When the Small Business Administration, created by the Small
Business Act of 1953, with authority,
inter alia, to lend
government funds to small businesses, has joined a private bank in
making a loan and the borrower becomes a bankrupt, the
Administration's interest in the unpaid balance of the loan is
entitled to the priority provided for "debts due to the United
States" under R.S. § 3466 and § 64 of the Bankruptcy Act -- even
though the Administration has agreed to share with the bank any
money collected on the loan. Pp.
364 U. S.
447-453.
(a) The Small Business Administration is an integral part of the
governmental mechanism -- not a separate legal entity -- and it is
entitled to the priority of the United States in collecting loans
made by it out of government funds.
Sloan Shipyards Corp. v.
United States Fleet Corp., 258 U. S. 549, and
Reconstruction Finance Corp. v. Menihan Corp.,
312 U. S. 81,
distinguished.
United States v. Remund, 330 U.
S. 539, followed. Pp.
364 U. S.
448-450.
(b) Since the Administration participated in making the loan and
acquired a beneficial interest in it prior to the petition in
bankruptcy, it is immaterial that formal assignment to the
Administration of the note evidencing the debt was not made by the
bank until after the filing of the petition. P.
364 U. S.
450.
(c) The Administration did not forfeit its right to priority by
agreeing to turn over to the bank part of any distribution obtained
because of its priority. Pp.
364 U. S.
451-453.
(d) Governmental priority in bankruptcy proceedings is not
inconsistent with the basic purposes and provisions of the Small
Business Act. P. 453.
272 F.2d 143, reversed.
Page 364 U. S. 447
MR. JUSTICE BLACK delivered the opinion of the Court.
The Small Business Act of 1953 [
Footnote 1] created the Small Business Administration
to
"aid, counsel, assist, and protect insofar as is possible the
interests of small business concerns in order to preserve free
competitive enterprise . . . and to maintain and strengthen the
overall economy of the Nation. [
Footnote 2]"
The Administration was given extraordinarily broad powers to
accomplish these important objectives, including that of lending
money to small businesses whenever they could not get necessary
loans on reasonable terms from private lenders. [
Footnote 3] When a part, but not all, of a
necessary loan can be obtained from a bank or other private lender,
the Administration is empowered to join that private lender in
making the loan. [
Footnote 4]
The basic question this case presents is whether, when the
Administration has joined a private bank in a loan and the borrower
becomes a bankrupt, the Administration's interest in the unpaid
balance of the loan is entitled to the priority provided for "debts
due to the United States" in R.S. § 3466 and § 64 of the Bankruptcy
Act, [
Footnote 5] even though
the Administration has agreed to share any money collected on the
loan with the private bank.
That question arises out of a joint bank-Administration loan of
$20,000 to a small business, $5,000 of the loan having come from
the funds of the bank and $15,000 from the Government Treasury.
Nine months later, an involuntary petition in bankruptcy was filed
against the borrower
Page 364 U. S. 448
by other creditors. The Administration appeared in the
proceedings upon that petition, filed a claim for $16,355.69, the
amount then due on the loan, including interest, and asserted
priority for its claim to the extent of $12,266.75, its 75 per cent
interest in the debt. After a hearing, the referee in bankruptcy
denied priority on the ground that the Administration is a "legal
entity," and therefore not entitled to the "privileges and
immunities of the United States." The District Court, on review,
rejected the ground upon which the referee had relied, but
concluded that, since the bankrupt's note evidencing the loan was
not assigned by the bank to the Administration until after the
commencement of bankruptcy proceedings, the debt is not entitled to
priority. [
Footnote 6] The
Court of Appeals affirmed on a third ground -- that the
Administration, having contracted to pay the participating private
bank one-fourth of any distribution received, could not assert its
priority and thus permit a private party to benefit from a priority
which, under R.S. § 3466 and the Bankruptcy Act, belongs to the
Government alone. [
Footnote 7]
We granted certiorari to consider the Government's contention that
the denial of priority to the Small Business Administration
handicaps that agency in the effective performance of the duties
imposed upon it by Congress. [
Footnote 8]
First. It is contended that the referee was correct in
holding that the Small Business Administration is a separate legal
entity, and therefore not entitled to governmental priority in a
bankruptcy proceeding. The contention rests upon a supposed analogy
between this case and
Sloan Shipyards Corp. v. United States
Shipping Board Emergency Fleet Corporation [
Footnote 9] and
Reconstruction Finance
Corp. v. J. G. Menihan
Page 364 U. S. 449
Corp., [
Footnote
10] in which cases this Court refused to treat the corporate
governmental agencies involved as the United States. Neither of
those cases, however, is controlling here. The agency involved in
Sloan Shipyards, the Fleet Corporation, was organized
under the laws of the District of Columbia pursuant to authority of
an Act of Congress which "contemplated a corporation in which
private persons might be stockholders." [
Footnote 11] This fact alone is enough to distinguish
the Fleet Corporation from the Small Business Administration,
which, as was contemplated from the beginning, gets all of its
money from the Government Treasury. Our decision in the
Reconstruction Finance Corp. case is equally inapplicable,
for that case involved only the question of whether the
Reconstruction Finance Corporation, having been endowed by Congress
with the capacity to sue and be sued, could be assessed costs in
connection with a suit it brought. The holding that such costs
could be assessed would not support a holding that the Small
Business Administration is not the United States for the purpose of
bankruptcy priority. [
Footnote
12]
Page 364 U. S. 450
Thus, neither of these cases requires us to hold that the Small
Business Administration, an agency created to lend the money of the
United States, is not entitled to all the priority that must be
accorded to the United States when the time comes to collect that
money. Under like circumstances, we refused to deny priority for
debts due to the Farm Credit Administration in
United States v.
Remund. [
Footnote 13]
As was said there of the Farm Credit Administration, the Small
Business Administration is "an integral part of the governmental
mechanism" [
Footnote 14]
created to accomplish what Congress deemed to be of national
importance. And it, like the Farm Credit Administration, is
entitled to the priority of the United States in collecting loans
made by it out of government funds.
Second. Respondent contends, as the District Court
held, that the Small Business Administration's assertion of
priority is precluded by our holding in
United States v.
Marxen [
Footnote 15]
that priority attaches only to those debts owing to the United
States on the date of the commencement of bankruptcy proceedings,
and not to debts that come into existence after that date. But this
requirement of the
Marxen case is fully met here by virtue
of the fact that the debt due the Administration arises out of the
loan made jointly by the bank and the United States nine months
prior to the petition in bankruptcy. Since beneficial ownership of
the three-fourths of the debt for which priority is asserted
belonged to the Administration from the date of the loan, it is
immaterial that formal assignment of the note evidencing the debt
was not made by the bank until after the filing of the
petition.
Page 364 U. S. 451
Third. The Court of Appeals held, and the contention is
reiterated here, that the Administration forfeited any right it
might otherwise have had to priority by agreeing to turn over to
the bank one-fourth of any distribution obtained because of its
priority. By this arrangement, it is urged, the Administration is
attempting "to give priority to a claim which the United States is
collecting for the benefit of a private party," contrary to the
principles announced by this Court in
Nathanson v. Labor
Board. [
Footnote 16]
But the
Nathanson case involved a significantly different
situation. There, the National Labor Relations Board sought to
obtain governmental priority for backpay claims belonging to
employees based upon their loss of pay as a result of allegedly
discriminatory discharges by the bankrupt. This Court's denial of
priority in that case, involving claims in which the United States
had no financial interest, would not justify a denial here where
the money was loaned by, and the debt sought to be collected is due
to, the United States. The fact that the Administration has
contracted to pay the participating private bank one-fourth of any
money it later collects on its loan does not mean the Government
must lose its priority. Respondent's argument to the contrary seems
to rest upon the assumption that the Government is deprived of its
priority by making a contract to pay a part of its funds to another
creditor of the bankrupt who has no priority. This argument finds
no support whatever in § 3466, in § 64 of the Bankruptcy Act, or in
the Small Business Act. Section 3466 declares in unequivocal
language that the United States is entitled to priority "[w]henever
any person indebted to the United States is insolvent," and § 64
recognizes that priority in bankruptcy proceedings. The purpose of
these sections is simply to protect the
Page 364 U. S. 452
interest of the Government in collecting money due to it.
[
Footnote 17] Once that
money is collected and placed in the Government Treasury, the end
sought to be achieved by § 3466 and § 64 of the Bankruptcy Act is
completely satisfied. At that point, 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. The Small
Business Administration is authorized to enter into contracts
calculated to induce private banks to make loans to small
businesses. [
Footnote 18]
The contract involved in this case, by providing 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. In those cases, acceptance of
respondent's argument would make it more difficult for the
Administration to perform its statutory duties. Clearly Congress
did not intend, by the very act of imposing duties upon the
Administration, to take away a privilege necessary to the effective
performance of those duties.
Respondent's argument from the policy of equality of
distribution for similar creditors expressed in the Bankruptcy Act
[
Footnote 19] is no more
convincing. 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 not of any inequality of distribution on the part
Page 364 U. S. 453
of the bankruptcy court, but of the bank's valid contract with
the Small Business Administration.
Fourth. Respondent's last contention, urged throughout
these proceedings, is that governmental priority is inconsistent
with the basic purposes and provisions of the Small Business Act.
The contention rests upon the fact that having a creditor with
governmental priority tends to make it more difficult for a small
businessman to borrow money from other persons, and, in this
respect, handicaps, rather than aids, borrowers, thus conflicting
with the Act's basic policy. In
United States v. Emory, we
rejected this same argument, with reference to priority for Federal
Housing Administration debts, stating that "[o]nly the plainest
inconsistency would warrant our finding an implied exception to . .
. so clear a command as that of § 3466." [
Footnote 20] The same conclusion must be reached
here.
It was error for the courts below to refuse the Government's
claim for priority.
Reversed and remanded.
MR. JUSTICE DOUGLAS dissents.
[
Footnote 1]
67 Stat. 232, as amended, 15 U.S.C. §§ 631-651.
[
Footnote 2]
67 Stat. 232.
[
Footnote 3]
67 Stat. 235-236.
[
Footnote 4]
Ibid.
[
Footnote 5]
R.S. § 3466, 31 U.S.C. § 191, establishes a general priority for
debts due to the United States. Section 64 of the Bankruptcy Act,
as amended, 11 U.S.C. § 104, provides that, in bankruptcy cases,
the priority so established should come fifth in the order of
preferred creditors.
[
Footnote 6]
168 F. Supp. 483.
[
Footnote 7]
272 F.2d 143.
[
Footnote 8]
362 U.S. 947.
[
Footnote 9]
258 U. S. 258 U.S.
549.
[
Footnote 10]
312 U. S. 312 U.S.
81.
[
Footnote 11]
258 U.S. at
258 U. S.
565.
[
Footnote 12]
The proper scope of that holding was recognized by Congress
itself when, several years later, the Reconstruction Finance
Corporation Act was amended expressly to deny the Corporation a
right of priority except with respect to debts arising out of its
wartime activities. Act of May 25, 1948, 62 Stat. 261. That the
assumption underlying this amendment was that the Corporation would
otherwise have had priority for all debts due to it is clear from
the discussion of the purpose of the amendment in the Senate.
Senator Buck stated that purpose as follows:
"The committee believes that RFC should not have such priority
with respect to debts arising from its normal lending activities. A
provision has been included in this section
which will
eliminate that priority except with respect to debts arising
under the specific war powers which are designated therein."
(Emphasis supplied.) Cong.Rec., 80th Cong., 2d Sess., Vol. 94,
Part 3, p. 4108.
See also In re Temple, 174 F.2d 145.
[
Footnote 13]
330 U. S. 330 U.S.
539.
[
Footnote 14]
Id. at
330 U. S.
542.
[
Footnote 15]
307 U. S. 307 U.S.
200.
[
Footnote 16]
344 U. S. 344 U.S.
25, at
344 U. S.
28.
[
Footnote 17]
For a discussion of the history and purposes of R.S. § 3466,
See United States v. State
Bank, 6 Pet. 29,
31 U. S. 35-37.
Compare Nathanson v. Labor Board, supra, at
344 U. S.
27-28.
[
Footnote 18]
67 Stat. 236.
[
Footnote 19]
11 U.S.C. § 1
et seq.
[
Footnote 20]
314 U. S. 314 U.S.
423,
314 U. S. 433.
See also United States v. Remund, supra, at
330 U. S.
544-545;
Illinois ex rel. Gordon v. United
States, 328 U. S. 8,
328 U. S.
11-12.