United States v. Walter Dunlap & Sons, Inc., in 85-1671. United States of America v. New Holland Sales Stables, Inc., in 85-1673 ( 1986 )

ADAMS, J., Circuit Judge,

concurring.

I concur in the result reached by the majority, but because I arrive at the same conclusion by an approach quite different jurisprudentially from that employed by the majority, I write separately.

I.

It is common ground that under Clearfield Trust Co. v. United States, 318 U.S. 363, 363, 63 S.Ct. 573, 573-74, 87 L.Ed. 838 (1943), federal law governs in this case. See also, United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). The troublesome issue concerns the content of the federal law.

Clearfield Trust declared that “[i]n the absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards.” 318 U.S. at 367, 63 S.Ct. at 575. In providing the substance of the federal law in the absence of federal legislation, courts are generally faced with a choice between fashioning federal common law or adopting the applicable state law. Kimbell Foods clarified Clearfield Trust by elaborating the factors to be considered when weighing, in the absence of legislative direction, the choice between judicially fashioned federal common law or judicial adoption of state law, in giving the federal law content.

In the case at hand, in contrast, there is valid non-judicial federal law, in the form of an agency regulation promulgated pursuant to an act of Congress, that is applicable to the legal question presented. Consequently, the rule of thumb provided by Kimbell Foods for guiding judicial crafting of the contours of federal law is inapposite. This, I respectfully suggest, is where the majority’s analysis of this issue may have gone astray.

As one commentator has observed concerning federal court adoption of state law,

[t]he adoption doctrine involves several considerations similar to the preemption doctrine ..., but the adoption issue arises not when there are both federal and state laws on the issue in question, but when a state law of general applicability is considered as a means of determining an issue on which Congress is silent. While the presence of congressional intent to occupy the area of law is one ground for preemption, the absence of any congressional intent is one of the prerequisites for the existence of the adoption issue.

Note, Adopting State Law as the Federal Rule of Decision: A Proposed Test, 43 U.Chi.L.Rev. 823, 827 n. 28 (1976) (emphasis added). Accordingly, it is clear that the first question in giving effect to federal law is whether the Congress has provided, directly or indirectly, any relevant legislation. This is so because the judicial branch may fill the void, with specialized federal common law or adopted state law, only if there is a void to be filled.

Because the federal government, its judicial branch included, is one of limited powers, the ultimate sources of federal law are usually thought of as reposing not in the pronouncements of the courts but in the constitutional and statutory texts that define the reach of federal governance. The federal judicial function is habitually regarded as explication of the texts.

Hill, The Law-Making Power of the Federal Courts: Constitutional Preemption, 67 Colum.L.Rev. 1024, 1024 (1967). “Thus, when a federal court announces a federal rule of decision in an area of plenary congressional competence, it exercises an initiative normally left to Congress, ousts state law, and yet acts without the political checks on national power created by state representation in Congress.” Monaghan, The Supreme Court, 1974 Term, — Foreword: Constitutional Common Law, 89 Harv.L.Rev. 1, 11 (1974). “Federal intervention has been thought of as requiring special justification, and the decision that such justification has been shown, being essentially discretionary, has belonged in most cases to Congress.” Hart, The Relations Between State and Federal Law, 54 Colum.L.Rev. 489, 497 (1954).

It is, moreover, firmly established that when Congress has spoken, the courts may not ignore the legislative directive, save for unconstitutional enactments, and instead fashion their own judge-made law. Marbury v. Madison, 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803). The judicial role outlined in Clearfield Trust and Kimbell Foods, then, is circumscribed by the doctrines of federalism and separation of powers. The Kimbell Foods test comes into play only when the judiciary is called upon to supply the substance of federal law because none has been furnished by other appropriate federal law-making authorities.

This constitutional principle has been all too often ignored, however, in the improvident resort to Kimbell Foods. The two cases that comprised Kimbell Foods arose in situations in which no agency regulation existed or was asserted to exist;¹ instead, in both cases, the lower courts framed their own federal rules to cover the situations. 440 U.S. at 718-27, 99 S.Ct. at 1453-58. The issue before the Supreme Court was the choice between such judicially-crafted rules of national application and adoption of the law of the forum state. The agencies concerned in the Kimbell Foods cases (the Small Business Administration and the Farmers Home Administration (FmHA)) argued for implementation of the favorable national rule devised and applied by the courts. When the Supreme Court rejected the rule formulated by the district courts, it did not reject an agency regulation of national application in favor of adopting state laws. Nor did Kimbell Foods hold that, as to all issues surrounding federal non-tax liens, state law rather than a national rule must be applied, thereby invalidating federal statutes or regulations. Rather, the Court held merely that in the absence of such non-judicial federal law, state law rather than a judicially created national rule should govern the issue of lien priority.

Congress is not the only appropriate source of federal law to which the courts must look before developing federal law judicially. Valid agency regulations must also be regarded as non-judicial sources of binding federal law.

The Constitution has never been regarded as denying to the Congress the necessary resources of flexibility and practicality, which will enable it to perform its function of laying down policies and establishing standards, while leaving to selected instrumentalities the making of subordinate rules within prescribed limits and the determination of facts to which the policy as declared by the legislature is to apply. Without capacity to give authorizations of that sort we should have the anomaly of a legislative power which in many circumstances calling for its exertion would be but a futility.

Panama Ref. Co. v. Ryan, 293 U.S. 388, 55 S.Ct. 241, 79 L.Ed. 446 (1935). Thus, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency regulations have the ‘force and effect of law.’ ” Chrysler Corp. v. Brown, 441 U.S. 281, 295, 99 S.Ct. 1705, 1714, 60 L.Ed.2d 208 (1979) (citing Batterton v. Francis, 432 U.S. 416, 425 n. 9, 97 S.Ct. 2399, 2405-06 n. 9, 53 L.Ed.2d 448 (1977)). See also Foti v. INS, 375 U.S. 217, 223, 84 S.Ct. 306, 310-11, 11 L.Ed.2d 281 (1963); United States v. Mersky, 361 U.S. 431, 437-38, 80 S.Ct. 459, 463-64, 4 L.Ed.2d 423 (1960); Atchison, T. & S.F. Ry. Co. v. Scarlett, 300 U.S. 471, 474, 57 S.Ct. 541, 543, 81 L.Ed. 748 (1937). “This doctrine is so well established that agency regulations implementing federal statutes have been held to pre-empt state law under the Supremacy Clause.” Chrysler, 441 U.S. at 295-96, 99 S.Ct. at 1714-15. Since valid agency regulations as well as congressional legislation will be given effect by the courts, the Kimbell Foods issue arises, and courts must devise the content of federal law themselves, only if neither non-judicial source of federal law is present. Clear-field merely “directs federal courts to fill the interstices of federal legislation.” Kimbell Foods, 440 U.S. at 727, 99 S.Ct. at 1458.

II.

The question here, then, is whether the federal regulations in question, 7 C.F.R. §§ 1962.17 & 1962.18, represent “properly promulgated, substantive agency regulations” that “have the ‘force and effect of law.’ ” Chrysler, 441 U.S. at 295, 99 S.Ct. at 1714. Under Chrysler, an agency regulation has the force and effect of law if: (1) the power to legislate on the subject and to promulgate the rule in question has been granted the agency by Congress and the regulation was promulgated in conformity with the congressionally mandated limitations; and (2) the regulation is a substantive (or “legislative”), rather than an interpretative, rule. Chrysler, 441 U.S. at 301-03, 99 S.Ct. at 1717-18.

A.

Authority to promulgate the regulations in question here derives from 5 U.S.C. § 301, and 7 U.S.C. §§ 1631(g), 1921 et seq., and 1989 (1985). This authority is delegated to the undersecretary of agriculture by 7 C.F.R. § 2.23, and thence to FmHA under 7 C.F.R. § 2.70. For nearly half a century, such delegations of legislative authority have been the norm.

The majority in its opinion seeks to lay down several new — and somewhat questionable — doctrines of administrative law: First, the majority seems to assert that Congress must explicitly delegate every rule an agency drafts — that Congress had to enact a statute empowering FmHA, in so many words, to formulate a rule specifying that sale profits must be appropriately applied in order for a lien to dissolve. Such a view has not been the law since Panama Refining, supra. Unless the majority is prepared to suggest that federal regulations governing federal liens securing federal loans are beyond the power delegated by the legislation, establishing the loan program and authorizing the agency to administer it and promulgate regulations governing it, the required “nexus between the regulations and some delegation of the requisite authority by Congress,” ante, at 1238 (quoting Chrysler Corp., 441 U.S. at 302, 99 S.Ct. at 1717-18), would seem to be clear.

Further, the majority presents a somewhat narrower objection: that the declaration in Kimbell Foods that “the stability of state commercial law should not be altered ‘in the absence of careful legislative deliberation,’ ” ante, at 1238 (quoting Kimbell Foods, 440 U.S. at 737, 99 S.Ct. at 1463), renders ineffectual the agency’s attempt to regulate in this area under Congress’s broad delegation of authority. Because the Supreme Court in Kimbell Foods stated that farm loan liens constitute an area in which congressional intent should be manifest before courts overturn state law, the majority argues that this consequently is an area in which agencies should not promulgate regulations altering state law without manifest congressional intent.

It would be a novel approach to administrative law to suggest that the courts may declare certain subject areas of federal legislation to be for Congress alone absent a specific congressional mandate, thereby not only constraining improper judicial legislating but also vitiating, as to such subjects, proper “general enabling provisions,” see ante, at 1239. The majority cites no authority for such a proposition, nor could it. In fact, no decision of the past 49 years could stand for “a finding that in the area of federal lending programs regulations ... enacted under a general enabling provision ... do not constitute the sort of explicit ‘congressional directive’ that will displace the application of state law as the federal rule of decision.” Ante, at 1239. As discussed supra at 1240-1242 Kimbell Foods in no way stands for such a finding as regards agency regulations, but stands rather for the proposition that courts should not upset state law in such areas absent a directive from the federal lawmaking branches.

The majority’s jurisprudence on this point also implies that courts should ignore federal regulations in some, if not all, cases when there is conflicting state law extant. See ante, at 1238. This clearly would be contrary to the supremacy clause.

B.

Dunlap’s primary argument, however, is that, under the first prong of the Chrysler test, the regulation in question is “interpretative” rather than legislative in nature. An interpretative rule, which does not have the force and effect of law, gives guidance to the staff of an agency and to affected parties regarding “how the agency intends to administer a statute or regulation. In contrast, a legislative rule, rather than merely setting forth an agency’s own interpretation of a statute it administers, actually implements that statute and, in so doing, ‘creates’ new law ‘affecting individual rights and obligations.’ ” New Jersey v. HHS, 670 F.2d 1262, 1281-82 (3d Cir.1981). See Chrysler, 441 U.S. at 302, 99 S.Ct. at 1717-18 (describing a “substantive rule” as “one ‘affecting individual rights and obligations’ ” and observing that “[t]his characteristic is an important touchstone for distinguishing those rules that may be ‘binding’ or have the ‘force of law’ ”).

Appellants here contend, and the majority agrees, that the regulation is directed principally to FmHA employees; that it merely instructs employees how to answer inquiries from purchasers who inquire of the agency and provides guidelines for when to consider a lien as still in force for agency purposes; and that it does not by its terms impose any legal duty on purchasers. Ante at 1238. See also United States v. Central Livestock Corp., 616 F.Supp. 629 (D.Kan.1985).

In light of this contention, the question becomes whether the FmHA promulgated these rules merely as internal guidelines, or as substantive law “affecting individual rights and obligations.” The Court of Appeals for the District of Columbia Circuit recently held that “[t]he real dividing point between regulations and general statements of policy is publication in the Code of Federal Regulations, which the statute authorizes to contain only documents ‘having general applicability and legal effect,’ 44 U.S.C. § 1510 (1982) ..., and which the government regulations provide shall contain only ‘each Federal regulation of general applicability and current or future effect,’ 1 C.F.R. § 81 (1986)....” Brock v. Cathedral Bluffs Shale Oil Co., 796 F.2d 533, 539 (D.C.Cir.1986) (emphasis in original).

The rule at issue here was propounded in conformity with the Administrative Procedure Act, and notice of the proposed rule-making was published in the Federal Register at 44 Fed.Reg. 4436 et seq. (Jan. 22, 1979). Dunlap contends that the rulemak-ing was procedurally deficient because the notice “gave no inkling that [FmHA] was promulgating anything more than technical instructions to its officers on when and how to release liens.” Brief for Appellant at 5 n. 2. The Notice of Rulemaking published in the Federal Register, however, announced, “This regulation is being published as a rule, with a request for comments, since the purpose of the change is to restructure existing regulations and incorporate provisions of the Agricultural Credit Act of 1978.” 44 Fed.Reg. 4437.

Turning to the regulations themselves, while a single clause of the regulations is phrased in hortatory terms to agency employees (“for example, if a borrower requests a release of 5 cows, make sure that not all the cattle are released,” § 1962.-17(d)), the mandatory nature of the regulations is clear. See, e.g., § 1962.18(b) (“The borrower must account for all security____ When borrowers sell security, the sale will be made subject to the FmHA lien. The property and proceeds will remain subject to the lien until the lien is released or the sale is approved by the County Supervisor and the proceeds are used for one or more of the [permissible] purposes.”) (emphasis added). The regulations make plain that the FmHA lien will not be released unless (a) the sale of the encumbered asset is approved by the FmHA county commissioner, and (b) the proceeds of the sale are applied only toward a permissible end. Failing this, it is FmHA’s intent under the regulation that the lien not be dissolved.

The majority asserts:

No federal statutory source is cited for this additional dictate, and the regulation appears to be an agency creation aimed solely at increasing the government’s collection efficiency. As worthy as that motive might be, it does not have Kim-bell’s support.

Ante at 1238. With all respect, I cannot agree. The purpose of the FmHA loans and the attendant Farm Management Plans is not merely the sale of the cattle but the repayment to the government of the loan from the proceeds of such sale. Although other, limited expenditure needs may be met out of the proceeds of the sale, in general the loan recipient must make repayment of the loan a primary use of the proceeds of sale. The FmHA, like any lender, protects itself in this arrangement by encumbering the collateral so that if it is sold and the sale proceeds are not used to repay the loan, the agency may recoup its outlay by taking possession of the collateral or by bringing a conversion action for its value. The agency thus requires that its lien against the collateral continue in effect beyond the agency-approved sale of the collateral until it can be assured that the proceeds are being used appropriately, whereas under the UCC (and, thus, most state laws), the agency’s consent to the sale would dissolve the lien. For this reason, the FmHA needs explicitly to override state law to achieve its purpose, and this it constitutionally and statutorily may do.

In addition, the regulations provide a way around any hardship caused by imposing upon third parties who transact business with encumbered farmers the de facto obligation to oversee the farmers’ use of the sale proceeds subsequent to the conclusion of their transaction: They stipulate that the agency will release the lien if the proceeds of the sale are handed over by the third party not to the farmer but rather jointly to the farmer and the FmHA.² But the fact that FmHA gives third parties such as Dunlap the option of avoiding, through issuance of a joint-payee check, continued exposure to conversion until farmers dispose of sale proceeds properly, rather than mandating issuance of such checks, does not reduce the regulations to a mere statement of policy or render their provisions inapposite.

The FmHA regulations appear, then, to be intended as substantive provisions that establish a new (non-UCC) requirement for the dissolution of FmHA liens. Clearly, the FmHA did in fact intend that state commercial law should not apply when the result would be the detrimental release of FmHA’s lien. This is neither an unconstitutional nor illogical policy. The regulation in question constitutes valid and enforceable federal law. It is thus the law governing this case. To ignore the FmHA regulations would require declaring them invalid as ultra vires, a step that has nothing whatsoever to do with Kimbell Foods, and one that should be recognized, and made explicit, if that is what the majority intends to do here. Under settled principles of administrative law, I do not believe there is any basis for such a declaration, and failing that, there is no compelling reason not to give the regulations the force of law.

In sum, in Kimbell Foods the Supreme Court addressed the propriety of judge-made law in the absence of a congressional mandate, not regulations promulgated by a federal agency under a congressional grant of authority. Thus, that case does not control here, and the applicable FmHA regulations should apply. Accord United States v. Farmers Co-op. Co., 708 F.2d 352, 353 n. 2 (8th Cir.1983) (“[W]e agree with the government that 7 C.F.R. § 1962.-17 governs the release or its security interest.”).

III.

There remains, however, the question of the proper application of the regulations. The majority notes, as an alternative ground for its holding, and I agree, that the appropriate interpretation of FmHA’s own regulations would be that the cattle at issue represented “normal,” rather than “basic,” security. Ante at 1239-1240. That being so, two conditions need be met under § 1962.18 for the release of the agency’s security interest: (1) that the FmHA consents to the sale, and (2) that the proceeds be applied toward an end permissible under § 1962.17.

The trial court found that FmHA consented to Noll’s sale of the cattle. See ante at 1234, 1234, 1237. And the agency admits that, were the cattle to be classified as normal rather than basic security, the conditions imposed by § 1962.17 would be met. See ante at 1240. Since I agree with the majority’s characterization of the security interest in Noll’s cattle as normal security, I would hold that under the applicable FmHA regulations the agency’s security interest was released upon Noll’s sale of the cattle. The appellants in this case therefore are not liable for conversion of the cattle.

IV.

In United States v. Kennedy, 738 F.2d 584 (3d Cir.1984), this court agreed that the Kimbell Foods test is inapplicable if there is a federal source of federal law, but interpreted this to include prior judicial rulings. This would mean, however, that once a federal court laid down a federal common law rule, subsequent courts would be bound to follow it as furnishing the appropriate federal content — even though Kimbell Foods explicitly declared that such national judge-made law is not to be fashioned or followed where state law would suffice. Kennedy erred, it seems, in asserting that prior court decisions can provide the federal element that obviates resort to the Kimbell Foods analysis. (Such decisions can, of course, supply the federal common lav/ should the Kimbell Foods analysis favor application of a national rule.)

Kennedy, however, cannot be dismissed as quickly as the majority seeks to do. Despite the fact that Kennedy came before us on a motion for summary judgment, the issue presented to the Court — whether the government had stated a claim for relief-required the Court to reach the question whether state or federal law applied, and, if federal law applied, its content. This Court ruled that Clearfield Trust mandated that federal law control, and then stated that “because the general federal law of conversion has already been defined” by a prior ruling of this Court, “we are not acting in the absence of an existing federal rule,” and therefore “we are not at liberty to adopt state law as the measure of the federal rule.” 738 F.2d at 586 n. 3. This explication in the Kennedy opinion precedes, both logically and in fact, the ruling on the sufficiency of the government’s factual allegations. See id. at 587. It thus would be inaccurate to rule that “the [Kennedy ] panel went on to discuss why state law was inapplicable” only “[a]fter resolving the issue presented” concerning the sufficiency of the government's allegations, and that, therefore, this portion of the Kennedy holding is mere dictum. Ante, at 1235. Moreover, while I agree that Sommerville does not constitute binding precedent because of the intervening Supreme Court opinion in Kimbell Foods, see ante, at 1237 n. 7, this exception to our Court’s Internal Operating Procedures (IOP’s) does not apply to Kennedy: Kennedy was decided by this Court subsequent to the Kimbell Foods decision, purportedly in conformance with its dictates. Although Kennedy adopted as the rule of law the Sommerville decision to which we need not adhere, that does not mean that Kennedy itself is a ruling that we may similarly ignore under our IOP’s.

Although I joined the court’s opinion in Kennedy, I can no longer concur in its reasoning. Where valid federal regulations exist, as in Kennedy and here, there is no need to resort to federal common law, whether crafted for the specific case or for prior cases. Accordingly, I believe that it would be in order for the Court to grant rehearing in banc to clarify the controlling law for the bench and bar of this circuit.

V.

In sum, I concur in the Court’s judgment because I agree with its alternative holding that the cattle in question represented normal security under the regulations, and the lien therefore was released by the FmHA-approved sale. I do not join, however, the Court’s analysis regarding the validity of the regulations and their applicability in the face of contrary state law. In addition, I believe that the Court might wish to consider this issue in banc in order to clear up any confusion regarding federal farm lien law, by clarifying the important process by which a court must give content to federal law.

1 . The majority notes that the Kimbell Foods Court reached its conclusion "only after comprehensive citations to various regulations which had a bearing on the issues presented. See 440 U.S. at 731-33, 737 [99 S.Ct. at 1460-61, 1463].” Ante, at 1238. These regulations had bearing on the issues, however, only to show that the agencies themselves recognized the importance of, and relied upon, state laws in their other areas of operations, thus weakening the argument that a national rule needed to be fashioned by the courts. Agency regulations "‘were in the picture’” in the sense that the agencies did indeed have regulations. None of them, however, governed the point in question before the Court, which was precisely why the Kimbell Foods Court was faced with a choice between federal (common) law and incorporation of state law.

2 . These requirements, of course, still impose upon third parties an obligation to inform themselves of any lien outstanding against the products they handle. This obviously places a burden on auctioneers who, under the Packers and Stockyards Administration rules, must turn the proceeds of the sale over to the farmer by the close of business of the following day. The Food Security Act of 1985, 7 U.S.C. § 1631 (effective Dec. 26, 1986), will alleviate this problem. As the majority notes, the 1985 Act "provides that a commission merchant shall not be subject to a security interest in products of others which he sells, unless he receives detailed written notice of the lien within one year before the sale.” Ante at 1239. This problem, then, will in the future cease to plague auctioneers such as appellants, who would otherwise admittedly be placed In something of a dilemma by the combination of the FmHA regulations, on the one hand, and the Packers & Stockyards Authority regulations, on the other.