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UNITED STATES v. KIMBELL FOODS

decided*fn*: April 2, 1979.

UNITED STATES
v.
KIMBELL FOODS, INC., ET AL.



CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT.

Marshall, J., delivered the opinion for a unanimous Court.

Author: Marshall

[ 440 U.S. Page 718]

 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.*fn1 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).*fn2 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

[ 440 U.S. Page 719]

     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*fn3 but, with one exception, does not specify priority rules to govern the SBA's security interests.*fn4

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 continued credit sales to O. K. Super Markets until the balance due reached $18,258.57 on January 15, 1971. Thereupon, Kimbell initiated state proceedings against O. K. Super Markets to recover this inventory debt.

Shortly before Kimbell filed suit, O. K. Super Markets had defaulted on the SBA-guaranteed loan. Republic assigned its security interest to the SBA in late December 1970, and recorded the assignment with Texas authorities on January 21, 1971. The United States then honored its guarantee and paid

[ 440 U.S. Page 720]

     Republic $252,331.93 (90% of the outstanding indebtedness) on February 3, 1971. That same day, O. K. Super Markets, with the approval of its creditors, sold its equipment and inventory and placed the proceeds in escrow pending resolution of the competing claims to the funds. Approximately one year later, the state court entered judgment against O. K. Super Markets, and awarded Kimbell $24,445.37, representing the inventory debt, plus interest and attorney's fees.

Kimbell thereafter brought the instant action to foreclose on its lien, claiming that its security interest in the escrow fund was superior to the SBA's.*fn5 The District Court held for the Government. On determining that federal law controlled the controversy, the court applied principles developed by this Court to afford federal statutory tax liens special priority over state and private liens where the governing statute does not specify priorities. Kimbell Foods, Inc. v. Republic Nat. Bank of Dallas, 401 F.Supp. 316, 321-322 (ND Tex. 1975). See, e. g., United States v. Security Trust & Sav. Bank, 340 U.S. 47 (1950); United States v. Pioneer American Ins. Co., 374 U.S. 84 (1963).*fn6 Under these rules, the lien "first in time" is "first in right."*fn7 However, to be

[ 440 U.S. Page 721]

     considered first in time, the nonfederal lien must be "choate," that is, sufficiently specific, when the federal lien arises.*fn8 A state-created lien is not choate until the "identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain, 347 U.S. 81, 84 (1954); see United States v. Vermont, 377 U.S. 351, 358 (1964). Failure to meet any one of these conditions forecloses priority over the federal lien, even if under state law the nonfederal lien was enforceable for all purposes when the federal lien arose.

Because Kimbell did not reduce its lien to judgment until February 1972, and the federal lien had been created either in 1969, when Republic filed its financing statement, or in 1971, when Republic recorded its assignment, the District

[ 440 U.S. Page 722]

     Court concluded that respondent's lien was inchoate when the federal lien arose. 401 F.Supp., at 324-325. Alternatively, the court held that even under state law, the SBA lien was superior to Kimbell's claim because the future advance clauses in the 1968 agreements were not intended to secure the debts arising from O. K. Super Market's subsequent inventory purchases. Id., at 325-326.

The Court of Appeals reversed. Kimbell Foods, Inc. v. Republic Nat. Bank of Dallas, 557 F.2d 491 (CA5 1977). It agreed that federal law governs the rights of the United States under its SBA loan program, id., at 498 n. 9, 503 n. 16, and that the "first in time, first in right" priority principle should control the competing claims. Id., at 502-503. However, the court refused to extend the choateness rule to situations in which the Federal Government was not an involuntary creditor of tax delinquents, but rather a voluntary commercial lender. Id., at 498, 500-502. Instead, it fashioned a new federal rule for determining which lien was first in time, and concluded that "in the context of competing state security interests arising under the U. C. C.," the first to meet UCC perfection requirements achieved priority. Id., at 503.*fn9

The Court of Appeals then considered which lien qualified as first perfected. Disagreeing with the District Court, the court determined that, under Texas law, the 1968 security agreements covered Kimbell's future advances, and that the liens securing those advances dated from the filing of the security agreements before the federal lien arose. Id., at 494-498, 503. But the Court of Appeals did not adopt Texas law. Rather, it proceeded to decide whether the future advances should receive the same treatment under federal common

[ 440 U.S. Page 723]

     law. After surveying three possible approaches,*fn10 the court held that Kimbell's future advances dated back to the 1968 agreements, and therefore took ...


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