LOCATION: Circuit Court of Montgomery County
DOCKET NO.: 42
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Tenth Circuit
CITATION: 364 US 446 (1960)
ARGUED: Nov 09, 1960 / Nov 10, 1960
DECIDED: Dec 05, 1960
Facts of the case
Media for Small Business Adm'n v. McClellanAudio Transcription for Oral Argument - November 10, 1960 in Small Business Adm'n v. McClellan
Audio Transcription for Oral Argument - November 09, 1960 in Small Business Adm'n v. McClellan
Number 42, Small Business Administration, Petitioner, versus G. M. McClellan, Trustee.
May it please the Court.
This case arises out of a vague bankruptcy proceeding.
It's here on certiorari to the Court of Appeals for the Tenth Circuit.
The petitioner is the Small Business Administration which is here challenging the denial by the court below of a statutory right explicitly conferred upon the Government by the Congress more than 160 years ago, the claim of priority in the distribution of the assets of the estate of an insolvent debtor.
The priority actually was written into the statute purposes far back as 1797.
That is one of the two principal statutes with which we are here concerned.
We set forth the text of that statute on page 3 of our brief.
It provides -- it provides in -- in very broad unequivocal terms that whenever any person indebted the United States is insolvent, the debts due to the United States shall first be satisfied.
The other pivotal statute with which this case is concerned is the Bankruptcy Act’s priority provisions themselves.
Now in the Bankruptcy Act, the Congress has carried over this right of priority under the 1797 statute and actually converted it into a fifth class priority in a bankruptcy proceeding.
It is that fifth class priority, the Small Business Administration claims it is entitled to in this case and it is that fifth class priority that was denied to the Small Business Administration by the courts below.
I would like briefly to review the facts out of which this controversy emerges.
In the -- in November of 1956, Byquist, the bankrupt in this case, a small wholesaler of electronic supplies and radio equipment, needed additional working capital.
He solicited the aid of both the Small Business Administration and a local bank, a private bank, the Brookville State Bank of Kansas.
He filed applications with them under the Small Business Administration Act for a loan of $20,000.
The bank took the position that it wasn't ready to extend the full $20,000 credit to him but that if the United States Government would participate with the bank, the Brookville State Bank and advanced $15,000 of the entire $20,000 loan sought by Byquist, the bank would add the additional $5000 and the $20,000 loan could be extended to Mr. Byquist.
The bank took this matter up with the Small Business Administration.
The Small Business Administration agreed to enter into a participation agreement with the bank so that the United States would advance 75% of the loan or $15,000 with the bank advancing the remaining $5,000.
At the time the United States entered into this -- to the Small Business Administration -- entered into this participation agreement with the bank and notified Mr. Byquist directly that his application has been approved.
In the participation agreement, and I would like to invite Your Honors attention to page 5 of our brief because this is one of the crucial provisions in the participation agreement upon which the Court of Appeals seize in order to justify its forfeiture of this long standing priority dated back in 1797.
The -- on page 5, we set forth two of -- in quotes, two of the provisions of the participation agreement.
The first one, paragraph 12, points out in effect that whenever any collection is made under the loan from the borrower, the proceeds are to be shared proportionately with both lenders, and that is three-fourths of each collection has to go to the United States and the remaining one-fourth to the bank.
Paragraph 14, the particular paragraph that the Court of Appeals relied on, also points out that -- in the event that there should be a loss under the loan.
The loss should be shared in proportion to the investment of the United States in the one hand and the bank on the other.
In other words, if there's a loss, United States gets stock to the extent of three-fourths of its interest and the bank only to the extent of its 25% interest.
The Government did not reduce its claim, Your Honor.
I will get to that.