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).
In response, plaintiff notes that the Kimbell Court specifically recognized that state law would not be incorporated as the federal common law if to do so "would frustrate specific objectives of the federal programs" or conflict with the need for national uniformity. U.S.A. v. Kimbell, supra, 440 U.S. at 728, 99 S. Ct. at 1458. Moreover, plaintiff contends, if clearly defined and applicable federal regulations or a general federal rule exist, the court has no choice but to follow the federal regulation or general rule. Plaintiff contends that there are federal regulations which are applicable in this case and which not only do not incorporate state law but also specify in detail what can and cannot be done with collateral and proceeds.
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.
Defendants 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 § 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 collateral, regardless of the debtor's failure to apply the sale proceeds to his loan. Therefore, defendants argue, they did not convert the cattle and are not liable to plaintiff.
While defendants' argument may well be correct if the UCC were applied, as plaintiff notes, there are federal regulations which govern when FmHA loans are involved. Paragraph IV.E of the security agreement between the Nolls and the FmHA states that the agreement is subject to FmHA regulations. Sections 1962.17(a) & (b) and 1962.18(b) of Title 7 of the Code of Federal Regulations govern the release of liens held by the FmHA. Section 1962.17 states in pertinent part:
§ 1962.17 Releasing chattel security.
Chattel security may be released only when release will not be to the financial detriment of FmHA. Borrowers will be strictly accountable to FmHA for the proper use of proceeds from the sale of security . . .