Opinion ID: 303769
Heading Depth: 1
Heading Rank: 2

Heading: Standing of the Trustee to Attack the Validity of the Deeds of Trust

Text: 8 Of all the complex legal issues we have to determine in this case, perhaps this is the simplest to resolve. It will aid in clarity of analysis to keep in mind these facts: that the Trustee here is not acting on behalf of Parkwood and Adams, the debtor corporations, but on behalf of all creditors, particularly the unsecured creditors; that none of the notes secured by the deeds of trust was assumed by either Parkwood or Adams, and therefore the claims against the bankrupt estate rest entirely and only on the deeds of trust covering the particular pieces of realty involved. Two of the principal grounds relied upon by the Referee, and approved by the District Court, were that the Trustee was estopped from attacking the validity of the deeds of trust and therefore could not set them aside by asserting rights under Secs. 70(c) and (e) of the Bankruptcy Act, and that somehow it was inequitable or would be a windfall to Parkwood and Adams to have these deeds of trust set aside. We think these two bases of decision by the Referee and the District Court were unsound. 9 In the first instance, what is equitable in a bankruptcy proceeding-and bankruptcy is part of the equity jurisdiction of the District Court-has been rather specifically spelled out in the Bankruptcy Act itself. In the second place, those provisions equally specifically give the Trustee here a right to set aside invalid deeds of trust. 10 Under Sec. 70(c) of the Bankruptcy Act 2 the trustee possesses the rights of any hypothetical lien creditor of the debtor. The trustee's rights do not depend on the existence of any such creditor, but it has the status of the ideal creditor, irreproachable and without notice, armed cap-a-pie with every right and power which is conferred by the law of the state upon its most favorite creditor who has acquired a lien by legal or equitable proceedings. 3 11 It follows that in the exercise of such rights the trustee cannot be affected by any so-called estoppel which may be attributable to the debtor. The whole purpose of Sec. 70(c) was to give the trustee defenses which the trustee might otherwise not have if he were confined to the position of the bankrupt, who may very frequently have engaged in various acts which would estop him to deny the validity of his security obligations. The bankrupt may have engaged in chicanery or favoritism of certain creditors or other acts that are in derogation of the Bankruptcy Act's paramount purpose: equality of distribution among all creditors. . . . The trustee would be sorely handicapped if he were not accorded some superior status, attaching as of the date of bankruptcy, that would enable him to challenge the validity of such transactions. This, then, is the purpose of the second sentence of Sec. 70(c). It has been justly and characteristically termed 'the strong-arm clause.' 4 12 As of the date the petition for reorganization was filed the Trustee here gained the rights and powers of a lien creditor who had perfected his lien on the property of the debtor, irrespective of whether such a creditor actually exists, so says Sec. 70(c). Among other powers of a lien creditor is the right to set aside an invalid deed of trust on the property. 5 13 In addition to the trustee's rights under Sec. 70(c), which apply versus all three mortgagees here, under Sec. 70(e) 6 of the Bankruptcy Act the trustee can assert the rights of any existing creditor who could move to set aside the deed of trust held by Equitable. In contrast to Sec. 70 (c), Sec. 70(e) requires the existence of a real creditor having that power. Potomac Cooperators, Inc., holds a second deed of trust on the same property on which Equitable holds a first deed of trust, and has filed proof of claim in the bankruptcy proceeding as a secured creditor. The Trustee himself, for the same reason that Potomac Cooperators could move to set aside the allegedly invalid deed of trust held by Equitable, moved to void the deed of trust under Sec. 70(e). Furthermore, the directive in Sec. 47(a) (8) of the Bankruptcy Act 7 to examine all proofs of claim and object to the allowance of such claims as may be improper requires the trustee to object to all invalid security instruments. In so doing, the trustee is acting for the benefit of all creditors and not, as the Referee and the court seemed to think, to create a windfall for the reorganized corporations whose affairs are being administered. 8 14 We conclude that the Trustee had standing to attack the validity of the deeds of trust held by the claimant insurance companies under Secs. 70(c) and 70(e) of the Bankruptcy Act, and that the District Court erred in holding to the contrary. 15 III. The Applicability of the District of Columbia Loan Shark Act to Loans Made by Insurance Companies 16 Section 26-601 of the District of Columbia Code provides: 17 It shall be unlawful and illegal to engage in the District of Columbia in the business of loaning money upon which a rate of interest greater than six percentum per annum is charged on any security of any kind . . . without procuring license. . . . 18 Section 26-610 of the Code exempts certain specified types of businesses from the operation of Sec. 26-601. At the time the loans herein were made, life insurance companies were not among the businesses so exempted. In construing Sec. 26-601 this court has held that 19 It applies to all who would engage, in the District of Columbia, in the business of lending money upon which a rate of interest greater than six per centum per annum is charged, except those exempted by section 26-610. 9 20 Appellees Equitable and Manufacturers nevertheless argue that Sec. 26-601 does not apply to insurance companies which invest their funds by making loans secured by real estate. This argument, which the District Court accepted, rests essentially upon three bases which we now examine. 21 First, it is maintained that life insurance companies are not engaged in the business of loaning money, but rather that the making of loans (the investment of funds in appellees' terms) is an integral part of the insurance business. But there is nothing in the statute which suggests that it applies only to those whose sole business is that of loaning money. In fact, Sec. 26-601 regulates the regular activity of loaning money regardless of whether those who are so engaged do so as part of another business. 10 Indeed, while not disputing that the lending of money is an integral part of the insurance business, appellant points out that if that were sufficient to remove a company from the coverage of Sec. 26-601, then the exemption section (Sec. 26-610) would be largely unnecessary. 22 Section 26-610 provides that nothing in Sec. 26-601 shall apply to the legitimate business of national banks, licensed bankers, trust companies, savings banks, building and loan associations . . . or real estate brokers. 11 Each of these exempted businesses is obviously engaged in activity which integrally involves the loaning of money. Thus if insurance companies were to be held not to be in the business of loaning money simply because their loans are an integral part of another, i. e., the insurance, business, the same rationale would apply for example to banks, whose loans can be said to be an integral part of the banking business, and there would have been no need specifically to exempt banks from the operation of the statute. We thus cannot agree with the Referee in Bankruptcy and the District Court that life insurance companies which regularly loan money on security are not engaged in the business of loaning money simply because they do so as part of their insurance business. 23 The second ground advanced to sustain the District Court's ruling is that since life insurance companies are comprehensively regulated under the provisions of Title 35 of the District of Columbia Code, they cannot be subject to licensing regulation of their lending activities under Sec. 26-601. 12 In the first place, we note that many of the other businesses exempted by Sec. 26-610 are also extensively regulated under other provisions of the District of Columbia Code or otherwise, but that such regulation did not obviate the need specifically to exempt them in Sec. 26-610. Furthermore, we find nothing in Title 35 which conflicts with the purpose of regulation of lenders under Sec. 26-601. Title 35 is concerned with the regulation of insurance companies for the protection of their policyholders. The Loan Shark Law, on the other hand, regulates those in the business of loaning money, in order to protect borrowers. Such regulation of lending activities for the protection of borrowers is in no way inconsistent with the regulation of insurance activities for the protection of policyholders. 24 The Referee and the District Court cited D.C.Code Sec. 35-535 which authorizes life insurance companies to lend money against the security of real estate. But Sec. 35-535 is nothing more than a legal list of investments which life insurance companies are permitted to make and is clearly directed toward the protection of policyholders. It says nothing concerning the terms on which such loans may be made, and thus in no way precludes other regulation for the protection of borrowers where interest in excess of 6% is to be charged. To hold that regulation of the insurance business as such, under one part of the Code, automatically exempts insurance companies from other types of regulation would nullify the effect of many general regulatory statutes insofar as the operations of insurance companies are concerned. For example, the same reasoning would support the conclusion that insurance companies were not subject to the usury statute, D.C. Code Sec. 28-3301. And the provision in Sec. 35-535(14) (f) that life insurance companies may acquire real estate for the production of income . . . [and] may improve or otherwise develop in any manner such real estate . . . might, under the reasoning of the District Court, lead to the conclusion that life insurance companies which own property need not comply with the building and zoning regulations of the District. We conclude, as we must, that nothing in Title 35's regulation of insurance companies prevents or precludes the application of Sec. 26-601 to loans such as those involved in the case at bar. 25 Finally, appellees urge that the legislative history of the Loan Shark Act indicates that it was not intended to apply to large loans made by institutional lenders and secured by real estate. In the first place, this view ignores the principle that where the meaning of a statute is plain on its face, interpretation thereof by resort to legislative history is improper. 13 Here the Act plainly applies to all who are in the business of lending money on security at a rate of interest in excess of 6% except for those types of organizations specifically exempted from coverage by Sec. 26-610. And this court has expressly held that Sec. 26-601 applies to large loans secured by real estate. 14 26 As illustrative of the general recognition that large loans secured by real estate do fall within Sec. 26-601, one need only consider the position of real estate brokers. Acting as agents for others, real estate brokers customarily participate in transactions involving large real estate loans. If such transactions did not fall within Sec. 26-601, it would never have been thought necessary to include real estate brokers in the list of those exempted under that section. 27 In contrast, prior to 1963 life insurance companies were not included in the list of organizations exempted by Sec. 26-610. It therefore inexorably follows that life insurance companies which prior to 1963 made loans at interest rates in excess of 6% were required to be licensed under Sec. 26-601. And if such loans were made without a license in violation of Sec. 26-601, they are, under the prior holdings of this court, together with the promissory notes and deeds of trust given therefor, illegal and void. As we held in Hartman v. Lubar, 15 28 if the disputed loan was made by one who was engaging in the business of lending money in violation of the law, and if the loan was made in the course of that business, then it constituted an illegal contract. The general rule is that an illegal contract, made in violation of a statutory prohibition designed for police or regulatory purposes, is void and confers no right upon the wrongdoer.    Every consideration of public policy suggests that a contract made in violation of the Loan Shark Law should be unenforceable. 29 If Congress, when it exempted life insurance companies from the coverage of the Loan Shark Act in 1963, had intended to validate previous transactions made by life insurance companies in violation of the Loan Shark Act, it could have done so by providing that the exemption granted in 1963 would have a retroactive effect. It did not do so. 16 30 The history of other exemptions added to Sec. 26-610 is illuminating. In 1960 Congress added small business investment companies to the list of those exempted. The House Committee on Banking and Currency stated the necessity for such exemption in terms unmistakably refuting the position of appellee insurance companies here: 31 Although it [Sec. 26-601 et seq.] was obviously not intended to apply to SBIC's, it does apply to them literally and constitutes an obstacle to effective operation of SBIC's in the District of Columbia. The bill grants the same exemption for SBIC's that is now written into the law for commercial banks, savings banks, savings and loan associations, and real estate brokers. 17 32 Again in 1962, in hearings on the bill predecessor to the 1963 amendment, which eventually exempted life insurance companies under Sec. 26-610, Congress was well aware that Sec. 26-601 applied to all entities not specifically exempted by Sec. 601, including life insurance companies. Testimony of the Chairman of the Legislative Committee, Mortgage Bankers Association of Metropolitan Washington, asserted that a majority of life insurance companies making mortgage loans in the District of Columbia had decided on advice of counsel that, as a result of court decisions and the omission of insurance companies from the list of those lending institutions exempted from the so-called Loan Shark Law, such insurance companies should not lend money in the District of Columbia at rates in excess of 6%. 18 The purpose of H.R. 9441 (the predecessor in the preceding Congress of H.R. 3191 enacted in the 88th Congress) was described as to remove a barrier that now prevents the free flow of money into the District of Columbia for investment and mortgage loans on real estate. 19 33 Under established principles of statutory construction it is significant that Congress acted to add small business investment companies and insurance companies to the list of exemptions under Sec. 26-610, and has never sought to amend Sec. 26-601 after this court's repeated interpretation of Sec. 26-601 as including all who would engage, in the District of Columbia, in the business of lending money upon which a rate of interest greater than 6 per centum per annum is charged, except those exempted by Sec. 26-610. 20 If Congress had interpreted Sec. 26-601 as the District Court did here, it would never have found it necessary in 1960 and 1963 to add exemptions. Nor would it have stated in 1963, adding the life insurance companies to Sec. 610, The purpose of this bill [H.R. 3191] is to exempt life insurance companies from the provision of an act regulating moneylending. 21 This same amendment also added a requirement that persons or legal entities exempted from Sec. 601 by Sec. 610(a) should maintain in the District of Columbia a resident agent, and provided a sanction that if the otherwise exempted entity did fail to appoint and maintain such resident agent, then it was not entitled to the exemption provided by Sec. 26-610(a). If Congress considered that the entities could have recourse to any other exemption except that provided by Sec. 26-610 (a), this sanction would have been obviously useless. 34 We conclude that life insurance companies which regularly make loans in the course of their insurance business are in the business of lending money within the meaning of Sec. 26-601 and until 1963 were not exempt from the requirement of obtaining a license in order to make loans at a rate of interest in excess of 6%. It follows that unless considerations peculiar to the cases of Equitable and Manufacturers operate to remove the transactions here involved from the applicability of the Loan Shark Law, the deeds of trust securing the loans herein are invalid and thus subject to attack by the Trustee in reorganization. To such considerations we now turn. 35