BUTNER V. UNITED STATES : CASE SUMMARY

The Supreme Court held in Butner v. United States440 U.S. 48 (1979) that property interests in bankruptcy are ordinarily created and defined by state law, and unless a federal bankruptcy interest requires a different result, state law should determine the existence and scope of those interests.

FACTS OF THE CASE

Golden Enterprises, Inc., the owner of an apartment complex in North Carolina, became insolvent and entered bankruptcy proceedings. The property was subject to a mortgage held by creditors, including Butner.

After the bankruptcy filing, the property generated rental income. A dispute arose over who was entitled to these rents collected during the bankruptcy proceeding. Under North Carolina law, a mortgagee generally did not acquire an automatic right to rents upon the debtor’s default unless additional steps were taken, such as obtaining possession, the appointment of a receiver, or an assignment of rents.

Butner argued that federal bankruptcy law should grant him a right to the rents even though state law would not.

ISSUE BEFORE THE SUPREME COURT

The issue before the Supreme Court was whether property interests in bankruptcy should be determined according to federal common law or according to applicable state law.

FINDINGS OF THE SUPREME COURT

Justice John Paul Stevens, writing for a unanimous Court, emphasized that bankruptcy law generally does not create property rights. The Supreme Court observed that property rights are usually matters of state law.  Uniform treatment of creditors is best achieved by applying the same property rules inside and outside bankruptcy.

Creditors should not receive a windfall merely because a debtor has entered bankruptcy. Federal courts should not create special bankruptcy property rules absent a clear federal interest.

The Court rejected the inconsistent federal common-law approaches that some lower courts had used to determine entitlement to rents.

SIGNIFICANCE OF THE JUDGMENT

Butner v. United States is one of the most frequently cited bankruptcy decisions in the United States. The case established what is commonly known as the “Butner Principle”. Bankruptcy does not create or enlarge property rights; it generally respects property interests as defined by non-bankruptcy law, especially state law.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.