Court Opinion

ID: 8878158
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:45:23.270355+00
Date Added: 2024-06-11T17:06:29.167098
License: Public Domain

ALBERT V. BRYAN, Circuit Judge,
(dissenting):
In my judgment the proceeds of sale should be distributed in this manner:
First, pay SBA the money owing on its mortgage;
Second, from this money require SBA to reimburse the Bank its loan of $400,-000; and
Third, to the mechanic’s lien any moneys left after payment of SBA’s loan.
The subordination stipulation in the Small Business Administration mortgage wholly distinguishes this case from the Government-priority-lien and the circuity-of-lien decisions on which the majority relies, e. g., United States v. City of New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). Although not so couched in terms, actually it is a covenant to pay the Bank’s loan from SBA’s recovery. The assurance is effectuated through the extension to the Bank of the benefit of SBA’s overriding priority.
I. To start with, the majority errs in deciding the Bank’s rights on the basis of the State law. The claim of the Bank rests entirely on Federal law. Priority as between the liens of the Bank and SBA is established solely by Federal criteria. W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881 (4 Cir. 1963). The primacy claimed by the Bank is not founded on State law. It is supported to a point, as will more explicitly appear immediately, by the decision in United States v. State of Texas, 314 U.S. 480, 62 S.Ct. 350, 8 L.Ed. 356 (1941) but it is only fully established by SBA’s mortgage stipulation. There can be no doubt that Federal law governs interpretation of the meaning and force of the stipulation.
II. The presence of the SBA mortgage following the Bank mortgage was not, as the majority would have it, simply a fortuitous circumstance. SBA’s mortgage complemented the Bank’s. The two loans had a single object, the provision of moneys for a project admittedly within the field of the Small Business Administration.
SBA policy in furnishing aid is to avoid interference with private financing. If it had placed the mortgage without having an understanding with the Bank, it might have pulled down the entire enterprise. This is true because the SBA mortgage might otherwise, as will soon appear, prevail over the Bank mortgage and thus destroy or dangerously impair its security. The Bank was not compelled to suffer a confiscation of this kind through an agreement of the owner and SBA alone. Such an act of the owner would certainly be an abrogation, or default, of and in the inherent condition of the mortgage that the security not be removed. Seemingly it would, also, be a breach of the owner’s warranties in the *163Bank’s mortgage.1 The moment the SBA mortgage was recorded, the Bank’s security was jeopardized. Thereupon the Bank would have the right to restrain its consummation or to foreclose unless this threat was abated. Obviously, SBA did not intend to bring about a collapse of the whole venture. No private mortgage would be obtainable on SBA-eligible projects if an owner and SBA, without the assent of the private lender, could completely dissolve the latter’s security. The stipulation in the SBA mortgage was plainly inserted to bar that possibility.
The statute did not in terms give a private mortgage a place above a subsequent Government mortgage, and the decisional law was by no means clear in so preferring it. The nearest approach was United States v. State of Texas, supra, 314 U.S. 480, p. 484, 62 S.Ct. 350, p. 352 (1941) where the uncertainty appears in the words of the Court:
“Section 3466 [now 31 USC § 191] mentions no exceptions to its requirement that ‘the debts due to the United States shall be first satisfied.’ It is nevertheless true that in several early decisions this Court read an exception into the section in the case of previously executed mortgages. Thelusson v. Smith, 2 Wheat, 396, 426, 4 L.Ed. 271; Conrad v. Atlantic Insurance Co., 1 Pet. 386, 7 L.Ed. 189; Brent v. Bank of Washington, 10 Pet. 596, 611, 612, 9 L.Ed. 547. This doctrine seems to have been based on the theory that mortgaged property passes to the mortgagee and is no longer a part of the estate of the mortgagor. See Con-ard v. Atlantic Insurance Co., supra, at 441-442, 7 L.Ed. 189. The question of whether the priority of the United States under § 3466 would also be defeated by a specific and perfected lien upon property, whose title remained in the debtor was reserved m those cases. Ibid; Brent v. Bank of Washington, supra, 10 Pet. at 611-612. * * * ” 2
That the parties believed there was this doubt is conclusively evidenced by their adoption of the stipulation. In any event, they now rely upon it.
III. But the stipulation is more than an acknowledgment of lien precedence. To repeat, it really amounts to an agreement between the owner and SBA, for the benefit of both the owner and the Bank, that SBA will from its prime position pay the Bank its loan. Accomplishing a complementation between the two loans, it saved the owner from foreclosure and permitted him to borrow from the Government.
Under the stipulation SBA could not appropriate its lien-recovery to its own loan until it had paid the Bank. SBA, of course, intended to press its overtop-ping lien to the fullest against the mortgage res, and then see that the Bank received its share.
Concededly, SBA was sheltering the Bank under the coverage of the sovereign prerogative. This use of its supremacy in aid of a private lender, however, was entirely within the powers of SBA, unquestionable precedent holds.
While the two loans were not made simultaneously, and so the facts are not identical with those in Small Business Administration v. McClellan, 364 U.S. 446, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960), still the principles there announced are apposite here. Declaring that SBA could lawfully extend its priority to protect private lenders, the Court spoke to the point as follows, p. 452, 81 S.Ct. p. 196:
“The Small Business Administration is authorized to enter into contracts calculated to induce private banks to make loans to small businesses. The contract involved in this case, by pro*164viding additional security to the private bank at the Government’s expense, is well adapted to that end. Indeed, in many cases such a contract may be the only way the Administration could induce private bank participation in a necessary loan.”
The Court continued:
“It is true that the allowance of the priority asserted here will place the bank, a private unsecured creditor, in a better position than other private unsecured creditors. But this position is a result * * * of the bank’s valid contract with the Small Business Administration.” p. 452-453, 81 S.Ct. p. 196.
Presently SBA did in effect contract with the Bank in order to save the Bank mortgage from the squeeze of SBA’s superior strength. Although not persuading the Bank to make the loan originally, the agreement of SBA did induce the Bank to continue its loan.
The status of the Bank’s claim becomes even plainer upon a consideration of the posture of its mortgage after SBA has paid the Bank’s loan. The mortgage is not thereby satisfied, but SBA is subro-gated to its lien. However, as subrogee it would merely step into the place of the Bank. The mortgage then would be subject to the same defenses as could have been interposed against the Bank if it had remained as the mortgagee. That would be the time and place for the contractor to assert his present claim of priority.
The upshot is that the Bank is entitled to payment by virtue of the agreement with SBA, without reference to State law, and consequently the priority given by the West Virginia statute to a mechanic’s lien has no immediate perti-nency.
IV. SBA had an untrammelled right to distribute its recovery by payment of a part to the Bank, just as the Court said in McClellan, supra, 364 U.S. 446, 81 S. Ct. 191:
“ * * * there is no difference between the money so received and money received from any other source and, like other money, it may be disbursed in any way the Government sees fit, including the satisfaction of obligations already incurred so long as the purpose is lawful.” p. 452, 81 S.Ct. p. 196.
The money would come to the Bank unencumbered by any obligation to anyone save the duty to wipe out the debt. Notwithstanding, the Court now subjects this money to the mechanic’s lien because State law gives priority to a mechanic’s lien over a private mortgage. The infirmity of this contention is that the Bank’s receipt did not derive from the enforcement of its lien against the property, but came out of the SBA’s priority. The Court’s decision violates the policy and agreement of SBA in making its loan. The contractor accepted the benefits of the loan — presumably it was applied to the cost of the construction— and without the stipulation, he would not have received the SBA money.
No equitable considerations dictate capture of the Bank’s recovery, as the Court now does, to save the contractor. He would not have recovered a penny had the Bank not participated in the case at all. The Bank has taken nothing from the contractor. Its claim is not satisfied out of moneys against which the contractor would otherwise be entitled. He is not displaced by any act of the Bank.
For its decision the Court reasons that the contractor’s priority over the Bank under State law should not be disturbed, cf. United States v. City of New Britain, supra, 347 U.S. 81, 88, 74 S.Ct. 367, 98 L.Ed. 520 (1954), because the contractor would prevail here, if the Federal government were not involved. However appealing it may seem at a glance, this contention ignores the paramount fact that the Federal government is involved here, and that its presence is attended by the compelling demands of the Federal statute and the policy and needs of the SBA.
In looking for equities to support its conclusion, the Court also muses on what *165might have been done by the Bank to save itself. It is said that the Bank was the only party which could have protected itself. It cannot be denied that it could have obtained a waiver of the mechanic’s lien before advancing the loan moneys. But this comes with poor grace from the contractor as ground for equitable relief; the exaction of a release would have put the pinch on the contractor.
If reveries are to create equities, it is only right to ponder also what the contractor might have done. The contract- or could have sought lien subordination from SBA as did the Bank. Had it been refused, the contractor could have treated the procurement of the SBA loan as a breach of the contract by the owner, i. e. impairment of the priority of the contractor’s statutory lien. Also, speaking of possibilities open to the litigants, the contractor could have demanded payments from the owner, at close intervals, to keep the payments current with the labor, materials and profit invested in the job.
Thus the equities in the case are as much with the Bank as with the contractor.
V. The schedule of application of the moneys I suggest is both legally and equitably sound. It accords the Federal claim its complete statutory priority and it enforces the agreement made by SBA for the benefit of the owner and the Bank, all in conformity with the policy of SBA. The mechanic’s lien is snuffed out, true, but solely by the statutory priority of SBA and not by the Bank. This hardship has been decried by scholars, but the outcome is rightly blamed on the ancient act of Congress, now 31 U.S.C. § 191, supra, fn. 1.3
I would reverse and distribute the moneys according to the formula first stated herein.

. The owner’s warranties were as follows:
“Grantor covenants that said real estate is free from all liens and incum-brances whatsoever, and that he will warrant generally said real estate." (Accent added)

. See also W. T. Jones & Co. v. Foodco Realty, Inc., supra, 318 F.2d 881, 886 (4th Cir. 1963), where this court expressed its doubt whether previously executed mortgages would now prevail over Federal priority asserted under the statute.

. See, e. g. Note, The Relative Priority of Small Business Administration Liens; An Unreasonable Extension of Federal Preference? 64 Mich.L.Rev. 1007 (1966); Kennedy, The Relative Priority of the Federal Government; The Pernicious Career of the Inchoate and General Lien, 63 Yale L.J. 905 (1954).