United States v. Hext

• Decision Date: 25 June 1971
• Docket Number: No. 29003.,29003.
• Citation: 444 F.2d 804
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Walter A. HEXT, Sr., et al., Defendants, Harlingen Compress Company et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

444 F.2d 804 (1971)

UNITED STATES of America, Plaintiff-Appellee, v. Walter A. HEXT, Sr., et al., Defendants Harlingen Compress Company et al., Defendants-Appellants.

No. 29003.

United States Court of Appeals, Fifth Circuit.

June 25, 1971.

Edward R. Finck, Jr., San Antonio, Tex., Nile E. Ball, Darrell B. Hester, Hester & Toscano, Bonner & Ball, Harlingen, Tex., for defendants-appellants.

Rollins M. Koppel, Carter, Stiernberg, Skaggs & Koppel, Harlingen, Tex., for Marshall & Marshall.

Frank C. Brooks, Brooks, Montgomery & Matthews, Dallas, Tex., for amicus curiae Southwestern Compress & Warehouse Assn.

Anthony J. P. Farris, U. S. Atty., Houston, Tex., Alan S. Rosenthal, Alexander P. Humphrey, Attys., Dept. of Justice, Civ. Div., Washington, D. C., James R. Gough, Frank C. Cooksey, Asst. U. S. Attys., Houston, Tex., William D. Ruckelshaus, Asst. Atty. Gen., Wahington, D. C., for plaintiff-appellee.

Before COLEMAN, INGRAHAM and WILKEY,^* Circuit Judges.

WILKEY, Circuit Judge:

The United States brought suit under the jurisdictional grant of 28 U.S.C. § 1345 alleging conversion of 578 bales of cotton in which it held a security interest. Named as defendants were Walter A. Hext, Sr. (Hext), the grower of the cotton, the W. A. Hext & Sons Gin Co., Inc. (the Gin Co.), a corporation wholly owned by Hext which ginned and marketed the cotton, Harlingen Compress Co. (Harlingen), a warehouse company which stored the cotton, and Marshall & Marshall (Marshall), a cotton brokerage firm through whom the cotton was marketed. A default judgment was entered against Hext and the Gin Co., both of whom were insolvent. After trial to the court, the District Judge, based on stipulated facts, depositions, and oral testimony, found Harlingen and Marshall liable to the United States and entered judgment against them in the amount of $15,650.13, plus interest, from which Harlingen and Marshall appeal. For reasons hereinafter stated we reverse the judgment of the trial court.

I. The Facts

The Farmers Home Administration (FHA) is an agency of the United States Department of Agriculture which, among other things, engages in the financing of farming operations as authorized by the Bankhead-Jones Farm Tenant Act.¹ In 1961-62 the FHA loaned Walter A. Hext, a cotton farmer, a total of $38,720.00 to finance his farming operations for 1962. In order to provide security for the loan, Hext granted a chattel mortgage on his forthcoming cotton crop to the FHA. The mortgage was duly recorded.² Hext, as the FHA knew when it made the loan, in addition to being a cotton farmer, was also in the cotton ginning business as the sole owner of the W. A. Hext and Sons Gin Co., Inc. The FHA was aware when it financed Hext's cotton crop that, after harvesting, the cotton would be ginned and marketed by Hext through his own ginning company. The Gin Co., in addition to processing the cotton grown by Hext, also ginned and marketed cotton produced by a number of other farmers in the area.³

After ginning, the Gin Co. transported the cotton to the Harlingen Compress Co., where the cotton was compressed and stored. Harlingen issued negotiable warehouse receipts covering each bale of cotton received. These negotiable receipts were retained by the Gin Co.⁴

In order to market the cotton the Gin Co. contracted with Marshall & Marshall, known in the cotton trade as a "spot broker" or "selling agent." At the Gin Co.'s direction Harlingen sent Marshall samples cut from each bale of cotton warehoused. Marshall displayed these samples, received offers to purchase from buyers who inspected the samples, and transmitted the offers to the Gin Co. The Gin Co. then told Marshall that the offers were either accepted or rejected, and Marshall communicated this information to the buyers. If an offer were accepted, Marshall prepared an invoice and draft and sent them to the Gin Co. The Gin Co. then forwarded the invoice, draft, and the warehouse receipts covering the cotton sold through banking channels to the buyer. When the draft was honored by the buyer the purchase price was credited to the Gin Co.'s account at its bank. In due course the buyers presented Harlingen with the warehouse receipts and shipping instructions, with which Harlingen complied. Neither Harlingen nor Marshall had any actual knowledge of the FHA's security interest.

As the Gin Co. received payment for the cotton from the buyers, it in turn paid the various farmers who had produced it⁵. In the case of the 578 bales of cotton grown by Hext himself, however, the money received for the cotton remained in the Gin Co. account. At the end of the season Hext was unable to make full payment on the loan, defaulting in the amount of $18,139.07.

With both Hext and the Gin Co. insolvent, the Government brought suit against Marshall, alleging that its actions as "selling agent" amounted to an exercise of dominion over the cotton in a manner inconsistent with the Government's security interest, thus constituting a conversion of the cotton. Marshall in turn filed a complaint naming Harlingen as a third-party defendant, and claiming a right of indemnity on any liability imposed. The ground for the cross-claim was that Harlingen had allegedly violated a 1913 Texas statute (Article 5571, Texas Revised Civil Statutes 1925) when it issued negotiable warehouse receipts covering the cotton without noting the existence of a lien thereon. The United States then amended its complaint to name Harlingen as a defendant, asserting liability both on the basis that Harlingen's actions amounted to a conversion of the cotton and on the claimed violation of Art. 5571. The trial court, without expressly deciding whether federal or Texas law applied to the transaction,⁶ rendered judgment for the United States against Harlingen and Marshall jointly on the conversion claim, and for Marshall against Harlingen on the cross-claim.

On this appeal both Marshall and Harlingen urge that the trial court erred in holding that the Government had not consented to the sale of the cotton, that the facts and circumstances demonstrated such consent, thus barring conversion liability.⁷ Marshall also claims that the acts performed by it as "selling agent" did not amount to the exercise of sufficient dominion over the cotton to constitute a basis for conversion liability. Harlingen additionally asserts that application of Art. 5571 as a basis for its liability over to Marshall was erroneous and that that statute had been repealed by implication by the subsequent enactment of the Texas Uniform Warehouse Receipts Act. Because of the approach we take in the analysis set forth below, we find it unnecessary to pass on these issues.

II. Choice of Law

Six Circuit Courts of Appeals have decided the issue of whether federal or state law controls in suits brought by the United States to enforce its rights under FHA farm mortgages. The Third, Sixth, Ninth, and Tenth Circuits have held that the rights and liabilities of the parties to such suits must be determined with reference to federal law.⁸ The remaining two courts, the Eighth and the Fourth Circuits, have held that state law controls.⁹ In United States v. McCleskey Mills,¹⁰ this court declined to decide the issue because it was presented in the context of a case where both state and federal law dictated the same result.

The merits of the choice of law question have been fully ventilated in the six Courts of Appeals decisions noted supra. It suffices to state here that the principal reason supporting the application of federal law is the need for a uniform rule of decision to govern the rights of the United States in the administration of a large-scale program, of nation-wide scope such as the FHA farm loan program, rather than subjecting "federal rights and duties to the exceptional uncertainty and heterogeneity" which might result "if disparate laws of individual states were applied to substantially identical loan transactions."¹¹

While maintaining that appellants here, as in McCleskey Mills, supra, are liable under both state and federal law, the Government strongly urges us now to decide whether state or federal law provides the proper rule of decision. In the first place, the Government represents that, because the choice of law question has not been settled in this Circuit, litigation of claims of improper disposition of property covered by FHA security agreements, typically involving relatively small amounts, has persisted, with the Government asserting liability under a uniform federal rule, and the defendants resisting on the basis of a claimed exoneration under state law. Whereas in those circuits where the choice of law issue has been resolved, we are told that lower court litigation has virtually ceased. Secondly, it is urged that while the law of some states of this Circuit coincides with the federal rule, in others the state law is contrary to the federal rule.¹²

After careful consideration, we have determined that a uniform federal interpretation is required. This case itself provides an illustration of the vagaries to which the FHA loan program might be subjected if state law were to control. The District Court found that the FHA's perfected security interest, recorded at the Cameron County courthouse, was a sufficient basis for the imposition of conversion liability on both Marshall and Harlingen, even though both of these parties were without actual knowledge of the Government's lien. The trial court further held that Harlingen's failure to note the existence of the Government's lien on the warehouse receipts issued by it, as the court held was then required by Article 5571 of the Texas Revised Civil Statutes, rendered Harlingen liable for the Government's loss.¹³ Apparently in response to this decision, the Texas Legislature in 1969 amended Article 5571 to provide as follows:

Cotton under lien. No person, firm or corporation which subsequently buys, sells, or deals in any way with

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