UNITED STATES v. KIMBELL FOODS, INC.
Argument of Stephen R. Barnett
Chief Justice Warren E. Burger: Case is submitted.
We will hear arguments next in United States against Kimbell Foods.
Mr. Barnett, you may proceed whenever you are ready.
Mr. Stephen R. Barnett: Thank you and Mr. Chief Justice and may it please the Court.
The question in this case is whether a private lien that has not become specific and definite, that has not become choate before a federal lien attaches to the same property take precedence over that federal lien.
Justice William J. Brennan: Well, I get it Mr. Barnett that specific indefinite, simply synonymous with choate?
Mr. Stephen R. Barnett: Well, I use the words Mr. Justice Brennan so as not to rely completely on the technical term developed by this Court, but for functional purposes I think choate is the word for better or worse.
Justice Lewis F. Powell: Does this mean that the claim must be reduced to judgment?
Mr. Stephen R. Barnett: No, Mr. Justice Powell, we do not take that position, the Crest Finance case, which we distinguish here may clear that when a lien -- when the amount of a lien is evidenced by notes, notes bearing face values, that lien is choate as the government conceded and as the Court held in that case, even though it was not reduced to judgment.
Thus if the future advances that Kimbell made in this case, the future advances had been evidenced by notes as where the inventory advances that Kimbell made in 1966 and 1968, this would then be a different case and Kimbell then would have a choate lien with respect to those future advances.
But the future advances here were not evidenced by notes that the lien does not have to be reduced to judgment when it is this kind of a lien, but there is a significant -- a crucial difference between having a dead evidence by notes and having a simply be an open account where the amount is indicated perhaps in one amount on the sellers books and another amount on the purposes books where there are all sorts of uncertainties and possible differences with respect to the amount that are not ironed out until there is a judgment.
Justice William H. Rehnquist: Mr. Barnett, would it be an equally appropriate phrasing of the question to say that this is a case where the government requests that this Court extend the choateness doctrine that is previously applied in tax areas to non-tax activities of the federal government to give it priority there?
Mr. Stephen R. Barnett: To apply, I would accept your statement Mr. Justice Rehnquist except for the last phrase to apply in those cases, the same rules, the first in time and choateness to give the government priority therefore when it prevails under those rules to give the other party priority when it prevails under those rules.
Justice William H. Rehnquist: Well, do you think that Fifth Circuits decision in this case was the violation of the first in time, first in right?
Mr. Stephen R. Barnett: In this case?
Justice William H. Rehnquist: Yes.
Mr. Stephen R. Barnett: Not a direct violation, but this Court has made clear in its decisions that the -- there is a violation of this Court's interpretation of the first in time, first in right rule as embodying the choateness approach to determining when a lien arises.
Justice William H. Rehnquist: But that is previously been applied by this Court only in the tax area.
Mr. Stephen R. Barnett: That is correct.
Justice William H. Rehnquist: So, you are asking us to extend it in this case from the tax area to the field of commercial lending.
Mr. Stephen R. Barnett: That is correct.
That is correct and as we point out, commercial lending is an activity of the federal government.
The SBA is not as the Court below said and as respondent says, simply another commercial lender.
The SBA makes loans for matters of policy not simply to make a profit.
The SBA authorized under a statute, which provides that it shall make loans 15 U.S.C. 636(a)(1) to small business concerns where financial assistance is not otherwise available on reasonable terms from non-federal sources.
In the record of this case on the SBA loan guarantee application at A73, that policy has stated as the first of the SBAs loan policies "the SBA will not extend financial assistance if the funds are otherwise available on reasonable terms from normal lending sources or the personal resources of the principles".
Justice Potter Stewart: Mr. Barnett, at what way does that argument cut?
What you are saying I suppose is the government is willing to take greater risks in lending than private lenders do.
So, why should have then the greater protection?
Mr. Stephen R. Barnett: Well, it takes greater risks but it needs protection that is consonant with those risks.
This Court in the area of tax liens decided bringing the rule over from the Insolvency Statute that the government needed the kind of protection reflected in the first in time, first in right rule as adumbrated by the choateness principle.
We submit that unless Congress says otherwise, it is appropriate to give the government the same protection here, a dollar coming in on recovery of an SBA lien is the same to the government as a dollar collected on taxes.
In fact, Congress replenishes the amount that the SBA loses, this is not in the record but Congress as in every year, since the establishment of the SBA as I understand it, appropriated at least enough to cover the amount that the SBA lost.
So that if the SBA does not recover on its security and it does in fact take security for almost virtually all its loans, Congress ends up appropriating that money.
Justice Potter Stewart: Yes, but it takes security that would not be sufficient to induce a commercial lender to advance the fund.
So, then just it starts from the promise that it is willing to take some additional risks.
Mr. Stephen R. Barnett: That is true and the question here is you are correct to what extent that would justify imposing on the government, this Court imposing on the government when Congress has not done so risks greater than had been imposed on the government in the context of federal tax liens.
Justice Potter Stewart: Well, no with the rule I suppose would be that it has to follow the same precautionary procedures that any other lender has to follow, have to search the title and if it is searched here, it would have found there was a perfected lien --
Mr. Stephen R. Barnett: That is the rule that is contended for here but the rule that has previously been established with respect to interest of the federal government by this Court --
Justice Potter Stewart: Yeah but the difference there is I understand it is that the government has no way of protecting itself from the tax case, he doesnt know who is going to fail to pay his taxes.
But here before they advance the money, they cant go out, make a title research like any other lender can.
Why shouldnt they have that obligation?
Mr. Stephen R. Barnett: Well because Congress has not said so for one thing, the rule was laid down by this Court and the tax lien area has been followed by the Courts of Appeals was unanimously followed by the --
Justice Potter Stewart: But you just told Mr. Justice Rehnquist, you are asking us to extend that rule --
Mr. Stephen R. Barnett: I'm asking this Court to extend this since this Court has not done so but the Courts of Appeals found no difficulty at all in concluding that the reasons this Court had given for the rule and the tax lien contacts were equally applicable to contractual liens.
Justice Potter Stewart: Well, I suggest you they are not equally applicable because in one case the government can check title and in the other case it cant.
Mr. Stephen R. Barnett: That was not one --
Justice Potter Stewart: It is not a justification for rather different approach to the problem?
Mr. Stephen R. Barnett: It maybe.
It was not one of the rules this Court gave for its doctrine in the tax lien area.
Justice William H. Rehnquist: Doesn't the government expect to lose some money on its SBA loan?
Mr. Stephen R. Barnett: Indeed it does, it loses approximately 4% in the latest year.
The question is whether it should lose more because of a rule adopted by this Court or whether Congress should make that decision.
Justice William H. Rehnquist: Well or whether this Court should confine the rule to the tax area where it now let Congress determine whether it should be extended further?
Mr. Stephen R. Barnett: Well, but the question from what basis would Congress start?
This Court has to make some federal law today.
Does it apply the previous rule or does it reach out and apply for example state law or the UCC or one of the concoctions of the Fifth Circuit and then tell Congress to go from there.
Justice William H. Rehnquist: Does the government in theory at least so far as the statutes are concerned, expect to collect all its taxes?
Mr. Stephen R. Barnett: Expect to collect all its taxes, I'm sure as a matter of practical prediction doesn't expect to.
Justice John Paul Stevens: It knows that some tax payers are going to be bankrupt?
Mr. Stephen R. Barnett: True.
Chief Justice Warren E. Burger: And some are going to evade and never be caught.
Mr. Stephen R. Barnett: Right and despite that this Court by laying down certain rules prior to the Tax Lien Act of 1966 gave the government a certain measure of protection.
Now the Congress in that Act limited the protection in certain very specific ways.
Our position here is that if that the government with respect to its contractual liens should be accorded the same traditional protection and if Congress wants to specifically limit that Congress is the body that should do it.
And it is quite significant as we contend that when Congress did act in the Tax Lien Act in 1966, it dealt specifically with the question of liens for future advances, which is involved here and it gave only very limited protection to those liens.
It provided that a lien for future advances is protected only if the advances are made that is as given priority.
Chief Justice Warren E. Burger: Couldn't Congress do the same thing in this area?
Mr. Stephen R. Barnett: Well, it could precisely but what the Court below has done and what respondent urges this Court to do is something very different, something that would give much less protection to the federal lien than Congress decided to give to the federal tax liens in the 1966 Act.
Justice Thurgood Marshall: Mr. Barnett, along with what my brother Steve told about, you don't want us -- you say that the SBA loses a lot of money.
Well, you don't want us to encourage it to lose more.
Mr. Stephen R. Barnett: Exactly, not.
Justice Thurgood Marshall: Well, what may be doing that if we tell them, do not use normal choate?
Mr. Stephen R. Barnett: I do not think the court --
Justice Thurgood Marshall: Well, I am checking to see if there is lien outstanding?
Mr. Stephen R. Barnett: I don't think the Court would be telling them not to use normal choate.
The SBA does check the question is what rules it must check under in this case, if it had checked, it might well have decided to make the loan anyway indeed, it was aware.
Justice Byron R. White: Well, Mr. Barnett, would not that if they check, it would have required that the other lien be waived.
Mr. Stephen R. Barnett: It might have, but Kimbell might have --
Justice Byron R. White: (Voice overlap) lender to do, is that?
Mr. Stephen R. Barnett: It might have made that request or demand and is equally possible that Kimbell would have refused.
Justice Byron R. White: Oh, that's highly unlikely on these facts, don't you think, because --
Mr. Stephen R. Barnett: No I don't think.
Justice Byron R. White: -- you have the outstanding indebtedness they could have easily said to cancel your outstanding lien and it gets really very unrealistic to assume that they would not have been able to clean it up.
Mr. Stephen R. Barnett: And then Kimbell would have continued to make loans on the same basis, I don't --
Justice Byron R. White: Or ask for an additional security like any outstanding balance, I think that's highly unrealistic.
Mr. Stephen R. Barnett: Well, but Kimbell here concededly might have said, if you pay us off we will release our collateral, but Kimbell here was also demanding that it keep its collateral with respect to the future advances.
Now it is not --
Justice Byron R. White: Is they demanding, they just did not talk about it.
As I understand that footnote and the opinion that they didn't really have a very sophisticated understanding in what was going on.
Mr. Stephen R. Barnett: But there is no reason to assume that Kimbell would have agreed to make future advances without keeping some collateral for that.
Justice Byron R. White: Perhaps not.
That they surely, the government surely could have said we are going to give you $300,000 we want to use $20,000 to pay off the existing indebtedness, which they did and we also want you to terminate that perfected lien and I'm sure that will happen, don't you?
Mr. Stephen R. Barnett: But maybe if the borrower okay, we are not assured of be able to purchase future inventory on credit.
Justice Byron R. White: So, we are going to turn down that $300,000 because we may need to borrow $5,000 in the future, that is very outstanding.
Mr. Stephen R. Barnett: Well, I concede that the SBA here could have demanded of Kimbell that it released its collateral.
It is not entirely cleare to me and certainly there would be cases in which it would not be cleared that the private lender would be willing to release collateral.
So, it is not simply a question of making the SBA be more careful but protecting some of the loans, the admittedly risky loans that the SBA does make because that its business to make risky loans and the question here is the measure of protection that the SBA will have and whether that measure is to be reduced as the Court of Appeals rule here would reduce it to a much greater extent than Congress and the Tax Lien Act reduce the protection of federal tax liens.
And indeed we find it ironic that the reason why the choateness rule is said here to be no longer worth following.
The reason why two Circuits the Fifth and Ninth have abandoned it is said to be the Tax Lien Act of 1966 which modified it in the area of tax liens, but yet, the very rule that act adopted for a future advances, which are involved here is much more protective of the government's interest than the rule that is proposed here.
Justice Byron R. White: But the rule you want Mr. Barnett which you defend certainly gives the government more protection than the Tax Lien Act.
Mr. Stephen R. Barnett: It does and Congress is fully --
Justice Byron R. White: Importantly more not only in right across the board expect with respect to this future advances.
Mr. Stephen R. Barnett: That is true, Mr. Justice White and Congress is fully able to --
Justice Byron R. White: And can I ask you another -- shoot a question, if a private lender had made this same loan that the SBA did in the face of an inventory financings scheme, how would the private lender have come out on these facts under the Uniform Commercial Code.
Mr. Stephen R. Barnett: On these facts the private lender would have lost, would have had its liens subordinate --
Justice Byron R. White: So, it would have under the Uniform Commercial Code, if a perfected inventory arrangement calling for future advances would take precedence over a later perfected mortgage?
Mr. Stephen R. Barnett: Over an intervening perfected mortgage.
That is correct.
Justice Byron R. White: Later perfected mortgage.
Mr. Stephen R. Barnett: Yes, later to the initial agreement prior to the advances.
Justice Byron R. White: Yes and so that the private lender, if he had to lend under these conditions here would have been on notice that there would be future advances and he would take subordinate to that.
Mr. Stephen R. Barnett: Would have been on notice that there could be future advances, these were optional but yes, would have taken subordinate to those future advances if they were made.
That is correct.
Justice Byron R. White: Well, if is that a rule in some all the states under state law or is it 49 states or what?
Mr. Stephen R. Barnett: Well that raises the question of how uniform is the Uniform Commercial Code.
It is the rule in Texas the Court here held, it is fairly clearing the rule under the 1972 Amendments to the Uniform Commercial Code, but as I understand that those amendments have been adopted by only some 21 states today.
So, it is not at all clear that is the rule in the 49 states that have adopted these codes.
Justice Byron R. White: But it says they I suppose if the question is, is it of course federal law applies here, the question is from what sources do you draw the federal law I suppose?
Mr. Stephen R. Barnett: Well, the proposal of response --
Justice Byron R. White: You are saying just take the Tax Lien law and apply it but you don't want the Tax Lien law because that's now been replaced by statute.
Mr. Stephen R. Barnett: No, no, no, we are saying take the common law principles that this Court developed on the basis first of the Insolvency Statute and then of the Tax Lien law.
The Court of Appeals --
Justice Byron R. White: But calling it common law does not give it any greater or less substance.
Mr. Stephen R. Barnett: I agree.
Justice Byron R. White: And so that it's a federal rule that was crafted in this Court.
Mr. Stephen R. Barnett: That's true, that's true.
Justice Byron R. White: So, the question is now in the ordinary commercial settings, what source should have be drawn?
Mr. Stephen R. Barnett: Well that's true.
The Court of Appeals didn't decide that question.
Justice Byron R. White: My comparison with some area that Congress is already discarded, I mean the rule for Tax Liens, Congress has already put aside.
Mr. Stephen R. Barnett: We don't agree with that characterization of it.
We would say that Congress has --
Justice Byron R. White: What it supposed to, what does the Congress did there?
Mr. Stephen R. Barnett: Congress has modified it and limited it.
There are indeed as the --
Justice Byron R. White: Well, so you now look to the statute not to our cases?
Mr. Stephen R. Barnett: No, not in all cases.
There are certain lacuna in the statute as the Second Circuit pointed out in the MacArthur Village case that might still be governed by this Court's previous decisions.
But Congress, against the background of this Court's previous decisions the choateness ruled the first time in time rule crafted limited exceptions in the statute.
The question here is whether the Court should take a quite different approach and adopt the UCC as the governing federal rule in this case.
Justice Byron R. White: Right, right.
That is the choice.
Mr. Stephen R. Barnett: That's the choice although it's not the choice to Court of Appeals show after all.
Justice William H. Rehnquist: No, I would disagree with apparently both my brother White and you Mr. Barnett.
I would think the Court of Appeals opinion can be justified on the base of following the law of Texas.
Mr. Stephen R. Barnett: Well, but the law of Texas is the UCC.
Justice William H. Rehnquist: Right.
But that it was followed not because the UCC was in existence in 49 states, but because this particular federal question of lien priority should be determined by reference to state law of the federal rule.
It's a federal rule, but it can be a reference to state law rather than to UCC.
Mr. Stephen R. Barnett: The reason why that is not a good idea we would submit is because state law is varying and the varying reason why this Court decided in Clearfield Trust that the choice of law question here was a federal question in the first place was primarily the need for uniformity.
The Court has since emphasized that in the Little Lake Misere case and in Miree versus DeKalb County.
A rule --
Justice John Paul Stevens: Have the Yazell's case on the other side of the scale.
Mr. Stephen R. Barnett: Yes.
Justice William H. Rehnquist: On household finance does --
Justice John Paul Stevens: Household finance.
Mr. Stephen R. Barnett: Yeah, but a rule that a rule that simply incorporate into the law at various states with respect to this question which is very much a question of the nationwide operation of a program and which is rather close to questions of commercial paper would undermine the purpose of uniformity.
Justice John Paul Stevens: Was the Yazell case and SBA case?
Mr. Stephen R. Barnett: I think it was, Mr. Justice Stevens.
Also would undermine here when we submit another reason for the application of federal law in the first place, which is the principle of federal supremacy if you well recognized by this Court in the New Britain case, the federal property interest should not be subjected to the sway of state law and --
Justice John Paul Stevens: Mr. Barnett, are you familiar with the position the government took in the argument of Butner case arising out of the second mortgage situation in North Carolina?
Mr. Stephen R. Barnett: I am not Mr. Justice Stevens.
Justice John Paul Stevens: The question is whether in determining whether the second mortgagee has to reduce the property to possession whether they should be governed by a federal rule or by reference to state law and the United States in that case, where it's a creditor, argued that the reference should be to state law, the federal rule should be that we should refer to matter to state law and it's one of those any basic difference between the two kinds of situations in connection with the need for uniformity.
Mr. Stephen R. Barnett: I'm sorry that I'm not familiar with that case.
So, I cannot say, even with respect to the UCC when it is argued here that the UCC should be adopted, there are various kinds of uncertainty that that would create, which I think the Court should be aware of.
For example, in addition to the fact that the UCC rules may vary very considerably in different states, there is the question of what would be the scope of this asserted adoption of the UCC.
For example, the Court of Appeals here said we are adopting the UCC with respect to when the state lien arises, we are not adopting it at least not yet with respect to the relation that question and we leave for another day, the question of whether we would apply the UCC in cases of other kinds of liens, mechanics liens, repairman's liens, which the Court said raise entirely different questions.
Well, if the UCC is to be embraced by this Court as the governing code of federal law in these cases where does the embrace stop?
Does it or does it not include those repairman's liens and mechanics liens and state tax liens and the questions that they raise.
The respondent would apparently say that this Court should limit the embrace to what consensual liens, which arise under the UCC.
On what basis would that limit be established with this Court be telling the other federal courts that they cannot use the UCC with respect to those other liens that they must or what?
There would be considerable uncertainties engendered, which are illustrated, of course by the Crittenden case, which I'll have occasion to discuss in greater detail later.
Justice William H. Rehnquist: Aren't they greater there than in this case because in Crittenden as I understand the Fifth Circuit's opinion we don't know what the Georgia law was, but here I thought that Judge Gee was quite clear as to what the law of Texas was.
Mr. Stephen R. Barnett: Well, but even if we knew what the Georgia law was the proposal would might be to adopt the UCC, even if the Georgia law is different.
Justice William H. Rehnquist: I certainly don't read the Fifth Circuit's opinion in this case is saying that in Kimbell Foods.
Mr. Stephen R. Barnett: Well, with respect to when the state lien arises, I read the opinion as saying we will follow UCC principles on that.
It happens that Texas here had adopted the UCC, but I find nothing in this case to indicate that the Fifth Circuit is saying we will follow state law, if that law happens to diverge from the UCC.
And well, I agree Mr. Justice Rehnquist that the problems in Crittenden are more complicated, my point is where would adoption of the UCC stop, would it not engender, all sorts of such problems, which to adopt where the UCC varies from state law to what extent to follow the UCC.
Justice Byron R. White: What would be in that respect, if you just follow the law of each state at least you might have some common understanding in the state what the rule was.
Mr. Stephen R. Barnett: You would have in the state but you would a complete overturning of the principle of uniformity, which --
Justice Byron R. White: What principle is that?
That's the question in this case.
One of the questions in this case whether to have a uniform rule and why shouldn't the SBA in operating in various states as a lender act any other lender?
Why should somebody a bank furnishing inventory financing have to say well, I guess we are good against every kind of a lender except the federal government with the SBA?
Mr. Stephen R. Barnett: Well because Congress has not said so for one thing, if that precise approach was a prose to --
Justice Byron R. White: I know that is bootstrapping.
You do not know?
Mr. Stephen R. Barnett: No, that precise approach was made to Congress in the drafting of 1966 Tax Lien Act as cited in our brief here.
It was proposed that federal tax liens be --
Justice Byron R. White: That's taxes.
That's a distinctive area.
Mr. Stephen R. Barnett: Well, is it or isn't it?
That's the case here.
We say that's the federal government --
Justice Byron R. White: Of course, it isn't.
Mr. Stephen R. Barnett: Well, then we would cite the need for uniformity, which this Court rely.
Justice Byron R. White: What need is that, I don't see understand that need?
Mr. Stephen R. Barnett: Well, one need is that a federal agency operating a nationwide program has to have some ability to rely on nationwide standards, it uses --
Justice Byron R. White: It obeys the speed limits where it's employees in every state, it doesn't want it national speed limit?
Mr. Stephen R. Barnett: No, it uses similar forms.
Its attorneys are transferred from one state to another --
Justice William H. Rehnquist: Household Finance managers in all 50 states.
Mr. Stephen R. Barnett: It is not the federal government.
Justice William H. Rehnquist: But you are saying there is a need, not that the government sovern but that the government needs it because of some peculiar difficulties of operating in all 50 states.
Mr. Stephen R. Barnett: And also because this Court has recognized that that is a reason for applying federal law in these states.
Justice Byron R. White: Not yet, not yet.
Mr. Stephen R. Barnett: No.
In Clearfield Trust, this Court --
Justice Byron R. White: Not yet in this commercial area.
Mr. Stephen R. Barnett: True, but in Clearfield Trust the proposition was that the need for uniformity is the reason for making it a question of federal law in the first place in a commercial area such as this.
I would like to reserve the remainder of my time.
Argument of Vernon O. Teofan
Chief Justice Warren E. Burger: Mr. Teofan.
Mr. Vernon O. Teofan: Mr. Chief Justice, may it please the Court.
Well, it may not have seen readily apparent from the government's abbreviated statement of the issue presented in this case.
This isn't simply a case of a choate federal lien versus an inchoate private lien.
This case is entirely different from any other cases on which the government relies.
The two competing liens that you have in this case were both created and perfected under the uniform commercial code of the State of Texas in favor of private lenders.
This wasn't a government lien from the inception, one lien the first lien was created in favor of Kimbell Foods.
It was perfected in 1966 and 1968 long before, the second party Republic National Bank acquired its security interest much less had it perfected and at least two years prior to the time that the SBA purchased an undivided 90% interest.
Chief Justice Warren E. Burger: Are you arguing, Mr. Teofan that if Texas was the only state that had this code and the other 49 states had a different uniform code.
The case would be the same?
Mr. Vernon O. Teofan: Yes, based on United States versus Vermont.
What the SBA is arguing in this case is that in 1961 five years after Kimbell perfected its lien when it purchased its 90% interest in the Republic National Bank security interest that invested that Republic National Bank security interest with federal lien rights and sovereign prerogatives, which related all the way back to when the lien was first taken by the Republic National Bank and by applying the choateness test at that point in time bootstraps the Republic National Bank security interest into a first position.
The Fifth Circuit rejected that logic and refused to extend the choate lien test into this kind of situation.
Now, when I was reviewing this Court's opinions in United States versus City of New Britain and United States versus Vermont, I realized that I had missed a very basic point in briefing the situation for Kimbell.
In United States versus City of New Britain, in that case you had competing local water rent liens and local tax liens competing with the federal tax lien.
The Court there laid down the basic rule that in determining what is first in time and therefore first in right you must determine which lien attached first and which lien became choate.
It didn't say that that test only applied to the private lien and not the government lien.
So, then you come to the United States versus Vermont, unanimous decision by this Court, the opinion written by Mr. Justice Stewart.
In that case, the two liens you had competing with each other was a federal tax lien and a Vermont tax lien, which arose under a statute that was patterned after the federal tax lien and whose reading was identical.
The Vermont tax lien had been assisted first, the federal lien some months later.
The government in that case argued that the Vermont lien was inchoate and urged that a different standard of choateness be applied to the state lien than to the government lien.
Will this Court rejected that?
Both liens rose under identical statutes and this Court held the Vermont lien first in time and prior in right.
The basis of the Vermont case essentially is this; when you have two competing liens, which arise under the same statute such as we have here are substantially identical statutes, the reasonable rule is to look to the statute for priority and that's uniform.
I submit that this Court can dispose off this case in favor of Kimbell just by reiterating that the federal common law rule is that with the liens arise under the same statute are under substantially identical statutes, you look to the statue for priority.
That's uniform, that's non-discriminatory and unquestionably just.
That point is not specifically covered in that brief and neither is the point was in relation to some subsequent congressional action.
After the brief --
Justice Potter Stewart: Does the SBA make direct loans or --
Mr. Vernon O. Teofan: Yes.
Justice Potter Stewart: And under what law do you suppose it the lien that arises, when it makes a direct loan?
Mr. Vernon O. Teofan: The basic proposition, we have no quarrel with it is that it is federal law governs but when the SBA enters into a field of consensual loans, it should be governed by the same law as all the rest of these cases.
Justice Potter Stewart: Well, let's say in this case, it was a direct loan by the SBA.
Mr. Vernon O. Teofan: It should be.
Justice Potter Stewart: And let's assume that it had been under what law would the lien arise?
Mr. Vernon O. Teofan: It would have arose under Texas law.
It would have its security agreement, it would have perfected it under Texas law.
Justice Potter Stewart: What makes you think so?
Mr. Vernon O. Teofan: Because the SBA when they make these kinds of loans --
Justice Potter Stewart: Was it the statute said it should be perfected when the money is paid out, it would be perfected with that.
Does the statute indicate that the SBA should follow the state law or not?
Mr. Vernon O. Teofan: I think yes, I think and I'm not positive on that, but I think the SBA statute says that the lien shall be recorded and perfected in accordance with state law.
Justice Potter Stewart: It does say that?
Mr. Vernon O. Teofan: I think so.
I know that they do and I know that the SBA Congress has admonished the SBA to make --
Justice Potter Stewart: I would think that would be a rather important in that if we would argue, if that were true in this case that Congress certainly intended to accommodate the laws of each individual state.
Mr. Vernon O. Teofan: Well, I think that the regulations may direct the SBA offices to file their liens in accordance with state law, perhaps so government can --
Justice Potter Stewart: Well, that it seems -- sounds to me like a rather substantial matter.
Mr. Vernon O. Teofan: I would be happy to look it up and submit something to this Court on that with your --
Justice Potter Stewart: Well, maybe, Mr. Barnett, will have something to say in response.
Mr. Vernon O. Teofan: Yes, but with relation to the --
Chief Justice Warren E. Burger: Perhaps, you can do it while you are having lunch.
Mr. Vernon O. Teofan: I will try.
The question came up what standard is supposed to be applied by the SBA in making loans?
Are they expected to have great losses?
Congress has admonished the SBA to make only loans of such sound value or so secured as to reasonably assure repayment.
It is pointed out by this Court in Yazell.
SBA activity is very localized, it is done by local offices and by agents who are experienced in the law of those localities but just before lunch, I want to point out one of the piece of legislation the Fifth Circuit in refusing to extend the choateness rule to this area look to, reconnect of Congress is a barometer of what was going on in the commercial world and also what federal intent was with relation to federal priority.
And that referred to the Tax Lien Act of 1966, which abolished a lot of the priorities established by the choateness rule.
Well, after the brief was filed in this case in November of last year, there was enacted the new Bankruptcy Act, which goes into effect for the most part in October of 1978.
In that Bankruptcy Act, Congress has done away completely without federal priority except for taxes accruing within three years of the filing of the petition.
The old subsection 64 (a)(5) giving the federal government priority for non-tax debts has been abolished.
Justice William H. Rehnquist: But that doesn't have retroactive effect in this case?
Mr. Vernon O. Teofan: No sir.
This is not a bankruptcy case.
I refer to that merely as an indicator of governmental policy on federal priority status.
Justice William H. Rehnquist: That doesn't get to how a government priority is to be established.
It didn't do away with priority for example that the government would have under a perfected lien in bankruptcy did it and it didn't answer how but to what law would you look to determine whether the lien is perfected?
Mr. Vernon O. Teofan: No, it does not answer those questions.
I just referred to what is an indicator that the priority, the super priority, which has been furnished to the government in previous cases, has been done away with and does not carry the same import that it did previously.
I'll resume after lunch.
Thank you very much.
Chief Justice Warren E. Burger: We will resume then at 1 o'clock at this point.
Mr. Teofan, you may continue.
Mr. Vernon O. Teofan: Mr. Chief Justice, may it please the Court.
During the lunch hour, I did run up to the library and attempt to find the basis for my belief that SBA loans are perfected in accordance with state law.
I knew that I had seen it somewhere and I knew that they did it.
What I did finally remember was that in the United States versus Yazell, which is an SBA case arising out of Texas, this Court in that case said there is no problem in complying with state law in fact SBA transactions in each state are specifically and in great detail adapted the state law and it refers to note 35.
Note 35 is the financial assistance manual of the Small Business Administration, SBA 500 is replete with admonitions to follow state law carefully.
Thus section 401.03 reads compliance with applicable laws.
When the United States disperses funds and is exercising a constitutional functional power and its rights and duties are governed by federal rather than local law.
However, it is frequently necessary in the obtaining of a marketable title or enforceable security interest and property to follow local procedural requirements and statutes.
Accordingly, care should be used in following or meeting all applicable requirements in statutes of the state in which the property is located including the filing and refiling, recording and rerecording of any documents and then to --
Justice Byron R. White: State or rather a SBA regulation with this --
Mr. Vernon O. Teofan: Yes, it's the financial assistance manual of the Small Business Administration.
In the short time that I had that was the best that I could up with.
Justice Byron R. White: That's not bad.
Mr. Vernon O. Teofan: Thank you.
Chief Justice Warren E. Burger: Hope you manage and get it done (Inaudible).
Mr. Vernon O. Teofan: Yes.
Justice Thurgood Marshall: Whereas in this case no defensible reason governed by the state law.
Mr. Vernon O. Teofan: That's exactly our position in this case Your Honor.
Justice Thurgood Marshall: As the last paragraph in the Yazell says?
Mr. Vernon O. Teofan: Yes.
Justice Thurgood Marshall: I know how to argued with.
Mr. Vernon O. Teofan: In their brief and in the argument, the government here strongly insist that there is a coherent, well-established, well-understood body of president that would establish that the choateness rule should be applied in this case.
And therefore urges this Court to not deviate from that rule but extend it into this new field of consensual security interest under Uniform Commercial Code.
First of all, such contention is not well taken.
There exists no such coherent, well-established, well-understood body of president.
This court has never extended the choate lien test rule outside the context of the federal Insolvency Statute or the federal Tax Lien Act.
In both of those fields, Congress has greatly reduced federal priority.
This Court has never held in any case that the choate lien test applies to a consensual security interest held or acquired by the government.
Neither this Court or any lower court has ever held a choateness test that applicable in a case involving a federal consensual lien versus a private consensual lien, a federal security interest under the Uniform Commercial Code versus a private security interest under the Uniform Commercial Code.
There has been no extension of that choate lien test into this area.
Consequently, there is no evil for the government to correct by legislation, they are just this field has not been covered.
The Five Circuit Court of Appeals cases relied on by the government is establishing this president at the time the transactions were entered into, all involve a competing statutory special interest lien created by a state statute, which either grants that lien super priority or relates it back to a point in time that has no reasonable connection with the establishment of the lien.
We don't have that in this case.
The choateness rule was developed primarily to prevent the special interest lien creditors from getting their leg up on the government in the collecting of its taxes in the exercise of a sovereign power.
Now what the government is trying to do in this case is to take the choate lien test and relate it back and give the government a leg up on the private lender and it's not required.
What they are attempting to do is to perpetrate a reverse evil that the choateness rule was originally fashioned by this Court to prevent.
Such coherent, well-established body of president was not even well understood by the attorneys and the representatives of the government and the SBA at the beginning of this case.
And the government's answer to Kimbell's complaint and then the detailed pre-trial agreement that was filed with the Court absolutely no mention whatsoever is made of choateness.
No issue is reserved as to whether or not Kimbell's lien is choate.
During the trial with this case counsel for the government stood up and announced to the trail court that its position was the same as the Republic National Banks.
The primary line of defense had nothing to do with choateness or federal super priority.
It was one Kimbell had either expressly or implyably agreed that its lien would be inferior to the lien of the Republic National Bank or number two that under applicable state law, future advances were not covered under the security agreement.
That was rejected by the Fifth Circuit, is not here before the Court.
It was not until after the case was actually tried and briefs were submitted to trail court that the issue of choateness was ever raised.
So, if it was such a well established, well understood body of president, why did it appear in the case so late?
I think the law review articles that had been written by the authorities with relation to the choateness rule demonstrate that it is not a clear body of law.
Even counsel in this case is somewhat unclear as to what is or is not a choate lien.
In the original brief, he took the position that Kimbell's lien could not be choate because it was not reduced to judgment.
Justice William H. Rehnquist: Of course you could say that by lots of groups of decisions in this Court currently in other fields of the law.
Mr. Vernon O. Teofan: Say, what Your Honor?
Justice William H. Rehnquist: That it isn't all that clear.
Mr. Vernon O. Teofan: Yes, yes and what?
Justice Byron R. White: (Inaudible)
Mr. Vernon O. Teofan: Yeah and what we are trying to do here is to fashion a federal rule that is a little bit clear at least clear and fair than the choateness test.
Justice Potter Stewart: I notice you dint say crafted, but it's the word that you use before.
Mr. Vernon O. Teofan: Alright, the word is fighting with me Your Honor.
Even the government doesn't know when a lien is choate.
They say, there is a big difference between a security interest that secures a debt owing on a promissory note, which it now says it maybe choate because of its concession made into the Crest Finance case but that doesn't apply where the debt is secured by an open account.
It says if you have got a piece of paper that says it's a promissory note that's good it's choate.
If your pieces of paper are invoices submitted on a weekly basis plus statements of account, they say that's not good, that's inchoate.
And why do they say that, they say that because there are many challenges that a creditor who purchases goods on open account can make and therefore there are many contingencies and until it's reduced to judgment, it can't be choate.
But that's what a specious reasoning, the same applies to a promissory note in the Crest case, you had a series of promissory notes.
Payments have been made on those notes, additional interest had accrued.
The debt secured was not the face of the promissory note, you had to go to the books and records of the government and you had to go to the books and records of the finance company to determine what the balance outstanding was on any given day.
And anybody who has tried a case on a promissory note knows that ingenious counsel can come up with as many defenses to suite for the balance of a promissory note as he can for a suite based on an account.
So, if a suite we submit Your Honor that if a security interest securing the balance on promissory notes is not choate so also should be held for the purpose of choateness in this area if it applies is the balance owing on an open account.
Even t any given point in time, you can determine the amount of the lien, the property to which it attaches the name of the secured party and the name of the debtor.
The other point with relation to security interest under the code is that some of the cases that indicated that a lien will be "if it's enforceable by summary proceedings, it is to be noted under the Uniform Commercial Code that upon default, a security interest can be enforced by summary proceedings.
The creditor goes up, picks up the property and sells it, no judicial action is required.
The government argues that what we really need to do here is take a rule that will give us this stability and certainty so that people who are engaged in commercial lending will know where they stand.
And they say that we can get that way through the choate lien test.
Now we submit that is not correct.
If you take their argument that a lien becomes -- that a private lien becomes a federal lien when it's acquired by the government and it relates all the way back to when it was first created and then you will apply the choateness test there, which you have is uncertainty foretold.
First of all, the man who makes a loan or who is extending credit, first he will not know if the government will ever come in and guarantee a loan, insure a loan or buy somebody's loan or get a direct loan sometime in the future three or four years.
If the government does come in and acquire a loan some years in advance then that creditor will not know to what date that lien relates back because there is absolutely nothing that requires the recordation of a government guarantee or a government security interest even after the government acquires it, nothing need really be filed off record.
And as far as the commercial community is concerned, there is absolutely no notice to anybody that there maybe a federal lien floating out there somewhere.
The other uncertainty, the third uncertainty is to what collateral will a federal lien attach when it relates back?
Property is sold, a lot of people have shipped in additional merchandize to the debtor like Kimbell did in this case, Kimbell's security interest is a purchase money security interest.
It secures the payment price of merchandize, which Kimbell actually shipped in, if the lien relates back prior to that time and Kimbell's lien is no good that's an uncertainty.
And the other uncertainty would be the amount of the debt that would be secured at the time the federal lien was given effect.
The amounts balance if the loan was originally $300,000 it could be down to 20, if it were originally 300 and it had future advances, clauses that could go up to 600.
Too much uncertainty would be created by applying the choateness rule in this concept of consensual liens.
The performance of a proprietary or a commercial function by the government is distinguished from a sovereign function such as collecting taxes.
You just wouldn't know where you stood.
Now, they make an argument in their brief that, this will not create any economic adverse effects on private loans to small businesses.
Now, common sense and experience tells every one of us that whether you are loaning money or selling product, if a private lender sells to a specific portion of a market and loses money, one or two things is going to happen.
He is either going to increase the cost of that service to the customer or he is going to curtail doing business in that segment of the economy.
The government has intimated that if this Court were to adopt the priority rules that have been incorporated by Congress in the Tax Lien Act of 1966 that Kimbell would lose because the advances were made more than 45 days after the federal lien, well, that argument is based on the premises that the federal lien was filed when it was originally filed in favor of Republic National Bank.
We submit that at that time it was not a federal lien under the decision of this case in Markson and there is no debt do an owing to the government.
Justice Byron R. White: Do you know what the SBA practice is when they buy a participation in the loan, is there any filing done under the state law then?
Mr. Vernon O. Teofan: Naming the SBA?
Nothing naming the SBA.
Justice Byron R. White: Could any lender ever discover that to what he thought was a good lien against the Republic National was now no longer good lien because the government has bought part of it.
Mr. Vernon O. Teofan: He would have to search the records daily.
Justice Byron R. White: Well, what records?
Mr. Vernon O. Teofan: In the case of the Uniform Commercial Code, he could search the record --
Justice Byron R. White: I know but I just asked you would the SBA do any filing whatsoever when it bought into the republic loan.
Mr. Vernon O. Teofan: It need not.
Justice Byron R. White: Well, does it or doesn't it?
Mr. Vernon O. Teofan: It does.
In this case, it did.
Justice Byron R. White: It did.
It filed under state law.
Why did it file?
Mr. Vernon O. Teofan: When it acquired undivided 90% interest in Republic loan in 1971 on I believe it was January 18th or 28th the later part of January 71.
It filed a UCC-3, which is an assignment statement with the Secretarial State of Texas.
Justice Byron R. White: Yes, why did it do that?
Mr. Vernon O. Teofan: Well, the reason you file those kind of things Your Honor is.
Justice Byron R. White: I don't know the reason private people did, and I wonder why that SBA did?
Mr. Vernon O. Teofan: Well, they may not have trusted Republic National Bank after their initial encounter in this case and didn't want Republic National Bank to be put in a position to either release or prejudice that lien.
The reason you file a UCC-3 is to prevent the original secured party from doing anything that would affect the assignee's rights.
The UCC-3 doesn't create any rights, it is purely a notice instrument.
Now, in this case the SBA --
Justice Byron R. White: But it needn't have?
Mr. Vernon O. Teofan: It needn't have because it did.
Justice Byron R. White: In which event the person making future advances might think that it was perfectly good against Republic, which it were.
Mr. Vernon O. Teofan: Yes.
Justice Byron R. White: They were but not against the United States.
Mr. Vernon O. Teofan: Right and that's exactly what happened to Kimbell in this case.
Kimbell wrapped along that they were owed $18,000 when the Republic lien was created and at the end of the road they were still owed $18,000, there was no big increase or decrease in the amount of debt that was secured.
But Mr. Justice White you are perfectly right.
There is no way that a private lender out there making a loan feeling that he is first insecure can ever know that five years later, the government is going to come in and assert some rights, relate them back and make themselves superior to his lien.
Justice William H. Rehnquist: Kimbell is not an insolvent in this case.
Mr. Vernon O. Teofan: Okay, Supermarket Your Honor was the debtor, it is not an insolvent.
Insolvency is not a issue in this case neither is bankruptcy, neither a federal tax loans.
Thank you very much.
Rebuttal of Stephen R. Barnett
Chief Justice Warren E. Burger: Very well, do you have anything further Mr. Barnett?
Mr. Stephen R. Barnett: Yes, I do, Mr. Chief Justice.
May I borrow that, these all things?
Well, I don't need it.
The statements from the SBA manual that my brother quotes makes clear that the rights and that were quoted in the Yazell makes clear that the rights of the SBA arise under federal law quote when the United States disperses its funds, it is exercising a constitutional functional power and its rights and duties are governed by federal rather than local law.
However, it is frequently necessary in the obtaining of a marketable title or enforceable security interest in property to follow local procedure requirements in statutes and so forth really it's a --
Justice Byron R. White: Are there anything in the SBA Act it says when this precisely when and what a federal lien arises?
Mr. Stephen R. Barnett: The only thing in the SBA Act that relates to liens is the section that we have quoted in our brief and discussed which provides that SBA liens are specifically subordinated to state and local liens for property taxes.
Justice Byron R. White: Yes.
Mr. Stephen R. Barnett: Congress specifically did that --
Justice Byron R. White: So what makes you think that it is by virtue of the federal law that a lien arises, I mean by some specific provision of the federal law?
Mr. Stephen R. Barnett: Well, a lien does not arise under state law or the UCC.
A lien arises as in this case from the security agreement, the security agreement is filed under state law of the UCC but the UCC does not create the lien and that is the policy in my brother's argument.
Justice Byron R. White: What gives that a rank in the priority?
Mr. Stephen R. Barnett: Well, that is the question in this case whether the federal law does and the question in this case --
Justice Byron R. White: Well, there isn't anything in the federal law that just says that is in.
Mr. Stephen R. Barnett: Well, this Court has relied on the first in time rule as federal law for one thing and the --
Justice Byron R. White: There is nothing in the SBA Act?
Mr. Stephen R. Barnett: There is nothing in the SBA Act except that specific provision which does subordinate SBA liens but only for a carefully tailored exception.
And as you were pointing out Mr. Justice White the SBA may not have to file under state law but it does and that is the answer to my brother's contention that people may never know when they are dealing with the SBA.
Justice Byron R. White: If that's also an answer to your argument about uniformity, they don't seem to be put so much store in the uniformity if they instruct all their local people to be awfully careful about the state law?
Mr. Stephen R. Barnett: Well, as a matter of convenience and as a matter of allowing other people to rely in the commercial world, they do file, but it doesn't follow that their lien is thereby created under state law and it doesn't follow the state law should govern their priority rights.
Chief Justice Warren E. Burger: What if they didn't file?
Mr. Stephen R. Barnett: That is not this case.
We are not here defending a situation in which the SBA lien has not been trialed.
Chief Justice Warren E. Burger: On a practice so.
Mr. Stephen R. Barnett: Yes that is the practice.
Chief Justice Warren E. Burger: But what if they didn't trample their practice in the legitimate case, what about the other -- rights of other people?
Mr. Stephen R. Barnett: We would have or at least would have difficulty defending that situation Mr. Chief Justice.
Justice William H. Rehnquist: Why, the lien is a reason under federal law?
You tell me.
Mr. Stephen R. Barnett: Well, I think there are reliance rights that the government would have to respect, and I think it is the government's practice and should be the government's practice to comply --
Justice Potter Stewart: To look to state law, to look to state, to not to look to non-uniform state law, so that people operating in that commercial market will know where they are.
Mr. Stephen R. Barnett: To comply with the local procedures and forms is all not to follow or not to be bound by state law as to government rights and priorities and I see my time is up.
Justice Thurgood Marshall: It would be the time to watch the state laws and follow them.
Mr. Stephen R. Barnett: So far as procedures and forms are concerned.
Justice Thurgood Marshall: In drafting service provisions, counsel should carefully consider the applicable laws of the states, that's what this regulation says.
Mr. Stephen R. Barnett: True, but not that does not imply that state law governs the rights as the earlier part of the regulation says the state law governs the governments rights.
Justice William H. Rehnquist: Mr. Barnett, the second sentence of that footnote 35 from the Yazell case, which you just read however it is frequently necessary in the (Inaudible) of a market rule title or enforceable security interest and property to follow local procedural requirements and statutes.
Now what do you take it, what does that carve out from the general federal principle that you are talking about?
Mr. Stephen R. Barnett: I don't think it carves anything out except as a matter of the government's discretionary decision to follow the state procedures.
Justice William H. Rehnquist: But it says that's frequently necessary to obtain an enforceable security
Mr. Stephen R. Barnett: Well, this is an abundance of caution in a manual that the SBA is directing towards employees, it is not a statement of applicable law being made in court or elsewhere.
Chief Justice Warren E. Burger: Thank you gentlemen the case is submitted.
We will hear arguments next in United States against Crittenden.
You may proceed whenever you're ready Mr. Barnett.
Mr. Stephen R. Barnett: Thank you Mr. Chief Justice and may it please the Court.
This case too involves competing liens in a tractor.
The federal government this time through the Farmers' Home Administration of the Department of Agriculture had a lien in the tractor as security for loans it made to the farmer.
After this lien had been established, the farmer took the tractor to respondent for repairs and the question is whether respondent statutory repairman's lien takes precedence over the earlier federal lien under principles of super priority or on the other hand whether the government's lien prevails under the principle of first in time, first in right.
The FHA makes loans pursuing to what is now the Consolidated Farm and Rural Development Act to farmers, who are unable to obtain sufficient credit elsewhere to finance their actual needs at reasonable rates in terms.
Thus like the SBA, the FHA is engaged in lending not to make a profit but to serve a policy interest of the federal government.
The distinction that my brother in the former case tried to make between sovereign and commercial functions of the government, he submitted it is not a valid distinction and this Court made that clear in cases such as Indian Towing when the government lends money through the FHA it is performing a governmental, a sovereign function for reasons of policy.
Justice William H. Rehnquist: Indian Towing arose on the Federal Tort Claims Act, didn't it?
Mr. Stephen R. Barnett: Yes, it is cited in our brief in Kimbell.
Indeed the provisions of the FHA's policy is written into the security agreement in this case at appendix page 10 in the security agreement it expressly provides that if at any time it appears to the FHA that the debtor can obtain a reasonable loan elsewhere, that is a loan on reasonable terms elsewhere, the debtor will at the FHA's request apply for that loan and pay off the FHA.
This was apparently quite a tractor in this case because between November 1972 and July 1973, the farmer brought it into respondent for repairs a total of seven times.
In each case respondent made the repairs and returned the tractor to the farmer, who did not pay his bill.
By July of 1973 the amount of the bill was $1,600.
When the respondent brought the tractor and again for the eighth time in December 1973 this time for repairs that raise the account to $2100, the respondent kept possession of the tractor while awaiting payment.
When the tractor was finally sold in 1978 incidentally it was sold for $1,500, less than the repair bill although admittedly this was three years after the or this was five years after the repairs had been made.
Well the --
Justice Potter Stewart: Are tractors like automobiles, passenger automobiles, is there artificial obsolescence.
Mr. Stephen R. Barnett: I don't know Mr. Justice Stewart, I'm not a farm boy.
Justice Potter Stewart: That's the reason I asked the question.
Mr. Stephen R. Barnett: Well, the Court of Appeals in Kimbell Foods rejected the choateness rule for determining lien priority.
The Court of Appeals in this case rejected the even more fundamental rule of first in time, first in right.
A rule that goes back in this Court to the 1827 decision in Rankin versus Scott in which Chief Justice Marshall stated that the principle is believe to be universal that a prior lien gives a prior claim, which is entitled to prior satisfaction out of the subjected banks.
Justice William H. Rehnquist: The Fifth Circuit also rejected the principle that federal law would refer to state law in this case, didn't they?
Didn't they say, we don't have to cite what Georgia law is in this case because we are going to follow a general common law with UCC principle?
Mr. Stephen R. Barnett: Yes, it did, not quite a UCC principle, the court here took a rather hybrid approach, it's started with the UCC but the UCC in this case incorporates state law the Court then looked to see what Georgia law was decided that either Georgia law was unclear or it was unfavorable, the Court then looked back to the UCC decided that it would adopt the UCC provision but without the part of the UCC provision that says unless Georgia law -- unless state law provides otherwise and then finally the Court picked up a piece of the Federal Tax Lien act of 1966 to complete its collage.
Justice William H. Rehnquist: What if this Court were to decide that as a matter of federal law the reference would be the Georgia law in this case.
Does the government agree that Judge Elliott's opinion that District Court or does the government think it should be sent back for a consideration by the Court of Appeals for the Fifth Circuit as to what Georgia law is?
Mr. Stephen R. Barnett: Well, we take the position that Georgia law is that the District Court was wrong that under Georgia law there is no such super priority here but it's not a position we rely on, it's not a question of state law.
But to answer the broader implications of your question Mr. Justice Rehnquist if the Court here were to take the position that state law governs we think it would have all, we think there would be all sorts of problems with that rule.
For one thing, it would destroy the uniformity, which we insist that this Court has recognized beginning with the Clearfield Trust case, in Clearfield Trust and the Court here recognized that the Fifth Circuit here relied on Kimbell and in its earlier Hicks case, the Fifth Circuit in stating that federal law governs stated the principle reason supporting the application of federal law is a need for uniform rule of decision to govern the rights of the United States and the administration of a large scale program.
Now that need for uniformity would be particularly destroyed in a situation of this case where the states are quite split on the question of super priority for repairmen's liens.
As we note in our brief page 27 no 24 there are at least 13 states that have been held to have statutes, which deny the repairmen the super priority those are 13th cited cases, I am sorry, to find the 13, the ALR annotation cited their list ten and our citations include three more.
Those are cases that have held that states have such statues, there may be other states that do.
Thus they would be quite a divergence in what the rule is under state law and recent method this would make it quite difficult for federal agencies to administer their programs.
Now the Yazell case, which has been cited in opposition to this principle, was a case involving a state law of Marital property and while the Court there followed that law, there is a statement in the opinion saying that if the SBA regulations worked to the contrary, the result might be different.
The SBA regulations now are to the contrary.
We submitted that case is very far from questions of commercial law as are involved in this case.
In Little Lake Misere as well this Court pointed out that the land acquisition there although it was an acquisition of land, the kind of thing traditionally governed by local law, quote is, when arising from and bearing heavily upon a federal regulatory program.
Choice of law is therefore a federal decision.
In Miree versus DeKalb County, in applying state law, the Court said the question here does not require decision under federal common law since the litigation is among private parties and no substantial rights or duties of the US hinge on the outcome.
Well, in this case substantial rights and duties of the US do hinge on the outcome, the litigation is not between private parties but the United States is involved and we submit that not only does Clearfield Trust apply but the principle of uniformity that's imbibed in Clearfield Trust would be inconsistent with borrowing or adopting state law as well.
Justice Byron R. White: Mr. Barnett, I take it you think that the SBA by regulation could subordinate its lien to purchase money mortgages and has?
Mr. Stephen R. Barnett: It has.
Justice Byron R. White: And I take it that you think that by regulation it need not -- it could have come out with other result on purchase money mortgages.
Mr. Stephen R. Barnett: Yes, I think it could by regulation.
Justice Byron R. White: And similarly here it could have if it wanted to provide by regulation that their liens would not be subordinate to mechanics liens clause?
Mr. Stephen R. Barnett: I think it could by regulation of --
Justice Byron R. White: And but it has been silent on that.
Mr. Stephen R. Barnett: Yes, it has the specific security agreement here gives that the specific authority to subordinate its lien if it wishes to in this case.
Justice Byron R. White: Yes, but you think by regulation the SBA could protect itself.
Mr. Stephen R. Barnett: I don't see, well, I don't could protect itself, yes.
Justice Byron R. White: In a situation -- from developing mechanics liens.
Mr. Stephen R. Barnett: Oh, no, no I'm sorry.
Justice Byron R. White: We will say it, it has an lien; it has a lien on a piece of property that the borrower sends to a mechanic and he does some work on it and he says pay the bill and the owner says I cant pay, so he just holds this.
Now could the SBA provide that its existing lien nevertheless is prior to the mechanics lien.
Mr. Stephen R. Barnett: No, I don't think so I misunderstood, I thought you are asking whether it could subordinate its lien by regulation and in this case it tried to protect itself that provided in the security agreement that the borrower may not encumber the tractor without its permission, I don't think the SBA could do that simply by regulation.
Justice Byron R. White: But Congress could I suppose.
Mr. Stephen R. Barnett: Congress could.
Justice Byron R. White: But you don't think that you don't think under the statute the SBA will have the authority to provide so provide by regulations.
Where did they get the authority to subordinate its interest to purchase money mortgages?
Mr. Stephen R. Barnett: I don't know, I will have to recheck my statement Mr. Justice White, I simply don't know whether would have the authority under regulation to do that or not to protect itself, to enact the rule that we are saying here is a rule of federal common law.
Justice Byron R. White: Well, you mean that a rule that this Court would enact?
Mr. Stephen R. Barnett: Yes, would recognize as federal common law.
I don't know, I rather doubt but I do not want to say where the SBA would have that authority under regulation.
Justice William H. Rehnquist: What if the FHA here at foreclose, or its during the shoes of the tractor owner and the tractor was being held by the repair people pursuant to the mechanics lien and the only claim made was the amount owed for that particular repair by the eighth time.
Do you think that the FHA could have gotten the Writ of Replevin or something that enforce the tractor owner to surrender -- the repairmen to surrender it?
Mr. Stephen R. Barnett: Yes, yes, as I was saying the first in time rule goes way back in this Court and has been uniformly applied by this Court.
The Second Circuit for example recognize that in the MacArthur Senior Village case, the Congress in the Tax lien Act of 1966 did of course make some exceptions to the rule in the case of federal tax liens but as the Second Circuit pointed out those exceptions were carefully tailored.
In particular the Second Circuit in the MacArthur Village case noted one such exception in the Tax Lien Act 26 U.S.C. 6323(b)(7) which applies to mechanics liens for the repair or improvement of a personnel residence containing not more than four dwelling units, occupied by the owner of such residence but only if the contract price is not more than $1000.
Well, now if the decision of the Court of Appeals here were appalled the decision that relies in part on the federal Tax Lien Act, one may wonder among other things, what the law would be with respect to this particular kind of mechanics lien or any other particular kind.
Would the Court here gives super priority to the that kind of lien even though the Tax Lien Act would not, would it give super priority only up to the amount of a $1000, would it incorporate to a limited of only four dwelling units in the residence.
This is we submit an example of the kind of uncertainties that are created by the decision here and we submitted wouldn't help to adopt any of the alternatives to the Court of Appeals ad hoc Eclecticism here for the reasons I noted a few moments ago on response to Mr. Justice Rehnquist, we submit that we are not held to adopt state law for one thing state law is very inconsistent on the précised question here for another thing uniformity is important we think and for yet another thing the policy that state law should not be able to hold sway over federal property interest is involved, now of course it can be said that if this court were to borrow or to adopt the rule borrowing state law, the Court is of course always free to examine a particular state law to determine whether its hostile to federal interest or aberrant.
But we submitted that would be a lot of ad hoc law-making for this Court to do and would involve supervision and criticism of state laws in a very large area the whole of commercial law, which would be approaching inferior to that of adopting or adhering to the clear federal rule first in time, first in right.
It is --
Justice Byron R. White: Unless that happened to be varied by an agency regulation?
Mr. Stephen R. Barnett: Well, again I don't know about an agency regulation but certainly it could be varied by Congress.
Justice Byron R. White: Well, didn't the SBA regulation on purchase money mortgages vary that?
Mr. Stephen R. Barnett: It varied by subordinating its claim.
My point is I'm not sure that the yes the agency regulation can subordinate its claim, I'm not sure whether it can strengthen or protect its claim.
The result reached by the Court of Appeals here is one that no one could have predicted and one we submit should not be appalled because it would create havoc with commercial transactions.
Now it may be suggested, it has been suggested that the model UCC should be adopted instead because it is suppose that the uniform has state law isn't on this question and because it would not be such a unique concoction as the Court of Appeals reached here.
However, we submit that alternative would not be acceptable either.
Justice Byron R. White: Well, Mr. Barnett, I take it from what you said while ago I just want to check that, you say 13 states would permit the lien or the credited lien or to replevin the property from the mechanics lien holder.
Mr. Stephen R. Barnett: Yes, at least 13 states have statutes that had been held to give priority to the earlier lienor against the subsequent repairmen and I assume that would allow replevin as well as --
Justice Byron R. White: Without paying his bill?
Mr. Stephen R. Barnett: Yes.
If the UCC is looked to one problem was that here and it is a problem that implicates the Kimbell case as well is that the UCC here itself refers to state law, so that if state law is inconsistent the resulting rule would be inconsistent as well and as I mentioned in the Kimbell argument that it seems to us as a problem with a adopting the UCC in the Kimbell situation how do you exclude the situation in mechanics liens that is presented here, just what is the scope that the of the rule that is being adopted, how would one know to what extent and with respect to what kinds of liens Court should use the UCC or should not.
Justice William H. Rehnquist: Don't state Courts also frequently differ in their interpretations of provisions with the UCC?
Mr. Stephen R. Barnett: That is another respect in what the UCC is inconsistent, it is not uniform, it has not been adopted everywhere, it has not been adopted in the Louisiana at all, the provisions of the original UCC the 1962 version have themselves not been adopted everywhere as illustrated by Georgia's failure to adopt the provision in this case.
Amendments are not adopted immediately if at all and judicial interpretations vary and as the First Circuit pointed out in the Chicago title case with respect to mechanics liens in particular there are many local eccentricities.
We see no way in which those eccentricities could fail to lead to confusion and uncertainty in the situation of this case and we see no way in which if the UCC were adopted in the Kimbell situation, those uncertainties would not creep into the rule to create havoc in the general rule and we submit that it is for Congress to determine to what extent federal contractual liens and in what precise respects federal contractual lien should be subordinated to the UCC to state law or anything else and again we find it significant to what Congress did in the 1966 Tax Lien Act was to reject the proposal that it simply adopt state law and place federal tax liens on the same basis as other liens under state law but instead adopted a carefully crafted set of federal rules for federal tax liens.
Justice William H. Rehnquist: You need the transposition of choateness from the tax insolvency field under the commercial loan field in this case to win for you?
Mr. Stephen R. Barnett: No, not in this case because in this case our lien is first in time by any definition.
We don't have to rely on the choateness rule in this case at all.
Justice Potter Stewart: Choateness really isn't an issue here, the lien simply didn't exist choate or un-choate until later?
Mr. Stephen R. Barnett: Exactly, whatever choateness means a lien is presumably inchoate when it does not yet exist.
Justice Potter Stewart: Right.
Justice Byron R. White: But what's really being challenged here is the first in time rule?
Mr. Stephen R. Barnett: Yes, exactly, exactly.
Well, now respondent has made an equitable argument that it is somehow unfair to the -- unfair for the first lienor to be given priority on the basis of first in time, first in right that the repairmen contributes value to the chattel and it is unfair to deprive him of a prior lien for that value.
We think there are several reasons why that argument should not be accepted, one is it significant that it has not been accepted in a number of states at least 13, the equity that is so clear to respondent is apparently not so clear to legislatures in that state.
In addition it should be noted that in reality we are not the first in time rule does not mean that the first lienor has an unchangeable primacy, it simply sets a starting point from which the parties made deal, a clear starting point.
If it is true that the value of the repairs would increase the value of the chattel more than the price of the repairs then it follows the first lienor would presumably consent to release of the portion of the collateral for the repairs and indeed the FHA in the security agreement in this case we take precisely that option in the record at A9, the security agreement on one hand requires the debtor to careful and maintain the collateral in good and husband like manner and goes on to provide in paragraph 3F that the FHA has the right to advance funds for the preservation or protection of the collateral with such advances to be added to the amount of the note at the same way of interest, so the question really is who decides whether the repair will increase the value of the chattel and is provident thing to do.
The first lienor the FHA here has tried to maintain to retain that right of decision and we submit that under the rule of first in time that right appropriately belongs to the first lienor and that there is nothing inequitable about that case.
The repairs may well be reasonable is conceivable however that they are not reasonable without suggesting that they are unreasonable in this case and might be pointed out that we have more than $2000 worth of repairs on a tractor that was eventually sold for only 5000.
It is conceivable that the FHA if asked, as it was entitled to be asked, would have decided nor might be better for the farmer to buy a new tractor.
Justice Byron R. White: But how much the Court below say the mechanics lienor had a first lien for?
Mr. Stephen R. Barnett: The Court of Appeals said only for the $500 worth of repairs.
Justice Byron R. White: That's all you are appealing, that's all you are appealing?
Mr. Stephen R. Barnett: That's all we are appealing in this case.
Unknown Speaker: And that was the latest.
Mr. Stephen R. Barnett: That was the last trip to the shop.
Unknown Speaker: (Voice overlap) trip to the shop?
Mr. Stephen R. Barnett: Yes the last trip to the shop.
Well, that's all we are appealing in this case Mr. Justice White the principle of whether the --
Justice Byron R. White: But in the Fifth Circuit that's all that you are subordinated to and any other transactions?
Mr. Stephen R. Barnett: Well, yes but the repairmen might keep possession from the very start.
Justice Byron R. White: Well -- and I will guarantee you never run up $2,000 that certainly wasn't on the first score around, he isn't going to use it.
Mr. Stephen R. Barnett: Well, one may wonder here why he went through -- went up $1,500 returning the tractor each time without doing anything to see whether the farmer would ever be able to pay.
Indeed that raises the question of the so called of the practical problems that respondent cites arguing that there is no way for repairmen to protect themselves if the first in time.
Justice Byron R. White: Mr. Barnett, how do you suggest relieve the matter to Congress, either way we decided we will obviously leave it to Congress, you just want us to decide it your way and then leave it to Congress?
Mr. Stephen R. Barnett: Well exactly and we say that our way is the way that of course was the first in the time rule that this Court has followed since 1827 and that is not only the traditional way but we suggested as the clear uncertain way rather than a way which would cause all sorts of uncertainty and complications but it is certainly true that one way or the other --
Justice Byron R. White: What is the rule under the Model Uniform Commercial Code?
Mr. Stephen R. Barnett: The Model Uniform Commercial Code says that the repairman in possession has super priority unless the repairmen's lien is created by a state statute and that statute provides otherwise at least 13 state statutes do provide otherwise, and thus the rule under the Model Code depends on the rule in the states.
Thank you I like to reserve the rest of my time.
Argument of Howell Hollis
Chief Justice Warren E. Burger: Mr. Hollis?
Mr. Howell Hollis: Mr. Chief Justice, may it please the Court.
The broad impact of this case is reflected in the amicus briefs filed both in this case and in the Kimbell case but the impact is broader than that because the individuals with the federal loan programs would design to protect and to benefit or the indirect are going to be affected by the decision of this Court if it overrules the Fifth Circuit and this is true because the utilization of the first in time choate lien doctrines ultimately creates a situation where a lender or where a mechanic will not be with one who has previously always going to deal with the federal government.
Apparently the government has abandoned the choate lien concept in the context of this case.
In their brief they utilized the Kimbell argument as their first argument and I gather today the counsel is admitted to the Court that choateness is not a concept or not a doctrine this Court may consider in determining whether or not to extend or amplify the first in time rule.
However the first in time rule incorporates and embraces the concept of choateness, so it's somewhat difficult to separate too.
The question is whether to expand a rule that was developed in the context of tax lien statute and the insolvency statute into a commercial arena.
Justice William H. Rehnquist: So the first in time rule was applied by courts long before the term choate was claimed, wasn't it?
Mr. Howell Hollis: The choateness test was -- my understanding was developed to determine that point in time at what you are competing lien was entitled to compete with the federal lien.
So you need to utilize it, when you consider on the first in time doctrine to determine that point in time at which you are competing lien may or may not compete.
Justice William H. Rehnquist: But if you go back to 1827 to the case that applied the first in time, first in right rule as the federal rule.
The Court adopted it wasn't creating a federal rule, it was just adopting what it thought was the common law rule was not it?
Mr. Howell Hollis: That's correct.
Notwithstanding that fact the government attempted to apply the concept of choateness in this case and did so in the brief.
Justice Thurgood Marshall: I understand in Georgia if it's been private there would be no problem other than the FHA, I mean if it had been a private loan or private instrument, they would had no problem.
Mr. Howell Hollis: There would be no problem if we were in a state court but there is a problem in as much as the government contented in the Fifth Circuit that state law is not clear as to whether or not the mechanic would have a priority under split Georgia statute.
Justice Thurgood Marshall: Do you say it is clear?
Mr. Howell Hollis: I say it is clear by virtue of the argument which we made in the later portion of our brief and which the District Court Judge applied in this case.
Justice Thurgood Marshall: Do we have to buy that in order to affirm?
Mr. Howell Hollis: No this Court can affirm the Fifth Circuit court by adopting the federal common law rule based upon the Uniform Commercial Code that the Fifth Circuit adopted.
You start from the proposition as the Court has suggested that it will that federal law must pertain.
Then the next question is what law of what will be the rule of law has been suggested that you can go directly to state law and so we will apply state law period or we will fashion a federal rule based upon something, whether the state law or in the case of the Fifth Circuit upon the Model Uniform Commercial Code.
The rule so fashioned at least does this, it is a commercial rule that was designed and developed for using a commercial transaction, it is not a rule that was designed to determine tax priorities and it is a rule that composed with 1962 instead of late 1800s, it's a recent rule.
The other aspect of utilizing a federal common law rule based upon the Uniform Commercial Code as we have indicated a little earlier and as the Court has become a way of respect to SBA and FHA the regulations in sales direct the lending offices and direct the agencies to utilize and incorporate and take advantage of and consider local law and local enterprise, when determining how to transact their business on a local level on the Uniform Commercial Code, does embrace a concept of locality the very same law, which the government relied upon in this case to a originally perfected security interest.
This Court has never applied the first in time rule of any area of commerce, it's been restricted to the Tax Lien area and the insolvency statute though the government is prevailed upon some of the lower courts to extend and amplify that doctrine.
No statutory basis at all for extending the doctrine and again the FHA regulations rely to the point that the federal government makes in its brief, they contend that the first in time rule is a uniform universal rule and that there are no exceptions.
Justice Byron R. White: Does FHA act or statute say that whenever money is advanced the government shall have a lien?
Mr. Howell Hollis: No, the statute itself requires that FHA advances be secured as the secretary deems necessary and appropriate so directs that FHA conduct himself as a commercial lender that they take back security for moneys advance.
The regulations --
Justice Byron R. White: Well you know the tax law say that at a certain time in the process of collecting taxes, a lien shall arise and specifically gives the government creates the lien.
Is there anything similar to that in the FHA, nor in any other regulation, do the regulations say that what kind of paper the FHA takes to evidence its lien and that sort of thing?
Mr. Howell Hollis: The reading the regulations is somewhat experience from reading Uniform Commercial Code, you have the concept of a security agreement, which was developed in the --
Justice Byron R. White: So, all this is right in the regulations I think?
Mr. Howell Hollis: Yes, sir it goes it's part and parcel.
For example there is even one portion of the regulations that informs the local lender about an esoteric farm loan for less than $2500, which is a Modern UCC provision, it's really --
Justice Byron R. White: So what if you found in these set of regulations they provision that, that is strictly in conflict with a the Uniform Commercial Code, the Model Act and b the way its enacted in a particular state.
Would you think that the regulation would govern?
Mr. Howell Hollis: Under the government's position --
Justice Byron R. White: Well, talking about your position, if say the regulation was flatly contrary to a provision in the Uniform Commercial Code as adopted in the relevant state, would the regulation govern or not?
Mr. Howell Hollis: To determine priorities.
Justice Byron R. White: Yes for example.
Mr. Howell Hollis: We contend that it would not that the uniform.
Justice Byron R. White: Because of what?
Mr. Howell Hollis: Because the Court should apply a federal rule such as the one fashioned by the Fifth Circuit as you --
Justice Byron R. White: You apparently concede that it would be federal law?
Mr. Howell Hollis: I don't concede that this Court should apply federal law but apparently the Court has already indicated that the base question is whether or not to consider this as a federal case or a purely state case.
Justice William H. Rehnquist: Well, aren't there two different questions.
One is whether it is a federal question as to the priority of the lien and another question is conceding that it is a federal question does the court deciding that federal question referred to a body of state law, to a body of federal common law or to some other body of law?
Mr. Howell Hollis: I think that's exactly what I'm attempting to say is that those are the two questions.
First we are going to decide it conceptually as a federal rule and then we have fashioned a federal although directly to state law as a federal rule.
Justice Byron R. White: But if it is a federal law then, if it is a federal question and then agency regulation was issued covering the disputed issue precisely wouldn't it take precedence over the state law?
Mr. Howell Hollis: I suppose if the regulation was not in conflict with the federal rule that was adopted that it would.
Justice Byron R. White: And if it working conflict with the statute as well, with the federal statute.
Mr. Howell Hollis: Well, in this instance, it would have to be in conflict with the case law because there is no statute.
Justice Potter Stewart: If we decide in this case that it was the duty of the Court stating federal to apply state law for example that as a matter of federal law whatever the duty was to apply state law then the FHA could hardly come out with regulations since to the effect the state law would be disregarded, could it?
Mr. Howell Hollis: Well, I understand it and the way that understood the discussion early, the FHA can issue almost any kind of regulations it wants to.
Justice Potter Stewart: Quite and defines of what might be decided in this case by this case, that's my question?
Mr. Howell Hollis: I'm not sure, whether they --
Justice Potter Stewart: Let's say this Court should decide in this case and its predecessor that what is applicable is the body of state substantive law in this area, whatever the state might be of all -- each of the 50s wherever the transaction is made.
Could the FHA in this case and the SBA in the previous case then come out with rules or regulations saying that state law shall be wholly disregarded and that our liens show, have this or that in the other priority regardless of the provisions of state law, I'm just referring in order to my brother White's question.
Mr. Howell Hollis: I don't, I think they could but it would not seem to me that they will be enforceable regulations.
Justice William H. Rehnquist: Why not unless we put our decision on a constitutional basis saying that this is the only way the government can run its business is constitutionally is by following state law but its never -- non of our cases ever suggested that first in time rule and choateness was a constitutionally with it and it just been a sort of a federal common law that Congress is perfectly free to preempt and supercede and similarly I suppose one of its agencies if it was authorized by a statute to do so.
Justice Byron R. White: Yes, but isn't the question whether there is any statute giving it any such authority.
You are not assuming there is some statutory basis for the FHA to draft one set of priority rules and the SBA to draft another set and then each government agency to draft rules or the things will help in these priority lien situations are you?
Justice Potter Stewart: And also shows inconsistent with whatever the Court says in these two cases.
Mr. Howell Hollis: Well, I don't know I think there is partially relying on it because the FHA has already subordinated some of its liens to some state liens when it didn't have to, hasn't it?
Justice Potter Stewart: Yes.
Mr. Howell Hollis: Yes.
Justice Potter Stewart: If the first in time rule is applicable it has.
Justice William H. Rehnquist: But in case, you feel like an innocent bystander, do you agree with the implication contained in my brother Steven's question that the agency would have either employed or expressed authority under the statute to draft the regulations which my brother White has referred to?
Mr. Howell Hollis: The way I read the regulations, The Enabling Act, the agency has given the authority to do specific things which is to make farm loans or operating loans and the entitle to draft legislation of regulations to implement that.
There is nothing in the enabling statute which would give the government the authority to have a super priority.
So I would not think that the drafting a regulations which granted the government super priority over mechanics liens and purchase money security interest and so forth would be a valid exercise of the congressional agent, of the agencies power.
We have drawn two statutory, two pieces of legislation to support our position that the first in time rule should not be extended one is the Uniform Commercial Code and the other is the Tax Lien Act of 1966, which is the Court indicated the in Kimbell argument earlier, eroded the basis for the extension of the first in time rule and in fact makes a specific exception with respect to mechanics liens and those who would retain possession of personal property for the purpose of asserting a repair lien.
Justice William J. Brennan: With respect to federal tax claims.
Mr. Howell Hollis: With respect to federal tax claims alone, we contended in our brief that the logical extension of the first in time rule would mean that the government would take superiority over purchase money security interest and its reply brief, the government notes that in analyzing that contention that the purchase money security interest would fail, it relies upon the Tax Lien Act of 1966 and the Uniform Commercial Code and some tax revenue rulings.
Importance of this is that the government turns to statute and state law and tax law to determine that it may or may not as it chooses to do so have a priority over purchase money security interest.
So the government flounders for a basis for this exception but it cannot be found.
First in time prevails, it has no exceptions, so what we are asking this Court to do is number one not extend the doctrine in the first instance and number two to call that an exception if it is so extended such as that exception found in the Tax Lien Act but more particularly we would wish that this Court apply the rule of law that the Fifth Circuit apply that of a federal common law based upon commercial rules.
Justice William H. Rehnquist: Aren't there some problems Mr. Hollies with if you apply a federal common law presumably the reason that you are doing it as to achieve some sort of certainty and yet if you resort to the UCC as interpreted by the states, you run into quite a variety of interpretations of some provisions.
Mr. Howell Hollis: Well, the policy question from the other side of the coin is are you putting certainly in the commercial business arena, certainly it is it is certain and sure and claim for the government but it is reasonable to anticipate that people would attempt to make an effort to work within the confines of the choate lien doctrine the first in time rules.
So if the first in time rule is expanded, so that the government has a super priority over after acquired liens.
The private sector, well then come in and make an effort to work with those rules.
So you have complexity on the private level which is of course counterbalanced by the uniformity and simplicity on the federal side.
Justice Potter Stewart: Oh, it's quite apart from differing constructions of the UCC by the various state courts you have in this context the UCC itself gives this super seniority to mechanics liens of this type unless the lien is created by state law and unless that state law provides that there should be no super seniority and were told to some 10 to 30 states don't give super seniority, so you wouldn't get anything likes uniformity in this area, wouldn't you under the UCC itself?
Mr. Howell Hollis: Under the UCC itself you would not.
Justice Potter Stewart: No, he would get defers to state loan in this respect.
Mr. Howell Hollis: Under the Fifth Circuit rule you would get uniformity.
Justice William H. Rehnquist: But you don't know where the Fifth Circuit is going from one case to another under Judge Goldberg's opinion, do you?
Mr. Howell Hollis: Well, they will face with the mechanics lien and the priority these are the affected security interest by the government and they decided that one question.
Justice William H. Rehnquist: Then where do we go next?
Mr. Howell Hollis: Well.
Justice William H. Rehnquist: John (Inaudible).
Mr. Howell Hollis: Alex Chalmers (ph).
Justice William H. Rehnquist: With somebody name Jack Crittenberg is the mechanic.
Mr. Howell Hollis: Where you go, there are traditional exceptions to a first in time rule as the Lehman would know it, who ever gets their first wins.
Some of the exceptions of the purchase money security interest, others are these statutory liens that state recognize.
Those are traditional in nature.
So you are talking about a rule of the Fifth Circuit fashioned to deal with a very traditional kind of case, a very normal kind of transaction on a very local, low level from the standpoint of the Tax Lien Act of 1966 they carved out a similar exception for repairmen and for an attorney's lien and for a perfected security purchase, money security interest.
So you are talking about exceptions to the time (Inaudible) first in time rule and you are talking about traditional exceptions nothing unusual or esoteric about the mechanics lien, it has been around for years especially one that is possessory in nature.
Chief Justice Warren E. Burger: What is the situation with respect if it's possibly relevant and if you know in most of the states as to a lien of a materialman, a painter or anyone else who paints a house which has a mortgage on it in all the states I know about firsthand, which should be 5 or 6 or 7.
The materialman's lien was superior to the lien of the mortgage even though the mortgage was first in time.
Is there any relationship between these two in terms of doctrine?
Mr. Howell Hollis: There is the relationship, the concept of the materialman or the mechanic is the he is one who improves and enhances value of property.
Chief Justice Warren E. Burger: He has preserved well if he didn't answered it, he is at least preserving the security, isn't he?
Mr. Howell Hollis: At least -- at least and as the Fifth Circuit rule fashioned in this case provides protection for one who says that it does not preserve it.
Chief Justice Warren E. Burger: Let me put it another way if you know, do you know of any state in which the materialman's lien would be subordinate to the first lien of the real estate mortgage and the circumstances I mentioned.
Mr. Howell Hollis: There are.
I cannot name the states but there are states that do not for example have a statutory materialman's lien in the first instance or that do not give it priority to a prior perfected first mortgage and these the similar situation is true with respect to personal property apparently because the government has cited some and also some 13 states, which do not give a super priority to the repairs of a mechanic.
So the rule would vary depending upon the state.
And its brief the government seem to elevate the importance of its lending programs to a constitutional level and whatever the underlying or underpinnings of the government lending programs are, they are certainly different from the functions that performs as a taxing entity and the tax arena the government is an involuntary creditor and the debtor is simply a neutral party.
However in a government lending program, the government participates with, bargains with, considers with, talks with is prospective borrower.
It's a voluntary enterprise and it is characterized by a commercial business dealings.
A rule, which comports with commercial business dealings is one fashioned by the Fifth Circuit.
A federal common law rule based upon the Uniform Commercial Code but the utilization, expansion and amplification of a first in time rule which does not comport with commercial expectations and as much as it does not recognize any exception, but is all encompassing and of course in conjunction with the choate test is one buying through which as the Fifth Circuit said the government always wins.
So, the utilization of a commercial doctrine as opposed to one that it does not recognize realities and the practicalities of dealing with the business world would be in a more appropriate rule for this Court to fashion in the absence of any congressional legislation at the contrary.
It's been suggested that the government needs to fulfill a particular interest in protecting its property.
However, as the exceptions to the Tax Lien Act of 1966 reflect the attorney's lien, the repairman's lien, the government is not hurt by the recognition of exceptions to the first in time rule.
And so far as a purchase money security interest is concerned, the government never had it, if the government was not on the scene the debtor would not have had an opportunity to ever obtain additional collateral.
But, the proprietary interest that the government has and the debtor's collateral and debtor's property is not defeated, divested, defaced, eroded by the failure to apply the first in time rule.
The government, in fact is better-off in this case after the tractor is repaired than before it was repaired.
Justice Potter Stewart: Could I make sure did you say earlier you sought the District Court was right on Georgia law?
Mr. Howell Hollis: I believe the District Court was correct and with respect to that.
Justice Potter Stewart: And so you think under Georgia law this lender, if the FHA had been a private lender having perfected its lien the way it was perfected here.
It would have been subordinate to the mechanics lien.
Mr. Howell Hollis: No.
I think that under Georgia law it would have the -- yes, yes it would have been subordinated to the mechanics lien.
Justice Potter Stewart: Not only for the last bill but all of them.
Is that right?
Mr. Howell Hollis: As I contend that and I contend it in the Fifth Circuit.
Justice Potter Stewart: But is not what the District Court did?
Mr. Howell Hollis: And that's what the District Court did.
Justice Potter Stewart: And you think that's consistent with Georgian law?
Mr. Howell Hollis: It was the Fifth Circuit noted no case where anybody ever -- property back and then were wouldn't got it again.
Chief Justice Warren E. Burger: Well, the District Court expressly found that whether under Georgia law or under a federal law?
Mr. Howell Hollis: Federal law state.
Justice Potter Stewart: Did the District Court so find with respect to the first six repair jobs?
Mr. Howell Hollis: In the entire pay bill.
Justice Potter Stewart: Entire but you are no longer asking, I mean you are just trying to defend the last $400 as I remember.
Could you have any cross petitioned?
Mr. Howell Hollis: I have not cross petitioned if --
Justice Potter Stewart: So that you do not know I have a claim for the first five repair bills, I understand.
Mr. Howell Hollis: By virtue of not having cross petition.
Justice Byron R. White: That's true, but it is a matter of the rule to be adopted.
It really makes a difference whether you say you adopt the Uniform Commercial Code without the reference to state law or whether you will just adopt the Uniform Commercial Code?
Mr. Howell Hollis: We would adopt that we believe the Fifth Circuit rule where adopted the Uniform Commercial Code with reference to state law is the appropriate rule.
Justice Byron R. White: Yeah, I know you.
But then, it didn't follow that.
It didn't go to the -- it did not follow Georgian law in that --
Mr. Howell Hollis: It did not decide the whole case.
In fact, the District Court held that we had an equitable lien on the tractor.
The Fifth Circuit said that it didn't feel compelled to reach that question in light of the view that it was taking over the case.
And then so far as the Georgia law is concerned, the Fifth Circuit look to see whether or not a mechanics lien was available under Georgia law and determining that it was made reference to the Uniform Commercial Code, the federal Tax Lien Act the question of complete and total possession the Fifth Circuit noted if it find no case on the subject and we couldn't either.
Chief Justice Warren E. Burger: You clarify for me if you will, what you say is the status now here in this Court of the District Court finding about Georgia law.
Mr. Howell Hollis: I believe that the District Court's decision with respect to Georgia law could be the basis for this court upholding its interpretation of Georgia law in granting Crittenden the super priority in this case.
Chief Justice Warren E. Burger: What the Fifth Circuit do about that?
Mr. Howell Hollis: The Fifth Circuit did not need to reach the question of --
Chief Justice Warren E. Burger: Should we decide that here when the Fifth Circuit is assuming thought we should reach it, should we decided here and the Fifth Circuit did not reach it?
Mr. Howell Hollis: I don't believe that this Court should decide it first of all or second that it need to that it can either remand it to the Fifth Circuit or that it can adopt the opinion of the District Court.
Chief Justice Warren E. Burger: But I take it to agree with if the Court concluded we needed to decide that, we needed to decide that, we shouldn't decide it here when the Fifth Circuit didn't reach it.
Is that right?
You say we don't need to reach it, but going hypothetically now.
Mr. Howell Hollis: I don't believe you need to decide that.
In conclusion, the choate lien test in the first in time rules transport at the end of the commercial area cannot to help to create -- I see my time is running.
Rebuttal of Stephen R. Barnett
Chief Justice Warren E. Burger: Thank you.
Do you have any further Mr. Barnett?
Mr. Stephen R. Barnett: Just one single point, Mr. Chief Justice.
The question has been suggested that the Clearfield Trust case and the policies inherent in it perhaps need reconsideration by the Court.
I would simply point out that the Court below in both of these cases explicitly held that federal law governs the cert petitions present and no question on the score.
And if the Court were to be interested in reconsidering Clearfield Trust, we would be interested in submitting a brief on that question now.
I know that it hasn't been suggested that Clearfield Trust be reconsidered with the spect of the question of whether it's a decision of federal law or not, but we would submit that if state law is to borrowed on a wholesale basis that implicates the policies embodied in the Clearfield Trust decision.
We submit that the main policy embodied there is uniformity and if state law is to be borrowed on a wholesale basis, one is going to encounter on certainty, sacrifices of the federal interest and perhaps even more uncertainty than one would have if one decided that it was a state question in the first place.
Justice Potter Stewart: It doesn't remove the matter from congressional reach or from agency reach if Congress gave the agency the regulatory authority.
Mr. Stephen R. Barnett: That is true.
I simply wish to suggest that if that question is to be reconsidered, we would be willing to submit a brief on it.
Chief Justice Warren E. Burger: Thank you, gentlemen.
The case is submitted.