United States v. Carson, 16801.

Citation372 F.2d 429
Decision Date08 February 1967
Docket NumberNo. 16801.,16801.
PartiesUNITED STATES of America, Plaintiff-Appellant, v. Charles E. CARSON, being the same person as Charles Edward Carson, and W. R. Ellis, d/b/a Ellis Livestock Commission Company, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Alan S. Rosenthal, Atty., Dept. of Justice, Washington, D. C., for appellant, John W. Douglas, Asst. Atty. Gen., Robert J. Vollen, Atty., Dept. of Justice, Washington, D. C., Thomas L. Robinson, U. S. Atty., Memphis, Tenn., on the brief.

Arthur J. Shea, Jr., Memphis, Tenn., for appellees.

Before McCREE, Circuit Judge, McALLISTER, Senior Circuit Judge, and WEINMAN, District Judge.*

McCREE, Circuit Judge.

We consider herein an appeal by the United States from a verdict in its favor against defendant Ellis in an action for conversion.

Upon obtaining an operating loan under the Bankhead-Jones Farm Tenant Act, 7 U.S.C. § 1941 et seq., defendant Carson executed a promissory note payable to the United States in the amount of $18,000.00. This note was secured by a mortgage evidenced by a duly recorded "Mississippi Chattel Deed of Trust" on livestock and other chattels located in Mississippi. By the terms of the deed of trust, Carson agreed not to sell or encumber the covered property without government consent. Contrary to this agreement, however, he delivered cattle covered by the deed to defendant Ellis, a Tennessee livestock broker, who sold the livestock in Memphis, Tennessee, for $1877.31 and transferred the proceeds to Carson, retaining $235.40 which represented commissions and an advance. Subsequently, Carson was declared bankrupt, and the amount of his debt to the United States was reduced to $1000.00.

The government, basing jurisdiction on 28 U.S.C. § 1345, filed a complaint in the United States District Court for the Western District of Tennessee against both Carson and Ellis, claiming that these defendants had converted property in which the government had a security interest. Damages were sought in the amount of the sale price of the cattle. A consent judgment was entered against Carson in the amount of $1000.00, and the district judge ruled that recovery against Ellis could not exceed this amount. In rendering his final decision, however, the district judge held that state law would be used in determining the extent of Ellis' liability, and that since Tennessee law limits recovery in a situation such as this to the amount retained by the livestock merchant at the time demand is made, judgment would be entered against Ellis in the amount of $235.40. On appeal from the decision of the district court, the government contends that liability for conversion of property in which it has obtained a security interest under a wide-reaching federal loan program is governed by federal law, and that the correct measure of damages under federal law is the fair market value of the property.

The question of which law should govern in a situation like this has been considered by four courts of appeals. The Ninth Circuit in United States v. Matthews, 244 F.2d 626 (1957), and the Third Circuit in United States v. Sommerville, 324 F.2d 712 (1963), have upheld the government's position. The Eighth Circuit in United States v. Kramel, 234 F.2d 577 (1956), and the Fourth Circuit in United States v. Union Livestock Sales Co., 298 F.2d 755, 96 A.L.R. 2d 199 (1962), have held that state law provides the applicable rule. Far more is involved here than a few head of cattle. This case raises serious issues both of federalism and of the separation of powers of the branches of the federal government. Cognizant of the difficulty of these issues we hold, for the reasons presently to be stated, that the situation is governed by a uniform federal law, and we further hold that the market value of the property rather than the amount retained by the converter is the appropriate measure of damages.

I. The Applicable Law

In contending that federal law should govern, appellant properly places much reliance on the decision of the Supreme Court in Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L. Ed. 838 (1943), wherein it was held that the right of the United States as drawee of a government check to avail itself of Clearfield's guaranty of prior endorsements was governed by federal law, and that under federal law delay by the drawee in asserting its claim would not provide a defense for the guarantor unless it could be shown that the delay caused a manifest loss. The Court said:

We agree with the Circuit Court of Appeals that the rule of Erie R. Co. v. Tompkins, 304 U.S. 64 58 S.Ct. 817, 82 L.Ed. 1188, does not apply to this action. The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law. When the United States disburses its funds or pays its debts, it is exercising a constitutional function or power. This check was issued for services performed under the Federal Emergency Relief Act of 1935, 49 Stat. 115. The authority to issue the check had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or of any other state. Cf. Board of Commissioners v. United States, 308 U.S. 343 60 S.Ct. 285, 84 L.Ed. 313; Royal Indemnity Co. v. United States, 313 U.S. 289 61 S.Ct. 995, 85 L.Ed. 1361. The duties imposed upon the United States and the rights acquired by it as a result of the issuance find their roots in the same federal sources. Cf. Deitrick v. Greaney, 309 U.S. 190 60 S.Ct. 480, 84 L.Ed. 694; D\'Oench, Duhme & Co. v. Federal Deposit Insurance Corp., 315 U.S. 447 62 S.Ct. 676, 86 L.Ed. 956. In absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards. 318 U.S. at 366, 367, 63 S.Ct. at 574.

Erie, which curtailed the power of the federal courts to enunciate federal common law when federal jurisdiction was founded solely on diversity of citizenship, was concerned with the unconstitutionality of federal judicial lawmaking in areas beyond the reach of Congressional legislation. 304 U.S. at 72, 58 S.Ct. 817. Clearfield and the cases cited therein emphasize that the federal courts should determine the governing rule or law "according to their own standards" in areas where constitutionally valid federal legislative programs have been commenced. Where a decision is likely to have a substantial effect on the implementation of a federal program, then a federal court should declare a rule consistent with the program's demands. Congresss, of course, is the primary source of federal law, and the federal courts must adhere to the intent of Congress whenever this intent is discernible. When congressional intent is not expressed or otherwise ascertainable, however, the courts may, within reasonable bounds, utilize the techniques of the common law to reach the appropriate rules for disposition of the controversies before them. Cf. D'Oench, Duhme & Co. v. Federal Deposit Insurance Corp., 315 U.S. 447, 472, 62 S.Ct. 676 (1942) (Jackson, J., concurring). As one writer has expressed it,

the separation of powers cannot be watertight; exclusive reliance upon statutory provision for the solution of all problems is futile. Beyond the political realities which will at times compel congressional by-passing of any issue — thus leaving it open until pending litigation forces court resolution — lies such simpler pressures as shortness of time and, perhaps more important, the severe limits of human foresight. Together, these factors combine to make the concept of statutory enactment as a totally self-sufficient and exclusive legislative process entirely unreal. At the very least, effective Constitutionalism requires recognition of power in the federal courts to declare, as a matter of common law or `judicial legislation,\' rules which may be necessary to fill in interstitially or otherwise effectuate the statutory patterns enacted in the large by Congress.1

The Court noted in Clearfield:

In our choice of the applicable federal rule we have occasionally selected state law. See Royal Indemnity Co. v. United States, supra. 318 U.S. at 367, 63 S.Ct. at 575.

Hence, even in situations where the federal courts are not bound by the constitutional principles underlying Erie to apply state law, they might refrain from enunciating a federal rule applicable throughout the nation. The presence of a federal program permits the federal courts to make a choice, but does not of itself determine what the choice will be. In the instant situation, however, formulation of a uniform federal rule, rather than adoption of the laws of the several states as the federal rule, is the more appropriate alternative.

The Bankhead-Jones Farm Tenant Act established an extensive federal lending program to help assure the efficient and productive use of our agricultural resources. The act requires that the loans made by the government be adequately secured. 7 U.S.C. § 1946. A uniform federal rule governing the liability of livestock brokers dealing tortiously with mortgaged property will help prevent the security interests of the United States from being unjustifiably defeated. See United States v. Sommerville, supra. The tort involved here is not of such novelty as to require judicial inaction until Congress has spoken. Compare United States v. Standard Oil Co., 332 U.S. 301, 67 S.Ct. 1604, 91 L. Ed. 2067 (1947).

In United States v. Helz, 314 F.2d 301 (6th Cir. 1963), a case involving an unsecured loan made under the National Housing Act, 12 U.S.C. § 1702 et seq., this court held that federal law governed the rights of the parties, and that under federal law the Michigan defense of coverture would not be adopted and the United States would therefore be permitted to recover from a married woman. The following statements in Helz with regard to the policies underlying...

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