U.S. v. Currituck Grain, Inc.

• Decision Date: 30 September 1993
• Docket Number: No. 91-1806,91-1806
• Citation: 6 F.3d 200
• Parties: 22 UCC Rep.Serv.2d 360 UNITED STATES of America, Plaintiff-Appellant, v. CURRITUCK GRAIN, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 200

6 F.3d 200

22 UCC Rep.Serv.2d 360

UNITED STATES of America, Plaintiff-Appellant, v. CURRITUCK GRAIN, INCORPORATED, Defendant-Appellee.

No. 91-1806.

United States Court of Appeals Fourth Circuit.

Argued April 9, 1992.

Decided Sept. 30, 1993.

Rudolf A. Renfer, Jr., U.S. Atty., Raleigh, Walter Lee Hinson, Jr., Narron, Holdford, Babb, Harrison & Rhodes, P.A., Wilson, NC, argued (B. Perry Morrison, Jr., Narron, Holdford, Babb, Harrison & Rhodes, P.A., Wilson, NC, on the brief), for plaintiff-appellant.

John David Leidy, Hornthal, Riley, Ellis & Maland, Elizabeth City, NC, argued (Mark M. Maland, Hornthal, Riley, Ellis & Maland, Elizabeth City, NC, on the brief), for defendant-appellee.

Before RUSSELL, WIDENER, and HALL, Circuit Judges.

OPINION

WIDENER, Circuit Judge:

The United States, on behalf of the Farmer's Home Administration (FmHA), appeals from an order of the United States District Court for the Eastern District of North Carolina dismissing its action in conversion against appellee Currituck Grain, Inc. (Currituck). In its complaint the FmHA alleged that Currituck converted property of the United States when it purchased certain crops subject to a security interest in favor of the FmHA. Finding that North Carolina commercial law provided the rule of decision under principles of federal common law, the district court dismissed the action on the grounds that under North Carolina's enactment of the Uniform Commercial Code (UCC), the FmHA's security interest in the crops had become subordinated to Currituck's interest at the time of the disputed sale, thereby depriving the FmHA of a cause of action for conversion against Currituck. We affirm.

I

As the district court dismissed the case pursuant to Fed.R.Civ.P. 12(b)(6), we assume as true all factual allegations in the complaint. The facts relevant to this appeal are uncomplicated. Though the record does not disclose the exact date, sometime in early 1985 the FmHA extended a farm operating loan to Mr. and Mrs. Robert S. Meiggs. Pursuant to the loan agreement the Meiggs granted the FmHA a security interest in all of their crops to be produced during the 1985 crop season. The FmHA properly perfected the security interest by filing a financing statement in the office of the Currituck County Register of Deeds.

Between September 1, 1985, and November 27, 1985, Currituck purchased corn and soybeans from the Meiggs for a total purchase price of $54,148.55. Though those products were subject to the FmHA's security interest, none of the purchase price was ever paid to the FmHA, nor did that agency consent to the sale or intentionally release its security interest. Sometime after these sales the Meiggs apparently defaulted on their loan obligation to the FmHA. ¹ After learning of the Meiggs' default and of their unauthorized sale of the collateral, the FmHA sought payment from Currituck in the amount of the value of the corn and soybeans received from the Meiggs. Then, on February 20, 1991, some 62 months after the last sale, the FmHA filed a complaint against Currituck alleging conversion of the encumbered grain.

In turn, Currituck moved to dismiss the complaint on the grounds that, through the operation of N.C.GEN.STAT. Secs. 25-9-301(1), 25-9-403(2), and 44-69.1, the FmHA's security interest had become unperfected and subordinate to Currituck's interest as a purchaser of the grain retroactively from June 20, 1987, 18 months after the Meiggs' final sale to Currituck. Thus, Currituck argued that at the time of sale and at the time of suit the FmHA had no present possessory interest in the grain on which to base a suit for conversion, and that applicable state law thus provided FmHA with no remedy. The FmHA opposed the motion, arguing that its cause of action in conversion against Currituck accrued at the time of the unauthorized grain sales and that, under principles of federal common law, the six-year federal statute of limitations for conversion of government property applied and made timely the action. See 28 U.S.C. Sec. 2415(b). The district court agreed with Currituck and, by order dated July 15, 1991, dismissed the complaint. The FmHA now appeals.

II

This case involves questions respecting the rights and responsibilities of the United States in carrying out a nationwide federal loan program. Because of the strong federal interest implicated when the United States disburses funds from the public fisc, it is well established that federal law ultimately controls the government's rights and responsibilities when acting in this arena. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979); Clearfield Trust Co. v. United States, 318 U.S. 363, 366-67, 63 S.Ct. 573, 574-75, 87 L.Ed. 838 (1943). The rule of decision governing a particular issue or set of issues, however, need not be a uniform federal one. Rather, the federal courts may adopt the otherwise-applicable state law as the rule of decision under federal common law in an appropriate case. See Kimbell Foods, 440 U.S. at 727-29, 99 S.Ct. at 1457-59. In the instant case the district court held that the Court's decision in Kimbell Foods required the adoption of North Carolina lien law as the rule of decision in disputes arising out of the FmHA's participation as a lender in the private credit market, and that North Carolina law provided the FmHA with no cause of action against Currituck. Before addressing whether state commercial law should supply the rule of decision here, we first examine the district court's application of that law to the dispute between Currituck and the FmHA.

Under North Carolina's enactment of the UCC, as a general rule when a debtor sells property subject to a creditor's security interest without the creditor's consent, that security interest continues in the property in the hands of the third-party purchaser. See N.C.GEN.STAT. Sec. 25-9-306(2). ² Thus, after such an unauthorized sale of collateral, in addition to recovering against proceeds in the hands of the debtor, "the secured party may repossess the collateral from [the transferee] or in an appropriate case maintain an action for conversion [against the transferee]." N.C.GEN.STAT. Sec. 25-9-306 amended official comment 3.

But the UCC provides an important exception to the principle that security interests continue in collateral after an unauthorized sale. N.C.GEN.STAT. Sec. 25-9-307(1) provides that "[a] buyer in the ordinary course of business ... other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence." An examination of the ever-important definition sections of the UCC reveals that in this case Currituck qualifies as "a person buying farm products from a person engaged in farming operations," see N.C.GEN.STAT. Sec. 25-9-109(3), and thus does not enjoy the benefit of this exception. Accordingly, by virtue of the farm products exception to Section 25-9-307(1) the FmHA's perfected security interest remained in the collateral after its sale to Currituck.

However, other provisions of North Carolina commercial law work to mitigate the effect of the farm products exception. Section 25-9-403(2) establishes a general limit on the period of time over which a security interest may be perfected and thus maintain priority over later-in-time security interests, judgment liens, and purchasers. That section states in relevant part:

Except as provided in ... article 12 of chapter 44, a filed financing statement is effective for a period of five years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the five-year period unless a continuation statement is filed prior to the lapse.... Upon lapse the security interest becomes unperfected, unless it is perfected without filing. If the security interest becomes unperfected upon lapse, it is deemed to have been unperfected as against a person who became a purchaser or lien creditor before lapse.

Thus, Section 25-9-403(2) provides that when a financing statement lapses due to the passage of time, the underlying security interest becomes unperfected both prospectively, as against later-in-time lien creditors and purchasers, and as it relates back against persons who became purchasers or lien creditors before lapse. See B. Clark, The Law of Secured Transactions Under the Uniform Commercial Code p 2.14, at 2-144 to 2-145 (1988).

Also relevant to the instant case is Section 25-9-403's reference to article 12 of chapter 44 of the General Statutes of North Carolina, which addresses various types of liens. Section 44-69.1 provides as follows:

No chattel mortgage, agricultural lien, or any lien of any nature upon peanuts, cotton, soybeans, corn, wheat or other grains shall be effective for any purpose for a longer period than 18 months from the date of sale or the date of delivery to the purchaser, whichever date shall fall last.

This statute by its terms extinguishes a creditor's security interest in collateral 18 months after the sale of the collateral by the debtor. We find as well, as did the district court, that Section 44-69.1's incorporation by reference into Section 25-9-403(2) requires that any financing statement associated with such an agricultural lien would lapse after the 18-month period, thus subjecting that lien to the relating back mechanism of Section 25-9-403(2). ³

Under North Carolina commercial law, then, on June 20, 1987, 18 months after the Meiggs' last sale to Currituck, the FmHA's security interest in the crops became unperfected as against anyone who became a "purchaser" before lapse. Moreover, by the operation of the final sentence of Section 25-9-403(2), at the moment of lapse the FmHA's lien was deemed to have been subordinate to such once-junior purchasers and lien...