari was filed on January 17, 1991.  The
jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

                          QUESTION PRESENTED

   Whether petitioners' tax claims fall within the scope of an
exception to the automatic stay provision of Section 362 of the
Bankruptcy Code.

                               STATEMENT

   1. Guterl Special Steel Corporation owned real property in
Lockport, New York.  In 1981, Guterl gave two mortgages on the
property, each in the amount of $7.5 million, to separate banks.
Ninety percent of the principal and interest on each loan was
guaranteed by an agency of the United States.  One mortgage was
guaranteed by the Economic Development Administration (EDA);  the
other by the Farmers Home Administration (FmHA).  Pet. App. 3a.

   On August 9, 1982, Guterl filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Western
District of Pennsylvania.  On August 26, 1983, the EDA paid 90% of the
balance due on one of the outstanding notes and was assigned the
bank's interest in Guterl's collateral.  FmHA paid 90% of the balance
due on the other note in return for an assignment of the bank's
interest in the collateral.  /1/ Pet. App. 3a-4a.

   In November 1983, the bankruptcy court ordered Guterl to liquidate
the collateral securing the mortgages.  In March 1984, the property
was sold for approximately $9.5 million.  Guterl deposited $549,550 of
the sale proceeds in an escrow account pending resolution of this
dispute.  Pet. App. 4a.

   At the time Guterl filed for bankruptcy, it had paid all real
property taxes that were then due.  After filing, however, Guterl
failed to pay $395,427.51 in city and school taxes.  Pet. App. 26a.
Petitioners claim that they are entitled to recover these unpaid taxes
from the proceeds held in the escrow account.  /2/

   2. The bankruptcy trustee initiated a proceeding under Rule 7001 of
the Bankruptcy Rules to determine entitlement to the funds placed in
the escrow account.  Petitioners recognized that the automatic stay
triggered by the filing of a bankruptcy petition bars "any act to
create, perfect, or enforce any lien against the property of the
estate." 11 U.S.C. 362(a)(4).  Petitioners argued, however, that their
tax claims fell under 11 U.S.C. 362(b)(3), which excepts from the
automatic stay acts to perfect an interest in property to the extent
that the trustee's interests are subject to 11 U.S.C. 546(b).  Section
546(b), in turn, provides that the trustee's power to avoid statutory
liens is subject to "any generally applicable law that permits
perfection of an interest in property to be effective against an
entity that acquires rights in such property before the date of such
perfection." 11 U.S.C. 546(b).

   The bankruptcy court concluded (Pet. App. 38a-50a) that the city
and school tax liens were created after Guterl filed its bankruptcy
petition and therefore were void under 11 U.S.C. 362(a)(4).  The
bankruptcy court observed that "creation (of a property interest), as
opposed to perfection, is not excepted from the automatic stay." Pet.
App. 47a.  The court explained that, after bankruptcy, petitioners had
done more than perfect a pre-existing interest, because "(e)ach of the
relevant statutes raised by (petitioners) require(s) affirmative,
primary actions to initiate lien status for real estate taxes." Pet.
App. 49a.  The bankruptcy court concluded that, until petitioners
carried out the acts of "publication, confirmation, and adoption"
required by state and local law, they had no more than "an expectation
of future collections." Ibid.  Because those actions were carried out
after Guterl filed its bankruptcy petition, they were "in violation of
Section 362(a)(4)." Ibid.

   The district court affirmed.  Pet. App. 24a-37a.  It agreed with
the bankruptcy court that the "earliest acts to create each of the
liens were taken after the petition was filed on August 9, 1982." Pet.
App. 35a.

   3. The court of appeals affirmed.  Pet. App. 1a-21a.  Relying on
its decision in Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884
F.2d 80, 85 (3d Cir. 1989), the court rejected petitioners' contention
that they had an "ever-present" interest in collecting property taxes.
 The court noted that 11 U.S.C. 546(b) applies only if "generally
applicable law" permits perfection of a property interest acquired
prior to the filing of the bankruptcy petition.  Pet. App. 11a.  The
court said that, while petitioners "may have an ever-present
expectation of collecting taxes on all property within their
jurisdiction, they do not have a property interest in a particular
piece of real estate until they take the affirmative acts necessary to
fix the amount of the tax due and to acquire a lien to the extent to
that amount." Pet. App. 12a.

   The court of appeals then examined local law to determine the date
on which petitioners' property interest was created.  It concluded
that the city and school taxes did not become an interest in property
until notice of the city tax assessment had been published and the
school tax roll was confirmed and adopted.  Pet. App. 12a.  Since
these events occurred after the bankruptcy petition was filed, the
petitioners' interests did not fall within the exception of 11 U.S.C.
546(b) to the automatic stay.

   The court of appeals also rejected petitioners' alternative
argument that the "tax status date" was the date on which petitioners'
interests attached, noting that the applicable New York statutes
provide that tax "liens are created on a certain date (not the tax
status date), after certain acts are taken." Pet. App. 14a.  In the
court's view, the tax status date merely establishes the value of the
property, and creates no more than an expectation that taxes will be
collected in the future.  Pet. App. 15a.  The court concluded that
petitioners acquire "an 'interest in property' only when (they have)
performed the statutory acts necessary to give rise to a perfectible
lien." Pet. App. 16a.  In this case, those actions were performed
after Guterl filed for bankruptcy.  Ibid.

   Judge Weis dissented in part.  Pet. App. 16a-21a.  In his view, the
Second Circuit's decision in In re Parr Meadows Racing Ass'n, 880 F.2d
1540 (1989), cert. denied, 110 S. Ct. 869 (1990), held that a local
government in the State of New York acquires an interest in real
property on the tax status date.  Judge Weis would have deferred to
the Second Circuit's resolution of a question of New York law.

                               ARGUMENT

   1. The automatic stay provision, triggered by the filing of a
bankruptcy petition, prohibits "any act to create, perfect, or enforce
any lien against property of an estate." 11 U.S.C. 362(a)(4).  The
automatic stay provision is "one of the fundamental debtor protections
provided by the bankruptcy laws." Midlantic Nat'l Bank v. New Jersey
Dep't of Envtl. Protection, 474 U.S. 494, 503 (1986) (quoting S. Rep.
No. 989, 95th Cong., 2d Sess. 54 (1978);  H.R. Rep. No. 595, 95th
Cong., 1st Sess. 340 (1977)).  Section 362(b)(3) of the Code carves
out an exception to the automatic stay, by allowing "any act to
perfect an interest in property to the extent that the trustee's
rights and powers are subject to such perfection under section 546(b)
of this title." 11 U.S.C. 362(b)(3).  Section 546(b), in turn,
provides that the rights and powers of the trustee to avoid statutory
liens "are subject to any generally applicable law that permits
perfectino of an interest in property to be effective against an
entity that requires rights in such property before the date of such
perfection." 11 U.S.C. 546(b).

   Section 546(b) establishes an exception to the automatic stay
where, under state law, a creditor has a prepetition interest in
property that needs only to be perfected after the bankruptcy petition
is filed.  See Virginia Beach Fed. Sav. & Loan Ass'n v. Wood, 901 F.2d
849, 852 (10th Cir. 1990);  Equibank, N.A. v. Wheeling-Pittsburgh
Steel Corp., 884 F.2d at 85;  In re Casbeer, 793 F.2d 1436, 1442-1443
(5th Cir. 1986);  4 L. King, Collier on Bankruptcy Paragraph 546.03(2)
(15th ed. 1983). See also S. Rep. No. 989, supra, at 86 (Section
546(b) allows a creditor to "perfect his interest against the trustee"
only if "under applicable nonbankruptcy law, and as of the date of the
petition," the creditor has an existing interest which merely needs to
be perfected "against an intervening interest holder.").  The purpose
of the Section 546(b) exception is to "protect, in spite of the
surprise intervention of (the) bankruptcy petition, those whom State
law protects." H.R. Rep. No. 595, supra, at 371.  Accordingly, the
validity of petitioners' contention in this case turns on the status
of their tax claims under state and local law.

   The bankruptcy court, district court, and court of appeals all held
that, under the applicable provisions of the Lockport City Charter and
the laws of the State of New York, petitioners' interests arose on the
dates the city taxes were published (January 4, 1983 and January 3,
1984) and the school tax rolls were adopted (September 13, 1982 and
September 1, 1983).  That holding is consistent with the provision of
the Lockport City Charter that city taxes "shall be a lien upon the
lands on which they are assessed * * * from the first publication of
the notice of such tax or assessment by the Treasurer." Lockport City
Charter Section C-271.  See Pet. App. 63a.  It also is consistent with
the provision of New York law that school taxes "shall become a lien
as of the date and hour of the confirmation or final adopting of the
school roll." N.Y. Real Prop. Tax Law Section 1312 (McKinney 1989).

   The courts below reasonably construed these provisions of state and
local law to conclude that petitioners did not have an interest in the
property until the tax liens were created.  Because the liens were
created after Guterl filed its petition for bankruptcy on August 9,
1982, petitioners' interests are outside the scope of the Section
546(b) exception to the automatic stay.  /3/

   2. Petitioners contend that the decision in this case conflicts
with the Fourth Circuit's decision in Maryland Nat'l Bank v. Mayor of
Baltimore, 723 F.2d 1138 (1983), and the Second Circuit's decision in
In re Parr Meadows Racing Ass'n, Inc., 880 F.2d 1540 (1989), cert.
denied, 110 S. Ct. 869 (1990).

   In the Maryland National Bank case, the Fourth Circuit concluded
that the City of Baltimore had an "ever-present" interest in the
property at issue "by force of the generally applicable laws of
Maryland" that prohibit both buyers and sellers from avoiding property
taxes through sale of the property.  723 F.2d at 1142.  The state and
local laws at issue here, unlike the Maryland statutes construed in
Maryland National Bank, identify "affirmative acts" necessary to
acquire an interest in the property.  See Pet. App. 12a.  Because each
decision turns on different provisions of state and local tax law,
they are not in conflict.

   In Parr Meadows, the Second Circuit considered and rejected both
the secured creditors' assertion that Suffolk County has no property
interest until taxes became due and payable, and the County's
assertion that it has an ever-present interest in the property.  The
court's narrow conclusion was that "for the tax system in Suffolk
County, neither rationale is correct." 880 F.2d at 1546 (emphasis
added).  The Second Circuit construed the Suffolk County Tax Act to
provide that the County acquired a property interest on the "tax
status date" of each year.  /4/ Id. at 1547.  Here, the court of
appeals construed the Lockport City Charter rather than the Suffolk
County Tax Act.

   Even if the decision in this case were in some tension with
Maryland Nat'l Bank or Parr Meadows, certiorari would not be
warranted.  In each case, the decision turned on the nature of a
property interest created by state or local tax law rather than any
provision of the Bankruptcy Code.  This Court generally does not
review a federal court of appeals' determination of a question of
state law.  Huddleston v. Dwyer, 322 U.S. 232, 237 (1944);  see R.
Stern, E. Gressman & S. Shapiro, Supreme Court Practice Section 4.10,
at 211 (6th ed. 1986).  Any uncertainty about the interpretation of
the laws of New York or the City of Lockport can be resolved
authoritatively by the state courts, or by state or local legislation.
 Because the court of appeals has decided a non-federal question of
limited significance, it warrants no further review.  /5/

                              CONCLUSION

   The petition for a writ of certiorari should be denied.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   STUART M. GERSON

      Assistant Attorney General

   MARK B. STERN

   LORI M. BERANEK

      Attorneys

   MARCH 1991

   /1/ The record does not disclose whether the FmHA made good on its
guarantee, but the court of appeals assumed, for purposes of this
case, that it had done so.  See Pet. App. 4a.

   /2/ The County of Niagara was a party in the court below, but has
not filed a petition for certiorari.  See Pet. ii.

   /3/ The logic of the court's decision is illustrated by
petitioners' claim for "water rents," which are taxes on "consumed"
water added to the city property tax bill.  See Pet. App. 61a.
Because Guterl had paid its taxes in full prior to filing the petition
for bankruptcy, petitioners are asserting that they had a property
interest in unpaid water rents before the water was consumed.

   /4/ Although the Second Circuit cited N.Y. Real Prop. Tax Law
Section 302 (McKinney 1984), that statute applies to cities, towns,
and school districts, but not to counties.  See Pet. App. 14a n.4.
See also N.Y. Gen. City Law Section 20(4) (McKinney 1989) (delegating
to local governments the taxation of real property).  Thus, the Second
Circuit was obliged to look to the Suffolk County Tax Act to determine
when Suffolk County acquired an interest in real property.

   /5/ Although petitioners assert (Pet. 9-12) that 11 U.S.C.
362(b)(3) excepts their tax claims from the automatic stay, they
concede (Pet. 9) that the exception of Section 362(b)(3) applies only
if, under applicable state and local laws, they acquired an interest
in the property before the bankruptcy petition was filed.  The courts
below, construing Lockport's Charter and the laws of New York,
reasonably concluded that petitioners did not acquire a property
interest until after the petition was filed.