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UNITED STATES v. NEW HOLLAND SALES STABLE

December 19, 1985

UNITED STATES of America
v.
NEW HOLLAND SALES STABLE, INC; UNITED STATES of America v. VINTAGE SALES STABLE, INC.; UNITED STATES of America v. WALTER DUNLAP & SONS, INC.



The opinion of the court was delivered by: HUYETT

 HUYETT, District Judge.

 The United States of America, acting on behalf of the Farmers Home Administration (FmHA), brought these three suits in conversion alleging that defendants converted a total of 236 head of cattle in which the FmHA held a perfected security interest. The 236 head of cattle were collateral for two FmHA loans which Mark and Cheryl Noll had received. Each defendant is a livestock commission merchant or livestock commission broker and each defendant handled the sale of some of the Nolls' cattle.

 Approximately on August 31, 1979 and December 24, 1980, Mark and Cheryl Noll received the two loans from the FmHA in the respective amounts of $90,000.00 and $230,360.00. As security for each loan, the Nolls signed and executed a security agreement which granted the FmHA a security interest in all livestock, crops, farm and other equipment described therein together with all property of a like nature acquired thereafter. The FmHA form security agreement contained a clause requiring the FmHA's prior written consent before collateral was sold. The Nolls also executed a financing statement which the FmHA filed with the prothonotary of Lancaster County thereby perfecting its security interest in the Nolls' property.

 Between the months of February and May 1981, the Nolls, with defendant New Holland acting as commission broker sold 97 head of cattle for total gross proceeds of $70,117.65. During the same period, the Nolls sold 68 head of cattle for a total of $46,780.16 with defendant Dunlap acting as commission broker and 71 head of cattle for $50,579.08 with defendant Vintage acting as commission broker. Also during this period, February through May 1981, the Nolls made five payments to FmHA, remitting a total of $155,000.00. At that time, however, the Nolls owed $259,000.00 and had received a total of $232,922.53 in gross proceeds from the sale of the cattle during this period. The remaining $77,922.53 from the proceeds, the Nolls used as an operating credit to pay normal, routine farm expenses.

 The proceeds from each sale handled by the defendants were paid directly to the Nolls after appropriate commissions were deducted. At no time did defendants have any knowledge of the security interests in the cattle being sold nor did they make any inquiries to that effect either to the Nolls, the FmHA, or the prothonotary's office in Lancaster County. Defendants each issued a bill of lading when the cattle were delivered and then followed normal, routine practices in handling the sales of the cattle.

 In August 1981, the FmHA Lancaster County supervisor, Patrick K. Freeman, learned that the Nolls would not be able to pay off the entire loan. At this time, Mr. Freeman completed a FmHA form entitled "Record of the Disposition of Security Property" (Freeman Dep.Ex.13) which listed Nolls' sales through the defendants and noted that he, on August 10, 1981, had not approved of the sales or the use of the proceeds. Subsequently, the Nolls filed for bankruptcy. The government now contends that each of the defendants converted the Nolls' cattle by selling them and failing to remit their value to the government. Seeking damages from each defendant in the amount of the gross proceeds each defendant received, the government claims total damages of $167,476.89. The unpaid balance due on the Nolls' loans, however, is $106,962.85.

 Presently before me are the parties' cross motions for summary judgment. Before the merits of these motions may be addressed, it is first necessary to determine whether liability in this case is governed by state or federal law. Defendants, in their joint memorandum in opposition to the government's motion for summary judgment, contend that under United States v. Kimbell, 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979) the relevant state law applies to any actions brought by the FmHA for alleged violations of its security interest in livestock. Plaintiff, on the other hand, contends that federal law should govern.

 Federal courts have consistently held that federal law provides the rule of decision in cases in which a genuine federal interest is at stake or in which a question involving the rights of the United States is presented. Applying federal law, the Court in Clearfield Trust Co. v. United States, 318 U.S. 363, 366, 63 S. Ct. 573, 574, 87 L. Ed. 838 (1943) emphasized that "the application of state law . . . would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states."

 Similarly, in United States v. Kimbell Foods, Inc., 440 U.S. at 726-27, 99 S. Ct. at 1457-58 (1979), the Court held that in proceedings to recover on federal loan programs, including FmHA loans, federal common law would apply. See also, United States v. Kennedy, 738 F.2d 584 (3d Cir.1984); United States v. Hext, 444 F.2d 804 (5th Cir.1971); United States v. Sommerville, 324 F.2d 712 (3d Cir.1963); United States v. Chesley's Sales, Inc., 523 F. Supp. 528 (W.D.Pa.1981). The Nolls' loans were granted pursuant to the Consolidated Farm and Rural Development Act. Because the security interest was obtained by the FmHA under an Act of Congress pursuant to a grant of constitutional authority, it is clear that the requisite federal interest is present. If disparate laws of individual states were applied to substantially identical loan transactions, the FmHA's ability to administer its large scale farm loan program would be seriously undermined. Therefore, federal law governs the issues raised in this case.

 The more difficult question is the content of the federal law to be applied. Defendants, relying on United States v. Kimbell, 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979), contend that even if a uniform federal common law were to be applied, "it should be derived from the legal rules developed in similar secured transactions cases across the Nation." (Defendants' Brief in opposition at p. 8). Specifically, defendants contend that the Uniform Commercial Code should serve as the basis for federal common law in this area. See United States v. Burnette-Carter Co., 575 F.2d 587 (6th Cir.), cert. denied, 439 U.S. 996, 99 S. Ct. 596, 58 L. Ed. 2d 669 (1978); United States v. Hext, 444 F.2d 804 (5th Cir.1971).

 Plaintiff's analysis is correct. As the Third Circuit noted in United States v. Kennedy, 738 F.2d 584, 586 n. 3 (3d Cir. 1984), the Kimbell Court's primary concern was with formulating a federal rule in the absence of an existing federal rule. Once the Kimbell Court had decided that federal law governed and no federal rule existed, the court had a choice between formulating a general federal rule or adopting the state law. The Kimbell Court chose to incorporate state law. Where, however, a federal rule of law or regulation exists the court has no choice to make; the court must apply the federal rule. Therefore, the court in United States v. Kennedy, 738 F.2d 584 was obliged to apply the federal rule of conversion as it had been articulated in United States v. Sommerville, 324 F.2d 712.

 What must be determined with respect to each issue raised by the parties in this case is whether an applicable federal rule or regulation exists. Federal Rule of Civil Procedure 56(c) states that summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. To prevail on a motion for summary judgment, the moving party must establish the absence of a genuine issue of material fact; all reasonable doubts as to the existence of a genuine issue of material fact must be resolved against the moving party. Joe Regueira, Inc. v. American Distilling Company, 642 F.2d 826 (5th Cir.1981). Each of the five separate and alternative arguments defendants have raised in support of their joint motion for summary judgment will now be examined.

┬áDefendants contend first that the FmHA authorized the Nolls to sell the cattle collateral and to receive the proceeds in their name only. Pointing to the Farm and Home Plan and the Supplementary Payment Agreement, defendants contend that the FmHA gave the Nolls written consent to sell the cattle handled by the defendants. Alternatively, defendants contend that the conduct of Patrick Freeman, the Lancaster County FmHA supervisor, amounted to consent. Under pre-UCC case law and UCC ┬ž 9-306(2), defendants argue, consent of a secured party to a debtor's sale of collateral, even if the debtor is required to remit the proceeds for application to the loan, extinguishes or releases the lien on the ...


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