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United States v. Smith

decided: November 9, 1987.

UNITED STATES OF AMERICA, PETITIONER-APPELLANT,
v.
DALE SMITH, SUZANNE SMITH, GORDON E. MILLS AND SHARON R. MILLS, RESPONDENTS-APPELLEES



Appeal from an order of the United States District Court for the Western District of New York (Telesca, J.), affirming Bankruptcy Court rulings that the United States did not have perfected security interests in harvested crops in the respondents' possession. Reversed and remanded.

Newman, Miner and Altimari, Circuit Judges.

Author: Altimari

ALTIMARI, Circuit Judge:

This case addresses the distinction between growing crops and harvested crops under Article 9 of the New York Uniform Commercial Code (McKinney 1964 & Supp. 1987). The United States appeals from an order of the District Court for the Western District of New York, Michael A. Telesca, Judge, affirming a decision by the Bankruptcy Court for the Western District of New York, Edward D. Hayes, Bankruptcy Judge. The district court held that the United States failed to perfect is security interests in the respondents' harvested crops, because its financing statements did not comply with § 9-402 of the U.C.C.

We hold that the United States did, in fact, have perfected security interests in the crops at issue, despite its admitted failure to comply with § 9-402 with respect to those crops. We therefore reverse the decision of the district court, and remand with instructions to remand to the bankruptcy court for the entry of appropriate orders.

BACKGROUND

The Smiths and the Mills ("respondents") are grain farmers in Seneca County, New York. Between 1977 and 1983, respondents borrowed substantial sums of money from the Farmers Home Administration ("FmHA"), an agency of the United States Department of Agriculture. To secure these loans, respondents executed security agreements which granted security interests to the FmHA in various types of collateral. The collateral included "[a]ll crops . . . now planted, growing or grown, or which are hereafter planted" on certain designated parcels of real estate. The collateral also included "other farm products, and supplies, now or hereafter acquired by Debtor, together with all increases, replacements, substitutions, and additions thereto."

Respondents also executed financing statements, which the FmHA duly filed with the Clerk of Seneca County. The financing statements provided that the following types of collateral were covered: "crops, livestock, supplies, other farm products and farm and other equipment." Both security agreements and the financing statements listed specific parcels of real estate on which respondents' crops were growing or to be grown.

In 1984, the Smiths and the Mills both filed bankruptcy petitions. At the time of filing, the Smiths were in possession of approximately 400 tons of harvested corn; the Mills, in turn, had possession of several tons of harvested corn and hay. The vast majority of this corn and hay had been grown on lands which were not identified in the FmHA security agreements or financing statements.

Respondents sought leave in the bankruptcy court to use these harvested crops (and the proceeds thereof) in the continuing operation of their farms. The United States objected to respondents' request, arguing that the FmHA's perfected security interests in respondents' farm products extended to the harvested crops at issue. The United States therefore sought protection against what it considered to be a wasting of assets in which it claimed a security interest.

The bankruptcy court concluded that this case was controlled by N.Y. U.C.C. § 9-402. Under that section, where a financing statement covers crops that are "growing or to be grown," the financing statement must contain a description of the real estate on which the crops are grown, as well as the name of the record owner. See id. §§ 9-402(1) & (5) (McKinney Supp. 1987). The bankruptcy court reasoned that because the harvested crops at issue were grown on lands not identified in the financing statements, the United States did not have perfected security interests in these crops. The court accordingly allowed respondents to use the harvested crops in their farming operations, and declined to order any protection for the United States' asserted interest in the crops.

The United States appealed to the District Court for the Western District of New York, which affirmed the bankruptcy court's orders.

Discussion

Because this case involves rights of the United States arising under a federal lending program, it must be decided with reference to federal law. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 59 L. Ed. 2d 711, 99 S. Ct. 1448 (1979). In appropriate circumstances, however, state law may be adopted as the federal rule of decision. See id. at 728-29. In the present case, we believe that New York law "furnish[es] convenient solutions in no way inconsistent with adequate protection of the federal interest[s]." Id. at 729 (quoting United States v. Standard Oil Co., 332 U.S. 301, 309, 91 L. Ed. 2067, 67 S. Ct. 1604 (1947)). The United States, moreover, does not ...


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