Monday, April 3, 2017
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Ninth Circuit Rules:
Debtor’s Interest in Jointly Held Realty Subject to Creditor’s Claim
By KENNETH OFGANG, Staff Writer
A bank seeking to collect millions of dollars from a bankrupt real estate developer may levy on his interest in a San Francisco co-op he owns jointly with his wife, the Ninth U.S. Circuit Court of Appeals ruled Friday.
Reversing a district judge, who had reversed a bankruptcy judge, the panel held that California law applied, rather than that of Arizona, even though the couple lives in that state and both the underlying debt and the bankruptcy were litigated there.
First Community Bank, headquartered in Sonoma County, is seeking to recoup millions of dollars it loaned to Larry Miller and his companies. Larry Miller Holdings, Inc. is the general partner of El Paseo Partners, L.P. and El Rancho Partners, LP.
The bank loaned the companies more than $5.7 million, which Miller personally guaranteed, in 2006. The notes and guaranty all designated California as the state whose laws would govern.
Arizona Litigation
After the loans went into default, the bank sued Larry and Kari Miller in the District of Arizona. It alleged that Miller was liable on his guarantee, and that his wife was liable to the extent that she owned a “marital community” interest in any property that could be levied upon to satisfy the debt.
The district judge granted summary judgment in favor of the bank for nearly $6.4 million, including prejudgment interest, while noting in dictum that community liability appeared to be precluded by an Arizona statute. The bank registered its judgment in the Northern District of California and recorded it in San Francisco, where the Millers owned a leasehold in a co-op on Jackson Street.
Miller subsequently filed a Chapter 11 petition in the Bankruptcy Court for the District of Arizona, which later converted the proceeding into a liquidation under Chapter 7. After the trustee sold the co-op, the bank brought an adversary proceeding seeking a declaration that its judgment lien was enforceable against the sale proceeds.
Bankruptcy Judge’s Ruling
The bankruptcy judge ruled that the registration of the judgment made California law applicable, that the co-op was therefore community property, and that the judgment was thus enforceable against the property. On appeal, however, U.S. District Judge Neal Wake ruled that “the Arizona rule concerning Arizona domiciliaries” applied and that the property could not be levied upon to satisfy a debt owed by only one of the spouses.
Senior U.S. District Judge Edward R. Korman, visiting from the Eastern District of New York, said neither of the lower courts analyzed the case correctly.
The correct analysis, he said, is that California choice-of-law rules govern because the case concerns the status of California realty; that those rules require the court to apply California substantive law because California’s interests are superior to Arizona’s under the facts of the case; and that under California law, the co-op was owned as a tenancy-in-common, not as community property, so the debtor’s interest was subject to creditor’s claims but the non-debtor spouse’s was not.
Korman rejected the bank’s argument that its registration of the judgment was, under federal law, sufficient in and of itself to create an enforceable lien against the co-op. Registration and recording, he said, creates a judgment lien against all of the debtor’s local property, but does not ensure that the lien is enforceable against any specific property.
Analysis Necessary
A choice-of-law analysis is necessary, he explained, because Arizona law renders a married person’s guaranty or similar commitment, if not agreed to in a writing signed by both spouses, voidable at the option of the non-signing spouse, to the extent it would otherwise encumber marital property. California, he noted, has no dual-signature requirement, whether the property is owned jointly, as community property, or as a tenancy-in-common, and subjects the entire community property of a couple to enforcement of a guaranty, even if only one spouse benefitted.
Applying California’s governmental interests test, Korman went on to say, the balance favors California. The facts that the parties agreed to have California law apply, that the co-op is located here, and that the underlying litigation concerns a loan that was made by a California bank render California’s interests superior to those of the Grand Canyon State, the judge reasoned.
Korman acknowledged that Kari Miller didn’t agree to repay the loan or to the application of California law. But California’s interests are still paramount, he said, because the application of Arizona law would defeat the state’s interests with respect to Larry Miller’s liability, while Kari Miller’s interests are protected no matter which state’s law applies.
Korman was joined by Senior Judge A. Wallace Tashima and Judge Milan D. Smith Jr.
The case is In re Miller, 14-16854.
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