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Butner v. United States | 440 U.S. 48 (1979)
A mortgagee, or lender’s, interest in a mortgaged property is generally governed by state law. In Butner versus United States, we explore whether that remains true in a bankruptcy context.
In nineteen seventy-three, Golden Enterprises filed for reorganization bankruptcy under Chapter Eleven of the Bankruptcy Act. As part of the proceedings, Golden issued a second mortgage on its North Carolina real estate, securing an indebtedness of three hundred sixty thousand dollars owed to William Butner. Although the mortgage granted Butner a security interest in the property itself, he didn’t obtain an express security interest in rents from the property.
Golden’s reorganization plan wasn’t confirmed, prompting conversion to a liquidation bankruptcy. At that point, both the first and second mortgages were in default. The court ordered the bankruptcy trustee to collect and retain rents from the North Carolina property. The property was subsequently sold to Butner for one hundred seventy-four thousand dollars, with payment made by Butner reducing Golden’s outstanding debt. The remaining balance owed was one hundred eighty-six thousand dollars.
At the time of the sale, the rents collected totaled approximately one hundred sixty-three thousand dollars. Claiming he had a security interest in the rents, Butner filed a motion asking the court to apply them to the second mortgage.
The bankruptcy judge denied the motion, holding that Butner had only a general unsecured claim. The district court reversed, holding that under North Carolina law, Butner had an interest in the rents. The Fourth Circuit, also applying North Carolina law but interpreting it differently, reversed. The United States Supreme Court granted cert, not to address the conflicting interpretations of state law, but instead to address a circuit split as to whether state or federal law determined a mortgagee’s property interest in that context.
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