Petition — United States v. Kimbell Foods, Inc.

Supreme Court brief1979

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Text

No. %%=1359

Gu the Supreme Court of the United States

Octoper TerM, 1977

Unitrep STATES OF AMERICA, PETITIONER

Uv.

KrwpeitL Foops, Ixc., ET AL.

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

WADE H. McCREE, Jr.,

Solicitor General,

BARBARA ALLEN BABCOCE,

Assistant Attorney General,

MARION L. JETTON,

Assistant to the Solirtt@r General,

THOMAS G. WILSON,

Attorney,

| Department of Justice,

| Washington, D.C. 20530.

I semantics, 1

Rae ean ae ae 1

I De nt eenabennamits 2

RIED cickintra el aidinenaiea ceitderntecieeeduatninaiane 2

Reasons for granting the petition___.____.___- 6

| Ean NENG Se Se Ne 14

CITATIONS

Cases:

- Aetna Insurance Co. v. United States, 456

2 Fe ar ae anes 12

Ault v. United States, 432 F. 2d 441, af-

firming Ault v. Harris, 317 F. Supp.

ED sinicocenecynesemdinteniiinitibtamiintectdadides 7

Chicago Title Insurance Co. v. Sherred

Village Associates, 568 F. 2d 217_-_ 7, 8, 12,13

Clearfield Trust Co. v. United States, 318

Se ee ee eee 8

Connecticut Mutual Life Insurance Co. Vv.

Carter, 446 F. 2d 136, certiorari denied

RS OE en eee 7

County of Spokane v. United States, 279

) ) re ae een 9

H. B. Agsten & Sons, Inc. v. Huntington

Trust & Savings Bank, 388 F. 2d 156,

certiorari denied, 390 U.S. 1025_______- 12

Rankin v. Scott, 12 Wheat. 177_...._---- i)

Small Business Administration v. McClel-

FEM, BO UE. Gi ceniisingas vilitimodeddctn 11

257-715—78——-1

Cases—Continued

T. H. Rogers Lumber Co. v. Apel, 468 page

Be GR: Bi ntientintidattshatnitiiwnanetiontve 7,12

United States v. Acri, 348 U.S. 211------ i)

United States v. California-Oregon Ply-

wood, Inc., 527 F. 2d 687....-.....---- 7,12

United States v. City of New Britain, 347

Us BE ccencuccescevecewsdunistnntatns 9

United States vy. Crittenden, 563 F. 2d

GE cewsncieiennenin i al areaceieteiai iat iaalaliies d, 7, 13

United States vy. General Douglas Mac-

Arthur Senior Village, Inc., 470 I. 2d

675 certiorari denied sub nom. County of

Nassau v. United States, 412 U.S. 922__-- 7, 12

United States v. Latrobe Construction Co.,

246 F. 2d 357, certiorari denied, 355 U.S.

SR Sicentichceecttiii ciescnisinclinneisiantieaiiiintatises 7

United States v. Oswald and Hess Co.,

FF ee Se ee 7

United States v. Pioneer American Insur-

Gate Gos Bee Gas Ginaacduccamedncoce 8

United States v. Security Trust & Savings

DAG: GES Ga Ceedsitinewinenineeie 8

United States v. White Bear Brewing Co.,

ss 2) fo eae 9

Willow Creek Lumber Co., Inc. v. Porter

County Plumbing & Heating, Inc., C.A.

7, No. 77-1536, decided March 16,

Statutes:

BD cciwcicsccsecidinntuieantoutetheasibinieinin 7, 8, 12

Federal Tax Lien Act of 1966, 80 Stat.

1125, amending 26 U.S.C. 6323___-_--~- 11

OD We i iciinercanuiininocdenes 12

Be ee Se ei iicictenisduntcinneschan 12

Ill

Statutes—Continued

Small Business Act, 72 Stat. 384, as

amended, 15 U.S.C. 631 et seq.:

Section 4(¢), 15 U.S.C. 633(¢)__.--_-

Section 7(a), 15 U.S.C. 636(a)_______

Section 7(a) (1), 15 U.S.C. 636(a) (1)_

1 - C GEG Lb tilciincotelnssasesaa

OF sn citehitienniniaiachactinsen treeverecsnunivtvions

BD UE Bel iicwcaccnccéces sedlbatietcasndueiiads

EE Te Aa ee a

TC 5 ee

Miscellaneous:

H.R. Rep. No. 1884, 89th Cong., 2d Sess.

EEE. silensiinateleniisisibdidsibapel ieee ciicsuiannaia

Plumb, Federal Tax Liens (3d ed. 1972) __

In the Supreme Court of the Wnited States

Ocroser Term, 1977

No.

Untrep States or AMERICA, PETITIONER

Vv.

Kimpett Foopns, Inc., ev At.

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

The Solicitor General, on behalf of the United

States of America, petitions for a writ of certiorari to

review the judgment of the United States Court of

Appeals for the Fifth Circuit in this case.

CPINIONS BELOW

The opinion of the court of appeals (App. A, infra,

pp. 14-294) is reported at 557 F. 2d 491. The opinion

of the district court (App. C, infra, pp. 314-53) is

reported at 401 F. Supp. 316.

JURISDICTION

The judgment of the court of appeals (App. B,

infra, p. 30a) was entered on August 12, 1977. A

petition for rehearing was denied on October 25, 1977

(1)

(App. D, infra, p. 54a). On January 16, 1978, Mr.

Justice Powell extended the time within which to file

a petition for a writ of certiorari to and ineluding

March 24, 1978. The jurisdiction of this Court is in-

voked under 28 U.S.C. 1254(1).

QUESTION PRESENTED

Whether a private lien that has not attached to

the property and become choate before a federal lien

attaches takes precedence over the federal lien.

STATEMENT

1. In February 1969 O K Super Markets, Ine., a

Dallas supermarket chain, borrowed $300,000 from

Republie National Bank of Dallas (App. C, infra,

p. 34a). The Small Business Administration guaran-

teed 90 percent of this loan, as it is authorized to do

hy Section 7(a) of the Small Business Act, 72 Stat.

384, 387, as amended, 15 U.S.C. 636(a), when the

“financial assistance applied for is not otherwise avail-

able on reasonable terms” from non-federal sources.’

The financing statement executed by O K Super Mar-

kets granted the hank a security interest in all the

debtor’s machinery, equipment, fixtures, and inven-

tory; the statement was filed with appropriate state

officials on February 18, 1969 (App. C, infra, p. 34a).

rity agreements with Kimbell Foods, Inc., in August

1 Efforts by the bank and the Small Business Administration

to have larger creditors of O K Super Markets guarantee parts

of this loan had been unsuccessful (App. C, infra, p. 344).

1966, April 1968, and November 1968." O K received

advances on inventory and gave a general security

interest in the stores’ equipment, fixtures, goods and

merchandise (App. A, infra, p. 24). Each agreement

contained a standard “dragnet’’ clause stating that

the security interest also was given to secure all

future advances made by Kimbell Foods to O K Su-

per Markets (id. at 3a).

By February 1969, when Republic made its fed-

eraily guaranteed loan, O K Super Markets still owed

Kimbell $24,893.10." O K paid Kimbell using the Re-

publie loan proceeds. In February 1969 O K also owed

Kimbell $18,390.93 on open account for inventory pur-

chases; it made payments equal to this amount, and

Kimbell credited these against this balance (App. A,

infra, pp. 3a—4a).

O K centinued to make purchases on open account

from Kimbell until January 15, 1971, when Kimbell

filed suit in a Texas state court to recover an unpaid

balanee of $18,258.57 (App. A, infra, p. 4a). At ap-

proximately the same time, O K defaulted on its pay-

ments to Republic, which then assigned its security

interest to the Small Business Administration. The

agency paid the bank 90 percent of the indebtedness,

whieh totaled $252,331.93 on that date, and filed the

assignment with the proper state official (App. C,

infra, pp. 344-354). Approximately a year after the

* The August 1966 security agreement and financing statement

ecuri financing

single $27,000 note (App. C, infra, pp. 334-34).

*O K had retired the 1966 note entirely, and the debt pertai

only to the 1968 note. (App. A, infra, p. 3a). a

assignment and filing, Kimbell obtained in a Texas

state court a judgment for $24,445.37 on its claims

against O K (id. at 33a, n. 2).

2. Kimbell filed the present suit in the United

States District Court for the Northern District of

Texas, seeking a declaration that its security interest

in O K’s property (and hence the state judgment)

created a claim to O K’s assets superior to that of the

hank and the United States.‘ The district court held

that the United States’ security interest is superior

(App. C, infra, pp. 364-464). It concluded that, un-

der the governing federal law, a private lien is not en-

titled to priority over a federal lien unless the private

lien has attached to the property, and all opportuni-

ties for contesting the amount of the lien have been

exhausted, before the federal lien attaches (id. at

364-424). The cowrt stated that because Kimbell

Foods did not make its lien choate until February

1972, when the state court judgment was entered, it

could not prevail over the United States’ security in-

terest, which had a priority date no later than Jan-

uary (id. at 43a).

3. The court of appeals reversed. It held that the

priority of the federal lien is governed by federal law,

* Jurisdiction was based on 28 U.S.C, 2410, relating to actions

affecting property on which the United States has a lien (App.

C, infra, p. 314). Three of OK’s stores had been sold, and Kimbell

asserted a claim to the resulting funds. (/d. at 324-33).

* The State of Texas and the City of Dallas intervened, claim-

ing delinquent sales taxes and ad valorem taxes from the fund.

The district court held that these claims did not have sufficient

priority to be recognized (App. C, infra, pp. 46a-5la), and the

intervenors did not appeal.

but it rejected the “choateness” rule followed by the

distriet court for determining when a private lien is

deemed to be perfected in competition with a federal

lien. It rejected the “choateness” doctrine because it

thought that the doctrine, which was deveioped in

large part in connection with federal tax liens, should

not be ‘‘extended” to situations in which the federal

government is a surrogate commercial lender (App.

A, tnfra, pp. 174-19a). The court stated that the

doctrine would cause potential ered? of businesses

that are eligible for Small Business Administration

loans to shun these businesses, thereby harming the

companies that the agency is supposed to assist (id.

at 19a). It observed that Congress has altered the

application of the choateness doctrine to tax liens,

and argued that ‘‘logical symmetry” requires that the

doctrine should not be applied to federal contractual

liens (id. at 20a—22,).°

The court then fashioned a new federal rule for

determining priorities. The court essentially adopted

the Uniform Commercial Code, modified by the gen-

erally accepted federal rule that the lien “first in

time is first in right” (App. A, infra, pp. 244-26a)."

*The court of appeals also rejected the district court’s alter-

nate holding (App. C, infra, pp. 43a-46a) that Kimbell’s lien

could not have priority because it was not perfected under Texas

law (App. A, infra, pp. 10a-13a). We do not present this ques-

tion of state law for decision by this Court.

° The court of appeals subsequently decided to abandon the

“first in time—first in right” rule. See United States v. Crittenden,

563 F. 2d 678 (C.A. 5). See also page 13, infra.

257 -715—78——2

But on the question whether the future advances

clauses in the security agreements between O K and

Kimbell give Kimbell’s 1970 and 1971 advances a

priority dating back to the 1966 and 1968 agreements,

the court considered a number of rules that had been

applied by other courts (id. at 26a-28a). It narrowed

its choice to two, but found it unnecessary to choose

between the rules, because either one gives Kimbell a

priority dating from before the earliest possible pri-

ority for the federal lien (rd. at 28a).

REASONS FOR GRANTING THE PETITION

1. The Small Business Administration is in charge

of a national program to make or guarantee loans

that private lenders find too risky. A substantial num-

ber of the borrowers are unable to repay the loans on

schedule. The Small Business Administration informs

us that outstanding direct loans and guarantees

amount to $8 billion, and that at most times approx1-

mately $1 billion is in default or in arrears.” Approx-

imately 3,400 cases are in litigation at any time, and

many involve questions of priorities between federal

liens and competing liens. Many of the borrowers

have operations in more than one state. It is plainly

desirable that there be a uniform federal rule for de-

” * During October 1977 there were 10,853 loans involving

$551,800,000 in liquidation. An additional 27,628 loans, involving

$493,600,000, were delinquent.

——e

termining the priorities of competing liens in cases in-

volving the feueral government.’

Uniformity has proved to be an elusive goal. The

courts of appeals are divided concerning the rules for

establishing priority when federal and private liens

compete. At least six courts of appeals have concluded

that the federal lien takes precedence unless the com-

peting lien attached to the property and became

“choate” before the attachment of the federal lien.’

Two courts of appeals, including the court in the pres-

ent case, reject the “choateness” doctrine." The two

*The Department of Housing and Urban Development, the

Veterans Administration, the Farmers Home Administration, the

Economic Development Administration, and @gggp other federal

agencies also make or guarantee loans, The rules of priority affect

them no less than they affect the Small Business Administration.

*° See Willow Creek Lumber Co., Inc, v. Porter County Plumb-

ing & Heating, Inc., C.A. 7, No. 77-1536, decided March 16, 1978;

Chicago Title Insurance Co. v. Sherred Village Associates, 568

F, 2d 217 (C.A. 1) ; United States vy. General Douglas MacArthur

Senior Village, Inc., 470 F, 2d 675 (C.A. 2), certiorari denied sud

nom, County of Nassau vy. United States, 412 U.S, 922; 7. 77.

Rogers Lumber Co, v. Apel, 468 F. 2d 14 (C.A. 10) ; United States

v. Oswald and Hess Co., 345 F. 2d 886 (C.A, 3); United States v.

Latrobe Construction Co., 246 F. 2d 357 (C.A. 8), certiorari denied,

355 U.S. 890. The cases from the First, Second, Seventh and Tenth

Circuits were decided after Congress amended the tax lien statutes

in 1966,

* In addition to the present case, see /nited States v. Crittenden,

supra; United States v. California-Oregon Plywood, Inc., 527

F, 2d 687 (C.A. 9); Connecticut Mutual Life Insurance Co. v.

Carter, 446 F, 2d 136 (C.A. 5), certiorari denied, 404 U.S. 857;

Ault v. United States, 432 F. 2d 441 (C.A. 9), affirming Ault v.

Harris, 317 F. Supp. 373 (D. Alaska).

most recent appellate decisions explicitly decline to

follow the decision of the court of appeals in the in-

stant case. This Court should resolve the conflict and

establish a uniform rule of priority.

2. The priority of a debt due the United States “is

always a federal question.” United States v. Security

Trust & Savings Bank, 340 U.S. 47, 49; United States

vy. Pioneer American Insurance Co., 374 U.S. 84, 88-

89. No federal statute governs the priority of federal

liens arising from the government’s lending programs,

and therefore “it is for the federal courts to fashion

the governing rule of law according to their own

standards.’ Clearfield Trust Co. v. United States, 318

U.S. 363, 367.

As a starting point, federal courts have followed

the “cardinal rule” that the lien “first in time is first

12 See Willow Creek, supra; Chicago Title Insurance Co., supra,

568 F. 2d at 222 (footnote omitted) : “What dissuades us in partic-

ular from joining the Fifth and Ninth Cireuits is that we would

not merely be siding with one camp, making the split in the cir-

cuits a bit more even. We would, having decided not to rely on the

traditional requirement of choateness in determining the cog-

nizable timing of a mechanic’s lien, have to adopt a substitute

formula, We would have difficulty in following the Fifth Circuit

in Kimbell Foods, supra, which applied local law, the Uniform

Commercial Code, to » privately held secured interest. This device

fitted the case admirably, since the U.C.C. is of general, nation-

wide application, with no quixotic parochial variations. Recourse

to the local law governing mechanics’ liens, however, would in-

corporate many local eccentricities. This fact led the Ninth Cir-

cuit in Ault, supra, to adopt * * * local law [only to a degree].

Application of this rule, though, would not only require [the

federal agency] to concern itself with the varying state laws, but

would require contractors to be aware of the possible applicability

of two sets of rules. Were we to carve out our own approach

which differed from the court in Au/t, we would have succeeded

only in further complicating a minefield * * *.”

—~—e-

oe rd

in right.” Unsted States v. City of New Britain, 347

U.S. 81, 85-86; Rankin v. Scott, 12 Wheat. 177, 179.

To determine which lien is “first in time,” most courts

have adopted the doctrine—initially deveioped in tax

and insolveney cases (see, e.g., County of Spokane v.

United States, 279 U.S. 80, 94-95 (insolvency sta-

tute); United States v. City of New Britain, supra

(tax lien))—that the non-federal lien has priority

from the date it becomes “choate.’’ A lien becomes

choate only when “the identity of the lienor, the prop-

erty subject to the lien, and the amount of the lien”

have been established. United States v. City of New

Britain, supra, 347 U.S. at 84. The amount of the lien

usually is not established until the lien is reduced to

judgment. See United States v. White Bear Brewing

Co., Ine., 350 U.S. 1010, 1011 (Douglas, J., dissent-

ing); United States v. Acri, 348 U.S. 211.

The court of appeals concluded, however, that the

choateness rule should be abolished for a variety of

“policy reasons” (App. A, infra, p. 17A). The court’s

reasons, we submit, do not bear scrutiny.

a. The court of appeals observed that the choate-

ness doctrine had been devised in tax lien cases, and

it stated that the government’s position as an in-

voluntary creditor in tax cases distinguishes tax liens

from other federal liens (App. A, infra, pp. 17A-

18A)." The court also argued that it is more impor-

*®31 U.S.C. 191 provides that in settling the affairs of any

insolvent, “the debts due to the United States shall be first

satisfied.”

**The court overlooked the fact that the choateness do+trine

was developed as an application of the insolvency statute, which

applies to all situations in which the government is a creditor

and the debtor is an “insolvent.”

tant for the government to collect taxes than to re-

cover bad debts. It is difficult, however, to find a

material distinction between a dollar received from

the collection of taxes and a dollar returned to the

treasury on repayment of a federal loan.

And it is not appropriate to regard the Small

Business Administration as an ordinary commercial

lender. Government loans, guarantees, and insurance

are provided for reasons of national policy, not to

make a profit. The assistance usually is provided only

if commercial credit is not available on reasonable

terms. 15 U.S.C. 636(a)(1); see also, e.g., 7 U.S.C.

1922(4), 1941(4) (Farmers Home Administration) ;

42 U.S.C. 3142(b)(4) economic Development

Administration). The court of appeals was quite

wrong in reasoning that the government should be

treated as an ordinary commercial lender because it

“enters the commercial credit scheme” with the same

“opportunity to evalyate the credit risks” as a private

lender (App. 4 dare p. 18A). The government en-

ters only where private lenders do not go, and the

choateness rule provides appropriate protection for

loans where the government is the lender of last

resort.

b. The court of appeals stated (App. A, infra, p.

19A) that the choateness doctrine harms small busi-

nesses, the intended beneficiaries of federal assistance,

because it would lead private creditors to shun busi-

nesses that could be eligible for federal loans. But the

Small Business Administration’s operations in juris-

dictions that follow the choateness doctrine afford an

opportunity to test the court’s assertion; that agency

Oe ORF Oe ree =

informs us that it has not detected the hesitance that

the court feared. Cf. Small Business Administration

Vv. McClellan, 364 U.S. 446, 453. The federal guarantee

often substantially improves the situation of the bor-

rower, making commercial lenders more, not less, will-

ing to lend additional sums. In the present case, for

example, the federal guarantee allowed O K to retire

outstanding indebtedness and provided needed operat-

ing funds for O K’s troubled business, all to the bene-

fit of O K’s creditors, who continued to advance new

sums.

Moreover, an alteration in the priority rules would

not be an unmixed blessing for small businesses even

if, as the court of appeals speculated, the present

priority rules cause some commercial lenders to treat

loans to small businesses as somewhat riskier. The

Small Business Administration, like other federal

lending or insuring agencies, has only limited re-

sources. It uses a revolving fund as the basis for loans

and guarantees (15 U.S.C. 633(c)). Inability of the

Small Business Administration to realize on the secu-

rity for its loans simply reduces the amount available

for future loans—to the detriment of the small busi-

nesses.

c. The suggestion that, in light of the Federal Tax

Lien Act of 1966, 80 Stat. 1125, amending 26 U.S.C.

6323, “logical symmetry urges rejection of * * * the

choateness doctrine” (App. A, infra, pp. 20A-21A),

rests on a misreading of the intent of Congress. The

Tax Lien Act explicity affects only tax liens, and Con-

gress did not alter the well-understood choateness rule

for any other liens. Five courts of appeals and the

Court of Claims have rejected the argument that the

Tax Lien Act has any bearing on the priorities of fed-

eral non-tax liens.** As the court explained in United

States v. General Douglas MacArthur Senior Village,

Inc., 470 F. 2d 675, 678-679 (C.A. 2} certiorari denied

sub nom. County of Nassau v. United States, 412 U.S.

922 (emphasis in orginal): “[w]Je are unable to con-

clude * * * that a Congressional enactment, carefully

drawn, which affects the priority of federal tax liens

leaves the courts free to disregard prior precedents

and thus to broadly extend the scope of the statute’s

principle to other unspecified areas which, though

somewhat analogous, were simply not addressed by

the Congress.” *

1° Willow Creek Lumber Co., Ine. v. Porter County Plumbing

& Heating, Inc., supra; Chicago Title Insurance Co. v. Sherred

Village Associates, supra; United States v. General Douglas

MacArthur Senior Village, Inc., supra; T. H. Rogers Lumber

Co. v. Apel, supra; 1. B, Agsten & Sons, Ine. vy. Huntington

Trust & Savings Bank, 388 F. 2d 156 (C.A. 4) (en banc), cer-

tiorari denied, 390 U.S. 1025; Aetna Jnsurance Co. v. United

States, 456 F. 2d 773 (Ct. Cl.). But see United States v. California-

Oregon Plywood, Inc., supra.

° Furthermore, the a Lien Act creates only limited excep-

tions to the “first in time” and choateness rules. The Act does

not abolish the choateness principle even for tax liens. See

H.R. Rep. No. 1884, 89th Cong., 2d Sess. 35 (1966). For ex-

ample, the Act does not protect mechanics’ liens that arise

before the lienors provide services or materials, even if these would

be protected under state law against later arising liens. 26 U.S.C.

6323(h)(2); Plumb, Federal Tax Liens 152 (3d ed. 1972).

And the Act gives priority to future advances pursuant to a writ-

ten commercial financing agreement only if they are made within

45 days of the filing of the tax lien. 26 U.S.C. 6323(c). A court

could achieve “logical symmetry” only by adopting the rules of

the Tax Lien Act for use in all non-tax lien cases, not by abolish-

ing the choateness doctrine. If the court had adopted the Tax

een ere

3. Any attempt to develop new priority rules by

litigation rather than by legislation is bound to pro-

duce considerable uncertainty. Once the choateness

rule had been discarded, the present case raised two

difficult issues—how a private lien is perfected, and

whether future advances relate back to the original

agreement. The court of appeals in resolving these

questions here, and in deciding United States v. Crit-

tenden, 563, F, 2d 678 (C.A. 5), considered the Uni-

form Commercial Code rule, state-modified versions of

the U.C.C., state rules that pre-dated the U.C.C., the

English rule, and the tax lien statute. The court nar-

rowed the field in this case, but did not select a rule

for future cases. Crittenden even rejected the “first in

time” doctrine in order to recognize a “super-priority”

for repairmen’s liens; super-priority claims raise

questions that defy logical analysis. As the First Cir-

cuit put the matter in Chicago Title Insurance Co. v.

Sherred Village Associates, 568 F. 2d 217, in the

course of rejecting the approach of the present case:

“[wJe cannot avoid feeling that there is much that we

do net know about the equities, effects of various rules,

and relative ability of the federal and local lienors to

protect themselves,’’ and new rules “could be more

equitably and intelligently made after Congressional

hearings, rather than after a trial between a limited

number of litigants” ( . 2d at 221 and n. 6).”

Lien Act here, it probably could not have reached the result it

did, because it appears that at least some of the advances by

Kimbell were made more than 45 days after the federal lien

attached and therefore would not have been accorded priority in

tax cases.

*t See also note 12, supra.

257-715—18—_3

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Wave H. McCrer, Jr.,

Solicitor General.

Barpara A, Bascock,

Assistant Attorney General.

Marion L. JETTON,

Assistant to the Solicitor General.

THomas G, WILSon,

Attorney.

Marcu 1978.

APPENDIX A

United States Court of Appeals Fifth Circuit

KimsBeit Foops, Inc., r/K/A KimBent Mu.tina Com-

PANY, D/B/A KimBeLL Grocery COMPANY, PLAIN-

TIFFS-APPELLANTS,

Repvusiic Nationa Bank or Datitas AND UNITED

STATES OF AMERICA, DEFENDANTS-APPELLEES.

No. 75-4105

Aug. 12, 1977

Rehearing and Rehearing En Bane Denied Oct. 25,

1977

A. L. Vickers, Vernon O. Teofan, Holt W. Guysi,

Dallas, Tex., for plaintiffs-appellants.

Frank J. Betancourt, Dallas, Tex., for Republic

Nat'l Bank.

Michael P. Carnes, U.S. Atty., Fort Worth, Tex.,

Charles D. Cabaniss, Asst. U.S. Atty., Dallas, Tex.,

for defendants-appellees.

Appeal from the United States District Court for

the Northern District of Texas.

Before THORNBERRY and GEE, Circuit Judges,

and MARKEY,* Chief Judge.

GEE, Cireuit Judge:

*Of the United States Court of Customs and Patent Appeals,

sitting by designation.

(14)

On this appeal we must decide which creditor of a

mercantile chain enjoys priority to repayment from

the proceeds of the sale of assets of three super-

markets, aggregating $86,672. One of these is the

Small Business Administration (hereinafter SBA),

an avatar of the United States, serving as the guar-

antor of a private loan to the debtor. SBA claims the

special priority enjoyed by the sovereign in collect-

ing taxes and the debts owed it by insolvents. We

conclude that the SBA lacks priority under either

state or federal law.

The other parties are the debtor, O.K. Super-

markets, Inc. (hereinafter O.K.), and a_ private

lender, Kimbell Foods, Ine. (hereinafter Kimbell).

O.K. is a Dallas supermarket chain. The bulk sale of

fixtures, equipment and inventory of three of its

stores forms the fund to which the parties seek pri-

ority. O.K. owed Kimbell because of weekly inventory

sales to O.K. on open account. Much of the factual

background from which the claims of the parties

emerged is undisputed.

O.K. executed three security agreements and fi-

nancing statements to Kimbell. The first was in

August 1966, securing a $20,000 promissory note from

Kimbell. The collateral listed included supermarket

equipment and fixtures and “[a]ll goods, wares and

merchandise and any and all additions or accessions

thereto.” In April and November of 1968, O.K. ex-

ecuted the remaining security agreements and finane-

ing statements to secure a $27,000 promissory note

from Kimbell. The collateral for these two agree-

ments was again specifically identified equipment

normally used in a supermarket and “[a]ll goods,

wares, merchandise and stock in trade and acces-

sions.” Each of the security agreements was duly

filed, and no termination statement was filed on any

of the agreements. It is of particular importance to

this case that each of the security agreements in-

cluded the provision that ‘‘said security interest also

being given to secure the payment of all other in-

debtedness at any time hereafter owing by Debtor to

Secured Party as well as the discharge of all obliga-

tions imposed upon Debtor hereunder.”

On February 2, 1969, O.K. borrowed $300,000 from

Republic National Bank of Dallas (hereinafter Re-

public). The SBA guaranteed 90% of this loan. On

February 18, 1969, Republic filed with the Secretary

of State of the State of Texas a security agreement

and financing statement executed by O.K. to Republic

granting it a security interest in all of the debtor’s

machinery, fixtures, equipment, inventory and all ad-

ditions and accessions thereto.t When O.K. defaulted

on this note the SBA paid Republic 90% of the out-

standing indebtedness, some $252,313.93, and on Janu-

ary 21, 1971, Republie assigned the SBA 90% of the

note and financing statement.

Events subsequent to the 1969 loan of $300,000 form

perhaps the most important part of this tableau. When

Republic made its loan, O.K. owed Kimbell $24,893.10

on the 1968 note for $27,000. O.K. paid off this note

from the Republic loan proceeds. Thus, both the 1966

note* and the 1968 note between O.K. and Kimbell

* Republic had previously filed a financing statement on August

7, 1968, covering the same collateral but refiled the statement on

February 18, 1969. The district court apparently considered only

the February 18 filing effective, see 401 F. Supp. at 323, as do we.

* The record is unclear on the disposition of the 1966 note, We

may assume that it was satisfied because the parties stipulated that

on February 12, 1969, the 1968 note was the only outstanding pro-

misory note between O.K. and Kimbell.

had been satisfied. O.K. still, however, owed Kimbell

$18,390.93 on open account for inventory purchases.

After February 12, 1969, O.K. paid Kimbell $18,390.93

against that debt—payments Kimbell credited to O.K.’s

oldest outstanding balances. O.K. kept on making in-

ventory purchases from Kimbell on open account until

January 15, 1971. By then the balance of O.K.’s ac-

eount with Kimbell was $18,258.57. On January 15,

1971, Kimbell filed suit in Texas courts to recover that

amount and, on January 31, 1972, obtained a judg-

ment for $24,445.37—-$18,258.57 principal, $1,186.80 in-

terest and $5,000 attorney’s fees.

Both the SBA and Kimbell claimed priority in the

£86,672 proceeds of the sale of three O.K. Supermar-

kets. After hearing the evidence and considering the

stipulations of the parties the court ruled that the

SBA had priority superior to all inchoate liens by

virtue of its special status as a federal lien creditor.

The district court ruled Kimbell’s lien inchoate because

Kimbell had not reduced its lien to judgment before

the SBA guaranteed Republic’s note or before the SBA

made good on its guarantee. The court went on to rule

that Kimbell did not have a good security interest in

the goods sold at bulk sale, a fact that certainly ren-

dered its lien inchoate. Kimbell appeals.

Kimbell’s Lien

We must first determine whether the district court

properly held that Kimbell’s security agreements se-

curing the 1966 and 1968 notes did not cover the ad-

vances Kimbel made to O.K. on open account.’ The

* Kimbell contends this question is not before the court because

of stipulations in the pretrial order of the parties, who stipulated

the existence of the 1966 and 1968 loans, security agreements and

security agreements provide that the security interest

also secures the payment of future indebtedness be-

tween the parties. Texas law countenances such so-

called “dragnet clauses.’’ See Tex. Bus. & Com. Code

§9.204(e) (Tex. U.C.C.).* Acknowledging this ap-

parent approval of future advance clauses, the district

court ruled that the future advance clause did not

operate in this case. It relied on pre-Code Texas cases

and U.C.C. cases from other jurisdictions to restrict

the application of the future advance clause to future

debts clearly contemplated by the parties. So reason-

ing, it ruled that in this case the parties meant the

security agreements to cover only the notes for which

financing statements. Nowhere in the stipulations did the parties

agree that the security agreements secured Kimbell’s advances to

O.K. of inventory on open account. Nor was the question explicit-

ly listed as one of the contested issues of law in the pretrial order.

The question was raised implicitly, however, in contested issues

of fact and law concerning the understanding of Republic as to

the priority of its lien, the effect of O.K.’s payoff of the 1968 note,

and the effect of O.K.’s payments to Kimbell of amounts greater

than the balance on open account outstanding just prior to Re-

public’s 1969 loan to Kimbell. We think the question was before

the court.

* Obligations covered by a security agreement may include

future advances or other value whether or not the advances or

value are given pursuant to commitment. * * * Tex.Bus. & Com.

Code §9.204(e) (1968) (Tex.U.C.C.). The Texas Business and

Commerce Code, containing Texas’ version of the U.C.C., was

amended in 1973, The amendments changed portions of the U.C.C.

relevant to this case, but those changes did not become effective

until January 1, 1974, Unless otherwise noted, we rely on the

Texas U.C.C. as it existed at the time of the relevant events in this

case.

they were executed, not later purchases on open

account. We view the transactions differently.°

Although the district court correctly stated the law

of Texas, it arrived at the wrong conclusion in light

of Texas’ application of its law. Texas courts do not

recognize the application of a future advance clause

unless the future advance to be secured was “reason-

ably within the contemplation of the parties to the

mortgage at the time it was made.” Wood v. Parker

Square State Bank, 400 8.W. 2d 898, 901 (Tex. 1966).

See also Moss v. Hipp, 387 8.W. 2d 656 (Tex. 1965) ;

Wallenstein & St. Claire, Annual Survey of Tezas

Law—Property, 30 Southwestern L.J. 28, 53 n. 214

(1976).° Consistent with this view, in Texas a future

advance clause in a mortgage does not secure a subse-

quent debt from the debtor to a third party acquired

from the third party by the mortgagee. See Wood, su-

pra. In circumstances similar to those at bar, however,

Texas courts have hinted that future advance clauses

will be effective. In Wood, for example, the Texas Su-

preme Court remarked that:

The more reasonable construction of this gen-

eral language [a future advance clause] is that

it referred to obligations directly arising be-

* The interpretation of a contract is a question of law, so we

are not restricted by the clearly erroneous rule of Fed. R. Civ. P.

52(a). See Backar v. Western States Producing Co., 547 F. 2d 876,

880 (5th Cir. 1977); First Natl Bank y. Ins. Co. of North

America, 495 F. 2d 519, 522 (5th Cir. 1974).

*In the absence of Texas cases dealing with future advance

clauses under the Code, we, like the district court, have drawn

upon Texas’ treatment of future advance clauses in other instru-

ments, Because the Texas U.C.C. gives no indication that future

advance clauses are to be treated differently today than under

Texas pre-Code law, we consider the pre-Code cases dealing with

other types of security interests authoritative.

tween Lincoln Enterprises [the original debtor]

and respondent bank [the original lender], i.e.,

where Lincoln became obligated to the bank as

the maker of an obligation, or became liable in

a secondary capacity in favor of the bank.

Supra at 902. See also Estes v. Republic National

Bank, 462 8.W. 2d 273 (Tex. 1970); Wallenstein &

St. Claire, supra at 53 n, 214. In light of this evidence

we conclude that in Texas a further extension of credit

to the debtor by the lender is deemed future indebted-

ness reasonably contemplated by the parties when they

execute a future advance clause.

The district court concluded that the parties did

not intend the future advance clause to cover pur-

chases on open account because the security agree-

ments were intended to cover only the amounts loaned

under a promissory note. In reaching this conclusion,

however, the district court ignored two important

factors: the parol evidence rule and Texas’ treatment

of future advance clauses in analogous situations.

The district court admitted testimony by Harold

Kindle, the president of O.K., about the subjective

intention of the parties when they executed the 1966

and 1968 notes, security agreements and financing

statements. Although his testimony was equivocal,’

" Indeed, well-nigh incoherent. When asked whether O.K. in-

tended that the security agreements cover all other advances and

open accounts between it and Kimbell, Kindle answered : “Well, I

considered the 1966 agreement a thing of the past from the 1968

agreement. I felt like it was, you know, a new beginning and since

we intended to pay the full amount—I realize it was a demand note

and they could demand it at any time they wanted to, but we had

had a good relationship so it was of no real concern. I didn’t stop

and ponder about, well, should I do this or should we do this. —

O.K, Supermarkets.”

When asked again, Kindle responded: “There again, there was

not any specific instruction—-on this question I mean—about

257-715—78——+4

the district court understood him to say that the

parties intended each transaction to be separate and

distinct. Admisssion of such testimony was error.

The language of the contract, unless ambiguous, rep-

resents the intention of the parties. The intent de-

duced from this objective matter, not the parties’ sub-

jective understandings, is controlling. See Western

Oil Fields, Inc. v. Pennzol United, Inc., 421 F. 2d

387, 390 (5th Cir. 1970) ; City of Pinehurst v. Spoon-

er Addition Water Co., 432 S.W. 2d 515, 518 (Tex.

1968); Wall v. Lower Colorado River Authority, 536

S.W. 2d 688, 691 (Tex. Civ. App.—Austin 1976,

writ ref’d n.re.). See also First National Bank

v. Rozelle, 493 F. 2d 1196, 1201 (10th Cir. 1974). Tes-

timony as to O.K.’s subjective intent in receiving the

future advance clause was a classic violation of the

parole evidence rule and clearly inadmissible.

The district court compounded this error by failing

to consider the truest test of the parties’ intention, the

words of the contract clearly providing that the secu-

rity agreement should cover future indebtedness. In

Estes v. Repubiic National Bank, 462 S.W. 2d 273

(Tex. 1970), the Texas Supreme Court upheld the ap-

plicability of a future advance clause despite the

debtor’s claim of an oral agreement that the deed of

trust containing the future advance clause was intend-

ed as a separate transaction not to extend to other

which agreement would cover which, I felt like we signed a new

statement in 68, end everything that had transpired in the past

was history. I felt like that any monies expended on either one

of those without an abrupt halt and then a start over again would

be—that °66 would be history now and then when the ’68 was paid

off, it would be history as well.”

indebtedness between the parties. In the absence of

some evidence that the “dragnet clause” was placed in

the contract by mutual mistake, the court found that

the clause clearly and unequivocally stated the inten-

tion of the parties for the land to secure the debtor’s

other loans from the bank. See also Wood, supra. In

light of the Estes and Wood cases, the district court

improperly discarded these future advance clauses.

The district court also relied on the circumstances

surrounding the 1966 and 1968 loans in finding that

the parties treated each loan as a separate and distinct

agreement for a specific, nonrecurring purpose and to

determine that the later inventory purchases were un-

related. Examining the documents and the circum-

stances surrounding their execution, we find nothing

that negates the parties’ statement that the security

agreements cover the inventory purchases on account.

The 1966 promissory note was entered into to free

O.K.’s current cash flow to purchase fixtures for a

new store and to allow O.K. to buy opening inventory

from Kimbell on credit. At least in part, then, the

1966 security agreement contemplated the purchase of

inventory on credit. The security agreement states that

it is given “to secure an advance of goods, wares and

merchandise and does not include a pree..isting debt.”

Under these circumstances we cannot say that later

inventory purchases on credit by O.K. were “un-

related” to the 1966 security agreement or involved

future advances “not of the same class” so as to negate

the applicability of the future advance clause, as the

district court held. See 401 F. Supp. at 325-26.

Again in 1968, O.K.’s promissory note allowed it

to delay payment on its open-account purchases so as

10A

to free current cash flow to pay off a debt owed As-

sociated Grocers, Inc. The 1968 security agreement

and financing statements were again related to Kim-

bell’s inventory advances on open account to O.K.’

Although the notes, security agreements and iinancing

statements were executed in response to special

factual circumstances, those circumstances are not

necessarily inconsistent with giving the future ad-

vance clauses in those agreements their plain mean-

ing, see First National Bank v. Rozelle, supra at

1201, holding that Kimbell’s 1966 and 1968 security

agreements and financing statements covered its later

advances of inventory to O.K. on open account.

Priority Under State Law

We now consider whether Kimbell had priority

under state law. If it did not, we need not consider

the more pressing questions of the applicability of

federal law and the relative priority of federal liens.

See United States v. P. S. Hotel Corp., 527 F. 2d

500, 501 (8th Cir. 1975). As the assignee of Republic’s

1969 note and security agreement, the SBA may

assert whatever priority that note might command

under state law. The district court did not directly

address the question of Republic’s priority qua note-

holder because of its view that Kimbell’s security

agreements with O.K. did not secure future ad-

vances. We find that they did, but even so the security

agreement of February 18, 1969, between Republic

and O.K. might be thought prior for two reasons.

First, Republic may have established a security in-

® O.K.’s failure to demand a termination statement under Tex.

Bus. & Com.Code § 9.404(a) (1968) (Tex.U.C.C.) after paying

off the 1968 note also tends to discredit the claim that the security

agreements applied only to the 1966 and 1968 notes.

11a

terest superior to that of Kimbell. Second, the 1969

note might be thought prior to secured future ad-

vanees made after February 18, 1969. After re-

viewing the Texas law, we conclude that neither of

these theories accords the SBA, standing in the shoes

a Republic, priority in the proceeds from the bulk

sale.

Republic could obtain a superior security interest in

the collateral, notwithstanding Kimbell’s previously

filed security agreement, if Republic attained a pur-

chase money security interest in the collateral. The

Uniform Commercial Code, adopted in Texas, pro-

vides that a purchase-money security interest in collat-

eral except inventory has priority over a conflicting

security interest in the same collateral if the purchase

money security interest is properly perfected. Tex.

Bus. & Com. Code § 9.314(d) (1968) (Tex. U.C.C.).

Unfortunately for Republic and the SBA, the record

reflects no purchase of goods by O.K. with the pro-

ceeds of the $300,000 note that could give rise to a

purchase-money security interest in any items sold at

the bulk sale—except inventory.

O.K. used some of the funds from the $300,000 note

to purchase inventory. Texas law affords Republic a

purchase-money security interest in that inventory

and grants Republic priority: if the security interest

was perfected at the time the debtor received posses-

sion; tf the holder of the purchase-money security

interest notified the holders of prior security interests

before the debtor received possession of the collateral:

and tf that notice stated that the person giving notice

had or expected to acquire a purchase-money security

interest in the specifically described goods. Tex. Bus.

& Com. Code § 9.312(¢) (1968) (Tex. U.C.C.). Re-

public-déd not give the required notice to Kimbell so

12a

as to establish priority in the inventory. See Borg

Warner Acceptance Corp. v. Wolfe City National

Bank, 544 S.W. 2d 947, 951 (Tex. Civ. App.—Dallas

1976, no writ). Kimbell was vaguely aware that Re-

public was planning to loan O.K. funds and would

expect to acquire a lien, but Republic never gave Kim-

bell the notification requisite for priority under the

Code. Republic never notified Kimbell that it expected

to acquire a lien on the inventory, nor did it describe

the inventory by item or type. Republic thus forfeited

whatever priority it could have attained. Republic had

priority, therefore, only if its lien was prior in time

to Kimbell’s.

Here we again inquire into the nature of the future

advance clause and the security interest it creates, a

particularly important endeavor when, as here, the

inquiry determines the status of the lien of an inter-

vening secured creditor. The Texas U.C.C. provides

in § 9.312(e)(1) that the first filed of conflicting se-

curity interests perfected by filing prevails. Tex.Bus.

& Com.Code § 9.312(e)(1) (1968) (Tex.U.C.C.). In

this case both Kimbell’s and Republie’s security in-

terests were perfected by filing; Kimbell would nor-

mally have priority unless the future advance did not

qualify because of the creation of an intervening se-

curity interest. The circumstance of a future advance

after an intervening filed security interest does not

alter the scheme, however. When both the interests

are filed security interests, we interpret section 9.312

(e) of the U.C.C. to adopt the relation-back position

so that the first-to-file rule awards priority even to

an advance made after an intervening security in-

terest. See Tex. Bus. & Com. Code § 9.312(e)(1) and

Example 4 (1968) (Tex. U.C.C.); Cohen, The Future

Advance Interest Unde: the Uniform Commercial

13a

Code: Validity and Priority, 10 B.C. Ind. & Com.

L. Rev. 1, 13 (1968); Comment, Priority of Future

Advances Lending Under the Uniform Commercial

Code, 35 U. Chi. L. Rev. 128, 133-34 (1967). The

1972 amendments to the U.C.C., adopted by Texas in

1973, effective in 1974, explicitly adopted the relation-

back position for future advances. See Tex. Bus. &

Com. Code § 9.312(g) (Supp.1976) (Tex.U.C.C.). Al-

though no Texas cases confirmed the prior U.C.C.

provisions’ adoption of the relation-back doctrine, the

doctrine was consistently upheld in pre-Code Texas

cases involving future advances. See Freiberg v. Ma-

gale, 70 Tex. 116, 7 S.W. 684, 685 (1888); Crabb v.

William Cameron & Co., 63 S.W.2d 367, 368 (Tex.

Com.App.1933, judgm’t adopted); Coke Lumber 4:

Mfg. Co. v. First National Bank, 529 8.W. 2d 612, 615

(Tex. Civ.App.—Dallas 1975, writ ref’d). See also

Wallenstein & St. Claire, supra at 53-54 n. 214. Under

Texas law, Kimbell retained a superior lien to Re-

public, and the SBA, as Republic’s assignee, held an

inferior state lien.

Priority Under Federal Law

The SBA asserts that, despite its poor showing

under state law, under federal law it has a claim su-

perior to Kimbell’s.. The SBA asserts the federal

* We have recently ruled that federal law controls the rights and

duties of the United States when it operates the SBA loan pro-

gram. United States v. Terrey, 554 F, 2d 685 (5th Cir. 1977). See

Miree vy. DeKalb County, —— U.S. ——, 97 S. Ct. 2490, 53 L, Ed.

2d 557 (1977) ; Clearfield Trust Co. v. United States, 318 U.S. 363,

63 S. Ct. 573, 87 L. Ed. 888 (1943). One matter in the record

suggests that this principle may not apply. The February 18,

1969, security agreement between Republic and O.K. provided

14a

common law priority rule of “first in time, first in

right” and the peculiar patina that federal courts

have placed on that rule specifying that only “choate”’

nonfederal liens may qualify as “first in time.” We

conclude that the “choateness” rule of federal common

law does not apply here.

Understanding the SBA’s argument requires a re-

view of the development of the federal common law of

priority. The source of much of federal priority law is

the congressional declaration awarding the United

States priority for the payment of its debts from cer-

tain insolvents.” In 31 U.S.C. § 191 (1970) (or Revised

that “This agreement shall be construed according to the laws

of the State of Texas.” The agreement bound the parties’ assigns

to this provision; thus, the SBA was bound to the application of

Texas iaw in its pursuit of its rights against O.K. See United

States v. Whitehouse Plastics, 501 F. 2d 692, 694 n. 1 (5th Cir.

1974). Cf. United States v. Terrey, 554 F, 2d 685 (5th Cir. 1977).

But see United States v. Outriggers, Inc., 549 F. 2d 337, 340 n. 5

(5th Cir. 1977) (SBA regulation requires application of federal

law to SBA documents). Nevertheless, we cannot read the lan-

guage in the security agreement as waiving the SBA’s right to

have federal law applied in evaluating the priority of its interest

against those of third parties.

2° Whenever any person indebted to the United States is in-

solvent, or whenever the estate of any deceased debtor, in the

hands of the executors or administrators, is insufficient to pay all

the debts due from the deceased, the debts due to the United States

shall be first satisfied; and the priority established shall extend as

well to cases in which a debtor, not having sufficient property to

pay all his debts, makes a voluntary assignment thereof, or in

which the estate and effects of an absconding, concealed, or absent

debtor are attached by process of law, as to cases in which an act

of bankruptcy is committed.

31 U.S.C. § 191 (1970). Although our present concept of govern-

mental priority developed as an intrinsic privilege of the English

crown, the United States’ priority derives solely from statute. See

15a

Statutes § 3466 as it is more commonly known), Con-

gress requires that in settling the affairs of cevtain in-

solvents “the debts due to the United States shall be

first satisfied.’’ Section 3466 had been read as only

granting the United States, as an unsecured creditor,

a priority against other unsecured creditors, see Ken-

nedy, The Relative Priority of the Federal Govern-

ment: The Pernicious Career of the Inchoate and

General Lien, 63 Yale L. J. 905, 909-11 (1954), thus

recognizing the integrity of pre-exisiting liens. But in

Spokane County v. United States, 279 U.S. 80, 49 8S.

Ct. 321, 73 L. Ed. 621 (1929), the Supreme Court con-

cluded that the priority granted the United States

would defer only to specifie and perfected (“choate”)

liens prior in time. 279 U.S. at 93-95, 49 S. Ct. 321.

To further protect the United States’ priority under

section 3466, the Supreme Court ruled that whether a

lien was choate involved a matter of federal law, see

United States vy. Waddill, Holland & Flinn, Inc., 323

U.S. 353, 65 8. Ct. 304, 89 L. Ed. 294 (1945), thus pre-

venting states from divesting the United States of

priority by adopting their own definitions of what con-

stituted a choate state lien. Later the Supreme Court

narrowly defined what could qualify as a cheate lien,”

effectively assuring absolute priority to United States

claims under section 3466. See Plumb, Federal Liens

and Priorities—Agenda for the Next Decade, T7 Yale

United States vy. Vermont, 377 U.S. 351, 358, 84 S, Ct. 1267, 12

L. Ed. 2d 370 (1965) ; United States v. New Britain, 347 U.S. 81,

84, 74S, Ct. 367, 98 L. Ed. 520 (1954).

"To assure that his lien was choate. the private lien holder

must establish the identity of the lienor, ..e property subject to the

lien, and the fixed amount of the lien. See, ¢.g., United States v.

New Britain, 347 U.S, 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954) ;

257—715—78& —_5

16a

L. J. 228, 230 (1967) ; Kennedy, From Spokane County

to Vermont: The Campaign of the Federal Govern-

ment Against the Inchoate Lien, 50 Lowa L. Rev. 724,

736 (1965); Burroughs, The Choate Lien Doctrine,

1963 Duke L. J. 449, 452. See generally, Lacy, Effect

of Federal Priority and Tax Lien Legislation on

Creditors of Vendors and Purchasers, 50 Ore. L. Rev.

621, 625-31 (1971). Our case does not require the ap-

plication of section 3466, since O.K. is not an insolvent,

but the SBA invokes the choateness doctrine spawned

by section 3466 to claim priority.

The SBA bases its argument on judicial extension

of the choateness doctrine to determine priority for

other federal liens. Although the federal tax statute

accorded the United States a lien for taxes only—

making no mention of priority for federal tax liens,

see 26 U.S.C. § 6321 (1970)—in United States v.

Security Trust & Savings Bank, 340 U.S. 47, 71 8.

Ct. 111, 95 L. Ed. 53 (1950), the Supreme Court held

that the choateness principles of section 3466 were

equally applicable when a federal tax lien was com-

peting for priority with a state lien. The purpose of

the tax lien statute was to assure prompt and certain

collection of taxes from tax delinquents; this pur-

pose required a rule similar to that prevailing with

collections under section 3466, 340 U.S. at 51, 71

S. Ct. 111. Other federal courts, without questioning

United States v. Pioneer American Ins, Co., 374 U.S, 84, 83 S. Ct.

1651, 10 L, Ed. 2d 770 (1963). Because the amount of the lien was

not fixed until the lienor had exhausted his opportunities to chal-

lenge the amount, the Court indicated that only possession or

reduction to judgment would meet the last criterion, See, ¢.g.,

United States v. Gilbert Associates, Inc. 345 U.S. 361, 73 8, Ct.

701, 97 L. Ed. 1071 (1953). See also Tevas Oil & Ges Corp. Vv.

United States, 466 F, 2d 1040, 1044-45 (5th Cir. 1972).

17a

whether the reasons for extending the choateness doe-

trine of section 3466 to tax liens justified its exten-

sion to other liens, have applied the doctrine to bestow

overriding priority on other federal liens. See, e. g.,

T. H. Rogers Lumber Co v. Apel, 468 F, 2d 14 (10th

Cir. 1972) (FHA mortgage lien); United States v.

Oswald & Hess Co., 345 F. 2d 886 (3d Cir. 1965) (SBA

mortgage lien); Jn re Lehigh Valley Mills, Inc.,

341 F. 2d 398 (3d Cir. 1965) (SBA security in-

terest). See also, Plumb, Federal Liens & Pri-

orities—Agenda for the Next Decade, 77 Yale

L. J. 228, 286-87 (1967). The SBA asks us to accord

it this superior status in this ordinary commerical

transaction far removed from the doctrine’s origins by

arguing that the choateness doctrine is an inevitable

consequence of applying federal law; but as our study

reveals, the choateness concept is a judicial creation

distinguishable from the well-recognized federal rule

of “first in time, first in right.” See Texas Oil d& Gas

Corp. v. United States, 466 F. 2d 1040, 1045 (5th Cir.

1972) ; Plumb, supra at 230. History in this area does

not permit us to enshrine without analysis the status

sought by the SBA. Viewing the choateness doctrine

independently, strong policy reasons militate against

its application in this context.

First, the interests supporting the Supreme Court’s

extension of section 3466's criteria to tax liens in Se-

curity Trust do not support a similar extension to

liens arising from SBA garden-variety commercial

loans or guaranties. The choateness doctrine reflects

a judicial recognition of the self-preservation prerog-

ative of the sovereign. Taxes are its lifeblood, and the

choateness doctrine recognizes and protects that vital

flow. Delinquent taxes make the United States an in-

voluntary creditor of the taxpayer, often ranged

18a

against other substantial commercial creditors and

state tax creditors. By the time the United States be-

comes aware of its status and files its tax lien, it may

well—absent self-help—tfind itself standing at the end

of the state priority line. The Supreme Cvuurt’s exten-

sion of the choateness doctrine protected the collection

of taxes and gave the United States, a sover-

eign, a measure of relief from its involuntary-credi-

tor status. When the United States, however, in its

less-exalted capacity as SBA, serves as a surrogate

commercial lender or guarantor, it enters the com-

mercial credit scheme voluntarily. These circumstances

afford it an opportunity to evaluate the credit risks,

to examine the interests of other creditors, and to

exact such security as the circumstances and policy

of the program dictate. See Plumb, The Relative

Priority of Federal and Business Claims: Yesterday,

Today and Tomorrow, 27 Bus. Lawyer 1195, 1217

(1972); Comment, The Priority of Federal Claims:

Selected Problems and Theorctical Considerations, 24

Case W. L. Rev. 521, 534-35 (1973); Comment, The

Relative Priority of SBA Liens: An Unreasonable

Extension of the Federal Preference, 64 Mich. L. Rev.

1107, 1128-29 (1966). As a quasi-commercial lender,

SBA (U.S.A.) does not require, and should not be

accorded, the special priority which it compels as sov-

ereign, so long as it complies with Congress’ admoni-

tion that it make loans which are “of such sound

value or so secured as reasonably to assure repay-

ment.”’ 15 U.S.C. § 636(a)(7) (1970). See Comment,

The Relative Priority of SBA Liens: An Unreason-

able Extension of the Federal Preference, supra at

1119.

Second, in a related concern, the importance of

taxes to the functioning of government mer-

194

its the extraordinary priority accorded them by the

judge-made “choateness” doctrine. The Supreme Court

has long recognized that section 3466 is informed by

the importance of securing adequate revenue to sus-

tain the public burdens and discharge the public

debts. See United States vy. Moore, 423 U.S. Ti, 81-

82, 96 S. Ct. 310, 46 L. Ed. 2d 219 (1975); United

States v. Emory, 314 U.S. 423, 426, 62 8. Ct. 317,

86 L. Ed. 315 (1943); United States v. State Bank

of North Carolina, 6 Pet. 29, 35, 8 L. “id. 308, 310

(1832). Consequently it has transferred that respect

for revenue-protecting measures to the tax-lien stat-

ute. See Security Trust, supra. On the other hand,

the SBA program is a supplement to commercial

loan operations, certainly less central to the proper

functioning of the national government and less de-

serving of the extraordinary peseeny accorded by

the choateness doctrine.

Third, granting the SBA an exceptional nrwrity

pursuant to the choateness doctrine is inconsistent

with the congressional declaration of poiicy pursuant

to its establishment of the SBA. In 15 U.S.C. § 631

(1970), Congress declares that the purpose of the

SBA assistance program is “to assist in the estab-

lishment, preservation, and strengthening of small

business concerns * * *.’’ If the SBA may belatedly

buy into loans and so assert liens superior to those of

prior secured creditors, every sane potential creditor

of small business will shun potential debtors of the

SBA as anathema or extract promises that the debtor

will not seek SBA assistance. What secured creditor

will extend credit on collateral that may only serve

to increase the security of a future SBA loan? Such

a legal posture scarcely assures a steady flow of cap-

ital into necessitous small business.

20a

Finally, logical svmmetry urges rejection of the

SBA’s effort to extend the choateness doctrine to this

context. The primary thrust of the SBA’s argument

is that because section 3466’s choateness doctrine was

extended to tax liens it should be extended to SBA

contractual liens. Yet in the Federal Tax Lien Act

of 1966 Congress substantially pared the applicability

of the choateness doctrine by recognizing that certain

state lien interests, including security interests, could

attain priority over tax liens. See 26 U.S.C. § 6323

(1970). See generally, Coogan, The Effect of the Fed-

evat Tax Lien Act of 1966 Upon Security Interests

Created Under the Uniform Commercial Code, 81

Harv. L. Rey. 1369 (1968). Why should the choateness

doctrine bestow priority on an SBA contractual lien

when a United States tax lien, more in need of the

protection of the choateness doctrine, commands no

such priority / Connecticut Mutual Life Ins. Co. v.

Carter, 446 F. 2d 136, 139 (5th Cir.), cert. denied, 404

U.S. 857, 92 S.Ct. 104, 30 L. Ed. 2d 98 (1971); Ault v.

Harris, 317 F. Supp. 373, 375 (D. Alaska), aff’d and

opinion adopted, 432 F. 2d 441 (9th Cir. 1970). See

Note, 3 Rutgers Camden L. Rev. 592, 597 (1972).”

In the absence of any congressioual directive to ex-

The district court distinguished Connecticut Mutual's analogy

to the 1966 Tax Lien Act by relying on cases in other circuits and

a subsequent case in our circuit reaffirming the existence of the

choateness doctrine, 401 F. Supp. at 323-24. In 7eras Oil & Gas

Corp, v. United States, 466 F, 2d 1040 (5th Cir. 1972), we uti-

lized the choateness doctrine to adjudge whether a state lien fitted

the priority provisions of the 1966 Tax Lien Act. This action is

not inconsistent with our refusal to extend the choateness doc-

trine to SBA security interests because previous case law had

established the applicability of the choateness doctrine to stat-

utorily-created federal tax liens. The 1966 Tax Lien Act adjusted

the application of the doctrine by recognizing the priority of cer-

21a

tend the choateness doctrine’ and in our role as judi-

cial custodians of the doctrine, we decline to extend

it further in this Circuit.

tain state interests, essentially granting exceptions to the choate-

ness doctrine. In this area of SBA contractual liens, the choateness

doctrine has not been established as a concomitant to the appli-

cation of the federal “first in time, first in right” rule. We con-

sider the 1966 Tax Lien Act as neither affirming nor denying the

applicability of the choateness doctrine to other federal liens, but

the Act’s recognition that some state claims should have priority

over federal tax liens is a strong policy argument against ex-

tending the choateness doctrine to deny priority to state claims.

Accordingly, the decisions of other circuit courts that deny

that the 1966 Tax Lien Act was intended to subordinate other

federal liens are consistent with our approach. See 7. 1/, Rogers

Lumber Co. v. Apel, 468 F. 2d 14 (10th Cir. 1972) ; United States

v. General Douglas MacArthur Senior Village, Ine., 470 F. 2d

675 (2d Cir, 1972). We differ with those courts because, unlike

them, we do not consider the choateness doctrine a necessary coni-

panion to the federal “first in time, first in right” priority scheme.

In 15 U.S.C. § 646 (1970), Congress subordinates SBA inter-

ests in property to state property taxes: “Any interest held by

the Administration in property, as security for a loan, shall be

subordinate to any lien on such property for taxes due on the

property to a state, a political subdivision thereof, in any case

when such lien would, under applicable state law, be superior to

such interest if such interest were held by any party other than

the United States.”

This statute could be read as ameliorating the impact of the

choateness doctrine by waiving the immunity it would grant, thus

implicitly recognizing the applicability of the choateness doctrine

to SBA liens. We have read the enactment less broadly, noting

that the purpose of § 646 is to waive the extraordinary priority

of § 3466, 31 U.S.C. § 191 (1970). See City of Sherman v. United

States, 400 F. 2d 373, 877 (5th Cir. 1968). By giving SBA liens

the same status as state liens with regard to state tax claims, the

provision also has the effect of waiving the “first in time, first in

right” principle to recognize the state’s grant of priority to later

liens for state and local taxes. See Edmondson v. Chesapeke

(Continued)

224

The SBA argues that circuit courts have already

concluded that the choateness doctrine applies to

mortgage liens, so it should apply here in the vir-

tually identical situation of a federal contractual lien

competing against state liens. It is true that a num-

ber of courts, including ours, have concluded that

the federal “first in time, first in right” approach to

priority applies to federal mortgage liens. See United

States v. Roessling, 280 F. 243 (5th Cir. 1960)

(mortgage lien under Emergency Relief Appropria-

tion Act of 1935); United States v. General Douglas

MacArthur Senior Village, 470 F. 2d 675 (2d Cir.

1972) (HUD mortgage lien); Director of Revenue

v. United States, 392 F. 2d 307 (10th Cir. 1968)

(SBA mortgage lien); United States v. County of

Towa, 295 F. 2d 257 (7th Cir. 1961) (Reconstruction

Finance Corp. mortgage lien); Southwest Engine

Co. v. United States, 275 F. 2d 106) (10th Cir.

1960) (SBA chattel mortgage lien). Those cases

are not necessarily authority for adoption of the

choateness doctrine here, however, for in each

ease the application of the “first in time, first in

right” doctrine, without using the concept of

choateness, could have given priority to the federal

liens because each competing state lien arose after

the federal lien. See Roessling, supra at 935; Gen-

eral Douglas MacArthur Senior Village, supra

at 677; Director of Revenue, supra at 313;

County of Towa, supra at 257-58; Southwest En-

gine Co., supra at 107. See also, Plumb, Federal Tax

Clamechip Corp., 350 F. Supp. 1236, 1239 (D,. Md. 1972). In light

of these purposes we detect no implicit congressional recognition of

and reaction to the general application of the choateness doctrine.

23a

Liens & Priorities—Agenda for the Next Decade,

77 Yale L. J. 228, 287 n. 368 (1967); Comment, The

Relative Priority of SBA Liens: An Unreasonable

Extension of the Federal Preference, 64 Mich. L.

Rev. 1107, 1128 (1966). Only the Third Circuit has

applied the choateness doctrine to give priority to

federal contractual liens when an unvarnished “first

in time, first in right” approach would have given

priority to the state claims. See United States v.

Oswald & Hess Co., 345 F. 2d 886 (3d Cir. 1965)

(SBA mortgage lien); In re Lehigh Valley Mills,

Inc., 341 F. 2d 398 (3d Cir. 1965) (SBA mortgage

lien). But there the Third Cireuit assumed without

analysis that “choateness” was part and parcel of the

federal law. Our examination of the history of the

choateness doctrine and the policy arguments against

its extension to circumstances when the United States

acts as lender persuade us to reject the Third Cir-

cuit’s approach and hold that the choateness doc-

trine does not apply to give priority to the SBA’s

contractual lien in the absence of insolvency."

»* Even if we did apply the choateness doctrine to this claim, it

is not certain that the SBA’s lien would prevail. To be choate,

the identity of the lienor, the property subject to the lien, and

the amount of the lien must be established. See note 10, supra.

For state liens competing with federal tax liens or liens with

§ 3466 priority, the last requirement meant that the lienor must

have either obtained a judgment or the lien must have been en-

forceable by summary proceeding. See United States v. Acri,

348 U.S. 211, 214, 75 S. Ct. 239, 99 L. Ed. 264 (1955); United

States v. Liverpool & London & Globe Ins. Co., 348 U.S. 215, 217,

75 S. Ct. 244, 99 L. Ed, 268 (1955). Under these criteria, federal

liens with § 3466 priority are virtually invulnerable to state

claims. Kennedy, From Spokane County to Vermont: The Cam-

paign of the Federal Government Against the Inchoate Lien, 50

Iowa L. Rev. 724, 736 (1965). The Supreme Court intimated

24a

Despite our decision that the choateness doctrine

alone does not give the SBA priority, the question

the choateness doctrine addresses still remains: how

does a federal court determine when a state lien has

arisen so that it may decide whether the state or the

federal lien is ‘‘first in time?” Whatever the answer

to that question may be in other contexts,” in the con-

prior to the 1966 Tax Lien Act, however, that the choateness

criteria might be more easily satisfied by state liens competing

against federal tax liens because Congress had not provided prior-

ity for tax liens. See United States v. Vermont, 377 U.S. 351, 385,

84 S. Ct. 1267, 12 L. Ed. 2d 370 (1964); Crest Finance Co, v.

United States, 368 U.S. 347, 82 S. Ct. 384, 7 L. Ed, 2d 342 (1961) ;

Texas Oil & Gas Corp. v. United States, 466 F. 2d 1040, 1045-46

(5th Cir. 1972). See also Coogan, The Effect of the Federal Tax

Lien Act of 1966 Upon Security Interests Created Under the Uni-

form Commercial Code, 81 Harv, L. Rev. 1369, 1378-79 (1968) ;

Kennedy, supra at 737; Burroughs, supra at 465-69. Similarly,

Congress has not provided priority for SBA liens in noninsol-

vency cases: relaxation of the stringent choateness requirements

also appears proper. Further, the same reasons that argue against

the extension of the choateness doctrine to federal contractual

liens would urge us to adopt a less stringent standard of choate-

ness in this context.

Thus, Kimbell’s lien could qualify as “choate.” The 1966 and

1968 security agreements and financing statements provided the

identity of the lienor and the property subject to the lien, Al-

though Kimbell had not fixed the amount of its lien by reduc-

ing it to judgment before the SBA lien arose on January 21,

1971, see infra, it had terminated extensions of credit so that its

accounts reflected the final amount of the claim secured by its

security agreements with O.K. This could suffice to meet relaxed

criteria applied to liens competing with federal contractual liens.

Cf. Crest Finance Co., supra (credit or secured by assignment of

accounts receivable with perfected lien under state law had

choate lien as against federal tax lien). See also Burroughs, supra,

at 470.

** Other types of state liens—for taxes, for mechanics and ma-

terialmen, or for certain types of secured loans—present problems

25a

text of competing state security interests arising un-

der the U.C.C., we conclude that liens perfected under

the UCC qualify to compete against federal liens un-

der the federal “first in time, first in right” priority

rules."° The UCC carefully prescribes the steps nec-

essary to perfect a security interest. Perfection under

the UCC provides many of the assurances of the ex-

istence of a lien required by the choateness doctrine—

identity of the debtor, identity of the lienholder, and

identity of the property serving as collateral. Further,

the UCC embodies rules of nationwide applicability—

all states but Louisiana have adopted it—assuring that

federal contractual liens will not be subject to the

idiosyneracies of particular state laws. Cf. First Na-

tional Bank v. SBA, 429 F. 2d 280, 286 (5th Cir.

1970). The context provides our final reason: perfec-

tion under the UCC provides protection to the secured

creditor against later-filed claims of other creditors ; in

that we leave for another day. First, the manner of perfection of

those liens is diverse—creating havoc with a nationwide pro-

gram—and may not provide notice sufficient for federal entities

to ascertain their existence before granting loans. Second, con-

sideration of these loans for qualification under the federal “first

in time, first in right” rule is complicated by the fact that sev-

eral states, including Texas, either provide special priority for

the liens, see e.g., Tex.Tax.—Gen.Ann, art. 1.07(1) (1969)

(preferred lien for state and city taxes), or allow subsequently

perfected liens to relate back to the date the debt was incurred.

See, ¢.g., Tex.Rev.Civ.Stat.Ann. art. 5459 § 2(a) (Supp. 1976)

(mechanic’s liens have priority from date construction com-

mences ).

16 In reaching our conclusion we do nut apply state law—for we

have previously concluded that federal law controls here—but we

rather adopt portions of state law in order to fashion a proper

federal rule. See United States v. Terrey, 554 F. 2d 685, 692 (5th

Cir. 1977); Ault v. Harris, 317 F. Supp. 373, 376 (D. Alaska),

aff'd and opinion adopted, 432 F, 2d 441 (9th Cir. 1970).

26a

the absence of congressional mandate or persuasive

policy reasons te the contrary, it should similarly pro-

tect secured creditors against later arising federal con-

tractual liens.

Even given our conclusions that the choateness doc-

trine does not apply here and that perfection under

the UCC will qualify a lien as “first in time,’”’ Kim-

bell must still establish that its lien was “first in time”

under federal law. Its task is complicated because, al-

though Kimbell had a perfected lien on the col-

lateral, the indebtedness the lien secured results from

future advances made after Republic made its loan

to O.K. When the SBA bought into Republic’s loan

in 1971, it bought Republie’s lien and for purposes

of federal priority under “first in time, first in right,”

the SBA’s lien “attached” when Republic’s lien arose

in 1969. See United States v. Ekland, 369 F. Supp.

1052, 1054-55 (8.D.I11.1972). Under Texas law, as

we have seen, the lien securing future advances dates

from Kimbell’s prior security interest. Does Kimbell’s

lien retain that date under federal common law and

thus remain prior in time to the Republic-SBA lien?

Perhaps because of the pervasiveness of the choate-

ness doctrine, we have found no federal case discuss-

ing the substantive content of the “first in time, first

in right’”’ rule with regard to future advances. Faced

with the necessity of fashioning a federal common-

law rule because of congressional silence on the sub-

ject, see Clearfield Trust Co. v. United States 318

U.S. 363, 376, 63 8. Ct. 573, 87 L. Ed. 838 (1943),

we grapple with the problem by first examining the

approach taken by the states.

Prior to the Uniform Commercial Code, the states

adopted diverse rules on whether an optional (as

opposed to an obligatory) future advance would

relate back to take priority from the date of the

27a

original security agreement. The majority rule was

that optional advances made before the advancing

ereditor received actual notice of an intervening lien

related back to the date of the original security in-

terest. See Cohen, The Future Advance Interest Un-

der the UCC: Validity & Priority, 10 B. C. Ind.

& Comm. L. Rev. 1, 12 (1968); 59 C. J. S. Mortgages

§ 230(1) (1949); 55 Am. Jur. 2d Mortgages § 352

(1971). A minority of jurisdictions adopted what was

known as the Michigan rule in which, although the

prior lien was effective to secure the future advance,

the lien was effective only from the date the future

advance was made. Intervening encumbrances took

priority over subsequent future advances. Cohen,

supra at 12-13. Another minority view, based on older

English precedent, held that optional future ad-

vances related back regardless of actual notice of

intervening liens “for it was the Folly of the sec-

ond Mortgagee, with Notice, to take such security.”

Gordon v. Graham, 22 Eng. Rep. 502, 2 Eq. Ca. Abr.

598 (1716). See Cohen, supra at 11. As we have seen,

the ubiquitous U.C.C., at least with respect to com-

peting security interests perfected by filing, adopted

the third rule. See, e.g., Tex. Bus. & Com. Code § 9.312

(e)(1) (1968) (Tex.U.C.C.).

Our brief survey of American jurisprudence evi-

dences at least this: the trend of thought in American

law rejects the Michigan rule and allows future ad-

vances secured by an earlier security agreement to

take priority from the date of the earlier security

agreement under some circumstances. We believe that

federal common law should recognize this legal prin-

ciple.” Cf. United States v. State of Alabama, 313

** The existence of various legal rules on future advances re-

flects the underlying conceptual problem of future advances, One

28a

U.S. 274, 61 S. Ct. 1011, 85 L. Ed. 1327 (1941)

(inchoate tax lien that became choate after United

States purchased property gave due notice of liability

and, when amount of tax was certain, related back to

day lien imposed). Given that, however, We need

go no further in crafting federal common law for

this case because under either the actual notice

rule or the U.C.C. rule Kimbell’s lien related back

to its prior security agreement and was prior in time

to the SBA’s lien.

Kimbell’s future advances relate back to and have

the priority of its original security agreements with

O.K. because at the time of the future advances Kim-

bell had no notice of the SBA’s lien. Thus, under the

stricter “actual notice” rule for relation back, Kim-

bell had no notice of the SBA’s intervening interest.

It is true that Kimbell was aware of Republic’s lien

and—so the record suggests—the SBA’s guaranty of

view is that a security interest that provides for optional future

advances creates a single lien when the interest is perfected. Fur-

ther future advances may increase the amount that the lien se-

cured, but the security interest itself is one and indivisible. A

second view is that a security interest for optional future ad-

vances may complete most of the requisities of perfection and

give notice of possible future advances but that a future advance

under the agreement takes a discrete lien dating from the day of

the advance. Comment, Priority of Future Advances Lending

Under the Uniform Commercial Code, 35 U. Chi, L. Rev. 128,

136-38 (1967). The original U.C.C. weighed heavily in favor of

the single interest theory, sce ¢.g., Tex. Bus. & Com. Code § 9.312

(e)(1) & Example 4 (1968) (Tex. U.C.C.), and the 1972 amend-

ments endorse the single interest theory more strongly. See, ¢.g.,

Tex, Bus. & Com. Code § 9.312(g) (Supp. 1976) (Tex. U.C.C.).

8 Strong policy arguments favoring greater protection for the

SBA counsel adoption of the actual notice rule while equally

strong considerations—similar to the ones that argue against the

choateness rule—urge adoption of the U.C.C. rule, We reserve the

final resolution of this difficult decision for another day.

29a

the loan the lien secured.” Yet under Texas law—the

U.C.C.—this notice could not affect Kimbell’s decision

whether to advance funds because under state law its

advances were secured by and took the priority of the

1966 and 1968 security agreements. It was only when

the SBA bought into the note in February 1971 that

Kimbell could have actual notice of the existence of a

federal lien and the application of federal law. At oral

argument the United States conceded that before it

bought into Republie’s note it had no lien. Without

actual notice of another lien that could supersede the

priority of its future advances under state law, Kim-

bell’s advancements are secured by and take the prior-

ity of the 1966 and 1968 security agreements.

In summary, the SBA’s purchase uf 90% of Repub-

lie’s loan to O.K. vested it with Republic’s lien, and,

in measuring priority under federal law, the SBA’s

lien attached when Republic’s lien arose in 1969. All of

Kimbell’s future advances were made subsequent to

Republic’s loan, but the future advances are secured

by the 1966 and 1968 security agreements and take

priority from those dates. Thus, Kimbell’s lien for

inventory advances is prior in time to the SBA’s lien,

and Kimbell has priority in the proceeds from the sale

of the three O.K. Supermarkets.

REVERSED.

** Kimbell’s awareness of the SBA’s guaranty did not suffice as

actual notice that the SBA had a lien, At oral argument the

United States admitted that it had no lien until Republic assigned

its lien on January 21, 1971.

See Lakeshore Apartments, Inc. v. United States, 351 F. 2d

349, 353 (9th Cir. 1965) ; City of New York v. United States, 414

F. Supp. 90, 92 (E.D.N.H. 1975). Cf. United States v. Marzen,

307 U.S. 200, 205, 59 S. Ct. 811, 83 L. Ed. 1222 (1939) (United

States as guarantor not a creditor in bankruptcy when note as-

signed it after petition filed) ; /n re Miller, 105 F, 24 926, 928-29

(2d Cir. 1939).

APPENDIX B

United States Court of Appeals for the Fifth Circuit

No. 75-4105

D. C. Docket No. CA 3-74-56 D

Krapeit Foops, Inc., F/K/A Kimpert. Mintine Com-

PANY, D/B/A KimBeLL Grocery COMPANY, PLAIN-

TIFFS-APPELLANTS

Rervsitic Nationa Bank oF Daas AND UNITED

STATES OF AMERICA, DEFENDANTS-APPELLEES

Appeal from the United States District Court for the

Northern District of Texas

Before THorNBERRY and Gee, Circuit Judges, and

Markey,’ Chief Judge

JUDGMENT

This cause came on to be heard on the transcript of

the record from the United States District Court for

the Northern District of Texas, and was argued by

counsel ;

On CONSIDERATION WHEREOF, It is now here ordered

and adjudged by this Court that the judgment of the

said District Court in this cause be, and the same is

hereby, reversed ;

It is further ordered that defendants-appellees pay

to plaintiffs-appellants, the costs on appeal to be

taxed by the Clerk of this Court.

August 12, 1977.

Tssued as Mandate: November 2, 1977.

1 Of the United States Court of Customs and Patent Appeals,

sitting by designation.

(30a)

APPENDIX C

In the United States District Court for the Northern

District of Texas, Dallas Division

(Civil Action No. 3-74-56-D)

(Filed September 8, 1975)

KrmBett Foops, Inc., 4 Corporation, F/K/A KIMBELL

Mittina Company, D/B/A KimBett Grocery Com-

PANY, PLAINTIFF,

Repusiic NationaL Bank or Datzas anp UNrrep

STATES OF AMERICA, DEFENDANTS, AND STATE OF

Texas AND City oF DALLAS, INTERVENORS

MEMORANDUM OPINION

This suit concerns the relative priorities of various

parties to $86,672.00, which is being held in escrow

by Republic National Bank. Jurisdiction is based

upon Title 28, United States Code, Section 2410, this

suit being brought to quiet title and foreclose liens

upon personal property in which the United States

claims an interest.

It will be necessary to cover each of the conflicting

claims in greater detail later, however, a brief rendi-

tion of the facts might be helpful at this point. The

claim of the plaintiff, Kimbell Foods, stems from

weekly inventory purchases made on open account by

O.K. Super Markets, Inc., a supermarket chain

that operated in Dallas, Texas. Kimbell Foods claims

that this indebtedness was secured by future advance

(314)

32a

clauses in security agreements executed by O.K.

Super Markets in 1966 and 1968. The Republic Bank

and the United States claim entitlement to the entire

proceeds in escrow due to a default by O.K. Super

Markets on a $300,000.00 Smail Business Administra-

tion guaranteed loan made by Republic National Bank

in February of 1969. Intervenors State of Texas and

the City of Dallas are seeking sums owed by O.K.

Super Markets for delinquent sales taxes. Addition-

ally, the City of Dallas is asserting a small claim for

delinquent ad valorem taxes on O.K. Super Markets’

personal property.

As noted previously, all of these parties are assert-

ing claims against funds beiag held in escrow by Re-

public National Bank. The source of these funds was

a bulk sale of all the fixtures, equipment and inven-

tory at three of O.K. Super Markets’ stores. These

stores were purchased ou February 8, 1971, by Grand

City Groceries, Inc., Pat H. Hood and Charles W.

Logan.’ The stores were sold pursuant to an agreement

entered into on February 3, 1971, between O.K.

Super Markets and the Republic National Bank and

approved as to form and substance by the Small Busi-

ness Administration and Kimbell Foods. This agree-

ment was the result of a meeting held on December

30, 1970, between a representative from the bank, the

acting Regional Director of the Small Business Ad-

?Grand City Groceries purchased the collateral located at 3026

Grand Avenue in Dallas for $30,000.00, which represented

$18,000.00 for inventory and $12,000.00 for fixtures, equipment

and other property. The O.K. Super Market collateral located

at 3805 Kiest Boulevard in Dallas was sold to Pat Hood for the

same price as the above. Charles Logan boughi the collateral at

1903 South Ervay in Dallas for $35,000.00, $21,000.00 being at-

tributable to inventory and $14,000.00 for fixtures, equipment and

other property.

33a

ministration (hereinafter referred to as the SBA)

and Mr. Harold Kindle, the President of O.K. Super

Markets. This agreement allowed O.K. Super Mar-

kets to find bulk purchasers for the stores and in re-

turn the bank released the debtor to the extent of

$95,000.00 owing on the $300,000.00 note. The agree-

ment further provided that the bank would hold the

total sum in escrow pending voluntary settlement or

court adjudication of the claims of the SBA, Republic

Bank and Kimbell Foods.

Kimbell Foods contends that its claim for $24,-

445.57 * is first and prior to the other claims of the

parties herein. O.K. Super Markets executed three

security agreements and financing statements in favor

of Kimbell Foods to secure the payment of certain

notes. The first of these agreements was executed

on August 30, 1966, to secure a note in the sum of

$20,000.00 and it was duly filed with the Secretary

of State on September 2, 1966. The list of collateral

which was attached to the agreement consisted of

various types of equipment that would be needed

in the operation of food stores. The agreement had a

standard printed “dragnet” clause which said that

the security interest in the listed collateral was also

given to secure all other future advances to the

debtor.” Subsequently, on April 17, 1968, and Novem-

ber 14, 1968, additional security agreements and fi-

*On February 4, 1972, Kimbell Foods obtained a judgment

against O.K. Super Markets and others in the 96th Judicial Dis-

trict Court of Tarrant County, Texas, in the sum of $18,258.57

principal, $1,186.80 interest and $5,000.00 in attorney’s fees.

*The August 4, 1966 agreement provided as follows: * * *

“said security interest also being given to secure the payment of

all other indebtedness at any time hereafter owing by Debtor to

Secured Party as well as the discharge of all obligations imposed

upon Debtor hereunder.”

34a

nancing statements were entered into between O.K.

Super Markets and the plaintiff, securing a note in

the sum of $27,000.00. These were both filed with the

Secretary of State. New collateral was listed in each

of these agreements and each contained an identical

future advance clause as the 1966 security agreement

and financing statement. These future advance clauses

are said by Kimbell Foods to encompass the later

inventory purchases on open account and, therefore,

the security interest in the inventory is perfected as

of the first filing in 1966. No termination statements

have been filed on any of these security agreements.

The United States is involved in this case due to the

fact that the SBA guaranteed 90% of a $300,000.00

loan made by Republic National Bank to O. K. Super

Markets on February 12, 1969. This loan was sought

and was needed by O.K. Super Markets because con-

sumer boycotts at some of their stores caused heavy

losses. Prior to this loan, the bank and the SBA tried

to get some of the larger creditors of O.K. Super

Markets to guarantee the loan in proportion to the

amount owed each creditor by O.K. Super Markets

but this effort proved to be unsuccessful.

To secure this $300,000.00 note O.K. Super Markets

executed a security agreement and financing state-

ment in favor of Republic Bank, which provided that

the bank would have a security interest in all of the

debtor’s machinery, fixtures, equipment and inventory.

A financing statement had been previously filed with

the Secretary of State on August 7, 1968, but the

financing statement was refiled on February 18, 1969,

following the making of the loan.

Even with this boost, the financial difficulties of

O.K. Super Markets continued, and they defaulted

on the note with the bank. Therefore, the United

354

States on February 3, 1971, paid Republic National

Bank 90% of the outstanding indebtedness, which

totaled $252,331.93 on that date.-The note and the

financing statement were assigned to the SBA and the

assignment was filed with Secretary of State on Janu-

ary 21, 1971.

When the SBA guaranteed loan was made by Re-

public National Bank on February 12, 1969, there was

a balance owing on the April 17, 1968, note between

O.K. Super Markets and Kimbell Foods in the sum

of $24,893.10. This was the only outstanding note

balance remaining on that date, however, there was a

running balance on the open account for inventory

purchases. Out of the $300,000.00 loaned to O.K.

Super Markets, $24,893.10 was immediately paid to the

plaintiff on February 12, 1969, thereby extinguishing

the last remaining promissory note balance.

The claim of the State of Texas and the City of

Dallas is principally for sales taxes that were due

and payable by O.K. Super Markets when they sold

the stores to Charles Logan, Pat Hood and Grand

City Groceries. The State is seeking $29,887.51 in

taxes, penalties and interest, and the City of Dallas

claims $12,229.64. The intervenors contend that under

State law they have a preferred lien which is first

and prior to all others on all property purchased

from O.K. Super Markets. They further contend

that their liens follow the proceeds in escrow re-

ceived from the sale of the stores.

Although recordation was not required until Jan-

uary 1, 1970, for a valid tax lien on personalty, the

State did record its tax liens prior to that date.

After this suit was filed, the State and City obtained

a default judgment in the District Court of Travis

364A

County, Texas, on February 13, 1973, against O.K.

Super Markets for past due taxes.

Aside from these sales taxes, the City of Dallas

claims $2,530.10 for delinquent ad valorem personal

property taxes, penalties and interest for the years

1969 through 1972. These ad valorem tax liens have

not been recorded nor has a judgment been obtained

thereon.

The above is a summary of the claims of each of the

parties. The Court will now discuss the law applica-

ble to this case.

The initial inquiry for this Court is whether state

or federal law or a combination of both controls the

disposition of these conflicting claims. Jurisdiction is

based upon a federal statute, 28 U.S.C.A. §2410, and

it has long been the rule that federal law applies

when a debt owing the United States is involved.

United States v. Security Trust & Savings Bank,

340 U.S. 47 (1950); Clearfield Trust Company v.

United States, 318 U. 8. 363 (1943); United States

v. General Douglas MacArthur Sr. Vil., Inc., 470:

F. 2d 675 (2d Cir. 1972); Texas Oil & Gus Corpora-

tion v. United States, 466 F. 2d 1040 (5th Cir. 1972) ;.

United States v. City of Albuquerque, New Mexico,

465 F. 2d 776 (10th Cir. 1972); United States v.

Oswald and Hess Company, 345 F. 2d 886 (3d Cir.

1965); In re Lehigh Valley Mills, Inc., 341 F. 2d

398 (3d Cir. 1965); W. T. Jones and Company v..

Foodco Realty, Inc., 318 F. 2d 881 (4th Cir. 1963)..

The reason for this rule is that the United States,

in exercising its governmental functions must be pro-

tected by a uniform federal law and should not be.

subjected to differing rules of the various states.

Clearfield Trust Co. v. United States, supra. There-

fore, federal law applies to a consideration of all

the claims in this case, unless of course there is a

37A

federal statute directing this Court to apply state

law. See Annot. 17 A.L.R. Fed. 874 (1973).

The federal rule for determining the relative prior-

ity between a federal lien and a state created lien is

first in time is first in right. United States v. New

Britain, 347 U.S. 81 (1954). In applying this rule,

the Supreme Court has consistently held that for a

non-federal lien to be entitled to priority it must be

both earlier in time and be choate at the time the

federal lien arises. United States v. New Britain,

supra; United States v. Waddili Company, 323 U.S.

353 (1945); United States v. Pioneer American Ins.

Company, 374 U.S. 84 (1963). A non-federal lien

meets the choateness test only if the identity of the

lienor, the property subject to the lien, and the

amount of the lien are established. United States v.

New Britain, supra at 84; United States v. Pioneer

American Ins. Company, supra at 89; United States

v. General Douglas MacArthur Sr. Vil., Inc., supra

at 678. The last requirement that the amount of the

hen be certain is only established if there is no fur-

ther opportunity for contesting the amount of the

lien. Thus, the lienor must have either obtained a

judgment or the lien must be enforceable by summary

proceeding. United States v. Acri, 348 U.S. 211

(1955); United States v. Liverpool & London Ins.

Company, 348 U.S. 215 (1955); In re Lehigh Valley

Mills, Inc., supra. With few exceptions no common

law, equitable, or statutory lien can meet the federal

standard of choateness unless the lienor’s claim has

been reduced to judgment. Plumb, Federal Liens and

Priorities—Agenda for the Next Decade, 77 Yale

L. J. 228, 230 (1967).

It has been said that the interim steps of filing and

recording a private or statutory lien, without obtain-

38a

ing a final judgment enforcing the lien against the

property serves “merely as a caveat of a more per-

fect lien to come.” * United States v. Vorretter, 355

U.S. 15 (1957) (prior recorded mechanics’ lien) ;

United States v. Hulley, 358 U.S. 66 (1958) (prior

recorded materialman’s lien). Thus, in United States

v. White Bear Brewing Company, 350 U.S. 1010

(1956), a federal tax lien was held entitled to priority

over a state mechanic’s lien, even though the me-

chanics’ lien was specific under state law, it had been

recorded for a certain amount, and suit had been

instituted before the federal tax lien arose. The law

that has developed around federal tax liens has been

consistently applied to federal mortgage liens. United

States v. General Douglas MacArthur Sr. Vil., Inc.,

supra (HUD mortgage lien); 7. H. Rogers Lumber

Company v. Apel, 468 F. 2d 14 (10th Cir. 1972) (FHA

mortgage lien) ; In re Lehigh Valley Mills, Inc., supra

(SBA mortgage lien).

Further, there is authority for the proposition that

a private or statutory state lien cannot be considered

choate unless it has attached to certain property by

reducing it to possession on the theory that the United

States has no claim against property no longer in the

possession of the debtor. United States v. Gilbert As-

sociates, 345 U.S. 361, 366 (1953); W. T. Jones and

Company v. Foodco Realty, Inc., swpra at 887.

Although a state may characterize a lien as choate

and specific, this is not conclusive, and this determina-

tion is always subject to reexamination by a federal

court. United States v. New Britain, supra; Illinois

v. Campbell, 329 U.S. 362 (1946); Texas Oil & Gas

* Justice Cardozo first used this expression in New York v.

Maclay, 288 U.S. 290, 294 (1933).

39a

Corporation v. United States, supra at 1050. Thus,

the Fifth Circuit, in the Tezras Oil & Gas case

stated :

* * * Tn the instant case, it is true that the

bank had done all it could do under the Uni-

form Commercial Code to secure its interest in

taxpayor-debtor’s accounts receivable. However,

that conclusion simply does not answer the

ease law as it has developed in the area of tax

liens. However “complete’’ a lender’s perfec-

tien may be under state recording laws and

however “specific” state law might deem that

interest to be, it is federal law that determines

the extent to which that state determination

will protect a private lien from a Federal tax

lien. 466 F. 2d at 1051.

Of course, if the state itself would characterize a lien

as inchoate, then that determination would be almost

conclusive. Illinois v. Campbell, supra.

From these cases, it is clear that the plaintiff and

the intervenors must show that their liens attached

and were perfected under the law of Texas and were

choate under federal law prior to the time the SBA

lien became choate. Texas Oil & Gas Corporation v.

United States, supra at 1052. The participation of

the SBA in the Republic Bank loan was evident from

the face of the note, therefore, their lien would be per-

fected as of the time of the February 18, 1969, filing.

The SBA’s claim to priority would be unaffected by

the fact that formal assignment by the bank did not

occur until approximately a year later. See Director

of Revenue, State of Colorado v. United States, 392

F. 2d 307 (10th Cir. 1968); W. T. Jones and Com-

pany V. Foodco Realty, Inc., supra; Texas Oil & Gas

Corporation v. United States, supra.

40A

The continued validity of the federal choate lien

test was questioned by two decisions which construed

the effect of the Federal Tax Lien Act of 1966 (P.L.

89-719, 80 Stat. 1125), on federal tax and mortgage

liens. See Ault v. Harris, 317 F. Supp. 373 (D.

Alaska 1968), aff’d per curiam (by adoption) 432

F. 2d 441 (9th Cir. 1970); Connecticut Mutual Life

Insurance Company vy. Carter, 446 F. 2d 136 (5th

Cir. 1971). In Connecticut Mutual an inchoate lien

for attorney’s fees contained in a first mortgage was

entitled to priority over a FHA mortgage lien where

the FHA expressly took their second mortgage sub-

ject to first mortgage. Over a strong dissent by Judge

Rives, the Court held that:

* * * the statute [Federal Tax Lien Act of

1966] diminishes the validity of the choate lien

test in the important field of taxation where the

doctrine originated. It would indeed be anoma-

lous and contrary to our view of congressional

intent to allow the FHA operating as a money-

lending agency to prevail in a situation where

the government as holder of a tax lien would

have an inferior security interest. 446 F. 2d at

139."

The rationale of the Ault and Connecticut Mutual

cases seems to be that since Congress chose to sub-

ordinate federal tax liens in certain specified instances

that they intended to subordinate all other federal

liens. However, at the same time these courts recog-

nized that Congress had spoken only to tax Hens, and

° The Connecticut Mutual decision prompted one District Court

to remark that, “The prognosis for the choate lien test is guarded

following the decision in Connecticut Mutua] Life Insurance Co.

v. Carter, * * *.” Nova Univ. of Advanced Tech., Ine. v. Motor

Vessel Gypsy, 331 F. Supp. 721, 722 (S.D. Fla. 1971).

41a

other federal liens were not specifically covered by

the statute.

This rationale has been questioned by two later deci-

sions of the Second and the Tenth Circuit Courts of

Appeal. In 7. H. Rogers Lumber Company vy. Apel,

supra, the Court in construing the priorities between

a FHA mortgage lien and mechanics’ and material-

man’s liens stated:

The fact that Congress chose to subordinate

tax liens furnishes no evidence that it intended

to subordinate all other federal liens to interests

created by the laws of the individual states. The

1966 Act — only to tax debts, and the re-

ports of the House and the Senate speak only of

subordinating federal unrecorded tax liens to

mechanics’ liens. There is not the slightest indi-

cation of the intent of Congress to subordinate

other claims. 468 F. 2d at 18.

The Second Cireuit in United States v. General

Douglas MacArthur Sr. Vil., Inc., supra, also con-

curred with the view of the Tenth Circuit:

We are unable to conclude, however, that a

Congressional enactment, carefully drawn,

which affects the priority of federal tax liens

leaves the courts free to disregard prior prece-

dents and thus to broadly extend the scope of

the statute’s principle to other unspecified

areas which, though somewhat analogous, were

pro nd not addressed by the Congress.

Although Judge Weinstein’s carefully consid-

ered opinion forcefully argues that such an

extension represents the best balancing of com-

peting interests, his discussion would more

appropriately be addressed to Congress. But

where Congress has considered proposals of a

highly qualified committee and has enacted

42a

specific, carefully-tailored legislation, it would

be inappropriate for a court to undertake piece-

meal extensions of the principles reflected in

this legislation merely because it is desirable,

especially in view of the fact that Congress saw

fit not to provide for these extensions, * * * In

view of the national scope of the problem and

the absence of legislation extending the prior-

ity of property tax liens beyond the confines of

the federal tax lien, the rule of first in time,

first in ay followed by the Supreme Court,

must apply. 470 F. 2d at 678-679.°

Additionally, the Fifth Circuit has now dispelled

any thought that the federal choate lien test was abol-

ished by the Connecticut Mutual case. In Texas Oil

& Gas Corporation v. United States, supra, the Court

stated that:

* * * It does not appear to this Court that

the 1966 amendments to the tax lien statutes

did away with the choateness doctrine of United

States v. Security Trust, supra. The Supreme

Court expressly rejected that inference after

earlier amendments to the tax lien statutes.

See United States v. Pioneer American, supra.

466 F. 2d at 1053.

Therefore, this Court concludes that the federal

choate lien test is still applieable to the elaims of

the parties herein and the Connecticut Mutual case is

limited to the particular set of circumstances with

which that Court was faced. The Court will now ex-

amine the claims of the parties with the law pre-

viously discussed as a foundation.

* See also, 7. B. Agsten & Sons, Inc. v. Huntington Trust &

Savings Bank, 388 F. 2d 156 (4th Cir, 1967); Aetna Insurance

Co. v. United States, 456 F. 2d 773 (Ct. Cl. 1972).

43a

KIMBELL FOODS

As noted previously, the plaintiff’s claim is for pur-

chases made by O.K. Super Markets for inven-

tory sold on an open account. The claim of Kimbell

Foods, and the parties have so stipulated, repre-

sents charges for goods sold to O.K. Super Mar-

kets subsequent to the date the SBA guaranteed loan

was made on February 12, 1969, and the Court de-

termines that these charges were also subsequent to

the February 18th filing of the financing statement.

Although the Court has found that the SBA se-

curity interest attached and was perfected in Feb-

ruary of 1969, this is not of primary importance in

the consideration of the plaintiff's cause of action

vis-a-vis that of the United States. Because even if

the government lien was not choate until the filing

of the assignment on January 21, 1971, the Court

would still have to conclude that the claim of the

United States would be prior in time. The elements

for a private choate lien are that the identity of

the lienor, the property subject to the lien and the

amount of the lien be certain. As previously discussed,

the last requirement is satisfied only when there is no

further opportunity to judicially challenge the amount

of the lien. This occurred when Kimbell Foods

reduced its lien to judgment on February 4, 1972,

some two years after the SBA guaranteed loan

was made to O.K. Super Markets and more than

one year after the assignment was filed. Therefore,

on this ground alone the claim of the United States

could be entitled to priority.

However, there is another and perhaps more basic

reason for the subordination of the plaintiff’s claim

to that of the United States. Under the choate lien

test, if the State of Texas would refuse to recognize

444

the lien as choate and valid, then that determination

would be almost conclusive upon this Court. As pre-

viously stated, Kimbell Foods contends that under

state law the future advance clauses found in the

1966 and 1968 security agreements and financing

statements apply to and secure the purchases made

by O.K. Super Markets on open account.

This Court is convinced that a Texas Court would

conclude that the future advance clauses on the printed

forms would not secure the later purchases on open

account. Prior to the adoption of the Uniform Com-

mercial Code, Texas courts have had occasion to con-

strue these “dragnet clauses.” These Courts stress

that these provisions will apply only to future in-

debtedness that was clearly contemplated by the par-

ties at the time of the making of the original agree-

ment. When the agreement provides that the col-

lateral secures, “all other indebtedness of any kind

arising between the parties,’’ this is construed to

mean future indebtedness of the same nature as that

previously described in the instrument. See Wood

v. Parker Square State Bank, 400 S.W. 2d 898 (Tex.

1966); Moss v. Hipp, 387 S.W. 2d 656 (Tex. 1965) ;

Finger Furniture Company v. Chase Manhattan Bank,

413 S.W. 2d 131 (Tex. Civ. App.—San Antonio, 1967,

writ ref’d n.r.e.).

Section 9-204(e) of the Uniform Commercial Code,

Ter. Bus. & Comm. Code Ann. § 9.204(e) (1968), al-

lows the creation of clauses in an original security

agreement that would secure future advances made to

the original debtor. However, these clauses will be

closely scrutinized and will be enforced only to the

extent that future transactions or liabilities sought to

be secured were in the clear contemplation of the par-

ties. The reason for this rule is that this device can be

45a

abused when a lender seeks to bring in claims against

the debtor that were not originally contemplated by

the parties. John Miller Supply Co., Inc. v. Western

State Bank, 10 U.C.C. Rep. Ser. 1329, 55 Wis. 2d 385

(Wis. Sup. 1972). The future advances must be of the

same class as the primary obligation and be so re-

lated that the consent of the debtor may be inferred.

2 Gilmore, Security Interests in Personal Property

§ 35.5 (1965); In re Eshleman, 10 U.C.C. Rep. Ser.

750 (E.D. Pa. 1972); John Miller Supply Cc., Ime. v.

Western State Bank, supra; National Bank of East-

ern Arkansas v. Blankenship, 177 F. Supp. 667 (1.D.

Ark. 1959).

The true intention of the parties is really the sole

and controlling factor in determining whether the

future advances were covered by the original agree-

ment. If the parties intended to deal on a single loan

basis, intending an entirely new transaction each time,

then each new agreement would have to be reper-

fected. John Miller Supply Co., Inc. v. Western State

Bank, supra; In re Sanelco, 7 U.C.C. Rep. Ser. 65

(M.D. Fla. 1969); In re Glawe, 6 U.C.C. Rep. Ser.

876 (E.D. Wis. 1969); Coin-O-Matie Service Co. v.

Rhode Island Hospital Trust Co., 3 U.C.C. Rep. Ser.

1112 (R.I. 1966).

After reviewing the facts of this case, the Court

is of the opinion that it was not the intention of O.K.

Super Markets and Kimbell Foods for the later pur-

chases on open account to be secured by the future

advance clauses in the 1966 and 1968 agreements. The

parties treated each as a separate and distinct agree-

ment and each was for a specific nonrecurring purpose.

The 1966 agreement was entered into to enable O.K.

Super Markets to expand to a new location by de-

laying the payment of a balance owing Kimbell

46a

Foods. This was not related in any way to the later

inventory purchases on open account by O.K. Super

Markets. Likewise, the 1968 agreements were entered

into for the purpose of delaying the payment of a

balance owing Kimbell Foods so that O.K. Super

Markets could pay off a debt owing Associated Gro-

cers, Ine. The later purchases on open account were

simply not of the same class as the primary indebt-

edness. As shown by the testimony of the president

of O.K. Super Markets, the parties intended each

transaction to be separate and distinct and each

agreement was renegotiated and reperfected. It is

the judgment of this Court that the parties did not

intend for the “boiler plate” future advance clauses

in the three agreements to secure the later purchases

on open account.

For this reason, as well as the fact that the lien of

the plaintiff was not choate at the time the lien of the

United States arose, the Court finds that the claim

asserted herein by the United States should prevail

over that of Kimbell Foods.

S‘ate and City Sales Tar Liens

Against the proceeds held in escrow, the State of

Texas and City of Dallas claim certain sums for

sales taxes that were due and payable by O.K. Super

Markets when the three stores were sold in 1971.

Although acknowledging that federal law is applicable

to this case, the intervenors contend that there is a

federal statute, 15 U.S.C. § 646,’ which subordinates

715 U.S.C.A,. § 646 provides as follows: “Any interest held by

the Administration in property, as security for a loan, shail be

subordinate to any lien on such property for taxes due on the

property to a State, or political subdivision thereof, in any case

47a

a SBA lien to state and city taxes that are accorded

priority under state law.

It is true that under the law of Texas, Article 1.07

of Title 122A, Tex. Rev. Civ. Stat. Ann., the State and

City have a preferred lien for taxes, penalties and

interest that is first and prior to all others. Under

state law these liens attach to all the property of

the debtor and they become effective when the taxes

are due and owing. State v. Smith, 4384 S.W. 2d 342

(Tex. 1968); Pecos County State Bank v. State,

468 S.W. 2d 867 (Tex. Civ. App.—Austin, 1971, writ

ref’d n.r.e.).

If the intervenors are entitled to pursue the pro-

ceeds into the escrow account, and if §646 is ap-

plicable to their claim, then it is clear that they would

stand first in line. However, if §646 is inapplicable,

then under the choate lien test the intervenors would

only be entitled to those taxes that became due and

payable by February of 1969, when the SBA lien be-

came choate. This is assuming of course that the

intervenors are entitled to pursue the proceeds of the

private sale of the three stores.

The problem with the intervenors’ argument as

it pertains to § 646 is that the decisions construing

this section have been uniform in their holdings that

general taxes, such as sales taxes, are not taxes due

on specific property and thus do not come within the

ambit of $646. See United States v. City of Albu-

quer,ve, New Mezico, supra; Director of Revenue

v. United States, supra; United States v. Clover

Spinning Mills Company, 373 F. 2d 274 (4th Cir.

1966); Annot., 17 A.L.R. Fed. 874 (1973). Even

where such lien would, under applicable State law, be superior

to such interest if such interest were held by any party other than

the United States.”

484

where the liens asserted are for ad valorem taxes

and thus entitled to priority, the Courts have disal-

lowed claims for penalties and interest under $646.

United States v. Consumers Scrap Iron Corpora-

tion, 384 F. 2d 62 (6th Cir. 1967); United States v.

Christensen, 218 F. Supp. 722 (D. Mont. 1963).

Aside from the questions under 4§646, the

government makes a strong attack on the inter-

venors’ right to assert their liens against the pro-

ceeds held in escrow. After reviewing the applica-

hle authorities, the Court believes that the position

taken by the United States is correct and finds that

the intervenors are not entitled to assert their liens

against the proceeds held in escrow.

As noted previously, these proceeds are from the

sale of three stores, which were sold pursuant to a

written agreement entered into between Republic

Bank and O.K. Super Markets and approved by the

United States and Kimbell Foods. It was a contract

with consideration flowing both ways and it was

entered into to obtain funds for the settlement of the

conflicting claims of the parties to the agreement.

Generally it may be said that a lien can follow the

proceeds of the sale of property where the lien has

heen “destroyed’’ by either wrongful conversion or

sale to an innocent purchaser for value. However, if

the lien is not destroyed then the lienor has no right

to the proceeds and the lien must follow the property.

dt Am. Jur. 2d Liens § 60 (1970); 33 C.J.S. Execu-

tions § 248 (1942).

Here, the liens held by the State and City were not

extinguished or destroyed by the bulk sale of the col-

lateral. Article 20.09 of Title 122A, Ter. Rev. Civ.

49a

Stat. Ann., provides that the purchaser of a business

or stock of goods must withhold a sufficient amount of

the purchase price to cover the sales taxes owed by the

vendor. If he fails to withhold such an amount, he be-

comes personally liable. It is xlso clear that the lien on

property purchased from O.K. Super Markets is still

valid and enforceable against the property in the

hands of the purchasers. See Pecos County State

Bank v. State, supra.

The State entered into certain releases with the

purchasers of the stores. While these agreements re-

leased the purchasers from personal liability, they

expressly provided that they did not “* * * release

any claim or lien on any property bought from O.K.

Super Markets, Inc. * * *.” These purchasers cannot

be classified as bona fide purchasers who are protected

from the tax liens, because they purchased the prop-

erty with full knowledge of the existence of such

liens. For these reasons, the Court concludes that the

intervenors are not entitled to a portion of the pro-

ceeds being held in eserow by Republic Bank for sales

taxes, penalties and interest.

AD VALOREM TAXES OF THE CITY OF DALLAS

The intervenor City of Dallas is asserting a claim

for delinquent ad valorem personal property taxes

that were owing to the City and the Dallas Independ-

ent School District for the years 1969, 1970, 1971 and

i972, when the stores were sold by O.K. Super Mar-

kets. The city seeks a total of $2,530.10 which repre-

sents $1,933.57 in delinquent taxes and $596.53 in

penalties and interest.

50a

Of course, if the intervenor is entitled to pursue the

proceeds, then 15 U.S.C.A. § 646, would subordinate

the claim of the United States to this ad valorem tax

claim because these are taxes due on specific property.

See Annot. 17 A.L.R. Fed. 874 (1973). In this regard,

Chapter 19, Section 14 of the Charter of the City of

Dallas gives priority to ad valorem taxes over all

other claims.* However, the Court entertains some

doubt as to whether the Dallas Independent School

District would have a specific statutory lien on per-

sonal property. See City of San Marcos v. Zimmer-

man, 361 S.W. 2d 929, 935 (Tex. Civ. App.—Austin,

1962, writ ref’d n.r.e.). The Court also would question

whether the City of Dallas is entitled to assert a claim

on behalf of a separate legal entity that is not a party

to this suit.

However, it is not necessary to make these deter-

minations because the Court feels that the City of

Dallas is not entitled to pursue the proceeds in escrow.

Just like the liens for sales taxes, the City’s lien for

ad valorem taxes was not destroyed by the bulk sale

of the collateral, and the City is entitled to pursue

the subject property into the hands of the purchasers.

See Pecos County State Bank vy. State, supra. Pur-

* This Charter provision provides as follows: “A lien is hereby

created on all property, personal and real in favor of the City of

Dallas, for all taxes, ad valorem, occupation or otherwise. Said lien

shall exist from January 1st in each year until the taxes are paid.

Such lien shall be prior to all other claims, and no gift, sale, assign-

ment or transfer of any kind, or judicial writ of any kind, can ever

defeat such lien, but the director of revenue and taxation may

pursue such property, and whenever found may seize and sell

enough thereof to satisfy such taxes,”

51a

suant to Article 1060a, Tex. Rev. Civ. Stat. Ann., a

city or school district is given the right to employ any

of the previously discussed methods for the collection

of taxes that are available to the State or a county.

See 54 Tex. Jur. 2d Taxation § 142 n. 1. Therefore,

the Court concludes that the City of Dallas is not en-

titled to assert the claim for ad valorem taxes against

the proceeds in escrow.

CONCLUSION

In summary, the Court finds that the United States

is entitled to the entire sum being held in escrow by

the Republic National Bank of Dallas. The United

States prevails over Kimbell Foods for two reasons.

In the first place, the lien asserted by the plaintiff was

not sufficiently specific to satisfy the federal choate

lien test until after the lien of the United States be-

came choate. Secondly, the future advances of inven-

tory on open account were not secured by the 1966

and 1968 security agreements. As to the tax claims of

the intervenors, the Court concludes that pursuant

to state statute these intervenors have full recourse

against the bulk purchasers of the stores and the

property purchased. Therefore, these tax liens were

not destroyed by the sale of the property and the

intervenors have no right to pursue the proceeds in

escrow.

Judgment will be entered in accordance with the

findings made herein.

Signed and entered this 5th day of September, 1975.

Wim M. Srecer,

United States District Judge.

In the United States District Court for the Northern

District of Texas, Dallas Division

(Civil Action No. 3-74-56-D)

Filed October 1, 1975

Kimpett Foons, Inc., 4 Corporation, F/K/A/ KIM-

BELL MILLING CoMPANY, D/B/A/ KIMBELL GROCERY

CoMPANY, PLAINTIFY,

Repustic NATIONAL Bank or DALLAS AND UNITED

Srares OF AMERICA, DEFENDANTS, AND STATE OF

Texas AND City OF DALLAS, INTERVENORS.

JUDGMENT

The above entitled cause came on regularly for trial

before the Court without a jury, after due notice to

all parties, and, after hearing the evidence and argu-

ment of counsel and considering the pleadings and

briefs, the Court rendered its decision on the 5th day

of September, 1975, by its Memorandum Opinion,

which was filed on the 8th day of September, 1975,

and in which appeared the findings of fact and con-

clusions of law of the Court.

It is, therefore, ORDERED, ADJUDGED, and

DECREED that the Plaintiff, Kimbell Foods, Inc.,

f/k/a/ Kimbell Milling Company, d/b/a/ Kimbell

Grocery Company, is not entitled to any portion of the

sum held in escrow by the Republic National Bank

of Dallas pursuant to the agreement of February 3,

1971, between the said Bank and O.K. Super Mar-

kets, Inc., and approved as to form and substance by

(52a)

53A

the Small Business Administration of the United

States of America and the said Kimbell Foods, and

all relief sought by the said Plaintiff against Re-

publie National Bank of Dallas and the United States

of America is denied.

It is further ORDERED, ADJUDGED, and DE-

CREED that the Intervenors, the State of Texas and

the City of Dallas, are not entitled to any portion of

the sum held in escrow by the Republic National

Bank of Dallas pursuant to the aforesaid agreement

of February 3, 1971, and all relief sought by the said

Intervenors against Republic National Bank of

Dallas and the United States of America is denied.

It is further ORDERED, ADJUDGED, and DE-

CREED that all sums held in escrow by the Republic

National Bank of Dallas pursuant to the aforesaid

agreement of February 3, 1971, the said sum being

$100,836.03 as of September 15, 1975, be recovered

by and paid over to the Defendant, the United States

of America, pursuant to the aforesaid Memorandum

Opinon of this Court.

It is further ORDERED, ADJUDGED, and DE-

CREED that the Defendants, the United States of

America and Republic National Bank of Dallas, have

and recover the costs of this proceeding from the

Plaintiff, Kimbell Foods, Inc.

Entered this 29th day of September, 1975. 7

WituiaM M. STEER,

United States District Judge.

APPENDIX D

UNITED States Court OF APPEALS,

FirrH CIRcvult,

OFFICE OF THE CLERK,

New Orleans, La., October 25, 1977.

To all parties listed below:

No. 75-4105—Kiimbell Foods, Inc., Etc. v. Republic

Nat’l. Bank of Dallas, et al, The State of

Texas, et al.

DEAR CouNSEL: This is to advise that an order has

this day been entered denying the petition( ) for

rehearing,** and no member of the panel nor Judge

in regular active service on the Court having re-

quested that the Court be polled on rehearing en bane

(Rule 35, Federal Rules of Appellate Procedure;

Local Fifth Circuit Rule 12) the petition( ) for re-

hearing en bane has also been denied.

See Rule 41, Federal Rules of Appellate Procedure

for issuance and stay of the mandate.

Very truly yours,

Epwarp W. WADSWORTH,

Clerk.

Brenna M. Havck,

Deputy Clerk.

**On behalf of appellee, U.S.A.

(54a)

U.S. GOVERNMENT PRINTING OFFICE: Ie78

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.