United States 77 1359 v. Kimbell Foods, Inc United States 77 1644 v. Crittenden, Nos. 77-1359

CourtUnited States Supreme Court
Writing for the CourtMARSHALL
Citation99 S.Ct. 1448,59 L.Ed.2d 711,440 U.S. 715
PartiesUNITED STATES, Petitioner, 77-1359 v. KIMBELL FOODS, INC., et al. UNITED STATES, Petitioner, 77-1644 v. Zac A. CRITTENDEN, Jr. d b a Crittenden Tractor Company
Decision Date02 April 1979
Docket NumberNos. 77-1359,77-1644

440 U.S. 715
99 S.Ct. 1448
59 L.Ed.2d 711
UNITED STATES, Petitioner, 77-1359

v.

KIMBELL FOODS, INC., et al. UNITED STATES, Petitioner, 77-1644 v. Zac A. CRITTENDEN, Jr. d b a Crittenden Tractor Company.

Nos. 77-1359, 77-1644.
Argued Jan. 8, 1979.
Decided April 2, 1979.
Syllabus

These cases present the question whether contractual liens arising from certain federal loan programs take precedence over private liens, absent a federal statute that sets priorities. Resolution of this question requires determination of whether federal or state law governs the conflicting claims and, if federal law applies, whether a uniform priority rule should be fashioned or state commercial law should be incorporated as the federal rule of decision. In No. 77-1359, the United States' contractual lien secures a loan guaranteed by the Small Business Administration (SBA) under the Small Business Act, which generally does not specify priority rules to govern SBA security interests. The private lien of respondent Kimbell Foods, Inc. (Kimbell), arose from security agreements that were executed before the federal guarantee and secured advances that Kimbell made after the federal guarantee. Both the federal and private security interests, which covered the same collateral, were perfected pursuant to Texas' Uniform Commercial Code. The District Court found that the Government's lien was superior to Kimbell's. In so ruling, it applied the first-in-time and choateness doctrines, rules originally developed to afford federal statutory tax liens special priority over state and private liens where the governing statute does not specify priorities. The Court of Appeals reversed the District Court's judgment. While agreeing that federal law governed the controversy and that the "first in time, first in right" priority principle controlled the competing claims, the court refused to extend the choateness rule to situations in which the Government was a voluntary lender. Instead, the Court of Appeals fashioned a federal common-law rule whereby the first lien to meet Uniform Commercial Code perfection requirements achieved priority, and held that under this rule Kimbell's lien was superior. Although the Court of Appeals did not adopt Texas law, it did determine that Texas law would also afford priority to Kimbell's security interests. In No. 77-1644, a borrower obtained several loans from the Farmers Home Administration (FHA) under the Consolidated Farmers Home Administration Act of 1961 (now

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redesignated the Consolidated Farm and Rural Development Act), which does not establish rules of priority. To secure the loans, the FHA obtained a security interest in the borrower's crops and farm equipment, and perfected its interest by filing a standard financing statement with Georgia officials. Subsequently, respondent repaired the borrower's tractor on numerous occasions. When the borrower failed to pay the repair bills, respondent retained the tractor and acquired a lien therein under Georgia law. After the borrower had filed for bankruptcy and had been discharged from his debts, the United States instituted this action to obtain possession of the tractor. The District Court granted summary judgment for respondent, holding that the FHA had not properly perfected its security interest because the financing statement inadequately described the collateral; and that even if the description were sufficient, both federal and state law accorded priority to respondent's lien. Affirming in part and reversing in part, the Court of Appeals fashioned a federal rule, based on the Model Uniform Commercial Code, to determine the validity of the financing statement. It found the description of the collateral adequate to perfect the FHA's security interest. As to the priority question, the Court of Appeals rejected state law as well as the first-in-time and choateness doctrines. In their place the court devised a special "federal commercial law rule" giving priority to repairman's liens when the repairman continuously possesses the property from the time his lien arises. The court concluded that under this rule respondent's lien for only the final repair bill took precedence over the FHA's security interest. Held:

1. The priority of liens stemming from federal lending programs must be determined with reference to federal law. Since both the SBA and the FHA derive their authority to effectuate loan transactions from specific Acts of Congress passed in the exercise of a "constitutional function or power," Clearfield Trust Co. v. United States, 318 U.S. 363, 366, 63 S.Ct. 573, 574, 87 L.Ed. 838, their rights, as well, should derive from a federal source. That the statutes authorizing these federal lending programs do not specify the appropriate rule of decision in no way limits the reach of federal law. Pp. 726-727.

2. Because a national rule is unnecessary to protect the federal interests underlying the SBA and FHA loan programs, the relative priority of private liens and consensual liens arising from the programs is to be determined under nondiscriminatory state laws, absent a congressional directive to the contrary. Pp. 727-740.

(a) Incorporating state law to determine the rights of the United States as against private creditors will in no way hinder administration of the SBA and FHA loan programs. The agencies' own operating

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practices, which recognize that the Government's security interests are controlled by the commercial law of each State, belie the assertion that a uniform rule of priority is needed to avoid the administrative burdens created by disparate state commercial rules. Pp. 729-733.

(b) Deference to customary commercial practices will not conflict with the objectives of the lending programs. The SBA and FHA loan programs are a form of social welfare legislation, primarily designed to assist farmers and businesses that cannot obtain funds from private lenders on reasonable terms. If Congress had intended the private commercial sector, rather than taxpayers in general, to bear the risks of default entailed by these public welfare programs, it would have established a priority scheme displacing state law. Since the Government is in substantially the same position as private lenders when it extends funds under the programs, the special status it seeks is unnecessary to safeguard the public fisc. Pp. 733-738.

(c) Rejecting well-established commercial rules which have proven workable over time could undermine the stability on which the commercial community depends in making reliable evaluations of risk. Absent concrete reasons for altering settled commercial practices, the prudent course is to adopt the readymade body of state law as the federal rule of decision until Congress strikes a different accommodation. Pp. 739-740.

3. The judgment in No. 77-1359 is affirmed since the Court of Appeals found that Texas law gave preference to Kimbell's lien. The judgment in No. 77-1644 is vacated, and the case is remanded for determination of whether the FHA's financing statement is sufficient under Georgia law, and whether Georgia treats repairmen's liens as superior to previously perfected consensual liens. P. 740.

No. 77-1359, 557 F.2d 491, affirmed; No. 77-1644, 563 F.2d 678, vacated and remanded.

Stephen R. Barnett, Dept. of Justice, Washington, D. C., for petitioner.

Vernon O. Teofan, Dallas, Tex., for Kimbell Foods, Inc.

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Howell Hollis, III, Atlanta, Ga., for Zac A. Crittenden, Jr.

Mr. Justice MARSHALL delivered the opinion of the Court.

We granted certiorari in these cases to determine whether contractual liens arising from certain federal loan programs take precedence over private liens, in the absence of a federal statute setting priorities.1 To resolve this question, we must decide first whether federal or state law governs the controversies; and second, if federal law applies, whether this Court should fashion a uniform priority rule or incorporate state commercial law. We conclude that the source of law is federal, but that a national rule is unnecessary to protect the federal interests underlying the loan programs. Accordingly, we adopt state law as the appropriate federal rule for establishing the relative priority of these competing federal and private liens.

I
A.

No. 77-1359 involves two contractual security interests in the personal property of O. K. Super Markets, Inc. Both interests were perfected pursuant to Texas' Uniform Commercial Code (UCC).2 The United States' lien secures a loan guaranteed by the Small Business Administration (SBA). The private lien, which arises from security agreements that preceded the federal guarantee, secures advances respondent made after the federal guarantee.

In 1968, O. K. Super Markets borrowed $27,000 from

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Kimbell Foods, Inc. (Kimbell), a grocery wholesaler. Two security agreements identified the supermarket's equipment and merchandise as collateral. The agreements also contained a standard "dragnet" clause providing that this collateral would secure future advances from Kimbell to O. K. Super Markets. Kimbell properly perfected its security interests by filing financing statements with the Texas Secretary of State according to Texas law.

In February 1969, O. K. Super Markets obtained a $300,000 loan from Republic National Bank of Dallas (Republic). The bank accepted as security the same property specified in Kimbell's 1968 agreements, and filed a financing statement with the Texas Secretary of State to perfect its security interest. The SBA guaranteed 90% of this loan under the Small Business Act, which authorizes such assistance 3 but, with one exception, does not specify priority rules to govern the SBA's security interests.4

O. K. Super Markets used the Republic loan proceeds to satisfy the remainder of the 1968 obligation and to discharge an indebtedness for inventory purchased from Kimbell on open account. Kimbell...

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