SUMMARY

In First Community Bank v. Gaughan (In re Miller), 853 F.3d 508 (9th Cir. 2017), the U.S. Court of Appeals for the Ninth Circuit ruled that a judgment lien attached against an Arizona debtor's property interest in California though Arizona law would have provided a different result. To read the full published decision, click here: http://cdn.ca9.uscourts.gov/datastore/opinions/2017/03/31/14-16854.pdf.

FACTS

Arizona domiciliaries, Larry and Kari Miller, owned a cooperative apartment in each of their names located in San Francisco, California. On behalf of his businesses, Mr. Miller executed a guaranty of a loan for $5.744 million from First Community Bank. The guaranty, the promissory note, and the loan agreement had a choice of law provision selecting California law as the governing law. Kari Miller did not sign the guaranty.

After Mr. Miller and his businesses defaulted on their obligations, the bank obtained a judgment in Arizona federal court against Mr. Miller for $6.373 million. The bank next registered the judgment with the district court for the Northern District of California. The bank then recorded the judgment with the San Francisco County Recorder's Office. Mr. Miller eventually filed for bankruptcy and his case was converted to chapter 7.

The chapter 7 trustee sold the co-op. The bank filed an action for declaratory relief that it had an enforceable judgment lien against the co-op and that it had priority to the sale proceeds. The Millers argued that under Arizona law, the co-op would be community property and Arizona law does not permit a guaranty obligation to be enforced against community property unless both spouses sign the guaranty. On the other hand, under California law, the property would be held in a tenancy-in-common, and Larry Miller’s interest in half of the property would be subject to the judgment lien.

The bankruptcy court ruled in favor of the bank, determining California law controls. The district court reversed. The bank appealed to the Ninth Circuit Court of Appeals.

REASONING

The Ninth Circuit overturned the district court's decision. It reasoned that the co-op was not community property under California law because the interest was not acquired while the Millers were domiciled in California. Instead, under California statutory law, the Millers held a tenancy-in-common interest. Applying California's choice of law rules, the appellate court held California law governs. In doing so, the Ninth Circuit distinguished an earlier California appellate level decision ruling that the law of a couple's matrimonial domicile would be controlling by noting that this case involved the claim of a California-based third-party creditor against property located in California.

The Ninth Circuit took an exhaustive route in reaching its conclusion. It determined that in federal question cases with exclusive jurisdiction in federal court, like bankruptcy cases, federal choice of law rules apply. Those rules provide that the creation of a lien in land is determined by the law of the court where the land is located. It noted that under California law, the enforcement of a judgment against property in California is subject to California's choice of law rules.

The appellate court then analyzed whether: (1) the relevant law between California and Arizona varied; (2) the difference resulted in a true conflict; and (3) whether one state's interest would be more impaired if its policy were subordinated to the other state's policy.

The Ninth Circuit reasoned that California's law varied from Arizona's in that it did not have a dual-signature requirement in order for guaranty obligations to be enforced against community assets. It also found there was a potential conflict between Arizona's policy of protecting unsuspecting spouses from guaranty debts and California's policy of fostering the growth of commercial lending by ensuring the enforceability of judgments of California creditors against real property in California, even where such property is held by a marital community. In analyzing the policy interests, it noted that the parties had chosen California law to govern the contract and their rights under it. The Ninth Circuit determined that the application of California law avoided any conflict in this instance because it resulted in the property being held as a tenancy-in-common, which effectively protected the non-signing spouse, Kari Miller, from the judgment as to her half of the interest. On the other hand, the application of Arizona law would harm the creditor and California’s creditor-friendly interests.

AUTHOR’S COMMENTARY

Miller contains three important practice pointers. First, though a share in a corporation embodied the Millers' interest in the co-op, that interest is treated as a form of real property under California law, meaning it can be subjected to a judgment lien simply by recording an abstract of judgment in the county where the underlying real property is located. Second, according to the Circuit Court, real property acquired by couples who reside outside of California at the time of the acquisition does not constitute community property under California law, but is instead a tenancy-in-common.

Third, notwithstanding the choice of law provisions in all of the documents, the domicile of the guarantor still mattered. The appeals court suggested that there could have been a different result in its choice of law analysis if the judgment had actually been enforced against community property. In retrospect, it would have been easier to have Mrs. Miller sign the guaranty.

These materials were written by ILC member Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California (mgomez@frandzel.com). Editorial contributions were provided by Christopher O. Rivas of Reed Smith LLP in Los Angeles, California (crivas@reedsmith.com).