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United States v. Sommerville

November 14, 1963; As Amended Jan. 8, 1964.


Author: Biggs

Before BIGGS, Chief Judge, STALEY, Circuit Judge, and STEEL, District Judge.

BIGGS, Chief Judge.

This case sounds in tort and has been labeled a suit for conversion: i.e., an action for the wrongful taking of an interest in property. The United States, acting on behalf of Farmers Home Administration (FHA), is the plaintiff. The defendant is an auctioneer licensed under the laws of Pennsylvania and doing business in that Commonwealth. He was cast in the litigation and appeals. The relevant facts follow.

During the period March 1954 to March 1958, FHA made loans from time to time to Flickinger, a farmer of Mercer County, Pennsylvania. As security for these loans Flickinger executed security agreements in favor of FHA covering all his personal property, including his farm equipment, crops and livestock. On July 10, 1958*fn1 Flickinger executed another security agreement covering the same property as security for a loan to him of $4,161.14 by FHA. This security agreement stated that it was "intended by the parties to serve as both 'Financing Statement' and 'Security Agreement' under Pennsylvania Law." The agreement was recorded in Mercer County in accordance with the law of Pennsylvania on the day it was executed.

Between March 30, 1959 and sometime in April, 1959, Flickinger, without the knowledge or consent of FHA, delivered three cows covered by the agreement to the defendant for auction sale in the regular course of business.*fn2 The defendant had no actual knowledge of FHA's security interest in the livestock.*fn3 The purchase money, less the defendant's commission, was turned over to Flickinger after the sale.

In April of 1959 FHA learned that Flickinger had sold the three cows. The Agency, however, took no action, except to urge Flickinger to conduct a voluntary liquidation of all of his property. In November 1959 such a sale was held and the proceeds were turned over to FHA. After payment of the proceeds to the Agency, Flickinger was still indebted to FHA in the amount of $551.69. FHA did not inform the auctioneer, the defendant Sommerville, that the three cows that Flickinger had delivered for sale to and were sold by Sommerville were covered by any security agreement.

The suit at bar was commenced on February 10, 1961. Sommerville then became aware for the first time of FHA's contentions and demands for payment.*fn4 An answer was filed and after various proceedings which need not be recited here, the case was tried to the court. The trial judge found Sommerville liable and entered judgment for the United States in the amount of $377.49.

The appeal presents the following issues: (1) whether the liability issue is governed by state or federal law; (2) whether the applicable law imposes liability on an auctioneer who sells livestock covered by an FHA security agreement without actual knowledge of that coverage; and (3) whether the United States by prior conduct waived its right to maintain the action against Sommerville. We will deal with these issues in the order presented.

(1) Whether Liability is Governed by State or Federal Law.

Decisions of the Supreme Court,*fn5 this court*fn6 and other courts*fn7 demonstrate that federal law is applicable in the case at bar. An independent federal rule of decision must be applied when a genuine federal interest would be subjected to uncertainty by application of disparate state rules.*fn8 No broad review of the decisions is necessary. Reference to the most pertinent will be sufficient. In Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 63 S. Ct. 573, 575, 87 L. Ed. 838 (1943), the United States sued a bank which guaranteed all prior endorsements on a federal check issued to a WPA worker. The Supreme Court applied federal common law. It emphasized that "the application of state law * * * would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states." A federal interest and a concomitant source of federal law were found to exist because "[the] authority to issue the check had its origin in the Constitution and the statutes of the United States * * *." Id., supra, 318 U.S. at 366, 63 S. Ct. at 575, 87 L. Ed. 838.

Genuine federal interests have been found to be present when federal elements such as statutes, regulations and executive orders exist in the pertinent field.*fn9 The reasoning underlying the Clearfield decision has been used to support the appliction of federal law to suits in which there were federal interests regardless of whether the United States was or was not a party,*fn10 or whether diversity of citizenship or a federal question served as the jurisdictional basis for the action. This court has applied federal law to determine the rights of parties under a lease executed by the United States.*fn11

The principles developed in contract cases were found to be applicable to tort actions in United States v. Standard Oil Co., 332 U.S. 301, 305, 67 S. Ct. 1604, 1607, 91 L. Ed. 2067 (1947). In the cited case the United States sued for loss of services and medical expenses incurred when a soldier was hospitalized by reason of the defendant's tortious conduct. The Supreme Court deemed federal law to be applicable. After discussing the principles of Clearfield, the Court said: "[They] are equally applicable in the facts of this case where the relations affected are noncontractual or tortious in character." A federal interest was found to exist in the relationship between the United States and the members of the armed services. The federal fisc was found to be affected and thus the United States' power to protect itself from financial injury added weight "to the military basis for excluding state intrusion." Id., supra, 332 U.S. at 306, 67 S. Ct. at 1607, 91 L. Ed. 2067. The Court concluded that "we know of no good reason [appears] why the Government's right to be indemnified * * * should vary * * * simply because the soldier marches or today perhaps as often flies across state lines." Id., supra, 332 U.S. at 310, 67 S. Ct. at 1609, 91 L. Ed. 2067.

In the case of Howard v. Lyons, 360 U.S. 593, 79 S. Ct. 1331, 3 L. Ed. 2d 1454 (1959), the Supreme Court held that federal common law governs the privilege afforded a naval officer in a diversity suit brought for defamation. It thus seems established, apparently beyond question, that the Clearfield doctrine applies in a tort-type case.

The loans to Flickinger and the acquisition by the FHA of a security interest in the cows were created under the authority of the Bankhead-Jones Farm Tenant Act, 65 Stat. 197. The Act authorized a large loan program designed to enable farmers and stockmen to become established successfully in a sound, well-balanced system of farming or stock raising and to make full and efficient use of their land and labor resources.*fn12 The security interest having been obtained under an Act of Congress pursuant to a grant of constitutional authority, it is clear that the requisite federal interest and source of federal law are present. But, we need not stop here since in the instant case, as in the Standard Oil decision, the power of the United States to protect its purse is operative. Potential financial injury to the United States is apparent. The duty to mold a federal rule is clear.*fn13

In so stating we are not unmindful of the statement of the Supreme Court in Clearfield that "[in] our choice of the applicable federal rule we have occasionally selected state law."*fn14 We conclude, however, that the interest of the United States in the administration of the loan program would be undermined and its power to protect its purse limited if disparate laws of individual states were applied to substantially identical loan transactions. Such transactions would be subjected to diverse legal effects.*fn15 The FHA would have to frame its loan program to suit the policies of particular states as evidenced by their respective laws. The United States, as a partyplaintiff would be able to protect itself from financial loss in one state but not in another. Protection of the purse is paramount here and is paramountly federal. Whether the United States can maintain a suit on an FHA loan must depend on uniform federal policies. Compare United States v. Shimer, 367 U.S. 374, 81 S. Ct. 1554, 6 L. Ed. 2d 908 (1961).

It can be argued, of course, that because of the terms of the security agreement, viz., because of that phrase stating that it was "intended by the parties to serve as both 'Financing Statement' and 'Security Agreement' under the Pennsylvania law," and because the security agreement was recorded as provided by the law of Pennsylvania, the law of Pennsylvania and not the federal law must define the obligations of Flickinger as well as the liabilities of Sommerville to the FHA. It can be contended further that since the Uniform Commercial Code, 12A P.S. ยง 9-503 (Supp.1962), set out as a cumulative remedy in the security agreement, gave the FHA the right to immediate possession of the cows upon default under Section 9 of the agreement and assertedly the right to maintain the action of conversion, Pennsylvania law must govern all of the rights and duties of the parties.

We find this argument unpersuasive. The fact of the recording of the security agreement as required by the Pennsylvania law under the terms of the security agreement is an incident in the perfecting of the lien of the FHA on the cows. To this extent we look to the law of Pennsylvania and no further. In respect to the other arguments set out in the preceding paragraph we are of the opinion that under the general federal law, discussed hereinafter, an individual who causes property in which another has a valid interest to be sold at auction without authorization and converts the proceeds to his own use, is guilty of the tort of conversion. The wronged individual becomes entitled to maintain his suit to recover damages when the property is taken. The genesis of the obligations, duties, and liabilities of the parties in this litigation lies in the Bankhead-Jones Farm Tenant Act, and absent express congressional declaration of intent that state law shall be applicable, we are reluctant to subject federal rights and duties to the exceptional uncertainty and heterogeneity*fn16 which may ensue in many cases. We will not do so.

We will now proceed to the second issue in the case mindful of "state rules and precedents only in so far as in professional judgment we may be persuaded that they are sound."*fn17

(2) Whether Federal Law Imposes Liability on an Auctioneer When He Sells Without Knowledge of an Existing Recorded FHA Security Agreement.

Viewed as a matter of federal policy we conclude that allowing the United States to maintain the suit at bar against the auctioneer is necessary and salutary. Such a conclusion gives the FHA an additonal remedy which augments the integrity of its security interest. If the Agency was limited to suing the mortgagor the ease with which loans could be made would be greatly impaired. The auctioneer earned commissions from the sale of the cattle and had it in his power to protect himself against such losses as that which incurred in the instant case. Costs of insurance had he been insured could have been regained from ...

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