Butner v. United States
440 U.S. 48 (1979)
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Rule of Law:
Property interests in a bankrupt's estate, including a mortgagee's right to rents from the mortgaged property, are created and defined by the law of the state where the property is located, not by a uniform federal rule of equity.
Facts:
- Golden Enterprises, Inc. (Golden) owned real estate in North Carolina.
- Petitioner held a second mortgage on Golden's property, which did not contain an express security interest in the rents earned by the property.
- Golden filed for a Chapter XI arrangement, during which a court-appointed agent collected rents.
- The arrangement plan was never confirmed, and Golden was formally adjudicated a bankrupt while both its first and second mortgages were in default.
- A bankruptcy trustee was appointed and ordered to collect and retain all rents from the property.
- The property was eventually sold to petitioner at a foreclosure sale, but the sale price was insufficient to cover the full $360,000 debt, leaving a balance of $186,000.
- By the time of the sale, the trustee had accumulated a fund of $162,971.32 from the property's rents.
Procedural Posture:
- Golden Enterprises, Inc. filed a petition for a Chapter XI arrangement in the bankruptcy court.
- Golden was later adjudicated a bankrupt, and a trustee was appointed.
- Petitioner filed a motion in the bankruptcy court claiming a security interest in the accumulated rent fund.
- The bankruptcy judge denied the motion, treating petitioner's remaining debt as a general unsecured claim.
- On appeal by petitioner, the U.S. District Court reversed the bankruptcy judge's decision.
- The bankruptcy trustee then appealed to the U.S. Court of Appeals for the Fourth Circuit, which reversed the District Court and reinstated the bankruptcy judge's ruling.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the controlling law.
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Issue:
Does a uniform federal rule of equity, rather than state law, determine a mortgagee's right to rents collected from a bankrupt's property after the filing of a bankruptcy petition?
Opinions:
Majority - Mr. Justice Stevens
No. A mortgagee's right to rents from property in a bankruptcy estate is determined by the law of the state where the property is located. Congress has the constitutional authority to create a uniform federal rule but has generally left the determination of property rights to state law. Property interests are created and defined by state law, and there is no reason they should be analyzed differently simply because a party is involved in a bankruptcy proceeding. Applying state law reduces uncertainty, discourages forum shopping, and prevents a party from receiving a windfall due to the "happenstance of bankruptcy." While bankruptcy proceedings may prevent a mortgagee from exercising state-law remedies like foreclosure, the bankruptcy court has the power to provide equivalent protection, such as by sequestering rents, to ensure the mortgagee is afforded the same protection they would have under state law if no bankruptcy had occurred.
Analysis:
This decision establishes the foundational principle in bankruptcy that state law governs the creation and definition of property rights, while federal bankruptcy law primarily governs the enforcement and distribution of those rights. The Court rejected the idea that bankruptcy judges can use general equitable powers to create substantive property rights that do not exist under applicable state law. This ruling promotes predictability and uniformity by ensuring that a creditor's property interests are the same both inside and outside of bankruptcy, discouraging forum shopping and preventing bankruptcy from altering pre-existing entitlements.
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