First Community Bank, Plaintiff-Appellant, v. Maureen Gaughan, Chapter 7 Trustee, Defendant-Appellee.
No. 14-16854
United States Court of Appeals, Ninth Circuit.
March 31, 2017
850 F.3d 508
IN RE Larry MILLER, Debtor, Argued and Submitted October 18, 2016 San Francisco, California
IN RE Larry MILLER, Debtor,
Steven J. Brown (argued), Steven J. Brown & Associates LLC, Phoenix, Arizona, for Defendant-Appellee.
OPINION
KORMAN, District Judge:
Larry and Kari Miller, both Arizona domiciliaries, owned a cooperative apartment located at 2170 Jackson Street in San Francisco, California. The co-op was held in each of their names, as husband and wife. First Community Bank, a judgment creditor of Larry Miller, obtained a lien against the Millers’ co-op.
Under Arizona law, the co-op would be treated as community property. See
Under California law, the co-op would not constitute community property because it was not acquired by the Millers while they were domiciled in California. See
FACTUAL BACKGROUND
Against this backdrop for the choice-of-law issue presented by this case, we turn to a more detailed discussion of the underlying facts. Larry Miller was the President of Miller Holding Investments, Inc., which in turn was the General Partner of both El Paseo Partners, L.P. and El Rancho Partners, LP, both limited partnerships organized under California law. First Community Bank (“FCB“) is a California corporation, doing business in the State of California, with its principal place of business in Sonoma County, California.
In December 2006, FCB extended credit to Paseo and Rancho in exchange for a Business Loan Agreement, a Promissory Note in the original principal amount of $5,744,000, and a Commercial Guaranty from Miller that personally secured repayment of all obligations owed to FCB under the Note and the Loan Agreement. All three of these contracts selected California‘s local law as the governing law. The Business Loan Agreement and the Promissory Note both stated on their face that they were accepted by FCB in California. Indeed, the guaranty given by Miller not only selected California as the governing law, it also provided that “[a]ny married person who signs this Guaranty hereby expressly agrees that recourse under this Guaranty may be had against both his or her separate property and community property.” Unfortunately, Paseo and Rancho could not live up to their obligations on the loans, and Miller defaulted on the guaranty.
On October 24, 2008, FCB sued Larry and Kari Miller in the United States District Court for the District of Arizona. FCB moved for summary judgment as to liability and damages on Larry Miller‘s breach of the Commercial Guaranty, and also requested a “[r]uling that Kari Miller has received notice and due process in connection with this legal action, to the extent that any of the property subject or potentially subject to enforcement and execution upon the judgment, whether located in the State of Arizona, the State of California or elsewhere, is asserted to belong in whole or in part to her marital community.” Complaint at 7, First Community Bank v. Larry L. Miller and Kari Miller, No. 2:08-cv-01952-NVW (D. Ariz. 2009), ECF No. 1. While the answer filed to the complaint alleged that neither the “Miller[s‘] marital community property, nor Kari Miller‘s sole and separate property, is subject to the claims in [First Community] Bank‘s complaint,” Answer at 14, id., ECF No. 11, the Millers “only legal opposition” to FCB‘s motion for summary judgment was that “California law requires [FCB] first to execute on collateral securing the loan,” before making their motion. Order Granting Motion for Summary Judgment as to Liability at 2-3, id., ECF No. 23.
The district court rejected this argument, and entered judgment against Larry Miller for the principal amount of $5.744 million plus accrued interest and ancillary damages, for a total judgment of $6.373 million (the “Arizona judgment“). Judgment, id., ECF No. 36. The judgment made no reference to the Millers’ community property, although the order granting the motion observed, in dictum and without undertaking a choice-of-law analysis, that “any [liability of the marital community] appears to be precluded by
As of the time that FCB registered its judgment in California, Larry and Kari Miller held an ownership interest, to which reference was made earlier, in real property located at 2170 Jackson Street, San Francisco, California, which consisted of their ownership share in Twenty-One Seventy Jackson Street Corporation and a leasehold in an apartment owned by the co-op.1 On June 23, 2009, consistent with the manner in which a judgment lien is obtained, FCB recorded the California judgment in the Official Records of the San Francisco County Recorder‘s Office.
Several years later, Larry Miller filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in the District of Arizona. Miller‘s proceeding was later converted to a Chapter 7 liquidation. In the course of administering the Miller estate, the Chapter 7 Trustee, Maureen Gaughan, sold the Millers’ co-op. FCB filed an adversary proceeding, seeking a declaration that it held an enforceable judgment lien on the co-op, thereby granting it priority over the proceeds of the sale.
The bankruptcy court held that, “[b]ecause the Miller Judgment was registered in California, California law governs the enforceability of the Miller Judgment against Debtors’ community property located in California, and under California law, Debtors’ community property located in California is liable for satisfaction of the Miller Judgment.” Judgment in Favor of First Community Bank at 4, First Community Bank v. Miller, No. 2:13-ap-00436-EPB (Bankr. D. Ariz. 2013), ECF No. 25. The Millers appealed to the district court.
The district court framed the issue presented as “whether an Arizona judgment against a husband on his sole and separate debt may be executed against the Arizona couple‘s community property in California.” In re Miller, 517 B.R. 145, 147 (D. Ariz. 2014). Answering this question in the negative, the district court held that “the Arizona federal judgment against the husband alone, later registered in a California federal court and recorded in California, does not lien their community real property in California.” Id. Moreover, it continued that “[t]his is the rule by Arizona statute, and California choice of law principles yield to the Arizona rule concerning Arizona domiciliaries.” Id. Presumably drawing upon those principles, the district court concluded that “California has no interest in ousting Arizona marital law concerning obligations between husband and wife and of persons contracting with one spouse, and the California community property statute by its terms does not purport to do so.” Id.
We reverse the judgment of the district court. While we agree that the co-op apartment does not come within the definition of community property, as that term is defined in
DISCUSSION
I. 28 U.S.C. § 1963 Does Not Obviate the Need for a Choice-of-Law Analysis
FCB‘s principal argument on appeal is that the registration of the judgment against Larry Miller, pursuant to
A party may register and enforce a federal judgment in another district, and “[a] judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in like manner.”
Thus, under California‘s enforcement procedures, when FCB registered the judgment rendered by the federal district court in Arizona in the Northern District of California, and formally recorded such judgment with the San Francisco County Recorder‘s Office, it acquired a judgment lien on the Millers’ co-op. See
Our discussion would end here if this case were being litigated in California. Some additional discussion, however, is required. While California‘s choice-of-law rules apply here, they do so as a result of a somewhat indirect path, which we now trace. “In federal question cases with exclusive jurisdiction in federal court, such as bankruptcy,” including this case, we apply federal choice-of-law rules. See In re Lindsay, 59 F.3d 942, 948 (9th Cir. 1995). Federal choice-of-law rules are based on the Restatement (Second) of Conflict of Laws. See In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1069 (9th Cir. 2001). Restatement § 230 provides that, “[w]hether a lien creates an interest in land and the nature of the interest created are determined by the law that would be applied by the courts of the situs.” Moreover, if the court of the situs “would have decided the particular question by reference to the local law of some other state, the forum will do likewise.” Restatement § 230, cmt. b. As noted previously, California is the situs of the real property at issue, so we apply its choice-of-law rules to resolve the conflict in this case.
II. Choice-of-Law Analysis
California applies the governmental interests mode of analysis to resolve choice-of-law problems. See McCann v. Foster Wheeler LLC, 48 Cal.4th 68, 87, 105 Cal.Rptr.3d 378, 225 P.3d 516 (2010). Under this approach, we analyze three related questions: (1) does relevant law vary between the potentially affected jurisdictions?; (2) If there is a difference in law, does a true conflict exist such that “each of the states involved has a legitimate but conflicting interest in applying its own law[?]“; (3) If there is a true conflict, “which state‘s interest would be more impaired if its policy were subordinated to the policy of the other state[?]” See Kearney v. Salomon Smith Barney, Inc., 39 Cal.4th 95, 111-12, 45 Cal.Rptr.3d 730, 137 P.3d 914 (2006) (citations omitted).
We begin our analysis with Arizona law, and more specifically its community property law, and then proceed to discuss California law.
Community property rests on a notion that husband and wife are a marital partnership (a ‘community‘) and should share accordingly.... Because it can exist only between husband and wife and cannot be converted into separate property without the consent of both spouses, community property can be conveyed to a third person only as an undivided whole.... Prior to the 1960s, the husband was deemed to be manager of the community, but beginning in the late 1960s, all ... community property states enacted statutes giving the husband and wife equal management powers. These statutes, however, differ in many details. JESSE DUKEMINIER, PROPERTY 354-55 (2d ed. 1988).
Although Arizona and California both have community property laws, there is one difference between the two that gives rise to the necessity of a choice-of-law analysis. In Arizona, “[a]ny transaction of guaranty, indemnity or suretyship” requires the “joinder of both spouses” — a requirement that has been construed to mean the signature of both spouses on the guaranty contract.
California has no such dual-signature requirement with respect to either community property, joint property, or a tenancy-in-common. Cf.
The absence of the signature of one spouse, however, does not necessarily indicate that the non-signing spouse did not know of, or consent to, the execution of the guaranty. The signature requirement is simply the mechanism for avoiding a dispute as to this issue. See All-Way Leasing, Inc. v. Kelly, 182 Ariz. 213, 216, 895 P.2d 125 (Ct. App. 1984). A guaranty without both required signatures is “not per se void, only voidable by the nonsigning spouse.” Geronimo Hotel & Lodge v. Putzi, 151 Ariz. 477, 479, 728 P.2d 1227 (1986). Thus, the Arizona Court of Appeals has recognized that “there may be circumstances where a spouse may be estopped from disaffirming a contract.” Consol. Roofing & Supply Co., Inc. v. Grimm, 140 Ariz. 452, 458, 682 P.2d 457 (Ct. App. 1984).3
The complaint filed by FCB in Arizona, which ended with the judgment against Larry Miller that underlies the lien at issue, put the Millers on notice that FCB planned to go after their community property. Nevertheless, the Millers did not defend on the ground that Kari Miller lacked “knowledge and acquiescence” sufficient to enable the Millers to rely on the absence of her signature on the guaranty. Indeed, as we explained earlier, rather than invoking
On the other hand, under the circumstances here, California does have a significant interest in effectuating its policy regarding enforcement of judgments in favor of California creditors against real property located there, whether the property constitutes community property or a tenancy-in-common. “California, as does every state, has a substantial interest in the economic health of corporations which do business within its borders. It derives substantial sales and income taxes, as well as other revenues, directly and indirectly from a corporation‘s activities within the state.” In re Air Crash Disaster Near Chi., Ill. on May 25, 1979, 644 F.2d 594, 614 (7th Cir. 1981). Moreover, California also has an interest in fostering the growth of commercial activities that require ready access to credit — a policy that would be undermined by limiting the ability of California creditors to enforce obligations for activities undertaken in California and made subject to the operation of California law by consent of the parties. Indeed, when Larry Miller sought credit in California to finance his business venture, he took advantage of the credit environment fostered by what the district court described as California‘s “general policy favoring creditors.” In re Miller, 517 B.R. at 149 n.1.
These considerations “reflect[] the principle articulated by the California Supreme Court that the policy of protecting the creditors of a spouse outweighs the policy of protecting family income.” Ordlock v. Comm‘r, 533 F.3d 1136, 1139 (9th Cir. 2008) (internal ellipses and alterations omitted). So too does the fact that California renders the entire community property of a married couple subject to enforcement of a guaranty — even if the guaranty was made solely for the benefit of a single spouse. See Lezine v. Sec. Pac. Fin. Servs., Inc., 14 Cal.4th 56, 64, 58 Cal.Rptr.2d 76, 925 P.2d 1002 (1996). While the co-op owned by the Millers did not come within the definition of community property in California, we refer to the manner in which community property is treated there simply to illustrate the strength of California‘s interest in the enforcement of the judgment lien against the co-op apartment located in San Francisco.
The policy interests discussed above are especially strong where, as here, the law chosen by the parties in their various agreements (including the guaranty) includes California‘s creditor-friendly interest described above. Indeed, the Supreme Court of California has adopted § 187 of the Restatement, see Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 464-65, 11 Cal.Rptr.2d 330, 834 P.2d 1148 (1992), which upholds “[t]he law of the state chosen by the parties to govern their contractual rights and duties ..., even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue.” Restatement § 187(2). Section 187 is a policy “providing for incorporation by reference” that enables parties “to determine the terms of their contractual engagements,” not a choice-of-law rule as such. Id. § 187, cmt. c.
Neither of the exceptions to the incorporation by reference rule of § 187, which also apply to the rule of § 194, is present here. Specifically, this is not a case in which “the chosen state has no substantial relationship to the parties or the transaction,” Restatement § 187(2)(a), nor would the chosen law “be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue.” Id. § 187(2)(b). While Arizona may have an interest in the determination of this issue, we cannot say that its interest is “materially greater ... than [that of] the chosen state,” particularly where the record does not adequately show whether or not Kari Miller had knowledge of, or consented to, the guaranty. Nor, to use the test applied in cases of a true conflict, is Arizona‘s interest more substantially impaired than that of California.
We recognize that Larry Miller‘s agreement to the application of California law does not bind Kari Miller. Nevertheless, the agreement should bind Larry Miller, and permit the enforcement of that agreement against him as a tenant-in-common. Moreover, the enforcement of the agreement in that way protects Kari Miller‘s one-half interest in the property as a co-tenant. Thus, the underlying purpose of
CONCLUSION
The judgment of the district court is REVERSED AND REMANDED for proceedings consistent with this opinion.