U.S. v. Crittenden

Decision Date21 November 1977
Docket NumberNo. 75-4174,75-4174
Citation563 F.2d 678
Parties23 UCC Rep.Serv. 198 UNITED STATES of America, Plaintiff-Appellant, v. Zac A. CRITTENDEN, Jr., d/b/a Crittenden Tractor Company, Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Ronald T. Knight, U. S. Atty., H. Palmer Carr, Jr., Asst. U. S. Atty., Macon, Ga., Ted L. Elders, Atty., Atlanta, Ga., Margaret M. Breinholt, Atty., Dept. of Agriculture, Washington, D. C., for plaintiff-appellant.

A'Delbert Bowen, Cuthbert, Ga., Albert W. Stubbs, Columbus, Ga., Howell Hollis, III, Atlanta, Ga., for defendant-appellee.

Appeal from the United States District Court for the Middle District of Georgia.

Before GOLDBERG and TJOFLAT, Circuit Judges, and WYATT *, District Judge.

GOLDBERG, Circuit Judge:

Today we examine the lineage of liens to determine their hierarchy. At issue is the relative priority of the Farmers Home Administration's (FHA) perfected security interest in a tractor and Zac A. Crittenden, Jr.'s mechanic's lien against the same tractor. The case presents a number of distinct issues, ranging from mundane commercial questions to intricate matters of federal common law. Specifically, we must decide (1) whether FHA's security interest was adequately perfected and whether this determination is governed by federal or state law; (2) whether the relative priority of the competing interests in the tractor at issue shall be determined under federal or state law; (3) if federal law applies, whether the applicable federal rule is the first in time, first in right rule, a federal common law rule guided by Uniform Commercial Code (U.C.C.) principles, or a federally incorporated state commercial law rule; and finally, (4) under the applicable rule, whether Crittenden's mechanic's lien is superior to FHA's security interest and if so, whether the lien's superiority extends to the tractor's entire repair bill or is limited to that portion of the bill representing repairs made during Crittenden's last and continuing possession of the tractor.

The district court sustained Crittenden's motion for summary judgment on the independent grounds that FHA had failed to perfect its security interest, that Crittenden's mechanic's lien had priority over the security interest under both federal and Georgia law, and that Crittenden was entitled to assert an equitable lien on the property superior to FHA's security interest. We hold (1) that the issue of the perfection of FHA's security interest must be decided with reference to federal law and that the government's security interest was adequately perfected; (2) that federal law governs the priority determination; (3) that the applicable federal standard is a federal commercial law rule guided by U.C.C. principles; and (4) that under this rule, Crittenden's mechanic's lien is superior to FHA's perfected security interest, but only to the extent of repairs made during his last and continuing possession of the tractor. 1

I.

Disputes over the priority of liens inevitably arise when a borrower is unable to pay his debts as they become due and lacks sufficient collateral to satisfy his creditors. Here the impecunious one was Ralph B. Bridges of Terrell County, Georgia. From 1970 to 1972 Bridges, in need of operating capital for his farm, obtained several loans pursuant to the Consolidated Farmers Home Administration Act of 1961, 7 U.S.C. § 1921 et seq., 2 from FHA, an agency of the United States Department of Agriculture. On February 2, 1972 Bridges executed a security agreement granting FHA a security interest in his crops and certain farm equipment, including an Allis Chalmers diesel 21 tractor. A financing statement, consisting of a standard FHA form, 3 was filed in the offices of the Clerks of Superior Court for Terrell County and for Randolph County on February 2, 1972.

On December 29, 1972 Bridges first took his Allis Chalmers tractor to Crittenden's place of business in Shellman, Georgia (Randolph County) for repairs. Between that date and December 21, 1973, Bridges brought his tractor to Crittenden for repairs some six times, accumulating an unpaid repair bill of $1607.47. On December 21, 1973 Bridges again took his tractor to Crittenden for repairs. The bill came to $543.81, raising the total outstanding debt to $2151.28. Because Bridges was unable to pay this bill, Crittenden retained possession of the tractor. On February 4, 1974, Bridges filed a petition in bankruptcy with the United States District Court, and on March 14, 1974 Crittenden successfully levied on the tractor 4 and was allowed to remain in possession as bailee.

Subsequent to Bridges' discharge in bankruptcy on September 26, 1974, the unpaid balance on the loans due FHA was $7,251.22, and the tractor was valued at $5,000. After Crittenden refused to turn over the tractor to FHA, the United States, plaintiff-appellant, filed this suit against Zac Crittenden, defendant-appellee, to obtain possession of the tractor. The district court granted defendant's motion for summary judgment and plaintiff now appeals.

II. The Financing Statement

The relevant pre-printed portion of the financing statement states:

1. This financing statement covers the following types or items of collateral, including proceeds and products thereof:

(a) Crops, livestock, supplies, other farm products, farm equipment and inventory.

(b)

The appellee maintains that FHA does not have a perfected security interest in the tractor because the tractor was not sufficiently described in the financing statement to meet the requirements for perfection under Georgia law. We disagree with appellee and the district court and hold that federal law rather than state law governs the determination of the sufficiency of a financing statement filed by FHA. We further hold that in this case the description found in the financing statement was sufficient to perfect a security interest in Bridges' tractor.

A. Choice of Law

In United States v. Hext, 444 F.2d 804 (5th Cir. 1971) we joined the Third, Sixth, Ninth, and Tenth Circuits in holding that the rights and liabilities of the parties to a suit arising from FHA loan transactions must, under the rationale of the Clearfield Trust doctrine, 5 be determined with reference to federal law. 6 Just as a supremacy clause reigns in constitutional terms, in the choice of law context the doctrine of supremacy must obtain in lien law where the government is the lender. In Hext, FHA had perfected a security interest in the debtor's cotton crop. The debtor later sold the cotton to a cotton broker who the parties agreed was a bona fide purchaser in good faith with no actual knowledge of FHA's security interest. The debtor then went bankrupt. In a conversion suit brought by FHA against the broker and a warehouse company that stored the cotton, the district court held the defendants liable for the government's loss under state law. We reversed, holding that federal common law, to be fashioned according to general principles of commercial law, must govern the rights and liabilities of the United States in suits arising from FHA loan transactions.

While it is unnecessary to detail fully the reasoning of our decision in Hext, it is instructive to note 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."

444 F.2d at 808, quoting United States v. Sommerville, 324 F.2d 712, 716, 717 (3rd Cir. 1963) (footnote omitted). We also stressed the undesirability of subjecting FHA to the possibility that the governing state law might be changed whenever the United States was successful in litigation. Id., at 809. 7

B. Determining the Applicable Federal Rule

Having concluded that federal law must determine whether FHA's financing statement is adequate to perfect its security interest, we now must decide whether to fashion a uniform federal rule or to incorporate the relevant state law rule. Hext admonishes us that in general this court should be guided by principles set forth in the Uniform Commercial Code when fashioning the federal common law rule applicable to suits arising from FHA loan transactions. Because the applicable U.C.C. sections for determining the sufficiency of a financing statement have been adopted by the Georgia Legislature, Ga.Code Ann. §§ 109A-9-402, 109A-9-110, it might appear that the law governing this issue would be the same whether we adopted a uniform federal rule or incorporated state law. However, judicial interpretations of the U.C.C. rules do differ from state to state, and adoption of state law by incorporation consequently would lead to variant results depending on the applicable state law. On the other hand, adoption of a single federal rule would lead to uniform results in determining the sufficiency of FHA's financing statement regardless of the law in the state whose law would otherwise be applied. For the reasons discussed below, we conclude that the proper federal rule is a uniform common law rule based on U.C.C. sections 9-402 and 9-110.

The need for a uniform federal rule to govern the sufficiency determination is apparent from the facts of the instant case. The financing statement at issue consists of a pre-printed FHA form which lists the most common types of collateral used to secure FHA loans. FHA uses this form to secure loans throughout the country. As we shall see, the only issue with respect to these forms is whether the pre-printed description of the collateral is sufficient to put third parties on notice of possible security interests. As a factual matter, it is presumably the case that a standard...

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