# Petition — United States v. Kimbell Foods, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1979
- **Citation:** 440 U.S. 715

## 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

II

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) __

12

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)

2

(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).

© K Super Markets had executed three earlier secu-
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).

3

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

4

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.

5

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

6

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

7

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).

8

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

9

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.”

10

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 =

es

11

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

12

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

13

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

14
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,

v.

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)

2a

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

3a

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.

4a

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

5a

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.

6a

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.

7A

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

SA

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.”

9A

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

v.
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,

v.

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

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,

v.

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0893%3A1. Public record. Not legal advice.