James F. Byrnes

“ The judgment below must have rested upon either of the following theories: that Congress intended by § 64, sub. a of the Bankruptcy Act to subordinate claims of the United States to wage claims in non-bankruptcy proceedings generally; or that Congress intended by § 64, sub. a to modify § 3466 only so far as to grant priority over the United States to wage claimants in state non-bankruptcy proceedings when they would be entitled to such priority by otherwise applicable state law.
There is a difficulty common to both theories which we regard as insurmountable. ”

“ Certainly there is no provision in the National Housing Act expressly relinquishing the priority of the United States with respect to claims arising under it. At best, therefore, such an intention on the part of Congress must be found in some patent inconsistency between the purposes of the Housing Act and § 3466. ”

“ As such it absorbs all of the assets, and the laborers who trusted their employer's credit get nothing. Such a preference of creditors, brought about by the debtor, would be an act of bankruptcy.
In 1920 when the railroads needed funds but lacked credit for private borrowing, government loans were authorized by Congress based upon such prospective earning power and security as would furnish reasonable assurance of repayment. ”

“ Possible priorities will now exist for every outstanding dollar.
The facts of this case show how government aid to a debtor may be a snare for his other creditors if the priority statute operates in this class of claims. About a dozen claimants became creditors in the aggregate amount of some nine hundred dollars for labor. Such labor claims were entitled to the preference under Missouri law common to labor claims. But for the priority of the government's claim, they would receive all of the realization from the assets-about two-thirds of their claims. ”

“ Congress was confronted with widespread need of repairs on property owned by persons without the cash or credit to secure them. [29] Moreover, not only homeowners but, like the railroads, hard pressed business establishments such as the distillery in this case were to be assisted in securing modernization loans. [30] Instead of lending these people federal funds, Congress lent them federal credit on which to borrow private funds, with the evident purpose of keeping the program as much as possible a matter of private enterprise handled in the course of private affairs. ”

“ From past interpretation we learn that the traditional function of § 3466 is the assurance of the public revenue, [17] whatever may be the expense to the competing creditors. Their interests are subordinated to the general advantage. [18] Title I of the National Housing Act, however, is not a revenue measure-it was intended to stimulate recovery and employment in the construction industries and to enable property-owners to obtain funds for sorely needed repairs by insuring financial institutions against loss on loans for such work. ”

“ Suppliers of goods or services in all fields of credit activity would be moved to constrict their advances to a borrower known to have created a secret but valid lien upon his assets superior to all general creditors. The full reach of the implication of credit dislocation may be readily gauged by the fact that at the end of 1936, 1,326,102 separate rehabilitation loans had been made under Title I for an aggregate amount of.$500,220,642. ”

“ This was accomplished by what is in effect a guarantee that all losses on rehabilitation loans up to a predetermined percentage (20% here) of the total made by the financial institution would be borne by the United States, either by taking over loans in default or paying the deficit. [20] That loss Congress intended the government to bear. [21] In estimating the loss it relied upon the experience of private companies which were unaided by any such priority as § 3466. [22] Loans could not be made for a longer term than five years and many would be for less. ”

“ This policy will tend to conserve the insurance reserve of 20% for possible later losses and also will maintain the understanding of the local community that these notes require the same prompt handling by makers as any other credit obligation. * * * it is the policy of the Federal Housing Administration to permit financial institutions every possible latitude in making collections on delinquent items. It is only after it clearly appears that further collection efforts will be fruitless that the Federal Housing Administration will insist that claims be made. ”

“ No security was required of the borrowers, and the interest charge was low. [12] Only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of § 3466. We think such inconsistency is wholly wanting here. ”