U.S. v. Kennedy, 83-5540

• Decision Date: 10 April 1984
• Docket Number: No. 83-5540,83-5540
• Citation: 738 F.2d 584
• Parties: 40 UCC Rep.Serv. 712 UNITED STATES of America, Appellant v. John Robert KENNEDY. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 584

738 F.2d 584

40 UCC Rep.Serv. 712

UNITED STATES of America, Appellant v. John Robert KENNEDY.

No. 83-5540.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6)

April 10, 1984.

Decided May 31, 1984.

J. Alan Johnson, U.S. Atty., Joel B. Strauss, Asst. U.S. Atty., U.S. Dept. of Justice, Pittsburgh, Pa. and James Michael Kelly, Associate Gen. Counsel, Raymond W. Fullerton, Asst. Gen. Counsel, Aaron B. Kahn, Atty., U.S. Dept. of Agriculture, Washington, D.C., for appellant.

Daniel E. Houlihan, Lope & Criss, Zelienople, Pa., for appellee.

Before ADAMS, BECKER and VAN DUSEN, Circuit Judges.

OPINION OF THE COURT

VAN DUSEN, Circuit Judge.

Plaintiff, the United States, acting on behalf of the Farmer's Home Administration ("FHA"), appeals from a district court order of May 27, 1983, granting defendant's motion to dismiss. Plaintiff had instituted suit for conversion against the buyers of collateral used to secure FHA loans. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. After consideration of the record and United States v. Sommerville, 324 F.2d 712 (3d Cir.1963), cert. denied, 376 U.S. 909, 84 S.Ct. 663, 11 L.Ed.2d 608 (1964), we vacate the district court's order and remand for further proceedings consistent with this opinion.

Because the plaintiff's complaint was dismissed at the pleadings stage, we must determine whether, in the light most favorable to the plaintiff, "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 101, 2 L.Ed.2d 80 (1957); Paolini v. Channel Home Centers, 668 F.2d 721, 722 (3d Cir.1981). To survive a motion to dismiss, the complaint must set forth "a short and plain statement of the claim," Fed.R.Civ.P. 8(a)(2), to "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. at 47, 78 S.Ct. at 102.

On March 29, 1983, the United States filed a complaint against John Robert Kennedy. The complaint alleges, inter alia, that James and Dona Vensel owed the United States more than $34,000. as principal and interest on three loans that the Government had extended to them. The complaint alleges that the Vensels executed promissory notes in favor of the Government when they obtained the loans and a security agreement at the time of the first loan.

According to the complaint, the security agreement grants the Government a security interest in all of the Vensels' currently owned and after-acquired livestock, crops, and farm equipment. Moreover, the security agreement provides that the Vensels would not sell the Government's collateral without the prior written consent of the Government and that the failure to abide by the restriction would constitute default. Upon default, the Government could take possession of its collateral. The complaint further alleges that, in connection with the loans, the Vensels executed a financing statement, which was duly filed with the Prothonotary of the county where the debtors resided and where the collateral was located. ¹

Finally, the complaint alleges that the Vensels sold some of the collateral to the defendant for $8500. Defendant allegedly paid $3700. by check made payable to Mr. Vensel and the FHA; he paid the remainder, $4800., to Mr. Vensel in cash. The gravamen of the complaint alleges that the Government demanded the remainder of the purchase price of the collateral from the defendant, who refused to pay it and thereby converted the collateral to his own use.

On May 11, 1983, defendant filed a motion to dismiss for failure to join an indispensable party. At the hearing on defendant's motion, defendant made an alternate oral motion that the complaint be dismissed for failure to state a claim. Defendant argued that the complaint failed to state a claim because the Government did not have the right to immediate possession of the collateral. The district court, relying on the Pennsylvania definition of conversion, found that the plaintiff's complaint did not meet the requirements of Pennsylvania law. Without considering whether the complaint was sufficient under general federal law, the court dismissed the Government's action without prejudice. Counsel apparently failed to inform the district court of this court's decision in United States v. Sommerville, 324 F.2d 712, 714-15 (3d Cir.1963).

Sommerville involves facts very similar to those in this case. ² In Sommerville, the court considered whether federal or state law governed a conversion action commenced pursuant to an FHA loan program. The court made, inter alia, two relevant findings. First, the court, following Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), held that because an important federal interest was involved in the FHA loan program, the court must apply federal law. Id. at 714-15. Second, the court refused to select state law as the applicable federal rule; instead, it formulated a general federal rule of conversion. ³ The court held that the defendant, who "interfered with and converted the FHA's right to the chattels ... must be held to be strictly accountable." Id. at 718. ⁴

Applying the principles of Sommerville to this case, we conclude that under the general federal law the Government's complaint has alleged sufficient facts to withstand defendant's motion to dismiss. ⁵ Accordingly, we remand for further proceedings consistent with this opinion.

1 In Sommerville, 324 F.2d at 717, the court stated:

"The fact of the recording of the security agreement as required by the...