Source: https://www.legalcrystal.com/case/96114/louisville-joint-stock-land-bank-vs-radford
Timestamp: 2019-04-18 18:51:43+00:00

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1. The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment. P. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. Pp. 295 U. S. 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. 295 U. S. 601 .
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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 585 .
Never, so far as appears, has a composition affected a secured claim held by a single creditor. P. 295 U. S. 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. 295 U. S. 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. 295 U. S. 589 .
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. Pp. 295 U. S. 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. 295 U. S. 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. 295 U. S. 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. 295 U. S. 593 .
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.
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 provisions of the Emergency Farm Mortgage Act, May 12, 1933, c. 25, 48 Stat. 41. [ Footnote 4 ] After they declined to do so, the Bank, having declared the entire indebtedness immediately payable, commenced, in June, 1933, a suit in the circuit court for Christian county against the Radfords and their tenant to foreclose the mortgages, and, invoking a covenant in the mortgage expressly providing therefor, sought the appointment of a receiver to take possession and control of the premises and to collect the rents and profits.
The referee ordered an appraisal of all of Radford's property, encumbered and unencumbered. The appraisers found that "the fair and reasonable value of the property of the debtor on which Louisville Joint Stock Bank has a mortgage" and also the "market value of said land" was then $4,445. [ Footnote 5 ] The referee approved the appraisal, although the Bank offered in open court to pay $9,205.09 in cash for the mortgaged property, and counsel for the bankrupt admitted that the Bank had a valid lien upon it for the amount so offered to be paid, and that, under the law, if the Bank's offer to purchase the property were accepted, all the money paid in in cash would be immediately returned to it in satisfaction of the mortgage indebtedness.
made in the form and detail of foreclosure and redemption. [ Footnote 9 ] But practically always the measures adopted for the mortgagor's relief, including moratorium legislation enacted by the several states during the present depression, [ Footnote 10 ] resulted primarily in a stay, and the relief afforded rested, as theretofore, upon the assumption that no substantive right of the mortgagee was being impaired, since payment in full of the debt with interest would fully compensate him.
Statutes for the relief of mortgagors, when applied to preexisting mortgages, have given rise, from time to time, to serious constitutional questions. The statutes were sustained by this Court when, as in Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398 , they were found to preserve substantially the right of the mortgagee to obtain, through application of the security, payment of the indebtedness. They were stricken down, as in W.B. Worthen Co. v. Kavanaugh, 295 U. S. 56 , when it appeared that this substantive right was substantially abridged. Compare W.B. Worthen Co. v. Thomas, 292 U. S. 426 .
"The injunction here in no ways impairs the lien, or disturbs the preferred rank of the pledgees. It does no more than suspend the enforcement of the lien by a sale of the collateral pending further action. It may be, as suggested, that, during the period of restraint, the collateral will decline in value; but the same may be said in respect of an injunction against the sale of real estate upon foreclosure of a mortgage, and such an injunction may issue in an ordinary proceeding in bankruptcy. Straton v. New, 283 U. S. 318 , 283 U. S. 321 , and cases cited. . . . The injunction here goes no further than to delay the enforcement of the contract. It affects only the remedy."
is desired by the requisite majority and is approved by the court. [ Footnote 16 ] Never, so far as appears, has any composition affected a secured claim held by a single creditor. Compositions are comparable to the voluntary adjustment with the mortgagee provided for in paragraph 3 of the Frazier-Lemke amendment. They are not analogous to the so-called adjustment compelled by paragraph 7.
of real property as determined by the law of the state in which the property is located. The bank argues that, if the bankruptcy clause were construed to permit the making of such fundamental changes, Congress could deal with every phase of the relations between an insolvent or nonpaying debtor and his creditors; that it might, among other things, divest state courts of jurisdiction over suits upon promissory notes between citizens of the same state; that commercial controversies arising from breach of contract might be brought under like control; that the obtaining of goods or credits by false pretenses, for example, could be made a crime against the United States despite the rule declared in United States v. Fox, 95 U. S. 670 ; that the commercial and financial life of each state would be in large measure subject to federal regulation, and that the lines between state and federal government could thus be redrawn by Congress.
"The fundamental and radically progressive nature of these extensions becomes apparent upon their mere statement, but all have been judicially approved or accepted as falling within the power conferred by the bankruptcy clause of the Constitution. [ Footnote 18 ]"
Fourth. The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment. [ Footnote 19 ] Under the bankruptcy power, Congress may discharge the debtor's personal obligation, because, unlike the states, it is not prohibited from impairing the obligations of contracts. Compare Mitchell v. Clark, 110 U. S. 633 , 110 U. S. 643 . But the effect of the Act here complained of is not the discharge of Radford's personal obligation.
as 6 percent on the appraised value. [ Footnote 21 ] Moreover, before any deferred payment of the purchase price is made, there is serious danger that the bank's investment might be further impaired. The mortgaged property might be lessened in value by waste. It might become burdened with the liens for accruing unpaid taxes; [ Footnote 22 ] for, while interest at the rate of one percent of the appraised value of the Radford farm is $44.45, the present annual taxes (plus insurance premium) are, as stipulated, $105. Thus, if the alternative offered by paragraph 3 were accepted, the transaction would result merely in a transfer of possession to the bankrupt for six years with an otherwise unsecured promise to purchase at the end of the period for a price less than the appraised value.
years, the bankrupt's only monetary obligation is to pay a reasonable rental fixed by the court. There is no provision for the payment of insurance or taxes, save as these may be paid from the rental received. During that period, the bankrupt has an option to purchase the farm at any time at its appraised, or reappraised, value. [ Footnote 23 ] 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. Thus, the bankrupt may leave it uncertain for years whether he will purchase, and, in the end, he may decline to buy. Meanwhile, the mortgagee may have had (and been obliged to decline) an offer from some other person to take the farm at a price sufficient to satisfy the full amount then due by the debtor. The mortgagee cannot require a reappraisal when, in its judgment, the time comes to sell; it may ask for a reappraisal only if and when the bankrupt requests a sale. Thus, the mortgagee is afforded no protection if the request is made when values are depressed to a point lower than the original appraisal. While paragraph 7 declares that the bankrupt's possession is "under the control of the court," this clause gives merely supervisory power. Such control leaves the court powerless to terminate the option unless there has been the commission of waste or failure to pay the prescribed rent.
Sixth. Radford contends that these changes in the position of the bank, wrought pursuant to the Act, do not impair substantive rights, because the bank retains every right in the property to which it is entitled. The contention rests upon the unfounded assertion that its only substantive right under the mortgage is to have the value of the security applied to the satisfaction of the debt. It would be more accurate to say that the only right under the mortgage left to the bank is the right to retain its lien until the mortgagor, some time within the five-year period, chooses to release it by paying the appraised value of the property. A mortgage lien so limited in character and incident is, of course, legally conceivable. It might be created by contract under existing law. [ Footnote 28 ] If a part of the mortgaged property were taken by eminent domain, a mortgagee would receive payment on a similar basis. [ Footnote 29 ] But the Frazier-Lemke Act does not purport to exercise the right of eminent domain, and neither the law of Kentucky nor Radford's mortgages contain any provision conferring upon the mortgagor an option to compel at any time within five years a release of the farm upon payment of its appraised value, and a right to retain meanwhile possession upon paying a rental to be fixed by the bankruptcy courts.
since it receives the rental value of the property. [ Footnote 30 ] It is argued that experience has proved that five years is not unreasonably long, since a longer period is commonly required to complete a voluntary contract for the sale and purchase of a farm, or to close a bankruptcy estate, or to close a railroad receivership. And it is asserted that Radford is, in effect, acting as receiver for the bankruptcy court. Radford's argument ignores the fact that, in ordinary bankruptcy proceedings and in equity receiverships, the court may, in its discretion order an immediate sale and closing of the estate, and it ignores also the fundamental difference in purpose between the delay permitted in those proceedings and that prescribed by Congress. When a court of equity allows a receivership to continue, it does so to prevent a sacrifice of the creditor's interest. Under the Act, the purpose of the delay in making a sale and of the prolonged possession accorded the mortgagor is to promote his interests at the expense of the mortgagee.
The Bank was organized under the Federal Farm Loan Act of July 17, 1916, c. 245, 39 Stat. 360. Section 12 of the Act provided that loans should not exceed 50 percent of the value of the land mortgaged and 20 percent of the value of permanent insured improvement thereon. The Bank loaned the Radfords $8,000 in 1922 and an additional $1,000 in 1924. The stocks and bonds of the Bank are privately owned. The bonds, "being instrumentalities of the Government of the United States," are tax exempt. Compare Smith v. Kansas City Title Co., 255 U. S. 180 ; Federal Land Bank of New Orleans v. Crosland, 261 U. S. 374 ; Act of May 12, 1933, c. 25, § 29, 48 Stat. 46.
It is the general rule that a holder of the equity of redemption can redeem from the mortgagee only on paying the entire mortgage debt. Collins v. Riggs, 14 Wall. 491; Jones v. Van Doren, 130 U. S. 684 , 130 U. S. 692 ; American Loan & Trust Co. v. Atlanta Electric Ry. Co., 99 F. 313, 315, 316; Lomas & Nettleton Co. v. Di Francesco, 116 Conn. 253, 258, 164 A. 495; Palk v. Lord Clinton, 12 Ves.Jr. 48, 58. The rule is for the protection of the mortgagee, and, unless waived by him, applies even when the redeemer has an interest in only part of the mortgaged property. Bank of Luverne v. Turk, 222 Ala. 549, 133 So. 52; Quinn Plumbing Co. v. New Miami Shores Corp., 100 Fla. 413, 129 So. 690; Shinn v. Barrie, 182 Ark. 366, 31 S.W.2d 540. Recognized exceptions to the rule are based on the action of the mortgagee in himself causing the lien on a part of the mortgaged property to be extinguished, Dexter v. Arnold, 1 Sumn. 109, 118; Welch v. Beers, 8 Allen 151; George v. Wood, 11 Allen 41; Meacham v. Steele, 93 Ill. 135; Coffin v. Parker, 127 N.Y. 117, 27 N.E. 814, or on the right of eminent domain, Dows v. Congdon, 16 How.Prac. 571; Mutual Life Insurance Co. v. Easton & Amboy R., 38 N.J.Eq. 132. Where the right of redemption after foreclosure sale is based entirely on statute, a different rule may be prescribed. Compare Northwestern Mutual Life Ins. Co. v. Hansen, 205 Iowa, 789, 218 N.W. 502; Tuttle v. Dewey, 44 Iowa, 306; State v. Carpenter, 19 Wash. 378, 53 P. 342; see Dougherty v. Kubat, 67 Neb. 269, 273, 93 N.W. 317. For collections of cases, see 2 Jones, Mortgages (8th Ed.1928) §§ 1370-1377; 2 Wiltsie, Mortgage Foreclosure (4th ed.1927) §§ 1196-1213, 1071.
Compare Pewabic Mining Co. v. Mason, 145 U. S. 349 , 145 U. S. 361 -362; Easton v. German-American Bank, 127 U. S. 532 ; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587 , 91 U. S. 590 ; Buchler v. Black, 226 F. 703; Caldwell v. Caldwell, 173 Ala. 216, 55 So. 515; Felton v. Le Breton, 92 Cal. 457, 28 P. 490; Chillicothe Paper Co. v. Wheeler, 68 Ill.App. 343; Kock v. Burgess, 176 Iowa 493, 156 N.W. 174, 158 N.W. 534; McNair v. Biddle, 8 Mo. 257; Stover v. Stark, 61 Neb. 374, 85 N.W. 286; Paulson v. Oregon Surety & Cas. Co., 70 Or. 175, 138 P. 838; Blythe v. Richards, 10 Serg. & R. 261; Archambault v. Pierce, 46 R.I. 295, 127 A. 146. Some states have abolished by statute the general rule that a mortgagee, exercising a power of sale conferred in the mortgage, may not purchase at his own sale. See Heighe v. Sale of Real Estate, 164 Md. 259, 164 A. 671, 676; Ten Eyck v. Craig, 62 N.Y. 406, 421; Galvin v. Newton, 19 R.I. 176, 178, 36 A. 3; 2 Wiltsie, Mortgage Foreclosure (4th Ed.1927) § 869.
See Bailey v. Glover, 21 Wall. 342, 88 U. S. 346 ; Mayer v. Hellman, 91 U. S. 496 , 91 U. S. 501 ; Wiswall v. Campbell, 93 U. S. 347 , 93 U. S. 350 ; Hanover National Bank v. Moyses, 186 U. S. 181 , 186 U. S. 186 ; Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 300 , 222 U. S. 307 ; Williams v. U.S. Fidelity & Guaranty Co., 236 U. S. 549 , 236 U. S. 554 ; Straton v. New, 283 U. S. 318 , 283 U. S. 320 . Also In re California Pacific R. Co., Fed.Cas. No. 2,315; In re Jordan, Fed.Cas. No. 7,514; In re Reiman, Fed.Cas. No. 11,673; In re Vogler, Fed.Cas. No. 16,986; Leidigh Carriage Co. v. Stengel, 95 F. 637, 647; In re Swofford Bros. Dry-Goods Co., 180 F. 549, 556; Story on The Constitution (4th Ed.) § 1106; Olmstead, Bankruptcy, A Commercial Regulation, 15 Harv.Law Rev. 829; Levinthal, The Early History of Bankruptcy Law, 66 U. of Pa.Law Rev. 223, 225.
For instance, the war power, Ex parte Milligan, 4 Wall. 2, 71 U. S. 119 ; Ochoa v. Hernandez, 230 U. S. 139 , 230 U. S. 153 -154; Hamilton v. Kentucky Distilleries Co., 251 U. S. 146 , 251 U. S. 155 . The power to tax, United States v. Railroad Co., 17 Wall. 322; Boyd v. United States, 116 U. S. 616 ; Nichols v. Coolidge, 274 U. S. 531 , 274 U. S. 542 ; Blodgett v. Holden, 275 U. S. 142 , 275 U. S. 147 ; Barclay & Co. v. Edwards, 267 U. S. 442 , 267 U. S. 450 ; Heiner v. Donnan, 285 U. S. 312 , 285 U. S. 326 . The power to regulate commerce, Monongahela Navigation Co. v. United States, 148 U. S. 312 , 148 U. S. 336 ; United States v. Joint Traffic Assn., 171 U. S. 505 , 171 U. S. 571 ; Carrol v. Greenwich Insurance Co., 199 U. S. 401 , 199 U. S. 410 ; United States v. Lynah, 188 U. S. 445 , 188 U. S. 471 ; United States v. Cress, 243 U. S. 316 , 243 U. S. 326 . The power to exclude aliens, Wong Wing v. United States, 163 U. S. 228 , 163 U. S. 236 -238. Compare Perry v. United States, 294 U. S. 330 .
Counsel for the debtor suggests that the reasonable rental provided for in paragraph 7 is more than the secured creditor ordinarily receives in bankruptcy, since interest on secured as well as unsecured claims ceases with the filing of the petition. But the rule relied upon applies only when the secured creditor, having realized upon his security, is seeking as a general creditor to prove for the deficiency against the bankrupt estate. Sexton v. Dreyfus, 219 U. S. 339 . It has no application when the mortgagee has a preferred claim against proceeds realized by the trustee from a sale of the security free of liens. Coder v. Arts, 213 U. S. 223 , 213 U. S. 228 , 213 U. S. 245 , aff'g 152 F. 943, 950; People's Homestead Assn. v. Bartlette, 33 F.2d 561; Mortgage Loan Co. v. Livingston, 45 F.2d 28, 34.
Counsel for Radford contends that the five-year provision of paragraph 7 is not inflexible, because, under the rule of Chastleton Corp. v. Sinclair, 264 U. S. 543 , it would cease to be effective on the termination of the emergency which is relied upon to justify the Act. But the Act does not make the five-year option period dependent upon the continuance of a national emergency, and the options conferred upon the farmer owner show that it was the needs of the particular debtor to which consideration was given.

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