Davidson v. Lonoke Production Credit Ass'n

• Decision Date: 22 December 1982
• Docket Number: No. 82-1067,82-1067
• Citation: 695 F.2d 1115
• Parties: Charles D. DAVIDSON, Trustee, Appellant, v. LONOKE PRODUCTION CREDIT ASSOCIATION, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1115

695 F.2d 1115

Charles D. DAVIDSON, Trustee, Appellant, v. LONOKE PRODUCTION CREDIT ASSOCIATION, Appellee.

No. 82-1067.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 12, 1982.

Decided Dec. 22, 1982.

Charles A. Walls, Jr., Lonoke, Ark., Wright, Lindsey & Jennings by Isaac A. Scott, Jr., and Jimmy W. Mitchell, Little Rock, Ark., for appellee.

Charles Darwin Davidson, P.A., Little Rock, Ark., for appellant.

Before BRIGHT and ARNOLD, Circuit Judges, and MEREDITH, ^* Senior District Judge.

ARNOLD, Circuit Judge.

In this adversary bankruptcy proceeding, the Bankruptcy Court held that Lonoke Production Credit Association had a security interest in the proceeds of certain crops grown by the bankrupt. The District Court affirmed. The trustee of the bankrupt estate appeals. He claims that the PCA's status as a secured creditor is precluded both by the legal insufficiency of the collateral description in its security agreement and financing statement, and also by a former adjudication of the Supreme Court of Arkansas. We agree with his contention that the Arkansas court's unpublished decision in Lonoke PCA v. Jean Carnation, No. 77-225 (Ark. Feb. 20, 1978), is conclusive against PCA's status as a secured creditor, and we therefore reverse the judgment without addressing the merits of the description issue.

I.

A brief review of the factual background is necessary to an understanding of the legal issues. ¹ In 1975 the bankrupt, Owen C. Glass, made a series of loans from the Lonoke PCA in order to finance his farming operations in Perry County, Arkansas. The PCA financed Glass's operation again in 1976 and received a security interest in crops and equipment and the proceeds of both to secure the indebtedness. A financing statement was filed with the Circuit Clerk of Perry County on May 5, 1976, which contained the following description of the two farms on which Glass's crops were to be grown:

The Bankruptcy Court held this description sufficient to satisfy the requirements of the Uniform Commercial Code, Ark.Stat.Ann. Sec. 85-9-402(1), and that the lien had therefore been perfected. The court relied on United States v. Oakley, 483 F.Supp. 762 (E.D.Ark.1980), and found the land description at issue indistinguishable from that approved in Oakley. We do not reach this issue, because the PCA is estopped to relitigate its entitlement to the lien by the judgment in earlier litigation in which it participated in the Arkansas state courts.

Mr. Glass's 1976 crop was apparently placed with Keenan Cotton Gin and Grain Elevator, Inc., which was also a defendant in the adversary proceeding below. At some point, the precise timing of which is unclear from the record, one Jean Carnation filed a writ of garnishment, which was based on state court litigation between her and Glass, against a portion of the crop held by Keenan. The garnishment action in the Circuit Court of Pulaski County, Arkansas, evidently either preceded the filing of the Glass bankruptcy petition in 1977, or else was allowed to proceed by the Bankruptcy Court. ² In any event, Lonoke PCA answered the garnishment action, alleging that its financing statement filed in Perry County on May 5, 1976 (the same one here at issue), created a perfected security interest in the crops or proceeds held by Keenan. The Pulaski Circuit Court found that the crops involved had not been properly identified as having been grown on the farms listed in the financing statement. It therefore held in favor of Carnation and against PCA's claim of a security interest. On PCA's appeal, this decision was affirmed by the Arkansas Supreme Court in an unpublished opinion, Lonoke Production Credit Association v. Carnation, No. 77-225 (Feb. 20, 1978). ³

II.

Although the briefs addressed primarily to the sufficiency of the collateral description in the financing statement, and only secondarily to the problem of issue preclusion, we think the latter is the controlling issue in the case. The precise question is whether under Arkansas law, which governs the effect of an Arkansas state-court judgment, the Carnation case, to which the PCA was a party but the trustee was not, should collaterally estop the PCA to relitigate the validity of its security interest in the Owen Glass assets held by the Keenan Cotton Gin. Our duty is to decide the case as we believe the Arkansas appellate courts would under these circumstances. Any lack of clear guidance on collateral estoppel in Arkansas law does not excuse this Court from its duty.

The question whether one not a party to a prior litigation may take advantage of a judgment, in subsequent litigation, to bind one who was a party to the result reached on an issue actually litigated has traditionally been answered by the phrase "mutuality of estoppel." In former times it was generally held that in order for one party to be bound by a prior adjudication, both must be bound. Restatement of Judgments Sec. 93 (1942). Therefore, with a few exceptions, a non-party could not take advantage of the previous litigation, since he was not, and constitutionally could not be, ⁴ bound by the earlier result. The rule requiring mutuality of estoppel has not, however, enjoyed universal support. It came under attack as early as 1942 with Justice Traynor's noted opinion in Bernhard v. Bank of America, 19 Cal.2d 807, 122 P.2d 892 (1942). In that decision the California Supreme Court rejected the mutuality requirement in its entirety. Bernhard has had a significant impact on the development of the law. It has, however, never been cited by the Arkansas appellate courts. Nonetheless, we think that Bernhard and its progeny must be discussed before we can predict how the Arkansas courts would deal with these facts.

The complaint in Bernhard v. Bank of America, supra, was filed by the second administratrix of an estate, who was also a beneficiary under the will, against the successor corporation of a bank which had held funds for the decedent. The plaintiff alleged that the bank had wrongly paid the funds over to the previous administrator of the estate without the decedent's authorization. The bank pleaded res judicata as a defense in that the probate court had previously found that the decedent had made a gift of the money to the former administrator of the estate. The plaintiff demurred to this defense, arguing that since the bank was not a party to the probate proceedings, there was no mutuality of estoppel. Despite this lack of mutuality, the California Supreme Court found "no compelling reason ... for requiring that the party asserting the plea of res judicata must have been a party, or in privity with a party, to the earlier litigation." Id. at 812, 122 P.2d at 894. The mutuality rule, Justice Traynor reasoned, should be replaced with three inquiries. "In determining the validity of a plea of res judicata three questions are pertinent: Was the issue decided in the prior adjudication identical with the one presented in the action in question? Was there a final judgment on the merits? Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication?" Id. at 813, 122 P.2d at 895. Each of these questions could be answered affirmatively in Bernhard, and the defense was held good.

The Bernhard analysis was accepted by a number of state and federal courts which reviewed the issue over the next thirty years. E.g., Zdanok v. Glidden, 327 F.2d 944 (2d Cir.1964); Bruszewski v. United States, 181 F.2d 419 (3d Cir.), cert. denied, 340 U.S. 865, 71 S.Ct. 87, 95 L.Ed. 632 (1950) ⁵; LaRose v. Casey, 570 S.W.2d 746 (Mo.App.1978); B.R. Dewitt, Inc. v. Hall, 19 N.Y.2d 141, 225 N.E.2d 195, 278 N.Y.S.2d 596 (1967). More importantly, the Bernhard view, with some refinements, has been adopted in two relatively recent decisions by the Supreme Court of the United States, Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), and Parklane Hosiery v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979), and in the new Restatement (Second) of Judgments (1982).

Blonder-Tongue Laboratories presented the Court with the opportunity to reconsider the often criticized rule of Triplett v. Lowell, 297 U.S. 638, 56 S.Ct. 645, 80 L.Ed. 949 (1936), which had held that a patentee whose patent had been invalidated in one circuit could nonetheless bring another infringement suit in another circuit against a different defendant because of the lack of mutuality of estoppel. The patentee in Blonder-Tongue had done exactly that, securing a judgment in his favor in the Seventh Circuit after this Court had held the patent invalid as obvious. The Court determined to overrule Triplett v. Lowell, supra, and the Seventh Circuit's judgment was vacated. ⁶ Justice White's opinion for the unanimous court noted that "the court-produced doctrine of mutuality of estoppel is undergoing fundamental change in the common-law tradition." 402 U.S. at 327, 91 S.Ct. at 1442. "[U]ncritical acceptance of the principle of mutuality of estoppel expressed in Triplett v. Lowell," he stated, "is today out of place." Id. at 350, 91 S.Ct. at 1453.

The limits of collateral estoppel were expanded further in Parklane Hosiery v. Shore, supra, in which the Court approved what has come to be known as the offensive use of the doctrine. Parklane was filed as a shareholder's derivative suit against the directors of a corporation over the filing of an allegedly false and misleading proxy. Before this shareholder's suit came to trial, the Securities and Exchange Commission filed its own suit for injunctive relief against the same defendants over the same false proxy. The S.E.C. suit came to trial first and the Commission prevailed. S.E.C. v. Parklane Hosiery Co., 422 F.Supp. 477 (S.D.N.Y.1976), aff'd, 558 F.2d 1083 (2d Cir.1977). The shareholder plaintiffs then moved for partial summary judgment on the basis of the...