State of Mont. v. U.S.

Decision Date27 August 1997
Docket NumberNo. 95-5123,95-5123
Citation124 F.3d 1269
PartiesSTATE OF MONTANA, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
CourtU.S. Court of Appeals — Federal Circuit

Nancy Bennett, Moulton, Bellingham, Longo & Mather, P.C., Billings, MT, argued for plaintiff-appellant. With her on the brief was Sidney R. Thomas.

Laureen Kapin, Trial Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, Washington, DC, argued for defendant-appellee. With her on the brief were Frank W. Hunger, Assistant Attorney General, David M. Cohen, Director, and Jeanne E. Davidson, Assistant Director.

Before PLAGER, Circuit Judge, SMITH, Senior Circuit Judge, and LOURIE, Circuit Judge.

EDWARD S. SMITH, Senior Circuit Judge.


The State of Montana appeals the decision of the United States Court of Federal Claims' granting summary judgment for the United States and finding that Montana was not an intended third-party beneficiary of a contract between the government and Great Western Sugar Company's bankruptcy creditors. Because we find that federal law mandates a priority for the United States' claim over Montana's claim, the judgment of the Court of Federal Claims is affirmed.

Facts 1

Great Western Sugar Company ("Great Western") was in the business of processing sugar beets and marketing the refined sugar with corporate headquarters in Dallas, Texas and operational headquarters in Denver, Colorado. Great Western operated sugar processing facilities in several states, including a factory in Billings, Montana. As a Montana employer, Great Western was subject to the dictates of the Montana Workers' Compensation Act ("Montana Act"). Pursuant to the Montana Act, Great Western elected to self-insure its workers' compensation risk. The Montana Act provides for an automatic lien against a self-insuring corporation's assets if the corporation does not meet its workers' compensation obligations. 2

Between October of 1984 and January of 1985 Great Western received three price support loans from the Commodity Credit Corporation ("CCC") for its 1984-1985 refined sugar production. The parties executed four security agreements pertaining to the refined beet sugar that would serve as collateral to secure the loans. CCC filed a financing statement with the state of Montana on October 24, 1984.

Congress created CCC under the Commodity Credit Corporation Charter Act ("Charter Act"). 15 U.S.C. § 714 et seq. CCC is an agency of the United States subject to the general supervision and direction of the Secretary of Agriculture. Pursuant to the Agricultural Act of 1949, as amended, 7 U.S.C. § 1421, et seq., CCC supports farm prices by providing nonrecourse loans to producers or farmers of agricultural commodities. Due to the perishable nature of sugar beets, CCC provides the loans to the sugar processors and not the sugar beet farmers. The processors then pay the sugar beet growers a minimum price for their crop and pledge the refined sugar as loan collateral. 7 C.F.R. §§ 1435.37(b), 1435.38 (1983).

The regulations governing the 1983 through 1985 sugar price support loan program required CCC to obtain waivers of liens or encumbrances on the sugar that Great Western pledged as loan collateral, in order to "protect fully the interest of CCC." 7 C.F.R. § 1435.121(d) (1983). In lieu of a lien waiver, CCC could accept a lienholder's subordination agreement giving CCC's claim priority. The regulations prohibited Great Western from encumbering the sugar collateral after CCC approved the loan. 7 C.F.R. § 1435.121(d) (1983). The processor was required to warrant that he had a legal right to grant CCC a first lien on the sugar.

In February of 1985 Great Western's financial situation had deteriorated to the point that its bank refused to honor its checks. A number of checks to Great Western's employees and former employees for benefits under the Montana Act were returned for insufficient funds. On March 7, 1985, Great Western filed a petition in bankruptcy under Chapter 11 in the United States District Court for the Northern District of Texas. The bankruptcy court authorized the sale of a portion of Great Western's assets, approximately 1,415,654 CWT 3 of refined sugar, including approximately 157,000 CWT located in Montana, to a company known as Tate & Lyle, "free and clear of any mortgage, pledge, claim, lien, encumbrance, security interest, or other rights of any kind to any entity." The proceeds of the sale to Tate & Lyle ("sugar proceeds") became part of the bankruptcy estate. The sale of the Montana portion of the sugar accounted for $3,182,390 of the sugar proceeds.

The State of Montana, as trustee for the uncompensated injured workers, a group of bank lenders, and CCC all asserted first liens on the sugar proceeds. In December of 1985 the bankruptcy court approved a compromise settlement agreement between Great Western, the bank lenders and CCC. Under the settlement agreement, the bank lenders agreed that CCC had a superior lien against the sugar proceeds, and the parties agreed to satisfy CCC's liens from the sugar proceeds. In exchange, CCC agreed (1) to release its claims against Great Western's assets, (2) to indemnify the bank lenders from any claims against the sugar proceeds, and (3) that the bank lenders should receive the non-sugar proceeds. As a result, CCC received $28,136,427.47 plus interest.

In the settlement agreement, CCC acknowledged:

(i) [T]hat upon implementation of this Comprehensive Settlement Agreement, the CCC may be subject to the claims of third parties and (ii) that other parties have asserted claims on [the sugar proceeds], which claims may be found to be superior or equal to the CCC liens and accordingly, the CCC agrees that it is subject to claims and obligations with respect to the CCC Sugar Proceeds ... whether such claims are asserted by such other parties or by the Bank Lenders by way of indemnity or contribution.

Neither the settlement agreement nor the bankruptcy court's order approving the settlement resolved Montana's claim for workers' compensation benefits.

In 1987, Montana entered into a court-approved settlement agreement with Great Western and the bank lenders. In return for $100,000, Montana released its claims against Great Western and the bank lenders and expressly reserved its right to pursue claims against CCC. 4

Great Western's injured workers sued Montana for unpaid benefits. See State ex rel. Div. of Workers Compensation v. District Court, 246 Mont. 225, 805 P.2d 1272 (1990). In 1992, Montana settled with eighteen injured workers for a total of $667,759.53. Montana took an assignment of the injured workers' rights against both Great Western and CCC.


On July 18, 1994, Montana filed an amended complaint with the Court of Federal Claims 5 seeking: (1) monetary damages of $667,759.63, plus interest, for breach of a third-party beneficiary contract--the settlement agreement between CCC and the bank lenders, (2) imposition of constructive trust under Montana state law, and (3) a declaratory judgment that Montana's lien was superior to the government's liens. Montana proceeded on the theory that Great Western's workers' compensation deficiency became a lien upon Great Western's property in the state and this lien was superior or equal to CCC's liens. See Montana v. United States, 33 Fed. Cl. 82 (1995)("Montana I ").

On September 2, 1994, the United States filed a motion to dismiss all three counts of Montana's complaint. The Court of Federal Claims granted the United States' motion as to counts 2 and 3, citing a lack of jurisdiction because the court has no power to order specific enforcement or grant equitable or declaratory relief. See Montana I, 33 Fed. Cl. at 88. The court found that while the agreement appeared on its face to be a third-party beneficiary contract for the benefit of creditors whose claims against Great Western were higher priority than CCC's claim, the plaintiff had not stated a claim to be such a creditor and directed Montana to show cause why count 1 should not also be dismissed. See id.

In briefs and oral argument on the issue, CCC argued that the court lacked jurisdiction because the agreement is not a third-party beneficiary contract. Further, the government argued, if the contract is construed to be a third-party beneficiary contract, the contract does not bind the government because CCC lacked authority to enter into such an agreement. The Court of Federal Claims granted summary judgment for the United States and dismissed Montana's complaint, holding that Montana was not an intended beneficiary of the settlement agreement because Montana's lien was not superior or equal to CCC's claim. See Montana v. United States, 33 Fed. Cl. 433, 437 (1995)("Montana II").

The court found that Montana's lien was lesser in priority to CCC's, reasoning that the statutes and regulations governing the sugar loan program contained a congressional directive mandating a super-priority for CCC's claims. Alternatively, the Court of Federal Claims held that if Montana state law controlled, CCC's claims took priority over Montana's lien. Montana II, 33 Fed. Cl. at 436, 437.

Finally, the Court of Federal Claims held that even if Montana's lien were found to be equal or superior to CCC's security interest, CCC's settlement agreement with the bank lenders was invalid. The court reasoned that the agreement was invalid because the CCC official who signed the agreement did not have authority to enter into an agreement that did not fully protect the interests of CCC. Montana appeals the grant of summary judgment on the third-party beneficiary claim.

Jurisdiction and Standard of Review

This court exercises jurisdiction over an appeal of summary judgment by the Court of Federal Claims pursuant to 28 U.S.C. § 1295(a)(3). This court employs complete and independent review over an appeal of the propriety of summary judgment, construing the facts...

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